27868 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9452] 

RIN 1545–BB28 

Application of Separate Limitations to 

Dividends From Noncontrolled Section 

902 Corporations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations, temporary 

regulations, and removal of temporary 

regulations. 

SUMMARY: This document contains final 

regulations regarding the application of 

separate foreign tax credit limitations to 

dividends received from noncontrolled 

section 902 corporations. The American 

Jobs Creation Act of 2004 (AJCA) 

modified the treatment of such 

dividends effective for taxable years 

beginning after December 31, 2002. The 

Gulf Opportunity Zone Act of 2005 

(GOZA) permits taxpayers to elect to 

defer the effective date of the AJCA 

amendments until taxable years 

beginning after December 31, 2004. The 

final regulations provide guidance 

needed to comply with these changes 

and affect corporations claiming foreign 

tax credits. 

DATES: Effective Date: These regulations 

are effective on June 11, 2009. 

Applicability Dates: For dates of 

applicability, see §§ 1.861–9(k), 1.861– 

12(c)(5), 1.902–1(g), 1.904–2(h)(1) and 

(2), 1.904–4(n), 1.904–5(o)(2), 1.904– 

7(f)(10), 1.904(f)–12(g)(5), and 1.964– 

1(d). 

FOR FURTHER INFORMATION CONTACT: 

Richard Chewning at (202) 622–3850 

(not a toll-free number). 

SUPPLEMENTARY INFORMATION

Paperwork Reduction Act 

The collections of information 

contained in the final regulations have 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork and 

Reduction Act (44 U.S.C. 3507(d)) under 

control number 1545–2014. The 

collections of information in the final 

regulations are in §§ 1.904–7(f)(9)(ii)(C) 

and 1.964–1(c)(3). This information is 

required, with respect to § 1.904– 

7(f)(9)(ii)(C), to notify the IRS that 

taxpayer has made the election to defer 

the applicability of the provisions of 

section 403 of the AJCA. With respect to 

§ 1.964–1(c)(3), this information is 

required to notify the IRS and domestic 

shareholders of a foreign corporation of 

elections made to adopt or change a 

method of accounting or taxable year of 

the foreign corporation. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number. 

Books or records relating to these 

collections of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

On April 20, 2006, a notice of 

proposed rulemaking by cross-reference 

to temporary regulations (REG–144784– 

02) under sections 861, 902, 904, and 

964 of the Code and temporary 

regulations (TD 9260) (the 2006 

temporary regulations) were filed with 

the Office of the Federal Register. On 

April 25, 2006, the notice of proposed 

rulemaking by cross-reference to 

temporary regulations and the 2006 

temporary regulations were published 

in the Federal Register (71 FR 24543 

and 71 FR 24516, respectively). 

Corrections to the 2006 temporary 

regulations were published on August 

21, 2006, and December 26, 2006, in the 

Federal Register (71 FR 48474 and 71 

FR 77264, respectively). Comments 

were received. A public hearing was not 

requested and none was held. After 

consideration of the comments, the 

proposed regulations are adopted as 

amended by this Treasury decision. 

Explanation and Summary of 

Comments 

The IRS and the Treasury Department 

received written comments on the 2006 

temporary regulations. Those comments 

are discussed in this preamble. These 

new regulations make several changes to 

the 2006 temporary regulations to take 

into account comments received, while 

adopting without amendment most of 

the temporary regulations. The 

significant comments and revisions are 

described in this preamble. 

I. Interest Expense Apportionment 

A. Interest Expense of a 10/50 

Corporation 

Section 904(d)(4)(A), as amended by 

the AJCA, provides that any dividend 

paid by a noncontrolled section 902 

corporation (10/50 corporation) shall be 

treated as income in a separate category 

based on the separate category of the 

underlying earnings and profits being 

distributed (look-through treatment), 

effective for taxable years beginning 

after December 31, 2002 (post-2002 

taxable years), without regard to when 

the distributed earnings were 

accumulated. For purposes of 

apportioning interest expense of a 10/50 

corporation in order to apply the 

dividend look-through rule, § 1.861– 

9T(f)(4) of the 2006 temporary 

regulations generally applies the same 

principles as § 1.861–9T(f)(3) 

(apportionment of interest expense of a 

controlled foreign corporation). Under 

these rules, interest expense of a 10/50 

corporation may be apportioned using 

either the asset method or the modified 

gross income method. Regardless of the 

interest expense apportionment 

methods used by its majority domestic 

corporate shareholders, the 10/50 

corporation (or the majority domestic 

corporate shareholders on behalf of the 

10/50 corporation) may elect to use any 

of the methods described in § 1.861–9T 

or § 1.861–9 (that is, the modified gross 

income, tax book value, alternative tax 

book value or fair market value method) 

to apportion the 10/50 corporation’s 

interest expense. 

Section 1.861–9T(j)(1) provides a rule 

for ‘‘tiering up’’ the income of tiers of 

controlled foreign corporations (CFCs) 

that use the modified gross income 

method to apportion interest expense. 

Under that rule, the lowest-tier CFC’s 

interest expense is allocated and 

apportioned based on its gross income, 

and its gross income reduced by such 

allocated and apportioned interest 

expense is then treated as gross income 

of the next-higher-tier CFC for purposes 

of apportioning the higher-tier CFC’s 

interest expense. These steps are then 

essentially repeated, moving up the 

tiers. A commenter requested that the 

IRS and the Treasury Department clarify 

the mechanics of apportioning interest 

expense when tiered corporations elect 

different apportionment methods. This 

commenter raises issues that are beyond 

the scope of this regulation project and 

therefore are not addressed in this 

document. 

B. Definition of ‘‘10 Percent Owned 

Corporation’’ 

Prior to revision by the 2006 

temporary regulations, § 1.861–12T(c)(2) 

required an affiliated group using the 

tax book value method in apportioning 

its interest expense to adjust the basis of 

stock in any ‘‘10 percent owned 

corporation’’ that is held directly by 

members of the group to reflect each 

member’s pro rata share of such 10 

percent owned corporation’s earnings 

and profits (or deficit in earnings and 

profits). The rule, as revised by the 2006 

temporary regulations, applies to stock 

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of a 10 percent owned corporation not 

only where its stock is held directly by 

members of the affiliated group, but also 

where its stock is held indirectly 

through a partnership or other passthrough entity. The revision was 

effective on April 25, 2006, and applied 

prospectively. The IRS and the Treasury 

Department stated in the preamble to 

the 2006 temporary regulations that the 

revision was a clarification. 

A commenter questioned why the 

regulations include a prospective, rather 

than a retroactive, effective date, if the 

revision clarified existing law. The IRS 

and the Treasury Department maintain 

that the revision is a clarification of 

existing law but continue to believe a 

prospective effective date is appropriate 

because the prior regulations were 

ambiguous. 

II. Carryover of Unused Foreign Taxes 

Under Section 904(c) 

In the case of unused foreign taxes 

attributable to dividends from a 10/50 

corporation with respect to which the 

taxpayer was no longer a qualifying 

shareholder as of the first day of the 

taxpayer’s first taxable year ending after 

the first day of the 10/50 corporation’s 

first post-2002 taxable year, § 1.904– 

2T(h)(1) provides that the unused 

foreign taxes are allocated among the 

taxpayer’s separate categories in the 

same percentages as the earnings in the 

10/50 corporation’s non-look-through 

pool or pre-1987 accumulated profits 

‘‘would have been assigned had they 

been distributed in the last taxable year 

in which the taxpayer was a domestic 

shareholder in such corporation.’’ In 

response to a comment, § 1.904–2(h)(1) 

of the final regulations clarifies that 

such taxes will be allocated as if lookthrough treatment applied in the year of 

the hypothetical distribution. 

III. Look-Through Rules as Applied to 

10/50 Corporations 

A. General Application of Look-Through 

With respect to applying the lookthrough rule to any dividend paid by a 

10/50 corporation in a post-2002 taxable 

year, § 1.904–5T(c)(4)(iii) of the 2006 

temporary regulations provides that any 

dividends paid in a post-2002 taxable 

year to a domestic corporation by a 10/ 

50 corporation with respect to which 

the domestic corporation meets the 

stock ownership requirements of section 

902(a) are treated as income in a 

separate category in proportion to the 

ratio of the portion of earnings and 

profits of the 10/50 corporation 

attributable to income in such category 

to the total amount of earnings and 

profits of the 10/50 corporation. 

A commenter expressed concern that 

in some cases, where a domestic 

shareholder meets the stock ownership 

requirements of section 902(a) but has a 

relatively small ownership interest, the 

administrative burden on both the 

taxpayer and the IRS of applying lookthrough to earnings and foreign taxes in 

a 10/50 corporation’s look-through 

pools could be significant. The 

commenter asserted that the process of 

obtaining and analyzing multiple years 

of historical financial data to ascertain 

the exact portion of distributions that 

relate to specific categories of income 

can be challenging, particularly where 

distributions relate to earnings from 

certain historical periods (for example, 

those during which the taxpayer did not 

own stock in the 10/50 corporation). 

The commenter indicated that the 

reconstruction and safe harbor methods 

provided in § 1.904–7T(f)(4)(i) and (ii) of 

the 2006 temporary regulations, 

respectively, reduce difficulties in 

reconstructing historical accumulated 

earnings and taxes accounts of a 10/50 

corporation, but those rules apply only 

to undistributed earnings and taxes 

accumulated in non-look-through 

periods and do not apply to 

distributions of earnings accumulated in 

look-through pools. The commenter 

suggested that the IRS and the Treasury 

Department consider providing an 

elective safe harbor approach for 

domestic shareholders who own a 

relatively small interest, such as 15 

percent or less, in the 10/50 corporation, 

which would characterize a dividend 

paid by a 10/50 corporation as income 

in a separate category by reference to the 

gross revenue of the 10/50 corporation 

for the last three years or a similar 

abbreviated period, with anti-abuse 

rules to address distortions. 

The IRS and the Treasury Department 

recognize that in some circumstances a 

domestic shareholder of a 10/50 

corporation (as well as a noncontrolling 

shareholder of a controlled foreign 

corporation (CFC)) may face difficulties 

in substantiating accumulated earnings 

and taxes accounts of the 10/50 

corporation (or CFC) on a look-through 

basis. However, the IRS and the 

Treasury Department believe use of a 

safe harbor is appropriate only as a 

limited rule for reconstructing earnings 

and taxes accumulated during prior year 

periods when the look-through rules did 

not apply to dividends from 10/50 

corporations. An ongoing safe harbor is 

not appropriate because the statutory 

look-through rules, which apply to all 

domestic shareholders meeting the stock 

ownership requirements of section 

902(a) (that is, 10 percent), generally 

require substantiation, and if the lookthrough treatment of a dividend from a 

10/50 corporation has not been 

adequately substantiated, section 

904(d)(4)(C)(ii) requires that such 

dividend be treated as passive income. 

See also § 1.904–5T(c)(4)(iii) of the 2006 

temporary regulations. 

B. Substantiation of Look-Through 

Treatment 

Section 1.904–5T(c)(4)(iii) of the 2006 

temporary regulations provides that a 

dividend from a 10/50 corporation is 

treated as passive income if the lookthrough characterization of the dividend 

is not substantiated to the satisfaction of 

the Commissioner. 

A commenter expressed concern that 

if a 10/50 corporation has high-taxed 

income outside the general and passive 

categories a taxpayer may intentionally 

fail to substantiate the look-through 

characterization of a dividend from the 

10/50 corporation in order to achieve 

cross-crediting. The commenter 

suggested that the final regulations 

include an anti-abuse rule for situations 

where the Commissioner determines 

that a taxpayer deliberately failed to 

substantiate the look-through 

characterization of the dividend. The 

commenter suggested that the anti-abuse 

rule could provide that in such a 

situation the earnings and associated 

taxes would be placed in a separate subbasket to prevent cross-crediting. 

Alternatively, the commenter suggested 

that the final regulations could apply 

rules similar to the rules of section 907. 

Finally, the commenter suggested that 

the inadequate substantiation rule in 

§ 1.904–5T(c)(4)(iii) should be revised to 

conform to the rule in § 1.904– 

7T(f)(4)(iii), which provides that the 

Commissioner will allocate the 

undistributed earnings and taxes in the 

non-look-through pools to the foreign 

corporation’s passive category only if 

the Commissioner determines that the 

look-through characterization of such 

earnings and taxes cannot reasonably be 

determined based on the available 

information. The IRS and the Treasury 

Department agree with this latter 

suggestion, and the rule in § 1.904– 

5(c)(4)(iii) of the final regulations adopts 

this comment. 

C. Application of Section 904(h) to 

10/50 Corporations 

For purposes of the section 904 

foreign tax credit limitation, section 

904(h) (section 904(g) prior to 

redesignation in the AJCA) provides that 

certain income derived from a United 

States-owned foreign corporation which 

would be treated as foreign source 

income under other Code provisions is 

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27870 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

treated as U.S. source income. This 

resourcing rule applies to certain 

payments of interest and dividends by 

a United States-owned foreign 

corporation as well as inclusions in 

gross income under sections 951(a) and 

1293 to the extent the payments or 

inclusions are attributable to income of 

the United States-owned foreign 

corporation from sources within the 

United States. Section 904(h)(6) 

generally defines a United States-owned 

foreign corporation as any foreign 

corporation if United States persons (as 

defined in section 7701(a)(30)) hold 50 

percent or more of either the total 

combined voting power of all classes of 

voting stock or the total value of the 

stock. 

Section 1.904–5(m) provides rules for 

the resourcing of certain amounts 

received or accrued (or treated as 

received or accrued) by a United States 

shareholder (as defined in section 

951(b)) from a United States-owned 

foreign corporation. Section 1.904– 

5T(m)(1) of the 2006 temporary 

regulations clarified that the resourcing 

rule applies not only to CFCs but also 

to 10/50 corporations that meet the 

definition of a United States-owned 

foreign corporation, and § 1.904– 

5T(m)(2)(ii) and (4) provide rules for 

resourcing interest and dividend 

payments from 10/50 corporations. 

In the preamble to the 2006 temporary 

regulations, the IRS and the Treasury 

Department stated that this revision 

clarified that the rules for resourcing 

interest and dividends also apply to a 

10/50 corporation that meets the 

definition of a United States-owned 

foreign corporation. 

A commenter suggested that the 

inclusion of 10/50 corporations within 

the resourcing rule of § 1.904–5T(m) 

was not simply a clarification and that 

the combination of referring to this 

provision as only a clarification and the 

prospective application of the rule is 

confusing. In addition, the commenter 

requested guidance on the appropriate 

treatment of dividends from 10/50 

corporations for 2003 through 2006 

under section 904(h) (section 904(g) as 

applicable for those years). The 

commenter suggested that § 1.904– 

5T(m) be made retroactive to 2003 (or 

2005 for taxpayers electing to apply the 

pre-AJCA section 904(d) rules to assign 

dividends paid by 10/50 corporations in 

their 2003 and 2004 taxable years to a 

single separate category for dividends 

from all 10/50 corporations) to match 

the retroactive effective date of the 

statutory changes to the look-through 

rules for 10/50 corporations and of the 

§ 1.904–7T rules for reconstructing nonlook-through pools. 

This comment is not adopted. The IRS 

and the Treasury Department continue 

to believe that the revision is a 

clarification of existing law. A 

retroactive effective date is unnecessary, 

however, because the statute provides 

the applicable rule. 

A commenter suggested that, because 

section 904(h) applies exactly the same 

rule to both section 951(a) and section 

1293 inclusions, § 1.904–5(m)(5) (other 

than the special rules for related person 

interest expense which are incorporated 

by cross-reference) should also reference 

section 1293 inclusions from United 

States-owned 10/50 corporations. The 

IRS and the Treasury Department agree, 

and § 1.904–5(m)(5) of the final 

regulations adopts this comment. 

D. Treatment of Earnings and Taxes 

Accumulated During a Non-LookThrough Period 

i. Reconstruction Method 

Section 1.904–7T(f)(2) of the 2006 

temporary regulations provides that any 

undistributed earnings and foreign 

income taxes in the non-look-through 

pools of a 10/50 corporation that were 

accumulated and paid as of the end of 

the 10/50 corporation’s last pre-2003 

taxable year are treated as if they were 

accumulated and paid during a period 

in which a distribution would have 

been eligible for look-through treatment. 

Section 1.904–7T(f)(4)(i) of the 2006 

temporary regulations provides that in 

order to substantiate the look-through 

characterization of the earnings and 

taxes in the non-look-through pools, the 

taxpayer must make a reasonable, goodfaith effort to reconstruct the non-lookthrough pools of earnings and taxes for 

each year in the non-look-through 

period, beginning with the first year in 

which earnings were accumulated in the 

non-look-through pool. Section 1.904– 

7T(f)(4)(i) further provides that 

reconstruction will be based on 

reasonably available books and records 

and other relevant information, and 

must take into account earnings 

distributed and taxes deemed paid in 

the non-look-through period as if they 

were distributed and deemed paid pro 

rata from the amounts that were added 

to the non-look-through pools during 

the non-look-through period. 

In recognition of the difficulty in 

reconstructing the pools, the IRS and 

the Treasury Department stated in the 

preamble to the 2006 temporary 

regulations that a reasonable 

approximation of the amounts properly 

included in the look-through pools, 

based on available records obtained 

through reasonable, good-faith efforts by 

the taxpayer, will adequately 

substantiate the reconstruction required 

by the statute. 

A commenter suggested that 

clarification of what constitutes other 

relevant information would be helpful. 

The IRS and the Treasury Department 

do not adopt this comment because the 

substantiation requirement requires 

evaluation of the facts and 

circumstances of each situation. 

With respect to earnings accumulated 

and foreign taxes paid in the 2003 

through 2006 taxable years, a 

commenter suggested that the rules in 

the 2006 temporary regulations 

concerning the look-through 

characterization and reconstruction of 

earnings and taxes in the non-lookthrough pools need to be clarified to 

provide that taxpayers are required to 

determine the sub-characterization of 

earnings and taxes, if relevant. As an 

example, the commenter stated that if a 

10/50 corporation conducts a financing 

business but does not itself qualify as a 

financial services entity within the 

meaning of § 1.904–4(e)(3)(i), a 

qualifying shareholder of the 10/50 

corporation must (if the shareholder 

does not elect the safe harbor method) 

determine what portion of the non-lookthrough earnings qualify as active 

financing income as defined in § 1.904– 

4(e)(2)(i). Such a determination would 

be necessary in order to determine 

whether the income would be placed in 

the separate category for financial 

services income upon distribution to an 

upper-tier financial services entity. The 

IRS and the Treasury Department agree 

with this comment that subcharacterization of earnings and taxes is 

required, if relevant, in determining the 

look-through characterization of 

earnings and taxes in the non-lookthrough pools and in reconstructing 

such pools. However, the IRS and the 

Treasury Department believe that the 

2006 temporary regulations already 

require reconstruction as if look-through 

applied for all section 904 purposes, 

including any relevant subcharacterization of the earnings and 

taxes pools. Accordingly, the final 

regulations adopt the rule in the 2006 

temporary regulations without change. 

ii. Safe Harbor 

Section 1.904–7T(f)(4)(ii) of the 2006 

temporary regulations provides a safe 

harbor in reconstructing the non-lookthrough pools under which a taxpayer 

may allocate the earnings and taxes in 

the non-look-through pools ratably to 

the look-through pools on the first day 

of the 10/50 corporation’s first post2002 taxable year in the same 

percentages as the taxpayer (or the 

qualified group member that owns the 

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Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 27871 

10/50 corporation) properly 

characterizes the stock of the 10/50 

corporation in the separate categories 

for purposes of apportioning the 

taxpayer’s (or qualified group member’s) 

interest expense in its first taxable year 

ending after the first day of the 10/50 

corporation’s first post-2002 taxable 

year. If a taxpayer elects to use the safe 

harbor method with respect to a 10/50 

corporation that uses the modified gross 

income method to apportion interest 

expense for the 10/50 corporation’s first 

post-2002 taxable year, earnings and 

taxes in the non-look-through pools are 

allocated to the look-through pools 

based on an average of the 10/50 

corporation’s modified gross income 

ratios for its taxable years beginning in 

2003 and 2004. The IRS and the 

Treasury Department stated in the 

preamble to the 2006 temporary 

regulations that the two-year base 

period rule is necessary to avoid 

potential distortions associated with 

allocating earnings and taxes from the 

non-look-through pool to the lookthrough pools based on the 10/50 

corporation’s modified gross income for 

just one taxable year. 

