The US Internal Revenue Service (IRS) Office of Chief Counsel (OCC) has released a memorandum (AM 2024-002) that examines how the taxable income limitation under the Internal Revenue Code (IRC) section 246(b) applies to both IRC section 951A global intangible low-taxed income (GILTI) and IRC section 250(b) foreign-derived intangible income (FDII).
At the end of 2017, the tax reform legislation known as the Tax Cuts and Jobs Act (“TCJA”), Public Law No. 115-97, included the new section 250 deduction in the list of deductions limited by the rules of section 246(b). This memorandum provides nontaxpayer-specific legal advice on how the taxable income limitation in section 246(b) applies to limit the deductions under sections 243, 245, and 250. This advice should not be used or cited as precedent.
The IRS has determined that a domestic corporation’s deduction under section 250, after considering the taxable income limitation in section 250(a)(2), is constrained by the limitations in section 246(b)(1).
This section caps the total deductions a domestic corporation can claim under section 243(a)(1), section 245(a) and (b), and section 250 to a specified percentage of taxable income as detailed in section 243(b)(3)(A) and (B).
Sections 243 and 245 permit certain corporations to deduct a certain percentage of the dividends they receive based on the size of their equity interest in the distributing corporation. Specifically, under section 243, dividends received by a corporation from a domestic corporation may give rise to a dividends-received deduction (“DRD”) of 50% (70% for tax years beginning before 1 January 1, 2018), 65% (80% for tax years beginning before 1 January 2018), or 100% of the amount of the dividend received.
Similarly, under section 245, the US-source portion of dividends received by a corporation from certain foreign corporations may give rise to a DRD of the same percentages.
The guidance covers three scenarios for taxpayers dealing with a domestic C corporation, each increasing in complexity:
Scenario 1
DC has a global intangible low-taxed income (“GILTI”) inclusion under section 951A of $200x, a gross-up for deemed paid foreign tax credits under section 78 (a “section 78 gross-up”) of $20x attributable to its GILTI inclusion, and a $10x deductible expense unrelated to the GILTI inclusion.
Scenario 2
DC has a GILTI inclusion of $200x, a section 78 gross-up of $60x attributable to its GILTI inclusion, and $40x of dividends from domestic 20-percent-owned corporations (as defined in section 243(c)(2)) that are dividends described in section 243(a)(1),2 $20x of dividends from domestic corporations that are not 20-percent-owned corporations that are dividends described in section 243(a)(1), and a $130x deductible expense unrelated to the GILTI Inclusion or the dividends.
Scenario 3
The facts are the same as in Scenario 2, except that DC also has $10x of foreign-derived intangible income, as defined in section 250(b) (“FDII”).
The memo explains that section 246(b) is applied twice: once for dividends from 20% owned corporations and separately for others. Different DRD groups are combined with the section 250 deduction, and if they surpass a certain taxable income percentage, deductions are reduced.
The IRS decided that the section 250 deduction, comprising FDII and GILTI, should not be split and allocated between sections 246(b)(3)(A) and (B). Adding section 250 to the deduction limitation list ensures that both FDII and GILTI are not reduced by deductions, maintaining their effective tax rate.
