Guidance Requested on Ring-Fencing of Losses From Deemed Repatriation

March 1, 2018

The Honorable Steven T. Mnuchin
U.S. Department of the Treasury
1500 Pennsylvania Avenue Northwest
Washington, D.C. 20220

Dear Secretary Mnuchin:

On behalf of the over 600 oil and natural gas companies the American Petroleum Institute represents, I want to thank you and your staff for your work on H.R. 1, the Tax Cuts and Jobs Act of 2017. As the Treasury Department continues its efforts to implement and clarify various aspects of the legislation through guidance, I want to raise an issue that holds immediate financial reporting and tax filing importance for our industry and thus requires near-term action from your Department.

During your testimony before the Senate Finance Committee on February 14, 2018, Senator Bill Cassidy, M.D. (R-LA) raised an issue with respect to Internal Revenue Code Section 965(n) and his desire to see a remaining item associated with this section addressed soon by Treasury guidance. Specifically, Section 965(n) is intended to “ring-fence” losses from the deemed repatriation but based on the legislative text some have questioned its application to losses generated in 2017.

The industry strongly believes that, based upon the legislative language and accompanying committee reports, Treasury has been granted regulatory authority to clarify that taxpayers may elect to “ring-fence” all losses, including those carried forward, carried back and generated in 2017, from the deemed repatriation. Attached is a document which summarizes this point in more detail.

We understand the Department may be issuing a third Notice with respect to the 2017 deemed repatriation and are requesting that clarification be included that the ring-fence election under Section 965(n) apply to all losses. Timing of this guidance is critical as API's member companies are currently calculating their overall 2017 tax liability and will be filing returns in the coming months. Without clarifying guidance on Section 965(n), the proper intent of the provision will be hindered and companies in our industry and others will face a higher tax burden associated with the deemed repatriation.

We welcome your consideration of this issue and stand ready to answer any questions you may have. Should you wish to follow up with us directly, please do not hesitate to contact our Director of Federal Relations for Tax Policy, Brian Johnson, at johnsonb@api.org.

Sincerely,

Jack N. Gerard
President and CEO
American Petroleum Institute
Washington, DC

cc:
The Honorable Kevin Brady, Chairman, U.S. House of Representatives Committee on Ways and Means
The Honorable Orrin Hatch, Chairman, U.S. Senate Committee on Finance

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Attachment I: 965(n) — NOL Ring-Fencing Election

Timing:

For many API member companies, a clarification of the § 965(n)(1)(A) language is needed as soon as possible, ideally in the next upcoming guidance, to provide certainty for financial reporting purposes.

Issue:

Section 965(n) provides the taxpayer an election to not apply its net operating losses to the income that results from the deemed repatriation. The clear legislative intent of the election was to provide taxpayers the option to forego using their losses in the year of repatriation (i.e., “ring-fence” the losses with such being available for carryover or carryback) and instead apply foreign tax credits to offset the tax related to the repatriated amount. The concern of many taxpayers is that their net operating losses would be required to be applied to the deemed repatriated income. The statutory language of new § 965(n) makes clear that net operating loss carryovers and net operating loss carrybacks to the repatriation year may be ring-fenced, as provided in § 965(n)(1)(B).

However, there is uncertainty regarding this provision's application to a loss created in the year of the deemed repatriation itself. This uncertainty is a product of the statute's language in § 965(n)(1)(A), which states, “(A) in determining the amount of the net operating loss deduction under § 172 of such shareholder for such taxable year, or . . .” (emphasis added). The use of the term “deduction” in this statute has created a large amount of confusion as to how this election should be interpreted. Generally, a taxpayer would not technically claim a net operating loss “deduction” in the repatriation year based on its overall loss in the year of repatriation, but instead would claim that overall loss from the repatriation year as a net operating loss deduction in a subsequent or prior year. However, the language in subparagraph (A) would seem to be entirely superfluous if it were not interpreted as applying to losses incurred in the repatriation year, because subparagraph (B) already addresses the use of NOL deductions carried to the repatriation year.

Concern:

The wording of § 965(n) poses a problem to numerous API member companies as it is subject to differing interpretations regarding how to apply losses generated in 2017. For several years the oil and natural gas industry has existed in a low-price environment resulting in large net operating losses. 2017 is no different despite the recent increase in the price of oil. Therefore, our members, like many taxpayers, will continue to be in a net operating loss position for 2017 before considering the deemed dividend from repatriation. Whether the § 965(n) election applies to losses generated in 2017, just as they clearly apply to net operating losses carried to the repatriation year, would have a material impact on our members. Given the legislative intent that the election applies to both current year net operating losses, as well as net operating losses carried to the repatriation year, clarification is needed by Treasury to refute any overly restrictive interpretations that § 965(n) does not apply to net operating losses generated in 2017.

Request for Guidance:

API and its member companies believe that § 965(n)(1)(A) and (B) should be construed such that each subparagraph has effect, and neither is redundant or superfluous. It is clear under a plain reading of the statute that § 965(n)(1)(B) provides a ring-fence to net operating loss carryovers and net operating loss carrybacks. Therefore, to avoid redundancy, § 965(n)(1)(A) should be construed to provide a ring-fence to the loss for the year of repatriation itself. This clarification thus would be a reasonable technical interpretation of the language of § 965(n) itself, in addition to sound policy consistent with the legislative intent. In addition, § 965(o) provides a general grant of regulatory authority to provide regulations and other guidance necessary to carry out the provisions of the section.