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.
A1. A person that is required to include amounts in income under section 965 of the Code in its 2017 taxable year, whether because, the person is a United States shareholder of a deferred foreign income corporation (as defined under section 965(d) of the Code) or because 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 United States shareholder of a deferred foreign income corporation, is required to report amounts under section 965 of the Code on its 2017 tax return.
A2. Amounts required to be reported on a 2017 tax return should be reported on the return as reflected in the table included in Appendix: Q&A2 DOCX . The table reflects only how items related to amounts included in income under section 965 of the Code should be reported on a 2017 tax return. It does not address the reporting in other scenarios, including distributions made in 2017, which should be reported consistent with the Code and the current forms and instructions.
A3. Yes. A person that has income under section 965 of the Code for its 2017 taxable year is required to include with its return an IRC 965 Transition Tax Statement PDF , 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." Multiple IRC 965 Transition Tax Statements can be combined into a single PDF file. The IRC 965 Transition Tax Statement must include the following information:
A model statement is included in Appendix: Q&A3. Adequate records must be kept supporting the section 965(a) inclusion amount, deduction under section 965(c) of the Code, and net tax liability under section 965, as well as the underlying calculations of these amounts. Moreover, additional reporting may be required when filing returns for subsequent tax years, and the manner of reporting may be different. See also Q&A8 concerning Form 5471 filing.
[1] Use section 965(h)(6) to calculate the total net tax liability under section 965 even if an election to pay the net tax liability under section 965 in installments has not been made and even if the person is not a United States shareholder of a deferred foreign income corporation. Do not reduce this amount by any net tax liabilities under section 965 with respect to which section 965(i) is effective. Section 965(h)(6) generally determines a person’s net tax liability under section 965 by starting with (i) the taxpayer’s tax liability with all section 965 amounts included and then subtracting (ii) the tax liability with no section 965 amounts included and with dividends received from deferred foreign income corporations disregarded. See Publication 5292 PDF for instructions to be used in computing the net tax liability under section 965. [2] If both one or more elections under section 965(i) have been made and an election under section 965(h) has been made, the amount of the net tax liability under section 965 to be paid in installments is: (i) the amount of the total net tax liability under section 965 as determined above less (ii) the aggregate amount of the taxpayer’s net tax liabilities under section 965 with respect to which section 965(i) elections are effective. See Publication 5292 for more information. [3] See Publication 5292 for more information regarding the calculation of amounts eligible for S corporation shareholder deferral under section 965(i).
A4. Section 965 of the Code permits multiple elections related to amounts included in income by reason of section 965 of the Code or the payment of a taxpayer’s net tax liability under section 965 (as determined under section 965(h)(6)). Statutory elections can be found in section 965(h), (i), (m), and (n).
Furthermore, the Treasury Department and the IRS have announced another election that may be made with respect to the determination of the post-1986 earnings and profits of a specified foreign corporation. This election is described in Notice 2018-13, 2018-6 I.R.B. 341, Section 3.02.
A5. The elections under section 965 of the Code are limited to taxpayers with a net tax liability under section 965 (in the case of section 965(h) of the Code), taxpayers that are shareholders of S corporations and that have a net tax liability under section 965 (in the case of section 965(i) of the Code), taxpayers that are REITs (in the case of section 965(m) of the Code), or taxpayers with an NOL (in the case of section 965(n) of the Code). Thus, a domestic partnership or an S corporation that is a United States shareholder of a deferred foreign income corporation may not make any of the elections under section 965 of the Code. The Treasury Department and the IRS provided further guidance concerning the availability of the elections under section 965 of the Code to direct and indirect partners in domestic partnerships, shareholders in S corporations, and beneficiaries in other passthrough entities that are United States shareholders of deferred foreign income corporations. See Section 3.05(b) of Notice 2018-26.
The election under Notice 2018-13, Section 3.02 may be made on behalf of a specified foreign corporation pursuant to the rules of §1.964-1(c)(3).
In the case of a consolidated group (as defined in §1.1502-1(h)), in which one or more members are United States shareholders of a specified foreign corporation, the agent for the group (as defined in §1.1502-77) must make the elections on behalf of its members.
A6. An election with respect to section 965 of the Code must be made by the due date (including extensions) for filing the return for the relevant year. However, even if an election is made under section 965(h) of the Code to pay a net tax liability under section 965 of the Code in installments, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year.
