Treatment of Overall Foreign and Domestic Losses, 72592-72606 [E7-24877]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 245 (Friday, December 21, 2007)]
[Rules and Regulations]
[Pages 72592-72606]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24877]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9371]
RIN 1545-BH14


Treatment of Overall Foreign and Domestic Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 904(g) of the Internal Revenue Code (Code) relating to the 
recapture of overall domestic losses. Section 402 of the American Jobs 
Creation Act of 2004 (AJCA) enacted new section 904(g) of the Code to 
provide for the recapture of overall domestic losses. These regulations 
provide guidance needed to comply with these changes, as well as 
updated guidance with respect to overall foreign losses and separate 
limitation losses, and affect individuals and corporations claiming 
foreign tax credits. The text of these temporary regulations also 
serves as the text of the proposed regulations (REG-141399-07) 
published in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on December 21, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.904(f)-1T(g), 1.904(f)-2T(e), 1.904(f)-7T(f), 1.904(f)-8T(c), 
1.904(g)-1T(f), 1.904(g)-2T(d), 1.904(g)-3T(i), and 1.1502-9T(e).

[[Page 72593]]


FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry, (202) 622-3850 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 402 of the AJCA enacted new section 904(g) of the Code to 
provide for the recharacterization of U.S. source income as foreign 
source income where a taxpayer's foreign tax credit limitation has been 
reduced as a result of an overall domestic loss. See Public Law 108-
357, 118 Stat. 1418 (October 22, 2004), as corrected by the Gulf 
Opportunity Zone Act of 2005, Public Law 109-135, 119 Stat. 2577 
(December 22, 2005). The primary reason for enacting these provisions 
was ``to create parity in the treatment of overall domestic losses and 
overall foreign losses in order to prevent the double taxation of 
income.'' H.R. Rep. No. 108-548, at 187 (June 16, 2004); see also S. 
Rep. No. 108-192, at 19-20 (November 7, 2003).
    When a U.S. source loss is allocated to reduce foreign source 
income, the foreign tax credit limitation is reduced for the taxable 
year, which may result in excess foreign tax credits. Any such excess 
foreign taxes may be credited, if at all, in a subsequent (or the 
preceding) taxable year. In addition, U.S. source taxable income in a 
subsequent taxable year is not offset by the U.S. source loss allocated 
to foreign source income in the prior taxable year, and U.S. tax on 
such U.S. source taxable income cannot be offset by the foreign tax 
credit carryforward. This may lead to the double taxation of foreign 
source income over time. The overall domestic loss recapture provisions 
amend this result.
    Section 904(g)(1) generally provides that a portion of a taxpayer's 
U.S. source income is recharacterized as foreign source income in an 
amount equal to the lesser of (1) the amount of the overall domestic 
loss for years prior to such taxable year and (2) fifty percent of the 
taxpayer's U.S. source income for such taxable year. Section 904(g)(2) 
generally defines an overall domestic loss for this purpose as any 
domestic loss to the extent it offsets foreign source taxable income 
for the current year or any preceding taxable year by reason of a 
carryback. Section 904(g)(4) provides that the Secretary of the 
Treasury shall prescribe such regulations as may be necessary to 
coordinate the overall domestic loss provisions with the overall 
foreign loss provisions.
    Similar rules were first enacted as a part of the Tax Reform Act of 
1976, Public Law 94-455, 90 Stat. 1531 (1976), in section 904(f) to 
deal with overall foreign losses. Under the overall foreign loss 
provisions, a portion of foreign source taxable income earned after an 
overall foreign loss year is recharacterized as U.S. source taxable 
income for foreign tax credit purposes. Unless a taxpayer elects a 
higher percentage, generally no more than 50 percent of the foreign 
source taxable income earned in any particular taxable year is 
recharacterized as U.S. source taxable income. Recapturing the overall 
foreign loss reduces the foreign tax credit limitation in one or more 
years following an overall foreign loss.
    The separate limitation loss provisions of section 904(f)(5) were 
added by the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 
(1986) (the 1986 Act) and amended by the Technical and Miscellaneous 
Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (1988). Other 
amendments to the overall foreign loss provisions were made by the AJCA 
as well.
    Regulations addressing overall foreign losses under section 904(f) 
were published in the Federal Register (52 FR 31992) on August 25, 1987 
(the 1987 regulations) and updated by regulations published in the 
Federal Register (71 FR 24516) on April 25, 2006 (the 2006 
regulations). Additional guidance was provided in Notice 89-3, 1989-1 
CB 623, regarding ordering rules for the allocation of net operating 
losses, overall foreign losses, and separate limitation losses; the 
recapture of overall foreign losses and separate limitation losses; and 
the allocation of U.S. source losses. The section 904(f) regulations 
have not been amended to reflect changes to the Code since the Tax 
Reform Act of 1976 or to incorporate the rules of Notice 89-3. See 
Sec.  601.601(d)(2)(ii)(b).
    These temporary regulations provide guidance needed to comply with 
enactment of the overall domestic loss regime, as well as provide 
updated guidance with respect to overall foreign losses and separate 
limitation losses.

Explanation of Provisions

I. Overall Domestic Losses

    The temporary regulations include rules in Sec. Sec.  1.904(g)-1T 
and 1.904(g)-2T which address the establishment, maintenance, and 
recapture of overall domestic loss accounts.

A. Overall Domestic Loss Accounts

    Section 1.904(g)-1T(b)(1) provides that taxpayers must establish 
overall domestic loss accounts for an overall domestic loss. It further 
provides that a separate overall domestic loss account must be 
maintained for each separate category of foreign source income that is 
offset by a domestic loss.
    Section 1.904(g)-1T(b)(2) explains when an overall domestic loss is 
sustained. Generally, an overall domestic loss is treated as sustained 
in the later of the taxable years in which the domestic loss is 
incurred or the foreign source income offset by the domestic loss is 
earned. Accordingly, in the case of a domestic loss that is carried 
back to offset foreign source income in a prior taxable year in which 
the taxpayer elects to credit foreign taxes, the resulting overall 
domestic loss is treated as sustained in the taxable year the domestic 
loss is incurred, not in the prior taxable year in which the domestic 
loss offsets foreign source income. In the case of a domestic loss that 
is carried forward to offset foreign source income in a later taxable 
year, however, the overall domestic loss is treated as sustained in the 
year in which the domestic loss offsets foreign source income, not the 
earlier year in which the domestic loss is incurred. Accordingly, if a 
taxpayer incurs a domestic loss in a pre-2007 taxable year, and the 
loss is carried forward as part of a net operating loss and applied to 
offset foreign source income in a post-2006 taxable year, the resulting 
overall domestic loss is treated as sustained in the post-2006 taxable 
year.
    Section 1.904(g)-1T(c) provides that an overall domestic loss is 
sustained when a domestic loss offsets foreign source taxable income in 
the same taxable year or a preceding taxable year by reason of a 
carryback, provided the taxpayer has elected to take a credit for its 
foreign taxes in the year of the offset. A domestic loss is the amount 
by which U.S. source gross income is exceeded by deductions properly 
allocated and apportioned thereto. See Sec.  1.904(g)-1T(c).
    Section 1.904(g)-1T(d) describes additions to overall domestic loss 
accounts. This includes any overall domestic losses of the taxpayer, as 
determined above, as well as any allocation from another taxpayer of an 
overall domestic loss account under Sec.  1.1502-9T, described in Part 
V of this preamble, and certain adjustments for capital gains and 
losses. Section 1.904(g)-1T(e) describes reductions to overall domestic 
loss accounts, including reductions for recaptured amounts and any 
allocation to another taxpayer of an overall domestic loss account 
under Sec.  1.1502-9T.

