October 2, 2018 / North America
With many taxpayers currently finalizing their Section 965 toll-charge calculations, a common concern has been that IRS guidance exists largely in proposed form. Treasury Regulations proposed in August will not be finalized until well after many taxpayers file their 2017 returns, reflecting their Section 965 calculations. Earlier this week, the IRS acknowledged these concerns and offered taxpayers relief with respect to one of the elections provided in the proposed regulations.
As a reminder, Proposed Regulations Section 1.965-2(f)(2) allows a U.S. taxpayer to elect to increase its basis in the stock of a positive-E&P specified foreign corporation (SFC) by the amount of deficit allocated from negative-E&P SFCs to that SFC’s Sec. 965(a) inclusion. The taxpayer would then be required to make a corresponding decrease in the basis of the negative-E&P SFCs whose deficits were applied against positive E&P. Therefore, although all taxpayers get a basis increase for the amount they actually include in gross income under Section 965(a), only electing taxpayers get a basis increase for E&P that was offset by deficits, and then only at the cost of a basis decrease in the stock of deficit SFCs.
The proposed regulations generally provide that taxpayers are required to make this binding election on their income tax return that reflects the toll-charge inclusion, with no late election relief available. However, many taxpayers have expressed concern with making a binding election based on proposed rules.