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, 63802-63804 [2019-24985]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 223 (Tuesday, November 19, 2019)]
[Rules and Regulations]
[Pages 63802-63804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24985]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9883]
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: Final regulations.

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SUMMARY: This document contains final regulations 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 final 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. This document finalizes the proposed regulations published on 
May 20, 2019. The regulations affect United States persons with direct 
or indirect ownership interests in certain foreign corporations.

DATES: 
    Effective Date: These regulations are effective on November 19, 
2019.
    Applicability Date: For the dates of applicability, see Sec. Sec.  
1.954-1(f)(3), 1.954-2(i)(2), and 1.958-2(h).

FOR FURTHER INFORMATION CONTACT: Kristine A. Crabtree at (202) 317-
6934.

SUPPLEMENTARY INFORMATION: 

Background

    On May 20, 2019, the Department of the Treasury (``Treasury 
Department'')

[[Page 63803]]

and the IRS published proposed regulations (REG-125135-15) under 
sections 954 and 958 in the Federal Register (84 FR 22751) (the 
``proposed regulations''). No public hearing was requested or held. All 
written comments received in response to the proposed regulations are 
available at www.regulations.gov or upon request. Because no comments 
suggested revisions to the proposed regulations, this Treasury decision 
adopts the proposed regulations as final regulations without change.

Summary of Comments

    The proposed regulations and the final regulations limit the 
application of the section 318(a)(3) constructive ownership rules for 
purposes of the definition of related person in section 954(d)(3) to 
avoid inappropriately treating entities, including CFCs, that do not 
have a significant relationship to each other as related persons. 
Comments agreed with the Treasury Department and the IRS that limiting 
the application of the downward attribution rules of section 
318(a)(3)(A) incorporated by section 958(b) for purposes of section 
954(d)(3) avoids inappropriate results, and one comment urged the 
Treasury Department and the IRS to provide a similar limitation on the 
application of those rules for purposes of determining whether a 
foreign corporation is a CFC. The Treasury Department and the IRS are 
separately studying the application of section 958(b) following the 
repeal of section 958(b)(4) by the Tax Cuts and Jobs Act, Public Law 
115-97 (2017), and the final regulations do not address the application 
of the constructive ownership rules of section 958(b) for purposes 
other than section 954(d)(3).

Effect on Other Documents

    Section 7(d) of Notice 2007-9, 2007-1 C.B. 401, is obsoleted.

Special Analyses

    OIRA has waived review of this final rule in accordance with 
section 6(a)(3)(A) of E.O. 12866.
    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), the notice of proposed rulemaking 
preceding this regulation was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses. No comments were received.

Drafting Information

    The principal author of the final regulations is James Beatty of 
the Office of Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the Treasury Department and the IRS 
participated in the development of these proposed regulations.

Statement of Availability of IRS Documents

    Notice 2007-9 is published in the Internal Revenue Bulletin (or 
Cumulative Bulletin) and is available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at https://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 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, 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

[[Page 63804]]

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 November 19, 2019, 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 November 19, 2019, 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 
November 19, 2019, 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 November 19, 2019, and for the taxable years of United States 
shareholders in which or with which such taxable years end.
* * * * *

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: October 28, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-24985 Filed 11-18-19; 8:45 am]
 BILLING CODE 4830-01-P