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Proposed and temporary regulations under IRC Section 901(m) affect covered asset acquisitions, which are transactions that are generally treated as asset acquisitions for U.S. income tax purposes and that either are treated as stock acquisitions or are disregarded for foreign income tax purposes. [TD 9800, 81 FR 88103 (Dec. 7, 2016) (the temporary regulations); 81 FR 88562 (Dec. 7, 2016) (the proposed regulations)]. Specifically, the temporary and proposed regulations provide rules for taxpayers for determining the amount of the disqualified portion of foreign income taxes under IRC Section 901(m). [81 FR 88103; 81 FR 88562].
Under IRC Section 901(a), a credit is allowed to taxpayers for taxes paid to foreign countries and to U.S. possessions. However, under IRC Section 901(m), the foreign tax credit will be denied with respect to foreign income that is not subject to U.S. taxation because of a covered asset acquisition. IRC Section 901(m) states that in the case of a covered asset acquisition, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets:
(A) shall not be taken into account in determining the credit allowed under IRC Section 901(a); and
(B) in the case of a foreign income tax paid by a IRC Section 902 corporation, shall not be taken into account for purposes of IRC Section 902 or 960. [IRC § 901(m)(1)].
IRC Section 901(m)(2) defines a “covered asset acquisition” as:
(A) a qualified stock purchase (as defined in IRC Section 338(d)(3) to which IRC Section 338(a) applies;
(B) any transaction that is treated as an acquisition of assets for U.S. income tax purposes and as the acquisition of stock of a corporation (or is disregarded) for purposes of the foreign income taxes of the relevant jurisdiction;
(C) any acquisition of an interest in a partnership which has an election in effect under IRC Section 754; and
(D) to the extent provided by the Secretary, any other similar transaction. [IRC § 901(m)(2)].
Notice 2014-44 and Notice 2014-45 provided initial guidance on IRC Section 901(m) and announced the Treasury’s intent to issue regulations that would address the application of IRC Section 901(m) to dispositions of assets following covered asset acquisitions (CAAs) and to CAAs that are described in IRC Section 901(m)(2)(C), which pertains to IRC Section 754 elections. [Notice 2014-44, 2014-2 C.B. 270 (July 21, 2014); Notice 2014-45, 2014-2 C.B. 388 (July 29, 2014)].
As noted above, the proposed and temporary regulations provide rules for calculating the disqualified portion of foreign income taxes under IRC Section 901(m). Temporary and proposed regulations section 1.901(m)-1 provide several definitions for purposes of the regulations, including definitions for the terms basis difference, covered asset acquisition, aggregate basis difference, aggregate basis carryover, aggregate basis difference, disqualified tax amount, foreign basis, foreign country creditable tax, and foreign income tax amount. Temporary and proposed regulations section 1.901(m)-2 sets forth the transactions that are CAAs and provides rules for the identification of assets that are relevant foreign assets (or RFAs) with respect to a CAA. Proposed regulations section 1.901(m)-3 provides rules for calculating the disqualified tax amount and also provides rules for determining what portion, if any, of aggregate basis difference will be carried forward to the next U.S. taxable year, i.e., the aggregate basis difference carryover. Temporary and proposed regulations section 1.901(m)-4 provides rules for calculating, for each RFA, the basis difference that arises as a result of a CAA and states that “a basis difference is computed separately with respect to each foreign income tax for which an asset subject to a CAA is an RFA.” Rules for calculating the amount of basis difference with respect to an RFA that is taken into account in a U.S. taxable year for purposes of determining the disqualified portion of a foreign income tax amount are provided in proposed regulations section 1.901(m)-5. Successor rules applicable to IRC Section 901(m) are provided in temporary and proposed regulations section 1.901(m)-6. Rules that describe basis difference that is not taken into account under IRC Section 901(m) because a CAA results in a de minimis amount of basis difference are provided in temporary and proposed regulations section 1.901(m)-7. Finally, proposed regulations section 1.901(m)-8 provides guidance on miscellaneous matters under IRC Section 901(m).