Part IV. Items — Internal Revenue Bulletin 2007-6

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Guidance Necessary to Facilitate Business Electronic Filing Under Section 1561

REG–161919–05

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9304) that affect component members of controlled groups of corporations and consolidated groups filing life-nonlife Federal income tax returns. They provide guidance regarding the apportionment of tax benefit items and the amount and type of information these members are required to submit with their returns. The text of those regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments, and a request for a public hearing, must be received by March 22, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–161919–05), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–161919–05), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–161919–05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Grid Glyer, (202) 622–7930, concerning submissions of comments and

requests for public hearings, Kelly Banks (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend 26 CFR Part 1 to add and 1.1561–3T, and amend §§1.1502–47T and 1.1563–1T. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to the following proposed regulations, §§1.1561–1, 1.1561–3 and 1.1563–1, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. With respect to the following proposed regulations, §§1.1502–43, 1.1502–47 and 1.1561–2, it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily affect large corporations (which are members of either controlled or consolidated groups). Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments

(a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Grid Glyer of the Office of Associate Chief Counsel (Corporate). Other personnel from the Treasury Department and the IRS participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1502–43 is amended by revising paragraph (d) and adding paragraph (e) to read as follows:

§1.1502–43 Consolidated accumulated earnings tax.

[The text of the proposed amendment to §1.1502–43 is the same as the text for §1.1502–43T published elsewhere in this issue of the Bulletin].

Par. 3. Section 1.1502–47 is amended by revising paragraph (s) and adding paragraph (t) to read as follows:

§1.1502–47 Consolidated returns by life-nonlife groups.

[The text of the proposed amendment to §1.1502–47 is the same as the text for §1.1502–47T published elsewhere in this issue of the Bulletin].

Par. 4. Section 1.1561–1 is added to read as follows:

February 5, 2007 463 2007–6 I.R.B.

§1.1561–1 General rules regarding certain tax benefits available to the component members of a controlled group of corporations.

[The text of the proposed §1.1561–1 is the same as the text for §1.1561–1T published elsewhere in this issue of the Bulletin].

Par. 5. Section 1.1561–2 is amended by revising paragraphs (a), (b), (c) and (d) and adding paragraph (f) to read as follows:

§1.1561–2 Determination of amount of tax benefits.

[The text of the proposed amendment to §1.1561–2 is the same as the text for 1.1561–2T published elsewhere in this issue of the Bulletin].

Par. 6. Section 1.1561–3 is added to read as follows:

§1.1561–3 Allocating the section 1561(a) tax items.

[The text of the proposed §1.1561–3 is the same as the text for §1.1561–3T published elsewhere in this issue of the Bulletin].

Par. 7. Section 1.1563–1 is added to read as follows:

§1.1563–1 Definition of controlled group of corporations and component members.

[The text of the proposed §1.1563–1 is the same as the text for §1.1563–1T published elsewhere in this issue of the Bulletin].

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

(Filed by the Office of the Federal Register on December 21, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2006, 71 F.R. 76955)

Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; Stewardship Expense; Correction

Announcement 2007–10

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to final and temporary regulations.

SUMMARY: This document contains corrections to final and temporary regulations (T.D. 9278, 2006–34 I.R.B. 256) that was published in the Federal Register on Friday, August 4, 2006 (71 FR 44466) regarding the treatment of controlled services transactions under section 482 and the allocation of income from intangibles, in particular with respect to contributions by a controlled party to the value of an intangible owned by another controlled party. This document also contains corrections to final and temporary regulations that modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482.

EFFECTIVE DATE: These corrections are effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Thomas A. Vidano, (202) 435–5265, or Carol B. Tan (202) 435–5159, for matters relating to section 482, and David F. Bergkuist, (202) 622–3850, for matters relating to stewardship expenses (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations (T.D. 9278) that are the subject of these corrections is under sections 482 and 861 of the Internal Revenue Code.

Need for Correction

As published, final and temporary regulations (T.D. 9278) contain errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, final and temporary regulations (T.D. 9278) that were the subject of FR Doc. 06–6497 are corrected as follows:

On page 44466, column 1, in the heading, the subject “Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; Stewardship Expense” is corrected to read “Treatment of Services Under Section 482; Allocation of Income and

Deductions From Intangibles; and Apportionment of Stewardship Expense”.

