Applicability of Notice 88-108 after OBRA 1993.

• Position: Omnibus Budget Reconciliation Act of 1993 - Tax Executives Institute's International Tax Committee

The Omnibus Budget Reconciliation Act of 1993 (OBRA) made several substantive changes to section 956 of the Internal Revenue Code, relating to the U.S. investment of the earnings of a controlled foreign corporation. This letter addresses the need to clarify that the 1993 amendments did not affect the principles enunciated in Notice 88-108, 1988-2 C.B. 445, which delineates an exception from the definition of U.S. property for certain short-term loan obligations. TEI urges the IRS and Treasury to affirm that Notice 88-108 remains applicable and to extend that notice's exception to loans made over the end of a fiscal quarter. We believe that such a result is explicitly supported by the legislative history of the OBRA amendments.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 5,000 members represent more than 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the amendments enacted under OBRA to section 956 of the Code, relating to the taxation of the investment of a controlled foreign corporations's earnings in U.S. property.

Historic Treatment of Loan Obligations

Prior to the enactment of OBRA, section 956(a) provided that if a controlled foreign corporation (CFC) had an investment in U.S. property "at the close of the taxable year," its U.S. shareholder was deemed to have received a dividend from the CFC equal to the shareholder's pro-rata share of the CFC's increase in earnings invested in such property for the year.(1) As amended by OBRA, section 956 now provides that the investment in U.S. property of a CFC equals the average of the amounts of...