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Tax Executives Institute-Department of the Treasury Liaison Meeting agenda February 16, 1990.

Tax Executives Institute - Department of the Treasury Liaison Meeting Agenda

On February 16, 1990, Tax Executives Institute held its annual liaison meeting with official of the Department of the Treasury's Office of Tax Policy. The Treasury's delegation to the liaison meeting was chaired by Kenneth W. Gideon, Assistant Secretary of the Treasury for Tax Policy, and included Philip Morrison, International Tax Counsel; Robert Wootten, Tax legislative Counsel; Harvey Rosen, Deputy Assistant Secretary for Tax Analysis; Lowell Dworin, Director, Office of Tax Analysis; Peter Barnes, Associate International Tax Counsel; and Gregory Jenner, Special Assistant to the Assistant Secretary for Tax Policy. The Institute's delegation was chaired by TEI President William M. Burk, and included members of the Executive Committee, the chairs of the Federal, International, and IRS Administrative Affairs Committees, and members of the Institute's professional staff. The agenda is reprinted below. (Many of the items on the agenda were also included on the agenda of the Institute's January 25, 1990, liaison meeting with the staff of the Joint Committee on Taxation. That agenda was reprinted in the January-February issue of The Tax Executive (beginning on page 27). Rather than reprinting those items, there are cross-references to that earlier agenda).

Table of Contents

I. Introductory Comments

A. Overview: Does a Constituency Exist for

Tax Simplication? 121

B. Identifying and Adhering to Governing
 Principles 121
 C. Improving the Tax Legislative Process 121


D. The Proper Target of Enhanced Compliance
 Measures 121
 E. Conclusion 121


II. Legislative and Policy Initiatives

A. Corporate Estimated Taxes 121

B. Foreign Tax Credit: Carryback and Carryforward

Rules 121

C. Corporate Capital Loss Carryforward

Period 122

D. Foreign Tax Credit: Dividends from Noncontrolled

Foreign Subsidiaries 122

E. Foreign Tax Credit: Creditability Against

Alternative Minimum Tax 122

F. Alternative Minimum Tax: Net Operating
 Loss Offset 122
 G. Interest Allocation Rules 122
 H. Passive Foreign Investment Companies 122


I. Foreign Tax Credit: Foreign Loss

Recapture Rules 122

J. Foreign Tax Credit: "Quickie" Refunds

Attributable to FTC Carrybacks 122

K. Foreign Tax Credit: Translation of

Deemed-Paid Foreign Taxes 122

L. Capitalization of Interest in the Foreign

Context 122

M. Alternative Minimum Tax: ACE

Preference - Foreign Source Income 122

N. Definition of Compensation for Employee
 Benefit Purposes 122
 O. Environmental Tax 122


P. Business Document Matching: Corporate

Information Returns 122

III. Regulatory Initiatives
 A. Foreign Sales Corporations 122
 1. Estimated Tax Rules 122
 2. Notice 89-94: Applicability to FSCs 123


B. Section 6114: Disclosure of Treaty-Based

Returns Positions 123

C. Section 864(e): Interest Allocation - Transition
 Rules 124
 D. Section 954(b)(4): High-Tax Exception 125


E. Notice 89-91: Allocation of Charitable

Contributions 125

F. Rev. Rul 89-73: Treatment of Short-Term

Loans under Section 956 126

G. Section 865(j)(1): Sourcing of Capital

Losses 126

H. Section 954: Personal Holding Company

Income - Treatment of Foreign Exchange
 Transactions 127
 I. Leased Employees 127


IV. Status Reports

A. Section 861: Sourcing of State Income

Taxes 127

B. Section 905(c): Notice of Redetermination
 of Foreign Tax 128
 C. Section 864(e): The CFC Netting Rule 128
 D. Section 482 White Paper 129


E. Sections 44 and 174: Research and

Experimental Expenditures 129

F. Section 864(e): Integrated Financial
 Transactions 129
 G. Section 125: Cafeteria Plans 130
 H. Section 166: Bad Debt Expense 130


I. Introductory Comments

A. Overview: Does a Constituency

Exist for Tax Simplifications?

[See Item No. I.A. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

B. Identifying and Adhering to

Governing Principles

[See Item No. I.B. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

C. Improving the Tax Legislative

Process

In addition to proposals to simplify specific provisions of the Internal Revenue Code, TEI submits that more attention must be focused on the process by which highly complex - and complicated - legislation is enacted. As explained more fully in the Institute's February 7 testimony before the House Ways and Means Committee, TEI believes that greater emphasis should be placed on the administrability of particular proposals during the legislative process. Safeguards must be built into the system.

The most effective safeguard would be the time to analyze and focus on specific provisions and on their administrability. To this end, TEI recommends the following:

1. IRS Testimony on Administrability of Legislative Proposals. The IRS should be asked to testify before Congress specifically to address the administrative aspects of proposed tax legislation. The testimony should address the following issues:

* the ability of the IRS to administer

the provisions and the

estimated cost to the IRS of

doing so; and

* the ability of taxpayers to

comply with the provision and

the estimated cost to taxpayers

of doing so.

2. Early Availability of Draft Legislative Language. A greater effort should be made to prepare draft legislative language in advance of hearings and mark-up sessions to allow the discovery and correction of administrative flaws before the legislation becomes law. In this regard, the Treasury Department should routinely draft statutory language to implement the Administration's tax proposals. Such a step would not only facilitate the integration of different provisions and minimize the enactment of redundant provisions, but would also substantially reduce the need for massive technical corrections.

3. Development of Pre-Enactment Forms and Schedules. In appropriate cases, the IRS should develop necessary tax forms and schedules before a proposal is enacted. Administrability can be measured in many ways, but perhaps the most vivid and immediate picture is painted by the forms and schedules required to "translate" a statutory provisions into the real world. If substantive provisions were not enacted until the IRS developed any necessary forms, Congress could make an informed decision whether the policy underlying the proposal was sufficiently important to justify the imposition of the attendant compliance burden.

