2. Context for Section 956 Planning
• Foreign corporation generally taxable separate from
its shareholders; U.S. shareholders generally only
taxed on distributions made by the foreign
corporation
– Advantages of deferral of income
• Compounding reinvestment at potentially lower tax rate
• APB 23 for permanently reinvested earnings (ETR)
• Anti-deferral regimes result in deemed distributions,
whether or not actually effected (e.g., Subpart F)
– Generally targeting passive income, related party income,
and “functional” repatriation
2

3. The Current Status of Deferral
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2001
2003
2005
2007
2009
Undistributed Foreign
Earnings (Billions $USD)
Undistributed
Foreign
Earnings
(Billions $USD)
Source: U.S. Permanent Subcommittee on Investigations, Sept. 2012, Ex. 1b & 1c 3

4. The Section 956(a) Inclusion
In the case of any controlled foreign corporation (CFC), the Section 956 inclusion with
respect to any U. S. shareholder for any taxable year is the lesser of—
the excess (if any) of—
(A) such shareholder's pro rata share of the average of the amounts of U.S. Property
held (directly or indirectly) by the CFC as of the close of each quarter of the taxable
year,
over
the amount of E&P described in section 959(c)(1)(A) with respect to such shareholder,
Or
(B) such shareholder's pro rata share of the current or accumulated E&P of the CFC
• The amount taken into account is its adjusted basis as determined for purposes of
computing earnings and profits, reduced by any liability to which the property is
subject
4

5. Purposes of Section 956
The purpose of section 956 of the Code is to terminate the tax
deferment privilege with respect to the earnings of CFCs when
such earnings are directly or indirectly repatriated.
S. Rep. No. 1881, 87th Cong., 2d Sess. 80, 87-88 (1962), 1962-3
C.B. 707 at 794, states, in part, “[g]enerally, earnings brought
back to the United States are taxed to the shareholders on the
grounds that this is substantially the equivalent of a dividend
being paid to them.”
5

6. United States Property
Subject to exceptions discussed below, “U.S. Property”
under section 956(c) includes:
– Stock in a domestic corporation
– Obligations of a U.S. person
– Tangible personal property or real property located in the
U.S.
– U.S. intangibles, such as the right to use patent, copyright,
invention, model or design, secret formula or process or
similar right acquired or developed for use in the U.S.
6

7. What is an “Obligation”
Treas. Reg. section 1.956-2T(d)(2) defines an “obligation” to include any bond,
note, debenture, certificate, bill receivable, account receivable, open account
or other indebtedness, whether or not issued at a discount or bearing
interest.
What about:
• Executory contracts
• Above/below market supply contracts, leaseholds, or licenses
• Imputed loans as a result of advance payments under vendor
contracts, rent, or licenses. See, e.g., Section 467; Treas. Reg.
section 1.988-2(e)(2)(iii)(B) (lump sum payments under currency
swap treated as imputed loan); Rev. Proc. 99-32 (imputed
receivable under Section 482); BMC Software, 141 T.C. No. 5
(2013)(Section 482 receivable treated as debt under Section 965
related party debt rules); Notice 2005-64, section 10.06, 2005-36
I.R.B. 471.
7

8. What is not an “Obligation”
The following are not obligations within the
meaning of section 956(c):
– Obligations of U.S. person from sale/processing of property or
performance of services, in an amount ordinary/necessary for conduct
of trade or business
– Obligations arising out of involuntary conversion of property that is
not U.S. property
– U.S. shareholder’s guaranty of CFC debt. TAM 8101012 (Oct. 7, 1980)
– U.S. shareholder’s pledge of CFC1 stock to support CFC2 debt. TAM
8042001 (Mar. 18, 1980)
– Funds of CFC held by U.S. shareholder as agent (not borrower) for CFC.
TAM 7745003 (Jul. 22, 1977)
8

