Final regs. and proposed regs. issued under Secs. 245A and 954

The IRS issued final regulations that limit the deduction under Sec. 245A for certain dividends U.S. persons receive from foreign corporations and the exception to Subpart F income under Sec. 954(c)(6) for certain dividends received by controlled foreign corporations (CFCs). The regulations also contain information reporting regulations under Sec. 6038 to administer these rules. The regulations (T.D. 9909) finalize proposed regulations (REG-106282-18) and withdraw temporary regulations (T.D. 9865) issued in June 2019. The IRS also issued additional proposed regulations (REG-103470-19) about the coordination between Sec. 245A and the global intangible low-taxed income (GILTI) rules in Sec. 951.

Secs. 245A and 954(c)(6) were added to the Code by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which was enacted on Dec. 22, 2017. Sec. 245A provides a 100% deduction to domestic corporations for certain dividends received from foreign corporations after Dec. 31, 2017. Sec. 954(c)(6) provides that a dividend received by a CFC from a related CFC is not included in the recipient CFC’s income subject to current tax under Secs. 951(a) and 954(c) if certain requirements are satisfied.

The temporary regulations in T.D. 9865 and proposed regulations in REG-106282-18 limited the Sec. 245A deduction and the Sec. 954(c)(6) exception with respect to distributions supported by certain earnings and profits (E&P) not subject to the integrated international tax regime created by the TCJA.

The IRS received many comments on the temporary and proposed regulations, including a number of comments objecting to the IRS’s regulatory authority to issue the rules and a claim that the regulations were an attempt to change the effective date of the Sec. 965 transition tax or the GILTI rules. The preamble to the final regulations contains a lengthy discussion regarding the IRS’s authority for issuing the rules and its position regarding the effective dates.

The final regulations adopt the proposed regulations with a number of modifications in response to other comments. These include changes and additions regarding the rules for extraordinary disposition accounts and extraordinary reductions, and the addition of new illustrations to clarify the anti-abuse rule in Regs. Sec. 1.245A-5 and a modification of the rule to make it self-executing rather than applicable under the discretion of the IRS.

The final regulations are effective on Aug. 27, the date they were published as final in the Federal Register. They apply to tax years ending on or after June 14, 2019, the date the temporary regulations were issued. If both the temporary and final regulations could apply, only the final regulations do. As an example, if a CFC has a tax period ending on Nov. 30, 2019, and it made a distribution during that period on Dec. 1, 2018, a portion of which would be an ineligible amount, the final regulations apply to the distribution.

Distributions made after Dec. 31, 2017, and before the final regulations apply, continue to be subject to the rules in the temporary regulations. However, a taxpayer may choose to apply the final regulations to distributions made during this period if the taxpayer and all related parties consistently apply the final rules in their entirety.

The IRS solicited comments in the preamble to the 2019 regulations on whether and how to coordinate the rules in Prop. Regs. Secs. 1.245A-5(c) and (d) (regarding extraordinary dispositions) with the rules in Regs. Sec. 1.951A-2(c)(5) (regarding the allocation of deduction or loss attributable to disqualified basis under the GILTI rules in Sec. 951A). In response to the comments received, the IRS issued proposed coordination rules in REG-103470-19.