CFC downward attributions get safe harbors: Reporting of Subpart F and GILTI inclusions may rely on 'alternate information'.

Author:Bonner, Paul
Position:Controlled foreign corporation, global intangible low taxed income

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 Rev. Proc. 2019-40.

The IRS also issued proposed regulations (REG-104223-18) concerning ownership attribution for determining the status of corporations as CFCs and their U.S. shareholders.

The guidance was prompted by the repeal of Sec. 958(b)(4) by the law known as the Tax Cuts and Jobs Act, RL. 115-97. Before its repeal, in determining constructive ownership of stock, Sec. 958(b)(4) provided that the rules in Sec. 318(a)(3)(A), (B), or (C) (the downward attribution rules) were not to be applied so as to consider a U.S. person as owning stock owned by a person that is not a U.S. person. The downward attribution rules 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.

Due to Sec. 958(b)(4)'s repeal, stock of a foreign corporation owned by a foreign person can be attributed to a U.S. person under the downward attribution rules in determining whether the U.S. person or another U.S. person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. As a result, U.S. persons that were not previously treated as U.S. shareholders may be treated as U.S. shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs. The Code change is effective for the last tax year of foreign corporations beginning before Jan. 1, 2018, and subsequently.

Ownership of stock in CFCs caused by the repeal of Sec. 958(b)(4), in turn, may require taxpayers to include in gross income amounts under Sees. 951 (Subpart F) and 951A (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.

Therefore, for foreign corporations that are not U.S.-controlled CFCs, the IRS will accept a U.S. person's determination that a corporation is not a CFC under Sec. 957(a) if the following conditions are satisfied:

* The U.S. person has no actual knowledge, statements received, and/or reliable publicly...

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