SECTION 3. TREATMENT OF — Internal Revenue Bulletin 2010-52

PRE-2011 TAXES

The Treasury Department and IRS will issue regulations providing that pre-2011 taxes described in paragraphs (a) through (d) of this section 3 will not be suspended under section 909:

(a) Any pre-2011 taxes that were not paid or accrued in connection with a pre2011 splitter arrangement identified in section 4 of this notice;

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foreign taxes paid or accrued in post-2010 taxable years.

.02 Reverse Hybrid Structures

A reverse hybrid structure exists when a section 902 corporation owns an interest in a reverse hybrid. A reverse hybrid is an entity that is a corporation for U.S. federal income tax purposes but is a pass-through entity or a branch under the laws of a foreign country imposing tax on the income of the entity. As a result, the owner of the reverse hybrid is subject to tax on the income of the entity under foreign law.

A pre-2011 splitter arrangement involving a reverse hybrid structure exists when pre-2011 taxes are paid or accrued by a section 902 corporation with respect to income of a reverse hybrid that is a covered person with respect to the section 902 corporation. A pre-2011 splitter arrangement involving a reverse hybrid structure may exist even if the reverse hybrid has a deficit in earnings and profits for a particular year (for example, due to a timing difference). Such taxes paid or accrued by the section 902 corporation are pre-2011 split taxes. The related income is the earnings and profits (computed for U.S. federal income tax purposes) of the reverse hybrid attributable to the activities of the reverse hybrid that gave rise to income included in the foreign tax base with respect to which the pre-2011 split taxes were paid or accrued. Accordingly, related income of the reverse hybrid would not include any item of income or expense attributable to a disregarded entity (as defined in §301.7701–2(c)(2)(i)) owned by the reverse hybrid if income attributable to the activities of the disregarded entity is not included in the foreign tax base.

.03 Certain Foreign Consolidated Groups

A foreign consolidated group exists when a foreign country imposes tax on the combined income of two or more entities. Tax is considered imposed on the combined income of two or more entities even if the combined income is computed under foreign law by attributing to one such entity the income of one or more other entities. ¹

A foreign consolidated group is a pre-2011 splitter arrangement to the extent that the taxpayer did not allocate the foreign consolidated tax liability among the members of the foreign consolidated group based on each member’s share of the consolidated taxable income included in the foreign tax base under the principles of §1.901–2(f)(3). A pre-2011 splitter arrangement involving a foreign consolidated group may exist even if one or more members has a deficit in earnings and profits for a particular year (for example, due to a timing difference). Pre-2011 taxes paid or accrued with respect to the income of a foreign consolidated group are pre-2011 split taxes to the extent that taxes paid or accrued by one member of the foreign consolidated group are imposed on a covered person’s share of the consolidated taxable income included in the foreign tax base. The related income is the earnings and profits (computed for U.S. federal income tax purposes) of such other member attributable to the activities of that other member that gave rise to income included in the foreign tax base with respect to which the pre-2011 split taxes were paid or accrued.

No inference should be drawn from the treatment of foreign consolidated groups under section 909 as to the determination of the person who paid the foreign income tax for U.S. federal income tax purposes.

.04 Group Relief and Other Loss-Sharing Regimes

A foreign group relief or other losssharing regime exists when one entity with a loss permits the loss to be used to offset the income of one or more other entities (a “shared loss”). A pre-2011 splitter arrangement involving a shared loss exists when the following three conditions are met:

(a) There is an instrument that is treated as indebtedness under the laws of the jurisdiction in which the issuer is subject to tax and that is disregarded for U.S. federal income tax purposes (a “disregarded debt instrument”). Examples of a disregarded debt instrument include a debt obligation between (1) two disregarded entities that

are owned by the same section 902 corporation, (2) two disregarded entities that are owned by a partnership with one or more partners that are section 902 corporations, (3) a section 902 corporation and a disregarded entity that is owned by that section 902 corporation, or (4) a partnership in which the section 902 corporation is a partner and a disregarded entity that is owned by such partnership.

