August 15th, 2025

One Big Beautiful Bill Repeals Repeal of Downward Attribution Rule for CFCs.

The One Big Beautiful Bill Act ("OBBBA", P.L. 119-21) (7/05/2025) rescinds the prior repeal of the downward attribution of stock ownership provision contained in Section 958(b)(4) that was part of the Tax Cuts and Jobs Act of 2017, P.L. 115-97 (12/22/2017), in determining whether a foreign corporation is a "controlled foreign corporation" for a particular tax year. In general, a foreign corporation is a CFC for a taxable year where more than 50% of the stock of the foreign corporation is owned by U.S. shareholders, as defined. A U.S. shareholder is a U.S. person (citizen, resident, domestic corporation, partnership, trust or estate) owning 10% or more of the foreign corporation's combined voting power of all classes of stock entitled to vote or 10% or more of the total value of shares of stock issued. After TCJA 2017, the CFC rules override the PFIC provision. See Section 951(c).

Foreign-US Joint Ventures.

In many instances a U.S. person will enter into a joint venture with foreign business interests to engage in a business enterprise outside of the United States. One tax planning objective may be to avoid CFC status so that the U.S. investors will be able to avoid an income inclusion under Subpart F and then after TCJA 2017, under the GILTI rules in Section 951A. One simple idea would be for the U.S. group to not own more than 50% of the equity in a foreign corporate entity. Such "50-50 ownership" structure may involve the foreign corporation's ownership of other foreign subsidiaries engaged in carrying on business perhaps through a permanent establishment in multiple jurisdictions. Prior to TCJA 2017, such foreign subsidiaries were not treated as CFCs even if the foreign joint venturer or partner owned one or more U.S. subsidiaries. In other instances, the U.S. person may only have a minority stock position in the foreign controlled corporation such as after a change of control acquisition whereby a foreign corporation has majority ownership and control.

Stock Attribution Rules in Section 958(b) and Section 318.

Section 958(b) provides that in determining U.S. shareholder and CFC status, the Section 318 constructive stock ownership rules are to be applied, including: (i) family attribution (Section 318(a)(1)(A)); (ii) upward attribution from entity to shareholder (Section 318(a)(2)(A)-(C)); (iii) proportionate corporate stock ownership imputed to 50% or more shareholder (Section 318(a)(2)(C); (iv) attribution from partner or beneficiary to partnership or estate respectively in accordance with Section 318(a)(3)(A); (v) Section 318(a)(3)(B) stock attribution from trust beneficiary to trust; (vi) option attribution per Section 318(a)(4); (vii) Section 318(a)(3)(C) attribution, where 50% or more in value of the stock of a corporation is owned by any person, the corporation is treated as owning the stock of such 50% or more shareholder; and (viii) downward attribution of stock ownership from owners to their ownership entities (Sections 318(a)(2)-318(a)(4)) which is the subject of this post, the reinstatement, as modified, by the OBBBA of Section 958(b)(4)(downward stock attribution rule). Operating rules are provided in Section 318(a)(5). Looks like an interesting puzzle to work on, right? Well, it's the law and needs to be carefully and correctly applied. See, e.g., Webber's Estate v. U.S., 263 F.Supp. 703 (E.D. Ky. 1967), (aff'd 404 F.2d 411, 6th Cir. 1968). Compare Estate of Weiskopf v. Commissioner, 77 T.C. 135 (1981).

The Tax Cuts and Jobs Act of 2017 Repeals Section 958(b)(4) And Requires Downward Stock Attribution

Prior to TCJA 2017, Section 958(b)(4) limited application of the downward attribution rule in Section 318(a)(3)(A)-(C) by denying its application in order to treat a U.S. person as owning stock owned by a person who is not a U.S. person such as a foreign partner's stock ownership in a foreign corporation. Under Section 958(b)(4) prior to TCJA 2017, a foreign joint venturer's stock ownership of foreign subsidiaries to its U.S. subsidiary could not be attributed to the U.S. equity owners. TCJA 2017 repealed Section 958(b)(4) in Sections 14213(a)(1), (a)(2). As eliminated, Section 318(a)(3)(C), applied by cross-reference from Section 958(b), the foreign corporate joint venture and its foreign corporate subsidiaries would be treated as CFCs by the U.S. shareholders by downward attribution. The result seemed a bit unfair. See, e.g. Estate of Nettie Miller, 40 TC 760 (1965), non-acq. 1966-1 CB 4. But Congress intended such result as reflected in the legislative history to TCJA 2017 where the Senate Finance Commitee stated:

"The Committee is aware of certain transactions used to avoid subpart F provisions. One such transaction involves effectuating “de-control” of a foreign subsidiary, by taking advantage of the section 958(b)(4) rule that effectively turns off the constructive stock ownership rules of 318(a)(3) when to do otherwise would result in a U.S. person being treated as owning stock owned by a foreign person. Accordingly, such a transaction converts former CFCs to non-CFCs, despite continuous ownership by U.S. shareholders. The Committee believes this provision is necessary to render de-controlling transactions ineffective as a means of avoiding the subpart F provisions."

