Tax Executives Institute—U.S. Department of Treasury Office of Tax Policy liaison meeting February 8, 2005

Tax Executive, The, Jan-Feb, 2005

On February 8, 2005, Tax Executives Institute was scheduled to meet with the Treasury Department's Office of Tax Policy. Because of budget hearings scheduled for the same day that required the attendance of the Treasury Department personnel, the meeting was postponed. The agenda for the meeting is reprinted below. Minutes of the rescheduled meeting will be published in a future issue of the magazine.

I. Introduction

II. 2004 Act Guidance

a. Commendation:

TEI commends the IRS and Treasury Department for their outreach in respect of guidance under the American Jobs Creation Act of 2004 (Pub. L. No. 108-357). The new law requires the government to issue clarifying rules within a tight timeframe and the collaborative approach helped ensure that the resulting guidance dealt with taxpayers' real-world concerns. We appreciate the government's efforts to issue guidance expeditiously and to draw TEI and its members into the process.

b. Repatriation Guidance:

New section 965 of the Internal Revenue Code provides that a U.S. shareholder may elect an 85-percent dividends-received deduction with respect to certain cash dividends received from the shareholder's controlled foreign corporation.

Based on the feedback we have received, taxpayers are generally pleased with Notice 2005-10, which was issued on January 13, 2005, and provides guidance concerning section 965. The Notice provides specific guidance on domestic reinvestment plans and investments in the United States under section 965(b)(4)(B). TEI is still reviewing the Notice, but we have identified the following issues that need clarification:

Section 5.02 provides that, other than expenditures for executive compensation, expenditures incurred in connection with the funding of worker hiring and training are permitted investments under the statute, including expenditures incurred for hiring new workers and training both existing and new workers, as well as "expenditures incurred on compensation and benefits." The latter phrase seemingly is very broad and encompasses compensation and benefit expenditures for new and existing workers. TEI recommends that the government clarify that this interpretation is correct.

Section 5.05 (b) provides that a dividend reinvestment plan may include funding for a qualified plan, as long as, in the taxpayer's business judgment, such funding improves the financial stability of the U.S. company. Consider the following example:

   A U.S. parent has an underfunded
   foreign pension plan
   in CFC 1 and is ultimately
   responsible for curing that
   underfunding. May a dividend
   from CFC 2 that is then
   contributed to CFC 1 to cure
   the underfunded pension
   plan qualify as a dividend
   reinvestment plan if funding
   from the U.S. company
   would otherwise impair the
   financial stability of the U.S.
   company? In other words, if
   the U.S. company must borrow
   to fund CFC 1's pension
   plan, is its financial stability
   considered to be impaired?

In addition, would the payment of retiree medical expenses be considered an item that improves the financial stability of the company?

Section 5.07 provides that expenditures incurred on advertising or marketing with respect to trademarks, trade names, and brand names or "similar intangible property" are permitted investments. TEI recommends that the government clarify that the advertising and marketing expenditures are not limited to intangible property, but include tangible property as well.

Further Guidance. Sections 965(d) and (e) provide special rules limiting foreign tax credits and expense deductions and limiting the attributes available to offset the nondeductible portion of dividends. There is confusion about whether the tax on the income inclusion of 15 percent of a qualified distribution can be offset in whole or part by foreign tax credits that are carried over from prior years. What is Treasury's position on this issue?

Acquisitions. If a Target does not pay a dividend in 2005, must the Purchaser's base period be modified by Target's prior year dividends?

PTI. Will there be further guidance on the tracing of previously taxed income (PTI) on distributions from lower-tier subsidiaries? Consider, for example, a transaction that begins with a distribution from CFC 2 to CFC 1 creating subpart F income, which would be eligible for the 85-percent exclusion if it were ultimately distributed to the U.S. parent. If CFC 1 has PTI from prior years, however, is that earlier PTI separated from the PTI created in 2005 to permit tracing of the repatriation amount?

Expense Allocations. Finally, when will further guidance be issued on the allocation and apportionment of expenses to section 965 dividends?

Domestic Manufacturing Deduction:

Section 199 of the Internal Revenue Code provides a deduction for a percentage of income attributable to a taxpayer's qualified production activities income (QPAI), which is the excess of the taxpayer's domestic production gross receipts (DPGR) over allocable production expenses. Section 199(c)(4)(A) defines DPGR as including the taxpayer's gross receipts derived from any lease, rental, license, sale, exchange, or other disposition of qualifying production property (QPP) that was manufactured, produced, grown, or extracted (MPGE) by the taxpayer in whole or in significant part within the United States.