Proposed Regulations Reduce Sec. 956 Income Inclusions

The IRS has issued proposed regulations that will reduce the Code Sec. 956 (Investment in U.S. Property) inclusion amount for certain domestic corporations that own stock in controlled foreign corporations (CFC). The proposed regulations are intended to ensure that Code Sec. 956 is applied consistently with the new participation exemption system under Code Sec. 245A (Enacted by the Tax Cuts and Jobs Act P.L. 115-97).

The proposed guidance provides a dividend received deduction against the Code Sec. 956 income for eligible U.S. corporate shareholders. This treatment would mirror the dividend received deduction (DRD) for actual dividend distributions from CFC’s foreign earnings to the U.S. shareholder.

There are ownership holding period requirements by the U.S. corporate shareholder of the CFC. A one-year holding period requirement applies under which a domestic corporation is not permitted a participation DRD for any dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend.

Additionally, certain taxpayers are excluded from received deduction – individual taxpayers, regulated investment companies (RICs) and real estate investment trusts (REITs), because they are not allowed to claim the participation DRD.

The guidance is effective once the Proposed Reg. §1.956-1 is finalized; however, the regulations can be relied on for a CFC’s tax year beginning after December 31, 2017 and U.S. shareholder with tax years in or within the CFC’s tax year end.

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