IRS Proposes Further Limits on the “Pro Rata Share” Rule of Code Sec. 951(a)(2)(B)

Prior to the Tax Cuts and Jobs Act (TCJA), the rules for allocating subpart F income in the case of a mid-year transfer of a controlled foreign corporation (CFC) were part of the routine plumbing of subpart F, necessary for the system to work correctly but not particularly exciting.

The new Proposed Regulations’ single entity treatment is an anti-abuse rule targeted at a specific transaction that the IRS and Treasury find objectionable. The Proposed Regulations would prevent a Code Sec. 959(b) distribution from being used to reduce the group’s subpart F income or GILTI for the year of the distribution.

The Preamble to the Proposed Regulations provided for a 30-day notice and comment period, which ended on January 18, 2023, so as to allow for immediate finalization of the new rules. Indeed, by the time of this article’s publication, the Proposed Regulations may have been finalized. Under Code Sec. 1503(a), corporations filing consolidated returns are subject to the provisions of any regulations promulgated before the due date of the consolidated return for the year. Thus, assuming the regulations are finalized in short order and “as is,” they would apply to transactions effected during calendar year 2022.

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Originally published in the January – February 2023 issue of the International Tax Journal.