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Text of regulations, section 965 “transition tax” and implications for exempt organizations

Section 965 “transition tax” and exempt organizations

The U.S. Treasury Department and IRS today released proposed regulations (REG-104226-18) relating to the “transition tax” under section 965—as added to the Code by the new tax law (Pub. L. No. 115-97) enacted in December 2017.

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Section 965 imposes a transition tax—one that requires a mandatory deemed repatriation of previously untaxed earnings. Under this provision, a 15.5% rate applies to earnings attributable to liquid assets, and an 8% rate applies to earnings attributable to illiquid assets. According to a related IRS release (IR-2018-158), taxpayers may generally elect to pay the transition tax in installments over an eight-year period under section 965(h). The proposed regulations contain detailed information on the calculation and reporting of a United States shareholder’s section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under section 965.

For exempt organizations, the guidance in the proposed regulations is generally limited to section 4940—the excise tax that section 501(c)(3) private foundations pay on their net investment income.

  • The preamble to the proposed regulations indicates section 965(a) inclusions generally will be included in the calculation of gross investment income of a private foundation for purposes of determining the excise tax imposed under section 4940. 
  • The preamble provides that elections may not be made under section 965(h) to pay tax imposed under section 4940 in eight installments.  
  • A section 965(c) deduction is not treated as an ordinary and necessary expense paid or incurred for the production or collection of gross investment income in computing the excise tax imposed under section 4940.  Prop. Reg. section 1.965-3(f)(4)

 

Read text of the proposed regulations [PDF 770 KB] (249 pages)

The purpose of this report is to provide text of today’s regulations. 

 

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

Alexandra Mitchell | +1 202 533 6078 | aomitchell@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com 

Randall Thomas | +1 202 533 3786 | randallthomas@kpmg.com

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