[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Rules and Regulations]
[Pages 8127-8143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3356]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9577]
RIN 1545-BK50


Foreign Tax Credit Splitting Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary Income Tax 
Regulations with respect to a new 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 new 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. The 
text of the temporary regulations also serves as the text of the 
proposed regulations (REG-132736-11) published in the Proposed Rules 
section of this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on February 14, 
2012.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.704-1T(b)(1)(ii)(b)(3), 1.909-1T(e), 1.909-2T(c), 1.909-3T(c), 1.909-
4T(b), 1.909-5T(c), and 1.909-6T(h).

FOR FURTHER INFORMATION CONTACT: Suzanne M. Walsh, (202) 622-3850 (not 
a toll-free call).

[[Page 8128]]


SUPPLEMENTARY INFORMATION: 

Background

I. Section 909

    Section 909 was enacted as part of EJMAA (Pub. L. 111-226, 124 
Stat. 2389 (2010)) to address situations in which foreign income taxes 
have been separated from the related income. Section 909(a) provides 
that if there is a foreign tax credit splitting event with respect to a 
foreign income tax paid or accrued by a taxpayer, such tax is not taken 
into account for federal tax purposes before the taxable year in which 
the related income is taken into account by the taxpayer. Section 
909(b) provides special rules with respect to a ``section 902 
corporation,'' which is defined in section 909(d)(5) as any foreign 
corporation with respect to which one or more domestic corporations 
meets the ownership requirements of section 902(a) or (b) (a section 
902 shareholder of the relevant section 902 corporation). If there is a 
foreign tax credit splitting event with respect to a foreign income tax 
paid or accrued by a section 902 corporation, the tax is not taken into 
account for purposes of section 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 such 
section 902 corporation or a section 902 shareholder. Thus, the tax is 
not added to the section 902 corporation's pool of ``post-1986 foreign 
income taxes'' (as defined in section 902(c)(2) and Sec.  1.902-
1(a)(8)), and its pool of ``post-1986 undistributed earnings'' (as 
defined in section 902(c)(1) and Sec.  1.902-1(a)(9)) is not reduced by 
such tax. Accordingly, section 909 suspends foreign income taxes paid 
or accrued by a section 902 corporation at the level of the payor 
section 902 corporation. In the case of a partnership, section 909(a) 
and (b) apply at the partner level, and, except as otherwise provided 
by the Secretary, a similar rule applies in the case of an S 
corporation or trust. See section 909(c)(1).
    For purposes of section 909, there is a foreign tax credit 
splitting event with respect to a foreign income tax if the related 
income is (or will be) taken into account by a covered person. See 
section 909(d)(1). Section 909 does not suspend foreign income taxes if 
the same person pays the tax but takes into account the related income 
in a different taxable period (or periods) due to, for example, timing 
differences between the U.S. and foreign tax accounting rules. 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. See section 909(d)(2). The Joint Committee on Taxation's 
technical explanation of the revenue provisions of EJMAA states that a 
foreign income tax includes any tax paid in lieu of such a tax within 
the meaning of section 903. Staff of the Joint Committee on Taxation, 
Technical Explanation of the Revenue Provisions of the Senate Amendment 
to the House Amendment to the Senate Amendment to H.R. 1586, Scheduled 
For Consideration by the House of Representatives on August 10, 2010, 
at 5 (August 10, 2010) (JCT Explanation). Section 909(d)(3) provides 
that the term ``related income'' means, with respect to any portion of 
any foreign income tax, the income (or, as appropriate, earnings and 
profits) to which such portion of the foreign income tax relates. The 
term ``covered person'' means, with respect to any person who pays or 
accrues a foreign income tax (the ``payor''): (1) Any entity in which 
the payor holds, directly or indirectly, at least a 10 percent 
ownership interest (determined by vote or value); (2) any person that 
holds, directly or indirectly, at least a 10 percent ownership interest 
(determined by vote or value) in the payor; (3) any person that bears a 
relationship to the payor described in section 267(b) or 707(b); and 
(4) any other person specified by the Secretary. See section 909(d)(4).
    Except as otherwise provided by the Secretary, any foreign income 
tax not currently taken into account by reason of section 909 is taken 
into account as a foreign income tax paid or accrued in the taxable 
year in which, and to the extent that, the taxpayer, the section 902 
corporation or a section 902 shareholder (as the case may be) takes the 
related income into account under chapter 1 of Subtitle A of the Code. 
See section 909(c)(2). Notwithstanding this general rule, foreign 
income taxes are translated into U.S. dollars under the rules of 
section 986(a) in the year actually paid or accrued and suspended, and 
not as if they were paid or accrued in the year in which the related 
income is taken into account. See section 909(c)(2).
    Section 909(e) provides that the Secretary may issue such 
regulations or other guidance as is necessary or appropriate to carry 
out the purposes of section 909, including guidance providing 
appropriate exceptions from the provisions of section 909 and for its 
proper application to hybrid instruments. The JCT Explanation states 
that such guidance may address the proper application of section 909 in 
cases involving disregarded payments, group relief, or other 
arrangements having a similar effect. JCT Explanation at 6. Section 
211(c)(1) of EJMAA provides that section 909 applies to foreign income 
taxes paid or accrued (including foreign income taxes paid or accrued 
by section 902 corporations) in taxable years beginning after December 
31, 2010 (post-2010 taxable years). Section 211(c)(2) of EJMAA provides 
that section 909 also applies to foreign taxes paid or accrued in 
taxable years beginning on or before December 31, 2010 (pre-2011 
taxable years), but only for purposes of applying sections 902 and 960 
to periods after December 31, 2010. For this purpose, 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. The JCT Explanation clarifies that the section 902 
effective date rule ``applies for purposes of applying sections 902 and 
960 to dividends paid, and inclusions under section 951(a) that occur, 
in taxable years beginning after December 31, 2010.'' JCT Explanation 
at 6-7.

