[Federal Register Volume 69, Number 144 (Wednesday, July 28, 2004)]
[Rules and Regulations]
[Pages 44930-44932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17079]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9143]
RIN 1545-AP30


Allocation and Apportionment of Deductions for Charitable 
Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary and final regulations.

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SUMMARY: This document contains temporary regulations relating to the 
allocation and apportionment of the deduction for charitable 
contributions allowed by sections 170, 873(b)(2), and 882(c)(1)(B). 
These regulations change the method of allocating and apportioning 
these deductions from ratable apportionment on the basis of gross 
income to apportionment on the basis of income from sources within the 
United States. The temporary regulations will affect individuals and 
corporations that make contributions to charitable organizations and 
that have foreign source income and calculate their foreign tax credit 
limitations under section 904. The text of the temporary regulations 
also serves as the text of the proposed regulations set forth in the 
Proposed Rules section in this issue of the Federal Register. This 
document also contains final regulations that remove the existing 
regulations concerning allocation and apportionment of charitable 
contribution deductions.

DATES: Effective Date: These regulations are effective July 28, 2004.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.861-8(a)(5), 1.861-8T(e)(12)(iv), and 1.861-14T(e)(6)(ii). The 
regulations are applicable to charitable contributions made on or after 
July 28, 2004. Taxpayers may elect to apply these regulations to 
contributions made before July 28, 2004, but during a taxable year 
ending after July 28, 2004.

FOR FURTHER INFORMATION CONTACT: Teresa Burridge Hughes (202) 622-3850 
(not a toll free call).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the regulations under section 
861 relating to the allocation and apportionment of the deduction for 
charitable contributions allowed under sections 170, 873(b)(2), and 
882(c). Currently, regulations under Sec.  1.861-8(e)(9)(iv) provide 
that such deductions generally are not definitely related to any gross 
income and therefore are ratably apportioned to the statutory and 
residual groupings on the basis of gross income.
    In 1991, the Treasury Department and the IRS issued proposed 
regulations (the 1991 proposed regulations) that would have changed the 
ratable apportionment rule of the final regulations to a rule that, 
assuming certain requirements are met, generally would apportion the 
deduction for a charitable contribution based on where the contribution 
would be used. Prop. Treas. Reg. Sec.  1.861-8(e)(12), 56 Fed. Reg. 
10,395 (1991). More specifically, the 1991 proposed regulations 
provided that the deduction for a charitable contribution would have 
been apportioned solely to foreign source gross income if the taxpayer, 
at the time of the contribution, knows or has reason to know that the 
contribution will be used solely outside the United States or that the 
contribution may necessarily be used only outside the United States. 
The 1991 proposed regulations also provided that the deduction for a 
charitable contribution would have been apportioned solely to U.S. 
source gross income if the taxpayer,

[[Page 44931]]

at the time of the contribution, both designates the contribution for 
use solely in the United States and reasonably believes that the 
contribution will be so used. Under the 1991 proposed regulations, a 
deduction for a charitable contribution that is not apportionable to 
United States or foreign source gross income under the foregoing rules 
would have been ratably apportioned on the basis of gross income.
    The preamble to the 1991 proposed regulations requested comments on 
the effects of the proposed rules on U.S. charities with significant 
international activities. Numerous comments were received on the 1991 
proposed regulations, most of which recommended that the proposed rules 
not be adopted. The principal reason given was that the 1991 proposed 
regulations would reduce funding for foreign charitable activities 
generally. In addition, the designation and place of use requirements 
were seen as generating significant paperwork and accountability 
burdens for both the contributors and the recipient charities. Many 
comments suggested that, instead of the bifurcated allocation and 
apportionment in the proposed regulations, the deduction for a 
charitable contribution should be allocated solely to income from 
sources within the United States.
    In response to the comments received, and upon further 
consideration of the issue, the 1991 proposed regulations are being 
withdrawn. See Notice of Proposed Rulemaking published in the Proposed 
Rules section of this issue of the Federal Register. In addition, the 
notice of proposed rulemaking includes proposed regulations which cross 
reference these temporary regulations and proposed regulations with 
respect to deductions for charitable contributions that are allowed 
under a U.S. income tax treaty (rather than under sections 170, 
873(b)(2), and 882(c)(1)(B)).

