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Anti-Deferral and Anti-Tax Avoidance


By Peter A. Glicklich and Candice M. Turner

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

overeign wealth funds (SWFs) are governmental investment vehicles, often funded with foreign exchange assets, and managed separately from the ofcial reserves of a monetary authority.1 They have recently attracted the attention of Congress and the imagination of the public press.2 This attraction may be the result of several factors, including an increase in commodity prices, growth in the size and public nature of SWF investments, and the recent U.S. credit crunch. In any event, Senators Baucus and Grassley of the Committee on Finance have requested the Joint Committee on Taxation [to] describe and [to] analyze the history, current rules, and policy underpinnings of the U.S. tax rules applicable to U.S. investment by foreign governments, including investments made by Sovereign Wealth Funds.3 They indicated that we ought to have a clear understanding of the U.S. tax rules that apply to these investments, how those rules compare to those that apply to non-governmental foreign investors, and how other countries tax these investments.4 Given the economic and political climate confronting SWFs today, it may be time for the United States to consider harmonizing the foreign governmental exemption found in Code Sec. 8925 and the U.S. treatment of tax-exempts under the unrelated business income tax (UBIT).6

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

Foreign Governmental Exemption in Code Sec. 892


The governmental exemption, based upon comity and concepts of sovereign immunity, rst appeared

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in U.S. tax legislation in 1917, and covered only certain investment income. Code Sec. 892(a)(1) still contains only a limited exemption for certain investment income earned by foreign governments. Code Sec. 892 was signicantly narrowed in by the Tax Reform Act of 1986 (TRA); temporary regulations published in 1988,7 with minor exceptions, remain effective today.8 obligations of the foreign government to participants under the plan, rather than inuring to the benet of a 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) nancial instruments held in the execution of governmental nancial or monetary policy, and (3) bank deposits.14 Income derived from any other sources is not exempt.15 The term other securities includes any evidence of indebtedness, thereby extending the exemption to all interest income, possibly excepting interest on open account indebtedness not evidenced in writing.16 Income from a nancial instrument is exempt under this rule only if implementation of governmental nancial or monetary policy is the primary purpose for holding the instrument.17 The term nancial instruments includes forward, futures and option contracts in any currency and currency swap agreements, but not currency itself unless it is held by a foreign central bank of issue.18 The exemption also covers gains on sales of stocks, bonds or other securities, and income under agreements to loan securities to brokers for use in short sales, but explicitly does not cover gain from the sale of partnership or trust interests.19 Gains from the disposition of an interest in a controlled commercial entity (CCE), described below, are not exempt, nor are any income received by or from a CCE. Exclusion for Commercial Activities. Most importantly, Code Sec. 892 excludes income from commercial activities conducted anywhere in the world. Unlike the approach in the pre-TRA regulations, the temporary Treasury regulations do not use the trade or business standard of Code Sec. 864(b) for determining commercial activity. Rather, commercial activity includes any activity, unless otherwise excepted, which [is] ordinarily conducted by the taxpayer or by other persons with a view towards the current or future production of income or gain.20 The temporary treasury regulations specify several activities that do 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 of whether such activities constitute a trade or business for purposes of Code Sec. 864(b)); loans (unless made by a banking, nancing or similar business);

What Is a Foreign Government?


For purposes of the Code Sec. 892 exemption, a foreign government is dened in Temporary Reg. 1.892-2T by exclusion, and includes only integral parts and controlled entities of a foreign sovereign.9 An integral part of a foreign sovereign is any person or bodies of persons, organization, agency, bureau, fund, instrumentality or other body, however designated, that constitutes a governing authority of a foreign country.10 An individual sovereign, ofcial or administrator acting in his or her private or personal capacity, determined under a facts and circumstances analysis, is not an integral part of a foreign sovereign.11 Controlled entity is dened as an entity that is separate in form from a foreign sovereign or otherwise constitutes a separate juridical entity, provided that it meets four additional criteria: (1) it is wholly owned and controlled by a foreign sovereign (directly or indirectly through one or more other controlled entities); (2) it is organized under the laws of the foreign sovereign by which it is owned; (3) its net earnings are credited to its own account or to other accounts of the foreign sovereign, with no part of its earnings inuring to the benet of any private person); and (4) its assets vest in the foreign sovereign upon dissolution.12 A controlled entity does not include partnerships or any other entity owned and controlled by more than one foreign sovereign. A separately organized pension trust also qualies as a controlled entity if it satises the following conditions: (1) the trust is established exclusively for the benet of employees or former employees of a foreign government or nongovernmental employees or former employees that perform or performed governmental or social services; (2) the funds comprising the trust are managed by trustees who are employees of, or persons appointed by, the foreign government; (3) the trust forming a part of the pension plan provides for retirement, disability or death benets in consideration for prior services rendered; and (4) income of the trust satises the

