Daily Tax Update - April 21, 2006

On April 20, the IRS issued temporary regulations (TD 9260) on the application of separate foreign tax credit limitations to dividends received from noncontrolled section 902 corporations under section 904(d)(4). The temporary regulations provide guidance needed to comply with these changes and affect corporations claiming foreign tax credits. The temporary regulations incorporate the guidance set forth in Notice 2003-5, 2003-1 C.B. 94, with modification.

  • The temporary regulations modify the section 902 and 904 regulations to reflect the look-through treatment of dividends from 10/50 corporations and provide transition rules for the treatment of overall foreign losses and separate limitation losses under section 904(f) and the carryover of excess foreign taxes under section 904(c). The temporary regulations also modify the grouping rules of § 1.904-4(c) that apply for purposes of determining whether an item of income is considered high-taxed income, the rules under § 1.861-9T governing the apportionment of interest expense of a 10/50 corporation, and the rules under § 1.861-12T governing the characterization of stock of a 10/50 corporation for purposes of apportioning the shareholder's interest expense.
  • In addition, the temporary regulations modify the regulations under section 964 to add rules permitting majority domestic corporate shareholders of a 10/50 corporation to make tax accounting elections on behalf of the 10/50 corporation. The temporary regulations also expand the section 964 regulations to allow controlling United States shareholders and majority domestic corporate shareholders to adopt or change the taxable year of a controlled foreign corporation or 10/50 corporation (as the case may be) on behalf of the foreign corporation. The temporary regulations also revise the regulations' procedural rules to permit statements evidencing the shareholders' action to be filed with the shareholders' tax returns instead of 183 days after the close of the foreign corporation's taxable year. Finally, the temporary regulations modify the section 964 regulations to eliminate obsolete provisions and reorganize some of the rules contained in § 1.964-1T(g)
  • Yesterday, the IRS also issued proposed regulations on the application of separate foreign tax credit limitations of dividends received from noncontrolled section 902 corporations under section 904(d)(4). Section 1.964-1(c)(2) and (3) provides that the controlling United States shareholders of a controlled foreign corporation, and the majority domestic corporate shareholders of a noncontrolled section 902 corporation, may make an election, or adopt or change a method of accounting or taxable year, on behalf of the foreign corporation. Section 1.964-1(c)(3)(ii) requires that a jointly executed statement evidencing the controlling shareholders' consent to the election, or change in method of accounting or taxable year of the foreign corporation, be retained by one or more of the shareholders, and that each controlling shareholder file a separate statement with its tax return for the taxable year with or within which the foreign corporation's taxable year ends.
  • For additional information, contact Philip R. West or Stan Smilack.

On May 9, the House Ways and Means Subcommittee on Select Revenue Measures will hold a hearing on corporate tax reform. According to the Subcommittee, "The purpose of this hearing is to understand how tax-preference items within the corporate tax code reallocate the tax burden and whether these shifts are beneficial or detrimental to the U.S. economy. Of specific interest is to understand how the current system affects a company’s decision of where and how to invest in technology, equipment and people."

  • In announcing the hearing, Subcommittee Chairman Dave Camp (R-MI) stated, "This hearing provides us with an opportunity to examine the current U.S. corporate tax system and the base upon which taxes are imposed. We seek to reform business taxation in a way which increases fairness, decreases complexity and improves the U.S. competitiveness on a global basis.”

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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