D. The Proper Target of Enhanced

Compliance Measures

[See Item No. I.C. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

E. Conclusion

In the succeeding sections of this agenda, TEI discusses several areas that it believes merit attention as efforts continue to simplify or improve the Internal Revenue Code and regulations. Taxpayers and government representatives may not always agree (with each other or among themselves) on how particular provisions should be simplified or where concerns of "equity" or "fairness" or revenue should override the simplification objective. TEI remains convinced, however, that progress can be made.

II. Legislative and Policy

Initiatives

A. Corporate Estimated Taxes

[See Item No. IV.A. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

B. Foreign Tax Credit: Carryback

and Carryforward Rules

[See Item No. II.A. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

C. Corporate Capital Loss

Carryforward Period

[See Item No. III.B. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

D. Foreign Tax Credit: Dividends

from Noncontrolled Foreign

Subsidiaries

[See Item No. II.C. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

E. Foreign Tax Credit:

Creditability Against

Alternative Minimum Tax

[See Item No. II.D. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

F. Alternative Minimum Tax:

Net Operating Loss Offset

[See Item No. III.D. of the TEI-Joint Committee Liaison Meeting Agenda reprinted in the January-February 1990 issue of The Tax Executive.]

G. Interest Allocation Rules

[See Item No. II.H. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

H. Passive Foreign Investment

Companies

[See Item No. II.G. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

I. Foreign Tax Credit: Foreign

Loss Recapture Rules

[See Item No. II.F. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

J. Foreign Tax Credit: "Quickie"

Refunds Attributable to FTC

Carrybacks

[See Item No. II.B. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

K. Foreign Tax Credit: Translation

of Deemed-Paid Foreign Taxes

[See Item No. II.E. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

L. Capitalization of Interest in the

Foreign Context

[See Item No. II.J. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

M. Alternatives Minimum Tax: ACE

Preference - Foreign Source

Income

[See Item No. III. F. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

N. Definition of Compensation for

Employee Benefit Purposes

[See Item No. III.H. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

O. Environmental Tax

[See Item No. III.A. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

P. Business Document Matching:

Corporate Information Returns

[See Item No. IV.B. of the TEI-Joint Committee Liaison Meeting Agenda, reprinted in the January-February 1990 issue of The Tax Executive.]

III. Regulatory Initiatives

A. Foreign Sales Corporations

1. Estimated Tax Rules

a. Descriptions of the Problem. In general, a portion of the income of a foreign sales corporation (FSC) is exempt from tax if certain conditions are met. The exemption is available with respect to income allocated to the FSC under special transfer-pricing rules. The transfer prices are based on either optional administrative rules or arm's-length pricing under section 482 of the Code. Under the administrative pricing rules, transfer prices shall be such that the FSC's taxable income will not exceed the greater of (i) 23 percent of the combined taxable income of the FSC and its related supplier (generally, its U.S. parent) attributable to foreign trading gross receipts derived from the sale of property by the FSC, or (ii) 1.83 percent of the gross receipts derived from the sale of the property by the FSC.

Although FSCs must file U.S. tax returns, as foreign corporations they cannot join in a consolidated returns with their U.S. parent. Thus, a FSC must separately file a corporate tax return and separately pay estimated taxes. The estimated tax rules effectively operate as a "Catch-22" for FSCs.

The problem in the FSC estimated tax area are twofold. First, combined taxable income is often not susceptible to accurate calculation until after the close of the taxable year, particularly if grouping or marginal costing is used. Indeed, Temp. Reg. $1.925(a)-1T(e)(4) permits a FSC and its related supplier to recalculate the amount of foreign trading gross receipts at any time prior to the expiration of the statute of limitations for the taxable year. If this provisions is utilized, combined taxable income will obviously change after year-end - long after estimated tax payments would have been made.

A similar problem exists with respect to the tax payments required to accompany extension of time request for filing income tax returns. Under Treas. Reg. $ 1.6081-3, a taxpayer (including a FSC) may receive an automatic six-month extension to file its tax return, if at least 90 percent of the tax liability is paid by the original due date. Because of the problems inherent in calculating combined taxable income, however, it is extremely difficult (if not impossible) to accurately determine the amount of tax owed by a FSC by the original due date of the return.

In the above circumstances, any underpayment of tax by the FSC will invariably be offset by an overpayment by its related supplier, and vice versa. Because the government is thus "made whole" by the offsetting (reciprocal) overpayment, there is no policy or revenue basis for penalizing the underpaying entity.

b. Recommendation. Adopt a rule whereby no estimated tax or failure-to-pay penalties or interest charges would be imposed if no such penalties and interest would be due on a net basis with respect to FSC commissions when the payments of both the FSC and its related supplier are taken into account. In addition, the Treasury and IRS should consider the adoption of a safe harbor for computing FSC estimated tax payments that would ameliorate the difficulty of accurately estimating combined taxable income on a quarterly basis during the taxable year. One method, patterned after the gross receipts method in section 925(a)(2) for computing the FSC's commission, would be to treat the FSC as having made adequate tax payments for purposes of sections 6655 and 6151, provided the quarterly installments equal or exceed the tax on 1.83 percent of the foreign trading gross receipts of the related supplier and the FSC for that quarter.

2. Notice 89-84: Applicability

To FSCs

a. Description of the Problem. Notice 89-84, 1989-31 I.R.B. 8, provides rules under sections 267(a)(3) and 163(e)(3) of the Code with respect to interest and other amounts that are owed by a domestic taxpayer to a related foreign person, but are not paid in the year in which the deduction for the item would otherwise be allowed. Although the Notice could be interpreted as requiring the deferral of a related supplier's FSC commission deduction until the year in which the commission is paid, TEI submits that such a result would be incorrect in light of section 267(a)(2) and (3) of the Code.

Section 267(a)(2) requires related persons to use the same accounting method with respect to transactions between themselves so that a deduction is allowed to one entity only when there is a corresponding income inclusion by the other. Thus, an accrual-basis payor would be placed on the cash-basis method of accounting with respect to the deduction of amounts (such as interest) owed to a related cash-basis taxpayers. Staff of the Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reductions Act of 1984, at 542 (1984).

