Chief Counsel Advisory Issued On Deemed Reinvestment In United States For Controlled Foreign Corporation Purposes Attributable To An Intercompany Loan Held By Controlled Foreign Partnership

In CCA 201420017 (5/15/2014) the Chief Counsel's Office concluded that pursuant to Treas. Reg. §1.956-1T(b)(4), the common parent corporation of an affiliated group of corporations was required to include amounts in income under §§ 956(a)(1)(B) and 956 as result of loan deemed to have been made by a disregarded foreign entity to the CFC in the tax year in issue.

Controlled Foreign Corporation Rules: An Overview

Each person who is a US shareholder per §951(b) of a CFC and who owns stock in such corporation of the last day of the tax year, the amount determined under §956 with respect to that shareholder for that taxable year (but only to the extent not excluded from income per §959(a)(2)(previously taxed subpart F income). Section 956(a) defines the includible amount as the lesser of: (i) the excess (if any) of (A) such shareholder's pro rata share of the average of the amounts of US property held (directly or indirectly) by the CFC as of the close of each quarter of such taxable year, over (B) the amount of earnings and profits per §959(c)(1)(A) as to such shareholdre or (2) such shareholder's pro rata share of the applicable earnings of the CFC.

"United States property" generally includes a debt or obligation of a domestic corporation that is a US shareholder (per §951(b)). Therefore, a US shareholder includes in income under §951(a)(1)(B) and §956 where its CFC holds an obligation of the shareholder as of the close of a quarter of the CFC's taxable year. The amount of the income inclusion is determined with respect to the CFC's basis in the obligation averaged over the quarters in its year when it holds the obligation. However, the inclusion amount will be limited in cases where the CFC has earnings and profits described in § 959(c)(1)(A) or where the shareholder's pro rata share of the CFC's applicable earnings is less than the amount that it would otherwise be included.

The legislative history to §956 provides that "if the facts indicate that the controlled foreign subsidiary facilitated a loan to, or borrowing by, a U.S. shareholder, the CFC is considered to have made a loan to (or acquired an obligation of) the U.S. shareholder." This could arise, for example, where a CFC makes a deposit in a bank and the deposit is either followed or preceded by the loan of a similar amount to the CFC's U.S. shareholder by the bank.

Treas. Reg. §1.956-1T(b)(4) provides that: a CFC will be deemed to hold indirectly investments in U.S. property acquired by any other foreign corporation that is controlled by the controlled foreign corporation, if one of the principal purposes for creating, organizing, or funding (through capital contributions or debt) such other foreign corporation is to avoid the application of § 956 with respect to the controlled foreign corporation. For purposes of this paragraph (b), a foreign corporation will be controlled by the CFC if the foreign corporation and the controlled foreign corporation are related parties under §267(b). In determining for purposes of this paragraph (b) whether two or more corporations are members of the same controlled group under §267, a person is considered to own stock owned directly by such person...