[Federal Register Volume 72, Number 215 (Wednesday, November 7, 2007)]
[Rules and Regulations]
[Pages 62771-62788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-21766]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9362]
RIN 1545-BG23


Foreign Tax Credit: Notification of Foreign Tax Redeterminations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary Income Tax Regulations 
relating to a United States taxpayer's obligation under section 905(c) 
of the Internal Revenue Code (Code) to notify the IRS of a foreign tax 
redetermination, which is a change in the taxpayer's foreign tax 
liability that may affect the taxpayer's foreign tax credit. This 
document also contains temporary Procedure and Administration 
Regulations under section 6689 relating to the civil penalty for 
failure to notify the IRS of a foreign tax redetermination as required 
under section 905(c). These temporary regulations affect taxpayers that 
have paid foreign taxes which have been redetermined and provide 
guidance needed to comply with statutory changes made to the applicable 
law by the Taxpayer Relief Act of 1997 and the American Jobs Creation 
Act of 2004. The text of the temporary regulations also serves as the 
text of the proposed regulations (REG-209020-86) set forth in the 
notice of proposed rulemaking on this subject published elsewhere in 
this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on November 7, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.905-3T(a), 1.905-4T(f), and 301.6689-1T(e). These regulations 
generally apply to foreign tax redeterminations occurring in taxable 
years of United States taxpayers beginning on or after November 7, 
2007, where the foreign tax redetermination affects the amount of 
foreign taxes paid or accrued by a United States taxpayer. Where the 
redetermination of foreign tax paid or accrued by a foreign corporation 
affects the amount of foreign taxes deemed paid under section 902 or 
960, this section applies to foreign tax redeterminations occurring in 
a taxable year of a foreign corporation which ends with or within the 
taxable year of the domestic corporate shareholder beginning on or 
after November 7, 2007. Section 1.905-3T(b) generally applies to taxes 
paid or

[[Page 62772]]

accrued in taxable years of United States taxpayers beginning on or 
after November 7, 2007 and to taxes paid or accrued by a foreign 
corporation in its taxable year which ends with or within the taxable 
year of the domestic corporate shareholder beginning on or after 
November 7, 2007. For foreign tax redeterminations occurring in taxable 
years of United States taxpayers beginning before November 7, 2007 and 
foreign tax redeterminations occurring in taxable years of a foreign 
corporation which end with or within the taxable year of the domestic 
corporate shareholder beginning before November 7, 2007, see Sec.  
1.905-4T(f)(2).

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

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public comment pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collections of information contained 
in these regulations have been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1056. Responses to this collection of 
information are mandatory.
    The collections of information in these temporary regulations are 
in Sec.  1.905-4T. This information is required in order for taxpayers 
to notify the IRS of a foreign tax redetermination that may require 
redetermination of the taxpayer's United States tax liability.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    For further information concerning these collections of 
information; where to submit comments on the collections of information 
and the accuracy of the estimated burden; and suggestions for reducing 
this burden, please refer to the preamble of the cross-referencing 
notice of proposed rulemaking published in this issue of the Federal 
Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Under section 905(c) and the regulations, a taxpayer that claims a 
foreign tax credit for taxes paid or accrued under section 901 or 
deemed paid under section 902 or 960 must notify the IRS when there has 
been a change to the amount of foreign taxes paid or accrued. In 
general, in the case of a foreign tax redetermination with respect to 
taxes claimed as a direct credit under section 901, the taxpayer's 
United States tax liability must be redetermined; and, in the case of a 
foreign tax redetermination with respect to taxes included in the 
computation of foreign taxes deemed paid under section 902 or 960, the 
foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes must be adjusted (subject to exceptions 
described in Sec. Sec.  1.905-3T(d)(3) and (f)). If the taxpayer fails 
to notify the IRS of a foreign tax redetermination, unless it is shown 
that such failure is due to reasonable cause and not due to willful 
neglect, section 6689 imposes a penalty of 5 percent of the deficiency 
attributable to such redetermination if the failure is for not more 
than 1 month, with an additional 5 percent for each additional month 
during which the failure continues, but not to exceed 25 percent of the 
deficiency.
    On June 23, 1988, the Federal Register published proposed (53 FR 
23659) (INTL-061-86) and temporary (53 FR 23611) (TD 8210) amendments 
to the Income Tax Regulations (26 CFR part 1) under section 905(c) and 
to the Procedure and Administration Regulations (26 CFR part 301) under 
section 6689 (the 1988 proposed and temporary regulations). These 
amendments reflected the changes made to the Internal Revenue Code by 
section 2(c)(2) of the Revenue Act of December 28, 1980 (94 Stat. 3503, 
3509) and section 1261(a) of the Tax Reform Act of 1986 (100 Stat. 
2085, 2591). The IRS and the Treasury Department received several 
written comments, which are discussed in this preamble. A public 
hearing concerning the proposed regulations was neither requested nor 
held. In response to written comments, on March 16, 1990, the IRS and 
the Treasury Department issued Notice 90-26, 1990-1 CB 336 (see Sec.  
601.601(d)(2)(ii)(b)), which suspended a portion of the temporary 
regulations, specifically Sec.  1.905-3T(d)(2)(ii)(A) and that part of 
Sec.  1.905-3T(d)(2)(ii)(C) which refers to that regulation, which 
provided rules for accounting for foreign tax redeterminations that 
affect the calculation of foreign taxes deemed paid with respect to 
distributions or inclusions out of post-1986 undistributed earnings of 
a foreign corporation. Section 1.905-3T(d)(2)(ii)(A) required that, in 
the case of a foreign tax redetermination that affects the amount of 
foreign taxes deemed paid by a United States corporation for a taxable 
year, if the foreign tax redetermination occurs more than 90 days 
before the due date (with extensions) of the taxpayer's income tax 
return for such taxable year and before the taxpayer actually files 
that return, then that taxpayer must adjust the foreign tax credit to 
be claimed on that return for such taxable year to account for the 
effect of the foreign tax redetermination.
    Alternatively, if a foreign tax redetermination occurs after the 
filing of the United States tax return, Sec.  1.905-3T(d)(2)(ii)(B) 
provides that appropriate upward or downward adjustments are made at 
the time of the foreign tax redetermination to the pools of post-1986 
foreign income taxes and post-1986 undistributed earnings of the 
foreign corporation. Section 1.905-3T(d)(2)(ii)(C) provides that, if 
the foreign tax redetermination occurs within 90 days of the due date 
of the United States tax return and before the taxpayer actually files 
its tax return, then the taxpayer may elect either to adjust the 
foreign tax credit to be claimed on that return in the manner described 
in Sec.  1.905-3T(d)(2)(ii)(A) or adjust the pools of post-1986 foreign 
income taxes and post-1986 undistributed earnings to reflect the effect 
of the foreign tax redetermination in the manner described in Sec.  
1.905-3T(d)(2)(ii)(B).
    Comments received by the IRS and the Treasury Department concerning 
the requirement in Sec.  1.905-3T(d)(2)(ii)(A) to notify the IRS of a 
foreign tax redetermination by adjusting the foreign tax credit on the 
return for the taxable year in which the foreign tax redetermination 
occurred stated that this requirement did not take into account the 
amount of time that taxpayers, especially large multinational 
corporations, need to prepare their income tax returns. In cases for 
which a foreign tax redetermination requires a redetermination of 
United States tax liability, Sec.  1.905-4T provides rules generally 
requiring taxpayers to file amended returns to notify the IRS of the 
redetermination.
    Sections 1102(a)(1) and 1102(a)(2) of the Taxpayer Relief Act of 
1997, Public Law 105-34 (111 Stat. 788, 963-966 (1997)), amended 
sections 986(a) and 905(c), respectively, effective for taxes paid or 
accrued in taxable years beginning after December 31, 1997. Section 
905(c)(1)(B) was added to provide that, if accrued taxes are not

[[Page 62773]]

paid before the date two years after the close of the taxable year to 
which such taxes relate, the taxpayer must notify the IRS and 
redetermine its United States tax liability for the year or years in 
which it claimed credit for such taxes. Section 986(a)(1)(A) was 
amended to provide that, for purposes of determining the amount of 
foreign tax credit, in the case of a taxpayer who takes foreign income 
taxes into account when accrued, the amount of any foreign income taxes 
(and any adjustment thereto) generally will be translated into dollars 
using the average exchange rate for the taxable year to which such 
taxes relate. However, under section 986(a)(1)(B), the spot exchange 
rate on the date the taxes are paid is used to translate foreign income 
taxes that are paid before, or more than two years after, the taxable 
year to which the taxes relate. Section 986(a)(1)(C) provides that, as 
determined under regulations, the average exchange rate also will not 
apply to taxes denominated in inflationary currencies.
    Subsequently, section 408(a) of the American Jobs Creation Act of 
2004, Public Law 108-357 (118 Stat. 1418, 1499 (2004)), modified 
section 986(a) and provided, effective for taxable years beginning 
after December 31, 2004, that, at the election of the taxpayer, the 
average exchange rate will not apply to any foreign income taxes the 
liability for which is denominated in any currency other than in the 
taxpayer's functional currency. If the taxpayer so elects, taxes will 
be translated into dollars using the exchange rates at the time such 
taxes were paid to the foreign country. See section 986(a)(1)(D)(i). 
Section 986(a)(1)(D)(ii) provides that this election is also applicable 
to foreign income taxes attributable to a qualified business unit in 
accordance with regulations prescribed by the Secretary. On May 15, 
2006, the IRS and the Treasury Department issued Notice 2006-47, 2006-
20 IRB 892 (see Sec.  601.601(d)(2)(ii)(b)), which provides interim 
rules with respect to this election. The notice provides that a 
taxpayer may elect to use the payment date exchange rates to translate 
all foreign income taxes, or it may elect to use the payment date 
exchange rates to translate only those nonfunctional currency foreign 
income taxes that are attributable to qualified business units with 
United States dollar functional currencies. Section 408(b)(1) of the 
American Jobs Creation Act of 2004 also added a special rule at section 
986(a)(1)(E) for taxes paid by regulated investment companies.
    In light of the statutory changes to sections 905(c) and 986(a) by 
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 
2004, the IRS and the Treasury Department believe it is appropriate to 
issue new proposed and temporary regulations. These new regulations 
make several significant changes to the rules of the 1988 proposed and 
temporary regulations to take into account statutory changes and the 
comments received on the 1988 proposed and temporary regulations, while 
leaving substantial portions of the 1988 proposed and temporary 
regulations unchanged. The new temporary regulations will permit the 
IRS to enforce properly sections 905(c) and 6689 without delay. The 
significant comments and revisions are described in this preamble.

Explanation of Provisions

I. Currency Translation Rules

    This document contains temporary Income Tax Regulations relating to 
the currency translation rules that apply in determining the amount of 
the foreign tax credit. Section 1.905-3T(b) has been revised to reflect 
the statutory changes to sections 905(c) and 986(a) by the Taxpayer 
Relief Act of 1997 and the American Jobs Creation Act of 2004. New 
Sec.  1.905-3T(b)(1)(i) provides that, in the case of a taxpayer or a 
member of a qualified group (as defined in section 902(b)(2)) that 
takes foreign income taxes into account when accrued, the amount of any 
foreign taxes denominated in foreign currency that have been paid or 
accrued, additional tax liability denominated in foreign currency, 
taxes withheld in foreign currency, or estimated taxes paid in foreign 
currency will be translated into dollars using the average exchange 
rate (as defined in Sec.  1.989(b)-1) for the United States taxable 
year to which such taxes relate.
    However, new Sec.  1.905-3T(b)(1)(ii) provides five exceptions to 
the general rule that accrual basis taxpayers translate foreign taxes 
using the average exchange rate. First, Sec.  1.905-3T(b)(1)(ii)(A) 
provides that any foreign taxes denominated in foreign currency that 
were paid more than two years after the close of the United States 
taxable year to which they relate will be translated into dollars using 
the exchange rate as of the date of payment of the foreign taxes.
    Second, Sec.  1.905-3T(b)(1)(ii)(B) provides that any foreign 
income taxes paid before the beginning of the United States taxable 
year to which such taxes relate will be translated into dollars using 
the exchange rate as of the date of payment of the foreign taxes.
    Third, Sec.  1.905-3T(b)(1)(ii)(C) provides that any foreign income 
taxes the liability for which is denominated in any inflationary 
currency will be translated into dollars using the exchange rate as of 
the date of payment of the foreign taxes. For this purpose, the term 
inflationary currency means the currency of a country in which there is 
cumulative inflation during the base period of at least 30 percent, as 
determined by reference to the consumer price index of the country 
listed in the monthly issues of International Financial Statistics, or 
a successor publication, of the International Monetary Fund. For 
purposes of Sec.  1.905-3T(b)(1)(ii)(C), base period means, with 
respect to any taxable year, the thirty-six calendar months immediately 
preceding the last day of such taxable year. See Sec.  1.985-
1(b)(2)(ii)(D).
    Fourth, under the provisions of Sec.  1.905-3T(b)(1)(ii)(D), a 
taxpayer that is otherwise required to translate foreign income taxes 
that are denominated in foreign currency using the average exchange 
rate may elect to translate foreign income taxes into dollars using the 
exchange rate as of the date of payment of the foreign taxes, provided 
that the liability for such taxes is denominated in nonfunctional 
currency. This election may be made for all foreign income taxes or for 
only those foreign income taxes the liability for which is denominated 
in nonfunctional currency and that are attributable to qualified 
business units with United States dollar functional currencies. This 
election allows taxpayers to avoid a mismatch between the translated 
dollar amount of foreign tax credit and the translated dollar amount of 
the foreign income used to pay the tax. The election must be made by 
attaching a statement to the taxpayer's timely filed return (including 
extensions) for the first taxable year to which the election applies. 
The statement must identify whether the election is made for all 
foreign taxes or only for foreign taxes attributable to qualified 
business units with a United States dollar functional currency. Once 
made, the election will apply to the taxable year for which made and 
all subsequent taxable years unless revoked with the consent of the 
Commissioner.
    Finally, in the case of a regulated investment company (as defined 
in section 851 and the regulations under that section) which takes into 
account income on an accrual basis, Sec.  1.905-3T(b)(1)(ii)(E) 
provides that foreign income taxes paid or accrued with

[[Page 62774]]

respect to such income will be translated into dollars using the 
exchange rate as of the date the income accrues. This exception takes 
account of the special rule at section 852(b)(9) that requires a 
regulated investment company to take dividends into account on the ex-
dividend date, rather than on the later date on which the dividends are 
paid (and the tax is actually withheld). The translation rule permits 
greater conformity between the translated dollar amount of dividends 
paid in foreign currency and the translated dollar amount of taxes 
withheld from such dividends. For a discussion of the effective dates 
of the currency translation provisions, see the ``Effective Date'' 
section of this document.
    Section 1.905-3T(b)(4), concerning the allocation of refunds of 
foreign tax to the separate categories of income under section 904(d), 
is not modified by these temporary regulations. Section 1.905-3T(b)(5), 
which provides rules with respect to the basis of foreign currency that 
is refunded, is revised to reflect the 1997 and 2004 changes to the 
currency translation rules, as provided in Sec.  1.905-3T(b)(3).

