[Federal Register Volume 69, Number 172 (Tuesday, September 7, 2004)]
[Proposed Rules]
[Pages 54067-54072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20244]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-101282-04]
RIN 1545-BD06


Treatment of a Stapled Foreign Corporation Under Sections 269B 
and 367(b)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains a notice of proposed rulemaking 
concerning the definition and tax treatment of a stapled foreign 
corporation, which generally is treated for tax purposes as a domestic 
corporation under section 269B of the Internal Revenue Code.

DATES: Written or electronic comments must be received by December 6, 
2004. Outlines of topics to be discussed at the public hearing 
scheduled for December 15, 2004, at 10 a.m. must be received by 
December 6, 2004.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-101282-04), room 5203, 
Internal Revenue Service, POB 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-101282-04), 
Courier's desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC 20224. Alternatively, taxpayers may submit comments 
electronically to the IRS Internet site at http://www.irs.gov/regs or 
via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-
REG-101282-04). The public hearing will be held in the auditorium, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Richard L. Osborne, (202) 622-3977, or Bethany Ingwalson, (202) 622-
3850; concerning submissions of comments, the hearing, and/or to be 
placed on the building access list to attend the hearing, LaNita Van 
Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Under section 269B(a)(1), if a domestic corporation and a foreign 
corporation are stapled entities, the foreign corporation will be 
treated as a domestic corporation for U.S. Federal tax purposes, unless 
otherwise provided in regulations. A domestic and a foreign

[[Page 54068]]

corporation are stapled entities if more than 50 percent in value of 
the beneficial ownership in each corporation consists of stapled 
interests. Section 269B(c)(2). Interests are stapled if, by reason of 
form of ownership, restrictions on transfer, or other terms and 
conditions, in connection with the transfer of one of such interests, 
the other such interests are also transferred or required to be 
transferred. Section 269B(c)(3).
    Section 269B(e) provides that a stapled foreign corporation will 
not be treated as a domestic corporation pursuant to section 269B(a)(1) 
if it is established to the satisfaction of the Secretary that the 
stapled corporations are foreign owned. A corporation is treated as 
foreign owned if U.S. persons own directly (or indirectly through 
applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of 
section 318(a)) less than 50 percent of the total combined voting power 
of all classes of stock entitled to vote and less than 50 percent of 
the total value of the stock of such corporation.
    On August 28, 1989, the IRS and the Treasury Department issued 
Notice 89-94 (1989-2 C.B. 416), announcing the intention to adopt 
regulations under section 269B. The Notice stated that regulations 
would provide that a stapled foreign corporation treated as a domestic 
corporation under section 269B(a)(1) was nevertheless to be treated as 
a foreign corporation for purposes of the definition of an includible 
corporation under section 1504(b). Notice 89-94 explained that, under 
these regulations, the stapled foreign corporation's losses would not 
offset the income of any member of the affiliated group unless a valid 
section 1504(d) election was in effect for the stapled foreign 
corporation.
    Subsequent to the issuance of Notice 89-94, the IRS and Treasury 
Department became aware of instances in which taxpayers attempted to 
use section 269B and Notice 89-94 to manipulate the computation of 
their foreign tax credit limitation. These transactions typically 
involved stapling the interests of a domestic and foreign corporation, 
all or substantially all of the interests of which were held by the 
same person or related persons. On July 22, 2003, the IRS and Treasury 
Department issued Notice 2003-50 (2003-32 I.R.B. 295) to address these 
situations. Notice 2003-50 announced that regulations would be issued 
under section 269B providing that a stapled foreign corporation will be 
treated as a domestic corporation in determining whether it is an 
includible corporation for purposes of Sec. Sec.  1.904(i)-1 and 1.861-
11T(d)(6).

