Tax Accounting Elections on Behalf of Foreign Corporations, 68370-68373 [2011-28658]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 214 (Friday, November 4, 2011)]
[Proposed Rules]
[Pages 68370-68373]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28658]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114749-09]
RIN 1545-BI63


Tax Accounting Elections on Behalf of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking and notice of 
proposed rulemaking.

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SUMMARY: These proposed regulations would clarify the rules for 
controlling domestic shareholders to adopt or change a method of 
accounting or taxable year on behalf of a foreign corporation. The 
regulations affect United States persons that own stock in certain 
foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 2, 2012.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-114749-09), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered between the 
hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-114749-09), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington DC 20224 or sent electronically via the Federal Rulemaking 
Portal at https://www.regulations.gov (IRS REG-114749-09).

FOR FURTHER INFORMATION CONTACT: Concerning submission of comments, 
Oluwafunmilayo (Funmi) Taylor (202) 622-7180; concerning the 
regulations, Joseph W. Vetting (202) 622-3402 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    On April 17, 1991, a notice of proposed rulemaking (INTL-939-86) 
under sections 953, 954, 964, 1248, and 6046 of the Internal Revenue 
Code (Code) was published in the Federal Register (56 FR 15540) (the 
1991 proposed regulations). No comments were received with respect to 
the proposed amendments under section 964, which would provide a 
special definition of controlling domestic shareholders for certain 
controlled foreign corporations with insurance income. Comments were 
received on other provisions of the 1991 proposed regulations, but no 
public hearing was requested and none was held.
    On July 1, 1992, a notice of proposed rulemaking (INTL-0018-92) 
under sections 952 and 964 of the Code was published in the Federal 
Register (57 FR 29246). A correction to the notice of proposed 
rulemaking was published on October 8, 1992, in the Federal Register 
(57 FR 46355). The proposed regulations would modify the regulations 
relating to required book-to-tax adjustments in respect of depreciation 
and inventory accounting. Comments were received. A public hearing was 
not requested and none was held.
    Final regulations published on June 10, 2009 (TD 9452) provided 
guidance for shareholders of certain foreign corporations to elect or 
change a method of accounting or a taxable year on behalf of the 
foreign corporation under section 964 of the Code.

Explanation of Provisions

    These proposed regulations provide clarification of the required 
book-to-tax adjustments, including those in respect of depreciation and 
amortization, and additional examples illustrating the application of 
Sec.  1.964-1(a) and (c). The proposed regulations also would delete 
Sec.  1.964-1(b)(3), Example 2. The example refers to section 963, 
which was repealed for taxable years beginning after December 31, 1975. 
Additionally, the proposed regulations provide rules regarding IRS-
initiated method changes.
    The Treasury Department and the IRS again request comments on 
whether the special control group definition contained in the 1991 
proposed regulations should be adopted.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations will be

[[Page 68371]]

submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses.

Comments and Request for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed regulations and how they can be made easier to understand. 
All comments will be available for public inspection and copying at 
https://www.regulations.gov or upon request. A public hearing may be 
scheduled if requested in writing by a person who timely submits 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the hearing will be published in the Federal Register.

Drafting Information

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

List of Subjects in 26 CFR Part I

    Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Proposed Regulations

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking published in the Federal Register on July 1, 1992 
(57 FR 29246) is withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.964-1 is amended as follows:
    1. Adding a new paragraph (a)(4).
    2. In paragraph (b)(3), revising the introductory text, 
redesignating Example (1) as Example, and removing Example (2).
    3. Revising the first sentence of paragraph (c)(1).
    4. Revising paragraph (c)(1)(iii) and removing paragraphs 
(c)(1)(iii)(a), (c)(1)(iii)(b), and (c)(1)(iii)(c).
    5. Revising paragraph (c)(1)(v).
    6. Inserting a sentence after the fourth sentence of paragraph 
(c)(2), revising the fifth sentence of paragraph (c)(2), and adding a 
sentence at the end of paragraph (c)(2).
    7. Revising paragraph (c)(8).
    8. Adding a new paragraph (c)(9).
    9. Revising paragraph (d).
    The additions and revisions read as follows:


Sec.  1.964-1  Determination of the earnings and profits of a foreign 
corporation.