II. Definition of Foreign Tax Redetermination

    The term ``foreign tax redetermination'' in Sec.  1.905-3T(c) has 
been revised to reflect the statutory changes made to section 905(c) in 
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 
2004. New Sec.  1.905-3T(c) provides that, for purposes of Sec. Sec.  
1.905-3T and 1.905-4T, a foreign tax redetermination means a change in 
the foreign tax liability that may affect a taxpayer's foreign tax 
credit. A foreign tax redetermination includes: (1) Accrued taxes that 
when paid differ from the amounts added to post-1986 foreign income 
taxes or claimed as credits by the taxpayer (such as corrections to 
overaccruals and additional payments); (2) accrued taxes that are not 
paid before the date two years after the close of the taxable year to 
which such taxes relate; (3) any tax paid that is refunded in whole or 
in part; and (4) for taxes taken into account when accrued but 
translated into dollars on the date of payment, a difference between 
the dollar value of the accrued tax and the dollar value of the tax 
paid attributable to fluctuations in the value of the foreign currency 
relative to the dollar between the date of accrual and the date of 
payment.
    Section 1.905-3T(d)(1) has been revised to reflect the modified 
definition in new Sec.  1.905-3T(c) of a foreign tax redetermination 
that results from currency fluctuations, but new Sec.  1.905-3T(d)(1) 
otherwise adopts without amendment the rule in Sec.  1.905-3T(d)(1) of 
the 1988 regulations that provides that no redetermination of United 
States tax liability is required with respect to such foreign tax 
redetermination if the amount of such redetermination is less than the 
lesser of ten thousand dollars or two percent of the total dollar 
amount of the foreign tax initially accrued with respect to that 
foreign country for the United States taxable year. Comments requested 
that this exception be broadened by eliminating the $10,000 limitation 
and by increasing the percentage ceiling from 2 percent to 5 percent, 
in order to increase the number of taxpayers eligible for the 
exception, therefore minimizing the administrative burden of filing 
amended returns for both taxpayers and the IRS. Since the 1988 
temporary regulations were published, the administrative burdens of 
accounting for exchange rate fluctuations have been substantially 
reduced by the change in law allowing taxpayers claiming credits on the 
accrual basis to use annual average exchange rates rather than date of 
payment exchange rates to translate foreign tax. In addition, the IRS 
and Treasury Department believe that it is appropriate to limit the 
exception to a dollar threshold. Accordingly, this comment was not 
adopted.

III. Adjustments to Pools of Post-1986 Undistributed Earnings and Post-
1986 Foreign Income Taxes

    On March 16, 1990, Notice 90-26, 1990-1 CB 336 (see Sec.  
601.601(d)(2)(ii)(b)), suspended Sec.  1.905-3T(d)(2)(ii)(A) and that 
part of Sec.  1.905-3T(d)(2)(ii)(C) which refers to Sec.  1.905-
3T(d)(2)(ii)(A). Prior to its suspension, Sec.  1.905-3T(d)(2)(ii)(A) 
required taxpayers to recompute the foreign tax credit claimed on their 
current year income tax return to account for foreign tax 
redeterminations that affect the amount of foreign tax deemed paid 
under section 902 or 960 and that occurred more than 90 days before the 
due date (with extensions) of the United States tax return for that 
taxable year and before the actual filing date. Section 1.905-
3T(d)(2)(ii)(C) permitted taxpayers to elect to apply Sec.  1.905-
3T(d)(2)(ii)(A) to a foreign tax redetermination occurring within 90 
days of the due date (with extensions) of the tax return for that 
taxable year and before the actual filing date.
    Section 1.905-3T(d)(2)(ii)(B) of the 1988 regulations requires 
that, if a foreign tax redetermination occurs after the filing of the 
United States tax return for such taxable year, then appropriate upward 
or downward adjustments will be made at the time of the foreign tax 
redetermination to the foreign corporation's pools of post-1986 foreign 
taxes and post-1986 earnings and profits to reflect the effect of the 
foreign tax redetermination in calculating foreign taxes deemed paid 
with respect to distributions and inclusions (and the amount of such 
distributions and inclusions) that are includible in taxable years 
subsequent to the taxable year for which such tax return is filed. The 
part of Sec.  1.905-3T(d)(2)(ii)(C) not suspended by Notice 90-26 
allows a taxpayer to elect to adjust the pools of post-1986 foreign 
taxes and post-1986 earnings and profits to reflect the effect of the 
foreign tax redetermination in the manner described in Sec.  1.905-
3T(d)(2)(ii)(B). Notice 90-26 also provided that, pending the issuance 
of final regulations under section 905(c), redeterminations otherwise 
subject to Sec.  1.905-3T(d)(2)(ii)(A) or (C) were required to be 
accounted for through adjustment to the appropriate pools of post-1986 
earnings and profits and post-1986 foreign taxes in the manner 
described in Sec.  1.905-3T(d)(3) and subject to the exceptions set 
forth in Sec.  1.905-3T(d)(4).
    A comment concerning Sec.  1.905-3T(d)(2) of the 1988 regulations 
was received, suggesting that taxpayers be allowed to elect to adjust 
earnings and profits and tax pools or file an immediate claim for 
refund, in the case of an additional assessment of foreign tax which 
generates a potential refund of U.S. tax. Because the taxpayer must 
wait for a subsequent distribution to benefit from the additional 
credits, the comment stated that the taxpayer is inappropriately denied 
an immediate benefit, that is, making a claim for an immediate refund, 
provided by section 6511(d)(3)(A). Subsequently, the Taxpayer Relief 
Act of 1997 confirmed the Secretary's regulatory authority to prescribe 
appropriate adjustments to a foreign corporation's pools of post-1986 
foreign income taxes and post-1986 undistributed earnings in lieu of a 
redetermination, and amended section 905(c)(2) explicitly to provide 
that no redetermination of U.S. tax shall be made by reason of 
additional taxes paid more than two years after the year to which they 
relate. In light of the statutory changes, this comment was not 
adopted.
    Section 1.905-3T(d)(2) of the 1988 regulations has been revised to 
reflect the provisions of Notice 90-26. New Sec.  1.905-3T(d)(2)(i) 
provides that appropriate upward or downward adjustments will be made 
at the time of the foreign tax redetermination to the

[[Page 62775]]

foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes, in accordance with Sec.  1.905-
3T(d)(2)(ii), to reflect the effect of the foreign tax redetermination 
in calculating foreign taxes deemed paid with respect to subsequent 
distributions and inclusions (and the amount of such distributions and 
inclusions).
    Section 1.905-3T(d)(2)(iii) of the 1988 regulations, which provides 
rules with respect to the reporting requirements for adjustments to the 
appropriate pools of post-1986 undistributed earnings and post-1986 
foreign income taxes has been revised. The 1988 regulations require 
that the domestic corporate shareholder attach notice of such 
adjustments to its return on a yearly basis. In the interest of 
reducing the reporting requirement burden, this notification 
requirement has been eliminated. New Sec.  1.905-3T(d)(2)(i) refers to 
Sec.  1.905-4T(b)(2), which provides that, where a redetermination of 
foreign tax paid or accrued by a foreign corporation affects the 
computation of foreign taxes deemed paid under section 902 or 960, and 
the taxpayer is required to adjust the foreign corporation's pools of 
post-1986 undistributed earnings and post-1986 foreign income taxes 
under Sec.  1.905-3T(d)(2), the taxpayer is required to notify the IRS 
of such redetermination by reflecting the adjustments to the foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes on a Form 1118 for the taxpayer's first taxable 
year with respect to which the redetermination affects the computation 
of foreign taxes deemed paid.
    The 1988 regulations provide four exceptions to the general rule in 
Sec.  1.905-3T(d)(2) requiring pooling adjustments in lieu of a 
redetermination of United States tax liability to account for the 
effect of a redetermination of foreign tax paid or accrued by a foreign 
corporation on foreign taxes deemed paid under section 902 or 960. A 
shareholder-level redetermination of United States tax liability is 
required where the foreign tax liability is denominated in a 
hyperinflationary currency (see Sec.  1.905-3T(d)(4)(i)); where the 
foreign tax redetermination occurs with respect to foreign taxes deemed 
paid with respect to a subpart F inclusion or an actual distribution 
which has the effect of reducing the foreign corporation's pool of 
post-1986 foreign income taxes below zero (see Sec.  1.905-
3T(d)(4)(iv)); or where a domestic corporate shareholder of a 
controlled foreign corporation receives a distribution out of 
previously taxed earnings and profits and a foreign country imposes tax 
on the foreign corporation's income, which tax is subsequently reduced 
(see Sec.  1.905-3T(f)). These exceptions are adopted without amendment 
and have been moved to Sec.  1.905-3T(d)(3)(i), (iv), and (vi), 
respectively, in the new temporary regulations.
    The fourth exception, at Sec.  1.905-3T(d)(4)(ii) in the 1988 
regulations, provides that if the foreign tax liability of a United 
States taxpayer is in a currency other than a hyperinflationary 
currency and the amount of foreign tax accrued for the taxable year to 
a foreign country, as measured in units of foreign currency, exceeds 
the amount of foreign tax paid to that foreign country for the taxable 
year by at least two percent, then the IRS, in its discretion, may 
require a redetermination of United States tax liability, in lieu of an 
adjustment of the pools of post-1986 undistributed earnings and post-
1986 foreign income taxes. Section 1.905-3T(d)(2)(iii) of the 1988 
regulations provides that, if a taxpayer may be required to redetermine 
its United States tax liability under Sec.  1.905-3T(d)(4)(ii), the 
taxpayer must attach a notice of such adjustment to its return for the 
year with or within which ends the foreign corporation's taxable year 
during which the foreign tax redetermination occurs. Comments were 
received with respect to these provisions, requesting that the 
regulations set forth the factors the IRS would take into account in 
determining whether to exercise such discretion; the percentage 
limitation be increased to ten percent; the IRS not enforce this 
provision if the deficiency resulting from the overaccrual of foreign 
tax is less than $25,000; and the provision only be used in specific 
situations, such as consistent overaccrual of foreign taxes. Further, 
in order to avoid taxpayers being subject to the penalty under section 
6689 for failure to notify the IRS within 180 days of the foreign tax 
redetermination, as required by Sec.  1.905-4T(b)(2) of the 1988 
regulations, a comment requested that, when the IRS exercises its 
discretion under Sec.  1.905-3T(d)(4)(ii), the date on which such 
redetermination occurs should be deemed to be the date on which the IRS 
notifies the taxpayer that a redetermination of U.S. tax liability is 
required.
    In lieu of the discretionary rule in the 1988 temporary 
regulations, Sec.  1.905-3T(d)(3)(ii) of the new regulations requires a 
redetermination of United States tax liability for all affected years 
if a foreign tax redetermination occurs with respect to foreign taxes 
paid by a foreign corporation and such foreign tax redetermination, if 
taken into account in the taxable year of the foreign corporation to 
which the foreign tax redetermination relates, has the effect of 
reducing by ten percent or more the foreign taxes deemed paid by the 
domestic corporate shareholder under section 902 or 960 in the taxable 
year of the shareholder with or within which ends the taxable year of 
the foreign corporation to which the foreign tax redetermination 
relates or in any intervening taxable year. Thus, a redetermination of 
the United States taxpayer's deemed paid credit under section 902 or 
960 is required by reason of a foreign tax redetermination at the 
foreign subsidiary level only if the overstatement of the foreign tax 
credit is substantial in amount, taking into account the effect of the 
redetermination on the entire tax pool of the foreign subsidiary and 
not just the tax attributable to the year to which the redetermination 
relates. This new rule is more consistent with the other three 
exceptions to pooling adjustments in Sec.  1.905-3T(d)(4)(i) and (iv) 
and Sec.  1.905-3T(f) of the 1988 temporary regulations, which are at 
new Sec.  1.905-3T(d)(3)(i), (iv), and (vi). Further, Sec.  1.905-
3T(d)(3)(ii) of the new regulations provides consistent treatment among 
taxpayers, adds certainty as to when adjustments to prior-year section 
902 or 960 credits are required, and reduces the administrative burden 
associated with yearly notification of such foreign tax 
redeterminations.
    A comment requested that the regulations be revised to address the 
situation where a controlled foreign corporation is sold. In a typical 
case, the seller of the controlled foreign corporation contracts to 
indemnify the buyer for any tax deficiencies arising with respect to 
taxable periods occurring prior to the date of the sale and will be 
entitled to any refunds relating to such periods. The additional 
assessments or refunds of tax are reflected as adjustments to the pools 
of the foreign corporation in the hands of the buyer but accrue 
economically to the seller. However, the seller derives no U.S. tax 
benefit or detriment from those additional payments or refunds because 
it no longer has an economic interest in the foreign corporation. It 
was suggested that the regulations should provide an additional 
exception to the pooling rules allowing recomputation of the seller's 
U.S. tax liability as if the foreign tax redetermination occurred 
immediately prior to the sale. The IRS and Treasury Department are 
continuing to study this issue and request comments on the

[[Page 62776]]

potential scope of an additional exception to the pooling adjustment 
rules in the context of various types of acquisitions.
    Comments are also solicited on other changes that should be made to 
the 1988 temporary regulations, including changes relating to the 
statutory changes made by the Taxpayer Relief Act of 1997 and the 
American Jobs Creation Act of 2004.

