US Companies Expanding Into Foreign Markets – Legal And Tax Considerations
by Chris Klug, Klug Law Office PLLC
As more US companies explore opportunities to expand outside the US, international tax law becomes increasingly more important. A company planning a cross-border transaction, operation, or investment must deal with several complex US tax rules. The structure chosen will have immediate and long-term tax consequences.
It will be important for the US company to understand how the cross-border transaction will be
impacted by US tax law, and how that transaction will interact with the laws of other countries
that are relevant to the transaction.
In entering a foreign market, there are many options for the US company. Initially the US
company will need to determine how they will target the foreign market and the market access
that is available. Once an access strategy has been determined, the US company will need to
determine what type of entity to form in the foreign jurisdiction. In making the entity selection,
there are many key tax considerations that could significantly impact the pro2tability of
the foreign operations.
There are typically three ways for a US company to enter a foreign jurisdiction:
(1) by licensing a local entity in the foreign country to make the goods or provide the services to the local market;
(2) by shipping the goods or services directly from the US for sale and use in the foreign market; or
(3) by investing directly in the foreign market, either alone or joining forces with a local entity, for local production, sale, and delivery.
Licensing to a local entity is likely the least expensive route to enter a foreign market and the least
commitment to the target foreign market, but is also the least likely avenue to generate substantial
profits. Exporting goods or services abroad generally reflects a greater commitment to the foreign
market and more of a need for the US company to understand the local market than merely licensing
the production of the products or the creation and delivery of the services. The failure of
US companies to adapt to the local market is a common reason for failure in a foreign jurisdiction.
The route that requires the most investment in the local market is direct investment in the
foreign country for local production of a product or delivery of a service.
Choice Of Entity
When a US company decides to establish a presence abroad, the choice of legal entity created in
that jurisdiction typically depends on: (1) whether the entity provides limited liability to the US
company; (2) the ease and expense of registration and compliance and other regulatory requirements;
and (3) the taxation of the entity both in the local jurisdiction and in the US.
Companies will typically want to conduct business through an entity in the local jurisdiction that
will provide limited liability with respect to the foreign operations. Other factors may lead to the
US company to conduct the business abroad other than through a separate legal entity. Generally,
if there is a decision by the US company not to form a local entity, a US subsidiary entity would
be formed to establish the foreign o#ce, with the goal being to isolate the potential liabilities
from the foreign operations.
Creating and maintaining a company in most countries involves compliance with several registration
requirements. The basic requirement is to register the company with the authorities that
register and regulate company foundation documents. In addition, registration requirements will
usually include registration with the tax authorities, securities regulators, and regional or local
business authorities, and sometimes with labor authorities.
The US company may also be restricted in carrying out its proposed activities in the foreign jurisdiction. For economic development or strategic reasons, many countries restrict certain types of
business activities to citizens of that country or entities that are majority-owned by citizens. On
the other hand, many countries encourage foreign investment by providing special tax incentives
or other incentives.
Tax considerations are often the most important factor in determining the form to operate in
the foreign jurisdiction. Tax planning includes planning for US income tax law, foreign tax law,
and tax treaties between the US and the foreign country. Careful planning for potential tax
costs in structuring of export transactions and investments outbound from the US is essential for maximizing profits in the foreign jurisdiction. An important objective will be to assure that
foreign based income (when treated as realized by the US company) will not be again subject to
significant income taxation, this second time being taxed in the US. If the profits are so taxed, this
could produce economic double taxation on the foreign realized income.
US companies are subject to US tax on their worldwide income from whatever source derived.1
To mitigate double taxation that occurs when a foreign branch or subsidiary is also taxed by the
country in which the branch or foreign subsidiary operates, the US foreign tax credit rules allow
the US company to o;set (subject to limitations) taxes due in the United States with income taxes
paid to other countries.2
It is important in minimizing overall tax to properly classify whether the income is foreign or
domestic. This will be determined under the US sourcing rules. Foreign jurisdictions will have
similar sourcing rules that will be applicable under their tax laws. Sometimes the status of a
transaction as being foreign or domestic will be resolved by the provisions of a bilateral income
tax treaty. The worst result would be each tax jurisdiction asserting the same item of income is
domestic income, with each jurisdiction then exercising primary tax jurisdiction over the same
income. In these circumstances the foreign tax credit cannot mitigate double taxation.