A commenter suggested that other 

potential distortions are not addressed 

in § 1.904–7T(f)(4)(ii), such as instances 

in which a material change in the 

foreign corporation’s operations (or 

asset composition) would distort the 

characterization of the non-look-through 

earnings and taxes under the safe harbor 

method. The commenter suggested that 

conditioning the use of the safe harbor 

method on the lack of any material 

change in the foreign corporation’s 

operations, structure, assets or income 

from the non-look-through period 

would reduce the likelihood of a 

distortion. 

The IRS and the Treasury Department 

acknowledge that the safe harbor 

method does not address all potential 

distortions. However, the purpose of the 

safe harbor method is to provide 

certainty and to minimize 

administrative burdens. The IRS and the 

Treasury Department believe that 

revising the safe harbor method to 

reflect the commenter’s suggestion 

would diminish these benefits of the 

safe harbor method. 

A commenter also suggested that the 

regulations should include guidance on 

how the safe harbor method election is 

to be made and the time frame for 

making the election. The commenter 

suggested that taxpayers should be 

allowed to elect the safe harbor method 

retroactively, on an amended return or 

during audit. 

The IRS and the Treasury Department 

agree with this comment. The final 

regulations provide that taxpayers may 

choose to use the safe harbor method on 

either timely filed or amended tax 

returns or during audit. However, if a 

taxpayer chooses to use the safe harbor 

method on an amended return or in the 

course of an audit, the taxpayer must 

make appropriate adjustments to 

eliminate any duplicate benefits arising 

from application of the safe harbor 

method to taxable years that are not 

open for assessment. A taxpayer’s 

choice to use the safe harbor method is 

evidenced by simply employing the 

method. No separate statement need be 

filed. 

In addition, the final regulations 

clarify that the safe harbor method is 

only available as a transition rule for 

taxpayers who were required to 

characterize the stock of the foreign 

corporation for purposes of 

apportioning interest expense in the 

taxpayer’s first taxable year ending after 

the first day of the foreign corporation’s 

first post-2002 taxable year. The safe 

harbor is not available to determine the 

look-through treatment of earnings 

accumulated by a foreign corporation 

that did not have a shareholder that was 

entitled to look-through treatment in 

such a year. 

iii. Treatment of a Deficit Accumulated 

in a Non-Look-Through Period 

Section 1.904–7T(f)(5) of the 2006 

temporary regulations provides that if 

there is an accumulated deficit in the 

non-look-through pool of a 10/50 

corporation or a CFC as of the end of the 

foreign corporation’s last pre-2003 

taxable year, the deficit and associated 

taxes, if any, are treated as if they had 

been accumulated and paid during a 

look-through period. The earnings and 

deficits in earnings making up the 

accumulated deficit are assigned to the 

look-through pools based on where the 

foreign corporation’s income and 

expenses or losses would have been 

assigned had they been incurred during 

a look-through period, or, if the taxpayer 

uses the safe harbor method, the deficit 

is allocated based on how the stock of 

the foreign corporation is properly 

characterized for interest expense 

apportionment purposes. 

A commenter suggested that the 

regulations should clarify that, for 

shareholders not using the safe harbor 

method, one or more separate income 

categories could have positive earnings, 

while one or more separate income 

categories could have a greater deficit. 

Thus, for example, if a 10/50 

corporation had a $100 deficit 

accumulated in its non-look-through 

pool as of the end of its last pre-2003 

taxable year, the deficit could consist of 

a $200 deficit in general limitation 

income and $100 earnings in the 

separate category for shipping income. 

The IRS and the Treasury Department 

believe that § 1.904–7T(f)(5) of the 2006 

temporary regulations is clear that, as 

part of reconstruction of a non-lookthrough pool that contains an 

accumulated deficit, one or more 

separate income categories could have 

positive earnings, while one or more 

separate income categories could have a 

greater deficit, and that therefore, the 

rule does not need to be revised to 

reflect the comment. 

iv. Section 952(c) Recapture Accounts 

In response to a comment, § 1.904– 

7(f)(7) of the final regulations provides 

that section 952(c)(2) recapture accounts 

maintained by a CFC with respect to 

dividends received from a 10/50 

corporation that were subject to the 

earnings and profits limitation of 

section 952(c)(1) are allocated to 

separate categories in the same manner 

as the associated post-1986 

undistributed earnings. 

v. GOZA Election 

Conforming changes are made to the 

transition rules at § 1.904–7(f)(9) for 

taxpayers electing to defer the 

applicability of the look-through rules 

for two years to reflect changes in 

response to comments made with 

respect to the general transition rules of 

§ 1.904–7(f)(7). 

E. Pre-Acquisition E&P 

Section 904(d)(4)(C)(i)(II), as amended 

by the AJCA, provides that the Secretary 

may prescribe regulations regarding the 

treatment of distributions out of 

earnings and profits of a 10/50 

corporation for periods before the 

taxpayer’s acquisition of the stock to 

which the distributions relate (preacquisition E&P). Such distributions 

may be out of post-1986 undistributed 

earnings accumulated by a 10/50 

corporation before the specific 

shareholder acquired its stock or out of 

pre-1987 accumulated profits 

accumulated before the 10/50 

corporation had any qualifying 

shareholder. The 2006 temporary 

regulations extend look-through 

treatment to dividends out of earnings 

and profits accumulated in non-lookthrough periods during which a 10/50 

corporation or a CFC had no qualifying 

shareholder and do not restrict lookthrough treatment of dividends paid to 

a new qualifying shareholder of an 

existing 10/50 corporation. The 

preamble to the 2006 temporary 

regulations stated that the IRS and the 

Treasury Department believe that lookmstockstill on PROD1PC66 with RULES2

27872 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

through treatment of pre-acquisition 

earnings is the more appropriate policy 

result than passive category treatment, if 

look-through characterization can be 

adequately substantiated under 

§§ 1.904–5T(c)(4)(iii) and 1.904–7T(f)(4). 

A commenter suggested that the 

extension of look-through treatment to 

pre-acquisition E&P is inappropriate 

because the liberalized cross-crediting 

of foreign taxes permitted by this 

treatment may encourage tax-motivated 

acquisitions in order to traffic in excess 

foreign taxes. The commenter suggested 

that the IRS and the Treasury 

Department exercise the regulatory 

authority under section 

904(d)(4)(C)(i)(II) to create new separate 

categories for pre-acquisition earnings 

and profits. 

This comment is not adopted. The IRS 

and the Treasury Department continue 

to believe that look-through treatment of 

pre-acquisition earnings, where the 

earnings and taxes are substantiated, is 

the more appropriate policy result. 

Moreover, denying look-through 

treatment to dividends of earnings of a 

10/50 corporation accumulated prior to 

a specific shareholder’s acquisition of 

stock entails unacceptable 

administrative complexity associated 

with maintaining multiple sets of lookthrough pools starting on different dates 

for different shareholders. Accordingly, 

the final regulations adopt the rule in 

the 2006 temporary regulations without 

change. 

IV. Recapture of an Overall Foreign 

Loss or Separate Limitation Loss 

Incurred in a Separate Category for 

Dividends From a 10/50 Corporation 

Section 1.904(f)–12T(g)(1) of the 2006 

temporary regulations provides that 

where a taxpayer had an overall foreign 

loss (OFL) or separate limitation loss 

(SLL) in a separate category for 

dividends from a 10/50 corporation, the 

OFL or SLL account is recaptured in 

subsequent taxable years out of income 

in the same separate categories in which 

the stock of the 10/50 corporation is 

properly characterized for purposes of 

apportioning the taxpayer’s interest 

expense in its first taxable year in which 

dividends from the 10/50 corporation 

are eligible for look-through treatment 

(that is, its first taxable year ending after 

the first day of the 10/50 corporation’s 

first post-2002 taxable year). 

A commenter suggested that a rule 

providing for recapture of the OFL or 

SLL from the other separate categories 

in the same proportions that post-OFL 

or SLL dividends from the 10/50 

corporation would have been assigned 

to such other separate categories had 

look-through applied would be more 

consistent with § 1.904–2T(h)(1) and (2) 

(carryovers of excess foreign taxes from 

10/50 baskets) and § 1.904–7T(f)(2) and 

(3) (characterization of non-lookthrough pools as if look-through had 

applied) that generally take the 

approach of following the consequences 

that would have applied if look-through 

had always been in effect. This 

comment is not adopted. The IRS and 

the Treasury Department stated in the 

preamble to the 2006 temporary 

regulations and continue to believe that 

recapturing losses from income earned 

in subsequent years is a forward-looking 

concept, and that reallocating OFL and 

SLL accounts based on the interest 

expense apportionment ratio (as 

opposed to, for example, reallocating 

losses based on reconstructed non-lookthrough pools) is consistent with that 

concept. 

V. Regulations Under Section 964 

A. Tax Elections, Adoptions of Method 

of Accounting or Taxable Year, and 

Changes in Method of Accounting or 

Taxable Year Made on Behalf of a CFC 

or 10/50 Corporation 

The 2006 temporary regulations at 

§ 1.964–1T(c)(2) and (3) provide rules 

allowing the majority domestic 

corporate shareholders of a 10/50 

corporation to make an election, adopt 

a method of accounting or taxable year, 

or change a method of accounting or 

taxable year on behalf of the 10/50 

corporation. The 2006 temporary 

regulations also allow the controlling 

United States shareholders of a CFC to 

make an election, adopt a method of 

accounting or taxable year, or change a 

method of accounting or taxable year on 

behalf of the CFC. Section 1.964– 

1T(c)(2) provides that for the first 

taxable year of a foreign corporation 

beginning after April 25, 2006, in which 

such foreign corporation first qualifies 

as a CFC or 10/50 corporation, any 

method of accounting or taxable year 

allowable under this section may be 

adopted or elected by such foreign 

corporation or on its behalf 

notwithstanding that, in previous years, 

its books or financial statements were 

prepared on a different basis, and 

notwithstanding that such election is 

required by the Code or regulations to 

be made in a prior taxable year. Section 

1.964–1T(c)(6) further provides that 

such actions may be deferred until the 

first year in which the computation of 

the foreign corporation’s earnings and 

profits is significant for U.S. tax 

purposes, and includes a nonexclusive 

list of significant events for taxable 

years beginning after April 25, 2006. 

Section 1.964–1T(c)(4) of the 2006 

temporary regulations acknowledges 

that a 10/50 corporation may have had 

a significant event in taxable years 

beginning on or before April 25, 2006, 

such as a distribution with respect to 

which the corporation’s shareholder 

could claim a deemed-paid foreign tax 

credit under section 902. In order to 

determine the allowable foreign tax 

credit, at the time of the distribution the 

10/50 corporation’s domestic corporate 

shareholder would have had to compute 

the 10/50 corporation’s earnings and 

profits, even though no procedure was 

then available for the controlling 

domestic shareholders to adopt or elect 

accounting methods on the 10/50 

corporation’s behalf. Section 1.964– 

1T(c)(4) provides that in this situation 

the 10/50 corporation’s earnings and 

profits shall be computed as if no 

accounting method elections were made 

and any permissible accounting method 

not requiring an election and reflected 

in the books of account regularly 

maintained by the 10/50 corporation for 

purposes of accounting to its 

shareholders had been adopted. 

Thereafter, in taxable years beginning 

after April 25, 2006, the 10/50 

corporation, or its controlling domestic 

shareholders, must obtain the consent of 

the Commissioner in order to change a 

particular accounting method or 

methods (or its taxable year) pursuant to 

the applicable revenue procedure. A 

commenter suggested that in post-2006 

years the controlling domestic 

shareholders of a 10/50 corporation 

should be permitted to change 

accounting methods on its behalf 

without obtaining the consent of the 

Commissioner or making adjustments to 

the 10/50 corporation’s earnings and 

profits under the principles of section 

481 to prevent the duplication or 

omission of amounts attributable to 

previous years. This comment is not 

adopted. The IRS and the Treasury 

Department believe that it would be 

inappropriate to give the controlling 

domestic shareholders of a 10/50 

corporation this type of ‘‘fresh start.’’ 

A commenter recommended 

simplifying the procedures in § 1.964– 

1T(c)(3) of the 2006 temporary 

regulations by which controlling 

domestic shareholders may make an 

election or adopt or change a method of 

accounting or taxable year on behalf of 

a foreign corporation. Specifically, the 

commenter suggested that § 1.964– 

1T(c)(3)(i) and (ii) be revised to provide 

that where a United States shareholder 

changes a method of accounting on 

behalf of a CFC of which it is the sole 

shareholder, such shareholder need file 

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only the original Form 3115 with its tax 

return, and need not file the statement 

(described in § 1.964–1T(c)(3)(ii)) that is 

required to be filed with each 

controlling domestic shareholder’s tax 

return. The IRS and the Treasury 

Department agree with the comment 

and believe it is equally applicable to 

changes in the taxable year of the CFC. 

Accordingly, § 1.964–1(c)(3)(ii) of the 

final regulations provides that in the 

case of a controlling domestic 

shareholder that is the sole shareholder 

of a CFC, no separate statement need be 

filed if the information described in 

§ 1.964–1(c)(3)(ii) is included on Form 

5471 (Information Return of U.S. 

Persons With Respect to Certain Foreign 

Corporations) and Form 3115 

(Application for Change in Accounting 

Method) or Form 1128 (Application to 

Adopt, Change or Retain a Tax Year), as 

applicable, filed with respect to the CFC 

with the shareholder’s return for such 

taxable year. 

B. Section 481(a) Adjustments 

Prior to its expiration, § 1.964– 

1T(g)(5) provided that adjustments to 

the appropriate separate category of 

earnings and profits and income of the 

controlled foreign corporation was 

required using the principles of section 

481(a) to prevent any duplication or 

omission of amounts attributable to 

previous years that would otherwise 

result from any election or adoption of 

a method of accounting. This provision 

was cross-referenced in § 1.964–1T(c)(4) 

of the 2006 temporary regulations. 

Commenters requested clarification 

regarding the mechanics of making the 

adjustments according to the principles 

of section 481(a), such as the period 

over which the section 481(a) 

adjustment is spread and whether a 

correlative section 481(a) adjustment 

should be made at the domestic 

shareholder level in order to capture an 

increased subpart F inclusion that 

would have been generated had 

earnings and profits initially been 

determined using the method 

subsequently elected or adopted. One 

commenter suggested that the 

regulations state specifically that the 

applicable domestic principles should 

apply so that the section 481 adjustment 

would be taken into account in 

determining the current earnings and 

profits of the CFC or 10/50 corporation 

beginning with the year of change and 

for the same period as the adjustment is 

taken into account for purposes of 

computing taxable income. 

In response to the comment, § 1.964– 

1(c)(2) of the final regulations provides 

that adjustments to the appropriate 

separate category (as defined in § 1.904– 

5(a)(1)) of earnings and profits and 

income of the foreign corporation shall 

be required under section 481 to prevent 

any duplication or omission of amounts 

attributable to previous years that would 

otherwise result from any change in a 

method of accounting. The details 

concerning the section 481 adjustment 

are addressed in applicable revenue 

procedures. See, for example, Rev. Proc. 

2008–52, 2008–36 IRB 587. 

C. Miscellaneous Cross-References 

The 2006 temporary regulations 

included in § 1.964–1T(c)(4) crossreferences to expired § 1.964–1T(g) that 

are updated in the final regulations. In 

addition, § 1.964–1(c)(2) of the final 

regulations adds cross-references to 

§§ 1.985–5, 1.985–6, and 1.986–7, which 

provide that a qualified business unit 

must make adjustments to its earnings 

and profits when it changes its 

functional currency or begins to use the 

dollar approximate separate transactions 

method of accounting. 

Section 1.964–1(b)(1)(v) includes a 

cross-reference to ‘‘paragraph (d) of this 

section.’’ Because of revisions to 

§ 1.964–1, that cross-reference and a 

similar cross-reference in § 1.989(b)–1 

were no longer effective. The final 

regulations replace the cross-references 

to paragraph (d) with the appropriate 

cross-reference to section 988 and the 

regulations under that section. 

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 

has also been determined that section 

553(b) of 5 U.S.C. chapter 5 does not 

apply to these regulations, and, because 

the regulations do not impose a 

collection of information on small 

entities, the Regulatory Flexibility Act, 

5 U.S.C. chapter 6, does not apply. 

Pursuant to section 7805(f) of the Code, 

the notice of proposed rulemaking 

preceding this regulation and temporary 

regulations were submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small businesses. 

Drafting Information 

The principal authors of the final 

regulations are Richard Chewning and 

Jeffrey Parry of the Office of Associate 

Chief Counsel (International). However, 

other personnel from the Treasury 

Department and the IRS participated in 

their development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority for part 1 

continues to read in part as follows: 

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

■ Par. 2. Section 1.861–9 is amended by 

removing paragraphs (h)(5)(iii) and 

(i)(4), revising paragraphs (a), (b), (c), 

(d), (e), (f), and (g)(1)(i), and adding 

paragraph (k), to read as follows: 

1.861–9 Allocation and apportionment of 

interest expense. 

(a) through (f)(3)(i) [Reserved]. For 

further guidance, see § 1.861–9T(a) 

through (f)(3)(i). 

(f)(3)(ii) Manner of election. The 

election shall be made by filing the 

statement and providing the written 

notice described in § 1.964–1(c)(3)(ii) 

and (iii), respectively, at the time and in 

the manner described therein. For 

further guidance, see § 1.861– 

9T(f)(3)(ii). 

(f)(3)(iii) and (iv) [Reserved]. For 

further guidance, see § 1.861– 

9T(f)(3)(iii) and (iv). 

(4) Noncontrolled section 902 

corporations—(i) In general. For 

purposes of computing earnings and 

profits of a noncontrolled section 902 

corporation (as defined in section 

904(d)(2)(E)) for Federal tax purposes, 

the interest expense of a noncontrolled 

section 902 corporation may be 

apportioned using either the asset 

method described in § 1.861–9T(g) or 

the modified gross income method 

described in § 1.861–9T(j). A 

noncontrolled section 902 corporation 

that is not a controlled foreign 

corporation may elect to use a different 

method of apportionment than that 

elected by one or more of its 

shareholders. A noncontrolled section 

902 corporation must use the same 

method of apportionment with respect 

to all its domestic corporate 

shareholders. 