Explanation of Provisions

Includible Corporation

    Consistent with Notice 89-94, this proposed regulation provides 
that a stapled foreign corporation, which is generally treated as a 
domestic corporation under section 269B, nevertheless will be treated 
as a foreign corporation for purposes of the definition of an 
includible corporation under section 1504(b). Thus, in the absence of a 
valid election under section 1504(d), an affiliated group cannot 
include the stapled foreign corporation in its consolidated tax return 
and therefore the affiliated group cannot use the stapled foreign 
corporation's losses to offset income of another member of the group. 
As announced in Notice 2003-50, however, the proposed regulation also 
treats a stapled foreign corporation as a domestic corporation in 
determining whether it is an includible corporation for purposes of 
Sec. Sec.  1.904(i)-1 and 1.861-11T(d)(6).

Determination of Stapled Corporation Status in the Case of Multiple 
Classes of Stock

    Section 269B(c)(2) provides that two or more entities are stapled 
entities if more than 50 percent in value of the beneficial ownership 
in each entity consists of stapled interests. This proposed regulation 
clarifies that this determination is made on an aggregate basis if 
there are multiple classes of stock. For example, if a class of stock 
in each corporation (representing more than 50 percent in value of such 
corporation) is stapled to a class of stock in the other corporation 
(representing less than 50 percent in value of such other corporation), 
the two corporations are considered stapled because, in the aggregate, 
more than 50 percent of the value of each corporation is stapled to the 
other corporation's stock.

Related Party Ownership Rule

    In cases where stapled interests constituting more than 50 percent 
of the beneficial ownership in each stapled entity are held by the same 
or related persons, the IRS and Treasury Department believe that the 
formal transfer restrictions have little or no substantive consequence 
and may be intended to facilitate the affirmative use of section 269B 
for tax avoidance purposes. Accordingly, for purposes of determining 
whether a foreign corporation and a domestic corporation are stapled 
entities under section 269B, this proposed regulation permits the 
Commissioner to treat interests that otherwise would be stapled 
interests as not being stapled if the same person or related persons 
(within the meaning of section 267(b) or 707(b)) hold stapled interests 
constituting more than 50 percent of the beneficial ownership of both 
corporations, and a principal purpose of the stapling of those 
interests is the avoidance of U.S. income tax. No inference is intended 
as to whether current structures involving majority interests held by 
the same person or related persons are stapled interests within the 
meaning of section 269B. In such cases, the IRS will continue to apply 
principles of existing law to determine whether interests are stapled 
for purposes of section 269B. For example, under a substance-over-form 
analysis, restrictions on the transferability of ownership interests 
may be disregarded for tax purposes if the majority interests are held 
by the same person or related persons.

Inbound and Outbound Conversions

    A corporation's status as either foreign or domestic may change 
under section 269B. For example, if a foreign corporation and a 
domestic corporation become stapled entities and are not foreign owned 
under section 269B(e), the foreign corporation will be treated as 
converting to a domestic corporation for U.S. tax purposes (inbound 
conversion). Similarly, if the stapled foreign corporation's interests 
cease to be stapled at some point in the future, the stapled foreign 
corporation no longer will be treated as a domestic corporation for 
U.S. tax purposes and, therefore, will be treated as converting to a 
foreign corporation (outbound conversion).
    Section 1.367(b)-2(g) provides that an inbound conversion is 
treated as a reorganization described in section 368(a)(1)(F) (F 
reorganization). This proposed regulation includes this rule and 
revises Sec.  1.367(b)-2(g) to include a cross-reference to the 
relocated provision. Additionally, this proposed regulation provides 
that an outbound conversion also is treated as an F reorganization. 
Treatment of an inbound or outbound conversion as an F reorganization 
also applies in cases where the conversion results from a change in 
ownership of a stapled foreign corporation that changes its status as 
foreign owned under section 269B(e). In all such cases, this proposed 
regulation treats the conversion as an F reorganization, even though 
all of the technical requirements of an F reorganization may not be 
satisfied. See Staff of Joint Committee on Taxation, General 
Explanation of the Revenue Provisions of the Deficit Reduction Act of 
1984, H.R. Doc. 4170, 98th Cong., 456-57 (1984).

