The IRS released Frequently Asked Questions for the Repatriation Tax on March 13, 2018. Under FAQ 11, the IRS politely asked all individuals who have a repatriation tax issue not to electronically file Form 1040 until April 2, 2018. Well, here we are, and on April 2 this week, the IRS released IRS Notice 2018-26. At 43 pages in length, this notice has a lot of information. Here are my ten big takeaways:
- The notice provides a lot of guidance related to partnerships. It starts by giving general guidance. For example, on page 12 the IRS highlights and underlines a reference to Notice 2010-41, which talks about regulations treatment of certain domestic partnerships as foreign partnerships when identifying U.S. shareholders required to include 951(a) inclusion amounts. Moreover, on page 30 of the notice, the IRS clearly indicates that each domestic pass-through owner must take into account its share of the Repatriation Tax inclusion regardless of whether the owner is a U.S. shareholder with respect to the Deferred Foreign Income Corporation. Partners who have less than a 10% ownership interest will not be allowed to make a §962 election (see the top of page 34).
- On page 14, the IRS discusses how §962 elections work for individuals.
- On page 15, the IRS discusses timing and payment of the tax due for citizens and residents abroad—June 15, 2018.
- On page 17, we get our first de minimis tax rule. When it comes to downward attribution, if a partner owns less than 5% in a partnership, then that interest will be considered de minimis and not be subject to the downward attribution analysis.
- At the bottom of page 17, we begin with a discussion on cash measurement dates. I think this may be the most important section of this notice. The IRS addresses the issue of a U.S. shareholder disposing of an interest in a specified foreign corporation before the November 2, 2017, measurement date. In this situation, the notice indicates that shareholders must look at their interests as of three different measurement dates:
- First Cash Measurement Date: Close of the last calendar date that ends after November 1, 2015, and before November 2, 2016.
- Second Cash Measurement Date: Close of the last calendar date that ends after November 1, 2016, and before November 2, 2017.
- Final Cash Measurement Date: Close of the last calendar date that begins before January 1, 2018, and ends on or after November 2, 2017.
- This notice provides a lot of guidance related to the Anti-Avoidance Rules. The IRS will disregard certain transactions if the following conditions are satisfied:
- Transaction (in whole or in part) occurs on or after November 2, 2017
- The principal purpose is to reduce the Repatriation Tax
- Transaction reduces the Repatriation Tax liability
- Reduces the §965 inclusion amount
- Reduces the aggregate foreign cash position
- Increases the amount of foreign taxes paid
- The anti-avoidance guidance provided in §3.04(a)(ii) through (iv) is all presumptions. Taxpayers must attach a statement to rebut the presumption.
- Any changes to the accounting method filed under Form 3115 after November 2, 2017, will be considered anti-avoidance (see 3.04(iv)).
- Entity classification changes filed under Form 8832 after November 2, 2017, will be considered anti-avoidance (see 3.04(iv)).
- When determining net accounts receivable, the terms accounts receivable and accounts payable will only include items with a term of less than one year.
The big takeaways here are mainly for pass-through entities like partnerships and for folks who may be thinking about transactions that will manipulate the toll charge. For domestic filers, the game plan has not changed. You will still need to pay your Repatriation Tax (or the first payment under the payment plan) on or before April 17, 2018. For filers living a foreign jurisdiction, you have a little more breathing room as you have until June 15, 2018, to make these calculations.
All taxpayers should check to see if their state has conformed with §965 to determine whether they need to make a state extension payment for the Repatriation Tax, as well.
How do I find out more? Our recent blog post by International Tax Director Mishkin Santa provides further details on the Repatriation Tax, as well as contact information should you have questions relevant to your situation.
By Mishkin Santa, J.D., LL.M, TEP | International Tax Director
Mishkin Santa is an International Tax Director at The Wolf Group, P.C., specializing in cross-border tax matters.
Mishkin provides both consulting and compliance services to foreign nationals, U.S. citizens, and other U.S. tax residents (individual and corporate) on international taxation issues, including Offshore Voluntary Disclosures, Exit Tax planning, pre-immigration planning, pre-retirement planning, foreign pension analysis, foreign trust taxation, expatriate taxation, and International Organization employee taxation.
This material is for informational purposes only and does not constitute tax or legal advice. Please consult your own tax or legal advisor before engaging in any transaction.