Acceleration Events of the Transition Tax Under IRC Section 965

Taxpayers that elected to pay their 2017 transition tax under IRC Section 965 of the Internal Revenue Code (IRC) in eight installments, and S corporation shareholders that elected to “indefinitely” defer their Section 965 liability, are generally required to pay the remaining balance of the Section 965 tax liability if an acceleration, or triggering, event occurs.

Acceleration events are:

  • Failure to make an installment payment;
  • Liquidation, sale, exchange or disposition of substantially all assets of the taxpayer;
  • Cessation of business;
  • Change of an individual status as U.S. person;
  • Death of the taxpayer;
  • Joining a U.S. consolidated group; and
  • Deconsolidation of a U.S. group.

Some tax-free reorganizations, as well as IRC Sections 351 (property contribution to a corporation) and 721 (property contribution to a partnership) transactions, may qualify as exchanges or dispositions and could be considered acceleration events, as could certain check-the-box elections. Payment of any unpaid remaining installments will become immediately due if certain acceleration events occur.

For shareholders of S corporations, acceleration events include:

  • Corporation ceases to be an S corporation;
  • Liquidation or sale of substantially all the assets of the S corporation;
  • Cessation of business by the S corporation;
  • The transfer of stock in the S corporation; and
  • Death of the shareholder.

In the case of liquidation, sale, exchange or other disposition of substantially all assets, taxpayers can prevent the tax liability from becoming immediately due if they enter into a transfer agreement with a qualifying transferee, defined as a single U.S. person other than a domestic pass-through entity. 

Under a transfer agreement, the transferee assumes liability for paying the remaining balance of the IRC Section 965 transition tax liability. Transfer agreements must be filed with the Internal Revenue Service within 30 days of the event. The agreements are also filed with the U.S. Federal income tax returns of the transferee and the transferor.

Note that it is possible that taxpayers may inadvertently trigger one of these events and become immediately liable for large sums of tax. Therefore, it is imperative that any client that owns a foreign corporation or partnership and is contemplating a reorganization or restructuring event should contact a member of the FGMK International Tax team prior to such actions.

There is no late-filing relief if the transfer agreement is not filed timely.

Within the various Section 965 Notices and Publication 5292, taxpayers have received piecemeal instructions for most every facet of Section 965.  Under Section 965(h), a U.S. shareholder could elect to defer the payment of the Section 965 liability over eight years. That deferral stays in effect until the liability is either:

i) Paid in total;

ii) Completely transferred to another taxpayer; or

iii) An acceleration event occurs.

Treasury Regulation §1.965-7(b)(3) defines an acceleration event and states that when such an event occurs, then the unpaid portion of all remaining installments shall be due on the date of such event. Note, however, that there are no specific instructions in the IRC or Regulations on how to make the payment and/or how to report it.

Looking to the Section 965 Frequently Asked Questions (FAQs) that the IRS has published, it becomes  apparent that a taxpayer can utilize the standard payment methods - online, wire, or mail a check along with the proper notation of “965 tax.”  See Question #10 in the 2017 FAQs.

In addition, new Forms 965-A and 965-B have the taxpayer record any payments, transfers, or acceleration event payments on Part II of the forms, which tracks the unpaid liability still outstanding. Any transfers in or out resulting from an acceleration event must be accompanied by a transfer agreement (that meets the required terms thereto), generally filed within 30 days of the date of such event and signed under penalties of perjury by the transferee and transferor.  The statement must also be timely filed with the income tax return of both parties to the event.

If you have any questions about this Alert, please contact any member of the International Tax team at FGMK.

 

Fuad S. Saba                                                                             Michael R. Pearson                        

Partner                                                                                      Director                               

Specialty Tax Practice                                                              Specialty Tax Practice

312.818.4305                                                                           312.638.2910

FSaba@fgmk.com                                                                    MPearson@fgmk.com

 

 

Scott W. Simpson                                                                  Ulises Ruiz

Director                                                                                  Senior Tax Manager

Specialty Tax Practice                                                           Specialty Tax Practice    

312.638.2923                                                                        312.638.2909

SSimpson@fgmk.com                                                          URuiz@fgmk.com

 

 

Search


Thought Leadership
Tax & Estate Planning Guide
Subscribe to Newsletter
Webinars
Press Releases