IRS Release of Q&As Addresses IRC Sec. 965 Issues

On March 13, 2018, the IRS issued IR-2018-53, which in question and answer (“Q&A”) format addresses questions regarding reporting requirements and election procedures under the newly enacted deemed repatriation provision contained in new IRC Sec. 965.   The IRS noted that further guidance will be provided for pass-through entities such as partnerships and S corporations that own interests in foreign corporations subject to IRC Sec. 965.

Background

IRC Sec. 965 imposes a one-time toll tax on non-previously taxed post-1986 earnings and profits (“E&P”) of certain foreign corporations as part of a transition to a partial territorial tax regime.

IRC Sec. 965 generally applies to a specified foreign corporation (“SFC”), which is defined as any controlled foreign corporation (“CFC”) or any foreign corporation with one or more domestic corporations that is treated as a U.S. shareholder (i.e., a domestic corporation treated as owning 10% or more of the foreign corporation’s voting stock or 10% of its total value, pursuant to the attribution rules of IRC Sec. 958(a) and Sec. 958(b)).

A number of elections are available to taxpayers, e.g., an election to pay the tax liability over a period of up to eight years and an election for shareholders of an S corporation to defer payment until a triggering event.

Highlights of the Q&As

1.  The Q&As state that toll tax filing requirements are imposed on (i) a U.S. shareholder of a deferred foreign income corporation (“DFIC”) (i.e., generally any SFC that has positive post-1986 E&P as of either November 2, 2017 or December 31, 2017), (ii) a direct or indirect partner in a domestic partnership that is a U.S. shareholder of a DFIC, (iii) a shareholder of an S corporation that is a U.S. shareholder of a DFIC, or (iv) a beneficiary of a pass-through entity that is a U.S. shareholder of a DFIC.
2. The Q&As make it clear that domestic partnerships and S corporations that are shareholders of a DFIC may not make any IRC Sec. 965 elections on behalf of their partners or shareholders.
3. The Q&As provide that a domestic partnership, S corporation, or other pass-through entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each DFIC for which such pass-through entity has an IRC Sec. 965(a) inclusion amount:
• The partner’s, shareholder’s, or beneficiary’s share of the partnership’s, S corporation’s, or other pass-through entity’s IRC Sec. 965(a) inclusion amount, if applicable.
• The partner’s, shareholder’s, or beneficiary’s share of the partnership’s, S corporation’s, or other pass-through entity’s deduction under IRC Sec. 965(c), if applicable.
• Information necessary for a domestic corporate partner, or an individual making an election under IRC Sec. 962, to compute its deemed paid foreign tax credits with respect to its share of the partnership’s, S corporation’s, or pass-through entity’s IRC Sec. 965(a) inclusion amount, if applicable.
4. The Q&As provide that a person that has income under IRC Sec. 965 for its 2017 taxable year is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury, and. in the case of an electronically filed return, in Portable Document Format (.pdf) with a filename of “965 Tax.” The IRC 965 Transition Tax Statement must include the following information:
   • The person’s total amount required to be included in income under IRC Sec. 965(a).
   • The person’s aggregate foreign cash position, if applicable.
   • The person’s total deduction under IRC Sec. 965(c).
   • The  person’s  deemed paid foreign taxes with respect to the total amount required to be included in income by reason of IRC Sec. 965(a).
   • The person’s disallowed deemed paid foreign taxes pursuant to IRC Sec. 965(g).
   • The total net tax liability under IRC Sec. 965 (as determined under IRC Sec. 965(h)(6), without regard to whether such paragraph is applicable), if applicable, which will be assessed.
   • The amount of net tax liability under IRC Sec. 965 to be paid in installments under IRC Sec. 965(h) of the Code, if applicable.
   • The amount of the net tax liability under IRC Sec. 965, the payment of which has been deferred, under IRC Sec. 965(i) of the Code, if applicable.
   • A listing of elections under IRC Sec. 965 of the Code or the election provided for in Notice 2018-13 that the taxpayer has made, if applicable.
5. An appendix to the Q&As provides a model 965 Transition Tax Statement.
6. The Q&As provide that an election with respect to IRC Sec. 965 must be made by the due date (including extensions) for filing the return for the relevant year.  However, even if an election is made under IRC Sec. 965(h) to pay the net tax liability in installments, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year.