The IRS has issued Notice 2018-26, 2018-16 IRB 1, announcing that the Department of the Treasury (Treasury Department) and the IRS intend to issue regulations in connection with Section 965, which was amended by the TCJA. The notice also announces relief from estimated tax penalties in connection with the amendment of Section 965 and the repeal of Section 958(b)(4) by the TCJA.
Section 965(a) provides that for the last taxable year of a deferred foreign income corporation (DFIC) that begins before Jan. 1 (such year of the DFIC, the “inclusion year”), the subpart F income of the corporation (as otherwise determined for such taxable year under Section 952) shall be increased by the greater of (1) the accumulated post-1986 deferred foreign income of such corporation determined as of Nov. 2, 2017, or (2) the accumulated post-1986 deferred foreign income of such corporation determined as of Dec. 31, 2017 (each such date, a “measurement date,” and the greater of the accumulated post-1986 deferred foreign income of the corporation as of the measurement dates, the “Section 965(a) earnings amount”). The Section 965(a) earnings amount is not subject to the rules or limitations in Section 952 and is not limited by the accumulated earnings and profits of the DFIC as of the close of the inclusion year. Section 965(b)(1) provides that if a taxpayer is a United States shareholder with respect to at least one DFIC and at least one E&P deficit foreign corporation, then the portion of the Section 965(a) earnings amount which would otherwise be taken into account under Section 951(a)(1) by a United States shareholder with respect to each DFIC (the “Section 965(a) inclusion amount”) is reduced by the amount of such shareholder’s aggregate foreign E&P deficit that is allocated to such DFIC.
Among the numerous announcements in the Notice, the Treasury Department and the IRS intend to issue regulations providing that – solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of Section 965(e)(1)(B) – stock owned, directly or indirectly, by or for a partner (tested partner) will not be considered as being owned by a partnership under Sections 958(b) and 318(a)(3)(A) if such partner owns less than 5 percent of the interests in the partnership’s capital and profits. Additionally, the Treasury Department and the IRS intend to issue regulations providing the applicable dates for determining a specified foreign corporation’s “final cash measurement date,” “second cash measurement date” and “first cash measurement date,” and that a United States shareholder takes into account its pro rata share of the cash position of a specified foreign corporation as of any cash measurement date of the specified foreign corporation on which such shareholder is a United States shareholder of such specified foreign corporation, regardless of whether such shareholder is a United States shareholder of such specified foreign corporation as of any other cash measurement date, including the final cash measurement date of such specified foreign corporation.
The regulations are also expected to provide that, for purposes of determining a specified foreign corporation’s post-1986 earnings and profits as of the measurement date on Nov. 2, 2017, any foreign income tax (as defined in Section 901(m)(5)) that accrues (1) within the specified foreign corporation’s U.S. taxable year that includes Nov. 2, 2017, and (2) after Nov. 2, 2017, but on or before Dec. 31, 2017, will be allocated between the respective portions of the foreign tax base on which the accrued foreign taxes are determined that are attributable to the part of the U.S. taxable year ending on Nov. 2, 2017, and the part of the U.S. taxable year beginning after Nov. 2, 2017. The regulations will also include an anti-avoidance rule and rules related to certain election, reporting and payments. Finally, the notice describes instances when the IRS will provide penalty relief under Sections 6654 and 6655 from tax liability under Section 965.