SERVICE ISSUES RULES ON IMPLICATION OF FOREIGN TAX REDETERMINATIONS.

The Service noted that, under section 902, a shareholder in a foreign corporation determines the amount of foreign taxes deemed paid by that shareholder on the basis of multiyear pools of earnings and profits and taxes. Under the temporary and proposed regulations, the Service said, a foreign tax redetermination that affects foreign taxes paid by a U.S. taxpayer "will be accounted for, with certain exceptions, through an adjustment to the affected pools of earnings and profits and foreign taxes of the foreign corporation."

The regulations, generally applicable to foreign tax redeterminations occurring in taxable years beginning after December 31, 1986, provide foreign currency translation rules, the method by which refunds of foreign tax are allocated to separate categories of income, and define "foreign tax redetermination"; a de minimis rule is provided for redeterminations that arise solely from a foreign currency fluctuation.

The regulations provide four exceptions to the general rule that foreign tax redeterminations are to be reflected in the foreign corporation's pools of earnings and profits and foreign taxes. Under the first exception, the Service said, if a foreign tax redetermination occurs within 90 days of the due date of the taxpayer's U.S. return and before the U.S. taxpayer actually files that return, then the taxpayer may elect to either adjust the foreign tax credit to be claimed on the return or adjust the pools to reflect the foreign tax redetermination.

The Service explained that a taxpayer must redetermine its U.S. tax liability if the foreign tax liability is in a "hyperinflationary currency." Furthermore, the Service said, a taxpayer's U.S. liability "must be redetermined if the foreign tax redetermination occurs after a distribution to a U.S. taxpayer or inclusion in income with respect to a U.S. shareholder and the redetermination would cause the foreign corporation's pool of foreign taxes to be reduced below zero." Finally, the Service noted, the fourth exception to the pooling rule allows the Service, "in its discretion, [to] require a taxpayer to redetermine its U.S. liability if the amount of the foreign tax liability accrued in foreign currency exceeds the amount of foreign tax paid in foreign currency by at least two percent."

The Service indicated that special rules apply "when a lower tier foreign corporation receives a refund of foreign tax after making a distribution to an upper tier foreign corporation and the refund would have the effect of reducing below zero the lower tier corporation's pool of foreign taxes in any separate category." Generally, the rule is intended to "prevent deficits in foreign tax pools," according to the Service.

The regulations also provide rules concerning the notice requirement that U.S. taxpayers must satisfy when a redetermination of taxpayer's U.S. tax liability is made. The regulations, as noted above, are generally applicable to foreign tax redeterminations that occur in taxable years beginning after December 31, 1986. The Service noted, however, that regulations also provide rules governing the application of section 905(c) to foreign tax redeterminations occurring in taxable years beginning prior to January 1, 1987.

Finally, the Service noted in the preamble, regulation section 301.6689-1T provides rules governing the imposition of the civil penalty, under section 6689, for failure to file notice of a foreign tax redetermination within the appropriate time period. A "reasonable cause" exception to this rule is provided.

Written comments and requests for a public hearing must be delivered or mailed by August 22, 1988. Comments and requests should be sent to: Commissioner of Internal Revenue, Attn: CC:LR:T (INTL- 061-86), Washington, D.C. 20224. For further information, contact Eli J. Dicker of the Office of Associate Chief Counsel (International) at (202) 566-3490.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: This document provides proposed Income Tax ReguLations and Regulations on Procedure and Administration relating to a taxpayer's obligation under section 905(c) of the Internal Revenue Code of 1986 to file notification of a foreign tax redetermination, to make adjustments to a taxpayer's pools of foreign taxes and earnings and profits, and the imposition of the civil penalty for failure to file such notice or report such adjustments. In the Rules and Regulations portion of this issue of the Federal Register, the Internal Revenue Service is issuing temporary regulations relating to these matters. The text of those temporary regulations also serves as the comment document for this proposed rulemaking.

DATES: Written comments and requests for a public hearing must be delivered or mailed before August 22, 1988. These rules would generally apply to taxable years beginning after December 31, 1986.

ADDRESS: Send comments and requests for a public hearing to Commissioner of Internal Revenue, Attention: CC:LR:T (INTL-061-86), Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Eli J. Dicker, of the Office of Associate Chef Counsel (International), within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T (INTL-061-86)) (202-566- 3490, not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)). Comments on the collection of information should be sent to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, D.C. 20503, Attention: Desk Officer for Internal Revenue Service, with copies to the Internal Revenue Service, Washington, D.C. 20224, Attention: IRS Reports Clearance Officer TR:FP.

The collection of information in this regulation is in sections 1.905-3T, 1.905-4T, and 1.905-5T. This information is required by the Internal Revenue Service to enable it to effectively administer the provisions of section 905(c). The information is needed by the Service to verify pooling adjustments to account for the effect of foreign tax redeterminations and to recompute a United States taxpayer's United States tax liability when a foreign tax redetermination requires such a recomputation. The likely respondents are individuals, households, businesses, and other for-profit institutions. Estimated total annual reporting burden: 10,000 hours. Estimated average annual burden per respondent: one hour. Estimated number of respondents: 10,000. Estimated annual frequency of responses: as necessary to comply with the provisions of section 905(c).

BACKGROUND

The temporary regulations published in the Rules and Regulations portion of this issue of the Federal Register add new sections 1.905- 3T, 1.905-4T, and 1.905-5T to 26 CFR Part 1. They also add section 301.6689-1T to 26 CFR Part 301. The final regulations that are proposed to be based on the temporary regulations would amend 26 CFR Parts 1, 301, and 602. For the text of the temporary regulations, see [INSERT FEDERAL REGISTER REFERENCE] [T.D. 8210] published in the Rules and Regulations portion of this issue of the Federal Register.

SPECIAL ANALYSES

These proposed rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. Although this document is a notice of proposed rulemaking that solicits public comments, the notice and public procedure requirements of 5 U.S.C. section 553 do not apply because the regulations proposed herein are interpretative. Therefore, an initial Regulatory Flexibility Analysis is not required by the Regulatory Flexibility Act (5 U.S.C. Chapter 6).

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before adopting these proposed regulations, consideration will be given to any written comments that are submitted (preferably eight copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying. A public hearing will be held upon written request to the Commissioner by any person who has submitted written comments. If a public hearing is held, notice of the time and place will be published in the Federal Register.

DRAFTING INFORMATION

The principal author of these regulations is Eli J. Dicker, of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. Other personnel from offices of the Internal Revenue Service and Treasury Department participated in developing the regulations both on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR SECTIONS 1.861-1 THROUGH 1997-1

Income taxes, United States investments abroad, Foreign currency, Foreign tax credit.

LIST OF SUBJECTS IN 26 CFR SECTIONS 301.6654-1 THROUGH 301.6696-1

Income taxes, Administration and procedure, Penalties.

LIST OF SUBJECTS IN 26 CFR PART 602

Reporting and recordkeeping requirements.

PROPOSAL OF REGULATIONS

The temporary regulations, [INSERT FEDERAL REGISTER REFERENCE] [T.D. 8210], published in the Rules and Regulations portion of this issue of the Federal Register, are hereby also proposed as final regulations under sections 905(c) and 6689.

