[Federal Register Volume 72, Number 245 (Friday, December 21, 2007)]
[Rules and Regulations]
[Pages 72592-72606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-24877]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9371]
RIN 1545-BH14


Treatment of Overall Foreign and Domestic Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 904(g) of the Internal Revenue Code (Code) relating to the 
recapture of overall domestic losses. Section 402 of the American Jobs 
Creation Act of 2004 (AJCA) enacted new section 904(g) of the Code to 
provide for the recapture of overall domestic losses. These regulations 
provide guidance needed to comply with these changes, as well as 
updated guidance with respect to overall foreign losses and separate 
limitation losses, and affect individuals and corporations claiming 
foreign tax credits. The text of these temporary regulations also 
serves as the text of the proposed regulations (REG-141399-07) 
published in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on December 21, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.904(f)-1T(g), 1.904(f)-2T(e), 1.904(f)-7T(f), 1.904(f)-8T(c), 
1.904(g)-1T(f), 1.904(g)-2T(d), 1.904(g)-3T(i), and 1.1502-9T(e).

[[Page 72593]]


FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry, (202) 622-3850 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 402 of the AJCA enacted new section 904(g) of the Code to 
provide for the recharacterization of U.S. source income as foreign 
source income where a taxpayer's foreign tax credit limitation has been 
reduced as a result of an overall domestic loss. See Public Law 108-
357, 118 Stat. 1418 (October 22, 2004), as corrected by the Gulf 
Opportunity Zone Act of 2005, Public Law 109-135, 119 Stat. 2577 
(December 22, 2005). The primary reason for enacting these provisions 
was ``to create parity in the treatment of overall domestic losses and 
overall foreign losses in order to prevent the double taxation of 
income.'' H.R. Rep. No. 108-548, at 187 (June 16, 2004); see also S. 
Rep. No. 108-192, at 19-20 (November 7, 2003).
    When a U.S. source loss is allocated to reduce foreign source 
income, the foreign tax credit limitation is reduced for the taxable 
year, which may result in excess foreign tax credits. Any such excess 
foreign taxes may be credited, if at all, in a subsequent (or the 
preceding) taxable year. In addition, U.S. source taxable income in a 
subsequent taxable year is not offset by the U.S. source loss allocated 
to foreign source income in the prior taxable year, and U.S. tax on 
such U.S. source taxable income cannot be offset by the foreign tax 
credit carryforward. This may lead to the double taxation of foreign 
source income over time. The overall domestic loss recapture provisions 
amend this result.
    Section 904(g)(1) generally provides that a portion of a taxpayer's 
U.S. source income is recharacterized as foreign source income in an 
amount equal to the lesser of (1) the amount of the overall domestic 
loss for years prior to such taxable year and (2) fifty percent of the 
taxpayer's U.S. source income for such taxable year. Section 904(g)(2) 
generally defines an overall domestic loss for this purpose as any 
domestic loss to the extent it offsets foreign source taxable income 
for the current year or any preceding taxable year by reason of a 
carryback. Section 904(g)(4) provides that the Secretary of the 
Treasury shall prescribe such regulations as may be necessary to 
coordinate the overall domestic loss provisions with the overall 
foreign loss provisions.
    Similar rules were first enacted as a part of the Tax Reform Act of 
1976, Public Law 94-455, 90 Stat. 1531 (1976), in section 904(f) to 
deal with overall foreign losses. Under the overall foreign loss 
provisions, a portion of foreign source taxable income earned after an 
overall foreign loss year is recharacterized as U.S. source taxable 
income for foreign tax credit purposes. Unless a taxpayer elects a 
higher percentage, generally no more than 50 percent of the foreign 
source taxable income earned in any particular taxable year is 
recharacterized as U.S. source taxable income. Recapturing the overall 
foreign loss reduces the foreign tax credit limitation in one or more 
years following an overall foreign loss.
    The separate limitation loss provisions of section 904(f)(5) were 
added by the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 
(1986) (the 1986 Act) and amended by the Technical and Miscellaneous 
Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (1988). Other 
amendments to the overall foreign loss provisions were made by the AJCA 
as well.
    Regulations addressing overall foreign losses under section 904(f) 
were published in the Federal Register (52 FR 31992) on August 25, 1987 
(the 1987 regulations) and updated by regulations published in the 
Federal Register (71 FR 24516) on April 25, 2006 (the 2006 
regulations). Additional guidance was provided in Notice 89-3, 1989-1 
CB 623, regarding ordering rules for the allocation of net operating 
losses, overall foreign losses, and separate limitation losses; the 
recapture of overall foreign losses and separate limitation losses; and 
the allocation of U.S. source losses. The section 904(f) regulations 
have not been amended to reflect changes to the Code since the Tax 
Reform Act of 1976 or to incorporate the rules of Notice 89-3. See 
Sec.  601.601(d)(2)(ii)(b).
    These temporary regulations provide guidance needed to comply with 
enactment of the overall domestic loss regime, as well as provide 
updated guidance with respect to overall foreign losses and separate 
limitation losses.

Explanation of Provisions

I. Overall Domestic Losses

    The temporary regulations include rules in Sec. Sec.  1.904(g)-1T 
and 1.904(g)-2T which address the establishment, maintenance, and 
recapture of overall domestic loss accounts.

A. Overall Domestic Loss Accounts

    Section 1.904(g)-1T(b)(1) provides that taxpayers must establish 
overall domestic loss accounts for an overall domestic loss. It further 
provides that a separate overall domestic loss account must be 
maintained for each separate category of foreign source income that is 
offset by a domestic loss.
    Section 1.904(g)-1T(b)(2) explains when an overall domestic loss is 
sustained. Generally, an overall domestic loss is treated as sustained 
in the later of the taxable years in which the domestic loss is 
incurred or the foreign source income offset by the domestic loss is 
earned. Accordingly, in the case of a domestic loss that is carried 
back to offset foreign source income in a prior taxable year in which 
the taxpayer elects to credit foreign taxes, the resulting overall 
domestic loss is treated as sustained in the taxable year the domestic 
loss is incurred, not in the prior taxable year in which the domestic 
loss offsets foreign source income. In the case of a domestic loss that 
is carried forward to offset foreign source income in a later taxable 
year, however, the overall domestic loss is treated as sustained in the 
year in which the domestic loss offsets foreign source income, not the 
earlier year in which the domestic loss is incurred. Accordingly, if a 
taxpayer incurs a domestic loss in a pre-2007 taxable year, and the 
loss is carried forward as part of a net operating loss and applied to 
offset foreign source income in a post-2006 taxable year, the resulting 
overall domestic loss is treated as sustained in the post-2006 taxable 
year.
    Section 1.904(g)-1T(c) provides that an overall domestic loss is 
sustained when a domestic loss offsets foreign source taxable income in 
the same taxable year or a preceding taxable year by reason of a 
carryback, provided the taxpayer has elected to take a credit for its 
foreign taxes in the year of the offset. A domestic loss is the amount 
by which U.S. source gross income is exceeded by deductions properly 
allocated and apportioned thereto. See Sec.  1.904(g)-1T(c).
    Section 1.904(g)-1T(d) describes additions to overall domestic loss 
accounts. This includes any overall domestic losses of the taxpayer, as 
determined above, as well as any allocation from another taxpayer of an 
overall domestic loss account under Sec.  1.1502-9T, described in Part 
V of this preamble, and certain adjustments for capital gains and 
losses. Section 1.904(g)-1T(e) describes reductions to overall domestic 
loss accounts, including reductions for recaptured amounts and any 
allocation to another taxpayer of an overall domestic loss account 
under Sec.  1.1502-9T.

[[Page 72594]]

B. Recapture of Overall Domestic Losses

    Section 1.904(g)-2T provides that overall domestic losses are 
recaptured by treating a portion of a taxpayer's U.S. source taxable 
income as foreign source income. If the taxpayer has overall domestic 
loss accounts attributable to more than one separate category, the 
recharacterized income will be allocated among those categories on a 
pro rata basis. The amount of U.S. source income subject to recapture 
is the lesser of the aggregate balance in the overall domestic loss 
account, or fifty percent of the taxpayer's U.S. source taxable income. 
Unlike the overall foreign loss recapture provisions in section 904(f), 
section 904(g) does not permit a taxpayer to elect to recharacterize 
more than fifty percent of its U.S. source taxable income. Recapture 
continues until the balance in the overall domestic loss account has 
been reduced to zero.

II. Separate Limitation Losses

    As discussed below, the 1987 regulations do not reflect the 
enactment of the separate limitation loss provisions of section 
904(f)(5) as part of the 1986 Act. These temporary regulations include 
new provisions regarding the establishment and recapture of separate 
limitation loss accounts. Section 1.904(f)-7T provides that taxpayers 
must establish a separate limitation loss account with respect to a 
separate category to the extent a foreign source loss in that category 
offsets foreign source income in another separate category. This 
section also provides definitions and rules relating to the maintenance 
of these accounts.
    Section 1.904(f)-8T provides rules for the recapture of separate 
limitation loss accounts. Separate limitation loss accounts are 
recaptured by recharacterizing a portion of the foreign source income 
in the separate category with the loss account as income in the 
separate category in which foreign source income of a prior year was 
offset to create the loss account. The amount of foreign source income 
subject to recharacterization is the lesser of the balance in a 
separate limitation loss account or the amount of foreign source income 
for the taxable year in that same separate category. There is no fifty-
percent limitation with respect to separate limitation loss account 
recapture. If there is more than one separate limitation loss account 
in a single separate category and the aggregate balance in all those 
loss accounts exceeds the income in the separate category, income is 
recharacterized in proportion to the balance in each account. Recapture 
with respect to a particular separate limitation loss account continues 
until the balance in the separate limitation loss account has been 
reduced to zero.

