Filing Requirements for Returns Claiming the Foreign Tax Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-208288-90]

RIN 1545-AP36

Filing Requirements for Returns Claiming the Foreign Tax Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation relating to the

substantiation requirements for taxpayers claiming foreign tax credits.

The proposed regulation is necessary to provide guidance to U.S.

taxpayers who claim foreign tax credits.

DATES: Written comments and requests for a public hearing must be

received by April 14, 1997.

ADDRESSES: Send Submissions to: CC:DOM:CORP:R (REG-208288-90), room

5228, 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-208288-90), 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.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joan

Thomsen, (202) 622-3840 (not a toll-free call); concerning submissions,

Evangelista Lee, (202) 622-7190 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

On June 3, 1988, the Internal Revenue Service issued a Notice

(Notice 88-65, 1988-1 C.B. 552) which stated that regulations would be

issued suspending portions of Sec. 1.905-2 of the Treasury Regulations.

Section 1.905-2 requires taxpayers who claim foreign tax credits to

attach documents to their returns substantiating the credits. The

Notice was issued in response to problems taxpayers were experiencing

because they could not timely obtain and prepare the necessary

documentation in a form suitable for submission with their tax returns.

The intent of the Notice was to advise taxpayers that Treasury and the

IRS would issue a new regulation that would suspend, beginning on

January 1, 1988, the existing regulation requiring the submission of

this documentation with a tax return. This new regulation has not been

issued. Instead of suspending the relevant portions of the existing

regulation, Treasury and the IRS now have decided to permanently

eliminate the requirement that documentation be submitted with the tax

return, effective January 1, 1988.

Explanation of Provisions

Sec. 1.905-2(a)(1), 1.905-2(b) (1) and (2), and 1.905-2(c)

Sections 1.905-2(a)(1), 1.905-2(b) (1) and (2), and 1.905-2(c) are

unchanged from the final regulations.

Sec. 1.905-2(a)(2)

Under Sec. 1.905-2(a)(2), taxpayers generally are required to

attach to their income tax returns either (1) the receipt for the

foreign tax payment, or (2) a foreign tax return for accrued foreign

taxes. Proposed Sec. 1.905-2(a)(2) removes the requirement that the

documentation must be attached to the income tax return.

The proposed regulation now provides that such evidence of foreign

taxes must be presented to the district director upon request.

Sec. 1.905-2(b)(3)

Section 1.905-2(b)(3) addresses issues for taxes withheld at the

source. The section allows the district director to accept secondary

evidence of such withholding. The proposed regulation clarifies that

evidence of a tax withheld at the source and the amount withheld is

only sufficient for an interim credit.

[[Page 1701]]

Upon request of the district director, taxpayers must provide evidence,

as provided in Sec. 1.905-2(a)(2), that the tax withheld was actually

paid to the foreign country. Although this regulation will be effective

on the date that is 30 days after the date the final regulation is

published in the Federal Register, it reflects an IRS requirement

upheld as a reasonable interpretation of current law by the Tax Court

and the Court of Appeals for the Seventh Circuit in Continental

Illinois Corp. v. Commissioner, T.C. Memo. 1991-66, 61 T.C.M. (CCH)

1916, 1939-42 (1991), aff'd in part and rev'd in part, 998 F.2d 513,

516-17 (7th Cir. 1993).

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 this regulation, 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, 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 Requests for a Public Hearing

Before this proposed regulation is adopted as a final regulation,

consideration will be given to any comments that are submitted timely

to the IRS. All comments will be available for public inspection and

copying. A public hearing may be scheduled if requested in writing by

any person that timely submits comments. If a public hearing is

scheduled, notice of the date, time, and place for the hearing will be

published in the Federal Register.

Drafting Information

The principal author of this regulation is Joan Thomsen of the

Office of the Associate Chief Counsel (International), IRS.

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

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 continues to

read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.905-2 is amended by:

1. Revising the second through fourth sentences in paragraph

(a)(2).

2. Adding two sentences to the end of paragraph (b)(3).

The revision and addition read as follows:

Sec. 1.905-2 Conditions of allowance of credit.

(a) * * *

(2) * * * Except where it is established to the satisfaction of the

district director that it is impossible for the taxpayer to furnish

such evidence, the taxpayer must provide upon request the receipt for

each such tax payment if credit is sought for taxes already paid or

withheld, or the return on which each such accrued tax was based if

credit is sought for taxes accrued. This receipt or return must be

either the original, a duplicate original, or a duly certified or

authenticated copy. The preceding two sentences are effective for

returns whose original due date falls on or after January 1, 1988. * *

*

(b) * * *

(3) * * * Any foreign tax credit claimed for taxes withheld at the

source is an interim credit and the taxpayer must prove that any taxes

withheld at the source were paid to the foreign country, as required in

paragraph (a) of this section. The preceding sentence is effective the

date that is 30 days after the date this regulation is published in the

Federal Register as a final regulation, however, for periods prior to

the date that is 30 days after the date this regulation is published in

the Federal Register as a final regulation, see Continental Illinois

Corp. v. Commissioner, T.C. Memo. 1991-66, 61 T.C.M. (CCH) 1916, 1939-

42 (1991), aff'd in part and rev'd in part, 998 F.2d 513, 516-17 (7th

Cir. 1993), wherein the court upheld this rule as a reasonable

interpretation of section 905(b) of the Internal Revenue Code.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 97-527 Filed 1-10-97; 8:45 am]

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