Notice 2019-1 — Notice 2019-1

# preamble

Previously Taxed Earnings and Profits Accounts

Notice 2019-01

# SECTION 1. OVERVIEW

This notice announces that the Department of the Treasury ("Treasury
Department") and the Internal Revenue Service ("IRS") intend to issue regulations
addressing certain issues arising from the enactment of the Tax Cuts and Jobs Act,
Pub. L. 115-97 (2017) (the "Act"), on December 22, 2017, with respect to foreign
corporations with previously taxed earnings and profits ("PTEP"). Section 2 of this
notice provides background on section 959 of the Internal Revenue Code ("Code") and
other relevant Code provisions. Section 3 of this notice describes proposed regulations
that the Treasury Department and the IRS intend to issue concerning PTEP arising
under provisions of the Act (the "forthcoming regulations"). Section 4 of this notice
describes the proposed applicability date of the forthcoming regulations. Section 5 of
this notice requests comments and provides contact information; as explained in that
section, the Treasury Department and the IRS intend to address additional PTEP issues
in separate guidance.

# SECTION 2. BACKGROUND

The term PTEP refers to earnings and profits ("E&P") of a foreign corporation
attributable to amounts which are, or have been, included in the gross income of a

United States shareholder (as defined under section 951(b)) ("U.S. shareholder") under
section 951(a) or under section 1248(a). See sections 959(a) and (e). Under section
959(a)(1), distributions of PTEP are excluded from the U.S. shareholder's gross income,
or the gross income of any other U.S. person who acquires the U.S. shareholder's
interest (or a portion thereof) in the foreign corporation (such U.S. person, a "successor
in interest"). Section 959(a)(2) further excludes PTEP from a U.S. shareholder's gross
income if such E&P would be included in the gross income of the U.S. shareholder or
successor in interest under section 951(a)(1)(B) as an amount determined under
section 956. Distributions of PTEP to a U.S. shareholder or successor in interest
generally are not treated as dividends except that such distributions immediately reduce
the E&P of the foreign corporation. Section 959(d).
Section 959(c) ensures that distributions from a foreign corporation are first
attributable to PTEP described in section 959(c)(1) ("section 959(c)(1) PTEP") and then
to PTEP described in section 959(c)(2) ("section 959(c)(2) PTEP"), and finally to non-
previously taxed E&P ("section 959(c)(3) E&P"). In addition, section 959(f) ensures
that, in determining the amount of any inclusion under sections 951(a)(1)(B) and 956
with respect to a foreign corporation, PTEP attributable to section 951(a)(1)(A)
inclusions remaining after any distributions during the year are taken into account
before non-previously taxed E&P described in section 959(c)(3).
On August 29, 2006, a notice of proposed rulemaking (REG-121509-00) was
published in the Federal Register (71 FR 51155) relating to the exclusion from gross
income of PTEP and associated basis adjustments, corrections to which were published
in the Federal Register on December 8, 2006 (71 FR 71116) (together, the "2006

proposed regulations"). The 2006 proposed regulations were intended to address some
of the complexities and open issues regarding the application of sections 959 and 961
that are not specifically addressed in the current final regulations, which were originally
published in 1965 and were amended in 1974, 1978, and 1983. See TD 6795 (1965-1
CB 287); TD 7334 (1975-1 CB 246); TD 7545 (1978-1 CB 245); TD 7893 (1983-1 CB
132). The 2006 proposed regulations have not been finalized. The Treasury
Department and the IRS intend to withdraw the 2006 proposed regulations and to issue
new proposed regulations under sections 959 and 961.
Under proposed §1.959-3(b), shareholders must account for PTEP with respect
to their stock in a foreign corporation, and foreign corporations must account for the
aggregate amount of PTEP of all shareholders, as well as section 959(c)(3) E&P.
Before the Act, annual accounts generally were maintained for each separate category
of income described in section 904(d)(1) and segregated between section 959(c)(1)
PTEP and section 959(c)(2) PTEP. See Notice 88-71, 1988-2 C.B. 374. Section
959(c)(1) PTEP consisted of E&P previously included in gross income under sections
951(a)(1)(B) and (C), and section 959(c)(2) PTEP consisted of E&P previously included
in gross income under section 951(a)(1)(A) or amounts included in gross income as a
dividend under section 1248. See §1.959-3(b)(1) and (2); see also proposed §1.959-
3(e)(2). Section 959(c)(1) PTEP also included E&P that had been originally classified
as section 959(c)(2) PTEP and was reclassified as section 959(c)(1) PTEP because it
reduced the amount of an income inclusion under section 951(a)(1)(B) or section
951(a)(1)(C) (before its repeal) pursuant to section 959(a)(2) or section 959(a)(3)
(before its repeal). See §1.959-3(b).

