Final regulations govern Sec. 965 transition tax

By Sally P. Schreiber, J.D.

The IRS finalized regulations on Wednesday on the Sec. 965 transition tax, which was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97 (T.D. 9846). 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.

Under Sec. 965, U.S. shareholders of specified foreign corporations must include these foreign earnings and profits (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.

The IRS issued proposed regulations (REG-104226-18) in August 2018, held a hearing on the proposed regulations on Oct. 22, 2018, and received written comments. The final regulations retain the basic approach and structure of the proposed regulations, with certain revisions based on the comments received. The preamble to the regulations, which spans over 140 pages, discusses in detail the revisions made to the proposed regulations, as well as the suggestions for revisions that were rejected and the reasons they were rejected.

The regulations cover:

  • General rules and definitions;
  • Adjustments to E&P and to basis;
  • Sec. 965(c) deductions;
  • Certain disregarded transactions;
  • Allowance of a credit or deduction for foreign income taxes;
  • Computation of foreign income taxes deemed paid and allocation and apportionment of deductions;
  • Rules regarding elections, payment, and other special rules.

There are also rules for affiliated groups, including consolidated groups.

The regulations are effective the date they are published in the Federal Register. (For now, the regulations have only been posted on the IRS website.)

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

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