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Temporary relief for CFC’s inventory moved to U.S. to escape hurricane damage

In a Notice, IRS has provided relief to certain controlled foreign corporations (CFCs) that may need to transport property described in Code Sec. 1221(a)(1) (“section 1221(a)(1) property,” i.e., inventory-type property) located in areas affected by Hurricane Irma and Hurricane Maria to the U.S. for safekeeping. A CFC will not be treated as holding U.S. property for purposes of Code Sec. 956 for such property for tax year quarters of a CFC ending on or after Sept. 5, 2017 and on or before Jan. 31, 2018.

Background. In general, U.S. shareholders of a foreign corporation are not subject to U.S. taxation on the income of the foreign corporation until an actual dividend is remitted by the foreign corporation to the U.S. shareholders. However, different rules apply to U.S. shareholders of a CFC.

A CFC is defined in Code Sec. 957(a) as any foreign corporation if more than 50% of the total combined voting power of all classes of stock entitled to vote, or more than 50% of the total value of the stock of the corporation, is owned directly, indirectly, or constructively by U.S. shareholders on any day during the tax year of the foreign corporation. A U.S. shareholder, in turn, is any U.S. person who owns, directly, indirectly, or constructively 10% of more of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. (Code Sec. 951(b))

Code Sec. 951(a)(1) requires that a U.S. shareholder owning CFC stock on the last day of the CFC’s tax year include in gross income (among other things) “the amount determined under Code Sec. 956 with respect to such shareholder for such year.” Under Code Sec. 956(a), the amount determined under Code Sec. 956 with respect to a U.S. shareholder is the lesser of:

1. 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 controlled foreign corporation as of the close of each quarter of such tax year, over (B) the amount of earnings and profits described in Code Sec. 959(c)(1)(A) with respect to such shareholder; or
2. such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation.

Code Sec. 956(c) defines U.S. property generally to include tangible property located in the U.S.

Section 1221(a)(1) property (whether or not connected with his trade or business) is the stock in trade of the taxpayer or other property of a kind which would properly be included in the taxpayer’s inventory if on hand at the close of the tax year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. (Code Sec. 1221(a)(1))

Relief provision. IRS recognizes that the damage caused by Hurricane Irma and Hurricane Maria has imperiled section 1221(a)(1) property located in affected areas.

To facilitate the safekeeping of such section 1221(a)(1) property, Notice 2017-55 provides that for purposes of Code Sec. 956, a CFC will not be treated as holding U.S. property as a result of holding section 1221(a)(1) property located in the U.S., if such property was located, on or before Sept. 5, 2017 in an area identified by the Federal Emergency Management Agency (FEMA) as subject to a major disaster or emergency declaration, and such property was transported to the U.S. for temporary storage for safekeeping in anticipation of, or as a result of, Hurricane Irma.

Notice 2017-55 also provides that, for purposes of Code Sec. 956, a CFC will not be treated as holding U.S. property as a result of holding section 1221(a)(1) property located in the U.S., if such property was located, on or before Sept. 17, 2017, in an area identified by FEMA as subject to a major disaster or emergency declaration, and such property was transported to the U.S. for temporary storage for safekeeping in anticipation of, or as a result of, Hurricane Maria.

References: For CFC’s investment in U.S. property being taxed to its U.. shareholders, see FTC 2d/FIN ¶  O-2760  et seq.; United States Tax Reporter ¶  9564.

Notice 2017-55, 2017-42 IRB

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