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Section 965 Tax Installment Payments Are Not Guaranteed

The Section 965 transition tax. Taxpayers with international earnings are still grappling with their reporting and payment obligations under the “deemed repatriation” tax after its enactment by the Tax Cuts and Jobs Act of 2017. For a general primer on the Section 965 transition tax, see Freeman Law’s previous articles: The Section 965 Transition Tax and The Section 965 Transition Tax And IRS Audits. Section 965 provides that a taxpayer may make an election to pay its tax liability in installment payments. However, as a recent Chief Counsel Advice noted, a domestic corporation that fails to report its Section 965 tax liability is not entitled to prorate its deficiency under Section 965(h)(4) of the Internal Revenue Code.

Section 965 Tax and Installment Payments, Generally

Generally, Section 965 requires that U.S. shareholders pay a tax on their pro rata share of the untaxed foreign earnings of certain “specified foreign corporations.”[1] That is, a specified foreign corporation’s subpart F income is increased for its last tax year beginning before January 1, 2018.[2] The income is subject to an effective tax rate of 15.5 percent or 8 percent.

Written by Zachary Montgomery | Posted in Freeman Law • Section 965 • Tax Installment Payments

The Section 965 Transition Tax And IRS Audits

Section 965 audits are on the rise. Taxpayers under section 965 transition tax audits often face significant potential liability exposure. The IRS previously announced an active “campaign” specifically targeting unpaid section 965 transition tax liability resulting from amendments to section 965 under the Tax Cuts & Jobs Act. For taxpayers with ownership in foreign corporations, that could mean increased exposure to an IRS audit.

On December 22, 2017, Congress amended the Internal Revenue Code (“IRC”) Section 965 through the Tax Cuts & Jobs Act (“TCJA”). As amended, Section 965 required that certain taxpayers include a “Section 965 inclusion” in income as part and parcel of the transition to a participation-exemption tax system (or, at least, a quasi participation-exemption system). The Section 965 inclusion is an amount based on the accumulated post-1986 deferred foreign income of certain foreign corporations directly or indirectly owned by the taxpayer. Notably, taxpayers can have Section 965 inclusions due to ownership of deferred foreign income corporations (“DFICs”) indirectly held through pass-through entities that are themselves U.S. shareholders of DFICs.