Oil and Gas Trade Group Raises 8 Issues With Proposed FTC Regs

February 5, 2019

CC:PA:LPD:PR (REG–105600-18)
Internal Revenue Service
Room 5203
Post Office Box 7604
Ben Franklin Station
Washington, DC 20224

To Whom It May Concern:

On behalf of the American Petroleum Institute (“API”) and its members I am submitting the attached comments pertaining to the Department of Treasury and Internal Revenue Service's (“Treasury and the IRS”) proposed regulations concerning “Guidance Related to the Foreign Tax Credit, Including Guidance Implementing Changes Made by the Tax Cuts and Jobs Act.” The Tax Cuts and Jobs Act (“TCJA”) made tremendous progress in modernizing the United States' international taxation rules. Associated with these changes were numerous amendments to the foreign tax credit rules. The proposed regulations put forth by Treasury and IRS helped to clarify many of the outstanding issues the changes to the foreign tax credit created.

There are several issues contained in Treasury and the IRS' proposed regulations which API and its members would like to address. First, it is unclear whether the section 78 dividend deemed associated with the global intangible low-taxed income (“GILTI”) inclusion is considered to be foreign oil related income (“FORI”). API believes this lack of clarity can be efficiently resolved by amending two pre-existing Treasury regulations. Second, income from the disposition of a foreign branch is allocated to the general income basket. API believes this income should be allocated to the foreign branch income basket, similar to income from the operation of the branch or the disposition of its assets. Third, one or more safe harbor methods should be added to Proposed Treasury Regulation Section 1.904-2(j)(1) to give taxpayers certainty regarding the methodology used to allocate pre-2018 general category carryover foreign tax credits (“FTCs”). Fourth, overall domestic losses (“ODLs”) should not be permitted to arise with respect to GILTI, or alternatively, that applicable amounts of foreign taxes attributable to the GILTI basket be allowed to “hover” until the GILTI category ODLs are recaptured. Fifth, the treatment of interest income and interest expense for a loan from a partnership to a borrower should be treated similarly to how interest income and expense is treated for a loan from a lender to a partnership. Sixth, the proposed regulations lack of reference to section 1293(f) ignores the creditability of qualified electing funds (“QEFs”). Seventh, the stock bases of hybrid instruments should be characterized as non-section 245A subgroup. Eighth, all deemed taxes paid under section 956 should be creditable under section 960.

We welcome the opportunity to discuss these comments at your convenience. You can reach me at (202) 682-8455 or at comstocks@api.org.

Sincerely,

Stephen Comstock
Director — Tax & Accounting Policy
American Petroleum Institute
Washington, DC

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Issue: It is not clear whether a section 78 dividend associated with a GILTI inclusion may be FORI.

Code Sections and Regulation Sections: Internal Revenue Code Sections 78, 907, 951A and 960; Treasury Regulation Sections 1.907(c)-2(d)(5) and 1.907(c)-3(c)

Requested Action: Treasury and the IRS should make proposed amendments to Regulation Sections 1.907(c)-2(d)(5) and 1.907(c)-3(c) to clarify that a section 78 dividend associated with deemed paid taxes under section 960(a) or section 960(d) may be FORI.

Discussion:

1. Summary of Proposal

It is not clear whether a section 78 dividend associated with a GILTI inclusion is FORI, because the relevant foreign income taxes related to GILTI are deemed paid under section 960(d), not section 960(a)(1).

Treasury and the IRS should clarify that a section 78 dividend related to FORI taxes deemed-paid under section 960(d) is characterized as FORI under section 907. Certain additional changes to the relevant Regulations are also necessary to reflect the repeal of section 902.

2. Background

If a taxpayer has a subpart F inclusion and is treated as having paid certain foreign income taxes under section 960 of the Code, section 78 treats the taxpayer as having received a dividend equal to the amount of such deemed-paid foreign income taxes (a “section 78 dividend”). For purposes of section 907, section 78 dividends associated with a deemed inclusion under subpart F are characterized as FORI to the extent that the relevant deemed paid taxes under section 960(a)(1)¹ are FORI taxes. See Section 907(c)(3)(B) and Treas. Reg. Sec. 1.907(c)-2(d)(5).

