[Federal Register Volume 81, Number 235 (Wednesday, December 7, 2016)]
[Proposed Rules]
[Pages 88562-88589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28759]



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Vol. 81

Wednesday,

No. 235

December 7, 2016

Part VI





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Covered Asset Acquisitions; Proposed Rule

  Federal Register / Vol. 81 , No. 235 / Wednesday, December 7, 2016 / 
Proposed Rules  

[[Page 88562]]


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Department of the Treasury

Internal Revenue Service

26 CFR Part 1

[REG 129128-14]
RIN 1545-BM36


Covered Asset Acquisitions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference in part to 
temporary regulations.

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SUMMARY: This document contains proposed Income Tax Regulations under 
section 901(m) of the Internal Revenue Code (Code) with respect to 
transactions that generally are treated as asset acquisitions for U.S. 
income tax purposes and either are treated as stock acquisitions or are 
disregarded for foreign income tax purposes. In the Rules and 
Regulations section of this issue of the Federal Register, temporary 
regulations are being issued under section 901(m) (the temporary 
regulations), the text of which serves as the text of a portion of 
these proposed regulations. These regulations are necessary to provide 
guidance on applying section 901(m). These regulations affect taxpayers 
claiming foreign tax credits.

DATES: Comments and requests for a public hearing must be received by 
March 7, 2017.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-129128-14), Room 5205, 
Internal Revenue Service, P.O. 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-
129128-14), 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-129128-14).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey L. 
Parry, (202) 317-6936; concerning submissions of comments, Regina 
Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. Section 901(m)

    Section 212 of the Education Jobs and Medicaid Assistance Act 
(EJMAA), enacted on August 10, 2010 (Pub. L. 111-226), added section 
901(m) to the Code. Section 901(m)(1) provides that, in the case of a 
covered asset acquisition (CAA), the disqualified portion of any 
foreign income tax determined with respect to the income or gain 
attributable to relevant foreign assets (RFAs) will not be taken into 
account in determining the foreign tax credit allowed under section 
901(a), and, in the case of foreign income tax paid by a section 902 
corporation (as defined in section 909(d)(5)), will not be taken into 
account for purposes of section 902 or 960. Instead, the disqualified 
portion of any foreign income tax (the disqualified tax amount) is 
permitted as a deduction. See section 901(m)(6).
    Under section 901(m)(2), a CAA is (i) a qualified stock purchase 
(as defined in section 338(d)(3)) to which section 338(a) applies; (ii) 
any transaction that is treated as an acquisition of assets for U.S. 
income tax purposes and as the acquisition of stock of a corporation 
(or is disregarded) for purposes of a foreign income tax; (iii) any 
acquisition of an interest in a partnership that has an election in 
effect under section 754; and (iv) to the extent provided by the 
Secretary, any other similar transaction. The Joint Committee on 
Taxation's technical explanation of EJMAA states that it is anticipated 
that the Secretary will issue regulations identifying other similar 
transactions that result in an increase to the basis of assets for U.S. 
income tax purposes without a corresponding increase for foreign income 
tax purposes. Staff of the Joint Committee on Taxation, Technical 
Explanation of the Revenue Provisions of the Senate Amendment to the 
House Amendment to the Senate Amendment to H.R. 1586, Scheduled for 
Consideration by the House of Representatives on August 10, 2010, at 14 
(Aug. 10, 2010) (JCT Explanation).
    Section 901(m)(3)(A) provides that the term ``disqualified 
portion'' means, with respect to any CAA, for any taxable year, the 
ratio (expressed as a percentage) of (i) the aggregate basis 
differences (but not below zero) allocable to such taxable year with 
respect to all RFAs; divided by (ii) the income on which the foreign 
income tax referenced in section 901(m)(1) is determined. If the 
taxpayer fails to substantiate the income on which the foreign income 
tax is determined to the satisfaction of the Secretary, such income 
will be determined by dividing the amount of such foreign income tax by 
the highest marginal tax rate applicable to the taxpayer's income in 
the relevant jurisdiction. The JCT Explanation states that for this 
purpose the income on which the foreign income tax is determined is the 
income as determined under the law of the relevant jurisdiction. See 
JCT Explanation at 14.
    Section 901(m)(3)(B)(i) provides the general rule that the basis 
difference with respect to any RFA will be allocated to taxable years 
using the applicable cost recovery method for U.S. income tax purposes. 
Section 901(m)(3)(B)(ii) provides that, except as otherwise provided by 
the Secretary, if there is a disposition of an RFA, the basis 
difference allocated to the taxable year of the disposition will be the 
excess of the basis difference of such asset over the aggregate basis 
difference of such asset that has been allocated to all prior taxable 
years. The statute further provides that no basis difference with 
respect to such asset will be allocated to any taxable year thereafter.
    Section 901(m)(3)(C)(i) provides that basis difference means, with 
respect to any RFA, the excess of: (i) The adjusted basis of such asset 
immediately after the CAA, over (ii) the adjusted basis of such asset 
immediately before the CAA. If the adjusted basis of an RFA immediately 
before the CAA exceeds the adjusted basis of the RFA immediately after 
the CAA (that is, where the adjusted basis of an asset with a built-in 
loss is reduced in a CAA), such excess is taken into account as a basis 
difference of a negative amount. See section 901(m)(3)(C)(ii).
    The JCT Explanation states that, for purposes of determining basis 
difference, it is the tax basis for U.S. income tax purposes that is 
relevant and not the tax basis as determined under the law of the 
relevant jurisdiction. See JCT Explanation at 14. However, the JCT 
Explanation further states that it is anticipated that the Secretary 
will issue regulations identifying those circumstances in which, for 
purposes of determining the adjusted basis of such assets immediately 
before the CAA, it may be acceptable to use foreign basis or another 
reasonable method. Id.
    Section 901(m)(4) provides that an RFA means, with respect to a 
CAA, any asset (including goodwill, going concern value, or other 
intangible) with respect to such acquisition if income, deduction, 
gain, or loss attributable to such asset is taken into account in 
determining the foreign income tax referenced in section 901(m)(1).
    Section 901(m)(7) provides that the Secretary may issue regulations 
or other guidance as is necessary or appropriate to carry out the 
purposes of section 901(m), including to exempt from its application 
certain CAAs and RFAs with respect to which the basis difference is de 
minimis. The JCT

[[Page 88563]]

Explanation states that regulations may also exclude from the 
application of section 901(m) CAAs that are not taxable for U.S. income 
tax purposes, or in which the basis of the RFAs is also increased for 
purposes of the law of the relevant foreign jurisdiction. See JCT 
Explanation at 16.
    Section 901(m) generally applies to CAAs occurring after December 
31, 2010. Section 901(m), however, does not apply to any CAA with 
respect to which the transferor and transferee are not related if the 
acquisition is made pursuant to a written agreement that was binding on 
January 1, 2011, and at all times thereafter; described in a ruling 
request submitted to the IRS on or before July 29, 2010; or described 
on or before January 1, 2011, in a public announcement or in a filing 
with the Securities and Exchange Commission. See EJMAA, section 212(b).

II. Notices 2014-44 and 2014-45

    The Department of the Treasury (Treasury Department) and the IRS 
issued Notice 2014-44 (2014-32 I.R.B. 270 (July 21, 2014)) and Notice 
2014-45 (2014-34 I.R.B. 388 (July 29, 2014)), announcing the intent to 
issue regulations addressing the application of section 901(m) to 
dispositions of RFAs following CAAs and to CAAs described in section 
901(m)(2)(C) (regarding section 754 elections). In addition, the 
notices announced the intent to issue regulations providing successor 
rules for the continued application of section 901(m) after subsequent 
transfers of RFAs with remaining basis difference. The temporary 
regulations issued in the Rules and Regulations section of this issue 
of the Federal Register provide the rules described in those Notices.

Explanation of Provisions

I. Overview

    These proposed regulations provide rules for computing the 
disqualified portion of foreign income taxes under section 901(m). 
Proposed Sec.  1.901(m)-1 provides definitions that apply for purposes 
of the proposed regulations. Proposed Sec.  1.901(m)-2 identifies the 
transactions that are CAAs, including additional categories of 
transactions that are identified as CAAs pursuant to the authority 
granted in section 901(m)(2)(D), and provides rules for identifying 
assets that are RFAs with respect to a CAA. Proposed Sec.  1.901(m)-3 
provides rules for computing the disqualified portion of foreign income 
taxes, describes the treatment under section 901(m)(1) of the 
disqualified portion, and provides rules for determining whether and to 
what extent basis difference that is assigned to a given taxable year 
is carried over to subsequent taxable years. Proposed Sec.  1.901(m)-4 
provides rules for determining the basis difference with respect to an 
RFA, including an election to use foreign basis for purposes of this 
determination. Proposed Sec.  1.901(m)-5 provides rules for taking into 
account basis difference under an applicable cost recovery method or as 
a result of a disposition of an RFA, rules for allocating that basis 
difference, when necessary, to one or more persons subject to section 
901(m), and rules for assigning that basis difference to a U.S. taxable 
year. Proposed Sec.  1.901(m)-6 provides successor rules for applying 
section 901(m) to subsequent transfers of RFAs that have basis 
difference that has not yet been fully taken into account, as well as 
for transferring an aggregate basis difference carryover of a person 
subject to section 901(m) either to another aggregate basis difference 
carryover account of such person or to another person subject to 
section 901(m). Proposed Sec.  1.901(m)-7 provides de minimis rules 
under which certain basis differences are not taken into account under 
section 901(m). Proposed Sec.  1.901(m)-8 provides guidance on the 
application of section 901(m) to pre-1987 foreign income taxes and 
anti-abuse rules relating to built-in loss assets.

II. Relevance of the Terms Section 901(m) Payor, Foreign Payor, RFA 
Owner (U.S.), and RFA Owner (Foreign)

    As provided under proposed Sec.  1.901(m)-1, a section 901(m) payor 
is a person that is eligible to claim the foreign tax credit allowed 
under section 901(a), regardless of whether the person chooses to claim 
the foreign tax credit, as well as a section 902 corporation. 
Therefore, a section 901(m) payor is the person required to compute a 
disqualified tax amount when section 901(m) applies. The foreign payor 
is the individual or entity (including a disregarded entity) subject to 
a foreign income tax. The RFA owner (U.S.) is the person that owns one 
or more RFAs for U.S. income tax purposes and therefore is required to 
report, or otherwise track, items of income, deduction, gain, or loss 
attributable to the RFAs for purposes of computing the U.S. taxable 
income of the RFA owner (U.S.). Similarly, the RFA owner (foreign) is 
the individual or entity (including a disregarded entity) that owns one 
or more RFAs for purposes of a foreign income tax and that therefore 
generally would report, or otherwise track, items of income, deduction, 
gain, or loss attributable to the RFAs for purposes of determining 
income reported on a foreign income tax return.
    The section 901(m) payor may also be the foreign payor, the RFA 
owner (U.S.), or the RFA owner (foreign), or any combination thereof; 
alternatively, the section 901(m) payor may not be any of them 
depending upon the application of the entity classification rules for 
U.S. income tax purposes. Further, the foreign payor and the RFA owner 
(foreign) may or may not be the same person for purposes of a foreign 
income tax depending upon whether the RFA owner (foreign) is a fiscally 
transparent entity for purposes of the foreign income tax. For example, 
if a foreign corporation, which is a section 902 corporation, owns RFAs 
and is the entity that is subject to a foreign income tax under the 
relevant foreign law, the foreign corporation is the section 901(m) 
payor, foreign payor, RFA owner (U.S.), and RFA owner (foreign). As 
another example, if two U.S. corporations each own a 50 percent 
interest in a partnership and the partnership owns a disregarded entity 
that is subject to a foreign income tax and that, for purposes of the 
foreign income tax, owns one or more RFAs, the corporate partners are 
each a section 901(m) payor, the disregarded entity is the foreign 
payor and the RFA owner (foreign), and the partnership is the RFA owner 
(U.S.).
    Finally, because the computation of a section 901(m) payor's 
disqualified tax amount is based on items determined at the level of 
the foreign payor, the RFA owner (U.S.), and the RFA owner (foreign), 
the regulations provide rules for allocating those items when the 
section 901(m) payor is not the foreign payor, the RFA owner (U.S.), or 
the RFA owner (foreign), or any combination thereof.

III. CAAs and RFAs

A. CAAs

    Proposed Sec.  1.901(m)-2(b) identifies six categories of 
transactions that constitute CAAs, three of which are specified in the 
statute (incorporated by cross reference to the temporary regulations) 
and three of which are additional categories of transactions that are 
identified as CAAs pursuant to the authority granted under section 
901(m)(2)(D). In addition, for transactions that occurred on or after 
January 1, 2011, and before the general applicability date of the 
temporary regulations (referred to as the ``transition period'' in the 
preamble to the temporary regulations and in this

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preamble), proposed Sec.  1.901(m)-2(d) (incorporated by cross 
reference to the temporary regulations) defines CAAs by reference to 
the statutory definition under section 901(m)(2). Transactions are CAAs 
regardless of whether any gain, income, loss, or deduction realized in 
connection with the transaction is taken into account for U.S. income 
tax purposes. However, basis difference resulting from a CAA may not be 
taken into account under section 901(m) pursuant to de minimis rules in 
proposed Sec.  1.901(m)-7.
    Proposed Sec.  1.901(m)-2(b)(1) through (4) describes four specific 
types of transactions that are generally expected to result in an 
increase in the basis of assets for U.S. income tax purposes without a 
corresponding increase in basis for foreign income tax purposes. This 
is because these transactions generally are treated as an acquisition 
of assets for U.S. income tax purposes and either are treated as an 
acquisition of stock or of a partnership interest or are disregarded 
for foreign income tax purposes. The other two categories of 
transactions described in proposed Sec.  1.901(m)-2(b)(5) and (6), 
which involve an acquisition of assets for both U.S. and foreign income 
tax purposes, are CAAs only if the transaction results in an increase 
in the basis of an asset for U.S. income tax purposes but not for 
foreign income tax purposes. Such transactions may include, for 
example, an acquisition of assets that is structured to avoid the 
application of the Code's corporate nonrecognition provisions, such as 
section 332, 351, or 361, while still qualifying for nonrecognition 
treatment for foreign income tax purposes.

B. RFAs

    Proposed Sec.  1.901(m)-2(c)(1) incorporates by cross reference to 
the temporary regulations the general definition of an RFA, which 
provides that an RFA means, with respect to a foreign income tax and a 
CAA, any asset (including goodwill, going concern value, or other 
intangible) subject to the CAA that is relevant in determining foreign 
income for purposes of the foreign income tax. In addition, for CAAs 
that occurred during the transition period, proposed Sec.  1.901(m)-
2(d) (incorporated by cross reference to the temporary regulations) 
defines RFAs by reference to the statutory definition under section 
901(m)(4).
    Proposed Sec.  1.901(m)-2(c)(2) generally provides that an asset is 
relevant in determining foreign income if income, deduction, gain, or 
loss attributable to such asset is or would be taken into account in 
determining foreign income immediately after the CAA. Proposed Sec.  
1.901(m)-2(c)(3) provides, however, that, after a CAA, an asset will 
become an RFA with respect to another foreign income tax if, pursuant 
to a plan or series of related transactions that have a principal 
purpose of avoiding the application of section 901(m), an asset that is 
not relevant in determining foreign income for purposes of that foreign 
income tax immediately after the CAA later becomes relevant in 
determining such foreign income. A principal purpose of avoiding 
section 901(m) will be deemed to exist if income, deduction, gain, or 
loss attributable to the asset is taken into account in determining 
such foreign income within the one-year period following the CAA.

IV. Disqualified Tax Amount and Aggregate Basis Difference Carryover

A. Disqualified Tax Amount

    Proposed Sec.  1.901(m)-3 sets forth the rules for computing the 
disqualified portion of foreign income taxes (referred to in the 
regulations as the ``disqualified tax amount''). Proposed Sec.  
1.901(m)-3 also sets forth the treatment under section 901(m)(1) of the 
disqualified tax amount and provides rules for determining whether and 
to what extent basis difference that is assigned to a given U.S. 
taxable year is carried over to subsequent U.S. taxable years (referred 
to in the regulations as ``aggregate basis difference carryover'').
    In general, a disqualified tax amount is computed separately for 
each foreign tax return that takes into account income, gain, 
deduction, or loss from one or more RFAs in computing the foreign 
taxable income and for each section 901(m) payor that pays or accrues, 
or that is considered to pay or accrue, a portion of the foreign income 
taxes reflected on the foreign tax return. Furthermore, if the foreign 
income taxes relate to more than one separate category described in 
Sec.  1.904-4(m) (including section 904(d) categories), a separate 
disqualified tax amount computation is done for each such separate 
category. Members of a U.S. affiliated group of corporations (as 
defined in section 1504) that file a consolidated return are each 
treated as a separate section 901(m) payor; therefore, disqualified tax 
amounts are computed at the member-level.
    The proposed regulations refer to the total taxable income (or 
loss) that is computed under foreign law for a foreign taxable year and 
reflected on a foreign tax return as ``foreign income'' and the total 
amount of tax reflected on a foreign tax return as a ``foreign income 
tax amount.'' Thus, foreign income does not include income that is 
exempt from the foreign income tax. The proposed regulations use the 
term ``foreign country creditable taxes'' (or ``FCCTs'') to refer to 
any foreign income taxes imposed by another foreign country or 
possession of the United States that were allowed under the relevant 
foreign law as a credit to reduce the foreign income tax amount and for 
which a credit is allowed under section 901 or 903. In addition, the 
proposed regulations define ``foreign income tax '' (by cross reference 
to the temporary regulations) to mean any income, war profits, or 
excess profits tax for which a credit is allowable under section 901 or 
903, other than any withholding tax determined on a gross basis as 
described in section 901(k)(1)(B).
    The foreign income, foreign income tax amount, and any FCCTs are 
determined at the foreign-payor level. If the foreign payor is not a 
section 901(m) payor, current law provides rules for determining the 
person that is considered to pay or accrue a foreign income tax amount 
for purposes of the foreign tax credit (see, for example, Sec. Sec.  
1.702-1(a)(6) and 1.901-2(f)). Those rules are not changed by these 
proposed regulations and therefore apply for purposes of determining 
the extent to which a foreign income tax amount is paid or accrued by, 
or considered paid or accrued by, a section 901(m) payor for purposes 
of section 901(m).
    Proposed Sec.  1.901(m)-3(b) sets forth the treatment of the 
disqualified tax amount and the computation of the disqualified tax 
amount. Pursuant to section 901(m)(1) and proposed Sec.  1.901(m)-
3(b)(1), the disqualified tax amount is not taken into account for 
purposes of determining foreign tax credits under section 901, 902, or 
960. A section 901(m) payor must compute a disqualified tax amount for 
any U.S. taxable year for which it is assigned a portion of the basis 
difference with respect to one or more RFAs.
    The disqualified tax amount is the lesser of the tentative 
disqualified tax amount and the foreign income tax amount paid or 
accrued by, or considered paid or accrued by, a section 901(m) payor. 
The tentative disqualified tax amount is determined using a modified 
version of the formula provided in section 901(m)(3). To determine the 
tentative disqualified tax amount, the foreign income tax amount paid 
or accrued by, or considered paid or accrued by, the section 901(m) 
payor for its U.S. taxable year (multiplicand) is multiplied by a ratio 
(disqualified ratio), the numerator of which is the sum of the portion 
of the basis

[[Page 88565]]

difference for all RFAs that is taken into account and assigned to the 
U.S. taxable year of the section 901(m) payor, and the denominator of 
which is the portion of the foreign income reflected on the foreign tax 
return that relates to the foreign income tax amount included in the 
multiplicand. The numerator and the denominator of the disqualified 
ratio are referred to in the proposed regulations as the ``aggregate 
basis difference'' and ``allocable foreign income,'' respectively.
    Allocable foreign income (the denominator of the disqualified 
ratio) and the foreign income tax amount (the multiplicand) are 
determined using the total amount of foreign income and foreign income 
tax amount reflected on the foreign income tax return that are 
allocable to the section 901(m) payor, instead of by reference only to 
the amounts determined with respect to the RFAs. The Treasury 
Department and the IRS have determined that this approach appropriately 
carries out the purposes of section 901(m) while avoiding the 
administrative and compliance burdens that would result from a 
requirement to trace amounts of income to RFAs and identify the portion 
of foreign income taxes imposed on that income.
    If a foreign income tax amount is computed taking into account an 
FCCT, the multiplicand of the tentative disqualified tax amount 
computation is the sum of the foreign income tax amount and any FCCTs 
paid or accrued by, or considered paid or accrued by, the section 
901(m) payor. The Treasury Department and the IRS have determined that 
it is appropriate to include any FCCTs in the multiplicand to better 
reflect the effective tax rate imposed on the aggregate basis 
difference. However, the tentative disqualified tax amount is reduced 
(but not below zero) to the extent any portion of the FCCTs is itself 
treated as a disqualified tax amount of the section 901(m) payor with 
respect to a different foreign income tax.
    The aggregate basis difference in the numerator includes cost 
recovery amounts and disposition amounts taken into account with 
respect to RFAs and assigned to the U.S. taxable year of the section 
901(m) payor under proposed Sec.  1.901(m)-5, as discussed in section 
VI. of this the Explanation of Provisions of this preamble. When the 
numerator and denominator are both positive amounts, the amount of 
aggregate basis difference included in the numerator is limited to the 
amount of foreign income in the denominator of the disqualified ratio 
(in other words, the allocable foreign income). This limitation ensures 
that multiplying the foreign income tax amount included in the 
multiplicand by the disqualified ratio would not produce a disqualified 
tax amount greater than 100 percent of the foreign income tax amount. 
See section IV.B. of the Explanation of Provisions section of this 
preamble for the treatment of any excess of the aggregate basis 
difference over the allocable foreign income as an aggregate basis 
difference carryover.
    The denominator of the disqualified ratio is the allocable foreign 
income. When the entire foreign income tax amount reflected on a 
foreign tax return is paid or accrued by, or considered paid or accrued 
by, a single section 901(m) payor for U.S. income tax purposes, the 
allocable foreign income is simply the total foreign income reflected 
on the foreign tax return. In general, this will be the case when the 
section 901(m) payor is the foreign payor or owns a disregarded entity 
that is the foreign payor, unless there is a change in ownership or a 
change in entity classification in the foreign payor requiring an 
allocation of the foreign income tax amount of the foreign payor (a 
mid-year transaction).
    If, however, the foreign income tax amount reflected on a foreign 
tax return is allocated to more than one person for U.S. income tax 
purposes, the allocable foreign income in the denominator of the 
disqualified ratio for a particular section 901(m) payor is equal to 
the portion of the foreign income reflected on the foreign tax return 
that relates to the foreign income tax amount allocated to, and 
considered paid or accrued by, that section 901(m) payor (and therefore 
that is included in the multiplicand of the tentative disqualified tax 
amount computation). Proposed Sec.  1.901(m)-3(b)(2)(iii)(C) provides 
guidance on how to determine the allocable foreign income in three 
types of cases: (i) The foreign income tax amount is allocated to a 
section 901(m) payor because the foreign payor is involved in a mid-
year transaction, such as the transfer of a disregarded entity during 
the disregarded entity's foreign taxable year or acquisitions involving 
elections under section 338 or 336(e); (ii) the foreign income tax 
amount is allocated to a section 901(m) payor that is a partner because 
the foreign payor is a partnership for U.S. income tax purposes that is 
legally liable for the foreign income tax amount under Sec.  1.901-
2(f)(4)(i) (or the foreign payor is a disregarded entity and its assets 
are owned for U.S. income tax purposes by an entity that is treated as 
a partnership for U.S. income tax purposes and that is legally liable 
for the foreign income tax amount under Sec.  1.901-2(f)(4)(ii)); and 
(iii) the foreign income tax amount is allocated to a section 901(m) 
payor under Sec.  1.901-2(f)(3)(i) because the section 901(m) payor is 
a member of a group whose income is taxed on a combined basis for 
foreign income tax purposes.
    Notwithstanding the rules described in the two preceding paragraphs 
for determining allocable foreign income, if a section 901(m) payor 
fails to substantiate its allocable foreign income to the satisfaction 
of the Secretary, then proposed Sec.  1.901(m)-3(b)(2)(iii)(D) provides 
that allocable foreign income will equal the amount determined by 
dividing the sum of the foreign income tax amount and the FCCTs that 
are paid or accrued by, or considered paid or accrued by, the section 
901(m) payor, by the highest marginal tax rate applicable to income of 
the foreign payor under the relevant foreign income tax. See section 
901(m)(3)(A).
    If the numerator is less than zero, the denominator is less than or 
equal to zero, or the multiplicand is zero, the tentative disqualified 
tax amount (and therefore the disqualified tax amount) is zero. If the 
disqualified tax amount for a year either is zero or is limited by the 
foreign income tax amount paid or accrued by, or considered paid or 
accrued by, a section 901(m) payor, there will be an aggregate basis 
difference carryover as described in the next section.

