For purposes of apportioning interest expense of a 10/50 corporation in order to apply the dividend look-through rule, new §1.861-9T(f)(4) generally applies the principles of §1.861-9T(f)(3) (apportionment of interest expense of a controlled foreign corporation). Under this rule, interest expense of a 10/50 corporation may be apportioned using either the asset method or the modified gross income method. Section 1.861-9T(f)(4) also provides that the election to use the asset method or modified gross income method may be made by either the 10/50 corporation itself or by the “majority domestic corporate shareholders” of the 10/50 corporation. The term majority domestic corporate shareholders means those domestic corporations that meet the ownership requirements of section 902(a) with respect to the 10/50 corporation (or to a first-tier foreign corporation that is a member of the same qualified group as the 10/50 corporation) that, in the aggregate, own directly or indirectly more than 50 percent of the combined voting power of all of the voting stock of the 10/50 corporation that is owned directly or indirectly by all domestic corporations that meet the ownership requirements of section 902(a) with respect to the 10/50 corporation (or a relevant first-tier 10/50 corporation). Unlike a controlled foreign corporation (CFC), however, a 10/50 corporation will not be required to use the asset method even though the majority domestic corporate shareholders elect the fair market value method of apportionment. Compare §1.861-9T(f)(3)(i) and §1.861-8T(c)(2) (requiring CFC to use fair market value method if controlling United States shareholders as defined in §1.861-9T(f)(3)(ii) elect fair market value method). The IRS and the Treasury Department believe that the conformity rule of §1.861-8T(c)(2) should not apply to foreign corporations that are not controlled by domestic shareholders. Therefore, regardless of the methods used by the majority domestic corporate shareholders of a 10/50 corporation, the 10/50 corporation (or the majority domestic corporate shareholders on behalf of the 10/50 corporation) may elect to use any of the methods described in §1.861-9T or §1.861-9 (e.g., the modified gross income, tax book value, alternative tax book value, or fair market value method) to apportion the 10/50 corporation’s interest expense.

For purposes of apportioning interest expense to income of a taxpayer in the various separate categories under section 904(d), §1.861-12T(c)(4) currently treats stock of each 10/50 corporation owned by the taxpayer as an asset giving rise to income in a separate category. The temporary regulations are amended to reflect the repeal of separate categories for dividends from 10/50 corporations. Because dividends from 10/50 corporations are eligible for look-through treatment in the same manner as dividends from CFCs, the IRS and the Treasury Department believe that stock of a 10/50 corporation should be treated for interest expense apportionment purposes in the same manner as stock of a CFC, which is characterized based on the income produced in the current year, or expected to be produced in future years, by the assets of the CFC. See §1.861-12T(c)(3). Accordingly, §1.861-12T(c)(4) is amended to provide that stock in a 10/50 corporation is characterized as an asset in the various separate categories on the basis of either the asset method (described in §1.861-12T(c)(3)(ii)) or the modified gross income method (described in §1.861-12T(c)(3)(iii)), depending on the method used by the 10/50 corporation to apportion its interest expense. In addition, the temporary regulations eliminate the special rule in §1.861-12T(c)(4)(ii) for separate limitation losses, which provided that a taxpayer could elect to reallocate interest expense that resulted in a loss in a separate category for dividends from a 10/50 corporation. This rule is no longer necessary due to the elimination of separate categories for dividends from 10/50 corporations.

The current temporary regulations require an affiliated group using the tax book value method in apportioning its interest expense to adjust the basis of stock in any “10 percent owned corporation” that is held directly by members of the group to reflect the member’s pro rata share of such corporation’s earnings and profits (or deficit in earnings and profits). §1.861-12T(c)(1), (c)(2). The adjustment must take into account such corporation’s pro rata share of the earnings and profits (or deficit) of any lower-tier 10 percent owned corporation. §1.861-12T(c)(2)(iii). In general, a corporation is a “10 percent owned corporation” if members of the affiliated group own directly or indirectly 10 percent or more of the voting power of the corporation. §1.861-12T(c)(2)(ii). As amended by this Treasury Decision, the basis adjustment rule of §1.861-12T(c)(2)(i) is revised to clarify that it applies to stock of a 10 percent owned corporation not only where stock in a 10 percent owned corporation is held directly by members of the affiliated group, but also where the stock is held indirectly through a partnership or other pass-through entity. Thus, the basis adjustment is required whenever the stock (rather than the interest in the pass-through entity) is the relevant asset for purposes of interest expense apportionment.

The 1997 Act and AJCA amendments expanded the look-through treatment of dividends from 10/50 corporations. The temporary regulations amend §1.902-1(d) to reflect these changes. The temporary regulations also reflect provisions of the 1997 Act amending section 902 to provide for the calculation of deemed-paid taxes with respect to distributions through up to six tiers of foreign corporations in a chain of corporations in a “qualified group” described in section 902(b)(2). Under section 902(b)(2), the term “qualified group” does not include any foreign corporation below the third tier in the chain unless such corporation is a controlled foreign corporation of which the domestic corporation is a United States shareholder. For a member of the qualified group below the third tier, only foreign income taxes paid with respect to periods during which it was a controlled foreign corporation are eligible to be deemed paid. The temporary regulations modify §1.902-1 to reflect these statutory amendments, effective for taxes paid by fourth-, fifth-, and sixth-tier qualified group members with respect to taxable years beginning after August 5, 1997.

Under §1.902-1(a)(7), foreign income taxes do not include amounts not treated as a tax or certain taxes for which credit is disallowed under various provisions of section 901. The temporary regulations update the definition of foreign income taxes in §1.902-1(a)(7) to exclude taxes for which a credit is disallowed under sections 901(j) (relating to the disallowance of a credit for foreign taxes paid or accrued to certain countries), sections 901(k) and (l) (disallowing credit for certain withholding taxes paid with respect to dividends or other income if the recipient does not meet certain holding period requirements or is under an obligation to make related payments with respect to substantially similar or related property), or any similar provision. In addition, the temporary regulations modify §1.902-1(a)(8) to reflect the amendment of section 902(c)(2)(B) in 1997, which clarified the definition of post-1986 foreign income taxes by substituting the phrase “attributable to” for the phrase “deemed paid with respect to.”

