John Deere Seeks Changes to Cash Position Determinations

21 September 2018

The Honorable David Kautter
Assistant Secretary — Tax Policy
U.S. Treasury Department
1500 Pennsylvania Ave. N.W.
Washington DC 20220

William M. Paul, Esq.
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington DC 20224

CC:PA:LPD:PR (REG-104226-18) room 5203
Internal Revenue Service
P.O. BOX 7604
Ben Franklin Station
Washington DC 20220

Re: Section 965 Comments — Determination of Cash Position under Section 965

Dear Mr. Kautter and Mr. Paul:

I am pleased to provide these comments on behalf of Deere & Company in response to the proposed regulations implementing Section 965 of the Tax and Job Cuts Act of 2017. Deere appreciates the opportunity the U.S. Treasury has provided us to highlight anomalies that could occur in measuring a U.S. taxpayer's cash position under Section 965, for purposes of applying the transition tax. These anomalies would be created by specific circumstances surrounding transactions that occurred during the very time of debate and enactment of the new tax law.

Deere is disappointed that the concerns addressed in our comment letters and which we discussed with Treasury staff were not addressed favorably in the Draft Section 965 Guidance that was proposed on August 9, 2018 at 83 FR 39514. The commentary, at page p.39538, refers to concerns similar to Deere's as "comments [that] requested guidance excluding certain assets from a specific foreign corporation's cash position, or otherwise providing special rules with respect to those assets, including cash used or intended to be used to fund foreign acquisitions . . .". This acknowledgement failed to address the unique facts of Deere's situation, namely that the acquisition cash now proposed to be taxed at the higher 15.5% rate, was cash contributed overseas by Deere from the United States in the five months prior to the measurement date. It also included cash from debt recently issued in foreign markets. Cash from both sources was there for the sole purpose of completing an acquisition under a contractual agreement entered into well before the measurement date. Moreover, the acquisition was scheduled to close before the measurement date, but was delayed until after the measurement date only because of the inaction of two foreign governments (China and Tanzania) to complete their own reviews in timely fashion.

While Congress' intent in establishing a bifurcated transition tax was to tax the liquid foreign earnings and profits of U.S. parent corporations at the higher tax rate, the acquisition cash contributed by Deere to the overseas acquisition was included in its cash position on the measurement date only because of the temporary delay in regulatory approvals. Moreover, these assets were not derived from foreign earnings and profits. While we appreciate the need for administrable rules and the difficulty in drawing fine lines, we respectfully submit that Deere's facts merit drawing a distinction. Not addressing these circumstances in the final rule would mean that significant cash assets: I) that were not generated from Deere's foreign earnings or profits, II) whose transfer was delayed beyond the measurement date only by regulatory delays outside Deere's control, and III) were in fact transferred off Deere's balance sheet within one month of the measurement date under a previously agreed contract, will nevertheless be included for tax purposes in its aggregate cash position on the measurement date, and be taxed at the higher rate of 15.5%.

We discussed this concern extensively with members of the House and Senate committees during consideration of the legislation, and we were assured that the U.S. Treasury Department would be given the necessary authority to address this problem through the rulemaking process. During our meetings with Treasury staff, we believe Treasury indicated it understood Deere's unique and unintended circumstances — that the cash originated in the United States and from foreign borrowings — and saw those circumstances as differentiating Deere from other situations where the cash originated in foreign operations. We understood Treasury to believe it had the authority to address these issues through rulemaking, and that it would be appropriate to address them. To that end, we were requested to provide more information and examples that could be considered for the proposed regulations, which we did. Unfortunately, the proposed regulations appear simply to dismiss the issue.

For these reasons, Deere respectfully requests that this issue be revisited and addressed favorably in the final regulation. A summary of the facts follows, including the cash contributed or lent by Deere to its foreign subsidiaries for purposes of completing an acquisition, and the basis for Treasury's authority to issue regulations carrying out Section 965. Also included is an example that supports and justifies the reconsideration of this issue in the final regulations.

The Deere team is prepared to meet with you and Treasury staff as appropriate to support your reconsideration of this issue in the final rules. Deere believes that the intent of Congress, as well as basic equity and fairness, justify the further clarification of the application of the transition tax to the unique circumstances of our situation.