III. Overall Foreign Loss

    The 1987 regulations set forth rules governing the determination 
and maintenance of overall foreign loss accounts, as well as the 
recapture of overall foreign losses and the allocation of net operating 
losses and net capital losses. The regulations do not reflect changes 
made to the overall foreign loss rules of section 904(f) as part of the 
1986 Act and certain subsequent changes to section 904(f), such as the 
enactment in the AJCA of section 904(f)(3)(D), addressing dispositions 
of stock in controlled foreign corporations. These temporary 
regulations update the existing regulations to take into account 
certain changes made to the overall foreign loss rules since the 1987 
regulations were promulgated.
    Section 1.904(f)-1(a) states that the 1987 regulations apply to 
taxpayers that sustain overall foreign losses (as defined in paragraph 
(c) of that section) in taxable years beginning after December 31, 
1975. However, paragraph (c) of that section only defines overall 
foreign losses for taxable years beginning after December 31, 1982, and 
before January 1, 1987.
    While it is beyond the scope of this project to undertake a full 
revision of the 1987 regulations to reflect all intervening statutory 
changes made to section 904(f), the Treasury Department and the IRS 
believe that as part of this regulations project the principles of the 
1987 regulations should be extended to apply to overall foreign losses 
sustained in taxable years beginning after December 31, 1986, modified 
so as to take into account statutory amendments. New Sec.  1.904(f)-
1T(a)(2) adopts such a rule.
    The Treasury Department and the IRS believe the application of the 
fifty-percent limitation on the amount of foreign source income subject 
to recapture in a taxable year under the overall foreign loss recapture 
provisions also needs to be clarified as part of this regulations 
project. Section 1.904(f)-2(c)(1) provides that the amount of foreign 
source taxable income subject to recapture in a taxable year is the 
lesser of the balance in the applicable overall foreign loss account in 
a given separate category or fifty percent of the taxpayer's foreign 
source taxable income in that same separate category. For example, 
recapture of a general category overall foreign loss would be limited 
to the lesser of the balance in the general category overall foreign 
loss account or fifty percent of the general category taxable income 
for the taxable year.
    The legislative history to the 1986 Act clarifies that the fifty-
percent limitation is to be applied to the full amount of the 
taxpayer's foreign source income, not on a separate-category-by-
separate-category basis. See H.R. Conf. Rep. No. 99-841 at II-590 
(1986). This clarification was incorporated by reference into Notice 
89-3, paragraph 3(b), and reflected in instructions to Form 1118 
(Foreign Tax Credit--Corporations). The temporary regulations modify 
the fifty-percent limitation to reflect this clarification.
    Section 1.904(f)-2T(c)(1) provides that the foreign source taxable 
income subject to recharacterization is the lesser of the aggregate 
amount of maximum potential recapture in all overall foreign loss 
accounts or fifty percent of the taxpayer's total foreign source 
income. If the aggregate amount of maximum potential recapture in all 
overall foreign loss accounts exceeds fifty percent of the taxpayer's 
total foreign source taxable income, foreign source taxable income in 
each separate category with an overall foreign loss account is 
recharacterized in an amount equal to the separate category's allocable 
portion of the section 904(f)(1) recapture amount. The maximum 
potential recapture from any separate category is the lesser of the 
balance in the overall foreign loss account or the foreign source 
taxable income for the current year in the same separate category.
    Other revisions to the 1987 regulations include updating provisions 
to reflect statutory and regulatory changes affecting capital gains and 
losses, in particular those provisions that were superseded by the 
regulations promulgated under section 904(b) in TD 9141 (July 20, 
2004). In addition, Sec.  1.904(f)-3 is made obsolete by the ordering 
rules added in Sec.  1.904(g)-3T and is removed accordingly.

IV. Coordination of Overall Foreign Losses, Separate Limitation Losses, 
and Overall Domestic Losses

    Under the specific grant of regulatory authority in section 
904(g)(4), these temporary regulations provide ordering rules for 
coordinating the section 904(f) overall foreign loss and separate 
limitation loss provisions and the section 904(g) overall domestic loss 
provisions.
    Section 1.904(g)-3T provides ordering rules for the allocation of 
net operating losses, net capital losses, U.S. source losses, and 
separate limitation losses, and the recapture of separate limitation 
losses, overall foreign losses, and overall domestic losses. While 
these rules generally follow the ordering rules set

[[Page 72595]]

forth in Notice 89-3, some changes were appropriate to take into 
account the enactment of the overall domestic loss provisions.

A. Step One: Allocation of Net Operating Loss and Net Capital Loss 
Carryovers

    These temporary regulations generally follow the rules of Notice 
89-3 for the carryover and carryback of net operating losses. Under 
Sec.  1.904(g)-3T(b)(1), net operating losses that are carried back to 
a prior year are allocated to income in the carryback year in 
accordance with the allocation rules for absorbing and allocating net 
operating loss carryovers. However, the income against which the net 
operating loss is allocated is the income after application of the 
overall foreign loss, separate limitation loss and overall domestic 
loss allocation and recapture rules for the carryback year.
    The rules for net operating loss carryforwards vary for full and 
partial carryovers of the net operating loss. In the case of a full net 
operating loss carryover, the U.S. source losses and foreign losses in 
separate categories that are part of the net operating loss are carried 
forward and combined with U.S. source income or loss and foreign source 
income or loss in the same categories as the respective portions of the 
net operating loss.
    In the case of a partial net operating loss carryover, several 
steps apply. In applying these steps it is important to distinguish the 
net operating loss, which is the total net operating loss, and the net 
operating loss carryover, which is the portion of the net operating 
loss that is absorbed in the carryover year. First, the U.S. source 
portion of the net operating loss (but not in excess of the net 
operating loss carryover) is carried over to the extent of U.S. source 
income in the carryover year. Second, the separate limitation losses 
that are part of the net operating loss are tentatively carried to the 
extent of taxable income in the same separate category. This amount is 
tentative because the total amount of matching net operating losses and 
separate limitation income may exceed the net operating loss carryover 
amount remaining after the first step. To the extent the total amount 
of these tentative loss carryovers is in fact limited by the amount of 
the remaining net operating loss carryover, then the tentative 
carryovers in each separate category are reduced on a pro rata basis so 
that their sum equals the amount of the remaining net operating loss 
carryover amount.
    Third, any net operating loss carryover remaining after the first 
and second steps is carried over proportionately from any remaining 
loss in each separate category and combined with foreign source loss, 
if any, in the same separate categories in the carryover year. Finally, 
any remaining U.S. source loss is carried over to the extent of the net 
operating loss carryover remaining after the third step, if any, and 
combined with U.S. source loss, if any, in the carryover year.
    The temporary regulations deviate from the net operating loss rules 
of Notice 89-3 in the final two steps. The temporary regulations 
require the U.S. source loss and foreign source losses in the separate 
categories that are carried over to be combined with U.S. source income 
or loss and foreign source income or loss in the same categories as the 
respective portions of the net operating loss. Then, the temporary 
regulations provide these losses are allocated against other income as 
part of the general loss allocation rules for current year losses. 
Notice 89-3, however, requires the allocation of the net operating loss 
against income in other separate categories before allocation of 
current year losses. The Treasury Department and the IRS believe there 
is no difference in result whether the net operating losses carried 
into a taxable year are allocated before or at the same time as current 
year losses, given the treatment of U.S. losses in Sec.  1.904(g)-3T. 
However, the approach of the temporary regulations provides added 
simplicity in application of the ordering rules as well as greater 
consistency with the rules for full net operating loss carryovers.
    The rules for the allocation of net operating losses apply 
similarly to net capital loss carryovers.

B. Step Two: Allocation of Separate Limitation Losses

    Separate limitation losses are first allocated to separate 
limitation income for the taxable year in other separate categories on 
a proportionate basis. Separate limitation loss accounts are increased 
as a result of any such allocations. To the extent the separate 
limitation losses exceed separate limitation income for the year, those 
losses are allocated against U.S. income, if any, for the taxable year 
and overall foreign loss accounts are increased.
    Unlike Notice 89-3, the temporary regulations also provide that 
offsetting separate limitation loss accounts are netted against one 
another. For example, if a taxpayer has a separate limitation loss 
account in the general category with respect to passive category 
income, and in the next year incurs a passive category separate 
limitation loss that offsets general category income, the two accounts 
will be netted against each other, rather than both being carried 
forward until each one is recaptured.

C. Step Three: Allocation of U.S. Source Loss

    U.S. source losses are allocated against separate limitation income 
on a proportionate basis, and overall domestic loss accounts are 
increased appropriately. Under the ordering rules in Notice 89-3, U.S. 
losses sustained in the current taxable year are allocated after all 
other losses are allocated and after separate limitation losses and 
overall foreign losses are recaptured. With the addition of section 
904(g), Congress expressed that domestic losses and foreign source 
losses should be treated with greater parity. To that end, the Treasury 
Department and the IRS believe the ordering rules of Notice 89-3 should 
be amended. Accordingly, the temporary regulations provide that U.S. 
losses are allocated in the same manner as foreign losses, before any 
income is recharacterized.

D. Step Four: Recapture of Overall Foreign Loss Accounts

    To the extent a taxpayer has any separate limitation income for the 
taxable year after losses are allocated in steps one through three, a 
portion of such income will be subject to recharacterization in order 
to recapture prior year overall foreign losses, if any.

E. Step Five: Recapture of Separate Limitation Loss Accounts

    To the extent a taxpayer has any separate limitation income for the 
taxable year after overall foreign losses are recaptured in step four, 
then such income will be subject to recharacterization in order to 
recapture prior year separate limitation losses, if any.

F. Step Six: Recapture of Overall Domestic Loss Accounts

    To the extent a taxpayer has any U.S. source income after losses 
are allocated in steps one through three, but not taking into account 
any foreign source income that is recharacterized as U.S. source income 
under step four, then a portion of such income will be subject to 
recharacterization in order to recapture prior year overall domestic 
losses, if any.
    The temporary regulations coordinate the overall foreign loss and 
overall domestic loss regimes by providing that the recapture of 
overall foreign and domestic loss accounts is done independently. 
Accordingly, income recharacterized under one recapture provision is 
not taken into account in

[[Page 72596]]

determining the amount of income subject to recharacterization under 
the other recapture provision. For example, foreign source income that 
is recharacterized as U.S. source income in order to recapture an 
overall foreign loss account will not then be included in the 
determination of U.S. source income subject to recharacterization as 
foreign source income in order to recapture an overall domestic loss 
account.

V. Consolidated Overall Domestic Loss Accounts--Sec.  1.1502-9T

    Section 1.1502-9T revises Sec.  1.1502-9 to include rules for the 
application of section 904(g) to consolidated groups and their members. 
Section 1.1502-9 provides rules only for the application of section 
904(f) to consolidated groups and their members. Under those rules, 
consolidated overall foreign loss (COFL) accounts and consolidated 
separate limitation loss (CSLL) accounts are determined by the 
consolidated group on an aggregate basis under the principles of 
Sec. Sec.  1.1502-11 and 1.1502-12. When a new member joins the group, 
its separate overall foreign loss and separate limitation loss accounts 
are combined with the appropriate COFL and CSLL accounts of the group. 
When a member leaves the group, it is allocated a pro rata portion of 
each of the group's COFL and CSLL accounts based on the member's share 
of the group's assets that generate income subject to 
recharacterization under the corresponding loss account. The temporary 
regulations do not alter these provisions addressing COFL and CSLL 
accounts. The revisions simply extend these principles to provide 
parallel treatment for consolidated overall domestic loss accounts.

Effective/Applicability Dates

    The effective date for these regulations is December 21, 2007. The 
regulations generally apply to taxable years beginning after December 
21, 2007. However, taxpayers may choose to apply the overall domestic 
loss provisions of the regulations in other taxable years beginning 
after December 31, 2006. In the alternative, taxpayers may use any 
reasonable method consistently applied for those years, including one 
based on the ordering rules of Notice 89-3.

