Code Section 304 The Gift That Keeps on Giving

The ATA Journal of Legal Tax Research In-Press, DOI/10.2308/jltr-52585

Posted: 5 Nov 2019

See all articles by Doron Narotzki

Doron Narotzki

University of Akron - The George W. Daverio School of Accountancy

Melanie McCoskey

University of Akron - The George W. Daverio School of Accountancy

Date Written: October 2019

Abstract

One central focus of the TCJA was to encourage U.S. international firms to "bring back earnings to the U.S." In an attempt to achieve this goal, the legislation enacted Section 245A, which provides a 100% DRD to U.S. corporations for certain foreign-sourced distributions. Section 304 requires the reclassification of stock sales between affiliated corporations as dividends. However, for many years, Code Section 304 was not fulfilling the original "anti-avoidance" tax policy that was behind its legislation, as is explained in this paper. Currently, the TCJA has created an opportunity to utilize Section 304 and Section 245A via a much more powerful tax planning tool. By utilizing the rules related to redemptions by related corporations under the (purportedly) anti-abuse provisions of Section 304 combined with the new 100% DRD of Section 245A, extracting earnings from affiliated foreign corporations tax-free has never been easier. This paper will discuss these two Code Sections and the micro-policy behind them The paper will then explain how they interact with each other and the resulting ability to extract certain foreign-sourced earnings tax-free. The paper will then finally suggest a legislative solution to fix this result and achieve parity between domestic U.S. corporations and foreign corporations.

Keywords: Corporate Tax, International Tax, Tax Policy, Code Section 304, Code Section 245A, Tax Planning

JEL Classification: K34

Suggested Citation

Narotzki, Doron and McCoskey, Melanie, Code Section 304 The Gift That Keeps on Giving (October 2019). The ATA Journal of Legal Tax Research In-Press, DOI/10.2308/jltr-52585, Available at SSRN: https://ssrn.com/abstract=3475695

Doron Narotzki (Contact Author)

University of Akron - The George W. Daverio School of Accountancy ( email )

259 S. Broadway Akron
Akron, OH 44325-4802
United States

Melanie McCoskey

University of Akron - The George W. Daverio School of Accountancy ( email )

United States

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