Nprm

n

kcderal Register

/

Vol. 53. No. 178

1 Mrednesdag. Septet-jbcr 14.

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relating 10 Iht ellocs tion and
apportionrncnt of interert expense and
certain othcr expenses for purposes 01
the lortign tax credit d e r and certain
other inccrnational tax provisions. h tbe
d e a end regulationm portion of this
Fdud Register, the Inlernal Revenue
Service i s issuing temporary regulations
relating lo these matterr. The text ni
,
those ternnorm ryregdaliona slto serves
as the wmment document for this notice
of proposed rulemaking. Certain
ndditional r e ~ l a l i o n rare also proposed
by this documcnl. Thin document also
withdraws Ihe nolice of proposed
rulemeking relaling to the same subject
t h ~ cappeared in h e FJtral Regislet on

September 11,1487 (52 FR 34580).
o ~ i ~There
s : regulations are propored
to be efitctivt lor taxable yearn
beginning after Decemhr 31,1988. In
general, theee regulationr would be
applicable io the alloation and
apportionment ofinterest expense and
certain other e x w e ¶ for taxable y e m
beginning after Decunber 31.lse6.
c o m m ~ t and
r =quePb
public
hearing must be delivered or mailed
before D-mbw
f 3.1988
ADDRESS: Scnd wmments and requests
for a public hearing to: Commissioner of
Iniernal Revenue [Alttntionr CCLRT; .1-52-1.
Washiryton
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Proposed Rules

35525

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call).
SUPPLEME ~ T A R Y~ H F O R M A ~ Q N :

Paperwork Reduction A d
The collection of inlormation
Internal Revenue Sewict
contained in this notice of proposed
d t m a k i q h s been submitted b the
26 CFR pafir 1,501,504,505 546,507,
. Office of Mampnrn t and Budget for..
511 , s t f 5 1 1 , ~ 1 g ,m d ~2 . ... .. ... ,
rtvicw in mccdancr w i ~ hthe
I
[lm-95246)
.'
Papemork Reduction Act of 1980 (44
,
U3.C.
35Mfi)). Cornmenis on h e
Alloution and Apportionment of
colleclioa of information should be sent
Intertst Expmse and Certain Othcr
he Ofice of Momation and
Exptnses
Regulator): Affairs. Office of
Management and budge^ M'sshington
AGENCY: Inlema! Revenue Senice.
DC 20j03. Atteniion: Desk Officer lor
Trtasuv.
Internal Revenue Service. with copies to
ACTION: Natict of propostd r u l t m t k ~ g
the In'emal Revenue Service
iacluding erogs-reference 10 tcrnpora?
tegula [ions.
address previously specified.
The a i i h a t i v e elections in this
SUMMARY: This document provides
regda tion are in P 1.86I-9T(g)[l][ii].
proposed Lncome Tax Regulations
'
which requires taxpayers afiirma lively

u s e OI

4 conlrolltd foreign v r a t i o h
nnd in I . b S l - 1 ~ ~ ) [ 4 ) [ i i ) .which
permitr l o x p l y m l o cltd under eerlein
cimmrtanecs 10 terllocalt Interest
e x p n r e thrt is rlloulcd to r
noncontrollllcd rtckion gO2 cowration.
Thir inlorm~ijonwill k used in mudits
01 taxpayers. Tbt likely rtspond~ntsare
busintsrts h n d othcr Iur-prohi

in~titulions.

EItimrltd total fimual repotling
bwdtw 2 5 ~howl.
)

Estimated annual burden per
10 minutes.

blimalcd numbu

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respondcnts:

h l h a i t d rnnnual
fnqucncy d
responrca: On ocusion.
Thim tbtimatt h an approximation of
the rveragt time cxptc~cdi o be

nccctsary to make he nfirmative

el+doa,,
H is bared on l u ~

infomation 4, ia availableto he
hternd Revenue Service.Individual
respondents may require grea~eror less
time, depending
particular
circumstances.

