The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. The tax imposed on the inclusion is referred to as the transition tax. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes. This item was published without a T.D. number. According to the IRS, a T.D. number will be assigned after the IRS resumes normal operations.
The final regulations generally apply beginning the last tax year of the foreign corporation that begins before January 1, 2018, and with respect to a U.S. person, beginning the tax year in which or with which such tax year of the foreign corporation ends.
Controlled Domestic Partnerships
Certain controlled domestic partnerships may be treated as foreign partnerships for purposes of determining the section 958(a) U.S. shareholders of a specified foreign corporation owned by the controlled domestic partnership and the section 958(a) stock owned by the shareholders. The definition of controlled foreign partnership is revised so that it is not determined just with respect to the U.S. shareholder, so that the controlled foreign partnership is clearly treated as a foreign partnership for all partners if the rule applies.
Definition of Pro Rata Share
The definitions of pro rata share and section 958(a) U.S. shareholder inclusion year are modified. The final regulations will require a section 965(a) inclusion by a section 958(a) U.S. shareholder in a case in which the specified foreign corporation, whether or not it is a CFC, ceases to be a specified foreign corporation during its inclusion year.
Downward Attribution Rule
A special rule applies when determining downward attribution from a partner to a partnership where the partner has a de minimis interest in the partnership. The threshold for applying the special attribution rule for partnerships is increased from five to 10 percent and is extended to trusts.
Basis Election Rules
The final regulations allow a taxpayer elect to increase its basis in the stock of its deferred foreign income corporations (DFICS) by the lesser of its section 965(b) previously taxed earnings and profits or the amount it can reduce the stock basis of its E&P deficit foreign corporations without recognizing gain. Within limits, a taxpayer may designate which stock of a DFIC is increased and by how much.
Exception from Anti-Abuse Rules
The final regulations provide an exception from the anti-abuse rules for certain incorporation transactions. The rules will not apply to disregard a transfer of stock of a specified foreign corporation by U.S. shareholder of a domestic corporation, if certain requirements are met. The section 965(a) inclusion amount with respect to the transferred stock of the specified foreign corporation must not be reduced and the aggregate foreign cash position of both the transferor and the transferee is determined as if each had held the transferred stock of the specified foreign corporation owned by the other on each of the cash measurement dates.
Foreign earnings of a domestic corporate U.S. shareholder are taxed at a rate of 15.5 percent, if held in cash, but only 8 percent if held otherwise, under Code Sec. 965. Cash includes cash and cash equivalents. The final regulations provide a narrow exception from the definition of cash position for certain commodities held by a specified foreign corporation in the ordinary course of its trade or business, as well as for certain privately negotiated contracts to buy and sell these assets.
Election and Payment Rules
The final regulations clarify that the signature requirement on an election statement is satisfied if the unsigned copy is attached to a timely-filed return of the person making the election, provided that the person retains the signed original in the manner specified.
Transition rules for filing transfer agreements have also been updated. If a triggering event or acceleration event occurs on or before December 31, 2018, the transfer agreement must be filed by January 31, 2019. Rules are added to address the death of an S corporation shareholder transferor. The final regulations also include modifications to certain requirements for the terms of a transfer agreement.
The final regulations provide that in the case of an additional liability reported on a return or amended return, any amount that is prorated to an installment, the due date of which has already passed, will be due with the return reporting the additional amount. The rule with respect to deficiencies remains the same, and payment for a deficiency prorated to an installment, the due date of which has already passed, is due on notice and demand.
Total Net Tax Liability Under Code Sec. 965
A taxpayer may elect to defer the payment of its total net tax liability under Code Sec. 965(h) and Code Sec. 965(i). Total net tax liability under section 965, which defines the portion of a taxpayer’s income tax eligible for deferral, is equal to the difference between a taxpayer’s net income tax with and without the application of Code Sec. 965. The final regulations will disregard effective repatriations taxed similarly to dividends under Code Sec. 951(a)(1)(B) resulting from investments in U.S. property under Code Sec. 956 when determining net income tax liability without the application of Code Sec. 965.
The consolidated group aggregate foreign cash position is determined under the final regulations as if all members of the consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are a single section 958(a) U.S. shareholder.
Previous Guidance Obsolete
The following previous guidance is obsolete:
– Notice 2018-7, I.R.B. 2018-4 I.R.B. 317;
– Notice 2018-13, I.R.B. 2018-6 341, Sections 1 through 4 and 6;
– Notice 2018-26, I.R.B. 2018-16 I.R.B. 480, Sections 1 through 5 and 7; and
– Notice 2018-78, I.R.B. 2018-42, 604, Sections 1 through 3 and 5.
Code Sec. 962
– CCH Reference – 2019FED ¶28,691
– CCH Reference – 2019FED ¶28,692
– Code Sec. 965
– CCH Reference – 2019FED ¶28,726
– CCH Reference – 2019FED ¶28,726B
– CCH Reference – 2019FED ¶28,726D
– CCH Reference – 2019FED ¶28,726F
CCH Reference – 2019FED ¶28,726H
CCH Reference – 2019FED ¶28,726J
CCH Reference – 2019FED ¶28,726L
CCH Reference – 2019FED ¶28,726N
CCH Reference – 2019FED ¶28,726P
CCH Reference – 2019FED ¶28,726S
Code Sec. 986
CCH Reference – 2019FED ¶28,860B
Tax Research Consultant
CCH Reference – TRC INTLOUT: 9550