IV. Time and Manner of Notification

A. Overview of New Rules
    New Sec.  1.905-4T(a) provides that if, as a result of a foreign 
tax redetermination (as defined in Sec.  1.905-3T(c)), a 
redetermination of United States tax liability is required under 
section 905(c) and Sec.  1.905-3T(d), the taxpayer must provide 
notification of the foreign tax redetermination. Section 1.905-4T(b)(1) 
of the new temporary regulations provides rules with respect to the 
time and manner of notifying the IRS of a foreign tax redetermination 
that necessitates a redetermination of United States tax liability. New 
Sec.  1.905-4T(b)(1)(i) sets forth the general rule that, where a 
redetermination of United States tax liability is required, the 
taxpayer must notify the IRS by filing an amended return, Form 1118 
(Foreign Tax Credit--Corporations) or 1116 (Foreign Tax Credit), and 
the statement required under Sec.  1.905-4T(c) for the taxable year 
with respect to which a redetermination of United States tax liability 
is required. However, where a foreign tax redetermination requires an 
individual to redetermine the individual's United States tax liability, 
and as a result of such foreign tax redetermination the amount of 
creditable taxes paid or accrued by such individual during the taxable 
year does not exceed the applicable dollar limitation in section 904(k) 
(currently $300, or $600 in the case of a joint return), the individual 
will not be required to file Form 1116 with the amended return for such 
taxable year if the individual satisfies the requirements of section 
904(k).
B. Revision of 1988 Temporary Regulations in Response to Comments
    The 1988 temporary regulations at Sec.  1.905-4T(b)(2) require 
taxpayers to notify the IRS of a foreign tax redetermination that 
reduced the amount of foreign taxes paid or deemed paid by filing an 
amended return for the affected year or years within 180 days after the 
date that the foreign tax redetermination occurred. The IRS and the 
Treasury Department received several comments suggesting that this rule 
was unduly burdensome to taxpayers. The comments noted that multiple 
foreign tax redeterminations requiring a redetermination of United 
States tax liability for the same taxable year would require the filing 
of multiple returns for such year, and that filing an amended Federal 
tax return would trigger additional state tax notification and amended 
return filing requirements.
    In light of these comments, the new temporary regulations at Sec.  
1.905-4T(b)(1)(ii) provide that, if a foreign tax redetermination 
reduced the amount of foreign taxes paid or accrued, or included in the 
computation of foreign taxes deemed paid, a taxpayer must file a 
separate notification for each taxable year with respect to which a 
redetermination of United States tax liability is required by the due 
date (with extensions) of the original return for the taxable year in 
which the foreign tax redetermination occurred. With respect to a 
foreign tax redetermination that increased the amount of foreign taxes 
paid or accrued, or included in the computation of foreign taxes deemed 
paid, new Sec.  1.905-4T(b)(1)(iii) adopts the rule provided in the 
1988 temporary regulations at Sec.  1.905-4T(b)(2) and provides that 
the taxpayer must file a separate notification for each taxable year 
with respect to which a redetermination of United States tax liability 
is required within the period provided by section 6511(d)(3)(A).
C. Special Rules for Certain Redeterminations
    The new temporary regulations at Sec.  1.905-4T(b)(1)(iv) provide 
that, where more than one foreign tax redetermination requires a 
redetermination of United States tax liability for the same taxable 
year and those redeterminations occur within two consecutive taxable 
years of the taxpayer, the taxpayer may file for such taxable year one 
amended return, Form 1118 or 1116, and the statement required under 
Sec.  1.905-4T(c) that reflect all such foreign tax redeterminations. 
If the taxpayer chooses to file one notification for such foreign tax 
redeterminations, the due date for such notification is the due date of 
the original return (with extensions) for the year in which the first 
foreign tax redetermination that reduced foreign tax liability 
occurred. However, because foreign tax redeterminations with respect to 
the taxable year for which a redetermination of United States tax 
liability is required may occur after the due date for providing such 
notification in the later of the two consecutive years, more than one 
amended return may be required with respect to that taxable year.
    Section 1.905-4T(b)(1)(v) of the new temporary regulations provides 
that, where a foreign tax redetermination requires a redetermination of 
United States tax liability that would otherwise result in an 
additional amount of United States tax due, but such amount is 
eliminated as a result of a carryback or carryover of an unused foreign 
tax under section 904(c), the taxpayer may, in lieu of applying the 
general notification rule described in Sec.  1.905-4T(b)(1)(i) or (ii), 
notify the IRS by attaching a statement to the original return for the 
taxable year in which the foreign tax redetermination occurs. The 
statement must be filed by the due date (with extensions) of such 
return and contain the information described in Sec.  1.904-2(f), 
including the amounts carried back or over to the year with respect to 
which a redetermination of United States tax liability is required.
    The 1988 temporary regulations at Sec.  1.905-3T(d)(2)(iii) provide 
rules concerning the time, manner, and contents of the notification 
statement for an adjustment of a foreign corporation's pools of post-
1986 undistributed earnings and post-1986 foreign income taxes due to a 
foreign tax redetermination. The new temporary regulations, at Sec.  
1.905-4T(b)(2), modify the reporting requirement with respect to such 
pooling adjustments by providing that where a redetermination of 
foreign tax paid or accrued by a foreign corporation affects the 
computation of foreign taxes deemed paid under section 902 or 960, and 
the taxpayer is required to adjust the foreign corporation's pools of 
post-1986 undistributed earnings and post-1986 foreign income taxes 
under Sec.  1.905-3T(d)(2), the taxpayer must notify the IRS of the 
redetermination by reflecting the adjustments to the foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes on a Form 1118 for the taxpayer's first taxable 
year with respect to which the redetermination affects the computation 
of foreign taxes deemed paid. New Sec.  1.905-4T(b)(2) requires the 
taxpayer to file the Form 1118 by the due date (with extensions) of the 
original return for such taxable year. In the case of multiple 
redeterminations that affect the computation of foreign taxes deemed 
paid for the same taxable year and that are required to be reported 
under new Sec.  1.905-4T(b)(2), a taxpayer may file one notification 
for all such redeterminations in lieu of filing a separate notification 
for each such redetermination.

[[Page 62777]]

D. Large and Mid-Size Business Taxpayers
    Section 1.905-4T(b)(2) of the 1988 temporary regulations requires a 
taxpayer to notify the IRS of a foreign tax redetermination that 
reduced the amount of foreign taxes paid or accrued, or included in the 
computation of foreign taxes deemed paid, by filing an amended return 
for the affected year within 180 days after the date that the foreign 
tax redetermination occurred. The IRS and the Treasury Department 
received several comments with respect to such rule suggesting that, in 
lieu of filing an amended return, taxpayers that are under continuous 
examination in a program such as the Coordinated Examination Program 
should be permitted to provide notice of foreign tax redeterminations 
to the examiner during an examination.
    Taking into account these comments, the new temporary regulations 
at Sec.  1.905-4T(b)(3) provide that, where a redetermination of United 
States tax liability is required by reason of a foreign tax 
redetermination that occurs while a taxpayer is under the jurisdiction 
of the Large and Mid-Size Business Division and that results in a 
reduction in the amount of foreign taxes paid or accrued, or included 
in the computation of foreign taxes deemed paid, the taxpayer must 
provide notice of such redetermination as part of the examination 
process in lieu of filing an amended return for the affected year as 
otherwise required by Sec.  1.905-4T(b)(1)(i) and (ii). If the taxpayer 
is required under Sec.  1.905-4T(b)(3) to provide notice as part of the 
examination process, the taxpayer must satisfy the requirements of 
Sec.  1.905-4T(b)(3) (in lieu of the generally applicable rules of 
Sec.  1.905-4T(b)(1)(i) or (ii)) in order not to be subject to the 
penalty under section 6689 and the regulations under that section.
    Section 1.905-4T(b)(3) of the new regulations requires a taxpayer 
to notify the IRS of the foreign tax redetermination by providing to 
the examiner a statement described in Sec.  1.905-4T(c) during an 
examination of the return for the taxable year for which a 
redetermination of United States tax liability is required by reason of 
the foreign tax redetermination. The taxpayer must provide the 
statement to the examiner no later than 120 days after the latest of 
the date the foreign tax redetermination occurs, the opening 
conference, or the hand-delivery or postmark date of the opening letter 
concerning the examination. If, however, the foreign tax 
redetermination occurs more than 180 days after the latest of the 
opening conference or the hand-delivery or postmark date of the opening 
letter, the taxpayer may, in lieu of applying the rules of Sec.  1.905-
4T(b)(1)(i) and (ii), provide to the examiner a statement which 
complies with the requirements of Sec.  1.905-4T(b)(3), and the IRS, in 
its discretion, may accept such statement or require the taxpayer to 
comply with the rules of Sec.  1.905-4T(b)(1)(i) and (ii).
    This exception in Sec.  1.905-4T(b)(3) to the generally applicable 
notification requirements of Sec.  1.905-4T(b)(1) is not permitted to 
extend the length of the notification period set forth in Sec.  1.905-
4T(b)(1). In addition, no notification under Sec.  1.905-4T(b)(3) will 
be due before May 5, 2008.

V. Notification Contents

    Section 1.905-4T(c)(1) of the new temporary regulations requires 
the taxpayer to furnish a statement that contains information 
sufficient for the IRS to redetermine the taxpayer's United States tax 
liability where such a redetermination is required under section 
905(c). The taxpayer must provide such information in a form that 
enables the IRS to verify and compare the original computations of the 
claimed foreign tax credit, the revised computations resulting from the 
foreign tax redetermination, and the net changes resulting therefrom. 
The statement must include the taxpayer's name, address, identifying 
number, and the taxable year or years of the taxpayer that are affected 
by the foreign tax redetermination. If the written statement is 
submitted to the IRS under Sec.  1.905-4T(b)(3), which provides rules 
with respect to taxpayers under the jurisdiction of the Large and Mid-
Size Business Division, the statement must also include a declaration 
under penalties of perjury.
    Where a redetermination of United States tax liability is required 
by reason of a foreign tax redetermination, new Sec.  1.905-4T(c)(2) 
requires that the taxpayer provide, in addition to the information 
described in new Sec.  1.905-4T(c)(1), specific information concerning 
the foreign tax redetermination. To take into account the amendment of 
section 986(a) (concerning translation rates for foreign taxes) by the 
Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 2004, 
the new temporary regulations require the taxpayer to provide the 
exchange rates used to translate the amount of foreign taxes paid, 
accrued, or refunded in accordance with Sec.  1.905-3T(b) (as the case 
may be). These new temporary regulations also include the requirement 
of the 1988 temporary regulations that taxpayers provide information 
relating to the interest paid by foreign governments or owing to the 
United States due to a foreign tax redetermination.
    If, as a result of a redetermination of foreign tax paid or accrued 
by a foreign corporation, adjustments to the pools of post-1986 
undistributed earnings and post-1986 foreign income taxes are required 
under Sec.  1.905-3T(d)(2) of the 1988 temporary regulations in lieu of 
a redetermination of a domestic corporate shareholder's United States 
tax liability, Sec.  1.905-3T(d)(2)(iii) of the 1988 temporary 
regulations requires that the taxpayer provide certain information 
concerning the foreign tax redetermination and the pooling adjustments. 
In order to reduce the notification requirement burden, the new 
temporary regulations modify this reporting requirement, as discussed 
above in section IV.C., ``Special Rules for Certain Redeterminations.'' 
If, as a result of a redetermination of foreign tax paid or accrued by 
a foreign corporation, a redetermination of United States tax liability 
is required under new Sec.  1.905-3T(d)(3) in lieu of a pooling 
adjustment, the new temporary regulations at Sec.  1.905-4T(c)(3) 
specify the information that the taxpayer must provide.

VI. Payment or Refund of United States Tax, and Application of Interest 
and Penalties

    Section 1.905-4T(d) of the new temporary regulations adopts without 
amendment that portion of the 1988 temporary regulations at Sec.  
1.905-4T(b)(1) which provides that the amount of tax, if any, due upon 
a redetermination of United States tax liability will be paid by the 
taxpayer after notice and demand has been made by the IRS. The 
regulation also clarifies that deficiency procedures under Subchapter B 
of chapter 63 of the Internal Revenue Code will not apply with respect 
to the assessment of the amount due upon such redetermination, meaning 
that the IRS is not required to send a statutory notice of deficiency 
to a taxpayer, and the taxpayer does not have an opportunity to 
petition the Tax Court, prior to the IRS' assessment and collection of 
the amount of additional tax due. In accordance with sections 905(c) 
and 6501(c)(5), the statute of limitations under section 6501(a) will 
not apply to the assessment and collection of the amount of additional 
tax due. The amount of tax, if any, shown by a redetermination of 
United States tax liability to have been overpaid will be credited or 
refunded to the

[[Page 62778]]

taxpayer in accordance with section 6511(d)(3)(A) and the provisions of 
Sec.  301.6511(d)-3. Accordingly, the taxpayer must file a claim for 
credit or refund within ten years from the last date (without 
extensions) prescribed for filing the return for the taxable year in 
which the foreign taxes were actually paid or accrued.
    Similarly, Sec.  1.905-4T(e) of the new temporary regulations 
adopts without amendment the interest and penalties provisions of the 
1988 temporary regulations at Sec.  1.905-4T(c). First, new Sec.  
1.905-4T(e)(1) provides that interest on the underpayment or 
overpayment resulting from a redetermination of United States tax 
liability will be computed in accordance with sections 6601 and 6611 
and the regulations under those sections. No interest will be assessed 
or collected on any underpayment resulting from a refund of foreign tax 
for any period before the receipt of the refund, except to the extent 
interest was paid by the foreign country or possession of the United 
States on the refund for the period. In no case, however, will interest 
assessed and collected pursuant to the preceding sentence for any 
period before receipt of the refund exceed the amount that otherwise 
would have been assessed and collected under section 6601 and the 
regulations under that section for that period. Interest will be 
assessed from the time the taxpayer (or the foreign corporation of 
which the taxpayer is a shareholder) receives a foreign tax refund 
until the taxpayer pays the additional tax due the United States.
    Second, new Sec.  1.905-4T(e)(2) provides that, if an adjustment to 
the foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes under Sec.  1.905-3T(d)(2) is required 
in lieu of a redetermination of United States tax liability, no 
underpayment or overpayment of United States tax liability will result 
from a foreign tax redetermination. Consequently, no interest will be 
paid by or to a taxpayer as a result of adjustments to a foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes where required under Sec.  1.905-3T(d)(2).
    Third, Sec.  1.905-4T(e)(3) of the new temporary regulations 
provides that failure to comply with the provisions of Sec.  1.905-4T 
of the new temporary regulations will subject the taxpayer to the 
penalty provisions of section 6689 and the regulations under that 
section.