The TCJA enacted the GILTI rules under section 951A. Under those rules, if a domestic corporation includes GILTI in its gross income under section 951A for a taxable year, that corporation is, under section 960(d), deemed to pay a portion of the foreign income taxes paid or accrued by its CFCs that are properly attributable to tested income. Generally, the corporation is also treated as having received a section 78 dividend related to the amount of such deemed-paid foreign income taxes.

Before the TCJA was enacted, section 907(c)(3)(B) provided that the term FORI includes “amounts with respect to which taxes are deemed paid under section 960(a).” (emphasis added) However, the TCJA changed that reference in section 907(c)(3)(B) from “section 960(a)” to “section 960.” This change indicates that Congress specifically intended for FORI to include amounts with respect to which taxes are deemed paid under any subsection of section 960, including section 960(a) (subpart F income) and section 960(d) (GILTI deemed-paid taxes).

3. Requested Action

a. Current Treatment by Treasury Regulations

Treasury Regulations promulgated under section 907 address the treatment of section 78 dividends, but the regulations are currently out-of-date because they do not address section 951A or section 960(d):

i. Treasury Regulation Section 1.907(c)-2(d)(5) currently states:

“The portion of a section 78 dividend that will be considered FORI will equal the amount of taxes deemed paid under either section 902(a) or section 960(a)(1) with respect to the dividend to the extent the taxes deemed paid are FORI taxes under §1.907(c)-3(b) or (c). See § 1.907(c)-3(a)(1).”

ii. A section 78 dividend related to GILTI arises by reason of section 960(d), not section 960(a). Furthermore, the TCJA repealed section 902.

iii. The regulation quoted immediately above cross-references Treasury Regulation Section 1.907(c)-3(b) and (c). Those subsections do not address section 951A (GILTI) or section 960(d) (deemed-paid foreign tax credits related to GILTI).

b. Proposed Changes to Existing Treasury Regulations

The issue described above could be addressed by the following changes:

i. Amend Treasury Regulation Section 1.907(c)-2(d)(5) to provide that a section 78 dividend will be treated as FORI to the extent that the taxes deemed paid under section 960(a) or section 960(d) are FORI:

“The portion of a section 78 dividend that will be considered FORI will equal the amount of taxes deemed paid under either section 902(a) or section 960(a)(1) with respect to the dividend to the extent the taxes deemed paid are FORI taxes under § 1.907(c)-3(c) (b) and (c). See § 1.907(c)-3(a)(1).”

ii. Amend Treasury Regulation Section 1.907(c)-3(c) to address section 951A and section 960:

“Includable amounts under section 951(a) or section 951A(a). (1) FOGEI taxes deemed paid under section 960 with respect to an amount includable in gross income under section 951(a) or section 951A(a) equal the total taxes deemed paid with respect to that amount multiplied by the fraction:

FOGEI taxes paid or accrued by the foreign corporation
Total foreign taxes paid or accrued by the foreign corporation

(2) With regard to an amount includable in gross income under section 951(a) in taxable years beginning after December 31, 1986, FOGEI taxes deemed paid with respect to that amount equal the total taxes deemed paid with respect to that amount within a separate category multiplied by the fraction:

Post-1986 FOGEI foreign income taxes as determined under the principles of section 902(c)(2) that are allocable to that separate category

Post-1986 foreign income taxes as determined under the principles of section 902(c)(2) that are allocable to that separate category

Taxes in the fraction in this paragraph (c)(2) include only those foreign taxes that may be deemed paid under section 960(a) by reason of such inclusion. See §§1.960-1(c)(3) and 1.960-2(c).

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Issue: Income from the operation of a foreign branch (and the disposition of assets by a foreign branch) is allocated to the section 904 basket for foreign branch income, but income from the disposition of a foreign branch is generally allocated to the section 904 basket for general category income.

