Highlights of the proposed earnings stripping regulations under Sec. 163(j); an admirable first effort in implementing a harsh statutory rule.

Congress and the IRS have become increasingly hostile towards foreign-owned U.S. corporations, based on their belief that these corporations are not paying their fair share of federal income taxes. In particular, Congress has been concerned with "earnings stripping," under which a U.S. corporation or branch of a foreign corporation obtains an interest deduction for its interest expense, but the payee is exempt from U.S. tax on the interest income. To prevent such interest deductions if the interest income is neither effectively connected with a U.S. trade or business nor subject to the full 30% withholding tax due to a tax treaty, Sec. 163(j) was enacted as part of the Revenue Reconciliation Act of 1989 (1989 RRA).

This article will examine Sec. 163(j) and analyze its proposed regulations, which were issued in June 1991.

Sec. 163(j)

Under Sec. 163(j), deductions for interest paid or accrued by a U.S. corporation or branch of a foreign corporation may be disallowed if the following three conditions are met. 1. The payor corporation's debt-to-equity ratio exceeds 1.5 to 1. 2. The payor corporation has "excess interest expense" for the tax year. 3. Interest is paid to a "related person" that is exempt from U.S. tax, in whole or in part, on the interest income. Sec. 163(j)(6)(C) requires that these calculations be made on an affiliated group basis.

Interest paid to a related person may be disallowed to the extent of "excess interest expense," the amount by which "net interest expense" exceeds 50% of "adjusted taxable income" plus any "excess limitation carryforward." Disallowed interest may be carried forward indefinitely and is deductible in a carryforward year to the extent of excess limitation generated in the carryforward year.

If 50% of adjusted taxable income exceeds net interest expense, excess limitation is generated. Excess limitation may be carried forward three years and used in the carryforward years to offset excess interest expense.(1) Example 1: Foreign corporation FC is exempt from tax under a tax treaty on interest payments received from its wholly owned U.S. subsidiary (DC). DC's net interest expense is $90 and its adjusted taxable income is $90. All its interest is paid to FC. DC's excess interest expense is $45 ($90 - (0.50 x $90)).

Alternatively, if DC has $200 of adjusted taxable income, it has no excess interest expense because 50% of its adjusted taxable income ($100) exceeds its net interest expense of $90. Instead, DC has $10 excess limitation carryforward.

Proposed Regulations

* In general The proposed regulations are effective for interest paid or accrued in tax years beginning after July 10, 1989.(2) In general, the regulations reflect the mechanical nature of Sec. 163(j), and address the following issues.

* What is a related person? * When is interest exempt from U.S. tax? * What is excess interest expense? * What is net interest expense? * What is adjusted taxable income? * Does the 1.5 to 1 debt-to-equity safe harbor apply? * What are the rules for affiliated groups and branches of foreign corporations?

* Definitions A related person is any person who is related to the payor corporation under Sec. 267(b) (including the constructive ownership rules of Sec. 267(c)) or 707(b)(1).(3) Relatedness is determined at the time an item of interest expense accrues. Any subsequent changes in the relationship between the related party and the taxpayer are ignored.(4) A broad anti-abuse rule is included, which provides that arrangements to shift stock ownership or voting rights away from any person for the purpose of avoiding Sec. 163(j) will be recharacterized.(5)

Interest is considered as exempt from U.S. tax if no tax is paid on the interest income, or if it is subject to a reduced treaty rate.(6) Interest subject to a reduced treaty rate is treated as partially taxable. For example, the U.S.-Japan income tax treaty reduces the withholding tax rate on interest from 30% to 10%. Interest payments to a Japanese parent company will be treated as one-third taxed and two-thirds tax-exempt. Two-thirds of any interest payments to the Japanese parent will be included in the computation of exempt related-person interest expense. The determination of whether interest is subject to tax is made on the date interest is paid or accrued by the payee.(7)

Sec. 163(j) will have little effect on outbound investors. A foreign corporation is not covered by the proposed regulations unless it has income effectively connected with a U.S. trade or business. Therefore, interest payments between controlled foreign corporations are not subject to disallowance.

Loans from a foreign corporation to its U.S. shareholder are also not subject to Sec. 163(j) in many cases. The proposed regulations provide that interest paid or accrued to a controlled foreign corporation (treated as subpart F income), or a passive foreign investment company that is a qualified electing fund, is not treated as tax-exempt to the extent included in income by a U.S. shareholder.(8) A similar rule applies to a foreign personal holding company.

