Special Rules Regarding Certain Section 951 Pro Rata Share Allocations, 8943-8945 [06-1532]
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Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations
with the National Futures Association’s
electronic filing procedures, and
(ii) for a commodity pool Account
Statement or Annual Report distributed
to participants, a facsimile of the
manually signed oath or affirmation of
such representative may be used so long
as the manually signed original is
retained in accordance with § 4.23.
(3) For each manually signed oath or
affirmation, there must be typed beneath
the signed oath or affirmation:
(i) The name of the individual signing
the document;
(ii) The capacity in which he is
signing;
(iii) The name of the commodity pool
operator for whom he is signing; and
(iv) The name of the commodity pool
for which the document is being
distributed.
*
*
*
*
*
I 4. Section 4.23 is amended by adding
a new paragraph (a)(12) to read as
follows:
§ 4.23
Recordkeeping.
*
*
*
*
*
(a) * * *
(12) A manually signed copy of each
Account Statement and Annual Report
provided pursuant to § 4.22, 4.7(b) or
4.12(b), and records of the key financial
balances submitted to the National
Futures Association for each commodity
pool Annual Report, which records
must clearly demonstrate how the key
financial balances were compiled from
the Annual Report.
*
*
*
*
*
Issued in Washington, DC, on February 16,
2006 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06–1615 Filed 2–21–06; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9251]
RIN 1545–BE71
Special Rules Regarding Certain
Section 951 Pro Rata Share Allocations
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
cprice-sewell on PROD1PC66 with RULES
AGENCY:
SUMMARY: This document contains final
regulations under section 951(a) of the
Internal Revenue Code (Code) regarding
a United States shareholder’s pro rata
VerDate Aug<31>2005
13:17 Feb 21, 2006
Jkt 208001
share of a controlled foreign
corporation’s (CFC’s) subpart F income,
previously excluded subpart F income
withdrawn from investment in less
developed countries, and previously
excluded subpart F income withdrawn
from foreign base country shipping
operations. These regulations are
intended to ensure that a CFC’s earnings
and profits for a taxable year attributable
to a section 304 transaction will not be
allocated in a manner that results in the
avoidance of Federal income tax. These
regulations are also intended to ensure
that earnings and profits of a CFC are
not allocated to certain preferred stock
in a manner inconsistent with the
economic interest that such stock
represents.
DATES: Effective Date: These regulations
are effective February 22, 2006.
Applicability Date: For dates of
applicability, see § 1.951–1(e)(3)(v),
(e)(4)(ii) and (e)(7).
FOR FURTHER INFORMATION CONTACT:
Jefferson VanderWolk, (202) 622–3810
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 6, 2004, the IRS published
in the Federal Register a notice of
proposed rulemaking (REG–129771–04,
2004–36 I.R.B. 453) under section 951 of
the Code. After consideration of
comments received, the proposed
regulations were modified and adopted
as final with the publication of T.D.
9222 on August 25, 2005 (70 FR 49864).
In response to comments, the IRS
published at the same time in the
Federal Register a notice of proposed
rulemaking (REG–129782–05, 70 FR
49894) under section 951 of the Code.
No written comments were received in
response to that notice of proposed
rulemaking. No public hearing was
requested or held on the notice of
proposed rulemaking. The proposed
regulations are adopted as final
regulations with the modifications
discussed below.
Explanation of Changes
Section 1.951–1(e) defines pro rata
share for purposes of section 951(a) of
the Code. The general rule, set forth in
§ 1.951–1(e)(3)(i), provides for the
allocation of current earnings and
profits to different classes of stock on
the basis of the respective amounts of
such earnings and profits that would be
distributed with respect to each class if
such earnings and profits were
distributed on the last day of the CFC’s
taxable year on which it is a CFC.
