[Federal Register Volume 77, Number 121 (Friday, June 22, 2012)]
[Rules and Regulations]
[Pages 37576-37587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15230]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9595]
RIN 1545-BH13


Treatment of Overall Foreign and Domestic Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations with respect to a 
provision of the Internal Revenue Code (Code) relating to the recapture 
of overall domestic losses that was enacted as part of the American 
Jobs Creation Act of 2004 (AJCA). These regulations provide guidance 
regarding 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.

DATES: Effective Date: These regulations are effective on June 22, 
2012.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.904(f)-1(g), 1.904(f)-2(e), 1.904(f)-7(f), 1.904(f)-8(c), 1.904(g)-
1(f), 1.904(g)-2(d), 1.904(g)-3(k), and 1.1502-9(e).

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

SUPPLEMENTARY INFORMATION:

[[Page 37577]]

Background

    On December 21, 2007, a notice of proposed rulemaking by cross-
reference to temporary regulations (REG-141399-07) under section 904 of 
the Code and temporary regulations (TD 9371) (2007 temporary 
regulations) were published in the Federal Register at 72 FR 72645 and 
72 FR 72592, respectively. No written comments were received. A public 
hearing was not requested and none was held. This Treasury decision 
adopts the proposed regulation with the changes discussed in this 
preamble.

Explanation of Changes

I. Dispositions of Property Under Section 904(f)(3)

    Section 904(f)(3) provides that if a taxpayer disposes of certain 
property used or held for use predominantly without the United States 
in a trade or business, gain is recognized on that disposition and 
treated as foreign source income, regardless of whether the gain would 
otherwise be recognized, to the extent of any overall foreign loss 
account in the separate category of foreign source taxable income 
generated by the property. Section 1.904(f)-2(d) provides separate 
rules for dispositions in which gain is recognized irrespective of 
section 904(f)(3) and dispositions in which the gain would not 
otherwise be recognized.
    A question has arisen regarding dispositions in which gain is 
recognized irrespective of section 904(f)(3) and the recognized gain is 
otherwise treated as U.S. source income under the Code. The Treasury 
Department and the IRS believe that the language of section 
904(f)(3)(A) is clear that gain on such dispositions is recharacterized 
as foreign source income only to the extent of the applicable section 
904(f)(3) recapture amount. Consistent with the statutory language, the 
regulations clarify that this limit on recharacterization applies. The 
amount of gain recharacterized as foreign source is equal to the lesser 
of the total recognized gain or the balance in the overall foreign loss 
account remaining after any other overall foreign loss recapture 
pursuant to section 904(f)(1) has been made.

II. Adjustments for Capital Gains and Losses and Qualified Dividend 
Income

    The 2007 temporary regulations provide rules coordinating the 
application of section 904(b), which addresses the effect of capital 
gains and losses on the foreign tax credit limitation, and section 
904(g), which addresses overall domestic losses and the recapture of 
such losses. Section 1.904(g)-1T(c)(2), which defines the term domestic 
loss, provides that if a taxpayer has any capital gains or losses, the 
amount of the domestic loss is determined by taking into account 
adjustments under section 904(b)(2) and Sec.  1.904(b)-1. If the 
taxpayer has capital gains or losses, Sec.  1.904(g)-1T(d)(3) provides 
that the amount by which an overall domestic loss reduces foreign 
source income in a taxable year is determined in accordance with Sec.  
1.904(b)-1(h)(1)(i) and (h)(1)(iii).
    The 2007 temporary regulations followed the approach of the 
coordination rules in Sec.  1.904(b)-1(h), which generally provide that 
adjustments under section 904(b) to capital gains and losses and 
qualified dividend income (section 904(b) adjustments) are taken into 
account first before applying the overall foreign loss provisions of 
section 904(f). These final regulations retain that basic approach; 
however, they revise several provisions of the 2007 temporary 
regulations and add new provisions to implement the mechanics of this 
coordination rule.
    First, Sec. Sec.  1.904(g)-1(c)(2) and (d)(3) are revised regarding 
the calculation of an overall domestic loss. These revisions reflect 
the fact that the regulations under section 904(b) do not provide 
specific adjustments to determine U.S. source loss on a stand-alone 
basis, but rather define the amount of U.S. source loss that offsets 
foreign source taxable income under section 904(f)(5)(D) as adjusted 
foreign taxable income, less adjusted worldwide taxable income. The 
calculation of the overall domestic loss is therefore expressly 
coordinated with the calculation of the section 904(f)(5)(D) amount as 
determined under Sec.  1.904(b)-1(h)(1)(iii).
    Second, Sec.  1.904(g)-2(b) is revised to clarify that section 
904(b) adjustments must be made for capital gains and losses and 
qualified dividend income before determining how much U.S. source 
taxable income is available to recapture an overall domestic loss 
account. Because the regulations under section 904(b) do not provide 
specific adjustments to determine U.S. source taxable income on a 
stand-alone basis, Sec.  1.904(g)-2(b) provides that U.S. source 
taxable income available to recapture an overall domestic loss account 
is determined following the principles of Sec.  1.904(b)-1(h)(1)(i), 
which provides rules on making the section 904(b) adjustments in 
determining foreign source taxable income.
    Third, a new step is added to the ordering rules in Sec.  1.904(g)-
3 to provide that any section 904(b) adjustments for capital gains and 
losses and qualified dividend income are made after determining the 
amount of net operating loss carryover, if any, in Step One, but before 
allocating losses or recapturing loss accounts in steps 3 through 7.
    Finally, the regulations have been revised to clarify that 
coordination with the section 904(b) provisions requires adjustments 
not only to capital gains and losses but to qualified dividend income 
as well.