(b) The owner of the disregarded debt instrument pays a foreign income tax attributable to a payment or accrual on the instrument.

(c) The payment or accrual on the disregarded debt instrument gives rise to a deduction for foreign tax purposes and the issuer of the instrument incurs a shared loss that is taken into account under foreign law by one or more entities that are covered persons with respect to the owner of the instrument.

In situations in which the three conditions described above are present, pre2011 taxes paid or accrued by the owner of the disregarded debt instrument with respect to amounts paid or accrued on the instrument (up to the amount of the shared loss) are pre-2011 split taxes. The related income of a covered person is an amount equal to the shared loss, determined without regard to the actual amount of the covered person’s earnings and profits.

.05 Hybrid Instruments

A hybrid instrument for purposes of this notice is an instrument that either (1) is treated as equity for U.S. federal income tax purposes but is treated as indebtedness for foreign tax purposes (“U.S. Equity HI”) or (2) is treated as indebtedness for U.S. federal income tax purposes but is treated as equity for foreign tax purposes (“U.S. Debt HI”).

(a) U.S. Equity HI. If the issuer of a U.S. Equity HI is a covered person with respect to a section 902 corporation that is the owner of the U.S. Equity HI, there is a pre-2011 splitter arrangement with respect to the portion of the pre-2011 taxes paid or accrued by the owner section 902 corporation with respect to the amounts on the instrument that are deductible by

1 A foreign tax is not considered to be imposed on combined income solely because foreign law: (1) permits one entity to surrender a net loss to another entity pursuant to a group relief or similar regime; (2) requires a shareholder of a corporation to include in income amounts attributable to taxes imposed on the corporation with respect to distributed earnings pursuant to an integrated tax system that allows the shareholder a credit for such taxes; or (3) requires a shareholder to include, pursuant to an anti-deferral regime, income attributable to the shareholder’s interest in a corporation.

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separate limitation losses on earnings and profits in another separate category) or section 952(c)(1) (relating to certain earnings and profits deficits).

(3) If the earnings and profits of a covered person include amounts attributable to both related income and other income, including pre-1997 earnings, then distributions, deemed distributions, and inclusions out of earnings and profits (for example, under section 301, 304, 367(b), 951(a), 964(e), 1248, or 1293) of the covered person are considered made out of related income and other income on a pro rata basis. Any reduction of a covered person’s earnings and profits that results from a payment on stock that is not treated as a dividend for U.S. federal income tax purposes ( e.g., pursuant to section 312(n)(7)) will also reduce related income and other income on a pro rata basis.

(4) In lieu of the rule in paragraph (3) of this section 4.06(b), a section 902 shareholder may choose to treat all distributions, deemed distributions, and inclusions out of earnings and profits of a covered person as attributable first to related income. A section 902 shareholder may choose to use this alternative method on a timely filed original income tax return for the first post-2010 taxable year in which the shareholder computes an amount of foreign taxes deemed paid with respect to a section 902 corporation that paid or accrued pre-2011 split taxes. Such choice by a section 902 shareholder is evidenced by employing the method on its income tax return; the section 902 shareholder need not file a separate statement. A section 902 shareholder that chooses this alternative method must consistently apply it with respect to all pre-2011 splitter arrangements.

(5) Distributions, deemed distributions, and inclusions of related income (including indirectly through a partnership) to persons other than the payor section 902 corporation retain their character as related income with respect to the associated pre2011 split taxes. (6) Related income carries over to other corporations in the same manner as earnings and profits carry over under section 381, §1.367(b)–7, or similar rules, and retains its character as related income with respect to the associated pre-2011 split taxes.

