Modifications to Sec. 956 made by the RRA.

• Author: Rollinson, Marjorie A.
• Position: Revenue Reconciliation Act of 1993

The changes made to Sec. 956 in the Revenue Reconciliation Act of 1993 (RRA) were modestly described as "modifications to Section 956." Sec. 956, on investment in U.S. property, requires U.S. shareholders of controlled foreign corporations (CFCs) to include in income their pro rata share of the CFC's investment in U.S. property. This seemingly innocent title belied the expansive changes made by the RRA. New Sec. 956 has abandoned the old theory of testing for yearly increases in U.S. property amounts in favor of a new cumulative approach.

Prior to the RRA, a U.S. shareholder computed its Sec. 956 investment in U.S. property by comparing the end of the year amount of U.S. property that would have constituted a dividend if distributed to the end of the previous year's amount, and including the differential as a deemed inclusion. Thus, the Sec. 956 test was basically a year-end test and involved a tracking of increases. While this test could lead to some strange results, including double counting of investments over a series of years, in general the concept allowed taxpayers to monitor their investments and either plan to avoid or intentionally trigger an inclusion.

New Sec. 956 will now require quarterly computations, and will trigger inclusions when the average of the quarterly amounts of investment in U.S. property for the year exceeds accumulated untaxed earnings and profits. Thus, in an attempt to end perceived abuses with a year-end test date, Congress has shifted the determinations, and hence the planning opportunities, to a quarterly basis. Consider the example on page 26 showing the calculations under old Sec. 956.

Under old Sec. 956, this example would have yielded no inclusion in 1993. Under the new law, the 1993 Sec. 956 amount would be $100, bringing the two-year total inclusion to $200. Assuming ending investment in U.S. property equals the average amount, this would result because the investment in U.S. property in 1993 is $200, and accumulated E&P is $200, with only $100 of previously taxed earnings and $100 of E&P yet untaxed. The cumulative approach of the new Sec. 956 will require an inclusion of the second $100 of untaxed E&P.

New Sec. 956 will also accelerate inclusions when a CFC has an outstanding balance of...