Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues


Famous Tax Quotes - The Regulations Barely Rocked The Statutory Boat

2019-10-24

Continuing our series on Famous Tax Quotes (quotes from court opinions and rulings with language that is colorful or that concisely states an important tax principle) today's tax quote is:

[W]e note that the regulations track the text of §956(d) nearly verbatim. The almost word-for-word match keeps the IRS’s terse explanation in line with the general principle that the more a regulation departs from a statute, the more an agency must explain itself. * * * Because the challenged regulations barely rocked the statutory boat, and because of the lack of public commentary and the straightforward nature of the regulations, little explanation was needed.

SIH Partners LLLP v. Commr., 923 F.3d 296 n.5 (3rd Cir. 2019).

Tags: 956 Investments in U.S. Property, Other - Famous Tax Quotes

Eaton Corp. v. Commr., 152 T.C. No. 2 (2019)

2019-03-01

Earlier this week the Tax Court concluded that the earnings and profits (E&P) of certain upper-tier CFCs was increased by the amount of Subpart F Income inclusions and Code §956 inclusions (Code §951(a) inclusions) that flowed up from lower-tier CFCs through a U.S. partnership.  Below is a chart of the entity structure in the Eaton case.

Eaton

Tags: 701 Partnerships, 951 Subpart F Income, 956 Investments in U.S. Property, Charts - Situational Charts

Updated IRS Practice Units by Topic Page

2018-11-13

The IRS publishes Practice Units (“PUs”) (formerly "International" Practice Units) on its website. PUs provide IRS staff with explanations of general tax concepts, as well as information about specific types of transactions. These PUs discuss many U.S. international tax issues that are applicable to businesses. The IRS website does not categorize them by topic therefore it can be difficult to find PUs on a particular topic. Our page Practice Units by Topic categorizes the PUs that relate to international activities by topic.

We have recently updated the page to include 29 new international related practice units published over the last several months. 

The topics include:

Tags: 367(b) Fgn to Fgn Corp, 367(d) Intangibles, 482 Cost Sharing Arrangements, 641-684 Trusts, 861 Source of Income, 884 Branch Profits Tax, 894 Treaties, 897 FIRPTA, 901 Foreign Tax Credits, 911 Foreign Earned Income Exclusion, 951 Subpart F Income, 956 Investments in U.S. Property, 987 Branch Transactions, 988 Transactions, 6038A 5472s, 6048 Foreign Trusts, 7701(b) Individual Residency, Other - IRS Practice Units

23 New Charts - Code §956 Regulation Examples from T.D. 9792

2016-12-15

Last month, the IRS released Treasury Decision 9792, which included final regulations under Code §956.  The final regulations include rules regarding U.S. property held by controlled foreign corporations ("CFCs") in transactions involving partnerships.  There were 23 examples in the regulations, and we have created new situational charts that illustrate all 23 of the examples. 

The charts are available at https://www.andrewmitchel.com/topic.php#sec956, where you can find hundreds of other situational charts. 

Tags: 956 Investments in U.S. Property, Authority - Treasury Decisions, Charts - Situational Charts

New Videos - August 2016

2016-09-13

Tags: 304 Transactions, 701 Partnerships, 956 Investments in U.S. Property, 1441 U.S. Withholding Taxes, Other - Videos

IRS International Practice Units By Category

2016-08-05

The IRS drafts publications that summarize in plain English U.S. tax rules for a variety of tax topics.  A few of the publications discuss U.S. international tax issues.  However, most of the IRS international publications deal with the U.S. taxation of individuals, and not with the U.S. taxation of businesses.

For example, IRS publications do not cover Subpart F Income, outbound transfers to foreign corporations, transfer pricing, etc.  To learn about these rules, one would often have to go to specialized training, read the underlying law (e.g., statute, regulations, cases, etc.), or read what advisors provide on the Internet.

Recently, the IRS has been publishing International Practice Units (“IPUs”) on its website.  IPUs provide IRS staff with explanations of general international tax concepts, as well as information about specific types of transactions.  These IPUs discuss many U.S. international tax issues that are applicable to businesses. 

To date, the IRS has published over 100 IPUs.  However, the IRS website containing these IPUs does not categorize them by topic.  Therefore, it can be difficult to find IPUs on a particular topic. 

