On October 1, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued Notice 2018-78 (the Notice). The Notice provides guidance with respect to the basis election under Prop. Reg. §1.965-2(f)(2), the application of rules for disregarding certain assets for determining aggregate foreign cash position in Prop. Reg. §1.965-3(b) to consolidated groups and relief in connection with Hurricane Florence.
On August 9, Treasury published in the Federal Register (83 FR 39514) a notice of proposed rule making (REG-104226-18), which contained proposed §§1.962-1 and 1.962-2, 1.965-1 through 1.965-9, and 1.986(c)-1 (the Proposed Regulations).
- Basis Election under Prop. Reg. §1.965-2(f)(2)
Prop. Reg. §1.965-2(f)(2) allows a Section 958(a) U.S. shareholder (as defined in Prop. Reg. §1.965-1(f)(33)) to elect to make certain basis adjustments with respect to each deferred foreign income corporation (as defined in Prop. Reg. §1.965-1(f)(17)) and each E&P deficit foreign corporation (as defined in Prop. Reg. §1.965-1(f)(22)) (such election, the “basis election”). Prop. Reg. §1.965-2(f)(2)(iii)(B)(1)(i) provides the general rule that the basis election must be made no later than the due date (taking into account extensions, if any) for the Section 958(a) U.S. shareholder’s return for the first taxable year that includes the last day of the last taxable year of a deferred foreign income corporation or E&P deficit foreign corporation of the Section 958(a) U.S. shareholder that begins before January 1, 2018. If the due date referred to in Prop. Reg. §1.965-2(f)(2)(iii)(B)(1)(i) occurred before September 10, 2018, Prop. Reg. §1.965-2(f)(2)(iii)(B)(1)(ii) (transition rule) provides that the basis election must be made by October 9, 2018. The Notice states that Treasury intends that, when final regulations under Section 965 are published in the Federal Register (the Final Regulations), the Final Regulations will provide that the transition rule will apply with respect to returns due (determined with regard to any extension) before the date that is 90 days after the date that the Final Regulations are published and that in such cases the basis election must be made no later than 90 days after the publication of the Final Regulations in the Federal Register. In addition, the Notice states that the Final Regulations will provide that, if a basis election was made on or before the date the final regulations are published, the basis election may be revoked no later than 90 days after the publication of the Final Regulations in the Federal Register. Relevant tax returns must be filed consistently with an election that has been made and not revoked.
- II. Application of Prop. Reg. §1.965-3(b) to Consolidated Groups
Prop. Reg. §1.965-3(b) provides rules allowing a Section 958(a) U.S. shareholder to disregard certain assets for purposes of determining its aggregate foreign cash position (as defined in Prop. Reg. §1.965-1(f)(8)). Prop. Reg. §1.965-8(e) provides that all members of a consolidated group that are Section 958(a) U.S. shareholders of a specified foreign corporation (as defined in Prop. Reg. §1.965-1(f)(45)) are treated as a single Section 958(a) U.S. shareholder for certain enumerated purposes that do not include Prop. Reg. §1.965-3(b). To prevent the overstatement of the aggregate foreign cash position, the Notice states that the Final Regulations will provide that all members of a consolidated group that are Section 958(a) U.S. shareholders of a specified foreign corporation are also treated as a single Section 958(a) U.S. shareholder for purposes of Prop. Reg. §1.965-3(b).
- III. Relief in Connection with Hurricane Florence
On September 15, and September 24, in response to Hurricane Florence, the IRS announced (IR-2018-187, NC-2018-03, SC-2018-01) that certain individual and business taxpayers would have until January 31, 2019, to file certain tax returns and make certain tax payments. The Notice provides a postponement for affected taxpayers to make elections with respect to Section 965 and file transfer agreements required to be filed under the Proposed Regulations. Affected taxpayers for whom elections with respect to Section 965 or transfer agreements are due on or after September 7, 2018, and before January 31, 2019, are granted additional time to file such elections or transfer agreements until January 31, 2019.The Notice provides that an affected taxpayer is any taxpayer whose principal residence or principal place of business was located in a Hurricane Florence covered disaster area, as defined in Treas. Reg. §301.7508A-1(d)(2), or whose records necessary to meet its obligation were maintained in such a covered disaster area, or in the case of a transfer agreement, a taxpayer who intends to enter into a transfer agreement with such a taxpayer.The Notice states that Taxpayers who believe they are entitled to this relief should mark “Hurricane Florence” on the top of the relevant Section 965 election statement or transfer agreement, and, in the case of a transfer agreement, a notation of which party to the agreement is an affected taxpayer whose principal residence or principal place of business was located in a Hurricane Florence covered disaster area, as defined in Treas. Reg. §301.7508A-1(d)(2), or whose records necessary to meet its filing obligation were maintained in such a covered disaster area.
The Proposed Regulations do not permit 9100 relief if a taxpayer fails to timely make the basis election so the Notice provides welcome relief by extending the time for taxpayers to make the basis election. This extended period provided by the Notice to make the election will permit taxpayers additional time to make an informed decision relating to the basis election.
The International Tax Team at Ryan & Wetmore is well-versed in international taxation. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
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