The proposed section 965 regulations: Crystalizing the Code and previously issued guidance

Authored by Jim Alajbegu, Lynette Stolarzyk and James C. Lawson

The IRS and Treasury Department released proposed regulations on Aug. 1, 2018, implementing section 965 of the Internal Revenue Code (the Code) as amended by the Tax Cuts and Jobs Act, enacted Dec. 22, 2017. Section 965 requires U.S. shareholders to pay a one-time repatriation tax on the previously untaxed foreign post-1986 earnings and profits (section 965(a) earnings amount) of a deferred foreign income corporation (DFIC). The proposed regulations contain the rules related to section 965 described in previously issued notices, with certain modifications, as well as additional guidance related to section 965. The proposed regulations would affect United States persons with direct or indirect ownership interests in certain foreign corporations. Taxpayers generally can elect to pay the transition tax in installments over an eight-year period under section 965(h).

The proposed regulations indicate that taxpayers may choose to apply the rules regarding elections and payments in their entirety to all tax years as if they were final regulations; such reliance language which was found in the previous notices, however, is generally absent from the proposed regulations when viewed in their entirety. The proposed regulations also provide additional guidance directed to assist taxpayers in calculating and reporting the repatriation tax. Taxpayers and tax preparers should review any prior repatriation tax calculations considering this new guidance. The proposed regulations generally apply beginning in the last taxable year of a foreign corporation that begins before Jan. 1, 2018, and with respect to a U.S. person, beginning in the taxable year in which or with which such taxable year of the foreign corporation ends.

Below please find highlights from the proposed regulations that should be considered for taxpayers affected by section 965. Given the volume and complexity of the regulations issued, this summary does not address all of the guidance provided.

Overview, general rules and definitions - Prop. Reg. section 1.965-1

Proposed section 1.965-1 speaks to general rules and definitions under section 965, many of which were previously defined in the Code and in subsequent notices. Clarifications to existing guidance are noted below and are not intended to be exhaustive but do include (i) partnership-specific commentary and (ii) modifications around the calculation of post-1986 earnings and profits.

Included in the partnership-specific commentary is a reference to downward attribution rules involving attributing stock from a partner to a partnership when determining whether a foreign corporation of a partner is a specified foreign corporation for purposes of section 965. Stock owned by a tested partner is not considered as owned by the partnership where the tested partner owns less than 5 percent of the partnership’s capital and profits interests. Further on the partnership front, domestic pass-through owners are required to take their share of any aggregate section 965(a) inclusion and their share of the section 965(c) deduction amount regardless of whether or not the domestic pass-through owner is also a U.S. shareholder with respect to a DFIC. Proposed section 1.965-1(e) provides special rules for certain controlled domestic partnerships which may result in the controlled domestic partnership being treated as a foreign partnership for purposes of determining a U.S. shareholder of the specified foreign corporation under section 958(a). Control is determined based on facts and circumstances, except that a partnership will be deemed controlled by a U.S. shareholder and related persons if, in the aggregate, those persons own more than 50 percent of the partnership’s capital or profits.

Proposed section 1.965-1(f)(29) follows closely to previous guidance regarding the calculation of post-1986 earnings and profits of a specified foreign corporation; however, it provides further clarification around distributions between specified foreign corporations in that a reduction of post-1986 earnings and profits at one specified foreign corporation cannot be more than the inclusion of such distributions at another specified foreign corporation. Further, additional guidance is provided as to reductions in earnings and profits for applicable taxes for the Nov. 2, 2017, measurement date.

Adjustments to earnings and profits and basis - Prop. Reg. section 1.965-2

Proposed section 1.965-2(b) provides the following ordering rules relating to adjustments to E&P for determining a section 958(a) U.S. shareholder’s inclusion under section 951(a)(1) and the treatment of distributions under section 959: (1) subpart F income of the specified foreign corporation is determined without regard to section 965(a); (2) distributions from one specified foreign corporation to another specified foreign corporation that are made before Jan. 1, 2018, are determined under section 959; (3) section 965(a) is applied; (4) distributions from the specified foreign corporation other than those described above are determined under section 959; (5) finally, amounts under section 956 are determined with respect to the specified foreign corporation and the section 958(a) U.S. shareholder.

