In IR-2019-128, published on July 16, 2019, the Internal Revenue Service provided additional information to help taxpayers meet their filing and payment requirements for the Section 965 transition tax on untaxed foreign earnings. The Tax Cuts and Jobs Act requires certain taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits have been repatriated to the? United States. The law provides details on the income that must be recognized. It also provides a related deduction which generally lowers the effective tax rate to between 8% and 15.5%. Certain taxpayers may elect to pay the transition tax over eight years.
Q1: I made a section 965(h) election on a prior tax return, electing to pay the section 965(h) net tax liability portion of a prior income tax liability in eight annual installments. How do I make the subsequent installment payments.
A1: Section 965(h) allows taxpayers to pay the section 965(h) net tax liability portion of their overall income tax liability over eight annual installments.
Q2: When and where can I file a “Transfer Agreement Under Section 965(h)(3)”and “Transfer Agreement Under Section 965(i)(2)” (hereafter, “Transfer Agreement”)?
A2: You may file a Transfer Agreement with the IRS’ Memphis Compliance Service Collection Operations at the following address: Memphis CSCO 5333 Getwell Road MS 81 Memphis, TN 38118 Transfer Agreements Under Section 965(h)(3) will be considered timely filed only if filed within 30 days of the date that the acceleration event occurs. Transfer Agreements Under Section 965(i)(2) will be considered timely filed only if filed within 30 days of the date that the triggering event occurs. However, if the triggering event is the death of the eligible section 965(i) transferor, the transfer agreement must be filed by the unextended due date for the eligible section 965(i) transferor’s final income tax return.
Q3: I am a shareholder of an S corporation. I deferred payment of my section 965 net tax liability related to the S corporation (my “section 965(i) net tax liability”) pursuant to a section 965(i) election. A triggering event under section 965(i)(2)(A)(ii) has occurred. While the entire section 965(i) net tax liability will be assessed on my return as an addition to tax for the year of the triggering event, I would like to make an election under section 965(h) so that I will pay the liability in eight annual installments. Section 965(i)(4)(D) provides that I must receive the consent of the Commissioner to pay my section 965(i) net tax liability in installments when a triggering event under section 965(i)(2)(A)(ii) has occurred. How can I obtain the consent of the Commissioner?
A3: You must file a Consent Agreement Under Section 965(i)(4)(D) (hereinafter, “Consent Agreement”) within 30 days of the occurrence of the triggering event. The requirements for Consent Agreements are set forth in §1.965-7(c)(3)(v)(D)(4). Under a transition rule set forth at §1.965-7(c)(3)(v)(D)(2)(ii), if the triggering event occurred on or before February 5, 2019, the Consent Agreement will be considered timely if it was filed by March 7, 2019.
Q4: Can the S corporation obtain the consent of the Commissioner as required by section 965(i)(4)(D) on behalf of the S corporation shareholders?
A4: No. Each S corporation shareholder must file a Consent Agreement and obtain the consent of the Commissioner.
Q5: Where can I file a Consent Agreement?
A5: You may file a Consent Agreement with the IRS’ Memphis Compliance Service Collection Operations at the following address: Memphis CSCO 5333 Getwell Road MS 81, Memphis, TN 38118.
Q7: I previously made a section 965(i) election with respect to my section 965(i) net tax liability, and a triggering event described in section 965(i)(2)(A) occurred this year. I made a section 965(h) election on my tax return for the year of the triggering event. If my payments, including estimated tax payments, for the year of the triggering event exceed my net income tax liability described under section 965(h)(6)(A)(ii) and the regulations thereunder (my net income tax determined without regard to section 965) and my first annual installment pursuant to my election under section 965(h), may I receive a refund of such excess amounts or credit such excess amounts to my next year’s estimated income tax?
A7: No. You may not receive a refund or credit of any portion of properly applied tax payments unless and until the amount of your payments exceeds your entire unpaid income tax liability, including all amounts to be paid in installments under section 965(h) in subsequent years. If your tax payments exceed the sum of your net tax liability determined without regard to section 965 and your first annual installment, the excess will be applied to your next annual installment and so on until the full amount of your section 965(i) net tax liability is satisfied or until the full amount of the tax payment is applied.
Q8: Do the S corporation and a transferor of the underlying S corporation shares (if any) remain jointly and severally liable for the payment of my section 965(i) net tax liability after I’ve made a section 965(h) election to pay such liability in eight annual installments?
A8: Yes. If you or a transferor made a section 965(i) election with respect to the section 965 liability attributable to your ownership interest in an S corporation, the S corporation is jointly and severally liable for your payment of the section 965(i) net tax liability with respect to the S corporation, as well as any penalties, additions to tax, or other additional amounts attributable to such net tax liability. If you received the S corporation shares pursuant to a Transfer Agreement Under Section 965(i)(2)(C), the transferor is also jointly and severally liable for your payment of the section 965(i) net tax liability associated with those shares, as well as any penalties, additions to tax, or other additional amounts attributable to such net tax liability. An election under 965(h) to pay your net tax liability in eight annual installments does not alter the joint and several liability of the S corporation or the transferor (if any) with respect to the underlying S corporation shares.