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Tax Cuts and Jobs Act

IRS delays due date for Code Sec. 965 basis election until after finalization of proposed regs

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Notice 2018-78, 2018-42 IRB

In a Notice, IRS has announced that the due date for the basis election described in proposed Code Sec. 965 regs published in August, that would have required taxpayers to make a binding election prior to the issuance of final regs, will be extended to 90 days after the publication of the final regs, and elections made in the interim will be revocable. IRS also announced that it will revise the rules set out in the proposed regs concerning the determination of the aggregate foreign cash position and postponed certain Code Sec. 965-related due dates for taxpayers affected by Hurricane Florence.

Background and prior guidance. Code Sec. 965 was added to the Code by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). Code Sec. 965 generally requires U.S. shareholders to pay a “transition tax” on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S.

Shortly after Code Sec. 965 went into effect, IRS issued a series of Notices, including: Notice 2018-7, 2018-4 IRB 317 (see “IRS issues guidance on deemed repatriation rules in Tax Cuts and Jobs Act“); Notice 2018-13, 2018-6 IRB 341 (see “IRS guidance on Tax Act’s deemed repatriation rules and constructive ownership changes“); and Notice 2018-26, 2018-16 IRB (see “IRS outlines regs to be issued on (deemed repatriation) transition tax“).

In August 2018, IRS issued proposed regs under Code Sec. 965, which generally mirrored the rules that were previewed by the Notices described above. For more details on the proposed regs, see “Prop regs on Sec. 965 transition tax—statutory background & overview,”  “Prop regs set out elections related to Sec. 965 transition tax,” and “Prop regs on Code Sec. 965 transition tax: Code Sec. 965(c) deduction, disregarded transactions, and FTCs.”

New Notice. In Notice 2018-78, IRS described a number of changes that it intends to make to the proposed regs before they are finalized.

…Extended due date for basis election. Prop Reg §1.965-2(f)(2) would allow a “section 958(a) U.S. shareholder” to elect to make certain basis adjustments with respect to each deferred foreign income corporation (DFIC) and each E&P deficit foreign corporation (basis election). Under Prop Reg §1.965-2(f)(2)(iii)(B)(1)(i), the basis election would generally have to be made no later than the due date (taking into account extensions, if any) for the section 958(a) U.S. shareholder’s return for the first tax year that includes the last day of the last tax year of a DFIC or E&P deficit foreign corporation of the section 958(a) U.S. shareholder that begins before Jan. 1, 2018. If the due date referred to in Prop Reg §1.965-2(f)(2)(iii)(B)(1)(i) occurred before Sept. 10, 2018, Prop Reg §1.965-2(f)(2)(iii)(B)(1)(ii) would provide a transition rule under which the basis election would have to be made by Oct. 9, 2018.

Noting that it would to “too onerous” to require taxpayers to make a binding basis election before the proposed regs are finalized, IRS stated that, when final Code Sec. 965 regs are published, they will provide that the transition rule will apply with respect to returns due (determined with regard to any extension) before the date that is 90 days after the date that the final regs are published, and that in such cases the basis election must be made no later than 90 days after the publication of the final regs.

In addition, IRS stated that the final regs will provide that if a basis election was made on or before the date the final regs are published, the basis election may be revoked no later than 90 days after the publication of the final regs. Relevant tax returns must be filed consistently with an election that has been made and not revoked. (Notice 2018-78, Section 2)

Determining aggregate foreign cash position for consolidated groups.  Prop Reg §1.965-3(b) would allow a section 958(a) U.S. shareholder to disregard certain assets for purposes of determining its “aggregate foreign cash position” (as defined in Prop Reg §1.965-1(f)(8)). Prop Reg §1.965-8(e) would provide that all members of a consolidated group that are section 958(a) U.S. shareholders of a “specified foreign corporation” (as defined in Prop Reg §1.965-1(f)(45)) are treated as a single section 958(a) U.S. shareholder for certain enumerated purposes that do not include Prop Reg §1.965-3(b).

In a description of the changes in Notice 2018-78, IRS stated that the rules set out in the proposed regs concerning the determination of the aggregate foreign cash position of a U.S. shareholder that is a member of a consolidated group were inconsistent with the more taxpayer-favorable rule announced in Notice 2018-7, and that the final regs would be revised to be more consistent with the Notice.

Accordingly, to prevent the overstatement of the aggregate foreign cash position, the final regs will provide that all members of a consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are also treated as a single section 958(a) U.S. shareholder for purposes of Prop Reg §1.965-3(b). (Notice 2018-78, Section 3)

Hurricane Florence relief. IRS has provided has provided a postponement for “affected taxpayers” (below) to make elections with respect to Code Sec. 965 and file transfer agreements required to be filed under the proposed regs. Affected taxpayers for whom elections with respect to Code Sec. 965 or transfer agreements are due on or after Sept. 7, 2018, and before Jan. 31, 2019, are granted additional time to file such elections or transfer agreements until Jan. 31, 2019.relief, by postponing certain tax filing and payment deadlines, to victims of Hurricane Florence.

An affected taxpayer is any taxpayer whose principal residence or principal place of business was located in a Hurricane Florence covered disaster area, as defined in Reg. §301.7508A-1(d)(2), or whose records necessary to meet its obligation were maintained in such a covered disaster area, or in the case of a transfer agreement, a taxpayer who intends to enter into a transfer agreement with such a taxpayer.

Taxpayers who believe they are entitled to this relief should mark “Hurricane Florence” on the top of the relevant Code Sec. 965 election statement or transfer agreement, and, in the case of a transfer agreement, a notation of which party to the agreement is an affected taxpayer whose principal residence or principal place of business was located in a Hurricane Florence covered disaster area, or whose records necessary to meet its filing obligation were maintained in such an area. (Notice 2018-78, Section 4)

References: For the treatment of pre-2018 deferred foreign income treated as subpart F income under Code Sec. 965, see FTC 2d/FIN ¶ O-2700 et seq.; United States Tax Reporter ¶9654.

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