[[Page 54069]]

    This proposed regulation references the section 367 regulations for 
purposes of determining the tax consequences under section 367 that 
result from an inbound or outbound conversion. Section 1.367(b)-2(f)(2) 
provides that an inbound F reorganization includes a transfer of assets 
by a foreign corporation to a domestic corporation. Section 1.367(a)-
1T(f) provides similar treatment in the case of an outbound conversion. 
Further, in both cases, the taxable year of the corporation ends as a 
result of the deemed conversion. See Sec. Sec.  1.367(a)-1T(e) and 
1.367(b)-2(f)(4).

U.S. Treaties

    Section 269B(d) provides that a stapled foreign corporation treated 
as a domestic corporation under section 269B will not be exempt from 
U.S. tax liability by reason of any treaty obligation of the United 
States. In enacting section 269B(d), Congress was concerned that a 
stapled foreign corporation that is resident in a treaty country might 
claim an exclusion from U.S. taxation, for example, on the basis that 
its income is not attributable to a permanent establishment in the 
United States. See H.R. Rep. No. 98-432, 98th Cong., 1st Sess., 244-45. 
This would be contrary to the purpose of section 269B, which is to tax 
a stapled foreign corporation on its worldwide income as if it were a 
domestic corporation. Accordingly, this proposed regulation provides 
that a stapled foreign corporation treated as a domestic corporation 
under section 269B may not claim an exemption or reduction in tax rates 
provided under a treaty entered into by the United States.

Collection

    Under section 269B(b), the Secretary may prescribe regulations 
providing that any U.S. income tax imposed on a stapled foreign 
corporation may, if not paid by such corporation, be collected from the 
domestic corporation whose ownership interests are stapled to the 
foreign corporation's ownership interests (stapled domestic 
corporation) or from the shareholders of the stapled foreign 
corporation. This proposed regulation provides that the Commissioner 
may collect the stapled foreign corporation's U.S. income tax liability 
from the stapled domestic corporation and, subject to certain 
limitations, from certain shareholders of such foreign corporation.
    Any U.S. income tax assessed as a tax liability of the stapled 
foreign corporation will be deemed to be properly assessed as a tax 
liability of the stapled domestic corporation and the 10-percent 
shareholders of the stapled foreign corporation. For these purposes, a 
10-percent shareholder of a stapled foreign corporation is defined as 
any person owning directly 10 percent or more of the total value or 
total combined voting power of all classes of stock in the stapled 
foreign corporation for any day of the foreign corporation's taxable 
year with respect to which the liability relates. The IRS and Treasury 
Department are concerned about 10-percent shareholders interposing 
entities in order to avoid collection under these rules. These proposed 
regulations contain a reserved section for rules regarding indirect 
ownership and request comments on how to address situations involving 
indirect ownership of the stapled foreign corporation.
    The Commissioner may collect from the stapled domestic corporation 
any U.S. income tax properly assessed but not timely paid by the 
stapled foreign corporation, and, if the domestic corporation fails to 
timely pay such tax or any portion thereof, from one or more 10-percent 
shareholders of the stapled foreign corporation. The collection action 
may proceed against the domestic corporation only after the 
Commissioner has issued a notice and demand for payment of unpaid U.S. 
income tax to the stapled foreign corporation, and the stapled foreign 
corporation has failed to pay the tax due by the date specified in the 
notice. A collection action then may proceed against the 10-percent 
shareholders of the stapled foreign corporation if the Commissioner has 
issued a notice and demand for payment of the unpaid tax to the stapled 
domestic corporation, and the stapled domestic corporation has failed 
to pay such tax by the date specified.
    This proposed regulation limits the amount of any U.S. income tax 
liability of the stapled foreign corporation that may be collected from 
any 10-percent shareholder of a stapled foreign corporation. The 
shareholder's share of the liability will be determined by assigning an 
equal portion of the total U.S. income tax liability of the stapled 
foreign corporation to each day in such corporation's taxable year, and 
then dividing that portion ratably among the shares outstanding for 
that day based on the relative values of such shares. The shareholder's 
share of the liability is the sum of the U.S. income tax liability 
allocated to the shares held by such shareholder for each day in the 
taxable year.