Section 1113(c)(2) of the 1997 Act provided that in the case of any chain of foreign corporations described in clauses (i) and (ii) of section 902(b)(2)(B), no liquidation, reorganization, or similar transaction in a taxable year beginning after August 5, 1997, can have the effect of permitting taxes to be taken into account under section 902 which could not have been taken into account under section 902 but for the transaction. This rule was enacted as part of the effective date of the 1997 Act’s extension of the deemed-paid credit rules from three to six tiers as discussed above. Accordingly, §1.902-1T(c)(8) is added to clarify that foreign taxes paid or accrued by a qualified group member are not eligible to be deemed paid if they were paid or accrued in a taxable year beginning on or before August 5, 1997, if such member was a fourth-, fifth- or sixth-tier corporation with respect to the taxpayer on the first day of its first taxable year beginning after August 5, 1997.

Section 904(d)(4)(C)(iv), as amended by the AJCA, provides that look-through treatment applies to the carryover of excess foreign taxes from pre-2003 taxable years to post-2002 taxable years to the extent that they are allocable to dividends from 10/50 corporations. Consistent with this statutory amendment, §1.904-2T(h)(1) provides that to the extent that a taxpayer has paid, accrued, or deemed paid excess taxes in a separate category for dividends from a 10/50 corporation paid in a pre-2003 taxable year and these excess taxes are carried over to taxable years beginning on or after the first day of the 10/50 corporation’s first post-2002 taxable year, the excess taxes are assigned to the appropriate separate category as if the associated dividends had been eligible for look-through treatment when paid, based on the reconstruction of the 10/50 corporation’s pre-2003 earnings in accordance with §1.904-7T(f) (discussed below in section V.E., “Treatment of earnings and taxes accumulated during a non-look-through period”). In the case of excess taxes attributable to dividends from a 10/50 corporation with respect to which the taxpayer is no longer a qualifying shareholder as of the first day of its first post-2002 taxable year, §1.904-2T(h)(1) provides that the excess taxes are assigned pro rata to the separate categories to which the foreign corporation’s pre-2003 earnings would have been assigned had they been distributed in the last year that the taxpayer was a qualifying shareholder.

If the Commissioner determines that the look-through characterization of the excess taxes cannot be reasonably determined under one of the methods described in §1.904-7T(f)(4), the Commissioner will assign such taxes to the general limitation category. Section 1.904-2T(h)(1) also provides that any excess taxes carried over from pre-2003 taxable years to post-2002 taxable years that would otherwise be assigned to the passive category are assigned to the general limitation category. The IRS and the Treasury Department believe that these rules are appropriate because to the extent the pre-2003 dividend paid by the 10/50 corporation that generated the excess credits would have been treated as passive income, such income and associated taxes would have been considered high-taxed income under section 904(d)(2)(A)(iii)(III) and generally would have been recharacterized as general limitation income and taxes.

Section 904(d)(4)(C)(iv), as amended by the AJCA, authorizes the Secretary to issue regulations for allocating carrybacks of excess taxes allocable to a dividend paid by a 10/50 corporation in a post-2002 taxable year to a pre-2003 taxable year for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried. The IRS and the Treasury Department determined that the regulations should not provide for the carryback of post-2002 excess taxes attributable to look-through dividends paid by a 10/50 corporation to a separate limitation category for dividends from each 10/50 corporation in pre-2003 years. Such a rule would be administratively burdensome because it would require taxpayers to maintain multiple sets of section 904(c) accounts for separate categories for the 2003 and 2004 taxable years and because it would necessitate complex stacking rules to determine the amount of excess taxes in a separate category that were attributable to dividends paid by specific 10/50 corporations. Accordingly, §1.904-2T(h)(2) provides that excess taxes that are allocable to dividends from 10/50 corporations paid in post-2002 taxable years that are attributable to one or more separate categories are carried back to prior taxable years in the same separate categories to which the dividends were assigned.

In general, income received or accrued by a United States person that would otherwise be passive income is treated as general limitation income if the income is determined to be high-taxed income within the meaning of section 904(d)(2)(F). In determining whether passive income is high-taxed income, the grouping rules of §1.904-4(c) apply separately to dividends and subpart F inclusions from each controlled foreign corporation, income of a qualified business unit (QBU), and income of a QBU of a controlled foreign corporation and any other look-through entity as defined in §1.904-5(i). §§1.904-4(c)(4) and (c)(5)(iv). The temporary regulations at §1.904-4T(c)(3) and (c)(4) provide that the grouping rules similarly apply separately to dividends from each 10/50 corporation, which includes dividends that are treated as passive income either on a look-through basis or due to inadequate substantiation. The IRS and the Treasury Department believe that this rule is consistent with the intent of the existing separate grouping rules as well as legislative intent that “the high-tax income rules apply appropriately to dividends treated as passive category income because of inadequate substantiation.” H.R. Conf. Rep. No. 755, 108th Cong. 2d Sess. 386 n.222 (2004). Consistent with the changes to the look-through rules enacted in the AJCA, this rule is effective for dividends paid in post-2002 taxable years of 10/50 corporations.

Section 904(d)(4)(A), as amended by the AJCA, provides that look-through treatment applies to any dividend paid by a 10/50 corporation in a post-2002 taxable year, regardless of the year in which the earnings were accumulated. Accordingly, §1.904-5T(c)(4)(iii) provides that any dividends paid in a post-2002 taxable year to a domestic corporation by a 10/50 corporation with respect to which the domestic corporation meets the stock ownership requirements of section 902(a) are treated as income in a separate category in proportion to the ratio of the portion of earnings and profits attributable to income in such category to the total amount of earnings and profits of the 10/50 corporation. Interest, rents, and royalties paid by a 10/50 corporation to a domestic corporation are not eligible for look-through treatment and are treated as passive income except as otherwise provided in section 904(d)(2)(A) and the regulations thereunder. Any dividend distribution by a 10/50 corporation to a shareholder that is not a corporation meeting the stock ownership requirements of section 902(a) or (b) is also treated as passive income. Finally, as provided in section 904(d)(4)(C)(ii), §1.904-5T(c)(4)(iii) provides that a dividend from a 10/50 corporation is treated as passive income if the look-through characterization of the dividend is not substantiated to the satisfaction of the Commissioner. These rules are generally applicable to dividends paid by a 10/50 corporation during its first post-2002 taxable year and thereafter, without regard to whether the corresponding taxable year of the dividend recipient is a post-2002 taxable year.

