26 U.S.C. § 965 — Treatment of deferred foreign income upon

Page 2212 TITLE 26—INTERNAL REVENUE CODE § 965 poration of stock in another foreign corpora- tion in a taxable year of the selling con- trolled foreign corporation beginning after December 31, 2017, rules similar to the rules of section 961(d) shall apply. (C) Foreign-source portion For purposes of this paragraph, the for- eign-source portion of any amount treated as a dividend under paragraph (1) shall be de- termined in the same manner as under sec- tion 245A(c). (Added Pub. L. 87–834, § 12(a), Oct. 16, 1962, 76 Stat. 1027; amended Pub. L. 91–172, title IV, § 442(b)(1), Dec. 30, 1969, 83 Stat. 628; Pub. L. 94–455, title X, § 1065(b), title XIX, §§ 1901(b)(32)(B)(iii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1654, 1800, 1834; Pub. L. 97–34, title II, § 206(c), Aug. 13, 1981, 95 Stat. 225; Pub. L. 97–248, title II, § 288(b)(2), Sept. 3, 1982, 96 Stat. 571; Pub. L. 100–647, title VI, § 6129(a), Nov. 10, 1988, 102 Stat. 3716; Pub. L. 105–34, title XI, § 1111(a), Aug. 5, 1997, 111 Stat. 968; Pub. L. 115–97, title I, §§ 14102(c)(1), 14212(b)(4), Dec. 22, 2017, 131 Stat. 2193, 2217.) Editorial Notes REFERENCES IN TEXT The Foreign Corrupt Practices Act of 1977, referred to in subsec. (a), is title I of Pub. L. 95–213, Dec. 19, 1977, 91 Stat. 1494, which enacted sections 78dd–1 to 78dd–3 of Title 15, Commerce and Trade, and amended sections 78m and 78ff of Title 15. For complete classification of this Act to the Code, see Short Title of 1977 Amend- ment note set out under section 78a of Title 15 and Ta- bles. AMENDMENTS 2017—Subsec. (b). Pub. L. 115–97, § 14212(b)(4), struck out ‘‘, 955,’’ after ‘‘sections 952’’. Subsec. (e)(4). Pub. L. 115–97, § 14102(c)(1), added par. (4). 1997—Subsec. (e). Pub. L. 105–34 added subsec. (e). 1988—Subsec. (d). Pub. L. 100–647 added subsec. (d). 1982—Subsec. (a). Pub. L. 97–248 inserted provision that payments referred to in sentence beginning ‘‘In de- termining such earnings and profits’’ are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person. 1981—Subsec. (a). Pub. L. 97–34 substituted ‘‘section 312(k)(4)’’ for ‘‘section 312(k)(3)’’. 1976—Subsec. (a). Pub. L. 94–455, §§ 1065(b), 1901(b)(32)(B)(ii), 1906(b)(13)(A), struck out ‘‘or his dele- gate’’ after ‘‘Secretary’’, inserted second sentence, and substituted ‘‘312(k)(3)’’ for ‘‘312(m)(3)’’ after ‘‘provided in section’’. Subsecs. (b), (c)(1), (2). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’ when- ever appearing. 1969—Subsec. (a). Pub. L. 91–172 inserted reference to the exception provided for in section 312(m)(3). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 14102(c)(2), Dec. 22, 2017, 131 Stat. 2193, provided that: ‘‘The amendments made by this subsection [amending this section] shall apply to sales or exchanges after December 31, 2017.’’ Amendment by section 14212(b)(4) of Pub. L. 115–97 ap- plicable to taxable years of foreign corporations begin- ning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such tax- able years of foreign corporations end, see section 14212(c) of Pub. L. 115–97, set out as a note under section 851 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title XI, § 1111(c)(1), Aug. 5, 1997, 111 Stat. 969, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to gain recognized on transactions occurring after the date of the enactment of this Act [Aug. 5, 1997].’’ EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title VI, § 6129(b), Nov. 10, 1988, 102 Stat. 3716, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to taxable years of foreign corporations beginning after December 31, 1988.’’ EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–248 applicable to payments made after Sept. 3, 1982, see section 288(c) of Pub. L. 97–248, set out as a note under section 162 of this title. EFFECTIVE DATE OF 1981 AMENDMENT Amendment by Pub. L. 97–34 applicable to property placed in service after Dec. 31, 1980, in taxable years ending after that date, see section 209(a) of Pub. L. 97–34, set out as an Effective Date note under section 168 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1065(b) of Pub. L. 94–455 appli- cable to payments described in section 162(c) of this title made more than 30 days after Oct. 4, 1976, see sec- tion 1066(b) of Pub. L. 94–455, set out as a note under section 952 of this title. § 965. Treatment of deferred foreign income upon transition to participation exemption system of taxation (a) Treatment of deferred foreign income as sub- part F income In the case of the last taxable year of a de- ferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise deter- mined for such taxable year under section 952) shall be increased by the greater of— (1) the accumulated post-1986 deferred for- eign income of such corporation determined as of November 2, 2017, or (2) the accumulated post-1986 deferred for- eign income of such corporation determined as of December 31, 2017. (b) Reduction in amounts included in gross in- come of United States shareholders of speci- fied foreign corporations with deficits in earnings and profits (1) In general In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder’s pro