Comments on proposed earnings stripping regulations under Section 163(j).

On June 12, 1991, the Internal Revenue Service issued proposed regulations under section 163(j) of the Internal Revenue Code, relating to the deductibility of interest paid by a U.S. affiliate to a related entity where no or very little tax is paid (so-called earnings stripping). The regulations were published in the Federal Register on June 18, 1991 (56 Fed. Reg. 27907), and in the July 22, 1991, issue of the Internal Revenue Bulletin (1991-29 I.R.B. 19). A public hearing on the regulations was held on September 25, 1991.

For simplicity's sake, the proposed regulations are referred to as the "proposed regulations"; specific provisions are cited as "Prop. Reg. [section]." References to page numbers are to the proposed regulations (and preamble) as published in the Internal Revenue Bulletin.

BACKGROUND

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 4,700 members represent more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable use to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations relating to the deductibility of interest paid by a U.S. affiliate to a related entity under section 163(j) of the Code.

SPECIFIC COMMENTS

1. Prop. Reg. [section] 1.163(j)-2(e):

Interest Equivalents

Section 163(j) was added to the Code by the Omnibus Reconciliation Act of 1989 to prevent the possible erosion of the U.S. tax base by the use of excessive deductions for interest paid by a taxable corporation to a tax-exempt related party. This so-called earnings stripping provision limits the U.S. interest deduction when (i) a corporation's debt-to-equity ratio exceeds 1.5 to 1; (ii) the interest is paid to a related party who is exempt from U.S. taxation; and (iii) the corporation has "excess interest expense," i.e., its net interest expense exceeds 50 percent of its adjusted taxable income plus the excess limitation carryforward.

Section 163(j)(B) of the Code provides that "net interest expense" may be adjusted according to regulations issued by the Secretary of the Treasury. The legislative history of the provision states that --

[T]he conferees understand that regulations could reduce net interest expense where all or a portion of income items not denominated as interest are appropriately characterized, in the Treasury's view, as equivalent to interest income The conferees expect that an amount would not be so characterized unless it predominantly reflects the time value of money or is a payment in substance for the use of forbearance of money. Similarly, the conferees understand that Treasury might choose to increase net interest expense, under regulations, by all or a portion of expense items not denominated [as] interest but appropriately characterized as equivalent to interest expense.

H.R. Rep. No. 101-386, 101st Cong., 1st Sess. 566-67 (1989) (hereinafter cited as "Conference Report"). Prop. Reg. [section} 1.163(j)-2(e)(3) reserves the issue of interest equivalents. In the preamble to the proposed regulations, the IRS announced its intention to treat interest equivalents as interest for purposes of section 163(j) and requested comments on the scope and operation of this rule. 1991-291 I.R.B. at 20.

TEI recommends that interest equivalents be limited to those delineated in the Conference Report: items that predominantly reflect the time value of money or in substance represent payments for the use or forbearance of money. These are essentially the criteria used in Temp. Reg. [section] 1.954-2T(h)(1) for determining income equivalents under the foreign personal holding company rules and in Temp. Reg. [section] 1.861-9T(b)(1)(i) for determining interest equivalents under the interest allocation rules. Adoption of a broader rule would add unnecessary complexity to the area without furthering any legitimate tax policy goal.

Accordingly, interest equivalents should not include rents or royalties from the use of property unless part of the financing structure is properly characterized by the parties as a loan (rather than as a lease or license). Such payments are not equivalent to interest. Nor should fees for services be treated as interest equivalents unless they are part of a financing arrangement in which the taxpayer's payments reflect the time value of money or the use or forbearance of money. In this regard, Prop. Reg. [section] 1.163(j)-2(e)(6) characterizes substitute payments under section 1058 security transfers as an interest equivalent, as does Temp. Reg. [section] 1.954-2T(h)(1). This conflicts with Prop. Reg. [section] 1.1058-1(d) which properly treats a substitute payment as a fee for the temporary use of property, i.e., a payment in the nature of a rental. We suggest that substitute payments -- especially substitute payments for dividends on stock transferred in a section 1058 transaction -- should not be categorically treated as interest.

