SERVICE RELEASES GUIDANCE ON TAXABLE YEARS FOR CFCs AND DIVIDEND DESIGNATION FOR FPHCs.

Rev. Proc. 90-26

SECTION 1. PURPOSE

This revenue procedure provides guidance with respect to the required taxable year of certain foreign corporations for U.S. tax purposes under section 898(a) of the Internal Revenue Code and the election set forth in section 898(c)(1)(B) of the Code. It also provides guidance for foreign personal holding companies with respect to the designation of certain dividends paid as being taken into account under section 563(c).

SECTION 2. BACKGROUND

01 Section 7401(a) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, 103 Stat. 2106 (December 19, 1989) (The "Act"), added section 898 to the Code. Section 898 generally requires the taxable year of "specified foreign corporations" that are controlled foreign corporations or foreign personal holding companies to conform (for U.S. tax purposes) to the taxable year of their majority United States shareholder, as defined in section 898(c)(1)(C), for taxable years of such foreign corporations which begin after July 10, 1989. Sections 898(c)(1)(B) permits a specified foreign corporation which is a controlled foreign corporation to elect a taxable year beginning one month earlier than the taxable year of its majority U.S. shareholder. Under section 898(c)(2), foreign personal holding companies that are not also controlled foreign corporations may not make the election provided by section 898(c)(1)(B). Accordingly, such foreign personal holding companies must follow section 3.01 of this revenue procedure and may not follow section 3.02 of this revenue procedure.

02 Section 7401(b)(1) of the Act amended section 563 of the Code by adding a new subsection (c) which generally requires that in determining the dividends paid deduction for purposes of the foreign personal holding company provisions of the Code, a dividend paid after the close of any taxable year, and on or before the 15th day of the 3rd month following the close of such taxable year, will be considered as paid during such taxable year to the extent the foreign personal holding company designates the dividend as being taken into account under section 563(c). The amount allowed as a deduction by reason of the application of section 563(c) cannot exceed the undistributed foreign personal holding company income of the corporation for the taxable year computed without regard to section 563(c).

SECTION 3. CHANGES IN THE TAXABLE YEAR OF SPECIFIED FOREIGN CORPORATIONS AND THE PROCEDURE FOR ELECTION UNDER SECTION 898(c)(1)(B) OF THE CODE

01 Specified foreign corporations described in section 898(b) of the Code are required to conform their taxable year to that of their majority U.S. shareholder. If no election under section 898(c)(1)(B) is being made for a specified foreign corporation, but the corporation is changing its first taxable year beginning after July 10, 1989, to conform to the taxable year of its majority U.S. shareholder, then the words "Change in Taxable Year -- No Section 898(c)(1)(B) Election" must appear on Form 5471 and, if applicable, Form 1120F, with respect to the specified foreign corporation.

02 The election under section 898(c)(1)(B) of the Code may be made for a specified foreign corporation which is a controlled foreign corporation for its first taxable year beginning after July 10, 1989, by indicating on Form 5471 and, if applicable, Form 1120F, that the taxable year shown on the form with respect to the controlled foreign corporation was determined in accordance with section 898(c)(1)(B). The following words must be used:

(1) if the election involves a change in the taxable year of the controlled foreign corporation, the words "Section 898(c)(1)(B) Election -- Change in Taxable Year" must appear on the form; and

(2) if the election does not involve a change in the taxable year of the controlled foreign corporation, the words "Section 898(c)(1)(B) Election" must appear on the form.

03 Any of the words required under section 3.01 or 3.02 of this revenue procedure to appear on Form 5471 and, if applicable, Form 1120F, must be placed in the upper left hand corner of the first paid of the form. If a specified foreign corporation is not required to change its taxable year under section 3.01 of this revenue procedure or if a specified foreign corporation which is a controlled foreign corporation does not make the election described in section 3.02 of this revenue procedure, then no notation concerning this fact need appear on Form 5471 and, if applicable, Form 1120F.

04 Section 7401(d)(2)(B) of the Act provides and if any foreign corporation is required by section 898 of the Code to change its taxable year for its first taxable year beginning after July 10, 1989, then the change will be treated as having been made with the consent of the Internal Revenue Service. In this connection, the changes in taxable year described in sections 3.01 and 3.02(1) of this revenue procedure constitute changes required under section 898 for which the consent of the Internal Revenue Service is granted under section 7401(d)(2)(B) of the Act. The consent of the Internal Revenue Service is not required for the election described in section 3.02(2) or in the circumstances described in the second sentence of section 3.03 of this revenue procedure.

05 Guidance concerning the need to obtain the consent of the Internal Revenue Service for changes in taxable years under section 898 of the Code, including changes in connection with an election under section 898(c)(1)(B), for years other than the first taxable year of the specified foreign corporation beginning after July 10, 1989, will be provided in a subsequent administrative pronouncement or regulations, as will guidance concerning other issues raised by section 898.

SECTION 4. PROCEDURE FOR DESIGNATION OF A DIVIDEND AS BEING TAKEN INTO ACCOUNT UNDER SECTION 563(c) OF THE CODE

A foreign personal holding company may designate a dividend paid after the close of any taxable year beginning after July, 10, 1989, and on or before the 15th day of the 3rd month following the close of such taxable year, as being taken into account under section 563(c) of the Code by making such designation on an attachment to Schedule N of Form 5471. The designation must set forth the date and amount of the distribution, state that the dividend is designated under section 563(c), and be signed and dated by a duly authorized corporate officer of the foreign personal holding company. The dividend so designated will be included in computing the dividends paid deduction of the foreign personal holding company on Form 5471, Schedule N, Part 11, Section B. The "Date paid" column on Schedule N should refer to the attachment on which the designation is made.

SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 63-7, 1963-1 C.B. 485; Rev. Proc. 75-54, 1975-2 C.B. 594; and Rev. Proc. 76-35, 1976-2 C.B. 658, are modified.

SECTION 6. EFFECTIVE DATES

Section 3 of this revenue procedure is effective for the first taxable year of a specified foreign corporation described in section 898(b) of the Code which begins after July 10, 1989. Section 4 of this revenue procedure is effective for the taxable years of a foreign personal holding company which begin after July 10, 1989.

DRAFTING INFORMATION

The principal author of this revenue procedure is David R. Cooper of the Office of the Associate Chief Counsel (International). For further information about this revenue procedure, contact Mr. Cooper at (202) 566-6645 (not a toll-free call).