VII. Foreign Tax Redeterminations With Respect to Pre-1987 Accumulated 
Profits

    Section 1.905-5T of the 1988 regulations provides rules relating to 
foreign tax redeterminations occurring in pre-1987 taxable years, and 
those occurring in post-1986 taxable years with respect to pre-1987 
accumulated profits. The new temporary regulations amend the cross-
references to Sec. Sec.  1.905-3T and 1.905-4T and clarify that these 
rules apply to foreign tax redeterminations with respect to pre-1987 
accumulated profits that are accumulated in taxable years of a foreign 
corporation beginning after December 31, 1986, but before the first 
taxable year in which the ownership requirements of section 902 are 
met. See Sec.  1.902-1(a)(10)(i).

VIII. Penalty Under Section 6689

    Under section 6689, a taxpayer that fails to notify the IRS of a 
foreign tax redetermination in the time and manner prescribed by 
regulations for giving such notice is subject to a penalty unless it is 
shown that such failure is due to reasonable cause and not due to 
willful neglect. Section 6689(a) provides that the penalty is 
calculated by adding to the deficiency attributable to the foreign tax 
redetermination an amount equal to 5 percent of the deficiency if the 
failure is for not more than 1 month, plus an additional 5 percent of 
the deficiency for each month (or fraction thereof) during which the 
failure continues. The total amount of the penalty is not to exceed 25 
percent of the deficiency.
    Section 301.6689-1T(a) has been revised to clarify that deficiency 
proceedings under Subchapter B of chapter 63 of the Code will not apply 
with respect to the amount of such penalty, meaning that the IRS is not 
required to send a statutory notice of deficiency to a taxpayer, and 
the taxpayer does not have an opportunity to petition the Tax Court, 
prior to the IRS' assessment and collection of the amount of such 
penalty.
    Comments were received suggesting that, in computing the amount of 
the penalty, an overpayment resulting from one foreign tax 
redetermination should offset an underpayment resulting from another 
foreign tax redetermination where both foreign tax redeterminations 
arise from the same foreign taxing jurisdiction and require a 
redetermination of United States tax liability for the same taxable 
year. Thus, the commentators suggested, where the underpayment is 
completely offset by one or more overpayments, the section 6689 penalty 
should not apply. Because the penalty is determined with respect to a 
deficiency attributable to such redetermination, there must be some 
deficiency for the penalty to apply. Where underpayments and 
overpayments offset each other to reduce or eliminate a deficiency, any 
penalty under section 6689 would also be reduced or eliminated. The IRS 
and Treasury Department do not believe an amendment to the regulations 
is necessary to clarify this rule.
    Another comment was received suggesting that the section 6689 
penalty generally should be inapplicable to Coordinated Exam Program 
taxpayers, provided that a notice of foreign tax redeterminations is 
submitted by the taxpayer at the commencement of the audit. Such a 
suggestion is generally adopted at Sec.  1.905-4T(b)(3). A further 
comment requested that the definition of reasonable care under the 
regulations be revised. The 1988 regulations provide that, if a 
taxpayer exercised ordinary business care and prudence and was 
nevertheless unable to file the notification within the prescribed 
time, then the delay will be considered to be due to reasonable cause 
and not willful neglect. The comment recommended instead adopting a 
more objective test based on substantial compliance. This comment is 
rejected because ordinary business care and prudence is the general 
standard for reasonable care that is used in the regulations for other 
penalties.
Effective/Applicability Date
    The new temporary regulations of Sec. Sec.  1.905-3T(c) and (d) and 
1.905-4T are generally applicable for foreign tax redeterminations 
occurring in taxable years of United States taxpayers beginning on or 
after November 7, 2007 where the redetermination affects the amount of 
foreign taxes paid or accrued by a United States taxpayer. Where the 
redetermination of foreign tax paid or accrued by a foreign corporation 
affects the computation of foreign taxes deemed paid under section 902 
or 960 with respect to post-1986 undistributed earnings (or pre-1987 
accumulated profits) of the foreign corporation, the new temporary 
regulations of Sec. Sec.  1.905-3T(c) and (d), 1.905-4T, and 1.905-5T 
are generally effective for foreign tax redeterminations occurring in 
taxable years of a foreign corporation which end with or within a 
taxable year of the domestic corporate shareholder beginning on or 
after November 7, 2007. See Sec.  1.905-4T(f)(1). In no case, however, 
will Sec.  1.905-4T(f) operate to extend the statute of limitations 
provided by section 6511(d)(3)(A).

[[Page 62779]]

    Section 1.905-3T(b), which provides rules with respect to currency 
translation, generally is applicable for taxes paid or accrued in 
taxable years of United States taxpayers beginning on or after November 
7, 2007 and to taxes paid or accrued by a foreign corporation in its 
taxable years which end with or within a taxable year of the domestic 
corporate shareholder beginning on or after November 7, 2007. For 
taxable years beginning after December 31, 1997, and before November 7, 
2007, section 986(a), as amended by the Taxpayer Relief Act of 1997 and 
the American Jobs Creation Act of 2004, shall apply. For taxable years 
beginning after December 31, 1986, and prior to the effective date of 
the Taxpayer Relief Act of 1997 (January 1, 1998), Sec.  1.905-3T of 
the 1988 temporary regulations shall apply.
    Section 1.905-3T(b)(1)(ii)(D), which provides taxpayers otherwise 
required to translate foreign income taxes using the average exchange 
rate an election to translate taxes using the exchange rate for the 
date of payment, is applicable for taxable years beginning on or after 
November 7, 2007. For taxable years beginning after December 31, 2004, 
and before November 7, 2007, the rules of Notice 2006-47, 2006-20 IRB 
892 (see Sec.  601.601(d)(2)(ii)(b)), shall apply.
    Although all foreign tax redeterminations occurring in taxable 
years beginning after December 31, 1986, are subject to the 
requirements of section 905(c) and the regulations under that section, 
the 1988 temporary regulations did not specify the date by which the 
required notifications must be made in order to avoid a penalty under 
section 6689. The IRS and the Treasury Department recognize the burden 
associated with requiring notification by a specific date of all 
previously-unreported foreign tax redeterminations that require a 
United States tax redetermination with respect to post-1986 taxable 
years. Consequently, the new temporary regulations at Sec.  1.905-
4T(f)(2) provide a specific due date only for notifications of foreign 
tax redeterminations that occurred in a taxpayer's three taxable years 
preceding the first taxable year identified in Sec.  1.905-4T(f)(1), 
and taxable years of foreign corporations ending with or within such 
taxable years of their domestic corporate shareholders. However, the 
unlimited statute of limitations under section 905(c) and deficiency 
interest provisions continue to apply to any underpayment of United 
States tax attributable to a foreign tax redetermination.
    Section 1.905-4T(f)(2)(ii) provides notification requirements for 
any foreign tax redetermination which occurred in the last taxable year 
of a United States taxpayer beginning before November 7, 2007 and the 
two immediately preceding taxable years and which reduced the amount of 
foreign taxes paid or accrued by the taxpayer for any taxable year. 
This section also requires notification of any redetermination of 
foreign taxes paid or accrued by a foreign corporation which occurred 
in a taxable year of the foreign corporation which ends with or within 
a taxable year of a domestic corporate shareholder described in the 
preceding sentence and which requires a redetermination of United 
States tax liability under Sec.  1.905-3T(d)(3) for any taxable year. 
If, as of November 7, 2007, the taxpayer has not satisfied the notice 
requirements described in Sec. Sec.  1.905-3T and 1.905-4T of the 1988 
temporary regulations with respect to such foreign tax 
redeterminations, the new temporary regulations at Sec.  1.905-
4T(f)(2)(ii) generally require the taxpayer to notify the IRS of such 
foreign tax redetermination no later than the due date (with 
extensions) of its original return for the taxable year following the 
taxable year in which these regulations are first effective.
    New Sec.  1.905-4T(f)(2)(ii) sets forth the time and manner of the 
notification, which must contain the previously-unreported information 
described in new Sec.  1.905-4T(c). The temporary regulations do not 
require notification of previously-unreported foreign tax 
redeterminations of a foreign corporation that occurred in taxable 
years of the foreign corporation that ended with or within a domestic 
corporate shareholder's taxable year beginning before November 7, 2007, 
if the foreign tax redetermination does not require a redetermination 
of United States tax liability but is accounted for by adjusting the 
foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes.
    New Sec.  1.905-4T(f)(2)(iii) provides that a taxpayer under the 
jurisdiction of the Large and Mid-Size Business Division that is 
otherwise required to file an amended return, Form 1118, and the 
statement required under Sec.  1.905-4T(c) as required in new Sec.  
1.905-4T(f)(2)(ii) may, in lieu of applying Sec.  1.905-4T(f)(2)(ii), 
notify the IRS in the course of an examination of the return for the 
taxable year for which a redetermination of United States tax liability 
is required. In such case, the notification must contain the 
information described in new Sec.  1.905-4T(c) and must be provided 
within 120 days after the latest of the opening conference or the hand-
delivery or postmark date of the opening letter concerning an 
examination of the return for the taxable year for which a 
redetermination of United States tax liability is required or May 5, 
2008, whichever is later. However, if November 7, 2007 is more than 180 
days after the latest of the opening conference or the hand-delivery or 
postmark date of the opening letter, the IRS, in its discretion, may 
accept such statement or require the taxpayer to comply with the rules 
of paragraph (f)(2)(ii) of this section. In addition, this exception to 
the notification requirements of Sec.  1.905-4T(f)(2)(ii) is not 
permitted to extend the length of the notification period set forth in 
Sec.  1.905-4T(f)(2)(ii). Therefore, Sec.  1.905-4T(f)(2)(iii) will not 
apply if the last day for providing notice of the foreign tax 
redetermination under Sec.  1.905-4T(f)(2)(ii) precedes the latest of 
the opening conference or the hand-delivery or postmark date of the 
opening letter concerning an examination of the return for the taxable 
year for which a redetermination of United States tax liability is 
required.
    Section 1.905-4T(f)(2)(iv) provides that interest will be computed 
in accordance with Sec.  1.905-4T(e), and that the taxpayer must 
satisfy the requirements of Sec.  1.905-4T(f)(2) in order not to be 
subject to the penalty provisions of section 6689 and the regulations 
under that section.

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 of the cross-
referenced notice of proposed rulemaking published in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Internal Revenue 
Code, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses.

Drafting Information

    The principal author of these regulations is Teresa Burridge Hughes 
of the Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury

[[Page 62780]]

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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 301 are 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 1.905-3T is amended as follows:
0
1. Revise the section heading and paragraphs (a), (b)(1), (b)(2), 
(b)(3), (b)(5), (c), and (d)(2)(i).
0
2. Revise the second and third sentences in paragraph (d)(1).
0
3. Remove paragraphs (d)(2)(ii), (d)(2)(iii), (d)(2)(iv), the heading 
for paragraph (d)(3), and paragraph (d)(3)(i).
0
4. Redesignate paragraphs (d)(3), (d)(3)(ii), (d)(3)(iii), (d)(3)(iv), 
and (d)(3)(v) as paragraph (d)(2)(ii), (d)(2)(ii)(A), (d)(2)(ii)(B), 
(d)(2)(ii)(C), and (d)(2)(ii)(D), respectively.
0
5. Add a new paragraph heading to newly-designated paragraph 
(d)(2)(ii).
0
6. Revise newly-designated paragraphs (d)(2)(ii)(A), (d)(2)(ii)(B), and 
(d)(2)(ii)(D).
0
7. Remove the language ``(d)(3)(iv)'' from the second to last sentence 
of newly-designated paragraph (d)(2)(ii)(C) and add the language 
``(d)(2)(ii)(C)'' in its place. Remove the language ``Sec.  1.905-
3T(d)(4)(iv)'' from the last sentence of newly-designated paragraph 
(d)(2)(ii)(C) and add the language ``paragraph (d)(3)(iv) of this 
section'' in its place.
0
8. Redesignate paragraph (d)(4) as paragraph (d)(3).
0
9. Remove the language ``(d)(4)'' from newly-designated paragraph 
(d)(3) and add the language ``(d)(3)'' in its place.
0
10. Revise newly-designated paragraphs (d)(3)(ii), (d)(3)(iii), and 
(d)(3)(v).
0
11. Redesignate paragraph (f) as paragraph (d)(3)(vi).
0
12. Add a new paragraph (f).
    The revisions and additions read as follows:


Sec.  1.905-3T  Adjustments to United States tax liability and to the 
pools of post-1986 undistributed earnings and post-1986 foreign income 
taxes as a result of a foreign tax redetermination (temporary).

