IRS provides key guidance on previously taxed E&P under Section 959, but leaves issues unresolved

Overview

The IRS issued Notice 2019-01 (the Notice) on December 14, providing administrative guidance and indicating plans to issue regulations under Section 959 relating to previously taxed earnings and profits (PTEP, historically referred to as previously taxed income, or PTI).  The Notice provides important guidance and examples related to tracking PTEP and ordering PTEP distributions, including 16 PTEP groups to track annually by Section 904 category. 

The ordering rules prioritize Section 965 PTEP over other types of PTEP, but otherwise order PTEP distributions on an annual last-in first-out (LIFO) basis, pro rata from the different categories and groups.  The Notice also provides transition rules for taxpayers that have not tracked PTEP at the level of detail required under the Notice.  While the Notice addresses a number of important issues, it also proposes withdrawing prior proposed regulations that answered questions now left unresolved by the Notice.

The takeaway

The Notice provides important guidance with respect to tracking PTEP and ordering PTEP distributions.  The complex tracking rules in the Notice may result in onerous compliance burdens for taxpayers, while leaving unresolved a number of open issues under Sections 959 and 961.  The Notice also introduces a novel and concerning interpretation of Section 959 in the context of CFCs with deficits.  Taxpayers and their advisors should assess the impact of the forthcoming regulations and develop comments for Treasury and the IRS.