(ii) Manner of election. The election to 

use the asset method described in 

§ 1.861–9T(g) or the modified gross 

income method described in § 1.861– 

9T(j) may be made either by the 

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27874 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

noncontrolled section 902 corporation 

or by the majority domestic corporate 

shareholders (as defined in § 1.964– 

1(c)(5)(ii)) on behalf of the 

noncontrolled section 902 corporation. 

The election shall be made by filing the 

statement and providing the written 

notice described in § 1.964–1(c)(3)(ii) 

and (iii), respectively, at the time and in 

the manner described therein. For 

further guidance, see § 1.861– 

9T(f)(4)(ii). 

(iii) Stock characterization. In general, 

the stock of a noncontrolled section 902 

corporation shall be characterized in the 

hands of any domestic corporation that 

meets the ownership requirements of 

section 902(a) with respect to the 

noncontrolled section 902 corporation, 

or in the hands of any member of the 

same qualified group as defined in 

section 902(b)(2), using the same 

method that the noncontrolled section 

902 corporation uses to apportion its 

interest expense. Stock in a 

noncontrolled section 902 corporation 

shall be characterized as a passive 

category asset in the hands of any such 

shareholder that fails to meet the 

substantiation requirements of § 1.904– 

5(c)(4)(iii), or in the hands of any 

shareholder that is not eligible to 

compute an amount of foreign taxes 

deemed paid with respect to a dividend 

from the noncontrolled section 902 

corporation for the taxable year. See 

§ 1.861–12(c)(4). 

(f)(5) through (g)(1)(i) [Reserved]. For 

further guidance, see § 1.861–9T(f)(5) 

through (g)(1)(i). 

* * * * * 

(k) Effective/applicability date. 

Paragraph (h)(5) of this section applies 

to taxable years beginning after 

December 31, 1989. Paragraph (i) of this 

section applies to taxable years 

beginning on or after March 26, 2004. 

Paragraphs (f)(3)(ii) and (4) of this 

section apply to taxable years of 

shareholders ending on or after April 

20, 2009. See 26 CFR 1.861– 

9T(f)(3)(ii)(last sentence) and (4) 

(revised as of April 1, 2009) for rules 

applicable to taxable years of 

shareholders ending after the first day of 

the first taxable year of the 

noncontrolled section 902 corporation 

beginning after December 31, 2002, and 

ending before April 20, 2009. 

■ Par. 3. Section 1.861–9T is amended 

as follows: 

■ 1. Remove paragraph (b)(6)(viii). 

■ 2. Revise the last sentence of 

paragraph (f)(3)(ii) and paragraph (f)(4). 

■ 3. Add paragraph (k). 

The revisions and additions read as 

follows: 

§ 1.861–9T Allocation and apportionment 

of interest expense (temporary). 

* * * * * 

(f) * * * 

(3) * * * 

(ii) * * * For guidance relating to the 

time and manner of this election, see 

§ 1.861–9(f)(3)(ii). 

* * * * * 

(4) * * * For further guidance, see 

§ 1.861–9(f)(4). 

* * * * * 

(k) Effective/applicability dates. 

Paragraph (b)(6) of this section applies 

to losses on any transaction described in 

paragraph (b)(6)(i) of this section that 

was entered into after September 14, 

1988. Paragraph (b)(6) of this section 

also applies to any gain that was 

realized on any transaction described in 

paragraph (b)(6)(i) of this section that 

was entered into after August 11, 1989. 

Taxpayers may also apply paragraph 

(b)(6) of this section to any gain that was 

realized on any transaction described in 

paragraph (b)(6)(i) of this section that 

was entered into after September 14, 

1988, and on or before August 11, 1989, 

if the taxpayer can demonstrate to the 

satisfaction of the Commissioner that 

substantially all of the arrangements 

described in paragraph (b)(6)(i) of this 

section to which the taxpayer became a 

party during that interim period were 

identified on the taxpayer’s books and 

records with the liabilities of the 

taxpayer in a substantially 

contemporaneous manner and that all 

losses and expenses that are subject to 

the rules of paragraph (b)(6) of this 

section were treated in the same manner 

as interest expense. For this purpose, 

arrangements that were identified in a 

substantially contemporaneous manner 

with the taxpayer’s assets shall be 

ignored. For further guidance, see 

§ 1.861–9(k). 

■ Par. 4. Section 1.861–12 is added as 

follows: 

§ 1.861–12 Characterization rules and 

adjustments for certain assets. 

(a) through (c)(1) [Reserved]. For 

further guidance, see § 1.861–12T(a) 

through (c)(1). 

(2) Basis adjustment for stock in 

nonaffiliated 10 percent owned 

corporations— (i) Taxpayers using the 

tax book value method—(A) General 

rule. For purposes of apportioning 

expenses on the basis of the tax book 

value of assets, the adjusted basis of any 

stock in a 10 percent owned corporation 

owned by the taxpayer either directly 

or, for taxable years beginning after 

April 25, 2006, indirectly through a 

partnership or other pass-through entity 

shall be— 

(1) Increased by the amount of the 

earnings and profits of such corporation 

(and of lower-tier 10 percent owned 

corporations) attributable to such stock 

and accumulated during the period the 

taxpayer or other members of its 

affiliated group held 10 percent or more 

of such stock; or 

(2) Reduced (but not below zero) by 

any deficit in earnings and profits of 

such corporation (and of lower-tier 10 

percent owned corporations) 

attributable to such stock for such 

period. 

(c)(2)(i)(B) through (c)(3) [Reserved] 

For further guidance, see § 1.861– 

12T(c)(2)(i)(B) through (c)(3). 

(4) Characterization of stock of 

noncontrolled section 902 

corporations—(i) General rule. The 

principles of § 1.861–12T(c)(3) shall 

apply to stock in a noncontrolled 

section 902 corporation (as defined in 

section 904(d)(2)(E)). Accordingly, stock 

in a noncontrolled section 902 

corporation shall be characterized as an 

asset in the various separate limitation 

categories on the basis of either the asset 

method described in § 1.861– 

12T(c)(3)(ii) or the modified gross 

income method described in § 1.861– 

12T(c)(3)(iii). Stock in a noncontrolled 

section 902 corporation the interest 

expense of which is apportioned on the 

basis of assets shall be characterized in 

the hands of its domestic shareholders 

(as defined in § 1.902–1(a)(1)) under the 

asset method described in § 1.861– 

12T(c)(3)(ii). Stock in a noncontrolled 

section 902 corporation the interest 

expense of which is apportioned on the 

basis of gross income shall be 

characterized in the hands of its 

domestic shareholders under the gross 

income method described in § 1.861– 

12T(c)(3)(iii). 

(ii) Nonqualifying shareholders. Stock 

in a noncontrolled section 902 

corporation shall be characterized as a 

passive category asset in the hands of a 

shareholder that is not eligible to 

compute an amount of foreign taxes 

deemed paid with respect to a dividend 

from the noncontrolled section 902 

corporation for the taxable year, and in 

the hands of any shareholder with 

respect to whom look-through treatment 

is not substantiated. See § 1.904– 

5(c)(4)(iii). 

(5) Effective/applicability date. 

Paragraphs (c)(2)(i)(A) and (4) of this 

section apply to taxable years of 

shareholders ending on or after April 

20, 2009. See 26 CFR § 1.861– 

12T(c)(2)(i) introductory text, (2)(i)(A), 

(2)(i)(B), and (4) (revised as of April 1, 

2009) for rules applicable to taxable 

years of shareholders ending after the 

first day of the first taxable year of the 

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Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 27875 

noncontrolled section 902 corporation 

beginning after December 31, 2002, and 

ending before April 20, 2009. 

(d) through (j) [Reserved]. For further 

guidance, see § 1.861–12T(d) through (j). 

■ Par. 5. Section 1.861–12T is amended 

as follows: 

■ 1. Paragraph (c)(2)(i) introductory text 

is removed. 

■ 2. Paragraph (c)(2)(i)(A) is revised. 

■ 3. Paragraph (c)(2)(i)(B) is removed. 

■ 4. A paragraph heading is added to the 

undesignated text following paragraph 

(c)(2), which is designated as new 

paragraph (c)(2)(i)(B). 

■ 5. Paragraph (c)(4) is revised. 

■ 6. A new paragraph (c)(5) is added. 

The revisions and additions read as 

follows: 

§ 1.861–12T Characterization rules and 

adjustments for certain assets (temporary). 

* * * * * 

(c) * * * 

(2)(i)(A) [Reserved]. For further 

guidance, see § 1.861–12(c)(2)(i)(A). 

(B) Computational rules. * * * 

(4) [Reserved]. For further guidance, 

see § 1.861–12(c)(4). 

(5) [Reserved]. For further guidance, 

see § 1.861–12(c)(5). 

* * * * * 

■ Par. 6. Section 1.902–1 is amended by 

revising paragraphs (a)(4)(ii), (a)(6), 

(a)(7), (a)(8)(i), (c)(8), (d)(1), (d)(2)(i), and 

(g) to read as follows: 

§ 1.902–1 Credit for domestic corporate 

shareholder of a foreign corporation for 

foreign income taxes paid by the foreign 

corporation. 

(a) * * * 

(4) * * * 

(ii) Fourth-, fifth-, or sixth-tier 

corporation. In the case of dividends 

paid to a third-, fourth-, or fifth-tier 

corporation by a foreign corporation in 

a taxable year beginning after August 5, 

1997, the foreign corporation is a 

fourth-, fifth-, or sixth-tier corporation, 

respectively, if at the time the dividend 

is paid, the corporation receiving the 

dividend owns at least 10 percent of the 

foreign corporation’s voting stock, the 

chain of foreign corporations that 

includes the foreign corporation is 

connected through stock ownership of 

at least 10 percent of their voting stock, 

the domestic shareholder in the first-tier 

corporation in such chain indirectly 

owns at least 5 percent of the voting 

stock of the foreign corporation through 

such chain, such corporation is a 

controlled foreign corporation (as 

defined in section 957) and the 

domestic shareholder is a United States 

shareholder (as defined in section 

951(b)) in the foreign corporation. Taxes 

paid by a fourth-, fifth-, or sixth-tier 

corporation shall be taken into account 

in determining post-1986 foreign 

income taxes only if such taxes are paid 

with respect to taxable years beginning 

after August 5, 1997, in which the 

corporation was a controlled foreign 

corporation. 

* * * * * 

(6) Upper- and lower-tier 

corporations. In the case of a sixth-tier 

corporation, the term upper-tier 

corporation means a first-, second-, 

third-, fourth-, or fifth-tier corporation. 

In the case of a fifth-tier corporation, the 

term upper-tier corporation means a 

first-, second-, third-, or fourth-tier 

corporation. In the case of a fourth-tier 

corporation, the term upper-tier 

corporation means a first-, second-, or 

third-tier corporation. In the case of a 

third-tier corporation, the term uppertier corporation means a first- or secondtier corporation. In the case of a secondtier corporation, the term upper-tier 

corporation means a first-tier 

corporation. In the case of a first-tier 

corporation, the term lower-tier 

corporation means a second-, third-, 

fourth-, fifth-, or sixth-tier corporation. 

In the case of a second-tier corporation, 

the term lower-tier corporation means a 

third-, fourth-, fifth-, or sixth-tier 

corporation. In the case of a third-tier 

corporation, the term lower-tier 

corporation means a fourth-, fifth-, or 

sixth-tier corporation. In the case of a 

fourth-tier corporation, the term lowertier corporation means a fifth- or sixthtier corporation. In the case of a fifth-tier 

corporation, the term lower-tier 

corporation means a sixth-tier 

corporation. 

(7) Foreign income taxes. The term 

foreign income taxes means income, war 

profits, and excess profits taxes as 

defined in § 1.901–2(a), and taxes 

included in the term income, war 

profits, and excess profits taxes by 

reason of section 903, that are imposed 

by a foreign country or a possession of 

the United States, including any such 

taxes deemed paid by a foreign 

corporation under this section. Foreign 

income, war profits, and excess profits 

taxes shall not include amounts 

excluded from the definition of those 

taxes pursuant to section 901 and the 

regulations under that section. See 

section 901(f) and (i) and paragraph 

(c)(5) of this section. Foreign income, 

war profits, and excess profits taxes also 

shall not include taxes for which a 

credit is disallowed under section 901 

and the regulations under section 901. 

See section 901(j), (k), and (l), and 

paragraphs (c)(4) and (8) of this section. 

(8) Post-1986 foreign income taxes— 

(i) In general. Except as provided in 

paragraphs (a)(10) and (13) of this 

section, the term post-1986 foreign 

income taxes of a foreign corporation 

means the sum of the foreign income 

taxes paid, accrued, or deemed paid in 

the taxable year of the foreign 

corporation in which it distributes a 

dividend plus the foreign income taxes 

paid, accrued, or deemed paid in the 

foreign corporation’s prior taxable years 

beginning after December 31, 1986, to 

the extent the foreign taxes were not 

attributable to dividends distributed to, 

or earnings otherwise included (for 

example, under section 304, 367(b), 551, 

951(a), 1248, or 1293) in the income of, 

a foreign or domestic shareholder in 

prior taxable years. Except as provided 

in paragraph (b)(4) of this section, 

foreign taxes paid or deemed paid by 

the foreign corporation on or with 

respect to earnings that were distributed 

or otherwise removed from post-1986 

undistributed earnings in prior post1986 taxable years shall be removed 

from post-1986 foreign income taxes 

regardless of whether the shareholder is 

eligible to compute an amount of foreign 

taxes deemed paid under section 902, 

and regardless of whether the 

shareholder in fact chose to credit 

foreign income taxes under section 901 

for the year of the distribution or 

inclusion. Thus, if an amount is 

distributed or deemed distributed by a 

foreign corporation to a United States 

person that is not a domestic 

shareholder within the meaning of 

paragraph (a)(1) of this section (for 

example, an individual or a corporation 

that owns less than 10% of the foreign 

corporation’s voting stock), or to a 

foreign person that does not meet the 

definition of an upper-tier corporation 

under paragraph (a)(6) of this section, 

then although no foreign income taxes 

shall be deemed paid under section 902, 

foreign income taxes attributable to the 

distribution or deemed distribution that 

would have been deemed paid had the 

shareholder met the ownership 

requirements of paragraphs (a)(1) 

through (4) of this section shall be 

removed from post-1986 foreign income 

taxes. Further, if a domestic shareholder 

chooses to deduct foreign taxes paid or 

accrued for the taxable year of the 

distribution or inclusion, it shall 

nonetheless be deemed to have paid a 

proportionate share of the foreign 

corporation’s post-1986 foreign income 

taxes under section 902(a), and the 

foreign income taxes deemed paid must 

be removed from post-1986 foreign 

income taxes. In the case of a foreign 

corporation the foreign income taxes of 

which are determined based on an 

accounting period of less than one year, 

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27876 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

the term year means that accounting 

period. See sections 441(b)(3) and 443. 

* * * * * 

(c) * * * 

(8) Effect of certain liquidations, 

reorganizations, or similar transactions 

on certain foreign taxes paid or accrued 

in taxable years beginning on or before 

August 5, 1997—(i) General rule. 

Notwithstanding the effect of any 

liquidation, reorganization, or similar 

transaction, foreign taxes paid or 

accrued by a member of a qualified 

group (as defined in section 902(b)(2)) 

shall not be eligible to be deemed paid 

if they were paid or accrued in a taxable 

year beginning on or before August 5, 

1997, by a corporation that was a 

fourth-, fifth- or sixth-tier corporation 

with respect to the taxpayer on the first 

day of the corporation’s first taxable 

year beginning after August 5, 1997. 

(ii) Example. The following examples 

illustrate the application of this 

paragraph (c)(8): 

Example. P, a domestic corporation, has 

owned 100 percent of the voting stock of 

foreign corporation S at all times since 

January 1, 1987. Until June 30, 2002, S 

owned 100 percent of the voting stock of 

foreign corporation T, T owned 100 percent 

of the voting stock of foreign corporation U, 

and U owned 100 percent of the voting stock 

of foreign corporation V. P, S, T, U, and V 

each use the calendar year as their U.S. 

taxable year. Thus, beginning in 1998 V was 

a fourth-tier controlled foreign corporation, 

and its foreign taxes paid or accrued in 1998 

and later taxable years were eligible to be 

deemed paid. On June 30, 2002, T was 

liquidated, causing S to acquire 100 percent 

of the stock of U. As a result, V became a 

third-tier controlled foreign corporation. In 

2003, V paid a dividend to U. Under 

paragraph (c)(8) of this section, foreign taxes 

paid by V in taxable years beginning before 

1998 are not taken into account in computing 

the foreign taxes deemed paid with respect 

to the dividend paid by V to U. 

(d) Dividends from controlled foreign 

corporations and noncontrolled section 

902 corporations—(1) General rule. If a 

dividend is described in paragraphs 

(d)(1)(i) through (iv) of this section, the 

following rules apply. If a dividend is 

paid out of post-1986 undistributed 

earnings or pre-1987 accumulated 

profits of a foreign corporation 

attributable to more than one separate 

category, the amount of foreign income 

taxes deemed paid by the domestic 

shareholder or the upper-tier 

corporation under section 902 and 

paragraph (b) of this section shall be 

computed separately with respect to the 

post-1986 undistributed earnings or pre1987 accumulated profits in each 

separate category out of which the 

dividend is paid. See § 1.904–5(c)(4) 

and (i), and paragraph (d)(2) of this 

section. The separately computed 

deemed-paid taxes shall be added to 

other taxes paid by the domestic 

shareholder or upper-tier corporation 

with respect to income in the 

appropriate separate category. The rules 

of this paragraph (d)(1) apply to 

dividends received by — 

(i) A domestic shareholder that is a 

United States shareholder (as defined in 

section 951(b) or section 953(c)) from a 

first-tier corporation that is a controlled 

foreign corporation; 

(ii) A domestic shareholder from a 

first-tier corporation that is a 

noncontrolled section 902 corporation; 

(iii) An upper-tier controlled foreign 

corporation from a lower-tier controlled 

foreign corporation if the corporations 

are related look-through entities within 

the meaning of § 1.904–5(i) (see § 1.904– 

5(i)(3)); or 

(iv) A foreign corporation that is 

eligible to compute an amount of foreign 

taxes deemed paid under section 

902(b)(1), from a controlled foreign 

corporation or a noncontrolled section 

902 corporation (that is, both the payor 

and payee corporations are members of 

the same qualified group as defined in 

section 902(b)(2) (see § 1.904–5 (i)(4)). 

(2) Look-through—(i) Dividends. Any 

dividend distribution by a controlled 

foreign corporation or noncontrolled 

section 902 corporation to a domestic 

shareholder or a foreign corporation that 

is eligible to compute an amount of 

foreign taxes deemed paid under section 

902(b)(1) shall be deemed paid pro rata 

out of each separate category of income. 

Any dividend distribution by a 

controlled foreign corporation to a 

controlled foreign corporation that is a 

related look-through entity within the 

meaning of § 1.904–5(i)(3) shall also be 

deemed to be paid pro rata out of each 

separate category of income. See 

§§ 1.904–5(c)(4) and (i), and 1.904–7. 

