E6-22024. Application of Separate Limitations to Dividends From Noncontrolled Section 902 Corporations; Correction

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendments.

SUMMARY:

This document contains corrections to final and temporary regulations that were published in the Federal Register on Tuesday, April 25, 2006 (71 FR 24516) concerning the application of separate foreign tax credit limitations to dividends received from noncontrolled section 902 corporations under section 904(d)(4).

DATES:

These corrections are effective April 25, 2006.

FOR FURTHER INFORMATION CONTACT:

Ginny Chung [phone] (not a toll-free call).

SUPPLEMENTARY INFORMATION:

 

Background

The final and temporary regulations (TD 9260) that are the subject of these corrections are under sections 902, 904, and 964 of the Internal Revenue Code.

Need for Correction

As published, TD 9260 contains errors that may prove to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1 is amended and continues to read in part:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.902-1 is amended by adding a heading to paragraph (a)(4)(i) introductory text and revising the heading for paragraph (c)(8) to read as follows:

§ 1.902-1

Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the foreign corporation.

(a) * * *

(4) Third- or lower-tier corporation—(i) Third-tier corporation. * * *

* * * * *

(c) * * *

(8) Effect of certain liquidations, reorganizations, or similar transactions on certain foreign taxes paid or accrued in taxable years beginning on or before August 5, 1997.

* * *

* * * * *

Par. 3. Section 1.902-1T is amended by revising the first sentence of paragraph (a)(7) to read as follows:

§ 1.902-1T

Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the foreign corporation (temporary).

(a) * * *

(7) * * * The term foreign income taxes means income, war profits, and excess profits taxes as defined in § 1.902-1(a), and taxes included in the term income, war profits, and excess profits taxes by reason of section 903, that are imposed by a foreign country or a possession of the United States, including any such taxes deemed paid by a foreign corporation under this section. * * *

* * * * *

Par. 4. Section 1.902-2 is amended by revising the first sentence of paragraph (a)(1) to read as follows:

§ 1.902-2

Treatment of deficits in post-1986 undistributed earnings and pre-1987 accumulated profits of a first- or lower-tier corporation for purposes of computing an amount of foreign taxes deemed paid under § 1.902-1.

(a) * * * (1) * * * For purposes of computing foreign income taxes deemed paid under § 1.902-1(b) with respect to dividends paid by a first- or lower-tier corporation, when there is a deficit in the post-1986 undistributed earnings of that corporation and the corporation makes a distribution to shareholders that is a dividend or would be a dividend if there were current or accumulated earnings and profits, then the post-1986 deficit shall be carried back to the most recent pre-effective date taxable year of the first- or lower-tier corporation with positive accumulated profits computed under section 902. * * *

* * * * *

Par. 5. Section 1.904-0 is amended by adding the entries for paragraphs (o)(1) and (o)(2) under § 1.904-5 to read as follows:

§ 1.904-0

Outline of regulations provisions for section 904.

* * * * *

§ 1.904-5

Look-through rules as applied to controlled foreign corporations and other entities.

* * * * *

(o) * * *

(1) Rules for controlled foreign corporations and other look-through entities.

(2) Rules for noncontrolled section 902 corporations.

* * * * *

Par. 6. Section 1.904-4 is amended by revising paragraph (c)(4) introductory text and adding paragraphs (c)(4)(i) through (c)(4)(iii) to read as follows:

§ 1.904-4

Separate application of section 904 with respect to certain categories of income.

* * * * *

(c) * * *

(3) and (4) [Reserved]. For further guidance, see § 1.904-4T(c)(3) and (4) introductory text.

(4)(i) Income from sources within the QBU's country of operation. Passive income from sources within the QBU's country of operation shall be treated as one item of income.

(ii) Income from sources without the QBU's country of operation. Passive income from sources without the QBU's country of operation shall be grouped on the basis of the tax imposed on that income as provided in § 1.904-4T(c)(3)(i) through (iv).

(iii) Determination of the source of income. For purposes of this paragraph (c)(4), income will be determined to be from sources within or without the QBU's country of operation under the laws of the foreign country of the payor of the income.

* * * * *

Par. 7. Section 1.904-5 is amended by revising paragraphs (a) introductory text and (a)(1) and adding Examples 4 and 5 to paragraph (i)(5) to read as follows:

§ 1.904-5

Look-through rules as applied to controlled foreign corporations and other entities.

(a) and (a)(1) [Reserved]. For further guidance, see § 1.904-5T(a) introductory text and (a)(1).

* * * * *

(i) * * *

(5) * * *

Examples 4 and 5 [Reserved]. For further guidance, see § 1.904-5T(i)(5) Examples 4 and 5.

