SECTION 2. BACKGROUND

.01 Application of Section 905(c) to Taxes Paid by Section 902 Corporations Pursuant to Foreign-Initiated Adjust- ments

If a foreign income tax liability for a prior year changes, section 905(c)(1) generally requires the taxpayer to notify the Secretary, who will redetermine the amount of the U.S. tax for the year or years affected. In the case of foreign income taxes deemed paid under section 902 or 960, section 905(c)(1) also authorizes the Secretary to prescribe adjustments to section 902 pools of post-1986 foreign income taxes and post-1986 undistributed earnings in lieu of redetermining the U.S. shareholder’s U.S. tax. If accrued foreign taxes of a section 902

corporation are paid more than two years after the close of the taxable year to which such taxes relate, section 905(c)(2)(B) (i)(I) provides that such taxes are taken into account in the taxable year in which the foreign taxes are paid. Temporary and proposed regulations issued in 1988 and 2007 implemented these rules. See §1.905–3T (2007). Portions of the temporary regulations expired on November 5, 2010, but remain outstanding in proposed form. Neither section 905(c) nor the regulations under that section specifically address how to account for additional payments of foreign income tax with respect to earnings of a section 902 corporation if, as the result of a liquidation, reorganization, or other corporate transaction, the person that makes an additional payment of tax pursuant to a foreign-initiated adjustment is different from the section 902 corporation that would have paid the tax had it been paid in the year to which the additional tax relates.

.02 Foreign Tax Credit Splitter Ar- rangements under Section 909

Section 909(a) provides that, if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a taxpayer, such tax will not be taken into account before the taxable year in which the related income is taken into account by the taxpayer.

Section 909(b) provides that, if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a section 902 corporation, such tax is not taken into account for purposes of section 902 or 960, or for purposes of determining earnings and profits under section 964(a), before the taxable year in which the related income is taken into account by the section 902 corporation or a domestic corporation that meets the ownership requirements of section 902(a) or (b) with respect to the section 902 corporation. Section 909(c)(1) provides that sections 909(a) and (b) apply at the partner level. See also §1.909–1(b).

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.

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Section 909(d)(1) provides that 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.

Regulations under section 909 narrow the statutory definition in section 909(d) (1) to provide that there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued only if, in connection with a “splitter arrangement,” the related income was, is, or will be taken into account for U.S. federal income tax purposes by a person that is a covered person (as defined in §1.909– 1(a)(4)) with respect to the payor of the tax. §1.909–2(a)(1). The term “payor” means a person that pays or accrues a foreign income tax within the meaning of §1.901–2(f), as well as a person that takes foreign income taxes paid or accrued by a partnership into account pursuant to section 702(a)(6). §1.909–1(a)(3).

Section 1.909–2(b) provides an exclusive list of splitter arrangements and identifies the split taxes and related income for each such arrangement. The preamble to the final regulations under section 909 states that the Treasury Department and the IRS will continue to consider other arrangements that inappropriately separate foreign income taxes from the related income. TD 9710, 80 FR 7323.

Section 1.909–2(a)(2) provides that split taxes are not taken into account for U.S. federal income tax purposes before the taxable year in which the related income is taken into account by the payor or, in the case of split taxes paid or accrued by a section 902 corporation, by a section 902 shareholder (as defined in §1.909–1(a)(2)) of the section 902 corporation.

Section 909(e) authorizes the Secretary to issue regulations or other guidance as is necessary or appropriate to carry out the purposes of section 909.