[Federal Register Volume 67, Number 19 (Tuesday, January 29, 2002)]
[Rules and Regulations]
[Pages 4173-4177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2044]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8981]
RIN 1545-BA40


Disallowance of Deductions and Credits for Failure to File Timely 
Return

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains regulations relating to the 
disallowance of deductions and credits for nonresident alien 
individuals and foreign corporations that fail to file a timely U.S. 
income tax return. The current regulations permit nonresident aliens 
and foreign corporations the benefit of deductions and credits only if 
they timely file a U.S. income tax return in accordance with subtitle F 
of the Internal Revenue Code, unless the Commissioner waives the filing 
deadlines. The temporary regulations revise the waiver standard. The 
text of these temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective January 29, 
2002.
    Applicability Date: For dates of applicability, see Secs. 1.874-
1T(b)(4) and 1.882-4T(a)(3)(iv) of these regulations.

FOR FURTHER INFORMATION CONTACT: Nina E. Chowdhry (202) 622-3880 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 871(b)(1) provides that a nonresident alien individual 
engaged in a trade or business within the United States shall be taxed 
on income effectively connected with the conduct of the trade or 
business within the United States. Likewise, under section 882(a)(1), a 
foreign corporation engaged in a trade or business within the United 
States shall be taxed on its income effectively connected with the 
conduct of the trade or business within the United States. In 
determining the amount of effectively connected taxable income, both 
the nonresident alien individual and the foreign corporation 
(collectively, foreign taxpayers) generally may deduct from effectively 
connected gross income expenses that are properly allocated and 
apportioned to that gross income. However, under sections 874(a)(1) and 
882(c)(2), a foreign taxpayer generally is entitled to those 
deductions, and to allowable credits, only if it files a true and 
accurate U.S. income tax return in the manner prescribed in subtitle F 
of the Internal Revenue Code (Code), including on the return all the 
information necessary for the calculation of the deductions and 
credits.
    Sections 1.874-1(b)(1) and 1.882-4(a)(3)(i) provide filing 
deadlines beyond which a return entitling the foreign taxpayer to 
deductions and credits may not be filed. Under Secs. 1.874-1(b)(2) and 
1.882-4(a)(3)(ii), as currently in effect, the Commissioner may waive 
the filing deadlines prescribed in Secs. 1.874-1(b)(1) and 1.882-
4(a)(3)(i) in rare and unusual circumstances if good cause for such 
waiver, based on the facts and circumstances, is established by a 
foreign taxpayer who does not file a return (a non-filer). When these 
regulations were promulgated in 1990, Treasury and the IRS intended 
that the waiver standard balance the legislative intent to establish 
strong compliance measures with respect to required

[[Page 4174]]

income tax return filing by foreign taxpayers with a means to grant 
relief from the filing deadlines in appropriate cases. In practice, the 
IRS has found that the standard currently in Secs. 1.874-1(b)(2) and 
1.882-4(a)(3)(ii) (the waiver standard) is too restrictive and does not 
achieve this balance.

Explanation of Provisions

    The temporary regulations in this document revise the waiver 
standard contained in Secs. 1.874-1(b)(2) and 1.882-4(a)(3)(ii) and 
provide examples of the application of the revised standard. The 
revised waiver standard provides that the filing deadlines may be 
waived by the Commissioner or his or her delegate if the non-filer 
establishes that, based on the facts and circumstances, the non-filer 
acted reasonably and in good faith in failing to file a U.S. income tax 
return (including a protective return). For this purpose, a non-filer 
is not considered to have acted reasonably and in good faith if the 
non-filer knew that it was required to file the return but chose not to 
file the return. In addition, a non-filer shall not be granted a waiver 
unless the non-filer cooperates in determining the non-filer's U.S. tax 
liability for the taxable year for which the return was not filed. The 
following factors will be considered by the IRS in determining whether 
a non-filer, based on the facts and circumstances, acted reasonably and 
in good faith in failing to file a U.S. income tax return: whether the 
non-filer voluntarily identifies itself to the IRS as having failed to 
file a U.S. income tax return before the IRS discovers the failure to 
file; whether the non-filer did not become aware of the non-filer's 
ability to file a protective return by the deadline for filing the 
protective return; whether the non-filer had not previously filed a 
U.S. income tax return; whether the non-filer failed to file a U.S. 
income tax return because, after exercising reasonable diligence 
(taking into account relevant experience and level of sophistication), 
the non-filer was unaware of the necessity for filing the return; 
whether the non-filer failed to file a U.S. income tax return because 
of intervening events beyond the non-filer's control; and whether other 
mitigating or exacerbating circumstances existed.

