Proposed Regulations – Tracking PTEP Under Section 959
On November 29, 2024, the IRS released Proposed Regulations, providing guidance on the complex issues surrounding Previously Taxed Earnings & Profits (PTEP).
The Proposed Regulations under Section 959 outline the need to establish and maintain annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to a covered shareholder holding stock in a foreign corporation. A “covered shareholder” is defined as any U.S. person, other than a domestic partnership or S Corporation. However, it should be noted that a covered person is not limited to a U.S. shareholder because the exclusion under §959(a) is not limited to U.S. shareholders.
Annual Accounts, Dollar Basis Pools, & PTEP Tax Pools
Annual PTEP accounts track a covered shareholder’s PTEP with respect to its interest in a foreign corporation during a taxable year and represent PTEP distributable exclusively to the covered shareholder. A covered shareholder is responsible for maintaining annual PTEP accounts (using information furnished by a foreign corporation) in a foreign corporation’s functional currency, tracked separately across each §904 category, and assigned among ten PTEP groups and two subgroups. Annual tracking is needed to follow the “last-in, first-out” distribution rule of §959(c).
Dollar basis pools track a foreign corporation’s PTEP with respect to a covered shareholder in U.S. dollars. Dollar basis tracking of PTEP pools allows a covered shareholder to determine foreign currency gain or loss under §986(c).
PTEP tax pools track foreign income taxes associated with a foreign corporation’s PTEP with respect to a covered shareholder in U.S. dollars.
A covered shareholder can elect to combine dollar basis pools and PTEP tax pools, resulting in a single PTEP and §904 grouping for all foreign corporations in which it holds an interest.
The Foreign Corporation’s Responsibility for PTEP Tracking
Foreign corporations must maintain PTEP accounts and PTEP tax pools with respect to each covered shareholder. The PTEP and foreign income taxes within are assigned to §904 categories and PTEP groups to reflect the foreign corporation-level attributes.
The Proposed Regulations clarify that a foreign corporation’s PTEP is to be determined independently of its earnings and profits (E&P). This separate determination is an important distinction, addressing issues where a foreign corporation’s E&P may be less than its PTEP because a current year deficit in E&P cannot reduce PTEP.
Forvis Mazars Insight: The IRS is currently looking at issues regarding foreign corporation-level §959(c)(3) E&P and whether it is necessary to compute E&P separately with respect to each covered shareholder.
Covered Shareholder-Level Adjustments
Adjustments to a PTEP account with respect to a covered shareholder may occur at three points during a taxable year.
The following adjustments are to be made at the beginning of a foreign corporation’s taxable year to ensure that the PTEP generated in these groups is available for distribution at the start of the taxable year:
- PTEP arising from a covered shareholder’s Subpart F or GILTI inclusion
- PTEP distributed to the foreign corporation during the tax year with respect to a covered shareholder
- PTEP with respect to a covered shareholder resulting from the application of the foreign corporation’s §961(c) basis to gain recognized during the taxable year
Other adjustments are to be made simultaneously with the relevant transaction as it occurs during the foreign corporation’s taxable year:
- PTEP distributed by the foreign corporation
- PTEP arising from the sale or exchange of stock that is recharacterized as a dividend under §1248
- PTEP transfers from or to a covered shareholder under the successor rules of §959
Finally, two adjustments are to be made at the end of a foreign corporation’s taxable year:
- Reassigned PTEP under §956
- PTEP arising from a covered shareholder’s inclusion in gross income by way of §956
Under the Proposed Regulations, adjustments to the related dollar basis pools and PTEP tax pools with respect to a covered shareholder are to occur at the time of the related adjustment to the covered shareholder’s annual PTEP account.
Distributions of PTEP
In general, PTEP distributed to a covered shareholder (other than §962 PTEP) is excluded from the covered shareholder’s gross income. Additionally, PTEP distributed by a Controlled Foreign Corporation (CFC) to another CFC is excluded from the recipient CFC’s gross income provided the PTEP relates to a covered shareholder of both CFCs.
Under the Proposed Regulations, the gross-up approach to allocating distributions of PTEP among covered shareholders who were both U.S. and non-U.S. shareholders (split-ownership structures) under Rev. Rul. 82-161 is replaced by a pro-rata allocation approach to avoid complex issues in allocating distributions of PTEP that were generated non-pro-rata with respect to U.S. shareholders.
A distribution must qualify as a covered distribution, defined as a distribution treated as a dividend under §316. Excluded from the definition of covered distributions are deemed distributions under §78, 367(b), 964(d), and 1248.
The Proposed Regulations set forth the following steps to aid taxpayers in determining the extent to which a covered distribution is comprised of PTEP:
- Each covered shareholder determines their share of the covered distribution.
- Each covered shareholder allocates their share of the covered distribution to the distributing foreign corporation’s PTEP and untaxed E&P.
- The covered distribution out of PTEP with respect to a covered shareholder is sourced to various PTEP baskets following §965 priority rules on a Last-in-First-Out (LIFO) basis.
Successor Transactions
When stock is acquired in a foreign corporation, the successor rules of §959 generally transfer the foreign corporation’s PTEP with respect to the relinquishing covered shareholder to the acquiring covered shareholder. However, transactions involving issuances, redemptions, and transfers, i.e., §351 transactions, are not privy to the general successor rules because such stock acquired in these manners is treated as substituted basis property. The IRS intends to issue further guidance on the transfer of PTEP in transactions to which the successor rules do not apply.
How Forvis Mazars Can Help
The proposed PTEP regulations create added complexity for taxpayers applying the rules at both the shareholder and corporate level. If you hold a direct or indirect interest in a foreign corporation, please reach out to a Forvis Mazars US professional to see how we can help you navigate the increasing complexities that arise when investing abroad.
- 1 Internal Revenue Cumulative Bulletin, 1982-1, www.govinfo.com.