[[Page 72594]]

B. Recapture of Overall Domestic Losses

    Section 1.904(g)-2T provides that overall domestic losses are 
recaptured by treating a portion of a taxpayer's U.S. source taxable 
income as foreign source income. If the taxpayer has overall domestic 
loss accounts attributable to more than one separate category, the 
recharacterized income will be allocated among those categories on a 
pro rata basis. The amount of U.S. source income subject to recapture 
is the lesser of the aggregate balance in the overall domestic loss 
account, or fifty percent of the taxpayer's U.S. source taxable income. 
Unlike the overall foreign loss recapture provisions in section 904(f), 
section 904(g) does not permit a taxpayer to elect to recharacterize 
more than fifty percent of its U.S. source taxable income. Recapture 
continues until the balance in the overall domestic loss account has 
been reduced to zero.

II. Separate Limitation Losses

    As discussed below, the 1987 regulations do not reflect the 
enactment of the separate limitation loss provisions of section 
904(f)(5) as part of the 1986 Act. These temporary regulations include 
new provisions regarding the establishment and recapture of separate 
limitation loss accounts. Section 1.904(f)-7T provides that taxpayers 
must establish a separate limitation loss account with respect to a 
separate category to the extent a foreign source loss in that category 
offsets foreign source income in another separate category. This 
section also provides definitions and rules relating to the maintenance 
of these accounts.
    Section 1.904(f)-8T provides rules for the recapture of separate 
limitation loss accounts. Separate limitation loss accounts are 
recaptured by recharacterizing a portion of the foreign source income 
in the separate category with the loss account as income in the 
separate category in which foreign source income of a prior year was 
offset to create the loss account. The amount of foreign source income 
subject to recharacterization is the lesser of the balance in a 
separate limitation loss account or the amount of foreign source income 
for the taxable year in that same separate category. There is no fifty-
percent limitation with respect to separate limitation loss account 
recapture. If there is more than one separate limitation loss account 
in a single separate category and the aggregate balance in all those 
loss accounts exceeds the income in the separate category, income is 
recharacterized in proportion to the balance in each account. Recapture 
with respect to a particular separate limitation loss account continues 
until the balance in the separate limitation loss account has been 
reduced to zero.

III. Overall Foreign Loss

    The 1987 regulations set forth rules governing the determination 
and maintenance of overall foreign loss accounts, as well as the 
recapture of overall foreign losses and the allocation of net operating 
losses and net capital losses. The regulations do not reflect changes 
made to the overall foreign loss rules of section 904(f) as part of the 
1986 Act and certain subsequent changes to section 904(f), such as the 
enactment in the AJCA of section 904(f)(3)(D), addressing dispositions 
of stock in controlled foreign corporations. These temporary 
regulations update the existing regulations to take into account 
certain changes made to the overall foreign loss rules since the 1987 
regulations were promulgated.
    Section 1.904(f)-1(a) states that the 1987 regulations apply to 
taxpayers that sustain overall foreign losses (as defined in paragraph 
(c) of that section) in taxable years beginning after December 31, 
1975. However, paragraph (c) of that section only defines overall 
foreign losses for taxable years beginning after December 31, 1982, and 
before January 1, 1987.
    While it is beyond the scope of this project to undertake a full 
revision of the 1987 regulations to reflect all intervening statutory 
changes made to section 904(f), the Treasury Department and the IRS 
believe that as part of this regulations project the principles of the 
1987 regulations should be extended to apply to overall foreign losses 
sustained in taxable years beginning after December 31, 1986, modified 
so as to take into account statutory amendments. New Sec.  1.904(f)-
1T(a)(2) adopts such a rule.
    The Treasury Department and the IRS believe the application of the 
fifty-percent limitation on the amount of foreign source income subject 
to recapture in a taxable year under the overall foreign loss recapture 
provisions also needs to be clarified as part of this regulations 
project. Section 1.904(f)-2(c)(1) provides that the amount of foreign 
source taxable income subject to recapture in a taxable year is the 
lesser of the balance in the applicable overall foreign loss account in 
a given separate category or fifty percent of the taxpayer's foreign 
source taxable income in that same separate category. For example, 
recapture of a general category overall foreign loss would be limited 
to the lesser of the balance in the general category overall foreign 
loss account or fifty percent of the general category taxable income 
for the taxable year.
    The legislative history to the 1986 Act clarifies that the fifty-
percent limitation is to be applied to the full amount of the 
taxpayer's foreign source income, not on a separate-category-by-
separate-category basis. See H.R. Conf. Rep. No. 99-841 at II-590 
(1986). This clarification was incorporated by reference into Notice 
89-3, paragraph 3(b), and reflected in instructions to Form 1118 
(Foreign Tax Credit--Corporations). The temporary regulations modify 
the fifty-percent limitation to reflect this clarification.
    Section 1.904(f)-2T(c)(1) provides that the foreign source taxable 
income subject to recharacterization is the lesser of the aggregate 
amount of maximum potential recapture in all overall foreign loss 
accounts or fifty percent of the taxpayer's total foreign source 
income. If the aggregate amount of maximum potential recapture in all 
overall foreign loss accounts exceeds fifty percent of the taxpayer's 
total foreign source taxable income, foreign source taxable income in 
each separate category with an overall foreign loss account is 
recharacterized in an amount equal to the separate category's allocable 
portion of the section 904(f)(1) recapture amount. The maximum 
potential recapture from any separate category is the lesser of the 
balance in the overall foreign loss account or the foreign source 
taxable income for the current year in the same separate category.
    Other revisions to the 1987 regulations include updating provisions 
to reflect statutory and regulatory changes affecting capital gains and 
losses, in particular those provisions that were superseded by the 
regulations promulgated under section 904(b) in TD 9141 (July 20, 
2004). In addition, Sec.  1.904(f)-3 is made obsolete by the ordering 
rules added in Sec.  1.904(g)-3T and is removed accordingly.

IV. Coordination of Overall Foreign Losses, Separate Limitation Losses, 
and Overall Domestic Losses

    Under the specific grant of regulatory authority in section 
904(g)(4), these temporary regulations provide ordering rules for 
coordinating the section 904(f) overall foreign loss and separate 
limitation loss provisions and the section 904(g) overall domestic loss 
provisions.
    Section 1.904(g)-3T provides ordering rules for the allocation of 
net operating losses, net capital losses, U.S. source losses, and 
separate limitation losses, and the recapture of separate limitation 
losses, overall foreign losses, and overall domestic losses. While 
these rules generally follow the ordering rules set

[[Page 72595]]

forth in Notice 89-3, some changes were appropriate to take into 
account the enactment of the overall domestic loss provisions.

