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Pine River, MN, Pine River Rgnl, NDB RWY Applicability dates: For dates of section 901(m) are not implicated in 34, Amdt 2A applicability, see §§ 1.704– such a situation because if the same Staples, MN, Staples Muni, NDB RWY 14, 1(b)(1)(ii)(b)(4), 1.901(m)–1(b), group takes into account the gains on Amdt 3C 1.901(m)–2(f), 1.901(m)–3(d), 1.901(m)– the RFAs up front and then, in the Tarkio, MO, Gould Peterson Muni, Takeoff future recognizes offsetting cost Minimums and Obstacle DP, Amdt 1 4(g), 1.901(m)–5(i), 1.901(m)–6(d), Trenton, MO, Trenton Muni, NDB RWY 18, 1.901(m)–7(g), and 1.901(m)–8(e). recovery items on those assets, over Amdt 7D, CANCELLED FOR FURTHER INFORMATION CONTACT: time, the U.S. income tax base is Trenton, MO, Trenton Muni, NDB RWY 36, Jeffrey L. Parry at (202) 317–6936 (not unchanged. Amdt 10B, CANCELLED a toll-free number). The Treasury Department and IRS Tioga, ND, Tioga Muni, RNAV (GPS) RWY SUPPLEMENTARY INFORMATION: agree that an exemption would be 12, Orig-B appropriate in certain cases, but have Toledo, OH, Toledo Executive, Takeoff Background determined that the comment’s Minimums and Obstacle DP, Amdt 3 On December 7, 2016, both a notice of suggestion is overbroad. As proposed by Gregory, SD, Gregory Muni—Flynn Fld, proposed rulemaking by cross-reference the comment, the exemption would RNAV (GPS) RWY 13, Orig-C apply to U.S. members of an affiliated Pierre, SD, Pierre Rgnl, ILS OR LOC RWY 31, in part to temporary regulations (REG– Amdt 13 129128–14) (2016 proposed regulations) group that do not file a consolidated Gilmer, TX, Fox Stephens Field-Gilmer under sections 901(m) and 704 of the return and to related controlled foreign Muni, VOR/DME–A, Amdt 1A, Code and temporary regulations (TD corporations. This leaves open the CANCELLED 9800) under section 901(m) were possibility of manipulation of foreign Houston, TX, William P Hobby, Takeoff published in the Federal Register at 81 tax credits. For example, in the case of Minimums and Obstacle DP, Amdt 7 FR 88562 and 81 FR 88103. The affiliated but non-consolidated U.S. Mount Pleasant, TX, Mount Pleasant Rgnl, temporary and proposed regulations entities, the entity recognizing the U.S. VOR/DME–A, Orig-A, CANCELLED gain on the assets up front may be an Sulphur Springs, TX, Sulphur Springs Muni, include the rules described in Notice 2014–44 (2014–32 I.R.B. 270 (August 4, entity that is exempt from tax under RNAV (GPS) RWY 1, Amdt 1C section 501 while the entity recognizing Terrell, TX, Terrell Muni, NDB RWY 17, 2014)) and Notice 2014–45 (2014–34 Amdt 4, CANCELLED I.R.B. 388 (August 18, 2014). the offsetting cost recovery items may be Ogden, UT, Ogden-Hinckley, ILS OR LOC A public hearing was not requested, in a position to take advantage of the RWY 3, Amdt 5A and none was held. However, the excess foreign taxes related to the basis Newport News, VA, Newport News/ Department of the Treasury (Treasury difference. Williamsburg Intl, ILS OR LOC RWY 7, Department) and the IRS received The Treasury Department and IRS Amdt 35 written comments in response to the have determined that the exemption Marshfield, WI, Marshfield Muni, SDF RWY notice of proposed rulemaking. After should apply only if a domestic section 34, Amdt 7, CANCELLED consideration of all the comments, the 901(m) payor or a member of its [FR Doc. 2020–05870 Filed 3–20–20; 8:45 am] 2016 proposed regulations under consolidated group recognized the gains or losses or took into account a BILLING CODE 4910–13–P section 901(m) are adopted as revised by distributive share of the gains or losses this Treasury decision. The revisions are recognized by a partnership for U.S. tax discussed in this preamble. This purposes as part of the original CAA. DEPARTMENT OF THE TREASURY Treasury decision also adopts the 2016 Accordingly, the definition of aggregate proposed regulations under section 704 basis difference is modified to take into Internal Revenue Service without revision. The regulations account allocated basis difference adopted by this Treasury decision are adjustments determined based on gain 26 CFR Part 1 referred to herein as the ‘‘final or loss recognized with respect to an regulations.’’ Defined terms used in this [TD 9895] RFA as a result of a CAA. See preamble but not defined herein have RIN 1545–BM36 § 1.901(m)–1(a)(1), (6), (48), and (49). the meaning provided in the final For example, if one domestic regulations. Covered Asset Acquisitions corporation, USS1, sold a foreign Summary of Comments and disregarded entity (FDE) that held an AGENCY: Internal Revenue Service (IRS), Explanation of Revisions asset to another member of its Treasury. consolidated group, USS2, the ACTION: Final regulations and removal of 1. Scope of Covered Asset Acquisitions transaction is a CAA, because it is an temporary regulations. (CAAs) asset sale for U.S. income tax purposes Proposed § 1.901(m)–2(b) identifies and an acquisition of stock of the FDE SUMMARY: This document contains final six categories of transactions that for foreign tax purposes. As a result, the Income Tax Regulations under section constitute CAAs, three of which are asset is an RFA owned by USS2 subject 901(m) of the Internal Revenue Code specified in the statute and three of to section 901(m). However, any (Code) with respect to transactions that which are additional categories of aggregate basis difference USS2 generally are treated as asset transactions that are identified as CAAs determines with respect to the RFA will acquisitions for U.S. income tax pursuant to the authority granted under be adjusted to take into account the gain purposes and either are treated as stock section 901(m)(2)(D). recognized for U.S. income tax purposes acquisitions or are disregarded for One comment requested that an by USS1 on the original sale, provided foreign income tax purposes. These exemption to section 901(m) be USS1 and USS2 are still members of the regulations are necessary to provide provided for CAAs in which all or same consolidated group in the year the guidance on applying section 901(m). substantially all of the gains and losses allocated basis difference is determined. These regulations affect taxpayers with respect to the relevant foreign Another comment suggested that the claiming foreign tax credits. assets (RFAs) are recognized by final category of transactions, which DATES: members of the U.S.-parented group that includes any asset acquisition for U.S. Effective date: These regulations are includes the section 901(m) payor. The and foreign income tax purposes that effective on March 23, 2020. comment suggested that the policies of results in an increase in the U.S. basis

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without a corresponding increase in the difference carryover rule is necessary to and (g)(3) of proposed § 1.901(m)–4 foreign basis, be replaced with one or prevent the avoidance of the purpose of provide that taxpayers may apply the more specifically defined transactions. section 901(m), particularly in the case foreign basis election retroactively to The comment recommended that new of timing differences. For example, CAAs that have occurred on or after CAAs be limited to specific transactions assume a section 901(m) payor that is January 1, 2011, provided that the that are likely to achieve the same also a foreign payor has a foreign taxable taxpayer applies all of the rest of the hyping of foreign tax credits as the three year ending on March 31 and a U.S. rules in the 2016 proposed regulations categories of CAAs specified in the taxable year ending on December 31. retroactively, with a few limited statute and that typically involve Assume further that the section 901(m) exceptions. intensive U.S. tax planning. The payor recognizes foreign gain on the One comment suggested that though comment also suggested that if the disposition of an RFA on November 30, this consistency requirement is Treasury Department and IRS found a in U.S. tax year 1. For U.S. income tax appropriate for tax years that remain list of specific transactions to be too purposes, because the disposition open, the requirement is unfair if some limited, they could add an anti-abuse occurs in U.S. tax year 1, the section tax years of the taxpayer or its affiliates rule that would treat any transaction as 901(m) payor will have allocated basis are already closed. The comment a CAA if it was structured with a difference in U.S. tax year 1, requiring recommended the consistency principal purpose of avoiding the a calculation of a disqualified tax requirement be modified to permit specific categories of transactions set amount. For foreign income tax taxpayers to apply the foreign basis forth in the revised list of transactions. purposes, the foreign tax on the gain is election as long as they apply the rules The Treasury Department and IRS do not imposed until the end of the foreign in the 2016 proposed regulations not agree that the final category of taxable year, which is March 31, in U.S. consistently to all relevant tax years that transactions is overbroad. Section tax year 2. Assuming the section 901(m) remain open. 901(m) is designed to address payor does not pay any other foreign The Treasury Department and IRS transactions that result in a basis taxes, the disqualified tax amount for agree that taxpayers should not be difference for U.S. and foreign income U.S. tax year 1 will be zero, because the denied the choice to retroactively apply tax purposes. There is no intent test. foreign taxes are not taken into account the foreign basis election because a Proposed § 1.901(m)–7 provides a de by the section 901(m) payor for U.S. closed tax year is preventing them from minimis exception that relieves the income tax purposes until U.S. tax year satisfying the consistency requirement. burden of applying section 901(m) to 2. Because the allocated basis difference However, because the statute of ordinary course transactions below the in U.S. tax year 1 does not give rise to limitations for refunds attributable to threshold provided in that rule. The a disqualified tax amount, the aggregate foreign tax credits is ten years while the Treasury Department and IRS have basis difference carryover rule requires statute of limitations for assessment is determined there is no policy that the allocated basis difference be generally only three years, the only justification for exempting transactions carried into U.S. tax year 2 and be used relevant tax years of the taxpayer or its to which this exception does not apply to calculate a disqualified tax amount affiliates that would be closed are the on the grounds that the transaction with respect to the foreign taxes taken tax years in which a consistent lacked an intent to hype foreign taxes, into account in U.S. tax year 2. Without application of the regulations would and replacing this category of the aggregate basis difference carryover result in an assessment. The Treasury transactions with an anti-abuse rule rule, there would be no disqualified tax Department and IRS do not believe would inappropriately introduce an amount in U.S. tax year 1, because there taxpayers should be able to obtain the intent component that is not required by are not foreign taxes taken into account benefits of retroactive application of the the statute. Accordingly, the comment is in that year, and no disqualified tax regulations while avoiding the negative not adopted. amount in U.S. tax year 2, because there consequences. Accordingly, while the is no allocated basis difference in that consistency requirement has been 2. Aggregate Basis Difference Carryover year. This would allow avoidance of the modified to apply only for tax years that Proposed § 1.901(m)–3(c) provides application of section 901(m) to a fact remain open, an additional requirement rules for determining the amount of pattern that is clearly meant to be is added that any deficiencies be taken aggregate basis difference carryover for covered by the statute. The aggregate into account that would have resulted a given U.S. taxable year of a section basis difference carryover rule also from the consistent application of the 901(m) payor that will be included in prevents taxpayers from avoiding the final regulations for a tax year that is the section 901(m) payor’s aggregate application of section 901(m) by timing closed. See § 1.901(m)–4(g)(3). For basis difference for the next U.S. taxable dispositions of RFAs to coincide with example, assume a taxpayer chooses to year. The carryover reflects the extent to offsetting unrelated foreign losses. For make a retroactive foreign basis election which the aggregate basis difference for these reasons, the comment is not that would give rise to a $6 million a U.S. taxable year has not yet given rise adopted. refund in a prior year that is open under to a disqualified tax amount. the statute of limitations for refunds but A comment requested that the 3. Foreign Basis Election that a consistent retroactive application aggregate basis difference carryover rule Basis difference with respect to an of another provision of the final be eliminated due to the increased RFA is generally equal to the U.S. basis regulations would give rise to a $1 compliance costs resulting from the in the RFA immediately after a CAA less million deficiency in another prior year added complexity of tracking the the U.S. basis in the RFA immediately that is closed under the statute of carryover amounts. The comment before the CAA. Proposed § 1.901(m)– limitations for assessment. In this case, argued that these compliance costs are 4(c) provides that a taxpayer may in order to meet the consistency unjustified, given that Congress enacted instead elect to determine basis requirement, the taxpayer would need an administrable approach in the statute difference as the U.S. basis in the RFA to reduce its refund claim in the open and did not express any intent that immediately after the CAA less the year from $6 million to $5 million to carryover rules could apply. foreign basis in the RFA immediately take into account the $1 million The Treasury Department and IRS after the CAA. This is referred to as the deficiency that would have resulted in have determined that the aggregate basis foreign basis election. Paragraphs (c) the closed tax year.

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4. Successor Rules account for purposes of section 901(m) are eliminated, as suggested by the The successor rules in proposed if either (i) the sum of the basis comment. See § 1.901(m)–7(c). differences for all RFAs with respect to § 1.901(m)–6(b) provide that section 6. Interaction With Section 909 901(m) continues to apply to any the CAA is less than the greater of $10 unallocated basis difference with million or 10 percent of the total U.S. One comment requested adding a respect to an RFA after there is a basis of all RFAs immediately after the priority rule to the regulations to transfer of the RFA for U.S. income tax CAA; or (ii) the RFA is part of a class address transactions to which both purposes, regardless of whether the of RFAs for which the sum of the basis section 901(m) and section 909 apply, transfer is a disposition, a CAA, or a differences of all RFAs in the class is such as, for example, the acquisition of less than the greater of $2 million or 10 non-taxable transaction. For example, if a reverse hybrid with respect to which percent of the total U.S. basis of all a section 901(m) payor contributes an a section 338 election is made. The RFAs in the class immediately after the RFA with respect to a prior CAA to a acquisition is a CAA under section CAA. The threshold dollar amounts and partnership, any unallocated basis 901(m), and the reverse hybrid structure difference in the RFA remains subject to percentages to meet the de minimis exemptions for related-party CAAs are is a specified foreign tax credit splitting the section 901(m) in the hands of the event under the section 909 regulations. partnership. One comment suggested lower than those for unrelated party CAAs, replacing the terms ‘‘$10 The comment recommended that, given that the Treasury Department and IRS the complexity of the calculation of consider whether it would be million,’’ ‘‘10 percent,’’ and ‘‘$2 million’’ with the terms ‘‘$5 million,’’ disqualified tax amounts under section appropriate to apply principles similar 901(m), those calculations should be to those of section 704(c) to treat the ‘‘5 percent,’’ and ‘‘$1 million,’’ respectively. made first and section 909 should then section 901(m) ‘‘taint’’ in the RFA as a be applied to determine whether any of built-in item that is allocated back to the One comment expressed the view that the threshold amounts for the de the remaining foreign taxes are contributing partner. suspended. The Treasury Department and IRS minimis rules were too low, noting that have considered this comment and the potential basis differential with The Treasury Department and IRS determined that the provisions in respect to transactions of those agree with the comment that if section proposed § 1.901(m)–5 for allocating magnitudes would not generate a 901(m) and section 909 apply to the basis difference to partners in a sufficient foreign tax credit benefit to same transaction, the section 901(m) partnership that owns RFAs reflect the justify intensive tax planning. The calculations should be undertaken most appropriate approach, whether the comment suggested raising the $10 before applying section 909. However, RFAs are contributed to the partnership million threshold to $15 million. The the comment’s recommendation implied in a successor transaction or the comment also recommended that only the portion of the foreign taxes partnership acquires them directly in a eliminating the reduced de minimis that are not disqualified under section CAA. These allocation rules are based thresholds in the context of related- 901(m) are subject to potential on the principle that the partner that party transactions. The comment argued suspension under section 909. The takes into account the basis difference is that the test should be different for Treasury Department and IRS disagree the one that should be subject to section related parties only if the fact that the with this implication. Section 909 901(m). For example, if there is a cost parties are related somehow makes the defers taking into account foreign taxes recovery amount of 20x due to increased rules less burdensome than they are for for purposes of claiming a foreign tax depreciation deductions related to a unrelated parties or makes the credit or claiming a deduction. Foreign U.S. basis step-up in a CAA, section likelihood of tax arbitrage higher. The taxes that are disqualified for foreign tax 901(m) basically operates to disallow a comment suggested that this was credit purposes under section 901(m) credit for foreign taxes on that 20x unlikely to be the case in the context of but remain eligible to be deducted may differential created between income for section 901(m). be subject to deferral under section 909 U.S. and foreign tax purposes. The 2016 Although the Treasury Department as well. The comment’s suggestion is proposed regulations take the approach and the IRS do not believe that the adopted with these clarifications. See that the partner to whom the 20x of comment made a compelling argument § 1.901(m)–8(d). increased depreciation is allocated is for increasing the threshold for the the one that benefits from the income cumulative basis difference exemption, 7. Changes Related to the Tax Cuts and differential and is therefore the one to the Treasury Department and IRS agree Jobs Act (TCJA) whom the section 901(m) disallowance that it is appropriate to extend the scope The final regulations reflect should apply. If some other partner of the de minimis rules in order to modifications to the rules contained in contributed the RFA to the partnership further reduce the burden of compliance but does not get an allocation of the with the rules. However, rather than the 2016 proposed regulations necessary increased depreciation deductions, the increasing the threshold amount, the to reflect statutory changes by the TCJA, Treasury Department and IRS see no Treasury Department and IRS have Public Law 115–97 (2017). References to policy reason to nevertheless subject the decided to add an additional exclusion, section 902 corporations are replaced contributing partner to the section such that a basis difference with respect with references to applicable foreign 901(m) disallowance. to an individual RFA is not taken into corporations, which consist of section account for purposes of section 901(m) 902 corporations before the applicability 5. De Miminis Threshold if the basis difference is less than of the TCJA modifications to the foreign Proposed § 1.901(m)–7 describes de $20,000. See § 1.901(m)–7(b)(4). Like the tax credit rules and controlled foreign minimis rules under which certain basis de minimis exceptions contained in the corporations thereafter. See § 1.901(m)– differences are not taken into account 2016 proposed regulations, this de 1(a)(7). In addition, a definition of for purposes of section 901(m). In minimis exception applies separate category is added and utilized general, under the 2016 proposed independently of the other de minimis to address the income groupings regulations, a basis difference with exceptions. Moreover, the reduced required under section 960 following respect to an RFA is not taken into thresholds for related-party transactions TCJA. See § 1.901(m)–1(a)(42).

