The IRS Office of Chief Counsel published a memo (memorandum 202436010) on Sept. 6 concluding that a controlled foreign corporation (CFC) is not allowed a dividends received deduction (DRD) under Section 245A for a dividend paid by another foreign corporation in which it held a 45% interest.
The memo focused on the plain language of Section 245A, which requires both:
- That the recipient of the dividend from a specified foreign corporation be a “domestic corporation”
- That the recipient of the dividend must also be a “United States Shareholder” of the foreign payor
The memo argued that neither condition was met under the facts presented In reaching this conclusion, the IRS made several arguments in addition to its interpretation of the plain language of Section 245A, including whether other statutory provisions could change the plain language of the interpretation of Section 245A, and whether the legislative history of the Tax Cuts and Jobs Act should override the statutory language.
The IRS asserted the statutory language itself is “clear and unambiguous in identifying the type of taxpayer to which it applies,” and ultimately concluded it was determinative.
The example presented in the memo is a vertical structure with a domestic U.S. shareholder that wholly owns a CFC (FC1), which in turn owns 45% of a single class of stock of a foreign corporation (FC2). The remaining stock of FC2 is owned by a nonresident alien individual. In the example, FC1 receives a dividend from FC2. The memo concludes that FC1 would not be entitled to a DRD under Section 245A for the dividend it received from FC2, because FC1 is neither a domestic corporation nor a U.S. shareholder with respect to FC2.
The memo provides non-taxpayer-specific legal advice regarding the application of Section 245A and may not be used or cited as precedent. Taxpayers and U.S. shareholders of CFCs that have included a CFC-level deduction under Section 245A with respect to a dividend received from a specified 10%-owned foreign corporation should review the memo and evaluate the impact on any positions taken.
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