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IRS Considering Narrow Relief From Repatriation Double Tax

Posted on Jan. 21, 2020

The IRS is “open to considering relief” for some taxpayers that may be facing double taxation as a result of earnings being taxed as dividends and under the Tax Cuts and Jobs Act’s transition tax.

“The IRS has determined that in unique circumstances, such as where a corporation paid an unusual dividend for business reasons, not because of the enactment of TCJA, it may be appropriate to provide relief from double taxation,” the agency said in a brief January 17 announcement.

Any such relief would be for taxpayers facing “no significant reduction” of the tax through foreign tax credits.

The announcement advises taxpayers facing the contemplated “limited circumstances” to reach out to the IRS.

John L. Harrington of Dentons said the announcement is unusual and “probably as unusual as the circumstances that it describes,” given that it was issued by the IRS alone and not as a joint document with Treasury, and that it doesn’t promise future action.

“Rather, it invites taxpayers to come into the IRS and describe sympathetic cases. . . . It is unclear what kind of relief might be provided,” Harrington said, noting that in some situations, the IRS could provide relief through private letter rulings or closing agreements. “Alternatively, this could be viewed as fact-finding for purposes of developing guidance, in which [case] Treasury would have to sign off.”

In November 2019 the IRS indicated that it would consider extending relief for the “fairly small number” of taxpayers facing double taxation as a result of the transition tax under section 965, which saw the repatriation of significant sums of foreign earnings.

Section 965 imposes a one-time tax — a 15.5 percent tax for cash positions and an 8 percent tax for other amounts — on U.S. shareholders’ share of a specified 10-percent-owned foreign corporation’s deferred earnings and profits. Final regs on the tax (T.D. 9846) were released in January 2019.

What Are They Getting At?

Harrington was unsure which circumstances the IRS found “so sympathetic,” noting that section 965 regs rejected comments asking for relief from double taxation of earnings and distributions, with the IRS asserting it was bound by the statute or existing guidance.

“I am all for providing relief from double taxation, and so I hope the IRS provides relief generously. But this announcement seems pretty restrained, focused not just on relieving double taxation that occurs as a legal matter but also as a factual matter,” Harrington said. “For example, if the earnings of a foreign corporation were subject to section 965 and those earnings are distributed as a taxable dividend, if the U.S. income taxes on that dividend are offset by foreign withholding tax, that seems to be carved out as not being double taxation in fact.”

Joseph Calianno of BDO USA LLP noted that while the announcement provides some general language relating to situations that may be eligible for relief, it does not provide a lot of specifics. He further noted that the issue of possible double taxation was raised by commentators and discussed in sections of the preamble to the final regs.

For example, in one of the situations raised in the preamble, Treasury rejected comments asking the IRS to mitigate double counting of E&P connected to dividends. That contemplated situation involved a request to reduce E&P by dividends distributed to a U.S. shareholder between November 2, 2017, and December 1, 2017, by a deferred foreign income corporation with an inclusion year ending November 30, 2018.

“Legislative history to section 965(o) makes clear that the Treasury Department and the IRS were expected to provide regulations to address double counting resulting from transactions between specified foreign corporations but is silent with respect to transactions between specified foreign corporations and United States shareholders. . . . Accordingly, the Treasury Department and the IRS have determined that the grant of regulatory authority in section 965 was not intended to address such fact patterns,” the preamble states. “Further . . . payments by a specified foreign corporation to a United States shareholder can have attendant U.S. tax effects that do not occur with respect to payments between specified foreign corporations.”

Calianno was encouraged by the IRS for taking a pragmatic approach with the announcement, although he hoped the IRS would provide more specificity when potential relief would apply. Like Harrington, he noted that the form of any relief was not fleshed out.

“What they put out here isn’t exactly clear,” Calianno said.

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