According to Law360, Internal Revenue Code Section 965 as enacted by the Tax Cuts and Jobs Act imposes a one-time transition tax on the deferred earnings and profits of certain foreign corporations owned by U.S. persons. This provision was enacted as a result of the United States transitioning to a quasi-territorial tax system.
As a way of lessening the impact of this acceleration of income tax on previously untaxed foreign earnings, Congress allowed the Section 965 tax liability to be deferred and paid over an eight-year period with the first installment due on April 17, 2018.
However, in regulatory guidance issued just three days before that due date, the Internal Revenue Service announced that it would apply a taxpayer’s overpayment of regular tax to the overall unsatisfied installment liability. The IRS updated the FAQs to address overpayments made by a taxpayer and In FAQ 13, the IRS declared that any estimated tax payments made for the 2017 tax year that exceeded the regular tax liability would be used to satisfy the unpaid transition tax deferred under Section 965(h). Further, FAQ 14 reflected that any excess of regular tax for the 2017 tax year and the first installment paid by the taxpayer would not be refunded to the taxpayer or credited to the 2018 tax year. Rather, the excess would be applied to the unsatisfied liability under Section 965.
This IRS position, which is inconsistent with the plain language of Section 965 and congressional intent, creates problems for both individual and corporate taxpayers.
The American Institute of Certified Public Accountants sent a letter to the commissioner of the IRS requesting that the IRS reconsider FAQ 13 and 14, so that taxpayers can apply an overpayment from the 2017 tax year to the 2018 or receive a refund.
It is possible the IRS may change its position or withdraw FAQ 13 and 14. Absent such action, a taxpayer can assert that the IRS has exceeded its authority in administering the collection of the Section 965 tax in a situation where a taxpayer has elected to pay it in installments.
A challenge to this IRS position could be made by filing a protest that an overpayment from the 2017 tax year should be applied to the 2018 or be refunded, as opposed to being used to offset the unsatisfied Section 965 liability. Presuming the IRS refused to do so, the taxpayer could challenge this decision in U.S. Tax Court, since at that point the Section 965 tax has already been collected, using the U.S. District Court or U.S. Court of Federal Claims to seek a refund of the overpayment may also be an option.
Read more at: Tax Times blog