This rule presents a problem because interest paid to a controlled foreign corporation will always constitute foreign personal holding company income, but will not necessarily be included in the income of a U.S. shareholder. For example, under Sec. 954(b)(4), any item of controlled foreign corporation income, including interest income, that is taxed at high rates by a foreign jurisdiction is treated as nonforeign personal holding company income and, as such, is not subject to current inclusion in a U.S. shareholder's income.

Excess interest expense is defined as the excess, if any, of "net interest expense" over 50% of "adjusted taxable income" plus any excess limitation carryforward.(9)

There is a limitation on disallowance. The proposed regulations follow the statute and limit the disallowed interest expense to the lesser of excess interest expense or exempt related-party interest expense.

Net interest expense is determined by netting gross interest income and gross interest expense.(10) Interest that is disallowed or capitalized under another Code section is never taken into account in computing net interest expense.(11) An interest deduction that is deferred, e.g., under Sec. 267(a)(3) for interest accrued by a U.S. subsidiary payable to its foreign parent, is taken into account for Sec. 163(j) purposes when no longer deferred under the applicable deferral provision.(12)

Unfortunately, the proposed regulations do not provide for a separate netting of related and unrelated interest transactions. See Example 2, on page 55.

Example 2: Determining Net Interest Expense

DC, from Example 1, has the following income and expenses.

                       Between      Between
                        related     unrelated
                       parties(*)    parties    Total
Interest income           $10         $10       $20
Interest expense           10          20         30
Net interest expense      $ 0         $10        $10

DC's excess interest expense is $10 ($10 + ($0 x 0.50)). As currently drafted, the proposed regulations do not permit DC to deduct $10 of its interest expense in the current year if the debt-to-equity ratio is not met. Disallowed interest expense is the lesser of excess interest expense ($10) or exempt related-party interest expense ($10). If a separate netting were allowed for related and unrelated transactions, DC's $10 of exempt related-party interest income and $10 exempt related-party interest expense would offset each other, resulting in a net exempt related-party interest of $0. No amount would be disallowed. (*)All paid to foreign related party, exempt from tax under treaty. Assume for this purpose that adjusted taxable income is $0.

Adjusted taxable income is determined by reference to taxable income with certain addbacks and subtractions. "Adjusted taxable income" is designed to approximate cash flow. The drafters of this provision intended to put related borrowers on a parity with unrelated borrowers. Since unrelated lenders look to cash flow from operations in assessing the company's ability to service its debt, Sec. 163(j) looks to cash flow in determining if interest is excessive.

Addbacks under Sec. 163(j)(6)(A) include net interest expense and deductions for net operating losses (NOLs), depreciation, depletion and amortization. The proposed regulations add items such as an increase in accounts payable during the year, a decrease in accounts receivable during the year and the dividends received deduction under Sec. 243 for 70%- and 80%-owned corporations.(13) The regulations also contain a special limit on addback of depreciation for sales within a consolidated group. Example 3: DC has $100 taxable income, taking into account an NOL carryover of $50, and $50 of net interest expense. Adjusted taxable income is $200.

Subtractions are found only in the proposed regulations. They include allowed or allowable depreciation for post-1986 years on property disposed of during the year, investment adjustments on the disposition of stock of a consolidated group member, any decrease in accounts payable during the year and any increase in accounts receivable during the year.(14)

An adjusted taxable loss is generated in any year in which the adjusted taxable income calculation yields a negative number. A taxpayer with an adjusted taxable loss is treated as if it had an adjusted taxable income of zero.(15) An adjusted taxable loss reduces excess limitation carryforward, if any, but is not thereafter carried forward.(16) Example 4: DC has excess limitation carryforward of $125, adjusted taxable loss of $150 and net interest expense of $100. Adjusted taxable loss first reduces excess limitation carryforward, so that excess limitation carryforward is reduced to $0. Adjusted taxable income is treated as $0. Disallowed interest expense is $100 ($100 net interest expense -- (0.50 x $0 adjusted taxable income) + $0 excess limitation carryforward).

Grandfathered Debt

Certain debt outstanding as of July 10, 1989 is treated as "grandfathered debt."(17) Any interest paid or accrued on a fixed-term obligation outstanding as of July 10, 1989 (or one issued under a written contract binding on that date) is treated as interest paid to an unrelated person. Modification in a manner that would give rise to a deemed exchange of instruments by the obligee under Sec. 1001 eliminates grandfathered status.

