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Tax Cuts and Jobs Act

Prop regs on Sec. 965 deemed repatriation/transition tax—Statutory background

Preamble to Prop Reg REG-104226-18, 8/1/2018; Prop Reg § 1.962-1Prop Reg § 1.962-2,Prop Reg § 1.965-1, Prop Reg § 1.965-2, Prop Reg § 1.965-3, Prop Reg § 1.965-4, Prop Reg § 1.965-5, Prop Reg § 1.965-6, Prop Reg § 1.965-7, Prop Reg § 1.965-8, Prop Reg § 1.965-9, Prop Reg § 1.986(c)-1

IRS Notice of proposed rulemaking: Guidance Regarding the Transition Tax Under Section 965 and Related Provisions (8/1/2018)

IRS has issued highly anticipated proposed regs under Code Sec. 965—the transition tax provision added to the Code by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). This article provides a statutory background of Code Sec. 965, as well as other relevant provisions.

As described by IRS, the proposed regs address “open questions regarding the application” of Code Sec. 965. They provide rules related to Code Sec. 965 described in the three notices issued since Dec. 22, 2017, with certain modifications, as well as additional guidance related to Code Sec. 965.

Specifically, the proposed guidance provides general rules and definitions, as well as rules related to the determination and treatment of Code Sec. 965(c) deductions, rules that would disregard certain transactions in connection with Code Sec. 965, rules related to foreign tax credits, rules regarding elections and payments, rules regarding the application of the section 965 regulations to affiliated groups, including consolidated groups, rules on dates of applicability, rules relating to Code Sec. 962 elections, and rules regarding the application of Code Sec. 986(c) in connection with Code Sec. 965.

For more details on the proposed regs, see ” 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.”

Background—Code Sec. 965Code 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.

Checkmark Observation:  The TCJA generally provides for a shift from the pre-2018 “worldwide” tax system to a “participation exemption system.” For more details, see 2017 Tax Reform: Checkpoint Special Study on foreign income, foreign persons tax changes in the “Tax Cuts and Jobs Act” (12/28/2017). Under the old rules, U.S. taxpayers were generally taxed on all income whether earned in the U.S. or abroad, but foreign income earned by a foreign subsidiary of a U.S. corporation would not be subject to U.S. tax on that income until it was “repatriated” to the U.S. via dividend. The transition tax effectively bridges the old rules with the new by taxing certain previously untaxed foreign income.

Treatment of “accumulated post-1986 income” as subpart F income.  Under Code Sec. 965(a), for the last tax year of a deferred foreign income corporation (DFIC; defined below) that begins before Jan. 1, 2018 (the “inclusion year”), the subpart F income of the corporation is increased by its accumulated “post-’86 deferred foreign income” measured as of either Nov. 2, 2017, or Dec. 31, 2017, whichever is greater (the “section 965(a) earnings amount”).

U.S. shareholder’s Section 965(a) inclusion.  If a taxpayer is a U.S. shareholder with respect to at least one DFIC and at least one “E&P [earnings and profits] deficit foreign corporation” (defined below), then the portion of the section 965(a) earnings amount which would otherwise be taken into account under Code Sec. 951(a)(1) by the shareholder with respect to each DFIC is reduced by the amount of such shareholder’s “aggregate foreign E&P deficit” (defined below) allocated to such DFIC. The portion of the section 965(a) earnings amount that is taken into account under Code Sec. 951(a)(1) by a U.S. shareholder, after this reduction (and, if applicable, the second reduction under Code Sec. 965(b)(5), described below), is referred to as the “section 965(a) inclusion amount.”

