Revenue Procedure and Proposed Regulations addressing Section 958(b)(4) repeal provide taxpayer-favorable rules

Overview

Treasury on October 1, 2019, released guidance relating to the 2017 tax reform legislation repeal of Section 958(b)(4).  Congress’ repeal of Section 958(b)(4) unintentionally broadened the universe of foreign corporations that should be treated as controlled foreign corporations (CFCs).  As a result, numerous ancillary and unexpected issues have arisen. 

The newly issued Revenue Procedure (Rev. Proc. 2019-40) and Proposed Regulations provide favorable rules addressing taxpayer concerns in compliance and other areas that generally impact the private equity industry – such as the methodology for determining a foreign corporation’s status as a passive foreign investment company (PFIC), level of inquiry expected of taxpayers when determining CFC status, and penalty relief in certain circumstances.

The takeaway

The Proposed Regulations and Revenue Procedure are welcome, generally taxpayer-favorable changes.  The modified PFIC testing for CFCs, addition of a safe harbor rule, clarification around taxpayers’ duty of inquiry, guidance on the use of alternative information, and available penalty relief are expected to result in reduced time and costs associated with tax compliance.