In other words, a CFC is considered as holding an obligation of a U.S. person if such CFC is a “pledgor” or “guarantor” of such obligation. The legal memorandum provides that, in certain cases, where the related U.S. person whose obligation is held by a CFC is “financially impaired,” the “undertaking,” expressed or implied, by another CFC may be treated as a pledge or guarantee.
This may occur if a related U.S. person: (1) incurs obligations from multiple CFCs, and (2) repayment of one obligation within the 60-day period is contingent on a subsequent obligation to another CFC. Moreover, if the assets of a CFC “serve as security” for the performance of an obligation of a related U.S. person, the CFC will be considered a pledgor or guarantor of that obligation.
The legal memorandum intones that each obligation may not be executed as one “in a series of related steps in a unified transaction.”4 Should it be determined that a series of obligations constitutes “rollovers” of a single obligation, the periods of disinvestment will be ignored for purposes of testing the 60- and 180-day rules. Whether a series of obligations is, in substance, a single obligation is ultimately a question of fact, and the legal memo sets forth factors to consider in making this determination, including:
• The volatility of economic conditions;
• The related U.S. person’s access to commercial paper markets; and
• A reasonable evaluation of whether these conditions will persist during the term of the loan.
Moreover, as might be expected, the legal notice provides that the analysis should evaluate the period of disinvestment; that is, the time that elapses between the repayment of one 60-day loan and the institution of another one. The legal guidance also cites an IRS Revenue Ruling (Rev. Rul. 89-73, 1989-1 C.B. 258) for the following reason: in the revenue ruling, it was held that “brief periods of disinvestment,” relative to the period the loans being evaluated were outstanding, should in fact be disregarded.
Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 A CFC is any foreign corporation more than 50% of the voting power or value of the stock of which is owned by U.S. shareholders on any day during the foreign corporation’s taxable year. See Sec. 957(a).
2 A U.S. shareholder is a U.S. person who owns at least 10% of the total combined voting power of all classes of the foreign corporation’s stock entitled to vote. See Sec. 951(b).
3 An obligation of a related person is an investment in which triggers a deemed dividend to the CFC’s U.S. shareholders.
4 See Jacobs Engineering Group, Inc. v. United States, 79 AFTR, 2d 97-1673.