rata share of the sub- part F income of each deferred foreign income corporation shall be reduced by the amount of such United States shareholder’s aggregate foreign E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation. Page 2213 TITLE 26—INTERNAL REVENUE CODE § 965 (2) Allocation of aggregate foreign E&P deficit The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corpora- tions of such United States shareholder in an amount which bears the same proportion to such aggregate as— (A) such United States shareholder’s pro rata share of the accumulated post-1986 de- ferred foreign income of each such deferred foreign income corporation, bears to (B) the aggregate of such United States shareholder’s pro rata share of the accumu- lated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder. (3) Definitions related to E&P deficits For purposes of this subsection— (A) Aggregate foreign E&P deficit (i) In general The term ‘‘aggregate foreign E&P def- icit’’ 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 defi- cits of the E&P deficit foreign corpora- tions of such shareholder, or (II) the amount determined under paragraph (2)(B). (ii) Allocation of deficit If the amount described in clause (i)(II) is less than the amount described in clause (i)(I), then the shareholder shall designate, in such form and manner as the Secretary determines— (I) the amount of the specified E&P deficit which is to be taken into account for each E&P deficit corporation with re- spect to the taxpayer, and (II) in the case of an E&P deficit cor- poration which has a qualified deficit (as defined in section 952), the portion (if any) of the deficit taken into account under subclause (I) which is attributable to a qualified deficit, including the qualified activities to which such por- tion is attributable. (B) E&P deficit foreign corporation The term ‘‘E&P deficit foreign corpora- tion’’ means, with respect to any taxpayer, any specified foreign corporation with re- spect 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 for- eign corporation, and (iii) such taxpayer was a United States shareholder of such corporation. (C) Specified E&P deficit The term ‘‘specified E&P deficit’’ means, with respect to any E&P deficit foreign cor- poration, the amount of the deficit referred to in subparagraph (B). (4) Treatment of earnings and profits in future years (A) Reduced earnings and profits treated as previously taxed income when distrib- uted For purposes of applying section 959 in any taxable year beginning with the taxable year described in subsection (a), with respect to any United States shareholder of a deferred foreign income corporation, an amount equal to such shareholder’s reduction under paragraph (1) which is allocated to such de- ferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such United States shareholder under sec- tion 951(a). (B) E&P deficits For purposes of this title, with respect to any taxable year beginning with the taxable year described in subsection (a), a United States shareholder’s pro rata share of the earnings and profits of any E&P deficit for- eign corporation under this subsection shall be increased by the amount of the specified E&P deficit of such corporation taken into account by such shareholder under para- graph (1), and, for purposes of section 952, such increase shall be attributable to the same activity to which the deficit so taken into account was attributable. (5) Netting among United States shareholders in same affiliated group (A) In general In the case of any affiliated group which includes at least one E&P net surplus share- holder and one E&P net deficit shareholder, the amount which would (but for this para- graph) be taken into account under section 951(a)(1) by reason of subsection (a) by each such E&P net surplus shareholder shall be reduced (but not below zero) by such share- holder’s applicable share of the affiliated group’s aggregate unused E&P deficit. (B) E&P net surplus shareholder For purposes of this paragraph, the term ‘‘E&P net surplus shareholder’’ means any United States shareholder which would (de- termined without regard to this paragraph) take into account an amount greater than zero under section 951(a)(1) by reason of sub- section (a). (C) E&P net deficit shareholder For purposes of this paragraph, the term ‘‘E&P net deficit shareholder’’ means any United States shareholder if— (i) the aggregate foreign E&P deficit with respect to such shareholder (as de- fined in paragraph (3)(A) without regard to clause (i)(II) thereof), exceeds (ii) the amount which would (but for this subsection) be taken into account by such shareholder under section 951(a)(1) by rea- son of subsection (a). (D) Aggregate unused E&P deficit For purposes of this paragraph— Page 2214 TITLE 26—INTERNAL REVENUE CODE § 965 (i) In general The term ‘‘aggregate unused E&P def- icit’’ means, with respect to any affiliated group, the lesser of— (I) the sum of the excesses described in subparagraph (C), determined with re- spect to each E&P net deficit share- holder in such group, or (II) the amount determined under sub- paragraph (E)(ii). (ii) Reduction with respect to E&P net def- icit shareholders which