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Internal Revenue Code, § 965. Treatment Of Deferred Foreign Income Upon Transition To Participation Exemption System Of Taxation

I.R.C. § 965(a) Treatment Of Deferred Foreign Income As Subpart F Income
In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of—
I.R.C. § 965(a)(1)
the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or
I.R.C. § 965(a)(2)
the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.
I.R.C. § 965(b) Reduction In Amounts Included In Gross Income Of United States Shareholders Of Specified Foreign Corporations With Deficits In Earnings And Profits
I.R.C. § 965(b)(1) In General
In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder's pro rata share of the subpart F income of each deferred foreign income corporation shall be reduced by the amount of such United States shareholder's aggregate foreign E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation.
I.R.C. § 965(b)(2) Allocation Of Aggregate Foreign E&P Deficit
The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an amount which bears the same proportion to such aggregate as—
I.R.C. § 965(b)(2)(A)
such United States shareholder's pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to
I.R.C. § 965(b)(2)(B)
the aggregate of such United States shareholder's pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder.
I.R.C. § 965(b)(3) Definitions Related To E&P Deficits
For purposes of this subsection—
I.R.C. § 965(b)(3)(A) Aggregate Foreign E&P Deficit
I.R.C. § 965(b)(3)(A)(i) In General
The term “aggregate foreign E&P deficit” means, with respect to any United States shareholder, the lesser of—
I.R.C. § 965(b)(3)(A)(i)(I)
the aggregate of such shareholder's pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder, or
I.R.C. § 965(b)(3)(A)(i)(II)
the amount determined under paragraph (2)(B).
I.R.C. § 965(b)(3)(A)(ii) Allocation Of Deficit
If the amount described in clause (i)(II) is less than the amount described in clause (i)(I), then the shareholder shall designate, in such form and manner as the Secretary determines—
I.R.C. § 965(b)(3)(A)(ii)(I)
the amount of the specified E&P deficit which is to be taken into account for each E&P deficit corporation with respect to the taxpayer, and
I.R.C. § 965(b)(3)(A)(ii)(II)
in the case of an E&P deficit corporation which has a qualified deficit (as defined in section 952), the portion (if any) of the deficit taken into account under subclause (I) which is attributable to a qualified deficit, including the qualified activities to which such portion is attributable.
I.R.C. § 965(b)(3)(B) E&P Deficit Foreign Corporation
The term “E&P deficit foreign corporation” means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if, as of November 2, 2017—
I.R.C. § 965(b)(3)(B)(i)
such specified foreign corporation has a deficit in post-1986 earnings and profits,
I.R.C. § 965(b)(3)(B)(ii)
such corporation was a specified foreign corporation, and
I.R.C. § 965(b)(3)(B)(iii)
such taxpayer was a United States shareholder of such corporation.
I.R.C. § 965(b)(3)(C) Specified E&P Deficit
The term “specified E&P deficit” means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B).
I.R.C. § 965(b)(4) Treatment Of Earnings And Profits In Future Years
I.R.C. § 965(b)(4)(A) Reduced Earnings And Profits Treated As Previously Taxed Income When Distributed
For purposes of applying section 959 in any taxable year beginning with the taxable year described in subsection (a), with respect to any United States shareholder of a deferred foreign income corporation, an amount equal to such shareholder's reduction under paragraph (1) which is allocated to such deferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such United States shareholder under section 951(a).
I.R.C. § 965(b)(4)(B) E&P Deficits
For purposes of this title, with respect to any taxable year beginning with the taxable year described in subsection (a), a United States shareholder's pro rata share of the earnings and profits of any E&P deficit foreign corporation under this subsection shall be increased by the amount of the specified E&P deficit of such corporation taken into account by such shareholder under paragraph (1), and, for purposes of section 952, such increase shall be attributable to the same activity to which the deficit so taken into account was attributable.
I.R.C. § 965(b)(5) Netting Among United States Shareholders In Same Affiliated Group
I.R.C. § 965(b)(5)(A) In General
In the case of any affiliated group which includes at least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by each such E&P net surplus shareholder shall be reduced (but not below zero) by such shareholder's applicable share of the affiliated group's aggregate unused E&P deficit.
I.R.C. § 965(b)(5)(B) E&P Net Surplus Shareholder
For purposes of this paragraph, the term “E&P net surplus shareholder” means any United States shareholder which would (determined without regard to this paragraph) take into account an amount greater than zero under section 951(a)(1) by reason of subsection (a).
I.R.C. § 965(b)(5)(C) E&P Net Deficit Shareholder
For purposes of this paragraph, the term “E&P net deficit shareholder” means any United States shareholder if—
I.R.C. § 965(b)(5)(C)(i)
the aggregate foreign E&P deficit with respect to such shareholder (as defined in paragraph (3)(A) without regard to clause (i)(II) thereof), exceeds
I.R.C. § 965(b)(5)(C)(ii)
the amount which would (but for this subsection) be taken into account by such shareholder under section 951(a)(1) by reason of subsection (a).