Code Sections and Regulation Sections: Internal Revenue Code Section 904(d)(1)(B); Proposed Treasury Regulation Sections 1.904-4(f)(2)(iv)(A) and 1.904-4(f)(2)(iv)(B)

Requested Action: Proposed Treasury Regulation Section 1.904-4(f)(2)(iv)(A) should be amended to provide that income from the disposition of a foreign branch is allocated to the section 904 basket for foreign branch income.

Discussion:

1. Summary of Proposal

Proposed Treasury Regulation Section 1.904-4(f)(2)(iv)(A) places gains from the sale of a foreign branch in the general income basket. However, the income of a branch is placed in the branch income basket. This disparate treatment yields inequitable results and should be rectified by placing gains on the sale of a branch in the branch income basket as well.

2. Background

Section 904(d)(1)(B) creates a new foreign tax credit basket for “foreign branch income.” Under regulations proposed in December 2018, this category of income includes “income attributable to foreign branches of the United States person held directly or indirectly through disregarded entities.”² Income is generally attributable to a foreign branch to the extent the income is reflected on the foreign branch's separate set of books and records.³ The regulations provide a special rule excluding gain from the disposition of an interest in a partnership or disregarded entity from the definition of foreign branch category income.⁴ A limited exception to this rule attributes income to a foreign branch resulting from the sale or exchange of an interest in a partnership or disregarded entity if such income is reflected on the books and records of a foreign branch and the interest is held by such foreign branch in the ordinary course of business.⁵

Neither the statute nor the relevant legislative history indicates whether income from the disposition of a foreign branch should be attributable to the foreign branch income basket.⁶ Under the proposed regulations, operating income from foreign branches is allocated to the foreign branch basket. In addition, income from the disposition of foreign branch assets is generally allocated to the foreign branch basket.⁷ However, income from the disposition of certain foreign branches is allocated to the general category income basket.

3. Requested Action

Proposed Treasury Regulation Section 1.904-4(f)(2)(iv)(A) should be amended to provide that income from the disposition of a foreign branch is allocated to the foreign branch income basket.

The disparate treatment of income attributable to a foreign branch's disposition of its assets compared to the treatment of the disposition of the entire foreign branch⁸ produces inappropriate results. For example, a foreign branch that incurs significant R&D expenses in the foreign branch income basket by developing valuable intellectual property should not generate general category income when the foreign branch is sold. Similarly, a foreign branch that generates significant operating income in the foreign branch basket while operating a heavy manufacturing facility and generates associated environmental liabilities should not, if the foreign branch is sold at a loss, have that loss offset general category income. In these examples, if the foreign branch directly sold the valuable intellectual property or the facility with associated liabilities, as applicable, the resulting gain or loss would be attributable to the foreign branch income basket.

Gross income attributable to a foreign branch should be allocated to the foreign branch income basket regardless of whether that income arises with respect to the operation of the foreign branch or from the disposition of the foreign branch. That approach is consistent with the general exclusion of income attributable to stock of a corporation from the foreign branch income basket both while the stock is held and at disposition.⁹

These rules should apply to all instances where gain is recognized with respect to the sale of a foreign branch, including upon incorporation of a foreign branch¹⁰ and with respect to the distributive share of partnership income attributable to the sale of a foreign branch.¹¹

These rules should not apply to the disposition of an interest in a partnership or disregarded entity that does not engage in sufficient activities to constitute a foreign trade or business (and which, therefore, does not generate foreign branch income prior to its disposition). If this proposal is adopted, Proposed Treasury Regulation Section 1.904-4(f)(2)(iv)(B) should be amended to apply to dispositions of such entities.

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Issue: Carryover of unused foreign taxes from pre-2018 tax years to post-2017 tax years.

Code Sections and Regulation Sections: Internal Revenue Code Section 904(c); Proposed Treasury Regulation Section 1.904-2(j)(1)

Requested Action: One or more safe harbor methods should be added to Proposed Treasury Regulation Section 1.904-2(j)(1) to give taxpayers certainty regarding the methodology used to allocate pre-2018 general category carryover FTCs.