In applying look-through to dividends from 10/50 corporations, expenses of the 10/50 corporation (such as payments of interest, rents, and royalties) must be allocated and apportioned to the 10/50 corporation’s pools of post-1986 undistributed earnings. §1.904-5T(c)(2)(iii) provides that expenses of a 10/50 corporation are allocated and apportioned to the income of the 10/50 corporation in the same manner as expenses of a CFC. See, e.g., section 954(b)(5); §1.904-5(c)(2)(ii)).

The temporary regulations, however, do not extend the special allocation rule for related person interest expense under section 954(b)(5) and §1.904-5(c)(2)(ii) (providing that interest paid by a CFC to a U.S. shareholder or any related look-through entity is first allocated to reduce foreign personal holding company income which is passive income) to interest paid by 10/50 corporations. The AJCA did not extend look-through treatment to interest paid by a 10/50 corporation to a domestic shareholder or to a related entity, and 10/50 corporations are not subject to subpart F. Accordingly, interest paid by a 10/50 corporation to a domestic shareholder, CFC, or another 10/50 corporation is treated as passive income (or high withholding tax interest, financial services income, or high-taxed general limitation income, as appropriate) and is apportioned to reduce the payor’s pools of post-1986 undistributed earnings under the rules applicable to unrelated person interest expense, even though the generally applicable expense allocation rules of §1.904-5 apply to determine which earnings are reduced at the payor 10/50 corporation level.

To reflect the extension of look-through treatment to dividends paid by 10/50 corporations and the repeal of separate categories for dividends from each 10/50 corporation, the temporary regulations remove the rules of §1.904-4(g) and amend the relevant provisions of §§1.902-1 and 1.904-5. In order for a dividend from a 10/50 corporation to qualify for look-through treatment, the shareholder must be a domestic corporation meeting the stock ownership requirements of section 902(a) with respect to the 10/50 corporation. Sections 904(d)(2)(E) and 904(d)(4).

In determining whether dividends paid by lower-tier corporations are eligible for look-through treatment, the eligibility requirements for dividends from 10/50 corporations and CFCs cannot be precisely conformed, because a taxpayer’s eligibility for look-through treatment of a dividend from a 10/50 corporation is based on whether the taxpayer meets the stock ownership requirements of section 902, whereas a taxpayer’s eligibility for look-through treatment of a dividend from a CFC is based on whether the taxpayer is a United States shareholder with respect to the CFC under section 951(b). See sections 904(d)(2)(E)(i), 904(d)(3)(A), 904(d)(3)(D), and 904(d)(4)(A). However, the IRS and the Treasury Department believe that the eligibility requirements for look-through treatment of dividends from 10/50 corporations and CFCs should be conformed to the greatest extent possible.

Accordingly, §1.902-1T(d)(1) provides that the amount of foreign taxes deemed paid is computed separately with respect to post-1986 undistributed earnings or pre-1987 accumulated profits in each separate category out of which a look-through dividend is paid in the following situations: (1) a dividend from a CFC to a domestic corporation meeting the stock ownership requirements of section 902(a) that is a United States shareholder (as defined in section 951(b) or section 953(c)) of the CFC; (2) a dividend from a 10/50 corporation to a domestic corporation meeting the stock ownership requirements of section 902(a); (3) a dividend received by an upper-tier CFC from a lower-tier CFC where the CFCs are related look-through entities under §1.904-5(i)(3); and (4) a dividend from a CFC or 10/50 corporation to a foreign corporation that is eligible to compute an amount of foreign taxes deemed paid under section 902(b)(1) (i.e., both the payor and payee corporations are members of the same qualified group as defined in section 902(b)(2)). Similarly, the temporary regulations at §1.904-5T(i)(4) apply look-through treatment to any dividend paid by a CFC or 10/50 corporation to another member of the same qualified group (as defined in section 902(b)(2)) that is eligible to compute an amount of foreign taxes deemed paid under section 902(b)(1), and retain the current rule of §1.904-5(i)(3) to the extent that it applies look-through treatment to dividends between CFCs that have a common 10 percent U.S. shareholder but do not meet the requirements of section 902(b).

Section 904(g) (redesignated under the AJCA as section 904(h) for taxable years beginning after 2006) provides that certain inclusions, including dividends and interest paid or accrued by a United States-owned foreign corporation to a United States shareholder or a related person and which would be treated as foreign source income, are treated as U.S. source income. Section 904(g)(6) defines a United States-owned foreign corporation as any foreign corporation if United States persons (as defined in section 7701(a)(30) hold 50 percent or more of either the total combined voting power of all classes of voting stock or the total value of the stock. Section 1.904-5(m) provides rules concerning the resourcing of certain amounts received or accrued (or treated as received or accrued) by a United States shareholder from a CFC. The temporary regulations at §1.904-5T(m) clarify that the rules for resourcing interest and dividends also apply to a 10/50 corporation that meets the definition of a United States-owned foreign corporation. These temporary regulations apply to amounts paid by a 10/50 corporation in taxable years of such corporation beginning after April 25, 2006.

Section 1.904-7T(f)(2) provides that earnings accumulated and foreign income taxes paid after a 10/50 corporation had a domestic corporate shareholder that met the stock ownership requirements of section 902(a) but before any such shareholder was eligible for look-through treatment of dividends (non-look-through pool) that exist as of the end of the 10/50 corporation’s last pre-2003 taxable year are treated as if they were accumulated and paid during a period in which the distribution would have been eligible for look-through treatment (look-through period). These earnings and taxes are treated as the opening balance of the post-1986 undistributed earnings and taxes pools in the 10/50 corporation’s other separate categories on the first day of the 10/50 corporation’s first post-2002 taxable year. Dividends that were paid in pre-2003 taxable years out of earnings accumulated in a non-look-through pool are not eligible for look-through treatment.

Section 1.904-7T(f)(4)(i) provides that in order to substantiate the look-through characterization of the earnings and taxes in the non-look-through pools, the taxpayer must reconstruct the non-look-through pools of earnings and taxes for each year in the non-look-through period, beginning with the first year in which earnings were accumulated in the non-look-through pool. Earnings and taxes are treated as if they were accumulated during a look-through period, taking into account earnings distributed and taxes deemed paid in the non-look-through period as if they were distributed and deemed paid pro rata from the amounts that were added to the non-look-through pools during the non-look-through period. As reconstructed, earnings and taxes in the non-look-through pools as of the last day of the 10/50 corporation’s last pre-2003 taxable year are assigned to the look-through pools on the first day of the 10/50 corporation’s first post-2002 taxable year.

