# Bulletin No. 1998–16

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Internal Revenue

bulletin

Bulletin No. 1998–16
April 20, 1998

HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
T.D. 8765, page 11.
Final regulations under section 985 of the Code relate to adjustments required when a qualified business unit (QBU) that
used the profit and loss method of accounting (P&L) in a
post-1986 year begins to use the dollar approximate separate transaction method of accounting (DASTM) and adjustments required when a QBU that used DASTM begins using
P&L.

T.D. 8766, page 17.
REG–104062–97, page 20.
Final, temporary, and proposed regulations under section
1502 of the Code relate to limitations on the use of certain
tax credits and related attributes by corporations filing consolidated income tax returns. A public hearing on the proposed regulations will be held on May 7, 1998.

T.D. 8767, page 4.
REG–104537–97, page 21.
Final, temporary, and proposed regulations under section
954 of the Code relate to the treatment under subpart F of
certain payments involving branches of a controlled foreign

Finding Lists begin on page 52.

Department of the Treasury
Internal Revenue Service

corporation (CFC) that are treated as separate entities for
foreign tax purposes or partnerships in which CFCs are
partners. A public hearing on the proposed regulations will
be held on July 15, 1998.

EXEMPT ORGANIZATIONS
Announcement 98–29, page 48.
A list is given of organizations now classified as private foundations.

ADMINISTRATIVE
REG–208299–90, page 26.
Proposed regulations under sections 482 and 864 of the
Code relate to rules for the allocation among controlled taxpayers and sourcing of income, deductions, gains and
losses from a global dealing operation; rules applying these
allocation and sourcing rules to foreign currency transactions and to foreign corporations engaged in a U.S. trade or
business; and rules concerning the mark-to-market treatment resulting from hedging activities of a global dealing operation. A public hearing will be held on July 9, 1998.

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 954.—Foreign Base
Company Income
26 CFR 1.954–9T: Hybrid branches (temporary).

T.D. 8767
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Guidance Under Subpart F
Relating to Partnerships and
Branches
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary and final regulations.
SUMMARY: This document contains
regulations relating to the treatment under
subpart F of certain payments involving
branches of a controlled foreign corporation (CFC) that are treated as separate entities for foreign tax purposes or partnerships in which CFCs are partners. These
regulations are necessary to provide guidance on transactions relating to such entities. These regulations will affect United
States shareholders of controlled foreign
corporations. The text of these temporary
regulations also serves as the text of the
proposed regulations published in
REG–104537–97, page 21 of this Bulletin.
DATES: Effective date: These regulations are effective March 23, 1998.
Applicability date: For dates of applicability see §§1.904–5T(o), 1.954–1T(c)(1)(i)(E), 1.954–2T(a)(5)(iii) and
(a)(6)(ii), 1.954–9T(d) and 301.7701–
3T(f) of these regulations.
FOR FURTHER INFORMATION CONTACT: Valerie Mark, (202) 622-3840
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
I. In general
In these temporary regulations and in
proposed regulations published in
REG–104537–97, the Treasury and IRS
set forth a framework for dealing with is-

April 20, 1998

sues posed by the use of certain entities
that are regarded as fiscally transparent
for purposes of U.S. tax law, with regard
to the application of subpart F of the Internal Revenue Code.
Subpart F was enacted by Congress to
limit the deferral of U.S. taxation of certain income earned outside the United
States by foreign corporations controlled
by U.S. persons. Limited deferral was retained after the enactment of subpart F to
protect the competitiveness of controlled
foreign corporations (CFCs) doing business overseas. See S. Rep. No. 1881,
87th Cong., 2d Sess. 78–80 (1962). This
limited deferral furthers the objective of
allowing a CFC engaged in an active
business, and located in a foreign country
for appropriate economic reasons, to
compete in a similar tax environment with
non-U.S. owned corporations located in
the same country.
Conversely, one of the purposes of subpart F is to prevent CFCs from converting
active income that is not easily moveable
and is earned in a jurisdiction in which a
business is located for non-tax reasons,
into passive, easily moveable income that
is shifted to a lower tax jurisdiction primarily for tax avoidance. Moreover,
when subpart F was first enacted it was
realized that related person transactions
can be easily manipulated to reduce both
United States and foreign taxes. Consequently, in enacting subpart F, Congress
provided that transactions of CFCs that
involve related persons generally give rise
to subpart F income with certain enumerated exceptions.
Hybrid branches, which, by definition,
are not regarded as fiscally transparent
under foreign law, are particularly well
suited to the type of tax avoidance described above. In light of the recent proliferation of hybrid branches, Treasury
and the IRS believe that it is appropriate
to consider the issues related to transactions involving hybrid branches, or other
hybrid entities, under subpart F.
The use of partnerships that are fiscally
transparent for U.S. tax purposes raises
additional issues in the context of subpart
F that are similar to those raised in
connection with hybrid branches. Such
partnerships may or may not be fiscally
transparent under foreign law. (Other fis-

4

cally-transparent entities, such as grantor
trusts, will be the subject of guidance issued in conjunction with the finalization
of regulations under section 672(f).)
The entity classification regulations of
§§301.7701–1 through 301.7701–3 (the
check-the-box regulations) make entity
classification generally elective, in part so
that taxpayers can choose a tax status that
is consistent with their business objectives. This administrative provision was
not intended to change substantive law.
Particularly in the international area, the
ability to more easily achieve fiscal transparency can lead to inappropriate results
under certain substantive international
provisions of the Code. Thus, the Treasury and the IRS believe that it is necessary to provide additional guidance regarding the use of hybrid entities in the
international context. See preamble to
TD 8697, 61 Fed. Reg. 66585 (December
18, 1996).
II. Hybrid Branches
As announced in Notice 98–11 (1998–
6 I.R.B. 13), the Treasury and the IRS understand that certain taxpayers are using
arrangements involving hybrid branches
to circumvent the purposes of subpart F
(sections 951 through 964 of the Code).
These arrangements generally involve the
use of deductible payments to reduce the
taxable income of a CFC under foreign
law, thereby reducing that CFC’s foreign
tax and, also under foreign law, the corresponding creation in another entity of
low-taxed, passive income of the type to
which subpart F was intended to apply.
Because of the structure of these arrangements, however, taxpayers take the position that this income is not taxed under
subpart F. Treasury and the IRS have
concluded that use of these hybrid branch
arrangements is contrary to the policies
and rules of subpart F.
U.S. international tax policy seeks to
balance the objective of neutrality of taxation between domestic and foreign business enterprises (seeking neither to encourage nor to discourage one over the
other), while keeping U.S. business competitive. Subpart F strongly reflects and
enforces that balance, while the arrangements described above involving hybrid
branches upset that balance.

1998–16 I.R.B.

Explanation of Provisions
Under these temporary regulations, hybrid branch payments, as defined in the
regulations, between a CFC and its hybrid
branch, or between hybrid branches of the
CFC may give rise to subpart F income.
When certain conditions are present, the
non-subpart F income of the CFC, in the
amount of the hybrid branch payment, is
recharacterized as subpart F income of the
CFC. Those conditions include that: the
hybrid branch payment reduces the foreign tax of the payor; the hybrid branch
payment would have been foreign personal holding company income if made
between separate CFCs; and there is a disparity between the effective rate of tax on
the payment in the hands of the payee and
the hypothetical rate of tax that would
have applied if the income had been taxed
in the hands of the payor. Treasury and
the IRS are considering applying similar
principles with respect to the foreign base
company services income rules of section
954(e). Comments are requested on this
issue. Any regulations promulgated on
this issue will be prospective.
Policies underlying subpart F would
also be avoided in certain non-hybrid
branch transactions that do not reduce the
tax of the payor. Treasury and the IRS invite comments on the extent to which
rules should be provided to address such
transactions. Any regulations promulgated on this issue will be prospective.
Comments are also requested regarding
the application of these rules to dividend
and other equity distributions.
The temporary regulations make clear
that the CFC and the hybrid branch, or the
hybrid branches, are treated as separate
corporations only to recharacterize nonsubpart F income as subpart F income in
the amount of the hybrid branch payment,
and to apply the tax disparity rule of
§1.954–9T(a)(5)(iv). For all other purposes (e.g., for purposes of the earnings
and profits limitation of section 952), a
CFC and its hybrid branch, or hybrid
branches, are not treated as separate corporations.
The temporary regulations provide that
the amount recharacterized as subpart F
income is the gross amount of the hybrid
branch payment limited by the amount of
the CFC’s earnings and profits attributable to non-subpart F income. This

1998–16 I.R.B.

amount is the excess of current earnings
and profits over subpart F income, determined after the application of the rules of
sections 954(b) and 952(c) and before the
application of these temporary regulations. To the extent that the full amount
required to be recharacterized under this
provision cannot be recharacterized because it exceeds earnings and profits attributable to non-subpart F income, there
is no requirement to carry such amounts
back or forward to another year.
For purposes of determining the
amount of taxes deemed paid under section 960, the amount of non-subpart F income recharacterized as subpart F income
is treated as attributable to income in separate foreign tax credit baskets in proportion to the ratio of non-subpart F income
in each basket to the total amount of nonsubpart F income of the CFC for the taxable year.
The temporary regulations provide
that, under certain circumstances, the
recharacterization rules will also apply to
a CFC’s proportionate share of any hybrid
branch payment made between a partnership in which the CFC is a partner and a
hybrid branch of the partnership, or between hybrid branches of such a partnership. When the partnership is treated as
fiscally transparent by the CFC’s taxing
jurisdiction, the recharacterization rules
are applied by treating the hybrid branch
payment as if it had been made directly
between the CFC and the hybrid branch,
or as though the hybrid branches of the
partnership had been hybrid branches of
the CFC, as applicable. If the partnership
is treated as a separate entity by the CFC’s
taxing jurisdiction, the recharacterization
rules are applied to the partnership as if it
were a CFC. Comments are requested on
whether the rule for such non-fiscally
transparent partnerships should be relaxed
in the case of small ownership interests.
The temporary regulations provide that
income will not be recharacterized unless
there is a disparity between the effective
rate at which the hybrid branch payment
is taxed to the payee and a hypothetical
tax rate that measures the tax savings to
the payor from the deductible payment.
This provision is similar to the rule in
§1.954–3(b), and adopts the same percentage tests as contained in that provision. The regulations also provide a special high tax exception applicable to the

5

hybrid branch payment that is similar to
the one contained in section 954(b)(4).
Comments are invited on whether the
rules of §1.954–9T could cause inappropriate multiple recharacterizations where
the hybrid branch payments are made
through a series of related hybrid entities.
The temporary regulations provide that
if these provisions affect an entity that has
elected under §301.7701–3(c) to be
treated as an entity disregarded as separate from its owner, such an entity may
elect to be classified as a corporation, provided it fulfills certain requirements,
notwithstanding the sixty-month limitation in that section.
III. Related Provisions
These temporary regulations provide
rules, contained in §1.954–1T(c)(1)(i)(B),
to prevent expenses, including related
person interest expense which would normally be allocable under section
954(b)(5) to subpart F income of a CFC,
from being allocated to a payment from
which the expense arises. The allocation
limit applies: (i) to the extent such payment is included in the subpart F income
of the CFC; (ii) if the expense arises from
any payment by the CFC to a hybrid partnership in which the CFC is a partner; and
(iii) if the payment reduces foreign tax
and there is a significant disparity in tax
rates between the payor and payee jurisdictions.
These temporary regulations also address the application of the related person
exceptions to the foreign personal holding
company income rules in the context of
partnership distributive shares and transactions involving hybrid branches. Under
section 954(c)(3), foreign personal holding company income does not include
certain interest, dividends, rents and royalties received from related corporations.
These exceptions apply, in the case of interest and dividends, when the related
corporate payor is organized in the country in which the CFC is organized and
uses a substantial part of its assets in a
trade or business in that country and, in
the case of rents and royalties, when the
rent or royalty payment is made for the
use or privilege of using property within
the CFC’s country of incorporation.
The rules regarding the application of
the related person exceptions with respect
to a CFC partner’s distributive share of

