Strategies to Recharacterize Gain from Certain Stock Sales with Untaxed Foreign Earnings

An underlying policy of the GILTI regime is to capture and tax certain income not already included in U.S. income under the Subpart F regime or otherwise. However, as certain types of income are expressly excluded from current taxation under the GILTI rules, a CFC may continue to have untaxed earnings. For instance, a U.S. shareholder’s “net deemed tangible income return,” which is 10 percent of the U.S. shareholder’s aggregate share of a CFC’s qualified business asset investment (QBAI) less a specified interest expense, is excluded from the U.S. shareholder’s GILTI amount. Untaxed income is accumulated and tracked as E&P under Section 1248. These accumulated earnings under Section 1248 can provide tax-saving and planning opportunities for certain transactions.

For example, Section 311(b) provides that if a corporation distributes property with a fair market value that is greater than the distributing corporation’s basis in the property, the distributor’s gain will be treated as a deemed sale of the property to the distributee at its fair market value. If the distributed property is stock of a foreign subsidiary corporation, the distribution is treated as a deemed sale or exchange by the distributor of its foreign subsidiary’s stock. This, coupled with gain recharacterization requirements of Section 1248 and the Section 245A dividends received deduction, presents a significant tax-saving opportunity for multinational companies. Tax practitioners working with CFCs can use these rules to recharacterize amounts that are treated as gain from the sale or exchange of stock as a deemed dividend under Section 1248 that can benefit from the dividends received deduction if the requirements of Section 245A are otherwise met.

Listen as our panel of international tax planning experts provides cost-saving solutions to recharacterize gain from certain foreign stock sales as a deemed dividend that may be eligible for the dividends received deduction.

1. Overview of the quasi-territorial system
2. Section 1248 and untaxed E&P
3. Section 311(b) distributions
4. Section 964(e) stock sales
5. Section 245A dividends received deduction

The panel will cover these and other critical issues:

• Overview of the quasi-territorial system, subpart F and GILTI
• Explaining the types of untaxed E&P after the enactment of the Tax Cuts and Jobs Act
• Historical background and mechanics of Section 1248
• Using untaxed E&P to recharacterize gain from certain Section 311(b) distributions
• Mitigating tax on Section 964(e) stock sales
• Utilizing Section 245A DRD to reduce tax

Learning Objectives

After completing this course, you will be able to:

• Identify tax-saving strategies that can be used to repatriate foreign earnings
• Determine how the Section 245A DRD can reduce tax on distributions
• Decide how Section 1248 prevents CFC shareholders from characterizing gains
• Ascertain when a distribution under Section 1248 might be tax free

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).