Section 269 and the anti-abuse rule of Temp. Reg. § 1.245A-5T reach a check-the-box GILTI-avoidance transaction

Plain-English summary

This Chief Counsel Advice tells IRS examiners how to attack a structure a U.S. multinational used to keep eleven months of a foreign subsidiary's income out of the U.S. minimum-tax base on foreign earnings (the GILTI regime that took effect in 2018). A U.S. group owned a foreign holding company that in turn owned a foreign sales entity that had been "disregarded" (invisible) for U.S. tax. The group made a check-the-box election to treat that entity as a separate corporation effective December 30, 2017, which for tax purposes created a brand-new corporation, and then had the new corporation elect a fiscal year ending November 30 under Section 898(c)(2). Because the new corporation's first tax year did not begin until December 1, 2018, the group argued that its January-through-November 2018 income (the "Gap Income") escaped GILTI entirely, and that a related dividend escaped subpart F income under the Section 954(c)(6) look-through rule. Chief Counsel advised that Section 269, which lets the IRS strip a tax benefit obtained by acquiring or forming a corporation with a principal purpose of tax avoidance, applies here: the deemed formation was an acquisition of control, the fiscal-year election was an "allowance" the group would not otherwise enjoy, and the group offered no business purpose, so the IRS may disallow the fiscal-year election or reallocate the Gap Income to bring it back into GILTI. In the alternative, Chief Counsel advised that the extraordinary-disposition rules and anti-abuse rule of Temp. Reg. § 1.245A-5T apply to the intercompany sales and 2018 dividend, increasing the holding company's subpart F income by 50% of the dividend (net of previously taxed amounts). This is advice to the examination team, not a ruling for the taxpayer.

Ruling snapshot

• Question: Do § 269 and, in the alternative, Temp. Reg. § 1.245A-5T apply to unwind a check-the-box plus § 898(c)(2) fiscal-year election used to exclude a CFC's "Gap Income" from GILTI?
• Outcome: advice given (both theories apply on the facts presented)
• Key authorities: IRC §§ 269, 898(c)(2), 951A, 954(c)(6), 245A; Temp. Treas. Reg. § 1.245A-5T; Treas. Reg. §§ 1.269-1, 301.7701-3; Rev. Proc. 2018-17

Full text (IRS public release)

```
Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 202501008
Release Date: 1/3/2025
INTL:
POSTS-107587-23

UILC: 245A.00-00, 269.00-00, 269.01-00, 951A.00-00, 954.02-02

date: May 30, 2024

 to:   Patrick Roecker
       (Team Manager, Supervisory Internal Revenue Agent (LB&I)

       Jimeel R. Hamud
       Associate Area Counsel (LB&I Division Counsel)

       Joseph P. Dewald
       Senior Counsel (LB&I Division Counsel)

from: Peter H. Blessing, Associate Chief Counsel
(International)

subject: Application of Section 269 and Temp. Treas. Reg. § 1.245A-5T To GILTI Avoidance
Transaction

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.


       Legend

       US Parent          =      ----------------------------------------------
       US Sub             =      ----------------------------------------
       US Group           =      US consolidated group which US Parent is the
                                 common parent
       Corporation Y      =      ----------------------------------
       Company Z/         =      --------------------------------------------------------
       Corporation Z
       CTB Election       =      Election for company Z to be treated as an association
                                 Taxed as corporation for Federal income tax ------------,
                                 effective as of December 30, 2017
       Country A          =      ----------------
       Country B          =      --------------

POSTS-107587-23 2

Z Products = ------------------------products
$W = $Z less the amount of the Sub F PTEP
$X = Amount of net gain with respect to the
Intercompany Sales
$Y = Gross value of property that Corporation Z owned for
Federal income tax purposes immediately after the
CTB Election
$Z = Amount of the 2018 Dividend
Gap Period = January 1, 2018, through November 30, 2018
Gap Income = Income earned by Corporation Z from its sales of Z Products
to Corporation Y, and also potentially to certain other related
persons
Intercompany = Sales by Corporation Z of Z products to Corporation Y, and
Sales also potentially to certain other related persons, during the
Gap Period
2018 Sub F = Subpart F income earned by Corporation Z during the Gap
Income Period from sources other than the Intercompany Sales
2018
Dividend = Dividend of $Z paid by Corporation Z to Corporation Y at the
end of Corporation Z’s taxable year reported as ending
November 30, 2018
Sub F PTEP = Previously taxed E&P associated with the 2018 Sub F
Income

I. Issues

Issue 1: Whether section 269: (1) applies with respect to the deemed incorporation of
Corporation Z resulting from the CTB Election; and (2) permits the IRS to disallow the
section 898(c)(2) election of a taxable year ending November 30, 2018, made with
respect to Corporation Z or provide for the allocation of the Gap Income to Corporation
Y, in either case to achieve the effect of disallowing the claimed exclusion of
Corporation Z’s income for the first eleven months of 2018 from US Sub’s GILTI
calculation.

Issue 2: In the alternative, whether Temp. Treas. Reg. § 1.245A-5T applies with respect
to the Intercompany Sales and the 2018 Dividend.

II. Conclusions

Issue 1: Yes, based on the facts presented, section 269 applies with respect to the
deemed incorporation of Corporation Z. Pursuant to section 269, the Commissioner
may either disallow the section 898(c)(2) election made with respect to Corporation Z
for the initial taxable year to which such election purportedly applies or allocate the Gap
Income to Corporation Y, which in either case disallows the claimed exclusion of
POSTS-107587-23 3

Corporation Z income for the first eleven months of 2018 from the US Sub’s GILTI
calculation.

Issue 2: Yes, in the alternative, based on the facts presented, Temp. Treas. Reg. §
1.245A-5T applies with respect to the Intercompany Sales and the 2018 Dividend and
would disallow the application of section 954(c)(6) to an amount of the 2018 Dividend
equal to (50% * $W). Accordingly, Corporation Y’s subpart F Income would be
increased by that amount for its 2018 taxable year.

III. Statement of Facts

----------------------------------------------(“US Parent”), a domestic corporation, is a calendar-
year taxpayer for Federal income tax purposes and is the parent entity for a
multinational operating business. US Parent is also the common parent of a US
consolidated group for Federal income tax purposes (the “US Group”). One member of
the US Group is ----------------------------------------. (“US Sub”). US Parent directly or
indirectly wholly owns US Sub. US Sub owns, within the meaning of section 958(a),
100% of the shares of -----------------------------------(“Corporation Y”), a foreign
corporation organized in ---------------- (“Country A”).

Corporation Y is a calendar-year taxpayer for Federal income tax purposes. Corporation
Y is in the business of selling certain -----------------------products. Corporation Y wholly
owned ---------------------------------------------------------(“Company Z”), an entity organized
in -------------- (“Country B”) that was disregarded as an entity separate from its owner for
Federal income tax purposes before December 30, 2017. In Corporation Y’s taxable
years ending December 31, 2017, and December 31, 2018, Corporation Y purchased
certain -----------------------products (the “Z Products”) from Company Z that Corporation
Y then on-sold. When Company Z was disregarded as an entity separate from its
owner, these intercompany purchases of Z Products were disregarded for Federal
income tax purposes.1

For its taxable year ending December 31, 2017, US Sub was required to include an
amount in income under section 951(a)(1) by reason of section 965.

In March 2018, an election under Treas. Reg. § 301.7701-3(c)(1)(i) was made for
Company Z to be treated as an association taxed as a corporation for Federal income
tax purposes, effective as of December 30, 2017 (the “CTB Election,” and Company Z
at all times when treated as an association taxed as a corporation for Federal income
tax purposes, “Corporation Z”). The US Group reported the CTB Election as a tax-free

1 Corporation Y may engage in other activities, and owns other entities disregarded as separate from Corporation Y for Federal
income tax purposes. These activities and other entities are not relevant to this legal analysis and so are omitted for simplicity.
POSTS-107587-23 4

section 351 transfer by Corporation Y to Corporation Z of all of the assets and liabilities
of Company Z in exchange for stock of Corporation Z. The gross value of property that
Corporation Z owned for Federal income tax purposes immediately after the CTB
Election was $Y. As a newly formed corporation, Corporation Z had earnings and profits
(“E&P”) of $0 upon its deemed incorporation.