There are two typical strategies for the US company, the deferral strategy and the flow-through
strategy. A corporate entity is used to accomplish the deferral strategy, and branches and partnerships
are used for the flow-through strategy.
When a business is not established in the US or under the laws of the US or of any state or the District of Columbia, the foreign owners or its US owners may be subject to additional US tax reporting requirements.3
Generally, the foreign tax treatment of an entity is not relevant to the US taxation of the entity and its owners. Tregulations, commonly known as the check-the-box regulations, provide default classification rules for eligible entities. A foreign eligible entity is an association taxed as a corporation if all of its members have limited liability.4 A foreign eligible entity is a partnership if it has two or more members and at least one member does not have limited liability.5The entity is a disregarded entity if it has a single owner and the owner does not have limited liability.6 US income tax laws require certain types of organizations formed in foreign countries to be treated as corporations for US federal income tax purposes; the foreign entities are commonly known as per se corporations.7 Except for the entities listed, a foreign company can elect to be treated as a partnership or disregarded entity for US income tax purposes.
One of the most effective tools in cross-border tax planning is the ability to make a check-the-box
election. As discussed above, if no election is made, the check-the-box regulations provide default
An eligible entity can make a check-the-box election and elect out of a default classification by filing
Form 8832, Entity Classification Election. An initial entity classification for a newly formed entity generally
must be made within 75 days of formation or 12 months after the date on which the election
was filed.8 When the entity is a foreign eligible entity, the initial classification must be determined as
of the date the entity becomes relevant for US tax purposes. A foreign eligible entity has a classification
when it becomes relevant. An entity that elects to change its classification is generally precluded from
changing its classification during the 60-month period following the effective date of the election.9
Hybrid And Reverse Hybrid Entities
A hybrid entity is a foreign company that is treated as a corporation for foreign tax purposes,
but as a disregarded entity or partnership for US tax purposes. Under the right circumstance, a
hybrid entity can o;er a US company the best of both worlds – for example, having a foreign
corporation treated as a flow-through for US tax purposes with the associated advantages, and at
the same time being treated as a foreign corporation under local law, allowing the US company
limited liability and a corporate presence in the foreign country.
A reverse hybrid entity is a foreign business that is treated as a corporation for US tax purposes,
but as a partnership for foreign tax purposes. For the US company, operating as a reverse hybrid
offers several tax planning opportunities. A foreign corporation will generally allow a US company
to defer residual US tax on foreign profits. The foreign corporation will also allow for more
control over the timing of income recognition, which is useful in foreign tax credit planning.
Under the deferral strategy, the US company conducts its foreign operations through a corporate
entity, meaning an entity that is required to be or elects to be treated as a corporation for US tax
purposes. The foreign entity will be subject to taxes in the foreign jurisdiction. Income tax consequences
in the US are generally deferred until the foreign entity repatriates the profits through distributions to the US company, unless one of the anti-deferral provisions of US tax law applies.
When the profits are repatriated to the US company, the profits will be subject to taxation in the
United States. The US company will have the opportunity to o;set US income taxation through
direct or indirect foreign tax credits. The deferral strategy makes sense when there is no immediate
plan to distribute profits, when the foreign company is not expected to generate losses, and
when the foreign jurisdiction taxes at a lower rate than the United States.
The tax advantages of forming a foreign corporation include:
(a) The foreign corporation will typically allow the US owner to defer US taxation on income
earned in low-tax jurisdictions;
(b) The corporate form allows more control over income recognition in the US, which can
be useful in foreign tax credit planning;
(c) The sale of stock of the foreign corporation may be exempt from foreign taxation; and
(d) The separate legal status of a foreign corporation can make it easier to justify management
fees and other intercompany charges (indirect expenses) to the foreign tax authorities.
The decision whether to operate through a foreign corporation depends on more than solely tax
considerations. A foreign corporation insulates the investors from liability issues in the foreign
jurisdiction. The foreign corporation may also provide a stronger image to customers and employees
in the foreign jurisdiction. A foreign corporation will typically be a superior vehicle to
facilitate foreign investment through the issuance of additional shares of stock in the corporation.
