disqualified basis
(A) Disqualified basis. The term disqualified basis has the meaning set forth in 1.951A-3(h)(2)(ii). (B) Residual CFC gross income. The term residual CFC gross income means gross income other than gross tested income, gross income taken into account in determining subpart F income, or gross income that is effectively connected, or treated as effectively connected, with the conduct of a trade or business in the United States (as described in 1.882-4(a)(1)). (iv) Reductions to disqualified basis pursuant to coordination rules. See 1.245A-7(b) or 1.245A-8(b), as applicable, for reductions to disqualified basis resulting from the application of 1.245A-5. (v) Examples. The following examples illustrate the application of this paragraph (c)(5). (A) Example 1: Sale of intangible property during the disqualified period(1) Facts. USP, a domestic corporation, owns all of the stock in CFC1 and CFC2, each a controlled foreign corporation. Both USP and CFC2 use the calendar year as their taxable year. CFC1 uses a taxable year ending November 30. On November 1, 2018, before the start of its first CFC inclusion year, CFC1 sells Asset A to CFC2 in exchange for $100x of cash. Asset A is intangible property that is amortizable under section 197. Immediately before the sale, the adjusted basis in Asset A is $20x, and CFC1 recognizes $80x of gain as a result of the sale ($100x$20x). CFC1's gain is not subject to U.S. tax or taken into account in determining an inclusion to USP under section 951(a)(1)(A).