New repatriation dividend deduction.

• Author: Zink, Bill

Under American Jobs Creation Act of 2004 (AJCA) Section 422(a), corporate taxpayers can elect to claim a deduction for 85% of cash dividends received from controlled foreign corporations (CFCs) in excess of a base amount; see new Sec. 965. This item summarizes this new deduction and discusses pending technical corrections that may clarify the Sec. 965(c)(1) term "applicable financial statements," which comes into play when computing the deduction's upper limit.

Repatriation DRD

For dividends to qualify for the new repatriation dividends-received deduction (repatriation DRD), they must be invested in the U.S. under a properly approved domestic reinvestment plan; see Sec. 965(b)(4). Under Sec. 965(f), eligible taxpayers can elect to claim the deduction, for either the taxpayer's last tax year that begins before Oct. 22, 2004 or the first tax year that begins during the one-year period commencing on Oct. 22, 2004. Thus, for calendar-year taxpayers, the election is available for tax years 2004 and 2005.

Under Sec. 965(a)(1), the election only applies to actual cash dividends, not to any deemed dividends or foreign tax credit (FTC) gross-ups. Distributions of previously taxed income are also excluded. There are a number of additional limits:

* The dividend eligible for the deduction is limited to the greatest of: (1) $500 million; (2) the earnings shown as permanently invested outside the U.S. on the taxpayer's most recently audited financial statements, certified before July 1, 2003; or (3) in the case of an applicable financial statement that fails to show a specific earnings amount, but does show a specific tax liability attributable to such earnings, the amount of such earnings determined by grossing up the tax liability at a 35% rate (Sec. 965(b)(1) and (c)).

* The dividend must be "extraordinary"; i.e., it cannot exceed the excess of all dividends received during the tax year from CFCs over (1) dividends received during each base-period year from CFCs; (2) amounts included in the U.S. shareholder's gross income for each base-period year under Sec. 951(a)(1)(B) for increases in investments in U.S. property by CFCs; and (3) amounts that would have been included for each base-period year for CFCs, but for Sec. 959(a). Sec. 965(c)(2) defines "base-period years" as three of the most recent five tax years ending before July 1, 2003, excluding the years with the highest and lowest of actual and deemed dividends (Sec. 965(b)(2)).

* The dividend...