Allocation of “aggregate foreign E&P deficit.”  The aggregate foreign E&P deficit of any U.S. shareholder is allocated to each DFIC of the shareholder in an amount that bears the same proportion to such aggregate as (i) the shareholder’s pro rata share of the section 965(a) earnings amount of the DFIC bears to (ii) the aggregate of the shareholder’s pro rata shares of the section 965(a) earnings amounts of all DFICs of the shareholder. (Code Sec. 965(b)(2))

“Aggregate foreign E&P deficit” means, with respect to any U.S. shareholder, the lesser of (i) the aggregate of the shareholder’s pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of the shareholder, or (ii) the aggregate of the shareholder’s pro rata shares of the section 965(a) earnings amounts of all DFICs of the shareholder. (Code Sec. 965(b)(3)(A)(i))

“E&P deficit foreign corporation” means, with respect to any taxpayer, any specified foreign corporation (as defined below) with respect to which the taxpayer is a U.S. shareholder, if, as of Nov. 2, 2017, (i) the specified foreign corporation had a deficit in post-’86 E&P (as defined below), (ii) the corporation was a “specified foreign corporation,” and (iii) the taxpayer was a U.S. shareholder of the corporation. (Code Sec. 965(b)(3)(B))

“Specified E&P deficit” means, with respect to an E&P deficit foreign corporation, the amount of the E&P deficit foreign corporation’s deficit in post-1986 earnings and profits as of Nov. 2, 2017. (Code Sec. 965(b)(3)(C))

For purposes of applying Code Sec. 959 in any tax year beginning with the inclusion year, with respect to any U.S. shareholder of a DFIC, an amount equal to the reduction in the shareholder’s pro rata share of the section 965(a) earnings amount of the DFIC by reason of the aggregate foreign E&P deficit allocated to such DFIC is treated as an amount which was included in the gross income of such shareholder under Code Sec. 951(a). (Code Sec. 965(b)(4)(A)) With respect to any tax year beginning with the inclusion year, a U.S. shareholder’s pro rata share of the E&P of any E&P deficit foreign corporation is increased by the amount of the specified E&P deficit of the E&P deficit foreign corporation taken into account by the shareholder, and, for purposes of Code Sec. 952, the increase is attributable to the same activity to which the deficit taken into account was attributable. (Code Sec. 965(b)(4)(B))

Aggregate unused E&P deficit.  Under Code Sec. 965(b)(5), in the case of any affiliated group which includes at least one “E&P net surplus shareholder” and one “E&P net deficit shareholder” (both defined below), the amount which would (but for Code Sec. 965(b)(5)) be taken into account under Code Sec. 951(a)(1) by reason of Code Sec. 965(a) by each E&P net surplus shareholder is reduced (but not below zero) by such shareholder’s applicable share of the affiliated group’s aggregate unused E&P deficit.

“E&P net surplus shareholder” means any U.S. shareholder which would (but for Code Sec. 965(b)(5)) take into account a section 965(a) inclusion amount greater than zero. (Code Sec. 965(b)(5)(B))

“E&P net deficit shareholder” means any U.S. shareholder if (i) the aggregate foreign E&P deficit with respect to such shareholder (as defined in Code Sec. 965(b)(3)(A) but without regard to Code Sec. 965(b)(3)(A)(i)(II)) exceeds (ii) the amount that would (but for Code Sec. 965(b)(5)) be taken into account by such shareholder under Code Sec. 951(a)(1) by reason of section 965(a) (the excess, the “excess aggregate foreign E&P deficit”). (Code Sec. 965(b)(5)(C))

“Applicable share” means, with respect to any E&P net surplus shareholder in any affiliated group, the amount which bears the same proportion to the group’s aggregate unused E&P deficit as (i) the product of (A) the shareholder’s group ownership percentage, multiplied by (B) the section 965(a) inclusion amount which would otherwise be taken into account by a U.S. shareholder, bears to (ii) the aggregate amount determined under clause (i) with respect to all E&P net surplus shareholders in the group. (Code Sec. 965(b)(5)(E))

“Aggregate unused E&P deficit” means, with respect to any affiliated group, the lesser of (i) the sum of the excess aggregate foreign E&P deficits determined with respect to each E&P net deficit shareholder in such affiliated group, or (ii) with respect to all E&P net surplus shareholders in the group, the aggregate of the product of (A) the shareholder’s group ownership percentage, multiplied by (B) the amount which would (but for Code Sec. 965(b)(5)) be taken into account under Code Sec. 951(a)(1) by reason of Code Sec. 965(a) by the shareholder. (Code Sec. 965(b)(5)(D))