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minority interest which is sufciently large to achieve investments in nancial instruments held in the exeffective control, or through creditor, contractual or ecution of governmental nancial or monetary policy; regulatory relationships which, together with ownerholding net leases on real property (or land that is ship interests held by the foreign government, achieve not producing income); and holding bank deposits. effective control.23 Similarly, trading for a taxpayers own account is not a commercial activity, although investments made by a Temporary Reg. 1.892-5T(d)(2) requires tracing banking, nancial or similar business are considered nonexempt income received from a CCE. For example, to be commercial activities, even if the income would dividends received by a controlled entity (non-CCE) par21 not be effectively connected to the business. ent from a subsidiary CCE are not exempt in the hands of the parent; but the mere receipt of the dividend does No direct guidance exists as to the deductions that not taint the parent as being engaged in a commercial are available to reduce gross income from a comentity. Yet, the (non-exempt) mercial activity. dividend continues to be Controlled Commercial The temporary treasury regulations traced further upstream. Entities (CCEs). As noted In particular, dividends above, income received specify several activities that paid by the parent in this by or from a CCE is not exdo not constitute commercial example to a grandparent empt from tax under Code activities: investments in stocks, controlled entity (non-CCE) Sec. 892. The term con(or, to the ultimate foreign trolled commercial entity bonds and other securities, is dened in the Code to regardless of the volume of trading sovereign) are also not considered exempt under mean any entity engaged (unless undertaken as a dealer); Code Sec. 892, because in commercial activities commodities trading (regardless of they are considered as (whether inside or outhaving been paid traced to side the United States) if whether such activities constitute the CCE. As suggested in the foreign government a trade or business for purposes of the preceding paragraph, either (1) holds (directly Code Sec. 864(b)); loans (unless commercial activities of or indirectly) any interest a subsidiary CCE are not in such entity which, by made by a banking, nancing, or attributed to its parent corvalue or voting interest, similar business); investments in poration (and thus do not is fty percent or more of nancial instruments held in the taint the parent as a CCE). the total of such interests in such entity; or (2) holds execution of governmental nancial Commercial activities of one CCE are not attributed (directly or indirectly) any or monetary policy; holding net to a brother or sister corother interest in such entity leases on real property (or land poration that is commonly which provides the foreign controlled either. government with effective which is not producing income); 22 Other than in the control of such entity. and holding bank deposits. case of publicly traded In an unfortunate use of partnerships, however, terminology, the threshold commercial activities of a partnership will taint any for control of a CCE under the Code can be much partner controlled entities as CCEs. Similarly, under the less than needed to be an exempt controlled entity temporary regulations taint also can spread downstream under the temporary regulations. from a CCE to any lower tier controlled entity.24 Under the Code, an entity engaged in commercial activities will be treated as a CCE if a foreign governCoordination with FIRPTA ment also holds sufcient interests in the entity, even less than 50 percent of the stock, to give it effecGain from the sale of stock of a noncontrolled corpotive control over the entity. The temporary treasury ration by a foreign government generally is exempt regulations use the expanded standard of effective from tax under Code Sec. 892.25 The exemption for practical control (emphasis added) instead, and proincome from the sale of corporate shares applies vide that a foreign government can have such control even where the shares constitute stock in a U.S. real even where the foreign government holds only a property holding corporation (USRPHC). Stock of a

