Anti Deferral and Anti Tax Avoidance August2010

7/28/2019 Anti Deferral and Anti Tax Avoidance August2010

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INTERNATIONAL TAX JOURNAL

Peter A. Glicklich and Candice M.Turner are Partners in the New Yorkoffice of Davies Ward Phillips &Vineberg LLP.

Anti-Deferral andAnti-Tax Avoidance

By Peter A. Glicklich and Candice M. Turner

Sovereign Wealth Funds at a Disadvantage Compared to U.S.Tax-Exempts

Sovereign wealth funds (SWFs) are governmentalinvestment vehicles, often funded with foreignexchange assets, and managed separately from

the official reserves of a monetary authority.1They haverecently attracted the attention of Congress and theimagination of the public press.2 This attraction maybe the result of several factors, including an increase incommodity prices, growth in the size and public natureof SWF investments, and the recent U.S. credit crunch.In any event, Senators Baucus and Grassley of theCommittee on Finance have requested the Joint Com-

mittee on Taxation [to] describe and [to] analyze thehistory, current rules, and policy underpinnings of theU.S. tax rules applicable to U.S. investment by foreigngovernments, including investments made by SovereignWealth Funds.3 They indicated that we ought to have a clear understanding of the U.S. tax rules thatapply to these investments, how those rules compare tothose that apply to non-governmental foreign investors,and how other countries tax these investments.4

Given the economic and political climate confront-ing SWFs today, it may be time for the United Statesto consider harmonizing the foreign governmentalexemption found in Code Sec. 8925 and the U.S.treatment of tax-exempts under the unrelated businessincome tax (UBIT).6

Foreign GovernmentalExemption in Code Sec. 892The governmental exemption, based upon comityand concepts of sovereign immunity, first appeared


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Anti-Deferral and Anti-Tax Avoidance

in U.S. tax legislation in 1917, and covered onlycertain investment income. Code Sec. 892(a)(1) stillcontains only a limited exemption for certain invest-ment income earned by foreign governments. CodeSec. 892 was significantly narrowed in by the TaxReform Act of 1986 (TRA); temporary regulations

published in 1988,7 with minor exceptions, remaineffective today.8

What Is a Foreign Government?

For purposes of the Code Sec. 892 exemption, aforeign government is defined in Temporary Reg.1.892-2T by exclusion, and includes only integralparts and controlled entities of a foreign sover-eign.9 An integral part of a foreign sovereign is anyperson or bodies of persons, organization, agency,bureau, fund, instrumentality or other body, howeverdesignated, that constitutes a governing authority

of a foreign country.10 An individual sovereign, of-ficial or administrator acting in his or her privateor personal capacity, determined under a facts andcircumstances analysis, is not an integral part of aforeign sovereign.11

Controlled entity is defined as an entity that isseparate in form from a foreign sovereign or otherwiseconstitutes a separate juridical entity, provided that itmeets four additional criteria: (1) it is whollyownedand controlled by a foreign sovereign (directly orindirectly through one or more other controlled enti-ties); (2) it is organized under the laws of the foreign

sovereign by which it is owned; (3) its net earningsare credited to its own account or to other accountsof the foreign sovereign, with no part of its earningsinuring to the benefit of any private person); and (4) itsassets vest in the foreign sovereign upon dissolution.12

A controlled entity does not include partnerships orany other entity owned and controlled by more thanone foreign sovereign.

A separately organized pension trust also quali-fies as a controlled entity if it satisfies the followingconditions: (1) the trust is established exclusivelyfor the benefit of employees or former employ-ees of a foreign government or nongovernmentalemployees or former employees that perform orperformed governmental or social services; (2) thefunds comprising the trust are managed by trusteeswho are employees of, or persons appointed by, theforeign government; (3) the trust forming a part ofthe pension plan provides for retirement, disabilityor death benefits in consideration for prior servicesrendered; and (4) income of the trust satisfies the

obligations of the foreign government to participantsunder the plan, rather than inuring to the benefit ofa private person.13

What Income Is Exempt?