We have created a web page that categorizes the IPUs by topic.  The topics include:

Tags: 163(j) Limit on Business Interest, 367(b) Fgn to Fgn Corp, 482 Cost Sharing Arrangements, 482 Transfer Pricing, 861 Source of Income, 884 Branch Profits Tax, 894 Limitation on Benefits, 894 Permanent Establishment, 894 Treaties, 897 FIRPTA, 901 Foreign Tax Credits, 911 Foreign Earned Income Exclusion, 911 Housing Cost Amounts, 951 Subpart F Income, 956 Investments in U.S. Property, 988 Transactions, 989 Qualified Business Unit (QBU), 1441 U.S. Withholding Taxes, 6048 Foreign Trusts, 7701(b) Individual Residency, Other - IRS Practice Units

New Videos - April 2016

2016-04-29

Tags: 304 Transactions, 331/332 Liquidations, 351 Exchanges, 368 Corporate Reorgs, 956 Investments in U.S. Property, Charts - Situational Charts, Form 8938, Other - Videos

Charts of Examples in Notice 2014-52

2015-02-05

UPDATE - 11/1/16:  Notice 2014-52 was made obsolete by T.D. 9761.  See our blog post Over 50 New Situational Charts – Code §7874 Regulation Examples.

On September 22, 2014, the IRS released Notice 2014-52.  The notice announced that regulations will be issued under Code §§304(b)(5)(B), 367, 956(e), 7701(l), and 7874 to target corporate inversions.

In summary, the notice aims to:

  • Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans (action under Code §956(e)).
  • Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free (action under Code §7701(l)).
  • Close a loophole to prevent inverted companies from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax (action Code §304(b)(5)(B)).
  • Make it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity (action under Code §7874).

The notice provides 11 examples of the new rules.  We have created situational charts that illustrate the examples.  Images of the charts are shown below and links to PDFs of the charts are also available:

Notice 2014-52 2.01(b) Ex

Notice 2014-52 2.03 Ex 1

Notice 2014-52 2.03 Ex 1 Alt,/p>

Notice 2014-52 2.03 Ex 2

Notice 2014-52 2.03 Ex 2 Alt

Notice 2014-52 3.02(e)(iii) Ex 1

Notice 2014-52 3.02(e)(iii) Ex 1 Alt

Notice 2014-52 3.02(e)(iii) Ex 2

Notice 2014-52 3.02(e)(iii) Ex 3

Notice 2014-52 3.03 Ex 1

Notice 2014-52 3.03 Ex 2

Tags: 304 Transactions, 367(b) Fgn to Fgn Corp, 956 Investments in U.S. Property, 1248 Sales of CFCs, 7874 Corporate Inversions, Authority - Notices, Charts - Situational Charts

International PLRs of Note for the 46th and 47th week of 2014

2014-12-02

Recently the IRS published the following Chief Counsel Advice relating to international taxation.

CCA 201446020 - Loans were made from CFC1 to a lower tier CFC with limited earnings and profits ("E&P").  The lower tier CFC then loaned the cash to the U.S. parent.  The U.S. parent claimed that the Code §956 inclusions were limited to the E&P of the lower tier CFC.  The IRS applied Treas. Reg. §1.956-1T(b)(4) and argued that one of the principal purposes of the back-to-back loans was to avoid the application of Code §956 to CFC1.  Accordingly, the U.S. parent must include in income the Code §956 amounts derived from CFC1 indirectly holding the U.S. parent loans rather than the Code §956 amounts which would be derived if the lower tier CFC were considered to hold the loan.

We created a chart for a similar CCA that was released earlier this year.  The blog post can be viewed here.

CCA 201447030 - Interest paid by a U.S. corporation's foreign disregarded entity is U.S. source income and subject to withholding under Code §1442.  Code §861(a)(1).

Tags: 861 Source of Income, 956 Investments in U.S. Property, 1441 U.S. Withholding Taxes, Authority - PLRs / CCAs

International PLRs of Note for the 36th week of 2014

2014-09-05

Today the IRS published the following Chief Counsel Advice relating to international taxation.

CCA 201436047 - Accrued but unpaid interest on an obligation that is U.S. property within the meaning of Code §956 is itself also U.S. property.

Tags: 956 Investments in U.S. Property, Authority - PLRs / CCAs

Chart of CCA 201420017: Code §956: Funneling of Loan through One CFC Partner is Disregarded

2014-05-20

Last week the IRS released Chief Counsel Advice 201420017.  The IRS addressed the issue of a foreign partnership loaning money to one of its partners, a controlled foreign coporation ("CFC"), and the CFC partner loaning the amount to its U.S. Parent.

U.S. Parent indirectly wholly owned CFC Partner 1 and CFC Partners.  DE 1, a disregarded entity of FPS, a foreign partnership, made a loan of cash to CFC Partner 1.  CFC Partner 1 then loaned that amount to US Parent.  US Parent included in its income the Code §956 amount related to the loan from CFC Partner 1.  CFC Partner 1 had limited earnings and profits, so the amount of the inclusion was limited to CFC Partner 1's earnings and profits.