Corporation Z purported to elect to adopt, for its first taxable year as an association
taxed as a corporation, a taxable year ending November 30 pursuant to section
898(c)(2). Under that purported election, Corporation Z’s first taxable year as an
association taxed as a corporation ended on November 30, 2018.

In response to an IRS Form 4564, Information Document Request (“IDR”), US Parent
did not provide a business purpose for making the CTB Election and making that
election effective December 30, 2017, rather than January 1, 2018. Furthermore, the
CTB Election and subsequent section 898(c)(2) election had no effect on the taxpayer’s
operations described in this section.

During the period from January 1, 2018, through November 30, 2018 (the “Gap
Period”), Corporation Z earned income from its sales of Z Products to Corporation Y,
and also potentially to certain other related persons within the meaning of section
267(b) or 707(b) (such income, the “Gap Income,” and such sales by Corporation Z
during the Gap Period, the (“Intercompany Sales”). Corporation Z recognized net gain
of $X with respect to the Intercompany Sales, and that gain was not of any of the types
described in section 951A(c)(2)(A)(i)(I)-(V). $X is an amount greater than each of: (i)
$50 million, and (ii) 5 percent of $Y. Corporation Z earned an amount of subpart F
income during the Gap Period from sources other than the Intercompany Sales (the
“2018 Sub F income”).

The US Group takes the position that the CTB Election and section 898(c)(2) election
permitted US Sub to change which controlled foreign corporation (“CFC”) was treated
as earning the Gap Income (and the taxable year in which the Gap Income was
reported): from Corporation Y’s taxable year beginning January 1, 2018, to Corporation
Z’s first taxable year ending November 30, 2018.2

2 For simplicity, this discussion assumes that Gap Income recognized by Corporation Z following the CTB Election would have been
recognized by Corporation Y for Federal income tax purposes, absent the CTB Election, during Corporation Y’s 2018 taxable year. It
does not alter our conclusions if Corporation Y would instead have recognized all or a portion of the Gap Income in a later taxable
year or years absent the CTB Election.
POSTS-107587-23 5

And further, the US Group takes the position that the CTB Election followed by
Corporation Z’s purported adoption of a November 30 taxable year caused the Gap
Income to be excluded from US Sub’s global intangible low-taxed income (“GILTI”)
calculation under section 951A because section 951A did not apply to Corporation Z’s
first taxable year..3

At the end of its taxable year reported as ending November 30, 2018, Corporation Z
paid a dividend to Corporation Y in the amount of $Z (the “2018 Dividend”). $Z equaled
the amount of all of Corporation Z’s E&P reported for its 2018 taxable year, including a
small amount of previously taxed E&P associated with the 2018 Sub F Income (the
“Sub F PTEP”). See section 959. $Z minus the amount of the Sub F PTEP equaled $W.
$W is an amount less than $X. The US Group took the position that the portion of the
2018 Dividend in excess of the Sub F PTEP (i.e., $W of the 2018 Dividend) was
excluded from Corporation Y’s foreign personal holding company income within the
meaning of section 954(c) (“FPHCI”) pursuant to section 954(c)(6) and, therefore,
excluded from Corporation Y’s subpart F income. Corporation Z made no other
distributions from December 1, 2017, through December 31, 2018.

In 2020, Corporation Z purported to change its taxable year from a fiscal year ending
November 30 to a calendar year.

IV. Law

      A.         Section 269

Section 269(a) applies where: (1) “any person or persons acquire, directly or indirectly,
control of a corporation” (the “Acquisition Requirement”); and (2) “the principal
purpose for which such acquisition was made is evasion or avoidance of Federal
income tax by securing the benefit of a deduction, credit, or other allowance which such
person or corporation would not otherwise enjoy” (the “Principal Purpose
Requirement”).

3 For purposes of this analysis, it is assumed that an increase in tested income of Corporation Y or Company Z during the Gap
Period would increase the Federal income tax liability of the US Group in its taxable year ending December 31, 2018. Further, the
Intercompany Sales would have been disregarded for Federal income tax purposes if Company Z remained disregarded as an entity
separate from its owner. Corporation Y would have effectively recognized the Gap Income as the Z Products were on-sold to other
regarded entities.

Further, the Intercompany Sales would have been disregarded for Federal income tax purposes if Company Z remained
disregarded as an entity separate from its owner. Corporation Y would have effectively recognized the Gap Income as the Z
Products were on-sold to other regarded entities.
POSTS-107587-23 6

Where it applies, section 269 permits the Secretary to disallow such deduction, credit,
or other allowance. See section 269(a). It also permits the Secretary “to distribute,
apportion, or allocate gross income . . . between or among the corporations, or
properties, or parts thereof, involved” in a fact pattern to which section 269 applies. See
section 269(c)(2).

Section 269(a) defines “control” as “the ownership of stock possessing at least 50
percent of the total combined voting power of all classes of stock entitled to vote or at
least 50 percent of the total value of shares of all classes of stock of the corporation.”
Treas. Reg. § 1.269-1(c) provides that the contribution of assets to a newly organized
corporation in exchange for all the stock of the newly organized corporation constitutes
an acquisition of control for purposes of the Acquisition Requirement. See also Treas.
Reg. § 1.269-3(b)(2) and (3) (indicating that the formation or organization of a
corporation constitutes an acquisition of control); Borge v. Commissioner, 405 F.2d 673
(2d Cir. 1968) (affirming the application of section 269 to the incorporation of a wholly
owned corporation). Similarly, Treas. Reg. § 1.269-1(c) provides that if a parent wholly
owns a subsidiary and the subsidiary acquires control of a corporation, the parent has
indirectly acquired control of the corporation for purposes of section 269.

For the Principal Purpose Requirement,4 Treas. Reg.§ 1.269-3(a) provides that, “[i]f the
purpose to evade or avoid Federal income tax exceeds in importance any other
purpose, it is the principal purpose.” Thus, for section 269 to apply, the tax avoidance
purpose need not be the only purpose, just the relatively most important purpose.

Treas. Reg. § 1.269-1(b) provides that “the phrase ’evasion or avoidance’ is not limited
to cases involving criminal penalties, or civil penalties for fraud.” Further, the legislative
history of the predecessor to section 269 makes clear that Congress phrased the
statute broadly so that the provision would apply not just to particular tax avoidance
schemes of which Congress was aware at the time of enactment, but also to future
avoidance schemes that might be developed. As the Ways and Means Committee
report addressing the predecessor to section 269 explained:

      [T]he section has not confined itself to a description of any particular methods for
      carrying out such tax avoidance schemes, but has included within its scope these
      devices in whatever form they may appear. For similar reasons, the scope of the
      terms used in this section is to be found in the objective of the section, namely, to
      prevent the tax liability from being reduced through the distortion or perversion
      effected through tax avoidance devices.

4 All discussion in this memorandum of any entity’s purpose with respect to the events described herein is solely for purposes of
analyzing whether the Principal Purpose Requirement in section 269 is satisfied.
POSTS-107587-23 7

H.R. Rep. No. 78-871, at 49 (1943). The Tax Court has likewise concluded that section
269 “was broadly drafted to include any type of acquisition which constitutes a device by
which one corporation secures a tax benefit to which it is otherwise not entitled.”
Briarcliff Candy Corp. v. Commissioner, T.C. Memo 1987-487.

Courts and certain IRS guidance have concluded that, even where a taxpayer forms or
acquires a corporation with an eye toward obtaining a tax benefit, section 269 will not
apply to prevent “tak[ing] advantage of provisions that represent a deliberate granting of
tax benefits.” Rocco, Inc. v. Commissioner, 72 T.C. 140, 152 (1979) (holding that
section 269 did not apply to disallow deferral of tax resulting from adoption of the cash
method of accounting, in part because the tax benefits of the cash method were
“consciously granted” by Congress). In this vein, section 269 has been interpreted not to
permit the Commissioner to disallow the benefits of incorporation for purposes of
obtaining tax benefits specifically granted to Western Hemisphere trade corporations.
