Rev. Proc. 72-22

Section 1. Purpose.

The purpose of this Revenue Procedure is to extend to United States taxpayers controlled by foreign corporations the offset relief granted by section 3 of Revenue Procedure 64-54.

Sec. 2. Background.

.01 Revenue Procedure 64-54, C.B. 1964-2, 1008, amplified by Revenue Procedure 65-31, C.B. 1965-2, 1024; clarified by Revenue Ruling 65-109, C.B. 1965-1, 222; amended by Revenue Procedure 66-33, C.B. 1966-2, 1231; clarified by Revenue Ruling 68-549, C.B. 1968-2, 202; supplemented by Revenue Procedure 71-1, C.B. 1971-1, 658, sets forth the policy and procedure governing the application of section 482 of the Internal Revenue Code of 1954 with respect to United States controlling taxpayers. Under the provisions of Revenue Procedure 64-54, offset relief with respect to the increased United States tax to the extent of foreign taxes paid by a foreign subsidiary is available only if there is a United States controlling taxpayer.

.02 Section 3 of Revenue Procedure 64-54 provides relief from economic double taxation by the allowance of an offset against the United States tax attributable to the adjustment under section 482 of the Code.

0.3 Section 3.02(3) of Revenue Procedure 64-54 reads as follows:

3 The United States controlling taxpayer (and any other United States person, controlling the foreign entity or controlled by such taxpayer, which is directly or indirectly affected by the section 482 allocation) must enter into a closing agreement under section 7121 of the Code in which:

(a) The taxpayer (and such other affected United States person) agrees that it and any person controlled by it will forego a foreign tax credit with respect to distributions of the accumulated profits (as defined in section 902(c) of the Code) of the controlled foreign entity for the year of the allocation to the extent that the foreign tax is being allowed as an offset to United States tax under this Revenue Procedure; and

(b) The taxpayer (and such other affected United States person) agrees to pay over to the United States Government an amount (not to exceed the relief allowed) equal to any recovery of foreign tax previously paid by the foreign entity to the extent that such recovery is attributable to the substance of the section 482 allocation.

For purposes of this paragraph, a United States person shall be deemed affected by the section 482 allocation if, absent the offset provided for in this section, it was, or in the future might be, able to claim as a credit against its United States tax all or a portion of the foreign tax allowed as such offset.

.04 Section 4.02 of Revenue Procedure 65-17, C.B. 1965-1, 833, as amplified by Revenue Procedure 65-31, C.B. 1965-2, 1024; and as amended by Revenue Procedure 65-17, Amendment I, C.B. 1966-2, 1211; and as amplified and clarified by Revenue Procedure 70-23, C.B. 1970-2, 505, provides that a taxpayer to which income has been allocated may, as part of a closing agreement, elect to establish an account receivable from the other entity involved in the transaction for the amount of income allocated, and that no further tax liability will arise from payment of the receivable.

.05 Section 4.04 of Revenue Procedure 65-31 prescribes the consequence of an allocation among corporations in a chain or related group where offset relief under Revenue Procedure 64-54, has been requested but account receivable treatment provided by Revenue Procedure 65-17 has not been elected. In that case the controlling United States taxpayer is deemed to have made a contribution to the capital of the foreign entity involved in the transaction, or to an intermediate controlling corporation if there is one. Where the allocation is between two corporate entities (sister-brother corporations) controlled by the same shareholder, such amounts will be treated as a distribution to the controlling shareholder with respect to the stock of the entity whose income is increased and as a capital contribution to the entity whose income is reduced by the allocation.

Sec. 3. Application.

The offset relief granted by section 3 of Revenue Procedure 64-54 will be extended to United States taxpayer controlled by foreign corporations. However, as a condition of applying this Revenue Procedure the closing agreement described in section 3.02(3) of Revenue Procedure 64-54 is required to effect the offset procedure. The United States taxpayer controlled by a foreign corporation availing itself of the offset provisions of Revenue Procedure 64-54 will be required by the Internal Revenue Service:

(a) where an election has been made to establish an account receivable pursuant to the provisions of Revenue Procedure 65-17, to agree that the amount allocable from the foreign corporation be actually paid to the United States taxpayer either by cash or a written debt obligation to cover the account receivable, and it is determined by the Service that for a taxable year beginning after December 31, 1964, the transactions giving rise to the section 482 allocation did not have as one of their principal purposes the avoidance of Federal income tax, or

(b) where the account receivable treatment of Revenue Procedure 65-17 has not been elected, to agree that it will be deemed to have paid a dividend to the foreign controlling corporation in the amount of the section 482 allocation less the offset provided by Revenue Procedure 64-54 and to withhold, pursuant to the provisions of section 1441 of the Code, a tax from such deemed paid dividend, for which the foreign corporation as payee becomes liable, as prescribed by section 881 of the Code or any applicable treaty.

Sec. 4. Effect on Other Documents.

Revenue Procedure 64-54 is supplemented.