Proposed section 1.965-2(c) provides that a DFIC’s previously taxed income (PTI) is increased and its section 959(c)(3) E&P (untaxed E&P) is decreased by an amount equal to the section 965(a) inclusion amount with respect to a section 958(a) U.S. shareholder. This adjustment is referred to as “section 965(a) previously taxed earnings and profits.”

Proposed section 1.965-2(d) provides that a DFIC’s PTI is increased and its section 959(c)(3) E&P (untaxed E&P) is decreased by an amount equal to the reduction in the section 965(a) inclusion amount under section 965(b)(1) with respect to a section 958(a) U.S. shareholder. This adjustment is referred to as “section 965(b) previously taxed earnings and profits.” Proposed section 1.965-2(d)(2)(i)(A) further provides that the section 959(c)(3) E&P (untaxed E&P) of an E&P deficit foreign corporation are increased by an amount equal to the portion of a section 958(a) U.S. shareholder’s pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under section 965(b)(1).

All adjustments prescribed in proposed section 1.965-2(c) and (d) require translation to functional currency using the Dec. 31, 2017, spot rate.

Proposed section 1.965-2(e) provides that, under section 961(a), a section 958(a) U.S. shareholder's basis in section 958(a) stock of a DFIC is increased by the section 958(a) U.S. shareholder’s section 965(a) inclusion amount with respect to the DFIC. However, rules relating to basis adjustments in the case of a section 962 election are reserved. Proposed section 1.965-2(f)(1) further clarifies that no adjustments to basis of stock are made under section 961 (or any other provision of the Code) to take into account the reduction to a section 958(a) U.S. shareholder’s pro rata share of the section 965(a) earnings amount of a DFIC under section 965(b)(1). However, recognizing the necessity of basis adjustments with respect to both DFIC and E&P foreign deficit corporation stock, proposed section 1.965-2(f)(2) allows taxpayers to elect to make the relevant basis adjustments by (1) increasing the section 958(a) U.S. shareholder’s basis in the stock of a DFIC by an amount equal to the section 965(b) previously taxed earnings and profits of the DFIC with respect to the section 958(a) U.S. shareholder and (2) decreasing the U.S. shareholder’s basis in the section 958(a) stock of an E&P deficit foreign corporation by an amount equal to the portion of the U.S. shareholder’s pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under section 965(b)(1).

Proposed section 1.965-2(h) addresses the timing and allocation among shares of the specified basis adjustments and requires netting of the specified basis adjustments and gain recognition to the extent that a net downward adjustment would exceed basis.

Section 965(c) deductions - Prop. Reg. section 1.965-3

The section 965(c) deduction is intended to offset the section 965(a) inclusion amount by a 15.5percent rate equivalent percentage for assets held as cash and cash equivalents and an 8 percent rate equivalent percentage for all other assets.

Proposed section 1.965-3(b) focuses on the rules for disregarding certain assets for determining appropriate foreign cash positions. Any account receivable, account payable, short-term obligation or derivative financial instrument between specified foreign corporations is disregarded as calculated on a cash measurement date and pursuant to the section 958(a) U.S. shareholders ownership percentage. Further, other assets can be disregarded by the section 958(a) U.S. shareholder where double-counted assets are disclosed on a timely filed statement with specifics around the description of the relevant asset, calculation as to the anticipated reduction in the cash asset, an explanation as to why double counting occurred and finally an explanation as to why the asset is not simply disregarded pursuant to general guidance on disregarding certain obligations between related specified foreign corporations.

