ABA Members Craft Recommendations for Transition Tax Regs

ABA Members Craft Recommendations for Transition Tax Regs

American Bar Association Section of Taxation

The American Bar Association Section of Taxation has requested changes to proposed transition tax regulations (<a href="/lr/resolve//289nm">REG-104226-18</a>), focusing its comments on passthrough entities and individuals (but not S corporations), the netting of accumulated post-1986 deferred foreign income with deficits in other related entities, and the foreign tax credit. Addressing a range of issues affecting passthroughs and individuals, section members seek clarification that a controlled domestic partnership (CDP) that is treated as a foreign partnership for purposes of the proposed regs is treated as a foreign partnership regarding all partners of the partnership. They also seek clarification that specified basis adjustments made by a foreign passthrough entity are subject to reduction for distributions made by a specified foreign corporation (SFC) under the rules of section 961(b)(1) in the same manner as if the section 958(a) stock or applicable property were owned directly by the section 958(a) U.S. shareholder. Members further ask that section 958(b) apply the de minimis exception to the downward attribution rule using a threshold of less than 5 percent of the interests in a partnership’s capital and profits for general partners, partners active in the management of the partnership, or partners with specific information rights. They seek a threshold of less than 15 percent of such interests for all other partners. Regarding other issues affecting passthroughs and individuals, the tax section requests guidance to take into account an SFC’s share of the cash position of a partnership in which the SFC is partner. Members ask the IRS to coordinate the questions and answers about reporting related to section 965 on 2017 tax returns and Publication 5259 with the final regs. Members also ask the IRS to give individual U.S. shareholders the ability to revoke a section 962 election that was made after the passage of the Tax Cuts and Jobs Act (<a href="/lr/resolve//1xftl">P.L. 115-97</a>) and before the issuance of the proposed regs. Members explain that they will comment on the effect of the proposed regs on S corporations in a separate letter. Section members next ask the IRS to consider guidance on deficits, basis adjustments, and the gain reduction rule. Specifically, the tax section recommends that the IRS reconsider its position in proposed reg. section 1.965-1(f)(22) that a deficit in post-1986 earnings and profit exists only if the deficit exceeds the aggregate of an SFC’s post-1986 E&amp;P treated as previously taxed income (PTI) as described in section 959(c)(1) and (c)(2). Members, recognizing that Treasury and the IRS may believe that adopting such a position requires a legislative change, recommend alternatively that the issue be addressed in the preamble to the final regs. The tax section also recommends against applying the downward basis adjustment rule of section 961(b) to a U.S. shareholder’s aggregate foreign E&amp;P deficit allocated to a deferred foreign income corporation (DFIC) under section 965(b)(2) (section 965(b) PTI). Further, they believe that the final regs should not require a section 961(b) downward basis adjustment for distributions of section 965(b) PTI. Moreover, members ask for a special ordering rule that would apply the gain reduction rule first to PTI that is available because of an inclusion under section 956(a) (section 965(a) PTI) and then to section 965(b) PTI only after all section 965(a) PTI has been distributed. Lastly, tax section members recommend that the IRS issue guidance on foreign tax credits and section 965. Specifically, they ask the IRS to clarify the rule in proposed reg. section 1.9651(f)(29)(ii) by providing a method by which a U.S. shareholder of an SFC can allocate foreign tax credits to the tax year of the SFC ending before December 31, 2017. Members request elimination of the restriction in proposed reg. section 1.965-5(b) and permit a credit for the full amount of withholding taxes incurred on a distribution of previously taxed income from the SFC, rather than merely the applicable percentage of the taxes. The tax section asks for streamlined reporting measures by unifying the calculation and reporting of foreign tax credits on IRS Form 1118. This, they say, would give taxpayers a single reference point for using foreign tax credits in future years. Members also recommend that the final regs permit access to foreign income taxes related to a hovering deficit through either (i) increasing the post-1986 foreign income taxes of the DFICs to which the associated hovering deficit is allocated under section 965(b), or (ii) increasing the post-1986 foreign income taxes of the E&amp;P deficit foreign corporation to which the hovering deficit relates for the inclusion year.

The American Bar Association Section of Taxation has requested changes to proposed transition tax regulations (REG-104226-18), focusing its comments on passthrough entities and individuals (but not S corporations), the netting of accumulated post-1986 deferred foreign income with deficits in other related entities, and the foreign tax credit.