I.R.C. § 965(b)(5)(D) Aggregate Unused E&P Deficit
For purposes of this paragraph—
I.R.C. § 965(b)(5)(D)(i) In General
The term “aggregate unused E&P deficit” means, with respect to any affiliated group, the lesser of—
I.R.C. § 965(b)(5)(D)(i)(I)
the sum of the excesses described in subparagraph (C), determined with respect to each E&P net deficit shareholder in such group, or
I.R.C. § 965(b)(5)(D)(i)(II)
the amount determined under subparagraph (E)(ii).
I.R.C. § 965(b)(5)(D)(ii) Reduction With Respect To E&P Net Deficit Shareholders Which Are Not Wholly Owned By The Affiliated Group
If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess described in subparagraph (C) which is taken into account under clause (i)(I) with respect to such E&P net deficit shareholder shall be such group ownership percentage of such amount.
I.R.C. § 965(b)(5)(E) Applicable Share
For purposes of this paragraph, the term “applicable share” means, with respect to any E&P net surplus shareholder in any affiliated group, the amount which bears the same proportion to such group's aggregate unused E&P deficit as—
I.R.C. § 965(b)(5)(E)(i)
the product of—
I.R.C. § 965(b)(5)(E)(i)(I)
such shareholder's group ownership percentage, multiplied by
I.R.C. § 965(b)(5)(E)(i)(II)
the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by such shareholder, bears to
I.R.C. § 965(b)(5)(E)(ii)
the aggregate amount determined under clause (i) with respect to all E&P net surplus shareholders in such group.
I.R.C. § 965(b)(5)(F) Group Ownership Percentage
For purposes of this paragraph, the term “group ownership percentage” means, with respect to any United States shareholder in any affiliated group, the percentage of the value of the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which is also used in section 1504 shall have the same meaning as when used in such section.
I.R.C. § 965(c) Application Of Participation Exemption To Included Income
I.R.C. § 965(c)(1) In General
In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section an amount equal to the sum of—
I.R.C. § 965(c)(1)(A)
the United States shareholder's 8 percent rate equivalent percentage of the excess (if any) of—
I.R.C. § 965(c)(1)(A)(i)
the amount so included as gross income, over
I.R.C. § 965(c)(1)(A)(ii)
the amount of such United States shareholder's aggregate foreign cash position, plus
I.R.C. § 965(c)(1)(B)
the United States shareholder's 15.5 percent rate equivalent percentage of so much of the amount described in subparagraph (A)(ii) as does not exceed the amount described in subparagraph (A)(i).
I.R.C. § 965(c)(2) 8 And 15.5 Percent Rate Equivalent Percentages
I.R.C. § 965(c)(2)(A) 8 Percent Rate Equivalent Percentage
The term “8 percent rate equivalent percentage” means, with respect to any United States shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 8 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in section 11 for such taxable year. In the case of any taxable year of a United States shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate of tax under section 11 after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the portion of such taxable year which is before and after such effective date, respectively.
I.R.C. § 965(c)(2)(B) 15.5 Percent Rate Equivalent Percentage
The term “15.5 percent rate equivalent percentage” means, with respect to any United States shareholder for any taxable year, the percentage determined under subparagraph (A) applied by substituting “15.5 percent rate of tax” for “8 percent rate of tax”.
I.R.C. § 965(c)(3) Aggregate Foreign Cash Position
For purposes of this subsection-
I.R.C. § 965(c)(3)(A) In General
The term “aggregate foreign cash position” means, with respect to any United States shareholder, the greater of—
I.R.C. § 965(c)(3)(A)(i)
the aggregate of such United States shareholder's pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018, or
I.R.C. § 965(c)(3)(A)(ii)
one half of the sum of—
I.R.C. § 965(c)(3)(A)(ii)(I)
the aggregate described in clause (i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017, plus
I.R.C. § 965(c)(3)(A)(ii)(II)
the aggregate described in clause (i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in subclause (I).
I.R.C. § 965(c)(3)(B) Cash Position
For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of—
I.R.C. § 965(c)(3)(B)(i)
cash held by such foreign corporation,
I.R.C. § 965(c)(3)(B)(ii)
the net accounts receivable of such foreign corporation, plus
I.R.C. § 965(c)(3)(B)(iii)
the fair market value of the following assets held by such corporation:
I.R.C. § 965(c)(3)(B)(iii)(I)
Personal property which is of a type that is actively traded and for which there is an established financial market.
I.R.C. § 965(c)(3)(B)(iii)(II)
Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government.
I.R.C. § 965(c)(3)(B)(iii)(III)
Any foreign currency.
I.R.C. § 965(c)(3)(B)(iii)(IV)
Any obligation with a term of less than one year.
I.R.C. § 965(c)(3)(B)(iii)(V)
Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.