On page 44470, column 2, in the preamble under the paragraph heading “5. Comparable Profits Method for Services—Temp. Treas. Reg. § 1.482–9T(f)”, fifth line from the top of the column, the language “assets play a greater role in general” is corrected to read “assets play a greater role in generating”.
On page 44475, column 3, in the preamble under the paragraph heading “Services Subject to a Qualified Cost Sharing Arrangement—Temp. Treas. Reg. § 1.482–9T(m)(3),“ fourth line from the top of the column, the language “two provisions, the rule § 1.482–” is corrected to read “two provisions, the rule in § 1.482–”.

Cynthia Grigsby, Senior Federal Register Liaison Officer,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on December 21, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2006, 71 F.R. 76913)

Treatment of Services Under Section 482 Allocation of Income and Deductions From Intangibles Stewardship Expense; Correction

Announcement 2007–11

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing.

SUMMARY: This document contains corrections to a notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing (REG–146893–02, 2006–34 I.R.B. 317) that was published in the Federal Register on Friday, August 4, 2006 (71 FR 44247) relating to the treatment of controlled services transactions under section 482. These regulations also provide guidance regarding the allocation of income from

2007–6 I.R.B. 464 February 5, 2007

Application of Separate Limitations to Dividends From Noncontrolled Section 902 Corporations; Correction

Announcement 2007–12

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

SUMMARY: This document contains corrections to final and temporary regulations (T.D. 9260, 2006–23 I.R.B. 1001) that were published in the Federal Register on Tuesday, April 25, 2006 (71 FR 24516) concerning the application of separate foreign tax credit limitations to dividends received from noncontrolled section 902 corporations under section 904(d)(4).

DATES: These corrections are effective April 25, 2006.

FOR FURTHER INFORMATION CONTACT: Ginny Chung (202) 622–3850 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations (T.D. 9260) that are the subject of these corrections are under sections 902, 904, and 964 of the Internal Revenue Code.

Need for Correction

As published, T.D. 9260 contains errors that may prove to be misleading and are in need of clarification.

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Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1 is amended and continues to read in part:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.902–1 is amended by adding a heading to paragraph (a)(4)(i)

intangibles, in particular with respect to contributions by a controlled party to the value of an intangible owned by another controlled party, as it relates to controlled services transactions, and modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482.

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking (REG–146893–02, REG–115037–00 and REG–138603–03) by cross-reference to temporary regulations that is the subject of this correction is under section 482 and 861 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed rulemaking (REG–146893–02, REG–115037–00 and REG–138603–03) by cross-reference to temporary regulations contains errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the notice of proposed rulemaking (REG–146893–02, REG–138603–03 and REG–115037–00) by cross-reference to temporary regulations that were the subject of FR Doc. 06–6674, is corrected as follows:

On page 44247, column 2, in the heading, the subject “Treatment of Services Under Section 482 Allocation of Income and Deductions From Intangibles Stewardship Expense” is corrected to read, “Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; and Apportionment of Stewardship Expense”.
On page 44248, column 2, instructional Par. 3., number 2 is corrected to read as follows:

“2. Paragraphs (d)(3)(ii)(C), Example 4, Example 5, Example 6 and (j)(6) are added.”

§ 1.482–1 [Corrected]

On page 44248, column 3, § 1.482–1(j), lines 2 and 3, the language “amendment to § 1.482–1(j) is the same as the text of § 1.482–1T(j)(1) and (2)” is corrected to read “amendment to § 1.482–1(j)(6) is the same as the text of § 1.482–1T(j)(6)”.

§ 1.482–8 [Corrected]

On page 44249, column 2, § 1.482–8(a), line 1, the language “(a) Example 10. Cost of services plus ” is corrected to read “(b) * * * Example 10. Cost of services plus ”.
On page 44249, column 2, § 1.482–8, paragraph (b) following Ex- ample 12 . is removed.

§ 1.482–9 [Corrected]

On page 44249, column 2, § 1.482–9(m)(6), last line, the language “operation as defined in § 1.482–8”. is corrected to read “operation as defined in the proposed § 1.482–8.”.