April 20, 1998

partnership income are part of the broader
set of rules addressing distributive share
issues in the context of subpart F contained in the proposed regulations published in REG–104537–97. Certain rules
relating to the related person exception
with respect to a CFC partner’s distributive share of partnership income, and certain rules relating to the related person exception with respect to hybrid branches,
however, are included in these temporary
regulations because they address a fact
pattern similar to the one to which the hybrid branch payment rules apply. No inference is intended as to the treatment
under existing law of such arrangements
in relation to the related party exceptions.
Under these rules, if the partnership receives an item of income that reduces the
income tax of the payor, the related person exceptions of section 954(c)(3) apply
to exclude the income from the foreign
personal holding company income of the
CFC partner only where: the exception
would have applied if the CFC earned the
income directly (testing relatedness and
country of incorporation at the CFC partner level); and either the partnership is organized and operates in the CFC’s country of incorporation, the partnership is
treated as fiscally transparent in the
CFC’s countries of incorporation and operation, or there is no significant disparity
between the effective rate of tax imposed
on the income and the rate of tax that
would be imposed on the income if
earned directly by the CFC partner.
The rules applying the related person
exceptions with respect to hybrid
branches address transactions illustrated
in the first example of Notice 98–11
(1998–6 I.R.B. 13). These rules apply to
payments by a CFC to a hybrid branch of
a related CFC. Under these rules, the related person exceptions will apply to exclude the payments from the foreign personal holding company income of the
recipient CFC only if the payment would
have qualified for the exception if the hybrid branch had been a separate CFC incorporated in the jurisdiction in which the
payment is subject to tax (other than a
withholding tax).

1.954–2T(a)(5)(iii) and (6)(iii), 1.954–
9T(d) and 301.7701–3T(f) of these regulations.

IV. Effective Date.
These regulations are effective March
23, 1998. For dates of applicability see
§§1.904–5T(o), 1.954–1T(c)(1)(i)(E),

(o) * * * Paragraph (k)(1) of this section does not apply on or after March 23,
1998. For rules applicable on or after
March 23, 1998, see §1.904–5T(k)(1).

April 20, 1998

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C.
chapter 5) does not apply to these regulations and, because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Par. 3. §1.904–5T is added to read as
follows:
§1.904–5T Look-through rules as
applied to controlled foreign
corporations and other entities
(temporary).

Accordingly, 26 CFR parts 1 and 301
are amended as follows:

(a) through (j) [Reserved]. For further
guidance, see §1.904–5(a) through (j).
(k) Ordering rules—(1) In general. Income received or accrued by a related
person to which the look-through rules
apply is characterized before amounts included from, or paid or distributed by, that
person and received or accrued by a related person. For purposes of determining the character of income received or
accrued by a person from a related person
if the payor or another related person also
receives or accrues income from the recipient and the look-through rules apply
to the income in all cases, the rules of
paragraph (k)(2) of this section apply.
Notwithstanding any other provision of
this section, the principles of §1.954–
1T(c)(1)(i) will apply to any expense subject to that subparagraph.
(k)(2) through (n) [Reserved]. For further guidance, see §1.904–5(k)(2) through
(n).
(o) Effective date. Section 1.904–
5T(k)(1) applies on or after March 23,
1998. For rules prior to March 23, 1998,
see §1.904–5(k)(1).
Par. 4. Section 1.954–0(b) is amended
by revising the paragraph heading and the
entry for §1.954–0(b) in the list to read as
follows:

PART 1—INCOME TAXES

§1.954–0 Introduction.

Drafting Information
The principal author of these regulations is Valerie Mark, of the Office of the
Associate Chief Counsel (International).
Other personnel from the IRS and Treasury Department also participated in the
development of these regulations.
*

*

*

*

*

Adoption of Amendments to the
Regulations

Paragraph 1. The authority citation for
26 CFR part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.904–5, paragraph (o) is
amended by adding a sentence at the end
to read as follows:
§1.904–5 Look-through rules as applied
to controlled foreign corporations and
other entities.
*

*

*

6

*

*

*

*

*

*

*

(b) Outline of §§1.954–0, 1.954–1 and
1.954–2.
§1.954–0 Introduction.
*

*

*

*

*

(b) Outline of §§1.954–0, 1.954–1, and
1.954–2.
* * * * *
Par. 5. Section 1.954–1 is amended by
adding a new paragraph (c)(1)(iv) to read
as follows:
§1.954–1 Foreign base company income.
*

*

*

*

*

1998–16 I.R.B.

(c) * * *
(1) * * *
(iv) Effective date. Paragraph (c)(1)(i)
of this section does not apply to all
amounts paid or accrued on or after
March 23, 1998, except for amounts paid
or accrued pursuant to arrangements entered into before March 23, 1998, and not
substantially modified (including, for example, by expansion of the arrangement
(whether by exercise of an option or otherwise) such as by an increase in the
amount of or term of any borrowing, leasing or licensing constituting the arrangement, changes in direct or indirect control
of any entity that is a party to the arrangement, or any similar measure which materially increases the tax benefit of the
arrangement) on or after March 23, 1998.
For rules applicable on or after March 23,
1998, see §1.954–1T(c)(1)(i).
Par. 6. Section 1.954–1T is added to
read as follows:
§1.954–1T Foreign base company
income (temporary).
(a) through (c)(1)(i) [Reserved]. For
further guidance, see §1.954–1(a) through
(c)(1).
(c)(1)(i) Deductions against gross foreign base company income—(A) In general. [Reserved]. For further guidance,
see §1.954–1(c)(1)(i).
(B) Special rule for deductible payments to certain non-fiscally transparent
entities. Notwithstanding any other provision of this section, except as provided
in paragraph (c)(1)(i)(C) of this section,
an expense (including a distributive share
of any expense) that would otherwise be
allocable under section 954(b)(5) against
the subpart F income of a controlled foreign corporation shall not be allocated
against subpart F income of the controlled
foreign corporation resulting from the
payment giving rise to the expense if—
(1) Such expense arises from a payment between the controlled foreign corporation and a partnership in which the
controlled foreign corporation is a partner
and the partnership is not regarded as fiscally transparent, as defined in §1.954–
9T(a)(7), by any country in which the
controlled foreign corporation does business or has substantial assets; and
(2) The payment from which the expense arises would have met the foreign
tax reduction test of §1.954–9T(a)(3) and

1998–16 I.R.B.

the tax disparity test of §1.954–
9T(a)(5)(iv) if those provisions had been
applicable to the payment.
(C) Limitations. Paragraph (c)(1)(i)(B)
shall not apply to the extent that the controlled foreign corporation partner has no
income against which to allocate the expense, other than its distributive share of a
payment described in paragraph (c)(1)(i)(B) of this section. Similarly, to the extent an expense described in paragraph
(c)(1)(i)(B) of this section exceeds the
controlled foreign corporation partner’s
distributive share of the payment from
which the expense arises, such excess
amount of the expense may reduce subpart F income (other than such payment)
to which it is properly allocable or apportionable under section 954(b)(5).
(D) Example. The following example
illustrates the application of paragraph
(c)(1)(i)(B) and (C) of this section:
Example. CFC, a controlled foreign corporation
in Country A, is a 70 percent partner in partnership
P, located in Country B. Country A’s tax laws do not
classify P as a fiscally transparent entity. The rate of
tax in country B is 15 percent of the tax rate in country A. P loans $100 to CFC at a market rate of interest. In year 1, CFC pays P $10 of interest on the
loan. The interest payment would have caused the
recharacterization rules of §1.954–9T to apply if the
payment were made between the entities described
in §1.954–9T(a)(2). CFC’s distributive share of P’s
interest income is $7, which is foreign personal
holding company income to CFC under section
954(c). Under paragraph (c)(1)(i)(B) of this section,
$7 of the $10 interest expense may not be allocated
against any of CFC’s subpart F income. However,
to the extent the remaining $3 of interest expense is
properly allocable to subpart F income of CFC other
than its distributive share of P’s interest income, this
expense may offset such other subpart F income.

(E) Effective date. Paragraph (c)(1)(i)(B), (C) and (D) of this section shall
apply to all amounts paid or accrued on or
after March 23, 1998, except for amounts
paid or accrued pursuant to arrangements
entered into before March 23, 1998, and
not substantially modified (including, for
example, by expansion of the arrangement (whether by exercise of an option or
otherwise) such as by an increase in the
amount of or term of any borrowing, leasing or licensing constituting the arrangement, changes in direct or indirect control
of any entity that is a party to the arrangement, or any similar measure which materially increases the tax benefit of the
arrangement) on or after March 23, 1998.
For rules applicable to amounts paid or

7

accrued pursuant to arrangements entered
into before March 23, 1998, see §1.954–1.
(c)(1)(ii) through (f) [Reserved]. For
further guidance, see §1.954–1(c)(1)(ii)
through (f).
Par. 7. Section 1.954–2T is added to
read as follows:
§1.954–2T Foreign personal holding
company income (temporary).
(a)(1) through (4) [Reserved]. For further guidance, see §1.954–2(a) through (4).
(5) Special rules applicable to distributive share of partnership income—(i) Application of related person exceptions
where payment reduces foreign tax of
payor. If a partnership receives an item of
income that reduced the foreign income
tax of the payor (determined under the
principles of §1.954–9T(a)(3)), to determine the extent to which a controlled foreign corporation’s distributive share of
such item of income is foreign personal
holding company income, the exceptions
contained in section 954(c)(3) shall apply
only if—
(A)(1) Any such exception would have
applied to exclude the income from foreign personal holding company income if
the controlled foreign corporation had
earned the income directly (determined
by testing, with reference to such controlled foreign corporation, whether an
entity is a related person, within the
meaning of section 954(d)(3), or is organized under the laws of, or uses property
in, the foreign country in which the controlled foreign corporation is created or
organized); and
(2) The distributive share of such income is not in respect of a payment made
by the controlled foreign corporation to
the partnership; and
(B)(1) The partnership is created or organized, and uses a substantial part of its
assets in a trade or business in the country
under the laws of which the controlled
foreign corporation is created or organized (determined under the principles of
§1.954–2(b)(4));
(2) The partnership is regarded as fiscally transparent, as defined in §1.954–
9T(a)(7), by all countries under the laws
of which the controlled foreign corporation is created or organized or has substantial assets; or
(3) The income is taxed in the year
when earned at an effective rate of tax

April 20, 1998

(determined under the principles of
§1.954–1(d)(2)) that is not less than 90
percent of, and not more than five percentage points less than, the effective rate of
tax that would have applied to such income under the laws of the country in
which the controlled foreign corporation is
created or organized if such income were
earned directly by the controlled foreign
corporation partner from local sources.
(ii) Certain other exceptions applicable
to foreign personal holding company income. [Reserved].
(iii) Effective date. Paragraph (a)(5)(i)
of this section shall apply to all amounts
paid or accrued on or after March 23,
1998, except for amounts paid or accrued
pursuant to arrangements entered into before March 23, 1998, and not substantially modified (including, for example,
by expansion of the arrangement (whether
by exercise of an option or otherwise)
such as by an increase in the amount of or
term of any borrowing, leasing or licensing constituting the arrangement, changes
in direct or indirect control of any entity
that is a party to the arrangement, or any
similar measure which materially increases the tax benefit of the arrangement) on or after March 23, 1998.
(6) Special rules applicable to exceptions from foreign personal holding company income treatment in circumstances
involving hybrid branches—(i) In general. In the case of a payment between a
controlled foreign corporation (or its hybrid branch, as defined in §1.954–9T(a)(6)) and the hybrid branch of a related
controlled foreign corporation, the exceptions contained in section 954(c)(3) shall
apply only if the payment would have
qualified for the exception if the payor
were a separate controlled foreign corporation created or organized in the jurisdiction where foreign tax is reduced and the
payee were a separate controlled foreign
corporation created or organized under
the laws of the jurisdiction in which the
payment is subject to tax (other than a
withholding tax).
(ii) Exception where no tax reduction
or tax disparity. Paragraph (a)(6)(i) of
this section shall not apply unless the payment would have met the foreign tax reduction test of §1.954–9T(a)(3) and the
tax disparity test of §1.954–9T(a)(5)(iv) if
those provisions had been applicable to
the payment.

