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Since its introduction in 1962, the current earnings and profits (E&P) limitation, in Code Sec. 952(c)(1)(A), (1) has been a critical, yet often unsung, mainstay of the subpart F anti-deferral [...]

This article is the second part of Chapter 9, Controlled Foreign Corporations, from the authors' most recent edition of UNITED STATES INTERNATIONAL TAXATION: OUTBOUND AND INBOUND ACTIVITIES. [paragraph] 9.26 Global [...]

I. Introduction Prior to 1962, U.S. tax regime generally allowed multinational corporations to defer tax on the income earned by their foreign subsidiaries until the income was repatriated to the [...], There are several categories of income under the umbrella of Subpart F that is subject to U.S taxes in the year in which it is earned by a controlled foreign corporation ("CFC"). One of the categories is Foreign Base Company Sales Income ("FBCSI"). Code Sec. 954(d)(1) sets forth the general rule defining FBCSI and identifies four types of personal property transactions that a CFC derives FBCSI involving related persons outside the CFC's country of organization. Code Sec. 954(d)(2) provides a special branch rule that applies in situations where the carrying on of activities by a CFC through a branch outside the country of incorporation of the CFC has substantially the same tax effect as if such branch were a wholly owned subsidiary corporation deriving such income} The branch rule prevents a U.S. shareholder from avoiding Code Sec. 954(d)(1) by having its CFC conduct activity through a branch rather than a related person. Reg. [section]1.954-3 further defines FBCSI and provides exceptions where a CFC can exclude its sales income from FBCSI. The focus of this article is to discuss the purpose of Code Sec. 954(d)(1) and (d)(2) and Reg. [section]1.954-3 and examine how the courts applied these statutes and regulations in making judgment in Whirlpool Financial Corporation v. Commissioner (2) and analyze why this case is so controversial.

This article (1) analyzes the Subpart F services rules and demonstrates how these antiquated rules--which have not been updated since the 1960s -- are ill-fitting and disruptive for modern services [...]

Code Sec. 267A generally disallows deductions for hybrid interest and royalty payments that are not included in the income of the recipient, which generally increases U.S. taxable income by the [...]

1. Introduction Before the 2017 Tax Cuts and Jobs Act ("TCJA"), the United States followed a worldwide tax system. Under this approach, all income a taxpayer earned worldwide was subject [...]

Table of Contents [paragraph]4.01 Introduction [paragraph]4.02 Background of DISCs [paragraph]4.03 DISC Qualification Requirements--Generally [paragraph]4.04 Gross Receipts Requirement for DISCs [paragraph]4.05 Assets Requirement for DISCs [paragraph]4.06 Deficiency Distribution to Meet DISC [...]

I. Introduction "[Credit is a system whereby] a person who can't pay, gets another person who can't pay, to guarantee that he can pay." (1) PL. 115-97, (2) better known [...]

Congress repealed Code Sec. 958(b)(4) ("Code Sec. 958(b)(4) Repeal") for a very narrow purpose--specifically, to address the perceived abuse of "decontrolling" of "controlled foreign corporations" ("CFCs"). Although this may have [...]

The landscape for cross-border spin-offs changed significantly after the 2017 enactment of the Tax Cuts and Jobs Act ("TCJA"). (1) In this column, we sketch out the beginnings of a [...]

Introduction As has been widely reported since its enactment in December 2017, the Tax Cuts and Jobs Act (the "TCJA") (1) represented a sea change in the U.S. international tax [...]

Introduction As international tax practitioners get their bearings post-TCJA, disregarded transactions are emerging as a problem of fresh significance for U.S. multinational companies. (1) In the pre-reform world, payments between [...]

Table of Contents I. Introduction: Squaring the Circle--Using a Corporate Framework to Tax Income on a Flow-Through Basis II. Disparate Treatment Depending upon the Level of the Sale--In General III. [...]

We are several months into a U.S. tax reform environment that most, if not all, of us could not have anticipated. Now that the dust has begun to settle following [...]

