Source: https://www.bna.com/section-956-60day-n57982059295/
Timestamp: 2016-12-07 16:26:23
Document Index: 616350886

Matched Legal Cases: ['§956', '§956', '§956', '§956', '§956', '§956', '§956', '§956', '§956', '§956', '§956', '§956', '§951', '§956', '§956', '§1', '§956', '§956', '§1', '§1', '§956', '§956', '§956', '§956', '§1', '§1', '§956', '§898']

Section 956: The 60-Day Limitation on the 30-Day Exception for Obligations of Related U.S. Persons | Bloomberg BNA
Section 956: The 60-Day Limitation on the 30-Day Exception for Obligations of Related U.S. Persons
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Generally, a loan made by a subsidiary to its parent or to an
affiliate is not a taxable event. Subpart F, however, provides a limited
exception. When a controlled foreign corporation ("CFC") makes a loan
to a related U.S. person, the United States shareholder ("U.S.
shareholder") of the CFC includes in its income the average of the amounts
of such loans outstanding on the last day of each quarter.1
Treasury and the IRS have provided an exception for short-term
loans. A loan to a related U.S. person held by a CFC at the end of a quarter
will not trigger an inclusion under Subpart F if the loan is repaid within 30
days from the time it is incurred (i.e., the "30-day
exception").2 This exception applies
only if the CFC does not hold for 60 or more days during its taxable year any
obligations3 of related U.S. persons
that (without regard to the 30-day exception) would be subject to §956
("the 60-day limitation").
The 30-day exception can be used to reduce third-party debt
outstanding at the end of a quarter. For example, a U.S. parent may have $100
million of third-party debt and $30 million of cash offshore. For quarterly and
annual financial reporting purposes, the $100 million is reported as gross
third-party debt, and the company's debt-to-equity ratio is calculated using
that amount (i.e., the $30 million of foreign cash is not netted against the
$100 million of outside debt). Under the 30-day exception, the CFC can loan the
$30 million to the U.S. parent over each quarter-end and at the end of the year
(subject to the 60-day limitation), which can then be used to reduce the U.S.
parent's $100 million of third-party debt to $70 million. The lower amount of
outside debt reflected on the financial statements may result in a better
credit rating and lower borrowing costs.4
CCA 201516064 addresses the application of the 60-day limitation on
the availability of the 30-day exception. The CCA states that all loans held by
a CFC that are subject to §956 must be counted for purposes of determining
whether the CFC held loans to related U.S. persons outstanding for 60 or more
days during the year, not just the loans qualifying for the 30-day exception.
Under the facts of the CCA, a CFC made two loans to its U.S. parent
("USP"). Let's assume the following dates and amounts, and that the
CFC is on a calendar taxable year. On
March 25, the CFC loans $20 million to USP. On April 15, USP repays $17.5
million (the remaining $2.5 million of the loan remains outstanding). On
September 20, CFC makes another loan to USP in the amount of $30 million, and
USP repays the $30 million to CFC on October 10. The $2.5 million amount of the
first loan continues outstanding for the remainder of the year.
The taxpayer addressed in the CCA apparently argued that there was
only a $2.5 million investment in U.S. property. The amounts of $17.5 million and $30 million
were each loaned to USP for less than 30 days. The total number of days both
amounts were outstanding was less than 60 days. If the 60-day limitation took
into account only loans outstanding for less than 30 days, the limitation would
be satisfied. In all events, the $2.5 million that remained outstanding from
March 25 through the end of the year would not qualify for the 30-day
The CCA, however, states that all §956 obligations must be counted
in calculating the 60-day limitation. This includes loans not outstanding at the end of a quarter and loans
that would otherwise qualify for the 30-day exception. Thus, the $2.5 million
that remained unpaid on the first loan is counted. Since the CFC had loans to
related U.S. persons outstanding for more than 59 days, the 30-day exception
did not apply to the $17.5 million loan or the $30 million loan, even though
they were both outstanding for less than 30 days.