April 20, 1998

(iii) Effective date. The rules of this
section shall apply to all amounts paid or
accrued on or after January 16, 1998, except for amounts paid or accrued pursuant
to arrangements entered into before January 16, 1998, and not substantially modified (including, for example, by expansion of the arrangement (whether by
exercise of an option or otherwise) such
as by an increase in the amount of or term
of any borrowing, leasing or licensing
constituting the arrangement, changes in
direct or indirect control of any entity that
is a party to the arrangement, or any similar measure which materially increases
the tax benefit of the arrangement) on or
after January 16, 1998.
(b) through (h) [Reserved]. For further
guidance, see §1.954–2(b) through (h).
Par. 8. Section 1.954–9T is added to
read as follows:
§1.954–9T Hybrid branches
(temporary).
(a) Subpart F income arising from certain payments involving hybrid
branches—(1) Payment causing foreign
tax reduction gives rise to additional subpart F income. The non-subpart F income of the controlled foreign corporation will be recharacterized as subpart F
income, to the extent provided in paragraph (a)(5) of this section, if—
(i) A hybrid branch payment, as defined
in paragraph (a)(6) of this section, is
made between the entities described in
paragraph (a)(2) of this section;
(ii) The hybrid branch payment reduces
foreign tax, as determined under paragraph (a)(3) of this section; and
(iii) The hybrid branch payment is
treated as falling within a category of foreign personal holding company income
under the rules of paragraph (a)(4) of this
section.
(2) Hybrid branch payment between
certain entities—(i) In general. Paragraph (a)(1) of this section shall apply to
hybrid branch payments between—
(A) A controlled foreign corporation
and its hybrid branch;
(B) Hybrid branches of a controlled
foreign corporation;
(C) A partnership in which a controlled
foreign corporation is a partner (either directly or through one or more branches or
other partnerships) and a hybrid branch of
the partnership; or

8

(D) Hybrid branches of a partnership in
which a controlled foreign corporation is
a partner (either directly or through one or
more branches or other partnerships).
(ii) Hybrid branch payment involving
partnership—(A) Fiscally transparent
partnership. To the extent of the controlled foreign corporation’s proportionate share of a hybrid branch payment, the
rules of paragraphs (a)(3), (4) and (5) of
this section shall be applied by treating
the hybrid branch payment between the
partnership and the hybrid branch as if it
were made directly between the controlled foreign corporation and the hybrid
branch, or as if the hybrid branches of the
partnership were hybrid branches of the
controlled foreign corporation, if the hybrid branch payment is made between—
(1) A fiscally transparent partnership in
which a controlled foreign corporation is
a partner (either directly or through one or
more branches or other fiscally transparent partnerships) and the partnership’s hybrid branch; or
(2) Hybrid branches of a fiscally transparent partnership in which a controlled
foreign corporation is a partner (either directly or through one or more branches or
other fiscally transparent partnerships).
(B) Non-fiscally transparent partnership. To the extent of the controlled foreign corporation’s proportionate share of
a hybrid branch payment, the rules of
paragraphs (a)(3) and (4) and (a)(5)(iv) of
this section shall be applied to the non-fiscally transparent partnership as if it were
the controlled foreign corporation, if the
hybrid branch payment is made between—
(1) A non-fiscally transparent partnership in which a controlled foreign corporation is a partner (either directly or
through one or more branches or other
partnerships) and the partnership’s hybrid
branch; or
(2) Hybrid branches of a non-fiscally
transparent partnership in which a controlled foreign corporation is a partner (either directly or through one or more
branches or other partnerships).
(C) Examples. The following examples
illustrate the application of this paragraph
(a)(2)(ii).
Example 1. CFC, a controlled foreign corporation in Country A, is a 90 percent partner in partnership P, which is treated as fiscally transparent under
the laws of Country A. P has a hybrid branch, BR,

1998–16 I.R.B.

in Country B. P makes an interest payment of $100
to BR. Under Country A law, CFC’s 90 percent
share of the payment reduces CFC’s Country A income tax. Under paragraph (a)(2)(ii)(A) of this section, the recharacterization rules of this section are
applied by treating the payment as if made by CFC
to BR. Ninety dollars of CFC’s non-subpart F income, to the extent available, and subject to the
earnings and profits and tax rate limitations of
§1.954–9T(a)(5), is recharacterized as subpart F income.
Example 2. CFC, a controlled foreign corporation in Country A, is a 90 percent partner in partnership P, which is treated as fiscally transparent under
the laws of Country A. P has two branches in Country B, BR1 and BR2. BR1 is treated as fiscally
transparent under the laws of Country A. BR2 is a
hybrid branch. BR1 makes an interest payment of
$100 to BR2. Under paragraph (a)(2)(ii)(A) of this
section, the payment by BR1, the fiscally transparent branch, is treated as a payment by P, and the
deemed payment by P, a fiscally transparent partnership, is treated as made by CFC. Under Country A
law, CFC’s 90 percent share of BR1’s payment reduces CFC’s Country A income tax. Ninety dollars
of CFC’s non-subpart F income, to the extent available, and subject to the earnings and profits and tax
rate limitations of §1.954–9T(a)(5), is recharacterized as subpart F income.

(3) Application when payment reduces
foreign tax. For purposes of paragraph
(a)(1) of this section, a hybrid branch payment reduces foreign tax when the foreign
tax imposed on the income of the payor or
any owner of the payor is less than the foreign tax that would have been imposed on
such income had the hybrid branch payment not been made, or the hybrid branch
payment creates or increases a loss or
deficit or other tax attribute which may be
carried back or forward to reduce the foreign income tax of the payor or any owner
in another year (determined by taking into
account any refund of such tax made to
the payor, payee or any other person).
(4) Hybrid branch payment that is included within a category of foreign personal holding company income—(i) In
general. For purposes of paragraph (a)(1)
of this section, whether the hybrid branch
payment is treated as income included
within a category of foreign personal
holding company income is determined
by treating a hybrid branch that is either
the payor or recipient of the hybrid branch
payment as a separate wholly-owned subsidiary corporation of the controlled foreign corporation that is incorporated in
the jurisdiction under the laws of which
such hybrid branch is created, organized
for foreign law purposes, or has substantial assets. Thus, the hybrid branch pay-

1998–16 I.R.B.

ment will be treated as included within a
category of foreign personal holding company income if, taking into account any
specific exceptions for that category, the
payment would be included within a category of foreign personal holding company
income if the branch or branches were
treated as separately incorporated for U.S.
tax purposes.
(ii) Extent to which controlled foreign
corporation and hybrid branches treated
as separate entities. For purposes other
than the determination under paragraph
(a)(4)(i) of this section, a controlled foreign corporation and its hybrid branch, a
partnership and its hybrid branch, or hybrid branches shall not be treated as separate entities. Thus, for example, if a controlled foreign corporation, including all
of its hybrid branches, has an overall
deficit in earnings and profits to which
section 952(c) applies, the limitation of
such section on the amount includible in
the subpart F income of such corporation
will apply. Similarly, for purposes of applying the de minimis and full inclusion
rules of section 954(b)(3), a controlled
foreign corporation and its hybrid branch,
or hybrid branches shall not be treated as
separate corporations. Further, a hybrid
branch payment that would reduce foreign personal holding company income
under section 954(b)(5) if made between
two separate entities will not create an expense if made between a controlled foreign corporation and its hybrid branch, a
partnership and its hybrid branch, or hybrid branches.
(5) Recharacterization of income attributable to current earnings and profits
as subpart F income—(i) General rule.
Non-subpart F income of a controlled foreign corporation in an amount equal to the
excess of earnings and profits of the controlled foreign corporation for the taxable
year over subpart F income, as defined in
section 952(a), will be recharacterized as
subpart F income under paragraph (a)(1)
of this section only to the extent provided
under paragraphs (a)(5)(ii) through (vi) of
this section.
(ii) Subpart F income. For purposes of
determining the excess of current earnings and profits over subpart F income
under paragraph (a)(1) of this section, the
amount of subpart F income is determined
before the application of the rules of this
section but after the application of the

9

rules of sections 952(c) and 954(b). Further, such amount is determined by treating the controlled foreign corporation and
all of its hybrid branches as a single corporation.
(iii) Recharacterization limited to gross
amount of hybrid branch payment—(A)
In general. The amount recharacterized
as subpart F income under paragraph
(a)(1) of this section is limited to the
amount of the hybrid branch payment.
(B) Exception for duplicative payments. [Reserved].
(iv) Tax disparity rule—(A) In general.
Paragraph (a)(1) of this section will apply
only if the hybrid branch payment falls
within the tax disparity rule. The hybrid
branch payment falls within the tax disparity rule if it is taxed in the year when
earned at an effective rate of tax that is
less than 90 percent of, and at least 5 percentage points less than, the hypothetical
effective rate of tax imposed on the hybrid branch payment, as determined under
paragraph (a)(5)(iv)(B) of this section.
(B) Hypothetical effective rate of tax—
(1) In general. The hypothetical effective
rate of tax imposed on the hybrid branch
payment is—
(i) For the taxable year of the payor in
which the hybrid branch payment is
made, the amount of income taxes that
would have been paid or accrued by the
payor if the hybrid branch payment had
not been made, less the amount of income
taxes paid or accrued by the payor; divided by
(ii) The amount of the hybrid branch
payment.
(2) Hypothetical effective rate of tax
when hybrid branch payment causes or
increases loss or deficit. If the hybrid
branch payment causes or increases a loss
or deficit of the payor for foreign tax purposes, and such loss or deficit can be carried forward or back, the hypothetical effective rate of tax imposed on the hybrid
branch payment is the effective rate of tax
that would be imposed on the taxable income of the payor for the year in which
the foreign law payment is made if the
payor’s taxable income were equal to the
amount of the hybrid branch payment.
(C) Examples. The application of this
paragraph (a)(5)(iv) is illustrated by the
following examples.
Example 1. In 1998, CFC organized in Country
A had net income of $60 from manufacturing for

