Comments on Rev. Rul. 89-73: use of short-term loans under Section 956, December 1, 1989.

• Author: Ezrati, Lester D.

Comments on Rev. Rul. 89-73: Use of Short-Term Loans under Section 956

December 1, 1989

This letter discusses Rev. Rul. 89-73, 1989-21 I.R.B. 19 (May 22, 1989), relating to the use of short-term loans from controlled foreign corporations (CFCs), which was issued by the Internal Revenue Service on May 21, 1989. Not only is this ruling contrary to the language of section 956 of the Internal Revenue Code, but it undermines the prospective effect of the temporary regulations issued last year under section 956. Tax Executives Institute recommends that the ruling be withdrawn.

Background

On June 13, 1988, the IRS issued proposed and temporary regulations under section 956, relating to certain investments in U.S. property. The temporary regulations amended Treas. Reg. $S 1.956-(d)(2) by eliminating the "one-year rule" which provided that, for purposes of determinging the amount of a CFC's earnings invested in "United States property," the definition of such property does not include a debt obligation of a related domestic corporation that either (a) is collected within one year from the time it is incurred, or (b) matures within one year from the time it is incurred (but is not collected within such period solely by reason of the inability or unwillingness of the debtor to make payment within such period). The temporary regulations are effective with respect to investments made on or after June 14, 1988 -- the day after the regulations were issued.

The Institute filed comments on the temporary regulations on September 7, 1988, objecting to the elimination of the one-year rule and recommending that, at a minimum, any change be effective with the first taxable year beginning after the date the regulations were issued. On September 16, 1988, the IRS announced in Notice 88-108 that the final regulations would exclude from the definition of the term "obligation" an obligation that would constitute an investment in U.S. property if held at the end of the CFC's taxable year, as long as the obligation is collected within 30 days from the time it is incurred.

Rev. Rul. 89-73 Expands the

Scope of the Statute

Under section 956 of the Code, if a CFC has an investment in U.S. property "at the close of the taxable year," its U.S. shareholder will be 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) Rev. Rul. 89-73 represents the IRS's most...