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Can I extend filing of my US 1040 return beyond October 15? And how about form 3520?

Weekly Q&A

US citizens living outside the US (i.e. abroad) have an automatic 2-month extension of time to file the individual income tax return from April 15th to June 15th.   If a further extension is needed, Form 4868 must be filed on or before June 15th, to receive an automatic extension of time to file their US individual income tax return to October 15th.

Still not enough time to properly file your US individual tax return and related schedules? Treasury Regulation 1.6081-1(a) authorizes the Commissioner to grant an extension to US citizens abroad to December 15th.  A letter explaining why an additional 2-month extension is required must be sent to the Internal Revenue Service (“IRS”) on or before October 15th.

The authorization to grant an addition 2-month extension of time to file to December 15th applies to any return, declaration, statement or other document which relates to any tax imposed by subtitle A or F of the Internal Revenue Code (“IRC”).  For example, Form 3520 “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” may also be extended to December 15th as the return filing obligation is imposed by subtitle A, subchapter J of the IRC.  When writing the letter be sure to include the tax return, information return, statement or other document, including the tax year for which the extension is requested.  You must also include a reason for needing additional time to file the required tax and information returns.

The above refers to the extension of time to file a return, and not the extension of time to pay.  All tax payments must be made by April 15th to avoid interest and late payment penalty charges.

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Can we eliminate GILTI tax by making the 962 Election?

Weekly Q&A

Pursuant to Barry v Commissioner, the courts concluded that dividends paid out of a CFC (following a 962 election) in a country in which has no treaty with a US, is a dividend but taxed at ordinary rates. It has always been my understanding that if a CFC that is otherwise not a PFIC and is situated in country who is party to US treaty, such as Canada, distributes a dividend following a 962 election, would be eligible for qualified dividend rates. In Barry V Commissioner, the courts concluded that the dividend was not considered as paid out of a notional domestic corporation (as the petitioner contends) and neither is considered as paid out of qualified foreign corporation (i.e. non-PFIC in a country that has a treaty with the US) and is therefore subject to ordinary rates.

GILTI will have its own basket with or without a 962 election. However, the proposed regulations do not contain rules on the foreign tax credit as it relates to GILTI, much less the appropriate basket when a distribution is paid out of the notional corporation (under 962). Such guidance is still pending. Neither is it clear that assuming the 962 election is not made and a dividend is distributed concurrently (assuming all income is active business income) in the same year as the GILTI inclusion, that the Canadian tax would also fall into the GILTI basket (or in the general basket if there is no income inclusion (under pre-TCJA Sec. 904) in the US due to PTI or under the CFC look-through rules), or whether or not the Canadian tax would be subject to a grind. Therefore, I would reserve any conclusions with respect to foreign tax credits.

Under the 962 election, we are still waiting for guidance if the 50% deduction under Sec. 250(a)(1)(B) is available to an individual shareholder who makes the 962 election. There is speculation that it would be however, without the 50% deduction, my tentative calculation (again absent any further guidance) demonstrates that a 26.3% tax rate is required in Canada in order to eliminate the GILTI tax on a 962 election. If the 50% deduction is available to individuals on a 962 election, then a 13.125% tax in Canada would eliminate GILTI (again based my tentative calculations). There is also a possibility that Congress may consider extending the 50% deduction to individual shareholders but would require a legislative fix.

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