Proposed Effective Dates

    Except as otherwise provided, the proposed regulations are 
applicable for taxable years that begin after the date on which final 
regulations are published in the Federal Register. Section 1.269B-
1(d)(1) and (f) (except in the case of the collection of tax from a 10-
percent shareholder that is a foreign person) applies beginning on July 
18, 1984, for any foreign corporation that became stapled to a domestic 
corporation after June 30, 1983, and beginning on January 1, 1987, for 
any foreign corporation that was stapled to a domestic corporation as 
of June 30, 1983. Section 1.269B-1(d)(2) applies for taxable years 
beginning after July 22, 2003, except that in the case of a foreign 
corporation that becomes stapled to a domestic corporation on or after 
July 22, 2003, then paragraph (d)(2) applies to taxable years ending on 
or after July 22, 2003. Section 1.269B-1(e) applies beginning on July 
18, 1984, except that Sec.  1.269B-1(e) does not apply, and the foreign 
corporation continues for all U.S. tax purposes to be a foreign entity, 
if the foreign corporation was stapled to a domestic corporation as of 
June 30, 1983, was entitled to benefits under an income tax treaty in 
existence as of that date, and has remained eligible to claim such 
treaty benefits. At such time as the stapled foreign corporation is no 
longer eligible to claim treaty benefits, the foreign corporation is 
deemed to convert to a domestic corporation for U.S. tax purposes.

Special Analyses

    The IRS and the Treasury Department have 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 that because this 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, this regulation 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 comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS specifically request 
comments on the clarity of the proposed regulations and how it may be 
made easier to

[[Page 54070]]

understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for December 15, 2004, at 10 
a.m., in the auditorium, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance more than 30 minutes before the hearing starts. 
For information about having your name placed on the building access 
list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT 
section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic 
(signed original and eight (8) copies) by December 6, 2004. A period of 
10 minutes will be allotted to each person for making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Richard L. Osborne 
and Bethany Ingwalson, of the 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.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

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


    Authority: 26 U.S.C. 7805 * * *
    Section 1.269B(b)-1 also issued under 26 U.S.C. 269B(b).

    Par. 2. Section 1.269B-1 is added to read as follows:


Sec.  1.269B-1  Stapled foreign corporations.

    (a) Treatment as a domestic corporation--(1) General rule. Except 
as otherwise provided, if a foreign corporation is a stapled foreign 
corporation within the meaning of paragraph (b)(1) of this section, 
such foreign corporation will be treated as a domestic corporation for 
U.S. Federal income tax purposes. Accordingly, for example, the 
worldwide income of such corporation will be subject to the tax imposed 
by section 11. For application of the branch profits tax under section 
884, and application of sections 871(a), 881, 1441, and 1442 to 
dividends and interest paid by a stapled foreign corporation, see 
Sec. Sec.  1.884-1(h) and 1.884-4(d).
    (2) Foreign owned exception. Paragraph (a)(1) of this section will 
not apply if a foreign corporation and a domestic corporation are 
stapled entities (as provided in paragraph (b) of this section) and 
such foreign and domestic corporations are foreign owned within the 
meaning of this paragraph (a)(2). A corporation will be treated as 
foreign owned if it is established to the satisfaction of the 
Commissioner that United States persons hold directly (or indirectly 
applying section 958(a)(2) and (3) and section 318(a)(4)) less than 50 
percent of the total combined voting power of all classes of stock 
entitled to vote and less than 50 percent of the total value of the 
stock of such corporation. For the consequences of a stapled foreign 
corporation becoming or ceasing to be foreign owned, therefore 
converting its status as either a foreign or domestic corporation 
within the meaning of this paragraph (a)(2), see paragraph (c) of this 
section.
    (b) Definition of a stapled foreign corporation--(1) General rule. 
A foreign corporation is a stapled foreign corporation if such foreign 
corporation and a domestic corporation are stapled entities. A foreign 
corporation and a domestic corporation are stapled entities if more 
than 50 percent of the aggregate value of each corporation's beneficial 
ownership consists of interests that are stapled. In the case of 
corporations with more than one class of stock, it is not necessary for 
a class of stock representing more than 50 percent of the beneficial 
ownership of the foreign corporation to be stapled to a class of stock 
representing more than 50 percent of the beneficial ownership of the 
domestic corporation, provided that more than 50 percent of the 
aggregate value of each corporation's beneficial ownership (taking into 
account all classes of stock) are in fact stapled. Interests are 
stapled if a transferor of one or more interests in one entity is 
required, by form of ownership, restrictions on transfer, or other 
terms or conditions, to transfer interests in the other entity. The 
determination of whether interests are stapled for this purpose is 
based on the relevant facts and circumstances, including, but not 
limited to, the corporations' by-laws, articles of incorporation or 
association, and stock certificates, shareholder agreements, agreements 
between the corporations, and voting trusts with respect to the 
corporations. For the consequences of a foreign corporation's change in 
status as a stapled foreign corporation (that is not foreign owned) 
under this paragraph (b)(1), see paragraph (c) of this section.
    (2) Related party ownership rule. For purposes of determining 
whether a foreign corporation is a stapled foreign corporation, the 
Commissioner may, at his discretion, treat interests that otherwise 
would be stapled interests as not being stapled if the same person or 
related persons (within the meaning of section 267(b) or 707(b)) hold 
stapled interests constituting more than 50 percent of the beneficial 
ownership of both corporations, and a principal purpose of the stapling 
of those interests is the avoidance of U.S. income tax. A stapling of 
interests may have a principal purpose of tax avoidance even though the 
tax avoidance purpose is outweighed by other purposes when taken 
together.
    (3) Example. The principles of paragraph (b)(1) of this section are 
illustrated by the following example:

    Example. USCo, a domestic corporation, and FCo, a foreign 
corporation, are publicly traded companies, each having two classes 
of stock outstanding. USCo's class A shares, which constitute 75% of 
the value of all beneficial ownership in USCo, are stapled to FCo's 
class B shares, which constitute 25% of the value of all beneficial 
ownership in F Co. USCo's class B shares, which constitute 25% of 
the value of all beneficial ownership in USCo, are stapled to FCo 
class A shares, which constitute 75% of the value of all beneficial 
ownership in FCo. Because more than 50% of the aggregate value of 
the stock of each corporation is stapled to the stock of the other 
corporation, USCo and FCo are stapled entities within the meaning of 
section 269B(c)(2).

    (c) Changes in domestic or foreign status. The deemed conversion of 
a foreign corporation to a domestic corporation under section 269B is 
treated as a reorganization under section 368(a)(1)(F). Similarly, the 
deemed conversion of a corporation that is treated as a domestic 
corporation under

[[Page 54071]]

section 269B to a foreign corporation is treated as a reorganization 
under section 368(a)(1)(F). For the consequences of a deemed 
conversion, including the closing of a corporation's taxable year, see 
Sec. Sec.  1.367(a)-1T(e), (f) and 1.367(b)-2(f).
    (d) Includible corporation--(1) Except as provided in paragraph 
(d)(2) of this section, a stapled foreign corporation treated as a 
domestic corporation under section 269B nonetheless will be treated as 
a foreign corporation in determining whether it is an includible 
corporation within the meaning of section 1504(b). Thus, for example, a 
stapled foreign corporation shall not be eligible to join in the filing 
of a consolidated return under section 1501, and a dividend paid by 
such corporation shall not constitute a qualifying dividend under 
section 243(b), unless a valid section 1504(d) election is made with 
respect to such corporation.
    (2) A stapled foreign corporation will be treated as a domestic 
corporation in determining whether it is an includible corporation 
under section 1504(b) for purposes of applying Sec. Sec.  1.904(i)-1 
and 1.861-11T(d)(6).
    (e) U.S. treaties--(1) A stapled foreign corporation that is 
treated as a domestic corporation under section 269B may not claim an 
exemption from U.S. income tax or a reduction in U.S. tax rates by 
reason of any treaty entered into by the United States.
    (2) The principles of this paragraph (e) are illustrated by the 
following example:

    Example. FCo, a Country X corporation, is a stapled foreign 
corporation that is treated as a domestic corporation under section 
269B. FCo qualifies as a resident of Country X pursuant to the 
income tax treaty between the United States and Country X. Under 
such treaty, the United States is permitted to tax business profits 
of a Country X resident only to the extent that the business profits 
are attributable to a permanent establishment of the Country X 
resident in the United States. While FCo earns income from sources 
within and without the United States, it does not have a permanent 
establishment in the United States within the meaning of the 
relevant treaty. Under paragraph (e)(1) of this section, however, 
FCo is subject to U.S. Federal income tax on its income as a 
domestic corporation without regard to the provisions of the U.S.-
Country X treaty and therefore without regard to the fact that FCo 
has no permanent establishment in the United States.

