Notice 2018-26

Additional Guidance Under Section 965; Guidance Under Sections 62, 962, and 6081 in
Connection With Section 965; and Penalty Relief Under Sections 6654 and 6655 in
Connection with Section 965 and Repeal of Section 958(b)(4)

Notice 2018-26
SECTION 1. OVERVIEW
This notice announces that the Department of the Treasury (“Treasury
Department”) and the Internal Revenue Service (“IRS”) intend to issue regulations in
connection with section 965 of the Internal Revenue Code (“Code”) as amended by “An
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on
the budget for fiscal year 2018,” P.L. 115-97 (the “Act”), which was enacted on
December 22, 2017. For prior guidance issued under section 965, see Notice 2018-07,
2018-4 I.R.B. 317; Notice 2018-13, 2018-6 I.R.B. 341; and Rev. Proc. 2018-17, 2018-9
I.R.B. 384. In addition, this notice announces relief from estimated tax penalties in
connection with the amendment of section 965 and the repeal of section 958(b)(4) by
the Act.
Section 2 of this notice provides background on section 965 and other relevant
provisions of the Code. Section 3 of this notice describes regulations that the Treasury
Department and the IRS intend to issue in connection with section 965 and announces
the IRS’s intent to modify certain form instructions as a result of section 965. Section 4
of this notice describes a modification that the Treasury Department and the IRS intend

to make with respect to regulations under section 965 that were described in section
3.04(a) of Notice 2018-13. Section 5 of this notice provides guidance under section 962
in connection with section 965. Section 6 of this notice provides guidance concerning
the application of the estimated tax rules in sections 6654 and 6655 and a waiver from
the penalty imposed under those sections with respect to estimated taxes in connection
with section 965 and the repeal of section 958(b)(4). Section 7 of this notice describes
the effective dates of the regulations and other guidance described in this notice, as well
as a clarification to the effective date provided in section 6 of Notice 2018-13 for the rule
described in section 5.01 of Notice 2018-13. Section 8 of this notice requests
comments and provides contact information.
SECTION 2. BACKGROUND
.01 Treatment of Accumulated Post-1986 Deferred Foreign Income as Subpart F
Income
Section 965(a) provides that for the last taxable year of a deferred foreign income
corporation (“DFIC”) that begins before January 1, 2018 (such year of the DFIC, the
“inclusion year”), the subpart F income of the corporation (as otherwise determined for
such taxable year under section 952) shall be increased by the greater of (1) the
accumulated post-1986 deferred foreign income of such corporation determined as of
November 2, 2017, or (2) the accumulated post-1986 deferred foreign income of such
corporation determined as of December 31, 2017 (each such date, a “measurement
date,” and the greater of the accumulated post-1986 deferred foreign income of the
corporation as of the measurement dates, the “section 965(a) earnings amount”).The
section 965(a) earnings amount is not subject to the rules or limitations in section 952

2

and is not limited by the accumulated earnings and profits of the DFIC as of the close of
the inclusion year.
.02 Determination of United States Shareholder’s Section 951(a)(1) Inclusion by
Reason of Section 965
Section 965(b)(1) provides that, if a taxpayer is a United States shareholder with
respect to at least one DFIC and at least one E&P deficit foreign corporation, then the
portion of the section 965(a) earnings amount which would otherwise be taken into
account under section 951(a)(1) by a United States shareholder with respect to each
DFIC is reduced by the amount of such United States shareholder’s aggregate foreign
E&P deficit that is allocated to such DFIC. The portion of the section 965(a) earnings
amount that is taken into account under section 951(a)(1) by a United States
shareholder, taking into account the reduction described in the preceding sentence, is
referred to in this notice as the “section 965(a) inclusion amount.”
.03 Allocation of Aggregate Foreign E&P Deficit and Definition of E&P Deficit Foreign
Corporation
The aggregate foreign E&P deficit of any United States shareholder is allocated
to each DFIC of the United States shareholder in an amount that bears the same
proportion to such aggregate as (A) such United States shareholder’s pro rata share of
the section 965(a) earnings amount of each such DFIC bears to (B) the aggregate of
such United States shareholder’s pro rata shares of the section 965(a) earnings
amounts of all DFICs of such United States shareholder. Section 965(b)(2). The term
“aggregate foreign E&P deficit” means, with respect to any United States shareholder,
the lesser of (I) the aggregate of such shareholder’s pro rata shares of the specified
E&P deficits of the E&P deficit foreign corporations of such shareholder or (II) the

3

aggregate of such shareholder’s pro rata shares of the section 965(a) earnings amounts
of all DFICs of such shareholder. Section 965(b)(3)(A)(i).
The term “E&P deficit foreign corporation” means, with respect to any taxpayer,
any specified foreign corporation with respect to which such taxpayer is a United States
shareholder, if, as of November 2, 2017, (i) such specified foreign corporation has a
deficit in post-1986 earnings and profits, (ii) such corporation was a specified foreign
corporation, and (iii) such taxpayer was a United States shareholder of such
corporation. Section 965(b)(3)(B). The term “specified E&P deficit” means, with respect
to an E&P deficit foreign corporation, the amount of such corporation’s deficit in post1986 earnings and profits as of November 2, 2017. See section 965(b)(3)(C).
.04 Application of the Participation Exemption
Section 965(c)(1) provides that there shall be allowed as a deduction for the
taxable year of a United States shareholder in which a section 965(a) inclusion amount
is included in the gross income of such United States shareholder an amount equal to
the sum of (A) the United States shareholder’s 8 percent rate equivalent percentage (as
defined in section 965(c)(2)(A)) of the excess (if any) of (i) the section 965(a) inclusion
amount, over (ii) the amount of such United States shareholder’s aggregate foreign
cash position, plus (B) the United States shareholder’s 15.5 percent rate equivalent
percentage (as defined in section 965(c)(2)(B)) of so much of such United States
shareholder’s aggregate foreign cash position as does not exceed the section 965(a)
inclusion amount. The deduction allowed to a United States shareholder under section
965(c) with respect to a section 965(a) inclusion amount of the United States
shareholder is referred to in this notice as a “section 965(c) deduction.”

4

Section 965(c)(3)(A) provides that the term “aggregate foreign cash position”
means, with respect to any United States shareholder, the greater of (i) the aggregate of
such United States shareholder’s pro rata share of the cash position of each specified
foreign corporation of such United States shareholder determined as of the close of the
last taxable year of such specified foreign corporation that begins before January 1,
2018 (“final cash measurement date”), 1 or (ii) one half of the sum of (I) the aggregate
described in clause (i) determined as of the close of the last taxable year of each such
specified foreign corporation that ends before November 2, 2017 (the “second cash
measurement date”), plus (II) the aggregate described in clause (i) determined as of the
close of the taxable year of each such specified foreign corporation that precedes the
taxable year referred to in subclause (I) (“first cash measurement date”). Each date
referred to in the preceding sentence is referred to in this notice as a “cash
measurement date.”
The cash position of any specified foreign corporation is the sum of (i) cash held
by such corporation, (ii) the net accounts receivable of such corporation, and (iii) the fair
market value of the following assets held by such corporation (each asset, a “cash
equivalent asset”): (I) personal property which is of a type that is actively traded and for
which there is an established financial market; (II) commercial paper, certificates of
deposit, the securities of the Federal government and of any State or foreign

1

Notice 2018-07 and Notice 2018-13 referred to the year that includes the final cash measurement date
as the “inclusion year” of such specified foreign corporation. However, only a DFIC can have an inclusion
year, and therefore the final cash measurement date of a specified foreign corporation, which can be a
DFIC, an E&P deficit foreign corporation, or neither, will not necessarily be the close of an inclusion year.
The regulations described in Notice 2018-07 and Notice 2018-13 will describe the final cash
measurement date consistently with section 965(c)(3)(A) and this notice. Any reference to an “inclusion
year” for a specified foreign corporation that is not a DFIC will describe the last year of the specified
foreign corporation that begins before January 1, 2018.

