[Federal Register Volume 73, Number 129 (Thursday, July 3, 2008)]
[Rules and Regulations]
[Pages 38113-38117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14919]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9406]
RIN 1545-BH03


Modifications to Subpart F Treatment of Aircraft and Vessel 
Leasing Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
addressing the treatment of certain income and assets related to the 
leasing of aircraft or vessels in foreign commerce under sections 367, 
954, and 956 of the Internal Revenue Code (Code). The regulations 
reflect statutory changes made by section 415 of the American Jobs 
Creation Act of 2004 (AJCA). In general, the regulations will affect 
United States shareholders of controlled foreign corporations that 
derive income from the leasing of aircraft or vessels in foreign 
commerce and U.S. persons that transfer property subject to these 
leases to a foreign corporation. The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on July 3, 2008.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367-2T(e)(2), 1.367-4T(c)(3)(i), 1.367-5T(f)(3)(ii), 1.954-2T(i) and 
1.956-2T(e).

FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations 
under section 367, John H. Seibert, at (202) 622-3860; concerning the 
temporary regulations under section 954 or 956, Paul J. Carlino at 
(202) 622-3840; concerning submissions of comments, Richard A. Hurst at 
[email protected] (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

In General

    This document contains amendments to 26 CFR Part 1 under sections 
367, 954 and 956 of the Code. Section 415(a) of the AJCA, Public Law 
108-357 (118 Stat. 1418) repealed sections 954(a)(4) and (f), the 
foreign base company shipping income provisions of subpart F. Following 
repeal of the foreign base company shipping income provisions, rents 
derived from leasing an aircraft or vessel in foreign commerce may be 
included in subpart F income only if the rents are described in another 
category of subpart F income, such as foreign personal holding company 
income (FPHCI) defined in section 954(c). Rents are included in FPHCI 
under section 954(c)(1)(A). Section 954(c)(2)(A) excludes from FPHCI 
rents received from unrelated persons and derived in the active conduct 
of a trade or business.
    Rents derived by a controlled foreign corporation (CFC) are 
considered to be derived in the active conduct of a trade or business 
if the rents are derived under any one of four circumstances described 
in the Treasury regulations under section 954(c)(2)(A). One such 
circumstance, provided in Sec.  1.954-2(c)(1)(iv), is when rents are 
derived from property leased as a result of the performance of 
marketing functions by the lessor CFC. These rents are considered to be 
derived in the active conduct of a trade or business if the lessor CFC, 
through its own officers or staff of employees located in a foreign 
country, maintains and operates an organization in the foreign country 
that is regularly engaged in the business of marketing, or of marketing 
and servicing, the leased property and that is substantial in relation 
to the amount of rents derived from leasing the property.
    Section 1.954-2(c)(2)(ii) provides that the determination of 
whether the organization in the foreign country is substantial in 
relation to the amount of rents derived is based on all the facts and 
circumstances. However, under Sec.  1.954-2(c)(2)(ii), the organization 
will be considered substantial in relation to the amount of rents if 
active leasing expenses, as defined in Sec.  1.954-2(c)(2)(iii), equal 
or exceed 25 percent of the adjusted leasing profit, as defined in 
Sec.  1.954-2(c)(2)(iv).
    Section 415(b) of the AJCA amended section 954(c)(2)(A) to create a 
new marketing safe harbor for the exclusion from FPHCI for rents 
derived from leasing an aircraft or vessel in foreign commerce. The 
amendment to section 954(c)(2)(A) provides:

    [R]ents derived from leasing an aircraft or vessel in foreign 
commerce shall not fail to be treated as derived in the active 
conduct of a trade or business if, as determined under regulations 
prescribed by the Secretary, the active leasing expenses are not 
less than 10 percent of the profit on the lease.

