The US Internal Revenue Service (IRS) issued an Office of Chief Counsel memorandum clarifying that a controlled foreign corporation (CFC) is not eligible for a dividends received deduction under section 245A.
This memorandum provides non-taxpayer-specific legal advice regarding the application of section 245A(a) of the Internal Revenue Code (the “Code”). This advice may not be used or cited as precedent.
Section 245A provides a 100% deduction for the foreign source portion of dividends received by US Shareholders from certain foreign corporations they own at least 10% of.
The memorandum provides the following summary of the facts and conclusion:
This memorandum provides non-taxpayer-specific legal advice regarding the application of section 245A(a) of the Internal Revenue Code (the “Code”). This advice may not be used or cited as precedent.
Facts
USP is a domestic corporation, and FC1 and FC2 are foreign corporations. USP wholly owns FC1. FC1 is a controlled foreign corporation (within the meaning of section 957(a)) (“CFC”). FC1 owns 45% of the single class of stock of FC2, and the remaining stock of FC2 is owned by a nonresident alien individual. FC2 is not a CFC but is a specified 10-percent owned foreign corporation (within the meaning of section 245A(b)) (“SFC”).
FC1 receives a dividend from FC2 (the “FC2 Dividend”). FC1 would be allowed the deduction under section 245A(a) with respect to the FC2 Dividend if FC1 were a domestic corporation.
Issue
Is FC1 allowed a deduction under section 245A(a) for the FC2 Dividend?
Conclusion
No, section 245A(a) does not allow a deduction to FC1 for the FC2 Dividend.
Law and AnalysisÂ
Application of plain language of section 245A(a) to foreign corporations Section 245A(a) generally allows a deduction (the “section 245A DRD”) for the foreign-source portion of a dividend received “from [an SFC] by a domestic corporation which is a United States shareholder with respect to such foreign corporation.” Section 951(b) provides that, for purposes of the Code, the term United States shareholder means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) that satisfies certain ownership requirements.
Thus, the plain language of section 245A(a) requires that (i) the recipient of the dividend from an SFC be a domestic corporation and (ii) the domestic corporation be a United States shareholder concerning the SFC.1 Because FC1 is neither a domestic corporation nor a United States shareholder with respect to FC2, the analysis of the issue ends there, and FC1 is not allowed the section 245A DRD for the FC2 Dividend.
Generally, a deduction is allowed as a matter of “legislative grace” clearly reflected in the applicable statute. Under the statute, a dividend received by a CFC from an SFC does not meet the terms of section 245A(a) because section 245A(a) limits the section 245A DRD to a dividend received from an SFC by a domestic corporation that is a United States shareholder of the SFC. None of section 245A(e)(2), section 964(e)(4), Footnote 1486, or §1.952-2 changes that result. Thus, FC1 is not allowed a section 245A DRD for the FC2 Dividend.