    (a) Effective/applicability dates--(1) Currency translation. Except 
as provided in Sec.  1.905-5T, paragraph (b) of this section applies to 
taxes paid or accrued in taxable years of United States taxpayers 
beginning on or after November 7, 2007 and to taxes paid or accrued by 
a foreign corporation in its taxable years which end with or within a 
taxable year of the domestic corporate shareholder beginning on or 
after November 7, 2007. For taxable years beginning after December 31, 
1997, and before November 7, 2007, section 986(a), as amended by the 
Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 2004, 
shall apply. For taxable years beginning after December 31, 1986, and 
before January 1, 1998, Sec.  1.905-3T (as contained in 26 CFR part 1, 
revised as of April 1, 2007) shall apply.
    (2) Foreign tax redeterminations. Paragraphs (c) and (d) of this 
section apply to foreign tax redeterminations occurring in taxable 
years of United States taxpayers beginning on or after November 7, 2007 
where the foreign tax redetermination affects the amount of foreign 
taxes paid or accrued by a United States taxpayer. Where the 
redetermination of foreign tax paid or accrued by a foreign corporation 
affects the computation of foreign taxes deemed paid under section 902 
or 960 with respect to post-1986 undistributed earnings of the foreign 
corporation, paragraphs (c) and (d) of this section apply to foreign 
tax redeterminations occurring in taxable years of a foreign 
corporation which end with or within a taxable year of the domestic 
corporate shareholder beginning on or after November 7, 2007. For 
corresponding rules applicable to foreign tax redeterminations 
occurring in taxable years beginning before November 7, 2007, see 
Sec. Sec.  1.905-3T and 1.905-5T (as contained in 26 CFR part 1, 
revised as of April 1, 2007).
    (b) Currency translation rules--(1) Translation of foreign taxes 
taken into account when accrued--(i) In general. Except as provided in 
paragraph (b)(1)(ii) of this section, in the case of a taxpayer or a 
member of a qualified group (as defined in section 902(b)(2)) that 
takes foreign income taxes into account when accrued, the amount of any 
foreign taxes denominated in foreign currency that have been paid or 
accrued, additional tax liability denominated in foreign currency, 
taxes withheld in foreign currency, or estimated taxes paid in foreign 
currency shall be translated into dollars using the average exchange 
rate (as defined in Sec.  1.989(b)-1) for the United States taxable 
year to which such taxes relate.
    (ii) Exceptions--(A) Taxes not paid within two years. Any foreign 
income taxes denominated in foreign currency that are paid more than 
two years after the close of the United States taxable year to which 
they relate shall be translated into dollars using the exchange rate as 
of the date of payment of the foreign taxes. To the extent any accrued 
foreign income taxes denominated in foreign currency remain unpaid two 
years after the close of the taxable year to which they relate, see 
paragraph (b)(3) of this section for translation rules for the required 
adjustments.
    (B) Taxes paid before taxable year begins. Any foreign income taxes 
paid before the beginning of the United States taxable year to which 
such taxes relate shall be translated into dollars using the exchange 
rate as of the date of payment of the foreign taxes.
    (C) Inflationary currency. Any foreign income taxes the liability 
for which is denominated in any inflationary currency shall be 
translated into dollars using the exchange rate as of the date of 
payment of the foreign taxes. For this purpose, the term inflationary 
currency means the currency of a country in which there is cumulative 
inflation during the base period of at least 30 percent, as determined 
by reference to the consumer price index of the country listed in the 
monthly issues of International Financial Statistics, or a successor 
publication, of the International Monetary Fund. For purposes of this 
paragraph (b)(1)(ii)(C), base period means, with respect to any taxable 
year, the thirty-six calendar months immediately preceding the last day 
of such taxable year (see Sec.  1.985-1(b)(2)(ii)(D)). Accrued but 
unpaid taxes denominated in an inflationary currency shall be 
translated into dollars at the exchange rate on the last day of the 
United States taxable year to which such taxes relate.
    (D) Election to translate taxes using exchange rate for date of 
payment. A taxpayer that is otherwise required to translate foreign 
income taxes that are denominated in foreign currency using the average 
exchange rate may elect to translate foreign income taxes described in 
this paragraph (b)(1)(ii)(D) into dollars using the exchange rate as of 
the date of payment of the foreign taxes, provided that the liability 
for such taxes is denominated in nonfunctional currency. A taxpayer may 
make an election under this paragraph

[[Page 62781]]

(b)(1)(ii)(D) for all foreign income taxes, or for only those foreign 
income taxes that are denominated in nonfunctional currency and are 
attributable to qualified business units with United States dollar 
functional currencies. The election must be made by attaching a 
statement to the taxpayer's timely filed return (including extensions) 
for the first taxable year to which the election applies. The statement 
must identify whether the election is made for all foreign taxes or 
only for foreign taxes attributable to qualified business units with 
United States dollar functional currencies. Once made, the election 
shall apply for the taxable year for which made and all subsequent 
taxable years unless revoked with the consent of the Commissioner. 
Accrued but unpaid taxes subject to an election under this paragraph 
(b)(1)(ii)(D) shall be translated into dollars at the exchange rate on 
the last day of the United States taxable year to which such taxes 
relate. For taxable years beginning after December 31, 2004, and before 
November 7, 2007, the rules of Notice 2006-47, 2006-20 IRB 892 (see 
Sec.  601.601(d)(2)(ii)(b)), shall apply.
    (E) Regulated investment companies. In the case of a regulated 
investment company (as defined in section 851 and the regulations under 
that section) which takes into account income on an accrual basis, 
foreign income taxes paid or accrued with respect to such income shall 
be translated into dollars using the exchange rate as of the date the 
income accrues.
    (2) Translation of foreign taxes taken into account when paid. In 
the case of a taxpayer that takes foreign income taxes into account 
when paid, the amount of any foreign tax liability denominated in 
foreign currency, additional tax liability denominated in foreign 
currency, or estimated taxes paid in foreign currency shall be 
translated into dollars using the exchange rate as of the date of 
payment of such foreign taxes. Foreign taxes withheld in foreign 
currency shall be translated into dollars using the exchange rate as of 
the date on which such taxes were withheld.
    (3) Refunds or other reductions of foreign tax liability. In the 
case of a taxpayer that takes foreign income taxes into account when 
accrued, a reduction in the amount of previously-accrued foreign taxes 
that is attributable to a refund of foreign taxes denominated in 
foreign currency, a credit allowed in lieu of a refund, the correction 
of an overaccrual, or an adjustment on account of accrued taxes 
denominated in foreign currency that were not paid by the date two 
years after the close of the taxable year to which such taxes relate, 
shall be translated into dollars using the exchange rate that was used 
to translate such amount when originally claimed as a credit or added 
to post-1986 foreign income taxes. In the case of foreign income taxes 
taken into account when accrued but translated into dollars on the date 
of payment, see paragraph (d) of this section for required adjustments 
to reflect a reduction in the amount of previously-accrued foreign 
taxes that is attributable to a difference in exchange rates between 
the date of accrual and date of payment. In the case of a taxpayer that 
takes foreign income taxes into account when paid, a refund or other 
reduction in the amount of foreign taxes denominated in foreign 
currency shall be translated into dollars using the exchange rate that 
was used to translate such amount when originally claimed as a credit. 
If a refund or other reduction of foreign taxes relates to foreign 
taxes paid or accrued on more than one date, then the refund or other 
reduction shall be deemed to be derived from, and shall reduce, the 
last payment of foreign taxes first, to the extent of that payment. See 
paragraphs (d)(1) (redetermination of United States tax liability for 
foreign taxes paid directly by a United States person) and (d)(2)(ii) 
(method of adjustment of a foreign corporation's pools of post-1986 
undistributed earnings and post-1986 foreign income taxes) of this 
section.
* * * * *
    (5) Basis of foreign currency refunded--(i) In general. A recipient 
of a refund of foreign tax shall determine its basis in the currency 
refunded under the following rules.
    (ii) United States dollar functional currency. If the functional 
currency of the qualified business unit (QBU) (as defined in section 
989 and the regulations under that section) that paid the tax and 
received the refund is the United States dollar or the person receiving 
the refund is not a QBU, then the recipient's basis in the foreign 
currency refunded shall be the dollar value of the refund determined 
under paragraph (b)(3) of this section by using, as appropriate, either 
the average exchange rate for the taxable year to which such taxes 
relate or the other exchange rate that was used to translate such 
amount when originally claimed as a credit or added to post-1986 
foreign income taxes.
    (iii) Nondollar functional currency. If the functional currency of 
the QBU receiving the refund is not the United States dollar and is 
different from the currency in which the foreign tax was paid, then the 
recipient's basis in the foreign currency refunded shall be equal to 
the functional currency value of the non-functional currency refund 
translated into functional currency at the exchange rate between the 
functional currency and the non-functional currency. Such exchange rate 
is determined under paragraph (b)(3) of this section by substituting 
the words ``functional currency'' for the word ``dollar'' and by using, 
as appropriate, either the average exchange rate for the taxable year 
to which such taxes relate or the other exchange rate that was used to 
translate such amount when originally claimed as a credit or added to 
post-1986 foreign income taxes.
    (iv) Functional currency tax liabilities. If the functional 
currency of the QBU receiving the refund is the currency in which the 
refund was made, then the recipient's basis in the currency received 
shall be the amount of the functional currency received.
    (v) Foreign currency gain or loss. For purposes of determining 
foreign currency gain or loss on the initial payment of accrued foreign 
tax in a non-functional currency, see section 988. For purposes of 
determining subsequent foreign currency gain or loss on the disposition 
of non-functional currency the basis of which is determined under this 
paragraph (b)(5), see section 988(c)(1)(C).
    (c) Foreign tax redetermination. For purposes of this section and 
Sec.  1.905-4T, the term foreign tax redetermination means a change in 
the foreign tax liability that may affect a taxpayer's foreign tax 
credit. A foreign tax redetermination includes: accrued taxes that when 
paid differ from the amounts added to post-1986 foreign income taxes or 
claimed as credits by the taxpayer (such as corrections to overaccruals 
and additional payments); accrued taxes that are not paid before the 
date two years after the close of the taxable year to which such taxes 
relate; any tax paid that is refunded in whole or in part; and, for 
taxes taken into account when accrued but translated into dollars on 
the date of payment, a difference between the dollar value of the 
accrued tax and the dollar value of the tax paid attributable to 
fluctuations in the value of the foreign currency relative to the 
dollar between the date of accrual and the date of payment.
    (d) * * * (1) * * * See Sec.  1.905-4T(b) which requires 
notification to the IRS of a foreign tax redetermination with respect 
to which a redetermination of United States liability is required, and 
see section 905(b) and the regulations under that section which require 
that a taxpayer substantiate that a foreign tax was paid and provide 
all necessary

[[Page 62782]]

information establishing its entitlement to the foreign tax credit. 
However, a redetermination of United States tax liability is not 
required (and a taxpayer need not notify the IRS) if the foreign taxes 
are taken into account when accrued but translated into dollars as of 
the date of payment, the difference between the dollar value of the 
accrued tax and the dollar value of the tax paid is attributable to 
fluctuations in the value of the foreign currency relative to the 
dollar between the date of accrual and the date of payment, and the 
amount of the foreign tax redetermination with respect to each foreign 
country is less than the lesser of ten thousand dollars or two percent 
of the total dollar amount of the foreign tax initially accrued with 
respect to that foreign country for the United States taxable year. * * 
*
    (2) Foreign taxes deemed paid under sections 902 or 960--(i) 
Redetermination of United States tax liability not required. Subject to 
the special rule of paragraph (d)(3) of this section, a redetermination 
of United States tax liability is not required to account for the 
effect of a redetermination of foreign tax paid or accrued by a foreign 
corporation on the foreign taxes deemed paid by a United States 
corporation under section 902 or 960. Instead, appropriate upward or 
downward adjustments shall be made, in accordance with paragraph 
(d)(2)(ii) of this section, at the time of the foreign tax 
redetermination to the foreign corporation's pools of post-1986 
undistributed earnings and post-1986 foreign income taxes to reflect 
the effect of the foreign tax redetermination in calculating foreign 
taxes deemed paid with respect to distributions and inclusions (and the 
amount of such distributions and inclusions) that are includible in the 
United States taxable year in which the foreign tax redetermination 
occurred and subsequent taxable years. See Sec.  1.905-4T(b)(2) for 
notification requirements where a redetermination of foreign tax paid 
or accrued by a foreign corporation affects the computation of foreign 
taxes deemed paid under section 902 or 960, and the taxpayer is 
required to adjust the foreign corporation's pools of post-1986 
undistributed earnings and post-1986 foreign income taxes under this 
paragraph (d)(2).
    (ii) Adjustments to the pools of post-1986 undistributed earnings 
and post-1986 foreign income taxes--(A) Reduction in foreign tax paid 
or accrued. A foreign corporation's pool of post-1986 foreign income 
taxes in the appropriate separate category shall be reduced by the 
United States dollar amount of a foreign tax refund or other reduction 
in the amount of foreign tax paid or accrued, translated into United 
States dollars as provided in paragraph (b)(3) of this section. A 
foreign corporation's pool of post-1986 undistributed earnings in the 
appropriate separate category shall be increased by the functional 
currency amount of the foreign tax refund or other reduction in the 
amount of foreign tax paid or accrued. The allocation of the refund or 
other adjustment to the appropriate separate categories shall be made 
in accordance with paragraph (b)(4) of this section and Sec.  1.904-6. 
If a foreign corporation receives a refund of foreign tax in a currency 
other than its functional currency, that refund shall be translated 
into its functional currency, for purposes of computing the increase to 
its pool of post-1986 undistributed earnings, at the exchange rate 
between the functional currency and the non-functional currency, as 
determined under paragraph (b)(3) of this section, by substituting the 
words ``functional currency'' for the word ``dollar'' and by using the 
same average or spot rate exchange rate convention that applies for 
purposes of translating such foreign taxes into United States dollars.
    (B) Additional foreign tax paid or accrued. A foreign corporation's 
pool of post-1986 foreign income taxes in the appropriate separate 
category shall be increased by the United States dollar amount of the 
additional foreign tax paid or accrued, translated in accordance with 
the rules of paragraphs (b)(1) and (b)(2) of this section. A foreign 
corporation's pool of post-1986 undistributed earnings in the 
appropriate separate category shall be decreased by the functional 
currency amount of the additional foreign tax paid or accrued. The 
allocation of the additional amount of foreign tax among the separate 
categories shall be made in accordance with Sec.  1.904-6. If a foreign 
corporation pays or accrues foreign tax in a currency other than its 
functional currency, that tax shall be translated into its functional 
currency, for purposes of computing the decrease to its pool of post-
1986 undistributed earnings, at the exchange rate between the 
functional currency and the non-functional currency, as determined 
under paragraph (b)(3) of this section, by substituting the words 
``functional currency'' for the word ``dollar'' and by using the same 
average or spot rate exchange rate convention that applies for purposes 
of translating such foreign taxes into United States dollars.
* * * * *
    (D) Examples. The following examples illustrate the application of 
this paragraph (d)(2):