Pursuant to the flow-through strategy, the US company operates a branch office or forms an
entity that elects to be treated as a partnership for US tax purposes. The tax consequences of the
foreign activities flow through to the US company. When operating through a flow-through entity,
the US company will be able to take advantage of both losses and foreign taxes incurred by
the foreign business operation. If the foreign business experiences losses, the losses will be treated
for US tax purposes as though they are losses of the US company.
When the foreign business is profitable and pays income taxes in the foreign country, the US
company will be considered to have paid the foreign taxes and can take advantage of direct foreign
tax credits. This strategy is beneficial when a US company wishes to deduct initial losses from
foreign operations, and when the US tax rate is lower than the foreign country.
Tax advantages of a flow -through entity include:
(a) A US tax filer can deduct foreign losses of a flow -through entity against US profits;
(b) The transfer of assets to the flow -through is a nontaxable event;
(c) Foreign tax credits will flow through to the US tax filer; and
(d) There may be no foreign taxes when the profits from the foreign flow -through are
repatriated, whereas dividends of a foreign corporation would generally be subject to
foreign withholding taxes.
In addition to tax considerations, there are other reasons to form a foreign flow-through entity.
The foreign flow-through will generally have less onerous legal compliance and financial reporting
requirements. Foreign laws may also require foreign corporations to have local shareholders
and directors. The use of a foreign flow-through entity avoids minimum capitalization requirements
imposed by some countries.
Branch Loss Recapture Rule
Many new companies will incur losses in the initial years before becoming profitable. A US
company could achieve maximum tax benefits by starting a foreign venture through a foreign
flow-through entity when the foreign company has losses, and then once the foreign company
becomes profitable making a check-the-box election to have the foreign company treated as a
corporation for purposes of US tax. Under the branch loss recapture rule, a US company must
recognize gain on the incorporation of a foreign flow-through entity to the extent the US company
has previously deducted losses against its taxable income.10
The recaptured income on the incorporation of the foreign flow-through entity is treated as foreign
source income and has the same character as the related branch losses.11 The purpose of the
foreign branch loss recapture rule is to prevent flowing through losses reducing taxes in the US
before incorporating the foreign flow-through entity as a foreign corporation to defer US taxation
when the foreign operation is profitable.
Foreign Tax Credit Planning
For US companies operating outside the US, foreign source income has likely also been subject to tax
in the foreign jurisdiction. To mitigate double taxation for a US company operating abroad, the US
allows the use of foreign tax paid as a dollar-for-dollar credit against US tax due on the same income.
Essentially, foreign tax credits o;set US tax, thus eliminating double taxation of the same income.
The foreign tax credit allows a US company to subtract income taxes paid to other countries from
the tentative tax owed to the US government. Foreign taxes other than income taxes (such as property
taxes, excise taxes, payroll taxes, or value-added taxes) can be deducted from foreign source
taxable income, but cannot be credited against US tax. All foreign income taxes can be credited
against US federal income tax, including taxes levied by governments below the national level.
The United States limits the foreign income taxes that US taxpayers can credit against their US
tax liability. The limitation equals the pre-credit US federal tax that is attributable to foreign
source income. The purpose of the limitation is to restrict foreign tax credits to mitigating double
taxation on foreign source income. The limitation prevents US taxpayers operating in high-tax
jurisdictions from using foreign tax credits to reduce tax imposed on US source income.
A US company operating in a foreign country through an entity classified as a flow-through entity
will be allocated its pro rata share of foreign tax credits to offset US taxation on the US company’s
pro rata share of foreign source income. In determining the separate basket limitations, an
owner allocates its distributive share of partnership income between general category income and
passive category income based on the character of the income at the entity level.
Foreign tax credit planning for US companies operating in foreign countries through foreign subsidiary
corporations is more complex than the rules for a flow-through entity. US corporations
normally cannot claim a dividend received deduction on a dividend from a foreign corporation.
A US corporation therefore must recognize the entire amount of a dividend from a foreign subsidiary
as US taxable income. The reason the rule diverges from a dividend between a US parent
and US subsidiary corporation is that the dividend distribution from the foreign corporation is
the first chance the US has to tax the profits of the foreign subsidiary, whereas the US subsidiary
is subject to US taxation on worldwide income.
A US corporation with a foreign subsidiary is eligible to claim deemed paid foreign tax credits if it
owns 10 percent or more of the voting stock of the foreign subsidiary and receives a dividend distribution
from that foreign corporation. The deemed paid foreign tax credit is allowed to protect
US corporations from double taxation and to closer equate the tax treatment of US corporations
with foreign subsidiaries with those operating through foreign 6ow-through entities.