I.R.C. § 965(c)(3)(C) Net Accounts Receivable
For purposes of this paragraph, the term “net accounts receivable” means, with respect to any specified foreign corporation, the excess (if any) of—
I.R.C. § 965(c)(3)(C)(i)
such corporation's accounts receivable, over
I.R.C. § 965(c)(3)(C)(ii)
such corporation's accounts payable (determined consistent with the rules of section 461).
I.R.C. § 965(c)(3)(D) Prevention Of Double Counting
Cash positions of a specified foreign corporation described in clause (ii), (iii)(I), or (iii)(IV) of subparagraph (B) shall not be taken into account by a United States shareholder under subparagraph (A) to the extent that such United States shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such United States shareholder with respect to another specified foreign corporation.
I.R.C. § 965(c)(3)(E) Cash Positions Of Certain Non-Corporate Entities Taken Into Account
An entity (other than a corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder's aggregate foreign cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such entity were a foreign corporation.
I.R.C. § 965(c)(3)(F) Anti-Abuse
If the Secretary determines that a principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.
I.R.C. § 965(d) Deferred Foreign Income Corporation; Accumulated Post-1986 Deferred Foreign Income
For purposes of this section-
I.R.C. § 965(d)(1) Deferred Foreign Income Corporation
The term “deferred foreign income corporation” means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post- 1986 deferred foreign income (as of the date referred to in paragraph (1) or (2) of subsection (a)) greater than zero.
I.R.C. § 965(d)(2) Accumulated Post-1986 Deferred Foreign Income
The term “accumulated post-1986 deferred foreign income” means the post-1986 earnings and profits except to the extent such earnings—
I.R.C. § 965(d)(2)(A)
are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or
I.R.C. § 965(d)(2)(B)
in the case of a controlled foreign corporation, if distributed, would be excluded from the gross income of a United States shareholder under section 959.
To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not United States shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph (B) if such shareholders were United States shareholders.
I.R.C. § 965(d)(3) Post-1986 Earnings And Profits
The term “post-1986 earnings and profits” means the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986, and by only taking into account periods when the foreign corporation was a specified foreign corporation) accumulated in taxable years beginning after December 31, 1986, and determined—
I.R.C. § 965(d)(3)(A)
as of the date referred to in paragraph (1) or (2) of subsection (a), whichever is applicable with respect to such foreign corporation, and
I.R.C. § 965(d)(3)(B)
without diminution by reason of dividends distributed during the taxable year described in subsection (a) other than dividends distributed to another specified foreign corporation.
I.R.C. § 965(e) Specified Foreign Corporation
I.R.C. § 965(e)(1) In General
For purposes of this section, the term “specified foreign corporation” means—
I.R.C. § 965(e)(1)(A)
any controlled foreign corporation, and
I.R.C. § 965(e)(1)(B)
any foreign corporation with respect to which one or more domestic corporations is a United States shareholder.
I.R.C. § 965(e)(2) Application To Certain Foreign Corporations
For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for purposes of applying subsection (f)).
I.R.C. § 965(e)(3) Exclusion Of Passive Foreign Investment Companies
Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.
I.R.C. § 965(f) Determinations Of Pro Rata Share
I.R.C. § 965(f)(1) In General
For purposes of this section, the determination of any United States shareholder's pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation).
I.R.C. § 965(f)(2) Special Rules
The portion which is included in the income of a United States shareholder under section 951(a)(1) by reason of subsection (a) which is equal to the deduction allowed under subsection (c) by reason of such inclusion—
I.R.C. § 965(f)(2)(A)
shall be treated as income exempt from tax for purposes of sections 705(a)(1)(B) and 1367(a)(1)(A), and
I.R.C. § 965(f)(2)(B)
shall not be treated as income exempt from tax for purposes of determining whether an adjustment shall be made to an accumulated adjustment account under section 1368(e)(1)(A).
I.R.C. § 965(g) Disallowance Of Foreign Tax Credit, Etc.
I.R.C. § 965(g)(1) In General
No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section.
I.R.C. § 965(g)(2) Applicable Percentage
For purposes of this subsection, the term “applicable percentage” means the amount (expressed as a percentage) equal to the sum of—
I.R.C. § 965(g)(2)(A)
0.771 multiplied by the ratio of—
I.R.C. § 965(g)(2)(A)(i)
the excess to which subsection (c)(1)(A) applies, divided by
I.R.C. § 965(g)(2)(A)(ii)
the sum of such excess plus the amount to which subsection (c)(1)(B) applies, plus
I.R.C. § 965(g)(2)(B)
0.557 multiplied by the ratio of—
I.R.C. § 965(g)(2)(B)(i)
the amount to which subsection (c)(1)(B) applies, divided by
I.R.C. § 965(g)(2)(B)(ii)
the sum described in subparagraph (A)(ii).
I.R.C. § 965(g)(3) Denial Of Deduction
No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).