2. Prop. Reg. [section] 1.163(j)-2(f):

Adjusted Taxable Income

a. Accounts Payable and Receivable. In enacting the earnings striply provision, Congress was primarily concerned with the thin capitalization of corporations. Specifically, concern was expressed that the original House provision was unduly expansive in that it --

would deny interest deductions where net interest expense exceeds the income threshold not because the corporation was thinly capitalized but because of year-to-year changes in profitability or in the amount of depreciation, amortization, or depletion.

Conference Report at 567. To address this concern, Congress provided for adjustments to taxable income for certain non-cash items to ensure that they did not "adversely affect interest deductibility." Conference Report at 567. Section 163(j)(6)(A) of the Code therefore defines "adjusted taxable income" (ATI) as taxable income computed without regard to (i) net interest expense, (ii) net operating losses, and (iii) depreciation, amortization, or depletion. The statute grants authority to the Secretary to prescribe other adjustments.

In addition to the mandatory adjustments provided for in the statute, Prop. Reg. [section] 1.163(j)-2(f) requires adjustments to a taxpayer's taxable income for items such as the annual differences in accounts payable and receivable. The preamble to the proposed regulations states that the purpose of the additional adjustments is "to more closely reflect the cash flow of the corporation." 1991-29 I.R.B. at 21.

The proposed regulations essentially place the taxpayer on the cash method of accounting for purposes of computing ATI. A cash-based computation of income is not, however, a more accurate measure of income than the accrual method already employed by taxpayers. [1] The cash method would also increase the magnitude of year-to-year fluctuations in income -- a circumstance that Congress specifically sought to avoid. There is no logical link between the congressional intent to target thinly capitalized corporations and the mandatory use of the cash method of accounting.

Moreover, the proposed regulations impose substantial administrative burdens on taxpayers by providing for the inclusion of items that are not normally calculated or used for any other purpose. They essentially require accrual-method taxpayers to set up and maintain a separate account for receivables and payables that are included in corporate taxable income. TEI submits that such a burden is unwarranted.

We recommend that the adjustments for receivables and payables be eliminated in the final regulations.

b. Depreciation, Amortization, or Depletion Adjustments. Prop. Reg. [section] 1.163(j)-2(f)(3)(i) provides that, with respect to the sale or disposition of property, ATI is reduced by the amount of any depreciation, amortization, or depletion allowed or allowable for taxable years beginning after July 10, 1986, with respect to such property. This reduction is required whether or not any actual gain results from such sale or disposition. The purpose of this adjustment is apparently to recapture upon sale the depreciation previously ignored in the computation of ATI under section 163(j)(6)(A)(i)(III) of the Code and Prop. Reg. [section] 1.163(j)-2(f)(2)(iii).

We submit that the adjustment under Prop. Reg. [section] 1.163(j)-2(f)(3)(i) is inconsistent with section 163(j)(6)(A) of the Code, which requires that depreciation be excluded from income for purposes of calculating the limitation under section 163(j). The statute makes no provision for further adjustments with respect to such property or to the recapture of such adjustments once made. As previously stated, the depreciation adjustments was intended to ensure that the "resulting non-cash deductions do not adversely affect interest deductibility." Conference Report at 567.

In enacting section 163(j)(6)(A), Congress did not merely defer the recognition of depreciation to the date of sale. Rather, it completely removed the effect of such a deduction on earnings. This intention is manifest in the legislative history which focuses on congressional concerns to reduce the effects of year-to-year fluctuations in profitability and non-cash deductions such as depreciation. Conference Report at 567. Recognizing the effects of economic depreciation entirely in the year of sale is distortive to income. Moreover, the proposed regulations would require the taxpayer to track post-1986 asset basis -- a requirement that is not imposed for any other purpose under the Code. Consequently, we recommend that the provision for depreciation, amortization, or depletion recapture be deleted from the final regulations.

c. LIFO Recapture. Prop. Reg. [section] 1.163(j)-2(f)(3)(viii) requires an adjustment for the decrease in the LIFO recapture amount (as defined in section 312(n)(4)(B)) between the end of the preceding taxable year and the end of the current taxable year. We recommend the deletion of this adjustment because such changes do not reflect cash flow. If the adjustment is retained, it should be clarified to state whether a reduction in the LIFO recapture amount will be permitted if it dips below the base-year amount and how much the reduction will be in such circumstances.

d. Additional Adjustments. In addition to the adjustments listed in Prop. Reg. [section] 1.163(j)-2(f), we recommend that a positive adjustment be required for dividends paid and actual capital investment (in excess of depreciation or amortization deductions for the year). The term "actual capital investment" should include shares of stock that are acquired from third parties for cash. Such adjustments would reflect the cash available to the taxpayer.