Since a US corporation generally does not recognize income from a foreign corporation until
there is a distribution, the deemed paid foreign tax credit could allow a US corporation to recognize a foreign tax credit prior to the related income being taken into account. To prevent
this tax credit and income matching issue, there are now provisions requiring the related foreign
income recognition as a prerequisite to receiving the deemed paid foreign tax credit.
Another complication of the deemed paid foreign tax credit and the matching of income and
taxes requirement is allocating deemed paid taxes to dividend distributions. Where a foreign corporation
accumulates earnings over several years, the allocation of deemed paid foreign tax credits
is more important. The allocation of deemed paid foreign tax credits is more significant where the
tax rate in the foreign country increases or decreases during the period the foreign corporation
For post-1986 foreign income taxes, the pooling method is required to allocate the deemed paid
foreign tax credits. Under the pooling method, the post-1986 foreign corporation’s income taxes
are evenly allocated to distributions in proportion to the post-1986 undistributed earnings.
Since the foreign tax credit is the primary vehicle for US companies to avoid double taxation of
foreign source income, proper planning for the foreign tax credit and dividend repatriation is
critical. It will be important for the US corporation to strategize for tax-efficient dividend repatriation
from foreign corporation subsidiaries.
Controlled Foreign Corporation And Subpart F Inclusions
A foreign corporation is a controlled foreign corporation (“CFC”) for a taxable year if more than
50 percent of its stock by vote or value is held by US shareholders at any time during the year.12
If a foreign corporation is a CFC for a period of 30 days or more during the taxable year, then
every US shareholder of the CFC at any time during that taxable year and any who own stock
in the CFC on the last day of the CFC’s taxable year must include in gross income their share of
subpart F income.13 A US Shareholder is a US person 14 owning at least 10 percent of the voting
stock of the CFC.15
US shareholders of foreign corporations are generally not taxed on the earnings of those corporations
until they receive distributions, which are usually taxed as dividends, or until they sell their
shares. In contrast, for CFCs there are inclusion rules for certain items of income, which are treated
as having been received by the US shareholder even though the CFC does not in fact make
any distributions. The purpose of this inclusion is to prevent the US shareholder from deferring
recognition of certain types of income earned through a CFC and thus avoiding or deferring tax on it. this inclusion rule can create timing issues for claiming foreign tax credits on later dividend
distributions from the CFC.
US shareholders of a CFC must include in their gross income their pro rata share of the CFC’s
(i) subpart F income, and (ii) investment of earnings in US property.16 The US shareholder’s pro
rata share is the amount of income the shareholder would receive if, on the last day of its taxable
year, the CFC had actually distributed pro rata to all of its shareholders a dividend equal to the
subpart F inclusion.17
Subpart F income includes the following income derived by a CFC:
1. Insurance income;
2. Foreign base company income;
3. International boycott income;
4. The sum of any illegal bribes or kickbacks paid on behalf of the CFC to a government
employee or official; and
5. Income from disfavored foreign countries.
A CFC’s subpart F income for its taxable year cannot exceed the CFC’s current year earnings and
profits.18 Subpart F inclusion is determined prior to any reduction of current year earnings and
profits for dividend distributions.
Foreign base company income consists of four additional subgroups of income derived by a CFC.
Foreign base company income includes:
1. Foreign personal company income;
2. Foreign base company sales income;
3. Foreign base company services income; and
4. Foreign base company oil-related income.
Foreign personal company income generally includes (i) dividends, interest, rents and annuities;
(ii) net gains from the disposition of property that produces dividend, interest, rent and royalty
income; and (iii) net gains from commodity and foreign currency transactions. There are numerous
rules that exempt select categories from foreign personal company income.
One important exception is worth mentioning: dividends, interest, rents and royalties received
from a related CFC are exempt from subpart F income, provided the payments are not themselves subpart F income of the related CFC. This exception allows cross-border payments between related CFCs without creating subpart F income in the US shareholders.19
The key point to keep in mind with CFCs is the pass-through of subpart F income to the US
shareholders. For active businesses operating in a foreign country, this is generally not an issue;
however, there are many subpart F inclusion rules for the US company to track and plan for.
