The IRS recently issued proposed regulations (REG-113839-22) that would treat members of a consolidated group as a single U.S. shareholder in certain cases for purposes of Section 951(a)(2)(B) with respect to controlled foreign corporation-to-controlled foreign corporation (CFC-to-CFC) distributions of previously taxed earnings and profits under Section 959(b) (“PTEP distributions”).
According to the preamble of the proposed regulations, the purpose of the guidance is to facilitate the clear reflection of income of a consolidated group by ensuring that the location of a foreign corporation within the group does not affect the amount of the group’s income under Sections 951(a)(1)(A) and 951A(a).
Per the proposed guidance, members of a consolidated group would be treated as a single U.S. shareholder for purposes of determining the amount described in Section 951(a)(2)(B) subsequent to a PTEP distribution from one CFC to another CFC before a transfer of such CFC between members within the consolidated group. As a result of such treatment, the transferee member’s pro rata share would reflect the period that both members owned stock of the CFC.
The regulations would apply to tax years for which the original consolidated return is due — without extensions — after the date of publication of the regulations as final in the Federal Register. Therefore, if the proposed regulations are finalized by April 15, 2023, the date that an original consolidated return is due for a calendar year taxpayer, the regulations would apply retroactively to transactions occurring in 2022.
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