III. Miscellaneous Revisions

    Other revisions have been made to the 2007 temporary regulations 
that have no intended substantive effect beyond improving the 
readability of the provisions. These include clarifying the term 
``section 904(f)(1) recapture amount'' in Sec.  1.904(f)-2)(c)(1) and 
simplifying the definitions of ``separate limitation loss'' and 
``separate limitation loss account'' in Sec.  1.904(f)-7(b)(3) and (c). 
The explanation for the taxable year in which an overall domestic loss 
is sustained in Sec.  1.904(g)-1(a)(2) is clarified as well.
    Section 1.904(g)-3(i) is reserved. The Treasury Department and the 
IRS will promulgate guidance addressing adjustments required under 
section 904(f)(3) with respect to disposition of property.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of 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.

[[Page 37578]]

Adoption of Amendments to the Regulations

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


0
Par. 2. Section 1.904(f)-0 is amended as follows:
0
1. In Sec.  1.904(f)-1, entries for paragraphs (a)(2), (d)(4), and (g) 
are added.
0
2. In Sec.  1.904(f)-2, entries for paragraphs (c), (c)(1), (d)(3)(i), 
(d)(3)(ii), and (e) are added.
0
3. In Sec. Sec.  1.904(f)-7 and 1.904(f)-8, paragraph entries are 
added.
    The additions and revisions read as follows:


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

* * * * *


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

    (a) * * *
    (2) Application to post-1986 taxable years.
* * * * *
    (d) * * *
    (4) Adjustments for capital gains and losses.
* * * * *
    (g) Effective/applicability date.


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

* * * * *
    (c) Section 904(f)(1) recapture.
    (1) In general.
* * * * *
    (d) * * *
    (3) * * *
    (i) Foreign source gain.
    (ii) U.S. source gain.
* * * * *
    (e) Effective/applicability.


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

    (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.


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

    (a) In general.
    (b) Effect of recharacterization of separate limitation income on 
associated taxes.
    (c) Effective/applicability date.


Sec.  1.904(f)-0T  [Removed]

0
Par. 3. Section 1.904(f)-0T is removed.

0
Par. 4. In Sec.  1.904(f)-1, paragraphs (a)(2), (d)(4), and (g) are 
revised to read as follows:


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

    (a) * * *
    (2) Application to post-1986 taxable years. The principles of 
Sec. Sec.  1.904(f)-1 through 1.904(f)-5 shall apply to any overall 
foreign loss sustained in taxable years beginning after December 31, 
1986, modified so as to take into account the effect of statutory 
amendments.
* * * * *
    (d) * * *
    (4) Adjustments for capital gains and losses and qualified dividend 
income. If a taxpayer has capital gains or losses or qualified dividend 
income, as defined in section 1(h)(11), the taxpayer shall make 
adjustments to such capital gains and losses and qualified dividend 
income to the extent required under section 904(b)(2) and Sec.  
1.904(b)-1 before applying the provisions of Sec.  1.904(f)-1. See 
Sec.  1.904(b)-1(h).
* * * * *
    (g) Effective/applicability date. Paragraphs (a)(2) and (d)(4) of 
this section shall apply to taxable years beginning on or after January 
1, 2012. Taxpayers may choose to apply paragraphs (a)(2) and (d)(4) of 
this section to other taxable years beginning after December 21, 2007, 
including periods covered by 26 CFR 1.904(f)-1T (revised as of April 1, 
2010).