(7) Related income will be considered taken into account by a section 902 share

the issuer as interest under the laws of a foreign jurisdiction in which the issuer is subject to tax but that do not give rise to income for U.S. federal income tax purposes. Pre-2011 split taxes paid or accrued by the section 902 corporation equal the total amount of pre-2011 taxes paid by the section 902 corporation less the amount of pre-2011 taxes that would have been paid or accrued had the section 902 corporation not been subject to tax on income from the U.S. Equity HI. The related income of the issuer of the U.S. Equity HI is an amount equal to the amounts that are deductible by the issuer for foreign tax purposes, determined without regard to the actual amount of the issuer’s earnings and profits.

(b) U.S. Debt HI. If the owner of a U.S. Debt HI is a covered person with respect to a section 902 corporation that is the issuer of the U.S. Debt HI, there is a pre-2011 splitter arrangement with respect to the portion of the pre-2011 taxes paid or accrued by the section 902 corporation on income in an amount equal to the interest (including original issue discount) paid or accrued on the instrument that is deductible for U.S. federal income tax purposes but that does not give rise to a deduction under the laws of a foreign jurisdiction in which the issuer is subject to tax. Pre-2011 split taxes are the pre-2011 taxes paid or accrued by the section 902 corporation on the income that would have been offset by the interest paid or accrued on the U.S. Debt HI had such interest been deductible for foreign tax purposes. The related income with respect to a U.S. Debt HI is the gross amount of the interest income recognized for U.S. federal income tax purposes by the owner of the U.S. Debt HI, determined without regard to the actual amount of the owner’s earnings and profits.

.06 Rules for Applying Section 909 to pre-2011 Split Taxes and Related Income

(a) General Rules

(1) The determination of related income, other income, pre-2011 split taxes, and other taxes, and the portion of these amounts that were distributed, deemed paid or otherwise transferred or eliminated must be made on an annual basis beginning with the first taxable year of the section 902 corporation beginning after

December 31, 1996 (“post-1996 taxable year”) in which the section 902 corporation paid or accrued a pre-2011 tax with respect to a pre-2011 splitter arrangement and ending with the section 902 corporation’s last pre-2011 taxable year. Annual amounts of related income and pre-2011 split taxes are aggregated for each separate pre-2011 splitter arrangement.

(2) The determination of annual and aggregate amounts of related income and pre-2011 split taxes with respect to each pre-2011 splitter arrangement must be made for each separate category as defined in §1.904–4(m) of the section 902 corporation, each covered person, and any other person that succeeds to the related income and pre-2011 split taxes. In the case of a pre-2011 splitter arrangement involving a shared loss, the amount of the related income in each separate category of the covered person is equal to the amount of income in that separate category that was offset by the shared loss for foreign tax purposes. In the case of a pre-2011 splitter arrangement involving a U.S. Equity HI, the related income is assigned to the issuer’s separate categories in the same proportions as the pre-2011 split taxes. Earnings and profits, including related income, are assigned to separate categories under the rules of §§1.904–4, –5, –7, and –7T. Foreign income taxes, including pre-2011 split taxes, are assigned to separate categories under the rules of §1.904–6. A section 902 shareholder must consistently apply methodologies for determining pre-2011 split taxes and related income with respect to all pre-2011 splitter arrangements.

(b) Rules Regarding Related Income

(1) In the case of each pre-2011 splitter arrangement involving a reverse hybrid or a foreign consolidated group, a covered person’s aggregate amount of related income must be adjusted each year by the net amount of income and expense attributable to the activities of the covered person that give rise to income included in the foreign tax base, even if the net amount is negative and regardless of whether the section 902 corporation paid or accrued any pre-2011 split taxes in such year.

(2) Related income is determined without regard to the application of §1.960–1(i)(4) (relating to the effect of

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a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a partner with respect to its distributive share of the related income of a partnership that is a covered person with respect to the partner to the extent the related income is taken into account by the partner.