For demand loans, interest paid or accrued before Sept. 1, 1989 is considered to be paid to unrelated persons.

Informal discussions with the authors of the proposed regulations indicate that if a line of credit was in existence as of July 10, 1989, any amount borrowed as of that date will generally be treated as grandfathered debt. The final regulations are expected to clarify this area.

Safe Harbor

A debt-to-equity ratio of 1.5 to 1 or less at the end of the tax year is treated as a safe harbor. If the safe harbor is met, current year interest expense is fully deductible under Sec. 163(j).(18) Not unexpectedly, the proposed regulations contain both subjective and objective anti-abuse rules.

"Debt" is defined as liabilities determined under general principles of tax law.(19) Certain items are excluded from the definition of debt: certain short-term liabilities, such as accrued operating expenses, accrued taxes payable and any account payable for its first 90 days if no interest is charged, and "commercial financing liabilities" relating to purchases of the taxpayer's inventory.(20) (It is not entirely clear what is intended by this last provision, although presumably it includes a "floor plan.")

Debt of a consolidated or an affiliated group does not include intercompany liabilities or any amount that would result in "double-counting."(21)

"Equity" is defined under Sec. 163(j)(2) as the sum of money and adjusted basis of assets minus debt. In accordance with Sec. 163(j)(2)(C), the proposed regulations provide that in determining the equity of an affiliated or consolidated group, each individual member's basis in its assets is taken into account.(22) A shareholder's basis in stock of an affiliated member is disregarded except in the limited circumstance when a "stock write-off election" is made (discussed below). Moreover, for intercompany deferred transactions, the basis of any affected assets is reduced to the extent intercompany gain has not been taken into account.(23)

However, if a shareholder owns at least 10% but less than 80% of a subsidiary's stock, the amount taken into account is the cost of the stock plus or minus the shareholder's allocable share of the subsidiary's earnings and profits.(24) For investments of less than 10%, the amount taken into account is the cost of the subsidiary stock.

A corporation's basis in its partnership interest is treated as an asset for this purpose, rather than the underlying basis of the partnership's assets.(25)

The proposed regulations allow a "stock write-off election" if a U.S. purchaser acquires a target in a qualified stock purchase under Sec. 338(d) and no election is made to step up the basis in the target's assets under Sec. 338. It may be made on a target-by-target basis. If the stock write-off election is made, the purchaser's basis in the stock of the target plus its liabilities will be substituted for the target's basis in its assets in computing the debt-to-equity ratio.(26) The election would typically be made if the target's basis in its asset is low.

However, the purchaser must amortize this special basis over a 96-month period.(27) An exception is provided, under which, if more than 50% by value of the target's assets are long-lived, the amortization period is 180 months. Long-lived assets are nonwasting tangibles and intangibles, e.g., land and goodwill, inventory and depreciable, amortizable or depletable assets with a recovery period of more than 25 years. A taxpayer claiming the benefit of the 180-month period must attach a statement to its return showing that it is entitled to do so.(28)

The fixed stock write-off election is made by attaching a statement to the tax return.(29) A taxpayer can elect out at any time in the same manner. Typically, this would happen when the special basis is amortized below the basis of the target's assets.

The election may be made retroactively. In that case, the purchaser would be required to take into account the amortized basis in the target's stock in computing the debt/equity ratio for post-effective date years. For example, the cost of target stock for a Dec. 31, 1985 acquisition, less the notional amortization of 60 (months held)/96 (amortization period), would be the Dec. 31, 1990 basis.

If there is a distribution of assets from a target or a target affiliate, the stock basis must be reduced by the fair market value (FMV) of the distributed assets.(30) As currently drafted, the proposed regulations include nonrecognition transfers in the definition of "distribution." As a result, a Sec. 351 transaction would be treated as a distribution. For example, if a target made a capital contribution of assets to a lower tier subsidiary, the special basis would be reduced by the FMV of those assets. This is clearly inappropriate, since the assets have not left the group. The IRS has informally indicated that the final regulations will change this result so that the write-down will apply only to transfers outside of the target group.

There are three debt-to-equity anti-abuse rules in the proposed regulations. The first is a mechanical rule to prevent debt rollovers. Decreases in debt within 90 days of year-end are disregarded to the extent of an increase in debt during the first 90 days of the succeeding tax year.(31) Unfortunately, this rule can trap cyclical or seasonal businesses. Moreover, a corporation that files on the statutory due date (i.e., within 75 days of the end of its tax year) is not able to make the calculation.

