Foreign Tax Credit Splitting Events, 7323-7336 [2015-02614]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 27 (Tuesday, February 10, 2015)]
[Rules and Regulations]
[Pages 7323-7336]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-02614]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9710]
RIN 1545-BK50


Foreign Tax Credit Splitting Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final Income Tax Regulations with 
respect to a provision of the Internal Revenue Code (Code) that 
addresses situations in which foreign income taxes have been separated 
from the related income. These regulations are necessary to provide 
guidance on applying the statutory provision, which was enacted as part 
of legislation commonly referred to as the Education Jobs and Medicaid 
Assistance Act (EJMAA) on August 10, 2010. These regulations affect 
taxpayers claiming foreign tax credits or deducting foreign income 
taxes.

DATES: Effective date: These regulations are effective on February 10, 
2015.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.704-1(b)(1)(ii)(b)(3), 1.909-1(e), 1.909-2(c), 1.909-3(c), 1.909-
4(b), 1.909-5(c), and 1.909-6(h).

FOR FURTHER INFORMATION CONTACT: Suzanne M. Walsh, (202) 317-6936 (not 
a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    On February 14, 2012, a notice of proposed rulemaking by cross-
reference to temporary regulations (REG-132736-11) under sections 909 
and 704 of the Code and temporary regulations (TD 9577) (2012 temporary 
regulations) were published in the Federal Register at [77 FR 8184] and 
[77 FR 8127], respectively.
    Section 1.909-6T of the 2012 temporary regulations set forth an 
exclusive list of splitter arrangements that applied to foreign income 
taxes paid or accrued by a section 902 corporation in a taxable year 
beginning on or before December 31, 2010, comprised of reverse hybrid 
structure splitter arrangements, foreign consolidated group splitter 
arrangements, group relief or other loss sharing regime splitter 
arrangements, and hybrid instrument splitter arrangements (pre-2011 
splitter arrangements).
    For foreign income taxes paid or accrued by any person in a taxable 
year beginning on or after January 1, 2011, Sec.  1.909-5T of the 2012 
temporary regulations adopted the same list of splitter arrangements as 
Sec.  1.909-6T, but added partnership inter-branch payment splitter 
arrangements to the list.
    For foreign income taxes paid or accrued by any person in a taxable 
year beginning on or after January 1, 2012, Sec.  1.909-2T adopted the 
list of splitter arrangements applicable to prior taxable years with 
certain changes. Because regulations under section 901 were modified 
for taxable years beginning after February 14, 2012, to address the 
application of the legal liability rule to combined income regimes, 
consolidated group splitter arrangements were removed from the list 
(although Sec.  1.909-5T applied the consolidated group splitter 
arrangement rules to foreign income taxes paid or accrued by any person 
in a taxable year beginning on or after January 1, 2012, and on or 
before February 14, 2012). In addition, the definitions of hybrid 
instrument splitter arrangements and loss-sharing splitter arrangements 
were expanded.
    Sections 1.909-3T and 1.909-6T provided interim mechanical rules 
for tracking taxes paid or accrued with respect to a splitter 
arrangement (split taxes) as well as the related income with respect to 
such taxes.
    The 2012 temporary regulations also removed the special rule for 
inter-branch payments previously set forth in Sec.  1.704-
1(b)(4)(viii)(d)(3).
    A public hearing was not requested and none was held. However, the 
IRS and the Treasury Department received written comments in response 
to the notice of proposed rulemaking. After consideration of all the 
comments, the proposed regulations under section 909 are adopted as 
amended by this Treasury decision. The revisions are discussed in this 
preamble. This Treasury decision also adopts the proposed regulations 
under section 704 without amendment.

Explanation of Revisions and Summary of Comments

I. Splitter Arrangements--In General

    This Treasury decision makes clarifying changes to certain of the 
definitions of splitter arrangements in Sec.  1.909-2T. It also makes a 
clarifying change to the interim mechanical rules for tracking split 
taxes and related income. Apart from this clarifying change, this 
Treasury decision does not address mechanical issues, which are still 
under consideration and will be addressed in future guidance.

[[Page 7324]]

II. Reverse Hybrid Splitter Arrangements

    Section 1.909-2T(b)(1) provides that a splitter arrangement exists 
with respect to a reverse hybrid entity when a payor pays or accrues 
foreign income taxes with respect to the income of the reverse hybrid. 
The split taxes are the taxes paid or accrued with respect to income of 
the reverse hybrid. The related income with respect to such split taxes 
is the earnings and profits of the reverse hybrid attributable to the 
activities of the reverse hybrid that gave rise to the foreign taxable 
income with respect to which the split taxes were paid or accrued.
    A comment indicated that there is confusion regarding the amount of 
the related income with respect to a reverse hybrid splitter 
arrangement in the case in which the reverse hybrid subsequently incurs 
a loss, causing its earnings and profits to fluctuate over multiple 
taxable years. The final regulations include two new examples at Sec.  
1.909-2(b)(1)(v) that clarify how to determine the related income 
amount with respect to split taxes from a reverse hybrid splitter 
arrangement.

III. Loss-Sharing Splitter Arrangements

    Section 1.909-2T(b)(2) provides that a splitter arrangement exists 
to the extent that the ``usable shared loss'' of a ``U.S. combined 
income group,'' which is an individual or corporation and all the 
entities with which it combines items of income and expense under U.S. 
federal income tax law, is used to offset foreign taxable income of 
another U.S. combined income group. A usable shared loss is defined as 
a shared loss of a U.S. combined income group that could be used under 
foreign law to offset the group's own income.
    A comment requested that the definition of a usable shared loss be 
clarified to exclude any shared loss that could not be used within the 
U.S. combined income group in a current foreign taxable year but that 
could be used within a group by carrying the loss either forward or 
back to a different foreign taxable year. The Treasury Department and 
the IRS agree that the usable shared loss definition should not require 
a U.S. combined income group to carry forward losses because it will 
not necessarily be foreseeable whether the group will have sufficient 
foreign taxable income in a future taxable year to use a loss that 
cannot be used currently or carried back within the group. It would be 
too unpredictable to adopt a ``wait and see'' rule that required a 
taxpayer to forego the opportunity to use a loss to reduce an 
affiliate's foreign tax liability in a current (or prior) foreign 
taxable year based on the speculation that it may be able to use the 
loss itself in a future foreign taxable year.
    It is appropriate, however, that the usable shared loss definition 
include a shared loss that could be used to offset foreign taxable 
income of the group in a previous taxable year. Because taxpayers can 
know in a current foreign taxable year whether a loss can be carried 
back for foreign law purposes within the U.S. combined income group, 
they should not be permitted to share such a loss in a way that 
inappropriately separates foreign income taxes from the related income. 
Although this may require taxpayers to treat taxes previously paid or 
accrued as split taxes, this is an acceptable outcome in light of the 
policy concerns that the loss-sharing splitter rules are intended to 
address. Furthermore, taxpayers can avoid having to treat taxes as 
split taxes on a retroactive basis by carrying back the loss. 
Accordingly, the regulations modify the definition to clarify that a 
usable shared loss is a shared loss that could be used under foreign 
tax law to offset income of the U.S. combined income group in a current 
or previous foreign taxable year.
    Another comment recommended that sharing a usable shared loss 
outside of a U.S. combined income group should give rise to a splitter 
arrangement only to the extent that the gross amount of such a usable 
shared loss shared away from the U.S. combined income group exceeds the 
gross amount of shared losses from other U.S. combined income groups 
that are received by the group. The Treasury Department and the IRS 
have determined that it is too burdensome to administer such a netting 
rule, particularly in light of the fact that the comment did not 
provide a reason why a U.S. combined income group would seek to use 
shared losses from another U.S. combined income group while sharing its 
own usable shared loss outside the group, rather than using its usable 
shared loss within the group. Therefore, the comment is not adopted.
    A further comment recommended that a U.S. combined income group 
with split taxes resulting from sharing a usable shared loss away from 
the group in a prior year be treated as receiving a distribution of 
related income to the extent of any shared loss received by it from a 
different U.S. combined income group. The Treasury Department and the 
IRS have determined that it is too burdensome to administer such a 
rule, which would entail reconciling actual related income accounts 
with deemed distributions of related income resulting from the receipt 
of a shared loss from another U.S. combined income group. Therefore, 
the comment is not adopted.
    A question has arisen about when references to ``income'' in Sec.  
1.909-2T(b)(2) are intended to refer to income for purposes of U.S. 
federal income tax law or to income for purposes of foreign tax law. 
The regulations clarify that the reference to the term ``income'' of 
that U.S. combined income group in Sec.  1.909-2(b)(2)(v) refers to 
income for purposes of foreign tax law.

IV. Hybrid Instrument Splitter Arrangements

    Section 1.909-2T(b)(3)(i) provides that there is a U.S. equity 
hybrid instrument splitter arrangement if payments or accruals with 
respect to a U.S. equity hybrid instrument (i) give rise to foreign 
income taxes paid or accrued by the owner of such instrument, (ii) are 
deductible by the issuer under the laws of its foreign jurisdiction, 
and (iii) do not give rise to income for U.S. federal income tax 
purposes.
    A question has arisen as to whether there is a splitter arrangement 
if an accrual for foreign law purposes with respect to a U.S. equity 
hybrid instrument does not give rise to income under U.S. law but a 
separate payment of the accrued amount is made that gives rise to 
income under U.S. law equal to all or a portion of the amount of the 
accrual. The reference to ``payments or accruals'' created confusion 
regarding the effect of a payment. The final regulations are clarified 
to provide that if an accrual under foreign law with respect to a U.S. 
equity hybrid instrument gives rise to a foreign-law deduction by the 
issuer, then regardless of whether a payment is made on the instrument, 
a splitter arrangement exists whenever an accrual gives rise to the 
imposition of foreign income taxes on the instrument owner without 
giving rise to income under U.S. federal income tax law. Any actual 
payment of the accrued amount, whether or not it is made periodically 
under the terms of the instrument, does not prevent the hybrid 
instrument from being a splitter arrangement. The payments, however, 
may be treated as a distribution of related income to the extent 
provided by Sec.  1.909-3 and Sec.  1.909-6(d). An example is added at 
Sec.  1.909-2(b)(3)(i)(E) to illustrate the application of the rule.

