The IRS is reconsidering its position on granting foreign tax credits for IRC section 304 transfers of stock in a foreign subsidiary between US and foreign subsidiaries of the same foreign parent corporation. Section 304 was intended to restrict the use of related-party stock transfers to convert ordinary income into capital gain, but it has turned into a planning vehicle for corporations wishing to receive deemed dividend treatment. Under section 301, stock transfers are characterized as a distribution to the selling corporation. The IRS had allowed the selling corporation to claim a deemed tax credit for taxes paid by the foreign acquiring corporation.
This document contains final regulations relating to the characterization of gain recognized with respect to stock in certain foreign corporations upon distributions. The regulations finalize proposed regulations and remove temporary regulations that characterize gain recognized with respect to stock in foreign corporations upon distributions as a deemed dividend in certain situations. The regulations affect certain persons that recognize gain with respect to stock in connection with the receipt of a distribution of property from a foreign corporation.
The final IRS consolidated return regulations will require some affiliated groups to calculate basis in subsidiary stock and earnings and profits separately, though certain elections can minimize the increased burden of applying multiple allocation methods. The regulations will result in changes in the treatment of tax-sharing agreements, the deemed dividend election, net operating losses and recordkeeping methods. Consolidated taxpayers should reconsider methods being used during he next tax preparation season because the deemed dividend election will no longer be available soon.
... its shares); or (iii) the payment of a dividend-in-kind. A butterfly transaction is not permitted ... on a reduction of its capital is deemed to be a dividend except in limited circumstances. ...
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