Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Rules and Regulations 8127 

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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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 § 1.902– 

1(a)(8)), and its pool of ‘‘post-1986 

undistributed earnings’’ (as defined in 

section 902(c)(1) and § 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 § 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 


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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 (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 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. 

§ 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 § 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 interbranch payment (the payor CFTE 

category). This is an exception to the 

general application of the principles of 

§ 1.904–6 that would allocate the CFTEs 

to the payor CFTE category that 

includes the related income. See 

§ 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 § 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 

§ 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 § 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 

§ 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 § 1.704– 

1(b)(4)(viii)(d)(3). As a result, the 

general principles of § 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 § 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 

§ 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 

§ 1.909–5T(a)(2). 


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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 § 1.704– 

1(b)(4)(viii)(c)(3)(ii) and § 1.704– 

1(b)(4)(viii)(d)(3) as in effect prior to 

February 14, 2012. See § 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 

§ 1.704–1(b)(4)(viii)(c)(3)(ii) and 

§ 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 § 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 § 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 § 1.909–1T(b), (c), and 

(d) provide rules that apply for purposes 

of that section and §§ 1.909–2T through 

1.909–5T. First, § 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, 

§ 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, § 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 § 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 preacquisition 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 § 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, § 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 § 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 § 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 § 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 § 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, § 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 § 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 § 1.909– 


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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 § 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 § 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 § 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 

§ 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 § 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 § 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, § 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 

§ 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 § 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 § 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 § 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 


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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 

§ 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 § 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 § 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 § 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 

§ 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 § 1.704– 

1(b)(4)(viii)(d) without regard to 

§ 1.704–1(b)(4)(viii)(d)(3). Under 

§ 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 § 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, 

§ 1.909–3T(a) provides that the 

principles of § 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 

§ 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, 

§ 1.909–4T(a) provides that the 

principles of § 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, § 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 

§ 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 § 1.909–6T(b), determined 

as if the payor were a section 902 

corporation. 

In addition, Notice 2010–92 states 

that allocations described in § 1.704– 

1(b)(4)(viii)(d)(3) will result in a foreign 


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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, § 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 interbranch payment splitter arrangement 

described in § 1.909–2T(b)(4) are split 

taxes to the extent such taxes are 

identified as split taxes in § 1.909– 

2T(b)(4)(ii). The related income with 

respect to the split taxes is the related 

income described in § 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 § 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. § 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. 

§ 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 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

■ Par. 2. Section 1.704–1 is amended as 

follows: 

■ 1. Paragraph (b)(0) is amended by 

adding an entry for § 1.704– 

1(b)(1)(ii)(b)(3) and revising the entry for 

§ 1.704–1(b)(4)(viii)(d)(3). 

■ 2. Paragraph (b)(1)(ii)(b)(3) is added. 

■ 3. Paragraph (b)(4)(viii)(c)(3)(ii) is 

revised. 

■ 4. Paragraph (b)(4)(viii)(d)(3) is 

revised. 

■ 5. Paragraph (b)(5) Example 24 is 

revised. 

The additions and revisions read as 

follows: 

§ 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 § 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 § 1.704–1T(b)(4)(viii)(d)(3). 

* * * * * 

(5) * * * 

Example 24. [Reserved]. For further 

guidance, see § 1.704–1T(b)(5) Example 

24. 

* * * * * 

■ Par. 3. Section 1.704–1T is added to 

read as follows: 

§ 1.704–1T Partner’s distributive share 

(temporary). 

(a) Through (b)(1)(ii)(b)(2) [Reserved]. 

For further guidance, see § 1.704–1(a) 

through (b)(1)(ii)(b)(2). 

(3) Special rules for certain interbranch payments—(A) In general. The 

provisions of § 1.704– 

1(b)(4)(viii)(c)(3)(ii) and § 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 


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Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Rules and Regulations 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 § 1.704– 

1(b)(4)(viii)(c)(3)(ii) and § 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 

§ 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 

§ 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 interbranch 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 § 1.704–1(b)(5) 

Example 25 through (e). 

(f) Expiration date. The applicability 

of this section expires on February 9, 

2015. 

■ Par. 4. Section 1.909–0T is added to 

read as follows: 

§ 1.909–0T Outline of regulation 

provisions for section 909 (temporary). 

This section lists the headings for 

§§ 1.909–1T through 1.909–6T. 

§ 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. 

§ 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 losssharing 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 interbranch payment splitter arrangement. 


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(iii) Related income from a partnership 

inter-branch payment splitter arrangement. 

(c) Effective/applicability date. 

(d) Expiration date. 

§ 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. 

§ 1.909–4T Coordination rules (temporary). 

(a) Interim rules. 

(b) Effective/applicability date. 

(c) Expiration date. 

§ 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. 

§ 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 pre2011 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. 

■ 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: 

§ 1.909–1T Definitions and special rules 

(temporary). 

(a) Definitions. For purposes of 

section 909, this section, and §§ 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 § 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 

§ 1.902–1(a)(8). 

(7) The term post-1986 undistributed 

earnings has the meaning provided in 

§ 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 

§ 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 pre1987 accumulated profits and pre-1987 

foreign income taxes. Section 909 and 

§§ 1.909–1T through –5T will apply to 

pre-1987 accumulated profits (as 

defined in § 1.902–1(a)(10)(i)) and pre1987 foreign income taxes (as defined in 

§ 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. 


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§ 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 § 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 § 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 § 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 § 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 

§ 1.894–1(d)(3)) for foreign tax purposes 

and that is a member of more than one 

U.S. combined income group, the 


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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 losssharing 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 losssharing 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 losssharing regime does not include an 

allocation of loss of an entity that is a 

partnership or other fiscally transparent 

entity (under the principles of § 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 

§ 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 losssharing 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 § 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 § 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 § 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 § 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 

§ 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 post1986 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 § 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 § 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 


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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 § 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 

§ 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 § 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 

§ 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 

§ 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 § 1.704– 

1(b)(4)(viii)(d) without regard to 

§ 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 interbranch 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. 

§ 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 § 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 § 1.909–6T(d)(4) applies 


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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. 

§ 1.909–4T Coordination rules (temporary). 

(a) Interim rules. The principles of 

paragraph (g) of § 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. 

§ 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 

§ 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 

§ 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 interbranch payment splitter arrangement 

described in § 1.909–2T(b)(4) are split 

taxes to the extent that such taxes are 

identified as split taxes in § 1.909– 

2T(b)(4)(ii). The related income with 

respect to the split taxes is the related 

income described in § 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 § 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 

§ 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. 

§ 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 pre2011 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 pre2011 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 pre2011 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 pre2011 taxable year or a section 902 

shareholder (as defined in § 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 post2010 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 


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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 

§ 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 § 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 pre2011 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 pre2011 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. Pre2011 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 


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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 

§ 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 §§ 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 § 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 pre2011 split taxes in such year. 

(2) Effect of separate limitation losses 

and deficits. Related income is 

determined without regard to the 

application of § 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, § 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 


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Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Rules and Regulations 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 prorata 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, § 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 pre2011 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 post2010 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 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9568] 

RIN 1545–BI47 

Section 482; Methods To Determine 

Taxable Income in Connection With a 

Cost Sharing Arrangement; Correction 

AGENCY: Internal Revenue Service (IRS). 


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