Tax News

CCH (cch.taxgroup.com) reports:

  The Treasury and IRS have issued final regulations regarding the application of the separate foreign tax credit limitation for dividends received from a noncontrolled Code Sec. 902 foreign corporation (10/50 corporation). The regulations reflect changes made by the American Jobs Creation Act of 2004 (P.L. 108-357) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). The regulations are effective on June 11, 2009.

  The American Jobs Creation Act provided that special look-through treatment applied to dividends paid by a 10/50 corporation to a domestic corporation, for dividends paid after 2002, regardless of when the earnings and profits were accumulated. A special transitional rule allowed taxpayers to elect out of the retroactive application of the look-through rules. Specifically, a taxpayer could elect not to have the look-through rules apply to tax years of a 10/50 corporation beginning after December 31, 2002, and before January 1, 2005.

  Under the regulations, dividends paid by a 10/50 corporation to a domestic corporation that meets the stock ownership requirements are treated as income in a separate category in proportion to the ratio of earnings and profits of the 10/50 corporation attributable to each category to total earnings and profits of the 10/50 corporation. Additionally, if the look-through character of the dividend is not substantiated to the satisfaction of the IRS, the dividend is treated as passive income, if the IRS determines that the look-through character of the dividend cannot reasonably be determined based on available information. The dividend will also be treated as passive income if it is received or accrued by a domestic shareholder or paid by a foreign corporation that does not meet the stock ownership requirements in Code Sec. 902.

  CCH Comment. The temporary regulations provided that if the taxpayer failed to substantiate the dividend treatment, the IRS could, without further action, treat the dividend as passive income. The rule was changed to conform to the rule that applies for inadequate substantiation under the transition rules for the treatment of non-look-through pools of a 10/50 corporation or controlled foreign corporation (CFC) in post-2002 tax years in Reg. §1.904-7(f)(4)(iii).

  The resourcing rules that require the resourcing of certain foreign source income of U.S.-owned foreign corporations also apply to 10/50 corporations that meet the definition of a U.S.-owned foreign corporation. The final regulations include a new rule for resourcing subpart F inclusions of a U.S. shareholder under Code Sec. 951(a)(1)(A) or PFIC inclusions under Code Sec. 1293 of a domestic corporate shareholder of a 10/50 corporation that is a qualified electing fund.

Transition Rules

  Under transition rules, any undistributed earnings and foreign taxes in non-look-through pools of a 10/50 corporation that were accumulated and paid as of the end of the 10/50 corporation's last pre-2003 tax year are treated as if they were accumulated and paid during a period in which a distribution would be eligible for look-through treatment. This requires that the taxpayer make a reasonable and good faith effort to reconstruct the non-look-through pools of earnings and taxes. Reconstruction is based on reasonably available books and records and other relevant information.

  Under a safe harbor method, a taxpayer may reconstruct the non-look-through pools using the same percentages the taxpayer uses to properly characterize the stock of the 10/50 corporation in the separate categories for purposes of apportioning the taxpayer's interest expense in its first tax year ending after the first day of the 10/50 corporation's first post-2002 tax year. The final regulations include guidance on how the safe harbor method election is made and the time frame for making the election.

  A taxpayer can choose to use the safe harbor method on either the timely filed or amended tax returns or during audit. If it is chosen on an amended return or during an audit, appropriate adjustments to eliminate any duplicate benefits arising from the application of the safe harbor method to tax years that are not open for assessment must be made. The taxpayer simply employs the safe harbor method, no separate statement is required. The final regulations also clarify that the safe harbor method is only available as a transition rule for taxpayers who were required to characterize stock of the foreign corporation for purposes of apportioning interest expense in the taxpayer's first tax year ending after the first day of the foreign corporation's first post-2002 tax year. The safe harbor does not apply to determine the treatment of earnings accumulated by a foreign corporation that did not have a shareholder entitled to look-through treatment in that year.

  The regulations also extend look-through treatment to dividends paid out of earnings and profits accumulated in non-look-through periods during which the 10/50 corporation or a CFC had no qualifying shareholder (pre-acquisition earnings) and do not restrict look-through treatment of dividends paid to a new qualifying shareholder of an existing 10/50 corporation. Overall foreign loss accounts (OFLs) and separate limitation loss (SLL) accounts in a separate category for 10/50 dividends are recaptured in subsequent years out of income in the same separate categories in which the stock of the 10/50 corporation is characterized for purposes of apportioning interest expense for the first tax year ending after the first day of the 10/50 corporation's first post-2002 tax year.

Accounting Elections, Etc.

  For purposes of the accounting elections under Code Sec. 964, the majority corporate shareholder of a 10/50 corporation may make an election, adopt a method of accounting or tax year or change a method of accounting or tax year on behalf of the 10/50 corporation. The same actions may be taken by the controlling U.S. shareholders of a CFC. The final regulations simplify the final regulations by providing that where a U.S. shareholder changes a method of accounting or tax year on behalf of a CFC of which it is a sole shareholder. the shareholder is not required file the statement required to be filed with each domestic shareholder's tax return, if the information that would otherwise be required is included in Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, Form 3115, Application for Change in Accounting Method or Form 1128, Application to Adopt, Change or Retain a Tax Year. Finally, the final regulations provide that adjustments to the appropriate separate categories of earnings and profits must be made under Code Sec. 481 to prevent the duplication or omission of amounts attributable to previous years that would otherwise result in a change in accounting. The details of the adjustment are found in Rev. Proc. 2008-52, I.R.B. 2008-36, 587.

T.D. 9452, 2009FED ¶47,022

Other References:

 
Code Sec. 861

  CCH Reference - 2009FED ¶27,139C

  CCH Reference - 2009FED ¶27,140

  CCH Reference - 2009FED ¶27,142C

  CCH Reference - 2009FED ¶27,143

 
Code Sec. 902

  CCH Reference - 2009FED ¶27,840C

  CCH Reference - 2009FED ¶27,840CA

 
Code Sec. 904

  CCH Reference - 2009FED ¶27,881

  CCH Reference - 2009FED ¶27,883

  CCH Reference - 2009FED ¶27,883A

  CCH Reference - 2009FED ¶27,885

  CCH Reference - 2009FED ¶27,885A

  CCH Reference - 2009FED ¶27,886

  CCH Reference - 2009FED ¶27,886D

  CCH Reference - 2009FED ¶27,888

  CCH Reference - 2009FED ¶27,888D

  CCH Reference - 2009FED ¶27,892

  CCH Reference - 2009FED ¶27,900

  CCH Reference - 2009FED ¶27,900A

 
Code Sec. 964

  CCH Reference - 2009FED ¶28,711

  CCH Reference - 2009FED ¶28,712

 
Code Sec. 989

  CCH Reference - 2009FED ¶28,922

  Tax Research Consultant

  CCH Reference - TRC INTLOUT: 6,204