IRS concludes Section 246(b) can limit GILTI and FDII deduction

 

The IRS Office of Chief Counsel published a generic legal advice memorandum (AM 2024-002) on Oct. 11 that provides non-taxpayer-specific legal advice on how Section 246(b) can further limit a taxpayer’s Section 250 deduction after applying the taxable income limitation in Section 250(a)(2).

 

Section 250(a)(2) limits a taxpayer’s global low taxed intangible income (GILTI) and foreign-derived intangible income (FDII) deduction based on taxable income when the sum of the FDII and GILTI deduction under Section 250 exceeds the taxable income of the domestic corporation.

 

Section 246, titled “[r]ules applying to deductions for dividends received” generally limits the scope of the various dividend received deduction (DRD) provisions. The limitation in Section 246(b) prevents dividends that are eligible for DRDs from being taxed at effective rates below those established by the statutory rate and the percentage of the DRD. However, Section 246(b)(3) provides special rules that not only limit the aggregate amount of deductions allowed by the DRD provisions in Sections 243(a)(1), 245(a) and (b), but also the deduction allowed under Section 250. There are two taxable income limitations in Section 246(b)(3), which the AM applied separately for determining whether and how the Section 246(b) limitation applies to reduce the DRDs and the Section 250 deductions.

 

The limitations set forth in Section 246(b) to further limit the Section 250 deduction for GILTI and FDII are not cross-referenced in Section 250, and are only cited in Treas. Reg. Sec. 1.250(b)-1(d)(2)(ii) when determining deductions to allocate to deduction eligible income. In the preamble to the final regulations (T.D. 9901, 85 F.R. 43042), the IRS determined that the coordination between Sections 246 and 250 would require further study.

 

Grant Thornton Insight:

 

Although AM 2024-002 is nonprecedential and provides non-taxpayer-specific legal advice, taxpayers claiming Section 250 deductions should consider the coordination between Sections 246 and 250 and evaluate the impact of any positions taken.

 
 

Contacts:

 
 
Cory Perry

Washington DC, Washington DC

Industries
  • Technology, media & telecommunications
  • Manufacturing, Transportation & Distribution
  • Private equity
Service Experience
  • Tax
 
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