Foreign Tax Credit: Notification of Foreign Tax Redeterminations, 62771-62788 [E7-21766]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 215 (Wednesday, November 7, 2007)]
[Rules and Regulations]
[Pages 62771-62788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-21766]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9362]
RIN 1545-BG23


Foreign Tax Credit: Notification of Foreign Tax Redeterminations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary Income Tax Regulations 
relating to a United States taxpayer's obligation under section 905(c) 
of the Internal Revenue Code (Code) to notify the IRS of a foreign tax 
redetermination, which is a change in the taxpayer's foreign tax 
liability that may affect the taxpayer's foreign tax credit. This 
document also contains temporary Procedure and Administration 
Regulations under section 6689 relating to the civil penalty for 
failure to notify the IRS of a foreign tax redetermination as required 
under section 905(c). These temporary regulations affect taxpayers that 
have paid foreign taxes which have been redetermined and provide 
guidance needed to comply with statutory changes made to the applicable 
law by the Taxpayer Relief Act of 1997 and the American Jobs Creation 
Act of 2004. The text of the temporary regulations also serves as the 
text of the proposed regulations (REG-209020-86) set forth in the 
notice of proposed rulemaking on this subject published elsewhere in 
this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on November 7, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.905-3T(a), 1.905-4T(f), and 301.6689-1T(e). These regulations 
generally apply to foreign tax redeterminations occurring in taxable 
years of United States taxpayers beginning on or after November 7, 
2007, where the foreign tax redetermination affects the amount of 
foreign taxes paid or accrued by a United States taxpayer. Where the 
redetermination of foreign tax paid or accrued by a foreign corporation 
affects the amount of foreign taxes deemed paid under section 902 or 
960, this section applies to foreign tax redeterminations occurring in 
a taxable year of a foreign corporation which ends with or within the 
taxable year of the domestic corporate shareholder beginning on or 
after November 7, 2007. Section 1.905-3T(b) generally applies to taxes 
paid or

[[Page 62772]]

accrued in taxable years of United States taxpayers beginning on or 
after November 7, 2007 and to taxes paid or accrued by a foreign 
corporation in its taxable year which ends with or within the taxable 
year of the domestic corporate shareholder beginning on or after 
November 7, 2007. For foreign tax redeterminations occurring in taxable 
years of United States taxpayers beginning before November 7, 2007 and 
foreign tax redeterminations occurring in taxable years of a foreign 
corporation which end with or within the taxable year of the domestic 
corporate shareholder beginning before November 7, 2007, see Sec.  
1.905-4T(f)(2).

FOR FURTHER INFORMATION CONTACT: Teresa Burridge Hughes, (202) 622-3850 
(not a toll-free call).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public comment pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collections of information contained 
in these regulations have been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1056. Responses to this collection of 
information are mandatory.
    The collections of information in these temporary regulations are 
in Sec.  1.905-4T. This information is required in order for taxpayers 
to notify the IRS of a foreign tax redetermination that may require 
redetermination of the taxpayer's United States tax liability.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    For further information concerning these collections of 
information; where to submit comments on the collections of information 
and the accuracy of the estimated burden; and suggestions for reducing 
this burden, please refer to the preamble of the cross-referencing 
notice of proposed rulemaking published in this issue of the Federal 
Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Under section 905(c) and the regulations, a taxpayer that claims a 
foreign tax credit for taxes paid or accrued under section 901 or 
deemed paid under section 902 or 960 must notify the IRS when there has 
been a change to the amount of foreign taxes paid or accrued. In 
general, in the case of a foreign tax redetermination with respect to 
taxes claimed as a direct credit under section 901, the taxpayer's 
United States tax liability must be redetermined; and, in the case of a 
foreign tax redetermination with respect to taxes included in the 
computation of foreign taxes deemed paid under section 902 or 960, the 
foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes must be adjusted (subject to exceptions 
described in Sec. Sec.  1.905-3T(d)(3) and (f)). If the taxpayer fails 
to notify the IRS of a foreign tax redetermination, unless it is shown 
that such failure is due to reasonable cause and not due to willful 
neglect, section 6689 imposes a penalty of 5 percent of the deficiency 
attributable to such redetermination if the failure is for not more 
than 1 month, with an additional 5 percent for each additional month 
during which the failure continues, but not to exceed 25 percent of the 
deficiency.
    On June 23, 1988, the Federal Register published proposed (53 FR 
23659) (INTL-061-86) and temporary (53 FR 23611) (TD 8210) amendments 
to the Income Tax Regulations (26 CFR part 1) under section 905(c) and 
to the Procedure and Administration Regulations (26 CFR part 301) under 
section 6689 (the 1988 proposed and temporary regulations). These 
amendments reflected the changes made to the Internal Revenue Code by 
section 2(c)(2) of the Revenue Act of December 28, 1980 (94 Stat. 3503, 
3509) and section 1261(a) of the Tax Reform Act of 1986 (100 Stat. 
2085, 2591). The IRS and the Treasury Department received several 
written comments, which are discussed in this preamble. A public 
hearing concerning the proposed regulations was neither requested nor 
held. In response to written comments, on March 16, 1990, the IRS and 
the Treasury Department issued Notice 90-26, 1990-1 CB 336 (see Sec.  
601.601(d)(2)(ii)(b)), which suspended a portion of the temporary 
regulations, specifically Sec.  1.905-3T(d)(2)(ii)(A) and that part of 
Sec.  1.905-3T(d)(2)(ii)(C) which refers to that regulation, which 
provided rules for accounting for foreign tax redeterminations that 
affect the calculation of foreign taxes deemed paid with respect to 
distributions or inclusions out of post-1986 undistributed earnings of 
a foreign corporation. Section 1.905-3T(d)(2)(ii)(A) required that, in 
the case of a foreign tax redetermination that affects the amount of 
foreign taxes deemed paid by a United States corporation for a taxable 
year, if the foreign tax redetermination occurs more than 90 days 
before the due date (with extensions) of the taxpayer's income tax 
return for such taxable year and before the taxpayer actually files 
that return, then that taxpayer must adjust the foreign tax credit to 
be claimed on that return for such taxable year to account for the 
effect of the foreign tax redetermination.
    Alternatively, if a foreign tax redetermination occurs after the 
filing of the United States tax return, Sec.  1.905-3T(d)(2)(ii)(B) 
provides that appropriate upward or downward adjustments are made at 
the time of the foreign tax redetermination to the pools of post-1986 
foreign income taxes and post-1986 undistributed earnings of the 
foreign corporation. Section 1.905-3T(d)(2)(ii)(C) provides that, if 
the foreign tax redetermination occurs within 90 days of the due date 
of the United States tax return and before the taxpayer actually files 
its tax return, then the taxpayer may elect either to adjust the 
foreign tax credit to be claimed on that return in the manner described 
in Sec.  1.905-3T(d)(2)(ii)(A) or adjust the pools of post-1986 foreign 
income taxes and post-1986 undistributed earnings to reflect the effect 
of the foreign tax redetermination in the manner described in Sec.  
1.905-3T(d)(2)(ii)(B).
    Comments received by the IRS and the Treasury Department concerning 
the requirement in Sec.  1.905-3T(d)(2)(ii)(A) to notify the IRS of a 
foreign tax redetermination by adjusting the foreign tax credit on the 
return for the taxable year in which the foreign tax redetermination 
occurred stated that this requirement did not take into account the 
amount of time that taxpayers, especially large multinational 
corporations, need to prepare their income tax returns. In cases for 
which a foreign tax redetermination requires a redetermination of 
United States tax liability, Sec.  1.905-4T provides rules generally 
requiring taxpayers to file amended returns to notify the IRS of the 
redetermination.
    Sections 1102(a)(1) and 1102(a)(2) of the Taxpayer Relief Act of 
1997, Public Law 105-34 (111 Stat. 788, 963-966 (1997)), amended 
sections 986(a) and 905(c), respectively, effective for taxes paid or 
accrued in taxable years beginning after December 31, 1997. Section 
905(c)(1)(B) was added to provide that, if accrued taxes are not

