[Federal Register Volume 59, Number 94 (Tuesday, May 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11602]


[[Page Unknown]]

[Federal Register: May 17, 1994]


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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[INTL-0006-90]
RIN 1545-AN87

 

Limitation On Use Of Deconsolidation To Avoid Foreign Tax Credit 
Limitations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed Income Tax Regulations 
relating to certain limitations on the amount of the foreign tax 
credit. This action is necessary because of changes to the applicable 
tax law made by the Revenue Reconciliation Act of 1989. These 
regulations would provide guidance needed to comply with these changes 
and would affect domestic corporations that are affiliates.

DATES: Comments and requests for a public hearing must be received by 
July 18, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (INTL-0006-90), room 
5228, Internal Revenue Service, POB Box 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R 
(INTL-0006-90), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Kenneth Allison of the Office of 
Associate Chief Counsel (International), within the Office of Chief 
Counsel, Internal Revenue Service, 202-622-3860 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed Income Tax Regulations (26 CFR part 
1) under section 904 of the Internal Revenue Code of 1986 (Code). These 
amendments are proposed to conform the regulations to section 7402(a) 
of the Revenue Reconciliation Act of 1989 (103 Stat. 2106, 2357). These 
amendments are proposed to be issued under the authority contained in 
sections 7805 and 904(i) of the Code.

Explanation of Provisions

General

    The Revenue Reconciliation Act of 1989 authorized the issuance of 
regulations requiring the resourcing of income of any member of an 
affiliated group of corporations (as expanded by the legislation) or 
the modification of the consolidated return regulations, to the extent 
that such resourcing or modification is necessary to prevent avoidance 
of the foreign tax credit limitations. Congress was particularly 
concerned about the interposition of entities other than ``includible 
corporations'' (as defined in section 1504(b)) into a chain of 
corporate ownership to deconsolidate domestic corporations in the chain 
and, as a result of the deconsolidation, avoid limitations on the 
foreign tax credit. Deconsolidation may be achieved by introducing a 
nonincludible entity (e.g., a foreign corporation) as the common parent 
of multiple chains of includible corporations or by interposition of a 
nonincludible entity deeper in a chain. The same concerns apply to 
groups of includible corporations that do not elect to file a 
consolidated return even though they are eligible to do so.
    Calculation of the foreign tax credit limitation is made on a 
consolidated group basis for those groups of corporations that are 
eligible and elect to file consolidated returns. By removing a domestic 
corporation from an affiliated group, taxpayers can manipulate the 
foreign tax credit limitation. For example, by isolating foreign losses 
in the disaffiliated corporation, taxpayers can increase the amount of 
foreign source income in the group by using foreign losses in the 
disaffiliated corporation to reduce U.S. source income in that 
corporation rather than to reduce the foreign source income in the rest 
of the group. This increases the amount of the foreign tax credit 
limitation over what the limitation would be if all of the related 
corporations were members of the consolidated group.

Explanation of Proposed Regulations

    Section 1.904(i)-1 treats certain domestic corporations that are 
either not eligible to be or, though eligible have not elected to be, 
members of the same consolidated group, as members of the same 
consolidated group solely for purposes of applying the foreign tax 
credit provisions of section 59(a), sections 901 through 908, and 
section 960. Section 1.904(i)-1 does not move income from one member of 
the extended consolidated group to another member. It only affects the 
source or foreign tax credit separate limitation character of the net 
income of members of the group.
    Section 1.904(i)-1 does not prescribe a particular method for 
allocating net income to affiliates. Rather, it permits taxpayers to 
use any consistently applied reasonable method to allocate net income 
to each affiliate. We invite comments on whether more detailed 
guidance, which may well circumscribe the ability of taxpayers to take 
alternative reasonable approaches, would be preferable.
    The provisions of section 904(i) apply to: (1) includible 
corporations that are members of the same affiliated group under 
section 1504(a) but that do not file consolidated returns; and (2) 
corporations that, because of the interposition of entities other than 
includible corporations (e.g., a foreign corporation in the chain or a 
common foreign parent), are not in the same affiliated group. If all 
includible corporations are eligible and have already elected to be 
members of the same consolidated group, then, as provided in 
Sec. 1.904(i)-1(b)(1)(iii), the rules of section 904(i) do not apply.
    These rules are necessary in order to prevent includible 
corporations from avoiding the foreign tax credit limitation rules, 
either by interposition of nonincludible corporations or by a failure 
to file a consolidated return when eligible to do so. However, the 
application of the regulations is not dependent upon whether the 
federal income tax consequences of its application favor, or are 
adverse to, the taxpayer.

