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DISCLAIMER: These materials do not, and are not intended to, constitute legal or tax advice. You should consult an attorney or tax advisor for individual advice regarding your own situation.Although we have made considerable efforts to be thorough in the construction of these pages, we offer no assurance that the information posted here is timely, accurate, complete or applicable to any particular set of facts. To the contrary, be aware that some of the material on these pages is out of date, incomplete and/or altered in relation to the official version. These documents are not posted here for commercial use and should not be relied upon for any purpose whatsoever.
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Although not technically within the definition of subpart F income, investments in U.S. property have essentially the same result (the U.S. shareholder is taxed on a foreign corporation’s earnings even though no actual distribution has occurred). The most common type of investment in U.S. property occurs when a foreign corporation loans money to a related U.S. corporation. In this case, the full amount of the loan is taxed as a dividend to the U.S. shareholder. Short term loans (less than 30 days) are excluded. In addition, the inclusion amount is calculated based upon average quarterly ending balances. However, an anti-abuse rule exists where the quarterly average is manipulated.
For additional information on Section 956 Inclusions, see tax-charts.com where you can purchase a flowchart pertaining to
Section 956: Investments in U.S. Property.
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Definition of U.S. Property
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The term "United States property" generally means any property which is . . .
tangible property located in the United States,
- stock of a domestic corporation,
- an obligation of a United States person, or
- any right to the use in the United States . . . a patent or copyright [etc.]
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Major Exceptions:
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The term 'United States property' does not include . . .
- [the U.S. treasury exception] obligations of the United States,
- [the deposit exception] money, or deposits with persons carrying on the banking business,
- [the sales exception] any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time . . . exceeds the amount which would be ordinary and necessary to carry on the trade or business,
- [the services exception] any obligation of a United States person . . . arising in connection with the provision of services by a controlled foreign corporation to the United States person if the amount of such obligation . . . is paid within 60 days [Reg. 1.956-2T(d)(2)],
- [the unrelated party stock or obligation exception] the stock or obligations of a domestic corporation which is [wholly unrelated]
- [30 day rule] as long as an obligation is collected within 30 days from the time it is incurred, then it will not be treated as an "obligation" for purposes of section 956 [Notice 88-108]
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Selected Cases and Rulings on Section 956
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Greenfield, 60 T.C. 425 (1973)
The exception to “United States Property” under section 956(c)(2)(C) [formerly section 956(b)(2)(C) and above referred to as the “sales” exception] did not apply for advances of funds for the acquisition of goods and services where “there was always a substantial balance in [the foreign corporation’s] favor . . . .” Also, since “the indebtedness . . . was unreasonable in some part, it would appear that the statute requires the entire amount of the indebtedness be disregarded for purposes of section [956(c)(2)(C)]”.
Gulf Oil, 87 T.C. 548 (1986)
A centralized cash management system created a section 956 inclusion.
Jacobs Engineering, 1997 U.S. Dist. Ct., Cent. Dist. Calif., 97-1 USTC 50,340
The taxpayer technically complied with the regulations, but violated their purpose and spirit. A series of 12 short term loans was in substance one two and a half year loan. See also Rev. Rul. 89-73.
The Limited, 286 F.3d 324 (6th Cir. 2002)
Tax Court reversed. A credit card bank is a “bank” for purposes of section the 956(b)(2)(A) [now (c)(2)(A)] exception for deposits with persons carrying on the banking business.
Ludwig, 68 T.C. 979 (1977)
Pledge of stock did not create a section 956 inclusion because the CFC was not the guarantor. This is no longer the rule where two thirds of the voting stock is pledged. See Reg. 1.956-2(c).
Rev. Rul. 76-192
A foreign subsidiary with E&P made a deposit with a foreign bank. The foreign bank then loaned to a newly incorporated foreign subsidiary with no E&P. The newco loaned the funds bank to the U.S. parent. Under the anti-abuse rule of Reg. 1.956-1(b)(3), the loan to the U.S. parent was treated as a loan from the foreign subsidiary that had E&P for purposes of determining the amount of the section 956 inclusion.
Rev. Rul. 87-89
A lender was considered to have made a direct loan to a related borrower where the lender deposits funds with an unrelated entity and that entity, in turn, lends funds to the borrower. See also Rev. Rul. 76-192. The loan to the related borrower would not have been made on the same terms without the deposit. The primary thrust of this ruling related to withholding taxes under section 881. For a chart depicting this ruling see Chart of Rev. Rul. 87-89
Notice 88-108
The final regulations issued under section 956 will exclude from the definition of the term "obligation", an obligation that would constitute an investment in US property if held at the end of the CFC's taxable year so long as the obligation is collected within 30 days from the time it is incurred.
Rev. Rul. 89-73
If a CFC lends to its U.S. shareholder, interrupted only by brief periods of repayment which include the last day of the CFC's taxable year, there exists in substance a repatriation of the earnings. See also Jacobs Engineering.
Rev. Rul. 90-112
A CFC that held an interest in a partnership which in turn owned real property located in the U.S. was treated as indirectly owning U.S. property. At the time, the regulations under section 956 did not specifically address this situation. However, the regulations have now been amended to address this circumstance. See Reg. 1.956-2(a)(3). For a chart depicting this ruling see Chart of Rev. Rul. 90-112
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