9. Ordinary and Necessary
Receivable Balances
Treas. Reg. section 1.956-2T(d)(2)(i)(B) carves out of the definition of “obligation”
certain ordinary course receivables from the sale of goods or provision of services.
• Services
– Ordinary and necessary as between unrelated parties
– Safe harbor at repayment within 60 days
– Measured at any time during the year
• Property sale/processing
– Ordinary and necessary to carry-on a trade or business
– No safe harbor
– Measured at any time during the year
• Examples of industry-based application with longer terms:
– PLR 200519005 (May 13, 2005)(lengthy production process; receivables never
exceeded inventory balances)
– TAM 8114032 (Dec. 30, 1980) (3 years for whiskey blender; necessary to keep
LIFO method in foreign country)
9

10. Intangibles for U.S. Use
• All facts and circumstances are relevant in determining
whether intangibles are acquired or developed for use in the
U.S.
• Considerations for intangibles for U.S. use:
– Difference between title ownership and tax ownership
– CFC owns rights but doesn’t exploit them or they have
minimal value
– Tangible vs. intangible property
• Software rights vs. sale of software to U.S. customers
ILM 201106007 (Feb. 11, 2011) (U.S. property was
measured by IP tax basis, not inventory tax basis)
10

11. Exceptions to U.S. property
Section 956(c)(2) establishes several exceptions to the definition
of U.S. property:
– U.S. bank deposits
– Property located in the U.S., purchased in the U.S, and exported for
use outside the U.S.
– Stock or obligations of unrelated U.S. corporations (neither U.S.
shareholders nor under common control determined at 25% by
attribution)
– Obligations of unrelated non-corporate U.S. persons
– Others exceptions related to shipping, oil and gas, financial services
– Short Term loans 30/60 day safe harbor
11

12. Factoring
(An Exception to the Exceptions…)
• Section 956(c)(3) generally treats receivables due from an
unrelated U.S. customer but acquired by the CFC from a U.S.
shareholder as investments in U.S. property
• The Section 956 inclusion is the entire face of the receivable,
not its tax basis
• Other factoring considerations besides Section 956:
– Factoring income may be foreign personal holding company income
unless the purchasing CFC meets the active financing exception
– Loss on the factoring may be suspended by Section 267(f) Treas. Reg.
section 1.267(f)-1(f). TAM 200611032 (Mar. 17, 2006) (loss permitted
when factoring had economic substance); but see CCA 200849012
(Dec. 5, 2008)
12

13. Short Term Exception
• Any note outstanding less than 30 days, so long as the same CFC has not loaned to
its U.S. shareholder more than 60 days in total. Notice 88-108
• Pay-downs permitted prior to quarter-end so as to not trip measurement dates.
GLAM 2007-016
• Notice 88-108 was extended to 60/180 days during financial crisis, though these
extensions are now expired
• Facts and circumstances will be analyzed to see if a series of short term loans are
in substance a single loan or truly separate. Compare Jacobs Engineering Group
Inc. v. U.S., 168 F.3d 499 (9th Cir. 1999) (series of loans over 2.5 years treated as
single loan; balance was outstanding 93.5% of the period) with Rev. Rul. 89-73, Ex.
2 (loans outstanding for less time than not, treated as separate); see also Treas.
Reg. section 1.956-1T(b)(4)(i) Eg. 1 and Eg. 2
• Short term loan exception applied on a CFC by CFC lender basis. GLAM 2009-013;
but see Treas. Reg. section 1.956-1T(b)(4)(i) (foreign corporation created,
organized, or capitalized with one of the principal purposes of avoiding the
application of section 956)
13

14. Open Accounts/Intercompany Balances
• Generally, an open account is a single outstanding obligation,
even if payments made regularly. Greenfield v. Commissioner,
506 F.2d 972 (5th Cir. 1975); Sherwood Property, 89 T.C. 651
(1978)
• Accounts receivable and accounts payable, if simultaneously
outstanding between the U.S. shareholder and the CFC are
analyzed on a gross basis. See Treas. Reg. section 1.956-1(e)(1)
(U.S. property reduced only by specific charges against asset)
• Netting prior to quarter end seems to be permitted. Gulf Oil
Corp., 87 T.C. 548 (1986); GLAM 2007-016
14

