The American Institute of CPAs (AICPA) has urged the IRS to reconsider providing “tax reform administrative relief” under final IRC Sec. 965 transition tax rules.
Under IRC Sec. 965, as amended by the Tax Cuts and Jobs Act of 2017 (TCJA) (P.L. 115-97), a “transition tax” is applied to post-1986 untaxed foreign earnings of certain specified foreign corporations owned by U.S. shareholders (as defined under IRC Sec. 951(b)) as if those earnings had been repatriated to the U.S. The AICPA on September 26, 2019, submitted comments on final IRC Sec. 965 regulations (T.D. 9846) urging the IRS to provide taxpayers certain administrative relief related to the transition tax.
AICPA Recommended Relief for IRC Sec. 965 Elections and Transfer Agreements
Specifically, the AICPA makes the following recommendations for administrative relief with respect to late or incomplete elections under IRC Secs. 965(i) and (h) and late or incomplete transfer agreements under IRC Sec. 965(i)(2):
• provide a process to obtain relief for late filed or incomplete elections under IRC Secs. 965(i) and 965(h) upon the triggering event of an IRC Sec. 965(i) election;
• allow reasonable cause or Treas. Reg. Sec. 9100 relief for late filed or incomplete transfer agreements under IRC Sec. 965(i)(2); and
• provide a process to obtain relief for late or incomplete elections under IRC Sec. 965(h).
Generally, IRC Sec. 965 allows certain U.S. shareholders to reduce the amount of income inclusion based on deficits in earnings and profits (E&P) with respect to other specified foreign corporations, according to the IRS. IRC Sec. 965(h) provides that taxpayers may elect to pay the transition tax over the course of eight annual installments with no interest. Additionally, certain taxpayers may enter into a transfer agreement with the IRS to defer payment of the remaining amount of the IRC Sec. 965(h) net tax liability or IRC Sec. 965(i) net tax liability that would otherwise become due as a result of certain acceleration or triggering events.
Final IRC Sec. 965 Regulations
The IRS officially published the revised, final IRC Sec. 965 regulations (T.D. 9846) on February 5, 2019. Procedurally, the rules state that administrative relief, pursuant to Treas. Reg. Sec. 301.9100-2 or § 301.9100-3 (section 9100), is unavailable for a late or incomplete election under IRC Secs. 965(i) and 965(h). The IRS states in the preamble to the transition tax regulations that it does not have the discretion to provide section 9100 relief when an election’s due date is statutory.
Late Election Relief Not Addressed by Congress
However, the AICPA notes in its comments to the IRS that the Service has on prior occasions provided taxpayers relief under section 9100 to make a late election regardless of an election’s due date being statutory. Further, the AICPA highlights that neither IRC Sec. 965(i) nor its legislative history address whether late election relief is available.
Additionally, the AICPA purports that refusing taxpayers the opportunity to obtain relief is “an unduly harsh result given the broad reach of IRC Sec. 965 to S corporation shareholders with different levels of sophistication.” Moreover, because the IRS takes the position that section 9100 relief is disallowed and taxpayers have no alternative means for obtaining relief for a late or incomplete election under IRC Sec. 965(i), “inequitable consequences could result that were not intended by Congress,” the AICPA cautions.
Notably, the AICPA also points out that unlike an election under IRC Sec. 965(i), the due date for filing a transfer agreement under IRC Sec. 965 (i)(2) is not prescribed by the statute. Thus, the IRS has absolute authority to provide relief to taxpayers who have filed a late or incomplete transfer agreement, according to the AICPA.
Tax Reform Administrative Relief
In addition to the question of IRS authority as it relates to providing the requested administrative relief, the AICPA also reasons that as a result of tax reform’s sweeping changes to the code taxpayers likely failed to properly file an election under IRC Sec. 965(i).
“Given the significant changes stemming from tax reform, it is likely that many taxpayers and their advisors, through reasonable cause, failed to properly file an election under section 965(i),” the AICPA said, adding that many shareholders filed their returns before the final rules were issued. “Due to the number of substantive changes between the proposed and final section 965 regulations, Treasury and the IRS should grant relief for shareholders to make an election under section 965(i) if those shareholders now have an increased tax liability under section 965.”
By Jessica Jeane, J.D.