The IRS and the Treasury Department recognize that shareholders may face difficulties in reconstructing historical accumulated earnings and taxes accounts of a 10/50 corporation on a look-through basis, because noncontrolling shareholders may have difficulty obtaining detailed records for prior periods from the 10/50 corporation. Therefore, the IRS and the Treasury Department anticipate that a reasonable approximation of the amounts properly included in the look-through pools, based on available records obtained through reasonable, good-faith efforts by the taxpayer, will adequately substantiate the reconstruction required by the statute.

Alternatively, §1.904-7T(f)(4)(ii) provides a safe harbor in reconstructing the non-look-through pools. Under the safe harbor, a taxpayer may allocate the earnings and taxes in the non-look-through pools ratably to the look-through pools on the first day of the 10/50 corporation’s first post-2002 taxable year in the same percentages as the taxpayer (or the qualified group member that owns the 10/50 corporation) properly characterizes the stock of the 10/50 corporation in the separate categories for purposes of apportioning the taxpayer’s (or qualified group member’s) interest expense in its first taxable year ending after the first day of the 10/50 corporation’s first post-2002 taxable year. Under §1.861-12T(c)(3) and (4), this characterization generally is based on how the assets or income of the 10/50 corporation are characterized in the separate categories for purposes of apportioning interest expense of the 10/50 corporation in the 10/50 corporation’s first post-2002 taxable year. However, §1.904-7T(f)(4)(ii) provides that if a taxpayer elects to use the safe harbor rule with respect to a 10/50 corporation that uses the modified gross income method to apportion interest expense for the 10/50 corporation’s first post-2002 taxable year, earnings and taxes in the non-look-through pools are allocated to the look-through pools based on an average of the 10/50 corporation’s modified gross income ratios for its taxable years beginning in 2003 and 2004. The IRS and the Treasury Department believe that the two-year base period rule is necessary to avoid potential distortions associated with allocating earnings and taxes from the non-look-through pool to the look-through pools based on the 10/50 corporation’s modified gross income for just one taxable year.

Section 904(d)(4)(C)(ii), as amended by the AJCA, provides that if the Secretary determines that look-through treatment of a dividend out of earnings formerly accumulated in the non-look-through pool has not been adequately substantiated, the dividend is treated as passive income for purposes of section 904(d). Section 1.904-7T(f)(4)(iii) provides that in the case where a taxpayer does not elect the safe harbor rule of §1.904-7T(f)(4)(ii) and the Commissioner determines that the look-through characterization of earnings and taxes in the non-look-through pools cannot reasonably be determined based on the available information, the Commissioner will assign the earnings and associated taxes to the passive category for purposes of section 904(d).

As provided in §1.904-7T(f)(3), rules similar to §1.904-7T(f)(2) will apply in assigning to separate categories earnings and taxes of a CFC that were accumulated during a non-look-through period. As reconstructed, earnings and taxes in a CFC’s non-look-through pools as of the last day of the CFC’s last pre-2003 taxable year will be added to the opening balance of the CFC’s look-through pools of earnings and taxes on the first day of the CFC’s first post-2002 taxable year. The taxpayer must substantiate the look-through characterization of such earnings and taxes in accordance with §1.904-7T(f)(4) by either reconstructing the non-look-through pools or electing the safe harbor.

In addition, as provided in §1.904-7T(f)(6), the rules of §1.904-7T(f)(2) will apply to assign to separate categories pre-1987 accumulated profits and pre-1987 foreign income taxes of a foreign corporation that were accumulated during a non-look-through period and, prior to the AJCA amendments, would have been assigned to a separate category for dividends from a 10/50 corporation. Accordingly, pre-1987 accumulated profits and pre-1987 foreign income taxes accumulated during a non-look-through period will be treated as if they were accumulated during a look-through period. The taxpayer must substantiate the look-through characterization of such earnings and taxes in accordance with §1.904-7T(f)(4) by either reconstructing the annual layers of pre-1987 accumulated profits or electing the safe harbor.

Section 1.904-7T(f)(5) provides that if there is an accumulated deficit in the non-look-through pool as of the end of a 10/50 corporation’s last pre-2003 taxable year, the deficit and associated taxes are treated in the same manner as earnings and taxes in a positive non-look-through pool, i.e., the deficit and taxes are treated as if they had been accumulated and paid during a look-through period. The earnings and deficits in earnings making up the accumulated deficit are assigned to the look-through pools based on where the 10/50 corporation’s income and expenses or losses would have been assigned had they been incurred during a look-through period, or, if the taxpayer elects the safe harbor, the deficit is allocated based on how the stock of the 10/50 corporation is properly characterized for interest expense apportionment purposes. If the taxpayer does not elect the safe harbor and the Commissioner determines that the look-through characterization of the deficit in the non-look-through pool cannot be reasonably determined based on the available information, the Commissioner will assign the deficit and any associated taxes to the 10/50 corporation’s passive category.

The temporary regulations treat the deficit in the non-look-through pool as the opening balance of the post-1986 undistributed earnings pools in the 10/50 corporation’s other separate categories on the first day of the 10/50 corporation’s first post-2002 taxable year. If the 10/50 corporation makes a distribution in a post-2002 taxable year in which there is a deficit balance in the aggregate of the look-through pools (as increased or reduced by earnings or a deficit in the non-look-through pool), the deficit balance is carried back, on a look-through basis, to reduce pre-1987 accumulated profits on a last in-first out basis, and the deficit is removed from post-1986 undistributed earnings. See §1.902-2(a)(1). If the deficit reduces to zero all of the pre-1987 accumulated profits, no foreign taxes in any of the pre-1987 annual layers are deemed paid with respect to the dividend. See §1.902-1(b)(4).

In the case of a CFC that was formerly a 10/50 corporation and has a deficit in the non-look-through pool that was accumulated while it was a 10/50 corporation, any deficit that was not absorbed by earnings in the look-through pools and that remains at the end of the CFC’s last pre-2003 taxable year is assigned to the look-through pools on the first day of the CFC’s first post-2002 taxable year based on the reconstruction or safe harbor rules of §1.904-7T(f)(4). Foreign income taxes associated with this deficit pool that were previously not creditable are also assigned to the look-through pools on the first day of the CFC’s first post-2002 taxable year based on the same method. To the extent that the portion of the deficit in the non-look-through pool that is assigned to a separate category exceeds post-1986 undistributed earnings in that category as of the end of the CFC’s last pre-2003 taxable year, the deficit will carry forward into the CFC’s post-1986 undistributed earnings pools for 2003. Under §1.904-7T(f)(6), similar rules apply to recharacterize a deficit in pre-1987 accumulated profits and any associated pre-1987 foreign income taxes that were accumulated during a non-look-through period.

