Private Foundation Provision Included in Section 965 Regulations

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The IRS recently issued regulations under Internal Revenue Code (IRC) Section 965. IRC §965 is known as the “transition tax” provision that was added to the code by the Tax Cuts and Jobs Act.

IRC §965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain “specified foreign corporations” as if those earnings had been repatriated to the United States. A specified foreign corporation is defined as (A) any controlled foreign corporation (CFC) and (B) any foreign corporation with respect to which one or more domestic corporations is a 10 percent or greater U.S. shareholder. A passive foreign investment company that isn’t a CFC with respect to a shareholder won’t be considered a specified foreign corporation.

The new regulations provide that a §965 inclusion amount is generally included in the calculation of gross investment income of a private foundation for purposes of determining the IRC §4940 excise tax. To the extent that a §965 inclusion amount is included in computing the unrelated business income tax of a private foundation, it won’t be included in the calculation of gross investment income for purposes of the §4940 excise tax. Typically, a deduction is allowed for any ordinary and necessary expenses directly connected to the production of gross investment income. The U.S. Department of the Treasury and the IRS have determined the §965(c) deduction wasn’t intended to reduce non-income tax provisions, such as the §4940 excise tax. Any deduction computed under §965(c) won’t be treated as an ordinary and necessary expense deductible against gross investment income.

Private foundations with investments in specified foreign corporations, either directly or through partnership investments, should be aware of the requirement to include §965 adjustments in their calculation of gross investment income. Schedules K-1 received from alternative investments should be carefully reviewed for disclosure of §965 adjustments.

For more information, contact Donna or your trusted BKD advisor.

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