The New York State and New York City Tax Departments have each issued pronouncements on the effects of IRC § 965 deemed repatriation income for taxpayers other than C corporations. (See page 5 for effects on Article 9-A and City corporate business tax.)
New York State. The New York State Department of Taxation and Finance has issued a Notice addressing the treatment of deemed repatriation income under IRC § 965 by individuals (including shareholders of S corporations). Important Notice N-18-4 (N.Y.S. Dep’t of Taxation & Fin., Apr. 2018). For federal income tax purposes, IRC § 965 requires that a U.S. shareholder owning at least 10% of a foreign subsidiary must include as Subpart F income its pro rata share of the accumulated earnings and profits of its foreign subsidiary. The income recognition is a one-time event, for the last taxable year beginning before January 1, 2018, and the taxpayer has the option to pay the resulting tax liability over eight years.
The Notice advises individuals that amounts required to be included in the individual’s 2017 federal adjusted gross income under § 965 will consequently be includable in the individual’s 2017 New York taxable income, and confirms that there is no deduction or exemption for this amount for personal income tax purposes. The Notice also notes that New York law does not provide an option to pay the resulting tax liability over eight years. Instead, the additional tax generated by the § 965 tax liability must be paid in the same year it is recognized and included in federal adjusted gross income.
Finally, the Notice concludes that the enactment of the Tax Cuts and Jobs Act (Public Law 115-97) so late in 2017 (December 22, 2017) constitutes reasonable cause for resulting underpayments of New York State tax attributable to § 965, which may be substantial. Accordingly, a taxpayer that is assessed a late payment penalty attributable to this amount may request a waiver of the penalty and must include a copy of its federal IRC 965 Transition Tax Statement with the penalty waiver request. If the taxpayer provides this information and either pays the remaining tax and interest, or enters into an installment payment plan to pay the same, the Department may waive the penalty.
New York City. The New York City Department of Finance has issued a Finance Memorandum also addressing the treatment of IRC § 965 deemed repatriation income under the General Corporation Tax (GCT), the Banking Corporation Tax (BTX), and the Unincorporated Business Tax (UBT). Finance Memorandum 18-4 (N.Y.C. Dep’t of Fin., Apr. 20, 2018). (Note: For tax years commencing on or after January 1, 2015, the GCT and BTX are only applicable to S corporations.) The Memorandum advises taxpayers that there are no specific modifications under the GCT, BTX, and UBT to the amount of § 965 income included for federal tax purposes. Instead, the § 965 income must be classified as business income, investment income, or income from subsidiary capital, to the extent applicable, and deductions must be attributed to that income, including the taxpayer’s deduction from § 965 income under § 965(c) for federal income tax purposes. The net income after expense attribution must then be allocated (or in the case of subsidiary capital, excluded) in accordance with the applicable law.
The Memorandum also clarifies that unlike under federal law, taxpayers do not have the option to pay the tax liability over eight years, regardless of whether the taxpayer’s owners deferred the tax liability for federal income tax purposes. However, like the State Notice, the Memorandum recognizes that the enactment of the Tax Cuts and Jobs Act so late in 2017 constitutes reasonable cause for taxpayers under the GCT, BTX, and UBT to underpay a portion of what may be a significant New York City tax liability for the 2017 tax year. Accordingly, a taxpayer that is assessed a late payment penalty attributable to the § 965 income may request a waiver of the penalty, which request must also include a federal IRC 965 Transition Tax Statement. If the taxpayer provides this information and, by October 15, 2018, either pays the remaining tax and interest or enters into an installment agreement to pay the same, the Department will waive the penalty.