Section 904(d)(4)(C)(i)(II), as amended by the AJCA, provides that the Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits of a 10/50 corporation for periods before the taxpayer’s acquisition of the stock to which the distributions relate (pre-acquisition E&P). Such distributions may be out of post-1986 undistributed earnings accumulated by a 10/50 corporation before the specific shareholder acquired its stock or out of pre-1987 accumulated profits accumulated before the 10/50 corporation had any qualifying shareholder. Prior to the AJCA amendments, such distributions, as well as distributions by a CFC out of earnings and profits for periods during which it was not a CFC, were subject to a separate foreign tax credit limitation for dividends from a 10/50 corporation. See section 904(d)(1)(E), section 904(d)(2)(E), and §1.904-4(g)(3).

The temporary regulations do not limit look-through treatment for dividends out of earnings and profits accumulated in non-look-through periods during which a 10/50 corporation or CFC had no qualifying shareholder. The IRS and the Treasury Department believe that look-through treatment of pre-acquisition earnings is the more appropriate policy result than passive category treatment, if look-through characterization can be adequately substantiated under the rules of §§1.904-5T(c)(4)(iii) and 1.904-7T(f)(4). In addition, the temporary regulations do not limit look-through treatment for dividends out of pre-acquisition E&P accumulated in periods during which the distributing corporation was a 10/50 corporation, because any such restriction would create administrative complexities associated with maintaining multiple sets of look-through pools starting on different dates for different U.S. shareholders. Accordingly, distributions of earnings and profits from 10/50 corporations and CFCs in post-2002 taxable years are generally eligible for look-through treatment, regardless of whether the distributing corporation was a look-through entity when the earnings were accumulated, and regardless of when the taxpayer acquired its stock.

Where a CFC has a separate category for dividends from each 10/50 corporation containing earnings attributable to pre-2003 distributions from the lower-tier 10/50 corporation, §1.904-7T(f)(7) provides that the CFC’s look-through pools of earnings and taxes will be adjusted to account for accumulated earnings and taxes attributable to dividends from the lower-tier 10/50 corporation as if the earnings and taxes were accumulated and deemed paid during a look-through period. Therefore, the earnings and taxes are recharacterized on the same basis used by the taxpayer to reconstruct the non-look-through pools of the lower-tier 10/50 corporation under §1.904-7T(f)(4). Taxes in each separate category for dividends from a lower-tier 10/50 corporation are assigned to the upper-tier CFC’s look-through pools based on where the associated earnings distributed by the lower-tier foreign corporation (prior to being reduced by, for example, expense apportionment or payment of foreign income taxes at the CFC level) would have been assigned had such earnings been eligible for look-through treatment when received by the CFC.

If a CFC has a deficit in a separate category for dividends from a lower-tier 10/50 corporation (due to, for example, expense apportionment or the payment of foreign income taxes by the CFC with respect to the lower-tier 10/50 corporation), the deficit and any associated taxes are treated as if they had been accumulated and deemed paid during a look-through period. Accordingly, the deficit is assigned to the upper-tier CFC’s look-through pools based on where the upper-tier CFC’s income and expenses or losses would have been assigned had dividends from the lower-tier 10/50 corporation been eligible for look-through treatment in the year such dividends were paid or such expenses and losses were incurred by the CFC.

Similar to §1.904-7T(f)(4)(ii) (which provides a safe harbor in reconstructing the non-look-through pools to account for undistributed earnings (or a deficit) and taxes in the non-look-through pool of a 10/50 corporation or CFC), §1.904-7T(f)(7)(iii) provides a safe harbor in reconstructing the look-through pools at the CFC level to account for undistributed earnings (or a deficit) and taxes in a CFC-level separate category for dividends from a lower-tier 10/50 corporation. The taxpayer may allocate the earnings (or deficit) and taxes to the look-through pools at the CFC level by applying the safe harbor at the level of the CFC. Thus, if the taxpayer elects the safe harbor, the earnings (or deficit) and taxes are allocated based on how the CFC would properly characterize the stock of the lower-tier 10/50 corporation for purposes of apportioning the CFC’s interest expense, which in turn is based on the apportionment ratios properly used by the 10/50 corporation to apportion its interest expense in its first post-2002 taxable year. In the case of a taxpayer that elects to use the safe harbor rule where the 10/50 corporation uses the modified gross income method to apportion interest expense for its first post-2002 taxable year, undistributed earnings (or a deficit) and taxes in a CFC-level separate category for dividends from a 10/50 corporation are allocated to the look-through pools based on the average of the 10/50 corporation’s modified gross income ratios for its taxable years beginning in 2003 and 2004.

In the case of a CFC that has in its qualified group a chain of 10/50 corporations, the safe harbor applies first to the stock of the third-tier 10/50 corporation and then to the stock of the second-tier 10/50 corporation. In the case of a taxpayer that elects the safe harbor with respect to a lower-tier 10/50 corporation of which the taxpayer was no longer a qualifying shareholder as of the end of the upper-tier CFC’s last pre-2003 taxable year (e.g., because the 10/50 corporation was no longer a member of the CFC’s qualified group), the earnings (or deficit) and taxes in the separate category for dividends from the lower-tier 10/50 corporation are assigned to the CFC’s look-through pools in the same percentages as the stock of the 10/50 corporation would have been characterized had the look-through rules applied in the last year the taxpayer was a qualifying shareholder of the 10/50 corporation.

If the taxpayer does not elect the safe harbor and the Commissioner determines that the look-through characterization of the undistributed earnings (or deficit) and taxes in a CFC’s separate category for dividends from a lower-tier 10/50 corporation cannot reasonably be determined based on the available information, the Commissioner will assign the earnings (or deficit) and taxes to the CFC’s passive category.

Section 1.904-7T(f)(8) provides guidance concerning when a dividend paid by a lower-tier corporation to an upper-tier corporation that is a member of the same qualified group is eligible for look-through treatment when the corporations’ first post-2002 taxable years begin on different dates. In the case of a dividend paid during the upper-tier corporation’s post-2002 taxable year but during the lower-tier corporation’s pre-2003 taxable year, the dividend will be included in a separate category in the year received. However, any earnings of the upper-tier corporation attributable to such dividends are treated, beginning on the first day of the upper-tier corporation’s next taxable year, as if they were accumulated during a look-through period. Dividends paid during the upper-tier corporation’s pre-2003 taxable year but during the lower-tier corporation’s post-2002 taxable year are eligible for look-through treatment in the year received.