* * * * *
    (a)(4) Example. The rules of this paragraph (a) are illustrated by 
the following example.

    Example. (i) Facts. P, a domestic corporation, owns all of the 
outstanding stock of FX, a controlled foreign corporation. In 
preparing its books for purposes of accounting to its shareholders, 
FX uses an accounting method (Local Books Method) to determine the 
amount of its depreciation expense that does not conform to 
accounting principles generally accepted in the United States (U.S. 
GAAP) or to U.S. income tax accounting standards as described in 
paragraph (c). The amount of the adjustment necessary to conform the 
depreciation expense determined under the Local Books Method with 
the amount that would be determined under U.S. GAAP for purposes of 
paragraph (a)(1)(ii) of this section if FX were a domestic 
corporation is not material. However, the adjustment necessary to 
conform the amount of the depreciation expense under the Local Books 
Method to U.S. income tax accounting standards for purposes of 
paragraph (a)(1)(iii) of this section is material.
    (ii) Result. Although FX is not required to make the adjustment 
necessary to conform the amount of its tax expense reserve deduction 
determined under the Local Books Method to the amount that would be 
determined under U.S. GAAP, FX is required to make the adjustment 
necessary to conform the amount of the depreciation expense 
determined under the Local Books Method to the amount of 
depreciation expense for the current year that would be allowed 
under U.S. income tax accounting standards as described in paragraph 
(c).

    (b) * * *
    (3) Example. The rules of this paragraph (b) are illustrated by the 
following example.
* * * * *
    (c) * * * (1) In general. Except as otherwise provided in the Code 
and regulations (for example, section 952(c)(3) (earnings and profits 
determined without regard to section 312(n)(4)-(6) for purposes of 
section 952(c)), the tax accounting standards to be applied in making 
the adjustments required by paragraph (a)(1)(iii) of this section shall 
be those applied to domestic corporations, including but not limited to 
the following:
* * * * *
    (iii) Depreciation and amortization. Depreciation and amortization 
shall be computed in accordance with the provisions of section 312(k) 
and the regulations under that section. In the case of a foreign 
corporation described in section 312(k)(4) (one with less than 20 
percent U.S.-source gross income), depreciation and amortization of 
items that are not described in section 312(k)(2) or (k)(3) shall be 
determined under the rules for determining taxable income. For example, 
amortization for amortizable section 197 intangibles (as defined in 
section 197(c)) is calculated in accordance with section 197, and 
depreciation for real property is calculated in accordance with section 
168(g)(2)(C)(iii). For any taxable year beginning before July 1, 1972, 
depreciation shall be computed in accordance with section 167 and the 
regulations under that section.
* * * * *
    (v) Taxable years. The period for computation of taxable income and 
earnings and profits known as the taxable year shall reflect the 
provisions of sections 441 and 898 and the regulations under those 
sections.
* * * * *
    (2) Adoption or change of method or taxable year. * * * Once 
adopted, a method of accounting or taxable year may be changed by or on 
behalf of the foreign corporation only in accordance with the 
applicable provisions of the Code and regulations. Adjustments to the 
appropriate separate category (as defined in Sec.  1.904-5(a)(1)) of 
earnings and profits and income of the foreign corporation (including a 
category of subpart F income described in section 952(a) or, in the 
case of foreign base company income, described in Sec.  1.954-
1(c)(1)(iii)) shall be required under section 481 to prevent any 
duplication or omission of amounts attributable to previous years that 
would otherwise result from any change in a method of accounting. * * * 
See paragraph (c)(9) of this section for rules if the change in method 
of accounting is required in connection with an audit of the foreign 
corporation's controlling domestic shareholders (as defined in 
paragraph (c)(5) of this section).
* * * * *
    (8) Examples. The following examples illustrate the application of 
paragraph (c) of this section:

    Example 1. P, a domestic corporation, owns all of the 
outstanding stock of FX, a controlled foreign corporation organized 
in 2012. In maintaining its books for the