B. Aggregate Basis Difference Carryover

    Proposed Sec.  1.901(m)-3(c) provides rules for determining the 
amount of aggregate basis difference carryover for a given U.S. taxable 
year of a section 901(m) payor that will be included in the section 
901(m) payor's aggregate basis difference for the next U.S. taxable 
year (and therefore included in the numerator of the disqualified ratio 
for purposes of the next year's disqualified tax amount computation). 
The carryover reflects the extent to which the aggregate basis 
difference for a U.S. taxable year has not yet given rise to a 
disqualified tax amount.
    If the disqualified tax amount is zero, none of the aggregate basis 
difference gives rise to a disqualified tax amount and therefore the 
full amount of the section 901(m) payor's aggregate basis difference 
for that year will be reflected in an aggregate basis difference 
carryover (positive or negative).
    If the disqualified tax amount is not zero, an aggregate basis 
difference carryover may still arise in two situations. First, if the 
aggregate basis difference exceeds the section 901(m) payor's allocable 
foreign income (the denominator of the disqualified ratio) and 
therefore the amount of the

[[Page 88566]]

aggregate basis difference included in the numerator is limited, the 
excess is reflected in an aggregate basis difference carryover. Second, 
if the tentative disqualified tax amount (which takes into account 
FCCTs) exceeds the foreign income tax amount paid or accrued by the 
section 901(m) payor (which does not include FCCTs), that excess tax 
amount is converted into an equivalent amount of aggregate basis 
difference that is reflected in an aggregate basis difference 
carryover. See Prop. Sec.  1.901(m)-3(c)(2)(ii)(B).

V. Determination of Basis Difference

    Proposed Sec.  1.901(m)-4 incorporates by cross reference the 
general rules in the temporary regulations for determining basis 
difference. Under these rules, basis difference is determined 
separately with respect to each foreign income tax for which an asset 
is an RFA.
    Proposed Sec.  1.901(m)-4(c)(1) provides for a foreign basis 
election, pursuant to which basis difference is equal to the U.S. basis 
in the RFA immediately after the CAA less the foreign basis in the RFA 
immediately after the CAA (including any adjustments to the foreign 
basis resulting from the CAA). Proposed Sec.  1.901(m)-4(c)(2) through 
(4) provide rules for making a foreign basis election. A foreign basis 
election generally is made by the RFA owner (U.S.). For example, in a 
section 338 CAA, the foreign basis election is made by the corporation 
that is the subject of the qualified stock purchase (new target as 
defined in Sec.  1.338-2(c)(17)). If the RFA owner (U.S.) is a 
partnership, however, each partner in the partnership (and not the 
partnership) may independently make a foreign basis election. A foreign 
basis election is made separately for each CAA and with respect to each 
foreign income tax and each foreign payor. For this purpose, a series 
of CAAs occurring as part of a plan (referred to in the regulations as 
an ``aggregated CAA transaction'') are treated as a single CAA. The 
proposed regulations contain examples illustrating the scope of the 
foreign basis election.
    The election is made by using foreign basis to determine the basis 
differences for purposes of computing a disqualified tax amount and an 
aggregate basis difference carryover. The election generally must be 
reflected on a timely filed original federal income tax return for the 
first U.S. taxable year that the foreign basis election is relevant. 
Proposed Sec.  1.901(m)-4(c)(5) provides an exception for certain cases 
in which the RFA owner (U.S.) is a partnership. This exception 
generally provides relief when one or more partners and the partnership 
have agreed that the partnership would determine whether to provide the 
partners with information to apply section 901(m) based on foreign 
basis and, in fact, the partnership provided the information to the 
partner using foreign basis, but when the partner timely filed its tax 
return it failed to report the application of section 901(m). The 
purpose of the relief is to address situations in which a partner must 
file an amended return in order to properly reflect the application of 
section 901(m) but does not have access to the necessary information to 
apply section 901(m) using U.S. basis. The criteria for qualifying for 
this relief should prevent partners from using hindsight in determining 
whether to make the foreign basis election.
    Proposed Sec.  1.901(m)-4(c)(6) provides another exception to the 
requirement to make the election in a timely filed original federal 
income tax return that applies if a taxpayer chooses to consistently 
apply these proposed regulations retroactively to all CAAs occurring 
before the regulations are issued in final form, including CAAs for 
which the taxpayer chooses not to make a foreign basis election. In 
this case, a foreign basis election may be reflected on a timely filed 
amended federal income tax return (or tax returns, as appropriate), 
provided that all amended returns are filed no later than one year 
following the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register.

VI. Basis Difference Taken Into Account

    Section 1.901(m)-5 provides rules for determining the amount of 
basis difference with respect to an RFA that is taken into account in a 
given U.S. taxable year (referred to in the regulations as ``allocated 
basis difference''). This allocated basis difference is used to compute 
a disqualified tax amount for a U.S. taxable year. Basis difference is 
taken into account in two ways: under an applicable cost recovery 
method or as a result of a disposition of the RFA.
    For purposes of the discussion under this section VI of the 
Explanation of Provisions section of the preamble, unless otherwise 
indicated, a reference to direct ownership of an interest in an entity 
refers to direct ownership for U.S. income tax purposes, which includes 
ownership through one or more disregarded entities. A reference to 
indirect ownership of an interest in an entity refers to ownership 
through one or more entities that are treated as fiscally transparent 
for U.S. income tax purposes, at least one of which is not a 
disregarded entity. Finally, a reference to indirect ownership of an 
interest in an entity for foreign income tax purposes means ownership 
through one or more entities that are treated as fiscally transparent 
for foreign income tax purposes.

A. Cost Recovery Rules

1. Determining a Cost Recovery Amount
    Proposed Sec.  1.901(m)-5(b)(2)(i) incorporates by cross reference 
the general rule in the temporary regulations that a cost recovery 
amount for an RFA is determined by applying an applicable cost recovery 
method to the basis difference rather than to the U.S. basis of the 
RFA.
    Proposed Sec.  1.901(m)-5(b)(2)(ii) provides that if the entire 
U.S. basis of the RFA is not subject to the same cost recovery method, 
the applicable cost recovery method for determining the cost recovery 
amount is the cost recovery method that applies to the portion of the 
U.S. basis that corresponds to the basis difference.
    Proposed Sec.  1.901(m)-5(b)(3) provides that, for purposes of 
section 901(m), an applicable cost recovery method includes any method 
for recovering the cost of property over time for U.S. income tax 
purposes (each application of a method giving rise to a ``U.S. basis 
deduction''). Such methods include depreciation, amortization, or 
depletion, as well as a method that allows the cost (or a portion of 
the cost) of property to be expensed in the year of acquisition or in 
the placed-in-service year, such as under section 179. Applicable cost 
recovery methods do not include any provision allowing for the recovery 
of U.S. basis upon a disposition of an RFA.
2. Attributing or Allocating a Cost Recovery Amount to a Section 901(m) 
Payor
    Under proposed Sec.  1.901(m)-5(b)(1), when an RFA owner (U.S.) is 
a section 901(m) payor, all of the cost recovery amount is attributed 
to the section 901(m) payor and assigned to the U.S. taxable year of 
the section 901(m) payor in which the corresponding U.S. basis 
deduction with respect to the RFA is taken into account under the 
applicable cost recovery method. This is the case regardless of whether 
the deduction is deferred or disallowed under other Code provisions 
(for example, see section 263A, which requires the capitalization of 
certain costs and expenses).
    If instead the RFA owner (U.S.) is not a section 901(m) payor but a 
fiscally transparent entity for U.S. income tax

[[Page 88567]]

purposes in which a section 901(m) payor directly or indirectly owns an 
interest, proposed Sec.  1.901(m)-5(d)(2) allocates all or a portion of 
the cost recovery amount to the section 901(m) payor. Under those 
rules, a cost recovery amount is allocated to the section 901(m) payor 
to the extent the U.S. basis deduction that corresponds to the cost 
recovery amount (both of which are determined at the level of the RFA 
owner (U.S.)) is (or will be) included in the section 901(m) payor's 
distributive share of the income of the RFA owner (U.S.) for U.S. 
income tax purposes. Proposed Sec.  1.901(m)-5(d)(6) assigns an 
allocated cost recovery amount to the U.S. taxable year of the section 
901(m) payor that includes the last day of the U.S. taxable year of the 
RFA owner (U.S.) in which the RFA owner (U.S.) takes into account the 
corresponding U.S. basis deduction (without regard to whether the 
deduction is deferred or disallowed under other Code provisions).
    Special rules under proposed Sec.  1.901(m)-5(e), discussed in 
section VI.D of the Explanation of Provisions section of this preamble, 
allocate a cost recovery amount that arises from an RFA with respect to 
certain section 743(b) CAAs. In addition, special rules under proposed 
Sec.  1.901(m)-5(g), discussed in section VI.F of the Explanation of 
Provisions section of this preamble, allocate a cost recovery amount to 
a section 901(m) payor in certain cases in which the RFA owner (U.S.) 
either is a reverse hybrid or is a fiscally transparent entity for both 
U.S. and foreign income tax purposes that is directly or indirectly 
owned by a reverse hybrid. A reverse hybrid is an entity that is 
treated as a corporation for U.S. income tax purposes but as a fiscally 
transparent entity for foreign income tax purposes.

B. General Disposition Rules

1. Definition of Disposition and Determining a Disposition Amount
    Proposed Sec.  1.901(m)-1(a)(10) defines (by cross reference to the 
temporary regulations) a disposition for purposes of section 901(m) as 
an event that results in gain or loss being recognized with respect to 
an RFA for purposes of U.S. income tax, a foreign income tax, or both. 
Proposed Sec.  1.901(m)-5(c)(2) incorporates by cross reference the 
rules provided in the temporary regulations for determining the amount 
of basis difference taken into account upon a disposition of an RFA 
(the disposition amount). Section 1.901(m)-5T(c)(2) provides that, if a 
disposition of an RFA is fully taxable for U.S. and foreign income tax 
purposes, the disposition amount will be any remaining unallocated 
basis difference (positive or negative). Section 1.901(m)-5T(c)(2) 
further provides that, if a disposition of an RFA is not fully taxable 
for both U.S. and foreign income tax purposes and the RFA has a 
positive basis difference, the disposition amount is based solely on 
the amount, if any, of foreign disposition gain and U.S. disposition 
loss. If, on the other hand, a disposition of an RFA is not fully 
taxable for both U.S. and foreign income tax purposes and the RFA has a 
negative basis difference, the temporary regulations provide that the 
disposition amount is based solely on the amount, if any, of foreign 
disposition loss and U.S. disposition gain. See section V.B of the 
preamble to the temporary regulations for a further discussion of these 
provisions.
2. Attributing or Allocating a Disposition Amount to a Section 901(m) 
Payor
    Under proposed Sec.  1.901(m)-5(c)(1), when the RFA owner (U.S.) is 
a section 901(m) payor, all of the disposition amount is attributed to 
the section 901(m) payor and assigned to the U.S. taxable year of the 
section 901(m) payor in which the disposition occurs.
    If instead the RFA owner (U.S.) is not a section 901(m) payor but a 
fiscally transparent entity for U.S. income tax purposes in which a 
section 901(m) payor directly or indirectly owns an interest, proposed 
Sec.  1.901(m)-5(d), discussed in section VI.C of the Explanation of 
Provisions section of this preamble, allocates all or a portion of a 
disposition amount to the section 901(m) payor and assigns it to a U.S. 
taxable year of the section 901(m) payor.
    Special rules under proposed Sec.  1.901(m)-5(e), discussed in 
section VI.D of the Explanation of Provisions section of this preamble, 
allocate a disposition amount to a section 901(m) payor and assign it 
to a U.S. taxable year of the section 901(m) payor when the disposition 
amount arises from an RFA with respect to certain section 743(b) CAAs. 
Special rules under proposed Sec.  1.901(m)-5(f), discussed in section 
VI.E of the Explanation of Provisions section of this preamble, 
allocate a disposition amount attributable to foreign disposition gain 
or foreign disposition loss to a section 901(m) payor and assign it to 
a U.S. taxable year of the section 901(m) payor when there is a mid-
year transaction. Special rules under proposed Sec.  1.901(m)-5(g), 
discussed in section VI.F of the Explanation of Provisions section of 
this preamble, allocate a disposition amount to a section 901(m) payor 
and assign it to a U.S. taxable year of the section 901(m) payor in 
certain cases in which the RFA owner (U.S.) either is a reverse hybrid 
or is a fiscally transparent entity for both U.S. and foreign income 
tax purposes that is directly or indirectly owned by a reverse hybrid.

C. Rules for Allocating and Assigning a Disposition Amount When the RFA 
Owner (U.S.) Is a Fiscally Transparent Entity

    This section describes the rules for allocating a disposition 
amount to a section 901(m) payor when the RFA owner (U.S.) is a 
fiscally transparent entity for U.S. income tax purposes in which a 
section 901(m) payor directly or indirectly owns an interest, as well 
as rules for assigning the allocated amount to a U.S. taxable year of 
the section 901(m) payor.
    The allocation rules (discussed in sections VI.C.1 and 2 of the 
Explanation of Provisions section of this preamble) vary depending on 
whether the disposition amount is attributable to foreign disposition 
gain or loss or U.S. disposition gain or loss. The rules for 
determining the extent to which a disposition amount is attributable to 
foreign or U.S. disposition gain or loss are discussed in section 
VI.C.3 of the Explanation of Provisions section of this preamble. The 
rules for assigning allocated disposition amounts to a U.S. taxable 
year of a section 901(m) payor are discussed in section VI.C.4 of the 
Explanation of Provisions section of this preamble.
1. Allocation of a Disposition Amount Attributable to Foreign 
Disposition Gain or Foreign Disposition Loss
    Proposed Sec.  1.901(m)-5(d)(3) addresses the allocation of a 
disposition amount attributable to foreign disposition gain or foreign 
disposition loss of an RFA. These rules should be interpreted and 
applied in a manner consistent with the principle that a disposition 
amount attributable to foreign disposition gain or foreign disposition 
loss should be allocated to a section 901(m) payor in the same 
proportion that the gain or loss is taken into account in computing a 
foreign income tax amount that is paid or accrued by, or considered 
paid or accrued by, the section 901(m) payor. This is because, for 
example, if an RFA has a positive basis difference, a disposition 
amount attributable to foreign disposition gain represents an amount of 
gain in years following the CAA that is included in foreign income but 
never included in U.S. taxable income or earnings and profits because 
of the step-up in the U.S. basis of the

[[Page 88568]]

RFA that occurred as a result of the CAA. Accordingly, to the extent a 
foreign disposition gain is taken into account in computing a foreign 
income tax amount, a portion of that foreign income tax amount should 
be disallowed as a foreign tax credit under section 901(m). Similarly, 
if an RFA has a negative basis difference and a foreign disposition 
loss is taken into account in computing a foreign income tax amount, 
this should result in an offset to the amount of the foreign income tax 
that otherwise would be disallowed as a foreign tax credit under 
section 901(m) as a result of a positive basis difference with respect 
to one or more other RFAs.
    There are two separate rules for identifying the extent to which a 
foreign disposition gain or foreign disposition loss is taken into 
account in computing a foreign income tax amount that is paid or 
accrued by, or considered paid or accrued by, a section 901(m) payor 
that directly or indirectly owns an interest in an RFA owner (U.S.) 
that is a fiscally transparent entity for U.S. income tax purposes. The 
first rule, which is described in proposed Sec.  1.901(m)-5(d)(3)(ii), 
applies when the foreign income tax amount is not allocated, for 
example, when the foreign payor is the section 901(m) payor. The second 
rule, which is described in proposed Sec.  1.901(m)-5(d)(3)(iii), 
applies when the foreign income tax amount is allocated, for example, 
under Sec.  1.704-1(b)(4)(viii) when the foreign payor is a partnership 
for U.S. income tax purposes in which the section 901(m) payor is a 
partner.
a. First Allocation Rule
    The first allocation rule applies when a section 901(m) payor, or a 
disregarded entity directly owned by a section 901(m) payor, is a 
foreign payor whose foreign income includes a distributive share of the 
foreign income (that includes the foreign disposition gain or foreign 
disposition loss) of the RFA owner (foreign). In this structure, the 
entire foreign income tax amount reflected on the foreign income tax 
return of the foreign payor is paid or accrued by, or considered paid 
or accrued by, the section 901(m) payor. This will be the case when the 
RFA owner (U.S.) is treated as a fiscally transparent entity not just 
for U.S. income tax purposes, but also for foreign income tax purposes, 
and the section 901(m) payor directly or indirectly owns an interest in 
the RFA owner (U.S.), provided that, in the case of indirect ownership, 
any entities in the ownership chain between the section 901(m) payor 
and the RFA owner (U.S), or, when one or more disregarded entities are 
directly owned by the section 901(m) payor, between the lowest-tier 
disregarded entity and the RFA owner (U.S.), are fiscally transparent 
for both U.S. and foreign income tax purposes. In these cases, the RFA 
owner (U.S.) and the RFA owner (foreign) are the same entity, except in 
the unusual case where the RFA owner (U.S.) is an entity that is 
disregarded as separate from its owner for foreign income tax purposes.
    The first allocation rule allocates a portion of a disposition 
amount attributable to foreign disposition gain or foreign disposition 
loss, as applicable, to the section 901(m) payor proportionally to the 
amount of the foreign disposition gain or foreign disposition loss that 
is included in the foreign payor's (in other words, the section 901(m) 
payor or the disregarded entity, as the case may be) distributive share 
of the foreign income of the RFA owner (foreign) for foreign income tax 
purposes.
    The following example illustrates the first allocation rule. A 
domestic entity that is a corporation for both U.S. and foreign income 
tax purposes (corporate partner) directly owns, for both U.S. and 
foreign income tax purposes, an interest in a foreign entity that is a 
partnership for both U.S. and foreign income tax purposes and that is 
the RFA owner (U.S.) and the RFA owner (foreign). In this case, when 
the partnership recognizes foreign disposition gain with respect to an 
RFA, the foreign income tax amount with respect to such gain is paid by 
the partners on their distributive shares of the foreign income of the 
partnership that includes the foreign disposition gain. The corporate 
partner, and not the partnership, is therefore a foreign payor and a 
section 901(m) payor. Accordingly, under the first allocation rule, a 
disposition amount attributable to foreign disposition gain is 
allocated to the corporate partner proportionally to the amount of the 
foreign disposition gain that is included in the corporate partner's 
distributive share of the foreign income of the partnership. Thus, for 
example, if the partnership recognizes $100 of foreign disposition gain 
and 50 percent of that gain is included in the corporate partner's 
distributive share of the foreign income of the partnership, and the 
disposition amount attributable to the foreign disposition gain is $40, 
the corporate partner would be allocated $20 of that amount (50 percent 
of $40). The same result would apply if the corporate partner directly 
owned the partnership interest through a disregarded entity that is the 
foreign payor.
b. Second Allocation Rule
    The second allocation rule applies when, instead of a section 
901(m) payor or a disregarded entity directly owned by a section 901(m) 
being a foreign payor, a section 901(m) payor directly or indirectly 
owns an interest in a fiscally transparent entity for U.S. income tax 
purposes (other than a disregarded entity directly owned by the section 
901(m) payor) that is a foreign payor whose foreign income includes all 
or a portion of the foreign income (that includes the foreign 
disposition gain or foreign disposition loss) of the RFA owner 
(foreign). Therefore, the section 901(m) payor is considered to pay or 
accrue only an allocated portion of the foreign income tax amount 
reflected on the foreign income tax return of the foreign payor. This 
will be the case when a section 901(m) payor directly or indirectly 
owns an interest in the foreign payor, and the foreign payor is (i) the 
RFA owner (U.S.), (ii) another fiscally transparent entity for U.S. 
income tax purposes (other than a disregarded entity directly owned by 
a section 901(m) payor) that directly or indirectly owns an interest in 
the RFA owner (U.S.) for both U.S. and foreign income tax purposes, or 
(iii) a disregarded entity directly owned by the RFA owner (U.S.). In 
each of these cases, the entity subject to tax for purposes of the 
foreign income tax (that is, the foreign payor) is treated as a 
fiscally transparent entity for U.S. income tax purposes.
    The mechanics of the second allocation rule are different than 
those of the first allocation rule. This is because the second 
allocation rule applies when neither the section 901(m) payor, nor a 
disregarded entity directly owned by a section 901(m) payor, is a 
foreign payor that takes into account a foreign disposition gain or 
foreign disposition loss for purposes of calculating a foreign income 
tax amount, but instead, for U.S. income tax purposes, a foreign income 
tax amount of the foreign payor is allocated to, and considered paid or 
accrued by, the section 901(m) payor. Accordingly, the second 
allocation rule allocates a portion of a disposition amount 
attributable to foreign disposition gain or foreign disposition loss, 
as applicable, to the section 901(m) payor proportionally to the amount 
of the foreign disposition gain or foreign disposition loss that is 
included in the allocable foreign income of the section 901(m) payor. 
As described in section IV.A of the Explanation of Provisions section 
of this preamble, allocable foreign income is generally the portion

[[Page 88569]]

of foreign income of a foreign payor that relates to the portion of the 
foreign income tax amount of that foreign payor that is allocated to 
and considered paid or accrued by a section 901(m) payor.
    The following example illustrates the second allocation rule. A 
domestic entity that is a corporation for both U.S. and foreign income 
tax purposes (corporate partner) directly owns an interest in a foreign 
entity, the RFA owner (U.S.) and RFA owner (foreign), that is a 
partnership for U.S. income tax purposes but a corporation for purposes 
of a foreign income tax (a hybrid partnership). In this case, when the 
hybrid partnership recognizes foreign disposition gain with respect to 
an RFA, it is the hybrid partnership, rather than the partners, that 
takes the gain into account for purposes of calculating a foreign 
income tax amount. The hybrid partnership is therefore the foreign 
payor. For U.S. income tax purposes, a foreign income tax amount of the 
hybrid partnership is allocated to, and considered paid or accrued by, 
its partners, including the corporate partner that is a section 901(m) 
payor (see Sec. Sec.  1.702-1(a)(6), 1.704-1(b)(4)(viii), and 1.901-
2(f)(4)(i)). Under the second allocation rule, a disposition amount 
attributable to foreign disposition gain is allocated to the corporate 
partner proportionally to the amount of the foreign disposition gain 
that is included in the corporate partner's allocable foreign income. 
Thus, for example, if the hybrid partnership pays a foreign income tax 
amount of $30 on $200 of foreign income that includes $100 of foreign 
disposition gain and $15 of the foreign income tax amount (50 percent 
of $30) is allocated to and considered paid by the corporate partner, 
the corporate partner's allocable foreign income would be $100 (50 
percent of the $200 foreign income to which the foreign income tax 
amount relates), which would include $50 of foreign disposition gain 
(50 percent of $100). If the disposition amount attributable to the 
foreign disposition gain is $60, the corporate partner would be 
allocated $30 of that amount ($60 multiplied by 50 percent, the portion 
of the total foreign disposition gain that is included in the corporate 
partner's allocable foreign income).
    In this example, the analysis would be similar if the corporate 
partner instead indirectly owned the partnership interest (for example 
through an upper-tier partnership), because the corporate partner would 
continue to be the section 901(m) payor and the hybrid partnership 
would continue to be the RFA owner (U.S.), the RFA owner (foreign), and 
the foreign payor.
2. Allocation of a Disposition Amount Attributable to U.S. Disposition 
Gain or U.S. Disposition Loss
    Proposed Sec.  1.901(m)-5(d)(4) addresses the allocation of a 
disposition amount attributable to U.S. disposition gain or U.S. 
disposition loss. Such disposition amounts are allocated to a section 
901(m) payor based on the portion of the U.S. disposition gain or U.S. 
disposition loss (which are determined at the level of the RFA owner 
(U.S.)) that is (or will be) included in the section 901(m) payor's 
distributive share of the income of the RFA owner (U.S.) for U.S. 
income tax purposes.
3. Determining the Extent to Which a Disposition Amount Is Attributable 
to Foreign or U.S. Disposition Gain or Loss
a. Positive Basis Difference
    When an RFA has a positive basis difference, a disposition amount 
arises from a disposition of the RFA only if the disposition results in 
a foreign disposition gain or a U.S. disposition loss (or both). To 
allocate such a disposition amount to a section 901(m) payor, it is 
necessary to determine the extent to which the disposition amount is 
attributable to foreign disposition gain or U.S. disposition loss.
    Proposed Sec.  1.901(m)-5(d)(5)(i) provides that if the disposition 
results in either a foreign disposition gain or a U.S. disposition 
loss, but not both, the entire disposition amount is attributable to 
foreign disposition gain or U.S. disposition loss, as applicable, even 
if the disposition amount exceeds the foreign disposition gain or the 
absolute value of the U.S. disposition loss. If the disposition results 
in both a foreign disposition gain and a U.S. disposition loss, the 
disposition amount is attributable first to foreign disposition gain to 
the extent thereof, and the excess disposition amount, if any, is 
attributable to the U.S. disposition loss, even if the excess 
disposition amount exceeds the absolute value of the U.S. disposition 
loss. In the case of a disposition that is fully taxable for both U.S. 
and foreign income tax purposes, a disposition amount may exceed the 
sum of the foreign disposition gain and the absolute value of the U.S. 
disposition loss if, immediately before the CAA, the foreign basis in 
the RFA was greater than the U.S basis, and a foreign basis election 
was not made.
b. Negative Basis Difference
    When an RFA has a negative basis difference, a disposition amount 
arises from a disposition of the RFA only if the disposition results in 
a foreign disposition loss or a U.S. disposition gain (or both). To 
allocate such a disposition amount to a section 901(m) payor, it is 
necessary to determine the extent to which the disposition amount is 
attributable to foreign disposition loss or U.S. disposition gain.
    Proposed Sec.  1.901(m)-5(d)(5)(ii) provides rules for making this 
determination when there is a negative basis difference that are 
similar to those provided in proposed Sec.  1.901(m)-5(d)(5)(i) for a 
positive basis difference.
4. Assigning a Disposition Amount to a U.S. Taxable Year of a Section 
901(m) Payor
    When a disposition amount is allocated to a section 901(m) payor 
under proposed Sec.  1.901(m)-5(d), proposed Sec.  1.901(m)-5(d)(6) 
provides that the disposition amount is assigned to the U.S. taxable 
year of the section 901(m) payor that includes the last day of the U.S. 
taxable year of the RFA owner (U.S.) in which the disposition occurs.