Generally. The Code Sec. 892 exemption covers

only enumerated items, including income from (1)investments in stocks, bonds and other securities, (2)financial instruments held in the execution of gov-ernmental financial or monetary policy, and (3) bankdeposits.14 Income derived from any other sources isnot exempt.15

The term other securities includes any evidenceof indebtedness, thereby extending the exemptionto all interest income, possibly excepting interest onopen account indebtedness not evidenced in writ-ing.16 Income from a financial instrument is exemptunder this rule only if implementation of govern-

mental financial or monetary policy is the primarypurpose for holding the instrument.17 The term fi-nancial instruments includes forward, futures andoption contracts in any currency and currency swapagreements, but not currency itself unless it is held bya foreign central bank of issue.18 The exemption alsocovers gains on sales of stocks, bonds or other securi-ties, and income under agreements to loan securitiesto brokers for use in short sales, but explicitly doesnot cover gain from the sale of partnership or trustinterests.19 Gains from the disposition of an interestin a controlled commercial entity (CCE), described

below, are not exempt, nor are any income receivedby or from a CCE.Exclusion for Commercial Activities. Most im-

portantly, Code Sec. 892 excludes income fromcommercial activities conducted anywhere in theworld. Unlike the approach in the pre-TRA regula-tions, the temporary Treasury regulations do not usethe trade or business standard of Code Sec. 864(b) fordetermining commercial activity. Rather, commer-cial activity includes any activity, unless otherwiseexcepted, which [is] ordinarily conducted by thetaxpayer or by other persons with a view towardsthe current or future production of income or gain.20The temporary treasury regulations specify severalactivities that do not constitute commercial activities:investments in stocks, bonds and other securities,regardless of the volume of trading (unless under-taken as a dealer); commodities trading (regardlessof whether such activities constitute a trade or busi-ness for purposes of Code Sec. 864(b)); loans (unlessmade by a banking, financing or similar business);


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investments in financial instruments held in the ex-ecution of governmental financial or monetary policy;holding net leases on real property (or land that isnot producing income); and holding bank deposits.Similarly, trading for a taxpayers own account is not acommercial activity, although investments made by a

banking, financial or similar business are consideredto be commercial activities, even if the income wouldnot be effectively connected to the business.21

No direct guidance exists as to the deductions thatare available to reduce gross income from a com-mercial activity.

Controlled CommercialEntities (CCEs). As notedabove, income receivedbyor froma CCE is not ex-empt from tax under CodeSec. 892. The term con-

trolled commercial entityis defined in the Code tomean any entity engagedin commercial activities(whether inside or out-side the United States) ifthe foreign governmenteither (1) holds (directlyor indirectly) any interestin such entity which, byvalue or voting interest,is fifty percent or more of

the total of such interestsin such entity; or (2) holds(directly or indirectly) anyother interest in such entitywhich provides the foreigngovernment with effectivecontrol of such entity.22

In an unfortunate use ofterminology, the thresholdfor control of a CCE under the Code can be muchless than needed to be an exempt controlled entityunder the temporary regulations.

Under the Code, an entity engaged in commercialactivities will be treated as a CCE if a foreign govern-ment also holds sufficient interests in the entity, evenless than 50 percent of the stock, to give it effec-tive control over the entity. The temporary treasuryregulations use the expanded standard of effectivepracticalcontrol (emphasis added) instead, and pro-vide that a foreign government can have such controleven where the foreign government holds only a

minority interest which is sufficiently large to achieveeffective control, or through creditor, contractual orregulatory relationships which, together with owner-ship interests held by the foreign government, achieveeffective control.23

Temporary Reg. 1.892-5T(d)(2) requires tracing

nonexempt income received from a CCE. For example,dividends received by a controlled entity (non-CCE) par-ent from a subsidiary CCE are not exempt in the handsof the parent; but the mere receipt of the dividend doesnot taint the parent as being engaged in a commercial

entity. Yet, the (non-exempt)dividend continues to betraced further upstream.In particular, dividendspaid by the parent in thisexample to a grandparentcontrolled entity (non-CCE)

(or, to the ultimate foreignsovereign) are also notconsidered exempt underCode Sec. 892, becausethey are considered ashaving been paid traced tothe CCE. As suggested inthe preceding paragraph,commercial activities ofa subsidiary CCE are notattributed to its parent cor-poration (and thus do not

taint the parent as a CCE).Commercial activities ofone CCE are notattributedto a brother or sister cor-poration that is commonlycontrolled either.

