Fashion Retailer Seeks Narrowed Rule in Transition Tax Regs

October 4, 2018

CC:PA:LPD:PR (REG-104226-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: IRS (REG-104226-18)
Disregard of Entity Classification Elections for Purposes of Applying Section 965

Dear Sir or Madam:

This letter is respectfully submitted in response to the Notice of Proposed Rulemaking under section 965 of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act, P.L. 115-97, published in the Federal Register on August 9,2018 (the “Proposed Regulations”.)

The anti-avoidance rule of proposed § 1.965-4(c)(2) provides that entity classification elections filed on or after November 2, 2017 are disregarded for purposes of determining the amounts of all section 965 elements of a United States shareholder if the election would otherwise change the amount of any section 965 element of the United States shareholder, regardless of whether the taxpayer made the election with a principal purpose to change the amount of a section 965 element.

Instead of this arbitrary and overbroad rule that disregards all entity classification elections regardless of intent, the Proposed Regulations should be amended to only disregard transactions where the taxpayer has not rebutted a presumption that the election was made with a principal purpose to reduce a section 965 element. Applying this rebuttable presumption standard would address Treasury's need to guard against abusive transactions, while also providing taxpayers an opportunity to address those concerns with respect to bona fide transactions.

Taxpayers make entity classification elections for many different reasons outside of section 965 and many taxpayers make such elections in the ordinary course of business each year. They are a product of Treasury's rule making authority and are not inherently abusive. Disregarding entity classification elections without a regard to intent would unjustly penalize taxpayers that made such elections for legitimate reasons unrelated to section 965, especially in cases where there was a pre-existing plan to make such election prior to even the introduction of the tax reform legislation.

This treatment is inconsistent with other anti-abuse rules provided in the Proposed Regulations, which apply only where the taxpayer has a principal purpose to change a 965 element. Neither the Proposed Regulations nor prior guidance provide an explanation or justification for why entity classification elections should be treated differently from other non-abusive transaction that have the potential to change a section 965 element. Applying a rebuttable presumption standard to entity classification elections would be consistent with the general anti-abuse rules of the Proposed Regulations.

In other sections of the Proposed Regulations, a per se rule determining that there was a principal purpose to reduce a section 965 element was only applied to transactions that were clearly abusive. For example, a cash reduction transaction that is a specified distribution is per se determined to have a principal purpose to reduce a section 965 element. A specified distribution is defined as one where a taxpayer carried out a cash reduction transaction with an intent to frustrate purposes of section 965, either by making a non-pro rata distribution to a foreign related party or making a distribution to a U.S. shareholder with a simultaneous intent to subsequently transfer the cash to a foreign related person. Such transactions are clearly abusive. If Treasury has concerns about specific transactions involving entity classification elections, then a narrowly tailored rule like the above would be a more appropriate remedy.

We request the Treasury Department amend the Proposed Regulations as recommended above.

Respectfully submitted,

Everett Gallagher
Senior Vice President and Treasurer
Abercrombie & Fitch
Albany, OH