Section 1.951–1(e)(3)(v) provides a
special rule that modifies the general
PO 00000
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Fmt 4700
Sfmt 4700
8943
rule regarding the allocation of a CFC’s
current earnings and profits to more
than one class of stock. The special rule
applies where a CFC has earnings and
profits and subpart F income for its
taxable year attributable to a transaction
described in section 304 of the Code and
that transaction is part of a plan a
principal purpose of which is to avoid
Federal income taxation by allocating
the subpart F income resulting from the
section 304 transaction
disproportionately to a tax-indifferent
party. Pursuant to the rule, such
earnings and profits are allocated to
each class of stock of the CFC in
accordance with the value of such class
relative to all other classes.
Several practitioners noted in oral
comments that proposed § 1.951–1(e)(6),
Example 9, which illustrates the
application of proposed § 1.951–
1(e)(3)(v), presented facts whose
characterization under other Code
sections could be unclear under the
circumstances. In response to these
comments, the IRS and Treasury
Department have revised the example in
order to limit the issues presented.
A comment on the rules originally
proposed on August 6, 2004, requested
guidance to eliminate inappropriate
distortions between subpart F
inclusions and economic realization
that taxpayers may achieve if
accumulated but unpaid dividends with
respect to preferred stock are not
discounted to present value for
purposes of determining the
hypothetical distribution. As a partial
response to that comment, proposed
§ 1.951–1(e)(4)(ii) provided a special
rule requiring accumulated but unpaid
dividends with respect to mandatorily
redeemable cumulative preferred stock
be taken into account at present value
for purposes of the hypothetical
distribution. Comments were requested
regarding the treatment of cumulative
preferred stock that does not have a
mandatory redemption date or that is
subject to a shareholder-level
agreement, such as a purchase option. In
addition, the preamble stated that the
IRS and the Treasury Department
anticipated that any such rules would
be effective for taxable years of a
controlled foreign corporation beginning
on or after January 1, 2006. No further
comments were received beyond the
original comment.
The IRS and Treasury Department
agree with the commentator that
accrued but unpaid dividends generally
present possibilities for distortion
between subpart F income inclusions
and economic income realization. These
distortions are similar to those that can
arise from stock with discretionary
E:\FR\FM\22FER1.SGM
22FER1
8944
Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations
distribution rights. Accordingly,
§ 1.951–1(e)(4)(ii) adds a rule that
generally treats cumulative preferred
stock with accrued but unpaid
dividends in the same manner as stock
with discretionary distribution rights (as
defined in § 1.951–1(e)(3)(ii)). Earnings
and profits are allocated to such stock
on the basis of the value of such stock
relative to the value of other classes of
stock outstanding.
There are two exceptions to this
general rule. First, to the extent that
dividends are paid with respect to such
stock during the year, earnings and
profits equal to the amount of such
dividends are first allocated to that class
of stock. Additional earnings and profits
are allocated to that class of stock only
in the amount (if any) by which the
value-based allocation of earnings and
profits to that class of stock exceeds the
amount of such dividends. Second, the
final regulations preserve the special
present-value rule (with technical
modifications) for certain mandatorily
redeemable cumulative preferred stock.
Consistent with the comment
received, and as provided in the
preamble to the proposed regulations,
these rules are effective for taxable years
of a controlled foreign corporation
beginning on or after January 1, 2006.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations and because these
regulations do not impose a collection
of information on small entities, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
cprice-sewell on PROD1PC66 with RULES
Drafting Information
The principal author of these
regulations is Jefferson VanderWolk of
the Office of the Associate Chief
Counsel (International). 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.
VerDate Aug<31>2005
13:17 Feb 21, 2006
Jkt 208001
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
I
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *.
Par. 2. Section 1.951–1 is amended by
revising paragraphs (e)(3)(v), (e)(4)(ii),
and the first sentence of paragraph
(e)(7), and paragraph (e)(6) Example 9 is
added.
The revisions and addition read as
follows:
I
§ 1.951–1 Amounts included in gross
income of United States shareholders.
