80 FR 52976 - United States Property Held by Controlled Foreign Corporations in Transactions Involving Partnerships; Rents and Royalties Derived in the Active Conduct of a Trade or Business
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 80, Issue 170 (September 2, 2015)
Internal Revenue Service
Federal Register Volume 80, Issue 170 (September 2, 2015)
| Page Range | 52976-52982 | |
| FR Document | 2015-21574 |
[Federal Register Volume 80, Number 170 (Wednesday, September 2, 2015)] [Rules and Regulations] [Pages 52976-52982] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-21574] ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9733] RIN 1545-BJ49 United States Property Held by Controlled Foreign Corporations in Transactions Involving Partnerships; Rents and Royalties Derived in the Active Conduct of a Trade or Business AGENCY: Internal Revenue Service (IRS), Treasury. [[Page 52977]] ACTION: Final and temporary regulations. ----------------------------------------------------------------------- SUMMARY: This document contains temporary regulations regarding the treatment as United States property of property held by a controlled foreign corporation (CFC) in connection with certain transactions involving partnerships. In addition, the temporary regulations provide rules regarding when a CFC is considered to derive rents and royalties in the active conduct of a trade or business for purposes of determining foreign personal holding company income (FPHCI). These regulations affect United States shareholders of CFCs. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register. The final regulations revise and add cross-references to coordinate the application of the temporary regulations. DATES: Effective Date: These regulations are effective on September 2, 2015. Applicability Dates: For dates of applicability, see Sec. Sec. 1.954-2T(j) and 1.956-1T(g). FOR FURTHER INFORMATION CONTACT: Rose E. Jenkins, (202) 317-6934 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains amendments to 26 CFR part 1 under of the Internal Revenue Code (Code). Section 956 determines the amount that a United States shareholder (as defined in section 951(b)) of a CFC must include in gross income with respect to the CFC under section 951(a)(1)(B). This amount is determined, in part, based on the average amount of United States property held, directly or indirectly, by the CFC at the close of each quarter during its taxable year. Subject to certain exceptions, United States property generally includes obligations of United States persons that are related to the CFC. Sections 956(c)(1)(C), 956(c)(2)(F), and 956(c)(2)(L). In general, the amount taken into account for section 956 purposes with respect to any United States property is the adjusted basis of the property, reduced by any liability to which the property is subject. See section 956(a) and Sec. 1.956-1(e). Section 956(e) grants the Secretary authority to prescribe such regulations as may be necessary to carry out the purposes of section 956, including regulations to prevent the avoidance of section 956 through reorganizations or otherwise. In addition, section 956(d) grants the Secretary authority to prescribe regulations pursuant to which a CFC that is a pledgor or guarantor of an obligation of a United States person is considered to hold the obligation. Section 1.956-1T(b)(4) provides in relevant part that, at the District Director's discretion, a CFC will be considered to hold indirectly investments in United States property acquired by any other foreign corporation that is controlled by the CFC if one of the principal purposes for creating, organizing, or funding (through capital contributions or debt) such other foreign corporation is to avoid the application of section 956 with respect to the CFC. This document also contains amendments to 26 CFR part 1 under section 954. Section 954 defines foreign base company income (FBCI), which generally is income earned by a CFC that is taken into account in computing the amount that a United States shareholder of the CFC must include in income under section 951(a)(1)(A). FBCI includes FPHCI, as defined in section 954(c), which, in turn, generally includes rents and royalties. Section 954(c)(1)(A). However, rents and royalties are excluded from FPHCI if they are received from a person other than a related person and derived in the active conduct of a trade or business within the meaning of section 954(c)(2)(A) and Sec. 1.954-2(c) and (d) (active rents and royalties exception). Temporary regulations in this document provide guidance on the active rents and royalties exception, including the treatment of cost sharing arrangements for purposes of the exception. Explanation of Provisions 1. Modifications of Anti-Avoidance Rule in Sec. 1.956-1T(b)(4) A. Modifications of Existing Rules These regulations modify Sec. 1.956-1T(b)(4) so that the rule can also apply when a foreign corporation controlled by a CFC is funded other than through capital contributions or debt. In addition, these temporary regulations add an example involving the funding of one CFC by another CFC that controls it to illustrate the application of the anti-avoidance rule when a principal purpose for funding the first CFC is to avoid the application of section 956 with respect to the funding CFC, even though there would be a section 956 inclusion with respect to the CFC that received the funding. This example illustrates that the CFCs' tax attributes associated with a section 956 inclusion (such as total earnings and profits, previously taxed earnings and profits, and foreign tax credit pools) are taken into account in determining whether a principal purpose of a funding was to avoid the application of section 956 with respect to the funding CFC. In addition, this example makes clear that if a CFC is considered to indirectly hold United States property pursuant to Sec. 1.956-1T(b)(4), then the CFC that actually holds the United States property will not also be considered to hold the property for purposes of section 956. See Example 3 in Sec. 1.956-1T(b)(4)(iv). These regulations also modify Example 1 and Example 2 of Sec. 1.956-1T(b)(4) to more closely reflect the language of new Sec. 1.956- 1T(b)(4)(iv). The Department of the Treasury (Treasury Department) and the IRS do not view these modifications as a substantive change. Moreover, Sec. 1.956-1T(b)(4) applies if ``one of the principal purposes'' for the transaction is to avoid the application of section 956 with respect to the CFC. These temporary regulations apply when ``a principal purpose'' for the transaction is to avoid the application of section 956 with respect to the CFC. The Treasury Department and the IRS do not view this modification as a substantive change, since both formulations appropriately reflect that there may be more than one principal purpose for a transaction. Accordingly, Sec. 1.956-1T(b)(4) may be applied if a principal purpose of a transaction is to avoid the application of section 956, even if there also were other principal purposes for the transaction. Finally, the Treasury Department and the IRS have concluded that Sec. 1.956-1T(b)(4) should apply without requiring the IRS to exercise its discretion, and, therefore, have modified the rule to be self- executing. This modification, as well as the modification to what constitutes a funding, is consistent with a previous change to a similar rule in Sec. 1.304-4(b). See TD 9477, 74 FR 69021 (Dec. 30, 2009). B. New Partnership Rule Existing Sec. 1.956-1T(b)(4) applies only to transactions that involve foreign corporations that are controlled by a CFC. The Treasury Department and the IRS understand that taxpayers may be using partnerships to structure transactions that are similar to the types of transactions addressed by Sec. 1.956-1T(b)(4). For example, with a principal purpose of avoiding the application of section 956, a CFC may contribute cash to a partnership in exchange for an interest in the partnership, which in [[Page 52978]] turn lends the cash to a United States shareholder of the CFC. In such a case, a taxpayer may take the position that the CFC is not treated as indirectly holding the entire obligation of the United States shareholder but instead is treated as holding the obligation only to the extent of the CFC's interest in the partnership under Sec. 1.956- 2(a)(3). These types of partnership transactions raise concerns similar to those that are currently addressed by Sec. 1.956-1T(b)(4). Accordingly, these temporary regulations expand Sec. 1.956-1T(b)(4) to include transactions involving partnerships that are controlled by the CFC. These temporary regulations also contain a coordination rule in Sec. 1.956-1T(b)(4)(iii), which provides that the new partnership rule in Sec. 1.956-1T(b)(4)(i)(C) applies only to the extent that the amount of United States property that a CFC would be treated as holding under the rule exceeds the amount that it would be treated as holding under Sec. 1.956-2(a)(3). 2. New Rule Governing Foreign Partnership Distributions Funded by CFCs The Treasury Department and the IRS also understand that CFCs are engaging in transactions in which a CFC lends funds to a foreign partnership, which then distributes the proceeds from the borrowing to a U.S. partner who is related to the CFC and whose obligation would be United States property if it were held (or treated as held) by the CFC. Alternatively, the CFC could guarantee a loan to a foreign partnership, which then could distribute the loan proceeds to a related U.S. partner. Taxpayers take the position that section 956 does not apply to these transactions even though the CFC's earnings are effectively repatriated to a related U.S. partner. In response to these transactions, the temporary regulations add Sec. 1.956-1T(b)(5) to address certain cases in which a CFC funds a foreign partnership (or guarantees a borrowing by a foreign partnership) and the foreign partnership makes a distribution to a U.S. partner that is related to the CFC. For purposes of section 956, Sec. 1.956-1T(b)(5) treats the partnership obligation as an obligation of the distributee partner to the extent of the lesser of the amount of the distribution that would not have been made but for the funding of the partnership or the amount of the foreign partnership obligation. For example, if a related United States shareholder of a CFC has an interest in a foreign partnership, the CFC lends $100 to the partnership, and the partnership distributes $100 to the United States shareholder in a distribution that would not have been made but for the loan from the CFC, then the entire $100 partnership obligation held by the CFC will be treated as an obligation of the United States shareholder that qualifies as United States property. Section 1.956- 1T(b)(5) generally has the same purpose and effect as proposed Sec. 1.956-4(c)(3) contained in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register (REG-155164-09) and will be removed upon the finalization of proposed Sec. 1.956-4(c)(3). 