Ownership Attribution for Purposes of Determining Whether a Person Is Related to a Controlled Foreign Corporation; Rents Derived in the Active Conduct of a Trade or Business, 22751-22756 [2019-10464]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 97 (Monday, May 20, 2019)]
[Proposed Rules]
[Pages 22751-22756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10464]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125135-15]
RIN 1545-BM90


Ownership Attribution for Purposes of Determining Whether a 
Person Is Related to a Controlled Foreign Corporation; Rents Derived in 
the Active Conduct of a Trade or Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide rules 
regarding the attribution of ownership of stock or other interests for 
purposes of determining whether a person is a related person with 
respect to a controlled foreign corporation (CFC) under section 
954(d)(3). In addition, the proposed regulations provide rules for 
determining whether a CFC is considered to derive rents in the active 
conduct of a trade or business for purposes of computing foreign 
personal holding company income (FPHCI). The regulations would affect 
United States persons with direct or indirect ownership interests in 
certain foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 19, 2019.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125135-15), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
125135-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-125135-
15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Rose E. Jenkins at (202) 317-6934; concerning submissions of comments 
and requests for a public hearing, Regina L. Johnson at 202-317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
sections 954 and 958 of the Internal Revenue Code (Code). Section 
954(a) defines foreign base company income (FBCI), which is a category 
of subpart F income. Subpart F income generally is income earned by a 
CFC that is taken into account in computing the amount that a United 
States shareholder (as defined in section 951(b)) of the CFC must 
include in income under section 951(a)(1)(A). FBCI includes foreign 
personal holding company income, as defined in section 954(c), as well 
as certain types of income from sales and services. The determination 
of whether certain types of sales and services income constitute FBCI 
depends, in part, on whether the income is earned from a transaction 
that involves a related person, as defined under section 954(d)(3). See 
section 954(d) and (e). The definition of related person under section 
954(d)(3) is also relevant in determining whether certain income 
qualifies for an exception to FPHCI. See, for example, sections 
954(c)(2)(A), 954(c)(3), and 954(c)(6). As provided in section 
952(a)(2), subpart F income also includes insurance income (as defined 
under section 953), and the rules in

[[Page 22752]]

section 953 similarly reference the definition of related person in 
section 954(d)(3). The definition of related person under section 
954(d)(3) is also relevant in determining whether an exception to the 
definition of United States property applies for purposes of section 
956. See section 956(c)(2)(L)(ii)(II). Additionally, certain provisions 
outside of subpart F \1\ reference the definition of related person in 
section 954(d)(3). See, for example, sections 267A, 904(d)(2)(I), 
988(a)(3)(C), 1297(b)(2), and 1471(e)(2).
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    \1\ References in this preamble to subpart F are references to 
subpart F, part III, subchapter N, chapter 1 of the Code.
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    Section 954(d)(3) provides that a person is a related person with 
respect to a CFC if the person is (i) an individual who controls the 
CFC; (ii) a corporation, a partnership, a trust, or an estate that 
controls or is controlled by the CFC; or (iii) a corporation, a 
partnership, a trust, or an estate that is controlled by the same 
person or persons that control the CFC. With respect to a corporation, 
control means the ownership, directly or indirectly, of stock 
possessing more than 50 percent of (i) the total voting power of all 
classes of stock entitled to vote or (ii) the total value of stock of 
the corporation. With respect to a partnership, trust, or estate, 
control means the ownership, directly or indirectly, of more than 50 
percent (by value) of the beneficial interests in the partnership, 
trust, or estate. Section 954(d)(3) states that ``rules similar to the 
rules of section 958 shall apply'' for purposes of determining 
ownership. Section 958 provides rules for determining direct, indirect, 
and constructive stock ownership and states that such rules ``shall 
apply'' for purposes of section 954(d)(3) to the extent that the effect 
is to treat a person as a related person within the meaning of section 
954(d)(3). See section 958(b). Sections 954(d)(3) and 958 were added to 
the Code in 1962, as part of the legislation that enacted the subpart F 
regime, and section 954(d)(3) provided as originally enacted that ``the 
rules for determining ownership of stock prescribed by section 958 
shall apply.'' Revenue Act of 1962 (Public Law 87-834, 76 Stat. 960). 
The change in the language of section 954(d)(3) to provide for the 
application of rules ``similar to the rules of'' section 958 was made 
in 1986, but no corresponding change was made to the language in 
section 958. Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 
2085).
    Final regulations published in the Federal Register on May 15, 1964 
(T.D. 6734, 29 FR 6385), cross-referenced section 958 and the 
regulations thereunder for purposes of determining ownership under 
section 954(d)(3) as then in effect. Final regulations published in the 
Federal Register on September 7, 1995 (T.D. 8618, 60 FR 46500), and 
corrected on December 4, 1995 (60 FR 62024), revised the regulations, 
in part to provide that the principles of section 958, modified to 
apply to domestic as well as foreign entities, applied for purposes of 
determining direct and indirect ownership under section 954(d)(3). 
Thus, under current Sec.  1.954-1(f)(2)(iv), the principles of section 
958(a) and (b) apply, without regard to whether an entity is foreign or 
domestic, to determine direct and indirect ownership for section 
954(d)(3) purposes. The existing regulations do not provide any 
additional guidance beyond this general statement. These proposed 
regulations would revise the existing regulations under section 
954(d)(3) to provide some specific guidance on the application of 
principles similar to the constructive ownership rules in section 
958(b).
    This document also proposes to revise rules under section 954(c). 
FPHCI, as defined in section 954(c), generally includes rents. Section 
954(c)(1)(A). However, rents are excluded from FPHCI if they are 
received from a person other than a related person and derived in the 
active conduct of a trade or business within the meaning of section 
954(c)(2)(A) and Sec.  1.954-2(c) (the active rents exception). These 
regulations propose to revise the rules under section 954(c) to provide 
guidance on the treatment of amounts (including royalties) paid or 
incurred by a CFC in connection with the CFC's rental income for 
purposes of the active rents exception.

Explanation of Provisions

1. Definition of Related Person in Section 954(d)(3)

    Section 1.954-1(f)(1), like section 954(d)(3), provides that a 
person is a related person with respect to a CFC if the person is (i) 
an individual who controls the CFC; (ii) a corporation, a partnership, 
a trust, or an estate that controls or is controlled by the CFC; or 
(iii) a corporation, a partnership, a trust, or an estate that is 
controlled by the same person or persons that control the CFC. Section 
1.954-1(f)(2) provides that, with respect to a corporation, control 
means the ownership, directly or indirectly, of stock possessing more 
than 50 percent of the total voting power of all classes of stock 
entitled to vote or the total value of stock of the corporation. With 
respect to a trust or estate, control means the ownership, directly or 
indirectly, of more than 50 percent (by value) of the beneficial 
interests of the trust or estate. With respect to a partnership, 
control means the ownership, directly or indirectly, of more than 50 
percent (by value) of the capital or profits interest in the 
partnership.
    Section 954(d)(3) provides that rules similar to the rules of 
section 958 apply for purposes of determining whether a person is a 
related person. Similarly, current Sec.  1.954-1(f)(2)(iv) states that 
the principles of section 958 apply to determine direct or indirect 
ownership for purposes of Sec.  1.954-1(f) and further provides that 
the principles of section 958 apply without regard to whether a 
corporation, partnership, trust, or estate is foreign or domestic or 
whether an individual is a citizen or resident of the United States.
    Under section 958(a)(1), stock is considered owned by a person if 
it is owned directly or indirectly through certain foreign entities 
under section 958(a)(2). In relevant part, section 958(b) provides that 
section 318(a) (relating to the constructive ownership of stock) 
applies for purposes of section 954(d)(3), subject to certain 
modifications, to the extent that the effect is to treat a person as a 
related person within the meaning of section 954(d)(3). Section Sec.  
1.958-2 sets forth the rules in section 318(a) as modified by section 
958(b).
    Section 318 provides rules that attribute the ownership of stock to 
certain family members, between certain entities and their owners, and 
to holders of options to acquire stock. Section 318(a)(1) provides 
rules attributing stock ownership among members of a family, and 
section 318(a)(2) provides rules attributing stock ownership ``upward'' 
from an entity to the owner of an entity. In addition, section 
318(a)(3) provides specific rules that attribute the ownership of stock 
``downward'' from the owner of an entity to the entity. In particular, 
section 318(a)(3)(A) provides that stock owned, directly or indirectly, 
by or for a partner in a partnership or a beneficiary of an estate is 
considered owned by the partnership or estate. This provision applies 
to all partners and beneficiaries without regard to the size of their 
interest in the partnership or estate. See also Sec.  1.958-2(d)(1)(i). 
Section 318(a)(3)(B) similarly provides, subject to certain exceptions, 
that stock owned, directly or indirectly, by or for a beneficiary of a 
trust (or a person who is considered an owner of a trust) is considered 
owned by the trust. See also Sec.  1.958-2(d)(1)(ii). In comparison, 
section 318(a)(3)(C) attributes stock

[[Page 22753]]

owned, directly or indirectly, by or for a person to a corporation only 
if 50 percent or more in value of the stock in the corporation is 
owned, directly or indirectly, by the person. See also Sec.  1.958-
2(d)(1)(iii). Section 318(a)(4) provides that a person that has an 
option to acquire stock is considered to own the stock. See also Sec.  
1.958-2(e).
    The Department of the Treasury (Treasury Department) and the IRS 
are concerned that, in certain situations, the application of the 
section 318(a)(3)(A) and (B) constructive ownership rules, if 
incorporated into Sec.  1.954-1(f) by the reference to section 958, 
could produce inappropriate results when defining related person for 
purposes of section 954(d)(3). For example, if two otherwise unrelated 
domestic corporations each owned interests in a partnership, the 
partnership would be treated under section 318(a)(3)(A) as owning any 
stock owned directly or indirectly by the unrelated domestic 
corporations. Thus, for purposes of section 954(d)(3), the partnership 
would be treated as controlling any corporations, including CFCs, in 
which one of the domestic corporations owned more than 50 percent of 
the stock, regardless of the size of the domestic corporation's 
ownership interest in the partnership, such that a CFC of one of the 
domestic corporations would be treated as related to a CFC of the other 
domestic corporation.
    Treatment of the domestic corporations' CFCs as related persons 
with respect to one another under section 954(d)(3) could be relied 
upon by taxpayers, for example, to treat payments of interest between 
the otherwise unrelated CFCs as interest that is eligible for the 
exception from FPHCI in section 954(c)(6). Similarly, a sale of 
personal property between a CFC of one domestic corporation and a CFC 
of the other domestic corporation could give rise to foreign base 
company sales income under section 954(d). The Treasury Department and 
the IRS do not believe that either of these results is appropriate when 
the domestic corporations each own 50 percent or less of the 
partnership because the domestic corporations (and thus their CFCs) do 
not have a significant relationship to each other, for purposes of 
section 954(d)(3), which itself refers to ownership of ``more than 50 
percent'' of stock or other ownership interests, and subpart F more 
generally.
    Similarly, when two unrelated domestic corporations each own 
exactly 50 percent of the stock of a joint venture corporation, that 
joint venture corporation would be treated under section 318(a)(3)(C) 
as owning other stock owned by the domestic corporations (including 
stock of CFCs) and, accordingly, could be treated as controlling the 
domestic corporations' CFCs, such that a CFC of one of the domestic 
corporations would be treated as related to a CFC of the other domestic 
corporation. The Treasury Department and the IRS do not believe that 
section 954(d)(3) was intended to treat the CFCs of the domestic 
corporations as related persons with respect to each other or with 
respect to the joint venture corporation in these circumstances, given 
that no person owns more than 50 percent of both the joint venture 
corporation and one of the CFCs directly or indirectly, as directly or 
indirectly would commonly be understood. Accordingly, the Treasury 
Department and the IRS interpret section 954(d)(3) to qualify the 
application of the constructive ownership rules in section 318(a)(3).
    Concerns about the application of the downward attribution rules of 
section 318(a)(3) similar to those discussed in this Part 1 were raised 
in connection with proposed regulations under section 385 (REG-108060-
15) (the section 385 proposed regulations) published by the Treasury 
Department and the IRS in the Federal Register on April 8, 2016 (81 FR 
20912), as discussed in the preamble to the final regulations under 