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The temporary rtgulalions published

in the rules and regulations portion of
this issue of the F d e d Register add
new temporary regulations if 1881-8T
through I--14T.
For h e text of the

David M e m c k regvding the allocation
and spportionment ofinleeat expense,
and Carl C o o p , regarding the

allocztim m d apportionment of other
e x p m x s botltof the Office of - Associate Chid -el
Fkmationak).
within ths Oft- of Chid Camsel, , .
Internal Rcvtnuc Semct, 1111
Constitution Avmuc NW, Washinglon,
DC zour (Attention: CCUkT [I95246)) (David Mcmck 202-6.
Carl Cooper 20243&5406. not a toll-he

to elect tilhtr Ihc gross income or tht
asset method of rpportiomcnt in h e

15.m

F O R FII#I)IER 9NFORMATKIH COWACT:

DEPARTMENT OF M E TREASURY

1908

C1

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temporary regulations, see FR Dm=

VB.8228) published in the d e s
end rtgdatioru portion of this issue of
tbe F a d e d Rtgistm. Ceriain additional
regulations ue also p m p d by h i s .

'20838

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document
Special

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It has been determined that these
proposed rules are not major m!ts as
defined in Executive Order 122Sf.
Therefon, a Regulatory Impact Analysis
is not required Although h i s dwrr.ent
is a notice of proposed rulemaking th2t
solicits public comments. the noti- and
public procedure reguiremcnk of 5
U3.C. 553 do not apply because il has
been determined *at thew proposed - regulations an interpmta tive. Thuef ore.
an initial Regulatory Flexibility Analysis
i s not required by the Regulatory
Flexibility Act [5 U S . C Chapter 6).
Comments and Requests for a Public
Hexing
Before adopting these proposed
regulations. consideration will be given
to any writtea c o ~ m e n l sthal are
slibrnitted (preferably a signed original
225 seven copies) to the Commissioner
of Interne! Revenue. All comments v:i.ill
be available For public inspection acd
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355-

'Federal Regislet

/

V O ~53.

KO.178 /

Wednesday, September 14. 1988

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A public hrrring will be held
who
upon written request by any
writlen comments on the
d t s . No!h oI tha timt md
place for tht hearing will k published
in the Fedtral Rtgbltr.

D r a f b gIdormalion

~cprindpeleuthoroithtpraposed
rtgulstions relating to the allocation and
apportionment of ifdertsl txpcmt L
David Mcrrick. and the principal author
of the proposed rtguhtions rclnting to
tbc allocation and appor~ionmcnlof
olhtr expensen is Carl C o o p , boih of
the Oflice or Associate CMd Coun~el
(Intcmmcional).wiihin tbt Offict of
Chief Counsel. Internal Revenue
Semice. Other pmmd fmm offices of
the Inlernal Revenue Service and
Treasury Deparmtni participaltd in .
developing these regulstions.
Lirl of Subihcts
,

(v) Anolysis o/ opemitng asis. For
t a x ~ b lyeam
t
belpnning uftcr December
31.1if o v a t i n g wstr other than
i n k s t wltb rrrpsa ta the property
exceed 15 percent d the total inurmc

derived from tht property in the lasmblc
ytrr [!or txampk, n n b or roy&lltcbi.
then a rigdiant portion of nvenut
shaUbtemridtttdtobCderivdItom
salts, bbor. rewices. or the use cf other
pt~ptrty.Fnt Chis p ~ r p 0 6 t tht
. term
"opemcoals" shall include only
expenses that arc deductible soit1y
undtt section 162.
[bW3)(v) hmugh 14)[vl)JRnerred]
(vii) The krm "qunlilie nonrecourac
Indebledntms" rhall not include my
transaction lhrt involver excesn

