IRS Extends Date for Section 965 Liability Transfer Agreements

Tax Law Update | October.12.2018

Code section 965 establishes a transition tax (the “Transition Tax”), which applies to U.S. corporations (and in certain cases, U.S. partnerships and individuals) having control over unrepatriated offshore earnings as of the end of the U.S. owner’s last fiscal year beginning before January 1, 2018. Under this tax, all offshore earnings are treated as an immediately taxable dividend to such U.S. owners. Code section 965(h), however, allows taxpayers to elect to pay the tax on this deemed repatriation in 8-year installments pursuant to what is commonly referred to as an “Installment Election.” However, notwithstanding the Installment Election, the occurrence of certain acceleration events (“Acceleration Events”) will trigger immediate taxation of the otherwise deferred liability. Some of these Acceleration Events may arise in the context of acquisitions when Target has a Transition Tax liability. These include:

  1. When target was not a member of any consolidated group, and then becomes a member of a consolidated group. This often happens when a corporation is acquired by a U.S. group.

  2. When a consolidated group ceases to exist, or otherwise no longer files a consolidated return because of the acquisition. This generally happens when a consolidated group is acquired by another corporation or a consolidated group.

To avoid the acceleration of this otherwise deferred tax liability, the transferor and transferee must enter into a “Transfer Agreement” under which the transferee agrees to assume the liability of the transferor for any unpaid installment payments. Although proposed regulations indicate that for Acceleration Events occurring prior to September 10, 2018, the Transfer Agreement must be filed with the IRS by October 9, 2018, on October 8, 2018 the IRS extended this deadline, realizing that taxpayers needed more specific instructions in connection with such Transfer Agreements, including where and how to submit the agreements. The IRS has indicated that it will issue further guidance in the near future with these specifics, and that Transfer Agreements filed in accordance with the future guidance will be considered timely notwithstanding the October 9, 2018 deadline. The key requirements for such an agreement are set forth in the attached document.

Companies involved in acquisitions on or after January 1, 2018 with Installment Elections in effect, should consider whether or not they need to file a Transfer Agreement and should be ready to submit the Agreements soon, notwithstanding the extension.