[Federal Register Volume 70, Number 190 (Monday, October 3, 2005)]
[Rules and Regulations]
[Pages 57509-57510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19622]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9226]
RIN 1545-BD27


Stock Held by Foreign Insurance Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations 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 regulations provide 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: Effective Date: These regulations are effective on October 3, 
2005.

FOR FURTHER INFORMATION CONTACT: Sheila Ramaswamy, (202) 622-3870 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On June 25, 2004, a notice of proposed rulemaking (REG-117307-04) 
was published in the Federal Register (69 FR 35543). No requests for a 
public hearing were received, and no public hearing was held. The IRS 
received one written comment in response to the notice of proposed 
rulemaking. After consideration of the comment, the proposed regulation 
is adopted without change.

Explanation of Provisions and Summary of Comments

    This Treasury decision adopts the language of the proposed 
regulation without change.
    The IRS received one comment in response to the proposed 
regulation. The commentator requested further clarification regarding 
what constitutes

[[Page 57510]]

an insurance company for federal income tax purposes. The IRS believes 
the issue of what constitutes an insurance company is outside the scope 
of this regulation, which solely relates to the application of the 
asset-use test to stock held by foreign insurance companies.
    The commentator also expressed concern about the interaction of the 
proposed regulation with Sec.  1.864-5(a), which provides, generally, 
that foreign source income, such as a foreign-source dividend or gain, 
cannot constitute U.S. effectively connected income in circumstances in 
which a U.S.-source dividend or gain would not constitute U.S. 
effectively connected income. Accordingly, the commentator is concerned 
that the rule in the regulations will also expand the category of 
foreign-source dividends or gains that may constitute effectively 
connected income. That is true and the Treasury Department and the IRS 
believe this is the appropriate result.
    The IRS invited comments whether the 10 percent threshold provided 
in the proposed regulation was an appropriate standard for determining 
whether stock is a portfolio investment. The commentator stated that it 
was possible for insurance companies to make a strategic investment in 
a corporation at a level below 10 percent of the vote or value of the 
corporation, such as by purchasing a special class of shares that 
conveyed the power to elect directors. The commentator recommended 
creating a rebuttable presumption of portfolio status.
    We do not believe that treating the 10 percent threshold as a 
rebuttable presumption is appropriate. The 10 percent threshold 
provides a reasonable method for identifying portfolio stock held by a 
branch of a foreign life insurance company.

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 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, the notice of proposed rulemaking preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal author of this regulation 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

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
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) Stock held by foreign insurance companies. This paragraph 
(c)(2)(iii) 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.
    Approved: August 9, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.
[FR Doc. 05-19622 Filed 9-30-05; 8:45 am]
BILLING CODE 4830-01-U