Lawrence B. Gibbs

ACTION: Temporary regulations.

SUMMARY: This document contains temporary Income Tax Regulations and Regulations on Procedure and Administration relating to a taxpayer's obligation under section 905(c) of the Internal Revenue Code of 1986 to file notice of a foreign tax redetermination or to make an adjustment to the taxpayer's pools of foreign taxes and earnings and profits, as the case may be, and the civil penalty for failure to file that notice or to make such adjustment. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register.

DATES: The amendments made by sections 1.905-3T and 1.905-4T are effective with respect to foreign tax redeterminations that occur July 25, 1988 except that, in the case of a tax deemed paid under section 902 or section 960, the amendments made by section 1.905-3T are effective with respect to earnings and profits of a foreign corporation accumulated in taxable years beginning after December 31, 1986. Sections 1.905-5T and 301.6689-1T are effective with respect to foreign tax redeterminations that occur after December 31, 1979.

FOR FURTHER INFORMATION CONTACT: Eli J. Dicker of the Office of the Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T (INTL-061-86)) (202- 566-3490, not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

This regulation is being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in this regulation has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under control number 1545-1056. The estimated average burden associated with the collection of information in this regulation is one hour per respondent.

For further information concerning this collection of information, and where to submit comments on this collection of information and the accuracy of the estimated burden, please refer to the preamble to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Federal Register.

BACKGROUND

This document contains temporary regulations under sections 905(c) and 6689 of the Internal Revenue Code of 1986. These temporary regulations conform the regulations to the changes made to the Internal Revenue Code by section 2(c)(2) of the Act of December 28, 1980 (Pub. L. 96-603, 94 Stat. 3503, 3509) and section 1261(a) of the Tax Reform Act of 1986 (TRA of 1986) (Pub. L. 99-514, 100 Stat. 2085, 2591), and are issued under the authority contained in section 6689 (94 Stat. 3509; 26 U.S.C. section 6689), section 989(c)(4) (100 Stat. 2591 26 U.S.C. section 989), and section 7805 (68A Stat. 917; 26 U.S.C. section 7805) of the Internal Revenue Code of 1986.

NEED FOR TEMPORARY REGULATIONS

Section 989(c)(4), which was added by the Tax Reform Act of 1986, provides that the Secretary may provide by regulations alternatives to redetermining a taxpayer's United States tax liability under section 905(c). Because those alternatives include a new method by which certain foreign tax redeterminations shall be accounted for through adjustments to multi-year pools of foreign taxes and earnings and profits, there is a need for immediate guidance in this regard, and the Internal Revenue Service has found it to be impractical to issue these temporary regulations either with the notice and public comment procedure under section 553(b) of title 5 of the United States Code, or the effective date limitation under section 553(d) of title 5.

EXPLANATION OF PROVISIONS

IN GENERAL

Under section 905(c), if accrued taxes when paid differ from the amounts claimed as credits or if any tax paid is refunded, the taxpayer must notify the Secretary. Upon receiving notice, the Secretary recomputes the amount of the taxpayer's United States tax liability for the year or years affected. If additional tax is due, upon notice and demand, the taxpayer must pay it. The amount of tax overpaid, if any, shall be refunded to the taxpayer in accordance with subchapter B of chapter 66 of the Code.

The current regulations under section 905(c) do not provide sufficient guidance regarding the events that trigger section 905(c), the notification the taxpayer must file, and the time any such notification must be filed. In addition, regulatory guidance is required with respect to section 6689 (relating to failure to file notice of a foreign tax redetermination), and section 989(c)(4) (providing for alternative adjustments to the application of section 905(c)).

Under section 902, as amended by the Tax Reform Act of 1986, a shareholder in a foreign corporation determines the amount of foreign taxes deemed paid by that shareholder on the basis of multi-year pools of earnings and profits and taxes. It was anticipated that alternative adjustments under section 989(c)(4) would take the form of increases and decreases to the multi-year pools of earnings and profits and foreign taxes for each separate category of income of a foreign corporation. Under prior law, foreign tax redeterminations that occurred with respect to foreign taxes paid by a foreign corporation and deemed paid by a United States taxpayer required a recomputation of the United States taxpayer's United States tax liability for the year or years affected by that redetermination. Under these temporary regulations, a foreign tax redetermination that affects foreign taxes deemed paid by a United States taxpayer will be accounted for, with certain exceptions, through an adjustment to the affected pools of earnings and profits and foreign taxes of the foreign corporation. The exceptions to that general rule will require a redetermination of United States tax liability for the year or years affected.

SPECIFIC PROVISIONS

Section 1.905-3T(a) sets out the scope of section 1.905-3T. Generally, that section will apply to foreign tax redeterminations occurring in taxable years beginning after December 31, 1986. In the cases of foreign tax redeterminations with respect to foreign taxes deemed paid, the redetermination must be with respect to taxes paid on earnings and profits and foreign taxes accumulated in taxable years beginning after December 31, 1986.

Section 1.905-3T(b) sets out the foreign currency translation rules applicable to accruals of foreign tax, payments of foreign tax and refunds of foreign tax. Section 1.905-3T(b)(4) provides the method by which refunds of foreign tax are allocated to separate categories of income. Section 1.905-3T(c) defines the term "foreign tax redetermination."

Section 1.905-3T(d)(1) provides that, if a foreign tax is paid directly by a United States person (and is creditable under section 901), a redetermination of the taxpayer's United States tax liability is required. A de minimis exception to recomputing the taxpayer's United States liability applies if the foreign tax redetermination arises solely from a foreign currency fluctuation.

Section 1.905-3T(d)(2) provides rules concerning foreign tax redeterminations that affect the amount of foreign tax deemed paid by a United States taxpayer under sections 902 or 960. In general, such foreign tax redeterminations are to be reflected in the foreign corporation's pools of earnings and profits and foreign taxes. However, there are four exceptions to this rule.

First, the taxpayer is required to reflect a foreign tax redetermination affecting the amount of foreign taxes deemed paid on the initial return claiming those taxes as a credit if the foreign tax redetermination occurs before the date that is 90 days prior to the due date of the United States return and before the United States taxpayer actually files that return. If the redetermination occurs within 90 days of the due date and prior to the filing of the return, then the taxpayer may elect to either adjust the foreign tax credit to be claimed on the return or adjust the pools to reflect the effect of the foreign tax redetermination.

Second, a taxpayer must redetermine its United States liability if the foreign tax liability is in a hyperinflationary currency.

Third, the United States liability must be redetermined if the foreign tax redetermination occurs after a distribution to a United States taxpayer or inclusion in income with respect to a United States shareholder and the redetermination would cause the foreign corporation's pool of foreign taxes to be reduced below zero.

Fourth, the Service, in its discretion, may require a taxpayer to redetermine its United States liability if the amount of the foreign tax liability accrued in foreign currency exceeds the amount of foreign tax paid in foreign currency by at least two percent.

