IRS Releases Notice 2018-78 Providing Additional Guidance on Code Sec. 965 Transition Tax

October 3, 2018

The notice of proposed rulemaking providing rules under section 965 published in the Federal Register on August 9, 2018, provided, among other things, for a basis election to be made by United States shareholders in certain circumstances. The guidance impacts proposed regulations issued in August 2018.
Under the guidance:

U.S. shareholders are allowed an extended time to make the basis adjustment election under the reduction rules of Code Sec. 965(b). This Notice 2018-78 announces that the due date for the basis election that would otherwise be required to be made before the final regulations are published will be extended to 90 days after the publication of the final regulations. Further, elections made in the interim will be revocable.
A more taxpayer favorable rule will be included in the final regulations for determining the aggregate foreign cash position of a U.S. shareholder that is a member of a consolidated group. The determination of the aggregate foreign cash position of a United States shareholder that is a member of a consolidated group, which were inconsistent with the more taxpayer-favorable rule announced in Notice 2018-07. and
U.S. shareholders affected by Hurricane Florence are provided an extended period to file election statements and transfer agreements. This Notice 2018-78 provides a postponement for taxpayers affected by Hurricane Florence to make elections, and file transfer agreements, related to section 965.

Extension of Time to Make Basis Adjustment Election

The proposed regulations generally provide that a U.S. shareholder’s basis in its stock or property of the deferred foreign corporation (DFIC) is increased by the amount of the U.S. shareholder’s Code Sec. 965(a) inclusion amount with respect to the DFIC. The amount that would otherwise be included under subpart F may be reduced under Code Sec. 965(b) if the taxpayer is a U.S. shareholder with respect to at least one DFIC and one E&P deficit foreign corporation. In general, no adjustments to the basis of stock or property are made to take into account the reduction of the Code Sec. 965(a) earnings amount under the reduction rules. A taxpayer may, however, elect to make relevant basis adjustments as a result of the reduction rules in certain circumstances.

Requiring taxpayers to make binding basis elections before the proposed regulations are finalized was deemed too onerous for taxpayers. As a result, the basis election must be made by no later than 90 days after the publication of the final Code Sec. 965 regulations in the Federal Register. The basis election will be irrevocable after that date.

Prior to this extension, taxpayers were required to make the basis election for the U.S. shareholder’s return for the first tax year that includes the last day of the last tax year of a DFIC or E&P deficit foreign corporation that begins before January 1, 2018. If the due date occurred before September 10, 2018, the due date was October 9, 2018.

Consolidated Group Rules
The final regulation will provide that all members of a consolidated group who are U.S. shareholders of one or more specified foreign corporations are treated as a single U.S. shareholder for certain purposes, including rules for disregarding certain assets in determining the aggregate foreign cash position and the Code Sec. 965(c) deduction. The proposed regulations specifically exclude these rules in applying the single taxpayer rule.

The modification is necessary to prevent the overstatement of the aggregate foreign cash position and is consistent with prior guidance in Notice 2018-7, I.R.B. 2018-4, 317.

Hurricane Florence Extension
Taxpayers who have been affected by Hurricane Florence are granted an extension to make Code Sec. 965 elections and file transfer agreements, required to be filed under the proposed regulations. Affected taxpayers with election statements or transfer agreements due on or after September 7, 2018, and before January 31, 2019, are granted additional time to file until January 31, 2019.
Taxpayers should mark “Hurricane Florence” on the top of the election statement or transfer agreement. If a transfer agreement is filed, the affected taxpayer must be noted.

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IRS Releases Notice 2018-78 Providing Additional Guidance on Code Sec. 965 Transition Tax