II. Section 901 Proposed Regulations Issued in 2006

    Section 909 was enacted to address concerns about the inappropriate 
separation of foreign income taxes and related income. These concerns 
were also the basis for the issuance in 2006 of proposed regulations 
under section 901 (2006 proposed regulations) concerning the 
determination of the person who paid a foreign income tax for foreign 
tax credit purposes (REG-124152-06, 71 FR 44240 (Aug. 4, 2006)). In 
particular, the proposed regulations would provide guidance under Sec.  
1.901-2(f) relating to the person on whom foreign law imposes legal 
liability for tax, including in the case of taxes imposed on the income 
of foreign consolidated groups and entities that have different 
classifications for U.S. and foreign tax law purposes. The Treasury 
Department and the IRS received written comments on the proposed 
regulations and held a hearing on October 13, 2006. All comments are 
available at www.regulations.gov or upon request. After taking into 
account the comments received, the 2006 proposed regulations are 
adopted, in part, as final regulations published elsewhere in this 
issue of the Federal Register.

III. Notice 2010-92

    The Treasury Department and the IRS issued Notice 2010-92 (2010-2 
CB 916 (December 6, 2010)), which primarily

[[Page 8129]]

addresses the application of section 909 to foreign income taxes paid 
or accrued by a section 902 corporation in pre-2011 taxable years. The 
notice provides rules for determining whether foreign income taxes paid 
or accrued by a section 902 corporation in pre-2011 taxable years (pre-
2011 taxes) are suspended under section 909 in post-2010 taxable years 
of a section 902 corporation. It also 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) and provides guidance on determining the amount of 
related income and pre-2011 taxes paid or accrued with respect to pre-
2011 splitter arrangements. The pre-2011 splitter arrangements are 
reverse hybrid structures, certain foreign consolidated groups, 
disregarded debt structures in the context of group relief and other 
loss-sharing regimes, and two classes of hybrid instruments. The notice 
states that the Treasury Department and the IRS expect future guidance 
will treat pre-2011 splitter arrangements as giving rise to foreign tax 
credit splitting events in post-2010 taxable years.
    Notice 2010-92 states that future guidance may identify additional 
transactions or arrangements to which section 909 applies (including, 
for example, additional arrangements involving group relief regimes), 
although any such guidance will apply only with respect to foreign 
taxes paid or accrued in post-2010 taxable years. The notice also 
states that the Treasury Department and the IRS do not intend to 
finalize the portion of the 2006 proposed regulations relating to the 
determination of the person who paid a foreign income tax with respect 
to the income of a reverse hybrid. See Prop. Sec.  1.901-2(f)(2)(iii).
    Concerning the effective date of section 909(b) (addressing a 
foreign tax credit splitting event with respect to a foreign income tax 
paid or accrued by a section 902 corporation), Notice 2010-92 provides 
that, consistent with the JCT Explanation, the Treasury Department and 
the IRS intend to issue regulations providing that section 909 does not 
apply in computing foreign taxes deemed paid under section 902 or 960 
before the first day of the section 902 corporation's first post-2010 
taxable year. Regarding the application of the section 909 effective 
date to situations involving partnerships, the notice states that in 
the case of a section 902 corporation that is a partner in a 
partnership, the section 902 corporation's distributive share of 
foreign income taxes paid or accrued by the partnership in a pre-2011 
taxable year of the partnership that is included in a post-2010 taxable 
year of the section 902 corporation will be treated as a tax paid or 
accrued by the section 902 corporation in a post-2010 taxable year. See 
Sec.  1.702-1(a)(6).
    Notice 2010-92 also provides guidance concerning the application of 
section 909 to partnerships and trusts, as well as the interaction 
between section 909 and other Code provisions. In addition, the notice 
solicits comments on issues that should be addressed in regulations, 
including whether portions of the 2006 proposed regulations should be 
finalized or modified in light of the enactment of section 909. The 
Treasury Department and the IRS received written comments on Notice 
2010-92, which are discussed in this preamble.