5

government; (III) any foreign currency; (IV) any obligation with a term of less than one
year (“short-term obligation”); and (V) any asset which the Secretary identifies as being
economically equivalent to any asset described in section 965(c)(3)(B). Section
965(c)(3)(B). For purposes of determining the aggregate foreign cash position of a
United States shareholder, the term “net accounts receivable” means, with respect to
any specified foreign corporation, the excess (if any) of (i) such corporation’s accounts
receivable, over (ii) such corporation’s accounts payable (determined consistent with
the rules of section 461). Section 965(c)(3)(C).
Section 965(c)(3)(D) provides that net accounts receivable, actively traded
property, and short-term obligations shall not be taken into account by a United States
shareholder in determining its aggregate foreign cash position to the extent that such
United States shareholder demonstrates to the satisfaction of the Secretary that such
amount is so taken into account by such United States shareholder with respect to
another specified foreign corporation.
Section 965(c)(3)(F) provides that if the Secretary determines that a principal
purpose of any transaction was to reduce the aggregate foreign cash position taken into
account under section 965(c), such transaction shall be disregarded for purposes of
section 965(c).
.05 Definition of DFIC and Accumulated Post-1986 Deferred Foreign Income
For purposes of section 965, a DFIC is, with respect to any United States
shareholder, any specified foreign corporation of such United States shareholder that
has accumulated post-1986 deferred foreign income (as of a measurement date)
greater than zero. Section 965(d)(1). The term “accumulated post-1986 deferred
foreign income” means the post-1986 earnings and profits of the specified foreign
6

corporation except to the extent such earnings and profits (A) are attributable to income
of the specified foreign corporation that is effectively connected with the conduct of a
trade or business within the United States and subject to tax under chapter 1
(“effectively connected income”), or (B) in the case of a controlled foreign corporation
(“CFC”), if distributed, would be excluded from the gross income of a United States
shareholder under section 959 (“previously taxed income”). Section 965(d)(2).
Section 965(d)(3) provides that the term “post-1986 earnings and profits” means
the earnings and profits of the foreign corporation (computed in accordance with
sections 964(a) and 986, and by taking into account only periods when the foreign
corporation was a specified foreign corporation) accumulated in taxable years beginning
after December 31, 1986, and determined (A) as of the measurement date that is
applicable with respect to such foreign corporation, and (B) without diminution by
reason of dividends distributed during the inclusion year other than dividends distributed
to another specified foreign corporation.
.06 Specified Foreign Corporation
Section 965(e)(1) provides that the term “specified foreign corporation” means
(A) any CFC and (B) any foreign corporation with respect to which one or more
domestic corporations is a United States shareholder. For purposes of sections 951
and 961, a specified foreign corporation described in section 965(e)(1)(B) is treated as a
CFC solely for purposes of taking into account the subpart F income of such corporation
under section 965(a) (and for purposes of determining a United States shareholder’s
pro rata share of any amount with respect to a specified foreign corporation under
section 965(f)). Section 965(e)(2). However, if a passive foreign investment company

7

(as defined in section 1297) with respect to the shareholder is not a CFC, then such
corporation is not a specified foreign corporation. Section 965(e)(3).
.07 Determination of Pro Rata Share
Section 965(f)(1) provides that the determination of any United States
shareholder’s pro rata share of any amount with respect to any specified foreign
corporation shall be determined under rules similar to the rules of section 951(a)(2) by
treating such amount in the same manner as subpart F income (and by treating such
specified foreign corporation as a CFC).
.08 Election Under Section 965(h) Concerning Payment of Net Tax Liability Under
Section 965
Section 965(h)(1) provides that in the case of a United States shareholder of a
DFIC, such United States shareholder may elect to pay the net tax liability under section
965 in eight installments. Section 965(h)(5) provides that any election under section
965(h)(1) must be made not later than the due date for the return of tax for the year of
the United States shareholder in which or with which the inclusion year of the DFIC
ends and must be made in such manner as the Secretary provides.
If an election is made under section 965(h)(1), the first installment must be paid
on the due date (determined without regard to any extension of time for filing the return)
for the return of tax for the year of the United States shareholder in which or with which
the inclusion year of the DFIC ends, and each succeeding installment must be paid on
the due date (determined without regard to any extension of time for filing the return) for
the return of tax for the taxable year following the taxable year with respect to which the
preceding installment was made. Section 965(h)(2).

8

Section 965(h)(6) defines the net tax liability under section 965 with respect to
any United States shareholder as the excess (if any) of (i) such taxpayer's net income
tax for the taxable year in which an amount is included in the gross income of such
United States shareholder under section 951(a)(1) by reason of section 965, over
(ii) such taxpayer's net income tax for such taxable year determined (I) without regard to
section 965, and (II) without regard to any income or deduction properly attributable to a
dividend received by such United States shareholder from any DFIC. For this purpose,
the term “net income tax” means the regular tax liability reduced by the credits allowed
under subparts A, B, and D of part IV of subchapter A.
.09 Election Under Section 965(i) Concerning Payment of Net Tax Liability Under
Section 965 by S Corporation Shareholder and Related Reporting Requirements
Section 965(i)(1) provides that in the case of any S corporation that is a United
States shareholder of a DFIC, each shareholder of such S corporation may elect to
defer payment of such shareholder's net tax liability under section 965 with respect to
such S corporation until the shareholder's taxable year which includes the triggering
event with respect to such liability.
Under section 965(i)(1), any net tax liability, payment of which is deferred under
section 965(i)(1), will be assessed on the return of tax as an addition to tax in the
shareholder's taxable year which includes the triggering event with respect to such
liability. As defined in section 965(i)(2), in the case of any shareholder's net tax liability
under section 965 with respect to any S corporation, the triggering event with respect to
such liability is whichever of the following occurs first: (i) such corporation ceases to be
an S corporation (determined as of the first day of the first taxable year that such
corporation is not an S corporation); (ii) a liquidation or sale of substantially all the
9

assets of such S corporation (including in a title 11 or similar case), a cessation of
business by such S corporation, such S corporation ceases to exist, or any similar
circumstance; or (iii) a transfer of any share of stock in such S corporation by the
taxpayer (including by reason of death, or otherwise). In the case of a transfer of less
than all of the taxpayer's shares of stock in the S corporation, such transfer shall only be
a triggering event with respect to so much of the taxpayer's net tax liability under section
965 with respect to such S corporation as is properly allocable to such stock. Section
965(i)(2)(B).
Section 965(i)(3) defines a shareholder's net tax liability under section 965 with
respect to any S corporation as the net tax liability under section 965 which would be
determined under section 965(h)(6) if the only amounts taken into account under
section 951(a)(1) by reason of section 965 by such shareholder were allocations from
such S corporation.
.10 Election Under Section 965(m) Concerning Inclusions of Amounts Under Section
965
Under section 965(m)(1)(B), a real estate investment trust (REIT) may elect, in
lieu of including any amount required to be taken into account under section 951(a)(1)
by reason of section 965 in the taxable year in which it would otherwise be included in
gross income (for purposes of the computation of REIT taxable income under section
857(b)), to include such amount in gross income in eight installments.
.11 Election Under Section 965(n) Not to Apply Net Operating Loss Deduction
Under section 965(n)(1), a United States shareholder of a DFIC may make an
election pursuant to which the amount described in section 965(n)(2) shall not be taken
into account (A) in determining the amount of the net operating loss deduction under
10

section 172 of such shareholder for such taxable year, or (B) in determining the amount
of taxable income for such taxable year which may be reduced by net operating loss
carryovers or carrybacks to such taxable year under section 172. The amount
described in section 965(n)(2) is the sum of (A) the amount required to be taken into
account under section 951(a)(1) by reason of section 965 (determined after the
application of section 965(c)), plus (B) in the case of a domestic corporation which
chooses to have the benefits of subpart A of part III of subchapter N for the taxable
year, the taxes deemed to be paid by such corporation under subsections (a) and (b) of
section 960 for such taxable year with respect to the amount described in section
965(n)(2)(A) which are treated as a dividends under section 78.
.12 Regulations or Other Guidance Under Section 965
Section 965(o) provides that the Secretary shall prescribe such regulations or
other guidance as may be necessary or appropriate to carry out the provisions of
section 965, including regulations or other guidance to provide appropriate basis
adjustments, and regulations or other guidance to prevent the avoidance of the
purposes of section 965, including through a reduction in earnings and profits, through
changes in entity classification or accounting methods, or otherwise.
.13 Definition of United States Shareholder
For taxable years of foreign corporations beginning before January 1, 2018,
under section 951(b), a United States shareholder is a United States person (within the
meaning of section 957(c)) that owns within the meaning of section 958(a), or is
considered as owning by applying the rules of ownership of section 958(b), 10 percent
or more of the total combined voting power of all classes of stock entitled to vote of the
stock of a foreign corporation. Under section 957(c), a United States person generally
11