Under the provisions of the Act, the portion of a U.S. shareholder's global
intangible low-taxed income ("GILTI") included in gross income under section 951A(a)
that is allocated to a controlled foreign corporation (as defined in section 957) ("CFC")
under section 951A(f)(2) and proposed §1.951A-6(b)(2) is treated as an amount
included in the gross income of a U.S. shareholder under section 951(a)(1)(A) for
purposes of section 959. Section 951A(f)(1). Likewise, amounts determined under
section 965(a), as amended by the Act, with respect to certain foreign corporations are
treated as increases to subpart F income, and a U.S. shareholder with respect to such a
foreign corporation generally includes in gross income under section 951(a)(1)(A) its pro
rata share of such amounts, subject to reduction under section 965(b) for certain deficits
attributable to stock in another foreign corporation owned by the U.S. shareholder.
Amounts of a U.S. shareholder's inclusions under section 965(a) that are reduced by
deficits attributable to stock of another foreign corporation under section 965(b) are
treated as amounts included in the shareholder's gross income under section 951(a) for
purposes of section 959. Section 965(b)(4)(A). Additionally, section 245A(e)(2) treats
certain hybrid dividends received by a CFC as subpart F income for purposes of section
951(a)(1)(A). Finally, section 964(e)(4) treats a certain portion of gain on the disposition
of CFC stock as subpart F income of the selling CFC for purposes of section
951(a)(1)(A). Accordingly, after the Act, section 959(c)(2) PTEP may arise from income
inclusions under section 951(a)(1)(A) (including by reason of section 245A(e)(2),
951A(f)(1), 959(e), 964(e)(4), or 965(a)) or by reason of the application of section
965(b)(4)(A).

Section 965 and proposed regulations under that section provide special foreign
tax credit and deduction rules, and proposed regulations under section 986 provide
special foreign currency gain or loss rules, for distributions of PTEP attributable to
income inclusions arising from the application of section 965(a) and PTEP attributable
to the application of section 965(b)(4)(A) (collectively, "section 965 PTEP"). See
proposed §§1.965-5 and 1.986(c)-1. Section 245A(e)(3) applies the disallowance of
foreign tax credits in section 245A(d) with respect to any amount included in the income
of a U.S. shareholder pursuant to section 245A(e)(2).
In addition, proposed regulations under section 960 establish, for purposes of
determining the amount of foreign income taxes deemed paid, a system of accounting
for PTEP in annual accounts for each separate category of income as defined in
proposed §1.904-5(a)(4)(v) ("section 904 category") and further segregate each annual
account among ten PTEP groups. Proposed §1.960-3(c). The groups correspond to
various types of income inclusions under section 951(a) (including amounts treated as
giving rise to an income inclusion under section 951(a) for purposes of section 959) and
PTEP reclassifications that can arise after the Act.
Finally, certain provisions of the Act provide for a deduction with respect to
certain amounts that are included in the income of a domestic corporation and treated
as section 951(a)(1)(A) inclusions for purposes of section 959. Sections 245A and
1248(j) generally allow a deduction with respect to gain on the sale of stock of a foreign
corporation treated as a dividend under section 1248. In the case of gain treated as a
dividend under section 964(e)(1) upon the sale or exchange by a CFC of stock of a
lower tier foreign corporation and included in the CFC's subpart F income under section

964(e)(4), section 964(e)(4) generally allows a deduction under section 245A with
respect to a domestic corporation's pro rata share of the subpart F income that it
includes in gross income as a dividend pursuant to section 964(e)(4).