April 20, 1998

Country A tax purposes. It also had a branch (BR) in
Country B. BR is a hybrid entity under paragraph
(a)(1) of this section. CFC made a payment of $40
to BR, which was a hybrid branch payment under
paragraph (a)(6) of this section, and was treated by
CFC as a deductible payment for Country A tax purposes. CFC paid $30 of Country A taxes in 1998. It
would have paid $50 of Country A taxes without the
deductible payment. Country A did not impose any
withholding tax on the $40 payment to BR. Country
B also did not impose a tax on the $40 received by
BR. Therefore, the effective rate of tax on that payment is 0%. Furthermore, the hypothetical effective
rate of tax on the $40 hybrid branch payment is 50%
($50-$30/$40). The effective rate of tax (0%) is less
than 90% of, and more than 5 percentage points less
than, this hypothetical rate of tax of 50%. As a result, the $40 hybrid branch payment falls within the
tax disparity rule of this paragraph (a)(5)(iv).
Example 2. Assume the same facts as in Example
1, except that CFC has a loss of $100 for the year for
Country A tax purposes. Under Country A law, CFC
can carry the loss forward for use in subsequent
years. CFC paid no Country A taxes in 1998. The
rate of tax in Country A is graduated from 20% to
50%. If the $40 hybrid branch payment were the
only item of taxable income of CFC, Country A
would have imposed tax at an effective rate of 30%.
The effective rate of tax (0%) is less than 90 percent
of, and more than 5 percentage points less than, the
hypothetical effective rate of tax (30%) imposed on
the hybrid branch payment. As a result, the $40 hybrid branch payment falls within the tax disparity
rule of this paragraph (a)(5)(iv).
Example 3. Assume the same facts as in Example
1, except that Country B imposes tax on the $40 hybrid payment to BR at an effective rate of 50%. The
effective rate of 50% is equal to the hypothetical effective rate of tax. As a result, the hybrid branch
payment does not fall within the tax disparity rule of
this paragraph (a)(5)(iv) and, thus, the recharacterization rules of paragraph (a)(1) of this section do not
apply. See also the special high tax exception of
paragraph (a)(5)(v) of this section.

(v) Special high tax exception—(A) In
general. Paragraph (a)(1) of this section
shall not apply if the non-subpart F income
recharacterized as subpart F income under
this section was subject to foreign income
taxes imposed by a foreign country or
countries at an effective rate that is greater
than 90 percent of the maximum rate of tax
specified in section 11 for the taxable year
of the controlled foreign corporation.
(B) Effective rate of tax. The effective
rate of tax imposed on the net amount of
the hybrid branch payment is determined
under the principles of §1.954–1(d)(2)
and (3). See paragraph (c) of this section
for the application of section 960 to
amounts recharacterized as subpart F income under this section.
(vi) No carryback or carryforward of
amounts in excess of current year earn-

April 20, 1998

ings and profits limitation. To the extent
that some or all of the amount required to
be recharacterized under this section is
not recharacterized as subpart F income
because the hybrid branch payment exceeds the amount that can be recharacterized, as determined under paragraph
(a)(5)(i) of this section, this excess shall
not be carried back or forward to another
year.
(6) Definitions. For purposes of this
section—
Entity means any person that is treated
by the United States or any jurisdiction as
other than an individual.
Hybrid branch means an entity that—
(i) Has a single owner (including ownership through branches) that is either a
controlled foreign corporation or a partnership in which a controlled foreign corporation is a partner (either directly or indirectly through one or more branches or
partnerships);
(ii) Is treated as fiscally transparent by
the United States; and
(iii) Is treated as non-fiscally transparent by the country in which the payor entity, any owner of a fiscally-transparent
payor entity, the controlled foreign corporation, or any intermediary partnership is
created, organized or has substantial assets.
Hybrid branch payment means the
gross amount of any payment (including
any accrual) which, under the tax laws of
any foreign jurisdiction to which the
payor is subject, is regarded as a payment
between two separate entities but which,
under U.S. income tax principles, is not
income to the recipient because it is between two parts of a single entity.
(7) Fiscally transparent and non-fiscally transparent. For purposes of this
section an entity shall be treated as fiscally transparent with respect to an interest holder of the entity, if such interest
holder is required, under the laws of any
jurisdiction to which it is subject, to take
into account separately, on a current basis,
such interest holder’s share of all items
which, if separately taken into account by
such interest holder, would result in an income tax liability for the interest holder in
such jurisdiction different from that
which would result if the interest holder
did not take the share of such items into
account separately. A non-fiscally transparent entity is an entity that is not fis-

10

cally transparent under this paragraph
(a)(7).
(b) Election to change classification—
(1) In general. If a hybrid branch subject
to the provisions of paragraph (a) of this
section is an entity that has made an election under §301.7701–3(c)(1) of this chapter to be disregarded as an entity separate
from its owner, such entity may elect to
change its classification to that of an association taxable as a corporation, under the
procedures described in §301.7701–3(c) of
this chapter, without regard to the limitation of §301.7701–3T(c)(1)(iv) of this
chapter, but only if such election is made
on or before the last day of the first taxable
year beginning on or after January 1, 1998.
An election made pursuant to this paragraph (b)(1) is effective as of the first day
of such taxable year. The 75 day limitation
on retroactivity in §301.7701–3(c)(1)(iii)
of this chapter does not apply.
(2) Limitation. An entity can elect to
change its classification under the provisions of this paragraph only one time.
(c) Application of section 960. For purposes of determining the amount of taxes
deemed paid under section 960, the
amount of non-subpart F income recharacterized as subpart F income under this
section shall be treated as attributable to
income in separate categories, as defined
in §1.904–5(a)(1), in proportion to the
ratio of non-subpart F income in each
such category to the total amount of nonsubpart F income of the controlled foreign
corporation for the taxable year.
(d) Effective dates—(1) Hybrid
branches of controlled foreign corporations. With respect to hybrid branch payments described in paragraph (a)(2)(i)(A)
and (B) of this section, the rules of this
section shall apply to all amounts paid or
accrued on or after January 16, 1998, except for amounts paid or accrued pursuant
to arrangements entered into before January 16, 1998, and not substantially modified (including, for example, by expansion of the arrangement (whether by
exercise of an option or otherwise) such
as by an increase in the amount of or term
of any borrowing, leasing or licensing
constituting the arrangement, changes in
direct or indirect control of any entity that
is a party to the arrangement, or any similar measure which materially increases
the tax benefit of the arrangement) on or
after January 16, 1998.

1998–16 I.R.B.

(2) Hybrid branches of partnerships in
which controlled foreign corporations are
partners. With respect to hybrid branch
payments described in paragraph (a)(2)(i)(C) and (D) of this section, the rules of
this section shall apply to all amounts
paid or accrued on or after March 23,
1998, except for amounts paid or accrued
pursuant to arrangements entered into before March 23, 1998, and not substantially modified (including, for example,
by expansion of the arrangement (whether
by exercise of an option or otherwise)
such as by an increase in the amount of or
term of any borrowing, leasing or licensing constituting the arrangement, changes
in direct or indirect control of any entity
that is a party to the arrangement, or any
similar measure which materially increases the tax benefit of the arrangement) on or after March 23, 1998.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 9. The authority citation for 26
CFR part 301 continue to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. In §301.7701–3, paragraph
(f)(1) is amended by adding a sentence at
the end to read as follows:
§301.7701–3. Classification of certain
business entities.
*

*

*

*

*

(f)(1) * * * Paragraphs (a), (c)(1)(iv)
and (f) of this section do not apply on or
after March 23, 1998. For rules applicable on or after March 23, 1998, see
§301.7701–3T(a), (c)(1)(iv) and (f).
Par. 11. Section 301.7701–3T is added
to read as follows:
§301.7701–3T Classification of certain
business entities (temporary).
(a) In general. A business entity that is
not classified as corporation under
§301.7701–2(b)(1), (3), (4), (5), (6), (7),
or (8) (an eligible entity) can elect its classification for federal tax purposes as provided in this section. An eligible entity
with at least two members can elect to be
classified as either an association (and
thus a corporation under §301.7701–
2(b)(2)) or a partnership, and an eligible
entity with a single owner can elect to be
classified as an association or to be disre-

1998–16 I.R.B.

garded as an entity separate from its
owner. Paragraph (b) of this section provides a default classification for an eligible entity that does not make an election.
Thus, elections are necessary only when
an eligible entity chooses to be classified
initially as other than the default classification or when an eligible entity chooses
to change its classification. An entity
whose classification is determined under
the default classification retains that classification (regardless of any changes in
the members’ liability that occurs at any
time during the time that the entity’s classification is relevant as defined in paragraph (d) of this section) until the entity
makes an election to change that classification under paragraph (c)(1) of this section. Paragraph (c) of this section provides rules for making express elections.
Paragraph (d) provides special rules for
foreign eligible entities. Paragraph (e) of
this section provides special rules for
classifying entities resulting from partnership terminations and divisions under section 708(b). Paragraph (f) of this section
sets forth the effective date of this section
and a special rule relating to prior periods.
An entity that has elected to be disregarded as an entity separate from its
owner may nevertheless be treated as a
corporation for the limited purposes of
§1.954–9T(a)(4)(i) of this chapter.
(b) through (c)(1)(iii) [Reserved]. For
further guidance, see §301.7701–3(b)
through (c)(1)(iii).
(c)(1)(iv) Limitation. If an eligible entity makes an election under paragraph
(c)(1)(i) of this section to change its classification (other than an election made by
an existing entity to change its classification as of the effective date of this section), the entity cannot change its classification by election again during the sixty
months succeeding the effective date of
the election. However, the Commissioner
may permit the entity to change its classification by election within the sixty
months if more than fifty percent of the
ownership interests in the entity as of the
effective date of the subsequent election
are owned by person that did not own any
interests in the entity on the filing date or
on the effective date of the entity’s prior
election. See §1.954–9T(b) of this chapter, for circumstances under which certain
eligible entities may make an election to
change their classification within the
sixty-month period.

11

(c)(1)(v) through (e) [Reserved]. For
further guidance, see §301.7701–3(c)(1)(v) through (e).
(f) Effective date. Section 301.7701–
3T(a) and (c)(1)(iv) applies on or after
March 23, 1998. For rules prior to March
23, 1998, see §301.7701–3(a) and
(c)(1)(iv).
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
March 23, 1998, 12:58 p.m., and published in the
issue of the Federal Register for March 26, 1998, 63
F.R. 14613)

Section 985.—Functional
Currency
26 CFR 1.985–1: Functional currency.

