- The repeal of Internal Revenue Code section 958(b)(4) by the Tax Cuts and Jobs Act leads to unintended consequences for certain controlled foreign corporations because they are subject to “downward attribution” from a foreign person to a United States person.
- AICPA recommends Treasury and IRS exercise their authority to provide relief from the income exclusion to certain affected CFC taxpayers.
Washington, D.C. (March 13, 2018) – The American Institute of CPAs (AICPA) today recommended that the U.S. Department of the Treasury and the Internal Revenue Service (IRS) provide regulatory relief to certain controlled foreign corporation (CFC) taxpayers affected by unintended consequences from the repeal of Internal Revenue Code section 958(b)(4) by Pub. L. No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA).
The AICPA wrote in its letter that Treasury and the IRS should exercise their authority in section 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, the letter stated, relief is needed to exclude a foreign corporation, which is considered a CFC solely as a result of the “downward attribution” rules of Internal Revenue Code section 318(a)(3), from the definition of a specified foreign corporation (SFC) under section 965 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.
The AICPA explained that the repeal of section 958(b)(4) creates “downward attribution” under section 318(a)(3) from a foreign person to a United States person. Due to the downward attribution, certain foreign corporations are treated as CFCs. Accordingly, a non-corporate U.S. shareholder could unexpectedly own an interest in a SFC as defined in section 965, which will result in an income inclusion to the U.S. shareholder of a portion of the corporation’s accumulated post-1986 deferred foreign income. The repeal of section 958(b)(4) applies retroactively to a foreign corporation’s last taxable year beginning before January 1, 2018 and each subsequent taxable year, which will cause an income inclusion on the U.S. shareholder’s 2017 tax return. It also applies to taxable years of U.S. shareholders in which or with which the taxable years of those foreign corporations’ end.
“The AICPA believes that the income inclusion to the U.S. shareholder is inconsistent with the intent of Section 965 and the repeal of section 958(b)(4),” the letter stated and cited language from the Joint Explanatory Statement of the Committee of the Conference to support its recommendation.