collrtemliullon wilbin the rncaniiq of
parspaph @)(12) ofthi* r e d o n . .
(b)(5]through (31) lRererved)
.
(121 E*#u ~ ~ ~ ~ l e m l i tFor
ah~n.
hxablt year4 beginning aftaDccunber
3 t 1989. a loan will be deemed to
invotve e x m a collaleralir~tian il tbt .
26 CFR f AEl-1 thm& 1497-1
principal amount of the loan im lee* h n
Income taxes. Aliens. Exports. DISCS. 60 pc-t
of tht value of identified
Foreign investment In U.S.. Foreign tax
property at Ibt time of ltr -use
[or
-&I.
FSC S o m e of ineome;U,S.
conrhction COBt in the u s e of self-nvesbnents abroad
corubckd assets). If tbc principal
.,
amolurt a1 h e Joan is gtenttt than Kl . ..
:6mP&Por
ptmatdrucb&thenrheloanwill
Rkp.Lrting a&d:-*&pins
.'.! .::::. . .be deemed not to invdve -8s
- ..
aqhrnentc.
.
., .
. . eollateraliration. If the principal a m d
. '.wpo'scd~ m e n d m lo
k :he ,.--.-- ;
, of the loan is witbin the range of BP to 80
: ~ l o ~ - m s - - : ~,I ~ ,-;:. . : . f-...
p e a t. of sucb vdue, the detumine tion
,&-rydiE;nk
FR =:!
f. :
of whether tbt h involver exr
cohttrdkntioa
shall
be
bared
on
f
a
a-mm VD.~ ~ p u in b
f b ~ ~' dand circumstur#* t a h g inb aaxlmtd
d e s and regulations p d h In thia
facton 8nCh U the ratio3 of loan-tQi s of tht
~ F~
t d e d R e g i s ¶ are
~~k b y
valw
in #rmpurbk nonrecom a h propoied as h d mgnhtiodr tmda: . bowithin tbs d e v a n t hidusby
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,
sections 861 and 8 M of tba h t d
0r~phicQmhct - - .
.
Revenue Code of 3986. In rdditioa tbt '(4
tbmueh
[el
Fccervcdl
regulatiow set forth klow arr also
hrr=&Cibk
proposed aa amendments l o the Income
C o m ~ d I n l v n oReI
Tax Regulations (28 CFR Pert 1).
IFR k.
Fild
&4S am1
T b e ~rowsedameudmenk to 26 CFEl
Part 1 klahg to this same subject and
.*urn
published on September 11,1987 I52 FR
34589) a n here by \\ithhwn.
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Income Tax Regulations
PART I-+AMENDED] . ..

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Pltagraph 1. b e sutbori~for Parr 1
s amended by adding Lhc lollowing .
'

itations:

Par. 2. Section 1.86l-10is added at the
~ppropriateplace t o read as follows:
r.s6l-l0
,xptntt.

Spcc(a1 rrlauibru of h t t r t s t

(a)though @][3)(iii) [Reserved)

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Federal Regisler 1 Vol. 53. No. 17a / Wednesday, Sepiernber 14. 1988 / Rules and