[[Page 62773]]

paid before the date two years after the close of the taxable year to 
which such taxes relate, the taxpayer must notify the IRS and 
redetermine its United States tax liability for the year or years in 
which it claimed credit for such taxes. Section 986(a)(1)(A) was 
amended to provide that, for purposes of determining the amount of 
foreign tax credit, in the case of a taxpayer who takes foreign income 
taxes into account when accrued, the amount of any foreign income taxes 
(and any adjustment thereto) generally will be translated into dollars 
using the average exchange rate for the taxable year to which such 
taxes relate. However, under section 986(a)(1)(B), the spot exchange 
rate on the date the taxes are paid is used to translate foreign income 
taxes that are paid before, or more than two years after, the taxable 
year to which the taxes relate. Section 986(a)(1)(C) provides that, as 
determined under regulations, the average exchange rate also will not 
apply to taxes denominated in inflationary currencies.
    Subsequently, section 408(a) of the American Jobs Creation Act of 
2004, Public Law 108-357 (118 Stat. 1418, 1499 (2004)), modified 
section 986(a) and provided, effective for taxable years beginning 
after December 31, 2004, that, at the election of the taxpayer, the 
average exchange rate will not apply to any foreign income taxes the 
liability for which is denominated in any currency other than in the 
taxpayer's functional currency. If the taxpayer so elects, taxes will 
be translated into dollars using the exchange rates at the time such 
taxes were paid to the foreign country. See section 986(a)(1)(D)(i). 
Section 986(a)(1)(D)(ii) provides that this election is also applicable 
to foreign income taxes attributable to a qualified business unit in 
accordance with regulations prescribed by the Secretary. On May 15, 
2006, the IRS and the Treasury Department issued Notice 2006-47, 2006-
20 IRB 892 (see Sec.  601.601(d)(2)(ii)(b)), which provides interim 
rules with respect to this election. The notice provides that a 
taxpayer may elect to use the payment date exchange rates to translate 
all foreign income taxes, or it may elect to use the payment date 
exchange rates to translate only those nonfunctional currency foreign 
income taxes that are attributable to qualified business units with 
United States dollar functional currencies. Section 408(b)(1) of the 
American Jobs Creation Act of 2004 also added a special rule at section 
986(a)(1)(E) for taxes paid by regulated investment companies.
    In light of the statutory changes to sections 905(c) and 986(a) by 
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 
2004, the IRS and the Treasury Department believe it is appropriate to 
issue new proposed and temporary regulations. These new regulations 
make several significant changes to the rules of the 1988 proposed and 
temporary regulations to take into account statutory changes and the 
comments received on the 1988 proposed and temporary regulations, while 
leaving substantial portions of the 1988 proposed and temporary 
regulations unchanged. The new temporary regulations will permit the 
IRS to enforce properly sections 905(c) and 6689 without delay. The 
significant comments and revisions are described in this preamble.

Explanation of Provisions

I. Currency Translation Rules

    This document contains temporary Income Tax Regulations relating to 
the currency translation rules that apply in determining the amount of 
the foreign tax credit. Section 1.905-3T(b) has been revised to reflect 
the statutory changes to sections 905(c) and 986(a) by the Taxpayer 
Relief Act of 1997 and the American Jobs Creation Act of 2004. New 
Sec.  1.905-3T(b)(1)(i) provides that, in the case of a taxpayer or a 
member of a qualified group (as defined in section 902(b)(2)) that 
takes foreign income taxes into account when accrued, the amount of any 
foreign taxes denominated in foreign currency that have been paid or 
accrued, additional tax liability denominated in foreign currency, 
taxes withheld in foreign currency, or estimated taxes paid in foreign 
currency will be translated into dollars using the average exchange 
rate (as defined in Sec.  1.989(b)-1) for the United States taxable 
year to which such taxes relate.
    However, new Sec.  1.905-3T(b)(1)(ii) provides five exceptions to 
the general rule that accrual basis taxpayers translate foreign taxes 
using the average exchange rate. First, Sec.  1.905-3T(b)(1)(ii)(A) 
provides that any foreign taxes denominated in foreign currency that 
were paid more than two years after the close of the United States 
taxable year to which they relate will be translated into dollars using 
the exchange rate as of the date of payment of the foreign taxes.
    Second, Sec.  1.905-3T(b)(1)(ii)(B) provides that any foreign 
income taxes paid before the beginning of the United States taxable 
year to which such taxes relate will be translated into dollars using 
the exchange rate as of the date of payment of the foreign taxes.
    Third, Sec.  1.905-3T(b)(1)(ii)(C) provides that any foreign income 
taxes the liability for which is denominated in any inflationary 
currency will be translated into dollars using the exchange rate as of 
the date of payment of the foreign taxes. For this purpose, the term 
inflationary currency means the currency of a country in which there is 
cumulative inflation during the base period of at least 30 percent, as 
determined by reference to the consumer price index of the country 
listed in the monthly issues of International Financial Statistics, or 
a successor publication, of the International Monetary Fund. For 
purposes of Sec.  1.905-3T(b)(1)(ii)(C), base period means, with 
respect to any taxable year, the thirty-six calendar months immediately 
preceding the last day of such taxable year. See Sec.  1.985-
1(b)(2)(ii)(D).
    Fourth, under the provisions of Sec.  1.905-3T(b)(1)(ii)(D), a 
taxpayer that is otherwise required to translate foreign income taxes 
that are denominated in foreign currency using the average exchange 
rate may elect to translate foreign income taxes into dollars using the 
exchange rate as of the date of payment of the foreign taxes, provided 
that the liability for such taxes is denominated in nonfunctional 
currency. This election may be made for all foreign income taxes or for 
only those foreign income taxes the liability for which is denominated 
in nonfunctional currency and that are attributable to qualified 
business units with United States dollar functional currencies. This 
election allows taxpayers to avoid a mismatch between the translated 
dollar amount of foreign tax credit and the translated dollar amount of 
the foreign income used to pay the tax. The election must be made by 
attaching a statement to the taxpayer's timely filed return (including 
extensions) for the first taxable year to which the election applies. 
The statement must identify whether the election is made for all 
foreign taxes or only for foreign taxes attributable to qualified 
business units with a United States dollar functional currency. Once 
made, the election will apply to the taxable year for which made and 
all subsequent taxable years unless revoked with the consent of the 
Commissioner.
    Finally, in the case of a regulated investment company (as defined 
in section 851 and the regulations under that section) which takes into 
account income on an accrual basis, Sec.  1.905-3T(b)(1)(ii)(E) 
provides that foreign income taxes paid or accrued with

