1. Repatriation and Foreign Tax Credit Planning
TEI Carolinas Chapter
Repatriation and Foreign Tax Credit Planning
Peter Daub, Baker & McKenzie, Washington, DC
Todd Schroeder, Baker & McKenzie, Dallas
September 25, 2015 1

2. Agenda Rate-Hyping Dueling Loans Prepayments Asset Purchases
Dry Holding Company
Acquisition Structures and Reorganizations
Cash Repatriation Choices: Primary options: loan by subsidiary, prepayments, distributions, asset purchases, other transactions
TO JEFF MAYDEW OF OUR TAX PRACTICE GROUP 2

3. Rate-Hyping USCO CFC 1 Stock Contributed CFC 1 <$70 Deficit>
CFC 2 $70 E&P $30 Taxes
CFC 1 <$70 Deficit>
CFC 1 Checks the Box

4. Hovering – Rate Hyping
EXAMPLE: CFC2 acquires all of the assets of a CFC1 in a tax-free transaction on
December 31, Each has the following attributes as of December 31, 2011:
Acquirer Target
Pool E&P Taxes Pool E&P Taxes
General Basket $ $ General Basket ($70) $ 0
If Acquirer pays a dividend of $70 before the transaction, it will bring with it $30 of taxes, a 30% effective rate ($30 / $70 + $30).
Assume the Surviving Corporation is a CFC, the attributes carry over as follows:
(Hovering) (Hovering)
Pool E&P Taxes (Deficit) (Taxes)
General Basket $ 70 $ ($ 70) ($0)
If Surviving Corporation earns another $100 in 2012, subject to $30 of taxes, the net $70 E&P will be eaten up by $70 of hovering deficit.
General Basket $ 70 $ ($0) ($0)
If, in 2013, Surviving Corporation does not earn any net income, and a $70 dividend is declared, it will bring with it $60 of taxes, a 46% effective rate ($60 / $70 + $60).

5. Dueling Loans USCO 12/31 Year Loan Loan CFC 1 9/30 Year CFC 2
F1 and F2 alternate in making a loan to USCO
USCO has uninterrupted and extended use of loan balance
Greater flexibility than otherwise provided by Notice
Risks
Jacobs Engineering distinguishable on the facts
No conduit financing involved
No de facto partnership between F1 and F2 provided economics of cash loan inure only to the specific lender
USCO can have uninterrupted and extended use of loan balance
Greater flexibility than Notice 5

6. Disinvestment Period = 45 days
Dueling Loans - Illustration
CFC 1 (9/30 tax year-end)
9/30
6/30
3/31
12/31
10/1 – 11/14
45 days
7/3 – 8/15
44 days
4/3 – 5/16
1/1– 2/14
CFC 2 (10/31 tax year-end)
8/16 - 9/30
46 days
11/15 – 12/31
47 days
2/15 – 4/2
48 days
5/17 – 7/2
7/31
10/31
1/31
4/30
7/31
10/1 – 11/14
Disinvestment Period = 45 days
8/16 – 12/30
Total Period = 138 days

7. Dueling Loans - Strategy
Notice permits a CFC to hold an obligation of its U.S. parent over the CFC’s year-end without triggering section 956 if the obligation is outstanding for no more than 30 days and the CFC holds such obligations for fewer than 60 days during the tax year.
During the financial crisis of 2008, Notice extended the 30-day period of Notice to 60 days and the 60-day period to 180 days.
The IRS issued GLAM to confirm the application of Notice where multiple related CFCs hold obligations of their U.S. parent. Under GLAM ’s interpretation of Notice , multiple CFCs may hold obligations of their U.S. parent, in the aggregate, for more than 180 days in a tax year provided that each CFC does not hold obligations for more than 180 days individually.

8. Dueling Loans – Strategy, cont’d
Notice has expired, but the principle articulated in GLAM remains valid. Related CFCs may hold obligations of their U.S. parent, in the aggregate, for more than 180 days in a tax year without triggering a section 956 inclusion, provided that the CFCs’ obligations do not cross their respective quarter-ends.
Under Revenue Procedure , a CFC may obtain automatic approval to elect a one-month deferral of its tax year under section 898(c)(2).

9. Dueling Loans – Strategy, cont’d
Therefore, GLAM permits two CFCs to make staggered loans covering, in the aggregate, almost the entire year. Staggered loans can give a U.S. parent access to up to 50 percent of its foreign cash 100 percent of the time.
To avoid application of Jacob’s Engineering, the CFCs should avoid rollover loans by maintaining a divestment period in between loans that is roughly equal to the term of each loan.

