On Jan. 15, 2019, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued final regulations (the Final Regulations) (reg-104226-18) implementing the one-time transition tax on offshore deferred earnings contained in the Tax Cuts and Jobs Act (TCJA). The Final Regulations largely follow the August 2018 proposed regulations with some modifications and clarifications on certain key issues. For our prior analysis of the proposed regulations, please see our article, IRS issues proposed transition tax regulations. The Final Regulations will be effective once published in the Federal Register and retain the applicability date contained in the proposed regulations, and will generally apply to the last tax year beginning before Jan. 1, 2018. Taxpayers should review the Final Regulations as soon as possible, because certain elections must be made within 90 days of publication.
While there are no significant changes between the proposed regulations and the Final Regulations, there are several changes worth pointing out as they may require taxpayer action. For example, contrary to the proposed regulations, for purposes of determining the aggregate foreign cash position consolidated groups will be treated as one shareholder. This may require certain taxpayers filing consolidated returns to reexamine their cash calculations, and potentially file amended returns.
The Final Regulations also make some changes to the definition of “cash position” by allowing for a narrow exception. Under the exception, certain commodity assets held by a specified foreign corporation (SFC) in the ordinary course of its trade or business will be exempt. The exemption also applies to privately negotiated contracts to buy or sell such assets. This exception will largely benefit oil and energy companies with large inventories of commodities. The exception would not apply to dealers or traders in commodities.
The Final Regulations also made some changes to the rules regarding specified payments. Comments on the proposed regulations’ requirement that SFCs have different measuring dates for specified payments noted that the rules were unnecessarily complex and would lead to inappropriate results. The Final Regulations removed the requirement to use different dates and replaced it with a taxpayer election to choose measurement dates, so long as the taxpayer is consistent. Taxpayers should review the calculations on their original returns to determine if there is a tax benefit to potentially amending returns with a different measurement.
Ordering rules regarding Section 1248 inclusions were also revised by the Final Regulations. Under the proposed regulations there was a potential for double taxation, however, the Final Regulations clarify that the Section 1248 amount should be determined at the same time as traditional subpart F income. This clarification would largely impact those taxpayers that sold shares of an SFC in their 2017 tax year.
The Final Regulations also altered the proposed regulations’ rule disregarding accounting method changes made by specified foreign corporations for taxable years ending in 2017 or 2018 and filed on or after Nov. 2, 2017. For purposes of determining the amounts of section 965 elements, the final regulations continue to disregard accounting method changes for those years that have negative section 481(a) adjustments (i.e., those that would decrease the section 965 inclusion amount). However, in contrast to the proposed regulations, the final regulations carve out accounting method changes with positive section 481(a) adjustments (those that increase the section 965 inclusion amount) from the scope of this rule.
Other changes made by the Final Regulations include expanding the de minimis exception for downward attribution from partners and trust beneficiaries from five percent to 10 percent, and clarifying that where the controlled domestic partnership rules apply, all partners (including U.S. partners) must treat the partnership as a foreign partnership.
These Final Regulations may have a significant impact on taxpayers subject to the transition tax. Accordingly, taxpayers subject to the transition tax should consult their tax advisers in order to evaluate whether to review their prior year tax returns. Any reviews should be conducted quickly because certain elections set forth in the final regulations must be made within 90 days of publication of the Final Regulations.