Determining the Amount of Taxes Paid for Purposes of Section 901; Correction, 67387-67388 [E8-27023]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 221 (Friday, November 14, 2008)]
[Rules and Regulations]
[Pages 67387-67388]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-27023]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9416]
RIN 1545-BH74


Determining the Amount of Taxes Paid for Purposes of Section 901; 
Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

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SUMMARY: This document contains corrections to final and temporary 
regulations (TD 9416) that were published in the Federal Register on 
Wednesday, July 16, 2008 (73 FR 40727) under section 901 of the 
Internal Revenue Code providing guidance relating to the determination 
of the amount of taxes paid for purposes of the foreign tax credit.

DATES: Effective Date: This correction is effective November 14, 2008, 
and is applicable on July 16, 2008.

FOR FURTHER INFORMATION CONTACT: Michael Gilman, (202) 622-3850 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The final and temporary regulations that are the subjects of this 
document are under section 901 of the Internal Revenue Code.

Need for Correction

    As published, final and temporary regulations (TD 9416) contain 
errors that may prove to be misleading and are in need of 
clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

0
Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

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

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


0
Par. 2. Section 1.901-2T is amended as follows:
0
1. The first sentence of paragraph (e)(5)(iv)(C)(5)(i) is revised.
0
2. Paragraph (e)(5)(iv)(D) Example 5. paragraphs (i)(A), (i)(B) and 
(ii) are revised.

[[Page 67388]]

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3. The first sentence of paragraph (e)(5)(iv)(D) Example 8.(i)(B) is 
revised.


Sec.  1.901-2T  Income, war profits, or excess profits tax paid or 
accrued (temporary).

* * * * *
    (e) * * *
    (5) * * *
    (iv) * * *
    (C) * * *
    (5) * * *
    (i) In general. The term passive investment income means income 
described in section 954(c), as modified by this paragraph 
(e)(5)(iv)(C)(5)(i) and paragraph (e)(5)(iv)(C)(5)(ii) of this section. 
* * *
* * * * *
    (D) * * *

    Example 5. * * *
    (i) * * *
    (A) A country X corporation (Foreign Bank) contributes $2 
billion to a newly-formed country X company (Newco) in exchange for 
all of the common stock of Newco and securities that are treated as 
debt of Newco for U.S. tax purposes and preferred stock of Newco for 
country X tax purposes. A domestic corporation (USP) contributes $1 
billion to Newco in exchange for securities that are treated as 
preferred stock of Newco for U.S. tax purposes and debt of Newco for 
country X tax purposes. Newco loans the $3 billion to a wholly-
owned, country X subsidiary of Foreign Bank (FSub) in return for a 
$3 billion, seven-year note paying interest currently. The Newco 
securities held by USP entitle the holder to fixed distributions of 
$4 million per year, and the Newco securities held by Foreign Bank 
entitle the holder to receive $82 million per year, payable only on 
maturity of the $3 billion FSub note in year 7. At the end of year 
5, pursuant to a prearranged plan, Foreign Bank acquires USP's Newco 
securities for a prearranged price of $1 billion. Country X does not 
impose tax on dividends received by one country X corporation from a 
second country X corporation. Under an income tax treaty between 
country X and the United States, country X does not impose country X 
tax on interest received by U.S. residents from sources in country 
X. None of Foreign Bank's stock is owned, directly or indirectly, by 
USP or any shareholders of USP that are domestic corporations, U.S. 
citizens or resident alien individuals.
    (B) In each of years 1 through 7, FSub pays Newco $124 million 
of interest on the $3 billion note. Newco distributes $4 million to 
USP in each of years 1 through 5. The distributions are deductible 
for country X tax purposes, and Newco pays country X $36 million 
with respect to $120 million of taxable income from the FSub note in 
each year. For U.S. tax purposes, in each year Newco's post-1986 
undistributed earnings are increased by $124 million of interest 
income and reduced by accrued interest expense with respect to the 
Newco securities held by Foreign Bank.
    (ii) Result. The $36 million payment to country X is not a 
compulsory payment, and thus is not an amount of tax paid, because 
the foreign payment is attributable to a structured passive 
investment arrangement. First, Newco is an SPV because all of 
Newco's income is passive investment income described in paragraph 
(e)(5)(iv)(C)(5) of this section; Newco's only asset, a note of 
FSub, is held to produce such income; the payment to country X is 
attributable to such income; and if the payment were an amount of 
tax paid it would be paid or accrued in a U.S. taxable year in which 
Newco meets the requirements of paragraph (e)(5)(iv)(B)(1)(i) of 
this section. Second, if the foreign payment were an amount of tax 
paid, USP would be deemed to pay its pro rata share of the foreign 
payment under section 902(a) in each of years 1 through 5 and, 
therefore, would be eligible to claim a credit under section 901(a). 
Third, USP would not pay any country X tax if it directly owned its 
proportionate share of Newco's assets, a note of FSub. Fourth, for 
country X tax purposes, Foreign Bank is eligible to receive a tax-
free distribution of $82 million attributable of each of years 1 
through 5, and that amount corresponds to more than 10 percent of 
the foreign base with respect to which USP's share of the foreign 
payment was imposed. Fifth, Foreign Bank is a counterparty because 
it owns stock of Newco for country X tax purposes and none of 
Foreign Bank's stock is owned, directly or indirectly, by USP or 
shareholders of USP that are domestic corporations, U.S. citizens, 
or resident alien individuals. Sixth, the United States and country 
X treat various aspects of the arrangement differently, including 
whether the Newco securities held by Foreign Bank and USP are debt 
or equity. The amount of credits claimed by USP if the payment to 
country X were an amount of tax paid is materially greater than it 
would be if, for U.S. tax purposes, the securities held by USP were 
treated as debt or the securities held by Foreign Bank were treated 
as equity, and the amount of income recognized by Newco for U.S. tax 
purposes is materially less than the amount of income recognized for 
country X tax purposes. Because the payment to country X is not an 
amount of tax paid, USP is not deemed to pay any country X tax under 
section 902(a). USP has dividend income of $4 million in each of 
years 1 through 5.
* * * * *
    Example 8. * * *
    (i) * * *
    (B) The transaction is structured in such a way that, for U.S. 
tax purposes, there is a loan of $1.5 billion from FC to USP, and 
USP is the owner of the class C stock and the class A stock. * * *
* * * * *

Guy Traynor,
Acting Chief, Publications and Regulations Branch, Legal Processing 
Division, Associate Chief Counsel (Procedure and Administration).
 [FR Doc. E8-27023 Filed 11-13-08; 8:45 am]
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