V. Mechanical Rules for Tracking Related Income and Split Taxes

    A comment recommended that the regulations should generally provide 
additional mechanical rules for tracking

[[Page 7325]]

related income. The Treasury Department and the IRS recognize that 
there are a number of mechanical issues related to tracking related 
income and split taxes that are not fully addressed in Sec.  1.909-6T. 
Other mechanical issues are under consideration and will be addressed 
in future guidance.
    One comment recommended revising Sec.  1.909-6T(e)(3) to provide 
for the carryover of split taxes in the circumstance in which a payor 
of split taxes that is a section 902 corporation combines with a 
section 902 shareholder in a transaction that is described in section 
381. Section 1.909-6T(e)(3) provides that split taxes that carry over 
to a foreign corporation under section 381, Sec.  1.367(b)-7, or 
similar rules retain their character as split taxes and, consequently, 
the transferee corporation is treated as the payor of the split taxes. 
That provision does not, however, provide that split taxes carry over 
to a domestic corporation in the case of a foreign-to-U.S. liquidation 
or other inbound transaction described in section 381.
    The Treasury Department and the IRS have determined that it is not 
appropriate to expand the scope of Sec.  1.909-6T(e)(3) as recommended 
by the comment. A carryover rule for inbound section 381 transactions 
would create preferential treatment, in certain fact patterns, of split 
foreign income taxes that are maintained by a section 902 corporation 
in suspension accounts rather than included in post-1986 foreign income 
tax pools, such as when the section 902 corporation has a deficit in 
post-1986 undistributed earnings and profits. In addition, if suspended 
foreign income taxes are carried over to a domestic section 902 
shareholder, currency exchange rate fluctuations could cause a 
disparity between the dollar amount of income included by the domestic 
section 902 shareholder in respect of the functional currency amount of 
earnings and profits used to make the suspended tax payment and the 
creditable dollar amount of the foreign income taxes that are 
unsuspended. This disparity is inconsistent with the inclusion that 
results from unsuspending split taxes at the level of the payor section 
902 corporation, deeming such taxes to be paid by the section 902 
shareholder, and including the dollar amount of taxes in the 
shareholder's income under the section 78 gross-up. Moreover, taxpayers 
could choose to avoid permanent suspension of split taxes in an inbound 
transaction by, for example, causing a distribution of the related 
income to the payor of the split taxes before the payor of the split 
taxes is liquidated or otherwise combined with a domestic person. For 
these reasons, the final regulations do not modify Sec.  1.909-6T(e)(3) 
to treat split taxes as a carryover attribute in inbound section 381 
transactions.
    Another comment addressed the fact pattern in which a covered 
person with the related income ceases to be a covered person with 
respect to the payor of split taxes and the payor does not take the 
related income into account before, or in connection with, the 
termination of the covered person relationship, resulting in the 
permanent suspension of split taxes. The comment recommended that, in 
this case, if the covered person is a direct or indirect subsidiary of 
the payor of the split taxes, the payor should be treated as having 
paid the split taxes on behalf of the covered person and as having made 
a capital contribution in the amount of the split taxes to the covered 
person directly or indirectly through a chain of subsidiaries, thereby 
stepping up basis in the covered person's stock. The comment also 
recommended reducing the earnings and profits of the covered person by 
the amount of the split taxes as though the covered person had paid the 
split taxes. Stepping up the basis of the stock of the covered person 
by the amount of the permanently suspended split taxes and reducing its 
earnings and profits by the same amount would ensure that any inclusion 
attributable to the earnings and profits or appreciated assets of the 
departing or liquidating covered person is reduced by the amount of the 
split taxes, effectively converting the permanently suspended split 
taxes into a deduction for the payor of the split taxes.
    Section 909 contemplates that split taxes may remain permanently 
suspended as a result of a disposition or liquidation of the covered 
person. Section 909 provides that split taxes are suspended until the 
related income is taken into account generally by the payor of the 
split tax or relevant section 902 shareholder, and does not provide for 
a deduction of split taxes in lieu of a credit. If the covered person 
does not distribute the full amount of related income prior to the 
liquidation or disposition of the covered person, and such liquidation 
or disposition does not result in the reflection of the related income 
in the earnings and profits of the payor of the split tax (or the 
relevant section 902 shareholder), then the related income is not taken 
into account as prescribed by section 909. The Treasury Department and 
the IRS, therefore, have concluded that it is appropriate for split 
taxes to remain suspended until and unless the related income is taken 
into account. Accordingly, the comment is not adopted.

VI. Taking Related Income Into Account as a Result of a Transaction 
Under Section 381

    A comment incorrectly interpreted Sec.  1.909-6T(d)(8)(ii) as 
providing that when a payor section 902 corporation with suspended 
split taxes combines with the covered person with the related income in 
a transaction described in section 381, all related income is treated 
as taken into account even if the full amount of related income is not 
reflected in the earnings and profits of the payor section 902 
corporation (or surviving corporation) as a result of the transaction.
    The Treasury Department and the IRS did not intend for a 
transaction described under section 381 to result in the unsuspension 
of split taxes if the transaction does not cause the payor of the split 
taxes to take into account earnings and profits of the covered person 
equal to the amount of related income specified in the relevant 
splitter arrangement definition. Accordingly, the final regulations 
clarify that split taxes are unsuspended only when the appropriate 
amount of related income is taken into account by the payor section 902 
corporation either as a result of a distribution or inclusion out of 
the earnings and profits of the covered person or as a result of the 
combination of the payor section 902 corporation and the covered person 
in a transaction described in section 381.

VII. Additional Splitter Arrangement Fact Patterns

    A comment recommended that the U.S. debt hybrid instrument splitter 
arrangement definition be expanded to include certain fact patterns in 
which the instrument owner is not related to the issuer of the 
instrument. The Treasury Department and the IRS have concluded that it 
is not appropriate at this time to extend the existing splitter 
arrangement list to include transactions between unrelated persons and 
do not adopt the comment. The Treasury Department and the IRS continue, 
however, to consider other arrangements that inappropriately separate 
foreign income taxes from the related income, and the circumstances 
under which a splitter arrangement described in regulations or other 
guidance under section 909 should be applied to arrangements between 
unrelated persons.

[[Page 7326]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Pursuant to 
section 7805(f) of the Internal Revenue Code, the NPRM preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small businesses.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    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 as follows:

    Authority:  26 U.S.C. 7805 * * *
Sections 1.909-1 through 1.906-6 also issued under 26 U.S.C. 909(e). 
* * *


0
Par. 2. Section 1.704-1 is amended as follows:
0
a. Paragraph (b)(0) is amended by adding entries for Sec.  1.704-
1(b)(1)(ii)(b)(3) and Sec.  1.704-1(b)(4)(viii)(d)(3).
0
b. Paragraph (b)(1)(ii)(b)(3) is revised.
0
c. Paragraph (b)(4)(viii)(d)(3) is revised.
0
c. Paragraph (b)(5), Example 24, is revised.
    The revisions read as follows:


Sec.  1.704-1.  Partner's distributive share.

* * * * *
    (b) Determination of partner's distributive share -(0) Cross-
references.

------------------------------------------------------------------------
                  Heading                              Section
------------------------------------------------------------------------
 
                              * * * * * * *
Special rules for certain interbranch            1.704-1(b)(1)(ii)(b)(3)
 payments.................................
 
                              * * * * * * *
Special rules for certain interbranch          1.704-1(b)(4)(viii)(d)(3)
 payments.................................
 
                              * * * * * * *
------------------------------------------------------------------------

    (1) * * *
    (ii) * * *
    (b) * * *
    (3) Special rules for certain inter-branch payments--(A) In 
general. The provisions of Sec.  1.704-1(b)(4)(viii)(d)(3) apply for 
partnership taxable years ending after February 9, 2015. See 26 CFR 
1.704-1T(b)(4)(viii)(d)(3) (revised as of April 1, 2014) for rules 
applicable to taxable years beginning on or after January 1, 2012, and 
ending on or before February 9, 2015.
    (B) Transition rule. Transition relief is provided herein to 
partnerships whose agreements were entered into prior to February 14, 
2012. In such cases, if there has been no material modification to the 
partnership agreement on or after February 14, 2012, then the 
partnership may apply the provisions of Sec.  1.704-
1(b)(4)(viii)(c)(3)(ii) and Sec.  1.704-1(b)(4)(viii)(d)(3) (revised as 
of April 1, 2011). For purposes of this paragraph (b)(1)(ii)(b)(3), any 
change in ownership constitutes a material modification to the 
partnership agreement. This transition rule does not apply to any 
taxable year in which persons bearing a relationship to each other that 
is specified in section 267(b) or section 707(b) collectively have the 
power to amend the partnership agreement without the consent of any 
unrelated party (and all subsequent taxable years).
* * * * *
    (4) * * *
    (vii) * * *
    (d) * * *
    (3) Special rules for inter-branch payments. For rules relating to 
foreign tax paid or accrued in partnership taxable years beginning 
before January 1, 2012, in respect of certain inter-branch payments, 
see 26 CFR 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011).
* * * * *
    (b)
    (5) * * *

    Example 24.  (i) The facts are the same as in Example 21, except 
that businesses M and N are conducted by entities (DE1 and DE2, 
respectively) that are corporations for country X and Y tax purposes 
and disregarded entities for U.S. Federal income tax purposes. Also, 
assume that DE1 makes payments of $75,000 during 2012 to DE2 that 
are deductible by DE1 for country X tax purposes and includible in 
income of DE2 for country Y tax purposes. As a result of such 
payments, DE1 has taxable income of $25,000 for country X purposes 
on which $10,000 of taxes are imposed and DE2 has taxable income of 
$125,000 for country Y purposes on which $25,000 of taxes are 
imposed. For U.S. Federal income tax purposes, $100,000 of AB's 
income is attributable to the activities of DE1 and $50,000 of AB's 
income is attributable to the activities of DE2. Pursuant to the 
partnership agreement, all partnership items from business M, 
excluding CFTEs paid or accrued by business M, are allocated 75% to 
A and 25% to B, and all partnership items from business N, excluding 
CFTEs paid or accrued by business N, are split evenly between A and 
B (50% each). Accordingly, A is allocated 75% of the income from 
business M ($75,000), and 50% of the income from business N 
($25,000). B is allocated 25% of the income from business M 
($25,000), and 50% of the income from business N ($25,000).
    (ii) Because the partnership agreement provides for different 
allocations of the net income attributable to businesses M and N, 
the net income attributable to each of business M and business N is 
income in separate CFTE categories. See paragraph (b)(4)(viii)(c)(2) 
of this section. Under paragraph (b)(4)(viii)(c)(3) of this section, 
the $100,000 of net income attributable to business M is in the 
business M CFTE category and the $50,000 of net income attributable 
to business N is in the business N CFTE category. Under paragraph 
(b)(4)(viii)(d)(1) of this section, the $10,000 of country X taxes 
is allocated to the business M CFTE category and $10,000 of the 
country Y taxes is allocated to the business N CFTE category. The 
additional $15,000 of country Y tax imposed with respect to the 
inter-branch payment is assigned to the business M CFTE category 
because for U.S. Federal income tax purposes, the related $75,000 of 
income that country Y is taxing is in the business M CFTE category. 
Therefore, $25,000 of taxes ($10,000 of country X taxes and $15,000 
of the country Y taxes) is related to the $100,000 of net income in 
the business M CFTE category and the other $10,000 of country Y 
taxes is related to the $50,000 of net income in the business N CFTE 
category. See paragraph (b)(4)(viii)(c)(1) of this section.