10. Dueling Loans – Potential Risks
Temp. Treas. Reg. § T(b)(4)
CAUTION: Cannot commingle the pools.
Section 269
Conduit Issues
Section 7701(o)
Debt v. Equity – unlikely to be successful, provided loans are repaid on time and advances have the formal indicia of debt
Step-Transaction – at what point will a reviewing court step the advances together and treat them as one loan?
Rev. Rul , C.B. 258 (2 months not OK, but 6 months OK)
Jacob’s Engineering v. Commissioner, 97-1 USTC ¶50,340 (C.D. Cal ), aff’d, 99-1 USTC ¶50,335 (9th Cir. 1999)
Proposed Code section 966 (Levin-Whitehouse-Begich-Shaheen Stop Tax Haven Abuse Act)

11. Prepayments Quid pro quo Prepayments Inventory prepayment
Corporate considerations
Fiduciary duties
Quid pro quo
A variation on the loan theme = accelerating intercompany payments of various kinds
Example: G&A fees traditionally paid annually in arrears could be paid up front; similarly prepayment could be made for inventory sold to a subsidiary
Even better – finding expenses that can be charged out that are not currently being back: one promising area is charge backs for equity compensation expenses.
HAND OFF TO TOM 11

12. Prepayments - Inventory
USCO F1
Cash equal to two years’ worth of inventory, discounted to reflect the fact that the money is advanced earlier than normal
Must be nonrefundable
Several issues to consider
Could immediate income be a benefit?
Computing the discount required for the prepayment?
Will the discount be considered imputed income that results in Subpart F income or a reduction in expense?
Can be used for inventory, services, royalties and with some adjustments it also works for cost sharing
Can USCO defer the income pursuant to Treas. Reg. § or Rev. Proc ?
If deferral is possible, how long? Could immediate income be a benefit?
Is the discount that foreign subsidiary receives subpart F income or is it a reduction in expense?
How far can you go? Can you repeat? 12

13. Prepayments - Issues
Can be used for inventory, services, royalties and cost sharing payments
Can USCO defer the income pursuant to Treas. Reg. § or Rev. Proc ?
If deferral is possible, how long?
Can you repeat?

14. Asset Purchases Asset purchases by subsidiaries Examples
Accounts receivable
Distressed assets
Corporate approval requirements
Tax consequences
Arm’s length standard
Deferral of losses
Future depreciation in value
Recap: We’ve looked at simple loans to parent, looked at the variation of prepayment, and looked at distributions, which may well be taxable to the parent. Now we will look at some more creative approaches that may offer some planning opportunities.
Parent may have assets that it cannot readily liquidate or does not want to liquidate, but which it can sell to a subsidiary for cash: A/R from customer sales, perhaps distressed assets such as customer receivables, auction rate notes or other investments the parent made which are illiquid
It is certainly worth exploring whether the parent could sell these to a subsidiary for cash. Again, need to plan ahead to make sure fiduciary duties are satisfied. Determining fair price for distressed assets may be difficult, but there may be a market for them and you could consider independent valuation, perhaps a true up clause in the sale document.
HAND TO JEFF FOR TAX ASPECTS 14

15. Dry Holding Company     F1 distributes cash to USCO in FY1
F1 borrows cash in FY1 from bank in anticipation of F2 sale of assets 
USCO
Bank F1
F1 FY1 E&P $0
PREVIOUS BULLETS ON SLIDE
Does F1 have E&P so that distribution is dividend?
Does F1 have adequate outside basis to absorb 301(c)(2) distribution?
Other issues such as boot or GRA triggers?
What types of guarantees or pledges will Bank demand?
F2 sells assets to unrelated party in FY2 
F2 distributes cash in FY2 to F1 to pay off loan UP F2  15

16. Dry Holding Company - Issues
The viability of a return of capital distribution depends on USCO’s basis in F1.
Excess of distribution over basis is gain under section 301(c)(3), treated as a dividend to the extent of F1’s E&P under section 1248.
Uniform basis?
Even if USCO’s basis is sufficiently large in the aggregate, if USCO’s basis is not sufficiently uniform, the IRS may argue that a portion of the distribution constitutes gain from the sale or exchange of property under the Fourth Circuit’s decision in Johnson, 435 F.2d 1257 (4th Cir. 1971).

17. Purchase of Parent Company Shares for Foreign Acquisition
USCO
Foreign acquirer
pays cash for
USCO shares
Foreign Public 
Foreign Holdco
Foreign acquirer uses USCO shares to pay for foreign target shares 
CFC’s purchase of Parent stock should be non-taxable under section 1032
CFC’s exchange of Parent stock in the acquisition should not trigger any significant gain to CFC due to FMV basis
Anti-"killer B" Notices should not apply as long as the acquisition of foreign target fails to qualify as a reorganization under section 368
Foreign Target
Foreign Acquirer 17

18. Purchase of Parent Company Shares for Foreign Acquisition
Foreign acquirer’s purchase of USCO stock should be non-taxable under section 1032.
Foreign acquirer’s exchange of USCO stock in the acquisition should not trigger any significant gain to foreign acquirer due to FMV basis.
Treas. Reg. § 1.367(b)-10 rules do not apply because there is no tax-free reorganization.
Anti-“Killer B" Notices should not apply as long as the acquisition of foreign target fails to qualify as a reorganization under section 368.

