Last week the IRS released Chief Counsel Advice 201420017. The IRS addressed the issue of a foreign partnership loaning money to one of its partners, a controlled foreign coporation ("CFC"), and the CFC partner loaning the amount to its U.S. Parent.
U.S. Parent indirectly wholly owned CFC Partner 1 and CFC Partners. DE 1, a disregarded entity of FPS, a foreign partnership, made a loan of cash to CFC Partner 1. CFC Partner 1 then loaned that amount to US Parent. US Parent included in its income the Code §956 amount related to the loan from CFC Partner 1. CFC Partner 1 had limited earnings and profits, so the amount of the inclusion was limited to CFC Partner 1's earnings and profits.
The IRS argued that funneling the loan through the specific CFC partner with limited earnings and profits was done to limit the amount of the Code §956 inclusion. Applying Treas. Reg. §1.956-1T(b)(4), the IRS opined that the loan to U.S. Parent was deemed to have been made by the foreign partnership. Consequently, each of the CFC Partners was deemed to hold an interest in the U.S. property equal to its interest in the foreign partnership. U.S. Parent's Code §956 inclusion was therefore not limited to CFC Partner 1's earnings and profits.
An image of the chart is shown below and the chart can be viewed as a PDF file here: CCA 201420017.
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