Tuesday, October 6, 2015

CFC'S Need to Be Aware of The 60-Day Limitation on the 30-Day Exception for Obligations of Related U.S. Persons!

Some U.S. companies have significant earnings offshore in their Controlled Foreign Corporations (CFCs) that have not been distributed as dividends. To avoid taxable dividend distributions of the Earnings and Profits (E&P) back to the U.S. Parent (USP), some companies may attempt to use short term loans from the CFCs to related U.S. group companies to achieve economic repatriation of the foreign earnings.

The IRS has established a Practice Unit to examine the short term loan exclusion from the definition of U.S. Property, and whether such loans may trigger an income inclusion under IRC Section 951. It looks both at the issue of whether the relatively "mechanical" rules for the short term loan exception are met as well as at the more complex issue of whether a series of short term loans is being used in an attempt to circumvent IRC Section 951.

Whether the requirements of Notice 88-108 or Notice 2008-91 are satisfied with respect to the obligation of the related U.S. person. If not, for IRC Section 956 purposes, the obligation will be considered to be acquired by the CFC as of the obligation’s origination date and will be U.S. property if held by the CFC on a quarter end.

A loan to a related U.S. person held by a CFC at the end of a quarter may not trigger an inclusion under Subpart F if the loan is repaid within 30 days from the time it is incurred (“30-day exception”). This exception applies only if the CFC does not hold for 60 or more days during its taxable year any obligations of related U.S. persons that would be subject to IRC §956 (“60-day limitation”). Generally, if a CFC holds an obligation of a related U.S. person at the end of a quarter of the CFC’s tax year, the CFC will be considered to hold U.S. property. However, pursuant to certain Notices issued by the IRS, short term obligations of a related U.S. person may be excluded from the definition of US property. For the short term loan exception to apply to a CFC’s tax years ending before October 4, 2008 and beginning on or after January 1, 2011:
  1. The obligation of the related U.S. person must be collected by the CFC within 30 days from the time the obligation is incurred (excluding the date of issuance, and including the date of repayment); and
  2. The CFC must hold obligations of related U.S. persons for less than 60 days during the CFC’s tax year.
Whether the related US person executes and repays each obligation to its CFC as a separate, independent transaction. If not, multiple obligations may be collapsed into a single obligation for purposes of IRC Section 956.

Certain judicial doctrines may be relevant to the analysis of whether an obligation is excluded under the short-term loan exception. For instance, in order for the short-term loan exception to apply to an obligation, the substance of the obligation must match its form, and the obligation must not be one step in a series of related steps in a unified transaction.
If it is determined that a series of obligations constitute successive roll-overs of a single obligation, then the periods of disinvestment will be ignored for purposes of testing the 30/60 day and 60/180 day rules of Notice 88-108 and Notice 2008-91, respectively.

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