Proposed section 1.965-3(c) considers the aggregate foreign cash position for a section 958(a) U.S. shareholder inclusion year. For a singular section 958(a) U.S. shareholder inclusion year, the foreign cash position for the inclusion year is equal to the aggregate foreign cash position of the section 958(a) U.S. shareholder. Where there are multiple section 958(a) U.S. shareholder inclusion years, a portion of the aggregate foreign cash position is allocated based on the lesser of (a) the section 958(a) U.S. shareholder’s aggregate foreign cash position or the section 958(a) U.S. shareholder’s section 965(a) inclusion amount for the inclusion year. For succeeding section 958(a) U.S. shareholder inclusion years, a portion of the aggregate foreign cash position is allocated based on the lesser of (a) any remaining section 958(a) U.S. shareholder’s aggregate foreign cash position less any amount allocated to previous section 958(a) inclusion years or the section 958(a) U.S. shareholder’s section 965(a) inclusion amount for the inclusion year. It is further noted that where estimations are used for purposes of calculating the foreign aggregate cash position for the section 958(a) U.S. shareholder in the first section 965(a) inclusion year, amended return filings are permitted to address any shortfalls associated with the correct foreign aggregate cash position. This amended filing may be necessary where a specified foreign corporation had a tax year beginning before Jan. 1, 2018, which caused the section 958(a) U.S. shareholder to have multiple inclusion years.

A section 965(c) deduction may reverse as income to a U.S. shareholder when it first becomes an expatriated entity at any time during the 10-year window which begins on the date the TCJA was enacted (Dec. 22, 2017) pursuant to proposed section 1.965-3(d). An expatriated entity is defined in section 7874(a)(2) but does not include a surrogate foreign corporation where such corporation is treated as a domestic corporation under section 7874(b). Tax is assessed on this reversal income at 35 percent and no foreign tax credit is allowed against it.

Under proposed section 1.965-3(f), it is noted that a section 965(c) deduction is not treated as an itemized deduction pursuant to section 63(d). For both domestic partnership and S corporation purposes, the section 965(a) inclusion amount and the section 965(c) deduction amount are netted when adjusting any basis amounts, and further, the section 965(c) deduction amount is treated as income exempt from tax when calculating basis. For purposes of an S corporation’s accumulated adjustments account (or AAA), the section 965(c) deduction is treated as income not exempt from tax. In calculating net investment income and the imposition of the 3.8 percent tax thereon, a section 965(c) deduction is not available to offset a section 965(a) inclusion. Similarly, no 965(c) deduction is available to offset a section 965(a) inclusion for purposes of section 4940 and the excise tax based on investment income. It is further noted that a section 965(c) deduction must be allocated to pass-through owners in the same proportion as the aggregate section 965(a) inclusion.

Disregard of certain transactions - Prop. Reg. section 1.965-4

Section 965(o) provides that the Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of section 965, including regulations or other guidance to provide appropriate basis adjustments and regulations or other guidance to prevent the avoidance of the purposes of section 965, including through a reduction in E&P, changes in entity classification or accounting methods, or otherwise.

The proposed regulations provide rules, consistent with section 3.04 of Notice 2018-26, to prevent the avoidance of section 965, including an anti-avoidance rule disregarding certain transactions and rules disregarding certain changes in accounting methods, entity classification elections and certain transactions occurring between measurement dates. The proposed regulations will require additional analysis for payments occurring between measurement dates where an item of income accrues ratably throughout the year.

The preamble to the regulations state that “the Conference Report reflects an intent for the Treasury Department and the IRS to address all strategies for avoiding a section 965(a) inclusion, without regard to the effect on overall tax liability” and rejects calls for a de minimis exception to the anti-avoidance rule.