The technical corrections provisions of the Tax Reform Act of 1986 extended the "matching" rule of section 267(a)(2) to situations in which the related payee is a foreign person. See I.R.C. $267(a)(3). The Treasury Department was authorized to clarify the application of the matching rule is cases where the related foreign payee does not include in income non-effective connected foreign source income. Staff of the Joint Comm. on Taxation, General Explanation of Technical Corrections to the Tax Reform Act of 1986 and Other Recent Tax Legislation 76 (1986).

The FSC, although a foreign person, has effectively connected income under section 921(d) in the same taxable year in which the related supplier accrues its deductions. Since the legislative history of section 267(a)(3) evinces congressional intent to apply the statute in situations where the foreign person did not have income effectively connected with its trade or business in the United States, section 267(a)(3) should not be construed to defer the deduction of an accrued commission to an accrual-basis FSC until the commission is paid. Indeed, it is our understanding that the IRS did not intend to reach FSCs when it issued Notice 89-84.

b. Recommendation. Clarify that Notice 89-94 was not intended to defer a deduction for a related supplier's FSC commissions until the commissions are paid.

B. Section 6114: Disclosure of

Treaty-Based Return Positions

1. Description of the Problem. Under section 6114(a) of the Code, a taxpayer taking a return position that a U.S. treaty overrides or modifies any provision of the Code must disclose that position in a statement attached to the return or, if no return is filed, in such form as the Secretary may prescribe. Section 6114(b) authorizes the Secretary to waive the disclosure requirements where he determines that the waiver will not impede the assessment and collection of tax. The temporary regulations, issued on September 8, 1989, generally require the reporting of all return positions unless specifically waived. The regulations are effective for taxable years for which the due date of the return (without extensions) occurs after December 31, 1988. Temp. Reg.$301-6114-1T(e). If the taxpayer filed a return for its first such year before November 13, 1989 (or if no return is required), then a statement must be filed within 90 days of the date of publications of the final regulations in the Federal Register.

Section 6114, enacted as part of the Technical and Miscellaneous Revenue Act of 1988, was intended to bring "issues to light expeditiously" and to "apprise the Service in a Timely manner of treaty claims whose merit is not known." Disclosure was to be made with "sufficient specificity to apprise the Secretary of the specific item of income or other amount claimed to be protected . . . ." S. Rep. No. 100-445, 100th Cong., 1st Sess. 322 (1988).

In striving to implement congressional intent, the temporary regulations impose reporting requirements that are tremendously and unnecessarily burdensome to taxpayers. TEI submits that taxpayers should not be required to develop information solely to satisfy the requirements of the temporary regulations. For example, while a taxpayer might properly be requested to furnish information in respect of gross receipts from its U.S. business (that does not constitute a permanent establishment), it should not be required to determine a fictional or hypothetical net income for that business.

More important, TEI believes that the reporting requirements can be refined in such a manner as to satisfy the statutory requirements while minimizing the burdens on taxpayers. Specifically, we suggest that the regulations provide that, when other information reported on the return discloses a treaty-based return position, then that disclosure satifies section 6114. In addition, companies not currently required to file a U.S. tax return should be deemed to have satisfied the section 6114 requirements where the information is disclosed on the returns of their U.S. shareholders. For example, a controlled foreign corporation (CFC) should not be required to separately report transactions that are currently required to be reported on a Form 5471 attached to its U.S. shareholder's return[2]. Disclosure of a CFC's treaty-based return position on this form should constitute timely and sufficient compliance with section 6114. This alternative reporting requirement should not "impede the assessment and collection of tax[3]".

2. Recommendation. Adopt a procedure whereby companies not currently required to file a U.S. return could comply with section 6114 by reporting the necessary information on the tax return of their U.S. shareholders. (If the current Form 5471 is considered insufficient to satisfy section 6114, TEI would be pleased to work with the IRS in revising that form.) In Addition, the regulations should provide that, when other information reported on the return discloses a tax treaty position, then that disclosure satisfies section 6114. Finally, we strongly recommend that taxpayers not be required to perform hypothetical calculation to comply with section 6114.

C. Section 864(e): Interest

Allocation - Transition Rules

1. Description of the Problem. Temp. Reg. $1.861-13T provides transitional relief from the expense allocation rules of section 864(e) (which require taxpayers to allocate interest expense on a consolidated, rather than a separate-company, basis). The regulation also provides transitional relief from the consolidated approach to interest allocation for taxpayers that experienced net increases in total indebtedness during certain time periods. The relief is phased in over a four-and five-year period, depending upon the time period in which the net increase in indebtedness occurred. The provision is generally applicable for taxable years beginning after 1986.

The temporary regulations require taxpayers to use an average monthly debt level in computing the percentage of interest expense that is subject to the pre-1987 allocation rules. The regulations thus depart - on a retroactive basis - from the transition rule set forth in the initial proposed regulations which instructed taxpayers to use a year-end debt level. See Prop. Reg. $1.861-11(e)(iv) (issued September 1, 1987). TEI believes it is improper to compel taxpayers to use the month-end rule on a retroactive basis.

TEI submits that taxpayers should not be penalized for relying on the prior regulations. Retroactively requiring the use of monthly debt levels will force taxpayers to recompute the amount of 1987 and 1988 interest expense subject to the post-1986 allocation rules, in some cases necessitating the filing of amended returns. Taxpayers that in good faith relied upon the prior regulations should not now be required to bear the cost and burden of recomputing their 1987 and 1988 tax liabilities.

2. Recommendations. Exercise the authority granted to the Secretary under section 7805(b) of the Code and require the use of average month-end debt levels on a prospective-only basis.

D. Section 954(b)(4): High-Tax

Exception

1. Description of the Problem. Section 954(b)(4 of the Code provides that income otherwise taxable under Subpart F may be excluded if the taxpayers is "subject to an effective rate of income tax imposed by a foreign country greater than 90 percent" of the U.S. rate. Temp. Reg. $1.954-1T(d) interprets the highly-tax exception to be available only if the income was subject to creditable foreign taxes and such taxes were paid or accrued (or deemed paid or accrued) with respects to the item of income.