There are two anti-abuse rules for equity. A mechanical rule provides that any transfer of assets made by a related person within 90 days of year-end is disregarded to the extent there is a transfer of the same or similar assets to a related person within 90 days of the corporation's succeeding tax year. This rule is inapplicable to the extent there has been a "transfer" at FMV.(32)

This rule is somewhat unclear both in meaning and scope. Clearly, a transfer of cash by a foreign parent to its U.S. subsidiary at year-end, followed by a dividend back to the parent after year-end (presumably at a very low or zero withholding rate under a tax treaty), would be covered. However, in the area of property transfers, it is unclear whether only one or both transfers must be for FMV. For example, if a corporation purchases an asset from a related party, the corporation's net equity remains the same. To require a subsequent disposition to be made at FMV as well casts a chill on intercorporate transactions such as dividends.

Moreover, transfers between members of an affiliated group are included by the definition of a "related party." Since the debt-to-equity ratio of an affiliated group is tested on an affiliate-wide basis, it will remain unchanged, regardless of transfers between affiliated members, with or without consideration. The final regulations should clarify that the 90-day rollover rule does not apply to interaffiliated transfers.

A subjective antistuffing rule provides, generally, that an asset will be disregarded if the "principal purpose" of acquiring the asset was to reduce the taxpayer's debt-to-equity ratio.(33) This would prevent, for example, the acquisition of a bankrupt company with high basis assets for the purpose of increasing equity. It would also be asserted when consideration-free transfers are made outside the 90-day period.

Consolidated and Affiliated Group Rules

Sec. 163(j)(6)(C) provides that all members of the same affiliated group must be treated as one taxpayer. This section generally looks to Sec. 1504(a) in defining members of an affiliated group. A consolidated group, however, is distinguished from an "affiliated" group.

A consolidated group is defined in the proposed regulations as one that files a consolidated return. However, the definition of affiliated group is more expansive. Sec. 163(j)(7)(B) gives the IRS the authority to make adjustments to the affiliated group rules "as may be appropriate" to carry out the purposes of Sec. 163(j). Apparently with this authority in mind, the proposed regulations provide that an affiliated group also encompasses those U.S. entities includible under the attribution rules of Sec. 318.(34)

The regulations provide the example of a foreign parent that owns two U.S. subsidiaries. The two U.S. subsidiaries will be treated as one affiliated group for purposes of the Sec. 163(j) computations.(35) Without Sec. 318 attribution, the presence of a foreign parent would bar affiliation under Sec. 1504(b). The legislative history to Sec. 163(j) does not really support this expansive grouping.(36)

* Consolidated groups The consolidated group rules are relatively simple. Calculations for a consolidated group are made for the group on a consolidated basis.(37) For example, the consolidated group's net interest expense is the excess, if any, of the group's aggregate interest expense over the group's aggregate interest income.

Interest is treated as paid or accrued to a related person if it would be treated as paid or accrued to a related payee by any member of the group.(38) The same rule also applies to affiliated groups.(39)

Special rules are provided for members entering or leaving the consolidated group, similar to the separate return limitation year (SRLY) rules. When a new member with excess interest expense carryforward joins a consolidated group, the carryforward may be used without limitation under Sec. 163(j) to the extent excess limitation is generated by the consolidated group.(40) When a new member with excess limitation carryforward joins a consolidated group, the carryforward may be used only to the extent that the new member generates excess interest expense.

A member leaving the group is required to carry forward to its first separate return year its pro rata share of the group's disallowed interest expense carryforward. The amount carried forward is the group's disallowed interest expense carryforward multiplied by a fraction. The numerator is the departing member's aggregate exempt related-person interest expense while it was a member. The denominator is the aggregate exempt related-person interest expense for all members of the group.(41) The proposed regulations do not limit the denominator to the period during which the departing member was a member of the group.

Except when the entire consolidated group is acquired, a departing member does not carry forward any portion of the group's excess limitation.(42) If the group is acquired, however, it can use its excess limitation if it has excess interest expense in a carryforward year, computed as if it were a separate group during the year.