are not wholly owned by the affiliated group If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess de- scribed in subparagraph (C) which is taken into account under clause (i)(I) with re- spect to such E&P net deficit shareholder shall be such group ownership percentage of such amount. (E) Applicable share For purposes of this paragraph, the term ‘‘applicable share’’ means, with respect to any E&P net surplus shareholder in any af- filiated group, the amount which bears the same proportion to such group’s aggregate unused E&P deficit as— (i) the product of— (I) such shareholder’s group ownership percentage, multiplied by (II) the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of sub- section (a) by such shareholder, bears to (ii) the aggregate amount determined under clause (i) with respect to all E&P net surplus shareholders in such group. (F) Group ownership percentage For purposes of this paragraph, the term ‘‘group ownership percentage’’ means, with respect to any United States shareholder in any affiliated group, the percentage of the value of the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Not- withstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which is also used in section 1504 shall have the same meaning as when used in such section. (c) Application of participation exemption to in- cluded income (1) In general In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States share- holder under section 951(a)(1) by reason of this section an amount equal to the sum of— (A) the United States shareholder’s 8 per- cent rate equivalent percentage of the excess (if any) of— (i) the amount so included as gross in- come, over (ii) the amount of such United States shareholder’s aggregate foreign cash posi- tion, plus (B) the United States shareholder’s 15.5 percent rate equivalent percentage of so much of the amount described in subpara- graph (A)(ii) as does not exceed the amount described in subparagraph (A)(i). (2) 8 and 15.5 percent rate equivalent percent- ages For purposes of this subsection— (A) 8 percent rate equivalent percentage The term ‘‘8 percent rate equivalent per- centage’’ means, with respect to any United States shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 8 percent rate of tax de- termined by only taking into account a de- duction equal to such percentage of such amount and the highest rate of tax specified in section 11 for such taxable year. In the case of any taxable year of a United States shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate of tax under section 11 after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the por- tion of such taxable year which is before and after such effective date, respectively. (B) 15.5 percent rate equivalent percentage The term ‘‘15.5 percent rate equivalent percentage’’ means, with respect to any United States shareholder for any taxable year, the percentage determined under sub- paragraph (A) applied by substituting ‘‘15.5 percent rate of tax’’ for ‘‘8 percent rate of tax’’. (3) Aggregate foreign cash position For purposes of this subsection— (A) In general The term ‘‘aggregate foreign cash posi- tion’’ 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 po- sition of each specified foreign corporation of such United States shareholder deter- mined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018, 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 for- eign corporation which ends before No- vember 2, 2017, plus (II) the aggregate described in clause (i) determined as of the close of the tax- able year of each such specified foreign corporation which precedes the taxable year referred to in subclause (I). (B) Cash position For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of— Page 2215 TITLE 26—INTERNAL REVENUE CODE § 965 (i) cash held by such foreign corporation, (ii) the net accounts receivable of such foreign corporation, plus (iii) the fair market value of the fol- lowing assets held by such corporation: (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 government. (III) Any foreign currency. (IV) Any obligation with a term of less than one year. (V) Any asset which the Secretary identifies as being economically equiva- lent to any asset described in this sub- paragraph. (C) Net accounts receivable For purposes of this paragraph, the term ‘‘net accounts receivable’’ means, with re- spect to any specified foreign corporation, the excess (if any) of— (i) such corporation’s accounts receiv- able, over (ii) such corporation’s accounts payable (determined consistent with the rules of section 461). (D) Prevention of double counting Cash positions of a specified foreign cor- poration described in clause (ii), (iii)(I), or (iii)(IV) of subparagraph (B) shall not be taken into account by a United States share- holder under subparagraph (A) to the extent that such United States shareholder dem- onstrates to the satisfaction of the Sec- retary that such amount is so taken into ac- count by such United States shareholder with respect to another specified foreign cor- poration. (E) Cash positions of certain non-corporate entities taken into account An entity (other than a corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States