The portion of the foreign income taxes 

attributable to a particular separate 

category that shall be deemed paid by 

the domestic shareholder or upper-tier 

corporation must be computed under 

the following formula: 

Foreign

domestic shareholder

 taxes deemed paid

 by or 

upper-tier corporation with 

respect to a separate category

=

Post- foreign income

taxes of first-tier or lower-tier

c

1986

orporation allocated and apportioned

to the separate category under §1.904-6 

 amount attributable

 to th

×

Dividend

e category

Post-1986 undistributed earnings

of fir

separate

st-tier or lower-tier

corporation in the separate category

(g) Effective/applicability dates. This 

section applies to any distribution made 

in and after a foreign corporation’s first 

taxable year beginning on or after 

January 1, 1987, except that the 

provisions of paragraphs (a)(4)(ii), (a)(6), 

(a)(7), (a)(8)(i), and (c)(8) of this section 

and, except as provided in § 1.904– 

7(f)(9), the provisions of paragraph (d) of 

this section apply to distributions made 

in taxable years of foreign corporations 

ending on or after April 20, 2009. See 

26 CFR 1.902–1T(a)(4)(ii), (a)(6), (a)(7), 

(a)(8)(i), and (c)(8) (revised as of April 

1, 2009) for rules applicable to 

distributions made in taxable years of 

foreign corporations beginning after 

April 25, 2006, and ending before April 

20, 2009, and 26 CFR 1.902–1T(d), 

except as provided in 26 CFR 1.904– 

7T(f)(9) (revised as of April 1, 2009), for 

rules applicable to distributions made in 

taxable years of foreign corporations 

beginning after December 31, 2002, and 

ending before April 20, 2009. 

§ 1.902–1T [Removed] 

■ Par. 7. Section 1.902–1T is removed. 

■ Par. 8. Section 1.904–0 is amended by 

revising the section heading and the 

entries for §§ 1.904–5(m), (m)(5), and 

(n), and 1.904–7(f) to read as follows: 

§ 1.904–0 Outline of regulation provisions 

for section 904. 

* * * * * 

§ 1.904–5 Look-through rules as applied to 

controlled foreign corporations and other 

entities. 

* * * * * 

(m) Application of section 904(h). 

* * * * * 

(5) Treatment of inclusions under 

sections 951(a)(1)(A) and 1293. 

* * * * * 

(n) Order of application of sections 

904(d) and (h). 


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Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 27877 

§ 1.904–7 Transition rules. 

* * * * * 

(f) * * * 

(1) Definition of non-look-through pools. 

(2) Treatment of non-look-through pools of 

a noncontrolled section 902 corporation. 

(3) Treatment of non-look-through pools of 

a controlled foreign corporation. 

(4) Substantiation of look-through 

character of undistributed earnings and taxes 

in a non-look-through pool. 

(i) Reconstruction of earnings and taxes 

pools. 

(ii) Safe harbor method. 

(iii) Inadequate substantiation. 

(iv) Examples. 

(5) Treatment of a deficit accumulated in 

a non-look-through pool. 

(6) Treatment of pre-1987 accumulated 

profits. 

(7) Treatment of post-1986 undistributed 

earnings or a deficit of a controlled foreign 

corporation attributable to dividends from a 

noncontrolled section 902 corporation paid 

in taxable years beginning before January 1, 

2003. 

(i) Look-through treatment of post-1986 

undistributed earnings at controlled foreign 

corporation level. 

(ii) Look-through treatment of deficit in 

post-1986 undistributed earnings at 

controlled foreign corporation level. 

(iii) Substantiation required for lookthrough treatment. 

(8) Treatment of distributions received by 

an upper-tier corporation from a lower-tier 

noncontrolled section 902 corporation, 

including when the corporations do not have 

the same taxable years. 

(i) Rule. 

(ii) Example. 

(9) Election to apply pre-AJCA rules to 

2003 and 2004 taxable years. 

(i) Definition. 

(ii) Time, manner, and form of election. 

(iii) Treatment of non-look-through pools 

in taxable years beginning after December 31, 

2004. 

(iv) Carryover of unused foreign tax. 

(v) Carryback of unused foreign tax. 

(vi) Recapture of overall foreign loss or 

separate limitation loss in the single category 

for dividends from all noncontrolled section 

902 corporations. 

(vii) Recapture of separate limitation losses 

in other separate categories. 

(viii) Treatment of undistributed earnings 

in an upper-tier corporation-level single 

category for dividends from lower-tier 

noncontrolled section 902 corporations. 

(ix) Treatment of a deficit in the single 

category for dividends from lower-tier 

noncontrolled section 902 corporations. 

(10) Effective/applicability date. 

■ Par. 9. Section 1.904–2 is amended by 

revising paragraphs (a) and (h) to read 

as follows: 

§ 1.904–2 Carryback and carryover of 

unused foreign tax. 

(a) Credit for foreign tax carryback or 

carryover. A taxpayer who chooses to 

claim a credit under section 901 for a 

taxable year is allowed a credit under 

that section not only for taxes otherwise 

allowable as a credit but also for taxes 

deemed paid or accrued in that year as 

a result of a carryback or carryover of an 

unused foreign tax under section 904(c). 

However, the taxes so deemed paid or 

accrued shall not be allowed as a 

deduction under section 164(a). 

Paragraphs (b) through (g) of this section 

and § 1.904–3, providing rules for the 

computation of carryovers and 

carrybacks, do not reflect a number of 

intervening statutory amendments, 

including the redesignation of section 

904(d) as section 904(c) for taxable years 

beginning after 1975, amendments to 

sections 904(d) and (f) regarding the 

application of separate limitations in 

taxable years beginning after 1986, the 

limitation of the carryback period to one 

year for unused foreign taxes arising in 

taxable years beginning after October 22, 

2004, and the extension of the carryover 

period to ten years for unused foreign 

taxes that may be carried to any taxable 

year ending after October 22, 2004. 

However, the principles of paragraphs 

(b) through (g) of this section and 

§ 1.904–3(b) through (g) shall apply in 

determining carrybacks and carryovers 

of unused foreign taxes, modified so as 

to take into account the effect of 

statutory amendments. For transition 

rules relating to the carryover and 

carryback of unused foreign tax paid 

with respect to dividends from 

noncontrolled section 902 corporations, 

see paragraph (h) of this section. For 

special rules regarding these 

computations in case of taxes paid, 

accrued, or deemed paid with respect to 

foreign oil and gas extraction income or 

foreign oil related income, see section 

907(f) and the regulations under that 

section. 

* * * * * 

(h) Transition rules for carryovers and 

carrybacks of pre-2003 and post-2002 

unused foreign tax paid or accrued with 

respect to dividends from noncontrolled 

section 902 corporations—(1) Carryover 

of unused foreign tax. Except as 

provided in §§ 1.904–7(f)(9)(iv) and 

1.904(f)–12(g)(3), the rules of this 

paragraph (h)(1) apply to reallocate to 

the taxpayer’s other separate categories 

any unused foreign taxes (as defined in 

paragraph (b)(2) of this section) that 

were paid or accrued or deemed paid 

under section 902 with respect to a 

dividend from a noncontrolled section 

902 corporation paid in a taxable year 

of the noncontrolled section 902 

corporation beginning before January 1, 

2003, which taxes were subject to a 

separate limitation for dividends from 

that noncontrolled section 902 

corporation. To the extent any such 

unused foreign taxes are carried forward 

to a taxable year of a domestic 

shareholder beginning on or after the 

first day of the noncontrolled section 

902 corporation’s first taxable year 

beginning after December 31, 2002, such 

taxes shall be allocated among the 

taxpayer’s separate categories in the 

same proportions as the related 

dividend would have been assigned had 

such dividend been eligible for lookthrough treatment when paid. 

Accordingly, the taxes shall be allocated 

in the same percentages as the 

reconstructed earnings in the 

noncontrolled section 902 corporation’s 

non-look-through pool and pre-1987 

accumulated profits that were 

accumulated in taxable years beginning 

before January 1, 2003, out of which the 

dividend was paid, in accordance with 

the rules of § 1.904–7(f), or, if the 

taxpayer uses the safe harbor method of 

§ 1.904–7(f)(4)(ii), in the same 

percentages as the taxpayer properly 

characterizes the stock of the 

noncontrolled section 902 corporation 

for purposes of apportioning its interest 

expense in its first taxable year ending 

after the first day of the noncontrolled 

section 902 corporation’s first taxable 

year beginning after December 31, 2002. 

See § 1.904–7(f)(2) and (4). In the case 

of unused foreign taxes allocable to 

dividends from a noncontrolled section 

902 corporation with respect to which 

the taxpayer was no longer a domestic 

shareholder (as defined in § 1.902–1(a)) 

as of the first day of such taxable year, 

such taxes shall be allocated among the 

taxpayer’s separate categories in the 

same percentages as the earnings in the 

noncontrolled section 902 corporation’s 

non-look-through pool or pre-1987 

accumulated profits would have been 

assigned had they been distributed and 

eligible for look-through treatment in 

the last taxable year in which the 

taxpayer was a domestic shareholder in 

such corporation. The unused foreign 

taxes that are carried forward shall be 

treated as allocable to general limitation 

income to the extent that such taxes 

would otherwise have been allocable to 

passive income, either on a lookthrough basis or as a result of 

inadequate substantiation under the 

rules of § 1.904–7(f)(4). 

(2) Carryback of unused foreign tax. 

The rules of this paragraph (h)(2) apply 

to any unused foreign taxes that were 

paid or accrued or deemed paid under 

section 902 with respect to a dividend 

from a noncontrolled section 902 

corporation paid in a taxable year of the 

noncontrolled section 902 corporation 

ending on or after April 20, 2009, which 

dividends were eligible for look-through 

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27878 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

treatment. See 26 CFR § 1.904–2T(h)(2) 

(revised as of April 1, 2009) for rules 

applicable to such unused foreign taxes 

with respect to a dividend from a 

noncontrolled section 902 corporation 

paid in a taxable year of the 

noncontrolled section 902 corporation 

beginning after December 31, 2002 and 

ending before April 20, 2009, which 

dividends were eligible for look-through 

treatment. To the extent any such 

unused foreign taxes are carried back to 

a prior taxable year of a domestic 

shareholder, a credit for such taxes shall 

be allowed only to the extent of the 

excess limitation in the same separate 

category or categories to which the 

related look-through dividend was 

assigned and not in any separate 

category for dividends from 

noncontrolled section 902 corporations. 

* * * * * 

■ Par. 10. Section 1.904–2T is amended 

by revising paragraphs (a), (b), (c), (d), 

(e), (f), (g), and (h) to read as follows: 

§ 1.904–2T Carryback and carryover of 

unused foreign tax (temporary). 

(a) through (h) [Reserved]. For further 

guidance, see § 1.904–2(a) through (h). 

* * * * * 

■ Par. 11. Section 1.904–4 is amended 

as follows: 

■ 1. Remove paragraph (c)(2)(i). 

■ 2. Redesignate paragraphs (c)(2)(ii)(A) 

and (c)(2)(ii)(B) as paragraphs (c)(2)(i) 

and (c)(2)(ii), respectively. 

■ 3. Remove the language ‘‘§ 1.904– 

6(a)(iii)’’ from the second sentence in 

newly-designated paragraph (c)(2)(i) and 

add the language ‘‘§ 1.904–6(a)(1)(iii)’’ 

in its place. 

■ 4. Remove the language ‘‘paragraph 

(c)(2)(ii)(B)’’ from the last sentence in 

newly-designated paragraph (c)(2)(i) and 

add the language ‘‘paragraph (c)(2)(ii)’’ 

in its place. 

■ 5. Remove the language ‘‘paragraph 

(c)(2)(ii)(A)’’ from the first sentence in 

newly-designated paragraph (c)(2)(ii) 

and add the language ‘‘paragraph 

(c)(2)(i)’’ in its place. 

■ 6. Revise paragraphs (c)(3) and (c)(4) 

introductory text. 

■ 7. Add paragraph (n). 

The revisions and addition read as 

follows: 

§ 1.904–4 Separate application of section 

904 with respect to certain categories of 

income. 

* * * * * 

(c) * * * 

(3) Amounts received or accrued by 

United States persons. Except as 

otherwise provided in paragraph (c)(5) 

of this section, all passive income 

received by a United States person shall 

be subject to the rules of this paragraph 

(c)(3). However, subpart F inclusions 

that are passive income, dividends from 

a controlled foreign corporation or 

noncontrolled section 902 corporation 

that are passive income, and income 

that is earned by a United States person 

through a foreign QBU that is passive 

income shall be subject to the rules of 

this paragraph only to the extent 

provided in paragraph (c)(4) of this 

section. For purposes of this section, a 

foreign QBU is a qualified business unit 

(as defined in section 989(a)), other than 

a controlled foreign corporation or 

noncontrolled section 902 corporation, 

that has its principal place of business 

outside the United States. These rules 

shall apply whether the income is 

received from a controlled foreign 

corporation of which the United States 

person is a United States shareholder, 

from a noncontrolled section 902 

corporation of which the United States 

person is a domestic corporation 

meeting the stock ownership 

requirements of section 902(a), or from 

any other person. For purposes of 

determining whether passive income is 

high-taxed income, the following rules 

apply: 

(i) All passive income received during 

the taxable year that is subject to a 

withholding tax of fifteen percent or 

greater shall be treated as one item of 

income. 

(ii) All passive income received 

during the taxable year that is subject to 

a withholding tax of less than fifteen 

percent (but greater than zero) shall be 

treated as one item of income. 

(iii) All passive income received 

during the taxable year that is subject to 

no withholding tax or other foreign tax 

shall be treated as one item of income. 

(iv) All passive income received 

during the taxable year that is subject to 

no withholding tax but is subject to a 

foreign tax other than a withholding tax 

shall be treated as one item of income. 

(4) Dividends and inclusions from 

controlled foreign corporations, 

dividends from noncontrolled section 

902 corporations, and income of foreign 

QBUs. Except as provided in paragraph 

(c)(5) of this section, all dividends and 

all amounts included in gross income of 

a United States shareholder under 

section 951(a)(1) with respect to the 

foreign corporation that (after 

application of the look-through rules of 

section 904(d)(3) and § 1.904–5) are 

attributable to passive income received 

or accrued by a controlled foreign 

corporation, all dividends from a 

noncontrolled section 902 corporation 

that are received or accrued by a 

domestic corporate shareholder meeting 

the stock ownership requirements of 

section 902(a) that (after application of 

the look-through rules of section 

904(d)(4) and § 1.904–5) are treated as 

passive income, and all amounts of 

passive income received or accrued by 

a United States person through a foreign 

QBU shall be subject to the rules of this 

paragraph (c)(4). This paragraph (c)(4) 

shall be applied separately to dividends 

and inclusions with respect to each 

controlled foreign corporation of which 

the taxpayer is a United States 

shareholder and to dividends with 

respect to each noncontrolled section 

902 corporation of which the taxpayer is 

a domestic corporate shareholder 

meeting the stock ownership 

requirements of section 902(a). This 

paragraph (c)(4) also shall be applied 

separately to income attributable to each 

foreign QBU of a controlled foreign 

corporation, noncontrolled section 902 

corporation, or any other look-through 

entity as defined in § 1.904–5(i), except 

that if the entity subject to the lookthrough rules is a United States person, 

then this paragraph (c)(4) shall be 

applied separately only to each foreign 

QBU of that United States person. 

* * * * * 

(n) Effective/applicability dates. For 

purposes of determining whether 

passive income is high-taxed income, 

the grouping rules of paragraphs (c)(3) 

and (4) of this section apply in taxable 

years ending on or after April 20, 2009. 

See 26 CFR § 1.904–4T(c)(3) and (4) 

(revised as of April 1, 2009) for grouping 

rules applicable to taxable years 

beginning after December 31, 2002, and 

ending before April 20, 2009. For 

corresponding rules applicable to 

taxable years beginning before January 

1, 2003, see 26 CFR § 1.904–4(c)(2)(i) 

(revised as of April 1, 2006). 

■ Par. 12. Section 1.904–4T is amended 

by revising paragraphs (c), (d), (e), (f), 

(g), (h)(1), and (h)(2) to read as follows: 

§ 1.904–4T Separate application of section 

904 with respect to certain categories of 

income (temporary). 

* * * * * 

(c) through (h)(2) [Reserved]. For 

further guidance, see § 1.904–4(c) 

through (h)(2). 

* * * * * 

■ Par. 13. Section 1.904–5 is amended 

by revising paragraphs (a) introductory 

text, (a)(1), (a)(4), (b), (c)(2)(iii), 

(c)(4)(iii), (i)(1), (i)(3), (i)(4), (i)(5) 

Examples 4 and 5, (m)(1), (m)(2)(ii), 

(m)(4)(i), (m)(5)(i), (n), and (o)(2) to read 

as follows: 

§ 1.904–5 Look-through rules as applied to 

controlled foreign corporations and other 

entities. 

(a) Definitions. For purposes of 

section 904(d)(3) and (4) and the 

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regulations under section 904, the 

following definitions apply: 

(1) The term separate category means, 

as the context requires, any category of 

income described in section 

904(d)(1)(A) and (B) (or section 

904(d)(1)(A), (B), (C), (D), (F), (G), (H), 

or (I) for taxable years beginning before 

January 1, 2007) and in § 1.904–4T(b) 

(or § 1.904–4(e) for taxable years 

beginning before January 1, 2007), any 

category of income described in § 1.904– 

4(m), or any category of earnings and 

profits to which income described in 

such provisions is attributable. 

* * * * * 

(4) The term noncontrolled section 

902 corporation means any foreign 

corporation with respect to which the 

taxpayer meets the stock ownership 

requirements of section 902(a), or, with 

respect to a lower-tier foreign 

corporation, the taxpayer meets the 

requirements of section 902(b). Except 

as provided in section 902 and the 

regulations under that section and 

paragraphs (i)(3) and (i)(4) of this 

section, a controlled foreign corporation 

shall not be treated as a noncontrolled 

section 902 corporation with respect to 

any distributions out of its earnings and 

profits for periods during which it was 

a controlled foreign corporation. In the 

case of a partnership owning a foreign 

corporation, the determination of 

whether a taxpayer meets the ownership 

requirements of section 902(a) or (b) 

will be made with respect to the 

taxpayer’s indirect ownership, and not 

the partnership’s direct ownership, in 

the foreign corporation. See section 

902(c)(7). 

(b) In general. Except as otherwise 

provided in section 904(d)(3) and (4) 

and this section, dividends, interest, 

rents, and royalties received or accrued 

by a taxpayer from a controlled foreign 

corporation in which the taxpayer is a 

United States shareholder shall be 

treated as general category income. See 

paragraph (c)(4)(iii) of this section for 

the treatment of dividends received by 

a domestic corporation from a 

noncontrolled section 902 corporation 

in which the domestic corporation 

meets the stock ownership requirements 

of section 902(a). 

(c) * * * 

(2) * * * 

(iii) Allocating and apportioning 

expenses of a noncontrolled section 902 

corporation. Expenses of a 

noncontrolled section 902 corporation 

shall be allocated and apportioned in 

the same manner as expenses of a 

controlled foreign corporation under 

paragraph (c)(2)(ii) of this section, 

except that the related person interest 

rule of paragraphs (c)(2)(ii)(C) and (D) of 

this section shall not apply. 

