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International implications of check-the-box regulations.

The classification of an entity as a corporation or a partnership typically has significant tax consequences to the members owning the entity. Entities taxable as partnerships in the United States are flow-through vehicles that do not pay income tax. Rather, they report such income, gain, loss, deduction, and credits and allocate it to their members. The members then recognize such taxable items as if the items were directly earned by them. Hence, members of entities that are taxable as partnerships in the United States are, for U.S. federal income tax purposes, permitted to directly claim losses and credits (including foreign tax credits) on their tax returns. In contrast, entities that are taxable as corporations are taxable at both the entity level and at the member level. Losses and credits of entities that are taxable as corporations generally do not flow through to members.

For over 30 years, the classification of entities as partnerships or corporations depended upon all the facts and circumstances concerning the entity pursuant to a test known as the "four factors test." On December 18, 1996, the IRS replaced the "four factors test" with regulations known as the "check-the-box" regulations that allow taxpayers to elect whether entities are to be taxable as corporations or partnerships.[1] The check-the-box regulations recognize three types of entities: corporations, partnerships, and single-member entities. Single-member entities are entities that are disregarded for U.S. federal tax purposes.[2] Thus, even where a single-member entity accords limited liability to its owners, the entity is disregarded for U.S. federal tax purposes.

The check-the-box regulations classify all domestic corporations as corporations. All other domestic entities are taxable as partnerships unless they elect otherwise. With regard to foreign entities, generally one entity from each major jurisdiction is deemed to be a "per se entity," that is always taxable as a corporation.[3] All other foreign entities are eligible to elect to be taxable as a partnership or a corporation. Transitional rules apply to entities in existence before January 1, 1997. These rules generally provide for entities to continue their prior classification.[4] In proper cases, foreign "per se entities" that were in existence on May 6, 1996, are entitled to continue to be classified as partnerships.[5] Entities with one owner that otherwise would be classified as partnerships are classified as single-member entities.

The entity classification rules in most foreign jurisdictions are not a liberal as the check-the-box rules Thus, U.S. taxpayers are permitted to choose the U.S. tax classification of most entities even though the foreign jurisdiction may mandate that such entities are always taxable a partnerships or corporations. Base upon the greater certainty and flexibility that exists in the United States in classifying entities as partnerships, single-member entities, or corporations (or associations taxable as corporations), U.S. taxpayers are capable of utilizing: a) foreign entities that are taxable abroad as corporations but are taxable in the United States as partnerships ("hybrids"); or b) foreign entities that are taxable abroad as partnerships but are taxable in the United States as corporations ("reverse hybrids"). The flexibility afforded to taxpayers translates into tax planning opportunities in structuring their U.S. and foreign operations.

Background on Outbound International Tax Planning

Two important aspects of tax planning for U.S.-based foreign operations are deferral and the optimization of foreign tax credits. Deferral can be achieved where foreign investments are owned by foreign corporations. Generally, the taxable income earned by a foreign company is not taxable in the United States until it is repatriated to the corporation's US. corporate parent through the payment of a corporate dividend or a sale of the stock in the foreign subsidiary. Thus, where a foreign company operates in a low tax jurisdiction, the U.S. parent can achieve deferral of U.S. income tax. When a dividend is eventually paid or the stock of a subsidiary is eventually sold, the dividend or sale can entitle the parent corporation to a foreign tax credit that represents the taxes paid to the relevant foreign jurisdictions by the foreign subsidiary.[6]

Because deferral was considered to be unwarranted in certain cases, over the years various anti-deferral provisions have been enacted. The most prominent of these provisions are known as the foreign personal holding company rules, the controlled foreign corporation rules, and the passive foreign investment company rules.[7] These anti-deferral rules generally provide that U.S. members that ultimately own foreign corporations are required to recognize directly certain types of income that are earned by the foreign corporations even though no distributions actually are made to the U.S. members. For example, as discussed below, under the controlled foreign corporation rules, investment income that is earned by a foreign corporation that is wholly-owned by a domestic corporation generally is included in the parent's taxable income for U.S. federal income tax purposes.[8] Hence, deferral tax planning is based largely upon avoiding application of the various anti-deferral regimes.

