The IRS recently released a 2013 Chief Counsel Memorandum (CCM 201910021
) in which it applied both the step-transaction and substance-over-form doctrines to create a Section 956 income inclusion to a U.S. parent consolidated group on structured intercompany loans from its Controlled Foreign Corporations (CFCs).
Section 956 applies to certain indebtedness held by a CFC. Such amounts are considered an investment in U.S. property, resulting in a deemed-income inclusion to the CFC’s U.S. shareholders, and are intended to be measured at the end of each quarter.
The intercompany loans were structured to meet the literal requirements of this quarterly rule, but the CCM indicates that structure was designed to avoid the anti-abuse rule under Treas. Reg. Sec. 1.956-1T(b)(4). The IRS relied on the substance-over-form doctrine, as it has done in previous Section 956 positions, along with the step-transaction doctrine. Together, these doctrines consolidate individual steps in a transaction into a single transaction in order to ensure the transaction’s substance, rather than its form, governs its tax treatment.
The CCM predates the Tax Cuts and Jobs Act and thus does not reflect changes made to Section 956 under the new law. However, it is indicative of the government’s focus on substance over form and economic substance when evaluating transactions with specific tax aims.
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