8120 Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Rules and Regulations 

employment, investment, productivity, 

innovation, or the ability of United 

States-based companies to compete with 

foreign-based companies in domestic 

and import markets. 

Executive Order 12866 

The Department of State has reviewed 

this proposed rule to ensure its 

consistency with the regulatory 

philosophy and principles set forth in 

Executive Order 12866 and has 

determined that the benefits of this final 

regulation justify its costs. The 

Department does not consider this final 

rule to be an economically significant 

action within the scope of section 3(f)(1) 

of the Executive Order since it is not 

likely to have an annual effect on the 

economy of $100 million or more or to 

adversely affect in a material way the 

economy, a sector of the economy, 

competition, jobs, the environment, 

public health or safety, or State, local or 

tribal governments or communities. 

Executive Orders 12372 and 13132: 

Federalism 

This regulation will not have 

substantial direct effects on the States, 

on the relationship between the national 

government and the States, or the 

distribution of power and 

responsibilities among the various 

levels of government. Nor will the rule 

have federalism implications warranting 

the application of Executive Orders No. 

12372 and No. 13132. 

Executive Order 12988: Civil Justice 

Reform 

The Department has reviewed the 

regulations in light of sections 3(a) and 

3(b)(2) of Executive Order No. 12988 to 

eliminate ambiguity, minimize 

litigation, establish clear legal 

standards, and reduce burden. 

Executive Order 13563: Improving 

Regulation and Regulatory Review 

The Department has considered this 

rule in light of Executive Order 13563, 

dated January 18, 2011, and affirms that 

this regulation is consistent with the 

guidance therein. 

Paperwork Reduction Act 

This rule does not impose information 

collection requirements under the 

provisions of the Paperwork Reduction 

Act, 44 U.S.C. Chapter 35. 

List of Subjects in 22 CFR Part 41 

Documentation of nonimmigrants. 

For the reasons stated in the 

preamble, the Department of State 

amends 22 CFR part 41 to read as 

follows: 

PART 41—[AMENDED] 

■ 1. The authority citation for part 41 

continues to read as follows: 

Authority: 8 U.S.C. 1104; Pub. L. 105–277, 

112 Stat. 2681–795 through 2681–801; 8 

U.S.C. 1185 note (section 7209 of Pub. L. 

108–458, as amended by section 546 of Pub. 

L. 109–295). 

■ 2. Section 41.54 is revised to read as 

follows: 

§ 41.54 Intracompany transferees 

(executives, managers, and specialized 

knowledge employees) 

(a) Requirements for L classification. 

An alien shall be classifiable under the 

provisions of INA section 101(a)(15)(L) 

if: 

(1) The consular officer is satisfied 

that the alien qualifies under that 

section; and either 

(2) In the case of an individual 

petition, the consular officer has 

received official evidence of the 

approval by DHS of a petition to accord 

such classification or of the extension 

by DHS of the period of authorized stay 

in such classification; or 

(3) In the case of a blanket petition, 

(i) The alien has presented to the 

consular officer official evidence of the 

approval by DHS of a blanket petition 

listing only those intracompany 

relationships and positions found to 

qualify under INA section 101(a)(15)(L); 

(ii) The alien is otherwise eligible for 

L–1 classification pursuant to the 

blanket petition; and, 

(iii) The alien requests that he or she 

be accorded such classification for the 

purpose of being transferred to, or 

remaining in, qualifying positions 

identified in such blanket petition; or 

(4) The consular officer is satisfied the 

alien is the spouse or child of an alien 

so classified and is accompanying or 

following to join the principal alien. 

(b) Petition approval. The approval of 

a petition by DHS does not establish 

that the alien is eligible to receive a 

nonimmigrant visa. 

(c) Alien not entitled to L–1 

classification under individual petition. 

The consular officer must suspend 

action on the alien’s application and 

submit a report to the approving DHS 

office if the consular officer knows or 

has reason to believe that an alien 

applying for a visa as the beneficiary of 

an approved individual petition under 

INA section 101(a)(15)(L) is not entitled 

to such classification as approved. 

(d) Labor disputes. Citizens of Canada 

or Mexico shall not be entitled to 

classification under this section if the 

Secretary of Homeland Security and the 

Secretary of Labor have certified that: 

(1) There is in progress a strike or 

lockout in the course of a labor dispute 

in the occupational classification at the 

place or intended place of employment; 

and, 

(2) The alien has failed to establish 

that the alien’s entry will not affect 

adversely the settlement of the strike or 

lockout or the employment of any 

person who is involved in the strike or 

lockout. 

(e) Alien not entitled to L–1 

classification under blanket petition. 

The consular officer shall deny L 

classification based on a blanket 

petition if the documentation presented 

by the alien claiming to be a beneficiary 

thereof does not establish to the 

satisfaction of the consular officer that 

(1) The alien has been continuously 

employed by the same employer, an 

affiliate or a subsidiary thereof, for one 

year within the three years immediately 

preceding the application for the L visa; 

(2) The alien was rendering services 

in a capacity that is managerial, 

executive, or involves specialized 

knowledge throughout that year; or 

(3) The alien is destined to render 

services in such a capacity, as identified 

in the petition and in an organization 

listed in the petition. 

(f) Former exchange visitor. Former 

exchange visitors who are subject to the 

two-year foreign residence requirement 

of INA section 212(e) are ineligible to 

apply for visas under INA section 

101(a)(15)(L) until they have fulfilled 

the residence requirement or obtained a 

waiver of the requirement. 

Dated: January 31, 2012. 

Janice L. Jacobs, 

Assistant Secretary for Consular Affairs, 

Department of State. 

[FR Doc. 2012–3455 Filed 2–13–12; 8:45 am] 

BILLING CODE 4710–06–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9576] 

RIN 1545–BF73 

Definition of a Taxpayer 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

Income Tax Regulations which provide 

guidance relating to the determination 

of who is considered to pay a foreign 

income tax for purposes of the foreign 

tax credit. These regulations provide 

rules for identifying the person with 

legal liability to pay the foreign income 


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tax in certain circumstances. These 

regulations affect taxpayers claiming 

foreign tax credits. 

DATES: Effective Date: These regulations 

are effective on February 14, 2012. 

Applicability Dates: For dates of 

applicability, see § 1.901–2(h)(4). 

FOR FURTHER INFORMATION CONTACT: 

Suzanne M. Walsh, (202) 622–3850 (not 

a toll-free call). 