[[Page 62774]]

respect to such income will be translated into dollars using the 
exchange rate as of the date the income accrues. This exception takes 
account of the special rule at section 852(b)(9) that requires a 
regulated investment company to take dividends into account on the ex-
dividend date, rather than on the later date on which the dividends are 
paid (and the tax is actually withheld). The translation rule permits 
greater conformity between the translated dollar amount of dividends 
paid in foreign currency and the translated dollar amount of taxes 
withheld from such dividends. For a discussion of the effective dates 
of the currency translation provisions, see the ``Effective Date'' 
section of this document.
    Section 1.905-3T(b)(4), concerning the allocation of refunds of 
foreign tax to the separate categories of income under section 904(d), 
is not modified by these temporary regulations. Section 1.905-3T(b)(5), 
which provides rules with respect to the basis of foreign currency that 
is refunded, is revised to reflect the 1997 and 2004 changes to the 
currency translation rules, as provided in Sec.  1.905-3T(b)(3).

II. Definition of Foreign Tax Redetermination

    The term ``foreign tax redetermination'' in Sec.  1.905-3T(c) has 
been revised to reflect the statutory changes made to section 905(c) in 
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 
2004. New Sec.  1.905-3T(c) provides that, for purposes of Sec. Sec.  
1.905-3T and 1.905-4T, a foreign tax redetermination means a change in 
the foreign tax liability that may affect a taxpayer's foreign tax 
credit. A foreign tax redetermination includes: (1) Accrued taxes that 
when paid differ from the amounts added to post-1986 foreign income 
taxes or claimed as credits by the taxpayer (such as corrections to 
overaccruals and additional payments); (2) accrued taxes that are not 
paid before the date two years after the close of the taxable year to 
which such taxes relate; (3) any tax paid that is refunded in whole or 
in part; and (4) for taxes taken into account when accrued but 
translated into dollars on the date of payment, a difference between 
the dollar value of the accrued tax and the dollar value of the tax 
paid attributable to fluctuations in the value of the foreign currency 
relative to the dollar between the date of accrual and the date of 
payment.
    Section 1.905-3T(d)(1) has been revised to reflect the modified 
definition in new Sec.  1.905-3T(c) of a foreign tax redetermination 
that results from currency fluctuations, but new Sec.  1.905-3T(d)(1) 
otherwise adopts without amendment the rule in Sec.  1.905-3T(d)(1) of 
the 1988 regulations that provides that no redetermination of United 
States tax liability is required with respect to such foreign tax 
redetermination if the amount of such redetermination is less than the 
lesser of ten thousand dollars or two percent of the total dollar 
amount of the foreign tax initially accrued with respect to that 
foreign country for the United States taxable year. Comments requested 
that this exception be broadened by eliminating the $10,000 limitation 
and by increasing the percentage ceiling from 2 percent to 5 percent, 
in order to increase the number of taxpayers eligible for the 
exception, therefore minimizing the administrative burden of filing 
amended returns for both taxpayers and the IRS. Since the 1988 
temporary regulations were published, the administrative burdens of 
accounting for exchange rate fluctuations have been substantially 
reduced by the change in law allowing taxpayers claiming credits on the 
accrual basis to use annual average exchange rates rather than date of 
payment exchange rates to translate foreign tax. In addition, the IRS 
and Treasury Department believe that it is appropriate to limit the 
exception to a dollar threshold. Accordingly, this comment was not 
adopted.

III. Adjustments to Pools of Post-1986 Undistributed Earnings and Post-
1986 Foreign Income Taxes

    On March 16, 1990, Notice 90-26, 1990-1 CB 336 (see Sec.  
601.601(d)(2)(ii)(b)), suspended Sec.  1.905-3T(d)(2)(ii)(A) and that 
part of Sec.  1.905-3T(d)(2)(ii)(C) which refers to Sec.  1.905-
3T(d)(2)(ii)(A). Prior to its suspension, Sec.  1.905-3T(d)(2)(ii)(A) 
required taxpayers to recompute the foreign tax credit claimed on their 
current year income tax return to account for foreign tax 
redeterminations that affect the amount of foreign tax deemed paid 
under section 902 or 960 and that occurred more than 90 days before the 
due date (with extensions) of the United States tax return for that 
taxable year and before the actual filing date. Section 1.905-
3T(d)(2)(ii)(C) permitted taxpayers to elect to apply Sec.  1.905-
3T(d)(2)(ii)(A) to a foreign tax redetermination occurring within 90 
days of the due date (with extensions) of the tax return for that 
taxable year and before the actual filing date.
    Section 1.905-3T(d)(2)(ii)(B) of the 1988 regulations requires 
that, if a foreign tax redetermination occurs after the filing of the 
United States tax return for such taxable year, then appropriate upward 
or downward adjustments will be made at the time of the foreign tax 
redetermination to the foreign corporation's pools of post-1986 foreign 
taxes and post-1986 earnings and profits to reflect the effect of the 
foreign tax redetermination in calculating foreign taxes deemed paid 
with respect to distributions and inclusions (and the amount of such 
distributions and inclusions) that are includible in taxable years 
subsequent to the taxable year for which such tax return is filed. The 
part of Sec.  1.905-3T(d)(2)(ii)(C) not suspended by Notice 90-26 
allows a taxpayer to elect to adjust the pools of post-1986 foreign 
taxes and post-1986 earnings and profits to reflect the effect of the 
foreign tax redetermination in the manner described in Sec.  1.905-
3T(d)(2)(ii)(B). Notice 90-26 also provided that, pending the issuance 
of final regulations under section 905(c), redeterminations otherwise 
subject to Sec.  1.905-3T(d)(2)(ii)(A) or (C) were required to be 
accounted for through adjustment to the appropriate pools of post-1986 
earnings and profits and post-1986 foreign taxes in the manner 
described in Sec.  1.905-3T(d)(3) and subject to the exceptions set 
forth in Sec.  1.905-3T(d)(4).
    A comment concerning Sec.  1.905-3T(d)(2) of the 1988 regulations 
was received, suggesting that taxpayers be allowed to elect to adjust 
earnings and profits and tax pools or file an immediate claim for 
refund, in the case of an additional assessment of foreign tax which 
generates a potential refund of U.S. tax. Because the taxpayer must 
wait for a subsequent distribution to benefit from the additional 
credits, the comment stated that the taxpayer is inappropriately denied 
an immediate benefit, that is, making a claim for an immediate refund, 
provided by section 6511(d)(3)(A). Subsequently, the Taxpayer Relief 
Act of 1997 confirmed the Secretary's regulatory authority to prescribe 
appropriate adjustments to a foreign corporation's pools of post-1986 
foreign income taxes and post-1986 undistributed earnings in lieu of a 
redetermination, and amended section 905(c)(2) explicitly to provide 
that no redetermination of U.S. tax shall be made by reason of 
additional taxes paid more than two years after the year to which they 
relate. In light of the statutory changes, this comment was not 
adopted.
    Section 1.905-3T(d)(2) of the 1988 regulations has been revised to 
reflect the provisions of Notice 90-26. New Sec.  1.905-3T(d)(2)(i) 
provides that appropriate upward or downward adjustments will be made 
at the time of the foreign tax redetermination to the