*
*
*
*
*
(e) * * *
(3) * * *
(v) Earnings and profits attributable to
certain section 304 transactions. For
taxable years of a controlled foreign
corporation beginning on or after
January 1, 2006, if a controlled foreign
corporation has more than one class of
stock outstanding and the corporation
has earnings and profits and subpart F
income for a taxable year attributable to
a transaction described in section 304,
and such transaction is part of a plan a
principal purpose of which is the
avoidance of Federal income taxation,
the amount of such earnings and profits
allocated to any one class of stock shall
be that amount which bears the same
ratio to the remainder of such earnings
and profits as the value of all shares of
such class of stock, determined on the
hypothetical distribution date, bears to
the total value of all shares of all classes
of stock of the corporation, determined
on the hypothetical distribution date.
(4) * * *
(i) * * *
(ii) Certain cumulative preferred
stock. For taxable years of a controlled
foreign corporation beginning on or after
January 1, 2006, if a controlled foreign
corporation has one or more classes of
preferred stock with cumulative
dividend rights, such stock shall be
considered for the purposes of this
section as stock with discretionary
distribution rights. As a result, the
provisions of paragraph (e)(3)(ii) of this
section shall apply for purposes of
allocating earnings and profits to such
stock, except that earnings and profits
shall first be allocated to the stock under
paragraph (e)(3)(i) of this section to the
extent of any dividends paid with
respect to the stock during the taxable
year. Additional earnings and profits
PO 00000
Frm 00024
Fmt 4700
Sfmt 4700
will be allocated to the stock only in an
amount equal to the excess (if any) of
the amount of earnings and profits
allocated to the stock under paragraph
(e)(3)(ii) of this section over the amount
of such dividends. Notwithstanding the
foregoing, if a class of redeemable
preferred stock with cumulative
dividend rights has a mandatory
redemption date, and all dividend
arrearages with respect to such stock
compound at least annually at a rate
that is not lower than the applicable
Federal rate (as defined in section
1274(d)(1)) (AFR) that applies on the
date the stock is issued for the term
from such issue date to the mandatory
redemption date, based on a comparable
compounding assumption, such stock
shall not be considered for purposes of
this section as stock with discretionary
distribution rights.
*
*
*
*
*
(6) * * *
Example 9. (i) Facts. In 2006, FC10, a
controlled foreign corporation within the
meaning of section 957(a), has outstanding
100 shares of common stock and 100 shares
of 6-percent, voting, preferred stock with a
par value of $10x per share. All of the
common stock is held by Corp H, a foreign
corporation, which invested $1000x in FC10
in exchange for the common stock. All of the
preferred stock is held by Corp J, a domestic
corporation, which invested $5000x in FC10
in exchange for the preferred stock. Corp H
is unrelated to Corp J. In 2006, FC10 borrows
$3000x from a bank and invests $5000x in
preferred stock issued by FC11, a foreign
corporation the common stock of which is
owned by Corp J. Corp J’s adjusted basis in
its FC 11 common stock is $5000x. FC11,
which has no current or accumulated
earnings and profits, distributes the $5000x
to Corp J. Subsequently, in 2007, FC10 sells
the FC11 preferred stock to FC12, a whollyowned foreign subsidiary of FC11 that has
$5000x of accumulated earnings and profits,
for $5000x in a transaction described in
section 304. FC10 repays the bank loan in
full. For 2007, FC10 has $5000x of earnings
and profits, all of which is subpart F income
attributable to a section 304 dividend arising
from FC10’s sale of the FC11 preferred stock
to FC12. At all relevant times, the value of
the common stock of FC10 is $1000x and the
value of the preferred stock of FC10 is
$5000x.
(ii) Analysis. The acquisition and sale of
the FC11 preferred stock by FC10 was part
of a plan a principal purpose of which was
the avoidance of Federal income tax by
depleting the earnings and profits of FC12
and allowing FC11 to make a distribution to
Corp J that it characterizes entirely as a
return of basis. FC10 has $5000x of earnings
and profits for 2007 attributable to a dividend
from a section 304 transaction which was
part of such plan. Under paragraph (e)(3)(v)
of this section, these earnings and profits are
allocated to the common and preferred stock
of FC10 in accordance with the relative value
of each class of stock ($1000x and $5000x,
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22FER1
Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations
respectively). Thus, for taxable year 2007,
$833x (1⁄6 × $5000x = $833x) of these
earnings and profits is allocated to FC10’s
common stock and $4167x (5⁄6 × $5000x =
$4167x) is allocated to its preferred stock.
