Final regs. govern CFC downward attribution

By Sally P. Schreiber, J.D.

The IRS on Monday issued ownership attribution rules for determining the status of corporations as controlled foreign corporations (CFCs) and whether their shareholders are U.S. shareholders (T.D. 9908). The regulations finalized the proposed rules (REG-104223-18) with a few changes in response to one comment.

Before its repeal by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, under the rules for constructive ownership of stock, Sec. 958(b)(4) excluded U.S. persons from constructively owning stock in a CFC by application of Sec. 318(a)(3)(A), (B), or (C). These provisions each attribute ownership of stock directly or indirectly for or by a partner, beneficiary, or controlling stockholder to the respective partnership, estate, trust, or corporation and thence to other partners, beneficiaries, or shareholders. The repeal of Sec. 958(b)(4) can cause stock of a foreign corporation to now be attributed to a U.S. person under Sec. 318(a)(3) (referred to as “downward attribution”).

Thus, a U.S. person could be treated as a U.S. shareholder of a CFC who was not formerly, and foreign corporations that were not previously treated as a CFC could be so treated. The Code change was effective for the last tax year of foreign corporations beginning before Jan. 1, 2018, and later.

The proposed regulations would amend a number of existing regulations (including regulations under Secs. 267, 332, and 1297) to ensure, in appropriate circumstances, that the operation of various rules is consistent with their application before the repeal of Sec. 958(b)(4).

A change made in response to a comment is that the exception from the CFC payee rule in Prop. Regs. Sec. 1.267(a)-3(c)(4) is expanded to apply to all amounts payable to a related foreign person that is a CFC that does not have any Sec. 958(a) U.S. shareholders (Regs. Sec. 1.267(a)-3(c)(4)). As a result, the Sec. 265(a)(3)(A) foreign payee rule will apply to those payments exempt from the application of the CFC payee rule. However, the IRS explained that the CFC payee rule continues to apply to a CFC that has a Sec. 958(a) shareholder even if the foreign corporation is a CFC due solely to Sec. 958(b)(4)’s repeal.

The regulations are effective when they are published in the Federal Register and generally apply on or after Oct. 1, 2019. For earlier tax years, a taxpayer may generally apply the rules set forth in the final regulations to the last tax year of a foreign corporation beginning before Jan. 1, 2018, and each subsequent tax year of the foreign corporation, and to tax years of U.S. shareholders in which or with which the foreign corporation’s tax years end, provided that the taxpayer and U.S. persons that are related (under Sec. 267 or 707) to the taxpayer apply the rules consistently for all foreign corporations.

And, although Regs. Sec. 1.958-2 applies to tax years of foreign corporations ending on or after Oct. 1, 2019, and tax years of U.S. shareholders in which or with which the tax years of those foreign corporations end, the same result applies before the date due to the effective date of the repeal of Sec. 958(b)(4).

Sally P. Schreiber, J.D., ( is a JofA senior editor.


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