Proposed regs. address several transition tax issues

The IRS issued proposed regulations on Wednesday on the Sec. 965 transition tax, which was added to the Code by P.L. 115-97, the law known as the Tax Cuts and Jobs Act (REG-104226-18). Sec. 965 applies to the last tax year of a deferred foreign income corporation (DFIC) that begins before Jan. 1, 2018. The Subpart F income of the corporation (determined for the tax year under Sec. 952) is increased by the greater of (1) the accumulated post-1986 deferred foreign income of that corporation determined as of Nov. 2, 2017, or (2) the accumulated post-1986 deferred foreign income of that corporation determined as of Dec. 31, 2017.

The 249-page proposed regulations that the IRS has issued are open to comment within 60 days of their publication in the Federal Register, which the IRS says is forthcoming.

To transition to the new system of taxation, U.S. shareholders of specified foreign corporations must include these foreign earnings and profit (E&P) amounts in income, which are then taxed at an 8% or 15.5% rate. U.S. shareholders may elect to pay this tax in eight annual installments.

Prop. Regs. Sec. 1.965-1 provides general rules and definitions, including Sec. 965(a) inclusions, Sec. 965(c) deductions, and the treatment of certain specified foreign corporations as controlled foreign corporations and certain controlled domestic partnerships as foreign partnerships.

Prop. Regs. Sec. 1.965-2 provides rules on adjustments to E&P and basis to determine how to apply Sec. 965 and a rule that limits the amount of gain recognized when applying Sec. 961(b)(2) for amounts in excess of basis.

Prop. Regs. Sec. 1.965-3 provides rules for determining Sec. 965(c) deductions, including how to calculate aggregate foreign cash position.

Prop. Regs. Sec. 1.965-4 sets forth rules that disregard certain transactions for Sec. 965 purposes. These are generally anti-tax-avoidance rules and include changes in methods of accounting and entity classification elections undertaken to avoid the Sec. 965 tax.

Prop. Regs. Secs. 1.965-5 and 1.965-6 provide rules on foreign tax credits. These rules generally describe how to calculate the allowable type and applicable percentage of foreign taxes paid or accrued on Sec. 965 income.

Prop. Regs. Sec. 1.965-7 provides rules for elections and payments. These address generally the election to pay the tax in eight installments and the amount of these payments.

Prop. Regs. Sec. 1.965-8 provides the rules that apply to affiliated groups, including consolidated groups.

Prop. Regs. Sec. 1.965-9 addresses when the regulations apply; Prop. Regs. Secs. 1.962-1 and 1.962-2 provide rules for Sec. 962 elections, which allow individuals to elect to be taxed at corporate rates. And finally, Prop. Regs. Sec. 1.986(c)-1 provides rules for how Sec. 986(c), which addresses previously taxed E&P, applies to Sec. 965.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.