Firm Questions Possible Glitch in Proposed FDII, GILTI Deduction Regs

March 20, 2019

CC:PA:LPD:PR (REG-104464-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Proposed Revisions to Regulations Sections 1.962-1

To Whom it may Concern:

For the reasons described below, we are requesting that the proposed revisions to Regulations §1.962-1 (the “Proposed Regulations”) include an amendment to paragraph (b)(2) of Reg. §1.962-1 to replace the now obsolete cross-reference to Code section 960(a)(1) with a general cross-reference to Code section 960 (or alternatively, a reference to both Code section 960(a) and (d)).

The Proposed Regulations would, in relevant part, make two significant changes to the regulations. First, a new paragraph (b)(l)(i)(A)(2) would be added to confirm that the taxable income inclusion under Code section 11 of an individual taxpayer who makes a section 962 election includes the taxpayer's GILTI inclusion amount under Code section 951A (as defined in Treas. Regs. §1.951A-1(c)(1)) for the taxable year. Second, a new paragraph (b)(3) would be added to confirm that the availability of a section 250 deduction with respect to such GILTI inclusion amount for purposes of calculating the Code section 11 taxable income amount. The allowance of the section 250 deduction is a significant benefit to taxpayers and I commend the Treasury Department and the Internal Revenue Service for recognizing that it is appropriate to allow individuals who make a section 962 election to benefit from the section 250 deduction.

The Proposed Regulations would make no changes to the language of Regulations §1.962-1(b)(2) which addresses the availability of indirect foreign tax credits under Code section 960 for an individual who makes a section 962 election. Regulations § 1.962-1(b)(2)(i) currently provides for a foreign tax credit under Code section 960(a)(1). The cross-reference to Code section 960(a)(1) is now obsolete, as the Tax Cuts and Jobs Act¹ amended section 960(a) by deleting Code section 960(a)(1). More significantly, there is no reference in the Regulation to the new Code section 960(d) foreign tax credit available for GILTI inclusions. The omission of any reference to Code section 960(d) raises a question as to whether the drafters of the Proposed Regulations intended to allow an individual who makes a section 962 election to claim a foreign tax credit under Code section 960(d) with respect to the GILTI inclusions taken into account by the taxpayer.

However, it seems relatively clear that an individual who makes a section 962 election is eligible to claim an indirect foreign tax credit under Code section 960(d) with respect to the GILTI inclusions taken into account under Proposed Regulations §1.962-l(b)(l)(i)(A)(2). Code section 951(A)(f)(1)(A) provides generally that GILTI inclusions are to be treated as subpart F income for purposes section 962. Section 962(a)(2), in turn, treats an individual who makes a section 962 election as a corporation for purposes of Code section 960. Moreover, the Proposed Regulations implicitly recognize that an indirect tax credit is available to a taxpayer with a GILTI inclusion, as Proposed Regulations §1.962-1(b)(3) provides that the calculation of the section 250 deduction takes into account the amount of the Code section 78 gross up inclusion associated with the GILTI inclusion. Specifically, Proposed Regulations §1.962-1(b)(3) states the section 250 deduction also applies to “the amount described in paragraph (b)(l)(i)(A)(3) of this section [the section 78 gross up amount] that is attributable to the amount described in paragraph (b)(l)(i)(A)(2) of this section [the GILTI inclusion amount].” By recognizing that the GILTI inclusion is accompanied by a section 78 gross amount the Proposed Regulations acknowledge that the taxpayer is receiving an indirect foreign tax credit with respect to the GILTI inclusion.

Accordingly, it is respectfully requested that the Proposed Regulations include an amendment to paragraph (b)(2) of Reg. §1.962-1 to replace the now obsolete cross-reference to Code section 960(a)(1) with a general cross-reference to Code section 960 (or alternatively, a reference to both Code section 960(a) and (d)).

Very truly yours,

Abraham Leitner
Goulston & Storrs PC
New York, NY

Enclosure