“Participation exemption.”  Under Code Sec. 965(c)(1), a U.S. shareholder of a DFIC that is required to include a section 965(a) inclusion amount in income may deduct, in the tax year of the inclusion amount, a “section 965(c) deduction amount” equal to the sum of (i) the shareholder’s 8% rate equivalent percentage (as defined in Code Sec. 965(c)(2)(A)) of the excess (if any) of (A) the section 965(a) inclusion amount, over (B) the amount of such shareholder’s “aggregate foreign cash position” (defined below), plus (ii) the shareholder’s 15.5% rate equivalent percentage (as defined in Code Sec. 965(c)(2)(B)) of so much of the U.S. shareholder’s aggregate foreign cash position as does not exceed the section 965(a) inclusion amount.

“Aggregate foreign cash position” means, with respect to any U.S. shareholder, the greater of (i) the aggregate of the shareholder’s pro rata share of the cash position of each specified foreign corporation of the shareholder determined as of the close of the last tax year of the specified foreign corporation that begins before Jan. 1, 2018, or (ii) one half of the sum of (A) the aggregate described in clause (i) determined as of the close of the last tax year of each specified foreign corporation that ends before Nov. 2, 2017, plus (B) the aggregate described in clause (i) determined as of the close of the tax year of each specified foreign corporation which precedes the tax year referred to in subclause (A). Each date referred to in the preceding sentence is referred to as a “cash measurement date.”

The cash position of any specified foreign corporation is the sum of (i) cash held by the corporation, (ii) the net accounts receivable of the corporation, and (iii) the fair market value of the certain “cash equivalent” assets held by the corporation including personal property which is of a type that is actively traded and for which there is an established financial market (actively traded property); commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government; any foreign currency; any obligation with a term of less than one year (short-term obligation); and other “economically equivalent” assets. However, the amount of net accounts receivable, actively traded property, and short-term obligations aren’t taken into account by a U.S. shareholder in determining its aggregate foreign cash position to the extent that the shareholder demonstrates to IRS that these amounts are taken into account by the shareholder with respect to another specified foreign corporation. (Code Sec. 965(c)(3)(D))

An entity (other than a corporation) will be treated as a “specified foreign corporation” of a U.S. shareholder for purposes of determining the shareholder’s aggregate foreign cash position if (i) any interest in the entity is held by a specified foreign corporation of the shareholder (determined after application of the rule in this sentence) and (ii) the entity, if it were a foreign corporation, would be a specified foreign corporation of the shareholder. (Code Sec. 965(c)(3)(E)

Under Code Sec. 965(c)(3)(F), if IRS determines that a principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under Code Sec. 965(c), the transaction shall be disregarded for purposes of that section.

Additional definitions. For Code Sec. 965 purposes, a DFIC is, with respect to any U.S. shareholder, any specified foreign corporation of the shareholder that has accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. (Code Sec. 965(d)(1))

“Accumulated post-1986 deferred foreign income” means the post-1986 E&P of the specified foreign corporation except to the extent such E&P (i) are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the U.S. and subject to tax under chapter 1, or (ii) in the case of a controlled foreign corporation (CFC), if distributed, would be excluded from the gross income of a U.S. shareholder under Code Sec. 959 as “previously taxed E&P.” (Code Sec. 965(d)(2))

“Post-1986 earnings and profits” means the E&P of the foreign corporation (computed in accordance with Code Sec. 964(a) and Code Sec. 986, and by taking into account only periods when the foreign corporation was a specified foreign corporation) accumulated in tax years beginning after Dec. 31, 1986, and determined (i) as of the E&P measurement date that is applicable with respect to such foreign corporation, and (ii) without diminution by reason of dividends distributed during the last tax year of the foreign corporation that begins before Jan. 1, 2018, other than dividends distributed to another specified foreign corporation. (Code Sec. 965(d)(3))

