Chief Counsel Advice
201910021
Released March 8, 2019
Advice
A structure designed to move CFC cash to the U.S. parent without a section 956 inclusion still triggers one
Apply this to your situation
This page covers one taxpayer's ruling from 2019, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
When a U.S. company owns a controlled foreign corporation (CFC), section 956 generally forces the U.S. shareholder to pick up income (via section 951(a)(1)(B)) when the CFC invests its earnings in "United States property," which includes obligations of, or funds effectively lent to, the U.S. parent. This anti-deferral rule stops companies from tapping offshore earnings at home tax-free without an actual dividend. This Chief Counsel Advice responds to an examination team's request about a corporate group that designed a transaction to move nearly a large sum from its CFCs up to the U.S. parent while trying to avoid a section 956 income inclusion, asserting a U.S. business-purpose need for the cash. The Chief Counsel's office advised that the taxpayer does not escape section 956. Applying the substance-over-form and step-transaction doctrines, the arrangement is treated according to its real effect, so the U.S. parent must include the amounts in income under sections 951(a)(1)(B) and 956 for the tax year at issue. Separately, under the anti-avoidance rule in the section 956 regulations (Treas. Reg. § 1.956), the CFC is treated as indirectly holding the U.S. parent's obligations, which independently produces the same inclusion. The memo is advice to the field, not a final assessment; it also flags case-development hazards and potential privilege. This is a classic reminder that labeling and routing cannot defeat section 956 when the substance is that CFC earnings ended up funding the U.S. parent.
Ruling snapshot
- Question: Must the U.S. parent include amounts in income under sections 951(a)(1)(B) and 956 as a result of a transaction structured to move CFC cash to the parent without a section 956 inclusion?
- Outcome: advice (yes, an inclusion is required, under both substance-over-form/step-transaction principles and the section 956 anti-avoidance regulation)
- Key authorities: IRC §§ 956, 951(a)(1)(B), 957; Treas. Reg. § 1.956; substance-over-form and step-transaction doctrines
Full text (IRS public release)
Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 201910021
Release Date: 3/8/2019
CC:INTL:B2 Third Party Communication: None
PRESP-149185-12 Date of Communication: Not Applicable
UILC: 956.00-00, 956.05-00, 951.00-00
date: December 27, 2013
to: ----------------------------
-----------------------------
(Large Business & International)
from: Jeffery Mitchell
Chief, Branch 2
(International)
subject: Application of Section 956 to the ------------------
This Chief Counsel Advice responds to your request for assistance. This advice may
not be used or cited as precedent.
LEGEND
US Parent = -----------------------------------
R = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-----------------------------------------------------
S = ------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
T = -------------------------------------------------
U = ------------------------------------------------------------------------
---------------------------------------
V = ------------------------------------------------------------------------
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PRESP-149185-12 2
Products and Services = ------------------------------------------------------------------------
------------------------------------------------------------------------
----------------------------------------------------
Date 1 = ------------------
Date 2 = --------------------------
Date 3 = ---------------------
Date 4 = --------------------------
Date 5 = ---------------------
Date 6 = --------------------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 6 = ------
Month 1 = -------------
Month 2 = -------------
Month 3 = ----------
Month 4 = -----------
Month 5 = --------
Month 6 = ------
Month 7 = -----
Month 8 = ------
Month 9 = -----
Month 10 = ---------
Month 11 = --------------
Month 12 = ----------
X day = --------
Y day = ---------
State = ------------
Country 1 = ----------------
Country 2 = ----------
Country 3 = --------------------------
Country 4 = -----------
Accounting Firm = -------------------
Issue = ---------------------------------------
PRESP-149185-12 3
Title 1 = ------------------------------------------------------------------------
-----------------------------------------
Title 2 = -------------------------------------
Title 3 = -------------------------------
Quote 1 = ------------------------------------------------------------------------
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----------------------------------------------------------------
Quote 2 = -----------------------------------------------------------------------
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--------------------------------
-----
---------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
----------
Quote 3 = ------------------------------------------------------------------------
---------------------------------------------
Quote 4 = ------------------------------------------------------------------------
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-------------------------
Quote 5 = ------------------------------------------------------------------------
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Quote 6 = ------------------------------------------------------------------------
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Quote 7 = ------------------------------------------------------------------------
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---------------------
PRESP-149185-12 4
Quote 8 = ------------------------------------------------------------------------
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--------------------------------------------
Quote 9 = ------------------------------------------------------------------------
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Amount W = ---------------------------
Amount X = -------------
Amount Y = -----------
Amount Z = -----------
ISSUE
Whether US Parent must include amounts in income under sections 951(a)(1)(B) and
956 as a result of the ------------------, for Tax Year 3.
CONCLUSION
Under the substance over form and step transaction doctrines, US Parent must include
amounts in income under sections 951(a)(1)(B) and 956 as a result of the ------------------
-----------, for Tax Year 3. Under Treas. Reg. § 1.956---------, US Parent also must
include amounts in income under sections 951(a)(1)(B) and 956 because the -------- of --
--------directly or indirectly -------------------------------------------------- of the US Parent --------
------------------------- during the ------------------.
FACTS
I. Ownership Structure and Business Operations
US Parent is a State corporation and the common parent of an affiliated group of
corporations that file a consolidated U.S. federal income tax return (the US Group or
Taxpayer). The US Group provides Products and Services. The US Group’s taxable
year ends on the last day of Month 12.
PRESP-149185-12 5
Throughout Tax Year 3,1 the year currently under audit, US Parent indirectly wholly
owned ------------- controlled foreign corporations within the meaning of section 957
(CFCs). ---------------------------------- ----------------------------------------------------------------------
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-----------------.2 Like the taxable year for the US Group, the taxable year for ----------
ends on the last day of Month 12.
--------------, a business entity organized under the laws of Country 2, which is --------------
-----------------------------------------------------------------for U.S. federal income tax purposes.
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--------------------------------------
------------------------------------------------------, an eligible entity organized under the laws of
Country 3, ------------------------------------------------------------------------- for U.S. federal
income tax purposes. ------------------------------------------, a business entity organized
under the laws of Country 3, which is -------------------------------------------------------------------
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for U.S. federal income tax purposes. During Year 3, ---------------------------------------------
--------------------------------------------------------------------------------.
II. Purpose of the --------------------
-------------------------------------------------------------US Parent ------------ on ------------------------
-------------------------------nearly -----------------------from ---------- (the -------------------- --).
US Parent asserts that the business purpose of the -------------------was to meet U.S. -----
-----------------------------------------needs.
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-------------------.3 ----------------------------------------------------------------------------------------------
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1
For purposes of this advice, “Tax Year 3” refers to the taxable year ending in Year 3. Tax Year 2 refers
to the taxable year ending in Year 2, and so on.
2
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3
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PRESP-149185-12 6
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-----------.4 ------------------------------------------------------------------------------------------------------
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-------------------------------------------------------------------.5 In addition, a Date 1 US Parent
presentation titled Title 1, that described the ------------------, stated Quote 2.
The presentation further states that Amount W --------------------------------------before the
end of Tax Year 2. It also states that Quote 3.
A Date 2 email between partners in Accounting Firm discusses Issue and reads, in part,
Quote 4. -------------------------------------------------------------------------------------------------------
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------------------------------
III. Establishing the --------------------
The -------------------was designed to provide a means for US Parent’s ------- to ----- --------
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---------------------------------------------------------,6 to US Parent without resulting in an
income inclusion to US Parent under section 956. -------------------------------------------------
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------------------------------------------7
4
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5
Quote 1.
6
An internal memo prepared by a team of employees in US Parent’s tax and treasury departments
discussed the potential adoption of the --------------------and noted that ------------------------------------------------
---------------------------------. Quote 6.
7
As explained below, section 956 applies, in part, based on the amounts of U.S. property held by a CFC
as of the close of each quarter of its taxable year.
PRESP-149185-12 7
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In an email, Accounting Firm stated that, for tax purposes, ---------------------------------------
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------------------------------------------------ In addition, during a summons interview, an
employee of US Parent indicated that ------------------------------------------------------------------
----------------------------------------------------------.9
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8
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9
Quote 7.
PRESP-149185-12 8
----------------------------------------------------------------------------
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In response to an IDR, --------------------------------------------------------------------------------------
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--------------------------.10
IV. Operation of the --------------------
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---------------------------------------------------------------------------------------- US Parent’s Tax
Year 3 monthly -------------------, prepared by US Parent’s treasury department,
demonstrate that US Parent consistently anticipated -----------------------------------------------
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----------------.
