Treasury Issues Guidance Treating Members of Consolidated Group as Single U.S. Shareholder for Subpart F, GILTI Purposes
The Department of the Treasury, on February 23, 2023, issued T.D. 9973 finalizing regulations that treat members of a consolidated group as a single U.S. shareholder for purposes of determining subpart F and global intangible low-taxed income (GILTI) inclusions from controlled foreign corporations (CFCs) under section 951(a)(2)(B) of the Internal Revenue Code. T.D. 9973 finalized proposed regulations published on December 14, 2022.
Overview of Section 951(a)(2)(B)
Under section 951(a)(1)(A), a U.S. shareholder of a CFC that owns, within the meaning of section 958(a), stock in the CFC on the last day of the CFC’s taxable year on which it is a CFC (the “relevant date”) is required to include in gross income its pro rata share of the corporation’s subpart F income.
Under section 951(a)(2)(A), a U.S. shareholder’s pro rata share is the amount the CFC would have distributed with respect to that shareholder’s section 958(a) stock if the CFC distributed pro rata to its shareholders all its subpart F income for the taxable year on the relevant date.
When the foreign corporation was a CFC for the entire taxable year, the U.S. shareholder must include in gross income its pro rata share of the subpart F income of the CFC for the entire year, even if the U.S. shareholder did not own its section 958(a) stock in the CFC for the entire year. When the foreign corporation was a CFC for only part of the taxable year, the U.S. shareholder includes in gross income only a portion of the CFC’s subpart F income for the year based on a ratio of the part of the year the foreign corporation was a CFC to the entire year of the CFC.
Under section 951A(a), each U.S. shareholder of a CFC that owns section 958(a) stock in a CFC on the relevant date is also required to include in gross income its GILTI inclusion amount. A U.S. shareholder’s GILTI inclusion amount is determined by taking into account its pro rata share of the tested income of such CFC. A U.S. shareholder’s pro rata share of a CFC’s tested income is determined under section 951(a)(2) in the same manner as a U.S. shareholder’s pro rata share of a CFC’s subpart F income.1
Section 951(a)(2)(B) addresses potential double taxation when a U.S. shareholder that owns section 958(a) stock in a CFC on the relevant date acquired its stock during the CFC’s taxable year, and the CFC distributed a dividend with respect to the acquired stock during the taxable year to the shareholder’s predecessor. Section 951(a)(2)(B) reduces a U.S. shareholder’s pro rata share of subpart F income by the amount of the dividend. However, the reduction is limited to the amount of the dividend that would have been received with respect to the acquired stock if the distribution had been an amount equal to the subpart F income for the taxable year multiplied by a fraction, the numerator of which is the number of days during the taxable year on which the U.S. shareholder did not own the acquired stock, and the denominator of which is the number of days during the entire taxable year (the “section 951(a)(2)(B) fraction”).2
Example 1 – Section 951(a)(2)(B) in General. DomCo1, a domestic corporation, owns 100% of the stock of ForCo, a CFC. In Year 1, ForCo earned $100 of subpart F income and no tested income. On February 1 of Year 1, ForCo distributed a $10 dividend to DomCo1. On March 14 of Year 1, DomCo1 sold its shares in ForCo to DomCo2, an unrelated domestic corporation. Each corporation has the calendar year as its taxable year. DomCo2 owned all of the Section 958(a) stock in ForCo on the relevant date (December 31 of Year 1). Under section 951(a)(1)(A), DomCo2 is initially required to include in gross income $100, its pro rata share of the subpart F income of ForCo determined under Section 951(a)(2)(A). Under Section 951(a)(2)(B), DomCo2’s pro rata share is reduced by the dividend.3 Thus, DomCo2 includes $90 ($100 - $10) in gross income as subpart F income.4
Application of Section 951(a)(2)(B) Prior to Final Regulations
