Washington, D.C. (May 20, 2025) – In a comment letter submitted to the U.S. Department of the Treasury and the Internal Revenue Service (IRS), the American Institute of CPAs (AICPA) provided comments to proposed regulations regarding the Previously Taxed Earnings and Profits (PTEP) and related basis adjustments under Sections 959 and 961.
When a U.S. shareholder has already been taxed on income from a foreign corporation – before that income is distributed– they’re said to have previously taxed earnings and profits. This generally happens when a U.S. shareholder owns a controlled foreign corporation (CFC) and certain types of foreign income are included in the shareholder’s income under Subpart F, GILTI, or other tax provisions. This system is meant to prevent double taxation by excluding the distribution from the shareholder’s gross income. Sections 959 and 961 of the Internal Revenue Code provide rules for taxpayers and the treatment of PTEP.
The proposed regulations provide rules addressing various aspects of the PTEP regime, such as increases and decreases to basis of stock, foreign currency gain or loss, and allocation of foreign tax credits.
The AICPA provides the following recommendations for Treasury and the IRS:
Expressly allow taxpayers to rely on the proposed regulations until they are finalized.
Under section 959, extend to foreign nongrantor trusts the proposed model for PTEP distributed through partnerships.
To coordinate the subchapter J rules with subpart F, provide that once PTEP is treated as distributed from the relevant controlled foreign corporation (CFC) to the foreign nongrantor trust, subsequent distributions from the trust to a beneficiary who previously reported income inclusions associated with the relevant CFC are first recoveries of that PTEP before the subchapter J rules are then applied to that beneficiary.
If the recommendation immediately above is not adopted, for the purpose of subchapter J, treat the trust’s distribution of excludable PTEP to the beneficiary as akin to either i) tax-exempt income (which will not trigger current taxation to the U.S. shareholder / beneficiary under the distributable net income model or the “throwback” anti-deferral regime under the character rule) or ii) trust principal (which also is not subject to either current taxation under the distributable net income model or the throwback regime).
Under section 961, extend the concept of derived basis to foreign nongrantor trusts such that those entities will have a derived basis in CFC shares.
“There is some uncertainty regarding taxpayer’s continued reliance on Notice 2019-01 and the portions of the proposed regulations that apply the 2019 Notice provisions,” says Reema Patel, Senior Manager, AICPA Tax Policy & Advocacy. “The lack of an express statement in the proposed regulations creates uncertainty among taxpayers about which aspects of the proposed regulations may be viewed as a reasonable interpretation of the statute and existing final regulations. Therefore, we recommend that Treasury and the IRS expressly allow taxpayers to rely on the proposed regulations in their entirety until they are finalized.”
About the American Institute of CPAs
The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with 397,000 members and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting. A founding member of the Association of International Certified Professional Accountants, the AICPA sets ethical standards for the profession, attestation standards, and U.S. auditing standards for private companies, not-for-profit organizations, and federal, state, and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, partners across the profession to build future talent, and drives continuing education to advance the vitality, relevance, and quality of the profession.
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Background
July 5, 2024 - AICPA Comments on Transactions With Foreign Trusts and Information Reporting on Transactions With Foreign Trusts and Large Proposed Gifts Proposed Regulations (REG-124850-08, Docket IRS-2024-022, RIN 1545-B104).
Contact: Veronica L. Vera
202-434-9215
Veronica.Vera@aicpa-cima.com