Proposed section 1.965-4(b)(1) speaks to the application of the anti-avoidance rule being based on whether there is a “change in the amount of a section 965 element” rather than a change in the section 965 tax liability, as described in Notice 2018-26. For this purpose, generally there is a change in the amount of a section 965 element if there is a reduction of a section 965(a) inclusion amount or aggregate foreign cash position or an increase in deemed paid foreign income taxes as a result of a section 965(a) inclusion, as per proposed section 1.965-4(d) and (e)(1). Finally, the anti-avoidance rule generally does not apply without a principal purpose of changing the amount of a section 965 element. Depending on the facts and circumstances, transactions that do not reduce overall tax liability may not meet the principal purpose test described in proposed section 1.965-4(b)(1).

Proposed section 1.965-4(c)(1) does not affect a taxpayer’s ability to change its method of accounting, including to change to a permissible method. Instead, the rule disregarding an accounting method change is relevant only for the limited purpose of determining the amount of a taxpayer’s section 965 elements.

The choice of a Nov. 2, 2017, measurement date reflects an intent to impose a transition tax on a snapshot of earnings as of a date that coincides with the introduction of the Act in Congress and reflects a general policy of disregarding taxpayer actions occurring after Nov. 2, 2017, that reduce the taxpayer’s liability imposed by reason of section 965, even if such future actions are otherwise respected under the Code. Such actions can include changes in accounting methods, whether to methods permissible or impermissible and regardless of the principal purpose for such change. A rule disregarding such changes is also consistent with the Conference Report, which reflects a clear intent for the Treasury Department and the IRS to exercise their authority under section 965(o) to disregard accounting method changes that reduce a taxpayer’s tax liability under section 965. See H.R. Rep. No. 115-466, at 619 (2017) (Conf. Rep.) for delineation of such intent.

Allowance of a credit or deduction for foreign income taxes - Prop. Reg. section 1.965-5

The -5 section of the proposed regulations provides rules for the allowance of a credit or deduction for foreign income taxes in connection with the application of section 965. Proposed section 1.965-5(b) provides rules under section 965(g) for the allowance of a credit or deduction for foreign income taxes paid or accrued. More specifically, proposed section 1.965-5(b) provides that neither a deduction nor a credit is allowed for the “applicable percentage” of any foreign income taxes paid or accrued with respect to any amount for which a section 965(c) deduction is allowed.

Proposed section 1.965-5(d) defines the term “applicable percentage” to mean, with respect to a section 958(a) U.S. shareholder and a section 958(a) U.S. shareholder inclusion year, the amount (expressed as a percentage) equal to the sum of the following two amounts:

  1. 0.771 multiplied by the ratio of (1) the section 965(a) inclusion amount in excess of the U.S. shareholder’s aggregate foreign cash position divided by (2) the section 965(a) inclusion amount, and
  2. 0.557 multiplied by the ratio of (1) the amount of the section 965(a) inclusion amount equal to the U.S. shareholder’s aggregate cash position, divided by (2) the section 965(a) inclusion amount.

In the case of a domestic pass-through owner that has a domestic pass-through owner share of a domestic pass-through entity’s section 965(a) inclusion amount, the domestic pass-through owner’s applicable percentage that is applied to foreign income taxes attributable to such section 965(a) inclusion amount is equal to the applicable percentage determined with respect to the domestic pass-through entity that is the section 958(a) U.S. shareholder.

Under proposed section 1.965-5(b), no deduction or credit is allowed for the applicable percentage of any withholding taxes imposed on a U.S. shareholder by the jurisdiction of residence of the distributing foreign corporation with respect to a distribution of section 965(a) previously taxed earnings and profits or section 965(b) previously taxed earnings and profits. Similarly, no deduction or credit is allowed for the applicable percentage of net basis taxes imposed on a U.S. citizen by the citizen’s jurisdiction of residence upon receipt of a distribution of section 965(a) previously taxed earnings and profits or section 965(b) previously taxed earnings and profits.