    Example 1. Controlled foreign corporation (CFC) is a wholly-
owned subsidiary of its domestic parent, P. Both CFC and P are 
calendar year taxpayers. CFC has a functional currency, the u, other 
than the dollar and its pool of post-1986 undistributed earnings is 
maintained in that currency. CFC and P use the average exchange rate 
to translate foreign taxes. In 2008, CFC accrued and paid 100u of 
foreign income taxes with respect to non-subpart F income. The 
average exchange rate for 2008 was $1:1u. In 2009, CFC received a 
refund of 50u of foreign taxes with respect to its non-subpart F 
income in 2008. CFC made no distributions to P in 2008. In 
accordance with paragraph (d)(2)(ii)(A) of this section and subject 
to paragraph (d)(3) of this section, in 2009 CFC's pool of post-1986 
foreign income taxes must be reduced by $50 (because the refund must 
be translated into dollars using the exchange rate that was used to 
translate such amount when added to CFC's post-1986 foreign income 
taxes, that is, $1:1u, the average exchange rate for 2008) and the 
CFC's pool of post-1986 undistributed earnings must be increased by 
50u (because the post-1986 undistributed earnings must be increased 
by the functional currency amount of the refund received). An income 
adjustment reflecting foreign currency gain or loss under section 
988 with respect to the refund of foreign taxes received by CFC is 
not required because the foreign taxes are denominated and paid in 
CFC's functional currency.
    Example 2. The facts are the same as in Example 1, except that 
in 2008, CFC had general category post-1986 undistributed earnings 
attributable to non-subpart F income of 200u (net of foreign taxes), 
and CFC accrued and paid 160u in foreign income taxes with respect 
to those earnings. The average exchange rate for 2008 was $1:1u. 
Also in 2008, CFC made a distribution to P of 50u, and P was deemed 
to have paid $40 of foreign taxes with respect to that distribution 
(50u/200u x $160). In 2009, CFC received a refund of foreign taxes 
of 5u with respect to its nonsubpart F income in 2008. Also in 2009, 
CFC made a distribution to P of 50u. CFC had no income and paid no 
foreign taxes in 2009. In accordance with paragraph (d)(2)(ii) of 
this section, CFC's pool of general category post-1986 foreign 
income taxes is reduced in 2009 by $5 to $115 (because the refund 
must be translated into dollars using the exchange rate that was 
used to translate such amount when added to CFC's post-1986 foreign 
income taxes, that is, $1:1u, the average exchange rate for 2008), 
and CFC's pool of general category post-1986 undistributed earnings 
must be increased in 2009 by 5u to 155u (because the post-1986 
undistributed earnings must be increased by the functional currency 
amount of the refund received). (An income adjustment reflecting 
foreign currency gain or loss under section 988 with respect to the 
refund of foreign taxes received by CFC is not required because the 
foreign taxes are denominated and paid in CFC's functional 
currency.) A redetermination of P's deemed paid credit

[[Page 62783]]

and U.S. tax for 2008 is not required, because the 5u refund, if 
taken into account in 2008, would have reduced P's deemed paid taxes 
by less than 10% (50u/205u x $155 = $37.80). See paragraph 
(d)(3)(ii) of this section. P is deemed to pay $37.10 of foreign 
taxes with respect to the distribution in 2009 of 50u (50u/155u x 
$115).
    Example 3. (i) CFC1 is a foreign corporation that is wholly-
owned by P, a domestic corporation. CFC2 is a foreign corporation 
that is wholly-owned by CFC1. The functional currency of CFC1 and 
CFC2 is the u, and the pools of post-1986 undistributed earnings of 
CFC1 and CFC2 are maintained in that currency. CFC1, CFC2, and P use 
the average exchange rate to translate foreign income taxes. In 
2008, CFC2 had post-1986 undistributed earnings attributable to non-
subpart F income of 100u (net of foreign taxes) and paid 100u in 
foreign income taxes with respect to those earnings. The average 
exchange rate for 2008 was $1:1u. CFC1 had no income and no earnings 
and profits other than those resulting from distributions from CFC2, 
as provided in either Situation 1 or Situation 2. CFC1 paid no 
foreign taxes.
    (ii) Situation 1. In 2009, CFC2 received a refund of foreign 
taxes of 25u with respect to its 2008 taxable year. As of the close 
of 2009, CFC2 had 125u of post-1986 undistributed earnings (100u + 
25u) and $75 of post-1986 foreign income taxes ($100-$25). In 2010, 
CFC2 made a distribution to CFC1 of 50u. CFC1 was deemed to have 
paid $30 of foreign taxes with respect to that distribution (50u/
125u x $75). (An income adjustment reflecting foreign currency gain 
or loss under section 988 with respect to the refund of foreign 
taxes received by CFC1 is not required because the foreign taxes are 
denominated and paid in CFC1's functional currency.) At the end of 
2010, CFC2 had 75u of post-1986 undistributed earnings (125u-50u) 
and $45 of post-1986 foreign income taxes ($75-$30).
    (iii) Situation 2. The facts are the same as in Example 3(ii), 
Situation 1, except that CFC2 made a distribution of 50u in 2009 and 
received a refund of 75u of foreign tax in 2010. In 2009, the amount 
of foreign taxes deemed paid by CFC1 is $50 (50u/100u x $100). In 
accordance with paragraph (d)(2)(ii)(C) of this section, the pools 
of post-1986 foreign income taxes of CFC1, as well as CFC2, must be 
adjusted in 2010, because the 2010 refund would otherwise have the 
effect of reducing below zero CFC2's pool of post-1986 foreign 
income taxes. Under paragraph (d)(3)(iv) of this section, the pools 
would have to be adjusted in 2009, and a redetermination of P's 
United States tax liability would be required, if P had received or 
accrued a distribution or inclusion from CFC1 or CFC2 in 2009 and 
computed an amount of foreign taxes deemed paid. CFC1's pool of 
post-1986 foreign income taxes must be reduced in 2010 by $42.86, 
determined as follows: $50 (foreign taxes deemed paid on the 
distribution from CFC2) minus $7.14 (the foreign taxes that would 
have been deemed paid had the refund occurred prior to the 
distribution (50u/175u x $25)). CFC2's pool of foreign taxes must be 
reduced in 2010 by $32.14, determined as follows: $75 (75u refund 
translated into dollars using the exchange rate that was used to 
translate such amount when originally added to post-1986 foreign 
income taxes, that is, $1:1u, the average exchange rate for 2008) 
minus $42.86 (the adjustment to CFC1's pool of post-1986 foreign 
income taxes). (An income adjustment reflecting foreign currency 
gain or loss under section 988 with respect to the refund of foreign 
taxes received by CFC1 is not required because the foreign taxes are 
denominated and paid in CFC1's functional currency.) The following 
reflects the pools of post-1986 undistributed earnings and post-1986 
foreign income taxes of CFC1 and CFC2.

----------------------------------------------------------------------------------------------------------------
                                                                 Post-1986 earnings (u)     Foreign taxes ($)
----------------------------------------------------------------------------------------------------------------
CFC2:
2008..........................................................                      100                      100
2009..........................................................              100-50 = 50              100-50 = 50
2010..........................................................            50 + 75 = 125         50-32.14 = 17.86
CFC1:
2009..........................................................                       50                       50
2010..........................................................                       50          50-42.86 = 7.14
----------------------------------------------------------------------------------------------------------------

* * * * *

    (d)(3) * * *
    (ii) Deemed paid foreign tax adjustment of ten percent or more. A 
redetermination of United States tax liability is required if a foreign 
tax redetermination occurs with respect to foreign taxes paid by a 
foreign corporation and such foreign tax redetermination, if taken into 
account in the taxable year of the foreign corporation to which the 
foreign tax redetermination relates, has the effect of reducing by ten 
percent or more the domestic corporate shareholder's foreign taxes 
deemed paid under section 902 or 960 with respect to a distribution or 
inclusion from the foreign corporation in any taxable year of the 
domestic corporate shareholder. If a redetermination of United States 
tax is required under the preceding sentence for any taxable year, a 
redetermination of United States tax is also required for all 
subsequent taxable years in which the domestic corporate shareholder 
received or accrued a distribution or inclusion from the foreign 
corporation.
    (iii) Example. The following example illustrates the application of 
paragraph (d)(3)(ii) of this section:

    Example. (i) Facts. Controlled foreign corporation (CFC) is a 
wholly-owned subsidiary of its domestic parent, P. Both CFC and P 
use the calendar year as their taxable year. CFC has a functional 
currency, the u, other than the dollar, and its pool of post-1986 
undistributed earnings is maintained in that currency. CFC and P use 
the average exchange rate to translate foreign income taxes. As of 
January 1, 2008, CFC had 500u of general category post-1986 
undistributed earnings and $200 of general category post-1986 
foreign income taxes. In 2008, when the average exchange rate for 
the year was $1:1u, CFC earned general category income of 600u, 
accrued 100u of foreign income tax with respect to that income, and 
made a distribution to P of 100u, 10% of CFC's post-1986 
undistributed earnings of 1,000u. P was deemed to have paid $30 of 
foreign income taxes in 2008 with respect to that distribution 
(100u/1,000u x $300). In 2009, CFC paid its actual foreign tax 
liability for 2007 of 80u. Also in 2009, for which the average 
exchange rate was $1:1.5u, CFC earned 500u of general category 
income, accrued 150u of tax with respect to that income, and 
distributed 100u to P. In 2010, CFC incurred a general category loss 
of (500u) and accrued no foreign tax. The loss was carried back to 
2008 for foreign tax purposes, and CFC received a refund in 2011 of 
all 80u of foreign taxes paid for its 2008 taxable year.
    (ii) Result in 2009. If the 20u overaccrual of tax for 2007 were 
taken into account in 2008, CFC's general category post-1986 
undistributed earnings would be 1,020u, CFC's general category post-
1986 foreign income taxes would be $280, and P would be deemed to 
pay $27.45 of tax with respect to the 2008 distribution of 100u 
(100u/1020u x $280 = $27.45). Because $2.55 is less than 10% of the 
$30 of foreign taxes deemed paid as originally calculated in 2008, P 
is not required to redetermine its deemed paid credit and U.S. tax 
liability for 2008 in 2009. Instead, CFC's general category post-
1986 foreign income taxes are reduced by $20 in 2009 (because the 
overaccrual for 2008 is translated into dollars using the exchange 
rate that was used to translate such amount when originally added to 
post-1986 foreign income taxes, that is, $1:1u, the average exchange 
rate for 2008), and the corresponding pool of general category post-
1986 undistributed earnings is increased by 20u in 2009 (because the 
post-1986 undistributed earnings pool is increased by the functional 
currency amount of the overaccrual). CFC's general category post-
1986 undistributed earnings are also

[[Page 62784]]

increased in 2009 to 1270u by the 350u earned in 2009 (900u + 20u + 
350u = 1270u), and CFC's general category post-1986 foreign income 
taxes are increased by $100 to $350 ($270 - $20 + $100). P is deemed 
to pay $27.56 of foreign income taxes in 2009 with respect to the 
100u distribution from CFC in that year (100u/1270u x $350).
    (iii) Result in 2011. If the 80u refund of tax for 2008 were 
taken into account in 2008, CFC's general category post-1986 
undistributed earnings would be 1,100u, CFC's general category post-
1986 foreign income taxes would be $200, and P would be deemed to 
pay $18.18 of tax with respect to the 2008 distribution of 100u 
(100u/1,100u x $200 = $18.18). Because $11.82 is more than 10% of 
the $30 of foreign taxes deemed paid as originally calculated in 
2008, under paragraph (d)(3)(ii) of this section, P is required to 
redetermine its deemed paid credit and U.S. tax liability for 2008 
and 2009 in 2011. As redetermined in 2011, CFC's post-1986 
undistributed earnings for 2009 are 1350u (1,100u as revised for 
2008, less 100u distributed in 2008, plus 350u earned in 2009), and 
its post-1986 foreign income taxes for 2009 are $381.82 ($200 as 
revised for 2008, less $18.18 deemed paid in 2008, plus $100 accrued 
for 2009). As redetermined in 2011, P's deemed paid credit with 
respect to the 100u distribution from CFC in 2009 is $24.28 (100u/
1350u x $381.82).

* * * * *
    (v) Example. The following example illustrates the application of 
paragraph (d)(3)(iv) of this section:

    Example. Controlled foreign corporation (CFC) is a wholly-owned 
subsidiary of its domestic parent, P. Both CFC and P are calendar 
year taxpayers. CFC has a functional currency, the u, other than the 
dollar, and its pool of post-1986 undistributed earnings is 
maintained in that currency. CFC and P use the average exchange rate 
to translate foreign taxes. The average exchange rate for both 2008 
and 2009 was $1:1u. In 2008, CFC earned 200u of general category 
income, accrued and paid 100u of foreign taxes with respect to that 
income, and made a distribution to P of 50u, half of CFC's post-1986 
undistributed earnings of 100u. P is deemed to have paid $50 of 
foreign taxes with respect to that distribution (50u/100u x $100). 
In 2009, CFC received a refund of all 100u of foreign taxes related 
to the general category income for 2008. In 2009, CFC earned an 
additional 290u of income, 200u of which was passive category income 
and 90u of which was general category income, and accrued and paid 
95u of foreign tax, 40u of which was with respect to the passive 
category income and 45u of which was with respect to the general 
category income. In accordance with paragraph (d)(3)(iv) of this 
section, P is required to redetermine its United States tax 
liability for 2008 to account for the foreign tax redetermination 
occurring in 2009 because, if an adjustment to CFC's pool of post-
1986 foreign income taxes in the general category were made, the 
pool would be ($5). A deficit is not permitted to be carried in 
CFC's pool of post-1986 foreign income taxes in any separate 
category.

* * * * *
    (f) Expiration date. The applicability of this section expires on 
or before November 5, 2010.