The legislative history of section 415(b) of the AJCA provides that the 
new safe harbor for rents derived from leasing an aircraft or vessel in 
foreign commerce ``is to be applied in accordance with the existing 
regulations under section

[[Page 38114]]

954(c)(2)(A) by comparing the lessor's `active leasing expenses' for 
its pool of leased assets to its `adjusted leasing profit.' '' H.R. 
Conf. Rep. No. 755, 108th Cong., 2d Sess. 389 (2004) (hereinafter 2004 
Conference Report). The 2004 Conference Report includes in the 
definition of the term ``aircraft or vessel'' engines that are leased 
separately from an aircraft or vessel. Id. at 391.
    An aircraft or vessel will qualify for the new safe harbor under 
section 954(c)(2)(A) only if it is leased in ``foreign commerce.'' The 
legislative history provides that, for purposes of this safe harbor,

    An aircraft or vessel will be considered to be leased in foreign 
commerce if it is used for the transportation of property or 
passengers between a port (or airport) in the United States and one 
in a foreign country or between foreign ports (or airports), 
provided the aircraft or vessel is used predominantly outside the 
United States. An aircraft or vessel will be considered used 
predominantly outside the United States if more than 50 percent of 
the miles during the taxable year are traversed outside the United 
States or the aircraft or vessel is located outside the United 
States more than 50 percent of the time during such taxable year.

Id. at 390.
    As an alternative to the new safe harbor, the legislative history 
makes clear that a lessor may qualify for the marketing exception by 
satisfying a facts and circumstances test. The report of the House of 
Representatives provides that:

    The safe harbor will not prevent a lessor from otherwise showing 
that it actively carries on a trade or business. In this regard, the 
requirements of section 954(c)(2)(A) will be met if a lessor 
regularly and directly performs active and substantial marketing, 
remarketing, management and operational functions with respect to 
the leasing of an aircraft or vessel (or component engines).

H.R. Rep. No. 108-548, Part I, at 210 (2004).
    The 2004 Conference Report also clarifies that the marketing 
exception for aircraft and vessels will apply whether the lessor 
engages in the marketing of the lease as a form of financing (versus 
marketing the property as such) or whether the lease is classified as a 
finance lease or operating lease for financial accounting purposes. 
2004 Conference Report at 390. The exception will also apply to an 
existing lease acquired by a lessor, if, following the acquisition, the 
lessor performs active and substantial management, operational, and 
remarketing functions with respect to the leased property. Id. The 2004 
Conference Report makes clear that a taxpayer no longer can claim FSC 
or ETI benefits for an existing FSC or ETI lease transferred to a CFC 
lessor. Id.
    The legislative history directs the Secretary of the Treasury to 
make conforming changes to the current regulations ``including guidance 
that aircraft or vessel leasing activity that satisfies the 
requirements of section 954(c)(2)(A) shall also satisfy the 
requirements for avoiding income inclusion under section 956 and 
section 367(a).'' Id. This legislative history indicates that Congress 
anticipated that taxpayers might restructure their operations with 
minimal tax cost to take advantage of the new benefits under subpart F 
provided by section 415 of the AJCA, namely the repeal of the foreign 
base company shipping income provisions and a liberalized marketing 
safe harbor for excluding active leasing income from aircraft or 
vessels engaged in foreign commerce from FPHCI.

Notice 2006-48

    Notice 2006-48 (2006-1 CB 922), released on May 2, 2006, provided 
guidance and announced the Treasury Department's and IRS' intention to 
amend the regulations under sections 367(a), 954, and 956 in accord 
with section 415 of the AJCA, and the accompanying legislative history. 
The notice provided that the future regulations would generally be 
effective beginning on or after May 2, 2006. These temporary 
regulations incorporate the rules of Notice 2006-48 with minor changes. 
See Sec.  601.601(d)(2)(ii)(b).

Explanation of Provisions

    The temporary regulations provide guidance with respect to the 
treatment of certain income and assets related to the leasing of 
aircraft or vessels in foreign commerce under sections 367, 954, and 
956 of the Code in light of section 415 of the AJCA.

Section 954 Regulations

    The temporary regulations add a new marketing safe harbor for 
purposes of determining whether rents derived from leasing aircraft or 
vessels (including component parts, such as engines, that are leased 
separately from an aircraft or vessel) in foreign commerce qualify for 
the active rents exclusion under section 954(c)(2)(A). This new safe 
harbor provides that an organization will be considered substantial 
under Sec.  1.954-2(c)(2)(ii) if active leasing expenses equal or 
exceed 10 percent of the adjusted leasing profit. The temporary 
regulations retain the rules in the current regulations regarding how 
to determine active leasing expenses and adjusted leasing profit and 
that as an alternative to the safe harbor test, a CFC can satisfy the 
substantiality test based upon its facts and circumstances. The 
temporary regulations also amend the current regulations to include a 
definition of foreign commerce and predominant use of an aircraft or 
vessel outside the United States in accordance with the definitions 
given such terms in the legislative history to section 415(b) of the 
AJCA. The temporary regulations also clarify that rents derived from 
certain finance leases and acquired leases are eligible for the active 
rents exclusion.

Section 956 Regulations

    Section 956(c)(1)(A) provides that the term ``United States 
property'' generally includes tangible property located in the United 
States. Section 956(c)(2) provides exceptions to the general definition 
of U.S. property. Section 956(c)(2)(D) excludes from the term U.S. 
property any aircraft, railroad rolling stock, vessel, motor vehicle, 
or container used in the transportation of persons or property in 
foreign commerce and used predominantly outside the United States.
    Section 1.956-2(b)(1)(vi) provides that whether an aircraft, 
railroad rolling stock, vessel, motor vehicle, or container is used 
predominantly outside the United States depends on the facts and 
circumstances in each case. The regulations also provide that as a 
general rule, such transportation property will be considered used 
predominantly outside the United States if 70 percent or more of the 
miles traversed in the use of such property are traversed outside the 
United States or if such property is located outside the United States 
70 percent of the time during such taxable year. The temporary 
regulations amend Sec.  1.956-2(b)(1)(vi) to provide that an aircraft 
or vessel is excluded from U.S. property if rents derived from leasing 
such aircraft or vessel are excluded from FPHCI under section 
954(c)(2)(A).

Section 367 Regulations

    Section 367 provides that if a U.S. person transfers property to a 
foreign corporation in an exchange described in sections 332, 351, 354, 
356, or 361 of the Code, the foreign corporation will not be considered 
a corporation for purposes of determining the extent to which gain will 
be recognized on such transfer. However, section 367(a)(3)(A) generally 
provides an exception to this rule if the property is used by the 
foreign corporation in the active conduct of a trade or business 
outside of the United States. In general, this exception does not apply 
to property of which the

[[Page 38115]]

transferor is a lessor at the time of the transfer, unless the 
transferee is the lessee or the regulations provide otherwise.
    Section 1.367(a)-2T(a) provides, in part, that section 367(a)(1) 
does not apply to property transferred to a foreign corporation if the 
property is transferred for use by that corporation in the active 
conduct of a trade or business outside of the United States and certain 
reporting requirements are met. Section 1.367(a)-2T(b)(3) provides that 
the principles of Sec.  1.954-2(d)(1) are used to determine whether a 
trade or business that produces rents or royalties is actively 
conducted, without regard to whether the rents or royalties are 
received from an unrelated person. Section 1.367(a)-2T(b)(4) provides 
generally that a foreign corporation conducts a trade or business 
outside of the United States if the primary managerial and operational 
activities of the trade or business are located outside of the United 
States and if immediately after the transfer the transferred assets are 
located outside of the United States.
    Section 1.367(a)-4T(c) through (f) contains rules for determining 
whether certain types of property are transferred for use in the active 
conduct of a trade or business outside the United States. Section 
1.367(a)-4T(c)(1) provides that if the transferred property will be 
leased by the transferee foreign corporation, the property generally is 
considered to be transferred for use in the active conduct of a trade 
or business outside of the United States only if all three of the 
following conditions are met: (i) The transferee's leasing constitutes 
the active conduct of a leasing business; (ii) the lessee does not use 
the property in the United States; and (iii) the transferee has need 
for substantial investment in assets of the type transferred.
    Section 1.367(a)-4T(b)(1) provides that even if property qualifies 
for the active trade or business exception, when a U.S. person 
transfers U.S. depreciated property to a foreign corporation, that 
person must include as ordinary income in the year of the transfer the 
gain realized that would have been included as ordinary income under 
section 617(d)(1), 1245(a), 1250(a), 1252(a), or 1254(a) of the Code if 
the taxpayer had sold the property at its fair market value on the date 
of the transfer (section 367 recapture). Section 1.367(a)-4T(b)(2)(ii) 
provides that, for this purpose, U.S. depreciated property includes 
property that has been used in the United States or has qualified as 
section 38 property by virtue of section 48(a)(2)(B).
    Section 1.367(a)-4T(b)(3) provides a methodology to compute the 
section 367 recapture amount if the property has been used partly 
outside the United States. In this circumstance, the amount of the 
section 367 depreciation recapture is determined by multiplying the 
full section 367 recapture amount by a fraction, the numerator of which 
is the U.S. use of the property and denominator of which is the total 
use of the property. For this purpose, U.S. use is the number of months 
that the property either was used within the United States or qualified 
as section 38 property by virtue of section 48(a)(2)(B) and was subject 
to depreciation by the transferor or a related person. Total use is the 
total number of months that the property was used (or was available for 
use), and subject to depreciation, by the transferor or a related 
person. Property is not considered to be used outside the United States 
during any period in which the property was, for purposes of section 38 
or 168, treated as property not used predominantly outside the United 
States pursuant to the provisions of section 48(a)(2)(B).
    Section 1.367(a)-5T(f) provides that, regardless of use in an 
active trade or business, section 367(a)(1) applies to a transfer of 
tangible property with respect to which the transferor is a lessor at 
the time of the transfer unless: (i) The transferee was the lessee and 
the transferee will not lease to third persons; or (ii) the transferee 
will lease to third persons and the transferee satisfies the conditions 
of Sec.  1.367(a)-4T(c)(1) or (2).
    The temporary regulations amend the section 367(a) regulations to 
provide that the principles of section 954(c)(2)(A) and the related 
regulations shall apply to determine whether a trade or business that 
produces rents or royalties is actively conducted under Sec.  1.367(a)-
2T(b)(3). For purposes of applying Sec.  1.367(a)-2T(b)(4), Sec.  
1.367(a)-4T(c)(3) provides that the substantial managerial and 
operational activities of the trade or business of leasing an aircraft 
or vessel must be conducted outside of the United States, and the 
aircraft or vessel must be used predominantly outside of the United 
States, as defined in section 954 and under the amended regulation. A 
lessee that uses an aircraft or vessel predominantly outside of the 
United States will satisfy the requirement in Sec.  1.367(a)-
4T(c)(1)(ii).
    In addition, Notice 2006-48 states that the Treasury Department and 
IRS were considering future guidance regarding how to determine whether 
an aircraft or vessel was used predominantly outside the United States 
for a particular month for purposes of calculating section 367 
recapture. The Notice also states that until further guidance is 
issued, taxpayers are permitted to use any reasonable method to make 
this determination. The Treasury Department and IRS continue to study 
this issue and therefore taxpayers may continue to use any reasonable 
method to make this determination until further guidance is issued.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. Ch. 6) please 
refer to the cross-reference notice of proposed rule making published 
elsewhere in this Federal Register. Pursuant to section 7805(f) of the 
Code, this regulation has 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 authors of these regulations are John H. Seibert and 
Paul J. Carlino, Office of Associate Chief Counsel (International). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 continues to read in 
part as follows:

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


0
Par. 2. Section 1.367(a)-2T is amended by adding paragraph (e) to read 
as follows:


Sec.  1.367(a)-2T  Exception for transfers of property for use in the 
active conduct of a trade or business (temporary).

* * * * *
    (e) Special rules for certain transfers occurring on or after May 
2, 2006--(1) General rule. Whether a trade or business that produces 
rents or royalties is actively conducted shall be determined under the 
principles of section 954(c)(2)(A) and the

[[Page 38116]]

accompanying regulations (but without regard to whether the rents or 
royalties are received from an unrelated party). See Sec.  1.954-2(c) 
and (d).
    (2) Effective/applicability date. The rules of this paragraph (e) 
apply to transfers occurring on or after May 2, 2006. However, if the 
transferor makes the election to apply the provisions of Sec.  
1.367(a)-4T(c)(3)(i) for transfers occurring on or after October 22, 
2004, then paragraph (e)(1) will also be applicable for the transfers 
occurring on or after October 22, 2004.
    (3) Expiration date. The applicability of this paragraph (e) will 
expire on July 1, 2011.

