SECTION 10. OTHER GUIDANCE

.01 Application of General Tax Law Principles

Unless otherwise specifically provided, general tax law principles, including the circular cash flow, step-transaction, and substance-over-form doctrines, apply for purposes of determining the federal income tax consequences of transactions undertaken in connection with section 965. For example, assume USP, a domestic corporation, wholly owns CFC1 which, in turn, wholly owns CFC2. If CFC2 declares a dividend and CFC1 declares a dividend of the same amount, and, at the direction of CFC1, CFC2 pays the amount of its dividend in cash directly to USP, then under applicable Code provisions, including section 965, such payment shall be treated as a distribution of cash from CFC2 to CFC1, followed by a distribution of cash from CFC1 to USP. See, e.g., Rev. Rul. 80–292, 1980–2 C.B. 104.

.02 Base Period Inclusions under Section 965(b)(2)(B)

In computing a taxpayer’s base period amount, section 965(b)(2)(B)(i) includes dividends described in section 965(c)(3) that were received during each base period year from CFCs, section 965(b)(2)(B)(ii)

includes amounts includible in gross income for each base period year under section 951(a)(1)(B) with respect to CFCs, and section 965(b)(2)(B)(iii) includes amounts that would have been included for each base period year but for section 959(a). For this purpose, dividends received from CFCs by a disregarded entity or a partnership owned by a U.S. shareholder during a base period year shall be treated as received by such U.S. shareholder to the extent the dividend was included in income shown on the U.S. shareholder’s return described in section 965(b)(2) for the base period year, regardless of whether cash or property in the amount of the dividend was received by the shareholder in the base period year. In addition, for purposes of section 965(b)(2)(B), amounts includible under section 951(a)(1)(B) (or that would have been so included but for section 959(a)) in gross income of a domestic partnership that was owned by a U.S. shareholder during a base period year shall be treated as includible in the U.S. shareholder’s income under section 951(a)(1)(B), or excluded under section 959(a), to the extent the includible amount was (i) allocated to the U.S. shareholder-partner under the rules of sections 702 and 704 and the regulations thereunder in a base period year; and (ii) separately stated to the partner under Treas. Reg. §1.702–1(a)(8)(ii).

.03 Allocation of $500 Million Limitation—Clarification of Section 4.05 of Notice 2005–38

Section 4.05 of Notice 2005–38 provides that the $500 million limitation on qualifying dividends described in section 965(b)(1)(A) is allocated among the qualified members of a section 52(a) group in proportion to the aggregate amount of total current and accumulated non-previously-taxed earnings and profits of all CFCs owned (within the meaning of section 958(a)) by such qualified members, determined with reference to the earnings and profits appropriately reported on Schedule J of the last Form 5471 filed on or before the apportionment date. For this purpose, the amount of non-PTI earnings and profits of a CFC taken into account by a qualified member is that member’s pro rata share of the CFC’s earnings and profits, determined in accordance with

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shareholder other than in its capacity as a member of the partnership.

.10 Domestic Reinvestment Plans—Clarification of Section 4.01 of Notice 2005–10

Section 965(b)(4)(B) provides that section 965(a) shall not apply to any dividend received by a U.S. shareholder unless the amount of the dividend is invested in the United States pursuant to a domestic reinvestment plan which provides for the reinvestment of such dividend in the United States. Section 4.01 of Notice 2005–10 provides that a taxpayer may adopt separate domestic reinvestment plans to apply to different cash dividends made during the election year. A taxpayer may, but is not required to, adopt a domestic reinvestment plan that provides for the reinvestment of cash dividends only from specified CFCs, to the extent of the dollar amounts of anticipated investments that are specified in the plan in accordance with section 4.03 of Notice 2005–10. In this situation, cash dividends from other CFCs in the election year that are not covered by another domestic reinvestment plan will not be subject to the section 965(a) DRD or to the disallowance of deductions and credits under section 965(d), even if the dollar amount of cash dividends from the specified CFCs is less than the total dollar amount of anticipated investments specified in the plan and if the taxpayer in fact expends the total dollar amount specified in the plan on permitted investments. On the other hand, a taxpayer may not choose to claim the section 965(a) DRD with respect to less than all of the qualifying dividends that are covered by a domestic reinvestment plan, assuming that all such amounts are properly reinvested in accordance with the plan and that all the other requirements under section 965 are satisfied. For example, assume that USP wholly owns CFC1 and CFC2. USP properly adopts a domestic reinvestment plan that provides for the reinvestment of up to $10 million of qualifying dividends in the United States. During the election year CFC1 pays qualifying dividends of $8 million, CFC2 pays qualifying dividends of $2 million, USP invests at least $10 million in permitted investments, and all the other requirements of section 965 are met. Unless the plan provides only for the reinvestment of qualify

section 951(a)(2) for the year for which Form 5471 was filed.

