Section 965 Transition Tax

Classification. Section 965 requires certain taxpayers to pay a transition tax on untaxed earnings of certain specified foreign corporations. See IRM 5.9.4.23, Section 965 Transition Tax, for more information. A Section 965 tax liability is an increase in the taxpayer’s income tax liability for the year in which it was required to be included on the debtor’s income tax return (generally, 2017 and/or 2018). It is classified in the same manner as the income tax period of the inclusion year, even if the payment is not yet due because of an election under section 965(h) or 965(i).

Inclusion Year. The tax generally should have been reported on a U.S. shareholder’s 2017 tax return if the specified foreign corporation’s last taxable year beginning before January 1, 2018, ended on December 31, 2017 (i.e., for calendar year specified foreign corporations). If the foreign corporation’s last tax year beginning before January 1, 2018, ended after January 1, 2018 (i.e., for non-calendar year specified foreign corporations), the tax generally would be included on the U.S. shareholder’s 2018 tax return. In certain circumstances, due to the presence of one or more domestic pass-through entities, the tax may be reported on a U.S. shareholder’s 2019 or later tax return.

Identifying Section 965 Tax. The debtor is required to report their Section 965 tax on their income tax return. For the 2017 tax year, the debtor was also required to file a Section 965 Transition Tax Statement; for tax years 2018 and subsequent, the debtor is required to file Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, for the year of the inclusion. When a debtor reports a Section 965 tax, a TC 971 Action Code (AC) 114 will post with the return. The Miscellaneous (MISC) Field will show the total amount of the Section 965 tax as shown on the return and it will be included in the TC 150.