This document provides answers to questions regarding return filing and tax payment obligations arising under section 14103 of “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L 115-97 (“the Act”), which was enacted on December 22, 2017. The new provision enacted by section 14103 of the Act, set forth at section 965 of the Internal Revenue Code (the “Code”), applies with respect to the last taxable year of certain specified foreign corporations (as defined under section 965(e) of the Code) beginning before January 1, 2018, and the amount included in income under section 965 of the Code is includible in the United States shareholder’s year in which or with which such a specified foreign corporation’s year ends. Taxpayers may have to pay tax resulting from section 965 of the Code when filing their 2017 tax returns. For example, section 965 of the Code may give rise to a 2017 tax liability for a calendar year United States shareholder holding an interest in a calendar year specified foreign corporation.

In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.

The instructions in these FAQs are for filing 2017 tax returns with an amount under section 965 of the Code. Failure to submit tax returns according to these instructions may result in difficulties in processing tax returns, including rejection, processing delays, or erroneous notices being issued.

Taxpayers who electronically file Form 1040 are requested to wait to file their return on or after April 2, 2018. This will provide the IRS time to make certain system changes to allow the returns to be accepted and processed.

For information on how this affects 2018 tax returns, see Questions and Answers about Reporting Related to Section 965 on 2018 Tax Returns.

Disclaimer

These FAQs are not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.