RzguIations

35471

the case of loans between afLliated
taxable income of each member of an
on1y occur in ckcwmtaacea in
gate debt-t~aasetratio
affhtedgroup from sources oulside the
cnrporaiiam h i t are hartcia1 and
which the a
United Slatel eball be determined by . nonhancia! corporations ( a s
01all relate m b f l t d foreis
allocating and apportioning the inteFest.
determined under P 1.86I-llT[d]]. loans
corporations in less than 80 percent of
the debt-to-nsaet mti0 of Ihe relaled
expease of each member eccording to
hekeen afIilietud wrporaiionr t h t t
United States ,hareholdtr. f i e value of appofionment hctiona which am
generate hqh uitkholding tax interest.
&e related United Stmtcs hamh holder's
computed as if all members of much
and certain back-to-back loans.
total assem within each separate
p u p were a single corporation Stock
Sectinn IBGf-11TIfJ provide9 the4 in
limitation category shall then be
in afIiliated corporatiom is not a e n
the computrrtio~~
of the combined
reduced by tbt principd amount of such into account in determiniq
taxable income of any FSC or DISC and
sharebolder'r third party Indebtedness
apportionment fractions under the asset it@related supplier which is a member of
the Interest on which is directly
method derrcribed in 8 l.%14T(B).In
an nflilieted group under the pricing
allocated to such b i t e t i o n category. If
tbe case of aa aff-dialed group (bat file8
rulca d section 925 or 994,the combined
there la insdiicient nlated person
a consolidated retun, coasolidated
taxable ir.cdme of such FSC or DISC and
indebtedness to attain the required debt- foreign tax =edit limitation3 are
its related oupptier ahell !re reduced by
to-asset ratio, certain stock id mntmUtd computtd for the grwp in accordance
the portbn of the tatai iolereat expense
foreipa corporations will be b a t e d a B
wik h e d e g of 1 1 . 1 m ~ .
01 the affdattd group &,,at is
indebtedness for purposes of this
apportioned under the asset method lo
Section t.BB1-11T(d) definer he term
sectioa Moreover. hi certain cases
combined grosa income from export
"&?hated p u p " to have the rame
involving disproportionata
meaning as II given h a t term by section mles involving that FSC or DISC.
concrntration~01pasaive esre~din
1504. except that section 1504(bH4) is
Section 1A61-llCg) addresses the
related controlled fofiimcorpamtions. - - b a p p l i ~ b k&mure eetion lm@)(4) problem of losses m a t e d through
t h e Co&sion@r may d o o x not to
b inapplicable. necti~n93tl corporalions ~ffilialed p u p apportionment in the
app Y the rules of 5 1mI-1qel to a arc included within the affdlia ted p u p
case of an filiated group that could
taxpayer:
, .
. - . . . . - - for purposes of compukuq the . , .::
.
, but does not, fiie a mmolidated return
~f/]ljow
Gmup A p ~ r ~ ~ m e n . r ~ fapportionment fractions applicable to
. or in canes where certain u n f i l i a t ~ d
intercst expense of other membcn. of tbe corporations are h a l e d as mcmbers of
Ln terept Expensegroup. The mgulatioru Indicate that
the afGliated group under the rule1 of
Section 1861-TITdescribes the
insurance companies subject to taxatinn 6 1.861-llT(d). Generally. section
operation of section awIel[ll and (51.
,d,
BM
only be
1.15024 01the regdatiuns provide3 for
wMch reqrrirea the 8ffiliatedp u p . . .
considered to be members ot the i :--.
w l i d a t e d determina tiom of forsign, .
a~~ortio=entofhtertstexPense.. . . : . ahatedpupiltheparentmeleekr-.- w
tax~i.editlimitatbnsinthecaseofaa
Section 1.88l-llT@] indicates that
under seetion 15w[c)(2)(A) of the Code.
aFdiated p u p filing a consolidated
section BB4[eJ(lJ and (51 ~PPB- to the.h y memberJ of
retrun. In the case of an affiliated group.
gmup
bt
computation af foreigu sourus taxable - : corntitUte kand
corporationr
+
that does not fde a consolidated return - iocomc fw pmpaaeSof -on
'1 defined in M,tiom) a h a &,
or a group that includes an unaffiliated
(relatingto varioua Limitatiom on the -.. .
h a t e d fu a f f f i a ~ e d e r
m d i b he-pob~oa Of. : treated a Separate afGLieted P U P - la corporation
9 1.681-11T(d], the amount of foreign tax .
additioa a brink holding company that
the -w -ble
-me of tbt .
- *.
r e h-ha~
and a foreim
. .- . h regulated rrader th- Banlr Holding,cre&ts d o w e d in any separate
limita tian category cannot exceed h e
cavratibn m)(&
sedWU . Company Act of 18% ia subject to
. : ~ p e d4
for pnrpoa- of segrtgating- ~f+djtsmmputed under paragraph-W .. :
- k& or haticf n m - 1
rdes m-tion
(der
.! md a p w o Ih-htereat
- . The adjusbnenb that may be required - ..' nndtr paragraph @ eli.minate Iusses in a
he
: and ermi.of its w e t s between the
~01.. financial and nonfinandal groups. limitation mtegory mated wihihia a
ofa d o n 907 form s e g at
given p u p member through the
Under aulboritygmnted by accrfon
determining reductions in the amount
- m(f),
f I.%Bf-llT[d) h d e r pmvfdes
apportionment of interest expense and
d o w a d as a foreign lax -dft mder
reduce income of other group m e m b s s
that
c
e
m a m a t e d corporations
section sol.Section We)(l] and (5)
be c o n s i d e d to Wnstitute
that have iocome in the same limitation
does not apply to tbe computation oi
affiliated mmratiom. These
ategory.
subpart F income of antrolled fomrparations iachde any indudible
corporatiom (&
sections 951 b u g h
Chomcterimti'on Rules and
. corporation and certain foreign
9641,the compuhtion of combined
Adjustmen& for Cerloin Assets
mtporatiom Mtb effecfively connec~ed
taxable income of a possessions
. income if8Q peFetnt af either the vote or
Section -1-iZT
provides rules that .. corporation and it3 a t e r (&
apply in apportioning w
e
*
under an .'
v d u e of nU orrtstnndhq shares of a&rection w),or the ,-pub
tion of .
asset mpporiionment method. including
effectively connected taxable
of, mrporatiom me owned d i d y or
expenses that is required by forem corpOtations. With ngard to
i n h t l y by members of the same
. . intcmt
affiliated p u p .
section 854[e)(2] to be apportioned
section 938 corporations. the
appartionment of the afBliated pup's
Section LMX-lfT(e] indicates that. in under an asset metbod
Section ~.&r-lZTfb]provides thal
interest expense Ior purposes of
the case of loans between members of
determining t h e amount of allowable .
u &ated
group, the indebtedness of - inventory must be characterized by
ucdt under section 936 is goby
reference to the source of sales income tbe member borrower i l not considerid
section 938.Any des*that are adopted
horn h e inventory for the year.
as an asset of the member lender. h
under section 936fi) could result in
generat a member lender lball hdude
%tian L&1-1ZT(cJ concerns the .
adjusbnenk to the docation and
related person interest income ia the
treatment of stock. In general. taxpayers
apportionment d interest experue
same class of gross income as the class wing the tax book value musl adjust h e
pursuant to these rules.
of grog3 income from which the member
adjusted basis of stock in a 10percent
Section 1.BB1-11T(d indicates thal
borrower deducts the relaled penon
otr-ncd corporation by the mount ol
except M ok&se
pmvided the
certain mmings and profits or ar.y
interest payment. Special rules apply in