T.D. 8765
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Change From Dollar
Approximate Separate
Transactions Method of
Accounting (DASTM) to the
Profit and Loss Method of
Accounting/Change From the
Profit and Loss Method to
DASTM
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final Regulations.
SUMMARY: This document contains
final Income Tax Regulations relating to
adjustments required when a qualified
business unit (QBU) that used the profit
and loss method of accounting (P&L) in a
post-1986 year begins to use the dollar
approximate separate transaction method
of accounting (DASTM) and adjustments
required when a QBU that used DASTM
begins using P&L. The regulations provide rules for taxpayers to construct an

April 20, 1998

opening dollar balance sheet for the QBU
and require income adjustments in certain
cases.
DATES: These regulations are effective
April 6, 1998.
FOR FURTHER INFORMATION CONTACT: Howard Wiener at (202) 6223870 (not a toll-free number) of the office
of Chief Counsel (International) within
the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue,
NW, Washington, DC 20224.
SUPPLEMENTARY INFORMATION:
Background
On January 5, 1993 and July 25, 1994,
the IRS published proposed amendments
to §1.985–7 in the Federal Register at 58
F.R. 300 (INTL–0045–92) and §1.985–1
in the Federal Register at 59 F.R. 37733
(INTL–0066–92), respectively. No public hearing was held and few comments
were received. After consideration of
these comments, the regulations are
adopted as a Treasury Decision with modifications as described below.
Explanation of Provisions
I. Proposed Rules for Changing From
P&L to DASTM (§1.985–7)
1. The Proposed Regulations
The proposed regulations under
§1.985–7 set forth transition rules for
QBUs changing from the profit and loss
method of accounting (P&L) to DASTM
in tax years after 1987. Section 1.985–6
provides the translation rules for QBUs
using DASTM in 1987. Generally, when
a QBU changes its functional currency,
two basic issues arise: (1) How should the
QBU translate its balance sheet accounts
into the new functional currency in a way
that preserves any unrecognized currency
gain or loss which accrued in the old
functional currency; and (2) whether income adjustments need to be made to recognize any currency gain or loss which
accrued in the old functional currency that
cannot be preserved.
Section 1.985–5 provides rules that
generally apply when a QBU changes its
functional currency. Under §1.985–5 balance sheet accounts are translated using
the spot rate on the last day prior to the

April 20, 1998

taxable year of change. In addition,
§1.985–5 generally requires recognition
of unrealized exchange gain or loss on instruments and other accounts that were
maintained in the functional currency to
which the QBU is changing.
The proposed regulations issued under
§1.985–7 were issued in response to taxpayer comments that §1.985–5 resulted in
significant distortions when a QBU either
elected or was required to use DASTM.
Applying the spot rate on the last day
prior to the year in which the QBU begins
to use DASTM (the “taxable year of
change”) to translate fixed assets typically
results in a significant loss of basis in dollar terms and does not take into account
certain income and expense distortions
that occur in the period immediately preceding the taxable year of change.
In response to taxpayers’ comments,
the proposed regulations provide for use
of the translation rules provided under
§1.985–3. These rules generally translate
fixed assets at the historical exchange rate
and other assets and liabilities at the current exchange rate. To correct for distortions that would result from applying historic exchange rates for fixed assets while
applying the current year’s spot rate for
other balance sheet accounts, the proposed regulations provide for income adjustments in the case of a controlled foreign corporation (CFC) and a branch that
reflect amounts that would have been included in income under DASTM.
In the case of a CFC, the proposed regulations provide for a shareholder level income adjustment to the extent subpart F
income realized during the period after
1986 until the taxable year of change differs from subpart F income that would
have been realized if the CFC had used
DASTM throughout this period. In the
case of a branch, the regulations provide
that any difference between the branch’s
local currency equity translated into dollars at the spot exchange rate on the last
day prior to the taxable year of change and
the taxpayer’s dollar basis pool on that day
is included in income over three taxable
years beginning with the taxable year of
change. For purposes of translating the
balance sheet of noncontrolled section 902
corporations, the proposed regulations
apply historic exchange rates for fixed assets. In such case, no shareholder level income adjustments are required.

12

Recognizing the administrative burden
of making income adjustments for all post1986 tax years in the case of a CFC, the
preamble to the proposed regulations requested comments regarding three alternative transition rules as follows: (1) requiring shareholder level adjustments for the
three-year base period used to determine
the hyperinflationary status of the local
currency, (in which case the general rule of
§1.985–5 would be applied in preparing
the balance sheet for the first year of the
base period); (2) treating a portion of retained earnings as subpart F income based
on an average historical rate of subpart F
income to total earnings and profits, and
(3) using the spot rate on the last day prior
to the taxable year of change to translate
balance sheet items with special rules to
allow historical exchange rates to translate
fixed assets to the extent of unrealized exchange loss on paid-in capital.
2. Reasons for change
The IRS is concerned that the approach
of the proposed regulations could create a
significant administrative burden for
shareholders of CFCs. The administrative
burden results from the requirement that
shareholders recompute subpart F income
for all of the CFC’s post 1986 taxable
years. If the functional currency of a CFC
becomes hyperinflationary in a year that
is significantly distant from the CFC’s
first post-1986 taxable year, records supporting the required recomputation may
be unavailable.
Further, the required recomputation
under the proposed regulations is generally inconsistent with the policy of sections 986 and 987 that the income of
branches with a functional currency different than that of the taxpayer and the
earnings and profits of foreign corporations be computed under a profit and loss
method, except in the case of hyperinflation. See S. Rep. No. 99–313, 99th
Cong., 2d Sess., 454 (1986). The recomputation under the proposed regulation
would put the CFC on DASTM for nonhyperinflationary years. Accordingly, the
rules in the proposed regulations have
been modified as described below.
II. Final Regulations for Changing
From P&L to DASTM (§1.985–7)
1. General Rule
The approach employed in the final

1998–16 I.R.B.

regulations has the general effect of treating a QBU as if it had applied §1.985–5
on the last day of the last taxable year
prior to the base period for determining
whether a currency is hyperinflationary
(transition date) and had applied DASTM
during the taxable years beginning after
the transition date until the taxable year of
change (look-back period). This approach addresses the problems of applying §1.985–5 in the taxable year of
change for purposes of translating fixed
assets by applying the historical exchange
rate to the extent fixed assets were acquired during the look-back period. Assets acquired prior to the look-back period
are translated by applying the spot rate on
the transition date. This approach also
corrects distortions in income and expense (generally interest income and expense) that occur during the look-back period.
The final regulations respond to taxpayers’ comments and provide an appropriate rule for translating the adjusted
basis of fixed assets into dollars by applying an exchange rate in effect prior to the
hyperinflationary period. Moreover, this
method more accurately reflects Congressional intent for QBUs to apply the profit
and loss method except in the case of hyperinflation. In addition, this approach
decreases the administrative burden of
changing to DASTM.
2. Foreign Corporations
In the case of a foreign corporation
which is either required or elects to use
DASTM, four basic corporate level adjustments are required as follows. (1) The
balance sheet is translated by treating the
corporation as if it had changed its functional currency to the dollar for the first
post-transition date taxable year and had
applied the rules of §1.985–5(c) on the
transition date. Assets acquired and liabilities incurred in the functional currency
during the look-back period are translated
by applying the rules of §1.985–3. (2)
The unrealized gain or loss on dollar denominated section 988 transactions as determined on the transition date are treated
as if recognized on that date (and actual
gain or loss recognized on dollar denominated section 988 transactions during the
look-back period is reversed). (3) The
dollar value of the pre-1987 E&P of the
corporation as stated on the transition date
in the functional currency is translated

1998–16 I.R.B.

into U.S. dollars at the spot rate in effect
on the transition date. (4) The dollar value
of the post-1986 E&P is computed by
translating the post-1986 E&P as stated
on the transition date in the functional
currency at the spot rate on such date and
adding to it the E&P for the years during
the look-back period as computed under
DASTM.
In the case of a CFC, there are three
shareholder level adjustments as follows:
(1) The U.S. shareholders must take into
income exchange gain or loss on the
deemed recognition of the section 988
transactions as determined at the corporate level to the extent such gain or loss is
subpart F income. (2) The U.S. shareholders must recognize foreign currency gain
or loss as computed under section 986(c)
as if all previously taxed earnings and
profits were distributed on the transition
date (however, any actual 986(c) gain or
loss recognized during the look-back period is reversed). (3) The subpart F income of the CFC is recomputed during
the look-back period under DASTM and
compared to the subpart F income as
computed under the P&L method. The
difference (positive or negative) is taken
into account in the taxable year of change
and spread over four years. Similar rules
apply to United States persons who have
made an election under section 1295 to
treat a passive foreign investment company as a qualified electing fund. In the
case of other foreign corporations, no
shareholder level income adjustments are
necessary.
4. Branches
In accord with the general approach articulated above, the regulations treat a
branch changing to DASTM as applying
the principles of §1.985–5 on the transition date. Thus, the balance sheet is translated by treating the branch as if it had
changed its functional currency to the dollar for the first post-transition date taxable
year and had applied the rules of §1.985–
5(c) on the transition date. Unrealized
gain or loss on dollar denominated section
988 transactions as stated on the transition
date are treated as if recognized on that
date (and any actual gain or loss realized
with respect to section 988 transactions
during the look-back period is reversed).
Further, the regulations require that the
taxpayer recognize gain or loss attributable to the branch’s equity pool (as stated

13

on the transition date) under the principles
of section 987, computed as if the branch
terminated on the transition date. Such
gain or loss is reduced by any section 987
gain and increased by any section 987
loss that was recognized by the taxpayer
with respect to remittances during the
look-back period. Finally, branch income
shall be determined under §1.985–3 for
each look-back year and compared to the
amount that was taken into account for
each year. The sum of the difference
(positive or negative) is taken into account in the taxable year of change and
spread over four years.
III. Rules for Changing from DASTM to
P&L (§1.985–1)
Under the proposed regulation, a QBU
that has been required or had elected to
use DASTM must change functional currency to the currency of its economic environment in a year in which the currency
is no longer hyperinflationary pursuant to
the three-year test under §1.985–1(b).
These rules provide that when a taxpayer
changes from DASTM to the P&L
method of accounting, §1.985–5 shall
apply for purposes of translating a QBU’s
balance sheet and for making certain income adjustments. Because these rules
generally do not create distortions and are
administrable, the final regulations adopt
these regulations as proposed.
IV. Other Changes
Various conforming changes have been
made to §§1.985–1 and 1.985–5 to account for the addition of §1.985–7. In addition, the definition of hyperinflation has
been liberalized to provide that for purposes of determining whether a currency
is hyperinflationary for income tax purposes, United States generally accepted
accounting principles will be accepted
provided that the determination is based
on criteria that is substantially similar to
the general rules provided in the regulations, the method of determination is applied consistently from year to year, and
the same method is applied to all related
persons.
Special Analysis
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

April 20, 1998

Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the notice of proposed rulemaking preceding the regulations was issued prior to
March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Accordingly, a regulatory flexibility analysis is not required. Pursuant to
section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Howard A. Wiener of the Office
of the Associate Chief Counsel (International). Other personnel from the IRS and
Treasury Department also participated in
their development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.985–1 is amended by:
1. Revising paragraph (b)(2)(ii)(C).
2. Adding a sentence to the end of
paragraph (b)(2)(ii)(D).
3. Adding paragraph (b)(2)(ii)(E).
The additions and revision reads as follows:
§1.985–1. Functional currency.
*

*

*

*

*

(b) * * *
(2) * * *
(ii) * * *
(C) Change in functional currency. If a
QBU is required to change its functional
currency to the dollar under paragraph
(b)(2)(ii)(A) of this section, or chooses or
is required to change its functional currency to the dollar for any open taxable
year (and all subsequent taxable years)
under §1.985–3(a)(2)(ii), the change is

April 20, 1998

considered to be made with the consent of
the Commissioner for purposes of
§1.985–4. A QBU changing functional
currency must make adjustments described in §1.985–7 if the year of change
(as defined in §1.481–1(a)(1)) begins
after 1987, or the adjustments described
in §1.985–6 if the year of change begins
in 1987. No adjustments under section
481 are required solely because of a
change in functional currency described
in this paragraph (b)(2)(ii)(C).
(D) * * * In making the determination
whether a currency is hyperinflationary,
the determination for purposes of United
States generally accepted accounting
principles may be used for income tax
purposes provided the determination is
based on criteria that is substantially similar to the rules previously set forth in this
paragraph (b)(2)(ii)(D), the method of determination is applied consistently from
year to year, and the same method is applied to all related persons as defined in
§1.985–3(e)(2)(vi).
(E) Change in functional currency
when currency ceases to be hyperinflationary–(1) In general. A QBU that has
been required to use the dollar as its functional currency under paragraph (b)(2) of
this section, or has elected to use the dollar as its functional currency under paragraph (b)(2)(ii)(B)(2) of this section or
§1.985–2, must change its functional currency as of the first day of the first taxable
year that follows three consecutive taxable years in which the currency of its
economic environment, determined under
paragraph (c)(2) of this section, is not a
hyperinflationary currency. The functional currency of the QBU for such year
shall be determined in accordance with
paragraph (c) of this section. For purposes of §1.985–4, the change is considered to be made with the consent of the
Commissioner. See §1.985–5 for adjustments that are required upon a change in
functional currency.
(2) Effective Date. This paragraph
(b)(2)(ii)(E) of this section applies to taxable years beginning after April 6, 1998.
Par. 3. Section 1.985–5(a) is amended
by adding the following sentence to the
end of the paragraph:
§1.985–5 Adjustments required upon
change in functional currency.
(a) * * *