Sec.  1.904(f)-1T  [Removed]

0
Par. 5. Section 1.904(f)-1T is removed.

0
Par. 6. In Sec.  1.904(f)-2, paragraphs (c)(1), (c)(5) Example 4, 
(d)(1), (d)(3), and (e) are revised to read as follows:


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

* * * * *
    (c) * * *
    (1) In general. In a taxable year in which a taxpayer elects the 
benefits of section 901 or section 30A, the section 904(f)(1) recapture 
amount is the amount of foreign source taxable income subject to 
recharacterization in a taxable year in which recapture of an overall 
foreign loss is required under paragraph (a) of this section. The 
section 904(f)(1) recapture amount equals 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 an overall foreign loss account in a 
separate category is the lesser of the balance in that overall foreign 
loss account or the foreign source taxable income for the year in the 
same separate category as the loss account. If, in any taxable year, in 
accordance with sections 164(a) and 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 (net of foreign taxes) in each 
separate category.
* * * * *
    (5) * * *
    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% 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 50% of Y's 
total foreign source taxable income ($1200 x 50% = $600). Therefore, 
pursuant

[[Page 37579]]

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 to $200 in accordance with Sec.  1.904(f)-1(e)(2).
* * * * *
    (d) * * *
    (1) In general. If a taxpayer disposes of property used or held for 
use predominantly without the United States in a trade or business 
during a taxable year and that property generates foreign source 
taxable income subject to a separate limitation to which paragraph (a) 
of this section applies, the applicable overall foreign loss account 
shall be recaptured as provided in paragraphs (d)(2), (d)(3), and 
(d)(4) of this section. See paragraph (d)(5) of this section for 
definitions. See the ordering rules under Sec.  1.904(g)-3(f) and (i) 
for coordination with other loss recapture under section 904(f) and 
(g).
* * * * *
    (3) Dispositions where gain is recognized irrespective of section 
904 (f)(3)--(i) Foreign source gain. If a taxpayer recognizes foreign 
source gain in a separate category on the disposition of property 
described in paragraph (d)(1) of this section, and there is a balance 
in a taxpayer's overall foreign loss account that is attributable to a 
loss in such separate category after applying paragraph (c) of this 
section, an additional portion of such balance shall be recaptured in 
accordance with paragraphs (a) and (b) of this section. The amount 
recaptured shall be the lesser of such balance or the full amount of 
the foreign source gain recognized on the disposition that was not 
previously recharacterized.
    (ii) U.S. source gain. If a taxpayer recognizes U.S. source gain on 
the disposition of property described in paragraph (d)(1) of this 
section, and there is a balance in a taxpayer's overall foreign loss 
account that is attributable to a loss in the separate category to 
which the income generated by such property is assigned after applying 
paragraph (c) of this section, an amount of the gain shall be treated 
as foreign source and an additional portion of such balance equal to 
that amount shall be recaptured in accordance with paragraphs (a) and 
(b) of this section. The amount of gain treated as foreign source and 
the amount of overall foreign loss recaptured shall be the lesser of 
the balance in the overall foreign loss account or the full amount of 
the gain recognized on the disposition.
* * * * *
    (e) Effective/applicability date. Paragraphs (c)(1), (c)(5) Example 
4, (d)(1), and (d)(3) of this section shall apply to taxable years 
beginning on or after January 1, 2012. Taxpayers may choose to apply 
paragraphs (c)(1), (c)(5) Example 4, (d)(1), and (d)(3) of this section 
to other taxable years beginning after December 21, 2007, including 
periods covered by 26 CFR 1.904(f)-2T (revised as of April 1, 2010).


