The Code and the regulations contain no special rule or qualification to treat a section 951 inclusion as a dividend for purposes of section 1(h)(11). Because there is no distribution, there is no dividend within the meaning of section 316(a), unless some special rule or qualification applies. It arises not from any distribution of property by a CFC but from its investment in “United States property held (directly or indirectly) by the controlled foreign corporation”. Here is a Tax Court opinion that explains why this is so:Ī section 951 inclusion involves no change in ownership of corporate property. Subpart F income is “pretend” income, while a dividend requires an actual change in ownership of something: the corporation must transfer money or property to a new owner–the shareholder. Income included in income under the Subpart F rules is not net investment income, because it is not a dividend.
The Net Investment Income Tax is imposed on “net investment income”. Subpart F Income is Not Net Investment Income
We only have to figure out how does the Net Investment Income Tax 3 applies to Subpart F income.įortunately, there is an answer. Just focus on one thing: Section 965 creates Subpart F income. And let’s forget about the timing of when this income is recognized. Let’s ignore all of the crazy shenanigans used to imposed income tax on this Subpart F income at a lower rate. 2 No Net Investment Income Tax on Subpart F Income The income created by Section 965 is treated as Subpart F income. shareholders 1 of “specified foreign corporations” to recognize an amount of income based on the earnings and profits of the foreign corporation. Without the election, Net Investment Income Tax is paid when an actual distribution is made by the foreign corporation of previously taxed earnings and profits. There is an election to make that happen. The taxpayer can choose to have income tax and Net Investment Income Tax imposed in the year that the that Section 965 requires deferred earnings and profits to be included in the taxpayer’s gross income. The taxpayer will not escape the Net Investment Tax. Income tax is paid all at once, or over eight years, as the taxpayer chooses. The taxpayer will pay income tax AND Net Investment Income Tax on the income recognized because of new Section 965. We received a question from our Maworkshop discussion about Section 965 about the interplay between the new transition tax rules (IRC §965) and the Net Investment Income Tax (IRC §1411). MaPhil Hodgen Friday Edition Question From Section 965 Workshop Section 965 and Net Investment Income Tax