SECTION 1. OVERVIEW

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to issue regulations under section 909 to address the separation of related income from foreign income taxes paid by a section 902 corporation (as defined in section 909(d)(5)) pursuant to a foreign-initiated adjustment. Under section 905(c), certain foreign income taxes paid by a section 902 corporation after the taxable year to which the taxes relate generally are taken into account by adjusting section 902 pools of post-1986 foreign income taxes in the taxable year in which the taxes are paid, rather than accounting for the taxes in the prior taxable year to which the taxes relate. The Treasury Department and the IRS are aware that, in anticipation of a large foreign-initiated adjustment that relates to a prior taxable year, a taxpayer may take steps to separate the additional payment of foreign income tax from the income to which it relates. Such foreigninitiated adjustments may arise under European Union (EU) State aid law, to the extent EU State aid payments result in creditable foreign taxes. Specifically, before a payment is made pursuant to a foreign-initiated adjustment, a taxpayer may attempt to change its ownership structure or cause the section 902 corporation to make an extraordinary distribution so that the subsequent tax payment creates a high-tax pool of post-1986 undistributed earnings that can be used to generate substantial amounts of foreign taxes deemed paid, without repatriating and including in U.S. taxable income the earnings and profits to which the taxes relate.

The Treasury Department and the IRS have determined that guidance to address these transactions is appropriate under section 909, which is intended to prevent the separation of creditable foreign taxes

from related income generally by deferring the right to claim credits until the related income is included in U.S. taxable income. Accordingly, this notice announces that the Treasury Department and the IRS intend to issue regulations under section 909 that will identify two new splitter arrangements relating to section 902 corporations that pay foreign income taxes pursuant to foreign-initiated adjustments. The regulations will apply similar rules to taxpayers that take the position that taxes paid by a U.S. person pursuant to a foreign-initiated adjustment to the tax liability of a section 902 corporation are eligible for a direct foreign tax credit under section 901.

No inference is intended from this notice as to the treatment of transactions described in this notice under current law, and the IRS may challenge such transactions under applicable Code provisions or judicial doctrines. In addition, no inference is intended under this notice as to whether (1) payments made pursuant to any particular foreign-initiated adjustment, including those arising under EU State aid law, qualify as payments of creditable foreign income taxes, or (2) taxes paid by a U.S. person pursuant to a foreign-initiated adjustment to the tax liability of a section 902 corporation are eligible for a direct foreign tax credit under section 901.