# SECTION 3. REGULATIONS TO BE ISSUED ADDRESSING PREVIOUSLY TAXED

EARNINGS AND PROFITS

.01 Annual Accounts and Groups of Previously Taxed Earnings and Profits
The Act created the need to account for new groups of PTEP because section
959(c)(2) PTEP may arise by reason of income inclusions under section 951(a)(1)(A),
245A(e)(2), 951A(f)(1), 959(e), 964(e)(4), or 965(a) or by reason of the application of
section 965(b)(4)(A), and those different groups of PTEP may be subject to different
rules under sections 960, 965(g), 245A(e)(3), and 986(c). Additionally, because section
959(c)(2) PTEP may be reclassified as section 959(c)(1) PTEP as a result of sections
956 and 959(a)(2), similar groups for section 959(c)(1) PTEP must be maintained in
order to properly apply sections 960, 965(g), 245A(e)(3), and 986(c) when earnings are
reclassified. Groups of section 959(c)(1) PTEP must also be maintained with respect to
inclusions under section 951(a)(1)(B) and section 951(a)(1)(C) (before its repeal) (in
such cases, not by reason of the application of section 959(a)(2) or section 959(a)(3)
(before its repeal)).
The Treasury Department and the IRS expect that the forthcoming regulations
will provide that an annual account (each an "annual PTEP account") must be
maintained and each annual PTEP account must be segregated into the 16 groups
described below in each section 904 category (individually, a "PTEP group" and
collectively, "PTEP groups"). For rules regarding the year and section 904 category to
which an account corresponds, see proposed §1.960-3(c)(1). These 16 groups include

the ten groups identified in proposed §1.960-3(c)(2), which is discussed in section 2 of
this notice, and six additional groups.
1. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 965(a) ("reclassified section 965(a) PTEP");
2. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 965(b)(4)(A) ("reclassified section 965(b) PTEP");
3. E&P described in section 959(c)(1)(A) by reason of section 951(a)(1)(B) and not
by reason of section 959(a)(2) ("section 951(a)(1)(B) PTEP");
4. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 951A(f)(2) ("reclassified section 951A PTEP");
5. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 245A(e)(2) ("reclassified section 245A(e)(2)
PTEP");
6. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 959(e) ("reclassified section 959(e) PTEP");
7. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 964(e)(4) ("reclassified section 964(e)(4) PTEP");
8. E&P described in section 959(c)(1)(A) that were initially described in section
959(c)(2) by reason of section 951(a)(1)(A) (other than E&P that were initially
described in (10) through (15) of this list) ("reclassified section 951(a)(1)(A)
PTEP");
9. E&P described in section 959(c)(1)(B), including by reason of section 959(a)(3)
(before its repeal) ("section 956A PTEP");

10. E&P described in section 959(c)(2) by reason of section 965(a) ("section 965(a)
PTEP");
11. E&P described in section 959(c)(2) by reason of section 965(b)(4)(A) ("section
965(b) PTEP");
12. E&P described in section 959(c)(2) by reason of section 951A(f)(2) ("section
951A PTEP");
13. E&P described in section 959(c)(2) by reason of section 245A(e)(2) ("section
245A(e)(2) PTEP");
14. E&P described in section 959(c)(2) by reason of section 959(e) ("section 959(e)
PTEP");
15. E&P described in section 959(c)(2) by reason of section 964(e)(4) ("section
964(e) PTEP"); and
16. E&P described in section 959(c)(2) by reason of section 951(a)(1)(A) not
otherwise described in (10) through (15) of this list ("section 951(a)(1)(A) PTEP").
Accordingly, after the Act, section 959(c)(1) PTEP will be comprised of PTEP
groups described in (1) through (9) of the preceding paragraph, and section 959(c)(2)
PTEP will be comprised of PTEP groups described in (10) through (16) of the preceding
paragraph. The forthcoming regulations will provide that once PTEP is assigned to a
PTEP group within an annual PTEP account for the year of the income inclusion under
section 951(a)(1) (including by reason of section 245A(e)(2), 951A(f)(1), 959(e),
964(e)(4), or 965(a)) or the year of application of section 965(b)(4)(A), the PTEP will be
maintained in an annual PTEP account with a year that corresponds to the year of the
account from which the PTEP originated if PTEP is distributed or reclassified in a

subsequent taxable year. See also proposed §§1.960-3(c)(3) and 1.960-3(c)(4)
(providing similar rules for purposes of determining the amount of foreign income taxes
deemed paid under section 960(b)).
As discussed in section 2 of this notice, proposed §1.960-3(c) provides that, for
purposes of determining the amount of foreign income taxes deemed paid under section
960(b), with respect to a CFC, a separate annual PTEP account is maintained in each
relevant section 904 category and the PTEP in each such account is assigned to one or
more of the PTEP groups. However, the Treasury Department and the IRS recognize
that for purposes of applying the ordering rules described in section 3.02 of this notice, it
may be necessary to aggregate amounts across section 904 categories. The Treasury
Department and the IRS expect that the forthcoming regulations will provide that, to the
extent a CFC has E&P in a PTEP group that is in more than one section 904 category,
any distribution out of that PTEP group is made pro rata out of the earnings and profits
in each section 904 category. Additionally, the rules in proposed §§1.960-1 and 1.960-3
addressing the types of PTEP groups and their treatment for purposes of applying
section 960(b) will be coordinated, as appropriate, with the forthcoming regulations
when finalized.
It is expected that forthcoming regulations will provide that dollar basis must be
tracked for each annual PTEP account, and, to the extent provided in the forthcoming
regulations, separately for each PTEP group within an annual account. The
forthcoming regulations will confirm that distributions from any PTEP group reduce the
shareholder's stock basis under section 961(b)(1) without regard to how that basis was