[[Page 7327]]

The allocations of country X taxes will be in proportion to the 
distributive shares of income to which they relate and will be 
deemed to be in accordance with the partners' interests in the 
partnership if such taxes are allocated 75% to A and 25% to B. The 
allocations of country Y taxes will be in proportion to the 
distributive shares of income to which they relate and will be 
deemed to be in accordance with the partners' interests in the 
partnership if $15,000 of such taxes is allocated 75% to A and 25% 
to B and the other $10,000 of such taxes is allocated 50% to A and 
50% to B. No inference is intended with respect to the application 
of other provisions to arrangements that involve disregarded 
payments.
    (iii) Assume that the facts are the same as in paragraph (i) of 
this Example 24, except that in order to reflect the $75,000 payment 
from DE1 to DE2, the partnership agreement allocates $75,000 of the 
income attributable to business M equally between A and B (50% 
each). In order to prevent separating the CFTEs from the related 
foreign income, the $75,000 payment is treated as a divisible part 
of the business M activity and, therefore, a separate activity. See 
paragraph (b)(4)(viii)(c)(2)(iii) of this section. Because items 
from the disregarded payment and business N are both shared equally 
between A and B, the disregarded payment activity and the business N 
activity are treated as a single CFTE category. See paragraph 
(b)(4)(viii)(c)(2)(i) of this section. Accordingly, $25,000 of net 
income attributable to business M is in the business M CFTE category 
and $75,000 of income of business M attributable to the disregarded 
payment and the $50,000 of net income attributable to business N are 
in the business N CFTE category. Under paragraph (b)(4)(viii)(d)(1) 
of this section, the $10,000 of country X taxes is allocated to the 
business M CFTE category and all $25,000 of the country Y taxes is 
allocated to the business N CFTE category. The allocations of 
country X taxes will be in proportion to the distributive shares of 
income to which they relate and will be deemed to be in accordance 
with the partners' interests in the partnership if such taxes are 
allocated 75% to A and 25% to B. The allocations of country Y taxes 
will be in proportion to the distributive shares of income to which 
they relate and will be deemed to be in accordance with the 
partners' interests in the partnership if such taxes are allocated 
50% to A and 50% to B.
* * * * *


Sec.  1.704-1T  [Removed]

0
Par. 3. Section 1.704-1T is removed.

0
Par. 4. Section 1.909-0 is added to read as follows:


Sec.  1.909-0  Outline of regulation provisions for section 909.

    This section lists the headings for Sec. Sec.  1.909-1 through 
1.909-6.


Sec.  1.909-1  Definitions and special rules.

    (a) Definitions.
    (b) Taxes paid or accrued by a partnership, S corporation or trust.
    (c) Related income of a partnership, S corporation or trust.
    (d) Application of section 909 to pre-1987 accumulated profits and 
pre-1987 foreign income taxes.
    (e) Effective/applicability date.


Sec.  1.909-2  Splitter arrangements.

    (a) Foreign tax credit splitting event.
    (1) In general.
    (2) Split taxes not taken into account.
    (b) Splitter arrangements.
    (1) Reverse hybrid splitter arrangements.
    (i) In general.
    (ii) Split taxes from a reverse hybrid splitter arrangement.
    (iii) Related income from a reverse hybrid splitter arrangement.
    (iv) Reverse hybrid.
    (v) Examples.
    (2) Loss-sharing splitter arrangements.
    (i) In general.
    (ii) U.S. combined income group.
    (iii) Income and shared loss of a U.S. combined income group.
    (iv) Split taxes from a loss-sharing splitter arrangement.
    (v) Related income from a loss-sharing splitter arrangement.
    (vi) Foreign group relief or other loss-sharing regime.
    (vii) Examples.
    (3) Hybrid instrument splitter arrangements.
    (i) U.S. equity hybrid instrument splitter arrangement.
    (ii) U.S. debt hybrid instrument splitter arrangement.
    (4) Partnership inter-branch payment splitter arrangements.
    (i) In general.
    (ii) Split taxes from a partnership inter-branch payment splitter 
arrangement.
    (iii) Related income from a partnership inter-branch payment 
splitter arrangement.
    (c) Effective/applicability date.


Sec.  1.909-3  Rules regarding related income and split taxes.

    (a) Interim rules for identifying related income and split taxes.
    (b) Split taxes on deductible disregarded payments.
    (c) Effective/applicability date.


Sec.  1.909-4  Coordination rules.

    (a) Interim rules.
    (b) Effective/applicability date.


Sec.  1.909-5  2011 and 2012 splitter arrangements.

    (a) Taxes paid or accrued in taxable years beginning in 2011.
    (b) Taxes paid or accrued in certain taxable years beginning in 
2012 with respect to a foreign consolidated group splitter arrangement.
    (c) Effective/applicability date.


Sec.  1.909-6  Pre-2011 foreign tax credit splitting events.

    (a) Foreign tax credit splitting event.
    (1) In general.
    (2) Taxes not subject to suspension under section 909.
    (3) Taxes subject to suspension under section 909.
    (b) Pre-2011 splitter arrangements.
    (1) Reverse hybrid structure splitter arrangements.
    (2) Foreign consolidated group splitter arrangements.
    (3) Group relief or other loss-sharing regime splitter 
arrangements.
    (i) In general.
    (ii) Split taxes and related income.
    (4) Hybrid instrument splitter arrangements.
    (i) In general.
    (ii) U.S. equity hybrid instrument splitter arrangement.
    (iii) U.S. debt hybrid instrument splitter arrangement.
    (c) General rules for applying section 909 to pre-2011 split taxes 
and related income.
    (1) Annual determination.
    (2) Separate categories.
    (d) Special rules regarding related income.
    (1) Annual adjustments.
    (2) Effect of separate limitation losses and deficits.
    (3) Pro rata method for distributions out of earnings and profits 
that include both related income and other income.
    (4) Alternative method for distributions out of earnings and 
profits that include both related income and other income.
    (5) Distributions, deemed distributions, and inclusions out of 
related income.
    (6) Carryover of related income.
    (7) Related income taken into account by a section 902 shareholder.
    (8) Related income taken into account by a payor section 902 
corporation.
    (9) Related income taken into account by an affiliated group of 
corporations that includes a section 902 shareholder.
    (10) Distributions of previously-taxed earnings and profits.
    (e) Special rules regarding pre-2011 split taxes.
    (1) Taxes deemed paid pro rata out of pre-2011 split taxes and 
other taxes.
    (2) Pre-2011 split taxes deemed paid in pre-2011 taxable years.
    (3) Carryover of pre-2011 split taxes.
    (4) Determining when pre-2011 split taxes are no longer treated as 
pre-2011 split taxes.
    (f) Rules relating to partnerships and trusts.
    (1) Taxes paid or accrued by partnerships.

[[Page 7328]]

    (2) Section 704(b) allocations.
    (3) Trusts.
    (g) Interaction between section 909 and other Code provisions.
    (1) Section 904(c).
    (2) Section 905(a).
    (3) Section 905(c).
    (4) Other foreign tax credit provisions.
    (h) Effective/applicability date.


Sec.  1.909-0T  [Removed]

0
Par. 5. Section 1.909-0T is removed.

0
Par. 6. Sections 1.909-1 is added to read as follows:


Sec.  1.909-1  Definitions and special rules.

    (a) Definitions. For purposes of section 909, this section, and 
Sec. Sec.  1.909-2 through 1.909-5, the following definitions apply:
    (1) The term section 902 corporation means any foreign corporation 
with respect to which one or more domestic corporations meet the 
ownership requirements of section 902(a) or (b).
    (2) The term section 902 shareholder means any domestic corporation 
that meets the ownership requirements of section 902(a) or (b) with 
respect to a section 902 corporation.
    (3) The term payor means a person that pays or accrues a foreign 
income tax within the meaning of Sec.  1.901-2(f), and also includes a 
person that takes foreign income taxes paid or accrued by a 
partnership, S corporation, estate or trust into account pursuant to 
section 702(a)(6), section 901(b)(5) or section 1373(a).
    (4) The term covered person means, with respect to a payor--
    (i) Any entity in which the payor holds, directly or indirectly, at 
least a 10 percent ownership interest (determined by vote or value);
    (ii) Any person that holds, directly or indirectly, at least a 10 
percent ownership interest (determined by vote or value) in the payor; 
or
    (iii) Any person that bears a relationship that is described in 
section 267(b) or 707(b) to the payor.
    (5) The term foreign income tax means any income, war profits, or 
excess profits tax paid or accrued to any foreign country or to any 
possession of the United States. A foreign income tax includes any tax 
paid or accrued in lieu of such a tax within the meaning of section 
903.
    (6) The term post-1986 foreign income taxes has the meaning 
provided in Sec.  1.902-1(a)(8).
    (7) The term post-1986 undistributed earnings has the meaning 
provided in Sec.  1.902-1(a)(9).
    (8) The term disregarded entity means an entity that is disregarded 
as an entity separate from its owner, as provided in Sec.  301.7701-
2(c)(2)(i) of this chapter.
    (9) The term hybrid partnership means a partnership that is subject 
to income tax in a foreign country as a corporation (or otherwise at 
the entity level) on the basis of residence, place of incorporation, 
place of management or similar criteria.
    (b) Taxes paid or accrued by a partnership, S corporation or trust. 
Under section 909(c)(1), section 909 applies at the partner level, and 
similar rules apply in the case of an S corporation or trust. 
Accordingly, in the case of foreign income taxes paid or accrued by a 
partnership, S corporation or trust, taxes allocated to one or more 
partners, shareholders or beneficiaries (as the case may be) will be 
treated as split taxes to the extent such taxes would be split taxes if 
the partner, shareholder or beneficiary had paid or accrued the taxes 
directly on the date such taxes are taken into account by the partner 
under sections 702 and 706(a), by the shareholder under section 
1373(a), or by the beneficiary under section 901(b)(5). Any such split 
taxes will be suspended in the hands of the partner, shareholder or 
beneficiary.
    (c) Related income of a partnership, S corporation or trust. For 
purposes of determining whether related income is taken into account by 
a covered person, related income of a partnership, S corporation or 
trust is considered to be taken into account by the partner, 
shareholder or beneficiary to whom the related income is allocated.
    (d) Application of section 909 to pre-1987 accumulated profits and 
pre-1987 foreign income taxes. Section 909 and Sec. Sec.  1.909-1 
through 1.909-5 will apply to pre-1987 accumulated profits (as defined 
in Sec.  1.902-1(a)(10)(i)) and pre-1987 foreign income taxes (as 
defined in Sec.  1.902-1(a)(10)(iii)) of a section 902 corporation 
attributable to taxable years beginning on or after January 1, 2012.
    (e) Effective/applicability date. This section applies to taxable 
years ending after February 9, 2015. See 26 CFR 1.909-1T (revised as of 
April 1, 2014) for rules applicable to taxable years beginning on or 
after January 1, 2011, and ending on or before February 9, 2015.


Sec.  1.909-1T  [Removed]

0
Par. 7. Section 1.909-1T is removed.

0
Par. 8. Section 1.909-2 is added to read as follows:


Sec.  1.909-2  Splitter arrangements.

