Notice 2018-78

Additional Guidance Under Section 965

Notice 2018-78
SECTION 1. OVERVIEW
On August 9, 2018, the Department of the Treasury (“Treasury Department”) and
the Internal Revenue Service (“IRS”) published in the Federal Register (83 FR 39514) a
notice of proposed rulemaking (REG-104226-18), which contained proposed §§1.962-1
and 1.962-2, 1.965-1 through 1.965-9, and 1.986(c)-1 (the “proposed regulations”). The
proposed regulations relate to section 965 of the Internal Revenue Code.
SECTION 2. BASIS ELECTION UNDER PROPOSED §1.965-2(f)(2)
Proposed §1.965-2(f)(2) allows a section 958(a) U.S. shareholder (as defined in
proposed §1.965-1(f)(33)) to elect to make certain basis adjustments with respect to
each deferred foreign income corporation (as defined in proposed §1.965-1(f)(17)) and
each E&P deficit foreign corporation (as defined in proposed §1.965-1(f)(22)) (such
election, the “basis election”). Proposed §1.965-2(f)(2)(iii)(B)(1)(i) provides the general
rule that the basis election must be made no later than the due date (taking into account
extensions, if any) for the section 958(a) U.S. shareholder’s return for the first taxable
year that includes the last day of the last taxable year of a deferred foreign income
corporation or E&P deficit foreign corporation of the section 958(a) U.S. shareholder
that begins before January 1, 2018. If the due date referred to in proposed §1.9652(f)(2)(iii)(B)(1)(i) occurred before September 10, 2018, proposed §1.9652(f)(2)(iii)(B)(1)(ii) (the “transition rule”) provides that the basis election must be made by
October 9, 2018.
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The Treasury Department and the IRS have determined that requiring taxpayers
to make a binding basis election before the proposed regulations are finalized would be
too onerous for taxpayers. Accordingly, the Treasury Department and the IRS intend
that when final regulations under section 965 are published in the Federal Register (the
“final regulations”), the final regulations will provide that the transition rule will apply with
respect to returns due (determined with regard to any extension) before the date that is
90 days after the date that the final regulations are published and that in such cases the
basis election must be made no later than 90 days after the publication of the final
regulations in the Federal Register. In addition, the final regulations will provide that if a
basis election was made on or before the date the final regulations are published, the
basis election may be revoked no later than 90 days after the publication of the final
regulations in the Federal Register. Relevant tax returns must be filed consistently with
an election that has been made and not revoked.
SECTION 3. APPLICATION OF PROPOSED §1.965-3(b) TO CONSOLIDATED
GROUPS
Proposed §1.965-3(b) provides rules allowing a section 958(a) U.S. shareholder
to disregard certain assets for purposes of determining its aggregate foreign cash
position (as defined in proposed §1.965-1(f)(8)). Proposed §1.965-8(e) provides that all
members of a consolidated group that are section 958(a) U.S. shareholders of a
specified foreign corporation (as defined in proposed §1.965-1(f)(45)) are treated as a
single section 958(a) U.S. shareholder for certain enumerated purposes that do not
include proposed §1.965-3(b). To prevent the overstatement of the aggregate foreign
cash position, the final regulations will provide that all members of a consolidated group
that are section 958(a) U.S. shareholders of a specified foreign corporation are also
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treated as a single section 958(a) U.S. shareholder for purposes of proposed §1.9653(b).
SECTION 4. RELIEF IN CONNECTION WITH HURRICANE FLORENCE
On September 15, 2018, and September 24, 2018, in response to Hurricane
Florence, the IRS announced (IR-2018-187, NC-2018-03, SC-2018-01) that certain
individual and business taxpayers would have until January 31, 2019, to file certain tax
returns and make certain tax payments. Questions have arisen as to whether that
announcement applies to elections with respect to section 965 and transfer agreements
required to be filed under the proposed regulations. This notice provides a
postponement for affected taxpayers to make elections with respect to section 965 and
file transfer agreements required to be filed under the proposed regulations. Affected
taxpayers for whom elections with respect to section 965 or transfer agreements are
due on or after September 7, 2018, and before January 31, 2019, are granted additional
time to file such elections or transfer agreements until January 31, 2019.
An affected taxpayer is any taxpayer whose principal residence or principal place
of business was located in a Hurricane Florence covered disaster area, as defined in
§301.7508A-1(d)(2), or whose records necessary to meet its obligation were maintained
in such a covered disaster area, or in the case of a transfer agreement, a taxpayer who
intends to enter into a transfer agreement with such a taxpayer.
Taxpayers who believe they are entitled to this relief should mark “Hurricane
Florence” on the top of the relevant section 965 election statement or transfer
agreement, and, in the case of a transfer agreement, a notation of which party to the
agreement is an affected taxpayer whose principal residence or principal place of

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business was located in a Hurricane Florence covered disaster area, as defined in
§301.7508A-1(d)(2), or whose records necessary to meet its filing obligation were
maintained in such a covered disaster area.
SECTION 5. SUBMISSION OF COMMENTS
The Treasury Department and the IRS requested comments in the proposed
regulations on all aspects of the proposed regulations, with a deadline of October 9,
2018, for comments to be submitted. The Treasury Department and the IRS are still
considering all of the comments that have been submitted as of the date of this notice
with respect to the proposed regulations in the course of developing final regulations
under section 965. The Treasury Department and the IRS continue to welcome the
submission of additional comments with respect to the proposed regulations by the
October 9, 2018, deadline. This notice is being issued in advance of final regulations
under section 965 due to the imminent filing deadlines that could otherwise apply to the
forms and elections described herein.
SECTION 6. DRAFTING INFORMATION
The principal author of this notice is Leni Perkins of the Office of Associate Chief
Counsel (International). However, other personnel from the Treasury Department and
the IRS participated in its development. For further information regarding this notice,
contact Ms. Perkins at (202) 317-6934 (not a toll free call).

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