0
Par. 3. Section 1.367(a)-4T is amended by adding paragraphs (c)(3) and 
(i) to read as follows:


Sec.  1.367(a)-4T  Special rules applicable to specified transfers of 
property (temporary).

* * * * *
    (c) * * *
    (3) Aircraft and vessels leased in foreign commerce--(i) In 
general. For the purposes of satisfying paragraph (c)(1) of this 
section, aircraft or vessels, including component parts such as engines 
leased separately from aircraft or vessels, transferred to a foreign 
corporation and leased to other persons by the foreign corporation 
shall be considered to be transferred for use in the active conduct of 
a trade or business if--
    (A) The employees of the foreign corporation perform substantial 
managerial and operational activities of leasing aircraft or vessels 
outside the United States; and
    (B) The leased tangible personal property is predominantly used 
outside the United States, as determined under Sec.  1.954-2T(c)(2)(v).
* * * * *
    (i) Effective/applicability date. (1) The rules of paragraph (c)(3) 
of this section apply for transfers of property occurring on or after 
May 2, 2006. Transferors may elect to apply these provisions to 
transfers occurring on or after October 22, 2004, by citing the 
provisions of paragraph (c)(3) of this section in the documentation for 
such transfers required by Sec.  1.6038B-1T(c)(4)(i) and (iv).
    (2) Expiration date. The applicability of paragraph (c)(3) of this 
section will expire on July 1, 2011.


0
Par. 4. Section Sec.  1.367(a)-5T is amended by adding paragraph (f)(3) 
to read as follows:


Sec.  1.367(a)-5T  Property subject to section 367(a)(1) regardless of 
use in a trade or business (temporary).

* * * * *
    (f) * * *
    (3)(i) With respect to vessels and aircraft, including their 
component parts, that will be leased by the transferee to third 
persons, the transferee satisfies the conditions set forth in Sec.  
1.367(a)-4T(c).
    (ii) Effective/applicability date. The rules of this paragraph 
(f)(3) apply for transfers of property occurring on or after May 2, 
2006. If the transferor makes the election to apply the provisions of 
Sec.  1.367(a)-4T(c)(3) to transfers occurring on or after October 22, 
2004, then paragraph (f)(3)(i) of this section will also be applicable 
for the transfers affected by that election.
    (iii) Expiration date. The applicability of this paragraph (f)(3) 
will expire on July 1, 2011.


0
Par. 5. Section 1.954-2 is amended as follows:
0
1. Paragraph (c)(2)(ii) is revised.
0
2. Paragraphs (c)(2)(v), (c)(2)(vi), (c)(2)(vii) and (c)(3) Example 6, 
and (i) are added. The revision and additions read as follows:


Sec.  1.954-2  Foreign personal holding company income.

* * * * *
    (c) * * *
    (2) * * *
    (ii)[Reserved]. For further guidance, see Sec.  1.954-2T(c)(2)(ii).
* * * * *

    (v) [Reserved]. For further guidance, see Sec.  1.954-2T(c)(2)(v).
    (vi) [Reserved]. For further guidance, see Sec.  1.954-
2T(c)(2)(vi).
    (3) * * *
    Example 6. [Reserved]. For further guidance, see Sec.  1.954-
2T(c)(3) Example 6.
* * * * *
    (i) [Reserved]. For further guidance, see Sec.  1.954-2T(i).


0
Par. 6. Section 1.954-2T is added to read as follows:


Sec.  1.954-2T  Foreign personal holding company income (temporary).