3. Prop. Reg. [section] 1.163(j)-2(f)(4):

Adjusted Taxable Losses

Under section 163(j)(2)(B)(ii), a taxpayer's excess limitation for any taxable year may be carried over to the three succeeding years, thereby reducing any excess interest expense in those years. Prop. Reg. [section] 1.163(j)-2(f)(4) establishes rules governing the effect of adjusted taxable losses. Subparagraph (ii) of the regulations provides that an adjusted taxable loss reduces the excess limitation carryforward, rather than the taxpayer's excess interest expense. Thus, a taxpayer will apparently lose its excess limitation carryforward in a year in which it does not have excess interest expense.

In a year in which an adjusted taxable loss occurs, ATI is deemed to be zero under Prop. Reg. [section] 1.163(j)-2(f)(4)(i). Any net interest expense is therefore "excess interest expense" (because 50 percent of zero is itself zero; the limitation on net interest expense is also zero under section 163(j)(2)B)(ii)). The adjusted taxable loss reduces the excess limitation in the later year and creates a more adverse effect than combining the two years. The effect of this provision is best illustrated by the following example:

Assume that A has an adjusted taxable loss for the year of $100, excess limitation carryforwards from prior years of $175, and net interest expense of $75. Under the proposed regulations, $100 of the carryforward is offset against the adjusted taxable loss. Net interest expense and excess interest expense are the same since the ATI is deemed to be zero, thereby offsetting the remaining $75 carryforward. Thus, the full $175 carryforward is used to offset only $75 of net interest expense.

Under this provision, the taxpayer is effectively penalized for incurring an adjusted taxable loss. This is contrary to the legislative history of the statute, which states:

Where profits are temporarily low relative to existing debt-service requirements, the corporation may receive deductions for net interest not only up to 50 percent of [the] current year's adjusted taxable income, but also up to the amounts of any excess limitation carried forward from the three prior years.

Conference Report at 567-68 (emphasis added). The computation of the excess limitation carryforward should be the same, without regard to whether the taxpayer has adjusted taxable income or loss. Consequently, under the foregoing example, $100 of excess limitation carryforward should be carried over into the next year. Subparagraph (ii) of Prop. Reg. [section] 1.163(j)-2(f)(4) should therefore be deleted.

4. Prop. Reg. [section] 1.163(j)-3(b):

Anti-Abuse Rule

Under section 163(j)(2)(A), the taxpayer's debt-to-equity ratio is determined as of the close of the taxable year (or any other day during the taxable year that the Secretary may prescribe). Prop. Reg. [section] 1.163(j)-3 establishes rules for the computation of the debt-to-equity ratio. Subparagraph (b)(4) of the regulation provides a special "anti-rollover" rule under which decreases in the taxpayer's aggregate debt during the last 90 days of the current taxable year are disregarded to the extent that the taxpayer's aggregate debt is increased during the first 90 days of the succeeding year. The rule thus acts as a one-way street: it can drive the debt-to-equity ratio up, but never down. TEI believes the rule is unwarranted.

There are many legitimate business reasons why a taxpayer may pay down its debt at year-end, but increase its debt during the next quarter. The actions are not undertaken as a tax-avoidance device, but rather represent sound debt management practices. Moreover, the anti-rollover rule could distort the debt-to-equity ratio by including the decreased debt in calculating the taxpayer's aggregate debt levels, but disregarding the decrease in any cash used to pay down that debt in the equity portion of the calculation. Finally, the regulations create severe administrative burdens for taxpayers who will be required to track liability increases and decreases on almost a daily basis during the 180-day period.