* * * * * 

(4) * * * 

(iii) Look-through rule for dividends 

from noncontrolled section 902 

corporations. Except as otherwise 

provided in this paragraph (c)(4)(iii), 

any dividend that is distributed by a 

noncontrolled section 902 corporation 

and received or accrued by a domestic 

corporation that meets the stock 

ownership requirements of section 

902(a) shall be treated as income in a 

separate category in proportion to the 

ratio of the portion of earnings and 

profits attributable to income in such 

category to the total amount of earnings 

and profits of the noncontrolled section 

902 corporation. A dividend distributed 

by a noncontrolled section 902 

corporation shall be treated as passive 

income if the Commissioner determines 

that the look-through characterization of 

such dividend cannot reasonably be 

determined based on the available 

information, or if such dividend is 

received or accrued by a shareholder 

that is neither a domestic corporation 

meeting the stock ownership 

requirements of section 902(a) nor a 

foreign corporation meeting the 

requirements of section 902(b). See 

paragraph (i)(4) of this section. See 

§ 1.904–7 for transition rules concerning 

the treatment of undistributed earnings 

(or a deficit) of a noncontrolled section 

902 corporation that were accumulated 

in taxable years beginning before 

January 1, 2003. 

* * * * * 

(i) Application of look-through rules 

to related entities—(1) In general. 

Except as provided in paragraphs (i)(2), 

(3), and (4) of this section, the principles 

of this section shall apply to 

distributions and payments that are 

subject to the look-through rules of 

section 904(d)(3) and this section from 

a controlled foreign corporation or other 

entity otherwise entitled to look-through 

treatment (a ‘‘look-through entity’’) 

under this section to a related lookthrough entity. A noncontrolled section 

902 corporation shall be considered a 

look-through entity only to the extent 

provided in paragraph (i)(4) of this 

section. Two look-through entities shall 

be considered to be related to each other 

if one owns, directly or indirectly, stock 

possessing more than 50 percent of the 

total voting power of all classes of 

voting stock of the other entity or more 

than 50 percent of the total value of 

such entity. In addition, two lookthrough entities are related if the same 

United States shareholders own, 

directly or indirectly, stock possessing 

more than 50 percent of the total voting 

power of all voting classes of stock (in 

the case of a corporation) or more than 

50 percent of the total value of each 

look-through entity. In the case of a 

corporation, value shall be determined 

by taking into account all classes of 

stock. In the case of a partnership, value 

shall be determined under the rules in 

paragraph (h)(4) of this section. For 

purposes of this section, indirect 

ownership shall be determined under 

section 318 and the regulations under 

that section. 

* * * * * 

(3) Special rule for dividends between 

controlled foreign corporations. Solely 

for purposes of dividend payments 

between controlled foreign corporations, 

two controlled foreign corporations 

shall be considered related look-through 

entities if the same United States 

shareholder owns, directly or indirectly, 

at least 10 percent of the total voting 

power of all classes of stock of each 

foreign corporation. If two controlled 

foreign corporations are not considered 

related look-through entities for 

purposes of this section because a 

United States shareholder does not 

satisfy the ownership requirement set 

forth in this paragraph (i)(3), the 

dividend payment will be characterized 

under the look-through rules of section 

904(d)(4) and this section if the 

requirements set forth in paragraph 

(i)(4) of this section are satisfied. 

(4) Payor and recipient of dividend 

are members of the same qualified 

group. Solely for purposes of dividend 

payments in taxable years beginning 

after December 31, 2002, between 

controlled foreign corporations, 

noncontrolled section 902 corporations, 

or a controlled foreign corporation and 

a noncontrolled section 902 corporation, 

the payor and recipient corporations 

shall be considered related look-through 

entities if the corporations are members 

of the same qualified group as defined 

in section 902(b)(2) and the recipient 

corporation is eligible to compute 

foreign taxes deemed paid with respect 

to the dividend under section 902(b)(1). 

(5) * * * 

Example 4. P, a domestic corporation, 

owns all of the voting stock of S, a controlled 

foreign corporation. S owns 5 percent of the 

voting stock of T, a controlled foreign 

corporation. The remaining 95 percent of the 

stock of T is owned by P. In 2006, T pays a 

$50 dividend to S and a $950 dividend to P. 

The dividend to S is not eligible for lookthrough treatment under paragraph (i)(4) of 

this section, and S is not eligible to compute 

an amount of foreign taxes deemed paid with 

respect to the dividend from T, because S 

and T are not members of the same qualified 

group (S owns less than 10 percent of the 

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voting stock of T). See section 902(b) and 

§ 1.902–1(a)(3). However, the dividend is 

eligible for look-through treatment under 

paragraph (i)(3) of this section because P 

owns at least 10 percent of the voting power 

of all classes of stock of both S and T. The 

dividend is subpart F income of S that is 

taxable to P. 

Example 5. P, a domestic corporation, 

owns 50 percent of the voting stock of S, a 

controlled foreign corporation. S owns 10 

percent of the voting stock of T, a controlled 

foreign corporation. The remaining 50 

percent of the stock of S and the remaining 

90 percent of the stock of T are owned, 

respectively, by X and Y. X and Y are each 

United States shareholders of T but are not 

related to P, S, or each other. In 2006, T pays 

a $100 dividend to S. The dividend is not 

eligible for look-through treatment under 

paragraph (i)(3) of this section because no 

United States shareholder owns at least 10 

percent of the voting power of all classes of 

stock of both S and T (P and X each own only 

5 percent of T). However, the dividend is 

eligible for look-through treatment under 

paragraph (i)(4) of this section, and S is 

eligible to compute an amount of foreign 

taxes deemed paid with respect to the 

dividend from T, because S and T are 

members of the same qualified group. See 

section 902(b) and § 1.902–1(a)(3). The 

dividend is subpart F income of S that is 

taxable to P and X. 

* * * * * 

(m) Application of section 904(h)—(1) 

In general. This paragraph (m) applies to 

certain amounts derived from controlled 

foreign corporations and noncontrolled 

section 902 corporations that are treated 

as United States-owned foreign 

corporations as defined in section 

904(h)(6). For purposes of determining 

the portion of an interest payment that 

is allocable to income earned or accrued 

by a controlled foreign corporation or 

noncontrolled section 902 corporation 

from sources within the United States 

under section 904(h)(3), the rules in 

paragraph (m)(2) of this section apply. 

For purposes of determining the portion 

of a dividend (or amount treated as a 

dividend, including amounts described 

in section 951(a)(1)(B)) paid or accrued 

by a controlled foreign corporation or 

noncontrolled section 902 corporation 

that is treated as from sources within 

the United States under section 

904(h)(4), the rules in paragraph (m)(4) 

of this section apply. For purposes of 

determining the portion of an amount 

included in gross income under section 

951(a)(1)(A) or 1293 that is attributable 

to income of the controlled foreign 

corporation or noncontrolled section 

902 corporation from sources within the 

United States under section 904(h)(2), 

the rules in paragraph (m)(5) of this 

section apply. In order to determine 

whether section 904(h) applies, section 

904(h)(5) (exception if a United Statesowned foreign corporation has a de 

minimis amount of United States source 

income) shall be applied to the total 

amount of earnings and profits of a 

controlled foreign corporation or 

noncontrolled section 902 corporation 

for a taxable year without regard to the 

characterization of those earnings under 

section 904(d). 

(2) * * * 

(ii) Interest payments from 

noncontrolled section 902 corporations. 

If interest is received or accrued by a 

shareholder from a noncontrolled 

section 902 corporation (where the 

shareholder is a domestic corporation 

that meets the stock ownership 

requirements of section 902(a)), the 

rules of paragraph (m)(2)(i) of this 

section apply in determining the portion 

of the interest payment that is from 

sources within the United States, except 

that the related party interest rules of 

paragraph (c)(2)(ii)(C) of this section 

shall not apply. 

* * * * * 

(4) Treatment of dividend payments— 

(i) Rule. Any dividend or distribution 

treated as a dividend under this section 

(including an amount included in gross 

income under section 951(a)(1)(B)) that 

is received or accrued by a United States 

shareholder from a controlled foreign 

corporation, or any dividend that is 

received or accrued by a domestic 

corporate shareholder meeting the stock 

ownership requirements of section 

902(a) from a noncontrolled section 902 

corporation, shall be treated as income 

in a separate category derived from 

sources within the United States in 

proportion to the ratio of the portion of 

the earnings and profits of the 

controlled foreign corporation or 

noncontrolled section 902 corporation 

in the corresponding separate category 

from United States sources to the total 

amount of earnings and profits of the 

controlled foreign corporation or 

noncontrolled section 902 corporation 

in that separate category. 

* * * * * 

(5) Treatment of inclusions under 

sections 951(a)(1)(A) and 1293—(i) 

Rule. Any amount included in the gross 

income of a United States shareholder of 

a controlled foreign corporation under 

section 951(a)(1)(A) or in the gross 

income of domestic corporate 

shareholders that meet the stock 

ownership requirements of section 

902(a) with respect to a noncontrolled 

section 902 corporation that is a 

qualified electing fund under section 

1293 shall be treated as income subject 

to a separate limitation that is derived 

from sources within the United States to 

the extent such amount is attributable to 

income of the controlled foreign 

corporation or qualified electing fund, 

respectively, in the corresponding 

category of income from sources within 

the United States. In order to determine 

a controlled foreign corporation’s 

taxable income and earnings and profits 

from sources within the United States in 

each separate category, the principles of 

paragraph (m)(4)(ii) of this section shall 

apply. In order to determine a qualified 

electing fund’s earnings and profits from 

sources within the United States in each 

separate category, the principles of 

paragraph (m)(4)(ii) of this section shall 

apply, except that the related person 

interest rule of paragraph (m)(2) of this 

section shall not apply. 

* * * * * 

(n) Order of application of section 

904(d) and (h). In order to apply the 

rules of this section, section 904(d)(1) 

shall first be applied to the controlled 

foreign corporation or noncontrolled 

section 902 corporation to determine the 

amount of income and earnings and 

profits derived by the controlled foreign 

corporation or noncontrolled section 

902 corporation in each separate 

category. The income and earnings and 

profits in each separate category that are 

from United States sources shall then be 

determined. Section 904(d)(3), (d)(4), 

and (h), and this section shall then be 

applied for purposes of characterizing 

and sourcing income received, accrued, 

or included by a United States 

shareholder in the controlled foreign 

corporation or a domestic corporate 

shareholder that meets the stock 

ownership requirements of section 

902(a) with respect to a noncontrolled 

section 902 corporation that is 

attributable or allocable to income or 

earnings and profits of the foreign 

corporation. 

(o) * * * 

(2) Rules for noncontrolled section 

902 corporations. Paragraphs (a), (a)(1), 

(a)(4), (b), (c)(2)(iii), (c)(4)(iii), (i)(1), 

(i)(3), (i)(4), (i)(5), Examples 4 and 5, 

(m)(1), (m)(2)(ii), (m)(4)(i), (m)(5)(i), and 

(n) of this section apply to distributions 

from a noncontrolled section 902 

corporation that are paid in taxable 

years of the noncontrolled section 902 

corporation ending on or after April 20, 

2009. See 26 CFR 1.904–5T(a), (a)(1), 

(a)(4), (b), (c)(2)(iii), (c)(4)(iii), (i)(1), 

(i)(3), (i)(4), (i)(5), Examples 4 and 5, 

and 26 CFR 1.904–7T(f)(9) (revised as of 

April 1, 2009) for rules applicable to 

distributions from a noncontrolled 

section 902 corporation that are paid in 

taxable years of the noncontrolled 

section 902 corporation beginning after 

December 31, 2002, and ending before 

April 20, 2009. See 26 CFR 1.904– 

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Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 27881 

5T(m)(1), (m)(2)(ii), (m)(4)(i), and (n) 

(revised as of April 1, 2009) for rules 

applicable to distributions from a 

noncontrolled section 902 corporation 

paid in taxable years of such 

corporation beginning after April 25, 

2006, and ending before April 20, 2009. 

For corresponding rules applicable to 

taxable years beginning before January 

1, 2003, see 26 CFR 1.904–5 (revised as 

of April 1, 2006). 

* * * * * 

■ Par. 14. Section 1.904–5T is amended 

by revising paragraphs (a), (b), (c), (d), 

(e), (f), (g), (h)(1), (h)(2), (i), (j), (k), (l), 

(m), (n), (o)(1), and (o)(2) to read as 

follows: 

§ 1.904–5T Look-through rules as applied 

to controlled foreign corporations and other 

entities (temporary). 

(a) through (h)(2) [Reserved]. For 

further guidance, see § 1.904–5(a) 

through (h)(2). 

* * * * * 

(i) through (o)(2). [Reserved]. For 

further guidance, see § 1.904–5(i) 

through (o)(2). 

* * * * * 

■ Par. 15. Section 1.904–7 is amended 

by revising paragraph (f) to read as 

follows: 

§ 1.904–7 Transition rules. 

* * * * * 

(f) Treatment of non-look-through 

pools of a noncontrolled section 902 

corporation or a controlled foreign 

corporation in post-2002 taxable years— 

(1) Definition of non-look-through pools. 

The term non-look-through pools means 

the pools of post-1986 undistributed 

earnings (as defined in § 1.902–1(a)(9)) 

that were accumulated, and post-1986 

foreign income taxes (as defined in 

§ 1.902–1(a)(8)) paid, accrued, or 

deemed paid, in and after the first 

taxable year in which the foreign 

corporation had a domestic shareholder 

(as defined in § 1.902–1(a)(1)) but before 

any such shareholder was eligible for 

look-through treatment with respect to 

dividends from the foreign corporation. 

(2) Treatment of non-look-through 

pools of a noncontrolled section 902 

corporation. Any undistributed earnings 

in the non-look-through pool that were 

accumulated in taxable years beginning 

before January 1, 2003, by a 

noncontrolled section 902 corporation 

as of the last day of the corporation’s 

last taxable year beginning before 

January 1, 2003, shall be treated in 

taxable years beginning after December 

31, 2002, as if they were accumulated 

during a period when a dividend paid 

by the noncontrolled section 902 

corporation to a domestic shareholder 

would have been eligible for lookthrough treatment under section 

904(d)(4) and § 1.904–5. Post-1986 

foreign income taxes paid, accrued or 

deemed paid with respect to such 

earnings shall be treated as if they were 

paid, accrued or deemed paid during a 

period when the related earnings were 

eligible for look-through treatment. Any 

such earnings and taxes in the non-lookthrough pools shall constitute the 

opening balance of the noncontrolled 

section 902 corporation’s pools of post1986 undistributed earnings and post1986 foreign income taxes on the first 

day of the foreign corporation’s first 

taxable year beginning after December 

31, 2002, in accordance with the rules 

of paragraph (f)(4) of this section. 

(3) Treatment of non-look-through 

pools of a controlled foreign 

corporation. A controlled foreign 

corporation may have non-look-through 

pools of post-1986 undistributed 

earnings and post-1986 foreign income 

taxes that were accumulated and paid in 

a taxable year beginning before January 

1, 2003, in which it was a noncontrolled 

section 902 corporation. Any such 

undistributed earnings in the non-lookthrough pool as of the last day of the 

controlled foreign corporation’s last 

taxable year beginning before January 1, 

2003, shall be treated in taxable years 

beginning on or after January 1, 2003, as 

if they were accumulated during a 

period when a dividend paid by the 

controlled foreign corporation out of 

such earnings, or an amount included in 

the gross income of a United States 

shareholder under section 951 that is 

attributable to such earnings, would 

have been eligible for look-through 

treatment. Any post-1986 foreign 

income taxes paid, accrued, or deemed 

paid with respect to such earnings shall 

be treated in taxable years beginning on 

or after January 1, 2003, as if they were 

paid, accrued, or deemed paid during a 

period when a dividend or inclusion out 

of such earnings would have been 

eligible for look-through treatment. Any 

such undistributed earnings and taxes 

in the non-look-through pools shall be 

added to the pools of post-1986 

undistributed earnings and post-1986 

foreign income taxes of the controlled 

foreign corporation in the appropriate 

separate categories on the first day of 

the controlled foreign corporation’s first 

taxable year beginning after December 

31, 2002, in accordance with the rules 

of paragraph (f)(4) of this section. 

Similar rules shall apply to characterize 

any previously-taxed earnings and 

profits described in section 959(c)(1)(A) 

that are attributable to earnings in the 

non-look-through pool. 

(4) Substantiation of look-through 

character of undistributed earnings and 

taxes in a non-look-through pool—(i) 

Reconstruction of earnings and taxes 

pools. In order to substantiate the lookthrough characterization of 

undistributed earnings and taxes in a 

non-look-through pool under section 

904(d)(4) and § 1.904–5, the taxpayer 

shall make a reasonable, good-faith 

effort to reconstruct the non-lookthrough pools of post-1986 

undistributed earnings and post-1986 

foreign income taxes (and previouslytaxed earnings and profits, if any) on a 

look-through basis for each year in the 

non-look-through period, beginning 

with the first taxable year in which post1986 undistributed earnings were 

accumulated in the non-look-through 

pool. Reconstruction shall be based on 

reasonably available books and records 

and other relevant information, and it 

must account for earnings distributed 

and taxes deemed paid in these years as 

if they were distributed and deemed 

paid pro rata from the amounts that 

were added to the non-look-through 

pools during the non-look-through 

period. 

(ii) Safe harbor method. A taxpayer 

that was eligible for look-through 

treatment with respect to a distribution 

from the foreign corporation in the 

taxpayer’s first taxable year ending after 

the first day of the foreign corporation’s 

first taxable year beginning after 

December 31, 2002, may allocate the 

undistributed earnings and taxes in the 

non-look-through pools to the foreign 

corporation’s look-through pools of 

post-1986 undistributed earnings and 

post-1986 foreign income taxes in other 

separate categories on the first day of 

the foreign corporation’s first taxable 

year beginning after December 31, 2002, 

in the same percentages as the taxpayer 

properly characterizes the stock of the 

foreign corporation in the separate 

categories for purposes of apportioning 

the taxpayer’s interest expense in its 

first taxable year ending after the first 

day of the foreign corporation’s first 

taxable year beginning after December 

31, 2002, under § 1.861–12T(c)(3) or 

§ 1.861–12(c)(4), as the case may be. If 

the modified gross income method 

described in § 1.861–9T(j) is used to 

apportion interest expense of the foreign 

corporation in its first taxable year 

beginning after December 31, 2002, the 

taxpayer must allocate the undistributed 

earnings and taxes in the non-lookthrough pools to the foreign 

corporation’s look-through pools of 

post-1986 undistributed earnings and 

post-1986 foreign income taxes based on 

an average of the foreign corporation’s 

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modified gross income ratios for the 

foreign corporation’s taxable years 

beginning in 2003 and 2004. A taxpayer 

may also use the safe harbor method 

described in this paragraph (f)(4)(ii) to 

allocate to separate categories any 

previously-taxed earnings and profits 

described in section 959(c)(1)(A) that 

are attributable to the non-look-through 

pool. A taxpayer may choose to use the 

safe harbor method on either a timely 

filed or amended tax return or during an 

audit. However, a taxpayer that uses the 

safe harbor method on an amended 

return or in the course of an audit must 

make appropriate adjustments to 

eliminate any duplicate benefits arising 

from application of the safe harbor 

method to taxable years that are not 

open for assessment. A taxpayer’s 

choice to use the safe harbor method is 

evidenced by employing the method. 

The taxpayer need not file any separate 

statement. 

(iii) Inadequate substantiation. If a 

taxpayer does not use, or is ineligible to 

use, the safe harbor method described in 

paragraph (f)(4)(ii) of this section and 

the Commissioner determines that the 

look-through characterization of 

earnings and taxes in the non-lookthrough pools cannot reasonably be 

determined based on the available 

information, the Commissioner shall 

allocate the undistributed earnings and 

taxes in the non-look-through pools to 

the foreign corporation’s passive 

category. 