TEI submits that the regulations erroneously equate the payment or accrual of taxes with being "subject to" foreign taxes. Subpart F was enacted to reach certain types of "Movable" income, i.e., income whose tax situs may be subject to manipulation. Although the scope of Subpart F was broadened in 1986, Congress recognized that there are some cases where no U.S. tax advantage is gained by routing income through a foreign corporation. In such circumstances, Congress anticipated that the high-tax exception set forth in section 954(b)(4) would be applied in a flexible manner to avoid sweeping non-tax motivated transactions under Subpart F. See H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 401 (1986); Staff of the Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 983 (1987).

A taxpayer may have no, or a small, foreign tax liability in a given year, but nevertheless be "subject to" a high effective tax rate. such a situation could occur through provisions of foreign tax laws that may allow corporations to carry forward net operating losses, surrender losses to group companies, or defer realization of income on items that must be accrued ratably under U.S. tax principles (such as original issue discount). The rule set forth in the temporary regulations may compel a taxpayer to make a yearly determination concerning whether certain foreign income was subject to the high-tax exception. Such a requirement hardly reflects the objective and flexible approach envisioned by Congress.

2. Recommendations. Amend the temporary regulations to exclude Subpart F income earned in a foreign jurisdiction where the controlled foreign corporation (CFC) would have paid tax at a rate greater that 90 percent of the U.S. rate (i.e., 30.6 percent), but for the reduction of foreign tax by one or more enumerated items. We specifically recommend that the taxpayer be permitted to take the following into account:

* Carryforwards or carrybacks

resulting from excess foreign

tax credits or net operating

losses.

* Differences in the timing of deductions

for items such as inventory

adjustments, accelerated

depreciation, or capital

expenditures.

* Differences in the timing of the

realization of income for items

such as interest or original

issue discount.

* Reductions in the amount of

capital gain subject to tax on

the sale of stock of an operating

company.

* Unrealized exchange losses required

to be recognized under

local law.

E. Notice 89-91: Allocation of

Charitable Contributions

1. Description of the Problem. Temp. Reg. [Section]1.861-14T sets forth special rules for allocating and apportioning expenses other than interest under section 864(e)(6) of the Code. Subsection (e) of the regulation describes those expenses that are subject to allocation and apportionment. In general, such expenses do not include any expense that is directly allocable to specific income-producing activities and property of the member of the affiliated group that incurred the expense. The rules generally apply to expenses of supportive functions (such as general and administrative expenses), research and development expenses, stewardship expenses, and certain legal and accounting expenses.

In Notice 89-91 (issued on August 1, 1989), the IRS announced its intention to modify Temp. Reg. [Section]1.861-14T(e) to include the deduction for charitable contributions within the scope of the allocation rules. Averring that such deductions are not definitely related to a class of gross income, the notice requires taxpayers to allocate and apportion their charitable contributions on an affiliated group basis.

TEI believes that in certain circumstances it is appropriate to trace the charitable contribution deduction to one or more classes of gross income. We also believe that deductions for contributions related only to U.S. or foreign operations should be allocated to those operations rather than apportioned on a single-taxpayer basis. Moreover, as a policy matter, U.S. corporations should not be penalized for donating to U.S. charities. At a time of reduced government spending in certain areas, corporation should be actively encouraged to contribute to domestic charitable organizations.[4]

2. Recommendation. Modify Notice 89-91 to provide that charitable contributions may be allocated to a specific class of income under sections 861 and 864(e) of the Code.

F. Rev. Rul. 89-73: Treatment

of Short-Term Loans under

Section 956

1. Description of the Problem. The temporary regulations issued in June 1988 under section 956 of the Code amended Treas. Reg. [Section]1.956-2(d)(2) by eliminating the "one-year" rule which provided that, for purposes of determining the amount of a CFC's earnings invested in "United States property," the definition of such property does not include a debt obligation of a related domestic corporation that either (a) is collected within one year from the time it is incurred, or (b) matures within one year from the time it is incurred (but is not collected within such period solely by reason of the inability or unwillingness of the debtor to make payment within such period).

In Rev. Rul. 89-73, 1989-21 I.R.B. 19, the IRS sets forth two examples addressing the circumstances under which a loan from a CFC will be deemed to be outstanding on the last day of the taxable year (even if the loan has been repaid). In Example (1), a CFC purchases its U.S. parent's debt obligation which is repaid 9.5 months later; 2 months later, the CFC purchases another debt obligation. The ruling concludes that the 2-month period between the sale and repurchase of the debt obligations is too brief and deems the CFC to have made an investment in U.S. property at the end of the taxable year.

In Example (2), the CFC purchases its U.S. parent's debt obligation which is repaid 5 months later; 6.5 months thereafter, the CFC purchases another debt obligation which it holds for 11 months and then sells. Comparing the time between the CFC's investments in U.S. property with the aggregate period the debt obligations were outstanding, the ruling concludes that the CFC did not have an investment in U.S. property at the end of the taxable year.

TEI submits that the revenue ruling is not only contrary to the language of section 956, but is unacceptably vague. Under section 956, if a CFC has an investment in U.S. property "at the close of the taxable year," its U.S. shareholder will be deemed to have received a dividend from the CFC equal to the shareholder's pro rata share of the CFC's increase in earnings invested in such property for the year.[5] The ruling's concept of an "effective repatriation" of earnings is inconsistent with this statutory language. Moreover, the ruling ignores Congress's intent to provide an exception from taxation for normal commercial practices. See H.R. Rep. No. 87-1881, 87th Cong., 2d Sess. 87-88 (1962); H.R. Rep. No. 87-1447, 87th Cong., 2d Sess. 63-66 (1962) (evincing congressional intent to exclude from taxation under section 956 "normal commercial transactions" with U.S. persons in which there was no intent to permit the funds to "remain in the United States indefinitely"). Short-term loans - undertaken as a legitimate debt management tool - are a far cry from the indefinite, long-term repatriation of earnings envisioned by Congress in enacting section 956.

