Use of GAAP to compute the earnings and profits of controlled foreign corporations.

• Position: Generally accepted accounting principles

On September 2, 1998, Tax Executives Institute submitted the following comments to the Internal Revenue Service in connection with the IRS's request for information on the collection of information under sections 952 and 964 of the Internal Revenue Code. The comments were prepared under the aegis of the Institute's International Tax Committee whose chair is Michael P. Boyle of Microsoft Corporation. TEI's previous comments on this subject -- which are referred to in the following submission -- were reprinted in the November-December 1992 issue of The Tax Executive.

This letter responds to the Internal Revenue Service's recent request for comments on the collection of information under the proposed section 952 and 964 regulations, relating to the computation of the earnings and profits of foreign corporations. The regulations were issued on June 30, 1992, and would eliminate the need to adjust financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) with respect to uniform capitalization (UNICAP) and depreciation for purposes of computing the earnings and profits (E&P) of a foreign corporation. Because the regulations would significantly reduce paperwork burdens for taxpayers and the government, Tax Executives Institute strongly urges that the final regulations be issued as soon as possible.

TEI and others have long been interested in the development of a simplified method of computing the E&P of foreign corporations. The proposed regulations mark a commendable first step in that development. In prior written comments and during meetings with IRS and Treasury representatives, the Institute wholeheartedly endorsed the concept. We continue to believe that, by allowing taxpayers to use GAAP financial information gathered for non-tax reasons, the Treasury Department and IRS can substantially reduce reporting burdens.

Indeed, TEI advocates the development of a much broader, elective, GAAP-based rule, i.e., one that goes beyond eliminating the computation of depreciation and UNICAP adjustments. We recommend that the GAAP E&P method permit...