2024 Proposed Regulations on Section 954 Elections

The IRS has released new proposed regulations regarding specific foreign currency gain or loss elections for Controlled Foreign Corporations (CFCs). This latest guidance updates the 2017 proposed regulations, particularly regarding elections under Sections 954 and 988.

Elections Under Section 954

Section 954(c)(1)(D) provides that foreign personal holding company income (FPHCI) includes the excess of foreign currency gains over losses from Section 988 transactions. Treasury Regulation Section 1.954-2(g) provides controlling U.S. shareholders of a CFC with options to manage how these gains and losses are treated as follows:

• Option 1: Shareholders can elect to exclude foreign currency gains/losses from the FPHCI calculation and instead treat them as subpart F income (cf. §1.954-2(g)(3)).
• Option 2: Shareholders can elect to treat all foreign currency gains/losses from Section 988 transactions and certain Section 1256 contracts as FPHCI (cf. §1.954-2(g)(4)).

These elections should be made by the controlling U.S. shareholders via an attachment with their original income tax returns for the tax year in which the CFC’s tax year ends.

Revocation of Elections under 2017 Proposals

Flexibility in Revocation

The 2017 proposed regulations allow controlling U.S. shareholders of a CFC to revoke a Section 954 election at any time, allowing taxpayers to determine with certainty whether the election would be beneficial for the year.

Re-election Restrictions

Once a Section 954 election was revoked, the 2017 proposals disallowed the shareholders from making a new election for six years following the year in which the previous election was revoked. After making a new election following a revocation, shareholders were restricted from revoking this new election for six years after it was made.

Administrative Simplicity

Under the 2017 proposed regulations, the revocation is simply done by attaching a statement with the U.S. shareholders’ original or amended income tax returns for the tax year in which the CFC’s tax year ends.

Revocation of Elections under 2024 Proposals

Mandatory Six-year Period

The 2024 proposed regulations impose a stricter rule by mandating that once a Section 954 election is made, it cannot be revoked for six years. This eliminates the flexibility that existed under the 2017 proposals, requiring taxpayers to commit to their election decision for a longer period.

The 2024 regulations maintain the six-year waiting period before a new election can be made after a revocation. The stricter revocation rules under the 2024 proposed regulations emphasize consistency and long-term commitment to an election. These measures are aimed at preventing tax avoidance strategies by limiting the ability to opportunistically revoke and make new elections.

Applicability and Reliance

The new proposed regulations would apply to tax years ending on or after the date the final regulations are published in the Federal Register. Taxpayers can rely on these new rules for making and revoking elections for tax years ending before the final regulations are published, provided they consistently apply the new rules.

As of August 19, 2024, taxpayers can no longer rely on the 2017 proposed regulations. The IRS will respect elections or revocations made under the previous rules as having been timely, provided they were made in compliance with earlier guidance.

The IRS is seeking public comments on these proposed regulations, particularly on the changes to the revocation rules. Comments must be submitted by October 21, 2024.

Reach out to our Global Business Services team with any questions regarding these requirements or any other international tax issue.