Other than in thecase of publicly tradedpartnerships, however,

commercial activities of a partnership will taint anypartner controlled entities as CCEs. Similarly, under thetemporary regulations taint also can spread downstreamfrom a CCE to any lower tier controlled entity.24

Coordination with FIRPTA

Gain from the sale of stock of a noncontrolledcorpo-ration by a foreign government generally is exemptfrom tax under Code Sec. 892.25 The exemption forincome from the sale of corporate shares applieseven where the shares constitute stock in a U.S. realproperty holding corporation (USRPHC). Stock of a

The temporary treasury regulationsspecify several activities thatdo not constitute commercial

activities: investments in stocks,

bonds and other securities,regardless of the volume of trading

(unless undertaken as a dealer);commodities trading (regardless ofwhether such activities constitute

a trade or business for purposes ofCode Sec. 864(b)); loans (unlessmade by a banking, financing, orsimilar business); investments in

financial instruments held in theexecution of governmental financialor monetary policy; holding netleases on real property (or landwhich is not producing income);

and holding bank deposits.


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USRPHC is generally treated as a United States realproperty interest (USRPI) gain from which is other-wise taxable to foreign investors under Code Sec.897(a).26 The governmental exemption does not ap-ply, however, to gain from the disposition of a directinterest in U.S. real estate.27 In other words, the Code

Sec. 892 temporary regulations draw a distinctionbetween gain from the disposition of USRPIs thatcomprise direct interests in real property describedin Code Sec. 897(c)(1)(A)(i), which are taxable un-der Code Sec. 892, and gain from the disposition ofUSRPIs that comprise stock in a USRPHC describedin Code Sec. 897(c)(1)(A)(ii), which are not taxableunder Code Sec. 892. Temporary Reg. 1.892-5T(b)(1) provides that a USRPHC or foreign corporationthat would have been a USRPHC if it were a U.S.corporation, and that meets the ownership test for aCCE, will be deemedto be a CCE.

An interesting issue arises with respect to certaindistributions from real estate investment trusts (REITs).Code Sec. 897(h)(1) treats any distribution from anoncontrolled REIT to a foreign corporation or otherREIT that is attributable to gain from the sale or ex-change of a USRPI as gain from the sale or exchangeof a USRPI, effectively characterizing the amountdistributed as being subject to FIRPTA following ataxable form of disposition of USRPIs by the REIT.28Historically, many U.S. tax practitioners took the viewthat Code Sec. 892 exempted the distributions froma REIT as a dividend. This view was supported by the

plain language of Code Sec. 892 and the temporaryregulations which exempt from U.S. tax, income ofa foreign government from an investment in stock(other than stock of a CCE).29

Similarly, practitioners historically did not con-sider Code Sec. 897(h)(1) to apply to a liquidatingdistribution from a noncontrolled REIT. UnderCode Sec. 331, a shareholder recognized gain ona sale of stock, and that treatment was generallyviewed to override the recharacterized rule in CodeSec. 897(h)(1).30

On June 13, 2007, however, the IRS issued Notice2007-55.31The Notice announced how future regula-tions will clarify that a distribution from a REIT thatis attributable to gain recognized by a noncontrolledREIT on the sale of a USRPI prior to a liquidation,does notavoid application of Code Sec. 897(h)(1)and does not qualify for any Code Sec. 892 exemp-tion, and so will be subject to tax under FIRPTA (andto FIRPTA withholding under Code Sec. 1445). TheNotice states that the IRS will challenge under cur-

rent statutory and regulatory provisions an assertionthat 892 exempts from taxation distributions froma [REIT] that are treated under 897(h)(1) as gainrecognized by a foreign government shareholder fromthe sale or exchange of a USRPI described in 897(c)(1)(A)(i). The Notice is controversial and is expected

to be challenged by sovereigns who planned theirholdings of U.S. real property through private REITslong before issuance of the Notice.