.04 Effect of Restatement of Certified Financial Statement

A restatement of a previously filed and certified financial statement described in section 965(c)(1) that occurs after June 30, 2003, does not alter the statement’s status as having been filed and certified on or before June 30, 2003. In such a case, the limitations described in section 965(b)(1)(B) and (C) are the amount of earnings permanently reinvested outside the United States, and a specific amount of tax liability, respectively, that are shown on the statement as originally filed, not the amounts shown on the restatement.

.05 Definition of United States

For purposes of section 965, the term “United States” includes the 50 states, the District of Columbia, the territorial waters of the United States, and the seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources. The term “United States” does not include possessions and territories of the United States or the airspace over the United States and these areas.

.06 Treatment of Accounts Payable Resulting from Section 482 Adjustments

Accounts payable established under Rev. Proc. 99–32, 1999–2 C.B. 296, in connection with section 482 adjustments are treated as indebtedness for purposes of section 965(b)(3).

.07 Exceptions to Related Party Indebtedness for Certain Ordinary Course Transactions of Banks and Dealers in Securities—Addition to Section 7.02 of Notice 2005–38

For purposes of section 965(b)(3), the term “indebtedness” does not include indebtedness of a CFC arising in the ordinary course of business as a bank or as a dealer in securities that would not be treated as U.S. property under section 956(c)(2)(A)(i), (J), (K), or (L) were it an obligation of a United States per

son (and not of the CFC). For purposes of applying the exception under section 956(c)(2)(A)(i), a “bank” is a CFC that meets the definition of a bank in section 585(a)(2)(B), without regard to the second sentence thereof, and without regard to whether the CFC is engaged in a U.S. trade or business, provided that the CFC operates under the laws of the foreign jurisdiction where it is engaged in business and is subject to supervision and examination by an authority having supervision over banking institutions in that jurisdiction (in lieu of supervision by a Federal or State supervisory authority).

.08 Intercompany Trade Payables—Modification of Section 7.02 of Notice 2005–38

For purposes of section 965(b)(3), in addition to the exceptions described in section 7.02 of Notice 2005–38 and section 10.07 of this notice, the term “indebtedness” does not include indebtedness of a CFC arising in the ordinary course of a business from licenses, provided that such indebtedness is actually paid within 183 days.

.09 Distributions to Intermediary Partnerships—Clarification of Section 3.02 of Notice 2005–10 and Section 9.06 of Notice 2005–38

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 a cash distribution in the amount of the CFC dividend during the election year. Section 9.06 of Notice 2005–38 provides a limited exception to the general cash distribution requirement with respect to cash dividends paid to a disregarded entity. This limited exception does not apply to cash dividends paid to a partnership. Therefore, a cash dividend paid by a CFC to a partnership that is owned by a U.S. shareholder is treated as received by such U.S. shareholder only if and to the extent the partnership distributes cash to the shareholder-partner in the election year. For this purpose, a distribution of cash does not include a guaranteed payment, as defined in section 707(c), or a payment made to the

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Estimated average annual burden hours per respondent: 10 hours.

Estimated number of respondents: 25,000. Estimated annual frequency of responses: once.

The collections of information contained in this notice have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information should be received by October 19, 2005. Comments are specifically requested concerning:

Whether the proposed collections of information are necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collections of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

Comments concerning the accuracy of the burden estimate and suggestions for reducing the burden of the final or temporary regulations should be sent to the Of- fice of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Ser- vice, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington DC 20224.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

ing dividends from either CFC1 or CFC2, the entire $10 million of qualifying dividends is subject to section 965.

.11 Qualified Plan Funding—Clarification of Section 5.05(b) of Notice 2005–10

Section 5.05(b) of Notice 2005–10 provides, in part, that the satisfaction of an obligation to fund a qualified plan ordinarily will contribute to the financial stabilization of the taxpayer. For this purpose, contributions to a qualified pension plan that do not give rise to excise tax under section 4972 (which imposes a tax on certain nondeductible pension contributions) will be considered to satisfy an obligation to fund a qualified plan even if those contributions are not currently deductible. Contributions to a qualified profit sharing or stock bonus plan also qualify for this purpose if those contributions to the plan are required under a fixed contribution formula provided under the terms of the plan. Contributions to a qualified profit sharing or stock bonus plan do not qualify if contributions to the plan are made on a discretionary basis.