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8. Applicability Dates the extent the taxpayers are natural § 1.901(m)–1(a)(13)) occurring on or The 2016 proposed regulations were persons or entities other than small after March 23, 2020. Taxpayers may, generally proposed to apply to CAAs entities. Small entities are significantly however, choose to apply paragraphs occurring on or after the date of less likely to engage in the types of (b)(4)(viii)(c)(4)(v) through (vii) of this publication of the final regulations. transactions addressed by the section before the date paragraphs However, the 2016 proposed regulations regulations than U.S. multinational (b)(4)(viii)(c)(4)(v) through (vii) of this also provided that taxpayers could rely corporations. Moreover, the de minimis section are applicable provided that on the rules therein before they would rules discussed in Part 5 of the they (along with any persons that are otherwise be applicable, provided that Summary of Comments and Explanation related (within the meaning of section taxpayers consistently applied proposed of Revisions section further limit the 267(b) or 707(b)) to the taxpayer)— § 1.901(m)–2 (excluding § 1.901(m)– number of small entities likely to be (i) Consistently apply paragraphs 2(d)) to all CAAs occurring on or after subject to the regulations. (b)(4)(viii)(c)(4)(v) through (vii) of this December 7, 2016, and consistently Pursuant to section 7805(f), the notice section, § 1.901(m)–1, and §§ 1.901(m)– applied § 1.704–1(b)(4)(viii)(c)(4)(v) of proposed rulemaking preceding this 3 through 1.901(m)–8 (excluding through (vii), § 1.901(m)–1, and regulation was submitted to the Chief § 1.901(m)–4(e)) to all CAAs occurring §§ 1.901(m)–3 through 1.901(m)–8 Counsel for Advocacy of the Small on or after January 1, 2011, and (excluding § 1.901(m)–4(e)) to all CAAs Business Administration for comment consistently apply § 1.901(m)–2 occurring on or after January 1, 2011. on its impact on small business. No (excluding § 1.901(m)–2(d)) to all CAAs For this purpose, persons that are comments were received. occurring on or after December 7, 2016, on any original or amended tax return related (within the meaning of section Drafting Information 267(b) or 707(b)) were treated as a single for each taxable year for which the The principal author of these application of the provisions listed in taxpayer. regulations is Jeffrey L. Parry of the In order to be consistent with the this paragraph (b)(1)(ii)(b)(4)(i) affects Office of Associate Chief Counsel revised applicability of the foreign basis the tax liability and for which the (International). However, other election, as discussed in Part 3 of this statute of limitations does not preclude personnel from the Treasury Summary of Comments and Explanation assessment or the filing of a claim for Department and the IRS participated in of Revisions section, and allow the rules refund, as applicable; their development. in the final regulations to be applied (ii) File all tax returns described in retroactively, the final regulations List of Subjects in 26 CFR Part 1 paragraph (b)(1)(ii)(b)(4)(i) of this provide that taxpayers may choose to section for any taxable year ending on Income taxes, Reporting and or before March 23, 2020, no later than apply the rules before they would recordkeeping requirements. otherwise be applicable, provided that March 23, 2021; and the consistency requirements described Amendments to the Regulations (iii) Make appropriate adjustments to take into account deficiencies that in the preceding paragraph are met, on Accordingly, 26 CFR part 1 is would have resulted from the consistent any original or amended tax return for amended as follows: each taxable year for which the application under paragraph application of the provisions affects the PART 1—INCOME TAXES (b)(1)(ii)(b)(4)(i) of this section for tax liability and for which the statute of taxable years that are not open for limitations does not preclude ■ Paragraph 1. The authority citation assessment. assessment or the filing of a claim for for part 1 is amended by removing * * * * * refund, as applicable. The relevant tax entries for §§ 1.901(m)–1T through (4) * * * returns for taxable years ending before 1.901(m)–8T and § 1.901(m)–5T and (viii) * * * March 23, 2020, must be filed no later adding entries for §§ 1.901(m)–1 (c) *** than March 23, 2021. In the case of through 1.901(m)–8 and § 1.901(m)–5 in (4) *** taxable years that are not open for numerical order to read as follows: (v) Adjustments related to section assessment, appropriate adjustments Authority: 26 U.S.C. 7805. 901(m). If one or more assets owned by must be made to take into account * * * * * a partnership are relevant foreign assets deficiencies that would have resulted Sections 1.901(m)–1 through 1.901–8 also (or RFAs) with respect to a foreign from the consistent application of the issued under 26 U.S.C. 901(m)(7). income tax, then, solely for purposes of applicable provisions. Section 1.901(m)–5 also issued under 26 applying the safe harbor provisions of U.S.C. 901(m)(3)(B)(ii). paragraph (b)(4)(viii)(a)(1) of this Special Analyses * * * * * section to allocations of CFTEs with These final regulations are not subject ■ Par. 2. Section 1.704–1 is amended by respect to that foreign income tax, the to review under section 6(b) of adding paragraphs (b)(1)(ii)(b)(4) and net income in a CFTE category that Executive Order 12866 pursuant to the (b)(4)(viii)(c)(4)(v) through (vii) to read includes partnership items of income, Memorandum of Agreement (April 11, as follows: deduction, gain, or loss attributable to 2018) between the Department of the the RFA shall be increased by the Treasury and the Office of Management § 1.704–1 Partner’s distributive share. amount described in paragraph and Budget regarding review of tax * * * * * (b)(4)(viii)(c)(4)(vi) of this section and regulations. (b) * * * reduced by the amount described in Pursuant to the Regulatory Flexibility (1) * * * paragraph (b)(4)(viii)(c)(4)(vii) of this Act (5 U.S.C. chapter 6), it is hereby (ii) * * * section. Similarly, a partner’s CFTE certified that this regulation will not (b) *** category share of income shall be have a significant economic impact on (4) Special rules for covered asset increased by the portion of the amount a substantial number of small entities. acquisitions. Paragraphs described in paragraph In general, foreign corporations are not (b)(4)(viii)(c)(4)(v) through (vii) of this (b)(4)(viii)(c)(4)(vi) of this section that is considered small entities. Nor are U.S. section apply to covered asset allocated to the partner under taxpayers considered small entities to acquisitions (CAAs) (as defined in § 1.901(m)–5(d) and reduced by the

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portion of the amount described in § 1.901(m)–6(c). For purposes of this (ii) For taxable years of foreign paragraph (b)(4)(viii)(c)(4)(vii) of this definition, if foreign law imposes tax on corporations beginning after December section that is allocated to the partner the combined income (within the 31, 2017, a controlled foreign under § 1.901(m)–5(d). The principles of meaning of § 1.901–2(f)(3)(ii)) of two or corporation (as defined in section 957). this paragraph (b)(4)(viii)(c)(4)(v) apply more foreign payors, all foreign payors (8) The term basis difference has the similarly when a partnership owns an whose items of income, deduction, gain, meaning provided in § 1.901(m)–4. RFA indirectly through one or more or loss are included in the U.S. taxable (9) The term CAA gain means the other partnerships. For purposes of this income or earnings and profits of the amount of gain recognized with respect paragraph (b)(4)(viii)(c)(4)(v) and section 901(m) payor are treated as a to an RFA for U.S. tax purposes as a paragraphs (b)(4)(viii)(c)(4)(vi) and single foreign payor. Aggregate basis result of a CAA. (b)(4)(viii)(c)(4)(vii) of this section, basis difference is determined with respect to (10) The term CAA loss means the difference is defined in § 1.901(m)–4, each separate category. amount of loss recognized with respect cost recovery amount is defined in (2) The term aggregate basis to an RFA for U.S. tax purposes as a § 1.901(m)–5(b)(2), disposition amount difference carryover has the meaning result of a CAA. is defined in § 1.901(m)–5(c)(2), foreign provided in § 1.901(m)–3(c). (11) The term consolidated group has income tax is defined in § 1.901(m)– (3) The term aggregated CAA the meaning provided in § 1.1502–1(h). 1(a)(26), RFA is defined in § 1.901(m)– transaction means a series of related (12) The term cost recovery amount 2(c), U.S. disposition gain is defined in CAAs occurring as part of a plan. has the meaning provided in § 1.901(m)–1(a)(52), and U.S. (4) The term allocable foreign income § 1.901(m)–5(b)(2). disposition loss is defined in means the portion of foreign income of (13) The term covered asset § 1.901(m)–1(a)(53). a foreign payor that relates to the foreign acquisition (or CAA) has the meaning (vi) Adjustment amounts for RFAs income tax amount of the foreign payor provided in § 1.901(m)–2. with a positive basis difference. With that is paid or accrued by, or considered (14) The term cumulative basis respect to RFAs with a positive basis paid or accrued by, a section 901(m) difference exemption has the meaning difference, the amount referenced in payor. provided in § 1.901(m)–7(b)(2). paragraph (b)(4)(viii)(c)(4)(v) of this (5) The term allocated basis difference (15) The term disposition means an section is the sum of any cost recovery means, with respect to an RFA and a event (for example, a sale, amounts and disposition amounts foreign income tax, the sum of the cost abandonment, or mark-to-market event) attributable to U.S. disposition loss that recovery amounts and disposition that results in gain or loss being correspond to partnership items that are amounts assigned to a U.S. taxable year recognized with respect to an RFA for included in the net income in the CFTE of the section 901(m) payor under purposes of U.S. income tax or a foreign category and that are taken into account § 1.901(m)–5. income tax, or both. for the U.S. taxable year of the (6) The term allocated basis difference (16) The term disposition amount has partnership under § 1.901(m)–5(d). adjustment means an adjustment to a the meaning provided in § 1.901(m)– (vii) Adjustment amounts for RFAs section 901(m) payor’s allocated basis 5(c)(2). with a negative basis difference. With difference with respect to an RFA and (17) The term disqualified tax amount respect to RFAs with a negative basis a foreign income tax for a U.S. taxable has the meaning provided in difference, the amount referenced in year. If the RFA has a positive basis § 1.901(m)–3(b). paragraph (b)(4)(viii)(c)(4)(v) of this difference, the allocated basis difference (18) The term disregarded entity section is the sum of any cost recovery adjustment is equal to the lesser of the means an entity that is disregarded as an amounts and disposition amounts allocated basis difference or the portion entity separate from its owner, as attributable to U.S. disposition gain that of any unallocated CAA gain that described in § 301.7701–2(c)(2)(i) of this correspond to partnership items that are corresponds to the CAA gain recognized chapter. included in the net income in the CFTE by the section 901(m) payor or a (19) The term fiscally transparent category and that are taken into account member of the section 901(m) payor’s entity means an entity, including a for the U.S. taxable year of the consolidated group. If the RFA has a disregarded entity, that is fiscally partnership under § 1.901(m)–5(d). negative basis difference, the allocated transparent under the principles of * * * * * basis difference adjustment is equal to § 1.894–1(d)(3) for purposes of U.S. ■ Par. 3. Section 1.901(m)–1 is added to the greater of the allocated basis income tax or a foreign income tax (or read as follows: difference or the portion of any both). unallocated CAA loss that corresponds (20) The term foreign basis means the § 1.901(m)–1 Definitions. to the CAA loss recognized by the adjusted basis of an asset determined for (a) Definitions. For purposes of section 901(m) payor or a member of the purposes of a foreign income tax. section 901(m), this section, and section 901(m) payor’s consolidated (21) The term foreign basis election §§ 1.901(m)–2 through 1.901(m)–8, the group. For purposes of this paragraph, has the meaning provided in following definitions apply: CAA gain or CAA loss recognized by the § 1.901(m)–4(c). (1) The term aggregate basis section 901(m) payor or a member of the (22) The term foreign country difference means, with respect to a section 901(m) payor’s consolidated creditable tax (or FCCT) means, with foreign income tax and a foreign payor, group includes their distributive share respect to a foreign income tax amount, the sum of the allocated basis of CAA gain or CAA loss recognized by the amount of income, war profits, or differences and the allocated basis a partnership. excess profits tax paid or accrued to a difference adjustments for a U.S. taxable (7) The term applicable foreign foreign country or possession of the year of a section 901(m) payor, plus any corporation means— United States and claimed as a foreign aggregate basis difference carryover (i) For taxable years of foreign tax credit for purposes of determining from the immediately preceding U.S. corporations beginning before January 1, the foreign income tax amount. To taxable year of the section 901(m) payor 2018, a section 902 corporation (as qualify as a FCCT, the tax imposed by with respect to the foreign income tax defined in section 909(d)(5) (as in effect the foreign country or possession must and foreign payor, as adjusted under on December 21, 2017)), and be a foreign income tax or a withholding

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tax determined on a gross basis as disregarded entity) subject to a foreign in § 1.904–5(a)(4)(v), and in the case of described in section 901(k)(1)(B). income tax. If foreign law imposes tax an applicable foreign corporation (23) The term foreign disposition gain on the combined income (within the described in paragraph (a)(7)(ii) of this means, with respect to a foreign income meaning of § 1.901–2(f)(3)(ii)) of two or section, each income group described in tax, the amount of gain recognized on a more individuals or entities, each such § 1.960–1(d)(2)(ii). disposition of an RFA in determining individual or entity is a foreign payor. (43) The term subsequent CAA has the foreign income, regardless of whether An individual or entity may be a foreign meaning provided in § 1.901(m)– the gain is deferred or otherwise not payor with respect to more than one 6(b)(4)(i). taken into account currently. foreign income tax for purposes of (44) The term subsequent section Notwithstanding the foregoing, if after a applying section 901(m). 743(b) CAA has the meaning provided section 743(b) CAA there is a (29) The term foreign taxable year in § 1.901(m)–6(b)(4)(iii). disposition of an asset that is an RFA means a taxable year for purposes of a (45) The term successor transaction with respect to that section 743(b) CAA, foreign income tax. has the meaning provided in foreign disposition gain has the meaning (30) The term mid-year transaction § 1.901(m)–6(b)(2). provided in § 1.901(m)–5(c)(2)(iii). means a transaction in which a foreign (46) The term tentative disqualified (24) The term foreign disposition loss payor that is a corporation or a tax amount has the meaning provided means, with respect to a foreign income disregarded entity has a change in in § 1.901(m)–3(b)(2)(ii). tax, the amount of loss recognized on a ownership or makes an election (47) The term unallocated basis disposition of an RFA in determining pursuant to § 301.7701–3 to change its difference means, with respect to an foreign income, regardless of whether entity classification, or a transaction in RFA and a foreign income tax, the basis the loss is deferred or disallowed or which a foreign payor that is a difference reduced by the sum of the otherwise not taken into account partnership terminates under section cost recovery amounts and the currently. Notwithstanding the 708(b)(1), provided in each case that the disposition amounts that have been foregoing, if after a section 743(b) CAA foreign payor’s foreign taxable year does computed under § 1.901(m)–5. there is a disposition of an asset that is not close as a result of the transaction, (48) The term unallocated CAA gain an RFA with respect to that section and, if the foreign payor is a corporation means, with respect to an RFA, the CAA 743(b) CAA, foreign disposition loss has or a partnership, the foreign payor’s U.S. gain reduced by the sum of the allocated the meaning provided in § 1.901(m)– taxable year closes. basis difference adjustments that have 5(c)(2)(iii). (31) The term prior CAA has the been computed with respect to the RFA. (25) The term foreign income means, meaning provided in § 1.901(m)–6(b)(2). (49) The term unallocated CAA loss with respect to a foreign income tax, the (32) The term prior section 743(b) means, with respect to an RFA, the CAA taxable income (or loss) reflected on a CAA has the meaning provided in loss reduced by the sum of the allocated foreign tax return (as properly amended § 1.901(m)–6(b)(4)(iii). basis difference adjustments that have or adjusted), even if the taxable income (33) The term relevant foreign asset been computed with respect to the RFA. (or loss) is reported by an entity that is (or RFA) has the meaning provided in (50) The term U.S. basis means the a fiscally transparent entity for purposes § 1.901(m)–2. adjusted basis of an asset determined for of the foreign income tax. If, however, (34) The term reverse hybrid has the U.S. income tax purposes. foreign law imposes tax on the meaning provided in § 1.909–2(b)(1)(iv). (51) The term U.S. basis deduction combined income (within the meaning (35) The term RFA class exemption has the meaning provided in of § 1.901–2(f)(3)(ii)) of two or more has the meaning provided in § 1.901(m)–5(b)(3). foreign payors, foreign income means § 1.901(m)–7(b)(3). (52) The term U.S. disposition gain the combined taxable income (or loss) of (36) The term RFA exemption has the means the amount of gain recognized for such foreign payors, regardless of meaning provided in § 1.901(m)–7(b)(4). U.S. income tax purposes on a whether such income (or loss) is (37) The term RFA owner (U.S.) disposition of an RFA, regardless of reflected on a single foreign tax return. means a person that owns an RFA for whether the gain is deferred or (26) The term foreign income tax U.S. income tax purposes. otherwise not taken into account means an income, war profits, or excess (38) The term RFA owner (foreign) currently. Notwithstanding the profits tax for which a credit is means an individual or entity (including foregoing, if after a section 743(b) CAA allowable under section 901 or section a disregarded entity) that owns an RFA there is a disposition of an asset that is 903, except that it does not include any for purposes of a foreign income tax. an RFA with respect to that section withholding tax determined on a gross (39) The term section 338 CAA has 743(b) CAA, U.S. disposition gain has basis as described in section the meaning provided in § 1.901(m)– the meaning provided in § 1.901(m)– 901(k)(1)(B). 2(b)(1). 5(c)(2)(iii). (27) The term foreign income tax (40) The term section 743(b) CAA has (53) The term U.S. disposition loss amount means, with respect to a foreign the meaning provided in § 1.901(m)– means the amount of loss recognized for income tax, the amount of tax 2(b)(3). U.S. income tax purposes on a (including an amount of tax that is zero) (41) The term section 901(m) payor disposition of an RFA, regardless of reflected on a foreign tax return (as means a person eligible to claim the whether the loss is deferred or properly amended or adjusted). If foreign tax credit allowed under section disallowed or otherwise not taken into foreign law imposes tax on the 901(a), regardless of whether the person account currently. Notwithstanding the combined income (within the meaning chooses to claim the foreign tax credit, foregoing, if after a section 743(b) CAA of § 1.901–2(f)(3)(ii)) of two or more as well as an applicable foreign there is a disposition of an asset that is foreign payors, however, a foreign corporation. Each member of a an RFA with respect to that section income tax amount means the amount consolidated group is a separate section 743(b) CAA, U.S. disposition loss has of tax imposed on the combined 901(m) payor. If individuals file a joint the meaning provided in § 1.901(m)– income, regardless of whether the tax is return, those individuals are treated as 5(c)(2)(iii). reflected on a single foreign tax return. a single section 901(m) payor. (54) The term U.S. taxable year means (28) The term foreign payor means an (42) The term separate category a taxable year as defined in section individual or entity (including a means each separate category described 7701(a)(23).

