Attorneys Seek Clarification of Issues Arising From Repatriation Guidance
Attorneys Seek Clarification of Issues Arising From Repatriation Guidance
- AuthorsFuller, James P.Forst, David L.
- Institutional AuthorsFenwick & West LLP
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2005-7013
- Tax Analysts Electronic Citation2005 TNT 65-17
Acting International Tax Counsel
Department of Treasury
1500 Pennsylvania Ave., N.W.
Washington, DC 20220
Nicholas J. DeNovio
Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Harry J. Hicks III
Associate Chief Counsel (International)
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Re: Section 965
Dear Ms. Brown and Messrs. DeNovio and Hicks:
This letter supplements comments made in our letter dated January 3, 2005 regarding § 965. We offer these additional comments on the interrelationship of §§ 936 and 965 following our helpful discussions with John Merrick.
In section E of our January 3, 2005 letter, we stated that it would be helpful if guidance clarified the § 965 consequences with respect to the termination of a § 936 company's possessions corporation election. If a domestic corporation that is a member of an affiliated group revokes its § 936 election, or if the election terminates by operation of law, the company is eligible to file, and must file, a consolidated return with the U.S. members of the affiliated group beginning immediately after the corporation's last taxable year in which its § 936 election is effective. See Notice 2005-21. Under § 965(c)(5)(A), all corporations in an affiliated group filing a consolidated return are treated as one U.S. shareholder. Accordingly, once a § 936 corporation's § 936 election is terminated and it joins the consolidated group with its U.S. affiliates, there no longer are two U.S. shareholders for purposes of § 965.
A § 936 corporation with a calendar year-end must receive dividends by December 31, 2005 in order for such dividends to be eligible for the benefits of § 965. § 965(f). Further, due to the repeal of § 936, such a corporation's last year in which it is eligible for the possessions tax credit is 2005.
A question thus arises with respect to such a corporation's required investment under § 965(b)(4). Section 936 companies are unique in the context of § 965 in that, as we discussed, a § 936 company (or a former § 936 company) itself cannot make the necessary qualified investment without radically altering its operations. Section 936 requires that as a practical matter all of an electing corporation's operations and employees be in Puerto Rico. Moreover, not long after the dividend is received the § 936 company will become a member of its U.S. parent's consolidated return group.
Section 965(c)(5)(A) does not limit the treatment of members of a consolidated group as a single shareholder. It simply states that all corporations in an affiliated group filing a consolidated return shall be treated as one shareholder. Thus, § 965 dividends received by the § 936 corporation should qualify as such provided qualifying investments are made by any member of the consolidated group once the § 936 corporation is a member of that group in accordance with the terms of the dividend reinvestment plans entered into by the § 936 corporation and the group. While the statute directly leads to this conclusion, we believe that it would be helpful if guidance acknowledged this result due to the magnitude of the amounts involved.
A related issue arises when a § 965 dividend is received by a former § 936 corporation after it is a member of the U.S. consolidated return group. This should be easy to address. The applicable domestic reinvestment plan should be the consolidated group's domestic reinvestment plan, and investments by any member of the group pursuant to the group's plan should be permissible. It would be helpful if guidance also confirmed this result.
Guidance with respect to the APB 23 amount also would be helpful. As stated in our original comments, the allocation of the APB 23 to the § 936 company should be flexible with respect to dividends paid while the company is still subject to § 936. When the § 936 company joins the consolidated group, its APB 23 amount, to the extent not reduced by its prior receipt of § 965 dividends, should be combined with the parent company's APB 23 amount.
Further, if the § 936 company terminates its § 936 status prior to the payment of any dividends, and the § 965 dividend is paid after the § 936 company joins the consolidated group, the APB 23 amount otherwise allocated to the § 936 company should be fully available to the consolidated return group, without diminution or other forfeiture by reason of the § 936 company having once been such.
We would be pleased to discuss these issues with you further.
James P. Fuller
David L. Forst
Fenwick & West LLP
Mountain View, California
(International), Internal Revenue Service
Thomas A. Vidano, Office of the Associate Chief Counsel
(International), Internal Revenue Service
- AuthorsFuller, James P.Forst, David L.
- Institutional AuthorsFenwick & West LLP
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2005-7013
- Tax Analysts Electronic Citation2005 TNT 65-17