Much Ado, but Little New: A Guide to Section 951(a) After Build Back Better, What are the ramifications of Congress' proposal?

AuthorBecker, Adam

The definition of "pro rata share" in Section 951(a)(2) is fundamental to the subpart F regime. That regime, of course, dates to the John F. Kennedy administration.1 Most words in current Section 951(a)(2) do, too. Though Congress amended Section 951(a)(1) on numerous occasions, it has left undisturbed the words of Section 951(a)(2) first enacted in 1962.2 Perhaps, like so many tax practitioners, successive Congresses since then simply found Section 951(a)(2) inscrutable.

Section 951(a)(2) was susceptible to improvement even before the enactment of the Tax Cuts and Jobs Act (TCJA)3 in 2017. But it was in that law that Congress rolled out Section 245A, the keystone of the United States' pseudo-territorial tax system for domestic subchapter C corporations.4 As this article details, in certain circumstances Sections 245A and 951(a)(2) arguably have permitted amounts of subpart F income, as well as tested income under the new GILTI regime, to escape US federal income taxation altogether. Congress might have avoided this result in the TCJA by limiting Section 245A in these circumstances or by modifying Section 951(a)(2). It did neither. The result has been less than ideal: an extraordinarily complex Treasury regulation5 and costly controversy between taxpayers and the government over the regulation's validity.6

Enter the Build Back Better (BBB) legislation proposed in late 2021.7 As of this writing, enactment of the BBB legislation is far from assured. Many in Washington believe that a political compromise permitting enactment would not require changes to the revenue provisions in the legislation (including the proposed amendments to Section 951(a)). Draft legislation never dies, however, and even if the BBB legislation were not enacted, we believe that the proposed amendments to Section 951(a) would likely reappear in future tax legislation. As part of the BBB legislation, Congress would modify Section 951(a) substantially.8 The proposed Section 951(a) effectively would rectify (thankfully, only prospectively9) Congress' failure to coordinate Sections 245A and 951(a) in the TCJA.10 But it would also go further, resolving over a half-century's worth of ambiguities.11 Unfortunately, proposed Section 951(a) is also chockablock with new and confusing concepts--only partially due to their lengthy, unmemorable names ("pro rata current earnings percentage," "nontaxed current dividend share").12 In this article we hope to elucidate these concepts to provide the US-outbound tax practitioner with a basic guide to proposed Section 951(a).


Section 951(a)(1) requires a United States shareholder (hereafter "US shareholder") of a controlled foreign corporation (CFC) to include certain amounts in gross income on a current basis, thus preventing deferral of US tax on that income. A US shareholder's "pro rata share of subpart F income" is one of the amounts that Section 951(a) obligates the shareholder to include in income.13 The US shareholder is subject to US taxation on this amount as if the CFC had distributed its subpart F income to the shareholder in the taxable year it earned the income--even if it does not actually make such a distribution.

Current Section 951(a)(2) defines a US shareholder's "pro rata share" for this purpose. The "pro rata share" concept inheres as to the particular shares of stock of a foreign corporation that the shareholder owns (or is treated as owning).14 As we will describe in more detail, Section 951(a) (2) comprises three basic concepts that together determine a US shareholder's pro rata share: 1) a hypothetical distribution of the CFC's earnings and profits (E&P) to its shareholders (what we will call a "hypothetical distribution"), 2) a proration of subpart F income to reflect the portion of the year during which the foreign corporation was a CFC (a "CFC status proration"), and 3) a reduction to the pro rata share for certain dividends to another person (a "dividend to another").

Similarly, Section 951A requires certain United States persons (hereafter "US persons") owning stock of a foreign corporation during a taxable year to include currently in their gross incomes their respective global intangible low-taxed income (GILTI) inclusions.15 The amount of a person's GILTI inclusion results from a formula for which the person's pro rata shares of certain items from the foreign corporation are the key inputs.16 Section 951A links to Section 951(a)(2) for the definition of "pro rata share."17 Accordingly, the GILTI regime also relies on the three concepts just identified.