There is no provision attributing disallowed interest expense to another member of either a consolidated group or an affiliated group when a member liquidates. A deduction for the disallowed interest expense carryover will not be allowed if no excess limitation has been generated. In such a case, the disallowed interest expense will "evaporate" at the time of liquidation. The rationale for this is not readily apparent, and a better result would be reached by incorporating Sec. 381 concepts.

* Affiliated groups The rules for affiliated groups are more complex because each member's items (a consolidated group is treated as one member for this purpose) must be separately computed on an annual basis. Nonetheless, interest disallowance and the debt-to-equity ratio are tested on an affiliated group basis.

The proposed regulations contain a four-step procedure for making the Sec. 163(j) calculations. (See the chart on page 59.) Generally, items are first computed on a separate-company basis.(43) Next, they are aggregated. The third step is to compute the group's interest deduction, determined by reference to adjusted taxable income, net interest expense or excess limitation carryforward from Step Two. Last, any disallowed interest expense or excess limitation carryforward is allocated back to each member.

The attribution rules can create significant reporting and recordkeeping problems in making the four-step calculation. It is not uncommon to have an affiliated group consisting of separate groups of subsidiaries operating autonomously in the United States. These groups do not usually share information of the nature necessary to make the Sec. 163(j) computations. Therefore, affiliated groups will need to establish procedures for coordinating information.

When a corporation leaves the affiliated group, it will carry forward to succeeding tax years any excess limitation or disallowed interest expense allocated to it.(44)

When a corporation becomes a member of an affiliated group, its nonaffiliation year interest expense carryforward may be deducted by the affiliated group to the extent of the affiliated group's excess limitation for the current year.(45) The same rule applies in a transaction to which Sec. 381(a) applies, i.e., asset acquisitions.(46)

Nonaffiliation year excess limitation carryforward, however, may be used by the affiliated group only to the extent of the excess interest expense generated by the new number or acquired group.(47) Three anti-abuse rules are provided here. First, if a corporation transfers its assets to another corporation in a transaction subject to Sec. 381, excess limitation of the transferor from a nonaffiliation year is lost.(48) This prevents, for example, a merger of the target into the acquiring corporation and using the combined excess interest expense to use the excess limitation carryforward of the acquired corporation. However, this rule does not appear to prevent the merger of the acquiring corporation into the target.

The second rule provides that if a newly acquired member incurs debt in connection with or after becoming a member, the interest expense related to the loan will be disregarded for purposes of using the excess limitation carryforward unless the loan proceeds are used by the new member in its preaffiliation business.(49) This rule prevents a new member with excess limitation carryforward from incurring a loan to absorb its excess limitation while the proceeds are actually used by another member of the group.

The third rule could affect a relatively common financing technique, known as "debt push-down." The proposed regulations provide that interest on a loan used for the acquisition of a corporation's stock that is incurred by the acquired corporation may be disregarded for purposes of using the excess limitation carryforward if "one of the purposes" for incurring the loan was to avoid the limits on the use of excess limitation.(50)

Income Effectively Connected With a U.S. Trade or Business

The earnings stripping provisions also apply to U.S. branches of foreign corporations. Generally, a branch may not deduct excess interest expense paid to a related party if the interest is exempt, in whole or in part, from U.S. tax and the branch's imputed debt-to-equity ratio exceeds 1.5 to 1 on the last day of the tax year.(51)

Disallowed interest expense is limited to excess interest expense.(52) Therefore, no amount is disallowed unless the branch has excess interest expense. Related person interest expense is not relevant for this purpose.

Generally, the terms "net interest expense," "adjusted taxable income" and "excess limitation" have the same meaning as discussed previously, with the following modifications.(53)

Excess interest expense for a branch is the excess of its net interest expense over the sum of 50% of adjusted taxable income plus any excess limitation carryforward.(54) Net interest expense is the branch's interest deduction under Regs. Sec. 1.882-5 minus interest income includible in its effectively connected income.(55) Interest expense for this purpose includes deemed paid interest expense under Sec. 884(f)(1)(B).(56)

Computation of the debt-to-equity ratio also differs from the general rule. Debt equals the foreign corporation's worldwide liabilities as computed under Step 2 of Regs. Sec. 1.882-5. This amount is adjusted for short-term and commercial financing liabilities (but not for partnership liabilities) under the general rules discussed earlier.(57) Equity equals the foreign corporation's worldwide assets as computed under Step 2 of Regs. Sec. 1.882-5.