section 385 (TD 9790) (the section 385 final regulations) published by 
the Treasury Department and the IRS in the Federal Register on October 
21, 2016 (81 FR 72858). See Part III.B.2.c.v of the Summary of Comments 
and Explanation of Revisions (81 FR 72866-72867). Accordingly, the 
section 385 final regulations revised the rules in the section 385 
proposed regulations concerning the definition of an expanded group to 
provide that section 318(a)(3) generally does not apply for such 
purpose. See Sec.  1.385-1(c)(4)(iii)(A).
    As noted in the Background section of this preamble, until 1986, 
section 954(d)(3) and section 958(b) both provided for the rules in 
section 958(b) to apply for purposes of section 954(d)(3). Although 
section 958(b) was not changed in 1986, when section 954(d)(3) was 
amended to provide that rules ``similar to'' those in section 958 would 
apply, the change to section 954(d)(3) indicates that Congress intended 
for the Treasury Department and the IRS to prescribe rules regarding 
the incorporation of section 958(b) into the definition of a related 
person under section 954(d)(3) with such modifications as may be 
appropriate. For the foregoing reasons, and consistent with the section 
385 final regulations, the Treasury Department and the IRS propose, 
pursuant to the grant of regulatory authority to the Secretary under 
section 7805(a), to revise Sec.  1.954-1(f) to provide that the rules 
of section 318(a)(3) and Sec.  1.958-2(d) do not apply for purposes of 
section 954(d)(3) and Sec.  1.954-1(f). Section 1.958-2 is also 
proposed to be revised to cross-reference the limitations on its 
applicability in Sec.  1.954-1(f). However, the revision to Sec.  
1.954-1(f) does not preclude a corporation, partnership, trust, or 
estate from being treated as controlled by the same person or persons 
that control the CFC under the other rules that remain applicable for 
purposes of section 954(d)(3) and Sec.  1.954-1(f). For example, if one 
domestic corporation (USP1) held 51 percent of the stock of a joint 
venture corporation, while an unrelated domestic corporation (USP2) 
held 49 percent of its stock, the joint venture corporation would 
continue to be a related person with respect to a CFC in which USP1 
owned 51 percent of the stock (CFC1) as a result of USP1's direct 
ownership of more than 50 percent of both entities, notwithstanding the 
fact that the joint venture corporation would no longer be treated as 
owning the stock of CFC1 owned by USP1.
    The Treasury Department and the IRS also are concerned that the 
application of the option attribution rule in section 318(a)(4) in the 
context of section 954(d)(3) could lead to inappropriate results. If, 
for example, two otherwise unrelated domestic corporations owned 51 
percent and 49 percent, respectively, of the total value of the stock 
of a joint venture CFC, and the 49-percent owner also held an option to 
acquire an additional 2 percent of the corporation, the 49-percent 
owner could take the position that it, as well as the 51-percent owner, 
controlled the CFC for purposes of section 954(d)(3). Based on this 
position, payments of interest between the joint venture CFC and 
another CFC of the 49-percent owner would be eligible for the exception 
from FPHCI in section 954(c)(6). The Treasury Department and the IRS 
have determined that it would be inappropriate to allow taxpayers to 
effectively elect related person status using options in this manner. 
Accordingly, these proposed regulations provide that section 318(a)(4) 
does not apply to treat a person that has an option to acquire stock or 
an equity interest, or an interest similar to such an option, as owning 
the stock or equity interest for purposes of the section 954(d) related 
person definition if a principal purpose for the use of the

[[Page 22754]]

