The guidance issued to date includes several notices, 2 Rev. Proc. 2018- 17, Publication 5292, Frequently Asked Questions (FAQs) with sample reporting statements and proposed regulations. But, there is still some ambiguity about disclosing information regarding the calculation of section 965 transition tax liability on the appropriate forms. With the extended deadlines for filing 2017 returns approaching, the IRS must offer guidance in how they will determine if an individual has complied with their obligations.
The AICPA has requested the following:
Automatic relief from penalties incurred by individuals, trusts or estates that have acted reasonably and made a good faith effort to properly report their section 965 tax liability on their 2017 tax returns.
Clarification that trusts and estates report section 965 tax in the same manner as individuals.
Clarification that the person (including a trust or estate) who owes the section 965 tax is the person who can make the section 965(i) election or assume the liability.
Guidance on the treatment of deferred foreign income upon transition to the participation exemption system of taxation (section 965) for S corporation trust shareholders, which trust transactions are section 965 triggering events and how a transferee of S corporation stock held in trust might assume the liability for the section 965 transition tax.
Also, the IRS FAQs provide for different treatments of pass-through and individual returns, which include the section 965 amounts and Form 1120, the U.S. Corporation Income Tax Return, which the IRS instructs should exclude the section 965 amounts.
Specifically, guidance is needed on how a corporate partner in a domestic partnership that receives an allocation of section 965 amounts on its Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. from the partnership should exclude the passed-through amounts from their calculation of the section 965 inclusion on Form 1120.
Presumably, this result is intended, as the IRS’s guidance in Section 3.05(b) of Notice 2018-26 indicates, that a corporation in this context has a single section 965 tax liability and that, for example, section 965 elections made by the corporation are only made with respect to the entire combined section 965 amounts.
An additional issue requiring clarification is how a taxpayer should reflect an election under section 965(n) and not apply a current or carryover net operating loss to the section 965 transition tax liability.
The AICPA also advises the agencies that the guidance to date isn’t clear on how to report certain information and the supporting calculations on a taxpayer’s primary tax form, particularly with respect to Form 1120.
For example, according to IRS FAQ #2 posted on March 13, the section 965(a) amount, the section 965(c) deduction, the deemed paid foreign taxes with respect to the section 965(a) amount and the foreign taxes disallowed under section 965(g) are not reported on Form 1118, Foreign Tax Credit – Corporations.
The deemed paid foreign taxes with respect to the section 965(a) amount and the foreign taxes disallowed under section 965(g) are reported on a separate statement, the IRC 965 Transition Tax Statement. Since the relevant section 965(a) amount is not reported on Form 1118, taxpayers must manually apportion expenses without the benefit of a schedule or worksheet to determine any foreign tax credit limitation.
Taxpayers also need guidance on how to reflect any credits carried forward that are used to offset their section 965 transition tax liability, the AICPA noted.
Thus, without updated forms or instructions for the 2017 tax year or binding guidance, taxpayers don’t know what information is required or how to properly report such information on Form 5471 to meet the “substantially complete” definition and thus avoid penalties under sections 6038, 6038A and 6046.
The AICPA recommends that the IRS provide automatic relief from these penalties for any taxpayer who has acted reasonably and made a good faith effort to provide any required information.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.