Part IV. Items of General Interest

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Guidance Under Section 956 for Determining the Basis of Property Acquired in Certain Nonrecognition Transactions

REG–102122–08

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 and the Treasury Department are issuing temporary regulations (T.D. 9402) under section 956 of the Internal Revenue Code (Code) relating to the determination of basis in property acquired by a controlled foreign corporation in certain nonrecognition transactions that are intended to avoid United States income tax. Those regulations affect United States shareholders of a controlled foreign corporation that acquires United States property in certain nonrecognition transactions. The text of those regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by September 22, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–102122–08), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–102122–08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–102122–08).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed

regulations, John H. Seibert, (202) 622–3860; concerning submissions of comments and/or requests for a hearing, Regina Johnson, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin provide guidance regarding the determination of basis for property acquired in certain nonrecognition transactions that repatriate earnings and profits of a controlled foreign corporation but are structured with the intent to avoid an income inclusion by the United States shareholders of the controlled foreign corporation under section 951(a)(1)(B). This avoidance is achieved by the use of the basis rules under section 362(a) for the acquisition by the controlled foreign corporation of certain stock or obligations that constitute United States property within the meaning of section 956(c).

The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations.

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. Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), 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 will affect primarily large multi-national United States corporations that own a significant interest in foreign corporations that acquire certain United States property in a transaction subject to the regulations. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small

Business Administration for comment on its impact on small entities.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department continue to consider, outside the context of section 956, the appropriate basis of stock or obligations issued by a transferor in the hands of the transferee as determined under section 362. The IRS and the Treasury Department are also considering whether any additional rules are necessary or appropriate to coordinate the section 956 basis determinations under these regulations with basis determinations under other provisions of the Code or regulations. Comments are requested in this regard. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested by any person who timely submits comments. If a public hearing is scheduled, notice of the date, time and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is John H. Seibert, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

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 1.956–1 is amended by adding a sentence to the end of paragraph (e)(1) and adding new paragraphs (e)(5), (e)(6) and (f) to read as follows:

August 4, 2008 278 2008–31 I.R.B.

ductions ” of Form 1040, “ U.S. Individual Income Tax Return ” or whether instead the allowable deduction would properly be taken into account in computing the ordinary business income or loss from the trade or business activities of the partnership on Schedule E, “ Supplemental Income and Loss .” Revenue Ruling 2008–38, 2008–31 I.R.B. 249, published concurrently with this announcement, provides that, in the case of an individual taxpayer, interest paid or accrued on indebtedness allocable to property held for investment described in § 163(d)(5)(A)(ii) is a trade or business deduction described in § 62(a)(1) that is deductible (after the application of the § 163(d)(1) limitation) in determining the taxpayer’s adjusted gross income. Accordingly, the limited partner described in Revenue Ruling 2008–12 would properly include the allowable amount of his distributive share of the trading partnership’s interest expense in computing the limited partner’s ordinary business income or loss on Schedule E. Consistent with the reporting requirements of Notice 88–37, 1988–1 C.B. 522, the interest deduction of the limited partner that is properly reportable on Schedule E should be identified on a separate line in Part II, Line 28, column (a), as “investment interest,” followed by the name of the trading partnership that paid or incurred the interest expense, and the amount of such interest expense should be entered in column (h).

DRAFTING INFORMATION

The principal author of this announcement is Faith P. Colson of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this announcement, contact Faith P. Colson at (202) 622–3060 (not a toll-free call).

§1.956–1 Shareholder’s pro rata share of a controlled foreign corporation’s increase in earnings invested in United States property .

• • • • (e) * * * (1) * * * See §1.956–1T(e)(6) for a special rule for determining amounts attributable to United States property acquired as the result of certain nonrecognition transactions.
• • (e)(5) [The text of the proposed amendment to §1.956–1(e)(5) is the same as the text for §1.956–1T(e)(5) published elsewhere in this issue of the Bulletin].

(e)(6) [The text of the proposed amendment to §1.956–1(e)(6) is the same as the text for §1.956–1T(e)(6) published elsewhere in this issue of the Bulletin].

(f) [The text of the proposed amendment to §1.956–1(f) is the same as the text for §1.956–1T(f) published elsewhere in this issue of the Bulletin].

Steven T. Miller, Acting Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on June 23, 2008, 8:45 a.m., and published in the issue of the Federal Register for June 24, 2008, 73 F.R. 35606)

Treatment of an Individual Nonmaterially Participating Partner’s Distributive Share of Investment Interest Expense From a Trader Partnership

Announcement 2008–65

In Revenue Ruling 2008–12, 2008–10 I.R.B. 520, the IRS clarified that a nonmaterially participating partner’s distributive share of the interest expense of a partner

ship engaged in the trade or business of trading in securities is subject to the investment interest limitation in § 163(d)(1), provided that the partner is an individual. This conclusion is based on the definition of the term “property held for investment” in § 163(d)(5)(A)(ii). Pursuant to that definition, a taxpayer’s interest in a trade or business activity that is not a passive activity is classified as property held for investment for § 163(d) purposes if the taxpayer does not materially participate in such activity. The scope of § 163(d)(5)(A)(ii) is narrow because trade or business activities in which the taxpayer does not materially participate are generally treated as passive activities under the general definition of “passive activity” in § 469(c)(1). However, certain specified trade or business activities are treated as per se nonpassive regardless of the taxpayer’s degree of participation in the activity. For example, § 469(c)(3) provides that the term “passive activity” does not include certain working interests in oil and gas properties. In Revenue Ruling 2008–12, the partnership’s activity involved the trading of personal property (as defined in § 1092(d)) for its own account. Under § 1.469–1T(e)(6), such activity is treated as per se nonpassive. Thus, even though the partnership’s trading activity rose to the level of a trade or business, its interest expense attributable to such activity and allocable to individual partners who did not materially participate in the activity was subject to the § 163(d) limitation, which is applied at the partner level.

Since publication of Revenue Ruling 2008–12, a number of taxpayers have inquired as to whether the interest deduction allowable to the nonmaterially participating limited partner after the application of the § 163(d) limitation would properly be reported on Schedule A, “ Itemized De-

2008–31 I.R.B. 279 August 4, 2008