In addition, the ruling provides that if a CFC lends its earnings to its U.S. parent "interrupted only by brief periods of repayment" which include the last day of the CFC's taxable year, a repatriation of earnings has occurred. Although the ruling concludes that a 2-month period between loans is "brief" and a 6.5-month interval is not, it is decidedly cryptic on how that determination is made.[6]

2. Recommendation. Withdraw Rev. Rul. 89-73. Not only does the ruling contravene the language of the statute, but, because of its emphasis on transactions occurring in 1987, it also appears to represent a back-door repeal of the one-year rule for years prior to the effective date of the 1988 regulations. We strongly object to such retroactive application and recommend that the ruling, if not withdrawn, should be applied on a prospective-only basis. (We note that legislation to overrule Rev. Rul. 89-73 will be the subject of February 21-22 hearings by the Select Revenue Measures Subcommittee of the House Ways and Means Committee.)

G. Section 865(j)(1): Sourcing of

Capital Losses

1. Description of the Problem. Section 865 of the Code provides a general sourcing rule for sales of personal property. The statute states that income from such sales by a U.S. resident shall be sourced in the United States, while income from sales by a nonresident are sourced outside the United States. Section 865(j)(1) authorizes the Secretary "to prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations. . . relating to the treatment of losses from sales of personal property."

Logically, losses on the sale of stock of a foreign subsidiary should be allocated and apportioned to the same class of income that would have resulted if a capital gain had been recognized on the sale of the stock. Capital gain resulting from the sale of stock of a foreign affiliate by a U.S. taxpayer would normally be treated as U.S.-source income under section 865(a) (assuming section 865(f) were inapplicable). A consistency rule is needed to protect a U.S. taxpayer from the whipsaw that results if losses on the sale of stock of a foreign affiliate were allocated to foreign-source income. For example, assume a taxpayer sells the stock of a foreign affiliate, recognizing gain on some shares and losses on the other. If the regulations do not provide for consistent treatment, the taxpayer may have a U.S. taxable capital gain and a foreign-source capital loss.

The legislative history of section 865(j) supports such a result. The Joint Committee staff's explanation of this provision states:

It is anticipated that regulations

will provide that losses

from sales of personal property

generally will be allocated consistently

with the source of

income that gains would generate

but that variations of this

principle may be necessary.

Staff of the Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 923 (1987). The regulations should reflect this congressional intent.

2. Recommendation. Adopt regulations under section 865(j) of the Code providing for symmetrical treatment on the source of capital gains and capital losses from the sale of stock of foreign affiliates.

H. Section 954: Personal

Holding Company Income - Treatment

of Foreign

Exchange Transactions

1. Description of the Problem. The Tax Reform Act of 1986 expanded the definition of foreign personal holding company (FPHC) income under Subpart F of the Code to include foreign currency gains attributable to section 988 transactions. An exception was provided, however, for hedging and other transactions that are directly related to the business needs of the controlled foreign corporation (CFC). I.R.C. [Section]954(c)(1)(D).

Many CFCs that borrow funds from their domestic parents have exchange gains or losses because the loans are made in U.S. dollars. Under Temp. Reg. [Section]1.954-2T(g), these gains will be treated as Subpart F income unless the loan proceeds are traced to a limited number of categories of expenditures. Accordingly, even CFCs that engage exclusively in the active conduct of a trade or business and generate little FPHC income may have that exchange gain on their loans treated as passive gain. Such a situation may arise, for example, where the loan proceeds are used to expand operations through a joint venture that will produce Subpart F income only on sale.

Moreover, the regulatory requirement that borrowed funds be traced to a particular transaction is not only difficult to apply, but frequently produces arbitrary results. For example, a profitable CFC wishing to expand its operations may make capital expenditures, pay taxes and dividends, or borrow money. Any borrowing of funds would normally be traced to the next expenditure. The particular expenditure may have nothing to do with the true character of the CFC's income. Under the regulations, however, currency gain may or may not be passive, depending on totally capricious considerations. Such a result is hardly in keeping with the business needs exception enacted by Congress.

2. Recommendation. Adopt regulations whereby a presumption is created that in cases where a CFC borrows to conduct business operations that would not generate passive income, any exchange gain or loss would not be passive.

I. Leased Employees

1. Description of the Problem. Section 414(n) of the Code treats the employees of certain leasing services as employees of the taxpayer that leases their services (referred to as the "recipient") for qualified plan purposes. The term "leased employee" is defined as any person who is not an employee of the recipient and who provides services to the recipient if (i) the services are provided under an agreement between the recipient and any other person, (ii) such person has performed services for the recipient on a "substantially full time basis" for at least one year; and (iii) the services have historically been performed in the business field of the recipient by employees.

Prop. Reg. [Section]1.414(n)-1(b)(12)(ii) provides that, regardless whether it was unusual for a service to be performed by an employee in a particular business field, if such service was actually performed by an employee of the taxpayer during the previous five years, then such service shall be considered historically performed by employees for purposes of section 414(n).

The proposed definition of leased employee is so broad that it would sweep many legitimate independent contractors within its reach. In addition, the regulations impose substantial recordkeeping and compliance burdens on taxpayers.

2. Recommendation. Adopt a narrower definition of the term "leased employee." Specifically, consideration should be given to excluding individuals hired under contract who meet the common-law definition of independent contractors.

IV. Status Reports

During its liaison meeting, TEI requests status reports with respect to the following regulatory projects that were discussed at last year's meeting.

A. Section 861: Sourcing of State

Income Taxes

In December 1988, the IRS issued temporary and proposed regulations under section 861 relating to the allocation and apportionment of deductions for state income taxes in computing taxable income from sources inside and outside the United States. Taxpayers and state taxing authorities almost universally believe that the regulations err in assuming that states both can and do impose taxes on income arising outside their borders. We particularly object to Examples 25 through 29, which require the calculation of hypothetically apportioned state taxes for states that impose no income tax (or income-based franchise tax) and, hence, have no rules for computing taxable income or apportioning such income. The regulations also require a taxpayer to calculate hypothetically apportioned state income using a separate-company apportionment and a U.S. water's edge apportionment for states that use neither method of sourcing income and expense.

The workload burden created by these regulations is tremendous, requiring the collection and analysis of additional data that is not used for any other purpose. Taxpayers simply do not maintain - and, with respect to the retroactive application of the regulations, could not have anticipated the need to maintain - the information required to perform the calculations. In addition, a wide variety of methods used by the states - coupled with the frequency with which they change - exacerbates the burdens imposed on taxpayers.