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. For applicability 
of the Regulatory Flexibility Act, see the cross-referenced notice of 
proposed rulemaking published elsewhere in this issue of the Federal 
Register. Pursuant to section 7805(f), these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Jeffrey L. Parry of 
the Office of Chief Counsel (International). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

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

    Section 1.904(g)-3T also issued under 26 U.S.C. 904(g)(4). * * *


0
Par. 2. Section 1.904-0 is amended by revising the section heading and 
introductory text to read as follows:


Sec.  1.904-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904-1 through 
1.904-7.
* * * * *

0
Par. 3. Section 1.904(b)-0 is added. The entries for Sec. Sec.  
1.904(b)-1 and 1.904(b)-2 in Sec.  1.904-0 are redesignated as entries 
in new Sec.  1.904(b)-0.


Sec.  1.904(b)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(b)-1 and 
1.904(b)-2.

0
Par. 4. Section 1.904(f)-0 is added and amended as follows:
0
1. The entries for Sec. Sec.  1.904(f)-1, 1.904(f)-2, 1.904(f)-3, 
1.904(f)-4, 1.904(f)-5, 1.904(f)-6 and 1.904(f)-12 in Sec.  1.904-0 are 
redesignated as entries in new Sec.  1.904(f)-0.
0
2. The entry for Sec.  1.904(f)-1(a) is redesignated as Sec.  1.904(f)-
1(a)(1) and a new entry for Sec.  1.904(f)-1(a)(2) is added.
0
3. The entries for Sec.  1.904(f)-1(d)(2), (d)(3), and (d)(4) are 
revised and the entry for Sec.  1.904(f)-1(d)(5) is removed.
0
4. The entries for Sec.  1.904(f)-2(c) and (c)(1) are revised.
0
5. The entries for Sec.  1.904(f)-3 are removed.
0
6. New entries for Sec. Sec.  1.904(f)-7 and 1.904(f)-8 are added.
0
The additions and revisions read as follows:


Sec.  1.904(f)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(f)-1 through 
1.904(f)-8 and 1.904(f)-12.
* * * * *
Sec.  1.904(f)-1 Overall foreign loss and the overall foreign loss 
account.
    (a)(1) Overview of regulations.
    (2) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1T(a)(2) in Sec.  1.904(f)-0T.
* * * * *
    (d) * * *
    (2) Overall foreign losses of another taxpayer.
    (3) Additions to overall foreign loss account created by loss 
carryovers.
    (4) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1T(d)(4) in Sec.  1.904(f)-0T.
* * * * *
Sec.  1.904(f)-2 Recapture of overall foreign losses.
* * * * *
    (c) and (c)(1) [Reserved]. For further guidance, see the entries 
for Sec.  1.904(f)-2T(c) and (c)(1) in Sec.  1.904(f)-0T.
* * * * *
Sec.  1.904(f)-7 Separate limitation loss and the separate 
limitation loss account.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(f)-7T in Sec.  1.904(f)-0T.

Sec.  1.904(f)-8 Recapture of separate limitation loss accounts.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(f)-8T in Sec.  1.904(f)-0T.


0
Par. 5. Section 1.904(f)-0T is added to read as follows:


Sec.  1.904(f)-0T  Outline of regulation provisions (temporary).

    This section lists the headings for Sec. Sec.  1.904(f)-1T, 
1.904(f)-2T, 1.904(f)-7T and 1.904(f)-8T.

Sec.  1.904(f)-1T Overall foreign loss and the overall foreign loss 
account (temporary).
    (a)(1) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1(a)(1) in Sec.  1.904(f)-0.
    (2) Application to post-1986 taxable years.
    (b) through (d)(3) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-1(b) through (d)(3) in Sec.  1.904(f)-0.
    (d)(4) Adjustments for capital gains and losses.
    (e) through (f) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-1(e) through (f) in Sec.  1.904(f)-0.
    (g) Effective/applicability date.
    (h) Expiration date.

Sec.  1.904(f)-2T Recapture of overall foreign loss (temporary).
    (a) and (b) [Reserved]. For further guidance, see the entries 
for Sec.  1.904(f)-2(a) and (b) in Sec.  1.904(f)-0.
    (c) Section 904(f)(1) recapture.

[[Page 72597]]

    (1) In general.
    (c)(2) through (d) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-2(c)(2) through (d) in Sec.  1.904(f)-0.
    (e) Effective/applicability date.
    (f) Expiration date.

Sec.  1.904(f)-7T Separate limitation loss and the separate 
limitation loss account (temporary).
    (a) Overview of regulations.
    (b) Definitions.
    (1) Separate category.
    (2) Separate limitation income.
    (3) Separate limitation loss.
    (c) Separate limitation loss account.
    (d) Additions to separate limitation loss accounts.
    (1) General rule.
    (2) Separate limitation losses of another taxpayer.
    (3) Additions to separate limitation loss account created by 
loss carryovers.
    (e) Reductions of separate limitation loss accounts.
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers.
    (2) Reduction for offsetting loss accounts.
    (3) Reduction for amounts recaptured.
    (f) Effective/applicability date.
    (g) Expiration date.

Sec.  1.904(f)-8T Recapture of separate limitation loss accounts 
(temporary).
    (a) In general.
    (b) Effect of recharacterization of separate limitation income 
on associated taxes.
    (c) Effective/applicability date.
    (d) Expiration date.


0
Par. 6. Section 1.904(f)-1 is amended as follows:
0
1. Redesignate paragraph (a) as (a)(1).
0
2. Add a new paragraph (a)(2).
0
3. In paragraph (d)(1), remove the language ``paragraph (d)(4) of this 
section'' and add the language ``paragraph (d)(3) of this section'' in 
its place.
0
4. Remove paragraphs (d)(2), (d)(5), and Example 4 and Example 5 in 
paragraph (f).
0
5. Redesignate paragraph (d)(3) as paragraph (d)(2), and paragraph 
(d)(4) as paragraph (d)(3).
0
6. In newly-redesignated paragraph (d)(3), remove the language 
``1.904(f)-1(d)(5)'' and add the language ``1.904(f)-1(d)(4)'' in its 
place.
0
7. Add new paragraphs (d)(4) and (g).
0
The revisions and additions read as follows:


Sec.  1.904(f)-1  Overall foreign loss and the overall foreign loss 
account.

* * * * *
    (a) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(a)(2).
* * * * *
    (d) * * *
    (4) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(d)(4).
* * * * *
    (g) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(g).

0
Par. 7. Section 1.904(f)-1T is added to read as follows:


Sec.  1.904(f)-1T  Overall foreign loss and the overall foreign loss 
account (temporary).

    (a)(1) [Reserved]. For further guidance, see Sec.  1.904(f)-
1(a)(1).
    (2) Application to post-1986 taxable years. The principles of 
Sec. Sec.  1.904(f)-1 through 1.904(f)-5 shall apply to overall foreign 
loss sustained in taxable years beginning after December 31, 1986, 
modified so as to take into account the effect of statutory amendments.
    (b) through (d)(3) [Reserved]. For further guidance, see Sec.  
1.904(f)-1(b) through (d)(3).
    (d)(4) Adjustments for capital gains and losses. If a taxpayer has 
capital gains or losses, the taxpayer shall make adjustments to such 
capital gains and losses to the extent required under section 904(b)(2) 
and Sec.  1.904(b)-1 before applying the provisions of Sec.  1.904(f)-
1T. See Sec.  1.904(b)-1(h).
    (e) and (f) [Reserved]. For further guidance, see Sec.  1.904(f)-
1(e) and (f).
    (g) Effective/applicability date. This section applies to taxable 
years beginning after December 21, 2007.
    (h) Expiration date. The applicability of this section expires on 
December 20, 2010.

0
Par. 8. Section 1.904(f)-2 is amended as follows:
0
1. Revise paragraph (c)(1).
0
2. Revise paragraph (c)(5) Example 4.
0
3. Add a new paragraph (e).
0
The revisions and addition read as follows:


Sec.  1.904(f)-2   Recapture of overall foreign losses.

* * * * *
    (c) * * * (1) [Reserved]. For further guidance, see Sec.  1.904(f)-
2T(c)(1).
    (5) * * *
    Example 4. [Reserved]. For further guidance see Sec.  1.904(f)-
2T(c)(5) Example 4.
* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.904(f)-2T(e).

0
Par. 9. Section 1.904(f)-2T is added to read as follows:


Sec.  1.904(f)-2T  Recapture of overall foreign losses (temporary).

    (a) and (b) [Reserved]. For further guidance, see Sec.  1.904(f)-
2(a) and (b).
    (c) Section 904(f)(1) recapture--(1) In general. In a year in which 
a taxpayer elects the benefits of section 901 or 30A, the amount of 
foreign source taxable income subject to recharacterization in a 
taxable year in which paragraph (a) of this section is applicable is 
the lesser of the aggregate amount of maximum potential recapture in 
all overall foreign loss accounts or fifty percent of the taxpayer's 
total foreign source taxable income. If the aggregate amount of maximum 
potential recapture in all overall foreign loss accounts exceeds fifty 
percent of the taxpayer's total foreign source taxable income, foreign 
source taxable income in each separate category with an overall foreign 
loss account is recharacterized in an amount equal to the section 
904(f)(1) recapture amount, multiplied by the maximum potential 
recapture in the overall foreign loss account, divided by the aggregate 
amount of maximum potential recapture in all overall foreign loss 
accounts. The maximum potential recapture in any account is the lesser 
of the balance in that overall foreign loss account (after reduction of 
such accounts in accordance with Sec.  1.904(f)-1(e)) or the foreign 
source taxable income for the year in the same separate category as the 
loss account. If, in any year, in accordance with section 164(a) and 
section 275(a)(4)(A), a taxpayer deducts rather than credits its 
foreign taxes, recapture is applied to the extent of the lesser of--
    (i) The balance in the overall foreign loss account in each 
separate category; or
    (ii) Foreign source taxable income minus foreign taxes in each 
separate category.
    (c)(2) through (5) Example 3 [Reserved]. For further guidance, see 
Sec.  1.904(f)-2(c)(2) through (5) Example 3.

    Example 4. Y Corporation is a domestic corporation that does 
business in the United States and abroad. On December 31, 2007, the 
balance in Y's general category overall foreign loss account is 
$500, all of which is attributable to a loss incurred in 2007. Y has 
no other loss accounts subject to recapture. For 2008, Y has U.S. 
source taxable income of $400 and foreign source taxable income of 
$300 in the general category and $900 in the passive category. Under 
paragraph (c)(1) of this section, the amount of Y's general category 
income subject to recharacterization is the lesser of the aggregate 
maximum potential recapture or 50 percent of the total foreign 
source taxable income. In this case Y's aggregate maximum potential 
recapture is $300 (the lesser of the $500 balance in the general 
category overall foreign loss account or $300 foreign source income 
in the general category for the year), which is less than $600, or 
50 percent of total foreign source taxable income ($1200 x 50%). 
Therefore, pursuant to paragraph (c) of this section, $300 of 
foreign source income in the general category is recharacterized as 
U.S. source income. The balance in Y's general category overall 
foreign loss account is reduced by $300 to $200 in accordance with 
Sec.  1.904(f)-1(e)(2).


[[Page 72598]]


    (c)(5) Example 5 through (d) [Reserved]. For further guidance, see 
Sec.  1.904(f)-2(c)(5) Example 5 through Sec.  1.904(f)-2(d).
    (e) Effective/applicability date. This section applies to taxable 
years beginning after December 21, 2007.
    (f) Expiration date. The applicability of this section expires on 
December 20, 2010.