originally created, including if the basis was created under section 961(a) due to an
inclusion unrelated to the PTEP group being distributed.
It is expected that the forthcoming regulations will provide transition rules for
annual PTEP accounts maintained before the applicability date of the regulations.
Annual PTEP accounts established for taxable years before the applicability date of the
forthcoming regulations will only need to be segregated between the section
951(a)(1)(B) PTEP group, the section 956A PTEP group, and the section 951(a)(1)(A)
PTEP group, except for the taxable year to which section 965 applies. For the taxable
year to which section 965 applies, annual PTEP accounts must also be segregated
between the reclassified section 965(a) PTEP group, the reclassified section 965(b)
PTEP group, the section 965(a) PTEP group, and the section 965(b) PTEP group (the
"section 965 PTEP groups"). A shareholder that has maintained a multi-year pool
instead of annual PTEP accounts for its section 951(a)(1)(B) PTEP, section 956A
PTEP, or its section 951(a)(1)(A) PTEP will be permitted to treat the respective pool as
a PTEP group in a single annual PTEP account with an average dollar basis, and that
annual PTEP account will be considered the annual PTEP account for the last taxable
year ending before the applicability date of the proposed regulations. Additionally, a
shareholder that has maintained aggregate dollar basis pools to reflect the dollar basis
of its total section 959(c)(1) PTEP or its total section 959(c)(2) PTEP (or both) for
taxable years before the applicability date of the regulations will be permitted to assign
an average dollar basis to the PTEP in each annual account (other than the section 965
PTEP groups), if it maintained annual accounts for section 959(c)(1) PTEP and section
959(c)(2) PTEP.

The forthcoming regulations described herein are intended to allow for the most
flexibility in applying the limitations on the creditability of certain foreign income taxes,
and the rules under section 986(c) regarding the recognition of foreign currency gain or
loss, to the different types of PTEP. Implementing all of the operative provisions
relating to PTEP following the Act with complete precision requires maintaining PTEP in
16 PTEP groups across the section 904 categories in annual accounts. The Treasury
Department and the IRS recognize the complexity and both the administrative and
compliance challenges associated with maintaining such a large number of PTEP
groups and are weighing those considerations against the need for precision in applying
the related foreign tax credit and foreign currency rules. Some of the proposed PTEP
groups, such as reclassified 245A(e) PTEP, reclassified section 959(e) PTEP,
reclassified section 964(e)(4) PTEP, section 956A PTEP, section 245A(e) PTEP,
section 959(e) PTEP, and section 964(e)(4) PTEP are unlikely to arise on a routine
basis. Additionally, because of the one-time nature of section 965, once all of the PTEP
in the section 965 PTEP groups are distributed, those groups will be completely
eliminated. See section 3.02 of this notice. Furthermore, the Treasury Department and
the IRS are considering ways to simplify the rules associated with PTEP by
consolidating PTEP groups or grouping accounts into multi-year accounts, or by other
methods, and request comments in this regard.
.02 Ordering of Earnings and Profits upon Distribution and Reclassification
Section 959(c) provides that, for purposes of sections 959(a) and (b), section
316(a)(2) (relating to E&P of the taxable year) ("current E&P") and then section
316(a)(1) (relating to E&P accumulated after February 28, 1913) ("accumulated E&P")
apply first to section 959(c)(1) PTEP, then to section 959(c)(2) PTEP, and finally to

section 959(c)(3) E&P. The reference to section 316 in section 959 indicates that a
distribution of PTEP is dependent upon the existence of E&P otherwise sufficient to
support a dividend under section 316. The forthcoming regulations will clarify that a
distribution will be a distribution of PTEP only to the extent it would have otherwise been
a dividend under section 316. For example, if a foreign corporation has no current E&P
or accumulated E&P at the end of a taxable year, a distribution from the corporation to a
shareholder during the taxable year will be a return of basis or treated as gain from the
sale or exchange of property under section 301(c)(2) or (3), respectively, regardless of
whether the shareholder has one or more annual PTEP accounts with respect to its
stock in the foreign corporation.
Under section 316, distributions are considered first as distributions from current
E&P, to the extent thereof, and then as distributions from the most recently accumulated
E&P, to the extent thereof. As noted above, PTEP will be maintained in annual PTEP
accounts. To facilitate the rule in section 959(c), which incorporates the ordering rule of
section 316, the forthcoming regulations will require a "last in, first out" approach to the
sourcing of distributions from annual PTEP accounts, subject to the special priority rule
for PTEP arising by reason of the application of section 965, as discussed in the
following paragraph. Thus, in general, section 959(c)(1) PTEP in the most recent
annual PTEP account will be distributed first (with an exception for section 965 PTEP),
followed by the next most recent annual PTEP account, and so on, after which the
same approach will apply to section 959(c)(2) PTEP. Within each annual PTEP
account, the PTEP attributable to each group of PTEP earned in that year will be
distributed in the order prescribed in the following paragraphs in this section 3.02.