[[Page 62775]]

foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes, in accordance with Sec.  1.905-
3T(d)(2)(ii), to reflect the effect of the foreign tax redetermination 
in calculating foreign taxes deemed paid with respect to subsequent 
distributions and inclusions (and the amount of such distributions and 
inclusions).
    Section 1.905-3T(d)(2)(iii) of the 1988 regulations, which provides 
rules with respect to the reporting requirements for adjustments to the 
appropriate pools of post-1986 undistributed earnings and post-1986 
foreign income taxes has been revised. The 1988 regulations require 
that the domestic corporate shareholder attach notice of such 
adjustments to its return on a yearly basis. In the interest of 
reducing the reporting requirement burden, this notification 
requirement has been eliminated. New Sec.  1.905-3T(d)(2)(i) refers to 
Sec.  1.905-4T(b)(2), which provides that, where a redetermination of 
foreign tax paid or accrued by a foreign corporation affects the 
computation of foreign taxes deemed paid under section 902 or 960, and 
the taxpayer is required to adjust the foreign corporation's pools of 
post-1986 undistributed earnings and post-1986 foreign income taxes 
under Sec.  1.905-3T(d)(2), the taxpayer is required to notify the IRS 
of such redetermination by reflecting the adjustments to the foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes on a Form 1118 for the taxpayer's first taxable 
year with respect to which the redetermination affects the computation 
of foreign taxes deemed paid.
    The 1988 regulations provide four exceptions to the general rule in 
Sec.  1.905-3T(d)(2) requiring pooling adjustments in lieu of a 
redetermination of United States tax liability to account for the 
effect of a redetermination of foreign tax paid or accrued by a foreign 
corporation on foreign taxes deemed paid under section 902 or 960. A 
shareholder-level redetermination of United States tax liability is 
required where the foreign tax liability is denominated in a 
hyperinflationary currency (see Sec.  1.905-3T(d)(4)(i)); where the 
foreign tax redetermination occurs with respect to foreign taxes deemed 
paid with respect to a subpart F inclusion or an actual distribution 
which has the effect of reducing the foreign corporation's pool of 
post-1986 foreign income taxes below zero (see Sec.  1.905-
3T(d)(4)(iv)); or where a domestic corporate shareholder of a 
controlled foreign corporation receives a distribution out of 
previously taxed earnings and profits and a foreign country imposes tax 
on the foreign corporation's income, which tax is subsequently reduced 
(see Sec.  1.905-3T(f)). These exceptions are adopted without amendment 
and have been moved to Sec.  1.905-3T(d)(3)(i), (iv), and (vi), 
respectively, in the new temporary regulations.
    The fourth exception, at Sec.  1.905-3T(d)(4)(ii) in the 1988 
regulations, provides that if the foreign tax liability of a United 
States taxpayer is in a currency other than a hyperinflationary 
currency and the amount of foreign tax accrued for the taxable year to 
a foreign country, as measured in units of foreign currency, exceeds 
the amount of foreign tax paid to that foreign country for the taxable 
year by at least two percent, then the IRS, in its discretion, may 
require a redetermination of United States tax liability, in lieu of an 
adjustment of the pools of post-1986 undistributed earnings and post-
1986 foreign income taxes. Section 1.905-3T(d)(2)(iii) of the 1988 
regulations provides that, if a taxpayer may be required to redetermine 
its United States tax liability under Sec.  1.905-3T(d)(4)(ii), the 
taxpayer must attach a notice of such adjustment to its return for the 
year with or within which ends the foreign corporation's taxable year 
during which the foreign tax redetermination occurs. Comments were 
received with respect to these provisions, requesting that the 
regulations set forth the factors the IRS would take into account in 
determining whether to exercise such discretion; the percentage 
limitation be increased to ten percent; the IRS not enforce this 
provision if the deficiency resulting from the overaccrual of foreign 
tax is less than $25,000; and the provision only be used in specific 
situations, such as consistent overaccrual of foreign taxes. Further, 
in order to avoid taxpayers being subject to the penalty under section 
6689 for failure to notify the IRS within 180 days of the foreign tax 
redetermination, as required by Sec.  1.905-4T(b)(2) of the 1988 
regulations, a comment requested that, when the IRS exercises its 
discretion under Sec.  1.905-3T(d)(4)(ii), the date on which such 
redetermination occurs should be deemed to be the date on which the IRS 
notifies the taxpayer that a redetermination of U.S. tax liability is 
required.
    In lieu of the discretionary rule in the 1988 temporary 
regulations, Sec.  1.905-3T(d)(3)(ii) of the new regulations requires a 
redetermination of United States tax liability for all affected years 
if a foreign tax redetermination occurs with respect to foreign taxes 
paid by a foreign corporation and such foreign tax redetermination, if 
taken into account in the taxable year of the foreign corporation to 
which the foreign tax redetermination relates, has the effect of 
reducing by ten percent or more the foreign taxes deemed paid by the 
domestic corporate shareholder under section 902 or 960 in the taxable 
year of the shareholder with or within which ends the taxable year of 
the foreign corporation to which the foreign tax redetermination 
relates or in any intervening taxable year. Thus, a redetermination of 
the United States taxpayer's deemed paid credit under section 902 or 
960 is required by reason of a foreign tax redetermination at the 
foreign subsidiary level only if the overstatement of the foreign tax 
credit is substantial in amount, taking into account the effect of the 
redetermination on the entire tax pool of the foreign subsidiary and 
not just the tax attributable to the year to which the redetermination 
relates. This new rule is more consistent with the other three 
exceptions to pooling adjustments in Sec.  1.905-3T(d)(4)(i) and (iv) 
and Sec.  1.905-3T(f) of the 1988 temporary regulations, which are at 
new Sec.  1.905-3T(d)(3)(i), (iv), and (vi). Further, Sec.  1.905-
3T(d)(3)(ii) of the new regulations provides consistent treatment among 
taxpayers, adds certainty as to when adjustments to prior-year section 
902 or 960 credits are required, and reduces the administrative burden 
associated with yearly notification of such foreign tax 
redeterminations.
    A comment requested that the regulations be revised to address the 
situation where a controlled foreign corporation is sold. In a typical 
case, the seller of the controlled foreign corporation contracts to 
indemnify the buyer for any tax deficiencies arising with respect to 
taxable periods occurring prior to the date of the sale and will be 
entitled to any refunds relating to such periods. The additional 
assessments or refunds of tax are reflected as adjustments to the pools 
of the foreign corporation in the hands of the buyer but accrue 
economically to the seller. However, the seller derives no U.S. tax 
benefit or detriment from those additional payments or refunds because 
it no longer has an economic interest in the foreign corporation. It 
was suggested that the regulations should provide an additional 
exception to the pooling rules allowing recomputation of the seller's 
U.S. tax liability as if the foreign tax redetermination occurred 
immediately prior to the sale. The IRS and Treasury Department are 
continuing to study this issue and request comments on the

[[Page 62776]]

potential scope of an additional exception to the pooling adjustment 
rules in the context of various types of acquisitions.
    Comments are also solicited on other changes that should be made to 
the 1988 temporary regulations, including changes relating to the 
statutory changes made by the Taxpayer Relief Act of 1997 and the 
American Jobs Creation Act of 2004.