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354n Federal Register / Vcl. 53, No. 17a

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14, 1988

/

Rules and Regulations
-

be computed by deducting from the
Stction r.sel-tn(g) provides rules
mnoerning the treahent of eta& in a
gross income derived from the sale of
foreign asles corporation and the
personal property the expenses. losses.
charecterizationaJseta that generate
or other deductions properly allocaled
foreip bade ~ C D ~ Stock
C . of e foreign
and apportioned thereto in accordance
4 e . s corparation r'FSCI i9 generally
with therules set forth fn4 f . 8 6 1 4 . The
not taken into account in a ~ ~ h o n m e n temowt of taxable income is then split
of interest for foreign tax credit
be~weendomestic and foreign sources
Purposes- B m u ~ he e assets of a FSC
based on fractions described in
'
a m laken into account fully I
n
paragraph (ii) of that example. Changes
n ! ! ~ y ~for
~ PurPolel
o ~ g of computing
to this section indicait that, while :he
FcL benefits, the
believes there
fractions are
the income
6hould be no secondary apponioment
derived from such#ales and assets
to FSC stack lor foreign tax credit
generating ouch income are to bc split

deficit thcreia This adjustment b to be
annually and im noncumdatfve.
Subject to consistency rules, foreign
corporations ere permitted to use
financial earnings in lieu of earnings and
pmfits for certain pre-efiective dele

years.
Section 1.861-12T(c) a l ~ provides
o
rules for characterizing dock of
contmlledforeip corporations. Stock in
a controlled foreign corparation is
&aracterized In the handa of the United
Stater shareholder either by reference to
the ease& or gross income of the