The forthcoming regulations will provide, under the grants of regulatory authority
in sections 965(o) and 7805(a), that PTEP attributable to income inclusions under
section 965(a) or by reason of section 965(b)(4)(A) receive priority when determining
the group of PTEP from which a distribution is made. This priority will be integrated into
the general ordering rule of section 959(c) that sources PTEP first from section
959(c)(1) PTEP and then from section 959(c)(2) PTEP. Thus, starting with section
959(c)(1) PTEP, under the forthcoming regulations, as an exception to the last-in, first-
out approach, distributions will be sourced first from the reclassified section 965(a)
PTEP and then from the reclassified section 965(b) PTEP. Once those PTEP groups
are exhausted, under the last-in, first-out approach, distributions will be sourced pro rata
from the remaining section 959(c)(1) PTEP groups in each annual PTEP account,
starting from the most recent annual account.
Once the PTEP groups relating to section 959(c)(1) PTEP are exhausted,
distributions will be sourced from section 959(c)(2) PTEP. As described in the
preceding paragraph, the forthcoming regulations will provide that, as an exception to
the last-in, first-out approach, distributions will be sourced first from section 965(a)
PTEP and then section 965(b) PTEP. Once those two PTEP groups are exhausted,
under the last-in, first-out approach, distributions will be sourced pro rata from the
remaining section 959(c)(2) PTEP groups in each annual PTEP account, starting from
the most recent annual PTEP account. Finally, once all the PTEP groups have been
exhausted, the remaining amount of any distributions will be sourced from section
959(c)(3) E&P, to the extent thereof.

The forthcoming regulations will also provide that reclassifications of PTEP
pursuant to the application of section 959(a)(2) will be sourced first from section 965(a)
PTEP, then section 965(b) PTEP, and then, under a last-in, first-out approach, pro rata
from the remaining section 959(c)(2) PTEP groups in each annual PTEP account,
starting from the most recent annual PTEP account.
These ordering rules are expected to simplify PTEP recordkeeping in the future
because, once a foreign corporation distributes all of its section 965 PTEP, the foreign
corporation and its U.S. shareholder(s) will have reduced the number of PTEP groups
that need to be tracked. Absent the ordering rules described in the preceding
paragraphs of this section 3.02, the last in, first out approach to PTEP distributions
would trap annual PTEP accounts with section 965 PTEP behind subsequent annual
PTEP accounts, requiring the section 965 PTEP to be tracked indefinitely. The ordering
rules to be provided in forthcoming regulations are illustrated by an example in section
3.04 of this notice.
.03 Adjustments Due to an Income Inclusion in Excess of Current Earnings and Profits
A U.S. shareholder's income inclusion under section 951A is not subject to a
limitation based on the E&P of its CFCs for the taxable year. Consequently, in a year in
which the portion of a U.S. shareholder's GILTI inclusion amount allocated to a CFC
under section 951A(f)(2) and proposed §1.951A-6(b)(2) exceeds the CFC's current
E&P, the PTEP resulting by reason of section 951A(f)(1) and proposed §1.951A-6(b)(1)
will exceed the CFC's current E&P and, in some cases, may exceed the CFC's
accumulated E&P as well. Similarly, an income inclusion under section 951(a)(1)(A) by
reason of section 965 is not subject to an E&P limitation. Further, while an inclusion
under section 951(a)(1)(A) (other than by reason of section 965) with respect to a CFC

