On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA) of 2017, P.L. 115-97, which introduced a wholesale set of tax cuts and other reforms that affect substantially all U.S. taxpayers, both corporate and individual.
One of the highlights of the new law is the repatriation of foreign-sourced accumulated earnings and profits with respect to controlled foreign corporations (CFCs) as defined. Newly enacted section 965 imposes a transition tax on the accumulated (and untaxed) foreign earnings of foreign subsidiaries of US companies by constructive (mandatory) repatriation under section 951(a)(1). Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate and the residual untaxed foreign earnings are taxed a rate of 8%. The “transition tax” may be paid in installments over an 8 year period.
In general any U.S. shareholder of a “specified foreign corporation” must include in gross income as of the last taxable year beginning before January 1, 2018, its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. A specified foreign corporation is any foreign corporation that has at least one U.S. shareholder, which of course will include a CFC. Passive foreign investment companies (PFICs) that are not also CFCs may not be a specified foreign corporation.
Amount of Repatriation Amount: Section 965(a) Inclusion Amount
Under the new law, Section 965(a) provides that for the last taxable year of a deferred foreign income corporation (DFIC) beginning before January 1, 2018 (the “inclusion year”), the subpart F income of the DFIC shall be the amount determined under section 952 and increased by the “section 965(a) earnings amount”, which is the greater of: (i) accumulated post-1986 deferred foreign income as of November 2, 2017; or (ii) the same deferred foreign income determined as of December 31, 2017. The section 965 earnings amount with respect to a DFIC is reduced by the amount of such US shareholder’s aggregate foreign E&P deficit allocated under section 965(b)(2) which sum represents the “section 965(a) inclusion amount”).
The Participation Exemption Dividend Provision’s Interaction With Repatriation of Foreign Source Accumulated Earnings and Profits
Adopting a similar set of mechanical rules to those rules pertaining to the participation exemption deduction under new section 245A,  section 965(c)(1) allows a deduction for the taxable year of a US shareholder with respect to a section 965(a)(1) inclusion amount that is included in gross income. The amount of the deduction is equal to: (i) the US shareholder’s 8% rate equivalent percentage of the excess (if any) of (1) amount included in gross income, less (2) the amount of such US shareholder’s aggregate foreign cash position (per section 965(c)(3)A); plus (ii) the US shareholder’s 15.5% rate equivalent percentage per section 965(c)(2)(B).
The “aggregate foreign cash position” under section 965(c)(3)(A) as to a US shareholder is the greater of: (i) the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such US shareholder determined as of the close of the inclusion year, or (ii) one-half of (1) the aggregate of such described in (i) the aggregate amount in (i) but over a two year period as of the applicable “cash measurement date”. The term “cash position” is specifically defined.
For section 951 inclusion amounts which are not allocable to the taxpayer’s aggregate foreign cash position, the deduction from the amount that is included in gross income of the US shareholder is equal to the 8% rate equivalent percentage which is the amount of the deduction required from the highest tax rate set forth under section 11 (or section 15 as the case may be) that would result in an 8% rate of tax.
Definition of DFIC and Accumulated Post-1986 Deferred Foreign Income
As to any US shareholder, a DFIC is any specified foreign corporation of such US shareholder that has accumulated post-1986 (positive) accumulated post-1986 deferred foreign income (as of a measurement date). Accumulated post-1986 deferred foreign income is defined under section 965(d)(2) as the post-1986 E&P of a specified foreign corporation but reduced by: (i) income of the specified foreign corporation which is effectively connected with the conduct of a trade or business in the U.S. (ECI) and thereby subject to US income tax; and/or (ii) as to a CFC, previously taxed income of a US shareholder under section 959. 
Definition of Specified Foreign Corporation
It is important to understand the breadth of new Section 965 since those US shareholders falling within the scope of the repatriation of foreign earnings rule are affirmatively obligation to report the section 951 inclusion amount and make payment of the additional tax, net of applicable deductions, unless the resulting obligation is timely elected to be paid over 8 annual installments.
The deemed repatriation provision potentially applies to any “specified foreign corporation” which term has two definitions as set forth in section 965(e)(1). First, a specified foreign corporation is any foreign corporation that is a CFC, i.e. a foreign corporation in which U.S. shareholders (10% or more voting stock) own more than 50% of the outstanding voting stock or value of the foreign corporation is owned, directly or indirectly, by U.S. shareholders on any day of the taxable year in question.  Constructive ownership rules are set out in section 958 and the regulations. In particular, section 958(a)(2) provides that in testing for stock ownership in a potential CFC, stock owned by or for a foreign corporation, foreign partnership, or foreign trust or estate is considered as owned proportionately by its shareholders, partners, or beneficiaries. Stock treated as constructively owned under section 958(a)(2) is treated as actually owned by such person.
Second, a “specified foreign corporation is “any foreign corporation with respect to which one or more domestic corporations is a US shareholder (10% corporation). In other words, the foreign corporation does not have to be a CFC as of the measuring date it only has to have one or more U.S. shareholders and may in fact not be a CFC. This greatly expands the U.S. shareholders subject to the section 951 inclusion. Therefore, all U.S. shareholders of any foreign corporation to which one or more domestic corporations is a U.S. shareholder as of the measurement date, each such U.S. shareholder is required to recapture its pro rata share of post-1986 accumulated E&P from foreign source income.