Explanation of Provisions

I. Section 704(b)

    Section 1.704-1(b)(4)(viii)(d)(3) provides that if a branch of a 
partnership (including a disregarded entity owned by the partnership) 
is required to include in income under foreign law a payment (an inter-
branch payment) it receives from the partnership or another branch of 
the partnership, any creditable foreign tax expenditure (CFTE) imposed 
with respect to the payment relates to the income in the CFTE category 
that includes the items attributable to the recipient (the recipient 
CFTE category). However, because the inter-branch payment is 
disregarded for U.S. Federal income tax purposes, the income related to 
the CFTEs imposed with respect to the payment may remain in the CFTE 
category that includes the items attributable to the payor of the 
inter-branch payment (the payor CFTE category). This is an exception to 
the general application of the principles of Sec.  1.904-6 that would 
allocate the CFTEs to the payor CFTE category that includes the related 
income. See Sec.  1.704-1(b)(4)(viii)(d)(1). Because this exception 
allows the CFTEs and related income to be allocated to different CFTE 
categories, they may potentially be allocated to the partners in a 
manner that separates the CFTEs from the related income.
    Notice 2010-92 states that the Treasury Department and the IRS 
recognize that certain allocations of CFTEs and income of a partnership 
can result in a separation of the CFTEs and the related income for 
purposes of section 909, notwithstanding that these allocations satisfy 
the requirements of section 704(b) and the regulations under that 
section. The notice states that partnership allocations that satisfy 
the requirements of section 704(b) and the regulations under that 
section will not constitute pre-2011 splitter arrangements except to 
the extent the arrangement otherwise constitutes one of the 
arrangements identified in the notice as a pre-2011 splitter 
arrangement (for example, allocations of taxes paid by a hybrid 
partnership on income of a reverse hybrid). However, the notice also 
states that the Treasury Department and the IRS will provide in future 
guidance that allocations described in Sec.  1.704-1(b)(4)(viii)(d)(3) 
will result in a foreign tax credit splitting event in post-2010 
taxable years to the extent such allocations result in foreign income 
taxes being allocated to a different partner than the related income. 
The notice also solicits comments on the extent to which Sec.  1.704-
1(b)(4)(viii)(d) and (b)(5), Example 24 should be modified in light of 
the enactment of section 909. A comment recommended eliminating the 
special exception for inter-branch payments set forth in Sec.  1.704-
1(b)(4)(viii)(d)(3). The Treasury Department and the IRS have 
determined that the regulations should be revised to prevent 
allocations under Sec.  1.704-1(b)(4)(viii)(d)(3) that would result in 
such a separation of taxes and related income from satisfying the safe 
harbor, regardless of whether section 909 applies.
    These temporary regulations remove the special exception for inter-
branch payments set forth in Sec.  1.704-1(b)(4)(viii)(d)(3). As a 
result, the general principles of Sec.  1.904-6 will apply to an inter-
branch payment so that the CFTEs imposed on that payment will be 
allocated to the CFTE category that includes the related income for 
U.S. Federal income tax purposes. Accordingly, if the CFTEs and related 
income are allocated to partners in the same ratios, the safe harbor is 
satisfied and the allocation does not give rise to a foreign tax credit 
splitting event. The temporary regulations revise Example 24 of Sec.  
1.704-1(b)(5) to reflect these changes. These changes are generally 
effective for taxable years beginning on or after January 1, 2012. 
Allocations made in accordance with Sec.  1.704-1(b)(4)(viii)(d)(3) in 
taxable years beginning on or after January 1, 2011, and before January 
1, 2012, will result in a foreign tax credit splitting event and 
suspension of foreign income taxes that are allocated to a different 
partner than the covered person that is allocated the related income. 
See Sec.  1.909-5T(a)(2).

[[Page 8130]]

    The temporary regulations also provide a transition rule for 
partnerships whose agreements were entered into prior to February 14, 
2012. 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) as in effect prior to February 14, 2012. See Sec.  
1.704-1T(b)(1)(ii)(b)(3). For purposes of this transition rule, 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 
specified in section 267(b) or 707(b) collectively have the power to 
amend the partnership agreement without the consent of any unrelated 
party (and all subsequent taxable years). In the case of any 
partnership that applies, under the transition rule, the provisions of 
Sec.  1.704-1(b)(4)(viii)(c)(3)(ii) and Sec.  1.704-1(b)(4)(viii)(d)(3) 
as in effect prior to February 14, 2012, an allocation of foreign 
income taxes paid or accrued by the partnership with respect to an 
inter-branch payment will result in a foreign tax credit splitting 
event to the extent that the tax on the inter-branch payment is not 
allocated to the partners in proportion to the distributive shares of 
income to which the inter-branch payment tax relates. See Sec.  1.909-
2T(b)(4).

II. Section 909

A. In General
    The temporary regulations provide an exclusive list of arrangements 
that will be treated as giving rise to foreign tax credit splitting 
events under section 909 with respect to foreign income taxes paid or 
accrued in taxable years beginning on or after January 1, 2012, as well 
as an exclusive list of arrangements that will be treated as giving 
rise to foreign tax credit splitting events with respect to foreign 
income taxes paid or accrued in a taxable year beginning on or after 
January 1, 2011, and before January 1, 2012. The temporary regulations 
further treat the foreign consolidated group splitter arrangement 
described in Sec.  1.909-6T(b)(2) as giving rise to a foreign tax 
credit splitting event with respect to foreign income taxes paid or 
accrued in a taxable year beginning on or after January 1, 2012, and on 
or before February 14, 2012. In addition, these regulations provide 
rules for determining related income and split taxes and for 
coordinating the interaction between section 909 and other Code 
provisions. Finally, these regulations include the guidance described 
in Notice 2010-92, which primarily addresses the application of section 
909 to foreign income taxes paid or accrued by section 902 corporations 
in taxable years beginning on or before December 31, 2010.
B. Definitions and Special Rules
    Section 1.909-1T(a) provides definitions, and Sec.  1.909-1T(b), 
(c), and (d) provide rules that apply for purposes of that section and 
Sec. Sec.  1.909-2T through 1.909-5T. First, Sec.  1.909-1T(b) and (c) 
provide rules substantially similar to those set forth in Notice 2010-
92 concerning the application of section 909 to partnerships and 
trusts, except that the temporary regulations expand the scope of the 
rules to include S corporations and taxes paid or accrued by persons 
other than section 902 corporations. Section 1.909-1T(b) provides that 
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.
    Section 5.02 of Notice 2010-92 provides that, for purposes of 
applying section 909 in post-2010 taxable years, there will not be a 
foreign tax credit splitting event with respect to a foreign income tax 
paid or accrued by a partner with respect to its distributive share of 
the related income of a partnership that is a covered person with 
respect to the partner to the extent the related income is taken into 
account by the partner. A comment recommended that regulations adopt an 
aggregate approach in the partnership context in determining whether 
related income is taken into account by a covered person. The Treasury 
Department and the IRS agree with this comment. Accordingly, Sec.  
1.909-1T(c) provides that 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.
    Second, Sec.  1.909-1T(d) addresses the application of section 909 
to annual layers of pre-1987 accumulated profits and pre-1987 foreign 
income taxes of a section 902 corporation. Section 909 and the 
regulations under that section will apply to pre-1987 accumulated 
profits and pre-1987 foreign income taxes of a section 902 corporation 
attributable to taxable years beginning on or after January 1, 2012. 
Pursuant to section 902(c)(6) and Sec.  1.902-1(a)(10)(i) and 
(a)(10)(iii), earnings and profits and associated foreign income taxes 
paid or accrued by a foreign corporation in taxable years before it was 
a section 902 corporation are treated as pre-1987 accumulated profits 
and pre-1987 foreign income taxes. Section 1.909-1T(d) provides that 
foreign corporations that become section 902 corporations must account 
for split taxes paid or accrued and related income in pre-acquisition 
taxable years beginning on or after January 1, 2012. Suspension of 
split taxes paid or accrued with respect to pre-1987 accumulated 
profits attributable to earlier taxable years is not required.
    The rules of Sec.  1.909-1T apply to taxable years beginning on or 
after January 1, 2011.
C. Splitter Arrangements
1. In General
    Section 909(d)(1) provides that there is a foreign tax credit 
splitting event with respect to a foreign income tax if the related 
income is (or will be) taken into account by a covered person. The 
Treasury Department and the IRS believe that a transaction or 
arrangement in which the related income was taken into account by a 
covered person before the associated foreign income tax is paid or 
accrued (for example, due to a timing difference) presents the same 
concerns about the inappropriate separation of foreign income taxes and 
related income that section 909 was intended to address. Accordingly, 
Sec.  1.909-2T(a)(1) provides that 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 Sec.  
1.909-2T(b) (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 Sec.  
1.909-2T(b). Income (or,

