Preamble to Prop Reg REG-104226-18, 8/1/2018; Prop Reg § 1.962-1, Prop 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
The Code Sec. 965 (deemed repatriation) transition tax provisions contained numerous elections with respect to the tax. The proposed regs provide details with respect to those elections.
For background on Code Sec. 965, see ” Prop regs on Sec. 965 deemed repatriation/transition tax—Statutory background.” For other provisions in the regs, see ” Prop regs on Code Sec. 965 transition tax: Code Sec. 965(c) deduction, disregarded transactions, and FTCs.”
Section 962 election.Code Sec. 962 provides that an individual who is a U.S. shareholder may elect to have his tax imposed under chapter 1 on amounts that are included in the individual’s gross income under Code Sec. 951(a) (controlled foreign corporation income of U.S. shareholder) by an amount equal to the tax that would be imposed under Code Sec. 11 (corporate income tax) 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))
Consistent with section 5 of Notice 2018-26, Prop Reg § 1.962-2(a) clarifies that an individual domestic pass-through owner that is a U.S. shareholder with respect to a domestic foreign income Corporation (DFIC) would be able to make an election under Code Sec. 962 with respect to the individual’s share of the Code Sec. 965(a) inclusion amount of a domestic pass-through entity with respect to the DFIC, and an individual who is not a U.S. shareholder of a DFIC would not be permitted to make that election.
In addition, notwithstanding the rule in current Reg. § 1.962-1(b)(1)(i), IRS has determined that in the case of a taxpayer making an election under Code Sec. 962, the Code Sec. 965(c) deduction should be allowed with respect to the tax imposed under Code Sec. 11. Thus, under Prop Reg § 1.962-1(b)(1)(i)(B), “taxable income” as used in Code Sec. 11 would be reduced by a taxpayer’s Code Sec. 965(c) deduction with respect to a Code Sec. 965(a) inclusion to which the Code Sec. 962 election applies.
Prop Reg § 1.965-3(e)(1) provides that any Code Sec. 965(c) deduction allowed in determining “taxable income” as used in Code Sec. 11 for purposes of computing the tax due as a result of a Code Sec. 962 election would not also be allowed for purposes of determining an individual’s actual taxable income.
Code Sec. 965 elections and domestic pass-through owners. The elections described Code Sec. 965(h), Code Sec. 965(m), and Code Sec. 965(n) are available to a U.S. shareholder of a DFIC under the terms of Code Sec. 965. However, because a domestic pass-through owner will take into account its share of a Code Sec. 965(a) inclusion amount (and the related Code Sec. 965(c) deduction amount) whether or not it is itself a U.S. shareholder, the proposed regs provide, consistent with Notice 2018-26, that a domestic pass-through owner would be able to make the Code Sec. 965(h) election, the Code Sec. 965(m)election, and the Code Sec. 965(n) election.
Section 965(h) election.Code Sec. 965(h)(1) provides that in the case of a U.S. shareholder of a DFIC, the U.S. shareholder may elect to pay the net tax liability under Code Sec. 965 in eight installments.
The proposed regs provide that the Code Sec. 965(h) election could be made by any person with a Code Sec. 965(h) net tax liability (which includes a Code Sec. 958(a) U.S. shareholder or a domestic pass-through owner in a domestic pass-through entity that is a Code Sec. 958(a) U.S. shareholder, but not a domestic pass-through entity itself). Under the proposed regs, the Code Sec. 965(h) election could be revoked only by paying the full amount of the unpaid Code Sec. 965(h) net tax liability. (Prop Reg § 1.965-7(b)(1)) The proposed regs also provide that a Code Sec. 965(h) election would be made with respect to the Code Sec. 965(h) net tax liability of a person, which is the person’s total net tax liability under Code Sec. 965 reduced by the aggregate amount of the person’s Code Sec. 965(i) net tax liabilities, if any, with respect to which elections under Code Sec. 965(i) are effective. (Prop Reg § 1.965-7(g)(4))
…Underpayment of an installment. Code Sec. 965(h)(3) provides that an addition to tax for failure to timely pay an installment required under Code Sec. 965(h)would be an acceleration event with respect to the unpaid portion of the remaining installments. Code Sec. 965(h)(4) provides that 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 would be prorated among the installments.
