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IRS Issues Guidance On Accounting Period Changes By Foreign Corporations To Prevent Avoidance of Transition Tax

The IRS has issued guidance for certain specified foreign corporations owned by U.S. shareholders subject to the Internal Revenue Code (IRC) Section 965 transition tax that are requesting a change in accounting period. The IRS will not approve a request to change the annual accounting period under either the existing automatic or general change of accounting period procedures if the change could result in the avoidance, reduction, or delay of the transition tax. This guidance applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when such request was filed.

Before the newly issued guidance, a specified foreign corporation with a tax year ending on December 31, 2017, could have avoided the purposes of IRC Section 965 by changing its tax year. If a calendar-year deferred foreign income corporation (DFIC) changed to a tax year closing on November 30, effective for its tax year beginning January 1, 2017, the election could defer a U.S. shareholder’s inclusion with respect to the DFIC by as much as 11 months. The election could also reduce the amount of the tax liability of a U.S. shareholder of the DFIC through the reduction of the post-1986 earnings and profits of the DFIC. Rev. Proc. 2002-39 and Rev. Proc. 2006-45 are modified.

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