Retroactive Tax Proposals Are Concern, Individuals Say

December 20, 2018

The Honorable Orrin Hatch (by facsimile)
Chairman
Committee on Finance
U.S. Senate
Washington, DC 20510

The Honorable Ron Wyden (by facsimile)
Ranking Member
Committee on Finance
U.S. Senate
Washington, DC 20510

The Honorable Kevin Brady (by facsimile)
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

The Honorable Richard Neal (by facsimile)
Ranking Member
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Hatch, Ranking Member Wyden, Chairman Brady, and Ranking Member Neal:

On December 17, 2018, House Ways and Means Committee Chairman Kevin Brady introduced a tax package as an amendment to H.R. 88 (Rules Committee Print 115-87, “Text of the House Amendment to the Senate Amendment to H.R. 88” or the “R.C.P. 115-87”).¹ Included in R.C.P. 115-87 are several purported technical corrections to P.L. 115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the so-called “Tax Cuts and Jobs Act” or “TCJA”).

As with the enactment of any major package of tax legislation such as the TCJA, technical corrections may be appropriate, especially in light of the accelerated process for the enactment of TCJA in December 2017 and the attenuated opportunity for comment and contemporaneous technical correction in 2017. Such contemporaneous comment and suggestions of technical modification may serve to correct typographical or cross-reference errors or to conform the resulting statutory text to the stated goals of the legislation under consideration. Technical modifications sought to be made after enactment are also commonly referred to as technical “corrections” to address situations not identified during the legislative consideration. In both cases, however, “technical” modifications are drafting tools to implement the expressed intent of the legislation, and are not changes to reflect changed policy goals. “Technical” corrections to recently enacted legislation to eliminate asymmetries between the statutory text and the stated legislative intents may have a retroactive effective date, to the effective date of the original enactment of the flawed statutory text.

In contrast, amendments to previously enacted tax legislation intended to implement new or different legislative intent, or even secret and previously undisclosed legislative intent not previously shared with the members of Congress who enacted the flawed legislation, are properly effective only prospectively from the date of introduction of the new legislative initiative. For the reasons stated below, the modifications proposed in Section 501(f) of R.C.P. 115-87, Div. A are not “technical corrections” that might be eligible for retroactive effect from the date specified in TCJA for the repeal of section 958(b)(4) of the Code, but are amendments to the Code as revised by TCJA that should have a prospective effective date.

The delineation between a technical correction and an amendment is not always obvious. In Section 501(d) of R.C.P. 115-87, Div. A, it is obvious that the proposed modification of section 162(q)(2) of the Code to permit a plaintiff to deduct attorney fees incurred in a sexual harassment or sexual abuse case² is a technical correction. The Committee Reports accompanying TCJA specifically refer to payments by the party responsible for harassment rather than the recipient of the settlement payment.³ Section 501(d) of R.C.P. 115-87, Div. A merely makes clear than the recipient of such settlement payments (i.e., the victim) is not precluded from deducting legal fees incurred to recover damages for sexual harassment.

Similarly, the modification to section 965(h) proposed in Section 501(e) of R.C.P. 115-87, Div. A, merely implements the “same year” tax comparison for the section 965 inclusion and the taxpayer's other federal income tax liabilities. That same year feature was clearly set out in the Committee Reports accompanying TCJA in order to establish the amount of that year's incremental tax that can be paid in installments.⁴

In contrast, the proposed adoption of section 958(b)(4) to reinsert the limitation on downward attribution repealed as part of TCJA and the proposed enactment of entirely new section 951B to create a new second Subpart F regime in Section 501(f) of R.C.P. 115-87, Div. A⁵ are examples of amendments to carry out a revised Congressional intent nowhere contemplated in the Committee Reports accompanying TCJA. This is because these provisions are not simply corrections to the Code provisions adopted as part of TCJA, but reflect an alternative means to subject taxpayers to current tax on non-U.S. corporate affiliates that may be under some degree of common ownership with a foreign corporation and in which a U.S. corporation may also have some direct or indirect ownership (as little as 10%).