has the meaning assigned to it by section 7701(a)(30), which includes a domestic
partnership or domestic trust. But see Notice 2010-41, 2010-22 I.R.B. 715 (announcing
that the Treasury Department and the IRS intend to issue regulations treating certain
domestic partnerships as foreign partnerships for purposes of identifying which United
States shareholders are required to include amounts in gross income under
section 951(a)). Moreover, an S corporation is treated as a partnership for purposes of
sections 951 through 965. See section 1373(a).
.14 Attribution Rules in Section 958(b) and Section 318(a)
Section 958 provides rules for determining direct, indirect, and constructive stock
ownership. Under section 958(a)(1), stock is considered owned by a person if it is
owned directly or is owned indirectly through certain foreign entities under section
958(a)(2). Under section 958(b), section 318 applies, with certain modifications, to the
extent that the effect is to treat any United States person as a United States shareholder
within the meaning of section 951(b), to treat a person as a related person within the
meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a
United States shareholder of a CFC for purposes of section 956(c)(2), or to treat a
foreign corporation as a CFC under section 957.
Section 318 provides rules that attribute the ownership of stock to certain family
members, between certain entities and their owners, and to holders of options to
acquire stock. Section 318(a)(1) provides rules attributing stock ownership among
members of a family. Section 318(a)(2) provides rules attributing stock ownership
“upward” from partnerships, estates, trusts, and corporations to partners, beneficiaries,
owners, and shareholders. In addition, section 318(a)(3) provides specific rules that
attribute the ownership of stock “downward” from partners, beneficiaries, owners, and
12

shareholders to partnerships, estates, trusts, and corporations. In particular, section
318(a)(3)(A) provides that stock owned, directly or indirectly, by or for a partner in a
partnership or a beneficiary of an estate is considered as owned by the partnership or
estate. This provision applies to all partners and beneficiaries without regard to the size
of their interest in the partnership or estate. Section 318(a)(3)(B) similarly provides,
subject to certain exceptions, that stock owned, directly or indirectly, by or for a
beneficiary of a trust (or a person who is considered an owner of a trust) is considered
owned by the trust. In comparison, section 318(a)(3)(C) provides that stock owned,
directly or indirectly, by or for a shareholder in a corporation is considered owned by the
corporation only if 50 percent or more in value of the stock in the corporation is owned,
directly or indirectly, by such person.
Effective for the last taxable year of foreign corporations beginning before
January 1, 2018, and each subsequent year of such foreign corporations, and for the
taxable years of United States shareholders in which or with which such taxable years
of foreign corporations end, the Act repeals section 958(b)(4). As in effect prior to
repeal, section 958(b)(4) provided that subparagraphs (A), (B), and (C) of section
318(a)(3) (providing for “downward” attribution) were not to be applied so as to consider
a United States person as owning stock that is owned by a person who is not a United
States person.
.15 Estimated Taxes Under Sections 6654 and 6655
Taxpayers who fail to make sufficient and timely payments of estimated taxes are
liable for additions to tax under sections 6654(a), for individuals, and 6655(a), for
corporations. Generally, the addition to tax is calculated by applying the underpayment

13

interest rate under section 6621 to the unpaid portion of any required installment for the
period that portion goes unpaid.
.16 Miscellaneous Itemized Deductions
Under section 67(a), miscellaneous itemized deductions are allowed only to the
extent that the aggregate of such deductions exceeds 2 percent of adjusted gross
income (the “2-percent floor”). As amended by the Act, section 67(g) provides that for
taxable years beginning after December 31, 2017, and before January 1, 2026, no
miscellaneous itemized deductions are allowable under section 67(a). In addition,
under section 56(b)(1)(A)(i), an individual subject to the alternative minimum tax (“AMT”)
in 2017 is not allowed a deduction for any miscellaneous itemized deduction. Under
section 63(d), itemized deductions generally mean all allowable deductions except for
the deductions allowable in arriving at adjusted gross income pursuant to section 62(a),
the deduction provided by section 151, and the deduction provided in section 199A
(added by the Act). Miscellaneous itemized deductions include all itemized deductions
other than those listed in section 67(b), which does not reference the deduction under
section 965(c).
.17 Election Under Section 962 for Individual to be Subject to Tax at Corporate Rates
As amended by the Act, section 962 provides that an individual who is a United
States shareholder may elect to have the tax imposed under chapter 1 on amounts that
are included in the individual’s gross income under section 951(a) be an amount equal
to the tax that would be imposed under section 11 if the amounts were received by a
domestic corporation. In addition, if such election is made, the amounts included in the
individual’s gross income under section 951(a) are treated as if they were received by a
domestic corporation for purposes of applying section 960 (relating to foreign tax
14

credits). See §1.962-1(a). However, the taxable income determined for purposes of
applying section 11 is not reduced by any deduction of the United States shareholder.
See §1.962-1(b)(1)(i). An election under section 962 does not affect tax imposed under
other chapters, including under chapter 2A.
.18 Extensions of Time for Filing Income Tax Returns and Paying Tax for Certain
Citizens and Residents Abroad
In relevant part, regulations under section 6081 provide an extension of time to
the fifteenth day of the sixth month following the close of the taxable year for filing
returns of income and for paying any tax shown on the return in the case of United
States citizens or residents whose tax homes and abodes, in a real and substantial
sense, are outside the United States and Puerto Rico, and United States citizens and
residents in military or naval service on duty, including non-permanent or short term
duty, outside the United States and Puerto Rico (“specified individuals”). See §1.60815(a)(5) and (6).
SECTION 3. REGULATIONS TO BE ISSUED ADDRESSING THE APPLICATION OF
SECTION 965
.01 Application of Section 318(a)(3)(A) to Treat a Foreign Corporation as a Specified
Foreign Corporation
As a result of the application of the constructive ownership rule in section
318(a)(3)(A) (providing for downward attribution of stock from a partner to a
partnership), it may be difficult to determine if a foreign corporation is a specified foreign
corporation under certain circumstances. Assume, for example, that a person, A, owns
100 percent of the stock of a domestic corporation, DC, and 1 percent of the interests in
a partnership, PS. Assume further that a United States citizen, USI, owns 10 percent of
the interests in PS and 10 percent by vote and value of the stock of a foreign
15

corporation, FC. The remaining 90 percent by vote and value of the stock of FC is
owned by non-U.S. persons that are unrelated to A, USI, DC, and PS. Absent the
application of sections 958(b), 318(a)(3)(A), and 318(a)(3)(C), FC would not be a
specified foreign corporation, because FC is not a CFC and there would be no domestic
corporation that is a United States shareholder of FC.
Under sections 958(b) and 318(a)(3)(A), PS would be treated as owning 100
percent of the stock of DC and 10 percent of the stock of FC. As a result, under
sections 958(b), 318(a)(5)(A), and 318(a)(3)(C), DC would be treated as owning the
stock of FC treated as owned by PS, and thus DC would be a United States
shareholder with respect to FC, causing FC to be a specified foreign corporation within
the meaning of section 965(e)(1)(B). USI is a United States shareholder with respect to
FC and thus, absent an exception, would be required to include amounts in gross
income under section 951(a)(1) by reason of section 965 with respect to FC. The
results are the same whether A or PS or both are domestic or foreign persons.
The Treasury Department and the IRS have determined that it would pose
compliance difficulties for taxpayers and administrative difficulties for the IRS to require
a United States person to determine whether a foreign corporation with respect to which
it is a United States shareholder is a specified foreign corporation if such foreign
corporation may be a specified foreign corporation solely by reason of downward
attribution under section 318(a)(3)(A) of stock from a partner to a partnership when such
partner has only a de minimis interest in such partnership. Accordingly, the Treasury
Department and the IRS intend to issue regulations, pursuant to the grant of authority
under section 965(o), providing that, solely for purposes of determining whether a

