Last week the IRS released Notice 2014-44, announcing that regulations will be issued under Code §901(m).
Code §901(m)(1) provides that, in the case of a covered asset acquisition ("CAA"), the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to relevant foreign assets ("RFAs") will not be taken into account in determining the foreign tax credit allowed under Code §901(a), and in the case of foreign income tax paid by a Code §902 corporation (as defined in Code §909(d)(5)) will not be taken into account for purposes of Code §§902 or 960. Instead, the disqualified portion of any foreign income tax is allowed as a deduction.
Calculation of the disqualified portion of a foreign income tax requires the determination of the basis difference, which is the change in an asset's adjusted basis as a result of a CAA. The regulations will deal with situations where there are differences in the U.S. and foreign basis of an asset as a result of a CAA. Certain transactions will not be treated as dispositions for purposes of Code §901(m).