Discussion:

1. Background

Under Proposed Treasury Regulations Section 1.904-2(j)(1)(ii), unused foreign taxes carried forward to a taxable year beginning after December 31, 2017 will generally be allocated to the same post-2017 separate category under section 904(d)(1) as the pre-2018 separate category from which the unused foreign taxes are carried. Proposed Treasury Regulation Section 1.904-2(j)(1)(iii) provides an exception to this rule that permits taxpayers to elect to allocate carryforward foreign taxes in the general basket (but not taxes deemed paid under section 902 or section 960) to the foreign branch basket. If a taxpayer makes this election, the taxpayer is required to assess the general category income earned in pre-2018 tax years to determine the extent to which the income would have been foreign branch category income under the rules described in Proposed Treasury Regulation Section 1.904-4(f). API supports these rules in the proposed regulations.

The proposed regulations also request comments on whether the final regulations should include a simplified rule to reconstruct the allocation of general category unused foreign taxes. API supports the final regulations adding one or more safe harbor methods to the general rules in Proposed Treasury Regulation Section 1.904-2(j)(1)(iii) to reconstruct the allocation of general category unused foreign taxes. One such safe harbor method could be relative amounts of foreign branch category and general category income or assets in the first post-2017 taxable year.

2. Requested Action

API supports finalizing the rules in Proposed Treasury Regulations Section 1.904-2(j)(1)(ii) and (iii) in their current form. API also recommends that the final regulations add one or more safe harbor methods to the general rules in Proposed Regulations Section 1.904-2(j)(1)(iii) for a simplified methodology for a taxpayer to reconstruct the allocation of general category unused foreign taxes.

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Issue: An ODL is created to the extent that a taxpayer's domestic losses are allocated to and offset foreign source income (“FSI”) under section 904(g). If a taxpayer sustains an ODL in a given tax year, the taxpayer's domestic losses are allocated on a proportionate basis to reduce the taxpayer's separate income groups of FSI in that year. If, in a subsequent tax year, such a taxpayer earns domestic income, that domestic income is generally recaptured and recharacterized as FSI to the extent of the balance in the taxpayer's ODL accounts. This recapture is allocated to the separate FSI categories in proportion to the taxpayer's then-current balances in their ODL accounts with respect to those separate FSI categories. The ODL rules were implemented to create parity between the treatment of overall foreign losses and overall domestic losses in order to prevent double taxation.

Because a taxpayer is not permitted to carryover any foreign taxes attributable to global intangible low-taxed income (“GILTI”) under section 904(c), future recapture of an ODL account that was created in 2018 or subsequent tax years related to the allocation of a domestic loss to the separate category for GILTI could result in the taxpayer having a limited amount of FTCs in the year of the ODL recapture (i.e., only having adequate FTCs) to offset their current year GILTI liability, with no FTCs to shield the portion of the ODL that is recaptured as FSI in the separate category for GILTI).

Code Section and Regulation Sections: Internal Revenue Code Sections 904(c), 904(d)(1), 904(g)

Requested Action: Since the proposed regulations are silent on this issue, we request Treasury and the IRS to issue guidance providing that either (i) ODL accounts should not be permitted to arise with respect to the separate category for GILTI as a result of a domestic loss or pre-2018 net operating loss (“NOL”) carryforward offsetting income in the GILTI basket; or (ii) if domestic losses or pre-2018 NOL carryforwards are required to offset income in the GILTI basket, an applicable amount of foreign taxes attributable to the GILTI basket in that year should “hover” until the GILTI category ODL is recaptured, at which point such FTCs would be utilized.

Similarly, a “hovering” rule should apply to foreign taxes associated with section 904(c) where such taxes were prevented from being utilized due to domestic loss (and domestic loss carryovers) and the section 904 ordering rules. In these situations, the associated section 904(c) taxes should “hover” until the associated general limitation ODL is recaptured in order to prevent double taxation.