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(b) Applicability dates. (1) Except as (iii) Make appropriate adjustments to increase in the foreign basis of such provided in paragraph (b)(2) of this take into account deficiencies that assets; and section, this section applies to CAAs would have resulted from the consistent (6) Any transaction (or series of occurring on or after March 23, 2020. application under paragraph (b)(3)(i) of transactions occurring pursuant to a (2) Paragraphs (a)(8), (12), (13), (15), this section for taxable years that are not plan) to the extent it is treated as an (16), (18), (19), (23) through (26), (31) open for assessment. acquisition of assets for purposes of through (33), (39), (40), (43) through both U.S. income tax and a foreign (45), (47), (50), and (52) through (54) of § 1.901(m)–1T [Removed] income tax, provided the transaction this section apply to CAAs occurring on ■ Par. 4. Section 1.901(m)–1T is results in an increase in the U.S. basis or after July 21, 2014, and to CAAs removed. without a corresponding increase in the occurring before that date resulting from foreign basis of one or more assets. ■ Par. 5. Section 1.901(m)–2 is added to an entity classification election made (c) Relevant foreign asset—(1) In read as follows: under § 301.7701–3 that is filed on or general. Except as provided in after July 29, 2014, and that is effective § 1.901(m)–2 Covered asset acquisitions paragraph (d) of this section, an RFA on or before July 21, 2014. Paragraphs and relevant foreign assets. means, with respect to a foreign income (a)(8), (12), (13), (15), (16), (18), (19), (a) In general. Paragraph (b) of this tax and a CAA, any asset (including (23) through (26) through (33), (39), (40), section sets forth the transactions that goodwill, going concern value, or other (43) through (45), (47), (50), and (52) are covered asset acquisitions (or intangible) subject to the CAA that is through (54) of this section also apply CAAs). Paragraph (c) of this section relevant in determining foreign income to CAAs occurring on or after January 1, provides rules for identifying assets that for purposes of the foreign income tax. 2011, and before July 21, 2014, other are relevant foreign assets (or RFAs) (2) RFA status with respect to a than CAAs occurring before July 21, with respect to a CAA. Paragraph (d) of foreign income tax. An asset is relevant in determining foreign income if 2014, resulting from an entity this section provides special rules for income, deduction, gain, or loss classification election made under identifying CAAs and RFAs with attributable to the asset is taken into § 301.7701–3 that is filed on or after July respect to transactions to which account in determining foreign income 29, 2014, and that is effective on or paragraphs (b) and (c) of this section do immediately after the CAA, or would be before July 21, 2014, but only if the not apply. Paragraph (e) of this section taken into account in determining basis difference (within the meaning of provides examples illustrating the rules foreign income immediately after the section 901(m)(3)(C)(i)) in one or more of this section, and paragraph (f) of this CAA if the asset were to give rise to RFAs with respect to the CAA had not section provides applicability dates. been fully taken into account under income, deduction, gain, or loss at such (b) Covered asset acquisitions. Except time. section 901(m)(3)(B) either as of July 21, as provided in paragraph (d) of this 2014, or, in the case of an entity (3) Subsequent RFA status with section, the transactions set forth in this respect to another foreign income tax. classification election made under paragraph (b) are CAAs. § 301.7701–3 that is filed on or after July After a CAA, an asset will become an (1) A qualified stock purchase (as 29, 2014, and that is effective on or RFA with respect to another foreign defined in section 338(d)(3)) to which before July 21, 2014, before the income tax if, pursuant to a plan or section 338(a) applies (section 338 transactions that are deemed to occur series of related transactions that have a CAA); under § 301.7701–3(g) as a result of the principal purpose of avoiding the change in classification. (2) Any transaction that is treated as application of section 901(m), an asset (3) Taxpayers may, however, choose an acquisition of assets for U.S. income that was not relevant in determining to apply provisions in this section tax purposes and treated as an foreign income for purposes of that before the date such provisions are acquisition of stock of a corporation (or foreign income tax immediately after the applicable pursuant to paragraph (b)(1) disregarded) for foreign income tax CAA becomes relevant in determining or (2) of this section, provided that they purposes; such foreign income. A principal (along with any persons that are related (3) Any acquisition of an interest in a purpose of avoiding section 901(m) will (within the meaning of section 267(b) or partnership that has an election in effect be deemed to exist if income, deduction, 707(b)) to the taxpayer)— under section 754 (section 743(b) CAA); gain, or loss attributable to the asset is (i) Consistently apply this section, (4) Any transaction (or series of taken into account in determining such § 1.704–1(b)(4)(viii)(c)(4)(v) through transactions occurring pursuant to a foreign income within the one-year (vii), and §§ 1.901(m)–3 through plan) to the extent it is treated as an period following the CAA, or would be 1.901(m)–8 (excluding § 1.901(m)–4(e)) acquisition of assets for purposes of U.S. taken into account in determining such to all CAAs occurring on or after income tax and as the acquisition of an foreign income during such time if the January 1, 2011, and consistently apply interest in a fiscally transparent entity asset were to give rise to income, § 1.901(m)–2 (excluding § 1.901(m)– for purposes of a foreign income tax; deduction, gain, or loss within the one- 2(d)) to all CAAs occurring on or after (5) Any transaction (or series of year period. December 7, 2016, on any original or transactions occurring pursuant to a (d) Identifying covered asset amended tax return for each taxable plan) to the extent it is treated as a acquisitions and relevant foreign assets year for which the application of the partnership distribution of one or more to which paragraphs (b) and (c) of this provisions listed in this paragraph assets the U.S. basis of which is section do not apply. For transactions (b)(3)(i) affects the tax liability and for determined by section 732(b) or 732(d) occurring on or after January 1, 2011, which the statute of limitations does not or to the extent it causes the U.S. basis and before July 21, 2014, other than preclude assessment or the filing of a of the partnership’s remaining assets to transactions occurring before July 21, claim for refund, as applicable; be adjusted under section 734(b), 2014, resulting from an entity (ii) File all tax returns described in provided the transaction results in an classification election made under paragraph (b)(3)(i) of this section for any increase in the U.S. basis of one or more § 301.7701–3 of this chapter that is filed taxable year ending on or before March of the assets distributed by the on or after July 29, 2014, and that is 23, 2020, no later than March 23, 2021; partnership or retained by the effective on or before July 21, 2014, the and partnership without a corresponding transactions set forth under section

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901(m)(2) are CAAs and the assets that of USSub is taken into account in entity classification election made are relevant foreign assets with respect determining foreign income for purposes of under § 301.7701–3 of this chapter that to the CAA under section 901(m)(4) are a foreign income tax nor would such items is filed on or after July 29, 2014, and RFAs. be taken into account in determining foreign that is effective on or before July 21, income for purposes of a foreign income tax (e) Examples. The following examples immediately after the acquisition if such 2014. illustrate the rules of this section: assets were to give rise to income, deduction, (3) Taxpayers may, however, choose (1) Example 1: CAA involving an gain, or loss immediately after the to apply provisions in this section acquisition of a partnership interest for acquisition. before the date such provisions are foreign income tax purposes—(i) Facts. (A) (B) On December 1 of Year 1, USSub applicable pursuant to paragraph (f)(1) FPS is an entity organized in Country F that contributes all its assets to FSub, its wholly or (2) of this section, provided that they is treated as a partnership for both U.S. and owned subsidiary, which is a corporation for (along with any persons that are related both U.S. and Country X income tax Country F income tax purposes. FPS is (within the meaning of section 267(b) or owned equally by FC1 and FC2, each of purposes, in a transfer described in section which is a corporation organized in Country 351 (subsequent transfer). USSub recognizes 707(b)) to the taxpayer)— F and treated as a corporation for both U.S. no gain or loss for U.S. or Country X income (i) Consistently apply this section and Country F income tax purposes. FPS has tax purposes as a result of the subsequent (excluding paragraph (d) of this section) a single asset, Asset A. USP, a domestic transfer. As a result of the subsequent to all CAAs occurring on or after corporation, owns all the interests in DE, a transfer, income, deduction, gain, or loss December 7, 2016 and consistently disregarded entity. attributable to the assets of USSub that were apply § 1.704–1(b)(4)(viii)(c)(4)(v) (B) Pursuant to the same transaction, USP transferred to FSub is taken into account in through (vii), § 1.901(m)–1, and determining foreign income of FSub for acquires FC1’s interest in FPS, and DE §§ 1.901(m)–3 through 1.901(m)–8 acquires FC2’s interest in FPS. For U.S. Country X tax purposes. income tax purposes, with respect to USP, (ii) Result. (A) Under paragraph (b)(1) of (excluding § 1.901(m)–4(e)) to all CAAs the acquisition of the interests in FPS is this section, the acquisition by USP2 of the occurring on or after January 1, 2011, on treated as the acquisition of Asset A by USP. stock of USSub is a section 338 CAA. Under any original or amended tax return for See Rev. Rul. 99–6, 1999–1 C.B. 432. For paragraph (c)(1) of this section, none of the each taxable year for which the Country F tax purposes, the acquisitions of assets of USSub are RFAs immediately after application of the provisions listed in the interests of FPS by USP and DE are the CAA, because none of the income, this paragraph (f)(3)(i) affects the tax treated as acquisitions of partnership deduction, gain, or loss attributable to such liability and for which the statute of assets is taken into account for purposes of interests. limitations does not preclude (ii) Result. The transaction is a CAA under determining foreign income with respect to paragraph (b)(4) of this section because it is any foreign income tax immediately after the assessment or the filing of a claim for treated as the acquisition of Asset A for U.S. CAA (nor would such items be taken into refund, as applicable; income tax purposes and the acquisition of account for purposes of determining foreign (ii) File all tax returns described in interests in a fiscally transparent entity for income immediately after the CAA if such paragraph (f)(3)(i) of this section for any Country F tax purposes. assets were to give rise to income, deduction, taxable year ending on or before March (2) Example 2: CAA involving an asset gain, or loss at such time). 23, 2020, no later than March 23, 2021; acquisition for purposes of both U.S. income (B) Although the subsequent transfer is not and a CAA under paragraph (b) of this section, tax and a foreign income tax—(i) Facts. (A) (iii) Make appropriate adjustments to USP, a domestic corporation, wholly owns the subsequent transfer causes the assets of CFC1, a foreign corporation, and CFC1 USSub to become relevant in the hands of take into account deficiencies that wholly owns CFC2, also a foreign FSub in determining foreign income for would have resulted from the consistent corporation. CFC1 and CFC2 are organized in Country X tax purposes. Because the application under paragraph (f)(3)(i) of Country F. CFC1 owns Asset A. subsequent transfer occurred within the one- this section for taxable years that are not (B) In an exchange described in section year period following the CAA, it is open for assessment. 351, CFC1 transfers Asset A to CFC2 in presumed to have a principal purpose of exchange for CFC2 common stock and cash. avoiding section 901(m) under paragraph § 1.901(m)–2T [Removed] (c)(3) of this section. Accordingly, the assets CFC1 recognizes gain on the exchange under ■ of USSub with respect to the CAA occurring Par. 6. Section 1.901(m)–2T is section 351(b). Under section 362(a), CFC2’s removed. U.S. basis in Asset A is increased by the gain on January 1 of Year 1 become RFAs with recognized by CFC1. For Country F tax respect to Country X tax as a result of the ■ Par. 7. Section 1.901(m)–3 is added to purposes, gain or loss is not recognized on subsequent transfer. Thus, a basis difference read as follows: the transfer of Asset A to CFC2, and therefore with respect to Country X tax must be there is no increase in the foreign basis in computed for the RFAs and taken into § 1.901(m)–3 Disqualified tax amount and Asset A. account under section 901(m). aggregate basis difference carryover. (ii) Result. The transaction is a CAA under (f) Applicability dates. (1) Except as (a) In general. If a section 901(m) paragraph (b)(6) of this section because it is provided in paragraph (f)(2) of this payor has an aggregate basis difference, treated as an acquisition of Asset A by CFC2 section, this section applies to CAAs with respect to a foreign income tax and for both U.S. and Country F income tax a foreign payor, for a U.S. taxable year, purposes, and it results in an increase in the occurring on or after March 23, 2020. U.S. basis of Asset A without a (2) Paragraphs (a), (b)(1) through (3), the section 901(m) payor must corresponding increase in the foreign basis of and (c)(1) of this section apply to determine the portion of a foreign Asset A. transactions occurring on or after July income tax amount that is disqualified (3) Example 3: RFA status determined 21, 2014, and to transactions occurring under section 901(m) (disqualified tax immediately after CAA; application of before that date resulting from an entity amount). Paragraph (b) of this section principal purpose rule—(i) Facts. (A) USP1 classification election made under provides rules for determining the and USP2 are unrelated domestic § 301.7701–3 of this chapter that is filed disqualified tax amount. Paragraph (c) corporations. USP1 wholly owns USSub, also on or after July 29, 2014, and that is of this section provides rules for a domestic corporation. On January 1 of Year effective on or before July 21, 2014. determining what portion, if any, of 1, USP2 acquires all of the stock of USSub from USP1 in a qualified stock purchase (as Paragraph (d) of this section applies to aggregate basis difference will be carried defined in section 338(d)(3)) to which section transactions occurring on or after forward to the next U.S. taxable year 338(a) applies. Immediately after the January 1, 2011, and before July 21, (aggregate basis difference carryover). acquisition, none of the income, deduction, 2014, other than transactions occurring Paragraph (d) of this section provides gain, or loss attributable to any of the assets before July 21, 2014, resulting from an applicability dates.

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(b) Disqualified tax amount—(1) In relates to the foreign income tax amount (A) The section 901(m) payor’s general. A section 901(m) payor’s allocated to that section 901(m) payor, aggregate basis difference for the U.S. disqualified tax amount is not taken into determined with respect to each taxable year is a negative amount; account in determining the credit separate category. (B) Foreign income is less than or allowed under section 901(a). If the (C) Rules for allocations. This equal to zero for the foreign taxable year section 901(m) payor is an applicable paragraph (b)(2)(iii)(C) provides of the foreign payor; or foreign corporation, the disqualified tax allocation rules that apply to determine (C) The foreign income tax amount amount is not taken into account for allocable foreign income in certain that is paid or accrued by, or considered purposes of section 902 (for tax years of cases. paid or accrued by, the section 901(m) foreign corporations beginning before (1) If the foreign payor is involved in payor for the U.S. taxable year is zero. January 1, 2018) or 960. Sections 78 and a mid-year transaction and the foreign (3) Examples. The following examples 275 do not apply to the disqualified tax income tax amount is allocated under illustrate the rules of paragraph (b)(2) of amount. The disqualified tax amount is § 1.336–2(g)(3)(ii), § 1.338–9(d), or this section. For purposes of all the allowed as a deduction to the extent § 1.901–2(f)(4), then, to the extent any examples, unless otherwise specified: otherwise deductible. See sections 164, portion of the foreign income tax USP is a domestic corporation. CFC1, 212, and 964 and the regulations under amount is allocated to, and considered CFC2, DE1, and DE2 are organized in those sections. paid or accrued by, a section 901(m) Country F and are treated as (2) Determination of disqualified tax payor, the allocable foreign income of corporations for Country F tax purposes. amount—(i) In general. Except as the section 901(m) payor is determined CFC1 and CFC2 are applicable foreign provided in paragraph (b)(2)(iv) of this in accordance with the principles of corporations. DE1 and DE2 are section, the disqualified tax amount is § 1.1502–76(b). To the extent the foreign disregarded entities. USP, CFC1, and equal to the lesser of the foreign income income tax amount is allocated to an CFC2 each have a calendar year for both tax amount that is paid or accrued by, entity that is a partnership for U.S. U.S. and Country F income tax or considered paid or accrued by, the income tax purposes, a portion of the purposes, and DE1 and DE2 each have section 901(m) payor for the U.S. foreign income is first allocated to the a calendar year for Country F tax taxable year or the tentative disqualified partnership in accordance with the purposes. Country F and Country G tax amount. All calculations are principles of § 1.1502–76(b), which is each impose a single tax that is a foreign determined with respect to each then allocated under the rules of income tax. CFC1, CFC2, DE1, and DE2 separate category. paragraph (b)(2)(iii)(C)(2) of this section each have a functional currency of the (ii) Tentative disqualified tax amount. to determine the allocable foreign u with respect to all activities. At all The tentative disqualified tax amount is income of a section 901(m) payor that relevant times, 1u equals $1. All equal to the amount determined under owns an interest in the partnership amounts are stated in millions. The paragraph (b)(2)(ii)(A) of this section directly or indirectly through one or examples assume that the applicable reduced (but not below zero) by the more other partnerships for U.S. income cost recovery method for property amount described in paragraph tax purposes. results in basis being recovered ratably (b)(2)(ii)(B) of this section. (2) If the foreign income tax amount over the life of the property beginning (A) The product of— on the first day of the U.S. taxable year (1) The sum of the foreign income tax is considered paid or accrued by a section 901(m) payor for a U.S. taxable in which the property is acquired or amount and the FCCTs that are paid or placed into service; there is a single accrued by, or considered paid or year under § 1.702–1(a)(6), the determination of the allocable foreign separate category with respect to a accrued by, the section 901(m) payor, foreign income and foreign income tax and income must be consistent with the allocation of the foreign income tax amount; and a section 901(m) payor (2) A fraction, the numerator of which properly substantiates its allocable is the aggregate basis difference, but not amount that relates to the foreign income. See § 1.704–1(b)(4)(viii). foreign income to the satisfaction of the in excess of the allocable foreign Secretary. income, and the denominator of which (3) If the foreign income tax amount is the allocable foreign income. that is allocated to, and considered paid (i) Example 1: Determining aggregate basis (B) The amount of the FCCT that is a or accrued by, a section 901(m) payor difference; multiple foreign payors—(A) Facts. CFC1 wholly owns CFC2 and DE1. disqualified tax amount of the section for a U.S. taxable year is determined under § 1.901–2(f)(3)(i), the allocable DE1 wholly owns DE2. Assume that the tax 901(m) payor with respect to another laws of Country F do not allow combined foreign income tax. foreign income is determined in income reporting or the filing of consolidated (iii) Allocable foreign income—(A) No accordance with § 1.901–2(f)(3)(iii). income tax returns. Accordingly, CFC1, allocation required. Except as provided (D) Failure to substantiate allocable CFC2, DE1, and DE2 file separate tax returns in paragraph (b)(2)(iii)(D) of this section, foreign income. If, pursuant to section for Country F tax purposes. USP acquires all if the entire foreign income tax amount 901(m)(3)(A), a section 901(m) payor of the stock of CFC1 in a qualified stock is paid or accrued by, or considered fails to substantiate its allocable foreign purchase (as defined in section 338(d)(3)) to income to the satisfaction of the which section 338(a) applies for both CFC1 paid or accrued by, a single section and CFC2. 901(m) payor, then the allocable foreign Secretary, then allocable foreign income (B) Result. (1) The acquisition of CFC1 income is equal to the entire foreign will equal the amount determined by gives rise to four separate CAAs under income, determined with respect to dividing the sum of the foreign income § 1.901(m)–2(b). The acquisition of the stock each separate category. tax amount and the FCCTs that are paid of CFC1 and the deemed purchase of the (B) Allocation required. Except as or accrued by, or considered paid or stock of CFC2 under section 338(h)(3)(B) are provided in paragraph (b)(2)(iii)(D) of accrued by, the section 901(m) payor, by each a section 338 CAA under § 1.901(m)– this section, if the foreign income tax the highest marginal tax rate applicable 2(b)(1). Furthermore, because the deemed amount is allocated to, and considered to income of the foreign payor under purchase of the assets of DE1 and DE2 for U.S. income tax purposes is disregarded for paid or accrued by, more than one foreign tax law. Country F tax purposes, each acquisition is person, a section 901(m) payor’s (iv) Special rule. A section 901(m) a CAA under § 1.901(m)–2(b)(2). Because allocable foreign income is equal to the payor’s disqualified tax amount is zero these four CAAs occur pursuant to a plan, portion of the foreign income that for a U.S. taxable year if: under § 1.901(m)–1(a)(3) they are part of an

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aggregated CAA transaction. Under under § 1.901(m)–1(a)(1), CFC2 has a single (b)(3)(i)(B)(3) (paragraph (B)(3) of this § 1.901(m)–1(a)(37), CFC1 is the RFA owner computation with respect to Country F tax, Example 1). (U.S.) with respect to its assets and those of because there is a single foreign payor (CFC2) (ii) Example 2: Computation of disqualified DE1 and DE2. CFC2 is the RFA owner (U.S.) for Country F tax purposes whose foreign tax amount—(A) Facts. On December 31 of with respect to its assets. Under § 1.901(m)– income tax amount, if any, is considered paid Year 0, USP acquires all of the stock of CFC1 1(a)(28), CFC1, CFC2, DE1, and DE2 are each or accrued by CFC2 as the section 901(m) a foreign payor for Country F tax purposes. payor. Furthermore, for each U.S. taxable in a qualified stock purchase (as defined in Under § 1.901(m)–1(a)(41), CFC1 is the year, CFC2 will compute a disqualified tax section 338(d)(3)) to which section 338(a) section 901(m) payor with respect to foreign amount and aggregate basis difference applies (Acquisition). CFC1 owns four assets income tax amounts for which CFC1, DE1, carryover (if any) under paragraph (b)(2) of (Asset A, Asset B, Asset C, and Asset D, and and DE2 are the foreign payors (see § 1.901– this section. collectively, Assets) and conducts activities 2(f)(1) and (f)(4)(ii)). CFC2 is the section (C) Alternative facts. Assume the same in Country F and in a Country G branch. The 901(m) payor with respect to foreign income facts as in paragraph (b)(3)(i)(A) of this activities conducted by CFC1 in Country G tax amounts for which CFC2 is the foreign section (paragraph (A) of this Example 1), are not subject to tax in Country F. The tax payor (see § 1.901–2(f)(1)). except that foreign income for Country F tax rate is 25% in Country F and 30% in Country (2) In determining aggregate basis purposes is based on combined income difference under § 1.901(m)–1(a)(1) for a U.S. (within the meaning of § 1.901–2(f)(3)(ii)) of G. For Country F tax purposes, CFC1’s taxable year of CFC1, CFC1 has three CFC1, CFC2, DE1, and DE2. For purposes of foreign income and foreign income tax computations with respect to Country F tax, determining an aggregate basis difference for amount for each foreign taxable year 1 because there are three foreign payors for a U.S. taxable year of CFC1 under through 15 is 100u and $25 (25u translated Country F tax purposes whose foreign § 1.901(m)–1(a)(1), CFC1, DE1, and DE2 are at the exchange rate of $1 = 1u), respectively. income tax amount, if any, is considered paid treated as a single foreign payor because all For Country G tax purposes, CFC1’s foreign or accrued by CFC1 as the section 901(m) of the items of income, deduction, gain, or income and foreign income tax amount for payor. Furthermore, for each U.S. taxable loss with respect to CFC1, DE1, and DE2 are each foreign taxable year 1 through 5 is 400u year, CFC1 will compute a separate included in the earnings and profits of CFC1 and $120 (120u translated at the exchange disqualified tax amount and aggregate basis for U.S. income tax purposes. For each U.S. difference carryover (if any) under paragraph taxable year, CFC1 will therefore compute a rate of $1 = 1u), respectively. No dispositions (b)(2) of this section, with respect to each single aggregate basis difference, disqualified occur for any of the Assets during the foreign payor. tax amount, and aggregate basis difference applicable cost recovery period. Additional (3) In determining aggregate basis carryover. The result for CFC2 under the facts relevant to each of the Assets are difference for a U.S. taxable year of CFC2 alternative facts is the same as in paragraph summarized below.