As discussed above, a dividend paid by the foreign subsidiary of a domestic corporation or the sale of the stock in a foreign corporation by a domestic parent typically is taxable to the domestic parent in the United States. However, under IRC [sections] 902, the dividend or sale normally entitles the domestic parent to a foreign tax credit in the United States for part or all of the taxes paid by the foreign subsidiary abroad.[9] The amount of foreign tax credits that can be generated by a dividend or a sale is subject to numerous limitations. The most significant limitations relate to: a) the amount of earnings that are considered to be repatriated by the dividend or the sale; b) the U.S. parent's domestic and foreign-sourced income; and c) the nature of the foreign subsidiaries' income (e.g., earnings attributable to investment income).[10] Based upon the foregoing, foreign tax credit planning often seeks to: a) minimize a foreign subsidiary's earnings (for US. foreign tax credit purposes) and, thus, increase the foreign taxes that become creditable as the result of the payment of a given dividend payment or stock sale;[11] b) increase a domestic parent's foreign-sourced income and, as a result, increase its ability to utilize foreign tax credits; and c) decrease a foreign subsidiary's income that is allocated to a "basket" (e.g., the passive income basket) that contains limited amounts of foreign taxes.

Deferral Tax Planning

As an initial matter, it is important to distinguish between situations in which a US. taxpayer is the direct owner of a foreign partnership or single-member entity, and in which a US. taxpayer owns a foreign subsidiary (taxed as a corporation), which, in turn, owns a foreign partnership or single-member entity. In the first situation, the U.S. taxpayer will have no deferral of income, which may not be important if the U.S. taxpayer has unused foreign tax credits. On the other hand, the taxpayer will obtain the immediate benefit of any foreign losses generated by such entity. In the second situation, the use of a foreign partnership or single-member entity below a foreign corporate tier may preserve deferral under the various anti-deferral tax regimes.

Under the controlled foreign corporation rules, passive income earned by a controlled foreign corporation (a "CFC"), such as dividends, interest, and royalties, is taxed currently to a U.S. shareholder regardless of whether there are any distributions from the CFC.[12] The check-the-box regulations provide opportunities for transferring foreign earnings within a foreign corporate group without triggering current US. taxation. For example, assume a U.S. corporate shareholder owns all the stock of a first-tier CFC ("FC1"), which, in turn, owns all the stock of a lower-tier foreign corporation ("FC2"). Generally, the controlled foreign corporation rules require that dividends paid by FC2 to FC1 will be treated as "subpart F income," which results in immediate taxation to the U.S. shareholder. If FC2 made an election to be treated as a single-member entity, the dividend distributions from FC2 to FC1 would no longer be characterized as dividends for U.S. tax purposes, but, rather, would be taxable as intra-company transfers (since FC2 would be treated as a branch or division of FC1). Similarly, if FC1 sold the stock of FC2, any gain recognized on the sale would be treated as subpart F income unless FC2 made an election to be disregarded as an entity for U.S. tax purposes. Upon making such an election, the sale of the FC2 stock would be treated as sale of the underlying assets held by FC2, which may not give rise to subpart F income.[13]

Moreover, assume a domestic corporation has multiple direct and indirect wholly-owned foreign subsidiaries. As a general rule, interest, rents, and royalties paid by one of the foreign subsidiaries to another will be treated as subpart F income that is not eligible for US. tax deferral. However, if the domestic parent checked the box to treat the foreign payer subsidiary and the foreign payee subsidiary as branches, then, subject to potential limitations that are set forth below, the payments of interest, rents, or royalties would be treated as intra-company funds transfers, which would not result in subpart F income.[14]

Another benefit from the use of transparent entities below a first-tier CFC is the ability to utilize losses within a foreign structure. Subpart F income inclusions generally are limited to the earnings and profits of the specific corporate entity that earns the subpart F income, but generally are not affected by losses of related entities. As a result, the active business losses of a lower-tier foreign corporation generally will not reduce the Subpart F income of an upper-tier foreign corporation. If the lower-tier foreign entities check the box to be treated as branches of the first-tier CFC, then the first-tier CFC can effectively consolidate its income with the income and losses of the lower-tier entities. Also, this consolidation of income and assets of lower-tier branch entities may be beneficial to the first-tier CFC under a number of other tests under the subpart F income rules, such as the de minimis exception.[15]

Similarly, the consolidation of income and assets of lower-tier entities that have checked the box may allow a first-tier foreign corporation to avoid being treated as a passive foreign investment company (a "PFIC").[16] Conversely, if the passive assets of the upper-tier and lower-tier foreign entities are so substantial that they could cause the whole group to be treated as a PFIC, then it may be preferable to ensure separate entity treatment for the active and passive companies for U.S. tax purposes.

