Covered Asset Acquisitions
| Citation | 85 FR 16245 |
| Record Number | 2020-05551 |
| Published date | 23 March 2020 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service,Treasury Department |
Federal Register, Volume 85 Issue 56 (Monday, March 23, 2020)
[Federal Register Volume 85, Number 56 (Monday, March 23, 2020)]
[Rules and Regulations]
[Pages 16245-16267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05551]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9895]
RIN 1545-BM36
Covered Asset Acquisitions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final Income Tax Regulations under
section 901(m) of the Internal Revenue Code (Code) with respect to
transactions that generally are treated as asset acquisitions for U.S.
income tax purposes and either are treated as stock acquisitions or are
disregarded for foreign income tax purposes. These regulations are
necessary to provide guidance on applying section 901(m). These
regulations affect taxpayers claiming foreign tax credits.
DATES:
Effective date: These regulations are effective on March 23, 2020.
Applicability dates: For dates of applicability, see Sec. Sec.
1.704-1(b)(1)(ii)(b)(4), 1.901(m)-1(b), 1.901(m)-2(f), 1.901(m)-3(d),
1.901(m)-4(g), 1.901(m)-5(i), 1.901(m)-6(d), 1.901(m)-7(g), and
1.901(m)-8(e).
FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry at (202) 317-6936
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 7, 2016, both a notice of proposed rulemaking by cross-
reference in part to temporary regulations (REG-129128-14) (2016
proposed regulations) under sections 901(m) and 704 of the Code and
temporary regulations (TD 9800) under section 901(m) were published in
the Federal Register at 81 FR 88562 and 81 FR 88103. The temporary and
proposed regulations include the rules described in Notice 2014-44
(2014-32 I.R.B. 270 (August 4, 2014)) and Notice 2014-45 (2014-34
I.R.B. 388 (August 18, 2014).
A public hearing was not requested, and none was held. However, the
Department of the Treasury (Treasury Department) and the IRS received
written comments in response to the notice of proposed rulemaking.
After consideration of all the comments, the 2016 proposed regulations
under section 901(m) are adopted as revised by this Treasury decision.
The revisions are discussed in this preamble. This Treasury decision
also adopts the 2016 proposed regulations under section 704 without
revision. The regulations adopted by this Treasury decision are
referred to herein as the ``final regulations.'' Defined terms used in
this preamble but not defined herein have the meaning provided in the
final regulations.
Summary of Comments and Explanation of Revisions
1. Scope of Covered Asset Acquisitions (CAAs)
Proposed Sec. 1.901(m)-2(b) identifies six categories of
transactions that constitute CAAs, three of which are specified in the
statute and three of which are additional categories of transactions
that are identified as CAAs pursuant to the authority granted under
section 901(m)(2)(D).
One comment requested that an exemption to section 901(m) be
provided for CAAs in which all or substantially all of the gains and
losses with respect to the relevant foreign assets (RFAs) are
recognized by members of the U.S.-parented group that includes the
section 901(m) payor. The comment suggested that the policies of
section 901(m) are not implicated in such a situation because if the
same group takes into account the gains on the RFAs up front and then,
in the future recognizes offsetting cost recovery items on those
assets, over time, the U.S. income tax base is unchanged.
The Treasury Department and IRS agree that an exemption would be
appropriate in certain cases, but have determined that the comment's
suggestion is overbroad. As proposed by the comment, the exemption
would apply to U.S. members of an affiliated group that do not file a
consolidated return and to related controlled foreign corporations.
This leaves open the possibility of manipulation of foreign tax
credits. For example, in the case of affiliated but non-consolidated
U.S. entities, the entity recognizing the U.S. gain on the assets up
front may be an entity that is exempt from tax under section 501 while
the entity recognizing the offsetting cost recovery items may be in a
position to take advantage of the excess foreign taxes related to the
basis difference.
The Treasury Department and IRS have determined that the exemption
should apply only if a domestic section 901(m) payor or a member of its
consolidated group recognized the gains or losses or took into account
a distributive share of the gains or losses recognized by a partnership
for U.S. tax purposes as part of the original CAA. Accordingly, the
definition of aggregate basis difference is modified to take into
account allocated basis difference adjustments determined based on gain
or loss recognized with respect to an RFA as a result of a CAA. See
Sec. 1.901(m)-1(a)(1), (6), (48), and (49). For example, if one
domestic corporation, USS1, sold a foreign disregarded entity (FDE)
that held an asset to another member of its consolidated group, USS2,
the transaction is a CAA, because it is an asset sale for U.S. income
tax purposes and an acquisition of stock of the FDE for foreign tax
purposes. As a result, the asset is an RFA owned by USS2 subject to
section 901(m). However, any aggregate basis difference USS2 determines
with respect to the RFA will be adjusted to take into account the gain
recognized for U.S. income tax purposes by USS1 on the original sale,
provided USS1 and USS2 are still members of the same consolidated group
in the year the allocated basis difference is determined.
Another comment suggested that the final category of transactions,
which includes any asset acquisition for U.S. and foreign income tax
purposes that results in an increase in the U.S. basis
[[Page 16246]]
without a corresponding increase in the foreign basis, be replaced with
one or more specifically defined transactions. The comment recommended
that new CAAs be limited to specific transactions that are likely to
achieve the same hyping of foreign tax credits as the three categories
of CAAs specified in the statute and that typically involve intensive
U.S. tax planning. The comment also suggested that if the Treasury
Department and IRS found a list of specific transactions to be too
limited, they could add an anti-abuse rule that would treat any
transaction as a CAA if it was structured with a principal purpose of
avoiding the specific categories of transactions set forth in the
revised list of transactions.
The Treasury Department and IRS do not agree that the final
category of transactions is overbroad. Section 901(m) is designed to
address transactions that result in a basis difference for U.S. and
foreign income tax purposes. There is no intent test. Proposed Sec.
1.901(m)-7 provides a de minimis exception that relieves the burden of
applying section 901(m) to ordinary course transactions below the
threshold provided in that rule. The Treasury Department and IRS have
determined there is no policy justification for exempting transactions
to which this exception does not apply on the grounds that the
transaction lacked an intent to hype foreign taxes, and replacing this
category of transactions with an anti-abuse rule would inappropriately
introduce an intent component that is not required by the statute.
Accordingly, the comment is not adopted.
2. Aggregate Basis Difference Carryover
Proposed Sec. 1.901(m)-3(c) provides rules for determining the
amount of aggregate basis difference carryover for a given U.S. taxable
year of a section 901(m) payor that will be included in the section
901(m) payor's aggregate basis difference for the next U.S. taxable
year. The carryover reflects the extent to which the aggregate basis
difference for a U.S. taxable year has not yet given rise to a
disqualified tax amount.
A comment requested that the aggregate basis difference carryover
rule be eliminated due to the increased compliance costs resulting from
the added complexity of tracking the carryover amounts. The comment
argued that these compliance costs are unjustified, given that Congress
enacted an administrable approach in the statute and did not express
any intent that carryover rules could apply.
The Treasury Department and IRS have determined that the aggregate
basis difference carryover rule is necessary to prevent the avoidance
of the purpose of section 901(m), particularly in the case of timing
differences. For example, assume a section 901(m) payor that is also a
foreign payor has a foreign taxable year ending on March 31 and a U.S.
taxable year ending on December 31. Assume further that the section
901(m) payor recognizes foreign gain on the disposition of an RFA on
November 30, in U.S. tax year 1. For U.S. income tax purposes, because
the disposition occurs in U.S. tax year 1, the section 901(m) payor
will have allocated basis difference in U.S. tax year 1, requiring a
calculation of a disqualified tax amount. For foreign income tax
purposes, the foreign tax on the gain is not imposed until the end of
the foreign taxable year, which is March 31, in U.S. tax year 2.
Assuming the section 901(m) payor does not pay any other foreign taxes,
the disqualified tax amount for U.S. tax year 1 will be zero, because
the foreign taxes are not taken into account by the section 901(m)
payor for U.S. income tax purposes until U.S. tax year 2. Because the
allocated basis difference in U.S. tax year 1 does not give rise to a
disqualified tax amount, the aggregate basis difference carryover rule
requires that the allocated basis difference be carried into U.S. tax
year 2 and be used to calculate a disqualified tax amount with respect
to the foreign taxes taken into account in U.S. tax year 2. Without the
aggregate basis difference carryover rule, there would be no
disqualified tax amount in U.S. tax year 1, because there are not
foreign taxes taken into account in that year, and no disqualified tax
amount in U.S. tax year 2, because there is no allocated basis
difference in that year. This would allow avoidance of the application
of section 901(m) to a fact pattern that is clearly meant to be covered
by the statute. The aggregate basis difference carryover rule also
prevents taxpayers from avoiding the application of section 901(m) by
timing dispositions of RFAs to coincide with offsetting unrelated
foreign losses. For these reasons, the comment is not adopted.
3. Foreign Basis Election
Basis difference with respect to an RFA is generally equal to the
U.S. basis in the RFA immediately after a CAA less the U.S. basis in
the RFA immediately before the CAA. Proposed Sec. 1.901(m)-4(c)
provides that a taxpayer may instead elect to determine basis
difference as the U.S. basis in the RFA immediately after the CAA less
the foreign basis in the RFA immediately after the CAA. This is
referred to as the foreign basis election. Paragraphs (c) and (g)(3) of
proposed Sec. 1.901(m)-4 provide that taxpayers may apply the foreign
basis election retroactively to CAAs that have occurred on or after
January 1, 2011, provided that the taxpayer applies all of the rest of
the rules in the 2016 proposed regulations retroactively, with a few
limited exceptions.
One comment suggested that though this consistency requirement is
appropriate for tax years that remain open, the requirement is unfair
if some tax years of the taxpayer or its affiliates are already closed.
The comment recommended the consistency requirement be modified to
permit taxpayers to apply the foreign basis election as long as they
apply the rules in the 2016 proposed regulations consistently to all
relevant tax years that remain open.
The Treasury Department and IRS agree that taxpayers should not be
denied the choice to retroactively apply the foreign basis election
because a closed tax year is preventing them from satisfying the
consistency requirement. However, because the statute of limitations
for refunds attributable to foreign tax credits is ten years while the
statute of limitations for assessment is generally only three years,
the only relevant tax years of the taxpayer or its affiliates that
would be closed are the tax years in which a consistent application of
the regulations would result in an assessment. The Treasury Department
and IRS do not believe taxpayers should be able to obtain the benefits
of retroactive application of the regulations while avoiding the
negative consequences. Accordingly, while the consistency requirement
has been modified to apply only for tax years that remain open, an
additional requirement is added that any deficiencies be taken into
account that would have resulted from the consistent application of the
final regulations for a tax year that is closed. See Sec. 1.901(m)-
4(g)(3). For example, assume a taxpayer chooses to make a retroactive
foreign basis election that would give rise to a $6 million refund in a
prior year that is open under the statute of limitations for refunds
but that a consistent retroactive application of another provision of
the final regulations would give rise to a $1 million deficiency in
another prior year that is closed under the statute of limitations for
assessment. In this case, in order to meet the consistency requirement,
the taxpayer would need to reduce its refund claim in the open year
from $6 million to $5 million to take into account the $1 million
deficiency that would have resulted in the closed tax year.
[[Page 16247]]
4. Successor Rules
The successor rules in proposed Sec. 1.901(m)-6(b) provide that
section 901(m) continues to apply to any unallocated basis difference
with respect to an RFA after there is a transfer of the RFA for U.S.
income tax purposes, regardless of whether the transfer is a
disposition, a CAA, or a non-taxable transaction. For example, if a
section 901(m) payor contributes an RFA with respect to a prior CAA to
a partnership, any unallocated basis difference in the RFA remains
subject to the section 901(m) in the hands of the partnership. One
comment suggested that the Treasury Department and IRS consider whether
it would be appropriate to apply principles similar to those of section
704(c) to treat the section 901(m) ``taint'' in the RFA as a built-in
item that is allocated back to the contributing partner.
The Treasury Department and IRS have considered this comment and
determined that the provisions in proposed Sec. 1.901(m)-5 for
allocating basis difference to partners in a partnership that owns RFAs
reflect the most appropriate approach, whether the RFAs are contributed
to the partnership in a successor transaction or the partnership
acquires them directly in a CAA. These allocation rules are based on
the principle that the partner that takes into account the basis
difference is the one that should be subject to section 901(m). For
example, if there is a cost recovery amount of 20x due to increased
depreciation deductions related to a U.S. basis step-up in a CAA,
section 901(m) basically operates to disallow a credit for foreign
taxes on that 20x differential created between income for U.S. and
foreign tax purposes. The 2016 proposed regulations take the approach
that the partner to whom the 20x of increased depreciation is allocated
is the one that benefits from the income differential and is therefore
the one to whom the section 901(m) disallowance should apply. If some
other partner contributed the RFA to the partnership but does not get
an allocation of the increased depreciation deductions, the Treasury
Department and IRS see no policy reason to nevertheless subject the
contributing partner to the section 901(m) disallowance.
5. De Miminis Threshold
Proposed Sec. 1.901(m)-7 describes de minimis rules under which
certain basis differences are not taken into account for purposes of
section 901(m). In general, under the 2016 proposed regulations, a
basis difference with respect to an RFA is not taken into account for
purposes of section 901(m) if either (i) the sum of the basis
differences for all RFAs with respect to the CAA is less than the
greater of $10 million or 10 percent of the total U.S. basis of all
RFAs immediately after the CAA; or (ii) the RFA is part of a class of
RFAs for which the sum of the basis differences of all RFAs in the
class is less than the greater of $2 million or 10 percent of the total
U.S. basis of all RFAs in the class immediately after the CAA. The
threshold dollar amounts and percentages to meet the de minimis
exemptions for related-party CAAs are lower than those for unrelated
party CAAs, replacing the terms ``$10 million,'' ``10 percent,'' and
``$2 million'' with the terms ``$5 million,'' ``5 percent,'' and ``$1
million,'' respectively.
One comment expressed the view that the threshold amounts for the
de minimis rules were too low, noting that the potential basis
differential with respect to transactions of those magnitudes would not
generate a sufficient foreign tax credit benefit to justify intensive
tax planning. The comment suggested raising the $10 million threshold
to $15 million. The comment also recommended eliminating the reduced de
minimis thresholds in the context of related-party transactions. The
comment argued that the test should be different for related parties
only if the fact that the parties are related somehow makes the rules
less burdensome than they are for unrelated parties or makes the
likelihood of tax arbitrage higher. The comment suggested that this was
unlikely to be the case in the context of section 901(m).
Although the Treasury Department and the IRS do not believe that
the comment made a compelling argument for increasing the threshold for
the cumulative basis difference exemption, the Treasury Department and
IRS agree that it is appropriate to extend the scope of the de minimis
rules in order to further reduce the burden of compliance with the
rules. However, rather than increasing the threshold amount, the
Treasury Department and IRS have decided to add an additional
exclusion, such that a basis difference with respect to an individual
RFA is not taken into account for purposes of section 901(m) if the
basis difference is less than $20,000. See Sec. 1.901(m)-7(b)(4). Like
the de minimis exceptions contained in the 2016 proposed regulations,
this de minimis exception applies independently of the other de minimis
exceptions. Moreover, the reduced thresholds for related-party
transactions are eliminated, as suggested by the comment. See Sec.
1.901(m)-7(c).
6. Interaction With Section 909
One comment requested adding a priority rule to the regulations to
address transactions to which both section 901(m) and section 909
apply, such as, for example, the acquisition of a reverse hybrid with
respect to which a section 338 election is made. The acquisition is a
CAA under section 901(m), and the reverse hybrid structure is a
specified foreign tax credit splitting event under the section 909
regulations. The comment recommended that, given the complexity of the
calculation of disqualified tax amounts under section 901(m), those
calculations should be made first and section 909 should then be
applied to determine whether any of the remaining foreign taxes are
suspended.
The Treasury Department and IRS agree with the comment that if
section 901(m) and section 909 apply to the same transaction, the
section 901(m) calculations should be undertaken before applying
section 909. However, the comment's recommendation implied that only
the portion of the foreign taxes that are not disqualified under
section 901(m) are subject to potential suspension under section 909.
The Treasury Department and IRS disagree with this implication. Section
909 defers taking into account foreign taxes for purposes of claiming a
foreign tax credit or claiming a deduction. Foreign taxes that are
disqualified for foreign tax credit purposes under section 901(m) but
remain eligible to be deducted may be subject to deferral under section
909 as well. The comment's suggestion is adopted with these
clarifications. See Sec. 1.901(m)-8(d).
7. Changes Related to the Tax Cuts and Jobs Act (TCJA)
The final regulations reflect modifications to the rules contained
in the 2016 proposed regulations necessary to reflect statutory changes
by the TCJA, Public Law 115-97 (2017). References to section 902
corporations are replaced with references to applicable foreign
corporations, which consist of section 902 corporations before the
applicability of the TCJA modifications to the foreign tax credit rules
and controlled foreign corporations thereafter. See Sec. 1.901(m)-
1(a)(7). In addition, a definition of separate category is added and
utilized to address the income groupings required under section 960
following TCJA. See Sec. 1.901(m)-1(a)(42).
[[Page 16248]]
8. Applicability Dates
The 2016 proposed regulations were generally proposed to apply to
CAAs occurring on or after the date of publication of the final
regulations. However, the 2016 proposed regulations also provided that
taxpayers could rely on the rules therein before they would otherwise
be applicable, provided that taxpayers consistently applied proposed
Sec. 1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016, and consistently applied Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, and Sec. Sec.
1.901(m)-3 through 1.901(m)-8 (excluding Sec. 1.901(m)-4(e)) to all
CAAs occurring on or after January 1, 2011. For this purpose, persons
that are related (within the meaning of section 267(b) or 707(b)) were
treated as a single taxpayer.
In order to be consistent with the revised applicability of the
foreign basis election, as discussed in Part 3 of this Summary of
Comments and Explanation of Revisions section, and allow the rules in
the final regulations to be applied retroactively, the final
regulations provide that taxpayers may choose to apply the rules before
they would otherwise be applicable, provided that the consistency
requirements described in the preceding paragraph are met, on any
original or amended tax return for each taxable year for which the
application of the provisions affects the tax liability and for which
the statute of limitations does not preclude assessment or the filing
of a claim for refund, as applicable. The relevant tax returns for
taxable years ending before March 23, 2020, must be filed no later than
March 23, 2021. In the case of taxable years that are not open for
assessment, appropriate adjustments must be made to take into account
deficiencies that would have resulted from the consistent application
of the applicable provisions.
Special Analyses
These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Department of the Treasury and the Office
of Management and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this regulation will not have a significant
economic impact on a substantial number of small entities. In general,
foreign corporations are not considered small entities. Nor are U.S.
taxpayers considered small entities to the extent the taxpayers are
natural persons or entities other than small entities. Small entities
are significantly less likely to engage in the types of transactions
addressed by the regulations than U.S. multinational corporations.
Moreover, the de minimis rules discussed in Part 5 of the Summary of
Comments and Explanation of Revisions section further limit the number
of small entities likely to be subject to the regulations.
Pursuant to section 7805(f), the notice of proposed rulemaking
preceding this regulation was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business. No comments were received.
Drafting Information
The principal author of these regulations is Jeffrey L. 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 in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
entries for Sec. Sec. 1.901(m)-1T through 1.901(m)-8T and Sec.
1.901(m)-5T and adding entries for Sec. Sec. 1.901(m)-1 through
1.901(m)-8 and Sec. 1.901(m)-5 in numerical order to read as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Sections 1.901(m)-1 through 1.901-8 also issued under 26 U.S.C.
901(m)(7).
Section 1.901(m)-5 also issued under 26 U.S.C. 901(m)(3)(B)(ii).