Proposed section 1.965-5(c) provides rules for the allowance of a credit or deduction for foreign income taxes treated as paid or accrued (foreign income taxes “deemed paid” by an eligible taxpayer) in connection with the application of section 965. More generally, proposed section 1.965-5(c) provides that a credit under section 901 is not allowed for the applicable percentage (as defined under paragraph (d)) of any foreign income taxes treated as paid or accrued with respect to any amount for which a section 965(c) deduction is allowed. Paragraph (c) further provides that no deduction is allowed for the applicable percentage of any foreign income taxes treated as paid or accrued with respect to any amount for which a section 965(c) deduction is allowed.

With respect to foreign income taxes deemed paid by a domestic corporation with respect to its section 965(a) inclusion amount, proposed section 1.965-5(c) provides that section 78 (providing for a “gross-up” of taxable income for foreign income taxes deemed paid) shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as:

  1. The excess of--
    1. The section 965(a) inclusion amount for a section 958(a) U.S. shareholder inclusion year, over
    2. The section 965(c) deduction amount allowable with respect to such section 965(a) inclusion amount, bears to
  2. Such section 965(a) inclusion amount.

With respect to foreign income taxes deemed paid by a domestic corporation attributable to such corporation’s domestic pass-through owner share of a section 965(a) inclusion amount of a domestic pass-through entity, proposed section 1.965-5(c) further provides that section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as the proportion determined above as applied to the domestic pass-through entity’s section 965(a) inclusion.

Computation of foreign income taxes deemed paid and allocation and apportionment of deductions - Prop. Reg. section 1.965-6

Proposed section 1.965-6 provides rules for the computation of foreign income taxes deemed paid and the allocation and apportionment of deductions. Proposed sections 1.965-6(b) and (c) provide the general rules for the computation of foreign income taxes deemed paid under sections 902 and 960. For purposes of determining foreign income taxes deemed paid under section 960(a)(1) with respect to a section 965(a) inclusion attributable to a DFIC, proposed section 1.965-6(b) provides that section 902 applies as if the section 965(a) inclusion, translated (if necessary) into the functional currency of the DFIC using the spot rate on Dec. 31, 2017, was a dividend paid by the DFIC.

In determining the amount of foreign income taxes deemed paid with respect to a section 965(a) inclusion, it is necessary to apply the “section 902 fraction” to available taxes in the relevant foreign corporation’s tax pool. As provided under paragraph (c) of this section, the term “section 902 fraction” means, with respect to a foreign corporation that is either a DFIC or an E&P deficit foreign corporation, the fraction that is:

  1. The dividend paid by, or the inclusion under section 951(a)(1) (including a section 965(a) inclusion) with respect to, the foreign corporation, as applicable (the numerator), divided by
  2. The foreign corporation’s post-1986 undistributed earnings (the denominator). See section 902(a).

As the numerator of the section 902 fraction is based on the section 965(a) inclusion amount (i.e., net of deficits allocated) and the denominator of that fraction is based on the foreign corporation’s post-1986 undistributed earnings (i.e., not reduced for deficits allocated), this could potentially result in trapped taxes in a DFIC. The preamble to these proposed regulations indicates that such trapped taxes will not be available under section 960(a)(3) (as in effect on Dec. 21, 2017) or new section 960(b) going forward.

When the denominator of the section 902 fraction is zero or less than zero, proposed section 1.965-6(c) provides that the section 902 fraction is zero and no foreign taxes are deemed paid thereby embracing historical “nimble dividend” rules. For purposes of the section 902 fraction, proposed section 1.965-6(c) further provides that the increase to the post-1986 undistributed earnings of an E&P deficit foreign corporation under section 965(b)(4)(B) and section 1.965-2(d)(2)(i)(A) takes effect as of the first day of the foreign corporation’s first taxable year following the E&P deficit foreign corporation’s last taxable year that begins before Jan. 1, 2018. Hence, it is anticipated that trapped taxes could result in the majority of cases where an E&P deficit foreign corporation also has historical foreign income taxes paid.