IV. Time and Manner of Notification

A. Overview of New Rules
    New Sec.  1.905-4T(a) provides that if, as a result of a foreign 
tax redetermination (as defined in Sec.  1.905-3T(c)), a 
redetermination of United States tax liability is required under 
section 905(c) and Sec.  1.905-3T(d), the taxpayer must provide 
notification of the foreign tax redetermination. Section 1.905-4T(b)(1) 
of the new temporary regulations provides rules with respect to the 
time and manner of notifying the IRS of a foreign tax redetermination 
that necessitates a redetermination of United States tax liability. New 
Sec.  1.905-4T(b)(1)(i) sets forth the general rule that, where a 
redetermination of United States tax liability is required, the 
taxpayer must notify the IRS by filing an amended return, Form 1118 
(Foreign Tax Credit--Corporations) or 1116 (Foreign Tax Credit), and 
the statement required under Sec.  1.905-4T(c) for the taxable year 
with respect to which a redetermination of United States tax liability 
is required. However, where a foreign tax redetermination requires an 
individual to redetermine the individual's United States tax liability, 
and as a result of such foreign tax redetermination the amount of 
creditable taxes paid or accrued by such individual during the taxable 
year does not exceed the applicable dollar limitation in section 904(k) 
(currently $300, or $600 in the case of a joint return), the individual 
will not be required to file Form 1116 with the amended return for such 
taxable year if the individual satisfies the requirements of section 
904(k).
B. Revision of 1988 Temporary Regulations in Response to Comments
    The 1988 temporary regulations at Sec.  1.905-4T(b)(2) require 
taxpayers to notify the IRS of a foreign tax redetermination that 
reduced the amount of foreign taxes paid or deemed paid by filing an 
amended return for the affected year or years within 180 days after the 
date that the foreign tax redetermination occurred. The IRS and the 
Treasury Department received several comments suggesting that this rule 
was unduly burdensome to taxpayers. The comments noted that multiple 
foreign tax redeterminations requiring a redetermination of United 
States tax liability for the same taxable year would require the filing 
of multiple returns for such year, and that filing an amended Federal 
tax return would trigger additional state tax notification and amended 
return filing requirements.
    In light of these comments, the new temporary regulations at Sec.  
1.905-4T(b)(1)(ii) provide that, if a foreign tax redetermination 
reduced the amount of foreign taxes paid or accrued, or included in the 
computation of foreign taxes deemed paid, a taxpayer must file a 
separate notification for each taxable year with respect to which a 
redetermination of United States tax liability is required by the due 
date (with extensions) of the original return for the taxable year in 
which the foreign tax redetermination occurred. With respect to a 
foreign tax redetermination that increased the amount of foreign taxes 
paid or accrued, or included in the computation of foreign taxes deemed 
paid, new Sec.  1.905-4T(b)(1)(iii) adopts the rule provided in the 
1988 temporary regulations at Sec.  1.905-4T(b)(2) and provides that 
the taxpayer must file a separate notification for each taxable year 
with respect to which a redetermination of United States tax liability 
is required within the period provided by section 6511(d)(3)(A).
C. Special Rules for Certain Redeterminations
    The new temporary regulations at Sec.  1.905-4T(b)(1)(iv) provide 
that, where more than one foreign tax redetermination requires a 
redetermination of United States tax liability for the same taxable 
year and those redeterminations occur within two consecutive taxable 
years of the taxpayer, the taxpayer may file for such taxable year one 
amended return, Form 1118 or 1116, and the statement required under 
Sec.  1.905-4T(c) that reflect all such foreign tax redeterminations. 
If the taxpayer chooses to file one notification for such foreign tax 
redeterminations, the due date for such notification is the due date of 
the original return (with extensions) for the year in which the first 
foreign tax redetermination that reduced foreign tax liability 
occurred. However, because foreign tax redeterminations with respect to 
the taxable year for which a redetermination of United States tax 
liability is required may occur after the due date for providing such 
notification in the later of the two consecutive years, more than one 
amended return may be required with respect to that taxable year.
    Section 1.905-4T(b)(1)(v) of the new temporary regulations provides 
that, where a foreign tax redetermination requires a redetermination of 
United States tax liability that would otherwise result in an 
additional amount of United States tax due, but such amount is 
eliminated as a result of a carryback or carryover of an unused foreign 
tax under section 904(c), the taxpayer may, in lieu of applying the 
general notification rule described in Sec.  1.905-4T(b)(1)(i) or (ii), 
notify the IRS by attaching a statement to the original return for the 
taxable year in which the foreign tax redetermination occurs. The 
statement must be filed by the due date (with extensions) of such 
return and contain the information described in Sec.  1.904-2(f), 
including the amounts carried back or over to the year with respect to 
which a redetermination of United States tax liability is required.
    The 1988 temporary regulations at Sec.  1.905-3T(d)(2)(iii) provide 
rules concerning the time, manner, and contents of the notification 
statement for an adjustment of a foreign corporation's pools of post-
1986 undistributed earnings and post-1986 foreign income taxes due to a 
foreign tax redetermination. The new temporary regulations, at Sec.  
1.905-4T(b)(2), modify the reporting requirement with respect to such 
pooling adjustments by providing that where a redetermination of 
foreign tax paid or accrued by a foreign corporation affects the 
computation of foreign taxes deemed paid under section 902 or 960, and 
the taxpayer is required to adjust the foreign corporation's pools of 
post-1986 undistributed earnings and post-1986 foreign income taxes 
under Sec.  1.905-3T(d)(2), the taxpayer must notify the IRS of the 
redetermination by reflecting the adjustments to the foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes on a Form 1118 for the taxpayer's first taxable 
year with respect to which the redetermination affects the computation 
of foreign taxes deemed paid. New Sec.  1.905-4T(b)(2) requires the 
taxpayer to file the Form 1118 by the due date (with extensions) of the 
original return for such taxable year. In the case of multiple 
redeterminations that affect the computation of foreign taxes deemed 
paid for the same taxable year and that are required to be reported 
under new Sec.  1.905-4T(b)(2), a taxpayer may file one notification 
for all such redeterminations in lieu of filing a separate notification 
for each such redetermination.