A “specified foreign corporation” means (i) any CFC (regardless of whether there is a domestic corporate shareholder) and (ii) any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder (“10% corporation”). (Code Sec. 965(e)(1)) However, if a passive foreign investment company (PFIC) under Code Sec. 1297 with respect to the shareholder is not a CFC, then such corporation is not a specified foreign corporation. (Code Sec. 965(e)(3)) An S corporation is treated as a partnership for purposes of Code Sec. 951 through Code Sec. 965 (Code Sec. 1373) and, for purposes of Code Sec. 951 and Code Sec. 961, a 10% corporation is treated as a CFC solely for purposes of taking into account the subpart F income of such corporation under Code Sec. 965(a) (and for purposes of determining a U.S. shareholder’s pro rata share of any amount with respect to a specified foreign corporation under Code Sec. 965(f)). (Code Sec. 965(e)(2))

For tax years of foreign corporations beginning before Jan. 1, 2018, under Code Sec. 951(b), a U.S. shareholder is a U.S. person (within the meaning of Code Sec. 957(c)) that owns or is considered as owning 10% or more of the total combined voting power of all classes of stock entitled to vote of the stock of a foreign corporation.

U.S. shareholder’s “pro rata share.”  Under Code Sec. 965(f)(1), the determination of any U.S. shareholder’s pro rata share of any amount with respect to any specified foreign corporation is determined under rules similar to the rules of Code Sec. 951(a)(2) by treating the amount in the same manner as subpart F income (and by treating the specified foreign corporation as a CFC).

Pass-through entities. Code Sec. 965(f)(2) provides that the portion that is included in the income of a U.S. shareholder under Code Sec. 951(a)(1) by reason of Code Sec. 965(a) that is equal to the section 965(c) deduction amount by reason of the inclusion is treated as income exempt from tax for purposes of Code Sec. 705(a)(1)(B) and Code Sec. 1367(a)(1)(A) but not treated as income exempt from tax for purposes of determining whether an adjustment is made to an accumulated adjustments account of an S corporation under Code Sec. 1368(e)(1)(A).

Interaction with foreign tax credit.  No credit is allowed under Code Sec. 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a section 965(c) deduction is allowed. The term “applicable percentage” means the amount (expressed as a percentage) equal to the sum of the following two amounts:

  1. 0.771 multiplied by the ratio of (A) the section 965(a) inclusion amount in excess of the U.S. shareholder’s aggregate foreign cash position divided by (B) the section 965(a) inclusion amount, and
  2. 0.557 multiplied by the ratio of (A) the amount of the section 965(a) inclusion amount equal to the United States shareholder’s aggregate cash position, divided by (B) the section 965(a) inclusion amount.

Further, no deduction is allowed for any tax for which credit is not allowable under Code Sec. 901 by reason of Code Sec. 965(g)(1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).

With respect to the taxes treated as paid or accrued by a domestic corporation with respect to the section 965(a) inclusion amount, Code Sec. 78 applies only to so much of such taxes as bears the same proportion to the amount of the taxes as (i) the excess of (A) the section 965(a) inclusion amount, over (B) the section 965(c) deduction amount with respect to such amount, bears to (ii) the section 965(a) inclusion amount.

Sec. 965(h) election to pay the Code Sec. 965 net tax liability in installments.  A U.S. shareholder of a DFIC may elect to pay, in eight installments, the “net tax liability” under Code Sec. 965, defined as the excess (if any) of (i) the taxpayer’s net income tax for the tax year in which an amount is included in the gross income of the shareholder under Code Sec. 951(a)(1) by reason of Code Sec. 965, over (ii) the taxpayer’s net income tax for such tax year determined (A) without regard to Code Sec. 965, and (B) without regard to any income or deduction properly attributable to a dividend received by the shareholder from any DFIC. (Code Sec. 965(h)(6)) For this purpose, the term “net income tax” means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A. (Code Sec. 965(h)(6)(B))

If a taxpayer makes an election under Code Sec. 965(h), the first installment is due on the due date (without regard to extensions) for the return of tax for the inclusion year (Code Sec. 965(h)(2)) and each successive installment is due on the due date (without regard to extensions) for the return of tax for the tax year following the tax year for which the previous installment payment was made.