Section 245A serves a different purpose. To the extent it applies, Section 245A effectively exempts from US taxation certain "foreign" E&P18 of qualifying foreign corporations. Specifically, an eligible domestic corporate shareholder19 of a foreign corporation that receives a dividend attributable to the foreign corporation's "foreign-source" E&P20 generally is allowed an equal deduction under Section 245A.21 The deduction zeroes out the net income attributable to the dividend. Thus, for the corporate shareholder that derives foreign income through a foreign corporation, the US tax system can be characterized as a territorial regime. Section 245A, however, does not apply to a dividend unless the relevant E&P have somehow slipped, untaxed, through post-TCJA subpart F.22

Not long after the TCJA was enacted, some in the government recognized the consequences of Congress' failure to coordinate Sections 245A and 951(a)--in particular, its failure to update the dividend-to-another concept in Section 951(a).23 Current Section 951(a)(2), both before and after the TCJA, expresses this concept: an "inclusion" US shareholder's pro rata share of a foreign corporation's subpart F income for a taxable year can be reduced where the corporation distributes a dividend in that taxable year to a person other than the inclusion shareholder (at a time during the taxable year when the inclusion shareholder does not own the stock).24 This is true even when the recipient of the dividend is not liable for any US tax whatsoever in respect of the dividend.25 Thereby, a portion of the foreign corporation's subpart F income (namely, an amount equal to the reduction attributable to the dividend26) can escape US taxation. From this perspective, Section 245A represented more of the same: like a dividend to a foreign person, a dividend allowed a Section 245A deduction is not subject to US taxation but nevertheless can reduce another US person's pro rata share of subpart F income. After the TCJA was enacted, some in Congress determined this result was inappropriate and proposed legislation to "correct" Section 951(a).27 Congress never passed the legislation.

Ultimately Treasury and the Internal Revenue Service acted to coordinate Sections 245A, 951, and 951A--by promulgating Treasury Regulations Section 1.245A-5(e) and (f), which together form the so-called extraordinary reduction rules.28 According to them, "[S]ection 245A and the subpart F and GILTI regimes ... form an integrated set of rules to tax post-2017 foreign earnings."29 Specifically:

[I]t would be inconsistent with the residual definition of [S]ection 245A eligible earnings [i.e., E&P remaining untaxed even after the application of the subpart F and GILTI regimes] and the interaction of [S]ection 245A and [those regimes]... to allow a [S]ection 245A deduction for a dividend paid out of [E&P] attributable to subpart F income or tested income where such dividends[]... could result in double non-taxation of such income.30

Taxpayers that interpreted "the text of [S]ection 245A in isolation"31 could reach this inconsistent result. To prevent them from doing so, Treasury and the IRS promulgated the extraordinary reduction rules to address scenarios where they deemed that applying Section 245A would be inappropriate. The rule essentially renders Section 245A inapplicable to the extent that amounts would escape US taxation.32

In the latest proposals for the BBB legislation, a new Congress has proposed technical amendments to Section 951(a).33 This article focuses on the ramifications of these proposed amendments to Section 951(a). One might ask: with Section 1.245A-5 on the books, why would Congress bother to revise Section 951(a)? One possibility is that Section 951(a) is the more appropriate rule to amend; as described below, disallowing a Section 245A deduction in case of a dividend might cause more pain than warranted. Another possibility is that, with the validity of Section 1.245A-5 under attack at this very moment, a statutory fix is needed--one that would solidify Treasury's authority.34 Finally, some might have determined that it is high time to tackle other irregularities in Section 951(a). Whatever the reasons, we now explore "proposed" Section 951(a), making reference to current Section 951(a), and describing those irregularities as we go.

Current vs. Proposed Section 951(a)


Were the BBB legislation enacted, subsection (a) of Section 951 would remain titled "Amounts included." US persons that constitute US shareholders with respect to the applicable foreign corporation would continue to do the including. The BBB legislation would not change the definition of "United States shareholder." That term would continue to mean, as to a particular foreign corporation, a US person that owns (within the meaning of Section 958(a)), or is treated as owning pursuant to Section 958(b), at least ten percent of the stock of the foreign corporation, as measured by voting power or value.35 Determining whether a US person is a US shareholder, then, would still take into account stock ownership under both the rules of subsection (a) of Section 958 as well as those of subsection (b).36

Under both current Section 951 and proposed Section 951, a US shareholder of a foreign corporation (during an applicable taxable year of the corporation) would not be required to include...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT