[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Rules and Regulations]
[Pages 3812-3813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1816]



Internal Revenue Service

26 CFR Part 1

[TD 8759]
RIN 1545-AP36

Filing Requirements for Returns Claiming the Foreign Tax Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulation.


SUMMARY: This document contains a final regulation relating to the 
substantiation requirements for taxpayers claiming foreign tax credits. 
The regulation is necessary to provide guidance to U.S. taxpayers who 
claim foreign tax credits.

DATES: Effective date: This regulation is effective January 27, 1998.
    Applicability date: These regulations are applicable for tax 
returns whose original due date falls on or after January 1, 1988.

FOR FURTHER INFORMATION CONTACT: Joan Thomsen, (202) 622-3850 (not a 
toll-free call).



    On January 13, 1997, the IRS published in the Federal Register a 
notice of proposed rulemaking (REG-208288-90), 62 FR 1700, relating to 
the filing requirements for returns claiming the foreign tax credit 
(the ``proposed regulation'').
    Written comments responding to the proposed regulation were 
received. A public hearing was requested and scheduled but was later 
canceled when the one requester withdrew the request to testify. After 
consideration of all of the written comments, the proposed regulation 
under section 905(b) is adopted as revised by this Treasury Decision.

Summary of Comments and Final Regulations

    The commenters argued that the ``interim credit'' notion 
incorporated in the proposed regulations from Continental Illinois, 
T.C. Memo 1991-66, 61 T.C.M. (CCH) 1916 (1991), aff'd in part and rev'd 
in part, 998 F.2d 513, 516-17 (7th Cir. 1993), was misapplied and that 
the proposed amendment to Sec. 1.905-2(b)(3) denied district directors 
the flexibility to find compliance with section 905(b) unless the 
taxpayer produces receipts (or other direct evidence of payment) in 
order to prove that the taxes actually were paid to the foreign 
government. They argued that, even if the district director should be 
able to require such proof in cases such as Continental Illinois, 
district directors must have the flexibility to accept lesser proof. 
They argued that a portfolio holder of publicly-traded foreign 
securities, for example, will not be able to obtain proof in the form 
of receipts evidencing that the issuer of the securities actually paid 
the withheld taxes to the foreign government.
    The comment letters are correct that the regulations historically 
have allowed the district director flexibility to determine that 
section 905(b) is satisfied without the production of tax receipts 
evidencing that the tax has been paid to the foreign government. 
Treasury and the IRS did not intend that the amendment to Sec. 1.905-
2(b)(3), as proposed, deny the district director the flexibility to 
accept secondary evidence of the foreign tax payment where it has been 
established to the satisfaction of the district director that it is 
impossible to furnish a receipt for such foreign tax payment. The 
amendment was merely intended to clarify that proof of the act of 
withholding through secondary evidence is not, per se, equivalent to 
proof of payment of the foreign tax. Treasury and the IRS have now 
concluded, however, that such clarification is not necessary. 
Continental Illinois v. Commissioner, supra.
    Therefore, in response to comments, the proposed regulation is 
finalized without its proposed amendment to Sec. 1.905-2(b)(3). Thus, 
the final regulations are identical to the final regulations currently 
in effect, except Sec. 1.905-2(a)(2) no longer requires a foreign 
receipt or return to be attached to a Form 1116 or Form 1118.
    Treasury and the IRS will continue to review the foreign tax credit 
substantiation rules to assure that they are functioning adequately. 

[[Page 3813]]

example, Treasury and the IRS are concerned that U.S. holders of 
foreign securities, including American Depositary Receipts (``ADRs''), 
may be claiming foreign tax credits in situations where an intermediary 
in the chain of ownership between the holder of a foreign security or 
an ADR and the issuer of the security (or the security underlying the 
ADR) has taken actions inconsistent with the ownership of the 
underlying security by the person claiming the credit, such as a 
disposition of such security. One approach to address this issue would 
involve modifying the substantiation, documentation and reporting rules 
with respect to payments on such securities and taxes withheld 
therefrom. For example, in order for a U.S. owner to be entitled to a 
credit for foreign taxes imposed on income with respect to a security, 
financial intermediaries (including custodians) could be required to 
substantiate that they have not taken any action inconsistent with 
beneficial ownership of the relevant security by such U.S. owner.
    It should be noted that portfolio investors are not necessarily 
entitled to foreign tax credits for the full amount indicated on the 
Form 1099 as foreign taxes paid. Portfolio investors are only entitled 
to a foreign tax credit for the amount of tax that is legally owed, 
which may not be the same as the amount withheld. If, for example, a 
portfolio investor is entitled to a refund of foreign tax withheld 
because of a reduced treaty withholding rate, the investor is only 
entitled to a foreign tax credit for the reduced amount, whether or not 
the investor files a refund claim with the foreign tax authorities. The 
IRS has made changes to the Form 1116 Instructions and Publication 514 
to clarify this point and intends to make similar changes to the Form 
1118 Instructions.

Explanation of Provisions

Section 1.905-2(a)(1), 1.905-2(b)(1), (2), and (3), and 1.905-2(c)

    Sections 1.905-2(a)(1), 1.905-2(b)(1), (2) and (3), and 1.905-2(c) 
are unchanged from the current final regulations.

Section 1.905-2(a)(2)

    Under former Sec. 1.905-2(a)(2), taxpayers generally were required 
to attach to their income tax returns either (1) the receipt for the 
foreign tax payment or (2) a foreign tax return for accrued foreign 
taxes. Section 1.905-2(a)(2) removes the requirement that the 
documentation be attached to the income tax return. The regulation now 
provides that such evidence of payment of foreign taxes must be 
presented to the district director upon request.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedures Act (5 
U.S.C. chapter 5) does not apply to this regulation, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding this regulation was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.
    Drafting Information: The principal author of this regulation is 
Joan Thomsen of the Office of the Associate Chief Counsel 
(International), IRS. 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:


    Paragraph 1. The authority citation for 26 CFR part 1 continues to 
read in part as follows:

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

    Par. 2. Section 1.905-2 is amended by revising the second through 
fourth sentences in paragraph (a)(2) to read as follows:

Sec. 1.905-2  Conditions of allowance of credit.

    (a) * * *
    (2) * * * Except where it is established to the satisfaction of the 
district director that it is impossible for the taxpayer to furnish 
such evidence, the taxpayer must provide upon request the receipt for 
each such tax payment if credit is sought for taxes already paid or the 
return on which each such accrued tax was based if credit is sought for 
taxes accrued. The receipt or return must be either the original, a 
duplicate original, or a duly certified or authenticated copy. The 
preceding two sentences are applicable for returns whose original due 
date falls on or after January 1, 1988. * * *
* * * * *
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.

    Approved: January 13, 1998.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-1816 Filed 1-26-98; 8:45 am]