3. Active Rents and Royalties Exception to FPHCI Although rents and royalties generally are included in FPHCI under section 954(c)(1)(A), rents and royalties derived in the active conduct of a trade or business and received from a person that is not a related person are excluded from FPHCI under the active rents and royalties exception in section 954(c)(2)(A) and Sec. 1.954-2(b)(6). The section 954 regulations provide the exclusive rules for determining whether rents and royalties are derived in the active conduct of a trade or business for purposes of section 954(c)(2)(A). Specifically, Sec. 1.954-2(c) provides four alternative ways for rents to be derived in the active conduct of a trade or business, and Sec. 1.954-2(d) provides two alternative ways for royalties to be derived in the active conduct of a trade or business. One way for a CFC to derive rents and royalties in the active conduct of a trade or business is to satisfy an ``active development'' test, which, among other things, requires the CFC to be ``regularly engaged'' either in the ``manufacture or production of, or in the acquisition and addition of substantial value to,'' certain property (Sec. 1.954-2(c)(1)(i), applicable to rents); or in the ``development, creation or production of, or in the acquisition of and addition of substantial value to,'' certain property (Sec. 1.954-2(d)(1)(i), applicable to royalties) (collectively, active development tests). Although certain of the alternative ways (specifically, the active management and marketing tests) in which a CFC can satisfy the active rents and royalties exception require that the relevant activities be performed by the CFC's own officers or staff of employees (Sec. 1.954-2(c)(1)(ii), (iv), and (d)(1)(ii)), the active development tests do not expressly contain this requirement. But see Sec. 1.954-2(d)(3) Example 5 (indicating that royalties received by a CFC that financed independent persons in development activities were not considered derived in the active conduct of a trade or business for purposes of section 954(c)(2)(A)). In addition to the active development tests, another way for a CFC to derive rents and royalties in the active conduct of a trade or business is to satisfy an ``active marketing'' test, which, among other things, requires the CFC to operate in a foreign country an organization that is regularly engaged in the business of marketing, or marketing and servicing, the leased or licensed property, and that is ``substantial'' in relation to the amount of rents or royalties derived from the leased or licensed property. See Sec. 1.954-2(c)(1)(iv) and (d)(1)(ii). Pursuant to a safe harbor in the regulations, an organization is ``substantial'' if the active leasing or licensing expenses equal or exceed 25 percent of the adjusted leasing or licensing profits. See Sec. 1.954-2(c)(2)(ii) and (d)(2)(ii). The regulations generally define active leasing expenses and active licensing expenses to mean, subject to certain exceptions, deductions that are properly allocable to rental or royalty income and that would be allowable under section 162 if the CFC were a domestic corporation. See Sec. 1.954-2(c)(2)(iii) and (d)(2)(iii). In general, the active rents and royalties exception is intended to distinguish between a CFC that passively receives investment income and a CFC that derives income from the active conduct of a trade or business. See S. Rep. No. 87-1881, 87th Cong., 2d Sess., at 83 (1962). Accordingly, the policy underlying the active rents and royalties exception requires that the CFC itself actively conduct the business that generates the rents or royalties. The Treasury Department and the IRS have determined that, consistent with this policy, the CFC must perform the relevant activities (that is, activities related to the manufacturing, production, development, or creation of, or, in the case of an acquisition, the addition of substantial value to, the property at issue) through its own officers or staff of employees in order to satisfy the active development tests. Thus, Sec. 1.954-2T(c)(1)(i) and (d)(1)(i) expressly provide that the CFC lessor or licensor must perform the required functions through its own officers or staff of employees. The Treasury Department and the IRS also have concluded that the policy of the active rents and royalties exception allows the relevant activities undertaken by a CFC through its officers or staff of employees to be performed in more than one foreign country. Thus, Sec. 1.954-2T(c)(1)(iv) and (d)(1)(ii) provide that (i) a CFC's officers or staff of employees may be located in one or more foreign [[Page 52979]] countries; and (ii) an organization that meets the requirements of the active marketing test can be maintained and operated by the officers or staff of employees either in a single foreign country or in multiple foreign countries collectively. Similarly, Sec. 1.954-2T(c)(2)(ii) and (d)(2)(ii) indicate that an organization can be in a single foreign country or in multiple foreign countries collectively for purposes of determining the substantiality of the foreign organization. In applying the active development tests and active marketing tests, questions have arisen as to the treatment of cost sharing arrangements under which a person other than the CFC actually conducts relevant activities. Consistent with the policy underlying the active rents and royalties exception that requires the CFC itself to conduct the relevant activities, Sec. 1.954-2T(c)(2)(viii) and (d)(2)(v) clarify that CST Payments and PCT Payments (as defined in Sec. 1.482- 7(b)(1)) made by a CFC will not cause the CFC's officers and employees to be treated as undertaking the activities of the controlled participant to which the payments are made. This clarification applies for purposes of the active development tests and the active marketing tests, including for purposes of determining whether an organization that engages in marketing is substantial. Similarly, Sec. 1.954- 2T(c)(2)(iii)(E) and (d)(2)(iii)(E) provide that deductions for CST Payments and PCT Payments are excluded from the definition of active leasing expenses and active licensing expenses, respectively. Thus, CST Payments and PCT Payments are not active leasing expenses or active licensing expenses for purposes of determining whether an organization is ``substantial'' under the safe harbor test. 4. Effective/Applicability Dates The rules in Sec. 1.956-1T(b)(4) described in Part 1 of this preamble apply to taxable years of CFCs ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, with respect to property acquired, including property treated as acquired as the result of a deemed exchange of property pursuant to section 1001, on or after September 1, 2015. The rule in Sec. 1.956-1T(b)(5) described in Part 2 of this preamble applies to taxable years of CFCs ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, in the case of distributions made on or after September 1, 2015. The rules regarding the active development test in Sec. Sec. 1.954-2T(c)(1)(i) and (d)(1)(i) described in Part 3 of this preamble apply to rents or royalties, as applicable, received or accrued during taxable years of CFCs ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, but only with respect to property manufactured, produced, developed, or created, or, in the case of acquired property, property to which substantial value has been added, on or after September 1, 2015. The rules regarding the active marketing test in Sec. Sec. 1.954-2T(c)(1)(iv), (c)(2)(ii), (d)(1)(ii), and (d)(2)(ii) described in Part 3 of this preamble, as well as the rules regarding cost-sharing arrangements in Sec. Sec. 1.954- 2T(c)(2)(iii)(E), (c)(2)(viii), (d)(2)(iii)(E), and (d)(2)(v) also described in Part 3 of this preamble, apply to rents or royalties, as applicable, received or accrued during taxable years of CFCs ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, to the extent that such rents or royalties that are received or accrued on or after September 1, 2015. No inference is intended as to the application of the provisions amended by these temporary regulations under current law. The IRS may, where appropriate, challenge transactions, including those described in these temporary regulations and this preamble, under currently applicable Code or regulatory provisions or judicial doctrines. Special Analyses Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory assessment is not required. It has been determined that sections 553(b) and (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the cross-referenced notice of proposed rulemaking published elsewhere in this issue of the Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal authors of these regulations are Barbara E. Rasch and Rose E. Jenkins of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.956-1T also issued under 26 U.S.C. 956(d) and 956(e). * * * * * 0 Par. 2. Section 1.954-2 is amended by: 0 a. Revising paragraphs (c)(1)(i), (c)(1)(iv), and (c)(2)(ii); 0 b. Adding paragraphs (c)(2)(iii)(E) and (c)(2)(viii); 0 c. Revising paragraphs (d)(1)(i) and (ii) and (d)(2)(ii); and 0 d. Adding paragraphs (d)(2)(iii)(E), (d)(2)(v), and (j). The revisions and additions read as follows: Sec. 1.954-2 Foreign personal holding company income. * * * * * (c) * * * (1) * * * (i) [Reserved]. For further guidance, see Sec. 1.954-2T(c)(1)(i). * * * * * (iv) [Reserved]. For further guidance, see Sec. 1.954- 2T(c)(1)(iv). (2) * * * (ii) [Reserved]. For further guidance, see Sec. 1.954- 2T(c)(2)(ii). (iii) * * * (E) [Reserved]. For further guidance, see Sec. 1.954- 2T(c)(2)(iii)(E). * * * * * (viii) [Reserved]. For further guidance, see Sec. 1.954- 2T(c)(2)(viii). * * * * * (d) * * * (1) * * * (i) [Reserved]. For further guidance, see Sec. 1.954-2T(d)(1)(i). (ii) [Reserved]. For further guidance, see Sec. 1.954- 2T(d)(1)(ii). (2) * * * (ii) [Reserved]. For further guidance, see Sec. 1.954- 2T(d)(2)(ii). (iii) * * * (E) [Reserved]. For further guidance, see Sec. 1.954- 2T(d)(2)(iii)(E). * * * * * [[Page 52980]] (v) [Reserved]. For further guidance, see Sec. 1.954-2T(d)(2)(v). * * * * * (j) [Reserved]. For further guidance, see Sec. 1.954-2T(j). 