Foreign Tax Credit Planning

The check-the-box regulations also help U.S. corporations avoid some of the common problems that arise in qualifying for indirect U.S. foreign tax credits under IRC [sections] 902. Under IRC [sections] 902, a U.S. corporation that owns at least 10 percent of the voting stock of a foreign corporation is treated as if it had paid a share of the foreign taxes paid by the foreign corporation (and hence is entitled to claim an "indirect" credit for such taxes) in the year that the foreign corporation distributes dividend income to the U.S. shareholder. In addition, under [sections] 902, as amended by the 1997 Tax Act, a U.S. corporate shareholder generally is entitled to the indirect credit for taxes paid by lower-tier foreign corporations (up to six tiers) provided that the U.S. shareholder owns at least five percent of the voting stock of the lower-tier corporation indirectly through a chain of foreign corporations connected through stock ownership of at least 10 percent of their voting stock.[17] If the problem arises at the first-tier level, the first-tier entity could check the box to be treated as a flow-through entity, which would mean that the U.S. shareholder would be treated as directly paying the foreign taxes of the first-tier entity (which would be creditable under [sections] 901). If the problem arises at a lower-tier level (e.g., first tier CFC owns less than 10 percent of the second tier entity), a check-the-box election could be filed on behalf of such lower-tier entity, which would effectively collapse the two entities into one for U.S. tax purposes.

A foreign tax credit limitation applies when a U.S. corporate shareholder receives IRC [sections] 902-eligible dividends from a foreign corporation that it does not control (i.e., the U.S. shareholder owns between 10 and 50 percent of the foreign corporation).[18] This separate "10/50" basket denies U.S. taxpayers the ability to cross-credit such dividends against other types of foreign sourced income, which could lead to a loss of the credit.[19] As with the [sections] 902 problem discussed above, this problem can be avoided if the 10/50 entity checks the box to be treated as a flow-through entity. If the 10/50 entity is at the first tier, then deferral will be lost. However, this result can be avoided if a wholly-owned foreign subsidiary (taxed as a corporation) is inserted as the first-tier entity.

Also, as stated above, the amount of a US. parent's foreign source taxable income will have a direct impact on the amount of foreign tax credits that the US. parent may claim.[20] In order to arrive at foreign source taxable income, a U.S. taxpayer must allocate various expenses, including interest, between U.S. source and foreign source income.[21] Interest expense generally is apportioned between U.S. and foreign sources based on the relative basis or value of assets generating U.S. or foreign income unless such indebtedness constitutes "qualified non recourse indebtedness" or other indebtedness that is specifically allocated and not apportioned. Such apportionment may have a significant effect on a U.S. taxpayer's foreign tax credit limitation. For example, if there is significant debt at the first-tier foreign subsidiary level, electing flow-through status for such entity would bring the interest expense associated with that debt into the allocation process of the U.S. parent group. Before the election, the foreign subsidiary's interest expense would reduce its earnings and would not affect the U.S. parent group's calculation. After the election, the interest expense would be allocated between both U.S. and foreign sources based on the assets of the U.S. parent, including the assets of the foreign subsidiary. The inclusion of the foreign subsidiary's interest expense may also increase the interest that is allocated to U.S. source income. The net effect of the foregoing reallocation may be to increase the U.S. parent's foreign source in come and, hence, increase its ability to utilize foreign tax credits if it is in an "excess credit" position.

Other Tax Planning Opportunities

The check-the-box regulations provide numerous other opportunities in connection with the transfer of assets to foreign entities and corporate acquisitions and reorganizations. For example, if a US. taxpayer transfers assets to a foreign corporation, such taxpayer will be subject to tax under IRC [sections] 367(a) on the outbound transfer. If the foreign entity made a check-the-box election, the U.S. taxpayer would not be subject to tax as a result of the outbound transfer.[22] Also, in connection with stock acquisitions, a US. taxpayer is only allowed to step-up the basis of the assets of the target corporation when such taxpayer has made an IRC [sections] 338 election (which requires that at least 80 percent of the target stock be purchased in the transaction). If the U.S. taxpayer intends to acquire less than 80 percent of the stock of a target corporation, such taxpayer may still obtain a step-up basis if the taxpayer causes the foreign target to elect partnership status under the check-the-box regulations (and the target would subsequently make an IRC [sections] 754 election which would be the step-up basis in the underlying assets).