Fact Summary

The U.S. parent company ("USP") operates on a fiscal year-end of October 31. In June 2017, USP announced it had entered into a definitive agreement to purchase a foreign target corporation ("FT") for USD 5.2 billion/EUR 4.4 billion. At the behest of the seller, the acquisition transaction was structured as purchases by USP's foreign subsidiaries of FT's subsidiaries around the globe. The receipt of regulatory approvals from approximately 20 jurisdictions was a condition to closing pursuant to the terms of the purchase agreement. While USP originally anticipated closing on or before September 15, 2017, delays in receiving the required regulatory approvals postponed the closing date initially to November 1, 2017, and ultimately to December 1, 2017. USP funded its planned acquisition with a combination of U.S. cash that was transferred to its foreign subsidiaries, third-party debt raised in foreign markets, and cash generated through overseas earnings. To ensure its foreign subsidiaries had the funds necessary to close on the acquisition and to reduce the risk of foreign currency exposure, USP provided the U.S. funds to its foreign subsidiaries in advance of the original anticipated closing date of September 15, 2017. Because of the delays in receiving regulatory approvals, which delayed the acquisition closing date, USP's October 31, 2017, balance sheet contained an extra USD 5.2 billion of cash for purposes of closing the FT acquisition transaction on November 1, 2017. Of that amount, approximately USD 2.5 billion originated in the U.S. and USD 1.0 originated through debt issued in foreign markets.

Applicable Law: New Section 965

New Section 965 taxes U.S. companies on all their previously tax-deferred post-1986 earnings and profits at rates that differ depending on whether the earnings and profits are held in cash and cash equivalents or other assets. The rate for earnings held in cash or liquid form is 15.5%, and the rate for the remainder is 8%. Per the House Committee Report accompanying the Tax Cuts and Jobs Act (TCJA), "[t]he Committee believe[d] that many domestic companies were reluctant to reinvest foreign earnings in the United States, when doing so would subject these earnings to high rates of corporate income tax rates. Accordingly, the Committee is aware that such companies have accumulated significant untaxed and undistributed foreign earnings as a result." Further, the Committee "believe[d] that the tax rate should consider the liquidity of [such] accumulated earnings." With respect to the computation of a U.S. shareholder's aggregate cash position, the Committee Report states that "by using a three-year average as the aggregate cash position for a U.S. shareholder, the effect of unusual or anomalous transactions is muted."

Taken together, the quoted language demonstrates that Congress's intent in enacting Section 965 was to tax deferred earnings at higher rates where the earnings are in liquid form and thus not reinvested in hard assets overseas, while also mitigating situations in which a cash position on a single measurement date may not fairly represent the taxpayer's true liquidity position.

The TCJA provides a broad grant of authority to the Treasury Secretary in Section 965(o) to prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of section 965. Pursuant to the Conference Report, this provision is intended to be a "specific grant of regulatory authority to carry out the intent of this provision."

Issue: Overstated Aggregate Cash Position Due to Impending Acquisition

In the factual situation described above, USP's foreign subsidiaries held cash of approximately USD 3.5 billion on October 31, 2017, solely in anticipation of the FT acquisition. This cash either originated in the United States or it was obtained through newly issued debt in foreign markets; none of the USD 3.5 billion came from, nor did it represent, tax-deferred foreign earnings held in liquid form. Further, this cash would not have been on USP's balance sheet at the end of FY2017 (nor in the prior year) if the FT transaction had closed by September 15th as originally contemplated. Therefore, the inclusion of this cash in the aggregate foreign cash position of USP would materially overstate the amount of USP's tax-deferred earning and profits held in liquid form.

To remedy the overstatement of cash position that would otherwise occur, USP requests that Treasury, through the regulatory authority granted to it by Congress under Section 965, issue guidance that would exclude from the definition of "aggregate foreign cash position" on a measurement date excess cash held on the balance sheet of a specified foreign corporation that was (1) contributed to the specified foreign corporation from the United States or (2) borrowed solely for the purposes of funding a foreign acquisition pursuant to a binding contract entered into before November 2, 2017.

Sample guidance language and examples are included below. USP's view is that both the U.S. cash and the cash borrowed in foreign markets should be excluded from the "aggregate foreign cash position" definition because neither bucket of cash represents tax-deferred earnings of the foreign subsidiaries.