Because the 1997 Act and the AJCA eliminated separate categories for dividends from 10/50 corporations for post-2002 taxable years, the temporary regulations provide transition rules for recapture in a post-2002 taxable year of (1) an overall foreign loss (OFL) or separate limitation loss (SLL) in a separate category for dividends from each 10/50 corporation that offset U.S. source income or income in other separate categories, respectively, in a pre-2003 taxable year; and (2) an SLL in another separate category (e.g., the general limitation or passive category) that offset income in a separate category for dividends from each 10/50 corporation in a pre-2003 taxable year.

Section 1.904(f)-12T(g)(1) provides that where a taxpayer had an OFL or SLL in a separate category for dividends from a 10/50 corporation (i.e., an OFL, or SLL, in the separate category that offset U.S. source income, or income in other separate categories, in a pre-2003 taxable year, or a later year in which the taxpayer received a dividend in the separate category, and the OFL or SLL would have been recaptured out of income in the separate category for dividends from that 10/50 corporation), the OFL or SLL account is recaptured out of income in the taxpayer’s other separate categories in the same percentages as the income generated by the assets of the 10/50 corporation. Specifically, the loss account will be recaptured in subsequent taxable years out of income in the same separate categories in which the stock of the 10/50 corporation is properly characterized for purposes of apportioning the taxpayer’s interest expense in its first taxable year in which dividends from the 10/50 corporation are eligible for look-through treatment (i.e., its first taxable year ending after the first day of the 10/50 corporation’s first post-2002 taxable year). Any SLL account in a separate category for dividends from a 10/50 corporation with respect to another category that would be assigned to that other category under this rule will be eliminated, since “recapture” to and from the same category would be meaningless. See §1.904(f)-12T(g)(4) Example 1.

The IRS and the Treasury Department determined that it is appropriate to reallocate OFL and SLL accounts based on how the taxpayer characterizes the stock of the 10/50 corporation for interest expense apportionment purposes in its first taxable year ending after the first day of the 10/50 corporation’s first post-2002 taxable year. The IRS and the Treasury Department believe that recapturing losses from income earned in subsequent years is a forward-looking concept. Reallocating losses that were incurred in a separate category for dividends from each 10/50 corporation to the appropriate separate category based on the interest expense apportionment ratio (as opposed to, for example, reallocating losses based on reconstructed non-look-through pools) is consistent with that concept.

In the case of a taxpayer that has an OFL or SLL account in a separate category for dividends from a 10/50 corporation but no longer is a qualifying shareholder with respect to the foreign corporation, the IRS and the Treasury Department determined that reallocating OFLs and SLLs incurred in separate categories for dividends from 10/50 corporations to the other separate categories may be inappropriate. In pre-2003 taxable years, recapture of the OFL or SLL would not have occurred because the taxpayer would not have received any additional dividends from the corporation that would be treated as income in the separate 10/50 loss category (unless the former shareholder reacquired a sufficient interest in the corporation to become a qualifying shareholder). Accordingly, §1.904(f)-12T(g)(3) provides that where a taxpayer was not a qualifying shareholder with respect to a foreign corporation on December 20, 2002 (or was not a qualifying shareholder on the first day of the taxpayer’s first post-2002 taxable year, pursuant to a transaction that was the subject of a binding contract which was in effect on December 20, 2002), any OFL or SLL accounts in the taxpayer’s separate category for dividends from that corporation will not be reallocated. See Notice 2003-5 (announcing regulations would provide that OFL and SLL accounts in a separate category for dividends from each 10/50 corporation where the taxpayer was no longer a qualifying shareholder of as of December 20, 2002, will not be consolidated into the OFL and SLL accounts of the single category for dividends from 10/50 corporations).

Section 1.904(f)-12T(g)(3) also provides that where an OFL or SLL account in a separate category for dividends from each 10/50 corporation is not reallocated because the taxpayer is no longer a qualifying shareholder of that foreign corporation, the taxpayer may not carry over any excess foreign taxes in that separate category to another separate category on a look-through basis. However, the temporary regulations allow the taxpayer to elect to carry over all excess taxes in its separate categories for dividends from 10/50 corporations to the other separate categories, provided that the taxpayer also reallocates the OFL and SLL accounts of such separate categories for dividends from 10/50 corporations into the OFL and SLL accounts of the appropriate separate categories.

To the extent that an SLL in another separate category (e.g., the general limitation or passive category) offset income in a separate category for dividends from each 10/50 corporation in a pre-2003 taxable year (or later year with or within which the 10/50 corporation’s last pre-2003 taxable year ends), income subsequently earned in the loss category will be recaptured as income in the same separate categories in which the taxpayer properly characterizes the stock of the 10/50 corporation on a look-through basis for purposes of apportioning the taxpayer’s interest expense. See §§1.904(f)-12T(g)(2). Section 1.904(f)-12T(g)(4), Example 2, illustrates how the apportionment rule applies to SLLs in the general limitation and passive categories that previously offset income in a separate category for dividends from a 10/50 corporation, where the taxpayer characterizes the stock of the 10/50 corporation as a multiple category asset.

Section 1.964-1T(c)(2) and (3) add rules allowing the majority domestic corporate shareholders of a 10/50 corporation to make an election, adopt a method of accounting or taxable year, or change a method of accounting or taxable year on behalf of the 10/50 corporation. Under §1.964-1T(c)(5), the term majority domestic corporate shareholders is defined as those domestic corporations that meet the ownership requirements of section 902(a) with respect to the 10/50 corporation (or to a first-tier foreign corporation that is a member of the same qualified group as the 10/50 corporation), that, in the aggregate, own directly or indirectly more than 50 percent of the combined voting power of all the voting stock of the 10/50 corporation that is owned directly or indirectly by all domestic corporations that meet the ownership requirements of section 902(a) with respect to the 10/50 corporation (or a relevant first-tier foreign corporation).