I.R.C. § 965(g)(4) Coordination With Section 78
With respect to the taxes treated as paid or accrued by a domestic corporation with respect to amounts which are includible in gross income of such domestic corporation by reason of this section, section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as—
I.R.C. § 965(g)(4)(A)
the excess of—
I.R.C. § 965(g)(4)(A)(i)
the amounts which are includible in gross income of such domestic corporation by reason of this section, over
I.R.C. § 965(g)(4)(A)(ii)
the deduction allowable under subsection (c) with respect to such amounts, bears to
I.R.C. § 965(g)(4)(B)
such amounts.
I.R.C. § 965(h) Election To Pay Liability In Installments
I.R.C. § 965(h)(1) In General
In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 installments of the following amounts:
I.R.C. § 965(h)(1)(A)
8 percent of the net tax liability in the case of each of the first 5 of such installments,
I.R.C. § 965(h)(1)(B)
15 percent of the net tax liability in the case of the 6th such installment,
I.R.C. § 965(h)(1)(C)
20 percent of the net tax liability in the case of the 7th such installment, and
I.R.C. § 965(h)(1)(D)
25 percent of the net tax liability in the case of the 8th such installment.
I.R.C. § 965(h)(2) Date For Payment Of Installments
If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in subsection (a) and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made.
I.R.C. § 965(h)(3) Acceleration Of Payment
If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer.
I.R.C. § 965(h)(4) Proration Of Deficiency To Installments
If an election is made under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.
I.R.C. § 965(h)(5) Election
Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary shall provide.
I.R.C. § 965(h)(6) Net Tax Liability Under This Section
For purposes of this subsection—
I.R.C. § 965(h)(6)(A) In General
The net tax liability under this section with respect to any United States shareholder is the excess (if any) of—
I.R.C. § 965(h)(6)(A)(i)
such taxpayer's net income tax for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over
I.R.C. § 965(h)(6)(A)(ii)
such taxpayer's net income tax for such taxable year determined—
I.R.C. § 965(h)(6)(A)(ii)(I)
without regard to this section, and
I.R.C. § 965(h)(6)(A)(ii)(II)
without regard to any income or deduction properly attributable to a dividend received by such United States shareholder from any deferred foreign income corporation.
I.R.C. § 965(h)(6)(B) Net Income Tax
The term “net income tax” means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A.
I.R.C. § 965(i) Special Rules For S Corporation Shareholders
I.R.C. § 965(i)(1) In General
In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder's net tax liability under this section with respect to such S corporation until the shareholder's taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder's taxable year which includes such triggering event.
I.R.C. § 965(i)(2) Triggering Event
I.R.C. § 965(i)(2)(A) In General
In the case of any shareholder's net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first:
I.R.C. § 965(i)(2)(A)(i)
Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation).
I.R.C. § 965(i)(2)(A)(ii)
A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance.
I.R.C. § 965(i)(2)(A)(iii)
A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise).
I.R.C. § 965(i)(2)(B) Partial Transfers Of Stock
In the case of a transfer of less than all of the taxpayer's shares of stock in the S corporation, such transfer shall only be a triggering event with respect to so much of the taxpayer's net tax liability under this section with respect to such S corporation as is properly allocable to such stock.
I.R.C. § 965(i)(2)(C) Transfer Of Liability
transfer described in clause (iii) of subparagraph (A) shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same manner as if such transferee were the taxpayer.
I.R.C. § 965(i)(3) Net Tax Liability
A shareholder's net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation.
I.R.C. § 965(i)(4) Election To Pay Deferred Liability In Installments
In the case of a taxpayer which elects to defer payment under paragraph (1)—
I.R.C. § 965(i)(4)(A)
subsection (h) shall be applied separately with respect to the liability to which such election applies,
I.R.C. § 965(i)(4)(B)
an election under subsection (h) with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect to such liability occurs,
I.R.C. § 965(i)(4)(C)
the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and
I.R.C. § 965(i)(4)(D)
if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection (h) with respect to such liability may be made only with the consent of the Secretary.
I.R.C. § 965(i)(5) Joint And Several Liability Of S Corporation
If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto.
I.R.C. § 965(i)(6) Extension Of Limitation On Collection
Any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability.
I.R.C. § 965(i)(7) Annual Reporting Of Net Tax Liability
I.R.C. § 965(i)(7)(A) In General
Any shareholder of an S corporation which makes an election under paragraph (1) shall report the amount of such shareholder's deferred net tax liability on such shareholder's return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns.
I.R.C. § 965(i)(7)(B) Deferred Net Tax Liability
For purposes of this paragraph, the term “deferred net tax liability” means, with respect to any taxable year, the amount of net tax liability payment of which has been deferred under paragraph (1) and which has not been assessed on a return of tax for any prior taxable year.
I.R.C. § 965(i)(7)(C) Failure To Report
In the case of any failure to report any amount required to be reported under subparagraph (A) with respect to any taxable year before the due date for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 percent of such amount.
I.R.C. § 965(i)(8) Election
Any election under paragraph (1)—
I.R.C. § 965(i)(8)(A)
shall be made by the shareholder of the S corporation not later than the due date for such shareholder's return of tax for the taxable year which includes the close of the taxable year of such S corporation in which the amount described in subsection (a) is taken into account, and
I.R.C. § 965(i)(8)(B)
shall be made in such manner as the Secretary shall provide.
