Page 558 - TaxAdviser_2022

TAX CLINIC

random that will report the inclusion no net DTIR, a GILTI inclusion ($350 − $0). The aggregate amount
as PTEP? amount (as defined in Regs. Sec. of USP’s pro rata share of tested
Fortunately for all, the IRS has ad- 1.951A-1(c)(1)) of $350 ($350 − $0). income and loss is $350 ($100 from
dressed this issue in Regs. Sec. 1.951A-5 The aggregate amount of USP’s pro CFC1 + $300x from CFC2 − $50
and provides examples for how the rata share of tested income is $400 from CFC3). Therefore, if the
tracking of E&P and PTEP should ($100 from CFC1 + $300x from shareholder neglects the CFC loss-
work. In general, a GILTI inclusion CFC2). Therefore, under paragraph exclusion rule, the portion of USP’s
is treated the same way as Subpart F (b)(2)(i) of this section, the portion GILTI inclusion amount treated
income, meaning that any inclusions of USP’s GILTI inclusion amount as being with respect to CFC1 is
identified out of a CFC’s E&P will need treated as being with respect to CFC1 $100 ($350 × [$100 ÷ $350]). The
to be tracked and reclassified as PTEP is $87.50 ($350 × [$100 ÷ $400]). portion of USP’s GILTI inclu-
on Schedules J and P. The steps in deter- The portion of USP’s GILTI inclu- sion amount treated as being with
mining how a GILTI inclusion is appor- sion amount treated as being with respect to CFC2 is $300 ($350 ×
tioned back to each CFC for purposes respect to CFC2 is $262.50 ($350 × [$300 ÷ $350]). The portion of
of tracking untaxed E&P and PTEP [$300 ÷ $400]). The portion of USP’s USP’s GILTI inclusion amount
are found in Regs. Sec. 1.951A-5(b) and GILTI inclusion amount treated as treated as being with respect to
state that, first, the amount of GILTI being with respect to CFC3 is $0 be- CFC3 is -$50 or ($350 × [$-50 ÷
apportioned to tested loss CFCs is zero cause CFC3 is a tested loss CFC. $350]). CFC1 would report ending
(see Regs. Sec. 1.951A-5(b)(2)). This untaxed E&P on Schedule J as $50
makes practical sense, as a CFC that is Now, why is this important? The ($150 – $100) and PTEP under
in a tested loss position would not carry GILTI regulations specifically omit test- Sec. 951A as $100. CFC2 would
with it any earnings that would be sub- ed loss CFCs from being apportioned report ending untaxed E&P on
ject to taxation and, as such, would not any amount of the GILTI inclusion. Schedule J as $200 ($500 – $300)
reclassify any losses from E&P to PTEP. Let’s take the above example, change and PTEP under Sec. 951A as
Next, the total GILTI inclusion must the facts around a bit, and not apply the $300. CFC3 would report ending
be apportioned among all tested income tested loss CFC apportionment exclu- untaxed E&P on Schedule J as -$25
CFCs. To do this, the portion of the sion for GILTI inclusion. ($25 – $50) and PTEP under Sec.
GILTI inclusion amount of the U.S. 951A as -$50.
shareholder should bear the same ratio Example 2:
to the amount of the U.S. shareholder’s Facts: USP, a domestic corporation, As can be seen, ignoring the tested
pro rata share of tested income for each owns all of the stock of three CFCs, loss CFC apportionment exclusions
tested income CFC as compared with CFC1, CFC2, and CFC3. USP, rule would cause an incorrect math-
the total tested income of all tested CFC1, CFC2, and CFC3 all use the ematical increase to untaxed E&P of
income CFCs. The following example calendar year as their tax year. In CFC3 (even though it was in a tested
from Regs. Sec. 1.951A-5(b)(2)(ii) year 1, CFC1 has tested income of loss position) and result in a negative
should help clear this up: $100x, CFC2 has tested income of PTEP balance of -$50 for CFC3 at
$300x, and CFC3 has tested loss of the end of year 1. It is apparent that
Example 1: $50x. USP has no net DTIR for year omitting the tested loss CFC appor-
Facts: USP, a domestic corporation, 1. CFC1 has accumulated untaxed tionment exclusion related to a Sec.
owns all of the stock of three CFCs, E&P before GILTI of $150, CFC2 951A GILTI inclusion can create some
CFC1, CFC2, and CFC3. USP, has accumulated untaxed E&P be- unorthodox results in tracking and
CFC1, CFC2, and CFC3 all use a fore GILTI of $500, and CFC3 has reporting E&P and PTEP of CFCs.
calendar year as their tax year. In year accumulated untaxed E&P before Note that although the example above
1, CFC1 has tested income of $100x, GILTI of $25. denominated the apportionment of
CFC2 has tested income of $300x, Analysis: In year 1, USP has net GILTI among tested income CFCs
and CFC3 has tested loss of $50x. CFC tested income (as defined in in U.S. dollars, once the apportioned
USP has no net DTIR for year 1. Regs. Sec. 1.951A-1(c)(2)) of $350 amount is determined for each CFC,
Analysis: In year 1, USP has net CFC ($100 + [$300 − $50]) and, because the apportioned inclusion amount
tested income (as defined in Regs. USP has no net DTIR, a GILTI should be translated from U.S. dollars
Sec. 1.951A-1(c)(2)) of $350 ($100 inclusion amount (as defined in back into the functional currency of the
+ $300 − $50) and, because USP has Regs. Sec. 1.951A-1(c)(1)) of $350 CFC for reporting on Schedule J and P

16 November 2022 The Tax Adviser