Firm Seeks Clarification in Proposed Transition Tax Regs

October 9, 2018

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

Re: Proposed Treasury Regulations Under Section 965

Dear Sir or Madam

On August 9,2078, the U.S. Department of the Treasury ("Treasury") and the U.S. Internal Revenue Service (the "IRS") issued proposed regulations under section¹ 965 (the "Proposed Regulations").² Treasury and the IRS invited comments on the Proposed Regulations.

As discussed in further detail below, the final regulations under section 965 should include a rule, consistent with Notice 2018-07,³ that the amounts determined under sections 965(c)(3)(A)(i) and (ii), respectively, for section 958(a) U.S. shareholders that are members of a U.S. consolidated group are aggregated across consolidated group members prior to calculating the "greater of" such amounts for purposes of determining the consolidated group aggregate foreign cash position.

In Notice 2078-07, Treasury and the IRS indicated that forthcoming regulations would treat all members of a consolidated group "as a single United States shareholder for purposes of determining the aggregate foreign cash position of the consolidated group." Additionally, Notice 2018-07 provides that under those regulations payables and short-term obligations owed between specified foreign corporations of a United States shareholder would be disregarded to the extent of the common ownership of such specified foreign corporations by the United States shareholder.

Taxpayers reasonably relied on Notice 2018-07 in accruing financial statement tax exposure under section 965 and in determining the impact of 'business operations undertaken between the date when Notice 2018-07 was issued and any cash measurement dates that followed it. Unfortunately, the approaches to cash position calculations in the Proposed Regulations materially differ from the guidance provided in Notice 2018-07.

Under the Proposed Regulations, obligations owed between specified foreign corporations owned by different section 958(a) U.S. shareholders in the same U.S. consolidated group would not be disregarded for purposes of measuring such section 958(a) U.S. shareholders' respective aggregate foreign cash positions. We acknowledge and agree with the change proposed in Notice 2018-18,⁴ which will cause Treas. Reg. § 1.965-3(b) to be applied on a consolidated group basis consistent with the rules of Notice 2018-07.

The Proposed Regulations also diverge from the approach announced in Notice 2018-07 with respect to the calculation of the "greater of'amounts under section 965(c)(3)(A)(i) and (ii). In the Proposed Regulations, those amounts would be determined on a section 958(a) U.S. shareholder-by-section 958(a) U.S. shareholder basis, rather than first aggregating the applicable amounts across all consolidated group section 958(a) U.S. shareholders before calculating the "greater of" such amounts. The following examples illustrate at least one distortion created by that outcome.

Example 1. U.S. parent owns two domestic subsidiaries: USS1 and USS2. USS1 owns two specified foreign corporations: SFC1 and SFC2. USS2 does not own any specified foreign corporations. SFC1 and SFC2 have cash position amounts on their applicable cash measurement dates as follows:

Cash Measurement Date	SFC1	SFC2
December 31, 2017	$0	$100
December 31, 2016	$100	$0
December 31, 2015	$100	$0

Applying the Proposed Regulations to the facts of Example l, the consolidated group aggregate foreign cash position of the U.S. consolidated group of U.S. parent would be 100, which is the greater of 100 (0 + 100, for the final cash measurement date) and 100 (50% x ((100 + 0) + (100 + 0)), for the average of the second and first cash measurement dates).

Example 2. Same facts as Example 1, except that USS2 owns SFC2.

Rather than first aggregating the cash position across section 958(a) U.S. shareholder members of the consolidated group for each measurement date, the Proposed Regulations simply add the "aggregate foreign cash position" (i.e., the result of the "greater of" calculation) for each group member as if such member were not a member of a consolidated group. Thus, applying the Proposed Regulations to the facts of Example 2, USS1 and USS2 would each have an aggregate foreign cash position of 100, and the consolidated group aggregate foreign cash position would be 200 — twice as much as in Example I where both foreign subsidiaries, with unchanged cash amounts, are owned by USS1.

The result that would occur under the Proposed Regulations in Example 2 is inappropriate. First, there is no obvious policy reason to treat a U.S. multinational consolidated group differently if its foreign subsidiaries are owned under more than one section 958(a) U.S. shareholder member. Second, the outcome in Example 2 applying the Proposed Regulations is inconsistent with the approach announced in Notice 2018-07, on which taxpayers relied in accruing the financial statement impact of section 965 and determining the impact of valid transactions undertaken between the issuance of Notice 2018-07 and the Proposed Regulations.

Furthermore, the distortion illustrated by Example 2 is not clearly corrected by the change to the regulations proposed in Notice 2018-78, if that change is implemented narrowly.⁵ To correct the distortion described above, some modest amendments to the Proposed Regulations are needed.

• Treas. Reg. § 1.965-8(e)(1) should be amended to include a reference to section 965(c) in the first sentence: "All members of a consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are treated as a single section 958(a) U.S. shareholder for purposes of sections 965(b), 965(c) and § 1.965-1(b)(2)."

• The first sentence of Treas. Reg. § 1.965-8(e)(3) should be struck. The rest of Treas. Reg. § 1.965-8(e)(3) should be simplified to read: "For purposes of determining the section 965(c) deduction amount of any section 958(a) U.S. shareholder that is a member of a consolidated group, the aggregate foreign cash position of the section 958(a) U.S. shareholder is equal to the aggregate section 965(a) inclusion amount of the section 958(a) U.S. shareholder multiplied by the group cash ratio of the consolidated group."

• In addition, Treas. Reg. § 1.965-8(f)(4) should read as follows:

Those changes would align the final regulations with the approach previously announced in Notice 2018-07.

I would be happy to discuss any aspect of this comment letter with you at your convenience.

Sincerely_,

John Giles
Vice President, General Tax Counsel
Cargill, Incorporated
Wayzata, MN