The American Bar Association Section of Taxation has requested changes to proposed transition tax regulations (REG-104226-18), focusing its comments on passthrough entities and individuals (but not S corporations), the netting of accumulated post-1986 deferred foreign income with deficits in other related entities, and the foreign tax credit. Addressing a range of issues affecting passthroughs and individuals, section members seek clarification that a controlled domestic partnership (CDP) that is treated as a foreign partnership for purposes of the proposed regs is treated as a foreign partnership regarding all partners of the partnership. They also seek clarification that specified basis adjustments made by a foreign passthrough entity are subject to reduction for distributions made by a specified foreign corporation (SFC) under the rules of section 961(b)(1) in the same manner as if the section 958(a) stock or applicable property were owned directly by the section 958(a) U.S. shareholder. Members further ask that section 958(b) apply the de minimis exception to the downward attribution rule using a threshold of less than 5 percent of the interests in a partnership’s capital and profits for general partners, partners active in the management of the partnership, or partners with specific information rights. They seek a threshold of less than 15 percent of such interests for all other partners. Regarding other issues affecting passthroughs and individuals, the tax section requests guidance to take into account an SFC’s share of the cash position of a partnership in which the SFC is partner. Members ask the IRS to coordinate the questions and answers about reporting related to section 965 on 2017 tax returns and Publication 5259 with the final regs. Members also ask the IRS to give individual U.S. shareholders the ability to revoke a section 962 election that was made after the passage of the Tax Cuts and Jobs Act (P.L. 115-97) and before the issuance of the proposed regs. Members explain that they will comment on the effect of the proposed regs on S corporations in a separate letter. Section members next ask the IRS to consider guidance on deficits, basis adjustments, and the gain reduction rule. Specifically, the tax section recommends that the IRS reconsider its position in proposed reg. section 1.965-1(f)(22) that a deficit in post-1986 earnings and profit exists only if the deficit exceeds the aggregate of an SFC’s post-1986 E&P treated as previously taxed income (PTI) as described in section 959(c)(1) and (c)(2). Members, recognizing that Treasury and the IRS may believe that adopting such a position requires a legislative change, recommend alternatively that the issue be addressed in the preamble to the final regs. The tax section also recommends against applying the downward basis adjustment rule of section 961(b) to a U.S. shareholder’s aggregate foreign E&P deficit allocated to a deferred foreign income corporation (DFIC) under section 965(b)(2) (section 965(b) PTI). Further, they believe that the final regs should not require a section 961(b) downward basis adjustment for distributions of section 965(b) PTI. Moreover, members ask for a special ordering rule that would apply the gain reduction rule first to PTI that is available because of an inclusion under section 956(a) (section 965(a) PTI) and then to section 965(b) PTI only after all section 965(a) PTI has been distributed. Lastly, tax section members recommend that the IRS issue guidance on foreign tax credits and section 965. Specifically, they ask the IRS to clarify the rule in proposed reg. section 1.9651(f)(29)(ii) by providing a method by which a U.S. shareholder of an SFC can allocate foreign tax credits to the tax year of the SFC ending before December 31, 2017. Members request elimination of the restriction in proposed reg. section 1.965-5(b) and permit a credit for the full amount of withholding taxes incurred on a distribution of previously taxed income from the SFC, rather than merely the applicable percentage of the taxes. The tax section asks for streamlined reporting measures by unifying the calculation and reporting of foreign tax credits on IRS Form 1118. This, they say, would give taxpayers a single reference point for using foreign tax credits in future years. Members also recommend that the final regs permit access to foreign income taxes related to a hovering deficit through either (i) increasing the post-1986 foreign income taxes of the DFICs to which the associated hovering deficit is allocated under section 965(b), or (ii) increasing the post-1986 foreign income taxes of the E&P deficit foreign corporation to which the hovering deficit relates for the inclusion year.

Sec. 965 Treatment of deferred foreign income upon transition to participation exemption system of taxation

Sec. 962 Election by individuals to be subject to tax at corporate rates

Sec. 62 Adjusted gross income defined

Sec. 6081 Extension of time for filing returns

Sec. 6654 Failure by individual to pay estimated income tax

Sec. 6655 Failure by corporation to pay estimated income tax

United States

Corporate taxation

Earnings and profits

Foreign-source income

Information reporting

International taxation

Tax Cuts and Jobs Act

Eric Solomon

DOC 2018-42814

2018 WTD 210-23

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Eric Solomon is a partner in the tax practice at Steptoe &amp; Johnson LLP.
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ABA Members Craft Recommendations for Transition Tax Regs