[Federal Register Volume 71, Number 247 (Tuesday, December 26, 2006)]
[Rules and Regulations]
[Pages 77264-77266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22024]


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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9260]
RIN 1545-BF46


Application of Separate Limitations to Dividends From 
Noncontrolled Section 902 Corporations; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

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

SUMMARY: This document contains corrections to final and temporary 
regulations that were published in the Federal Register on Tuesday, 
April 25, 2006 (71 FR 24516) concerning the application of separate 
foreign tax credit limitations to dividends received from noncontrolled 
section 902 corporations under section 904(d)(4).

DATES: These corrections are effective April 25, 2006.

FOR FURTHER INFORMATION CONTACT: Ginny Chung (202) 622-3850 (not a 
toll-free call).

SUPPLEMENTARY INFORMATION: 

Background

    The final and temporary regulations (TD 9260) that are the subject 
of these corrections are under sections 902, 904, and 964 of the 
Internal Revenue Code.

Need for Correction

    As published, TD 9260 contains errors that may prove to be 
misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

0
Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

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

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


0
Par. 2. Section 1.902-1 is amended by adding a heading to paragraph 
(a)(4)(i) introductory text and revising the heading for paragraph 
(c)(8) to read as follows:


Sec.  1.902-1  Credit for domestic corporate shareholder of a foreign 
corporation for foreign income taxes paid by the foreign corporation.

    (a) * * *
    (4) Third- or lower-tier corporation--(i) Third-tier corporation. * 
* *
* * * * *
    (c) * * *
    (8) Effect of certain liquidations, reorganizations, or similar 
transactions on certain foreign taxes paid or accrued in taxable years 
beginning on or before August 5, 1997.
    * * *
* * * * *

0
Par. 3. Section 1.902-1T is amended by revising the first sentence of 
paragraph (a)(7) to read as follows:


Sec.  1.902-1T  Credit for domestic corporate shareholder of a foreign 
corporation for foreign income taxes paid by the foreign corporation 
(temporary).

    (a) * * *
    (7) * * * The term foreign income taxes means income, war profits, 
and excess profits taxes as defined in Sec.  1.902-1(a), and taxes 
included in the term income, war profits, and excess profits taxes by 
reason of section 903, that are imposed by a foreign country or a 
possession of the United States, including any such taxes deemed paid 
by a foreign corporation under this section. * * *
* * * * *

[[Page 77265]]


0
Par. 4. Section 1.902-2 is amended by revising the first sentence of 
paragraph (a)(1) to read as follows:


Sec.  1.902-2  Treatment of deficits in post-1986 undistributed 
earnings and pre-1987 accumulated profits of a first- or lower-tier 
corporation for purposes of computing an amount of foreign taxes deemed 
paid under Sec.  1.902-1.

    (a) * * * (1) * * * For purposes of computing foreign income taxes 
deemed paid under Sec.  1.902-1(b) with respect to dividends paid by a 
first- or lower-tier corporation, when there is a deficit in the post-
1986 undistributed earnings of that corporation and the corporation 
makes a distribution to shareholders that is a dividend or would be a 
dividend if there were current or accumulated earnings and profits, 
then the post-1986 deficit shall be carried back to the most recent 
pre-effective date taxable year of the first- or lower-tier corporation 
with positive accumulated profits computed under section 902. * * *
* * * * *

0
Par. 5. Section 1.904-0 is amended by adding the entries for paragraphs 
(o)(1) and (o)(2) under Sec.  1.904-5 to read as follows:


Sec.  1.904-0  Outline of regulations provisions for section 904.

* * * * *


Sec.  1.904-5  Look-through rules as applied to controlled foreign 
corporations and other entities.

* * * * *
    (o) * * *
    (1) Rules for controlled foreign corporations and other look-
through entities.
    (2) Rules for noncontrolled section 902 corporations.
* * * * *

0
Par. 6. Section 1.904-4 is amended by revising paragraph (c)(4) 
introductory text and adding paragraphs (c)(4)(i) through (c)(4)(iii) 
to read as follows:


Sec.  1.904-4  Separate application of section 904 with respect to 
certain categories of income.

* * * * *
    (c) * * *
    (3) and (4) [Reserved]. For further guidance, see Sec.  1.904-
4T(c)(3) and (4) introductory text.
    (4)(i) Income from sources within the QBU's country of operation. 
Passive income from sources within the QBU's country of operation shall 
be treated as one item of income.
    (ii) Income from sources without the QBU's country of operation. 
Passive income from sources without the QBU's country of operation 
shall be grouped on the basis of the tax imposed on that income as 
provided in Sec.  1.904-4T(c)(3)(i) through (iv).
    (iii) Determination of the source of income. For purposes of this 
paragraph (c)(4), income will be determined to be from sources within 
or without the QBU's country of operation under the laws of the foreign 
country of the payor of the income.
* * * * *
    Par. 7. Section 1.904-5 is amended by revising paragraphs (a) 
introductory text and (a)(1) and adding Examples 4 and 5 to paragraph 
(i)(5) to read as follows:


Sec.  1.904-5  Look-through rules as applied to controlled foreign 
corporations and other entities.