See Rev. Rul. 70-238, 1970-1 C.B. 61 (concluding that the special deduction allowed in
computing the taxable income of a Western Hemisphere trade corporation “was
intended primarily to grant relief . . . to American corporations trading in foreign
countries within the Western Hemisphere,” and that therefore, “the creation of a new
domestic corporation to carry on the business in the Western Hemisphere (other than in
the United States) of an existing domestic corporation is not tax avoidance” within the
meaning of section 269). Similarly, section 269 has been interpreted not to permit the
Commissioner to disallow an election of status as a subchapter S corporation. See
Modern Home Fire & Casualty Insurance Co. v. Commissioner, 54 T.C. 839, 853 (1970)
(reasoning that, had taxpayer’s sole motivation for electing to be taxed under
subchapter S been to offset the taxpayer’s income against its owner’s losses, “the
enjoyment of this benefit would be consistent with the intent of Congress . . . and thus
cannot be regarded as tax avoidance”); Rev. Rul. 76-363, 1976-2 C.B. 90 (concluding
that, even though the taxpayer’s principal purpose for the acquisition was to secure the
exemption from corporate tax provided by subchapter S, that benefit “cannot be
regarded as tax avoidance,” and therefore section 269 did not apply).

In each such circumstance, even though the formation or acquisition of a corporation
resulted in a tax benefit, because that benefit was directly aligned with Congress’s intent
in enacting the underlying provisions, section 269 was not applicable. In contrast, where
a deliberate granting of tax benefits by Congress is not manifest, section 269 may be
invoked. See, e.g., Coastal Oil Storage Co. v. Commissioner, 242 F.2d 396, 400 (4th
Cir. 1957), affirming in part and reversing in part, 25 T.C. 1304 (1956) (holding that the
predecessor of section 269 applied where multiple corporations were formed to exploit a
prior-law surtax exemption).

Treas. Reg. § 1.269-1(a) defines the term “allowance” broadly to mean “anything in the
internal revenue laws which has the effect of diminishing tax liability. The term includes,
among other things, a deduction, a credit, an adjustment, an exemption, or an
exclusion.” This regulatory language echoes language in the House Ways and Means
Committee report for the predecessor to section 269 (old section 129). See H. Rep. No.
78-871, at 49 (1943) (explaining that “‘deduction, credit or allowance’ has reference to
POSTS-107587-23 8

any provision which has the effect of diminishing the tax liability resulting from the gross
amount of any item of income or the aggregate of the gross amounts of any or all items
thereof”).

Courts have held that section 269 permits the Secretary to disallow benefits that are
expected at the time of the acquisition of control, even if those benefits come into
existence only as a result of or after the acquisition. See R.P. Collins & Co., Inc. v.
United States, 303 F.2d 142, 146 (1st Cir. 1962) (concluding that, once a tax avoidance
purpose was established, post-acquisition losses were “tarred by the same brush”);
Luke v. Commissioner, 351 F.2d 568, 572 (7th Cir. 1965) (holding that section 269 may
bar future tax benefits which are either contemplated or result from the basic tax
avoidance transaction); Borge v. Commissioner, 405 F.2d 673, 678-79 (2d Cir. 1968)
(holding that section 269 can apply to deny anticipated or prospective benefits).

To be subject to disallowance under section 269, the deduction, credit, or other
allowance must be something the taxpayer “would not otherwise enjoy” absent the
acquisition that resulted in control. See section 269(a); Commodores Point Terminal
Corp. v. Commissioner, 11 T.C. 411, 417 (1948) (explaining that, as used in the
predecessor to section 269, “[t]he word ‘otherwise’ can only be interpreted to mean that
the deduction, credit, or allowance, if it is to be disallowed, must stem from the acquired
control”).

   B.     The “Check the Box” Regulations

Treas. Reg. § 301.7701-3(c)(1)(i) provides that, in general, any “eligible entity”—that is,
any business entity not required to be classified as a corporation under Treas. Reg. §
301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8)—may elect to change its classification from
the default classification provided by Treas. Reg. § 301.7701-3(b) by filing Form 8832,
Entity Classification Election, with the service center designated on Form 8832.

Treas. Reg. § 301.7701-3(g)(1)(iv) provides that, if an entity that is disregarded as an
entity separate from its owner elects to be classified as an association taxed as a
corporation, the owner of the disregarded entity is deemed to contribute all of the assets
and liabilities of the entity to the association in exchange for stock of the association.

Treas. Reg. § 301.7701-3(g)(2)(i) provides that the tax treatment of an election under
Treas. Reg. § 301.7701-3(c)(1)(i) is determined under all relevant provisions of the
Internal Revenue Code and general principles of tax law, including the step transaction
doctrine. The preamble to the notice of proposed rulemaking proposing Treas. Reg. §
301.7701-3 further explains that “[t]his provision . . . is intended to ensure that the tax
consequences of an elective change will be identical to the consequences that would
have occurred if the taxpayer had actually taken the steps described in the . . .
regulations.” REG-105162-97, 62 Fed. Reg. 55768 (Oct. 28, 1997) (emphasis added).
See also Dover Corp. v. Commissioner, 122 T.C. 324, 348 (2004) (characterizing the
deemed liquidation pursuant to a “disregarded entity election . . . as an actual liquidation
. . . for income tax purposes.”); id. at 350 (“As stated by respondent on brief, pursuant to
POSTS-107587-23 9

section 301.7701–3(g)(1)(ii) and (2)(i), Proced. & Admin. Regs., ‘there is no difference
between a check-the-box liquidation and an actual liquidation.’”).

In accordance with this treatment, courts apply anti-abuse doctrines to the deemed
transactions pursuant to a “check the box” election in the same manner that those
doctrines apply to actual transactions. See, e.g., Tucker v. Commissioner, T.C. Memo
2017-183 (applying the economic substance doctrine to a transaction including a “check
the box” election because “[t]his manipulation of the elective regime for creating a
partnership is patently inconsistent with legislative intent”), aff'd, 766 F. App’x 132 (5th
Cir. 2019).

      C.        Section 898

Section 898(c)(1)(A) generally provides that a CFC must have the same taxable year as
its majority U.S. shareholder. Section 898(c)(2), however, allows a CFC to elect a
taxable year beginning one month before the majority U.S. shareholder’s taxable year,
providing that “[a] specified foreign corporation5 may elect, in lieu of the taxable year
under [section 898(c)(1)(A)], a taxable year beginning 1 month earlier than the majority
U.S. shareholder year.”

Section 898 was intended to address:

      improper deferral of income to U.S. shareholders of controlled foreign
      corporations. . . . Where present law allows subpart F income earned by a
      controlled foreign corporation . . . to be subjected to Federal income tax in a
      taxable year later than that in which it was earned, the value of the income
      earned is understated. Such a deferral of income generally is only available to
      certain taxpayers, resulting in preferential treatment of those taxpayers at the
      overall expense of others.

H.R. Rep. No. 101-247, at 1285 (1989). The report used an example to explain the
problem that the provision addressed:

      For example, assume a controlled foreign corporation has a taxable year ending
      on January 31, while its U.S. shareholder uses the calendar year as its taxable
      year. Any subpart F income earned by the controlled foreign corporation is
      deemed distributed to the U.S. shareholder on January 31, thus allowing the U.S.
      shareholder to defer tax on eleven months' worth of current subpart F income.

5 For purposes of section 898, the term “specified foreign corporation” includes all of the CFCs at issue here. Section 898(b)(1)(A).
POSTS-107587-23 10

Id. at 1283-84. The preamble to proposed regulations under section 898 similarly states,
“The purpose of section 898 is to eliminate the deferral of income and, therefore, the
understatement in income, by United States shareholders of certain controlled foreign
corporations. . . .” 58 Fed. Reg. 290, 291 (Jan. 5, 1993). Likewise, a subsequent IRS
Notice states, “Prior to the enactment of section 898, an SFC's shareholder(s) [i.e., U.S.
shareholders of a CFC] could elect a taxable year for the SFC that resulted in the
unwarranted deferral of U.S. tax on its subpart F . . . income. Section 898 was enacted
to minimize the opportunities for such deferral.” Notice 95-13, 1995-1 C.B. 296.

Section 898(c)(2)—which is titled “1-Month Deferral Allowed”—was added by the
Senate without further explanation in the legislative history. Section 898(c)(2) permits a
CFC to elect a taxable year “beginning 1 month earlier than the majority U.S.
shareholder year.” See Senate Print, Revenue Reconciliation Act of 1989: Explanation
of Provisions Approved by the Committee on October 3, 1989, at *102 (Oct. 12, 1989)
(“[I]n the case of a specified foreign corporation which is a controlled foreign
corporation, such corporation may elect to use as its taxable year, a taxable year that
begins one month earlier than the taxable year of the majority U.S. shareholder.”). Thus,
section 898(c)(2) permits a CFC to elect a taxable year ending one month before the
end of the majority U.S. shareholder’s taxable year, allowing one month of deferral to
the majority U.S. shareholder. See, e.g., Rev. Proc. 2007-64, 2007-42 I.R.B. 818
(referring to the taxable year elected under section 898(c)(2) as the “one-month deferral
year”).