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as the case may be, 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 Sec.  1.909-
2T(b). 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 section 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.  1.909-3T(a) for rules relating to when 
split taxes and related income are taken into account.
    A comment requested that the regulations provide an exclusive list 
of arrangements that are subject to section 909 for post-2010 taxable 
years, similar to the approach adopted in Notice 2010-92, which 
provides an exclusive list of arrangements that are treated as giving 
rise to foreign tax credit splitting events for purposes of applying 
section 909 to pre-2011 taxes paid or accrued by section 902 
corporations. The Treasury Department and the IRS agree with the 
comment, and accordingly, Sec.  1.909-2T(b) sets forth an exclusive 
list of arrangements that will be treated as giving rise to foreign tax 
credit splitting events. Future guidance may identify additional 
transactions or arrangements to which section 909 applies, although any 
such guidance will apply to foreign taxes paid or accrued in taxable 
years beginning on or after the date such guidance is issued.
    In particular, the Treasury Department and the IRS are concerned 
about certain types of asset transfers that can result in the 
separation of foreign income taxes and the related income, for example, 
because of differences in when income accrues or how basis is 
determined for purposes of U.S. and foreign tax law. Section 901(m) 
applies to foreign taxes paid or accrued in connection with certain 
transactions that are covered asset acquisitions described in section 
901(m)(2). The Treasury Department and the IRS considered several 
approaches to address the interaction of sections 901(m) and 909, 
including providing taxpayers with an election to apply section 909 in 
lieu of section 901(m). The Treasury Department and the IRS concluded 
that applying section 909 to covered asset acquisitions between related 
parties would substantially increase the complexity and administrative 
burdens associated with such transactions. Accordingly, a covered asset 
acquisition is not a foreign tax credit splitting event for purposes of 
section 909. Nevertheless, section 901(m) may apply to foreign taxes 
paid or accrued in connection with a foreign tax credit splitting 
event, for example, if an election under section 338(a) is made with 
respect to the acquisition of the interests in a reverse hybrid. In 
such case, the Treasury Department and the IRS are considering the 
extent to which section 909 should apply to suspend deductions for 
foreign income taxes with respect to which section 901(m) disallows a 
credit.
    The Treasury Department and the IRS are also considering whether to 
treat as foreign tax credit splitting events other arrangements or 
transactions that can result in the separation of foreign income taxes 
and the related income, for example, because of differences in when a 
shareholder is taxed on a dividend out of earnings of a covered person. 
One such arrangement is a distribution that is a dividend for foreign 
tax purposes but for U.S. Federal income tax purposes is either not 
includible in the shareholder's gross income pursuant to section 305(a) 
or is disregarded. See Rev. Rul. 80-154 (1980-1 CB 68) (involving a 
series of arrangements that were treated as a stock distribution from a 
foreign corporation to which section 305(a) applies), and Rev. Rul. 83-
142 (1983-2 CB 68) (involving a cash payment by a corporation to its 
shareholder which was returned to the corporation and disregarded for 
U.S. Federal income tax purposes even though treated as a dividend 
subject to withholding tax under foreign law). The Treasury Department 
and the IRS are considering whether and to what extent such types of 
asset transfers and distributions should be treated as foreign tax 
credit splitting events and request comments on the circumstances in 
which such treatment should apply.
2. Reverse Hybrid Splitter Arrangements
    Section 1.909-2T(b)(1) describes a reverse hybrid splitter 
arrangement. The definition of a reverse hybrid splitter arrangement is 
substantially identical to that set forth in Notice 2010-92, except 
that the scope is extended to cover taxes paid or accrued by persons 
other than section 902 corporations. A reverse hybrid is 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. 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). The foreign income taxes paid or accrued 
with respect to income of the reverse hybrid are split taxes. 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 the split taxes were 
paid or accrued. Accordingly, related income of the reverse hybrid only 
includes items of income or expense attributable to a disregarded 
entity owned by the reverse hybrid to the extent that the income 
attributable to the activities of the disregarded entity is included in 
the payor's foreign tax base.
3. Loss-Sharing Splitter Arrangements
    Section 1.909-2T(b)(2) expands the types of loss-sharing 
arrangements that Notice 2010-92 treats as splitter arrangements. A 
foreign group relief or loss-sharing regime is a regime in which one 
entity may surrender its loss to offset the income of one or more other 
entities. Such a loss of one entity that, in connection with a foreign 
group relief or other loss-sharing regime, is taken into account by one 
or more other entities for foreign tax purposes is a ``shared loss.'' 
Shared losses can be used to shift foreign tax liability from one 
entity to another without a concomitant shift in U.S. earnings and 
profits. Notice 2010-92 applied only to shared losses attributable to 
debt that is disregarded for U.S. Federal income tax purposes. A 
comment suggested that it would be appropriate to treat other loss-
sharing arrangements as foreign tax credit splitter arrangements as 
well, in particular, when the payor of a tax could have used the shared 
loss to offset foreign tax on income that is treated as the payor's own 
income under U.S. Federal income tax principles. The Treasury 
Department and the IRS agree that the scope of loss-sharing 
arrangements that are treated as splitter arrangements should be 
expanded to cover these cases. Accordingly Sec.  1.909-

