Code Section 864
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 864 | 12/31/2010 | Worker, Homeownership, and Business Assistance Act of 2009 (Public Law 111-5)297 | Delay in Application of Worldwide Allocation of Interest | 20,123 |
| 864 | 8/10/2010 | The Air Traffic Control Act | Modification of Affiliation Rules for Purposes of Rules Allocating Interest Expense | 390 |
| 864 | 3/18/2010 | The Hiring Incentives to Restore Employment Act | Delay in Application of Worldwide Allocation of Interest | 9,911 |
| 861, 862, and 864 | *See Notes Below | The Small Business Jobs Act of 2010 | Source rules for income on guarantees | 2,000 |
* Notes on Effective Date
The provision applies to guarantees issued after the date of enactment. No inference is intended with respect to the source of income received with respect to guarantees issued before the date of enactment.
Delay in Application of Worldwide Allocation of Interest
Explanation of Provision335
The provision delays the effective date of the worldwide interest allocation rules for seven years, until taxable years beginning after December 31, 2017. The required dates for making the worldwide affiliated group election and the financial institution group election are changed accordingly.
The provision also eliminates the special phase-in rule that applies in the case of the first taxable year to which the worldwide interest allocation rules apply.
Modification of Affiliation Rules for Purposes of Rules Allocating Interest Expense
Explanation of Provision
The provision treats a foreign corporation as a member of an affiliated group, for interest allocation and apportionment purposes, if (1) more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected income, and (2) at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence). Thus, under the provision, if more than 50 percent of a foreign corporation’s gross income is effectively connected income and at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group, then all of the foreign corporation’s assets and interest expense are taken into account for the purposes of allocating and apportioning the interest expense of the affiliated group.
Delay in Application of Worldwide Allocation of Interest
Explanation of Provision335
The provision delays the effective date of the worldwide interest allocation rules for three year, until taxable years beginning after December 31, 2020. The required dates for making the worldwide affiliated group election and the financial institution group election are changed accordingly.
Source rules for income on guarantees
Explanation of Provision
This provision effects a legislative override of the opinion in Container Corp. v. Commissioner, supra, by amending the source rules of section 861 and 862 to address income from guarantees issued after the date of enactment. Under new section 861(a)(9), income from sources within the United States includes amounts received, whether directly or indirectly, from a non-corporate resident or a domestic corporation for the provision of a guarantee of indebtedness of such person. The scope of the provision includes payments that are made indirectly for the provision of a guarantee. For example, the provision would treat as income from U.S. sources a guarantee fee paid by a foreign bank to a foreign corporation for the foreign corporation’s guarantee of indebtedness owed to the bank by the foreign corporation’s domestic subsidiary, where the cost of the guarantee fee is passed on to the domestic subsidiary through, for example, additional interest charged on the indebtedness.
Such U.S.-source income also includes amounts received from a foreign person, whether directly or indirectly, for the provision of a guarantee of indebtedness of that foreign person if the payments received are connected with income of such person which is effectively connected with conduct of a U.S. trade or business. A conforming amendment to section 862 provides that amounts received from a foreign person, whether directly or indirectly, for the provision of a guarantee of that person’s debt, are treated as foreign source income if they are not from sources within the United States as determined under new section 861(a)(9).
For purposes of this provision, the phrase ‘‘noncorporate residents’’ has the same meaning as for purposes of section 861(a)(1), except that foreign partnerships are not included. Payments received from a foreign partnership for the provision of a guarantee of indebtedness of that foreign partnership are U.S. source if the amounts received are connected with income which is effectively connected with the conduct of a U.S. trade or business. A conforming amendment to section 864 provides that amounts received, whether directly or indirectly, for the provision of a guarantee are deemed to be effectively connected with the conduct of a U.S. trade or business if derived in the active conduct of a banking, financing or similar business.
Although this provision overturns the opinion in Container Corp. v. Commissioner, supra, no inference is intended with respect to the source of income received for the provision of a guarantee issued before the date of enactment. The Secretary may provide rules for determining the source of other types of payments that are not within the scope of this provision.
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297- H.R. 3548. The bill passed the House on the suspension calendar on September 22, 2009. The Senate passed the bill with an amendment on November 4, 2009. The House agreed to the Senate amendment on the suspension calendar on November 5, 2009. The President signed the bill on November 6, 2009. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of Certain Revenue Provisions of the ‘‘Worker, Homeownership, and Business Assistance Act of 2009’’ (JCX 44–09), November 3, 2009.
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335- The effective date of the worldwide interest allocation rules was subsequently further delayed by section 551 of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. No. 111–147, described in Part Seven of this document.
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