option or similar interest is to cause a person to be treated as a 
related person with respect to a CFC (the option anti-abuse rule).
    Section 7(d) of Notice 2007-9, 2007-1 C.B. 401, stated that 
regulations containing a similar rule would be issued, providing that 
if a principal purpose for the use of the option or similar interest is 
to qualify dividends, interest, rents, or royalties paid by a foreign 
corporation for the section 954(c)(6) exception, the dividends, 
interest, rents, or royalties received or accrued from such foreign 
corporation will not be treated as being received or accrued from a CFC 
payor and, therefore, will not be eligible for the section 954(c)(6) 
exception. Notice 2007-9 indicated that section 7(d) would be effective 
for taxable years of foreign corporations beginning after December 31, 
2006. Accordingly, these proposed regulations also contain, pursuant to 
the grant of regulatory authority to the Secretary under section 
954(c)(6), the rule described in Notice 2007-9 (the Notice 2007-9 
option anti-abuse rule), which is proposed to apply for taxable years 
of CFCs beginning after December 31, 2006, and ending before the date 
of publication in the Federal Register of the Treasury decision 
adopting these rules as final regulations, and for the taxable years of 
United States shareholders in which or with which such years end. 
Section 7(d) of Notice 2007-9 will be obsoleted upon finalization of 
these proposed regulations.
    Comments with respect to the section 385 proposed regulations also 
raised concerns regarding the application of section 318(a)(4) to 
options in a joint venture corporation. See Part III.B.2.c.vi of the 
Summary of Comments and Explanation of Revisions (81 FR 72867). The 
section 385 final regulations address those comments by providing that 
section 318(a)(4) applies only to options that are reasonably certain 
to be exercised as described in Sec.  1.1504-4(g). See Sec.  1.385-
1(c)(4)(iii)(C). Comments are requested as to whether the concerns of 
the Treasury Department and the IRS concerning the application of 
section 318(a)(4) for purposes of the definition of related person in 
section 954(d)(3) would be better addressed by the proposed option 
anti-abuse rule or a rule similar to Sec.  1.385-1(c)(4)(iii)(C).

2. Active Rent Exception to FPHCI

    Although rents generally are included in FPHCI under section 
954(c)(1)(A), rents derived in the active conduct of a trade or 
business and received from a person that is not a related person are 
excluded from FPHCI under the active rents exception in section 
954(c)(2)(A) and Sec.  1.954-2(b)(6). The section 954 regulations 
provide the exclusive rules for determining whether rents are derived 
in the active conduct of a trade or business for purposes of section 
954(c)(2)(A). Specifically, Sec.  1.954-2(c) provides four alternative 
ways for rents to be derived in the active conduct of a trade or 
business, one of which applies to rents derived by a CFC from leasing 
property as a result of performing marketing activities. Under this 
rule, the CFC derives rents in the active conduct of a trade or 
business when the CFC satisfies an ``active marketing'' test, which, 
among other things, requires the CFC to operate in a foreign country or 
countries an organization that is regularly engaged in the business of 
marketing, or marketing and servicing, the leased property, and that is 
``substantial'' in relation to the amount of rents derived from the 
property. See Sec.  1.954-2(c)(1)(iv). Pursuant to a safe harbor in the 
regulations, an organization is ``substantial'' if its active leasing 
expenses equal or exceed 25 percent of the adjusted leasing profit. See 
Sec.  1.954-2(c)(2)(ii). The regulations generally define active 
leasing expenses to mean, subject to certain exceptions, deductions 
that are properly allocable to rental income and that would be 
allowable under section 162 if the CFC were a domestic corporation. See 
Sec.  1.954-2(c)(2)(iii). The regulations generally define adjusted 
leasing profit to mean the gross income of the lessor from rents, 
reduced by certain items. See Sec.  1.954-2(c)(2)(iv).
    A CFC may derive rent from leasing property that it does not own. 
In that case, the CFC likely will make payments to the owner of the 
property, which may be characterized as rent. For purposes of applying 
the safe harbor, the regulations provide that rents paid or incurred by 
the CFC with respect to the rental income (i) are not taken into 
account in determining active leasing expenses (in other words, are 
excluded from the definition of active leasing expenses); and (ii) are 
taken into account for purposes of determining adjusted leasing profit 
(in other words, reduce the CFC's gross income for purposes of 
determining adjusted leasing profit). Section 1.954-2(c)(2)(iii)(B) and 
(iv)(A). These rules reflect the principle that when a lessor CFC 
derives rents from property that it does not own, the substantiality of 
the CFC's marketing organization should be determined under the safe 
harbor on the basis of the CFC's income and expenses net of any 
payments that it makes for the use of the property.
    The Treasury Department and the IRS are aware that in cases in 
which a lessor CFC derives rent from leasing property that it does not 
own, the CFC may make payments to the owner of the property that are 
characterized as royalties rather than rent. For purposes of the safe 
harbor, there is no reason to distinguish between payments made by the 
CFC for the use of property based on their characterization as rents or 
royalties. For example, if a CFC pays $100 for the transfer of a 
computer program, and in turn transfers the computer program to an 
unrelated person for $150 in a transaction that is treated as a lease 
under Sec.  1.861-18, the determination of whether the CFC satisfies 
the safe harbor in Sec.  1.954-2(c)(2)(ii) should not depend on whether 
the transaction pursuant to which the CFC received the computer program 
is characterized under Sec.  1.861-18 as a license, under which the CFC 
pays royalties, or a lease, under which the CFC pays rents. In both 
cases, the CFC's $100 payment for use of the computer program should be 
excluded from active leasing expenses and reduce the CFC's adjusted 
leasing profit, in order to ensure that only expenses related to the 
marketing organization are taken into account in assessing its 
substantiality. Accordingly, the Treasury Department and the IRS 
propose to revise Sec.  1.954-2(c)(2)(iii)(B) and Sec.  1.954-
2(c)(2)(iv)(A) to apply generally to amounts paid or incurred, 
including both rents and royalties, by the lessor CFC for the right to 
use the property (or a component thereof) that generated the rental 
income.

