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IRS Chief Counsel memorandum addresses 30-day rule under Section 956

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Tax Hot TopicsIn an IRS Chief Counsel Advice memorandum (CCA 201516064) released April 17, the IRS Office of Associate Chief Counsel (International) determined that Notice 88-108 provides an exception for obligations held by a controlled foreign corporation (CFC) that meet the 30-day test if, and only if, all obligations held by a CFC meet the 60-day test.

Under the facts of the CCA, Parent, a domestic corporation, wholly owned a CFC organized in Country A. Both Parent and the CFC have taxable years ending Day 1. During Year 1, which is after 1988, the CFC made several loans to Parent pursuant to a line of credit between the CFC as lender and Parent as borrower.

On Date 1, the CFC loaned Amount 1 to Parent. Amount 1 was outstanding on the last day of CFC's quarter including Date 1. On Date 2, fewer than 30 calendar days after Date 1, Parent repaid Amount 2, which is Amount 3 minus Amount 1, to the CFC. Amount 3 remained outstanding after Date 2. On Date 3, CFC loaned Amount 4 to Parent. Amount 4 and Amount 3 were outstanding on the last day of CFC's quarter including Date 3. On Date 4, fewer than 30 calendar days after Date 3, Parent repaid Amount 4 to CFC.

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.

Section 956 generally requires a U. S. shareholder to include in income its pro-rata share of the average amount of U. S. property (including certain obligations) held by a CFC as of the close of each quarter (subject to earnings and profits limitations). Notice 88-108 announced that final regulations under Section 956 would exclude from the definition of the term “obligation” an obligation that would constitute an investment in U.S. property if held at the end of the CFC's taxable year, as long as the obligation is collected within 30 days from the time it is incurred (the 30-day rule). This exclusion does not apply if the CFC holds for 60 or more calendar days during such taxable year obligations that, without regard to the 30-day rule, would constitute an investment in U.S. property if held at the end of the CFC's taxable year.

The issue presented in the CCA was whether a CFC that holds for 60 or more calendar days during a taxable year an obligation that, without regard to the 30-day rule, would constitute U.S. property within the meaning of Section 956, could rely on the exclusion from the definition of the term “obligation” in Notice 88-108 with respect to obligations that meet the 30-day and 60-day tests.

The CCA concluded that Notice 88-108 provides an exception for obligations that meet the 30-day test if, and only if, all obligations held by a CFC meet the 60-day test. Thus, because the CFC held Amount 3 obligation for 60 or more calendar days during the taxable year, Notice 88-108 does not exclude any obligations of Parent from the definition of obligation for purposes of Section 956.

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Brandon Boyle
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E brandon.boyle@us.gt.com

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