I.R.C. § 965(j) Reporting By S Corporation
Each S corporation which is a United States shareholder of a specified foreign corporation shall report in its return of tax under section 6037(a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a shareholder under section 6037(b) shall include a statement of such shareholder's pro rata share of such amounts.
I.R.C. § 965(k) Extension Of Limitation On Assessment
Notwithstanding section 6501, the limitation on the time period for the assessment of the net tax liability under this section (as defined in subsection (h)(6)) shall not expire before the date that is 6 years after the return for the taxable year described in such subsection was filed.
I.R.C. § 965(l) Recapture For Expatriated Entities
I.R.C. § 965(l)(1) In General
If a deduction is allowed under subsection (c) to a United States shareholder and such shareholder first becomes an expatriated entity at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act (with respect to a surrogate foreign corporation which first becomes a surrogate foreign corporation during such period), then—
I.R.C. § 965(l)(1)(A)
the tax imposed by this chapter shall be increased for the first taxable year in which such taxpayer becomes an expatriated entity by an amount equal to 35 percent of the amount of the deduction allowed under subsection (c), and
I.R.C. § 965(l)(1)(B)
no credits shall be allowed against the increase in tax under subparagraph (A).
I.R.C. § 965(l)(2) Expatriated Entity
For purposes of this subsection, the term “expatriated entity” has the same meaning given such term under section 7874(a)(2), except that such term shall not include an entity if the surrogate foreign corporation with respect to the entity is treated as a domestic corporation under section 7874(b).
I.R.C. § 965(l)(3) Surrogate Foreign Corporation
For purposes of this subsection, the term “surrogate foreign corporation” has the meaning given such term in section 7874(a)(2)(B).
I.R.C. § 965(m) Special Rules For United States Shareholders Which Are Real Estate Investment Trusts
I.R.C. § 965(m)(1) In General
If a real estate investment trust is a United States shareholder in 1 or more deferred foreign income corporations—
I.R.C. § 965(m)(1)(A)
any amount required to be taken into account under section 951(a)(1) by reason of this section shall not be taken into account as gross income of the real estate investment trust for purposes of applying paragraphs (2) and (3) of section 856(c) to any taxable year for which such amount is taken into account under section 951(a)(1), and
I.R.C. § 965(m)(1)(B)
if the real estate investment trust elects the application of this subparagraph, notwithstanding subsection (a), any amount required to be taken into account under section 951(a)(1) by reason of this section shall, in lieu of the taxable year in which it would otherwise be included in gross income (for purposes of the computation of real estate investment trust taxable income under section 857(b)), be included in gross income as follows:
I.R.C. § 965(m)(1)(B)(i)
8 percent of such amount in the case of each of the taxable years in the 5-taxable year period beginning with the taxable year in which such amount would otherwise be included.
I.R.C. § 965(m)(1)(B)(ii)
15 percent of such amount in the case of the 1st taxable year following such period.
I.R.C. § 965(m)(1)(B)(iii)
20 percent of such amount in the case of the 2nd taxable year following such period.
I.R.C. § 965(m)(1)(B)(iv)
25 percent of such amount in the case of the 3rd taxable year following such period.
I.R.C. § 965(m)(2) Rules For Trusts Electing Deferred Inclusion
I.R.C. § 965(m)(2)(A) Election
Any election under paragraph (1)(B) shall be made not later than the due date for the first taxable year in the 5-taxable year period described in clause (i) of paragraph (1)(B) and shall be made in such manner as the Secretary shall provide.
I.R.C. § 965(m)(2)(B) Special Rules
If an election under paragraph (1)(B) is in effect with respect to any real estate investment trust, the following rules shall apply:
I.R.C. § 965(m)(2)(B)(i) Application Of Participation Exemption
For purposes of subsection (c)(1)—
I.R.C. § 965(m)(2)(B)(i)(I)
the aggregate amount to which subparagraph (A) or (B) of subsection (c)(1) applies shall be determined without regard to the election,
I.R.C. § 965(m)(2)(B)(i)(II)
each such aggregate amount shall be allocated to each taxable year described in paragraph (1)(B) in the same proportion as the amount included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section is allocated to each such taxable year.
I.R.C. § 965(m)(2)(B)(i)(III) No Installment Payments
The real estate investment trust may not make an election under subsection (g) for any taxable year described in paragraph (1)(B).
I.R.C. § 965(m)(2)(B)(ii) Acceleration Of Inclusion
If there is a liquidation or sale of substantially all the assets of the real estate investment trust (including in a title 11 or similar case), a cessation of business by such trust, or any similar circumstance, then any amount not yet included in gross income under paragraph (1)(B) shall be included in gross income as of the day before the date of the event and the unpaid portion of any tax liability with respect to such inclusion shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed).