0
Par. 10. Section 1.904(f)-3 is revised to read as follows:


Sec.  1.904(f)-3  Allocation of net operating losses and net capital 
losses.

    For rules relating to the allocation of net operating losses and 
net capital losses, see Sec.  1.904(g)-3T.

0
Par. 11. Sections 1.904(f)-7, 1.904(f)-7T, 1.904(f)-8, and 1.904(f)-8T 
are added to read as follows:


Sec.  1.904(f)-7  Separate limitation loss and the separate limitation 
loss account. [Reserved].

    For further guidance, see Sec.  1.904(f)-7T.


Sec.  1.904(f)-7T  Separate limitation loss and the separate limitation 
loss account (temporary).

    (a) Overview of regulations. This section provides rules for 
determining a taxpayer's separate limitation losses, for establishing 
separate limitation loss accounts, and for making additions to and 
reductions from such accounts for purposes of section 904(f). Section 
1.904(f)-8T provides rules for recharacterizing the balance in any 
separate limitation loss account under the general recharacterization 
rule of section 904(f)(5)(C).
    (b) Definitions. The definitions in paragraphs (b)(1) through (4) 
of this section apply for purposes of this section and Sec. Sec.  
1.904(f)-8T and 1.904(g)-3T.
    (1) Separate category means each separate category of income 
described in section 904(d) and any other category of income described 
in Sec.  1.904-4(m). For example, income subject to section 901(j) or 
904(h)(10) is income in a separate category.
    (2) Separate limitation income means, with respect to any separate 
category, the taxable income from sources outside the United States, 
separately computed for that category for the taxable year. Separate 
limitation income shall be determined by taking into account any 
adjustments for capital gains and losses under section 904(b)(2) and 
Sec.  1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(i).
    (3) Separate limitation loss means, with respect to any separate 
category, the amount by which the foreign source gross income in that 
category is exceeded by the sum of expenses, losses and other 
deductions (not including any net operating loss deduction under 
section 172(a) or any expropriation loss or casualty loss described in 
section 907(c)(4)(B)(iii)) properly allocated and apportioned thereto 
for the taxable year. Separate limitation losses are determined 
separately for each separate category. Accordingly, income and 
deductions attributable to a separate category are not netted with 
income and deductions attributable to another separate category for 
purposes of determining the amount of a separate limitation loss. 
Separate limitation losses shall be determined by taking into account 
any adjustments for capital gains and losses under section 904(b)(2) 
and Sec.  1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(i).
    (c) Separate limitation loss account. Any taxpayer that sustains a 
separate limitation loss that is allocated to reduce separate 
limitation income of the taxpayer under the rules of Sec.  1.904(g)-3T 
must establish a separate limitation loss account for the loss. The 
taxpayer must establish separate loss accounts for each separate 
category in which a separate limitation loss is incurred that is 
allocated to reduce other separate limitation income. A separate 
account must then be established for each separate category to which a 
portion of the loss is allocated. The balance in any separate 
limitation loss account represents the amount of separate limitation 
income that is subject to recharacterization (as income in another 
separate category) in a subsequent year pursuant to Sec.  1.904(f)-8T 
and section 904(f)(5)(F). From year to year, amounts may be added to or 
subtracted from the balance in such loss accounts, as provided in 
paragraphs (d) and (e) of this section.
    (d) Additions to separate limitation loss accounts--(1) General 
rule. A taxpayer's separate limitation loss as defined in paragraph 
(b)(3) of this section shall be added to the applicable separate 
limitation loss accounts at the end of the taxable year to the extent 
that the separate limitation loss has reduced separate limitation 
income in one or more other separate categories of the taxpayer during 
the taxable year. For rules with respect to net operating loss 
carryovers, see paragraph (d)(3) of this section and Sec.  1.904(g)-3T.
    (2) Separate limitation losses of another taxpayer. If any portion 
of any separate limitation loss account of another taxpayer is 
allocated to the taxpayer in accordance with Sec.  1.1502-9T (relating 
to consolidated separate limitation losses) the taxpayer shall add such 
amount to its applicable separate limitation loss account.
    (3) Additions to separate limitation loss account created by loss 
carryovers. The taxpayer shall add to each separate limitation loss 
account all net operating loss carryovers to the current taxable year 
to the extent that separate limitation losses included in the net 
operating loss carryovers reduced foreign source income in other 
separate categories for the taxable year.
    (e) Reductions of separate limitation loss accounts. The taxpayer 
shall subtract the following amounts from its separate limitation loss 
accounts at the end of its taxable year in the following order as 
applicable:
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers. A separate limitation loss account is reduced by the amount 
of any separate limitation loss account which is allocated to another 
taxpayer in accordance with Sec.  1.1502-9T (relating to consolidated 
separate limitation losses).
    (2) Reduction for offsetting loss accounts. A separate limitation 
account is reduced to take into account any netting of separate 
limitation loss accounts under Sec.  1.904(g)-3T(c).
    (3) Reduction for amounts recaptured. A separate limitation loss 
account is reduced by the amount of any separate limitation income that 
is earned in the same separate category as the separate limitation loss 
that resulted in the account and that is recharacterized in accordance 
with Sec.  1.904(f)-8T (relating to recapture of separate limitation 
losses) or section 904(f)(5)(F) (relating to recapture of separate 
limitation loss accounts out of gain realized from dispositions).
    (f) Effective/applicability date. This section applies to taxpayers 
that sustain separate limitation losses in taxable years beginning 
after December 21, 2007. For taxable years beginning after December 31, 
1986, and on or before December 21, 2007, see section 904(f)(5).
    (g) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(f)-8  Recapture of separate limitation loss accounts.

    [Reserved]. For further guidance, see Sec.  1.904(f)-8T.


Sec.  1.904(f)-8T  Recapture of separate limitation loss accounts 
(temporary).

    (a) In general. A taxpayer shall recapture a separate limitation 
loss account as provided in this section. If the taxpayer has a 
separate limitation loss account or accounts in any separate category 
(the ``loss category'') and the

[[Page 72599]]

loss category has income in a subsequent taxable year, the income shall 
be recharacterized as income in that other category or categories. The 
amount of income recharacterized shall not exceed the separate 
limitation loss accounts for the loss category as determined under 
Sec.  1.904(f)-7T, including the aggregate separate limitation loss 
accounts from the loss category not previously recaptured under this 
paragraph (a). If the taxpayer has more than one separate limitation 
loss account in a loss category, and there is not enough income in the 
loss category to recapture the entire amount in all the loss accounts, 
then separate limitation income in the loss category shall be 
recharacterized as separate limitation income in the separate 
limitation loss categories on a proportionate basis. This is determined 
by multiplying the total separate limitation income subject to 
recapture by a fraction, the numerator of which is the amount in a 
particular loss account and the denominator of which is the total 
amount in all loss accounts for the separate category.
    (b) Effect of recapture of separate limitation income on associated 
taxes. Recharacterization of income under paragraph (a) of this section 
shall not result in the recharacterization of any tax. The rules of 
Sec.  1.904-6, including the rules that the taxes are allocated on an 
annual basis and that foreign taxes paid on U.S. source income shall be 
allocated to the separate category that includes that U.S. source 
income (see Sec.  1.904-6(a)), shall apply for purposes of allocating 
taxes to separate categories. Allocation of taxes pursuant to Sec.  
1.904-6 shall be made before the recapture of any separate limitation 
loss accounts of the taxpayer pursuant to the rules of this section.
    (c) Effective/applicability date. This section applies to taxpayers 
that sustain separate limitation losses in taxable years beginning 
after December 21, 2007. For taxable years beginning after December 31, 
1986, and on or before December 21, 2007, see section 904(f)(5).
    (d) Expiration date. The applicability of this section expires on 
December 20, 2010.
0
Par. 11. Section 1.904(g)-0 is added to read as follows:


Sec.  1.904(g)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(g)-1 through 
1.904(g)-3.

Sec.  1.904(g)-1 Overall domestic loss and the overall domestic loss 
account.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(g)-1T in Sec.  1.904(g)-0T.

Sec.  1.904(g)-2 Recapture of overall domestic losses.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(g)-2T in Sec.  1.904(g)-0T.

Sec.  1.904(g)-3 Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate 
limitation losses, and for recapture of separate limitation losses, 
overall foreign losses, and overall domestic losses. [Reserved]. For 
further guidance, see the entries for Sec.  1.904(g)-3T in Sec.  
1.904(g)-0T.


0
Par. 12. Section 1.904(g)-0T is added to read as follows:


Sec.  1.904(g)-0T  Outline of regulation provisions (temporary).

    This section lists the headings for Sec. Sec.  1.904(g)-1T through 
1.904(g)-3T.

Sec.  1.904(g)-1T Overall domestic loss and the overall domestic 
loss account (temporary).
    (a) Overview of regulations.
    (b) Overall domestic loss accounts.
    (1) In general.
    (2) Taxable year in which overall domestic loss is sustained.
    (c) Determination of a taxpayer's overall domestic loss.
    (1) Overall domestic loss defined.
    (2) Domestic loss defined.
    (3) Qualified taxable year defined.
    (4) Method of allocation and apportionment of deductions.
    (d) Additions to overall domestic loss accounts.
    (1) General rule.
    (2) Overall domestic loss of another taxpayer.
    (3) Adjustments for capital gains and losses.
    (e) Reductions of overall domestic loss accounts.
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers.
    (2) Reduction for amounts recaptured.
    (f) Effective/applicability date.
    (g) Expiration date.

Sec.  1.904(g)-2T Recapture of overall domestic losses (temporary).
    (a) In general.
    (b) Determination of U.S. source taxable income for purposes of 
recapture.
    (c) Section 904(g)(1) recapture.
    (d) Effective/applicability date.
    (e) Expiration date.

Sec.  1.904(g)-3T Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate 
limitation losses, and for recapture of separate limitation losses, 
overall foreign losses, and overall domestic losses (temporary).
    (a) In general.
    (b) Step One: Allocation of net operating loss and net capital 
loss carryovers.
    (1) In general.
    (2) Full net operating loss carryover.
    (3) Partial net operating loss carryover.
    (4) Net capital loss carryovers.
    (c) Step Two: Allocation of separate limitation losses.
    (d) Step Three: Allocation of U.S. source losses.
    (e) Step Four: Recapture of overall foreign loss accounts.
    (f) Step Five: Recapture of separate limitation loss accounts.
    (g) Step Six: Recapture of overall domestic loss accounts.
    (h) Examples.
    (i) Effective/applicability date.
    (j) Expiration date.


0
Par. 13. Sections 1.904(g)-1, 1.904(g)-1T, 1.904(g)-2, 1.904(g)-2T, 
1.904(g)-3, and 1.904(g)-3T are added to read as follows:


Sec.  1.904(g)-1  Overall domestic loss and the overall domestic loss 
account.

    [Reserved]. For further guidance, see Sec.  1.904(g)-1T.


Sec.  1.904(g)-1T  Overall domestic loss and the overall domestic loss 
account (temporary).

    (a) Overview of regulations. This section provides rules for 
determining a taxpayer's overall domestic losses, for establishing 
overall domestic loss accounts, and for making additions to and 
reductions from such accounts for purposes of section 904(g). Section 
1.904(g)-2T provides rules for recapturing the balance in any overall 
domestic loss account under the general recharacterization rule of 
section 904(g)(1). Section 1.904(g)-3T provides ordering rules for the 
allocation of net operating losses, net capital losses, U.S. source 
losses, and separate limitation losses, and the recapture of separate 
limitation losses, overall foreign losses and overall domestic losses.
    (b) Overall domestic loss accounts--(1) In general. Any taxpayer 
that sustains an overall domestic loss under paragraph (c) of this 
section must establish an account for such loss. Separate overall 
domestic loss accounts must be maintained with respect to each separate 
category in which foreign source income is offset by the domestic loss. 
The balance in each overall domestic loss account represents the amount 
of such overall domestic loss subject to recapture in a given year. 
From year to year, amounts may be added to or subtracted from the 
balances in such accounts as provided in paragraphs (d) and (e) of this 
section.
    (2) Taxable year in which overall domestic loss is sustained. When 
a taxpayer incurs a domestic loss that is carried back as part of a net 
operating loss to offset foreign source income in a qualified taxable 
year, as defined in paragraph (c)(3) of this section, the resulting 
overall domestic loss is treated as sustained in the later year in 
which the domestic loss was incurred and not in the earlier year in 
which the loss offset foreign source income. Similarly, when a taxpayer 
incurs a domestic loss that is carried forward as part of a net

[[Page 72600]]

operating loss and applied to offset foreign source income in a later 
taxable year, the resulting overall domestic loss is treated as 
sustained in the later year in which the domestic loss offsets foreign 
source income and not in the earlier year in which the loss was 
incurred. For example, if a taxpayer incurs a domestic loss in the 2007 
taxable year that is carried back to the 2006 qualified taxable year 
and offsets foreign source income in 2006, the resulting overall 
domestic loss is treated as sustained in the 2007 taxable year. If a 
taxpayer incurs a domestic loss in a pre-2007 taxable year that is 
carried forward to a post-2006 qualified taxable year and offsets 
foreign source income in the post-2006 year, the resulting overall 
domestic loss is treated as sustained in the post-2006 year. The 
overall domestic loss account is established at the end of the later of 
the taxable year in which the domestic loss arose or the qualified 
taxable year to which the loss is carried and applied to offset foreign 
source income, and will be recaptured from U.S. source income arising 
in subsequent taxable years.
    (c) Determination of a taxpayer's overall domestic loss--(1) 
Overall domestic loss defined. For taxable years beginning after 
December 31, 2006, a taxpayer sustains an overall domestic loss--
    (i) In any qualified taxable year in which its domestic loss for 
such taxable year offsets foreign source taxable income for the taxable 
year or for any preceding qualified taxable year by reason of a 
carryback; and
    (ii) In any other taxable year in which the domestic loss for such 
taxable year offsets foreign source taxable income for any preceding 
qualified taxable year by reason of a carryback.
    (2) Domestic loss defined. For purposes of this section and 
Sec. Sec.  1.904(g)-2T and 1.904(g)-3T, the term domestic loss means 
the amount by which the U.S. source gross income for the taxable year 
is exceeded by the sum of the expenses, losses and other deductions 
properly apportioned or allocated to such income, taking into account 
any net operating loss carried forward from a prior taxable year, but 
not any loss carried back. If a taxpayer has any capital gains or 
losses, the amount of the taxpayer's domestic loss shall be determined 
by taking into account adjustments under section 904(b)(2) and Sec.  
1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(iii).
    (3) Qualified taxable year defined. For purposes of this section 
and Sec. Sec.  1.904(g)-2T and 1.904(g)-3T, the term qualified taxable 
year means any taxable year for which the taxpayer chooses the benefits 
of section 901.
    (4) Method of allocation and apportionment of deductions. In 
determining its overall domestic loss, a taxpayer shall allocate and 
apportion expenses, losses, and other deductions to U.S. gross income 
in accordance with sections 861(b) and 865 and the regulations 
thereunder, including Sec. Sec.  1.861-8T through 1.861-14T.
    (d) Additions to overall domestic loss accounts--(1) General rule. 
A taxpayer's overall domestic loss as determined under paragraph (c) of 
this section shall be added to the applicable overall domestic loss 
account at the end of its taxable year to the extent that the overall 
domestic loss either reduces foreign source income for the year (but 
only if such year is a qualified taxable year) or reduces foreign 
source income for a qualified taxable year to which the loss has been 
carried back.
    (2) Overall domestic loss of another taxpayer. If any portion of 
any overall domestic loss of another taxpayer is allocated to the 
taxpayer in accordance with Sec.  1.1502-9T (relating to consolidated 
overall domestic losses) the taxpayer shall add such amount to its 
applicable overall domestic loss account.
    (3) Adjustments for capital gains and losses. If the taxpayer has 
capital gains or losses, the amount by which an overall domestic loss 
reduces foreign source income in a taxable year shall be determined in 
accordance with Sec.  1.904(b)-1(h)(1)(i) and (iii).
    (e) Reductions of overall domestic loss accounts. The taxpayer 
shall subtract the following amounts from its overall domestic loss 
accounts at the end of its taxable year in the following order, if 
applicable:
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers. An overall domestic loss account is reduced by the amount of 
any overall domestic loss which is allocated to another taxpayer in 
accordance with Sec.  1.1502-9T (relating to consolidated overall 
domestic losses).
    (2) Reduction for amounts recaptured. An overall domestic loss 
account is reduced by the amount of any U.S. source income that is 
recharacterized in accordance with Sec.  1.904(g)-2T(c) (relating to 
recapture under section 904(g)(1)).
    (f) Effective/applicability date. This section applies to any 
taxpayer that sustains an overall domestic loss for a taxable year 
beginning after December 21, 2007. Taxpayers may choose to apply this 
section to overall domestic losses sustained in other taxable years 
beginning after December 31, 2006, as well.
    (g) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(g)-2  Recapture of overall domestic losses.

    [Reserved]. For further guidance, see Sec.  1.904(g)-2T.


Sec.  1.904(g)-2T  Recapture of overall domestic losses (temporary).

    (a) In general. A taxpayer shall recapture an overall domestic loss 
as provided in this section. Recapture is accomplished by treating a 
portion of the taxpayer's U.S. source taxable income as foreign source 
income. The recharacterized income is allocated among and increases 
foreign source income in separate categories in proportion to the 
balances of the overall domestic loss accounts with respect to those 
separate categories. As a result, if the taxpayer elects the benefits 
of section 901, the taxpayer's foreign tax credit limitation is 
increased. As provided in Sec.  1.904(g)-1T(f)(2), the balance in a 
taxpayer's overall domestic loss account with respect to a separate 
category is reduced at the end of each taxable year by the amount of 
loss recaptured during that taxable year. Recapture continues until 
such time as the amount of U.S. source income recharacterized as 
foreign source income equals the amount in the overall domestic loss 
account.
    (b) Determination of U.S. source taxable income for purposes of 
recapture. For purposes of determining the amount of an overall 
domestic loss subject to recapture, the taxpayer's taxable income from 
U.S. sources shall be computed in accordance with the rules set forth 
in Sec.  1.904(g)-1T(c)(4).
    (c) Section 904(g)(1) recapture. The amount of any U.S. source 
taxable income subject to recharacterization in a taxable year in which 
paragraph (a) of this section is applicable is the lesser of the 
aggregate balance in taxpayer's overall domestic loss accounts in each 
separate category (after reduction of such account in accordance with 
Sec.  1.904(g)-1T(e)) or fifty percent of the taxpayer's U.S. source 
taxable income (as determined under paragraph (b) of this section).
    (d) Effective/applicability date. This section applies to any 
taxpayer that sustains an overall domestic loss for a taxable year 
beginning after December 21, 2007. Taxpayers may choose to apply this 
section to overall domestic losses sustained in other taxable years 
beginning after December 31, 2006, as well.

[[Page 72601]]

    (e) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(g)-3  Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate limitation 
losses, and for recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses.

    [Reserved]. For further guidance, see Sec.  1.904(g)-3T.


Sec.  1.904(g)-3T  Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate limitation 
losses, and for recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses (temporary).