   D.     Section 951A; Status as a CFC; Revenue Procedure

On December 22, 2017, Congress passed the tax legislation known as the Tax Cuts
and Jobs Act (the “TCJA”). The TCJA included the GILTI anti-deferral regime in new
section 951A. Section 951A generally requires that each U.S. shareholder of a CFC
include in gross income the U.S. shareholder's GILTI for the taxable year determined by
taking into account the tested income or tested loss of each of the U.S. shareholder’s
CFCs, among other attributes. Section 951A is effective for “taxable years of foreign
corporations beginning after December 31, 2017, and to taxable years of United States
shareholders in which or with which such taxable years of foreign corporations end.”
See Pub. L. No. 115-97, § 14201(d), 131 Stat. 2213 (2017).

Section 957(a) defines a CFC as a foreign corporation for which more than 50 percent
of (1) the total combined voting power of all classes of stock of such corporation entitled
to vote, or (2) the total value of the stock of such corporation, is owned (within the
meaning of section 958(a)), or is considered as owned by applying the rules of
ownership of section 958(b), by U.S. shareholders on any day during the taxable year of
such foreign corporation.

Section 951(b) defines a U.S. shareholder as any U.S. person, which includes a
domestic corporation, who owns (within the meaning of section 958(a)), or is considered
as owning by applying the rules of ownership of section 958(b), 10 percent or more of
the total combined voting power of all classes of stock entitled to vote of such foreign
POSTS-107587-23 11

corporation, or 10 percent or more of the total value of shares of all classes of stock of
such foreign corporation.

Revenue Procedure 2018-17, 2018-9 I.R.B. 384, which was issued to prevent taxpayers
from changing taxable years to avoid section 965, generally prohibits certain foreign
corporations owned, directly or indirectly, by one or more U.S. shareholders from
changing their taxable year ending December 31, 2017. Specifically, the Revenue
Procedure provides that a request to change the annual accounting period of a CFC will
not be approved if: (1) the CFC’s taxable year (determined without regard to the
requested change) ends on December 31; (2) were the change granted, the first
effective year of the CFC would begin on January 1, 2017, and would end before
December 31, 2017; and (3) the CFC has one or more U.S. shareholders that are
required to include an amount in income under section 951(a)(1) by reason of section
965.

   E.    Limitation of Section 245A Deduction and Section 954(c)(6) Exception
   Pursuant to Temp. Treas. Reg. § 1.245A-5T

As relevant here, Temp. Treas. Reg. § 1.245A-5T provides rules that limit the
applicability of section 954(c)(6) when a portion of a dividend is paid out of an
extraordinary disposition account. Section 954(c)(6) provides that certain types of
income that would otherwise constitute FPHCI are, when received or accrued from a
related person, not FPHCI to the extent attributable or properly allocable to income of
the related person which is neither subpart F income nor income treated as effectively
connected with the conduct of a trade or business in the United States.

Temp. Treas. Reg. § 1.245A-5T(c)(1) provides that the term “extraordinary disposition
amount” means the portion of a dividend received by a section 245A shareholder from
an SFC that is paid out of the extraordinary disposition account with respect to the
section 245A shareholder.

Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(A) provides that the term “extraordinary
disposition account” means, with respect to a section 245A shareholder of an SFC, an
account the balance of which is equal to the product of the “extraordinary disposition
ownership percentage” and the “extraordinary disposition E&P,” reduced (but not below
zero) by the “prior extraordinary disposition amount,” and adjusted under Temp. Treas.
Reg. § 1.245A-5T(c)(4), as applicable.

Temp. Treas. Reg. § 1.245A-5T(i)(21) provides that a “section 245A shareholder” is a
domestic corporation that is a United States shareholder with respect to an SFC that
owns directly or indirectly stock of the SFC. Under Temp. Treas. Reg. § 1.245A-
5T(i)(27), the term “United States shareholder” has the meaning provided in section
951(b).

Temp. Treas. Reg. § 1.245A-5T(i)(22) provides that the term “SFC” has the meaning
provided in section 245A(b)(1), which is any foreign corporation with respect to which
POSTS-107587-23 12

any domestic corporation is a United States shareholder with respect to such
corporation.

Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(B) provides that the term “extraordinary
disposition ownership percentage” means the percentage of stock (by value) of an SFC
that a section 245A shareholder owns directly or indirectly at the beginning of the
disqualified period or, if later, on the first day during the disqualified period on which the
SFC is a CFC.

Temp. Treas. Reg. § 1.245A-5T(c)(3)(iii) provides that the term “disqualified period”
means, with respect to an SFC that is a CFC on any day during the taxable year that
includes January 1, 2018, the period beginning on January 1, 2018, and ending as of
the close of the taxable year of the SFC, if any, that begins before January 1, 2018, and
ends after December 31, 2017.

Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(C) provides that the term ”extraordinary
disposition E&P” means an amount of E&P of an SFC equal the sum of the net gain
recognized by the SFC with respect to specified property in each extraordinary
disposition.

Temp. Treas. Reg. § 1.245A-5T(c)(3)(iv) provides that the term “specified property”
means any property if gain recognized with respect to such property during the
disqualified period is not described in section 951A(c)(2)(A)(i)(I)-(V).

Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(A) provides that, subject to a de minimis
exception, the term “extraordinary disposition” means, with respect to an SFC, any
disposition of specified property by the SFC on a date on which it was a CFC and during
the SFC's disqualified period to a related party if the disposition occurs outside of the
ordinary course of the SFC's activities.

Temp. Treas. Reg. § 1.245A-5T(i)(19) provides that the term “related party” means, with
respect to a person, another person bearing a relationship described in section 267(b)
or 707(b) to the person.

As described in Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(B), a determination as to
whether a disposition is undertaken outside of the ordinary course of an SFC's activities
is made on the basis of facts and circumstances, taking into account whether the
transaction is consistent with the SFC's past activities, including with respect to quantity
and frequency.

Temp Treas. Reg. § 1.245A-5T(c)(3)(ii)(C) provides a “per se” rule. As relevant here, it
provides that a disposition is treated as occurring outside of the ordinary course of an
SFC's activities if the disposition is undertaken with a principal purpose of generating
E&P during the disqualified period.
POSTS-107587-23 13

Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(E) provides a de minimis exception to the
concept of an extraordinary disposition if the sum of the net gain recognized by an SFC
with respect to specified property in all dispositions otherwise described in the definition
of extraordinary disposition does not exceed the lesser of $50 million or 5 percent of the
gross value of all of the SFC's property held immediately before the beginning of its
disqualified period.

Temp. Treas. Reg. 1.245A-5T(c)(3)(i)(D) provides the definition of “prior extraordinary
disposition amount.”

Temp. Treas. Reg. § 1.245A-5T(c)(2)(i) provides that for purposes of determining the
portion of a dividend received by a section 245A shareholder from an SFC that is paid
out of the extraordinary disposition account with respect to the section 245A
shareholder, the dividend is first considered paid out of non-extraordinary disposition
E&P with respect to the section 245A shareholder, and the dividend is next considered
paid out of the extraordinary disposition account to the extent of the section 245A
shareholder's extraordinary disposition account balance.

Temp. Treas. Reg. § 1.245A-5T(d)(1) provides that if an upper-tier CFC receives a
dividend from a lower-tier CFC, the dividend is eligible for the exception to FPHCI under
section 954(c)(6) only to the extent that the amount that would be eligible for the section
954(c)(6) exception (determined without regard to Temp. Treas. Reg. § 1.245A-5T(d))
exceeds the “disqualified amount.” The “disqualified amount” equals: 50 percent
multiplied by of the quotient of: (i) the sum of each section 245A shareholder's “tiered
extraordinary disposition amount” with respect to the lower-tier CFC, and (ii) the
percentage (expressed as a decimal) of stock of the upper-tier CFC (by value) owned,
in the aggregate, by U.S. tax residents that include in gross income their pro rata share
of the upper-tier CFC's subpart F income under section 951(a) on the last day of the
upper-tier CFC's taxable year.