Applicable Relevant foreign Basis cost recovery Assets income tax difference period Cost recovery amount (years)

Asset A ...... Country F tax ...... 150u 15 10u (150u/15). Asset B ...... Country F tax ...... 50u 5 10u (50u/5). Asset C ...... Country G tax ...... 300u 5 60u (300u/5). Asset D ...... Country G tax ...... (100u) 5 negative 20u (negative 100/5).

(B) Result. (1) Under § 1.901(m)–2(b)(1), disposition amounts. Because there are no year is $5, the lesser of two amounts: the the acquisition of the stock of CFC1 is a dispositions, the only allocated basis tentative disqualified tax amount, in this section 338 CAA. Under § 1.901(m)–2(c)(1), differences taken into account in determining case, $5 ($25 foreign income tax amount × Assets A and B are RFAs with respect to an aggregate basis difference are cost (20u aggregate basis difference/100u Country F tax, because they are relevant in recovery amounts. Under § 1.901(m)–5(b), allocable foreign income)), or the foreign determining foreign income of CFC1 for any cost recovery amounts are attributed to income tax amount paid or accrued by CFC1, Country F tax purposes and were owned by CFC1, because CFC1 is the section 901(m) in this case, $25. After U.S. taxable year 5, CFC1 when the Acquisition occurred. Assets payor and RFA owner (U.S.) with respect to Asset B has no unallocated basis difference C and D are RFAs with respect to Country G all of the Assets. For each U.S. taxable year, with respect to Country F tax. Accordingly, tax, because they are relevant in determining CFC1 will compute a separate disqualified in U.S. taxable years 6 through 15, CFC1 has foreign income of CFC1 for Country G tax tax amount and aggregate basis difference an aggregate basis difference of 10u each purposes and were owned by CFC1 when the carryover (if any) with respect to Country F year. Accordingly, for U.S. taxable years 6 Acquisition occurred. Under § 1.901(m)– tax and Country G tax under paragraph (b)(2) through 15, the disqualified tax amount each 1(a)(37), CFC1 is the RFA owner (U.S.) with of this section. For purposes of both year is $2.50, the lesser of two amounts: the respect to all of the RFAs. Under § 1.901(m)– disqualified tax amount computations, tentative disqualified tax amount, in this 1(a)(41) and (28), CFC1 is the section 901(m) because CFC1 is the section 901(m) payor case, $2.50 ($25 foreign income tax amount payor and the foreign payor for Country F and foreign payor, the foreign income tax × (10u aggregate basis difference/100u and Country G tax purposes. amount paid or accrued by CFC1 with allocable foreign income)), or the foreign (2) In determining aggregate basis respect to Country F tax and Country G tax, income tax amount paid or accrued by CFC1, difference for a U.S. taxable year of CFC1, respectively, will be the entire foreign in this case, $25. After U.S. taxable year 15, CFC1 has two computations, one with income tax amount and CFC1’s allocable Asset A has no unallocated basis difference respect to Country F tax and one with respect foreign income will be the entire foreign with respect to Country F tax and, therefore, to Country G tax. Under § 1.901(m)–1(a)(1), income. CFC1 has no disqualified tax amount with the aggregate basis difference for a U.S. (3) With respect to Country F tax, in U.S. respect to Country F Tax. taxable year with respect to Country F tax is taxable years 1 through 5, CFC1 has an (4) With respect to Country G tax, in U.S. equal to the sum of the allocated basis aggregate basis difference of 20u each year taxable years 1 through 5, CFC1 has an differences and allocated basis difference (10u cost recovery amount with respect to aggregate basis difference of 40u each year adjustments with respect to Assets A and B Asset A plus 10u cost recovery amount with (60u cost recovery amount with respect to for the U.S. taxable year. Under § 1.901(m)– respect to Asset B). For U.S. taxable years 1 Asset C + (20u) cost recovery amount with 1(a)(5), allocated basis differences are the through 5, under paragraph (b)(2) of this respect to Asset D). For U.S. taxable years 1 sum of cost recovery amounts and section, the disqualified tax amount each through 5, under paragraph (b)(2) of this

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section, the disqualified tax amount each the aggregate basis difference with respect to (A) If a section 901(m) payor’s year is $12, the lesser of two amounts: the Country F tax and with respect to Country G aggregate basis difference for the U.S. tentative disqualified tax amount, in this tax and will use those amounts to separately × taxable year exceeds its allocable foreign case, $12 ($120 foreign income tax amount compute a disqualified tax amount and income, the excess gives rise to an (40u aggregate basis difference/400u aggregate basis difference carryover (if any) allocable foreign income)), or the foreign with respect to each foreign income tax. aggregate basis difference carryover. income tax amount paid or accrued by CFC1, Because DE1 is a disregarded entity owned (B) If the tentative disqualified tax in this case, $120. After U.S. taxable year 5, by USP during the entire U.S. taxable year 3, amount exceeds the disqualified tax Asset C and Asset D have no unallocated the foreign income tax amount paid or amount, the excess tentative basis difference with respect to Country G accrued by DE1 is not subject to allocation. disqualified tax amount is converted tax. Accordingly, in U.S. taxable years 6 Accordingly, for purposes of each of the into aggregate basis difference carryover through 15, CFC1 has no disqualified tax disqualified tax amount computations, the by multiplying such excess by a amount with respect to Country G Tax. foreign income tax amount paid or accrued fraction, the numerator of which is the (iii) Example 3: FCCT—(A) Facts. In U.S. by USP with respect to Country F tax and allocable foreign income, and the taxable year 1, USP acquires all of the Country G tax, respectively, is the entire interests in DE1 in a transaction foreign income tax amount paid or accrued denominator of which is the sum of the (Transaction) that is treated as a stock by DE1, and, under paragraph (b)(2)(iii)(A) of foreign income tax amount and the acquisition for Country F tax purposes. this section, USP’s allocable foreign income FCCTs that are paid or accrued by, or Immediately after the Transaction, DE1 owns will be equal to DE1’s entire foreign income. considered paid or accrued by, the assets (Pre-Transaction Assets), all of which (3) As stated in paragraph (b)(3)(iii)(A) of section 901(m) payor. are used in a Country G branch and give rise this section (paragraph (A) of this Example (3) Example. The following example to income that is taken into account for 3), for U.S. taxable year 3 USP has 100u illustrates the rules of paragraph (c) of Country F tax and Country G tax purposes. aggregate basis difference with respect to this section. After the Transaction, DE1 acquires Country F tax and 100u aggregate basis additional assets (Post-Transaction Assets), difference with respect to Country G tax. (i) Facts. (A) On July 1 of Year 1, CFC1 which are not used by the Country G branch. With respect to Country G tax, in U.S. taxable acquires all of the interests of DE1 in a Both Country F and Country G have a tax rate year 3, under paragraph (b)(2) of this section, transaction (Transaction) that is treated as a of 30%. Country F imposes worldwide tax on the disqualified tax amount is $30, the lesser stock acquisition for Country F tax purposes. its residents and provides a foreign tax credit of the two amounts: the tentative disqualified CFC1 and DE1 are organized in Country F for taxes paid to other jurisdictions. In tax amount, in this case, $30 ($30 foreign and are treated as corporations for Country F foreign taxable year 3, 100u of income is income tax amount × (100u aggregate basis tax purposes. CFC1 is an applicable foreign attributable to DE1’s Post-Transaction Assets difference/100u allocable foreign income)), or corporation, and DE1 is a disregarded entity. and 100u of income is attributable to DE1’s the foreign income tax amount considered CFC1 has a calendar year for U.S. income tax Pre-Transaction Assets. For Country G tax paid or accrued by USP, in this case, $30. purposes, and DE1 has a June 30 year-end for purposes, the foreign income is 100u and (4) With respect to Country F tax, in U.S. Country F tax purposes. Country F imposes × foreign income tax amount is 30u (30% taxable year 3, under paragraph (b)(2) of this a single tax that is a foreign income tax. CFC1 100u). For Country F tax purposes, the section, the disqualified tax amount is $0, the and DE1 each have a functional currency of foreign income is 200u and the pre-foreign lesser of two amounts: the tentative the u with respect to all activities. × tax credit tax is 60u (30% 200u). The 60u disqualified tax amount, in this case $0 (($30 Immediately after the Transaction, DE1 owns of Country F pre-foreign tax credit tax is foreign income tax amount + $30 Country G one asset, Asset A, that gives rise to income reduced by the 30u foreign income tax FCCT) × (100u aggregate basis difference/ that is taken into account for Country F tax amount imposed for Country G tax purposes. 200u foreign income) = $30 reduced by $30 purposes. For the first U.S. taxable year (U.S. Thus, the foreign income tax amount for Country G FCCT that is a disqualified tax taxable year 1) there is a cost recovery Country F tax purposes is $30 (30u translated amount of USP), or the foreign income tax amount with respect to Asset A of 9u, and into dollars at the exchange rate of $1 = 1u). amount considered paid or accrued by USP, for each subsequent U.S. taxable year until Assume that for U.S. taxable year 3 USP has in this case, $30. the U.S. basis is fully recovered, there is a 100u aggregate basis difference with respect cost recovery amount with respect to Asset to Country F tax and 100u aggregate basis (c) Aggregate basis difference A of 18u. There is no disposition of Asset A. difference with respect to Country G tax. USP carryover—(1) In general. If a section (ii) Result. (A) Under § 1.901(m)–2(b)(2), does not dispose of DE1 or any assets of DE1 901(m) payor has an aggregate basis the Transaction is a CAA. Under § 1.901(m)– in U.S. taxable year 3. difference carryover for a U.S. taxable 2(c)(1), Asset A is an RFA with respect to (B) Result. (1) Under § 1.901(m)–2(b)(2), year, as determined under this Country F tax because it is relevant in the Transaction is a CAA. Under § 1.901(m)– paragraph (c), the aggregate basis determining the foreign income of DE1 for 2(c)(1), the Pre-Transaction Assets are RFAs Country F tax purposes and was owned by with respect to both Country F tax and difference carryover is taken into DE1 when the Transaction occurred. Under Country G tax, because they are relevant in account in computing the section § 1.901(m)–1(a)(37), CFC1 is the RFA owner determining the foreign income of DE1 for 901(m) payor’s aggregate basis (U.S.) with respect to Asset A. Under Country F tax and Country G tax purposes difference for the next U.S. taxable year. § 1.901(m)–1(a)(28), DE1 is a foreign payor and were owned by DE1 when the For successor rules that apply to an for Country F tax purposes. Under Transaction occurred. Under § 1.901(m)– aggregate basis difference carryover, see § 1.901(m)–1(a)(41), CFC1 is the section 1(a)(37), USP is the RFA owner (U.S.) with § 1.901(m)–6(c). 901(m) payor with respect to foreign income respect to the RFAs. Under § 1.901(m)– (2) Amount of aggregate basis tax amounts for which DE1 is the foreign 1(a)(28), DE1 is a foreign payor for Country payor (see § 1.901–2(f)(4)(ii)). F tax and Country G tax purposes. Under difference carryover. (i) If a section (B) Under § 1.901(m)–1(a)(1), in § 1.901(m)–1(a)(41), USP is the section 901(m) payor’s disqualified tax amount determining the aggregate basis difference for 901(m) payor with respect to foreign income is zero, all of the section 901(m) payor’s U.S. taxable year 1, CFC1 has one tax amounts for which DE1 is the foreign aggregate basis difference (positive or computation with respect to Country F tax. payor (see § 1.901–2(f)(4)(ii)). Because the negative) for the U.S. taxable year gives Under § 1.901(m)–1(a)(1), aggregate basis Country G foreign income tax amount is rise to an aggregate basis difference difference with respect to Country F tax is claimed as a credit for purposes of carryover to the next U.S. taxable year. equal to the sum of allocated basis determining the Country F foreign income differences and allocated basis difference tax amount, the Country G foreign income tax (ii) If a section 901(m) payor’s adjustments with respect to all RFAs, which, amount is an FCCT under § 1.901(m)– disqualified tax amount is not zero, then in this case, is only Asset A. Under 1(a)(22). aggregate basis difference carryover can § 1.901(m)–1(a)(5), allocated basis differences (2) Under § 1.901(m)–1(a)(1), for each U.S. arise in either or both of the following are the sum of cost recovery amounts and taxable year, USP will separately compute two situations: disposition amounts. Because there is no

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disposition of Asset A, the only allocated this paragraph (d)(1) affects the tax the CAA, less the foreign basis in the basis difference taken into account in liability and for which the statute of RFA immediately after the CAA. For determining an aggregate basis difference are limitations does not preclude this purpose, the foreign basis cost recovery amounts with respect to Asset assessment or the filing of a claim for immediately after the CAA takes into A. Under § 1.901(m)–5(b), any cost recovery refund, as applicable account any adjustment to that foreign amounts are assigned to a U.S taxable year of CFC1, because CFC1 is the section 901(m) (2) File all tax returns described in basis resulting from the CAA for payor and RFA owner (U.S.) with respect to paragraph (d)(1) of this section for any purposes of the foreign income tax. Asset A. Under paragraph (b)(2) of this taxable year ending on or before March (2) Except as otherwise provided in section, for each U.S. taxable year, CFC1 will 23, 2020, no later than March 23, 2021; this paragraph (c), a foreign basis compute a disqualified tax amount and and election is made by the RFA owner aggregate basis difference carryover with (3) Make appropriate adjustments to (U.S.). If, however, the RFA owner respect to the aggregate basis difference. take into account deficiencies that (U.S.) is a partnership, each partner in Because DE1 is a disregarded entity owned would have resulted from the consistent the partnership (and not the by CFC1, the foreign income tax amount paid application under paragraph (d)(1) of partnership) may independently make a or accrued by DE1 is not subject to allocation. this section for taxable years that are not foreign basis election. In the case of one Accordingly, for purposes of the disqualified open for assessment. tax amount computation, the foreign income or more tiered partnerships, the foreign basis election is made at the level at tax amount paid or accrued by CFC1 with § 1.901(m)–3T [Removed] respect to Country F tax is the entire foreign which a partner is not also a ■ income tax amount paid or accrued by DE1, Par. 8. Section 1.901(m)–3T is partnership. and under paragraph (b)(2)(iii)(A) of this removed. (3) The foreign basis election may be section, CFC1’s allocable foreign income will ■ Par. 9. Section 1.901(m)–4 is added to made separately for each CAA, and with be equal to DE1’s entire foreign income. read as follows: respect to each foreign income tax and (C) In U.S. taxable year 1, CFC1 has an each foreign payor. For purposes of aggregate basis difference of 9u (the 9u cost § 1.901(m)–4 Determination of basis making the foreign basis election, all recovery amount with respect to Asset A for difference. CAAs that are part of an aggregated CAA U.S. taxable year 1). However, because the (a) In general. This section provides transaction are treated as a single CAA. foreign taxable year of DE1, the foreign payor, rules for determining for each RFA the will not end between July 1 and December Furthermore, for purposes of making the basis difference that arises as a result of foreign basis election, if foreign law 31, there will not be a foreign income tax a CAA. A basis difference is computed amount for U.S. taxable year 1. Because the imposes tax on the combined income foreign income tax amount considered paid separately with respect to each foreign (within the meaning of § 1.901– or accrued by CFC1 for U.S. taxable year 1 income tax for which an asset subject to 2(f)(3)(ii)) of two or more foreign payors, is zero, under paragraph (b)(2)(iv) of this a CAA is an RFA. Paragraph (b) of this all foreign payors whose items of section, the disqualified tax amount for U.S. section provides the general rule for income, deduction, gain, or loss for U.S. taxable year 1 of CFC1 is also zero. determining basis difference that income tax purposes are included in the Furthermore, because the disqualified tax references only U.S. basis in the RFA. U.S. taxable income or earnings and amount is zero, under paragraph (c)(2)(i) of Paragraph (c) of this section provides for profits of a single section 901(m) payor this section, CFC1 has an aggregate basis an election to determine basis difference are treated as a single foreign payor. difference carryover equal to 9u, the entire by reference to foreign basis and sets amount of the aggregate basis difference for (4) A foreign basis election is made by U.S. taxable year 1. Under paragraph (c)(1) of forth the procedures for making the using foreign basis to determine basis this section, the 9u aggregate basis difference election. Paragraph (d) of this section difference for purposes of computing a carryover is taken into account in computing provides special rules for determining disqualified tax amount and an CFC1’s aggregate basis difference for U.S. basis difference in the case of a section aggregate basis difference carryover for taxable year 2. Accordingly, in U.S. taxable 743(b) CAA. Paragraph (e) of this the U.S. taxable year, as provided under year 2, CFC1 has an aggregate basis difference section provides a special rule for § 1.901(m)–3. A separate statement or of 27u (18u cost recovery amount for U.S. determining basis difference in an RFA form evidencing the foreign basis taxable year 2, plus 9u aggregate basis with respect to a CAA to which election need not be filed. Except as difference carryover from U.S. taxable year paragraphs (b) through (d) of this provided in paragraphs (c)(5) and (6) of 1). section do not apply. Paragraph (f) of this section, in order for a foreign basis (d) Applicability dates. This section this section provides examples election to be effective, the election applies to CAAs occurring on or after illustrating the rules of this section, and must be reflected on a timely filed March 23, 2020. Taxpayers may, paragraph (g) of this section provides original federal income tax return however, choose to apply this section applicability dates. (taking into account extensions) for the before the date this section is applicable (b) General rule. Except as otherwise first U.S. taxable year that the foreign provided that they (along with any provided in paragraphs (c), (d), and (e) basis election is relevant to the persons that are related (within the of this section, basis difference is the computation of any amounts reported meaning of section 267(b) or 707(b)) to U.S. basis in the RFA immediately after on such return, including on any the taxpayer)— the CAA, less the U.S. basis in the RFA required schedules. (1) Consistently apply this section, immediately before the CAA. Basis (5) If the RFA owner (U.S.) is a § 1.704–1(b)(4)(viii)(c)(4)(v) through difference is an attribute that attaches to partnership, a foreign basis election (vii), § 1.901(m)–1, and §§ 1.901(m)–4 an RFA. reflected on a partner’s timely filed through 1.901(m)–8 (excluding (c) Foreign basis election. (1) An amended federal income tax return is § 1.901(m)–4(e)) to all CAAs occurring election (foreign basis election) may be also effective if all of the following on or after January 1, 2011, and made to apply section 901(m)(3)(C)(i)(II) conditions are satisfied: consistently apply § 1.901(m)–2 by reference to the foreign basis (i) The partner’s timely filed original (excluding § 1.901(m)–2(d)) to all CAAs immediately after the CAA instead of federal income tax return (taking into occurring on or after December 7, 2016, the U.S. basis immediately before the account extensions) for the first U.S. on any original or amended tax return CAA. Accordingly, if a foreign basis taxable year of the partner in which a for each taxable year for which the election is made, basis difference is the foreign basis election is relevant to the application of the provisions listed in U.S. basis in the RFA immediately after computation of any amounts reported