Comparing Code Sec. 892and UBIT RulesThe exemption under Code Sec. 892 is generallymore limited than the exemption available to CodeSec. 501 tax-exempt organizations.32Those organiza-tions include religions and educational institutions,instrumentalities of the U.S. government, pension

trusts, and certain private foundations. Code Sec.501(b), however, permits imposition of the unrelatedbusiness income tax (UBIT).33

The purpose of UBIT was reflected in the SenateReport accompanying Code Sec. 511: the problemat which the tax on unrelated business income isdirected is primarily that of unfair competition. Thetax-free status of 501(c) organizations enables themto use their profits tax-free to expand operations,while their competitors can expand only with theprofits remaining after taxes.34 In this regard, the ex-emptions under Code Secs. 501 and 892 are similar;

both allow profit-making activities relevant to thepurpose for which they are given an exemption (inthe case of Code Sec. 892, governmental functions)but tax income not relevant to that purpose and ac-tivities that compete with other taxable businesses.UBIT, however, is imposed on a narrower base thanincome that is subject to tax after applying the CodeSec. 892 exemption.

UBIT is imposed on the gross income derived byany organization from the unrelated trade or business regularly carried on by it subject to deductions.35Initially, UBIT is limited to income from a trade orbusiness, which is not defined in Code Sec. 511. Asexplained above, the governmental exemption onlyprotects certain types of income from U.S. tax. More-over, although the exemption exceptions in Code Sec.892 were initially linked to income from a trade orbusiness as defined in Code Sec. 864(b), that link wasremoved from the current regulations, expanding theexceptions to capture certain commercial income,whether or not from a trade or business.



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The exemption for U.S. tax-exempts generally ex-cludes more and broader categories of income fromtax. Unlike the governmental exemption, other pas-sive income, such as royalties, is also exempt fromUBIT.36 Additionally, income from several other typesof activities, which would generally be subject to tax,

are also excluded from the reach of UBIT. Specifi-cally excluded from unrelated trade or business, arebusinesses staffed by volunteers, sales of donated mer-chandise, businesses operated for the convenience ofconstituents, certain entertainment and recreationalactivities at fairs and similar events, certain activi-ties at conventions and trade shows, bingo games,small hospitals providingservices for each other,agricultural or horticulturalorganizations provision ofbenefits or privileges for

their members, provisionsof low cost articles in con-nection with solicitationsof contributions, exchang-ing or renting mailing listsand uses of the names oracknowledgments of cor-porate sponsors.37

Of particular note, real property rents are generallyexempt from UBIT, regardless of whether the man-agement of the property would be an active trade orbusiness, provided the rents are not based upon the

income or profits derived from the property.38

Gainfrom the sale or disposition of real property is alsogenerally exempt from UBIT.39 Foreign governments,on the other hand, are obviously subject to tax underFIRPTA on any income attributable to a U.S. realproperty interest (other than gain from the disposi-tion of stock of noncontrolled USRPHC), even if theincome is not derived from a trade or business.40

As in the case of the governmental exemption,income from dividends and interest and gain fromthe sale of stock, is generally not subject to tax underthe UBIT rules either. With respect to investments insubsidiaries, the exemptions differ: Dividends andinterest are eligible for exemption under Code Sec.892 if the sovereign owns less than 50 percent of thestock of the payor by vote or value, and if the payor isnot otherwise a CCE. By contrast, Code Sec. 512(b)(13) subject to UBIT only interest, royalties and rents(but not dividends) received from certain controlledentities; and for this purpose, a corporation is con-sidered controlled only if the exempt organization

owns stock possessing more than 50 percent of thevote or value of all of the stock (actually or construc-tively, applying the rules of Code Sec. 318). Similarrules apply to payments from a partnership or othercontrolled entity.41

Another important distinction between the gov-

ernmental exemption and that of U.S. tax-exemptsis that a controlled entitys exemption automaticallyterminates under Code Sec. 892 if it earns even ascintilla from a commercial activity, while a U.S.tax-exempts exemption is not. Thus, if a controlledentity of a foreign sovereign has commercial activ-ity anywhere in the world, it will be a CCE and will

no longer be exemptfrom any U.S. incometax. In addition, incomefrom that entity couldbe subject to tax when

paid to the hands of anygovernmental parent, as-suming it is U.S. source,effectively connected,income. With respect toU.S. tax-exempts, how-ever, the tax imposedon unrelated business

income generally has no impact on the treatmentof the entity as otherwise tax-exempt.42