While TCJA 2017 did open the door for broader income inclusion outcomes for U.S. shareholders under Subpart F and GILTI, all was not lost in the process. Where the U.S. shareholder now subject to the broader reach of Subpart F inclusion and Section 956 as well, where the U.S. shareholder was a domestic C corporation, the new international provisions provided favorable outcomes as well. See Sections 250, 245A, 959-961, 962. See August, Congressional Action to Rescue the Tax Cuts and Jobs Act of 2017 from Falling Off the “2025 Tax Cliff” Under the Second Trump Administration, Corporate Taxation (WG&L), Jan/Feb. 2025; “President Biden's 'Made in America' Tax Plan: Reversing the International Tax Benefits Extended to U.S. Corporations Under the TCJA,” Corporate Taxation (WG&L) (May/Jun 2021); The Maze of Tunnels and Bridges Pass-Through Entities Must Traverse in Reporting Subpart F and GILTI Income Inclusions and Previously Taxed Income Recoveries," Corporate Taxation (WG&L), Journal of Corporate Taxation (WG&L)(July/Aug 2021).

The effective date of the repeal of Section 954(b)(4) was for the last tax year of foreign corporations beginning before January 1, 2018, and each subsequent year and for tax years of U.S. shareholders in which or with which such tax years of the foreign corporations end. Rev. Proc. 2019-40, 2019-43 IRB 982 provided "limited relief" where taxpayers adversely affected by the repeal of Section 958(b)(4) may have only limited ability to obtain information needed to accurately determine correct amounts and whether such foreign corporations were CFCs; penalty relief also provided where "safe harbor" guidelines followed in filing Forms 5471 and related statements.

The problem with the repeal of Section 954(b)(4) in TCJA 2017 was its width. It was too broad in its application and in some instances resulted in an unfair outcome or burden on U.S. minority shareholder groups engaged in investing with foreign investors in a foreign parent corporation that might own one or more controlled foreign subsidiaries. The required downward attribution rule in Section 318(a)(2) would cause such U.S. minority group to be treated as U.S. shareholders in a controlled foreign corporation with pass through treatment being mandatory. The OBBBA narrows the reach in revised Section 954(b)(4) while at the same time guards against situations in which the U.S. minority shareholder owns more than 50% of the foreign corporation parent, i.e., it is U.S. person controlled as discussed below.

The OBBBA Brings Back Section 958(b)(4) But Enacts A New Rule of Inclusion in Section 951B.

OBBBA Section 70353(a)-(f) restores the limitation on downward attribution of stock ownership in applying Section 958(b) which removes foreign subsidiaries from becoming CFCs of U.S. shareholders. The concern was that the repeal announced in TCJA 2017 was overly broad. Accordingly, revived Section 958(b)(4) further announces that Sections 958(b)(1) and (b)(4) will not apply when the result is to treat stock of a domestic corporation as now owned by a US shareholder in apply the constructive distribution rule of Section 956(c)(2). Accordingly, U.S. minority shareholders may, in certain instances, be able to avoid the income inclusion rules under Subpart F (Section 951(a)(1)) or GILTI (Section 951A) that was eliminated in TCJA 2017. Note the OBBBA has changed the term "global intangible low-taxed intangible income" ("GILTI") to "net CFC tested income" (NCTI) or Subpart F (Section 951(a)(1)). But there is new Section 951B which put into law in the OBBBA effective for taxable years of foreign corporations ending after December 31, 2025.

Meet New Section 951B

While the downward attribution ownership rule was reinstated, Section 951B was also enacted by Congress in the OBBBA, Section 70353(b) to reduce or eliminate tax planning strategies that attempt to end-run the CFC rules in a manner unintended by Congress. There are two operative terms to Section 951B: (i) "foreign controlled U.S. shareholder"; and (ii) "foreign controlled foreign corporation" ("F-CFC"). A foreign controlled U.S. shareholder is one that would be a U.S. shareholder by applying a downward attribution constructive ownership rule (by not applying revived Section 958(b)(4)) but only in instances where the result is that a U.S. shareholder owns more than 50% of the foreign corporation's stock. In other words, the downward attribution rule, in effect, continues to apply under Section 951B if the result in applying Sections 318(a)(3) is that the U.S. person is a more than a 50% shareholder (in lieu of the 10% stock ownership threshold in defining U.S. shareholder per Section 951(b), then the income inclusion rules under Subpart F and NCTI will apply. U.S. persons who are minority owners of foreign controlled foreign corporations unrelated to any foreign controlled U.S. shareholders will have no income inclusion provided the F-CFC is not a CFC. Hopefully there will be guidance issue in this area in the near future which could also be part of the PTEP regulations project that is under study by the U.S. Treasury and the Internal Revenue Service.

This post is intended for informational and educational purposes only and may not be relied upon by the reader or third party as legal advice. August Tax Law, P.C. recommends that the reader consult with its tax counsel or tax advisor on the issues discussed in this blog post.