Section 901(m) was a 2010 revenue raiser and an anti-abuse provision from a different era in U.S. international tax.2 Section 901(m) arose in the world of deferral and post-1986 E&P and tax pools, where taxpayers could selectively repatriate high-taxed earnings and defer low-taxed earnings from tax, and when the United States had one of the highest statutory rates of corporate tax in the world. Through this provision, Congress sought to cut back the foreign tax credit benefit from §338 elections and similar transactions that produced amortization for U.S. E&P purposes, but not for local tax purposes — so-called ''covered asset acquisitions.'' Such transactions might be the product of planning or, more commonly, the result of taxpayers' natural choice to elect §338(g) in the acquisition of a foreign target, particularly where the foreign target and the sellers of stock were foreign persons not affected in any way by the buyer's §338 election.

In December 2016, the IRS and Treasury issued proposed regulations3 providing detailed guidance on §901(m) and the calculations of the amount of disqualified taxes.4 Some of these calculations are painfully detailed, for example, the rules for dispositions or third country creditable taxes. The Proposed Regulations generally were prospective only, so that perhaps some tax professionals left the Proposed Regulations on the shelf. Now, virtually all of the rules found in the Proposed Regulations have been included in the Final Regulations and are generally effective for covered asset acquisitions completed after March 23, 2020.5 This article serves to reacquaint readers with the now final regulations and highlight some of the key provisions that were retained from the Proposed Regulations.


The Proposed Regulations greatly expanded the scope of ''covered asset acquisitions'' (''CAAs'') to which §901(m) applies. As will be seen, the Final Regulations retained the broad catch-all category of any asset transfer that has different basis conse- quences for U.S. and foreign purposes, despite com- mentary asking for this rule to be limited or removed. Going forward, it is safe to assume that any move- ment of assets giving rise to a ''basis difference'' will be subject to §901(m). More transactions, particularly internal restructurings, will need to be monitored for potential §901(m) issues.5

The statute applies to three specified transactions that typically have been used to give rise to the ben- efit that §901(m) was enacted to prevent: a stock pur- chase with a §338(g) election, a stock purchase treated as an asset purchase because the target has elected disregarded entity status (e.g., a ''check-and- sell'' transaction), and a purchase of an interest in a partnership with a §754 election.7 One common fea- ture of the statutory categories of ''covered asset ac- quisitions'' is that they all involve a U.S. tax election that results in effectively a hybrid treatment. Under the Final Regulations, §901(m) no longer is so lim- ited.

Specifically, in addition to categories for transfers of interests in pass-through entities, the Final Regula- tions treat as a covered asset acquisition ''any trans- action. . .to the extent it is treated as an acquisition of assets for purposes of both U.S. income tax and a for- eign income tax, provided that the transaction results in an increase in the U.S. basis without a correspond- ing increase in the foreign basis of one of more as- sets.'' 8 Thus, §901(m) will not apply to pure asset transfers that receive a different U.S. and foreign tax treatment. For example, the regulations include an ex- ample of a §351 transaction where CFC1 transfers as- sets to CFC2 in return for stock and boot.9 For U.S. tax purposes, CFC2 receives a stepped-up basis in the assets to the extent of CFC1's gain recognition under §351(b). To the extent CFC2 does not receive a cor- responding foreign tax basis step-up, §901(m) will now apply to CFC2.

While the Example in the regulations could be the result of planning by the taxpayer, such as through the issuance of ''non-qualified preferred stock,'' such planning will come with a cost under the Tax Cuts and Jobs Act of 2017 (''TCJA'') (Pub. L. No. 115-97) given that CFC1's gain would be taxed as subpart F income or global intangible low-taxed income (GILTI). In addition, the rule does not require any planning to be done; it is activated whenever a trans- fer of assets results in a higher basis for U.S. than for foreign purposes. As a result, internal restructurings now will be rife with potential §901(m) implications.