Discussion:

1. Background

After the enactment of the TCJA, there are four separate FTC baskets under section 904(d)(1): passive, general, foreign branch income and GILTI. Because the TCJA added a new category of income under section 904(d)(1) related to GILTI, a taxpayer may be required to allocate a portion of domestic losses generated in post-2017 tax years or pre-2018 NOL carryforwards against income in the GILTI basket. However, under section 904(c), FTCs related to GILTI may not be carried forward or carried back to other tax years. When the taxpayer in that situation generates domestic income in later years, a portion of that income will be recast as GILTI to the extent that the original domestic loss/NOL was allocated to reduce GILTI. The effect of this is that the taxpayer may recapture a portion of the taxpayer's ODL as GILTI, but that taxpayer may not have sufficient current year FTCs in the GILTI FTC basket in the year of the ODL recapture.

Example

Assume that a company generates a $100 domestic loss in 2019, at a time when the taxpayer has foreign passive income of $10, foreign general income of $90, foreign branch income of $700 and GILTI of $200. In that case, the company would be required under the 904(g) rules to allocate $100 loss against their various categories of income described in section 904(d)(1). See sections 904(f)(5)(D) and 904(g)(4). As a result, the 2019 domestic loss would shelter the taxpayer's foreign source income as follows:

	2019 Foreign-Source Income (before allocation of domestic loss)	Allocation of Domestic Loss	2019 Foreign-Source Income (after allocation of domestic loss)
Passive	10	-1	9
General	90	-9	81
Foreign branch	700	-70	630
GILTI	200	-20	180
Total	1,000	-100	900

The allocation of the 2019 domestic loss against general and foreign branch income would generally displace FTCs (if any) in those categories, and those excess FTCs (if any) would be eligible to be carried back one year or forward up to ten years, until used. As a result, as long as the taxpayer generates $200 of domestic income in the next ten years, the taxpayer should be eligible to shelter any domestic income that is recharacterized as “general” or “foreign branch” income under section 904(g) with those FTCs.

However, FTCs related to GILTI may not be carried forward or back under section 904(c). As a result, FTCs that are displaced in the 2019 tax year as a result of the allocation of $20 of the domestic loss to the GILTI basket will not be eligible to be carried to any other tax year. When that taxpayer generates domestic income in future tax years, a portion of that domestic income will be recast as GILTI under section 904(g). In that case, the taxpayer may be short in the GILTI FTC basket in the year of the recast — even if the taxpayer may have otherwise had excess FTCs in the GILTI basket in the 2019 tax year.

2. Requested Action

Under Section 904(d)(7), Treasury and the IRS have broad regulatory authority to promulgate final regulations as may be necessary or appropriate under section 904, including application of the new section 904(d)(1) baskets for foreign branch income and GILTI. To cure the current inequities found within the Proposed Regulations as they relate to a taxpayer's inability to utilize GILTI FTCs, we request Treasury and the IRS to provide guidance that either (i) ODL accounts should not be permitted to arise with respect to the separate category for GILTI as a result of a domestic loss or pre-2018 NOL carryforward offsetting income in the GILTI basket; or (ii) if domestic losses or pre-2018 NOL carryforwards are required to offset income in the GILTI basket, an applicable amount of foreign taxes attributable to the GILTI basket in that year should “hover” until the GILTI category ODL is recaptured, at which point such FTCs would be utilized.

Similarly, a “hovering” rule should apply to foreign taxes associated with section 904(c) where such taxes were prevented from being utilized due to domestic loss (and domestic loss carryovers) and the section 904 ordering rules.

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Issue: The treatment of interest income and interest expense for a loan from a partnership to a borrower should be treated similarly to how interest income and expense is treated for a loan from a lender to a partnership.

Code Sections and Regulation Sections: Proposed Treasury Regulation Section 1.861-9(e)(8)(ii)

Requested Action: Align the treatment of interest expense and income for a loan from a partnership to a borrower that occurs in the same context as a specified partnership loan.

Discussion:

1. Summary of Proposal

Treasury and the IRS should provide a rule that for a loan from a partnership to a borrower, the interest income and expense of the borrower should be sourced in the same manner as a lender in a specified partnership loan transaction. The interest income should be assigned to the same statutory and residual groupings as those groupings from which the interest expense is deducted as determined in the allocation and apportionment rules in sections 1.861-9 and 1.861-13.