[[Page 62777]]

D. Large and Mid-Size Business Taxpayers
    Section 1.905-4T(b)(2) of the 1988 temporary regulations requires a 
taxpayer to notify the IRS of a foreign tax redetermination that 
reduced the amount of foreign taxes paid or accrued, or included in the 
computation of foreign taxes deemed paid, by filing an amended return 
for the affected year within 180 days after the date that the foreign 
tax redetermination occurred. The IRS and the Treasury Department 
received several comments with respect to such rule suggesting that, in 
lieu of filing an amended return, taxpayers that are under continuous 
examination in a program such as the Coordinated Examination Program 
should be permitted to provide notice of foreign tax redeterminations 
to the examiner during an examination.
    Taking into account these comments, the new temporary regulations 
at Sec.  1.905-4T(b)(3) provide that, where a redetermination of United 
States tax liability is required by reason of a foreign tax 
redetermination that occurs while a taxpayer is under the jurisdiction 
of the Large and Mid-Size Business Division and that results in a 
reduction in the amount of foreign taxes paid or accrued, or included 
in the computation of foreign taxes deemed paid, the taxpayer must 
provide notice of such redetermination as part of the examination 
process in lieu of filing an amended return for the affected year as 
otherwise required by Sec.  1.905-4T(b)(1)(i) and (ii). If the taxpayer 
is required under Sec.  1.905-4T(b)(3) to provide notice as part of the 
examination process, the taxpayer must satisfy the requirements of 
Sec.  1.905-4T(b)(3) (in lieu of the generally applicable rules of 
Sec.  1.905-4T(b)(1)(i) or (ii)) in order not to be subject to the 
penalty under section 6689 and the regulations under that section.
    Section 1.905-4T(b)(3) of the new regulations requires a taxpayer 
to notify the IRS of the foreign tax redetermination by providing to 
the examiner a statement described in Sec.  1.905-4T(c) during an 
examination of the return for the taxable year for which a 
redetermination of United States tax liability is required by reason of 
the foreign tax redetermination. The taxpayer must provide the 
statement to the examiner no later than 120 days after the latest of 
the date the foreign tax redetermination occurs, the opening 
conference, or the hand-delivery or postmark date of the opening letter 
concerning the examination. If, however, the foreign tax 
redetermination occurs more than 180 days after the latest of the 
opening conference or the hand-delivery or postmark date of the opening 
letter, the taxpayer may, in lieu of applying the rules of Sec.  1.905-
4T(b)(1)(i) and (ii), provide to the examiner a statement which 
complies with the requirements of Sec.  1.905-4T(b)(3), and the IRS, in 
its discretion, may accept such statement or require the taxpayer to 
comply with the rules of Sec.  1.905-4T(b)(1)(i) and (ii).
    This exception in Sec.  1.905-4T(b)(3) to the generally applicable 
notification requirements of Sec.  1.905-4T(b)(1) is not permitted to 
extend the length of the notification period set forth in Sec.  1.905-
4T(b)(1). In addition, no notification under Sec.  1.905-4T(b)(3) will 
be due before May 5, 2008.

V. Notification Contents

    Section 1.905-4T(c)(1) of the new temporary regulations requires 
the taxpayer to furnish a statement that contains information 
sufficient for the IRS to redetermine the taxpayer's United States tax 
liability where such a redetermination is required under section 
905(c). The taxpayer must provide such information in a form that 
enables the IRS to verify and compare the original computations of the 
claimed foreign tax credit, the revised computations resulting from the 
foreign tax redetermination, and the net changes resulting therefrom. 
The statement must include the taxpayer's name, address, identifying 
number, and the taxable year or years of the taxpayer that are affected 
by the foreign tax redetermination. If the written statement is 
submitted to the IRS under Sec.  1.905-4T(b)(3), which provides rules 
with respect to taxpayers under the jurisdiction of the Large and Mid-
Size Business Division, the statement must also include a declaration 
under penalties of perjury.
    Where a redetermination of United States tax liability is required 
by reason of a foreign tax redetermination, new Sec.  1.905-4T(c)(2) 
requires that the taxpayer provide, in addition to the information 
described in new Sec.  1.905-4T(c)(1), specific information concerning 
the foreign tax redetermination. To take into account the amendment of 
section 986(a) (concerning translation rates for foreign taxes) by the 
Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 2004, 
the new temporary regulations require the taxpayer to provide the 
exchange rates used to translate the amount of foreign taxes paid, 
accrued, or refunded in accordance with Sec.  1.905-3T(b) (as the case 
may be). These new temporary regulations also include the requirement 
of the 1988 temporary regulations that taxpayers provide information 
relating to the interest paid by foreign governments or owing to the 
United States due to a foreign tax redetermination.
    If, as a result of a redetermination of foreign tax paid or accrued 
by a foreign corporation, adjustments to the pools of post-1986 
undistributed earnings and post-1986 foreign income taxes are required 
under Sec.  1.905-3T(d)(2) of the 1988 temporary regulations in lieu of 
a redetermination of a domestic corporate shareholder's United States 
tax liability, Sec.  1.905-3T(d)(2)(iii) of the 1988 temporary 
regulations requires that the taxpayer provide certain information 
concerning the foreign tax redetermination and the pooling adjustments. 
In order to reduce the notification requirement burden, the new 
temporary regulations modify this reporting requirement, as discussed 
above in section IV.C., ``Special Rules for Certain Redeterminations.'' 
If, as a result of a redetermination of foreign tax paid or accrued by 
a foreign corporation, a redetermination of United States tax liability 
is required under new Sec.  1.905-3T(d)(3) in lieu of a pooling 
adjustment, the new temporary regulations at Sec.  1.905-4T(c)(3) 
specify the information that the taxpayer must provide.

VI. Payment or Refund of United States Tax, and Application of Interest 
and Penalties

    Section 1.905-4T(d) of the new temporary regulations adopts without 
amendment that portion of the 1988 temporary regulations at Sec.  
1.905-4T(b)(1) which provides that the amount of tax, if any, due upon 
a redetermination of United States tax liability will be paid by the 
taxpayer after notice and demand has been made by the IRS. The 
regulation also clarifies that deficiency procedures under Subchapter B 
of chapter 63 of the Internal Revenue Code will not apply with respect 
to the assessment of the amount due upon such redetermination, meaning 
that the IRS is not required to send a statutory notice of deficiency 
to a taxpayer, and the taxpayer does not have an opportunity to 
petition the Tax Court, prior to the IRS' assessment and collection of 
the amount of additional tax due. In accordance with sections 905(c) 
and 6501(c)(5), the statute of limitations under section 6501(a) will 
not apply to the assessment and collection of the amount of additional 
tax due. The amount of tax, if any, shown by a redetermination of 
United States tax liability to have been overpaid will be credited or 
refunded to the

