IRS finalizes regulations coordinating Sections 956 and 245A

Tax Hot Topics newsletter The IRS published final regulations (TD 9859) under Section 956 on May 23 that look to create symmetry between the taxation of foreign earnings which are actually repatriated and effectively repatriated in light of the new participation exemption regime under Section 245A. To accomplish this, proposed regulations provided that an inclusion amount otherwise determined under Section 956 (tentative Section 956 amount) is reduced to the extent the U.S. shareholder would have been allowed a deduction under Section 245A had the U.S. shareholder received an actual distribution from the controlled foreign corporation (CFC) equal to the amount determined under Section 956. Find our prior coverage on the proposed regulations here.

Although the final regulations largely adopt the guidance in the proposed regulations, two notable changes were made. The first provided an ordering rule which treats a hypothetical distribution as being attributable first to Section 959(c)(2) previously taxed earnings and profits and then to Section 959(c)(3) previously taxed earnings and profits. This corrects a mechanical glitch in the proposed regulations that may have resulted in earnings being subject to Section 956 that would have otherwise qualified for a Section 245A dividends received deduction.

The second change provides that the tentative Section 956 amount with respect to a domestic partnership is reduced to the extent that one or more domestic corporate partners would be entitled to a Section 245A deduction if the partnership received such amount as a distribution. Any remaining amount of the domestic partnership’s inclusion under Sections 951(a)(1)(B) and 956 is allocated to the partners in the same proportion as net income would result to the partners upon a hypothetical distribution (i.e., a distribution from the CFC to the domestic partnership). The preamble to the proposed regulations proposed two methods when a CFC is held through a partnership (the finalized version being one of those), but received no comments.

The final regulations are applicable to the tax years of CFCs which begin on or after July 22, 2019, and the tax years of U.S. shareholders in which or with which such CFC tax years end. However, taxpayers may choose to apply the rules to tax years of CFCs beginning after Dec. 31, 2017, subject to a consistency requirement.

David Sites
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
Washington National Tax Office
T +1 202 521 1522

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