In another context, assume that US. parent company owns a chain of foreign first-, second-, and third-tier foreign subsidiaries (FC1, FC2, and FC3, respectively) and would like to have FC2 distribute the stock of FC3 to FC1 without the recognition of gain by FC2. Further assume that the proposed distribution would not satisfy the requirements of IRC [sections] 355 as a tax-free distribution. If FC2 makes a check-the-box election to be disregarded for U.S. tax purposes, this election will be treated as a deemed [sections] 332/337 liquidation of FC2, which would not result in recognition of gain.[23] Accordingly, in connection with the deemed liquidation, FC2 can distribute the FC3 stock to FC1 without recognizing any gain or having such distribution treated as a dividend to FC1 for U.S. tax purposes. By making a check-the-box election, the parties may be able to achieve a U.S. tax result that is similar to [sections] 355 without having to satisfy the technical requirements of [sections] 355.

Developing Limitations on Use of Check-the-Box Entities

The flexibility accorded by check-the-box entities with regard to international tax planning is becoming an increasingly complex area due to a developing set of authorities that outline what is and is not a permissible use of check-the-box entities. In 1994, the IRS finalized regulations that were designed generally to prevent tax planning utilizing partnerships that the IRS deemed to be abusive (the Partnership Anti-Abuse Regulations).[24] These regulations provided that the IRS was permitted to recast a transaction where "a partnership [was] formed or availed of in connection with a transaction a principal purpose of which was to reduce substantially the present value of the partner's aggregate tax liability in a manner that [was] inconsistent with the intent of subchapter K."[25] The regulations provide that the "intent of subchapter K" includes the following: a) the partnership in each partnership transaction must have a substantial business purpose; b) the substance of the partnership transaction must accord with its reporting form; c) the partnership's operations and transactions must reflect the partners' economic agreement.[26] When the IRS has determined that a transaction is inconsistent with the intent of subchapter K, the IRS has various remedies including: a) disregarding the partnership; b) treating some purported partners as parties who are not partners; c) adjusting the partnership's method of accounting; d) reallocating taxable items among the partners; and e) otherwise adjusting or modifying the claimed tax treatment.[27] The Partnership Anti-Abuse Regulations also provide that, when necessary to carry out any provisions of the Internal Revenue Code, the IRS can treat a partnership as an "aggregate of its partners."[28] Thus, when a partnership recognizes an item of income, the IRS can determine that the tax classification of that item is to be determined as if it had been directly recognized by the partner.[29]

The Partnership Anti-Abuse Regulations contain examples that specifically authorize the use of partnerships for international tax planning purposes. For example, in a transaction that is discussed above, the Partnership Anti-Abuse Regulations specifically authorize the use of partnerships to avoid the classification of foreign tax credits as 10/50 foreign tax credits.[30] However, the scope of transactions involving check-the-box entities that would be subject to recharacterization under the Partnership Anti-Abuse Regulations remains uncertain.

More recently, the IRS has stated in two notices that it would address perceived abuses associated with check-the-box entities in forthcoming regulations. In Notice 98-5, the IRS stated that it would issue regulations addressing the use of check-the-box entities and other entities to generate foreign tax credits in transactions deemed to be impermissible by the IRS. In Notice 98-11, the IRS stated that it would issue regulations addressing transactions that it believes are "designed to manipulate the inconsistencies between foreign tax systems to inappropriately generate low- or non-tax income on which United States tax might be permanently deferred."[31]

