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14 September 2018 US: RICs granted relief by Revenue Procedure 2018-47 from Section 4982 excise tax for Section 965 inclusions On 6 September 2018, the United States (US) Treasury Department and Internal Revenue Service (IRS) released Revenue Procedure 2018-47 in response to taxpayers' requests for relief from the application of the Internal Revenue Code1 Section 4982 excise tax that could otherwise be owed with respect to Section 965 inclusion amounts, due to the administrative burden placed on regulated investment companies (RICs) to obtain the required information, compute the required amounts and make "required distributions" in a brief amount of time. Revenue Procedure 2018-47 provides the requested relief by stating that the IRS will not challenge a RIC treating its share of a Section 965(a) inclusion (and its related Section 965(c) deduction (together, the "transition amounts")) attributable to a specified foreign corporation with a calendar year-end in the same manner as specified gain (and loss) under Section 4982(e)(5). Accordingly, a RIC may treat these transition amounts as items of income that are properly taken into account during the portion of the RIC's 2017 tax year that is after 31 October for purposes of Section 4982 and instead may include these amounts in the RIC's excise tax calculation for 2018. Section 965, as amended by Pub. L. No. 115-77 (the Act), generally requires a US corporate shareholder (including a RIC) that owns 10% or more of a foreign corporation to include as current income (specifically, as a "subpart F inclusion" under Section 951(a)(1)) its pro rata share of the foreign corporation's post-1986 undistributed accumulated earnings and profits for its last tax year beginning before 1 January 2018. This mandatory subpart F inclusion is subject to a participation exemption, resulting in tax on the inclusion at rates of 15.5%, if attributable to the foreign corporation's cash position, or 8%, if attributable to the foreign corporation's other positions. More particularly, Section 965(a), as amended, provides that for the last tax year of a deferred foreign income corporation (DFIC) (as defined in Section 965(d)(1)) that begins before 1 January 2018, the subpart F income of the corporation (as otherwise determined for such tax year under Section 952) will be increased by the greater of: (1) the accumulated post-1986 deferred foreign income (as defined in Section 965(d)(2)) of such corporation determined as of 2 November 2017, or (2) the accumulated post-1986 deferred foreign income of such corporation determined as of 31 December 2017. Section 965(b) may cause the amount of the inclusion under Section 965(a) to be reduced, and Section 965(c) provides a deduction to a US shareholder of a DFIC in the year that the US shareholder has an inclusion under Section 951(a)(1) by reason of Section 965. If the tax year of a DFIC is the calendar year, the subpart F income of the DFIC will be increased by the amount described in Section 965(a) for the tax year of the DFIC ended 31 December 2017. In general, Section 4982(a) imposes a 4% excise tax on the "undistributed income" of a RIC. The "undistributed income" of a RIC equals the "required distribution" of a RIC for the calendar year minus the distributed amount for such calendar year. Section 4982 provides special rules for determining the "required distribution" amount. Generally, the required distribution amount equals 98% of the RICs ordinary income for the calendar year plus 98.2% of the RIC's capital gain net income for the one-year period ending on 31 October of the calendar year. Among other items of ordinary income, a RIC must include its pro rata share of subpart F income to determine its required distribution amount. For certain non-periodic items of income, Section 4982(e)(5) provides a special rule that any ordinary gains or losses from the sale, exchange or other disposition of property (i.e., "specified gain" or "specified loss") incurred after 31 October are deferred until the following calendar year. The administrative burden created by the interplay of the Section 4982 excise tax calculation and Section 965's transition amounts arose because the Act did not address the transition amounts' impact with respect to the application of the excise tax rules under Section 4982. Under Section 965, a DFIC's subpart F income for its tax year that includes or ends on 31 December 2017, is the greater of the DFIC's accumulated post-1986 deferred foreign income determined as of 2 November 2017, or 31 December 2017. Section 4982(e)(1)(C) provides that for excise tax purposes, the ordinary income portion of the "required distribution" is determined by treating the calendar year as a RIC's tax year. Thus, under these two provisions certain RICs are required both to compute the transition amounts and make corresponding distributions by 31 December 2017. Revenue Procedure 2018-47 announces that the IRS will not challenge RICs that treat their transition amounts under Section 965 in the same manner as other non-periodic post-31 October items of ordinary income (e.g., foreign currency gains or losses attributable to a Section 988 transition) for purposes of applying the excise tax under Section 4982. Specifically, the IRS will not challenge such treatment only if the RIC:
Revenue Procedure 2018-47 is welcome news for taxpayers. By clarifying that a RIC's share of deferred foreign income from a specified foreign corporation with a calendar year-end may be treated as arising on 1 January 2018, for excise tax purposes, RICs are afforded additional time to make the required distribution under Section 4982; thereby alleviating the impact of the exercise tax on the mandatory inclusion under Section 965. This is because prior to the issuance of Revenue Procedure 2018-47, any amount includable as subpart F income of a RIC by the reason of the Section 965 transition tax could increase a RICs required distribution. Without time to properly determine the RIC's Section 965 inclusion and to make the actual distributions of the increased required distribution amount, a RIC could have faced a 4% excise tax on the Section 965 inclusion. RICs that have Section 965 transition amounts from a specified foreign corporation with a calendar year-end should consider treating such amounts as arising on 1 January 2018, for purposes of Section 4982. By doing so, the Section 965 transition amounts will be first taken into account in excise tax calculations for 2018. Note that Section 965 applies only to a single tax year of a DFIC — that is, the DFIC's last tax year beginning before 1 January 2018. Section 965 will not apply to subsequent years. Based on the timing rules for subpart F inclusions, the last RIC tax year in which a Section 965 inclusion could occur is 31 October 2019. 1 All "Section" references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
Document ID: 2018-6084 |