Treasury and the IRS have become aware that some consolidated groups were taking the position that the group’s aggregate inclusions under section 951(a)(1)(A) and section 951A(a) were being reduced by changing the location of the ownership of stock of a CFC within the group. Specifically, some taxpayers were taking the position that a group’s aggregate pro rata share of a lower-tier CFC’s subpart F income or tested income was reduced under section 951(a)(2)(B) by reason of a section 959(b) distribution made by a lower-tier CFC before an intragroup acquisition of stock of the lower-tier CFC.5
Example 2 – Position Taken for Section 959(b) Distributions. M1 and M2 are members of the USP consolidated group. M1 owns 100% of the stock of CFC1, which owns 100% of the stock of CFC2. CFC1 and CFC2 are both CFCs. Each corporation has the calendar year as its taxable year. In Year 1, CFC2 had $100 of subpart F income, which M1 included in gross income under section 951(a)(1)(A). In Year 2, CFC2 had $100 of subpart F income. On February 1 of Year 2, CFC2 made a $10 section 959(b) distribution to CFC1. On March 14 of Year 2, M1 transferred its CFC1 stock to M2 in a section 351 transaction. Under section 951(a)(1)(A), M2 is initially required to include in gross income $100, its pro rata share of the subpart F income of CFC2 determined under section 951(a)(2)(A). Using the same section 951(a)(2)(B) calculation as in Example 1, the consolidated group takes the position that M2’s pro rata share is reduced under section 951(a)(2)(B) by the $10 section 959(b) distribution, resulting in an inclusion of $90.5
Application of Section 951(a)(2)(B) After Final Regulations
T.D. 9973 adds new Reg. §1.1502-80(j), which provides that in determining the amount described in section 951(a)(2)(B) that is attributable to distributions to which section 959(b) applies, members of a consolidated group are treated as a single U.S. shareholder for purposes of determining the part of the year during which that shareholder did not own the section 958(a) stock owned on the relevant date.
Example 3 - Application of Treas. Reg. §1.1502-80(j). The facts are the same as in Example 2. However, under Treas. Reg. §1.1502-80(j), all members of the consolidated group are treated as a single shareholder. As a result, there are no days during Year 2 on which that single shareholder did not own all the stock of CFC2. As result, the section 951(a)(2)(B) fraction would be zero (0 days/365 days). Therefore, M2 must include in gross income all $100 of the subpart F income of CFC2, with no reduction under section 951(a)(2)(B).
Treas. Reg. §1.1502-80(j) applies to taxable years for which the original consolidated federal income tax return is due after February 23, 2023.
How BDO Can Help
The rules, including those in section 951(a)(2)(B), concerning the calculation of a U.S. shareholder’s pro rata shares of subpart F income and tested income of a CFC when the stock of the CFC is transferred are complicated. BDO can help multinational taxpayers navigate these rules, including new Reg. §1.1502-80(j).
1 See section 951A(e) and Treas. Reg. §1.951A-1(d).
2 In applying section 951(a)(2)(B) to determine the reduction of the pro rata share of subpart F income and pro rata share of tested income, Treas. Reg. §1.951-1(b) allocates the distribution between the subpart F income and tested income based on the proportion of subpart F income or tested income to total subpart F income and tested income.
3 The limitation of $20 ($100x(73days/365 days)) under section 951(a)(2)(B) does not apply, as the amount of the dividend paid ($10) was less than the limitation.
4 The dividend received by DomCo1 is not eligible for the section 245A dividends received deduction. See Treas. Reg. §1.245A-5.
5 Section 959(b) provides that for purposes of section 951(a), the earnings and profits of a CFC attributable to amounts which are, or have been, included in the gross income of a U.S. shareholder under section 951(a) (PTEP) will not, when distributed through a chain of ownership described in section 958(a), also be included in the gross income of another CFC for purposes of applying section 951(a) to which other CFC with respect to such U.S. shareholder (or to any other U.S. shareholder who acquires from any person any portion of the interest of such U.S. shareholder in the CFC).
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