PLR 200850023: permission to leave the foreign tax credit safe harbor, granted without deciding the question the safe harbor exists to answer

Plain-English summary

A three page private letter ruling from the Office of Associate Chief Counsel (International), "Refer Reply To: CC:INTL:B03", control number "PLR-135901-08", dated September 11, 2008 and released 12/12/2008. It answers "your letter dated August 15, 2008, in which you request consent for Corp A to revoke, effective for Tax Year Y and for all subsequent taxable years, its election, effective beginning for Tax Year X, to use the safe harbor method described in Treas. Reg. §1.901-2A(c)(3) in determining the amount of foreign income tax paid or accrued (or deemed paid or accrued) to Country L." Consent is granted.

The background is the foreign tax credit problem of the dual capacity taxpayer. A company operating abroad may pay a foreign government in two capacities at once: as a taxpayer, and as a buyer of something specific, such as the right to extract a resource. Only the first is creditable. Treas. Reg. §1.901-2A(c)(1) gives dual capacity taxpayers two ways to split the payment, "either a “facts and circumstances” method or a ”safe harbor” method to determine the amount of a levy that is not paid in exchange for a specific economic benefit." Corp A elected the safe harbor for Country L levies beginning in Tax Year X, and now wants out.

Getting out requires permission. The election "may not be revoked without the consent of the Commissioner. Consent is normally given, provided the conditions set forth in the regulation are satisfied." The letter then works through those conditions and finds two of them met. The application was made "not later than 30 days before Date N", the due date including extensions for the group's consolidated return for Tax Year Y. And the election had been in effect for at least the three taxable years before Tax Year Y, which is the circumstance §1.901-2A(d)(4)(vi) identifies as one where consent will normally be given. Both boxes ticked, consent follows.

What makes this ruling worth reading is the paragraph that does not decide anything. Immediately after granting consent the letter says: "No opinion was requested, and no opinion is expressed, as to whether, based upon all of the relevant facts and circumstances, the amount (if any) paid pursuant to a levy or levies imposed by Country L is not an amount paid in exchange for a specific economic benefit." That is the underlying question the whole safe harbor apparatus exists to answer. The taxpayer is being allowed to change the method it uses to compute the split, while the substance of the split stays entirely open and reviewable on examination. The letter is about procedure, not about how much foreign tax Corp A may credit, and it says so twice over, adding that the office "has not verified any of the material submitted in support of the request for rulings" and that everything remains "subject to verification on examination."

The structure described is the shortest possible chain for a ruling of this kind. Corp A is a domestic common parent filing a consolidated return. It owns, directly and indirectly, all of Corp B, a controlled foreign corporation. Corp B owns all of Corp C, another controlled foreign corporation, "which beneficially owns operations in Country L." Corp C itself is the dual capacity taxpayer. Two ownership links, no intermediate partnerships, no restructuring, and a single lettered date in the legend. The legend defines seven terms in all and every one of them is redacted, so the country, the corporations, the years and the filing deadline are all withheld, and only the shape of the arrangement survives.

One typographic defect is reproduced as released rather than repaired. In the sentence describing the two methods, the quotation mark opening the phrase "safe harbor" is a closing mark rather than an opening one, so the text reads "or a ”safe harbor” method" while the matching phrase beside it, "a “facts and circumstances” method", is set correctly. The document came from a clean text layer rather than a scan, so this is a defect in the released file itself. It is flagged here and left as it stands.

The document is signed "Richard L. Chewning, Senior Counsel, Branch 3 (International)". It carries the required disclosure, "Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent", and closes with an "Enclosure: Copy for 6110 purposes", meaning the redacted version prepared for public release under that section. Its index entry, UILC 901.00-00 and 901.01-04 with the subjects Taxes of Foreign Countries and of Possessions of U.S. and Dual Capacity Taxpayers, matches the document exactly.

Every provision cited in this letter is a Treasury regulation. No case is cited, and no Code section other than the 6110 disclosure itself. The citation check this corpus normally runs could not be performed because the legal research tool is unavailable in this session, so the regulation cites are reproduced exactly as released and none has been supplied or corrected from memory.

Ruling snapshot

• Question: May Corp A revoke, for Tax Year Y and later years, its election to use the safe harbor method for determining foreign income tax paid to Country L?
• Outcome: Approved. Consent granted, because the application came more than 30 days before the return due date and the election had been in effect at least three prior taxable years. No opinion was expressed on whether any Country L levy is paid in exchange for a specific economic benefit.
• Key authorities: Treas. Reg. §1.901-2A(c)(1), §1.901-2A(c)(3), §1.901-2A(d) and §1.901-2A(d)(4), including (d)(4)(i) through (vi) and specifically (d)(4)(vi); and the dual capacity taxpayer definition in Treas. Reg. §1.901-2(a)(2)(ii)(A).

