The IRS clarified in a memorandum made public last month that controlled foreign corporations aren’t entitled to a dividends-received deduction under Section 245A of the tax code. Taxpayers may owe taxes, interest, and penalties if they had CFCs that took this deduction.
The memo says that if Congress intended for Section 245A to allow the deduction, it would have included the deduction in the plain language of the code. While taxpayers and practitioners have cited sections of the code and regulations to argue that the deduction should be permitted, the IRS rejected these claims.
Taxpayers who improperly used the dividends-received deduction in the past may now find themselves with Subpart F inclusions that are taxable in the year earned.
