[Federal Register Volume 69, Number 122 (Friday, June 25, 2004)]
[Proposed Rules]
[Pages 35543-35544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14392]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-117307-04]
RIN 1545-BD27


Stock Held by Foreign Insurance Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation relating to the 
determination of income of foreign insurance companies that is 
effectively connected with the conduct of a trade or business within 
the United States. The regulation provides that the exception to the 
asset-use test for stock shall not apply in determining whether the 
income, gain, or loss from portfolio stock held by foreign insurance 
companies constitutes effectively connected income.

DATES: Written or electronic comments and requests for a public hearing 
must be received by September 23, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-117307-04), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
117307-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking 
Portal at http://www.regulations.gov (IRS and REG-117307-04).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Sheila 
Ramaswamy, at (202) 622-3870; concerning submissions and delivery of 
comments, Robin Jones, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    In 1992, the Treasury Department and the IRS published proposed 
regulations under section 864 providing that stock is not treated as an 
asset used in, or held for use in, the conduct of a trade or business 
in the United States. Proposed Sec.  1.864-4(c)(2)(ii)(C). The notice 
of proposed rulemaking solicited comments regarding the appropriate 
treatment of income from portfolio stock investments of insurance 
companies. The Treasury Department and the IRS published final 
regulations in 1996 which adopted the general rule in the proposed 
regulations that stock is not treated as an asset used in, or held for 
use in, the conduct of a U.S. trade or business. TD 8657(1996-1 C.B. 
153). The final regulations reserved on the treatment of stock held by 
a foreign insurance company. Sec.  1.864-4(c)(2)(iii)(b). This proposed 
regulation sets forth circumstances in which stock held by a foreign 
insurance company is not subject to the general rule in Sec.  1.864-
4(c)(2)(iii)(a), which provides that stock is not an asset used in a 
U.S. trade or business.

Explanation of Provisions

    In the case of a foreign corporation engaged in a trade or business 
within the United States during the taxable year, section 864(c)(2) 
generally provides rules for determining whether certain fixed or 
determinable, annual or periodical income from sources within the 
United States or gain or loss from sources within the United States 
from sale or exchange of capital assets is income effectively connected 
with the conduct of a trade or business in the United States. Section 
864(c)(2). In making this determination, the factors taken into account 
include whether (a) the income, gain or loss is derived from assets 
used in or held for use in the conduct of such trade or business (the 
asset-use test), or (b) the activities of such trade or business were a 
material factor in the realization of such income, gain or loss. 
Section 864(c)(2). Section 1.864-4(c)(2)(iii)(a) generally provides 
that stock of a corporation (whether domestic or foreign) is not an 
asset used in or held for use in the conduct of a trade or business in 
the United States except as provided in (c)(2)(iii)(b). Section 1.864-
4(c)(2)(iii)(b) entitled ``Stock Held by Foreign Insurance Companies'' 
is reserved.
    Insurance companies hold investment assets, such as stocks and 
bonds, to fund their obligations to policyholders and to meet their 
surplus (capital) requirements. Thus, stock held in an

[[Page 35544]]

investment portfolio may be an asset held for use in the trade or 
business of a foreign insurance company. By contrast, stock of a 
subsidiary generally is not held for the purpose of meeting an 
insurance company's business needs.
    This proposed regulation provides that the general rule excluding 
stock from the asset-use test does not apply to stock held by a foreign 
insurance company unless such company owns directly, indirectly, or 
constructively 10 percent or more of the vote or value of the company's 
stock. The 10-percent threshold is intended to distinguish portfolio 
stock held to fund policyholder obligations and surplus requirements 
from investments in a subsidiary. Comments are requested as to whether 
this 10-percent threshold provides an appropriate standard for 
determining whether stock is a portfolio investment for these purposes.

Proposed Effective Date

    This regulation is proposed to apply to taxable periods beginning 
on or after the date of publication of a Treasury decision adopting 
this rule as a final regulation in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. 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 Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for a public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Sheila 
Ramaswamy, 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.

Proposed Amendment 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 
revising Sec.  1.864-4 as follows:

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

    Par. 2. In Sec.  1.864-4, paragraph (c)(2)(iii)(b) is revised to 
read as follows:
* * * * *


Sec.  1.864-4  U.S. source income effectively connected with U.S. 
business.

* * * * *
    (c) * * *
    (2) * * *
    (iii) * * *
    (b) Paragraph (c)(2)(iii) of this section shall not apply to stock 
of a corporation (whether domestic or foreign) held by a foreign 
insurance company unless the foreign insurance company owns 10 percent 
or more of the total voting power or value of all classes of stock of 
such corporation. For purposes of this section, section 318(a) shall be 
applied in determining ownership, except that in applying section 
318(a)(2)(C), the phrase ``10 percent'' is used instead of the phrase 
``50 percent.''
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-14392 Filed 6-24-04; 8:45 am]
BILLING CODE 4830-01-P