16

foreign corporation is a specified foreign corporation within the meaning of section
965(e)(1)(B), stock owned, directly or indirectly, by or for a partner (tested partner) will
not be considered as being owned by a partnership under sections 958(b) and
318(a)(3)(A) if such partner owns less than five percent of the interests in the
partnership’s capital and profits. For purposes of the preceding sentence, an interest in
the partnership owned by another partner will be considered as being owned by the
tested partner under the principles of sections 958(b) and 318, as modified by this
notice, as if the interest in the partnership were stock.
Thus, for example, assume the same facts as in the example above, except that
A is a corporation wholly owned by B, and B directly owns 4 percent of the interests in
PS. For purposes of the rule in this section 3.01, applying the principles of sections
958(b) and 318, as modified by this notice, as if the interest in PS were stock, A is
treated as owning the interests in PS owned by B (in addition to the 1 percent interest in
PS that A owns directly), and thus A is not treated as owning less than five percent of
the interests in PS’s capital and profits. Accordingly, the rule in this section 3.01 does
not apply, and PS is treated as owning A’s stock in DC for purposes of determining
whether FC is a specified foreign corporation within the meaning of section
965(e)(1)(B).
.02 Determination of Cash Measurement Dates of a Specified Foreign Corporation with
Respect to a United States Shareholder
In certain cases, a specified foreign corporation may not be owned by a particular
United States shareholder on all of the cash measurement dates, whether because the
specified foreign corporation goes out of existence before the final cash measurement
date or because its stock is acquired or disposed of between cash measurement dates.
17

The Treasury Department and the IRS understand that section 965(c)(3)(A)(i) could be
interpreted to treat the close of the final taxable year of a specified foreign corporation
that ceased to exist before November 2, 2017, as the final cash measurement date of
such specified foreign corporation. Additionally, if a United States shareholder acquires
or disposes of stock of a specified foreign corporation between cash measurement
dates of the specified foreign corporation, questions have been raised as to whether the
United States shareholder’s pro rata share of the cash position of such specified foreign
corporation as of an earlier or subsequent cash measurement date should be taken into
account for purposes of determining the United States shareholder’s aggregate foreign
cash position.
The Treasury Department and the IRS intend to issue regulations providing that
(i) the final cash measurement date of a specified foreign corporation is the close of the
last taxable year of the specified foreign corporation that begins before January 1, 2018,
and ends on or after November 2, 2017, if any; (ii) the second cash measurement date
of a specified foreign corporation is the close of the last taxable year of the specified
foreign corporation that ends after November 1, 2016, and before November 2, 2017, if
any; (iii) the first cash measurement date of a specified foreign corporation is the close
of the last taxable year of the specified foreign corporation that ends after November 1,
2015, and before November 2, 2016, if any; and (iv) a United States shareholder takes
into account its pro rata share of the cash position of a specified foreign corporation as
of any cash measurement date of the specified foreign corporation on which such
United States shareholder is a United States shareholder of such specified foreign
corporation, regardless of whether such United States shareholder is a United States

18

shareholder of such specified foreign corporation as of any other cash measurement
date, including the final cash measurement date of such specified foreign corporation.
For purposes of applying this paragraph, a 52-53-week taxable year is deemed to begin
on the first day of the calendar month nearest to the first day of the 52-53-week taxable
year, and is deemed to end or close on the last day of the calendar month nearest to
the last day of the 52-53-week taxable year, as the case may be. See §1.441-2(c).
Example. (i) Facts. Except as otherwise provided, for all relevant periods, USP,
a domestic corporation, has owned directly at least 10 percent of the stock of CFC1,
CFC2, CFC3, and CFC4, each a foreign corporation. CFC1 and CFC2 have calendar
year U.S. taxable years. CFC3 and CFC4 have U.S. taxable years that end on
November 30. No entity has a short taxable year, except as a result of the transactions
described below.
(a) USP transferred all of its stock of CFC2 to an unrelated person on June 30,
2016, at which point USP ceased to be a United States shareholder with respect to
CFC2.
(b) CFC4 dissolved on December 30, 2010, and, as a result, its final taxable year
ended on December 30, 2010.
(ii) Analysis. Each of CFC1, CFC2, CFC3, and CFC4 is a specified foreign
corporation. Taking into account the regulations described in this section 3.02, the cash
measurement dates of the specified foreign corporations to be taken into account by
USP in determining its aggregate foreign cash position are summarized in the following
table:

CFC1
CFC2
CFC3
CFC4

Final
December 31,
2017
N/A
November 30,
2018
N/A

Cash Measurement Dates
Second
First
December 31, 2016
December 31, 2015
N/A
November 30, 2016

December 31, 2015
November 30, 2015

N/A

N/A

.03 Treatment of Certain Accrued Foreign Income Taxes for Purposes of Determining
Post-1986 Earnings and Profits
Post-1986 earnings and profits are defined, in relevant part, as the earnings and
profits of a specified foreign corporation determined as of each of the two measurement
19

dates described in section 965(a) and “computed in accordance with sections 964(a)
and 986.” Section 965(d)(3). In general, section 964(a) provides that, under regulations
prescribed by the Secretary, the earnings and profits of any foreign corporation, and the
deficit in earnings and profits of any foreign corporation, for any taxable year shall be
determined according to rules substantially similar to those applicable to domestic
corporations. As described in section 3.02 of Notice 2018-13, for purposes of
measuring the post-1986 earnings and profits of a specified foreign corporation as of a
measurement date, the extent to which an item of income, deduction, gain, or loss is
taken into account as of such measurement date must be determined under principles
generally applicable to the calculation of the earnings and profits of a domestic
corporation. Section 3.02(a) of Notice 2018-13 provided a limited exception to this
general rule in order to reduce taxpayer compliance burdens. Section 3.02(a) of Notice
2018-07 also announced the intention to issue regulations that may provide exceptions
to this general rule in limited cases that are contemplated by section 965 or the
legislative history to the Act, such as to address double counting or double noncounting.
The Treasury Department and the IRS have determined that an additional limited
exception to the general rule is appropriate for certain foreign income taxes that accrue
between measurement dates. Accordingly, the Treasury Department and the IRS
intend to issue regulations providing that, for purposes of determining a specified
foreign corporation’s post-1986 earnings and profits as of the measurement date on
November 2, 2017, any foreign income tax (as defined in section 901(m)(5)) that
accrues (i) within the specified foreign corporation’s U.S. taxable year that includes

20

November 2, 2017, and (ii) after November 2, 2017, but on or before December 31,
2017, will be allocated between the respective portions of the foreign tax base on which
the accrued foreign taxes are determined that are attributable to the part of the U.S.
taxable year ending on November 2, 2017, and the part of the U.S. taxable year
beginning after November 2, 2017.
The Treasury Department and the IRS have determined that it is appropriate to
limit the scope of the regulations to foreign income taxes that accrue on or before
December 31, 2017, in order to allow for the section 965(a) earnings amounts of each
specified foreign corporation to be determined as of the final measurement date,
December 31, 2017.
The regulations announced in this section 3.03 are relevant solely for purposes
of determining a specified foreign corporation’s post-1986 earnings and profits
(including a deficit) within the meaning of section 965(d)(3). Therefore, the regulations
to be issued will not affect, for example, the computation of credits for taxes deemed
paid under sections 902 and 960.
.04 Prevention of the Reduction of the Section 965 Tax Liability of a United States
Shareholder
(a) Anti-Avoidance Rule
(i) Transactions Undertaken with a Principal Purpose of Reducing Section 965 Tax
Liability
The Treasury Department and the IRS intend to issue regulations under sections
965(c)(3)(F) and 965(o) providing that a transaction will be disregarded for purposes of
determining a United States shareholder’s section 965 tax liability if each of the
following conditions is satisfied: (i) such transaction occurs, in whole or in part, on or
after November 2, 2017 (the “specified date”); (ii) such transaction is undertaken with a
21

principal purpose of reducing the section 965 tax liability of such United States
shareholder; and (iii) such transaction would, without regard to this sentence, reduce
the section 965 tax liability of such United States shareholder (the “anti-avoidance
rule”).
For purposes of this section 3.04(a) and section 3.04(b) of this notice, a
transaction (or change in method of accounting or election described in section 3.04(b)
of this notice) reduces the section 965 tax liability of a United States shareholder if such
transaction (i) reduces a section 965(a) inclusion amount of such United States
shareholder with respect to any specified foreign corporation, (ii) reduces the aggregate
foreign cash position of such United States shareholder, or (iii) increases the amount of
foreign income taxes of any specified foreign corporation deemed paid by such United
States shareholder under section 960 as a result of an inclusion under section 951(a) by
reason of section 965. Also for purposes of this section 3.04(a) and section 3.04(b) of
this notice, in the case of a United States shareholder that is a domestic pass-through
entity, a domestic pass-through owner of such domestic pass-through entity is also
treated as a United States shareholder. For the definition of domestic pass-through
entity and domestic pass-through owner, see section 3.05(b) of this notice.
Under section 3.04(a)(ii) through (iv) of this notice, certain transactions are
presumed to be undertaken with a principal purpose of reducing the section 965 tax
liability of a United States shareholder for purposes of the anti-avoidance rule. The
presumption described in the preceding sentence may be rebutted only if facts and
circumstances clearly establish that the transaction was not undertaken with a principal
purpose of reducing the section 965 tax liability of a United States shareholder. The

