IRS Provides Temporary Relief under Subpart F in Response to the Liquidity Crisis

Excerpt from Practical US/International Tax Strategies by Edward Tanenbaum and Diana Wessells (Alston & Bird LLP)

Treasury and the IRS issued Notice 2008-91, which provides temporary and limited relief to a particular aspect of Section 956, in connection with the current liquidity crisis. Under Sections 951 and 956, a U.S. shareholder of a controlled foreign corporation (CFC) is subject to tax on the amount equal to the lesser of (1) the U.S. 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, less the amount of earnings and profits previously included in the U.S. shareholder’s gross income, or (2) the U.S. shareholder’s pro rata share of the applicable earnings of the CFC. The effect of these provisions is to treat the U.S. shareholders of the CFC as receiving the amount invested in U.S. property as a constructive dividend. Section 956 is consistent with the other provisions of subpart F insofar as it is intended to prevent the tax-free repatriation of earnings.

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