    (a) Foreign tax credit splitting event--(1) In general. There is a 
foreign tax credit splitting event with respect to foreign income taxes 
paid or accrued if and only if, in connection with an arrangement 
described in paragraph (b) of this section (a splitter arrangement) the 
related income was, is or will be taken into account for U.S. Federal 
income tax purposes by a person that is a covered person with respect 
to the payor of the tax. Foreign income taxes that are paid or accrued 
in connection with a splitter arrangement are split taxes to the extent 
provided in paragraph (b) of this section. Income (or, as appropriate, 
earnings and profits) that was, is or will be taken into account by a 
covered person in connection with a splitter arrangement is related 
income to the extent provided in paragraph (b) of this section.
    (2) Split taxes not taken into account. Split taxes will not be 
taken into account for U.S. Federal income tax purposes before the 
taxable year in which the related income is taken into account by the 
payor or, in the case of split taxes paid or accrued by a section 902 
corporation, by a section 902 shareholder of such section 902 
corporation. Therefore, in the case of split taxes paid or accrued by a 
section 902 corporation, split taxes will not be taken into account for 
purposes of sections 902 or 960, or for purposes of determining 
earnings and profits under section 964(a), before the taxable year in 
which the related income is taken into account by the payor section 902 
corporation, a section 902 shareholder of the section 902 corporation, 
or a member of the section 902 shareholder's consolidated group. See 
Sec.  1.909-3(a) for rules relating to when split taxes and related 
income are taken into account.
    (b) Splitter arrangements. The arrangements set forth in this 
paragraph (b) are splitter arrangements.
    (1) Reverse hybrid splitter arrangements--(i) In general. A reverse 
hybrid is a splitter arrangement when a payor pays or accrues foreign 
income taxes with respect to income of a reverse hybrid. A reverse 
hybrid splitter arrangement exists even if the reverse hybrid has a 
loss or a deficit in earnings and profits for a particular year for 
U.S. Federal income tax purposes (for example, due to a timing 
difference).
    (ii) Split taxes from a reverse hybrid splitter arrangement. The 
foreign income taxes paid or accrued with respect to income of the 
reverse hybrid are split taxes.
    (iii) Related income from a reverse hybrid splitter arrangement. 
The related income with respect to split taxes from a reverse hybrid 
splitter arrangement is the earnings and profits (computed for U.S. 
Federal income tax purposes) of the reverse hybrid attributable to the 
activities of the reverse hybrid that gave rise to income included in 
the payor's foreign tax base with respect to which

[[Page 7329]]

the split taxes were paid or accrued. Accordingly, related income of 
the reverse hybrid includes items of income or expense attributable to 
a disregarded entity owned by the reverse hybrid only to the extent 
that the income attributable to the activities of the disregarded 
entity is included in the payor's foreign tax base.
    (iv) Reverse hybrid. The term reverse hybrid means an entity that 
is a corporation for U.S. Federal income tax purposes but is a fiscally 
transparent entity (under the principles of Sec.  1.894-1(d)(3)) or a 
branch under the laws of a foreign country imposing tax on the income 
of the entity.
    (v) Examples. The following examples illustrate the rules of 
paragraph (b)(1) of this section.

    Example 1.  (i) Facts. USP, a domestic corporation, wholly owns 
DE, a disregarded entity for U.S. federal income tax purposes that 
is organized in country A and treated as a corporation for country A 
tax purposes. DE wholly owns RH, a corporation for U.S. Federal 
income tax purposes that is organized in country A and treated as a 
fiscally transparent entity for country A tax purposes. Country A 
imposes an income tax at the rate of 30% on DE with respect to the 
items of income earned by RH. Prior to year 1, RH had no income for 
country A purposes and had no post-1986 earnings and profits for 
U.S. Federal income tax purposes. In year 1, RH earns 200u of income 
on which DE pays 60u of country A tax. Pursuant to Sec.  1.901-
2(f)(4)(ii), USP is treated as legally liable for the 60u of country 
A taxes paid by DE. DE has no other income. In year 2, RH earns no 
income and incurs no losses or expenses. At the end of year 2, RH 
distributes 100u to DE.
    (ii) Result. (A) Split taxes and related income. Pursuant to 
Sec.  1.909-2(b)(1)(iv), RH is a reverse hybrid because it is a 
corporation for U.S. Federal income tax purposes and a fiscally 
transparent entity for country A purposes. Pursuant to Sec.  1.909-
2(b)(1), RH is a covered person with respect to USP because USP 
wholly owns RH for U.S. Federal income tax purposes. Pursuant to 
Sec.  1.909-2(b)(1)(i), there is a splitter arrangement with respect 
to RH because USP paid country A tax with respect to the income of 
RH. All 60u of taxes paid by USP in year 1 with respect to the 
income of RH are split taxes pursuant to Sec.  1.909-2(b)(1)(ii). 
The post-1986 earnings and profits of RH are 200u as of the end of 
year 1. Pursuant to Sec.  1.909-2(b)(1)(iii), the related income in 
year 1 is the 200u of RH's earnings and profits that are 
attributable to the activities that gave rise to the split taxes. No 
additional split taxes or related income arise in year 2.
    (B) Distribution. Because DE is a disregarded entity, the 100u 
distribution by RH at the end of year 2 is treated as a dividend to 
USP. Pursuant to Sec.  1.909-6(d)(7) and Sec.  1.909-3(a), 100u of 
the 200u of related income of RH, or 50%, is taken into account by 
USP by reason of the 100u dividend. Accordingly, pursuant to Sec.  
1.909-6(e)(4) and Sec.  1.909-3(a), a ratable portion of the split 
taxes, or 30u of taxes (50% of 60u), is no longer treated as split 
taxes and is taken into account by USP for U.S. Federal income tax 
purposes.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that in year 2, RH has a 100u loss for U.S. Federal income 
tax purposes as well as for country A tax purposes. For country A 
tax purposes, DE takes the 100u loss into account in year 2 and may 
not carry back the 100u loss to offset its country A taxable income 
for year 1. At the end of year 2, RH distributes 100u to DE.
    (ii) Result. (A) Split taxes and related income. The split taxes 
and related income for year 1 are the same as in Example 1. Pursuant 
to Sec.  1.909-2(b)(1)(iii), Sec.  1.909-6(d)(1) and Sec.  1.909-
3(a), the total related income of RH is reduced to 100u (200u - 
100u) in year 2 because RH incurred a 100u loss in year 2 
attributable to the activities that are included in DE's country A 
tax base.
    (B) Distribution. Because DE is a disregarded entity, the 100u 
distribution by RH at the end of year 2 is treated as a dividend to 
USP. Pursuant to Sec.  1.909-6(d)(7) and Sec.  1.909-3(a), 100u of 
the 100u of related income of RH, or 100%, is taken into account by 
USP by reason of the 100u dividend. Accordingly, pursuant to Sec.  
1.909-6(e)(4) and Sec.  1.909-3(a), a ratable portion of the split 
taxes, or 60u of taxes (100% of 60u), is no longer treated as split 
taxes and is taken into account by USP for U.S. Federal income tax 
purposes.

    (2) Loss-sharing splitter arrangements--(i) In general. A foreign 
group relief or other loss-sharing regime is a loss-sharing splitter 
arrangement to the extent that a shared loss of a U.S. combined income 
group could have been used to offset income of that group in the 
current or in a prior foreign taxable year (usable shared loss) but is 
used instead to offset income of another U.S. combined income group.
    (ii) U.S. combined income group. The term U.S. combined income 
group means an individual or a corporation and all entities (including 
entities that are fiscally transparent for U.S. Federal income tax 
purposes under the principles of Sec.  1.894-1(d)(3)) that for U.S. 
Federal income tax purposes combine any of their respective items of 
income, deduction, gain or loss with the income, deduction, gain or 
loss of such individual or corporation. A U.S. combined income group 
can arise, for example, as a result of an entity being disregarded or, 
in the case of a partnership or hybrid partnership and a partner, as a 
result of the allocation of income or any other item of the partnership 
to the partner. For purposes of this paragraph (b)(2)(ii), a branch is 
treated as an entity, all members of a U.S. affiliated group of 
corporations (as defined in section 1504) that file a consolidated 
return are treated as a single corporation, and two or more individuals 
that file a joint return are treated as a single individual. A U.S. 
combined income group may consist of a single individual or corporation 
and no other entities, but cannot include more than one individual or 
corporation. In addition, an entity may belong to more than one U.S. 
combined income group. For example, a hybrid partnership with two 
corporate partners that do not combine any of their items of income, 
deduction, gain or loss for U.S. Federal income tax purposes is in a 
separate U.S. combined income group with each of its partners.
    (iii) Income and shared loss of a U.S. combined income group--(A) 
Income. Except as otherwise provided in this paragraph (b)(2)(iii)(A), 
the income of a U.S. combined income group is the aggregate amount of 
taxable income recognized or taken into account for foreign tax 
purposes by those members that have positive taxable income for foreign 
tax purposes. In the case of an entity that is fiscally transparent 
(under the principles of Sec.  1.894-1(d)(3)) for foreign tax purposes 
and that is a member of more than one U.S. combined income group, the 
foreign taxable income of the entity is allocated between or among the 
groups under foreign tax law. In the case of an entity that is not 
fiscally transparent for foreign tax purposes and that is a member of 
more than one U.S. combined income group, the foreign taxable income of 
the entity is allocated between or among those groups based on U.S. 
Federal income tax principles. For example, in the case of a hybrid 
partnership, the foreign taxable income of the partnership is allocated 
between or among the groups in the manner the partnership allocates the 
income under section 704(b). To the extent the foreign taxable income 
would be income under U.S. Federal income tax principles in another 
year, the income is allocated between or among the groups based on how 
the hybrid partnership would allocate the income if the income were 
recognized for U.S. Federal income tax purposes in the year in which 
the income is recognized for foreign tax purposes. To the extent the 
foreign taxable income would not constitute income under U.S. Federal 
income tax principles in any year, the income is allocated between or 
among the groups in the same manner as the partnership items 
attributable to the activity giving rise to the foreign taxable income.
    (B) Shared loss. The term shared loss means a loss of one entity 
for foreign tax purposes that, in connection with a foreign group 
relief or other loss-sharing regime, is taken into account by one or 
more other entities. Except as otherwise provided in this paragraph 
(b)(2)(iii)(B), the amount of shared loss of a U.S.

[[Page 7330]]

combined income group is the sum of the shared losses of all members of 
the U.S. combined income group. In the case of an entity that is 
fiscally transparent (under the principles of Sec.  1.894-1(d)(3)) for 
foreign tax purposes and that is a member of more than one U.S. 
combined income group, the shared loss of the entity is allocated 
between or among the groups under foreign tax law. In the case of an 
entity that is not fiscally transparent for foreign tax purposes and 
that is a member of more than one U.S. combined income group, the 
shared loss of the entity will be allocated between or among those 
groups based on U.S. Federal income tax principles. For example, in the 
case of a hybrid partnership, the shared loss of the partnership will 
be allocated between or among the groups in the manner the partnership 
allocates the loss under section 704(b). To the extent the shared loss 
would be a loss under U.S. Federal income tax principles in another 
year, the loss is allocated between or among the groups based on how 
the partnership would allocate the loss if the loss were recognized for 
U.S. Federal income tax purposes in the year in which the loss is 
recognized for foreign tax purposes. To the extent the shared loss 
would not constitute a loss under U.S. Federal income tax principles in 
any year, the loss is allocated between or among the groups in the same 
manner as the partnership items attributable to the activity giving 
rise to the shared loss.
    (iv) Split taxes from a loss-sharing splitter arrangement. Split 
taxes from a loss-sharing splitter arrangement are foreign income taxes 
paid or accrued by a member of the U.S. combined income group with 
respect to income from the current foreign taxable year, or, in the 
case of a foregone carryback loss, from the prior foreign taxable year, 
equal to the amount of the usable shared loss of that group that 
offsets income of another U.S. combined income group.
    (v) Related income from a loss-sharing splitter arrangement. The 
related income with respect to split taxes from a loss-sharing splitter 
arrangement is an amount of income of the individual or corporate 
member of the U.S. combined income group equal to the amount of income 
under foreign tax law of that U.S. combined income group that is offset 
by the usable shared loss of another U.S. combined income group.
    (vi) Foreign group relief or other loss-sharing regime. A foreign 
group relief or other loss-sharing regime exists when an entity may 
surrender its loss to offset the income of one or more other entities. 
A foreign group relief or other loss-sharing regime does not include an 
allocation of loss of an entity that is a partnership or other fiscally 
transparent entity (under the principles of Sec.  1.894-1(d)(3)) for 
foreign tax purposes or regimes in which foreign tax is imposed on 
combined income (such as a foreign consolidated regime), as described 
in Sec.  1.901-2(f)(3).
    (vii) Examples. The following examples illustrate the rules of 
paragraph (b)(2) of this section.