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-----------------------------------------------US Parent’s bank allowed US Parent to have a -------
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-------------------------------------------------------------------------------------------------
In response to an IDR, US Parent indicated, in part, -----------------------------------------------
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-----------------------------------------------------------------------------------------------------------.11 US
Parent also identified ------ potential sources for repayment, including cash received
from operations, issuance of commercial paper and bonds, distributions of previously
taxed earnings excluded from gross income under section 959, and other distributions
from--------.
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10
Quote 8.
11
Quote 9.
PRESP-149185-12 9
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------------------------------------------------------------------.12
The ------- were not formally --------------. Nor were any ---------formally ------------------------
--------------. There were no formal commitments to ------------------------.
US Parent had the ability to ----------------------------from third parties to ---------------- in Tax
Year 3 but did not --------------------------------.
V. US Parent’s Treatment of the --------------------
--------------------------------------------------------------------------------------------------under
sections 951(a)(1)(B) and 956 related to the -------------------because --------------------, in
form, held US Parent -------------- as of ----- quarterly measuring dates.
LAW AND ANALYSIS
I. Overview
The policy and intent of section 956 is to treat a CFC that invests its earnings in U.S.
property as effectively repatriating those earnings to its U.S. shareholder.13 Authorities
such as Jacobs Engineering,14 discussed elsewhere in this advice, reflect that policy by
denying recognition of the form ---------------------------------------------------------------------------
------------------------------- (so as technically to avoid holding U.S. property on the relevant
measuring date), ---------------------------------------------------------------------------------------------
----------- in circumvention of the purpose of section 956. ------------------------------------------
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-------- This advice concludes that these authorities, such as Jacobs Engineering,15
12
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13
S. Rep. No. 1,881 at 88 (1962), reprinted in 1962-3 C.B. at 794. S. Rep. No. 94-938, at 226 (1976),
reprinted in 1976-3 C.B. 3.
14
Jacobs Engineering Group v. United States, 79 A.F.T.R. 2d 97-1673 (C.D. Cal. 1997), aff’d by
unpublished decision, 168 F.3d 499 (9th Cir. 1999).
15
Id.; Greenfield v. Comm’r, 60 T.C. 425 (1975) (---------------------------------------------------------------------------
PRESP-149185-12 10
apply -------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------.
Sections III and IV of the LAW AND ANALYSIS section conclude that the substance
over form and step transaction doctrines, as interpreted in the section 956 context by
the existing precedents, apply to treat the -------------------as a repatriation of ----------------
-------- earnings that requires US Parent to include income under sections 951(a)(1)(B)
and 956.
Section V of the LAW AND ANALYSIS section of this advice discusses how ---------------
------------------------------------------------------------------------ is treated as a ------------------------
------------ of the -- -------, pursuant to Treas. Reg. § 1.956---------.
II. Section 956
A. Statute
Section 951(a)(1) provides that every person who is a U.S. shareholder (as defined in
section 951(b)) of a CFC and who owns (within the meaning of section 958(a)) stock in
such corporation on the last day in such year, on which such corporation is a CFC, shall
include in his gross income for his taxable year in which or with which such taxable year
of the corporation ends, the amount determined under section 956 with respect to such
shareholder for such year (but only to the extent not excluded from gross income under
section 959(a)(2)).
Section 956(a) provides:
In the case of any controlled foreign corporation, the amount determined under
this section with respect to any United States shareholder for any taxable year is
the lesser of –
(1) The excess (if any) of—
--------------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------); Schering-Plough Corp. v. United States, 651 F.Supp.2d 219,
at 244 (D.N.J. 2009), aff’d, Merck & Co., Inc. v. United States, 652 F.3d 475 (3d Cir. 2011) (-------------------
-------------------------------------------------------------------------------------------------------------).
See also Rev. Rul. 87-89, 1987-2 C.B. 195 (---------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------); Rev. Rul. 89-
73, 1989-1 C.B. 258 (---------------------------------------------------------------------------------------------------------------
-----------------------------------------).
PRESP-149185-12 11
(A) Such shareholder’s pro rata share of the average of the
amounts of United States property held (directly or indirectly) by
the controlled foreign corporation as of the close of each quarter
of such tax year, over
(B) The amount of earnings and profits described in section
959(c)(1)(A) with respect to such shareholder, or
(2) such shareholder’s pro rata share of the applicable earnings of such
controlled foreign corporation.
The amount taken into account under paragraph (1) with respect to any property
shall be its adjusted basis as determined for purposes of computing earnings and
profits, reduced by any liability to which the property is subject.
B. Legislative History
Before 1962, U.S. shareholders of controlled foreign corporations were not subject to
U.S. tax on earnings of the foreign corporations unless and until earnings of the foreign
corporations were distributed to the shareholders as a dividend. In 1962, Congress
added the subpart F provisions (which include section 956) to the Code. Section 956
was intended “to prevent the repatriation of income to the United States in a manner
which does not subject it to U.S. taxation.” H.R. Rep. No. 1447, at 58. The investment
by a CFC of its earnings in U.S. property, including obligations of a U.S. person, “is
substantially the equivalent of a dividend.” S. Rep. No. 1,881 at 88 (1962), reprinted in
1962-3 C.B. at 794. As noted in the legislative history, “[t]his objective also accounts for
some of the features of this provision, which deny tax deferral where funds are brought
back and invested in the United States in a manner which does not otherwise subject
them to U.S. taxation.” H.R. Rep. No. 87-1447, at 58 (1962), reprinted in 1962-3 C.B.
405, 462. “[S]ince the investment . . . in the stock or debt obligations of a related U.S.
person or its domestic affiliates makes funds available for use by the U.S. shareholders,
it constitutes an effective repatriation of earnings which should be taxed.” S. Rep. No.
94-938, at 226 (1976), reprinted in 1976-3 C.B. 3.
C. Obligations of Related U.S. Persons
The term “United States property” generally includes an obligation of a domestic
corporation that is a United States shareholder (as defined in section 951(b)) of the
CFC.16 Before their amendment in 1988, the regulations under section 956 provided an
exception for indebtedness collected or maturing within one year from the time it is
16
Section 956(c)(1)(C), 956(c)(2)(F), 956(c)(2)(L). As discussed in section II.E. of the LAW AND
ANALYSIS section of this advice, -----------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------. See Notice 2008-91,
2008-43 I.R.B. 1001; Notice 88-108, 1988-2 C.B. 446.
PRESP-149185-12 12
incurred.17 This exception was eliminated in 1988.18 The preamble to the regulation
explained that the exception was removed because “CFC’s may make successive loans
with a maturity of less than one year as a means of loaning their earnings to related
U.S. corporations on a long term basis in avoidance of section 956.”19
US Parent is a domestic corporation that is a U.S. shareholder of ----------. Accordingly,
-------------- of US Parent held by ---------- constitute U.S. property.
D. Quarterly Measuring Dates
Before its amendment in 1993, section 956 measured the amount of U.S. property held
by a CFC on an annual, rather than a quarterly, basis.20 The Senate Report to the 1993
amendment, providing for measurement on a quarterly basis, explained that
[the] measurement of assets as of the close of each quarter of the taxable year
shall disregard short-term loans or other temporary arrangements with regard to
the corporation’s assets, where one of the principal purposes of such an
arrangement was to avoid taking assets into account for purposes of this
provision. Examples of what the IRS views as such arrangements are discussed
in Rev. Rul. 89-73 (1989-1 C.B. 258), interpreting present law.21
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E. Short-Term Loan Exception under Notices 88-108 and 2008-91
Shortly after the repeal of the exception for loans outstanding less than one year,
discussed above in section II.C. of the LAW AND ANALYSIS section of this advice, the
IRS and Treasury Department issued Notice 88-108, 1988-2 C.B. 446. Notice 88-108
17
Treas. Reg. § 1.956-2(d)(2)(ii) (1987).
18
T.D. 8209, 1988-2 C.B. 174 (June 14, 1988).
19
Id.
20
The former version of section 956 provided that “the amount of earnings of a [CFC] invested in United
States property at the close of any taxable year is the aggregate amount of such property held, directly or
indirectly, by the [CFC] at the close of the taxable year.”
21
S. Rep. No. 103-37, at 178 (1993). Revenue Rul. 89-73 is discussed in section III.C.2. of the LAW
AND ANALYSIS section of this advice.