If the US company will enter the foreign market by shipping the product to the foreign country,
then establishing an Interest-Charge Domestic International Sales Corporation (“IC-DISC”) can
provide US export tax incentives. The IC-DISC provisions are intended to incentivize and facilitate
growth in US production for export products and certain services by US forms to foreign markets.
To realize the benefits, generally the owners of a US corporation will establish another US corporation
that quali2es as an IC-DISC. Qualified export receipts (“QER”) are allocated to the ICDISC
which are excluded from US federal corporate income tax. The exempt portion allocated
to the IC-DISC is not subject to tax 20 until distributed or deemed distributed to the shareholders
of the IC-DISC, which is taxed to the shareholders as a qualified dividend. /is converts the
ordinary income taxed at rates up to 39.6 percent to qualified dividends taxed at a maximum rate
of 20 percent, reducing the tax rate by 19.6 percent.
Although the IC-DISC is not a taxable entity, the IC-DISC’s US shareholders are subject to tax
on both actual and deemed dividend distributions from the IC-DISC.21 Thedeemed distributions
do not include income from the 2rst USD10m of qualified export receipts for each year.22 The ICDISC
allows a US shareholder to defer paying US tax on the income derived from up to USD10m
of qualified export receipts each year. The US shareholder must pay an interest charge on its IC-DISC
deferred tax liability. The interest rate is the current market rate for the 52-week Treasury bills.23
- Qualified export property that generates qualified receipts eligible for IC-DISC treatment from
qualified sales or leases must:
- Be manufactured, produced, grown, or extracted in the United States, by a person other than
- Be held in the ordinary course for use, consumption and disposition outside the US; and
Have no more than 50 percent in foreign content.
The key benefits to the IC-DISC are:
The operating company receives a deduction on the commission paid to the IC-DISC;
There is no federal corporate income tax on the IC-DISC’s qualifying income; and
The IC-DISC shareholders are taxed at qualified dividend rates on actual or deemed dividends
from the IC-DISC.
In conjunction with the IC-DISC, the operating company that is manufacturing a product will typically
be eligible for the Domestic Production Activities Deduction (“DPAD”) since the goods are being
manufactured, produced, grown, or extracted in the United States. The DPAD equals 9 percent
of the lesser of taxable income or qualified production activities income. The DPAD is further limited
to 50 percent of the taxpayer’s W-2 wages that are related to domestic production gross receipts.
Taxable Acquisition Of Foreign Corporations
The US company acquiring a foreign target corporation will likely prefer a taxable asset acquisition
because it would allow the US company to acquire only the desired assets and leave behind in the
foreign target entity any unwanted assets and liabilities. Moreover, the US company would take a
cost basis in the acquired assets, which typically would provide the US company with larger depreciation and amortization deductions and reduce gains on a subsequent sale of the acquired assets.
In contrast, a seller is likely to prefer a stock acquisition because liabilities of the target would
remain with the foreign target corporation (“FTC”) and the seller would not be required to recognize
gain in the target’s assets. In a stock acquisition, the foreign target corporation retains its
historic cost basis in its assets.
In certain circumstances, Internal Revenue Code (“IRC”) § 338 will permit a US purchaser that
acquires stock of a target corporation to achieve a step-up in the basis of the target corporation’s
assets by electing to have the stock acquisition treated as an asset acquisition, but only if the target
corporation is acquired in a qualified stock purchase (“QSP”).
A QSP is a transaction in which a corporation acquires at least 80 percent of the voting power and
value of the stock of another corporation by purchase (generally, a taxable acquisition) during the
12-month period beginning on the date of the 2rst acquisition included in the QSP.
If an eligible purchaser makes an election under IRC § 338, the target is treated as having sold
all of its assets at the close of the acquisition date at fair market value in a single transaction and is treated as a new corporation that purchased all of the old target’s assets as of the beginning of
the date after the acquisition date. All of the old target’s tax attributes (e.g., earnings and pro2ts)
The old target is fully taxable on the deemed asset sale. As a result, the new target takes a fair market
value basis in the assets deemed acquired and, going forward, receives the benefits of larger
amortization and depreciation deductions and reduced gain on any future sale of the assets.