share- holder’s aggregate foreign cash position if any interest in such entity is held by a spec- ified foreign corporation of such United States shareholder (determined after appli- cation of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such enti- ty were a foreign corporation. (F) Anti-abuse If the Secretary determines that a prin- cipal purpose of any transaction was to re- duce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection. (d) Deferred foreign income corporation; accu- mulated post-1986 deferred foreign income For purposes of this section— (1) Deferred foreign income corporation The term ‘‘deferred foreign income corpora- tion’’ means, with respect to any United States shareholder, any specified foreign cor- poration of such United States shareholder which has accumulated post-1986 deferred for- eign income (as of the date referred to in para- graph (1) or (2) of subsection (a)) greater than zero. (2) Accumulated post-1986 deferred foreign in- come The term ‘‘accumulated post-1986 deferred foreign income’’ means the post-1986 earnings and profits except to the extent such earn- ings— (A) are attributable to income of the speci- fied foreign corporation which is effectively connected with the conduct of a trade or business within the United States and sub- ject to tax under this chapter, or (B) in the case of a controlled foreign cor- poration, if distributed, would be excluded from the gross income of a United States shareholder under section 959. To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not United States shareholders, accumulated post-1986 de- ferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph (B) if such shareholders were United States shareholders. (3) Post-1986 earnings and profits The term ‘‘post-1986 earnings and profits’’ means the earnings and profits of the foreign corporation (computed in accordance with sec- tions 964(a) and 986, and by only taking into account periods when the foreign corporation was a specified foreign corporation) accumu- lated in taxable years beginning after Decem- ber 31, 1986, and determined— (A) as of the date referred to in paragraph (1) or (2) of subsection (a), whichever is ap- plicable with respect to such foreign cor- poration, and (B) without diminution by reason of divi- dends distributed during the taxable year de- scribed in subsection (a) other than divi- dends distributed to another specified for- eign corporation. (e) Specified foreign corporation (1) In general For purposes of this section, the term ‘‘spec- ified foreign corporation’’ means— (A) any controlled foreign corporation, and (B) any foreign corporation with respect to which one or more domestic corporations is a United States shareholder. (2) Application to certain foreign corporations For purposes of sections 951 and 961, a for- eign corporation described in paragraph (1)(B) shall be treated as a controlled foreign cor- poration solely for purposes of taking into ac- count the subpart F income of such corpora- tion under subsection (a) (and for purposes of applying subsection (f)). (3) Exclusion of passive foreign investment companies Such term shall not include any corporation which is a passive foreign investment com- Page 2216 TITLE 26—INTERNAL REVENUE CODE § 965 pany (as defined in section 1297) with respect to the shareholder and which is not a con- trolled foreign corporation. (f) Determinations of pro rata share (1) In general For purposes of this section, the determina- tion of any United States shareholder’s pro rata share of any amount with respect to any specified foreign corporation shall be deter- mined under rules similar to the rules of sec- tion 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation). (2) Special rules The portion which is included in the income of a United States shareholder under section 951(a)(1) by reason of subsection (a) which is equal to the deduction allowed under sub- section (c) by reason of such inclusion— (A) shall be treated as income exempt from tax for purposes of sections 705(a)(1)(B) and 1367(a)(1)(A), and (B) shall not be treated as income exempt from tax for purposes of determining wheth- er an adjustment shall be made to an accu- mulated adjustment account under section 1368(e)(1)(A). (g) Disallowance of foreign tax credit, etc. (1) In general No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section. (2) Applicable percentage For purposes of this subsection, the term ‘‘applicable percentage’’ means the amount (expressed as a percentage) equal to the sum of— (A) 0.771 multiplied by the ratio of— (i) the excess to which subsection (c)(1)(A) applies, divided by (ii) the sum of such excess plus the amount to which subsection (c)(1)(B) ap- plies, plus (B) 0.557 multiplied by the ratio of— (i) the amount to which subsection (c)(1)(B) applies, divided by (ii) the sum described in subparagraph (A)(ii). (3) Denial of deduction No deduction shall be allowed under this chapter for any tax for which credit is not al- lowable under section 901 by reason of para- graph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). (4) Coordination with section 78 With respect to the taxes treated as