PRESP-149185-12 13
provides that the final section 956 regulations will 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, so long as the obligation is collected within 30 days
from when it is incurred. The notice further provides that this exclusion shall not apply,
however, if the CFC holds for 60 or more calendar days during the taxable year (or 120
days or more during the CFC’s taxable year that includes June 14, 1988) obligations
that would otherwise qualify as an investment in U.S. property.22
Notice 2008-91, 2008-43 I.R.B. 1001, was issued in response to the 2008 liquidity crisis
during which U.S. corporations had difficulty funding their operations. Notice 2008-91
effectively expanded the scope of the short-term loan exception provided in Notice 88-
108 to provide that a CFC may exclude from the definition of the term “obligation” an
obligation that was collected within 60 days from when it was incurred. This exclusion
does not apply if the CFC holds obligations that would otherwise qualify as an
investment in U.S. property for 180 or more calendar days during the taxable year.
Notice 2008-91 applies to the first two taxable years of a foreign corporation ending
after October 3, 2008.23
Thus, Notices 88-108 and 2008-91 provide that, under certain circumstances,
obligations held as of the end of a quarter of a CFC’s taxable year are not treated as
U.S. property. ------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------.
As discussed in sections III and IV of the LAW AND ANALYSIS section of this advice, --
-------, in substance, held US Parent ---------------over ------ quarterly measuring dates.
US Parent is not eligible to apply ------------------------------------------ to exclude the ----------
---------------held by ---------- from the definition of U.S. property because ---------------- -----
------------- ----------- ----------------set forth in the ---------.
F. U.S. Property -------------------------------------------------
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22
The 1993 amendment to section 956 to change the measuring date from the end of the taxable year to
the end of each quarter “is not intended to change the measurement of U.S. property that may apply, for
example, in the case of certain short-term obligations, as provided in IRS Notice 88-108 (1982-2 C.B.
rd st
445), interpreting present law.” S. Rep. No. 36, 103 Cong., 1 Sess. (1993).
23
The duration of Notice 2008-91 was later extended by Notice 2009-10, 2009-5 I.R.B. 419, and Notice
2010-12, 2010-4 I.R.B. 326. The extension ends for tax years beginning on or after January 1, 2011.
PRESP-149185-12 14
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G. --------------------------------
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H. Section 1.956-1T(b)(4) Anti-Abuse Rule
The section 956 regulations contain an anti-abuse rule designed to prevent the
repatriation of a CFC’s earnings through the use of related corporations. The rule
provides that, at the discretion of the District Director, a CFC will be considered to hold
indirectly U.S. property acquired by any foreign corporation that is controlled by the CFC
if one of the principal purposes for creating, organizing, or funding (through capital
contributions or debt) that foreign corporation is to avoid the application of section 956
with respect to the CFC. Treas. Reg. § 1.956-1T(b)(4). For purposes of this rule, a
foreign corporation is considered to be controlled by a CFC if a common parent owns at
least 50 percent of the vote or value of both corporations. Treas. Reg. § 1.956-1T(b)(4).
24
Treas. Reg. §1.956-2(a)(3). See also Rev. Rul. 90-112, 1990-2 C.B. 186.
25
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PRESP-149185-12 15
This Chief Counsel Advice does not address the potential application of Treas. Reg.
§ 1.956-1T(b)(4). As noted in part III.B.1 of the LAW AND ANALYSIS section of this
advice, the -------------------was designed to avoid the application of this anti-abuse rule.
Whether this rule applies to the -------------------would depend on, among other things,
further factual development and on whether, for example, the -------------------------- --------
---------------------------------------------------.
III. Substance Over Form Doctrine
A. In General
The substance of a transaction, and not its form, governs its treatment for tax purposes.
See Comm’r v. Court Holding, 324 U.S. 331, 334 (1945). Courts recast transactions
where the taxpayer’s form does not comport with the reality of the transaction. Id. “The
court has never regarded the simple expedient of drawing up papers as controlling for
tax purposes when the objective economic realities are to the contrary.” Merck & Co.,
Inc. v. United States, 652 F.3d 475, 481 (3d Cir. 2011) (quoting Frank Lyon v. United
States, 435 U.S. 561 (1978)). The substance over form doctrine is used to effect the
underlying purpose of a statute. Consolidated Edison Co. of N.Y. v. United States, 703
F.3d 1367, 1374 (Fed. Cir. 2013). The purpose of the substance over form doctrine is
to deny legal effect to transactions that comply with the literal terms of a statute but
contravene the purpose of the statute. See Stewart v. Comm’r, 714 F.2d 977, 988 (9th
Cir. 1983).
The substance of a transaction is assessed in light of all the facts and circumstances.
Grodt & McKay Realty, Inc. v. Comm’r, 77 T.C. 1221 (1981). The substance over form
doctrine requires viewing the transaction as a whole. John Hancock Life Ins. V.
Comm’r, 141 T.C. 1 (2013). When applying the substance over form doctrine,
“transactions between related parties merit extra scrutiny.” Merck & Co., Inc. v. United
States, 652 F.3d 475, 481 (3d Cir. 2011).
Courts have applied the substance over form doctrine to various transactions that have
been structured with the intent to avoid the application of section 956. See Greenfield v.
Comm’r, 60 T.C. 425 (1975) (-----------------------------------------------------------------------------
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---------------------------------------------------------------------------); Jacobs Engineering Group v.
United States, 79 A.F.T.R. 2d 97-1673 (C.D. Cal. 1997), aff’d by unpublished decision,
168 F.3d 499 (9th Cir. 1999) (------------------------------------------------------------------------------
---------------------------------------------------------); Schering-Plough Corp. v. United States,
651 F.Supp.2d 219, at 244 (D.N.J. 2009), aff’d, Merck & Co., Inc. v. United States, 652
F.3d 475 (3d Cir. 2011) (------------------------------------------------------------------------------------
----------------------------------------).
PRESP-149185-12 16
Courts have applied the substance over form doctrine to re-characterize various
transactions involving indebtedness, especially cases involving related parties. See
Merck & Co., Inc. v. United States, 652 F.3d 475 (3d Cir. 2011) (-------------------------------
------------------------------------); Rogers v. United States, 281 F.3d 1108, 1127 (10th Cir.
2002) (re-characterizing loan as a sale in substance); BB&T Corp. v. U.S., 523 F.3d 461
(4th Cir. 2008) (disregarding nonrecourse indebtedness incurred to finance a “head”
lease when indebtedness was not genuine in substance); Fin Hay Realty Co. v.
Comm’r, 398 F.2d 694 (3d Cir. 1968) (holding purported debt to be equity in substance);
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--------------------------------------------------------------; Plantation Patterns, Inc. v. Comm’r, 462
F.2d 712 (5th Cir. 1972) (treating purported guarantor as obligor in substance); In re G-I
Holdings Inc, No. 02-3082, 2009 WL 4911953 (D. N.J. 2009) (determining whether a
party is liable on debt); Maher v. United States, No. 16253-1 (W.D. Mo. 1969) (holding
that property was not in substance subject to a liability where the lender was not
actually relying on the property as collateral); Lang v. Comm’r, 32 B.T.A. 522 (1935)
(determining whether a taxpayer has primary or secondary liability under an obligation).
It is also the long-standing ruling position of the IRS to apply the substance over form
doctrine to transactions that in form attempt to avoid the application of section 956. See
Rev. Rul. 87-89 (----------------------------------------------------------------------------------------------
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---------------); Rev. Rul. 89-73 (----------------------------------------------------------------------------
--------------------------------------------------------------------------------). Congress endorsed the
analysis of these revenue rulings. See H. Rep. 2264, Omnibus Budget Reconciliation
Act of 1993 (----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------); S. Rep. 103-37, at 178
(1993) (----------------------------------------------------------------------------------------------------------
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--------------------------------------------).
B. Application to -------------------
The issue is whether, under the substance over form doctrine, the ----------------------------
--------------------------------------------------------------------------------------------------------should be
respected -------------------------------------------------------------------------------------------------------
----------------------------, or whether the -------------------should be viewed as --------------------
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----------------. To answer this question, the “economic reality” of the ------------------- must
be carefully analyzed to determine whether it corresponds to its formal and technical
characterization. Merck & Co., 652 F.3d at 481. Towards this end, it must be
determined whether the -------------------, while structured to technically avoid the
application of section 956, produces results that are contrary to the purpose of the
PRESP-149185-12 17
provision at issue. Stewart v. Comm’r, 714 F.2d 977, 988 (9th Cir. 1983) (finding that
taxpayer’s contribution of property to transferee, followed by transferee’s sale of the
contributed property, conflicted with the purpose of section 351; upholding the
application of the substance over form doctrine to disregard the sale by the transferee).
