Section 965 Transition Tax

General Information. Section 965, as amended by the Tax Cuts and Jobs Act (TCJA) of 2017, requires certain taxpayers to pay a transition tax on the untaxed earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. A Section 965 liability is a one-time tax that could have been incurred in 2017 or 2018. A Section 965 liability is an increase in the taxpayer’s income tax for the year in which it is required to be included on the taxpayer income tax return (the "inclusion year" ). Any liability resulting from Section 965 is therefore an income tax and should be treated as such in bankruptcy. Further, a section 965 liability arises when the rest of the income tax liability arises (at the end of the income tax year), because that is when all the events that give rise to the income tax have occurred. The fact that the taxpayer may elect to defer payment does not change when the tax claim arises for bankruptcy purposes because bankruptcy claims include amounts that may not be due at the time the bankruptcy case was filed. The caseworker will therefore include on their proof of claim the entire amount of an income tax for any tax year that ended before the petition date, whether the tax includes a Section 965 liability, and whether or not any payment has been deferred under Section 965. See IRM 21.1.1.3.3.2, Section 965 Transition Tax, and IRM 21.5.13.2, IRC 965 - Transition Tax Overview, for more information.

Eligibility. Those potentially subject to the transition tax are:

United States shareholders of a specified foreign income corporation

Certain direct/indirect domestic partners in domestic partnerships that are United States shareholders of specified foreign corporations

A shareholder in an S corporation that is a United States shareholder of a specified foreign corporation.

Certain beneficiaries of another pass-through entity that is a United States shareholder of a specified foreign corporation.