On October 1, 2008, Tax Executives Institute submitted the following comments to the U.S. Department of the Treasury and the Internal Revenue Service on Notice 2008-01, relating to the treatment of certain obligations of controlled foreign corporations for purposes of section 956 of the Internal Revenue Code. The comments were prepared under the aegis of TEI's International Tax Committee whose chair is Brian C. Ugai of Starbucks Coffee Company.
Tax Executives Institute commends the government for issuing Notice 2008-91, which temporarily expands to 60 days the period in which controlled foreign corporations may lend money to their U.S. shareholders without triggering section 956 of the Internal Revenue Code. Absent the notice, section 956 would generally require the U.S. shareholder to include such amounts in its taxable income because the amounts are considered "obligations" of U.S. persons.
In light of the financial liquidity crisis, the recent Treasury and IRS announcements are both welcome and appropriate. We believe, however, that additional action is warranted. Several suggestions for further action are advanced here as are recommendations for addressing the technical and administrative issues associated with Notice 2008-91.
Notices 88-108 and 2008-91
Section 956 of the Code generally provides that a U.S. shareholder of a CFC will be taxed on an amount equal to the lesser of (i) the U.S. shareholder's pro rata share of the average amount of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the taxable year, less that portion of the CFC's earnings and profits previously included in the shareholder's gross income, or (ii) the shareholder's pro rata share of the CFC's applicable earnings. Subsection (c) defines U.S. property to include an obligation of a U.S. person.
Notice 88-108, 1988-2 C.B. 445, provides an exception to section 956 treatment for an obligation that would otherwise be U.S. property if held at the end of the CFC's quarter in each taxable year. (1) This exception for obligations that are collected within 30 days from the time incurred, however, is only available if the CFC did not hold for more than 60 days during the year obligations that would qualify as U.S. property. The notice was issued to accommodate the situation in which a U.S. parent corporation borrows from its foreign affiliates at the end of each quarter to pay down external debt, a practice that permits the U.S. parent...