D. Special Allocation Rules for Certain Section 743(b) CAAs

    Proposed Sec.  1.901(m)-5(e) provides that when a section 901(m) 
payor acquires a partnership interest in a section 743(b) CAA, 
including a section 743(b) CAA with respect to a lower-tier partnership 
that results from a direct acquisition by the section 901(m) payor of 
an interest in an upper-tier partnership, a cost recovery amount or a 
disposition amount that arises from an RFA with respect to that CAA is 
allocated to the acquiring section 901(m) payor. These amounts are 
assigned to the U.S. taxable year of the section 901(m) payor that 
includes the last day of the U.S. taxable year of the partnership in 
which, in the case of a cost recovery amount, the partnership takes 
into account the corresponding U.S. basis deduction, or, in the case of 
a disposition amount, the disposition occurs.
    This special rule does not apply if it is another partnership, and 
not a section 901(m) payor, that acquires a partnership interest in a 
section 743(b) CAA. In that case, the general rules for allocating a 
cost recovery amount or disposition amount when the RFA owner (U.S.) is 
a fiscally transparent entity apply.

E. Special Allocation Rules for Certain Mid-Year Transactions

    Proposed Sec.  1.901(m)-5(f) provides rules for allocating a 
disposition amount when there is a disposition of an RFA during a 
foreign taxable year in which the foreign payor is involved in a mid-
year transaction, and the disposition

[[Page 88570]]

results in foreign disposition gain or foreign disposition loss that is 
allocated under the principles of Sec.  1.1502-76(b) to the persons 
involved in the mid-year transaction for purposes of allocating the 
foreign income tax amount of the foreign payor. A typical example is 
when a section 901(m) payor owns a disregarded entity that is both an 
RFA owner (foreign) and the foreign payor, and the disregarded entity 
sells the RFA in the same year that the section 901(m) payor sells the 
disregarded entity to another section 901(m) payor. If the RFA has 
positive unallocated basis difference and there is foreign disposition 
gain on the sale of the RFA, the sale will give rise to a disposition 
amount that will be used by the section 901(m) payors to calculate a 
disqualified portion of the foreign income tax amount reflected on the 
foreign income tax return of the disregarded entity. Pursuant to Sec.  
1.901-2(f)(4)(ii), that foreign income tax amount must be allocated 
between the buyer and seller of the disregarded entity based on the 
respective portions of foreign income that are attributable under the 
principles of Sec.  1.1502-76(b) to the buyer's and seller's respective 
periods of ownership of the disregarded entity during its foreign 
taxable year. Under proposed Sec.  1.901(m)-5(f)(2), the disposition 
amount attributable to foreign disposition gain is similarly allocated 
between the buyer and the seller based on the principles in proposed 
Sec.  1.901(m)-5(d), discussed in section VI.C of the Explanation of 
Provisions section of this preamble, that apply to allocate a 
disposition amount when the RFA owner (U.S.) is a fiscally transparent 
entity for U.S. income tax purposes.

F. Special Allocation Rules for Certain Reverse Hybrids

    Proposed Sec.  1.901(m)-5(g) addresses the allocation of cost 
recovery amounts and disposition amounts when the RFA owner (U.S.) is 
either a reverse hybrid or a fiscally transparent entity for both U.S. 
and foreign income tax purposes that is directly or indirectly owned by 
a reverse hybrid for U.S. and foreign income tax purposes, and in 
either case, a foreign payor directly or indirectly owns an interest in 
the reverse hybrid for foreign income tax purposes and therefore 
includes in its foreign income a distributive share of the foreign 
income (that includes the foreign disposition gain or foreign 
disposition loss) of the RFA owner (foreign). These allocation rules 
are similar to the allocation rules discussed in section VI.C.1 of the 
Explanation of Provisions section of this preamble that apply to 
allocate a disposition amount attributable to foreign disposition gain 
or foreign disposition loss when the RFA owner (U.S.) is a fiscally 
transparent entity for U.S. income tax purposes. These rules are 
broader in scope, however, because they apply to allocate not just 
foreign disposition gain or foreign disposition loss, but rather, both 
cost recovery amounts and entire disposition amounts (which may be 
attributable, in whole or in part, to U.S. disposition gain or U.S. 
disposition loss). This is because the basis difference giving rise to 
such amounts may not be taken into account in computing U.S. taxable 
income or earnings and profits of the owners of the reverse hybrid 
until one or more subsequent U.S. taxable years (for example, upon the 
receipt of a distribution of property from the reverse hybrid).
    These rules should be interpreted and applied in a manner 
consistent with the principle that a cost recovery amount or a 
disposition amount (or both) should be allocated to a section 901(m) 
payor proportionally to the amount of the foreign income of the RFA 
owner (foreign) that is taken into account in computing a foreign 
income tax amount of a foreign payor that is paid or accrued by, or 
considered paid or accrued by, the section 901(m) payor.
    There are two separate rules for allocating a cost recovery amount 
or disposition amount to a section 901(m) payor when the RFA owner 
(U.S.) either is a reverse hybrid or a fiscally transparent entity for 
both U.S. and foreign income tax purposes that is directly or 
indirectly owned by a reverse hybrid for U.S. and foreign income tax 
purposes. The first rule, which is described in Sec.  1.901(m)-5(g)(2), 
applies when the foreign income tax amount is not allocated, for 
example, when the foreign payor is the section 901(m) payor. The second 
rule, which is described in Sec.  1.901(m)-5(g)(3), applies when the 
foreign income tax amount is allocated, for example, under Sec.  1.704-
1(b)(4)(viii) when the foreign payor is a partnership for U.S. income 
tax purposes in which the section 901(m) payor is a partner.
1. First Allocation Rule
    The first allocation rule applies when a section 901(m) payor, or a 
disregarded entity directly owned by a section 901(m) payor, is the 
foreign payor whose foreign income includes a distributive share of the 
foreign income of the RFA owner (foreign). In this structure, the 
entire foreign income tax amount reflected on the foreign income tax 
return of the foreign payor is paid or accrued by, or considered paid 
or accrued by, the section 901(m) payor. This will be the case when a 
section 901(m) payor directly or indirectly owns an interest in the 
reverse hybrid, provided that in the case of indirect ownership, any 
entities in the ownership chain between the section 901(m) payor and 
the reverse hybrid, or, when one or more disregarded entities are 
directly owned by the section 901(m) payor, between the lowest-tier 
disregarded entity and the reverse hybird, are fiscally transparent for 
both U.S. and foreign income tax purposes. In these cases, the RFA 
owner (U.S.) and the RFA owner (foreign) are the same entity, except in 
the unusual case where the RFA owner (U.S.) is an entity that is 
disregarded as separate from its owner for foreign income tax purposes.
    The first allocation rule allocates a portion of a cost recovery 
amount or a disposition amount to the section 901(m) payor 
proportionally to the amount of the foreign income of the RFA owner 
(foreign) that is included in the foreign income of the foreign payor 
(in other words, the section 901(m) payor or the disregarded entity, as 
the case may be).
    The following example illustrates the first allocation rule. A 
domestic entity that is a corporation for both U.S. and foreign income 
tax purposes (corporate owner) owns an interest in a reverse hybrid 
that is the RFA owner (U.S.) and the RFA owner (foreign). A foreign 
income tax amount with respect to the foreign income of the reverse 
hybrid is paid by the owners of the reverse hybrid on their 
distributive shares of such foreign income. The corporate owner, and 
not the reverse hybrid, is therefore a foreign payor and a section 
901(m) payor. Under the first allocation rule, a cost recovery amount 
or a disposition amount is allocated to the corporate owner 
proportionally to the amount of the foreign income of the reverse 
hybrid that is included in the foreign income of the corporate owner. 
Thus, for example, if 50 percent of the foreign income of the reverse 
hybrid is included in the foreign income of the corporate owner, the 
corporate owner would be allocated 50 percent of a cost recovery amount 
or a disposition amount with respect to an RFA owned by the reverse 
hybrid. The same result would apply if the corporate owner directly 
owned the interest in the reverse hybrid through a disregarded entity 
that is the foreign payor.
    Alternatively, if the reverse hybrid was not the RFA owner 
(foreign) but instead the reverse hybrid owned an interest in the RFA 
owner (U.S.) and RFA owner (foreign), which is a partnership for both 
U.S. and foreign

[[Page 88571]]

income tax purposes, and 60 percent of the foreign income of the 
partnership is included in the foreign income of the reverse hybrid 
(and therefore 30 percent (50 percent of 60 percent) of the foreign 
income of the partnership is included in the foreign income of the 
corporate owner), the corporate owner would be allocated 30 percent of 
a cost recovery amount or a disposition amount with respect to an RFA 
owned by the partnership.
2. Second Allocation Rule
    The second allocation rule applies when instead of a section 901(m) 
payor, or a disregarded entity directly owned by a section 901(m) 
payor, being a foreign payor, a section 901(m) payor directly or 
indirectly owns an interest in the foreign payor whose foreign income 
includes a distributive share of the foreign income of the RFA owner 
(foreign). Therefore, the section 901(m) payor is considered to pay or 
accrue only an allocated portion of the foreign income tax amount 
reflected on the foreign income tax return of the foreign payor. This 
will be the case when the foreign payor is a fiscally transparent 
entity for U.S. income tax purposes (other than a disregarded entity 
directly owned by the section 901(m) payor) that either directly or 
indirectly owns an interest in the RFA owner (foreign) for foreign 
income tax purposes. In these cases, the RFA owner (U.S.) and the RFA 
owner (foreign) are the same entity, except in the unusual case where 
the RFA owner (U.S.) is an entity that is disregarded as separate from 
its owner for foreign income tax purposes.
    The mechanics of the second allocation rule are different than 
those of the first allocation rule. This is because the second 
allocation rule applies when neither a section 901(m) payor, nor a 
disregarded entity directly owned by a section 901(m) payor, is a 
foreign payor that takes into account the foreign income of the RFA 
owner (foreign) for purposes of calculating a foreign income tax 
amount, but instead, for U.S. income tax purposes, a foreign income tax 
amount of the entity that is the foreign payor is allocated to, and 
considered paid or accrued by, the section 901(m) payor. Accordingly, 
the second allocation rule allocates a portion of cost recovery amounts 
and disposition amounts proportionally to the amount of the foreign 
income of the RFA owner (foreign) that is included in the foreign 
income of the foreign payor that is then included in the allocable 
foreign income of the section 901(m) payor. As described in section 
IV.A of the Explanation of Provisions section of this preamble, 
allocable foreign income is generally the portion of foreign income of 
a foreign payor that relates to the portion of the foreign income tax 
amount of that foreign payor that is allocated to and considered paid 
or accrued by a section 901(m) payor.
    The following example illustrates the second allocation rule. A 
domestic entity that is a corporation for both U.S. and foreign income 
tax purposes (corporate partner) owns an interest in an entity that is 
a partnership for U.S. income tax purposes but a corporation for 
foreign income tax purposes (hybrid partnership), which, in turn, owns 
an interest in a reverse hybrid that is the RFA owner (U.S.) and the 
RFA owner (foreign). A foreign income tax amount with respect to the 
foreign income of the reverse hybrid is paid by the owners of the 
reverse hybrid on their distributive shares of such foreign income. 
Therefore, the hybrid partnership, rather than its partners, is the 
foreign payor. For U.S. income tax purposes, the foreign income tax 
amount paid or accrued by the hybrid partnership is allocated to, and 
considered paid or accrued by, the corporate partner that is the 
section 901(m) payor (see Sec. Sec.  1.702-1(a)(6), 1.704-
1(b)(4)(viii), and 1.901-2(f)(4)(i)). Under the second allocation rule, 
a cost recovery amount or a disposition amount with respect to an RFA 
owned by the reverse hybrid is allocated to the corporate partner 
proportionally to the amount of foreign income of the reverse hybrid 
that is taken into account in determining the foreign income of the 
hybrid partnership and then the allocable foreign income of the 
corporate partner. Thus, for example, if the reverse hybrid has $500 of 
foreign income and the hybrid partnership pays a foreign income tax 
amount of $30 on $200 of foreign income that includes a $100 
distributive share of the foreign income of the reverse hybrid (20 
percent of $500) and $15 of the foreign income tax amount (50 percent 
of $30) is allocated to and considered paid by the corporate partner, 
then the corporate partner's allocable foreign income would be $100 (50 
percent of the $200 foreign income to which the foreign income tax 
amount relates). A cost recovery amount or disposition amount with 
respect to the RFAs owned by the reverse hybrid would be allocated 10 
percent to the corporate partner (the corporate partner's 50 percent 
share of the hybrid partnership's 20 percent share of the reverse 
hybrid's foreign income).

VII. Successor Rules

    Proposed Sec.  1.901(m)-6 provides successor rules for applying 
section 901(m) following a transfer of RFAs that have basis difference 
that has not yet been fully taken into account (referred to in the 
regulations as ``unallocated basis difference'') as well as for 
determining when an aggregate basis difference carryover of a section 
901(m) payor either becomes an aggregate basis difference carryover of 
the section 901(m) payor with respect to another foreign payor or is 
transferred to another section 901(m) payor.

A. Unallocated Basis Difference

    Proposed Sec.  1.901(m)-6(b)(1) and (2) incorporate by cross 
reference the successor rules set forth in the temporary regulations, 
which provide generally that section 901(m) continues to apply to an 
RFA after it has been transferred for U.S. income tax purposes if the 
RFA continues to have unallocated basis difference following the 
transfer (a successor transaction).
    Proposed Sec.  1.901(m)-6(b)(3) sets forth two clarifications for 
applying the successor rules. First, if an asset is an RFA with respect 
to more than one foreign income tax, the successor rules apply 
separately with respect to each foreign income tax. Second, any 
subsequent cost recovery amount for an RFA transferred in a successor 
transaction will be determined based on the applicable cost recovery 
method that applies to the U.S. basis (or portion thereof) that 
corresponds to the unallocated basis difference. Thus, if a successor 
transaction restarts the depreciation schedule for an RFA, the 
transaction may result in unallocated basis difference being taken into 
account at a different recovery rate than otherwise would have applied.
    Proposed Sec.  1.901(m)-6(b)(4)(iii) also incorporates by cross 
reference the rule set forth in the temporary regulations that provides 
an exception to the general rule when an RFA is subject to multiple 
section 743(b) CAAs. See section VI.B. of the Explanation of Provisions 
section of the preamble to the temporary regulations for a discussion 
of those provisions.
    Proposed Sec.  1.901(m)-6(b)(4)(ii), which is not included in the 
temporary regulations, provides an exception to the general successor 
rule if a foreign basis election is made under proposed Sec.  1.901(m)-
4(c) with respect to a subsequent CAA that otherwise would trigger the 
rules for successor transactions. If a foreign basis election is made 
with respect to a foreign income tax, the only basis difference that 
will be taken into account after the subsequent CAA with respect to 
that foreign income tax is the basis difference determined for the 
subsequent CAA.

[[Page 88572]]

B. Aggregate Basis Difference Carryover

    Proposed Sec.  1.901(m)-6 provides successor rules for aggregate 
basis difference carryovers, the computation of which is described in 
section IV.B of the Explanation of Provisions section of this preamble. 
An aggregate basis difference carryover is treated as a tax attribute 
of the section 901(m) payor that retains its character as an aggregate 
basis difference carryover with respect to a foreign income tax and a 
foreign payor and with respect to a separate category, as described in 
Sec.  1.904-4(m) (including the section 904(d) categories). When a 
section 901(m) payor transfers its assets in a transaction to which 
section 381 applies, proposed Sec.  1.901(m)-6(c)(1) provides that any 
aggregate basis difference carryovers of the section 901(m) payor are 
transferred to the corporation that succeeds to the earnings and 
profits, if any. When substantially all of the assets of one foreign 
payor are transferred to another foreign payor, both of which are 
directly or indirectly owned by the same section 901(m) payor, proposed 
Sec.  1.901(m)-6(c)(2) provides that an aggregate basis difference 
carryover of the section 901(m) payor with respect to the transferor 
foreign payor becomes an aggregate basis difference carryover of the 
section 901(m) payor with respect to the transferee foreign payor.
    Proposed Sec.  1.901(m)-6(c)(3) provides an anti-abuse rule that 
would transfer an aggregate basis difference carryover when, with a 
principal purpose of avoiding the application of section 901(m), there 
is a transfer of assets or a change in either the allocation of foreign 
income for foreign income tax purposes or the allocation of foreign 
income tax amounts for U.S. income tax purposes that is intended to 
separate foreign income tax amounts from the related aggregate basis 
difference carryover. This anti-abuse rule would apply, for example, 
if, with the principal purpose of avoiding the application of section 
901(m), a partnership agreement is amended in order to reduce the 
allocation of foreign income to a partner that is a section 901(m) 
payor with an aggregate basis difference carryover.

VIII. De Minimis Rules

    Proposed Sec.  1.901(m)-7 describes de minimis rules under which 
certain basis differences are not taken into account for purposes of 
section 901(m). This determination is made when an asset subject to a 
CAA first becomes an RFA. If that same asset is also an RFA by reason 
of being subject to a subsequent CAA, the de minimis tests are applied 
only to the additional basis difference, if any, that results from the 
subsequent CAA. Accordingly, any unallocated basis difference that 
arose from the prior CAA that did not qualify for the de minimis 
exemption at the time of the prior CAA will not be retested at the time 
of the subsequent CAA.
    In general, a basis difference with respect to an RFA is not taken 
into account for purposes of section 901(m) if either (i) the sum of 
the basis differences for all RFAs with respect to the CAA is less than 
the greater of $10 million or 10 percent of the total U.S. basis of all 
RFAs immediately after the CAA; or (ii) the RFA is part of a class of 
RFAs for which the sum of the basis differences of all RFAs in the 
class is less than the greater of $2 million or 10 percent of the total 
U.S. basis of all RFAs in the class. For this purpose, the classes of 
RFAs are the seven asset classes defined in Sec.  1.338-6(b).
    The Treasury Department and the IRS decided that transactions 
between related parties should be more tightly regulated, and 
therefore, the threshold dollar amounts and percentages to meet the de 
minimis exemptions for related party CAAs are lower than those for 
unrelated party CAAs, replacing the terms ``$10 million,'' ``10 
percent,'' and ``$2 million'' wherever they occur with the terms ``$5 
million,'' ``5 percent,'' and ``$1 million,'' respectively. In 
addition, an anti-abuse provision at proposed Sec.  1.901(m)-7(e) 
denies application of the de minimis exemptions to CAAs between related 
parties that are entered into or structured with a principal purpose of 
avoiding the application of section 901(m).

IX. Miscellaneous

    Proposed Sec.  1.901(m)-8(b) provides that, when a foreign 
corporation becomes a section 902 corporation for the first time, as 
part of the required reconstruction of the U.S. tax history of the pre-
1987 foreign income taxes of the foreign corporation, section 901(m) 
and these regulations must be applied to determine any disqualified tax 
amounts or aggregate basis difference carryovers that apply to the 
foreign corporation.
    Proposed Sec.  1.901(m)-8(c) provides an anti-abuse rule that 
applies to disregard an RFA with a built-in loss to the extent it 
relates to any asset acquisition structured with a principal purpose to 
use that RFA to avoid the application of section 901(m). This rule may 
apply, for example, if, with a principal purpose of avoiding the 
application of section 901(m), an asset is acquired in a transaction 
that preserves a built-in loss in the asset for U.S. income tax 
purposes but not for foreign income tax purposes.