The IRS argued that funneling the loan through the specific CFC partner with limited earnings and profits was done to limit the amount of the Code §956 inclusion.  Applying Treas. Reg. §1.956-1T(b)(4), the IRS opined that the loan to U.S. Parent was deemed to have been made by the foreign partnership.  Consequently, each of the CFC Partners was deemed to hold an interest in the U.S. property equal to its interest in the foreign partnership.  U.S. Parent's Code §956 inclusion was therefore not limited to CFC Partner 1's earnings and profits.

An image of the chart is shown below and the chart can be viewed as a PDF file here: CCA 201420017.

We will shortly add this chart to andrewmitchel.com, where you can find hundreds of similar situational charts.

CCA_201420017

Tags: 701 Partnerships, 956 Investments in U.S. Property, Authority - PLRs / CCAs, Charts - Situational Charts

Barnes Group - Structured Repatriation Was a Dividend

2013-05-10

Last month the Tax Court issued its opinion in Barnes Group, Inc. v. Commr., T.C. Memorandum 2013-109.

In the case, Barnes indirectly owned 100% of ASA, a Singapore controlled foreign corporation. ASA had excess cash that Barnes wanted to repatriate to the U.S. However, Barnes would have had to pay U.S. tax if ASA had distributed the cash as a dividend to Barnes, or if ASA had loaned the cash to Barnes.

Barnes sought advice from multiple advisors looking for methods to repatriate the cash without paying U.S. tax. After rejecting advice from Ernst & Young and Deloitte Touche, Barnes spoke with PriceWaterhouseCoopers (“PwC”). PwC suggested a plan in which the cash could be repatriated in a tax free manner through two Code §351 exchanges.

In the first Code §351 exchange, ASA and Barnes transferred cash to a Bermuda corporation (“Bermuda”) in exchange for Bermuda stock. In the second Code §351 exchange, Bermuda transferred cash and Barnes transferred Bermuda common stock to a Delaware corporation (“Delaware”) in exchange for Delaware stock. Delaware then loaned the cash to Barnes.

Although Bermuda’s ownership of shares in Delaware was an investment in U.S. property under Code §956, the taxpayer argued that Bermuda’s basis in the Delaware shares was zero (under Rev. Rul. 74-503) and that the 956 inclusion should therefore be zero.

The Tax Court held that the cash that started at ASA and ended at Barnes was in substance a dividend and was taxable to Barnes under Code §301.  Shown below is a chart of the case (here for PDF of Barnes):

Barnes

Tags: 351 Exchanges, 956 Investments in U.S. Property, Charts - Situational Charts

Code §951 Inclusions Are Not Qualified Dividend Income

2011-12-17

On December 7, 2011, the Tax Court published Rodriquez v. Commr., 137 T.C. No. 14 (2011).  In this case, the taxpayers filed tax returns including in gross income, under Code §§951(a)(1)(B) and 956, approximately $1.6 million for 2003 and approximately $1.5 million for 2004.  The inclusions represented their controlled foreign corporation’s earnings invested in U.S. property.

The taxpayers had treated the inclusions as qualified dividend income under Code §1(h)(11).  The I.R.S. argued, and the court held, that the Code §951 inclusions were not qualified dividend income because the inclusions were not dividends.  In Notice 2004-70, the I.R.S. had provided guidance that Code §951 inclusions did not constitute qualified dividend income under Code §1(h)(11), and the court in Rodriquez agreed with this conclusion.

Depending upon the circumstances, it may have made sense for the taxpayers in Rodriquez to make Code §962 elections for 2003 and 2004, where individuals can elect to be subject to tax at corporate rates but at the same time be allowed to claim deemed paid foreign tax credits under Code §960.

Tags: 951 Subpart F Income, 956 Investments in U.S. Property

CCA 201106007 - Investments in U.S. Property - Intangibles

2011-02-14

In a recently released I.R.S. Chief Counsel Memorandum (CCA 201106007), the I.R.S. addressed whether the sale of software products by a controlled foreign corporation (CFC) to U.S. end-user customers gave rise to an investment in U.S. property for purposes of Code § 956(c)(1)(D).

The I.R.S. concluded that the sale of the software products by the CFC to U.S. end-user customers did not constitute an investment in U.S. property for purposes of Code § 956(c)(1)(D).  However, the memorandum continued, indicating that other related transactions between the CFC and its U.S. parent may constitute an investment in U.S. property under Code § 956.