2. Background

Treasury and the IRS identified the risk that some loans made to a partnership by a United States person, or a member of its affiliated group which owns an interest in the partnership, could result in a distortion of the foreign tax credit limitation if the distributive share of interest expense and interest income from the same loan were both taken into account by the taxpayer. This distortion would be due to differences in rules governing the source and separate category of interest income and the rules that govern allocation and apportionment of interest expense. Proposed Treasury Regulation Section 1.861-9(e)(8)(ii) resolved this distortive effect by requiring that, to the extent a lender in a specified partnership loan transaction takes into account both interest expense and interest income with respect to the same loan, the interest income is assigned to the same statutory and residual groupings as those groupings from which the interest expense is determined.

3. Requested Action

A similar rule for a loan from partnerships to a borrower, the opposite direction from the proposed regulations, should be adopted. For a loan from a partnership to a borrower, the interest income and expense of the borrower should be sourced in the same manner. The adoption of such a proposed rule would create a two-way street which will offer parity between the two types of loans. If such a rule is not adopted, for example, a loan from a partnership to a borrower, where the partners and the borrower are in the same consolidated group, would result in U.S. source interest income to the partners in the partnership but would result in disparate treatment to the borrower with it having its interest expense assigned to the various groupings determined under the section 861 rules as applied to the consolidated group.

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Issue: By not referencing section 1293(f), the proposed regulations under section 960 do not directly consider the creditability granted by section 1293(f).

Code Sections and Regulation Sections: Internal Revenue Code Sections 957(a), 960, 1293(a) and 1293(f); Proposed Treasury Regulation Sections 1.960-1(a)(1) and 1.960-1(b)(2)

Requested Action: Treasury and the IRS should provide clarification that qualified electing funds are eligible to take FTCs under Proposed Treasury Regulation Sections 1.960-1(a)(1) and 1.960-1(b)(2).

Discussion:

1. Summary of Proposal

Proposed Treasury Regulation Section 1.960-1(a)(1) provides rules to associate current year foreign income taxes of a controlled foreign corporation (“CFC”) with the current year income of the CFC or a distribution of previously taxed earnings and profits of that CFC. The proposed regulations are intended to be the exclusive rules for defining the deemed foreign income taxes paid by a domestic corporation but do not include a reference to taxes deemed creditable for QEFs under section 1293(f). To ensure FTCs deemed creditable by section 1293(f) reference should be made to this section by Proposed Treasury Regulation Section 1.960-1(a)(1).

2. Background

Proposed Treasury Regulation Section 1.960-1(a)(1) explicitly states, “These regulations provide the exclusive rules for determining the foreign income taxes deemed paid by a domestic corporation.” However, Proposed Treasury Regulation Section 1.960-1(b)(2) defines CFC by reference to section 957(a) without any reference to QEFs under section 1293(f). Section 1293(f) grants a 10-percent corporate shareholder FTCs for amounts included from owning stock of a QEF under section 1293(a) by including such amounts as if included under section 951(a). The Proposed Treasury Regulation Section 1.960-1(b)(2) definition of CFC is used by Proposed Treasury Regulation Section 1.961-1(a)(1) resulting in the proposed regulation section being inapplicable to QEFs and eliminating the creditability of foreign taxes paid for 10-percent corporate shareholders under section 1293(f). To ensure FTCs deemed creditable under section 1293(f) reference should be made in Proposed Treasury Regulation Section 1.961-1(a)(1) to section 1293(f).

3. Requested Action

Treasury and the IRS should clarify the applicability of the section 960 proposed regulations by incorporating a reference to section 1293(f) in Proposed Treasury Regulation Section 1.960-1(a)(1). Such a reference will clarify that the section 960 regulations do not inadvertently prohibit taxpayers from claiming FTCs permitted under section 1293(f).

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Issue: It is unclear whether stock basis of a CFC associated with hybrid instrument income will be section 245A group or non-section 245A group under Proposed Treasury Regulation Section 1.861-13(a)(5). Treasury and the IRS should clarify stock basis associated with hybrid instruments should be classified as non-section 245A subgroup.