Thus, TEI believes the anti-rollover rule is ill-advised and should be eliminated. At a minimum, the IRS should establish a presumptive rule, thereby permitting taxpayers to show that the changes in debt levels were undertaken for valid business purposes. (2) This is the approach taken in computing the asset portion of the debt-to-equity ratio under Prop. Reg. [section] 1.163(j)-3(c)(5), and would be consistent with the approach the IRS has taken in other areas. See, e.g., Temp. Reg. [section] 1.884-1T(e)(3) (for purposes of the branch tax rules reductions in liabilities are disregarded where one of the principal purposes is to decrease artificially taxpayer's U.S. liabilities); Treas. Reg. [section] 1.1502-20(e)(1) ("anti-stuffing" rule only applies when transfer is "with a view" to avoid gain recognition).

5. Prop. Reg. [section] 1.163(j)-3(c):

Adjusted Stock Basis

Equity is defined in section 163(j)(2)(C) of the Code as the sum of a taxpayer's cash and the adjusted basis of its assets reduced by its debt. Under Prop. Reg. [section] 1.163(j)-3(c)(2), assets include the adjusted basis of stock of any corporation that is not an includible corporation under section 1504(b) of the Code. The final regulations should confirm that stock held in all corporations that are neither includible corporations nor affiliated group members under Prop. Reg. [subsection] 1.163(j)-5(a)(2) and (3) will be accorded the same treatment: the use of a stock basis rather than a look-through asset basis to measure equity.

6. Prop. Reg. [section] 1.163(j)-3(c)(5):

Anti-Stuffing Rule

The proposed regulations establish an anti-stuffing rule that is the obverse of the anti-rollover rule. Prop. Reg. [section] 1.163(j)-3(c)(5)(ii) provides that, for purposes of determining a taxpayer's equity, any transfer of assets made by a related person to the taxpayer during the last 90 days of the year shall be disregarded to the extent that there is a transfer of the same or similar assets by the taxpayer to a related person during the first 90-days of the succeeding year.

The anti-stuffing rule suffers from the same deficiencies that the rollover rule displays: excessive length and the inability to accommodate legitimate business transfers occurring around the end of the taxpayer's taxable year. The rule should be framed as a rebuttable presumption, thereby permitting the taxpayer to challenge any assumption that related party transfers are intended as abusive manipulations of the company's debt-to-equity ratio.

In addition, the anti-stuffing rule is too sweeping in its scope. As written, the rule applies to "any transfer of assets." Since Prop. Reg. [section] 1.163(j)-3(c)(1) can be construed to include money within the definition of "asset," the anti-stuffing rule arguably applies to year-end dividends paid to a non-includible parent company that, in turn, either pays dividends to its own parent company or contributes funds to a subsidiary that is unaffiliated with, but related to, the first payer under section 163(j). Dividend payment or contribution sequences among related parties established to meet business needs should not be so penalized. The rule should be modified to exclude dividends and contributions made in the normal course of business without an intent to thwart the restrictions of section 163(j).

7. Prop. Reg. [section] 1.163(j)-4:

Interest Not Subject to Tax

Prop. Reg. [section] 1.163(j)-4 specifies rules on the extent to which interest paid to certain entities (such as controlled foreign corporations, foreign personal holding companies, and passive foreign investment companies) is considered exempt from U.S. tax for purposes of the earnings stripping provision. The provision apparently includes interest meeting the 80-percent foreign business requirements of section 861(c)(1) of the Code. It is doubtful, however, that such interest was intended to be included within the scope of section 163(j). The focus of the special rules provided in Prop. Reg. [subsection] 1.163(j)-4(d)(1)(i), (2)(i), and (3)(i) -- and, indeed, that of section 163(j) as a whole -- is upon interest income generated in the United States and paid to a foreign entity. Section 861(a)(1)(A) interest, however, should not be considered exempt income since it is foreign-source income that is exempt from tax under subchapter N of the Code. The final regulations should provide an exemption for section 861(a)(1)(A) interest.

8. Prop. Reg. [section] 1.163(j)-5:

Affiliated Groups

a. Definition of Affiliated Group. Section 163(j)(6)(C) of the Code provides that all members of the same affiliated group are to be treated as one taxpayer. Under Prop. Reg. [section] 1.163(j)-5(a)(2), an "affiliated group" is defined as all members of an affiliated group of which the taxpayer is a member without regard to whether such affiliated group files a consolidated return. Prop. Reg. [section] 1.163(j)-5(a)(3)(i) provides that, if at least 80-percent of the total voting power and value of the stock of an includible corporation is owned, directly or indirectly, by another includible corporation, the first corporation is treated as a member of an affiliated group that includes the other corporation. The section 318 attribution rules apply to determine indirect stock ownership. Under the proposed regulations, two affiliated groups that are not qualified to file a consolidated return, but are owned by a common foreign parent, are treated as a single taxpayer for purposes of the earnings stripping provision.