0 Par. 3. Section 1.954-2T is added to read as follows: Sec. 1.954-2T Foreign personal holding company income (temporary). (a)(1) through (c)(1) introductory text [Reserved]. For further guidance, see Sec. 1.954-2(a)(1) through (c)(1). (i) Property that the lessor, through its own officers or staff of employees, has manufactured or produced, or property that the lessor has acquired and, through its own officers or staff of employees, added substantial value to, but only if the lessor, through its officers or staff of employees, is regularly engaged in the manufacture or production of, or in the acquisition and addition of substantial value to, property of such kind; (c)(1)(ii) and (iii) [Reserved]. For further guidance, see Sec. 1.954-2(c)(1)(ii) and (c)(1)(iii). (iv) Property that is leased as a result of the performance of marketing functions by such lessor through its own officers or staff of employees located in a foreign country or countries, if the lessor, through its officers or staff of employees, maintains and operates an organization either in such country or in such countries (collectively), as applicable, that is regularly engaged in the business of marketing, or of marketing and servicing, the leased property and that is substantial in relation to the amount of rents derived from the leasing of such property. (c)(2)(i) [Reserved]. For further guidance, see Sec. 1.954- 2(c)(2)(i). (ii) Substantiality of foreign organization. For purposes of paragraph (c)(1)(iv) of this section, whether an organization either in a foreign country or in foreign countries (collectively) is substantial in relation to the amount of rents is determined based on all the facts and circumstances. However, such an organization will be considered substantial in relation to the amount of rents if active leasing expenses, as defined in paragraph (c)(2)(iii) of this section, equal or exceed 25 percent of the adjusted leasing profit, as defined in paragraph (c)(2)(iv) of this section. In addition, for purposes of aircraft or vessels leased in foreign commerce, an organization will be considered substantial if active leasing expenses, as defined in paragraph (c)(2)(iii) of this section, equal or exceed 10 percent of the adjusted leasing profit, as defined in paragraph (c)(2)(iv) of this section. For purposes of paragraphs (c)(1)(iv) and (c)(2) of this section and Sec. 1.956-2(b)(1)(vi), the term aircraft or vessels includes component parts, such as engines that are leased separately from an aircraft or vessel. (c)(2)(iii) introductory text through (c)(2)(iii)(D) [Reserved]. For further guidance, see Sec. 1.954-2(c)(2)(iii) through (c)(2)(iii)(D). (E) Deductions for CST Payments or PCT Payments (as defined in Sec. 1.482-7(b)). (c)(2)(iv) through (c)(2)(vii) [Reserved]. For further guidance, see Sec. 1.954-2(c)(2)(iv) through (c)(2)(vii). (viii) Cost sharing arrangements (CSAs). For purposes of paragraphs (c)(1)(i) and (iv) of this section, CST Payments or PCT Payments (as defined in Sec. 1.482-7(b)(1)) made by the lessor to another controlled participant (as defined in Sec. 1.482-7(j)(1)(i)) pursuant to a CSA (as defined in Sec. 1.482-7(a)) do not cause the activities undertaken by that other controlled participant to be considered to be undertaken by the lessor's own officers or staff of employees. (c)(3) and (d)(1) introductory text [Reserved]. For further guidance, see Sec. 1.954-2(c)(3) and (d)(1). (i) Property that the licensor, through its own officers or staff of employees, has developed, created, or produced, or property that the licensor has acquired and, through its own officers or staff of employees, added substantial value to, but only so long as the licensor, through its officers or staff of employees, is regularly engaged in the development, creation, or production of, or in the acquisition and addition of substantial value to, property of such kind; or (ii) Property that is licensed as a result of the performance of marketing functions by such licensor through its own officers or staff of employees located in a foreign country or countries, if the licensor, through its officers or staff of employees, maintains and operates an organization either in such foreign country or in such foreign countries (collectively), as applicable, that is regularly engaged in the business of marketing, or of marketing and servicing, the licensed property and that is substantial in relation to the amount of royalties derived from the licensing of such property. (d)(2)(i) [Reserved]. For further guidance, see Sec. 1.954- 2(d)(2)(i). (ii) Substantiality of foreign organization. For purposes of paragraph (d)(1)(ii) of this section, whether an organization either in a foreign country or in foreign countries (collectively) is substantial in relation to the amount of royalties is determined based on all of the facts and circumstances. However, such an organization will be considered substantial in relation to the amount of royalties if active licensing expenses, as defined in paragraph (d)(2)(iii) of this section, equal or exceed 25 percent of the adjusted licensing profit, as defined in paragraph (d)(2)(iv) of this section. (d)(2)(iii) introductory text through (d)(2)(iii)(D) [Reserved]. For further guidance, see Sec. 1.954-2(d)(2)(iii) through (d)(2)(iii)(D). (E) Deductions for CST Payments or PCT Payments (as defined in Sec. 1.482-7(b)). (d)(2)(iv) [Reserved]. For further guidance, see Sec. 1.954- 2(d)(2)(iv). (v) Cost sharing arrangements (CSAs). For purposes of paragraphs (d)(1)(i) and (ii) of this section, CST Payments or PCT Payments (as defined in Sec. 1.482-7(b)(1)) made by the licensor to another controlled participant (as defined in Sec. 1.482-7(j)(1)(i)) pursuant to a CSA (as defined in Sec. 1.482-7(a)) do not cause the activities undertaken by that other controlled participant to be considered to be undertaken by the licensor's own officers or staff of employees. (d)(3) through (i) [Reserved]. For further guidance, see Sec. 1.954-2(d)(3) through (i). (j) Effective/applicability date. Paragraphs (c)(1)(i) and (d)(1)(i) of this section apply to rents or royalties, as applicable, received or accrued during taxable years of controlled foreign corporations ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, but only with respect to property manufactured, produced, developed, or created, or in the case of acquired property, property to which substantial value has been added, on or after September 1, 2015. Paragraphs (c)(1)(iv), (c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii), (d)(1)(ii), (d)(2)(ii), (d)(2)(iii)(E), and (d)(2)(v) of this section apply to rents or royalties, as applicable, received or accrued during taxable years of controlled foreign corporations ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, to the extent that such rents or royalties are received or accrued on or after September 1, 2015. See Sec. Sec. 1.954-2(c)(1)(i), (c)(1)(iv), (c)(2)(ii), (c)(2)(iii), (d)(1)(i), (d)(1)(ii), (d)(2)(ii), and (d)(2)(iii), as contained in 26 CFR part 1 revised as of April 1, 2015, for rules applicable to rents or royalties, as applicable, received or accrued before September 1, 2015. (k) Expiration date. The applicability of paragraphs (c)(1)(i), (c)(1)(iv), (c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii), [[Page 52981]] (d)(1)(i), (d)(1)(ii), (d)(2)(ii), (d)(2)(iii)(E), and (d)(2)(v) of this section expires on or before August 31, 2018. 0 Par. 4. Section 1.956-1 is amended by: 0 1. Adding paragraphs (b)(4), (b)(5), (f), and (g)(1) through (3). 0 2. Redesignating paragraph (e)(6)(vii) as paragraph (g)(4) and revising it. The additions and revisions read as follows: Sec. 1.956-1 Shareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in United States property. * * * * * (b) * * * (4) [Reserved]. For further guidance, see Sec. 1.956-1T(b)(4). (5) [Reserved]. For further guidance, see Sec. 1.956-1T(b)(5). * * * * * (f) [Reserved]. For further guidance, see Sec. 1.956-1T(f). (g) introductory text through (g)(3) [Reserved]. For further guidance, see Sec. 1.956-1T(g) through (g)(3). (4) Paragraph (e)(6) of this section applies to property acquired in exchanges occurring on or after June 24, 2011. For transactions that occur prior to June 24, 2011, see Sec. 1.956-1T(e)(6) as contained in 26 CFR part 1 revised as of April 1, 2011. 