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on such return, including on any or, in the case of an entity classification is an entity organized in Country X and required schedules, does not reflect the election made under § 301.7701–3 of treated as a corporation for Country X tax application of section 901(m); this chapter that is filed on or after July purposes. DE2 is an entity organized in (ii) The information provided by the 29, 2014, and that is effective on or Country Y and treated as a corporation for partnership to the partner for purposes Country Y tax purposes. DE1 and DE2 are before July 21, 2014, before the disregarded entities. Country X and Country of applying section 901(m) and any transactions that are deemed to occur Y each impose a single tax that is a foreign information required to be reported by under § 301.7701–3(g) as a result of the income tax. US1 and US2, unrelated the partnership is based solely on change in classification. domestic corporations, and FP, a foreign computations that use foreign basis to (f) Examples. The following examples person unrelated to US1 and US2, acquire determine basis difference; and illustrate the rules of this section: partnership interests in USPS from existing (iii) Before the due date of the original partners of USPS pursuant to the same plan. (1) Example 1: Scope of basis choice; (ii) Result. Under § 1.901(m)–2(b)(3), the federal income tax return described in identifying separate CAAs, RFA owners acquisitions of the partnership interests in paragraph (c)(5)(i) of this section, the (U.S.), and foreign payors in an aggregated USPS by US1, US2, and FP each give rise to partner delegated the authority to the CAA transaction—(i) Facts. CFC1 wholly partnership to choose whether to owns CFC2, both of which are applicable separate section 743(b) CAAs, but under provide the partner with information to foreign corporations, organized in Country F, § 1.901(m)–1(a)(3), they are treated as an and treated as corporations for Country F tax aggregated CAA transaction because they apply section 901(m) using foreign occur as part of a plan. Under § 1.901(m)– basis, either pursuant to a written purposes. CFC1 also wholly owns DE1, and DE1 wholly owns DE2. DE1 and DE2 are 1(a)(37), USPS is the RFA owner (U.S.) with partnership agreement (within the respect to the assets of DE1 and DE2 that are meaning of § 1.704–1(b)(2)(ii)(h)) or entities organized in Country F treated as corporations for Country F tax purposes and RFAs. Under § 1.901(m)–1(a)(28), DE1 is a written notice provided by the partner as disregarded entities for U.S. income tax foreign payor for Country X tax purposes, to the partnership. purposes. Country F imposes a single tax that and DE2 is a foreign payor for Country Y tax (6) If, pursuant to paragraph (g)(3) of is a foreign income tax. All of the stock of purposes. Because the RFA owner (U.S.) is a this section, a taxpayer chooses to have CFC1 is acquired in a qualified stock partnership, paragraph (c)(2) of this section this section apply to CAAs occurring on purchase (within the meaning of section provides that US1, US2, and FP (the relevant or after January 1, 2011, a foreign basis 338(d)(3)) to which section 338(a) applies for partners in USPS) separately choose whether election will be effective if the election both CFC1 and CFC2. For Country F tax to make a foreign basis election for purposes purposes, the transaction is treated as an of determining basis difference. Furthermore, is reflected on a timely filed amended under paragraph (c)(3) of this section, the federal income tax return (or tax returns, acquisition of the stock of CFC1. (ii) Result. (A) The acquisition of CFC1 choice to make the election is made as applicable) filed no later than March gives rise to four separate CAAs described in separately by each partner with respect to 23, 2021. § 1.901(m)–2. Under § 1.901(m)–2(b)(1), the each foreign payor. Thus, in this case, each (7) The foreign basis election is acquisition of the stock of CFC1 and the partner may make separate elections for the irrevocable. Relief under § 301.9100–1 is deemed acquisition of the stock of CFC2 RFAs that are relevant in determining foreign not available for the foreign basis under section 338(h)(3)(B) are each a section income of DE1 for Country X tax purposes election. 338 CAA. Furthermore, because the deemed and the RFAs that are relevant in (d) Determination of basis difference acquisition of the assets of each of DE1 and determining foreign income of DE2 for in a section 743(b) CAA—(1) In general. DE2 for U.S. income tax purposes is Country Y tax purposes. Except as provided in paragraphs (d)(2) disregarded for Country F tax purposes, the (g) Applicability dates. (1) Except as and (e) of this section, if there is a deemed acquisitions are CAAs under provided in paragraph (g)(2) of this § 1.901(m)–2(b)(2). Because the four CAAs section 743(b) CAA, basis difference is occurred pursuant to a plan, under section, this section applies to CAAs the resulting basis adjustment under § 1.901(m)–1(a)(3), all of the CAAs are part of occurring on or after March 23, 2020. section 743(b) that is allocated to the an aggregated CAA transaction. Under (2) Paragraphs (a), (b), and (d)(1) of RFA under section 755. § 1.901(m)–1(a)(37), CFC1 is the RFA owner this section apply to CAAs occurring on (2) Foreign basis election. If a foreign (U.S.) with respect to its assets and the assets or after July 21, 2014, and to CAAs basis election is made with respect to a of DE1 and DE2 that are RFAs. CFC2 is the occurring before that date resulting from section 743(b) CAA, then, for purposes RFA owner (U.S.) with respect to its assets an entity classification election made of paragraph (d)(1) of this section, the that are RFAs. Under § 1.901(m)–1(a)(28), under § 301.7701–3 that is filed on or CFC1, CFC2, DE1, and DE2 are each a foreign section 743(b) adjustment is determined payor for Country F tax purposes. after July 29, 2014, and that is effective by reference to the foreign basis of the (B) Under paragraph (c) of this section, a on or before July 21, 2014. Paragraph (e) RFA, determined immediately after the foreign basis election may be made by the of this section applies to CAAs CAA. RFA owner (U.S.). The election is made occurring on or after January 1, 2011, (e) Determination of basis difference separately with respect to each CAA (for this and before July 21, 2014, other than in an RFA with respect to a CAA with purpose, treating all CAAs that are part of an CAAs occurring before July 21, 2014, respect to which paragraphs (b), (c), and aggregated CAA transaction as a single CAA) resulting from an entity classification (d) of this section do not apply. For and with respect to each foreign income tax election made under § 301.7701–3 of CAAs occurring on or after January 1, and foreign payor. Thus, in this case, CFC1 this chapter that is filed on or after July can make a separate foreign basis election for 2011, and before July 21, 2014, other one or more of the following three groups of 29, 2014, and that is effective on or than CAAs occurring before July 21, RFAs: RFAs that are relevant in determining before July 21, 2014. Taxpayers may, 2014, resulting from an entity foreign income of CFC1; RFAs that are however, consistently apply paragraph classification election made under relevant in determining foreign income of (d)(1) of this section to all section 743(b) § 301.7701–3 of this chapter that is filed DE1; and RFAs that are relevant in CAAs occurring on or after January 1, on or after July 29, 2014, and that is determining foreign income of DE2. 2011. For this purpose, persons that are effective on or before July 21, 2014, Furthermore, CFC2 can make a foreign basis related (within the meaning of section basis difference in an RFA with respect election for all of its RFAs that are relevant 267(b) or 707(b)) will be treated as a in determining its foreign income. to the CAA is the amount of any basis (2) Example 2: Scope of basis choice; RFA single taxpayer. difference (within the meaning of owner (U.S.) is a partnership—(i) Facts. (3) Taxpayers may, however, choose section 901(m)(3)(C)(i)) that had not USPS is a domestic partnership for which a to apply provisions in this section been taken into account under section section 754 election is in effect. USPS owns before the date such provisions are 901(m)(3)(B) either as of July 21, 2014, two assets, the stock of DE1 and DE2. DE1 applicable pursuant to paragraph (g)(1)

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or (2) of this section, provided that they (f) of this section provides special rules includes any method for recovering the (along with any persons that are related for allocating certain disposition cost of property over time for U.S. (within the meaning of section 267(b) or amounts when a foreign payor is income tax purposes (each application 707(b)) to the taxpayer)— transferred in a mid-year transaction. of a method giving rise to a U.S. basis (i) Consistently apply this section Paragraph (g) of this section provides deduction). Such methods include (excluding paragraph (e) of this section), special rules for allocating both cost depreciation, amortization, or depletion, § 1.704–1(b)(4)(viii)(c)(4)(v) through recovery amounts and disposition as well as a method that allows the cost (vii), § 1.901(m)–1, § 1.901(m)–3, and amounts in certain cases in which the (or a portion of the cost) of property to §§ 1.901(m)–5 through 1.901(m)–8 to all RFA owner (U.S.) either is a reverse be expensed in the year of acquisition CAAs occurring on or after January 1, hybrid or a fiscally transparent entity for or in the placed-in-service year, such as 2011, and consistently apply both U.S. and foreign income tax under section 179. Applicable cost § 1.901(m)–2 (excluding § 1.901(m)– purposes that is directly or indirectly recovery methods do not include any 2(d)) to all CAAs occurring on or after owned by a reverse hybrid. Paragraph provision allowing the U.S. basis to be December 7, 2016, on any original or (h) of this section provides examples recovered upon a disposition of an RFA. amended tax return for each taxable illustrating the application of this (c) Basis difference taken into account year for which the application of the section. Paragraph (i) of this section as a result of a disposition—(1) In provisions listed in this paragraph provides the applicability dates. general. Except as provided in (g)(3)(i) affects the tax liability and for (b) Basis difference taken into account paragraph (f) of this section, when the which the statute of limitations does not under applicable cost recovery RFA owner (U.S.) is a section 901(m) preclude assessment or the filing of a method—(1) In general. When the RFA payor, all of a disposition amount is claim for refund, as applicable; owner (U.S.) is a section 901(m) payor, attributed to the section 901(m) payor (ii) File all tax returns described in all of a cost recovery amount is and assigned to the U.S. taxable year of paragraph (g)(3)(i) of this section for any attributed to the section 901(m) payor the section 901(m) payor in which the taxable year ending on or before March and assigned to the U.S. taxable year of disposition occurs. If instead the RFA 23, 2020, no later than March 23, 2021; the section 901(m) payor in which the owner (U.S.) is a fiscally transparent and corresponding U.S. basis deduction is entity for U.S. income tax purposes, (iii) Make appropriate adjustments to taken into account under the applicable except as provided in paragraphs (e), (f), take into account deficiencies that cost recovery method. This is the case and (g) of this section, a disposition would have resulted from the consistent regardless of whether the deduction is amount is allocated to one or more application under paragraph (g)(3)(i) of deferred or disallowed for U.S. income section 901(m) payors under paragraph this section for taxable years that are not tax purposes. If instead the RFA owner (d) of this section. If a disposition open for assessment. (U.S.) is a fiscally transparent entity for amount arises from an RFA with respect U.S. income tax purposes, a cost to a section 743(b) CAA, in certain cases § 1.901(m)–4T [Removed] recovery amount is allocated to one or the disposition amount is allocated to a ■ Par. 10. Section 1.901(m)–4T is more section 901(m) payors under section 901(m) payor under paragraph removed. paragraph (d) of this section, except as (e) of this section. If there is a ■ Par. 11. Section 1.901(m)–5 is added provided in paragraphs (e) and (g) of disposition of an RFA in a foreign to read as follows: this section. If a cost recovery amount taxable year of a foreign payor during arises from an RFA with respect to a which there is a mid-year transaction, in § 1.901(m)–5 Basis difference taken into section 743(b) CAA, in certain cases the certain cases a disposition amount is account. cost recovery amount is allocated to a allocated under paragraph (f) of this (a) In general. This section provides section 901(m) payor under paragraph section. In certain cases in which the rules for determining the amount of (e) of this section. In certain cases in RFA owner (U.S.) either is a reverse basis difference with respect to an RFA which the RFA owner (U.S.) either is a hybrid or a fiscally transparent entity for that is taken into account in a U.S. reverse hybrid or a fiscally transparent both U.S. and foreign income tax taxable year for purposes of determining entity for both U.S. and foreign income purposes that is directly or indirectly the disqualified portion of a foreign tax purposes that is directly or owned by a reverse hybrid, a disposition income tax amount. Paragraph (b) of this indirectly owned by a reverse hybrid, a amount is allocated to one or more section provides rules for determining a cost recovery amount is allocated to one section 901(m) payors under paragraph cost recovery amount and assigning that or more section 901(m) payors under (g) of this section. amount to a U.S. taxable year of a single paragraph (g) of this section. (2) Determining a disposition section 901(m) payor when the RFA (2) Determining a cost recovery amount—(i) Disposition is fully taxable owner (U.S.) is the section 901(m) amount—(i) General rule. A cost for purposes of both U.S. income tax payor. Paragraph (c) of this section recovery amount for an RFA is and the foreign income tax. If a provides rules for determining a determined by applying the applicable disposition of an RFA is fully taxable disposition amount and assigning that cost recovery method to the basis (that is, results in all gain or loss, if any, amount to a U.S. taxable year of a single difference rather than to the U.S. basis. being recognized with respect to the section 901(m) payor when the RFA (ii) U.S. basis subject to multiple cost RFA) for purposes of both U.S. income owner (U.S.) is the section 901(m) recovery methods. If the entire U.S. tax and the foreign income tax, the payor. Paragraph (d) of this section basis is not subject to the same cost disposition amount is equal to the provides rules for allocating cost recovery method, the applicable cost unallocated basis difference with recovery amounts and disposition recovery method for determining the respect to the RFA. amounts when the RFA owner (U.S.) is cost recovery amount is the cost (ii) Disposition is not fully taxable for a fiscally transparent entity for U.S. recovery method that applies to the purposes of U.S. income tax or the income tax purposes. Paragraph (e) of portion of the U.S. basis that foreign income tax (or both). If the this section provides special rules for corresponds to the basis difference. disposition of an RFA is not fully allocating cost recovery amounts and (3) Applicable cost recovery method. taxable for purposes of both U.S. income disposition amounts with respect to For purposes of section 901(m), an tax and the foreign income tax, the certain section 743(b) CAAs. Paragraph applicable cost recovery method disposition amount is determined under

