January 30, 2023

Code §245A – Sometimes Things Are More Than They Appear

January 30, 2023/ Ruchelman P.L.L.C.

Code §245A of effectively exempts U.S. corporation from U.S. Federal income tax on dividends received from certain foreign subsidiaries. It allows a deduction equal to the amount of the dividend received. Code §245A applies only with respect to dividends received “by a domestic corporation which is a United States shareholder.” Nevertheless, Code §245A can also apply to dividends received by a controlled foreign corporation from a qualifying participation in a lower-tier foreign corporation. The question presented in that fact pattern relates to how Code §245A will be applied. Is the controlled foreign corporation entitled to claim the deduction as dividends are received? Or is a U.S. corporation that is a U.S. Shareholder with regard to the foreign corporation entitled to claim the deduction at the time Subpart F income is reported in its U.S. tax return? Significantly different results may apply depending on the answer. Interestingly, the differences affect U.S. taxpayers other than the corporation that is a U.S. Shareholder. Stanley C. Ruchelman and Daniela Shani explain the different results that may apply.

June 02, 2020

Anti-Abuse Rules of Temp. Reg. §1.245A-5T – A New Cerberus for the U.S. Tax System

June 02, 2020/ Ruchelman P.L.L.C.

In a companion piece to the preceding article, Andreas A. Apostolides and Stanley C. Ruchelman explore many of the anti-abuse rules attached to the foreign D.R.D. provisions. These rules are designed to close the door on financial products that undermine the I.R.S. view of the global biosphere comprised of the D.R.D., Subpart F, P.T.I., and G.I.L.T.I. The goal is to ensure that the benefit of the foreign D.R.D. is not expanded beyond boundaries viewed proper by the writers of the regulations. The D.R.D. is not a tool to shift profits abroad and to bring those profits back to the U.S. tax-free.

June 02, 2020

Heads I Win, Tails You (I.R.S.) Lose – Not Any More: Hybrid Dividends And Code §245A(e)

June 02, 2020/ Ruchelman P.L.L.C.

With the enactment of the Tax Cuts and Jobs Act, much hoopla was made regarding the adoption of a territorial tax system in the U.S. What was not appreciated at the time was that so many anti-abuse rules were adopted in conjunction with the adoption of the G.I.L.T.I. rules, that the foreign D.R.D. is less of a lion and more like a hamster for most cross-border businesses based in the U.S. Neha Rastogi and Nina Krauthamer explore all the nuances and exceptions that make global tax planning under prior law an ever fonder memory.

September 30, 2019

Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

September 30, 2019/ Ruchelman P.L.L.C.

Most tax advisers in the U.S. view Code §1248 as a supporting part of U.S. C.F.C. rules. Under the provision, capital gain derived by a 10% shareholder of a C.F.C. from the sale or disposition of shares of the C.F.C. may be converted into dividend income to the extent of some or all of the accumulated earnings of the C.F.C. Prior to the Tax Cuts and Jobs Act of 2017, Code §1248 applied to all 10% U.S. Shareholders of a C.F.C. However, that is no longer the case. Whether the delinking was intentional is not clear. What is clear is that some U.S. Shareholders are not subject to Code §1248, and the tax consequences may be sub-optimal for the U.S. Shareholder. Neha Rastogi, Andreas A. Apostolides, and Stanley C. Ruchelman explain the pitfalls that may occur.

June 28, 2019

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

June 28, 2019/ Ruchelman P.L.L.C.

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

January 26, 2018

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

January 26, 2018/ Ruchelman P.L.L.C.

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.