Enacting a tax retroactively to take property from a United States person is potentially a taking prohibited by the Due Process Clause of the Fifth Amendment to the Constitution. Enacting new section 951B to take property from such a United States person, in the form of a tax measured by the income of certain foreign corporations in which such a United States person may have some direct or indirect ownership is a tax that will take property. Such a taking may be permitted by the Constitution if enacted with due process. See Eder v. Commissioner of Internal Revenue, 138 F.2d 27 (2d. Cir, 1943). Eder involved a foreign personal holding company, a perceived abusive situation that Congress addressed prospectively in enacting section 331 in 1937. However, if R.C.P. 115-87, Div. A, Section 501(f) is enacted as drafted, it will retroactively subject to tax income that was never described as income to be taxed in connection with the repeal of section 958(b)(4) or in any other section of TCJA. That is not due process.

If the concepts contained in in R.C.P. 115-87, Div. A, Section 501(f) are to be enacted, these new provisions should be effective only on a prospective basis as further discussed below.

We submit this letter on our own behalf, but we note that one or more of our clients may be affected by action or inaction in response to this comment letter.

Background — Tax Cuts and Jobs Act

The TCJA, amended section 958(b) by deleting subparagraph (b)(4).⁶ Prior to its repeal, section 958(b)(4) prohibited the attribution, under the “constructive ownership” provisions of sections 318(a)(3) and 958(b), of stock owned by a foreign person to a United States person (the so-called limitation on “downward attribution”). The attribution rules in section 958 exist to determine whether a United States person is a “United States shareholder” and whether a foreign corporation is a “controlled foreign corporation.”⁷

The legislative history to TCJA reflects that it was intended that the repeal of section 958(b)(4) would expand the scope of the Subpart F regime so as to treat certain foreign corporations as controlled foreign corporations for all purposes of the Code, including the Subpart F regime. Specifically, the Conference Report to TCJA provides as follows:

In adopting this provision, the conferees intend to render ineffective certain transactions that are used to as a means of avoiding the subpart F provisions. One such transaction involves effectuating “de-control” of a foreign subsidiary, by taking advantage of the section 958(b)(4) rule that effectively turns off the constructive stock ownership rules of 318(a)(3) when to do otherwise would result in a U.S. person being treated as owning stock owned by a foreign person. Such a transaction converts former CFCs to non-CFCs, despite continuous ownership by U.S. shareholders.⁸

Not only was the scope broadened for foreign corporations to be treated as controlled foreign corporations, this change in the attribution rules was intentionally made retroactive to “the last taxable year of foreign corporations beginning before January 1, 2018”⁹ (even if that taxable year closed prior to the date of enactment of TCJA), in order, presumably, to apply not only the Subpart F regime,¹⁰ but also the new transition toll tax rules of section 965 (which were also adopted as part of TCJA)¹¹ to the broader group of foreign corporations in 2017. Nothing in this language or any other written explanation available to voting members of the 115^th Congress prior to enactment of the TCJA hinted at the enactment of a new substantive regime to tax certain United States subsidiaries of certain foreign corporations on income not then described in Subpart F or the described amendments to Subpart F to be enacted by TCJA.

The TCJA then under consideration included a new regime to be included in new section 951A (entitled “Global Intangible Low-Taxed Income”) (the so-called “GILTI” regime). The GILTI regime would require certain United States shareholders to include in their gross income the “net tested income” of controlled foreign corporations.¹² The GILTI regime was designed to 'fit' on top of the same architecture as the remainder of the Subpart F regime, specifically adopting the concepts of “United States shareholder” and “controlled foreign corporation” for the application of the GILTI regime.¹³ This is reflected not only by the inclusion of new section 951A within Subpart F of the Code, but also by the concurrent amendment to section 951(b) and section 957 to provide that the definitions for the terms “United States shareholder” and “controlled foreign corporation,” respectively, are being defined for all purposes of the Code — i.e., a unified definition for those terms when used in section 951A or elsewhere in the Code outside of Subpart F.

The design feature that the GILTI regime was intended to 'fit' on top of the same architecture as the remainder of the Subpart F regime, is also reflected by the use of the same timing and measurement for income inclusions rules found in the Subpart F regime for the GILTI regime¹⁴ and through the provisions to coordinate consequences of the GILTI and Subpart F regime.¹⁵

R.C.P. 115-87 and “Technical Corrections”

Section 501 of R.C.P. 115-87, Div. A is entitled “Technical amendments relating to Public Law 115–97.” The title thus purports to characterize the component provisions as merely technical corrections for certain provisions enacted as part of TCJA. Although as noted above, Section 501 of R.C.P. 115-87, Div. A does include certain technical corrections, the proposed changes to the Code contained in Section 501(f) of R.C.P. 115-87, Div. A are not technical corrections but are instead substantive, and likely revenue raising amendments to the core architecture of the Code, enacting new rules not reflected or intended at the time of TCJA.