SUPPLEMENTARY INFORMATION: 

Background 

I. Section 901 Regulations 

On August 4, 2006, the Federal 

Register published proposed regulations 

(71 FR 44240) under section 901 of the 

Internal Revenue Code concerning the 

determination of the person who paid a 

foreign income tax for foreign tax credit 

purposes (2006 proposed regulations). 

The 2006 proposed regulations would 

address the inappropriate separation of 

foreign income taxes from the income 

on which the tax was imposed in certain 

circumstances. In particular, the 2006 

proposed regulations would provide 

guidance under § 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 2006 

proposed regulations and held a public 

hearing on October 13, 2006. All 

comments are available at 

www.regulations.gov or upon request. In 

Notice 2007–95 (2007–2 CB 1091 

(December 3, 2007)), the Treasury 

Department and the IRS announced that 

when issued, the final regulations will 

be effective for taxable years beginning 

after the final regulations are published 

in the Federal Register. This Treasury 

decision adopts, in part, the 2006 

proposed regulations with the changes 

discussed in this preamble. 

II. Section 909 and Notice 2010–92 

Section 909 was enacted as part of 

legislation commonly referred to as the 

Education Jobs and Medicaid Assistance 

Act (EJMAA) on August 10, 2010 (Pub. 

L. 111–226, 124 Stat. 2389 (2010)). 

Section 909 was enacted to address 

concerns about the inappropriate 

separation of foreign income taxes and 

related income. 

Section 909 provides that there is a 

foreign tax credit splitting event if a 

foreign income tax is paid or accrued by 

a taxpayer or section 902 corporation 

and the related income is, or will be, 

taken into account by a covered person 

with respect to such taxpayer or section 

902 corporation. In such a case, the tax 

is suspended until the taxable year in 

which the related income is taken into 

account by the payor of the tax or, if the 

payor is a section 902 corporation, by a 

section 902 shareholder of the section 

902 corporation. 

On December 6, 2010, the Treasury 

Department and the IRS issued Notice 

2010–92 (2010–2 CB 916 (December 6, 

2010)), which primarily addresses the 

application of section 909 to foreign 

income taxes paid or accrued by a 

section 902 corporation in taxable years 

beginning on or before December 31, 

2010 (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 

taxable years beginning after December 

31, 2010 (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 (pre2011 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 pre2011 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 future guidance will 

provide that foreign tax credit splitting 

events in post-2010 taxable years will at 

least include all of the pre-2011 splitter 

arrangements. 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. § 1.901–2(f)(2)(iii). Temporary 

regulations under section 909 are 

published elsewhere in this issue of the 

Federal Register. 

Summary of Comments and 

Explanation of Revisions 

I. In General 

In response to written comments on 

the 2006 proposed regulations and in 

light of the enactment of section 909, 

the Treasury Department and the IRS 

have determined that it is appropriate to 

finalize certain portions of the 2006 

proposed regulations. These final 

regulations revise several of the 

proposed rules to take into account 

comments received. Other portions of 

those regulations are adopted without 

amendment. The Treasury Department 

and the IRS have also determined that 

the remaining portions of the 2006 

proposed regulations should be 

withdrawn. The Treasury Department 

and the IRS, however, are continuing to 

consider whether and to what extent to 

revise or clarify the general rule that tax 

is considered paid by the person who 

has legal liability under foreign law for 

the tax. For example, the Treasury 

Department and the IRS are continuing 

to study whether it is appropriate to 

provide a special rule for determining 

who has legal liability in the case of a 

withholding tax imposed on an amount 

of income that is considered received by 

different persons for U.S. and foreign 

tax purposes, as in the case of certain 

sale-repurchase transactions. 

II. Taxes Imposed on Combined Income 

Section 1.901–2(f)(2) of the 2006 

proposed regulations addresses the 

application of the legal liability rule to 

foreign consolidated groups and other 

combined income regimes, including 

those in which the regime imposes joint 

and several liability in the U.S. sense, 

those in which the regime treats 

subsidiaries as branches of the parent 

corporation (or otherwise attributes 

income of subsidiaries to the parent 

corporation), and those in which some 

of the group members have limited 

obligations, or even no obligation, to 

pay the consolidated tax. Section 1.901– 

2(f)(2)(i) of the 2006 proposed 

regulations provides that the foreign tax 

must be apportioned among the persons 

whose income is included in the 

combined base pro rata based on each 

person’s portion of the combined 

income, as computed under foreign law. 

Because failure to allocate appropriately 

the consolidated tax among the 

members of the group may result in the 

separation of foreign income tax from 

the related income as described in 

section 909, comments recommended 

that the proposed rules be finalized in 

lieu of treating these arrangements as 

foreign tax credit splitting events under 

section 909, which would require 

suspension of split tax until the related 

income is taken into account. The 

Treasury Department and the IRS agree 

with the comments, and accordingly, 

§ 1.901–2(f)(3)(i) of the final regulations 

adopts with minor modifications Prop. 

§ 1.901–2(f)(2)(i). As these regulations 

are generally effective for foreign taxes 

paid or accrued during taxable years 

beginning after February 14, 2012, a 

foreign tax credit splitting event will not 

occur with respect to foreign taxes paid 

or accrued on combined income in such 


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years. However, with respect to foreign 

income taxes paid or accrued on 

combined income during taxable years 

beginning after December 31, 2010, and 

on or before February 14, 2012, 

temporary regulations under section 909 

provide that a foreign tax credit splitting 

event occurs to the extent that a 

taxpayer does 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 § 1.901–2(f)(3) prior to 

its amendment by this Treasury 

decision. 

One comment recommended that 

combined income subject to preferential 

tax rates should be allocated only to 

group members with that type of 

income, in order to more closely match 

the tax with the related income. The 

Treasury Department and the IRS agree 

with this comment, and § 1.901– 

2(f)(3)(i) of the final regulations 

provides that combined income with 

respect to each foreign tax that is 

imposed on a combined basis, and 

combined income subject to tax 

exemption or preferential tax rates, is 

computed separately, and the tax on 

that combined income base is allocated 

separately. 

Section 1.901–2(f)(2)(ii) of the 2006 

proposed regulations provides that for 

purposes of § 1.901–2(f)(2) of the 2006 

proposed regulations, foreign tax is 

imposed on the combined income of 

two or more persons if such persons 

compute their taxable income on a 

combined basis under foreign law. 