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USRPHC is generally treated as a United States real property interest (USRPI) gain from which is otherwise taxable to foreign investors under Code Sec. 897(a).26 The governmental exemption does not apply, however, to gain from the disposition of a direct interest in U.S. real estate.27 In other words, the Code Sec. 892 temporary regulations draw a distinction between gain from the disposition of USRPIs that comprise direct interests in real property described in Code Sec. 897(c)(1)(A)(i), which are taxable under Code Sec. 892, and gain from the disposition of USRPIs that comprise stock in a USRPHC described in Code Sec. 897(c)(1)(A)(ii), which are not taxable under Code Sec. 892. Temporary Reg. 1.892-5T(b) (1) provides that a USRPHC or foreign corporation that would have been a USRPHC if it were a U.S. corporation, and that meets the ownership test for a CCE, will be deemed to be a CCE. An interesting issue arises with respect to certain distributions from real estate investment trusts (REITs). Code Sec. 897(h)(1) treats any distribution from a noncontrolled REIT to a foreign corporation or other REIT that is attributable to gain from the sale or exchange of a USRPI as gain from the sale or exchange of a USRPI, effectively characterizing the amount distributed as being subject to FIRPTA following a taxable form of disposition of USRPIs by the REIT.28 Historically, many U.S. tax practitioners took the view that Code Sec. 892 exempted the distributions from a REIT as a dividend. This view was supported by the plain language of Code Sec. 892 and the temporary regulations which exempt from U.S. tax, income of a foreign government from an investment in stock (other than stock of a CCE).29 Similarly, practitioners historically did not consider Code Sec. 897(h)(1) to apply to a liquidating distribution from a noncontrolled REIT. Under Code Sec. 331, a shareholder recognized gain on a sale of stock, and that treatment was generally viewed to override the recharacterized rule in Code Sec. 897(h)(1).30 On June 13, 2007, however, the IRS issued Notice 2007-55.31 The Notice announced how future regulations will clarify that a distribution from a REIT that is attributable to gain recognized by a noncontrolled REIT on the sale of a USRPI prior to a liquidation, does not avoid application of Code Sec. 897(h)(1) and does not qualify for any Code Sec. 892 exemption, and so will be subject to tax under FIRPTA (and to FIRPTA withholding under Code Sec. 1445). The Notice states that the IRS will challenge under current statutory and regulatory provisions an assertion that 892 exempts from taxation distributions from a [REIT] that are treated under 897(h)(1) as gain recognized by a foreign government shareholder from the 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 their holdings of U.S. real property through private REITs long before issuance of the Notice.

Comparing Code Sec. 892 and UBIT Rules


The exemption under Code Sec. 892 is generally more limited than the exemption available to Code Sec. 501 tax-exempt organizations.32 Those organizations 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 unrelated business income tax (UBIT).33 The purpose of UBIT was reected in the Senate Report accompanying Code Sec. 511: the problem at which the tax on unrelated business income is directed is primarily that of unfair competition. The tax-free status of 501(c) organizations enables them to use their prots tax-free to expand operations, while their competitors can expand only with the prots remaining after taxes.34 In this regard, the exemptions under Code Secs. 501 and 892 are similar; both allow prot-making activities relevant to the purpose for which they are given an exemption (in the case of Code Sec. 892, governmental functions) but tax income not relevant to that purpose and activities that compete with other taxable businesses. UBIT, however, is imposed on a narrower base than income that is subject to tax after applying the Code Sec. 892 exemption. UBIT is imposed on the gross income derived by any organization from the unrelated trade or business regularly carried on by it subject to deductions.35 Initially, UBIT is limited to income from a trade or business, which is not dened in Code Sec. 511. As explained above, the governmental exemption only protects certain types of income from U.S. tax. Moreover, although the exemption exceptions in Code Sec. 892 were initially linked to income from a trade or business as dened in Code Sec. 864(b), that link was removed from the current regulations, expanding the exceptions to capture certain commercial income, whether or not from a trade or business.