This raises the stakes in ensuring that an internal transaction is tax-free in that busting tax-free treat- ment will result not only in the recognition of gain, but also loss of the tax benefit of the corresponding step-up. For example, assume that in the example above, CFC2 did not pay cash boot to CFC1, but the transfer inadvertently resulted in taxable gain, due to the failure to satisfy the ''control'' requirement, the presence of a ''springing'' note, or liabilities in excess of basis under §357(c). Such gain will be included in U.S. Parent's income as tested income or subpart F in- come. Not only that, but the taxpayer now is subject to loss of part of its foreign tax credits under §901(m).10

The same problem seemingly could also arise where a U.S. person makes a taxable outbound trans- fer of assets to a controlled foreign corporation under §367. Assume U.S. taxpayer incorporates a foreign branch. Under the more rigorous §367 rules after the TCJA, outbound transfers will normally be taxable under §367(a) and/or §367(d). 11 A gain under §367(a) would normally increase the basis of the CFC's assets without a corresponding increase to foreign tax basis. Again, the taxpayer would appear to face the unpleas- ant combination of recognizing fully taxable gain, without enjoying the benefits of the basis step-up.

Comments requested relief in the situation where the same U.S. taxpayer is effectively on both sides of the covered asset acquisition, so that the taxpayer would recognize gain for U.S. tax purposes on the sale of the relevant foreign assets (RFAs). With GILTI, subpart F, and §965, the gain on the sale would almost always be included in the same taxpay- er's income. 12 In other words, if the same or a related taxpayer ''paid for'' the basis step-up, from a policy perspective, the transaction should be exempt from §901(m)'s disallowance of foreign tax credits.


1 William Skinner is a partner at Fenwick & West LLP, based in Mountain View, CA, focusing his practice on corporate taxa- tion and international tax planning for multinational companies and tax controversies. He may be reached at wrskinner@ Any views expressed herein are solely those of the author, not his firm, and any errors and omissions are the author's sole responsibility. r William R. Skinner, Fenwick & West LLP, All Rights Reserved.

2 All section references herein are to the Internal Revenue Code, as amended (the ''Code''), or the Treasury regulations thereunder, unless otherwise indicated.

3 NPRM REG-129128-14 (Dec. 7, 2016) (hereinafter, the ''Pro- posed Regulations''). The final regulations were issued T.D. 9895 (Mar. 23, 2020) and are referred to here as the Final Regulations.

4 In a previous article in this journal, the author covered the §901(m) Proposed Regulations: Unpacking the New §901(m) Proposed Regulations, 46 Tax Mgmt. Int'l J. 303 (June 9, 2017). This article focuses only on the portions of the Proposed Regulations that were changed or subject of significant commentary in the rulemaking process.

5 See, e.g., Reg. §1.901(m)-1(b)(1).

6 This monitoring will be particularly important for anyone contemplating the early adoption of the final regulations, for ex- ample, to obtain the benefit of the Foreign Basis Election, dis- cussed below. As discussed below, early adoption of the regula- tions will cause the broadened set of CAAs to apply to any trans- actions done after the December 2016 issuance of the Proposed Regulations. See Reg. §1.901(m)-2(f)(3)(i).

7 See §901(m)(2).

8 Reg. §1.901(m)-2(b)(6).

9 Reg. §1.901(m)-2(e)(2) Ex. 2.

10 The IRS declined to provide relief for situations where the CAA itself is subject to U.S. tax by the taxpayer, because of the ''possibility of manipulation of foreign tax credits.'' T.D. 9895, Preamble §1. However, in the new worldwide system created by GILTI, such possibilities are limited and remote.

11 See §367(d)(4) (broadened definition of intangibles) and TCJA §14102(e)(1) (repealing the active business exception of former §367(a)(3)). Query whether there is a difference in this re- gard between gain recognized under §367(a) and deemed royal- ties under §367(d).

12 For transactions in the ''disqualified period'' between De- cember 31, 2017 and the first effective date of GILTI, other well- known sets of regulations under §245A and §951A prevent the taxpayer from reaping a benefit from a ''costless'' sale.

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Originally published in the Tax Management International Journal.

Originally published May 7, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.