Foreign corporations prior to the proposed Section 501(f) of R.C.P. 115-87, Div. A were taxable pursuant to sections 881 and 882, and the operation of those sections was then subject to the application of the applicable provisions of the 57 bilateral tax treaties to which the United States is a party.¹⁶ While it is certainly within the competence of the Congress to change that architecture, and to override treaties, such amendments and treaty overrides are peculiarly inappropriate for slipping in as mere “technical corrections.”¹⁷ The proposed amendment involves an obvious nondiscrimination issue under the 57 bilateral tax treaties to which the United States is a party, and that issue should at least be addressed by formal Congressional consideration instead of the silence in R.C.P. 115-87.

Specifically, Section 501(f)(1) of R.C.P. 115-87, Div. A proposes to amend section 958(b) by inserting after section 958(b)(3) the following:

(4) Subparagraphs (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

This is word-for-word the text of section 958(b)(4) prior to its repeal as part of TCJA. Further, this re-adoption of section 958(b)(4) is to apply with the same effective date as its repeal as part of TCJA.¹⁸ It is somewhat unclear how a repeal and re-adoption of the exact same language are both to be effective on the same date, but it is nevertheless clear that this re-adoption is not a technical correction but a straight retroactive amendment to the Code to the law prior to TCJA.

Congress in enacting the repeal of section 958(b)(4) as part of TCJA clearly understood what it intended — i.e., to broaden the scope of foreign corporations that are subject to the Subpart F regime through the repeal of the limitation on downward attribution, with this new broaden scope to apply not only to the traditional income inclusion rules of section 951, but also the new transition toll tax rules of section 965 and the new GILTI regime of section 951A. The Committee Reports for TCJA at least acknowledge that bilateral tax treaties are relevant to the assertion of taxing jurisdiction by the United States.¹⁹

In addition to the re-adoption of section 958(b)(4), Section 501(f)(2) of R.C.P. 115-87, Div. A proposes to add new section 951B to the Code. This section creates new definitions and rules for the application of Subpart F. The proposed text for new section 951B of the Code is attached as an appendix.

Specifically, proposed, new section 951B creates new terms of “foreign controlled foreign corporation” and “foreign controlled United States shareholder” which, in general, are defined to be a person that would otherwise qualify as a controlled foreign corporation or a more than 50 percent United States shareholder, as applicable, if the proposed, newly re-adopted section 958(b)(4) limitation of downward attribution was once again repealed. With these new definitions, in general, a taxpayer is required to apply for a second time all the rules of Subpart F, including the transition toll tax rules of section 965 and the GILTI regime of section 951A, to determine if income inclusions would be required under these rules if the relevant operative terms were “foreign controlled foreign corporation” and “foreign controlled United States shareholder” rather than merely “controlled foreign corporation” and “United States shareholder,” respectively.²⁰

It is proposed that new section 951B shall apply to “(A) the last taxable year of foreign corporations beginning before January 1, 2018, and each subsequent taxable year of such foreign corporations, and (B) taxable years of United States persons in which or with which such taxable years of foreign corporations end.”²¹ Thus, like the re-adoption of section 958(b)(4), new section 951B is proposed to have a retroactive effect on taxpayers as if it had been enacted as part of TCJA.

The application of the Subpart F regime to taxpayers based on pre-TCJA law and concepts and then the re-application of the Subpart F regime for a second time based on, essentially, the repeal of section 958(b)(4), and then including, presumably, the highest of the two amounts in the gross income of the U.S. taxpayer was not contemplated or intended by Congress when enacting TCJA.²²

It is speculated by some observers who write for periodical tax news sources that these changes “would provide relief to some multinationals and private equity firms facing additional taxes on offshore earnings because of the 2017 tax law.” In that “[a]n apparent glitch in the law could subject certain U.S. taxpayers to tax on the offshore earnings of foreign entities even though those taxpayers don't control the entities generating the earnings.”²³ However, that journalistic speculation is clearly incorrect. The proposed changes will require a double application of the Subpart F regime, once with a limitation on downward attribution and a second time without the limitation on downward attribution. Amelioration appears to be inaccurate at best, and perhaps even misleading. Specifically, the only benefit under the new provision for the double application of the Subpart F regime will be obtained by those U.S. taxpayers that will fail the “foreign controlled United States shareholder” test because they own directly, indirectly or with attribution (including with downward attribution) only 50 percent or less of the tested foreign corporation. As a result, many multinationals and private equity firms will remain subject to additional U.S. federal taxes on their offshore earnings as a result of the effective repeal of the limitation on downward attribution in section 958(b)(4).²⁴