Effective Date

    These regulations apply to open years for which requests for 
waivers of application of sections 874(a) and 882(c) are filed on or 
after January 29, 2002.

Special Analyses

    It has been determined that these temporary regulations are 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 Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations and, because no 
notice of proposed rulemaking is required, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, these temporary regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small businesses.

Drafting Information

    The principal author of these regulations is Nina Chowdhry of the 
Office of Associate Chief Counsel (International). 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.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

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

    Section 1.874-1T also issued under 26 U.S.C. 874. * * *
    Section 1.882-4T also issued under 26 U.S.C. 882(c). * * *


    Par. 2. Section 1.874-1 is amended by:
    1. Revising paragraph (b)(2).
    2. Paragraphs (b)(3) and (b)(4) are redesignated as paragraphs 
(b)(5) and (b)(6), respectively.
    3. New paragraphs (b)(3) and (b)(4) are added.
    The revision and additions read as follows:


Sec. 1.874-1  Allowance of deductions and credits to nonresident alien 
individuals.

* * * * *
    (b)(2) through (4) For further guidance, see Sec. 1.874-1T(b)(2) 
through (4).
* * * * *
    Par. 3. Section 1.874-1T is added to read as follows:


Sec. 1.874-1T  Allowance of deductions and credits to nonresident alien 
individuals (temporary).

    (a) through (b)(1) For further guidance, see Sec. 1.874-1(a) 
through (b)(1).
    (b)(2) Waiver. The filing deadlines set forth in paragraph (b)(1) 
of this section may be waived if the nonresident alien individual 
establishes to the satisfaction of the Commissioner or his or her 
delegate that the individual, based on the facts and circumstances, 
acted reasonably and in good faith in failing to file a U.S. income tax 
return (including a protective return (as described in Sec. 1.874-
1(b)(6))). For this purpose, a nonresident alien individual shall not 
be considered to have acted reasonably and in good faith if the 
individual knew that he or she was required to file the return and 
chose not to file the return. In addition, a nonresident alien 
individual shall not be granted a waiver unless the individual 
cooperates in determining his or her U.S. income tax liability for the 
taxable year for which the return was not filed. The Commissioner or 
his or her delegate shall consider the following factors in determining 
whether the nonresident alien individual, based on the facts and 
circumstances, acted reasonably and in good faith in failing to file a 
U.S. income tax return:
    (i) Whether the individual voluntarily identifies himself or 
herself to the Internal Revenue Service as having failed to file a U.S. 
income tax return before the Internal Revenue Service discovers the 
failure to file;
    (ii) Whether the individual did not become aware of his or her 
ability to file a protective return (as described in Sec. 1.874-
1(b)(6)) by the deadline for filing the protective return;
    (iii) Whether the individual had not previously filed a U.S. income 
tax return;
    (iv) Whether the individual failed to file a U.S. income tax return 
because, after exercising reasonable diligence (taking into account his 
or her relevant experience and level of sophistication), the individual 
was unaware of the necessity for filing the return;
    (v) Whether the individual failed to file a U.S. income tax return 
because of intervening events beyond the individual's control; and
    (vi) Whether other mitigating or exacerbating factors existed.
    (3) Examples. The following examples illustrate the provisions of 
this paragraph (b). In all examples, A is a nonresident alien 
individual and uses the calendar year as A's taxable year. The examples 
are as follows:


[[Page 4175]]