    (a) In general. This section provides ordering rules for the 
allocation of net operating losses, net capital losses, U.S. source 
losses, and separate limitation losses, and for recapture of separate 
limitation losses, overall foreign losses, and overall domestic losses. 
The rules must be applied in the order set forth in paragraphs (b) 
through (g) of this section.
    (b) Step One: Allocation of net operating loss and net capital loss 
carryovers--(1) In general. Net operating losses from a current taxable 
year are carried forward or back to a taxable year in the following 
manner. Net operating losses that are carried forward pursuant to 
section 172 are combined with income or loss in the carryover year in 
the manner described in this paragraph (b). The combined amounts are 
then subject to the ordering rules provided in paragraphs (c) through 
(g) of this section. Net operating losses that are carried back to a 
prior taxable year pursuant to section 172 are allocated to income in 
the carryback year in the manner set forth in paragraphs (b)(2) and 
(3), (c), and (d) of this section. The income in the carryback year to 
which the net operating loss is allocated is the foreign source income 
in each separate category and the U.S. source income after the 
application of sections 904(f) and 904(g) to income and loss in that 
previous year, including as a result of net operating loss carryovers 
or carrybacks from taxable years prior to the current taxable year.
    (2) Full net operating loss carryover. If the full net operating 
loss (that remains after carryovers to other taxable years) is less 
than or equal to the taxable income in a particular taxable year 
(carryover year), and so can be carried forward in its entirety to such 
carryover year, U.S. source losses and foreign source losses in 
separate categories that are part of a net operating loss from a 
particular taxable year that is carried forward in its entirety shall 
be combined with the U.S. income or loss and the foreign source income 
or loss in the same separate categories in the carryover year.
    (3) Partial net operating loss carryover. If the full net operating 
loss (that remains after carryovers to other taxable years) exceeds the 
taxable income in a carryover year, and so cannot be carried forward in 
its entirety to such carryover year, the following rules apply:
    (i) First, any U.S. source loss (not to exceed the net operating 
loss carryover) shall be carried over to the extent of any U.S. source 
income in the carryover year.
    (ii) If the net operating loss carryover exceeds the U.S. source 
loss carryover determined under paragraph (b)(3)(i) of this section, 
then separate limitation losses that are part of the net operating loss 
shall be tentatively carried over to the extent of separate limitation 
income in the same separate category in the carryover year. If the sum 
of the potential separate limitation loss carryovers determined under 
the preceding sentence exceeds the amount of the net operating loss 
carryover reduced by any U.S. source loss carried over under paragraph 
(b)(3)(i) of this section, then the potential separate limitation loss 
carryovers shall be reduced pro rata so that their sum equals such 
amount.
    (iii) If the net operating loss carryover exceeds the sum of the 
U.S. and separate limitation loss carryovers determined under 
paragraphs (b)(3)(i) and (ii) of this section, then a proportionate 
part of the remaining loss from each separate category shall be carried 
over to the extent of such excess and combined with the foreign source 
loss, if any, in the same separate categories in the carryover year.
    (iv) If the net operating loss carryover exceeds the sum of all the 
loss carryovers determined under paragraphs (b)(3)(i), (ii), and (iii) 
of this section, then any U.S. source loss not carried over under 
paragraph (b)(3)(i) of this section shall be carried over to the extent 
of such excess and combined with the U.S. source loss, if any, in the 
carryover year.
    (4) Net capital loss carryovers. Rules similar to the rules of 
paragraphs (b)(1) through (3) of this section apply for purposes of 
determining the components of a net capital loss carryover to a taxable 
year.
    (c) Step Two: Allocation of separate limitation losses. The 
taxpayer shall allocate separate limitation losses sustained during the 
taxable year (increased, if appropriate, by any losses carried over 
under paragraph (b) of this section), in the following manner:
    (1) the taxpayer shall allocate its separate limitation losses for 
the year to reduce its separate limitation income in other separate 
categories on a proportionate basis, and increase its separate 
limitation loss accounts appropriately. To the extent a separate 
limitation loss in one separate category is allocated to reduce 
separate limitation income in a second separate category, and the 
second category has a separate limitation loss account from a prior 
taxable year with respect to the first category, the two separate 
limitation loss accounts shall be netted one against the other.
    (2) If the taxpayer's separate limitation losses for the taxable 
year exceed the taxpayer's separate limitation income for the year, so 
that the taxpayer has separate limitation losses remaining after the 
application of paragraph (c)(1) of this section, the taxpayer shall 
allocate those losses to its U.S. source income for the taxable year, 
to the extent thereof, and shall increase its overall foreign loss 
accounts appropriately.
    (d) Step Three: Allocation of U.S. source losses. The taxpayer 
shall allocate U.S. source losses sustained during the taxable year 
(increased, if appropriate, by any losses carried over under paragraph 
(b) of this section) to separate limitation income on a proportionate 
basis, and shall increase its overall domestic loss accounts 
appropriately.
    (e) Step Four: Recapture of overall foreign loss accounts. If the 
taxpayer's separate limitation income for the taxable year (reduced by 
any losses carried over under paragraph (b) of this section) exceeds 
the sum of the taxpayer's U.S. source loss and separate limitation 
losses for the year, so that the taxpayer has separate limitation 
income remaining after the application of paragraphs (c)(1) and (d) of 
this section, then the taxpayer shall recapture prior year overall 
foreign losses, if any, in accordance with Sec. Sec.  1.904(f)-2 and 
1.904(f)-2T.
    (f) Step Five: Recapture of separate limitation loss accounts. To 
the extent the taxpayer has remaining separate limitation income for 
the year after the application of paragraph (e) of this section, then 
the taxpayer shall recapture prior year separate limitation loss 
accounts, if any, in accordance with Sec.  1.904(f)-8T.
    (g) Step Six: Recapture of overall domestic loss accounts. If the 
taxpayer's U.S. source income for the year (reduced by any losses 
carried over under paragraph (b) of this section or

[[Page 72602]]

allocated under paragraph (c) of this section, but not increased by any 
recapture of overall foreign loss accounts under paragraph (e) of this 
section) exceeds the taxpayer's separate limitation losses for the 
year, so that the taxpayer has U.S. source income remaining after the 
application of paragraph (c)(2) of this section, then the taxpayer 
shall recapture its prior year overall domestic losses, if any, in 
accordance with Sec.  1.904(g)-2T.
    (h) Examples. The following examples illustrate the rules of this 
section. Unless otherwise noted, all corporations use the calendar year 
as the U.S. taxable year.
    Example 1. (i) Facts. (A) Z Corporation is a domestic 
corporation with foreign branch operations in Country B. For 2009, Z 
has a net operating loss of ($500), determined as follows:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
           ($300)                       $0                  ($200)
------------------------------------------------------------------------

    (B) For 2008, Z had the following taxable income and losses 
after application of section 904(f) and (g) to income and loss in 
2008:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $400                     $200                    $110
------------------------------------------------------------------------

    (ii) Net operating loss allocation. Because Z's taxable income 
for 2008 exceeds its total net operating loss for 2009, the full net 
operating loss is carried back. Under Step 1, each component of the 
net operating loss is carried back and combined with its same 
category in 2008. See paragraph (b)(2) of this section. After 
allocation of the net operating loss, Z has the following taxable 
income and losses for 2008:


------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $100                     $200                   ($90)
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 3, the ($90) of U.S. loss is 
allocated proportionately to reduce the general category and passive 
category income. Accordingly, $30 ($90 x $100/$300) of the U.S. loss 
is allocated to general category income and $60 ($90 x $200/$300) of 
the U.S. loss is allocated to passive category income, with a 
corresponding creation or increase to Z's overall domestic loss 
accounts.
    Example 2. (i) Facts. (A) X Corporation is a domestic 
corporation with foreign branch operations in Country C. As of 
January 1, 2007, X has no loss accounts subject to recapture. For 
2007, X has a net operating loss of ($1400), determined as follows:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
           ($400)                   ($200)                  ($800)
------------------------------------------------------------------------

    (B) X has no taxable income in 2005 or 2006 available for offset 
by a net operating loss carryback. For 2008, X has the following 
taxable income and losses:


------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $500                   ($100)                   $1200
------------------------------------------------------------------------

    (ii) Net operating loss allocation. Under Step 1, because X's 
total taxable income for 2008 of $1600 ($1200 + $500 - $100) exceeds 
the total 2007 net operating loss, the full $1400 net operating loss 
is carried forward. Under paragraph (b)(2) of this section, each 
component of the net operating loss is carried forward and combined 
with its same category in 2008. After allocation of the net 
operating loss, X has the following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $100                   ($300)                    $400
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 2, $100 of the passive 
category loss offsets the $100 of general category income, resulting 
in a passive category separate limitation loss account with respect 
to general category income, and the other $200 of passive category 
loss offsets $200 of the U.S. source taxable income, resulting in 
the creation of an overall foreign loss account in the passive 
category.
    Example 3. (i) Facts. Assume the same facts as in Example 2, 
except that in 2008, X had the following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $200                   ($100)                   $1200
------------------------------------------------------------------------

    (ii) Net operating loss allocation. Under Step 1, because the 
total net operating loss for 2007 of ($1400) exceeds total taxable 
income for 2008 of $1300 ($1200 + $200 - $100), X has a partial net 
operating loss carryover to 2008 of $1300. Under paragraph (b)(3)(i) 
of this section, first, the $800 U.S. source component of the net 
operating loss is allocated to U.S. income for 2008. The tentative 
general category carryover under paragraph (b)(3)(ii) of this 
section ($200) does not exceed the remaining net operating loss 
carryover amount ($500). Therefore, $200 of the general category 
component of the net operating loss is next allocated to the general 
category income for 2008. Under paragraph (b)(3)(iii) of this 
section, the remaining $300 of net operating loss carryover ($1300 - 
$800 - $200) is carried over proportionally from the remaining net 
operating loss components in the general category ($200, or $400 
total general category loss--$200 general category loss already 
allocated) and passive category ($200). Therefore, $150 
($300x$200x$400) of the remaining net operating loss carryover is 
carried over from the general category for 2007 and combined with 
the general category for 2008, and $150 ($300x$200x$400) of the 
remaining net operating loss carryover is carried over from the 
passive category for 2007 and combined with the passive category for 
2008. After allocation of the net operating loss carryover from 2007 
to the appropriate categories for 2008, X has the following taxable 
income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
           ($150)                   ($250)                    $400
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 2, the losses in the general 
and passive categories fully offset the U.S. source income, 
resulting in the creation of general category and passive category 
overall foreign loss accounts.
    Example 4. (i) Facts. Assume the same facts as in Example 2, 
except that in 2008, X has the following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $200                     $200                  ($200)
------------------------------------------------------------------------

    (ii) Net operating loss allocation. Under Step 1, because the 
total net operating loss of ($1400) exceeds total taxable income for 
2008 of $200 ($200 + $200 - $200), X has a partial net operating 
loss carryover to 2008 of $200. Because X has no U.S. source income 
in 2008, under paragraph (b)(3)(i) of this section no portion of the 
U.S. source component of the net operating loss is initially carried 
into 2008. Because the total tentative carryover under paragraph 
(b)(3)(ii) of this section of $400 ($200 in each of the general and 
passive categories) exceeds the net operating loss carryover amount, 
the tentative carryover from each separate category is reduced 
proportionately by $100 ($200 x $200/$400). Accordingly, $100 ($200 
- $100) of the general category component of the net operating loss 
is carried forward and $100 ($200 - $100) of the passive category 
component of the net operating loss is carried forward and combined 
with income in the same respective categories for 2008. After 
allocation of the net operating loss carryover from 2007, X has the 
following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $100                     $100                  ($200)
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 3, the $200 U.S. source loss 
offsets the remaining $100 of general category income and $100 of 
passive category income, resulting in the creation of overall 
domestic loss accounts with respect to the general and passive 
categories.
    Example 5. (i) Facts. Assume the same facts as in Example 2, 
except that in 2008, X has the following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $800                   ($100)                    $100
------------------------------------------------------------------------

    (ii) Net operating loss allocation. Under Step 1, because X's 
total net operating loss in 2007 of ($1400) exceeds its total 
taxable income for 2008 of $800 ($100 + $800 - $100), X has a 
partial net operating loss carryover to 2008 of $800. Under 
paragraph (b)(3)(i) of this section, $100 of the U.S. source 
component of the net operating loss

[[Page 72603]]

is allocated to U.S. income for 2008. The tentative general category 
carryover under paragraph (b)(3)(ii) of this section does not exceed 
the remaining net operating loss carryover amount. Therefore, $400 
of the general category component of the net operating loss is 
allocated to reduce general category income in 2008. Under paragraph 
(b)(3)(iii) of this section, of the remaining $300 of net operating 
loss carryover ($800 - $100 - $400), $200 is carried forward from 
the passive category component of the net operating loss and 
combined with the passive category for 2008. Under paragraph 
(b)(3)(iv) of this section, the remaining $100 ($300 - $200) of net 
operating loss carryover is carried forward from the U.S. source 
component of the net operating loss and combined with the U.S. 
source income (loss) for 2008. After allocation of the net operating 
loss carryover from 2007, X has the following taxable income and 
losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $400                   ($300)                  ($100)
------------------------------------------------------------------------