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this paragraph (c)(2)(ii). See § 1.901(m)– an interest, as well as for assigning the foreign income tax purposes and a 6 for rules regarding the continued allocated amount to a U.S. taxable year section 901(m) payor either directly application of section 901(m) if the RFA of the section 901(m) payor. For owns an interest in the RFA owner has any unallocated basis difference purposes of this paragraph (d), unless (U.S.) or directly owns an interest in after determining the disposition otherwise indicated, a reference to another fiscally transparent entity for amount under paragraph (c)(2)(ii)(A) or direct or indirect ownership in an entity U.S. and foreign income tax purposes, (B) of this section, as applicable. means for U.S. income tax purposes. For which, in turn, directly or indirectly (A) Positive basis difference. If the purposes of this paragraph (d), a person owns an interest in the RFA owner disposition of an RFA is not fully indirectly owns an interest in an entity (U.S.) for both U.S. and foreign income taxable for purposes of both U.S. income for U.S. income tax purposes if the tax purposes. In these cases, the section tax and the foreign income tax, and the person owns the interest through one or 901(m) payor is allocated the portion of RFA has a positive basis difference, the more fiscally transparent entities for a disposition amount that is equal to the disposition amount equals the lesser of: U.S. income tax purposes, and at least product of the disposition amount (1) Any foreign disposition gain plus one of the fiscally transparent entities is attributable to foreign disposition gain any U.S. disposition loss (for this not a disregarded entity. For purposes of or foreign disposition loss, as purpose, expressed as a positive this paragraph (d), a person indirectly applicable, and a fraction, the amount), or owns an interest in an entity for foreign numerator of which is the portion of the (2) Unallocated basis difference with income tax purposes if the person owns foreign disposition gain or foreign respect to the RFA. the interest through one or more fiscally disposition loss recognized by the RFA (B) Negative basis difference. If the transparent entities for foreign income owner (foreign) for foreign income tax disposition of an RFA is not fully tax purposes. If the RFA owner (U.S.) is purposes that is (or will be) included in taxable for purposes of both U.S. income a lower-tier fiscally transparent entity the foreign payor’s distributive share of tax and the foreign income tax, and the for U.S. income tax purposes in which the foreign income of the RFA owner RFA has a negative basis difference, the the section 901(m) payor indirectly (foreign), and the denominator of which disposition amount equals the greater owns an interest, the rules of this is the foreign disposition gain or foreign of: section apply in a manner consistent disposition loss. (1) Any U.S. disposition gain (for this with the application of these rules when (iii) Second allocation rule. This purpose, expressed as a negative the section 901(m) payor directly owns paragraph (d)(3)(iii) applies when amount) plus any foreign disposition an interest in the RFA owner (U.S.). loss, or (2) Allocation of a cost recovery neither a section 901(m) payor nor a (2) Unallocated basis difference with amount. A cost recovery amount is disregarded entity directly owned by a respect to the RFA. allocated to a section 901(m) payor that section 901(m) payor is the foreign (iii) Disposition of an RFA after a directly or indirectly owns an interest in payor with respect to the foreign income section 743(b) CAA. If an RFA was the RFA owner (U.S.) to the extent the of the RFA owner (foreign). Instead, a subject to a section 743(b) CAA and U.S. basis deduction that corresponds to section 901(m) payor directly or subsequently there is a disposition of the cost recovery amount is (or will be) indirectly owns an interest in the the RFA, then, for purposes of included in the section 901(m) payor’s foreign payor, which is a fiscally determining the disposition amount, distributive share of the income of the transparent entity for U.S. income tax foreign disposition gain or foreign RFA owner (U.S.) for U.S. income tax purposes (other than a disregarded disposition loss are specially defined to purposes. entity directly owned by the section mean the amount of gain or loss (3) Allocation of a disposition amount 901(m) payor), and, therefore, the recognized for purposes of the foreign attributable to foreign disposition gain section 901(m) payor is considered to income tax on the disposition of the or foreign disposition loss—(i) In pay or accrue only its allocated portion RFA that is allocable to the partnership general. Except as provided in of the foreign income tax amount of the interest that was transferred in the paragraph (f) of this section, a foreign payor. This will be the case section 743(b) CAA. In addition, U.S. disposition amount attributable to when the foreign payor is either the disposition gain or U.S. disposition loss foreign disposition gain or foreign RFA owner (U.S.), another fiscally are specially defined to mean the disposition loss (as determined under transparent entity for U.S. income tax amount of gain or loss recognized for paragraph (d)(5) of this section) is purposes (other than a disregarded U.S. income tax purposes on the allocated under paragraph (d)(3)(ii) or entity directly owned by a section disposition of the RFA that is allocable (d)(3)(iii) of this section to a section 901(m) payor) that directly or indirectly to the partnership interest that was 901(m) payor that directly or indirectly owns an interest in the RFA owner transferred in the section 743(b) CAA, owns an interest in the RFA owner (U.S.) for both U.S. and foreign income taking into account the basis adjustment (U.S.). tax purposes, or a disregarded entity under section 743(b) that was allocated (ii) First allocation rule. This directly owned by the RFA owner to the RFA under section 755. paragraph (d)(3)(ii) applies when a (U.S.). In these cases, the section 901(m) (d) General rules for allocating and section 901(m) payor, or a disregarded payor is allocated the portion of a assigning a cost recovery amount or a entity directly owned by a section disposition amount that is equal to the disposition amount when the RFA 901(m) payor, is the foreign payor product of the disposition amount owner (U.S.) is a fiscally transparent whose foreign income includes a attributable to foreign disposition gain entity—(1) In general. Except as distributive share of the foreign income or foreign disposition loss, as provided in paragraphs (e), (f), and (g) of the RFA owner (foreign) and, applicable, and a fraction, the of this section, this paragraph (d) therefore, all of the foreign income tax numerator of which is the portion of the provides rules for allocating a cost amount of the foreign payor is paid or foreign disposition gain or foreign recovery amount or a disposition accrued by, or considered paid by, the disposition loss that is included in the amount when the RFA owner (U.S.) is section 901(m) payor. Thus, this allocable foreign income of the section a fiscally transparent entity for U.S. paragraph (d)(3)(ii) applies when the 901(m) payor, and the denominator of income tax purposes in which a section RFA owner (U.S.) is a fiscally which is the foreign disposition gain or 901(m) payor directly or indirectly owns transparent entity for both U.S. and foreign disposition loss. If allocable

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foreign income is not otherwise required to foreign disposition loss to the extent (c)(1) or (d) of this section, as to be determined because there is no thereof, and the excess disposition applicable. foreign income tax amount, the amount, if any, is attributable to the U.S. (2) Allocation rule. To the extent a numerator is the portion of the foreign disposition gain, even if the absolute disposition amount is attributable to disposition gain or foreign disposition value of the excess disposition amount foreign disposition gain or foreign loss that would be included in the exceeds the U.S. disposition gain. disposition loss, a section 901(m) payor allocable foreign income of the section (6) U.S. taxable year of a section is allocated the portion of the 901(m) payor if there were a foreign 901(m) payor to which an allocated cost disposition amount equal to the product income tax amount. recovery amount or disposition amount of the disposition amount attributable to (4) Allocation of a disposition amount is assigned. A cost recovery amount or foreign disposition gain or foreign attributable to U.S. disposition gain or a disposition amount allocated to a disposition loss, as applicable, and a U.S. disposition loss. A section 901(m) section 901(m) payor under paragraph fraction, the numerator of which is the payor that directly or indirectly owns an (d) of this section is assigned to the U.S. portion of the foreign disposition gain or interest in the RFA owner (U.S.) is taxable year of the section 901(m) payor foreign disposition loss that is included allocated the portion of a disposition that includes the last day of the U.S. in the allocable foreign income of the amount that is equal to the product of taxable year of the RFA owner (U.S.) in section 901(m) payor, and the the disposition amount attributable to which, in the case of a cost recovery denominator of which is the foreign U.S. disposition gain or U.S. disposition amount, the RFA owner (U.S.) takes into disposition gain or foreign disposition loss (as determined under paragraph account the corresponding U.S. basis loss. If allocable foreign income is not (d)(5) of this section), as applicable, and deduction (without regard to whether otherwise required to be determined a fraction, the numerator of which is the the deduction is deferred or disallowed because there is no foreign income tax portion of the U.S. disposition gain or for U.S. income tax purposes), or in the amount, the numerator is the portion of U.S. disposition loss that is (or will be) case of a disposition amount, the the foreign disposition gain or foreign included in the section 901(m) payor’s disposition occurs. disposition loss that would be included in the allocable foreign income of the distributive share of income of the RFA (e) Special rules for certain section owner (U.S.) for U.S. income tax section 901(m) payor if there were a 743(b) CAAs. If a section 901(m) payor purposes, and the denominator of which foreign income tax amount. acquires a partnership interest in a is the U.S. disposition gain or U.S. (3) Assignment to a U.S. taxable year section 743(b) CAA, including a section disposition loss. of a section 901(m) payor. A disposition (5) Determining the extent to which a 743(b) CAA with respect to a lower-tier amount allocated to a section 901(m) disposition amount is attributable to partnership that results from a direct payor under paragraph (f)(2) of this foreign or U.S. disposition gain or loss— acquisition by the section 901(m) payor section is assigned to the U.S. taxable (i) RFA with a positive basis difference. of an interest in an upper-tier year of the section 901(m) payor in When there is a disposition of an RFA partnership, and subsequently there is a which the foreign disposition gain or with a positive basis difference and the cost recovery amount or a disposition foreign disposition loss (or portion disposition results in either a foreign amount that arises from an RFA with thereof) is included in allocable foreign disposition gain or a U.S. disposition respect to that section 743(b) CAA, all income of the section 901(m) payor or, loss, but not both, the entire disposition of the cost recovery amount or the if allocable foreign income is not amount is attributable to foreign disposition amount is allocated to that otherwise required to be determined disposition gain or U.S. disposition loss, section 901(m) payor. The U.S. taxable because there is no foreign income tax as applicable, even if the disposition year of the section 901(m) payor to amount, the U.S. taxable year in which amount exceeds the foreign disposition which the cost recovery amount or the the foreign disposition gain or foreign gain or the absolute value of the U.S. disposition amount is assigned is the disposition loss would be included in disposition loss. If the disposition U.S. taxable year in which, in the case allocable foreign income if there were a results in both a foreign disposition gain of a cost recovery amount, the section foreign income tax amount. and a U.S. disposition loss, the 901(m) payor takes into account the (g) Reverse hybrids—(1) In general. disposition amount is attributable first corresponding U.S. basis deduction This paragraph (g) provides rules for to foreign disposition gain to the extent (without regard to whether the allocating a cost recovery amount or a thereof, and the excess disposition deduction is deferred or disallowed for disposition amount when the RFA amount, if any, is attributable to the U.S. U.S. income tax purposes), or in the owner (U.S.) is either a reverse hybrid disposition loss, even if the excess case of a disposition amount, the or a fiscally transparent entity for U.S. disposition amount exceeds the absolute disposition occurs. and foreign income tax purposes that is value of the U.S. disposition loss. (f) Mid-year transactions—(1) In directly or indirectly owned by a reverse (ii) RFA with a negative basis general. When a disposition of an RFA hybrid for U.S. and foreign income tax difference. When there is a disposition occurs in the same foreign taxable year purposes, and in each case, the foreign of an RFA with a negative basis that a foreign payor is involved in a payor whose foreign income includes a difference and the disposition results in mid-year transaction, the portion of the distributive share of the foreign income either a foreign disposition loss or a U.S. disposition amount that is attributable of the RFA owner (foreign) directly or disposition gain, but not both, the entire to foreign disposition gain or foreign indirectly owns an interest in the disposition amount is attributable to disposition loss (as determined under reverse hybrid for foreign income tax foreign disposition loss or U.S. paragraph (d)(5) of this section) is purposes. Application of the allocation disposition gain, as applicable, even if allocated to a section 901(m) payor and rules under paragraphs (g)(2) and (g)(3) the absolute value of the disposition assigned to a U.S. taxable year of the of this section depend upon whether a amount exceeds the absolute value of section 901(m) payor under this section 901(m) payor or a disregarded the foreign disposition loss or the U.S. paragraph (f). To the extent the entity directly owned by a section disposition gain. If the disposition disposition amount is attributable to 901(m) payor is the foreign payor, or, results in both a foreign disposition loss U.S. disposition gain or U.S. disposition instead, a section 901(m) payor directly and a U.S. disposition gain, the loss (as determined under paragraph or indirectly owns an interest in the disposition amount is attributable first (d)(5) of this section), see paragraph foreign payor. For purposes of this

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paragraph (g), unless otherwise a cost recovery amount or disposition otherwise required to be determined for indicated, a reference to direct or amount, or portion thereof, is assigned a section 901(m) payor because there is indirect ownership in an entity means to the U.S. taxable year of the section no foreign income tax amount, the for U.S. income tax purposes. For 901(m) payor that includes the last day numerator is the foreign income of the purposes of this paragraph (g), a person of the U.S. taxable year of the reverse RFA owner (foreign) that is included in indirectly owns an interest in an entity hybrid in which, in the case of a cost the foreign income of the foreign payor for U.S. income tax purposes if the recovery amount, the reverse hybrid and that would be included in allocable person owns the interest through one or takes into account the corresponding foreign income of the section 901(m) more fiscally transparent entities for U.S. basis deduction (without regard to payor if there were a foreign income tax U.S. income tax purposes, and at least whether the deduction is deferred or amount. one of the fiscally transparent entities is disallowed for U.S. income tax (ii) Assignment to a U.S. taxable year not a disregarded entity. For purposes of purposes), or, in the case of a of a section 901(m) payor. A cost this paragraph (g), a person indirectly disposition amount, the disposition recovery amount or a disposition owns an interest in an entity for foreign occurs. If the reverse hybrid is not the amount, or portion thereof, that is income tax purposes if the person owns RFA owner (U.S.) but instead the allocated to a section 901(m) payor the interest through one or more fiscally reverse hybrid directly or indirectly under paragraph (g)(3)(i) of this section transparent entities for foreign income owns an interest in the RFA owner is assigned to the U.S. taxable year of tax purposes. If the RFA owner (U.S.) is (U.S.) for both U.S. and foreign income the section 901(m) payor in which the a lower-tier fiscally transparent entity tax purposes, a cost recovery amount or foreign income of the RFA owner for U.S. income tax purposes in which disposition amount, or portion thereof, (foreign) described in paragraph (g)(3)(i) the reverse hybrid indirectly owns an is assigned to the U.S. taxable year of of this section is included in the interest, the rules of this section apply the section 901(m) payor that includes allocable foreign income of the section in a manner consistent with the the last day of the U.S. taxable year of 901(m) payor, or, if there is no foreign application of these rules when the the reverse hybrid, which, in turn, income tax amount, the U.S. taxable reverse hybrid directly owns an interest includes the last day of the U.S. taxable year of the section 901(m) payor in in the RFA owner (U.S.). year of the RFA owner (U.S.) in which, which the foreign income of the RFA (2) First allocation rule—(i) Allocation in the case of a cost recovery amount, owner (foreign) described in paragraph to a section 901(m) payor. This the RFA owner (U.S.) takes into account (g)(3)(i) of this section would be paragraph (g)(2)(i) applies when a the corresponding U.S. basis deduction included in allocable foreign income if section 901(m) payor, or a disregarded (without regard to whether the there were a foreign income tax amount. entity directly owned by a section deduction is deferred or disallowed for (h) Examples. The following examples 901(m) payor, is the foreign payor U.S. income tax purposes), or, in the illustrate the rules of this section. In whose foreign income includes a case of a disposition amount, the addition to any facts described in a distributive share of the foreign income disposition occurs. particular example, the following facts of the RFA owner (foreign), and, (3) Second allocation rule—(i) apply to all the examples unless therefore, all of the foreign income tax otherwise specified: CFC1, CFC2, and amount of the foreign payor is paid or Allocation to a section 901(m) payor. This paragraph (g)(3)(i) applies when DE are organized in Country F and accrued by, or considered paid or treated as corporations for Country F tax accrued by, the section 901(m) payor. neither a section 901(m) payor nor a disregarded entity directly owned by a purposes. CFC1 and CFC2 are each an Thus, this paragraph (g)(2)(i) applies applicable foreign corporation that is when a section 901(m) payor either section 901(m) payor is the foreign payor with respect to the foreign income wholly owned by the same U.S. directly owns an interest in the reverse corporation, and DE is a disregarded hybrid or directly owns an interest in a of the RFA owner (foreign). Instead, a section 901(m) payor directly or entity. CFC1 and CFC2 each have a U.S. fiscally transparent entity for U.S. and taxable year that is a calendar year, and foreign income tax purposes, which, in indirectly owns an interest in the foreign payor, which is a fiscally CFC1, CFC2, and DE each have a foreign turn, directly or indirectly owns an taxable year that is a calendar year. interest in the reverse hybrid for both transparent entity for U.S. income tax purposes (other than a disregarded Country F imposes a single tax that is U.S. and foreign income tax purposes. a foreign income tax. CFC1, CFC2, and In these cases, the section 901(m) payor entity directly owned by the section 901(m) payor), and, therefore, the DE each have a functional currency of is allocated the portions of cost recovery the u with respect to all activities. At all amounts or disposition amounts (or section 901(m) payor is considered to pay or accrue only its allocated portion relevant times, 1u equals $1. All both) with respect to RFAs that are amounts are stated in millions. The equal to the product of the sum of the of the foreign income tax amount of the foreign payor. In these cases, the section examples assume that the applicable cost recovery amounts and the cost recovery method for property disposition amounts and a fraction, the 901(m) payor is allocated the portions of cost recovery amounts or disposition results in basis being recovered ratably numerator of which is the portion of the over the life of the property beginning foreign income of the RFA owner amounts (or both) with respect to RFAs on the first day of the U.S. taxable year (foreign) that is included in the foreign that are equal to the product of the sum in which the property is acquired or income of the foreign payor, and the of the cost recovery amounts and the placed into service. denominator of which is the foreign disposition amounts and a fraction, the income of the RFA owner (foreign). numerator of which is the portion of the (1) Example 1: CAA followed by (ii) Assignment to a U.S. taxable year foreign income of the RFA owner disposition: Fully taxable for both U.S. of a section 901(m) payor. This (foreign) that is included in the foreign income tax and foreign income tax paragraph (g)(2)(ii) applies when a cost income of the foreign payor and purposes—(i) Facts. (A) On January 1, Year 1, USP acquires all of the stock of CFC1 in recovery amount or a disposition included in the allocable foreign income a qualified stock purchase (as defined in amount, or portion thereof, is allocated of the section 901(m) payor, and the section 338(d)(3)) to which section 338(a) to a section 901(m) payor under denominator of which is the foreign applies (Section 338 Acquisition). At the paragraph (g)(2)(i) of this section. If the income of the RFA owner (foreign). If time of the Section 338 Acquisition, CFC1 reverse hybrid is the RFA owner (U.S.), allocable foreign income is not owns a single asset (Asset A) that is located