X. Modifications to the Section 704(b) Regulations Related to Section 
901(m)

    Section 1.704-1(b)(4)(viii) provides a safe harbor under which 
allocations of creditable foreign tax expenditures (CFTEs) (as defined 
in Sec.  1.704-1(b)(4)(viii)(b)) by a partnership to its partners are 
deemed to be in accordance with the partners' interests in the 
partnership. In general, the purpose of the safe harbor is to match 
allocations of CFTEs with the income to which the CFTEs relate. In 
order to apply the safe harbor, a partnership must (1) determine the 
partnership's ``CFTE categories,'' (2) determine the partnership's net 
income in each CFTE category, and (3) allocate the partnership's CFTEs 
to each category. In order to satisfy the safe harbor, partnership 
allocations of CFTEs in a CFTE category must be proportionate to the 
allocations of the partnership's net income in the CFTE category.
    A CFTE may be subject to section 901(m) because it is a foreign 
income tax amount that is paid or accrued by a partnership. 
Specifically, if a partnership owns an RFA with respect to a foreign 
income tax and that RFA has a basis difference subject to section 
901(m), a portion of a foreign income tax amount paid or accrued by the 
partnership that relates to that foreign income tax may be disallowed 
as a foreign tax credit under section 901(m) in the hands of section 
901(m) payors to whom the foreign income tax amount is allocated. The 
disqualified tax amount is determined by taking into account cost 
recovery amounts and disposition amounts with respect to the RFA that 
are allocated to those section 901(m) payors pursuant to the rules 
provided in proposed Sec.  1.901(m)-5. In order to ensure that the 
proper portion of a foreign income tax amount paid or accrued by a 
partnership is disallowed under section 901(m), adjustments to the net 
income (and the allocations of that income) in a CFTE category that 
includes items attributable to the RFA are necessary in certain cases.
    To illustrate such a case, assume a domestic entity that is a 
partnership for U.S. income tax purposes but a corporation for purposes 
of a foreign income tax (a hybrid partnership) is owned by partner A 
and partner B, each of which is a domestic entity that is a corporation 
for both U.S. and foreign income tax purposes. In this case, the hybrid 
partnership is the foreign payor and partners A and B are section 
901(m) payors. The hybrid partnership is the RFA owner (U.S.) and the 
RFA owner (foreign) with respect to a single asset that is an RFA. 
Assume that in a given

[[Page 88573]]

year the hybrid partnership has 110u of gross income for both U.S. and 
foreign tax purposes and a 10u depreciation deduction solely for U.S. 
income tax purposes, which gives rise to a cost recovery amount with 
respect to the RFA (as determined under proposed Sec.  1.901(m)-
5(b)(2)). All partnership items are allocated equally to partners A and 
B, except that the entire 10u U.S. depreciation deduction is allocated 
to partner A. Thus, partner A's distributive share of income is 45u 
(110u x 50%, less 10u) and partner B's distributive share of income is 
55u (110u x 50%). Because the entire U.S. depreciation deduction is (or 
will be included) in partner A's distributive share of income for U.S. 
income tax purposes, the entire cost recovery amount that corresponds 
to the U.S. depreciation deduction of 10u is allocated to partner A. 
See proposed Sec.  1.901(m)-5(d)(2). As a result, Partner A will take 
into account the 10u cost recovery amount in calculating a disqualified 
tax amount with respect to the portion of the relevant foreign income 
tax amount paid or accrued by the hybrid partnership and allocated to 
partner A under the CFTE allocation rules. In order to ensure that the 
portion of the foreign income tax amount paid or accrued by the hybrid 
partnership that is attributable to the 10u basis difference is 
properly subject to section 901(m), the U.S. depreciation deduction 
should not be taken into account under the CFTE allocation rules so 
that the portion of the foreign income tax amount attributable to the 
10u basis difference is allocated to partner A. Accordingly, the net 
income of the CFTE category that includes the U.S. basis deduction 
should be increased by 10u (from 100u to 110u) to back out the portion 
of the U.S. depreciation deduction that corresponds to the cost 
recovery amount, and partner A's share of that net income should be 
increased by 10u (from 45u to 55u). In this example, as a result of the 
adjustment, the foreign income tax amount paid or accrued by the hybrid 
partnership will be allocated equally between partner A and partner B, 
because they each will have a 50-percent share of the net income in the 
CFTE category, as adjusted. Absent the adjustment, a portion of the 
foreign income tax amount attributable to the 10u basis difference 
would be allocated to partner B, a person that is not subject to 
section 901(m) (because no cost recovery amount is allocated to partner 
B).
    No modification to the safe harbor is necessary to address cost 
recovery amounts and disposition amounts attributable to section 743(b) 
adjustments that are allocated to partners under proposed Sec.  
1.901(m)-5(e) (which applies when a section 901(m) payor acquires a 
partnership interest in a section 743(b) CAA), because, in these cases, 
Sec.  1.704-1T(b)(4)(viii)(c)(3)(i) already provides that the 
partnership determines net income in a CFTE category without regard to 
section 743(b) adjustments that its partners may have to the basis of 
property of the partnership. However, as discussed in section VI.D of 
the Explanation of Provisions section of this preamble, proposed Sec.  
1.901(m)-5(e) does not apply when another partnership (which by 
definition cannot be a section 901(m) payor) acquires a partnership 
interest in a section 743(b) CAA. Thus, modification to the safe harbor 
is necessary for all CAAs other than those section 743(b) CAAs 
described in proposed Sec.  1.901(m)-5(e).
    Accordingly, these proposed regulations add special rules under 
proposed Sec.  1.704-1(b)(4)(viii)(c)(4)(v), (vi), and (vii) to address 
partnership items that give rise to cost recovery amounts and 
disposition amounts attributable to CAAs (other than section 743(b) 
CAAs described in proposed Sec.  1.901(m)-5(e)). Specifically, these 
rules provide that, if an RFA has a positive basis difference, net 
income in a CFTE category that takes into account partnership items of 
income, deduction, gain, or loss attributable to the RFA (applicable 
CFTE category) is increased by the sum of the cost recovery amounts and 
disposition amounts attributable to U.S. disposition loss that 
correspond to those partnership items. Furthermore, to the extent a 
partner is allocated those cost recovery amounts or disposition amounts 
attributable to U.S. disposition loss, that partner's share of the net 
income in the CFTE category is increased by the same amount. 
Alternatively, if an RFA has a negative basis difference, the net 
income in the applicable CFTE category is decreased by the sum of the 
cost recovery amounts and disposition amounts attributable to U.S. 
disposition gain that correspond to partnership items in that CFTE 
category. Furthermore, to the extent a partner is allocated those cost 
recovery amounts or disposition amounts attributable to U.S. 
disposition gain, that partner's share of the net income in the CFTE 
category is decreased by the same amount.

XI. Effective/Applicability Dates

    These proposed regulations will apply to CAAs occurring on or after 
the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register. Taxpayers may, however, 
rely on the proposed regulations prior to the date the regulations are 
applicable provided that they both consistently apply proposed Sec.  
1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) to all CAAs occurring on or 
after December 7, 2016 and consistently apply proposed Sec.  1.901(m)-1 
and Sec. Sec.  1.901(m)-3 through 1.901(m)-8 (excluding Sec.  1.901(m)-
4(e)) to all CAAs occurring on or after January 1, 2011. For this 
purpose, persons that are related (within the meaning of section 267(b) 
or 707(b)) will be treated as a single taxpayer.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply because the 
regulations do not impose a collection of information on small 
entities. Pursuant to section 7805(f), these regulations will be 
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 comments that are submitted timely 
to the IRS as prescribed in this preamble under ADDRESSES. The Treasury 
Department and the IRS request comments on all aspects of the proposed 
rules. All comments will be available at www.regulations.gov or upon 
request. 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 Associate 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 88574]]

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

    Sections 1.901(m)-1 through -8 also issued under 26 U.S.C. 
901(m)(7).* * *
    Section 1.901(m)-5 also issued under 26 U.S.C. 901(m)(3)(B)(ii). 
* * *

0
Par. 2. Section 1.704-1, as proposed to be amended at 81 FR 5967, 
February 4, 2016, is further amended by adding two sentences at the end 
of paragraph (b)(1)(ii)(b)(1) and by adding paragraphs 
(b)(4)(viii)(c)(4)(v) through (b)(4)(viii)(c)(4)(vii) to read as 
follows:


Sec.  1.704-1  Partner's distributive share.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (b) * * *
    (1) * * * Paragraphs (b)(4)(viii)(c)(4)(v) through (vii) of this 
section apply to covered asset acquisitions (CAAs) (as defined in Sec.  
1.901(m)-1(a)(8)) occurring on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. Taxpayers may, however, rely on paragraphs 
(b)(4)(viii)(c)(4)(v) through (vii) of this section prior to the date 
paragraphs (b)(4)(viii)(c)(4)(v) through (vii) of this section are 
applicable provided that they consistently apply paragraphs 
(b)(4)(viii)(c)(4)(v) through (vii) of this section, Sec.  1.901(m)-1, 
and Sec. Sec.  1.901(m)-3 through 1.901(m)-8 (excluding Sec.  1.901(m)-
4(e)) to all CAAs occurring on or after January 1, 2011, and 
consistently apply Sec.  1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) to 
all CAAs occurring on or after December 7, 2016.
* * * * *
    (4) * * *
    (viii) * * *
    (c) * * *
    (4) * * *
    (v) Adjustments related to section 901(m). If one or more assets 
owned by a partnership are relevant foreign assets (or RFAs) with 
respect to a foreign income tax, then, solely for purposes of applying 
the safe harbor provisions of paragraph (b)(4)(viii)(a)(1) of this 
section to allocations of CFTEs with respect to that foreign income 
tax, the net income in a CFTE category that includes partnership items 
of income, deduction, gain, or loss attributable to the RFA shall be 
increased by the amount described in paragraph (b)(4)(viii)(c)(4)(vi) 
of this section and reduced by the amount described in paragraph 
(b)(4)(viii)(c)(4)(vii) of this section. Similarly, a partner's CFTE 
category share of income shall be increased by the portion of the 
amount described in paragraph (b)(4)(viii)(c)(4)(vi) of this section 
that is allocated to the partner under Sec.  1.901(m)-5(d) and reduced 
by the portion of the amount described in paragraph 
(b)(4)(viii)(c)(4)(vii) of this section that is allocated to the 
partner under Sec.  1.901(m)-5(d). The principles of this paragraph 
(b)(4)(viii)(c)(4)(v) apply similarly when a partnership owns an RFA 
indirectly through one or more other partnerships. For purposes of 
paragraphs (b)(4)(viii)(c)(4)(v), (b)(4)(viii)(c)(4)(vi), and 
(b)(4)(viii)(c)(4)(vii) of this section, basis difference is defined in 
Sec.  1.901(m)-4, cost recovery amount is defined in Sec.  1.901(m)-
5(b)(2), disposition amount is defined in Sec.  1.901(m)-5(c)(2), 
foreign income tax is defined in Sec.  1.901(m)-1(a)(21), RFA is 
defined in Sec.  1.901(m)-2(c), U.S. disposition gain is defined in 
Sec.  1.901(m)-1(a)(43), and U.S. disposition loss is defined in Sec.  
1.901(m)-1(a)(44).
    (vi) Adjustment amounts for RFAs with a positive basis difference. 
With respect to RFAs with a positive basis difference, the amount 
referenced in (b)(4)(viii)(c)(4)(v) is the sum of any cost recovery 
amounts and disposition amounts attributable to U.S. disposition loss 
that correspond to partnership items that are included in the net 
income in the CFTE category and that are taken into account for the 
U.S. taxable year of the partnership under Sec.  1.901(m)-5(d).
    (vii) Adjustment amounts for RFAs with a negative basis difference. 
With respect to RFAs with a negative basis difference, the amount 
referenced in (b)(4)(viii)(c)(4)(v) is the sum of any cost recovery 
amounts and disposition amounts attributable to U.S. disposition gain 
that correspond to partnership items that are included in the net 
income in the CFTE category and that are taken into account for the 
U.S. taxable year of the partnership under Sec.  1.901(m)-5(d).
* * * * *
0
Par. 3. Section 1.901(m)-1 is added to read as follows:


Sec.  1.901(m)-1  Definitions.

    (a) Definitions. [The text of proposed Sec.  1.901(m)-1(a) is the 
same as the text of Sec.  1.901(m)-1T(a) published elsewhere in this 
issue of the Federal Register.]
    (1) The term aggregate basis difference means, with respect to a 
foreign income tax and a foreign payor, the sum of the allocated basis 
differences for a U.S. taxable year of a section 901(m) payor, plus any 
aggregate basis difference carryover from the immediately preceding 
U.S. taxable year of the section 901(m) payor with respect to the 
foreign income tax and foreign payor, as adjusted under Sec.  1.901(m)-
6(c). For purposes of this definition, if foreign law imposes tax on 
the combined income (within the meaning of Sec.  1.901-2(f)(3)(ii)) of 
two or more foreign payors, all foreign payors whose items of income, 
deduction, gain, or loss are included in the U.S. taxable income or 
earnings and profits of the section 901(m) payor are treated as a 
single foreign payor. Aggregate basis difference is determined with 
respect to each separate category described in Sec.  1.904-4(m).
    (2) The term aggregate basis difference carryover has the meaning 
provided in Sec.  1.901(m)-3(c).
    (3) The term aggregated CAA transaction means a series of related 
CAAs occurring as part of a plan.
    (4) The term allocable foreign income means the portion of foreign 
income of a foreign payor that relates to the foreign income tax amount 
of the foreign payor that is paid or accrued by, or considered paid or 
accrued by, a section 901(m) payor.
    (5) The term allocated basis difference means, with respect to an 
RFA and a foreign income tax, the sum of the cost recovery amounts and 
disposition amounts assigned to a U.S. taxable year of the section 
901(m) payor under Sec.  1.901(m)-5.
    (6) through (8) [The text of proposed Sec. Sec.  1.901(m)-1(a)(6) 
through (8) is the same as the text of Sec. Sec.  1.901(m)-1T(a)(6) 
through (8) published elsewhere in this issue of the Federal Register.]
    (9) The term cumulative basis difference exemption has the meaning 
provided in Sec.  1.901(m)-7(b)(2).
    (10) through (11) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(10) through (11) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(10) through (11) published elsewhere in this issue of the Federal 
Register.]
    (12) The term disqualified tax amount has the meaning provided in 
Sec.  1.901(m)-3(b).
    (13) through (14) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(13) through (14) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(13) through (14) published elsewhere in this issue of the Federal 
Register.]

[[Page 88575]]

    (15) The term foreign basis means the adjusted basis of an asset 
determined for purposes of a foreign income tax.
    (16) The term foreign basis election has the meaning provided in 
Sec.  1.901(m)-4(c).
    (17) The term foreign country creditable tax (or FCCT) means, with 
respect to a foreign income tax amount, the amount of income, war 
profits, or excess profits tax paid or accrued to a foreign country or 
possession of the United States and claimed as a foreign tax credit for 
purposes of determining the foreign income tax amount. To qualify as a 
FCCT, the tax imposed by the foreign country or possession must be a 
foreign income tax or a withholding tax determined on a gross basis as 
described in section 901(k)(1)(B).
    (18) through (21) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(18) through (21) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(18) through (21) published elsewhere in this issue of the Federal 
Register.]
    (22) The term foreign income tax amount means, with respect to a 
foreign income tax, the amount of tax (including an amount of tax that 
is zero) reflected on a foreign tax return (as properly amended or 
adjusted). If foreign law imposes tax on the combined income (within 
the meaning of Sec.  1.901-2(f)(3)(ii)) of two or more foreign payors, 
however, a foreign income tax amount means the amount of tax imposed on 
the combined income, regardless of whether the tax is reflected on a 
single foreign tax return.
    (23) The term foreign payor means an individual or entity 
(including a disregarded entity) subject to a foreign income tax. If a 
foreign income tax imposes tax on the combined income (within the 
meaning of Sec.  1.901-2(f)(3)(ii)) of two or more individuals or 
entities, each such individual or entity is a foreign payor. An 
individual or entity may be a foreign payor with respect to more than 
one foreign income tax for purposes of applying section 901(m).
    (24) The term foreign taxable year means a taxable year for 
purposes of a foreign income tax.
    (25) The term mid-year transaction means a transaction in which a 
foreign payor that is a corporation or a disregarded entity has a 
change in ownership or makes an election pursuant to Sec.  301.7701-3 
to change its entity classification, or a transaction in which a 
foreign payor that is a partnership terminates under section 708(b)(1), 
provided in each case that the foreign payor's foreign taxable year 
does not close as a result of the transaction, and, if the foreign 
payor is a corporation or a partnership, the foreign payor's U.S. 
taxable year closes.
    (26) through (28) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(26) through (28) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(26) through (28) published elsewhere in this issue of the Federal 
Register.]
    (29) The term reverse hybrid has the meaning provided in Sec.  
1.909-2(b)(1)(iv).
    (30) The term RFA class exemption has the meaning provided in Sec.  
1.901(m)-7 (b)(3).
    (31) The term RFA owner (U.S.) means a person that owns an RFA for 
U.S. income tax purposes.
    (32) The term RFA owner (foreign) means an individual or entity 
(including a disregarded entity) that owns an RFA for purposes of a 
foreign income tax.
    (33) through (34) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(33) through (34) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(33) through (34) published elsewhere in this issue of the Federal 
Register.]
    (35) The term section 901(m) payor means a person eligible to claim 
the foreign tax credit allowed under section 901(a), regardless of 
whether the person chooses to claim the foreign tax credit, as well as 
a section 902 corporation (as defined in section 909(d)(5)). If members 
of a U.S. affiliated group of corporations (as defined in section 1504) 
file a consolidated return, each member is a separate section 901(m) 
payor. If individuals file a joint return, those individuals are 
treated as a single section 901(m) payor.
    (36) through (38) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(36) through (38) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(36) through (38) published elsewhere in this issue of the Federal 
Register.]
    (39) The term tentative disqualified tax amount has the meaning 
provided in Sec.  1.901(m)-3(b)(2).
    (40) through (41) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(40) through (41) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(40) through (41) published elsewhere in this issue of the Federal 
Register.]
    (42) The term U.S. basis deduction has the meaning provided in 
Sec.  1.901(m)-5(b)(3).
    (43) through (45) [The text of proposed Sec. Sec.  1.901(m)-
1(a)(43) through (45) is the same as the text of Sec. Sec.  1.901(m)-
1T(a)(43) through (45) published elsewhere in this issue of the Federal 
Register.]
    (b) Effective/applicability date. (1) Paragraphs (a)(1), (2), (3), 
(4), (5), (9), (12), (15), (16), (17), (22), (23), (24), (25), (29), 
(30), (31), (32), (35), (39), and (42) of this section apply to CAAs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register.
    (2) [The text of proposed Sec.  1.901(m)-1(b)(2) is the same as the 
text of Sec.  1.901(m)-1T(b)(2) published elsewhere in this issue of 
the Federal Register.]
    (3) Taxpayers may, however, rely on this section prior to the date 
this section is applicable provided that they both consistently apply 
this section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), and 
Sec. Sec.  1.901(m)-3 through 1.901(m)-8 (excluding Sec.  1.901(m)-
4(e)) to all CAAs occurring on or after January 1, 2011, and 
consistently apply Sec.  1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) to 
all CAAs occurring on or after December 7, 2016. For this purpose, 
persons that are related (within the meaning of section 267(b) or 
707(b)) will be treated as a single taxpayer.
0
Par. 4. Section 1.901(m)-2 is added to read as follows:


Sec.  1.901(m)-2  Covered asset acquisitions and relevant foreign 
assets.

    (a) through (b)(3) [The text of proposed Sec. Sec.  1.901(m)-2(a) 
through (b)(3) is the same as the text of Sec. Sec.  1.901(m)-2T(a) 
through (b)(3) published elsewhere in this issue of the Federal 
Register.]
    (4) Any transaction (or series of transactions occurring pursuant 
to a plan) to the extent it is treated as an acquisition of assets for 
purposes of U.S. income tax and as the acquisition of an interest in a 
fiscally transparent entity for purposes of a foreign income tax;
    (5) Any transaction (or series of transactions occurring pursuant 
to a plan) to the extent it is treated as a partnership distribution of 
one or more assets the U.S. basis of which is determined by section 
732(b) or 732(d) or which causes the U.S. basis of the partnership's 
remaining assets to be adjusted under section 734(b), provided the 
transaction results in an increase in the U.S. basis of one or more of 
the assets distributed by the partnership or retained by the 
partnership without a corresponding increase in the foreign basis of 
such assets; and
    (6) Any transaction (or series of transactions occurring pursuant 
to a plan) to the extent it is treated as an acquisition of assets for 
purposes of both U.S. income tax and a foreign income tax, provided the 
transaction results in an increase in the U.S. basis without a 
corresponding increase in the foreign basis of one or more assets.
    (c) Relevant foreign asset--(1) [The text of proposed Sec.  
1.901(m)-2(c)(1) is the same as the text of Sec.  1.901(m)-

[[Page 88576]]

2T(c)(1) published elsewhere in this issue of the Federal Register.]
    (2) RFA status with respect to a foreign income tax. An asset is 
relevant in determining foreign income if income, deduction, gain, or 
loss attributable to the asset is taken into account in determining 
foreign income immediately after the CAA, or would be taken into 
account in determining foreign income immediately after the CAA if the 
asset were to give rise to income, deduction, gain, or loss at such 
time.
    (3) Subsequent RFA status with respect to another foreign income 
tax. After a CAA, an asset will become an RFA with respect to another 
foreign income tax if, pursuant to a plan or series of related 
transactions that have a principal purpose of avoiding the application 
of section 901(m), an asset that was not relevant in determining 
foreign income for purposes of that foreign income tax immediately 
after the CAA becomes relevant in determining such foreign income. A 
principal purpose of avoiding section 901(m) will be deemed to exist if 
income, deduction, gain, or loss attributable to the asset is taken 
into account in determining such foreign income within the one-year 
period following the CAA, or would be taken into account in determining 
such foreign income during such time if the asset were to give rise to 
income, deduction, gain, or loss within the one-year period.
    (d) [The text of proposed Sec.  1.901(m)-2(d) is the same as the 
text of Sec.  1.901(m)-2T(d) published elsewhere in this issue of the 
Federal Register.]
    (e) Examples. The following examples illustrate the rules of this 
section:

    Example 1.  CAA involving an acquisition of a partnership 
interest for foreign income tax purposes--(i) Facts. (A) FPS is an 
entity organized in Country F that is treated as a partnership for 
both U.S. and Country F income tax purposes. FPS is owned 50/50 by 
FC1 and FC2, each of which is a corporation organized in Country F 
and treated as a corporation for both U.S. and Country F income tax 
purposes. FPS has a single asset, Asset A. USP, a domestic 
corporation, owns all the interests in DE, a disregarded entity.
    (B) Pursuant to the same transaction, USP acquires FC1's 
interest in FPS, and DE acquires FC2's interest in FPS. For U.S. 
income tax purposes, with respect to USP, the acquisition of the 
interests in FPS is treated as the acquisition of Asset A by USP. 
See Rev. Rul. 99-6, 1999-1 C.B. 432. For Country F tax purposes, the 
acquisitions of the interests of FPS by USP and DE are treated as 
acquisitions of partnership interests.
    (ii) Result. The transaction is a CAA under paragraph (b)(4) of 
this section because it is treated as the acquisition of Asset A for 
U.S. income tax purposes and the acquisition of interests in a 
partnership for Country F tax purposes.
    Example 2.  CAA involving an asset acquisition for purposes of 
both U.S. income tax and a foreign income tax--(i) Facts. (A) USP, a 
domestic corporation, wholly owns CFC1, a foreign corporation, and 
CFC1 wholly owns CFC2, also a foreign corporation. CFC1 and CFC2 are 
organized in Country F. CFC1 owns Asset A.
    (B) In an exchange described in section 351, CFC1 transfers 
Asset A to CFC2 in exchange for CFC2 common stock and cash. CFC1 
recognizes gain on the exchange under section 351(b). Under section 
362(a), CFC2's U.S. basis in Asset A is increased by the gain 
recognized by CFC1. For Country F tax purposes, gain or loss is not 
recognized on the transfer of Asset A to CFC2, and therefore there 
is no increase in the foreign basis in Asset A.
    (ii) Result. The transaction is a CAA under paragraph (b)(6) of 
this section because it is treated as an acquisition of Asset A by 
CFC2 for both U.S. and Country F income tax purposes, and it results 
in an increase in the U.S. Basis of Asset A without a corresponding 
increase in the foreign basis of Asset A.
    Example 3.  RFA status determined immediately after CAA; 
application of principal purpose rule--(i) Facts. (A) USP1 and USP2 
are unrelated domestic corporations. USP1 wholly owns USSub, also a 
domestic corporation. On January 1 of Year 1, USP2 acquires all of 
the stock of USSub from USP1 in a qualified stock purchase (as 
defined in section 338(d)(3)) to which section 338(a) applies. 
Immediately after the acquisition, none of the income, deduction, 
gain, or loss attributable to any of the assets of USSub is taken 
into account in determining foreign income for purposes of a foreign 
income tax nor would such items be taken into account in determining 
foreign income for purposes of a foreign income tax immediately 
after the acquisition if such assets were to give rise to income, 
deduction, gain, or loss immediately after the acquisition.
    (B) On December 1 of Year 1, USSub contributes all its assets to 
FSub, its wholly owned subsidiary, which is a corporation for both 
U.S. and Country X income tax purposes, in a transfer described in 
section 351 (subsequent transfer). USSub recognizes no gain or loss 
for U.S. or Country X income tax purposes as a result of the 
subsequent transfer. As a result of the subsequent transfer, income, 
deduction, gain, or loss attributable to the assets of USSub that 
were transferred to FSub is taken into account in determining 
foreign income of FSub for Country X tax purposes.
    (ii) Result. (A) Under paragraph (b)(1) of this section, the 
acquisition by USP2 of the stock of USSub is a section 338 CAA. 
Under paragraph (c)(1) of this section, none of the assets of USSub 
are RFAs immediately after the CAA, because none of the income, 
deduction, gain, or loss attributable to such assets is taken into 
account for purposes of determining foreign income with respect to 
any foreign income tax immediately after the CAA (nor would such 
items be taken into account for purposes of determining foreign 
income immediately after the CAA if such assets were to give rise to 
income, deduction, gain, or loss at such time).
    (B) Although the subsequent transfer is not a CAA under 
paragraph (b) of this section, the subsequent transfer causes the 
assets of USSub to become relevant in the hands of FSub in 
determining foreign income for Country X tax purposes. Because the 
subsequent transfer occurred within the one-year period following 
the CAA, it is presumed to have a principal purpose of avoiding 
section 901(m). Accordingly, under paragraph (c)(2) of this section, 
the assets of USSub with respect to the CAA occurring on January 1 
of Year 1 become RFAs with respect to Country X tax as a result of 
the subsequent transfer. Thus, a basis difference with respect to 
Country X tax must be computed for the RFAs and taken into account 
under section 901(m).