    (a) and (a)(1) [Reserved]. For further guidance, see Sec.  1.904-
5T(a) introductory text and (a)(1).
* * * * *
    (i) * * *
    (5) * * *
    Examples 4 and 5 [Reserved]. For further guidance, see Sec.  1.904-
5T(i)(5) Examples 4 and 5.
* * * * *
    Par. 8. Section 1.904(f)-12T is amended by revising the heading for 
paragraph (g)(1) to read as follows:


Sec.  1.904(f)-12T  Transition rules (temporary).

* * * * *
    (g) * * * (1) Recapture of separate limitation loss or overall 
foreign loss in a separate category for dividends from a noncontrolled 
section 902 corporation. * * *
* * * * *

0
Par. 9. Section 1.964-1 is amended by:
0
1. Redesignating paragraphs (a) introductory text, (a)(1), (a)(2) and 
(a)(3) as paragraphs (a)(1) introductory text, (a)(1)(i), (a)(1)(ii) 
and (a)(1)(iii), respectively.
0
2. Designating the undesignated text following newly-designated 
paragraph (a)(1)(iii) as paragraph (a)(2).
0
3. Removing the comma following the word ``shall'' from newly-
designated paragraph (a)(1) introductory text.
0
4. Removing the last sentence in newly-designated paragraph (a)(1)(i).
0
5. Revising newly-designated paragraph (a)(2), and the text of 
paragraphs (b)(1) introductory text and (c)(1) introductory text.
    The revisions read as follows:


Sec.  1.964-1  Determination of the earnings and profits of a foreign 
corporation.

    (a) * * *
    (2) Required adjustments. The computation described in paragraph 
(a)(1) of this section shall be made in the foreign corporation's 
functional currency (determined under section 985 and the regulations 
under that section) and may be made by following the procedures 
described in paragraphs (a)(1)(i) through (a)(1)(iii) of this section 
in an order other than the one listed, as long as the result so 
obtained would be the same. In determining earnings and profits, or the 
deficit in earnings and profits, of a foreign corporation under section 
964, the amount of an illegal bribe, kickback, or other payment (within 
the meaning of section 162(c), as amended by section 288 of the Tax 
Equity and Fiscal Responsibility Act of 1982 in the case of payments 
made after September 3, 1982, and the regulations issued pursuant to 
section 964) paid after November 3, 1976, by or on behalf of the 
corporation during the taxable year of the corporation directly or 
indirectly to an official, employee, or agent in fact of a government 
shall not be taken into account to decrease such earnings and profits 
or to increase such deficit. No adjustment shall be required under 
paragraph (a)(1)(ii) or (iii) of this section unless it is material. 
Whether an adjustment is material depends on the facts and 
circumstances of the particular case, including the amount of the 
adjustment, its size relative to the general level of the corporation's 
total assets and annual profit or loss, the consistency with which the 
practice has been applied, and whether the item to which the adjustment 
relates is of a recurring or merely a nonrecurring nature. For the 
treatment of earnings and profits whose distribution is prevented by 
restrictions and limitations imposed by a foreign government, see 
section 964(b) and the regulations issued pursuant to section 964. For 
rules for determining the earnings and profits (or deficit in earnings 
and profits) of a foreign corporation for taxable years beginning 
before January 1, 1987, for purposes of sections 951 through 964, see 
26 CFR 1.964-1(a) (revised as of April 1, 2006).
    (b) * * * (1) * * * The accounting principles to be applied in 
making the adjustments required by paragraph (a)(1)(ii) of this section 
shall be those accounting principles generally accepted in the United 
States for purposes of reflecting in the financial statements of a 
domestic corporation the operations of its foreign affiliates, 
including the following:
* * * * *
    (c) * * * (1) * * * The tax accounting standards to be applied in 
making the adjustments required by

[[Page 77266]]

paragraph (a)(1)(iii) of this section shall be the following:
* * * * *
0
Par. 10. Section 1.964-1T is amended by revising the first sentence of 
paragraph (c)(2) and the last sentence of paragraph (c)(5)(i) to read 
as follows:


Sec.  1.964-1T  Determination of the earnings and profits of a foreign 
corporation (temporary).

* * * * *
    (c) * * *
    (2) * * * For the first taxable year of a foreign corporation 
beginning after April 25, 2006, in which such foreign corporation first 
qualifies as a controlled foreign corporation (as defined in section 
957 or 953) or a noncontrolled section 902 corporation (as defined in 
section 904(d)(2)(E)), any method of accounting or taxable year 
allowable under this section may be adopted, and any election allowable 
under this section may be made, by such foreign corporation or on its 
behalf notwithstanding that, in previous years, its books or financial 
statements were prepared on a different basis, and notwithstanding that 
such election is required by the Internal Revenue Code or regulations 
to be made in a prior taxable year. * * *
* * * * *
    (5) * * * (i) * * * In the event that the United States 
shareholders of the controlled foreign corporation do not, in the 
aggregate, own (within the meaning of section 958(a)) more than 50 
percent of the total combined voting power of all classes of the stock 
of such foreign corporation entitled to vote, the controlling United 
States shareholders of the controlled foreign corporation shall be all 
those United States shareholders who own (within the meaning of section 
958(a)) stock of such corporation.
* * * * *

Cynthia Grigsby,
Senior Federal Register Liaison Officer, Publications and Regulations 
Branch, Legal Processing Division, Associate Chief Counsel (Procedure 
and Administration).
[FR Doc. E6-22024 Filed 12-22-06; 8:45 am]
BILLING CODE 4830-01-P