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in Country F. Asset A gives rise to income recovery amount and a disposition amount. this paragraph (h)(2)(ii) (the results of this that is taken into account for Country F tax Under paragraph (b)(2) of this section, the Example 2). purposes. Asset A is tangible personal cost recovery amount for Year 2, as of the (B) The result for Year 1 is the same as in property that, under the applicable cost date of the subsequent transaction, is 9u paragraph (h)(1)(ii)(B) of this section recovery method in the hands of CFC1, is ((90u basis difference/5 years) × 6/12). Under (paragraph (ii)(B) of Example 1). depreciable over 5 years. There are no cost § 1.901(m)–1(a)(15), the subsequent (C) In Year 2, Asset A has an allocated recovery deductions available for Country F transaction is a disposition of Asset A, basis difference that includes both a cost tax purposes with respect to Asset A. because the subsequent transaction is an recovery amount and a disposition amount. Immediately before the Section 338 event that results in an amount of gain being Under paragraph (b)(2) of this section, the Acquisition, Asset A has a U.S. basis of 10u recognized for U.S. income tax and Country cost recovery amount for Year 2, as of the and a foreign basis of 40u. Immediately after F tax purposes. Because all realized gain in date of the subsequent transaction, is 9u the Section 338 Acquisition, Asset A has a Asset A is recognized for U.S. income tax and ((90u basis difference/5 years) × 6/12). Under U.S. basis of 100u and foreign basis of 40u. Country F tax purposes, the rule in paragraph § 1.901(m)–1(a)(15), the subsequent (B) On July 1, Year 2, Asset A is transferred (c)(2)(i) of this section applies to determine transaction is a disposition of Asset A, to an unrelated thirdparty in exchange for the disposition amount. Under that rule, the because the subsequent transaction is an 120u in a transaction in which all realized disposition amount for Year 2 is the event that results in an amount of gain being gainis recognized for both U.S. income tax unallocated basis difference of 63u (90u basis recognized for Country F tax purposes. and Country F tax purposes(subsequent difference, less total 27u taken into account Because the disposition is not also fully transaction). For U.S. income tax purposes, as cost recovery amounts in Year 1 and Year taxable for U.S. income tax purposes, the rule CFC1recognizes U.S. disposition gain of 50u 2). Accordingly, the allocated basis difference in paragraph (c)(2)(ii) of this section applies (amount realized of 120u, lessU.S. basis of for Year 2 is 72u (9u of cost recovery amount, to determine the disposition amount. Under 70u (100u cost basis, less 30u of plus 63u of disposition amount). Under that rule, the disposition amount is 60u, the accumulateddepreciation)) with respect to paragraphs (b)(1) and (c)(1) of this section, all lesser of (i) 60u (60u foreign disposition gain Asset A. The 30u of accumulateddepreciation of the 72u of allocated basis difference is plus absolute value of 0u U.S. disposition is the sum of 20u of depreciation in Year 1 attributed to CFC1 and assigned to Year 2, loss), and (ii) 63u unallocated basis (100u costbasis/5 years) and 10u of because CFC1 is a section 901(m) payor and difference (90 basis difference less total 27u depreciation in Year 2 ((100u cost basis/ the RFA owner (U.S.) with respect to Asset taken into account as cost recovery amounts, 5years) × 6/12). For Country F tax purposes, A and Year 2 is the U.S. taxable year of CFC1 18u in Year 1 and 9u in Year 2). Accordingly, CFC1 recognizes foreigndisposition gain of in which it takes into account the the allocated basis difference for the first half 80u (amount realized of 120u, less foreign corresponding 10u of depreciation and in of Year 2 is 69u (9u of cost recovery amount, basisof 40u) with respect to Asset A. which the disposition occurred. plus 60u of disposition amount). Under Immediately after the subsequenttransaction, (D) Unallocated basis difference with paragraphs (b)(1) and (c)(1) of this section, all Asset A has a U.S. basis and a foreign basis respect to Asset A, as determined of the 69u of allocated basis difference is of 120u. immediately after the subsequent transaction, attributed to CFC1 and assigned to Year 2, (ii) Result. (A) Under § 1.901(m)–2(b)(1), is 0u (90u basis difference less 90u basis because CFC1 is a section 901(m) payor and USP’s acquisition of the stock of CFC1 in the difference taken into account as 27u total the RFA owner (U.S.) with respect to Asset Section 338 Acquisition is a section 338 cost recovery amount in Year 1 and Year 2 A and Year 2 is the U.S. taxable year of CFC1 CAA. Under § 1.901(m)–2(c)(i), Asset A is an and as a 63u disposition amount in Year 2). in which it takes into account the RFA with respect to Country F tax because Accordingly, because there is no unallocated corresponding 10u of depreciation and in it is relevant in determining the foreign basis difference with respect to Asset A which the disposition occurred. income of CFC1 for Country F tax purposes. attributable to the Section 338 Acquisition, (D) Unallocated basis difference with Under § 1.901(m)–4(b), the basis difference the subsequent transaction is not a successor respect to Asset A immediately after the with respect to Asset A is 90u (100u¥10u). transaction as defined in § 1.901(m)–6(b)(2). subsequent transaction is 3u (90u basis Under § 1.901(m)–1(a)(37), CFC1 is the RFA Furthermore, the subsequent transaction is difference less 87u basis difference taken into owner (U.S.) with respect to Asset A. Under not a CAA under § 1.901(m)–2(b). For these account as a 27u total cost recovery amount § 1.901(m)–1(a)(28), CFC1 is a foreign payor reasons, section 901(m) no longer applies to in Year 1 and Year 2 and as a 60u disposition for Country F tax purposes. Under Asset A. amount in Year 2). Accordingly, because § 1.901(m)–1(a)(41), CFC1 is the section (2) Example 2: CAA followed by there is unallocated basis difference of 3u 901(m) payor with respect to a foreign disposition: nontaxable for U.S. income tax with respect to Asset A attributable to the income tax amount for which CFC1 is the purposes and taxable for foreign income tax Section 338 Acquisition, as determined foreign payor (see § 1.901–2(f)(1)). purposes—(i) Facts. The facts are the same as immediately after the subsequent transaction, (B) Under § 1.901(m)–1(a)(5), allocated in paragraph (h)(1)(i)(A) of this section the subsequent transaction is a successor basis differences are the sum of cost recovery (paragraph (i)(A) of Example 1) but the facts transaction as defined in § 1.901(m)–6(b)(2). amounts and disposition amounts. In Year 1, in paragraph (h)(1)(i)(B) of this section Following the subsequent transaction, the Asset A has an allocated basis difference that (paragraph (i)(B) of Example 1) are instead unallocated basis difference of 3u must be includes only a cost recovery amount. Under that on July 1, Year 2, Asset A is transferred taken into account as cost recovery amounts paragraph (b)(2) of this section, the cost to CFC2, in exchange for 100u of stock of or disposition amounts (or both) by CFC2, the recovery amount for Year 1 is determined by CFC2 (subsequent transaction). For U.S. new section 901(m) payor and RFA owner applying the applicable cost recovery method income tax purposes, CFC1 does not (U.S.) of Asset A. See § 1.901(m)–6(b)(3)(ii). of Asset A in the hands of CFC1 to the basis recognize any U.S. disposition gain or U.S. Because the subsequent transaction is not a difference with respect to Asset A. disposition loss with respect to Asset A. For CAA under § 1.901(m)–2(b), there is no Accordingly, the cost recovery amount is 18u Country F tax purposes, CFC1 recognizes additional basis difference with respect to (90u basis difference/5 years). Under foreign disposition gain of 60u (amount Asset A as a result of the subsequent paragraph (b)(1) of this section, all of the 18u realized of 100u, less foreign basis of 40u) transaction. cost recovery amount is attributed to CFC1 with respect to Asset A. Immediately after (3) Example 3: CAA followed by and assigned to Year 1, because CFC1 is a the subsequent transaction, Asset A has a disposition: nontaxable for both U.S. income section 901(m) payor and RFA owner (U.S.) U.S. basis of 70u (100u cost basis less 30u tax and foreign income tax purposes—(i) with respect to Asset A and Year 1 is the U.S. accumulated depreciation) and a foreign Facts. The facts are the same as in paragraph taxable year of CFC1 in which it takes into basis of 100u. The 30u of accumulated (h)(1)(i)(A) of this section (paragraph (i)(A) of account the corresponding 20u of depreciation is the sum of 20u of Example 1) but the facts in paragraph depreciation. Immediately after Year 1, under depreciation in Year 1 (100u cost basis/5 (h)(1)(i)(B) of this section (paragraph (i)(B) of § 1.901(m)–1(a)(47), unallocated basis years) and 10u in Year 2 ((100u cost basis/ Example 1) are instead that on July 1, Year difference is 72u with respect to Asset A 5 years) × 6/12). 2, CFC1 transfers Asset A to CFC2, in (90u¥18u). (ii) Result. (A) The results described in exchange for 110u of stock of CFC2 (C) In Year 2, Asset A has an allocated paragraph (h)(1)(ii)(A) of this section (subsequent transaction). For U.S. income tax basis difference that includes both a cost (paragraph (ii)(A) of Example 1) also apply to purposes, CFC1 does not recognize any U.S.

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disposition gain or U.S. disposition loss with is filed on or after July 29, 2014, and CAAs or that involve partnerships. respect to Asset A as a result of the that is effective on or before July 21, Paragraph (c) of this section provides subsequent transaction. Furthermore, for 2014. Paragraphs (b)(2)(i) and (c)(2) of rules for determining when an aggregate Country F tax purposes, CFC1 recognizes no this section also apply to CAAs basis difference carryover of a section foreign disposition gain or foreign disposition loss with respect to Asset A as a occurring on or after January 1, 2011, 901(m) payor either becomes an result of the subsequent transaction. and before July 21, 2014, other than aggregate basis difference carryover of Immediately after the subsequent transaction, CAAs occurring before July 21, 2014, the section 901(m) payor with respect to Asset A has a U.S. basis of 70u (100u cost resulting from an entity classification another foreign payor or is transferred to basis less 30u accumulated depreciation) and election made under § 301.7701–3 that another section 901(m) payor, and a foreign basis of 40u. The 30u of is filed on or after July 29, 2014, and paragraph (d) of this section provides accumulated depreciation is the sum of 20u that is effective on or before July 21, applicability dates. of depreciation in Year 1 (100u cost basis/5 2014, but only with respect to basis (b) Successor rules for unallocated years) and 10u in Year 2 ((100u cost basis/ difference determined under 5 years) × 6/12). basis difference—(1) In general. Except (ii) Result. (A) The result for Year 1 is the § 1.901(m)–4T(e) with respect to the as provided in paragraph (b)(4) of this same as in paragraph (h)(1)(ii)(A) of this CAA. section, section 901(m) continues to section (paragraph (ii)(A) of Example 1). (3) Taxpayers may, however, choose apply after a successor transaction to (B) The result for Year 1 is the same as in to apply provisions in this section any unallocated basis difference paragraph (h)(1)(ii)(B) of this section before the date such provisions are attached to a transferred RFA until the (paragraph (ii)(B) of Example 1). applicable pursuant to paragraphs (i)(1) entire basis difference has been taken (C) In Year 2, Asset A has an allocated and (2) of this section, provided that into account as a cost recovery amount basis difference that includes only a cost they (along with any persons that are or a disposition amount (or both) under recovery amount. Under paragraph (b)(2) of related (within the meaning of section this section, the cost recovery amount for § 1.901(m)–5. Year 2, as of the date of the subsequent 267(b) or 707(b)) to the taxpayer)— (2) Definition of a successor (i) Consistently apply this section, transaction, is 9u ((90u basis difference/5 transaction. A successor transaction years) x 6/12). Under § 1.901(m)–1(a)(15), the § 1.704–1(b)(4)(viii)(c)(4)(v) through occurs with respect to an RFA if, after subsequent transaction does not constitute a (vii), § 1.901(m)–1, § 1.901(m)–3, a CAA (prior CAA), there is a transfer disposition of Asset A, because the § 1.901(m)–4 (excluding § 1.901(m)– of the RFA for U.S. income tax purposes subsequent transaction is not an event that 4(e)), § 1.901(m)–6, § 1.901(m)–7, and and the RFA has unallocated basis results in an amount of gain or loss being § 1.901(m)–8 to all CAAs occurring on recognized for U.S. income tax or for Country difference with respect to the prior or after January 1, 2011, and CAA, determined immediately after the F tax purposes. Therefore, no disposition consistently apply § 1.901(m)–2 amount is taken into account for Asset A in transfer. A successor transaction may (excluding § 1.901(m)–2(d)) to all CAAs Year 2. Under paragraph (b)(1) of this section, occur regardless of whether the transfer all of the 9u of allocated basis difference is occurring on or after December 7, 2016, of the RFA is a disposition, a CAA, or attributed to CFC1 and assigned to Year 2, on any original or amended tax return a non-taxable transaction for purposes because CFC1 is a section 901(m) payor and for each taxable year for which the of U.S. income tax. If the RFA was RFA owner (U.S.) with respect to Asset A application of the provisions listed in subject to multiple prior CAAs, a and Year 2 is the U.S. taxable year of CFC1 this paragraph (i)(3)(i) affects the tax in which it takes into account the separate determination must be made liability and for which the statute of with respect to each prior CAA as to corresponding 10u of depreciation. limitations does not preclude (D) Unallocated basis difference with whether the transfer is a successor assessment or the filing of a claim for respect to Asset A immediately after the transaction. refund, as applicable; subsequent transaction is 63u (90u basis (3) Special considerations. (i) If an difference, less 27u total cost recovery (ii) File all tax returns described in paragraph (i)(3)(i) of this section for any asset is an RFA with respect to more amounts, 18u in Year 1 and 9u in Year 2). than one foreign income tax, this Accordingly, because there is unallocated taxable year ending on or before March basis difference of 63u with respect to Asset 23, 2020, no later than March 23, 2021; paragraph (b) applies separately with A attributable to the CAA, as determined and respect to each foreign income tax. immediately after the subsequent transaction, (ii) Make appropriate adjustments to (ii) Any subsequent cost recovery the subsequent transaction is a successor take into account deficiencies that amount for an RFA transferred in a transaction as defined in § 1.901(m)–6(b)(2). would have resulted from the consistent successor transaction is determined Following the subsequent transaction, the based on the post-transaction applicable unallocated basis difference of 63u must be application under paragraph (i)(3)(i) of this section for taxable years that are not cost recovery method, as described in taken into account as cost recovery amounts § 1.901(m)–5(b)(3), that applies to the or disposition amounts (or both) by CFC2, the open for assessment. new section 901(m) payor and RFA owner U.S. basis (or portion thereof) that § 1.901(m)–5T [Removed] (U.S.) of Asset A. See § 1.901(m)–6(b)(3)(ii). corresponds to the unallocated basis Because the subsequent transaction is not a ■ Par. 12. Section 1.901(m)–5T is difference. CAA under § 1.901(m)–2(b), there is no removed. (4) Successor transaction is a CAA— additional basis difference with respect to ■ Par. 13. Section 1.901(m)–6 is added (i) In general. An asset may be an RFA Asset A as a result of the subsequent to read as follows: with respect to multiple CAAs if a transaction. successor transaction is also a CAA (i) Applicability dates. (1) Except as § 1.901(m)–6 Successor rules. (subsequent CAA). Except as otherwise provided in paragraph (i)(2) of this (a) In general. This section provides provided in this paragraph (b)(4), if section, this section applies to CAAs successor rules applicable to section there is a subsequent CAA, unallocated occurring on or after March 23, 2020. 901(m). Paragraph (b) of this section basis difference with respect to any (2) Paragraphs (b)(2)(i) and (c)(2) of provides rules for the continued prior CAAs will continue to be taken this section apply to CAAs occurring on application of section 901(m) after an into account under section 901(m) after or after July 21, 2014, and to CAAs RFA that has unallocated basis the subsequent CAA. Furthermore, the occurring before that date resulting from difference has been transferred, subsequent CAA may give rise to an entity classification election made including special rules applicable to additional basis difference subject to under § 301.7701–3 of this chapter that successor transactions that are also section 901(m).

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(ii) Foreign basis election. If a foreign § 301.7701–3(g)(1)(iii) and (3)(ii). The section 901(m) payor’s aggregate basis basis election is made under § 1.901(m)– Deemed Liquidation is disregarded for difference carryover with respect to the 4(c) with respect to a foreign income tax Country A tax purposes. No gain or loss is other foreign payor. In such a case, the in a subsequent CAA, any unallocated recognized on the Deemed Liquidation for section 901(m) payor’s aggregate basis either U.S. or Country A tax purposes. basis difference with respect to one or (ii) Result. Under § 1.901(m)–2(b)(1), the difference carryover with respect to the more prior CAAs will not be taken into acquisition by CFC of the stock of FT is a first foreign payor is reduced to zero. account under section 901(m). The only section 338 CAA. Under § 1.901(m)–2(c)(1), (3) Anti-abuse rule. If a section 901(m) basis difference that will be taken into Asset is an RFA with respect to Country A payor has an aggregate basis difference account after the subsequent CAA with tax and the Acquisition, because immediately carryover with respect to a foreign respect to that foreign income tax is the after the Acquisition, Asset is relevant in income tax and a foreign payor and, basis difference with respect to the determining foreign income of FT for with a principal purpose of avoiding the subsequent CAA. Country A tax purposes, and FT owned Asset application of section 901(m), assets of (iii) Multiple section 743(b) CAAs. If when the Acquisition occurred. Under the foreign payor are transferred to § 1.901(m)–4(b), the basis difference with another foreign payor in a transaction an RFA is subject to two section 743(b) respect to Asset is 200u (300u—100u). Under CAAs (prior section 743(b) CAA and § 1.901(m)–2(b)(2), the Deemed Liquidation not described in paragraph (c)(1) or (2) subsequent section 743(b) CAA) and the is a CAA (subsequent CAA) because the of this section, then a portion of the same partnership interest is acquired in Deemed Liquidation is treated as an aggregate basis difference carryover of both the CAAs, the RFA will be treated acquisition of assets for U.S. income tax the section 901(m) payor is transferred as having no unallocated basis purposes and is disregarded for Country A either to the aggregate basis difference difference with respect to the prior tax purposes. Because the U.S. basis in Asset carryover of the section 901(m) payor section 743(b) CAA if the basis is 300u immediately before and after the with respect to the other foreign payor difference for the section 743(b) CAA is Deemed Liquidation, the subsequent CAA or to another section 901(m) payor, as does not give rise to any additional basis determined independently from the appropriate. The portion of the difference. The Deemed Liquidation is not a aggregate basis difference carryover prior section 743(b) CAA. In this regard, disposition under § 1.901(m)–1(a)(15) see generally § 1.743–1(f). If the because it did not result in gain or loss being transferred is determined based on the subsequent section 743(b) CAA results recognized with respect to Asset for U.S. or ratio of fair market value of the assets from the acquisition of only a portion of Country A tax purposes. Accordingly, no transferred to the fair market value of all the partnership interest acquired in the basis difference with respect to Asset is taken of the assets of the foreign payor that prior section 743(b) CAA, then the into account under § 1.901(m)–5 as a result transferred the assets. Similar principles transferor will be required to equitably of the Deemed Liquidation, and the apply when, with a principal purpose of apportion the unallocated basis unallocated basis difference with respect to avoiding the application of section Asset immediately after the Deemed 901(m), there is a change in the difference attributable to the prior Liquidation is 200u (200u—0u). Under section 743(b) CAA between the portion allocation of foreign income for foreign paragraph (b)(2) of this section, the Deemed income tax purposes or the allocation of retained by the transferor and the Liquidation is a successor transaction portion transferred. In this case, with because there is a transfer of Asset for U.S. foreign income tax amounts for U.S. respect to the portion transferred, the income tax purposes from FT to CFC and income tax purposes that would RFAs will be treated as having no Asset has unallocated basis difference with otherwise separate foreign income tax unallocated basis difference with respect to the Acquisition immediately after amounts from the related aggregate basis respect to the prior section 743(b) CAA the Deemed Liquidation. Accordingly, under difference carryover. if basis difference for the subsequent paragraph (b)(1) of this section, section (4) Ownership. For purposes of this 901(m) will continue to apply to the section 743(b) CAA is determined paragraph (c), a section 901(m) payor unallocated basis difference with respect to owns an interest in a foreign payor if the independently from the prior section Asset until the entire 200u basis difference 743(b) CAA. section 901(m) payor owns the interest has been taken into account under directly or indirectly through one or (5) Example. The following example § 1.901(m)–5. illustrates the rules of paragraph (b) of more fiscally transparent entities for (c) Successor rules for aggregate basis this section. U.S. income tax purposes. difference carryover—(1) Transfers of a (d) Applicability dates—(1) Except as (i) Facts. USP, a domestic corporation, section 901(m) payor’s aggregate basis provided in paragraph (d)(2) of this wholly owns CFC, a foreign corporation difference carryover to another person. section, this section applies to CAAs organized in Country A and treated as a If a corporation acquires the assets of a corporation for both U.S. and Country A tax occurring on or after March 23, 2020. purposes. FT is an unrelated foreign section 901(m) payor in a transaction to (2) Paragraphs (a), (b)(1) and (2), corporation organized in Country A and which section 381 applies, that (b)(4)(i) and (iii), and (b)(5) of this treated as a corporation for both U.S. and corporation succeeds to any aggregate section apply to CAAs occurring on or Country A tax purposes. FT owns one asset, basis difference carryovers of the section after July 21, 2014, and to CAAs a parcel of land (Asset). Country A imposes 901(m) payor. occurring before that date resulting from a single tax that is a foreign income tax. On (2) Transfers of a section 901(m) an entity classification election made January 1, Year 1, CFC acquires all of the payor’s aggregate basis difference under § 301.7701–3 of this chapter that stock of FT in exchange for 300u in a carryover with respect to a foreign payor is filed on or after July 29, 2014, and qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) to another foreign payor. If a section that is effective on or before July 21, applies (Acquisition). Immediately before the 901(m) payor has an aggregate basis 2014. Paragraphs (a), (b)(1) and (2), Acquisition, Asset had a U.S. basis of 100u, difference carryover, with respect to a (b)(4)(i) and (iii), and (b)(5) of this and immediately after the Acquisition, Asset foreign income tax and a foreign payor, section also apply to CAAs occurring on had a U.S. basis of 300u. Effective on and substantially all of the assets of the or after January 1, 2011, and before July February 1, Year 1, FT elects to be a foreign payor are transferred to another 21, 2014, other than CAAs occurring disregarded entity pursuant to § 301.7701–3. foreign payor in which the section before July 21, 2014, resulting from an As a result of the election, FT is deemed, for U.S. income tax purposes, to distribute Asset 901(m) payor owns an interest, the entity classification election made to CFC in liquidation (Deemed Liquidation) section 901(m) payor’s aggregate basis under § 301.7701–3 that is filed on or immediately before the closing of the day difference carryover with respect to the after July 29, 2014, and that is effective before the election is effective pursuant to first foreign payor is transferred to the on or before July 21, 2014, but only with