Foreign tax is considered to be imposed 

on the combined income of two or more 

persons even if the combined income is 

computed under foreign law by 

attributing to one such person (for 

example, the foreign parent of a foreign 

consolidated group) the income of other 

such persons. However, foreign tax is 

not considered to be imposed on the 

combined income of two or more 

persons solely because foreign law: (1) 

Permits one person to surrender a net 

loss to another person pursuant to a 

group relief or similar regime; (2) 

requires a shareholder of a corporation 

to include in income amounts 

attributable to taxes imposed on the 

corporation with respect to distributed 

earnings, pursuant to an integrated tax 

system that allows the shareholder a 

credit for such taxes; or (3) requires a 

shareholder to include, pursuant to an 

anti-deferral regime (similar to subpart F 

of the Internal Revenue Code (sections 

951 through 965)), income attributable 

to the shareholder’s interest in the 

corporation. 

The final regulations adopt § 1.901– 

2(f)(2)(ii) of the 2006 proposed 

regulations with several modifications 

in response to comments. Section 

1.901–2(f)(3)(ii) of the final regulations 

provides that tax is considered to be 

computed on a combined basis if two or 

more persons that would otherwise be 

subject to foreign tax on their separate 

taxable incomes add their items of 

income, gain, deduction, and loss to 

compute a single consolidated taxable 

income amount for foreign tax purposes. 

In addition, foreign tax is not 

considered to be imposed on the 

combined income of two or more 

persons if, because one or more of such 

persons is a fiscally transparent entity 

under foreign law, only one of such 

persons is subject to tax under foreign 

law (even if two or more of such persons 

are corporations for U.S. tax purposes). 

The regulations include additional 

illustrations clarifying that foreign tax is 

not considered to be imposed on 

combined income solely because foreign 

law: (1) Reallocates income from one 

person to a related person under foreign 

transfer pricing provisions; (2) requires 

a person to take into account a 

distributive share of taxable income of 

an entity that is a partnership or other 

fiscally transparent entity for foreign tax 

law purposes; or (3) requires a person to 

take all or part of the income of an 

entity that is a corporation for U.S. tax 

purposes into account because foreign 

law treats the entity as a branch or 

fiscally transparent entity (a reverse 

hybrid). A reverse hybrid does not 

include an entity that is treated under 

foreign law as a branch or fiscally 

transparent entity solely for purposes of 

calculating combined income of a 

foreign consolidated group. 

One comment requested clarification 

that the exclusions from the definition 

of a combined income base (for 

example, foreign integration and antideferral regimes) apply solely for 

purposes of determining whether a 

foreign income tax is imposed on 

combined income, and do not apply for 

purposes of determining each person’s 

ratable share of the combined income 

base. The Treasury Department and the 

IRS agree that these exclusions from the 

definition of a combined income base 

do not exclude any amount of income 

otherwise subject to tax on a combined 

basis from the operation of the 

combined income rule. However, since 

nothing in the list of exclusions affects 

the amount of income in the combined 

income base, which is computed under 

foreign law, the Treasury Department 

and the IRS believe a change is 

unnecessary. 

Section 1.901–2(f)(2)(iii) of the 2006 

proposed regulations provides that a 

reverse hybrid is considered to have 

legal liability under foreign law for 

foreign taxes imposed on the owners of 

the reverse hybrid in respect of each 

owner’s share of the reverse hybrid’s 

income. As stated in Notice 2010–92, 

the Treasury Department and the IRS 

will not 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. Notice 

2010–92 identifies reverse hybrids as 

pre-2011 splitter arrangements, and the 

temporary regulations under section 909 

also identify reverse hybrids as splitter 

arrangements. 

Section 1.901–2(f)(2)(iv) of the 2006 

proposed regulations provides rules for 

determining each person’s share of the 

combined income tax base, generally 

relying on foreign tax reporting of 

separate taxable income or books 

maintained for that purpose. The 2006 

proposed regulations provide that 

payments between group members that 

result in a deduction under both U.S. 

and foreign tax law will be given effect 

in determining each person’s share of 

the combined income. The 2006 

proposed regulations, however, 

explicitly reserve with respect to the 

effect of hybrid instruments and 

disregarded payments between related 

parties, which the preamble to the 

proposed regulations describes as a 

matter to be addressed in subsequent 

published guidance. Section 1.901– 

2(f)(2)(iv) of the 2006 proposed 

regulations also provides special rules 

addressing the effect of dividends (and 

deemed dividends) and net losses of 

group members on the determination of 

separate taxable income. 

Section 1.901–2(f)(3)(iii) of the final 

regulations adopts Prop. § 1.901– 

2(f)(2)(iv) with modifications reflecting 

that certain hybrid instruments and 

certain disregarded payments are treated 

as splitter arrangements subject to 

section 909. In particular, the final 

regulations provide that in determining 

separate taxable income of members of 

a combined income group, effect will be 

given to intercompany payments that 

are deductible under foreign law, even 

if such payments are not deductible (or 

are disregarded) for purposes of U.S. tax 

law. Thus, for example, interest accrued 

by one group member with respect to an 

instrument held by another member that 

is treated as debt for foreign tax 

purposes but as equity for U.S. tax 

purposes would be considered income 

of the holder and would reduce the 

taxable income of the issuer. The final 

regulations, however, include a crossVerDate Mar<15>2010 14:25 Feb 13, 2012 Jkt 226001 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 E:\FR\FM\14FER1.SGM 14FER1

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Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Rules and Regulations 8123 

reference to § 1.909–2T(b)(3)(i) for rules 

requiring suspension of foreign income 

taxes paid or accrued by the owner of 

a U.S. equity hybrid instrument. 

Section 1.901–2(f)(2)(v) of the 2006 

proposed regulations provides that U.S. 

tax principles apply to determine the 

tax consequences if one person remits a 

tax that is the legal liability of another 

person. For example, a payment of tax 

for which a corporation has legal 

liability by a shareholder of that 

corporation (including an owner of a 

reverse hybrid), will ordinarily result in 

a deemed capital contribution and 

deemed payment of tax by the 

corporation. Prop. § 1.901–2(f)(2)(v) also 

provides that if the corporation 

reimburses the shareholder for the tax 

payment, such reimbursement would 

ordinarily be treated as a distribution for 

U.S. tax purposes. The Treasury 

Department and the IRS received several 

comments regarding Prop. § 1.901– 

2(f)(2)(v) noting that a shareholder’s 

payment of a corporation’s tax and a 

corporation’s reimbursement of a 

shareholder for paying its tax liability 

will not result in deemed capital 

contribution and deemed dividend 

treatment if arrangements are in place 

that treat the shareholder’s payment of 

the tax as pursuant to a lending or 

agency arrangement. In response to 

these comments, the second and third 

sentences of § 1.901–2(f)(2)(v) of the 

2006 proposed regulations are not 

included in § 1.901–2(f)(3)(iv) of the 

final regulations, and the final 

regulations simply provide that U.S. tax 

principles apply to determine the tax 

consequences if one person remits a tax 

that is the legal liability of another 

person. 