    (a) through (c)(2)(i) [Reserved]. For further guidance see, Sec.  
1.954-2(a) through (c)(2)(i).
    (ii) Substantiality of foreign organization. For purposes of 
paragraph (c)(1)(iv) of this section, whether an organization in a 
foreign country is substantial in relation to the amount of rents is 
determined based on all facts and circumstances. However, such an 
organization will be considered substantial in relation to the amount 
of rents if active leasing expenses, as defined in paragraph 
(c)(2)(iii) of this section, equal or exceed 25 percent of the adjusted 
leasing profit, as defined in paragraph (c)(2)(iv) of this section. In 
addition, for purposes of aircraft or vessels leased in foreign 
commerce, an organization will be considered substantial if active 
leasing expenses, as defined in paragraph (c)(2)(iii) of this section, 
equal or exceed 10 percent of the adjusted leasing profit, as defined 
in paragraph (c)(2)(iv) of this section. For purposes of paragraphs 
(c)(1)(iv) and (c)(2) of this section and Sec.  1.956-2T(b)(1)(vi), the 
term aircraft or vessels includes component parts, such as engines that 
are leased separately from an aircraft or vessel.
    (c)(2)(iii) through (c)(2)(iv) [Reserved]. For further guidance 
see, Sec.  1.954-2(c)(2)(iii) through (c)(2)(iv).
    (v) Leased in foreign commerce. For purposes of paragraph 
(c)(1)(iv) and (2)(ii) of this section, an aircraft or vessel is 
considered to be leased in foreign commerce if the aircraft or vessel 
is used in foreign commerce and is used predominately outside the 
United States. For purposes of this paragraph (c)(2)(v), an aircraft or 
vessel is considered to be leased in foreign commerce if used for the 
transportation of property or passengers between a port (or airport) in 
the United States and one in a foreign country or between foreign ports 
(or airports) provided the aircraft or vessel is used predominantly 
outside the United States. An aircraft or vessel will be considered to 
be used predominantly outside the United States if more than 50 percent 
of the miles traversed during the taxable year in the use of such 
property are traversed outside the United States or if the aircraft or 
vessel is located outside the United States more than 50 percent of the 
time during the taxable year.
    (vi) Leases acquired by the CFC lessor. Except as provided in this 
paragraph (c)(2)(vi), the exception in paragraph (c)(1)(iv) of this 
section will also apply to rents from leases acquired from any person, 
if following the acquisition the lessor performs active and substantial 
management, operational, and remarketing functions with respect to the 
leased property. However, if any person is claiming a benefit with 
respect to an acquired lease pursuant to sections 921 or 114 of the 
Internal Revenue Code or section 101(d) of the American Jobs Creation 
Act of 2004, Public Law 108-357 (118 Stat. 1418) (2004), the rents from 
such lease, notwithstanding Sec.  1.954-2(b)(6), (2)(c) and the 
remainder of this section, are ineligible for the exception in section 
954(c)(2)(A).
    (vii) Finance leases. Paragraph (c)(1)(iv) of this section can 
apply to a lessor engaged in the marketing of leases that are treated 
as finance leases for

[[Page 38117]]

financial accounting purposes but are treated as leases for Federal 
income tax purposes.
    (3) Examples 1 through 5 [Reserved]. For further guidance, see 
Sec.  1.954-2(c)(3) Examples 1 through 5.

    Example 6. The facts are the same as in Example 2, except that 
controlled foreign corporation D purchases aircraft which it leases 
to others. If Corporation D incurs active leasing expenses, as 
defined in paragraph (c)(2)(iii) of this section, equal to or in 
excess of 10 percent of its adjusted leasing profit, as defined in 
paragraph (c)(2)(iv) of this section, the rental income of 
Corporation D from its leases with the unrelated foreign 
corporations is substantial and will be considered as derived in the 
active conduct of a trade or business for purposes of section 
954(c)(2)(A). If a particular aircraft subject to lease was not used 
by the lessee corporation in foreign commerce, for example, because 
50 percent or less of the miles during the taxable year were 
traversed outside the United States and the aircraft was located in 
the United States for 50 percent or more of the taxable year, 
Corporation D is not prevented from otherwise showing that it 
actively carries on a trade or business with regard to the rents 
derived from that aircraft, for example, based on its facts and 
circumstances, or as within the meaning of paragraph (c)(1)(i) or 
(iii) of this section.