0 Par. 5. Section 1.956-1T is amended by revising paragraph (b)(4), and adding paragraphs (b)(5), (e)(6), (g), and (h) to read as follows: Sec. 1.956-1T Shareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in United States property (temporary). * * * * * (b) * * * (4) Certain indirectly held United States property--(i) General rule. For purposes of section 956, United States property held indirectly by a controlled foreign corporation includes-- (A) United States property held on behalf of the controlled foreign corporation by a trustee or a nominee; (B) United States property acquired by any other foreign corporation that is controlled by the controlled foreign corporation if a principal purpose of creating, organizing, or funding by any means (including through capital contributions or debt) the other foreign corporation is to avoid the application of section 956 with respect to the controlled foreign corporation; and (C) Property acquired by a partnership that is controlled by the controlled foreign corporation if the property would be United States property if held directly by the controlled foreign corporation, and a principal purpose of creating, organizing, or funding by any means (including through capital contributions or debt) the partnership is to avoid the application of section 956 with respect to the controlled foreign corporation. (ii) Control. For purposes of paragraphs (b)(4)(i)(B) and (C) of this section, a controlled foreign corporation controls a foreign corporation or partnership if the controlled foreign corporation and the other foreign corporation or partnership are related within the meaning of or section 707(b). For this purpose, in determining whether two corporations are members of the same controlled group under, a person is considered to own stock owned directly by such person, stock owned for the purposes of, and stock owned with the application of section 267(c). (iii) Coordination rule. Paragraph (b)(4)(i)(C) of this section applies only to the extent that the amount of United States property that is treated as held indirectly by a controlled foreign corporation under that paragraph exceeds the amount of United States property that is treated as held by the controlled foreign corporation under Sec. 1.956-2(a)(3). (iv) Examples. The following examples illustrate the rules of this paragraph (b)(4). In each example, unless otherwise provided, P is a domestic corporation that wholly owns two controlled foreign corporations, FS1 and FS2. Example 1. (i) Facts. FS1 sells inventory to FS2 in exchange for trade receivables due in 60 days. Avoiding the application of section 956 with respect to FS1 was not a principal purpose of establishing the trade receivables. FS2 has no earnings and profits and FS1 has substantial accumulated earnings and profits. FS2 makes a loan to P equal to the amount it owes FS1 under the trade receivables. FS2 pays the trade receivables according to their terms. (ii) Result. FS1 will not be considered to indirectly hold United States property under this paragraph (b)(4) because the funding of FS2 through the sale of inventory in exchange for the establishment of trade receivables was not undertaken with a principal purpose of avoiding the application of section 956 with respect to FS1. Example 2. (i) Facts. The facts are the same as in Example 1, except that, with a principal purpose of avoiding the application of section 956 with respect to FS1, FS1 and FS2 agree to defer FS2's payment obligation, and FS2 does not timely pay the receivables. (ii) Result. FS1 is considered to hold indirectly United States property under this paragraph (b)(4), because there was a funding of FS2, a principal purpose of which was to avoid the application of section 956 with respect to FS1. Example 3. (i) Facts. FS1 has $100x of post-1986 undistributed earnings and profits and $100 post-1986 foreign income taxes, but does not have any cash. FS2 has earnings and profits of at least $100x, no post-1986 foreign income taxes, and substantial cash. Neither FS1 nor FS2 has earnings and profits described in section 959(c)(1) or section 959(c)(2). FS2 loans $100x to FS1. FS1 then loans $100x to P. An income inclusion by P of $100x under sections 951(a)(1)(B) and 956 with respect to FS1 would result in foreign income taxes deemed paid by P under section 960. A principal purpose of funding FS1 through the loan from FS2 is to avoid the application of section 956 with respect to FS2. (ii) Result. Under paragraph (b)(4)(i)(B) of this section, FS2 is considered to indirectly hold the $100x obligation of P that is held by FS1. As a result, P has an income inclusion of $100x under sections 951(a)(1)(B) and 956 with respect to FS2, and the foreign income taxes deemed paid by P under section 960 is $0. P does not have an income inclusion under sections 951(a)(1)(B) and 956 with respect to FS1 related to the $100x loan from FS1 to P. Example 4. (i) Facts. FS1 has substantial earnings and profits. P and FS1 are the only partners in a foreign partnership, FPRS. FS1 contributes $600x cash to FPRS in exchange for a 60% interest in the partnership, and P contributes real estate located outside the United States ($400x value) to FPRS in exchange for a 40% interest in the partnership. There are no special allocations in the FPRS partnership agreement. FPRS lends $100x to P. Under Sec. 1.956- 2(a)(3), FS1 is treated as holding United States property of $60x (60% x $100x) as a result of the FPRS loan to P. A principal purpose of creating, organizing, or funding FPRS is to avoid the application of section 956 with respect to FS1. (ii) Result. Before taking into account paragraph (b)(4)(iii) of this section, because FS1 controls FPRS and a principal purpose of creating, organizing, or funding FPRS was to avoid the application of section 956 with respect to FS1, FS1 is considered under paragraph (b)(4)(i)(C) of this section to indirectly hold the $100x obligation of P that would be United States property if held directly by FS1. However, under paragraph (b)(4)(iii) of this section, FS1 is treated as holding United States property under paragraph (b)(4)(i)(C) only to the extent the amount held indirectly under paragraph (b)(4)(i)(C) of this section exceeds the amount of United States property that FS1 is treated as holding under Sec. 1.956-2(a)(3). The amount of United States property that FS1 is treated as indirectly holding under paragraph (b)(4)(i)(C) of this section ($100x) exceeds the amount determined under Sec. 1.956- 2(a)(3) ($60x) by $40x. Thus, FS1 is considered to hold United States property within the meaning of section 956(c) in the amount of $100x ($60x under Sec. 1.956-2(a)(3) and $40x under paragraphs (b)(4)(i)(C) and (b)(4)(iii) of this section). (5) Certain foreign partnership distributions funded by CFCs--(i) General rule. For purposes of section [[Page 52982]] 956, an obligation of a foreign partnership that is held (or that would be treated as held under Sec. 1.956-2(c) if the obligation were an obligation of a United States person) by a controlled foreign corporation is treated as a separate obligation of a partner in the partnership when-- (A) The foreign partnership distributes an amount of money or property to the partner; (B) The foreign partnership would not have made the distribution but for a funding of the partnership through the obligation; and (C) The partner is related to the controlled foreign corporation within the meaning of section 954(d)(3). (ii) Amount of obligation. Notwithstanding Sec. 1.956-1(e), the amount that is treated as an obligation of the distributee partner pursuant to paragraph (b)(5)(i) of this section is equal to the lesser of the amount of the partnership distribution that would not have been made but for the funding of the partnership or the amount (as determined under Sec. 1.956-1(e)) of the obligation of the foreign partnership that is held (or that would be treated as held under Sec. 1.956-2(c) if the obligation were an obligation of a United States person) by the controlled foreign corporation. (iii) Example. (A) Facts. P, a domestic corporation, wholly owns FS, a controlled foreign corporation. P owns a 70% interest in FPRS, a foreign partnership. A domestic corporation that is unrelated to P and FS owns the remaining 30% interest in FPRS. FPRS borrows $100x from FS, and distributes $80x to P. FPRS would not have made the distribution to P but for the funding by FS. (B) Result. Under paragraph (b)(5)(i) of this section, a portion of the obligation of FPRS that FS holds is treated as an obligation of P, which constitutes United States property, because FPRS made a distribution to P that FPRS would not have made but for the funding of FPRS through the obligation held by FS. Under paragraph (b)(5)(ii) of this section, the amount that is treated as an obligation of P is the lesser of the amount of the distribution, $80x, or the amount of the entire obligation of FPRS held by FS, $100x. For purposes of section 956, therefore, on the date the loan to FPRS is made, FS is considered to hold United States property of $80x. * * * * * (e)(6) [Reserved]. For further guidance, see Sec. 1.956-1(e)(6). * * * * * (g) Effective/applicability date. (1) Paragraph (b)(4) of this section applies to taxable years of controlled foreign corporations ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, with respect to property acquired on or after September 1, 2015. See paragraph (b)(4) of Sec. 1.956-1T, as contained in 26 CFR part 1 revised as of April 1, 2015, for the rules applicable to taxable years of controlled foreign corporations ending before September 1, 2015 and property acquired before September 1, 2015. For purposes of this paragraph (g)(1), a deemed exchange of property pursuant to section 1001 on or after September 1, 2015 constitutes an acquisition of the property on or after that date. (2) Paragraph (b)(5) of this section applies to taxable years of controlled foreign corporations ending on or after September 1, 2015, and to taxable years of United States shareholders in which or with which such taxable years end, in the case of distributions made on or after September 1, 2015. (3) [Reserved]. (4) [Reserved]. For further guidance, see Sec. 1.956-1(g)(4). (h) Expiration date. The applicability of paragraphs (b)(4) and (b)(5) of this section expires on or before August 31, 2018. Approved: July 30, 2015. John Dalrymple, Deputy Commissioner for Services and Enforcement. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2015-21574 Filed 9-1-15; 8:45 am] BILLING CODE 4830-01-P
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of this section, an indication that the (C) Required method of distributing consultation with the PBGC and the
individual could not be located through ballot package. Ballot packages must be Secretary of Labor) will—
reasonable efforts); distributed to eligible voters by first- (A) Certify that a majority of all
(iii) Current electronic mailing class U.S. mail. A supplemental copy of eligible voters has voted to reject the
addresses for those eligible voters the mailed ballot package may also be suspension that was approved under
identified in paragraph (h)(2)(iii)(B)(4) sent by an electronic communication to paragraph (g) of this section, or
of this section; and an eligible voter who has consented to (B) Issue a final authorization to
(iv) The individualized estimates receive electronic communications. suspend as described in paragraph (h)(6)
provided to eligible voters as part of the (D) Timing. Ballot packages will be of this section.