* * * * *
0
Par. 2. Section 1.704-1 is amended by adding paragraphs
(b)(1)(ii)(b)(4) and (b)(4)(viii)(c)(4)(v) through (vii) to read as
follows:
Sec. 1.704-1 Partner's distributive share.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(b) * * *
(4) Special rules for covered asset acquisitions. Paragraphs
(b)(4)(viii)(c)(4)(v) through (vii) of this section apply to covered
asset acquisitions (CAAs) (as defined in Sec. 1.901(m)-1(a)(13))
occurring on or after March 23, 2020. Taxpayers may, however, choose to
apply paragraphs (b)(4)(viii)(c)(4)(v) through (vii) of this section
before the date paragraphs (b)(4)(viii)(c)(4)(v) through (vii) of this
section are applicable provided that they (along with any persons that
are related (within the meaning of section 267(b) or 707(b)) to the
taxpayer)--
(i) Consistently apply paragraphs (b)(4)(viii)(c)(4)(v) through
(vii) of this section, Sec. 1.901(m)-1, and Sec. Sec. 1.901(m)-3
through 1.901(m)-8 (excluding Sec. 1.901(m)-4(e)) to all CAAs
occurring on or after January 1, 2011, and consistently apply Sec.
1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to all CAAs occurring on or
after December 7, 2016, on any original or amended tax return for each
taxable year for which the application of the provisions listed in this
paragraph (b)(1)(ii)(b)(4)(i) affects the tax liability and for which
the statute of limitations does not preclude assessment or the filing
of a claim for refund, as applicable;
(ii) File all tax returns described in paragraph
(b)(1)(ii)(b)(4)(i) of this section for any taxable year ending on or
before March 23, 2020, no later than March 23, 2021; and
(iii) Make appropriate adjustments to take into account
deficiencies that would have resulted from the consistent application
under paragraph (b)(1)(ii)(b)(4)(i) of this section for taxable years
that are not open for assessment.
* * * * *
(4) * * *
(viii) * * *
(c) * * *
(4) * * *
(v) Adjustments related to section 901(m). If one or more assets
owned by a partnership are relevant foreign assets (or RFAs) with
respect to a foreign income tax, then, solely for purposes of applying
the safe harbor provisions of paragraph (b)(4)(viii)(a)(1) of this
section to allocations of CFTEs with respect to that foreign income
tax, the net income in a CFTE category that includes partnership items
of income, deduction, gain, or loss attributable to the RFA shall be
increased by the amount described in paragraph (b)(4)(viii)(c)(4)(vi)
of this section and reduced by the amount described in paragraph
(b)(4)(viii)(c)(4)(vii) of this section. Similarly, a partner's CFTE
category share of income shall be increased by the portion of the
amount described in paragraph (b)(4)(viii)(c)(4)(vi) of this section
that is allocated to the partner under Sec. 1.901(m)-5(d) and reduced
by the
[[Page 16249]]
portion of the amount described in paragraph (b)(4)(viii)(c)(4)(vii) of
this section that is allocated to the partner under Sec. 1.901(m)-
5(d). The principles of this paragraph (b)(4)(viii)(c)(4)(v) apply
similarly when a partnership owns an RFA indirectly through one or more
other partnerships. For purposes of this paragraph
(b)(4)(viii)(c)(4)(v) and paragraphs (b)(4)(viii)(c)(4)(vi) and
(b)(4)(viii)(c)(4)(vii) of this section, basis difference is defined in
Sec. 1.901(m)-4, cost recovery amount is defined in Sec. 1.901(m)-
5(b)(2), disposition amount is defined in Sec. 1.901(m)-5(c)(2),
foreign income tax is defined in Sec. 1.901(m)-1(a)(26), RFA is
defined in Sec. 1.901(m)-2(c), U.S. disposition gain is defined in
Sec. 1.901(m)-1(a)(52), and U.S. disposition loss is defined in Sec.
1.901(m)-1(a)(53).
(vi) Adjustment amounts for RFAs with a positive basis difference.
With respect to RFAs with a positive basis difference, the amount
referenced in paragraph (b)(4)(viii)(c)(4)(v) of this section is the
sum of any cost recovery amounts and disposition amounts attributable
to U.S. disposition loss that correspond to partnership items that are
included in the net income in the CFTE category and that are taken into
account for the U.S. taxable year of the partnership under Sec.
1.901(m)-5(d).
(vii) Adjustment amounts for RFAs with a negative basis difference.
With respect to RFAs with a negative basis difference, the amount
referenced in paragraph (b)(4)(viii)(c)(4)(v) of this section is the
sum of any cost recovery amounts and disposition amounts attributable
to U.S. disposition gain that correspond to partnership items that are
included in the net income in the CFTE category and that are taken into
account for the U.S. taxable year of the partnership under Sec.
1.901(m)-5(d).
* * * * *
0
Par. 3. Section 1.901(m)-1 is added to read as follows:
Sec. 1.901(m)-1 Definitions.
(a) Definitions. For purposes of section 901(m), this section, and
Sec. Sec. 1.901(m)-2 through 1.901(m)-8, the following definitions
apply:
(1) The term aggregate basis difference means, with respect to a
foreign income tax and a foreign payor, the sum of the allocated basis
differences and the allocated basis difference adjustments for a U.S.
taxable year of a section 901(m) payor, plus any aggregate basis
difference carryover from the immediately preceding U.S. taxable year
of the section 901(m) payor with respect to the foreign income tax and
foreign payor, as adjusted under Sec. 1.901(m)-6(c). For purposes of
this definition, if foreign law imposes tax on the combined income
(within the meaning of Sec. 1.901-2(f)(3)(ii)) of two or more foreign
payors, all foreign payors whose items of income, deduction, gain, or
loss are included in the U.S. taxable income or earnings and profits of
the section 901(m) payor are treated as a single foreign payor.
Aggregate basis difference is determined with respect to each separate
category.
(2) The term aggregate basis difference carryover has the meaning
provided in Sec. 1.901(m)-3(c).
(3) The term aggregated CAA transaction means a series of related
CAAs occurring as part of a plan.
(4) The term allocable foreign income means the portion of foreign
income of a foreign payor that relates to the foreign income tax amount
of the foreign payor that is paid or accrued by, or considered paid or
accrued by, a section 901(m) payor.
(5) The term allocated basis difference means, with respect to an
RFA and a foreign income tax, the sum of the cost recovery amounts and
disposition amounts assigned to a U.S. taxable year of the section
901(m) payor under Sec. 1.901(m)-5.
(6) The term allocated basis difference adjustment means an
adjustment to a section 901(m) payor's allocated basis difference with
respect to an RFA and a foreign income tax for a U.S. taxable year. If
the RFA has a positive basis difference, the allocated basis difference
adjustment is equal to the lesser of the allocated basis difference or
the portion of any unallocated CAA gain that corresponds to the CAA
gain recognized by the section 901(m) payor or a member of the section
901(m) payor's consolidated group. If the RFA has a negative basis
difference, the allocated basis difference adjustment is equal to the
greater of the allocated basis difference or the portion of any
unallocated CAA loss that corresponds to the CAA loss recognized by the
section 901(m) payor or a member of the section 901(m) payor's
consolidated group. For purposes of this paragraph, CAA gain or CAA
loss recognized by the section 901(m) payor or a member of the section
901(m) payor's consolidated group includes their distributive share of
CAA gain or CAA loss recognized by a partnership.
(7) The term applicable foreign corporation means--
(i) For taxable years of foreign corporations beginning before
January 1, 2018, a section 902 corporation (as defined in section
909(d)(5) (as in effect on December 21, 2017)), and
(ii) For taxable years of foreign corporations beginning after
December 31, 2017, a controlled foreign corporation (as defined in
section 957).
(8) The term basis difference has the meaning provided in Sec.
1.901(m)-4.
(9) The term CAA gain means the amount of gain recognized with
respect to an RFA for U.S. tax purposes as a result of a CAA.
(10) The term CAA loss means the amount of loss recognized with
respect to an RFA for U.S. tax purposes as a result of a CAA.
(11) The term consolidated group has the meaning provided in Sec.
1.1502-1(h).
(12) The term cost recovery amount has the meaning provided in
Sec. 1.901(m)-5(b)(2).
(13) The term covered asset acquisition (or CAA) has the meaning
provided in Sec. 1.901(m)-2.
(14) The term cumulative basis difference exemption has the meaning
provided in Sec. 1.901(m)-7(b)(2).
(15) The term disposition means an event (for example, a sale,
abandonment, or mark-to-market event) that results in gain or loss
being recognized with respect to an RFA for purposes of U.S. income tax
or a foreign income tax, or both.
(16) The term disposition amount has the meaning provided in Sec.
1.901(m)-5(c)(2).
(17) The term disqualified tax amount has the meaning provided in
Sec. 1.901(m)-3(b).
(18) The term disregarded entity means an entity that is
disregarded as an entity separate from its owner, as described in Sec.
301.7701-2(c)(2)(i) of this chapter.
(19) The term fiscally transparent entity means an entity,
including a disregarded entity, that is fiscally transparent under the
principles of Sec. 1.894-1(d)(3) for purposes of U.S. income tax or a
foreign income tax (or both).
(20) The term foreign basis means the adjusted basis of an asset
determined for purposes of a foreign income tax.
(21) The term foreign basis election has the meaning provided in
Sec. 1.901(m)-4(c).
(22) The term foreign country creditable tax (or FCCT) means, with
respect to a foreign income tax amount, the amount of income, war
profits, or excess profits tax paid or accrued to a foreign country or
possession of the United States and claimed as a foreign tax credit for
purposes of determining the foreign income tax amount. To qualify as a
FCCT, the tax imposed by the foreign country or possession must be a
foreign income tax or a withholding
[[Page 16250]]
tax determined on a gross basis as described in section 901(k)(1)(B).
(23) The term foreign disposition gain means, with respect to a
foreign income tax, the amount of gain recognized on a disposition of
an RFA in determining foreign income, regardless of whether the gain is
deferred or otherwise not taken into account currently. Notwithstanding
the foregoing, if after a section 743(b) CAA there is a disposition of
an asset that is an RFA with respect to that section 743(b) CAA,
foreign disposition gain has the meaning provided in Sec. 1.901(m)-
5(c)(2)(iii).
(24) The term foreign disposition loss means, with respect to a
foreign income tax, the amount of loss recognized on a disposition of
an RFA in determining foreign income, regardless of whether the loss is
deferred or disallowed or otherwise not taken into account currently.
Notwithstanding the foregoing, if after a section 743(b) CAA there is a
disposition of an asset that is an RFA with respect to that section
743(b) CAA, foreign disposition loss has the meaning provided in Sec.
1.901(m)-5(c)(2)(iii).
(25) The term foreign income means, with respect to a foreign
income tax, the taxable income (or loss) reflected on a foreign tax
return (as properly amended or adjusted), even if the taxable income
(or loss) is reported by an entity that is a fiscally transparent
entity for purposes of the foreign income tax. If, however, foreign law
imposes tax on the combined income (within the meaning of Sec. 1.901-
2(f)(3)(ii)) of two or more foreign payors, foreign income means the
combined taxable income (or loss) of such foreign payors, regardless of
whether such income (or loss) is reflected on a single foreign tax
return.
(26) The term foreign income tax means an income, war profits, or
excess profits tax for which a credit is allowable under section 901 or
section 903, except that it does not include any withholding tax
determined on a gross basis as described in section 901(k)(1)(B).
(27) The term foreign income tax amount means, with respect to a
foreign income tax, the amount of tax (including an amount of tax that
is zero) reflected on a foreign tax return (as properly amended or
adjusted). If foreign law imposes tax on the combined income (within
the meaning of Sec. 1.901-2(f)(3)(ii)) of two or more foreign payors,
however, a foreign income tax amount means the amount of tax imposed on
the combined income, regardless of whether the tax is reflected on a
single foreign tax return.
(28) The term foreign payor means an individual or entity
(including a disregarded entity) subject to a foreign income tax. If
foreign law imposes tax on the combined income (within the meaning of
Sec. 1.901-2(f)(3)(ii)) of two or more individuals or entities, each
such individual or entity is a foreign payor. An individual or entity
may be a foreign payor with respect to more than one foreign income tax
for purposes of applying section 901(m).
(29) The term foreign taxable year means a taxable year for
purposes of a foreign income tax.
(30) The term mid-year transaction means a transaction in which a
foreign payor that is a corporation or a disregarded entity has a
change in ownership or makes an election pursuant to Sec. 301.7701-3
to change its entity classification, or a transaction in which a
foreign payor that is a partnership terminates under section 708(b)(1),
provided in each case that the foreign payor's foreign taxable year
does not close as a result of the transaction, and, if the foreign
payor is a corporation or a partnership, the foreign payor's U.S.
taxable year closes.
(31) The term prior CAA has the meaning provided in Sec. 1.901(m)-
6(b)(2).
(32) The term prior section 743(b) CAA has the meaning provided in
Sec. 1.901(m)-6(b)(4)(iii).
(33) The term relevant foreign asset (or RFA) has the meaning
provided in Sec. 1.901(m)-2.
(34) The term reverse hybrid has the meaning provided in Sec.
1.909-2(b)(1)(iv).
(35) The term RFA class exemption has the meaning provided in Sec.
1.901(m)-7(b)(3).
(36) The term RFA exemption has the meaning provided in Sec.
1.901(m)-7(b)(4).
(37) The term RFA owner (U.S.) means a person that owns an RFA for
U.S. income tax purposes.
(38) The term RFA owner (foreign) means an individual or entity
(including a disregarded entity) that owns an RFA for purposes of a
foreign income tax.
(39) The term section 338 CAA has the meaning provided in Sec.
1.901(m)-2(b)(1).
(40) The term section 743(b) CAA has the meaning provided in Sec.
1.901(m)-2(b)(3).
(41) The term section 901(m) payor means a person eligible to claim
the foreign tax credit allowed under section 901(a), regardless of
whether the person chooses to claim the foreign tax credit, as well as
an applicable foreign corporation. Each member of a consolidated group
is a separate section 901(m) payor. If individuals file a joint return,
those individuals are treated as a single section 901(m) payor.
(42) The term separate category means each separate category
described in Sec. 1.904-5(a)(4)(v), and in the case of an applicable
foreign corporation described in paragraph (a)(7)(ii) of this section,
each income group described in Sec. 1.960-1(d)(2)(ii).
(43) The term subsequent CAA has the meaning provided in Sec.
1.901(m)-6(b)(4)(i).
(44) The term subsequent section 743(b) CAA has the meaning
provided in Sec. 1.901(m)-6(b)(4)(iii).
(45) The term successor transaction has the meaning provided in
Sec. 1.901(m)-6(b)(2).
(46) The term tentative disqualified tax amount has the meaning
provided in Sec. 1.901(m)-3(b)(2)(ii).
(47) The term unallocated basis difference means, with respect to
an RFA and a foreign income tax, the basis difference reduced by the
sum of the cost recovery amounts and the disposition amounts that have
been computed under Sec. 1.901(m)-5.
(48) The term unallocated CAA gain means, with respect to an RFA,
the CAA gain reduced by the sum of the allocated basis difference
adjustments that have been computed with respect to the RFA.
(49) The term unallocated CAA loss means, with respect to an RFA,
the CAA loss reduced by the sum of the allocated basis difference
adjustments that have been computed with respect to the RFA.
(50) The term U.S. basis means the adjusted basis of an asset
determined for U.S. income tax purposes.
(51) The term U.S. basis deduction has the meaning provided in
Sec. 1.901(m)-5(b)(3).
(52) The term U.S. disposition gain means the amount of gain
recognized for U.S. income tax purposes on a disposition of an RFA,
regardless of whether the gain is deferred or otherwise not taken into
account currently. Notwithstanding the foregoing, if after a section
743(b) CAA there is a disposition of an asset that is an RFA with
respect to that section 743(b) CAA, U.S. disposition gain has the
meaning provided in Sec. 1.901(m)-5(c)(2)(iii).
(53) The term U.S. disposition loss means the amount of loss
recognized for U.S. income tax purposes on a disposition of an RFA,
regardless of whether the loss is deferred or disallowed or otherwise
not taken into account currently. Notwithstanding the foregoing, if
after a section 743(b) CAA there is a disposition of an asset that is
an RFA with respect to that section 743(b) CAA, U.S. disposition loss
has the meaning provided in Sec. 1.901(m)-5(c)(2)(iii).
(54) The term U.S. taxable year means a taxable year as defined in
section 7701(a)(23).
[[Page 16251]]
(b) Applicability dates. (1) Except as provided in paragraph (b)(2)
of this section, this section applies to CAAs occurring on or after
March 23, 2020.
(2) Paragraphs (a)(8), (12), (13), (15), (16), (18), (19), (23)
through (26), (31) through (33), (39), (40), (43) through (45), (47),
(50), and (52) through (54) of this section apply to CAAs occurring on
or after July 21, 2014, and to CAAs occurring before that date
resulting from an entity classification election made under Sec.
301.7701-3 that is filed on or after July 29, 2014, and that is
effective on or before July 21, 2014. Paragraphs (a)(8), (12), (13),
(15), (16), (18), (19), (23) through (26) through (33), (39), (40),
(43) through (45), (47), (50), and (52) through (54) of this section
also apply to CAAs occurring on or after January 1, 2011, and before
July 21, 2014, other than CAAs occurring before July 21, 2014,
resulting from an entity classification election made under Sec.
301.7701-3 that is filed on or after July 29, 2014, and that is
effective on or before July 21, 2014, but only if the basis difference
(within the meaning of section 901(m)(3)(C)(i)) in one or more RFAs
with respect to the CAA had not been fully taken into account under
section 901(m)(3)(B) either as of July 21, 2014, or, in the case of an
entity classification election made under Sec. 301.7701-3 that is
filed on or after July 29, 2014, and that is effective on or before
July 21, 2014, before the transactions that are deemed to occur under
Sec. 301.7701-3(g) as a result of the change in classification.
(3) Taxpayers may, however, choose to apply provisions in this
section before the date such provisions are applicable pursuant to
paragraph (b)(1) or (2) of this section, provided that they (along with
any persons that are related (within the meaning of section 267(b) or
707(b)) to the taxpayer)--
(i) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), and Sec. Sec. 1.901(m)-3 through
1.901(m)-8 (excluding Sec. 1.901(m)-4(e)) to all CAAs occurring on or
after January 1, 2011, and consistently apply Sec. 1.901(m)-2
(excluding Sec. 1.901(m)-2(d)) to all CAAs occurring on or after
December 7, 2016, on any original or amended tax return for each
taxable year for which the application of the provisions listed in this
paragraph (b)(3)(i) affects the tax liability and for which the statute
of limitations does not preclude assessment or the filing of a claim
for refund, as applicable;
(ii) File all tax returns described in paragraph (b)(3)(i) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(iii) Make appropriate adjustments to take into account
deficiencies that would have resulted from the consistent application
under paragraph (b)(3)(i) of this section for taxable years that are
not open for assessment.
Sec. 1.901(m)-1T [Removed]
0
Par. 4. Section 1.901(m)-1T is removed.
0
Par. 5. Section 1.901(m)-2 is added to read as follows:
Sec. 1.901(m)-2 Covered asset acquisitions and relevant foreign
assets.
(a) In general. Paragraph (b) of this section sets forth the
transactions that are covered asset acquisitions (or CAAs). Paragraph
(c) of this section provides rules for identifying assets that are
relevant foreign assets (or RFAs) with respect to a CAA. Paragraph (d)
of this section provides special rules for identifying CAAs and RFAs
with respect to transactions to which paragraphs (b) and (c) of this
section do not apply. Paragraph (e) of this section provides examples
illustrating the rules of this section, and paragraph (f) of this
section provides applicability dates.
(b) Covered asset acquisitions. Except as provided in paragraph (d)
of this section, the transactions set forth in this paragraph (b) are
CAAs.