Under the facts of the memorandum, the taxpayer (“Taxpayer”), a U.S. entity, was a distributor of information technology products and services.  Taxpayer developed software in the United States pursuant to a cost sharing agreement (CSA) with its wholly-owned foreign subsidiary (“Sub”).  Sub was a CFC as defined in Code § 957.  Pursuant to the CSA, Sub acquired the rights to exploit copyrights in the U.S.  When Taxpayer completed development of a software product intended for sale to end-user customers, a final version of the software code was transferred to a “gold master” disk and sent to Sub.  Sub then reproduced and sold copies of the software to end-user customers in the United States.

The definition of “United States property” for purposes of Code § 956(c)(1)(D) includes any right to use intangible property in the U.S. that is acquired or developed by a CFC for use in the U.S.  Under the statute, the relevant consideration is whether the intangible property acquired or developed by a CFC is a right to use property in the U.S.  Whether such right has been acquired or developed for use in the U.S. is to be determined based on all the facts and circumstances of the case. Treas. Reg. § 1.956- 2(a)(iv)(d).  U.S. property is defined in relation to whether a CFC develops intangible property intended for use in the U.S. or acquires the right to use intangible property in the U.S., and it is not defined not in relation to whether such right is actually exercised.  Accordingly, an investment in U.S. property arises upon the acquisition or development of rights to use intangible property in the U.S., not upon the actual use of that intangible property in the U.S.

The CCA held that Sub made an investment in U.S. property under Code § 956 when it acquired or developed the rights to use copyright rights in the U.S. pursuant to the CSA.  However, the actual sales of the computer software copies from Sub to end-user customers in the U.S. did not in themselves give rise to an investment in U.S. property within the meaning of Code § 956(c)(1)(D).  Furthermore, the actual transfer of copies of the software by Sub to the end-user U.S. customers did not affect the calculation of the inclusion amount, if any, under Code § 956 attributable to Sub’s original investment in U.S. property, because Sub did not acquire or develop additional rights (or relinquish any rights) to use the software in the U.S. merely as a result of the sale of copies to a U.S. person.

Although Sub made an investment in U.S. property when it acquired or developed the rights to use copyright rights in the U.S. pursuant to the CSA, the amount of the investment in U.S. property depended on Sub’s adjusted basis in the copyright rights.  If Sub’s costs of acquiring and developing the copyright rights were deductible and in fact deducted, Sub may have had a $0 basis in the U.S. property.

Tags: 956 Investments in U.S. Property

New Section 956 Foreign Tax Credit Blending Rule

2010-08-13

Earlier this week, President Obama signed into law H.R. 1586.  This new law has several important changes to U.S. international tax rules.  Today’s blog post discusses the new Section 956 foreign tax credit blending rule.

The new law adds a new subsection (subsection (c)) to Code § 960.  Under this new rule, if there is a Section 956 inclusion where the U.S. shareholder will be allowed to claim deemed paid foreign tax credits (i.e., a “qualified group” exists), the amount of the deemed paid foreign tax credits can be limited.

Under the new rule, if the amount of the deemed paid foreign tax credits under the normal “hopscotch” rule would exceed the deemed paid foreign tax credits if cash (in an amount equal to the Section 956 inclusion) were distributed in a series of distributions through the chain of ownership, then the deemed paid foreign tax credits will be limited to the amount calculated under the hypothetical cash distribution.

For example, if a lower-tier foreign subsidiary (“CFC2”) had a high tax pool of earnings and a first-tier foreign subsidiary (“CFC1”) had a low tax pool of earnings, under the old rules the U.S. Parent could access the high tax pool of earnings and could bypass the low tax pool of earnings by making a 956 loan from CFC2 to the U.S. Parent.

956_inclusion_hopscotch

Under the new rule of Code § 960(c), U.S. Parent would only be able to claim foreign tax credits equal to the amount that would have been allowed if a cash distribution was made from CFC2 to CFC1, and then a cash distribution was made from CFC1 to U.S. Parent.  In other words, U.S. Parent cannot claim deemed paid foreign tax credits based solely on the earnings pool of CFC2, but instead must base the deemed paid foreign tax credits on CFC1’s earnings (after considering the hypothetical cash distribution from CFC2).

The good news is that the effective date of Code § 960(c) is for “acquisitions of United States property . . . after December 31, 2010.”  Consequently, Congress has been kind enough to allow planning transactions for this year to extract as much lower-tier high taxed earnings as possible.