is generally subject to an E&P limitation under section 952(c)(1)(A), a U.S.
shareholder's inclusion under section 951(a)(1)(A) with respect to the CFC can exceed
its E&P if such CFC has a tested loss. See section 951A(c)(2)(B)(ii) and proposed
§1.951A-6(d) (increasing a CFC's E&P by the amount of a tested loss solely for
purposes of applying the E&P limitation of section 952(c)(1)(A)).
As noted in section 3.02 of this notice, the aggregate of the amounts of section
959(c)(1) PTEP, section 959(c)(2) PTEP, and section 959(c)(3) E&P of a foreign
corporation must equal the amount of E&P of the foreign corporation. The forthcoming
regulations under section 959 will provide that current E&P are first classified as section
959(c)(3) E&P and then section 959(c)(3) E&P are reclassified as section 959(c)(1)
PTEP or section 959(c)(2) PTEP, as appropriate, in full, which may have the effect of
creating or increasing a deficit in section 959(c)(3) E&P. For example, in a case in
which the portion of a U.S. shareholder's GILTI inclusion amount allocated to a CFC
under section 951A(f)(2) and proposed §1.951A-6(b)(2) exceeds the current E&P of the
CFC, section 959(c)(3) E&P will first be increased by the CFC's current E&P and then
decreased by the entire amount of the portion of the GILTI inclusion amount allocated to
the CFC , possibly below zero, and section 959(c)(2) PTEP will be increased by the
same amount. For a similar rule in the case in which a U.S. shareholder's inclusion
under section 951(a) by reason of section 965(a) exceeds E&P, see proposed §1.965-
2(d)(1).
Finally, in a case where a foreign corporation has a current-year deficit in E&P,
that deficit will solely reduce the foreign corporation's section 959(c)(3) E&P without
affecting the amount of its section 959(c)(1) PTEP or section 959(c)(2) PTEP.

.04 Examples
The rules described in sections 3.02 and 3.03 of this notice are illustrated in the
following examples:
Example 1--(i) Facts. USP, a domestic corporation, wholly owns FC, a foreign
corporation that has the U.S. dollar as its functional currency. Both USP and FC use
the calendar year as their taxable year. Before 2018, the PTEP of FC was maintained
in annual accounts. As of December 31, 2018, FC's $300x of E&P (before taking into
account distributions made or inclusions under section 951(a)(1)(B) in 2018) applicable
to USP's interest in FC are classified under section 3.01 of this notice as follows:

Section 959(c)(1) Section 959(c)(2)
Section
959(c)(3) Year
Reclassified
Section
965(a)
PTEP
Reclassified
Section
965(b)
PTEP
Section
951(a)(1)(B)
PTEP
Section
965(a)
PTEP
Section
965(b)
PTEP
Section
951A
PTEP
Section
951(a)(1)(A)
PTEP
2018 50x 30x
20x 2017 100x 50x
2016 25x 25x
Total 25x 255x 20x

In 2018, FC has an amount described in section 956(a) ("section 956(a) amount") of
$125x, without considering the application of section 959(a)(2). In 2019, FC earns $25x
of current E&P, and the amount of USP's income inclusion under section 951A(a) that is
allocated to FC under section 951A(f)(2) and proposed §1.951A-6(b)(2) is $20x. FC
also makes a distribution of $195x in 2019. In 2020, FC earns no current E&P, but FC
makes a distribution of $60x. For all years, the PTEP of FC in each PTEP group is
described in a single section 904 category, and all section 959(c)(3) E&P of FC are
described in a single section 904 category.

(ii) Analysis--(A) 2018. As of December 31, 2018, before considering FC's
section 956(a) amount, FC has total section 959(c)(2) PTEP of $255x. Under section
959(a)(2) and (f)(1), because FC's section 959(c)(2) PTEP exceeds its section 956(a)
amount, USP does not include any amount in income under section 951(a)(1)(B).
However, under section 959(c)(1)(A), $125x of FC's section 959(c)(2) earnings must be
reclassified as section 959(c)(1) PTEP. Under the rules described in section 3.02 of this
notice, the reclassification is sourced first from section 965(a) PTEP and then from
section 965(b) PTEP. Under the rules in section 3.01 of this notice, the reclassified
PTEP remains in the 2017 annual PTEP account. Thus, in FC's 2017 annual PTEP
account, FC's reclassified section 965(a) PTEP is increased by $100x and its section
965(a) PTEP is decreased by $100x. Additionally, FC's reclassified section 965(b)
PTEP is increased by $25x and its section 965(b) PTEP is decreased by $25x.
Accordingly, as of December 31, 2018, FC's E&P applicable to USP's interest in FC are
classified under section 3.01 of this notice as follows:

Section 959(c)(1) Section 959(c)(2)

Year
Reclassified
Section
965(a)
PTEP
Reclassified
Section
965(b)
PTEP
Section
951(a)(1)(B)
PTEP
Section
965(a)
PTEP
Section
965(b)
PTEP
Section
951A
PTEP
Section
951(a)(1)(A)
PTEP
Section
959(c)(3)
2018 50x 30x
20x 2017 100x 25x 25x
2016 25x 25x
Total 150x 130x 20x