.03 Section 704(b) Allocations

The Treasury Department and IRS recognize that certain allocations of creditable foreign tax expenditures and income of a partnership can result in the separation of the creditable foreign tax expenditures and the related income for purposes of section 909, notwithstanding that these allocations satisfy the requirements of section 704(b) and the regulations thereunder. See, e.g., §1.704–1(b)(4)(viii)( d ) and §1.704–1(b)(5), Example 24 . Partnership allocations that satisfy the requirements of section 704(b) and the regulations thereunder will not constitute pre-2011 splitter arrangements except to the extent the arrangement is otherwise described in section 4 of this notice (for example, a payment or accrual on a disregarded debt instrument that gives rise to a shared loss). However, the Treasury Department and IRS will provide in future guidance that allocations described in §1.704–1(b)(4)(viii)( d )( 3 ) will result in a foreign tax credit splitting event in post-2010 taxable years to the extent such allocations result in foreign income taxes being allocated to a different partner than the related income. The Treasury Department and IRS solicit comments on the extent to which §1.704–1(b)(4)(viii)( d ) and §1.704–1(b)(5), Example 24 should be modified in light of the enactment of section 909.

Trusts

Rules similar to the rules of sections 5.01 and 5.02 of this notice will apply in the case of any trust with one or more beneficiaries that is a section 902 corporation.

holder to the extent that the related income is recognized as gross income by the section 902 shareholder, or by an affiliated corporation described in paragraph (9) of this section 4.06(b), upon a distribution, deemed distribution, or inclusion (such as under section 951(a)) out of the earnings and profits of the covered person attributable to such related income.

(8) Related income will be considered taken into account by a payor section 902 corporation if (a) the related income is reflected in the earnings and profits of such section 902 corporation for U.S. federal income tax purposes by reason of a distribution, deemed distribution, or inclusion out of the earnings and profits of the covered person attributable to such related income or (b) the payor section 902 corporation and the covered person are combined in a transaction described in section 381(a)(1) or (2).

(9) A section 902 shareholder will be considered to have taken related income into account if one or more members of an affiliated group of corporations (as defined in section 1504) that files a consolidated federal income tax return that includes the section 902 shareholder takes the related income into account.

(10) Distributions and deemed distributions described in this section 4.06(b) (including in the case of a section 902 shareholder that has chosen the alternative method described in paragraph (4) of this section 4.06(b)) do not include distributions of amounts described in section 959(c)(1) or (c)(2), which are distributed before amounts described in section 959(c)(3).

(1) If the pre-2011 taxes of a section 902 corporation include both pre-2011 split taxes and other taxes, including pre-1997 taxes, then foreign taxes deemed paid under section 902 or 960 or otherwise removed from post-1986 foreign income taxes in pre-2011 taxable years will be treated as attributable to pre-2011 split taxes and other taxes on a pro rata basis.

(2) pre-2011 split taxes deemed paid in pre-2011 taxable years in connection with a dividend paid to a shareholder described in section 902(b) retain their character as pre-2011 split taxes. The section 902(b) shareholder will be treated as the

payor section 902 corporation with respect to those pre-2011 split taxes.

(3) pre-2011 split taxes that carry over to another foreign corporation, including under section 381, §1.367(b)–7 or similar rules, retain their character as pre-2011 split taxes. The transferee foreign corporation will be treated as the payor section 902 corporation with respect to those pre-2011 split taxes.

(4) For each pre-2011 splitter arrangement, as related income is taken into account by the payor section 902 corporation or a section 902 shareholder as provided in section 4.06(b), a ratable portion of the associated pre-2011 split taxes will no longer be treated as pre-2011 split taxes. In the case of a pre-2011 splitter arrangement involving a reverse hybrid or a foreign consolidated group, if aggregate related income is reduced to zero (other than as a result of a distribution, deemed distribution, or inclusion described in section 4.06(b)) or less than zero, pre-2011 split taxes will retain their character as pre-2011 split taxes until the amount of aggregate related income is positive and the related income is taken into account by the payor section 902 corporation or a section 902 shareholder as provided in section 4.06(b).