Several characteristics distinguish the ------------------------------------------------------------------
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-----------------------------------------------------------------------------------------------. First, the -------
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-------------------.26 ---------------------------------------------------------------------------------------------
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--------------------------------------------------------, through the meticulous orchestration of
Taxpayer’s tax and treasury departments, ------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------- US
Parent’s treasury department prepared annual and monthly -------------------------------------
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and monitored -----------------------------------to be sure that the ------------------- could meet
those -----------------------------------------.
In form, ----------------------------------------------------------------------------------------------------------
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---------------------------------. In substance, however, -------------------------------------------------
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------------------------------------------------. In substance, -----------------------------------------------
26
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PRESP-149185-12 18
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----------------------------------------------------------------------------------------------------. In
substance, -----------------------------------------------------------------------------------------------------
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------------------------------------------.
1. Purpose of ------------------
It is undisputed that the -------------------was designed to repatriate earnings from ----------
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to US Parent ---------------------------, while avoiding the application of section 956.
Between Date 5 and Date 6, the duration of ----------------------------------------------------------
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--------------------------------------------------------------------------------------------------------------.
During this period, US Parent had a --------------------------------------------------------------------
------------------------.
Before the restructurings undertaken ------------------------------------------------- ----had a
sufficient amount of cash that could have been used to fund US Parent’s --------------------
------------------------------------------------------------------------------------------------------------------.
Accordingly, but for tax considerations, -- could have simply distributed cash to US
Parent or, alternatively, US Parent could have simply borrowed funds, on a long-term
basis, from --. But these alternatives would have resulted in income to US Parent --
either dividend income or, if US Parent borrowed the funds, an inclusion under sections
951(a)(1)(B) and 956.
The -------------------attempts to avoid section 956 by exploiting ----------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------. ---------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
PRESP-149185-12 19
-------------------------------------------------,27 ----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------.28
2. Congressional Intent
Interpreting section 956 to permit the -------------------is contrary to explicit Congressional
intent. Congress enacted section 956 “to prevent the repatriation of income to the
United States in a manner which does not subject it to U.S. taxation.” H.R. Rep. No.
1447, at 58. The -------------------was designed for this very purpose – to repatriate
earnings to US Parent from ----------- without running afoul of section 956 by exploiting --
--------------------------------------. In addition, when changing the year-end measuring date
to quarter-end measuring dates in 1993, Congress specifically stated such short-term
loans should be disregarded where one of the principal purposes of the arrangement is
to avoid taking assets into account for purposes of section 956.29
Thus, Congress acknowledged that even with quarterly measuring dates, taxpayers
could attempt to avoid the application of section 956 through ------------------------------------
----------------------------------------------------------------------------- and did not intend those
arrangements to be respected. Accordingly, the -------------------not only undermines the
purpose of section 956, but is contrary to explicit legislative history ----------------------------
---------------------------------------------------------.
Generally, obligations held by a CFC that are, in both form and substance, short-term in
nature and that are not outstanding on a quarterly measurement date are not taken into
account under section 956. Such short-term obligations do not constitute a repatriation
of funds under section 956 because the obligations are not held for a significant period
of time.30 -------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------.
3. Case Law
The -------------------is not only contrary to the purpose of section 956 as set out in the
legislative history but is also inconsistent with case law. The Ninth Circuit rejected a ----
-------------------------------------------------------------where the taxpayer’s form satisfied the
27
This advice does not consider the proper treatment of the various transactions ---------------------------------
-----------------------------------------------------------------, or whether the transactions should be respected for
U.S. tax purposes.
28
These transactions, and the ------------------- in general, were also carefully structured in an effort to
avoid the anti-abuse rule in Treas. Reg. § 1.956-1T(b)(4).
29
S. Rep. No. 103-37, at 178 (1993).
30
Id. (-------------------------------------------------------------------------------------------------------).
PRESP-149185-12 20
literal requirements of a then-existing regulatory exception. In Jacobs Engineering, the
court considered the proper treatment of a series of short-term loans that were
structured to avoid the application of section 956.31 In Jacobs Engineering, the
domestic parent corporation was in need of capital and therefore sought to borrow funds
from its wholly owned CFC. To avoid an income inclusion under section 956, however,
the parent corporation structured this borrowing through a series of twelve short-term
loans from the CFC, none of which had a term in excess of a few months. These loans
spanned the taxable years 1982 through 1984. For the years at issue, regulations
under section 956 provided that the term “obligation” did not include indebtedness
collected within one year from the time in which it was incurred.32 The district court
noted that nothing in the exception limited the number of loans that could be made in a
given period, or required a period of delay between loans. Accordingly, the taxpayer
took the position that section 956 did not apply because each loan, in form, qualified
under this exception.
The government conceded that the taxpayer technically avoided the literal application of
section 956, but argued that the tax consequences of the loans should be analyzed
based on the substance of the loans, not their form. Accordingly, the government
asserted that the substance of the loans resulted in a repatriation of funds to the
domestic parent corporation beyond the one-year maximum allowable under the
exception and therefore resulted in an income inclusion under section 956.
The district court agreed with the government that the domestic parent corporation was
in possession of the funds in question for almost all of the two and a half year period,
and that this reflected the economic reality that the capital was repatriated for more than
a year. The court noted that the parent corporation was not in need of working capital
on 12 different occasions for unrelated reasons, but instead needed working capital
over the entire two and a half year period. The court concluded that “for 93.5% of that
time, Jacobs obtained that capital from its foreign subsidiary in violation of the spirit of
26 U.S.C. section 956.”
The Ninth Circuit Court of Appeals affirmed, holding that the district court correctly
applied the substance over form doctrine. The court found that the transaction “violated
the purpose and spirit of that regulation, which was to except true, short term obligations
from the imposition of tax under IRC sections 951 and 956.”
The facts of Jacobs Engineering -------------------------------------------------------------------------
---------------------------------------------------------------------------------------Jacobs Engineering --
----------------------------, the domestic parent corporation needed capital over -----------------
31
This issue also arose in McCulloch Corporation v. Comm’r, T.C. Memo 1984-422, but the court
resolved the case on other grounds.
32
Jacobs Engineering involved section 956 before its amendment in 1993, which used an annual, rather
than quarterly, testing period.
PRESP-149185-12 21
--------(in Jacobs Engineering, ------------------------------------------------- -------------) and
sought to borrow it from ------------------------ ----------------------------Jacobs Engineering, ---
------------------------------------------------------------------------------------------for unrelated
reasons, but rather needed --------------------------------------------------over a ------------
period.
Both the taxpayer in -------------------------------------------------------aware of section 956,
considered its application, and implemented -----------------------------------with the intent to
avoid its application. Like the --------------------------------- in --------------------------, the
structure of the ------- had no business purpose apart from avoiding the application of
section 956. Despite having a -----------------------------------, both the taxpayer in ------------
------------------------------------ attempted to avoid section 956 by using --------------------------
------------------------------------------------------------------------------------------------ that, in form,
would avoid the application of section 956.
The only potentially meaningful factual difference between -------------------------- and the
instant matter is that the taxpayer in --------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------. ---------------------------provides that ------
-----------------------------------------------designed primarily to avoid the literal terms of
section 956 are ignored under the substance over form doctrine. The substance over
form doctrine is not so inflexible that it can be side-stepped by the artifice of structuring
what in substance --------------------------------------------------------------------------------------------
------. Indeed, the substance of this situation is no different from the substance in --------
--------------------------. The court in -------------------------- found it key that the taxpayer had
possession of the --------------------------------------------------. The -------in ------------------------
--------------------------------------------------------------------------------------. The ----------------------
---------------------------------------------------------------------------------------------------------------------
------. And like the -------------------------------------, the -------------------was devised --------
the ----------------------------------------------in the U.S.
Given the long-term nature of US Parent’s needs and the ----------------------------------------
------------------------------, the substance of the arrangement does not comport with its
form. The statutory quarterly measuring dates are intended to ensure that there are no
long-term reinvestments of CFC earnings with a related U.S. person. The ------------------
------------conflicts with this purpose because US Parent did in fact receive ------------------
--------- from ------------, although it was structured such that, in form, ---------------------------
-----------------------------------------------. In substance, ------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
PRESP-149185-12 22
---------------------------------------------------------------------------------------------------------------------
----------------must be treated as what it was in substance: a --------------------------------------
----- over the entire taxable year of ----------------------------.