In its written comments and public testimony, TEI has recommended that the temporary regulations relating to the allocation and apportionment of state income taxes (or income-based franchise taxes) be withdrawn. The regulations not only create tremendous administrative burdens, but are also based on controversial theoretical assumptions. We have also stated that, at a minimum, if the regulations are not withdrawn, they should be applied on a prospective-only basis.

What is the status of these regulations?

B. Section 905(c): Notice of

Redetermination of Foreign Tax

Certain filing requirements contained in the temporary regulations issued under section 905(c) of the Code impose substantial burdens on taxpayers without producing a concomitant benefit to compliance efforts or the public fisc. Specifically, the regulations require that (i) taxpayers include in their returns any redeterminations of foreign taxes occurring more than 90 days prior to the filing of the return (the "90-day rule") and (ii) with respect to redeterminations occurring after the return is filed, taxpayers file an amended return within 180 days of the redetermination (the "180-day rule").

The workload burden engendered by these two requirements is horrendous. In several meetings with TEI, IRS and Treasury officials have suggested that the 90-day rule might be revised to take into account redeterminations received by taxpayers within 2.5 months after the end of the taxable year (March 15 for a calendar-year taxpayer). There have also been indications that, with respect to the 180-day rule, a yearly filing requirement may be feasible.

What is the status of these requirements?

C. Section 864(e): The CFC

Netting Rule

Under Temp. Reg. [Section]1.81-10T(e), the debt-to-assets ratio of the U.S. affiliated group is compared to that of the related controlled foreign corporation (CFC); if the CFC's debt-to-assets ratio is substantially less (measured by a phased-in scale), then third-party indebtedness of the U.S. affiliated group will be directly allocated against foreign source income. Although the reformulated netting rule reduces the degree to which third-party indebtedness will be directly allocated against foreign source income, it nonetheless violates the general fungibility principle adopted by Congress in enacting section 864(e).

The netting rule may well be the most controversial regulation proposed under the Tax Reform Act of 1986.

The netting rule may well be the most controversial regulation proposed under the Tax Reform Act of 1986. Treasury officials have recently expressed a willingness to take a fresh look at the factious rule.

What is the status of the netting rule?

D. Section 482 White Paper

Since the issuance of its October 18, 1988, discussion draft on intercompany pricing (the Section 482 White Paper), IRS and Treasury officials have made several statements expressing a willingness to re-examine the availability of safe harbors and the use of cost-sharing agreements, as well as raising the possibility of a clearance procedure for pricing policies.

TEI commends the IRS and Treasury for their amenability to re-evaluate certain aspects of the Section 482 White Paper. We continue to believe that the use of safe harbors in respect of intercompany pricing will provide certainty in administration and relieve the uncertainty surrounding intercompany pricing. Moreover, we welcome the IRS's willingness to develop an elective preconfirmation procedure (whereby taxpayers could obtain an advance ruling in respect of transfer pricing). Such a procedure, coupled with greater flexibility with respect to cost-sharing agreements, would bring stability to the system and enhance compliance with section 482.

During its liaison meeting, TEI invites comments on the status of these proposals.

E. Sections 44 and 174: Research and Experimental Expenditures

The preamble to the proposed regulations issued under section 174 states that the IRS is considering the continuing validity of Rev. Proc. 69-21 (1969-2 C.B. 303), relating to the deductibility of software development costs, in light of the enactment of section 263A. 1989-21 I.R.B. at 31. In its written comments on the section 174 regulations, TEI recommended that the revenue procedure be retained. We pointed out that by clarifying the general applicability of section 174 to software the procedure served to minimize disputes between taxpayers and the IRS examiners. Moreover, examining agents might misinterpret the revocation of Rev. Proc. 69-21 as a signal to generally disallow section 174 deductions in respect of computer software.

What is the status of the section 174 regulations and, in particular, Rev. Proc. 69-21?

F. Section 864(e): Integrated

Financial Transactions

Section 864(e)(7) of the Code requires the Treasury to promulgate regulations providing for the direct allocation of interest expense to income generated from certain integrated financial transactions. The temporary regulations, issued on September 9, 1988, provide strict rules for determining whether a borrowing and an investment constitute an integrated financial transaction. We submit that the temporary regulations eviscerate the statutory rule.

Under the temporary regulations, a transaction meets the definition of "integrated financial transaction" only if the borrowing and investment mature within 10 days of each other. The regulations also provide that rollovers or related-party transactions will not qualify for direct allocation. These two provisions generally destroy the usefulness of the exception.

As a practical matter, arbitrage rarely consists of investments or borrowings with perfectly matched maturity dates; the mismatch of maturities is handled through rollovers. The time between the commitment to borrow or invest and the closing date of the transaction frequently is as long as 30 days. The regulations, however, fail to take into account these "real-world" aspects of the financial community.

In addition, the Institute continues to believe that the determination whether parts of a transaction are "integrated" for purposes of section 864(e)(7) should be made by taking into account the same factors a corporate treasurer takes into account in conducting the transaction. See Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 948 (1987) (reflecting congressional intent that regulations be promulgated to take into account the reality of corporate treasury arbitrage functions). A single integrated financial transaction may comprise several parts and may be closed and replaced, renewed, or rolled-over to increase net yield or to improve timing. If all parts of a transaction result in a balancing of risk and a setting of a net rate of return without any direct effect on the corporation's active trade or business, the transaction should be considered of a financial nature; to the extent that these segments are intended to yield a net result, they should be deemed to form an integrated financial transaction.

In its comments TEI recommended that the temporary regulations be revised to remove the 10-day requirement and to sanction the use of rollover investments. In addition, the definition of which components of a financial transaction will be deemed to be "integrated" should be revised to take into account the same factors a corporate treasurer uses in effecting financial transactions.

What is the status of the integrated financial transactions rules?

