SECTION 9. DRAFTING

INFORMATION

The principal author of this notice is Paul J. Carlino of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Carlino at (202) 622–3840 (not a tollfree call).

Request for Comments

Comments may be submitted to CC:PA:LPD:PR (Notice 2007–9), Room 5203, Internal Revenue Service, PO Box 7604, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at 1111

are considering a rule similar to the one described in section 7(d) of this notice for principal purpose domestic partnerships.

(b) Amounts that reduce the U.S. income tax base, including factoring income

Transactions abuse the purposes of section 954(c)(6) if they reduce income from the U.S. income tax base by having the net effect of creating a deduction of a payment, accrual, or loss of a person subject to U.S. tax without a corresponding inclusion in the subpart F income of the CFC recipient, where such inclusion would have resulted in the absence of section 954(c)(6).

For purposes of section 954(c)(6), interest includes factoring income which is treated as income equivalent to interest for purposes of section 954(c)(1)(E) and interest described in section 864(d) (collectively, factoring income). However, certain factoring income is not eligible for the section 954(c)(6) exception. Any factoring income derived from a transaction which has the net effect of creating a deduction of a payment, accrual, or loss of a person subject to U.S. tax without a corresponding inclusion in the subpart F income of the CFC recipient, where such inclusion would have resulted in the absence of section 954(c)(6), is not eligible for the section 954(c)(6) exception. The following example illustrates the application of this paragraph:

Example . (i) Facts . USP, a domestic corporation, owns 100% of the stock of CFC1 and CFC2. USP sells inventory to CFC1 in exchange for receivables. USP sells the CFC1 receivables to CFC2 at a discount, and CFC2 generates income on the collection of the CFC1 receivables.

(ii) Analysis . The income earned by CFC2 on the collection of receivables is related person factoring income as defined in section 864(d) and, therefore, is treated as interest income received on a loan from CFC2 to CFC1. However, because CFC2 acquired the CFC1 receivables from USP at a discount, resulting in a current loss for USP, such interest income is not eligible for the section 954(c)(6) exception.

(c) Avoidance of section 956

If a dividend reduces or eliminates the applicable earnings of a CFC, within the meaning of section 956(b)(1), such that it reduces a U.S. shareholder’s inclusion pursuant to section 951(a)(1)(B), the dividend is not eligible for the section 954(c)(6) exception. See also Treas. Reg. § 1.956–1T(b)(4). The following

example illustrates the application of this paragraph:

Example . (i) Facts . USP, a domestic corporation, owns 100% of the stock of CFC1 which, in turn, owns 100% of the stock of CFC2. At the beginning of Year 1, at a time when the stock of CFC2 has a value of $300 and CFC2 has zero applicable earnings (within the meaning of section 956(b)(1)), CFC2 loans $100 to USP in exchange for a note. During Year 1, CFC2 generates $100 of non-subpart F earnings and profits. Shortly before the end of Year 1, CFC2 distributes $100 to CFC1 that results in a $100 dividend to CFC1 and, as a result, CFC2 takes the position that it’s applicable earnings under section 956(b)(1) are reduced from $100 to $0.

(ii) Analysis . The USP note held by CFC2 is United States property (within the meaning of section 956(c)(1)(C)), and CFC2 generated $100 of earnings and profits during Year 1. As a result, USP would have an income inclusion of $100 pursuant to section 951(a)(1)(B), but for the applicable earnings limitation under section 956(b)(1). However, as a result of the Year 1 dividend CFC2 paid to CFC1, CFC2 does not have any applicable earnings and USP, therefore, would not have a section 951(a)(1)(B) inclusion. Thus, the dividend income of CFC1 is not eligible for the section 954(c)(6) exception.

(d) Use of options or similar interests

When the use of options or similar interests causes a foreign corporation to become a CFC payor, and a principal purpose for the use of the options or similar interests is to qualify dividends, interest, rents, or royalties paid by the foreign corporation for the section 954(c)(6) exception, the dividends, interest, rents, or royalties received or accrued from such foreign corporation will not be treated as being received or accrued from a CFC payor and, therefore, will not be eligible for the section 954(c)(6) exception. For purposes of this paragraph, an interest that is similar to an option includes, but is not limited to, a warrant, a convertible debt instrument, an instrument other than debt that is convertible into stock, a put, a stock interest subject to risk of forfeiture, and a contract to acquire or sell stock.

(e) Change of character of income through the use of a conduit entity

When a transaction changes the character of the underlying income, is effected through the use of a conduit entity, and a principal purpose for the use of the conduit entity is to qualify the underlying income for the section 954(c)(6) exception, the dividends, interest, rents, or royalties received or accrued will not be treated as

2007–5 I.R.B. 404 January 29, 2007

(2) Amounts —(i) For each 2006 Form 1040 Series federal income tax return filed showing one exemption for purposes of determining the standard amount, the standard amount allowed on that return is $30.

(ii) For each 2006 Form 1040 Series federal income tax return filed showing two exemptions for purposes of determining the standard amount, the standard amount allowed on that return is $40.

(iii) For each 2006 Form 1040 Series federal income tax return filed showing three exemptions for purposes of determining the standard amount, the standard amount allowed on that return is $50.

(iv) For each 2006 Form 1040 Series federal income tax return filed showing four or more exemptions for purposes of determining the standard amount, the standard amount allowed on that return is $60.

(c) Interest . The standard amount represents both the overpayment of the federal communications excise tax paid on nontaxable service and the interest on that overpayment.

(d) Actual Amounts . To request a credit or refund for the actual amount of federal communications excise tax paid, taxpayers must complete Form 8913, Credit for Fed- eral Telephone Excise Tax Paid, and attach that form to their 2006 Form 1040 Series federal income tax return.

(e) Examples . The following examples illustrate the application of this section.

Example 1 . A, an individual, files a joint return with Z, A’s spouse. A meets the conditions to allowance described in paragraph (a) of this section. A used the 2006 federal income tax return instructions to determine that their correct number of exemptions is two. A may request the credit or refund of the federal communications excise tax under § 4251 for $40.

Example 2 . B, an individual, used the 2006 federal income tax return instructions to determine that she had one exemption. B further used her telephone bills for the period March 1, 2003, through July 31, 2006, to determine that the total amount paid for federal communications excise tax under § 4251 for nontaxable service to all telecommunications providers was $45. Completing Form 8913 and attaching it to her 2006 Form 1040 Series federal income tax return, B may request a credit or refund of $45, the actual amount she paid in federal communications excise tax on nontaxable service under § 4251. As an alternative, B may request a credit or refund of the standard amount of $30 without having to complete Form 8913.

Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR (Notice 2007–9) Room 5203. Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov . Include the notice number (Notice 2007–9) in the subject line.

Communications Excise Tax; Toll Telephone Service

Notice 2007–11