We submit that the definition of affiliated group set forth in the proposed regulations is unduly broad. As the IRS observed in the preamble, the affiliated group rules are complex. 1991-29 I.R.B. at 22. They also create enormous administrative burdens, especially for non-consolidated corporations. The general rules of Prop. Reg. [subsection] 1.163(j)-2 and 1.163(j)-3 appear adequate to address the concerns evinced by the earnings stripping provision. Rather than promulgating a general rule that would subject all taxpayers to unnecessary compliance burdens, the Treasury and IRS should use their authority under section 163(j)(7) to specifically target abusive situations. We therefore recommend that the final regulations provide that non-consolidated groups will not be treated as a single taxpayer under the earnings stripping provision.

b. Deferred Intercompany Gain and Loss. Prop. Reg. [section] 1.163(j)-5(b)(4) requires an adjustment in computing ATI for deferred intercompany gain, without providing a corresponding positive adjustment for intercompany loss. Similarly, Prop. Reg. [section] 1.163(j)-5(d)(3)(iii) provides for an adjustment for deferred intercompany gain in computing equity without a matching adjustment for deferred loss.

Fairness dictates that positive adjustments for deferred intercompany loss be permitted in the final regulations. Consistency is needed to protect a taxpayer from the whipsaw that results if deferred intercompany gains, but not deffered losses, are accounted for in computing ATI or the debt-to-equity ratio. We recommend that the final regulations be modified to treat deferred intercompany gains and losses consistently.

9. Prop. Reg. [section] 1.163(j)-5(e):

Fixed Stock Write-Off Method

Prop. Reg. [section] 1.163(j)-5(e) provides special rules to address the distortions in the debt-to-equity ratio that may occur in a qualified stock purchase for which no section 338 election is made. Under the proposed regulations, the purchasing corporation may elect to amortize the adjusted basis of the target's stock over a fixed period. In the preamble, the IRS requested comments on the application of this fixed stock write-off-method to nontaxable acquisitions of stock or assets. 1991-29 I.R.B. at 22.

We commend the IRS and Treasury for recognizing the distortions that may arise from a stock purchase. We suggest, moreover, that the fixed stock write-off method be expanded to include other stock purchases. As currently drafted, the method is available only with respect to companies 80 percent of the stock of which is acquired by its new parent within a 12-month period. We believe that the method should be available for all stock purchases that result in stock ownership meeting the 80-percent vote and value test of section 1504(a)(2) of the Code, regardless of the percentage of stock acquired.

Extension of the fixed stock write-off method to such purchases need not entail any burdensome segregation of stock and asset bases where less than the whole of the target affiliate is acquired. In such cases, a reasonable method could be adopted to avoid duplicate inclusions and segregate the stock basis for a separate write-down. We believe this would effectively deal with any acquisition in which the stock basis is determined by purchase.

10. Prop. Reg. [section] 1.163(j)-7:

Interaction with Uniform

Capitalization Rules

Prop. Reg. [section] 1.163(j)-7 provides rules coordinating the interest deferral rules with other provisions affecting the computation of deductible interest expense. Subparagraph (b)(4) of the proposed regulations requires the capitalization of interest before application of the section 163(j) regulations. In the preamble, the IRS stated that regulations under section 263A(f) will provide that (i) exempt related person interest expense attributable to traced debt will be capitalized; and (ii) with respect to interest not attributable to traced debt, non-exempt related person interest will be capitalized before exempt interest. 1991-29 I.R.B. at 23.

TEI commends the IRS for its common-sense approach to the interaction of sections 163(j) and 263A. We believe that the simplification achieved through this provision is a good example of how the "rough justice" concept should work. We agree that any other approach would increase complexity. We fail to see, however, the policy justification for granting "priority" to non-exempt interest over exempt interest. Consequently, we recommend that all interest not attributable to traced debt be aggregated for purposes of the capitalization rule. Thus, a ratable portion of both exempt and nonexempt interest should be capitalized.