A. Step One: Allocation of Net Operating Loss and Net Capital Loss 
Carryovers

    These temporary regulations generally follow the rules of Notice 
89-3 for the carryover and carryback of net operating losses. Under 
Sec.  1.904(g)-3T(b)(1), net operating losses that are carried back to 
a prior year are allocated to income in the carryback year in 
accordance with the allocation rules for absorbing and allocating net 
operating loss carryovers. However, the income against which the net 
operating loss is allocated is the income after application of the 
overall foreign loss, separate limitation loss and overall domestic 
loss allocation and recapture rules for the carryback year.
    The rules for net operating loss carryforwards vary for full and 
partial carryovers of the net operating loss. In the case of a full net 
operating loss carryover, the U.S. source losses and foreign losses in 
separate categories that are part of the net operating loss are carried 
forward and combined with U.S. source income or loss and foreign source 
income or loss in the same categories as the respective portions of the 
net operating loss.
    In the case of a partial net operating loss carryover, several 
steps apply. In applying these steps it is important to distinguish the 
net operating loss, which is the total net operating loss, and the net 
operating loss carryover, which is the portion of the net operating 
loss that is absorbed in the carryover year. First, the U.S. source 
portion of the net operating loss (but not in excess of the net 
operating loss carryover) is carried over to the extent of U.S. source 
income in the carryover year. Second, the separate limitation losses 
that are part of the net operating loss are tentatively carried to the 
extent of taxable income in the same separate category. This amount is 
tentative because the total amount of matching net operating losses and 
separate limitation income may exceed the net operating loss carryover 
amount remaining after the first step. To the extent the total amount 
of these tentative loss carryovers is in fact limited by the amount of 
the remaining net operating loss carryover, then the tentative 
carryovers in each separate category are reduced on a pro rata basis so 
that their sum equals the amount of the remaining net operating loss 
carryover amount.
    Third, any net operating loss carryover remaining after the first 
and second steps is carried over proportionately from any remaining 
loss in each separate category and combined with foreign source loss, 
if any, in the same separate categories in the carryover year. Finally, 
any remaining U.S. source loss is carried over to the extent of the net 
operating loss carryover remaining after the third step, if any, and 
combined with U.S. source loss, if any, in the carryover year.
    The temporary regulations deviate from the net operating loss rules 
of Notice 89-3 in the final two steps. The temporary regulations 
require the U.S. source loss and foreign source losses in the separate 
categories that are carried over to be combined with U.S. source income 
or loss and foreign source income or loss in the same categories as the 
respective portions of the net operating loss. Then, the temporary 
regulations provide these losses are allocated against other income as 
part of the general loss allocation rules for current year losses. 
Notice 89-3, however, requires the allocation of the net operating loss 
against income in other separate categories before allocation of 
current year losses. The Treasury Department and the IRS believe there 
is no difference in result whether the net operating losses carried 
into a taxable year are allocated before or at the same time as current 
year losses, given the treatment of U.S. losses in Sec.  1.904(g)-3T. 
However, the approach of the temporary regulations provides added 
simplicity in application of the ordering rules as well as greater 
consistency with the rules for full net operating loss carryovers.
    The rules for the allocation of net operating losses apply 
similarly to net capital loss carryovers.

B. Step Two: Allocation of Separate Limitation Losses

    Separate limitation losses are first allocated to separate 
limitation income for the taxable year in other separate categories on 
a proportionate basis. Separate limitation loss accounts are increased 
as a result of any such allocations. To the extent the separate 
limitation losses exceed separate limitation income for the year, those 
losses are allocated against U.S. income, if any, for the taxable year 
and overall foreign loss accounts are increased.
    Unlike Notice 89-3, the temporary regulations also provide that 
offsetting separate limitation loss accounts are netted against one 
another. For example, if a taxpayer has a separate limitation loss 
account in the general category with respect to passive category 
income, and in the next year incurs a passive category separate 
limitation loss that offsets general category income, the two accounts 
will be netted against each other, rather than both being carried 
forward until each one is recaptured.

C. Step Three: Allocation of U.S. Source Loss

    U.S. source losses are allocated against separate limitation income 
on a proportionate basis, and overall domestic loss accounts are 
increased appropriately. Under the ordering rules in Notice 89-3, U.S. 
losses sustained in the current taxable year are allocated after all 
other losses are allocated and after separate limitation losses and 
overall foreign losses are recaptured. With the addition of section 
904(g), Congress expressed that domestic losses and foreign source 
losses should be treated with greater parity. To that end, the Treasury 
Department and the IRS believe the ordering rules of Notice 89-3 should 
be amended. Accordingly, the temporary regulations provide that U.S. 
losses are allocated in the same manner as foreign losses, before any 
income is recharacterized.

D. Step Four: Recapture of Overall Foreign Loss Accounts

    To the extent a taxpayer has any separate limitation income for the 
taxable year after losses are allocated in steps one through three, a 
portion of such income will be subject to recharacterization in order 
to recapture prior year overall foreign losses, if any.

E. Step Five: Recapture of Separate Limitation Loss Accounts

    To the extent a taxpayer has any separate limitation income for the 
taxable year after overall foreign losses are recaptured in step four, 
then such income will be subject to recharacterization in order to 
recapture prior year separate limitation losses, if any.

F. Step Six: Recapture of Overall Domestic Loss Accounts

    To the extent a taxpayer has any U.S. source income after losses 
are allocated in steps one through three, but not taking into account 
any foreign source income that is recharacterized as U.S. source income 
under step four, then a portion of such income will be subject to 
recharacterization in order to recapture prior year overall domestic 
losses, if any.
    The temporary regulations coordinate the overall foreign loss and 
overall domestic loss regimes by providing that the recapture of 
overall foreign and domestic loss accounts is done independently. 
Accordingly, income recharacterized under one recapture provision is 
not taken into account in

[[Page 72596]]

determining the amount of income subject to recharacterization under 
the other recapture provision. For example, foreign source income that 
is recharacterized as U.S. source income in order to recapture an 
overall foreign loss account will not then be included in the 
determination of U.S. source income subject to recharacterization as 
foreign source income in order to recapture an overall domestic loss 
account.

V. Consolidated Overall Domestic Loss Accounts--Sec.  1.1502-9T

    Section 1.1502-9T revises Sec.  1.1502-9 to include rules for the 
application of section 904(g) to consolidated groups and their members. 
Section 1.1502-9 provides rules only for the application of section 
904(f) to consolidated groups and their members. Under those rules, 
consolidated overall foreign loss (COFL) accounts and consolidated 
separate limitation loss (CSLL) accounts are determined by the 
consolidated group on an aggregate basis under the principles of 
Sec. Sec.  1.1502-11 and 1.1502-12. When a new member joins the group, 
its separate overall foreign loss and separate limitation loss accounts 
are combined with the appropriate COFL and CSLL accounts of the group. 
When a member leaves the group, it is allocated a pro rata portion of 
each of the group's COFL and CSLL accounts based on the member's share 
of the group's assets that generate income subject to 
recharacterization under the corresponding loss account. The temporary 
regulations do not alter these provisions addressing COFL and CSLL 
accounts. The revisions simply extend these principles to provide 
parallel treatment for consolidated overall domestic loss accounts.