Sec.  1.904(f)-2T  [Removed]

0
Par. 7. Section 1.904(f)-2T is removed.

0
Par. 8. Section 1.904(f)-7 is revised to read as follows:


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

    (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 
reducing such accounts for purposes of section 904(f). Section 
1.904(f)-8 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 
(b)(4) of this section apply for purposes of this section and 
Sec. Sec.  1.904(f)-8 and 1.904(g)-3.
    (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 
section 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 and qualified dividend income, 
as defined in section 1(h)(11), 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)(D)(iii)) properly apportioned or allocated to that 
separate category for the taxable year. Separate limitation losses 
shall be determined by taking into account any adjustments for capital 
gains and losses and qualified dividend income 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 in one or more other separate categories of the 
taxpayer under the rules of Sec.  1.904(g)-3 must establish a separate 
limitation loss account for the loss with respect to each such other 
separate category. The balance in any separate limitation loss account 
represents the amount of such separate limitation loss that is subject 
to recapture in a given taxable year pursuant to Sec.  1.904(f)-8 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 its taxable year to the extent 
that the separate limitation loss reduces separate limitation income in 
one or more other separate categories in that taxable year or in a year 
to which the loss has been carried back. For rules with respect to net 
operating loss carryovers, see paragraph (d)(3) of this section and 
Sec.  1.904(g)-3.
    (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.  1.1502-9 (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 one or more 
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 that is allocated to another 
taxpayer in accordance with

[[Page 37580]]

Sec.  1.1502-9 (relating to consolidated separate limitation losses).
    (2) Reduction for offsetting loss accounts. A separate limitation 
loss account is reduced to take into account any netting of separate 
limitation loss accounts under Sec.  1.904(g)-3(d)(1).
    (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 
and that is recharacterized in accordance with Sec.  1.904(f)-8 
(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 certain dispositions).
    (f) Effective/applicability date. This section applies to taxpayers 
that sustain separate limitation losses in taxable years beginning on 
or after January 1, 2012. Taxpayers may choose to apply this section to 
separate limitation losses sustained in other taxable years beginning 
after December 21, 2007, including periods covered by 26 CFR 1.904(f)-
7T (revised as of April 1, 2010). For rules relating to taxable years 
beginning after December 31, 1986, and on or before December 21, 2007, 
see section 904(f)(5).


Sec.  1.904(f)-7T  [Removed]

0
Par. 8. Section 1.904(f)-7T is removed.

0
Par. 9. Section 1.904(f)-8 is revised to read as follows:


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

    (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 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 aggregate balance in all separate 
limitation loss accounts for the loss category as determined under 
Sec.  1.904(f)-7. 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 all of the loss accounts, then separate 
limitation income in the loss category shall be recharacterized as 
separate limitation income in the other separate categories on a 
proportionate basis. This is determined by multiplying the total 
separate limitation income subject to recharacterization by a fraction, 
the numerator of which is the amount in a particular separate 
limitation loss account and the denominator of which is the total 
amount in all separate limitation loss accounts for the loss category.
    (b) Effect of recharacterization 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 on 
or after January 1, 2012. Taxpayers may choose to apply this section to 
separate limitation losses sustained in other taxable years beginning 
after December 21, 2007, including periods covered by 26 CFR Sec.  
1.904(f)-8T (revised as of April 1, 2010). For rules relating to 
taxable years beginning after December 31, 1986, and on or before 
December 21, 2007, see section 904(f)(5).


Sec.  1.904(f)-8T  [Removed]

0
Par. 10. Section 1.904(f)-8T is removed:

0
Par. 11. Section 1.904(g)-0 is amended by adding the entries for 
Sec. Sec.  1.904(g)-1, 1.904(g)-2, and 1.904(g)-3 to read as follows:


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

* * * * *


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

    (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.


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

    (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.


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 the recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses.

    (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: Section 904(b) adjustments.
    (d) Step Three: Allocation of separate limitation losses.
    (e) Step Four: Allocation of U.S. source losses.
    (f) Step Five: Recapture of overall foreign loss accounts.
    (g) Step Six: Recapture of separate limitation loss accounts.
    (h) Step Seven: Recapture of overall domestic loss accounts.
    (i) [Reserved].
    (j) Examples.
    (k) Effective/applicability date.


