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IRS Rules on Loans from Controlled Foreign Corporations (CFC)


June 2015

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Synopsis

In Chief Counsel Advice Memorandum 201516064 (the “CCA”), the IRS concluded that the 30 day rule short-term loan exception under Notice 88-108, 1988- 2 C.B. 446, does not apply to any obligation owned by a CFC unless all obligations held during the tax year by the CFC are held for less than 60 days (i.e., satisfy the 60-day-rule).

Issue

Section 951(a)(1)(B) generally requires a U.S. shareholder of a CFC to include its pro-rata share of the CFC’s earnings that are invested in “US property” under Section 956 to recognize as an income inclusion its investment in U.S. Property (i.e., the CFC loan). U.S. property includes an “obligation of a [US] person.”

Under the Notice 88-108, certain loans from a CFC to the United States shareholder that crossed the year end (now quarter end) could be excluded if: (1) the loans were collected within 30 days of the time they were incurred (the 30-day-rule) and, (2) the loans were held for fewer than 60 days in total during the year (the 60-day-rule).

The issue that arose was how to deal with numerous loans from a CFC - whether to test each loan separately or aggregate the loans. Under the specific facts of the CCA, the IRS applies its aggregated approach as shown in the following examples:

  • U.S. Parent, a domestic corporation, wholly owns CFC A, a controlled foreign corporation (“CFC”) within the meaning of section 957 that is organized in Country A. U.S. Parent and CFC A both have taxable years ending Day 1.
  • During Year 1, which is after 1988, CFC A made several loans to U.S. Parent pursuant to a line of credit between CFC A as lender and U.S. Parent as borrower. On Date 1, CFC A loaned Amount 1 to U.S. Parent. Amount 1 was outstanding on the last day of CFC A’s quarter including Date 1.
  • On Date 2, fewer than 30 calendar days after Date 1, U.S. Parent repaid Amount 2, which is Amount 3 less than Amount 1, to CFC A. Amount 3 remained outstanding after Date 2.
  • On Date 3, CFC A loaned Amount 4 to U.S. Parent. Amount 4 and Amount 3 were outstanding on the last day of CFC A’s quarter including Date 3.
  • On Date 4, fewer than 30 calendar days after Date 3, U.S. Parent repaid Amount 4 to CFC A.
  • As a result of these advances and repayments, Amount 3 was outstanding for more than 60 calendar days during Year 1, although Amount 2 and Amount 4 were each outstanding for fewer than 30 calendar days during Year 1 and were cumulatively outstanding for fewer than 60 calendar days during Year 1.

 

Conclusion

Since Amount 3 was not eligible for the short-term loan exception under the Notice, the CCA concludes that all obligations of USP held by CFC1 are ineligible for the short-term loan exception. This would hold despite the fact that Amount 2 and Amount 4 each satisfy both the 30-day-rule and the 60-day rule.

The CCA provides the IRS interpretation of the short-term loan exception under Notice 88-108. Clients should review their intercompany balances to insure that those CFCs do not hold any obligations that constitute investments in U.S. property that may be ineligible for the short-term loan exception under Notice 88-108.

Contact

To learn more about CohnReznick’s International Tax Practice, please visit our webpage.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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