Explanation of Provisions

    The temporary regulations provide that the deduction for charitable 
contributions allowed by sections 170, 873(b)(2), and 882(c)(1)(B) is 
definitely related and allocable to all of the taxpayer's gross income 
and is apportioned between the statutory grouping (or among the 
statutory groupings) of gross income and the residual grouping on the 
basis of the relative amounts of gross income from sources in the 
United States in each grouping. For example, where a deduction for 
charitable contributions is allocated and apportioned for purposes of 
the foreign tax credit limitation, the charitable contribution 
deduction is allocated to all of the taxpayer's gross income and 
apportioned solely to the residual grouping consisting of U.S. source 
gross income. This revision of the regulations is consistent with the 
policy of the section 170 contribution rules. The revision is intended 
to ensure that a taxpayer is not discouraged from making a charitable 
contribution that is deductible under section 170 simply because the 
allocation and apportionment rules would reduce the taxpayer's foreign 
source income and, accordingly, the taxpayer's foreign tax credit 
limitation as a result of the deduction.
    The temporary regulations also provide that, where a charitable 
contribution is made by a member of an affiliated group, the deduction 
for the charitable contribution is related to and allocated to the 
income of all of the members of the affiliated group and not to any 
subset of the group. This rule is consistent with the provisions of 
Notice 89-91 (1989-2 C.B. 408). Finally, the provisions of the final 
regulations under Sec.  1.861-8(e)(9)(iv) and Sec.  1.861-8(g), Example 
18, which provide for ratable allocation and apportionment of 
deductions for charitable contributions, are removed.
    The regulations are effective for charitable contributions made on 
or after July 28, 2004. Taxpayers may elect to apply these regulations 
to contributions made before July 28, 2004 but during a taxable year 
ending on or after July 28, 2004.

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 also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble to the cross-
referenced notice of proposed rulemaking published in the Proposed 
Rules section in this issue of the Federal Register. Pursuant to 
section 7805(f) of the Internal Revenue 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 Teresa Burridge 
Hughes, Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority for part 1 continues to read in part:

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

0
Par. 2. Section Sec.  1.861-8 is amended as follows:
0
1. Remove the language ``paragraphs (c)(2)'' from paragraph (a)(2) and 
add the language ``paragraphs (c)(3)'' in its place.
0
2. Add a new second sentence to paragraph (a)(5)(i).
0
3. Revise paragraph (e)(1).
0
4. Remove the language ``paragraph (c)(2)'' from the paragraph (e)(9) 
introductory text and add the language ``paragraph (c)(3)'' in its 
place.
0
5. Add the word ``and'' at the end of paragraph (e)(9)(iii).
0
6. Remove paragraphs (e)(9)(iv) and (g) Example 18 (iv).
0
7. Redesignate paragraph (e)(9)(v) as paragraph (e)(9)(iv).
0
8. Add new paragraph (e)(12).
0
9. Redesignate paragraph (g) Example 18 (i) as paragraph (g) Example 18 
(i)(A).
0
10. Remove the last three entries in the table following the language 
``Total gross income .... 40,000,000'' from newly designated paragraph 
(g) Example 18 (i)(A).
0
11. Add new paragraph (g) Example 18 (i)(B) immediately following the 
table in newly designated paragraph (g) Example 18 (i)(A).
0
12. Designate the undesignated text following new paragraph (g) Example 
18 (i)(B) as paragraph (g) Example 18 (i)(C).
    The revisions and additions read as follows:


Sec.  1.861-8  Computation of taxable income from sources within the 
United States and from other sources and activities.