I.R.C. § 965(n) Election Not To Apply Net Operating Loss Deduction
I.R.C. § 965(n)(1) In General
If a United States shareholder of a deferred foreign income corporation elects the application of this subsection for the taxable year described in subsection (a), then the amount described in paragraph (2) shall not be taken into account—
I.R.C. § 965(n)(1)(A)
in determining the amount of the net operating loss deduction under section 172 of such shareholder for such taxable year, or
I.R.C. § 965(n)(1)(B)
in determining the amount of taxable income for such taxable year which may be reduced by net operating loss carryovers or carrybacks to such taxable year under section 172.
I.R.C. § 965(n)(2) Amount Described
The amount described in this paragraph is the sum of—
I.R.C. § 965(n)(2)(A)
the amount required to be taken into account under section 951(a)(1) by reason of this section (determined after the application of subsection (c)), plus
I.R.C. § 965(n)(2)(B)
in the case of a domestic corporation which chooses to have the benefits of subpart A of part III of subchapter N for the taxable year, the taxes deemed to be paid by such corporation under subsections (a) and (b) of section 960 for such taxable year with respect to the amount described in subparagraph (A) which are treated as a dividends under section 78.
I.R.C. § 965(n)(3) Election
Any election under this subsection shall be made not later than the due date (including extensions) for filing the return of tax for the taxable year and shall be made in such manner as the Secretary shall prescribe.
I.R.C. § 965(o) Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including—
I.R.C. § 965(o)(1)
regulations or other guidance to provide appropriate basis adjustments, and
I.R.C. § 965(o)(2)
regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise.
(Added by Pub. L. 108-357, title IV, Sec. 422(a), Oct. 22, 2004, 118 Stat. 1418; amended by Pub. L. 109-135, title IV, Sec. 403(q), Dec. 21, 2005, 119 Stat. 2577; Pub. L. 115-97, title I, Sec. 14103(a), Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
AMENDMENTS
2017 —Sec. 965. Pub. L. 115-97, Sec. 14103(a), amended Sec. 965. Before amendment, it read as follows:
“Sec. 965. Temporary Dividends Received Deduction
“(a) Deduction
“(1) In General.—In the case of a corporation which is a United States shareholder and for which the election under this section is in effect for the taxable year, there shall be allowed as a deduction an amount equal to 85 percent of the cash dividends which are received during such taxable year by such shareholder from controlled foreign corporations.
“(2) Dividends Paid Indirectly From Controlled Foreign Corporations.—If, within the taxable year for which the election under this section is in effect, a United States shareholder receives a cash distribution from a controlled foreign corporation which is excluded from gross income under section 959(a), such distribution shall be treated for purposes of this section as a cash dividend to the extent of any amount included in income by such United States shareholder under section 951(a)(1)(A) as a result of any cash dividend during such taxable year to—
“(A) such controlled foreign corporation from another controlled foreign corporation that is in a chain of ownership described in section 958(a), or
“(B) any other controlled foreign corporation in such chain of ownership from another controlled foreign corporation in such chain of ownership, but only to the extent of cash distributions described in section 959(b) which are made during such taxable year to the controlled foreign corporation from which such United States shareholder received such distribution.
“(b) Limitations
“(1) In General.—The amount of dividends taken into account under subsection (a) shall not exceed the greater of—
“(A) $500,000,000,
“(B) the amount shown on the applicable financial statement as earnings permanently reinvested outside the United States, or
“(C) in the case of an applicable financial statement which fails to show a specific amount of earnings permanently reinvested outside the United States and which shows a specific amount of tax liability attributable to such earnings, the amount equal to the amount of such liability divided by 0.35.
“The amounts described in subparagraphs (B) and (C) shall be treated as being zero if there is no such statement or such statement fails to show a specific amount of such earnings or liability, as the case may be.
“(2) Dividends Must Be Extraordinary.—The amount of dividends taken into account under subsection (a) shall not exceed the excess (if any) of—
“(A) the cash dividends received during the taxable year by such shareholder from controlled foreign corporations, over
“(B) the annual average for the base period years of—
“(i) the dividends received during each base period year by such shareholder from controlled foreign corporations,
“(ii) the amounts includible in such shareholder's gross income for each base period year under section 951(a)(1)(B) with respect to controlled foreign corporations, and
“(iii) the amounts that would have been included for each base period year but for section 959(a) with respect to controlled foreign corporations.
“The amount taken into account under clause (iii) for any base period year shall not include any amount which is not includible in gross income by reason of an amount described in clause (ii) with respect to a prior taxable year. Amounts described in subparagraph (B) for any base period year shall be such amounts as shown on the most recent return filed for such year; except that amended returns filed after June 30, 2003, shall not be taken into account.
“(3) Reduction Of Benefit If Increase In Related Party Indebtedness.—The amount of dividends which would (but for this paragraph) be taken into account under subsection (a) shall be reduced by the excess (if any) of—
“(A) the amount of indebtedness of the controlled foreign corporation to any related person (as defined in section 954(d)(3)) as of the close of the taxable year for which the election under this section is in effect, over
“(B) the amount of indebtedness of the controlled foreign corporation to any related person (as so defined) as of the close of October 3, 2004.