4. Summary
For section 956 to apply, a CFC must hold U.S. property -----------------------------------------
---------------- at the end of a quarter of its taxable year. In the -----------------------------------
------------------ did not, in form, hold ------------------US Parent at the end of ----- quarterly
measuring dates. --------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
The substance over form doctrine recharacterizes a transaction’s form in accordance
with its substance. For example, although in Jacobs Engineering and -----------------------
------------------------------------------------------------------------------------------------------------------
(discussed below), the CFC did not actually hold U.S. property on the measuring date,
the substance over form doctrine (and step transaction doctrine) recharacterized the
separate loans’ form as a continuous loan, consistent with the CFC’s continuing
commitment to the U.S. shareholder that in substance bridged the measuring date. In
the instant case, although the ------------------- did not, in form, hold the ------- on -----
quarterly measuring dates, the substance over form doctrine (and step transaction
doctrine) recharacterizes the ------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------
C. -------------------------------------------
---------------------- that the substance over form doctrine does not apply to the ---------------
------------to result in a section 956 inclusion. ---------------------------------------------------------
---------------------------------------------------------------------------------------
1. Case Law
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------.33 In Moline
Properties, the Supreme Court held that a sole shareholder of a corporation holding real
estate was unable to treat gain realized by the corporation as gain taxable to him as an
individual.34 Although Moline Properties generally stands for the principle that courts
33
Moline Properties, Inc. v. Comm’r, 319 U.S. 436 (1943).
34
Id. at 440.
PRESP-149185-12 23
recognize corporations as distinct legal entities, this principle is subject to other
doctrines, such as the substance over form doctrine.35 The fact that a corporation is
regarded as separate under Moline Properties does not prevent courts from
recharacterizing transactions that, in form, involve that corporation.36 For example,
courts will apply a version of the substance over form doctrine to disregard intermediary
“conduits” used to avoid U.S. withholding tax, while stopping short of finding that the
intermediary’s corporate existence should be disregarded as a factual matter or that the
intermediary is the agent of a principal.37
Similarly, Moline Properties does not bar a court from finding a section 1031 exchange,
in substance, where one corporation sells property to a third party for cash while a
related corporation buys new property from the third party for cash in a purportedly
separate transaction.38 The decision reached in Redwing Carriers demonstrates that
courts will collapse transactions involving separate, related corporations when doing so
better reflects the substance of the transaction.
------------------------------------------------------------------------------------------------------------ --------
---------------------------------------------------------. Humana Inc. v. Comm’r, 881 F.2d 247 (6th
Cir. 1989). Humana involved a domestic parent company and its subsidiaries, all of
which operated hospitals. The parent corporation formed a domestic captive insurance
company, which provided insurance for the parent corporation and the operating
35
It is also subject to authorities such as section 482. See, e.g., National Securities Corp. v. Comm’r, 137
F.2d 600 (3rd Cir. 1943) (upholding the application of the predecessor to section 482 to disallow a loss
claimed by a subsidiary that sold shares it received, with a built-in loss, from its parent corporation; the
court otherwise respected the separate existence of the subsidiary that purportedly sold the built-in loss
shares).
36
See, e.g,. Wolf v. Comm'r, 357 F.2d 483 (9th Cir. 1966) (deeming target corporation to have assumed
shareholder's liability in substance, when in form shares of the target were contributed to a newly formed
corporation, which assumed transferor's liability, in a purported section 351 transaction, after which target
corporation merged into newly formed corporation; court reached its conclusion despite acknowledging
that newly formed corporation was a valid corporation that technically had survived the merger).
See also Long Term Capital Holdings, et. al. v. United States, 330 F.Supp.2d 122, 193 (D. Conn. 2004),
aff’d 150 Fed.Appx. 40 (2d Cir. 2005) (rejecting taxpayer’s argument that the step transaction doctrine
could not apply to a transaction involving a partnership that was an ongoing business entity engaged in
independent profit making activities).
37
See, e.g., Del Commercial Properties, Inc. v. Comm’r, T.C. Memo 1999-411 (disregarding role of Dutch
affiliate lender to U.S. borrower to find that the borrower in substance paid interest to a Canadian affiliate
that indirectly funded the Dutch affiliate; although the court noted the Dutch affiliate had minimal assets
and business activity, it did not disregard that affiliate’s existence as a factual matter or find that it was an
agent of the Canadian affiliate).
38
See Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652 (5th Cir. 1968).
PRESP-149185-12 24
subsidiaries. The IRS disallowed premiums paid to the captive insurance company on
the grounds that the contracts at issue did not qualify as insurance contracts.
At issue in Humana was whether contracts constituted insurance, which requires an
analysis of whether there was appropriate “risk shifting” (shifting of risk of loss between
the insured and the insurer) and “risk distribution” (distributing the risk insured against
over a group). The Sixth Circuit disagreed with the IRS and found that there was risk
shifting and risk distribution between the operating subsidiaries and the captive
insurance company. As a threshold matter, the court noted that the parent, the captive
insurance company and the operating subsidiaries must each be treated as separate
corporate entities under Moline Properties. The Sixth Circuit determined that the Tax
Court misapplied the substance over form doctrine to the transaction to find that there
was no risk shifting. The Sixth Circuit stated that the substance over form doctrine is
not a broad doctrine that can be applied “at the discretion of the tax court whenever it
feels that a taxpayer is taking advantage of the tax laws to produce a favorable result for
the taxpayer.”39 Rather, the doctrine should apply to disregard a corporate entity only
“where Congress has evinced an intent” to disregard the separate entity, and noted that
“a particular legislative purpose . . . may call for the disregarding of the separate entity”,
as may “the necessity of striking down frauds on the tax statute.”40 The court further
noted that the doctrine can apply when there is specific congressional intent to
disregard the form of a transaction. The Sixth Circuit noted that Congress had
manifested no intent to disregard the separate corporate entity of captive insurers and
that the taxpayer had a valid business purpose for incorporating its captive insurer.
The -------------------is distinguishable from -------------------------------------------------------------
Humana. As discussed earlier, Congress has expressed a specific concern about the
creation of temporary arrangements that result in CFCs, in form, not holding U.S.
property on quarterly measuring dates, and thus, avoiding section 956.41 The -------------
------------was carefully planned to avoid section 956. There is no non-tax business
purpose for the -------------------. Accordingly, the substance over form doctrine is not
applied to the -------------------simply because the taxpayer’s related party transaction
produced a favorable tax result; rather, it applies because the substance of the -----------
----------- is a repatriation of earnings subject to section 956, and Congress specifically
provided that taxpayers should not be able to avoid section 956 --------------------------------
-------------------------------------------------.
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
39
881 F.2d at 254.
40
881 F.2d at 254-255.
41
S. Rep. No. 103-37, at 178 (1993).
PRESP-149185-12 25
-------------------------------------------------------------------.42 That case involved a dispute over
the tax basis that a bank had in certain rights acquired when it took over failed savings
and loans institutions. The taxpayer argued that it had a cost basis in the rights at issue
because it acquired them (along with other consideration) in exchange for acquiring the
liabilities of three failing thrift institutions. Whether taxpayer’s position was correct
turned on the characterization of the transaction negotiated between the acquirer and
the Federal Savings and Loan Insurance Corporation. The Ninth Circuit held that the
taxpayer did have a cost basis in the rights, equal to some portion of the thrifts’ excess
liabilities.
Neither Washington Mutual nor the briefs filed in that case discuss the substance over
form doctrine. --------------------------------------Washington Mutual because of language
that the court quotes from Lewis and Taylor, Inc. v. Comm’r, 447 F.2d 1074 (9th Cir.
1971): “the fact that a transaction is so arranged that the tax consequences are highly
favorable to one of the parties affords the commissioner no license to recast it into one
of less advantage.”43
Lewis and Taylor involved a dispute over an amount that a corporation paid to a
shareholder’s estate for deferred compensation that it owed the decedent.44 Although
the corporation initially offered the estate an amount solely to redeem shares owned by
the shareholder, it later revised the offer to attribute a portion of that amount to deferred
compensation, deductible by the corporation.45 The corporation offered evidence that it
properly valued the shares, while the IRS offered no evidence.46 In light of the
uncontroverted evidence offered by the corporation, the Ninth Circuit held that the form
of the transaction was consistent with the substance of the transaction.47
The unobjectionable quote from Lewis and Taylor ----------------------------, and the opinion
more generally, merely stand for the proposition that the form of a transaction will be
respected when it is in accordance with its substance. In contrast, the form of the --------
---------------------------------------------------is not consistent with its substance -------------------
-----------------------------------, and, thus, must be recharacterized in accordance with its
substance.