earlier notices described in section distributed to eligible voters no later * * * * *
432(e)(9)(F) (or, if an individualized than 30 days after the Secretary of the (3) * * *
estimate is no longer accurate for an Treasury has approved an application (iv) Statement in opposition to the
eligible voter, a corrected version of that for a suspension of benefits under proposed suspension. The statement in
estimate). paragraph (g) of this section. The date opposition to the proposed suspension
(3) Communicate with eligible voters. on which the ballot packages are mailed that is prepared from comments
In accordance with section to the eligible voters is referred to as the received on the application, as required
432(e)(9)(H)(iv) and paragraph (h)(1)(ii) ballot distribution date. under section 432(e)(9)(H)(iii)(II), will
of this section, the plan sponsor is (iv) Collection and tabulation of votes be compiled by the Secretary of Labor
responsible for communicating with cast by eligible voters—(A) Voting and will be written in accordance with
eligible voters, which includes— period. The voting period begins on the the rules of paragraph (h)(3)(ii) of this
(i) Notifying the eligible voters ballot distribution date. The voting section. If no comments in opposition
described in paragraph (h)(2)(iii)(B)(4) period generally remains open until the are received, the statement in
of this section that a ballot package is 30th day following the date the opposition to the proposed suspension
being distributed by first-class U.S. Secretary of the Treasury has approved will include a statement indicating that
mail; and an application for a suspension of there were no such comments.
(ii) Making reasonable efforts (using benefits under paragraph (g) of this (v) Model ballot. A model ballot may
the standards that apply for purposes of section. However, the voting period will be published in the form of a revenue
paragraph (f)(1)(i) of this section) as not close earlier than 21 days after the procedure, notice, or other guidance
necessary to locate eligible voters for ballot distribution date. In addition, the published in the Internal Revenue
whom the plan sponsor has received Secretary (in consultation with the Bulletin.
notification that the mailed ballot PBGC and the Secretary of Labor) may
* * * * *
packages are returned as undeliverable specify a later date to end the voting (7) Effective/applicability date.
so that ballot packages can be sent to period in appropriate circumstances. Paragraph (h)(2) and paragraphs
those eligible voters. (B) Required use of automated voting
(4) Eligible voters to receive electronic (h)(3)(iv) and (v) of this section apply on
system. Votes must be cast using an
notification. Those eligible voters whom and after June 17, 2015.
automated voting system that meets the (8) Expiration date. The applicability
the plan sponsor must notify requirements of paragraph (h)(2)(iv)(C) of paragraph (h)(2) and paragraphs
electronically are— of this section. Votes cast by any other
(i) Eligible voters who previously (h)(3)(iv) and (v) of this section expires
method are invalid. on June 15, 2018.
received the notice described in (C) Automated voting system. An
paragraph (f) of this section in electronic automated voting system meets the * * * * *
form (as permitted under paragraph requirements of this paragraph John M. Dalrymple,
(f)(3)(ii) of this section), and (h)(2)(iv)(C) only if the system— Deputy Commissioner for Services and
(ii) Any other eligible voters who (1) Collects votes cast by eligible Enforcement.
regularly receive plan-related voters both electronically (through a Approved: August 25, 2015.
communications from the plan sponsor Web site) and telephonically (through a
in electronic form. toll-free number using a touch-tone or Mark J. Mazur,
(5) Method of notifying certain eligible interactive voice response); and Assistant Secretary of the Treasury (Tax
voters. The notification described in (2) Accepts only votes cast during the Policy).
paragraph (h)(2)(iii)(B)(3)(i) of this voting period by an eligible voter who [FR Doc. 2015–21766 Filed 8–31–15; 11:15 am]
section for an eligible voter must be provides the eligible voter’s unique BILLING CODE 4830–01–P
made using the electronic form identifier described in paragraph
normally used to send plan-related (h)(2)(iii)(A)(2) of this section.
communications to that voter (or the (D) Policies and procedures. The DEPARTMENT OF THE TREASURY
form used to provide the notice in Secretary of the Treasury (in
paragraph (f) of this section, if different). consultation with the PBGC and the Internal Revenue Service
The plan sponsor must send this Secretary of Labor) may establish such
notification promptly after being policies and procedures as may be 26 CFR Part 1
informed of the ballot distribution date necessary to facilitate the administration [TD 9733]
(within the meaning of paragraph of the vote under this paragraph (h)(2).
RIN 1545–BJ49
(h)(2)(iii)(D) of this section) and the These policies and procedures may
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notification must include the ballot include, but are not limited to, United States Property Held by
distribution date. establishing a process for an eligible Controlled Foreign Corporations in
(6) Pay costs associated with voter to challenge the vote. Transactions Involving Partnerships;
distribution. The plan sponsor is (v) Determination of whether a
Rents and Royalties Derived in the
responsible for paying all costs majority of the eligible voters has voted
Active Conduct of a Trade or Business
associated with printing, assembling, to reject the suspension. Within 7
and distributing the ballot package, calendar days after the end of the voting AGENCY: Internal Revenue Service (IRS),
including postage. period, the Secretary of the Treasury (in Treasury.
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countries; and (ii) an organization that the active development test in §§ 1.954– However, other personnel from the
meets the requirements of the active 2T(c)(1)(i) and (d)(1)(i) described in Part Treasury Department and the IRS
marketing test can be maintained and 3 of this preamble apply to rents or participated in their development.
operated by the officers or staff of royalties, as applicable, received or
List of Subjects in 26 CFR Part 1
employees either in a single foreign accrued during taxable years of CFCs
country or in multiple foreign countries ending on or after September 1, 2015, Income taxes, Reporting and
collectively. Similarly, § 1.954– and to taxable years of United States recordkeeping requirements.