Proposed Effective Date

    These regulations are proposed to be effective for taxable years of 
affiliates beginning after December 31, 1993.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. All comments will be available for public inspection and copying. 
A public hearing may be scheduled if requested in writing by a person 
that timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Kenneth D. 
Allison of the Office of Associate Chief Counsel (International), 
within the Office of Chief Counsel, Internal Revenue Service. However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

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

    Section 1.904(i)-1 also issued under 26 U.S.C. 904(i). * * *
    Par. 2. In Sec. 1.904-0, the introductory text is revised and table 
of contents entries are added for Sec. 1.904(i)-1 to read as follows:


Sec. 1.904-0  Outline of regulation provisions for section 904.

    This section lists the paragraphs contained in the regulations that 
implement section 904.
* * * * *

Sec. 1.904(i)-1  Limitation on use of deconsolidation to avoid 
foreign tax credit limitations.

(a) General rule.
(b) Definitions and special rules.
(1) Affiliate.
(i) Generally.
(ii) Exception for newly acquired affiliates.
(iii) Exception for some consolidated groups.
(2) Includible corporation.
(c) Taxable years.
(d) Consistent treatment of foreign taxes paid.
(e) Effective date.

    Par. 3. Section 1.904(i)-1 is added to read as follows:

Sec. 1.904(i)-1  Limitation on use of deconsolidation to avoid 
foreign tax credit limitations.

    (a) General rule. If two or more includible corporations are 
affiliates, within the meaning of paragraph (b)(1) of this section, at 
any time during their taxable years, then, solely for purposes of 
applying the foreign tax credit provisions of section 59(a), sections 
901 through 908, and section 960, each of those affiliates will be 
treated as if they were part of the same consolidated return group for 
that portion of the year during which those corporations were 
affiliates. Thus, each affiliate must compute its foreign source 
taxable income or loss in each separate category, as defined in 
Sec. 1.904-5(a)(1). Those amounts are combined for all affiliates to 
determine one amount for the group of affiliates in each separate 
category. The rules of section 904(f) are then applied to the combined 
amounts in each separate category to determine the group's net taxable 
income or loss in each separate category. Any net taxable income so 
calculated for purposes of the foreign tax credit provisions must then 
be allocated pro rata among the affiliates under any consistently 
applied reasonable method. This allocation will only affect the source 
and foreign tax credit separate limitation character of the income of 
each affiliate, and will not otherwise affect an affiliate's total net 
income or loss. This section applies whether the federal income tax 
consequences of its application favor, or are adverse to, the taxpayer.
    (b) Definitions and special rules--For purposes of this section 
only, the following terms will have the meanings specified.
    (1) Affiliate--(i) Generally. Affiliates are includible 
corporations--
    (A) That are members of the same affiliated group, as defined in 
section 1504(a); or
    (B) That would be members of the same affiliated group, as defined 
in section 1504(a); but for
    (1) The ownership of one or more includible corporations by 
entities that are not includible corporations; or
    (2) The inapplicability of the constructive ownership rules of 
section 1563(e) for purposes of section 1504(a).
    (ii) Exception for newly acquired affiliates. An includible 
corporation will not be considered an affiliate of another includible 
corporation during its taxable year beginning before the date on which 
the first includible corporation first becomes an affiliate with 
respect to that other includible corporation.
    (iii) Exception for some consolidated groups. The provisions of 
paragraph (a) of this section shall not apply if the only affiliates 
under this definition are already members of the same consolidated 
group without operation of this section.
    (2) Includible corporation. The term includible corporation has the 
same meaning it has in section 1504(b).
    (c) Taxable years. If all of the affiliates use the same U.S. 
taxable year for determining gross income, then that year must be used 
for purposes of applying this section. If, however, the affiliates use 
more than one U.S. taxable year for determining gross income, then an 
appropriate taxable year must be used for applying this section. The 
determination whether a year is appropriate must take into account all 
of the relevant facts and circumstances, including the U.S. taxable 
years used by the affiliates for general U.S. income tax purposes. 
Those affiliates that do not use the year determined in the preceding 
sentence as their U.S. taxable year for general U.S. income tax 
purposes must, for purposes of this section, use their U.S. taxable 
year or years ending within the taxable year determined in the 
preceeding sentence. If, however, the stock of an affiliate is disposed 
of so that it ceases to be an affiliate, then the taxable year of that 
affiliate will be considered to end on the disposition date for 
purposes of this section.
    (d) Consistent treatment of foreign taxes paid. All affiliates must 
consistently either elect under section 901(a) to claim a credit for 
foreign income taxes paid or accrued, or deemed paid or accrued, or to 
deduct foreign taxes paid or accrued under section 164. See also 
Sec. 1.1502-4(a); Sec. 1.905-1(a).
    (e) Effective date. This section will be effective for taxable 
years of affiliates beginning after December 31, 1993.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-11602 Filed 5-16-94; 8:45 am]
BILLING CODE 4830-01-U