22

regulations will provide that a taxpayer that takes the position that the presumption is
rebutted must attach a statement to its income tax return for its taxable year in which or
with which the relevant taxable year of the relevant specified foreign corporation ends
disclosing that it has rebutted the presumption. In the case of a transaction described in
section 3.04(a)(ii) and (iii), if the presumption does not apply because such transaction
occurs in the ordinary course of business, whether such transaction was undertaken
with a principal purpose of reducing the section 965 tax liability of a United States
shareholder must be determined under all the facts and circumstances. Under section
3.04(a)(ii) through (iv) of this notice, certain transactions are also treated per se as
being undertaken with a principal purpose of reducing the section 965 tax liability of a
United States shareholder. Further, under section 3.04(a)(ii), certain distributions are
treated per se as not being undertaken with a principal purpose of reducing the section
965 tax liability of such United States shareholder and therefore are not subject to the
anti-avoidance rule.
For purposes of the rules described in section 3.04(a)(ii) through (iv) of this
notice, a person is treated as related to a United States shareholder if (i) the person
bears a relationship to the United States shareholder described in section 267(b) or
section 707(b) and (ii) the relationship described in clause (i) of this sentence is satisfied
either immediately before or immediately after the transaction. Furthermore, for
purposes of the rules described in section 3.04(a)(ii) and (iv) of this notice, the term
“transfer” includes any disposition, exchange, contribution, distribution, issuance,
redemption, recapitalization, or loan, and includes an indirect transfer (for example, a
transfer of an interest in a partnership is a transfer of the assets of such partnership).

23

No inference is intended as to the treatment, under general tax law, of
transactions that occurred before the specified date. The IRS may, where appropriate,
challenge such transactions under the Code, regulations, or judicial doctrines such as
the step transaction doctrine or the economic substance doctrine.
(ii) Application of the Anti-Avoidance Rule to Cash Reduction Transactions
For purposes of applying the anti-avoidance rule, a cash reduction transaction is
presumed to be undertaken with a principal purpose of reducing the section 965 tax
liability of a United States shareholder. For this purpose, the term “cash reduction
transaction” means (i) a transfer of cash, accounts receivable, or cash equivalent assets
by a specified foreign corporation to a United States shareholder of such specified
foreign corporation or a person related to a United States shareholder of such specified
foreign corporation, or (ii) an assumption by a specified foreign corporation of an
accounts payable of a United States shareholder of such specified foreign corporation
or a person related to a United States shareholder of such specified foreign corporation,
if such transfer or assumption would, without regard to the anti-avoidance rule, reduce
the aggregate foreign cash position of such United States shareholder. The
presumption described in this paragraph does not apply to a cash reduction transaction
that occurs in the ordinary course of business.
Notwithstanding the presumption described in the preceding paragraph, except in
the case of a specified distribution, a cash reduction transaction that is a distribution by
a specified foreign corporation to a United States shareholder of such specified foreign
corporation will be treated per se as not being undertaken with a principal purpose of
reducing the section 965 tax liability of such United States shareholder for purposes of
the anti-avoidance rule. A specified distribution will be treated per se as being
24

undertaken with a principal purpose of reducing the section 965 tax liability of a United
States shareholder for purposes of the anti-avoidance rule. For purposes of this section
3.04(a)(ii), the term “specified distribution” means a cash reduction transaction that is a
distribution by a specified foreign corporation of a United States shareholder if (i) at the
time of the distribution, there was a plan or intention for the distributee to transfer,
directly or indirectly, cash, accounts receivable, or cash equivalent assets to any
specified foreign corporation of such United States shareholder, or (ii) the distribution is
a non pro rata distribution to a foreign person that is related to such United States
shareholder. For purpose of clause (i) of the preceding sentence, an indirect transfer
includes, for example, a transfer of cash to a partnership if a specified foreign
corporation of such United States shareholder is a partner.
(iii) Application of the Anti-Avoidance Rule to E&P Reduction Transactions
For purposes of applying the anti-avoidance rule, an E&P reduction transaction is
presumed to be undertaken with a principal purpose of reducing the section 965 tax
liability of a United States shareholder. For this purpose, the term “E&P reduction
transaction” means a transaction between a specified foreign corporation and any of
(i) a United States shareholder of such specified foreign corporation, (ii) another
specified foreign corporation of a United States shareholder of such specified foreign
corporation, or (iii) any person related to a United States shareholder of such specified
foreign corporation, if such transaction would, without regard to the anti-avoidance rule,
reduce the accumulated post-1986 deferred foreign income or the post-1986
undistributed earnings (as defined in section 902(c)(1) as in effect before the date of the
enactment of the Act) of such specified foreign corporation or another specified foreign
corporation of any United States shareholder of such specified foreign corporation. The
25

presumption described in this paragraph does not apply to an E&P reduction transaction
that occurs in the ordinary course of business.
Notwithstanding the presumption described in the preceding paragraph, a
specified transaction will be treated per se as being undertaken with a principal purpose
of reducing the section 965 tax liability of a United States shareholder for purposes of
the anti-avoidance rule. For purposes of the preceding sentence, the term “specified
transaction” means an E&P reduction transaction that involves one or more of the
following: (i) a complete liquidation of a specified foreign corporation to which section
331 applies; (ii) a sale or other disposition of stock by a specified foreign corporation, or
(iii) a distribution by a specified foreign corporation that reduces the earnings and profits
of such specified foreign corporation pursuant to section 312(a)(3).
(iv) Application of the Anti-Avoidance Rule to Pro Rata Share Transactions
For purposes of applying the anti-avoidance rule, a pro rata share transaction is
presumed to be undertaken with a principal purpose of reducing the section 965 tax
liability of a United States shareholder. For this purpose, the term “pro rata share
transaction” means a transfer of the stock of a specified foreign corporation to a United
States shareholder of the specified foreign corporation or a person related to a United
States shareholder of such specified foreign corporation if such transfer would, without
regard to the anti-avoidance rule, (i) reduce such United States shareholder’s pro rata
share of the section 965(a) earnings amount of such specified foreign corporation if it is
a DFIC; (ii) increase such United States shareholder’s pro rata share of the specified
E&P deficit of such specified foreign corporation if it is an E&P deficit foreign
corporation; or (iii) reduce such United States shareholder’s pro rata share of the cash
position of such specified foreign corporation.
26

Notwithstanding the presumption described in the preceding paragraph, an
internal group transaction will be treated per se as being undertaken with a principal
purpose of reducing the section 965 tax liability of a United States shareholder for
purposes of the anti-avoidance rule. For purposes of the preceding sentence, the term
“internal group transaction” means a pro rata share transaction if, immediately before or
after the transfer, the transferor of the stock of the specified foreign corporation and the
transferee of such stock are members of an affiliated group in which the United States
shareholder is a member. For this purpose, the term “affiliated group” has the meaning
set forth in section 1504(a), determined without regard to paragraphs (1) through (8) of
section 1504(b), and the term “members of an affiliated group” means entities included
in the same affiliated group. For purposes of identifying an affiliated group and the
members of such group, (i) each partner in a partnership, as determined without regard
to clause (ii) of this sentence, is treated as holding its proportionate share of the stock
held by the partnership, as determined under the rules and principles of sections 701
through 777, and (ii) if one or more members of an affiliated group own, in the
aggregate, at least 80 percent of the interests in a partnership’s capital or profits, the
partnership will be treated as a corporation that is a member of the affiliated group.
Example. (i) Facts. FP, a foreign corporation, owns all of the stock of USP, a
domestic corporation. USP owns all of the stock of FS, a foreign corporation. USP has
held the stock of FS for more than one year. USP has a calendar year taxable year;
FS’s taxable year ends November 30. On January 2, 2018, USP transfers all of the
stock of FS to FP in exchange for cash. On January 3, 2018, FS makes a distribution
with respect to the stock transferred to FP. USP treats the transaction as a taxable sale
of the FS stock and claims a dividends received deduction under section 245A with
respect to its deemed dividend under section 1248(j) as a result of the sale. FS has
post-1986 earnings and profits as of December 31, 2017, and no previously taxed
income or effectively connected income for any previous taxable year.

27

(ii) Analysis. The transfer of the stock of FS is a pro rata share transaction
because such transfer is to a person related to USP, and the transfer would, without
regard to the anti-avoidance rule, reduce USP’s pro rata share of FS’s section 965(a)
earnings amount. Because USP and FP are also members of an affiliated group within
the meaning of this section 3.04(a)(iv), the transfer of the stock of FS is also an internal
group transaction and is treated per se as being undertaken with a principal purpose of
reducing the section 965 tax liability of USP. Accordingly, the transfer will be
disregarded for purposes of determining USP’s section 965 tax liability with the result
that, among other things, USP’s pro rata share of FS’s section 965(a) earnings amount
is determined as if USP owned (within the meaning of section 958(a)) 100 percent of
the stock of FS on the last day of FS’s inclusion year and no other person received a
distribution with respect to such stock during such year. See section 951(a)(2)(A) and
(B).
(b) Disregard of Certain Changes in Method of Accounting and Entity Classification
Elections
The Treasury Department and the IRS also intend to issue regulations, pursuant
to the grant of authority under section 965(o), providing that any change in method of
accounting made for a taxable year of a specified foreign corporation that ends in 2017
or 2018 will be disregarded for purposes of determining the section 965 tax liability of a
United States shareholder if such change in method of accounting would otherwise
reduce the section 965 tax liability of such United States shareholder. The rule
described in this section 3.04(b) will apply whether or not such change in method of
accounting was made in accordance with the procedures described in Rev. Proc. 201513, 2015-5 I.R.B. 419 (or successor), and whether or not such change in method of
accounting was properly made. These regulations will not apply to a change in method
of accounting for which the original and/or duplicate copy of any Form 3115, Application
for Change in Accounting Method, requesting the change was filed before the specified
date, November 2, 2017.
The regulations will also provide that any entity classification election under
§301.7701-3 that is filed on or after the specified date will be disregarded for purposes
28

of determining the section 965 tax liability of such United States shareholder if such
entity classification election would otherwise reduce the section 965 tax liability of any
United States shareholder. An entity classification election filed on or after the specified
date will be subject to these regulations even if such entity classification election was
effective on a date before the specified date.
The regulations described in this section 3.04(b) will apply regardless of whether
such change in method of accounting or change of entity classification election is made
with a principal purpose of reducing the section 965 tax liability of a United States
shareholder.
.05 Rules Related to Elections, Reporting, and Payment
(a) Documentation of Cash Position
Section 965(c)(3)(D) provides that net accounts receivable, actively traded
property, and short-term obligations shall not be taken into account by a United States
shareholder in determining its aggregate foreign cash position to the extent that such
United States shareholder demonstrates to the satisfaction of the Secretary that such
amount is so taken into account by such United States shareholder with respect to
another specified foreign corporation. The IRS intends to issue forms, publications,
regulations, or other guidance that will specify the documentation that a United States
shareholder must maintain or provide, and the time and manner for providing any such
documentation, in order to make the required demonstration to the Secretary.
(b) United States Persons Eligible to Make Elections Under Section 965 in the Case of a
United States Shareholder that is a Domestic Pass-Through Entity
Section 965 increases the amount included in the gross income of a United
States shareholder under section 951(a)(1) only if such United States shareholder owns
29

(within the meaning of section 958(a)) stock in one or more specified foreign
corporations. See section 951(a)(2)(A). For purposes of this notice, the term “section
958(a) stock” means, with respect to a United States shareholder of a DFIC, the stock
of the DFIC owned by the United States shareholder within the meaning of section
958(a).
The Treasury Department and IRS have determined that if a domestic passthrough entity is a United States shareholder of a DFIC and owns section 958(a) stock
in such DFIC, the section 965(a) inclusion amount with respect to such section 958(a)
stock and the section 965(c) deduction with respect to such amount should be
determined at the level of the domestic pass-through entity. However, the domestic
pass-through owners of the domestic pass-through entity are subject to federal income
tax on their share of the section 965(a) inclusion amount with respect to the section
958(a) stock of the domestic pass-through entity. Accordingly, in the case of a domestic
pass-through entity that is a United States shareholder, the regulations will provide that
each domestic pass-through owner takes into account its share of the section 965(a)
inclusion amount with respect to section 958(a) stock of a DFIC of the domestic passthrough entity and the section 965(c) deduction with respect to such amount, regardless
of whether such domestic pass-through owner is also a United States shareholder with
respect to such DFIC. In this case, the section 965(a) inclusion amount and the related
section 965(c) deduction must be allocated in the same proportion. For example, if a
domestic pass-through owner is allocated 50 percent of the section 965(a) inclusion
amount with respect to section 958(a) stock of a domestic pass-through entity, such
domestic pass-through owner must be allocated 50 percent of the related section 965(c)

30

deduction. If the domestic pass-through owner is also a United States shareholder with
respect to such DFIC that owns section 958(a) stock of such DFIC, regulations will
provide that the section 965(a) inclusion amount with respect to such section 958(a)
stock of such domestic pass-through owner and the section 965(c) deduction with
respect to such amount are determined separately from its share of the section 965(a)
inclusion amount and section 965(c) deduction of the domestic pass-through entity.
For purposes of this notice, the term “domestic pass-through entity” means a
pass-through entity that is a United States person (as defined in section 7701(a)(30)).
Also for purposes of this notice, a “pass-through entity” means a partnership, S
corporation, or any other person to the extent that the income or deductions of such
person are included in the income of one or more direct or indirect owners or
beneficiaries of the person. Accordingly, if, for example, a domestic trust is subject to
federal income tax on a portion of its section 965(a) inclusion amount and its domestic
pass-through owners are subject to tax on the remaining portion, the domestic trust is
treated as a domestic pass-through entity with respect to such remaining portion. Also
for purposes of this notice, the term “domestic pass-through owner” means a United
States person that is a partner, shareholder, beneficiary, grantor, or owner, as the case
may be, in a domestic pass-through entity, except that, in the case of tiered passthrough entities, the term does not include a partner, shareholder, beneficiary, or owner
that is itself a domestic pass-through entity. In the case of tiered pass-through entities,
a reference in this notice to a domestic pass-through owner includes a United States
person that is an indirect partner, shareholder, beneficiary, or owner through one or
more other pass-through entities, and a reference to a domestic pass-through owner’s

31

share of the section 965(a) inclusion amount and section 965(c) deduction of a
domestic pass-through entity includes such domestic pass-through owner’s share of the
section 965(a) inclusion amount and section 965(c) deduction of a domestic passthrough entity owned indirectly by such domestic pass-through owner through one or
more other pass-through entities.
The elections under section 965(h), (m), and (n) (“specified elections”) are
described in section 965 as available to a United States shareholder of a DFIC.
However, because a domestic pass-through owner includes in income a share of the
section 965(a) inclusion amount with respect to section 958(a) stock of a DFIC of a
domestic pass-through entity, the Treasury Department and the IRS intend to issue
regulations, pursuant to the grant of regulatory authority under section 965(o), allowing
such domestic pass-through owner to make a specified election that applies to its share
of the section 965(a) inclusion amount with respect to section 958(a) stock of a DFIC of
the domestic pass-through entity. Such a domestic pass-through owner will be
permitted to make a specified election regardless of whether the domestic pass-through
owner is itself a United States shareholder of the DFIC. If a domestic pass-through
owner makes a specified election for its taxable year, such election will be applicable to
all section 965(a) inclusion amounts included in the gross income of such domestic
pass-through owner for such taxable year (other than amounts with respect to which
elections under section 965(i) are effective), whether included directly by reason of
owning section 958(a) stock in a DFIC or indirectly by reason of being a domestic passthrough owner.

32

If an S corporation is, directly or indirectly, a partner, beneficiary, or owner of a
domestic pass-through entity and takes into account a share of the section 965(a)
inclusion amount of a domestic pass-through entity with respect to a DFIC, and the S
corporation is a United States shareholder of the DFIC, the regulations will provide that
shareholders of the S corporation will be permitted to make an election under section
965(i) to defer the shareholder’s net tax liability under section 965 with respect to the S
corporation. However, in such a case, if the S corporation is not itself a United States
shareholder of a DFIC, the net tax liability under section 965 of a shareholder with
respect to the S corporation for purposes of the election under section 965(i) will not
include the shareholder’s share of the domestic pass-through entity’s section 965(a)
inclusion amount with respect to the DFIC or section 965(c) deduction with respect to
such amount.
(c) Determination of Amount of Net Tax Liability Under Section 965 for Purposes of
Section 965(h)
As discussed in section 3.05(b) of this notice, if a domestic pass-through entity is
a United States shareholder that has a section 965(a) inclusion amount with respect to
section 958(a) stock in a DFIC, a United States person that is a domestic pass-through
owner, directly or indirectly, in such domestic pass-through entity is subject to net
income tax on its share of the section 965(a) inclusion amount. Accordingly, the
Treasury Department and the IRS intend to issue regulations providing that for
purposes of determining the net tax liability under section 965 of a domestic passthrough owner, the domestic pass-through owner will be treated as a United States
shareholder. See, however, section 5 of this notice, which provides that a domestic

33

pass-through owner that is not itself a United States shareholder is not permitted to
make an election under section 962.
Furthermore, the regulations will provide that, in the case of a taxpayer that has
made one or more elections under section 965(i) for a taxable year, the taxpayer’s net
tax liability under section 965 for purposes of section 965(h) is the taxpayer’s net tax
liability under section 965 as determined under section 965(h)(6) (taking into account
the rules in this section 3.05(c)) reduced by the aggregate amount of the taxpayer’s net
tax liabilities under section 965 as determined under section 965(i)(3) (taking into
account the rule provided in section 3.05(b) of this notice) with respect to which
elections under section 965(i) are effective.
(d) Application of Section 965(n) to Losses Arising in the Year in Which the Inclusion
Year of a DFIC Ends
A United States shareholder of a DFIC may elect the application of section
965(n) for the taxable year of the United States shareholder in which, or with which, the
inclusion year of the DFIC ends. If such an election is made, the United States
shareholder does not take into account the amount described in section 965(n)(2) in
determining the amount of the net operating loss deduction under section 172 of such
shareholder for such taxable year or in determining the amount of taxable income for
such taxable year which may be reduced by net operating loss carryovers or carrybacks
to such taxable year under section 172.
Questions have arisen regarding the scope of the election under section 965(n)
due to the use of the term “deduction” in section 965(n)(1)(A). A net operating loss
“deduction” for a taxable year generally refers to the amount of a net operating loss
carried to such taxable year from a prior or subsequent year rather than the net
34

operating loss arising from such year. Compare section 172(a) and (c). However,
interpreting “deduction” in section 965(n)(1)(A) to refer to carryovers or carrybacks (and
not to the net operating loss for the taxable year) would cause that paragraph to be
duplicative of section 965(n)(1)(B), which already provides that amounts described in
section 965(n)(2) are disregarded for purposes of applying net operating loss carryovers
or carrybacks to such taxable year under section 172. The Treasury Department and
the IRS have determined that section 965(n)(1)(A) was intended to apply to a different
set of losses than those to which section 965(n)(1)(B) applies. Therefore, the Treasury
Department and the IRS intend to issue regulations providing that, if an election under
section 965(n) is made with respect to a taxable year in which or with which the
inclusion year of a DFIC ends, the amount of a net operating loss for such taxable year
will be determined without taking into account as gross income the amount described in
section 965(n)(2). The regulations will also clarify that an election made under section
965(n) will be treated as made with respect to both the amount of a net operating loss
for such taxable year and the net operating loss carryovers or carrybacks for such
taxable year.
(e) Filing and Payment Due Date for Specified Individuals
A specified individual (as defined in section 2.18 of this notice) who does not
make the election under section 965(h)(1) or (i)(1) is considered to have timely filed
such person’s return and paid the net tax liability under section 965 if the filing and
payment are made on or before the fifteenth day of the sixth month following the close
of the taxable year, and the specified individual attaches a statement to the return
showing that the person for whom the return is made is a person described in §1.60815(a). See §1.6081-5(a)(5)-(6), and (b). For a specified individual who makes the
35

election under section 965(h)(1), section 965(h)(2) provides that the installments must
be paid on the due dates for the relevant returns (determined without regard to any
extension of time for filing the return).
The question has arisen whether the disregarding of extensions of time to file in
section 965(h)(2) applies to negate the extension of time to pay that is otherwise
available under §1.6081-5 for a specified individual that does not make the election
under section 965(h)(1). The Treasury Department and the IRS intend to issue
regulations providing that, if a specified individual receives an extension of time to file
and pay under §1.6081-5(a)(5) or (6), then the individual’s due date for an installment
payment under section 965(h) is also the fifteenth day of the sixth month following the
close of a taxable year.
.06 Treatment of Section 965(c) Deduction for Purposes of Sections 62(a) and 63(d)
Questions have arisen as to whether the section 965(c) deduction is a
miscellaneous itemized deduction as defined in section 67(b). The Treasury
Department and the IRS have determined that an individual’s section 965(c) deduction
was not intended to be subject to the 2-percent floor under section 67 or the deduction
disallowance under the AMT, or, in the case of a taxable year beginning after December
31, 2017, the deduction disallowance under section 67 as modified by the Act.
Therefore, the Treasury Department and the IRS intend to issue regulations, pursuant
to the grant of authority under section 965(o), providing that a section 965(c) deduction
will not be treated as an itemized deduction, including for purposes of sections 56 and
67.

36

SECTION 4. MODIFICATION OF RULE DESCRIBED IN SECTION 3.04(a) OF
NOTICE 2018-13
Section 3.04(a) of Notice 2018-13 announced that the Treasury Department and
the IRS intend to issue regulations providing that, for purposes of calculating the net
accounts receivable of a specified foreign corporation, the term “accounts receivable”
means receivables described in section 1221(a)(4), and the term “accounts payable”
means payables arising from the purchase of property described in section 1221(a)(1)
or 1221(a)(8) or the receipt of services from vendors or suppliers. The Treasury
Department and the IRS have determined that it is appropriate to exclude any
receivable or payable with an initial term of one year or more for purposes of calculating
a specified foreign corporation’s net accounts receivable. Cf. section
965(c)(3)(B)(iii)(IV) (short-term obligations). Accordingly, the Treasury Department and
the IRS intend to issue regulations providing that the terms “accounts receivable” and
“accounts payable” will include only receivables or payables with a term of less than one
year.
SECTION 5. REGULATIONS TO BE ISSUED ADDRESSING ELECTIONS UNDER
SECTION 962
As discussed in section 3.05(b) of this notice, if a domestic pass-through entity is
a United States shareholder that has a section 965(a) inclusion amount with respect to
section 958(a) stock in a DFIC, a domestic pass-through owner of such entity is subject
to net income tax on its share of the section 965(a) inclusion amount. The Treasury
Department and the IRS intend to issue regulations clarifying that a domestic passthrough owner who is an individual (including, as provided in §1.962-2(a), a trust or
estate) and a United States shareholder with respect to a DFIC may make an election
under section 962 with respect to the individual’s share of the section 965(a) inclusion
37