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owns stock possessing more than 50 percent of the The exemption for U.S. tax-exempts generally exvote or value of all of the stock (actually or construccludes more and broader categories of income from tively, applying the rules of Code Sec. 318). Similar tax. Unlike the governmental exemption, other pasrules apply to payments from a partnership or other sive income, such as royalties, is also exempt from 36 controlled entity.41 UBIT. Additionally, income from several other types of activities, which would generally be subject to tax, Another important distinction between the govare also excluded from the reach of UBIT. Speciernmental exemption and that of U.S. tax-exempts cally excluded from unrelated trade or business, are is that a controlled entitys exemption automatically businesses staffed by volunteers, sales of donated merterminates under Code Sec. 892 if it earns even a chandise, businesses operated for the convenience of scintilla from a commercial activity, while a U.S. constituents, certain entertainment and recreational tax-exempts exemption is not. Thus, if a controlled activities at fairs and similar events, certain activientity of a foreign sovereign has commercial activties at conventions and trade shows, bingo games, ity anywhere in the world, it will be a CCE and will small hospitals providing no longer be exempt services for each other, from any U.S. income agricultural or horticultural tax. In addition, income Temporary Reg. 1.892-5T(b) organizations provision of from that entity could (1) provides that a USRPHC or benets or privileges for be subject to tax when foreign corporation that would their members, provisions paid to the hands of any of low cost articles in congovernmental parent, ashave been a USRPHC if it were a nection with solicitations suming it is U.S. source, U.S. corporation, and that meets of contributions, exchangeffectively connected, the ownership test for a CCE, will ing or renting mailing lists income. With respect to and uses of the names or U.S. tax-exempts, howbe deemed to be a CCE. acknowledgments of corever, the tax imposed porate sponsors.37 on unrelated business income generally has no impact on the treatment Of particular note, real property rents are generally of the entity as otherwise tax-exempt.42 exempt from UBIT, regardless of whether the management of the property would be an active trade or The treatment of income from subsidiaries or other business, provided the rents are not based upon the entities held by U.S. tax-exempts is also signicantly income or prots derived from the property.38 Gain different than the treatment of such income to foreign governments. If an exempt organization holds an from the sale or disposition of real property is also 39 interest in a passthrough entity, such as a partnership generally exempt from UBIT. Foreign governments, or common trust fund, the organizations share of on the other hand, are obviously subject to tax under the entitys income is treated as unrelated business FIRPTA on any income attributable to a U.S. real income only to the same extent that it would have property interest (other than gain from the disposibeen if the entitys activities and assets were earned tion of stock of noncontrolled USRPHC), even if the or held by the U.S. tax-exempt.43 In contrast, comincome is not derived from a trade or business.40 mercial activities of a partnership held by a controlled As in the case of the governmental exemption, entity of a foreign government are attributed to the income from dividends and interest and gain from foreign government and that attribution causes a the sale of stock, is generally not subject to tax under controlled entity that is a partner to be treated as a the UBIT rules either. With respect to investments in CCE, effectively tainting all of its other income under subsidiaries, the exemptions differ: Dividends and Code Sec. 892 and possibly subjecting the sale of the interest are eligible for exemption under Code Sec. partnership interest to U.S. tax.44 892 if the sovereign owns less than 50 percent of the stock of the payor by vote or value, and if the payor is As noted previously, the Code Sec. 892 rules not otherwise a CCE. By contrast, Code Sec. 512(b) with respect to investments in real estate are also (13) subject to UBIT only interest, royalties and rents more restrictive than under the UBIT rules. Income (but not dividends) received from certain controlled from leasing real property is generally considered a entities; and for this purpose, a corporation is connonexempt commercial activity under Temporary sidered controlled only if the exempt organization Reg. 1.892-4T(c) unless the real property produces

