SECTION 9. OTHER GUIDANCE

.01 Section 78 Gross-Up, Disallowance of Expenses Pursuant to Section 965(d)(2),

and Computation of Alternative Minimum Tax in Election Year

Section 78 does not apply to any tax which is not allowable as a credit under section 901 by reason of section 965(d).

The disallowance of expenses in section 965(d)(2) applies only to expenses that are “directly allocable” to the deductible portion described in section 965(d)(1).

For purposes of calculating alternative minimum tax for the election year under section 55(a) in accordance with section 965(e)(1)(B), the taxpayer’s regular tax described in section 55(c) and tentative minimum tax determined under section 55(b)(1)(B) do not include tax attributable to nondeductible CFC dividends.

The IRS and Treasury will incorporate the rules in this section 9.01 into subsequent guidance. This subsequent guidance will provide detail regarding these and related rules.

.02 Contiguous Country Branches of Domestic Life Insurance Companies

Amounts added to the life insurance company taxable income of a domestic life insurance company by reason of section 814(e)(2) (dealing with contiguous country branches of a domestic life insurance company) are not eligible for the section 965(a) DRD.

.03 Cash Dividends in Excess of Amounts Covered by Domestic Reinvestment Plans

A domestic reinvestment plan may provide for the investment in the United States of an amount that is less than the entire amount of cash dividends that are otherwise eligible for the section 965(a) DRD. In such a case, the section 965(a) DRD applies only to the amount of eligible dividends that are reinvested pursuant to the plan (assuming that all the other requirements under section 965 are satisfied).

.04 Section 958(a) Chain of Ownership — Stock Deemed Issued Pursuant to Section 304(a)(1)

If stock of an acquiring CFC is deemed to be issued to another CFC pursuant to section 304(a)(1), the acquiring CFC is treated as being in a chain of ownership described in section 958(a) for purposes of applying section 965(a)(2).

2005–22 I.R.B. 1116 May 31, 2005

for purposes of valuing assets pursuant to section 5.06 of Notice 2005–10, even if they use the tax book value or alternative tax book value methodology for purposes of allocating and apportioning interest expense under section 864(e). Such election is made on the annual report (required under section 8.02(a) of Notice 2005–10) filed by the taxpayer for the taxable year of the acquisition.

.06 Distributions to Intermediary Disregarded Entities — Clarification of Section 3.02 of Notice 2005–10

Section 3.02 of Notice 2005–10 provides that for purposes of section 965(a), a cash dividend paid by a CFC to a passthrough entity that is owned by a U.S. shareholder is treated as received by such U.S. shareholder only if and to the extent that such shareholder receives cash in the amount of the CFC dividend during the taxable year for which such election is in effect. For this purpose, a disregarded entity need not actually distribute cash to a U.S. shareholder of the CFC, provided that the U.S. shareholder otherwise receives the cash from the disregarded entity and there is no legal obligation for the U.S. shareholder to repay the cash to the disregarded entity. ⁷ For purposes of the preceding sentence, the term U.S. shareholder is defined in section 951(b).

Example . (i) Facts . USP, a domestic corporation, wholly owns DE, a disregarded entity. DE wholly owns CFC, a foreign corporation. Since Year 1, USP has held a $200x obligation of DE. CFC pays a $100x dividend to DE during Year 3, USP’s election year. Also during Year 3, DE repays $100x of its obligation to USP.

(ii) Result . The $100x dividend paid by CFC is paid to DE, a pass-through entity that is owned by USP. As a result, pursuant to section 3.02 of Notice 2005–10, such dividend is treated as a cash dividend for purposes of section 965 only if and to the extent that USP receives $100x from DE during Year 3 without an obligation to repay those funds to DE. DE’s repayment of $100x of its $200x obligation held by USP satisfies this requirement, and the $100x dividend paid by CFC during the election year therefore qualifies as a cash dividend for purposes of section 965. The result is the same regardless of whether the $100x repayment by DE is of principal, accrued interest, or both.

(iii) Alternative Facts . The facts are the same except that instead of using the $100x to satisfy a portion of an obligation held by USP, DE uses the $100x cash to acquire an asset from USP. The result is the same.