- IRS Notice 2008-91 - IRS Expands Ability of U.S. Shareholders to Borrow from Foreign Subsidiaries; Continues Trend of Taxpayer-Friendly Guidance in Light of Credit Difficulties and Economic Downturn
- October 31, 2008 | Author: Saba Ashraf
- Law Firm: Troutman Sanders LLP - Atlanta Office
The IRS recently issued guidance in Notice 2008-91 that expands the ability of a U.S. shareholder to obtain financing from a foreign subsidiary without triggering adverse tax consequences. 1
Generally, income generated by a foreign corporation that is owned by a U.S. shareholder is not subject to U.S. tax until the foreign corporation distributes a dividend to the U.S. shareholder. Sections 951(a)(1)(B) and 956 of the Code provide a broad exception to this general rule by requiring a U.S. shareholder to include in income a deemed dividend from a foreign corporation that is a “controlled foreign corporation,” or “CFC,” where the foreign corporation has earnings and profits and makes certain investments in United States property.
For purposes of Code Section 956, “United States property” generally includes an obligation of a United States person that is a U.S. shareholder of the CFC (or related to a U.S. shareholder). Thus, where a U.S. shareholder borrows money from a CFC, Code Sections 951(a)(1)(B) and 956 generally require the U.S. shareholder to include a deemed dividend in income where the CFC has earnings and profits and the CFC owns the obligation at the end of one or more quarters of a taxable year.
In Notice 88-108, the IRS promulgated an important exception to the definition of “obligation” for purposes of Code Section 956 with respect to short-term obligations held by a CFC. Notice 88-108 provides that definition of the term “obligation” excludes an obligation that would constitute an investment in United States property, so long as the obligation is collected within 30 days from the time that the obligation is incurred. However, the exception does not apply if the CFC holds for 60 or more calendar days during the taxable year obligations, which without regard to the 30-day rule of the preceding sentence, would constitute an investment in United States property.
In Notice 2008-91, the IRS acknowledged that circumstances affecting liquidity have made it difficult for U.S. taxpayers to fund their operations and therefore expanded the application of the exception for short-term obligations provided in Notice 88-108. To facilitate liquidity in the near term, the exception for short-term obligations was expanded such that definition of the term “obligation” excludes an obligation that would constitute an investment in United States property, so long as the obligation is collected within 60 days from the time that the obligation is incurred. However, the exception does not apply if the CFC holds for 180 or more calendar days during the taxable year obligations, which without regard to the 60-day rule of the preceding sentence, would constitute an investment in United States property.
To summarize, in Notice 2008-91, the IRS extended the length of time that an obligation can remain outstanding from 30 to 60 days while continuing to be excluded from the definition of “obligation” for purposes of Code Section 956. In addition, the IRS increased the number of calendar days that a CFC can hold obligations that would otherwise constitute investments in United States property and still have the short-term obligation exception apply from less than 60 calendar days to less than 180 calendar days.
The expanded short-term obligation exception provided in Notice 2008-91 applies only for the first two taxable years of a CFC ending after October 3, 2008. Thus, if a CFC has a calendar tax year, Notice 2008-91 will apply for the CFC’s taxable years ending December 31, 2008 and December 31, 2009. Notice 2008-91 provides that its application does not otherwise affect the application of Notice 88-108 and that a CFC may apply either Notice, but not both.
Notice 2008-91 is the most recent guidance by the IRS, in what hopefully is an emerging trend, in which the IRS interpreted tax rules so as to allow certain taxpayers flexibility during the current economic downturn, particularly taxpayers with losses. For example, the IRS recently issued Notice 2008-78, in which the IRS announced that it would issue regulations under Code Section 382 that effectively eliminate the presumption that capital contributions to a loss corporation within two years prior to an ownership change are part of a plan to avoid or increase the Section 382 limitation. Additionally, in Notice 2008-83, the IRS provided that any deduction properly allowed after an ownership change of a bank with respect to losses on loans or bad debts will not be treated as a built-in loss or a deduction attributable to periods before the change date for purposes of Code Section 382.