(1) A qualified stock purchase (as defined in section 338(d)(3)) to
which section 338(a) applies (section 338 CAA);
(2) Any transaction that is treated as an acquisition of assets for
U.S. income tax purposes and treated as an acquisition of stock of a
corporation (or disregarded) for foreign income tax purposes;
(3) Any acquisition of an interest in a partnership that has an
election in effect under section 754 (section 743(b) CAA);
(4) Any transaction (or series of transactions occurring pursuant
to a plan) to the extent it is treated as an acquisition of assets for
purposes of U.S. income tax and as the acquisition of an interest in a
fiscally transparent entity for purposes of a foreign income tax;
(5) Any transaction (or series of transactions occurring pursuant
to a plan) to the extent it is treated as a partnership distribution of
one or more assets the U.S. basis of which is determined by section
732(b) or 732(d) or to the extent it causes the U.S. basis of the
partnership's remaining assets to be adjusted under section 734(b),
provided the transaction results in an increase in the U.S. basis of
one or more of the assets distributed by the partnership or retained by
the partnership without a corresponding increase in the foreign basis
of such assets; and
(6) Any transaction (or series of transactions occurring pursuant
to a plan) to the extent it is treated as an acquisition of assets for
purposes of both U.S. income tax and a foreign income tax, provided the
transaction results in an increase in the U.S. basis without a
corresponding increase in the foreign basis of one or more assets.
(c) Relevant foreign asset--(1) In general. Except as provided in
paragraph (d) of this section, an RFA means, with respect to a foreign
income tax and a CAA, any asset (including goodwill, going concern
value, or other intangible) subject to the CAA that is relevant in
determining foreign income for purposes of the foreign income tax.
(2) RFA status with respect to a foreign income tax. An asset is
relevant in determining foreign income if income, deduction, gain, or
loss attributable to the asset is taken into account in determining
foreign income immediately after the CAA, or would be taken into
account in determining foreign income immediately after the CAA if the
asset were to give rise to income, deduction, gain, or loss at such
time.
(3) Subsequent RFA status with respect to another foreign income
tax. After a CAA, an asset will become an RFA with respect to another
foreign income tax if, pursuant to a plan or series of related
transactions that have a principal purpose of avoiding the application
of section 901(m), an asset that was not relevant in determining
foreign income for purposes of that foreign income tax immediately
after the CAA becomes relevant in determining such foreign income. A
principal purpose of avoiding section 901(m) will be deemed to exist if
income, deduction, gain, or loss attributable to the asset is taken
into account in determining such foreign income within the one-year
period following the CAA, or would be taken into account in determining
such foreign income during such time if the asset were to give rise to
income, deduction, gain, or loss within the one-year period.
(d) Identifying covered asset acquisitions and relevant foreign
assets to which paragraphs (b) and (c) of this section do not apply.
For transactions occurring on or after January 1, 2011, and before July
21, 2014, other than transactions occurring before July 21, 2014,
resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that is filed on or after July 29, 2014, and
that is effective on or before July 21, 2014, the transactions set
forth under section
[[Page 16252]]
901(m)(2) are CAAs and the assets that are relevant foreign assets with
respect to the CAA under section 901(m)(4) are RFAs.
(e) Examples. The following examples illustrate the rules of this
section:
(1) Example 1: CAA involving an acquisition of a partnership
interest for foreign income tax purposes--(i) Facts. (A) FPS is an
entity organized in Country F that is treated as a partnership for
both U.S. and Country F income tax purposes. FPS is owned equally by
FC1 and FC2, each of which is a corporation organized in Country F
and treated as a corporation for both U.S. and Country F income tax
purposes. FPS has a single asset, Asset A. USP, a domestic
corporation, owns all the interests in DE, a disregarded entity.
(B) Pursuant to the same transaction, USP acquires FC1's
interest in FPS, and DE acquires FC2's interest in FPS. For U.S.
income tax purposes, with respect to USP, the acquisition of the
interests in FPS is treated as the acquisition of Asset A by USP.
See Rev. Rul. 99-6, 1999-1 C.B. 432. For Country F tax purposes, the
acquisitions of the interests of FPS by USP and DE are treated as
acquisitions of partnership interests.
(ii) Result. The transaction is a CAA under paragraph (b)(4) of
this section because it is treated as the acquisition of Asset A for
U.S. income tax purposes and the acquisition of interests in a
fiscally transparent entity for Country F tax purposes.
(2) Example 2: CAA involving an asset acquisition for purposes
of both U.S. income tax and a foreign income tax--(i) Facts. (A)
USP, a domestic corporation, wholly owns CFC1, a foreign
corporation, and CFC1 wholly owns CFC2, also a foreign corporation.
CFC1 and CFC2 are organized in Country F. CFC1 owns Asset A.
(B) In an exchange described in section 351, CFC1 transfers
Asset A to CFC2 in exchange for CFC2 common stock and cash. CFC1
recognizes gain on the exchange under section 351(b). Under section
362(a), CFC2's U.S. basis in Asset A is increased by the gain
recognized by CFC1. For Country F tax purposes, gain or loss is not
recognized on the transfer of Asset A to CFC2, and therefore there
is no increase in the foreign basis in Asset A.
(ii) Result. The transaction is a CAA under paragraph (b)(6) of
this section because it is treated as an acquisition of Asset A by
CFC2 for both U.S. and Country F income tax purposes, and it results
in an increase in the U.S. basis of Asset A without a corresponding
increase in the foreign basis of Asset A.
(3) Example 3: RFA status determined immediately after CAA;
application of principal purpose rule--(i) Facts. (A) USP1 and USP2
are unrelated domestic corporations. USP1 wholly owns USSub, also a
domestic corporation. On January 1 of Year 1, USP2 acquires all of
the stock of USSub from USP1 in a qualified stock purchase (as
defined in section 338(d)(3)) to which section 338(a) applies.
Immediately after the acquisition, none of the income, deduction,
gain, or loss attributable to any of the assets of USSub is taken
into account in determining foreign income for purposes of a foreign
income tax nor would such items be taken into account in determining
foreign income for purposes of a foreign income tax immediately
after the acquisition if such assets were to give rise to income,
deduction, gain, or loss immediately after the acquisition.
(B) On December 1 of Year 1, USSub contributes all its assets to
FSub, its wholly owned subsidiary, which is a corporation for both
U.S. and Country X income tax purposes, in a transfer described in
section 351 (subsequent transfer). USSub recognizes no gain or loss
for U.S. or Country X income tax purposes as a result of the
subsequent transfer. As a result of the subsequent transfer, income,
deduction, gain, or loss attributable to the assets of USSub that
were transferred to FSub is taken into account in determining
foreign income of FSub for Country X tax purposes.
(ii) Result. (A) Under paragraph (b)(1) of this section, the
acquisition by USP2 of the stock of USSub is a section 338 CAA.
Under paragraph (c)(1) of this section, none of the assets of USSub
are RFAs immediately after the CAA, because none of the income,
deduction, gain, or loss attributable to such assets is taken into
account for purposes of determining foreign income with respect to
any foreign income tax immediately after the CAA (nor would such
items be taken into account for purposes of determining foreign
income immediately after the CAA if such assets were to give rise to
income, deduction, gain, or loss at such time).
(B) Although the subsequent transfer is not a CAA under
paragraph (b) of this section, the subsequent transfer causes the
assets of USSub to become relevant in the hands of FSub in
determining foreign income for Country X tax purposes. Because the
subsequent transfer occurred within the one-year period following
the CAA, it is presumed to have a principal purpose of avoiding
section 901(m) under paragraph (c)(3) of this section. Accordingly,
the assets of USSub with respect to the CAA occurring on January 1
of Year 1 become RFAs with respect to Country X tax as a result of
the subsequent transfer. Thus, a basis difference with respect to
Country X tax must be computed for the RFAs and taken into account
under section 901(m).
(f) Applicability dates. (1) Except as provided in paragraph (f)(2)
of this section, this section applies to CAAs occurring on or after
March 23, 2020.
(2) Paragraphs (a), (b)(1) through (3), and (c)(1) of this section
apply to transactions occurring on or after July 21, 2014, and to
transactions occurring before that date resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that is filed on or after July 29, 2014, and that is effective on or
before July 21, 2014. Paragraph (d) of this section applies to
transactions occurring on or after January 1, 2011, and before July 21,
2014, other than transactions occurring before July 21, 2014, resulting
from an entity classification election made under Sec. 301.7701-3 of
this chapter that is filed on or after July 29, 2014, and that is
effective on or before July 21, 2014.
(3) Taxpayers may, however, choose to apply provisions in this
section before the date such provisions are applicable pursuant to
paragraph (f)(1) or (2) of this section, provided that they (along with
any persons that are related (within the meaning of section 267(b) or
707(b)) to the taxpayer)--
(i) Consistently apply this section (excluding paragraph (d) of
this section) to all CAAs occurring on or after December 7, 2016 and
consistently apply Sec. 1.704-1(b)(4)(viii)(c)(4)(v) through (vii),
Sec. 1.901(m)-1, and Sec. Sec. 1.901(m)-3 through 1.901(m)-8
(excluding Sec. 1.901(m)-4(e)) to all CAAs occurring on or after
January 1, 2011, on any original or amended tax return for each taxable
year for which the application of the provisions listed in this
paragraph (f)(3)(i) affects the tax liability and for which the statute
of limitations does not preclude assessment or the filing of a claim
for refund, as applicable;
(ii) File all tax returns described in paragraph (f)(3)(i) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(iii) Make appropriate adjustments to take into account
deficiencies that would have resulted from the consistent application
under paragraph (f)(3)(i) of this section for taxable years that are
not open for assessment.
Sec. 1.901(m)-2T [Removed]
0
Par. 6. Section 1.901(m)-2T is removed.
0
Par. 7. Section 1.901(m)-3 is added to read as follows:
Sec. 1.901(m)-3 Disqualified tax amount and aggregate basis
difference carryover.
(a) In general. If a section 901(m) payor has an aggregate basis
difference, with respect to a foreign income tax and a foreign payor,
for a U.S. taxable year, the section 901(m) payor must determine the
portion of a foreign income tax amount that is disqualified under
section 901(m) (disqualified tax amount). Paragraph (b) of this section
provides rules for determining the disqualified tax amount. Paragraph
(c) of this section provides rules for determining what portion, if
any, of aggregate basis difference will be carried forward to the next
U.S. taxable year (aggregate basis difference carryover). Paragraph (d)
of this section provides applicability dates.
[[Page 16253]]
(b) Disqualified tax amount--(1) In general. A section 901(m)
payor's disqualified tax amount is not taken into account in
determining the credit allowed under section 901(a). If the section
901(m) payor is an applicable foreign corporation, the disqualified tax
amount is not taken into account for purposes of section 902 (for tax
years of foreign corporations beginning before January 1, 2018) or 960.
Sections 78 and 275 do not apply to the disqualified tax amount. The
disqualified tax amount is allowed as a deduction to the extent
otherwise deductible. See sections 164, 212, and 964 and the
regulations under those sections.
(2) Determination of disqualified tax amount--(i) In general.
Except as provided in paragraph (b)(2)(iv) of this section, the
disqualified tax amount is equal to the lesser of the foreign income
tax amount that is paid or accrued by, or considered paid or accrued
by, the section 901(m) payor for the U.S. taxable year or the tentative
disqualified tax amount. All calculations are determined with respect
to each separate category.
(ii) Tentative disqualified tax amount. The tentative disqualified
tax amount is equal to the amount determined under paragraph
(b)(2)(ii)(A) of this section reduced (but not below zero) by the
amount described in paragraph (b)(2)(ii)(B) of this section.
(A) The product of--
(1) The sum of the foreign income tax amount and the FCCTs that are
paid or accrued by, or considered paid or accrued by, the section
901(m) payor, and
(2) A fraction, the numerator of which is the aggregate basis
difference, but not in excess of the allocable foreign income, and the
denominator of which is the allocable foreign income.
(B) The amount of the FCCT that is a disqualified tax amount of the
section 901(m) payor with respect to another foreign income tax.
(iii) Allocable foreign income--(A) No allocation required. Except
as provided in paragraph (b)(2)(iii)(D) of this section, if the entire
foreign income tax amount is paid or accrued by, or considered paid or
accrued by, a single section 901(m) payor, then the allocable foreign
income is equal to the entire foreign income, determined with respect
to each separate category.
(B) Allocation required. Except as provided in paragraph
(b)(2)(iii)(D) of this section, if the foreign income tax amount is
allocated to, and considered paid or accrued by, more than one person,
a section 901(m) payor's allocable foreign income is equal to the
portion of the foreign income that relates to the foreign income tax
amount allocated to that section 901(m) payor, determined with respect
to each separate category.
(C) Rules for allocations. This paragraph (b)(2)(iii)(C) provides
allocation rules that apply to determine allocable foreign income in
certain cases.
(1) If the foreign payor is involved in a mid-year transaction and
the foreign income tax amount is allocated under Sec. 1.336-
2(g)(3)(ii), Sec. 1.338-9(d), or Sec. 1.901-2(f)(4), then, to the
extent any portion of the foreign income tax amount is allocated to,
and considered paid or accrued by, a section 901(m) payor, the
allocable foreign income of the section 901(m) payor is determined in
accordance with the principles of Sec. 1.1502-76(b). To the extent the
foreign income tax amount is allocated to an entity that is a
partnership for U.S. income tax purposes, a portion of the foreign
income is first allocated to the partnership in accordance with the
principles of Sec. 1.1502-76(b), which is then allocated under the
rules of paragraph (b)(2)(iii)(C)(2) of this section to determine the
allocable foreign income of a section 901(m) payor that owns an
interest in the partnership directly or indirectly through one or more
other partnerships for U.S. income tax purposes.
(2) If the foreign income tax amount is considered paid or accrued
by a section 901(m) payor for a U.S. taxable year under Sec. 1.702-
1(a)(6), the determination of the allocable foreign income must be
consistent with the allocation of the foreign income tax amount that
relates to the foreign income. See Sec. 1.704-1(b)(4)(viii).
(3) If the foreign income tax amount that is allocated to, and
considered paid or accrued by, a section 901(m) payor for a U.S.
taxable year is determined under Sec. 1.901-2(f)(3)(i), the allocable
foreign income is determined in accordance with Sec. 1.901-
2(f)(3)(iii).
(D) Failure to substantiate allocable foreign income. If, pursuant
to section 901(m)(3)(A), a section 901(m) payor fails to substantiate
its allocable foreign income to the satisfaction of the Secretary, then
allocable foreign income will equal the amount determined by dividing
the sum of the foreign income tax amount and the FCCTs that are paid or
accrued by, or considered paid or accrued by, the section 901(m) payor,
by the highest marginal tax rate applicable to income of the foreign
payor under foreign tax law.
(iv) Special rule. A section 901(m) payor's disqualified tax amount
is zero for a U.S. taxable year if:
(A) The section 901(m) payor's aggregate basis difference for the
U.S. taxable year is a negative amount;
(B) Foreign income is less than or equal to zero for the foreign
taxable year of the foreign payor; or
(C) The foreign income tax amount that is paid or accrued by, or
considered paid or accrued by, the section 901(m) payor for the U.S.
taxable year is zero.
(3) Examples. The following examples illustrate the rules of
paragraph (b)(2) of this section. For purposes of all the examples,
unless otherwise specified: USP is a domestic corporation. CFC1, CFC2,
DE1, and DE2 are organized in Country F and are treated as corporations
for Country F tax purposes. CFC1 and CFC2 are applicable foreign
corporations. DE1 and DE2 are disregarded entities. USP, CFC1, and CFC2
each have a calendar year for both U.S. and Country F income tax
purposes, and DE1 and DE2 each have a calendar year for Country F tax
purposes. Country F and Country G each impose a single tax that is a
foreign income tax. CFC1, CFC2, DE1, and DE2 each have a functional
currency of the u with respect to all activities. At all relevant
times, 1u equals $1. All amounts are stated in millions. The examples
assume that the applicable cost recovery method for property results in
basis being recovered ratably over the life of the property beginning
on the first day of the U.S. taxable year in which the property is
acquired or placed into service; there is a single separate category
with respect to a foreign income and foreign income tax amount; and a
section 901(m) payor properly substantiates its allocable foreign
income to the satisfaction of the Secretary.
(i) Example 1: Determining aggregate basis difference; multiple
foreign payors--(A) Facts. CFC1 wholly owns CFC2 and DE1. DE1 wholly
owns DE2. Assume that the tax laws of Country F do not allow
combined income reporting or the filing of consolidated income tax
returns. Accordingly, CFC1, CFC2, DE1, and DE2 file separate tax
returns for Country F tax purposes. USP acquires all of the stock of
CFC1 in a qualified stock purchase (as defined in section 338(d)(3))
to which section 338(a) applies for both CFC1 and CFC2.
(B) Result. (1) The acquisition of CFC1 gives rise to four
separate CAAs under Sec. 1.901(m)-2(b). The acquisition of the
stock of CFC1 and the deemed purchase of the stock of CFC2 under
section 338(h)(3)(B) are each a section 338 CAA under Sec.
1.901(m)-2(b)(1). Furthermore, because the deemed purchase of the
assets of DE1 and DE2 for U.S. income tax purposes is disregarded
for Country F tax purposes, each acquisition is a CAA under Sec.
1.901(m)-2(b)(2). Because these four CAAs occur pursuant to a plan,
under Sec. 1.901(m)-1(a)(3) they are part of an
[[Page 16254]]
aggregated CAA transaction. Under Sec. 1.901(m)-1(a)(37), CFC1 is
the RFA owner (U.S.) with respect to its assets and those of DE1 and
DE2. CFC2 is the RFA owner (U.S.) with respect to its assets. Under
Sec. 1.901(m)-1(a)(28), CFC1, CFC2, DE1, and DE2 are each a foreign
payor for Country F tax purposes. Under Sec. 1.901(m)-1(a)(41),
CFC1 is the section 901(m) payor with respect to foreign income tax
amounts for which CFC1, DE1, and DE2 are the foreign payors (see
Sec. 1.901-2(f)(1) and (f)(4)(ii)). CFC2 is the section 901(m)
payor with respect to foreign income tax amounts for which CFC2 is
the foreign payor (see Sec. 1.901-2(f)(1)).
(2) In determining aggregate basis difference under Sec.
1.901(m)-1(a)(1) for a U.S. taxable year of CFC1, CFC1 has three
computations with respect to Country F tax, because there are three
foreign payors for Country F tax purposes whose foreign income tax
amount, if any, is considered paid or accrued by CFC1 as the section
901(m) payor. Furthermore, for each U.S. taxable year, CFC1 will
compute a separate disqualified tax amount and aggregate basis
difference carryover (if any) under paragraph (b)(2) of this
section, with respect to each foreign payor.
(3) In determining aggregate basis difference for a U.S. taxable
year of CFC2 under Sec. 1.901(m)-1(a)(1), CFC2 has a single
computation with respect to Country F tax, because there is a single
foreign payor (CFC2) for Country F tax purposes whose foreign income
tax amount, if any, is considered paid or accrued by CFC2 as the
section 901(m) payor. Furthermore, for each U.S. taxable year, CFC2
will compute a disqualified tax amount and aggregate basis
difference carryover (if any) under paragraph (b)(2) of this
section.
(C) Alternative facts. Assume the same facts as in paragraph
(b)(3)(i)(A) of this section (paragraph (A) of this Example 1),
except that foreign income for Country F tax purposes is based on
combined income (within the meaning of Sec. 1.901-2(f)(3)(ii)) of
CFC1, CFC2, DE1, and DE2. For purposes of determining an aggregate
basis difference for a U.S. taxable year of CFC1 under Sec.