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200850023 Third Party Communication: None
Release Date: 12/12/2008 Date of Communication: Not Applicable
Index Number: 901.00-00, 901.01-04
Person To Contact:
---------------------------------- ------------------------, ID No. ------------------
---------------------------------------- ----------------------------------------------------
------------------------ Telephone Number:
---------------------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:INTL:B03
PLR-135901-08
Date:
September 11, 2008

              TY: -------

Legend

Corp A = ------------------------
------------------------
Corp B = -----------------------------------------------
Corp C = ------------------------------------------
Country L = -------
Date N = ---------------------------
Tax Year X = -------
Tax Year Y = -------

Dear ----------------:

This is in response to your letter dated August 15, 2008, in which you request consent
for Corp A to revoke, effective for Tax Year Y and for all subsequent taxable years, its
election, effective beginning for Tax Year X, to use the safe harbor method described in
Treas. Reg. §1.901-2A(c)(3) in determining the amount of foreign income tax paid or
accrued (or deemed paid or accrued) to Country L. The information submitted for
consideration is substantially as set forth below.

The ruling contained in this letter is based upon information and representations you
submitted and accompanied by your penalty of perjury statement. While this office has
not verified any of the material submitted in support of the request for rulings, it is
subject to verification on examination.

Corp A is a domestic corporation that is the common parent of an affiliated group of
corporations (“Corp A Group”) that has filed a U.S. consolidated federal income tax
return for Tax Year X and for all subsequent tax years. The due date (including
extensions) for Corp A’s U.S. consolidated federal income tax return for Tax Year Y is
Date N, which is more than 30 days after August 15, 2008.
PLR-135901-08 2

Corp A Group owns, directly and indirectly, 100 percent of Corp B, a controlled foreign
corporation (CFC) for U.S. tax purposes. Corp B owns 100 percent of Corp C, another
CFC, which beneficially owns operations in Country L. Corp C is, and has been, a dual
capacity taxpayer, as defined in Treas. Reg. §1.901-2(a)(2)(ii)(A), with respect to its
operations in Country L.

Treas. Reg. §1.901-2A(c)(1) permits dual capacity taxpayers in computing foreign tax
credits for qualifying levies of each country to use either a “facts and circumstances”
method or a ”safe harbor” method to determine the amount of a levy that is not paid in
exchange for a specific economic benefit.

Corp A filed a safe harbor method election under Treas. Reg. §1.901-2A(c)(3) with
respect to Country L levies paid or accrued (or deemed paid or accrued) by members of
Corp A Group effective for Tax Year X and for subsequent years. That safe harbor
method election has not been revoked under §1.901-2A(d)(4).

Treas. Reg. §1.901-2A(d) describes the manner in which taxpayers may elect and
revoke the safe harbor method. Treas. Reg. §1.901-2A(d)(4) provides that the safe
harbor method election may not be revoked without the consent of the Commissioner.
Consent is normally given, provided the conditions set forth in the regulation are
satisfied. The regulation provides that an application for consent to revoke the election
must be made not later than 30 days before the due date (including extensions) for the
filing of the income tax return for the first taxable year for which the revocation is sought
to be effective, with certain exceptions not applicable to this situation. The
Commissioner may make his consent to any revocation conditioned upon adjustments
being made in one or more taxable years so as to prevent the revocation from resulting
in a distortion of the amount of any item relating to tax liability in any taxable year. The
Commissioner will normally consent to a revocation under the circumstances described
in §1.901-2A(d)(4)(i) through (vi).

Treas. Reg. §1.901-2A(d)(4)(vi) provides that the Commissioner will normally consent to
a revocation of a safe harbor method election if the election has been in effect with
respect to at least three taxable years prior to the taxable year for which the revocation
is to be effective.

Based solely on the information and representations submitted, Corp A’s application for
consent to revoke the safe harbor method election with respect to qualifying levies of
Country L was made not later than 30 days before Date N, the due date (including
extensions) for Corp A’s U.S. consolidated federal income tax return for Tax Year Y,
and the applicable safe harbor method election has been in effect with respect to at
least Corp A’s last three taxable years prior to Tax Year Y. Accordingly, consent is
PLR-135901-08 3

granted to Corp A to revoke the safe harbor method election with respect to qualifying
levies of Country L effective for Tax Year Y and for all subsequent taxable years.

No opinion was requested, and no opinion is expressed, as to whether, based upon all
of the relevant facts and circumstances, the amount (if any) paid pursuant to a levy or
levies imposed by Country L is not an amount paid in exchange for a specific economic
benefit.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                   Sincerely,



                                   Richard L. Chewning
                                   Senior Counsel, Branch 3
                                   (International)

Enclosure:
Copy for 6110 purposes
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