(iv) Examples. The following 

examples illustrate the application of 

this paragraph (f)(4): 

Example 1. P, a domestic corporation, has 

owned 50 percent of the voting stock of S, 

a foreign corporation, at all times since 

January 1, 1987, and S has been a 

noncontrolled section 902 corporation with 

respect to P since that date. P and S use the 

calendar year as their U.S. taxable year. The 

first year in which post-1986 undistributed 

earnings were accumulated in the non-lookthrough pool of S was 1987. As of December 

31, 2002, S had 200u of post-1986 

undistributed earnings and $100 of post-1986 

foreign income taxes in its non-look-through 

pools. P does not use the safe harbor method 

under paragraph (f)(4)(ii) of this section to 

allocate the earnings and taxes in the nonlook-through pools to S’s other separate 

categories and does not attempt to 

substantiate the look-through 

characterization of S’s non-look-through 

pools. The Commissioner, however, 

reasonably determines, based on information 

used to characterize S’s stock for purposes of 

apportioning P’s interest expense in P’s 2003 

and 2004 taxable years, that 100u of the 

earnings and all $100 of the taxes in the nonlook-through pools are properly assigned on 

a look-through basis to the general limitation 

category, and 100u of earnings and no taxes 

are properly assigned on a look-through basis 

to the passive category. Therefore, in 

accordance with the Commissioner’s lookthrough characterization of the earnings and 

taxes in S’s non-look-through pools, on 

January 1, 2003, S has 100u of post-1986 

undistributed earnings and $100 of post-1986 

foreign income taxes in the general limitation 

category and 100u of post-1986 undistributed 

earnings and no post-1986 foreign income 

taxes in the passive category. 

Example 2. The facts are the same as in 

Example 1, except that the Commissioner 

cannot reasonably determine, based on the 

available information, the proper lookthrough characterization of the 200u of 

undistributed earnings and $100 of taxes in 

S’s non-look-through pools. Accordingly, the 

Commissioner will assign such earnings and 

taxes to the passive category, so that as of 

January 1, 2003, S has 200u of post-1986 

undistributed earnings and $100 of post-1986 

foreign income taxes in the passive category, 

and the Commissioner will treat S as a 

passive category asset for purposes of 

apportioning P’s interest expense. 

(5) Treatment of a deficit 

accumulated in a non-look-through 

pool. Any deficit in the non-lookthrough pool of a noncontrolled section 

902 corporation or a controlled foreign 

corporation as of the end of its last 

taxable year beginning before January 1, 

2003, shall be treated in taxable years 

beginning after December 31, 2002, as if 

the deficit had been accumulated during 

a period in which a dividend paid by 

the foreign corporation would have been 

eligible for look-through treatment. In 

the case of a noncontrolled section 902 

corporation, the deficit and taxes, if any, 

in the non-look-through pools shall 

constitute the opening balance of the 

look-through pools of post-1986 

undistributed earnings and post-1986 

foreign income taxes of the 

noncontrolled section 902 corporation 

in the appropriate separate categories on 

the first day of its first taxable year 

beginning after December 31, 2002. In 

the case of a controlled foreign 

corporation, the deficit and taxes, if any, 

in the non-look-through pools shall be 

added to the balance of the look-through 

pools of post-1986 undistributed 

earnings and post-1986 foreign income 

taxes of the controlled foreign 

corporation in the appropriate separate 

categories on the first day of its first 

taxable year beginning after December 

31, 2002. The taxpayer must 

substantiate the look-through 

characterization of the deficit and taxes 

in accordance with the rules of 

paragraph (f)(4) of this section. If a 

taxpayer does not use the safe harbor 

method described in paragraph (f)(4)(ii) 

of this section and the Commissioner 

determines that the look-through 

characterization of the deficit and taxes 

cannot reasonably be determined based 

on the available information, the 

Commissioner shall allocate the deficit 

and taxes, if any, in the non-lookthrough pools to the foreign 

corporation’s passive category. If, as of 

the end of a taxable year beginning after 

December 31, 2002, in which it pays a 

dividend, the foreign corporation has 

zero or a deficit in post-1986 

undistributed earnings (taking into 

account any earnings or a deficit 

accumulated in taxable years beginning 

before January 1, 2003), the deficit in 

post-1986 undistributed earnings shall 

be carried back to reduce pre-1987 

accumulated profits, if any, on a last-in 

first-out basis. See § 1.902–2(a)(1). If, as 

of the end of a taxable year beginning 

after December 31, 2002, in which the 

foreign corporation pays a dividend out 

of current earnings and profits, it has 

zero or a deficit in post-1986 

undistributed earnings (taking into 

account any earnings or a deficit 

accumulated in taxable years beginning 

before January 1, 2003), and the sum of 

current plus accumulated earnings and 

profits is zero or less than zero, no 

foreign taxes shall be deemed paid with 

respect to the dividend. See § 1.902– 

1(b)(4). 

(6) Treatment of pre-1987 

accumulated profits. Any pre-1987 

accumulated profits (as defined in 

§ 1.902–1(a)(10)) of a controlled foreign 

corporation or noncontrolled section 

902 corporation shall be treated in 

taxable years beginning after December 

31, 2002, as if they were accumulated 

during a period in which a dividend 

paid by the foreign corporation would 

have been eligible for look-through 

treatment. Any pre-1987 foreign income 

taxes (as defined in § 1.902–1(a)(10)(iii)) 

shall be treated as if they were paid, 

accrued or deemed paid during a year 

when a dividend out of the related pre1987 accumulated profits would have 

been eligible for look-through treatment. 

The taxpayer must substantiate the lookthrough characterization of the pre-1987 

accumulated profits and pre-1987 

foreign income taxes in accordance with 

the rules of paragraph (f)(4) of this 

section. If a taxpayer does not use, or is 

ineligible to use, the safe harbor method 

described in paragraph (f)(4)(ii) of this 

section and the Commissioner 

determines that the look-through 

characterization of the pre-1987 

accumulated profits and pre-1987 

foreign income taxes cannot reasonably 

be determined based on the available 

information, the pre-1987 accumulated 

profits and pre-1987 foreign income 

taxes shall be allocated to the foreign 

corporation’s passive category. 

(7) Treatment of post-1986 

undistributed earnings or a deficit of a 

controlled foreign corporation 

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attributable to dividends from a 

noncontrolled section 902 corporation 

paid in taxable years beginning before 

January 1, 2003—(i) Look-through 

treatment of post-1986 undistributed 

earnings at controlled foreign 

corporation level. Dividends paid by a 

noncontrolled section 902 corporation 

to a controlled foreign corporation in 

post-1986 taxable years of the 

noncontrolled section 902 corporation 

beginning before January 1, 2003, were 

assigned to a separate category for 

dividends from that noncontrolled 

section 902 corporation. Beginning on 

the first day of the controlled foreign 

corporation’s first taxable year 

beginning on or after the first day of the 

lower-tier corporation’s first taxable 

year beginning after December 31, 2002, 

any post-1986 undistributed earnings, or 

previously-taxed earnings and profits 

described in section 959(c)(1) or (2), of 

the controlled foreign corporation in 

such a separate category shall be treated 

as if they were accumulated during a 

period when a dividend paid by the 

noncontrolled section 902 corporation 

would have been eligible for lookthrough treatment. Any post-1986 

foreign income taxes in such a separate 

category shall also be treated as if they 

were paid, accrued or deemed paid 

during a period when such a dividend 

would have been eligible for lookthrough treatment. Any such post-1986 

undistributed earnings and post-1986 

foreign income taxes in a separate 

category for dividends from a 

noncontrolled section 902 corporation 

shall be added to the opening balance of 

the controlled foreign corporation’s 

look-through pools of post-1986 

undistributed earnings and post-1986 

foreign income taxes in the appropriate 

separate categories on the first day of 

the controlled foreign corporation’s first 

taxable year beginning on or after the 

first day of the lower-tier corporation’s 

first taxable year beginning after 

December 31, 2002. Any section 

952(c)(2) recapture account with respect 

to such a separate category shall be 

allocated in the same manner as the 

associated post-1986 undistributed 

earnings. The taxpayer must 

substantiate the look-through 

characterization of such earnings and 

taxes in accordance with the rules of 

paragraph (f)(7)(iii) of this section. 

(ii) Look-through treatment of deficit 

in post-1986 undistributed earnings at 

controlled foreign corporation level. If a 

controlled foreign corporation has a 

deficit in a separate category for 

dividends from a lower-tier 

noncontrolled section 902 corporation 

that is a member of the controlled 

foreign corporation’s qualified group as 

defined in section 902(b)(2), such deficit 

shall be treated in taxable years of the 

upper-tier corporation beginning on or 

after the first day of the lower-tier 

corporation’s first taxable year 

beginning after December 31, 2002, as if 

the deficit had been accumulated during 

a period in which a dividend from the 

lower-tier corporation would have been 

eligible for look-through treatment. Any 

post-1986 foreign income taxes in the 

separate category for dividends from the 

noncontrolled section 902 corporation 

shall also be treated as if they were paid, 

accrued or deemed paid during a period 

when the dividends were eligible for 

look-through treatment. The deficit and 

related post-1986 foreign income taxes, 

if any, shall be added to the opening 

balance of the controlled foreign 

corporation’s look-through pools of 

post-1986 undistributed earnings and 

post-1986 foreign income taxes in the 

appropriate separate categories on the 

first day of the controlled foreign 

corporation’s first taxable year 

beginning on or after the first day of the 

lower-tier corporation’s first taxable 

year beginning after December 31, 2002. 

The taxpayer must substantiate the lookthrough characterization of the deficit 

and taxes in accordance with the rules 

of paragraph (f)(7)(iii) of this section. 

(iii) Substantiation required for lookthrough treatment. The taxpayer must 

substantiate the look-through 

characterization of post-1986 

undistributed earnings, previouslytaxed earnings and profits, or a deficit 

in post-1986 undistributed earnings in a 

separate category for dividends paid by 

a noncontrolled section 902 corporation 

in taxable years beginning before 

January 1, 2003, by making a reasonable, 

good-faith effort to reconstruct the 

earnings (or deficit) and taxes in the 

separate category at the level of the 

controlled foreign corporation on a lookthrough basis, in accordance with the 

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

section. Alternatively, the taxpayer may 

allocate the earnings (or deficit) and 

taxes to the controlled foreign 

corporation’s look-through pools under 

the safe harbor method described in 

paragraph (f)(4)(ii) of this section at the 

level of the controlled foreign 

corporation. If the taxpayer uses the safe 

harbor method, the earnings (or deficit) 

and taxes shall be allocated to the 

controlled foreign corporation’s lookthrough pools in the appropriate 

separate categories on the first day of 

the controlled foreign corporation’s first 

taxable year beginning on or after the 

first day of the lower-tier corporation’s 

first taxable year beginning after 

December 31, 2002. The allocation shall 

be made in the same percentages as the 

controlled foreign corporation would 

properly characterize the stock of the 

lower-tier noncontrolled section 902 

corporation in the separate categories 

for purposes of apportioning the 

controlled foreign corporation’s interest 

expense in its first taxable year ending 

after the first day of the noncontrolled 

section 902 corporation’s first taxable 

year beginning after December 31, 2002. 

Under § 1.861–12T(c)(3), the 

apportionment ratios properly used by 

the controlled foreign corporation are in 

turn based on the apportionment ratios 

properly used by the noncontrolled 

section 902 corporation to apportion its 

interest expense in its first taxable year 

beginning after December 31, 2002. In 

the case of a taxpayer that uses the safe 

harbor method where the lower-tier 

noncontrolled section 902 corporation 

uses the modified gross income method 

described in § 1.861–9T(j) to apportion 

interest expense for its first taxable year 

beginning after December 31, 2002, 

earnings (or a deficit) and taxes in the 

separate category for dividends from the 

noncontrolled section 902 corporation 

shall be allocated to the look-through 

pools based on the average of the 

noncontrolled section 902 corporation’s 

modified gross income ratios for its 

taxable years beginning in 2003 and 

2004. In the case of a controlled foreign 

corporation that has in its qualified 

group a chain of lower-tier 

noncontrolled section 902 corporations, 

the safe harbor applies first to 

characterize the stock of the third-tier 

corporation and then to characterize the 

stock of the second-tier corporation. 

Where a taxpayer uses the safe harbor 

method with respect to a lower-tier 

noncontrolled section 902 corporation 

with respect to which the taxpayer did 

not meet the requirements of section 

902(a) as of the end of the upper-tier 

controlled foreign corporation’s last 

taxable year beginning before January 1, 

2003, the earnings (or deficit) and taxes 

in the separate category for dividends 

from the lower-tier corporation shall be 

allocated to the upper-tier corporation’s 

look-through pools in the separate 

categories in the same percentages as 

the stock of the lower-tier corporation 

would have been characterized for 

purposes of apportioning the upper-tier 

corporation’s interest expense in the last 

year the taxpayer met the ownership 

requirements of section 902(a) with 

respect to the lower-tier corporation if 

the look-through rules had applied in 

that year. If a taxpayer does not use the 

safe harbor method described in this 

paragraph (f)(7)(iii), and the 

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Commissioner determines that the lookthrough characterization of the earnings 

(or deficit) and taxes cannot reasonably 

be determined based on the available 

information, the Commissioner shall 

allocate the earnings (or deficit) and 

associated foreign income taxes to the 

controlled foreign corporation’s passive 

category. 

(8) Treatment of distributions received 

by an upper-tier corporation from a 

lower-tier noncontrolled section 902 

corporation, including when the 

corporations do not have the same 

taxable years—(i) Rule. In the case of 

dividends paid by a lower-tier 

noncontrolled section 902 corporation 

to an upper-tier corporation where both 

are members of the same qualified group 

as defined in section 902(b)(2), the 

following rules apply. Dividends paid 

by the lower-tier corporation in taxable 

years beginning before January 1, 2003, 

are assigned to a separate category for 

dividends from that corporation, 

regardless of whether the corresponding 

taxable year of the recipient corporation 

began after December 31, 2002. Post1986 undistributed earnings, 

previously-taxed earnings and profits, 

and post-1986 foreign income taxes in 

such a separate category shall be treated, 

beginning on the first day of the uppertier corporation’s first taxable year 

beginning on or after the first day of the 

lower-tier corporation’s first taxable 

year beginning after December 31, 2002, 

as if they were accumulated during a 

period when a dividend paid by the 

lower-tier corporation would have been 

eligible for look-through treatment 

under section 904(d)(4) and § 1.904–5. 

Dividends paid by a lower-tier 

corporation in taxable years beginning 

after December 31, 2002, are eligible for 

look-through treatment when paid, 

without regard to whether the 

corresponding taxable year of the 

recipient upper-tier corporation began 

after December 31, 2002. 

(ii) Example. The following example 

illustrates the application of paragraph 

(f) of this section: 

Example. M, a domestic corporation, has 

directly owned 50 percent of the stock of 

foreign corporation X, and X has directly 

owned 50 percent of the stock of foreign 

corporation Y, at all times since X and Y 

were organized on January 1, 1990. 

Accordingly, X and Y are noncontrolled 

section 902 corporations with respect to M, 

and X and Y are members of the same 

qualified group. M and Y use the calendar 

year as their U.S. taxable year, and X uses a 

taxable year beginning on July 1. Under 

§ 1.904–4(g) and paragraph (f)(10) of this 

section, a dividend paid to M by X on 

January 15, 2003 (during X’s last pre-2003 

taxable year) is not eligible for look-through 

treatment in 2003. However, under § 1.861– 

12(c)(4), M will characterize the stock of X 

on a look-through basis for purposes of 

interest expense apportionment in its 2003 

taxable year. Under § 1.904–2(h)(1), any 

unused foreign taxes in M’s separate category 

for dividends from X will be carried over to 

M’s other separate categories on a lookthrough basis for M’s taxable years beginning 

on and after January 1, 2004. Under 

paragraph (f)(2) of this section, any 

undistributed earnings and taxes in X’s nonlook-through pools will be allocated to X’s 

other separate categories on July 1, 2003. 

Under § 1.904–5(i)(4) and paragraphs (f)(8)(i) 

and (f)(10) of this section, a dividend paid to 

X by Y on January 15, 2003 (during Y’s first 

post-2002 taxable year) is eligible for lookthrough treatment when paid, 

notwithstanding that it is received in a pre2003 taxable year of X. 

(9) Election to apply pre-AJCA rules to 

2003 and 2004 taxable years—(i) 

Definition. The term single category for 

dividends from all noncontrolled 

section 902 corporations means the 

separate category described in section 

904(d)(1)(E) as in effect for taxable years 

beginning after December 31, 2002, and 

prior to its repeal by the American Jobs 

Creation Act (AJCA), Public Law 108– 

357, 118 Stat. 1418 (October 22, 2004). 

(ii) Time, manner, and form of 

election. A taxpayer may elect not to 

apply the provisions of section 403 of 

the AJCA and to apply the rules of this 

paragraph (f)(9) to taxable years of 

noncontrolled section 902 corporations 

beginning after December 31, 2002, and 

before January 1, 2005, without regard 

to whether the corresponding taxable 

years of the taxpayer or any upper-tier 

corporation begin before or after such 

dates. A taxpayer shall be eligible to 

make such an election provided that— 

(A) The taxpayer’s tax liability as 

shown on an original or amended tax 

return for each of its affected taxable 

years is consistent with the rules of this 

paragraph (f)(9), the guidance set forth 

in Notice 2003–5 (2003–1 CB 294) (see 

§ 601.601(d)(2) of this chapter), and the 

principles of § 1.861–12(c)(4) for each 

such year for which the statute of 

limitations does not preclude the filing 

of an amended return; 

(B) The taxpayer makes appropriate 

adjustments to eliminate any duplicate 

benefits arising from the application of 

this paragraph (f)(9) to taxable years that 

are not open for assessment; and 

(C) The taxpayer attaches a statement 

to its next tax return for which the due 

date (with extensions) is more than 90 

days after April 25, 2006, indicating that 

the taxpayer elects not to apply the 

provisions of section 403 of the AJCA to 

taxable years of its noncontrolled 

section 902 corporations beginning in 

2003 and 2004, and that the taxpayer 

has filed original returns or will file 

amended returns reflecting tax liabilities 

for each affected year that satisfy the 

requirements described in this 

paragraph (f)(9)(ii). 

(iii) Treatment of non-look-through 

pools in taxable years beginning after 

December 31, 2004. Undistributed 

earnings (or a deficit) and taxes in the 

non-look-through pools of a controlled 

foreign corporation or a noncontrolled 

section 902 corporation as of the end of 

its last taxable year beginning before 

January 1, 2005, shall be treated in 

taxable years beginning after December 

31, 2004, as if they were accumulated 

and paid during a period in which a 

distribution out of earnings in the nonlook-through pool would have been 

eligible for look-through treatment. 

Such earnings (or deficit) and taxes 

shall be added to the foreign 

corporation’s pools of post-1986 

undistributed earnings and post-1986 

foreign income taxes in the appropriate 

separate categories on the first day of 

the foreign corporation’s first taxable 

year beginning after December 31, 2004. 

In accordance with the principles of 

paragraph (f)(4) of this section, the 

taxpayer must reconstruct the non-lookthrough pools or, if the taxpayer chooses 

to use the safe harbor method, allocate 

the earnings and taxes in the non-lookthrough pools to the foreign 

corporation’s look-through pools in the 

appropriate separate categories on the 

first day of the foreign corporation’s first 

taxable year beginning after December 

31, 2004. Under the safe harbor method, 

this allocation is made in the same 

percentages as the taxpayer properly 

characterized the stock of the foreign 

corporation for purposes of 

apportioning the taxpayer’s interest 

expense in the taxpayer’s first taxable 

year ending after the first day of the 

foreign corporation’s first taxable year 

beginning after December 31, 2002. See 

§ 1.861–12T(c)(3) and § 1.861–12(c)(4). 