prior to h e aUocaticin and
apportionment of expenses to gross
corporation user in the allocation and
income
in order to avoid compljcat,Dn
in
apportionment of i t s own expenses.
the a~~ortionment
of interest and '&Ier
Section I.BGI-ITT(C) also provides
expenses definitely related to all
concerning
keakent of s t d
income, No other change to the
a noneontrolled reetion 902
~ t b ~ tbc
y dividenda
b
~ r o d ~ i o of
n @ t x ~ m p l ei. 1nlmdedThus, for purpose^
of ex om pi^ 2. ,
from
each
such
corporalion
constitute
a
.
to the
!''t$~~~$~a ~
~
~
~ experuer
~ that are
, nlloable
"
~
~
~ q a m ' eb t a ' o n categovp the
l e c b d ~
~ ~ o n43333
s has generation or meetion
income
,
regdetione provide 8 special rule
cannot k directly aUocaled to either tht
lntcrrst. , not yet been enacted 'Ibe Service
-tting
he
antidpatem
tbai upan enaciment of these f o e b or domestic podon thereor but
expense that gives rise to 4 separate
remain equally allocable to b o h
*esw
1.86X-13T wiil be
limitation loss in e nonmnblled jectIon -ition
issued
i
n
r
form
h a t is substnntially
902 corporation limita tion calesory to
~ f f i l i o k dGmup Alhcotion and
any separate limitation dategory that is
to mp'
lm'-'l lSz
Appofiionment offipenses Uher Than
- in excess
provided that d.- - -1.
-P
mtid~ated
changes bkreSt.,-- -, . ,
. , ,
.
. -..
in those ati ions comer= .:
,.
;:
:.,.
. ......
, reslIoeation does not muse a loss h"
o*e.
ms-dosation (1)Ibe addition of a rule lo
Section 1.861-t4T describes'the
hat.
in
compuhg
the
various
transition
operation
of section 8&(s)(6), which
irrevocable and m o t h b erevoked by
,
- ,
! .: . . . . - .
-. . amourib under PmP.RW I 5 l ~ - l l ~: requires
b ~
h e m i a t e d group allocation
. an amended
4(3;any hdebtednea h e interest on and appottionment of expenses. other
'
mnPm.
which
ia directly d w t e d to idmtiSed
btew3c whi& am
dirrclly ,
-,
treatment of notea and other
prow* under 5 1m-8[e)(2)livl shall
allocable and apportiana b k to any
reeivables. N o t e and other mceivables
takm into
-. ..
,
sp&c income producing aclivity or
of s a t e d corporations art wt taken i21 n,inu,rpoation of a rule
property. % d o n 1.881-14T(a) outlinw . .
into a a w t er pmvided in J -1;
the averash of e n d - o f - m d . :
mtenlt ',f 8 ~ M l - l fand
l p-'ju
..
mb
mi
a
debt l e ~ d .in-.-R+
$lABl-l1(~](7)
hat5 m1-14~ IPPbM Fnanl
.
'rrlakdmnaoUed fOma mrporstion
fm tb.
of W~PU- hd!
,
-bk
-8
m
b
. - am characterired by refemice to the
. . . .
. ofa
sowct of the intereat income received
~ h modificetion
,
rule
31,1986.Sction 1.864-14T(b) describes
Nates of
-mlled Iom@
hop. Reg. 5 1&I-ll(g] to provide for - the operaw sections to which sechon
864[e](6) applies. These are the
cowration are c h a r a d ~ a
&, pmmtim of m i t i o n
to the treatment of the Interest inmme
between a -feror
a transferee in' mmptatioa of foreign source laxab!e
received. as detemhed under the lookhe
-fer,
=d
,
income for purposes of section W-4
(relating to various limilatbns on tbe
through rules of tectioa SOC(d#3)[Cl.
hp.
R ~ 5 l.scr.
(4) nc
Section 1.861-1 ZT[e) indicates hat
11(g)(3) to
when a
fomign tuc MI)
the
. computation ef
the combined taxable income of the
certain ho!ders of podolio securities
m f e r e c acquires st&
of a
related supplier and a fareign sales
that generate Ioreiga s o w dividends
corporation and the emferee
or any
. or hterest may h k e hi0 aCC&lmttbc
mmber of its affiliated p u p assum
- ~0rpbtatiOD
ma ( ~ d e 3r h b a d 921::;:h g h W }or a domestic internatid SovrCe of gain On tbe disposition of 3uch
m ~q&&
an
indebtednesq
.
- , sales torpatation PEL')[under r e securities-These holders inclnde holders - an acquired corporation, su& in whose hands tbe semities co~lrtitute indebte&eu w i -~ ~ u t to be
.
through W].and the appheation of
inventory and bolden 80 p e m t of
section 9(n for purposes of determinicg
transition qualified until such t h e as
whose gross incone horn such Becarities the transferee disposes of the acquired
-ductions in the amount allowed as. a
consists of gains.
corporation but shall themafie? cease to loreiga lax credit cnder section 931.
Section l.BEl-lrT[fJprovides that, in
Section 864[e){6) does not apply to the
be ttansition-quaMed.
the case of any asset in connection with
The regulations also amend f 1.86s
computation of subpart F income of
which interest expense is =pitalired
controlled foreign corporations [under
3ro). &le 2 Thai e x m p k formerly
deferred. or disanowed under any
pmvided that in casta in which a
sections 951 L h u g h 984) or the
provision. the adjusted basis or fair
taxpayer appropriately uses it 'forthe
coinputation cZ egectively c o ~ e c i e d
market value (depending on the
computation of income h r n certain
taxabia income of foreign corporations
taxpayer's choice of apportionment
sales of personal property ddrived parcly The application of section 864(=)[5)in
methods) of such an asset aha0 be
from wi&n and partly from without the connection wit!! section 936
reduced.
United Slates, taxabie income shall rust
corporations i s tcaervcd.
conmlled foreign cnrporacion,
depending on which method J U