    (a) * * * (1) * * *
    (5) * * * (i) * * * Paragraph (g) Example 18 (i)(B) applies to 
charitable contributions made on or after July 28, 2004.
* * * * *
    (e) Allocation and apportionment of certain deductions--(1) In 
general. Paragraphs (e)(2) and (e)(3) of this section contain rules 
with respect to the allocation and apportionment of interest

[[Page 44932]]

expense and research and development expenditures, respectively. 
Paragraphs (e)(4) through (e)(8) of this section contain rules with 
respect to the allocation of certain other deductions. Paragraph (e)(9) 
of this section lists those deductions which are ordinarily considered 
as not being definitely related to any class of gross income. Paragraph 
(e)(10) of this section lists special deductions of corporations which 
must be allocated and apportioned. Paragraph (e)(11) of this section 
lists personal exemptions which are neither allocated nor apportioned. 
Paragraph (e)(12) of this section contains rules with respect to the 
allocation and apportionment of deductions for charitable 
contributions. Examples of allocation and apportionment are contained 
in paragraph (g) of this section.
* * * * *
    (12) [Reserved]. For further guidance, see Sec.  1.861-8T(e)(12).
* * * * *
    (g) General examples. * * *
    Example 18. * * * (i)(A) * * *
    (i)(B) In addition, X incurs expenses of its supervision department 
of $1,600,000.
* * * * *

0
Par. 3. Section 1.861-8T is amended as follows:
0
1. Add new paragraph (e)(12).
0
2. Add a new second sentence to paragraph (h).
    The additions read as follows:


Sec.  1.861-8T  Computation of taxable income from sources within the 
United States and from other sources and activities (temporary).

* * * * *
    (e) * * *
    (12) Deductions for certain charitable contributions--(i) In 
general. The deduction for charitable contributions that is allowed 
under sections 170, 873(b)(2), and 882(c)(1)(B) is definitely related 
and allocable to all of the taxpayer's gross income. The deduction 
allocated under this paragraph (e)(12)(i) shall be apportioned between 
the statutory grouping (or among the statutory groupings) of gross 
income and the residual grouping on the basis of the relative amounts 
of gross income from sources in the United States in each grouping.
    (ii) Coordination with Sec.  1.861-14T. A deduction for a 
charitable contribution by a member of an affiliated group shall be 
allocated and apportioned under the rules of this section and Sec.  
1.861-14T(c)(1).
    (iii) Treaty provisions. [Reserved]
    (iv) Effective date. (A) The rules of paragraphs (e)(12)(i) and 
(ii) shall apply to charitable contributions made on or after July 28, 
2004. Taxpayers may apply the provisions of paragraphs (e)(12)(i) and 
(ii) to charitable contributions made before July 28, 2004 but during 
the taxable year ending on or after July 28, 2004.
    (B) The applicability of this section expires on or before July 27, 
2007.
* * * * *
    (h) * * * However, see paragraph (e)(12)(iv) of this section and 
Sec.  1.861-14T(e)(6)(ii) for rules concerning the allocation and 
apportionment of deductions for charitable contributions. * * *

0
Par. 4. Section 1.861-14T is amended by revising the section heading 
and adding paragraph (e)(6) to read as follows:


Sec.  1.861-14T  Special rules for allocating and apportioning certain 
expenses (other than interest expense) of an affiliated group of 
corporations (temporary).

* * * * *
    (e) * * *
    (6) Charitable contribution expenses--(i) In general. A deduction 
for a charitable contribution by a member of an affiliated group shall 
be allocated and apportioned under the rules of Sec.  1.861-8T(e)(12) 
and paragraph (c)(1) of this section.
    (ii) Effective date. (A) The rules of this paragraph shall apply to 
charitable contributions made on or after July 28, 2004 and, for 
taxpayers applying the second sentence of Sec.  1.861-8T(e)(12)(iv)(A), 
to charitable contributions made during the taxable year ending on or 
after July 28, 2004.
    (B) The applicability of this section expires on or before July 27, 
2007.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: July 20, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-17079 Filed 7-27-04; 8:45 am]
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