New guidance on the IRC §965 transition tax affects proposed regulations issued in August 2018. This guidance:
- extends the deadline for U.S. shareholders to make the basis adjustment election under the reduction rules of IRC §965(b);
- relaxes the rules for the aggregate foreign cash position of a U.S. shareholder that belongs to a consolidated group; and
- extends deadlines for election statements and transfer agreements from U.S. shareholders affected by Hurricane Florence.
Extended Deadline for Basis Adjustment Election
Under the proposed regulations, a U.S. shareholder’s basis in its stock or property of a deferred foreign corporation (DFIC) generally increases by the shareholder’s IRC §965(a) inclusion amount with respect to the DFIC. However, IRC §965(b) reduces subpart F income by a corresponding amount if the taxpayer is a U.S. shareholder with respect to at least one:
- DFIC, and
- E&P deficit foreign corporation.
This reduction generally does not affect basis of stock or property. However, taxpayers may elect to make relevant basis adjustments in some circumstances. Under a transition rule, the election deadline was October 9, 2018, for some U.S. shareholders.
However, the IRS realized that it was onerous to require taxpayers to make binding basis elections before the proposed regulations are finalized. As a result, the deadline for the basis election is extended to 90 days after the publication of the final IRC § 965 regulations. The basis election will be irrevocable after that date.
Consolidated Group Rules
The final regulations will treat U.S. shareholders of specified foreign corporations as a single U.S. shareholder for certain purposes if they are all members of a consolidated group. For instance, this rule applies for purposes of the rules that disregard certain assets in determining the aggregate foreign cash position and the IRC §965(c) deduction. The proposed regulations had specifically excluded these rules in applying the single taxpayer rule. The modification is necessary to prevent the overstatement of the aggregate foreign cash position. It is also consistent with prior guidance in Notice 2018-7.
Hurricane Florence Extension
Finally, deadlines for IRC §965 elections and file transfer agreements that are required by the proposed regulations are extended for taxpayers who are affected by Hurricane Florence. Election statements and transfer agreements due on or after September 7, 2018, and before January 31, 2019, are now due on January 31, 2019.
Taxpayers should mark “Hurricane Florence” on the top of the election statement or transfer agreement. The taxpayer should also note any other taxpayers affected by a transfer agreement.