AICPA, ABA Urge Extensive Changes to Proposed Transition Tax Rules
The American Institute of Certified Public Accountants (AICPA) and the
American Bar Association (ABA) Section of Taxation are urging the IRS to
make extensive changes to proposed "transition tax" rules.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last
December, revived and amended Code Sec. 965. The new Code Sec.
965 generally requires U.S. shareholders pay a mandatory one-time
repatriation "transition" tax on untaxed foreign earnings of certain
"The Tax Cuts and Jobs Act treats these foreign earnings as
repatriated and places a 15.5 percent tax on cash or cash equivalents,
and an 8 percent tax on the remaining earnings. Generally, the
transition tax can be paid in installments over an eight-year period
when a taxpayer files a timely election under section 965(h),"Treasury
Secretary Steven Mnuchin said in a statement.
The IRS held an October 22 public hearing on NPRM REG-104226-18,
which provides rules for implementing the transition tax created under
last year’s tax reform. IRS officials did not provide any feedback at
In an October 31 comment letter to the IRS, the AICPA offered 15
recommendations to provide taxpayers further clarity and guidance on tax
reform’s transition tax requirements. The AICPA’s recommendations
include the following:
- Clarify that previously taxed earnings (PTI) under Code Sec.
965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of
applying Code Sec. 1248(d).
- Clarify that the portion of a Code Sec. 965 inclusion liability
attributable to Code Sec. 956 is eligible for the appropriate reduced
rate of tax as a consequence of the deduction provided for in Code Sec.
- Provide taxpayers with additional flexibility when making the basis
adjustment election under Proposed Reg. §1.965-2(f) by including the
ability to make partial basis adjustments, elect adjustments on an
entity-by-entity basis, and modify the proposed consistency provision on
- Provide guidance as to the ordering of distributions of PTI
between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of
applying Code Sec. 959(c) and Code Sec. 986(c).
- Provide relief to taxpayers that make or have made late elections
under the proposed regulations and clarify the procedure for obtaining
- Provide that U.S. shareholders that are members of the same
consolidated group are treated as a single U.S. shareholder for all
purposes with respect to Code Sec. 965.
- Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is
not taken into account under Code Sec. 864(e)(4)(D) for purposes of
allocating and apportioning interest expense.
- Exercise the authority under Code Sec. 965(o) to provide relief from
the income inclusion to certain affected taxpayers. Specifically,
provide guidance excluding a foreign corporation that is considered a
controlled foreign corporation (CFC) solely as a result of the "downward
attribution" rules of Code Sec. 318(a)(3) from the definition of an
specified foreign corporation (SFC) for any U.S. shareholder not
considered a related party (within the meaning of Code Sec. 954(d)(3))
with respect to the domestic corporation to which ownership was
- Provide a carve-out for certain "triggering events" of an S
corporation Code Sec. 965(i), such as where the S corporation and
relevant shareholders maintain direct or indirect ownership of the
transferred assets (e.g., tax-free transfers).
- Provide guidance on the interaction between a Code Sec. 962 election
and a Code Sec. 965(i) election, including clarifying that an eligible
taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax
liability for which they intend to defer inclusion under Code Sec.
Likewise, the ABA made similar recommendations on the proposed
regulations and related guidance in an October 29 letter sent to IRS
Commissioner Charles Rettig. The ABA’s 80-page letter grouped its
principal recommendations into the three categories:
- the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
- the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
- issues in applying the foreign tax credit.