0
Par. 3. Section 1.905-4T is revised to read as follows:


Sec.  1.905-4T  Notification of foreign tax redetermination 
(temporary).

    (a) Application of this section. The rules of this section apply 
if, as a result of a foreign tax redetermination (as defined in Sec.  
1.905-3T(c)), a redetermination of United States tax liability is 
required under section 905(c) and Sec.  1.905-3T(d).
    (b) Time and manner of notification--(1) Redetermination of United 
States tax liability--(i) In general. Except as provided in paragraphs 
(b)(1)(iv), (v), and (b)(3) of this section, any taxpayer for which a 
redetermination of United States tax liability is required must notify 
the Internal Revenue Service (IRS) of the foreign tax redetermination 
by filing an amended return, Form 1118 (Foreign Tax Credit--
Corporations) or Form 1116 (Foreign Tax Credit), and the statement 
required under paragraph (c) of this section for the taxable year with 
respect to which a redetermination of United States tax liability is 
required. Such notification must be filed within the time prescribed by 
this paragraph (b) and contain the information described in paragraph 
(c) of this section. Where a foreign tax redetermination requires an 
individual to redetermine the individual's United States tax liability, 
and as a result of such foreign tax redetermination the amount of 
creditable taxes paid or accrued by such individual during the taxable 
year does not exceed the applicable dollar limitation in section 
904(k), the individual shall not be required to file Form 1116 with the 
amended return for such taxable year if the individual satisfies the 
requirements of section 904(k).
    (ii) Reduction in amount of foreign tax liability. Except as 
provided in paragraphs (b)(1)(iv), (v), and (b)(3) of this section, for 
each taxable year of the taxpayer with respect to which a 
redetermination of United States tax liability is required by reason of 
a foreign tax redetermination that reduces the amount of foreign taxes 
paid or accrued, or included in the computation of foreign taxes deemed 
paid, the taxpayer must file a separate notification for each such 
taxable year by the due date (with extensions) of the original return 
for the taxpayer's taxable year in which the foreign tax 
redetermination occurred.
    (iii) Increase in amount of foreign tax liability. Except as 
provided in paragraphs (b)(1)(iv), (v), and (b)(3) of this section, for 
each taxable year of the taxpayer with respect to which a 
redetermination of United States tax liability is required by reason of 
a foreign tax redetermination that increases the amount of foreign 
taxes paid or accrued, or included in the computation of foreign taxes 
deemed paid, the taxpayer must notify the Internal Revenue Service 
within the period provided by section 6511(d)(3)(A). Filing of such 
notification within the prescribed period shall constitute a claim for 
refund of United States tax.
    (iv) Multiple redeterminations of United States tax liability for 
same taxable year. Where more than one foreign tax redetermination 
requires a redetermination of United States tax liability for the same 
taxable year of the taxpayer and those redeterminations occur within 
two consecutive taxable years of the taxpayer, the taxpayer may file 
for such taxable year one amended return, Form 1118 or 1116, and the 
statement required under paragraph (c) of this section that reflect all 
such foreign tax redeterminations. If the taxpayer chooses to file one 
notification for such redeterminations, the taxpayer must file such 
notification by the due date (with extensions) of the original return 
for the taxpayer's taxable year in which the first foreign tax 
redetermination that reduces foreign tax liability occurred. Where a 
foreign tax redetermination with respect to the taxable year for which 
a redetermination of United States tax liability is required occurs 
after the date for providing such notification, more than one amended 
return may be required with respect to that taxable year.
    (v) Carryback and carryover of unused foreign tax. Where a foreign 
tax redetermination requires a redetermination of United States tax 
liability that would otherwise result in an additional amount of United 
States tax due, but such amount is eliminated as a result of a 
carryback or carryover of an unused foreign tax under section 904(c), 
the taxpayer may, in lieu of applying the rules of paragraphs (b)(1)(i) 
and (ii) of this section, notify the IRS of such redetermination by 
attaching a statement to the original return for the taxpayer's taxable 
year in which the foreign tax redetermination occurs. Such statement 
must be filed by the due date (with extensions) of the original return 
for the taxpayer's taxable year in which the foreign tax 
redetermination occurred and contain the information described in Sec.  
1.904-2(f).

[[Page 62785]]

    (vi) Example. The following example illustrates the application of 
this paragraph (b)(1):

    Example. (i) X, a domestic corporation, is an accrual basis 
taxpayer and uses the calendar year as its United States taxable 
year. X conducts business through a branch in Country M, the 
currency of which is the m, and also conducts business through a 
branch in Country N, the currency of which is the n. X uses the 
average exchange rate to translate foreign income taxes. Assume that 
X is able to claim a credit under section 901 for all foreign taxes 
paid or accrued.
    (ii) In 2008, X accrued and paid 100m of Country M taxes with 
respect to 400m of foreign source general category income. The 
average exchange rate for 2008 was $1:1m. Also in 2008, X accrued 
and paid 50n of Country N taxes with respect to 150n of foreign 
source general category income. The average exchange rate for 2008 
was $1:1n. X claimed a foreign tax credit of $150 ($100 (100m at 
$1:1m) + $50 (50n at $1:1n)) with respect to its foreign source 
general category income on its United States tax return for 2008.
    (iii) In 2009, X accrued and paid 100n of Country N taxes with 
respect to 300n of foreign source general category income. The 
average exchange rate for 2009 was $1.50:1n. X claimed a foreign tax 
credit of $150 (100n at $1.5:1n) with respect to its foreign source 
general category income on its United States tax return for 2009.
    (iv) On June 15, 2012, when the spot exchange rate was $1.40:1n, 
X received a refund of 10n from Country N, and, on March 15, 2013, 
when the spot exchange rate was $1.20:1m, X was assessed by and paid 
Country M an additional 20m of tax. Both payments were with respect 
to X's foreign source general category income in 2008. On May 15, 
2013, when the spot exchange rate was $1.45:1n, X received a refund 
of 5n from Country N with respect to its foreign source general 
category income in 2009.
    (v) X must redetermine its United States tax liability for both 
2008 and 2009. With respect to 2008, X must notify the IRS of the 
June 15, 2012, refund of 10n from Country N that reduced X's foreign 
tax liability by filing an amended return, Form 1118, and the 
statement required in paragraph (c) of this section for 2008 by the 
due date of the original return (with extensions) for 2012. The 
amended return and Form 1118 must reduce the amount of foreign taxes 
claimed as a credit under section 901 by $10 (10n refund translated 
at the average exchange rate for 2008, or $1:1n (see Sec.  1.905-
3T(b)(3)). X will recognize foreign currency gain or loss under 
section 988 in or after 2012 on the conversion of the 10n refund 
into dollars. With respect to the March 15, 2013, additional 
assessment of 20m by Country M, X must notify the IRS within the 
time period provided by section 6511(d)(3)(A), increasing the 
foreign taxes available as a credit by $24 (20m translated at the 
exchange rate on the date of payment, or $1.20:1m ). See sections 
986(a)(1)(B)(i) and 986(a)(2)(A) and Sec.  1.905-3T(b)(1)(ii)(A). X 
may so notify the IRS by filing a second amended return, Form 1118, 
and the statement required in paragraph (c) of this section for 
2008, within the time period provided by section 6511(d)(3)(A). 
Alternatively, when X redetermines its United States tax liability 
for 2008 to take into account the 10n refund from Country N which 
occurred in 2012, X may also take into account the 20m additional 
assessment by Country M which occurred on March 15, 2013. See Sec.  
1.905-4T(b)(1)(iv). Where X reflects both foreign tax 
redeterminations on the same amended return, Form 1118, and in the 
statement required in paragraph (c) of this section for 2008, the 
amount of X's foreign taxes available as a credit would be:
    (A) Reduced by $10 (10n refund translated at $1:1n) and
    (B) Increased by $24 (20m additional assessment translated at 
the exchange rate on the date of payment, March 15, 2013, or 
$1.20:1m). The foreign taxes available as a credit therefore would 
be increased by $14 ($24 (additional assessment) - $10 (refund)). 
The due date of the 2008 amended return, Form 1118, and the 
statement required in paragraph (c) of this section reflecting 
foreign tax redeterminations in both years would be the due date 
(with extensions) of X's original return for 2012.
    (vi) With respect to 2009, X must notify the IRS by filing an 
amended return, Form 1118, and the statement required in paragraph 
(c) of this section for 2009 that is separate from that filed for 
2008. The amended return, Form 1118, and the statement required in 
paragraph (c) of this section for 2009 must be filed by the due date 
(with extensions) of X's original return for 2013. The amended 
return and Form 1118 must reduce the amount of foreign taxes claimed 
as a credit under section 901 by $7.50 (5n refund translated at the 
average exchange rate for 2009, or $1.50:1n). X will recognize 
foreign currency gain or loss under section 988 in or after 2013 on 
the conversion of the 5n refund into dollars.

    (2) Pooling adjustment in lieu of redetermination of United States 
tax liability. Where a redetermination of foreign tax paid or accrued 
by a foreign corporation affects the computation of foreign taxes 
deemed paid under section 902 or 960, and the taxpayer is required to 
adjust the foreign corporation's pools of post-1986 undistributed 
earnings and post-1986 foreign income taxes under Sec.  1.905-3T(d)(2), 
the taxpayer is required to notify the IRS of such redetermination by 
reflecting the adjustments to the foreign corporation's pools of post-
1986 undistributed earnings and post-1986 foreign income taxes on a 
Form 1118 for the taxpayer's first taxable year with respect to which 
the redetermination affects the computation of foreign taxes deemed 
paid. Such Form 1118 must be filed by the due date (with extensions) of 
the original return for such taxable year. In the case of multiple 
redeterminations that affect the computation of foreign taxes deemed 
paid for the same taxable year and that are required to be reported 
under this paragraph (b)(2), a taxpayer may file one notification for 
all such redeterminations in lieu of filing a separate notification for 
each such redetermination. See section 905(b) and the regulations under 
that section which require that a taxpayer substantiate that a foreign 
tax was paid and provide all necessary information establishing its 
entitlement to the foreign tax credit.
    (3) Taxpayers under the jurisdiction of the Large and Mid-Size 
Business Division. The rules of this paragraph (b)(3) apply where a 
redetermination of United States tax liability is required by reason of 
a foreign tax redetermination that results in a reduction in the amount 
of foreign taxes paid or accrued, or included in the computation of 
foreign taxes deemed paid, and such foreign tax redetermination occurs 
while a taxpayer is under the jurisdiction of the Large and Mid-Size 
Business Division (or similar program). The taxpayer must, in lieu of 
applying the rules of paragraphs (b)(1)(i) and (ii) of this section 
(requiring the filing of an amended return, Form 1118, and a statement 
described in paragraph (c) of this section by the due date (with 
extensions) of the original return for the taxpayer's taxable year in 
which the foreign tax redetermination occurred), notify the IRS of such 
redetermination by providing to the examiner the statement described in 
paragraph (c) of this section during an examination of the return for 
the taxable year for which a redetermination of United States tax 
liability is required by reason of such foreign tax redetermination. 
The taxpayer must provide the statement to the examiner no later than 
120 days after the latest of the date the foreign tax redetermination 
occurs, the opening conference of the examination, or the hand-delivery 
or postmark date of the opening letter concerning the examination. If, 
however, the foreign tax redetermination occurs more than 180 days 
after the latest of the opening conference or the hand-delivery or 
postmark date of the opening letter, the taxpayer may, in lieu of 
applying the rules of paragraphs (b)(1)(i) and (ii) of this section, 
provide the statement to the examiner within 120 days after the date 
the foreign tax redetermination occurs, and the IRS, in its discretion, 
may accept such statement or require the taxpayer to comply with the 
rules of paragraphs (b)(1)(i) and (ii) of this section. A taxpayer 
subject to the rules of this paragraph (b)(3) must satisfy the rules of 
this paragraph (b)(3) (in lieu of the rules of paragraphs (b)(1)(i) and 
(ii) of this section) in order not to be subject to the penalty 
relating to the failure to file notice of a foreign tax

[[Page 62786]]

redetermination under section 6689 and the regulations under that 
section. This paragraph (b)(3) shall not apply where the due date 
specified in paragraph (b)(1)(ii) of this section for providing notice 
of the foreign tax redetermination precedes the latest of the opening 
conference or the hand-delivery or postmark date of the opening letter 
concerning an examination of the return for the taxable year for which 
a redetermination of United States tax liability is required by reason 
of such foreign tax redetermination. In addition, any statement that 
would otherwise be required to be provided under this paragraph (b)(3) 
on or before May 5, 2008 will be considered timely if provided on or 
before May 5, 2008.
    (4) Example. The following example illustrates the application of 
paragraph (b)(3) of this section:

    Example. X, a taxpayer under the jurisdiction of the Large and 
Mid-Size Business Division, uses the calendar year as its United 
States taxable year. On October 15, 2009, X receives a refund of 
foreign tax that constitutes a foreign tax redetermination that 
necessitates a redetermination of United States tax liability for 
X's 2008 taxable year. Under paragraph (b)(1)(ii) of this section, X 
is required to notify the IRS of the foreign tax redetermination by 
filing an amended return, Form 1118, and the statement required in 
paragraph (c) of this section for its 2008 taxable year by September 
15, 2010 (the due date (with extensions) of the original return for 
X's 2009 taxable year). On December 15, 2010, the IRS hand delivers 
an opening letter concerning the examination of the return for X's 
2008 taxable year, and the opening conference for such examination 
is scheduled for January 15, 2011. Because the date for notifying 
the IRS of the foreign tax redetermination under paragraph 
(b)(1)(ii) of this section precedes the date of the opening 
conference concerning the examination of the return for X's 2008 
taxable year, paragraph (b)(3) of this section does not apply, and X 
must notify the IRS of the foreign tax redetermination by filing an 
amended return, Form 1118, and the statement required in paragraph 
(c) of this section for the 2007 taxable year by September 15, 2010.