Section 1.964-1(c)(3) of the current final regulations permits controlling United States shareholders of a CFC to make an election, or to adopt or change a method of accounting, on behalf of the CFC. Subject to the rules of section 898, the temporary regulations at §1.964-1T(c)(3) extend this rule to permit controlling United States shareholders of a CFC to adopt or change the taxable year of a CFC. Finally, the temporary regulations revise the requirement that the controlling shareholders file a written statement executed by each of the controlling shareholders with the IRS within 180 days of the close of the foreign corporation’s taxable year for which the adoption or change in method of accounting is to be effective. In lieu of the written statement, §1.964-1T(c)(3)(i)(B) requires that the jointly executed statement evidencing the controlling shareholders’ consent to the adoption or change be retained by one or more of the shareholders, and that each shareholder file a separate statement with its tax return for the taxable year with or within which the foreign corporation’s taxable year ends. This change will facilitate e-filing by eliminating the signature requirement and will facilitate compliance by conforming the dates on which the election statement and the shareholder’s tax return must be filed.

As discussed in the Background section of this document, section 403(l) of the GOZA provides a rule under which a taxpayer may elect not to apply the extended look-through rules enacted in the AJCA for taxable years of 10/50 corporations beginning after December 31, 2002, and before January 1, 2005 (2003 and 2004 taxable years). In order to make the election, a taxpayer must attach a statement notifying the IRS of such election to its next tax return for which the due date (with extensions) is more than 90 days after April 25, 2006. The electing taxpayer’s tax liability as shown on its original or amended tax returns for its affected taxable years generally must be consistent with the guidance set forth in Notice 2003-5, 2003-1 C.B. 294, and the rules of §1.861-12T(c)(4) (characterizing the stock of a 10/50 corporation as an asset in the various separate categories). The electing taxpayer must also make appropriate adjustments to eliminate any double benefit arising from the election in years that are not open for assessment. §1.904-7T(f)(9).

Taxpayers that elect to apply the pre-AJCA look-through rules for the 2003 and 2004 taxable years must assign dividends paid by 10/50 corporations in their 2003 and 2004 taxable years out of pre-2003 earnings to a single separate category for dividends from all 10/50 corporations (see Notice 2003-5). The temporary regulations provide transition rules for applying the AJCA look-through rules in taxable years of 10/50 corporations beginning after December 31, 2004.

Under §1.904-7T(f)(9)(iii), pre-2003 earnings (or a deficit) and taxes in the non-look-through pool that existed as of the end of the foreign corporation’s last pre-2005 taxable year are treated as if they were accumulated and paid during a period in which a distribution from that corporation would have been eligible for look-through treatment. These earnings (or deficits) and taxes are added to the foreign corporation’s post-1986 undistributed earnings and taxes pools in the appropriate separate categories on the first day of the foreign corporation’s first post-2004 taxable year. In accordance with the principles of §1.904-7T(f)(4), the taxpayer must reconstruct the non-look-through pools or, if the taxpayer elects the safe harbor, allocate the earnings and taxes in the foreign corporation’s non-look-through pools to the foreign corporation’s look-through pools on the first day of the foreign corporation’s first post-2004 taxable year. Under the safe harbor, this allocation is made in the same percentages as the taxpayer properly characterized the stock of the foreign corporation for purposes of interest expense apportionment in the taxpayer’s first taxable year ending after the first day of the foreign corporation’s first post-2002 taxable year. If the taxpayer does not elect the safe harbor and the Commissioner determines that the look-through characterization of the earnings (or deficit) and taxes cannot reasonably be determined, the Commissioner will allocate the earnings (or deficit) and taxes to the passive category.

To the extent that a taxpayer had excess foreign taxes in the single category for dividends from all 10/50 corporations (regardless of whether they were carried forward from separate categories for dividends from each 10/50 corporation in pre-2003 taxable years under Notice 2003-5 or resulted from dividends paid in 2003 and 2004 taxable years), they will be carried forward to the appropriate separate categories in the same manner as excess taxes in the separate categories for dividends from each 10/50 corporation are carried over in the case of a non-electing taxpayer. See §1.904-2T(h)(1). The taxpayer must determine which 10/50 corporations paid the dividends to which the excess taxes are attributable and then assign the taxes to the appropriate separate categories as if such dividends had been eligible for look-through treatment when paid. Accordingly, §1.904-7T(f)(9)(iv) provides that excess taxes in the single category for dividends from 10/50 corporations are assigned to the appropriate separate categories by reconstructing the non-look-through pools or, if the taxpayer elects the safe harbor, by allocating the taxes in the same percentages as the taxpayer properly characterized the stock of the foreign corporation for purposes of apportioning the taxpayer’s interest expense for its first taxable year with or within which the 10/50 corporation’s first post-2002 taxable year began. This transition rule applies only to excess taxes attributable to dividends out of pre-2003 earnings, because only these taxes are included in the single category for dividends from all 10/50 corporations.

To the extent that excess taxes carried forward to the single category for dividends from 10/50 corporations under the rules of Notice 2003-5 were absorbed by low-taxed dividends paid by 10/50 corporations in 2003 or 2004 taxable years out of pre-2003 earnings, or expired unused, the amount of excess taxes carried forward to a separate category on a look-through basis will be smaller than the aggregate amount of excess taxes initially carried forward to the single category for dividends from 10/50 corporations. To simplify the process of determining which 10/50 corporations paid the dividends to which the remaining excess taxes are attributable, §1.904-7T(f)(9)(iv) treats the remaining excess taxes as attributable pro rata to the dividends paid by all 10/50 corporations out of non-look-through pools in a particular taxable year that resulted in excess taxes that were eligible to be carried forward. Such excess taxes are then carried forward to the separate categories based on how the non-look-through pools are recharacterized under the rules of §1.904-7T(f)(4).

Excess taxes that would otherwise be assigned to the passive category and excess taxes with respect to which neither the IRS nor the taxpayer can substantiate look-through character are assigned to the general limitation category. This rule, previously discussed in section III above, applies regardless of whether a taxpayer elects to apply the pre-AJCA look-through rules to dividends paid in taxable years of its 10/50 corporations beginning in 2003 and 2004.

To the extent that a taxpayer has excess foreign taxes attributable to a look-through dividend paid by a 10/50 corporation in post-2002 taxable years and such taxes are eligible for carryback, the taxes will be carried back within the same separate category and not to the separate categories or single category for dividends from 10/50 corporations. See §1.904-7T(f)(9)(v).

