AICPA urges Treasury, IRS to simplify Sec. 951 documentation rules

The “determine and document” requirement in Notice 2025‑75 is “ambiguous and potentially onerous,” and Treasury should eliminate, simplify, or replace it, the AICPA told Treasury and IRS officials in a letter last week.

In the letter, dated Feb. 4, the AICPA asserted that the notice’s requirement that Sec. 951(a) inclusion shareholders “determine and document that the dividend increased the taxable income of a United States person” does not adequately explain the level of analysis, substantiation, or third-party information needed to demonstrate an increase in taxable income.

The AICPA recommended that Treasury adopt one of two proposed approaches that it contends would lessen the administrative burden of compliance while remaining consistent with the treatment of dividends under existing U.S. tax law.

Background

In the notice, “Transition Rule for Applying Section 951(a)(2)(B),” the IRS said it intends to issue proposed regulations related to the transition rule under Section 70354(c)(2) of H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act. The transition rule modifies the application of Sec. 951(a)(2)(B) for certain tax years of foreign corporations beginning before Jan. 1, 2026.

Sec. 951(a) requires certain U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income their pro rata share of Subpart F income. Before H.R. 1’s amendments, Sec. 951(a)(1) generally limited inclusions to U.S. shareholders who owned stock in a CFC on the last day of the foreign corporation’s tax year on which it was a CFC. H.R. 1 amended Secs. 951(a) and 951A to apply Subpart F to U.S. shareholders who owned stock in a foreign corporation on any day during its taxable year that it was a CFC. H.R. 1’s amendment is effective for the tax years of foreign corporations beginning after Dec. 31, 2025.

H.R. 1 also added a transition rule under Sec. 951(a)(2)(B), providing that certain dividends are not treated as dividends for purposes of Sec. 951(a)(2), except as otherwise provided by the Treasury secretary.

The transition rule applies to two categories of dividends:

• Paid or deemed paid on or before June 28, 2025, and during the tax year of a CFC that includes such date, provided the U.S. shareholder described in Sec. 951(a) did not own (within the meaning of Sec. 958(a)) the stock of the CFC during the portion of the tax year on or before June 28, 2025, or

• Paid or deemed paid after June 28, 2025, and before a foreign corporation’s first tax year beginning after Dec. 31, 2025.

Section 3.03(4) of the notice provides that, where a Sec. 951(a) inclusion shareholder reduces its pro rata share of Subpart F income or tested income as a result of a dividend subject to the transition rule, the shareholder must “determine and document that the dividend increased the taxable income of a United States person subject to federal income tax.” To comply, the Sec. 951(a) inclusion shareholder must attach a statement to Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with the required information.

AICPA recommendations

In response, the AICPA urged Treasury to revise the requirement by:

• Eliminating or significantly paring back the documentation requirement regarding transactions where the dividend is required by law to be included in the gross income of a U.S. person and where no exclusion or deduction could reasonably apply; or

• Adopting a per se rule or safe harbor under which the “determine and document” requirement does not apply to dividends received by certain U.S. persons for whom inclusion in taxable income is mandatory. “For all other situations, Treasury and the IRS should clarify that federal income tax principles must be analyzed and the type of documentation is sufficient to demonstrate that the dividend increased taxable income,” the letter said.

The AICPA said the notice’s requirement adds steps where the tax law already makes the result clear, such as dividends received by S corporations or individuals. The result, the letter said, is an “administrative burden without a corresponding compliance benefit and introduces uncertainty as to the scope of the taxpayer’s obligation.”

Also, many transactions to which the transition rule applies have closed, some even before the notice was issued, the letter said.

“Requiring taxpayers to obtain or reconstruct such information after the fact may be impracticable or impossible and could result in inconsistent compliance outcomes based on factors outside the taxpayer’s control,” the letter said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.