The treatment of income from subsidiaries or otherentities held by U.S. tax-exempts is also significantly

different than the treatment of such income to foreigngovernments. If an exempt organization holds aninterest in a passthrough entity, such as a partnershipor common trust fund, the organizations share ofthe entitys income is treated as unrelated businessincome only to the same extent that it would havebeen if the entitys activities and assets were earnedor held by the U.S. tax-exempt.43In contrast, com-mercial activities of a partnership held by a controlledentity of a foreign government are attributed to theforeign government and that attribution causes acontrolled entity that is a partner to be treated as aCCE, effectively tainting all of its other income underCode Sec. 892 and possibly subjecting the sale of thepartnership interest to U.S. tax.44

As noted previously, the Code Sec. 892 ruleswith respect to investments in real estate are alsomore restrictive than under the UBIT rules. Incomefrom leasing real property is generally considered anonexempt commercial activity under TemporaryReg. 1.892-4T(c) unless the real property produces

Temporary Reg. 1.892-5T(b)(1) provides that a USRPHC or

foreign corporation that wouldhave been a USRPHC if it were aU.S. corporation, and that meets

the ownership test for a CCE, willbe deemedto be a CCE.


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income only from a net lease. Furthermore, incomefrom sales of real property is not exempt under CodeSec. 892.45 Under UBIT, rental income generally isexempt from classification as an unrelated trade orbusiness unless it is based on personal property orbusiness profits.46 Gains and losses from the sale of

property, including real property, are generally ex-empt from UBIT unless it is inventory.47

While the UBIT regime generally provides a broaderexemption than Code Sec. 892, it is more restrictivein at least one respect: the exclusion for tax-exemptsdoes not cover income from debt-financed property.48Generally, property is debt-financed property if it isheld to produce income and acquisition indebtednesswith respect to the property exists at any time duringthe tax year (or, in the case of a disposition, at anytime during the preceding 12 months).49 There is nosimilar rule under Code Sec. 892.

U.S. pension plans are generally exempt from thedebt-financed limitation.50 If one or more qualifiedpension plans owns too much stock of a REIT, how-ever, dividends received from the REIT are treated asincome from an unrelated business to the extent thatthe REIT has net income from an unrelated trade orbusiness.51 Pursuant to Code Sec. 856(h)(3)(C), if apension fund holds more than a 10-percent interestin any pension held REIT at any time during theyear, the REIT will be treated as having for suchtaxable year gross income from unrelated trade orbusiness in an amount which bears the same ratio to

the aggregate dividend paid

as the gross incomeof the REIT for the REIT year from unrelated trades orbusinesses, bears to the gross income of the REIT forthe year.52 A REIT is considered to be a pension-heldREIT for this purpose if any pension plan holds morethan 25 percent of the REIT interests or pension fundsholding at least 10 percent of the REIT hold more than50 percent of the REIT in the aggregate. However,income earned by the REIT, which would not havebeen UBIT if earned directly by the U.S. pension plan,is not subject to this UBIT deeming rule.

Despite their divergence, the UBIT rules havesome application to the governmental exemptionin the area of pension funds.53 A pension fund thatis operated by and for the benefit of the employeesof a foreign government, as described in Temporary

Reg. 1.892-2T(c), will not be treated as a controlledcommercial entity if it solely earns income that wouldnot be treated as UBIT under Code Sec. 512(a)(1) ifthe fund were a qualified trust described in CodeSec. 401(a).54The UBIT rules appear to have no otherdirect application to controlled entities other than

pension funds; instead, income controlled entitieswill be subject to U.S. tax and not exempt underCode Sec. 892 if such controlled entities engage incommercial activity.

The legislative history of Code Sec. 892 and thetemporary Treasury regulations offer no rationale forthe variance between UBIT and income of a foreigngovernment from commercial activity.

Conclusion

The justification for the exemption from U.S. taxation

of foreign sovereigns is grounded in fundamentalnotions of comity and sovereign immunity, which,as interpreted for over 30 years, do not extend tocommercial activities, to avoid providing an unfaircomparative advantage. The same rationale applies tounrelated trade or business income of an otherwisetax-exempt U.S. organization (whether religious,educational, labor, social or pension fund).