1.901(m)-1(a)(1), CFC1, DE1, and DE2 are treated as a single foreign
payor because all of the items of income, deduction, gain, or loss
with respect to CFC1, DE1, and DE2 are included in the earnings and
profits of CFC1 for U.S. income tax purposes. For each U.S. taxable
year, CFC1 will therefore compute a single aggregate basis
difference, disqualified tax amount, and aggregate basis difference
carryover. The result for CFC2 under the alternative facts is the
same as in paragraph (b)(3)(i)(B)(3) (paragraph (B)(3) of this
Example 1).
(ii) Example 2: Computation of disqualified tax amount--(A)
Facts. On December 31 of Year 0, USP acquires all of the stock of
CFC1 in a qualified stock purchase (as defined in section 338(d)(3))
to which section 338(a) applies (Acquisition). CFC1 owns four assets
(Asset A, Asset B, Asset C, and Asset D, and collectively, Assets)
and conducts activities in Country F and in a Country G branch. The
activities conducted by CFC1 in Country G are not subject to tax in
Country F. The tax rate is 25% in Country F and 30% in Country G.
For Country F tax purposes, CFC1's foreign income and foreign income
tax amount for each foreign taxable year 1 through 15 is 100u and
$25 (25u translated at the exchange rate of $1 = 1u), respectively.
For Country G tax purposes, CFC1's foreign income and foreign income
tax amount for each foreign taxable year 1 through 5 is 400u and
$120 (120u translated at the exchange rate of $1 = 1u),
respectively. No dispositions occur for any of the Assets during the
applicable cost recovery period. Additional facts relevant to each
of the Assets are summarized below.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Applicable cost
Assets Relevant foreign income Basis recovery period Cost recovery amount
tax difference (years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Asset A............................... Country F tax............ 150u 15 10u (150u/15).
Asset B............................... Country F tax............ 50u 5 10u (50u/5).
Asset C............................... Country G tax............ 300u 5 60u (300u/5).
Asset D............................... Country G tax............ (100u) 5 negative 20u (negative 100/5).
--------------------------------------------------------------------------------------------------------------------------------------------------------
(B) Result. (1) Under Sec. 1.901(m)-2(b)(1), the acquisition of
the stock of CFC1 is a section 338 CAA. Under Sec. 1.901(m)-
2(c)(1), Assets A and B are RFAs with respect to Country F tax,
because they are relevant in determining foreign income of CFC1 for
Country F tax purposes and were owned by CFC1 when the Acquisition
occurred. Assets C and D are RFAs with respect to Country G tax,
because they are relevant in determining foreign income of CFC1 for
Country G tax purposes and were owned by CFC1 when the Acquisition
occurred. Under Sec. 1.901(m)-1(a)(37), CFC1 is the RFA owner
(U.S.) with respect to all of the RFAs. Under Sec. 1.901(m)-
1(a)(41) and (28), CFC1 is the section 901(m) payor and the foreign
payor for Country F and Country G tax purposes.
(2) In determining aggregate basis difference for a U.S. taxable
year of CFC1, CFC1 has two computations, one with respect to Country
F tax and one with respect to Country G tax. Under Sec. 1.901(m)-
1(a)(1), the aggregate basis difference for a U.S. taxable year with
respect to Country F tax is equal to the sum of the allocated basis
differences and allocated basis difference adjustments with respect
to Assets A and B for the U.S. taxable year. Under Sec. 1.901(m)-
1(a)(5), allocated basis differences are the sum of cost recovery
amounts and disposition amounts. Because there are no dispositions,
the only allocated basis differences taken into account in
determining an aggregate basis difference are cost recovery amounts.
Under Sec. 1.901(m)-5(b), any cost recovery amounts are attributed
to CFC1, because CFC1 is the section 901(m) payor and RFA owner
(U.S.) with respect to all of the Assets. For each U.S. taxable
year, CFC1 will compute a separate disqualified tax amount and
aggregate basis difference carryover (if any) with respect to
Country F tax and Country G tax under paragraph (b)(2) of this
section. For purposes of both disqualified tax amount computations,
because CFC1 is the section 901(m) payor and foreign payor, the
foreign income tax amount paid or accrued by CFC1 with respect to
Country F tax and Country G tax, respectively, will be the entire
foreign income tax amount and CFC1's allocable foreign income will
be the entire foreign income.
(3) With respect to Country F tax, in U.S. taxable years 1
through 5, CFC1 has an aggregate basis difference of 20u each year
(10u cost recovery amount with respect to Asset A plus 10u cost
recovery amount with respect to Asset B). For U.S. taxable years 1
through 5, under paragraph (b)(2) of this section, the disqualified
tax amount each year is $5, the lesser of two amounts: the tentative
disqualified tax amount, in this case, $5 ($25 foreign income tax
amount x (20u aggregate basis difference/100u allocable foreign
income)), or the foreign income tax amount paid or accrued by CFC1,
in this case, $25. After U.S. taxable year 5, Asset B has no
unallocated basis difference with respect to Country F tax.
Accordingly, in U.S. taxable years 6 through 15, CFC1 has an
aggregate basis difference of 10u each year. Accordingly, for U.S.
taxable years 6 through 15, the disqualified tax amount each year is
$2.50, the lesser of two amounts: the tentative disqualified tax
amount, in this case, $2.50 ($25 foreign income tax amount x (10u
aggregate basis difference/100u allocable foreign income)), or the
foreign income tax amount paid or accrued by CFC1, in this case,
$25. After U.S. taxable year 15, Asset A has no unallocated basis
difference with respect to Country F tax and, therefore, CFC1 has no
disqualified tax amount with respect to Country F Tax.
(4) With respect to Country G tax, in U.S. taxable years 1
through 5, CFC1 has an aggregate basis difference of 40u each year
(60u cost recovery amount with respect to Asset C + (20u) cost
recovery amount with respect to Asset D). For U.S. taxable years 1
through 5, under paragraph (b)(2) of this
[[Page 16255]]
section, the disqualified tax amount each year is $12, the lesser of
two amounts: the tentative disqualified tax amount, in this case,
$12 ($120 foreign income tax amount x (40u aggregate basis
difference/400u allocable foreign income)), or the foreign income
tax amount paid or accrued by CFC1, in this case, $120. After U.S.
taxable year 5, Asset C and Asset D have no unallocated basis
difference with respect to Country G tax. Accordingly, in U.S.
taxable years 6 through 15, CFC1 has no disqualified tax amount with
respect to Country G Tax.
(iii) Example 3: FCCT--(A) Facts. In U.S. taxable year 1, USP
acquires all of the interests in DE1 in a transaction (Transaction)
that is treated as a stock acquisition for Country F tax purposes.
Immediately after the Transaction, DE1 owns assets (Pre-Transaction
Assets), all of which are used in a Country G branch and give rise
to income that is taken into account for Country F tax and Country G
tax purposes. After the Transaction, DE1 acquires additional assets
(Post-Transaction Assets), which are not used by the Country G
branch. Both Country F and Country G have a tax rate of 30%. Country
F imposes worldwide tax on its residents and provides a foreign tax
credit for taxes paid to other jurisdictions. In foreign taxable
year 3, 100u of income is attributable to DE1's Post-Transaction
Assets and 100u of income is attributable to DE1's Pre-Transaction
Assets. For Country G tax purposes, the foreign income is 100u and
foreign income tax amount is 30u (30% x 100u). For Country F tax
purposes, the foreign income is 200u and the pre-foreign tax credit
tax is 60u (30% x 200u). The 60u of Country F pre-foreign tax credit
tax is reduced by the 30u foreign income tax amount imposed for
Country G tax purposes. Thus, the foreign income tax amount for
Country F tax purposes is $30 (30u translated into dollars at the
exchange rate of $1 = 1u). Assume that for U.S. taxable year 3 USP
has 100u aggregate basis difference with respect to Country F tax
and 100u aggregate basis difference with respect to Country G tax.
USP does not dispose of DE1 or any assets of DE1 in U.S. taxable
year 3.
(B) Result. (1) Under Sec. 1.901(m)-2(b)(2), the Transaction is
a CAA. Under Sec. 1.901(m)-2(c)(1), the Pre-Transaction Assets are
RFAs with respect to both Country F tax and Country G tax, because
they are relevant in determining the foreign income of DE1 for
Country F tax and Country G tax purposes and were owned by DE1 when
the Transaction occurred. Under Sec. 1.901(m)-1(a)(37), USP is the
RFA owner (U.S.) with respect to the RFAs. Under Sec. 1.901(m)-
1(a)(28), DE1 is a foreign payor for Country F tax and Country G tax
purposes. Under Sec. 1.901(m)-1(a)(41), USP is the section 901(m)
payor with respect to foreign income tax amounts for which DE1 is
the foreign payor (see Sec. 1.901-2(f)(4)(ii)). Because the Country
G foreign income tax amount is claimed as a credit for purposes of
determining the Country F foreign income tax amount, the Country G
foreign income tax amount is an FCCT under Sec. 1.901(m)-1(a)(22).
(2) Under Sec. 1.901(m)-1(a)(1), for each U.S. taxable year,
USP will separately compute the aggregate basis difference with
respect to Country F tax and with respect to Country G tax and will
use those amounts to separately compute a disqualified tax amount
and aggregate basis difference carryover (if any) with respect to
each foreign income tax. Because DE1 is a disregarded entity owned
by USP during the entire U.S. taxable year 3, the foreign income tax
amount paid or accrued by DE1 is not subject to allocation.
Accordingly, for purposes of each of the disqualified tax amount
computations, the foreign income tax amount paid or accrued by USP
with respect to Country F tax and Country G tax, respectively, is
the entire foreign income tax amount paid or accrued by DE1, and,
under paragraph (b)(2)(iii)(A) of this section, USP's allocable
foreign income will be equal to DE1's entire foreign income.
(3) As stated in paragraph (b)(3)(iii)(A) of this section
(paragraph (A) of this Example 3), for U.S. taxable year 3 USP has
100u aggregate basis difference with respect to Country F tax and
100u aggregate basis difference with respect to Country G tax. With
respect to Country G tax, in U.S. taxable year 3, under paragraph
(b)(2) of this section, the disqualified tax amount is $30, the
lesser of the two amounts: the tentative disqualified tax amount, in
this case, $30 ($30 foreign income tax amount x (100u aggregate
basis difference/100u allocable foreign income)), or the foreign
income tax amount considered paid or accrued by USP, in this case,
$30.
(4) With respect to Country F tax, in U.S. taxable year 3, under
paragraph (b)(2) of this section, the disqualified tax amount is $0,
the lesser of two amounts: the tentative disqualified tax amount, in
this case $0 (($30 foreign income tax amount + $30 Country G FCCT) x
(100u aggregate basis difference/200u foreign income) = $30 reduced
by $30 Country G FCCT that is a disqualified tax amount of USP), or
the foreign income tax amount considered paid or accrued by USP, in
this case, $30.
(c) Aggregate basis difference carryover--(1) In general. If a
section 901(m) payor has an aggregate basis difference carryover for a
U.S. taxable year, as determined under this paragraph (c), the
aggregate basis difference carryover is taken into account in computing
the section 901(m) payor's aggregate basis difference for the next U.S.
taxable year. For successor rules that apply to an aggregate basis
difference carryover, see Sec. 1.901(m)-6(c).
(2) Amount of aggregate basis difference carryover. (i) If a
section 901(m) payor's disqualified tax amount is zero, all of the
section 901(m) payor's aggregate basis difference (positive or
negative) for the U.S. taxable year gives rise to an aggregate basis
difference carryover to the next U.S. taxable year.
(ii) If a section 901(m) payor's disqualified tax amount is not
zero, then aggregate basis difference carryover can arise in either or
both of the following two situations:
(A) If a section 901(m) payor's aggregate basis difference for the
U.S. taxable year exceeds its allocable foreign income, the excess
gives rise to an aggregate basis difference carryover.
(B) If the tentative disqualified tax amount exceeds the
disqualified tax amount, the excess tentative disqualified tax amount
is converted into aggregate basis difference carryover by multiplying
such excess by a fraction, the numerator of which is the allocable
foreign income, and the denominator of which is the sum of the foreign
income tax amount and the FCCTs that are paid or accrued by, or
considered paid or accrued by, the section 901(m) payor.
(3) Example. The following example illustrates the rules of
paragraph (c) of this section.
(i) Facts. (A) On July 1 of Year 1, CFC1 acquires all of the
interests of DE1 in a transaction (Transaction) that is treated as a
stock acquisition for Country F tax purposes. CFC1 and DE1 are
organized in Country F and are treated as corporations for Country F
tax purposes. CFC1 is an applicable foreign corporation, and DE1 is
a disregarded entity. CFC1 has a calendar year for U.S. income tax
purposes, and DE1 has a June 30 year-end for Country F tax purposes.
Country F imposes a single tax that is a foreign income tax. CFC1
and DE1 each have a functional currency of the u with respect to all
activities. Immediately after the Transaction, DE1 owns one asset,
Asset A, that gives rise to income that is taken into account for
Country F tax purposes. For the first U.S. taxable year (U.S.
taxable year 1) there is a cost recovery amount with respect to
Asset A of 9u, and for each subsequent U.S. taxable year until the
U.S. basis is fully recovered, there is a cost recovery amount with
respect to Asset A of 18u. There is no disposition of Asset A.
(ii) Result. (A) Under Sec. 1.901(m)-2(b)(2), the Transaction
is a CAA. Under Sec. 1.901(m)-2(c)(1), Asset A is an RFA with
respect to Country F tax because it is relevant in determining the
foreign income of DE1 for Country F tax purposes and was owned by
DE1 when the Transaction occurred. Under Sec. 1.901(m)-1(a)(37),
CFC1 is the RFA owner (U.S.) with respect to Asset A. Under Sec.
1.901(m)-1(a)(28), DE1 is a foreign payor for Country F tax
purposes. Under Sec. 1.901(m)-1(a)(41), CFC1 is the section 901(m)
payor with respect to foreign income tax amounts for which DE1 is
the foreign payor (see Sec. 1.901-2(f)(4)(ii)).
(B) Under Sec. 1.901(m)-1(a)(1), in determining the aggregate
basis difference for U.S. taxable year 1, CFC1 has one computation
with respect to Country F tax. Under Sec. 1.901(m)-1(a)(1),
aggregate basis difference with respect to Country F tax is equal to
the sum of allocated basis differences and allocated basis
difference adjustments with respect to all RFAs, which, in this
case, is only Asset A. Under Sec. 1.901(m)-1(a)(5), allocated basis
differences are the sum of cost recovery amounts and disposition
amounts. Because there is no
[[Page 16256]]
disposition of Asset A, the only allocated basis difference taken
into account in determining an aggregate basis difference are cost
recovery amounts with respect to Asset A. Under Sec. 1.901(m)-5(b),
any cost recovery amounts are assigned to a U.S taxable year of
CFC1, because CFC1 is the section 901(m) payor and RFA owner (U.S.)
with respect to Asset A. Under paragraph (b)(2) of this section, for
each U.S. taxable year, CFC1 will compute a disqualified tax amount
and aggregate basis difference carryover with respect to the
aggregate basis difference. Because DE1 is a disregarded entity
owned by CFC1, the foreign income tax amount paid or accrued by DE1
is not subject to allocation. Accordingly, for purposes of the
disqualified tax amount computation, the foreign income tax amount
paid or accrued by CFC1 with respect to Country F tax is the entire
foreign income tax amount paid or accrued by DE1, and under
paragraph (b)(2)(iii)(A) of this section, CFC1's allocable foreign
income will be equal to DE1's entire foreign income.
(C) In U.S. taxable year 1, CFC1 has an aggregate basis
difference of 9u (the 9u cost recovery amount with respect to Asset
A for U.S. taxable year 1). However, because the foreign taxable
year of DE1, the foreign payor, will not end between July 1 and
December 31, there will not be a foreign income tax amount for U.S.
taxable year 1. Because the foreign income tax amount considered
paid or accrued by CFC1 for U.S. taxable year 1 is zero, under
paragraph (b)(2)(iv) of this section, the disqualified tax amount
for U.S. taxable year 1 of CFC1 is also zero. Furthermore, because
the disqualified tax amount is zero, under paragraph (c)(2)(i) of
this section, CFC1 has an aggregate basis difference carryover equal
to 9u, the entire amount of the aggregate basis difference for U.S.
taxable year 1. Under paragraph (c)(1) of this section, the 9u
aggregate basis difference carryover is taken into account in
computing CFC1's aggregate basis difference for U.S. taxable year 2.
Accordingly, in U.S. taxable year 2, CFC1 has an aggregate basis
difference of 27u (18u cost recovery amount for U.S. taxable year 2,
plus 9u aggregate basis difference carryover from U.S. taxable year
1).
(d) Applicability dates. This section applies to CAAs occurring on
or after March 23, 2020. Taxpayers may, however, choose to apply this
section before the date this section is applicable provided that they
(along with any persons that are related (within the meaning of section
267(b) or 707(b)) to the taxpayer)--
(1) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, and Sec. Sec.
1.901(m)-4 through 1.901(m)-8 (excluding Sec. 1.901(m)-4(e)) to all
CAAs occurring on or after January 1, 2011, and consistently apply
Sec. 1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016, on any original or amended tax return for
each taxable year for which the application of the provisions listed in
this paragraph (d)(1) affects the tax liability and for which the
statute of limitations does not preclude assessment or the filing of a
claim for refund, as applicable
(2) File all tax returns described in paragraph (d)(1) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(3) Make appropriate adjustments to take into account deficiencies
that would have resulted from the consistent application under
paragraph (d)(1) of this section for taxable years that are not open
for assessment.
Sec. 1.901(m)-3T [Removed]
0
Par. 8. Section 1.901(m)-3T is removed.
0
Par. 9. Section 1.901(m)-4 is added to read as follows:
Sec. 1.901(m)-4 Determination of basis difference.
(a) In general. This section provides rules for determining for
each RFA the basis difference that arises as a result of a CAA. A basis
difference is computed separately with respect to each foreign income
tax for which an asset subject to a CAA is an RFA. Paragraph (b) of
this section provides the general rule for determining basis difference
that references only U.S. basis in the RFA. Paragraph (c) of this
section provides for an election to determine basis difference by
reference to foreign basis and sets forth the procedures for making the
election. Paragraph (d) of this section provides special rules for
determining basis difference in the case of a section 743(b) CAA.
Paragraph (e) of this section provides a special rule for determining
basis difference in an RFA with respect to a CAA to which paragraphs
(b) through (d) of this section do not apply. Paragraph (f) of this
section provides examples illustrating the rules of this section, and
paragraph (g) of this section provides applicability dates.
(b) General rule. Except as otherwise provided in paragraphs (c),
(d), and (e) of this section, basis difference is the U.S. basis in the
RFA immediately after the CAA, less the U.S. basis in the RFA
immediately before the CAA. Basis difference is an attribute that
attaches to an RFA.
(c) Foreign basis election. (1) An election (foreign basis
election) may be made to apply section 901(m)(3)(C)(i)(II) by reference
to the foreign basis immediately after the CAA instead of the U.S.
basis immediately before the CAA. Accordingly, if a foreign basis
election is made, basis difference is the U.S. basis in the RFA
immediately after the CAA, less the foreign basis in the RFA
immediately after the CAA. For this purpose, the foreign basis
immediately after the CAA takes into account any adjustment to that
foreign basis resulting from the CAA for purposes of the foreign income
tax.
(2) Except as otherwise provided in this paragraph (c), a foreign
basis election is made by the RFA owner (U.S.). If, however, the RFA
owner (U.S.) is a partnership, each partner in the partnership (and not
the partnership) may independently make a foreign basis election. In
the case of one or more tiered partnerships, the foreign basis election
is made at the level at which a partner is not also a partnership.
(3) The foreign basis election may be made separately for each CAA,
and with respect to each foreign income tax and each foreign payor. For
purposes of making the foreign basis election, all CAAs that are part
of an aggregated CAA transaction are treated as a single CAA.