3. Proposed Applicability Dates

    These regulations generally are proposed to apply for taxable years 
of CFCs ending on or after the date of publication in the Federal 
Register of the Treasury decision adopting these rules as final 
regulations, and for the taxable years of United States shareholders in 
which or with which such taxable years end. However, pursuant to the 
authority under section 7805(b)(1)(C), the Notice 2007-9 option anti-
abuse rule is proposed to apply for taxable years of CFCs beginning 
after December 31, 2006, and ending before the date of publication in 
the Federal Register of the Treasury decision adopting these rules as 
final regulations, and for the taxable years of United States 
shareholders in which or with which such years end. Furthermore, 
pursuant to the authority under section 7805(b)(1)(B), the rules in 
proposed Sec.  1.954-1(f)(2)(iv)(B)(1) and (3) will apply to taxable 
years of CFCs ending on or after May 17, 2019, and to taxable years of 
United States shareholders in

[[Page 22755]]

which or with which such taxable years end, with respect to amounts 
that are received or accrued by a CFC on or after May 17, 2019 to the 
extent the amounts are received or accrued by the CFC in advance of the 
period to which such amounts are attributable with a principal purpose 
of avoiding the application of Sec.  1.954-1(f)(2)(iv)(B)(1) or (3) 
with respect to such amounts. As discussed in Part 1 of this 
Explanation of Provisions, these rules would prevent taxpayers from 
effectively electing related person status in inappropriate situations, 
including to qualify payments for the exception from FPHCI in section 
954(c)(6). Accordingly, the Treasury Department and the IRS have 
determined that an immediate applicability date for these rules is 
appropriate to address the possibility of acceleration of payments to a 
period before these rules are adopted as final regulations. Until the 
effective date of the final regulations, CFCs may rely on the rules in 
proposed Sec.  1.954-1(f)(2)(iv) for taxable years ending on or after 
May 17, 2019, provided that they consistently apply the rules in 
Sec. Sec.  1.954-1(f)(2)(iv) and 1.958-2(d) and (e) for all such 
taxable years.

Special Analyses

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility.
    The Treasury Department will submit the final regulations to the 
Office of Management and Budget's Office of Information and Regulatory 
Affairs (OIRA) for Executive Order 12866 review consideration. The 
Treasury Department requests comment and any potential data regarding 
the expected impacts of this proposed regulation, including whether the 
impacts of this proposed regulation will have an annual effect on the 
economy of $100 million or more.
    Because this rulemaking is an interpretive rule and does not impose 
a collection of information on small entities, under 5 U.S.C. 603(a) 
the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
do not apply. Accordingly, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business. The 
Treasury Department requests comment on the impacts of this proposed 
regulation on small entities and businesses.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules, as well as whether modifications to the attribution 
rules similar to those proposed to be made to Sec.  1.954-1(f) should 
apply for purposes other than the definition of related person under 
section 954(d)(3) and Sec.  1.954-1(f). All comments will be available 
at www.regulations.gov or upon request. A public hearing will be 
scheduled if requested in writing by any person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is Rose E. 
Jenkins of the Office of Associate Chief Counsel (International). 
However, other personnel from the Treasury Department and the IRS 
participated in the development of these proposed regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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


Section 1.954-1 also issued under 26 U.S.C. 954(b) and (c).  Section 
1.954-2 also issued under 26 U.S.C. 954(b) and (c).