Shortly after the publication of Notice 98-11, the IRS issued temporary and final regulations (the "hybrid regulations") that are intended to prevent CFCs from using hybrids to "convert active income that is not easily moveable and is earned in a jurisdiction in which a business is located for non-tax reasons, into passive, easily moveable income that is shifted to a lower tax jurisdiction primarily for tax avoidance."[32] The hybrid regulations apply where: a) a payor makes a payment to a hybrid that reduces the payor's foreign tax; b) the payment would have been foreign personal holding income in the hands of the payee; and c) the payee is taxed at an effective rate of tax on the payment that is less than the rate that would have applied if the income had been taxed to the payor.[33] The following illustrates the application of the hybrid regulations. A controlled foreign corporation organized in country A ("FC1") is the parent of a second controlled foreign corporation ("FC2") that also is organized in country A, a high tax jurisdiction. In order to generate a deduction in country A, FC1 organizes a wholly-owned branch ("Hybrid Branch") in a low tax jurisdiction, country B. Although Hybrid Branch is a disregarded single-member entity in the United States, it is treated as a taxable entity in both countries A and B. Hybrid Branch makes a loan to FC2. The interest payments made by FC2 generate deductions that reduce FC2's taxable income in country A. Moreover, the interest income, when recognized by Hybrid Branch, is subject to little or no tax in country B and no tax in country A. For U.S. federal income tax purposes, the interest payment from the FC2 to FC1 ordinarily would be considered subpart F income that was recognized by FC1's domestic parent. However, due to the fact that FC2 and FC1 are organized in the same country (i.e., country A) the form of the interest payments qualify for the "same country exception" from the CFC rules. As such, the interposition of Hybrid Branch results in a reduction of tax in country A but no corresponding tax in countries A or B and no subpart F income in the United States. The proposed regulations treat Hybrid Branch as a corporation for purposes of characterizing the interest payment as foreign personal holding income. However, for all other purposes, Hybrid Branch is disregarded.[34] In general, with regard to hybrids that are owned by CFCs, the hybrid regulations are effective for transactions entered into on or after January 16, 1998.[35] Thus, transactions in place before January 16, 1998, are unaffected by the hybrid regulations until and unless they are substantially modified.[36] Accompanying the hybrid regulations are proposed regulations that address how other aspects of the subpart F rules apply to partnerships.

Notice 98-11 and the hybrid regulations classify an entity as a corporation for CFC purposes that otherwise is classified as a partnership. It is unclear whether the IRS has the authority to reclassify entities in such a manner.[37] It should also be noted that Notice 98-11 and the hybrid regulations take the unusual position that the U.S. tax classification of an entity for controlled foreign corporation purposes depends upon the taxability of specified transactions in foreign jurisdictions.

In an attempt to clarify the Treasury Department's authority in this area, at the time of the writing of this article, President Clinton's 1998 tax proposal included a provision that would permit the IRS to address hybrids.[38] This proposal specifically references Notices 98-11 and 98-5 as examples of areas where the IRS is authorized to address perceived tax avoidance through regulations. The proposal would also address other "hybrids." For example, the proposal specifically authorizes the IRS to address tax structures that are based upon the inconsistent treatment of loans and leases in the United States and in foreign jurisdictions.

Conclusion

The check-the-box regulations provide taxpayers with greater flexibility in planning investments ahead in order to preserve deferral and maximize the utilization of foreign tax credits. However, these tax planning opportunities are coming under increased scrutiny by the IRS.

[1] Treas. Dec. 8697, 61 Fed. Reg. 66584-66593 (December 18, 1996).

[2] Treas. Reg. [sections] 301.7701-2(c)(2)(i).

[3] Treas. Reg. [sections] 301.7701-2(a).

[4] Treas. Reg. [subsections] 301.7701-2(e) and -3(b)(3).

[5] Treas. Reg. [sections] 301.7701-2(d).

[6] See I.R.C. [subsections] 901, 902. Except as otherwise indicated, all "I.R.C. [sections]" references are to the Internal Revenue Code of 1986.

[7] See I.R.C. [subsections] 951-964, 551-558, 1291-1298.

[8] I.R.C. [subsections] 951(a)(1), 954(c).

[9] I.R.C. [subsections] 902, 1248.

[10] See I.R.C. [sections] 904.

[11] For example, minimization of earnings can be achieved by structuring a transaction involving foreign corporations as a tax-free organization in the United States.

[12] A CFC is defined generally as any foreign corporation if U.S. persons own more than 50 percent of the corporation's stock (taking into account only those persons that own at least 10 percent of the stock). I.R.C. [sections] 957(a).

[13] However, if the election is made immediately before the sale, the IRS could apply the step transaction doctrine to disallow this result. [See Waterman Steamship Corp. v. Commissioner 430 F. 2d 1185 (5th Cir. 1970), cert. denied, 401 U.S. 939 (1971).]

[14] Notice 98-11, 1998-6 I.R.B. 18.

[15] Under the de minimis exception, if the sum of "foreign base company income" (which is a component of subpart F income and includes dividends, interest, and gains from stock sales) and gross insurance income is less than the lesser of a) five percent of gross income, or b) $1 million, then no part of the gross income is treated as foreign base company income or insurance income. I.R.C. [sections] 954(b)(3)(A).

[16] A passive foreign investment company is defined as any foreign corporation where a) 75 percent or more of its gross income is passive income, or b) at least 50 percent of the average value of its assets produces passive income or is held for the production of passive income. I.R.C. [sections] 1297(a). Under the PFIC rules, U.S. shareholders generally must either include their proportionate share of the PFIC income currently (if the PFIC is a qualified electing fund) or pay tax on income realized from the PFIC subject to an interest charge which is attributable to the value of the deferral.