Code Sections and Regulation Sections: Internal Revenue Code Sections 245A, 861 and 904(b)(4); Proposed Treasury Regulation Sections 1.861-13(a) and 1.861-13(a)(5)

Requested Action: Treasury and the IRS should clarify that stock basis of CFCs associated with hybrid instruments is non-section 245A subgroup under Proposed Treasury Regulation Section 1.861-13(a)(5).

Discussion

1. Summary of Proposal

Proposed Treasury Regulation Section 1.861-13 provides special rules for the characterization of CFC stock. The rules generally provide for a characterization based upon the type of income the stock of the CFC generates. Step five of the rules under Proposed Treasury Regulation Section 1.861-13(a)(5) distinguishes section 245A subgroup stock basis from non-section 245A subgroup stock basis. However, it is unclear how stock basis of CFCs associated with hybrid instruments will be treated. Treasury and the IRS should clarify this stock basis associated with hybrid instruments is non-245A subgroup stock basis.

2. Background

Proposed Treasury Regulation section 1.861-13(a) provides that section 904(b)(4) applies to any stock basis characterized as section 245A subgroup as determined by Proposed Treasury Regulation Section 1.861-13(a)(5). Section 904(b)(4) provides that 861 expenses allocable to the stock of a CFC whose income qualifies for the participation exemption under section 245A, section 245A subgroup, should be excluded from the section 904 limitation calculation.

Therefore, if CFC stock basis is characterized as section 245A subgroup under Proposed Treasury Regulation Section 1.861-13(a)(5), entities with hybrid instruments at the beginning of the tax year are required to exclude the stock basis in the hybrid instruments when determining the deductions properly allocable or apportioned to foreign source income for purposes of calculating the 904 limitation. This results in the additional stranding of section 904 FTC carryforwards because taxpayers lose the benefit of averaging their beginning and ending year values where the stock basis in hybrid instruments did not actually qualify for the section 245A participation exemption.

This result also further exacerbates the problem of taxpayers being required to recapture ODLs without first reducing foreign source income by the amount of section 861 expenses allocated to such CFCs. This occurs because the excluded section 861 expenses are, however, deducted for purposes of calculating the US tax liability before FTCs. Consequently, the tax effected ODL recapture amount is greater than the US tax liability before the utilization of FTCs. The impact of this provision results in the additional stranding of section 904 FTC carryforwards because the ODL is recaptured without a corresponding utilization of FTCs.

3. Requested Action

Treasury and the IRS should clarify that CFC stock basis associated with hybrid instruments under Proposed Treasury Regulation Section 1.861-13(a)(5) is non-section 245A subgroup.

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Issue: Deemed credits paid for all section 956 inclusions should be creditable.

Code Sections and Regulation Sections: Internal Revenue Code Sections 951(a)(1)(B), 956 and 960; Proposed Treasury Regulation Section 1.960-2(b)

Requested Action: Treasury and the IRS should reverse its decision that no foreign taxes are deemed paid under section 960(a) with respect to an inclusion under section 951(a)(1)(B).

Discussion:

1. Summary of Proposal

The decision to exclude foreign taxes paid with respect to an inclusion under section 951(a)(1)(B) is not based upon the legislative history or statutory intent of the TCJA. As such, this exclusion should be reversed.

2. Background

The TCJA modified and expanded several aspects of section 960. However, there is no mention of section 956 in the legislative history of the amendments to section 960.¹² If Congress had intended to deny deemed paid credits for all 956 inclusions, they would have done so in section 956 or referenced the intent to do so in the legislative history of section 960. However, there is nothing in the statute that provides for the denial of foreign tax credits for all section 956 inclusions. Therefore, the decision to prohibit taxpayers from claiming foreign tax credits with respect to an inclusion under section 956 is unwarranted and outside the scope of the TCJA.

3. Requested Action

Treasury and the IRS should reverse its decision in Proposed Treasury Regulation Section 1.960-2(b) that no foreign taxes are deemed paid under section 960(a) with respect to an inclusion under section 951(a)(1)(B).