Extension Granted for Branch Profits Tax Election

Third Party Communication: None

This is in response to a letter dated November 11, 2015, and subsequent correspondence, submitted on behalf of FC by its authorized representative, requesting an extension of time under Treas. Reg. § 301.9100-3 to elect under Treas. Reg. § 1.884-1(e)(3) to reduce its U.S. liabilities for purposes of computing its branch profits tax liability under section 884 of the Internal Revenue Code.

The rulings contained in this letter are based upon information and representations submitted by FC and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

According to an affidavit provided by Individual A, who is an employee of FC, FC had no employees in either its Country A or City A offices trained in U.S. tax law and FC relied on accounting firms engaged by FC to properly prepare its U.S. federal tax returns. According to an affidavit provided by Individual B, who reviewed FC's Tax Year Form 1120-F on behalf of Accounting Firm, Individual B did not check the draft Form 1120-F that Individual B reviewed for the presence of a statement declaring that the election under Treas. Reg. § 1.884-1(e)(3) had been made.

FC represents that granting relief to allow it to file a late election under Treas. Reg. § 1.884-1(e)(3) will not prejudice the interest of the government. In addition, FC represents that it acted reasonably and in good faith, and that no hindsight is involved.

Generally, "U.S. net equity" refers to a foreign corporation's U.S. assets, reduced (including below zero) by its U.S. liabilities. Sec. 884(c)(1). The term "U.S. liabilities" means the liabilities of a foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. Sec. 884(c)(2)(B). For this purpose, Treas. Reg. § 1.884-1(e)(3) defines the term "U.S. liabilities" as the amount of liabilities determined under Treas. Reg. § 1.884-1(e)(1) decreased by the amount of liabilities determined under Treas. Reg. § 1.884-1(e)(3), and increased by the amount of liabilities determined under Treas. Reg. § 1.884-1(e)(2).

Treasury Regulation § 1.884-1(e)(3) provides an election to reduce U.S. liabilities for purposes of determining the branch profits tax. Under Treas. Reg. § 1.884-1(e)(3)(ii), for any taxable year, a foreign corporation may elect to reduce the amount of its liabilities determined under Treas. Reg. § 1.884-1(e)(1) by an amount that does not exceed the lesser of the amount of U.S. liabilities as of the determination date, or the amount of U.S. liability reduction needed to reduce a dividend equivalent amount as of the determination date to zero.

Under Treas. Reg. § 1.884-1(e)(3)(iii), a foreign corporation that elects to reduce its liabilities must also, for purposes of computing the amount of its interest apportioned to effectively connected income under Treas. Reg. § 1.882-5, reduce its U.S.-connected liabilities for the taxable year by the amount of the reduction in liabilities under Treas. Reg. § 1.884-1(e)(3). Such a reduction in U.S.-connected liabilities requires a corresponding decrease in the amount of interest apportioned to effectively connected income under Treas. Reg. § 1.882-5 for purposes of Treas. Reg. § 1.884-4(a) and for all other Internal Revenue Code sections for which the amount of interest apportioned under Treas. Reg. § 1.882-5 is relevant. See Treas. Reg. § 1.884-1(e)(3)(iii).

Under Treas. Reg. § 1.884-1(e)(3)(iv), a foreign corporation makes the election under Treas. Reg. § 1.884-1(e)(3) by attaching a statement to its return for the taxable year that it has elected to reduce its liabilities. The statement must also indicate that the foreign corporation has reduced the amount of its U.S.-connected liabilities for the taxable year and must indicate the amount of such reductions. An election made under Treas. Reg. § 1.884-1(e)(3) must be made before the due date (including extensions) for the foreign corporation's income tax return for the taxable year.

Treasury Regulation § 301.9100-3 provides standards for extensions of time for making regulatory elections when the deadline for making the election is other than a due date prescribed by statute. Treasury Regulation § 301.9100-2 provides the rules governing automatic extensions of time for making certain elections. Treasury Regulation § 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of Treas. Reg. § 301.9100-2.

Treasury Regulation § 301.9100-3(a) provides that requests for relief will be granted when the taxpayer provides the evidence (including affidavits described in Treas. Reg. § 301.9100-3(e)) to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) the grant of relief will not prejudice the interests of the Government.

Treasury Regulation § 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by a regulation, a revenue ruling, revenue procedure, notice, or announcement.

Treasury Regulation § 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the standards set forth in Treas. Reg. § 301.9100-3 to make a regulatory election under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Moreover, Treas. Reg. § 301.9100-1(a) provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Internal Revenue Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to FC's authorized representative.