[[Page 62778]]

taxpayer in accordance with section 6511(d)(3)(A) and the provisions of 
Sec.  301.6511(d)-3. Accordingly, the taxpayer must file a claim for 
credit or refund within ten years from the last date (without 
extensions) prescribed for filing the return for the taxable year in 
which the foreign taxes were actually paid or accrued.
    Similarly, Sec.  1.905-4T(e) of the new temporary regulations 
adopts without amendment the interest and penalties provisions of the 
1988 temporary regulations at Sec.  1.905-4T(c). First, new Sec.  
1.905-4T(e)(1) provides that interest on the underpayment or 
overpayment resulting from a redetermination of United States tax 
liability will be computed in accordance with sections 6601 and 6611 
and the regulations under those sections. No interest will be assessed 
or collected on any underpayment resulting from a refund of foreign tax 
for any period before the receipt of the refund, except to the extent 
interest was paid by the foreign country or possession of the United 
States on the refund for the period. In no case, however, will interest 
assessed and collected pursuant to the preceding sentence for any 
period before receipt of the refund exceed the amount that otherwise 
would have been assessed and collected under section 6601 and the 
regulations under that section for that period. Interest will be 
assessed from the time the taxpayer (or the foreign corporation of 
which the taxpayer is a shareholder) receives a foreign tax refund 
until the taxpayer pays the additional tax due the United States.
    Second, new Sec.  1.905-4T(e)(2) provides that, if an adjustment to 
the foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes under Sec.  1.905-3T(d)(2) is required 
in lieu of a redetermination of United States tax liability, no 
underpayment or overpayment of United States tax liability will result 
from a foreign tax redetermination. Consequently, no interest will be 
paid by or to a taxpayer as a result of adjustments to a foreign 
corporation's pools of post-1986 undistributed earnings and post-1986 
foreign income taxes where required under Sec.  1.905-3T(d)(2).
    Third, Sec.  1.905-4T(e)(3) of the new temporary regulations 
provides that failure to comply with the provisions of Sec.  1.905-4T 
of the new temporary regulations will subject the taxpayer to the 
penalty provisions of section 6689 and the regulations under that 
section.

VII. Foreign Tax Redeterminations With Respect to Pre-1987 Accumulated 
Profits

    Section 1.905-5T of the 1988 regulations provides rules relating to 
foreign tax redeterminations occurring in pre-1987 taxable years, and 
those occurring in post-1986 taxable years with respect to pre-1987 
accumulated profits. The new temporary regulations amend the cross-
references to Sec. Sec.  1.905-3T and 1.905-4T and clarify that these 
rules apply to foreign tax redeterminations with respect to pre-1987 
accumulated profits that are accumulated in taxable years of a foreign 
corporation beginning after December 31, 1986, but before the first 
taxable year in which the ownership requirements of section 902 are 
met. See Sec.  1.902-1(a)(10)(i).

VIII. Penalty Under Section 6689

    Under section 6689, a taxpayer that fails to notify the IRS of a 
foreign tax redetermination in the time and manner prescribed by 
regulations for giving such notice is subject to a penalty unless it is 
shown that such failure is due to reasonable cause and not due to 
willful neglect. Section 6689(a) provides that the penalty is 
calculated by adding to the deficiency attributable to the foreign tax 
redetermination an amount equal to 5 percent of the deficiency if the 
failure is for not more than 1 month, plus an additional 5 percent of 
the deficiency for each month (or fraction thereof) during which the 
failure continues. The total amount of the penalty is not to exceed 25 
percent of the deficiency.
    Section 301.6689-1T(a) has been revised to clarify that deficiency 
proceedings under Subchapter B of chapter 63 of the Code will not apply 
with respect to the amount of such penalty, meaning that the IRS is not 
required to send a statutory notice of deficiency to a taxpayer, and 
the taxpayer does not have an opportunity to petition the Tax Court, 
prior to the IRS' assessment and collection of the amount of such 
penalty.
    Comments were received suggesting that, in computing the amount of 
the penalty, an overpayment resulting from one foreign tax 
redetermination should offset an underpayment resulting from another 
foreign tax redetermination where both foreign tax redeterminations 
arise from the same foreign taxing jurisdiction and require a 
redetermination of United States tax liability for the same taxable 
year. Thus, the commentators suggested, where the underpayment is 
completely offset by one or more overpayments, the section 6689 penalty 
should not apply. Because the penalty is determined with respect to a 
deficiency attributable to such redetermination, there must be some 
deficiency for the penalty to apply. Where underpayments and 
overpayments offset each other to reduce or eliminate a deficiency, any 
penalty under section 6689 would also be reduced or eliminated. The IRS 
and Treasury Department do not believe an amendment to the regulations 
is necessary to clarify this rule.
    Another comment was received suggesting that the section 6689 
penalty generally should be inapplicable to Coordinated Exam Program 
taxpayers, provided that a notice of foreign tax redeterminations is 
submitted by the taxpayer at the commencement of the audit. Such a 
suggestion is generally adopted at Sec.  1.905-4T(b)(3). A further 
comment requested that the definition of reasonable care under the 
regulations be revised. The 1988 regulations provide that, if a 
taxpayer exercised ordinary business care and prudence and was 
nevertheless unable to file the notification within the prescribed 
time, then the delay will be considered to be due to reasonable cause 
and not willful neglect. The comment recommended instead adopting a 
more objective test based on substantial compliance. This comment is 
rejected because ordinary business care and prudence is the general 
standard for reasonable care that is used in the regulations for other 
penalties.
Effective/Applicability Date
    The new temporary regulations of Sec. Sec.  1.905-3T(c) and (d) and 
1.905-4T are generally applicable for foreign tax redeterminations 
occurring in taxable years of United States taxpayers beginning on or 
after November 7, 2007 where the redetermination affects the amount of 
foreign taxes paid or accrued by a United States taxpayer. Where the 
redetermination of foreign tax paid or accrued by a foreign corporation 
affects the computation of foreign taxes deemed paid under section 902 
or 960 with respect to post-1986 undistributed earnings (or pre-1987 
accumulated profits) of the foreign corporation, the new temporary 
regulations of Sec. Sec.  1.905-3T(c) and (d), 1.905-4T, and 1.905-5T 
are generally effective for foreign tax redeterminations occurring in 
taxable years of a foreign corporation which end with or within a 
taxable year of the domestic corporate shareholder beginning on or 
after November 7, 2007. See Sec.  1.905-4T(f)(1). In no case, however, 
will Sec.  1.905-4T(f) operate to extend the statute of limitations 
provided by section 6511(d)(3)(A).