This 60-day limitation is a "cliff rule." If the CFC has
loans outstanding to related U.S. persons for 59 days, the 30-day exception is
available, but if the CFC holds §956 loans for 60 days, the 30-day exception is
not available for any loan. Also, there
is no de minimis rule, nor explicit relief for oversights or inadvertent
loans. For example, if a CFC made a 10-day loan during the year to a related
U.S. person over a quarter-end for $100 million, and also had one other loan to
a related U.S. person during the year in the amount of $50 that was outstanding
for 61 days, the $100 million loan literally would not qualify for the
exception. It would seem appropriate for
the IRS to not rigidly apply the 60-day limitation in order to properly carry
out the purpose of providing an exception to §956 for short-term, quarter-end
loans.5
Receivables arising from the sale of inventory or the provision of
services that qualify for another exception are not counted as obligations for
purposes of the 60-day limitation.6 Also, the
60-day limitation does not take into account other types of investments in U.S.
property, such as stock in a related U.S. corporation or investments in U.S.
tangible property located in the United States.
Under certain circumstances, the IRS has asserted that successive
loans should be treated as one continuous loan.7
Such position means that the days between the successive loans are counted and
would likely cause the 60-day limitation to be failed. It is generally accepted
that successive loans made by a CFC to a related U.S. person that are off for
approximately as many days as they are on should not be treated as one
continuous loan.8 Accordingly, this
step-transaction concept should be easy to avoid because to qualify for the
30-day exception a CFC cannot have loans outstanding during a year for more
than 59 days.
The 60-day limitation is applied on a CFC-by-CFC basis consistent
with the rules in §956 and the regulations. Therefore, a CFC with loans otherwise satisfying the 30-day and 60-day
requirements does not lose the exception if a related CFC has loans outstanding
to related U.S. persons for 60 or more days.
Section 956 applies only to loans made by a CFC to related U.S.
persons. Therefore, loans to foreign related persons generally are not subject
to §956,9 and accordingly are not counted for
purposes of the 60-day limitation. Under certain limited circumstances,
however, if a CFC makes a loan or capital contribution to a related foreign
corporation which uses the proceeds to make a loan to a related U.S. person,
the funding CFC can be considered as holding the loan to the related U.S.
person. This anti-abuse rule applies only if there is a principal purpose to
avoid the application of §956 to the funding CFC.10 Care should be taken to avoid the
application of this indirect investment rule, because it might cause a CFC to
fail the 60-day requirement.11
The §956 computational rules provide another short-term loan
exception. The amount of the §956 investment is the average of the amounts of
loans to related U.S. persons held by a CFC as of the end of each quarter of
the CFC's taxable year. Loans
outstanding during a quarter but not at the end of a quarter are not counted.
Thus, a CFC can make intra-quartile loans to related U.S. persons without a
deemed distribution under §956.
Relying on the intra-quartile loan exception eliminates the 60-day
limitation (and also the short-term loans can be outstanding for more than 30
days). As mentioned above, successive loans should not be treated as one continuous
loan deemed outstanding over a quarter-end provided the loans are off for
approximately as long as they are on.
If a U.S. parent desires to obtain the financial reporting benefits
of quarter-end loans, a CFC can adopt a fiscal year that closes one month
earlier than the fiscal year of its U.S. parent.12This permits a CFC to loan funds
over its U.S. parent's quarter-ends but not over the quarter-ends of the CFC.
CCA 201516064 states that the IRS views all §956 loans of a CFC outstanding
during a year as being taken into account in determining whether the 60-day
limitation is met. In doing so, the IRS again confirmed the continued viability
of the 30-day exception for short-term loans outstanding over a CFC's
quarter-end.13
This commentary also appears in the October 2015 issue of the Tax Management International Journal. For
more information, in the Tax Management Portfolios, see Fried and Liss, 6260
T.M., CFCs – Investment of Earnings in United States Property, and in
Tax Practice Series, see ¶7150, U.S. Persons -- Worldwide Taxation.
1 §951(a)(1)(B), §956.
The amount included in the income of the U.S. shareholder is limited to the
earnings and profits of the CFC that have not been previously subject to U.S.
taxation under Subpart F. See Yoder, Subpart F Inclusions and
Dividends: Key Ordering Rules, 41 Tax Mgmt. Int'l J. 570 (Oct. 12, 2012).