    (f) Effective/applicability date. (1) [The text of proposed Sec.  
1.901(m)-2(f)(1) is the same as the text of Sec.  1.901(m)-2T(f)(1) 
published elsewhere in this issue of the Federal Register.]
    (2) Paragraphs (b)(4) through (b)(6), (c)(2), (c)(3), and (e) of 
this section apply to CAAs occurring on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.
    (3) Taxpayers may, however, rely on this section prior to the date 
this section is applicable provided that they both consistently apply 
this section (excluding paragraph (d) of this section) to all CAAs 
occurring on or after December 7, 2016 and consistently apply Sec.  
1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  1.901(m)-1, and 
Sec. Sec.  1.901(m)-3 through 1.901(m)-8 (excluding Sec.  1.901(m)-
4(e)) to all CAAs occurring on or after January 1, 2011. For this 
purpose, persons that are related (within the meaning of section 267(b) 
or 707(b)) will be treated as a single taxpayer.
0
Par. 5. Section 1.901(m)-3 is added to read as follows:


Sec.  1.901(m)-3  Disqualified tax amount and aggregate basis 
difference carryover.

    (a) In general. If a section 901(m) payor has an aggregate basis 
difference, with respect to a foreign income tax and a foreign payor, 
for a U.S. taxable year, the section 901(m) payor must determine the 
portion of a foreign income tax amount that is disqualified under 
section 901(m) (disqualified tax amount). Paragraph (b) of this section 
provides rules for determining the disqualified tax amount. Paragraph 
(c) of this section provides rules for determining what portion, if 
any, of aggregate basis difference will be carried forward to the next 
U.S. taxable year (aggregated basis difference carryover). Paragraph 
(d) of this section provides the effective/applicability date.

[[Page 88577]]

    (b) Disqualified tax amount--(1) In general. A section 901(m) 
payor's disqualified tax amount is not taken into account in 
determining the credit allowed under section 901(a). If the section 
901(m) payor is a section 902 corporation, the disqualified tax amount 
is not taken into account for purposes of section 902 or 960. Sections 
78 and 275 do not apply to the disqualified tax amount. The 
disqualified tax amount is allowed as a deduction to the extent 
otherwise deductible (see sections 164, 212, and 964 and the 
regulations under those sections).
    (2) Determination of disqualified tax amount--(i) In general. 
Except as provided in paragraph (b)(2)(iv) of this section, the 
disqualified tax amount is equal to the lesser of the foreign income 
tax amount that is paid or accrued by, or considered paid or accrued 
by, the section 901(m) payor for the U.S. taxable year or the tentative 
disqualified tax amount. All calculations are determined with respect 
to each separate category described in Sec.  1.904-4(m).
    (ii) Tentative disqualified tax amount. The tentative disqualified 
tax amount is equal to the amount determined under paragraph 
(b)(2)(ii)(A) of this section reduced (but not below zero) by the 
amount described in paragraph (b)(2)(ii)(B) of this section.
    (A) The product of--
    (1) The sum of the foreign income tax amount and the FCCTs that are 
paid or accrued by, or considered paid or accrued by, the section 
901(m) payor, and
    (2) A fraction, the numerator of which is the aggregate basis 
difference, but not in excess of the allocable foreign income, and the 
denominator of which is the allocable foreign income.
    (B) The amount of the FCCT that is a disqualified tax amount of the 
section 901(m) payor with respect to another foreign income tax.
    (iii) Allocable foreign income--(A) No allocation required. Except 
as provided in paragraph (b)(2)(iii)(D) of this section, if the entire 
foreign income tax amount is paid or accrued by, or considered paid or 
accrued by, a single section 901(m) payor, then the allocable foreign 
income is equal to the entire foreign income, determined with respect 
to each separate category described in Sec.  1.904-4(m).
    (B) Allocation required. Except as provided in paragraph 
(b)(2)(iii)(D) of this section, if the foreign income tax amount is 
allocated to, and considered paid or accrued by, more than one person, 
a section 901(m) payor's allocable foreign income is equal to the 
portion of the foreign income that relates to the foreign income tax 
amount allocated to that section 901(m) payor, determined with respect 
to each separate category described in Sec.  1.904-4(m).
    (C) Rules for allocations. This paragraph (b)(2)(iii)(C) provides 
allocation rules that apply to determine allocable foreign income in 
certain cases.
    (1) If the foreign payor is involved in a mid-year transaction and 
the foreign income tax amount is allocated under Sec.  1.336-
2(g)(3)(ii), 1.338-9(d), or 1.901-2(f)(4), then, to the extent any 
portion of the foreign income tax amount is allocated to, and 
considered paid or accrued by, a section 901(m) payor, the allocable 
foreign income of the section 901(m) payor is determined in accordance 
with the principles of Sec.  1.1502-76(b). To the extent the foreign 
income tax amount is allocated to an entity that is a partnership for 
U.S. income tax purposes, a portion of the foreign income is first 
allocated to the partnership in accordance with the principles of Sec.  
1.1502-76(b), which is then allocated under the rules of paragraph 
(b)(2)(iii)(C)(2) of this section to determine the allocable foreign 
income of a section 901(m) payor that owns an interest in the 
partnership directly or indirectly through one or more other 
partnerships for U.S. income tax purposes.
    (2) If the foreign income tax amount is considered paid or accrued 
by a section 901(m) payor for a U.S. taxable year under Sec.  1.702-
1(a)(6), the determination of the allocable foreign income must be 
consistent with the allocation of the foreign income tax amount that 
relates to the foreign income. See Sec.  1.704-1(b)(4)(viii).
    (3) If the foreign income tax amount that is allocated to, and 
considered paid or accrued by, a section 901(m) payor for a U.S. 
taxable year is determined under Sec.  1.901-2(f)(3)(i), the allocable 
foreign income is determined in accordance with Sec.  1.901-
2(f)(3)(iii).
    (D) Failure to substantiate allocable foreign income. If, pursuant 
to section 901(m)(3)(A), a section 901(m) payor fails to substantiate 
its allocable foreign income to the satisfaction of the Secretary, then 
allocable foreign income will equal the amount determined by dividing 
the sum of the foreign income tax amount and the FCCTs that are paid or 
accrued by, or considered paid or accrued by, the section 901(m) payor, 
by the highest marginal tax rate applicable to income of the foreign 
payor under foreign tax law.
    (iv) Special rule. A section 901(m) payor's disqualified tax amount 
is zero for a U.S. taxable year if:
    (A) The section 901(m) payor's aggregate basis difference for the 
U.S. taxable year is a negative amount;
    (B) Foreign income is less than or equal to zero for the foreign 
taxable year of the foreign payor; or
    (C) The foreign income tax amount that is paid or accrued by, or 
considered paid or accrued by, the section 901(m) payor for the U.S. 
taxable year is zero.
    (3) Examples. The following examples illustrate the rules of 
paragraph (b)(2) of this section. For purposes of all the examples, 
unless otherwise specified: USP is a domestic corporation. CFC1, CFC2, 
DE1, and DE2 are organized in Country F and are treated as corporations 
for Country F tax purposes. CFC1 and CFC2 are section 902 corporations 
(as defined in section 909(d)(5)). DE1 and DE2 are disregarded 
entities. USP, CFC1, and CFC2 have a calendar year for both U.S. and 
Country F income tax purposes, and DE1 and DE2 have a calendar year for 
Country F tax purposes. Country F and Country G each impose a single 
tax that is a foreign income tax . CFC1, CFC2, DE1, and DE2 each have a 
functional currency of the u with respect to all activities. At all 
relevant times, 1u equals $1. All amounts are stated in millions. The 
examples assume that the applicable cost recovery method for property 
results in basis being recovered ratably over the life of the property 
beginning on the first day of the U.S. taxable year in which the 
property is acquired or placed into service; there is a single Sec.  
1.904-4(m) separate category with respect to a foreign income and 
foreign income tax amount; and a section 901(m) payor properly 
substantiates its allocable foreign income to the satisfaction of the 
Secretary.

    Example 1.  Determining aggregate basis difference; multiple 
foreign payors--(i) Facts. CFC1 wholly owns CFC2 and DE1. DE1 wholly 
owns DE2. Assume that the tax laws of Country F do not allow 
combined income reporting or the filing of consolidated income tax 
returns. Accordingly, CFC1, CFC2, DE1, and DE2 file separate tax 
returns for Country F tax purposes. USP acquires all of the stock of 
CFC1 in a qualified stock purchase (as defined in section 338(d)(3)) 
to which section 338(a) applies for both CFC1 and CFC2.
    (ii) Result. (A) The acquisition of CFC1 gives rise to four 
separate CAAs under Sec.  1.901(m)-2(b). The acquisition of the 
stock of CFC1 and the deemed acquisition of the stock of CFC2 under 
section 338(h)(3)(B) is each a Section 338 CAA under Sec.  1.901(m)-
2(b)(1). Furthermore, because the deemed acquisition of the assets 
of DE1 and DE2 for U.S. income tax purposes is disregarded for 
Country F tax purposes, each acquisition is a CAA under Sec.  
1.901(m)-2(b)(2). Because these four CAAs occur pursuant to a plan, 
under Sec.  1.901(m)-1(a)(3) they are part of an aggregated CAA 
transaction. Under

[[Page 88578]]

Sec.  1.901(m)-1(a)(31), CFC1 is the RFA owner (U.S.) with respect 
to its assets and those of DE1 and DE2. CFC2 is the RFA owner (U.S.) 
with respect to its assets. Under Sec.  1.901(m)-1(a)(23), CFC1, 
CFC2, DE1, and DE2 are each a foreign payor for Country F tax 
purposes. Under Sec.  1.901(m)-1(a)(35), CFC1 is the section 901(m) 
payor with respect to foreign income tax amounts for which CFC1, 
DE1, and DE2 are the foreign payors (see Sec. Sec.  1.901-2(f)(1) 
and 1.901-2(f)(4)(ii)). CFC2 is the section 901(m) payor with 
respect to foreign income tax amounts for which CFC2 is the foreign 
payor (see Sec.  1.901-2(f)(1)).
    (B) In determining aggregate basis difference under Sec.  
1.901(m)-1(a)(1) for a U.S. taxable year of CFC1, CFC1 has three 
computations with respect to Country F tax, because there are three 
foreign payors for Country F tax purposes whose foreign income tax 
amount, if any, is considered paid or accrued by CFC1 as the section 
901(m) payor. Furthermore, for each U.S. taxable year, CFC1 will 
compute a separate disqualified tax amount and aggregate basis 
difference Carryover (if any) under paragraph (b)(2) of this 
section, with respect to each foreign payor.
    (C) In determining aggregate basis difference for a U.S. taxable 
year of CFC2 under Sec.  1.901(m)-1(a)(1), CFC2 has a single 
computation with respect to Country F tax, because there is a single 
foreign payor (CFC2) for Country F tax purposes whose foreign income 
tax amount, if any, is considered paid or accrued by CFC2 as the 
section 901(m) payor. Furthermore, for each U.S. taxable year, CFC2 
will compute a disqualified tax amount and aggregate basis 
difference Carryover (if any) under paragraph (b)(2) of this 
section.
    (iii) Alternative facts. Assume the same facts as in paragraph 
(i) of this Example 1, except that foreign income for Country F tax 
purposes is based on combined income (within the meaning of Sec.  
1.901-2(f)(3)(ii)) of CFC1, CFC2, DE1, and DE2. For purposes of 
determining an aggregate basis difference for a U.S. taxable year of 
CFC1 under Sec.  1.901(m)-1(a)(1), CFC1, DE1, and DE2 are treated as 
a single foreign payor because all of the items of income, 
deduction, gain, or loss with respect to CFC1, DE1, and DE2 are 
included in the earnings and profits of CFC1 for U.S. income tax 
purposes. For each U.S. taxable year, CFC1 will therefore compute a 
single aggregate basis difference, disqualified tax amount, and 
aggregate basis difference carryover. The result for CFC2 under the 
alternative facts is the same as in paragraph (ii)(C) of this 
Example 1.
    Example 2. Computation of disqualified tax amount--(i) Facts. On 
December 31 of Year 0, USP acquires all of the stock of CFC1 in a 
qualified stock purchase (as defined in section 338(d)(3)) to which 
section 338(a) applies (Acquisition). CFC1 owns four assets (Asset 
A, Asset B, Asset C, and Asset D, and collectively, Assets) and 
conducts activities in Country F and in a Country G branch. The 
activities conducted by CFC1 in Country G are not subject to tax in 
Country F. The tax rate is 25% in Country F and 30% in Country G. 
For Country F tax purposes, CFC1's foreign income and foreign income 
tax amount for each foreign taxable year 1 through 15 is 100u and 
$25 (25u translated at the exchange rate of $1 = 1u), respectively. 
For Country G tax purposes, CFC1's foreign income and foreign income 
tax amount for each foreign taxable year 1 through 5 is 400u and 
$120 (120u translated at the exchange rate of $1 = 1u), 
respectively. No dispositions occur for any of the Assets during the 
applicable cost recovery period. Additional facts relevant to each 
of the Assets are summarized below.

----------------------------------------------------------------------------------------------------------------
                                                                            Applicable
             Assets              Relevant foreign income       Basis       cost recovery   Cost recovery amount
                                           tax              difference    period (years)
----------------------------------------------------------------------------------------------------------------
Asset A........................  Country F tax..........            150u              15  10u (150u/15).
Asset B........................  Country F tax..........             50u               5  10u (50u/5).
Asset C........................  Country G tax..........            300u               5  60u (300u/5).
Asset D........................  Country G tax..........          (100u)               5  negative 20u (negative
                                                                                           100/5).
----------------------------------------------------------------------------------------------------------------

    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(1), the Acquisition 
of the stock of CFC1 is a Section 338 CAA. Under Sec.  1.901(m)-
2(c)(1), Assets A and B are RFAs with respect to Country F tax, 
because they are relevant in determining foreign income of CFC1 for 
Country F tax purposes and were owned by CFC1 when the Acquisition 
occurred. Assets C and D are RFAs with respect to Country G tax, 
because they are relevant in determining foreign income of CFC1 for 
Country G tax purposes and were owned by CFC1 when the Acquisition 
occurred. Under Sec.  1.901(m)-1(a)(31), CFC1 is the RFA owner 
(U.S.) with respect to all of the RFAs. Under Sec.  1.901(m)-
1(a)(35) and (a)(23), CFC1 is the section 901(m) payor and the 
foreign payor for Country F and Country G tax purposes.
    (B) In determining aggregate basis difference for a U.S. taxable 
year of CFC1, CFC1 has two computations, one with respect to Country 
F tax and one with respect to Country G tax. Under Sec.  1.901(m)-
1(a)(1), the aggregate basis difference for a U.S. taxable year with 
respect to Country F tax is equal to the sum of the allocated basis 
differences with respect to Assets A and B for the U.S. taxable 
year. Under Sec.  1.901(m)-1(a)(5), allocated basis differences are 
comprised of cost recovery amounts and disposition amounts. Because 
there are no dispositions, the only allocated basis differences 
taken into account in determining an aggregate basis difference are 
cost recovery amounts. Under Sec.  1.901(m)-5(b), any cost recovery 
amounts are attributed to CFC1, because CFC1 is the section 901(m) 
payor and RFA owner (U.S.) with respect to all of the Assets. For 
each U.S. taxable year, CFC1 will compute a separate disqualified 
tax amount and aggregate basis difference carryover (if any) with 
respect to Country F tax and Country G tax under paragraph (b)(2) of 
this section. For purposes of both disqualified tax amount 
computations, because CFC1 is the section 901(m) payor and foreign 
payor, the foreign income tax amount paid or accrued by CFC1 with 
respect to Country F tax and Country G tax, respectively, will be 
the entire foreign income tax amount and CFC1's allocable foreign 
income will be the entire foreign income.
    (C) With respect to Country F tax, in U.S. taxable years 1 
through 5, CFC1 has an aggregate basis difference of 20u each year 
(10u cost recovery amount with respect to Asset A plus 10u cost 
recovery amount with respect to Asset B). For U.S. taxable years 1 
through 5, under paragraph (b)(2) of this section, the disqualified 
tax amount each year is $5, the lesser of two amounts: the tentative 
disqualified tax amount, in this case, $5 ($25 foreign income tax 
amount x (20u aggregate basis difference/100u allocable foreign 
income)), or the foreign income tax amount paid or accrued by CFC1, 
in this case, $25. After U.S. taxable year 5, Asset B has no 
unallocated basis difference with respect to Country F tax. 
Accordingly, in U.S. taxable years 6 through 15, CFC1 has an 
aggregate basis difference of 10u each year. Accordingly, for U.S. 
taxable years 6 through 15, the disqualified tax amount each year is 
$2.50, the lesser of two amounts: the tentative disqualified tax 
amount, in this case, $2.50 ($25 foreign income tax amount x (10u 
aggregate basis difference/100u allocable foreign income)), or the 
foreign income tax amount paid or accrued by CFC1, in this case, 
$25. After U.S. taxable year 15, Asset A has no unallocated basis 
difference with respect to Country F tax and, therefore, CFC1 has no 
disqualified tax amount with respect to Country F Tax.
    (D) With respect to Country G tax, in U.S. taxable years 1 
through 5, CFC1 has an aggregate basis difference of 40u each year 
(60u cost recovery amount with respect to Asset C + (20u) cost 
recovery amount with respect to Asset D). For U.S. taxable years 1 
through 5, under paragraph (b)(2) of this section, the disqualified 
tax amount each year is $12, the lesser of two amounts: the 
tentative disqualified tax amount, in this case, $12 ($120 foreign 
income tax amount x (40u aggregate basis difference/400u allocable 
foreign income)), or the foreign income tax amount paid or accrued 
by CFC1, in this case, $120. After U.S. taxable year 5, Asset C and 
Asset D have no unallocated basis difference with respect to Country 
G

[[Page 88579]]

tax. Accordingly, in U.S. taxable years 6 through 15, CFC1 has no 
disqualified tax amount with respect to Country G Tax.
    Example 3.  FCCT--(i) Facts. In U.S. taxable year 1, USP 
acquires all of the interests in DE1 in a transaction (Transaction) 
that is treated as a stock acquisition for Country F tax purposes. 
Immediately after the Transaction, DE1 owns assets (Pre-Transaction 
Assets), all of which are used in a Country G branch and give rise 
to income that is taken into account for Country F tax and Country G 
tax purposes. After the Transaction, DE1 acquires additional assets 
(Post-Transaction Assets), which are not used by the Country G 
branch. Both Country F and Country G have a tax rate of 30%. Country 
F imposes worldwide tax on its residents and provides a foreign tax 
credit for taxes paid to other jurisdictions. In foreign taxable 
year 3, 100u of income is attributable to DE1's Post-Transaction 
Assets and 100u of income is attributable to DE1's Pre-Transaction 
Assets. For Country G tax purposes, the foreign income is 100u and 
foreign income tax amount is 30u (30% x 100u). For Country F tax 
purposes, the foreign income is 200u and the pre-foreign tax credit 
tax is 60u (30% x 200u). The 60u of Country F pre-foreign tax credit 
tax is reduced by the 30u foreign income tax amount imposed for 
Country G tax purposes. Thus, the foreign income tax amount for 
Country F tax purposes is $30 (30u translated into dollars at the 
exchange rate of $1 = 1u). Assume that for U.S. taxable year 3 USP 
has 100u aggregate basis difference with respect to Country F tax 
and 100u aggregate basis difference with respect to Country G tax. 
USP does not dispose of DE1 or any assets of DE1 in U.S. taxable 
year 3.
    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(2), the Transaction 
is a CAA. Under Sec.  1.901(m)-2(c)(1), the Pre-Transaction Assets 
are RFAs with respect to both Country F tax and Country G tax, 
because they are relevant in determining the foreign income of DE1 
for Country F tax and Country G tax purposes and were owned by DE1 
when the Transaction occurred. Under Sec.  1.901(m)-1(a)(31), USP is 
the RFA owner (U.S.) with respect to the RFAs. Under Sec.  1.901(m)-
1(a)(23), DE1 is a foreign payor for Country F tax and Country G tax 
purposes. Under Sec.  1.901(m)-1(a)(35), USP is the section 901(m) 
payor with respect to foreign income tax amounts for which DE1 is 
the foreign payor (see Sec.  1.901-2(f)(4)(ii)). Because the Country 
G foreign income tax amount is claimed as a credit for purposes of 
determining the Country F foreign income tax amount, the Country G 
foreign income tax amount is an FCCT under Sec.  1.901(m)-1(a)(17).
    (B) Under Sec.  1.901(m)-1(a)(1), for each U.S. taxable year, 
USP will separately compute the aggregate basis difference with 
respect to Country F tax and with respect to Country G tax, and will 
use those amounts to separately compute a disqualified tax amount 
and aggregate basis difference carryover (if any) with respect to 
each foreign income tax . Because DE1 is a disregarded entity owned 
by USP during the entire U.S. taxable year 3, the foreign income tax 
amount paid or accrued by DE1 is not subject to allocation. 
Accordingly, for purposes of each of the disqualified tax amount 
computations, the foreign income tax amount paid or accrued by USP 
with respect to Country F tax and Country G tax, respectively, is 
the entire foreign income tax amount paid or accrued by DE1, and, 
under paragraph (b)(2)(iii)(A) of this section, USP's allocable 
foreign income will be equal to DE1's entire foreign income.
    (C) As stated in paragraph (i) of this Example 3, for U.S. 
taxable year 3 USP has 100u aggregate basis difference with respect 
to Country F tax and 100u aggregate basis difference with respect to 
Country G tax. With respect to Country G tax, in U.S. taxable year 
3, under paragraph (b)(2) of this section, the disqualified tax 
amount is $30, the lesser of the two amounts: the tentative 
disqualified tax amount, in this case, $30 ($30 foreign income tax 
amount x (100u aggregate basis difference/100u allocable foreign 
income)), or the foreign income tax amount considered paid or 
accrued by USP, in this case, $30.
    (D) With respect to Country F tax, in U.S. taxable year 3, under 
paragraph (b)(2) of this section, the disqualified tax amount is $0, 
the lesser of two amounts: the tentative disqualified tax amount, in 
this case $0 (($30 foreign income tax amount + $30 Country G FCCT) x 
(100u aggregate basis difference/200u foreign income) = $30 reduced 
by $30 Country G FCCT that is a disqualified tax amount of USP), or 
the foreign income tax amount considered paid or accrued by USP, in 
this case, $30.

    (c) Aggregate basis difference carryover--(1) In general. If a 
section 901(m) payor has an aggregate basis difference carryover for a 
U.S. taxable year, as determined under this paragraph (c), the 
aggregate basis difference carryover is taken into account in computing 
the section 901(m) payor's aggregate basis difference for the next U.S. 
taxable year. For successor rules that apply to an aggregate basis 
difference carryover, see Sec.  1.901(m)-6(c).
    (2) Amount of aggregate basis difference carryover. (i) If a 
section 901(m) payor's disqualified tax amount is zero, all of the 
section 901(m) payor's aggregate basis difference (positive or 
negative) for the U.S. taxable year gives rise to an aggregate basis 
difference carryover to the next U.S. taxable year.
    (ii) If a section 901(m) payor's disqualified tax amount is not 
zero, then aggregate basis difference carryover can arise in either or 
both of the following two situations:
    (A) If a section 901(m) payor's aggregate basis difference for the 
U.S. taxable year exceeds its allocable foreign income, the excess 
gives rise to an aggregate basis difference carryover.
    (B) If the tentative disqualified tax amount exceeds the 
disqualified tax amount, the excess tentative disqualified tax amount 
is converted into aggregate basis difference carryover by multiplying 
such excess by a fraction, the numerator of which is the allocable 
foreign income, and the denominator of which is the sum of the foreign 
income tax amount and the FCCTs that are paid or accrued by, or 
considered paid or accrued by, the section 901(m) payor.
    (3) Example. The following example illustrates the rule of 
paragraph (c) of this section.