§ 1.861–8 [Corrected]

On page 44249, column 3, § 1.861–8(f)(4), line 3, the language “same as the text of § 1.861–8T(c)(4)(i)” is corrected to read “same as the text of § 1.861–8T(f)(4)(i)”.
On page 44249, column 3, § 1.861–8(h), line 3, the language “as the text of § 1.861–8T(h)(1) published” is corrected to read “as the text of § 1.861–8T(h) published”.

Cynthia Grigsby, Senior Federal Register Liaison Officer,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on December 21, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2006, 71 F.R. 46956)

February 5, 2007 465 2007–6 I.R.B.

(iii) Determination of the source of income . For purposes of this paragraph (c)(4), income will be determined to be from sources within or without the QBU’s country of operation under the laws of the foreign country of the payor of the income.

- - - Par. 7. Section 1.904–5 is amended by revising paragraphs (a) introductory text and (a)(1) and adding Examples 4 and 5 to paragraph (i)(5) to read as follows:

§ 1.904–5 Look-through rules as applied to controlled foreign corporations and other entities .

(a) and (a)(1) [Reserved]. For further guidance, see § 1.904–5T(a) introductory text and (a)(1).

- - - (i) - - (5) - * Examples 4 and 5 [Reserved]. For further guidance, see § 1.904–5T(i)(5) Exam- ples 4 and 5 .
- - - Par. 8. Section 1.904(f)–12T is amended by revising the heading for paragraph (g)(1) to read as follows:

§ 1.904(f)–12T Transition rules (temporary) .

- - - (g) * * * (1) Recapture of separate limi- tation loss or overall foreign loss in a sep- arate category for dividends from a non- controlled section 902 corporation .
- - - Par. 9. Section 1.964–1 is amended by:

Redesignating paragraphs (a) introductory text, (a)(1), (a)(2) and (a)(3) as paragraphs (a)(1) introductory text, (a)(1)(i), (a)(1)(ii) and (a)(1)(iii), respectively.
Designating the undesignated text following newly-designated paragraph (a)(1)(iii) as paragraph (a)(2).
Removing the comma following the word “shall” from newly designated paragraph (a)(1) introductory text.
Removing the last sentence in newlydesignated paragraph (a)(1)(i).
Revising newly-designated paragraph (a)(2), and the text of paragraphs

introductory text and revising the heading for paragraph (c)(8) to read as follows:

§ 1.902–1 Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the foreign corporation .

(a) - - (4) Third- or lower-tier corpora- tion —(i) Third-tier corporation . - * *

- - - (c) - - (8) Effect of certain liquidations, re- organizations, or similar transactions on certain foreign taxes paid or accrued in taxable years beginning on or before Au- gust 5, 1997 .
- - - Par. 3. Section 1.902–1T is amended by revising the first sentence of paragraph (a)(7) to read as follows:

§ 1.902–1T Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the foreign corporation (temporary) .

(a) - - (7) * * * The term foreign income taxes means income, war profits, and excess profits taxes as defined in § 1.902–1(a), and taxes included in the term income, war profits, and excess profits taxes by reason of section 903, that are imposed by a foreign country or a possession of the United States, including any such taxes deemed paid by a foreign corporation under this section. - -

- - - Par. 4. Section 1.902–2 is amended by revising the first sentence of paragraph (a)(1) to read as follows:

§ 1.902–2 Treatment of deficits in post-1986 undistributed earnings and pre-1987 accumulated profits of a first- or lower-tier corporation for purposes of computing an amount of foreign taxes deemed paid under § 1.902–1 .

(a) * * * (1) * * *For purposes of computing foreign income taxes deemed paid under § 1.902–1(b) with respect to dividends paid by a first- or lower-tier corporation, when there is a deficit in the post

1986 undistributed earnings of that corporation and the corporation makes a distribution to shareholders that is a dividend or would be a dividend if there were current or accumulated earnings and profits, then the post-1986 deficit shall be carried back to the most recent pre-effective date taxable year of the first- or lower-tier corporation with positive accumulated profits computed under section 902. - * *

- - - Par. 5. Section 1.904–0 is amended by adding the entries for paragraphs (o)(1) and (o)(2) under § 1.904–5 to read as follows:

§ 1.904–0 Outline of regulations provisions for section 904 .

§ 1.904–5 Look-through rules as applied to controlled foreign corporations and other entities .

- - - (o) - - (1) Rules for controlled foreign corporations and other look-through entities.

(2) Rules for noncontrolled section 902 corporations.