* * * * *
0
Par. 2. Section 1.954-0 is amended in paragraph (b) by adding entries 
for Sec. Sec.  1.954-1(f)(3), (f)(3)(i) through (iii), (g), and (g)(1) 
through (4) and 1.954-2(c)(2)(v) through (viii), (d)(2)(v), (i), and 
(i)(1) through (3) to read as follows:

Sec.  1.954-0 Introduction.
* * * * *
    (b) * * *
Sec.  1.954-1 Foreign base company income.
* * * * *
    (f) * * *
    (3) Applicability dates.
    (i) General rule.
    (ii) Option rule in paragraph (f)(2)(iv)(B)(2) of this section.
    (iii) Anti-abuse rule.
    (g) Distributive share of partnership income.
    (1) Application of related person and country of organization 
tests.
    (2) Application of related person test for sales and purchase 
transactions between a partnership and its controlled foreign 
corporation partner.
    (3) Examples.
    (4) Effective date.

Sec.  1.954-2 Foreign personal holding company income.
* * * * *
    (c) * * *
    (2) * * *
    (v) Leased in foreign commerce.
    (vi) Leases acquired by the CFC lessor.
    (vii) Marketing of leases.
    (viii) Cost sharing arrangements (CSAs).
* * * * *
    (d) * * *
    (2) * * *
    (v) Cost sharing arrangements (CSAs).
* * * * *
    (i) Applicability dates.
    (1) Paragraphs (c)(2)(v) through (vii).
    (2) Paragraphs (c)(2)(iii)(B) and (c)(2)(iv)(A) of this section.
    (3) Other paragraphs.

0
Par. 3. Section 1.954-1 is amended by revising paragraph (f)(2)(iv) and 
adding paragraph (f)(3) to read as follows:


Sec.  1.954-1  Foreign base company income.

* * * * *
    (f) * * *
    (2) * * *
    (iv) Direct or indirect ownership. For purposes of section 
954(d)(3) and this paragraph (f), to determine direct or indirect 
ownership--
    (A) The principles of Sec.  1.958-1 and section 958(a) apply 
without regard to whether a corporation, partnership, trust, or estate 
is foreign or domestic or whether an individual is a citizen or 
resident of the United States; and
    (B) The principles of Sec.  1.958-2 and section 958(b) apply, 
except that--
    (1) Neither section 318(a)(3), nor Sec.  1.958-2(d) or the 
principles thereof, applies to attribute stock or other interests to a 
corporation, partnership, estate, or trust; and
    (2) Neither section 318(a)(4), nor Sec.  1.958-2(e) or the 
principles thereof, applies to treat dividends, interest,

[[Page 22756]]