Again, the proposed re-adoption of section 958(b)(4) and proposed adoption of section 951B are amendments to the existing Code, and are not technical corrections to the legislation enacted as part of TCJA.²⁵ These proposed changes in Section 501(f) of R.C.P. 115-87, Div. A are no more technical corrections than if the adoption of the GILTI regime in section 951A was made retroactive to 1962 as a 'technical correction' to the adoption of the Subpart F regime in 1962 because the end of deferral could have been an alternative means for designing the controlled foreign corporation regime rules of sections 951-964 in 1962.²⁶ Because these proposed changes in Section 501(f) of R.C.P. 115-87, Div. A are not merely technical corrections, the effective dates for such changes, if enacted, should be prospective.

Precedent: The Tax Reform Act of 1986 and The Technical and Miscellaneous Revenue Act of 1988

As discussed above, the need for technical corrections of major tax legislation is a common occurrence. However, in the past, Congress has been careful to distinguish between technical corrections (with retroactive effective dates) and amendments to the Code to provide an alternative to what was previously adopted (with prospective effective date).

In this regard, the Tax Reform Act of 1986 (P.L. 99-514) (“TRA 1986”) brought about a fundamental revision of the Code. Even though the provisions of TRA 1986 were proposed, debated, discussed, revised, and rewritten over a 2-year period, it still needed technical corrections. The primary piece of legislation to include those technical corrections and amendments was the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) (“TAMRA”). The effective dates for the TAMRA changes to the Code as enacted by TRA 1986 reflect whether Congress viewed those changes as technical corrections (with retroactive effective dates) or as fundamental amendments (with prospective effective dates).

For example, TAMRA included several corrections to the foreign currency gains and loss rules of section 988 as adopted as part of TRA 1986. These technical corrections were each made retroactive to the effective date of the underlying section 988 regime as adopted by TRA 1986.²⁷ Nevertheless, even though viewed as a technical correction, the adoption of the definition of the term “delivery” in section 988(c)(5) was effective only from the date of notice of the change (of June 11, 1987), rather than retroactive to the date section 988 was adopted by TRA 1986.²⁸ Moreover, TAMRA's (i) repeal of the exception for certain foreign currency positions subject to the section 1256 marked-to-market regime and (ii) adoption of a new and more elaborate set of rules in section 988(c)(1)(D) for the exclusion of foreign currency positions subject to the section 1256 marked-to-market regime, and providing a mechanism to elect to include such contracts within the rules of section 988, were viewed as such material changes not contemplated in 1986 that TAMRA provided a prospective effective date.²⁹

Fifth Amendment Concerns

The question might be why it matters whether the proposed changes in Section 501(f) of R.C.P. 115-87, Div. A are to be effective on a prospective or retroactive basis? The answer is that taxpayers relied on the clear language and intent of the changes to the Subpart F regime reflected by the repeal of section 958(b)(4) in designing and implementing their business transactions during 2018 and they will be harmed through an increased U.S. federal tax liability if the proposed re-adoption of section 958(b)(4) is made retroactive to the same date as its repeal as part of TCJA. This taking is even more troublesome given that Treasury and IRS have issued guidance since the enactment of TCJA that acknowledges and applies the repeal of section 958(b)(4).³⁰

As a result of the repeal of the limitation on downward attribution, many foreign members of non-U.S. multinational groups in fact constituted “controlled foreign corporations” as defined after TCJA and as intended by Congress in repealing section 958(b)(4). Given this broaden definition of a “controlled foreign corporation,” taxpayers implemented during 2018 business transactions that relied on that repeal. For example, the repeal of section 958(b)(4) enabled a controlled foreign corporation directly or indirectly held by a United States shareholder to lend to foreign members of its non-U.S. multinational group (treated as controlled foreign corporations as a result of the repeal of section 958(b)(4)), with the resulting interest income earned by that controlled foreign corporation qualifying for the exception from Subpart F foreign personal holding company income pursuant to section 954(c)(6), albeit remaining subject to inclusion under GILTI whereby its United States shareholder would be entitled to the 50 percent deduction of section 250(a) after TCJA. However, as proposed by R.C.P. 115-87, the retroactive reinstatement of the limitation on downward attribution of section 958(b)(4) would cause the resulting interest income earned by the controlled foreign corporation during 2018 to constitute Subpart F foreign personal holding company income, and subject to full residual U.S. federal taxation under section 951(a). This is especially troubling given that such a controlled foreign corporation, if it could have foretold the proposed reversal of law, might have been able to reinvest its excess cash to produce income exempt from Subpart F, while subject to inclusion under GILTI and entitled to the 50 percent deduction of section 250(a).

