[Federal Register: November 14, 2008 (Volume 73, Number 221)] [Rules and Regulations] [Page 67387-67388] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr14no08-12] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9416] RIN 1545-BH74 Determining the Amount of Taxes Paid for Purposes of Section 901; Correction AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Correcting amendment. ----------------------------------------------------------------------- SUMMARY: This document contains corrections to final and temporary regulations (TD 9416) that were published in the Federal Register on Wednesday, July 16, 2008 (73 FR 40727) under section 901 of the Internal Revenue Code providing guidance relating to the determination of the amount of taxes paid for purposes of the foreign tax credit. DATES: Effective Date: This correction is effective November 14, 2008, and is applicable on July 16, 2008. FOR FURTHER INFORMATION CONTACT: Michael Gilman, (202) 622-3850 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background The final and temporary regulations that are the subjects of this document are under section 901 of the Internal Revenue Code. Need for Correction As published, final and temporary regulations (TD 9416) contain errors that may prove to be misleading and are in need of clarification. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Correction of Publication 0 Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 continues to read, in part, as follows: Authority: 26 U.S.C. 7805 * * * 0 Par. 2. Section 1.901-2T is amended as follows: 0 1. The first sentence of paragraph (e)(5)(iv)(C)(5)(i) is revised. 0 2. Paragraph (e)(5)(iv)(D) Example 5. paragraphs (i)(A), (i)(B) and (ii) are revised. [[Page 67388]] 0 3. The first sentence of paragraph (e)(5)(iv)(D) Example 8.(i)(B) is revised. Sec. 1.901-2T Income, war profits, or excess profits tax paid or accrued (temporary). * * * * * (e) * * * (5) * * * (iv) * * * (C) * * * (5) * * * (i) In general. The term passive investment income means income described in section 954(c), as modified by this paragraph (e)(5)(iv)(C)(5)(i) and paragraph (e)(5)(iv)(C)(5)(ii) of this section. * * * * * * * * (D) * * * Example 5. * * * (i) * * * (A) A country X corporation (Foreign Bank) contributes $2 billion to a newly-formed country X company (Newco) in exchange for all of the common stock of Newco and securities that are treated as debt of Newco for U.S. tax purposes and preferred stock of Newco for country X tax purposes. A domestic corporation (USP) contributes $1 billion to Newco in exchange for securities that are treated as preferred stock of Newco for U.S. tax purposes and debt of Newco for country X tax purposes. Newco loans the $3 billion to a wholly- owned, country X subsidiary of Foreign Bank (FSub) in return for a $3 billion, seven-year note paying interest currently. The Newco securities held by USP entitle the holder to fixed distributions of $4 million per year, and the Newco securities held by Foreign Bank entitle the holder to receive $82 million per year, payable only on maturity of the $3 billion FSub note in year 7. At the end of year 5, pursuant to a prearranged plan, Foreign Bank acquires USP's Newco securities for a prearranged price of $1 billion. Country X does not impose tax on dividends received by one country X corporation from a second country X corporation. Under an income tax treaty between country X and the United States, country X does not impose country X tax on interest received by U.S. residents from sources in country X. None of Foreign Bank's stock is owned, directly or indirectly, by USP or any shareholders of USP that are domestic corporations, U.S. citizens or resident alien individuals. (B) In each of years 1 through 7, FSub pays Newco $124 million of interest on the $3 billion note. Newco distributes $4 million to USP in each of years 1 through 5. The distributions are deductible for country X tax purposes, and Newco pays country X $36 million with respect to $120 million of taxable income from the FSub note in each year. For U.S. tax purposes, in each year Newco's post-1986 undistributed earnings are increased by $124 million of interest income and reduced by accrued interest expense with respect to the Newco securities held by Foreign Bank. (ii) Result. The $36 million payment to country X is not a compulsory payment, and thus is not an amount of tax paid, because the foreign payment is attributable to a structured passive investment arrangement. First, Newco is an SPV because all of Newco's income is passive investment income described in paragraph (e)(5)(iv)(C)(5) of this section; Newco's only asset, a note of FSub, is held to produce such income; the payment to country X is attributable to such income; and if the payment were an amount of tax paid it would be paid or accrued in a U.S. taxable year in which Newco meets the requirements of paragraph (e)(5)(iv)(B)(1)(i) of this section. Second, if the foreign payment were an amount of tax paid, USP would be deemed to pay its pro rata share of the foreign payment under section 902(a) in each of years 1 through 5 and, therefore, would be eligible to claim a credit under section 901(a). Third, USP would not pay any country X tax if it directly owned its proportionate share of Newco's assets, a note of FSub. Fourth, for country X tax purposes, Foreign Bank is eligible to receive a tax- free distribution of $82 million attributable of each of years 1 through 5, and that amount corresponds to more than 10 percent of the foreign base with respect to which USP's share of the foreign payment was imposed. Fifth, Foreign Bank is a counterparty because it owns stock of Newco for country X tax purposes and none of Foreign Bank's stock is owned, directly or indirectly, by USP or shareholders of USP that are domestic corporations, U.S. citizens, or resident alien individuals. Sixth, the United States and country X treat various aspects of the arrangement differently, including whether the Newco securities held by Foreign Bank and USP are debt or equity. The amount of credits claimed by USP if the payment to country X were an amount of tax paid is materially greater than it would be if, for U.S. tax purposes, the securities held by USP were treated as debt or the securities held by Foreign Bank were treated as equity, and the amount of income recognized by Newco for U.S. tax purposes is materially less than the amount of income recognized for country X tax purposes. Because the payment to country X is not an amount of tax paid, USP is not deemed to pay any country X tax under section 902(a). USP has dividend income of $4 million in each of years 1 through 5. * * * * * Example 8. * * * (i) * * * (B) The transaction is structured in such a way that, for U.S. tax purposes, there is a loan of $1.5 billion from FC to USP, and USP is the owner of the class C stock and the class A stock. * * * * * * * * Guy Traynor, Acting Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration). [FR Doc. E8-27023 Filed 11-13-08; 8:45 am] BILLING CODE 4830-01-P
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