    (c) Notification contents--(1) In general. In addition to 
satisfying the requirements of paragraph (b) of this section, the 
taxpayer must furnish a statement that contains information sufficient 
for the IRS to redetermine the taxpayer's United States tax liability 
where such a redetermination is required under section 905(c), and to 
verify adjustments to the pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes where such adjustments are required 
under Sec.  1.905-3T(d)(2). The information must be in a form that 
enables the IRS to verify and compare the original computations with 
respect to a claimed foreign tax credit, the revised computations 
resulting from the foreign tax redetermination, and the net changes 
resulting therefrom. The statement must include the taxpayer's name, 
address, identifying number, and the taxable year or years of the 
taxpayer that are affected by the foreign tax redetermination. In 
addition, the taxpayer must provide the information described in 
paragraph (c)(2) or (c)(3) of this section, as appropriate. If the 
statement is submitted to the IRS under paragraph (b)(3) of this 
section, which provides requirements with respect to reporting by 
taxpayers under the jurisdiction of the Large and Mid-Size Business 
Division, the statement must also include the following declaration 
signed by a person authorized to sign the return of the taxpayer: 
``Under penalties of perjury, I declare that I have examined this 
written statement, and to the best of my knowledge and belief, this 
written statement is true, correct, and complete.''
    (2) Foreign taxes paid or accrued. Where a redetermination of 
United States tax liability is required by reason of a foreign tax 
redetermination as defined in Sec.  1.905-3T(c), in addition to the 
information described in paragraph (c)(1) of this section, the taxpayer 
must provide the following: the date or dates the foreign taxes were 
accrued, if applicable; the date or dates the foreign taxes were paid; 
the amount of foreign taxes paid or accrued on each date (in foreign 
currency) and the exchange rate used to translate each such amount, as 
provided in Sec.  1.905-3T(b)(1) or (b)(2); and information sufficient 
to determine any interest due from or owing to the taxpayer, including 
the amount of any interest paid by the foreign government to the 
taxpayer and the dates received. In addition, in the case of any 
foreign tax that is refunded in whole or in part, the taxpayer must 
provide the date of each such refund; the amount of such refund (in 
foreign currency); and the exchange rate that was used to translate 
such amount when originally claimed as a credit (as provided in Sec.  
1.905-3T(b)(3)) and the exchange rate for the date the refund was 
received (for purposes of computing foreign currency gain or loss under 
section 988). In addition, in the case of any foreign taxes that were 
not paid before the date two years after the close of the taxable year 
to which such taxes relate, the taxpayer must provide the amount of 
such taxes in foreign currency, and the exchange rate that was used to 
translate such amount when originally added to post-1986 foreign income 
taxes or claimed as a credit. Where a redetermination of United States 
tax liability results in an amount of additional tax due, but the 
carryback or carryover of an unused foreign tax under section 904(c) 
only partially eliminates such amount, the taxpayer must also provide 
the information required in Sec.  1.904-2(f).
    (3) Foreign taxes deemed paid. Where a redetermination of United 
States tax liability is required under Sec.  1.905-3T(d)(3) to account 
for the effect of a redetermination of foreign tax paid or accrued by a 
foreign corporation on foreign taxes deemed paid under section 902 or 
960, in addition to the information described in paragraphs (c)(1) and 
(c)(2) of this section, the taxpayer must provide the balances of the 
pools of post-1986 undistributed earnings and post-1986 foreign income 
taxes before and after adjusting the pools in accordance with the rules 
of Sec.  1.905-3T(d)(2), the dates and amounts of any dividend 
distributions or other inclusions made out of earnings and profits for 
the affected year or years, and the amount of earnings and profits from 
which such dividends were paid for the affected year or years.
    (d) Payment or refund of United States tax. The amount of tax, if 
any, due upon a redetermination of United States tax liability shall be 
paid by the taxpayer after notice and demand has been made by the IRS. 
Subchapter B of chapter 63 of the Internal Revenue Code (relating to 
deficiency procedures) shall not apply with respect to the assessment 
of the amount due upon such redetermination. In accordance with 
sections 905(c) and 6501(c)(5), the amount of additional tax due shall 
be assessed and collected without regard to the provisions of section 
6501(a) (relating to limitations on assessment and collection). The 
amount of tax, if any, shown by a redetermination of United States tax 
liability to have been overpaid shall be credited or refunded to the 
taxpayer in accordance with the provisions of section 6511(d)(3)(A) and 
Sec.  301.6511(d)-3 of this chapter.
    (e) Interest and penalties--(1) In general. If a redetermination of 
United States tax liability is required by reason of a foreign tax 
redetermination, interest shall be computed on the underpayment or 
overpayment in accordance with sections 6601 and 6611 and the 
regulations under these sections. No interest shall be assessed or 
collected on any underpayment resulting from a refund of foreign tax 
for any period before the receipt of the refund, except to the extent 
interest was paid by the foreign country or possession of the United 
States on the refund for the period. In no case, however, shall 
interest assessed and collected pursuant to the preceding sentence for 
any period

[[Page 62787]]

before receipt of the foreign tax refund exceed the amount that 
otherwise would have been assessed and collected under section 6601 and 
the regulations under this section for that period. Interest shall be 
assessed from the time the taxpayer (or the foreign corporation of 
which the taxpayer is a shareholder) receives a refund until the 
taxpayer pays the additional tax due the United States.
    (2) Adjustments to pools of foreign taxes. No underpayment or 
overpayment of United States tax liability results from a 
redetermination of foreign tax unless a redetermination of United 
States tax liability is required. Consequently, no interest shall be 
paid by or to a taxpayer as a result of adjustments to a foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes made in accordance with Sec.  1.905-3T(d)(2).
    (3) Imposition of penalty. Failure to comply with the provisions of 
this section shall subject the taxpayer to the penalty provisions of 
section 6689 and the regulations under that section.
    (f) Effective/applicability date--(1) In general. This section 
applies to foreign tax redeterminations (defined in Sec.  1.905-3T(c)) 
occurring in taxable years of United States taxpayers beginning on or 
after November 7, 2007, where the foreign tax redetermination affects 
the amount of foreign taxes paid or accrued by a United States 
taxpayer. Where the redetermination of foreign tax paid or accrued by a 
foreign corporation affects the computation of foreign taxes deemed 
paid under section 902 or 960 with respect to pre-1987 accumulated 
profits or post-1986 undistributed earnings of the foreign corporation, 
this section applies to foreign tax redeterminations occurring in a 
taxable year of the foreign corporation which ends with or within a 
taxable year of its domestic corporate shareholder beginning on or 
after November 7, 2007. In no case, however, shall this paragraph 
(f)(1) operate to extend the statute of limitations provided by section 
6511(d)(3)(A).
    (2) Foreign tax redeterminations occurring in taxable years 
beginning before November 7, 2007--(i) Scope. This paragraph (f)(2) 
applies to any foreign tax redetermination (as defined in Sec.  1.905-
3T(c)) which occurred in any of the three taxable years of a United 
States taxpayer immediately preceding the taxpayer's first taxable year 
beginning on or after November 7, 2007; reduced the amount of foreign 
taxes paid or accrued by the taxpayer; and requires a redetermination 
of United States tax liability for any taxable year. This paragraph 
(f)(2) also applies to any redetermination of foreign tax paid or 
accrued by a foreign corporation which occurred in a taxable year of 
the foreign corporation which ends with or within any of the three 
taxable years of a domestic corporate shareholder immediately preceding 
such shareholder's first taxable year beginning on or after November 7, 
2007; reduced foreign taxes included in the computation of foreign 
taxes deemed paid by such shareholder under section 902 or 960; and 
requires a redetermination of United States tax liability under Sec.  
1.905-3T(d)(3) for any taxable year. For corresponding rules applicable 
to foreign tax redeterminations occurring in taxable years beginning 
before the third taxable year immediately preceding the taxable year 
beginning on or after November 7, 2007, see 26 CFR 1.905-4T and 1.905-
5T (as contained in 26 CFR part 1, revised as of April 1, 2007).
    (ii) Notification required. If, as of November 7, 2007, the 
taxpayer has not satisfied the notification requirements described in 
Sec.  1.905-3T and this section (as contained in 26 CFR part 1, revised 
as of April 1, 2007, as modified by Notice 90-26, 1990-1 CB 336, see 
Sec.  601.601(d)(2)(ii)(b) of this chapter), with respect to a foreign 
tax redetermination described in paragraph (f)(2)(i) of this section, 
the taxpayer must notify the IRS of the foreign tax redetermination by 
filing an amended return, Form 1118 or 1116, and the statement required 
in paragraph (c) of this section for the taxable year with respect to 
which a redetermination of United States tax liability is required. 
Such notification must be filed no later than the due date (with 
extensions) of the original return for the taxpayer's first taxable 
year following the taxable year in which these regulations are first 
effective. Where the foreign tax redetermination requires an individual 
to redetermine the individual's United States tax liability, and as a 
result of such foreign tax redetermination the amount of creditable 
taxes paid or accrued by such individual during the taxable year does 
not exceed the applicable dollar limitation in section 904(k), the 
individual shall not be required to file Form 1116 with the amended 
return for such taxable year if the individual satisfies the 
requirements of section 904(k). The rules of paragraphs (b)(1)(iv) and 
(v) of this section (concerning multiple redeterminations of United 
States tax liability for the same taxable year, and the carryback and 
carryover of unused foreign tax) shall apply.
    (iii) Taxpayers under the jurisdiction of the Large and Mid-Size 
Business Division. If a taxpayer under the jurisdiction of the Large 
and Mid-Size Business Division is otherwise required under paragraph 
(f)(2)(ii) of this section to notify the IRS of a foreign tax 
redetermination described in paragraph (f)(2)(ii) of this section by 
filing an amended return, Form 1118, and the statement required in 
paragraph (c) of this section, such taxpayer may, in lieu of applying 
the rules of paragraph (f)(2)(ii) of this section, provide to the 
examiner the information described in paragraph (c) of this section 
during an examination of the return for the taxable year for which a 
redetermination of United States tax liability is required by reason of 
such foreign tax redetermination. The taxpayer must provide the 
information to the examiner on or before the date that is the later of 
May 5, 2008 or 120 days after the latest of the opening conference or 
the hand-delivery or postmark date of the opening letter concerning an 
examination of the return for the taxable year for which a 
redetermination of United States tax liability is required. However, if 
November 7, 2007 is more than 180 days after the latest of the opening 
conference or the hand-delivery or postmark date of the opening letter, 
the IRS, in its discretion, may accept such statement or require the 
taxpayer to comply with the rules of paragraph (f)(2)(ii) of this 
section. This paragraph (f)(2)(iii) shall not apply where the due date 
specified in paragraph (f)(2)(ii) of this section for providing notice 
of the foreign tax redetermination precedes the latest of the opening 
conference or the hand-delivery or postmark date of the opening letter 
concerning an examination of the return for the taxable year for which 
a redetermination of United States tax liability is required.
    (iv) Interest and penalties. Interest shall be computed in 
accordance with paragraph (e) of this section. Failure to comply with 
the provisions of this paragraph (f)(2) shall subject the taxpayer to 
the penalty provisions of section 6689 and the regulations under that 
section.
    (3) Expiration date. The applicability of this section expires on 
or before November 5, 2010.

0
Par. 4. Section 1.905-5T is amended as follows:
0
1. Remove the language ``earnings and profits accumulated in taxable 
years of a foreign corporation beginning prior to January 1, 1987'' 
from the second sentence of paragraph (a) and add the language ``pre-
1987 accumulated profits (as defined in Sec.  1.902-1(a)(10)(i)'' in 
its place.
0
2. Remove the language ``Sec.  1.905-4(b)(3)'' from the second sentence 
of

[[Page 62788]]

paragraph (d)(1) and add the language ``Sec.  1.905-4T(c)'' in its 
place.
0
3. Remove the language ``Sec.  1.905-4T(b)(3)(ii)(A)'' from paragraph 
(d)(2) and add the language ``Sec.  1.905-4T(c)(2)'' in its place.
0
4. Remove the language ``paragraph (b)(3)(iii)'' from paragraph (d)(3) 
and add the language ``Sec.  1.905-4T(c)(3)'' in its place.
0
5. Remove the language ``Sec.  1.905-4T(b)(3)(iii) in lieu of the 
exchange rate for the date of the accrual'' from paragraph (d)(4) and 
add the language ``Sec.  1.905-4T(c)(3)'' in its place.
0
6. Revise the heading and first sentence of paragraph (f).
0
7. Add a new paragraph (g).
    The revision and addition read as follows:


Sec.  1.905-5T  Foreign tax redeterminations and currency translation 
rules for foreign tax redeterminations occurring in taxable years 
beginning prior to January 1, 1987 (temporary).

* * * * *
    (f) Special effective/applicability date. See Sec.  1.905-4T(f) for 
the applicability date of notification requirements relating to foreign 
tax redeterminations that affect foreign taxes deemed paid under 
section 902 or section 960 with respect to pre-1987 accumulated profits 
accumulated in taxable years of a foreign corporation beginning on or 
after January 1, 1987. * * *
    (g) Expiration date. The applicability of this section expires on 
or before November 5, 2010.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 continues to read as 
follows:

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

0
Par. 6. Section 301.6689-1T is amended as follows:
0
1. Add a new sentence at the end of paragraph (a).
0
2. Revise paragraph (e).
    The addition and revision read as follows:


Sec.  301.6689-1T  Failure to file notice of redetermination of foreign 
tax (temporary).

    (a) * * * Subchapter B of chapter 63 of the Internal Revenue Code 
(relating to deficiency proceedings) shall not apply with respect to 
the assessment of the amount of the penalty.
* * * * *
    (e) Effective/applicability date--(1) In general. This section 
applies to foreign tax redeterminations (as defined in Sec.  1.905-
3T(c) of this chapter) occurring in taxable years of United States 
taxpayers beginning on or after November 7, 2007, and in the three 
immediately preceding taxable years. For corresponding rules applicable 
to foreign tax redeterminations occurring in earlier taxable years of 
United States taxpayers, see 26 CFR 301.6689-1T (as contained in 26 CFR 
part 301, revised as of April 1, 2007).
    (2) Expiration date. The applicability of this section expires on 
or before November 5, 2010.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: August 9, 2007.
Karen A. Sowell,
Deputy Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-21766 Filed 11-6-07; 8:45 am]
BILLING CODE 4830-01-P