Effective/Applicability Dates

    The effective date for these regulations is December 21, 2007. The 
regulations generally apply to taxable years beginning after December 
21, 2007. However, taxpayers may choose to apply the overall domestic 
loss provisions of the regulations in other taxable years beginning 
after December 31, 2006. In the alternative, taxpayers may use any 
reasonable method consistently applied for those years, including one 
based on the ordering rules of Notice 89-3.

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. For applicability 
of the Regulatory Flexibility Act, see the cross-referenced notice of 
proposed rulemaking published elsewhere in this issue of the Federal 
Register. Pursuant to section 7805(f), these regulations have been 
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 Jeffrey L. Parry of 
the Office of Chief Counsel (International). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 is amended by adding an 
entry in numerical order to read in part as follows:

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

    Section 1.904(g)-3T also issued under 26 U.S.C. 904(g)(4). * * *


0
Par. 2. Section 1.904-0 is amended by revising the section heading and 
introductory text to read as follows:


Sec.  1.904-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904-1 through 
1.904-7.
* * * * *

0
Par. 3. Section 1.904(b)-0 is added. The entries for Sec. Sec.  
1.904(b)-1 and 1.904(b)-2 in Sec.  1.904-0 are redesignated as entries 
in new Sec.  1.904(b)-0.


Sec.  1.904(b)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(b)-1 and 
1.904(b)-2.

0
Par. 4. Section 1.904(f)-0 is added and amended as follows:
0
1. The entries for Sec. Sec.  1.904(f)-1, 1.904(f)-2, 1.904(f)-3, 
1.904(f)-4, 1.904(f)-5, 1.904(f)-6 and 1.904(f)-12 in Sec.  1.904-0 are 
redesignated as entries in new Sec.  1.904(f)-0.
0
2. The entry for Sec.  1.904(f)-1(a) is redesignated as Sec.  1.904(f)-
1(a)(1) and a new entry for Sec.  1.904(f)-1(a)(2) is added.
0
3. The entries for Sec.  1.904(f)-1(d)(2), (d)(3), and (d)(4) are 
revised and the entry for Sec.  1.904(f)-1(d)(5) is removed.
0
4. The entries for Sec.  1.904(f)-2(c) and (c)(1) are revised.
0
5. The entries for Sec.  1.904(f)-3 are removed.
0
6. New entries for Sec. Sec.  1.904(f)-7 and 1.904(f)-8 are added.
0
The additions and revisions read as follows:


Sec.  1.904(f)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(f)-1 through 
1.904(f)-8 and 1.904(f)-12.
* * * * *
Sec.  1.904(f)-1 Overall foreign loss and the overall foreign loss 
account.
    (a)(1) Overview of regulations.
    (2) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1T(a)(2) in Sec.  1.904(f)-0T.
* * * * *
    (d) * * *
    (2) Overall foreign losses of another taxpayer.
    (3) Additions to overall foreign loss account created by loss 
carryovers.
    (4) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1T(d)(4) in Sec.  1.904(f)-0T.
* * * * *
Sec.  1.904(f)-2 Recapture of overall foreign losses.
* * * * *
    (c) and (c)(1) [Reserved]. For further guidance, see the entries 
for Sec.  1.904(f)-2T(c) and (c)(1) in Sec.  1.904(f)-0T.
* * * * *
Sec.  1.904(f)-7 Separate limitation loss and the separate 
limitation loss account.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(f)-7T in Sec.  1.904(f)-0T.

Sec.  1.904(f)-8 Recapture of separate limitation loss accounts.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(f)-8T in Sec.  1.904(f)-0T.


0
Par. 5. Section 1.904(f)-0T is added to read as follows:


Sec.  1.904(f)-0T  Outline of regulation provisions (temporary).

    This section lists the headings for Sec. Sec.  1.904(f)-1T, 
1.904(f)-2T, 1.904(f)-7T and 1.904(f)-8T.

Sec.  1.904(f)-1T Overall foreign loss and the overall foreign loss 
account (temporary).
    (a)(1) [Reserved]. For further guidance, see the entry for Sec.  
1.904(f)-1(a)(1) in Sec.  1.904(f)-0.
    (2) Application to post-1986 taxable years.
    (b) through (d)(3) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-1(b) through (d)(3) in Sec.  1.904(f)-0.
    (d)(4) Adjustments for capital gains and losses.
    (e) through (f) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-1(e) through (f) in Sec.  1.904(f)-0.
    (g) Effective/applicability date.
    (h) Expiration date.

Sec.  1.904(f)-2T Recapture of overall foreign loss (temporary).
    (a) and (b) [Reserved]. For further guidance, see the entries 
for Sec.  1.904(f)-2(a) and (b) in Sec.  1.904(f)-0.
    (c) Section 904(f)(1) recapture.

[[Page 72597]]

    (1) In general.
    (c)(2) through (d) [Reserved]. For further guidance, see the 
entries for Sec.  1.904(f)-2(c)(2) through (d) in Sec.  1.904(f)-0.
    (e) Effective/applicability date.
    (f) Expiration date.

Sec.  1.904(f)-7T Separate limitation loss and the separate 
limitation loss account (temporary).
    (a) Overview of regulations.
    (b) Definitions.
    (1) Separate category.
    (2) Separate limitation income.
    (3) Separate limitation loss.
    (c) Separate limitation loss account.
    (d) Additions to separate limitation loss accounts.
    (1) General rule.
    (2) Separate limitation losses of another taxpayer.
    (3) Additions to separate limitation loss account created by 
loss carryovers.
    (e) Reductions of separate limitation loss accounts.
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers.
    (2) Reduction for offsetting loss accounts.
    (3) Reduction for amounts recaptured.
    (f) Effective/applicability date.
    (g) Expiration date.

Sec.  1.904(f)-8T Recapture of separate limitation loss accounts 
(temporary).
    (a) In general.
    (b) Effect of recharacterization of separate limitation income 
on associated taxes.
    (c) Effective/applicability date.
    (d) Expiration date.


0
Par. 6. Section 1.904(f)-1 is amended as follows:
0
1. Redesignate paragraph (a) as (a)(1).
0
2. Add a new paragraph (a)(2).
0
3. In paragraph (d)(1), remove the language ``paragraph (d)(4) of this 
section'' and add the language ``paragraph (d)(3) of this section'' in 
its place.
0
4. Remove paragraphs (d)(2), (d)(5), and Example 4 and Example 5 in 
paragraph (f).
0
5. Redesignate paragraph (d)(3) as paragraph (d)(2), and paragraph 
(d)(4) as paragraph (d)(3).
0
6. In newly-redesignated paragraph (d)(3), remove the language 
``1.904(f)-1(d)(5)'' and add the language ``1.904(f)-1(d)(4)'' in its 
place.
0
7. Add new paragraphs (d)(4) and (g).
0
The revisions and additions read as follows:


Sec.  1.904(f)-1  Overall foreign loss and the overall foreign loss 
account.

