In Notice 2017-68, the IRS announced that certain obligations of U.S. persons received by controlled foreign corporations (CFCs) would be excluded from U.S. property for purposes of Sec. 956(c) if the obligation was received in exchange for property that, if transported to the United States for temporary storage because of Hurricane Irma or Hurricane Maria, would not be treated as U.S. property under Notice 2017-55.
Sec. 956 requires a U.S. shareholder of a CFC to include in income for any tax year the shareholder's pro rata share of the CFC's "applicable earnings" or, if less, the shareholder's pro rata share of the average of the amounts of U.S. property held by the CFC over its earnings and profits as described in Sec. 959(c)(1)(A). For this purpose, "U.S. property" includes an obligation of a U.S. person (Sec. 956(c)(1)(C)), unless arising in connection with the sale or processing of property where the obligation's amount during the tax year does not exceed an amount that would be ordinary and necessary to carry on the trade or business of the U.S. person and counterparty if the sale or processing transaction had been made between unrelated persons (Sec. 956(c)(2)(C)).
In Notice 2017-55, the IRS announced that a CFC would not be treated as holding U.S. property as the result of temporarily storing for safekeeping in the United States in anticipation of, or as a result of, Hurricane Irma or Hurricane Maria any Sec. 1221(a)(1) property (generally, inventory or other property held for sale to customers in the ordinary course of the taxpayer's trade or business) that had been located in an area affected by the hurricanes on or before Sept. 5, 2017 (Irma), or Sept. 17, 2017 (Maria), including Puerto Rico and the U.S. Virgin Islands. Such affected areas are those identified by the Federal Emergency Management Agency as subject to a major disaster or emergency declaration. (Although Puerto Rico and the U.S. Virgin Islands are U.S. possessions, Sec. 7701(a)(9) defines "United States" when used in a geographical sense, as by Sec. 956, as including "only the States and the District of Columbia.") This notice applies to tax year quarters of a CFC ending on or after Sept. 5, 2017, and on or before Jan. 31, 2018.
One month later, in Notice 2017-68, the IRS provided further relief in the form of a safe harbor for CFCs that have sold or need to sell property located in the hurricane disaster areas in exchange for obligations of U.S.-related persons. Such obligations may be excluded from U.S. property if received in exchange for property that, if transported to the United States for safekeeping due to either hurricane, would not cause the CFC to be treated as holding U.S. property under Notice 2017-55.
The Service noted that, generally, whether an obligation of a U.S. person meets the exception in Sec. 956(c)(2)(C) is determined based on all the facts and circumstances, citing Regs. Sec. 1.956-2(b)(1)(v). However, "to provide certainty," the Service stated in Notice 2017-68 that for purposes of Sec. 956, a U.S. person's obligation held by a CFC will be considered to meet the exception if (1) it was received in exchange for property that, if transported to the United States for temporary storage for safekeeping in anticipation of, or as a result of, Hurricane Irma or Hurricane Maria, would not cause the CFC to be treated as holding U.S. property pursuant to Notice 2017-55, and (2) the obligation is no longer outstanding on or before March 31, 2018.
An obligation that does not meet these conditions may nonetheless be excluded from U.S. property depending on the facts and circumstances.
- Notices 2017-55 and 2017-68
— By Paul Bonner, a JofA senior editor.