11. Prop. Reg. [section] 1.163(j)-9:

Loan Guarantees

Prop. Reg. [section] 1.163(j)-9 reserves the treatment of loan guarantees under the statute. In the preamble, the IRS requested comments on this issue. 1991-29 I.R.B. at 23.

The Conference Report on the provision discusses the use of loan guarantees as follows:

Some have argued that the House report's discussion of parent-guaranteed debt would potentially have made ordinary third-party financing transactions subject to the disallowance rule, in view of the common practice of having parents guarantee that debt of their subsidiaries in order to reduce the cost of third-party borrowings. The conferees intend to clarify that the provision is not to be interpreted generally to subject third-party interest to disallowance under the rule whenever such a guarantee is given in the ordinary course.

Conference Report at 566. Treasury was not precluded, however, from disallowing the interest on third-party debt where the use of the guarantee is "a device for avoiding the operation of the earnings stripping rules. . . ." Id.

TEI suggests that loan guarantees not be viewed as a tax-avoidance device where the lender looks to the borrowing subsidiary, rather than the parent-guarantor, for repayment of the loan. Thus, loan guarantees that merely secure more favorable interest rates or other loan terms would not subject the interest to the earnings stripping rules. This determination should be based on the facts and circumstances that exist at the time the guarantee is made. [3]

12. Prop. Reg. [section] 1.163(j)-10:

Effective Dates and

Transitional Rules

Prop. Reg. [section] 1.163(j)-10 provides effective dates, transitional rules, and grandfather rules for certain debt obligations. In general, interest that would otherwise be disallowed under section 163(j) will not be disallowed if paid with respect to a fixed-term obligation outstanding on July 10, 1989. Under the proposed regulations, an obligation will cease to be treated as grandfathered if its term is extended or if it is revised in a transaction that results in the obligee being deemed to have made an exchange of debt instruments under section 1001 of the Code.

We suggest that the final regulations illustrate the operation of the rules through the inclusion of examples, especially with respect to deemed exchanges. We offer the following example:

A, a domestic corporation is a wholly owned subsidiary of F, a foreign corporation. In 1988, F lends A$X, evidenced by a written loan agreement providing for specific quarterly payments of principal through 1998. The agreement also provides for the payment of interest on a quarterly basis according to a formulary interest rate based upon the London Interbank Offered Rate (LIBOR). The interest rate is reset quarterly according to a formula specified in the loan agreement. The interest rate changes quarterly or is reset after July 10, 1989, in accordance with the terms of the loan agreement, but the loan term itself is not extended or otherwise modified. The loan from F to A is a fixed-term debt obligation outstanding on July 10, 1989 that has not been modified after that date in a manner which would give rise to a deemed exchange of debt instruments by F under section 1001 of the Code.

CONCLUSION

Tax Executives Institute appreciates this opportunity to present our views on the proposed and temporary regulations under section 163(j) of the Code relating to deductibility of interest paid to related parties. If you have any questions, please do not hesitate to call Raymond G. Rossi, chair of TEI's International Tax Committee, at [phone] or Mary L. Fahey of the Institute's professional staff at [phone].

[1] Indeed, increasingly Congress (and the Treasury Department) have required taxpayers to report income and expenses on an accrual basis, essentially on the ground that the accrual method more closely reflects income. See, e.g., I.R.C. [section] 448 (limiting the use of the cash method of accounting by certain entities). See also Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, 99th Cong., 2d Sess. 474 (1987) ("The Congress believed that the cash method of accounting frequently fails to reflect accurately the economic results of a taxpayer's trade or business over a taxable year.").

[2] It is unclear how the anti-rollover rule would operate in the context of a consolidated group of corporations. Since such a group's debt and equity are determined on an aggregate basis. TEI believes that the anti-rollover rule (if retained) should also apply on an aggregate, rather than a company-by-company, basis. The regulations should be revised to confirm this result.

[3] We suggest that the IRS issue a formal notice confirming that, until the regulations on loan guarantees are issued, the Planation Patterns case will continue to control this issue. See Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712 (5th Cir.), cert. denied, 409 U.S. 1076 (1972). Although the legislative history and the preamble make this clear, a formal notice would make it easier for U.S. taxpayers to communicate IRS positions to their foreign parents.