III. Taxes Imposed on Partnerships and 

Disregarded Entities 

Section 1.901–2(f)(3) of the 2006 

proposed regulations provides rules 

regarding the treatment of two types of 

hybrid entities. First, in the case of an 

entity that is treated as a partnership for 

U.S. income tax purposes but is taxable 

at the entity level under foreign law 

(which the 2006 proposed regulations 

define as a hybrid partnership), such 

entity is considered to have legal 

liability under foreign law for foreign 

income tax imposed on the income of 

the entity. The 2006 proposed 

regulations also provide rules for 

allocating foreign tax paid or accrued by 

a hybrid partnership if the partnership’s 

U.S. taxable year closes with respect to 

one or more (or all) partners or if there 

is a change in ownership of the hybrid 

partnership. See Prop. § 1.901–2(f)(3)(i). 

Second, in the case of an entity that 

is disregarded as separate from its 

owner for U.S. federal income tax 

purposes, the person that is treated as 

owning the assets of such entity for U.S. 

tax purposes is considered to have legal 

liability under foreign law for tax 

imposed on the income of the entity. 

The 2006 proposed regulations provide 

rules for allocating foreign tax between 

the old owner and the new owner of a 

disregarded entity if there is a change in 

the ownership of the disregarded entity 

during the entity’s foreign taxable year 

and such change does not result in a 

closing of the entity’s foreign taxable 

year. See Prop. § 1.901–2(f)(3)(ii). The 

2006 proposed regulations generally 

provide that for hybrid partnerships and 

disregarded entities, allocations of tax 

will be made under the principles of 

§ 1.1502–76(b) based on the respective 

portions of the taxable income of the 

hybrid entity (as determined under 

foreign law) for the foreign taxable year 

that are attributable to the period ending 

on the date of the ownership change (or 

the last day of the terminating 

partnership’s U.S. taxable year) and the 

period ending after such date. This 

approach is consistent with the rule 

provided in § 1.338–9(d) for 

apportioning foreign tax paid by a target 

corporation that is acquired in a 

transaction that is treated as an asset 

acquisition pursuant to an election 

under section 338, if the foreign taxable 

year of the target does not close at the 

end of the acquisition date. 

A change in the ownership of a hybrid 

partnership or disregarded entity during 

the entity’s foreign taxable year that 

does not result in the closing of the 

hybrid entity’s foreign taxable year may 

result in the separation of income from 

the associated foreign income taxes. A 

change in the ownership occurs if there 

is a disposition of all or a portion of the 

owner’s interest. A separation of income 

from the associated foreign income taxes 

could occur if the foreign tax paid or 

accrued with respect to such foreign 

taxable year has not been allocated 

appropriately between the old owner 

and the new owner. Certain changes of 

ownership involving related parties 

could be treated as a foreign tax credit 

splitting event under section 909. 

Comments recommended that the 

proposed legal liability rules addressing 

the treatment of hybrid entities be 

finalized in lieu of treating the abovedescribed case of a change in the 

ownership of a hybrid entity as a foreign 

tax credit splitting event under section 

909. The Treasury Department and the 

IRS agree, and accordingly, the final 

regulations adopt the proposed rules 

with modifications in response to 

comments. 

One comment recommended that, if a 

termination under section 708(b)(1)(B) 

requires a closing of the books to 

allocate U.S. taxable income between 

the old partnership and new partnership 

but the foreign taxable year does not 

close, or if a change in a partner’s 

interest results in a closing of the 

partnership’s taxable year with respect 

to the partner and an allocation of 

partnership items based on a closing of 

the books under section 706, foreign tax 

for the year of change should similarly 

be allocated under the principles of 

sections 706 and 708 and the 

regulations under those sections based 

on a closing of the books, rather than 

under the principles of § 1.1502–76(b), 

which permits ratable allocation of the 

foreign tax with an exception for 

extraordinary items. The comment 

noted that apportioning the foreign tax 

using the same methodology as is used 

to apportion U.S. taxable income 

between the terminating partnership 

and the new partnership, or between the 

partner whose interest changes and the 

other partners, would lead to better 

matching of foreign tax and the 

associated income. The Treasury 

Department and the IRS are concerned 

about the increased administrative and 

compliance burdens associated with 

requiring a closing of the foreign tax 

books in order to apportion foreign tax 

for the year of change. Accordingly, this 

comment was not adopted. 

In response to a comment, the final 

regulations apply the same foreign tax 

allocation rules to section 708 

terminations that arise under section 

708(b)(1)(A) in the case of a partnership 

that has ceased its operations, including 

a change in ownership in which a 

partnership becomes a disregarded 

entity. The final regulations also apply 

the same allocation rules if there are 

multiple ownership changes within a 

single foreign taxable year. 

Finally, § 1.901–2(f)(3)(i) of the 2006 

proposed regulations defines a hybrid 

partnership as an entity that is treated 

as a partnership for U.S. income tax 

purposes but is taxable at the entity 

level under foreign law. Because the 

Treasury Department and the IRS 

believe that a special definition of the 

term hybrid partnership is unnecessary 

and could cause confusion, references to 

the term hybrid partnership are replaced 

in the final regulations with references 

to the term partnership. No substantive 

change is intended by this revision. 

IV. Effective/Applicability Date 

The 2006 proposed regulations would 

generally apply to foreign taxes paid or 

accrued during taxable years beginning 

on or after January 1, 2007. However, 


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consistent with Notice 2007–95, 

§ 1.901–2(h)(4) provides that these final 

regulations are generally effective for 

foreign taxes paid or accrued in taxable 

years beginning after February 14, 2012. 

