RICs Can Postpone the Inclusion of Code Sec 965 Transition Tax to 2018

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REGULATED INVESTMENT COMPANIES CAN POSTPONE DISTRIBUTING CODE SEC. 965 AMOUNT

In a Revenue Procedure, IRS has allowed regulated investment companies (RICs) to postpone to 2018 the inclusion of the Code Sec. 965 transition tax in gross income, for purposes of computing the RIC required distribution.

A regulated investment company (RIC) can be any one of several investment entities – for example, a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT) or unit investment trust (UIT) – that is deemed eligible by the Internal Revenue Service (IRS) to pass through the taxes on capital gains.

Code Sec. 4982(a) imposes an excise tax on most RICs for each calendar year equal to 4% of the excess of the required distribution for the calendar year over the distributed amount for the calendar year. One of the amounts included in the calculation of the required distribution for a calendar year generally is 98% of the RIC's ordinary income for the calendar year (determined under Code Sec. 4982(e)(1)) (Code Sec. 4982(b))

Code Sec. 4982(e)(5) defers ordinary income from "specified gains and losses" that occur after Oct. 31 of a calendar year to Jan. 1 of the following calendar year for purposes of Code Sec. 4982. Specified gains and losses are defined as ordinary gain or loss from the sale, exchange, or other disposition of property (including the termination of a position with respect to such property). The term includes any foreign currency gain or loss attributable to a Code Sec. 988 transaction (within the meaning of Code Sec. 988) and any gain or loss on marketable shares of a passive foreign investment company (PFIC) that are marked to market under Code Sec. 1296.

Overview of Code Sec. 965

Code Sec. 965(a), as amended by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), provides that for the last tax year of a deferred foreign income corporation (DFIC) that begins before Jan. 1, 2018, the subpart F income of the corporation (as otherwise determined for such tax year under Code Sec. 952) will be increased by the greater of 

  1. The accumulated post-'86 deferred foreign income (as defined in Code Sec. 965(d)(2)) of such corporation determined as of Nov. 2, 2017, or
  2. The accumulated post-'86 deferred foreign income of such corporation determined as of Dec. 31, 2017.

Code Sec. 965(c) provides a deduction to a U.S. shareholder of a DFIC in the year that the U.S. shareholder has an inclusion under Code Sec. 951(a)(1) by reason of Code Sec. 965.

If the tax year of a DFIC is the calendar year, the subpart F income of the DFIC will be increased by the amount described in Code Sec. 965(a) for the tax year of the DFIC ended Dec. 31, 2017. Under Code Sec. 951(a)(1)(A) and Code Sec. 965(e)(2), a RIC that is a U.S. shareholder (as defined in Code Sec. 951(b)) of such DFIC must include in gross income its pro rata share of the DFIC's subpart F income for its tax year that includes or ends on Dec. 31, 2017. Code Sec. 4982(e)(1)(C) provides that for excise tax purposes, the ordinary income portion of the required distribution is determined by treating the calendar year as a RIC's tax year. As a result, amounts included in a RIC's income under Code Sec. 951(a)(1), by reason of Code Sec. 965, from a calendar-year DFIC, increase the RIC's 2017 required distribution under Code Sec. 4982.

The TCJA was enacted on Dec. 22, 2017, and contained provisions that required certain RICs both to compute the amount of a new type of inclusion and to make corresponding distributions by Dec. 31, 2017. IRS received requests for relief from taxpayers who cited the administrative burden of obtaining information from a DFIC, computing the required amounts, and making the required distributions in a brief amount of time. An inclusion under Code Sec. 951(a) by reason of Code Sec. 965 is not a specified gain under Code Sec. 4982(e)(5) because it is not an ordinary gain from the sale, exchange, or other disposition of property.

The inclusion is, however, a non-periodic item of ordinary income required to be computed as of Nov. 2, 2017, and Dec. 31, 2017. Thus, the period during which a RIC could pay dividends in respect of an inclusion under Code Sec. 951(a)(1) by reason of Code Sec. 965 with respect to a calendar-year DFIC ended very shortly after the amendment of Code Sec. 965 and on the same date that the amount of any inclusion could be computed.

Inclusion of Section 965 amount postponed

IRS has determined that, in the circumstances described above, it is in the interest of sound tax administration to allow additional time for a RIC to make the required distribution under Code Sec. 4982.

Therefore, for any amount that Code Sec. 965 would (but for this Revenue Procedure) require a RIC to include in gross income under Code Sec. 951(a)(1) for the RIC's excise tax year ended on Dec. 31, 2017 (a 2017 Inclusion), IRS will not challenge a RIC's treatment if the RIC 

  1. Treats the 2017 Inclusion in the same manner as a specified gain (within the meaning of Code Sec. 4982(e)(5)(B)(i)) that (but for Code Sec. 4982(e)(5)) would be properly taken into account during the portion of the RIC's 2017 excise tax year that is after Oct. 31; and
  2. Treats any deduction under Code Sec. 965(c) attributable to the 2017 Inclusion in the same manner as a specified loss (within the meaning of Code Sec. 4982(e)(5)(B)(ii)) that (but for Code Sec. 4982(e)(5)) would be properly taken into account during the portion of the RIC's 2017 excise tax year that is after Oct. 31.