* * * * *
    (a) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(a)(2).
* * * * *
    (d) * * *
    (4) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(d)(4).
* * * * *
    (g) [Reserved]. For further guidance, see Sec.  1.904(f)-1T(g).

0
Par. 7. Section 1.904(f)-1T is added to read as follows:


Sec.  1.904(f)-1T  Overall foreign loss and the overall foreign loss 
account (temporary).

    (a)(1) [Reserved]. For further guidance, see Sec.  1.904(f)-
1(a)(1).
    (2) Application to post-1986 taxable years. The principles of 
Sec. Sec.  1.904(f)-1 through 1.904(f)-5 shall apply to overall foreign 
loss sustained in taxable years beginning after December 31, 1986, 
modified so as to take into account the effect of statutory amendments.
    (b) through (d)(3) [Reserved]. For further guidance, see Sec.  
1.904(f)-1(b) through (d)(3).
    (d)(4) Adjustments for capital gains and losses. If a taxpayer has 
capital gains or losses, the taxpayer shall make adjustments to such 
capital gains and losses to the extent required under section 904(b)(2) 
and Sec.  1.904(b)-1 before applying the provisions of Sec.  1.904(f)-
1T. See Sec.  1.904(b)-1(h).
    (e) and (f) [Reserved]. For further guidance, see Sec.  1.904(f)-
1(e) and (f).
    (g) Effective/applicability date. This section applies to taxable 
years beginning after December 21, 2007.
    (h) Expiration date. The applicability of this section expires on 
December 20, 2010.

0
Par. 8. Section 1.904(f)-2 is amended as follows:
0
1. Revise paragraph (c)(1).
0
2. Revise paragraph (c)(5) Example 4.
0
3. Add a new paragraph (e).
0
The revisions and addition read as follows:


Sec.  1.904(f)-2   Recapture of overall foreign losses.

* * * * *
    (c) * * * (1) [Reserved]. For further guidance, see Sec.  1.904(f)-
2T(c)(1).
    (5) * * *
    Example 4. [Reserved]. For further guidance see Sec.  1.904(f)-
2T(c)(5) Example 4.
* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.904(f)-2T(e).

0
Par. 9. Section 1.904(f)-2T is added to read as follows:


Sec.  1.904(f)-2T  Recapture of overall foreign losses (temporary).

    (a) and (b) [Reserved]. For further guidance, see Sec.  1.904(f)-
2(a) and (b).
    (c) Section 904(f)(1) recapture--(1) In general. In a year in which 
a taxpayer elects the benefits of section 901 or 30A, the amount of 
foreign source taxable income subject to recharacterization in a 
taxable year in which paragraph (a) of this section is applicable is 
the lesser of the aggregate amount of maximum potential recapture in 
all overall foreign loss accounts or fifty percent of the taxpayer's 
total foreign source taxable income. If the aggregate amount of maximum 
potential recapture in all overall foreign loss accounts exceeds fifty 
percent of the taxpayer's total foreign source taxable income, foreign 
source taxable income in each separate category with an overall foreign 
loss account is recharacterized in an amount equal to the section 
904(f)(1) recapture amount, multiplied by the maximum potential 
recapture in the overall foreign loss account, divided by the aggregate 
amount of maximum potential recapture in all overall foreign loss 
accounts. The maximum potential recapture in any account is the lesser 
of the balance in that overall foreign loss account (after reduction of 
such accounts in accordance with Sec.  1.904(f)-1(e)) or the foreign 
source taxable income for the year in the same separate category as the 
loss account. If, in any year, in accordance with section 164(a) and 
section 275(a)(4)(A), a taxpayer deducts rather than credits its 
foreign taxes, recapture is applied to the extent of the lesser of--
    (i) The balance in the overall foreign loss account in each 
separate category; or
    (ii) Foreign source taxable income minus foreign taxes in each 
separate category.
    (c)(2) through (5) Example 3 [Reserved]. For further guidance, see 
Sec.  1.904(f)-2(c)(2) through (5) Example 3.

    Example 4. Y Corporation is a domestic corporation that does 
business in the United States and abroad. On December 31, 2007, the 
balance in Y's general category overall foreign loss account is 
$500, all of which is attributable to a loss incurred in 2007. Y has 
no other loss accounts subject to recapture. For 2008, Y has U.S. 
source taxable income of $400 and foreign source taxable income of 
$300 in the general category and $900 in the passive category. Under 
paragraph (c)(1) of this section, the amount of Y's general category 
income subject to recharacterization is the lesser of the aggregate 
maximum potential recapture or 50 percent of the total foreign 
source taxable income. In this case Y's aggregate maximum potential 
recapture is $300 (the lesser of the $500 balance in the general 
category overall foreign loss account or $300 foreign source income 
in the general category for the year), which is less than $600, or 
50 percent of total foreign source taxable income ($1200 x 50%). 
Therefore, pursuant to paragraph (c) of this section, $300 of 
foreign source income in the general category is recharacterized as 
U.S. source income. The balance in Y's general category overall 
foreign loss account is reduced by $300 to $200 in accordance with 
Sec.  1.904(f)-1(e)(2).


[[Page 72598]]


    (c)(5) Example 5 through (d) [Reserved]. For further guidance, see 
Sec.  1.904(f)-2(c)(5) Example 5 through Sec.  1.904(f)-2(d).
    (e) Effective/applicability date. This section applies to taxable 
years beginning after December 21, 2007.
    (f) Expiration date. The applicability of this section expires on 
December 20, 2010.

0
Par. 10. Section 1.904(f)-3 is revised to read as follows:


Sec.  1.904(f)-3  Allocation of net operating losses and net capital 
losses.

    For rules relating to the allocation of net operating losses and 
net capital losses, see Sec.  1.904(g)-3T.

0
Par. 11. Sections 1.904(f)-7, 1.904(f)-7T, 1.904(f)-8, and 1.904(f)-8T 
are added to read as follows:


Sec.  1.904(f)-7  Separate limitation loss and the separate limitation 
loss account. [Reserved].

    For further guidance, see Sec.  1.904(f)-7T.


Sec.  1.904(f)-7T  Separate limitation loss and the separate limitation 
loss account (temporary).

