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October 2, 2018

With many taxpayers currently finalizing their Section 965 toll-charge calculations, a common concern has been that IRS guidance exists largely in proposed form. Treasury Regulations proposed in August will not be finalized until well after many taxpayers file their 2017 returns, reflecting their Section 965 calculations. Earlier this week, the IRS acknowledged these concerns and offered taxpayers relief with respect to one of the elections provided in the proposed regulations.

As a reminder, Proposed Regulations Section 1.965-2(f)(2) allows a U.S. taxpayer to elect to increase its basis in the stock of a positive-E&P specified foreign corporation (SFC) by the amount of deficit allocated from negative-E&P SFCs to that SFC’s Sec. 965(a) inclusion. The taxpayer would then be required to make a corresponding decrease in the basis of the negative-E&P SFCs whose deficits were applied against positive E&P. Therefore, although all taxpayers get a basis increase for the amount they actually include in gross income under Section 965(a), only electing taxpayers get a basis increase for E&P that was offset by deficits, and then only at the cost of a basis decrease in the stock of deficit SFCs.

The proposed regulations generally provide that taxpayers are required to make this binding election on their income tax return that reflects the toll-charge inclusion, with no late election relief available. However, many taxpayers have expressed concern with making a binding election based on proposed rules.

This week, the IRS released Notice 2018-78, providing taxpayers with additional time to make or revoke the election:

  • A taxpayer whose return is due (with extensions) prior to 90 days after publication of the final regulations may make the election within 90 days of their publication.
  • If a taxpayer makes the election prior to publication of the final regulations, they make revoke the election within 90 days of publication of the final regulations.

Alvarez & Marsal Taxand Says:

Barring a dramatic change in its mechanics, this election will remain beneficial for many taxpayers. However, with at least three months to decide whether to make the election, taxpayers can take a more considered approach. As you finalize your toll-charge compliance, feel free to call your A&M Taxand contact to discuss whether you should consider this election, and when and how to make it.

Related Issues:

Special Alert: IRS Releases Proposed Sec. 965 Regulations

On August 1, the IRS issued proposed regulations which interpret and apply the Sec. 965 transition tax. These regulations, by and large, affirm the interpretations of Sec. 965 from a trio of IRS Notices and a Revenue Procedure.