2T(c)(2)(ii) and (d)(2)(ii) indicate that an shareholders in which or with which Amendments to the Regulations
organization can be in a single foreign such taxable years end, but only with
country or in multiple foreign countries respect to property manufactured, Accordingly, 26 CFR part 1 is
collectively for purposes of determining produced, developed, or created, or, in amended as follows:
the substantiality of the foreign the case of acquired property, property
organization. to which substantial value has been PART 1—INCOME TAXES
In applying the active development added, on or after September 1, 2015. ■ Paragraph 1. The authority citation
tests and active marketing tests, The rules regarding the active marketing for part 1 is amended by adding entries
questions have arisen as to the treatment test in §§ 1.954–2T(c)(1)(iv), (c)(2)(ii), in numerical order to read in part as
of cost sharing arrangements under (d)(1)(ii), and (d)(2)(ii) described in Part follows:
which a person other than the CFC 3 of this preamble, as well as the rules
actually conducts relevant activities. regarding cost-sharing arrangements in Authority: 26 U.S.C. 7805 * * *
Consistent with the policy underlying §§ 1.954–2T(c)(2)(iii)(E), (c)(2)(viii), * * * * *
the active rents and royalties exception (d)(2)(iii)(E), and (d)(2)(v) also described Section 1.956–1T also issued under 26
that requires the CFC itself to conduct in Part 3 of this preamble, apply to rents U.S.C. 956(d) and 956(e).
the relevant activities, § 1.954– or royalties, as applicable, received or * * * * *
2T(c)(2)(viii) and (d)(2)(v) clarify that accrued during taxable years of CFCs ■ Par. 2. Section 1.954–2 is amended
CST Payments and PCT Payments (as ending on or after September 1, 2015, by:
defined in § 1.482–7(b)(1)) made by a and to taxable years of United States ■ a. Revising paragraphs (c)(1)(i),
CFC will not cause the CFC’s officers shareholders in which or with which (c)(1)(iv), and (c)(2)(ii);
and employees to be treated as such taxable years end, to the extent ■ b. Adding paragraphs (c)(2)(iii)(E) and
undertaking the activities of the that such rents or royalties that are (c)(2)(viii);
controlled participant to which the received or accrued on or after ■ c. Revising paragraphs (d)(1)(i) and (ii)
payments are made. This clarification September 1, 2015. No inference is and (d)(2)(ii); and
applies for purposes of the active intended as to the application of the ■ d. Adding paragraphs (d)(2)(iii)(E),
development tests and the active provisions amended by these temporary (d)(2)(v), and (j).
marketing tests, including for purposes regulations under current law. The IRS The revisions and additions read as
of determining whether an organization may, where appropriate, challenge follows:
that engages in marketing is substantial. transactions, including those described
§ 1.954–2 Foreign personal holding
Similarly, § 1.954–2T(c)(2)(iii)(E) and in these temporary regulations and this company income.
(d)(2)(iii)(E) provide that deductions for preamble, under currently applicable
CST Payments and PCT Payments are Code or regulatory provisions or judicial * * * * *
excluded from the definition of active doctrines. (c) * * *
leasing expenses and active licensing (1) * * *
expenses, respectively. Thus, CST Special Analyses (i) [Reserved]. For further guidance,
Payments and PCT Payments are not Certain IRS regulations, including this see § 1.954–2T(c)(1)(i).
active leasing expenses or active one, are exempt from the requirements * * * * *
licensing expenses for purposes of of Executive Order 12866, as (iv) [Reserved]. For further guidance,
determining whether an organization is supplemented and reaffirmed by see § 1.954–2T(c)(1)(iv).
‘‘substantial’’ under the safe harbor test. Executive Order 13563. Therefore, a (2) * * *
regulatory assessment is not required. It (ii) [Reserved]. For further guidance,
4. Effective/Applicability Dates has been determined that sections see § 1.954–2T(c)(2)(ii).
The rules in § 1.956–1T(b)(4) 553(b) and (d) of the Administrative (iii) * * *
described in Part 1 of this preamble Procedure Act (5 U.S.C. chapter 5) do (E) [Reserved]. For further guidance,
apply to taxable years of CFCs ending not apply to these regulations. For see § 1.954–2T(c)(2)(iii)(E).
on or after September 1, 2015, and to applicability of the Regulatory * * * * *
taxable years of United States Flexibility Act (5 U.S.C. chapter 6), refer (viii) [Reserved]. For further guidance,
shareholders in which or with which to the cross-referenced notice of see § 1.954–2T(c)(2)(viii).
such taxable years end, with respect to proposed rulemaking published * * * * *
property acquired, including property elsewhere in this issue of the Federal (d) * * *
treated as acquired as the result of a Register. Pursuant to section 7805(f) of (1) * * *
deemed exchange of property pursuant the Internal Revenue Code, these (i) [Reserved]. For further guidance,
to section 1001, on or after September regulations have been submitted to the see § 1.954–2T(d)(1)(i).
1, 2015. The rule in § 1.956–1T(b)(5) Chief Counsel for Advocacy of the Small (ii) [Reserved]. For further guidance,
asabaliauskas on DSK5VPTVN1PROD with RULES
described in Part 2 of this preamble Business Administration for comment see § 1.954–2T(d)(1)(ii).
applies to taxable years of CFCs ending on its impact on small business. (2) * * *
on or after September 1, 2015, and to (ii) [Reserved]. For further guidance,
taxable years of United States Drafting Information see § 1.954–2T(d)(2)(ii).
shareholders in which or with which The principal authors of these (iii) * * *
such taxable years end, in the case of regulations are Barbara E. Rasch and (E) [Reserved]. For further guidance,
distributions made on or after Rose E. Jenkins of the Office of see § 1.954–2T(d)(2)(iii)(E).
September 1, 2015. The rules regarding Associate Chief Counsel (International). * * * * *
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(v) [Reserved]. For further guidance, purposes of paragraphs (c)(1)(iv) and the facts and circumstances. However,
see § 1.954–2T(d)(2)(v). (c)(2) of this section and § 1.956– such an organization will be considered
* * * * * 2(b)(1)(vi), the term aircraft or vessels substantial in relation to the amount of
(j) [Reserved]. For further guidance, includes component parts, such as royalties if active licensing expenses, as
see § 1.954–2T(j). engines that are leased separately from defined in paragraph (d)(2)(iii) of this
an aircraft or vessel. section, equal or exceed 25 percent of
■ Par. 3. Section 1.954–2T is added to (c)(2)(iii) introductory text through the adjusted licensing profit, as defined
read as follows: (c)(2)(iii)(D) [Reserved]. For further in paragraph (d)(2)(iv) of this section.
§ 1.954–2T Foreign personal holding guidance, see § 1.954–2(c)(2)(iii) (d)(2)(iii) introductory text through
company income (temporary). through (c)(2)(iii)(D). (d)(2)(iii)(D) [Reserved]. For further
(E) Deductions for CST Payments or guidance, see § 1.954–2(d)(2)(iii)
(a)(1) through (c)(1) introductory text
PCT Payments (as defined in § 1.482– through (d)(2)(iii)(D).
[Reserved]. For further guidance, see
7(b)). (E) Deductions for CST Payments or
§ 1.954–2(a)(1) through (c)(1). (c)(2)(iv) through (c)(2)(vii) PCT Payments (as defined in § 1.482–
(i) Property that the lessor, through its [Reserved]. For further guidance, see 7(b)).
own officers or staff of employees, has § 1.954–2(c)(2)(iv) through (c)(2)(vii). (d)(2)(iv) [Reserved]. For further
manufactured or produced, or property (viii) Cost sharing arrangements guidance, see § 1.954–2(d)(2)(iv).
that the lessor has acquired and, (CSAs). For purposes of paragraphs (v) Cost sharing arrangements (CSAs).
through its own officers or staff of (c)(1)(i) and (iv) of this section, CST For purposes of paragraphs (d)(1)(i) and
employees, added substantial value to, Payments or PCT Payments (as defined (ii) of this section, CST Payments or
but only if the lessor, through its officers in § 1.482–7(b)(1)) made by the lessor to PCT Payments (as defined in § 1.482–
or staff of employees, is regularly another controlled participant (as 7(b)(1)) made by the licensor to another
engaged in the manufacture or defined in § 1.482–7(j)(1)(i)) pursuant to controlled participant (as defined in
production of, or in the acquisition and a CSA (as defined in § 1.482–7(a)) do § 1.482–7(j)(1)(i)) pursuant to a CSA (as
addition of substantial value to, not cause the activities undertaken by defined in § 1.482–7(a)) do not cause the
property of such kind; that other controlled participant to be activities undertaken by that other
(c)(1)(ii) and (iii) [Reserved]. For considered to be undertaken by the controlled participant to be considered
further guidance, see § 1.954–2(c)(1)(ii) lessor’s own officers or staff of to be undertaken by the licensor’s own
and (c)(1)(iii). employees. officers or staff of employees.
