The American Institute of CPAs (AICPA) has submitted an extensive set of recommendations and comments to the Internal Revenue Service (IRS) about proposed regulations (REG-104226-18) regarding the transition tax under Internal Revenue Code section 965 and related provisions.
Section 965 affects U.S. taxpayers with direct or indirect ownership interests in certain foreign corporations. The proposed IRS regulations would implement changes made by the Tax Cuts and Jobs Act.
The AICPA’s October 31 letter made 15 specific recommendations:
- Clarify that previously taxed earnings (PTI) under section 965(b)(4)(A) are deemed included in section 951 for purposes of applying section 1248(d).
- Clarify that the portion of a section 965 inclusion liability attributable to section 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in section 965(c).
- Provide taxpayers with additional flexibility when making the basis adjustment election under Prop. Reg. § 1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis and modify the proposed consistency provision on related persons.
- Provide guidance as to the ordering of distributions of PTI between section 965(a) PTI and section 965(b) PTI for the purposes of applying section 959(c) and section 986(c).
- Provide relief to taxpayers that make or have made late elections under the proposed section 965 regulations and clarify the procedure for obtaining such relief.
- Provide that United States (U.S.) shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to section 965.
- Clarify that the PTI amount created under section 965(b)(4)(A) is not taken into account under section 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
- Exercise the authority under section 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the “downward attribution” rules of section 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of section 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
- Provide a carve-out for certain “triggering events” of an S corporation under 965(i) such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
- Clarify the application of ordering rules regarding subsequent distributions of section 965 inclusion amounts by a taxpayer that made a section 962 election for the section 965 inclusion year.
- Provide guidance to help prevent unintended consequences resulting from the requirement in the proposed regulations that certain specified payments are disregarded for section 965 purposes.
- Provide guidance on the interaction of the anti-abuse rules stating that certain transactions and elections are disregarded for purposes of section 965.
- Correct a drafting error in Prop. Reg. § 1.965-7(c)(2)(i).
- Provide guidance on the interaction between a section 962 election and a section 965(i) election, including clarifying that an eligible taxpayer may make a section 962 election for a section 965 tax liability for which they intend to defer inclusion under section 965(i).
- Provide guidance on which taxpayer(s) must sign the section 965 statement and elections attached to a married filing joint individual income tax return.