amount of a domestic pass-through entity with respect to such DFIC. However, an
individual who is not a United States shareholder of a DFIC is not permitted to make an
election under section 962 with respect to the individual’s share of a section 965(a)
inclusion amount of a domestic pass-through entity with respect to such DFIC
notwithstanding the rules in section 3.05(b) and (c) of this notice. See section 962(b).
The regulations will clarify that the same principles apply to inclusions under section
951(a) other than by reason of section 965.
If an individual elects to have the provisions of section 962 apply for a taxable
year, the tax imposed on amounts included in the individual’s gross income under
section 951(a) (directly by reason of owning section 958(a) stock or indirectly by reason
of being a domestic pass-through owner), including by reason of section 965, is an
amount equal to the tax that would be imposed under section 11 if the amounts were
received by a domestic corporation. In addition, §1.962-1(b)(1)(i) provides that a
deduction of a United States shareholder does not reduce the amount included in gross
income under section 951(a) for purposes of computing the amount of tax that would be
imposed under section 11.
The Treasury Department and the IRS have determined that in the case of a
taxpayer making an election under section 962, Congress intended for the section
965(c) deduction (which is generally available to United States shareholders of DFICs,
including individuals) to be allowed with respect to the tax imposed under section 11
rather than under section 1. See H.R. Rep. No. 115-466, at 620 (2017) (Conf. Rep.).
Pursuant to the grant of authority under section 965(o), the Treasury Department and
the IRS intend to modify §1.962-1(b)(1)(i) to provide that, in computing the amount of

38

tax due as a result of a section 962 election, the section 965(c) deduction may be taken
into account. Specifically, the regulations will provide that “taxable income” as used in
section 11 shall be reduced by the section 965(c) deduction. These regulations will not
apply to any other deductions, and therefore existing §1.962-1(b)(1)(i) will continue to
provide that “taxable income” as used in section 11 shall not be reduced by any other
deductions. Any section 965(c) deduction allowed in determining “taxable income” as
used in section 11 for purposes of computing the tax due as a result of a section 962
election will not also be allowed for purposes of determining an individual’s actual
taxable income.
Example. (i) Facts. USI, a United States citizen, owns 10% of the capital and
profits of USPRS, a domestic partnership that has a calendar year taxable year, the
remainder of which is owned by foreign persons unrelated to USI or USPRS. USPRS
owns all of the stock of FS, a foreign corporation that is a CFC with a calendar year U.S.
taxable year. USPRS has a section 965(a) inclusion amount with respect to FS of
$1,000 and is allowed a section 965(c) deduction of $700. FS has no post-1986 foreign
income taxes (as defined in section 902(c)(1) as in effect before the date of the
enactment of the Act). USI makes a valid election under section 962 for 2017.
(ii) Analysis. USI’s “taxable income” described in §1.962-1(b)(1)(i) equals $100
(USI’s distributive share of USPRS’s section 965(a) inclusion amount) minus $70 (USI’s
distributive share of USPRS’s allowable section 965(c) deduction), or $30. No other
deductions are allowed in determining this amount. USI’s tax on such amount will be
equal to the tax imposed under section 11 as if $30 were received by a domestic
corporation. USI cannot deduct $70 for purposes of determining USI’s taxable income
that is subject to tax under section 1.
SECTION 6. PENALTY RELIEF UNDER SECTIONS 6654 AND 6655 IN
CONNECTION WITH THE AMENDMENT OF SECTION 965 AND THE REPEAL OF
SECTION 958(B)(4)
.01 Penalty Waiver with Respect to Section 965
A United States shareholder that has a net tax liability under section 965
generally includes the amount of the net tax liability on its return for the year in which or
with which the inclusion year of the DFIC ends.
39

Section 965(h)(1) provides that a United States shareholder of a DFIC may elect
to pay the net tax liability under section 965 in eight annual installments, the first of
which is due on the due date (without regard to any extension of time to file) of the
return for the shareholder’s taxable year in which or with which the inclusion year of the
DFIC ends. Each successive installment is due on the due date (without regard to any
extension of time to file) of the return for the taxable year following the taxable year the
prior installment was made. Section 965(h)(2). The timely payment of an installment
does not incur underpayment interest. See H.R. Rep. No. 115-466, at 611 (2017)
(Conf. Rep.). Section 965(h), therefore, demonstrates Congress’s intent to permit a
taxpayer to pay its net tax liability under section 965 without incurring additional liability,
including additions to tax. Consistent with this intent, and in the interest of sound tax
administration, the IRS will waive underpayment penalties under sections 6654 and
6655 with respect to a taxpayer’s net tax liability under section 965 for those taxpayers
that make an election under section 965(h). In addition, the IRS will waive
underpayment penalties under sections 6654 and 6655 with respect to a taxpayer’s net
tax liability under section 965 for those taxpayers who do not elect to pay their net tax
liability under section 965 in installments. Accordingly, a taxpayer’s required
installments of estimated tax need not include amounts attributable to its net tax liability
under section 965 to prevent the imposition of penalties under sections 6654(a) and
6655(a). If a taxpayer fails to timely pay its net tax liability under section 965 when due,
other sections of the Code may apply; for example, additions to tax could result under
section 6651, and installment payments could be accelerated under section 965(h)(3).

40

The instructions to estimated tax forms will be modified, as necessary, to clarify
that no underpayment penalty will be imposed under section 6654 or section 6655 with
respect to a taxpayer’s net tax liability under section 965 and that the taxpayer may
exclude such amounts when calculating the amount of its required installment.
.02 Penalty Waiver for 2017 with Respect to Amendments to Sections 965 and 958(b)
by the Act
In addition, because the amendment to section 965 and the repeal of section
958(b)(4) could also affect tax liability (other than by way of the imposition of the net tax
liability under section 965) for periods that end before or shortly after the enactment of
the Act, the IRS has determined that additional penalty relief is appropriate. Therefore,
the IRS has determined that if the amendment to section 965 or the amendment to
section 958(b) by the Act causes an underpayment related to a required installment of
estimated tax due on or before January 15, 2018, the estimated tax penalty under
section 6654 or section 6655 will not apply to that underpayment.
SECTION 7. EFFECTIVE DATES
Section 965 is effective for the last taxable years of foreign corporations that
begin before January 1, 2018, and with respect to United States shareholders, for the
taxable years in which or with which such taxable years of the foreign corporations end.
The Treasury Department and the IRS intend to provide that the regulations and
instructions described in sections 3, 4, 5, and 6 of this notice are effective beginning for
the first taxable year of a foreign corporation (and with respect to United States
shareholders, the taxable years in which or with which such taxable years of the foreign
corporations end) to which section 965 applies. Before the issuance of the regulations

41

and instructions described in this notice, taxpayers may rely on the rules described in
sections 3, 4, 5, and 6 of this notice.
This notice also clarifies one of the effective dates described in section 6 of
Notice 2018-13, which provided that taxpayers could rely on the rules described in
section 5.01 of Notice 2018-13 with respect to the last taxable year of foreign
corporations beginning before January 1, 2018, and for the taxable years of United
States shareholders in which or with which such taxable years of foreign corporations
end, pending the issuance of further guidance. Taxpayers may rely on section 5.01 of
Notice 2018-13 with respect to the last taxable year of foreign corporations beginning
before January 1, 2018, and each subsequent year of such foreign corporations, and for
the taxable years of United States shareholders in which or with which such taxable
years of foreign corporations end, pending the issuance of further guidance (the
application of which will be prospective).
SECTION 8. REQUEST FOR COMMENTS AND CONTACT INFORMATION
The Treasury Department and the IRS request comments on the rules described
in this notice. The Treasury Department and the IRS expect to issue additional
guidance under section 965, and the Treasury Department and the IRS request
comments on what additional guidance should be issued to assist taxpayers in applying
section 965.
Written comments may be submitted to the Office of Associate Chief Counsel
(International), Attention: Leni C. Perkins, Internal Revenue Service, IR-4579, 1111
Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit
comments electronically to Notice.comments@irscounsel.treas.gov. Comments will be
available for public inspection and copying.
42

The principal author of this notice is Ms. Perkins of the Office of Associate Chief
Counsel (International). For further information regarding this notice, contact Ms.
Perkins at (202) 317-6934 (not a toll free call).

43