If the target is a corporation, an eligible purchaser can elect unilaterally under IRC § 338(g) to
treat the stock acquisition as an asset acquisition. An election under IRC § 338(g) results in two
levels of tax because the old target recognizes gain or loss on the deemed asset sale and the selling
US shareholders recognize gain or loss on the sale of their target stock. Any incremental tax cost
on the deemed asset sale is borne by the purchaser. Consequently, an eligible purchaser is unlikely
to make an IRC § 338(g) election unless the target is a foreign corporation or has a net operating
loss sufficient to o;set the gain recognized on the deemed asset sale.
If the target corporation is a foreign target corporation, then an IRC § 338(g) election can be extremely
beneficial to the US acquiring company. If the FTC is not a CFC before the acquisition,
then, unless the FTC is engaged in a US trade or business, the US acquiring company will generally
make an IRC § 338(g) election with respect to its acquisition of FTC’s stock because gain on the
deemed sale of FTC’s assets will generally be foreign source income that is not subject to US tax.
If the FTC is engaged in a US trade or business, the US acquiring company generally will not
make an IRC § 338(g) election because gain on the deemed sale of FTC’s assets would be taxable
in the United States to the extent it is e;ectively connected with the FTC’s US trade or business.
If the FTC was a CFC before the acquisition, then IRC § 1248 may apply to convert all or a portion
of the gain of FTC’s selling US shareholders into ordinary dividend income. In addition, the
IRC § 338(g) election can affect the FTC’s selling shareholders.24
If the FTC is a CFC with respect to which a US acquiring company makes an IRC § 338(g) election,
then (i) the selling shareholders of the FTC are deemed to own the FTC through the end
of the acquisition date,25 and (ii) the selling shareholders of FTC must take into account the tax
consequences of the deemed sale of FTC’s assets and the earnings and profits therefrom. /us,
for example, if the deemed sale of FTC’s assets under IRC § 338 gives rise to subpart F income,
FTC’s selling US Shareholders will have to take that subpart F income into account.26 An IRC § 338(g) election can be bene2cial to a US company acquiring an FTC. In most cases
with no cost to the FTC’s selling shareholders, an IRC § 338(g) election allows the US company
to receive a cost basis in the assets of the FTC through a stock sale.
There are many opportunities for US companies to expand into foreign markets. It is important
for the US company to do its due diligence in planning to enter the foreign market. /e
entity that is selected for the foreign operations will have significant short- and long-term tax
and legal consequences.
It is important to have experienced tax advisors involved both in the foreign country that the
company will be expanding to and in the US, to plan to minimize overall taxation. In order to
mitigate double taxation, it will be important for the US company to strategically plan for the
repatriation of profits whether through a 6ow-through or deferral strategy. For a US company operating
in multiple countries, US and foreign taxes can significantly impact the after-tax profits,
so it is important to properly structure the foreign operations to minimize overall taxes.
1 IRC §§ 1, 11, and 61.
2 IRC § 901.
3 IRC § 7701(a)(5); Treas. Reg. § 1.6038-3(b)(7).
4 Treas. Reg. § 301.7701-3(b)(2)(B).
5 Treas. Reg. § 301.7701-3(b)(2)(A).
6 Treas. Reg. § 301.7701-3(b)(2)(C).
7 Treas. Reg. § 301.7701-1(a)(1).
8 Treas. Reg. § 301.7701-3(c)(1)(iii).
9 Treas. Reg. § 301.7701-3(c)(1)(iv).
10 IRC § 367(a)(3)(C).
11 IRC § 367(a)(3)(C).
12 IRC § 957(a).
13 IRC § 951(a)(1).
14 A US person is a US citizen, resident, domestic corporation, partnership, trust or estate.
15 IRC § 951(b).
16 IRC § 951(a)(1).
17 IRC § 951(a)(2).
18 IRC § 952(c)(1)(A).
19 IRC § 954(c)(6).
20 IRC § 991.
21 IRC § 995(a)-(b).
22 IRC § 995(b)(1)(E).
23 IRC § 995(f).
24 A purchasing corporation that makes an IRC § 338(g) election with respect to the acquisition of CFC
stock is required to provide written notice of the election to US persons that hold stock of the CFC
on the acquisition date or that sold stock to any purchasing group member during the 12-month
acquisition period. Treas. Reg. §1.338-2(e)(4)(i).
25 Treas. Reg. § 1.338-9(b)(2).
26 Treas. Reg. § 1.338-9(b)(1).