19. All Cash “D” Reorganization
Key Facts
Foreign Holdco buys Foreign Target from USCO in exchange for cash or a note in an all cash “D” reorganization
USCO must have a FMV basis in its Foreign Target stock
USCO
Foreign Target
Foreign Holdco

20. Related Party “B” Reorganizations – Pre-Notice 2014-32
FA is deemed to distribute $100 to USP ($5 dividend and $95 return of basis)
USP is deemed to contribute $100 to FA
USP’s basis in FA is increased by $100 to $105
USS recognizes no gain on transfer if GRA filed
US Parent 1
Issues US Parent Stock to CFC
Issues $100 Note to USP 2
Transfer US Parent Stock to USS
Foreign Acquiring
US Sub
E&P - $5
Basis - $100
Transfer Foreign Target Shares to Foreign Acquiring
Foreign Target
Foreign Target
E&P - $100
Basis - $10
FMV - $100

21. Notice
Removes deemed contribution under Treas. Reg. § 1.367(b)-10(b)(2) (but allows basis increase in amount of target stock basis under Treas. Reg. § ).
Changes section 367(b)/(a) priority rule by including only amounts which are subject to US tax.
Anti-abuse rule “clarified.”
E&P of Target.
Effective for triangular reorganizations completed on or after April 25, 2014, but has a binding commitment exception.

22. Related Party “B” Reorganizations - Post-Notice 2014-32
In addition to FA’s E&P of $5, under the anti-abuse rule, may also consider FT’s E&P to determine dividend amount – so now entire $100 may be treated as a dividend.
USP adjusts its basis in FA under the general rules of Treas. Reg. §
Generally, USP increases its basis in FA by the historic basis that USS had in FT stock (here FA’s basis is increased by only $10 to $110).
USS recognizes no gain on transfer assuming GRA.
$100 Dividend
US Parent
Foreign Acquiring
US Sub
E&P - $5
Basis - $100
Foreign Target
Foreign Target
E&P - $100
Basis - $10
FMV - $100

23. Related Party “B” Reorganizations - Post-Notice 2014-32, cont’d
US Parent
Under current Treas. Reg. § 1.367(b)-10(a)(2)(iii) “priority rule,” Treas. Reg. § 1.367(b)-10 does not apply if the section 367(a) gain is equal to or greater than sum of deemed dividend under section 301(c)(1) and gain recognized under section 301(c)(3) (the “section 367(b) income”)
Under Notice , section 367(b) income would include amounts only to the extent they are subject to US tax
US Tax Consequences
Section 367(a) gain would be zero because of GRA
Section 367(b) income would be zero because PTI not actually subject to US tax, so that 367(a) amount equals 1.367(b)-10 amount and 1.367(b)-10 would not apply
$100
Note
USP Shares 1
USP Shares
Foreign Acquiring
US Sub
FT Shares
PTI = $5 2
Foreign Target
Foreign Target
PTI = $100

24. Notice
IRS believes certain outbound reorgs involving IP transfers result in improper cash repatriation
IRS will amend section 367(d) regulations effective for transfers occurring on or after July 13, 2012, which will subject such reorgs to immediate income recognition on transferred IP
In outbound reorg with boot or assumption of liabilities, US transferor (or qualified successor) treats boot as prepayment of deemed section 367(d) royalty
In outbound reorg, US transferor recognizes gain on IP if there is no “qualified successor” (domestic corporate shareholder of transferor)
Qualified successor potentially subject to immediate tax on disposition of shares received in reorg to a related foreign person

25. Share Return of Capital Distribution
USP
1 - UST reincorporates into F Newco in outbound F reorg
2 - F Holdco contributes cash to F Newco in exchange for Class B common stock
3 - F Newco distributes cash on Class A common stock
US Tax Consequences
Outbound reorg not subject to Notice ?
Distribution treated as section 301 return of capital distribution, not a disposition of stock. Rev. Rul , C.B. 113. 3
F Holdco
Cash
Cash 2 1
Outbound F reorg
F Newco Class B common stock
UST
F Newco

26. Internal Financing USP USS F Newco F Holdco UST F Newco
1 - USP borrows from outside lenders
2 - USP onlends the funds to USS
3 - USS uses the funds to purchase stock of UST
4 - UST reincorporates into F Newco in outbound F reorg
5 - USS transfers F Newco stock to F Holdco in exchange for F Holdco’s assumption of the note to USP and F Holdco stock
US Tax Consequences
Outbound F reorg not subject to Notice ?
Does F Holdco’s assumption of internal debt not result in the application of section 304 under section 304(b)(3)(B) acquisition indebtedness exception?
If so, 304 does not apply; no gain under sections 351 and 357. 1
Cash
Outside Lenders
USP
Note(s)
Assumption of note to USP and F Holdco stock
Note
Cash 2
USS
UST stock 3
F Newco stock 5
Cash
UST
F Newco
F Holdco
Outbound F reorg
F Newco 4

27. Thank you Peter M. Daub Baker & McKenzie, Washington, DC
(202)
Todd A. Schroeder
Baker & McKenzie, Dallas
(214)