    Example 1.  (i) Facts. USP, a domestic corporation, wholly owns 
CFC1, a corporation organized in country A. CFC1 wholly owns CFC2 
and CFC3, both corporations organized in country A. CFC2 wholly owns 
DE, an entity organized in country A. DE is a corporation for 
country A tax purposes and a disregarded entity for U.S. Federal 
income tax purposes. Country A has a loss-sharing regime under which 
a loss of CFC1, CFC2, CFC3 or DE may be used to offset the income of 
one or more of the others. Country A imposes an income tax at the 
rate of 30% on the taxable income of corporations organized in 
country A. In year 1, before any loss sharing, CFC1 has no income, 
CFC2 has income of 50u, CFC3 has income of 200u, and DE has a loss 
of 100u. Under the provisions of country A's loss-sharing regime, 
the group decides to use DE's 100u loss to offset 100u of CFC3's 
income. After the loss is shared, for country A's tax purposes, CFC2 
still has 50u of income on which it pays 15u of country A tax. CFC3 
has income of 100u (200u less the 100u shared loss) on which it pays 
30u of country A tax. For U.S. Federal income tax purposes, the loss 
sharing with CFC3 is not taken into account. Because DE is a 
disregarded entity, its 100u loss is taken into account by CFC2 and 
reduces its earnings and profits for U.S. Federal income tax 
purposes. Accordingly, before application of section 909, CFC2 has a 
loss for earnings and profits purposes of 65u (50u income less 15u 
taxes paid to country A less 100u loss of DE). CFC2 also has the 
U.S. dollar equivalent of 15u of foreign income taxes to add to its 
post-1986 foreign income taxes pool. CFC3 has earnings and profits 
of 170u (200u income less 30u of taxes) and the dollar equivalent of 
30u of foreign income taxes to add to its post-1986 foreign income 
taxes pool.
    (ii) Result. Pursuant to Sec.  1.909-2(b)(2)(ii), CFC2 and DE 
constitute one U.S. combined income group, while CFC1 and CFC3 each 
constitute separate U.S. combined income groups. Pursuant to Sec.  
1.909-2(b)(2)(iii)(A), the income of the CFC2 U.S. combined income 
group is 50u (CFC2's country A taxable income of 50u). The income of 
the CFC3 U.S. combined income group is 200u (CFC3's country A 
taxable income of 200u). Pursuant to Sec.  1.909-2(b)(2)(iii)(B), 
the shared loss of the CFC2 U.S. combined income group includes the 
100u of shared loss incurred by DE. The usable shared loss of the 
CFC2 U.S. combined income group is 50u, the amount of the group's 
shared loss that could have otherwise offset CFC2's 50u of country A 
taxable income that is included in the income of the CFC2 U.S. 
combined income group. There is a splitter arrangement because the 
50u usable shared loss of the CFC2 U.S. combined income group was 
used instead to offset income of CFC3, which is included in the CFC3 
U.S. combined income group. Pursuant to Sec.  1.909-2(b)(2)(iv), the 
split taxes are the 15u of country A income taxes paid by CFC2 on 
50u of income, an amount of income of the CFC2 U.S. combined income 
group equal to the amount of usable shared loss of that group that 
was used to offset income of the CFC3 U.S. combined income group. 
Pursuant to Sec.  1.909-2(b)(2)(v), the related income is the 50u of 
CFC3's income that equals the amount of income of the CFC3 U.S. 
combined income group that was offset by the usable shared loss of 
the CFC2 U.S. combined income group.
    Example 2. (i) Facts. USP, a domestic corporation, wholly owns 
CFC1, a corporation organized in country B. CFC1 wholly owns CFC2 
and CFC3, both corporations organized in country B. CFC2 wholly owns 
DE, an entity organized in country B. DE is a corporation for 
country B tax purposes and a disregarded entity for U.S. Federal 
income tax purposes. CFC2 and CFC3 each own 50% of HP1, an entity 
organized in country B. HP1 is a corporation for country B tax 
purposes and a partnership for U.S. Federal income tax purposes. All 
items of income and loss of HP1 are allocated for U.S. Federal 
income tax purposes equally between CFC2 and CFC3, and all entities 
use the country B currency ``u'' as their functional currency. 
Country B has a loss-sharing regime under which a loss of any of 
CFC1, CFC2, CFC3, DE, and HP1 may be used to offset the income of 
one or more of the others. Country B imposes an income tax at the 
rate of 30% on the taxable income of corporations organized in 
country B. In year 1, before any loss sharing, CFC2 has income of 
100u, CFC1 and CFC3 have no income, DE has a loss of 100u, and HP1 
has income of 200u. Under the provisions of country B's loss-sharing 
regime, the group decides to use DE's 100u loss to offset 100u of 
HP1's income. After the loss is shared, for country B tax purposes, 
CFC2 has 100u of income on which it pays 30u of country B income 
tax, and HP1 has 100u of income (200u less the 100u shared loss) on 
which it pays 30u of country B income tax. For U.S. Federal income 
tax purposes, the loss sharing with HP1 is not taken into account, 
and, because DE is a disregarded entity, its 100u loss is taken into 
account by CFC2 and reduces CFC2's earnings and profits for U.S. 
Federal income tax purposes. The 200u income of HP1 is allocated 50/
50 to CFC2 and CFC3, as is the 30u of country B income tax paid by 
HP1. Accordingly, before application of section 909, for U.S. 
Federal income tax purposes, CFC2 has earnings and profits of 55u 
(100u income plus 100u share of HP1's income less 100u loss of DE 
less 30u country B income tax paid by CFC2 less 15u share of HP1's 
country B income tax) and the dollar equivalent of 45u of country B 
income tax to add to its post-1986 foreign income taxes pool. CFC3 
has earnings and profits of 85u (100u share of HP1's income less 15u 
share of HP1's country B income taxes) and the

[[Page 7331]]

dollar equivalent of 15u of country B income tax to add to its post-
1986 foreign income taxes pool.
    (ii) U.S. combined income groups. Pursuant to Sec.  1.909-
2(b)(2)(ii), because the income and loss of HP1 are combined in part 
with the income and loss of both CFC2 and CFC3, it belongs to both 
of the separate CFC2 and CFC3 U.S. combined income groups. DE is a 
member of the CFC2 U.S. combined income group.
    (iii) Income of the U.S. combined income groups. Pursuant to 
Sec.  1.909-2(b)(2)(iii)(A), the income of the CFC2 U.S. combined 
income group is the 200u country B taxable income of the members of 
the group with positive taxable incomes (CFC2's country B taxable 
income of 100u plus 50% of HP1's country B taxable income of 200u, 
or 100u). Because DE does not have positive taxable income for 
country B tax purposes, its 100u loss is not included in the income 
of the CFC2 U.S. combined income group. The income of the CFC3 U.S. 
combined income group is 100u (50% of HP1's country B taxable income 
of 200u, or 100u).
    (iv) Shared loss of the U.S. combined income groups. Pursuant to 
Sec.  1.909-2(b)(2)(iii)(B), the shared loss of the CFC2 U.S. 
combined income group is the 100u loss incurred by DE that is used 
to offset 100u of HP1's income. The CFC3 U.S. combined income group 
has no shared loss. Pursuant to Sec.  1.909-2(b)(2)(i), the usable 
shared loss of the CFC2 U.S. combined income group is 100u, the full 
amount of the group's 100u shared loss that could have been used to 
offset income of the CFC2 U.S. combined income group had the loss 
been used to offset 100u of CFC2's country B taxable income.
    (v) Income offset by shared loss. The shared loss of the CFC2 
combined income group is used to offset 100u country B taxable 
income of HP1. Because the taxable income of HP1 is allocated 50/50 
between the CFC2 and CFC3 U.S. combined income groups, the shared 
loss is treated as offsetting 50u of the CFC2 U.S. combined income 
group's income and 50u of the CFC3 U.S. combined income group's 
income.
    (vi) Splitter arrangement. There is a splitter arrangement 
because 50u of the 100u usable shared loss of the CFC2 U.S. combined 
income group was used to offset income of the CFC3 U.S. combined 
income group. Pursuant to Sec.  1.909-2(b)(2)(iv), the split taxes 
are the 15u of country B income tax paid by CFC2 on 50u of its 
income, which is equal to the amount of the CFC2 U.S. combined 
income group's usable shared loss that was used to offset income of 
another U.S. combined income group. Pursuant to Sec.  1.909-
2(b)(2)(v), the related income is the 50u of CFC3's income that was 
offset by the usable shared loss of the CFC2 U.S. combined income 
group.

    (3) Hybrid instrument splitter arrangements--(i) U.S. equity hybrid 
instrument splitter arrangement--(A) In general. A U.S. equity hybrid 
instrument is a splitter arrangement if:
    (1) Under the laws of a foreign jurisdiction in which the 
instrument owner is subject to tax, the instrument gives rise to income 
includible in the instrument owner's income and such inclusion results 
in foreign income taxes paid or accrued by the instrument owner;
    (2) Under the laws of a foreign jurisdiction in which the issuer is 
subject to tax, the instrument gives rise to deductions that are 
incurred or otherwise taken into account by the issuer; and
    (3) The events that give rise to income includible in the 
instrument owner's income for foreign tax purposes as described in 
paragraph (b)(3)(i)(A)(1) of this section, and to deductions for the 
issuer for foreign tax purposes as described in paragraph 
(b)(3)(i)(A)(2) of this section, do not result in an inclusion of 
income for the instrument owner for U.S. federal income tax purposes.
    (B) Split taxes from a U.S. equity hybrid instrument splitter 
arrangement. Split taxes from a U.S. equity hybrid instrument splitter 
arrangement equal the total amount of foreign income taxes paid or 
accrued by the owner of the hybrid instrument less the amount of 
foreign income taxes that would have been paid or accrued had the owner 
of the U.S. equity hybrid instrument not been subject to foreign tax on 
income from the instrument with respect to the events described in 
Sec.  1.909-2(b)(3)(i)(A).
    (C) Related income from a U.S. equity hybrid instrument splitter 
arrangement. The related income with respect to split taxes from a U.S. 
equity hybrid instrument splitter arrangement is income of the issuer 
of the U.S. equity hybrid instrument in an amount equal to the amounts 
giving rise to the split taxes that are deductible by the issuer for 
foreign tax purposes, determined without regard to the actual amount of 
the issuer's income or earnings and profits for U.S. Federal income tax 
purposes.
    (D) U.S. equity hybrid instrument. The term U.S. equity hybrid 
instrument means an instrument that is treated as equity for U.S. 
Federal income tax purposes but for foreign income tax purposes either 
is treated as indebtedness or otherwise entitles the issuer to a 
deduction with respect to such instrument.