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income only from a net lease. Furthermore, income from sales of real property is not exempt under Code Sec. 892.45 Under UBIT, rental income generally is exempt from classication as an unrelated trade or business unless it is based on personal property or business prots.46 Gains and losses from the sale of property, including real property, are generally exempt from UBIT unless it is inventory.47 While the UBIT regime generally provides a broader exemption than Code Sec. 892, it is more restrictive in at least one respect: the exclusion for tax-exempts does not cover income from debt-nanced property.48 Generally, property is debt-nanced property if it is held to produce income and acquisition indebtedness with respect to the property exists at any time during the tax year (or, in the case of a disposition, at any time during the preceding 12 months).49 There is no similar rule under Code Sec. 892. U.S. pension plans are generally exempt from the debt-nanced limitation.50 If one or more qualied pension plans owns too much stock of a REIT, however, dividends received from the REIT are treated as income from an unrelated business to the extent that the REIT has net income from an unrelated trade or business.51 Pursuant to Code Sec. 856(h)(3)(C), if a pension fund holds more than a 10-percent interest in any pension held REIT at any time during the year, the REIT will be treated as having for such taxable year gross income from unrelated trade or business in an amount which bears the same ratio to the aggregate dividend paid as the gross income of the REIT for the REIT year from unrelated trades or businesses, bears to the gross income of the REIT for the year.52 A REIT is considered to be a pension-held REIT for this purpose if any pension plan holds more than 25 percent of the REIT interests or pension funds holding at least 10 percent of the REIT hold more than 50 percent of the REIT in the aggregate. However, income earned by the REIT, which would not have been UBIT if earned directly by the U.S. pension plan, is not subject to this UBIT deeming rule. Despite their divergence, the UBIT rules have some application to the governmental exemption in the area of pension funds.53 A pension fund that is operated by and for the benet of the employees of a foreign government, as described in Temporary Reg. 1.892-2T(c), will not be treated as a controlled commercial entity if it solely earns income that would not be treated as UBIT under Code Sec. 512(a)(1) if the fund were a qualied trust described in Code Sec. 401(a).54 The UBIT rules appear to have no other direct application to controlled entities other than pension funds; instead, income controlled entities will be subject to U.S. tax and not exempt under Code Sec. 892 if such controlled entities engage in commercial activity. The legislative history of Code Sec. 892 and the temporary Treasury regulations offer no rationale for the variance between UBIT and income of a foreign government from commercial activity.

Conclusion
The justication for the exemption from U.S. taxation of foreign sovereigns is grounded in fundamental notions of comity and sovereign immunity, which, as interpreted for over 30 years, do not extend to commercial activities, to avoid providing an unfair comparative advantage. The same rationale applies to unrelated trade or business income of an otherwise tax-exempt U.S. organization (whether religious, educational, labor, social or pension fund). Strong parallels would appear to exist between the rationale for exemption of both groups. Yet, the Code Sec. 892 exemption is generally more narrow, but in limited circumstances, more broad, than the rules applicable to the unrelated business income of U.S. tax-exempt organizations. Perhaps it is time to broaden the Code Sec. 892 exemption and harmonize it with the exemption applicable to tax-exempt organizations. In its deliberations, Congress might to be reminded of the preference for a balanced and rational approach to equating the taxation of the commercial income of both foreign governments and tax-exempt organizations, since the exemptions both carry similar potential competitive advantages (over taxable U.S. businesses). Harmonization could also improve the international competitiveness of the U.S. capital markets, assist in reducing the United Statess balance of payment decit, and improve U.S. capital import and capital export neutrality.

ENDNOTES
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Department of Treasury, Appendix 3 Sovereign Wealth Funds, June 13, 2007. Subsequent to the draft of this article, the Joint Committee on Taxation and the New

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

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

Continued on page 48

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of a U.S. real property interest de ned in 897(c)(1)(A)(i) shall in no event qualify for exemption under 892. Reg. 1.892-3T(a)(1). Code Sec. 512(b)(3). Code Sec. 512(b)(5). Code Sec. 514. Code Sec. 514(b)(1). Code Sec. 514(c)(9). Code Sec. 856(h)(3)(C). Id. Often, the practical implications of the availability of Code Sec. 892 exemption to pension funds are small because of the availability for exemption under tax treaties with the United States. However, related party dividends and interest are generally excluded from treaty benefits and there is usually no exemption from FIRPTA for interests in noncontrolled USRPHCs. Temporary Reg. 1.892-5T(b)(3). The temporary Treasury regulation provides further, however, that even if a pension trust earns no income that would be UBIT (and thus is not a controlled commercial entity), its income from commercial activities will not be exempt under Code Sec. 892. Because the income is of the type described in Temporary Reg. 1.892-3T and is not income from commercial activities as described in Temporary Reg. 1.892-4T. Temporary Reg. 1.892-5T(b)(3).

ings and prots amount as relates to the stock of CFC1.

