SECTION 1. OVERVIEW

This notice provides guidance concerning section 909 of the Internal Revenue Code (“Code”). The Treasury Department and Internal Revenue Service (“IRS”) anticipate that this will be the first of several items of published guidance concerning section 909. This notice primarily addresses the application of section 909 to

for property or services) shall deduct and withhold from such payment a tax in an amount equal to 3% of such payment. There are many exceptions to the § 3402(t) withholding requirements, including the exception provided by § 3402(t)(2)(G) for payment made by a political subdivision of a State (or an instrumentality of a political subdivision of a State) which makes less than $100,000,000 of payments for property or services annually (other than payments otherwise exempt from § 3402(t) withholding, such as payroll payments). TIPRA originally provided that § 3402(t) applies to payments made after December 31, 2010.

Notice 2008–38, 2008–1 C.B. 683, published on March 31, 2008, invited public comments on guidance under § 3402(t). Notice 2008–38 requested specific comments on the application of § 3402(t) to payment cards. Proposed regulations under §§ 3402(t), 3406, 6011, 6051, 6071, and 6302 were published on December 5, 2008 (REG–158747–06, 2009–4 I.R.B. 362 [73 FR 74082]). Subsequently, § 1511 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111–5, 123 Stat. 115, amended the effective date of § 3402(t) withholding, so that it applies only to payments made after December 31, 2011. The Treasury Department and the IRS are currently developing final regulations under § 3402(t).

On July 30, 2008, following the enactment of § 3402(t), § 6050W was enacted as part of the Housing Assistance Tax Act of 2008, Div. C of the Housing and Economic Recovery Act of 2008, Pub. L. No. 110–289, 122 Stat. 2654. Section 6050W requires merchant acquiring entities that make payment to merchants and other participating payees in settlement of reportable payment card transactions to report the gross amount of these transactions for each payee for each calendar year. This reporting requirement applies to payment card transactions for calendar years beginning after December 31, 2010. Final regulations under § 6050W were published on August 16, 2010 (T.D. 9496, 2010–43 I.R.B. 484 [75 FR 49821]).

Under proposed § 31.3402(t)–3(e), payments subject to withholding under § 3402(t) include payments made by payment card. Numerous commenters indicated that applying § 3402(t) with

holding and related reporting requirements to payment card transactions would be difficult to administer and noted that these transactions will already be reported under § 6050W. This notice responds to the concerns raised and the need for taxpayers to begin the implementation process to comply with the requirements of § 3402(t).

GUIDANCE

The withholding requirements of § 3402(t) and the related reporting requirements will not apply to any payment made by payment card for any calendar year beginning earlier than at least 18 months from the date further guidance is finalized for § 3402(t) withholding on payments by payment card (and thus will not apply for the 2012 calendar year).

This guidance does not apply to any payment made using a convenience check. Convenience checks are accepted and processed through the banking system in the same manner as traditional checks.

For purposes of this notice, the following definitions apply:

(1) Payment card transaction means any transaction in which a payment card, or any account number or other indicia associated with a payment card, is accepted as payment;

(2) Payment card means any card, including any stored value card, issued pursuant to an agreement or arrangement that provides for—

(A) One or more issuers of such cards; (B) A network of persons unrelated to each other, and to the issuer, who agree to accept such cards as payment; and

(C) Standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept the cards as payment;

(3) Stored value card means any card with a prepaid value, including any gift card;

(4) Convenience check means a check issued in connection with a payment card account;

(5) Merchant acquiring entity means the bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions; and

(6) Participating payee means a person who agrees to accept payment cards as payment.

2010–52 I.R.B. 916 December 27, 2010

For purposes of section 909, there is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account by a covered person. Section 909(d)(1). Section 909 does not suspend foreign income taxes if the same person pays the tax but takes into account the related income in a different taxable period (or periods) due to, for example, timing differences between the U.S. and foreign tax accounting rules. The term “foreign income tax” means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States. Section 909(d)(2). A foreign income tax includes any tax paid in lieu of such a tax within the meaning of section 903. Section 909(d)(3) provides that the term “related income” means, with respect to any portion of any foreign income tax, the income (or, as appropriate, earnings and profits) to which such portion of the foreign income tax relates. The term “covered person” means, with respect to any person who pays or accrues a foreign income tax (the “payor”): (1) any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value); (2) any person that holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor; (3) any person that bears a relationship to the payor described in section 267(b) or 707(b); and (4) any other person specified by the Secretary. Section 909(d)(4). Except as otherwise provided by the Secretary, any foreign income tax not currently taken into account by reason of section 909 is taken into account as a foreign income tax paid or accrued in the taxable year in which, and to the extent that, the taxpayer, the section 902 corporation or a section 902 shareholder (as the case may be) takes the related income into account under chapter 1 of the Code. Section 909(c)(2). Notwithstanding this general rule, foreign income taxes are translated into U.S. dollars under the general rules of section 986 and not as if they were paid or accrued in the year in which the related income is taken into account. Section 909(c)(2). Section 909(e) provides that the Secretary may issue such regulations or other guidance as is necessary or appropriate

foreign income taxes paid or accrued by a section 902 corporation in taxable years beginning on or before December 31, 2010 (“pre-2011 taxable years”). The Treasury Department and IRS expect to issue regulations that incorporate the guidance described in this notice.

Section 2 of this notice provides background information with respect to section 909. Section 3 provides rules for determining whether foreign income taxes paid or accrued by a section 902 corporation in pre-2011 taxable years (“pre-2011 taxes”) are suspended under section 909 in taxable years beginning after December 31, 2010 (“post-2010 taxable years”) of a section 902 corporation. Section 4 identifies an exclusive list of arrangements that will be treated as giving rise to foreign tax credit splitting events in pre-2011 taxable years (“pre-2011 splitter arrangements”) and provides guidance on determining the amount of related income and pre-2011 taxes paid or accrued with respect to pre-2011 splitter arrangements. Section 5 provides guidance concerning the application of section 909 to partnerships and trusts. Section 6 discusses the interaction between section 909 and other Code provisions. Section 7 provides the effective date of the regulations described in this notice. Section 8 solicits comments and provides contact information.

Unless otherwise provided, the guidance described in this notice applies only to pre-2011 taxes and does not apply to foreign income taxes paid or accrued in post-2010 taxable years. Future guidance will address the application of section 909 to foreign income taxes paid or accrued in post-2010 taxable years. The Treasury Department and IRS expect that future guidance will provide that foreign tax credit splitting events in post-2010 taxable years will at least include all of the arrangements identified in section 4 of this notice. This future guidance may also provide that section 909 applies to other transactions or arrangements not identified in section 4 of this notice, but any such guidance relating to the definition of a foreign tax credit splitting event will apply only with respect to foreign income taxes paid or accrued in post-2010 taxable years.

Section 909 does not address the determination of the person who paid a foreign income tax for U.S. federal income tax purposes. See §1.901–2(f). Further, nothing

in this notice should be construed as providing guidance with respect to that determination.