SECTION 1. OVERVIEW

The Department of the Treasury (Treasury Department) and the Internal Reve

nue Service (IRS) are issuing this notice to address the application of sections 853 and 905(c) of the Internal Revenue Code to the receipt by a regulated investment company (RIC) of a refund of a tax that was eligible for a foreign tax credit under section 901 or 903 (“foreign tax”) if that foreign tax, when paid by the RIC, was treated as paid by the RIC’s shareholders under section 853(b)(2) because an election was made under section 853(a). This notice describes regulations under sections 853 and 905(c) that the Treasury Department and the IRS intend to issue. This notice also provides guidance on obtaining administrative relief through closing agreements.

RICs do not generally have changes to their foreign tax liabilities, as described in section 905(c), both because foreign withholding taxes, which RICs generally pay, are usually determinable at the time the income from which the tax is withheld is paid or accrued, and because section 986(a)(1)(E) provides that a RIC reporting income using an accrual method translates foreign income taxes into dollars using the exchange rate as of the date the income accrues. Therefore, both the amount of the foreign tax, as denominated in the foreign currency, and the appropriate exchange rate for the tax are typically ascertainable before the RIC furnishes statements to shareholders or files its income tax return.

Recently, however, the Court of Justice of the European Union held that member states of the European Union could not impose withholding taxes on certain foreign investors if substantially similar domestic investors were not subject to tax. Numerous RICs are now seeking, and some have received, refunds of foreign taxes paid to these countries. In light of these refund claims and payments, taxpayers have requested that the Treasury Department and the IRS provide guidance concerning the appropriate treatment of these refunds by RICs that made elections under section 853(a) for the years in which the taxes were originally paid.

Although such refunds are subject to section 905(c), the Code does not explicitly address how section 905(c) applies to amounts that were treated as paid by a RIC’s shareholders under section 853 or the manner in which a RIC and its shareholders may satisfy their obligations un

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der section 905(c). In general, when a foreign tax is refunded, the taxpayer must notify the IRS, which redetermines the amount of the taxpayer’s U.S. tax liability for the year or years affected, and the taxpayer must pay any redetermined amount upon notice and demand. When RICs receive refunds of foreign taxes, however, providing adequate notification to shareholders and the IRS may be impractical, in part because the RICs may not know the identities or addresses of shareholders who claimed foreign tax credits in previous years. Without guidance providing alternative procedures for the particular situation of RICs that made elections under section 853 and their shareholders, the application of section 905(c) could lead to significant administrative costs and uncertainty for the U.S. government and for RICs and their shareholders.

The Treasury Department and the IRS believe that published guidance detailing alternative methods that RICs and their shareholders may use to satisfy their obligations under sections 853 and 905(c) will promote effective tax administration. This notice provides guidance, and describes regulations that the Treasury Department and the IRS intend to issue, in order to help affected taxpayers discharge their obligations under sections 853 and 905(c).

Section 2 provides background information with respect to sections 853 and 905(c). Section 3 provides that RICs and their shareholders may satisfy their obligations under sections 853 and 905(c) under two alternative methods—following a netting method or obtaining a closing agreement. These two alternatives are described in sections 4 and 5. Section 6 describes the expected effective date of the regulations described in section 4 and the effective date of the guidance in section 5. Section 7 solicits comments and provides contact information for purposes of submitting comments. Section 8 relates to requirements under the Paperwork Reduction Act.