Temp. Treas. Reg. § 1.245A-5T(i)(28) provides that the term “upper-tier CFC” means a
CFC that owns, within the meaning of section 958(a)(2), stock in another CFC.

Temp. Treas. Reg. § 1.245A-5T(i)(13) provides that the term “lower-tier CFC” means a
CFC the stock of which is owned, within the meaning of section 958(a)(2), in whole or in
part, by another CFC.

Temp. Treas. Reg. § 1.245A-5T(d)(2)(i) provides that the term “tiered extraordinary
disposition amount” means, with respect to a dividend received by an upper-tier CFC
from a lower-tier CFC, the portion of the dividend that would be an extraordinary
disposition amount if the section 245A shareholder received as a dividend its pro rata
share of the dividend from the lower-tier CFC.

Under Temp. Treas. Reg. § 1.245A-5T(k) and (l), Temp. Treas. Reg. § 1.245A-5T
applies to distributions occurring after December 31, 2017, and before June 14, 2022.
See also Treas. Reg. § 1.245A-5(k)(1); Temp. Treas. Reg. § 1.954(c)(6)-1T.
POSTS-107587-23 14

Temp. Treas. Reg. § 1.245A-5T(h) provides that the Commissioner may make
appropriate adjustments to any amounts determined under Temp. Treas. Reg. §
1.245A-5T if a transaction is engaged in with a principal purpose of avoiding the
purposes of Temp. Treas. Reg. § 1.245A-5T.

The preamble to the Treasury Decision promulgating Temp. Treas. Reg. § 1.245A-5T
states:

  I]n certain atypical circumstances, a literal application of section 245A (read in
  isolation) could result in the section 245A deduction applying to earnings and
  profits of a CFC attributable to the types of income addressed by the subpart F or
  GILTI regimes—the specific types of earnings that Congress described as
  presenting base erosion concerns. These circumstances arise when a CFC’s
  fiscal year results in a mismatch between the effective date for GILTI and the
  final measurement date under section 965 or involve unanticipated interactions
  between section 245A and the rules for allocating subpart F income and GILTI
  when there is a change in ownership of a CFC. Moreover, the Treasury
  Department and the IRS are aware that some taxpayers are undertaking
  transactions with a view to eliminating current or future taxation of all foreign
  earnings of a CFC, including earnings attributable to base erosion-type income,
  by structuring into these situations. These transactions have the potential to
  substantially undermine the anti-base erosion framework for post-2017 foreign
  earnings.

T.D. 9865 (June 18, 2019) (emphasis added).

The preamble goes on to provide:

  The Treasury Department and the IRS are aware that during the disqualified
  period, CFCs may have engaged in certain transactions with related parties with
  a goal of creating stepped-up basis for the buyer, while generating earnings and
  profits for the seller CFC that are not subject to any current tax and may be
  eligible for the section 245A deduction. Because the transactions generally are
  structured to avoid creating subpart F income and occur during the disqualified
  period, the income from these transactions generally is not subject to U.S. tax
  under the transition tax under section 965, the subpart F regime, or the GILTI
  regime.

Id. The preamble further states:

  Similar to section 245A, the exemption from subpart F income under section
  954(c)(6) can be used in the context of certain transactions to avoid taxation of
  income that would otherwise be taxed under the subpart F or GILTI regimes.
  Such transactions are not dependent upon the availability of section 245A at the
  level of the United States shareholder. This type of concern was first generally
  described in Notice 2007-9, but has been exacerbated by the enactment of

POSTS-107587-23 15

   section 951A as part of the Act because (1) dividends qualifying for section
   954(c)(6) generally are not treated as tested income pursuant to section
   951A(c)(2)(A)(i)(IV); and (2) the same structured transactions used to avoid
   subpart F inclusions can also be used to avoid GILTI inclusions. Given the
   authority in section 954(c)(6)(A) for the Treasury Department and the IRS to
   issue regulations preventing the abuse of section 954(c)(6), the temporary
   regulations under section 954(c)(6) are designed to ensure that the section
   954(c)(6) exception is not used to erode the U.S. tax base through certain
   transactions preventing the taxation of income that would otherwise be taxed
   under the subpart F or GILTI regimes. Consistent with the temporary regulations
   issued under section 245A, these rules are targeted to ensure that the section
   954(c)(6) exception is not available for this limited category of earnings.

Id. (emphasis added).

V. Analysis

   A.     Section 269

If a transaction satisfies both the Acquisition Requirement and the Principal Purpose
Requirement, then the Secretary may disallow a deduction, credit, or other allowance
obtained as a result of the acquisition of control. This analysis first applies the
Acquisition Requirement, and then the Principal Purpose Requirement, and then
considers how section 269 affects US Sub’s GILTI calculation.

          1.     Acquisition Requirement

Before the CTB Election Company Z was an eligible entity that was disregarded as an
entity separate from its owner. Company Z was eligible to make the CTB Election.
Under Treas. Reg. § 301.7701-3(g)(1)(iv), as a result of the CTB Election, Corporation
Y was deemed to contribute all of the assets and liabilities of Company Z to Corporation
Z in exchange for stock of Corporation Z. Treas. Reg. § 301.7701-3(g)(2)(i) provides
that the tax treatment of an election under Treas. Reg. § 301.7701 3(c)(1)(i) is
determined under all relevant provisions of the Internal Revenue Code and general
principles of tax law.

Corporation Y’s deemed contribution of assets and liabilities to the newly regarded
Corporation Z constitutes the organization of a corporation, and as such constitutes the
acquisition of control of a corporation under section 269(a)(1), as set out in Treas. Reg.
§ 1.269-1(c). US Sub indirectly acquires 100 percent of the stock of Corporation Z for
purposes of section 269 because US Sub owns 100 percent of the stock of Corporation
Y. See Treas. Reg. 1.269-1(c). Therefore, US Sub meets the Acquisition Requirement
with respect to the CTB Election.
POSTS-107587-23 16

          2.     Principal Purpose Requirement

The Principal Purpose Requirement, as defined above, has four elements, each of
which is discussed below: (1) whether US Group secured the benefit of a “deduction,
credit, or other allowance”; (2) whether the benefit is one which the taxpayer “would not
otherwise enjoy” absent the acquisition; (3) whether the acquisition of control resulted in
“evasion or avoidance of Federal income tax”; and (4) whether the principal purpose for
the acquisition of control was evasion or avoidance of Federal income tax. As explained
below, the attempt to exclude the Gap Income from US Sub’s GILTI computation via
Corporation Z’s election under section 898(c)(2) satisfies all of these elements.

                        a)      Allowance

Corporation Z's ability to elect a new taxable year under section 898(c)(2) gave rise to
the exclusion of Gap Income and therefore, for the initial year, is an "allowance."

Focusing first on the statute, the term “other allowance” follows the specified items
“deduction” and “credit.” Section 269. Each of a deduction and a credit has the effect of
reducing tax liability. This commonality informs the meaning of “other allowance.”
Accordingly, Treas. Reg. § 1.269-1(a) defines an allowance as “anything in the internal
revenue laws that has the effect of diminishing tax liability.” The regulation goes on to
provide that an allowance “includes, among other things, a deduction, a credit, an
adjustment, an exemption, or an exclusion.” Deductions and credits are defined by the
statute as types of allowance, and adjustments, exemptions, and exclusions are
described in Treas. Reg. § 1.269-1(a) as examples of other items that are allowances.
This list is non-exclusive by its terms, reflecting that other rules in the Federal income
tax law can be allowances provided they share the tax-reducing effect of deductions,
credits, adjustments, exemptions, and exclusions.

Corporation Z’s section 898(c)(2) election for its fiscal year, ended November 30, 2018,
resulted in the exclusion of the Gap Income from US Sub’s GILTI tax base. Thus, it is
an “allowance” within the meaning of section 269(a) and Treas. Reg. § 1.269-1(a). Were
it not for the section 898(c)(2) election, Corporation Z would have been a calendar year
taxpayer. See section 898(a)(1). Had Corporation Z been a calendar year taxpayer, US
Sub would have been required to include the Gap Income in the calculation of its GILTI
inclusion, increasing its tax liability relative to the liability it would have had if the Gap
Income were not required to be included. Corporation Z’s section 898(c)(2) election thus
caused the Gap Income to be permanently excluded from US Sub’s GILTI calculation
(and the US Group’s income more generally), thereby permanently reducing the US
Group’s U.S. Federal income tax liability. Although no authority has specifically held that
a section 898(c)(2) election can be an allowance within the meaning of section 269(a),
the provision as applied here is within the scope of the types of provisions that
Congress envisioned section 269 would address. As the Tax Court described, section
269 “was broadly drafted to include any type of acquisition which constitutes a device by
which one corporation secures a tax benefit to which it is otherwise not entitled.”