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respect to basis difference determined (b) General rule—(1) In general. A paragraph (c), is satisfied. Solely for under § 1.901(m)–4T(e) with respect to basis difference with respect to an RFA purposes of this paragraph (c), the the CAA. and a foreign income tax is not taken cumulative basis difference exemption (3) Taxpayers may, however, choose into account under section 901(m) if the and the RFA class exemption are to apply provisions in this section requirements under the cumulative applied taking into account all the basis before the date such provisions are basis difference exemption, the RFA differences with respect to all the RFAs applicable pursuant to paragraphs (d)(1) class exemption, or the RFA exemption owned by all the RFA owners (U.S.) that and (2) of this section, provided that are satisfied. are attributable to the CAAs that are part they (along with any persons that are (2) Cumulative basis difference of the aggregated CAA transaction. related (within the meaning of section exemption. Except as provided in (d) Rules of application. The 267(b) or 707(b)) to the taxpayer)— paragraph (c) of this section, a basis following rules apply for purposes of (i) Consistently apply this section, difference, with respect to an RFA and this section. § 1.704–1(b)(4)(viii)(c)(4)(v) through a foreign income tax, is not taken into (1) Whether a basis difference (vii), § 1.901(m)–1, §§ 1.901(m)–3 account under section 901(m) qualifies for the cumulative basis through 1.901(m)–5 (excluding (cumulative basis difference exemption) difference exemption, the RFA class § 1.901(m)–4(e)), § 1.901(m)–7, and if the sum of that basis difference and exemption, or the RFA exemption is § 1.901(m)–8 to all CAAs occurring on all other basis differences (including determined when an asset first becomes or after January 1, 2011, and negative basis differences), with respect an RFA with respect to a CAA. In the consistently apply § 1.901(m)–2 to a single CAA and a single RFA owner case of a subsequent CAA described in (excluding § 1.901(m)–2(d)) to all CAAs (U.S.), is less than the greater of: § 1.901(m)–6(b)(4), the application of occurring on or after December 7, 2016, (i) $10 million, or the cumulative basis difference on any original or amended tax return (ii) 10 percent of the total U.S. basis exemption, the RFA class exemption, for each taxable year for which the of all the RFAs immediately after the and the RFA exemption is based on application of the provisions listed in CAA. basis difference, if any, that results from (3) RFA class exemption—(i) Except this paragraph (d)(3)(i) affects the tax the subsequent CAA. as provided in paragraph (c) of this liability and for which the statute of (2) If there is an aggregated CAA section, a basis difference, with respect limitations does not preclude transaction, the cumulative basis to an RFA and a foreign income tax, is assessment or the filing of a claim for difference exemption and each RFA not taken into account under section refund, as applicable; class exemption are applied by treating 901(m) (RFA class exemption) if the (ii) File all tax returns described in all CAAs that are part of the aggregated RFA is part of a class of RFAs and the paragraph (d)(3)(i) of this section for any CAA transaction as a single CAA. absolute value of the sum of the basis taxable year ending on or before March (3) Basis difference is computed in differences (including negative basis 23, 2020, no later than March 23, 2021; accordance with § 1.901(m)–4 except differences), with respect to a single and that a foreign basis election need not be CAA and a single RFA owner, for all the (iii) Make appropriate adjustments to evidenced if the cumulative basis RFAs in that class is less than the take into account deficiencies that difference exemption, an RFA class greater of: would have resulted from the consistent exemption, or the RFA exemption apply (A) $2 million, or to all RFAs with respect to the CAA. application under paragraph (d)(3)(i) of (B) 10 percent of the total U.S. basis (4) Basis difference is translated into this section for taxable years that are not of all the RFAs in that class of RFAs U.S. dollars (if necessary) using the spot open for assessment. immediately after the CAA. rate determined under the principles of § 1.901(m)–6T [Removed] (ii) For purposes of this paragraph (b)(3), the classes of RFAs are the seven § 1.988–1(d) on the date of the CAA. (e) Anti-abuse rule. The cumulative ■ Par. 14. Section 1.901(m)–6T is asset classes defined in § 1.338–6(b), basis difference exemption, an RFA removed. regardless of whether the CAA is a class exemption, and the RFA ■ Par. 15. Section 1.901(m)–7 is added section 338 CAA. exemption are not available if the to read as follows: (4) RFA exemption. A basis difference, with respect to an RFA and transferor and transferee in the CAA are § 1.901(m)–7 De minimis rules. a foreign income tax, is not taken into related persons (as described in section (a) In general. This section provides account under section 901(m) (RFA 267(b) or 707(b)) and the CAA was rules describing basis difference that is exemption) if the absolute value of the entered into, or structured, with a not taken into account under section basis difference with respect to the RFA principal purpose of avoiding the 901(m) because a CAA results in a de is less than $20,000. application of section 901(m). See also minimis amount of basis difference. (c) Special rule if a CAA is part of an § 1.901(m)–8(c), which provides that Paragraph (b) of this section sets forth aggregated CAA transaction. If a CAA is certain built-in loss assets are not taken the general rule for determining whether part of an aggregated CAA transaction into account for purposes of applying the de minimis threshold is met. and a single RFA owner (U.S.) does not this section. Paragraph (c) of this section modifies own all the RFAs attributable to the (f) Examples. The following examples the general rule in the case of CAAs that CAAs that are part of the aggregated illustrate the rules of this section: are part of an aggregated CAA CAA transaction, the cumulative basis (1) Example 1: De minimis; cumulative transaction. Paragraph (d) of this section difference exemption and the RFA class basis difference exemption—(i) Facts. USP, a provides rules for applying this section, exemption apply to such CAA only if, domestic corporation, as part of a plan, and paragraph (e) of this section in addition to satisfying the purchases all of the stock of CFC1 and CFC2 provides an anti-abuse rule applicable requirements of paragraph (b)(2) or from a single seller. CFC1 and CFC2 are applicable foreign corporations, organized in to related persons. Paragraph (f) of this (b)(3) of this section, respectively, Country F, and treated as corporations for section provides examples that illustrate determined without regard to this Country F tax purposes. Country F imposes the application of this section. paragraph (c), the cumulative basis a single tax that is a foreign income tax. Each Paragraph (g) of this section provides difference exemption or the RFA class acquisition is a qualified stock purchase (as applicability dates. exemption, as modified by this defined in section 338(d)(3)) to which section

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338(a) applies. A foreign basis election is not to income that is taken into account for difference with respect to any single RFA is made under § 1.901(m)–4(c). Immediately Country F tax purposes, and those assets are greater than $20,000. At all relevant times, 1u after the acquisition of the stock of CFC1 and in a single class, as defined in § 1.338–6(b). equals $1. All amounts are stated in millions. CFC2, the assets of CFC1 and CFC2 give rise Assume that the absolute value of the basis The additional facts are summarized below.

Total U.S. basis Relevant foreign assets immediately Total U.S. basis Total basis before immediately after difference

Assets of CFC1 ...... 48u 60u 12u Assets of CFC2 ...... 100u 96u (4)u

Total ...... 148u 156u 8u

(ii) Result. (A) Under § 1.901(m)–2(b)(1), cumulative basis difference exemption are difference exemption for purposes of USP’s acquisitions of the stock of CFC1 and not satisfied, without regard to paragraph (c) paragraph (c) of this section are satisfied if CFC2 are each a section 338 CAA. Under of this section, paragraph (c) of this section the sum of the basis differences with respect 1.901(m)–1(a)(3), the two section 338 CAAs is not applicable. The RFA class exemption to all of the RFAs of CFC2 and CFC1 is less constitute an aggregated CAA transaction is not relevant because all of the RFAs of than the threshold of $15.6 million, the because the acquisitions occur as part of a CFC1 are in a single class. Finally, because greater of $10 million or $15.6 million (10% plan. Under § 1.901(m)–2(c)(1), the assets of the absolute value with respect to each RFA of the total U.S. basis of $156 million (156 CFC1 and CFC2 are RFAs for Country F tax is greater than $20,000, the RFA exemption million u translated into dollars at the purposes because they are relevant in does not apply. Accordingly, the basis exchange rate of $1 = 1u)). In this case, the determining foreign income of CFC1 and CFC differences with respect to all of the RFAs of sum of the basis differences is $8 million (8 2, respectively, for Country F tax purposes. CFC1 must be taken into account under million u translated into dollars at the Under § 1.901(m)–1(a)(37), CFC1 is the RFA section 901(m). exchange rate of $1 = 1 u). Because the sum owner (U.S.) with respect to its assets, and (C) In the case of the section 338 CAA with of the basis differences of $8 million is less CFC2 is the RFA owner (U.S.) with respect respect to CFC2, without regard to paragraph than the threshold of $15.6 million, the to its assets. (c) of this section, the requirements of the requirements of the cumulative basis (B) Under paragraph (b)(2) of this section, cumulative basis difference exemption are difference exemption are satisfied in the case the application of the cumulative basis satisfied if the sum of the basis differences of the section 338 CAA with respect to CFC2. difference exemption is based on a single is less than the threshold of $10 million, the Accordingly, none of the basis differences CAA and a single RFA owner (U.S.), subject greater of $10 million or $ 9.6 million (10% with respect to the RFAs of CFC2 are taken to the requirements under paragraph (c) of of the total U.S. basis of $96 million (96 into account under section 901(m). this section that apply when there is an million u translated into dollars at the (2) Example 2: De minimis; RFA Class aggregated CAA transaction. In the case of exchange rate of $1 = 1u)) In this case, the Exemption—(i) Facts. USP, a domestic the section 338 CAA with respect to CFC1, sum of the basis differences is ($4) million corporation, acquires all the stock of CFC, an without regard to paragraph (c) of this ((4) million u translated into dollars at the applicable foreign corporation organized in section, the requirements of the cumulative exchange rate of $1 = 1 u). Because the sum Country F and treated as a corporation for basis difference exemption are satisfied if the of the basis differences of ($4) million is less Country F tax purposes, in a qualified stock sum of the basis differences is less than the than the threshold of $10 million, the purchase (as defined in section 338(d)(3)) to threshold of $10 million, the greater of $10 requirements of the cumulative basis which section 338(a) applies. Country F million or $6 million (10% of the total U.S. difference exemption are satisfied. However, imposes a single tax that is a foreign income basis of $60 million (60 million u translated because the section 338 CAA with respect to tax. A foreign basis election is not made into dollars at the exchange rate of $1 = 1u)). CFC2 is part of an aggregated CAA under § 1.901(m)–4(c). Immediately after the In this case, the sum of the basis differences transaction that includes the section 338 acquisition of CFC, the assets of CFC give rise is $12 million (12 million u translated into CAA with respect to CFC1, paragraph (c) of to income that is taken into account for dollars at the exchange rate of $1 = 1 u). this section is applicable. Under paragraph Country F tax purposes. Assume that the Because the sum of the basis differences of (c) of this section, the requirements of the absolute value of the basis difference with $12 million is not less than the threshold of cumulative basis difference exemption must respect to any single RFA is greater than $10 million, the requirements of the also be satisfied taking into account all of the $20,000. At all relevant times, 1u equals $1. cumulative basis difference exemption are RFAs of both CFC2 and CFC1. In this case, All amounts are stated in millions. The not satisfied. Because the requirements of the the requirements of the cumulative basis additional facts are summarized below.

Total U.S. basis Relevant foreign assets immediately Total U.S. basis Total basis before immediately after difference

Cash (Class I) ...... 10u 10u 0u Inventory (Class IV) ...... 14u 15u 1u Buildings (Class V) ...... 19u 30u 11u

Total ...... 43u 55u 12u

(ii) Result. (A) Under § 1.901(m)–2(b)(1), difference exemption are satisfied if the sum Because the sum of the basis differences of USP’s acquisition of the stock of CFC is a of the basis differences is less than the $12 million is not less than the threshold of section 338 CAA. Under § 1.901(m)–2(c)(1), threshold of $10 million, the greater of $10 $10 million, the requirements of the the assets of CFC are RFAs for Country F tax million or $5.5 million (10% of the total U.S. cumulative basis difference exemption are purposes because they are relevant in basis of $55 million (55 million u translated not satisfied. determining foreign income of CFC for into dollars at the exchange rate of $1 = 1u)). (C) Under paragraph (b)(3) of this section, Country F tax purposes. In this case, the sum of the basis differences each of CFC’s assets is allocated to its class (B) Under paragraph (b)(2) of this section, is $12 million (12 million u translated into under § 1.338–6(b) for purposes of the RFA the requirements of the cumulative basis dollars at the exchange rate of $1 = 1 u). class exemption. The requirements of the

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RFA class exemption with respect to the taxable year ending on or before March however, choose to apply this section Class IV RFAs (in this case, inventory) are 23, 2020, no later than March 23, 2021; before the date this section is applicable satisfied if the absolute value of the sum of and provided that they (along with any the basis differences with respect to the Class (3) Make appropriate adjustments to persons that are related (within the IV RFAs is less than the threshold of $2 take into account deficiencies that million, the greater of $2 million or $1.5 meaning of section 267(b) or 707(b)) to million (10% of the total U.S. basis of Class would have resulted from the consistent the taxpayer)— IV RFAs of $15 million (15 million u application under paragraph (g)(1) of (1) Consistently apply this section, translated into dollars at the exchange rate of this section for taxable years that are not § 1.704–1(b)(4)(viii)(c)(4)(v) through $1 = 1u)). In this case, the absolute value of open for assessment. (vii), § 1.901(m)–1, and §§ 1.901(m)–3 the sum of the basis differences is $1 million § 1.901(m)–7T [Removed] through 1.901(m)–7 (excluding (1 million u translated into dollars at the § 1.901(m)–4(e)) to all CAAs occurring exchange rate of $1 = 1 u). Because the sum ■ Par. 16. Section 1.901(m)–7T is on or after January 1, 2011, and of the basis differences of $1 million is less removed. consistently apply § 1.901(m)–2 than the threshold of $2 million, the ■ requirements of the RFA class exemption are Par. 17. Section 1.901(m)–8 is added (excluding § 1.901(m)–2(d)) to all CAAs satisfied. Accordingly, the basis differences to read as follows: occurring on or after December 7, 2016, with respect to the Class IV RFAs are not § 1.901(m)–8 Miscellaneous. on any original or amended tax return taken into account under section 901(m). for each taxable year for which the (D) The requirements of the RFA class (a) In general. This section provides application of the provisions listed in guidance on other matters under section exemption with respect to the Class V RFAs this paragraph (e)(1) affects the tax 901(m). Paragraph (b) of this section (in this case, buildings) is satisfied if the liability and for which the statute of absolute value of the sum of the basis provides guidance on the application of limitations does not preclude differences with respect to the Class V RFAs section 901(m) to pre-1987 foreign assessment or the filing of a claim for is less than the threshold of $3 million, the income taxes. Paragraph (c) of this refund, as applicable; greater of $2 million or $3 million (10% of section provides anti-abuse rules the total U.S. basis of Class V RFAs of $30 (2) File all tax returns described in relating to built-in loss assets. Paragraph million (30 million u translated into dollars paragraph (e)(1) of this section for any (d) of this section provides guidance on at the exchange rate of $1 = 1u)). In this case, taxable year ending on or before March the interaction of section 901(m) and the absolute value of the sum of the basis 23, 2020, no later than March 23, 2021; section 909. Paragraph (e) of this section differences is $11 million (11 million u and translated into dollars at the exchange rate of provides applicability dates. $1 = 1 u). Because the sum of the basis (b) Application of section 901(m) to (3) Make appropriate adjustments to differences of $11 million is not less than the pre-1987 foreign income taxes. Section take into account deficiencies that threshold of $3 million, the requirements of 901(m) and §§ 1.901(m)–1 through would have resulted from the consistent the RFA class exemption are not satisfied. 1.901–8 apply to pre-1987 foreign application under paragraph (e)(2) of Finally, because the absolute value with income taxes (as defined in § 1.902– this section for taxable years that are not respect to each RFA is greater than $20,000, open for assessment. the RFA exemption does not apply. 1(a)(10)(iii)) of an applicable foreign Accordingly, the basis differences with corporation. § 1.901(m)–8T [Removed] (c) Anti-abuse rule for built-in loss respect to the Class V RFAs are taken into ■ account under section 901(m). RFAs. A basis difference with respect to Par. 18. Section 1.901(m)–8T is (E) The Class I RFAs (in this case, cash) are an RFA described in section removed. irrelevant because there are no basis 901(m)(3)(C)(ii) (built-in loss RFA) will Sunita Lough, differences with respect to those RFAs. not be taken into account for purposes Deputy Commissioner for Services and (g) Applicability dates. This section of computing an allocated basis Enforcement. applies to CAAs occurring on or after difference for a U.S. taxable year of a Approved: February 13, 2020. March 23, 2020. Taxpayers may, section 901(m) payor if any RFA, David J. Kautter, however, choose to apply this section including an RFA other than built-in Assistant Secretary of the Treasury (Tax before the date this section is applicable loss RFAs, is acquired with a principal Policy). provided that they (along with any purpose of using one or more built-in [FR Doc. 2020–05551 Filed 3–20–20; 8:45 am] persons that are related (within the loss RFAs to avoid the application of meaning of section 267(b) or 707(b)) to section 901(m). Furthermore, a basis BILLING CODE 4830–01–P the taxpayer)— difference with respect to a built-in loss (1) Consistently apply this section, RFA will not be taken into account for § 1.704–1(b)(4)(viii)(c)(4)(v) through purposes of the cumulative basis DEPARTMENT OF HOMELAND (vii), § 1.901(m)–1, §§ 1.901(m)–3 difference exemption or the RFA class SECURITY through 1.901(m)–6 (excluding exemption under § 1.901(m)–7 if any Coast Guard § 1.901(m)–4(e)), and § 1.901(m)–8 to all RFAs, including RFAs other than built- CAAs occurring on or after January 1, in loss RFAs, are acquired with a 33 CFR Part 165 2011, and consistently apply principal purpose of avoiding the § 1.901(m)–2 (excluding § 1.901(m)– application of section 901(m). [Docket Number USCG–2020–0167] 2(d)) to all CAAs occurring on or after (d) Interaction with section 909. The December 7, 2016, on any original or amount of a foreign income tax that is RIN 1625–AA00 amended tax return for each taxable disqualified under section 901(m) is Safety Zone; Pacific Ocean, Hilo year for which the application of the determined before applying section 909. Harbor, HI—Lightering Operations provisions listed in this paragraph (g)(1) However, section 909 may apply to affects the tax liability and for which the suspend a deduction for the amount of AGENCY: Coast Guard, DHS. statute of limitations does not preclude a foreign income tax that is disqualified ACTION: Temporary final rule. assessment or the filing of a claim for under section 901(m). refund, as applicable; (e) Applicability dates. This section SUMMARY: The Coast Guard is (2) File all tax returns described in applies to CAAs occurring on or after establishing a temporary safety zone for paragraph (g)(1) of this section for any March 23, 2020. Taxpayers may, the navigable waters of Hilo Harbor,

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