IRS corrects regulations issued under Sections 965 and 250

Tax Hot Topics newsletter The IRS issued corrections to final regulations under Section 965 (84 FR 14260) and proposed regulations under Section 250 (84 FR 14634 and 84 FR 14901).

The changes under Section 250 included the addition of a sentence to the preamble defining financial services income by reference to Section 904(d)(2)(d) and Prop. Treas. Reg. Sec. 1.904-4(e)(1)(ii). Several applicability dates provided in the preamble of the proposed regulations package were also corrected to apply to taxable years beginning on or after March 4, 2019.

The corrections to the final regulations under Section 965 are more noteworthy. The first modifies the “dealer exception,” which provides that specified foreign corporations (SFCs) that are dealers and traders in commodities must include commodities in their cash positions. This rule now applies to specific commodities held by an SFC in its capacity as a dealer or trader rather than testing the entity to determine if it is a dealer or trader.

The second change to the Section 965 final regulations treats all members of an affiliated group that are Section 958(a) U.S. shareholders as a single U.S. shareholder for purposes of the limited basis election under Treas. Reg. Sec. 1.965-2(f)(2)(ii)(A)(2). As written prior to its correction, a U.S. shareholder could apply the limited basis election only if it owned stock of both a deferred foreign income corporation (DFIC) and E&P deficit foreign corporation. This correction allows members of an affiliated group that only own DFICs to make the election.

Finally, the Section 965 final regulations were corrected to provide a clarification to the anti-diminution rule. As originally written, the rule states that an SFC may not reduce its earnings and profits for a distribution made to its U.S. shareholder in a year that had an SFC measurement date. In limited situations (e.g., if an SFC has a Nov. 30 tax-year end) the rule could apply to multiple years of an SFC. Therefore, it was clarified that the anti-diminution rule applies only to the last year of an SFC beginning before Jan. 1, 2018.

David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

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

Cory Perry
Senior Manager, Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Manager, Washington National Tax Office
T+1 202 521 1522

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