14

However, a QBU that changes to the
dollar pursuant to §1.985–1(b)(2) after
1987 shall apply §1.985–7.
*

*

*

*

*

Par. 4. Section 1.985–7 is added as
follows:
1.985–7 Adjustments required in
connection with a change to DASTM.
(a) In general. If a QBU begins to use
the dollar approximate separate transactions method of accounting set forth in
§1.985–3 (DASTM) in a taxable year beginning after April 6, 1998, adjustments
shall be made as provided by this section.
For the rules with respect to foreign corporations, see paragraph (b) of this section. For the rules with respect to adjustments to the income of United States
shareholders of controlled foreign corporations, see paragraph (c) of this section.
For the rules with respect to adjustments
relating to QBU branches, see paragraph
(d) of this section. For the effective date
of this section, see paragraph (e). For
purposes of applying this section, the
look-back period shall be the period beginning with the first taxable year after
the transition date and ending on the last
day prior to the taxable year of change.
The term transition date means the later of
the last day of the last taxable year ending
before the base period as defined in
§1.985–1(b)(2)(ii)(D) or the last day of
the taxable year in which the QBU last
applied DASTM. The taxable year of
change shall mean the taxable year of
change as defined in §1.481–1(a)(1). The
application of this paragraph may be illustrated by the following examples:
Example 1. A calendar year QBU that has not
previously used DASTM operates in a country in
which the functional currency of the country is hyperinflationary as defined under §1.985–1(b)(2)(ii)(D) for the QBU’s 1999 tax year. The lookback period is the period from January 1, 1996
through December 31, 1998, the transition date is
December 31, 1995, and the taxable year of change
is the taxable year beginning January 1, 1999.
Example 2. A QBU that has not previously used
DASTM with a taxable year ending June 30, operates in a country in which the functional currency of
the country is hyperinflationary for the QBU’s tax
year beginning July 1, 1999 as defined under
§1.985–1(b)(2)(ii)(D)(where the base period is the
thirty-six calendar months immediately preceding
the first day of the current calendar year 1999). The
look-back period is the period from July 1, 1995
through June 30, 1999, the transition date is June 30,
1995, and the taxable year of change is the taxable
year beginning July 1, 1999.

1998–16 I.R.B.

(b) Adjustments to foreign corporations—(1) In general. In the case of a
foreign corporation, the corporation shall
make the adjustments set forth in paragraphs (b)(2) through (4) of this section.
The adjustments shall be made on the first
day of the taxable year of change.
(2) Treatment of certain section 988
transactions—(i) Exchange gain or loss
from section 988 transactions unrealized
as of the transition date. A foreign corporation shall adjust earnings and profits by
the amount of any unrealized exchange
gain or loss that was attributable to a section 988 transaction (as defined in sections 988(c)(1)(A), (B), and (C)) that was
denominated in terms of (or determined
by reference to) the dollar and was held
by the corporation on the transition date.
Such gain or loss shall be computed as if
recognized on the transition date and shall
be reduced by any gain and increased by
any loss recognized by the corporation
with respect to such transaction during the
look-back period. The amount of such
gain or loss shall be determined without
regard to the limitations of section 988(b)
(i.e., whether any gain or loss would be
realized on the transaction as a whole).
The character and source of such gain or
loss shall be determined under section
988. Proper adjustments shall be made to
account for gain or loss taken into account
by reason of this paragraph (b)(2). See
§1.985–5(f) Example 1, footnote 1.
(ii) Treatment of a section 988 transaction entered into and terminated during
the look-back period. A foreign corporation shall reduce earnings and profits by
the amount of any gain, and increase
earnings and profits by the amount of any
loss, that was recognized with respect to
any dollar denominated section 988 transactions entered into and terminated during
the look-back period.
(3) Opening balance sheet. The opening balance sheet of a foreign corporation
for the taxable year of change shall be determined as if the corporation had
changed its functional currency to the dollar by applying § 1.985–5(c) on the transition date and had translated its assets and
liabilities under §1.985–3 during the
look-back period.
(4) Earnings and profits adjustments—(i) Pre-1987 accumulated profits.
The foreign income taxes and accumulated profits or deficits in accumulated

1998–16 I.R.B.

profits of a foreign corporation that are attributable to taxable years beginning before January 1, 1987, as stated on the transition date, and that were maintained for
purposes of section 902 in the old functional currency, shall be translated into
dollars at the spot rate in effect on the
transition date. The applicable accumulated profits shall be reduced on a last-in,
first-out basis by the aggregate dollar
amount (translated from functional currency in accordance with the rules of section 989(b)) attributable to earnings and
profits that were distributed (or treated as
distributed) during the look-back period
to the extent such amounts distributed exceed the earnings and profits calculated
under (b)(4)(ii) or (b)(4)(iii), as applicable. See §1.902–1(b)(2)(ii). Once translated into dollars, these pre-1987 taxes
and accumulated profits or deficits in accumulated profits shall (absent a change
in functional currency) remain in dollars
for all federal income tax purposes.
(ii) Post-1986 undistributed earnings
of a CFC. In the case of a controlled foreign corporation (within the meaning of
section 957 or section 953(c)(1)(B))(CFC) or a foreign corporation subject to
the rules of §1.904–6(a)(2), the corporation’s post-1986 undistributed earnings in
each separate category as defined in
§1.904–5(a)(1) as of the first day of the
taxable year of change (and prior to adjustment under paragraph (c)(1) of this
section) shall equal the sum of—
(A) The corporation’s post-1986
undistributed earnings and profits (or
deficit in earnings and profits) in each
separate category as defined in §1.904–
5(a)(1) as stated on the transition date
translated into dollars at the spot rate in
effect on the transition date; and
(B) The sum of the earnings and profits (or deficit in earnings and profits) in
each separate category determined under
§1.985–3 for each post-transition date
taxable year prior to the taxable year of
change.
Such amount shall be reduced by the aggregate dollar amount (translated from
functional currency in accordance with
the rules of section 989(b)) attributable to
earnings and profits that were distributed
(or treated as distributed) during the lookback period out of post-1986 earnings and
profits in such separate category. For purposes of applying this paragraph

15

(b)(4)(ii)(B), the opening balance sheet
for calculating earnings and profits under
§1.985–3 for the first post-transition year
shall be translated into dollars pursuant to
§1.985–5(c).
(iii) Post-1986 undistributed earnings
of other foreign corporations. In the case
of a foreign corporation that is not a CFC
or subject to the rules of §1.904–6(a)(2),
the corporation’s post-1986 undistributed
earnings shall equal the sum of—
(A) The corporation’s post-1986
undistributed earnings (or deficit) on the
transition date translated into dollars at
the spot rate in effect on the transition
date; and
(B) The sum of the earnings and profits (or deficit in earnings and profits) determined under §1.985–3 for each posttransition date taxable year (or such later
year determined under section 902(c)(3)(A)) prior to the taxable year of
change.
Such amount shall be reduced by the aggregate dollar amount (translated from
functional currency in accordance with
the rules of section 989(b)) that was distributed (or treated as distributed) during
the look-back period out of post-1986
earnings and profits. For purposes of applying this paragraph (b)(4)(iii)(B), the
opening balance sheet for calculating
earnings and profits under §1.985-3 for
the first post-transition year shall be translated into dollars pursuant to §1.985–5(c).
(c) United States shareholders of controlled foreign corporations—(1) In general. A United States shareholder (within
the meaning of section 951(b) or section
953(c)(1)(B)) of a CFC that changes to
DASTM shall make the adjustments set
forth in paragraphs (c)(2) through (5) of
this section on the first day of the taxable
year of change. Adjustments under this
section shall be taken into account by the
shareholder (or such shareholder’s successor in interest) ratably over four taxable years beginning with the taxable year
of change. Similar rules shall apply in determining adjustments to income of
United States persons who have made an
election under section 1295 to treat a passive foreign investment company as a
qualified electing fund.
(2) Treatment under subpart F of income recognized on section 988 transactions. The character of amounts taken
into account under paragraph (b)(2) of

April 20, 1998

this section for purposes of sections 951
through 964, shall be determined on the
transition date and to the extent characterized as subpart F income shall be taken
into account in accordance with the rules
of paragraph (c)(1) of this section. Such
amounts shall retain their character for all
federal income tax purposes (including
sections 902, 959, 960, 961, 1248, and
6038).
(3) Recognition of foreign currency
gain or loss on previously taxed earnings
and profits on the transition date. Gain or
loss is recognized under section 986(c) as
if all previously taxed earnings and profits
as determined on the transition date, if
any, were distributed on such date. Such
gain or loss shall be reduced by any foreign currency gain and increased by any
foreign currency loss that was recognized
under section 986(c) with respect to distributions of previously taxed earnings
and profits during the look-back period.
Such amount shall be characterized in accordance with section 986(c) and taken
into account in accordance with the rules
of paragraph (c)(1) of this section.
(4) Subpart F income adjustment.
Subpart F income in a separate category
shall be determined under §1.985–3 for
each look-back year. For this purpose, the
opening DASTM balance sheet shall be
determined under §1.985–5. The sum of
the difference (positive or negative) between the amount computed pursuant to
§1.985–3 and amount that was included
in income for each year shall be taken into
account in the taxable year of change pursuant to paragraph (c)(1) of this section.
Such amounts shall retain their character
for all federal income tax purposes (including sections 902, 959, 960, 961,
1248, and 6038). For rules applicable if
an adjustment under this section results in
a loss for the taxable year in a separate
category, see section 904(f) and the regulations thereunder. The amount of previously taxed earnings and profits as determined under section 959(c)(2) shall be
adjusted (positively or negatively) by the
amount taken into account under this
paragraph (c)(4) as of the first day of the
taxable year of change.
(5) Foreign tax credit. A United States
shareholder of a CFC shall compute an
amount of foreign taxes deemed paid
under section 960 with respect to any positive adjustments determined under para-