    (f) Tax assessment and collection procedures--(1) In general. (i) 
Any income tax imposed on a stapled foreign corporation by reason of 
its treatment as a domestic corporation under section 269B (whether 
such income tax is shown on the stapled foreign corporation's U.S. 
Federal income tax return or determined as a deficiency in income tax) 
shall be assessed as the income tax liability of such stapled foreign 
corporation.
    (ii) Any income tax assessed as a liability of a stapled foreign 
corporation under paragraph (f)(1)(i) of this section shall be 
considered as having been properly assessed as an income tax liability 
of the stapled domestic corporation (as defined in paragraph (f)(4)(i) 
of this section) and all 10-percent shareholders of the stapled foreign 
corporation (as defined in paragraph (f)(4)(ii) of this section). The 
date of such deemed assessment shall be the date the income tax 
liability of the stapled foreign corporation was properly assessed. The 
Commissioner may collect such income tax from the stapled domestic 
corporation under the circumstances set forth in paragraph (f)(2) of 
this section and may collect such income tax from any 10-percent 
shareholders of the stapled foreign corporation under the circumstances 
set forth in paragraph (f)(3) of this section.
    (2) Collection from domestic stapled corporation. If the stapled 
foreign corporation does not pay its income tax liability that was 
properly assessed, the unpaid balance of such income tax or any portion 
thereof may be collected from the stapled domestic corporation, 
provided that the following conditions are satisfied:
    (i) The Commissioner has issued a notice and demand for payment of 
such income tax to the stapled foreign corporation in accordance with 
Sec.  301.6303-1;
    (ii) The stapled foreign corporation has failed to pay the income 
tax by the date specified in such notice and demand;
    (iii) The Commissioner has issued a notice and demand for payment 
of the unpaid portion of such income tax to the stapled domestic 
corporation in accordance with Sec.  301.6303-1.
    (3) Collection from 10-percent shareholders of the stapled foreign 
corporation. The unpaid balance of the stapled foreign corporation's 
income tax liability may be collected from a 10-percent shareholder of 
the stapled foreign corporation, limited to each such shareholder's 
income tax liability as determined under paragraph (f)(4)(iv) of this 
section, provided the following conditions are satisfied:
    (i) The Commissioner has issued a notice and demand to the stapled 
domestic corporation for the unpaid portion of the stapled foreign 
corporation's income tax liability, as provided in paragraph 
(f)(2)(iii) of this section;
    (ii) The stapled domestic corporation has failed to pay the income 
tax by the date specified in such notice and demand;
    (iii) The Commissioner has issued a notice and demand for payment 
of the unpaid portion of such income tax to such 10-percent shareholder 
of the stapled foreign corporation in accordance with Sec.  301.6303-1.
    (4) Special rules and definitions. For purposes of this paragraph 
(f), the following rules and definitions apply:
    (i) Stapled domestic corporation. A domestic corporation is a 
stapled domestic corporation with respect to a stapled foreign 
corporation if such domestic corporation and the stapled foreign 
corporation are stapled entities as described in paragraph (b)(1) of 
this section.
    (ii) 10-percent shareholder. A 10-percent shareholder of a stapled 
foreign corporation is any person that owned directly 10 percent or 
more of the total value or total combined voting power of all classes 
of stock in the stapled foreign corporation for any day of the stapled 
foreign corporation's taxable year with respect to which the income tax 
liability relates.
    (iii) 10-percent shareholder in the case of indirect ownership of 
stapled foreign corporation stock. [Reserved].
    (iv) Determination of a 10-percent shareholder's income tax 
liability. The income tax liability of a 10-percent shareholder of a 
stapled foreign corporation, for the income tax of the stapled foreign 
corporation under section 269B and this section, is determined by 
assigning an equal portion of the total income tax liability of the 
stapled foreign corporation for the taxable year to each day in such 
corporation's taxable year, and then dividing that portion ratably 
among the shares outstanding for that day on the basis of the relative 
values of such shares. The liability of any 10-percent shareholder for 
this purpose is the sum of the income tax liability allocated to the 
shares held by such shareholder for each day in the taxable year.
    (v) Income tax. The term income tax means any income tax liability 
imposed on a domestic corporation under title 26 of the United States 
Code, including additions to tax, additional amounts, penalties, and 
interest related to such income tax liability.
    (g) Effective dates--(1) Except as provided in this paragraph (g), 
the provisions of this section are applicable for taxable years that 
begin after the date the final regulations are published in the Federal 
Register.
    (2) Paragraphs (d)(1) and (f) of this section (except as applied to 
the

