Rebecca Rosenberg (Northwestern), Bad Apples and Wild Cards: Removal of the Predominant Character Approach from the Foreign Tax Credit Regulations, 72  Kan. L. Rev. 203 (2023): 

This Article analyzes the removal of the predominant character approach from regulations about the creditability of foreign taxes for federal income tax purposes. For decades, the creditability of each foreign tax under the § 901 regulations was evaluated based on the foreign tax's "predominant character." In the big picture, a creditable foreign tax was supposed to sufficiently resemble U.S. income tax, but it did not have to be a perfect match to U.S. income tax rules. Instead, only its predominant character had to meet each of the three basic regulatory requirements under such regulations.

Without the predominant character approach, the bad apple rule applies: a small disparity between a tested foreign levy and any of the (now four) basic regulatory requirements can be enough to defeat creditability of the foreign tax (under the § 901 regulations) for all taxpayers, with some exceptions. Essentially, creditable foreign taxes are now required to more closely resemble U.S. income tax. In addition, the predominant character approach allowed unspecified ("wild card") differences between a tested foreign tax and the regulations, but has not been replaced by a functional equivalent in the current final regulations.

The government recently allowed taxpayers to apply the previous version of some portions of the regulations, including the predominant character rule, temporarily, while it considers whether to alter the current final regulations. Therefore, this is a good time to analyze the import and effect of the predominant character rule's absence from the current regulations.

This Article also suggests possible taxpayer approaches for mitigating the impact of the predominant character rule's removal, if such removal becomes mandatory again after 2023. For example, other parts of the § 901 regulations can potentially be used to (in effect) separate conforming and nonconforming aspects of a foreign tax from each other for purposes of testing under the § 901 regulations, in order to obtain creditability for the qualifying portions of a foreign levy.

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