October 2, 2018 IRS announces changes to Section 965 transition tax rules affecting basis election deadline, aggregate foreign cash position, and relief in connection with Hurricane Florence In Notice 2018-78 (the Notice), the US Treasury Department and the Internal Revenue Service (IRS) have announced certain amendments to the rules included in the proposed regulations under Section 965 (Section 965 proposed regulations) that were issued on August 1, 2018 (REG-104226-18). For a detailed discussion of the Section 965 proposed regulations, see Tax Alert 2018-1571. The Notice announces that the final regulations will include the following:
Basis election under Prop. Reg. Section 1.965-2(f)(2) Under Prop. Reg. Section 1.965-2(f)(2), a Section 958(a) US shareholder may elect to make certain basis adjustments with respect to the stock of each deferred foreign income corporation (DFIC) and each E&P deficit foreign corporation (basis election). Under the Section 965 proposed regulations, the basis election must be made by the due date (taking into account extensions, if any) of the Section 958(a) US shareholder's return for the first tax year that includes the last day of an inclusion year of the Section 958(a) US shareholder's DFIC or E&P deficit foreign corporation. As used here, the inclusion year is the last tax year that begins before January 1, 2018. If this due date occurred before September 10, 2018, however, a transition rule in the proposed regulations would require the basis election to be made by October 9, 2018. To alleviate the burden of making a binding basis election before the proposed regulations are finalized, the final regulations will include two rules addressing the timing and revocability of the election. Taxpayers whose income tax return is due before the date that is 90 days before the date that the final regulations are published must make the basis election no later than 90 days after the publication of the final regulations. In addition, the final regulations will allow taxpayers that made a basis election before final regulations were issued to revoke that election no later than 90 days after the publication date of the final regulations. Key takeaway. With a more reasonable due date and limited revocability for the basis election, taxpayers that previously decided not to make the election based on the impracticality of performing the requisite due diligence should reconsider that decision. Application of Prop. Reg. Section 1.965-3(b) to consolidated groups Under Prop. Reg. Section 1.965-3(b), a US shareholder (within the meaning of Section 958(a)) may disregard certain assets for purposes of determining its aggregate foreign cash position. Prop. Reg. Section 1.965-8(e) specifies that all members of a consolidated group that are US shareholders of a specified foreign corporation (SFC) are treated as a single US shareholder for certain enumerated purposes that do not include Prop. Reg. Section 1.965-3(b). To prevent the overstatement of the aggregate foreign cash position, the IRS plans to modify the final regulations so that all consolidated group members that are US shareholders of an SFC are also treated as a single US shareholder for purposes of Prop. Reg. Section 1.965-3(b). Key takeaway. This update aligns the aggregate foreign cash position calculation more closely with the anticipated result of the rules as originally described in Section 3.01(b) and (c) of Notice 2018-07. Relief in connection with Hurricane Florence The IRS recently announced disaster relief by extending the due date to January 31, 2019, for income tax returns of taxpayers affected by Hurricane Florence (affected taxpayers) (IR-2018-187, NC-2018-03, SC-2018-01). Under the Notice, the IRS provides a postponement for affected taxpayers that have elections for Section 965 or transfer agreements that are due on or after September 7, 2018, and before January 31, 2019. Those taxpayers are granted until January 31, 2019, to file those elections or transfer agreements. Taxpayers that believe they are entitled to this relief are instructed to mark "Hurricane Florence" on the top of the relevant Section 965 election statement or transfer agreement, and, in the case of a transfer agreement, to note which party to the agreement is an affected taxpayer. Implications These updates are welcome relief for most taxpayers and very timely with the extended due date of the 2017 corporate income tax return fast approaching. ———————————————
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