    (E) Example. (i) Facts. USP, a domestic corporation, wholly owns 
CFC1, which wholly owns CFC2. Both CFC1 and CFC2 are corporations 
organized in country A. CFC2 issues an instrument to CFC1 that is 
treated as indebtedness for country A tax purposes but equity for 
U.S. Federal income tax purposes. Under country A's income tax laws, 
the instrument accrues interest at the end of each month, which 
results in a deduction for CFC2 and an income inclusion and tax 
liability for CFC1 in country A. The accrual of interest does not 
result in an inclusion of income for CFC1 for U.S. Federal income 
tax purposes. Pursuant to the terms of the instrument, CFC2 makes a 
distribution at the end of the year equal to the amounts of interest 
that have accrued during the year, and such payment is treated as a 
dividend that is included in the income of CFC1 for U.S. Federal 
income tax purposes.
    (ii) Result. Pursuant to Sec.  1.909-2(b)(3)(i)(D), because the 
instrument is treated as equity for U.S. Federal income tax purposes 
but is treated as indebtedness for country A tax purposes, it is a 
U.S. equity hybrid instrument. Pursuant to Sec.  1.909-
2(b)(3)(i)(A)(3), because the accrual of interest under foreign law 
does not result in an inclusion of income of CFC1 for U.S. Federal 
income tax purposes, there is a splitter arrangement. The fact that 
the payment of the accrued amount at the end of the year pursuant to 
the terms of the instrument gives rise to a dividend that is 
included in income of CFC1 for U.S. Federal income tax purposes does 
not change the result because it is the accrual of interest and not 
the payment that gives rise to income or deductions under foreign 
law. The payments will be treated as a distribution of related 
income to the extent provided by Sec.  1.909-3 and Sec.  1.909-6(d).

    (ii) U.S. debt hybrid instrument splitter arrangement--(A) In 
general. A U.S. debt hybrid instrument is a splitter arrangement if 
foreign income taxes are paid or accrued by the issuer of a U.S. debt 
hybrid instrument with respect to income in an amount equal to the 
interest (including original issue discount) paid or accrued on the 
instrument that is deductible for U.S. Federal income tax purposes but 
that does not give rise to a deduction under the laws of a foreign 
jurisdiction in which the issuer is subject to tax.
    (B) Split taxes from a U.S. debt hybrid instrument splitter 
arrangement. Split taxes from a U.S. debt hybrid instrument splitter 
arrangement are the foreign income taxes paid or accrued by the issuer 
on the income that would have been offset by the interest paid or 
accrued on the U.S. debt hybrid instrument had such interest been 
deductible for foreign tax purposes.
    (C) Related income from a U.S. debt hybrid instrument splitter 
arrangement. The related income from a U.S. debt hybrid instrument 
splitter arrangement is the gross amount of the interest income 
recognized for U.S. Federal income tax purposes by the owner of the 
U.S. debt hybrid instrument, determined without regard to the actual 
amount of the owner's income or earnings and profits for U.S. Federal 
income tax purposes.
    (D) U.S. debt hybrid instrument. The term U.S. debt hybrid 
instrument means an instrument that is treated as equity for foreign 
tax purposes but as

[[Page 7332]]

indebtedness for U.S. Federal income tax purposes.
    (4) Partnership inter-branch payment splitter arrangements--(i) In 
general. An allocation of foreign income tax paid or accrued by a 
partnership with respect to an inter-branch payment as described in 
Sec.  1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011) (the 
inter-branch payment tax) is a splitter arrangement to the extent the 
inter-branch payment tax is not allocated to the partners in the same 
proportion as the distributive shares of income in the CFTE category to 
which the inter-branch payment tax is or would be assigned under Sec.  
1.704-1(b)(4)(viii)(d) without regard to Sec.  1.704-
1(b)(4)(viii)(d)(3).
    (ii) Split taxes from a partnership inter-branch payment splitter 
arrangement. The split taxes from a partnership inter-branch splitter 
arrangement equal the excess of the amount of the inter-branch payment 
tax allocated to a partner under the partnership agreement over the 
amount of the inter-branch payment tax that would have been allocated 
to the partner if the inter-branch payment tax had been allocated to 
the partners in the same proportion as the distributive shares of 
income in the CFTE category referred to in paragraph (b)(4)(i) of this 
section.
    (iii) Related income from a partnership inter-branch payment 
splitter arrangement. The related income from a partnership inter-
branch payment splitter arrangement equals the amount of income 
allocated to a partner that exceeds the amount of income that would 
have been allocated to the partner if income in the CFTE category 
referred to in paragraph (b)(4)(i) of this section in the amount of the 
inter-branch payment had been allocated to the partners in the same 
proportion as the inter-branch payment tax was allocated under the 
partnership agreement.
    (c) Effective/applicability date. This section applies to foreign 
income taxes paid or accrued in taxable years ending after February 9, 
2015. However, a taxpayer may choose to apply the provisions of Sec.  
1.909-2T (as contained in 26 CFR part 1, revised as of April 1, 2014) 
in lieu of this section to foreign income taxes paid or accrued in its 
first taxable year ending after February 9, 2015, and in taxable years 
of foreign corporations with respect to which the taxpayer is a 
domestic shareholder (as defined in Sec.  1.902-1(a)) that end with or 
within that first taxable year. See 26 CFR 1.909-2T (revised as of 
April 1, 2014) for rules applicable to foreign income taxes paid or 
accrued in taxable years beginning on or after January 1, 2012, and 
ending on or before February 9, 2015.


Sec.  1.909-2T  [Removed]

0
Par. 9. Section 1.909-2T is removed.

0
Par.10. Section 1.909-3 is added to read as follows:


Sec.  1.909-3  Rules regarding related income and split taxes.

    (a) Interim rules for identifying related income and split taxes. 
The principles of paragraphs (d) through (f) of Sec.  1.909-6 apply to 
related income and split taxes in taxable years beginning on or after 
January 1, 2011, except that the alternative method for identifying 
distributions of related income described in Sec.  1.909-6(d)(4) 
applies only to identify the amount of pre-2011 split taxes of a 
section 902 corporation that are suspended as of the first day of the 
section 902 corporation's first taxable year beginning on or after 
January 1, 2011.
    (b) Split taxes on deductible disregarded payments. Split taxes 
include taxes paid or accrued in taxable years beginning on or after 
January 1, 2011, with respect to the amount of a disregarded payment 
that is deductible by the payor of the disregarded payment under the 
laws of a foreign jurisdiction in which the payor of the disregarded 
payment is subject to tax on related income from a splitter 
arrangement. The amount of the deductible disregarded payment to which 
this paragraph (b) applies is limited to the amount of related income 
from such splitter arrangement.
    (c) Effective/applicability date. This section applies to taxable 
years ending after February 9, 2015. See 26 CFR 1.909-3T (revised as of 
April 1, 2014) for rules applicable to taxable years beginning on or 
after January 1, 2011, and ending on or before February 9, 2015.


Sec.  1.909-3T  [Removed]

0
Par. 11. Section 1.909-3T is removed.

0
Par. 12. Section 1.909-4 is added to read as follows:


Sec.  1.909-4  Coordination rules.

    (a) Interim rules. The principles of paragraph (g) of Sec.  1.909-6 
apply to taxable years beginning on or after January 1, 2011.
    (b) Effective/applicability date. This section applies to taxable 
years ending after February 9, 2015. See 26 CFR 1.909-4T (revised as of 
April 1, 2014) for rules applicable to taxable years beginning on or 
after January 1, 2011, and ending on or before February 9, 2015.


Sec.  1.909-4T  [Removed]

0
Par. 13. Section 1.909-4T is removed.

0
Par. 14. Section 1.909-5 is added to read as follows:


Sec.  1.909-5  2011 and 2012 splitter arrangements.

    (a) Taxes paid or accrued in taxable years beginning in 2011. (1) 
Foreign income taxes paid or accrued by any person in a taxable year 
beginning on or after January 1, 2011, and before January 1, 2012, in 
connection with a pre-2011 splitter arrangement (as defined in Sec.  
1.909-6(b)), are split taxes to the same extent that such taxes would 
have been treated as pre-2011 split taxes if such taxes were paid or 
accrued by a section 902 corporation in a taxable year beginning on or 
before December 31, 2010. The related income with respect to split 
taxes from such an arrangement is the related income described in Sec.  
1.909-6(b), determined as if the payor were a section 902 corporation.
    (2) Foreign income taxes paid or accrued by any person in a taxable 
year beginning on or after January 1, 2011, and before January 1, 2012, 
in connection with a partnership inter-branch payment splitter 
arrangement described in Sec.  1.909-2(b)(4) are split taxes to the 
extent that such taxes are identified as split taxes in Sec.  1.909-
2(b)(4)(ii). The related income with respect to the split taxes is the 
related income described in Sec.  1.909-2(b)(4)(iii).
    (b) Taxes paid or accrued in certain taxable years beginning in 
2012 with respect to a foreign consolidated group splitter arrangement. 
Foreign income taxes paid or accrued by any person in a taxable year 
beginning on or after January 1, 2012, and on or before February 14, 
2012, in connection with a foreign consolidated group splitter 
arrangement described in Sec.  1.909-6(b)(2) are split taxes to the 
same extent that such taxes would have been treated as pre-2011 split 
taxes if such taxes were paid or accrued by a section 902 corporation 
in a taxable year beginning on or before December 31, 2010. The related 
income with respect to split taxes from such an arrangement is the 
related income described in Sec.  1.909-6(b)(2), determined as if the 
payor were a section 902 corporation.
    (c) Effective/applicability date. The rules of this section apply 
to foreign income taxes paid or accrued in taxable years beginning on 
or after January 1, 2011, and on or before February 14, 2012.


Sec.  1.909-5T  [Removed]

0
Par. 15. Section 1.909-5T is removed.

0
Par. 16. Sections 1.909-6 is added to read as follows:

[[Page 7333]]

Sec.  1.909-6  Pre-2011 foreign tax credit splitting events.

