Final loss allocation regs. result in increased FTC limitations.

AuthorKral, Mark E.
PositionIRS regulations; foreign tax credit

The IRS has issued long-awaited proposed, final and temporary regulations on the allocation of loss recognized on the disposition of stock and other personal property. These regulations also clarify the allocation and computations of foreign tax credits (FTCs). The general effect of these new rules is to permit U.S. taxpayers to claim more FTCs currently, primarily because certain items of loss are no longer considered to reduce foreign-source income.

Background

Before this updated guidance, Prop. Regs. Sec. 1.865-1 contained the most current guidance, calling for a loss incurred on the sale of other personal property to be allocated based on that property's income. Prop. Regs. Sec. 1.865-2 provided that losses incurred with the stock's sale were generally allocated to the seller's residence, with a series of antitaxpayer exceptions; this was inconsistent with the generally favorable treatment accorded losses on sale or disposition of stock. In International Multifoods Corp., 108 TC 579 (1997), the Tax Court supported the proposed regulations that the loss on stock sales is generally sourced to the seller's residence.

The IRS had also issued proposed regulations in 1992, which amended the regulations under Sec. 904 that determine whether passive income is "highly taxed" for purposes of assigning an item of income and its related FTCs to the passive or general limitation income basket. These proposed regulations were finalized in 1996, but taxpayers had flexibility with the effective date.

New Rules

The new rules, which closely follow the original proposed regulations, include some changes that generally benefit taxpayers.

Net operating losses. Temp. Regs. Sec. 1.861-8T(e)(8) provides that net operating loss (NOL) deductions under Sec. 172 are allocated and apportioned in the same manner as the deductions that generated the NOL deduction.

Loss on personal property other than stock. The general rule under Temp. Regs. Sec. 1.865-1T(a) now provides that loss on personal property other than stock is allocated in the same manner in which gain from the sale of that personal property would be sourced. For example, this now allows a U.S. taxpayer who incurs a loss on the sale of a foreign bond to allocate that loss against U.S.-source income. Under the 1996 proposed regulations, this loss would have been foreign-source because the interest income from the bond was foreign-source, thereby reducing the Sec. 904 foreign tax limitation.

Temp. Regs. Sec...

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