If a taxpayer does not use the safe 

harbor method described in paragraph 

(f)(4)(ii) of this section and the 

Commissioner determines that the lookthrough characterization of the earnings 

(or deficit) and taxes cannot reasonably 

be determined based on the available 

information, the earnings (or deficit) 

and taxes shall be allocated to the 

foreign corporation’s passive category. 

(iv) Carryover of unused foreign tax. 

To the extent that a taxpayer has unused 

foreign taxes in the single category for 

dividends from all noncontrolled 

section 902 corporations, such taxes 

shall be carried forward to the 

appropriate separate categories in the 

taxpayer’s taxable years beginning on or 

after the first day of the relevant 

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noncontrolled section 902 corporation’s 

first taxable year beginning after 

December 31, 2004. Such unused taxes 

shall be carried forward in the same 

manner as § 1.904–2(h)(1) provides that 

unused foreign taxes in the separate 

categories for dividends from each 

noncontrolled section 902 corporation 

are carried over to taxable years 

beginning on or after the first day of the 

noncontrolled section 902 corporation’s 

first taxable year beginning after 

December 31, 2002, in the case of a 

taxpayer that does not make the election 

under this paragraph (f)(9). The electing 

taxpayer shall determine which 

noncontrolled section 902 corporations 

paid the dividends to which the unused 

foreign taxes are attributable and assign 

the taxes to the appropriate separate 

categories as if such dividends had been 

eligible for look-through treatment when 

paid. Accordingly, the taxpayer must 

substantiate the look-through 

characterization of the unused foreign 

taxes in accordance with paragraph 

(f)(4) of this section by reconstructing 

the non-look-through pools or, if the 

taxpayer uses the safe harbor method, 

by allocating the unused foreign taxes to 

other separate categories in the same 

percentages as the taxpayer properly 

characterized the stock of the 

noncontrolled section 902 corporation 

for purposes of apportioning the 

taxpayer’s interest expense for its first 

taxable year ending after the first day of 

the noncontrolled section 902 

corporation’s first taxable year 

beginning after December 31, 2002. The 

rule described in this paragraph 

(f)(9)(iv) shall apply only to unused 

foreign taxes attributable to dividends 

out of earnings that were accumulated 

by noncontrolled section 902 

corporations in taxable years of such 

corporations beginning before January 1, 

2003, because only unused foreign taxes 

attributable to distributions out of pre2003 earnings are included in the single 

category for dividends from all 

noncontrolled section 902 corporations. 

To the extent that unused foreign taxes 

carried forward to the single category for 

dividends from all noncontrolled 

section 902 corporations under the rules 

of Notice 2003–5 were either absorbed 

by low-taxed dividends paid by 

noncontrolled section 902 corporations 

out of the non-look-through pool in 

taxable years of such corporations 

beginning in 2003 or 2004, or expired 

unused, the amount of taxes carried 

forward to the separate categories on a 

look-through basis will be smaller than 

the aggregate amount of taxes initially 

carried forward to the single category for 

dividends from all noncontrolled 

section 902 corporations. In this case, 

the unused foreign taxes arising in each 

taxable year shall be deemed 

attributable to each noncontrolled 

section 902 corporation in the same 

ratio as the dividends included in the 

separate category that were paid by such 

corporation in such year bears to all 

such dividends paid by all 

noncontrolled section 902 corporations 

in such year. Unused foreign taxes 

carried forward from the separate 

categories for dividends from each 

noncontrolled section 902 corporation 

to the single category for dividends from 

all noncontrolled section 902 

corporations will similarly be deemed to 

have been utilized on a pro rata basis. 

The remaining unused foreign taxes are 

then assigned to the appropriate 

separate categories under the rules of 

paragraph (f)(4) of this section. Unused 

foreign taxes shall be treated as 

allocable to general category income to 

the extent that such taxes would 

otherwise have been allocable to passive 

income (based on reconstructed pools or 

the safe harbor method), or to the extent 

that, under paragraph (f)(4)(iii) of this 

section, the Commissioner determines 

that the look-through characterization 

cannot reasonably be determined based 

on the available information. 

(v) Carryback of unused foreign tax. 

To the extent that a taxpayer has unused 

foreign taxes attributable to a dividend 

paid by a noncontrolled section 902 

corporation that was eligible for lookthrough treatment under section 

904(d)(4) and § 1.904–5, any such 

unused foreign taxes shall be carried 

back to prior taxable years within the 

same separate category and not to the 

single category for dividends from all 

noncontrolled section 902 corporations 

or any separate category for dividends 

from a noncontrolled section 902 

corporation. See Notice 2003–5 for rules 

relating to the carryback of unused 

foreign taxes in the single category for 

dividends from all noncontrolled 

section 902 corporations. 

(vi) Recapture of overall foreign loss 

or separate limitation loss in the single 

category for dividends from all 

noncontrolled section 902 corporations. 

To the extent that a taxpayer has a 

balance in a separate limitation loss or 

overall foreign loss account in the single 

category for dividends from all 

noncontrolled section 902 corporations 

under section 904(d)(1)(E) (prior to its 

repeal by the AJCA), at the end of the 

taxpayer’s last taxable year beginning 

before January 1, 2005 (or a later taxable 

year in which the taxpayer received a 

dividend subject to the separate 

limitation for dividends from all 

noncontrolled section 902 corporations), 

the amount of such balance shall be 

allocated on the first day of the 

taxpayer’s next taxable year to the 

taxpayer’s other separate categories. The 

amount of such balance that is 

attributable to each noncontrolled 

section 902 corporation shall be 

allocated in the same percentages as the 

taxpayer properly characterized the 

stock of such corporation for purposes 

of apportioning the taxpayer’s interest 

expense for its first taxable year ending 

after the first day of such corporation’s 

first taxable year beginning after 

December 31, 2002, under § 1.861– 

12T(c)(3) or § 1.861–12(c)(4), as the case 

may be. To the extent that a taxpayer 

has a balance in a separate limitation 

loss account for the single category for 

dividends from all noncontrolled 

section 902 corporations with respect to 

another separate category, and the 

separate limitation loss account would 

otherwise be assigned to that other 

category under this paragraph (f)(9)(vi), 

such balance shall be eliminated. 

(vii) Recapture of separate limitation 

losses in other separate categories. To 

the extent that a taxpayer has a balance 

in any separate limitation loss account 

in a separate category with respect to 

the single category for dividends from 

all noncontrolled section 902 

corporations at the end of the taxpayer’s 

last taxable year with or within which 

ends the last taxable year of the relevant 

noncontrolled section 902 corporation 

beginning before January 1, 2005, such 

loss shall be recaptured in subsequent 

taxable years as income in the 

appropriate separate category. The 

separate limitation loss account shall be 

deemed attributable on a pro rata basis 

to those noncontrolled section 902 

corporations that paid dividends out of 

earnings accumulated in taxable years 

beginning before January 1, 2003, in the 

years in which the separate limitation 

loss in the other separate category arose. 

The ratable portions of the separate 

limitation loss account shall be 

recaptured as income in the taxpayer’s 

separate categories in the same 

percentages as the taxpayer properly 

characterized the stock of the relevant 

noncontrolled section 902 corporation 

for purposes of apportioning the 

taxpayer’s interest expense in its first 

taxable year ending after the first day of 

such corporation’s first taxable year 

beginning after December 31, 2002, 

under § 1.861–12T(c)(3) or § 1.861– 

12(c)(4), as the case may be. To the 

extent that a taxpayer has a balance in 

any separate limitation loss account in 

any separate category that would have 

been recaptured as income in that same 

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27886 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

category under this paragraph (f)(9)(vii), 

such balance shall be eliminated. 

(viii) Treatment of undistributed 

earnings in an upper-tier corporationlevel single category for dividends from 

lower-tier noncontrolled section 902 

corporations. Where a controlled foreign 

corporation or noncontrolled section 

902 corporation has a single category for 

dividends from all noncontrolled 

section 902 corporations containing 

earnings attributable to dividends paid 

by one or more lower-tier corporations, 

the following rules apply. The post-1986 

undistributed earnings, previouslytaxed earnings and profits described in 

section 959(c)(1) or (2), if any, and 

associated post-1986 foreign income 

taxes shall be allocated to the upper-tier 

corporation’s other separate categories 

in the same manner as earnings and 

taxes in a separate category for 

dividends from each noncontrolled 

section 902 corporation maintained by 

the upper-tier corporation are allocated 

under paragraph (f)(7) of this section. 

Accordingly, post-1986 undistributed 

earnings, previously-taxed earnings and 

profits, if any, and post-1986 foreign 

income taxes in the single category for 

dividends from all noncontrolled 

section 902 corporations shall be treated 

as if they were accumulated and paid, 

accrued or deemed paid during a period 

when a dividend paid by each lower-tier 

corporation that paid dividends 

included in the single category would 

have been eligible for look-through 

treatment. If the taxpayer uses the safe 

harbor method described in paragraph 

(f)(7)(iii) of this section, the earnings 

and taxes shall be allocated based on the 

apportionment ratios properly used by 

the lower-tier corporation to apportion 

its interest expense for its first taxable 

year beginning after December 31, 2002. 

Any section 952(c)(2) recapture account 

with respect to the single category shall 

be allocated in the same manner as the 

associated post-1986 undistributed 

earnings. The taxpayer must 

substantiate the look-through 

characterization of the earnings and 

taxes in accordance with the rules of 

paragraph (f)(7)(iii) of this section. If the 

taxpayer does not use the safe harbor 

method and the Commissioner 

determines that the look-through 

characterization of the earnings cannot 

reasonably be determined based on the 

available information, the earnings and 

taxes shall be assigned to the upper-tier 

corporation’s passive category. 

(ix) Treatment of a deficit in the single 

category for dividends from lower-tier 

noncontrolled section 902 corporations. 

Where a controlled foreign corporation 

or noncontrolled section 902 

corporation had an aggregate deficit in 

the single category for dividends from 

all noncontrolled section 902 

corporations as of the end of the uppertier corporation’s last taxable year 

beginning before January 1, 2005, such 

deficit and the associated post-1986 

foreign income taxes, if any, shall be 

allocated to the upper-tier corporation’s 

other separate categories in the same 

percentages in which the non-lookthrough pools of each lower-tier 

corporation to which the deficit is 

attributable were assigned to such 

corporation’s other separate categories 

in its first taxable year beginning after 

December 31, 2002. If the taxpayer uses 

the safe harbor method described in 

paragraph (f)(7)(iii) of this section, the 

deficit and taxes shall be allocated 

based on how the taxpayer properly 

characterized the stock of the lower-tier 

noncontrolled section 902 corporation 

for purposes of apportioning the uppertier corporation’s interest expense for 

the upper-tier corporation’s first taxable 

year ending after the first day of the 

lower-tier corporation’s first taxable 

year beginning after December 31, 2002. 

The taxpayer must substantiate the lookthrough characterization of the deficit 

and taxes in accordance with the rules 

of paragraph (f)(7)(iii) of this section. If 

the taxpayer does not use the safe 

harbor method and the Commissioner 

determines that the look-through 

characterization of the deficit cannot 

reasonably be determined based on the 

available information, the deficit and 

taxes shall be assigned to the upper-tier 

corporation’s passive category. 

(10) Effective/applicability date. This 

paragraph (f) shall apply to dividends 

from a noncontrolled section 902 

corporation that are paid in taxable 

years of the noncontrolled section 902 

corporation ending on or after April 20, 

2009. See 26 CFR § 1.904–7T(f) (revised 

as of April 1, 2009) for rules applicable, 

except in the case of a taxpayer that 

makes the election under paragraph 

(f)(9) of that section, to dividends from 

a noncontrolled section 902 corporation 

that are paid in taxable years of the 

noncontrolled section 902 corporation 

beginning after December 31, 2002, and 

ending before April 20, 2009. See 26 

CFR 1.904–7T(f) (revised as of April 1, 

2009) for rules applicable, in the case of 

a taxpayer that makes the election under 

paragraph (f)(9) of that section, to 

dividends from a noncontrolled section 

902 corporation that are paid in taxable 

years of the noncontrolled section 902 

corporation beginning after December 

31, 2004, and ending before April 20, 

2009. However, taxpayers may choose to 

apply paragraph (f) of this section in its 

entirety in lieu of 26 CFR 1.904–7T(f) to 

all dividends paid in periods covered by 

the temporary regulations, provided that 

appropriate adjustments are made to 

eliminate duplicate benefits arising from 

application of paragraph (f) to taxable 

years that are not open for assessment. 

■ Par. 16. Section 1.904–7T is amended 

by revising paragraphs (a), (b), (c), (d), 

(e), and (f) to read as follows: 

§ 1.904–7T Transition rules (temporary). 

(a) through (f) [Reserved]. For further 

guidance, see § 1.904–7(a) through (f). 

* * * * * 

■ Par. 17. Section 1.904(f)–0 is amended 

by adding the entries for § 1.904(f)– 

12(g)(1), (g)(2), (g)(3), (g)(4), and (g)(5) as 

follows: 

§ 1.904(f)–0 Outline of regulation 

provisions. 

* * * * * 

§ 1.904(f)–12 Transition rules. 

* * * * * 

(g) * * * 

(1) Recapture of separate limitation loss or 

overall foreign loss in a separate category for 

dividends from a noncontrolled section 902 

corporation. 

(2) Recapture of separate limitation loss in 

another separate category. 

(3) Exception. 

(4) Examples. 

(5) Effective/applicability date. 

* * * * * 

■ Par. 18. Section 1.904(f)–12 is 

amended by revising paragraph (g) to 

read as follows: 

§ 1.904(f)–12 Transition rules. 

* * * * * 

(g) Recapture in years beginning after 

December 31, 2002, of separate 

limitation losses and overall foreign 

losses incurred in years beginning 

before January 1, 2003, with respect to 

the separate category for dividends from 

a noncontrolled section 902 

corporation—(1) Recapture of separate 

limitation loss or overall foreign loss in 

a separate category for dividends from 

a noncontrolled section 902 

corporation. To the extent that a 

taxpayer has a balance in any separate 

limitation loss or overall foreign loss 

account in a separate category for 

dividends from a noncontrolled section 

902 corporation under section 

904(d)(1)(E) (prior to its repeal by Public 

Law 108–357, 118 Stat. 1418 (October 

22, 2004)) at the end of the taxpayer’s 

last taxable year beginning before 

January 1, 2003 (or a later taxable year 

in which the taxpayer received a 

dividend subject to a separate limitation 

for dividends from that noncontrolled 

section 902 corporation), the amount of 

such balance shall be allocated on the 

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first day of the taxpayer’s next taxable 

year to the taxpayer’s other separate 

categories. The amount of such balance 

shall be allocated in the same 

percentages as the taxpayer properly 

characterized the stock of the 

noncontrolled section 902 corporation 

for purposes of apportioning the 

taxpayer’s interest expense for its first 

taxable year ending after the first day of 

such corporation’s first taxable year 

beginning after December 31, 2002, 

under § 1.861–12T(c)(3) or § 1.861– 

12(c)(4), as the case may be. To the 

extent a taxpayer has a balance in any 

separate limitation loss account in a 

separate category for dividends from a 

noncontrolled section 902 corporation 

with respect to another separate 

category, and the separate limitation 

loss would otherwise be assigned to that 

other category under this paragraph 

(g)(1), such balance shall be eliminated. 

(2) Recapture of separate limitation 

loss in another separate category. To the 

extent that a taxpayer has a balance in 

any separate limitation loss account in 

a separate category with respect to a 

separate category for dividends from a 

noncontrolled section 902 corporation 

under section 904(d)(1)(E) (prior to its 

repeal by Public Law 108–357, 118 Stat. 

1418 (October 22, 2004)) at the end of 

the taxpayer’s last taxable year with or 

within which ends the last taxable year 

of the noncontrolled section 902 

corporation beginning before January 1, 

2003, such loss shall be recaptured in 

subsequent taxable years as income in 

the appropriate separate categories. The 

separate limitation loss shall be 

recaptured as income in other separate 

categories in the same percentages as 

the taxpayer properly characterizes the 

stock of the noncontrolled section 902 

corporation for purposes of 

apportioning the taxpayer’s interest 

expense in its first taxable year ending 

after the first day of the foreign 

corporation’s first taxable year 

beginning after December 31, 2002, 

under § 1.861–12T(c)(3) or § 1.861– 

12(c)(4), as the case may be. To the 

extent a taxpayer has a balance in a 

separate limitation loss account in a 

separate category that would have been 

recaptured as income in that same 

category under this paragraph (g)(2), 

such balance shall be eliminated. 

(3) Exception. Where a taxpayer 

formerly met the stock ownership 

requirements of section 902(a) with 

respect to a foreign corporation, but did 

not meet the requirements of section 

902(a) on December 20, 2002 (or on the 

first day of the taxpayer’s first taxable 

year beginning after December 31, 2002, 

in the case of a transaction that was the 

subject of a binding contract in effect on 

December 20, 2002), if the taxpayer has 

a balance in any separate limitation loss 

or overall foreign loss account for a 

separate category for dividends from 

that foreign corporation under section 

904(d)(1)(E) (prior to its repeal by Public 

Law 108–357, 118 Stat. 1418 (October 

22, 2004)) at the end of the taxpayer’s 

last taxable year beginning before 

January 1, 2003, then the amount of 

such balance shall not be subject to 

recapture under section 904(f) and this 

section. If a separate limitation loss or 

overall foreign loss account for such 

category is not subject to recapture 

under this paragraph (g)(3), the taxpayer 

cannot carry over any unused foreign 

taxes in such separate category to any 

other limitation category. However, a 

taxpayer may elect to recapture the 

balances of all separate limitation loss 

and overall foreign loss accounts for all 

separate categories for dividends from 

such formerly-owned noncontrolled 

section 902 corporations under the rules 

of paragraphs (g)(1) and (2) of this 

section. If a taxpayer so elects, it may 

carry over any unused foreign taxes in 

these separate categories to the 

appropriate separate categories as 

provided in § 1.904–2(h). 

(4) Examples. The following examples 

illustrate the application of this 

paragraph (g): 

Example 1. X is a domestic corporation 

that meets the ownership requirements of 

section 902(a) with respect to Y, a foreign 

corporation the stock of which X owns 50 

percent. Therefore, Y is a noncontrolled 

section 902 corporation with respect to X. 

Both X and Y use the calendar year as their 

taxable year. As of December 31, 2002, X had 

a $100 balance in its separate limitation loss 

account for the separate category for 

dividends from Y, of which $60 offset general 

limitation income and $40 offset passive 

income. For purposes of apportioning X’s 

interest expense for its 2003 taxable year, X 

properly characterized the stock of Y as a 

multiple category asset (80% general and 

20% passive). Under paragraph (g)(1) of this 

section, on January 1, 2003, $80 ($100 × 80/ 

100) of the $100 balance in the separate 

limitation loss account is assigned to the 

general limitation category. Of this $80 

balance, $32 ($80 × 40/100) is with respect 

to the passive category, and $48 ($80 × 60/ 

100) is with respect to the general limitation 

category and therefore is eliminated. The 

remaining $20 balance ($100 × 20/100) of the 

$100 balance is assigned to the passive 

category. Of this $20 balance, $12 ($20 × 60/ 

100) is with respect to the general limitation 

category, and $8 ($20 × 40/100) is with 

respect to the passive category and therefore 

is eliminated. 

