SECTION 3. DIVIDENDS

For purposes of section 954(c)(6), the term “dividend” has the meaning provided in section 316(a), including any amount

2007–5 I.R.B. 402 January 29, 2007

under section 954(b)(5) and Treas. Reg. § 1.954–1(a)(4) and (c) to reduce the related CFC payor’s adjusted gross FBCI (as defined in Treas. Reg. § 1.954–1(a)(3)), adjusted gross insurance income (as defined in Treas. Reg. § 1.954–1(a)(6)), or any other category of income included in subpart F income under section 952(a).

In general, rents and royalties that are allocated and apportioned to income that is not subpart F income are eligible for the section 954(c)(6) exception (subject to the rules below for ECI), even if deductions for such amounts exceed the gross income of the related CFC payor in the year paid or accrued. However, rents and royalties are not eligible for the section 954(c)(6) exception to the extent deductions for such amounts create (or increase) a deficit which under section 952(c) may reduce the subpart F income of the related CFC payor or another CFC.

(b) Rents and royalties properly allocable or apportionable to non-ECI

Rents and royalties are not eligible for the section 954(c)(6) exception to the extent the deductions for the rent or royalty payments are allocated and apportioned under section 882(c) and Treas. Reg. § 1.861–8, to gross income of the related CFC payor that is (or is treated as) ECI.

Rents and royalties are not eligible for the section 954(c)(6) exception to the extent deductions for such amounts create (or increase) a net operating loss carryover that is effectively connected with the conduct of a trade or business within the United States.