IRS Provides Relief for Domestic Partnership and S Corp Filings Under GILTI Regs

(Parker Tax Publishing September 2019)

The IRS announced its intention to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation to apply Prop. Reg. Sec. 1.951A-5, relating to the treatment of domestic partnerships and S corporations for determining the amount of the global intangible low-taxed income (GILTI) inclusion, for tax years ending before June 22, 2019. The IRS also announced that (1) certain penalties will not apply to a domestic partnership or S corporation that acted consistently with Prop. Reg. Sec. 1.951A-5 on or before June 21, 2019, but filed a tax return consistent with the final regulations under Reg. Sec. 1.951A-1(e), and (2) if certain notification and reporting requirements are satisfied, taxpayers may rely on this guidance before the applicable regulations are issued. Notice 2019-46.

Background

The Tax Cuts and Jobs Act (TCJA) added Code Sec. 951A, which applies to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which, or with which, such tax years of foreign corporations end. Code Sec. 951A(a) requires a U.S. shareholder of any controlled foreign corporation (CFC) for any tax year to include in gross income the shareholder's global intangible low-taxed income (GILTI) inclusion for such tax year. In general, a U.S. shareholder's GILTI inclusion amount is determined by reference to the stock of CFCs that the shareholder owns. A U.S. shareholder of a foreign corporation is defined as a U.S. person that owns, or is considered as owning by applying the ownership rules of Code Sec. 958(b), at least 10 percent of the total combined voting power or value of stock of the foreign corporation. Code Sec. 957(c) generally defines a U.S. person by reference to Code Sec. 7701(a)(30), which defines a U.S. person as a citizen or resident of the United States, a domestic partnership, a domestic corporation, and certain estates and trusts. For purposes of the subpart F provisions, an S corporation is treated as a partnership, and the shareholders of such corporation are treated as partners of such partnership.

In 2018, the IRS issued proposed regulations under Code Sec. 951A, which provided a hybrid approach to the treatment of a domestic partnership that is a U.S. shareholder (U.S. shareholder partnership) of a CFC (partnership CFC). Under the hybrid approach, a U.S. shareholder partnership would determine its GILTI inclusion amount, and the partners of the partnership that were not also U.S. shareholders of the partnership CFC would take into account their distributive share of the partnership's GILTI inclusion amount. Partners that were themselves U.S. shareholders of a partnership CFC would not take into account their distributive share of the partnership's GILTI inclusion amount, and instead would be treated as proportionately owning the stock of the partnership CFC within the meaning of Code Sec. 958(a) as if the domestic partnership were a foreign partnership. In June of 2019, the IRS issued final regulations which did not adopt the hybrid approach with respect to domestic partnerships in the proposed regulations. Under the final regulations, a domestic partnership (including a U.S. shareholder partnership) does not have a GILTI inclusion amount, and therefore no partner of the partnership has a distributive share of a GILTI inclusion amount. Rather, for purposes of determining the GILTI inclusion amount of any partner of a domestic partnership, each partner is treated as proportionately owning the stock of a CFC owned by the partnership within the meaning of Code Sec. 958(a) in the same manner as if the domestic partnership were a foreign partnership. Because only a U.S. person that is a U.S. shareholder can have a GILTI inclusion amount, a partner that is not a U.S. shareholder of a partnership CFC does not have a GILTI inclusion amount determined by reference to such partnership CFC. Thus, under the final regulations, a partner that is not a U.S. shareholder with respect to a partnership CFC has neither a distributive share of a GILTI inclusion amount nor a GILTI inclusion amount that is determined by reference to such partnership CFC. The final regulations apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end. Therefore, domestic partnerships and S corporations that file their income tax returns for the 2018 tax year after June 21, 2019, must, absent any relief, file income tax returns consistent with the final regulations and furnish Schedules K-1 to their partners and shareholders that are consistent with these income tax returns.

