- The IRS released the first tranche of Proposed Regulations on PTEP.
- The Proposed Regulations provide guidance under several IRC Sections, addressing PTEP tracking under Section 959 and the impact of PTEP on basis of stock in a foreign corporation under Section 961.
- Additionally, the Proposed Regulations address the computation of foreign currency gains and losses with respect to distributions of PTEP under Section 986(c).
The Bottom Line
On November 29, the IRS released the first in an expected series of Proposed Regulations to address the complex issues around Previously Taxed Earnings & Profits (PTEP) of controlled foreign corporations (CFC) and related basis adjustments, several of which were introduced originally in Notice 2019-01.
The IRS enacted §959 to prevent double taxation on the Earnings & Profits (E&P) of CFCs held by US Shareholders and §961 to address adjustments to basis in the stock of CFCs from the generation and distribution of PTEP. The IRS has not updated the regulations under §959 and §961 since 1965, despite the new categories of PTEP created by the Tax Cuts and Jobs Act (TCJA), e.g.., GILTI (Global Intangible Low Taxed Income) under Section 951A and Transition Tax under Section 965.
Additionally, the proposed regulations intend to implement Notice 88-71 for taxpayers applying §986(c) when calculating foreign currency gains or losses on distributions of PTEP and consider the interplay between foreign income taxes paid under Sections 164(a), 901(a), and 960(b) and PTEP tracking.
Finally, the regulations consider the impact to individuals with PTEP making a Section 962 election and those subject to the Net Investment Income Tax under Section 1411.
What’s Next?
The IRS is accepting commentary on the Proposed Regulations until March 2nd, 2025.
The Proposed Regulations will likely take effect in tax years beginning on or after the date by which the Proposed Regulations are finalized. Taxpayers may consider applying the proposed regulations prior to finalization in certain circumstances.