Sec.  1.904(g)-0T  [Removed]

0
Par. 12. Section 1.904(g)-0T is removed:

0
Par. 13. Section 1.904(g)-1 is revised to read as follows:


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

    (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 
reducing such accounts for purposes of section 904(g). Section 
1.904(g)-2 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)-3 provides

[[Page 37581]]

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 overall domestic loss account for such loss 
with respect to each separate category, as defined in Sec.  1.904(f)-
7(b)(1), of the taxpayer 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 taxable year. From year to year, amounts may be 
added to or subtracted from the balances in such loss accounts as 
provided in paragraphs (d) and (e) of this section.
    (2) Taxable year in which overall domestic loss is sustained. When 
a domestic loss is carried back or carried forward as part of a net 
operating loss, and offsets foreign source income in a carryover year, 
the resulting overall domestic loss is treated as sustained in the 
later of the year in which the domestic loss was incurred or the year 
to which the loss was carried. Accordingly, 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. In addition, when a taxpayer incurs a domestic 
loss that is carried forward as part of a net 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. An overall domestic loss account is established, 
or increased under paragraph (d) of this section, at the end of the 
taxable year in which the overall domestic loss is treated as sustained 
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)-2 and 1.904(g)-3, 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 or qualified dividend income, as defined in section 1(h)(11), 
the amount of the taxpayer's domestic loss that offsets foreign source 
income must be determined taking into account adjustments under section 
904(b)(2). See Sec.  1.904(g)-1(d)(3) for further guidance.
    (3) Qualified taxable year defined. For purposes of this section 
and Sec. Sec.  1.904(g)-2 and 1.904(g)-3, 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. source gross 
income in accordance with sections 861(b) and 865 and the regulations 
thereunder, including Sec. Sec.  1.861-8 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.  1.1502-9 (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 or qualified dividend income, the amount by 
which a domestic loss is considered to reduce foreign source income in 
a taxable year shall equal the section 904(f)(5)(D) amount determined 
under Sec.  1.904(b)-1(h)(1)(iii), regardless of the amount of domestic 
loss that was determined before taking any section 904(b)(2) 
adjustments into account.
    (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, as 
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.  1.1502-9 (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)-2(c) (relating to 
recapture under section 904(g)(1)).
    (f) Effective/applicability date. This section applies to taxpayers 
that sustain an overall domestic loss for a taxable year beginning on 
or after January 1, 2012. Taxpayers may choose to apply this section to 
overall domestic losses sustained in other taxable years beginning 
after December 31, 2006, including periods covered by 26 CFR Sec.  
1.904(g)-1T (revised as of April 1, 2010).


Sec.  1.904(g)-1T  [Removed]

0
Par. 14. Section 1.904(g)-1T is removed.

0
Par. 15. Section 1.904(g)-2 is revised to read as follows:


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

    (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

[[Page 37582]]

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 chooses the benefits of 
section 901, the taxpayer's foreign tax credit limitation is increased. 
As provided in Sec.  1.904(g)-1(e)(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 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)-1(c)(4). U.S. source taxable income shall be 
determined by taking into account adjustments for capital gains and 
losses and qualified dividend income in a similar manner to the 
adjustments made to foreign source taxable income under section 
904(b)(2) and Sec.  1.904(b)-1, following the principles of Sec.  
1.904(b)-1(h)(1)(i).
    (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 applies is the lesser of the aggregate 
balance of the taxpayer's overall domestic loss accounts or 50 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 taxpayers 
that sustain an overall domestic loss for a taxable year beginning on 
or after January 1, 2012. Taxpayers may choose to apply this section to 
overall domestic losses sustained in other taxable years beginning 
after December 31, 2006, including periods covered by 26 CFR 1.904(g)-
2T (revised as of April 1, 2010).


Sec.  1.904(g)-2T  [Removed]

0
Par. 16. Section 1.904(g)-2T is removed.

0
Par. 17. Section 1.904(g)-3 is revised to read as follows:


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 the recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses.

    (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 the 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 (i) 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 
(i) 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), 
(b)(3), (c), (d), and (e) 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. source 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) 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: Section 904(b) adjustments. The taxpayer shall make 
any required adjustments to capital gains and losses and qualified 
dividend income under section 904(b)(2).
    (d) Step Three: 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 taxable year to reduce its separate limitation income in other 
separate categories on a proportionate basis, and increase its

[[Page 37583]]