A7. A person makes an election under section 965 of the Code or the election provided for in Notice 2018-13, Section 3.02, by attaching to a 2017 tax return a statement signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf), for each such election. Each such statement must include the person’s name, taxpayer identification number and any other information relevant to the election, such as the net tax liability under section 965 with respect to which the installment election under section 965(h)(1) of the Code applies, the name and taxpayer identification number of the S corporation with respect to which the deferral election under section 965(i)(1) of the Code is made, the section 965(a) inclusion amount with respect to which the election under section 965(m)(1)(B) of the Code applies, the amount described in section 965(n)(2) of the Code to which the election under section 965(n)(1) of the Code applies, and the name and taxpayer identification number, if any, of the specified foreign corporation with respect to which the election under Notice 2018-13, Section 3.02, is made. Model statements are included in Appendix: Q&A7. Each election statement must have the applicable title and, in the case of an attachment in Portable Document Format (.pdf) included with an electronically filed return, the file name reflected in the following table:
| Provision Under Which Election is Made | Title | File Name |
|---|---|---|
| Section 965(h)(1) PDF | Election to Pay Net Tax Liability Under Section 965 in Installments under Section 965(h)(1) | 965(h) |
| Section 965(i)(1) PDF | S Corporation Shareholder Election to Defer Payment of Net Tax Liability Under Section 965 Under Section 965(i)(1) | 965(i) |
| Section 965(m)(1)(B) PDF | Statement for Real Estate Investment Trusts Electing Deferred Inclusions Under Section 951(a)(1) By Reason of Section 965 Under Section 965(m)(1)(B) | 965(m) |
| Section 965(n) PDF | Election Not to Apply Net Operating Loss Deduction under section 965(n) | 965(n) |
| Notice 2018-13, Section 3.02 PDF | Election Under Section 3.02 of Notice 2018-13 to Use Alternative Method to Compute Post-1986 Earnings and Profits | 2018-13 |
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. United States shareholders not otherwise required to file Form 5471 should consult the instructions to Form 5471 to determine the correct category of filer. 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.
A9. Yes. A domestic partnership, S corporation, or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount:
For more information concerning the application of section 965 to domestic partnerships, S corporations, or other domestic passthrough entities, see Section 3.05(b) of Notice 2018-26.
A10. 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 and not otherwise satisfied by another payment or credit as described in Q&A13 and Q&A14 (the 965 Payment). See Q&A13 for information regarding how the IRS will apply 2017 estimated tax payments. Both payments must be paid by the due date of the applicable return (without extensions). But see Notice 2018-26, section 3.05(e), providing that if an individual receives an extension of time to file and pay under §1.6081-5(a)(5) or (6), the individual’s due date for the 965 Payment is also extended.
The 965 Payment must be made either by wire transfer or by check or money order. This may be the first year’s installment of tax owed in connection with a 2017 tax return by a taxpayer making the election under section 965(h) of the Code, or the full net tax liability under section 965 of the Code for a taxpayer who does not make such election and does not make an election under section 965(i) of the Code. For the 965 Payment, there is no penalty for taxpayers electing to use wire transfers as an alternative to otherwise mandated EFTPS payments. Accordingly, taxpayers that would normally be required to pay through EFTPS should submit the 965 Payment via wire transfer or they may be subject to penalties. On a wire payment of tax owed under section 965 of the Code, the taxpayer would use a 5-digit tax type code of 09650. On a check or money order payment of tax owed resulting from section 965 of the Code, include an appropriate payment voucher (such as Form 1040-V or 1041-V) and along with all other required information write on the front of your payment “2017 965 Tax.”
For the payment owed without regard to section 965, normal payment procedures apply. This payment may be made at the same or different time from the 965 Payment, but must be made by the due date of the return or penalties and interest may apply.
A11. Individual taxpayers who electronically file their Form 1040 should file on or after April 2, 2018. Individual taxpayers who file a paper Form 1040 can do so at any time.
A12. The person should consider filing an amended return based on the information provided in these FAQs and Appendices. Failure to submit a return in this manner may result in processing difficulties and erroneous notices being issued. Failure to accurately reflect the net tax liability under section 965 of the Code in total tax could result in interest and penalties.
In order to amend a return, a person would file the applicable form for amending the return pursuant to regular instructions and would attach:
A13. The IRS will apply 2017 estimated tax payments first to a taxpayer’s 2017 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965), and then to its tax liability under section 965, including those amounts that are subject to payment in installments pursuant to an election under section 965(h).
A14. No. A taxpayer may not receive a refund or credit of any portion of properly applied 2017 tax payments unless and until the amount of payments exceeds the entire unpaid 2017 income tax liability, including all amounts to be paid in installments under section 965(h) in subsequent years. If a taxpayer’s 2017 tax payments exceed the 2017 net income tax liability described under section 965(h)(6)(A)(ii) (net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h), the excess will be applied to the next successive annual installment (due in 2019) (and to the extent such excess exceeds the amount of such next successive annual installment due, then to the next such successive annual installment (due in 2020), etc.) pursuant to an election under section 965(h).
A15. No. The IRS has determined that no addition to tax for an underpayment of estimated taxes under section 6654 or 6655 will apply (nor be increased) if a taxpayer makes an estimated tax payment sufficient to satisfy both the underpayment of the first required estimated tax installment for 2018 and the full amount of the second required estimated tax installment for 2018 on or before the due date for the second installment (that is, June 15, 2018, for calendar year taxpayers). This relief from the addition to tax for the underpayment of estimated taxes applies only to taxpayers whose first required installment for 2018 was due on or before April 18, 2018.
If the IRS sends a taxpayer a notice of an addition to tax for underpayment of estimated tax under section 6654 or 6655 and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for underpayment of estimated taxes in accordance with the provisions in these FAQs and updated instructions to Forms 2210 and 2220.