(7) Effective dates. Except as provided
in paragraphs (e)(3)(v) and (e)(4)(ii) of
this section, this paragraph (e) applies
for taxable years of a controlled foreign
corporation beginning on or after
January 1, 2005. * * *
*
*
*
*
*
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9245]
RIN 1545–BE15
Disclosure of Return Information to the
Department of Agriculture
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
SUMMARY: This document contains final
regulations that incorporate and clarify
the phrase ‘‘return information reflected
on returns’’ in conformance with the
terms of section 6103(j)(5) of the
Internal Revenue Code (Code), which
provides for limited disclosures of
returns and return information in
connection with the census of
agriculture. These final regulations also
remove certain items of return
information that the Department of
Agriculture no longer needs for
conducting the census of agriculture.
DATES: Effective Date: These regulations
are effective on February 22, 2006.
FOR FURTHER INFORMATION CONTACT:
Deborah Lambert-Dean at (202) 622–
4570 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
cprice-sewell on PROD1PC66 with RULES
Background
This document contains amendments
to 26 CFR part 301 under section 6103(j)
of the Code. On June 6, 2003, the
Federal Register published a temporary
regulation (TD 9060) regarding
disclosure of return information to the
Department of Agriculture (68 FR
13:17 Feb 21, 2006
Jkt 208001
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
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulations do not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the IRS
submitted the NPRM preceding this
Treasury decision to the Chief Counsel
for Advocacy of the Small Business
Administration for comment on its
impact on small business.
Approved: February 8, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury (Tax Policy).
[FR Doc. 06–1532 Filed 2–21–06; 8:45 am]
VerDate Aug<31>2005
33857) and a notice of proposed
rulemaking (NPRM) (REG–103809–03)
cross-referencing the temporary
regulations (68 FR 33887). There were
no comments submitted in response to
the NPRM. There was no request for a
public hearing, and none took place.
The proposed regulations are adopted
and the corresponding temporary
regulations are removed.
Drafting Information
The principal author of these
regulations is Deborah Lambert-Dean,
Office of the Associate Chief Counsel,
Procedure & Administration (Disclosure
& Privacy Law Division).
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
I
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
for part 301 is amended by removing the
entry for ‘‘Section 301.6103(j)(5)–1T and
adding an entry in numerical order to
read in part as follows:
I
Authority: 26 U.S.C. 7805 * * *.
Section 301.6103(j)(5)–1 also issued
under 26 U.S.C. 6103(j)(5). * * *
301.6103(j)(5)–1T
[Removed]
Par. 2. Section 301.6103(j)(5)–1T is
removed.
I Par. 3. Section 301.6103(j)(5)–1 is
added to read as follows:
I
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8945
§ 301.6103(j)(5)–1 Disclosures of return
information reflected on returns to officers
and employees of the Department of
Agriculture for conducting the census of
agriculture.
(a) General rule. Pursuant to the
provisions of section 6103(j)(5) of the
Internal Revenue Code and subject to
the requirements of paragraph (c) of this
section, officers or employees of the
Internal Revenue Service will disclose
return information reflected on returns
to officers and employees of the
Department of Agriculture to the extent,
and for such purposes, as may be
provided by paragraph (b) of this
section. ‘‘Return information reflected
on returns’’ includes, but is not limited
to, information on returns, information
derived from processing such returns,
and information derived from other
sources for the purposes of establishing
and maintaining taxpayer information
relating to returns.