For purposes of allocating and apportioning expenses, proposed section 1.965-6(d) provides that a section 965(c) deduction does not result in any gross income, including a section 965(a) inclusion, being treated as exempt, excluded or eliminated income within the meaning of section 864(e)(3) or section 1.861-8T(d). Similarly, a section 965(c) deduction does not result in the treatment of stock as an exempt asset within the meaning of section 864(e)(3) or section 1.861-8T(d).

In addition, consistent with the general inapplicability of section 1.861-8T(d)(2) to earnings and profits described in sections 959(c)(1) or 959(c)(2), proposed section 1.965-6(d) provides that neither section 965(a) previously taxed earnings and profits nor section 965(b) previously taxed earnings and profits are treated as giving rise to gross income that is exempt, excluded or eliminated income. Similarly, the asset that gives rise to a section 965(a) inclusion, section 965(a) previously taxed earnings and profits, or section 965(b) previously taxed earnings and profits is not treated as a tax-exempt asset.

Elections, payment and other special rules - Prop. Reg. section 1.965-7

Section 965(h) election - Proposed section 1.965-7(b) provides guidance regarding an election that may be made with respect to the payment of the section 965(h) net tax liability that allows payment to be made in eight installments, subject to acceleration if one of a number of specified events occur. The election must be made no later than the due date (including extensions of time to file) of the tax return for the relevant year and can only be revoked by paying the remaining unpaid section 965(h) net tax liability. An election statement and perjury statement must be attached to the return and a model for this election has been provided in Appendix QA7 of Advance Release Documents dated April 13, 2018. The due date for the installment payments is the due date (without regard to extensions) for the tax return for the relevant year.

The occurrence of an acceleration event will cause the unpaid portion of the remaining installments to become due on the date of the event. Such acceleration events include: (1) failure to timely pay an installment; (2) a liquidation, sale, exchange, or other disposition of substantially all the assets of the person, including title 11 or death of the individual; (3) a cessation of the business; (4) the person ceases to be a U.S. person; (5) joining a consolidated group; or (6) the consolidated group cease to exist. Limited exceptions are available in circumstance where there is an eligible section 965(h) transferor and a transfer agreement. We note here that a deficiency event is treated differently from an acceleration event and where an event is determined to result in a deficiency, any underpaid section 965(a) tax liability is generally pro-rated over any remaining installments.

IRS issued published and issued a list of frequently asked questions and answers pertaining to the payment of the section 965(h) net tax liability which included guidance on paying the first installment payment required when a section 965(h) election is made. Subsequent to that guidance by way of an Office of Chief Counsel Memorandum dated Aug. 2, 2018, the IRS responded to taxpayer concerns and acknowledged that taxpayers that made payments with respect to the 2017 tax liability may have remitted more than the sum of the portion of the 2017 income tax liability not subject to payment in installments and the first installment payment of the section 965(h) tax liability. However, the IRS stated that refunds of any excess payment amounts would not be made until the entire 2017 tax liability is paid, including all future installments of the deferred payment of the section 965(h) tax liability.

Section 965(i) election - Proposed section 1.965-7(c) provides rules that allow each shareholder of an S corporation (other than a domestic pass-through entity) that is a U.S. shareholder of a DFIC to defer payment of the shareholder’s section 965(i) tax liability with respect to the S corporation until the shareholder’s taxable year that includes a “triggering” event. An election statement and perjury statement must be attached to the return and a model for this election has been provided in Appendix QA7 of Advance Release Documents dated April 13, 2018.

Triggering events are listed in proposed section 1.965-7(c)(3) and include: (1) the corporation ceasing to be an S corporation; (2) a liquidation, sale, exchange or other disposition of all the assets of the S corporation including cessation of its business; or (3) the transfer of any share of stock by the shareholder of the S corporation. Certain shareholders that had made a section 965(i) election may, upon the occurrence of a triggering event, make a section 965(h) election with respect to the shareholder’s additional tax assessed due to the triggering event.