As a second example, given the broadened definition of “controlled foreign corporation,” a U.S. member of a non-U.S. multinational group was permitted during 2018 to integrate the business operations of a controlled foreign corporation directly or indirectly held by the United States shareholder with a foreign member of the group in a tax-free reorganization without incurring the toll charge under section 367(b)³¹ of including in the United States shareholder's gross income the section 1248 amount (or other gain) of the merged controlled foreign corporation, provided the resulting entity of the merger remained a controlled foreign corporation (as determined without limitation on downward attribution after TCJA). However, as proposed by R.C.P. 115-87, the retroactive reinstatement of the limitation on downward attribution of section 958(b)(4) might cause the resulting entity to cease to be a controlled foreign corporation, triggering inclusion by the United States shareholder in its gross income the section 1248 amount (or other gain) of the merged controlled foreign corporation. Again, this is troubling because the non-U.S. multinational group could have decided to forego the benefits of business integration if it could have foretold a change in law that would cause that integration to give rise to U.S. federal tax.

This retroactive change in law that triggers taxation on completed transactions is not only bad tax policy, but is also a potential violation of the Due Process Clause of the Fifth Amendment to the Constitution. The Fifth Amendment provides in relevant part that “No person shall be . . . deprived of life, liberty, or property, without due process of law. . . . ” The Supreme Court has stated that “due process is flexible, and calls for such procedural protections as the particular situation demands.”³² In this regard, “consideration of what procedures due process may require under any given set of circumstances must begin with a determination of the precise nature of the government function involved, as well as of the private interest that has been affected by governmental action.”³³

In the instant situation, it is, of course, recognized that the government has an important interest in protecting the administration of the tax system. However, once a statute is enacted that is clear and in accordance with the stated reasons for enactment reflected in the legislative history for its enactment, taxpayers have a right to rely on that statute to guide their selection and design of business transactions.

Indeed, taxpayer confidence in fundamental fair play (i.e., due process) and the rule of law is fundamental to the administration of a federal income tax system based largely on taxpayer self-assessment and voluntary compliance. Other countries where such taxpayer confidence has been eroded by capricious or unpredictable behavior are notably unable to maintain a complex income-based system and are forced to rely instead on entirely different approaches to taxation. By retroactively changing the U.S. federal tax consequences of business transactions implemented in reliance on the statute as enacted by TCJA, Congress will be subjecting those transactions to incremental tax and taxpayers will have no opportunity to otherwise challenge or have judicial review, except for recourse found by the invocation of the Due Process Clause of the Fifth Amendment.

In the context of the retroactive application of federal income tax legislation, the Supreme Court has stated that “[i]n each case it is necessary to consider the nature of the tax and the circumstances in which it is laid before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation.³⁴ Further, the Court has consistently held that the application of an income tax statute to the entire calendar year in which enactment took place does not per se violate the Due Process Clause of the Fifth Amendment.³⁵ That being recognized, however, courts have still recognized a distinction between retroactive legislation that addresses the rate of tax as opposed to whether a transaction was or was not taxable.

In this regard, in Stockdale v. Insurance Companies, the Court stated as follows:

The right of Congress to have imposed this tax by a new statute, although the measure of it was governed by the income of the past year, cannot be doubted; much less can it be doubted that it could impose such a tax on the income of the current year, though part of that year had elapsed when the statute was passed.³⁶

But this doctrine has been further refined since the 19^th century, as reflected by Judge Learned Hand's opinion in Cohan v. Commissioner in which he described the doctrine on retroactivity in the context for federal income tax legislation as follows:

Nobody has a vested right in the rate of taxation, which may be retroactively changed at the will of Congress at least for periods of less than twelve months; Congress has done so from the outset. . . . The injustice is no greater than if a man chanced to make a profitable sale in the months before the general rates are retroactively changed. Such a one may indeed complain that, could he have foreseen the increase, he would have kept the transaction unliquidated, but it will not avail him; he must be prepared for such possibilities, the system being already in operation. His is a different case from that of one who, when he takes action, has no reason to suppose that any transactions of the sort will be taxed at all.³⁷ (Emphasis added.)