(b) Disclosure of return information
reflected on returns to officers and
employees of the Department of
Agriculture. (1) Officers or employees of
the Internal Revenue Service will
disclose the following return
information reflected on returns
described in this paragraph (b) for
individuals, partnerships and
corporations with agricultural activity,
as determined generally by industry
code classification or the filing of
returns for such activity, to officers and
employees of the Department of
Agriculture for purposes of, but only to
the extent necessary in, structuring,
preparing, and conducting, as
authorized by chapter 55 of title 7,
United States Code, the census of
agriculture.
(2) From Form 1040 ‘‘U.S. Individual
Income Tax Return’’, Form 1041 ‘‘U.S.
Income Tax Return for Estates and
Trusts’’, Form 1065 ‘‘U.S. Return of
Partnership Income’’ and Form 1065–B
‘‘U.S. Return of Income for Electing
Large Partnerships’’ (Schedule F)—
(i) Taxpayer identity information (as
defined in section 6103(b)(6) of the
Internal Revenue Code);
(ii) Spouse’s Social Security Number;
(iii) Annual accounting period;
(iv) Principal Business Activity (PBA)
code;
(v) Taxable cooperative distributions;
(vi) Income from custom hire and
machine work;
(vii) Gross income;
(viii) Master File Tax (MFT) code;
(ix) Document Locator Number (DLN);
(x) Cycle posted;
(xi) Final return indicator;
(xii) Part year return indicator; and
(xiii) Taxpayer telephone number.
E:\FR\FM\22FER1.SGM
22FER1
]]>Agencies
[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Rules and Regulations]
[Pages 8943-8945]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1532]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9251]
RIN 1545-BE71
Special Rules Regarding Certain Section 951 Pro Rata Share
Allocations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations under section 951(a)
of the Internal Revenue Code (Code) regarding a United States
shareholder's pro rata share of a controlled foreign corporation's
(CFC's) subpart F income, previously excluded subpart F income
withdrawn from investment in less developed countries, and previously
excluded subpart F income withdrawn from foreign base country shipping
operations. These regulations are intended to ensure that a CFC's
earnings and profits for a taxable year attributable to a section 304
transaction will not be allocated in a manner that results in the
avoidance of Federal income tax. These regulations are also intended to
ensure that earnings and profits of a CFC are not allocated to certain
preferred stock in a manner inconsistent with the economic interest
that such stock represents.
DATES: Effective Date: These regulations are effective February 22,
2006.
Applicability Date: For dates of applicability, see Sec. 1.951-
1(e)(3)(v), (e)(4)(ii) and (e)(7).
FOR FURTHER INFORMATION CONTACT: Jefferson VanderWolk, (202) 622-3810
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 6, 2004, the IRS published in the Federal Register a
notice of proposed rulemaking (REG-129771-04, 2004-36 I.R.B. 453) under
section 951 of the Code. After consideration of comments received, the
proposed regulations were modified and adopted as final with the
publication of T.D. 9222 on August 25, 2005 (70 FR 49864). In response
to comments, the IRS published at the same time in the Federal Register
a notice of proposed rulemaking (REG-129782-05, 70 FR 49894) under
section 951 of the Code. No written comments were received in response
to that notice of proposed rulemaking. No public hearing was requested
or held on the notice of proposed rulemaking. The proposed regulations
are adopted as final regulations with the modifications discussed
below.
Explanation of Changes
Section 1.951-1(e) defines pro rata share for purposes of section
951(a) of the Code. The general rule, set forth in Sec. 1.951-
1(e)(3)(i), provides for the allocation of current earnings and profits
to different classes of stock on the basis of the respective amounts of
such earnings and profits that would be distributed with respect to
each class if such earnings and profits were distributed on the last
day of the CFC's taxable year on which it is a CFC.
Section 1.951-1(e)(3)(v) provides a special rule that modifies the
general rule regarding the allocation of a CFC's current earnings and
profits to more than one class of stock. The special rule applies where
a CFC has earnings and profits and subpart F income for its taxable
year attributable to a transaction described in section 304 of the Code
and that transaction is part of a plan a principal purpose of which is
to avoid Federal income taxation by allocating the subpart F income
resulting from the section 304 transaction disproportionately to a tax-
indifferent party. Pursuant to the rule, such earnings and profits are
allocated to each class of stock of the CFC in accordance with the
value of such class relative to all other classes.