2. --------------------
42
Washington Mutual, 636 F.3d 1207 (9th Cir. 2011).
43
Lewis and Taylor, 447 F.2d at 1077.
44
Id. at 1076.
45
Id.
46
Id. at 1077.
47
Id. at 1078.
PRESP-149185-12 26
-------------------------that the -------------------complied with -------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------applies the substance over
form doctrine to ----------------------involving the -------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------48
The ------- first states that the facts and circumstances of each case must be reviewed to
determine if, in substance, there has been a repatriation of the earnings of the CFC.
The ------- further provides that if a CFC ---------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------- The ----------
concludes in ---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------- The ------- further
concludes in ---------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------- -----------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------. Finally, the ------- notes that
other factors, in addition to -----------------------------------, may indicate a repatriation of
earnings of the CFC that should be taken into account for section 956 purposes.
-------------------------------because the --------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------will not be recharacterized
under the -------------------.
--------------------------- on -------------------- is misplaced. ----------------------------- to the
argument the taxpayer asserted in ----------------------------------------------------------------------
---------------------------------------the taxpayer entered into a complex transaction
(“reinvestment plan”) in an attempt to repatriate funds from a CFC to its domestic parent
corporation without incurring any tax. The taxpayer attempted to rely on a ------------------
--------to support its technical position that it did not have an income inclusion under
section 956. In evaluating the taxpayer’s ability to rely on the --------------------the court in
--------------------------------------------------------------------------------------------------------------
48
During the years at issue ----------------, section 956 measured U.S. property only as of the close of the
taxable year.
PRESP-149185-12 27
---------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
The court then explained that the taxpayer ------------------------------- in order to show that
it reasonably relied on the conclusions in the ------------------- to preclude the
Commissioner from challenging the reinvestment plan: (1) that the form of the
reinvestment plan is respected; and (2) that the facts of the reinvestment plan are
substantially the same as those considered in the -------------------. The court held that
the taxpayer failed to -----------------------. The taxpayer failed to ---------------------------------
because the reinvestment plan, in substance, constituted a dividend. The court found
that the taxpayer also failed -----------------------------------in part because it found
substantial differences between the reinvestment plan and the -------------------. The
court explained that ------------------------------------------------------------------------------------------
----------------------------------------------------------------------
Accordingly, under ------------------, US Parent must demonstrate that both the form of the
-------------------is respected, and the facts of the -------------------are substantially the
same as those considered in --------------------. As was the case in ------------------, the -----
-------------------fails to -----------------------.
First, as discussed above, the form of the -------------------is not respected under the
substance over form doctrine or, alternatively, as described below under the step-
transaction doctrine. Instead, ----------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------. Thus, in substance, -----------------------------------------------------------------------
----------- and --------------------, by its terms, does not apply.
Second, the facts of the -------------------are not substantially the same as those
considered in -------------------- ---------------------------that the -------------------should be
PRESP-149185-12 28
applied ----------------------------------------------------------------------------------------------------------
-----. Taxpayers cannot apply a -------------------to only certain aspects of a single plan or
transaction. In ------------------, the taxpayer similarly attempted to rely on a -----------------
------- for purposes of one aspect of an overall transaction. The tax court rejected this
argument and stated:
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------------
Because the -------------------------------------------part of a pre-arranged plan, the facts of
the entire -------------------must be compared to the facts considered in ------------------------
-----------------------------------------------------------------------------------------------------------------.
This comparison highlights substantial factual differences. The pivotal facts of the -------
-------------------involve a ---------------acquiring, from unrelated parties, publicly-held debt
of its U.S. shareholder that matures and is repaid shortly before the CFC’s year end. As
was the case in ------------------, the pivotal facts of the -------------------differ substantially
from those of the -------------------. Those differences include: (1) -------------------------------
----------------------------------; (2) ----------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------; --------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------- (4) the -------------------involved, directly or
indirectly, --- -------------------------------------------------------------------; (5) --------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------- and
(6) most significantly, ----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------.
Indeed, the ----------------------------------------------in an attempt to distinguish its facts from
the facts of ----------------------------------------and --------------------------, discussed above. ---
------------------------------that ---------------------should be applied -----------------------------------
------------------------------. -------------------fails because the ----------------------------must be
considered together (as required under ------------------), and when so considered, the ----
----------------------facts differ substantially from those in --------------------.
PRESP-149185-12 29
In summary, ----------------------------on ---------------------because the form of the --------------
----------- is not respected, and the facts of the -------------------are substantially different
from the facts considered in --------------------.
3. -------------------
-------------------------------- that ---------------- not meet ---------------------- technical
requirements --------------------------------------------------------------------------------------------------
----------------------------. ---------------------------------------that------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------. -------------------------------that because the -------------------
--------------------------------------------------------------------------------------------------------------------
“substantially complies” with -------------------, it does not have a section 956 inclusion. ---
-----------------------that ---------------------is evidence of a general policy of ----------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------.
------------------------------------------------substantial compliance with ---------------------is
misplaced. The -------- provides a limited exception to the general application of section
956 that applies only if specific requirements are satisfied, which was not the case with
the -------------------. The ----------------------limitations in the --------are intended to prevent
the results sought under the -------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------. The -----------
------------------------------------------------------------------------------------------------------------------is
intended to apply to ---------------that, unlike ---------------under the -------------------,-----------
----------------------------------------------------------. Finally, nothing in the --------, or in any
other authorities, suggests that “substantial compliance” with the --------has any
relevance for purposes of interpreting section 956. Indeed, the fact that the -----------
provides limitations based on ---------------------------------------------confirms that --------------
------------------------------------------------ are not in compliance.
4. -----------------
--------------------------------------------on ------------------for its position that the form of the -----
-------------------should be respected for purposes of section 956. -------------------------------
-----------------------------------------------------------------------------------------------------------that,
under -----------------, ---------------------should be applied --------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------.
------------------reviews the application of -------------------------------------------------- of a
related U.S. person held by -------------------------in light of certain judicial doctrines and
regulations under section 956. Specifically, the ---------provides that each -----------------
PRESP-149185-12 30
must not --------------------------------------------------------------in a unified transaction, citing ---
---------------------------and --------------------. The advice then explains that if, under these
authorities, -----------------------------constitutes ---------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------. To determine whether ------------------------------------, the ------
---------explains that all relevant facts and circumstances at the time of the ------------------
--------------must be taken into account. It notes that such factors may include --------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------and the related U.S. person’s financial capacity to ------------------------------------
independently. Finally, the ---------notes that the -------------------------------must be taken
into account.
--------------------------- on ------------------is misplaced for several reasons. ---------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------.49 Moreover, the ------------
does not support --------------------------and, in fact, supports the conclusion that the --------
-----------, in substance, results in an inclusion under section 956. -----------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
----------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
The US Parent ---------------held by ---------- fail to satisfy any of these three
requirements. First, as noted above, the --------by its terms does not apply to the ---------
-----------. ----------------------------on an interpretation of a --------when the --------does not
apply to its facts. Second, the US Parent ---------------are not ---------------------------- by ---
-------. To the contrary, -------US Parent -------------is funded pursuant to the pre-
arranged --------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------- Indeed, the second and third requirements of the ---------are intended to
49
Moreover, the -----------sentence of -----------------provides, -----------------------------------------------------------
-----------------
PRESP-149185-12 31
prevent the application of the --------to arrangements like the -------------------.
Accordingly, the --------, even if it were precedential, does not support Taxpayer’s
position that the form of the -------------------should be respected.
IV. Step Transaction Doctrine
A. In General
Under the step transaction doctrine, individual steps in a transaction are consolidated
into a single integrated transaction in order to ensure that a transaction is taxed in
accordance with its substance rather than its form. Greene v. United States, 13 F.3d
577, 583 (2d Cir. 1994). The step transaction doctrine can be viewed as a subset of the
substance over form doctrine. Penrod v. Comm’r, 88 T.C. 1415, 1428 (1987).
