Foreign Tax Credit Splitting and Application of Section 909 to Pre-2011 Taxes

Foreign Tax Credit Splitting and Application of Section 909 to Pre-2011 Taxes

IRC Section 909 provides that a foreign tax credit splitting event cannot be taken into account for federal income tax purposes before the taxable year in which the taxpayer takes the related income into account. IRC Section 909 was added by the Education, Jobs and Medicaid Assistance Act, and became effective on January 1, 2011. (P.L. 111-226, 111th Cong., 2d Sess., § 211(a) (Aug. 10, 2010). The new provision prevents the splitting or separation of foreign tax credits from their associated foreign income. (P.L. 111-226, § 211(a)). In December 2010, the Service issued its initial guidance on the application of the provision. (Notice 2010-92, 2010 IRB LEXIS 1005).

IRC Section 909 ("Suspension of Taxes and Credits Until Related Income Taken Into Account) provides that if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, such tax shall not be taken into account for federal income tax purposes before the taxable year in which the related income is taken into account by the taxpayer. (IRC § 909(a); see Lexis Tax Advisor -- Federal Code Explanation § 909(a)).

IRC Section 909 provides special rules for Section 902 corporations, for partnerships, and for the treatment of foreign taxes after suspension under the provisions of IRC Section 909. IRC Section 909 also provides definitions for key terms and also provides for the authority of the Secretary to issue regulatory guidance.

With respect to Section 909 corporations, under Section 909, a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a Section 902corporation cannot be taken into account: (1) for purposes of Section 902or Section 960, or (2) for purposes of determining earnings and profits under IRC Section 964(a), before the taxable year in which the related income is taken into account by such Section 902corporation or a domestic corporation which meets the ownership requirements under Section 902(a) or Section 902(b) with respect to such Section 902 corporation. (IRC § 909(b); See Lexis Tax Advisor -- Federal Code Explanation § 909(b)).

As noted, IRC Section 909 applies to foreign income taxes paid or accrued in taxable years beginning after December 31, 2010. In addition, the Education, Jobs and Medicaid Assistance Act included the "deemed-paid transition rule", under which IRC Section 909 also applies to foreign income taxes paid or accrued by an IRC Section 902 corporation in taxable years beginning on or before December 31, 2010, and not deemed paid under IRC Section 902(a) or IRC Section 960 on or before such date, but only for purposes of applying IRC Section 902 and Section 960 with respect to such period after December 31, 2010. (P.L. 111-226, § 211(c), and JCX-46-10 (Aug. 10, 2010)).

In Notice 2010-92, 2010 IRB LEXIS 1005, the Service issued its initial guidance on IRC Section 909. Specifically, Notice 2010-92 addresses the application of IRC Section 909 to taxable years beginning on or before December 31, 2010, or "pre-2011 taxable years", as referenced by the notice. The notice refers to foreign taxes paid or accrued by a Section 902 corporation in pre-2011 taxable years as "pre-2011 taxes". (Notice 2010-92, § 1).

Notice 2010-92 states that, unless otherwise provided, the guidance it prescribes only applies to pre-2011 taxes and not to foreign income taxes paid or accrued in post-2010 taxable years. However, the notice also indicates that future guidance will "at least" include all of the arrangements that are described in section 4 of the notice, which identifies pre-2011 splitter arrangements. (Notice 2010-92, § 1).

Section 3 of Notice 2010-92 identifies certain pre-2011 taxes that will not be suspended under Section 909. Such taxes are:

(a) Any pre-2011 taxes that were not paid or accrued in connection with a pre-2011 splitter arrangement identified in section 4 of Notice 2010-92;

(b) Any pre-2011 taxes that were paid or accrued in connection with a pre-2011 splitter arrangement identified in section 4 of the notice ("pre-2011 split taxes") but that were deemed paid under Section 902(a) or Section 960 on or before the last day of the Section 902 corporation's last pre-2011 taxable year;

(c) Any pre-2011 split taxes if either: (1) the payor Section 902 corporation took the related income into account in a pre-2011 taxable year, or (2) a Section 902 shareholder took the related income into account on or before the last day of the Section 902 corporation's last pre-2011 taxable year; and

(d) Any pre-2011 split taxes paid or accrued by a Section 902 corporation in taxable years of such Section 902 corporation beginning before January 1, 1997. (Notice 2010-92, § 3).

As noted, Notice 2010-92 provides a list of pre-2011 splitter arrangements. Per Section 4 of the notice, the list is "an exclusive list of such arrangements that will be treated as giving rise to foreign tax credit splitting events for purposes of applying Section 909 to pre-2011 taxes" (Notice 2010-92, § 4.01).

The arrangements identified as pre-2011 splitter arrangements are:

(a) Reverse hybrid structures (discussed in section 4.02);

(b) Certain foreign consolidated groups (discussed in section 4.03);

(c) Group relief and other loss-sharing regimes (discussed in section 4.04); and

(d) Hybrid instruments (discussed in section 4.05).

Section 4 discusses when each of these arrangements exists for purposes of the applying Section 909. (Notice 2010-92, § 4.02, 4.03, 4.04, 4.05). As to additional arrangements, Section 4 states that future guidance may include additional arrangements to which Section 909 applies, but only with respect to foreign taxes paid or accrued in post-2010 taxable years. (Notice 2010-92, § 4.01).

Guidance is also provided in Section 4 on determining the amount of related income and pre-2011 taxes paid or accrued by a Section 902 corporation with respect to pre-2011 splitter arrangements. Section 4 provides that the determination of related income, other income, pre-2011 split taxes, and other taxes, and the portion of these amounts that were distributed, deemed paid or otherwise transferred or eliminated must be made on an annual basis during the period that begins with the first taxable year of the Section 902 corporation beginning after December 31, 1996 ("post-1996 taxable year") in which the Section 902 corporation paid or accrued a pre-2011 tax with respect to a pre-2011 splitter arrangement and that ends with the Section 902 corporation's last pre-2011 taxable year. (Notice 2010-92, § 4.06). Section 4 further provides that annual amounts of related income and pre-2011 split taxes are to be aggregated for each separate pre-2011 splitter arrangement. (Notice 2010-92, § 4.06).

Section 4 further provides that the determination of annual and aggregate amounts of related income and pre-2011 split taxes with respect to each pre-2011 splitter arrangement must be made for each separate category as defined in Regulations Section 1.904-4(m) of the Section 902 corporation, each covered person, and any other person that succeeds to the related income and pre-2011 split taxes. (Notice 2010-92, § 4.06).

Section 5 of the notice provides guidance relating to partnerships and trusts, and Section 6 of the notice provides guidance relating to the interaction between Section 909 and other IRC provisions, specifically, IRC Section 904(c), IRCSection 905(a), and IRC Section 905(c). (Notice 2010-92, § 5).

As to future guidance, recently, the Service has informally expressed that the guidance provided in Notice 2010-92 is not necessarily an indication of future guidance. (2011 TNT 20-2, "Future FTC Splitter Guidance May Not Resemble Recent Notice, Officials Say," Tax Notes Today, Tax Analysts (Jan. 31, 2011), and 130 Tax Notes 500, "IRS Officials Try to Keep it Simple in Upcoming Guidance," Tax Notes, Tax Analysts (Jan. 31, 2011). However, as noted above with respect to guidance for post-2010 taxable years, Notice 2010-92 states that future guidance will "at least" include all of the pre-2011 splitter arrangements identified in the notice. Accordingly, the guidance provided in Notice 2010-92 may provide some insight as to the direction regulations or other guidance will take.

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