IRS Chief Counsel: E&P consequences of income inclusion

E&P consequences of income inclusion

The IRS today publicly released a memorandum* concluding that a taxpayer (a U.S. domestic corporation), that wholly owns a controlled foreign corporation (CFC), must increase its earnings and profits by the amount of its income inclusion with respect to the CFC under section 951(a)(1) in the year of the inclusion—regardless of whether the U.S. taxpayer receives distributions from the CFC in the same year. AM2015-001 (release date February 13, 2015, and dated February 9, 2015)

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Read AM2015-001 [PDF 47 KB]

Summary

The taxpayer is a U.S. domestic corporation that wholly owns the CFC, within the meaning of section 957(a). As such, the taxpayer is a “U.S. shareholder” of the CFC, as defined by section 951(b).

The CFC earns subpart F income and holds United States property in year 1. As a result, the taxpayer incudes amounts in income under sections 951(a)(1)(A) and 951(a)(1)(B) with respect to the CFC for year 1.

The question posed in the IRS Chief Counsel memo is:

Whether the taxpayer must increase its earnings and profits (E&P) by the amount of its income inclusion with respect to the CFC under section 951(a)(1)?

The IRS memo concludes that the taxpayer must increase its earnings and profits by the amount of its income inclusion relating to the CFC under section 951(a)(1) in the year of the inclusion—regardless of whether the taxpayer receives distributions from the CFC in that same year.

KPMG observation

The memo also reaches the symmetrical conclusion (although not specifically asked in the question as posed) that a taxpayer is not to increase its E&P when it receives a distribution of previously taxed income to which sections 959 and 961(b) apply.

*The memorandum is legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The memo is issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. It is not to be used or cited as precedent.

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