[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Rules and Regulations]
[Pages 40661-40663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13690]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9211]
RIN 1545-AP30; RIN 1545-BD47


Allocation and Apportionment of Deductions for Charitable 
Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
allocation and apportionment of the deduction for charitable 
contributions allowed under sections 170, 873(b)(2), and 882(c)(1)(B) 
and the deduction for charitable contributions allowed under an income 
tax treaty. These regulations apportion the deduction for charitable 
contributions on the basis of income from sources within the United 
States. These regulations 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.

DATES: Effective Date: These regulations are effective July 28, 2004, 
except Sec.  1.861-8(e)(12)(ii), which is effective July 14, 2005.

[[Page 40662]]

    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.861-8(e)(12)(iv) and 1.861-14(e)(6)(ii). The regulations generally 
apply to charitable contributions made on or after July 28, 2004, 
although taxpayers generally may choose to apply these regulations to 
contributions made before July 28, 2004, but during a taxable year 
ending on or after July 28, 2004. Section 1.861-8(e)(12)(ii) applies to 
contributions made on or after July 14, 2005, although taxpayers may 
choose to apply that section to contributions made before July 14, 
2005, but during a taxable year ending on or after July 14, 2005.

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

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. Section 1.861-
8(e)(9)(iv) (the 1977 regulations) provided that deductions for 
charitable contributions generally were not definitely related to any 
gross income and therefore were 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 1977 regulations to a rule that, assuming certain 
requirements were met, generally would have apportioned the deduction 
for a charitable contribution based on where the contribution would 
have been used. Prop. Treas. Reg. Sec.  1.861-8(e)(12), 56 FR 10,395.
    On July 28, 2004, the Treasury Department and the IRS issued 
temporary regulations (T.D. 9143, 2004-36 I.R.B. 442) relating to the 
allocation and apportionment of the deduction for charitable 
contributions allowed under sections 170, 873(b)(2), and 882(c)(1)(B) 
of the Internal Revenue Code. A notice of proposed rulemaking by cross 
reference to the temporary regulations (REG-208246-90, 2004-36 I.R.B. 
450) was also published in the Federal Register on the same date. That 
notice of proposed rulemaking also proposed rules governing the 
allocation and apportionment of the deduction for charitable 
contributions that is allowed under a U.S. income tax treaty (rather 
than under sections 170, 873(b)(2), and 882(c)(1)(B)). As part of the 
issuance of the temporary and proposed regulations, the Treasury 
Department and the IRS removed the 1977 regulations and withdrew the 
1991 proposed regulations. REG-208246-90; 2004-36 I.R.B. 450. Although 
a public hearing on the proposed regulations was originally scheduled 
for December 2, 2004, the public hearing was cancelled because no 
person requested to provide an oral statement at the hearing.

Explanation of Provisions

    These final regulations adopt the rules of the temporary and 
proposed regulations, which provide that the deduction for charitable 
contributions 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 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. The corresponding temporary regulations 
are removed.
    One written comment responding to the temporary and proposed 
regulations was received. The comment requested that taxpayers be 
permitted to elect to apply the new allocation and apportionment rules 
to deductions for charitable contributions previously claimed on timely 
filed tax returns for all open tax years. After consideration, the 
Treasury Department and the IRS concluded that adoption of the 
comment's suggestion is not appropriate. The new allocation and 
apportionment rules apply to charitable contributions made on or after 
July 28, 2004. Although the temporary regulations permit taxpayers to 
apply the new rules to charitable contributions made before July 28, 
2004, this election applies only to charitable contributions made in a 
taxable year that ends on or after July 28, 2004. The purpose of this 
election is to allow taxpayers to apply only one set of allocation and 
apportionment rules to charitable contributions made in the same 
taxable year. To permit taxpayers to apply the new rules to all open 
tax years would not provide such simplification and would raise 
concerns regarding fairness and administration.
    The regulations also adopt, as proposed, the rules with respect to 
deductions for charitable contributions that are allowed under an 
income tax treaty (rather than by sections 170, 873(b)(2), and 
882(c)(1)(B)). The regulations make one change to the effective date in 
the proposed regulations. As with the deduction for charitable 
contributions allowed under sections 170, 873(b)(2), and 882(c)(1)(B), 
the regulations give taxpayers the opportunity to apply the new rules 
for all charitable contributions made during the taxable year. 
Accordingly, the rule for the deduction for charitable contributions 
allowed under an income tax treaty is effective for taxable years 
beginning on or after July 14, 2005, with an election to apply the rule 
to contributions made before July 14, 2005, but during a taxable year 
that ends on or after July 14, 2005.