Several practitioners noted in oral comments that proposed Sec.
1.951-1(e)(6), Example 9, which illustrates the application of proposed
Sec. 1.951-1(e)(3)(v), presented facts whose characterization under
other Code sections could be unclear under the circumstances. In
response to these comments, the IRS and Treasury Department have
revised the example in order to limit the issues presented.
A comment on the rules originally proposed on August 6, 2004,
requested guidance to eliminate inappropriate distortions between
subpart F inclusions and economic realization that taxpayers may
achieve if accumulated but unpaid dividends with respect to preferred
stock are not discounted to present value for purposes of determining
the hypothetical distribution. As a partial response to that comment,
proposed Sec. 1.951-1(e)(4)(ii) provided a special rule requiring
accumulated but unpaid dividends with respect to mandatorily redeemable
cumulative preferred stock be taken into account at present value for
purposes of the hypothetical distribution. Comments were requested
regarding the treatment of cumulative preferred stock that does not
have a mandatory redemption date or that is subject to a shareholder-
level agreement, such as a purchase option. In addition, the preamble
stated that the IRS and the Treasury Department anticipated that any
such rules would be effective for taxable years of a controlled foreign
corporation beginning on or after January 1, 2006. No further comments
were received beyond the original comment.
The IRS and Treasury Department agree with the commentator that
accrued but unpaid dividends generally present possibilities for
distortion between subpart F income inclusions and economic income
realization. These distortions are similar to those that can arise from
stock with discretionary
[[Page 8944]]
distribution rights. Accordingly, Sec. 1.951-1(e)(4)(ii) adds a rule
that generally treats cumulative preferred stock with accrued but
unpaid dividends in the same manner as stock with discretionary
distribution rights (as defined in Sec. 1.951-1(e)(3)(ii)). Earnings
and profits are allocated to such stock on the basis of the value of
such stock relative to the value of other classes of stock outstanding.
There are two exceptions to this general rule. First, to the extent
that dividends are paid with respect to such stock during the year,
earnings and profits equal to the amount of such dividends are first
allocated to that class of stock. Additional earnings and profits are
allocated to that class of stock only in the amount (if any) by which
the value-based allocation of earnings and profits to that class of
stock exceeds the amount of such dividends. Second, the final
regulations preserve the special present-value rule (with technical
modifications) for certain mandatorily redeemable cumulative preferred
stock.
Consistent with the comment received, and as provided in the
preamble to the proposed regulations, these rules are effective for
taxable years of a controlled foreign corporation beginning on or after
January 1, 2006.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations and because
these regulations do not impose a collection of information on small
entities, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice of proposed rulemaking
preceding these regulations 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 Jefferson VanderWolk
of the Office of the Associate Chief Counsel (International). 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 1.951-1 is amended by revising paragraphs (e)(3)(v),
(e)(4)(ii), and the first sentence of paragraph (e)(7), and paragraph
(e)(6) Example 9 is added.
The revisions and addition read as follows:
Sec. 1.951-1 Amounts included in gross income of United States
shareholders.
* * * * *
(e) * * *
(3) * * *
(v) Earnings and profits attributable to certain section 304
transactions. For taxable years of a controlled foreign corporation
beginning on or after January 1, 2006, if a controlled foreign
corporation has more than one class of stock outstanding and the
corporation has earnings and profits and subpart F income for a taxable
year attributable to a transaction described in section 304, and such
transaction is part of a plan a principal purpose of which is the
avoidance of Federal income taxation, the amount of such earnings and
profits allocated to any one class of stock shall be that amount which
bears the same ratio to the remainder of such earnings and profits as
the value of all shares of such class of stock, determined on the
hypothetical distribution date, bears to the total value of all shares
of all classes of stock of the corporation, determined on the
hypothetical distribution date.