    Example.  Aggregate basis difference carryover; section 901(m) 
payor's U.S. taxable year differs from the foreign taxable year of 
foreign payor--(i) Facts. (A) On July 1 of Year 1, CFC1 acquires all 
of the interests of DE1 in a transaction (Transaction) that is 
treated as a stock acquisition for Country F tax purposes. CFC1 and 
DE1 are organized in Country F and are treated as corporations for 
Country F tax purposes. CFC1 is a section 902 corporation (as 
defined in section 909(d)(5)), and DE1 is a disregarded entity . 
CFC1 has a calendar year for U.S. income tax purposes, and DE1 has a 
June 30 year-end for Country F tax purposes. Country F imposes a 
single tax that is a foreign income tax . CFC1 and DE1 each have a 
functional currency of the u with respect to all activities. 
Immediately after the Transaction, DE1 owns one asset, Asset A, that 
gives rise to income that is taken into account for Country F tax 
purposes. For the first U.S. taxable year (U.S. taxable year 1) 
there is a cost recovery amount with respect to Asset A of 9u, and 
for each subsequent U.S. taxable year until the U.S. basis is fully 
recovered, there is a cost recovery amount with respect to Asset A 
of 18u. There is no disposition of Asset A.
    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(2), the Transaction 
is a CAA. Under Sec.  1.901(m)-2(c)(1), Asset A is an RFA with 
respect to Country F tax because it is relevant in determining the 
foreign income of DE1 for Country F tax purposes and was owned by 
DE1 when the Transaction occurred. Under Sec.  1.901(m)-1(a)(31), 
CFC1 is the RFA owner (U.S.) with respect to Asset A. Under Sec.  
1.901(m)-1(a)(23), DE1 is a foreign payor for Country F tax 
purposes. Under Sec.  1.901(m)-1(a)(35), CFC1 is the section 901(m) 
payor with respect to foreign income tax amounts for which DE1 is 
the foreign payor (see Sec.  1.901-2(f)(4)(ii)).
    (B) Under Sec.  1.901(m)-1(a)(1), in determining the aggregate 
basis difference for U.S. taxable year 1, CFC1 has one computation 
with respect to Country F tax. Under Sec.  1.901(m)-1(a)(1), 
aggregate basis difference with respect to Country F tax is equal to 
the sum of allocated basis differences with respect to all RFAs, 
which, in this case, is only Asset A. Under Sec.  1.901(m)-1(a)(5), 
allocated basis differences are comprised of cost recovery amounts 
and disposition amounts. Because there is no disposition of Asset A, 
the only allocated basis difference taken into account in 
determining an aggregate basis difference are cost recovery amounts 
with respect to Asset A. Under Sec.  1.901(m)-5(b), any cost 
recovery amounts are assigned to a U.S taxable year of CFC1, because 
CFC1 is the section 901(m) payor and RFA owner (U.S.) with respect 
to Asset A. Under paragraph (b)(2) of this

[[Page 88580]]

section, for each U.S. taxable year, CFC1 will compute a 
disqualified tax amount and aggregate basis difference carryover 
with respect to the aggregate basis difference. Because DE1 is a 
disregarded entity owned by CFC1, the foreign income tax amount paid 
or accrued by DE1 is not subject to allocation. Accordingly, for 
purposes of the disqualified tax amount computation, the foreign 
income tax amount paid or accrued by CFC1 with respect to Country F 
tax is the entire foreign income tax amount paid or accrued by DE1, 
and under paragraph (b)(2)(iii)(A) of this section, CFC1's allocable 
foreign income will be equal to DE1's entire foreign income.
    (C) In U.S. taxable year 1, CFC1 has an aggregate basis 
difference of 9u (the 9u cost recovery amount with respect to Asset 
A for U.S. taxable year 1). However, because the foreign taxable 
year of DE1, the foreign payor, will not end between July 1 and 
December 31, there will not be a foreign income tax amount for U.S. 
taxable year 1. Because the foreign income tax amount considered 
paid or accrued by CFC1 for U.S. taxable year 1 is zero, under 
paragraph (b)(2)(iv) of this section, the disqualified tax amount 
for U.S. taxable year 1 of CFC1 is also zero. Furthermore, because 
the disqualified tax amount is zero, under paragraph (c)(2)(i) of 
this section, CFC1 has an aggregate basis difference carryover equal 
to 9u, the entire amount of the aggregate basis difference for U.S. 
taxable year 1. Under paragraph (c)(1) of this section, the 9u 
aggregate basis difference carryover is taken into account in 
computing CFC1's aggregate basis difference for U.S. taxable year 2. 
Accordingly, in U.S. taxable year 2, CFC1 has an aggregate basis 
difference of 27u (18u cost recovery amount for U.S. taxable year 2, 
plus 9u aggregate basis difference carryover from U.S. taxable year 
1).

    (d) Effective/applicability date. This section applies to CAAs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. 
Taxpayers may, however, rely on this section prior to the date this 
section is applicable provided that they both consistently apply this 
section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  
1.901(m)-1, and Sec. Sec.  1.901(m)-4 through 1.901(m)-8 (excluding 
Sec.  1.901(m)-4(e)) to all CAAs occurring on or after January 1, 2011, 
and consistently apply Sec.  1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) 
to all CAAs occurring on or after December 7, 2016. For this purpose, 
persons that are related (within the meaning of section 267(b) or 
707(b)) will be treated as a single taxpayer.
0
Par. 6. Section 1.901(m)-4 is added to read as follows:


Sec.  1.901(m)-4  Determination of basis difference.

    (a) through (b) [The text of proposed Sec. Sec.  1.901(m)-4(a) 
through (b) is the same as the text of Sec. Sec.  1.901(m)-4T(a) 
through (b) published elsewhere in this issue of the Federal Register.]
    (c) Foreign basis election. (1) An election (foreign basis 
election) may be made to apply section 901(m)(3)(C)(i)(II) by reference 
to the foreign basis immediately after the CAA instead of the U.S. 
basis immediately before the CAA. Accordingly, if a foreign basis 
election is made, basis difference is the U.S. basis in the RFA 
immediately after the CAA, less the foreign basis in the RFA 
immediately after the CAA. For this purpose, the foreign basis 
immediately after the CAA takes into account any adjustment to that 
foreign basis resulting from the CAA for purposes of the foreign income 
tax .
    (2) Except as otherwise provided in this paragraph (c), a foreign 
basis election is made by the RFA owner (U.S.). If, however, the RFA 
owner (U.S.) is a partnership, each partner in the partnership (and not 
the partnership) may independently make a foreign basis election. In 
the case of one or more tiered partnerships, the foreign basis election 
is made at the level at which a partner is not also a partnership.
    (3) The election may be made separately for each CAA, and with 
respect to each foreign income tax and each foreign payor. For purposes 
of making the foreign basis election, all CAAs that are part of an 
aggregated CAA transaction are treated as a single CAA. Furthermore, 
for purposes of making the foreign basis election, if foreign law 
imposes tax on the combined income (within the meaning of Sec.  1.901-
2(f)(3)(ii)) of two or more foreign payors, all foreign payors whose 
items of income, deduction, gain, or loss for U.S. income tax purposes 
are included in the U.S. taxable income or earnings and profits of a 
single section 901(m) payor are treated as a single foreign payor.
    (4) A foreign basis election is made by using foreign basis to 
determine basis difference for purposes of computing a disqualified tax 
amount and an aggregate basis difference carryover for the U.S. taxable 
year, as provided under Sec.  1.901(m)-3. A separate statement or form 
evidencing the foreign basis election need not be filed. Except as 
provided in paragraph (c)(5) and (6) of this section, in order for a 
foreign basis election to be effective, the election must be reflected 
on a timely filed original federal income tax return (including 
extensions) for the first U.S. taxable year that the foreign basis 
election is relevant to the computation of any amounts reported on such 
return, including on any required schedules.
    (5) If the RFA owner (U.S.) is a partnership, a foreign basis 
election reflected on a partner's timely filed amended federal income 
tax return is also effective if all of the following conditions are 
satisfied:
    (i) The partner's timely filed original federal income tax return 
(including extensions) for the first U.S. taxable year of the partner 
in which a foreign basis election is relevant to the computation of any 
amounts reported on such return, including on any required schedules, 
does not reflect the application of section 901(m);
    (ii) The information provided by the partnership to the partner for 
purposes of applying section 901(m) and any information required to be 
reported by the partnership is based solely on computations that use 
foreign basis to determine basis difference; and
    (iii) Prior to the due date of the original federal income tax 
return (including extensions) described in paragraph (c)(5)(i) of this 
section, the partner delegated the authority to the partnership to 
choose whether to provide the partner with information to apply section 
901(m) using foreign basis, either pursuant to a written partnership 
agreement (within the meaning of Sec.  1.704-1(b)(2)(ii)(h)) or written 
notice provided by the partner to the partnership.
    (6) If, pursuant to paragraph (g)(3) of this section, a taxpayer 
chooses to have this section apply to CAAs occurring on or after 
January 1, 2011, a foreign basis election will be effective if the 
election is reflected on a timely filed amended federal income tax 
return (or tax returns, as applicable) filed no later than one year 
following the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register.
    (7) The foreign basis election is irrevocable. Relief under Sec.  
301.9100-1 is not available for the foreign basis election.
    (d) Determination of basis difference in a section 743(b) CAA--(1) 
[The text of proposed Sec.  1.901(m)-4(d)(1) is the same as the text of 
Sec.  1.901(m)-4T(d)(1) published elsewhere in this issue of the 
Federal Register.]
    (2) Foreign basis election. If a foreign basis election is made 
with respect to a section 743(b) CAA, then, for purposes of paragraph 
(d)(1) of this section, the section 743(b) adjustment is determined by 
reference to the foreign basis of the RFA, determined immediately after 
the CAA.
    (e) [The text of proposed Sec.  1.901(m)-4(e) is the same as the 
text of Sec.  1.901(m)-4T(e) published elsewhere in this issue of the 
Federal Register.]
    (f) Examples. The following examples illustrate the rules of this 
section:


[[Page 88581]]


    Example 1.  Scope of basis choice; identifying separate CAAs, 
RFA owners (U.S.), and foreign payors in an aggregated CAA 
transaction --(i) Facts. CFC1 wholly owns CFC2, both of which are 
section 902 corporations (as defined in section 909(d)(5)), 
organized in Country F, and treated as corporations for Country F 
tax purposes. CFC1 also wholly owns DE1, and DE1 wholly owns DE2. 
DE1 and DE2 are entities organized in Country F treated as 
corporations for Country F tax purposes and as disregarded entities 
for U.S. income tax purposes. Country F imposes a single tax that is 
a foreign income tax . All of the stock of CFC1 is acquired in a 
qualified stock purchase (within the meaning of section 338(d)(3)) 
to which section 338(a) applies for both CFC1 and CFC2. For Country 
F tax purposes, the transaction is treated as an acquisition of the 
stock of CFC1.
    (ii) Result. (A) The acquisition of CFC1 gives rise to four 
separate CAAs described in Sec.  1.901(m)-2. Under Sec.  1.901(m)-
2(b)(1), the acquisition of the stock of CFC1 and the deemed 
acquisition of the stock of CFC2 under section 338(h)(3)(B) are each 
a section 338 CAA. Furthermore, because the deemed acquisition of 
the assets of each of DE1 and DE2 for U.S. income tax purposes is 
disregarded for Country F tax purposes, the deemed acquisitions are 
CAAs under Sec.  1.901(m)-2(b)(2). Because the four CAAs occurred 
pursuant to a plan, under Sec.  1.901(m)-1(a)(3), all of the CAAs 
are part of an aggregated CAA transaction. Under Sec.  1.901(m)-
1(a)(31), CFC1 is the RFA owner (U.S.) with respect to its assets 
and the assets of DE1 and DE2 that are RFAs. CFC2 is the RFA owner 
(U.S.) with respect to its assets that are RFAs. Under Sec.  
1.901(m)-1(a)(23), CFC1, CFC2, DE1, and DE2 are each a foreign payor 
for Country F tax purposes.
    (B) Under paragraph (c) of this section, a foreign basis 
election may be made by the RFA owner (U.S.). The election is made 
separately with respect to each CAA (for this purpose, treating all 
CAAs that are part of an aggregated CAA transaction as a single CAA) 
and with respect to each foreign income tax and foreign payor. Thus, 
in this case, CFC1 can make a separate foreign basis election for 
one or more of the following three groups of RFAs: RFAs that are 
relevant in determining foreign income of CFC1; RFAs that are 
relevant in determining foreign income of DE1; and RFAs that are 
relevant in determining foreign income of DE2. Furthermore, CFC2 can 
make a foreign basis election for all of its RFAs that are relevant 
in determining its foreign income.
    Example 2.  Scope of basis choice; RFA owner (U.S.) is a 
partnership--(i) Facts. USPS is a domestic partnership for which a 
section 754 election is in effect. USPS owns two assets, the stock 
of DE1 and DE2. DE1 is an entity organized in Country X and treated 
as a corporation for Country X tax purposes. DE2 is an entity 
organized in Country Y and treated as a corporation for Country Y 
tax purposes. DE1 and DE2 are disregarded entities. Country X and 
Country Y each impose a single tax that is a foreign income tax . 
US1 and US2, unrelated domestic corporations, and FP, a foreign 
person unrelated to US1 and US2, acquire partnership interests in 
USPS from existing partners of USPS pursuant to the same plan.
    (ii) Result. Under Sec.  1.901(m)-2(b)(3), the acquisitions of 
the partnership interests in USPS by US1, US2, and FP each give rise 
to separate section 743(b) CAAs, but under Sec.  1.901(m)-1(a)(3), 
they are treated as an aggregated CAA transaction because they occur 
as part of a plan. Under Sec.  1.901(m)-1(a)(31), USPS is the RFA 
owner (U.S.) with respect to the assets of DE1 and DE2 that are 
RFAs. Under Sec.  1.901(m)-1(a)(23), DE1 is a foreign payor for 
Country X tax purposes and DE2 is a foreign payor for Country Y tax 
purposes. Because the RFA owner (U.S.) is a partnership, paragraph 
(c)(2) of this section provides that US1, US2, and FP (the relevant 
partners in USPS) separately choose whether to make a foreign basis 
election for purposes of determining basis difference. Furthermore, 
under paragraph (c)(3) of this section, the choice to make the 
election is made separately by each partner with respect to each 
foreign payor. Thus, in this case, each partner may make separate 
elections for the RFAs that are relevant in determining foreign 
income of DE1 for Country X tax purposes and the RFAs that are 
relevant in determining foreign income of DE2 for Country Y tax 
purposes.

    (g) Effective/applicability date--(1) [The text of proposed Sec.  
1.901(m)-4(g)(1) is the same as the text of Sec.  1.901(m)-4T(g)(1) 
published elsewhere in this issue of the Federal Register.]
    (2) Except for paragraphs (a), (b), (d)(1), and (e) of this 
section, this section applies to CAAs occurring on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.
    (3) Taxpayers may, however, rely on this section prior to the date 
this section is applicable provided that they both consistently apply 
this section (excluding paragraph (e) of this section), Sec.  1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  1.901(m)-1, Sec.  1.901(m)-
3, and Sec. Sec.  1.901(m)-5 through 1.901(m)-8 to all CAAs occurring 
on or after January 1, 2011, and consistently apply Sec.  1.901(m)-2 
(excluding Sec.  1.901(m)-2(d)) to all CAAs occurring on or after 
December 7, 2016. For this purpose, persons that are related (within 
the meaning of section 267(b) or 707(b)) will be treated as a single 
taxpayer.
0
Par. 7. Section 1.901(m)-5 is added to read as follows:


Sec.  1.901(m)-5  Basis difference taken into account.

    (a) In general. This section provides rules for determining the 
amount of basis difference with respect to an RFA that is taken into 
account in a U.S. taxable year for purposes of determining the 
disqualified portion of a foreign income tax amount. Paragraph (b) of 
this section provides rules for determining a cost recovery amount and 
assigning that amount to a U.S. taxable year of a single section 901(m) 
payor when the RFA owner (U.S.) is the section 901(m) payor. Paragraph 
(c) of this section provides rules for determining a disposition amount 
and assigning that amount to a U.S. taxable year of a single section 
901(m) payor when the RFA owner (U.S.) is the section 901(m) payor. 
Paragraph (d) of this section provides rules for allocating cost 
recovery amounts and disposition amounts when the RFA owner (U.S.) is a 
fiscally transparent entity for U.S. income tax purposes. Paragraph (e) 
of this section provides special rules for allocating cost recovery 
amounts and disposition amounts with respect to certain section 743(b) 
CAAs. Paragraph (f) of this section provides special rules for 
allocating certain disposition amounts when a foreign payor is 
transferred in a mid-year transaction. Paragraph (g) of this section 
provides special rules for allocating both cost recovery amounts and 
disposition amounts in certain cases in which the RFA owner (U.S.) 
either is a reverse hybrid or a fiscally transparent entity for both 
U.S. and foreign income tax purposes that is directly or indirectly 
owned by a reverse hybrid. Paragraph (h) of this section provides 
examples illustrating the application of this section. Paragraph (i) of 
this section provides the effective/applicability date.
    (b) Basis difference taken into account under applicable cost 
recovery method--(1) In general. When the RFA owner (U.S.) is a section 
901(m) payor, all of a cost recovery amount is attributed to the 
section 901(m) payor and assigned to the U.S. taxable year of the 
section 901(m) payor in which the corresponding U.S. basis deduction is 
taken into account under the applicable cost recovery method. This is 
the case regardless of whether the deduction is deferred or disallowed 
for U.S. income tax purposes. If instead the RFA owner (U.S.) is a 
fiscally transparent entity for U.S. income tax purposes, a cost 
recovery amount is allocated to one or more section 901(m) payors under 
paragraph (d) of this section, except as provided in paragraphs (e) and 
(g) of this section. If a cost recovery amount arises from an RFA with 
respect to a section 743(b) CAA, in certain cases the cost recovery 
amount is allocated to a section 901(m) payor under paragraph (e) of 
this section. In certain cases in which the RFA owner (U.S.) either is 
a reverse hybrid or a fiscally transparent entity for both U.S. and 
foreign income tax purposes that is directly or indirectly owned by a 
reverse hybrid, a cost recovery amount is allocated to one

[[Page 88582]]

or more section 901(m) payors under paragraph (g) of this section.
    (2) Determining a cost recovery amount--(i) [The text of proposed 
Sec.  1.901(m)-5(b)(2)(i) is the same as the text of Sec.  1.901(m)-
5T(b)(2)(i) published elsewhere in this issue of the Federal Register.]
    (ii) U.S. basis subject to multiple cost recovery methods. If the 
entire U.S. basis is not subject to the same cost recovery method, the 
applicable cost recovery method for determining the cost recovery 
amount is the cost recovery method that applies to the portion of the 
U.S. basis that corresponds to the basis difference.
    (3) Applicable cost recovery method. For purposes of section 
901(m), an applicable cost recovery method includes any method for 
recovering the cost of property over time for U.S. income tax purposes 
(each application of a method giving rise to a ``U.S. basis 
deduction''). Such methods include depreciation, amortization, or 
depletion, as well as a method that allows the cost (or a portion of 
the cost) of property to be expensed in the year of acquisition or in 
the placed-in-service year, such as under section 179. Applicable cost 
recovery methods do not include any provision allowing the U.S. basis 
to be recovered upon a disposition of an RFA.
    (c) Basis difference taken into account as a result of a 
disposition--(1) In general. Except as provided in paragraph (f) of 
this section, when the RFA owner (U.S.) is a section 901(m) payor, all 
of a disposition amount is attributed to the section 901(m) payor and 
assigned to the U.S. taxable year of the section 901(m) payor in which 
the disposition occurs. If instead the RFA owner (U.S.) is a fiscally 
transparent entity for U.S. income tax purposes, except as provided in 
paragraphs (e), (f), and (g) of this section, a disposition amount is 
allocated to one or more section 901(m) payors under paragraph (d) of 
this section. If a disposition amount arises from an RFA with respect 
to a section 743(b) CAA, in certain cases the disposition amount is 
allocated to a section 901(m) payor under paragraph (e) of this 
section. If there is a disposition of an RFA in a foreign taxable year 
of a foreign payor during which there is a mid-year transaction, in 
certain cases a disposition amount is allocated under paragraph (f) of 
this section. In certain cases in which the RFA owner (U.S.) either is 
a reverse hybrid or a fiscally transparent entity for both U.S. and 
foreign income tax purposes that is directly or indirectly owned by a 
reverse hybrid, a disposition amount is allocated to one or more 
section 901(m) payors under paragraph (g) of this section.
    (2) [The text of proposed Sec.  1.901(m)-5(c)(2) is the same as the 
text of Sec.  1.901(m)-5T(c)(2) published elsewhere in this issue of 
the Federal Register.]
    (d) General rules for allocating and assigning a cost recovery 
amount or a disposition amount when the RFA owner (U.S.) is a fiscally 
transparent entity--(1) In general. Except as provided in paragraphs 
(e), (f), and (g) of this section, this paragraph (d) provides rules 
for allocating a cost recovery amount or a disposition amount when the 
RFA owner (U.S.) is a fiscally transparent entity for U.S. income tax 
purposes in which a section 901(m) payor directly or indirectly owns an 
interest, as well as for assigning the allocated amount to a U.S. 
taxable year of the section 901(m) payor. For purposes of this 
paragraph (d), unless otherwise indicated, a reference to direct or 
indirect ownership in an entity means for U.S. income tax purposes. For 
purposes of this paragraph (d), a person indirectly owns an interest in 
an entity for U.S. income tax purposes if the person owns the interest 
through one or more fiscally transparent entities for U.S. income tax 
purposes, and at least one of the fiscally transparent entities is not 
a disregarded entity . For purposes of this paragraph (d), a person 
indirectly owns an interest in an entity for foreign income tax 
purposes if the person owns the interest through one or more fiscally 
transparent entities for foreign income tax purposes. If the RFA owner 
(U.S.) is a lower-tier fiscally transparent entity for U.S. income tax 
purposes in which the section 901(m) payor indirectly owns an interest, 
the rules of this section apply in a manner consistent with the 
application of these rules when the section 901(m) payor directly owns 
an interest in the RFA owner (U.S.).
    (2) Allocation of a cost recovery amount. A cost recovery amount is 
allocated to a section 901(m) payor that directly or indirectly owns an 
interest in the RFA owner (U.S.) to the extent the U.S. basis deduction 
that corresponds to the cost recovery amount is (or will be) included 
in the section 901(m) payor's distributive share of the income of the 
RFA owner (U.S.) for U.S. income tax purposes.
    (3) Allocation of a disposition amount attributable to foreign 
disposition gain or foreign disposition loss--(i) In general. Except as 
provided in paragraph (f) of this section, a disposition amount 
attributable to foreign disposition gain or foreign disposition loss 
(as determined under paragraph (d)(5) of this section) is allocated 
under paragraph (d)(3)(ii) or (d)(3)(iii) of this section to a section 
901(m) payor that directly or indirectly owns an interest in the RFA 
owner (U.S.).
    (ii) First allocation rule. This paragraph (d)(3)(ii) applies when 
a section 901(m) payor, or a disregarded entity directly owned by a 
section 901(m) payor, is the foreign payor whose foreign income 
includes a distributive share of the foreign income of the RFA owner 
(foreign) and, therefore, all of the foreign income tax amount of the 
foreign payor is paid or accrued by, or considered paid by, the section 
901(m) payor. Thus, this paragraph (d)(3)(ii) applies when the RFA 
owner (U.S.) is a fiscally transparent entity for both U.S. and foreign 
income tax purposes and a section 901(m) payor either directly owns an 
interest in the RFA owner (U.S.) or directly owns an interest in 
another fiscally transparent entity for U.S. and foreign income tax 
purposes, which, in turn, directly or indirectly owns an interest in 
the RFA owner (U.S.) for both U.S. and foreign income tax purposes. In 
these cases, the section 901(m) payor is allocated the portion of a 
disposition amount that is equal to the product of the disposition 
amount attributable to foreign disposition gain or foreign disposition 
loss, as applicable, and a fraction, the numerator of which is the 
portion of the foreign disposition gain or foreign disposition loss 
recognized by the RFA owner (foreign) for foreign income tax purposes 
that is (or will be) included in the foreign payor's distributive share 
of the foreign income of the RFA owner (foreign), and the denominator 
of which is the foreign disposition gain or foreign disposition loss.
    (iii) Second allocation rule. This paragraph (d)(3)(iii) applies 
when neither a section 901(m) payor nor a disregarded entity directly 
owned by a section 901(m) payor is the foreign payor with respect to 
the foreign income of the RFA owner (foreign). Instead, a section 
901(m) payor directly or indirectly owns an interest in the foreign 
payor, which is a fiscally transparent entity for U.S. income tax 
purposes (other than a disregarded entity directly owned by the section 
901(m) payor), and, therefore, the section 901(m) payor is considered 
to pay or accrue only its allocated portion of the foreign income tax 
amount of the foreign payor. This will be the case when the foreign 
payor is either the RFA owner (U.S.), another fiscally transparent 
entity for U.S. income tax purposes (other than a disregarded entity 
directly owned by a section

[[Page 88583]]

