Sec. 901(m) temporary regulations apply to covered asset acquisitions.

• Author: Schreiber, Sally P.

The IRS issued temporary regulations that are designed to prevent taxpayers from misapplying the Sec. 901 (m) statutory disposition rule in certain dispositions of relevant foreign assets (RFAs), including where the gain or loss from the disposition of an RFA is recognized for U.S. income tax purposes but not for foreign income tax purposes, and cases in which no gain or loss is recognized for purposes of U.S. or foreign income tax from the disposition of an RFA (T.D. 9800). The temporary regulations adopt rules proposed in Notices 2014-44 and 2014-45.

Sec. 901(m)(l) provides that, in the case of a covered asset acquisition (CAA), the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to RFAs is not taken into account in determining the Sec. 901(a) foreign tax credit, and in the case of foreign income tax paid by a Sec. 902 corporation, is not taken into account for purposes of Sec. 902 or 960. Instead, the disqualified portion of any foreign income tax is allowed as a deduction. A CAA is (1) a qualified stock purchase (as defined in Sec. 338 (Sec. 338 CAA)); (2) any transaction that is treated as an asset acquisition for U.S. income tax purposes and as the acquisition of stock of a corporation (or is disregarded) for purposes of a foreign income tax; (3) any acquisition of an interest in a partnership that has a Sec. 754 election in effect (Sec. 743(b) CAA); and (4) any other similar transaction the IRS provides.

The temporary regulations are aimed at certain taxpayers that are engaging in transactions shortly after a CAA occurs that are intended to invoke application of the Sec. 901(m)(3)(B)(ii) statutory disposition rule to avoid the purpose of Sec. 901(m). As an example of such a transaction, USP, a domestic corporation, wholly owns FSub, a foreign corporation, and FSub acquires 100% of FT, a foreign corporations stock, in a Sec. 338 qualified stock purchase. The acquisition of FT's stock is a Sec. 338 CAA, and FT's assets are RFAs for that Sec. 338 CAA. Shortly after the acquisition of FT in the Sec. 338 CAA, FT becomes disregarded as an entity separate from its owner. As a result, FT is deemed, solely for U.S. tax purposes, to distribute all of its assets and liabilities to FSub in a deemed liquidation immediately before the closing of the day before the election is effective. Under...