15. Hewlett-Packard Case Study
HPCo
USS
FS1
BCC
FS4FS3 FS1
CCHC
CCHC Loan Dates
Loan 1 Jan 2 – Feb 17
Loan 2 Apr 2 – May 17
Loan 3 July 2 – Aug 17
Loan 4 Oct 2 – Nov 17
BCC Loan Dates
Loan 1 Feb 17 – Apr 2
Loan 2 May 17 – July 2
Loan 3 Aug 17 – Oct 2
Loan 4 Nov 17 – Jan 2
• Off-shore,
intragroup bank
• Never accepted
deposits or made
loans to any entity
that did the same
from CCHC
• Tax reviewed all
loans made and
monitored all
repayments
• Legacy Compaq
“stagnant pool
of cash” at $6.5B
• Never accepted
deposits, made
loans to, any
entity that did
the same from
BCC
Source: US Permanent Subcommittee on Investigations, Sept. 2012 15

16. Measuring Investments in U.S. Property
• The Section 956 investment amount is treated as the tax
basis, computed for E&P purposes, in the hands of the CFC.
– If CFC employees have stock options to acquire U.S. shareholder stock
and the CFC purchase U.S. shareholder stock concurrent with exercise,
this stock basis not taken into account as investment in U.S. property.
PLR 201014049
• Treas. Reg. 1.956-1(e)(6)(basis of stock or debt of U.S.
shareholder acquired in a section 362(a) transaction is at least
equal to fair market value) (effective June 24, 2008); cf. Rev.
Rul. 74-503(zero basis holding revoked)
16

17. Pledges/Guarantees
• Section 956(d) provides a CFC has made an investment in U.S.
property if it acts as a “pledgor or guarantor” of U.S.
shareholder debt
• CFC assets “at any time, even indirectly, as security for the
performance of an obligation of a U.S. person” Treas. Reg.
section 1.956-2(c)(2); see, e.g., FSA 200216022 (Apr. 19,
2002)(CFC covenant to provide U.S. shareholder “with
sufficient liquid assets via cash dividends to meet those
obligations” treated as indirect security)
• Issue can arise in acquisition diligence, negotiating credit
agreements, and restructurings
17

18. Indirect Pledge
A CFC is deemed to provide an indirect guaranty if:
• At least 662/3% of voting power of CFC stock is pledged, and
• Negative covenants restrict CFC discretion with respect to the
disposition of its assets or its ability to incur liabilities.
Examples of negative covenants:
• Treas. Reg. section 1.956-2(c)(3)
• FSA 5132 (Aug. 8, 1997).
• Bright line test (arose from IRS loss in Ludwig) as this is the
supermajority vote in most jurisdictions to force a liquidation.
18

19. Measurement with
Guaranty/Pledge
– Full balance of the Loan?
– Limit to fair value of the assets of the CFC?
– Multiple CFC guarantors See FSA 200216022 (pro
ration)
19

20. FS2
Loan Agreements, Guarantees,
& Pledges
Bank loans to USP and requires maximum credit support for best interest rate.
• Who can be a loan party:
– US1? US2? US3?
– FS1? FS2? FS4?
• Can USP pledge all of:
– US1 equity? US2 equity?
– US3 equity?
– FS3 equity? FS1 equity?
– FS2 equity?
– Note payable by FS2? By FS3
– FS4 equity?
• Can Bank enter into put with FS4 to
put the Loan receivable from USP
for its principal and accrued interest?
See FSA 200216022
USP
US1
FS1US2
FS4FS3 FS5
Note payable
US3
FS6
Bank
Loan
Note payable
20