paid or accrued by a domestic corporation with re- spect to amounts which are includible in gross income of such domestic corporation by rea- son of this section, section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as— (A) the excess of— (i) the amounts which are includible in gross income of such domestic corporation by reason of this section, over (ii) the deduction allowable under sub- section (c) with respect to such amounts, bears to (B) such amounts. (h) Election to pay liability in installments (1) In general In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 in- stallments of the following amounts: (A) 8 percent of the net tax liability in the case of each of the first 5 of such install- ments, (B) 15 percent of the net tax liability in the case of the 6th such installment, (C) 20 percent of the net tax liability in the case of the 7th such installment, and (D) 25 percent of the net tax liability in the case of the 8th such installment. (2) Date for payment of installments If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any exten- sion of time for filing the return) for the re- turn of tax for the taxable year described in subsection (a) and each succeeding installment shall be paid on the due date (as so deter- mined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made. (3) Acceleration of payment If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of sub- stantially all the assets of the taxpayer (in- cluding in a title 11 or similar case), a ces- sation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the tax- payer. (4) Proration of deficiency to installments If an election is made under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been as- sessed with respect to such net tax liability, the deficiency shall be prorated to the install- ments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the de- ficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Sec- Page 2217 TITLE 26—INTERNAL REVENUE CODE § 965 retary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax. (5) Election Any election under paragraph (1) shall be made not later than the due date for the re- turn of tax for the taxable year described in subsection (a) and shall be made in such man- ner as the Secretary shall provide. (6) Net tax liability under this section For purposes of this subsection— (A) In general The net tax liability under this section with respect to any United States share- holder is the excess (if any) of— (i) such taxpayer’s net income tax for the taxable year in which an amount is in- cluded in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over (ii) such taxpayer’s net income tax for such taxable year determined— (I) without regard to this section, and (II) without regard to any income or deduction properly attributable to a div- idend received by such United States shareholder from any deferred foreign in- come corporation. (B) Net income tax The term ‘‘net income tax’’ means the reg- ular tax liability reduced by the credits al- lowed under subparts A, B, and D of part IV of subchapter A. (i) Special rules for S corporation shareholders (1) In general In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which in- cludes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sen- tence shall be assessed on the return of tax as an addition to tax in the shareholder’s taxable year which includes such triggering event. (2) Triggering event (A) In general In the case of any shareholder’s net tax li- ability under this section 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 corpora- tion is not an S corporation). (ii) A liquidation or sale of substantially all the assets of such S corporation (in- cluding in a title 11 or similar case), a ces- sation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance. (iii) A transfer of any share of stock in such S corporation by the taxpayer (in- cluding by reason of death, or otherwise). (B) Partial transfers of stock In the case of a transfer of less than all of the taxpayer’s shares of stock in the S cor- poration, such transfer shall only be a trig- gering event with respect to so much of the taxpayer’s net tax liability under this sec- tion with respect to such S corporation as is properly allocable to such stock. (C) Transfer of liability A transfer described in clause (iii) of sub- paragraph (A) shall not be treated as a trig- gering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same man- ner as if such transferee were the taxpayer. (3) Net tax liability A shareholder’s net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation. (4) Election to pay deferred liability in install- ments In the case of a taxpayer which elects to defer payment under paragraph (1)— (A) subsection (h) shall be applied sepa- rately with respect to the liability to which such election applies, (B) an election under subsection (h) with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with re- spect to such liability occurs, (C) the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but deter- mined without regard to any extension of time for filing the return), and (D) if the triggering event with respect to any net tax liability is described