    (a) Overview of regulations. This section provides rules for 
determining a taxpayer's separate limitation losses, for establishing 
separate limitation loss accounts, and for making additions to and 
reductions from such accounts for purposes of section 904(f). Section 
1.904(f)-8T provides rules for recharacterizing the balance in any 
separate limitation loss account under the general recharacterization 
rule of section 904(f)(5)(C).
    (b) Definitions. The definitions in paragraphs (b)(1) through (4) 
of this section apply for purposes of this section and Sec. Sec.  
1.904(f)-8T and 1.904(g)-3T.
    (1) Separate category means each separate category of income 
described in section 904(d) and any other category of income described 
in Sec.  1.904-4(m). For example, income subject to section 901(j) or 
904(h)(10) is income in a separate category.
    (2) Separate limitation income means, with respect to any separate 
category, the taxable income from sources outside the United States, 
separately computed for that category for the taxable year. Separate 
limitation income shall be determined by taking into account any 
adjustments for capital gains and losses under section 904(b)(2) and 
Sec.  1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(i).
    (3) Separate limitation loss means, with respect to any separate 
category, the amount by which the foreign source gross income in that 
category is exceeded by the sum of expenses, losses and other 
deductions (not including any net operating loss deduction under 
section 172(a) or any expropriation loss or casualty loss described in 
section 907(c)(4)(B)(iii)) properly allocated and apportioned thereto 
for the taxable year. Separate limitation losses are determined 
separately for each separate category. Accordingly, income and 
deductions attributable to a separate category are not netted with 
income and deductions attributable to another separate category for 
purposes of determining the amount of a separate limitation loss. 
Separate limitation losses shall be determined by taking into account 
any adjustments for capital gains and losses under section 904(b)(2) 
and Sec.  1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(i).
    (c) Separate limitation loss account. Any taxpayer that sustains a 
separate limitation loss that is allocated to reduce separate 
limitation income of the taxpayer under the rules of Sec.  1.904(g)-3T 
must establish a separate limitation loss account for the loss. The 
taxpayer must establish separate loss accounts for each separate 
category in which a separate limitation loss is incurred that is 
allocated to reduce other separate limitation income. A separate 
account must then be established for each separate category to which a 
portion of the loss is allocated. The balance in any separate 
limitation loss account represents the amount of separate limitation 
income that is subject to recharacterization (as income in another 
separate category) in a subsequent year pursuant to Sec.  1.904(f)-8T 
and section 904(f)(5)(F). From year to year, amounts may be added to or 
subtracted from the balance in such loss accounts, as provided in 
paragraphs (d) and (e) of this section.
    (d) Additions to separate limitation loss accounts--(1) General 
rule. A taxpayer's separate limitation loss as defined in paragraph 
(b)(3) of this section shall be added to the applicable separate 
limitation loss accounts at the end of the taxable year to the extent 
that the separate limitation loss has reduced separate limitation 
income in one or more other separate categories of the taxpayer during 
the taxable year. For rules with respect to net operating loss 
carryovers, see paragraph (d)(3) of this section and Sec.  1.904(g)-3T.
    (2) Separate limitation losses of another taxpayer. If any portion 
of any separate limitation loss account of another taxpayer is 
allocated to the taxpayer in accordance with Sec.  1.1502-9T (relating 
to consolidated separate limitation losses) the taxpayer shall add such 
amount to its applicable separate limitation loss account.
    (3) Additions to separate limitation loss account created by loss 
carryovers. The taxpayer shall add to each separate limitation loss 
account all net operating loss carryovers to the current taxable year 
to the extent that separate limitation losses included in the net 
operating loss carryovers reduced foreign source income in other 
separate categories for the taxable year.
    (e) Reductions of separate limitation loss accounts. The taxpayer 
shall subtract the following amounts from its separate limitation loss 
accounts at the end of its taxable year in the following order as 
applicable:
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers. A separate limitation loss account is reduced by the amount 
of any separate limitation loss account which is allocated to another 
taxpayer in accordance with Sec.  1.1502-9T (relating to consolidated 
separate limitation losses).
    (2) Reduction for offsetting loss accounts. A separate limitation 
account is reduced to take into account any netting of separate 
limitation loss accounts under Sec.  1.904(g)-3T(c).
    (3) Reduction for amounts recaptured. A separate limitation loss 
account is reduced by the amount of any separate limitation income that 
is earned in the same separate category as the separate limitation loss 
that resulted in the account and that is recharacterized in accordance 
with Sec.  1.904(f)-8T (relating to recapture of separate limitation 
losses) or section 904(f)(5)(F) (relating to recapture of separate 
limitation loss accounts out of gain realized from dispositions).
    (f) Effective/applicability date. This section applies to taxpayers 
that sustain separate limitation losses in taxable years beginning 
after December 21, 2007. For taxable years beginning after December 31, 
1986, and on or before December 21, 2007, see section 904(f)(5).
    (g) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(f)-8  Recapture of separate limitation loss accounts.

    [Reserved]. For further guidance, see Sec.  1.904(f)-8T.


Sec.  1.904(f)-8T  Recapture of separate limitation loss accounts 
(temporary).

    (a) In general. A taxpayer shall recapture a separate limitation 
loss account as provided in this section. If the taxpayer has a 
separate limitation loss account or accounts in any separate category 
(the ``loss category'') and the

[[Page 72599]]

loss category has income in a subsequent taxable year, the income shall 
be recharacterized as income in that other category or categories. The 
amount of income recharacterized shall not exceed the separate 
limitation loss accounts for the loss category as determined under 
Sec.  1.904(f)-7T, including the aggregate separate limitation loss 
accounts from the loss category not previously recaptured under this 
paragraph (a). If the taxpayer has more than one separate limitation 
loss account in a loss category, and there is not enough income in the 
loss category to recapture the entire amount in all the loss accounts, 
then separate limitation income in the loss category shall be 
recharacterized as separate limitation income in the separate 
limitation loss categories on a proportionate basis. This is determined 
by multiplying the total separate limitation income subject to 
recapture by a fraction, the numerator of which is the amount in a 
particular loss account and the denominator of which is the total 
amount in all loss accounts for the separate category.
    (b) Effect of recapture of separate limitation income on associated 
taxes. Recharacterization of income under paragraph (a) of this section 
shall not result in the recharacterization of any tax. The rules of 
Sec.  1.904-6, including the rules that the taxes are allocated on an 
annual basis and that foreign taxes paid on U.S. source income shall be 
allocated to the separate category that includes that U.S. source 
income (see Sec.  1.904-6(a)), shall apply for purposes of allocating 
taxes to separate categories. Allocation of taxes pursuant to Sec.  
1.904-6 shall be made before the recapture of any separate limitation 
loss accounts of the taxpayer pursuant to the rules of this section.
    (c) Effective/applicability date. This section applies to taxpayers 
that sustain separate limitation losses in taxable years beginning 
after December 21, 2007. For taxable years beginning after December 31, 
1986, and on or before December 21, 2007, see section 904(f)(5).
    (d) Expiration date. The applicability of this section expires on 
December 20, 2010.
0
Par. 11. Section 1.904(g)-0 is added to read as follows:


Sec.  1.904(g)-0  Outline of regulation provisions.

    This section lists the headings for Sec. Sec.  1.904(g)-1 through 
1.904(g)-3.

Sec.  1.904(g)-1 Overall domestic loss and the overall domestic loss 
account.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(g)-1T in Sec.  1.904(g)-0T.

Sec.  1.904(g)-2 Recapture of overall domestic losses.
    [Reserved]. For further guidance, see the entries for Sec.  
1.904(g)-2T in Sec.  1.904(g)-0T.

Sec.  1.904(g)-3 Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate 
limitation losses, and for recapture of separate limitation losses, 
overall foreign losses, and overall domestic losses. [Reserved]. For 
further guidance, see the entries for Sec.  1.904(g)-3T in Sec.  
1.904(g)-0T.