Interestingly, if a 956 loan is put in place on or before December 31, 2010, but generates 956 inclusions in years after 2010, it appears that the new blending rule may not apply.  This is because the new rule keys off of acquisitions of U.S. property after December 31, 2010.  If the loan (or other U.S. property) is in place prior to December 31, 2010, there would be no acquisition of U.S. property after December 31, 2010.

However, the new law authorizes the I.R.S. and the Treasury Department to issue regulations or other guidance to carry out the purposes of the new rule.  See new Code § 960(c)(2).

Tags: 901 Foreign Tax Credits, 956 Investments in U.S. Property, Charts - Situational Charts

Alice in Wonderland

2009-12-31

Everything is getting blurry!!  Where am I?  The sands seem to be shifting under my feet.  I get this way when the Treasury Department keeps changing the definitions of words for temporary periods.  In other words, they say that a word in a statute has a particular meaning for one year and a different meaning for the following year. 

Literally on the last day of the year, the Treasury Department has issued an edict that the word “obligation” will not mean what we thought it would mean on the first day of next year (i.e., tomorrow).

I am talking about Notice 2010-12 that extends the application of Notice 2008-91 for another year.  On October 27, 2008, the Treasury Department published Notice 2008-91, which describes a temporary elective exclusion from the definition of “obligation” for purposes of Code § 956.  The temporary period was set to expire on December 31, 2009.  Notice 2010-12 extends the temporary period until December 31, 2010.

The Notice provides that the Treasury Department does “not anticipate extending the [modified definition] to any additional periods.”  They sound like they are addicted to this new-found power to redefine words, but that “really, we can kick the habit.”

If the Treasury Department, rather than Congress and the President, can temporarily change the definition of “obligation” in Code § 956(c)(1)(C) from one year to the next, it would be nice if they would change the definition of “15%” in Code § 1(h)(1)(C) to “zero” - - - - - - just for one year - - - - - - only on an elective basis - - - - - - please??

Tags: 956 Investments in U.S. Property

I.R.S. Shuts Down Another Repatriation Technique

2008-08-08

On June 23, 2008, the IRS and the Treasury Department published Treasury Decision 9402 which includes new regulations under section 956.  The government has stated that it is aware that certain taxpayers are engaging in certain nonrecognition transactions in which a controlled foreign corporation (CFC) acquires certain United States property (within the meaning of section 956(c)) without resulting in an income inclusion to the United States shareholders of the CFC under section 951(a)(1)(B).

In one such transaction, for example, USP, a domestic corporation and the common parent of an affiliated group that files a consolidated tax return, owns 100- percent of the outstanding stock of US1 and US2, both domestic corporations that join USP in the filing of a consolidated tax return. US1 owns 100 percent of the stock of CFC, a controlled foreign corporation.  CFC holds cash that would be taxable as a dividend to US1 if it were to distribute the cash to US1. 

In a transaction intended to bring the cash to the U.S., but to avoid dividend treatment, US2 issues $100x of its stock to CFC in exchange for $10x of CFC stock and $90x cash.

USP takes the position that :

  1. US2's transfer of its stock to CFC in exchange for $10x of CFC stock and $90x cash is an exchange to which section 351 applies;
  2. US2 recognizes no gain on the receipt of $10x of CFC stock and $90x cash in exchange for its stock pursuant to section 1032(a);
  3. CFC recognizes no gain on the issuance of its stock to US2 under section 1032(a);
  4. CFC's basis in the US2 stock is zero pursuant to section 362(a); and
  5. US1 and US2 do not and will not have an income inclusion under section 951(a)(1)(B) as a result of CFC holding the US2 stock (which constitutes United States property under section 956(c)).

At first blush, one would expect that CFC’s acquisition of US2 stock should trigger an inclusion because of the investment in U.S. property.  However, inclusions under section 956 are keyed to the basis of the property.  Because the US2 stock held by CFC has a zero basis, there would be no inclusion under section 951(a)(1)(B).

The government indicated these transactions raise significant policy concerns because the transactions may have the effect of repatriating earnings and profits of a CFC without a corresponding dividend inclusion, or an income inclusion under section 951(a)(1)(B) by reason of the CFC's investment in United States property.

As a result, the new regulations provide that when a CFC acquires stock or obligations of a domestic issuing corporation, that constitute United States property under section 956(c), from such corporation pursuant to an exchange in which the controlled foreign corporation's basis in such property is determined under section 362(a), the CFC's basis in such United States property (solely for purposes of section 956) shall be no less than the fair market value of the property transferred by the controlled foreign corporation in exchange for such property.

Tags: 368 Corporate Reorgs, 956 Investments in U.S. Property