purposes.
1hm-1nu1pmvide3
wncemhg the treatment of stock in a
domestic international sales corporation
end he
ofaeretr that
8e"erate ~ a l i f i e dexport receipts.
Seclion 1.8B1-13T {relating t o .
h n s ition rules] ha. b e ~ nnurvec/ due

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Vol. 53, No. 178

- Section 1.861-14T(c~ stater that he
mabic bcpmt.of each member bf an
miated gmu~
shall be detennintd by
ahocating and apportioning the
trpenscs desujbed In I 1.&lyl4.rIe] of
each member aceording to
a,>portionmentfractions which are
cmputed am if all memben of such
m u g w e n a single corparatlon. For this
purpose, interarfiliaie transaction# are
h f n a t e d . In cases in which an asset
mehod ofapportionmen! It used. #to&
ia affiated catparatlons ir not taken

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into account and Ioans between

mtmbem of tbt affdiated group are
healed in accardance with 4 1.861IIT(e).In the case of an erdiated p u p
ha1 filer a comolida~edrehim
consolidated foreign tax m d i t - * .
limitations are computed for the groap in
amdance with the ruler af f 1.15024.
A special rule is provided In the case of
expenses inclrrred by one member ol an
a@"ated p u p that relate to the gross
iacornc of some. bat not all. ather .
membem of the affiliated grvup. Such
q m e s are to be apportiwed only on
the bash of apputionmmt facton
derived horn the member h a u - r b g such
expenses and hrn those other membem
- to wbch the expense relab. In other
-YO&
only d memben (andnot aH,
mcmbem) ate h a t e d as e single - - . tarpayer for p u r p o i ~of~s p p o F t i m n t
of g& q e m c lmadditiow parewph.
( c ) - k # d c 8 t t b a t i f ~ 4 8 2 ~ .- .
npplie& adjustmentof income-md - .
expnseanaqmembenofhegmup pl~snantto~482htokmadr
prim to the allorretian and
- app+omd
of-expenseslpnderthe.,....
&ofpqpph[cL
- - -:..
Section 1.8SI-14Tfd) defini the term .
-affiliated groupbtiohave the r a m m e d g e~ i s given that term by section
.I% except that section 1504(b)(4] is
inapplicable. Because section 15M(b)[4)
is inapplicable, section 938 corporatiom
are included withln the af6liated gmnp
for purposes of computing tbe
apportiorunent hctions applicable to
expeas- of other members of the p u p
In edditiap 6nancial wrpmatiory
whidxmelnatedasaseparate - '. : ;
affil'ated group for p
w of the~
allocation and apporti-t
of interest
expease under section 86Qte)(S) and
P l.es3-11Vdl. are induded withkt the
afliiated p u p for purposes of the
allocation and apportionmeat of
expensa ahtr than hterest Life

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insuraace wmpanics taxable ~ d o r
section BM are included in an affiliaw

group consisring in part of other
companies ody if an election is made under stction 1504[cHZ)(A).
Section 1.861-14T[e)describes tbe
expenses that are subject to allocation

September 14, 1988
--

and apportionment under the d e n of
paragraph [c). la gentrnL Lbe r x p m ~ s
to whch paragraph (c) relate0 do not
hclude interest experme or any otber
axpcnpt wkich b dirtclly alIocable to .
sptciflc incoma producing activitin or
property of the member of the effdated
graup that incurred the expenw. An
expense is considered to be directiy
aUom ble to specific income producing
acuvitier or property of ihe member
l n m d n g the expense if, t h n g into
eccount h e income d a I l members of
the affiliated group, \he expense is
mnsidered detmitely rerated w f t b tbt
meaning of P lfil-8(b](2] rolely to
,
gross h o m e derived by the member
inthe expense. nu¶.
the rules of
paragraph (c) apply to the expensea 01
supportive functions much er general
and aduuniatrative expenses. b certaig
research and experimental expenses
[not subject to eUacaiion to U.S.rams
under he ~tatutorymoratorium). 10
certahrtewardship expenses,and to
certain generalized l eg41 and accaunting
expeasea. Pmposed legislation c~ureally