The proposed regulations coordinate Sec. 163(j) with the branch profits tax under Sec. 884. They provide that the disallowance and carryforward under Sec. 163(j) will not affect when interest expense reduces earnings and profits or the computation of U.S. net equity under Sec. 884.(58) For example, although interest may be disallowed under Sec. 163(j), interest payments are nonetheless treated as actually paid for purposes of computing U.S. net equity.

Unanswered Questions

Rules on parent-guaranteed and back-to-back loans are reserved for future regulations.(59) The issue of guarantees is particularly important, as parent-guaranteed debt is not uncommon. Presumably, any rules will seek to recharacterize a foreign parent-guaranteed debt (generating unrelated-party interest) as a loan between the foreign parent and its U.S. subsidiary.

The preamble to the proposed regulations states that the rules on guarantees will apply prospectively. The preamble also states that the IRS will continue to characterize debt as equity in fact patterns such as that in Plantation Patterns.(60) The only real guidance with respect to guarantees can be found in the Conference Report to the 1989 RRA, which stated that, generally, interest disallowance is not intended when a guarantee is given in the "ordinary course."(61)

As previously stated, the area of interest equivalents is also reserved in the proposed regulations.(62) However, the Conference Report indicated that an amount would be treated as interest if it "predominantly reflects the time value of money or is a payment . . . for the use of forbearance of money."

Conclusion

The proposed regulations, in general, follow the statute. Nonetheless, some of the rules may be difficult to comply with. For example, the expanded definition of affiliated group may cause taxpayers practical problems in attempting to gather information from entities reluctant to provide it. The anti-abuse provisions are numerous and can create traps for the unwary. Overall, however, the proposed regulations represent an excellent first effort in implementing a harsh statutory rule.

The most noteworthy aspect of the proposed regulations is what they do not contain. For companies that structured around Sec. 163(j) through the use of parent-guaranteed debt or interest equivalents, the most important part of the regulations remains to be issued.

Four-Step Procedure for Making the Sec. 163(j) Calculations

Step One:

Separately determine

--exempt related-person interest expense

--interest income

--interest expense

--taxable income

--adjustments to taxable income

Step Two:

Aggregate separately determined items from Step

One to determine the group's

--net interest expense

--adjusted taxable income

--exempt related-person interest expense

--excess limitation carryforward from three prior

years

--disallowed interest expense carryforward from

prior years

Step Three:

Determine the group's current year in interest

deduction by

--determining the group's excess interest expense,

if any, from computations in Step Two

--determining the disallowed interest expense for

the computation year by reference to the exempt

related-person interest expense and excess interest

expense, as computed in Steps Two and Three,

respectively

--allocating any disallowed interest expense for

the current year based on the following formula:

Member's exempt related-person

interest expense for the current year

/Group's exempt related-person

interest expense for the current year

--deducting disallowed interest expense

carryforward, rather than disallowed interest

expense, if there is excess limitation for the

current year after the computations in Step Two

--allocating the deduction for disallowed interest

expense carryforward in accordance with the

following formula:

Member's disallowed interest expense

carryforward from the preceding year

/Group's disallowed interest expense

carryforward from the preceding year

Step Four:

Determine each member's carryforward to next

computation year by

--allocating disallowed interest expense

carryforward (consisting of the member's

disallowed interest expene for the current year

plus the member's allocable share of disallowed

interest expense carryforward) in accordance with

the following formula:

Member's disallowed interest expense

carryforward from the preceding year

/Group's disallowed interest expense

carryforward from the preceding year

--allocating unused excess limitation carryforward

from the preceding two years in accordance with

the following formula:

Member's excess limitation carryforward

from the specific computation year

/Group's excess limitation carryforward

from the same prior computation year

--allocating unused current year excess limitation

in accordance with the following formula:

Separate excess limitation for each

member for the current year

/Total of the separate excess limitations of

each member for the current year

(1)Sec. 163(j)(2)(B). (2)Prop. Regs. Sec. 1.163(j)-10(a). (3)Prop. Regs. Sec. 1.163(j)-2(g)(1). (4)Prop. Regs. Sec. 1.163(j)-2(g)(3). (5)Prop. Regs. Sec. 1.163(j)-2(g)(2). (6)Prop. Regs. Sec. 1.163(j)-4(a) and (b). To forestall allegations of discrimination by U.S. treaty partners, Sec. 163(j) also applies to interest paid to U.S. tax-exempt entities, such as pension funds. (7)Prop. Regs. Sec. 1.163(j)-4(c). (8)Prop. Regs. Sec. 1.163(j)-4(d). (9)Prop. Regs. Sec. 1.163(j)-2(b). (10)Prop. Regs. Sec. 1.163(j)-2(d). (11)See, generally, Prop. Regs. Sec. 1.163(j)-7. (12)Prop. Regs. Sec. 1.163(j)-7(b)(2). (13)Prop. Regs. Sec. 1.163(j)-2(f)(2). (14)Prop. Regs. Sec. 1.163(j)-2(f)(3). (15)Prop. Regs. Sec. 1.163(j)-2(f)(4)(i). (16)Prop. Regs. Sec. 1.163(j)-2(f)(4)(ii) and (iii). (17)Prop. Regs. Sec. 1.163(j)-10(b). (18)Prop. Regs. Sec. 1.163(j)-1(b). (19)Prop. Regs. Sec. 1.163(j)-3(b)(1). (20)Prop. Regs. Sec. 1.163(j)-3(b)(2). (21)Prop. Regs. Sec. 1.163(j)-5(d)(2). (22)Prop. Regs. Sec. 1.163(j)-5(d)(1). (23)Prop. Regs. Sec. 1.163(j)-5(d)(3)(iii). (24)Prop. Regs. Sec. 1.163(j)-3(c)(2). (25)Prop. Regs. Sec. 1.163(j)-3(c)(4). (26)See, generally, Prop. Regs. Sec. 1.163(j)-5(e). (27)Prop. Regs. Sec. 1.163(j)-5(e)(5)(vi)(A). (28)Prop. Regs. Sec. 1.163(j)-5(e)(5)(vi)(B). (29)Prop. Regs. Sec. 1.163(j)-5(e)(4). (30)Prop. Regs. Sec. 1.163(j)-5(e)(2)(ii). (31)Prop. Regs. Sec. 1.163(j)-3(b)(4). (32)Prop. Regs. Sec. 1.163(j)-3(c)(5)(ii). (33)Prop. Regs. Sec. 1.163(j)-3(c)(5)(i). (34)Prop. Regs. Sec. 1.163(j)-5(a)(3)(i). (35)Prop. Regs. Sec. 1.163(j)-5(a)(3)(ii). (36)See H. Rep. No. 101-247, 101st Cong., 1st Sess. 1248 (1989). (37)Prop. Regs. Sec. 1.163(j)-5(b)(2). (38)Prop. Regs. Sec. 1.163(j)-5(b)(3). (39)Prop. Regs. Sec. 1.163(j)-5(c)(2)(ii)(C). (40)Prop. Regs. Secs. 1.163(j)-5(b)(5) and -6. (41)Prop. Regs. Sec. 1.163(j)-5(b)(6)(i). (42)Prop. Regs. Sec. 1.163(j)-5(b)(6)(ii). (43)Prop. Regs. Sec. 1.163(j)-5(c)(2). (44)Prop. Regs. Sec. 1.163(j)-5(c)(2)(iv)(D). (45)Prop. Regs. Sec. 1.163(j)-6(a)(1). (46)Prop. Regs. Sec. 1.163(j)-6(a)(2). (47)Prop. Regs. Sec. 1.163(j)-6(b)(1). (48)Prop. Regs. Sec. 1.163(j)-6(b)(2). (49)Prop. Regs. Sec. 1.163(j)-6(b)(3). (50)Id. (51)Prop. Regs. Sec. 1.163(j)-8(a). (52)Prop. Regs. Sec. 1.163(j)-8(b). (53)Prop. Regs. Sec. 1.163(j)-8(c)(1). (54)Prop. Regs. Sec. 1.163(j)-8(c)(4). (55)Prop. Regs. Sec. 1.163(j)-8(c)(2). (56)Prop. Regs. Sec. 1.163(j)-8(d). (57)Prop. Regs. Sec. 1.163(j)-8(e). (58)Prop. Regs. Sec. 1.163(j)-8(g). (59)Prop. Regs. Sec. 1.163(j)-9. (60)Plantation Patterns, Inc., 462 F2d 712 (5th Cir. 1972)(29 AFTR2d 72-1408, 72-2 USTC [P] 9494), cert, denied. (61)H. Rep. No. 101-386, 101st Cong., 1st Sess. 567 (1989). (62)Prop. Regs. Sec. 1.163(j)-2(e)(3).