(4) * * *
(i) * * *
(ii) Certain cumulative preferred stock. For taxable years of a
controlled foreign corporation beginning on or after January 1, 2006,
if a controlled foreign corporation has one or more classes of
preferred stock with cumulative dividend rights, such stock shall be
considered for the purposes of this section as stock with discretionary
distribution rights. As a result, the provisions of paragraph
(e)(3)(ii) of this section shall apply for purposes of allocating
earnings and profits to such stock, except that earnings and profits
shall first be allocated to the stock under paragraph (e)(3)(i) of this
section to the extent of any dividends paid with respect to the stock
during the taxable year. Additional earnings and profits will be
allocated to the stock only in an amount equal to the excess (if any)
of the amount of earnings and profits allocated to the stock under
paragraph (e)(3)(ii) of this section over the amount of such dividends.
Notwithstanding the foregoing, if a class of redeemable preferred stock
with cumulative dividend rights has a mandatory redemption date, and
all dividend arrearages with respect to such stock compound at least
annually at a rate that is not lower than the applicable Federal rate
(as defined in section 1274(d)(1)) (AFR) that applies on the date the
stock is issued for the term from such issue date to the mandatory
redemption date, based on a comparable compounding assumption, such
stock shall not be considered for purposes of this section as stock
with discretionary distribution rights.
* * * * *
(6) * * *
Example 9. (i) Facts. In 2006, FC10, a controlled foreign
corporation within the meaning of section 957(a), has outstanding
100 shares of common stock and 100 shares of 6-percent, voting,
preferred stock with a par value of $10x per share. All of the
common stock is held by Corp H, a foreign corporation, which
invested $1000x in FC10 in exchange for the common stock. All of the
preferred stock is held by Corp J, a domestic corporation, which
invested $5000x in FC10 in exchange for the preferred stock. Corp H
is unrelated to Corp J. In 2006, FC10 borrows $3000x from a bank and
invests $5000x in preferred stock issued by FC11, a foreign
corporation the common stock of which is owned by Corp J. Corp J's
adjusted basis in its FC 11 common stock is $5000x. FC11, which has
no current or accumulated earnings and profits, distributes the
$5000x to Corp J. Subsequently, in 2007, FC10 sells the FC11
preferred stock to FC12, a wholly-owned foreign subsidiary of FC11
that has $5000x of accumulated earnings and profits, for $5000x in a
transaction described in section 304. FC10 repays the bank loan in
full. For 2007, FC10 has $5000x of earnings and profits, all of
which is subpart F income attributable to a section 304 dividend
arising from FC10's sale of the FC11 preferred stock to FC12. At all
relevant times, the value of the common stock of FC10 is $1000x and
the value of the preferred stock of FC10 is $5000x.
(ii) Analysis. The acquisition and sale of the FC11 preferred
stock by FC10 was part of a plan a principal purpose of which was
the avoidance of Federal income tax by depleting the earnings and
profits of FC12 and allowing FC11 to make a distribution to Corp J
that it characterizes entirely as a return of basis. FC10 has $5000x
of earnings and profits for 2007 attributable to a dividend from a
section 304 transaction which was part of such plan. Under paragraph
(e)(3)(v) of this section, these earnings and profits are allocated
to the common and preferred stock of FC10 in accordance with the
relative value of each class of stock ($1000x and $5000x,
[[Page 8945]]
respectively). Thus, for taxable year 2007, $833x (\1/6\ x $5000x =
$833x) of these earnings and profits is allocated to FC10's common
stock and $4167x (\5/6\ x $5000x = $4167x) is allocated to its
preferred stock.
(7) Effective dates. Except as provided in paragraphs (e)(3)(v) and
(e)(4)(ii) of this section, this paragraph (e) applies for taxable
years of a controlled foreign corporation beginning on or after January
1, 2005. * * *
* * * * *
Approved: February 8, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-1532 Filed 2-21-06; 8:45 am]
BILLING CODE 4830-01-P