(iv) Property that is leased as a result (c)(3) and (d)(1) introductory text (d)(3) through (i) [Reserved]. For
of the performance of marketing [Reserved]. For further guidance, see further guidance, see § 1.954–2(d)(3)
functions by such lessor through its own § 1.954–2(c)(3) and (d)(1). through (i).
officers or staff of employees located in (i) Property that the licensor, through (j) Effective/applicability date.
a foreign country or countries, if the its own officers or staff of employees, Paragraphs (c)(1)(i) and (d)(1)(i) of this
lessor, through its officers or staff of has developed, created, or produced, or section apply to rents or royalties, as
employees, maintains and operates an property that the licensor has acquired applicable, received or accrued during
organization either in such country or in and, through its own officers or staff of taxable years of controlled foreign
such countries (collectively), as employees, added substantial value to, corporations ending on or after
applicable, that is regularly engaged in but only so long as the licensor, through September 1, 2015, and to taxable years
the business of marketing, or of its officers or staff of employees, is of United States shareholders in which
marketing and servicing, the leased regularly engaged in the development, or with which such taxable years end,
property and that is substantial in creation, or production of, or in the but only with respect to property
relation to the amount of rents derived acquisition and addition of substantial manufactured, produced, developed, or
from the leasing of such property. value to, property of such kind; or created, or in the case of acquired
(c)(2)(i) [Reserved]. For further (ii) Property that is licensed as a result property, property to which substantial
guidance, see § 1.954–2(c)(2)(i). of the performance of marketing value has been added, on or after
(ii) Substantiality of foreign functions by such licensor through its September 1, 2015. Paragraphs (c)(1)(iv),
organization. For purposes of paragraph own officers or staff of employees (c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii),
(c)(1)(iv) of this section, whether an located in a foreign country or (d)(1)(ii), (d)(2)(ii), (d)(2)(iii)(E), and
organization either in a foreign country countries, if the licensor, through its (d)(2)(v) of this section apply to rents or
or in foreign countries (collectively) is officers or staff of employees, maintains royalties, as applicable, received or
substantial in relation to the amount of and operates an organization either in accrued during taxable years of
rents is determined based on all the such foreign country or in such foreign controlled foreign corporations ending
facts and circumstances. However, such countries (collectively), as applicable, on or after September 1, 2015, and to
an organization will be considered that is regularly engaged in the business taxable years of United States
substantial in relation to the amount of of marketing, or of marketing and shareholders in which or with which
rents if active leasing expenses, as servicing, the licensed property and that such taxable years end, to the extent
defined in paragraph (c)(2)(iii) of this is substantial in relation to the amount that such rents or royalties are received
section, equal or exceed 25 percent of of royalties derived from the licensing of or accrued on or after September 1,
the adjusted leasing profit, as defined in such property. 2015. See §§ 1.954–2(c)(1)(i), (c)(1)(iv),
paragraph (c)(2)(iv) of this section. In (d)(2)(i) [Reserved]. For further (c)(2)(ii), (c)(2)(iii), (d)(1)(i), (d)(1)(ii),
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addition, for purposes of aircraft or guidance, see § 1.954–2(d)(2)(i). (d)(2)(ii), and (d)(2)(iii), as contained in
vessels leased in foreign commerce, an (ii) Substantiality of foreign 26 CFR part 1 revised as of April 1,
organization will be considered organization. For purposes of paragraph 2015, for rules applicable to rents or
substantial if active leasing expenses, as (d)(1)(ii) of this section, whether an royalties, as applicable, received or
defined in paragraph (c)(2)(iii) of this organization either in a foreign country accrued before September 1, 2015.
section, equal or exceed 10 percent of or in foreign countries (collectively) is (k) Expiration date. The applicability
the adjusted leasing profit, as defined in substantial in relation to the amount of of paragraphs (c)(1)(i), (c)(1)(iv),
paragraph (c)(2)(iv) of this section. For royalties is determined based on all of (c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii),
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![Federal Register / Vol. 80, No. 170 / Wednesday, September 2, 2015 / Rules and Regulations 52981
(d)(1)(i), (d)(1)(ii), (d)(2)(ii), (d)(2)(iii)(E), corporation, and a principal purpose of Example 3. (i) Facts. FS1 has $100x of
and (d)(2)(v) of this section expires on creating, organizing, or funding by any post-1986 undistributed earnings and profits
or before August 31, 2018. means (including through capital and $100 post-1986 foreign income taxes, but
contributions or debt) the partnership is does not have any cash. FS2 has earnings and
■ Par. 4. Section 1.956–1 is amended profits of at least $100x, no post-1986 foreign
by: to avoid the application of section 956 income taxes, and substantial cash. Neither
■ 1. Adding paragraphs (b)(4), (b)(5), (f), with respect to the controlled foreign FS1 nor FS2 has earnings and profits
and (g)(1) through (3). corporation. described in section 959(c)(1) or section
■ 2. Redesignating paragraph (e)(6)(vii) (ii) Control. For purposes of 959(c)(2). FS2 loans $100x to FS1. FS1 then
as paragraph (g)(4) and revising it. paragraphs (b)(4)(i)(B) and (C) of this loans $100x to P. An income inclusion by P
The additions and revisions read as section, a controlled foreign corporation of $100x under sections 951(a)(1)(B) and 956
controls a foreign corporation or with respect to FS1 would result in foreign
follows:
partnership if the controlled foreign income taxes deemed paid by P under
§ 1.956–1 Shareholder’s pro rata share of corporation and the other foreign section 960. A principal purpose of funding
a controlled foreign corporation’s increase FS1 through the loan from FS2 is to avoid the
corporation or partnership are related application of section 956 with respect to
in earnings invested in United States within the meaning of or section 707(b).
property. FS2.
For this purpose, in determining (ii) Result. Under paragraph (b)(4)(i)(B) of
* * * * * whether two corporations are members this section, FS2 is considered to indirectly
(b) * * * of the same controlled group under, a hold the $100x obligation of P that is held
(4) [Reserved]. For further guidance, person is considered to own stock by FS1. As a result, P has an income
see § 1.956–1T(b)(4). owned directly by such person, stock inclusion of $100x under sections
(5) [Reserved]. For further guidance, owned for the purposes of, and stock 951(a)(1)(B) and 956 with respect to FS2, and
see § 1.956–1T(b)(5). owned with the application of section the foreign income taxes deemed paid by P
* * * * * under section 960 is $0. P does not have an
267(c). income inclusion under sections 951(a)(1)(B)
(f) [Reserved]. For further guidance, (iii) Coordination rule. Paragraph and 956 with respect to FS1 related to the
see § 1.956–1T(f). (b)(4)(i)(C) of this section applies only to $100x loan from FS1 to P.
(g) introductory text through (g)(3) the extent that the amount of United Example 4. (i) Facts. FS1 has substantial
[Reserved]. For further guidance, see States property that is treated as held earnings and profits. P and FS1 are the only
§ 1.956–1T(g) through (g)(3). indirectly by a controlled foreign partners in a foreign partnership, FPRS. FS1
(4) Paragraph (e)(6) of this section corporation under that paragraph contributes $600x cash to FPRS in exchange
applies to property acquired in exceeds the amount of United States for a 60% interest in the partnership, and P
exchanges occurring on or after June 24, property that is treated as held by the contributes real estate located outside the
2011. For transactions that occur prior United States ($400x value) to FPRS in
controlled foreign corporation under
to June 24, 2011, see § 1.956–1T(e)(6) as exchange for a 40% interest in the
§ 1.956–2(a)(3). partnership. There are no special allocations
contained in 26 CFR part 1 revised as of (iv) Examples. The following in the FPRS partnership agreement. FPRS
April 1, 2011. examples illustrate the rules of this lends $100x to P. Under § 1.956–2(a)(3), FS1
■ Par. 5. Section 1.956–1T is amended paragraph (b)(4). In each example, is treated as holding United States property
by revising paragraph (b)(4), and adding unless otherwise provided, P is a of $60x (60% × $100x) as a result of the FPRS
paragraphs (b)(5), (e)(6), (g), and (h) to domestic corporation that wholly owns loan to P. A principal purpose of creating,
read as follows: two controlled foreign corporations, FS1 organizing, or funding FPRS is to avoid the
and FS2. application of section 956 with respect to
§ 1.956–1T Shareholder’s pro rata share of FS1.