April 20, 1998

graph (c) of this section. The amount of
foreign tax deemed paid shall be computed with reference to the full amount of
the adjustment and to the post-1986
undistributed earnings determined under
paragraph (b)(4)(i) and (ii) of this section
and the post-1986 foreign income taxes of
the CFC on the first day of the taxable
year of change (i.e., without taking into
account earnings and taxes for the taxable
year of change.) For purposes of section
960, the associated taxes in each separate
category shall be allocated pro rata
among, and deemed paid in, the shareholder’s taxable years in which the income is taken into account. (No adjustment to foreign taxes deemed paid in
prior years is required solely by reason of
a negative adjustment to income under
paragraph (c)(1) of this section.)
(d) QBU branches—(1) In general. In
the case of a QBU branch, the taxpayer
shall make the adjustments set forth in
paragraphs (d)(2) through (d)(4) of this
section. Adjustments under this section
shall be taken into account by the taxpayer ratably over four taxable years beginning with the taxable year of change.
(2) Treatment of certain section 988
transactions—(i) Exchange gain or loss
from section 988 transactions unrealized
as of the transition date. A QBU branch
shall adjust income by the amount of any
unrealized exchange gain or loss that was
attributable to a section 988 transaction
(as defined in sections 988(c)(1)(A), (B),
and (C)) that was denominated in terms of
(or determined by reference to) the dollar
and was held by the QBU branch on the
transition date. Such gain or loss shall be
computed as if recognized on the transition date and shall be reduced by any gain
and increased by any loss recognized by
the QBU branch with respect to such
transaction during the look-back period.
The amount of such gain or loss shall be
determined without regard to the limitations of section 988(b) (i.e., whether any
gain or loss would be realized on the
transaction as a whole). The character
and source of such gain or loss shall be
determined under section 988. Proper adjustments shall be made to account for
gain or loss taken into account by reason
of this paragraph (d)(2). See §1.985–5(f)
Example 1, footnote 1.
(ii) Treatment of a section 988 transaction entered into and terminated during

16

the look-back period. A QBU branch
shall reduce income by the amount of any
gain, and increase income by the amount
of any loss, that was recognized with respect to any dollar denominated section
988 transactions entered into and terminated during the look-back period.
(3) Deemed termination income adjustment. The taxpayer shall realize gain
or loss attributable to the QBU branch’s
equity pool (as stated on the transition
date) under the principles of section 987,
computed as if the branch terminated on
the transition date. Such amount shall be
reduced by section 987 gain and increased
by section 987 loss that was recognized
by such taxpayer with respect to remittances during the look-back period.
(4) Branch income adjustment.
Branch income in a separate category
shall be determined under §1.985–3 for
each look-back year. For this purpose, the
opening DASTM balance sheet shall be
determined under §1.985–5. The sum of
the difference (positive or negative) between the amount computed pursuant to
§1.985–3 and amount taken into account
for each year shall be taken into account
in the taxable year of change pursuant to
paragraph (d)(1) of this section. Such
amounts shall retain their character for all
federal income tax purposes.
(5) Opening balance sheet. The opening balance sheet of a QBU branch for the
taxable year of change shall be determined
as if the branch had changed its functional
currency to the dollar by applying
§ 1.985–5(c) on the transition date and had
translated its assets and liabilities under
§1.985–3 during the look-back period.
(e) Effective date. This section is effective for taxable years beginning after April
6, 1998. However, a taxpayer may choose
to apply this section to all open taxable
years beginning after December 31, 1986,
provided each person, and each QBU
branch of a person, that is related (within
the meaning of §1.985–2(d)(3)) to the taxpayer also applies this section rules.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved February 11, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.

1998–16 I.R.B.

(Filed by the Office of the Federal Register on
March 4, 1998, 8:45 a.m., and published in the issue
of the Federal Register for March 5, 1998, 63 F.R.
10772)

Section 1.1502–3: Regulations
26 CFR 1.1502–3: Consolidated investment credit.

T.D. 8766
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Consolidated Returns—
Limitations on the Use of
Certain Credits; Overall
Foreign Loss Accounts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
temporary amendments to the consolidated return regulations. The temporary
amendments modify the date temporary
regulations apply as published in the Federal Register on January 12, 1998, relating to the use of tax credits of a consolidated group and its members. The
amendments provide guidance to consolidated groups that have a taxable year beginning on or after January 1, 1997, for
which the income tax return is due on or
before March 13, 1998. The text of the
temporary regulations also serves as the
text of REG–104062–97, page 20 of this
Bulletin.
DATES: Effective dates: These amendments are effective March 13, 1998.
Applicability dates: For dates of application, see the Effective Dates portion of
the preamble under SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CONTACT: Roy A. Hirschhorn, (202) 6227770.
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
On January 12, 1998, the IRS and Treasury published in the Federal Register

1998–16 I.R.B.

final, temporary and proposed regulations
(the January 12, 1998, regulations) relating to limitations on the use of certain tax
credits and related attributes by corporations filing consolidated income tax returns. In general, the January 12, 1998,
regulations relate to the separate return
limitation year provisions (and certain
consolidated return changes in ownership) for general business credits, alternative minimum tax credits, foreign tax
credits and overall foreign loss accounts.
The January 12, 1998, regulations were
generally applicable to consolidated return years beginning on or after January
1, 1997. IRS and Treasury have determined that the appropriate effective date
of those regulations should be for consolidated return years for which the due date
(without extensions) of the income tax return is after March 13, 1998. In lieu of
applying this effective date, a consolidated group may choose to apply the effective date provisions as published in the
January 12, 1998, regulations. Taxpayers
making this choice must apply all of those
effective date provisions for all relevant
years. Thus, such taxpayers may not
choose to apply one provision of the January 12, 1998, regulations and not another.
Effective Dates
The temporary amendments are applicable to consolidated return years for
which the due date of the income tax return (without extensions) is after March
13, 1998. As explained in the Background portion of this preamble, taxpayers may instead choose to apply the effective date provisions of the January 12,
1998, regulations (i.e., generally taxable
years beginning on or after January 1,
1997).
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It is hereby certified that these
regulations do not have a significant economic impact on a substantial number of
small entities. This certification is based
on the fact that these regulations principally affect corporations filing consolidated federal income tax returns that have
carryover or carryback of credits from

17

separate return limitation years. Available
data indicates that many consolidated return filers are large companies (not small
businesses). In addition, the data indicates that an insubstantial number of consolidated return filers that are smaller
companies have credit carryovers or carrybacks, and thus even fewer of these filers
have credit carryovers or carrybacks that
are subject to the separate return limitation
year rules. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It has also been determined that
under section 553(d) of the Administrative
Procedure Act (5 U.S.C. chapter 5) these
regulations should be effective immediately because they involve the applicability of regulations that modify the limitations on the use of certain tax attributes for
taxable years beginning on or after January 1, 1997. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice
of proposed rulemaking accompanying
these regulations is being sent to the Small
Business Administration for comment on
their impact on small businesses.
Drafting Information
The principal author of these regulations is Roy A. Hirschhorn of the Office
of Assistant Chief Counsel (Corporate).
Other personnel from the IRS and Treasury participated in their development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1502–3 is amended by
revising paragraphs (c)(3), (d)(2) and
(e)(3) to read as follows:
§1.1502–3 Consolidated investment
credit.
*

*

*

*

*

(c) * * *
(3) Special effective date. This paragraph (c) applies to consolidated return

April 20, 1998

years for which the due date of the income tax return (without extensions) is on
or before March 13, 1998. See §1.1502–
3T(c) for the rule that limits the group’s
use of a section 38 credit carryover or carryback from a SRLY for a consolidated return year for which the due date of the income tax return (without extensions) is
after March 13, 1998. For taxable years
not subject to §1.1502–3T(c), prior law
applies. See §1.1502–3(c) in effect prior
to January 12, 1998 (§1.1502–3(c) as contained in the 26 CFR part 1 edition revised
April 1, 1997) for prior law. See also
§1.1502–3T(c)(4) for an optional effective
date rule (generally making the rules of
this paragraph (c) inapplicable to a consolidated return year beginning after December 31, 1996, if the due date of the income
tax return (without extensions) for such
year is on or before March 13, 1998).
(d) Examples. * * *
(2) Example (2) and Example (3) of
this paragraph (d) do not apply to consolidated return years for which the due date
of the income tax return (without extensions) is after March 13, 1998. For consolidated return years for which the due
date of the income tax return (without extensions) is after March 13, 1998, see
§1.1502–3T(d).
(e) * * *
(3) Special effective date. This paragraph (e) applies only to a consolidated
return change of ownership that occurred
during a consolidated return year for
which the due date of the income tax return (without extensions) is on or before
March 13, 1998. See §1.1502–3T(c)(4)
for an optional effective date rule (generally making the rules of this paragraph
(e) inapplicable if the consolidated return
change of ownership occurred on or after
January 1, 1997, and during a consolidated return year for which the due date
of the income tax return (without extensions) is on or before March 13, 1998).
*

*

*

*

*

Par. 3. Section 1.1502–3T is amended
by revising paragraphs (c)(3) and (d)(2)
and adding a new paragraph (c)(4) to read
as follows:
§1.1502–3T Consolidated investment
credit (temporary).
*

*

April 20, 1998

*

*

*

(c) * * *
(3) Effective date. This paragraph (c)
applies to consolidated return years for
which the due date of the income tax return (without extensions) is after March
13, 1998. However, a group does not take
into account a consolidated taxable year
for which the due date of the income tax
return (without extensions) is on or before
March 13, 1998, in determining a member’s (or subgroup’s) contributions to the
consolidated section 38(c) limitation
under this paragraph (c). See also
§1.1502–3(c).
(4) Optional effective date of January
1, 1997. In lieu of paragraphs (c)(3) and
(d)(2) of this section and §§1.1502–
3(c)(3), (d)(2) and (e)(3) (relating to the
general business credit), 1.1502–4(f)(3)
and (g)(3), 1.1502–4T(f) and (g)(3) (relating to the foreign tax credit), 1.1502–9(a)
(the next to last sentence), 1.1502–9T(b)(1)(v) (relating to overall foreign losses),
and 1.1502–55T(h)(4)(iii)(C) (relating to
the alternative minimum tax credit), a
consolidated group may apply such paragraphs as they appear in 1998–10 I.R.B.
23 (see §601.601(d)(2) of this chapter). A
consolidated group making this choice
must apply all such paragraphs for all relevant years.
(d) * * *
(2) This paragraph (d) applies to consolidated return years for which the due
date of the income tax return (without extensions) is after March 13, 1998. See
also §1.1502–3(d) for years for which the
due date of the income tax return (without
extensions) is on or before March 13,
1998.
* * * * *
Par. 4. Section 1.1502–4 is amended by
revising paragraphs (f)(3) and (g)(3) to
read as follows:
§1.1502–4 Consolidated foreign tax
credit.
*

*

*

*

*

(f) * * *
(3) Special effective date ending SRLY
limitation. See §1.1502–4T(f) for the rule
that ends the SRLY limitation with respect to foreign tax credits for consolidated return years for which the due date
of the income tax return (without extensions) is after March 13, 1998. See also
§1.1502–3T(c)(4) for an optional effec-

18

tive date rule (generally making the rules
of this paragraph (f) inapplicable to a consolidated return year beginning after December 31, 1996, if the due date of the income tax return (without extensions) for
such year is on or before March 13, 1998.
(g) * * *
(3) Special effective date for CRCO
limitation. See §1.1502–4T(g)(3) for the
rule that ends the CRCO limitation with
respect to a consolidated return change of
ownership that occurs on or after the first
day of a taxable year for which the due
date of the income tax return (without extensions) is after March 13, 1998. See
also §1.1502–3T(c)(4) for an optional effective date rule (generally making the
rules of this paragraph (g) inapplicable if
the consolidated return change of ownership occurred on or after January 1, 1997,
and during a consolidated return year for
which the due date of the income tax return (without extensions) is on or before
March 13, 1998).
*

*

*

*

*

Par. 5. Section 1.1502–4T is amended
by revising paragraphs (f) and (g)(3) to
read as follows:
§1.1502–4T Consolidated foreign tax
credit (temporary).
*

*

*

*

*

(f) Limitation on unused foreign tax
carryover or carryback from separate return limitation years. Section 1.1502–
4(f) does not apply for consolidated return
years for which the due date of the income tax return (without extensions) is
after March 13, 1998. For consolidated
return years for which the due date of the
income tax return (without extensions) is
after March 13, 1998, a group shall include an unused foreign tax of a member
arising in a SRLY without regard to the
contribution of the member to consolidated tax liability for the consolidated return year. See also §1.1502–3T(c)(4) for
an optional effective date rule (generally
making the rules of this paragraph (f) applicable to a consolidated return year beginning after December 31, 1996, if the
due date of the income tax return (without
extensions) for such year is on or before
March 13, 1998).
*

*

*

*

*

1998–16 I.R.B.