Proposed Solution: Sample Regulatory Guidance Language and Example

Cash held by a specified foreign corporation on a measurement date, which is not earnings and profits of the specified foreign corporation and is held solely for closing on the acquisition of a foreign target after such measurement date pursuant to a binding written contract, may inflate the aggregate foreign cash position of a United States shareholder. Where such cash was obtained by the specified foreign corporation through cash infusions or loans from a United States shareholder, it does not represent tax-deferred earnings of the specified foreign corporation being held in liquid form because it originated in the U.S. and was not generated through the business activities of the specified foreign corporation. Where such cash was obtained through third party debt raised in the foreign markets, such cash does not represent tax-deferred earnings of the specified foreign corporation being held in liquid form because it was not generated through the regular business activities of the specified foreign corporation, but instead was raised solely for a one-time acquisition. Accordingly, for purposes of determining the cash position of a specified foreign corporation, the Treasury Department and the IRS intend to issue regulations providing that any cash obtained by a specified foreign corporation, where such specified foreign corporation is legally obligated to transfer such cash to a third party to acquire a foreign target corporation pursuant to a binding contract entered into prior to November 2, 2017, shall be excluded from the aggregate foreign cash position of the United States shareholder. However, for purposes of determining the aggregate foreign cash position of the United States shareholder, any cash held by the foreign target corporation as of the acquisition date shall be treated as if it were held by the specified foreign corporation on the measurement date.

Example. (i) Facts. USP, a domestic corporation, owns all the stock of CFC1, a foreign corporation, which owns all the stock of CFC2, also a foreign corporation. USP, CFC 1 and CFC2 have an October 31 fiscal year end. Prior to October 31, 2017, USP had entered into a binding commitment pursuant to which CFC2 was legally obligated to purchase foreign target corporation (FT) for $1000, with an expected closing date of November 1, 2017 or shortly thereafter. To provide CFC2 with sufficient funds to complete the FT acquisition, USP issued $600 of debt in the U.S. and then used that cash to make a capital contribution and/or loan to CFC1 totaling $600. CFC1 then lent the U.S. cash of $600 to CFC2 pursuant to a long-term note. Additionally, CFC1 borrowed $300 from third party lenders in foreign markets and lent this $300 of borrowed cash to CFC2 pursuant to a long-term note. CFC1 held no other cash. On October 31, 2017, CFC2 held (i) the $600 of U.S. cash; (ii) the $300 of borrowed foreign cash; and (iii) $100 of its own cash. On December 1, 2017, CFC2 purchased FT for $1,000 with the $600 of U.S. cash, the $300 of borrowed foreign cash and $100 of its own foreign cash. On the acquisition date, FT had $25 of cash and no other liquid assets on its balance sheet.

(ii) Analysis. USP's aggregate foreign cash position considered with respect to its fiscal year ended October 31, 2017, is $125. USP's aggregate foreign cash position includes the $100 of CFC2's foreign cash, and the $25 of FT's foreign cash.

In summary, Deere requests that, consistent with Congress' intent, the Secretary modify the Section 965 Draft Regulation language to exclude from liquid assets any amounts that the taxpayer demonstrates: i) did not originate from foreign earnings and profits, ii) were recorded on the balance sheet of a foreign entity within five months of the measurement date, iii) originated from a U.S. related party or third party debt issuance, and iv) were permanently reinvested within thirty days of the measurement date to complete an acquisition.

Deere believes that Congress provided Treasury with an explicit grant of authority to correct the exact situation that Deere is facing. Section 965 (o) states:

"The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section."

Additionally, the Conference Report states:

"A specific grant of regulatory authority to carry out the intent of this provision is included. For example, the Secretary may identify instances in which it is appropriate to grant relief from potential double-counting of earnings and profits, which may occur due to different measurement dates applicable to specified foreign corporations within an affiliated group, or the timing of intragroup distributions . . ."

Based upon discussions with members of Congress and their staff, Deere believes that Congress did not intend to tax liquid assets that never represented foreign untaxed earnings and profits at the higher 15.5% rate as described in the example above and that the Secretary should prescribe regulations appropriate to carry out Congress' intent.

Deere appreciates the opportunity to submit these comments and respectfully requests further clarifying regulations regarding the treatment of acquisition cash in this circumstance. Please let me know if you have any questions or require additional information.

Sincerely,

James M. McCabe
Vice President, Taxes
Deere & Company
Moline, IL

Cc:
John Rauber
Lindsay Kitzinger
Douglas Poms
Gary Scanlon
Jason Yen
Brenda Zent