Treasury Issues Final Regulations Under Section 901(m)


On March 23, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) published in the Federal Register final regulations under Section 901(m) with respect to transactions that generally are treated as asset acquisitions for U.S. income tax purposes and are either treated as stock acquisitions or are disregarded for foreign income tax purposes. The regulations provide guidance on applying Section 901(m) and affect certain taxpayers claiming foreign tax credits.



On December 7, 2016, both a notice of proposed rulemaking by cross-reference in part to temporary regulations (REG-129128-14) under Sections 901(m) and 704 of the Code and temporary regulations (TD 9800) under Section 901(m) were published in the Federal Register at 81 FR 88562 and 81 FR 88103. For a summary discussion of the proposed and temporary regulations see our December 2016 tax alert.
The final regulations adopt the proposed regulations under Section 901(m) as final with certain revisions.
One modification included in the final regulations is that the definition of aggregate basis difference is modified to take into account allocated basis difference adjustments determined based on gain or loss recognized with respect to a relevant foreign asset (RFA) as a result of a covered asset acquisition (CAA).[1]
Also, the consistency requirement in proposed §1.901(m)-4(c) and (g)(3) has been modified to apply only for tax years that remain open, and an additional requirement is added that any deficiencies be taken into account that would have resulted from the consistent application of the final regulations for a closed tax year.[2]
The final regulations expand the de minimis exception in proposed §1.901(m)-7 and add an additional exclusion, such that a basis difference with respect to an individual RFA is not taken into account for purposes of Section 901(m) if the basis difference is less than $20,000.[3] Like the de minimis exceptions contained in the 2016 proposed regulations, this de minimis exception applies independently of the other de minimis exceptions. Moreover, the reduced thresholds for related-party transactions are eliminated.[4]
The final regulations also provide that if Section 901(m) and Section 909 apply to the same transaction, the Section 901(m) calculations are undertaken before applying Section 909. Foreign taxes that are disqualified for foreign tax credit purposes under Section 901(m) but remain eligible to be deducted may be subject to deferral under Section 909 as well.[5]
In addition, the final regulations reflect modifications to the rules contained in the 2016 proposed regulations necessary to reflect statutory changes by the Tax Cuts and Jobs Act (TCJA).
The final regulations also adopt the 2016 proposed regulations under Section 704 without revision.
For dates of applicability, see §§1.704-1(b)(1)(ii)(b)(4), 1.901(m)-1(b), 1.901(m)-2(f), 1.901(m)-3(d), 1.901(m)-4(g), 1.901(m)-5(i), 1.901(m)-6(d), 1.901(m)-7(g), and 1.901(m)-8(e).

[1] See §1.901(m)-1(a)(1), (6), (48), and (49).
[2] See §1.901(m)-4(g)(3).
[3] See §1.901(m)-7(b)(4).
[4] See §1.901(m)-7(c).
[5] See §1.901(m)-8(d).