- - - Par. 6. Section 1.904–4 is amended by revising paragraph (c)(4) introductory text and adding paragraphs (c)(4)(i) through (c)(4)(iii) to read as follows:

§ 1.904–4 Separate application of section 904 with respect to certain categories of income .

- - - (c) - - (3) and (4) [Reserved]. For further guidance, see § 1.904–4T(c)(3) and (4) introductory text.

(4)(i) Income from sources within the QBU’s country of operation . Passive income from sources within the QBU’s country of operation shall be treated as one item of income.

(ii) Income from sources without the QBU’s country of operation . Passive income from sources without the QBU’s country of operation shall be grouped on the basis of the tax imposed on that income as provided in § 1.904–4T(c)(3)(i) through (iv).

2007–6 I.R.B. 466 February 5, 2007

25, 2006, in which such foreign corporation first qualifies as a controlled foreign corporation (as defined in section 957 or 953) or a noncontrolled section 902 corporation (as defined in section 904(d)(2)(E)), any method of accounting or taxable year allowable under this section may be adopted, and any election allowable under this section may be made, by such foreign corporation or on its behalf notwithstanding that, in previous years, its books or financial statements were prepared on a different basis, and notwithstanding that such election is required by the Internal Revenue Code or regulations to be made in a prior taxable year. - * *

- - - (5) - - *(i) - - - In the event that the United States shareholders of the controlled foreign corporation do not, in the aggregate, own (within the meaning of section 958(a)) more than 50 percent of the total combined voting power of all classes of the stock of such foreign corporation entitled to vote, the controlling United States shareholders of the controlled foreign corporation shall be all those United States shareholders who own (within the meaning of section 958(a)) stock of such corporation.

Cynthia Grigsby, Senior Federal Register Liaison Officer,

Publications and Regulations Branch,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on December 22, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 26, 2006, 71 F.R. 77264)

(b)(1) introductory text and (c)(1) introductory text.

The revisions read as follows:

§ 1.964–1 Determination of the earnings and profits of a foreign corporation .

(a) - * (2) Required adjustments . The computation described in paragraph (a)(1) of this section shall be made in the foreign corporation’s functional currency (determined under section 985 and the regulations under that section) and may be made by following the procedures described in paragraphs (a)(1)(i) through (a)(1)(iii) of this section in an order other than the one listed, as long as the result so obtained would be the same. In determining earnings and profits, or the deficit in earnings and profits, of a foreign corporation under section 964, the amount of an illegal bribe, kickback, or other payment (within the meaning of section 162(c), as amended by section 288 of the Tax Equity and Fiscal Responsibility Act of 1982 in the case of payments made after September 3, 1982, and these regulations) paid after November 3, 1976, by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government shall not be taken into account to decrease such earnings and profits or to increase such deficit. No adjustment shall be required under paragraph (a)(1)(ii) or (iii) of this section unless it is material. Whether an adjustment is material depends on the facts and circumstances of the particular case, including the amount of the adjustment, its size relative to the general level of the corporation’s total assets and annual profit or loss, the consistency with

which the practice has been applied, and whether the item to which the adjustment relates is of a recurring or merely a nonrecurring nature. For the treatment of earnings and profits whose distribution is prevented by restrictions and limitations imposed by a foreign government, see section 964(b) and these regulations. For rules for determining the earnings and profits (or deficit in earnings and profits) of a foreign corporation for taxable years beginning before January 1, 1987, for purposes of sections 951 through 964, see 26 CFR 1.964–1(a) (revised as of April 1, 2006). (b) - - *(1) - - - The accounting principles to be applied in making the adjustments required by paragraph (a)(1)(ii) of this section shall be those accounting principles generally accepted in the United States for purposes of reflecting in the financial statements of a domestic corporation the operations of its foreign affiliates, including the following:

- - - (c) - - *(1) - - *The tax accounting standards to be applied in making the adjustments required by paragraph (a)(1)(iii) of this section shall be the following:
- - - Par. 10. Section 1.964–1T is amended by revising the first sentence of paragraph (c)(2) and the last sentence of paragraph (c)(5)(i) to read as follows:

§ 1.964–1T Determination of the earnings and profits of a foreign corporation (temporary) .

- - - (c) - - (2) * - * For the first taxable year of a foreign corporation beginning after April

February 5, 2007 467 2007–6 I.R.B.