The proposed regs provide that if a person is assessed a deficiency with respect to the person’s Code Sec. 965(h) net tax liability, or the person timely files a return increasing the amount of its Code Sec. 965(h) net tax liability above the amount taken into account in the payment of the first installment, or the person files an amended return increasing the amount of its Code Sec. 965(h) net tax liability, the deficiency or additional amount would be prorated among the installments under Code Sec. 965(h)(4). This proration rule would not apply if the deficiency or additional liability was due to negligence, intentional disregard of rules and regs, or fraud with intent to evade tax, in which case, the proposed regs clarify that the deficiency would be payable on notice and demand. (Prop Reg § 1.965-7(b)(1)(ii)(C))
… Acceleration events. The proposed regs provide that if a taxpayer makes a Code Sec. 965(h) election, and subsequently an acceleration event described in Code Sec. 965(h)(3) and Prop Reg § 1.965-7(b)(3)(ii) occurs, the unpaid portion of all remaining installments of the taxpayer’s Code Sec. 965(h) net tax liability generally would be accelerated and due on the date of the event.
Prop Reg § 1.965-7(b)(3)(ii)(B) provides that, in addition to a liquidation or sale of substantially all of the assets of a taxpayer, any exchange or other disposition of substantially all of the assets of a taxpayer would constitute an acceleration event. In addition, Prop Reg § 1.965-7(b)(3)(ii)(D) provides that any event that results in a person no longer being a U.S. person (including, for example, a resident alien becoming a nonresident alien) would be an acceleration event. Prop Reg § 1.965-7(b)(3)(ii)(E) provides that a person that was not a member of any consolidated group becoming a member of a consolidated group would be treated as an acceleration event with respect to the person. Prop Reg § 1.965-7(b)(3)(ii)(F) provides that when a consolidated group ceases to exist, or otherwise no longer files a consolidated return, that would constitute an acceleration event.
The proposed regs provide an exception (the “eligible section 965(h) transferee exception”) pursuant to which the acceleration provisions of Code Sec. 965(h)(3)and Prop Reg § 1.965-7(b)(3)(ii) would not apply (such that the unpaid portion of all remaining installments would not be due as of the date specified therein) to a person with respect to which an acceleration event occurs if the requirements described in Prop Reg § 1.965-7(b)(3)(iii)(A)(1) (describing the acceleration events eligible for this exception) and Prop Reg § 1.965-7(b)(3)(iii)(A)(2) (setting forth the terms of a required transfer agreement) were satisfied.
Generally, acceleration events eligible for this exception would include (i) liquidations, sales, exchanges, or other dispositions of substantially all of the assets of a person (with the exception of, in the case of an individual, by reason of death, and with special rules applying in the case of a consolidated group), (ii) a corporation that was not a member of any consolidated group becoming a member of a consolidated group, and (iii) a consolidated group ceasing to exist by reason of acquisition and immediately joining another consolidated group. (Prop Reg § 1.965-7(b)(3)(iii)(B))
… Election mechanics. Code Sec. 965(h)(5) provides that a Code Sec. 965(h) election would have to be made no later than the due date (taking into account extensions, if any) for the return for the tax year in which the taxpayer has the Code Sec. 965(a) inclusions to which the Code Sec. 965(h) net tax liability is attributable and would have to be made in the manner prescribed by IRS.
Under Prop Reg § 1.965-7(b)(2)(ii), a Code Sec. 965(h) election would have to be made no later than the due date taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request, without regard to whether an extension request was made. The election would be made by attaching a statement, signed under penalties of perjury, to the taxpayer’s return for the relevant tax year including the taxpayer’s name, taxpayer identification number, total net tax liability under Code Sec. 965, Code Sec. 965(h) net tax liability, Code Sec. 965(i) net tax liability with respect to which a Code Sec. 965(i) election is effective (if applicable), and anticipated amounts of each installment. (Prop Reg § 1.965-7(b)(2)(iii))
Section 965(i) election.Code Sec. 965(i) provides that a shareholder of an S corporation that is itself a U.S. shareholder of a DFIC would be able to elect to defer payment of its net tax liability under Code Sec. 965 with respect to such S corporation until the shareholder’s tax year which includes a triggering event with respect to such liability.