Briarcliff Candy Corp. v. Commissioner, T.C. Memo 1987-487.
POSTS-107587-23 17

The formation of a new corporation (for Federal income tax purposes) to exclude
income using a section 898(c)(2) election is similar to the formation of a new corporation
to exclude income under the former surtax exemption, to which section 269 was
applied. Congress and the courts concluded the $25,000 corporate surtax exemption
granted by prior-law section 15(b) to be an “allowance” soon after the enactment of
section 129 (the predecessor to section 269). A 1949 Senate Finance Committee report
noted that section 129 empowered the Secretary to address abuse of the surtax
exemption:

  It is not intended, however, that the exemption of the first $25,000 of a
  corporation's surtax net income from the surtax shall be abused by the splitting
  up, directly or indirectly, of a business enterprise into two or more corporations or
  the forming of two or more corporations to carry on an integrated business
  enterprise. It is believed that sections 45 and 129 will prevent this form of tax
  avoidance.

S.Rep. No. 81-2375, at 70 (1950). The surtax exemption was a per-corporation benefit;
absent the application of an anti-abuse rule like section 269, an enterprise with enough
surtax net income to soak-up a second exemption could split its business across
multiple newly formed corporations and multiply the exemption amount. When a
taxpayer attempted precisely this abuse and the IRS denied a second surtax exemption,
the Tax Court held that section 129 did not apply on other grounds, but did not question
that the exemption was an “allowance.” On appeal, the Fourth Circuit held that section
129 did apply, which necessarily entailed holding that the exemption was an allowance.
See Coastal Oil Storage Co. v. Commissioner, 242 F.2d 396, 400 (4th Cir. 1957),
affirming in part and reversing in part, 25 T.C. 1304 (1956). Thus, Congress and the
courts viewed the surtax exemption as an allowance to which section 129 could apply.

Under Taxpayer’s position, the exclusion from GILTI during the Gap Period provided by
a section 898(c)(2) election would be available to calendar year U.S. shareholders of a
calendar year CFC that owned a disregarded entity eligible to elect to be treated under
Treas. Reg. § 301.7701-3(c)(1)(i) as an association taxed as a corporation for Federal
income tax purposes. Taxpayers that had this fact pattern and made the “check the box”
election to treat the disregarded entity as an association could argue that the elective
incorporation for tax purposes caused the otherwise unavailable section 898(c)(2)
election to spring into existence, giving them the option to elect a November 30 taxable
year, just as a new surtax exemption amount sprang into existence with the creation of
a new corporation under prior-law section 15(b). In both cases, taxpayers would be
forming a new corporation to “split[] up” the operation of “an integrated business
enterprise” and obtain otherwise unavailable tax benefits. S.Rep. No. 81-2375, at 70
(1950). If allowed, this section 898(c)(2) election could have the effect of excluding
eleven months of tested income from the U.S. shareholder’s GILTI calculation, just as
the surtax exemption would have shielded a fixed amount of surtax net income from
taxation.
POSTS-107587-23 18

In sum, the section 898(c)(2) election, whereby Corporation Z purported to adopt a
taxable year ending November 30, 2018, which resulted in a claimed exclusion of Gap
Income from the US Sub and US Group’s GILTI tax base, is an allowance within the
meaning of section 269(a).

                 b)     “Would not otherwise enjoy”

US Sub would not have been able to make a section 898(c)(2) election with respect to
Corporation Z and create Gap Income excluded from GILTI if it did not make the CTB
Election with respect to Corporation Z. In other words, the deemed acquisition that
occurred pursuant to the CTB election permitted US Sub to secure the benefit of an
allowance that US Sub would not otherwise have enjoyed. Absent the CTB Election, the
activities of Corporation Z would have been treated for Federal income tax purposes as
undertaken by Corporation Y because Company Z was disregarded as an entity
separate from its owner. Corporation Y was at all relevant times a CFC with a calendar
taxable year for Federal income tax purposes, meaning its taxable year ends on
December 31. US Sub, which is Corporation Y’s sole U.S. shareholder, was required to
include an amount in income under section 951(a)(1) by reason of section 965. Based
on these facts, Revenue Procedure 2018-17 prevented Corporation Y itself from
adopting a taxable year ending before December 31, 2017. As a result, the first taxable
year of Corporation Y to which section 951A was applicable was its taxable year
beginning January 1, 2018. Given that all of the Gap Income was earned on or after
January 1, 2018, the Gap Income would have been included in US Sub’s calculation of
its GILTI inclusion absent the CTB Election.

As a result of the CTB Election, Corporation Z was treated as a newly formed
corporation and was not prohibited by Revenue Procedure 2018-17 from electing under
section 898(c)(2) a taxable year ending November 30, 2018, for its first year of
existence. By making the section 898(c)(2) election for Corporation Z, US Sub obtained
the benefit of excluding the Gap Income from its calculation of its GILTI inclusion
because section 951A did not apply to income earned by Corporation Z during the Gap
Period. Section 951A did not apply with respect to Corporation Z until its taxable year
beginning on December 1, 2018, which is eleven months later than the beginning of the
first taxable year of Corporation Y to which section 951A applied. In short, as a result of
the CTB Election (i.e., the acquisition of control of Corporation Z within the meaning of
section 269(a)(1)), US Sub obtained the benefit of the section 898(c)(2) election for
Corporation Z (with the resulting exclusion of Gap Income from the GILTI tax base of
US Sub and the US Group), which it would not have otherwise enjoyed absent the CTB
Election.

                 c)     Evasion or Avoidance of Federal Income Tax

The exclusion from US Sub’s GILTI calculation of the Gap Income here constitutes the
evasion or avoidance of Federal income tax within the meaning of section 269.
POSTS-107587-23 19

The regulations provide that the term “evasion or avoidance” is “not limited to cases
involving criminal penalties, or civil penalties for fraud.” Treas. Reg. § 1.269-1(b). And
as described above in Part IV.A of this memorandum, the legislative history to section
269 also describes the scope of the “evasion or avoidance” addressed by the statute as
encompassing anything that results in the reduction of tax liability “through the distortion
or perversion effected through tax avoidance devices.” H.R. Rep. No. 78-871, at 49
(1943). Here, the section 898(c)(2) election was used as a device to reduce US Sub’s
taxable income by excluding the Gap Income from US Sub’s GILTI calculation. Indeed,
it had no meaningful effect on the US Group other than to exclude the Gap Income and
thereby reduce the US Group’s tax liability. Corporation Z adopted a calendar year soon
after the device had served its purpose. The regulations and legislative history confirm
that, through its use of the broad term “evasion or avoidance,” section 269
encompasses abuses like the scheme at issue here.

Furthermore, the exclusion from GILTI provided by a section 898(c)(2) election made in
connection with the retroactive CTB Election during the Gap Period does not reflect the
type of “deliberate granting of tax benefits” that courts have held may not be the subject
of adjustment under section 269. See Rocco, Inc. v. Commissioner, 72 T.C. 140, 152
(1979). The statutory structure of section 898, the provision’s legislative history, and
related IRS guidance demonstrate that the provision was intended to curb tax abuse
and level the playing field across similarly situated taxpayers by generally preventing
deferral of Subpart F income. These same sources demonstrate that section 898(c)(2)
was intended to allow only limited, one-month deferral of Subpart F income from a CFC.
But Corporation Z’s use of the section 898(c)(2) election on these facts does the
opposite: it creates not just deferral (which is what section 898 was enacted to combat)
but permanent exclusion of the Gap Income from US Group’s GILTI. Indeed, the
legislative history of section 898 explained that the provision was intended to prevent as
much as eleven months of deferral of tax on CFC income. US Parent has used that
same provision to purport to achieve permanent exclusion of eleven months of tested
income. That result is a clear abuse of the provision and does not reflect a deliberate
grant of tax benefits by Congress, but rather the type of device that section 269 was
enacted to address. See H.R. Rep. No. 78-871, at 49 (1943) (explaining that section
129, the predecessor to section 269, “has not confined itself to a description of any
particular methods for carrying out such tax avoidance schemes, but has included within
its scope these devices in whatever form they may appear”).