Authors Note: After completion of this article, Treasury issued Final Section 385 Regulations (TD 9790, October 13) that made several significant changes to the Proposed Regulations analyzed in this article. [...]

The new temporary regulations ("Temporary Regulations") reduce the tax benefits resulting from certain post-inversion transactions. (1) The Temporary Regulations implement the rules described in Notice 2014-52 and Notice 2015-79, but [...]

This article analyzes the Subpart F services rules and demonstrates how these antiquated rules--which have not been updated since the 1960s--are ill-fitting and disruptive for modern services businesses. The authors [...]

4. Location of Machines Another question that commentators have discussed concerns whether machines used in providing services should be a factor in determining where a CFC performs its services. For [...]

The use of partnerships in the international context has become more prevalent. As a result, the international issues inherent in subchapter K have taken on increased importance. Christopher Trump and [...]

I. Introduction On April 25, 2014, the IRS and Treasury issued Notice 2014-32 (the "Notice") in response to the cash repatriation strategy popularly known as the "Killer B," a triangular [...]

On December 24, 2008, Treasury and the IRS promulgated the contract manufacturing regulations. (1) Among other things, these regulations established the substantial contribution test. When a CFC's activities are sufficient [...]

Eric Smith analyzes the tax treatment of deemed inclusions under Code Sec. 951 to U.S. Shareholders of Controlled Foreign Corporations. Introduction Despite calls for reform, deferral of U.S. income tax [...]

Introduction on November 30, 2012, the Treasury released proposed regulations that provide guidance with respect to Code Sec. 1411. Code Sec. 1411, the subject of a previous column, (1) refers [...]

On February 10, 2012, the IRS released Private Letter Ruling 201206003 (the "LTR"). In the LTR, a controlled foreign corporation (CFC) sold products that it had purchased from an unrelated [...]

On June 20, 2011, the Court of Appeals for the Third Circuit affirmed the 2009 decision of the District Court for the District of New Jersey in Schering-Plough Corp. (1) [...]

Congress has made substantial changes to section 956 of the Internal Revenue Code ("the Code") (1) since it was enacted in 1962. Code Sec. 956 causes U.S. shareholders (defined below) [...]

The IRS (1) gave us an early Christmas present on December 24, 2008, when it issued final, temporary and proposed regulations addressing contract manufacturing structures and the branch rule ("December [...]

"Tax havens" continue to present a combination of real and perceived challenges to the proper functioning of the U.S. tax system. These challenges are already addressed by highly complex legal [...]

During the liquidity crisis, the Treasury responded to the frozen credit markets by issuing Notice 2008-91, (1) which allowed U.S. taxpayers to borrow from their controlled foreign corporations (CFCs) for [...]

The IRS (1) gave us an early Christmas present on December 24, 2008, when it issued final, temporary and proposed regulations addressing contract manufacturing structures and the branch rule ("December [...]

During the current economic crisis, we have seen credit markets freeze up. In response, the Treasury has gone to great lengths to restore liquidity and ultimately to avert the ever [...]

Introduction In our March 2007 column, Kyoto Meets Subpart F: U.S. and Foreign Tax Implications of Structuring for Global Emissions Trading, (1) we discussed the rather recent phenomenon involving the [...]

The IRS issued proposed regulations in February addressing contract manufacturing structures and the branch rule ("Proposed Regulations"). (1) These long-awaited Proposed Regulations provide guidance on when a controlled foreign corporation [...]

The IRS has ruled in a complicated transaction in which a partnership consisting of two controlled foreign corporations liquidated its assets.? The Service ruled that this transaction should be deemed a sale of a partnership interest from one partner to another.? The decision is reveiwed and evaluated.

An IRS ruling on the recognition of foreign base company sales income by a controlled foreign corporation which assigns work to a contract manufacturer is discussed.

The authors discuss the US Tax Court's decision in Suzy's Zoo in regard to the use of contract manufacturers and the generation of foreign income.