For taxpayers that maintained OFL and SLL recapture accounts in the single category for dividends from all 10/50 corporations (for example, as the result of consolidating OFL and SLL accounts of separate categories for dividends from each 10/50 corporation into one set of OFL and SLL accounts of the single category for dividends from all 10/50 corporations under Notice 2003-5), the temporary regulations provide a transition rule for recapture in a post-2004 taxable year of an OFL and SLL in the single category for dividends from all 10/50 corporations. Section 1.904-7T(f)(9)(vi) provides that the OFL and SLL accounts are assigned to the appropriate separate categories, on the first day of the taxpayer’s first post-2004 taxable year following the last taxable year in which it received a dividend in this category. The assignment is based on how the stock of each 10/50 corporation giving rise to the OFL or SLL is properly characterized for purposes of apportioning the taxpayer’s interest expense for its first taxable year with or within which the 10/50 corporation’s first post-2002 taxable year began.

For taxpayers that maintained an SLL recapture account in another separate category (e.g., the general or passive category) with respect to the single category for dividends from all 10/50 corporations, §1.904-7T(f)(9)(vii) provides that the SLL will be recaptured as income in the appropriate separate categories in post-2004 taxable years. Income is recaptured in the separate categories in the same percentages as the taxpayer properly characterized the stock of the 10/50 corporations with respect to which the loss account was established for purposes of apportioning the taxpayer’s interest expense for its first taxable year with or within which the 10/50 corporation’s first post-2002 taxable year began.

Where a CFC or 10/50 corporation had a single category for dividends from all 10/50 corporations containing earnings attributable to dividends paid in 2003 or 2004 taxable years of a lower-tier 10/50 corporation, the undistributed earnings, previously-taxed earnings, and associated taxes are treated in post-2004 taxable years in the same manner as pre-2003 undistributed earnings and taxes in a separate category for dividends from each 10/50 corporation maintained at the CFC or 10/50 corporation level. Accordingly, §1.904-7T(f)(9)(viii) provides that the undistributed earnings and associated taxes in the single category for dividends from all 10/50 corporations are assigned to the appropriate separate categories based on the taxpayer’s reconstruction of the non-look-through pools of the lower-tier foreign corporation, or, if the taxpayer elects the safe harbor, by allocating the earnings and taxes in the same percentages as the taxpayer properly characterized (or would have characterized) the stock of the lower-tier 10/50 corporation for purposes of apportioning the upper-tier corporation’s interest expense for its first post-2002 taxable year.

Where a CFC or 10/50 corporation had an aggregate deficit in the single category for dividends from all 10/50 corporations as of the end of the foreign corporation’s 2004 taxable year, the deficit and associated taxes are treated in the same manner as a deficit in post-1986 undistributed earnings attributable to dividends from a lower-tier 10/50 corporation. Accordingly, §1.904-7T(f)(9)(ix) provides that the deficit is assigned to the look-through pools based on where the upper-tier corporation’s income and expenses or losses would have been assigned had they been incurred during a look-through period, or, if the taxpayer elects the safe harbor, the deficit is allocated based on how the taxpayer properly characterized the stock of the lower-tier corporation for purposes of apportioning the upper-tier corporation’s interest expense in its first taxable year with or within which the lower-tier corporation’s first post-2002 taxable year began. Where the taxpayer does not elect the safe harbor and the Commissioner determines that the look-through characterization of the deficit cannot reasonably be determined based on the available information, the Commissioner will assign the deficit and taxes to the upper-tier corporation’s passive category.

Section 403 of the AJCA provides that the amendments apply to taxable years beginning after December 31, 2002. The statutory language and legislative history of the AJCA do not specifically state whether the effective date refers to the taxable year of the foreign corporation or that of the U.S. shareholder. The temporary regulations clarify that the effective date of the amendments refers to the foreign corporation’s taxable year, thereby eliminating the separate category for dividends from each 10/50 corporation as of the beginning of the foreign corporation’s first post-2002 taxable year. Thus, dividends paid by the foreign corporation on and after that date (including dividends paid in a U.S. shareholder’s pre-2003 taxable year) are eligible for look-through treatment. Basing the effective date on the foreign corporation’s taxable year eliminates the need to create and maintain multiple sets of look-through pools of a single foreign corporation that begin on different dates for different shareholders. Accordingly, the temporary regulations are effective for dividends paid in taxable years of 10/50 corporations beginning after December 31, 2002.

As discussed in the Background section of this document, section 403(l) of the GOZA provides a rule allowing taxpayers to elect not to apply the expanded look-through rules enacted in the AJCA to taxable years beginning in 2003 and 2004. As discussed in section VIII above, the temporary regulations provide guidance on the time, form, and manner of the election as well as transition rules applicable to taxpayers that elect to apply the pre-AJCA rules governing 10/50 dividends to 2003 and 2004 taxable years.

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(f) * * *

(3) * * *

(ii) * * * The election shall be made by filing a statement described in §1.964-1T(c)(3)(ii) at the time and in the manner described therein and providing a written notice described in §1.964-1T(c)(3)(iii), except that no such statement or notice is required to be filed or sent before July 24, 2006.

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(4) Noncontrolled section 902 corporations — (i) In general. For purposes of computing earnings and profits of a noncontrolled section 902 corporation (as defined in section 904(d)(2)(E)) for federal tax purposes, the interest expense of a noncontrolled section 902 corporation may be apportioned using either the asset method described in paragraph (g) of this section or the modified gross income method described in paragraph (j) of this section. A noncontrolled section 902 corporation that is not a controlled foreign corporation may elect to use a different method of apportionment than that elected by one or more of its shareholders. A noncontrolled section 902 corporation must use the same method of apportionment with respect to all its domestic corporate shareholders.

(ii) Manner of election. The election to use the asset method described in paragraph (g) of this section or the modified gross income method described in paragraph (j) of this section may be made either by the noncontrolled section 902 corporation or by the majority domestic corporate shareholders (as defined in §1.964-1T(c)(5)(ii)) on behalf of the noncontrolled section 902 corporation. The election shall be made by filing a statement described in §1.964-1T(c)(3)(ii) at the time and in the manner described therein and providing a written notice described in §1.964-1T(c)(3)(iii), except that no such statement or notice is required to be filed or sent before July 24, 2006.

(iii) Stock characterization. In general, the stock of a noncontrolled section 902 corporation shall be characterized in the hands of any domestic corporation that meets the ownership requirements of section 902(a) with respect to the noncontrolled section 902 corporation, or in the hands of any member of the same qualified group as defined in section