n-07-58.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Request for Comments Regarding Financial Services Income Under Section 904(d)

Notice 2007-58

The Internal Revenue Service (IRS) and the Treasury Department are studying
the appropriateness of updating Treasury Regulation §1.904-4(e) in light of recent
statutory changes. This notice invites public comments relating to the definitions of
financial services income, active financing income or financial services entities under
that regulation.

BACKGROUND

Section 404 of the American Jobs Creation Act of 2004, Public Law 108-357, 118
Stat. 1418 (October 22, 2004) (AJCA) generally reduced the number of separate foreign
tax credit limitation categories under section 904(d) of the Internal Revenue Code (the
Code) from eight to two, effective for taxable years beginning after December 31, 2006.
As a result, income which would have been assigned to the separate category for
financial services income had such income been earned in a taxable year beginning
before January 1, 2007, is now treated as general category income. However, this
applies only in the case of a member of a financial services group or any other person
predominantly engaged in the active conduct of a banking, insurance, financing, or
similar business. Section 904(d)(2)(C)(i). Treasury Regulation §1.904-4(e)(3)(i)
currently provides that a person is considered to be predominantly engaged in the
active financing business for any year if for that year at least 80 percent of its gross
income is active financing income, as defined in Treasury Regulation §1.904-4(e)(2).

Section 401 of the AJCA modifies present-law interest expense allocation rules
under section 864 of the Code to provide taxpayers with a one-time election under new
section 864(f) to allocate and apportion interest expense of the domestic members of a
worldwide affiliated group (as defined in new section 864(f)(1)(C)) on a worldwide-group
basis. Taxpayers are allowed to apply present-law financial institution group rules to
treat certain financial institutions as a separate affiliated group for purposes of interest
allocation under the worldwide fungibility approach. In the alternative, section 401 of
the AJCA also provides a one-time election under section 864(f)(5) to expand the
present-law financial institution group to include “financial corporations.” A financial

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corporation, as defined in new section 864(f)(5)(B), is any corporation if at least 80
percent of its gross income is financial services income, as described in section
904(d)(2)(D)(ii) of the Code and the regulations thereunder, derived from transactions
with persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to
the corporation. This provision is effective for taxable years beginning after December
31, 2008.

The IRS and the Treasury Department believe that it is appropriate to review the
provisions relating to financial services income and entities in Treasury Regulation
§1.904-4(e) in light of the amendments to the foreign tax credit rules in the AJCA.

REQUEST FOR COMMENTS

The IRS and the Treasury Department request comments specifically on whether
any items currently listed as active financing income under Treasury Regulation §1.904-
4(e)(2)(i) are over-inclusive or under-inclusive and whether any of the listed items
should be clarified as applying only to transactions involving customers. More
generally, comments are welcome as to whether any other provisions of Treasury
Regulation §1.904-4(e) relating to the definitions of financial services income, active
financing income or financial services entities should be modified to take into
consideration recent statutory changes or any changes in the nature of financial
services that have taken place since this regulation was originally published.

Comments should be submitted on or before September 10, 2007, and should
include a reference to Notice 2007-58. Send submissions to CC:PA:LPD:PR (Notice
2007-58), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2007-58), Courier’s
desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC
20044, or sent electronically, via the following e-mail address:
Notice.comments@irscounsel.treas.gov
. Please include “Notice 2007-58” in the subject
line of any electronic communication. All material submitted will be available for public
inspection and copying.

DRAFTING INFORMATION
The principal author of this announcement is Jeffrey L. Parry of the Office of
Associate Chief Counsel (International). For further information regarding this
announcement contact Jeffrey L. Parry at (202) 622-3850 (not a toll-free call).