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. Because the 
regulations do 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 
proposed regulations preceding these regulations were 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.

Adoption of 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 as 
follows:

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


0
Par. 2. Section 1.861-8 is amended as follows:
0
1. Remove the last sentence of paragraph (a)(5)(i).
0
2. Revise paragraph (e)(12).
    The revision reads as follows:


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

* * * * *
    (e) * * * (1) * * *
    (12) Deductions for certain charitable contributions--(i) In 
general. The deduction for charitable contributions

[[Page 40663]]

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) Treaty provisions. If a deduction for charitable contributions 
not otherwise permitted by sections 170, 873(b)(2), and 882(c)(1)(B) is 
allowed under a U.S. income tax treaty, and such treaty limits the 
amount of the deduction based on a percentage of income arising from 
sources within the treaty partner, the deduction is definitely related 
and allocable to all of the taxpayer's gross income. The deduction 
allocated under this paragraph (e)(12)(ii) 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 within the treaty partner within each 
grouping.
    (iii) Coordination with Sec. Sec.  1.861-14 and 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, Sec.  1.861-14(e)(6), and Sec.  1.861-14T(c)(1).
    (iv) Effective date. (A) The rules of paragraphs (e)(12)(i) and 
(iii) of this section shall apply to charitable contributions made on 
or after July 28, 2004. Taxpayers may apply the provisions of 
paragraphs (e)(12)(i) and (iii) of this section to charitable 
contributions made before July 28, 2004, but during the taxable year 
ending on or after July 28, 2004.
    (B) The rules of paragraphs (e)(12)(ii) of this section shall apply 
to charitable contributions made on or after July 14, 2005. Taxpayers 
may apply the provisions of paragraph (e)(12)(ii) of this section to 
charitable contributions made before July 14, 2005, but during the 
taxable year ending on or after July 14, 2005.
* * * * *

0
Par. 3. Section 1.861-8T is amended as follows:
0
1. Remove paragraph (e)(12).
0
2. Revise the second sentence of paragraph (h) introductory text.
    The revision reads as follows:


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

* * * * *
    (h) * * * However, see Sec. Sec.  1.861-8(e)(12)(iv) and 1.861-
14(e)(6) for rules concerning the allocation and apportionment of 
deductions for charitable contributions. * * *
* * * * *

0
Par. 4. Section 1.861-14 is amended by removing paragraphs (d)(3) 
through (j), adding new paragraphs (d)(3) through (e)(5), adding 
paragraph (e)(6) and adding new paragraphs (f) through (j) to read as 
follows:


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

* * * * *
    (d)(3) through (e)(5) [Reserved]. For further guidance, see Sec.  
1.861-14T(d)(3) through (e)(5).
    (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. Sec.  
1.861-8(e)(12) and 1.861-14T(c)(1).
    (ii) Effective date. (A) The rules of this paragraph shall apply to 
charitable contributions subject to Sec.  1.861-8(e)(12)(i) that are 
made on or after July 28, 2004, and, for taxpayers applying the second 
sentence of Sec.  1.861-8(e)(12)(iv)(A), to charitable contributions 
made during the taxable year ending on or after July 28, 2004.
    (B) The rules of this paragraph shall apply to charitable 
contributions subject to Sec.  1.861-8(e)(12)(ii) that are made on or 
after July 14, 2005, and, for taxpayers applying the second sentence of 
Sec.  1.861-8(e)(12)(iv)(B), to charitable contributions made during 
the taxable year ending on or after July 14, 2005.
    (f) through (j) [Reserved]. For further guidance, see Sec.  1.861-
14T(f) through (j).


Sec.  1.861-14T  [AMENDED]

0
Par. 5. Section 1.861-14T is amended by removing paragraph (e)(6).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: July 5, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-13690 Filed 7-13-05; 8:45 am]
BILLING CODE 4830-01-P