Section 883.—Exclusions From Gross Income

26 CFR 1.883–5: Effective dates.

T.D. 9218

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Exclusions From Gross Income of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule; delay of effective date.

SUMMARY: This document amends the applicability date of final regulations under sections 883(a) and (c) (T.D. 9087, 2003–2 C.B. 781) which were published in the Federal Register on August 26, 2003 (68 FR 51394). Those final regulations relate to income derived by a foreign corporation from the international operation of ships or aircraft.

DATES: Effective Date: These regulations are effective August 8, 2005.

Applicability Date: These regulations are applicable to taxable years of foreign corporations beginning after September 24, 2004.

FOR FURTHER INFORMATION CONTACT: Patricia Bray, (202) 622–3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Sections 883(a)(1) and (a)(2) of the Internal Revenue Code (Code) provide that income derived by a foreign corporation from the international operation of ships or aircraft may be excluded from gross income.

In 2003, the Treasury Department and the IRS issued final regulations under section 883 applicable to taxable years of a foreign corporation beginning 30 days or more after August 26, 2003. The final regulations provide, in general, that a foreign corporation organized in a qualified foreign country and engaged in the international operation of ships or aircraft shall exclude qualified income from gross income for purposes of U.S. Federal income taxation, provided that the corporation can satisfy certain stock ownership and related documentation requirements.

The regulations provide that a foreign corporation may satisfy the stock ownership requirement if it meets one of three tests under §1.883–1(c)(2). One such test provides that a controlled foreign corporation, as defined in section 957(a) (CFC), satisfies the stock ownership test of §1.883–1(c)(2) if it meets the requirements of §1.883–3, including the income inclusion test of §1.883–3(b). The income inclusion test requires that more than 50 percent of the adjusted net foreign base company income derived by the CFC from the international operation of a ships or aircraft be includible in the gross income of one or more U.S. citizens, individual residents of the United States, or domestic corporations.

Need for Change

Pursuant to section 423 of the American Jobs Creation Act of 2004, 118 Stat. 1418 (2004), Public Law 108–357 (AJCA), the applicability date of the final regulations under section 883 is delayed for one year, so that they apply to taxable years of foreign corporations seeking qualified foreign corporation status beginning after September 24, 2004. This regulation makes the conforming changes to the final regulations.

September 12, 2005 503 2005–37 I.R.B.

(b) Election for retroactive application . Taxpayers may elect to apply §§1.883–1 through 1.883–4 for any open taxable year of the foreign corporation beginning after December 31, 1986, except that the substantiation and reporting requirements of §1.883–1(c)(3) (relating to the substantiation and reporting required to be treated as a qualified foreign corporation) or §§1.883–2(f), 1.883–3(d) and 1.883–4(e) (relating to additional information to be included in the return to demonstrate whether the foreign corporation satisfies the stock ownership test) will not apply to any year beginning before September 25, 2004. Such election shall apply to the taxable year of the election and to all subsequent taxable years beginning before September 25, 2004.

(c) Transitional information reporting rule . For taxable years of the foreign corporation beginning after September 24, 2004, and until such time as the Form 1120–F, “ U.S. Income Tax Return of a Foreign Corporation,” or its instructions are revised to provide otherwise, the information required in §1.883–1(c)(3) and §1.883–2(f), §1.883–3(d) or §1.883–4(e), as applicable, must be included on a written statement attached to the Form 1120–F and filed with the return.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved June 24, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury (Tax Policy) .

(Filed by the Office of the Federal Register on August 5, 2005, 8:45 a.m., and published in the issue of the Federal Register for August 8, 2005, 70 F.R. 45529)