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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Remember when Code §1248 was intended to right an economic wrong by converting low-taxed capital gain to highly-taxed dividend income? (If you do, you probably remember the maximum tax on earned income (50% rather than 70%) and income averaging over three years designed to eliminate the effect of spiked income in a particular year.) Tax law has changed, and dividend income no longer is taxed at high rates. Indeed, for C-corporations receiving foreign-source dividends from certain 10%-owned corporations, there is no tax whatsoever. This is a much better tax result than that extended to capital gains, which are taxed at 21% for corporations. Neha Rastogi and Stanley C. Ruchelman evaluate whether the conversion of capital gains into dividend income produces a meaningful benefit in many instances, given the likelihood of prior taxation under Subpart F or G.I.L.T.I. rules for the U.S. parent of a multinational group. Hence the question, is the conversion of taxable capital gains into dividend income under Code §1248 a real benefit, or is it simply a glistening

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Transition Tax – Proposed Regulations Are Here

Transition Tax – Proposed Regulations Are Here

The I.R.S. has published proposed regulations on Code §965, which requires a U.S. Shareholder to pay income tax on a pro rata share of previously untaxed foreign earnings held in a C.F.C. and certain other foreign corporations. The tax is commonly referred to as the transition tax. It is designed to tax deferred foreign income prior to the transition to a participation exemption system for intercompany dividends from certain foreign corporations. A multi-step computation is required to (i) measure post-1986 E&P, (ii) allocate E&P deficits among affiliated foreign corporations, (iii) calculate the aggregate foreign cash position, (iv) compute allowed deductions, and (v) determine foreign tax credits. Elizabeth V. Zanet, Rusudan Shervashidze, and Beate Erwin detail the required steps as well as special rules applicable to individuals.

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Code §962 Election Offers Benefits Under U.S. Tax Reform

Code §962 Election Offers Benefits Under U.S. Tax Reform

Two provisions in the recent tax reform legislation – Code §§965 (transition tax) and 250 (50% deduction for G.I.L.T.I.) – focus on C.F.C.’s and their U.S. Shareholders.  In each case, corporate U.S. Shareholders are entitled to a deduction that is not granted to an individual with regard to income that is taxed under Subpart F.  However, Code §962 may allow an individual who is a U.S. Shareholder of a C.F.C. to elect to be taxed on the Subpart F Income as if a corporation.  This allows for tax at a lower rate and a foreign tax credit for corporate income taxes paid by the C.F.C.  Elizabeth V. Zanet and Galia Antebi explain the workings of Code §962 and focus on the position of naysayers who caution that it may not provide the relief it appears to provide.

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I.R.S. Offers Additional Guidance on Code §965 Transition Tax

I.R.S. Offers Additional Guidance on Code §965 Transition Tax

On the way toward a dividends received deduction for certain dividends paid by foreign subsidiaries, Congress enacted a one-shot income inclusion of all post-1986 earnings from C.F.C.’s and foreign corporations having 10% U.S. Shareholders that are corporations.  In March, the I.R.S. issued an F.A.Q. providing additional guidance on open issues for 2017 tax returns.  Rusudan Shervashidze and Stanley C. Ruchelman explain the mechanics of the income inclusion and an election to defer payments for eight years, sometimes more.

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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

International tax planning in the U.S. has been turned on its head by the Tax Cuts and Jobs Act (“T.C.J.A.”).  This article looks at (i) the new dividends received deduction that eliminates U.S. tax on the receipt of direct investment dividends paid by a 10%-owned foreign corporation to a U.S. corporation, (ii) the repatriation of post-1986 net accumulated earnings of 10%-owned foreign corporations by U.S. persons and the accompanying deferred tax rules, (iii) changes to Code §367(a) that eliminate an exemption from tax on outbound transfers of assets that will be used in the active conduct of a foreign trade or business, and (iv) a broadening of the scope of Subpart F income by reason of a change to certain definitions.  Rusudan Shervashidze and Stanley C. Ruchelman address and comment on these revisions.

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