If there is an addition to tax for failure to timely pay an installment required under Code Sec. 965(h), a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, the unpaid portion of the remaining installments will be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). (Code Sec. 965(h)(3)) However, the preceding sentence does not apply in the case of the sale of substantially all the assets of a taxpayer to a buyer if the buyer enters into an agreement with IRS under which the buyer is liable for the remaining installments due under Code Sec. 965(h) in the same manner as if the buyer were the taxpayer.

If a taxpayer has made an election under Code Sec. 965(h), and subsequently, a deficiency is assessed with respect to the taxpayer’s net tax liability for purposes of Code Sec. 965(h), then the amount of the deficiency will be prorated among the installments. (Code Sec. 965(h)(4) The part of the deficiency prorated to any installment the date for payment of which has not arrived will be collected at the same time as, and as part of, such installment. The part of the deficiency prorated to any installment the date for payment of which has arrived must be paid upon notice and demand from IRS. However, the proration rule does not apply if the deficiency is due to negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax.

Sec. 965(i) deferral election by S corporation shareholder.  In the case of any S corporation that is a U.S. shareholder of a DFIC, each shareholder of the S corporation may elect to defer payment of the shareholder’s net tax liability under Code Sec. 965 with respect to the S corporation until the shareholder’s tax year which includes the triggering event with respect to such liability

Any net tax liability, payment of which is deferred under Code Sec. 965(i)(1), will be assessed on the return of tax as an addition to tax for the shareholder’s tax year which includes the triggering event with respect to such liability, including if the corporation ceases to be an S corporation, a liquidation or sale of substantially all the assets of the S corporation (including in a title 11 or similar case), a cessation of business by the S corporation, the S corporation ceases to exist, or any similar circumstance, or a transfer of any share of stock in the S corporation by the taxpayer (including by reason of death, or otherwise). In the case of a transfer of less than all of the taxpayer’s shares of stock in the S corporation, the transfer is only a triggering event with respect to the portion of the taxpayer’s net tax liability under Code Sec. 965 with respect to the S corporation as is properly allocable to the transferred stock. (Code Sec. 965(i)(2)(B)) Moreover, a transfer of stock in the S corporation is not a triggering event if the transferee enters into an agreement with IRS under which the transferee is liable for the net tax liability under Code Sec. 965 with respect to the stock in the same manner as if such transferee were the taxpayer. (Code Sec. 965(i)(2)(C))

If a triggering event occurs, Code Sec. 965(i)(4) permits a taxpayer to make an election under Code Sec. 965(h) with respect to the liability to which the Code Sec. 965(i) election applied by the due date for the return of tax for the tax year in which the triggering event occurred, and the first installment under Code Sec. 965(h) must also be paid by the due date (without regard to extensions) for the return for the tax year of the triggering event. However, the election may only be made with IRS’s consent in the case of a triggering event that is a liquidation or sale of substantially all of the assets of the S corporation. (Code Sec. 965(i)(4)(D))

Code Sec. 965(i)(3) defines a shareholder’s net tax liability under Code Sec. 965 with respect to any S corporation as the net tax liability under Code Sec. 965 which would be determined under Code Sec. 965(h)(6) if the only amounts taken into account by the shareholder under Code Sec. 951(a)(1) by reason of Code Sec. 965 were allocations from the S corporation. If any shareholder of an S corporation makes an election under Code Sec. 965(i) to defer payment of its net tax liability under Code Sec. 965 with respect to an S corporation, the S corporation is jointly and severally liable for the deferred payment and any penalty, addition to tax, or additional amount attributable thereto. (Code Sec. 965(i)(5))

Code Sec. 965(i)(6) provides that any limitation on the time period for the collection of a liability deferred under Code Sec. 965(i) is not treated as beginning before the date of the triggering event with respect to such liability. Code Sec.  965(i)(7) requires any shareholder of an S corporation that makes an election under Code Sec. 965(i) to report the amount of the shareholder’s “deferred net tax liability” on the shareholder’s return of tax for the tax year for which the election is made and on the return of tax for each taxable year thereafter until the amount has been fully assessed.

