[Federal Register Volume 77, Number 122 (Monday, June 25, 2012)]
[Proposed Rules]
[Pages 37837-37838]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15443]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-134935-11]
RIN 1545-BK55
Overall Foreign Loss Recapture on Property Dispositions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: These proposed regulations provide guidance regarding the
coordination of the rules for determining high-taxed income with
capital gains adjustments and the allocation and recapture of overall
foreign losses and overall domestic losses, as well as the coordination
of the recapture of overall foreign losses on certain dispositions of
property and other rules concerning overall foreign losses and overall
domestic losses. These regulations affect individuals and corporations
claiming foreign tax credits.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 24, 2012.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-134935-11), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
134935-11), Courier's desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20044, or sent electronically, via the
Federal eRulemaking Portal at www.regulations.gov (IRS REG-134935-11).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey L.
Parry, (202) 622-3850; concerning submissions of comments,
Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
1. High-Taxed Income
Section 904(d)(2)(F) of the Internal Revenue Code (Code) provides
that certain high-taxed income that would otherwise be passive income
will be treated as general category income if the foreign taxes paid or
accrued, and deemed paid or accrued, with respect to such income exceed
the highest rate of tax specified in section 1 or section 11, whichever
applies, multiplied by the amount of such income. Section 1.904-4(c)
provides detailed rules for determining whether income is high-taxed,
including rules for testing income based on subgroups within passive
income and allocating expenses, losses and other deductions to that
income.
Questions have arisen regarding the coordination of these rules
with the capital gains adjustments under section 904(b) and loss
allocations and loss account recapture under section 904(f) and (g).
The proposed regulations at Sec. 1.904-4(c) clarify that the
determination as to whether income is high-taxed is made before taking
into account any adjustments under section 904(b) or any allocation of
losses or recapture of loss accounts under section 904(f) and (g). The
Treasury Department and the IRS believe these ordering rules are
consistent with the use in section 904(d)(2)(F) of the highest
statutory U.S. tax rate, rather than the taxpayer's pre-credit
effective U.S. tax rate, to determine whether income is high-taxed.
2. Dispositions of Property Under Section 904(f)(3)
Section 904(f)(3) provides that if a taxpayer disposes of certain
property used or held for use predominantly without the United States
in a trade or business, gain is recognized on that disposition and
treated as foreign source income, regardless of whether the gain would
otherwise be recognized, to the extent of any overall foreign loss
account in the separate category of foreign source taxable income
generated by the property. Section 1.904(f)-2(d) provides separate
rules for dispositions in which gain is recognized irrespective of
section 904(f)(3) and dispositions in which the gain would not
otherwise be recognized.
Questions have arisen regarding the coordination of overall foreign
loss recapture under section 904(f)(3) with other provisions of section
904(f) and (g). Accordingly, these proposed regulations revise the
ordering rules under Sec. 1.904(g)-3 that generally provide for the
coordination of section 904(f) and (g) to include specific references
for taking into account overall foreign loss recapture under section
904(f)(3).
In the case of dispositions in which gain is recognized
irrespective of section 904(f)(3), the overall foreign loss recapture
is included in Step Five along with other general overall foreign loss
recapture.
Dispositions in which the gain would not otherwise be recognized
are addressed separately. Section 1.904(f)-2(d)(4)(i) provides, in
part, that where gain would not otherwise be recognized on a
disposition, the amount of gain that will be recognized under section
904(f)(3) is equal to the balance in the applicable foreign loss
account after taking into account any amounts recaptured from the
account from other recognized income for the year (as well as certain
other adjustments). In other words, the additional amount of income to
be recognized can only be determined after the first seven steps of the
ordering rules in Sec. 1.904(g)-3 have been completed. Accordingly, a
new Step Eight is added to those ordering rules to address the
recognition of the additional income under section 904(f)(3) and the
corresponding recapture of the applicable overall foreign loss account.