2 Notice 88-108, 1988-2
C.B. 445. See GLAM 2007-0016
(confirms that, although Notice 88-108 literally applies to year-end
obligations, the 30-day exception will be available for obligations outstanding
at the end of each quarter); Yoder, IRS Applies §956 30-Day Exception to
Quarters, 36 Tax Mgmt. Int'l J. 664 (Dec. 4, 2007).
3 The regulations define
"obligation" as indebtedness. Reg. §1.956-2T(d)(2).
See Yoder, Short-term
CFC Loans May Avoid Code Sec. 956, 34 Int'l Tax J. 3 (Jan. – Feb. 2008).
See, e.g., FSA
200216022 (suggests multiple inclusions under §956 be avoided by prorating
guarantees made by several CFCs of a single loan to a related U.S. person); CCA
03673 (similar conclusion).
§956(c)(2)(C); Reg. §1.956-2(b)(1)(v), §1.956-2T(d)(2)(i)(B). See Yoder,
Improving Efficiency of Global Cash Utilization: Accelerated Payments for
Inventory, 38 Tax Mgmt. Int'l J. 171 (Mar. 13, 2009). The 60-day rule takes
into account only loans that would otherwise be subject to §956.
See Rev. Rul.
89-73, 1989-1 C.B. 258; Jacobs Engineering Group Inc. v. U.S., 79 AFTR
2d 97-1673 (C.D. Calif. 1997), aff'd, 168 F.2d 499 (9th Cir. 1999). For
a detailed analysis of the Jacobs Engineering case, see Yoder and
McGill, Treatment of CFC Loans to U.S. Affiliates: The Sword and Sickle of
Subpart F, 26 Tax Mgmt. Int'l J. 454 (Sept. 12, 1997).
See Yoder, Notice
2008-91 Exception to §956: Guidance on Particular Issues, 39 Tax Mgmt.
Int'l J. 96 (Feb. 12, 2010).
9 While the Code limits
the application of §956 to loans to related U.S. persons, Treasury and the IRS
recently issued Notice 2014-52, 2014-42 I.R.B. 712, stating that regulations
would be issued to apply §956 to loans to foreign corporations in certain inverted
structures implemented after September 22, 2014. The Notice states that the
30-day exception is not available for such loans. See Yoder, Section 956: IRS Treats
Foreign Property as U.S. Property, 44 Tax Mgmt. Int'l J. 157 (Mar. 13,
10 Reg. §1.956-1T(b)(4).
11 The cases that have
addressed the indirect investment rule have applied it where a CFC parent made
a capital contribution to a CFC subsidiary that had no earnings and profits,
and the CFC subsidiary invested the funds in U.S. property on a long-term
basis. Schering-Plough Corp. v. U.S., 651 F. Supp. 2d 219 (D.N.J. 2009)
order denying motion for retrial,Merck & Co v. United States, 2010-1
USTC ¶ 50,373 (D.N.J. 2010), aff'd,Merck & Co., 652 F.3d 475
(3d Cir. 2011); The Limited, Inc. v. Commissioner, 113 T.C. 169 (1999), rev'd
on other grounds, 286 F.3d 324 (6th Cir. 2002). None of these opinions
addresses whether Reg. §1.956-1T(b)(4) is valid, or whether it exceeds the
agency's rulemaking authority. For a discussion of recent IRS guidance applying
the indirect investment rule, see Yoder, IRS Applies the §956
Indirect Investment Rule to a Partnership Loan, 43 Tax Mgmt. Int'l J. 630
(Oct. 10, 2014); Yoder, IRS Expands the Application of the Code Sec. 956
Anti-Conduit Rule, 41 Int'l Tax J. 3 (Mar.-Apr. 2015).
12 §898(c)(1)(B).
13 Congress has
expressly recognized the 30-day exception for loans as provided in Notice
88-108. H.R. Rep. No. 111, 103d Cong., 1st Sess. (1993), at 701 (May 23, 1993),
1993-3 C.B. 277.