Section 1.905-3T(d)(2)(iii) sets out the notification and information reporting requirements when an adjustment is made to a foreign corporation's pools of earnings and profits and foreign taxes. That section also describes the interest and penalties to be imposed for failure to make the proper adjustment or provide the proper notice of a foreign tax redetermination.

Section 1.905-3T(d)(2)(iv) provides examples illustrating the application of the rules of sections 1.905-3T(d)(2)(ii) and 1.905- 3T(d)(2)(iii).

Section 1.905-3T(d)(3) provides rules regarding the method of adjustment to a foreign corporation's pools of taxes and earnings and profits if a foreign tax redetermination results from a refund of foreign tax or an additional assessment of foreign tax.

Section 1.905-3T(d)(3)(iv) provides a special rule that applies when a lower tier foreign corporation receives a refund of foreign tax after making a distribution to an upper tier foreign corporation and the refund would have the effect of reducing below zero the lower tier corporation's pool of foreign taxes in any separate category. The rules of that paragraph provide a formula for computing the proper adjustment to both the upper and lower tier foreign corporations' pools of foreign taxes. This rule is intended to prevent deficits in foreign tax pools. Section 1.905-3T(d)(3)(v) provides examples illustrating the application of this rule.

Section 1.905-3T(d)(4) sets out the exceptions described above to the general rule of pooling adjustments to account for the effect of a foreign tax redetermination.

Section 1.905-3T(e) provides rules relating to the imposition of foreign tax on a refund of foreign tax.

Section 1.905-3T(f) requires United States shareholders to redetermine their United States tax liability (upon receipt of previously taxed income) if a foreign country imposed tax on income of a controlled foreign corporation included in income of the United States shareholder under section 951(a)(1) and that tax is reduced upon the distribution of earnings and profits of the controlled foreign corporation. The temporary regulations do not provide special rules concerning the method of determining the amount of foreign taxes paid or deemed paid in cases in which the corporate level tax is reduced and additional tax, either withholding tax or a second level corporate tax, is imposed. Taxpayers are invited to comment on determining the appropriate method of making these adjustments in split rate and imputation systems.

Section 1.905-4T provides rules regarding the notification requirements imposed on a United States taxpayer when a redetermination of United States tax liability is or may be required. Section 1.905-4T(b) provides that the taxpayer shall file a notice of foreign tax redetermination. That notice will be made on an amended return, Form 1120X or 1040X, and Form 1118 or Form 1116, relating to computing the foreign tax credit, in the manner described in the instructions to the Form 1118. Section 1.905-4T(b)(3)(i), (ii), and (iii) provides the information to be included on the Forms. Section 1.905-4T(b)(2) provides rules regarding the time for filing the notice of foreign tax redetermination.

Section 1.905-4T(c)(1) provides rules regarding the imposition of interest if a redetermination of United States tax results in either an overpayment or deficiency of United States tax.

Section 1.905-4T(c)(2) provides that a deficiency or overpayment of United States tax liability does not result from a redetermination of foreign tax unless a redetermination of United States tax liability is required. Therefore, no interest shall be paid by or to a United States corporation as a result of adjustments made by a foreign corporation to its pools of foreign taxes and earnings and profits.

Section 1.905-4T(d) sets out the effective date for section 1.905-4T.

Generally, section 1.905-5T sets out rules governing the application of section 905(c) to foreign tax redeterminations occurring in taxable years beginning prior to January 1, 1987. Foreign tax redeterminations occurring after December 31, 1986, with respect to foreign taxes deemed paid under sections 902 or 960 with respect to earnings and profits accumulated in taxable years of the foreign corporation beginning prior to January 1, 1987 are also governed by that section.

Section 1.905-5T(b) provides the foreign currency translation rules for foreign tax redeterminations governed by section 1.905-5T. Section 1.905-5T(c) defines the term "foreign tax redetermination" by reference to the definition contained in section 1.905-3T(c).

Section 1.905-5T(d)(1), (2), (3), and (4) sets out the information required to be provided to the Internal Revenue Service in order to recompute a taxpayer's United States tax liability.

Section 1.905-5T(e) provides a de minimis exception to the notification and redetermination requirements of section 1.905-5T.

Section 1.905-5T(f) provides the effective date for section 1.905-5T.

Section 301.6689-1T sets out rules governing the imposition of the civil penalty under section 6689 of the Internal Revenue Code for failure to file notice of a foreign tax redetermination within the applicable time period. Section 301.6689-1T(d) provides a reasonable cause exception to the imposition of the civil penalty, and details the conditions necessary for the application of that exception.

SPECIAL ANALYSES

These rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. A general notice of proposed rulemaking is not required by 5 U.S.C. section 553 for temporary regulations. Therefore, these rules do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6) and a Regulatory Flexibility Analysis is not required.

DRAFTING INFORMATION

The principal author of these regulations is Eli J. Dicker of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. However, other personnel from offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR SECTIONS 1.861-1 THROUGH 1.997-1

Income taxes, United States investments abroad, Foreign currency, Foreign tax credit.

LIST OF SUBJECTS IN 26 CFR SECTIONS 301.6654-1 THROUGH 301.6696-1

Income taxes, Administration and procedure, Penalties.

LIST OF SUBJECTS IN 26 CFR PART 602

Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR Parts 1, 301, and 602 are amended as follows:

INCOME TAX REGULATIONS (26 CFR Part 1)

Paragraph 1. The authority for Part 1 continues to read in part:

Authority: 26 U.S.C. 7805. * * * Sections 1.905-3T and 1.905-4T also issued under 26 U.S.C. 989(c)(4).

Par. 2. Sections 1.905-3 and 1.905-5 are deleted.

Par. 3. Section 1.905-4 is redesignated as paragraph (d) of section 1.905-2.

Par. 4. New sections 1.905-3T, 1.905-4T and 1.905-5T are added immediately after section 1.905-2 to read as follows:

SECTION 1.905-3T ADJUSTMENTS TO THE POOLS OF FOREIGN TAXES AND EARNINGS AND PROFITS WHEN THE ALLOWABLE FOREIGN TAX CREDIT CHANGES (TEMPORARY).

(a) FOREIGN TAX REDETERMINATIONS SUBJECT TO SECTIONS 985 THROUGH 989 OF THE INTERNAL REVENUE CODE. This section applies to a foreign tax redetermination that occurs in a taxpayer's taxable year beginning after December 31, 1986 with respect to --

(1) Tax that is paid or accrued by or on behalf of a taxpayer (including taxes paid or accrued prior to January 1, 1987), or

(2) Tax that is deemed paid or accrued by a taxpayer under section 902 or section 960 with respect to earnings and profits of a foreign corporation accumulated in taxable years of the foreign corporation beginning after December 31, 1986.

(b) CURRENCY TRANSLATION RULES -- (1) ACCRUAL OF FOREIGN TAX. Accrued and unpaid foreign tax liabilities denominated in foreign currency, as determined under foreign law, shall be translated into dollars at the exchange rate as of the last day of the taxable year of the taxpayer.

(2) PAYMENTS OF FOREIGN TAX. Foreign tax liabilities denominated in foreign currency shall be translated into dollars at the rate of exchange for the date of the payment of the foreign tax. Tax withheld in foreign currency shall be translated into dollars at the rate for the date on which the tax is withheld. Estimated tax paid in foreign currency shall be translated into dollars at the rate for the date on which the estimated tax payment is made.

(3) REFUNDS OF FOREIGN TAX. A refund of foreign tax shall be translated into dollars using the exchange rate for the date of the payment of the foreign taxes. If a refund of foreign tax relates to foreign taxes paid on more than one date, then the refund shall be deemed to be derived from, and shall reduce, the last payment of foreign taxes first, to the extent thereof. See section 1.905- 3T(d)(3) relating to the method of adjustment of a foreign corporation's pools of earnings and profits and foreign taxes.

(4) ALLOCATION OF REFUNDS OF FOREING TAX. Refunds of foreign tax shall be allocated to the same separate category as foreign taxes to which the refunded taxes relate. Refunds are related to foreign taxes of a separate category if the foreign tax that was refunded was imposed with respect to that separate category. See section 904(d) and section 1.904-6 concerning the allocation of taxes to separate categories of income. Earnings and profits of a foreign corporation in the separate category to which the refund relates shall be increased to reflect the foreign tax refund.

(5) BASIS OF FOREIGN CURRENCY REFUNDED. A recipient of a refund of foreign tax shall determine its basis in the currency refunded under the following rules.

(i) If the functional currency of the qualified business unit (as defined in section 989 and the regulations thereunder, hereinafter "QBU") that paid the tax and received the refund is the United States dollar or the person receiving the refund is not a QBU, then the recipient's basis in the foreign currency refunded shall be the dollar value of the refund determined, under paragraph (b)(2) of this section, on the date the foreign tax was paid.

(ii) If the functional currency of the QBU receiving the refund is not the United States dollar and is different from the currency in which the foreign tax was paid, then the recipient's basis in the foreign currency refunded shall be equal to the functional currency value of the non-functional refunded translated into functional currency at the exchange rate between the functional currency and the non-functional currency, determined under paragraph (b)(2) of this section, on the date the foreign tax was paid.

(iii) If the functional currency of the QBU receiving the refund is the currency in which the refund was made, then the recipient's basis in the currency received shall be the amount of the functional currency received.

For purposes of determining exchange gain or loss on the initial payment of foreign tax in a non-functional currency, see section 988. For purposes of determining subsequent exchange gain or loss on the disposition of non-functional currency the basis of which is determined under this rule, see section 988.

(c) FOREIGN TAX REDETERMINATION. For purposes of this section, the term "foreign tax redetermination" means a change in the foreign tax liability that may affect a United States taxpayer's foreign tax credit. A foreign tax redetermination includes --

(1) A refund of foreign taxes;

(2) A difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to differences in the units of foreign currency paid and the units of foreign currency accrued; or

(3) A difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to fluctuations in the value of the foreign currency relative to the dollar between the date of accrual and the date of payment.

(d) REDETERMINATION OF UNITED STATES TAX LIABILITY -- (1) FOREIGN TAXES PAID DIRECTLY BY A UNITED STATES PERSON. If a foreign tax redetermination occurs with respect to foreign tax paid or accrued by or on behalf of a United States taxpayer, then a redetermination of United States tax liability is required for the taxable year for which the foreign tax was claimed as a credit. See section 1.905-4T(b) which requires notification to the Internal Revenue Service of a foreign tax redetermination in situations in which a redetermination of United States liability is required. However, a redetermination of United States tax liability is not required (and a taxpayer need not notify the Service) if the foreign tax redetermination is described in paragraph (c)(3) (that is, it is caused solely by a foreign currency fluctuation), and the amount of the foreign tax redetermination with respect to the foreign country is less than the lesser of ten thousand dollars or two percent of the total dollar amount of the foreign tax initially accrued with respect to that foreign country for the taxable year. In such case, an appropriate adjustment shall be made to the taxpayer's United States tax liability in the taxable year during which the foreign tax redetermination occurs.

(2) FOREIGN TAXES DEEMED PAID UNDER SECTIONS 902 OR 960 -- (i) REDETERMINATION OF UNITED STATES TAX LIABILITY NOT REQUIRED. Subject to the special rule of paragraph (d)(4), a redetermination of United States tax liability is not required to account for the effect of a redetermination of foreign tax paid or accrued by a foreign corporation on the foreign taxes deemed paid by a United States corporation under sections 902 or section 960. Instead, adjustments shall be made, and notification of such adjustments shall be filed, as required by paragraphs (d)(2) and (3) of this section.

(ii) ADJUSTMENTS TO POOLS. In the case of a foreign tax redetermination that affects the amount of foreign taxes deemed paid by a United States corporation for a taxable year --

(A) If the foreign tax redetermination occurs more than 90 days before the due date (determined with extensions) of the United States taxpayer's United States income tax return for such taxable year and before the taxpayer actually files that return, then that United States taxpayer shall adjust the foreign tax credit to be claimed on that return for such taxable year to account for the effect of the foreign tax redetermination (including the impact of the foreign tax redetermination on the earnings and profits of the foreign corporation);

(B) If a foreign tax redetermination occurs after the filing of the United States tax return for such taxable year, then appropriate upward or downward adjustments shall be made at the time of the foreign tax redetermination to the pool of foreign taxes and the pool of earnings and profits of the foreign corporation as provided in paragraph (d)(3) to reflect the effect of the foreign tax redetermination in calculating foreign taxes deemed paid with respect to distributions and inclusions (and the amount of such distributions and inclusions) that are includible in taxable years subsequent to the taxable year for which such tax return is filed; and

(C) If the foreign tax redetermination occurs within 90 days of the due date (determined with extensions) of the United States tax return and before the taxpayer actually files its tax return, then the taxpayer may elect either to adjust the foreign tax credit to be claimed on that return in the manner described in subparagraph (A) of this paragraph (d)(2)(ii) or adjust the pools of foreign taxes and earnings and profits to reflect the effect of the foreign tax redetermination in the manner described in paragraph (d)(2)(ii)(B), provided that consistent elections are made by the taxpayer and all other members of the affiliated group, as defined in section 1504(a), of which the taxpayer is a member, with respect to all foreign tax redeterminations occurring on or before any date within the 90 day period.

(iii) REPORTING REQUIREMENTS. If an adjustment to the appropriate pool of foreign taxes and earnings and profits is required under paragraphs (d)(2)(ii)(B) or (C), the United States corporation shall attach a notice of such adjustment to its return for the year with or within which ends the foreign corporation's taxable year during which the foreign tax redetermination occurs. The United States corporation shall provide: its name and identifying number; the foreign corporation's name, address, and identifying number (if any); the amount of any refunds of foreign taxes and the exchange rate as of the time of the original payment of the refunded foreign taxes; the amounts of unrefunded foreign taxes when paid and when accrued in foreign currency, the exchange rates for the accrual and payment dates of unrefunded foreign taxes, and the dollar amounts of unrefunded foreign taxes paid and accrued; the current balances of the pools of earnings and profits and foreign taxes before and after the foreign tax redetermination; and such other information as the Service may require. If a taxpayer may be required to redetermine its United States tax liability under paragraph (d)(4)(ii) of section 1.905-3T (relating to foreign tax adjustments of two percent or more), the notice shall specifically identify foreign tax adjustments described in such paragraph and shall include a complete factual description justifying the overaccrual of foreign tax. If the United States corporation fails to attach the required notice, to provide the necessary information, or to make the required adjustments, then it must provide notification of the foreign tax redetermination under section 1.905-4T. The Service may, in its discretion, make a redetermination of United States tax liability, and subject the taxpayer to the interest provisions of section 6601 and the penalty provisions of section 6689 and the regulations thereunder.