    (iii) Loss allocation. (A) Under Step 2, the $300 passive 
category loss offsets the $300 of income in the general category, 
resulting in the creation of a passive category separate limitation 
loss account with respect to the general category.
    (B) Under Step 3, the $100 U.S. source loss offsets the 
remaining $100 of the general category income, resulting in the 
creation of an overall domestic loss account with respect to the 
general category.
    Example 6. (i) Facts. (A) Y Corporation is a domestic 
corporation with foreign branch operations in Country D. Y has no 
net operating losses and does not make an election to recapture more 
than the required amount of overall foreign losses. As of January 1, 
2007, Y has a ($200) general category overall foreign loss (OFL) 
account and a ($200) general category separate limitation loss (SLL) 
account with respect to the passive category. For 2007, Y has $400 
of passive category income that is fully offset by a ($400) domestic 
loss in that taxable year, giving rise to the creation of an overall 
domestic loss (ODL) account with respect to the passive category. As 
of January 1, 2008, Y has the following balances in its OFL, SLL, 
and ODL accounts:

------------------------------------------------------------------------
                     General
-------------------------------------------------     US  Passive ODL
          OFL                  Passive SLL
------------------------------------------------------------------------
             $200                     $200                    $400
------------------------------------------------------------------------

    (B) In 2008, Y has the following taxable income and losses:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
             $400                   ($100)                    $600
------------------------------------------------------------------------

    (ii) Loss allocation. Under Step 2, the $100 of passive category 
loss offsets $100 of the general category income, creating a passive 
category SLL account of $100 with respect to the general category. 
Because there is an offsetting general category SLL account of $200 
with respect to the passive category from a prior taxable year, the 
two accounts are netted against each other so that all that remains 
is a $100 general category SLL account with respect to the passive 
category.
    (iii) OFL account recapture. Under Step 4, 50 percent of the 
remaining $300, or $150, of income in the general category is 
subject to recharacterization as U.S. source income as a recapture 
of part of the OFL account in the general category.
    (iv) SLL account recapture. Under Step 5, $100 of the remaining 
$150 of income in the general category is recharacterized as passive 
category income as a recapture of the general category SLL account 
with respect to the passive category.
    (v) ODL account recapture. Under Step 6, 50 percent of the $600, 
or $300, of U.S. source income is subject to recharacterization as 
foreign source passive category income as a recapture of a part of 
the ODL account with respect to the passive category. None of the 
$150 of general category income that was recharacterized as U.S. 
source income under Step 5 is included here as income subject to 
recharacterization in connection with recapture of the overall 
domestic loss account.
    (v) Results. (A) After the allocation of loss and recapture of 
loss accounts, X has the following taxable income and losses for 
2008:

------------------------------------------------------------------------
        General                  Passive                    US
------------------------------------------------------------------------
              $50                     $400                    $450
------------------------------------------------------------------------

    (B) As of January 1, 2009, Y has the following balances in its 
OFL, SLL and ODL accounts:

------------------------------------------------------------------------
               General                     Passive             US
------------------------------------------------------------------------
       OFL            Passive SLL        General SLL       Passive ODL
------------------------------------------------------------------------
          $50                 $0                $0              $100
------------------------------------------------------------------------

    (i) Effective/applicability date. This section applies to taxable 
years beginning after December 21, 2007. Taxpayers may choose to apply 
this section to other taxable years beginning after December 31, 2006, 
as well.
    (j) Expiration date. The applicability of this section expires on 
December 20, 2010.

0
Par. 15. Section 1.904(i)-0 is added. The entries for Sec.  1.904(i)-1 
in Sec.  1.904-0 are redesignated as entries for new Sec.  1.904(i)-0.


Sec.  1.904(i)-0  Outline of regulation provisions.

    This section lists the headings for Sec.  1.904(i)-1.

0
Par. 16. Section 1.904(j)-0 is added. The entries for Sec.  1.904(j)-1 
in Sec.  1.904-0 are redesignated as entries for new Sec.  1.904(j)-0.


Sec.  1.904(j)-0  Outline of regulation provisions.

    This section lists the headings for Sec.  1.904(j)-1.

0
Par. 17. Section 1.1502-9 is revised to read as follows:


Sec.  1.1502-9  Consolidated overall foreign losses, separate 
limitation losses, and overall domestic losses.

    [Reserved]. For further guidance, see Sec.  1.1502-9T.

0
Par. 18. Section 1.1502-9T is added to read as follows:


Sec.  1.1502-9T  Consolidated overall foreign losses, separate 
limitation losses, and overall domestic losses (temporary).

    (a) In general. This section provides rules for applying section 
904(f) and (g) (including its definitions and nomenclature) to a group 
and its members. Generally, section 904(f) concerns rules relating to 
overall foreign losses (OFLs) and separate limitation losses (SLLs) and 
the consequences of such losses. Under section 904(f)(5), losses are 
computed separately in each category of income described in section 
904(d)(1) or Sec.  1.904-4(m) (separate category). Section 904(g) 
concerns rules relating to overall domestic losses (ODLs) and the 
consequences of such losses. Paragraph (b) of this section defines 
terms and provides computational and accounting rules, including rules 
regarding recapture. Paragraph (c) of this section provides rules that 
apply to OFLs, SLLs, and ODLs when a member becomes or ceases to be a 
member of a group. Paragraph (d) of this section provides a predecessor 
and successor rule. Paragraph (e) of this section provides effective 
dates.
    (b) Consolidated application of section 904(f) and (g). A group 
applies section 904(f) and (g) for a consolidated return year in 
accordance with that section, subject to the following rules:

[[Page 72604]]

    (1) Computation of CSLI or CSLL and consolidated U.S.-source 
taxable income or CDL. The group computes its consolidated separate 
limitation income (CSLI) or consolidated separate limitation loss 
(CSLL) for each separate category under the principles of Sec.  1.1502-
11 by aggregating each member's foreign-source taxable income or loss 
in such separate category computed under the principles of Sec.  
1.1502-12, and taking into account the foreign portion of the 
consolidated items described in Sec.  1.1502-11(a)(2) through (8) for 
such separate category. The group computes its consolidated U.S.-source 
taxable income or consolidated domestic loss (CDL) under similar 
principles.
    (2) Netting CSLLs, CSLIs, and consolidated U.S.-source taxable 
income. The group applies section 904(f)(5) to determine the extent to 
which a CSLL for a separate category reduces CSLI for another separate 
category or consolidated U.S.-source taxable income.
    (3) Netting CDL and CSLI. The group applies section 904(g)(2) to 
determine the extent to which a CDL reduces CSLI.
    (4) CSLL, COFL, and CODL accounts. To the extent provided in 
section 904(f), the amount by which a CSLL for a separate category (the 
loss category) reduces CSLI for another separate category (the income 
category) shall result in the creation of (or addition to) a CSLL 
account for the loss category with respect to the income category. 
Likewise, the amount by which a CSLL for a loss category reduces 
consolidated U.S.-source taxable income will create (or add to) a 
consolidated overall foreign loss account (a COFL account). To the 
extent provided in section 904(g), the amount by which a CDL reduces 
CSLI shall result in the creation of (or addition to) a consolidated 
overall domestic loss (CODL) account for the income category reduced by 
the CDL.
    (5) Recapture of COFL, CSLL, and CODL accounts. In the case of a 
COFL account for a loss category, section 904(f)(1) and (3) 
recharacterizes some or all of the foreign-source income in the loss 
category as U.S.-source income. In the case of a CSLL account for a 
loss category with respect to an income category, section 904(f)(5)(C) 
and (F) recharacterizes some or all of the foreign-source income in the 
loss category as foreign-source income in the income category. In the 
case of a CODL account, section 904(g)(3) recharacterizes some of the 
U.S.-source income as foreign-source income in the separate category 
that was offset by the CDL. The COFL account, CSLL account, or CODL 
account is reduced to the extent income is recharacterized with respect 
to such account.
    (6) Intercompany transactions--(i) Nonapplication of section 904(f) 
disposition rules. Neither section 904(f)(3) (in the case of a COFL 
account) nor section 904(f)(5)(F) (in the case of a CSLL account) 
applies at the time of a disposition that is an intercompany 
transaction to which Sec.  1.1502-13 applies. Instead, section 
904(f)(3) and (5)(F) applies only at such time and only to the extent 
that the group is required under Sec.  1.1502-13 (without regard to 
section 904(f)(3) and (5)(F)) to take into account any intercompany 
items resulting from the disposition, based on the COFL or CSLL account 
existing at the end of the consolidated return year during which the 
group takes the intercompany items into account.
    (ii) Examples. Paragraph (b)(6)(i) of this section is illustrated 
by the following examples. The identity of the parties and the basic 
assumptions set forth in Sec.  1.1502-13(c)(7)(i) apply to the 
examples. Except as otherwise stated, assume further that the 
consolidated group recognizes no foreign-source income other than as a 
result of the transactions described. The examples are as follows:

    Example 1. (i) On June 10, year 1, S transfers nondepreciable 
property with a basis of $100 and a fair market value of $250 to B 
in a transaction to which section 351 applies. The property was 
predominantly used without the United States in a trade or business, 
within the meaning of section 904(f)(3). B continues to use the 
property without the United States. The group has a COFL account in 
the relevant loss category of $120 as of December 31, year 1.
    (ii) Because the contribution from S to B is an intercompany 
transaction, section 904(f)(3) does not apply to result in any gain 
recognition in year 1. See paragraph (b)(5)(i) of this section.
    (iii) On January 10, year 4, B ceases to be a member of the 
group. Because S did not recognize gain in year 1 under section 351, 
no gain is taken into account in year 4 under Sec.  1.1502-13. Thus, 
no portion of the group's COFL account is recaptured in year 4. For 
rules requiring apportionment of a portion of the COFL account to B, 
see paragraph (c)(2) of this section.
    Example 2. (i) The facts are the same as in paragraph (i) of 
Example 1. On January 10, year 4, B sells the property to X for 
$300. As of December 31, year 4, the group's COFL account is $40. 
(The COFL account was reduced between year 1 and year 4 due to 
unrelated foreign-source income taken into account by the group.)
    (ii) B takes into account gain of $200 in year 4. The $40 COFL 
account in year 4 recharacterizes $40 of the gain as U.S. source. 
See section 904(f)(3).
    Example 3. (i) On June 10, year 1, S sells nondepreciable 
property with a basis of $100 and a fair market value of $250 to B 
for $250 cash. The property was predominantly used without the 
United States in a trade or business, within the meaning of section 
904(f)(3). The group has a COFL account in the relevant loss 
category of $120 as of December 31, year 1. B predominantly uses the 
property in a trade or business without the United States.
    (ii) Because the sale is an intercompany transaction, section 
904(f)(3) does not require the group to take into account any gain 
in year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL 
account is not reduced in year 1.
    (iii) On January 10, year 4, B sells the property to X for $300. 
As of December 31, year 4, the group's COFL account is $60. (The 
COFL account was reduced between year 1 and year 4 due to unrelated 
foreign-source income taken into account by the group.)
    (iv) In year 4, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account to produce the same effect 
on consolidated taxable income as if S and B were divisions of a 
single corporation. See Sec.  1.1502-13(c). All of B's $50 
corresponding gain is recharacterized under section 904(f)(3). If S 
and B were divisions of a single corporation and the intercompany 
sale were a transfer between the divisions, B would succeed to S's 
$100 basis in the property and would have $200 of gain ($60 of which 
would be recharacterized under section 904(f)(3)), instead of a $50 
gain. Consequently, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account, and $10 of S's gain is 
recharacterized under section 904(f)(3) as U.S. source income to 
reflect the $10 difference between B's $50 recharacterized gain and 
the $60 recomputed gain that would have been recharacterized.