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 against each 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 (d)(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 to that extent in accordance with Sec.  1.904(f)-1.
    (e) Step Four: 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 to the 
extent of such allocation in accordance with Sec.  1.904(g)-1.
    (f) Step Five: 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 (d)(1) and (e) of 
this section, then the taxpayer shall recapture prior year overall 
foreign losses, if any, and reduce overall foreign loss accounts in 
accordance with Sec.  1.904(f)-2.
    (g) Step Six: Recapture of separate limitation loss accounts. To 
the extent the taxpayer has remaining separate limitation income for 
the year after the application of paragraph (f) of this section, then 
the taxpayer shall recapture prior year separate limitation losses, if 
any, in accordance with Sec.  1.904(f)-8 and reduce separate limitation 
loss accounts in accordance with Sec.  1.904(f)-7.
    (h) Step Seven: 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 allocated under 
paragraph (d) of this section, but not increased by any recapture of 
overall foreign loss accounts under paragraph (f) 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 (d)(2) of this section, then the taxpayer shall recapture its 
prior year overall domestic losses, if any, and reduce overall domestic 
loss accounts in accordance with Sec.  1.904(g)-2.
    (i) [Reserved]
    (j) 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                   U.S.
------------------------------------------------------------------------
          ($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                   U.S.
------------------------------------------------------------------------
            $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                   U.S.
------------------------------------------------------------------------
            $100                     $200                   ($90)
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 4, 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                   U.S.
------------------------------------------------------------------------
          ($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                   U.S.
------------------------------------------------------------------------
            $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                   U.S.
------------------------------------------------------------------------
            $100                   ($300)                    $400
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 3, $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                   U.S.
------------------------------------------------------------------------
            $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 ($300 x 
$200/$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 ($300 x $200/$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:

[[Page 37584]]



------------------------------------------------------------------------
        General                  Passive                   U.S.
------------------------------------------------------------------------
          ($150)                   ($250)                    $400
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 3, 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                   U.S.
------------------------------------------------------------------------
            $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                   U.S.
------------------------------------------------------------------------
            $100                     $100                  ($200)
------------------------------------------------------------------------

    (iii) Loss allocation. Under Step 4, 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                   U.S.
------------------------------------------------------------------------
            $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 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                   U.S.
------------------------------------------------------------------------
            $400                   ($300)                  ($100)
------------------------------------------------------------------------

    (iii) Loss allocation. (A) Under Step 3, 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 4, 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                               U.S.
------------------------------------------------------------------------
          OFL               OFL SLL (Passive)         ODL  (Passive)
------------------------------------------------------------------------
            $200                     $200                    $400
------------------------------------------------------------------------

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

------------------------------------------------------------------------
        General                  Passive                   U.S.
------------------------------------------------------------------------
            $400                   ($100)                    $600
------------------------------------------------------------------------

    (ii) Loss allocation. Under Step 3, 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 5, 50% 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 6, $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 7, 50% 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.
    (vi) Results. (A) After the allocation of loss and recapture of 
loss accounts, X has the following taxable income and losses for 
2008:

------------------------------------------------------------------------
        General                  Passive                   U.S.
------------------------------------------------------------------------
             $50                     $400                    $450
------------------------------------------------------------------------

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

----------------------------------------------------------------------------------------------------------------
                         General                                    Passive                      U.S.
----------------------------------------------------------------------------------------------------------------
            OFL                     SLL  (Passive)              SLL  (General)              ODL  (Passive)
----------------------------------------------------------------------------------------------------------------
                   $50                           $0                          $0                        $100
----------------------------------------------------------------------------------------------------------------

    (k) Effective/applicability date. This section applies to taxable 
years beginning on or after January 1, 2012. Taxpayers may choose to 
apply this section to other taxable years beginning after December 31, 
2006, including

[[Page 37585]]

periods covered by 26 CFR Sec.  1.904(g)-3T (revised as of April 1, 
2010).


Sec.  1.904(g)-3T  [Removed]

0
Par. 18. Section 1.904(g)-3T is removed.

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Par. 19. 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.

    (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:
    (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 (a)(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) will 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 will 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 section 
904(f)(3) recharacterize 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 section 904(f)(5)(F) recharacterize 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 section 904(f)(5)(F) apply 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 section 904(f)(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

[[Page 37586]]

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 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, fair market value, or alternative tax 
book 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

[[Page 37587]]

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 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 $2,000/$8,000) and a $5 
CSLL account for the general category with respect to the passive 
category ($20 x $2,000/$8,000). 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% 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% 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% 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 on or after January 1, 2012, for 
which the return is due (without extensions) after June 22, 2012. 
Taxpayers may choose to apply the provisions of this section to other 
consolidated return years beginning after December 31, 2006, including 
periods covered by 26 CFR 1.1502-9T (revised as of April 1, 2010). 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).


Sec.  1.1502-9T  [Removed]

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Par. 20. Section 1.1502-9T is removed.

 Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 13, 2012.
Emily S. McMahon,
 Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-15230 Filed 6-21-12; 8:45 am]
BILLING CODE 4830-01-P