Interest stripping regulations create unexpected affiliated groups.Prop. Regs. Sec. 1.163(j)-5(a)(3) provides a special rule resulting in the creation of an affiliated af·fil·i·ate v. af·fil·i·at·ed, af·fil·i·at·ing, af·fil·i·ates v.tr. 1. To adopt or accept as a member, subordinate associate, or branch: group where affiliated group status would not otherwise exist for Sec. 163(j) earnings stripping purposes. Consider, for example, the situation in which a U.S. corporation (USP USP - unique sales point ) owns 100% of U.S. subsidiary A and 60% of U.S. subsidiary B. As drafted, Prop. Regs. Sec. 1.163(j)-5(a)(3) would apply the Sec. 318(a)(2)(C) attribution rules Attribution Rules A set of rules created by Canada Customs and Revenue Agency (CCRA) that prevents investors from transferring assets between family members with the intention of avoiding taxes. resulting in an affiliated group for earnings stripping purposes consisting of USP, A and B. This would result even though a less-than-80% indirect ownership link exists between A and B. Consider also, for example, a situation in which foreign parent corporation F owns 100% of U.S. subsidiary A, which owns 60% of U.S. subsidiary B. F also owns 100% of U.S. subsidiary C. Without modification A change or alteration in existing materials. Modification generally has the same meaning in the law as it does in common parlance. The term has special significance in the law of contracts and the law of sales. , Prop. Regs. Sec. 1.163(j)-5(a)(3) results in A, B and C being treated as members of the same affiliated group for earnings stripping purposes. Similarly, the equity investments of venture capital funds Venture Capital Funds An investment fund that manages money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential. Notes: and investment bankers Investment Banker A person representing a financial institution that is in the business of raising capital for corporations and municipalities. Notes: An investment banker may not accept deposits or make commercial loans. (operating as a partnership) may be treated as members of a single affiliated group. Given the current economic climate, many companies are having difficulties borrowing funds and raising capital through public offerings. As a consequence, venture capital firms Name Location Founding date Managing Partners/Directors Specialty Capital managed 5AM Ventures Menlo Park, CA; Waltham, MA 2002 John Diekman, PhD (managing partner), Scott Rocklage, PhD (managing partner), Andrew Schwab (managing partner) life sciences $200M [1] and investment bankers are providing their portfolio of companies with relatively large amounts of capital and taking, in many cases, a greater-than-50% equity interest in such companies. Under the Sec. 318 attribution rules reference in Prop. Regs. Sec. 1.163(j)-5(a)(3), such companies may be treated as a single taxpayer for Sec. 163(j) purposes. As a result, the books and records of companies so affected would have to be shared among such companies in order to perform the calculations required under Sec. 163(j). For companies included in the portfolio of a venture capital fund or investment banker, the individual companies are distinctly separate and independent business interests, and would not freely share books and records for tax reporting purposes. |
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