[[Page 8132]]

2T(b)(2)(i) defines a ``loss-sharing splitter arrangement'' as arising 
under a foreign group relief or other loss-sharing regime to the extent 
a shared loss of a U.S. combined income group could have been used to 
offset income of that group (a ``usable shared loss'') but is used 
instead to offset income of another U.S. combined income group.
    Under Sec.  1.909-2T(b)(2)(ii), a U.S. combined income group 
consists of a single individual or corporation and all other 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 may arise, for example, as a result of an entity being 
disregarded for U.S. Federal income tax purposes 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 this purpose, a branch is treated as an entity, all 
members of a U.S. consolidated group are treated as a single 
corporation, and individuals filing 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 that 
combines items of income, deduction, gain or loss with the income, 
deduction, gain or loss of two or more other entities can belong to 
more than one U.S. combined income group. For example, a hybrid 
partnership that has two corporate partners that do not combine items 
of income, deduction, gain or loss with each other belongs to each 
partner's separate U.S. combined income group, because each partner 
receives an allocable share of hybrid partnership items.
    Under Sec.  1.909-2T(b)(2)(iii)(A), the income of a U.S. combined 
group consists of the aggregate amount of taxable income of the members 
of the group that have positive taxable income, as computed under 
foreign law. Under Sec.  1.909-2T(b)(2)(iii)(B), the amount of shared 
loss of a U.S. combined income group is the sum of the shared losses of 
all members of the group. Section 1.909-2T(b)(2)(iii)(A) and (B) 
provide that 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 or 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 is 
a member of more than one U.S. combined income group, the entity's 
foreign taxable income or shared loss is allocated between the separate 
U.S. combined income groups based on U.S. Federal income tax 
principles. Although the allocations are based on U.S. Federal income 
tax principles, the amount of the foreign taxable income or shared loss 
to be allocated is determined under foreign law. In the case of a 
hybrid partnership with two partners that are in different U.S. 
combined income groups, income or a shared loss incurred by the hybrid 
partnership, as determined under foreign law, is allocated between or 
among the U.S. combined income groups based on how the hybrid 
partnership allocated the income or loss under section 704(b). To the 
extent the income or shared loss would be income or loss under U.S. tax 
principles in another year, the income or shared loss is allocated to 
the U.S. combined income groups based on how the hybrid partnership 
would allocate the income or shared loss if it were recognized for U.S. 
tax purposes in the year it is recognized for foreign tax purposes. To 
the extent the income or shared loss would not constitute income or 
loss under U.S. tax principles in any year, the income or shared loss 
is allocated to the U.S. combined income groups in the same manner as 
the partnership items attributable to the activity giving rise to the 
income or shared loss.
    Section 1.909-2T(b)(2)(iv) provides that split taxes from a loss-
sharing splitter arrangement are foreign income taxes paid or accrued 
by a member of a U.S. combined income group with respect to income 
equal to the amount of the usable shared loss of that U.S. combined 
income group that offsets income of a different U.S. combined income 
group. Under Sec.  1.909-2T(b)(2)(v), the related income is an amount 
of income of the individual or corporate member of a U.S. combined 
income group equal to the amount of income of that U.S. combined income 
group that is offset by the usable shared loss of another U.S. combined 
income group.
4. Hybrid Instrument Splitter Arrangements
    Section 1.909-2T(b)(3) describes hybrid instrument splitter 
arrangements. The definition of hybrid instrument splitter arrangements 
is substantially identical to that set forth in Notice 2010-92, except 
that the scope is extended to cover taxes paid or accrued by persons 
other than section 902 corporations. In addition, Sec.  1.909-
2T(b)(3)(i)(D) defines a U.S. equity hybrid instrument as an instrument 
that is treated as equity for U.S. Federal income tax purposes but is 
treated as indebtedness for foreign tax purposes, or with respect to 
which the issuer is otherwise entitled to a deduction for foreign tax 
purposes for amounts paid or accrued with respect to the instrument. 
For example, an instrument that is treated as equity for U.S. Federal 
income tax purposes but with respect to which amounts paid or accrued 
by the issuer are treated for foreign tax purposes as a deductible 
notional interest payment (even though the instrument is otherwise 
treated as equity for foreign tax purposes) is a U.S. equity hybrid 
instrument. Under Sec.  1.909-2T(b)(3)(i)(A), a U.S. equity hybrid 
instrument is a splitter arrangement if foreign income taxes are paid 
or accrued by the owner of a U.S. equity hybrid instrument with respect 
to payments or accruals on or with respect to the instrument that are 
deductible by the issuer 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.
    Under Sec.  1.909-2T(b)(3)(i)(B), split taxes from a U.S. equity 
hybrid instrument splitter arrangement equal the total amount of 
foreign income taxes, including withholding 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. Under Sec.  1.909-2T(b)(3)(i)(C), 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 payments or accruals 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.
    Section 1.909-2T(b)(3)(ii)(D) defines a U.S. debt hybrid instrument 
as an instrument that is treated as equity for foreign tax purposes but 
as indebtedness for U.S. Federal income tax purposes. Under Sec.  
1.909-2T(b)(3)(ii)(A), 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

