The IRS has issued final regs on the ownership attribution rules under Code Sec. 958(b); that Code section was modified by the Tax Cuts and Jobs Act. Those regs adopt 2019 proposed regs. The final regs also expand the controlled foreign corporation (CFC) payee rule to apply to all amounts payable to a related foreign person that is a CFC that does not have any Code Sec. 958(a) U.S. shareholders.
Background—statutory framework.
Code Sec. 958 provides rules for determining direct, indirect, and constructive stock ownership. Under Code Sec. 958(a)(1), stock is considered owned by a person if it is owned directly or is owned indirectly through certain foreign entities under Code Sec. 958(a)(2).
Generally, Code Sec. 318 provides rules that attribute the ownership of stock to certain family members, between certain entities and their owners, and to holders of options to acquire stock. Code Sec. 318(a)(3) generally attributes stock owned by a person to a partnership, estate, trust, or corporation in which the person has an interest (so-called “downward attribution”).
Under Code Sec. 958(b), the stock ownership attribution rules under Code Sec. 318 apply, with certain modifications, to the extent that the effect is to treat (1) any U.S. person as a U.S. shareholder of a foreign corporation; (2) a person as a related person within the meaning of Code Sec. 954(d)(3); (3) the stock of a domestic corporation as owned by a U.S. shareholder of a controlled foreign corporation (CFC) for purposes of Code Sec. 956(c)(2); or (4) a foreign corporation as a CFC under Code Sec. 957.
As in effect before repeal, Code Sec. 958(b)(4) provided that Code Sec. 318(a)(3) was not to be applied so as to consider a U.S. person as owning stock owned by a person who is not a U.S. person (a “foreign person”). Effective for the last tax year of foreign corporations beginning before January 1, 2018, and each subsequent year of the foreign corporations, and for the tax years of U.S. shareholders in which or with which such tax years of the foreign corporations end, Code Sec. 958(b)(4) was repealed by section 14213 of the Tax Cuts and Jobs Act (TCJA, PL 115-97).
Code Sec. 267(a)(2) provides that, in the case of certain interest and expenses paid by a taxpayer to a related person, if an amount is not includible in the payee’s gross income until it is paid, the amount generally is not deductible by the taxpayer until the amount is includible in the gross income of the payee.
Code Sec. 267(a)(3)(B)(i) provides that in the case of any item payable to a CFC, a deduction is allowable to the payor with respect to the amount for any taxable year before the year in which paid only to the extent that an amount attributable to the item is includible during such prior taxable year in the gross income of a U.S. person who owns stock in such corporation under Code Sec. 958(a).
Code Sec. 863 and its regs provide rules for determining the source of certain items of gross income. Code Sec. 863(d) provides rules regarding gross income from space and ocean activities. Code Sec. 863(e) provides rules regarding gross income from international communications.
Code Sec. 1297(e) provides the rules used to measure a foreign corporation’s assets for purposes of determining whether it meets the asset test in Code Sec. 1297(a)(2) and is a passive foreign investment company (PFIC). If the foreign corporation is a CFC and is not a publicly traded corporation, when determining whether the average percentage of assets of the corporation that produce passive income is at least 50%, adjusted basis (rather than value) of the assets must be used. (Code Sec. 1297(e)(2))
Background—Not. 2018-13.
In 2018, the IRS issued Notice 2018-13, 2018-6 IRB 341. Notice 2018-13, Sec. 5.01, provided that the IRS had determined that, in light of the repeal of Code Sec. 958(b)(4), further study was necessary to determine whether it was appropriate for the source of income described in Code Sec. 863(d) and Code Sec. 863(e) to be determined by reference to the status of the recipient as a CFC. Accordingly, the Notice provided that, for purposes of applying the Code Sec. 863(d) and Code Sec. 863(e) regs, taxpayers could determine whether a foreign corporation was a CFC without regard to the repeal of Code Sec. 958(b)(4) pending further guidance
Background—proposed regs.
In 2019, the IRS issued proposed regs regarding the ownership attribution rules under Code Sec. 958(b) (“proposed regs”). See Proposed reliance regs on ownership attribution rules issued (10/02/2019).
The proposed regs provided in part:
- CFC payee rule. The proposed regs provided that an amount, other than interest, that is income of a related foreign person with respect to which the related foreign person is exempt from U.S. taxation on the amount owed pursuant to a treaty obligation of the U.S. is exempt from the application of Code Sec. 267(a)(3)(B)(i) if the related foreign person is a CFC that does not have any U.S. shareholders that owned (within the meaning of Code Sec. 958(a)) stock in the CFC. (Prop Reg §1.267(a)-3(c)(4)) Such U.S. shareholders are sometimes referred to as “Code Sec. 958(a) U.S. shareholders.”
- PFIC asset test. The proposed regs modified the definition of a CFC for purposes of the Code Sec. 1297(e) PFIC rules to disregard downward attribution from foreign persons. (Prop Reg §1.1297-1(d)(1)(iii)(A))
Background—PFIC proposed regs.
In July 2019, the IRS had published other proposed regs under Reg §1.1297-1 (the “PFIC proposed regs”). See Proposed regs provide guidance on PFIC ownership rules (07/11/2019) .
Final regs.
The final regs adopt the proposed regs with the modifications discussed below. (Preamble to TD 9908)
CFC payee rule. The final regs expand the CFC payee rule to apply to all amounts payable to a related foreign person that is a CFC that does not have any Code Sec. 958(a) U.S. shareholders. (Reg §1.267(a)-3(c)(4))
PFIC asset test. The IRS has decided to finalize Prop Reg §1.1297-1(d)(1)(iii)(A) as part of the Treasury Decision finalizing the PFIC proposed regulations. (Preamble to TD 9908)
Not. 2018-13, Sec. 5.01 is obsoleted.
Notice 2018-13, Sec. 5.01, is obsolete as of September 22, 2020. (Preamble to TD 9908)
Applicability dates.
The final regs generally apply on or after October 1, 2019. For tax years before tax years covered by the final regs, a taxpayer may generally apply the rules set forth in the final regs to the last tax year of a foreign corporation beginning before January 1, 2018, and each subsequent tax year of the foreign corporation, and to tax years of U.S. shareholders in which or with which such tax years of the foreign corporation end, provided that the taxpayer and U.S. persons that are related (within the meaning of Code Sec. 267 or Code Sec. 707) to the taxpayer consistently apply the relevant rule with respect to all foreign corporations. (Preamble to TD 9908)
Moreover, although Reg §1.958-2 applies to tax years of foreign corporations ending on or after October 1, 2019, and tax years of U.S. shareholders in which or with which such tax years of foreign corporations end, the same result applies before such date due to the effective date of the repeal of Code Sec. 958(b)(4). (Preamble to TD 9908)
To continue your research on the attribution rules for determining stock ownership in a CFC, see FTC 2d/FIN ¶O-2330.
Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!