Consistent with Notice 2018-26, the proposed regs provide that any shareholder of an S corporation that is a U.S. shareholder of a DFIC, whether it owns Code Sec. 958(a) stock of such DFIC or not, would be able to make the election. However, if the S corporation was not a U.S. shareholder with respect to a DFIC, the shareholders of that S corporation would not be able to make a Code Sec. 965(i) election for their shares of the Code Sec. 965(a) inclusion or Code Sec. 965(c)deduction with respect to that DFIC. (Prop Reg § 1.965-7(c) and Prop Reg § 1.965-7(g)(6))
… Election mechanics. The proposed regs provide procedural rules regarding how an S corporation shareholder would be able to make the Code Sec. 965(i)election. A Code Sec. 965(i) election would have to be made no later than the due date (taking into account extensions, if any) for the S corporation shareholder’s return for the tax year that includes the last day of the tax year of the S corporation in which the S corporation has a Code Sec. 965(a) inclusion to which the shareholder’s Code Sec. 965(i) net tax liability is attributable. It would be made by attaching a statement, signed under penalties of perjury, to its return for that year. The statement would have to include the shareholder’s name, taxpayer identification number, the name and taxpayer identification number of the S corporation with respect to which the election is made, the amount described in Prop Reg § 1.965-7(g)(10)(i)(A) for purposes of determining the Code Sec. 965(i)net tax liability with respect to the S corporation, the amount described in Reg. § 1.965-7(g)(10)(i)(B), and the Code Sec. 965(i) net tax liability with respect to the S corporation. (Prop Reg § 1.965-7(c)(2)(ii) and Prop Reg § 1.965-7(c)(2)(iii))
Section 965(m) election. Under Code Sec. 965(m)(1)(B), a real estate investment trust (REIT) that is a U.S. shareholder of a DFIC would be able to elect, in lieu of including any amount required to be taken into account under Code Sec. 951(a)(1) by reason of Code Sec. 965 in the tax year in which it would otherwise be included 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.
A REIT would make a Code Sec. 965(m) election by attaching a statement, signed under penalties of perjury, to its return for the tax year in which it would otherwise be required to include REIT Code Sec. 965 amounts (as defined in Prop Reg § 1.965-7(g)(2)) in gross income. The statement would have to include the REIT’s name, taxpayer identification number, REIT Code Sec. 965 amounts, and anticipated amounts of each portion of the REIT Code Sec. 965 amounts to be included in each year. (Prop Reg § 1.965-7(d)(3)(ii) and (iii))
Section 965(n) election. Code Sec. 965(n) provides that a U.S. shareholder of a DFIC would be able to elect to exclude the amount described in Code Sec. 965(n)(2) (generally the amount required to be taken into account under Code Sec. 965) from the determination of the amount of the NOL deduction under Code Sec. 172 of such shareholder for such tax year or the amount of taxable income for such tax year which may be reduced by NOL carryovers or carrybacks to such tax year under Code Sec. 172.
The proposed regs provide that if a Code Sec. 965(n) election is made for a tax year, the election would apply to NOLs for the tax year for which the election is made as well as the NOL carryovers or carrybacks to such tax year, each in their entirety. (Prop Reg § 1.965-7(e)(1)(iii))
The proposed regs clarify that the Code Sec. 965(n) election would apply to all components of the consolidated NOL deduction (as defined in Reg. § 1.1502-21(a)). (Prop Reg § 1.965-7(e)(1)(iii))
… Election mechanics. A person would make a Code Sec. 965(n) election by attaching a statement, signed under penalties of perjury, to its return for the tax year (taking into account extensions, if any) to which the election applies. (Prop Reg § 1.965-7(e)(2)(ii)) The statement would have to include the person’s name, taxpayer identification number, the amounts described in Code Sec. 965(n)(2)(A), Prop Reg § 1.965-7(e)(1)(ii)(A) , Code Sec. 965(n)(2)(B) and Prop Reg § 1.965-7(e)(1)(ii)(B), and the sum thereof. (Prop Reg § 1.965-7(e)(2)(iii))
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.
