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IRS Releases Additional Transition Tax Guidance

On April 2, 2018, the IRS released additional guidance (Notice 2018-26) on IRC Sec. 965, the so-called transition or repatriation tax. The absence of sufficient guidance from the IRS and many state tax authorities has made compliance with this tax provision rather challenging.

Enacted in December 2017 as part of the Tax Cuts and Jobs Act, IRC Sec. 965 imposes a one-time tax on non-previously taxed, post-1986 earnings and profits (“E&P”) of certain foreign corporations.

U.S. shareholders of specified foreign corporations (“SFCs”) must report this E&P on their 2017 U.S. federal income tax returns. The income is taxed at reduced rates of tax, and those rates are dependent on the mix of assets of the SFC (cash and cash-equivalent assets versus non-cash and cash-equivalent assets). There are various elections that U.S. taxpayers can make to defer the payment of the tax. 

Since the enactment, the IRS has issued guidance in the form of Notice 2018-7, Notice 2018-13, Rev. Proc. 2018-17 and IR-2018-53 (Frequently Asked Questions).

Notice 2018-26 indicates that the IRS and the Treasury intend to issue regulations with respect to IRC Sec.  965 addressing key issues including:

  1. Determination of a “specified foreign corporation;”
  2. Anti-avoidance transactions;
  3.  Interaction between  IRC Sec. 962 elections and IRC Sec. 965;
  4.  Various elections available to taxpayers and pass-through entities;
  5.  Effect of the repeal of IRC Sec. 958(b)(4) attribution rules;
  6.  Relief from estimated tax penalties resulting from IRC Sec. 965 inclusions;
  7. Method of paying the IRC Sec. 965 tax; and
  8. Clarification of effective dates.

Although this release is certainly welcomed, the IRS will need to issue further guidance addressing items such as the interaction of IRC Sec. 965 and the Net Investment Income Tax, penalty relief for taxpayers underpaying the IRC Sec. 965 tax liability and/or the first installment where a good faith effort to comply was made, and other related matters.  

Gerard O'Beirne focuses on corporate federal, state and local taxation, providing tax planning and tax compliance. He also works with expatriates on their financial management and tax issues, including pre-departure and subsequent return tax planning and tax compliance.

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