Foreign Tax Credit Impacts
Under section 965(g), no creditable foreign tax (or alternatively, no deduction) is allowed under section 901 to the extent of the applicable percentage of foreign taxes paid or accrued with respect to any amount for which a deduction is allowed under section 965(c))1). The applicable percentage is defined in section 965(g)(2) and is designed to reduce FTCs in proportion to the foreign source income accumulated E&P that was reduced by virtue of the deduction in section 965(c)(2) in arriving at the 15.5% equivalent rate or 8% equivalent rate.
Election to Pay Tax Liability Attributable to Repatriation Inclusion In Installments
A US shareholder of a deferred foreign income corporation may elect to pay the net tax liability from the mandatory section 951 inclusion of the pre-effective-date of the new law undistributed CFC earnings in eight annual installments that are “back-end loaded”. This rule is set forth in section 965(h). An election to pay tax in installments is required to be made by the due date for the 2017 tax year tax return which is the taxable year in which the pre-effective date CFC earnings are included in income.
Any S corporation which is a U.S. shareholder allows each shareholder to elect to defer such shareholder’s net tax liability under section 965(a) as to each such specified foreign corporation. The deferral continues until there is a triggering event such as the liquidation of the corporation, conversion to C status or sale of part or all of the shareholder’s stock.
Initial Take-Aways From New Section 965
As with the Bush Administration’s first version of a partial tax holiday on foreign source income, accumulated earnings and profits, section 965 is free of any plan requirement to invest the funds in the U.S. In contrast, under new section 965, the U.S. taxpayer can literally do anything it wants with the funds it receives that represent the deemed section 951(a) inclusion (and corresponding basis adjustment). Last-minute games to jump into Subchapter S to continue for an indefinite period the deferral on accumulated foreign earnings and profits or jump out of a 10% stock position in a foreign corporation are presumably going to be tested by the government for whether such efforts will be respected. Similarly, there may be strategies with respect to marrying deficit E&P foreign corporations with positive E&P foreign corporations. There also presumably were last minute “cash stripping” exercises to avoid or reduce the 15.5% repatriation rate and land on the 8% only residual tax rate. It is therefore noteworthy that the Service rushed to get out its Notice 2018-07 anticipating the games that have been played and may continue to be played for fiscal year CFCs and their U.S. shareholders.
This is a summary of an article by this author on the same subject which will appear in the next issue of the Journal of Passthrough Entities, Wolters Kluwer
 In 2004, Congress passed the American Jobs Creation Act (ACJA), P.L. 108-357, which contained a repatriation provision contained in §965 which provided U.S. multinational corporations a one-time tax reduction on money earned in foreign countries. Under AJCA, foreign earnings were permitted to be repatriated at a tax rate of 5.25% instead of up to 35%, subject to treaty override. This was achieved through a temporary elective 85% dividends received deduction on certain repatriations of cash from a CFC. The benefits were available only for a single year and only to the extent that dividends received from a taxpayer’s CFCs during a specified base period. It was further required by Congress that the repatriated dividends be paid in cash an invested within the US under a “dividend reinvestment plan” approved by the taxpayer’s management and board.
 It should be noted that for many U.S. shareholders, their post-1986 foreign source accumulated E&P were eliminated under the 2004 repatriation rules.
 Under new §245A, a participation exemption system is established for foreign income received by a specified 10% owned foreign corporation with respect to any domestic corporation which is a US shareholder under §951(b). The exemption is achieved through a 100% dividends received deduction (DRD) for the foreign-source income portion of dividends received from the foreign corporation. The foreign-source portion of any dividend is based on the ratio of the foreign corporation’s post-1986 undistributed foreign earnings bears to the corporation’s total post-1986 undistributed earnings. Foreign tax credits are disallowed for any dividend for which a DRD is allowed and would also disallow any deduction for any foreign tax for which credit is not allowable. The TCJA also repeals §902 effective for taxable years beginning after 2017. As to §960, as amended by the TCJA, it continues to provide for deemed paid foreign taxes with respect to §951(a)(1) inclusions but only to the extent “properly attributable” to the inclusion. Special rules in §960(b) apply for FTCs for distributions of previously taxed income. The amendments to §960 are effective for tax years of foreign corporation beginning after 2017 and U.S. shareholders’ tax years in which or with which such taxable years of foreign corporations ends.
 As mentioned, the §951 inclusion amount is the US shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of the deferred foreign income corporation as of the measurement date, i.e., November 2, 201 or December 21, 2017. This amount is reduced a U.S. shareholder’s pro rata share of post-1986 accumulated deficits in earnings and profits of specified foreign corporations.
 Section 965(d))2) also notes that regulations or other IRS guidance may provide that for a CFC that has shareholders that are not US shareholders, accumulated post-1986 deferred foreign income will be reduced by amounts which would be PTI under §959 were such shareholders US shareholders.
 Prior to revision in the TCJA, under §951(b) a “U.S. shareholder” is a “U.S. Person” per §7701(a)(3), including a domestic partnership or corporation, or a non-foreign trust or estate, that owns 10% or more of the corporation’s total combined voting power. Stock attribution rules are provided under §958. See, e.g., Framatone Connectors USA, Inc. v. Comm’r, 118 TC 32 (2002), aff’d 108 Fed. Appx. 683 (2nd Cir. 2004); Garlock, Inc. v. Comm’r, 489 F.2d 197 (2nd Cir. 1973), cert. den. 417 US 911 (1974)(attempted de-control recapitalization of CFC).
 Presumably the regulations will confirm that less than 10% U.S. shareholders are not subject to §965.
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