“Deferred net tax liability” means the amount of net tax liability under Code Sec. 965 payment of which has been deferred under Code Sec. 965(i) and which has not been assessed on a return of tax for any prior tax year. (Code Sec.  965(i)(7)(B)) In the case of any failure to report any amount required to be reported pursuant to Code Sec. 965(i)(7) with respect to any tax year before the due date for the return of tax for the tax year, there will be assessed on the return as an addition to tax 5% of such amount. (Code Sec. 965(i)(7)(C))

Sec. 965(m) election concerning inclusion of amounts under Code Sec. 965 and related provisions.  Under Code Sec. 965(m)(1)(B), a real estate investment trust (REIT) that is a U.S. shareholder of a DFIC may elect, in lieu of including any amount required to be taken into account under Code Sec. 951(a)(1) in gross income (for purposes of the computation of REIT taxable income under Code Sec. 857(b)), to include such amount in gross income in eight installments.

If this election is made, the REIT’s aggregate Code Sec. 965(c) deduction must be determined without regard to the election and allocated to each tax year for which an installment is included in the same proportion as the amount of the installment included in gross income. (Code Sec. 965(m)(2)(B)(i)(II)) Furthermore, the REIT may not make a Code Sec. 965(h) election for any tax year for which an installment is included. (Code Sec. 965(m)(2)(B)(i)(III)) Under Code Sec. 965(m)(2)(B)(ii), if there is a liquidation or sale of substantially all the assets of the REIT (including in a title 11 or similar case), a cessation of business by the trust, or any similar circumstance, then any amount not yet included in gross income will be included in gross income as of the day before the date of the event, and the unpaid portion of any tax liability with respect to the inclusion will be due on the date of the event (or in the case of a title 11 or similar case, the day before the petition is filed).

Any amount required to be taken into account under Code Sec. 951(a)(1) by reason of Code Sec. 965 by a REIT that is a U.S. shareholder of a DFIC is not taken into account as gross income of the REIT for purposes of applying paragraphs (2) and (3) of Code Sec. 856(c) to any tax year for which the amount is taken into account under section 951(a)(1). (Code Sec. 965(m)(1)(A))

Sec. 965(n) election to not apply net operating loss (NOL) deduction.  Under Code Sec. 965(n)(1), a U.S. shareholder of a DFIC may make an election pursuant to which the amount described in Code Sec. 965(n)(2) isn’t taken into account (i) in determining the amount of the shareholder’s NOL deduction under Code Sec. 172 for the tax year, or (ii) in determining the amount of taxable income for the tax year which may be reduced by NOL carryovers or carrybacks to the tax year under Code Sec. 172.

The amount described in Code Sec. 965(n)(2) is the sum of (i) the amount required to be taken into account under Code Sec. 951(a)(1) by reason of Code Sec. 965 (determined after the application of Code Sec. 965(c)), plus (ii) in the case of a domestic corporation which chooses to have the benefits of subpart A of part III of subchapter N for the tax year, the taxes deemed to be paid by the corporation under Code Sec. 960(a) and Code Sec. 960(b) for the tax year with respect to the amount described in Code Sec. 965(n)(2)(A) which are treated as a dividend under Code Sec. 78.