rents, or royalties received or accrued from a foreign corporation as 
received or accrued from a controlled foreign corporation payor if a 
principal purpose of the use of an option to acquire stock or an equity 
interest, or an interest similar to such an option, that causes the 
foreign corporation to be a controlled foreign corporation payor is to 
qualify dividends, interest, rents, or royalties paid by the foreign 
corporation for the section 954(c)(6) exception. For purposes of this 
paragraph (f)(2)(iv)(B)(2), an interest that is similar to an option to 
acquire stock or an equity interest includes, but is not limited to, a 
warrant, a convertible debt instrument, an instrument other than debt 
that is convertible into stock or an equity interest, a put, a stock or 
equity interest subject to risk of forfeiture, and a contract to 
acquire or sell stock or an equity interest.
    (3) Neither section 318(a)(4), nor Sec.  1.958-2(e) or the 
principles thereof, applies to treat a person that has an option to 
acquire stock or an equity interest, or an interest similar to such an 
option, as owning the stock or equity interest if a principal purpose 
for the use of the option or similar interest is to treat a person as a 
related person with respect to a controlled foreign corporation under 
this paragraph (f). For purposes of this paragraph (f)(2)(iv)(B)(3), an 
interest that is similar to an option to acquire stock or an equity 
interest includes, but is not limited to, a warrant, a convertible debt 
instrument, an instrument other than debt that is convertible into 
stock or an equity interest, a put, a stock or equity interest subject 
to risk of forfeiture, and a contract to acquire or sell stock or an 
equity interest.
    (3) Applicability dates--(i) General rule. Except as otherwise 
provided in this paragraph (f)(3), paragraph (f)(2)(iv) of this section 
applies to taxable years of controlled foreign corporations ending on 
or after the date of publication in the Federal Register of the 
Treasury decision adopting these rules as final regulations, and 
taxable years of United States shareholders in which or with which such 
taxable years end.
    (ii) Option rule in paragraph (f)(2)(iv)(B)(2) of this section. 
Paragraph (f)(2)(iv)(B)(2) of this section applies to taxable years of 
controlled foreign corporations beginning after December 31, 2006, and 
ending before the date of publication in the Federal Register of the 
Treasury decision adopting these rules as final regulations, and 
taxable years of United States shareholders in which or with which such 
taxable years end.
    (iii) Anti-abuse rule. Paragraphs (f)(2)(iv)(B)(1) and (3) of this 
section apply to taxable years of controlled foreign corporations 
ending on or after May 17, 2019, and to taxable years of United States 
shareholders in which or with which such taxable years end, with 
respect to amounts that are received or accrued by a controlled foreign 
corporation on or after May 17, 2019 to the extent the amounts are 
received or accrued in advance of the period to which such amounts are 
attributable with a principal purpose of avoiding the application of 
paragraph (f)(2)(iv)(B)(1) or (3) of this section with respect to such 
amounts.
* * * * *
0
Par. 4. Section 1.954-2 is amended by:
0
1. Revising paragraphs (c)(2)(iii)(B) and (c)(2)(iv)(A).
0
2. Revising the heading of paragraph (i).
0
3. Redesignating paragraph (i)(2) as paragraph (i)(3).
0
4. Adding new paragraph (i)(2).
    The revisions and addition read as follows:


Sec.  1.954-2  Foreign personal holding company income.

* * * * *
    (c) * * *
    (2) * * *
    (iii) * * *
    (B) Deductions for amounts (including rents and royalties) paid or 
incurred by the lessor for the right to use the property (or a 
component thereof) that generated the rental income;
* * * * *
    (iv) * * *
    (A) Amounts (including rents and royalties) paid or incurred by the 
lessor for the right to use the property (or a component thereof) that 
generated the rental income;
* * * * *
    (i) Applicability dates. * * *
    (2) Paragraphs (c)(2)(iii)(B) and (c)(2)(iv)(A) of this section. 
Paragraphs (c)(2)(iii)(B) and (c)(2)(iv)(A) of this section apply for 
taxable years of controlled foreign corporations ending on or after the 
date of publication in the Federal Register of the Treasury decision 
adopting these rules as final regulations, and for the taxable years of 
United States shareholders in which or with which such taxable years 
end.
* * * * *
0
Par. 5. Section 1.958-2 is amended by revising paragraph (d)(1) 
introductory text and the first sentence of paragraph (e) and adding 
paragraph (h) to read as follows:


Sec.  1.958-2  Constructive ownership of stock.

* * * * *
    (d) * * *
    (1) * * * Except as otherwise provided in paragraph (d)(2) of this 
section and Sec.  1.954-1(f)--
* * * * *
    (e) * * * Except as otherwise provided in Sec.  1.954-1(f), if any 
person has an option to acquire stock, such stock shall be considered 
as owned by such person. * * *
* * * * *
    (h) Applicability date. Paragraphs (d)(1) and (e) of this section 
apply for taxable years of controlled foreign corporations ending on or 
after the date of publication in the Federal Register of the Treasury 
decision adopting these rules as final regulations, and for the taxable 
years of United States shareholders in which or with which such taxable 
years end.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-10464 Filed 5-17-19; 8:45 am]
 BILLING CODE 4830-01-P