in para- graph (2)(A)(ii), an election under subsection (h) with respect to such liability may be made only with the consent of the Sec- retary. (5) Joint and several liability of S corporation If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally lia- ble for such payment and any penalty, addi- tion to tax, or additional amount attributable thereto. (6) Extension of limitation on collection Any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with re- spect to such liability. (7) Annual reporting of net tax liability (A) In general Any shareholder of an S corporation which makes an election under paragraph (1) shall Page 2218 TITLE 26—INTERNAL REVENUE CODE § 965 1 See References in Text note below. report the amount of such shareholder’s de- ferred net tax liability on such shareholder’s return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns. (B) Deferred net tax liability For purposes of this paragraph, the term ‘‘deferred net tax liability’’ means, with re- spect to any taxable year, the amount of net tax liability payment of which has been de- ferred under paragraph (1) and which has not been assessed on a return of tax for any prior taxable year. (C) Failure to report In the case of any failure to report any amount required to be reported under sub- paragraph (A) with respect to any taxable year before the due date for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 per- cent of such amount. (8) Election Any election under paragraph (1)— (A) shall be made by the shareholder of the S corporation not later than the due date for such shareholder’s return of tax for the tax- able year which includes the close of the taxable year of such S corporation in which the amount described in subsection (a) is taken into account, and (B) shall be made in such manner as the Secretary shall provide. (j) Reporting by S corporation Each S corporation which is a United States shareholder of a specified foreign corporation shall report in its return of tax under section 6037(a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a share- holder under section 6037(b) shall include a statement of such shareholder’s pro rata share of such amounts. (k) Extension of limitation on assessment Notwithstanding section 6501, the limitation on the time period for the assessment of the net tax liability under this section (as defined in subsection (h)(6)) shall not expire before the date that is 6 years after the return for the tax- able year described in such subsection was filed. (l) Recapture for expatriated entities (1) In general If a deduction is allowed under subsection (c) to a United States shareholder and such share- holder first becomes an expatriated entity at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act 1 (with respect to a surrogate for- eign corporation which first becomes a surro- gate foreign corporation during such period), then— (A) the tax imposed by this chapter shall be increased for the first taxable year in which such taxpayer becomes an expatriated entity by an amount equal to 35 percent of the amount of the deduction allowed under subsection (c), and (B) no credits shall be allowed against the increase in tax under subparagraph (A). (2) Expatriated entity For purposes of this subsection, the term ‘‘expatriated entity’’ has the same meaning given such term under section 7874(a)(2), ex- cept that such term shall not include an enti- ty if the surrogate foreign corporation with re- spect to the entity is treated as a domestic corporation under section 7874(b). (3) Surrogate foreign corporation For purposes of this subsection, the term ‘‘surrogate foreign corporation’’ has the mean- ing given such term in section 7874(a)(2)(B). (m) Special rules for United States shareholders which are real estate investment trusts (1) In general If a real estate investment trust is a United States shareholder in 1 or more deferred for- eign income corporations— (A) any amount required to be taken into account under section 951(a)(1) by reason of this section shall not be taken into account as gross income of the real estate invest- ment trust for purposes of applying para- graphs (2) and (3) of section 856(c) to any tax- able year for which such amount is taken into account under section 951(a)(1), and (B) if the real estate investment trust elects the application of this subparagraph, notwithstanding subsection (a), any amount required to be taken into account under sec- tion 951(a)(1) by reason of this section shall, in lieu of the taxable year in which it would otherwise be included in gross income (for purposes of the computation of real estate investment trust taxable income under sec- tion 857(b)), be included in gross income as follows: (i) 8 percent of such amount in the case of each of the taxable years in the 5-tax- able year period beginning with the tax- able year in which such amount would oth- erwise be included. (ii) 15 percent of such amount in the case of the 1st taxable year following such pe- riod. (iii) 20 percent of such amount in the case of the 2nd taxable year following such period. (iv) 25 percent of such amount in the case of the 3rd taxable year following such period. (2) Rules for trusts