August 21, 2020
BREAKING TAX NEWS | Treasury finalizes controversial Temp. Reg. Section 1.245A-5T with few changes but proposes regulations that would generally eliminate "double taxation" of extraordinary dispositions
Today, August 21, 2020, the Treasury Department and the Internal Revenue Service released final regulations under IRC 245A (TD 9909), finalizing (with limited modification) a controversial temporary regulation (Temp. Treas. Reg. Section 1.245A-5T) issued in June 2019.
When it applies, Treas. Reg. Section 1.245A-5, like its predecessor, causes a portion of a dividend that would otherwise qualify for a dividends received deduction under IRC Section 245A to fail to qualify, thus giving rise to taxable income to the distributee. (The final regulation also includes analogous provisions rendering the exception for foreign personal holding company income under IRC Section 954(c)(6) inapplicable for certain CFC-to-CFC dividends.)
The final regulation applies only to tax periods ending on or after June 14, 2019, though Temp. Treas. Reg. Section 1.245A-5T continues to apply to any distribution after December 31, 2017, to which the final regulation does not apply.
Simultaneously, Treasury and the IRS today released taxpayer-favorable proposed regulations under IRC Sections 245A and 951A (REG-124737-19) that taxpayers may apply retroactively (if they and all related parties do so consistently). Absent the proposed regulations, "extraordinary dispositions" under Treas. Reg. Section 1.245A-5 — i.e., certain property sales between related CFCs during the so-called GILTI gap period — generally would be taxed twice: once under Treas. Reg. Section 1.245A-5 (by denying an IRC Section 245A deduction for earnings and profits resulting from the extraordinary disposition), and once under the GILTI regime under IRC Section 951A (by denying a depreciation or amortization deduction corresponding to the basis increase resulting from the extraordinary disposition). The proposed regulations, in effect, would cause the extraordinary disposition to be taxed only once — by coordinating Treas. Reg. Section 1.245A-5 and the GILTI regulations so that only one applied.
A detailed Tax Alert is forthcoming. EY will be hosting a webcast addressing these regulations on a future date. An invitation with the date of the webcast will be emailed shortly.