[[Page 68372]]

purpose of accounting to its shareholders, FX deducts additions to a 
reserve for bad debts. Assume that if FX were a domestic 
corporation, it would be required to use the specific charge-off 
method under section 166 with respect to allowable bad debt losses. 
In accordance with paragraph (c)(1)(i) of this section, FX's reserve 
deductions must be adjusted (if the adjustments are material) in 
order to compute its earnings and profits in accordance with U.S. 
income tax accounting standards as described in paragraph (c). 
Accordingly, P must compute FX's earnings and profits using the 
specific charge-off method of accounting for bad debts in accordance 
with section 166.
    Example 2. FX, a controlled foreign corporation, maintains its 
books for the purpose of accounting to its shareholders by 
capitalizing research and experimental expenses. A, B, and C, the 
United States shareholders (as defined in section 951(b)) of FX, own 
45 percent, 30 percent, and 25 percent, respectively, of its only 
class of outstanding stock. For the first taxable year of FX, 
pursuant to paragraph (c)(3) of this section, B and C adopt on its 
behalf the section 174 method of currently deducting research and 
experimental expenses. Regardless of whether A objects to this 
action or receives the notice required by paragraph (c)(3)(iii) of 
this section, adjustments must be made to reflect the use of the 
section 174 method in computing the earnings and profits of FX with 
respect to A as well as with respect to B and C.
    Example 3. (i) P, a calendar year domestic corporation that uses 
the fair market value method of apportioning interest expense, owns 
all of the outstanding stock of FX, a controlled foreign corporation 
organized in 2002 that uses the calendar year as its taxable year 
for foreign tax purposes. On June 1, 2012, FX makes a distribution 
to P. Prior to that distribution, none of the significant events 
specified in paragraph (c)(6) of this section had occurred. In 
addition, neither P nor FX had ever made or adopted, or been 
required to make or adopt, an election or method of accounting or 
taxable year for United States tax purposes with respect to FX. FX 
does not act to make any election or adopt any method of accounting 
or a taxable year for United States tax purposes.
    (ii) P must compute FX's earnings and profits for FX's 2002 
through 2012 taxable years in order to determine if any portion of 
the 2012 distribution is taxable as a dividend and to determine P's 
deemed paid foreign tax credit on such portion under section 902. 
Under paragraph (c)(2) of this section, P may make an election or 
adopt a method or methods of accounting and a taxable year on behalf 
of FX by satisfying the requirements of paragraph (c)(3) of this 
section by the due date (with extensions) of P's Federal income tax 
return for 2012, its taxable year with which ends FX's 2012 taxable 
year. Under paragraph (c)(4) of this section, any such election or 
adoption will govern the computation of FX's earnings and profits 
for its taxable years beginning in 2002 and subsequent taxable years 
for purposes of determining the Federal income tax liability of P 
and any subsequent shareholders of FX in 2012 and subsequent taxable 
years, unless the Commissioner consents to a change.
    (iii) If P fails to satisfy the requirements under paragraph 
(c)(3) of this section and such failure is not shown to the 
satisfaction of the Commissioner to be due to reasonable cause, the 
earnings and profits of FX will be computed on the basis of a 
calendar taxable year as if no elections were made and any 
permissible methods of accounting not requiring an election and 
reflected in FX's books were adopted. Any subsequent attempt by FX 
or P to change an accounting method or taxable year of FX shall be 
effective only if the Commissioner consents to the change.
    Example 4. (i) The facts are the same as in Example 3, except 
that P owns 80 percent, rather than all, of the outstanding stock of 
FX. M, a calendar year domestic corporation, owns the remaining 20 
percent of the stock of FX beginning in 2002. M uses the tax book 
value method to allocate its interest expense under section 
864(e)(4).
    (ii) M, but not P, must compute FX's earnings and profits 
beginning in 2002 in order to determine the adjustment under Sec.  
1.861-12(c) and Sec.  1.861-12T(c) to M's basis in the stock of FX 
for M's 2002 through 2011 taxable years. Because P, the controlling 
domestic shareholder of FX, has not made or adopted, or been 
required to make or adopt, an election or a method of accounting or 
taxable year with respect to FX, the earnings and profits of FX for 
2002 through 2011 will be computed on the basis of a calendar 
taxable year as if no elections were made and any permissible 
methods of accounting not requiring an election and reflected in 
FX's books were adopted. However, a properly filed, timely election 
or adoption of a method of accounting or taxable year by, or on 
behalf of, FX with respect to FX's taxable year ending in 2012, when 
FX's earnings and profits are first significant for United States 
tax purposes for P, FX's controlling domestic shareholder, shall not 
be treated as a change in accounting method or a change in taxable 
year for any pre-2012 taxable year of FX. M will not be required to 
recompute its basis adjustments for 2002 through 2011 by reason of 
P's adoption of a method or methods of accounting or taxable year 
with respect to FX for 2012. See paragraph (c)(4)(iii) of this 
section. However, any method of accounting or taxable year adopted 
on behalf of FX by P pursuant to this paragraph (c) with respect to 
FX is binding on P, FX, and M for purposes of computing FX's 
earnings and profits in 2002 and subsequent taxable years for 
purposes of determining the Federal income tax liability of P, M, 
and any subsequent shareholders of FX in 2012 and subsequent taxable 
years, unless the Commissioner consents to a change.
    Example 5. (i) In 1987, P, a calendar year domestic corporation 
that uses the tax book value method to allocate its interest expense 
under section 864(e)(4), acquired 50 percent of the outstanding 
stock of 10/50 Corp, a noncontrolled section 902 corporation 
organized in 1980. For taxable years beginning on or before April 
25, 2006, the provisions of this paragraph (c) did not provide a 
mechanism for shareholders of noncontrolled section 902 corporations 
to make elections or adopt methods of accounting or a taxable year 
on behalf of noncontrolled section 902 corporations. However, P had 
to compute 10/50 Corp's earnings and profits in order to determine 
the adjustment under Sec.  1.861-12(c) and Sec.  1.861-12T(c) to P's 
basis in the stock of 10/50 Corp beginning with P's 1987 taxable 
year.
    (ii) For taxable years beginning on or before April 25, 2006, P 
was required to compute 10/50 Corp's earnings and profits as if any 
permissible method of accounting not requiring an election and 
reflected in 10/50 Corp's books had been adopted. See paragraph 
(c)(4)(ii) of this section. In taxable years beginning after April 
25, 2006, in accordance with paragraph (c)(3) of this section P may 
request the consent of the Commissioner to change any method of 
accounting or the taxable year on behalf of 10/50 Corp.

