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Final regs coordinate DRD, GILTI anti-abuse rules

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Tax Hot Topics newsletter The IRS has issued final regulations (T.D. 9934) that coordinate the extraordinary disposition rules under the Section 245A regulations and the disqualified basis rules under Section 951A.

The final regulations adopt proposed regulations issued Aug. 27 that addressed gap-year and other planning strategies that used dividends-received deduction (DRD) in a manner the IRS found contrary to legislative intent. The regulations are meant to prevent fiscal-year taxpayers from exploiting a mismatch in effective dates by applying Section 245A against income that should have been subject to tax under the global intangible low taxed income (GILTI) regime under Section 951A or otherwise subject to U.S. tax. For more details on the proposed regulations, see our prior coverage.

The final regulations specifically address the Section 245A extraordinary disposition rule, which limits the Section 245A deduction of a Section 245A shareholder. In general, for any tax year, an otherwise qualifying taxpayer will be permitted to claim a Section 245A deduction only to the extent that the dividend exceeds the “ineligible amount.” The ineligible amount comprises 50% of the portion of the dividend attributable to extraordinary disposition amounts and 100% of amounts attributable to extraordinary reduction amounts.

In addition, the final regulations address the Section 951A disqualified basis rules that apply to a deduction or loss attributable to basis created from a transfer of property from a CFC to a related person during the GILTI gap-year.

The final regulations coordinate the extraordinary disposition rule under Section 245A with the disqualified basis and disqualified payment rules under Section 951A. The coordination mechanism involves two operative rules: the disqualified basis (DQB) reduction rule, which reduces disqualified basis in certain cases, and the extraordinary disposition account (EDA) reduction rule, which reduces an extraordinary disposition account in certain cases. The final regulations provide two versions of both the DQB reduction rule and the EDA reduction rule. One version of the rules would apply to simple cases, while the other would apply to complex cases. The final regulations also make one revision to the proposed regulations with regard to the DQB reduction rule. Specifically, the final regulations provide that prior extraordinary disposition amounts (such as those that give rise to an income inclusion to a Section 245A shareholder by reason of Sections 951(a)(1)(B) and 956(a)), also reduce disqualified basis under the DQB reduction rule.

The final regulations apply to taxable years of foreign corporations beginning on or after Dec. 1, 2020, and to taxable years of Section 245A shareholders in which or with which such taxable years of foreign corporations end. Taxpayers may choose to apply the final regulations early with certain limitations. Final regulations related to information reporting have also been issued under Section 6038 to facilitate administration of these final regulations.

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

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

Yasmin Dirks
Manager
Washington National Tax Office
+1 202 521 1506

Olivia Arnold
Manager
Washington National Tax Office
+1 678 515 2490

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