[[Page 8133]]

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. Under Sec.  1.909-
2T(b)(3)(ii)(B), 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. Under Sec.  1.909-
2T(b)(3)(ii)(C), 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.
5. Partnership Inter-Branch Payment Splitter Arrangements
    Section 1.909-2T(b)(4) describes a partnership inter-branch payment 
splitter arrangement. The Treasury Department and the IRS stated in 
section 5.03 of Notice 2010-92 that future guidance would provide that 
allocations described in Sec.  1.704-1(b)(4)(viii)(d)(3) will result in 
a foreign tax credit splitting event in post-2010 taxable years to the 
extent such allocations result in foreign income taxes being allocated 
to a different partner than the related income.
    Under Sec.  1.909-2T(b)(4)(i), 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). Under Sec.  1.909-2T(b)(4)(ii), split 
taxes from a partnership inter-branch payment 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 tax had been allocated in the same proportion as the 
distributive shares of income in that CFTE category. Under Sec.  1.909-
2T(b)(4)(iii), 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 that CFTE category 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.
D. Rules Regarding Related Income and Split Taxes and Coordination 
Rules
    Section 4.06 of Notice 2010-92 provides guidance on determining the 
amount of related income and pre-2011 split taxes paid or accrued with 
respect to pre-2011 splitter arrangements. A comment requested guidance 
on the treatment of related income and split taxes in the case of 
certain dispositions that were not described in section 4.06 of Notice 
2010-92 (specifically, dispositions of section 902 corporations in 
transactions other than those that qualify under section 381). The 
Treasury Department and the IRS expect to issue regulations that 
provide additional guidance on determining the amount of related income 
and split taxes attributable to a foreign tax credit splitting event, 
and intend to address the comment when such regulations are issued. 
Until such guidance is issued, Sec.  1.909-3T(a) provides that the 
principles of Sec.  1.909-6T(d) through 1.909-6T(f) (which adopt the 
rules described in section 4.06 of Notice 2010-92) will apply to 
related income and split taxes in taxable years beginning on or after 
January 1, 2011, except that the alternative ``related income first'' 
method described in Sec.  1.909-6T(d)(4) (which adopts section 
4.06(b)(4) of Notice 2010-92) for identifying distributions of related 
income 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. A comment recommended that taxpayers be given the 
choice to apply the ``related income first'' method to identify post-
2010 split taxes of a section 902 corporation, with use of such method 
conditioned on the taxpayer not applying section 902 to distributions 
from a section 902 corporation until all of the corporation's earnings 
and profits attributable to related income have been distributed. The 
Treasury Department and the IRS believe that the recommendation would 
necessitate rules that would result in significant administrative 
complexity, and accordingly, the comment was not adopted.
    These temporary regulations include a rule concerning split taxes 
that was not described in Notice 2010-92. Section 1.909-3T(b) provides 
that 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 rule applies is limited to the amount of related income 
from such splitter arrangement.
    In addition to future guidance on determining the amount of related 
income and split taxes, the Treasury Department and the IRS expect to 
issue regulations that provide additional guidance on the interaction 
between section 909 and other Code provisions such as sections 904(c), 
905(a), and 905(c). Until such guidance is issued, Sec.  1.909-4T(a) 
provides that the principles of Sec.  1.909-6T(g), which adopt the 
rules described in section 6 of Notice 2010-92, will apply to taxable 
years beginning on or after January 1, 2011.
E. 2011 and Certain 2012 Splitter Arrangements
    Section 909 applies to foreign income taxes paid or accrued in 
taxable years beginning after December 31, 2010. Section 1.909-2T(b), 
setting forth the exclusive list of splitter arrangements, is effective 
for foreign income taxes paid or accrued in taxable years beginning on 
or after January 1, 2012. Notice 2010-92 states that pre-2011 splitter 
arrangements will give rise to foreign tax credit splitting events in 
post-2010 taxable years. Accordingly, Sec.  1.909-5T(a)(1) provides 
that 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.  
1.909-6T(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 pre-2011 taxable year. The 
related income with respect to split taxes from such an arrangement is 
the related income described in Sec.  1.909-6T(b), determined as if the 
payor were a section 902 corporation.
    In addition, Notice 2010-92 states that allocations described in 
Sec.  1.704-1(b)(4)(viii)(d)(3) will result in a foreign