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Rules and Regulations 3 H 7 3

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conwlidated dtterminakions of foreign
tax cndit limitations in tbt caw of an
alfiliated group Eiling a consohdated
r e t u n L the case of an affdiated group
that does not a e a consolidated ntum
tbt amoue of foreign tax medits -.
allowed hany meparate limibtlan -.:
category cannot exceed the credits
computtd as required by p e r a p p b (8).

In general, paragraph (g) requires
adjushients to eliminate losees In a
limitauon category crea~edthrough Ihe
apportionment of expense and
comspotdng1y reduces income or other
p u p membem that have income hi the
same limitation category.
Section 1.661-f4T(h] provide3 special
ruler concerning the aUocation of
r e s v v e experues of n life insurance .
company.
, .
Section I-881-14Tu)provides
.
exempies iIlustraiing the a p p b t i o n of
.
!he rule3 of Ihin sectioa . .,
S-1

Adyea

It has h e n determined that thew under considemtion by Canpas may
rule3 are not major d e s as defined in affect the heahnent of research and
Executive Order 12291.Therefore. a
experimental expenses under this
Regulatory Impact halysis is not
p r o p o d regulation
pruposed ...
q u i r e 4 A general notice of proposed
regulation d be changed if necessary, rulemalring in not requhd by 5 U.S.C.
ta ~onfnrmto !hat leghiation upon ib
5 553 for temporary wgdaLions.
euachent. .Therefon, these d e s do not constit~te
Section ts61-14T[T] provides. that the. regulatiom subject to the Regulatory. .
eombiaed taxable income of a FSC w
Flexibility Act (5 U.S.CCbapter 91 and
DISc and ita related supplier shall be
a Regulatory flexibihty Analph is not
reduced by the portion of the expm
qllifed .
of the d 3 h t e d p u p desctibed ia
pmaeph (e) &t kincwred in
l h f l i r q - M o r m a t..i o
n
.
awnectim with aport sales involving .
The
prindpa~
a
n
t
h
of
~
t hk
~g&&
thatFSCorDEUnder~~rula-r.*--:
relating to the allocation and . .-expensea of other p u p membem may
apporfionymt of i n t e s t txpeme is'
be attributed lo the combined taxable David Menick. and the pwapal author
-me
of a FSC or DISC and its related
supplier without affecbng the amount of of the regulatioas relating to the
docatiaa and appwtionmeut of d a i n
-rues
o k f st deductible (ather
expcnses other than interest is Carl
than any cornmi:. ton payabte by the
Cooper. both of the DfZice 01the
related supplier to the FSC c r DISC) by
A s s k a t e Chief Counsel [Internatiodh
the F S C DISC. rehted supplier, arid
other members of the affiliated group.
within the Ofice of Chief Gunsel,
Intemd Reventie Service. t lowever,
The FSC or DISC is mtitled to its
atatutnry w
o
n of tho combined.
other personnel horn offices of the.
taxable iommt, after reductinn by any . Internal Revenue Senice and the - .
a m r l i d ~ppvp
e x p a s s , far p a p o s t s
Treasury Deparbnmt participated ia
of detenoiubg the transfer price of
developing the regulations.
expmt pmperty sold by the related
suppiier to a buyaell FSC or DISC or the List of Subjecb
.
commission paid by the related suppliex rn m1.m-1Lo 1-7-1
b8mmmissionFSCorDlSC
Lncome laxer. Aliens. Exports, DISC,
Section 1861-14T[gL by incorporating
by moss-reference tht rules ofpmpcrsed Foreign investment in U.S.. Foreign tax
4 l . B S I - ~addresses
~ ~ ~ the prnblem of a c d L FSC Source af iricorne, United
Stales invesments abroad
losses mated tbmugh zffiliated group
apportionment in the case of an
26 CfR Part 6Lt2
afihated group that cuuld. hut doc3 n o t
Reporting and recordkeeping
file a consolidated return Generally,
4 1 . 1 5 0 3 of tbe regulations provides far requirements.
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