Example 2. The facts are the same as in 

Example 1, except that as of December 31, 

2002, X had a $30 balance in its separate 

limitation loss account in the general 

limitation category, and a $20 balance in its 

separate limitation loss account in the 

passive category, both of which offset income 

in the separate category for dividends from 

Y. Under paragraph (g)(2) of this section, the 

separate limitation loss accounts in the 

general limitation and passive categories 

with respect to the separate category for 

dividends from Y will be recaptured on and 

after January 1, 2003, from income in other 

separate categories, as follows. Of the $30 

balance in X’s separate limitation loss 

account in the general category with respect 

to the separate category for dividends from Y, 

$6 ($30 × 20/100) is with respect to the 

passive category, and $24 ($30 × 80/100) is 

with respect to the general limitation 

category and therefore is eliminated. Of the 

$20 balance in X’s separate limitation loss 

account in the passive category with respect 

to the separate category for dividends from Y, 

$16 ($20 × 80/100) will be recaptured out of 

general limitation income, and $4 ($20 × 20/ 

100) would otherwise be recaptured out of 

passive income and therefore is eliminated. 

(5) Effective/applicability date. This 

paragraph (g) applies to taxable years 

ending on or after April 20, 2009. See 

26 CFR 1.904(f)–12T(g) (revised as of 

April 1, 2009) for rules applicable to 

taxable years beginning after December 

31, 2002, and ending before April 20, 

2009. 

* * * * * 

■ Par. 19. Section 1.904(f)–12T is 

amended by revising paragraphs (a), (b), 

(c), (d), (e), (f), and (g) to read as follows: 

§ 1.904(f)–12T Transition rules 

(temporary). 

(a) through (g) [Reserved]. For further 

guidance, see § 1.904(f)–12(a) through 

(g). 

* * * * * 

■ Par. 20. Section 1.964–1 is amended 

as follows: 

■ 1. Revise paragraph (a)(1). 

■ 2. Remove the last sentence of 

paragraph (a)(2). 

■ 3. Revise paragraphs (b)(1)(v), 

(c)(1)(v), (c)(2), (c)(3), (c)(4), (c)(5), and 

(c)(6). 

■ 4. Remove and reserve paragraph 

(c)(8). 

■ 5. Add new paragraphs (a)(3) and (d). 

■ 6. Designate the undesignated text 

preceding paragraph (c)(1)(v) as 

paragraph (c)(1)(vi) and revise it. 

The revisions and additions read as 

follows: 

§ 1.964–1 Determination of the earnings 

and profits of a foreign corporation. 

(a)(1) In general. For rules for 

determining the earnings and profits (or 

deficit in earnings and profits) of a 

foreign corporation for taxable years 

beginning before January 1, 1987, for 

purposes of sections 951 through 964, 

see 26 CFR 1.964–1(a) (revised as of 

April 1, 2006). For taxable years 

beginning after December 31, 1986, 

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27888 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

except as otherwise provided in the 

Code and regulations, the earnings and 

profits (or deficit in earnings and 

profits) of a foreign corporation for its 

taxable year shall be computed for all 

Federal income tax purposes 

substantially as if such corporation were 

a domestic corporation by— 

* * * * * 

(3) Translation into dollars. In the 

case of a foreign corporation with a 

functional currency other than the 

United States dollar (dollar), see 

sections 986(b) and 989(b) for rules 

regarding the time and manner of 

translating distributions or inclusions of 

the foreign corporation’s earnings and 

profits into dollars. 

(b) * * * 

(1) * * * 

(v) Foreign currency. If transactions 

effected in a foreign currency other than 

that in which the books of the 

corporation are kept are translated into 

the foreign currency reflected in the 

books, such translation shall be made in 

a manner substantially similar to that as 

prescribed in section 988 and the 

regulations under that section for the 

translation of foreign currency amounts 

into United States dollars. 

* * * * * 

(c) * * * 

(1) * * * 

(v) Taxable years. The period for 

computation of taxable income and 

earnings and profits known as the 

taxable year shall reflect the provisions 

of section 441 and the regulations under 

that section. 

(vi) Applicable requirements. Except 

as provided in paragraphs (c)(2) and (c) 

(3) of this section, any requirements 

imposed by the Code or applicable 

regulations with respect to making an 

election or adopting or changing a 

method of accounting or taxable year 

must be satisfied by or on behalf of the 

foreign corporation just as though it 

were a domestic corporation if such 

election or such adoption or change of 

method or taxable year is to be taken 

into account in the computation of its 

earnings and profits. 

(2) Adoption or change of method or 

taxable year. For the first taxable year of 

a foreign corporation beginning after 

April 25, 2006, in which such foreign 

corporation first qualifies as a controlled 

foreign corporation (as defined in 

section 957 or 953) or a noncontrolled 

section 902 corporation (as defined in 

section 904(d)(2)(E)), any method of 

accounting or taxable year allowable 

under this section may be adopted, and 

any election allowable under this 

section may be made, by such foreign 

corporation or on its behalf 

notwithstanding that, in previous years, 

its books or financial statements were 

prepared on a different basis, and 

notwithstanding that such election is 

required by the Code or regulations to 

be made in a prior taxable year. Any 

allowable methods adopted or elections 

made shall be reflected in the 

computation of the foreign corporation’s 

earnings and profits for such taxable 

year, prior taxable years, and (unless the 

Commissioner consents to a change) 

subsequent taxable years. However, see 

section 898 for the rules regarding the 

taxable year of a specified foreign 

corporation as defined in section 898(b). 

Any allowable method of accounting or 

election that relates to events that first 

arise in a subsequent taxable year may 

be adopted or made by or on behalf of 

the foreign corporation for such year. 

Adjustments to the appropriate separate 

category (as defined in § 1.904–5(a)(1)) 

of earnings and profits and income of 

the foreign corporation shall be required 

under section 481 to prevent any 

duplication or omission of amounts 

attributable to previous years that would 

otherwise result from any change in a 

method of accounting. See paragraph 

(c)(3) of this section for the manner in 

which a method of accounting or a 

taxable year may be adopted or changed 

on behalf of the foreign corporation. See 

paragraph (c)(4) of this section for 

applicable rules if the amount of the 

foreign corporation’s earnings and 

profits became significant for United 

States tax purposes before a method of 

accounting or taxable year was adopted 

by the foreign corporation or on its 

behalf in accordance with the rules of 

paragraph (c)(3) of this section. See 

paragraph (c)(6) of this section for 

special rules postponing the time for 

taking action by or on behalf of a foreign 

corporation until the amount of its 

earnings and profits becomes significant 

for U.S. tax purposes. See also §§ 1.985– 

5, 1.985–6, and 1.986–7 relating to 

adjustments to earnings and profits of a 

QBU required when the QBU changes 

its functional currency or begins to use 

the dollar approximate separate 

transactions method of accounting. 

(3) Action on behalf of corporation— 

(i) In general. An election shall be 

deemed made, or an adoption or change 

in method of accounting or taxable year 

deemed effectuated, on behalf of the 

foreign corporation only if its 

controlling domestic shareholders (as 

defined in paragraph (c)(5) of this 

section)— 

(A) Satisfy for such corporation any 

requirements imposed by the Internal 

Revenue Code or applicable regulations 

with respect to such election or such 

adoption or change in method or taxable 

year (including the provisions of 

sections 442 and 446 and the 

regulations under those sections, as well 

as any operative provisions), such as the 

filing of forms, the execution of 

consents, securing the permission of the 

Commissioner, or maintaining books 

and records in a particular manner. For 

purposes of this paragraph (c)(3)(i)(A), 

the books of the foreign corporation 

shall be considered to be maintained in 

a particular manner if the controlling 

domestic shareholders or the foreign 

corporation regularly keep the records 

and accounts required by section 964(c) 

and the regulations under that section in 

that manner; 

(B) File the statement described in 

paragraph (c)(3)(ii) of this section, at the 

time and in the manner prescribed 

therein; and 

(C) Provide the written notice 

required by paragraph (c)(3)(iii) of this 

section at the time and in the manner 

prescribed therein. 

(ii) Statement required to be filed with 

a tax return. The statement required by 

this paragraph (c)(3)(ii) shall set forth 

the name, country of organization, and 

U.S. employer identification number (if 

applicable) of the foreign corporation, 

the name, address, stock interests, and 

U.S. employer identification number of 

each controlling domestic shareholder 

(or, if applicable, the shareholder’s 

common parent) approving the action, 

and the names, addresses, U.S. 

employer identification numbers, and 

stock interests of all other domestic 

shareholders notified of the action 

taken. Such statement shall describe the 

nature of the action taken on behalf of 

the foreign corporation and the taxable 

year for which made, and identify a 

designated shareholder who retains a 

jointly executed consent confirming that 

such action has been approved by all of 

the controlling domestic shareholders 

and containing the signature of a 

principal officer of each such 

shareholder (or its common parent). 

Each controlling domestic shareholder 

(or its common parent) shall file the 

statement with, and on or before the due 

date (including extensions) of, its own 

tax return (or information return, if 

applicable) for its taxable year with or 

within which ends the taxable year of 

the foreign corporation for which the 

election is made or for which the 

method of accounting or taxable year is 

adopted or changed. In the case of a 

controlling domestic shareholder that is 

the sole shareholder of a controlled 

foreign corporation, no separate 

statement need be filed if the 

information described in this paragraph 

(c)(3)(ii) is included on Form 5471 and 

Form 3115 or 1128, as applicable, filed 

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Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 27889 

with respect to the controlled foreign 

corporation with the shareholder’s 

return for such taxable year. 

(iii) Notice. On or before the filing 

date described in paragraph (c)(3)(ii) of 

this section, the controlling domestic 

shareholders shall provide written 

notice of the election made or the 

adoption or change of method or taxable 

year effected to all other persons known 

by them to be domestic shareholders 

who own (within the meaning of section 

958(a)) stock of the foreign corporation. 

Such notice shall set forth the name, 

country of organization and U.S. 

employer identification number (if 

applicable) of the foreign corporation, 

and the names, addresses, and stock 

interests of the controlling domestic 

shareholders. Such notice shall describe 

the nature of the action taken on behalf 

of the foreign corporation and the 

taxable year for which made, and 

identify a designated shareholder who 

retains a jointly executed consent 

confirming that such action has been 

approved by all of the controlling 

domestic shareholders and containing 

the signature of a principal officer of 

each such shareholder (or its common 

parent). However, the failure of the 

controlling domestic shareholders to 

provide such notice to a person required 

to be notified shall not invalidate the 

election made or the adoption or change 

of method or taxable year effected. 

(4) Effect of action or inaction by 

controlling domestic shareholders—(i) 

In general. Any election, or adoption or 

change of method of accounting or 

taxable year made by the controlling 

domestic shareholders on behalf of the 

foreign corporation pursuant to 

paragraph (c)(3) of this section or any 

other provision of the regulations (for 

example, § 1.985–2(c)(2) or (3)) shall be 

reflected in the computation of the 

earnings and profits of such corporation 

under this section to the extent that it 

bears upon the federal income tax 

liability of the domestic shareholders of 

the foreign corporation. Any such action 

shall bind both the foreign corporation 

and its domestic shareholders as to the 

computation of the foreign corporation’s 

earnings and profits for the taxable year 

of the foreign corporation for which the 

election is made or for which the 

method of accounting or taxable year is 

adopted or changed and in subsequent 

taxable years unless the Commissioner 

consents to a change. The preceding 

sentence shall apply regardless of— 

(A) When the action was taken; 

(B) Whether the foreign corporation 

was a controlled foreign corporation or 

a noncontrolled section 902 corporation 

at the time the action was taken; 

(C) When ownership was acquired; or 

(D) Whether the domestic shareholder 

received the written notice required by 

paragraph (c)(3)(ii) of this section. 

(ii) Inaction or untimely action. In the 

event that action by or on behalf of the 

foreign corporation is not undertaken by 

the time specified in paragraph (c)(6) of 

this section and such failure is shown 

to the satisfaction of the Commissioner 

to be due to reasonable cause, such 

action may be undertaken during any 

period of at least 30 days occurring after 

such showing is made which the 

Commissioner may specify as 

appropriate for this purpose. In the 

event that action by or on behalf of the 

foreign corporation is not undertaken by 

the time specified in paragraph (c)(6) of 

this section and such failure is not 

shown to the satisfaction of the 

Commissioner to be due to reasonable 

cause, earnings and profits shall be 

computed as if no elections had been 

made and any permissible accounting 

methods not requiring an election and 

reflected in the books of account 

regularly maintained by the foreign 

corporation for the purpose of 

accounting to its shareholders had been 

adopted. Accordingly, if the earnings 

and profits of a noncontrolled section 

902 corporation became significant for 

United States income tax purposes in a 

taxable year beginning on or before 

April 25, 2006, the corporation’s 

earnings and profits shall be computed 

as if no elections had been made and 

any permissible accounting methods not 

requiring an election and reflected in 

the books of account regularly 

maintained by the foreign corporation 

for purposes of accounting to its 

shareholders had been adopted. 

Thereafter, any change in a particular 

accounting method or methods or 

taxable year may be made by, or on 

behalf of, the foreign corporation only 

with the Commissioner’s consent. 

(iii) Computation of earnings and 

profits by a minority shareholder prior 

to majority election or significant event. 

A shareholder of a foreign corporation 

may be required to compute the foreign 

corporation’s earnings and profits before 

the foreign corporation or its controlling 

domestic shareholders make, or are 

required under this section to make, an 

election or adopt a method of 

accounting for federal income tax 

purposes. In such a case, the 

shareholder must compute earnings and 

profits in accordance with this section. 

Such computation shall be made as if no 

elections had been made and any 

permissible accounting methods not 

requiring an election and reflected in 

the books of account regularly 

maintained by the foreign corporation 

for the purpose of accounting to its 

shareholders had been adopted. 

However, a later, properly filed, and 

timely election or adoption of method 

by, or on behalf of, the foreign 

corporation shall not be treated as a 

change in accounting method. 

(5) Controlling domestic 

shareholders—(i) Controlled foreign 

corporations. For purposes of this 

paragraph (c), the controlling domestic 

shareholders of a controlled foreign 

corporation shall be its controlling 

United States shareholders. The 

controlling United States shareholders 

of a controlled foreign corporation shall 

be those United States shareholders (as 

defined in section 951(b) or 953(c)) who, 

in the aggregate, own (within the 

meaning of section 958(a)) more than 50 

percent of the total combined voting 

power of all classes of the stock of such 

foreign corporation entitled to vote and 

who undertake to act on its behalf. In 

the event that the United States 

shareholders of the controlled foreign 

corporation do not, in the aggregate, 

own (within the meaning of section 

958(a)) more than 50 percent of the total 

combined voting power of all classes of 

the stock of such foreign corporation 

entitled to vote, the controlling United 

States shareholders of the controlled 

foreign corporation shall be all those 

United States shareholders who own 

(within the meaning of section 958(a)) 

stock of such corporation. 

(ii) Noncontrolled section 902 

corporations. For purposes of this 

paragraph (c), the controlling domestic 

shareholders of a noncontrolled section 

902 corporation that is not a controlled 

foreign corporation shall be its majority 

domestic corporate shareholders. The 

majority domestic corporate 

shareholders of a noncontrolled section 

902 corporation shall be those domestic 

corporations that meet the ownership 

requirements of section 902(a) with 

respect to the noncontrolled section 902 

corporation (or to a first-tier foreign 

corporation that is a member of the 

same qualified group (as defined in 

section 902(b)(2)) as the noncontrolled 

section 902 corporation) that, in the 

aggregate, own directly or indirectly 

more than 50 percent of the combined 

voting power of all of the voting stock 

of the noncontrolled section 902 

corporation that is owned directly or 

indirectly by all domestic corporations 

that meet the ownership requirements of 

section 902(a) with respect to the 

noncontrolled section 902 corporation 

(or a relevant first-tier foreign 

corporation). 

(6) Action not required until 

significant. Notwithstanding any other 

provision of this paragraph, action by or 

on behalf of a foreign corporation (other 

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27890 Federal Register / Vol. 74, No. 111 / Thursday, June 11, 2009 / Rules and Regulations 

than a foreign corporation subject to tax 

under section 882) to make an election 

or to adopt a taxable year or method of 

accounting shall not be required until 

the due date (including extensions) of 

the return for a controlling domestic 

shareholder’s first taxable year with or 

within which ends the foreign 

corporation’s first taxable year in which 

the computation of its earnings and 

profits is significant for United States 

tax purposes with respect to its 

controlling domestic shareholders (as 

defined in § 1.964–1(c)(5)). The filing of 

the information return required by 

section 6038 shall not itself constitute a 

significant event. For taxable years 

beginning after April 25, 2006, events 

that cause a foreign corporation’s 

earnings and profits to have United 

States tax significance include, without 

limitation: 

(A) A distribution from the foreign 

corporation to its shareholders with 

respect to their stock. 

(B) An amount is includible in gross 

income with respect to such corporation 

under section 951(a). 

(C) An amount is excluded from 

subpart F income of the foreign 

corporation or another foreign 

corporation by reason of section 952(c). 

(D) Any event making the foreign 

corporation subject to tax under section 

882. 

(E) The use by the foreign 

corporation’s controlling domestic 

shareholders of the tax book value (or 

alternative tax book value) method of 

allocating interest expense under 

section 864(e)(4). 

(F) A sale or exchange of the foreign 

corporation’s stock of the controlling 

domestic shareholders that results in the 

recharacterization of gain under section 

1248. 

* * * * * 

(d) Effective/applicability dates. 

Paragraphs (c)(1)(v) through (c)(6) of this 

section apply to taxable years ending on 

or after April 20, 2009. See 26 CFR 

§§ 1.964–1T(c)(1)(v) through (c)(6) 

(revised as of April 1, 2009) for rules 

applicable to taxable years beginning 

after April 25, 2006, and ending before 

April 20, 2009. However, taxpayers may 

choose to apply paragraphs (c)(1)(v) 

through (c)(6) of this section in their 

entirety in lieu of 26 CFR §§ 1.964– 

1T(c)(1)(v) through (c)(6) for periods 

covered by the temporary regulations, 

provided that appropriate adjustments 

are made to eliminate duplicate benefits 

arising from the application of 

paragraphs (c)(1)(v) through (c)(6) of this 

section to taxable years that are not 

open for assessment. 

§ 1.964–1T [Removed] 

■ Par. 21. Section 1.964–1T is removed. 

§ 1.989(b)–1 [Amended] 

■ Par. 22. Section 1.989(b)–1 is 

amended by removing the language 

‘‘within the meaning of § 1.964–1(d)(5)’’ 

and adding the language ‘‘described in 

§ 1.988–1(d)(1)’’ in its place. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 23. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 24. In § 602.101, paragraph (b) is 

amended by removing the entry for 

‘‘§ 1.964–1T’’ and adding the following 

entries in numerical order to the table 

to read as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.904–7 ..................................... 1545–2104 

* * * * * 

1.964–1 ..................................... 1545–2104 

* * * * * 

Approved: March 24, 2009. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

Bernard Knight, 

Acting General Counsel of the Treasury. 

[FR Doc. E9–13521 Filed 6–10–09; 8:45 am] 

BILLING CODE 4830–01–P 

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