G. Section 125: Cafeteria Plans

On March 2, 1989, the IRS issued proposed regulations under section 125 of the Code, relating to the non-discrimination and qualification requirements for certain employee benefit plans. In its written comments, TEI has recommended that the proposed regulations be amended: (i) to permit cash-outs of unused benefits (such as health care and dependent care benefits) similar to the cash-out permitted with respect to vacation benefits;(ii) to define what constitutes a significant curtailment in coverage or a significant change in cost; and (iii) to revise certain requirements in respect of flexible spending arrangements.

What is the status of the section 125 regulations?

H. Section 166: Bad Debt Expense

Under section 166(a) of the Code, a taxpayer may deduct debts that become worthless within the taxable year; where a debt is only partially worthless, however, the deduction may not exceed the amount charged off for financial accounting purposes. In 1986, Congress directed the Treasury to study and issue a report regarding the appropriate criteria to be used to determine if a debt is worthless for federal income tax purposes. The report, which was to have been filed with the House Committee on Ways and Means and the Senate Committee on Finance by January 1, 1988, is to consider under what circumstances a rule providing for a conclusive or rebuttable presumption of the worthlessness of the indebtedness is appropriate. H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-316 (1986).

What is the status of the Treasury's bad debt study? Have any particularly vexing issues been identified that have contributed to the delayed issuance of the study? During the liaison meeting, we invite comment on the following possible criteria for determining the worthlessness of debts:

* With respect to both wholly and partially worthless obligations, a rebuttable presumption should arise that a taxpayer's tax bad debt charge-offs will be the same as its charge-offs for book purposes. * If the ratio of taxpayer's average of book recoveries to book charge-offs (recovery rate) for the taxable year and the preceding six taxable years is no more than 25 percent, a presumption should arise that the taxpayer's bad debt charge-offs equal the book charge-offs. No presumption should arise if a taxpayer's recovery rate exceeds 25 percent for the six-year period. (1) The Institute is pleased with the decision to extend the transitional filing date until after the regulations become final. See Notice 90-19 (Feb. 9, 1990). We note, however, that further refinements are necessary in order to lessen the substantial administrative burdens engendered by the regulations.

(2) Schedule M of Form 5471 (Information Return with Respect to a Foreign Corporation) elicits information on both the U.S. shareholder and the CFC and captures detailed information on intercompany transactions involving sales of property, compensation, commissions, rents, royalties, license fees, dividends, interest, and insurance premiums.

(3) This amelioratory rule would seem especially appropriate in the case of taxpayers continually audited under the IRS's Coordinated Examination Program (where any necessary supplemental information can be made available on audit).

PHOTO : 1990 Midyear Conference: TEI President Bill Burk and TEI Vice President Mike Bernard at breakfast with Ken Gideon, Assistant Secretary for Tax Policy, Department of the Treasury.

PHOTO : 1990 Midyear Conference: Bernie Jerlstrom, chair of TEI's International Tax Committee, introduces Ernie Aud of Coopers & Lybrand during the International Tax technical session.

PHOTO : 1990 Midyear Conference: Mel Schwarz and Ada Rousso, both of Price Waterhouse, discuss compliance issues related to the alternative minimum tax as Lester Ezrati, chair of TEI's Federal Tax Committee, listens.

PHOTO : Ray Rossi of Intel Corporation welcomes participants to TEI's International Tax Compliance Seminar in Chicago.

PHOTO : 1989 Midyear Conference: Michael Durst, Special Counsel to the IRS Office of Chief Counsel, comments on implementing penalty reform as Linda Burke, chair of TEI's IRS Administrative Affairs Committee, former TEI President Chuck Rau of MCI Communications, and Richard Stark of Johnson & Gibbs look on.

What is the status of these regulations?

B. Section 905(c): Notice of

Redetermination of Foreign Tax

Certain filing requirements contained in the temporary regulations issued under section 905(c) of the Code impose substantial burdens on taxpayers without producing a concomitant benefit to compliance efforts or the public fisc. Specifically, the regulations require that (i) taxpayers include in their returns any redeterminations of foreign taxes occuring more than 90 days prior to the filing of the return (the "90-day rule") and (ii) with respect to redeterminations occurring after the return is filed, taxpayers file an amended return within 180 days of the redetermination (the "180-day rule").

The workload burden engendered by these two requirements is horrendous. In several meetings with TEI, IRS and Treasury officials have suggested that the 90-day rule might be revised to take into account redeterminations received by taxpayers within 2.5 months after the end of the taxable year (March 15 for a calendar-year taxpayer). There have also been indications that, with respect to the 180-day rule, a yearly filing requirement may be feasible.

What is the status of these requirements?

C. Section 864(e): The CFC

Netting Rule

Under Temp. Reg. $ 1.81-10T(e), the debt-to-assets ratio of the U.S. affiliated group is compared to that of the related controlled foreign corporation (CFC); if the CFC's debt-to-assets ratio is substantially less (measured by a phased-in scale), then third-party indebtedness of the U.S. affiliated group will be directly allocated against foreign source income. Although the reformulated netting rule reduces the degree to which third-party indebtedness will be directly allocated against foreign source income, it nonetheless violates the general fungibility principle adopted by Congress in enacting section 864(e).

The netting rule may well be the most controversial regulation proposed under the Tax Reform Act of 1986. Treasury officials have recently expressed a willingness to take a fresh look at the factious rule.

What is the status of the netting rule?

D. Section 482 White Paper

Since the issuance of its October 18, 1988, discussion draft on intercompany pricing (the Section 482 White Paper), IRS and Treasury officials have made several statements expressing a willingness to re-examine the availability of safe harbors and the use of cost-sharing agreements, as well as raising the possibility of a clearance procedure for pricing policies.

TEI commends the IRS and Treasury for their amenability to re-evaluate certain aspects of the Section 482 White Paper. We continue to believe that the use of safe harbors in respect of intercompany pricing will provide certainty in administration and relieve the uncertainty surrounding intercompany pricing. Moreover, we welcome the IRS's willingness to develop an elective preconfirmation procedure (whereby taxpayers could obtain an advance ruling in respect of transfer pricing). Such a procedure, coupled with greater flexibility with respect to cost-sharing agreements, would bring stability to the system and enhance compliance with section 482.

During its liaison meeting, TEI invites comments on the status of these proposals.