Similarly, the Court reasoned in Lewellyn v. Frick

the general principle “that laws are not to be considered as applying to cases which arose before their passage” is preserved when to disregard it would be to impose an unexpected liability that, if known, might have induced those concerned to avoid it and to use their money in other ways.³⁸

The proposed new provisions of Section 501(f) of R.C.P. 115-87, Div. A are potentially unconstitutional as the result of their retroactive effect because they would impose federal tax on transactions that would not have been subject to tax based on the Code in effect on the date the transactions were implemented, and proposing such changes in the guise of 'technical corrections' does not alter their potential violation of the Due Process Clause of the Fifth Amendment.

Revision to Effective Date

To comply with the Due Process Clause of the Fifth Amendment, and given the significant re-writing of the Code reflected by the provisions, the effective date of new provisions of Section 501(f)(3) of R.C.P. 115-87, Div. A, if enacted, should be revised as follows (new text in red and bold, with deletions in red and strikethrough):

(3) The amendments made by paragraphs (1) and (2) shall apply to — (A) the last first taxable year of foreign corporations beginning before January 1, 2018 on or after [the date R.C.P. 115-87 or its successor is introduced as a Bill], and each subsequent taxable year of such foreign corporations, and (B) taxable years of United States persons in which or with which such taxable years of foreign corporations end.

* * *

We appreciate your consideration of our comments. We would be happy to discuss any questions you may have in person or by phone.

Sincerely,

Jeffrey M. O'Donnell

Robert H. Dilworth

Matthew A. Lykken

CC:
Mr. David J. Kautter
Assistant Secretary for Tax Policy, and Acting
Commissioner of the Internal Revenue Service
U.S. Department of the Treasury

Mr. Lafayette G. “Chip” Harter III
Deputy Assistant Secretary
International Tax Affairs
U.S. Department of the Treasury

Mr. William M. Paul
Acting Chief Counsel and
Deputy Chief Counsel (Technical)
Internal Revenue Service

Mr. Douglas Poms
International Tax Counsel
U.S. Department of the Treasury

Thomas Barthold
Joint Committee on Taxation

---

Appendix — Text of Proposed New Section 951B

SEC. 951B. AMOUNTS INCLUDED IN GROSS INCOME OF FOREIGN CONTROLLED UNITED STATES SHAREHOLDERS.

(a) IN GENERAL. — In the case of any foreign controlled United States shareholder of a foreign controlled foreign corporation —

(1) this subpart (other than sections 951A,951(b), 957, and 965) shall be applied with respect to such shareholder (separately from, and in addition to, the application of this subpart without regard to this section) —

(A) by substituting 'foreign controlled United States shareholder' for 'United States shareholder' each place it appears therein, and

(B) by substituting 'foreign controlled foreign corporation' for 'controlled foreign corporation' each place it appears therein, and

(2) sections 951A and 965 shall be applied with respect to such shareholder —

(A) by treating each reference to 'United States shareholder' in such section as including a reference to such shareholder, and

(B) by treating each reference to 'controlled foreign corporation' in such section as including a reference to such foreign controlled foreign corporation.

(b) FOREIGN CONTROLLED UNITED STATES SHAREHOLDER. — For purposes of this section, the term 'foreign controlled United States shareholder' means, with respect to any foreign corporation, any United States person which would be a United States shareholder with respect to such foreign corporation if —

(1) section 951(b) were applied by substituting 'more than 50 percent' for '10 percent or more', and

(2) section 958(b) were applied without regard to paragraph (4) thereof.

(c) FOREIGN CONTROLLED FOREIGN CORPORATION. — For purposes of this section, the term 'foreign controlled foreign corporation' means a foreign corporation, other than a controlled foreign corporation, which would be a controlled foreign corporation if section 957(a) were applied —

(1) by substituting 'foreign controlled United States shareholders' for 'United States shareholders', and

(2) by substituting 'section 958(b) (other than paragraph (4) thereof)' for 'section 958(b)'.

(d) REGULATIONS. — The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance —

(1) to treat a foreign controlled United States shareholder or a foreign controlled foreign corporation as a United States shareholder or as a controlled foreign corporation, respectively, for purposes of provisions of this title other than this subpart, and

(2) to prevent the avoidance of the purposes of this section.