The IRS has updated its practice unit on the Code Sec. 965 Transition Tax. The summary is as follows:
On December 22, 2017, IRC 965 was amended by “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L. 115-97 (Tax Cuts and Jobs Act [“TCJA”]). As a result of the amendment, certain taxpayers are required to include in income an amount (section 965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. Other taxpayers may have inclusions in income under IRC 951(a) by reason of IRC 965 due to ownership of deferred foreign income corporations (“DFICs”) through pass-through entities that are themselves U.S. shareholders of DFICs.
In general, IRC 965 requires United States shareholders, as defined under IRC 951(b), to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, IRC 965 allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits (“E&P”) with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in IRC 965(c). A reduced foreign tax credit applies to the inclusion under IRC 965(g). Generally, a specified foreign corporation means either a controlled foreign corporation(“CFC”), as defined under IRC 957, or a foreign corporation (other than a passive foreign investment company, as defined under IRC 1297, that is not also a CFC) that has a United States shareholder that is a domestic corporation.
Certain taxpayers may make certain elections with respect to IRC 965. These elections include: An election to pay the section 965 net tax liability over eight years.
• An election by S corporation shareholders to defer payment of the section 965 net tax liability with respect to such S corporation untila triggering event.
• An election by real estate investments trusts to take both section 965(a) inclusions and the corresponding section 965(c) deductionsinto account over eight years.,
• An election not to apply a net operating loss.
• An election to use an alternative method to calculate post-1986 earnings and profits (post 1986 E&P).
• An election to use basis adjustments under Treas. Reg. 1.965-2(f).
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.