The IRS has released new proposed regulations on making and revoking certain foreign currency gain or loss elections. These new proposals withdraw 2017 proposed regs §1.954-2(g)(3)(iii) and (g)(4)(iii) and proposed §1.988-7(c) through (e) and repropose them with revisions. (Preamble to Prop Reg REG-111629-23, 8/19/2024).
The IRS received comments about the 2017 proposals from practitioners who noted that the language of §1.954-2(g)(3)(ii) is inconsistent with other CFC filing requirements, which generally must be filed by U.S. shareholders for the tax year of a CFC that ends with or within the U.S. shareholders' tax year.
In response to those comments, the IRS has issued a new set of proposed regs.
These new proposals would revise Reg §1.954-2(g)(3)(ii) to provide that controlling U.S. shareholders could make a §1.954-2(g) election on behalf of a CFC by filing a statement, clearly indicating that the election has been made, with their original income tax returns for the tax years of the controlling U.S. shareholders in which or with which the tax year of the CFC ends.
Additionally, these proposed regulations withdraw 2017 proposed §1.954-2(g)(3)(iii) and (g)(4)(iii). The IRS' new proposals would provide that controlling U.S. shareholders revoke a §1.954-2(g) election on behalf of a CFC by filing a statement that clearly indicates the election has been revoked with their original income tax returns for the tax years of the controlling U.S. shareholders in which or with which the tax year of the CFC ends.
Under new Prop Reg §1.954-2(g)(3)(iii) and Prop Reg §1.954-2(g)(4)(iii), controlling U.S. shareholders would be precluded from revoking a §1.954-2(g) election made on behalf of a CFC (including an initial election) until six years after the year in which the election was made. Additionally, the new proposals would provide that if a CFC's controlling U.S. shareholders revoke a §1.954-2(g) election, they may not make a new §1.954-2(g) election on behalf of the CFC until six years after the year in which the previous election was revoked.
According to the IRS, this change to the revocation rules "would limit taxpayers from opportunistically making or revoking a §1.954-2(g) election." For example, this change would limit taxpayers' ability to selectively recognize certain foreign currency losses.
Other proposals contained in this NPRM include changes to 2017 proposed regs §1.988-7(c) through §1.988-7(e).
For example, new Proposed Reg §1.988-7(d) would provide that the election made pursuant to proposed §1.988-7(c) is subject to rules like those imposed on Code Sec. 475 elections. The election would be effective for the tax year for which it is made and all subsequent years. The new proposal would provide that a taxpayer may revoke the election only with the IRS' consent.
Generally, these proposed regulations would apply to tax years ending on or after the date final regulations are published in the Federal Register (the "finalization date").
Taxpayers can rely on these proposed regulations and the treatment of certain elections, or revocation of elections, made in earlier periods.
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