A16. If an individual meets the criteria in this paragraph and pays the total amount of the first installment on or before the due date for the second installment, the IRS will not assess an addition to tax for failure to timely pay the first installment and will not accelerate subsequent installments under section 965(h)(3). An individual with a net tax liability under section 965 is required to report the liability on his or her tax return for the year in which or with which the inclusion year of the deferred foreign income corporation ends and pay the full amount of that liability on the unextended due date of that return, unless the individual elects to pay the liability in eight annual installments pursuant to section 965(h)(1). However, the IRS has determined that, if an individual’s net tax liability under section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under section 965(h), and the individual did not pay the full amount of the first installment by the due date under section 965(h)(2), the failure to make the payment will not result in an acceleration event under section 965(h)(3) so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions). For this purpose, the relevant due date generally is April 15, 2019. In the case of United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico, and United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, the relevant due date is June 17, 2019, which is provided by Treas. Reg. §1.6081-5(a)(5) and (6). Although the IRS will not assess an addition to tax for failure to timely pay the first installment, a taxpayer will be liable for interest on such amount from the due date of the installment. See I.R.C. §6601.
If the IRS sends a taxpayer a notice of an addition to tax for failure to timely pay the first installment, and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment due under section 965(h)), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for failure to timely pay the first installment in accordance with the provisions in these FAQs.
A17. Yes. If an individual with a net tax liability under section 965 in the individual’s 2017 tax year has already filed his or her tax return and did not make an election under section 965(h), such individual can make the section 965(h) election by filing a Form 1040X that complies with the procedures set forth in these FAQs (including, for example, the IRC 965 Transition Tax Statement(s) described in Q&A 3 and the election statement described in Q&A 7) on or before the due date of the individual’s 2017 return, taking into account any additional time that would have been granted if the individual had made an extension request. For this purpose, the IRS will treat the individual as if he or she had requested and received the extension.
A18. You may file a Transfer Agreement at IRS’ Brookhaven Compliance Service Collection Operations at the following address:
Brookhaven Compliance Service Collection Operation
Brookhaven CSCO
1040 Waverly Avenue, Stop 662C
Holtsville, NY 11772
Transfer Agreements will be considered timely filed if filed by the date provided in the final regulations under section 965.
A19. Yes, for the IRS to properly process a Transfer Agreement, an eligible section 965(h) transferee must consent to the immediate assessment of the portion of the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid in the Transfer Agreement. This may be done in one of the following manners:
(i) Transfer Agreements may include the following statement directly above the perjury jurat and the signatures of the eligible section 965(h) transferor and eligible section 965(h) transferee:
By signing this transfer agreement, [the eligible section 965(h) transferee] waives the right to a notice of liability and consents to the immediate assessment of the portion of the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid, as shown in paragraph [insert paragraph number of the transfer agreement]. [The eligible section 965(h) transferee] understands that by signing this agreement, [the eligible section 965(h) transferee] will not be able to contest this liability in Tax Court, except as additional transferee or fiduciary liability is determined for this year; or
(ii) An eligible section 965(h) transferee may include an executed Form 870T, Waiver of Restrictions on Assessment and Collection of Transferee or Fiduciary Liability, with the Transfer Agreement Under Section 965(h)(3) filed with the IRS, as described in A18, consenting to the immediate assessment of the portion of the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid as set forth in the Transfer Agreement Under Section 965(h)(3).
The IRS will not be able to process a Transfer Agreement Under Section 965(h)(3) until such time as the eligible section 965(h) transferee has consented to the immediate assessment of the portion of the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid as set forth in the Transfer Agreement under Section 965(h)(3). While the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid will be immediately assessed against the eligible section 965(h) transferee, the remaining installments will not become immediately due as long as the eligible 965(h) transferee agrees to be liable for the remaining installments in the same manner as the eligible 965(h) transferor and meets other requirements of section 965(h). Transfer agreements filed before the date provided in the final regulations under section 965, including transfer agreements filed in reliance on the proposed regulations, will be subject to any additional information requests issued by the Commissioner pursuant to proposed §1.965-7(b)(3)(iii)(C)(1).
A20. If you have previously filed a Transfer Agreement, the Transfer Agreement should be filed again at the IRS office set forth in A18. If a Transfer Agreement Under Section 965(h)(3) does not contain the consent language set forth in A19, the IRS will not be able to process the Transfer Agreement until such time as the eligible section 965(h) transferee has consented to the immediate assessment of the portion of the eligible section 965(h) transferor’s section 965(h) net tax liability remaining unpaid as set forth in the Transfer Agreement Under Section 965(h)(3). To be processable by the IRS, the Transfer Agreement Under Section 965(h)(3) may either (i) include the language provided in A19 or (ii) the eligible section 965(h) transferee may execute and attach a Form 870T to the refiled Transfer Agreement. If a Transfer Agreement is submitted without the consent language or a Form 870T, the IRS will request that the transferee execute a Form 870T.
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.