The Department of Treasury and the IRS have proposed regulations on the time for making and revoking certain elections relating to foreign currency gains and losses.
Elections under § 1.954-2(g)
Under section 954(c)(1)(D) of the Internal Revenue Code (IRC) and Treasury Regulations §1.954-2(g), foreign personal holding company income (FPHCI) includes the excess of foreign currency gains over foreign currency losses attributable to any IRC section 988 transactions. This is important because FPHCI is a type of income that can be subject to US tax under Subpart F rules, even if it has not been distributed to US shareholders.
With respect to a controlled foreign corporation (CFC)'s computation of its FPHCI, US shareholders that are controlling US shareholders of a CFC may elect to:
- exclude foreign currency gains and losses otherwise includible in the CFC's FPHCI computation under Treasury Regulations §1.954-2(g) and instead include such foreign currency gains and losses in the category (or categories) of Subpart F income to which such gains and losses relate (Treasury Regulations §1.954-2(g)(3)); or
- treat as FPHCI all foreign currency gains and losses attributable to any section 988 transaction (except those described in §1.954-2(g)(5)) and any section 1256 contract that would be a section 988 transaction if not for section 988(c)(1)(D) (Treasury Regulations §1.954-2(g)(4)).
Controlling US shareholders make either of the above elections "on behalf of the CFC by filing a statement with their original income tax return for the taxable year of the US shareholders ending with or within the taxable year of the CFC for which the election is made, clearly indicating that the election has been made."
Under Treasury Regulations §1.954-2(g)(3)(iii) and (g)(4)(iii), the controlling US shareholders may revoke an election with the Commissioner's consent.
The proposed regulations provide that:
- controlling US shareholders may make a §1.954-2(g) election on behalf of a CFC by filing a statement with the original income tax returns for the taxable years of the controlling US shareholders in which or with which the taxable year of the CFC for which the election is made ends, clearly indicating that the election has been made;
- controlling US shareholders may revoke a §1.954-2(g) election on behalf of a CFC by filing a statement with their original income tax returns for the taxable years of the controlling US shareholders in which or with which the taxable year of the CFC for which the revocation is made ends, clearly indicating that the §1.954-2(g) election has been revoked;
- controlling US shareholders would be precluded from revoking a §1.954-2(g) election made on behalf of a CFC (including an initial election) until the sixth taxable year following the year in which the election was made; and
- if a CFC's controlling US shareholders revoke a §1.954-2(g) election, they may not make a new §1.954-2(g) election on behalf of the CFC until the sixth taxable year following the year in which the previous election was revoked.
Election under Proposed § 1.988-7(c)
IRC section 988 governs the tax treatment of foreign currency transactions. Under proposed regulations released in 2017, a taxpayer, including a CFC, could elect to use a mark-to-market method of accounting for section 988 gains and losses with respect to certain section 988 transactions.
According to the Treasury and the IRS, the 2017 proposed regulations provided too much flexibility by allowing taxpayers to make the election after knowing whether it would be beneficial, and thus selectively recognize losses. To address this, the Treasury and the IRS propose that the timing for making and revoking a §1.988-7 election, should align with the timing rules for making an election under IRC section 475. Section 475 governs the use of the mark-to-market accounting method for dealers in commodities and traders in securities or commodities.
Under the proposed rules, taxpayers must make the §1.988-7 election on the tax return for the year immediately preceding the year for which the election applies. Once made, the election would be effective for the taxable year for which it is made and all subsequent years. The taxpayer may revoke the election only with the consent of the IRS Commissioner. In addition, under the proposed rules, a taxpayer wishing to adopt the mark-to-market method under section 1.988-7 must receive the IRS Commissioner's consent to change their accounting method.
Source: IBFD Tax Research Platform News