Furthermore, for purposes of making the foreign basis election, if
foreign law imposes tax on the combined income (within the meaning of
Sec. 1.901-2(f)(3)(ii)) of two or more foreign payors, all foreign
payors whose items of income, deduction, gain, or loss for U.S. income
tax purposes are included in the U.S. taxable income or earnings and
profits of a single section 901(m) payor are treated as a single
foreign payor.
(4) A foreign basis election is made by using foreign basis to
determine basis difference for purposes of computing a disqualified tax
amount and an aggregate basis difference carryover for the U.S. taxable
year, as provided under Sec. 1.901(m)-3. A separate statement or form
evidencing the foreign basis election need not be filed. Except as
provided in paragraphs (c)(5) and (6) of this section, in order for a
foreign basis election to be effective, the election must be reflected
on a timely filed original federal income tax return (taking into
account extensions) for the first U.S. taxable year that the foreign
basis election is relevant to the computation of any amounts reported
on such return, including on any required schedules.
(5) If the RFA owner (U.S.) is a partnership, a foreign basis
election reflected on a partner's timely filed amended federal income
tax return is also effective if all of the following conditions are
satisfied:
(i) The partner's timely filed original federal income tax return
(taking into account extensions) for the first U.S. taxable year of the
partner in which a foreign basis election is relevant to the
computation of any amounts reported
[[Page 16257]]
on such return, including on any required schedules, does not reflect
the application of section 901(m);
(ii) The information provided by the partnership to the partner for
purposes of applying section 901(m) and any information required to be
reported by the partnership is based solely on computations that use
foreign basis to determine basis difference; and
(iii) Before the due date of the original federal income tax return
described in paragraph (c)(5)(i) of this section, the partner delegated
the authority to the partnership to choose whether to provide the
partner with information to apply section 901(m) using foreign basis,
either pursuant to a written partnership agreement (within the meaning
of Sec. 1.704-1(b)(2)(ii)(h)) or written notice provided by the
partner to the partnership.
(6) If, pursuant to paragraph (g)(3) of this section, a taxpayer
chooses to have this section apply to CAAs occurring on or after
January 1, 2011, a foreign basis election will be effective if the
election is reflected on a timely filed amended federal income tax
return (or tax returns, as applicable) filed no later than March 23,
2021.
(7) The foreign basis election is irrevocable. Relief under Sec.
301.9100-1 is not available for the foreign basis election.
(d) Determination of basis difference in a section 743(b) CAA--(1)
In general. Except as provided in paragraphs (d)(2) and (e) of this
section, if there is a section 743(b) CAA, basis difference is the
resulting basis adjustment under section 743(b) that is allocated to
the RFA under section 755.
(2) Foreign basis election. If a foreign basis election is made
with respect to a section 743(b) CAA, then, for purposes of paragraph
(d)(1) of this section, the section 743(b) adjustment is determined by
reference to the foreign basis of the RFA, determined immediately after
the CAA.
(e) Determination of basis difference in an RFA with respect to a
CAA with respect to which paragraphs (b), (c), and (d) of this section
do not apply. For CAAs occurring on or after January 1, 2011, and
before July 21, 2014, other than CAAs occurring before July 21, 2014,
resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that is filed on or after July 29, 2014, and
that is effective on or before July 21, 2014, basis difference in an
RFA with respect to the CAA is the amount of any basis difference
(within the meaning of section 901(m)(3)(C)(i)) that had not been taken
into account under section 901(m)(3)(B) either as of July 21, 2014, or,
in the case of an entity classification election made under Sec.
301.7701-3 of this chapter that is filed on or after July 29, 2014, and
that is effective on or before July 21, 2014, before the transactions
that are deemed to occur under Sec. 301.7701-3(g) as a result of the
change in classification.
(f) Examples. The following examples illustrate the rules of this
section:
(1) Example 1: Scope of basis choice; identifying separate CAAs,
RFA owners (U.S.), and foreign payors in an aggregated CAA
transaction--(i) Facts. CFC1 wholly owns CFC2, both of which are
applicable foreign corporations, organized in Country F, and treated
as corporations for Country F tax purposes. CFC1 also wholly owns
DE1, and DE1 wholly owns DE2. DE1 and DE2 are entities organized in
Country F treated as corporations for Country F tax purposes and as
disregarded entities for U.S. income tax purposes. Country F imposes
a single tax that is a foreign income tax. All of the stock of CFC1
is acquired in a qualified stock purchase (within the meaning of
section 338(d)(3)) to which section 338(a) applies for both CFC1 and
CFC2. For Country F tax purposes, the transaction is treated as an
acquisition of the stock of CFC1.
(ii) Result. (A) The acquisition of CFC1 gives rise to four
separate CAAs described in Sec. 1.901(m)-2. Under Sec. 1.901(m)-
2(b)(1), the acquisition of the stock of CFC1 and the deemed
acquisition of the stock of CFC2 under section 338(h)(3)(B) are each
a section 338 CAA. Furthermore, because the deemed acquisition of
the assets of each of DE1 and DE2 for U.S. income tax purposes is
disregarded for Country F tax purposes, the deemed acquisitions are
CAAs under Sec. 1.901(m)-2(b)(2). Because the four CAAs occurred
pursuant to a plan, under Sec. 1.901(m)-1(a)(3), all of the CAAs
are part of an aggregated CAA transaction. Under Sec. 1.901(m)-
1(a)(37), CFC1 is the RFA owner (U.S.) with respect to its assets
and the assets of DE1 and DE2 that are RFAs. CFC2 is the RFA owner
(U.S.) with respect to its assets that are RFAs. Under Sec.
1.901(m)-1(a)(28), CFC1, CFC2, DE1, and DE2 are each a foreign payor
for Country F tax purposes.
(B) Under paragraph (c) of this section, a foreign basis
election may be made by the RFA owner (U.S.). The election is made
separately with respect to each CAA (for this purpose, treating all
CAAs that are part of an aggregated CAA transaction as a single CAA)
and with respect to each foreign income tax and foreign payor. Thus,
in this case, CFC1 can make a separate foreign basis election for
one or more of the following three groups of RFAs: RFAs that are
relevant in determining foreign income of CFC1; RFAs that are
relevant in determining foreign income of DE1; and RFAs that are
relevant in determining foreign income of DE2. Furthermore, CFC2 can
make a foreign basis election for all of its RFAs that are relevant
in determining its foreign income.
(2) Example 2: Scope of basis choice; RFA owner (U.S.) is a
partnership--(i) Facts. USPS is a domestic partnership for which a
section 754 election is in effect. USPS owns two assets, the stock
of DE1 and DE2. DE1 is an entity organized in Country X and treated
as a corporation for Country X tax purposes. DE2 is an entity
organized in Country Y and treated as a corporation for Country Y
tax purposes. DE1 and DE2 are disregarded entities. Country X and
Country Y each impose a single tax that is a foreign income tax. US1
and US2, unrelated domestic corporations, and FP, a foreign person
unrelated to US1 and US2, acquire partnership interests in USPS from
existing partners of USPS pursuant to the same plan.
(ii) Result. Under Sec. 1.901(m)-2(b)(3), the acquisitions of
the partnership interests in USPS by US1, US2, and FP each give rise
to separate section 743(b) CAAs, but under Sec. 1.901(m)-1(a)(3),
they are treated as an aggregated CAA transaction because they occur
as part of a plan. Under Sec. 1.901(m)-1(a)(37), USPS is the RFA
owner (U.S.) with respect to the assets of DE1 and DE2 that are
RFAs. Under Sec. 1.901(m)-1(a)(28), DE1 is a foreign payor for
Country X tax purposes, and DE2 is a foreign payor for Country Y tax
purposes. Because the RFA owner (U.S.) is a partnership, paragraph
(c)(2) of this section provides that US1, US2, and FP (the relevant
partners in USPS) separately choose whether to make a foreign basis
election for purposes of determining basis difference. Furthermore,
under paragraph (c)(3) of this section, the choice to make the
election is made separately by each partner with respect to each
foreign payor. Thus, in this case, each partner may make separate
elections for the RFAs that are relevant in determining foreign
income of DE1 for Country X tax purposes and the RFAs that are
relevant in determining foreign income of DE2 for Country Y tax
purposes.
(g) Applicability dates. (1) Except as provided in paragraph (g)(2)
of this section, this section applies to CAAs occurring on or after
March 23, 2020.
(2) Paragraphs (a), (b), and (d)(1) of this section apply to CAAs
occurring on or after July 21, 2014, and to CAAs occurring before that
date resulting from an entity classification election made under Sec.
301.7701-3 that is filed on or after July 29, 2014, and that is
effective on or before July 21, 2014. Paragraph (e) of this section
applies to CAAs occurring on or after January 1, 2011, and before July
21, 2014, other than CAAs occurring before July 21, 2014, resulting
from an entity classification election made under Sec. 301.7701-3 of
this chapter that is filed on or after July 29, 2014, and that is
effective on or before July 21, 2014. Taxpayers may, however,
consistently apply paragraph (d)(1) of this section to all section
743(b) CAAs occurring on or after January 1, 2011. For this purpose,
persons that are related (within the meaning of section 267(b) or
707(b)) will be treated as a single taxpayer.
(3) Taxpayers may, however, choose to apply provisions in this
section before the date such provisions are applicable pursuant to
paragraph (g)(1)
[[Page 16258]]
or (2) of this section, provided that they (along with any persons that
are related (within the meaning of section 267(b) or 707(b)) to the
taxpayer)--
(i) Consistently apply this section (excluding paragraph (e) of
this section), Sec. 1.704-1(b)(4)(viii)(c)(4)(v) through (vii), Sec.
1.901(m)-1, Sec. 1.901(m)-3, and Sec. Sec. 1.901(m)-5 through
1.901(m)-8 to all CAAs occurring on or after January 1, 2011, and
consistently apply Sec. 1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to
all CAAs occurring on or after December 7, 2016, on any original or
amended tax return for each taxable year for which the application of
the provisions listed in this paragraph (g)(3)(i) affects the tax
liability and for which the statute of limitations does not preclude
assessment or the filing of a claim for refund, as applicable;
(ii) File all tax returns described in paragraph (g)(3)(i) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(iii) Make appropriate adjustments to take into account
deficiencies that would have resulted from the consistent application
under paragraph (g)(3)(i) of this section for taxable years that are
not open for assessment.
Sec. 1.901(m)-4T [Removed]
0
Par. 10. Section 1.901(m)-4T is removed.
0
Par. 11. Section 1.901(m)-5 is added to read as follows:
Sec. 1.901(m)-5 Basis difference taken into account.
(a) In general. This section provides rules for determining the
amount of basis difference with respect to an RFA that is taken into
account in a U.S. taxable year for purposes of determining the
disqualified portion of a foreign income tax amount. Paragraph (b) of
this section provides rules for determining a cost recovery amount and
assigning that amount to a U.S. taxable year of a single section 901(m)
payor when the RFA owner (U.S.) is the section 901(m) payor. Paragraph
(c) of this section provides rules for determining a disposition amount
and assigning that amount to a U.S. taxable year of a single section
901(m) payor when the RFA owner (U.S.) is the section 901(m) payor.
Paragraph (d) of this section provides rules for allocating cost
recovery amounts and disposition amounts when the RFA owner (U.S.) is a
fiscally transparent entity for U.S. income tax purposes. Paragraph (e)
of this section provides special rules for allocating cost recovery
amounts and disposition amounts with respect to certain section 743(b)
CAAs. Paragraph (f) of this section provides special rules for
allocating certain disposition amounts when a foreign payor is
transferred in a mid-year transaction. Paragraph (g) of this section
provides special rules for allocating both cost recovery amounts and
disposition amounts in certain cases in which the RFA owner (U.S.)
either is a reverse hybrid or a fiscally transparent entity for both
U.S. and foreign income tax purposes that is directly or indirectly
owned by a reverse hybrid. Paragraph (h) of this section provides
examples illustrating the application of this section. Paragraph (i) of
this section provides the applicability dates.
(b) Basis difference taken into account under applicable cost
recovery method--(1) In general. When the RFA owner (U.S.) is a section
901(m) payor, all of a cost recovery amount is attributed to the
section 901(m) payor and assigned to the U.S. taxable year of the
section 901(m) payor in which the corresponding U.S. basis deduction is
taken into account under the applicable cost recovery method. This is
the case regardless of whether the deduction is deferred or disallowed
for U.S. income tax purposes. If instead the RFA owner (U.S.) is a
fiscally transparent entity for U.S. income tax purposes, a cost
recovery amount is allocated to one or more section 901(m) payors under
paragraph (d) of this section, except as provided in paragraphs (e) and
(g) of this section. If a cost recovery amount arises from an RFA with
respect to a section 743(b) CAA, in certain cases the cost recovery
amount is allocated to a section 901(m) payor under paragraph (e) of
this section. In certain cases in which the RFA owner (U.S.) either is
a reverse hybrid or a fiscally transparent entity for both U.S. and
foreign income tax purposes that is directly or indirectly owned by a
reverse hybrid, a cost recovery amount is allocated to one or more
section 901(m) payors under paragraph (g) of this section.
(2) Determining a cost recovery amount--(i) General rule. A cost
recovery amount for an RFA is determined by applying the applicable
cost recovery method to the basis difference rather than to the U.S.
basis.
(ii) U.S. basis subject to multiple cost recovery methods. If the
entire U.S. basis is not subject to the same cost recovery method, the
applicable cost recovery method for determining the cost recovery
amount is the cost recovery method that applies to the portion of the
U.S. basis that corresponds to the basis difference.
(3) Applicable cost recovery method. For purposes of section
901(m), an applicable cost recovery method includes any method for
recovering the cost of property over time for U.S. income tax purposes
(each application of a method giving rise to a U.S. basis deduction).
Such methods include depreciation, amortization, or depletion, as well
as a method that allows the cost (or a portion of the cost) of property
to be expensed in the year of acquisition or in the placed-in-service
year, such as under section 179. Applicable cost recovery methods do
not include any provision allowing the U.S. basis to be recovered upon
a disposition of an RFA.
(c) Basis difference taken into account as a result of a
disposition--(1) In general. Except as provided in paragraph (f) of
this section, when the RFA owner (U.S.) is a section 901(m) payor, all
of a disposition amount is attributed to the section 901(m) payor and
assigned to the U.S. taxable year of the section 901(m) payor in which
the disposition occurs. If instead the RFA owner (U.S.) is a fiscally
transparent entity for U.S. income tax purposes, except as provided in
paragraphs (e), (f), and (g) of this section, a disposition amount is
allocated to one or more section 901(m) payors under paragraph (d) of
this section. If a disposition amount arises from an RFA with respect
to a section 743(b) CAA, in certain cases the disposition amount is
allocated to a section 901(m) payor under paragraph (e) of this
section. If there is a disposition of an RFA in a foreign taxable year
of a foreign payor during which there is a mid-year transaction, in
certain cases a disposition amount is allocated under paragraph (f) of
this section. In certain cases in which the RFA owner (U.S.) either is
a reverse hybrid or a fiscally transparent entity for both U.S. and
foreign income tax purposes that is directly or indirectly owned by a
reverse hybrid, a disposition amount is allocated to one or more
section 901(m) payors under paragraph (g) of this section.
(2) Determining a disposition amount--(i) Disposition is fully
taxable for purposes of both U.S. income tax and the foreign income
tax. If a disposition of an RFA is fully taxable (that is, results in
all gain or loss, if any, being recognized with respect to the RFA) for
purposes of both U.S. income tax and the foreign income tax, the
disposition amount is equal to the unallocated basis difference with
respect to the RFA.
(ii) Disposition is not fully taxable for purposes of U.S. income
tax or the foreign income tax (or both). If the disposition of an RFA
is not fully taxable for purposes of both U.S. income tax and the
foreign income tax, the disposition amount is determined under
[[Page 16259]]
this paragraph (c)(2)(ii). See Sec. 1.901(m)-6 for rules regarding the
continued application of section 901(m) if the RFA has any unallocated
basis difference after determining the disposition amount under
paragraph (c)(2)(ii)(A) or (B) of this section, as applicable.
(A) Positive basis difference. If the disposition of an RFA is not
fully taxable for purposes of both U.S. income tax and the foreign
income tax, and the RFA has a positive basis difference, the
disposition amount equals the lesser of:
(1) Any foreign disposition gain plus any U.S. disposition loss
(for this purpose, expressed as a positive amount), or
(2) Unallocated basis difference with respect to the RFA.
(B) Negative basis difference. If the disposition of an RFA is not
fully taxable for purposes of both U.S. income tax and the foreign
income tax, and the RFA has a negative basis difference, the
disposition amount equals the greater of:
(1) Any U.S. disposition gain (for this purpose, expressed as a
negative amount) plus any foreign disposition loss, or
(2) Unallocated basis difference with respect to the RFA.
(iii) Disposition of an RFA after a section 743(b) CAA. If an RFA
was subject to a section 743(b) CAA and subsequently there is a
disposition of the RFA, then, for purposes of determining the
disposition amount, foreign disposition gain or foreign disposition
loss are specially defined to mean the amount of gain or loss
recognized for purposes of the foreign income tax on the disposition of
the RFA that is allocable to the partnership interest that was
transferred in the section 743(b) CAA. In addition, U.S. disposition
gain or U.S. disposition loss are specially defined to mean the amount
of gain or loss recognized for U.S. income tax purposes on the
disposition of the RFA that is allocable to the partnership interest
that was transferred in the section 743(b) CAA, taking into account the
basis adjustment under section 743(b) that was allocated to the RFA
under section 755.
(d) General rules for allocating and assigning a cost recovery
amount or a disposition amount when the RFA owner (U.S.) is a fiscally
transparent entity--(1) In general. Except as provided in paragraphs
(e), (f), and (g) of this section, this paragraph (d) provides rules
for allocating a cost recovery amount or a disposition amount when the
RFA owner (U.S.) is a fiscally transparent entity for U.S. income tax
purposes in which a section 901(m) payor directly or indirectly owns an
interest, as well as for assigning the allocated amount to a U.S.
taxable year of the section 901(m) payor. For purposes of this
paragraph (d), unless otherwise indicated, a reference to direct or
indirect ownership in an entity means for U.S. income tax purposes. For
purposes of this paragraph (d), a person indirectly owns an interest in
an entity for U.S. income tax purposes if the person owns the interest
through one or more fiscally transparent entities for U.S. income tax
purposes, and at least one of the fiscally transparent entities is not
a disregarded entity. For purposes of this paragraph (d), a person
indirectly owns an interest in an entity for foreign income tax
purposes if the person owns the interest through one or more fiscally
transparent entities for foreign income tax purposes. If the RFA owner
(U.S.) is a lower-tier fiscally transparent entity for U.S. income tax
purposes in which the section 901(m) payor indirectly owns an interest,
the rules of this section apply in a manner consistent with the
application of these rules when the section 901(m) payor directly owns
an interest in the RFA owner (U.S.).
(2) Allocation of a cost recovery amount. A cost recovery amount is
allocated to a section 901(m) payor that directly or indirectly owns an
interest in the RFA owner (U.S.) to the extent the U.S. basis deduction
that corresponds to the cost recovery amount is (or will be) included
in the section 901(m) payor's distributive share of the income of the
RFA owner (U.S.) for U.S. income tax purposes.
(3) Allocation of a disposition amount attributable to foreign
disposition gain or foreign disposition loss--(i) In general. Except as
provided in paragraph (f) of this section, a disposition amount
attributable to foreign disposition gain or foreign disposition loss
(as determined under paragraph (d)(5) of this section) is allocated
under paragraph (d)(3)(ii) or (d)(3)(iii) of this section to a section
901(m) payor that directly or indirectly owns an interest in the RFA
owner (U.S.).
