Proposed section 902 regulations.

• Position: Tax Executives Institute International Tax Committee

On May 16, 1995, Tax Executives Institute filed the following comments with the Internal Revenue Service concerning proposed regulations under section 902 of the Code, relating to the computation of the deemed paid foreign tax credit. TEI's comments were prepared under the aegis of its International Tax Committee, whose chair is Philip J. Bergquist of Apple Computer, Inc. A task force headed by Christine A. Holtzmuller of Mead Corporation was formed to prepare the comments; its members included James A. McFall of Xerox Corporation, Lisa Norton of Ingersoll-Rand Co., Robert G. Sedlacek of Gerber Corporation, and Joseph S. Tann, Jr., of Ameritech Corporation. Thomas J. Brya of G.D. Searle & Co. and the Chicago Chapter's International Tax Committee also contributed materially to the preparation of the comments.

On January 5, 1995, the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations under section 902 of the Internal Revenue Code, relating to the computation of foreign taxes deemed paid, to conform the regulations to section 1202(a) of the Tax Reform Act of 1986 (Pub. L. No. 99-514, 100 Stat. 1085) and to section 1012(b) of the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. No. 100-647, 102 Stat. 3242) with respect to taxable years beginning after December 31, 1986. The proposed regulations were published in the Federal Register on January 6, 1995 (60 Fed. Reg. 2049), and in the Internal Revenue Bulletin on March 6, 1995 (1995-10 I.R.B. 18).(1)

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 5,000 members represent more than 2,500 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under section 902 of the Internal Revenue Code, relating to the computation of the deemed-paid foreign tax credit.

1. Prop. Reg. [sections] 1.902-1(a)(1): Definition of Domestic Shareholder

   U.S. income tax law has long permitted a domestic corporate taxpayer to credit foreign taxes paid on repatriated income against its U.S. income tax on such income. See, e.g., [sections] 240(c) of the Revenue Act of 1918, 40 Stat. 1082 (establishing the foreign tax credit). Section 902 of the Code provides a mechanism by which foreign income taxes paid by a foreign corporation are deemed paid by a domestic corporate shareholder owning at least 10 percent of the voting stock of the foreign corporation. This section 902 credit is often referred to as the "indirect" or "deemed paid" credit. In United States v. Goodyear Tire & Rubber Co., 493 U.S. 132, 139 (1989), the Supreme Court held that "[t]he history of the indirect credit clearly demonstrates that the credit was intended to protect a domestic parent from double taxation of its income."

   Prop. Reg. [sections] 1.902-1(a)(1) defines "domestic shareholder" as:

   a domestic corporation which

   owns at least 10 percent of

   the voting stock of the foreign

   corporation at the time

   it receives a dividend from

   such foreign corporation.

   The proposed regulations do not define ownership for purposes of section 902. In Rev. Rul. 71-141, 1971-1 C.B. 211; the IRS ruled that two 50-percent domestic corporate partners in a U.S. general partnership could claim the indirect credit with respect to dividends received by the partnership from a 40-percent owned foreign corporation. The preamble to the proposed regulations asks "under what other circumstances a section 902 credit with respect to stock held by a partnership or other pass-through entity should flow through to a domestic corporation."(2) The preamble specifically requests comments on (i) whether the holding of Rev. Rul. 71-141 should be expanded to allow taxes paid by a foreign corporation to be considered deemed paid by domestic corporations that are partners in domestic limited partnerships or foreign partnerships, shareholders in limited liability companies, and beneficiaries of domestic or foreign trusts or estates or interest holders in other pass-through entities, and (ii) if so, how the government would administer the expansion.

   The questions in the preamble perplexed and unsettled many tax professionals because the assumption was that Rev. Rul. 71-141 already applied to foreign, as well as domestic, partnerships (and to limited, as well as general, partners). Stated simply, TEI believes the preamble's question should be answered in the affirmative. Where a corporate member of a pass-through entity -- whether a domestic limited partnership, limited liability company, foreign general or limited partnership, or domestic or foreign trust or estate -- owns a sufficient interest in that entity under section 318 to claim at least a 10-percent interest in any foreign corporation's voting stock (which stock is held by the pass-through entity), the (domestic) corporate member should be entitled to a deemed-paid credit. Any other result would destroy the symmetry between...