(iv) EXAMPLES. The following examples illustrate the application of paragraph (d)(2)(ii) and (iii) of this section. In each case, the exceptions of paragraph (d)(4) do not apply.

EXAMPLE (1). Controlled foreign corporation S is a wholly- owned subsidiary of domestic corporation, P. P is a fiscal year taxpayer whose taxable year ends on June 30. P does not request an extension for filing its United States tax return for the taxable year ending June 30, 1988 and files its return on its September 15, 1988 due date. S is a calendar year taxpayer. In 1987, S earned 100u of Subpart F income and accrued foreign taxes with respect to that income of 20u. At the time of accrual, the exchange rate was $1:4u. S paid the 20u of accrued tax with respect to its income on June 15, 1988, when the exchange rate was $1:2u. P includes the 100u in gross income under section 951(a) and claims a credit under section 960. P must use the amount of taxes actually paid by S (20u=810) in determining foreign taxes deemed paid by P. Pursuant to paragraph (d)(2)(ii)(A), P is required to compute foreign taxes deemed paid taking into account the foreign tax redetermination that occurred on June 15, which was more than 90 days before the due date of P's tax return (September 15, 1988) and before P actually filed its return.

EXAMPLE (2). The facts are the same as in Example (1), except that S paid its tax liability on October 16, 1988. P filed its United States income tax return for 1987 on September 15, 1987, before the foreign tax redetermination. P properly computed its section 960 credit on its 1987 return with respect to its 100u Subpart F inclusion on the basis of the amount of accrued foreign tax. Subject to the special rule of paragraph (d)(3)(iv), P is required, pursuant to the provisions of paragraph (d)(2)(ii)(B), to make the appropriate adjustments to the relevant pool of foreign taxes and pool of earnings and profits for purposes of calculating foreign taxes deemed paid in subsequent taxable years.

EXAMPLE (3). Controlled foreign corporation S is a wholly-owned subsidiary of domestic corporation, P. P is a fiscal year (June 30) taxpayer, and S is a calendar year taxpayer. In 1987, S earned 100u of general limitation manufacturing income that was not Subpart F income. S accrued 40u in foreign tax with respect to that income as of the end of its taxable year when the exchange rate was $1:4u. During 1987 and 1988, P received no distributions (and had no section 951(a)(1) inclusions) from S. S paid its taxes on March 15, 1988 when the exchange rate was $1:2u (40u=$20). S received a refund of foreign tax of 20u on July 1, 1988. No section 905(c) adjustment is required on these facts. As of the end of 1988, S's pool of general limitation accumulated earnings and profits equals 80u (100u-20u), and its pool of foreign taxes imposed on general limitation income equals $10 (40u-20u=20u, translated as of the date of payment ($1:2u), equals $10).

(3) ADJUSTMENTS TO THE POOLS OF EARNINGS AND PROFITS AND FOREIGN TAXES -- (i) IN GENERAL. If a foreign corporation is required to adjust its earnings and profits and foreign taxes under section 1.905-3T(d)(2)(ii)(B) or (C), then that adjustment shall be made in accordance with the provisions of this section.

(ii) REFUNDS OF FOREIGN TAXES. A foreign corporation shall reduce its pool of foreign taxes in the appropriate separate category by the United States dollar amount of a foreign tax refund translated as provided in paragraph (b)(3). A foreign corporation shall increase its pool of earnings and profits in the appropriate separate category by the functional currency amount of the foreign tax refund. The allocation of the refund to the appropriate separate categories shall be made in accordance with sections 1.905-3T(b)(4) and 1.904-6. If a foreign corporation receives a refund of foreign tax in a currency other than its functional currency, that refund shall be translated into its functional currency, for purposes of computing the increase to its pool of earnings and profits, at the exchange rate as of the date of the payment of the foreign tax.

(iii) ADDITIONAL ASSESSMENTS OF FOREIGN TAX. A foreign corporation shall increase its pool of foreign taxes in the appropriate separate category by the United State dollar amount of the additional foreign tax paid or accrued translated as provided in paragraphs (b)(1) and (2). A foreign corporation shall decrease its earnings and profits in the appropriate separate category by the functional currency amount of the additional foreign tax paid or accrued. The allocation of the additional amount of foreign tax among separate categories shall be made in accordance with section 1.904-6.

(iv) REFUNDS OF FOREIGN TAXES OF LOWER TIER FOREIGN CORPORATIONS THAT CAUSE DEFICITS IN FOREIGN TAX POOLS. If a lower tier foreign corporation receives a refund of foreign tax after making a distribution to an upper tier foreign corporation and the refund would have the effect of reducing below zero the lower tier corporation's pool of foreign taxes in any separate category, then both the lower tier and upper tier corporations shall adjust the appropriate pool of foreign taxes to reflect that refund. The upper tier foreign corporation shall adjust its pool of foreign taxes by the difference between the United States dollar amount of foreign tax deemed paid by the upper tier foreign corporation prior to the refund and the United States dollar amount of foreign tax recomputed as if the refund occurred prior to the distribution. The upper tier foreign corporation shall not make any adjustment to its earnings and profits because foreign taxes deemed paid by the upper tier corporation are not included in the upper tier corporation's earnings and profits. The lower tier foreign corporation shall adjust its pool of foreign taxes by the difference between the United States dollar amount of the refund and the United States dollar amount of the adjustment to the upper tier foreign corporation's pool of foreign taxes. The earnings and profits of the lower tier foreign corporation shall be adjusted to reflect the full amount of the refund. The provisions of this paragraph (d)(3)(iv) do not apply to distributions or inclusions to a United States person. See section 1.905-3T(d)(4)(iv) for rules relating to actual or deemed distributions made to a United States person.

(v) EXAMPLES. The following examples illustrate the application of this paragraph (d)(3).

EXAMPLE (1). Controlled foreign corporation (CFC) is a wholly-owned subsidiary of its domestic parent, P. Both CFC and P are calendar year taxpayers. CFC has a functional currency, the u, other than the dollar and maintains its pool of earnings and profits in that currency. At the end of year 1, CFC paid 100u in taxes with respect to non-Subpart F income when the exchange rate was $1:1u. In year 2, n a date that is after P filed its United States tax return, CFC receives a refund of 50u of its year 1 taxes. CFC made no distributions to P in year 1. In accordance with paragraph (d)(3)(ii) and subject to paragraph (d)(4), CFC shall reduce its pool of foreign taxes by $50 and increase its pool of earnings and profits by 50u.

EXAMPLE (2). Controlled foreign corporation (CFC) is a wholly-owned subsidiary of its domestic parent, P. Both CFC and P are calendar year taxpayers. In year 1 CFC earned 400u of general limitation manufacturing income and 200u of shipping income. On date 1, CFC paid 200u of foreign tax, 100u with respect to general limitation manufacturing income, and 100u with respect to shipping income. On date 1, the exchange rate is $1:1u. On date 2, a date that is after the filing of P's United States tax return, CFC receives a refund of 75u, 25u of which is related to the manufacturing income and 50u of which is related to the shipping income. Subject to paragraph (d)(4), CFC shall reduce its pools of foreign taxes related to general limitation income and shipping income by $25 and $50, respectively (because the refund is translated at the rate of exchange prevailing on the date of payment of the foreign tax), and increase the respective pools of earnings and profits by 25u and 50u (because the earnings and profits are increased by the functional currency amount of the refund received). If the refund to CFC was not specifically related to any separate category of income, CFC, pursuant to section 1.904-6, is required to allocate that refund in accordance with the provisions of that section.

EXAMPLE (3). CFC1 is a foreign corporation that is wholly- owned by P, a domestic corporation. CFC2 is a foreign corporation that is wholly-owned by CFC1. Unless stated otherwise, the exchange rate is always $1:1u. In year 1, CFC2 has earnings and profits of 100u (net of foreign taxes) and paid 100u in foreign taxes with respect to those earnings. CFC2 has no income and pays no foreign taxes in years 2 and 3. CFC1 has no earnings and profits other than those resulting from distributions from CFC2 and pays no foreign taxes.

SITUATION (i). In year 2, CFC2 receives a refund of foreign taxes of 25u. In year 3, CFC2 makes a distribution to CFC1 of 50u. CFC1 is deemed to have paid $30 of foreign taxes with respect to that distribution (50u/125u x $75). At the end of year 3, the following reflects the pools of earnings and profits and foreign taxes of CFC1 and CFC2.

     CFC2           Earnings and Profits(u)       Foreign Taxes

     CFC2           Earnings and Profits(u)       Foreign Taxes

(i) HYPERINFLATIONARY CURRENCIES. A redetermination of United States tax liability is required if the foreign tax liability is in a hyperinflationary currency. The term "hyperinflationary currency" means the currency of a country in which there is cumulative inflation during the base period of at least 100% as determined by reference to the consumer price index of the country listed in the monthly issues of International Financial Statistics, or a successor publication, of the International Monetary Fund. "Base period" means, with respect to any taxable year, the thirty-six calendar months immediately preceding the last day of such taxable year (see section 1.985-2T(b)(2)).

(ii) FOREIGN TAX ADJUSTMENT OF TWO PERCENT OR MORE. If the foreign tax liability of a United States taxpayer is in a currency other than a hyperinflationary currency and the amount of foreign tax accrued for the taxable year to a foreign country, as measured in units of foreign currency, exceeds the amount of foreign tax paid to that foreign country for the taxable year (as measured in units of foreign currency) by at least two percent, then the Service, in its discretion, may require a redetermination of United States tax liability.

(iii) EXAMPLE. The provisions of paragraph (d)(4)(ii) are illustrated by the following example.

EXAMPLE. Controlled foreign corporation is a wholly-owned subsidiary of its domestic parent, P. Both CFC and P are calendar year taxpayers. In year 1, CFC has general limitation income of 200u and, by year-end, had accrued foreign taxes with respect to that income of 100u when the exchange rate is $1:1u. In year 1, CFC makes a distribution to P of 50u, half of its earnings and profits of 100u. P is deemed to have paid $50 of foreign tax with respect to that distribution (50u/100u x $100). In year 2, after P has filed its United States tax return, CFC pays its actual foreign tax liability of 98.50 when the exchange rate is $1:1u. Subject to paragraph (d)(4), CFC must reduce its pool of foreign taxes by $1.50 and increase the corresponding pool of earnings and profits by 1.50u. (The refund is translated into dollars at the rate of exchange prevailing on the date of payment of the foreign tax, and the adjustment to earnings and profits is in "u"s.) In year 2, CFC earns 200u of general limitation income and accrues 120u of tax when the exchange rate is $1:1u. In year 2, CFC distributes 100u to P. P is deemed to have paid $128 of foreign tax (($48.50 + $120) x 100u/(51.50u + 80u)). In year 3, after P filed its year 2 United States tax return, CFC pays its actual year 2 tax liability of 100u when the exchange rate is $1:1u. The Service may require P to recompute its year 2 United States tax liability to account for the effect of the overaccrual of foreign tax pursuant to section 1.905-3T(d)(4)(ii).

(iv) DEFICIT IN FOREIGN TAX POOL. A redetermination of United States tax liability is required if a foreign tax redetermination occurs with respect to foreign taxes deemed paid with respect to a Subpart F inclusion or an actual distribution which has the effect of reducing below zero the distributing foreign corporation's pool of foreign taxes in any separate category. Whether a foreign corporation's pool of foreign taxes is reduced below zero shall be determined at the close of the taxable year of the foreign corporation in which the foreign tax redetermination occurred. In no case shall taxes paid or accrued with respect to one separate category be applied to offset a negative balance in any other separate category.

(v) EXAMPLE. The provisions of paragraph (d)(4)(iv) are illustrated by the following example.

EXAMPLE. Controlled foreign corporation (CFC) is a wholly- owned subsidiary of P, a domestic corporation. Both P and CFC are calendar year taxpayers. In year 1, CFC has 200u of general limitation income with respect to which 100 of taxes are paid when the exchange rate was $1:1u. In year 1, CFC distributes half (50u) of its earnings and profits (100u). Under section 902, P is deemed to have paid $50 of the foreign taxes paid by CFC with respect to that distribution (50u/100u x $100). In year 2, CFC receives a refund of all of its year 1 taxes (100u). In year 2, CFC earns an additional 290u of income -- 200u of shipping income with respect to which 100u of taxes are paid, and 90u of general limitation income with respect to which 45u of taxes are paid when the exchange rate was $1:1u. P is required to redetermine its year 1 United States tax liability to account for the foreign tax redetermination occurring in year 2 because, if an adjustment to CFC's pool of general limitation taxes were made, the pool would be ($5). CFC is not permitted to carry a deficit in any pool of foreign taxes; therefore, P must redetermine its United States liability for year 1.

(e) FOREIGN TAX IMPOSED ON FOREIGN REFUND. If the redetermination of foreign tax for a taxable year or years is occasioned by the refund to the taxpayer of taxes paid to a foreign country or possession of the United States and the foreign country or possession imposed tax on the refund, then the amount of the refund shall be considered to be reduced by the amount of any tax described in section 901 imposed by the foreign country or possession of the United States with respect to such refund. In such case, no other credit under section 901, and no deduction under section 164, shall be allowed for any taxable year with respect to such tax imposed on such refund.

