In response to the liquidity crisis, which has made it difficult for taxpayers to fund their operations, the IRS quickly responded on Oct. 3 with Notice 2008-91, temporarily expanding the short-term financing exception to IRC § 956. This measure will permit corporations to access cash from their controlled foreign corporations (CFCs) without having an income inclusion for U.S. tax purposes. Since the IRS stated that it did this to facilitate liquidity in the near term, the new exclusion rules apply only for the first two taxable years of a foreign corporation ending after Oct. 3, 2008, and does not apply to tax years beginning after Dec. 31, 2009. For calendar year corporations, the notice is applicable to tax years 2008 and 2009.
Generally, a loan from a CFC to its U.S. shareholder is treated as the acquisition of an obligation of a U.S. person by the CFC that is an investment in U.S. property. Such an investment may require the U.S. shareholder to recognize income under IRC § 951. Prior Notice 88-108 provided an exception for shortterm loans repaid within 30 days, as long as the CFC does not hold obligations that would be investments for more than 60 days during the year.
Notice 2008-91 extends the exception for loans held by the CFC that are repaid within 60 days from the time incurred (and allows the CFC to elect to exclude them under section 956 from the definition of “obligation”), as long as the CFC does not hold obligations that would be investments in U.S. property for 180 days or more during the tax year. The latest rules do not otherwise affect the application of Notice 88-108. A CFC may rely on either notice but not both.
By AICPA Technical Manager Eileen Reichenberg Sherr, CPA, M. Taxation.