                 d)     Principal Purpose

The only remaining question is whether the evasion or avoidance of Federal income tax
provided by the allowance was the principal purpose for which the acquisition was
made.

As described above, the acquisition of control in this case resulted from the CTB
Election with respect to Company Z. Treas. Reg. § 301.7701-3(g)(2)(i) provides that the
tax treatment of an election under Treas. Reg. § 301.7701-3(c)(1)(i) is determined under
all relevant provisions of the Internal Revenue Code and general principles of tax law,
POSTS-107587-23 20

including the step transaction doctrine. Therefore, just as section 269 may apply to the
actual formation of a new corporation undertaken with the relevant principal purpose, so
too can it apply to the deemed formation of a new corporation pursuant to a “check the
box” election, if all other statutory requirements are satisfied.

US Parent’s sole purpose for acquiring Corporation Z was the evasion or avoidance of
Federal income tax. When asked in an IDR, US Parent did not provide a business
purpose for making the CTB Election and making that election effective December 30,
2017, rather than January 1, 2018. Furthermore, the CTB Election and subsequent
section 898(c)(2) election had no effect on the taxpayer’s business operations described
herein. Rather the CTB Election and subsequent section 898(c)(2) election served no
purpose other than to exclude permanently eleven months of tested income from US
Sub’s GILTI calculation. As such, tax avoidance or evasion was the principal purpose of
the transaction. Moreover, the fact that Corporation Z’s taxable year was changed to a
calendar year in 2020 reinforces the artificial nature of, and aggressive tax planning
involved with, the original transaction.

In sum, these facts satisfy both the Acquisition Requirement and the Principal Purpose
Requirement. Section 269(a) thus gives the authority to disallow the exclusion from
GILTI provided by the section 898(c)(2) election.

         3.     Effect of Applying Section 269

Section 269 permits the Secretary to disallow the section 898(c)(2) election made with
respect to Corporation Z or to allocate to Corporation Y the Gap Income reported as
earned by Corporation Z. See section 269(a) and (c)(2). Either of these approaches
disallows the exclusion of the Gap Income from the US Sub’s GILTI calculation
purportedly effected by Corporation Z’s section 898(c)(2) election and, thus, properly
reflects the Gap Income in US Sub’s GILTI calculation.

  B.     Limitation of Section 245A Deduction and Section 954(c)(6) Exception

Pursuant to Temp. Treas. Reg. § 1.245A-5T

In the alternative, if section 269 were not applied in the manner described in Part V.A of
this memorandum, Temp Treas. Reg. § 1.245A-5T applies to the transactions described
above to increase Corporation Y’s subpart F income by (50% * $W).

         1.    US Sub’s Extraordinary Disposition Account with Respect to
         Corporation Z

US Sub’s “extraordinary disposition account” with respect to Corporation Z, before
taking into account the 2018 Dividend, was $X.

The term “extraordinary disposition account” means, with respect to a section 245A
shareholder of an SFC, an account the balance of which is equal to the product of the
“extraordinary disposition ownership percentage” and the “extraordinary disposition
POSTS-107587-23 21

E&P,” reduced (but not below zero) by the “prior extraordinary disposition amount,” and
adjusted under Temp. Treas. Reg. § 1.245A-5T(c)(4), as applicable. Temp. Treas. Reg.
§ 1.245A-5T(c)(3)(i)(A).

During the Gap Period, US Sub was a United States shareholder with respect to
Corporation Z within the meaning of section 951(b) because US Sub indirectly wholly
owned Corporation Z. Temp. Treas. Reg. § 1.245A-5T(i)(27). Accordingly, Corporation
Z was an SFC, and US Sub was a section 245A shareholder with respect to
Corporation Z. Temp. Treas. Reg. § 1.245A-5T(i)(21) and (22).

US Sub's “extraordinary disposition ownership percentage” with respect to Corporation
Z was 100%. Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(B). US Sub indirectly wholly
owned Corporation Z by value on January 1, 2018, which was the beginning of the
disqualified period, and Corporation Z was a CFC as of that date. See Temp. Treas.
Reg. § 1.245A-5T(c)(3)(iii).

Corporation Z’s extraordinary disposition E&P was $X. Corporation Z’s extraordinary
disposition E&P equals an amount of Corporation Z’s E&P equal to the sum of the net
gain recognized by Corporation Z with respect to specified property in each
extraordinary disposition. Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(C). The Z Products
that Corporation Z sold during the disqualified period (i.e., the Gap Period) in the
Intercompany Sales constituted specified property because Corporation Z recognized
net gain of $X with respect to the Intercompany Sales during the Gap Period, and that
gain is not described in section 951A(c)(2)(A)(i)(I)-(V). Temp. Treas. Reg. § 1.245A-
5T(c)(3)(iv).

Each Intercompany Sale constituted an extraordinary disposition. An “extraordinary
disposition” means, with respect to Corporation Z, any disposition of specified property
by Corporation Z on a date on which it was a CFC and during Corporation Z’s
disqualified period to a related party if the disposition occurs outside of the ordinary
course of Corporation Z’s activities. Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(A). Further,
Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(B) provides that a determination as to whether
a disposition is undertaken outside of the ordinary course of an SFC's activities is made
on the basis of the facts and circumstances, taking into account whether the transaction
is consistent with the SFC's past activities, including with respect to quantity and
frequency. However, a disposition is “per se” treated as occurring outside of the
ordinary course of an SFC’s activities if the disposition is undertaken with a principal
purpose of generating E&P during the disqualified period. Temp Treas. Reg. § 1.245A-
5T(c)(3)(ii)(C).

Each Intercompany Sale was a disposition of specified property (the Z Products) to a
related party (Corporation Y or other related parties) during the disqualified period (the
Gap Period). The Intercompany Sales occurred outside of the ordinary course of
POSTS-107587-23 22

Corporation Z’s activities within the meaning of Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)
because they are subject to the relevant “per se” rule.6 US Parent engaged in tax
structuring to create the Intercompany Sales as regarded dispositions to attempt to
cause the Gap Income to be excluded from US Sub’s GILTI under section 951A. In
other words, the intent was to newly create the Intercompany Sales as regarded
dispositions that generated E&P (i.e., the Gap Income) during the disqualified period.
Temp Treas. Reg. § 1.245A-5T(c)(3)(ii)(C).7 Accordingly, the Intercompany Sales were
undertaken with a principal purpose of generating E&P during the disqualified period
within the meaning of this “per se” rule.

Further, the Intercompany Sales do not qualify for the de minimis exception of Temp.
Treas. Reg. § 1.245A-5T(c)(3)(ii)(E). The sum of the net gain recognized by Corporation
Z with respect to the Intercompany Sales ($X) exceeded the lesser of $50 million or 5
percent of $Y (the gross value of all of Corporation Z’s property held immediately before
the beginning of its disqualified period).

US Sub’s prior extraordinary disposition amount with respect to Corporation Z was $0
because no dividend was received from Corporation Z before the 2018 Dividend. See
Temp. Treas. Reg. § 1.245A-5T(c)(3)(i)(D)(1).8

Accordingly, US Sub’s “extraordinary disposition account” with respect to Corporation Z,
before taking into account the 2018 Dividend, is calculated as follows under Temp.
Treas. Reg. § 1.245A-5T(c)(3)(i)(A):

(“extraordinary disposition ownership percentage” * “extraordinary disposition E&P”) -
“prior extraordinary disposition amount” = (100% * $X) - $0 = $X

6 Because the “per se” rule applies, it is unnecessary to perform the facts-and-circumstances analysis under Temp. Treas. Reg. §
1.245A-5T(c)(3)(ii)(B) to determine whether the Intercompany Sales were outside Corporation Z’s ordinary course of business,
which may require additional factual background. However, Corporation Z was newly formed for Federal income tax purposes
pursuant to the CTB Election immediately before the Gap Period. Accordingly, Corporation Z had no relevant “past activities” before
the Gap Period. Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii)(B).

7 A transaction is only a “disposition” within the meaning of Temp. Treas. Reg. § 1.245A-5T(c)(3)(ii) if the transaction is regarded for
Federal income tax purposes. See, e.g., Treas. Reg. § 301.7701-2(a) (“if the entity is disregarded, its activities are treated in the
same manner as a sole proprietorship, branch, or division of the owner”).

