![]() Under the 2019 regulations, for this purpose, a shareholder’s share of non-EDA E&P was measured by its percentage ownership of stock of the SFC immediately after the distribution.įinal regulations change: Under the 2019 regulations, if the distribution was part of or due to the sale of the stock of the SFC, a shareholder’s share of non-EDA E&P could have been fully eliminated. Non-previously-taxed E&P that is not in the EDA (and is therefore eligible for the participation exemption) is considered distributed before any EDA E&P. This change is significant because the interplay of the section 956 regulations and the 2019 regulations could have resulted in the same extraordinary disposition effectively denying the participation exemption twice. Dividends subject to this disallowance include actual dividends as well as deemed dividends that result from the sale of shares of a CFC.įinal regulations change: The final regulations provide that the EDA account of the SFC is reduced to reflect section 956 inclusions by the USSH with respect to the SFC. Certain IP that is never transferred in the ordinary course of business (such as trademarks and goodwill) does not qualify for this exception.Įarnings from extraordinary dispositions are accumulated in the shareholder’s extraordinary disposition account (EDA) with respect to the SFC, and 50% of the participation exemption with respect to dividends attributable to the EDA is disallowed. ![]() Under the 2019 regulations, a transfer of intangible property (IP) was always treated as outside the ordinary course and therefore as an extraordinary disposition.įinal regulations change: Under the final regulations, certain IP transfers will not be considered extraordinary dispositions if the taxpayer had a reasonable expectation that the IP would be sold in the ordinary course of business to a third-party customer within one year. In general, an extraordinary disposition is a non-ordinary course disposition of specified property (generally, any property that produces tested income) to a related party during the disqualified period. To address this disconformity in effective dates, the extraordinary disposition rules of the 2019 regulations limited the availability of the participation exemption with respect to SFC dividends from E&P attributable to extraordinary asset dispositions. In the IRS’s view, this timing mismatch was contrary to the intent of the participation exemption, which was to allow the participation exemption only with respect to SFC earnings that had been taken into account in determining amounts subject to the transition tax or GILTI. The section 951A (GILTI) provisions, which are effective for taxable years of CFCs beginning after December 31, 2017.īecause of these varying effective dates, there was a period of time (the disqualified period, which was between Novemor Januand the end of the fiscal year) during which earnings of a non-calendar year CFC were not subject to either section 965 or the GILTI rules, but were nevertheless eligible for the participation exemption if distributed.The participation exemption, which is effective for distributions by SFCs made after December 31, 2017.The transition tax, which was a one-time tax under section 965 on US shareholders (USSHs) on the deferred earnings of SFCs, measured as of November 2 or December 31, 2017.The extraordinary disposition rules address the availability of the participation exemption for certain distributions of earnings and profits (E&P) that were not subject to US taxation due to differing effective dates within TCJA. In this alert, we will discuss the general concepts of extraordinary dispositions and extraordinary reductions and highlight the important changes contained in the final and the more relevant provisions of the proposed regulations. Those opportunities were addressed by temporary regulations defining and dealing with transactions giving rise to an extraordinary disposition or an extraordinary reduction. However, Treasury and the IRS were concerned that the participation exemption created opportunities for US corporations to inappropriately reduce their tax liabilities. Section 245A, which was enacted as part of the TCJA, allows a US corporation a 100% dividend received deduction (referred to as a participation exemption) with respect to dividends from a 10%-owned foreign corporation (an SFC). This week’s package finalizes the temporary section 245A regulations that were issued in June of 2019 (the 2019 regulations) to address certain potential tax avoidance transactions. On Friday, August 21, the IRS and Treasury released a new package of final and proposed regulations, continuing the practice of providing taxpayers with weekend reading. Structured Finance & Capital Equipment ValuationĪrticle featured on Thompson Reuters' Taxnet Pro, August 2020 ![]() Portfolio Company Performance Improvement Merger, Acquisition & Divestiture Services
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