(ii) First allocation rule. This paragraph (d)(3)(ii) applies when
a section 901(m) payor, or a disregarded entity directly owned by a
section 901(m) payor, is the foreign payor whose foreign income
includes a distributive share of the foreign income of the RFA owner
(foreign) and, therefore, all of the foreign income tax amount of the
foreign payor is paid or accrued by, or considered paid by, the section
901(m) payor. Thus, this paragraph (d)(3)(ii) applies when the RFA
owner (U.S.) is a fiscally transparent entity for both U.S. and foreign
income tax purposes and a section 901(m) payor either directly owns an
interest in the RFA owner (U.S.) or directly owns an interest in
another fiscally transparent entity for U.S. and foreign income tax
purposes, which, in turn, directly or indirectly owns an interest in
the RFA owner (U.S.) for both U.S. and foreign income tax purposes. In
these cases, the section 901(m) payor is allocated the portion of a
disposition amount that is equal to the product of the disposition
amount attributable to foreign disposition gain or foreign disposition
loss, as applicable, and a fraction, the numerator of which is the
portion of the foreign disposition gain or foreign disposition loss
recognized by the RFA owner (foreign) for foreign income tax purposes
that is (or will be) included in the foreign payor's distributive share
of the foreign income of the RFA owner (foreign), and the denominator
of which is the foreign disposition gain or foreign disposition loss.
(iii) Second allocation rule. This paragraph (d)(3)(iii) applies
when neither a section 901(m) payor nor a disregarded entity directly
owned by a section 901(m) payor is the foreign payor with respect to
the foreign income of the RFA owner (foreign). Instead, a section
901(m) payor directly or indirectly owns an interest in the foreign
payor, which is a fiscally transparent entity for U.S. income tax
purposes (other than a disregarded entity directly owned by the section
901(m) payor), and, therefore, the section 901(m) payor is considered
to pay or accrue only its allocated portion of the foreign income tax
amount of the foreign payor. This will be the case when the foreign
payor is either the RFA owner (U.S.), another fiscally transparent
entity for U.S. income tax purposes (other than a disregarded entity
directly owned by a section 901(m) payor) that directly or indirectly
owns an interest in the RFA owner (U.S.) for both U.S. and foreign
income tax purposes, or a disregarded entity directly owned by the RFA
owner (U.S.). In these cases, the section 901(m) payor is allocated the
portion of a disposition amount that is equal to the product of the
disposition amount attributable to foreign disposition gain or foreign
disposition loss, as applicable, and a fraction, the numerator of which
is the portion of the foreign disposition gain or foreign disposition
loss that is included in the allocable foreign income of the section
901(m) payor, and the denominator of which is the foreign disposition
gain or foreign disposition loss. If allocable
[[Page 16260]]
foreign income is not otherwise required to be determined because there
is no foreign income tax amount, the numerator is the portion of the
foreign disposition gain or foreign disposition loss that would be
included in the allocable foreign income of the section 901(m) payor if
there were a foreign income tax amount.
(4) Allocation of a disposition amount attributable to U.S.
disposition gain or U.S. disposition loss. A section 901(m) payor that
directly or indirectly owns an interest in the RFA owner (U.S.) is
allocated the portion of a disposition amount that is equal to the
product of the disposition amount attributable to U.S. disposition gain
or U.S. disposition loss (as determined under paragraph (d)(5) of this
section), as applicable, and a fraction, the numerator of which is the
portion of the U.S. disposition gain or U.S. disposition loss that is
(or will be) included in the section 901(m) payor's distributive share
of income of the RFA owner (U.S.) for U.S. income tax purposes, and the
denominator of which is the U.S. disposition gain or U.S. disposition
loss.
(5) Determining the extent to which a disposition amount is
attributable to foreign or U.S. disposition gain or loss--(i) RFA with
a positive basis difference. When there is a disposition of an RFA with
a positive basis difference and the disposition results in either a
foreign disposition gain or a U.S. disposition loss, but not both, the
entire disposition amount is attributable to foreign disposition gain
or U.S. disposition loss, as applicable, even if the disposition amount
exceeds the foreign disposition gain or the absolute value of the U.S.
disposition loss. If the disposition results in both a foreign
disposition gain and a U.S. disposition loss, the disposition amount is
attributable first to foreign disposition gain to the extent thereof,
and the excess disposition amount, if any, is attributable to the U.S.
disposition loss, even if the excess disposition amount exceeds the
absolute value of the U.S. disposition loss.
(ii) RFA with a negative basis difference. When there is a
disposition of an RFA with a negative basis difference and the
disposition results in either a foreign disposition loss or a U.S.
disposition gain, but not both, the entire disposition amount is
attributable to foreign disposition loss or U.S. disposition gain, as
applicable, even if the absolute value of the disposition amount
exceeds the absolute value of the foreign disposition loss or the U.S.
disposition gain. If the disposition results in both a foreign
disposition loss and a U.S. disposition gain, the disposition amount is
attributable first to foreign disposition loss to the extent thereof,
and the excess disposition amount, if any, is attributable to the U.S.
disposition gain, even if the absolute value of the excess disposition
amount exceeds the U.S. disposition gain.
(6) U.S. taxable year of a section 901(m) payor to which an
allocated cost recovery amount or disposition amount is assigned. A
cost recovery amount or a disposition amount allocated to a section
901(m) payor under paragraph (d) of this section is assigned to the
U.S. taxable year of the section 901(m) payor that includes the last
day of the U.S. taxable year of the RFA owner (U.S.) in which, in the
case of a cost recovery amount, the RFA owner (U.S.) takes into account
the corresponding U.S. basis deduction (without regard to whether the
deduction is deferred or disallowed for U.S. income tax purposes), or
in the case of a disposition amount, the disposition occurs.
(e) Special rules for certain section 743(b) CAAs. If a section
901(m) payor acquires a partnership interest in a section 743(b) CAA,
including a section 743(b) CAA with respect to a lower-tier partnership
that results from a direct acquisition by the section 901(m) payor of
an interest in an upper-tier partnership, and subsequently there is a
cost recovery amount or a disposition amount that arises from an RFA
with respect to that section 743(b) CAA, all of the cost recovery
amount or the disposition amount is allocated to that section 901(m)
payor. The U.S. taxable year of the section 901(m) payor to which the
cost recovery amount or the disposition amount is assigned is the U.S.
taxable year in which, in the case of a cost recovery amount, the
section 901(m) payor takes into account the corresponding U.S. basis
deduction (without regard to whether the deduction is deferred or
disallowed for U.S. income tax purposes), or in the case of a
disposition amount, the disposition occurs.
(f) Mid-year transactions--(1) In general. When a disposition of an
RFA occurs in the same foreign taxable year that a foreign payor is
involved in a mid-year transaction, the portion of the disposition
amount that is attributable to foreign disposition gain or foreign
disposition loss (as determined under paragraph (d)(5) of this section)
is allocated to a section 901(m) payor and assigned to a U.S. taxable
year of the section 901(m) payor under this paragraph (f). To the
extent the disposition amount is attributable to U.S. disposition gain
or U.S. disposition loss (as determined under paragraph (d)(5) of this
section), see paragraph (c)(1) or (d) of this section, as applicable.
(2) Allocation rule. To the extent a disposition amount is
attributable to foreign disposition gain or foreign disposition loss, a
section 901(m) payor is allocated the portion of the disposition amount
equal to the product of the disposition amount attributable to foreign
disposition gain or foreign disposition loss, as applicable, and a
fraction, the numerator of which is the portion of the foreign
disposition gain or foreign disposition loss that is included in the
allocable foreign income of the section 901(m) payor, and the
denominator of which is the foreign disposition gain or foreign
disposition loss. If allocable foreign income is not otherwise required
to be determined because there is no foreign income tax amount, the
numerator is the portion of the foreign disposition gain or foreign
disposition loss that would be included in the allocable foreign income
of the section 901(m) payor if there were a foreign income tax amount.
(3) Assignment to a U.S. taxable year of a section 901(m) payor. A
disposition amount allocated to a section 901(m) payor under paragraph
(f)(2) of this section is assigned to the U.S. taxable year of the
section 901(m) payor in which the foreign disposition gain or foreign
disposition loss (or portion thereof) is included in allocable foreign
income of the section 901(m) payor or, if allocable foreign income is
not otherwise required to be determined because there is no foreign
income tax amount, the U.S. taxable year in which the foreign
disposition gain or foreign disposition loss would be included in
allocable foreign income if there were a foreign income tax amount.
(g) Reverse hybrids--(1) In general. This paragraph (g) provides
rules for allocating a cost recovery amount or a disposition amount
when the RFA owner (U.S.) is either a reverse hybrid or a fiscally
transparent entity for U.S. and foreign income tax purposes that is
directly or indirectly owned by a reverse hybrid for U.S. and foreign
income tax purposes, and in each case, the foreign payor whose foreign
income includes a distributive share of the foreign income of the RFA
owner (foreign) directly or indirectly owns an interest in the reverse
hybrid for foreign income tax purposes. Application of the allocation
rules under paragraphs (g)(2) and (g)(3) of this section depend upon
whether a section 901(m) payor or a disregarded entity directly owned
by a section 901(m) payor is the foreign payor, or, instead, a section
901(m) payor directly or indirectly owns an interest in the foreign
payor. For purposes of this
[[Page 16261]]
paragraph (g), unless otherwise indicated, a reference to direct or
indirect ownership in an entity means for U.S. income tax purposes. For
purposes of this paragraph (g), a person indirectly owns an interest in
an entity for U.S. income tax purposes if the person owns the interest
through one or more fiscally transparent entities for U.S. income tax
purposes, and at least one of the fiscally transparent entities is not
a disregarded entity. For purposes of this paragraph (g), a person
indirectly owns an interest in an entity for foreign income tax
purposes if the person owns the interest through one or more fiscally
transparent entities for foreign income tax purposes. If the RFA owner
(U.S.) is a lower-tier fiscally transparent entity for U.S. income tax
purposes in which the reverse hybrid indirectly owns an interest, the
rules of this section apply in a manner consistent with the application
of these rules when the reverse hybrid directly owns an interest in the
RFA owner (U.S.).
(2) First allocation rule--(i) Allocation to a section 901(m)
payor. This paragraph (g)(2)(i) applies when a section 901(m) payor, or
a disregarded entity directly owned by a section 901(m) payor, is the
foreign payor whose foreign income includes a distributive share of the
foreign income of the RFA owner (foreign), and, therefore, all of the
foreign income tax amount of the foreign payor is paid or accrued by,
or considered paid or accrued by, the section 901(m) payor. Thus, this
paragraph (g)(2)(i) applies when a section 901(m) payor either directly
owns an interest in the reverse hybrid or directly owns an interest in
a fiscally transparent entity for U.S. and foreign income tax purposes,
which, in turn, directly or indirectly owns an interest in the reverse
hybrid for both U.S. and foreign income tax purposes. In these cases,
the section 901(m) payor is allocated the portions of cost recovery
amounts or disposition amounts (or both) with respect to RFAs that are
equal to the product of the sum of the cost recovery amounts and the
disposition amounts and a fraction, the numerator of which is the
portion of the foreign income of the RFA owner (foreign) that is
included in the foreign income of the foreign payor, and the
denominator of which is the foreign income of the RFA owner (foreign).
(ii) Assignment to a U.S. taxable year of a section 901(m) payor.
This paragraph (g)(2)(ii) applies when a cost recovery amount or a
disposition amount, or portion thereof, is allocated to a section
901(m) payor under paragraph (g)(2)(i) of this section. If the reverse
hybrid is the RFA owner (U.S.), a cost recovery amount or disposition
amount, or portion thereof, is assigned to the U.S. taxable year of the
section 901(m) payor that includes the last day of the U.S. taxable
year of the reverse hybrid in which, in the case of a cost recovery
amount, the reverse hybrid takes into account the corresponding U.S.
basis deduction (without regard to whether the deduction is deferred or
disallowed for U.S. income tax purposes), or, in the case of a
disposition amount, the disposition occurs. If the reverse hybrid is
not the RFA owner (U.S.) but instead the reverse hybrid directly or
indirectly owns an interest in the RFA owner (U.S.) for both U.S. and
foreign income tax purposes, a cost recovery amount or disposition
amount, or portion thereof, is assigned to the U.S. taxable year of the
section 901(m) payor that includes the last day of the U.S. taxable
year of the reverse hybrid, which, in turn, includes the last day of
the U.S. taxable year of the RFA owner (U.S.) in which, in the case of
a cost recovery amount, the RFA owner (U.S.) takes into account the
corresponding U.S. basis deduction (without regard to whether the
deduction is deferred or disallowed for U.S. income tax purposes), or,
in the case of a disposition amount, the disposition occurs.
(3) Second allocation rule--(i) Allocation to a section 901(m)
payor. This paragraph (g)(3)(i) applies when neither a section 901(m)
payor nor a disregarded entity directly owned by a section 901(m) payor
is the foreign payor with respect to the foreign income of the RFA
owner (foreign). Instead, a section 901(m) payor directly or indirectly
owns an interest in the foreign payor, which is a fiscally transparent
entity for U.S. income tax purposes (other than a disregarded entity
directly owned by the section 901(m) payor), and, therefore, the
section 901(m) payor is considered to pay or accrue only its allocated
portion of the foreign income tax amount of the foreign payor. In these
cases, the section 901(m) payor is allocated the portions of cost
recovery amounts or disposition amounts (or both) with respect to RFAs
that are equal to the product of the sum of the cost recovery amounts
and the disposition amounts and a fraction, the numerator of which is
the portion of the foreign income of the RFA owner (foreign) that is
included in the foreign income of the foreign payor and included in the
allocable foreign income of the section 901(m) payor, and the
denominator of which is the foreign income of the RFA owner (foreign).
If allocable foreign income is not otherwise required to be determined
for a section 901(m) payor because there is no foreign income tax
amount, the numerator is the foreign income of the RFA owner (foreign)
that is included in the foreign income of the foreign payor and that
would be included in allocable foreign income of the section 901(m)
payor if there were a foreign income tax amount.
(ii) Assignment to a U.S. taxable year of a section 901(m) payor. A
cost recovery amount or a disposition amount, or portion thereof, that
is allocated to a section 901(m) payor under paragraph (g)(3)(i) of
this section is assigned to the U.S. taxable year of the section 901(m)
payor in which the foreign income of the RFA owner (foreign) described
in paragraph (g)(3)(i) of this section is included in the allocable
foreign income of the section 901(m) payor, or, if there is no foreign
income tax amount, the U.S. taxable year of the section 901(m) payor in
which the foreign income of the RFA owner (foreign) described in
paragraph (g)(3)(i) of this section would be included in allocable
foreign income if there were a foreign income tax amount.
(h) Examples. The following examples illustrate the rules of this
section. In addition to any facts described in a particular example,
the following facts apply to all the examples unless otherwise
specified: CFC1, CFC2, and DE are organized in Country F and treated as
corporations for Country F tax purposes. CFC1 and CFC2 are each an
applicable foreign corporation that is wholly owned by the same U.S.
corporation, and DE is a disregarded entity. CFC1 and CFC2 each have a
U.S. taxable year that is a calendar year, and CFC1, CFC2, and DE each
have a foreign taxable year that is a calendar year. Country F imposes
a single tax that is a foreign income tax. CFC1, CFC2, and DE each have
a functional currency of the u with respect to all activities. At all
relevant times, 1u equals $1. All amounts are stated in millions. The
examples assume that the applicable cost recovery method for property
results in basis being recovered ratably over the life of the property
beginning on the first day of the U.S. taxable year in which the
property is acquired or placed into service.
(1) Example 1: CAA followed by disposition: Fully taxable for
both U.S. income tax and foreign income tax purposes--(i) Facts. (A)
On January 1, Year 1, USP acquires all of the stock of CFC1 in a
qualified stock purchase (as defined in section 338(d)(3)) to which
section 338(a) applies (Section 338 Acquisition). At the time of the
Section 338 Acquisition, CFC1 owns a single asset (Asset A) that is
located
[[Page 16262]]
in Country F. Asset A gives rise to income that is taken into
account for Country F tax purposes. Asset A is tangible personal
property that, under the applicable cost recovery method in the
hands of CFC1, is depreciable over 5 years. There are no cost
recovery deductions available for Country F tax purposes with
respect to Asset A. Immediately before the Section 338 Acquisition,
Asset A has a U.S. basis of 10u and a foreign basis of 40u.
Immediately after the Section 338 Acquisition, Asset A has a U.S.
basis of 100u and foreign basis of 40u.
(B) On July 1, Year 2, Asset A is transferred to an unrelated
thirdparty in exchange for 120u in a transaction in which all
realized gainis recognized for both U.S. income tax and Country F
tax purposes(subsequent transaction). For U.S. income tax purposes,
CFC1recognizes U.S. disposition gain of 50u (amount realized of
120u, lessU.S. basis of 70u (100u cost basis, less 30u of
accumulateddepreciation)) with respect to Asset A. The 30u of
accumulateddepreciation is the sum of 20u of depreciation in Year 1
(100u costbasis/5 years) and 10u of depreciation in Year 2 ((100u
cost basis/5years) x 6/12). For Country F tax purposes, CFC1
recognizes foreigndisposition gain of 80u (amount realized of 120u,
less foreign basisof 40u) with respect to Asset A. Immediately after
the subsequenttransaction, Asset A has a U.S. basis and a foreign
basis of 120u.
(ii) Result. (A) Under Sec. 1.901(m)-2(b)(1), USP's acquisition
of the stock of CFC1 in the Section 338 Acquisition is a section 338
CAA. Under Sec. 1.901(m)-2(c)(i), Asset A is an RFA with respect to
Country F tax because it is relevant in determining the foreign
income of CFC1 for Country F tax purposes. Under Sec. 1.901(m)-
4(b), the basis difference with respect to Asset A is 90u (100u-
10u). Under Sec. 1.901(m)-1(a)(37), CFC1 is the RFA owner (U.S.)
with respect to Asset A. Under Sec. 1.901(m)-1(a)(28), CFC1 is a
foreign payor for Country F tax purposes. Under Sec. 1.901(m)-
1(a)(41), CFC1 is the section 901(m) payor with respect to a foreign
income tax amount for which CFC1 is the foreign payor (see Sec.
1.901-2(f)(1)).
(B) Under Sec. 1.901(m)-1(a)(5), allocated basis differences
are the sum of cost recovery amounts and disposition amounts. In
Year 1, Asset A has an allocated basis difference that includes only
a cost recovery amount. Under paragraph (b)(2) of this section, the
cost recovery amount for Year 1 is determined by applying the
applicable cost recovery method of Asset A in the hands of CFC1 to
the basis difference with respect to Asset A. Accordingly, the cost
recovery amount is 18u (90u basis difference/5 years). Under
paragraph (b)(1) of this section, all of the 18u cost recovery
amount is attributed to CFC1 and assigned to Year 1, because CFC1 is
a section 901(m) payor and RFA owner (U.S.) with respect to Asset A
and Year 1 is the U.S. taxable year of CFC1 in which it takes into
account the corresponding 20u of depreciation. Immediately after
Year 1, under Sec. 1.901(m)-1(a)(47), unallocated basis difference
is 72u with respect to Asset A (90u-18u).
(C) In Year 2, Asset A has an allocated basis difference that
includes both a cost recovery amount and a disposition amount. Under
paragraph (b)(2) of this section, the cost recovery amount for Year
2, as of the date of the subsequent transaction, is 9u ((90u basis
difference/5 years) x 6/12). Under Sec. 1.901(m)-1(a)(15), the
subsequent transaction is a disposition of Asset A, because the
subsequent transaction is an event that results in an amount of gain
being recognized for U.S. income tax and Country F tax purposes.
