ABA Tax Section Recommends Modifying Proposed GILTI Regs

ABA Tax Section Recommends Modifying Proposed GILTI Regs

American Bar Association Section of Taxation

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (<a href="/lr/resolve//28f7p">REG-104390-18</a>) implementing provisions of the Tax Cuts and Jobs Act that require U.S. shareholders to include global intangible low-taxed income generated by controlled foreign corporations in their gross income. The TCJA added section 951A, which requires a U.S. shareholder of any CFC to include their GILTI in their gross income. The proposed regs provide guidance on determining the GILTI inclusion amount. The tax section recommends that the regs include a special rule for a foreign passthrough entity to make basis adjustments to directly held CFC stock (or property by reason of which the entity is treated as owning CFC stock under section 958(a)) regarding the GILTI inclusion of a domestic partner of the entity. Section members say the rule could be modeled after the specified basis adjustments prescribed by the proposed section 965 regs. Members also propose rules to coordinate the application of section 961(b) with the basis adjustments and the rules of section 743(b). The tax section suggests the use of a pure aggregate approach for domestic partnerships that are U.S. shareholders of CFCs. Under this methodology, the domestic partnership would be treated as a foreign partnership for purposes of GILTI. Alternatively, if the pure aggregate approach is not adopted, section members recommend a pure entity approach, under which a domestic partnership would be respected as a U.S. shareholder. If neither of these approaches is adopted, members also present another option as an alternative to the hybrid methodology for domestic partnerships in the proposed regs. The tax section requests clarification that any domestic corporation that owns the stock of a CFC through a partnership, whether domestic or foreign, qualifies for the section 250 deduction to the extent the domestic corporate partner either has a direct inclusion of GILTI under section 951A or receives a distributive share of a domestic partnership’s GILTI inclusion under section 951A. Section members also believe partnership basis adjustments, such as section 743(b) adjustments, should be taken into account for purposes of determining the disqualified basis of some property resulting from disqualified transfers by CFCs during the disqualified period. The tax section asks that the regs clarify how to compute the amounts of disallowed deductions attributable to disqualified basis regarding property that has disqualified basis and basis other than disqualified basis. Section members suggest that the partnership qualified business asset investment ratio be determined using the gross taxable income (rather than the gross section 704(b) income) of a partnership that is included in a CFC partner’s tested income. The regs should also indicate whether the partnership qualified business asset investment ratio takes into account allocations under section 704(c), including allocations of remedial income, members say.

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-104390-18) implementing provisions of the Tax Cuts and Jobs Act that require U.S. shareholders to include global intangible low-taxed income generated by controlled foreign corporations in their gross income.

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-104390-18) implementing provisions of the Tax Cuts and Jobs Act that require U.S. shareholders to include global intangible low-taxed income generated by controlled foreign corporations in their gross income. The TCJA added section 951A, which requires a U.S. shareholder of any CFC to include their GILTI in their gross income. The proposed regs provide guidance on determining the GILTI inclusion amount. The tax section recommends that the regs include a special rule for a foreign passthrough entity to make basis adjustments to directly held CFC stock (or property by reason of which the entity is treated as owning CFC stock under section 958(a)) regarding the GILTI inclusion of a domestic partner of the entity. Section members say the rule could be modeled after the specified basis adjustments prescribed by the proposed section 965 regs. Members also propose rules to coordinate the application of section 961(b) with the basis adjustments and the rules of section 743(b). The tax section suggests the use of a pure aggregate approach for domestic partnerships that are U.S. shareholders of CFCs. Under this methodology, the domestic partnership would be treated as a foreign partnership for purposes of GILTI. Alternatively, if the pure aggregate approach is not adopted, section members recommend a pure entity approach, under which a domestic partnership would be respected as a U.S. shareholder. If neither of these approaches is adopted, members also present another option as an alternative to the hybrid methodology for domestic partnerships in the proposed regs. The tax section requests clarification that any domestic corporation that owns the stock of a CFC through a partnership, whether domestic or foreign, qualifies for the section 250 deduction to the extent the domestic corporate partner either has a direct inclusion of GILTI under section 951A or receives a distributive share of a domestic partnership’s GILTI inclusion under section 951A. Section members also believe partnership basis adjustments, such as section 743(b) adjustments, should be taken into account for purposes of determining the disqualified basis of some property resulting from disqualified transfers by CFCs during the disqualified period. The tax section asks that the regs clarify how to compute the amounts of disallowed deductions attributable to disqualified basis regarding property that has disqualified basis and basis other than disqualified basis. Section members suggest that the partnership qualified business asset investment ratio be determined using the gross taxable income (rather than the gross section 704(b) income) of a partnership that is included in a CFC partner’s tested income. The regs should also indicate whether the partnership qualified business asset investment ratio takes into account allocations under section 704(c), including allocations of remedial income, members say.

Sec. 951A Global intangible low-taxed income included in gross income of United States shareholders

Sec. 951 Amounts included in gross income of United States shareholders

Sec. 1502 Regulations

Sec. 6038 Information reporting with respect to certain foreign corporations and partnerships

United States

Consolidated returns

Controlled foreign corporations (CFCs)

Information reporting

Intangible assets

International taxation

Tax Cuts and Jobs Act

Eric Solomon

DOC 2019-1812

2019 WTD 13-20

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Eric Solomon is a partner in the tax practice at Steptoe &amp; Johnson LLP.
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ABA Tax Section Recommends Modifying Proposed GILTI Regs