New Guidance on Forced / Deemed Repatriation Under IRC Section 965

By Marc Schwartz


So naïve of me. When will I learn? When Congress passed the December 2017 tax legislation, it created such complexity that my head still hurts. Focusing on the international provisions didn’t reduce the complexity. While I’ll get to the point in a minute, I still feel somewhat bad for the IRS. Congress passed a confusing, cumbersome and complex piece of legislation and left it to the IRS to interpret and provide much-needed guidance. What became quickly clear is the high likelihood not one member of Congress read through the entire tax bill, much less the Conference Committee Report. Even if it was read, the probability that the implications were fully understood is low.


In any case, Internal Revenue Code Section (“§”) 965 is today’s topic. On March 13, 2018 the IRS published Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns (“Q&A”), see  ( Many of our clients are other CPA or law firms, and we’ve been fielding questions about §965. Pre-March 13, while we had been hoping for additional guidance, when we had to provide advice on how to report the relevant income and tax figures, our answer went something like the following – Well, as you likely know there’s no formal guidance. In following what we see as the “spirit” of the law, Conference Committee Report and the three (3) IRS communications [yes – there were already 3 separate communications shining light on portions of the §965 murkiness], we recommend attaching a statement to the tax return showing the 965 income, tax, election(s), schedule of taxes due per year, tax due this year, etc.


Today’s guidance is helpful and, at the same time, gives me headache when I see the additional resources and effort that will go into attempting to comply. For most CPA firms, I gather this level of effort was not baked into a fixed price to prepare the relevant tax returns or a possible range of hours to be invested. So what’s the Q&A discuss? I won’t run through all the details of §965, nor copy/paste the entire 23-page notice because I know you can’t wait to read it yourselves. But, here’s a summary of both.


As the Q&A provides, §965 applies with respect to the last taxable year of certain specified foreign corporations beginning before January 1, 2018, and the amount included in income under §965 of the Code is includible in the US shareholder’s year in which or with which such a specified foreign corporation’s year ends. So, §965 must be considered now for a calendar year US shareholder holding an interest in a calendar year specified foreign corporation. Fiscal year taxpayers (suppose the specified foreign corporation and US owners have 30 September year ends) will take §965 into account in the return for the 30 September 2018 year end, although remember the relevant earnings and profits [(“E&P”), i.e., basically retained earnings computed under US tax principles] is from January 1, 1987 to either 2 November 2017 or 31 December 2017, whichever is greater. (See our other blogs for the general 965 rules ( among others ).


The Q&A states, The instructions in these FAQs are for filing 2017 tax returns with an amount under section 965 of the Code. In that sense it provides direct guidance and, as a practitioner, I appreciate that. Additional direct guidance is that failing to submit returns based on the new guidance may result in difficulties in processing tax returns, including rejection, processing delays, or erroneous notices being issued. The introduction concludes that electronic filers should wait until on or after 2 April to file so the IRS has time to make certain system changes.


Q1/A1 focuses on who is required to report amounts under §965. That shouldn’t be too big a deal for those who have been studying the law. The answer — A person that is required to include amounts in income under §965 of the Code in its 2017 taxable year, whether because, the person is a US shareholder of a deferred foreign income corporation (as defined under §965(d) of the Code) or because he/she/it is a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a US shareholder of a deferred foreign income corporation.


Q2. How are amounts under section 965 of the Code reported on a 2017 tax return?

Appendix: Q&A2 is a table reflecting how data should be reported. I’ll let you look at that on your own, but it’s a helpful guide and shows how the information should be presented (e.g., §965(a) amount; §965(c) deduction; Foreign Tax Credit (if applicable); Reporting Net Liability and Amounts to Be Paid in Installments and shows details based on the particular form filed (e.g., 1040, 1120, 1065, etc.)). It looks like we need to compute the taxable income that, were it taxed at 35%, would yield the same tax as either the 15.5% or the 8% under §965, so remember your algebra.


The third one is the one I call the “budget buster”. It sounded simple enough — Q3. Is there any other reporting in connection with section 965 of the Code required on a 2017 tax return? It’s the answer that made me try to take slow, deep breaths to stay in a good mood.


The answer is that each taxpayer must include an IRC 965 Transition Tax Statement, signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf) with a filename of “965 Tax”. So, it’s not just a tax return statement, but you’ve got to get the statements signed under penalties of perjury. Pretty soon are taxpayers going to have to sign and notarize every single page of a tax return? Isn’t every page supposed to be correct and shouldn’t the signature on a tax return represent the entire filing?! All right, I just find it intrusive to get my clients to have to sign so many pages. Or, if you’re in-house, you’re still having to get the CFO, CEO, (or someone else!) to sign additional pages. What gets included?


  1. The person’s total amount required to be included in income under 965(a) of the Code.
  2. The person’s aggregate foreign cash position, if applicable.
  3. The person’s total deduction under 965(c) of the Code.
  4. The person’s deemed paid foreign taxes with respect to the total amount required to be included in income by reason of 965(a).
  5. The person’s disallowed deemed paid foreign taxes pursuant to 965(g).
  6. The total net tax liability under 965 (as determined under §965(h)(6), without regard to whether such paragraph is applicable), if applicable, which will be assessed.
  7. The amount of the net tax liability under 965 to be paid in installments under §965(h) of the Code, if applicable.
  8. The amount of the net tax liability under 965, the payment of which has been deferred, under §965(i) of the Code, if applicable.
  9. A listing of elections under 965 of the Code or the election provided for in Notice 2018-13 that the taxpayer has made, if applicable.