New Step Eight also provides that if the additional recognition of gain
increases the allowable amount of the net operating loss deduction,
then the recapture of the overall foreign loss account occurs first
before the additional net operating loss carryover is taken into
account to offset all or a portion of that gain. The Treasury
Department and the IRS believe priority should be given to the
additional recapture of the overall foreign loss account pursuant to
section 904(f)(3) before any net operating loss carryover reduces that
gain. This is because the primary reason for recognizing the otherwise
unrecognized gain is to recapture the overall foreign loss account.
Proposed Effective Date
The regulations, as proposed, will apply to any taxable year ending
on or after the date of publication of a Treasury decision adopting
these rules as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a
[[Page 37838]]
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these regulations have
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a
signed original and eight (8) copies) that are submitted timely to the
IRS. The Treasury Department and the IRS request comments on all
aspects of the proposed rules. All comments will be available for
public inspection and copying. A public hearing will be scheduled if
requested in writing by any person that timely submits comments. If a
public hearing is scheduled, notice of the date, time, and place for
the public hearing will be published in the Federal Register.
Drafting Information
The principal author of these regulations is Jeffrey L. Parry of
the Office of Chief Counsel (International). However, other personnel
from the IRS and the Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.904-4 is amended by adding paragraph (c)(2)(iii)
and by adding a sentence at the end of paragraph (n) to read as
follows:
Sec. 1.904-4 Separate application of section 904 with respect to
certain categories of income.
* * * * *
(c) * * *
(2) * * *
(iii) Coordination with section 904(b), (f) and (g). The
determination of whether foreign-source passive income is high-taxed is
made before taking into account any adjustments under section 904(b) or
any allocation or recapture of a separate limitation loss, overall
foreign loss or overall domestic loss under section 904(f) and (g).
* * * * *
(n) * * * Paragraph (c)(2)(iii) of this section applies to taxable
years ending on or after the date of publication of a Treasury decision
adopting these rules as final regulations in the Federal Register.
Par. 3. Section 1.904(g)-3 is amended by revising paragraph (f),
adding paragraph (i) and adding a sentence at the end of paragraph (k)
to read as follows:
Sec. 1.904(g)-3 Ordering rules for the allocation of net operating
losses, net capital losses, U.S. source losses, and separate limitation
losses, and for the recapture of separate limitation losses, overall
foreign losses, and overall domestic losses.
* * * * *
(f) Step Five: Recapture of overall foreign loss accounts. If the
taxpayer's separate limitation income for the taxable year (reduced by
any losses carried over under paragraph (b) of this section) exceeds
the sum of the taxpayer's U.S. source loss and separate limitation
losses for the year, so that the taxpayer has separate limitation
income remaining after the application of paragraphs (d)(1) and (e) of
this section, then the taxpayer shall recapture prior year overall
foreign losses, if any, in accordance with Sec. 1.904(f)-2, and reduce
overall foreign loss accounts in accordance with Sec. 1.904(f)-2. Such
recapture shall include amounts determined under Sec. 1.904(f)-2(c)
and (d)(3) but not Sec. 1.904(f)-2(d)(4).
* * * * *
(i) Step Eight: Dispositions under section 904(f)(3) in which gain
would not otherwise be recognized. The taxpayer shall determine the
amount of gain that would otherwise not be recognized but that must be
recognized in accordance with Sec. 1.904(f)-2(d)(4) (not exceeding the
taxpayer's applicable overall foreign loss account) and then apply
Sec. 1.904(f)-2(a) and (b) to recapture overall foreign loss accounts
in an amount equal to the gain recognized. To the extent this
recognition of gain in a taxable year increases the amount of a net
operating loss carryover to that taxable year, paragraphs (b) through
(e) of this section shall be applied to determine the allocation of the
additional net operating loss, but only after the applicable overall
foreign loss account has been recaptured as provided in this paragraph
(i).
(k) * * * Paragraphs (f) and (i) of this section apply to taxable
years ending on or after the date of publication of a Treasury decision
adopting these rules as final regulations in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-15443 Filed 6-22-12; 8:45 am]
BILLING CODE 4830-01-P