The IRS has released new proposed regulations on making and revoking certain foreign currency gain or loss elections. These new proposals withdraw 2017 proposed regs §1.954-2(g)(3)(iii) and (g)(4)(iii) and proposed §1.988-7(c) through (e) and repropose them with revisions. (Preamble to Prop Reg REG-111629-23, 8/19/2024).
Making an election under Section 954. Code Sec. 954(c)(1)(D) provides that foreign personal holding company income (“FPHCI”) includes the excess of foreign currency gains over foreign currency losses attributable to any Code Sec. 988 transactions.
Reg §1.954-2(g) provides controlling U.S. shareholders of a controlled foreign corporation (“CFC”) with two different elections with respect to computing a CFC’s FPHCI.
First, controlling U.S. shareholders could elect to exclude foreign currency gain or loss otherwise includable in the CFC’s FPHCI computation and instead include such foreign currency gain or loss in subpart F income (the §1.954-2(g)(3) election).
Second, controlling U.S. shareholders could (with certain exceptions) elect to treat as FPHCI all foreign currency gains or losses attributable to any Section 988 transaction and any Section 1256 contract that (but for Section 988(c)(1)(D)) would be a Section 988 transaction (the §1.954-2(g)(4) election).
Controlling U.S. shareholders make either election on behalf of the CFC by filing a statement clearly indicating that the election has been made with their original income tax return for the tax year of the U.S. shareholders ending with or within the tax year of the CFC for which the election is made.
Revoking an election under Section 954. Under Reg §1.954-2(g)(3)(iii) and Reg §1.954-2(g)(4)(iii), a CFC’s controlling U.S. shareholders could revoke a §1.954-2(g) election by or with the consent of the Commissioner.
In 2017, the IRS issued proposed revisions to the rules for revoking §1.954-2(g) elections (NPRM REG-119514-15, 12/19/2017).
Note. Under the 2017 proposals, taxpayers could have made a §1.988-7 election after the end of the year to which the election would apply, giving the taxpayer the ability to determine with certainty whether the election would be beneficial for that year.
Under the 2017 proposed regulations, a CFC’s controlling U.S. shareholders could revoke the CFC’s §1.954-2(g) election at any time. In addition, the 2017 proposals provided that if the election was revoked, a new election couldn’t be made for six tax years following the year in which the previous election was revoked, and the subsequent election couldn’t be revoked until six tax years following the year in which the subsequent election was made.
Under the 2017 proposed regs, a CFC’s controlling U.S. shareholders could revoke a §1.954-2(g) election by filing a statement clearly indicating that the election was revoked with their original or amended income tax returns for the tax year of the U.S. shareholders ending with or within the tax year of the CFC for which the election is revoked.
The 2017 proposed regulations permitted taxpayers to rely on proposed §1.954-2(g)(3)(iii) and (g)(4)(iii) to revoke §1.954-2(g) elections for tax years ending on or after December 19, 2017, subject to a consistency requirement.
New 2024 proposals. The IRS received comments about the 2017 proposals from practitioners who noted that the language of §1.954-2(g)(3)(ii) is inconsistent with other CFC filing requirements, which generally must be filed by U.S. shareholders for the tax year of a CFC that ends with or within the U.S. shareholders’ tax year.
In response to those comments, the IRS has issued a new set of proposed regs (NPRM REG-111629-23).
These new proposals would revise Reg §1.954-2(g)(3)(ii) to provide that controlling U.S. shareholders could make a §1.954-2(g) election on behalf of a CFC by filing a statement, clearly indicating that the election has been made, with their original income tax returns for the tax years of the controlling U.S. shareholders in which or with which the tax year of the CFC ends.
Additionally, these proposed regulations withdraw 2017 proposed §1.954-2(g)(3)(iii) and (g)(4)(iii). The IRS’ new proposals would provide that controlling U.S. shareholders revoke a §1.954-2(g) election on behalf of a CFC by filing a statement that clearly indicates the election has been revoked with their original income tax returns for the tax years of the controlling U.S. shareholders in which or with which the tax year of the CFC ends.
Under new Prop Reg §1.954-2(g)(3)(iii) and Prop Reg §1.954-2(g)(4)(iii), controlling U.S. shareholders would be precluded from revoking a §1.954-2(g) election made on behalf of a CFC (including an initial election) until six years after the year in which the election was made. Additionally, the new proposals would provide that if a CFC’s controlling U.S. shareholders revoke a §1.954-2(g) election, they may not make a new §1.954-2(g) election on behalf of the CFC until six years after the year in which the previous election was revoked.
According to the IRS, this change to the revocation rules “would limit taxpayers from opportunistically making or revoking a §1.954-2(g) election.” For example, this change would limit taxpayers’ ability to selectively recognize certain foreign currency losses.
The Treasury Department and the IRS request comments on this aspect of re-Proposed Reg 1.954-2(g)(3)(iii) and re-Proposed Reg 1.954-2(g)(4)(iii).
Other proposals contained in this NPRM include changes to 2017 proposed regs §1.988-7(c) through §1.988-7(e).
For example, new Proposed Reg §1.988-7(d) would provide that the election made pursuant to proposed §1.988-7(c) is subject to rules like those imposed on Code Sec. 475 elections. The election would be effective for the tax year for which it is made and all subsequent years. The new proposal would provide that a taxpayer may revoke the election only with the IRS’ consent.
Applicability date. Generally, these proposed regulations would apply to tax years ending on or after the date final regulations are published in the Federal Register (the “finalization date”).
Reliance. Taxpayers can rely on these proposed regulations and the treatment of certain elections, or revocation of elections, made in earlier periods as follows:
For tax years ending before the 2024 proposals are finalized, taxpayers may rely on Proposed Reg 1.954-2(g)(3)(ii) and re-Proposed Reg 1.954-2(g)(3)(iii) and re-Proposed Reg 1.954-2(g)(4)(iii) in making and revoking §1.954-2(g) elections, provided that they consistently apply proposed §1.954-2(g)(3)(ii) and (iii) and (g)(4)(iii) to such tax years.
For elections made before the 2024 proposals were issued, the IRS generally will respect elections or revocations made in compliance with earlier guidance as having been timely made for the relevant tax year. As of August 19, 2024, taxpayers may no longer rely on 2017 proposed §1.954-2(g)(3)(iii) and (g)(4)(iii) when making elections.
For tax years ending before the 2024 proposals are finalized, taxpayers may rely on proposed §1.988-7(c) and (d) in making and revoking the §1.988-7 election, if they consistently apply proposed §1.988-7(c) and (d) to such tax years.
In addition, the IRS will respect elections or revocations properly made under previous guidance before the 2024 proposals were issued. However, as of August 19, 2024, taxpayers may no longer rely on 2017 proposed §1.988-7(c) and (d).
2017 proposals withdrawn. 2017 Proposed Reg §1.954-2(g)(3)(iii) and Proposed Reg §1.954-2(g)(4)(iii) and Proposed Reg §1.988-7(c) through Proposed Reg §1.988-7(e), contained in NPRM REG-119514-15 are withdrawn.
Comments requested. Written or electronic comments and requests for a public hearing must be received by October 21, 2024. The IRS strongly encourages commenters to submit public comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-111629-23) by following the online instructions for submitting comments.
For more information about CFC shareholders’ election to characterize foreign currency gains as subpart F income, see Checkpoint’s Federal Tax Coordinator ¶ O-2573.
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