21. LSTA Credit Agreement provisions:
Pledges, Guarantees and the
Section 956 Pledge Carve-Out
If Borrower or any Loan Party creates, forms or acquires any Subsidiary, Borrower will
(i) grant the Administrative Agent for the benefit of the Lender a security interest in
and lien on (A) all of the issued and outstanding shares of Capital Stock of any such
Domestic Subsidiary or (B) sixty-five percent (65%) of the issued and outstanding
shares of Capital Stock of any such Foreign Subsidiary and (ii) cause each such
Domestic Subsidiary to (A) guaranty all of the Borrower’s Obligations pursuant to an
unlimited continuing guaranty and (B) secure said guaranty with a first priority
perfected security interest in all of the accounts, inventory, [etc.] and the proceeds
thereof other than any Excluded Property.
21

22. Some Key Definitions (LSTA)
• “Domestic Subsidiary” means any Subsidiary that is incorporated or organized under the laws
of any political subdivision of the United States.
Or
• “Domestic Subsidiary” shall mean each Subsidiary of the U.S. Borrower that is organized
under the laws of the United States, any state thereof, or the District of Columbia, unless
such Subsidiary is wholly owned by Foreign Subsidiaries.
• “Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.
• “Material Subsidiary” means any Loan Party and any other Subsidiary as to which (a) the
aggregate gross revenues of itself and its Subsidiaries … are greater than or equal to X% of
the aggregate gross revenues of the Company and its Subsidiaries, or (b) the aggregate equity
capital of itself and its Subsidiaries… are greater than or equal to X% of the aggregate equity
capital of the Company and its Subsidiaries.
• “Borrower”/ “Loan Party”
• “Excluded Property” means (a) Capital Stock of any Foreign Subsidiary in excess of sixty-five
percent (65%) of such Capital Stock.
22

23. More Key Definitions (LSTA)
• “Excluded Stock” shall mean (i) any Capital Stock with respect to which pledging such Capital
Stock would result in adverse Tax consequences as reasonably determined by Borrower, (ii)
solely in the case of any pledge of Capital Stock of any Foreign Subsidiary or any Domestic
Subsidiary substantially all of the assets of which consist of Capital Stock of Foreign
Subsidiaries, in each case to secure the Obligations of the U.S. Borrower, any Capital Stock of
any class of such Foreign Subsidiary or such Domestic Subsidiary in excess of 65% of the
outstanding Capital Stock of such class (such percentage to be adjusted upon any Change in
Law as may be required to avoid adverse U.S. federal income Tax consequences to the U.S.
Borrower or any Subsidiary, including any change in Treasury Regulation § 1.956-2(c)).
• “Excluded Subsidiary” shall mean (a) each Subsidiary that is not a Material Subsidiary, (b) any
Domestic Subsidiary substantially all the assets of which consist of (x) Capital Stock of
Foreign Subsidiaries or (y) of other Domestic Subsidiaries so long as substantially all the
assets of any such other Domestic Subsidiary consist of Capital Stock of Foreign
Subsidiaries, (c) any other Subsidiary with respect to which (x) providing a Guarantee would
result in adverse Tax consequences as reasonably determined by Holdings, or (y) any Foreign
Subsidiary that is not an entity disregarded under Treasury Regulation § 301.7701-
3(b)(2)(i)(C) from a U.S. person within the meaning of Code § 7701(a)(30).
23

24. On-Shore/Off-Shore Syndicated Loans
USP
US1
FS1US2 FS2
FS4FS3 FS5
Note payable
US3
FS6
Bank
Loan 1
Loan 2
24

25. On-Shore/Off-Shore Syndicated Loans
“Borrower” shall mean each, with respect to any Loan, any of (a) the U.S. Borrower,
(b) the Foreign Borrowers, and (c) any Additional Borrower, required to repay such
Loan. Notwithstanding anything to the contrary in this Agreement or any other Loan
Document, no Foreign Borrower shall be obligated for any Borrowing of the U.S.
Borrower or a Guarantor that is a Domestic Subsidiary.
Other issues:
• Collateral
• Fees
• Obligations
• Guarantees
• Borrowing Base
• Covenants on Payment of Expenses
• Additional Borrowers
• Segregating accounts
25