a controlled foreign corporation’s increase Example 1. (i) Facts. FS1 sells inventory (ii) Result. Before taking into account
in earnings invested in United States to FS2 in exchange for trade receivables due paragraph (b)(4)(iii) of this section, because
property (temporary). in 60 days. Avoiding the application of FS1 controls FPRS and a principal purpose
section 956 with respect to FS1 was not a of creating, organizing, or funding FPRS was
* * * * * principal purpose of establishing the trade to avoid the application of section 956 with
(b) * * * receivables. FS2 has no earnings and profits respect to FS1, FS1 is considered under
(4) Certain indirectly held United and FS1 has substantial accumulated paragraph (b)(4)(i)(C) of this section to
States property—(i) General rule. For earnings and profits. FS2 makes a loan to P indirectly hold the $100x obligation of P that
purposes of section 956, United States equal to the amount it owes FS1 under the would be United States property if held
property held indirectly by a controlled trade receivables. FS2 pays the trade directly by FS1. However, under paragraph
foreign corporation includes— receivables according to their terms. (b)(4)(iii) of this section, FS1 is treated as
(A) United States property held on (ii) Result. FS1 will not be considered to holding United States property under
behalf of the controlled foreign indirectly hold United States property under paragraph (b)(4)(i)(C) only to the extent the
this paragraph (b)(4) because the funding of amount held indirectly under paragraph
corporation by a trustee or a nominee;
FS2 through the sale of inventory in (b)(4)(i)(C) of this section exceeds the amount
(B) United States property acquired by exchange for the establishment of trade
any other foreign corporation that is of United States property that FS1 is treated
receivables was not undertaken with a as holding under § 1.956–2(a)(3). The amount
controlled by the controlled foreign principal purpose of avoiding the application of United States property that FS1 is treated
corporation if a principal purpose of of section 956 with respect to FS1. as indirectly holding under paragraph
creating, organizing, or funding by any Example 2. (i) Facts. The facts are the (b)(4)(i)(C) of this section ($100x) exceeds the
means (including through capital same as in Example 1, except that, with a amount determined under § 1.956–2(a)(3)
contributions or debt) the other foreign principal purpose of avoiding the application ($60x) by $40x. Thus, FS1 is considered to
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corporation is to avoid the application of section 956 with respect to FS1, FS1 and hold United States property within the
of section 956 with respect to the FS2 agree to defer FS2’s payment obligation, meaning of section 956(c) in the amount of
and FS2 does not timely pay the receivables. $100x ($60x under § 1.956–2(a)(3) and $40x
controlled foreign corporation; and (ii) Result. FS1 is considered to hold
(C) Property acquired by a partnership under paragraphs (b)(4)(i)(C) and (b)(4)(iii) of
indirectly United States property under this this section).
that is controlled by the controlled paragraph (b)(4), because there was a funding
foreign corporation if the property of FS2, a principal purpose of which was to (5) Certain foreign partnership
would be United States property if held avoid the application of section 956 with distributions funded by CFCs—(i)
directly by the controlled foreign respect to FS1. General rule. For purposes of section
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![52982 Federal Register / Vol. 80, No. 170 / Wednesday, September 2, 2015 / Rules and Regulations
956, an obligation of a foreign after September 1, 2015. See paragraph more than 8 months of imprisonment
partnership that is held (or that would (b)(4) of § 1.956–1T, as contained in 26 without using its normal guidelines for
be treated as held under § 1.956–2(c) if CFR part 1 revised as of April 1, 2015, decision-making
the obligation were an obligation of a for the rules applicable to taxable years DATES: Effective September 2, 2015.
United States person) by a controlled of controlled foreign corporations FOR FURTHER INFORMATION CONTACT:
foreign corporation is treated as a ending before September 1, 2015 and Stephen J. Husk, Case Operations
separate obligation of a partner in the property acquired before September 1, Administrator U.S. Parole Commission,
partnership when— 2015. For purposes of this paragraph 90 K Street NE., Washington, DC 20530,
(A) The foreign partnership (g)(1), a deemed exchange of property telephone (202) 346–7061. Questions
distributes an amount of money or pursuant to section 1001 on or after about this publication are welcome, but
property to the partner; September 1, 2015 constitutes an inquiries concerning individual cases
(B) The foreign partnership would not acquisition of the property on or after cannot be answered over the phone.
have made the distribution but for a that date.
SUPPLEMENTARY INFORMATION:
funding of the partnership through the (2) Paragraph (b)(5) of this section
obligation; and applies to taxable years of controlled Background
(C) The partner is related to the foreign corporations ending on or after In the notice of proposed rulemaking
controlled foreign corporation within September 1, 2015, and to taxable years published at 79 FR 47603–47605, we
the meaning of section 954(d)(3). of United States shareholders in which discussed the possible revision of our
(ii) Amount of obligation. or with which such taxable years end, rules pertaining to decisions to revoke
Notwithstanding § 1.956–1(e), the in the case of distributions made on or terms of supervision without a
amount that is treated as an obligation after September 1, 2015. revocation hearing for persons charged
of the distributee partner pursuant to (3) [Reserved]. with only administrative violations or
paragraph (b)(5)(i) of this section is (4) [Reserved]. For further guidance,
specifically identified misdemeanor
equal to the lesser of the amount of the see § 1.956–1(g)(4).
crimes. We refer you to the previous
partnership distribution that would not (h) Expiration date. The applicability
publication for a review of the
have been made but for the funding of of paragraphs (b)(4) and (b)(5) of this
background material. In the notice of
the partnership or the amount (as section expires on or before August 31,
proposed rulemaking, we encouraged
determined under § 1.956–1(e)) of the 2018.
the public to comment on our proposed
obligation of the foreign partnership that Approved: July 30, 2015. changes and we received two written
is held (or that would be treated as held John Dalrymple, comments from interested persons and/
under § 1.956–2(c) if the obligation were
Deputy Commissioner for Services and or organizations. However, only one
an obligation of a United States person) Enforcement. public comment, submitted by the
by the controlled foreign corporation.
Mark J. Mazur, Public Defender Service for the District
(iii) Example. (A) Facts. P, a domestic Assistant Secretary of the Treasury (Tax of Columbia, suggested modifications to
corporation, wholly owns FS, a controlled Policy). the proposed rule.
foreign corporation. P owns a 70% interest in
[FR Doc. 2015–21574 Filed 9–1–15; 8:45 am]
FPRS, a foreign partnership. A domestic Public Comment From the Public
corporation that is unrelated to P and FS BILLING CODE 4830–01–P Defender Service for the District of
owns the remaining 30% interest in FPRS. Columbia (PDS)
FPRS borrows $100x from FS, and distributes
$80x to P. FPRS would not have made the DEPARTMENT OF JUSTICE PDS recommends that we develop a
distribution to P but for the funding by FS. new risk assessment tool to be applied
(B) Result. Under paragraph (b)(5)(i) of this Parole Commission to all residents of the District of
section, a portion of the obligation of FPRS Columbia. While we may review the
that FS holds is treated as an obligation of 28 CFR Part 2 effectiveness of risk assessment tools
P, which constitutes United States property, used for all cases under our jurisdiction,
because FPRS made a distribution to P that [Docket No. UPSC 2014–01] we believe that the final rule for special
FPRS would not have made but for the
procedures for swift and short-term
funding of FPRS through the obligation held Paroling, Recommitting and
by FS. Under paragraph (b)(5)(ii) of this sanctions should be extended only to
Supervising Federal Prisoners:
section, the amount that is treated as an those persons who commit low level
Prisoners Serving Sentences Under
obligation of P is the lesser of the amount of violations of supervision.
the United States and District of
the distribution, $80x, or the amount of the Paragraph (d)(3) of the proposed rule
Columbia Codes
entire obligation of FPRS held by FS, $100x. stated that, notwithstanding our general
For purposes of section 956, therefore, on the AGENCY: United States Parole policy, when revoking supervised
date the loan to FPRS is made, FS is Commission, Justice. release for administrative violations
considered to hold United States property of under this paragraph, we may impose
$80x. ACTION: Final rule.
new terms of supervised release that are
* * * * * SUMMARY: The United States Parole less than the maximum authorized term.
(e)(6) [Reserved]. For further Commission is revising its rules PDS recommends that we provide
guidance, see § 1.956–1(e)(6). pertaining to decisions to revoke terms training to our Hearing Examiners to
* * * * * of supervision without a revocation impose shorter terms of supervision
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(g) Effective/applicability date. (1) hearing. The rule allows for a releasee even when revoking supervised release
Paragraph (b)(4) of this section applies charged with administrative violations for other types of violations.
to taxable years of controlled foreign or specifically identified misdemeanor Based on the comments, the final rule
corporations ending on or after crimes to apply for a prison sanction of omits the language from paragraph
September 1, 2015, and to taxable years 8 months or less. If a releasee qualifies (d)(3) of the proposed rule. We are
of United States shareholders in which and applies for a sanction under this permitted to impose periods of
or with which such taxable years end, section, the Commission may approve a supervised release that are less than the
with respect to property acquired on or revocation decision that includes no maximum authorized term for all
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Document Created: 2018-02-26 10:10:45
Document Modified: 2018-02-26 10:10:45
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final and temporary regulations. | |
| Dates | Effective Date: These regulations are effective on September 2, 2015. | |
| Contact | Rose E. Jenkins, (202) 317-6934 (not a toll-free number). | |
| FR Citation | 80 FR 52976 | |
| RIN Number | 1545-BJ49 | |
| CFR Associated | Income Taxes and Reporting and Recordkeeping Requirements |
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