901(m) payor) that directly or indirectly owns an interest in the RFA 
owner (U.S.) for both U.S. and foreign income tax purposes, or a 
disregarded entity directly owned by the RFA owner (U.S.). In these 
cases, the section 901(m) payor is allocated the portion of a 
disposition amount that is equal to the product of the disposition 
amount attributable to foreign disposition gain or foreign disposition 
loss, as applicable, and a fraction, the numerator of which is the 
portion of the foreign disposition gain or foreign disposition loss 
that is included in the allocable foreign income of the section 901(m) 
payor, and the denominator of which is the foreign disposition gain or 
foreign disposition loss. If allocable foreign income is not otherwise 
required to be determined because there is no foreign income tax 
amount, the numerator is the portion of the foreign disposition gain or 
foreign disposition loss that would be included in the allocable 
foreign income of the section 901(m) payor if there were a foreign 
income tax amount.
    (4) Allocation of a disposition amount attributable to U.S. 
disposition gain or U.S. disposition loss. A section 901(m) payor that 
directly or indirectly owns an interest in the RFA owner (U.S.) is 
allocated the portion of a disposition amount that is equal to the 
product of the disposition amount attributable to U.S. disposition gain 
or U.S. disposition loss (as determined under paragraph (d)(5) of this 
section), as applicable, and a fraction, the numerator of which is the 
portion of the U.S. disposition gain or U.S. disposition loss that is 
(or will be) included in the section 901(m) payor's distributive share 
of income of the RFA owner (U.S.) for U.S. income tax purposes, and the 
denominator of which is the U.S. disposition gain or U.S. disposition 
loss.
    (5) Determining the extent to which a disposition amount is 
attributable to foreign or U.S. disposition gain or loss--(i) RFA with 
a positive basis difference. When there is a disposition of an RFA with 
a positive basis difference and the disposition results in either a 
foreign disposition gain or a U.S. disposition loss, but not both, the 
entire disposition amount is attributable to foreign disposition gain 
or U.S. disposition loss, as applicable, even if the disposition amount 
exceeds the foreign disposition gain or the absolute value of the U.S. 
disposition loss. If the disposition results in both a foreign 
disposition gain and a U.S. disposition loss, the disposition amount is 
attributable first to foreign disposition gain to the extent thereof, 
and the excess disposition amount, if any, is attributable to the U.S. 
disposition loss, even if the excess disposition amount exceeds the 
absolute value of the U.S. disposition loss.
    (ii) RFA with a negative basis difference. When there is a 
disposition of an RFA with a negative basis difference and the 
disposition results in either a foreign disposition loss or a U.S. 
disposition gain, but not both, the entire disposition amount is 
attributable to foreign disposition loss or U.S. disposition gain, as 
applicable, even if the absolute value of the disposition amount 
exceeds the absolute value of the foreign disposition loss or the U.S. 
disposition gain. If the disposition results in both a foreign 
disposition loss and a U.S. disposition gain, the disposition amount is 
attributable first to foreign disposition loss to the extent thereof, 
and the excess disposition amount, if any, is attributable to the U.S. 
disposition gain, even if the absolute value of the excess disposition 
amount exceeds the U.S. disposition gain.
    (6) U.S. taxable year of a section 901(m) payor to which an 
allocated cost recovery amount or disposition amount is assigned. A 
cost recovery amount or a disposition amount allocated to a section 
901(m) payor under paragraph (d) of this section is assigned to the 
U.S. taxable year of the section 901(m) payor that includes the last 
day of the U.S. taxable year of the RFA owner (U.S.) in which, in the 
case of a cost recovery amount, the RFA owner (U.S.) takes into account 
the corresponding U.S. basis deduction (without regard to whether the 
deduction is deferred or disallowed for U.S. income tax purposes), or 
in the case of a disposition amount, the disposition occurs.
    (e) Special rules for certain section 743(b) CAAs. If a section 
901(m) payor acquires a partnership interest in a section 743(b) CAA, 
including a section 743(b) CAA with respect to a lower-tier partnership 
that results from a direct acquisition by the section 901(m) payor of 
an interest in an upper-tier partnership, and subsequently there is a 
cost recovery amount or a disposition amount that arises from an RFA 
with respect to that section 743(b) CAA, all of the cost recovery 
amount or the disposition amount is allocated to that section 901(m) 
payor. The U.S. taxable year of the section 901(m) payor to which the 
cost recovery amount or the disposition amount is assigned is the U.S. 
taxable year in which, in the case of a cost recovery amount, the 
section 901(m) payor takes into account the corresponding U.S. basis 
deduction (without regard to whether the deduction is deferred or 
disallowed for U.S. income tax purposes), or in the case of a 
disposition amount, the disposition occurs.
    (f) Mid-year transactions--(1) In general. When a disposition of an 
RFA occurs in the same foreign taxable year that a foreign payor is 
involved in a mid-year transaction, the portion of the disposition 
amount that is attributable to foreign disposition gain or foreign 
disposition loss (as determined under paragraph (d)(5) of this section) 
is allocated to a section 901(m) payor and assigned to a U.S. taxable 
year of the section 901(m) payor under this paragraph (f). To the 
extent the disposition amount is attributable to U.S. disposition gain 
or U.S. disposition loss (as determined under paragraph (d)(5) of this 
section), see paragraph (c)(1) or (d) of this section, as applicable.
    (2) Allocation rule. To the extent a disposition amount is 
attributable to foreign disposition gain or foreign disposition loss, a 
section 901(m) payor is allocated the portion of the disposition amount 
equal to the product of the disposition amount attributable to foreign 
disposition gain or foreign disposition loss, as applicable, and a 
fraction, the numerator of which is the portion of the foreign 
disposition gain or foreign disposition loss that is included in the 
allocable foreign income of the section 901(m) payor, and the 
denominator of which is the foreign disposition gain or foreign 
disposition loss. If allocable foreign income is not otherwise required 
to be determined because there is no foreign income tax amount, the 
numerator is the portion of the foreign disposition gain or foreign 
disposition loss that would be included in the allocable foreign income 
of the section 901(m) payor if there were a foreign income tax amount.
    (3) Assignment to a U.S. taxable year of a section 901(m) Payor. A 
disposition amount allocated to a section 901(m) payor under paragraph 
(f)(2) of this section is assigned to the U.S. taxable year of the 
section 901(m) payor in which the foreign disposition gain or foreign 
disposition loss (or portion thereof) is included in allocable foreign 
income of the section 901(m) payor or, if allocable foreign income is 
not otherwise required to be determined because there is no foreign 
income tax amount, the U.S. taxable year in which the foreign 
disposition gain or foreign disposition loss would be included in 
allocable foreign income if there were a foreign income tax amount.
    (g) Reverse hybrids--(1) In general. This paragraph (g) provides 
rules for allocating a cost recovery amount or a disposition amount 
when the RFA owner (U.S.) is either a reverse hybrid

[[Page 88584]]

or a fiscally transparent entity for U.S. and foreign income tax 
purposes that is directly or indirectly owned by a reverse hybrid for 
U.S. and foreign income tax purposes, and in each case, the foreign 
payor whose foreign income includes a distributive share of the foreign 
income of the RFA owner (foreign) directly or indirectly owns an 
interest in the reverse hybrid for foreign income tax purposes. 
Application of the allocation rules under paragraphs (g)(2) and (g)(3) 
of this section depend upon whether a section 901(m) payor or a 
disregarded entity directly owned by a section 901(m) payor is the 
foreign payor, or, instead, a section 901(m) payor directly or 
indirectly owns an interest in the foreign payor. For purposes of this 
paragraph (g), unless otherwise indicated, a reference to direct or 
indirect ownership in an entity means for U.S. income tax purposes. For 
purposes of this paragraph (g), a person indirectly owns an interest in 
an entity for U.S. income tax purposes if the person owns the interest 
through one or more fiscally transparent entities for U.S. income tax 
purposes, and at least one of the fiscally transparent entities is not 
a disregarded entity . For purposes of this paragraph (g), a person 
indirectly owns an interest in an entity for foreign income tax 
purposes if the person owns the interest through one or more fiscally 
transparent entities for foreign income tax purposes. If the RFA owner 
(U.S.) is a lower-tier fiscally transparent entity for U.S. income tax 
purposes in which the reverse hybrid indirectly owns an interest, the 
rules of this section apply in a manner consistent with the application 
of these rules when the reverse hybrid directly owns an interest in the 
RFA owner (U.S.).
    (2) First allocation rule--(i) Allocation to a section 901(m) 
payor. This paragraph (g)(2)(i) applies when a section 901(m) payor, or 
a disregarded entity directly owned by a section 901(m) payor, is the 
foreign payor whose foreign income includes a distributive share of the 
foreign income of the RFA owner (foreign), and, therefore, all of the 
foreign income tax amount of the foreign payor is paid or accrued by, 
or considered paid or accrued by, the section 901(m) payor. Thus, this 
paragraph (g)(2)(i) applies when a section 901(m) payor either directly 
owns an interest in the reverse hybrid or directly owns an interest in 
a fiscally transparent entity for U.S. and foreign income tax purposes, 
which, in turn, directly or indirectly owns an interest in the reverse 
hybrid for both U.S. and foreign income tax purposes. In these cases, 
the section 901(m) payor is allocated the portions of cost recovery 
amounts or disposition amounts (or both) with respect to RFAs that are 
equal to the product of the sum of the cost recovery amounts and the 
disposition amounts and a fraction, the numerator of which is the 
portion of the foreign income of the RFA owner (foreign) that is 
included in the foreign income of the foreign payor, and the 
denominator of which is the foreign income of the RFA owner (foreign).
    (ii) Assignment to a U.S. taxable year of a section 901(m) Payor. 
This paragraph (g)(2)(ii) applies when a cost recovery amount or a 
disposition amount, or portion thereof, is allocated to a section 
901(m) payor under paragraph (g)(2)(i) of this section. If the reverse 
hybrid is the RFA owner (U.S.), a cost recovery amount or disposition 
amount, or portion thereof, is assigned to the U.S. taxable year of the 
section 901(m) payor that includes the last day of the U.S. taxable 
year of the reverse hybrid in which, in the case of a cost recovery 
amount, the reverse hybrid takes into account the corresponding U.S. 
basis deduction (without regard to whether the deduction is deferred or 
disallowed for U.S. income tax purposes), or, in the case of a 
disposition amount, the disposition occurs. If the reverse hybrid is 
not the RFA owner (U.S.) but instead the reverse hybrid directly or 
indirectly owns an interest in the RFA owner (U.S.) for both U.S. and 
foreign income tax purposes, a cost recovery amount or disposition 
amount, or portion thereof, is assigned to the U.S. taxable year of the 
section 901(m) payor that includes the last day of the U.S. taxable 
year of the reverse hybrid, which, in turn, includes the last day of 
the U.S. taxable year of the RFA owner (U.S.) in which, in the case of 
a cost recovery amount, the RFA owner (U.S.) takes into account the 
corresponding U.S. basis deduction (without regard to whether the 
deduction is deferred or disallowed for U.S. income tax purposes), or, 
in the case of a disposition amount, the disposition occurs.
    (3) Second allocation rule--(i) Allocation to a section 901(m) 
payor. This paragraph (g)(3)(i) applies when neither a section 901(m) 
payor nor a disregarded entity directly owned by a section 901(m) payor 
is the foreign payor with respect to the foreign income of the RFA 
owner (foreign). Instead, a section 901(m) payor directly or indirectly 
owns an interest in the foreign payor, which is a fiscally transparent 
entity for U.S. income tax purposes (other than a disregarded entity 
directly owned by the section 901(m) payor), and, therefore, the 
section 901(m) payor is considered to pay or accrue only its allocated 
portion of the foreign income tax amount of the foreign payor. In these 
cases, the section 901(m) payor is allocated the portions of cost 
recovery amounts or disposition amounts (or both) with respect to RFAs 
that are equal to the product of the sum of the cost recovery amounts 
and the disposition amounts and a fraction, the numerator of which is 
the portion of the foreign income of the RFA owner (foreign) that is 
included in the foreign income of the foreign payor and included in the 
allocable foreign income of the section 901(m) payor, and the 
denominator of which is the foreign income of the RFA owner (foreign). 
If allocable foreign income is not otherwise required to be determined 
for a section 901(m) payor because there is no foreign income tax 
amount, the numerator is the foreign income of the RFA owner (foreign) 
that is included in the foreign income of the foreign payor and that 
would be included in allocable foreign income of the section 901(m) 
payor if there were a foreign income tax amount.
    (ii) Assignment to a U.S. taxable year of a section 901(m) payor. A 
cost recovery amount or a disposition amount, or portion thereof, that 
is allocated to a section 901(m) payor under paragraph (g)(3)(i) of 
this section is assigned to the U.S. taxable year of the section 901(m) 
payor in which the foreign income of the RFA owner (foreign) described 
in paragraph (g)(3)(i) of this section is included in the allocable 
foreign income of the section 901(m) payor, or, if there is no foreign 
income tax amount, the U.S. taxable year of the section 901(m) payor in 
which the foreign income of the RFA owner (foreign) described in 
paragraph (g)(3)(i) of this section would be included in allocable 
foreign income if there were a foreign income tax amount.
    (h) Examples. The following examples illustrate the rules of this 
section. In addition to any facts described in a particular example, 
the following facts apply to all the examples unless otherwise 
specified: CFC1, CFC2, and DE are organized in Country F and treated as 
corporations for Country F tax purposes. CFC1 and CFC2 are each a 
section 902 corporation (as defined in section 909(d)(5)) that is 
wholly owned by the same U.S. corporation, and DE is a disregarded 
entity . CFC1 and CFC2 have a U.S. taxable year that is a calendar 
year, and CFC1, CFC2, and DE have a foreign taxable year that is a 
calendar year. Country F imposes a single tax that is a foreign income 
tax . CFC1, CFC2, and DE each have a functional currency of the u with

[[Page 88585]]

respect to all activities. At all relevant times, 1u equals $1. All 
amounts are stated in millions. The examples assume that the applicable 
cost recovery method for property results in basis being recovered 
ratably over the life of the property beginning on the first day of the 
U.S. taxable year in which the property is acquired or placed into 
service.

    Example 1.  CAA followed by disposition: fully taxable for both 
U.S. income tax and foreign income tax purposes--(i) Facts. (A) On 
January 1, Year 1, USP acquires all of the stock of CFC1 in a 
qualified stock purchase (as defined in section 338(d)(3)) to which 
section 338(a) applies (Section 338 Acquisition). At the time of the 
Section 338 Acquisition, CFC1 owns a single asset (Asset A) that is 
located in Country F. Asset A gives rise to income that is taken 
into account for Country F tax purposes. Asset A is tangible 
personal property that, under the applicable cost recovery method in 
the hands of CFC1, is depreciable over 5 years. There are no cost 
recovery deductions available for Country F tax purposes with 
respect to Asset A. Immediately before the Section 338 Acquisition, 
Asset A has a U.S. basis of 10u and a foreign basis of 40u. 
Immediately after the Section 338 Acquisition, Asset A has a U.S. 
basis of 100u and foreign basis of 40u.
    (B) On July 1, Year 2, Asset A is transferred to an unrelated 
third party in exchange for 120u in a transaction in which all 
realized gain is recognized for both U.S. income tax and Country F 
tax purposes (subsequent transaction). For U.S. income tax purposes, 
CFC1 recognizes U.S. disposition gain of 50u (amount realized of 
120u, less U.S. basis of 70u (100u cost basis, less 30u of 
accumulated depreciation)) with respect to Asset A. The 30u of 
accumulated depreciation is the sum of 20u of depreciation in Year 1 
(100u cost basis/5 years) and 10u of depreciation in Year 2 ((100u 
cost basis/5 years) x 6/12). For Country F tax purposes, CFC1 
recognizes foreign disposition gain of 80u (amount realized of 120u, 
less foreign basis of 40u) with respect to Asset A. Immediately 
after the subsequent transaction, Asset A has a U.S. basis and a 
foreign basis of 120u.
    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(1), USP's acquisition 
of the stock of CFC1 in the Section 338 Acquisition is a section 338 
CAA. Under Sec.  1.901(m)-2(c)(i), Asset A is an RFA with respect to 
Country F tax because it is relevant in determining the foreign 
income of CFC1 for Country F tax purposes. Under Sec.  1.901(m)-
4(b), the basis difference with respect to Asset A is 90u (100u - 
10u). Under Section 901(m)-1(a)(31), CFC1 is the RFA owner (U.S.) 
with respect to Asset A. Under Sec.  1.901(m)-1(a)(23), CFC1 is a 
foreign payor for Country F tax purposes. Under Sec.  1.901(m)-
1(a)(35), CFC1 is the section 901(m) payor with respect to a foreign 
income tax amount for which CFC1 is the foreign payor (see Sec.  
1.901-2(f)(1)).
    (B) Under Sec.  1.901(m)-1(a)(5), allocated basis differences 
are comprised of cost recovery amounts and disposition amounts. In 
Year 1, Asset A has an allocated basis difference that includes only 
a cost recovery amount. Under paragraph (b)(2) of this section, the 
cost recovery amount for Year 1 is determined by applying the 
applicable cost recovery method of Asset A in the hands of CFC1 to 
the basis difference with respect to Asset A. Accordingly the cost 
recovery amount is 18u (90u basis difference/5 years). Under 
paragraph (b)(1) of this section, all of the 18u cost recovery 
amount is attributed to CFC1 and assigned to Year 1, because CFC1 is 
a section 901(m) payor and RFA owner (U.S.) with respect to Asset A 
and Year 1 is the U.S. taxable year of CFC1 in which it takes into 
account the corresponding 20u of depreciation. Immediately after 
Year 1, under Sec.  1.901(m)-1(a)(40), unallocated basis difference 
is 72u with respect to Asset A (90u-18u).
    (C) In Year 2, Asset A has an allocated basis difference that 
includes both a cost recovery amount and a disposition amount. Under 
paragraph (b)(2) of this section, the cost recovery amount for Year 
2, as of the date of the subsequent transaction, is 9u ((90u basis 
difference/5 years) x 6/12). Under Sec.  1.901(m)-1(a)(10), the 
subsequent transaction is a disposition of Asset A, because the 
subsequent transaction is an event that results in an amount of gain 
being recognized for U.S. income tax and Country F tax purposes. 
Because all realized gain in Asset A is recognized for U.S. income 
tax and Country F tax purposes, the rule in paragraph (c)(2)(i) of 
this section applies to determine the disposition amount. Under that 
rule, the disposition amount for Year 2 is the unallocated basis 
difference of 63u (90u basis difference, less total 27u taken into 
account as cost recovery amounts in Year 1 and Year 2). Accordingly, 
the allocated basis difference for Year 2 is 72u (9u of cost 
recovery amount, plus 63u of disposition amount). Under paragraphs 
(b)(1) and (c)(1) of this section, all of the 72u of allocated basis 
difference is attributed to CFC1 and assigned to Year 2, because 
CFC1 is a section 901(m) payor and the RFA owner (U.S.) with respect 
to Asset A and Year 2 is the U.S. taxable year of CFC1 in which it 
takes into account the corresponding 10u of depreciation and in 
which the disposition occurred.
    (D) Unallocated basis difference with respect to Asset A, as 
determined immediately after the subsequent transaction, is 0u (90u 
basis difference less 90u basis difference taken into account as 27u 
total cost recovery amount in Year 1 and Year 2 and as a 63u 
disposition amount in Year 2). Accordingly, because there is no 
unallocated basis difference with respect to Asset A attributable to 
the Section 338 Acquisition, the subsequent transaction is not a 
successor transaction as defined in Sec.  1.901(m)-6(b)(2). 
Furthermore, the subsequent transaction is not a CAA under Sec.  
1.901(m)-2(b). For these reasons, section 901(m) no longer applies 
to Asset A.
    Example 2.  CAA followed by Disposition: nontaxable for U.S. 
income tax purposes and taxable for foreign income tax purposes--(i) 
Facts. The facts are the same as in paragraph (i)(A) of Example 1 
but the facts in paragraph (i)(B) of Example 1 are instead that on 
July 1, Year 2, Asset A is transferred to CFC2, in exchange for 100u 
of stock of CFC2 (subsequent transaction). For U.S. income tax 
purposes, CFC1 does not recognize any U.S. disposition gain or U.S. 
disposition loss with respect to Asset A. For Country F tax 
purposes, CFC1 recognizes foreign disposition gain of 60u (amount 
realized of 100u, less foreign basis of 40u) with respect to Asset 
A. Immediately after the subsequent transaction, Asset A has a U.S. 
basis of 70u (100u cost basis less 30u accumulated depreciation) and 
a foreign basis of 100u. The 30u of accumulated depreciation is the 
sum of 20u of depreciation in Year 1 (100u cost basis/5 years) and 
10u in Year 2 ((100u cost basis/5 years) x 6/12).
    (ii) Result. (A) The results described in paragraph (ii)(A) of 
Example 1 also apply to this Example 2.
    (B) The result for Year 1 is the same as in paragraph (ii)(B) of 
Example 1.
    (C) In Year 2, Asset A has an allocated basis difference that 
includes both a cost recovery amount and a disposition amount. Under 
paragraph (b)(2) of this section, the cost recovery amount for Year 
2, as of the date of the subsequent transaction, is 9u ((90u basis 
difference/5 years) x 6/12). Under Sec.  1.901(m)-1(a)(10), the 
Transaction is a disposition of Asset A, because the subsequent 
transaction is an event that results in an amount of gain being 
recognized for Country F tax purposes. Because the disposition is 
not also fully taxable for U.S. income tax purposes, the rule in 
paragraph (c)(2)(ii) of this section applies to determine the 
disposition amount. Under that rule, the disposition amount is 60u, 
the lesser of (i) 60u (60u foreign disposition gain plus absolute 
value of 0u U.S. disposition loss), and (ii) 63u unallocated basis 
difference (90 basis difference less total 27u taken into account as 
cost recovery amounts, 18u in Year 1 and 9u in Year 2). Accordingly, 
the allocated basis difference for the first half of Year 2 is 69u 
(9u of cost recovery amount, plus 60u of disposition amount). Under 
paragraphs (b)(1) and (c)(1) of this section, all of the 69u of 
allocated basis difference is attributed to CFC1 and assigned to 
Year 2, because CFC1 is a section 901(m) payor and the RFA owner 
(U.S.) with respect to Asset A and Year 2 is the U.S. taxable year 
of CFC1 in which it takes into account the corresponding 10u of 
depreciation and in which the disposition occurred.
    (D) Unallocated basis difference with respect to Asset A 
immediately after the subsequent transaction is 3u (90u basis 
difference less 87u basis difference taken into account as a 27u 
total cost recovery amount in Year 1 and Year 2 and as a 60u 
disposition amount in Year 2). Accordingly, because there is 
unallocated basis difference of 3u with respect to Asset A 
attributable to the Section 338 Acquisition, as determined 
immediately after the subsequent transaction, the subsequent 
transaction is a successor transaction as defined in Sec.  1.901(m)-
6(b)(2). Following the subsequent transaction, the unallocated basis 
difference of 3u must be taken into account as cost recovery amounts 
or disposition amounts (or both) by CFC2, the new section 901(m) 
payor and RFA owner (U.S.) of Asset A. See Sec.  1.901(m)-
6(b)(3)(ii). Because the subsequent transaction is not a CAA under 
Sec.  1.901(m)-2(b), there is no additional basis difference with 
respect to Asset A as a result of the subsequent transaction.

[[Page 88586]]

    Example 3.  CAA followed by disposition: nontaxable for both 
U.S. income tax and foreign income tax purposes--(i) Facts. The 
facts are the same as in paragraph (i)(A) of Example 1 but the facts 
in paragraph (i)(B) of Example 1 are instead that on July 1, Year 2, 
CFC1 transfers Asset A to CFC2, in exchange for 110u of stock of 
CFC2 (subsequent transaction). For U.S. income tax purposes, CFC1 
does not recognize any U.S. disposition gain or U.S. disposition 
loss with respect to Asset A as a result of the subsequent 
transaction. Furthermore, for Country F tax purposes, CFC1 
recognizes no foreign disposition gain or foreign disposition loss 
with respect to Asset A as a result of the subsequent transaction. 
Immediately after the subsequent transaction, Asset A has a U.S. 
basis of 70u (100u cost basis less 30u accumulated depreciation) and 
a foreign basis of 40u. The 30u of accumulated depreciation is the 
sum of 20u of depreciation in Year 1 (100u cost basis/5 years) and 
10u in Year 2 ((100u cost basis/5 years) x 6/12).
    (ii) Result. (A) The result for Year 1 is the same as in 
paragraph (ii)(A) of Example 1.
    (B) The result for Year 1 is the same as in paragraph (ii)(B) of 
Example 1.
    (C) In Year 2, Asset A has an allocated basis difference that 
includes only a cost recovery amount. Under paragraph (b)(2) of this 
section, the cost recovery amount for Year 2, as of the date of the 
subsequent transaction, is 9u ((90u basis difference/5 years) x 6/
12). Under Sec.  1.901(m)-1(a)(10), the subsequent transaction does 
not constitute a disposition of Asset A, because the subsequent 
transaction is not an event that results in an amount of gain or 
loss being recognized for U.S. income tax or for Country F tax 
purposes. Therefore, no disposition amount is taken into account for 
Asset A in Year 2. Under paragraph (b)(1) of this section, all of 
the 9u of allocated basis difference is attributed to CFC1 and 
assigned to Year 2, because CFC1 is a section 901(m) payor and RFA 
owner (U.S.) with respect to Asset A and Year 2 is the U.S. taxable 
year of CFC1 in which it takes into account the corresponding 10u of 
depreciation.
    (D) Unallocated basis difference with respect to Asset A 
immediately after the subsequent transaction is 63u (90u basis 
difference, less 27u total cost recovery amounts, 18u in Year 1 and 
9u in Year 2). Accordingly, because there is unallocated basis 
difference of 63u with respect to Asset A attributable to the CAA, 
as determined immediately after the subsequent transaction, the 
subsequent transaction is a successor transaction as defined in 
Sec.  1.901(m)-6(b)(2). Following the subsequent transaction, the 
unallocated basis difference of 63u must be taken into account as 
cost recovery amounts or disposition amounts (or both) by CFC2, the 
new section 901(m) payor and RFA owner (U.S.) of Asset A. See Sec.  
1.901(m)-6(b)(3)(ii). Because the subsequent transaction is not a 
CAA under Sec.  1.901(m)-2(b), there is no additional basis 
difference with respect to Asset A as a result of the subsequent 
transaction.