    (d) through (h) [Reserved]. For further guidance, see Sec.  1.954-
2(d) through (h).
    (i)(1) Effective/applicability date. Paragraph (c) of this section 
applies to taxable years of controlled foreign corporations beginning 
on or after May 2, 2006, and for tax years of United States 
shareholders with or within which such tax years of the controlled 
foreign corporations ends. Taxpayers may elect to apply paragraph (c) 
of this section to taxable years of controlled foreign corporations 
beginning after December 31, 2004, and for tax years of United States 
shareholders with or within which such tax years of the controlled 
foreign corporations end. If an election is made to apply paragraph 
(b)(1)(vi) of this section to taxable years beginning after December 
31, 2004, then the election must also be made for paragraph (c) of this 
section.
    (2) Expiration date. The applicability of Sec.  1.954-2T(c) will 
expire on July 1, 2011.


0
Par. 7. Section 1.956-2 is amended as follows:
0
1. Paragraph (b)(1)(vi) is revised.
0
2. Paragraph (e) is added.
    The revisions and addition read as follows:


Sec.  1.956-2  Definition of United States property.

* * * * *
    (b) * * *
    (1) * * *
    (vi) [Reserved]. For further guidance, see Sec.  1.956-
2T(b)(1)(vi).
* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.956-2T(e).


0
Par. 8. Section 1.956-2T is amended as follows:
0
1. Paragraphs (a), (b), (b)(1)(i), (b)(1)(ii), (b)(1)(iii), (b)(1)(iv), 
(b)(1)(v), (b)(i)(vi), (c), (d) and (d)(1) are added.
0
2. Paragraph (e) is added.
    The revisions and addition read as follows:


Sec.  1.956-2T  Definition of United States property (temporary).

    (a) through (b)(1)(v) [Reserved]. For further guidance, see Sec.  
1.956-2(a) through (b)(1)(v).
    (vi) Any aircraft, railroad rolling stock, vessel, motor vehicle, 
or container used in the transportation of persons or property in 
foreign commerce and used predominantly outside the United States. 
Whether transportation property described in this subdivision is used 
in foreign commerce and predominantly outside the United States is to 
be determined from all the facts and circumstances of each case. As a 
general rule, such transportation property will be considered to be 
used predominantly outside the United States if 70 percent or more of 
the miles traversed (during the taxable year at the close of which a 
determination is made under section 956(a)(2)) in the use of such 
property are traversed outside the United States or if such property is 
located outside the United States 70 percent of the time during such 
taxable year. Notwithstanding the above, an aircraft or vessel (as the 
term is defined in Sec.  1.954-2T(c)(2)(ii)) is excluded from U.S. 
property if rents derived from leasing such aircraft or vessel are 
excluded from foreign personal holding company income under section 
954(c)(2)(A). See paragraph (e) of this section for the effective/
applicability dates of this paragraph (b)(1)(vi).
    (c) through (d)(1) [Reserved]. For further guidance, see Sec.  
1.956-2(b)(1)(vii) through (d)(1).
* * * * *
    (e) Effective/applicability date. Paragraph (b)(1)(vi) of this 
section applies to taxable years of controlled foreign corporations 
beginning on or after May 2, 2006, and for tax years of United States 
shareholders with or within which such tax years of the controlled 
foreign corporations end. Taxpayers may elect to apply the rule of this 
section to taxable years of controlled foreign corporations beginning 
after December 31, 2004, and for tax years of United States 
shareholders with or within which such tax years of foreign 
corporations end. If an election is made to apply Sec.  1.954-2T(c) to 
taxable years of a controlled foreign corporation beginning after 
December 31, 2004, then the election must also be made for paragraph 
(b)(1)(vi) of this section.
    (2) Expiration date. The applicability of paragraph (b)(1)(vi) of 
this section will expire on July 1, 2011.

    Approved: June 23, 2008.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-14919 Filed 7-2-08; 8:45 am]
BILLING CODE 4830-01-P