(f) REDUCTION OF CORPORATE LEVEL TAX ON DISTRIBUTION OF EARNINGS AND PROFITS. If a United States shareholder of a controlled foreign corporation receives a distribution out of previously taxed earnings and profits and a foreign country has imposed tax on the income of the controlled foreign corporation, which tax is reduced on distribution of the earnings and profits of the corporation, than the United States shareholder shall redetermine its United States tax liability for the year or years affected.

SECTION 1.905-4T NOTIFICATION AND REDETERMINATION OF UNITED STATES TAX LIABILITY (TEMPORARY).

(a) APPLICATION OF THIS SECTION. The rules of this section shall apply if, as a result of a foreign tax redetermination as defined in section 1.905-3T(c), a redetermination of United States tax liability is required under section 1.905-3T.

(b) NOTIFICATION -- (1) GENERAL RULES. Any United States taxpayer for which a redetermination of United States tax liability is required shall notify the Secretary in the manner described in this paragraph (b), and the Service will redetermine the United States tax liability of the United States taxpayer. Notification shall be made by filing Form 1120X or 1040X, and Form 1118 or 1116, in the manner described in the instructions to Form 1118 with the Service Center where the taxpayer filed the tax return claiming the foreign tax credit to which the notice relates. Notification shall be filed within the time prescribed by and shall contain the information required by this paragraph (b). The amount of tax, if any, due upon a redetermination shall be paid by the taxpayer after notice and demand has been made by the Service. Subchapter B of chapter 63 of the Code (relating to deficiency procedures) shall not apply with respect to the assessment of the amount due upon such redetermination. In accordance with section 905(c) and section 6501(c)(5), the amount of additional tax due shall be assessed and collected without regard to the provisions of section 6401(a) (relating to limitations on assessment and collection). The amount of tax, if any, shown by a redetermination to have been overpaid shall be credited or refunded to the taxpayer in accordance with the provisions of section 301.6511(d)-3.

(2) TIME FOR FILING. If a redetermination of United States tax liability is necessitated by a foreign tax redetermination that reduced the amount of foreign taxes paid or deemed paid, then the United States taxpayer shall file the notification with respect to such foreign tax redetermination within 180 days after the date that the foreign tax redetermination occurs. If a redetermination of United States liability is necessitated by a foreign tax redetermination that increased the amount of foreign taxes paid or deemed paid, then the United States taxpayer claiming foreign tax credits for accrued foreign taxes must notify the Service within the period provided by section 6511(d)(3)(A). Filing of the appropriate notification within the prescribed time shall constitute a claim for refund of United States tax.

(3) NOTIFICATION CONTENTS -- (i) IN GENERAL. The taxpayer shall provide the Service with information sufficient to redetermine the tax including, but not limited to, the following: the United States taxpayer's name, address, and identifying number; the taxable year or years of the taxpayer that are affected by the redetermination of United States tax liability; information required in paragraph (b)(ii) and (iii) below with respect to foreign tax redeterminations affecting the redetermination of United States tax liability, including information in a form that will enable the Service to verify and compare the original computations with respect to a claimed foreign tax credit, the revised computations resulting from the foreign tax redeterminations, and the net changes resulting therefrom.

(ii) DIRECT FOREIGN TAX CREDIT. In the case of foreign taxes paid by or on behalf of the taxpayer, if --

(A) The taxpayer receives a refund of foreign tax, the taxpayer's information shall include: the amount of foreign taxes paid in foreign currency; the date or dates the foreign taxes were paid; the rate of exchange on each date the foreign taxes were paid; the amount of the foreign taxes refunded in foreign currency;

(B) The foreign taxes when paid differ from the accrued amounts claimed as credits by the taxpayer because of fluctuation in the value of the foreign currency in which the foreign taxes were paid, the taxpayer's information shall include the following: the date on which foreign taxes were accrued and the dates on which the foreign taxes were paid; the rates of exchange for each such date; and the amount of foreign taxes accrued or paid in foreign currency on each such date;

(C) The foreign taxes when paid differ from accrued amounts claimed as credits by the taxpayer because the taxpayer is assessed additional or less foreign tax, the taxpayer's information shall include the following: the original amounts and information described in subdivision (B) of this paragraph (b)(3)(ii); the amount of additional or reduced foreign tax in foreign currency; and the revised amounts are information described in subdivision (B) of this paragraph (b)(3)(ii).

(iii) FOREIGN TAXES DEEMED PAID. In the case of foreign taxes paid or accrued by a foreign corporation that are deemed paid or accrued under section 902 or section 960 and with respect to which the taxpayer is required to redetermine its United States tax liability, the United States taxpayer's information shall include the following: the foreign corporation's name and identifying number (if any); the dates and amounts of any dividend distributions or other inclusions made out of earnings and profits for the affected year or years; and the amount of earnings and profits from which such dividends were paid for the affected year or years; and information described in paragraph (b)(3)(ii) as applied to the foreign corporation. In the case of a failure to attach the required notification or to make the required adjustments described in section 1.905-3T(d)(2)(iii), the taxpayer's information shall also include a complete factual description justifying that failure.

(c) INTEREST AND PENALTY -- (1) GENERAL RULES. If a foreign tax redetermination results in a redetermination of United States tax liability, then interest shall be computed on the deficiency or overpayment in accordance with sections 6601 and 6611 and the regulations thereunder. No interest shall be assessed or collected on any deficiency resulting from a refund of foreign tax for any period before the receipt of the refund, except to the extent interest was paid by the foreign country or possession of the United States on the refund for the period. In no case, however, shall interest assessed and collected pursuant to the preceding sentence for any period before receipt of the refund exceed the amount that otherwise would have been assessed and collected under section 6601 and the regulations thereunder for that period. Interest shall be assessed from the time the taxpayer (or the foreign corporation of which the taxpayer is a shareholder) receives a refund until the taxpayer pays the additional tax due the United States.

(2) NO INTEREST ON ADJUSTMENTS TO POOLS OF FOREIGN TAXES. A deficiency or overpayment of United States tax liability does not result from a redetermination of foreign tax unless a redetermination of United States liability is required. Consequently, no interest will be paid by or to a United States corporation as a result of adjustments by a foreign corporation to its pools of foreign taxes and earnings and profits under paragraph (d)(2) of section 1.905-3T.

(3) IMPOSITION OF PENALTY. Failure to comply with the provisions of this section shall subject the taxpayer to the penalty provisions of section 6689 and the regulations thereunder.

(d) EFFECTIVE DATE. The provisions of this section apply to foreign tax redeterminations described in section 1.905-3T(a). Notwithstanding paragraph (b)(2) of this section (relating to time for filing the required notice), the taxpayer shall have 180 days after the publication of an Announcement in the Internal Revenue Bulletin notifying taxpayers of the availability of the Forms and instructions to comply with the provisions of this section. In no case, however, shall this paragraph (d) operate to extend the statute of limitations provided by section 6511(d)(3)(A).

SECTION 1.905-5T FOREIGN TAX REDETERMINATIONS AND CURRENCY TRANSLATION RULES FOR FOREIGN TAX REDETERMINATIONS OCCURRING IN TAXABLE YEARS BEGINNING PRIOR TO JANUARY 1, 1987 (TEMPORARY).

