Tax News

CCH (cch.taxgroup.com) reports:

  The Treasury and IRS have issued temporary and proposed regulations regarding the treatment of aircraft and vessel leasing income under
Code Secs. 954,
956 and 367. The temporary regulations reflect changes made by the American Jobs Creation Act of 2004 (P.L.108-357), which repealed the foreign base company shipping provisions and liberalized the marketing safe harbor for aircraft or vessels engaged in foreign commerce. The temporary regulations incorporate the rules of Notice 2006-48, 2006-1 CB 922, which was issued to provide interim guidance, with minor changes. The temporary regulations generally apply on or after May 2, 2008.

  In general, active rents can be excluded from subpart F foreign personal holding company income (FPHCI) when rents are derived from leasing property as a result of the marketing functions of a lessor CFC, if the organization in the foreign country is substantial in relation to the amount of rents derived, based on all of the facts and circumstances. Under a safe harbor test, an organization is substantial in relation to the amount of rents, if active leasing expenses equal or exceed 25 percent of the adjusted leasing profit. The temporary regulations preserve the existing test for determining the substantiality of a foreign organization and include the special marketing safe harbor for aircraft and vessels engaged in foreign commerce. Accordingly, for purposes of aircraft or vessels leased in foreign commerce, an organization will be considered substantial if active leasing expenses, equal or exceed 10 percent of the adjusted leasing profit. The definitions of foreign commerce and the predominant use of an aircraft or vessel outside of the United States are consistent with the legislative history of P.L. 108-357. The temporary regulations also clarify that certain finance leases and acquired leases are eligible for the exclusion

  Temporary regulations issued under Code Sec. 956 provide an exclusion from the definition of U.S. property for aircraft or vessels that generate leasing income that is excluded from FPHCI under the active rents exception.

  Temporary regulations issued under Code Sec. 367 are amended with respect to the rules that treat a U.S. person's transfer of property to a foreign corporation as a nonrecognition transaction if the property is used in the active conduct of a trade or business outside of the United States. Under the temporary regulations, the principles of the active rents exception in Code Sec. 954(c)(2)(A) and the related regulations will apply to determine whether a trade or business that produces rents or royalties is actively conducted. In determining whether certain types of property are transferred for use in the active conduct of a trade or business outside of the United States, a special rule is added to cover aircraft and vessels in foreign commerce. Under the rule, whether leased personal property is predominately used outside of the United States is determined under the Code Sec. 954 temporary regulations. The issue of how to determine whether an aircraft or vessel was used predominantly outside of the Unite States for a particular month for purposes of Code Sec. 367 recapture remains under study. Until guidance is issued, taxpayers may use any reasonable method to make this determination.

  The text of the temporary regulations also serves as the text of the proposed regulations. Written or electronic comments and requests for a public hearing must be received by October 1, 2008.

T.D. 9406, 2008FED ¶47,045

Proposed Regulations, NPRM REG-138355-07, 2008FED ¶49,814

Other References:

 
Code Sec. 367

  CCH Reference - 2008FED ¶16,642

  CCH Reference - 2008FED ¶16,644

  CCH Reference - 2008FED ¶16,645

 
Code Sec. 954

  CCH Reference - 2008FED ¶28,535B

  CCH Reference - ¶ 2008FED ¶28,535BC

 
Code Sec. 956

  CCH Reference - 2008FED ¶28,573

  CCH Reference - 2008FED ¶28,574

  Tax Research Consultant

  CCH Reference - TRC INTLOUT: 9,106.05
CCH Reference - TRC INTLOUT: 9,256.05
CCH Reference -
TRC INTL: 30,068