A comment raised several transitionrelated questions arising in situations 

where applying the final regulations 

changes the person who is considered 

the taxpayer with respect to a particular 

foreign income tax. First, the comment 

stated it is unclear what happens to the 

carryover under section 904(c) of foreign 

taxes paid or accrued in a taxable year 

beginning before the effective date of the 

final regulations (pre-effective date year) 

to a taxable year beginning on or after 

the effective date of the final regulations 

(post-effective date year). The comment 

recommended that the regulations 

clarify the treatment of foreign tax credit 

carryovers from pre-effective date years 

and foreign tax credit carrybacks from 

post-effective date years, and that the 

regulations provide that taxes paid or 

accrued in a pre-effective date year that 

are carried forward to a post-effective 

date year be assigned to the taxpayer 

that paid or accrued the foreign taxes in 

the pre-effective date year. Similarly, 

the comment recommended that taxes 

paid or accrued in a post-effective date 

year that are carried back to the last preeffective date year should be treated in 

the carryback year as paid or accrued by 

the taxpayer that paid or accrued the 

taxes in the post-effective date year. 

The Treasury Department and the IRS 

believe it is clear under current law that 

the person who paid or accrued foreign 

income taxes in a pre-effective date year 

is the person who is eligible under 

section 904(c) to carry forward such 

taxes to a post-effective date year, 

notwithstanding that such person may 

not be considered the taxpayer under 

these final regulations had the taxes 

been paid or accrued in the posteffective date carryover year. Similarly, 

the Treasury Department and the IRS 

believe it is clear that the person who 

paid or accrued foreign income taxes in 

a post-effective date year is the person 

who is eligible under section 904(c) to 

carry back such taxes to the last preeffective date year. Therefore, the 

Treasury Department and the IRS 

believe that revision of the final 

regulations to reflect this comment is 

unnecessary. 

The comment also recommended that 

taxpayers be permitted to apply the final 

regulations retroactively, but that 

taxpayers should not be permitted to 

take inconsistent positions with respect 

to the incidence of the foreign tax. The 

comment recommended that a duty of 

consistency be imposed on related 

parties, or parties that were related at 

the time the foreign tax was imposed. If 

parties that were related but are now 

unrelated do not agree on an election to 

apply the regulations retroactively, the 

comment stated no election should be 

permitted. 

In response to the comment, the final 

regulations permit taxpayers to apply 

the combined income rules of § 1.901– 

2(f)(3) of the final regulations to taxable 

years beginning after December 31, 

2010, and on or before February 14, 

2012. This provision will permit 

taxpayers to avoid uncertainty regarding 

the application of section 909 to foreign 

taxes paid or accrued by foreign 

consolidated groups in pre-effective 

date taxable years beginning in 2011 

and 2012. No inference is intended as to 

the determination of the person who 

paid the foreign tax under the rules in 

effect prior to the amendment of the 

regulations by this Treasury decision. 

To the extent that a taxpayer did not 

allocate foreign consolidated tax 

liability among the members of a foreign 

consolidated group based on each 

member’s share of the consolidated 

taxable income included in the foreign 

tax base under the principles of § 1.901– 

2(f)(3), the foreign consolidated group is 

a foreign tax credit splitting event under 

section 909. See Section 4.03 of Notice 

2010–92 and § 1.909–5T. 

The Treasury Department and the IRS 

have concerns about the administrative 

complexity and burden on taxpayers 

associated with requirements to elect to 

apply § 1.901–2(f)(4) retroactively that 

would be necessary to prevent potential 

whipsaws from two unrelated persons 

claiming a foreign tax credit for a single 

payment of foreign income tax, in cases 

where different persons are considered 

to pay the tax under the final 

regulations and under prior law. 

Although taxpayers may not elect to 

apply § 1.901–2(f)(4) retroactively, 

certain portions of that provision, 

specifically with respect to the person 

that has legal liability for a foreign tax 

paid by a disregarded entity or a 

partnership in the absence of a change 

in ownership, were consistent with the 

rules in effect under the final 

regulations prior to amendment by this 

Treasury decision. In addition, to 

prevent treating more than one person 

as paying a single amount of tax, 

§ 1.901–2(f)(4) of the final regulations 

will not apply to any amount of tax paid 

or accrued in a post-effective date year 

of any person, if such tax would be 

treated as paid or accrued by a different 

person in a pre-effective date year under 

the prior regulations. 

Availability of IRS Documents 

IRS notices 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 

in part as of February 14, 2012. 

Notice 2007–95 (2007–2 CB 1091). 

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 this regulation and because the 

regulation does not impose a collection 

of information requirement on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Pursuant to section 7805(f) of the 

Internal Revenue Code, the notice of 

proposed rulemaking preceding this 

regulation was submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

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 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

■ Par. 2. Section 1.706–1 is amended by 

adding paragraph (c)(6) to read as 

follows: 

§ 1.706–1 Taxable years of partner and 

partnership. 

* * * * * 

(c) * * * 

(6) Foreign taxes. For rules relating to 

the treatment of foreign taxes paid or 


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accrued by a partnership, see § 1.901– 

2(f)(4)(i) and (f)(4)(ii). 

* * * * * 

■ Par. 3. Section 1.901–2 is amended by 

revising paragraph (f)(3) and adding 

paragraphs (f)(4), (f)(5), and (h)(4) to 

read as follows: 

§ 1.901–2 Income, war profits, or excess 

profits tax paid or accrued. 

* * * * * 

(f) * * * 

(3) Taxes imposed on combined 

income of two or more persons—(i) In 

general. If foreign tax is imposed on the 

combined income of two or more 

persons (for example, a husband and 

wife or a corporation and one or more 

of its subsidiaries), foreign law is 

considered to impose legal liability on 

each such person for the amount of the 

tax that is attributable to such person’s 

portion of the base of the tax. Therefore, 

if foreign tax is imposed on the 

combined income of two or more 

persons, such tax is allocated among, 

and considered paid by, such persons 

on a pro rata basis in proportion to each 

person’s portion of the combined 

income, as determined under foreign 

law and paragraph (f)(3)(iii) of this 

section. Combined income with respect 

to each foreign tax that is imposed on 

a combined basis is computed 

separately, and the tax on that combined 

income is allocated separately under 

this paragraph (f)(3)(i). If foreign law 

exempts from tax, or provides for 

specific rates of tax with respect to, 

certain types of income, or if certain 

expenses, deductions or credits are 

taken into account only with respect to 

a particular type of income, combined 

income with respect to such portions of 

the combined income is also computed 

separately, and the tax on that combined 

income is allocated separately under 

this paragraph (f)(3)(i). The rules of this 

paragraph (f)(3) apply regardless of 

which person is obligated to remit the 

tax, which person actually remits the 

tax, or which person the foreign country 

could proceed against to collect the tax 

in the event all or a portion of the tax 

is not paid. For purposes of this 

paragraph (f)(3), the term person means 

an individual or an entity (including a 

disregarded entity described in 

§ 301.7701–2(c)(2)(i) of this chapter) that 

is subject to tax in a foreign country as 

a corporation (or otherwise at the entity 

level). In determining the amount of tax 

paid by an owner of a partnership or a 

disregarded entity, this paragraph (f)(3) 

first applies to determine the amount of 

tax paid by the partnership or 

disregarded entity, and then paragraph 

(f)(4) of this section applies to allocate 

the amount of such tax to the owner. 