8 Further, no relevant transfer of Corporation Z’s stock occurred that would implicate the successor rules of Temp. Treas. Reg. §
1.245A-5T(c)(4).
POSTS-107587-23 23

          2.    Application of Temp. Treas. Reg. § 1.245A-5T(d)(1) to the 2018
          Dividend

Under Temp. Treas. Reg. § 1.245A-5T(d)(1), although US Sub claimed that section
954(c)(6) applied to $W of the 2018 Dividend, only (50% * $W) of that portion of the
2018 Dividend qualified for section 954(c)(6). The remainder of that portion of the 2018
Dividend—also equal to (50% * $W)—was subpart F income to Corporation Y for its
2018 taxable year.

Temp. Treas. Reg. § 1.245A-5T(d)(1) provides that if an upper-tier CFC receives a
dividend from a lower-tier CFC, the dividend is eligible for the exception to FPHCI under
section 954(c)(6) only to the extent that the amount that would be eligible for the section
954(c)(6) exception (determined without regard to Temp. Treas. Reg. § 1.245A-
5T(d)(1)) exceeds the “disqualified amount.” The “disqualified amount” equals 50
percent multiplied by the quotient of: (1) the sum of each section 245A shareholder’s
tiered extraordinary disposition amount with respect to the lower-tier CFC, and (2) the
percentage (expressed as a decimal) of stock of the upper-tier CFC (by value) owned,
in the aggregate, by U.S. tax residents that include in gross income their pro rata share
of the upper-tier CFC’s subpart F income under section 951(a) on the last day of the
upper-tier CFC’s taxable year.

Corporation Y was an upper-tier CFC because it was a CFC that wholly owned
Corporation Z, another CFC. Temp. Treas. Reg. § 1.245A-5T(i)(28). Corporation Z was
a lower-tier CFC because it was a CFC the stock of which was wholly owned by
Corporation Y, another CFC. Temp. Treas. Reg. § 1.245A-5T(i)(13).

The “tiered extraordinary disposition amount” is, with respect to the 2018 Dividend
received by Corporation Y from Corporation Z, the portion of the 2018 Dividend that
would be an “extraordinary disposition amount” if US Sub received as a dividend its pro
rata share of the 2018 Dividend from Corporation Z. Temp. Treas. Reg. § 1.245A-
5T(d)(2)(i).

In this hypothetical, the “extraordinary disposition amount” would be $W. Temp. Treas.
Reg. § 1.245A-5T(c)(1). Specifically, the “extraordinary disposition amount” in this
hypothetical would be the portion of the 2018 Dividend received by US Sub from
Corporation Z that is paid out of the extraordinary disposition account. Id. As described
above, US Sub’s extraordinary disposition account with respect to Corporation Z, before
taking into account the 2018 Dividend, was $X. For purposes of determining the portion
of the 2018 Dividend hypothetically received by US Sub from Corporation Z that is paid
out of this extraordinary disposition account, the 2018 Dividend is first considered paid
out of non-extraordinary disposition E&P and then next paid out of the extraordinary
disposition account (to the extent thereof). Temp. Treas. Reg. § 1.245A-5T(c)(2)(i).
Here, Corporation Z’s only non-extraordinary disposition E&P was the Sub F PTEP. The
amount of the 2018 Dividend ($Z) minus the amount of the Sub F PTEP equaled $W.
POSTS-107587-23 24

And $W is an amount less than $X.9 Accordingly, under Temp. Treas. Reg. § 1.245A-
5T(c)(2)(i), that remaining amount of the 2018 Dividend ($W) would be treated as made
out of US Sub’s extraordinary disposition account ($X). Thus, $W would be the
extraordinary disposition amount in this hypothetical, and so was the tiered
extraordinary disposition amount with respect to the 2018 Dividend.

Under Temp. Treas. Reg. § 1.245A-5T(d)(1), the amount of the 2018 Dividend eligible
for section 954(c)(6) equals:

(amount of the 2018 Dividend otherwise eligible for section 954(c)(6) without regard to
Temp. Treas. Reg. § 1.245A-5T(d)(1)) - (50% * ((US Sub’s “tiered extraordinary
disposition amount” with respect to Corporation Z) / (the percentage, expressed as a
decimal, of stock of Corporation Y owned by US Sub))) =

($W) - (50% * ($W/1.0)) = $W - (50% * $W) = 50% * $W.

Thus, only (50% * $W) of the non-Sub F PTEP portion of the 2018 Dividend was
excluded from Corporation Y’s FPHCI pursuant to section 954(c)(6) and, therefore,
excluded from Corporation Y’s subpart F income. The remainder of that portion of the
2018 Dividend—also equal to (50% * $W)—was subpart F income to Corporation Y for
its 2018 taxable year.

               3.    Application of Temp. Treas. Reg. § 1.245A-5T(h) to the 2018
               Dividend

To the extent Temp. Treas. Reg. § 1.245A-5T(d)(1) were not applied to the 2018
Dividend as described above, the anti-abuse rule in Temp. Treas. Reg. § 1.245A-5T(h)
would properly be applied to reach the same result.

Temp. Treas. Reg. § 1.245A-5T(h) provides that the Commissioner may make
appropriate adjustments to any amounts determined under Temp. Treas. Reg. §
1.245A-5T if a transaction is engaged in with a principal purpose of avoiding the
purposes of Temp. Treas. Reg. § 1.245A-5T.

The transactions described above with respect to Corporation Y and Corporation Z were
undertaken to avoid the purposes of Temp. Treas. Reg. § 1.245A-5T. Specifically, the
CTB Election and the section 898(c)(2) election were undertaken in an attempt to
permanently exclude the Gap Income from US Sub’s GILTI calculation (and the US
Group’s income more generally) by engineering “a mismatch between the effective date
for GILTI and the final measurement date under section 965” with Corporation Z’s

9 The excess of $X minus $W would remain in US Sub’s extraordinary disposition account with respect to Corporation Z.
POSTS-107587-23 25

purported fiscal year. T.D. 9865 (June 18, 2019) (emphasis added). In other words, the
intent was to cause the Intercompany Sales to be regarded transactions that generated
E&P (i.e., the Gap income) during the disqualified period. Id. (“[D]uring the disqualified
period, CFCs may have engaged in certain transactions with related parties with a goal
of creating stepped-up basis for the buyer, while generating earnings and profits for the
seller CFC that are not subject to any current tax and may be eligible for the section
245A deduction.”). Thus, the purposes of Temp. Treas. Reg. § 1.245A-5T included
preventing the type of Gap Period planning that US Parent undertook. See also id.
(“[S]ome taxpayers are undertaking transactions with a view to eliminating current or
future taxation of all foreign earnings of a CFC, including earnings attributable to base
erosion-type income, by structuring into these situations.”).

Further, the 2018 Dividend paid in tandem with these transactions used “section
954(c)(6) . . . to avoid taxation of income that would otherwise be taxed under the
subpart F or GILTI regimes.” Id. Temp. Treas. Reg. § 1.245A-5T and related regulations
were “designed to ensure that the section 954(c)(6) exception is not used to erode the
U.S. tax base through certain transactions preventing the taxation of income that would
otherwise be taxed under the subpart F or GILTI regimes.” Id. In other words, the tax-
free treatment of the non-Sub F PTEP portion of the 2018 Dividend—specifically paid
out of E&P attributable to the GILTI avoidance transactions—was precisely the type of
tax avoidance that Temp. Treas. Reg. § 1.245A-5T was intended to prevent.

Accordingly, the Commissioner may make appropriate adjustments with respect to
these transactions because they were engaged in with a principal purpose of avoiding
the purposes of Temp. Treas. Reg. § 1.245A-5T. In this context, appropriate
adjustments would include adjustments that reach the same result regarding the
treatment of the 2018 Dividend as under Treas. Reg. § 1.245A-5T(d)(1) (i.e., increasing
Corporation Y’s subpart F income for its 2018 taxable year by (50% * $W) with respect
to the 2018 Dividend). That treatment appropriately addresses the attempted GILTI
avoidance associated with these transactions, achieved by tax planning to cause the
Intercompany Sales to be regarded transactions that generated E&P (i.e., the Gap
income) during the disqualified period.
```