    (a) Foreign tax credit splitting event--(1) In general. This 
section provides rules for determining whether foreign income taxes 
paid or accrued by a section 902 corporation (as defined in section 
909(d)(5)) in taxable years beginning on or before December 31, 2010 
(pre-2011 taxable years and pre-2011 taxes) are suspended under section 
909 in taxable years beginning after December 31, 2010, (post-2010 
taxable years) of a section 902 corporation. Paragraph (b) of this 
section identifies an exclusive list of arrangements that will be 
treated as giving rise to foreign tax credit splitting events in pre-
2011 taxable years (pre- 2011 splitter arrangements). Paragraphs (c), 
(d), and (e) of this section provide rules for determining the related 
income and pre-2011 split taxes paid or accrued with respect to pre-
2011 splitter arrangements. Paragraph (f) of this section provides 
rules concerning the application of section 909 to partnerships and 
trusts. Paragraph (g) of this section provides rules concerning the 
interaction between section 909 and other Internal Revenue Code (Code) 
provisions.
    (2) Taxes not subject to suspension under section 909. Pre-2011 
taxes that will not be suspended under section 909 or paragraph (a) of 
this section are:
    (i) Any pre-2011 taxes that were not paid or accrued in connection 
with a pre-2011 splitter arrangement identified in paragraph (b) of 
this section;
    (ii) Any pre-2011 taxes that were paid or accrued in connection 
with a pre-2011 splitter arrangement identified in paragraph (b) of 
this section (pre-2011 split taxes) but that were deemed paid under 
section 902(a) or 960 on or before the last day of the section 902 
corporation's last pre-2011 taxable year;
    (iii) Any pre-2011 split taxes if either the payor section 902 
corporation took the related income into account in a pre-2011 taxable 
year or a section 902 shareholder (as defined in Sec.  1.909-1(a)(2)) 
of the relevant section 902 corporation took the related income into 
account on or before the last day of the section 902 corporation's last 
pre-2011 taxable year; and
    (iv) Any pre-2011 split taxes paid or accrued by a section 902 
corporation in taxable years of such section 902 corporation beginning 
before January 1, 1997.
    (3) Taxes subject to suspension under section 909. To the extent 
that the section 902 corporation paid or accrued pre-2011 split taxes 
that are not described in paragraph (a)(2) of this section, section 909 
and the regulations under that section will apply to such pre-2011 
split taxes for purposes of applying sections 902 and 960 in post-2010 
taxable years of the section 902 corporation. Accordingly, these taxes 
will be removed from the section 902 corporation's pools of post-1986 
foreign income taxes and suspended under section 909 as of the first 
day of the section 902 corporation's first post-2010 taxable year. 
There is no increase to a section 902 corporation's earnings and 
profits for the amount of any pre-2011 taxes to which section 909 
applies that were previously deducted in computing earnings and profits 
in a pre-2011 taxable year.
    (b) Pre-2011 splitter arrangements. The arrangements set forth in 
this paragraph (b) are pre-2011 splitter arrangements.
    (1) Reverse hybrid structure splitter arrangements. A reverse 
hybrid structure exists when a section 902 corporation owns an interest 
in a reverse hybrid. A reverse hybrid is an entity that is a 
corporation for U.S. Federal income tax purposes but is a pass-through 
entity or a branch under the laws of a foreign country imposing tax on 
the income of the entity. As a result, the owner of the reverse hybrid 
is subject to tax on the income of the entity under foreign law. A pre-
2011 splitter arrangement involving a reverse hybrid structure exists 
when pre-2011 taxes are paid or accrued by a section 902 corporation 
with respect to income of a reverse hybrid that is a covered person 
with respect to the section 902 corporation. A pre-2011 splitter 
arrangement involving a reverse hybrid structure may exist even if the 
reverse hybrid has a deficit in earnings and profits for a particular 
year (for example, due to a timing difference). Such taxes paid or 
accrued by the section 902 corporation are pre-2011 split taxes. The 
related income is the earnings and profits (computed for U.S. Federal 
income tax purposes) of the reverse hybrid attributable to the 
activities of the reverse hybrid that gave rise to income included in 
the foreign tax base with respect to which the pre-2011 split taxes 
were paid or accrued. Accordingly, related income of the reverse hybrid 
would not include any item of income or expense attributable to a 
disregarded entity (as defined in Sec.  301.7701-2(c)(2)(i) of this 
chapter) owned by the reverse hybrid if income attributable to the 
activities of the disregarded entity is not included in the foreign tax 
base.
    (2) Foreign consolidated group splitter arrangements. A foreign 
consolidated group exists when a foreign country imposes tax on the 
combined income of two or more entities. Tax is considered imposed on 
the combined income of two or more entities even if the combined income 
is computed under foreign law by attributing to one such entity the 
income of one or more entities. A foreign consolidated group is a pre-
2011 splitter arrangement to the extent that the taxpayer did not 
allocate the foreign consolidated tax liability among the members of 
the foreign consolidated group based on each member's share of the 
consolidated taxable income included in the foreign tax base under the 
principles of Sec.  1.901-2(f)(3) (revised as of April 1, 2011). A pre-
2011 splitter arrangement involving a foreign consolidated group may 
exist even if one or more members has a deficit in earnings and profits 
for a particular year (for example, due to a timing difference). Pre-
2011 taxes paid or accrued with respect to the income of a foreign 
consolidated group are pre-2011 split taxes to the extent that taxes 
paid or accrued by one member of the foreign consolidated group are 
imposed on a covered person's share of the consolidated taxable income 
included in the foreign tax base. The related income is the earnings 
and profits (computed for U.S. Federal income tax purposes) of such 
other member attributable to the activities of that other member that 
gave rise to income included in the foreign tax base with respect to 
which the pre-2011 split taxes were paid or accrued. No inference 
should be drawn from the treatment of foreign consolidated groups under 
section 909 as to the determination of the person who paid the foreign 
income tax for U.S. Federal income tax purposes.
    (3) Group relief or other loss-sharing regime splitter 
arrangements--(i) In general. A foreign group relief or other loss-
sharing regime exists when one entity with a loss permits the loss to 
be used to offset the income of one or more entities (shared loss). A 
pre-2011 splitter arrangement involving a shared loss exists when the 
following three conditions are met:
    (A) There is an instrument that is treated as indebtedness under 
the laws of the jurisdiction in which the issuer is subject to tax and 
that is disregarded for U.S. Federal income tax purposes (disregarded 
debt instrument). Examples of a disregarded debt instrument include a 
debt obligation between two disregarded entities that are owned by the 
same section 902 corporation, two disregarded entities that are owned 
by a partnership with one or more partners that are section 902 
corporations, a section 902 corporation and a disregarded entity that 
is owned by that

[[Page 7334]]

section 902 corporation, or a partnership in which the section 902 
corporation is a partner and a disregarded entity that is owned by such 
partnership.
    (B) The owner of the disregarded debt instrument pays a foreign 
income tax attributable to a payment or accrual on the instrument.
    (C) The payment or accrual on the disregarded debt instrument gives 
rise to a deduction for foreign tax purposes and the issuer of the 
instrument incurs a shared loss that is taken into account under 
foreign law by one or more entities that are covered persons with 
respect to the owner of the instrument.
    (ii) Split taxes and related income. In situations described in 
paragraph (b)(3)(i) of this section, pre-2011 taxes paid or accrued by 
the owner of the disregarded debt instrument with respect to amounts 
paid or accrued on the instrument (up to the amount of the shared loss) 
are pre-2011 split taxes. The related income of a covered person is an 
amount equal to the shared loss, determined without regard to the 
actual amount of the covered person's earnings and profits.
    (4) Hybrid instrument splitter arrangements--(i) In general. A 
hybrid instrument for purposes of this paragraph (b)(4) is an 
instrument that either is treated as equity for U.S. Federal income tax 
purposes but is treated as indebtedness for foreign tax purposes (U.S. 
equity hybrid instrument), or is treated as indebtedness for U.S. 
Federal income tax purposes but is treated as equity for foreign tax 
purposes (U.S. debt hybrid instrument).
    (ii) U.S. equity hybrid instrument splitter arrangement. If the 
issuer of a U.S. equity hybrid instrument is a covered person with 
respect to a section 902 corporation that is the owner of the U.S. 
equity hybrid instrument, there is a pre-2011 splitter arrangement with 
respect to the portion of the pre-2011 taxes paid or accrued by the 
owner section 902 corporation with respect to the amounts on the 
instrument that are deductible by the issuer as interest under the laws 
of a foreign jurisdiction in which the issuer is subject to tax but 
that do not give rise to income for U.S. Federal income tax purposes. 
Pre-2011 split taxes paid or accrued by the section 902 corporation 
equal the total amount of pre-2011 taxes paid or accrued by the section 
902 corporation less the amount of pre-2011 taxes that would have been 
paid or accrued had the section 902 corporation not been subject to tax 
on income from the U.S. equity hybrid instrument. The related income of 
the issuer of the U.S. equity hybrid instrument is an amount equal to 
the amounts that are deductible by the issuer for foreign tax purposes, 
determined without regard to the actual amount of the issuer's earnings 
and profits.
    (iii) U.S. debt hybrid instrument splitter arrangement. If the 
owner of a U.S. debt hybrid instrument is a covered person with respect 
to a section 902 corporation that is the issuer of the U.S. debt hybrid 
instrument, there is a pre-2011 splitter arrangement with respect to 
the portion of the pre-2011 taxes paid or accrued by the section 902 
corporation on income in an amount equal to the interest (including 
original issue discount) paid or accrued on the instrument that is 
deductible for U.S. Federal income tax purposes but that does not give 
rise to a deduction under the laws of a foreign jurisdiction in which 
the issuer is subject to tax. Pre-2011 split taxes are the pre-2011 
taxes paid or accrued by the section 902 corporation on the income that 
would have been offset by the interest paid or accrued on the U.S. debt 
hybrid instrument had such interest been deductible for foreign tax 
purposes. The related income with respect to a U.S. debt hybrid 
instrument is the gross amount of the interest income recognized for 
U.S. Federal income tax purposes by the owner of the U.S. debt hybrid 
instrument, determined without regard to the actual amount of the 
owner's earnings and profits.
    (c) General rules for applying section 909 to pre-2011 split taxes 
and related income--(1) Annual determination. The determination of 
related income, other income, pre-2011 split taxes, and other taxes, 
and the portion of these amounts that were distributed, deemed paid or 
otherwise transferred or eliminated must be made on an annual basis 
beginning with the first taxable year of the section 902 corporation 
beginning after December 31, 1996 (post-1996 taxable year) in which the 
section 902 corporation paid or accrued a pre-2011 tax with respect to 
a pre-2011 splitter arrangement and ending with the section 902 
corporation's last pre-2011 taxable year. Annual amounts of related 
income and pre-2011 split taxes are aggregated for each separate pre-
2011 splitter arrangement.
    (2) Separate categories. The determination of annual and aggregate 
amounts of related income and pre-2011 split taxes with respect to each 
pre-2011 splitter arrangement must be made for each separate category 
as defined in Sec.  1.904-4(m) of the section 902 corporation, each 
covered person, and any other person that succeeds to the related 
income and pre-2011 split taxes. In the case of a pre-2011 splitter 
arrangement involving a shared loss (as described in paragraph (b)(3) 
of this section), the amount of the related income in each separate 
category of the covered person is equal to the amount of income in that 
separate category that was offset by the shared loss for foreign tax 
purposes. In the case of a pre-2011 splitter arrangement involving a 
U.S. equity hybrid instrument (as described in paragraph (b)(4)(ii) of 
this section), the related income is assigned to the issuer's separate 
categories in the same proportions as the pre-2011 split taxes. 
Earnings and profits, including related income, are assigned to 
separate categories under the rules of Sec. Sec.  1.904-4, 1.904-5, and 
1.904-7. Foreign income taxes, including pre-2011 split taxes, are 
assigned to separate categories under the rules of Sec.  1.904-6. A 
section 902 shareholder must consistently apply methodologies for 
determining pre-2011 split taxes and related income with respect to all 
pre-2011 splitter arrangements.
    (d) Special rules regarding related income--(1) Annual adjustments. 
In the case of each pre-2011 splitter arrangement involving a reverse 
hybrid or a foreign consolidated group (as described in paragraphs 
(b)(1) and (2) of this section, respectively), a covered person's 
aggregate amount of related income must be adjusted each year by the 
net amount of income and expense attributable to the activities of the 
covered person that give rise to income included in the foreign tax 
base, even if the net amount is negative and regardless of whether the 
section 902 corporation paid or accrued any pre-2011 split taxes in 
such year.
    (2) Effect of separate limitation losses and deficits. Related 
income is determined without regard to the application of Sec.  1.960-
1(i)(4) (relating to the effect of separate limitation losses on 
earnings and profits in another separate category) or section 952(c)(1) 
(relating to certain earnings and profits deficits).
    (3) Pro rata method for distributions out of earnings and profits 
that include both related income and other income. If the earnings and 
profits of a covered person include amounts attributable to both 
related income and other income, including earnings and profits 
attributable to taxable years beginning before January 1, 1997, then 
distributions, deemed distributions, and inclusions out of earnings and 
profits (for example, under sections 301, 304, 367(b), 951(a), 964(e), 
1248, or 1293) of the covered person are considered made out of related 
income and other income on a pro rata basis. Any reduction of a

