IRC Section 965 Transition Tax Agreement

| 2/7/2019
On Feb. 5, 2019, the IRS published final regulations related to the transition tax under IRC Section 965. Under the regulations, taxpayers that elected to defer the payment of the transition tax liability and that entered into certain transactions on or before Feb. 5, 2019, have until March 7, 2019, to file a transfer agreement in order to maintain the ability to retain the deferral. Taxpayers that do not file timely transfer agreements must immediately pay the remaining balance of the deferred transition tax. A draft version of the final regulations released on the IRS' website provided that transfer agreements for transactions occurring on or before Jan. 1, 2019, were required to be filed by Jan. 31, 2019. However, because the government shutdown delayed publication of the final regulations, the due date was extended. 


Section 965 imposes a one-time transition tax on the previously untaxed post-1986 foreign earnings and profits of controlled foreign corporations and certain other U.S.-owned foreign corporations as the price to transition to a new territorial tax regime. Section 965(h) allows a taxpayer to elect to pay its transition tax in installments over eight years. If, however, a taxpayer elects to pay the transition tax in installments under Section 965(h) and later an acceleration event occurs, the balance of the remaining installments becomes immediately due. The regulations provide an exception to this rule if a transfer agreement is entered into by the transferor and the transferee. The regulations specifically provide that Section 9100 relief is not available if the agreement is not timely filed.

According to the regulations, an acceleration event includes a liquidation, sale, exchange, or other disposition of substantially all of the taxpayer’s assets or joining a new consolidated group. All members of a consolidated group are treated as one person. When determining whether a transfer of assets by one member of a consolidated group constitutes an acceleration event, all of the assets of the consolidated group are taken into account. It should be noted that nonrecognition events may be acceleration events. Certain internal group transactions, such as transferring the stock of a first-tier foreign subsidiary in an outbound 351 exchange, inbound F reorganizations, and liquidations of foreign subsidiaries, also may be acceleration events. 

In general, the transfer agreement must be filed within 30 days of the acceleration event. However, if a nonrecognition exchange occurred prior to Feb. 5, 2019, the transfer agreement must be filed by March 7, 2019. The transfer agreement must be signed by both the transferor and transferee and filed under penalties of perjury. 

Taxpayers that underwent transactions in 2018 should review the requirements under IRC Section 965(h) and file any required transfer agreements by the due date or risk having to immediately pay any remaining installments. 

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Brent Felten
Brent Felten
Partner, Washington National Tax
John Kelleher - Large
John Kelleher
Partner, Tax