[[Page 62779]]

    Section 1.905-3T(b), which provides rules with respect to currency 
translation, generally is applicable for taxes paid or accrued in 
taxable years of United States taxpayers beginning on or after November 
7, 2007 and to taxes paid or accrued by a foreign corporation in its 
taxable years which end with or within a taxable year of the domestic 
corporate shareholder beginning on or after November 7, 2007. For 
taxable years beginning after December 31, 1997, and before November 7, 
2007, section 986(a), as amended by the Taxpayer Relief Act of 1997 and 
the American Jobs Creation Act of 2004, shall apply. For taxable years 
beginning after December 31, 1986, and prior to the effective date of 
the Taxpayer Relief Act of 1997 (January 1, 1998), Sec.  1.905-3T of 
the 1988 temporary regulations shall apply.
    Section 1.905-3T(b)(1)(ii)(D), which provides taxpayers otherwise 
required to translate foreign income taxes using the average exchange 
rate an election to translate taxes using the exchange rate for the 
date of payment, is applicable for taxable years beginning on or after 
November 7, 2007. For taxable years beginning after December 31, 2004, 
and before November 7, 2007, the rules of Notice 2006-47, 2006-20 IRB 
892 (see Sec.  601.601(d)(2)(ii)(b)), shall apply.
    Although all foreign tax redeterminations occurring in taxable 
years beginning after December 31, 1986, are subject to the 
requirements of section 905(c) and the regulations under that section, 
the 1988 temporary regulations did not specify the date by which the 
required notifications must be made in order to avoid a penalty under 
section 6689. The IRS and the Treasury Department recognize the burden 
associated with requiring notification by a specific date of all 
previously-unreported foreign tax redeterminations that require a 
United States tax redetermination with respect to post-1986 taxable 
years. Consequently, the new temporary regulations at Sec.  1.905-
4T(f)(2) provide a specific due date only for notifications of foreign 
tax redeterminations that occurred in a taxpayer's three taxable years 
preceding the first taxable year identified in Sec.  1.905-4T(f)(1), 
and taxable years of foreign corporations ending with or within such 
taxable years of their domestic corporate shareholders. However, the 
unlimited statute of limitations under section 905(c) and deficiency 
interest provisions continue to apply to any underpayment of United 
States tax attributable to a foreign tax redetermination.
    Section 1.905-4T(f)(2)(ii) provides notification requirements for 
any foreign tax redetermination which occurred in the last taxable year 
of a United States taxpayer beginning before November 7, 2007 and the 
two immediately preceding taxable years and which reduced the amount of 
foreign taxes paid or accrued by the taxpayer for any taxable year. 
This section also requires notification of any redetermination of 
foreign taxes paid or accrued by a foreign corporation which occurred 
in a taxable year of the foreign corporation which ends with or within 
a taxable year of a domestic corporate shareholder described in the 
preceding sentence and which requires a redetermination of United 
States tax liability under Sec.  1.905-3T(d)(3) for any taxable year. 
If, as of November 7, 2007, the taxpayer has not satisfied the notice 
requirements described in Sec. Sec.  1.905-3T and 1.905-4T of the 1988 
temporary regulations with respect to such foreign tax 
redeterminations, the new temporary regulations at Sec.  1.905-
4T(f)(2)(ii) generally require the taxpayer to notify the IRS of such 
foreign tax redetermination no later than the due date (with 
extensions) of its original return for the taxable year following the 
taxable year in which these regulations are first effective.
    New Sec.  1.905-4T(f)(2)(ii) sets forth the time and manner of the 
notification, which must contain the previously-unreported information 
described in new Sec.  1.905-4T(c). The temporary regulations do not 
require notification of previously-unreported foreign tax 
redeterminations of a foreign corporation that occurred in taxable 
years of the foreign corporation that ended with or within a domestic 
corporate shareholder's taxable year beginning before November 7, 2007, 
if the foreign tax redetermination does not require a redetermination 
of United States tax liability but is accounted for by adjusting the 
foreign corporation's pools of post-1986 undistributed earnings and 
post-1986 foreign income taxes.
    New Sec.  1.905-4T(f)(2)(iii) provides that a taxpayer under the 
jurisdiction of the Large and Mid-Size Business Division that is 
otherwise required to file an amended return, Form 1118, and the 
statement required under Sec.  1.905-4T(c) as required in new Sec.  
1.905-4T(f)(2)(ii) may, in lieu of applying Sec.  1.905-4T(f)(2)(ii), 
notify the IRS in the course of an examination of the return for the 
taxable year for which a redetermination of United States tax liability 
is required. In such case, the notification must contain the 
information described in new Sec.  1.905-4T(c) and must be provided 
within 120 days after the latest of the opening conference or the hand-
delivery or postmark date of the opening letter concerning an 
examination of the return for the taxable year for which a 
redetermination of United States tax liability is required or May 5, 
2008, whichever is later. However, if November 7, 2007 is more than 180 
days after the latest of the opening conference or the hand-delivery or 
postmark date of the opening letter, the IRS, in its discretion, may 
accept such statement or require the taxpayer to comply with the rules 
of paragraph (f)(2)(ii) of this section. In addition, this exception to 
the notification requirements of Sec.  1.905-4T(f)(2)(ii) is not 
permitted to extend the length of the notification period set forth in 
Sec.  1.905-4T(f)(2)(ii). Therefore, Sec.  1.905-4T(f)(2)(iii) will not 
apply if the last day for providing notice of the foreign tax 
redetermination under Sec.  1.905-4T(f)(2)(ii) precedes the latest of 
the opening conference or the hand-delivery or postmark date of the 
opening letter concerning an examination of the return for the taxable 
year for which a redetermination of United States tax liability is 
required.
    Section 1.905-4T(f)(2)(iv) provides that interest will be computed 
in accordance with Sec.  1.905-4T(e), and that the taxpayer must 
satisfy the requirements of Sec.  1.905-4T(f)(2) in order not to be 
subject to the penalty provisions of section 6689 and the regulations 
under that section.

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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble of the cross-
referenced notice of proposed rulemaking published in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Internal Revenue 
Code, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses.

Drafting Information

    The principal author of these regulations is Teresa Burridge Hughes 
of the Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury

[[Page 62780]]

Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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

0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

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

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


0
Par. 2. Section 1.905-3T is amended as follows:
0
1. Revise the section heading and paragraphs (a), (b)(1), (b)(2), 
(b)(3), (b)(5), (c), and (d)(2)(i).
0
2. Revise the second and third sentences in paragraph (d)(1).
0
3. Remove paragraphs (d)(2)(ii), (d)(2)(iii), (d)(2)(iv), the heading 
for paragraph (d)(3), and paragraph (d)(3)(i).
0
4. Redesignate paragraphs (d)(3), (d)(3)(ii), (d)(3)(iii), (d)(3)(iv), 
and (d)(3)(v) as paragraph (d)(2)(ii), (d)(2)(ii)(A), (d)(2)(ii)(B), 
(d)(2)(ii)(C), and (d)(2)(ii)(D), respectively.
0
5. Add a new paragraph heading to newly-designated paragraph 
(d)(2)(ii).
0
6. Revise newly-designated paragraphs (d)(2)(ii)(A), (d)(2)(ii)(B), and 
(d)(2)(ii)(D).
0
7. Remove the language ``(d)(3)(iv)'' from the second to last sentence 
of newly-designated paragraph (d)(2)(ii)(C) and add the language 
``(d)(2)(ii)(C)'' in its place. Remove the la