[[Page 8134]]

tax credit splitting event in post-2010 taxable years to the extent 
such allocations result in foreign income taxes being allocated to a 
different partner than the related income. Accordingly, Sec.  1.909-
5T(a)(2) provides that 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.  1.909-2T(b)(4) are 
split taxes to the extent such taxes are identified as split taxes in 
Sec.  1.909-2T(b)(4)(ii). The related income with respect to the split 
taxes is the related income described in Sec.  1.909-2T(b)(4)(iii).
    Finally, these temporary regulations provide that 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.  1.909-6T(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 pre-2011 taxable year. 
This rule ensures that section 909 applies to suspend foreign tax on 
income of foreign consolidated groups paid or accrued in post-2010 
taxable years to the extent the tax is not apportioned among the 
members of the group in accordance with the principles of Treas. Reg. 
Sec.  1.901-2(f)(3). Final regulations published elsewhere in this 
issue of the Federal Register explicitly apply the ratable allocation 
rules of Treas. Reg. Sec.  1.901-2(f)(3) to tax paid on combined income 
of foreign consolidated groups, without regard to whether the group 
members are jointly and severally liable for the tax under foreign law.
F. Pre-2011 Foreign Tax Credit Splitting Events
    Section 1.909-6T adopts the rules described in Notice 2010-92 
regarding pre-2011 foreign tax credit splitting events and the 
application of section 909 to foreign income taxes paid or accrued by a 
section 902 corporation in pre-2011 taxable years.

Availability of IRS Documents

    IRS notices and revenue rulings cited in this preamble are made 
available by the Superintendent of Documents, U.S. Government Printing 
Office, Washington, DC 20402.

Effect on Other Documents

    The following publication is obsolete as of February 14, 2012:
    Notice 2010-92 (2010-2 CB 916).

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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble of the cross-
referenced notice of proposed rulemaking published in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Internal Revenue 
Code, this regulation has been 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 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 continues to read in 
part as follows:

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


0
Par. 2. Section 1.704-1 is amended as follows:
0
1. Paragraph (b)(0) is amended by adding an entry for Sec.  1.704-
1(b)(1)(ii)(b)(3) and revising the entry for Sec.  1.704-
1(b)(4)(viii)(d)(3).
0
2. Paragraph (b)(1)(ii)(b)(3) is added.
0
3. Paragraph (b)(4)(viii)(c)(3)(ii) is revised.
0
4. Paragraph (b)(4)(viii)(d)(3) is revised.
0
5. Paragraph (b)(5) Example 24 is revised.
    The additions and revisions read as follows:


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

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

------------------------------------------------------------------------
             Heading                              Section
------------------------------------------------------------------------
 
                                * * * * *
[Reserved]                         1.704-1(b)(1)(ii)(b)(3)
 
                                * * * * *
[Reserved]                         1.704-1(b)(4)(viii)(d)(3)
 
                                * * * * *
------------------------------------------------------------------------

    (1) * * *
    (ii) * * *
    (b) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.704-
1T(b)(1)(ii)(b)(3).
* * * * *
    (4) * * *
    (viii) * * *
    (c) * * *
    (3) * * *
    (ii) Special rules. Income attributable to an activity shall 
include the amount included in a partner's income as a guaranteed 
payment (within the meaning of section 707(c)) from the partnership to 
the extent that the guaranteed payment is not deductible by the 
partnership under foreign law. See paragraph (b)(5) Example 25 (iv) of 
this section. Income attributable to an activity shall not include an 
item of partnership income to the extent the allocation of such item of 
income (or payment thereof) results in a deduction under foreign law. 
See paragraph (b)(5) Example 25 (iii) and (iv) of this section. 
Similarly, income attributable to an activity shall not include net 
income that foreign law would exclude from the foreign tax base as a 
result of the status of a partner. See paragraph (b)(5) Example 27 of 
this section.
    (d) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.704-
1T(b)(4)(viii)(d)(3).
* * * * *
    (5) * * *
    Example 24. [Reserved]. For further guidance, see Sec.  1.704-
1T(b)(5) Example 24.
* * * * *

0
Par. 3. Section 1.704-1T is added to read as follows:


Sec.  1.704-1T  Partner's distributive share (temporary).

    (a) Through (b)(1)(ii)(b)(2) [Reserved]. For further guidance, see 
Sec.  1.704-1(a) through (b)(1)(ii)(b)(2).
    (3) Special rules for certain inter-branch payments--(A) In 
general. The provisions of Sec.  1.704-1(b)(4)(viii)(c)(3)(ii) and 
Sec.  1.704-1(b)(4)(viii)(d)(3) apply for partnership taxable years 
beginning on or after January 1, 2012.
    (B) Transition rule. Transition relief is provided herein to 
partnerships whose

[[Page 8135]]

agreements were entered into prior to February 14, 2012. In such case, 
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).
    (b)(1)(iii) through (b)(4)(viii)(d)(2) [Reserved]. For further 
guidance, see Sec.  1.704-1(b)(1)(iii) through (b)(4)(viii)(d)(2).
    (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)(4)(ix) through (b)(5) Example 23 [Reserved]. For further 
guidance, see Sec.  1.704-1(b)(4)(ix) through (b)(5) Example 23.

    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. 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. 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 percent to A and 25 percent 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 percent each). Accordingly, 
A is allocated 75 percent of the income from business M ($75,000), 
and 50 percent of the income from business N ($25,000). B is 
allocated 25 percent of the income from business M ($25,000), and 50 
percent 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. 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. 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 percent to A and 25 
percent 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 percent 
to A and 25 percent to B and the other $10,000 of such taxes is 
allocated 50 percent to A and 50 percent 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 
percent 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 percent to A and 25 
percent 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 percent to A and 
50 percent to B.
    Example 25 through (e) [Reserved]. For further guidance, see Sec.  
1.704-1(b)(5) Example 25 through (e).
    (f) Expiration date. The applicability of this section expires on 
February 9, 2015.

