The House Ways and Means Committee’s official Report on H.R. 1, the Tax Cuts and Jobs Act, the tax reform bill that passed the House, includes additional explanations of the bill that were not previously included in the Committee’s initial section-by-section summary (or additional summary) or the Joint Committee on Taxation’s description of the bill. The Committee Report also addresses certain technical issues with the bill.
Deemed repatriation inclusion mechanics. For example, the Committee Report acknowledges that the bill’s mandatory deemed repatriation provisions requiring U.S. shareholders to include their pro rata share of their specified foreign corporation’s earnings and profits could be interpreted to require multiple inclusions with respect to the same earnings and profits in certain cases. The Committee Report states that such multiple inclusions are not intended:
The Committee is aware that certain aspects of this section require additional attention. For example, the Committee recognizes that the definition of post-1986 earnings and profits could operate to count the same earnings twice where a specified foreign corporation makes a distribution to another specified foreign corporation on or after November 2, 2017, but prior to the end of the taxable year to which section 965 applies. The Committee intends to correct this inappropriate result. Additionally, the Committee is aware that the definition of post-1986 earnings and profits in this section includes a provision that increases post-1986 earnings and profits by the amount of any qualified deficit, within the meaning of section 952 of the Code. The Committee intends to revise this provision to allow qualified deficits to reduce post-1986 earnings and profits for purposes of section 965 and to ensure that qualified deficits taken into account under section 965 cannot be used to reduce future subpart F income. The Committee also understands that the existing net operating loss (NOL), overall domestic loss (ODL), and foreign tax credit carry-forward rules may interact with income inclusions arising from section 965 in ways that may not be appropriate and that require additional consideration.”
Contributions to corporate capital. Another provision of the bill that raises uncertainty as to its scope and its effect on other provisions of the Code is section 3304, which adds a new section 76 to the Code to treat capital contributions to corporations not in exchange for stock as gross income to the corporation, which the Committee had described as intended to remove the federal tax subsidy for state and local governments to offer concessions to businesses that locate in their jurisdiction (a common example of which is land grants or other subsidies for sports stadiums). The provision could be read to apply to a capital contribution by a corporation to its wholly owned subsidiary, if the transferee corporation did not formally issue additional stock. The Committee Report clarifies that these transactions are not within the scope of new section 76:
“The provision does not change the application of the meaningless gesture doctrine, described in Lessinger v. Commissioner, 872 F.2d 519 (2d. Cir. 1989) and related cases, as well as in administrative guidance. Thus, under the provision, whether incremental shares of stock are issued when the existing shareholder or shareholders of a corporation make a pro-rata contribution to the capital of the corporation is not determinative of whether the contribution is included in income of the corporation.”