[17] I.R.C. [subsections] 902(a), (b).

[18] I.R.C. [subsections] 904(d)(1)(E), 904(d)(2)(E).

[19] The Taxpayer Relief Act of 1997 removes this separate limitation for tax years beginning after 2002.

[20] Under I.R.C. [sections] 904(a), the amount of foreign tax credit is limited to an amount equal to the U.S. tax liability (before credits) multiplied by a fraction, the numerator of which is equal to the taxpayer's total foreign source taxable income and the denominator of which is equal to the taxpayer's worldwide taxable income. Consequently, any decrease in foreign source income decreases the amount of foreign tax credit that is available to a U.S. taxpayer.

[21] Treas. Reg. [subsections] 1.861-8T through 1.861-14T prescribe detailed rules for allocating expenses between U.S. and foreign sources.

[22] If the entity were a single member entity, then there would be no transfer of assets for U.S. tax purposes, and, if the entity were a partnership, there would be no U.S. tax on the transfer to the partnership. The Taxpayer Relief Act of 1997 repealed I.R.C. [sections] 1491, which generally imposed a 35 percent excise tax on transfers of assets to a foreign partnership.

[23] Treas. Reg. [sections] 7.367(b)-5(c).

[24] Treas. Reg. [sections] 1.701-2.

[25] Treas. Reg. [sections] 1.702-2(b).

[26] Treas. Reg. [sections] 1.701-2(a).

[27] Treas. Reg. [sections] 1.701-2(b).

[28] Treas. Reg. [sections] 1.701-2(g).

[29] Id. The foregoing regulatory provision is, in part, the product of the IRS's unsuccessful argument in Brown Group, Inc. v. Commissioner 77 F.3d 217(8th Cir.), rev'g, 104 T.C. 105(1995); see Notice 9639, 1996-2 C.B. 209.

[30] Treas. Reg. [subsections] 1.701-2(d)(Example 3),-2(f) (Example 3).

[31] Id.

[32] Prop. Treas. Reg. [subsections] 1.904-5T, 1.954-1T(c)(1)(i)(E), 1.954-2T(a)(5)(iii), -2T(a)(6)(ii), 1.954-9T(d), 301.7701-3T(f); Fed. Reg. 14613 (March 26, 1998).

[33] Id. The preamble to the hybrid regulations state that the foregoing principles may be extended to apply to foreign base company services income.

[34] Prop. Treas. Reg. [sections] 1.954-9t(a)(4)(ii). Thus, the hybrid branch is disregarded for purposes of applying the earnings and profits limitation, the diminimus exception and the high tax exception under the subpart F rules. Id.

[35] Id.

[36] Prop. Treas. Reg. [sections] 1.954-9T(d)(1). An effective date of March 23, 1998 applies to hybrid branches of partnerships in which CFCs are partners.

[37] Although, the Partnership Anti-Abuse Regulations permit the IRS to wholly disregard an entity as a sham, they do not expressly permit the IRS to reclassify a partnership or a single-member entity as a corporation. See Treas. Reg. [sections] 1.701-2. Both the Chairman and the Ranking Democrat for the House Ways and Means Committee recently have written letters to the Secretary of the Treasury that question the validity of Notice 98-11. See Daily Tax Report, No. 56, P.L-1 (March 24, 1998).

[38] Treasury Department's General Explanations of the Clinton Administration's Revenue Proposals for Fiscal Year 1999, issued February 2,1998, Daily Tax Report, February 3, 1998 (the "Treasury's Explanation"). See Priv. Mr. Rul. 9748005 (August 19, 1997) (quoted in the Treasury's Explanation as a permissible use of a hybrid lease).

James H. Barrett is a partner in the Miami office of the law firm of Baker & McKenzie and is a member of the Tax Section of The Florida Bar He received an LL.M. (1985) from New York University and a J.D. (1984) from the University of Chicago.

William P. Ewing is an associate with the law firm of Troutman Sanders LLP in Atlanta, Georgia, where he practices in the areas of international, corporate, and partnership taxation. He received an LL.M. in taxation from the University of Florida (1992) and a J.D. from the University of South Carolina.

This column is submitted on behalf of the Tax Section, Lauren Y. Detzel, chair and Michael D. Miller and Lester B. Law, editors.
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