(ii) Combined income. For purposes of 

this paragraph (f)(3), foreign tax is 

imposed on the combined income of 

two or more persons if such persons 

compute their taxable income on a 

combined basis under foreign law and 

foreign tax would otherwise be imposed 

on each such person on its separate 

taxable income. For example, income is 

computed on a combined basis if two or 

more persons add their items of income, 

gain, deduction, and loss to compute a 

single consolidated taxable income 

amount for foreign tax purposes. 

Foreign tax is considered to be imposed 

on the combined income of two or more 

persons even if the combined income is 

computed under foreign law by 

attributing to one such person (for 

example, the foreign parent of a foreign 

consolidated group) the income of other 

such persons or by treating persons that 

would otherwise be subject to tax as 

separate entities as unincorporated 

branches of a single corporation for 

purposes of computing the foreign tax 

on the combined income of the group. 

However, foreign tax is not considered 

to be imposed on the combined income 

of two or more persons if, because one 

or more persons is a fiscally transparent 

entity (under the principles of § 1.894– 

1(d)(3)) under foreign law, only one of 

such persons is subject to tax under 

foreign law (even if two or more of such 

persons are corporations for U.S. 

Federal income tax purposes). 

Therefore, foreign tax is not considered 

to be imposed on the combined income 

of two or more persons solely because 

foreign law: 

(A) Permits one person to surrender a 

loss to another person pursuant to a 

group relief or other loss-sharing regime 

described in § 1.909–2T(b)(2)(vi); 

(B) Requires a shareholder of a 

corporation to include in income 

amounts attributable to taxes imposed 

on the corporation with respect to 

distributed earnings, pursuant to an 

integrated tax system that allows the 

shareholder a credit for such taxes; 

(C) Requires a shareholder to include, 

pursuant to an anti-deferral regime 

(similar to subpart F of the Internal 

Revenue Code (sections 951 through 

965)), income attributable to the 

shareholder’s interest in the 

corporation; 

(D) Reallocates income from one 

person to a related person under foreign 

transfer pricing rules; 

(E) Requires a person to take into 

account a distributive share of income 

of an entity that is a partnership or other 

fiscally transparent entity for foreign tax 

law purposes; or 

(F) Requires a person to take all or 

part of the income of an entity that is 

a corporation for U.S. Federal income 

tax purposes into account because 

foreign law treats the entity as a branch 

or fiscally transparent entity (a reverse 

hybrid). A reverse hybrid does not 

include an entity that is treated under 

foreign law as a branch or fiscally 

transparent entity solely for purposes of 

calculating combined income of a 

foreign consolidated group. 

(iii) Portion of combined income—(A) 

In general. Each person’s portion of the 

combined income is determined by 

reference to any return, schedule or 

other document that must be filed or 

maintained with respect to a person 

showing such person’s income for 

foreign tax purposes, as properly 

amended or adjusted for foreign tax 

purposes. If no such return, schedule or 

other document must be filed or 

maintained with respect to a person for 

foreign tax purposes, then, for purposes 

of this paragraph (f)(3), such person’s 

income is determined from the books of 

account regularly maintained by or on 

behalf of the person for purposes of 

computing its income for foreign tax 

purposes. Each person’s portion of the 

combined income is determined by 

adjusting such person’s income 

determined under this paragraph 

(f)(3)(iii)(A) as provided in paragraph 

(f)(3)(iii)(B) and (f)(3)(iii)(C) of this 

section. 

(B) Effect of certain payments—(1) 

Each person’s portion of the combined 

income is determined by giving effect to 

payments and accrued amounts of 

interest, rents, royalties, and other 

amounts between persons whose 

income is included in the combined 

base to the extent such amounts would 

be taken into account in computing the 

separate taxable incomes of such 

persons under foreign law if they did 

not compute their income on a 

combined basis. Each person’s portion 

of the combined income is determined 

without taking into account any 

payments from other persons whose 

income is included in the combined 

base that are treated as dividends or 

other non-deductible distributions with 

respect to equity under foreign law, and 

without taking into account deemed 

dividends or any similar attribution of 

income made for purposes of computing 

the combined income under foreign law, 

regardless of whether any such deemed 

dividend or attribution of income 

results in a deduction or inclusion 

under foreign law. 

(2) For purposes of determining each 

person’s portion of the combined 

income, the treatment of a payment is 

determined under foreign law. Thus, for 

example, interest accrued by one group 

member with respect to an instrument 


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held by another member that is treated 

as debt for foreign tax purposes but as 

equity for U.S. Federal income tax 

purposes would be considered income 

of the holder and would reduce the 

income of the issuer. See also § 1.909– 

2T(b)(3)(i) for rules requiring 

suspension of foreign income taxes paid 

or accrued by the owner of a U.S. equity 

hybrid instrument. 

(C) Net losses. If tax is considered to 

be imposed on the combined income of 

three or more persons and one or more 

of such persons has a net loss for the 

taxable year for foreign tax purposes, the 

following rules apply. If foreign law 

provides mandatory rules for allocating 

the net loss among the other persons, 

then the rules that apply for foreign tax 

purposes apply for purposes of this 

paragraph (f)(3). If foreign law does not 

provide mandatory rules for allocating 

the net loss, the net loss is allocated 

among all other such persons on a pro 

rata basis in proportion to the amount 

of each person’s income, as determined 

under paragraphs (f)(3)(iii)(A) and 

(f)(3)(iii)(B) of this section. For purposes 

of this paragraph (f)(3)(iii)(C), foreign 

law is not considered to provide 

mandatory rules for allocating a net loss 

solely because such loss is attributed 

from one person to a second person for 

purposes of computing combined 

income, as described in paragraph 

(f)(3)(ii) of this section. 

