Daily Tax Update - August 22, 2005

Treasury and IRS Issue Third Notice on Section 965 Temporary Dividends Received Deduction for the Repatriation of Foreign Earnings:
Today, the Treasury Department and IRS issued Notice 2005-64, the long-awaited third notice dealing with the 2004 legislation providing an 85% deduction for certain dividends received from controlled foreign corporations. The Notice addresses, inter alia, the following issues

  • Cash received by U.S. owners of disregarded entities and partnerships attributable to dividends received by those entities from controlled foreign corporations (CFCs), and previously taxed income (PTI) received by U.S. owners of CFCs attributable to dividends received by those CFCs from other CFCs in the same year the PTI is distributed to the U.S. owners.
  • Foreign currency translation rules for dividends received
  • Various issues relating to the foreign tax credits associated with the deductible portion of qualifying dividends, including
  • Clarification that the section 78 gross-up does not apply to taxes not allowable as credits
    • Clarification that no new foreign tax credit basket is created
    • Clarification that CFCs paying qualifying dividends are not exempt assets for purposes of the expense allocation rules of section 864(e)
    • Determining disallowed credits attributable to deductible dividends
    • The impact on earnings and tax accounts of the payment of deductible dividends
    • Rules relating to the treatment of overall foreign losses and separate limitation losses
  • The disallowance of deductions directly allocable to the deductible portion of qualifying dividends, including
    • Exclusion of interest from the class of nondeductible expenses
    • Inclusion of only a narrow percentage of stewardship expenses
    • Inclusion of only a narrow class of other expenses
  • The interaction of the deduction with the alternative minimum tax
  • Miscellaneous significant clarifications, including
    • The continued applicability of judicial doctrines such as circular cash flow, step transaction and substance over form
    • The treatment of dividends received by CFCs and partnerships for purposes of the base period calculation
    • The effect of restatements of financial statements on the section 965(b)(1)(B) and (C) limitations
    • The definition of "United States" to include certain offshore activities (e.g. drilling and fishing) and to exclude territories and possessions (including Puerto Rico)
    • The treatment of section 482 receivables to conform accounts
    • The treatment of certain ordinary course indebtedness of banks and securities dealers and certain ordinary course trade payables for purposes of the related party indebtedness rules
    • The treatment of domestic reinvestment plans where there is a deviation between the amount specified in the plan and the qualifying dividends received.
  • For additional information, contact Philip R. West via email or John J. Giles via email.
  • The notice can be accessed here.   

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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