The courts have developed three tests to determine whether to apply the step
transaction doctrine in a particular transaction: (i) the “end result” test, under which a
transaction is collapsed if a series of formally separate steps are prearranged parts of a
single transaction intended from the outset to reach an ultimate result; (ii) the
“interdependence” test, which focuses on the relationship between the steps and
analyzes whether the “steps were so interdependent that the legal relations created by
one of the transactions seem fruitless without completion of the series;” True v. United
States, 190 F.3d 1165, 1175 (10th Cir. 1999) and (iii) the “binding commitment” test,
under which a series of transactions are collapsed if, when the first step is entered into,
there was a binding commitment to undertake the later steps. Penrod, 88 T.C. at 1428.
A transaction needs to satisfy only one of the three tests in order for the step transaction
doctrine to apply to the transaction. True, 190 F.3d at 1175.
B. Application of the Step Transaction Doctrine to the -------------------
The -------------------relied on a coordinated ------------------------------------------------------------
------------------------------- to US Parent, and ------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------.
Under the step transaction doctrine, the -------------------deserves particular scrutiny
because ------ the parties to the transaction are related. Schering-Plough Corp. v.
United States, 651 F.Supp.2d 219, 246 (D.N.J. 2009) (--------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------).
Under either the end result test, the interdependence test, or the binding commitment
test,50 the step transaction doctrine applies to --------------------------------------------------------
50
This section of the advice focuses on the end result and interdependence tests, as the tests a court is
most likely to apply. See, e.g., Barnes Group at 48-49 (describing the binding commitment test as seldom
applied and the appropriate test only where a substantial period of time has passed between the steps
that are under scrutiny). -----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
PRESP-149185-12 32
---------------------------------------------------------------------------------------------------------------------
--------.
1. End Result Test
The end result test analyzes whether a series of steps are prearranged parts of a single
transaction that, from the outset, is designed to achieve a specific end-result. True, 190
F.3d at 1175. The test focuses on the parties’ subjective intent when they structure the
transaction. Superior Trading, LLC v. Comm’r, 137 T.C. 70, 89 (2011).
The application of the end result test to the facts at hand ----------- to that in Jacobs
Engineering, in which the court applied both the end result and interdependence tests to
collapse ------------------------------------------------------. In Jacobs Engineering, the U.S.
parent needed working capital for a two and a half year period, but wanted to avoid the
application of section 956. Thus, the U.S. parent entered into a series of loans that
repatriated the CFC’s earnings for 93.5% of the two and half year period, but did not, in
form, result in a section 956 inclusion to the U.S. parent. The series of loans were
designed to fulfill the U.S. parent’s long-term need for working capital, and there was no
evidence that the U.S. parent had a separate business purpose for each of the short
term loans.
-----------, in this case, US Parent needed --------------------over the duration ------------------
------------------------------------------. There is no evidence of a --------------------------------------
business purpose for making -----------------------------------------------------------------------------
------------------. While it is true that the taxpayer in Jacobs Engineering secured its long-
term funding ---------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------- -----------
----------------------------------- of US Parent, ------------------- does not prevent the application
of the step transaction doctrine to the -------------------. The inquiry under the end result
test is focused on the intent of the parties in structuring a transaction, and determines
whether various steps were undertaken in order to achieve an ultimate result. The
analysis is not limited to transactions between ---------------; transactions that are
collapsed under the end result test often involve --------------------. See Long Term
Capital Holdings, 330 F. Supp. 2d 122 (----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------).
-------------------------------- We also note that even where courts have chosen to apply the binding
commitment test, a contract that compels the steps to occur is not a prerequisite. See McDonald’s
Restaurants of Illinois v. Comm’r, 688 F.2d 520, 525 (7th Cir. 1982) (applying the binding commitment
test to find that historic shareholders of target were extremely likely, although not contractually bound, to
dispose of acquiring corporation’s stock because of the likelihood that the acquiring corporation’s stock
would be registered).
PRESP-149185-12 33
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------thereby literally complying
with the specific technical requirements of section 956 to avoid an income inclusion.
The step transaction doctrine prevents US Parent from being able to avoid the
application of section 956 to this repatriation ---------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------. Under the end
result test, ------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------, which
results in section 956 inclusions to US Parent.
2. Interdependence Test
The interdependence test analyzes the relationship between the intermediate steps in a
complex transaction, rather than the “end result.” Assoc. Wholesale Grocers, Inc. v.
United States, 927 F.2d 1517, 1523 (10th Cir. 1991). This test focuses on whether the
intervening steps in a series of steps would have been fruitless or meaningless if the
other steps in the series had not taken place. Penrod, 88 T.C. at 1430.
---------------------------------------------------------------------------------------------------------------------
----------------to be interdependent, and thus recharacterized the ------- under the
interdependence test, ---------------------------------------------------------------------------------------
----------------------------. In reaching its conclusion that ------------were interdependent, the
Jacobs Engineering court emphasized the contrast between the taxpayer’s long-term
borrowing needs and the short term of --------------------------. In the case of US Parent, --
------------------------------------------------------------------------------------------------ in -----------------
-----------------------------------------------------------------------, and US Parent has not provided
a non-tax business reason as to why -------------------------------------------------------------------
---------------------------. -------------Jacobs Engineering, US Parent needed ---------------------
--------------------------------------------------------------------------------------------------------------------
for all of Tax Year 3, and -----------------------------------------------would not have satisfied
this long term need. Likewise, -----------------in isolation would not have provided US
Parent with --------------that it needed for Tax Year 3 because ------------------------------------
-----------------------------------------------------------------------------------------. US Parent’s needs
are satisfied only if -------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
which occurred pursuant to the -------------------. Accordingly, the interdependence test
applies to ------------------------------------------------------------------------------. As a result, -------
--------------------------------------------------------------------------------------------- – throughout Tax
Year 3.
PRESP-149185-12 34
The presence of -----------------------------------------------does not preclude applying the step
transaction doctrine. The Fifth Circuit’s holding in Redwing Carriers illustrates that -------
--------------------------transactions are collapsed and treated in accordance with their
substance when they are interrelated, even when ---------------------enter into one side of
a transaction (such as a section 1031 exchange of like-kind property) normally entered
into by a ---------------.51 In Redwing Carriers, a corporation sold used property to a third
party for cash, and at or about the same time, that corporation’s subsidiary bought new
like-kind property from the third party for cash.52 The fact that the selling corporation and
its subsidiary were separate entities did not prevent the court from finding an integrated
section 1031 exchange and stating that “[t]he buying and selling were synchronous
parts meshed into the same transaction and not independent transactions.”53
Similarly, in the ------------------, the fact that -----------------------------------------------------------
-------------------- does not preclude application of the step transaction doctrine --------------
---------------------------------------------------------------------------------------------------------------------
----------------54
In its application of the interdependence test, the Tax Court in Barnes Group focused its
inquiry on whether there was a non-tax business purpose for each of the separate steps
in the transaction. As discussed, US Parent has not provided ---------------business
purpose for ----------------------. Rather, Taxpayer needed ------------------- over the entire
term of the ------------------. As in Barnes Group, the lack of a non-tax business purpose -
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------.
3. Summary
---------------------------------, the -------- --------effectively a long-term repatriation of foreign
earnings that was subject to section 956. The steps in the -------------------were designed
to achieve the end result of providing US Parent with -----------------------------access to ---
--------------- cash while improperly avoiding the application of section 956, and, thus,
should be collapsed under the end result test. ------------------------------------------------------
---------------------------------------------Accordingly, the -------------------------------------------------
------------------------------------------------------------------------------------------------------------under
the interdependence test, should be --------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------. As a
51
399 F.2d 652.
52
The taxpayer chose the form of separate purchase and sale transactions because (under the law in
effect at the time) it would have allowed the taxpayer to (i) increase the basis of the newly acquired
trucks, which would allow for greater depreciation with respect to the trucks that would be used to reduce
ordinary income; and (ii) treat the gain on the sale of the old trucks as capital gain.
53
Id. at 656.
54
Id.
PRESP-149185-12 35
result, ---------- held an obligation of US Parent – -----------------------------------------–
throughout Tax Year 3.
------------ Schering Plough and Long Term Capital, the application of the step
transaction doctrine to the case at hand does not invent new steps; rather it reorders
and eliminates the steps that were taken by US Parent and -------------------------------------
---------------------------------------------------------------------------------------------------------------.
Thus, the recast ------------------------from ---------- is consistent with the parties’ underlying
intent, and recognizes the reality of the transaction.