(iv) Collateral consequences. U.S. tax 

principles apply to determine the tax 

consequences if one person remits a tax 

that is the legal liability of, and thus is 

considered paid by, another person. 

(4) Taxes imposed on partnerships 

and disregarded entities—(i) 

Partnerships. If foreign law imposes tax 

at the entity level on the income of a 

partnership, the partnership is 

considered to be legally liable for such 

tax under foreign law and therefore is 

considered to pay the tax for U.S. 

Federal income tax purposes. The rules 

of this paragraph (f)(4)(i) apply 

regardless of which person is obligated 

to remit the tax, which person actually 

remits the tax, or which person the 

foreign country could proceed against to 

collect the tax in the event all or a 

portion of the tax is not paid. See 

§§ 1.702–1(a)(6) and 1.704–1(b)(4)(viii) 

for rules relating to the determination of 

a partner’s distributive share of such 

tax. If the U.S. taxable year of a 

partnership closes for all partners due to 

a termination of the partnership under 

section 708(b)(1)(A) and the regulations 

under that section and the foreign 

taxable year of the partnership does not 

close, then foreign tax paid or accrued 

with respect to the foreign taxable year 

in which the termination occurs is 

allocated between the terminating 

partnership and its successors or 

assigns. For example, if, as a result of a 

change in ownership during a 

partnership’s foreign taxable year, the 

partnership becomes a disregarded 

entity and the entity’s foreign taxable 

year does not close, foreign tax paid or 

accrued by the owner of the disregarded 

entity with respect to the foreign taxable 

year is allocated between the 

partnership and the owner of the 

disregarded entity. If the U.S. taxable 

year of a partnership closes for all 

partners due to a termination of the 

partnership under section 708(b)(1)(B) 

and the regulations under that section 

and the foreign taxable year of the 

partnership does not close, then foreign 

tax paid or accrued by the new 

partnership with respect to the foreign 

taxable year in which the termination 

occurs is allocated between the 

terminating partnership and the new 

partnership. If multiple terminations 

under section 708(b)(1)(B) occur within 

the foreign taxable year, foreign tax paid 

or accrued with respect to that foreign 

taxable year by a new partnership is 

allocated among all terminating and 

new partnerships. In the case of any 

termination under section 708(b)(1), the 

allocation of foreign tax is made based 

on the respective portions of the taxable 

income (as determined under foreign 

law) for the foreign taxable year that are 

attributable under the principles of 

§ 1.1502–76(b) to the period of existence 

of each terminating and new 

partnership, or successor or assign of a 

terminating partnership, during the 

foreign taxable year. Foreign tax 

allocated to a terminating partnership 

under this paragraph (f)(4)(i) is treated 

as paid or accrued by such partnership 

as of the close of the last day of its final 

U.S. taxable year. In the case of a change 

in any partner’s interest in the 

partnership (a variance), except as 

otherwise provided in section 706(d)(2) 

(relating to certain cash basis items) or 

706(d)(3) (relating to tiered 

partnerships), foreign tax paid or 

accrued by the partnership during its 

U.S. taxable year in which the variance 

occurs is allocated between the portion 

of the U.S. taxable year ending on, and 

the portion of the U.S. taxable year 

beginning on the day after, the day of 

the variance. The allocation is made 

under the principles of this paragraph 

(f)(4)(i) as if the variance were a 

termination under section 708(b)(1). 

(ii) Disregarded entities. If foreign law 

imposes tax at the entity level on the 

income of an entity described in 

§ 301.7701–2(c)(2)(i) of this chapter (a 

disregarded entity), the person (as 

defined in section 7701(a)(1)) who is 

treated as owning the assets of the 

disregarded entity for U.S. Federal 

income tax purposes is considered to be 

legally liable for such tax under foreign 

law. Such person is considered to pay 

the tax for U.S. Federal income tax 

purposes. The rules of this paragraph 

(f)(4)(ii) apply regardless of which 

person is obligated to remit the tax, 

which person actually remits the tax, or 

which person the foreign country could 

proceed against to collect the tax in the 

event all or a portion of the tax is not 

paid. If there is a change in the 

ownership of such disregarded entity 

during the entity’s foreign taxable year 

and such change does not result in a 

closing of the disregarded entity’s 

foreign taxable year, foreign tax paid or 

accrued with respect to such foreign 

taxable year is allocated between the 

transferor and the transferee. If there is 

more than one change in the ownership 

of a disregarded entity during the 

entity’s foreign taxable year, foreign tax 

paid or accrued with respect to that 

foreign taxable year is allocated among 

all transferors and transferees. The 

allocation is made based on the 

respective portions of the taxable 

income of the disregarded entity (as 

determined under foreign law) for the 

foreign taxable year that are attributable 

under the principles of § 1.1502–76(b) to 

the period of ownership of each 

transferor and transferee during the 

foreign taxable year. If, as a result of a 

change in ownership, the disregarded 

entity becomes a partnership and the 

entity’s foreign taxable year does not 

close, foreign tax paid or accrued by the 

partnership with respect to the foreign 

taxable year is allocated between the 

owner of the disregarded entity and the 

partnership under the principles of this 

paragraph (f)(4)(ii). If the person who 

owns a disregarded entity is a 

partnership for U.S. Federal income tax 

purposes, see § 1.704–1(b)(4)(viii) for 

rules relating to the allocation of such 

tax among the partners of the 

partnership. 

(5) Examples. The following examples 

illustrate the rules of paragraphs (f)(3) 

and (f)(4) of this section: 

Example 1. (i) Facts. A, a United States 

person, owns 100 percent of B, an entity 

organized in country X. B owns 100 percent 

of C, also an entity organized in country X. 

B and C are corporations for U.S. and foreign 

tax purposes that use the ‘‘u’’ as their 

functional currency. Pursuant to a 

consolidation regime, country X imposes an 

income tax described in (a)(1) of this section 

on the combined income of B and C within 

the meaning of paragraph (f)(3)(ii) of this 

section. In year 1, C pays 25u of interest to 

B. If B and C did not report their income on 

a combined basis for country X tax purposes, 


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the interest paid from C to B would result in 

25u of interest income to B and 25u of 

deductible interest expense to C. For 

purposes of reporting the combined income 

of B and C, country X first requires B and C 

to determine their own income (or loss) on 

a separate schedule. For this purpose, 

however, neither B nor C takes into account 

the 25u of interest paid from C to B because 

the income of B and C is included in the 

same combined base. The separate income of 

B and C reported on their country X 

schedules for year 1, which do not reflect the 

25u intercompany payment, is 100u and 

200u, respectively. The combined income 

reported for country X purposes is 300u (the 

sum of the 100u separate income of B and 

200u separate income of C). 