In Notice 2019-46, the IRS stated that it is aware that many domestic partnerships and S corporations furnished Schedules K-1 to their partners and shareholders on or before the date the final regulations were issued. Consistent with Prop. Reg. 1.951A-5, these Schedules K-1 may have reported a distributive share of the domestic partnership's GILTI inclusion amount or a pro rata share of the S corporation's GILTI inclusion amount. In the absence of relief, to avoid potential penalties under Code Secs. 6698, 6699, or 6722, these domestic partnerships and S corporations could be required to file returns for the 2018 tax year consistent with the final regulations, and furnish Schedules K-1 consistent with their Form 1065 (Schedule K) or Form 1120S (Schedule K). The issuance of corrected Schedules K-1 consistent with the final regulations under these circumstances may result in significant additional costs to these domestic partnerships and S corporations and significant burden to the IRS related to processing amended returns based on corrected Schedules K-1. After considering the compliance burden of domestic partnerships and S corporations associated with Reg. Sec. 1.951A-1(e), the IRS has decided to provide relief in Notice 2019-46 for certain domestic partnerships and S corporations so that they may apply the rules in the proposed regulations for tax years ending before June 22, 2019. In addition, Notice 2019-46 provides that certain penalties that might otherwise apply to domestic partnerships or S corporations that acted consistently with Prop. Reg. Sec. 1.951A-5 before June 22, 2019, do not apply.

Notice 2019-46 Relief

According to the IRS, it is anticipated that forthcoming regulations will provide that a domestic partnership or S corporation may apply the rules in Prop. Reg. 1.951A-5, in their entirety, for tax years that ended before June 22, 2019. The forthcoming regulations are expected to provide that in order to apply the rules in Prop. Reg. 1.951A-5, a partnership or S corporation must satisfy the notification and reporting requirements described in the notice. It is anticipated that forthcoming regulations will provide that the amount excludible from gross income under Code Sec. 959 reflects only amounts included in income by a partner or shareholder under Prop. Reg. Sec. 1.951A-5. If a domestic partnership or S corporation satisfies the requirements of Notice 2019-46, penalties for failures described in Code Secs. 6698(a), 6699(a), 6722(a) or any similar provision will not apply to the domestic partnership or S corporation to the extent such failures arise from acting consistently with Prop. Reg. 1.951A-5 before June 22, 2019, including from filing a Form 1065 or Form 1120S based on the final regulations after June 21, 2019, that incorporates Schedules K-1 consistent with the proposed regulations that were issued before June 22, 2019. In order for the relief provisions to apply, a domestic partnership or S corporation must provide notification to each partner of the partnership or shareholder of the S corporation (1) that the Schedule K-1 provided to the partner or shareholder is consistent with Prop. Reg. 1.951A-5; (2) whether the domestic partnership or S corporation filed a Form 1065 or Form 1120S consistent with Prop. Reg. Sec. 1.951A-5 or the final regulations; and (3) that the notification is being provided in accordance with Notice 2019-46. Such notification must be provided no later than the extended due date of the domestic partnership's or S corporation's tax return (September 16, 2019, in the case of a calendar-year filer), and may be provided through any reasonable method, including via mail, e-mail, or posting on a website through which the domestic partnership or S corporation would ordinarily disseminate tax information to its partners or shareholders.

In the event a domestic partnership or S corporation has filed its tax return and not filed for an extension of time to file its return, the notice must be provided by the date on which the return would have been due had an extension been properly requested. The domestic partnership or S corporation must also attach the required notification and Form 8992 reflecting computations under Prop. Reg. Sec. 1.951A-5 to any tax return with respect to which the rules of Notice 2019-46 are being applied if the tax return has not been filed as of the date of publication of this notice. If a domestic partnership or S corporation furnished a Schedule K-1 based on Prop. Reg. Sec. 1.951A-5, the domestic partnership or S corporation must separately state on Schedules K-1 for subsequent tax years the partner's or shareholder's distributive share or pro rata share of a foreign corporation's distributions to the domestic partnership or S corporation of earnings and profits that relate to the GILTI inclusion amount of the partnership or S corporation that was reflected on the first mentioned Schedules K-1. This information must be provided for each tax year of the domestic partnership or S corporation following the tax year to which the first Schedule K-1 relates.

For a discussion of the GILTI inclusion rules, see Parker Tax ¶201,512.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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