    (i) Effective/applicability date. (1) Except for paragraphs 
(b)(2)(i) and (c)(2) of this section, this section applies to CAAs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register.
    (2) [The text of proposed Sec.  1.901(m)-5(i)(2) is the same as the 
text of Sec.  1.901(m)-5T(i)(2) published elsewhere in this issue of 
the Federal Register.]
    (3) Taxpayers may, however, rely on this section prior to the date 
this section is applicable provided that they both consistently apply 
this section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  
1.901(m)-1, Sec.  1.901(m)-3, Sec.  1.901(m)-4 (excluding Sec.  
1.901(m)-4(e)), Sec.  1.901(m)-6, Sec.  1.901(m)-7, and Sec.  1.901(m)-
8 to all CAAs occurring on or after January 1, 2011, and consistently 
apply Sec.  1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) to all CAAs 
occurring on or after December 7, 2016. For this purpose, persons that 
are related (within the meaning of section 267(b) or 707(b)) will be 
treated as a single taxpayer.
0
Par. 8. Section 1.901(m)-6 is added to read as follows:


Sec.  1.901(m)-6  Successor rules.

    (a) through (b)(2) [The text of proposed Sec. Sec.  1.901(m)-6(a) 
through (b)(2) is the same as the text of Sec. Sec.  1.901(m)-6T(a) 
through (b)(2) published elsewhere in this issue of the Federal 
Register.]
    (3) Special considerations. (i) If an asset is an RFA with respect 
to more than one foreign income tax, this paragraph (a) applies 
separately with respect to each foreign income tax.
    (ii) Any subsequent cost recovery amount for an RFA transferred in 
a successor transaction is determined based on the post-transaction 
applicable cost recovery method, as described in Sec.  1.901(m)-
5(b)(3), that applies to the U.S. basis (or portion thereof) that 
corresponds to the unallocated basis difference.
    (4)(i) [The text of proposed Sec.  1.901(m)-6(b)(4)(i) is the same 
as the text of Sec.  1.901(m)-6T(b)(4)(i) published elsewhere in this 
issue of the Federal Register.]
    (ii) Foreign basis election. If a foreign basis election is made 
under Sec.  1.901(m)-4(c) with respect to a foreign income tax in a 
subsequent CAA, any unallocated basis difference with respect to one or 
more prior CAAs will not be taken into account under section 901(m). 
The only basis difference that will be taken into account after the 
subsequent CAA with respect to that foreign income tax is the basis 
difference with respect to the subsequent CAA.
    (b)(4)(iii) [The text of proposed Sec.  1.901(m)-6(b)(4)(iii) is 
the same as the text of Sec.  1.901(m)-6T(b)(4)(iii) published 
elsewhere in this issue of the Federal Register.]
    (5) [The text of proposed Sec.  1.901(m)-6(b)(5) is the same as the 
text of Sec.  1.901(m)-6T(b)(5) published elsewhere in this issue of 
the Federal Register.]
    (c) Successor rules for aggregate basis difference carryover--(1) 
Transfers of a section 901(m) payor's aggregate basis difference 
carryover to another person. If a corporation acquires the assets of a 
section 901(m) payor in a transaction to which section 381 applies, 
that corporation succeeds to any aggregate basis difference carryovers 
of the section 901(m) payor.
    (2) Transfers of a section 901(m) payor's aggregate basis 
difference carryover with respect to a foreign payor to another foreign 
payor. If a section 901(m) payor has an aggregate basis difference 
carryover, with respect to a foreign income tax and a foreign payor, 
and substantially all of the assets of the foreign payor are 
transferred to another foreign payor in which the section 901(m) payor 
owns an interest, the section 901(m) payor's aggregate basis difference 
carryover with respect to the first foreign payor is transferred to the 
section 901(m) payor's aggregate basis difference carryover with 
respect to the other foreign payor. In such a case, the section 901(m) 
payor's aggregate basis difference carryover with respect to the first 
foreign payor is reduced to zero.
    (3) Anti-abuse rule. If a section 901(m) payor has an aggregate 
basis difference carryover with respect to a foreign income tax and a 
foreign payor and, with a principal purpose of avoiding the application 
of section 901(m), assets of the foreign payor are transferred to 
another foreign payor in a transaction not described in paragraph 
(c)(1) or (2) of this section, then a portion of the aggregate basis 
difference carryover of the section 901(m) payor is transferred either 
to the aggregate basis difference carryover of the section 901(m) payor 
with respect to the other foreign payor or to another section 901(m) 
payor, as appropriate. The portion of the aggregate basis difference 
carryover transferred is determined based on the ratio of fair market 
value of the assets transferred to the fair market value of all of the 
assets of the foreign payor that transferred the assets. Similar 
principles apply when, with a principle purpose of avoiding the 
application of section 901(m), there is a change in the allocation of 
foreign income for foreign income tax purposes or the allocation of 
foreign income tax amounts for U.S. income tax purposes that would 
otherwise separate foreign income tax

[[Page 88587]]

amounts from the related aggregate basis difference carryover.
    (4) Ownership. For purposes of this paragraph (c), a section 901(m) 
payor owns an interest in a foreign payor if the section 901(m) payor 
owns the interest directly or indirectly through one or more fiscally 
transparent entities for U.S. income tax purposes.
    (d) Effective/applicability date. (1) [The text of proposed Sec.  
1.901(m)-6(d)(1) is the same as the text of Sec.  1.901(m)-6T(d)(1) 
published elsewhere in this issue of the Federal Register.]
    (2) Paragraphs (b)(3), (b)(4)(ii), and (c) of this section apply to 
CAAs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    (3) Taxpayers may, however, rely on this section prior to the date 
this section is applicable provided that they both consistently apply 
this section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  
1.901(m)-1, Sec. Sec.  1.901(m)-3 through 1.901(m)-5 (excluding Sec.  
1.901(m)-4(e)), Sec.  1.901(m)-7, and Sec.  1.901(m)-8 to all CAAs 
occurring on or after January 1, 2011, and consistently apply Sec.  
1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) to all CAAs occurring on or 
after December 7, 2016. For this purpose, persons that are related 
(within the meaning of section 267(b) or 707(b)) will be treated as a 
single taxpayer.
0
Par. 9. Section 1.901(m)-7 is added to read as follows:


Sec.  1.901(m)-7  De minimis rules.

    (a) In general. This section provides rules describing basis 
difference that is not taken into account under section 901(m) because 
a CAA results in a de minimis amount of basis difference. Paragraph (b) 
of this section sets forth the general rule for determining whether the 
de minimis threshold is met. Paragraph (c) of this section provides 
modifications to the general rule in the case of CAAs involving related 
persons and CAAs that are part of an aggregated CAA transaction. 
Paragraph (d) of this section provides rules for applying this section, 
and paragraph (e) of this section provides an anti-abuse rule 
applicable to related persons. Paragraph (f) of this section provides 
examples that illustrate the application of this section. Paragraph (g) 
of this section provides the effective/applicability date.
    (b) General rule--(1) In general. A basis difference with respect 
to an RFA and a foreign income tax is not taken into account under 
section 901(m) if the requirements under either the cumulative basis 
difference exemption or the RFA class exemption are satisfied.
    (2) Cumulative basis difference exemption. Except as provided in 
paragraph (c) of this section, a basis difference, with respect to an 
RFA and a foreign income tax, is not taken into account under section 
901(m) (cumulative basis difference exemption) if the sum of that basis 
difference and all other basis differences (including negative basis 
differences), with respect to a single CAA and a single RFA owner 
(U.S.), is less than the greater of:
    (i) $10 million, or
    (ii) 10 percent of the total U.S. basis of all the RFAs immediately 
after the CAA.
    (3) RFA class exemption--(i) Except as provided in paragraph (c) of 
this section, a basis difference, with respect to an RFA and a foreign 
income tax, is not taken into account under section 901(m) (RFA class 
exemption) if the RFA is part of a class of RFAs and the absolute value 
of the sum of the basis differences (including negative basis 
differences), with respect to a single CAA and a single RFA owner, for 
all the RFAs in that class is less than the greater of:
    (A) $2 million, or
    (B) 10 percent of the total U.S. basis of all the RFAs in that 
class of RFAs immediately after the CAA.
    (ii) For purposes of this paragraph (b)(3), the classes of RFAs are 
the seven asset classes defined in Sec.  1.338-6(b), regardless of 
whether the CAA is a section 338 CAA.
    (c) Special rules--(1) Modification of de minimis rules for related 
persons. If the transferor and transferee in the CAA are related 
persons (as described in section 267(b) or 707(b)), the cumulative 
basis difference exemption and the RFA class exemption, as described in 
paragraph (b) of this section, are applied by replacing the terms ``$10 
million,'' ``10 percent'', and ``$2 million'' wherever they occur in 
that paragraph with the terms ``$5 million,'' ``5 percent,'' and ``$1 
million,'' respectively.
    (2) CAA part of an aggregated CAA transaction. If a CAA is part of 
an aggregated CAA transaction and a single RFA owner (U.S.) does not 
own all the RFAs attributable to the CAAs that are part of the 
aggregated CAA transaction, the cumulative basis difference exemption 
and the RFA class exemption apply to such CAA only if, in addition to 
satisfying the requirements of paragraph (b)(2) or (b)(3) of this 
section, respectively, determined without regard to this paragraph 
(c)(2), the cumulative basis difference exemption or the RFA class 
exemption, as modified by this paragraph (c)(2), is satisfied. Solely 
for purposes of this paragraph (c)(2), the cumulative basis difference 
exemption and the RFA class exemption are applied taking into account 
all the basis differences with respect to all the RFAs owned by all the 
RFA owners (U.S.) that are attributable to the CAAs that are part of 
the aggregated CAA transaction.
    (d) Rules of application. The following rules apply for purposes of 
this section.
    (1) Whether a basis difference qualifies for the cumulative basis 
difference exemption or the RFA class exemption is determined when an 
asset first becomes an RFA with respect to a CAA. In the case of a 
subsequent CAA described in Sec.  1.901(m)-6(b)(4), the application of 
the cumulative basis difference exemption and the RFA class exemption 
is based on basis difference, if any, that results from the subsequent 
CAA.
    (2) If there is an aggregated CAA transaction, the cumulative basis 
difference exemption and each RFA class exemption are applied by 
treating all CAAs that are part of the aggregated CAA transaction as a 
single CAA.
    (3) Basis difference is computed in accordance with Sec.  1.901(m)-
4 except that a foreign basis election need not be evidenced if either 
the cumulative basis difference exemption or an RFA class exemption 
apply to all RFAs with respect to the CAA.
    (4) Basis difference is translated into U.S. dollars (if necessary) 
using the spot rate determined under the principles of Sec.  1.988-1(d) 
on the date of the CAA.
    (e) Anti-abuse rule. The cumulative basis difference exemption and 
an RFA class exemption are not available if the transferor and 
transferee in the CAA are related persons (as described in section 
267(b) or 707(b)) and the CAA was entered into, or structured, with a 
principal purpose of avoiding the application of section 901(m). See 
also Sec.  1.901(m)-8(c), which provides that certain built-in loss 
assets are not taken into account for purposes of applying this 
section.
    (f) Examples. The following examples illustrate the rules of this 
section:

    Example 1.  De minimis; cumulative basis difference exemption--
(i) Facts. USP, a domestic corporation, as part of a plan, purchases 
all of the stock of CFC1 and CFC2 from a single seller. CFC1 and 
CFC2 are section 902 corporations (as defined in section 909(d)(5)), 
organized in Country F, and treated as corporations for Country F 
tax purposes. Country F imposes a single tax that is a foreign 
income tax . Each acquisition is a qualified stock purchase (as 
defined in section 338(d)(3)) to which section 338(a) applies. A 
foreign basis election is not made under Sec.  1.901(m)-4(c). 
Immediately after the acquisition of the stock of CFC1 and CFC2, the 
assets of CFC1 and CFC2 give rise to

[[Page 88588]]

income that is taken into account for Country F tax purposes, and 
those assets are in a single class, as defined in Sec.  1.338-6(b). 
At all relevant times, 1u equals $1. All amounts are stated in 
millions. The additional facts are summarized below.

----------------------------------------------------------------------------------------------------------------
                                                                    Total U.S.      Total U.S.
                                                                       basis           basis        Total basis
                     Relevant foreign assets                        immediately     immediately     difference
                                                                      before           after
----------------------------------------------------------------------------------------------------------------
Assets of CFC1..................................................             48u             60u             12u
Assets of CFC2..................................................            100u             96u            (4)u
                                                                 -----------------------------------------------
    Total.......................................................            148u            156u              8u
----------------------------------------------------------------------------------------------------------------

    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(1), USP's 
acquisitions of the stock of CFC1 and CFC2 are each a section 338 
CAA. Under 1.901(m)-1(a)(3), the two section 338 CAAs constitute an 
aggregated CAA transaction because the acquisitions occur as part of 
a plan. Under Sec.  1.901(m)-2(c)(1), the assets of CFC1 and CFC2 
are RFAs for Country F tax purposes because they are relevant in 
determining foreign income of CFC1 and CFC 2, respectively, for 
Country F tax purposes. Under Sec.  1.901(m)-1(a)(31), CFC1 is the 
RFA owner (U.S.) with respect to its assets, and CFC2 is the RFA 
owner (U.S.) with respect to its assets.
    (B) Under paragraph (b)(2) of this section, the application of 
the cumulative basis difference exemption is based on a single CAA 
and a single RFA owner (U.S.), subject to the requirements under 
paragraph (c)(2) of this section that apply when there is an 
aggregated CAA transaction. In the case of the section 338 CAA with 
respect to CFC1, without regard to paragraph (c)(2) of this section, 
the requirements of the cumulative basis difference exemption are 
satisfied if the sum of the basis differences is less than the 
threshold of $10 million, the greater of $10 million or $6 million 
(10% of the total U.S. basis of $60 million (60 million u translated 
into dollars at the exchange rate of $1 = 1u)). In this case, the 
sum of the basis differences is $12 million (12 million u translated 
into dollars at the exchange rate of $1 = 1 u). Because the sum of 
the basis differences of $12 million is not less than the threshold 
of $10 million, the requirements of the cumulative basis difference 
exemption are not satisfied. Because the requirements of the 
cumulative basis difference exemption are not satisfied, without 
regard to paragraph (c)(2) of this section, paragraph (c)(2) of this 
section is not applicable. Finally, the RFA class exemption is not 
relevant because all of the RFAs of CFC1 are in a single class. 
Accordingly, the basis differences with respect to all of the RFAs 
of CFC1 must be taken into account under section 901(m).
    (C) In the case of the section 338 CAA with respect to CFC2, 
without regard to paragraph (c)(2) of this section, the requirements 
of the cumulative basis difference exemption are satisfied if the 
sum of the basis differences is less than the threshold of $10 
million, the greater of $10 million or $ 9.6 million (10% of the 
total U.S. basis of $96 million (96 million u translated into 
dollars at the exchange rate of $1 = 1u)) In this case, the sum of 
the basis differences is ($4) million ((4) million u translated into 
dollars at the exchange rate of $1 = 1 u). Because the sum of the 
basis differences of ($4) million is less than the threshold of $10 
million, the requirements of the cumulative basis difference 
exemption are satisfied. However, because the section 338 CAA with 
respect to CFC2 is part of an aggregate CAA transaction that 
includes the section 338 CAA with respect to CFC1, paragraph (c)(2) 
of this section is applicable. Under paragraph (c)(2) of this 
section, the requirements of the cumulative basis difference 
exemption must also be satisfied taking into account all of the RFAs 
of both CFC2 and CFC1. In this case, the requirements of the 
cumulative basis difference exemption for purposes of paragraph 
(c)(2) of this section are satisfied if the sum of the basis 
differences with respect to all of the RFAs of CFC2 and CFC1 is less 
than the threshold of $15.6 million, the greater of $10 million or 
$15.6 million (10% of the total U.S. basis of $156 million (156 
million u translated into dollars at the exchange rate of $1 = 1u)) 
In this case, the sum of the basis differences is $8 million (8 
million u translated into dollars at the exchange rate of $1 = 1 u). 
Because the sum of the basis differences of $8 million is less than 
the threshold of $15.6 million, the requirements of the cumulative 
basis difference exemption are satisfied in the case of the section 
338 CAA with respect to CFC2. Accordingly, none of the basis 
differences with respect to the RFAs of CFC2 are taken into account 
under section 901(m).
    Example 2.  De minimis; RFA Class Exemption--(i) Facts. USP, a 
domestic corporation, acquires all the stock of CFC, a section 902 
corporation (as defined in section 909(d)(5)) organized in Country F 
and treated as a corporation for Country F tax purposes, in a 
qualified stock purchase (as defined in section 338(d)(3)) to which 
section 338(a) applies. Country F imposes a single tax that is a 
foreign income tax . A foreign basis election is not made under 
Sec.  1.901(m)-4(c). Immediately after the acquisition of CFC, the 
assets of CFC give rise to income that is taken into account for 
Country F tax purposes. At all relevant times, 1u equals $1. All 
amounts are stated in millions. The additional facts are summarized 
below.

----------------------------------------------------------------------------------------------------------------
                                                                    Total U.S.      Total U.S.
                                                                       basis           basis        Total basis
                     Relevant foreign assets                        immediately     immediately     difference
                                                                      before           after
----------------------------------------------------------------------------------------------------------------
Cash (Class I)..................................................             10u             10u              0u
Inventory (Class IV)............................................             14u             15u              1u
Buildings (Class V).............................................             19u             30u             11u
                                                                 -----------------------------------------------
    Total.......................................................             43u             55u             12u
----------------------------------------------------------------------------------------------------------------

    (ii) Result. (A) Under Sec.  1.901(m)-2(b)(1), USP's acquisition 
of the stock of CFC is a section 338 CAA. Under Sec.  1.901(m)-
2(c)(1), the assets of CFC are RFAs for Country F tax purposes 
because they are relevant in determining foreign income of CFC for 
Country F tax purposes.
    (B) Under paragraph (b)(2) of this section, the requirements of 
the cumulative basis difference exemption are satisfied if the sum 
of the basis differences is less than the threshold of $10 million, 
the greater of $10 million or $5.5 million (10% of the total U.S. 
basis of $55 million (55 million u translated into dollars at the 
exchange rate of $1 = 1u)). In this case, the sum of the basis 
differences is $12 million (12 million u translated into dollars at 
the exchange rate of $1 = 1 u). Because the sum of the basis 
differences of $12 million is not less than the threshold of $10 
million, the requirements of the cumulative basis difference 
exemption are not satisfied.
    (C) Under paragraph (b)(3) of this section, each of CFC's assets 
is allocated to its class under Sec.  1.338-6(b) for purposes of the 
RFA class exemption. The requirements of the RFA class exemption 
with respect to the Class IV RFAs (in this case, inventory) are 
satisfied if the absolute value of the sum of the basis differences 
with respect to the Class IV RFAs is less than the threshold of $2

[[Page 88589]]

million, the greater of $2 million or $1.5 million (10% of the total 
U.S. basis of Class IV RFAs of $15 million (15 million u translated 
into dollars at the exchange rate of $1 = 1u)) In this case, the 
absolute value of the sum of the basis differences is $1 million (1 
million u translated into dollars at the exchange rate of $1 = 1 u). 
Because the sum of the basis differences of $1 million is less than 
the threshold of $2 million, the requirements of the RFA class 
exemption are satisfied. Accordingly, the basis differences with 
respect to the Class IV RFAs are not taken into account under 
section 901(m).
    (D) The requirements of the RFA class exemption with respect to 
the Class V RFAs (in this case, buildings) is satisfied if the 
absolute value of the sum of the basis differences with respect to 
the Class V RFAs is less than the threshold of $3 million, the 
greater of $2 million or $3 million (10% of the total U.S. basis of 
Class V RFAs of $30 million (30 million u translated into dollars at 
the exchange rate of $1 = 1u)). In this case, the absolute value of 
the sum of the basis differences is $11 million (11 million u 
translated into dollars at the exchange rate of $1 = 1 u). Because 
the sum of the basis differences of $11 million is not less than the 
threshold of $3 million, the requirements of the RFA class exemption 
are not satisfied. Accordingly, the basis differences with respect 
to the Class V RFAs are taken into account under section 901(m).
    (E) The Class I RFAs (in this case, cash) are irrelevant because 
there is no basis differences with respect to those RFAs.

    (g) Effective/applicability date. This section applies to CAAs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. 
Taxpayers may, however, rely on this section prior to the date this 
section is applicable provided that they both consistently apply this 
section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  
1.901(m)-1, Sec. Sec.  1.901(m)-3 through 1.901(m)-6 (excluding Sec.  
1.901(m)-4(e)), and Sec.  1.901(m)-8 to all CAAs occurring on or after 
January 1, 2011, and consistently apply Sec.  1.901(m)-2 (excluding 
Sec.  1.901(m)-2(d)) to all CAAs occurring on or after December 7, 
2016. For this purpose, persons that are related (within the meaning of 
section 267(b) or 707(b)) will be treated as a single taxpayer.
0
Par. 10. Section 1.901(m)-8 is added to read as follows:


Sec.  1.901(m)-8  Miscellaneous.

    (a) In general. This section provides guidance on other matters 
under section 901(m). Paragraph (b) of this section provides guidance 
on the application of section 901(m) to pre-1987 foreign income taxes. 
Paragraph (c) of this section provides anti-abuse rules relating to 
built-in loss assets. Paragraph (d) of this section provides the 
effective/applicability date.
    (b) Application of section 901(m) to pre-1987 foreign income taxes. 
Section 901(m) and Sec. Sec.  1.901(m)-1 through -8 apply to pre-1987 
foreign income taxes (as defined in Sec.  1.902-1(a)(10)(iii)) of a 
section 902 corporation.
    (c) Anti-abuse rule for built-in loss RFAs. A basis difference with 
respect to an RFA described in section 901(m)(3)(C)(ii) (built-in loss 
RFA) will not be taken into account for purposes of computing an 
allocated basis difference for a U.S. taxable year of a section 901(m) 
payor if any RFA, including an RFA other than built-in loss RFAs, is 
acquired with a principal purpose of using one or more built-in loss 
RFAs to avoid the application of section 901(m). Furthermore, a basis 
difference with respect to a built-in loss RFA will not be taken into 
account for purposes of the cumulative basis difference exemption or 
the RFA class exemption under Sec.  1.901(m)-7 if any RFAs, including 
RFAs other than built-in loss RFAs, are acquired with a principal 
purpose of avoiding the application of section 901(m).
    (d) Effective/applicability date. This section applies to CAAs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. 
Taxpayers may, however, rely on this section prior to the date this 
section is applicable provided that they both consistently apply this 
section, Sec.  1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.  
1.901(m)-1, and Sec. Sec.  1.901(m)-3 through 1.901(m)-7 (excluding 
Sec.  1.901(m)-4(e)) to all CAAs occurring on or after January 1, 2011, 
and consistently apply Sec.  1.901(m)-2 (excluding Sec.  1.901(m)-2(d)) 
to all CAAs occurring on or after December 7, 2016. For this purpose, 
persons that are related (within the meaning of section 267(b) or 
707(b)) will be treated as a single taxpayer.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-28759 Filed 12-6-16; 8:45 am]
 BILLING CODE 4830-01-P