Strong parallels would appear to exist betweenthe rationale for exemption of both groups. Yet, theCode Sec. 892 exemption is generally more narrow,but in limited circumstances, more broad, than the

rules applicable to the unrelated business income ofU.S. tax-exempt organizations.Perhaps it is time to broaden the Code Sec. 892

exemption and harmonize it with the exemptionapplicable to tax-exempt organizations. In its de-liberations, Congress might to be reminded of thepreference for a balanced and rational approachto equating the taxation of the commercial incomeof both foreign governments and tax-exempt orga-nizations, since the exemptions both carry similarpotential competitive advantages (over taxable U.S.businesses). Harmonization could also improve theinternational competitiveness of the U.S. capitalmarkets, assist in reducing the United Statess balanceof payment deficit, and improve U.S. capital importand capital export neutrality.


ENDNOTES1 Department of Treasury, Appendix 3 Sover-

eign Wealth Funds, June 13, 2007.2 Subsequent to the draft of this article, the

Joint Committee on Taxation and the New

York Bar Association Tax Section both issuedreports on SWFs. Joint Comm. on Taxation,Economic and U.S. Income Tax Issues Raisedby Sovereign Wealth Fund Investment in the

United States (JCX-49-08), June 17, 2008;NY State Bar Assoc. Tax Section, Reporton the Tax Exemption for Sovereigns under

Continued on page 48


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of a U.S. real property interest definedin 897(c)(1)(A)(i) shall in no eventqualify for exemption under 892. Reg.1.892-3T(a)(1).

46 Code Sec. 512(b)(3).47 Code Sec. 512(b)(5).48 Code Sec. 514.49 Code Sec. 514(b)(1).50 Code Sec. 514(c)(9).51 Code Sec. 856(h)(3)(C).52 Id.53 Often, the practical implications of the

availability of Code Sec. 892 exemptionto pension funds are small because of theavailability for exemption under tax treatieswith the United States. However, relatedparty dividends and interest are generallyexcluded from treaty benefits and thereis usually no exemption from FIRPTA forinterests in noncontrolled USRPHCs.

54 Temporary Reg. 1.892-5T(b)(3). The tem-porary Treasury regulation provides further,however, that even if a pension trust earnsno income that would be UBIT (and thus

is not a controlled commercial entity), itsincome from commercial activities will notbe exempt under Code Sec. 892. Becausethe income is of the type described in Tem-porary Reg. 1.892-3T and is not incomefrom commercial activities as described inTemporary Reg. 1.892-4T. Temporary Reg.1.892-5T(b)(3).

Reg. 1.1248-8(c) provides spe-

cial rules for tracking attributableearnings under Code Sec. 1248 inCFC-to-CFC liquidations. Thesespecial rules generally only allowE&P to tier up for Code Sec. 1248purposes upon the liquidationto the extent such E&P wouldbe included in USPs Code Sec.1248 amount under Code Sec.1248(c)(2).17 As noted above, the60 of carryover CFC2 E&P wouldappear to be included in USPsCode Sec. 1248(c)(2) calculation.Therefore, such earnings shouldcarry up to CFC1 and should gointo CFC1s Code Sec. 1248 earn-ings pool for purposes of CodeSec. 1248 and for purposes ofdetermining the USPs section1248 amount and the all earn-

Cross-Border BusinessContinued from page 14

ings and profits amount as relatesto the stock of CFC1.

Conclusion

The demise of the Killer B may have

increased the spotlight on Cash Dsas a potential repatriation device.The Cash D is arguably more lim-ited in its scope than the Killer B,requiring a U.S. multinational tohave one or more well-placed,high basis CFCs (perhaps froma direct or indirect acquisition)for the structure to makes sense.Hence, the Cash D may never at-tain the iconic status of the KillerB (and the legend of mega-billion

dollar repatriation transactionsthat are prominently reported inthe WALL STREET JOURNAL). How-ever, the foreign-to-foreign CashD has already established itselfas a worthy planning tool when aU.S. multinational is evaluating itsrepatriation alternatives.