    Example 1. Nonresident alien individual discloses own failure to 
file. In Year 1, A became a limited partner with a passive 
investment in a U.S. limited partnership that was engaged in a U.S. 
trade or business. During Year 1 through Year 4, A incurred losses 
with respect to A's U.S. partnership interest. A's foreign tax 
advisor incorrectly concluded that because A was a limited partner 
and had only losses from A's partnership interest, A was not 
required to file a U.S. income tax return. A was aware neither of 
A's obligation to file a U.S. income tax return for those years nor 
of A's ability to file a protective return for those years. A had 
never filed a U.S. income tax return before. In Year 5, A began 
realizing a profit, rather than a loss, with respect to the 
partnership interest, and, for this reason, engaged a U.S. tax 
advisor to handle A's responsibility to file U.S. income tax 
returns. In preparing A's U.S. income tax return for Year 5, A's 
U.S. tax advisor discovered that returns were not filed for Year 1 
through Year 4. Therefore, with respect to those years for which 
applicable filing deadlines in Sec. 1.874-1(b)(1) were not met, A 
would be barred by paragraph Sec. 1.874-1(a) from claiming any 
deductions that otherwise would have given rise to net operating 
losses on returns for these years, and would have been available as 
loss carryforwards in subsequent years. At A's direction, A's U.S. 
tax advisor promptly contacted the appropriate examining personnel 
and cooperated with the Internal Revenue Service in determining A's 
income tax liability, for example, by preparing and filing the 
appropriate income tax returns for Year 1 through Year 4 and by 
making A's books and records available to an Internal Revenue 
Service examiner. A has met the standard described in paragraph 
(b)(2) of this section for waiver of any applicable filing deadlines 
in Sec. 1.874-1(b)(1).
    Example 2. Nonresident alien individual refuses to cooperate. 
Same facts as in Example 1, except that while A's U.S. tax advisor 
contacted the appropriate examining personnel and filed the 
appropriate income tax returns for Year 1 through Year 4, A refused 
all requests by the Internal Revenue Service to provide supporting 
information (for example, books and records) with respect to those 
returns. Because A did not cooperate in determining A's U.S. tax 
liability for the taxable years for which an income tax return was 
not timely filed, A is not granted a waiver as described in 
paragraph (b)(2) of this section of any applicable filing deadlines 
in Sec. 1.874-1(b)(1).
    Example 3. Nonresident alien individual fails to file a 
protective return. Same facts as in Example 1, except that in Year 1 
through Year 4, A also consulted a U.S. tax advisor, who advised A 
that it was uncertain whether U.S. income tax returns were necessary 
for those years and that A could protect its right subsequently to 
claim the loss carryforwards by filing protective returns under 
Sec. 1.874-1(b)(6). A did not file U.S. income tax returns or 
protective returns for those years. A did not present evidence that 
intervening events beyond A's control prevented A from filing an 
income tax return, and there were no other mitigating factors. A has 
not met the standard described in paragraph (b)(2) of this section 
for waiver of any applicable filing deadlines in Sec. 1.874-1(b)(1).
    Example 4. Nonresident alien with effectively connected income. 
In Year 1, A, a computer programmer, opened an office in the United 
States to market and sell a software program that A had developed 
outside the United States. A had minimal business or tax experience 
internationally, and no such experience in the United States. 
Through A's personal efforts, U.S. sales of the software produced 
income effectively connected with a U.S. trade or business. A, 
however, did not file U.S. income tax returns for Year 1 or Year 2. 
A was aware neither of A's obligation to file a U.S. income tax 
return for those years, nor of A's ability to file a protective 
return for those years. A had never filed a U.S. income tax return 
before. In November of Year 3, A engaged U.S. counsel in connection 
with licensing software to an unrelated U.S. company. U.S. counsel 
reviewed A's U.S. activities and advised A that A should have filed 
U.S. income tax returns for Year 1 and Year 2. A immediately engaged 
a U.S. tax advisor who, at A's direction, promptly contacted the 
appropriate examining personnel and cooperated with the Internal 
Revenue Service in determining A's income tax liability, for 
example, by preparing and filing the appropriate income tax returns 
for Year 1 and Year 2 and by making A's books and records available 
to an Internal Revenue Service examiner. A has met the standard 
described in paragraph (b)(2) of this section for waiver of any 
applicable filing deadlines in Sec. 1.874-1(b)(1).
    Example 5. IRS discovers nonresident alien's failure to file. In 
Year 1, A, a computer programmer, opened an office in the United 
States to market and sell a software program that A had developed 
outside the United States. Through A's personal efforts, U.S. sales 
of the software produced income effectively connected with a U.S. 
trade or business. A had extensive experience conducting similar 
business activities in other countries, including making the 
appropriate tax filings. However, A was aware neither of A's 
obligation to file a U.S. income tax return for those years, nor of 
A's ability to file a protective return for those years. A had never 
filed a U.S. income tax return before. Despite A's extensive 
experience conducting similar business activities in other 
countries, A made no effort to seek advice in connection with A's 
U.S. tax obligations. A failed to file either U.S. income tax 
returns or protective returns for Year 1 and Year 2. In November of 
Year 3, an Internal Revenue Service examiner asked A for an 
explanation of A's failure to file U.S. income tax returns. A 
immediately engaged X, a U.S. tax advisor, and cooperated with the 
Internal Revenue Service in determining A's income tax liability, 
for example, by preparing and filing the appropriate income tax 
returns for Year 1 and Year 2 and by making A's books and records 
available to the examiner. A did not present evidence that 
intervening events beyond A's control prevented A from filing a 
return, and there were no other mitigating factors. A has not met 
the standard described in paragraph (b)(2) of this section for 
waiver of any applicable filing deadlines in Sec. 1.874-1(b)(1).
    Example 6. Nonresident alien with prior filing history. A began 
a U.S. trade or business in Year 1 as a sole proprietorship. A's tax 
advisor filed the appropriate U.S. income tax returns for Year 1 
through Year 6, reporting income effectively connected with A's U.S. 
trade or business. In Year 7, A replaced its tax advisor with a tax 
advisor unfamiliar with U.S. tax law. A did not file a U.S. income 
tax return for any year from Year 7 through Year 10, although A had 
effectively connected income for those years. A was aware of A's 
ability to file a protective return for those years. In Year 11, an 
Internal Revenue Service examiner contacted A and asked for an 
explanation of A's failure to file income tax returns after Year 6. 
A immediately engaged a U.S. tax advisor and cooperated with the 
Internal Revenue Service in determining A's income tax liability, 
for example, by preparing and filing the appropriate income tax 
returns for Year 7 through Year 10 and by making A's books and 
records available to the examiner. A did not present evidence that 
intervening events beyond A's control prevented A from filing a 
return, and there were no other mitigating factors. A has not met 
the standard described in paragraph (b)(2) of this section for 
waiver of any applicable filing deadlines in Sec. 1.874-1(b)(1).