Recapture—expatriated entities.   If a Code Sec. 965(c) deduction is allowed to a U.S. shareholder and the shareholder first becomes an expatriated entity (as defined under Code Sec. 7874(a)(2), except not including an entity if the surrogate foreign corporation with respect to it is treated as a domestic corporation Code Sec. section 7874(b)) at any time during the 10-year period beginning on the date of the TCJA (with respect to a surrogate foreign corporation (as defined under Code Sec. 7874(a)(2)(B)) that first becomes a surrogate foreign corporation during such period), the tax imposed under chapter 1 will be increased for the first tax year in which such taxpayer becomes an expatriated entity by an amount equal to 35% of the amount of the Code Sec. 965(c) deduction, and no credits will be allowed against such increase in tax. (Code Sec. 965(l))

Background—other related Code, etc. provisions.  As amended by the TCJA, Code Sec. 962 provides that an individual who is a U.S. shareholder may elect to have the tax imposed under chapter 1 on amounts that are included in the individual’s gross income under Code Sec. 951(a) be an amount equal to the tax that would be imposed under Code Sec. 11 if the amounts were received by a domestic corporation. In addition, if an election is made under Code Sec. 962, the amounts included in the individual’s gross income under Code Sec. 951(a) are treated as if they were received by a domestic corporation for purposes of applying Code Sec. 960 (relating to foreign tax credits). (Reg. §1.962-1(a)) However, the taxable income determined for purposes of applying Code Sec. 11 is not reduced by any deduction of the U.S. shareholder. (Reg. §1.962-1(b)(1)(i)) An election under Code Sec. 962 does not affect tax imposed under other chapters, including under chapter 2A.

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). Under Code Sec. 958(b)Code Sec. 318 applies, with certain modifications, to the extent that the effect is to treat any U.S. person as a U.S. shareholder within the meaning of Code Sec. 951(b), to treat a person as a related person within the meaning of Code Sec. 954(d)(3), to treat the stock of a domestic corporation as owned by a U.S. shareholder of a CFC for purposes of Code Sec. 956(c)(2), or to treat a foreign corporation as a CFC under Code Sec. 957.

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) provides specific rules that attribute the ownership of stock “downward” from partners, beneficiaries, owners, and shareholders to partnerships, estates, trusts, and corporations.

Effective for the last tax year of foreign corporations beginning before Jan. 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 taxable years of the foreign corporations end, the TCJA repeals Code Sec. 958(b)(4), which, prior to its repeal, provided that Code Sec. 318(a)(3)‘s downward attribution rules were not to be applied so as to consider a U.S. person as owning stock that is owned by a person who is not a U.S. person.

The TCJA also suspended miscellaneous itemized deductions under Code Sec. 67(a) and Code Sec. 56(b)(1)(A)(i) (for individuals subject to alternative minimum tax) for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.

Under Code Sec. 63(d), itemized deductions generally mean all allowable deductions except for the deductions allowable in arriving at adjusted gross income pursuant to Code Sec. 62(a), the deduction provided by Code Sec. 151, and the deduction provided in Code Sec. 199A (added by the TCJA. Miscellaneous itemized deductions include all itemized deductions other than those listed in Code Sec. 67(b), which does not reference the Code Sec. 965(c) deduction.

An inclusion under Code Sec. 951(a)(1), including a section 965(a) inclusion, generally is included in the calculation of gross investment income of a private foundation for purposes of determining the excise tax imposed under Code Sec. 4940 (generally 2% of net investment income). Gross investment income under Code Sec. 4940 does not include an inclusion under Code Sec. 951(a)(1), including a section 965(a) inclusion, to the extent the amount is included in computing the unrelated business income tax imposed by Code Sec. 511. (Code Sec. 4940(c)(2)Code Sec. 4940(c)(3) allows as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of income.

Regs under Code Sec. 6081 provide an extension of time to the 15th day of the 6th month following the close of the tax year for filing returns of income taxes and for paying any tax shown on the return for U.S. citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the U.S. and Puerto Rico, and U.S. citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico. (Reg. §1.6081-5(a)(5)Reg. § 1.6081-5(a)(6))

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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