IRS Announces Regulations on Previously Taxed Earnings and Profits

On Dec. 14, the IRS issued Notice 2019-01, which indicates that the U.S. Department of the Treasury and the IRS intend to issue regulations addressing the operation of previously taxed earnings and profits (PTEP) distributions in light of changes made by the Tax Cuts and Jobs Act.

The notice provides general background on IRC Section 959 and other related IRC provisions and outlines the substance of proposed regulations that Treasury and the IRS intend to issue, including expanded categories of PTEP, formerly referenced as previously taxed income (PTI). The notice also contains a proposed applicability date and contact information for the forthcoming regulations and requests written comments. The regulations are expected to:

• Provide that an annual account must be maintained for PTEP and that account must be segregated, potentially, into 16 different baskets
• Provide that the dollar basis must be tracked for each annual PTEP account and, to the extent applicable, separately for each PTEP basket within an annual account
• Provide transition rules for annual PTEP accounts maintained before the applicability date of the regulations
• Require a “last in, first out” approach to the sourcing of distributions from annual PTEP accounts for purposes of calculating PTI exchange gain or loss, subject to application of Section 965

In addition, the notice:

• Indicates that global intangible low-taxed income (GILTI) inclusions based on U.S. taxable income principles rather than earnings and profits (E&P) in excess of current year PTEP can create deficits in Section 959(c)(3) E&P
• Addresses the new ordering rules and coordination among PTEP accounts that are expected to be included in the forthcoming regulations

The guidance is expected to apply to tax years ending after Dec. 14, 2018, for U.S. shareholders and to taxable years ending with or within such tax years of U.S. shareholders for foreign corporations. U.S. shareholders may rely on the ordering rules described in the notice until the proposed regulations are released if the shareholder and each person related to the shareholder applies the rules consistently with respect to PTEP of all foreign corporations in which the shareholder or related shareholder owns stock. This rule is in effect for all taxable years beginning with the shareholder’s or the related shareholder’s taxable year that includes the taxable year-end of any such foreign corporation to which Section 965 applies.