Because all realized gain in Asset A is recognized for U.S. income
tax and Country F tax purposes, the rule in paragraph (c)(2)(i) of
this section applies to determine the disposition amount. Under that
rule, the disposition amount for Year 2 is the unallocated basis
difference of 63u (90u basis difference, less total 27u taken into
account as cost recovery amounts in Year 1 and Year 2). Accordingly,
the allocated basis difference for Year 2 is 72u (9u of cost
recovery amount, plus 63u of disposition amount). Under paragraphs
(b)(1) and (c)(1) of this section, all of the 72u of allocated basis
difference is attributed to CFC1 and assigned to Year 2, because
CFC1 is a section 901(m) payor and the RFA owner (U.S.) with respect
to Asset A and Year 2 is the U.S. taxable year of CFC1 in which it
takes into account the corresponding 10u of depreciation and in
which the disposition occurred.
(D) Unallocated basis difference with respect to Asset A, as
determined immediately after the subsequent transaction, is 0u (90u
basis difference less 90u basis difference taken into account as 27u
total cost recovery amount in Year 1 and Year 2 and as a 63u
disposition amount in Year 2). Accordingly, because there is no
unallocated basis difference with respect to Asset A attributable to
the Section 338 Acquisition, the subsequent transaction is not a
successor transaction as defined in Sec. 1.901(m)-6(b)(2).
Furthermore, the subsequent transaction is not a CAA under Sec.
1.901(m)-2(b). For these reasons, section 901(m) no longer applies
to Asset A.
(2) Example 2: CAA followed by disposition: nontaxable for U.S.
income tax purposes and taxable for foreign income tax purposes--(i)
Facts. The facts are the same as in paragraph (h)(1)(i)(A) of this
section (paragraph (i)(A) of Example 1) but the facts in paragraph
(h)(1)(i)(B) of this section (paragraph (i)(B) of Example 1) are
instead that on July 1, Year 2, Asset A is transferred to CFC2, in
exchange for 100u of stock of CFC2 (subsequent transaction). For
U.S. income tax purposes, CFC1 does not recognize any U.S.
disposition gain or U.S. disposition loss with respect to Asset A.
For Country F tax purposes, CFC1 recognizes foreign disposition gain
of 60u (amount realized of 100u, less foreign basis of 40u) with
respect to Asset A. Immediately after the subsequent transaction,
Asset A has a U.S. basis of 70u (100u cost basis less 30u
accumulated depreciation) and a foreign basis of 100u. The 30u of
accumulated depreciation is the sum of 20u of depreciation in Year 1
(100u cost basis/5 years) and 10u in Year 2 ((100u cost basis/5
years) x 6/12).
(ii) Result. (A) The results described in paragraph
(h)(1)(ii)(A) of this section (paragraph (ii)(A) of Example 1) also
apply to this paragraph (h)(2)(ii) (the results of this Example 2).
(B) The result for Year 1 is the same as in paragraph
(h)(1)(ii)(B) of this section (paragraph (ii)(B) of Example 1).
(C) In Year 2, Asset A has an allocated basis difference that
includes both a cost recovery amount and a disposition amount. Under
paragraph (b)(2) of this section, the cost recovery amount for Year
2, as of the date of the subsequent transaction, is 9u ((90u basis
difference/5 years) x 6/12). Under Sec. 1.901(m)-1(a)(15), the
subsequent transaction is a disposition of Asset A, because the
subsequent transaction is an event that results in an amount of gain
being recognized for Country F tax purposes. Because the disposition
is not also fully taxable for U.S. income tax purposes, the rule in
paragraph (c)(2)(ii) of this section applies to determine the
disposition amount. Under that rule, the disposition amount is 60u,
the lesser of (i) 60u (60u foreign disposition gain plus absolute
value of 0u U.S. disposition loss), and (ii) 63u unallocated basis
difference (90 basis difference less total 27u taken into account as
cost recovery amounts, 18u in Year 1 and 9u in Year 2). Accordingly,
the allocated basis difference for the first half of Year 2 is 69u
(9u of cost recovery amount, plus 60u of disposition amount). Under
paragraphs (b)(1) and (c)(1) of this section, all of the 69u of
allocated basis difference is attributed to CFC1 and assigned to
Year 2, because CFC1 is a section 901(m) payor and the RFA owner
(U.S.) with respect to Asset A and Year 2 is the U.S. taxable year
of CFC1 in which it takes into account the corresponding 10u of
depreciation and in which the disposition occurred.
(D) Unallocated basis difference with respect to Asset A
immediately after the subsequent transaction is 3u (90u basis
difference less 87u basis difference taken into account as a 27u
total cost recovery amount in Year 1 and Year 2 and as a 60u
disposition amount in Year 2). Accordingly, because there is
unallocated basis difference of 3u with respect to Asset A
attributable to the Section 338 Acquisition, as determined
immediately after the subsequent transaction, the subsequent
transaction is a successor transaction as defined in Sec. 1.901(m)-
6(b)(2). Following the subsequent transaction, the unallocated basis
difference of 3u must be taken into account as cost recovery amounts
or disposition amounts (or both) by CFC2, the new section 901(m)
payor and RFA owner (U.S.) of Asset A. See Sec. 1.901(m)-
6(b)(3)(ii). Because the subsequent transaction is not a CAA under
Sec. 1.901(m)-2(b), there is no additional basis difference with
respect to Asset A as a result of the subsequent transaction.
(3) Example 3: CAA followed by disposition: nontaxable for both
U.S. income tax and foreign income tax purposes--(i) Facts. The
facts are the same as in paragraph (h)(1)(i)(A) of this section
(paragraph (i)(A) of Example 1) but the facts in paragraph
(h)(1)(i)(B) of this section (paragraph (i)(B) of Example 1) are
instead that on July 1, Year 2, CFC1 transfers Asset A to CFC2, in
exchange for 110u of stock of CFC2 (subsequent transaction). For
U.S. income tax purposes, CFC1 does not recognize any U.S.
[[Page 16263]]
disposition gain or U.S. disposition loss with respect to Asset A as
a result of the subsequent transaction. Furthermore, for Country F
tax purposes, CFC1 recognizes no foreign disposition gain or foreign
disposition loss with respect to Asset A as a result of the
subsequent transaction. Immediately after the subsequent
transaction, Asset A has a U.S. basis of 70u (100u cost basis less
30u accumulated depreciation) and a foreign basis of 40u. The 30u of
accumulated depreciation is the sum of 20u of depreciation in Year 1
(100u cost basis/5 years) and 10u in Year 2 ((100u cost basis/5
years) x 6/12).
(ii) Result. (A) The result for Year 1 is the same as in
paragraph (h)(1)(ii)(A) of this section (paragraph (ii)(A) of
Example 1).
(B) The result for Year 1 is the same as in paragraph
(h)(1)(ii)(B) of this section (paragraph (ii)(B) of Example 1).
(C) In Year 2, Asset A has an allocated basis difference that
includes only a cost recovery amount. Under paragraph (b)(2) of this
section, the cost recovery amount for Year 2, as of the date of the
subsequent transaction, is 9u ((90u basis difference/5 years) x 6/
12). Under Sec. 1.901(m)-1(a)(15), the subsequent transaction does
not constitute a disposition of Asset A, because the subsequent
transaction is not an event that results in an amount of gain or
loss being recognized for U.S. income tax or for Country F tax
purposes. Therefore, no disposition amount is taken into account for
Asset A in Year 2. Under paragraph (b)(1) of this section, all of
the 9u of allocated basis difference is attributed to CFC1 and
assigned to Year 2, because CFC1 is a section 901(m) payor and RFA
owner (U.S.) with respect to Asset A and Year 2 is the U.S. taxable
year of CFC1 in which it takes into account the corresponding 10u of
depreciation.
(D) Unallocated basis difference with respect to Asset A
immediately after the subsequent transaction is 63u (90u basis
difference, less 27u total cost recovery amounts, 18u in Year 1 and
9u in Year 2). Accordingly, because there is unallocated basis
difference of 63u with respect to Asset A attributable to the CAA,
as determined immediately after the subsequent transaction, the
subsequent transaction is a successor transaction as defined in
Sec. 1.901(m)-6(b)(2). Following the subsequent transaction, the
unallocated basis difference of 63u must be taken into account as
cost recovery amounts or disposition amounts (or both) by CFC2, the
new section 901(m) payor and RFA owner (U.S.) of Asset A. See Sec.
1.901(m)-6(b)(3)(ii). Because the subsequent transaction is not a
CAA under Sec. 1.901(m)-2(b), there is no additional basis
difference with respect to Asset A as a result of the subsequent
transaction.
(i) Applicability dates. (1) Except as provided in paragraph (i)(2)
of this section, this section applies to CAAs occurring on or after
March 23, 2020.
(2) Paragraphs (b)(2)(i) and (c)(2) of this section apply to CAAs
occurring on or after July 21, 2014, and to CAAs occurring before that
date resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that is filed on or after July 29, 2014, and
that is effective on or before July 21, 2014. Paragraphs (b)(2)(i) and
(c)(2) of this section also apply to CAAs occurring on or after January
1, 2011, and before July 21, 2014, other than CAAs occurring before
July 21, 2014, resulting from an entity classification election made
under Sec. 301.7701-3 that is filed on or after July 29, 2014, and
that is effective on or before July 21, 2014, but only with respect to
basis difference determined under Sec. 1.901(m)-4T(e) with respect to
the CAA.
(3) Taxpayers may, however, choose to apply provisions in this
section before the date such provisions are applicable pursuant to
paragraphs (i)(1) and (2) of this section, provided that they (along
with any persons that are related (within the meaning of section 267(b)
or 707(b)) to the taxpayer)--
(i) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, Sec. 1.901(m)-
3, Sec. 1.901(m)-4 (excluding Sec. 1.901(m)-4(e)), Sec. 1.901(m)-6,
Sec. 1.901(m)-7, and Sec. 1.901(m)-8 to all CAAs occurring on or
after January 1, 2011, and consistently apply Sec. 1.901(m)-2
(excluding Sec. 1.901(m)-2(d)) to all CAAs occurring on or after
December 7, 2016, on any original or amended tax return for each
taxable year for which the application of the provisions listed in this
paragraph (i)(3)(i) affects the tax liability and for which the statute
of limitations does not preclude assessment or the filing of a claim
for refund, as applicable;
(ii) File all tax returns described in paragraph (i)(3)(i) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(ii) Make appropriate adjustments to take into account deficiencies
that would have resulted from the consistent application under
paragraph (i)(3)(i) of this section for taxable years that are not open
for assessment.
Sec. 1.901(m)-5T [Removed]
0
Par. 12. Section 1.901(m)-5T is removed.
0
Par. 13. Section 1.901(m)-6 is added to read as follows:
Sec. 1.901(m)-6 Successor rules.
(a) In general. This section provides successor rules applicable to
section 901(m). Paragraph (b) of this section provides rules for the
continued application of section 901(m) after an RFA that has
unallocated basis difference has been transferred, including special
rules applicable to successor transactions that are also CAAs or that
involve partnerships. Paragraph (c) of this section provides rules for
determining when an aggregate basis difference carryover of a section
901(m) payor either becomes an aggregate basis difference carryover of
the section 901(m) payor with respect to another foreign payor or is
transferred to another section 901(m) payor, and paragraph (d) of this
section provides applicability dates.
(b) Successor rules for unallocated basis difference--(1) In
general. Except as provided in paragraph (b)(4) of this section,
section 901(m) continues to apply after a successor transaction to any
unallocated basis difference attached to a transferred RFA until the
entire basis difference has been taken into account as a cost recovery
amount or a disposition amount (or both) under Sec. 1.901(m)-5.
(2) Definition of a successor transaction. A successor transaction
occurs with respect to an RFA if, after a CAA (prior CAA), there is a
transfer of the RFA for U.S. income tax purposes and the RFA has
unallocated basis difference with respect to the prior CAA, determined
immediately after the transfer. A successor transaction may occur
regardless of whether the transfer of the RFA is a disposition, a CAA,
or a non-taxable transaction for purposes of U.S. income tax. If the
RFA was subject to multiple prior CAAs, a separate determination must
be made with respect to each prior CAA as to whether the transfer is a
successor transaction.
(3) Special considerations. (i) If an asset is an RFA with respect
to more than one foreign income tax, this paragraph (b) applies
separately with respect to each foreign income tax.
(ii) Any subsequent cost recovery amount for an RFA transferred in
a successor transaction is determined based on the post-transaction
applicable cost recovery method, as described in Sec. 1.901(m)-
5(b)(3), that applies to the U.S. basis (or portion thereof) that
corresponds to the unallocated basis difference.
(4) Successor transaction is a CAA--(i) In general. An asset may be
an RFA with respect to multiple CAAs if a successor transaction is also
a CAA (subsequent CAA). Except as otherwise provided in this paragraph
(b)(4), if there is a subsequent CAA, unallocated basis difference with
respect to any prior CAAs will continue to be taken into account under
section 901(m) after the subsequent CAA. Furthermore, the subsequent
CAA may give rise to additional basis difference subject to section
901(m).
[[Page 16264]]
(ii) Foreign basis election. If a foreign basis election is made
under Sec. 1.901(m)-4(c) with respect to a foreign income tax in a
subsequent CAA, any unallocated basis difference with respect to one or
more prior CAAs will not be taken into account under section 901(m).
The only basis difference that will be taken into account after the
subsequent CAA with respect to that foreign income tax is the basis
difference with respect to the subsequent CAA.
(iii) Multiple section 743(b) CAAs. If an RFA is subject to two
section 743(b) CAAs (prior section 743(b) CAA and subsequent section
743(b) CAA) and the same partnership interest is acquired in both the
CAAs, the RFA will be treated as having no unallocated basis difference
with respect to the prior section 743(b) CAA if the basis difference
for the section 743(b) CAA is determined independently from the prior
section 743(b) CAA. In this regard, see generally Sec. 1.743-1(f). If
the subsequent section 743(b) CAA results from the acquisition of only
a portion of the partnership interest acquired in the prior section
743(b) CAA, then the transferor will be required to equitably apportion
the unallocated basis difference attributable to the prior section
743(b) CAA between the portion retained by the transferor and the
portion transferred. In this case, with respect to the portion
transferred, the RFAs will be treated as having no unallocated basis
difference with respect to the prior section 743(b) CAA if basis
difference for the subsequent section 743(b) CAA is determined
independently from the prior section 743(b) CAA.
(5) Example. The following example illustrates the rules of
paragraph (b) of this section.
(i) Facts. USP, a domestic corporation, wholly owns CFC, a
foreign corporation organized in Country A and treated as a
corporation for both U.S. and Country A tax purposes. FT is an
unrelated foreign corporation organized in Country A and treated as
a corporation for both U.S. and Country A tax purposes. FT owns one
asset, a parcel of land (Asset). Country A imposes a single tax that
is a foreign income tax. On January 1, Year 1, CFC acquires all of
the stock of FT in exchange for 300u in a qualified stock purchase
(as defined in section 338(d)(3)) to which section 338(a) applies
(Acquisition). Immediately before the Acquisition, Asset had a U.S.
basis of 100u, and immediately after the Acquisition, Asset had a
U.S. basis of 300u. Effective on February 1, Year 1, FT elects to be
a disregarded entity pursuant to Sec. 301.7701-3. As a result of
the election, FT is deemed, for U.S. income tax purposes, to
distribute Asset to CFC in liquidation (Deemed Liquidation)
immediately before the closing of the day before the election is
effective pursuant to Sec. 301.7701-3(g)(1)(iii) and (3)(ii). The
Deemed Liquidation is disregarded for Country A tax purposes. No
gain or loss is recognized on the Deemed Liquidation for either U.S.
or Country A tax purposes.
(ii) Result. Under Sec. 1.901(m)-2(b)(1), the acquisition by
CFC of the stock of FT is a section 338 CAA. Under Sec. 1.901(m)-
2(c)(1), Asset is an RFA with respect to Country A tax and the
Acquisition, because immediately after the Acquisition, Asset is
relevant in determining foreign income of FT for Country A tax
purposes, and FT owned Asset when the Acquisition occurred. Under
Sec. 1.901(m)-4(b), the basis difference with respect to Asset is
200u (300u--100u). Under Sec. 1.901(m)-2(b)(2), the Deemed
Liquidation is a CAA (subsequent CAA) because the Deemed Liquidation
is treated as an acquisition of assets for U.S. income tax purposes
and is disregarded for Country A tax purposes. Because the U.S.
basis in Asset is 300u immediately before and after the Deemed
Liquidation, the subsequent CAA does not give rise to any additional
basis difference. The Deemed Liquidation is not a disposition under
Sec. 1.901(m)-1(a)(15) because it did not result in gain or loss
being recognized with respect to Asset for U.S. or Country A tax
purposes. Accordingly, no basis difference with respect to Asset is
taken into account under Sec. 1.901(m)-5 as a result of the Deemed
Liquidation, and the unallocated basis difference with respect to
Asset immediately after the Deemed Liquidation is 200u (200u--0u).
Under paragraph (b)(2) of this section, the Deemed Liquidation is a
successor transaction because there is a transfer of Asset for U.S.
income tax purposes from FT to CFC and Asset has unallocated basis
difference with respect to the Acquisition immediately after the
Deemed Liquidation. Accordingly, under paragraph (b)(1) of this
section, section 901(m) will continue to apply to the unallocated
basis difference with respect to Asset until the entire 200u basis
difference has been taken into account under Sec. 1.901(m)-5.
(c) Successor rules for aggregate basis difference carryover--(1)
Transfers of a section 901(m) payor's aggregate basis difference
carryover to another person. If a corporation acquires the assets of a
section 901(m) payor in a transaction to which section 381 applies,
that corporation succeeds to any aggregate basis difference carryovers
of the section 901(m) payor.
(2) Transfers of a section 901(m) payor's aggregate basis
difference carryover with respect to a foreign payor to another foreign
payor. If a section 901(m) payor has an aggregate basis difference
carryover, with respect to a foreign income tax and a foreign payor,
and substantially all of the assets of the foreign payor are
transferred to another foreign payor in which the section 901(m) payor
owns an interest, the section 901(m) payor's aggregate basis difference
carryover with respect to the first foreign payor is transferred to the
section 901(m) payor's aggregate basis difference carryover with
respect to the other foreign payor. In such a case, the section 901(m)
payor's aggregate basis difference carryover with respect to the first
foreign payor is reduced to zero.
(3) Anti-abuse rule. If a section 901(m) payor has an aggregate
basis difference carryover with respect to a foreign income tax and a
foreign payor and, with a principal purpose of avoiding the application
of section 901(m), assets of the foreign payor are transferred to
another foreign payor in a transaction not described in paragraph
(c)(1) or (2) of this section, then a portion of the aggregate basis
difference carryover of the section 901(m) payor is transferred either
to the aggregate basis difference carryover of the section 901(m) payor
with respect to the other foreign payor or to another section 901(m)
payor, as appropriate. The portion of the aggregate basis difference
carryover transferred is determined based on the ratio of fair market
value of the assets transferred to the fair market value of all of the
assets of the foreign payor that transferred the assets. Similar
principles apply when, with a principal purpose of avoiding the
application of section 901(m), there is a change in the allocation of
foreign income for foreign income tax purposes or the allocation of
foreign income tax amounts for U.S. income tax purposes that would
otherwise separate foreign income tax amounts from the related
aggregate basis difference carryover.
(4) Ownership. For purposes of this paragraph (c), a section 901(m)
payor owns an interest in a foreign payor if the section 901(m) payor
owns the interest directly or indirectly through one or more fiscally
transparent entities for U.S. income tax purposes.
(d) Applicability dates--(1) Except as provided in paragraph (d)(2)
of this section, this section applies to CAAs occurring on or after
March 23, 2020.