(a) IN GENERAL. This section sets forth rules governing the application of section 905(c) to foreign tax redeterminations occurring prior to January 1, 1987. However, the rules of this section also apply to foreign tax redeterminations occurring after December 31, 1986 with respect to foreign tax deemed paid under section 902 or section 960 with respect to earnings and profits accumulated in taxable years of a foreign corporation beginning prior to January 1, 1987.

(b) CURRENCY TRANSLATION RULES -- (1) FOREIGN TAXES PAID BY THE TAXPAYER AND CERTAIN FOREIGN TAXES DEEMED PAID. Foreign taxes paid in foreign currency that are paid by or on behalf of a taxpayer or deemed paid under section 960 (or under section 902 in a deemed distribution under section 1248) shall be translated into dollars at the rate of exchange for the date of the payment of the foreign tax. Refunds of such taxes shall be translated into dollars at the rate of exchange for the date of the refund.

(2) FOREIGN TAXES DEEMED PAID ON AN ACTUAL DISTRIBUTION. Foreign taxes deemed paid by a taxpayer under section 902 with respect to an actual distribution and refunds of such taxes shall be translated into dollars at the rate of exchange for the date of the distribution of the earnings to which the taxes relate.

(c) FOREIGN TAX REDETERMINATION. The term "foreign tax redetermination" means a foreign tax redetermination as defined in section 1.905-3T(c).

(d) REDETERMINATION OF UNITED STATES TAX LIABILITY -- (1) IN GENERAL. A redetermination of United States tax liability is required with respect to any foreign tax redetermination subject to this section and shall be subject to the requirements of section 1.905- 4T(b). The content of the notification required by this paragraph (d) shall be the same as provided in section 1.905-4T(b)(3), except as modified by paragraphs (d)(2), (3), and (4) of this section.

(2) REFUNDS. In the case of any refund of foreign tax, the rate of exchange on the date of the refund shall be included in the information required by section 1.905-4T(b)(3)(ii)(A).

(3) FOREIGN TAXES DEEMED PAID UNDER SECTION 902. In the case of foreign taxes paid or accrued by a foreign corporation that are deemed paid or accrued under section 902 with respect to an actual distribution and with respect to which there was a redetermination of foreign tax, the United States taxpayer's information shall include, in lieu of the information required by paragraph (b)(3)(iii), the following: the foreign corporation's name and identifying number (if any); the date on which the foreign taxes were accrued and the dates on which the foreign taxes were paid; the amounts of the foreign taxes accrued or paid in foreign currency on each such date; the dates on which any foreign taxes were refunded and the amounts thereof; the dates and amounts of any dividend distributions made out of earnings and profits for the affected year or years; the rate of exchange on the date of any such distribution; and the amount of earnings and profits from which such dividends were paid for the affected year or years.

(4) FOREIGN TAXES DEEMED PAID UNDER SECTION 960. In the case of foreign taxes paid under section 960 (or under section 902 in the case of an amount treated as a dividend under section 1248), the rate of exchange determined under section 1.964-1 for translating accrued foreign taxes shall be included in the information required by section 1.905-4T(b)(3)(iii) in lieu of the exchange rate for the date of the accrual.

(e) EXCEPTION FOR DE MINIMIS CURRENCY FLUCTUATIONS. A United States taxpayer need not notify the Service of a foreign tax redetermination that results solely from a currency fluctuation if the amount of such redetermination with respect to the foreign country is less than the lesser of ten thousand dollars or two percent of the total dollar amount of the foreign tax, prior to the adjustment, initially accrued with respect to that foreign country for the taxable year.

(f) SPECIAL EFFECTIVE DATE. If a foreign tax redetermination within the meaning of this section occurs after December 31, 1979, and before July 25, 1988, and the taxpayer has not notified the Service before that date of the redetermination as required under section 1.905-3 as it appeared in the CFR dated April 1, 1988, then the taxpayer shall have 180 days after the publication of an Announcement in the Internal Revenue Bulletin notifying taxpayers of the availability of the Forms and instructions to comply with the provisions of this section. Failure to comply with the provisions of this section shall subject the taxpayer to the penalty provisions of section 6689 and the regulations thereunder. In no case, however, shall this paragraph operate to extend the statute of limitations provided by section 6511(d)(3)(A).

REGULATIONS ON PROCEDURE AND ADMINISTRATION 26 CFR Part 301

Par. 5. The authority for Part 301 continues to read in part:

Authority: 26 U.S.C. 7805. * * * Section 301.6689-1T also issued under 26 U.S.C. 6689(a).

Par. 6. New section 301.6689-1T is added immediately after section 301.6688-1, to read as follows:

SECTION 301.6689-1T FAILURE TO FILE NOTICE OF REDETERMINATION OF FOREIGN TAX (TEMPORARY).

(a) APPLICATION OF CIVIL PENALTY. If a foreign tax redetermination was made with respect to taxes for which the taxpayer previously claimed the foreign tax credit, and the taxpayer failed to notify the Service on or before the date prescribed in regulations under section 905(c) or in regulations under section 404A(g)(2) for giving notice of a foreign tax redetermination, then, unless paragraph (d) of this section applies, there shall be added to the deficiency attributable to such redetermination an amount determined under paragraph (b) of this section.

(b) AMOUNT OF PENALTY. The amount of the penalty shall be equal to --

(1) Five percent of the deficiency if the failure is for not more than one month, plus

(2) An additional five percent of the deficiency for each month (or fraction thereof) during which the failure continues, but not to exceed in the aggregate twenty-five percent of the deficiency. If the penalty imposed under paragraph (a) of this section applies, then the penalty imposed under section 6653(a), relating to failure to pay by reason of negligent or intentional disregard of rules and regulations, shall not apply.

(c) FOREIGN TAX REDETERMINATION DEFINED. For purposes of this section, a foreign tax redetermination is any redetermination for which a notice is required under section 905(c) and the regulations thereunder, or section 404A(g)(2) and the regulations thereunder.

(d) REASONABLE CAUSE. The penalty set forth in this section shall not apply if it is established to the satisfaction of the Service that the failure to file the notification within the prescribed time was due to reasonable cause and not due to willful neglect. An affirmative showing of reasonable cause must be made in the form of a written statement that sets forth all the facts alleged as reasonable cause for the failure to file the notification on time and that contains a declaration by the taxpayer that the statement is made under the penalties of perjury. This statement must be filed with the service center in which the notification was required to be filed. The taxpayer must file this statement with the notice required under section 905(c) and the regulations thereunder or section 404A(g)(2) and the regulations thereunder. If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the notification within the prescribed time, then the delay will be considered to be due to reasonable cause and not willful neglect.

(e) EFFECTIVE DATE. This section is effective with respect to foreign tax redeterminations occurring after December 31, 1979.

OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT (26 CFR Part 602)

Par. 7. The authority for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. Section 602.101(c) is amended by inserting in the appropriate place in the table "section 1.905-4T . . . 1545-1056", "section 1.905-5T . . . 1545-1056", and " section 301.6689-1T . . . 1545-1056".

Lawrence B. Gibbs