The IRS lacks authority for its hybrid business entity and contract manufacturing regulations which are aimed at reducing legitimate foreign tax credits on active income. The IRS has extended IRC Subpart F rules applicable to controlled foreign corporation passive income beyond their intended application and to the detriment of US multinational businesses.

Stock transfers between US persons and foreign corporations in IRC section 351 and section 354 exchange transactions are the subject of IRS final regulations under section 367 which were issued in June 1998. Recognition of gain on stock transfers to foreign corporations is required unless the transferor controls under 5% of the foreign corporation and agrees to a 5-year recognition of gain agreement.

US investors may realize tax advantages by structuring their investments so as to receive classification as controlled foreign corporations (CFCs), rather than as 10/50 companies. Using a usufruct is one method of achieving CFC status in certain countries even where local laws generally make CFC recognition difficult. Typically, these considerations arise in conjunction with foreign joint ventures in which CFC status would provide tax treatment preferable to 10/50 company dividend treatment.

US anti-deferral tax rules are a major tax issues in an era of multinationals, controlled foreign corporations, and passive foreign investment companies. Critics say the rules inhibit US companies' ability to compete globally. Repealing deferral or instituting a territorial system are possible solutions but, even without a repeal, the check-the-box entity classification rules will provide tax simplification in this area of the law.

Legislation passed by the US Congress in 1996 regarding international tax matters was not wholly consistent with Clinton administration tax policy, but most provisions were accepted because they were attached to minimum wage and health insurance portability laws. The IRC section 956A excess passive assets rules for controlled foreign corporations were repealed, as were Puerto Rican and possessions tax credit laws. The Congress was able to pass laws taxing US source income earned by expatriates, though such laws may conflict with tax treaties. The administration supported changes in interest rates and other tax laws for foreign trusts.

Technical corrections implemented under the Small Business Job Protection Act of 1996 affect income tax, foreign tax, estate tax, and tax-exempt laws, and tax practitioners should review these changes with pending litigation and possible amended returns in mind. A number of provisions affect controlled foreign corporations, and some reporting requirements for tax-exempt organizations have been revised. Retroactive inflation adjustments have been implemented for savings bond interest and the kiddie tax. Earnings stripping and stock redemption treatment have also been clarified.

The final IRS regulations governing the tax treatment of foreign currency hedging transactions entered into by Subpart F taxpayers have expanded the definitions used to allow more transactions to qualify. Compared to the temporary regulations, more transactions are considered to have been entered into for the purpose of hedging under the final regulations, meaning that more transactions are excluded from foreign personal holding company income treatment. The temporary regulations also imposed strict reporting requirements that have been relaxed in the final regulations.

The IRS regulations enacted to ensure that US corporations cannot use controlled foreign corporations (CFCs) to avoid US source taxation have prompted flip transactions and complicated multinational business combinations. Flip transactions are attempts to avoid to Subpart F taxation of CFCs by turning the CFC into the parent of the US parent corporation. When corporations of different nations merge, potential taxation of stock dividends under the tax laws of both nations can result, and some merging companies issue special shares that retain the nationality of the separate corporations.

Tax planning by multinational corporations designed to minimize liability under IRC section 956A should focus on possible restructuring or decontrol and proper treatment of assets. Section 956A was enacted in 1993 as a part of the Subpart F scheme designed to keep US-based multinationals from using foreign subsidiaries to defer income. Section 956A is the latest component of a system that includes foreign personal holding company and accumulated earnings statutes. Tax planning is needed because inconsistencies among statutes may result in multiple taxation.

The increasingly global nature of business has led to an increase in foreign currency translation, and US tax policy and tax accounting methods will need to address the changes in the economic environment. The accounting methods used vary depending on whether the foreign entity is a foreign branch of a US company, a controlled foreign corporation, or a non-controlled foreign corporation. Special issues include the treatment of hyperinflation, foreign tax credits and the choice of a functional currency for accounting purposes.