    (9) Change of method on audit. If, in connection with an audit (or 
audits) of one or more shareholders of the foreign corporation who 
collectively would constitute the foreign corporation's controlling 
domestic shareholder(s) if they undertook to act on the corporation's 
behalf, the Commissioner determines that a method of accounting of the 
foreign corporation does not clearly reflect income, the computation of 
earnings and profits shall be made in a manner which, in the opinion of 
the Commissioner, does clearly reflect income. See section 446 and the 
related regulations. The Commissioner shall provide written notice of 
the change in method of accounting to each such shareholder and to all 
other persons known by the Commissioner to be domestic shareholders who 
own (within the meaning of section 958(a)) stock of the foreign 
corporation. However, the failure of the Commissioner to provide such 
notice to any such other person shall not invalidate the change of 
method, which shall bind both the foreign corporation and all of its 
domestic shareholders as to the computation of the foreign 
corporation's earnings and profits for the taxable year of the foreign 
corporation for which the method of accounting is changed and in 
subsequent taxable years unless the Commissioner consents to a change.
    (d) Effective/applicability date. This section applies in computing 
earnings and profits of foreign corporations in taxable years of 
foreign corporations beginning on or after the date of publication of 
these regulations as final regulations in the Federal Register, and 
taxable years of shareholders with or within which such taxable years 
of the foreign corporations end. See 26 CFR 1.964-1 (revised as of 
April 1, 2011) for

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rules applicable to taxable years beginning before such date.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-28658 Filed 11-3-11; 8:45 am]
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