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NYSBA Tax Section Looks for Guidance on Dividends Received Deduction

NYSBA Tax Section Looks for Guidance on Dividends Received Deduction

New York State Bar Association Tax Section

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on the new section 245A dividends received deduction for dividends distributed by a controlled foreign corporation. Section 245A was added to the code under the Tax Cuts and Jobs Act (<a href="/lr/resolve//1xftl">P.L. 115-97</a>) as part of the U.S. government’s move toward a modified territorial tax system for income earned by foreign subsidiaries of domestic corporations and other domestic shareholders. Section 245A provides for a 100 percent dividends received deduction (the section 245A participation exemption) regarding the “foreign-source portion” of any dividend received from a specified 10 percent owned foreign corporation (STFC) by a domestic corporation that is a U.S. shareholder. Section members outline a wide range of recommendations for guidance on the new provision, asking first for clarification that deemed dividends not specifically referenced in the legislative history of the statute qualify for the participation exemption. Members also seek guidance to clarify that a domestic corporation that is a partner in a partnership be allowed to claim the section 245A participation exemption regarding the portion of any dividends received by the partnership from a foreign corporation that are allocated to the corporate partner as long as the allocation has substantial economic effect. The tax section requests guidance on the application of the section 958 attribution rules to partnerships for purposes of determining whether a partner in a partnership is a U.S. shareholder. The tax section next addresses the possible need for a technical correction to the TCJA. Members say that if Treasury determines that Congress intended that any amount treated as a “dividend received” by a domestic corporation from a foreign corporation under section 78 before the effective date of the amendments made to section 78 by the act should not be treated as “any dividend received” for purposes of section 245A, Treasury should issue guidance to that effect. Or, if Treasury believes it does not have the authority to issue that guidance, it should propose a technical correction to the act for consideration by Congress. Section members urge Treasury and the IRS to provide guidance saying that section 1059 should not apply to deemed dividends that arise under section 1248(a) and section 964(e). Moreover, guidance should provide that section 245A applies to a foreign corporation that receives a dividend from another foreign corporation, subject to some exceptions, including for distributions of amounts that are excluded from gross income for purposes of section 951(a) by reason of section 959(b). Also, members say, guidance should clarify that the holding period aggregation rule in reg. section 1.1502-13(c)(1)(ii) applies for purposes of applying section 246(c)(1) to a dividend received by a member of a consolidated group that acquires a share of stock of an STFC from another member of the same consolidated group. Members cite the need for guidance on many other issues arising because of the new section 245A dividends received deduction, including issues related to taxpayers holding multiple blocks of shares of an STFC with different holding periods, deemed redemptions, the tolling of the holding period, the treatment of portions of a dividend as tax-exempt income, and the computation of the foreign-source portion of a dividend received for purposes of section 245A.

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on the new section 245A dividends received deduction for dividends distributed by a controlled foreign corporation.

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on the new section 245A dividends received deduction for dividends distributed by a controlled foreign corporation. Section 245A was added to the code under the Tax Cuts and Jobs Act (P.L. 115-97) as part of the U.S. government’s move toward a modified territorial tax system for income earned by foreign subsidiaries of domestic corporations and other domestic shareholders. Section 245A provides for a 100 percent dividends received deduction (the section 245A participation exemption) regarding the “foreign-source portion” of any dividend received from a specified 10 percent owned foreign corporation (STFC) by a domestic corporation that is a U.S. shareholder. Section members outline a wide range of recommendations for guidance on the new provision, asking first for clarification that deemed dividends not specifically referenced in the legislative history of the statute qualify for the participation exemption. Members also seek guidance to clarify that a domestic corporation that is a partner in a partnership be allowed to claim the section 245A participation exemption regarding the portion of any dividends received by the partnership from a foreign corporation that are allocated to the corporate partner as long as the allocation has substantial economic effect. The tax section requests guidance on the application of the section 958 attribution rules to partnerships for purposes of determining whether a partner in a partnership is a U.S. shareholder. The tax section next addresses the possible need for a technical correction to the TCJA. Members say that if Treasury determines that Congress intended that any amount treated as a “dividend received” by a domestic corporation from a foreign corporation under section 78 before the effective date of the amendments made to section 78 by the act should not be treated as “any dividend received” for purposes of section 245A, Treasury should issue guidance to that effect. Or, if Treasury believes it does not have the authority to issue that guidance, it should propose a technical correction to the act for consideration by Congress. Section members urge Treasury and the IRS to provide guidance saying that section 1059 should not apply to deemed dividends that arise under section 1248(a) and section 964(e). Moreover, guidance should provide that section 245A applies to a foreign corporation that receives a dividend from another foreign corporation, subject to some exceptions, including for distributions of amounts that are excluded from gross income for purposes of section 951(a) by reason of section 959(b). Also, members say, guidance should clarify that the holding period aggregation rule in reg. section 1.1502-13(c)(1)(ii) applies for purposes of applying section 246(c)(1) to a dividend received by a member of a consolidated group that acquires a share of stock of an STFC from another member of the same consolidated group. Members cite the need for guidance on many other issues arising because of the new section 245A dividends received deduction, including issues related to taxpayers holding multiple blocks of shares of an STFC with different holding periods, deemed redemptions, the tolling of the holding period, the treatment of portions of a dividend as tax-exempt income, and the computation of the foreign-source portion of a dividend received for purposes of section 245A.

Sec. 245A Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations.

Sec. 951 Amounts included in gross income of United States shareholders

Sec. 951A Global intangible low-taxed income included in gross income of United States shareholders

Sec. 958 Rules for determining stock ownership

Sec. 1059 Corporate shareholder's basis in stock reduced by nontaxed portion of extraordinary dividends

Sec. 1248 Gain from certain sales or exchanges of stock in certain foreign corporations

Sec. 78 Gross Up For Deemed Paid Foreign Tax Credit

Sec. 964 Miscellaneous provisions

United States

Controlled foreign corporations (CFCs)

Corporate taxation

Dividends

Exemptions and deductions

Foreign-source income

Tax Cuts and Jobs Act

Karen Gilbreath Sowell

DOC 2018-42380

2018 WTD 208-23

Sowell, Karen Gilbreath

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NYSBA Tax Section Looks for Guidance on Dividends Received Deduction