AICPA recommends changes to prop. regs. on PTEP, related basis adjustments

The AICPA recommended five changes to proposed regulations (REG-105479-18), including to expressly allow taxpayers to rely on the proposed regulations dealing with previously taxed earnings and profits (PTEP) and related basis adjustments under Secs. 959 and 961 until they are final.

In a comment letter sent Tuesday to Treasury and the IRS, the AICPA said that the proposed regulations create “uncertainty regarding taxpayer continued reliance” on Notice 2019-01. The letter recommends that the IRS make it clear that taxpayers can rely on the proposed regulations in their entirety until they are finalized.

The AICPA, in its other recommendations, said that Treasury and the IRS should:

• Under Sec. 959, extend to foreign nongrantor trusts the proposed model for PTEP distributed through partnerships.

• To coordinate the Subchapter J rules with Subpart F, provide that once PTEP is treated as distributed from the relevant controlled foreign corporation (CFC) to the foreign nongrantor trust, subsequent distributions from the trust to a beneficiary who previously reported income inclusions associated with the relevant CFC are first recoveries of that PTEP before the Subchapter J rules are then applied to that beneficiary.

• If the above recommendation is not adopted, for the purpose of Subchapter J, treat the trust’s distribution of excludable PTEP to the beneficiary as akin to either (1) tax-exempt income (which will not trigger current taxation to the U.S. shareholder or beneficiary under the distributable net income model or the “throwback” anti-deferral regime under the character rule) or (2) trust principal (which also is not subject to either current taxation under the distributable net income model or the throwback regime).

• Under Sec. 961, extend the concept of derived basis to foreign nongrantor trusts such that those entities will have a derived basis in CFC shares.

As the AICPA described in a news release, when a U.S. shareholder has been taxed on income from a foreign corporation — before that income is distributed — they are said to have PTEP. This generally happens when a U.S. shareholder owns a CFC and certain types of foreign income are included in the shareholder’s income under Subpart F, global intangible low-taxed income, or other tax provisions.

This system is meant to prevent double taxation by excluding the distribution from the shareholder’s gross income. Secs. 959 and 961 provide rules for taxpayers and the treatment of PTEP, the AICPA said in its release.

The proposed regulations deal with various aspects of the PTEP regime, such as increases and decreases to basis of stock, foreign currency gain or loss, and allocation of foreign tax credits.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.