(2) Paragraphs (a), (b)(1) and (2), (b)(4)(i) and (iii), and (b)(5)
of this section apply to CAAs occurring on or after July 21, 2014, and
to CAAs occurring before that date resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that is filed on or after July 29, 2014, and that is effective on or
before July 21, 2014. Paragraphs (a), (b)(1) and (2), (b)(4)(i) and
(iii), and (b)(5) of this section also apply to CAAs occurring on or
after January 1, 2011, and before July 21, 2014, other than CAAs
occurring before July 21, 2014, resulting from an entity classification
election made under Sec. 301.7701-3 that is filed on or after July 29,
2014, and that is effective on or before July 21, 2014, but only with
[[Page 16265]]
respect to basis difference determined under Sec. 1.901(m)-4T(e) with
respect to the CAA.
(3) Taxpayers may, however, choose to apply provisions in this
section before the date such provisions are applicable pursuant to
paragraphs (d)(1) and (2) of this section, provided that they (along
with any persons that are related (within the meaning of section 267(b)
or 707(b)) to the taxpayer)--
(i) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, Sec. Sec.
1.901(m)-3 through 1.901(m)-5 (excluding Sec. 1.901(m)-4(e)), Sec.
1.901(m)-7, and Sec. 1.901(m)-8 to all CAAs occurring on or after
January 1, 2011, and consistently apply Sec. 1.901(m)-2 (excluding
Sec. 1.901(m)-2(d)) to all CAAs occurring on or after December 7,
2016, on any original or amended tax return for each taxable year for
which the application of the provisions listed in this paragraph
(d)(3)(i) affects the tax liability and for which the statute of
limitations does not preclude assessment or the filing of a claim for
refund, as applicable;
(ii) File all tax returns described in paragraph (d)(3)(i) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(iii) Make appropriate adjustments to take into account
deficiencies that would have resulted from the consistent application
under paragraph (d)(3)(i) of this section for taxable years that are
not open for assessment.
Sec. 1.901(m)-6T [Removed]
0
Par. 14. Section 1.901(m)-6T is removed.
0
Par. 15. Section 1.901(m)-7 is added to read as follows:
Sec. 1.901(m)-7 De minimis rules.
(a) In general. This section provides rules describing basis
difference that is not taken into account under section 901(m) because
a CAA results in a de minimis amount of basis difference. Paragraph (b)
of this section sets forth the general rule for determining whether the
de minimis threshold is met. Paragraph (c) of this section modifies the
general rule in the case of CAAs that are part of an aggregated CAA
transaction. Paragraph (d) of this section provides rules for applying
this section, and paragraph (e) of this section provides an anti-abuse
rule applicable to related persons. Paragraph (f) of this section
provides examples that illustrate the application of this section.
Paragraph (g) of this section provides applicability dates.
(b) General rule--(1) In general. A basis difference with respect
to an RFA and a foreign income tax is not taken into account under
section 901(m) if the requirements under the cumulative basis
difference exemption, the RFA class exemption, or the RFA exemption are
satisfied.
(2) Cumulative basis difference exemption. Except as provided in
paragraph (c) of this section, a basis difference, with respect to an
RFA and a foreign income tax, is not taken into account under section
901(m) (cumulative basis difference exemption) if the sum of that basis
difference and all other basis differences (including negative basis
differences), with respect to a single CAA and a single RFA owner
(U.S.), is less than the greater of:
(i) $10 million, or
(ii) 10 percent of the total U.S. basis of all the RFAs immediately
after the CAA.
(3) RFA class exemption--(i) Except as provided in paragraph (c) of
this section, a basis difference, with respect to an RFA and a foreign
income tax, is not taken into account under section 901(m) (RFA class
exemption) if the RFA is part of a class of RFAs and the absolute value
of the sum of the basis differences (including negative basis
differences), with respect to a single CAA and a single RFA owner, for
all the RFAs in that class is less than the greater of:
(A) $2 million, or
(B) 10 percent of the total U.S. basis of all the RFAs in that
class of RFAs immediately after the CAA.
(ii) For purposes of this paragraph (b)(3), the classes of RFAs are
the seven asset classes defined in Sec. 1.338-6(b), regardless of
whether the CAA is a section 338 CAA.
(4) RFA exemption. A basis difference, with respect to an RFA and a
foreign income tax, is not taken into account under section 901(m) (RFA
exemption) if the absolute value of the basis difference with respect
to the RFA is less than $20,000.
(c) Special rule if a CAA is part of an aggregated CAA transaction.
If a CAA is part of an aggregated CAA transaction and a single RFA
owner (U.S.) does not own all the RFAs attributable to the CAAs that
are part of the aggregated CAA transaction, the cumulative basis
difference exemption and the RFA class exemption apply to such CAA only
if, in addition to satisfying the requirements of paragraph (b)(2) or
(b)(3) of this section, respectively, determined without regard to this
paragraph (c), the cumulative basis difference exemption or the RFA
class exemption, as modified by this paragraph (c), is satisfied.
Solely for purposes of this paragraph (c), the cumulative basis
difference exemption and the RFA class exemption are applied taking
into account all the basis differences with respect to all the RFAs
owned by all the RFA owners (U.S.) that are attributable to the CAAs
that are part of the aggregated CAA transaction.
(d) Rules of application. The following rules apply for purposes of
this section.
(1) Whether a basis difference qualifies for the cumulative basis
difference exemption, the RFA class exemption, or the RFA exemption is
determined when an asset first becomes an RFA with respect to a CAA. In
the case of a subsequent CAA described in Sec. 1.901(m)-6(b)(4), the
application of the cumulative basis difference exemption, the RFA class
exemption, and the RFA exemption is based on basis difference, if any,
that results from the subsequent CAA.
(2) If there is an aggregated CAA transaction, the cumulative basis
difference exemption and each RFA class exemption are applied by
treating all CAAs that are part of the aggregated CAA transaction as a
single CAA.
(3) Basis difference is computed in accordance with Sec. 1.901(m)-
4 except that a foreign basis election need not be evidenced if the
cumulative basis difference exemption, an RFA class exemption, or the
RFA exemption apply to all RFAs with respect to the CAA.
(4) Basis difference is translated into U.S. dollars (if necessary)
using the spot rate determined under the principles of Sec. 1.988-1(d)
on the date of the CAA.
(e) Anti-abuse rule. The cumulative basis difference exemption, an
RFA class exemption, and the RFA exemption are not available if the
transferor and transferee in the CAA are related persons (as described
in section 267(b) or 707(b)) and the CAA was entered into, or
structured, with a principal purpose of avoiding the application of
section 901(m). See also Sec. 1.901(m)-8(c), which provides that
certain built-in loss assets are not taken into account for purposes of
applying this section.
(f) Examples. The following examples illustrate the rules of this
section:
(1) Example 1: De minimis; cumulative basis difference
exemption--(i) Facts. USP, a domestic corporation, as part of a
plan, purchases all of the stock of CFC1 and CFC2 from a single
seller. CFC1 and CFC2 are applicable foreign corporations, organized
in Country F, and treated as corporations for Country F tax
purposes. Country F imposes a single tax that is a foreign income
tax. Each acquisition is a qualified stock purchase (as defined in
section 338(d)(3)) to which section
[[Page 16266]]
338(a) applies. A foreign basis election is not made under Sec.
1.901(m)-4(c). Immediately after the acquisition of the stock of
CFC1 and CFC2, the assets of CFC1 and CFC2 give rise to income that
is taken into account for Country F tax purposes, and those assets
are in a single class, as defined in Sec. 1.338-6(b). Assume that
the absolute value of the basis difference with respect to any
single RFA is greater than $20,000. At all relevant times, 1u equals
$1. All amounts are stated in millions. The additional facts are
summarized below.
----------------------------------------------------------------------------------------------------------------
Total U.S. basis
Relevant foreign assets immediately Total U.S. basis Total basis
before immediately after difference
----------------------------------------------------------------------------------------------------------------
Assets of CFC1......................................... 48u 60u 12u
Assets of CFC2......................................... 100u 96u (4)u
--------------------------------------------------------
Total.............................................. 148u 156u 8u
----------------------------------------------------------------------------------------------------------------
(ii) Result. (A) Under Sec. 1.901(m)-2(b)(1), USP's
acquisitions of the stock of CFC1 and CFC2 are each a section 338
CAA. Under 1.901(m)-1(a)(3), the two section 338 CAAs constitute an
aggregated CAA transaction because the acquisitions occur as part of
a plan. Under Sec. 1.901(m)-2(c)(1), the assets of CFC1 and CFC2
are RFAs for Country F tax purposes because they are relevant in
determining foreign income of CFC1 and CFC 2, respectively, for
Country F tax purposes. Under Sec. 1.901(m)-1(a)(37), CFC1 is the
RFA owner (U.S.) with respect to its assets, and CFC2 is the RFA
owner (U.S.) with respect to its assets.
(B) Under paragraph (b)(2) of this section, the application of
the cumulative basis difference exemption is based on a single CAA
and a single RFA owner (U.S.), subject to the requirements under
paragraph (c) of this section that apply when there is an aggregated
CAA transaction. In the case of the section 338 CAA with respect to
CFC1, without regard to paragraph (c) of this section, the
requirements of the cumulative basis difference exemption are
satisfied if the sum of the basis differences is less than the
threshold of $10 million, the greater of $10 million or $6 million
(10% of the total U.S. basis of $60 million (60 million u translated
into dollars at the exchange rate of $1 = 1u)). In this case, the
sum of the basis differences is $12 million (12 million u translated
into dollars at the exchange rate of $1 = 1 u). Because the sum of
the basis differences of $12 million is not less than the threshold
of $10 million, the requirements of the cumulative basis difference
exemption are not satisfied. Because the requirements of the
cumulative basis difference exemption are not satisfied, without
regard to paragraph (c) of this section, paragraph (c) of this
section is not applicable. The RFA class exemption is not relevant
because all of the RFAs of CFC1 are in a single class. Finally,
because the absolute value with respect to each RFA is greater than
$20,000, the RFA exemption does not apply. Accordingly, the basis
differences with respect to all of the RFAs of CFC1 must be taken
into account under section 901(m).
(C) In the case of the section 338 CAA with respect to CFC2,
without regard to paragraph (c) of this section, the requirements of
the cumulative basis difference exemption are satisfied if the sum
of the basis differences is less than the threshold of $10 million,
the greater of $10 million or $ 9.6 million (10% of the total U.S.
basis of $96 million (96 million u translated into dollars at the
exchange rate of $1 = 1u)) In this case, the sum of the basis
differences is ($4) million ((4) million u translated into dollars
at the exchange rate of $1 = 1 u). Because the sum of the basis
differences of ($4) million is less than the threshold of $10
million, the requirements of the cumulative basis difference
exemption are satisfied. However, because the section 338 CAA with
respect to CFC2 is part of an aggregated CAA transaction that
includes the section 338 CAA with respect to CFC1, paragraph (c) of
this section is applicable. Under paragraph (c) of this section, the
requirements of the cumulative basis difference exemption must also
be satisfied taking into account all of the RFAs of both CFC2 and
CFC1. In this case, the requirements of the cumulative basis
difference exemption for purposes of paragraph (c) of this section
are satisfied if the sum of the basis differences with respect to
all of the RFAs of CFC2 and CFC1 is less than the threshold of $15.6
million, the greater of $10 million or $15.6 million (10% of the
total U.S. basis of $156 million (156 million u translated into
dollars at the exchange rate of $1 = 1u)). In this case, the sum of
the basis differences is $8 million (8 million u translated into
dollars at the exchange rate of $1 = 1 u). Because the sum of the
basis differences of $8 million is less than the threshold of $15.6
million, the requirements of the cumulative basis difference
exemption are satisfied in the case of the section 338 CAA with
respect to CFC2. Accordingly, none of the basis differences with
respect to the RFAs of CFC2 are taken into account under section
901(m).
(2) Example 2: De minimis; RFA Class Exemption--(i) Facts. USP,
a domestic corporation, acquires all the stock of CFC, an applicable
foreign corporation organized in Country F and treated as a
corporation for Country F tax purposes, in a qualified stock
purchase (as defined in section 338(d)(3)) to which section 338(a)
applies. Country F imposes a single tax that is a foreign income
tax. A foreign basis election is not made under Sec. 1.901(m)-4(c).
Immediately after the acquisition of CFC, the assets of CFC give
rise to income that is taken into account for Country F tax
purposes. Assume that the absolute value of the basis difference
with respect to any single RFA is greater than $20,000. At all
relevant times, 1u equals $1. All amounts are stated in millions.
The additional facts are summarized below.
----------------------------------------------------------------------------------------------------------------
Total U.S. basis
Relevant foreign assets immediately Total U.S. basis Total basis
before immediately after difference
----------------------------------------------------------------------------------------------------------------
Cash (Class I)......................................... 10u 10u 0u
Inventory (Class IV)................................... 14u 15u 1u
Buildings (Class V).................................... 19u 30u 11u
--------------------------------------------------------
Total.............................................. 43u 55u 12u
----------------------------------------------------------------------------------------------------------------
(ii) Result. (A) Under Sec. 1.901(m)-2(b)(1), USP's acquisition
of the stock of CFC is a section 338 CAA. Under Sec. 1.901(m)-
2(c)(1), the assets of CFC are RFAs for Country F tax purposes
because they are relevant in determining foreign income of CFC for
Country F tax purposes.
(B) Under paragraph (b)(2) of this section, the requirements of
the cumulative basis difference exemption are satisfied if the sum
of the basis differences is less than the threshold of $10 million,
the greater of $10 million or $5.5 million (10% of the total U.S.
basis of $55 million (55 million u translated into dollars at the
exchange rate of $1 = 1u)). In this case, the sum of the basis
differences is $12 million (12 million u translated into dollars at
the exchange rate of $1 = 1 u). Because the sum of the basis
differences of $12 million is not less than the threshold of $10
million, the requirements of the cumulative basis difference
exemption are not satisfied.
(C) Under paragraph (b)(3) of this section, each of CFC's assets
is allocated to its class under Sec. 1.338-6(b) for purposes of the
RFA class exemption. The requirements of the
[[Page 16267]]
RFA class exemption with respect to the Class IV RFAs (in this case,
inventory) are satisfied if the absolute value of the sum of the
basis differences with respect to the Class IV RFAs is less than the
threshold of $2 million, the greater of $2 million or $1.5 million
(10% of the total U.S. basis of Class IV RFAs of $15 million (15
million u translated into dollars at the exchange rate of $1 = 1u)).
In this case, the absolute value of the sum of the basis differences
is $1 million (1 million u translated into dollars at the exchange
rate of $1 = 1 u). Because the sum of the basis differences of $1
million is less than the threshold of $2 million, the requirements
of the RFA class exemption are satisfied. Accordingly, the basis
differences with respect to the Class IV RFAs are not taken into
account under section 901(m).
(D) The requirements of the RFA class exemption with respect to
the Class V RFAs (in this case, buildings) is satisfied if the
absolute value of the sum of the basis differences with respect to
the Class V RFAs is less than the threshold of $3 million, the
greater of $2 million or $3 million (10% of the total U.S. basis of
Class V RFAs of $30 million (30 million u translated into dollars at
the exchange rate of $1 = 1u)). In this case, the absolute value of
the sum of the basis differences is $11 million (11 million u
translated into dollars at the exchange rate of $1 = 1 u). Because
the sum of the basis differences of $11 million is not less than the
threshold of $3 million, the requirements of the RFA class exemption
are not satisfied. Finally, because the absolute value with respect
to each RFA is greater than $20,000, the RFA exemption does not
apply. Accordingly, the basis differences with respect to the Class
V RFAs are taken into account under section 901(m).
(E) The Class I RFAs (in this case, cash) are irrelevant because
there are no basis differences with respect to those RFAs.
(g) Applicability dates. This section applies to CAAs occurring on
or after March 23, 2020. Taxpayers may, however, choose to apply this
section before the date this section is applicable provided that they
(along with any persons that are related (within the meaning of section
267(b) or 707(b)) to the taxpayer)--
(1) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, Sec. Sec.
1.901(m)-3 through 1.901(m)-6 (excluding Sec. 1.901(m)-4(e)), and
Sec. 1.901(m)-8 to all CAAs occurring on or after January 1, 2011, and
consistently apply Sec. 1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to
all CAAs occurring on or after December 7, 2016, on any original or
amended tax return for each taxable year for which the application of
the provisions listed in this paragraph (g)(1) affects the tax
liability and for which the statute of limitations does not preclude
assessment or the filing of a claim for refund, as applicable;
(2) File all tax returns described in paragraph (g)(1) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(3) Make appropriate adjustments to take into account deficiencies
that would have resulted from the consistent application under
paragraph (g)(1) of this section for taxable years that are not open
for assessment.
Sec. 1.901(m)-7T [Removed]
0
Par. 16. Section 1.901(m)-7T is removed.
0
Par. 17. Section 1.901(m)-8 is added to read as follows:
Sec. 1.901(m)-8 Miscellaneous.
(a) In general. This section provides guidance on other matters
under section 901(m). Paragraph (b) of this section provides guidance
on the application of section 901(m) to pre-1987 foreign income taxes.
Paragraph (c) of this section provides anti-abuse rules relating to
built-in loss assets. Paragraph (d) of this section provides guidance
on the interaction of section 901(m) and section 909. Paragraph (e) of
this section provides applicability dates.
(b) Application of section 901(m) to pre-1987 foreign income taxes.
Section 901(m) and Sec. Sec. 1.901(m)-1 through 1.901-8 apply to pre-
1987 foreign income taxes (as defined in Sec. 1.902-1(a)(10)(iii)) of
an applicable foreign corporation.
(c) Anti-abuse rule for built-in loss RFAs. A basis difference with
respect to an RFA described in section 901(m)(3)(C)(ii) (built-in loss
RFA) will not be taken into account for purposes of computing an
allocated basis difference for a U.S. taxable year of a section 901(m)
payor if any RFA, including an RFA other than built-in loss RFAs, is
acquired with a principal purpose of using one or more built-in loss
RFAs to avoid the application of section 901(m). Furthermore, a basis
difference with respect to a built-in loss RFA will not be taken into
account for purposes of the cumulative basis difference exemption or
the RFA class exemption under Sec. 1.901(m)-7 if any RFAs, including
RFAs other than built-in loss RFAs, are acquired with a principal
purpose of avoiding the application of section 901(m).
(d) Interaction with section 909. The amount of a foreign income
tax that is disqualified under section 901(m) is determined before
applying section 909. However, section 909 may apply to suspend a
deduction for the amount of a foreign income tax that is disqualified
under section 901(m).
(e) Applicability dates. This section applies to CAAs occurring on
or after March 23, 2020. Taxpayers may, however, choose to apply this
section before the date this section is applicable provided that they
(along with any persons that are related (within the meaning of section
267(b) or 707(b)) to the taxpayer)--
(1) Consistently apply this section, Sec. 1.704-
1(b)(4)(viii)(c)(4)(v) through (vii), Sec. 1.901(m)-1, and Sec. Sec.
1.901(m)-3 through 1.901(m)-7 (excluding Sec. 1.901(m)-4(e)) to all
CAAs occurring on or after January 1, 2011, and consistently apply
Sec. 1.901(m)-2 (excluding Sec. 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016, on any original or amended tax return for
each taxable year for which the application of the provisions listed in
this paragraph (e)(1) affects the tax liability and for which the
statute of limitations does not preclude assessment or the filing of a
claim for refund, as applicable;
(2) File all tax returns described in paragraph (e)(1) of this
section for any taxable year ending on or before March 23, 2020, no
later than March 23, 2021; and
(3) Make appropriate adjustments to take into account deficiencies
that would have resulted from the consistent application under
paragraph (e)(2) of this section for taxable years that are not open
for assessment.
Sec. 1.901(m)-8T [Removed]
0
Par. 18. Section 1.901(m)-8T is removed.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: February 13, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-05551 Filed 3-20-20; 8:45 am]
BILLING CODE 4830-01-P