“All controlled foreign corporations with respect to which the taxpayer is a United States shareholder shall be treated as 1 controlled foreign corporation for purposes of this paragraph. The Secretary may prescribe such regulations as may be necessary or appropriate to prevent the avoidance of the purposes of this paragraph, including regulations which provide that cash dividends shall not be taken into account under subsection (a) to the extent such dividends are attributable to the direct or indirect transfer (including through the use of intervening entities or capital contributions) of cash or other property from a related person (as so defined) to a controlled foreign corporation.
“(4) Requirement To Invest In United States.—Subsection (a) shall not apply to any dividend received by a United States shareholder unless the amount of the dividend is invested in the United States pursuant to a domestic reinvestment plan which—
“(A) is approved by the taxpayer's president, chief executive officer, or comparable official before the payment of such dividend and subsequently approved by the taxpayer's board of directors, management committee, executive committee, or similar body, and
“(B) provides for the reinvestment of such dividend in the United States (other than as payment for executive compensation), including as a source for the funding of worker hiring and training, infrastructure, research and development, capital investments, or the financial stabilization of the corporation for the purposes of job retention or creation.
“(c) Definitions And Special Rules.—For purposes of this section—
“(1) Applicable Financial Statement.—The term “applicable financial statement” means—
“(A) with respect to a United States shareholder which is required to file a financial statement with the Securities and Exchange Commission (or which is included in such a statement so filed by another person), the most recent audited annual financial statement (including the notes which form an integral part of such statement) of such shareholder (or which includes such shareholder)—
“(i) which was so filed on or before June 30, 2003, and
“(ii) which was certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
“(B) with respect to any other United States shareholder, the most recent audited financial statement (including the notes which form an integral part of such statement) of such shareholder (or which includes such shareholder)—
“(i) which was certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
“(ii) which is used for the purposes of a statement or report—
“(I) to creditors,
“(II) to shareholders, or
“(III) for any other substantial nontax purpose.
“(2) Base Period Years
“(A) In General.—The base period years are the 3 taxable years—
“(i) which are among the 5 most recent taxable years ending on or before June 30, 2003, and
“(ii) which are determined by disregarding—
“(I) 1 taxable year for which the sum of the amounts described in clauses (i), (ii), and (iii) of subsection (b)(2)(B) is the largest, and
“(II) 1 taxable year for which such sum is the smallest.
“(B) Shorter Period.—If the taxpayer has fewer than 5 taxable years ending on or before June 30, 2003, then in lieu of applying subparagraph (A), the base period years shall include all the taxable years of the taxpayer ending on or before June 30, 2003.
“(C) Mergers, Acquisitions, Etc.
“(i) In General.—Rules similar to the rules of subparagraphs (A) and (B) of section 41(f)(3) shall apply for purposes of this paragraph.
“(ii) Spin-Offs, Etc.—If there is a distribution to which section 355 (or so much of section 356 as relates to section 355) applies during the 5-year period referred to in subparagraph (A)(i) and the controlled corporation (within the meaning of section 355) is a United States shareholder--
“(I) the controlled corporation shall be treated as being in existence during the period that the distributing corporation (within the meaning of section 355) is in existence, and
“(II) for purposes of applying subsection (b)(2) to the controlled corporation and the distributing corporation, amounts described in subsection (b)(2)(B) which are received or includible by the distributing corporation or controlled corporation (as the case may be) before the distribution referred to in subclause (I) from a controlled foreign corporation shall be allocated between such corporations in proportion to their respective interests as United States shareholders of such controlled foreign corporation immediately after such distribution.
“Subclause (II) shall not apply if neither the controlled corporation nor the distributing corporation is a United States shareholder of such controlled foreign corporation immediately after such distribution.
“(3) Dividend.—The term “dividend” shall not include amounts includible in gross income as a dividend under section 78, 367, or 1248. In the case of a liquidation under section 332 to which section 367(b) applies, the preceding sentence shall not apply to the extent the United States shareholder actually receives cash as part of the liquidation.
“(4) Coordination With Dividends Received Deduction.—No deduction shall be allowed under section 243 or 245 for any dividend for which a deduction is allowed under this section.
“(5) Controlled Groups
“(A) In General.—All United States shareholders which are members of an affiliated group filing a consolidated return under section 1501 shall be treated as one United States shareholder.
“(B) Application Of $500,000,000 Limit.—All corporations which are treated as a single employer under section 52(a) shall be limited to one $500,000,000 amount in subsection (b)(1)(A), and such amount shall be divided among such corporations under regulations prescribed by the Secretary.
“(C) Permanently Reinvested Earnings.—If a financial statement is an applicable financial statement for more than 1 United States shareholder, the amount applicable under subparagraph (B) or (C) of subsection (b)(1) shall be divided among such shareholders under regulations prescribed by the Secretary.