There’s a good model statement you may access via a link on the Q&A. Of course there’s a requirement to keep adequate records for all relevant data.


There’s a portion about the types of elections that may be made and who makes them. Taxpayers making elections must have a net tax liability under §965; or be S corporation shareholders when the corporation has a net tax liability under section 965; or be taxpayers that are REITs; or be taxpayers with an NOL. The Q&A clarifies a domestic partnership or an S corporation that is a US shareholder of a deferred foreign income corporation may not make any of the elections. Of note, the Q&A states the Treasury Department and the IRS intend to provide further guidance concerning the availability of the elections to direct and indirect partners in domestic partnerships, shareholders in S corporations, and beneficiaries in other passthrough entities that are US shareholders of deferred foreign income corporations.


The election must be made by the due date (including extensions) for filing the return for the relevant year. There’s also a reminder that, for those electing installment treatment, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year. There’s additional formalities, including a requirement to sign the election under penalties of perjury.


This next one touches on an issue many practitioners have raised concerns about. I apologize – but here’s a copy/paste.


Q8. Is a Form 5471 with respect to all specified foreign corporations with respect to which a person is a United States shareholder required to be filed with the person’s 2017 tax return, regardless of whether the specified foreign corporations are CFCs?


A8. Yes. In order to collect information relevant to the calculation of a United States shareholder’s section 965(a) inclusion amount, a person that was a United States Shareholder of a specified foreign corporation during its 2017 taxable year, including on the last day of such year, and owned stock of the specified foreign corporation on the last day of the specified foreign corporation’s year that ended during the person’s year must file a Form 5471 with respect to the specified foreign corporation completed with the identifying information on page 1 of Form 5471 above Schedule A, as well as Schedule J. The exceptions to filing in the instructions to Form 5471 otherwise will continue to apply. Notice 2018-13, Section 5.02 also provides an exception to filing Form 5471 for certain United States shareholders considered to own stock by “downward attribution” from a foreign person. The IRS intends to modify the instructions to the Form 5471 as necessary.


So, being a member of an outside advisory firm, I can already hear my clients yelling, What did you say? Can you please repeat that because I’m sure I misheard? I’ve got to complete another freaking form?!


Yes, what’s another page 1 and Schedule J when your tax return packet might already be 50+ pages? I won’t even get into what we’ve previously written about taxpayers owning 10% of a specified foreign corporation and who might not practically or legally have access to the books and records to even make a drunken stab at the E&P. Such is life.


Q9 is a good one. Are domestic partnerships, S corporations, or other passthrough entities required to report any additional information to their partners, shareholders, or beneficiaries in connection with section 965 of the Code? The answer is that the relevant flow-through entity should attach a statement to the Schedule K-1s, if applicable, that includes data such as the partner’s/shareholder’s/beneficiary’s share of the §965(a) inclusion amount, deduction under §965(c), if applicable, and information necessary for a taxpayer making a §962 election to compute deemed paid foreign tax credits. So, it’s easy to see why there’s going to be more headaches for all, and why, as usual, tax return extension forms will be selling like hotcakes. Is it reasonable to expect partnerships and other flow-throughs that typically have a difficult time as it is to get “normal” data each year to add the above? Hopefully my cynicism is misplaced, but it’s been carefully nurtured by Congress over a 22+ year international tax career.


So, I’ve referenced how to report the income, tax, etc., how to make elections; why so many people will be signing documents under penalties of perjury, but how do you pay the tax? Will the government make it easy?


Well, define easy. Suppose on the 2017 tax return a taxpayer has a “normal” income tax payable of $10,000 and a Section 965 payable of $20,000. The taxpayer should just write a check for $30,000, right? No. Ok, then just do it all through EFTPS as a $30,000 payment, right? No? Bring $30,000 cash in $2 bills to the nearest IRS office? No.


Answer 10 states, A taxpayer should make two separate payments as follows: one payment reflecting tax owed without regard to section 965 of the Code, and a second, separate payment reflecting tax owed resulting from section 965 of the Code (the 965 Payment). Both payments must be paid by the due date of the applicable return (without extensions).


The Section 965 payment must be made by wire transfer or check or money order. There is no penalty for taxpayers electing to use wire transfers as an alternative to otherwise mandated EFTPS payments, per the Q&A. There’s more specifics about the logistics, but I don’t understand why taxpayers now must make separate payments. Sometimes it’s difficult enough for companies just to get one check cut in time. You know who you are.


I already touched on the don’t file until April 2 if you file electronically theme. Paper returns are fine any time. But what if you already filed 2017 electronically? Answer 12 says you should consider filing an amended return based on the Q&A.


So, the guidance is helpful. It’s probably necessary. So, thank you IRS. Frankly, Congress didn’t do you any favors, and you’re moving reasonably quickly. I mean that.

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