    (4) Effective date. Paragraphs (b)(2) and (3) of this section are 
applicable to open years for which a request for a waiver is filed on 
or after January 29, 2002.
    (b)(5) through (e). For further guidance, see Sec. 1.874-1 (b)(5) 
through (e).

    Par. 4. Section 1.882-4 is amended by:
    1. Revising paragraph (a)(3)(ii).
    2. Paragraphs (a)(3)(iii) through (a)(3)(v) are redesignated as 
paragraphs (a)(3)(v) through (a)(3)(vii), respectively.
    3. New paragraphs (a)(3)(iii) and (a)(3)(iv) are added.
    The revision and additions read as follows:


Sec. 1.882-4  Allowance of deductions and credits to foreign 
corporations.

    (a) * * *
    (3) * * *
    (ii) through (iv) For further guidance, see Sec. 1.882-4T(a)(3)(ii) 
through (iv).
* * * * *
    Par. 5. Section 1.882-4T is added to read as follows:


Sec. 1.882-4T  Allowance of deductions and credits to foreign 
corporations (temporary).

    (a) through (a)(3)(i) For further guidance, see Sec. 1.882-4(a) 
through (a)(3)(i).
    (a)(3)(ii) The filing deadlines set forth in Sec. 1.882-4(a)(3)(i) 
may be waived if the foreign corporation establishes to the 
satisfaction of the Commissioner or his or her delegate that the 
corporation, based on the facts and circumstances, acted reasonably and 
in good faith in

[[Page 4176]]