    (c) Becoming or ceasing to be a member of a group--(1) Adding 
separate accounts on becoming a member. At the time that a corporation 
becomes a member of a group (a new member), the group adds to the 
balance of its COFL, CSLL or CODL account the balance of the new 
member's corresponding OFL account, SLL account or ODL account. A new 
member's OFL account corresponds to a COFL account if the account is 
for the same loss category. A new member's SLL account corresponds to a 
CSLL account if the account is for the same loss category and with 
respect to the same income category. A new member's ODL account 
corresponds to a CODL account if the account is with respect to the 
same income category. If the group does not have a COFL, CSLL or CODL 
account corresponding to the new member's account, it creates a COFL, 
CSLL or CODL account with a balance equal to the balance of the 
member's account.
    (2) Apportionment of consolidated account to departing member--(i) 
In general. A group apportions to a member that ceases to be a member 
(a

[[Page 72605]]

departing member) a portion of each COFL, CSLL and CODL account as of 
the end of the year during which the member ceases to be a member and 
after the group makes the additions or reductions to such account 
required under paragraphs (b)(4), (b)(5) and (c)(1) of this section 
(other than an addition under paragraph (c)(1) of this section 
attributable to a member becoming a member after the departing member 
ceases to be a member). The group computes such portion under paragraph 
(c)(2)(ii) of this section, as limited by paragraph (c)(2)(iii) of this 
section. The departing member carries such portion to its first 
separate return year after it ceases to be a member. Also, the group 
reduces each account by such portion and carries such reduced amount to 
its first consolidated return year beginning after the year in which 
the member ceases to be a member. If two or more members cease to be 
members in the same year, the group computes the portion allocable to 
each such member (and reduces its accounts by such portion) in the 
order that the members cease to be members.
    (ii) Departing member's portion of group's account. A departing 
member's portion of a group's COFL, CSLL or CODL account for a loss 
category is computed based upon the member's share of the group's 
assets that generate income subject to recapture at the time that the 
member ceases to be a member. Under the characterization principles of 
Sec. Sec.  1.861-9T(g)(3) and 1.861-12T, the group identifies the 
assets of the departing member and the remaining members that generate 
U.S.-source income (domestic assets) and foreign-source income (foreign 
assets) in each separate category. The assets are characterized based 
upon the income that the assets are reasonably expected to generate 
after the member ceases to be a member. The member's portion of a 
group's COFL or CSLL account for a loss category is the group's COFL or 
CSLL account, respectively, multiplied by a fraction, the numerator of 
which is the value of the member's foreign assets for the loss category 
and the denominator of which is the value of the foreign assets of the 
group (including the departing member) for the loss category. The 
member's portion of a group's CODL account for each income category is 
the group's CODL account multiplied by a fraction, the numerator of 
which is the value of the member's domestic assets and the denominator 
of which is the value of the domestic assets of the group (including 
the departing member). The value of the domestic and foreign assets is 
determined under the asset valuation rules of Sec.  1.861-9T(g)(1) and 
(2) using either tax book value or fair market value under the method 
chosen by the group for purposes of interest apportionment as provided 
in Sec.  1.861-9T(g)(1)(ii). For purposes of this paragraph (c)(2)(ii), 
Sec.  1.861-9T(g)(2)(iv) (assets in intercompany transactions) shall 
apply, but Sec.  1.861-9T(g)(2)(iii) (adjustments for directly 
allocated interest) shall not apply. If the group uses the tax book 
value method, the member's portions of COFL, CSLL, and CODL accounts 
are limited by paragraph (c)(2)(iii) of this section. In addition, for 
purposes of this paragraph (c)(2)(ii), the tax book value of assets 
transferred in intercompany transactions shall be determined without 
regard to previously deferred gain or loss that is taken into account 
by the group as a result of the transaction in which the member ceases 
to be a member. The assets should be valued at the time the member 
ceases to be a member, but values on other dates may be used unless 
this creates substantial distortions. For example, if a member ceases 
to be a member in the middle of the group's consolidated return year, 
an average of the values of assets at the beginning and end of the year 
(as provided in Sec.  1.861-9T(g)(2)) may be used or, if a member 
ceases to be a member in the early part of the group's consolidated 
return year, values at the beginning of the year may be used, unless 
this creates substantial distortions.
    (iii) Limitation on member's portion for groups using tax book 
value method. If a group uses the tax book value method of valuing 
assets for purposes of paragraph (c)(2)(ii) of this section and the 
aggregate of a member's portions of COFL and CSLL accounts for a loss 
category (with respect to one or more income categories) determined 
under paragraph (c)(2)(ii) of this section exceeds 150 percent of the 
actual fair market value of the member's foreign assets in the loss 
category, the member's portion of the COFL or CSLL accounts for the 
loss category shall be reduced (proportionately, in the case of 
multiple accounts) by such excess. In addition, if the aggregate of a 
member's portions of CODL accounts (with respect to one or more income 
categories) determined under paragraph (c)(2)(ii) of this section 
exceeds 150 percent of the actual fair market value of the member's 
domestic assets, the member's portion of the CODL accounts shall be 
reduced (proportionately, in the case of multiple accounts) by such 
excess. This rule does not apply in the case of COFL or CSLL accounts 
if the departing member and all other members that cease to be members 
as part of the same transaction own all (or substantially all) the 
foreign assets in the loss category. In the case of CODL accounts, this 
rule does not apply if the departing member and all other members that 
cease to be members as part of the same transaction own all (or 
substantially all) the domestic assets.
    (iv) Determination of values of domestic and foreign assets binding 
on departing member. The group's determination of the value of the 
member's and the group's domestic and foreign assets for a loss 
category is binding on the member, unless the Commissioner concludes 
that the determination is not appropriate. The common parent of the 
group must attach a statement to the return for the taxable year that 
the departing member ceases to be a member of the group that sets forth 
the name and taxpayer identification number of the departing member, 
the amount of each COFL and CSLL for each loss category and each CODL 
that is apportioned to the departing member under this paragraph 
(c)(2), the method used to determine the value of the member's and the 
group's domestic and foreign assets in each such loss category, and the 
value of the member's and the group's domestic and foreign assets in 
each such loss category. The common parent must also furnish a copy of 
the statement to the departing member.
    (v) Anti-abuse rule. If a corporation becomes a member and ceases 
to be a member, and a principal purpose of the corporation becoming and 
ceasing to be a member is to transfer the corporation's OFL account, 
SLL account or ODL account to the group or to transfer the group's 
COFL, CSLL or CODL account to the corporation, appropriate adjustments 
will be made to eliminate the benefit of such a transfer of accounts. 
Similarly, if any member acquires assets or disposes of assets 
(including a transfer of assets between members of the group and the 
departing member) with a principal purpose of affecting the 
apportionment of accounts under paragraph (c)(2)(i) of this section, 
appropriate adjustments will be made to eliminate the benefit of such 
acquisition or disposition.
    (vi) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. (i) On November 6, year 1, S, a member of the P 
group, a consolidated group with a calendar consolidated return 
year, ceases to be a member of the group. On December 31, year 1, 
the P group has a $40 COFL account for the general category, a $20 
CSLL account for the general category (that is, the loss category) 
with respect to the

[[Page 72606]]

passive category (that is, the income category), and a $10 CODL 
account with respect to the passive category (that is, the income 
category). No member of the group has foreign-source income or loss 
in year 1. The group apportions its interest expense according to 
the tax book value method.
    (ii) On November 6, year 1, the group identifies S's assets and 
the group's assets (including S's assets) expected to produce 
foreign-source general category income. Use of end-of-the-year 
values will not create substantial distortions in determining the 
relative values of S's and the group's relevant assets on November 
6, year 1. The group determines that S's relevant assets have a tax 
book value of $2,000 and a fair market value of $2,200. Also, the 
group's relevant assets (including S's assets) have a tax book value 
of $8,000. On November 6, year 1, S has no assets expected to 
produce U.S. source income.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 
COFL account for the general category ($40 x $2000/$8000) and a $5 
CSLL account for the general category with respect to the passive 
category ($20 x $2000/$8000). S does not take any portion of the 
CODL account. The limitation described in paragraph (c)(2)(iii) of 
this section does not apply because the aggregate of the COFL and 
CSLL accounts for the general category that are apportioned to S 
($15) is less than 150 percent of the actual fair market value of 
S's general category foreign assets ($2,200 x 150%).
    Example 2. (i) Assume the same facts as in Example 1, except 
that the fair market value of S's general category foreign assets is 
$4 as of November 6, year 1.
    (ii) Under paragraph (c)(2)(iii) of this section, S's COFL and 
CSLL accounts for the general category must be reduced by $9, which 
is the excess of $15 (the aggregate amount of the accounts 
apportioned under paragraph (c)(2)(ii) of this section) over $6 (150 
percent of the $4 actual fair market value of S's general category 
foreign assets). S thus takes a $4 COFL account for the general 
category ($10-($9 x $10/$15)) and a $2 CSLL account for the general 
category with respect to the passive category ($5-($9 x $5/$15)).
    Example 3. (i) Assume the same facts as in Example 1, except 
that S also has assets that are expected to produce U.S. source 
income.
    (ii) On November 6, year 1, the group identifies S's assets and 
the group's assets (including S's assets) expected to produce U.S. 
source income. Use of end-of-the-year values will not create 
substantial distortions in determining the relative values of S's 
and the group's relevant assets on November 6, year 1. The group 
determines that S's relevant assets have a tax book value of $3,000 
and a fair market value of $2,500. Also, the group's relevant assets 
(including S's assets) have a tax book value of $6,000.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $5 
CODL account ($10 x $3,000/$6,000), in addition to the COFL and CSLL 
accounts determined in Example 1. The limitation described in 
paragraph (c)(2)(iii) of this section does not apply because the 
CODL account that is apportioned to S ($5) is less than 150 percent 
of the actual fair market value of S's U.S. assets ($2,500 x 150%).

    (d) Predecessor and successor. A reference to a member includes, as 
the context may require, a reference to a predecessor or successor of 
the member. See Sec.  1.1502-1(f).
    (e) Effective/applicability date. This section applies to 
consolidated return years beginning after December 21, 2007. Taxpayers 
may choose to apply the provisions of this section relating to overall 
domestic losses to other consolidated return years beginning after 
December 31, 2006, as well. For rules relating to overall foreign 
losses and separate limitation losses in consolidated return years 
beginning on or before December 21, 2007 see 26 CFR 1.1502-9 (revised 
as of April 1, 2007).
    (f) Expiration date. The applicability of this section expires on 
December 20, 2010.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.

    Approved: December 14, 2007.

Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-24877 Filed 12-20-07; 8:45 am]
BILLING CODE 4830-01-P