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Corrections to final regulations under section 965

Corrections to final regulations under section 965

The U.S. Treasury Department and IRS today released for publication in the Federal Register corrections (“Technical Corrections”) to final regulations regarding the transition tax under section 965—final regulations that were published in the Federal Register on February 5, 2019.


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The technical corrections were issued as two releases. Read the corrections [PDF 260 KB] and corrections [PDF 261 KB] to the final regulations (T.D. 9846).

Read an initial analysis of the final regulations (“Final Regulations”) under section 965: TaxNewsFlash


  • Dealer exclusion only applies to specific commodities: The Final Regulations provided that commodities held by a specified foreign corporation (“SFC”) would be excluded from the cash position of the SFC if the commodity was held as stock in trade or inventory held primarily for sale to customers or as supplies regularly used or consumed by the SFC in the ordinary course of a trade or business conducted by the SFC (a “specified commodity”), but only if the SFC was not a dealer or trader in commodities (the “dealer exclusion”). The dealer exclusion was not well defined by the Final Regulations and, as a result, the exclusion of commodities from the cash position of SFCs engaged in businesses that, e.g., transformed commodities into products that are themselves commodities was in doubt. The Technical Corrections modify the dealer exclusion to provide that it only applies to specific commodities that are held by the SFC in its capacity as a dealer or trader in commodities, instead of testing whether the SFC is itself a dealer or trader in commodities. As a result of this change, the fair market value of commodities that otherwise would be treated as specified commodities may be excluded from the cash position of an SFC even if the SFC does act as a dealer or trader with respect to some, but not all, of its commodities.

  • Limited-basis election: The Final Regulations provided a section 958(a) U.S. shareholder (“USSH”) an election (“basis election”) to increase the basis of its stock of a deferred foreign income corporation (“DFIC”), which could allow a section 958(a) USSH to receive distributions of previously taxed earnings and profits of the DFIC created because of the use of specified deficits without the recognition of gain the section 958(a) USSH might otherwise recognize under section 961(b)(2). If the election is made,the section 958(a) USSH must also reduce the basis of its stock of an E&P deficit foreign corporation (“EPDFC”) by the amount of the specified deficit from such EPDFC. Such reduction could cause the section 958(a) USSH to recognize gain under section 961(b)(2) with respect to its stock of the EPDFC and, to provide relief, the Final Regulations also provided a “limited-basis election.” The limited-basis election would allow a section 958(a) USSH to limit the amount of the increases and decreases to its stock as a result of the basis election to the amount of the USSH’s basis in its EPDFC stock. As written, the limited-basis election would not be available if a section 958(a) USSH did not own both DFIC and EPDFC stock. Members of an affiliated group were not treated as a single section 958(a) USSH for this purpose even though the DFICs of one member of the group could benefit from the specified deficits of EPDFCs for another member pursuant to section 965(b). The Technical Corrections revise Reg. section 1.965-8(e) to provide that all members of an affiliated group that are section 958(a) USSHs of an SFC are treated as a single section 958(a) USSH for purposes of the basis election, including the limited-basis election, which would allow members of an affiliated group that own only DFICs to make the limited-basis election.

  • Anti-diminution rule clarified: The Final Regulations provide ordering rules used to determine the E&P of SFCs as of a measuring date and the treatment of distributions made by SFCs. See Reg. section 1.965-2(b). As compared to the proposed section 965 regulations, the Final Regulations applied these ordering rules to any tax year of the SFC that included a measuring date. Thus, the ordering rules could apply to the last tax year of an SFC beginning before January 1, 2018 (“repat year”) and to the tax year of the SFC immediately preceding the repat year if such tax year included a measuring date. The application of the ordering rules to a year other than the repat year would most often be relevant to SFCs with tax years that end on November 30. The expansion of the ordering rules to a tax year of an SFC other than the repat year, however, could be read to apply the “anti-diminution” rule to tax years of an SFC other than the repat year. The anti-diminution rule requires that the E&P of an SFC as of a measuring date be determined by not taking into account any reductions of E&P that would otherwise occur because of a distribution by the SFC to its section 958(a) USSH. The Technical Corrections clarify that the anti-diminution rule does not apply to any distribution made by an SFC in a tax year other than the repat year for purposes of determining the E&P of the SFC as of a measuring date by providing that such distributions are characterized under the rules of section 959 as part of step 2 of the ordering rules.


For more information, contact a tax professional with KPMG’s Washington National Tax:

Seth Green | +1 202 533 3022 |

Christopher Riccardi | +1 404 222 7187 |

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