failing to file a U.S. income tax return (including a protective return 
(as described in Sec. 1.882-4(a)(3)(vi))). For this purpose, a foreign 
corporation shall not be considered to have acted reasonably and in 
good faith if the foreign corporation knew that it was required to file 
the return and chose not to file the return. In addition, a foreign 
corporation shall not be granted a waiver unless the foreign 
corporation cooperates in the process of determining its income tax 
liability for the taxable year for which the return was not filed. The 
Commissioner or his or her delegate shall consider the following 
factors in determining whether the foreign corporation, based on the 
facts and circumstances, acted reasonably and in good faith in failing 
to file a U.S. income tax return:
    (A) Whether the corporation voluntarily identifies itself to the 
Internal Revenue Service as having failed to file a U.S. income tax 
return before the Internal Revenue Service discovers the failure to 
file;
    (B) Whether the corporation did not become aware of its ability to 
file a protective return (as described in Sec. 1.882-4(a)(3)(vi)) by 
the deadline for filing a protective return;
    (C) Whether the corporation had not previously filed a U.S. income 
tax return;
    (D) Whether the corporation failed to file a U.S. income tax return 
because, after exercising reasonable diligence (taking into account its 
relevant experience and level of sophistication), the corporation was 
unaware of the necessity for filing the return;
    (E) Whether the corporation failed to file a U.S. income tax return 
because of intervening events beyond the corporation's control; and
    (F) Whether other mitigating or exacerbating factors existed.
    (iii) The following examples illustrate the provisions of this 
section. In all examples, FC is a foreign corporation and uses the 
calendar year as its taxable year. The examples are as follows:

    Example 1. Foreign corporation discloses own failure to file. In 
Year 1, FC became a limited partner with a passive investment in a 
U.S. limited partnership that was engaged in a U.S. trade or 
business. During Year 1 through Year 4, FC incurred losses with 
respect to FC's U.S. partnership interest. FC's foreign tax director 
incorrectly concluded that because FC was a limited partner and had 
only losses from FC's partnership interest, FC was not required to 
file a U.S. income tax return. FC's management was aware neither of 
FC's obligation to file a U.S. income tax return for those years nor 
of FC's ability to file a protective return for those years. FC had 
never filed a U.S. income tax return before. In Year 5, FC began 
realizing a profit, rather than a loss, with respect to the 
partnership interest, and, for this reason, engaged a U.S. tax 
advisor to handle FC's responsibility to file U.S. income tax 
returns. In preparing FC's income tax return for Year 5, FC's U.S. 
tax advisor discovered that returns were not filed for Year 1 
through Year 4. Therefore, with respect to those years for which 
applicable filing deadlines in Sec. 1.882-4(a)(3)(i) were not met, 
FC would be barred by Sec. 1.882-4(a)(2) from claiming any 
deductions that otherwise would have given rise to net operating 
losses on returns for these years, and would have been available as 
loss carryforwards in subsequent years. At FC's direction, FC's U.S. 
tax advisor promptly contacted the appropriate examining personnel 
and cooperated with the Internal Revenue Service in determining FC's 
income tax liability, for example, by preparing and filing the 
appropriate income tax returns for Year 1 through Year 4 and by 
making FC's books and records available to an Internal Revenue 
Service examiner. FC has met the standard described in paragraph 
(a)(3)(ii) of this section for waiver of any applicable filing 
deadlines in Sec. 1.882-4(a)(3)(i).
    Example 2. Foreign corporation refuses to cooperate. Same facts 
as in Example 1, except that while FC's U.S. tax advisor contacted 
the appropriate examining personnel and filed the appropriate income 
tax returns for Year 1 through Year 4, FC refused all requests by 
the Internal Revenue Service to provide supporting information (for 
example, books and records) with respect to those returns. Because 
FC did not cooperate in determining its U.S. tax liability for the 
taxable years for which an income tax return was not timely filed, 
FC is not granted a waiver as described in paragraph (a)(3)(ii) of 
this section of any applicable filing deadlines in Sec. 1.882-
4(a)(3)(i).
    Example 3. Foreign corporation fails to file a protective 
return. Same facts as in Example 1, except that in Year 1 through 
Year 4, FC's tax director also consulted a U.S. tax advisor, who 
advised FC's tax director that it was uncertain whether U.S. income 
tax returns were necessary for those years and that FC could protect 
its right subsequently to claim the loss carryforwards by filing 
protective returns under Sec. 1.882-4(a)(3)(vi). FC did not file 
U.S. income tax returns or protective returns for those years. FC 
did not present evidence that intervening events beyond FC's control 
prevented FC from filing an income tax return, and there were no 
