Exclusions From Gross Income of Foreign Corporations, 45529-45530 [05-15534]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 151 (Monday, August 8, 2005)]
[Rules and Regulations]
[Pages 45529-45530]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-15534]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9218]
RIN 1545-BE16


Exclusions From Gross Income of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule; delay of effective date.

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SUMMARY: This document amends the applicability date of final 
regulations under sections 883(a) and (c) (TD 9087) which were 
published in the Federal Register on August 26, 2003 (68 FR 51394). 
Those final regulations relate to income derived by a foreign 
corporation from the international operation of ships or aircraft.

DATES: Effective Date: These regulations are effective August 8, 2005.
    Applicability Date: These regulations are applicable to taxable 
years of foreign corporations beginning after September 24, 2004.

FOR FURTHER INFORMATION CONTACT: Patricia Bray, (202) 622-3880 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Sections 883(a)(1) and (a)(2) of the Internal Revenue Code (Code) 
provide that income derived by a foreign corporation from the 
international operation of ships or aircraft may be excluded from gross 
income.
    In 2003, the Treasury Department and the IRS issued final 
regulations under section 883 applicable to taxable years of a foreign 
corporation beginning 30 days or more after August 26, 2003. The final 
regulations provide, in general, that a foreign corporation organized 
in a qualified foreign country and engaged in the international 
operation of ships or aircraft shall exclude qualified income from 
gross income for purposes of U.S. Federal income taxation, provided 
that the corporation can satisfy certain stock ownership and related 
documentation requirements.
    The regulations provide that a foreign corporation may satisfy the 
stock ownership requirement if it meets one of three tests under Sec.  
1.883-1(c)(2). One such test provides that a controlled foreign 
corporation, as defined in section 957(a) (CFC), satisfies the stock 
ownership test of Sec.  1.883-1(c)(2) if it meets the requirements of 
Sec.  1.883-3, including the income inclusion test of

[[Page 45530]]

Sec.  1.883-3(b). The income inclusion test requires that more than 50 
percent of the adjusted net foreign base company income derived by the 
CFC from the international operation of a ships or aircraft be 
includible in the gross income of one or more U.S. citizens, individual 
residents of the United States, or domestic corporations.

Need for Change

    Pursuant to section 423 of the American Jobs Creation Act of 2004, 
(118 Stat. 1418, 2004), Public Law 108-357 (AJCA), the applicability 
date of the final regulations under section 883 is delayed for one 
year, so that they apply to taxable years of foreign corporations 
seeking qualified foreign corporation status beginning after September 
24, 2004. This regulation makes the conforming changes to the final 
regulations.

Request for Comments

    Pursuant to section 415 of AJCA, sections 954(a)(4) and 954(f), 
relating to foreign base company shipping income, were repealed 
effective for taxable years of foreign corporations beginning after 
December 31, 2004, and for taxable years of U.S. shareholders with or 
within which such taxable years of the foreign corporations end. 
Questions have arisen as to the proper interpretation of Sec.  1.883-
3(b) in light of the statutory amendments to section 954. Foreign 
corporations have expressed concern that they may no longer satisfy the 
CFC test if they no longer derive foreign base company income from the 
international operation of their ships or aircraft as a result of the 
statutory amendments to sections 954(a)(4) and (f).
    The IRS and the Treasury Department believe the better 
interpretation of Sec.  1.883-3(b) is that a CFC that satisfied the CFC 
test prior to the effective date of the new legislation may continue to 
satisfy it after the effective date of the new legislation, provided 
the CFC can demonstrate that had sections 954(a)(4) and (f) not been 
repealed, more than 50 percent of its current earnings and profits 
derived from its international operation of ships or aircraft would 
have been attributable to amounts includible in the gross income of one 
or more U.S. citizens, individual residents of the United States or 
domestic corporations (pursuant to section 951(a)(1)(A) or another 
provision of the Code) for the taxable years of such persons in which 
the taxable year of the CFC ends. Conversely, a CFC will not qualify 
for the exception if it cannot make such a showing.
    The IRS and the Treasury Department expect to revise this section 
of the regulations to clarify this point. Comments are invited on the 
most appropriate way to accomplish this goal consistent with the 
principles of the existing regulations and AJCA.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. The collection 
of information referenced in this rule was previously reviewed by the 
Office of Management and Budget and approved under control number 1545-
1677. The collection of information referenced in these regulations 
also was previously certified not to have a significant economic impact 
on a substantial number of small entities. This certification was based 
upon the fact that these regulations apply to foreign corporations and 
impose only a limited collection of information burden on shareholders 
of such corporations, which in some cases may include U. S. small 
entities. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) was not required. 
Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations (REG-208280-86; REG-136311-01; 
67 FR 50510) was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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

0
Par. 2. Section 1.883-5 is revised to read as follows:


Sec.  1.883-5  Effective dates.

    (a) General rule. Sections 1.883-1 through 1.883-4 apply to taxable 
years of a foreign corporation seeking qualified foreign corporation 
status beginning after September 24, 2004.
    (b) Election for retroactive application. Taxpayers may elect to 
apply Sec. Sec.  1.883-1 through 1.883-4 for any open taxable year of 
the foreign corporation beginning after December 31, 1986, except that 
the substantiation and reporting requirements of Sec.  1.883-1(c)(3) 
(relating to the substantiation and reporting required to be treated as 
a qualified foreign corporation) or Sec. Sec.  1.883-2(f), 1.883-3(d) 
and 1.883-4(e) (relating to additional information to be included in 
the return to demonstrate whether the foreign corporation satisfies the 
stock ownership test) will not apply to any year beginning before 
September 25, 2004. Such election shall apply to the taxable year of 
the election and to all subsequent taxable years beginning before 
September 25, 2004.
    (c) Transitional information reporting rule. For taxable years of 
the foreign corporation beginning after September 24, 2004, and until 
such time as the Form 1120-F, ``U.S. Income Tax Return of a Foreign 
Corporation,'' or its instructions are revised to provide otherwise, 
the information required in Sec.  1.883-1(c)(3) and Sec.  1.883-2(f), 
Sec.  1.883-3(d) or Sec.  1.883-4(e), as applicable, must be included 
on a wirtten statement attached to the Form 1120-F and file with the 
return.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: June 24, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-15534 Filed 8-5-05; 8:45 am]
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