0
Par. 12. Section 1.904(g)-0T is added to read as follows:


Sec.  1.904(g)-0T  Outline of regulation provisions (temporary).

    This section lists the headings for Sec. Sec.  1.904(g)-1T through 
1.904(g)-3T.

Sec.  1.904(g)-1T Overall domestic loss and the overall domestic 
loss account (temporary).
    (a) Overview of regulations.
    (b) Overall domestic loss accounts.
    (1) In general.
    (2) Taxable year in which overall domestic loss is sustained.
    (c) Determination of a taxpayer's overall domestic loss.
    (1) Overall domestic loss defined.
    (2) Domestic loss defined.
    (3) Qualified taxable year defined.
    (4) Method of allocation and apportionment of deductions.
    (d) Additions to overall domestic loss accounts.
    (1) General rule.
    (2) Overall domestic loss of another taxpayer.
    (3) Adjustments for capital gains and losses.
    (e) Reductions of overall domestic loss accounts.
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers.
    (2) Reduction for amounts recaptured.
    (f) Effective/applicability date.
    (g) Expiration date.

Sec.  1.904(g)-2T Recapture of overall domestic losses (temporary).
    (a) In general.
    (b) Determination of U.S. source taxable income for purposes of 
recapture.
    (c) Section 904(g)(1) recapture.
    (d) Effective/applicability date.
    (e) Expiration date.

Sec.  1.904(g)-3T Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate 
limitation losses, and for recapture of separate limitation losses, 
overall foreign losses, and overall domestic losses (temporary).
    (a) In general.
    (b) Step One: Allocation of net operating loss and net capital 
loss carryovers.
    (1) In general.
    (2) Full net operating loss carryover.
    (3) Partial net operating loss carryover.
    (4) Net capital loss carryovers.
    (c) Step Two: Allocation of separate limitation losses.
    (d) Step Three: Allocation of U.S. source losses.
    (e) Step Four: Recapture of overall foreign loss accounts.
    (f) Step Five: Recapture of separate limitation loss accounts.
    (g) Step Six: Recapture of overall domestic loss accounts.
    (h) Examples.
    (i) Effective/applicability date.
    (j) Expiration date.


0
Par. 13. Sections 1.904(g)-1, 1.904(g)-1T, 1.904(g)-2, 1.904(g)-2T, 
1.904(g)-3, and 1.904(g)-3T are added to read as follows:


Sec.  1.904(g)-1  Overall domestic loss and the overall domestic loss 
account.

    [Reserved]. For further guidance, see Sec.  1.904(g)-1T.


Sec.  1.904(g)-1T  Overall domestic loss and the overall domestic loss 
account (temporary).

    (a) Overview of regulations. This section provides rules for 
determining a taxpayer's overall domestic losses, for establishing 
overall domestic loss accounts, and for making additions to and 
reductions from such accounts for purposes of section 904(g). Section 
1.904(g)-2T provides rules for recapturing the balance in any overall 
domestic loss account under the general recharacterization rule of 
section 904(g)(1). Section 1.904(g)-3T provides ordering rules for the 
allocation of net operating losses, net capital losses, U.S. source 
losses, and separate limitation losses, and the recapture of separate 
limitation losses, overall foreign losses and overall domestic losses.
    (b) Overall domestic loss accounts--(1) In general. Any taxpayer 
that sustains an overall domestic loss under paragraph (c) of this 
section must establish an account for such loss. Separate overall 
domestic loss accounts must be maintained with respect to each separate 
category in which foreign source income is offset by the domestic loss. 
The balance in each overall domestic loss account represents the amount 
of such overall domestic loss subject to recapture in a given year. 
From year to year, amounts may be added to or subtracted from the 
balances in such accounts as provided in paragraphs (d) and (e) of this 
section.
    (2) Taxable year in which overall domestic loss is sustained. When 
a taxpayer incurs a domestic loss that is carried back as part of a net 
operating loss to offset foreign source income in a qualified taxable 
year, as defined in paragraph (c)(3) of this section, the resulting 
overall domestic loss is treated as sustained in the later year in 
which the domestic loss was incurred and not in the earlier year in 
which the loss offset foreign source income. Similarly, when a taxpayer 
incurs a domestic loss that is carried forward as part of a net

[[Page 72600]]

operating loss and applied to offset foreign source income in a later 
taxable year, the resulting overall domestic loss is treated as 
sustained in the later year in which the domestic loss offsets foreign 
source income and not in the earlier year in which the loss was 
incurred. For example, if a taxpayer incurs a domestic loss in the 2007 
taxable year that is carried back to the 2006 qualified taxable year 
and offsets foreign source income in 2006, the resulting overall 
domestic loss is treated as sustained in the 2007 taxable year. If a 
taxpayer incurs a domestic loss in a pre-2007 taxable year that is 
carried forward to a post-2006 qualified taxable year and offsets 
foreign source income in the post-2006 year, the resulting overall 
domestic loss is treated as sustained in the post-2006 year. The 
overall domestic loss account is established at the end of the later of 
the taxable year in which the domestic loss arose or the qualified 
taxable year to which the loss is carried and applied to offset foreign 
source income, and will be recaptured from U.S. source income arising 
in subsequent taxable years.
    (c) Determination of a taxpayer's overall domestic loss--(1) 
Overall domestic loss defined. For taxable years beginning after 
December 31, 2006, a taxpayer sustains an overall domestic loss--
    (i) In any qualified taxable year in which its domestic loss for 
such taxable year offsets foreign source taxable income for the taxable 
year or for any preceding qualified taxable year by reason of a 
carryback; and
    (ii) In any other taxable year in which the domestic loss for such 
taxable year offsets foreign source taxable income for any preceding 
qualified taxable year by reason of a carryback.
    (2) Domestic loss defined. For purposes of this section and 
Sec. Sec.  1.904(g)-2T and 1.904(g)-3T, the term domestic loss means 
the amount by which the U.S. source gross income for the taxable year 
is exceeded by the sum of the expenses, losses and other deductions 
properly apportioned or allocated to such income, taking into account 
any net operating loss carried forward from a prior taxable year, but 
not any loss carried back. If a taxpayer has any capital gains or 
losses, the amount of the taxpayer's domestic loss shall be determined 
by taking into account adjustments under section 904(b)(2) and Sec.  
1.904(b)-1. See Sec.  1.904(b)-1(h)(1)(iii).
    (3) Qualified taxable year defined. For purposes of this section 
and Sec. Sec.  1.904(g)-2T and 1.904(g)-3T, the term qualified taxable 
year means any taxable year for which the taxpayer chooses the benefits 
of section 901.
    (4) Method of allocation and apportionment of deductions. In 
determining its overall domestic loss, a taxpayer shall allocate and 
apportion expenses, losses, and other deductions to U.S. gross income 
in accordance with sections 861(b) and 865 and the regulations 
thereunder, including Sec. Sec.  1.861-8T through 1.861-14T.
    (d) Additions to overall domestic loss accounts--(1) General rule. 
A taxpayer's overall domestic loss as determined under paragraph (c) of 
this section shall be added to the applicable overall domestic loss 
account at the end of its taxable year to the extent that the overall 
domestic loss either reduces foreign source income for the year (but 
only if such year is a qualified taxable year) or reduces foreign 
source income for a qualified taxable year to which the loss has been 
carried back.
    (2) Overall domestic loss of another taxpayer. If any portion of 
any overall domestic loss of another taxpayer is allocated to the 
taxpayer in accordance with Sec.  1.1502-9T (relating to consolidated 
overall domestic losses) the taxpayer shall add such amount to its 
applicable overall domestic loss account.
    (3) Adjustments for capital gains and losses. If the taxpayer has 
capital gains or losses, the amount by which an overall domestic loss 
reduces foreign source income in a taxable year shall be determined in 
accordance with Sec.  1.904(b)-1(h)(1)(i) and (iii).
    (e) Reductions of overall domestic loss accounts. The taxpayer 
shall subtract the following amounts from its overall domestic loss 
accounts at the end of its taxable year in the following order, if 
applicable:
    (1) Pre-recapture reduction for amounts allocated to other 
taxpayers. An overall domestic loss account is reduced by the amount of 
any overall domestic loss which is allocated to another taxpayer in 
accordance with Sec.  1.1502-9T (relating to consolidated overall 
domestic losses).
    (2) Reduction for amounts recaptured. An overall domestic loss 
account is reduced by the amount of any U.S. source income that is 
recharacterized in accordance with Sec.  1.904(g)-2T(c) (relating to 
recapture under section 904(g)(1)).
    (f) Effective/applicability date. This section applies to any 
taxpayer that sustains an overall domestic loss for a taxable year 
beginning after December 21, 2007. Taxpayers may choose to apply this 
section to overall domestic losses sustained in other taxable years 
beginning after December 31, 2006, as well.
    (g) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(g)-2  Recapture of overall domestic losses.