other mitigating factors. FC has not met the standard described in 
paragraph (a)(3)(ii) of this section for waiver of any applicable 
filing deadlines in Sec. 1.882-4(a)(3)(i).
    Example 4. Foreign corporation with effectively connected 
income. In Year 1, FC, a technology company, opened an office in the 
United States to market and sell a software program that FC had 
developed outside the United States. FC had minimal business or tax 
experience internationally, and no such experience in the United 
States. Through FC's direct efforts, U.S. sales of the software 
produced income effectively connected with a U.S. trade or business. 
FC, however, did not file U.S. income tax returns for Year 1 or Year 
2. FC's management was aware neither of FC's obligation to file a 
U.S. income tax return for those years, nor of FC's ability to file 
a protective return for those years. FC had never filed a U.S. 
income tax return before. In January of Year 4, FC engaged U.S. 
counsel in connection with licensing software to an unrelated U.S. 
company. U.S. counsel reviewed FC's U.S. activities and advised FC 
that FC should have filed U.S. income tax returns for Year 1 and 
Year 2. FC immediately engaged a U.S. tax advisor, at FC's 
direction, who promptly contacted the appropriate examining 
personnel and cooperated with the Internal Revenue Service in 
determining FC's income tax liability, for example, by preparing and 
filing the appropriate income tax returns for Year 1 and Year 2 and 
by making FC's books and records available to an Internal Revenue 
Service examiner. FC has met the standard described in paragraph 
(a)(3)(ii) of this section for waiver of any applicable filing 
deadlines in Sec. 1.882-4(a)(3)(i).
    Example 5. IRS discovers foreign corporation's failure to file. 
In Year 1, FC, a technology company, opened an office in the United 
States to market and sell a software program that FC had developed 
outside the United States. Through FC's direct efforts, U.S. sales 
of the software produced income effectively connected with a U.S. 
trade or business. FC had extensive experience conducting similar 
business activities in other countries, including making the 
appropriate tax filings. However, FC's management was aware neither 
of FC's obligation to file a U.S. income tax return for those years, 
nor of FC's ability to file a protective return for those years. FC 
had never filed a U.S. income tax return before. Despite FC's 
extensive experience conducting similar business activities in other 
countries, FC made no effort to seek advice in connection with FC's 
U.S. tax obligations. FC failed to file either U.S. income tax 
returns or protective returns for Year 1 and Year 2. In January of 
Year 4, an Internal Revenue Service examiner asked FC for an 
explanation of FC's failure to file U.S. income tax returns. FC 
immediately engaged X, a U.S. tax advisor, and cooperated with the 
Internal Revenue Service in determining FC's income tax liability, 
for example, by preparing and filing the appropriate income tax 
returns for Year 1 and Year 2 and by making FC's books and records 
available to the examiner. FC did not present evidence that 
intervening events beyond FC's control prevented FC from filing a 
return, and there were no other mitigating factors. FC has not met 
the standard described in paragraph (a)(3)(ii) of this section for 
waiver of any applicable filing deadlines in Sec. 1.882-4(a)(3)(i) 
of this section.
    Example 6. Foreign corporation with prior filing history. FC 
began a U.S. trade or business in Year 1. FC's tax advisor filed the 
appropriate U.S. income tax returns for Year 1 through Year 6, 
reporting income effectively connected with FC's U.S. trade or 
business. In Year 7, FC replaced its tax advisor with a tax advisor 
unfamiliar with U.S. tax law. FC did not file a U.S. income tax 
return for any year from Year 7 through Year 10, although FC had 
effectively connected income for those years. FC's

[[Page 4177]]

management was aware of FC's ability to file a protective return for 
those years. In Year 11, an Internal Revenue Service examiner 
contacted FC and asked FC's chief financial officer for an 
explanation of its failure to file U.S. income tax returns after 
Year 6. FC immediately engaged a U.S. tax advisor and cooperated 
with the Internal Revenue Service in determining FC's income tax 
liability, for example, by preparing and filing the appropriate 
income tax returns for Year 7 through Year 10 and by making FC's 
books and records available to the examiner. FC did not present 
evidence that intervening events beyond FC's control prevented FC 
from filing a return, and there were no other mitigating factors. FC 
has not met the standard described in paragraph (a)(3)(ii) of this 
section for waiver of any applicable filing deadlines in Sec. 1.882-
4(a)(3)(i).

    (iv) Paragraphs (a)(3)(ii) and (iii) of this section are applicable 
to open years for which a request for a waiver is filed on or after 
January 29, 2002.
    (a)(3)(v) through (b)(2) For further guidance, see Sec. 1.882-
4(a)(3)(v) through (b)(2).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: January 4, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 02-2044 Filed 1-28-02; 8:45 am]
BILLING CODE 4830-01-P