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


Sec.  1.909-0T  Outline of regulation provisions for section 909 
(temporary).

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

Sec.  1.909-1T Definitions and special rules (temporary).

    (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.
    (f) Expiration date.

Sec.  1.909-2T Splitter arrangements (temporary).

    (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.
    (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.

[[Page 8136]]

    (iii) Related income from a partnership inter-branch payment 
splitter arrangement.
    (c) Effective/applicability date.
    (d) Expiration date.

Sec.  1.909-3T Rules regarding related income and split taxes 
(temporary).

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

Sec.  1.909-4T Coordination rules (temporary).

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

Sec.  1.909-5T 2011 and 2012 splitter arrangements (temporary).

    (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.
    (d) Expiration date.

Sec.  1.909-6T Pre-2011 foreign tax credit splitting events 
(temporary).

    (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.
    (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.
    (i) Expiration date.


0
Par. 5. Sections 1.909-1T, 1.909-2T, 1.909-3T, 1.909-4T, 1.909-5T, and 
1.909-6T are added to read as follows:


Sec.  1.909-1T  Definitions and special rules (temporary).

    (a) Definitions. For purposes of section 909, this section, and 
Sec. Sec.  1.909-2T through -5T, 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 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).
    (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.  1.909-1T 
through -5T 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 beginning on or after January 1, 2011.
    (f) Expiration date. The applicability of this section expires on 
February 9, 2015.

[[Page 8137]]

Sec.  1.909-2T  Splitter arrangements (temporary).

    (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.  1.909-3T(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 the split taxes were 
paid or accrued. Accordingly, related income of the reverse hybrid only 
includes items of income or expense attributable to a disregarded 
entity owned by the reverse hybrid 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.
    (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 (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 
that 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. 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. 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. 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. 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

[[Page 8138]]

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 that 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. 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. 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. 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 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 
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. 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 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 taxes to add to 
its post-1986 foreign income taxes pool.
    (ii) Result. Pursuant to Sec.  1.909-2T(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.  
1.909-2T(b)(2)(iii)(A), the income of the CFC2 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.  1.909-2T(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.  1.909-2T(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.  1.909-2T(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. 
Assume that all items of income and loss of HP1 are allocated for 
U.S. Federal income tax purposes equally between CFC2 and CFC3, and 
that 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 + 100u share of HP1's income - 100u loss 
of DE - 30u country B income tax paid by CFC2 - 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 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-
2T(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.  1.909-2T(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

[[Page 8139]]

positive taxable incomes (CFC2's country B taxable income of 100u + 
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.  1.909-2T(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.  1.909-2T(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.  1.909-2T(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-
2T(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 payments or accruals on or with 
respect to such instrument:
    (1) Give rise to foreign income taxes paid or accrued by the owner 
of such instrument;
    (2) Are deductible by the issuer under the laws of a foreign 
jurisdiction in which the issuer is subject to tax; and
    (3) Do not give rise to income 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.
    (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 payments 
or accruals 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 is treated as indebtedness for foreign 
tax purposes, or with respect to which the issuer is otherwise entitled 
to a deduction for foreign tax purposes for amounts paid or accrued 
with respect to the instrument.
    (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 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 beginning on or after 
January 1, 2012.
    (d) Expiration date. The applicability of this section expires on 
February 9, 2015.


Sec.  1.909-3T  Rules regarding related income and split taxes 
(temporary).

    (a) Interim rules for identifying related income and split taxes. 
The principles of paragraphs (d) through (f) of Sec.  1.909-6T 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.  1.909-6T(d)(4) 
applies

[[Page 8140]]

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. The rules of this section apply 
to taxable years beginning on or after January 1, 2011.
    (d) Expiration date. The applicability of this section expires on 
February 9, 2015.


Sec.  1.909-4T  Coordination rules (temporary).

    (a) Interim rules. The principles of paragraph (g) of Sec.  1.909-
6T apply to taxable years beginning on or after January 1, 2011.
    (b) Effective/applicability date. The rules of this section apply 
to taxable years beginning on or after January 1, 2011.
    (c) Expiration date. The applicability of this section expires on 
February 9, 2015.


Sec.  1.909-5T  2011 and 2012 splitter arrangements (temporary).

    (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.  
1.909-6T(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.  
1.909-6T(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.  1.909-2T(b)(4) are split taxes to the 
extent that such taxes are identified as split taxes in Sec.  1.909-
2T(b)(4)(ii). The related income with respect to the split taxes is the 
related income described in Sec.  1.909-2T(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.  1.909-6T(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.  1.909-6T(b)(2), determined as if the 
payor were a section 902 corporation.
    (c) Effective/applicability date. The rules of this section apply 
to foreign taxes paid or accrued in taxable years beginning on or after 
January 1, 2011, and on or before February 14, 2012.
    (d) Expiration date. The applicability of this section expires on 
February 9, 2015.


Sec.  1.909-6T  Pre-2011 foreign tax credit splitting events 
(temporary).

    (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.  1.909-1T(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

[[Page 8141]]

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 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

[[Page 8142]]

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 (b)(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 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 if:
    (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 payor section 902 corporation and the covered person are 
combined 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

[[Page 8143]]

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 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 (b)(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.
    (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 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 beginning after December 31, 2010.
    (i) Expiration date. The applicability of this section expires on 
February 9, 2015.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: February 8, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-3356 Filed 2-9-12; 4:15 pm]
BILLING CODE 4830-01-P