[[Page 7335]]

covered person's earnings and profits that results from a payment on 
stock that is not treated as a dividend for U.S. Federal income tax 
purposes (for example, pursuant to section 312(n)(7)) will also reduce 
related income and other income on a pro rata basis.
    (4) Alternative method for distributions out of earnings and 
profits that include both related income and other income. Solely for 
purposes of identifying the amount of pre-2011 split taxes of a section 
902 corporation that are suspended as of the first day of the section 
902 corporation's first post-2010 taxable year, in lieu of the rule set 
forth in paragraph (d)(3) of this section, a section 902 shareholder 
may choose to treat all distributions, deemed distributions, and 
inclusions out of earnings and profits of a covered person as 
attributable first to related income. A section 902 shareholder may 
choose to use this alternative method on a timely filed original income 
tax return for the first post-2010 taxable year in which the 
shareholder computes an amount of foreign income taxes deemed paid with 
respect to a section 902 corporation that paid or accrued pre-2011 
split taxes. Such choice by a section 902 shareholder is evidenced by 
employing the method on its income tax return; the section 902 
shareholder need not file a separate statement. A section 902 
shareholder that chooses this alternative method must consistently 
apply it with respect to all pre-2011 splitter arrangements.
    (5) Distributions, deemed distributions, and inclusions of related 
income. Distributions, deemed distributions, and inclusions of related 
income (including indirectly through a partnership) to persons other 
than the payor section 902 corporation retain their character as 
related income with respect to the associated pre-2011 split taxes.
    (6) Carryover of related income. Related income carries over to 
other corporations in the same manner as earnings and profits carry 
over under section 381, Sec.  1.367(b)-7, or similar rules, and retains 
its character as related income with respect to the associated pre-2011 
split taxes.
    (7) Related income taken into account by a section 902 shareholder. 
Related income will be considered taken into account by a section 902 
shareholder to the extent that the related income is recognized as 
gross income by the section 902 shareholder, or by an affiliated 
corporation described in paragraph (d)(9) of this section, upon a 
distribution, deemed distribution, or inclusion (such as under section 
951(a)) out of the earnings and profits of the covered person 
attributable to such related income.
    (8) Related income taken into account by a payor section 902 
corporation. Related income will be considered taken into account by a 
payor section 902 corporation to the extent that:
    (i) The related income is reflected in the earnings and profits of 
such section 902 corporation for U.S. Federal income tax purposes by 
reason of a distribution, deemed distribution, or inclusion out of the 
earnings and profits of the covered person attributable to such related 
income; or
    (ii) The related income is reflected as a positive adjustment to 
the earnings and profits of such section 902 corporation for U.S. 
Federal income tax purposes by reason of the section 902 corporation 
and the covered person combining in a transaction described in section 
381(a)(1) or (a)(2).
    (9) Related income taken into account by an affiliated group of 
corporations that includes a section 902 shareholder. A section 902 
shareholder will be considered to have taken related income into 
account if one or more members of an affiliated group of corporations 
(as defined in section 1504) that files a consolidated Federal income 
tax return that includes the section 902 shareholder takes the related 
income into account.
    (10) Distributions of previously-taxed earnings and profits. 
Distributions and deemed distributions described in paragraph (d) of 
this section (including in the case of a section 902 shareholder that 
has chosen the alternative method described in paragraph (d)(4) of this 
section) do not include distributions of amounts described in section 
959(c)(1) or (c)(2), which are distributed before amounts described in 
section 959(c)(3).
    (e) Special rules regarding pre-2011 split taxes--(1) Taxes deemed 
paid pro-rata out of pre-2011 split taxes and other taxes. If the pre-
2011 taxes of a section 902 corporation include both pre-2011 split 
taxes and other taxes, then foreign income taxes deemed paid under 
section 902 or 960 or otherwise removed from post-1986 foreign income 
taxes in pre-2011 taxable years will be treated as attributable to pre-
2011 split taxes and other taxes on a pro-rata basis.
    (2) Pre-2011 split taxes deemed paid in pre-2011 taxable years. 
Pre-2011 split taxes deemed paid in pre-2011 taxable years in 
connection with a dividend paid to a shareholder described in section 
902(b) retain their character as pre-2011 split taxes. The section 
902(b) shareholder will be treated as the payor section 902 corporation 
with respect to those pre-2011 split taxes.
    (3) Carryover of pre-2011 split taxes. Pre-2011 split taxes that 
carry over to another foreign corporation, including under section 381, 
Sec.  1.367(b)-7 or similar rules, retain their character as pre-2011 
split taxes. The transferee foreign corporation will be treated as the 
payor section 902 corporation with respect to those pre-2011 split 
taxes.
    (4) Determining when pre-2011 split taxes are no longer treated as 
pre-2011 split taxes. For each pre-2011 splitter arrangement, as 
related income is taken into account by the payor section 902 
corporation or a section 902 shareholder as provided in paragraph (d) 
of this section, a ratable portion of the associated pre-2011 split 
taxes will no longer be treated as pre-2011 split taxes. In the case of 
a pre-2011 splitter arrangement involving a reverse hybrid or a foreign 
consolidated group (as described in paragraphs (b)(1) and (2) of this 
section, respectively), if aggregate related income is reduced to zero 
(other than as a result of a distribution, deemed distribution, or 
inclusion described in paragraph (d) of this section) or less than 
zero, pre-2011 split taxes will retain their character as pre-2011 
split taxes until the amount of aggregate related income is positive 
and the related income is taken into account by the payor section 902 
corporation or a section 902 shareholder as provided in paragraph (d) 
of this section.
    (f) Rules relating to partnerships and trusts--(1) Taxes paid or 
accrued by partnerships. In the case of foreign income taxes paid or 
accrued by a partnership, the taxes will be treated as pre-2011 split 
taxes to the extent such taxes are allocated to one or more section 902 
corporations and would be pre-2011 split taxes if the partner section 
902 corporation had paid or accrued the taxes directly on the date such 
taxes are included by the section 902 corporation under sections 702 
and 706(a). Further, any foreign income taxes subject to section 909 
will be suspended in the hands of the partner section 902 corporation.
    (2) Section 704(b) allocations. Partnership allocations that 
satisfy the requirements of section 704(b) and the regulations 
thereunder will not constitute pre-2011 splitter arrangements except to 
the extent the arrangement is otherwise described in paragraph (b) of 
this section (for example, a payment or accrual on a disregarded debt 
instrument that gives rise to a shared loss).
    (3) Trusts. Rules similar to the rules of paragraph (f)(1) of this 
section will apply in the case of any trust with one or more 
beneficiaries that is a section 902 corporation.

[[Page 7336]]

    (g) Interaction between section 909 and other Code provisions--(1) 
Section 904(c). Section 909 does not apply to excess foreign income 
taxes that were paid or accrued in pre-2011 taxable years and carried 
forward and deemed paid or accrued under section 904(c) in a post-2010 
taxable year.
    (2) Section 905(a). For purposes of determining in post-2010 
taxable years the allowable deduction for foreign income taxes paid or 
accrued under section 164(a), the carryover of excess foreign income 
taxes under section 904(c), and the extended period for claiming a 
credit or refund under section 6511(d)(3)(A), foreign income taxes to 
which section 909 applies are first taken into account and treated as 
paid or accrued in the year in which the related income is taken into 
account, and not in the earlier year to which the tax relates 
(determined without regard to section 909).
    (3) Section 905(c). If a redetermination of foreign income taxes 
claimed as a direct credit under section 901 occurs in a post-2010 
taxable year and the foreign tax redetermination relates to a pre-2011 
taxable year, to the extent such foreign tax redetermination increased 
the amount of foreign income taxes paid or accrued with respect to the 
pre-2011 taxable year (for example, due to an additional assessment of 
foreign tax or a payment of a previously accrued tax not paid within 
two years), section 909 will not apply to such taxes. If a 
redetermination of foreign tax paid or accrued by a section 902 
corporation occurs in a post-2010 taxable year and increases the amount 
of foreign income taxes paid or accrued by the section 902 corporation 
with respect to a pre-2011 taxable year (for example, due to an 
additional assessment of foreign tax or a payment of a previously 
accrued tax not paid within two years), such taxes will be treated as 
pre-2011 taxes. Section 909 will apply to such taxes if they are pre-
2011 split taxes and the taxes will be suspended in the post-2010 
taxable year in which they would otherwise be taken into account as a 
prospective adjustment to the section 902 corporation's pools of post-
1986 foreign income taxes.
    (4) Other foreign tax credit provisions. Section 909 does not 
affect the applicability of other restrictions or limitations on the 
foreign tax credit under existing law, including, for example, the 
substantiation requirements of section 905(b).
    (h) Effective/applicability date. This section applies to foreign 
income taxes paid or accrued by section 902 corporations in pre-2011 
taxable years for purposes of computing foreign income taxes deemed 
paid with respect to distributions or inclusions out of earnings and 
profits of section 902 corporations in taxable years of the section 902 
corporation ending after February 9, 2015. See 26 CFR 1.909-6T (revised 
as of April 1, 2014) for rules applicable to foreign income taxes paid 
or accrued by section 902 corporations in pre-2011 taxable years for 
purposes of computing foreign income taxes deemed paid with respect to 
distributions or inclusions out of earnings and profits of section 902 
corporations in taxable years of the section 902 corporation beginning 
after December 31, 2010, and ending on or before February 9, 2015.


Sec.  1.909-6T  [Removed]

0
Par. 17. Section 1.909-6T is removed.

Rosemary Sereti,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: February 4, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-02614 Filed 2-9-15; 8:45 am]
BILLING CODE 4830-01-P