(ii) Result. On the separate schedules 

described in paragraph (f)(3)(iii)(A) of this 

section, B’s separate income is 100u and C’s 

separate income is 200u. Under paragraph 

(f)(3)(iii)(B)(1) of this section, the 25u interest 

payment from C to B is taken into account 

for purposes of determining B’s and C’s 

portions of the combined income under 

paragraph (f)(3)(iii) of this section, because B 

and C would have taken the items into 

account if they did not compute their income 

on a combined basis. Thus, B’s portion of the 

combined income is 125u (100u plus 25u) 

and C’s portion of the combined income is 

175u (200u less 25u). The result is the same 

regardless of whether the 25u interest 

payment from C to B is deductible for U.S. 

Federal income tax purposes. See paragraph 

(f)(3)(iii)(B)(2) of this section. 

Example 2. (i) Facts. A, a United States 

person, owns 100 percent of B, an entity 

organized in country X. B is a corporation for 

country X tax purposes, and a disregarded 

entity for U.S. income tax purposes. B owns 

100 percent of C and D, entities organized in 

country X that are corporations for both U.S. 

and country X tax purposes. B, C, and D use 

the ‘‘u’’ as their functional currency and file 

on a combined basis for country X income 

tax purposes. Country X imposes an income 

tax described in paragraph (a)(1) of this 

section at the rate of 30 percent on the 

taxable income of corporations organized in 

country X. Under the country X combined 

reporting regime, income (or loss) of C and 

D is attributed to, and treated as income (or 

loss) of, B. B has the sole obligation to pay 

country X income tax imposed with respect 

to income of B and income of C and D that 

is attributed to, and treated as income of, B. 

Under the law of country X, country X may 

proceed against B, but not C or D, if B fails 

to pay over to country X all or any portion 

of the country X income tax imposed with 

respect to such income. In year 1, B has 

income of 100u, C has income of 200u, and 

D has a net loss of (60u). Under the law of 

country X, B is considered to have 240u of 

taxable income with respect to which 72u of 

country X income tax is imposed. Country X 

does not provide mandatory rules for 

allocating D’s loss. 

(ii) Result. Under paragraph (f)(3)(ii) of this 

section, the 72u of country X tax is 

considered to be imposed on the combined 

income of B, C, and D. Because country X 

law does not provide mandatory rules for 

allocating D’s loss between B and C, under 

paragraph (f)(3)(iii)(C) of this section D’s 

(60u) loss is allocated pro rata: 20u to B 

((100u/300u) × 60u) and 40u to C ((200u/ 

300u) × 60u). Under paragraph (f)(3)(i) of this 

section, the 72u of country X tax must be 

allocated pro rata among B, C, and D. 

Because D has no income for country X tax 

purposes, no country X tax is allocated to D. 

Accordingly, 24u (72u × (80u/240u)) of the 

country X tax is allocated to B, and 48u (72u 

× (160u/240u)) of such tax is allocated to C. 

Under paragraph (f)(4)(ii) of this section, A is 

considered to have legal liability for the 24u 

of country X tax allocated to B under 

paragraph (f)(3) of this section. 

Example 3. (i) Facts. A, B, and C are U.S. 

persons that each use the calendar year as 

their taxable year. A and B each own 50 

percent of the capital and profits of D, an 

entity organized in country M. D is a 

partnership for U.S. tax purposes, but is a 

corporation for country M tax purposes. D 

uses the ‘‘u’’ as its functional currency and 

the calendar year as its taxable year for both 

U.S. tax purposes and country M tax 

purposes. Country M imposes an income tax 

described in paragraph (a)(1) of this section 

at a rate of 30 percent at the entity level on 

the taxable income of D. On September 30 of 

Year 1, A sells its 50 percent interest in D to 

C. A’s sale of its partnership interest results 

in a termination of the partnership under 

section 708(b)(1)(B) for U.S. tax purposes. As 

a result of the termination, ‘‘old’’ D’s taxable 

year closes on September 30 of Year 1 for 

U.S. tax purposes. New D also has a short 

U.S. taxable year, beginning on October 1 and 

ending on December 31 of Year 1. The sale 

of A’s interest does not close D’s taxable year 

for country M tax purposes. D has 400u of 

taxable income for its foreign taxable year 

ending December 31, Year 1 with respect to 

which country M imposes 120u of income 

tax, equal to $120 as translated in accordance 

with section 986(a). 

(ii) Result. Under paragraph (f)(4)(i) of this 

section, partnership D is legally liable for the 

$120 of country M income tax imposed on its 

foreign taxable income. Because D’s taxable 

year closes on September 30, Year 1, for U.S. 

tax purposes, but does not close for country 

M tax purposes, under paragraph (f)(4)(i) of 

this section the $120 of country M tax must 

be allocated under the principles of § 1.1502– 

76(b) between terminating D and new D. See 

§ 1.704–1(b)(4)(viii) for rules relating to the 

allocation of terminating D’s country M taxes 

between A and B and the allocation of new 

D’s country M taxes between B and C. 

* * * * * 

(h) * * * 

(4) Paragraphs (f)(3), (f)(4), and (f)(5) 

of this section apply to foreign taxes 

paid or accrued in taxable years 

beginning after February 14, 2012. 

However, if an amount of tax is paid or 

accrued in a taxable year of any person 

beginning on or before February 14, 

2012, and the tax is treated as paid or 

accrued by such person under 26 CFR 

1.901–2(f) (revised as of April 1, 2011), 

then paragraph (f)(4) of this section will 

not apply, and 26 CFR 1.901–2(f) 

(revised as of April 1, 2011) will apply, 

to determine the person with legal 

liability for that tax. No other person 

will be treated as legally liable for such 

tax, even if the tax is paid or accrued on 

a date that falls within a taxable year of 

such other person beginning after 

February 14, 2012. Taxpayers may 

choose to apply paragraph (f)(3) of this 

section to foreign taxes paid or accrued 

in taxable years beginning after 

December 31, 2010, and on or before 

February 14, 2012. 

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. 2012–3352 Filed 2–9–12; 4:15 pm] 

BILLING CODE 4830–01–P 

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. 

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 §§ 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). 


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