    [Reserved]. For further guidance, see Sec.  1.904(g)-2T.


Sec.  1.904(g)-2T  Recapture of overall domestic losses (temporary).

    (a) In general. A taxpayer shall recapture an overall domestic loss 
as provided in this section. Recapture is accomplished by treating a 
portion of the taxpayer's U.S. source taxable income as foreign source 
income. The recharacterized income is allocated among and increases 
foreign source income in separate categories in proportion to the 
balances of the overall domestic loss accounts with respect to those 
separate categories. As a result, if the taxpayer elects the benefits 
of section 901, the taxpayer's foreign tax credit limitation is 
increased. As provided in Sec.  1.904(g)-1T(f)(2), the balance in a 
taxpayer's overall domestic loss account with respect to a separate 
category is reduced at the end of each taxable year by the amount of 
loss recaptured during that taxable year. Recapture continues until 
such time as the amount of U.S. source income recharacterized as 
foreign source income equals the amount in the overall domestic loss 
account.
    (b) Determination of U.S. source taxable income for purposes of 
recapture. For purposes of determining the amount of an overall 
domestic loss subject to recapture, the taxpayer's taxable income from 
U.S. sources shall be computed in accordance with the rules set forth 
in Sec.  1.904(g)-1T(c)(4).
    (c) Section 904(g)(1) recapture. The amount of any U.S. source 
taxable income subject to recharacterization in a taxable year in which 
paragraph (a) of this section is applicable is the lesser of the 
aggregate balance in taxpayer's overall domestic loss accounts in each 
separate category (after reduction of such account in accordance with 
Sec.  1.904(g)-1T(e)) or fifty percent of the taxpayer's U.S. source 
taxable income (as determined under paragraph (b) of this section).
    (d) Effective/applicability date. This section applies to any 
taxpayer that sustains an overall domestic loss for a taxable year 
beginning after December 21, 2007. Taxpayers may choose to apply this 
section to overall domestic losses sustained in other taxable years 
beginning after December 31, 2006, as well.

[[Page 72601]]

    (e) Expiration date. The applicability of this section expires on 
December 20, 2010.


Sec.  1.904(g)-3  Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate limitation 
losses, and for recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses.

    [Reserved]. For further guidance, see Sec.  1.904(g)-3T.


Sec.  1.904(g)-3T  Ordering rules for the allocation of net operating 
losses, net capital losses, U.S. source losses, and separate limitation 
losses, and for recapture of separate limitation losses, overall 
foreign losses, and overall domestic losses (temporary).

    (a) In general. This section provides ordering rules for the 
allocation of net operating losses, net capital losses, U.S. source 
losses, and separate limitation losses, and for recapture of separate 
limitation losses, overall foreign losses, and overall domestic losses. 
The rules must be applied in the order set forth in paragraphs (b) 
through (g) of this section.
    (b) Step One: Allocation of net operating loss and net capital loss 
carryovers--(1) In general. Net operating losses from a current taxable 
year are carried forward or back to a taxable year in the following 
manner. Net operating losses that are carried forward pursuant to 
section 172 are combined with income or loss in the carryover year in 
the manner described in this paragraph (b). The combined amounts are 
then subject to the ordering rules provided in paragraphs (c) through 
(g) of this section. Net operating losses that are carried back to a 
prior taxable year pursuant to section 172 are allocated to income in 
the carryback year in the manner set forth in paragraphs (b)(2) and 
(3), (c), and (d) of this section. The income in the carryback year to 
which the net operating loss is allocated is the foreign source income 
in each separate category and the U.S. source income after the 
application of sections 904(f) and 904(g) to income and loss in that 
previous year, including as a result of net operating loss carryovers 
or carrybacks from taxable years prior to the current taxable year.
    (2) Full net operating loss carryover. If the full net operating 
loss (that remains after carryovers to other taxable years) is less 
than or equal to the taxable income in a particular taxable year 
(carryover year), and so can be carried forward in its entirety to such 
carryover year, U.S. source losses and foreign source losses in 
separate categories that are part of a net operating loss from a 
particular taxable year that is carried forward in its entirety shall 
be combined with the U.S. income or loss and the foreign source income 
or loss in the same separate categories in the carryover year.
    (3) Partial net operating loss carryover. If the full net operating 
loss (that remains after carryovers to other taxable years) exceeds the 
taxable income in a carryover year, and so cannot be carried forward in 
its entirety to such carryover year, the following rules apply:
    (i) First, any U.S. source loss (not to exceed the net operating 
loss carryover) shall be carried over to the extent of any U.S. source 
income in the carryover year.
    (ii) If the net operating loss carryover exceeds the U.S. source 
loss carryover determined under paragraph (b)(3)(i) of this section, 
then separate limitation losses that are part of the net operating loss 
shall be tentatively carried over to the extent of separate limitation 
income in the same separate category in the carryover year. If the sum 
of the potential separate limitation loss carryovers determined under 
the preceding sentence exceeds the amount of the net operating loss 
carryover reduced by any U.S. source loss carried over under paragraph 
(b)(3)(i) of this section, then the potential separate limitation loss 
carryovers shall be reduced pro rata so