[[Page 54072]]

collection of tax from any 10-percent shareholder of a stapled foreign 
corporation that is a foreign person) are applicable beginning on--
    (i) July 18, 1984, for any foreign corporation that became stapled 
to a domestic corporation after June 30, 1983; and
    (ii) January 1, 1987, for any foreign corporation that was stapled 
to a domestic corporation as of June 30, 1983.
    (3) Paragraph (d)(2) of this section is applicable for taxable 
years beginning after July 22, 2003, except that in the case of a 
foreign corporation that becomes stapled to a domestic corporation on 
or after July 22, 2003, paragraph (d)(2) of this section applies for 
taxable years ending on or after July 22, 2003.
    (4) Paragraph (e) of this section is applicable beginning on July 
18, 1984, except as provided in paragraph (g)(5) of this section.
    (5) In the case of a foreign corporation that was stapled to a 
domestic corporation as of June 30, 1983, which was entitled to claim 
benefits under an income tax treaty as of that date, and which remains 
eligible for such treaty benefits, paragraph (e) of this section will 
not apply to such foreign corporation and for all purposes of the Code 
such corporation will continue to be treated as a foreign entity. The 
prior sentence will continue to apply even if such treaty is 
subsequently modified by protocol, or superseded by a new treaty, so 
long as the stapled foreign corporation continues to be eligible to 
claim such treaty benefits. If the treaty benefits to which the stapled 
foreign corporation was entitled as of June 30, 1983 are terminated, 
then a deemed conversion of the foreign corporation to a domestic 
corporation shall occur pursuant to paragraph (c) of this section as of 
the date of such termination.
    Par. 3. In Sec.  1.367(b)-2, paragraph (g) is revised to read as 
follows:


Sec.  1.367(b)-2  Definitions and special rules.

* * * * *
    (g) Stapled stock under section 269B. For rules addressing the 
deemed conversion of a foreign corporation to a domestic corporation 
under section 269B, see Sec.  1.269B-1(c).
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    Par 4. The authority citation for part 301 continues to read, in 
part, as follows:


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

    Section 301.269B-1 also issued under 26 U.S.C. 269B(b).

    Par. 5. Section 301.269B-1 is added to read as follows:


Sec.  301.269B-1  Stapled foreign corporations.

    In accordance with section 269B(a)(1), a stapled foreign 
corporation is subject to the same taxes that apply to a domestic 
corporation under Title 26 of the Internal Revenue Code. For provisions 
concerning taxes other than income for which the stapled foreign 
corporation is liable, apply the same rules as set forth in Sec.  
1.269B-1(a) through (f)(1)(i), and (g), except that references to 
income tax shall be replaced with the term tax. In addition, for 
purposes of collecting those taxes solely from the stapled foreign 
corporation, the term tax means any tax liability imposed on a domestic 
corporation under Title 26, including additions to tax, additional 
amounts, penalties, and interest related to that tax liability.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-20244 Filed 9-3-04; 8:45 am]
BILLING CODE 4830-01-P