electing deferred inclusion (A) Election Any election under paragraph (1)(B) shall be made not later than the due date for the first taxable year in the 5-taxable year pe- riod described in clause (i) of paragraph (1)(B) and shall be made in such manner as the Secretary shall provide. (B) Special rules If an election under paragraph (1)(B) is in effect with respect to any real estate invest- ment trust, the following rules shall apply: Page 2219 TITLE 26—INTERNAL REVENUE CODE § 965 2 So in original. (i) Application of participation exemption For purposes of subsection (c)(1)— (I) the aggregate amount to which sub- paragraph (A) or (B) of subsection (c)(1) applies shall be determined without re- gard to the election, (II) each such aggregate amount shall be allocated to each taxable year de- scribed in paragraph (1)(B) in the same proportion as the amount included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section is allocated to each such taxable year. (III) NO INSTALLMENT PAYMENTS.—The real estate investment trust may not make an election under subsection (g) for any taxable year described in para- graph (1)(B). (ii) Acceleration of inclusion If there is a liquidation or sale of sub- stantially all the assets of the real estate investment trust (including in a title 11 or similar case), a cessation of business by such trust, or any similar circumstance, then any amount not yet included in gross income under paragraph (1)(B) shall be in- cluded in gross income as of the day before the date of the event and the unpaid por- tion of any tax liability with respect to such inclusion shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). (n) Election not to apply net operating loss de- duction (1) In general If a United States shareholder of a deferred foreign income corporation elects the applica- tion of this subsection for the taxable year de- scribed in subsection (a), then the amount de- scribed in paragraph (2) shall not be taken into account— (A) in determining the amount of the net operating loss deduction under 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 sec- tion 172. (2) Amount described The amount described in this paragraph is the sum of— (A) the amount required to be taken into account under section 951(a)(1) by reason of this section (determined after the applica- tion of subsection (c)), plus (B) in the case of a domestic corporation which chooses to have the benefits of sub- part 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 subpara- graph (A) which are treated as a dividends 2 under section 78. (3) Election Any election under this subsection shall be made not later than the due date (including extensions) for filing the return of tax for the taxable year and shall be made in such manner as the Secretary shall prescribe. (o) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appro- priate to carry out the provisions of this sec- tion, including— (1) regulations or other guidance to provide appropriate basis adjustments, and (2) regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classifica- tion or accounting methods, or otherwise. (Added Pub. L. 108–357, title IV, § 422(a), Oct. 22, 2004, 118 Stat. 1514; amended Pub. L. 109–135, title IV, § 403(q), Dec. 21, 2005, 119 Stat. 2627; Pub. L. 115–97, title I, § 14103(a), Dec. 22, 2017, 131 Stat. 2195.) Editorial Notes REFERENCES IN TEXT The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (l)(1), probably means the date of the enactment of title I of Pub. L. 115–97, which was approved Dec. 22, 2017. Prior versions of the bill that was enacted into law as Pub. L. 115–97 included such Short Title, but it was not enacted as part of title I of Pub. L. 115–97. AMENDMENTS 2017—Pub. L. 115–97 amended section generally. Prior to amendment, section related to temporary dividends received deduction. 2005—Subsec. (a)(2)(B). Pub. L. 109–135, § 403(q)(1), in- serted ‘‘from another controlled foreign corporation in such chain of ownership’’ before ‘‘, but only to the ex- tent’’. Subsec. (b)(2)(A). Pub. L. 109–135, § 403(q)(2), inserted ‘‘cash’’ before ‘‘dividends’’. Subsec. (b)(3). Pub. L. 109–135, § 403(q)(3), inserted at end ‘‘The Secretary may prescribe such regulations as may be necessary or appropriate to prevent the avoid- ance of the purposes of this paragraph, including regu- lations which provide that cash dividends shall not be taken into account under subsection (a) to the extent such dividends are attributable to the direct or indirect transfer (including through the use of intervening enti- ties or capital contributions) of cash or other property from a related person (as so defined) to a controlled for- eign corporation.’’ Subsec. (c)(1). Pub. L. 109–135, § 403(q)(4), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: ‘‘The term ‘applicable financial statement’ means, with respect to a United States shareholder, the most recently audited financial statement (including notes and other docu- ments which accompany such statement) which in- cludes such shareholder— ‘‘(A) which is certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and ‘‘(B) which is used for the purposes of a statement or report— ‘‘(i) to creditors, ‘‘(ii) to shareholders, or ‘‘(iii) for any other substantial nontax purpose. In the case of a corporation required to file a financial statement with the Securities and Exchange Commis- sion, such term means the most recent such statement filed on or before June 30, 2003.’’ Page 2220 TITLE 26—INTERNAL REVENUE CODE § 970 Subsec. (d)(2). Pub. L. 109–135, § 403(q)(5), substituted ‘‘directly allocable’’ for ‘‘properly allocated and appor- tioned’’. Subsec. (d)(4). Pub. L. 109–135, § 403(q)(6), added par. (4). Subsec. (e)(1). Pub. L. 109–135, § 403(q)(7), inserted ‘‘which are imposed by foreign countries and posses- sions of the United States and are’’ after ‘‘taxes’’ in concluding provisions. Subsec. (f). Pub. L. 109–135, § 403(q)(8), inserted ‘‘on or’’ before ‘‘before the due date’’ in concluding provi- sions. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendments by Pub. L. 109–135 effective as if in- cluded in the provisions of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which they relate, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title. EFFECTIVE DATE Section applicable to taxable years ending on or after Oct. 22, 2004, see section 422(d) of Pub. L. 108–357, set out as an Effective Date of 2004 Amendments note under section 56 of this title. SUBPART G—EXPORT TRADE CORPORATIONS Sec. 970. Reduction of subpart F income of export trade corporations. 971. Definitions. [972. Repealed.] Editorial Notes AMENDMENTS 1976—Pub. L. 94–455, title XIX, § 1901(b)(27)(B), Oct. 4, 1976, 90 Stat. 1799, struck out item 972 ‘‘Consolidation of group of export trade corporations’’. 1962—Pub. L. 87–834, § 12(a), Oct. 16, 1962, 76 Stat. 1027, added heading of subpart G, and items 970 to 972. § 970. Reduction of subpart F income of export trade corporations (a) Export trade income constituting foreign base company income (1) In general In the case of a controlled foreign corpora- tion (as defined in section 957) which for the taxable year is an export trade corporation, the subpart F income (determined without re- gard to this subpart) of such corporation for such year shall be reduced by an amount equal to so much of the export trade income (as de- fined in section 971(b)) of such corporation for such year as constitutes foreign base company income (as defined in section 954), but only to the extent that such amount does not exceed whichever of the following amounts is the lesser: (A) an amount equal to 11⁄2 times so much of the export promotion expenses (as defined in section 971(d)) of such corporation for such year as is properly allocable to the ex- port trade income which constitutes foreign base company income of such corporation for such year, or (B) an amount equal to 10 percent of so much of the gross receipts for such year (or, in the case of gross receipts arising from commissions, fees, or other compensation for its services, so much of the gross amount upon the basis of which such commissions, fees, or other compensation is computed) ac- cruing to such export trade corporation from the sale, installation, operation, mainte- nance, or use of property in respect of which such corporation derives export trade in- come as is properly allocable to the export trade income which constitutes foreign base company income of such corporation for such year. The allocations with respect to export trade income which constitutes foreign base com- pany income under subparagraphs (A) and (B) shall be made under regulations prescribed by the Secretary. (2) Overall limitation The reduction under paragraph (1) for any taxable year shall not exceed an amount which bears the same ratio to the increase in the investments in export trade assets (as de- fined in section 971(c)) of such corporation for such year as the export trade income which constitutes foreign base company income of such corporation for such year bears to the en- tire export trade income of such corporation for such year. [(b) Repealed. Pub. L. 115–97, title I, § 14212(b)(5), Dec. 22, 2017, 131 Stat. 2217] (c) Investments in export trade assets (1) Amount of investments For purposes of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject. (2) Increase in investments in export trade as- sets For purposes of subsection (a), the amount of increase in investments in export trade as- sets of any controlled foreign corporation for any taxable year is the amount by which— (A) the amount of such investments at the close of the taxable year, exceeds (B) the amount of such investments at the close of the preceding taxable year. (3) Decrease in investments in export trade as- sets For purposes of subsection (b), the amount of decrease in investments in export trade as- sets of any controlled foreign corporation for any taxable year is the amount by which— (A) the amount of such investments at the close of the preceding taxable year (reduced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds (B) the amount of such investments at the close of the taxable year. (4) Special rule A United States shareholder of an export trade corporation may, under regulations pre- scribed by the Secretary, make the determina- tions under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States