(g)(3) Special effective date for CRCO
limitation. Section 1.1502–4(g) applies
only to a consolidated return change of
ownership that occurred during a consolidated return year for which the due date
of the income tax return (without extensions) is on or before March 13, 1998.
See also §1.1502–3T(c)(4) for an optional
effective date rule (generally making the
rules of this paragraph (g)(3) applicable if
the consolidated return change of ownership occurred on or after January 1, 1997,
and during a consolidated return year for
which the due date of the income tax return (without extensions) is on or before
March 13, 1998).
Par. 6. In §1.1502–9, paragraph (a) is
amended by removing the last sentence
and adding two sentences in its place to
read as follows:
§1.1502–9 Application of overall foreign
loss recapture rules to corporations filing
consolidated returns.
(a) * * * See §1.1502–9T(b)(1)(v) for
the rule that ends the separate return limitation year limitation for consolidated return years for which the due date of the
income tax return (without extensions) is
after March 13, 1998. See also §1.1502–
3T(c)(4) for an optional effective date
rule (generally making the rules of paragraphs (b)(1)(iii) and (iv) of this section
inapplicable for a consolidated return year
beginning after December 31, 1996, if the
due date of the income tax return (without
extensions) for such year is on or before
March 13, 1998).
*

*

*

*

*

Par. 7. Section 1.1502–9T is amended
by revising paragraph (b)(1)(v) to read as
follows:
§1.1502–9T Application of overall
foreign loss recapture rules to
corporations filing consolidated returns
(temporary).

1998–16 I.R.B.

*

*

*

*

*

(b)(1)(v) Special effective date for
SRLY limitation. Sections 1.1502–
9(b)(1)(iii) and (iv) apply only to consolidated return years for which the due date
of the income tax return (without extensions) is on or before March 13, 1998.
For consolidated return years for which
the due date of the income tax return
(without extensions) is after March 13,
1998, the rules of §1.1502–9(b)(1)(ii)
shall apply to overall foreign losses from
separate return years that are separate return limitation years. For purposes of applying §1.1502–9(b)(1)(ii) in such years,
the group treats a member with a balance
in an overall foreign loss account from a
separate return limitation year on the first
day of the first consolidated return year
for which the due date of the income tax
return (without extensions) is after March
13, 1998, as a corporation joining the
group on such first day. An overall foreign loss that is part of a net operating
loss or net capital loss carryover from a
separate return limitation year of a member that is absorbed in a consolidated return year for which the due date of the income tax return (without extensions) is
after March 13, 1998, shall be added to
the appropriate consolidated overall foreign loss account in the year that it is absorbed. For consolidated return years for
which the due date of the income tax return (without extensions) is after March
13, 1998, similar principles apply to overall foreign losses when there has been a
consolidated return change of ownership
(regardless of when the change of ownership occurred). See also §1.1502–3T(c)(4) for an optional effective date rule
(generally making this paragraph
(b)(1)(v) applicable to a consolidated return year beginning after December 31,
1996, if the due date of the income tax return (without extensions) for such year is
on or before March 13, 1998).

19

*

*

*

*

*

Par. 8. Section 1.1502–55T is amended
by revising paragraph (h)(4)(iii)(C) to
read as follows:
§1.1502–55T Computation of alternative
minimum tax of consolidated groups
(temporary).
*

*

*

*

*

(h)(4) * * *
(iii) * * *
(C) Effective date. This paragraph
(h)(4)(iii) applies to consolidated return
years for which the due date of the income tax return (without extensions) is
after March 13, 1998. However, a group
does not take into account a consolidated
taxable year for which the due date of the
income tax return (without extensions) is
on or before March 13, 1998, in determining a member’s (or subgroup’s) contributions to the consolidated section 53(c)
limitation under paragraph (h)(4)(iii) of
this section. See §1.1502–3T(c)(4) for an
optional effective date rule (generally
making this paragraph (h)(4)(iii) applicable to a consolidated return year beginning after December 31, 1996, if the due
date of the income tax return (without extensions) for such year is on or before
March 13, 1998).
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved March 9, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
March 13, 1998, at 8:45 a.m., and published in the
Federal Register for March 16, 1998, 63 F.R. 12641)

April 20, 1998

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing

the hearing, Mike Slaughter (202) 6227190 (not toll-free numbers).

Consolidated Returns—
Limitations on the Use of
Certain Credits and Related
Tax Attributes

SUPPLEMENTARY INFORMATION:

REG–104062–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.
SUMMARY: In T.D. 8766 on page 17 of
this Bulletin, the IRS is issuing temporary
regulations that relate to the use of certain tax credits and losses of a consolidated group and its members. The text of
those temporary regulations also serves as
the text of these proposed regulations.
This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written comments and outlines
of topics to be discussed at the public
hearing scheduled for May 7, 1998, at 10
a.m., must be received by April 13, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R [REG–104062–97],
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8 a.m.
and 5 p.m. to: CC:DOM:CORP:R
[REG–104005–98], Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the Home Page
or by submitting comments directly to the
IRS Internet site at: http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing has been scheduled for
May 7, 1998, at 10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW, Washington DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, in general, Roy A. Hirschhorn (202)
622-7770; concerning submissions and

April 20, 1998

Background
T.D. 8766 amends the Income Tax Regulations (26 CFR part 1) relating to section
1502. The temporary regulations provide
rules that relate to the use of certain tax
credits and related tax attributes of a consolidated group and its members. The
text of those temporary regulations also
serves as the text of these proposed regulations. The preamble to the temporary
regulations explains the temporary regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It is hereby certified
that these regulations do not have a significant economic impact on a substantial
number of small entities. This certification is based on the fact that these regulations principally affect corporations filing
consolidated federal income tax returns
that have carryover or carryback of credits from separate return limitation years.
Available data indicates that many consolidated return filers are large companies
(not small businesses). In addition, the
data indicates that an insubstantial number of consolidated return filers that are
smaller companies have credit carryovers
or carrybacks, and thus even fewer of
these filers have credit carryovers or carrybacks that are subject to the separate return limitation year rules. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration

20

will be given to any written comments
(preferably a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be made available
for public inspection and copying.
A public hearing has been scheduled
for May 7, 1998, at 10 a.m., in room
2615. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral comments at the hearing must submit written
comments and an outline of the topics
(signed original and eight (8) copies) to
be discussed by April 13, 1998.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Roy A. Hirschhorn of the Office
of Assistant Chief Counsel (Corporate).
Other personnel from the IRS and Treasury participated in their development.
*

*

*

*

*

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
26 CFR part 1 is amended by adding entries in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–3 also issued under 26
U.S.C. 1502.
Section 1.1502–4 also issued under 26
U.S.C. 1502.
Section 1.1502–9 also issued under 26
U.S.C. 1502. * * *
Section 1.1502–55 also issued under 26
U.S.C. 1502. * * *
Par. 2. Section 1.1502–3, as proposed
to be amended at 63 F.R. 1804, January

1998–16 I.R.B.

12, 1998, is amended by revising paragraphs (c)(3) and (d)(2) and adding paragraph (c)(4) to read as follows:
§1.1502–3 Consolidated investment
credit.
*

*

*

*

*

(c) * * *
(3) and (4) [The text of proposed paragraphs (c)(3) and (4) of this section is the
same as the text of §1.1502–3T(c)(3) and
(4) published in T.D. 8766.]
(d) * * *
(2) [The text of proposed paragraph
(d)(2) of this section is the same as the
text of §1.1502–3T(d)(2) published in
T.D. 8766.]
*

*

*

*

*

Par. 3. Section 1.1502–4, as proposed to
be amended at 63 F.R. 1804, January 12,
1998, is amended by revising paragraphs
(f)(3) and (g)(3) to read as follows:
§1.1502–4 Consolidated foreign tax
credit.
*

*

*

*

*

(f) * * *
(3) [The text of proposed paragraph
(f)(3) of this section is the same as the text
of §1.1502–4T(f)(3) published in T.D.
8766.]
(g) * * *
(3) [The text of proposed paragraph
(g)(3) of this section is the same as the
text of §1.1502–4T and (g)(3) published
in T.D. 8766.]
*

*

*

*

*

Par. 4. Section 1.1502–9, as proposed
to be amended at 63 F.R. 1804, January
12, 1998, is amended by revising paragraph (b)(1)(v) to read as follows:
§1.1502–9 Application of overall foreign
losses recapture rules to corporations
filing consolidated returns.
*

*

*

*

*

(b) * * *
(1) * * *
(v) [The text of proposed paragraph
(b)(1)(v) of this section is the same as the
text of §1.1502–9T(b)(1)(v) published in
T.D. 8766.]
*

*

1998–16 I.R.B.

*

*

*

Par. 5. Section 1.1502–55, as proposed
to be added at 57 F.R. 62257, December
30, 1992, and amended at 63 F.R. 1804,
January 12, 1998, is further amended by
revising paragraph (h)(4)(iii)(C) to read
as follows as follows:
§1.1502–55 Computation of alternative
minimum tax of consolidated groups.
*

*

*

*

*

(h) * * *
(4) * * *
(iii) * * *
(C) [The text of proposed paragraph
(h)(4)(iii)(C) of this section is the same as
the text of §1.1502–55T(h)(4)(iii)(C)
published in T.D. 8766.]
*

*

*

*

*

Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
March 13, 1998, at 8:45 a.m., and published in the
Federal Register for March 16, 1998, 63 F.R. 12717)

Notice of Proposed Rulemaking
and Notice of Public Hearing
Guidance Under Subpart F
Relating to Partnerships and
Branches
REG–104537–97

public hearing on these proposed regulations.
DATES: Written comments must be received by June 24, 1998. Outlines of oral
comments to be discussed at the public
hearing scheduled for July 15, 1998, must
be received by June 24, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–104537–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:T:R
(REG–104537–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Valerie Mark, (202) 622-3840; concerning
submissions and the hearing, Mike
Slaughter (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking, notice of proposed rulemaking by
cross-reference to temporary regulations
and notice of public hearing.
SUMMARY: The IRS and Treasury Department are issuing temporary regulations, published in T.D. 8767, page 4 of
this Bulletin, relating to the treatment
under subpart F of certain branches of a
controlled foreign corporation (CFC) that
are treated as separate entities for foreign
tax purposes . The text of the temporary
regulations also serves as the text of these
proposed regulations. In addition, this
document contains proposed regulations
relating to the treatment of a CFC’s distributive share of partnership income.
This document also provides notice of a

21

Background
I. In General
In these proposed regulations, and in
temporary regulations published in T.D.
8767, the Treasury and IRS set forth a
framework for dealing with the issues
posed by the use of certain entities which
are regarded as fiscally transparent for the
purposes of U.S. tax law, with regard to
the application of subpart F of the Internal
Revenue Code.
Subpart F was enacted by Congress to
limit the deferral of U.S. taxation of certain income earned outside the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A43b906408048660f. Public record. Not legal advice.