* * * * *

Par. 8. Section 1.904(f)-12T is amended by revising the heading for paragraph (g)(1) to read as follows:

§ 1.904(f)-12T

Transition rules (temporary).

* * * * *

(g) * * * (1) Recapture of separate limitation loss or overall foreign loss in a separate category for dividends from a noncontrolled section 902 corporation.* * *

* * * * *

Par. 9. Section 1.964-1 is amended by:

1. Redesignating paragraphs (a) introductory text, (a)(1), (a)(2) and (a)(3) as paragraphs (a)(1) introductory text, (a)(1)(i), (a)(1)(ii) and (a)(1)(iii), respectively.

2. Designating the undesignated text following newly-designated paragraph (a)(1)(iii) as paragraph (a)(2).

3. Removing the comma following the word “shall” from newly-designated paragraph (a)(1) introductory text.

4. Removing the last sentence in newly-designated paragraph (a)(1)(i).

5. Revising newly-designated paragraph (a)(2), and the text of paragraphs (b)(1) introductory text and (c)(1) introductory text.

The revisions read as follows:

§ 1.964-1

Determination of the earnings and profits of a foreign corporation.

(a) * * *

(2) Required adjustments. The computation described in paragraph (a)(1) of this section shall be made in the foreign corporation's functional currency (determined under section 985 and the regulations under that section) and may be made by following the procedures described in paragraphs (a)(1)(i) through (a)(1)(iii) of this section in an order other than the one listed, as long as the result so obtained would be the same. In determining earnings and profits, or the deficit in earnings and profits, of a foreign corporation under section 964, the amount of an illegal bribe, kickback, or other payment (within the meaning of section 162(c), as amended by section 288 of the Tax Equity and Fiscal Responsibility Act of 1982 in the case of payments made after September 3, 1982, and the regulations issued pursuant to section 964) paid after November 3, 1976, by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government shall not be taken into account to decrease such earnings and profits or to increase such deficit. No adjustment shall be required under paragraph (a)(1)(ii) or (iii) of this section unless it is material. Whether an adjustment is material depends on the facts and circumstances of the particular case, including the amount of the adjustment, its size relative to the general level of the corporation's total assets and annual profit or loss, the consistency with which the practice has been applied, and whether the item to which the adjustment relates is of a recurring or merely a nonrecurring nature. For the treatment of earnings and profits whose distribution is prevented by restrictions and limitations imposed by a foreign government, see section 964(b) and the regulations issued pursuant to section 964. For rules for determining the earnings and profits (or deficit in earnings and profits) of a foreign corporation for taxable years beginning before January 1, 1987, for purposes of sections 951 through 964, see 26 CFR 1.964-1(a) (revised as of April 1, 2006).

(b) * * * (1) * * * The accounting principles to be applied in making the adjustments required by paragraph (a)(1)(ii) of this section shall be those accounting principles generally accepted in the United States for purposes of reflecting in the financial statements of a domestic corporation the operations of its foreign affiliates, including the following:

* * * * *

(c) * * * (1) * * * The tax accounting standards to be applied in making the adjustments required by paragraph (a)(1)(iii) of this section shall be the following:

* * * * *

Par. 10. Section 1.964-1T is amended by revising the first sentence of paragraph (c)(2) and the last sentence of paragraph (c)(5)(i) to read as follows:

§ 1.964-1T

Determination of the earnings and profits of a foreign corporation (temporary).

* * * * *

(c) * * *

(2) * * * For the first taxable year of a foreign corporation beginning after April 25, 2006, in which such foreign corporation first qualifies as a controlled foreign corporation (as defined in section 957 or 953) or a noncontrolled section 902 corporation (as defined in section 904(d)(2)(E)), any method of accounting or taxable year allowable under this section may be adopted, and any election allowable under this section may be made, by such foreign corporation or on its behalf notwithstanding that, in previous years, its books or financial statements were prepared on a different basis, and notwithstanding that such election is required by the Internal Revenue Code or regulations to be made in a prior taxable year. * * *

* * * * *

(5) * * * (i) * * * In the event that the United States shareholders of the controlled foreign corporation do not, in the aggregate, own (within the meaning of section 958(a)) more than 50 percent of the total combined voting power of all classes of the stock of such foreign corporation entitled to vote, the controlling United States shareholders of the controlled foreign corporation shall be all those United States shareholders who own (within the meaning of section 958(a)) stock of such corporation.

* * * * *

Cynthia Grigsby,

Senior Federal Register Liaison Officer, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration).