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IRS extends Section 965 basis election due date

Relief for Hurricane Florence included in guidance

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slow moving storms floodsThe IRS released guidance (Notice 2018-78) giving taxpayers additional time to make the basis adjustment election under the Section 965 proposed regulations. Taxpayers will now have up to 90 days after publication of the final regulations to make the basis election if their tax returns were otherwise due before the final regulations are published. Taxpayers may also revoke an election previously made up to 90 days after the publication of the final regulations. Additional time is only provided to make the basis adjustment election, and all other Section 965 elections must be made with a timely filed return.

The notice also provides that the final Section 965 regulations will contain revised rules to prevent the overstatement of the aggregate foreign cash position by consolidated groups. In addition, it clarifies relief provided in IR-2018-187 to victims of Hurricane Florence making it clear that additional time is also allowed with respect to elections and transfer agreements under Section 965.

Background In August, the IRS issued a comprehensive set of proposed regulations under Section 965. The guidance included provisions that allow U.S. shareholders to elect to make certain basis adjustments for each deferred foreign income corporation (DFIC) and E&P deficit foreign corporation owned by that shareholder and related persons. The proposed rules provided that the basis election be made no later than the due date (accounting for any extension) for the shareholder’s return for the first taxable year that includes the last day of the most recent taxable year of a DFIC or an E&P deficit corporation.

See Grant Thornton’s previous coverage on the proposed regulations and basis election here.

Extension of time to make basis election The IRS acknowledged in the latest guidance that forcing taxpayers to make a basis election before the final regulations are issued would be onerous. As such, the IRS announced it will provide additional time to make the election in the final regulations. Under the final regulations, taxpayers will be able to make their basis election up to 90 days after the final regulations are published if their tax returns were otherwise due before the final rules are published. Taxpayers who have already made a basis election or will make an election on or before the date the final regulations are published will be able to revoke that election until 90 days after the final regulations are published.

For corporate and individual taxpayers with Dec. 31, 2017, tax years that included the last day of the most recent taxable year of a DFIC or an E&P deficit corporation, the election was otherwise due by Oct. 15. This welcome relief alleviates the burden imposed on these taxpayers, who would have needed to undertake complex analyses in a short period of time without the benefit of final regulations.

Other guidance in the notice The proposed regulations provide rules allowing Section 958(a) U.S. shareholders to disregard certain assets for purposes of determining aggregate foreign cash position. The proposed regulations also provide rules stating that all members of a consolidated group that are Section 958(a) U.S. shareholders of a specified foreign corporation are treated as a single Section 958(a) U.S. shareholder for certain purposes, but not for the rules that disregard certain assets for purposes of determining aggregate foreign cash position.

To prevent the overstatement of the aggregate foreign cash position by consolidated groups, the notice provides 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 the rules that disregard certain assets when determining aggregate foreign cash position.

The notice also clarifies relief previously provided to victims of Hurricane Florence who were required to make elections or file transfer agreements pursuant to the Section 965 proposed regulations on or after Sept. 7, 2018. Those deadlines have been postponed until Jan. 31, 2019. Affected taxpayer’s returns will be considered timely for purposes of making the elections under Section 965 if filed before this date. Additionally, transfer agreements required to be filed under the proposed regulations will also be considered timely if filed by affected taxpayers on or before Jan. 31, 2019. See Grant Thornton’s coverage of Hurricane Florence relief.

Next steps The ability to make the basis elections was not announced until August. This left many taxpayers with less than three months to evaluate the impact of the basis election. In some instances, the election could trigger gain recognition and require significant analysis to determine its benefits. This left many taxpayers scrambling to comply. The extension of time to make the election is welcome relief and provides taxpayers with additional time to undertake this complex analysis.

Contacts: David Sites
Partner
Washington National Tax Office
+1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
+1 202 521 1543

Cory Perry
Managing Director
Washington National Tax Office
+1 202 521 1509

Mike Del Medico
Managing Director
Washington National Tax Office
+1 202 521 1522

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