E. Sections 44 and 174: Research

and Experimental Expenditures

The preamble to the proposed regulations issued under section 174 states that the IRS is considering the continuing validity of Rev. Proc. 69-21 (1969-2 C.B. 303), relating to the deductibility of software development costs, in light of the enactment of section 263A. 1989-21 I.R.B. at 31. In its written comments on the section 174 regulations, TEI recommended that the revenue procedure be retained. We pointed out that by clarifying the general applicability of section 174 to software the procedure served to minimize disputes between taxpayers and the IRS examiners. Moreover, examining agents might misinterpret the revocation of Rev. Proc. 69-21 as a signal to generally disallow section 174 deductions in respect of computer software.

What is the status of the section 174 regulations and, in particular, Rev. Proc. 69-21?

F. Section 864(e): Integrated

Financial Transactions

Section 864(e)(7) of the Code requires the Treasury to promulgate regulations providing for the direct allocation of interest expense to income generated from certain integrated financial transactions. The temporary regulations, issued on September 9, 1988, provide strict rules for determining whether a borrowing and an investment constitute an integrated financial transaction. We submit that the temporary regulations eviscerate the statutory rule.

Under the temporary regulations, a transaction meets the definition of "integrated financial transaction" only if the borrowing and investment mature within 10 days of each other. The regulations also provide that rollovers or related-party transactions will not qualify for direct allocation. These two provisions generally destroy the usefulness of the exception.

As a practical matter, arbitrage rarely consists of investments or borrowings with perfectly matched maturity dates; the mismatch of maturities is handled through rollovers. The time between the commitment to borrow or invest and the closing date of the transaction frequently is as long as 30 days. The regulations, however, fail to take into account these "realworld" aspects of the financial community.

In addition, the Institute continues to believe that the determination whether parts of a transaction are "integrated" for purposes of section 864(e)(7) should be made by taking into account the same factors a corporate treasurer takes into account in conducting the transaction. See Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 948 (1987) (reflecting congressional intent that regulations be promulgated to take into account the reality of corporate treasury arbitrage functions). A single integrated financial transaction may comprise several parts and may be closed and replaced, renewed, or rolled-over to increase net yield or to improve timing. If all parts of a transaction result in a balancing of risk and a setting of a net rate of return without any direct effect on the corporation's active trade or business, the transaction should be considered of a financial nature; to the extent that these segments are intended to yield a net result, they should be deemed to form an integrated financial transaction.

In its comments TEI recommended that the temporary regulations be revised to remove the 10-day requirement and to sanction the use of rollover investments. In addition, the definition of which components of a financial transaction will be deemed to be "integrated" should be revised to take into account the same factors a corporate treasurer uses in effecting financial transactions.

What is the status of the integrated financial transactions rules?

G. Section 125: Cafeteria Plans

On March 2, 1989, the IRS issued proposed regulations under section 125 of the Code, relating to the non-discrimination and qualification requirements for certain employee benefit plans. In its written comments, TEI has recommended that the proposed regulations be amended: (i) to permit cash-outs of unused benefits (such as health care and dependent care benefits) similar to the cash-out permitted with respect to vacation benefits;(ii) to define what constitutes a significant curtailment in coverage or a significant change in costs; and (iii) to revise certain requirements inc respect of flexible spending arrangements.

What is the status of the section 125 regulations?

H. Section 166: Bad Debt Expense

Under section 166(a) of the Code, a taxpayer may deduct debts that become worthless within the taxable year; where a debt is only partially worthless, however, the deduction may not exceed the amount charged off for financial accounting purposes. In 1986, Congress directed the Treasury to study and issue a report regarding the appropriate criteria to be used to determine if a debt is worthless for federal income tax purposes. The report, which was to have been filed with the House Committee on Ways and Means and the Senate Committee on Finance by January 1, 1988, is to consider under what circumstances a rule providing for a conclusive or rebuttable presumption of the worthlessness of the indebtedness is appropriate. H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-316 (1986).

What is the status of the Treasury's bad debt study? Have any particularly vexing issues been identified that have contributed to the delayed issuance of the study? During the liaison meeting, we invite comment on the following possible criteria for determining the worthlessness of debts:

* With respect to both wholly

and partially worthless obligations,

a rebuttable presumption

should arise that a

taxpayer's tax bad debt charge-offs

will be the same as its

charge-offs for book purposes.

* If the ratio of a taxpayer's average

of book recoveries to book

charge-offs (recovery rate) for

the taxable year and the preceding

six taxable years is no

more than 25 percent, a presumption

should arise that the

taxpayer's bad debt charge-offs

equal the book charge-offs. No

presumption should arise if a

taxpayer's recovery rate exceeds

25 percent for the six-year

period.

(1) The Institute is pleased with the decision to extend the transitional filing date until after the regulations become final. See Notice 90-19 (Feb. 9, 1990). We note, however, that further refinements are necessary in order to lessen the substantial administrative burdens engendered by the regulations.

(2) Schedule M of Form 5471 (Information Return with Respect to a Foreign Corporation) elicits information on both the U.S. shareholder and the CFC and captures detailed information on intercompany transactions involving sales of property, compensation, commissions, rents, royalties, license fees, dividends, interest, and insurance premiums.

(3) This amelioratory rule would seem especially appropriate in the case of taxpayers continually audited under the IRS's Coordinated Examination Program (where any necessary supplemental information can be made available on audit).

(4) The regulations in effect for the last 13 years provide that the deduction for charitable contributions shall "generally" be considered as not definitely related to a class of gross income and thus shall be allocated based on consolidated gross income, thereby implying that in certain instances the allocation of such contributions to a specific class of income may be proper. Treas. Reg. sub section 1.861-8(e)(9)(iv); 1.861-8(g), Example (18)(iv) (1977). Notice 89-91 would eliminate the word "generally" from the regulations.

(5) This assumes that there has been no cash dividends to the U.S. shareholder in respect of the same increase in the CFC's earnings and profits.

(6) For example, there is no discussion concerning whether a "brief" period is determined based on the absolute number of months between the loans or the number of months relative to the terms of the obligations sought to be aggregated.
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