46 47 48 49 50 51 52 53

Conclusion
The demise of the Killer B may have increased the spotlight on Cash Ds as a potential repatriation device. The Cash D is arguably more limited in its scope than the Killer B, requiring a U.S. multinational to have one or more well-placed, high basis CFCs (perhaps from a direct or indirect acquisition) for the structure to makes sense. Hence, the Cash D may never attain the iconic status of the Killer B (and the legend of mega-billion dollar repatriation transactions that are prominently reported in the WALL STREET JOURNAL). However, the foreign-to-foreign Cash D has already established itself as a worthy planning tool when a U.S. multinational is evaluating its repatriation alternatives.
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ENDNOTES
This article contains material described in U.S. TAXATION OF INTERNATIONAL MERGERS, ACQUISITIONS AND JOINT VENTURES by Dolan, Dabrowski, Jackman and Tretiak Warren, Gorham & Lamont, and is reprinted with permission; all other rights in this article are reserved to Warren, Gorham & Lamont. Special thanks to Ron Dabrowski, an international tax principal in KMPGs Washington National Tax Ofce for his assistance with this article. Perhaps youre also feeling nostalgic about buying gas for $2.50 a gallon. Notice 2006-85, IRB 2006-41, 677. Notice 2007-48, IRB 2007-25, 1248. One company apparently got in under the wire, with a $12.5B buyback reported in the May 30, 2007, WALL STREET JOURNAL. See William M. Bulkeley, New Offshore Arm Drives Repurchase, Easing Tax Burden, at A4. A great example of the maxim that he who hesitates is lost (from Cato in 1713, by the English poet Joseph Addison). Notice 2008-10, IRB, 2008-10, 277. A D reorganization is a transfer by a corporation of all or part of its assets to another corporation if immediately after the transfer, the transferor is in control of the corporation to which the assets are transferred;

Reg. 1.1248-8(c) provides special rules for tracking attributable earnings under Code Sec. 1248 in CFC-to-CFC liquidations. These special rules generally only allow E&P to tier up for Code Sec. 1248 purposes upon the liquidation to the extent such E&P would be included in USPs Code Sec. 1248 amount under Code Sec. 1248(c)(2).17 As noted above, the 60 of carryover CFC2 E&P would appear to be included in USPs Code Sec. 1248(c)(2) calculation. Therefore, such earnings should carry up to CFC1 and should go into CFC1s Code Sec. 1248 earnings pool for purposes of Code Sec. 1248 and for purposes of determining the USPs section 1248 amount and the all earn-

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but only if, in pursuance of a plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualies under Code Sec. 354, 355 or 356. Control for a nondivisive D reorganization is at least 50 percent (vote or value), rather than the 80 percent vote referenced in Code Sec. 368(c) for divisive D reorganizations. 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). Rev. Rul. 70-240, 1970-1 CB 81. Rev. Rul. 2004-83, IRB 2004-32, 157. Rev. Rul. 2004-83, Situation 1 addresses a consolidated group, where Code Sec. 304 is inapplicable pursuant to Reg. 1.1502-80(b). Situation 2, however, provides that P, S and T are not members of a consolidated group. See also H.R. REP. NO. 98-432, Part II, 1249 (1984) and Rev. Rul. 67-274, 1967-2 CB 141. Reg. 1.368-2T(l)(2)(i). The target is then deemed to distribute the nominal share (along with the boot) to its shareholders. Where appropriate, the nominal share is deemed to continue moving within the chains of ownership as necessary to reect the actual ownership of the selling and acquiring corporation. A Cash D may have a number of applications, in addition to repatriation. For example, a sale treated as a Cash D may (1) produce more benecial foreign tax results (e.g., the buyer has a lower rate of withholding tax under its tax treaty with the United States), or (2) permit a U.S. acquirer to push down debt of a recently acquired foreign target to a foreign acquirer. Business purpose and offshore planning would, of course, need to be analyzed. If there is appreciation in the stock of CFC2, there is some uncertainty in the outcome. There is authority to suggest that, unlike Code Sec. 304, the dividend is treated as paid only out of the targets earnings and prots (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. denied, SCt, 449 US 836, 101 SCt 110 (1980). However, the IRS has taken the position the E&P of both companies should be taken into account in a Cash D. See J.E. Davant, 43 TC 540, Dec. 27,223 (1965), affd in part and revd 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. For a more comprehensive description of Notice 2008-10, see Hal Hicks and David J. Sotos, The Empire Strikes Back (Again) Killer Bs, Deadly Ds and Code Sec. 367 As the Death Star Against the Repatriation Rebels, I NTERNATIONAL T AX J., May June 2008, at 37.

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