“(d) Denial Of Foreign Tax Credit; Denial Of Certain Expenses
“(1) Foreign Tax Credit.—No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the deductible portion of—
“(A) any dividend, or
“(B) any amount described in subsection (a)(2) which is included in income under section 951(a)(1)(A). No deduction shall be allowed under this chapter for any tax for which credit is not allowable by reason of the preceding sentence.
“(2) Expenses.—No deduction shall be allowed for expenses directly allocable to the deductible portion described in paragraph (1).
“(3) Deductible Portion.—For purposes of paragraph (1), unless the taxpayer otherwise specifies, the deductible portion of any dividend or other amount is the amount which bears the same ratio to the amount of such dividend or other amount as the amount allowed as a deduction under subsection (a) for the taxable year bears to the amount described in subsection (b)(2)(A) for such year.
“(4) Coordination With Section 78.—Section 78 shall not apply to any tax which is not allowable as a credit under section 901 by reason of this subsection.
“(e) Increase In Tax On Included Amounts Not Reduced By Credits, Etc.
“(1) In General.—Any tax under this chapter by reason of nondeductible CFC dividends shall not be treated as tax imposed by this chapter for purposes of determining—
“(A) the amount of any credit allowable under this chapter, or
“(B) the amount of the tax imposed by section 55.
“Subparagraph (A) shall not apply to the credit under section 53 or to the credit under section 27(a) with respect to taxes which are imposed by foreign countries and possessions of the United States and are attributable to such dividends.
“(2) Limitation On Reduction In Taxable Income, Etc.
“(A) In General.—The taxable income of any United States shareholder for any taxable year shall in no event be less than the amount of nondeductible CFC dividends received during such year.
“(B) Coordination With Section 172.—The nondeductible CFC dividends for any taxable year shall not be taken into account—
“(i) in determining under section 172 the amount of any net operating loss for such taxable year, and 965(e)(2)(B)(ii) in determining taxable income for such taxable year for purposes of the 2nd sentence of section 172(b)(2).
“(3) Nondeductible CFC Dividends.—For purposes of this subsection, the term “nondeductible CFC dividends” means the excess of the amount of dividends taken into account under subsection (a) over the deduction allowed under subsection (a) for such dividends.
“(f) Election.—The taxpayer may elect to apply this section to—
“(1) the taxpayer's last taxable year which begins before the date of the enactment of this section, or
“(2) the taxpayer's first taxable year which begins during the 1-year period beginning on such date.
“Such election may be made for a taxable year only if made on or before the due date (including extensions) for filing the return of tax for such taxable year.”
2005 — Subsec. (a)(2)(B). Pub. L. 109-135, Sec. 403(q)(1), amended subpar. (B) by inserting “from another controlled foreign corporation in such chain of ownership" before “, but only to the extent”.
Subsec. (b)(2)(A). Pub. L. 109-135, Sec. 403(q)(2), amended subpar. (A) by inserting “cash” before “dividend”.
Subsec. (b)(3). Pub. L. 109-135, Sec. 403(q)(3), amended par. (3) by adding the sentence at the end.
Subsec. (c)(1). Pub. L. 109-135, Sec. 403(q)(4), amended par. (1). Before amendment, it read as follows:
“(1) APPLICABLE FINANCIAL STATEMENT-
“The term ‘applicable financial statement’ means, with respect to a United States shareholder, the most recently audited financial statement (including notes and other documents which accompany such statement) which includes such shareholder--
“(A) which is certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
“(B) which is used for the purposes of a statement or report--
“(i) to creditors,
“(ii) to shareholders, or
“(iii) for any other substantial nontax purpose.
“In the case of a corporation required to file a financial statement with the Securities and Exchange Commission, such term means the most recent such statement filed on or before June 30, 2003.”
Subsec. (d)(2). Pub. L. 109-135, Sec. 403(q)(5), amended par. (2) by substituting “directly allocable” for “properly allocated and apportioned”.
Subsec. (d)(4). Pub. L. 109-135, Sec. 403(q)(6), added par. (4).
Subsec. (e)(1). Pub. L. 109-135, Sec. 403(q)(7), amended the last sentence of par. (1) by inserting “which are imposed by foreign countries and possessions of the United States and are” after “taxes”.
Subsec. (f). Pub. L. 109-135, Sec. 403(q)(8), amended subsec. (f) by inserting “on or” before “before the due date”.
EFFECTIVE DATE OF 2017 AMENDMENTS
Amendment by Sec. 14103(a) of Pub. L. 115-97 is effective on the date of the enactment of this Act [Enacted: Dec. 22, 2017].
EFFECTIVE DATE OF 2005 AMENDMENTS
Amendments by Sec. 403(q) of Pub. L. 109-135 effective as if included in the provisions of the American Jobs Creation Act of 2004 [Pub. L. 108-357, Sec. 422] to which they relate.
EFFECTIVE DATE
Effective for taxable years ending after the date of the enactment of this Act [Enacted: Oct. 22, 2004].