26. Formed/Funded
• CFC treated as holding U.S. Property held by another foreign
corporation (under common control) , if one of the principal
purposes for creating, organizing, or funding (through capital
contributions or debt) such other foreign corporation is to
avoid the application of section 956 with respect to the
controlled foreign corporation.
• Common control means the foreign corporations are related
parties under section 267(b).
26

27. Formed or Funded Example
FS2 owes debt, old and cold, to USP
1. FS1 loans money to FS2
2. FS2 repays loan payable to USP.
FS2 is funded with one principal purpose of
avoiding Section 956. See Treas. Reg. section
1.956-1T(b)(4), Ex. 2; see also The Limited Inc.,
113 T.C. 169 (1999), rev’d on other issues, 286
F.3d 324 (6th Cir. 2002)
USP
FS1 FS2
Loan payable
E&P=$0E&P=$100X
1
2
27

28. Conduit Examples
USP
CFC1
Foreign
Bank
CFC2
depositloan
loan
1
2
3
1. CFC2 makes $X deposit with Bank
2. Bank makes loan of $X to CFC1. USP
guarantees loan.
3. CFC1 makes loan to USP
Loan to CFC1 treated as held by CFC2. See
Rev. Rul. 76-192
USP
CFC
Foreign
BankInterest
Rate swap
1
2
1. USP and Bank enter into floating-floating
interest rate swap.
2. USP sells right to payments from Bank to
CFC for cash (under Notice 89-21, USP
deferred the income).
Recast as loan from CFC to USP and a
floating-rate repayment to Bank.
Schering-Plough (Merck)
28

29. Collateral Considerations Following
Schering-Plough
– Structure can no longer be effected as the deferral notice
was revoked and NPCs are now investments in U.S.
property
– Implications to prepaid royalty, advance payment for
goods, or similar arrangements?
– What is the basis of the property if debt? See Treas. Reg.
section 1.461-4(d)(3)?
29

30. Partnerships
• Anti-Brown Group regulations apply aggregate theory to
testing Section 956 for assets or obligations held by
partnerships. Treas. Reg. section 1.956-2(a)(3); see also Rev.
Rul. 90-112
• Determination of investment in U.S. property is the CFC’s
proportionate share of partnership assets
– See PLR 200832024 (CFC did not share in profits related to
U.S. assets. U.S. assets separated in disregarded entity, no
loans across)
• How would this work where the CFC loans to a partnership
that includes a U.S. Shareholder?
30

31. USP
US1
FS1US2 FS2
FS4FS3
FS6
Loan payable
US3
FS6
Partnership Pledges
US3
FS5
US2, FS2, and FS5 are all
partnerships for U.S. Tax purposes.
• Can FS2 guaranty USP debt?
• Can US3 pledge FS2 equity?
• Can FS2 pledge FS5 equity?
31

32. Computations under Section 956
• Pro rata share is determined on a hypothetical
distribution basis. When the CFC has multiple classes
of stock, equity priorities are generally respected.
• PTI is reduced first by cash distributions during the
year.
• Ignore U.S. property owned, and E&P accrued,
before entity became a CFC under section 956(b)(2).
32

33. Section 960(c)- The Anti-Hopscotch Rule
• Applicable for investments in U.S. property after December 31st, 2010 for
2nd tier or lower CFCs
• Generally limits the foreign tax credit (FTC) to the amount that would be
received if the distribution actually tiered up.
• If the limit applies, excess FTCs are trapped at the lower tier CFC (e.g.,
FTCs are separated from income)
• Anti-hopscotch rule does not apply to loans in place (or guaranteed by the
CFC) prior to the effective date unless the loans were modified and the
modification resulted in an exchange under Treas. Reg. section 1.1001-3
• Section 954(c)(6) applies (expires for tax years that begin on or after
January 1, 2014)
33