V. Indirect ----------------------------
A. Overview
If ------------------------------------------------------------------------------------------------------------------
--------------------------------------------would be considered to hold U.S. property if ----- --------
--------- are ---------- directly or indirectly -------------- for US Parent’s -------------- under the
-------------------. As described above in section II.G. of the LAW AND ANALYSIS section
of this advice, section 956(-) and Treas. Reg. § 1.956------ provide rules addressing -----
--------------------------------. It must be determined whether those rules apply to the ---------
-----------, such that -------------------------------------------------------------------- of US Parent ----
-------------- held by -------- on -------------------- quarterly measuring dates.
B. Assets of ----------
The general rule of Treas. Reg. § 1.956----------provides that if the -------- of a CFC -------
at any time, -----------------------------, as ---------- for the ---------------- of ---------------- of a
U.S. person, the CFC will be considered a ------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------. The
application of this general rule does not depend on a formal, ------------------------------------
---------------------------- executed between the CFC and the --------. Although the
regulations contain an example involving --------------------------------------------------------------
-------------------------------------------------------------------------------------------,55 nothing in the
general rule requires a -----------------------. When the -----------------------------------------------
are all related, the parties can easily dispense with a formal ----------------------.
Recognizing the flexibility that is peculiar to related parties, courts subject related party
transactions to a higher level of scrutiny than a transaction involving unrelated parties.
See, e.g., Merck & Co., 652 F.3d, at 481.
------------------------------------------------------------- entered into formal -----------------------------
--------------- with respect to the -------.56 The facts and circumstances surrounding the
55
Treas. Reg. § 1.956---------------------------.
56
Because US Parent wholly owns ----------, no such --------------------------were necessary.
PRESP-149185-12 36
planning and operation of the -------------------support the conclusion that the ---------of ----
--------indirectly -------------------------for US Parent’s ---------------throughout the duration of
the -------------------. The ------------------- was conceived and designed as a way to
repatriate on a long-term basis cash held by US Parent’s --------in a way that avoided
section 956. The -------------------required constant and meticulous coordination between
US Parent, -----------. This high degree of coordination meant that ---------of ----------- -----
---------indirectly ---------------for the US Parent ---------------based on conduct of the
parties, rather than directly by formal -----------------------.
The actions of US Parent, both through the team that devised the ------------------ and the
treasury department that implemented, monitored, and oversaw the ------------------,
leave no doubt that the ---------of ---------- would be available -------------that US Parent
had the necessary -------------------in whole or in part any ------------------------------------------
-------------------------------------------------------------------------------------.
An agreement by ---------- to --------------------------------sufficient to satisfy US Parent’s -----
------------ to ---------------------can be inferred from the conduct of the parties.57 ----------
did not ----- to US Parent on an ad hoc basis----------------------------------------------------------
-------------------------------------------. -----------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------- US Parent prepared monthly -------------------, showing ----------------
-------------------------------------------------------------------------------------------------. Consistent
with the monthly ------------, ---------- ----------------------------------------------------------------------
----------- to satisfy US Parent’s --------------------------------------needs.
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
57
The conduct of the parties is a commonly used tool of jurisprudence for determining the existence as
well as the terms and substance of an agreement. For example, in Lincoln Electric Co. v. Comm’r, 444
F.2d 491 (6th Cir. 1971), the court held that a long-standing, consistent practice of paying bonuses to
manufacturing employees constituted a liability for such bonuses that was required to be included as part
of the direct labor cost of the taxpayer’s inventory cost at year end. In contract law, courts have long
looked to the conduct of the parties to determine both the existence of an agreement and the terms of an
agreement. Simon v. Riblet Tramway Co., 505 P.2d 1291 (Wash. App. 1973); J.C. Schaefer Electric, Inc.
v. O. Frank Heinz Construction Co., Inc., 300 F.Supp. 396 (1969); see also, 1 Corbin on Contracts § 1.19
(Rev. Ed. 1993), and cases cited therein; 17 C.J.S. Contracts § 6 (2011), and cases cited therein.
Similarly, in tax law substance over form cases, the courts often compare the conduct of the parties to the
formal terms of the transactional agreement to determine the weight to be given the form of the
transaction. See, e.g., Barnes Group v. Comm’r, T.C. Memo. 2013-109 (No. 27211-09). Simply put, the
consistent conduct of the parties is often the best evidence of what the parties, themselves, believe to be
their own obligations and the obligations of other parties to the transaction.
PRESP-149185-12 37
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
Although US Parent could have ---------the ------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------nonetheless ------------
indirectly as -----------for US Parent’s --------------------------------------. A CFC is treated as
a -------------for purposes of Treas. Reg. § 1.956--------- if its --------------------------------------
-----------, as -----------------------------------------------------------of a U.S. person. This general
rule applies regardless of whether that U.S. person has sources ------------------other than
those owned by the CFC that is an indirect --------------------------.
Instead of agreeing to -------------------on behalf of US Parent-------------------------------------
------------------------------------------------------------------------. In this way, the ---------of ---------
-------- ---------, indirectly, as ----------------------------------------------to the ---------------.
Accordingly, the ---------of ---------- indirectly ------------------------for the US Parent -----------
-------------under the -------------------, and, thus, -- is treated as a ---------------------------------
----------------------------------------------------------------------------------------------------------------of -
----------------------------------held by ------------------------------------------------------------------------
------------------------------------------.
C. Application to --
As discussed, section 956(-) and Treas. Reg. § 1.956-------apply when a CFC directly or
indirectly is a ---------------------------------------------------of a related U.S. person. Neither
the Code nor the regulations specifically address the application of section 956 to --------
------------------------------------------------------------------------------such as the indirect ------------
------------- by -- discussed above in section V.B. of the LAW AND ANALYSIS section of
this advice.
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------------.58 --------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------
-------------------------------------------------------------------------------------------------------------If
those --------------------------------for the performance of US Parent’s -------------- to -----------
58
---------------------------------------------------------------------------------
PRESP-149185-12 38
-- would be treated as holding those ---------------under section 956(-) and Treas. Reg.
§ 1.956------.59 The section 956 regulations specifically provide that section 956(-)
applies to situations in which the ---------of a CFC indirectly -----------------------for a --------
-- a related U.S. person.60 ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------ --------------------
------------------------------------------------------------------------------------------------------------------of
Treas. Reg. § 1.956----------illustrates that the -------- of a CFC -----------------------for an ---
------------ of a related person where the stock of the CFC is --------------------------------------
------------------------------------------------------------------------------------------------------------------ --
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------Thus, ------------ is considered
a ---------------------------of US Parent’s -------------- to -- under the ------------------, and
treated as holding the -------------- on ---------------------quarterly measuring dates,
because significant ---------of -- directly or indirectly -----------------------for the ----------------
------------------------------------------------------------------------------------------------------------------.
VI. Results of Applying Section 956 to the --------------------
A. Substance Over Form and Step Transaction Doctrines
The substance over form and step-transaction doctrines, described above in sections III
and IV of the LAW AND ANALYSIS section of this advice, treat the ---------------------------
------------------------------, held by ---------- as -------------, outstanding over the course of the
entire taxable year of ----------. The authorities discussed above, such as Jacobs
Engineering, support looking beyond -------------------------------------------------to conclude
that the -------------------is in substance a ----------------------------------------------------------------
59
-----------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
---------------------------
60
Treas. Reg. § 1.956-----------
PRESP-149185-12 39
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------.
The amount of ----------------------------------------------------, in substance, may be
approximated by the ------------------of that -------------------------------------------------------------
------------- outstanding, in form, over the course of the taxable year of the -------------------
-------. Section 956 would then apply to ----- by treating it as holding an interest in the
amount of ------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------, calculated under the preceding
sentence, held as of the close of each quarter of ---- taxable year.
B. Indirect ---------------------------
The indirect ---------------------------rule, described above in section V of the LAW AND
ANALYSIS section of this advice, treats ---------------------------------------------------------------
----------------------------------- as a ---------------------------of -------US Parent -------------held by
--. Under Treas. Reg. § 1.956-----------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------- each US Parent ------
-------------held by -- for which -- is considered a ----------------------------is treated as held
by --. Thus, ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------is treated as holding U.S. property as of the close of each
quarter of --- taxable year equal to the amount of the US Parent -------------------------------
-------------------------------------------------------------------------------------determined to be held
by -- on that date.
CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS
This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.
Please call (202) 317-6934 if you have any further questions.
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