Section 965(m) election - Proposed section 1.965-7(d) provides rules whereby a real estate investment trust (REIT) may elect to defer inclusion in gross income of its REIT section 965 amounts over an eight-year period.

Section 965(n) election - Proposed section 1.965-7(e) provides that a person may make an irrevocable election to not take into account the “applicable amount” in determining its net operating loss under section 172 for the taxable year or in determining the amount of taxable income for such taxable year that may be reduced by net operating loss carryovers or carrybacks to such taxable year. The “applicable amount” is defined as the person’s section 965(a) inclusions reduced by the person’s section 965(c) deductions for the taxable year and, in the case of a domestic corporation, the taxes deemed paid under section 960(a)(1) associated with the section 965(a) inclusions that are treated as dividends under section 78.

Election to use alternative method for calculating post-1986 earnings and profits - Proposed section 1.965-7(f) provides for an irrevocable election that applies to specified foreign corporations that do not have a 52-53-week taxable year. The regulation prescribes rules for the alternative method of calculating post-1986 earnings and profits in regard to the Nov. 2 measurement date.

Affiliated groups (including consolidated groups) - Prop. Reg. section 1.965-8

Proposed section 1.965-8 provides rules on the application of section 965 to members of an affiliated group as defined in section 1504(a) and including members of a consolidated group as defined in Reg. section 1.1502-1(h).

Proposed section 1.965-8(b) provides the mechanics for offsetting positive accumulated E&P of a U.S. shareholder who is a member of an affiliated group by the allocable share of the U.S. shareholder’s affiliated group’s aggregate unused E&P deficit. Proposed section 1.965(c) speaks to the designation of the portion of the excess aggregate foreign E&P deficit taken into account by members of an affiliated group. Each member of the affiliated group that is an E&P net deficit shareholder must designate by maintaining in its books and records a statement setting forth the portion of the excess aggregate foreign E&P deficit taken into account under section 965(b)(5). When some, but not all, members of an affiliated group are members of a consolidated group, then the consolidated group is treated as a single member of the affiliated group.

Proposed section 1.965-8(e) addresses the treatment of a consolidated group as a single section 958(a) U.S. shareholder or a single person for purposes of section 965(b), as well as the available election under section 965(h) for purposes of electing to pay the tax liability in installments, section 965(k) in regard to the extension of limitation on assessment and section 965(n) with respect to the election not to apply the net operating loss deduction. The treatment of a consolidated group as a single U.S. shareholder does not apply for purposes of determining the amount of any member’s inclusion under section 951, including the section 965(a) inclusion or section 965(c) deduction, or foreign income taxes deemed paid with respect to a section 965(a) inclusion. Specifically in regard to computing the member’s aggregate foreign cash position, guidance is provided in proposed section 1.965(e)-8(e)(3) and is calculated by way of the aggregate section 965(a) inclusion multiplied by the group cash ratio, which is represented by the sum of the aggregate foreign cash position of each member of a consolidated group.

Applicability dates - Prop. Reg. section 1.965-9

Proposed sections 1.965-1 through 1.965-8 apply beginning the last taxable year of a foreign corporation that begins before Jan. 1, 2018, and with respect to a U.S. person, beginning the taxable year in which or with which such taxable year of the foreign corporation ends. Specifically with respect to proposed section 1.965-4 for rules disregarding certain transactions, the applicable dates noted above are ignored. In coordinating sections 965 and 986, foreign currency gain or loss distributions of section 965(a) previously taxed earnings and profits will be determined based on movements in the exchange rate between Dec. 31, 2017, and the date of distribution, as reduced in proportion of the section 965(c) deduction; there is no application of section 986(c) for distributions of section 965(b) previously taxed earnings and profits.

For related insights and in-depth analysis, see our Tax Reform Resource Center.

For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.


The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.