October 21, 2019 - Douglas Myser

CFC attributions get safe harbors. U.S. persons who own stock in controlled foreign corporations CFCs may be able to benefit from safe harbors for determining CFC status and resulting income inclusions under a revenue procedure the IRS issued. At the same time, the IRS issued proposed regulations (REG-104223-18) concerning ownership attribution for determining the status of corporations as CFCs and their U.S. shareholders. Under Sec. 967(A), a CFC is any foreign corporation of which U.S. shareholders own or are considered to won more than 50% of the voting power or value of its stock on any day during the corporation's tax year. The guidance is prompted by repeal of Sec. 958(b)(4) under the law known as the Tax Cuts and Jobs Act, P.L. 115-97, the IRS explained in an accompanying news release. CFC attributions get safe harbors.

Before its repeal, under the rules for constructive ownership of stock, Sec. 958(b)(4) excluded U.S. persons from constructively owning stock in a CFC by application of Sec. 318(a)(3)(A), (B), or (C), which each attribute ownership of stock directly or indirectly for or by a partner, beneficiary, or controlling stockholder to the respective partnership, estate, trust, or corporation and thence to other partners, beneficiaries, or shareholders. The repeal of Sec. 958 (B) (4) can cause stock of a foreign corporation to now be attributed to a U.S. person under Sec. 318(A)(3) (referred to as downward attribution). Thus a U.S. person may now be treated as a U.S. shareholder of a CFC who was not formerly, and foreign corporations that were not previously treated as a CFC may also be so treated. The code change is effective for the last tax year of foreign corporations beginning Jan. 1, 2018, and subsequently.

Ownership of stock in CFCs, in turn, may require taxpayers to include in gross income amounts under Sec. 951 (subpart F) and 951 A (global intangible low taxed income, or GILTI). In issuing the relief, the IRS stated it recognized that taxpayers so affected might not be able to obtain information to accurately determine these income amounts or whether foreign corporations in which they now are considered to own stock are in fact CFCs.

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