* This article contains material describedin U.S. TAXATION OF INTERNATIONAL MERGERS,ACQUISITIONS AND JOINT VENTURES by Dolan,

Dabrowski, Jackman and Tretiak Warren,Gorham & Lamont, and is reprinted withpermission; all other rights in this article arereserved to Warren, Gorham & Lamont. Spe-cial thanks to Ron Dabrowski, an interna-tional tax principal in KMPGs WashingtonNational Tax Office for his assistance withthis article.

1 Perhaps youre also feeling nostalgic aboutbuying gas for $2.50 a gallon.

2 Notice 2006-85, IRB 2006-41, 677.3 Notice 2007-48, IRB 2007-25, 1248. One

company apparently got in under the wire,with a $12.5B buyback reported in the May30, 2007, WALL STREET JOURNAL. SeeWilliamM. Bulkeley, New Offshore Arm Drives

Repurchase, Easing Tax Burden, at A4. Agreat example of the maxim that he whohesitates is lost (from Cato in 1713, bythe English poet Joseph Addison).

4 Notice 2008-10, IRB, 2008-10, 277.5 A D reorganization is a transfer by a corpo-

ration of all or part of its assets to anothercorporation if immediately after the transfer,the transferor is in control of the cor-poration to which the assets are transferred;

but only if, in pursuance of a plan, stock orsecurities of the corporation to which theassets are transferred are distributed in atransaction which qualifies under Code Sec.354, 355 or 356. Control for a nondivisiveD reorganization is at least 50 percent (voteor value), rather than the 80 percent votereferenced in Code Sec. 368(c) for divisive

D reorganizations.6 W.L. Morgan, 33 TC 30, Dec. 23,789 (1959),

revd, CA-3, 61-1 USTC 9317,288 F2d 676,cert. denied, SCt, 368 US 836, 82 SCt 32(1961).

7 Rev. Rul. 70-240, 1970-1 CB 81.8 Rev. Rul. 2004-83, IRB 2004-32, 157. Rev.

Rul. 2004-83, Situation 1 addresses a con-solidated group, where Code Sec. 304 isinapplicable pursuant to Reg. 1.1502-80(b).Situation 2, however, provides that P, S and Tare not members of a consolidated group. SeealsoH.R. REP. NO. 98-432, Part II, 1249 (1984)and Rev. Rul. 67-274, 1967-2 CB 141.

9 Reg. 1.368-2T(l)(2)(i). The target is thendeemed to distribute the nominal share

(along with the boot) to its shareholders.Where appropriate, the nominal share isdeemed to continue moving within thechains of ownership as necessary to reflectthe actual ownership of the selling andacquiring corporation.

10 A Cash D may have a number of applica-tions, in addition to repatriation. For ex-ample, a sale treated as a Cash D may (1)produce more beneficial foreign tax results(e.g., the buyer has a lower rate of withhold-ing tax under its tax treaty with the UnitedStates), or (2) permit a U.S. acquirer to pushdown debt of a recently acquired foreigntarget to a foreign acquirer.

11 Business purpose and offshore planning

would, of course, need to be analyzed. Ifthere is appreciation in the stock of CFC2,there is some uncertainty in the outcome.There is authority to suggest that, unlikeCode Sec. 304, the dividend is treated aspaid only out of the targets earnings andprofits (E&P). See American Manufacturing,55 TC 204, Dec. 30,399 (1970); Atlas Tool,70 TC 86, Dec. 35,124 (1978), affd, CA-3,80-1 USTC 9177,614 F2d 860, cert. de-nied, SCt, 449 US 836, 101 SCt 110 (1980).However, the IRS has taken the position theE&P of both companies should be taken intoaccount in a Cash D. See J.E. Davant, 43 TC540, Dec. 27,223 (1965), affd in part andrevd in part, CA-5, 66-2 USTC 9618,366

F2d 874, cert. denied, SCt, 386 US 1022,87 SCt 1370 (1967), and Rev. Rul. 70-140,1970-1 CB 73.

12 For a more comprehensive description ofNotice 2008-10, seeHal Hicks and David

J. Sotos, The Empire Strikes Back (Again)Killer Bs, Deadly Ds and Code Sec. 367As the Death Star Against the RepatriationRebels, INTERNATIONAL TAX J., MayJune2008, at 37.

ENDNOTES


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Anti Deferral and Anti Tax Avoidance August2010

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