(B) 2019--(1) Current year adjustments. During 2019, FC earns $25x of current
E&P, and the amount of USP's income inclusion under section 951A(a) that is allocated
to FC under section 951A(f)(2) and proposed §1.951A-6(b)(2) is $20x. Thus, before
taking into account USP's income inclusions with respect to FC and any distributions by
FC, FC's section 959(c)(3) E&P is initially increased by $25x. As a result of USP's
income inclusion under section 951A, FC's section 951A PTEP increases by $20x and
FC's section 959(c)(3) E&P is decreased by $20x. Accordingly, as of December 31,
2019, FC's E&P (before taking into account distributions made in 2019) applicable to
USP's interest in FC are classified under section 3.01 of this notice as follows:

Section 959(c)(1) Section 959(c)(2)
Section
959(c)(3) Year
Reclassified
Section
965(a)
PTEP
Reclassified
Section
965(b)
PTEP
Section
951(a)(1)(B)
PTEP
Section
965(a)
PTEP
Section
965(b)
PTEP
Section
951A
PTEP
Section
951(a)(1)(A)
PTEP
2019 20x
25x 2018 50x 30x
2017 100x 25x 25x
2016 25x 25x
Total 150x 150x 25x

(2) Distribution. FC's distribution of $195x is from PTEP because the entire
distribution would be a dividend under section 316(a) without regard to section 959 (that
is, for purposes of section 316, at the end of 2019, FC has $325x of E&P (without
regard to the distribution), $25x of which is current E&P). Under section 959(c), the
distribution is first treated as attributable to section 959(c)(1) PTEP.

(i) Section 959(c)(1) PTEP. Under the rules described in section 3.02 of this
notice, the distribution is first sourced from reclassified section 965(a) PTEP and then
from reclassified section 965(b) PTEP, and then pro rata from the remaining PTEP
groups that contain section 959(c)(1) PTEP under a last-in, first-out ("LIFO") approach.
Thus, in FC's 2017 annual PTEP account, FC's reclassified section 965(a) PTEP is
decreased by $100x and its reclassified section 965(b) PTEP is decreased by $25x. In
FC's 2016 annual PTEP account, FC's section 951(a)(1)(B) PTEP is reduced by $25x.
Thus, of the distribution of $195x, $150x is treated as attributable to section 959(c)(1)
PTEP ($100x + $25x + $25x).

(ii) Section 959(c)(2) PTEP. After the section 959(c)(1) PTEP is exhausted, the
remaining portion of the distribution ($45x) is treated as attributable to section 959(c)(2)
PTEP, to the extent thereof. Under the rules described in section 3.02 of this notice,
distributions are first sourced from section 965(a) PTEP and then from section 965(b)

PTEP, and then pro rata from the remaining PTEP groups that contain section 959(c)(2)
PTEP under a LIFO approach. Thus, in FC's 2017 annual PTEP account, FC's section
965(b) PTEP is decreased by $25x. In FC's 2019 annual PTEP account, FC's section
951A PTEP is decreased by $20x. Because the entire distribution has been accounted
for, the remaining PTEP groups that contain section 959(c)(2) PTEP and FC's section
959(c)(3) E&P are not affected. Accordingly, as of December 31, 2019, FC's E&P
applicable to USP's interest in FC are classified under section 3.01 of this notice as
follows:

Section 959(c)(1) Section 959(c)(2)
Section
959(c)(3) Year
Reclassified
Section
965(a)
PTEP
Reclassified
Section
965(b)
PTEP
Section
951(a)(1)(B)
PTEP
Section
965(a)
PTEP
Section
965(b)
PTEP
Section
951A
PTEP
Section
951(a)(1)(A)
PTEP

25x 2018 50x 30x

2016 25x
Total 105x 25x

(C) 2020. FC's distribution of $60x is from PTEP because the entire distribution
would be a dividend under section 316(a) without regard to section 959 (that is, for
purposes of section 316, at the end of 2020, FC has $130x of E&P (without regard to
the distribution), all which is accumulated E&P). Under section 959(c), the distribution is
first treated as attributable to section 959(c)(1) PTEP; however, FC has no section
959(c)(1) PTEP. Additionally, FC has no section 965(a) PTEP or section 965(b) PTEP.
Under the rules described in section 3.02 of this notice, the distribution is sourced pro
rata from the remaining PTEP groups that contain section 959(c)(2) PTEP under a LIFO
approach. Thus, in FC's 2018 annual PTEP account, FC's section 951A PTEP is
decreased by $37.5x ($60x x $50x/$80x) and its section 951(a)(1)(A) PTEP is
decreased by $22.5x ($60x x $30x/$80x). Because the entire distribution has been
accounted for, the remaining PTEP groups that contain section 959(c)(2) PTEP and
FC's section 959(c)(3) E&P are not affected. Accordingly, as of December 31, 2020,
FC's E&P applicable to USP's interest in FC are classified under section 3.01 of this
notice as follows:

Section 959(c)(1) Section 959(c)(2)
Section
959(c)(3) Year
Reclassified
Section
965(a)
PTEP
Reclassified
Section
965(b)
PTEP
Section
951(a)(1)(B)
PTEP
Section
965(a)
PTEP
Section
965(b)
PTEP
Section
951A
PTEP
Section
951(a)(1)(A)
PTEP

25x 2018 12.5x 7.5x

2016 25x
Total 45x 25x

Example 2. (i) Facts. USP, a domestic corporation, wholly owns FC, a foreign
corporation that has the U.S. dollar as its functional currency. Both USP and FC use
the calendar year as their taxable year. At the beginning of Year 1, FC has

accumulated E&P of $50x, all of which is section 959(c)(3) E&P. In Year 1, FC has
$25x of current E&P and FC makes no distributions. Furthermore, in Year 1, USP's
income inclusion under section 951A(a) that is allocated to FC under section 951A(f)(2)
and proposed §1.951A-6(b)(2) is $100x.
(ii) Analysis. Before taking into account USP's income inclusions with respect to
FC in Year 1, FC's current E&P for Year 1 increase FC's section 959(c)(3) E&P by $25x
to $75x ($50x + $25x). The $100x of USP's income inclusion under section 951A(a)
allocated to FC results in an increase of $100x to FC's section 951A PTEP (resulting in
a balance of $100x) and a reduction of $100x to FC's section 959(c)(3) E&P resulting in
a deficit of $25x ($75x - $100x). The sum of the amounts of FC's section 959(c)(1)
PTEP ($0x), section 959(c)(2) PTEP ($100x), and section 959(c)(3) E&P (deficit of
$25x) equals the amount of FC's E&P ($75x).

# SECTION 4. APPLICABILITY DATE

It is expected that the forthcoming regulations will apply to taxable years of
United States shareholders (and successors in interest) ending after December 14,
2018 and to taxable years of foreign corporations ending with or within such taxable
years of United States shareholders. See section 7805(b)(1)(C). Before the issuance
of the forthcoming regulations, a shareholder may rely on the rules described in section
3 of this notice if the shareholder and each person related to the shareholder under
section 267(b) or 707(b) (each such person, a "related shareholder") apply the rules
consistently with respect to PTEP of all foreign corporations in which the shareholder or
related shareholder, as the case may be, owns stock for all taxable years beginning with
the shareholder's or the related shareholder's taxable year that includes the taxable
year end of any such foreign corporation to which section 965 applies.

# SECTION 5. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS request comments on the rules described
in this notice, including potential simplification of the rules described in section 3.02 of
this notice through the establishment of multi-year PTEP accounts. The Treasury
Department and the IRS also request comments concerning the following topics:

1. The extent to which basis created under section 961(c) should be treated as
basis for purposes of determining tested income in applying section 951A;
2. The extent to which gain or loss, including foreign currency gain or loss, should
be recognized by reason of distributions of PTEP. Additionally, the Treasury
Department and the IRS request comments regarding a potential election
pursuant to which the shareholder would agree to establish and maintain a multi-
year section 951A PTEP group and not apply section 250(a)(2) to the extent
such provision would otherwise be relevant in calculating its foreign currency
gain or loss on a distribution of section 951A PTEP;
3. The application of sections 959 and 961 to domestic and foreign partnerships;
and
4. Other guidance that should be issued under sections 959 and 961, including
comments on the 2006 proposed regulations and the extent to which guidance in
the 2006 proposed regulations should be incorporated into new proposed
regulations.
Comments should be submitted by February 12, 2019. Comments may be
submitted electronically via the Federal eRulemaking Portal at www.regulations.gov
(type IRS-2018-0041 in the search field on the regulations.gov homepage to find this
notice and submit comments). Written comments may be submitted to the Office of
Associate Chief Counsel (International), Attention: Melinda E. Harvey, Internal Revenue
Service, IR-4579, 1111 Constitution Avenue, NW, Washington, DC 20224.
Comments will be available for public inspection and copying.

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