[Federal Register Volume 77, Number 122 (Monday, June 25, 2012)]
[Proposed Rules]
[Pages 37837-37838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15443]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-134935-11]
RIN 1545-BK55


Overall Foreign Loss Recapture on Property Dispositions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: These proposed regulations provide guidance regarding the 
coordination of the rules for determining high-taxed income with 
capital gains adjustments and the allocation and recapture of overall 
foreign losses and overall domestic losses, as well as the coordination 
of the recapture of overall foreign losses on certain dispositions of 
property and other rules concerning overall foreign losses and overall 
domestic losses. These regulations affect individuals and corporations 
claiming foreign tax credits.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 24, 2012.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-134935-11), room 5203, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
134935-11), Courier's desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20044, or sent electronically, via the 
Federal eRulemaking Portal at www.regulations.gov (IRS REG-134935-11).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey L. 
Parry, (202) 622-3850; concerning submissions of comments, 
Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

1. High-Taxed Income

    Section 904(d)(2)(F) of the Internal Revenue Code (Code) provides 
that certain high-taxed income that would otherwise be passive income 
will be treated as general category income if the foreign taxes paid or 
accrued, and deemed paid or accrued, with respect to such income exceed 
the highest rate of tax specified in section 1 or section 11, whichever 
applies, multiplied by the amount of such income. Section 1.904-4(c) 
provides detailed rules for determining whether income is high-taxed, 
including rules for testing income based on subgroups within passive 
income and allocating expenses, losses and other deductions to that 
income.
    Questions have arisen regarding the coordination of these rules 
with the capital gains adjustments under section 904(b) and loss 
allocations and loss account recapture under section 904(f) and (g). 
The proposed regulations at Sec.  1.904-4(c) clarify that the 
determination as to whether income is high-taxed is made before taking 
into account any adjustments under section 904(b) or any allocation of 
losses or recapture of loss accounts under section 904(f) and (g). The 
Treasury Department and the IRS believe these ordering rules are 
consistent with the use in section 904(d)(2)(F) of the highest 
statutory U.S. tax rate, rather than the taxpayer's pre-credit 
effective U.S. tax rate, to determine whether income is high-taxed.

2. 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.
    Questions have arisen regarding the coordination of overall foreign 
loss recapture under section 904(f)(3) with other provisions of section 
904(f) and (g). Accordingly, these proposed regulations revise the 
ordering rules under Sec.  1.904(g)-3 that generally provide for the 
coordination of section 904(f) and (g) to include specific references 
for taking into account overall foreign loss recapture under section 
904(f)(3).
    In the case of dispositions in which gain is recognized 
irrespective of section 904(f)(3), the overall foreign loss recapture 
is included in Step Five along with other general overall foreign loss 
recapture.
    Dispositions in which the gain would not otherwise be recognized 
are addressed separately. Section 1.904(f)-2(d)(4)(i) provides, in 
part, that where gain would not otherwise be recognized on a 
disposition, the amount of gain that will be recognized under section 
904(f)(3) is equal to the balance in the applicable foreign loss 
account after taking into account any amounts recaptured from the 
account from other recognized income for the year (as well as certain 
other adjustments). In other words, the additional amount of income to 
be recognized can only be determined after the first seven steps of the 
ordering rules in Sec.  1.904(g)-3 have been completed. Accordingly, a 
new Step Eight is added to those ordering rules to address the 
recognition of the additional income under section 904(f)(3) and the 
corresponding recapture of the applicable overall foreign loss account. 
New Step Eight also provides that if the additional recognition of gain 
increases the allowable amount of the net operating loss deduction, 
then the recapture of the overall foreign loss account occurs first 
before the additional net operating loss carryover is taken into 
account to offset all or a portion of that gain. The Treasury 
Department and the IRS believe priority should be given to the 
additional recapture of the overall foreign loss account pursuant to 
section 904(f)(3) before any net operating loss carryover reduces that 
gain. This is because the primary reason for recognizing the otherwise 
unrecognized gain is to recapture the overall foreign loss account.

Proposed Effective Date

    The regulations, as proposed, will apply to any taxable year ending 
on or after the date of publication of a Treasury decision adopting 
these rules as final regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a

[[Page 37838]]

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, these regulations have 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules. All comments will be available for 
public inspection and copying. A public hearing will be scheduled if 
requested in writing by any person that timely submits comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. Section 1.904-4 is amended by adding paragraph (c)(2)(iii) 
and by adding a sentence at the end of paragraph (n) to read as 
follows:


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

* * * * *
    (c) * * *
    (2) * * *
    (iii) Coordination with section 904(b), (f) and (g). The 
determination of whether foreign-source passive income is high-taxed is 
made before taking into account any adjustments under section 904(b) or 
any allocation or recapture of a separate limitation loss, overall 
foreign loss or overall domestic loss under section 904(f) and (g).
* * * * *
    (n) * * * Paragraph (c)(2)(iii) of this section applies to taxable 
years ending on or after the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register.
    Par. 3. Section 1.904(g)-3 is amended by revising paragraph (f), 
adding paragraph (i) and adding a sentence at the end of paragraph (k) 
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.

* * * * *
    (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, in accordance with Sec.  1.904(f)-2, and reduce 
overall foreign loss accounts in accordance with Sec.  1.904(f)-2. Such 
recapture shall include amounts determined under Sec.  1.904(f)-2(c) 
and (d)(3) but not Sec.  1.904(f)-2(d)(4).
* * * * *
    (i) Step Eight: Dispositions under section 904(f)(3) in which gain 
would not otherwise be recognized. The taxpayer shall determine the 
amount of gain that would otherwise not be recognized but that must be 
recognized in accordance with Sec.  1.904(f)-2(d)(4) (not exceeding the 
taxpayer's applicable overall foreign loss account) and then apply 
Sec.  1.904(f)-2(a) and (b) to recapture overall foreign loss accounts 
in an amount equal to the gain recognized. To the extent this 
recognition of gain in a taxable year increases the amount of a net 
operating loss carryover to that taxable year, paragraphs (b) through 
(e) of this section shall be applied to determine the allocation of the 
additional net operating loss, but only after the applicable overall 
foreign loss account has been recaptured as provided in this paragraph 
(i).
    (k) * * * Paragraphs (f) and (i) of this section apply to taxable 
years ending on or after the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-15443 Filed 6-22-12; 8:45 am]
BILLING CODE 4830-01-P