Foundations of U.S. International Taxation (Portfolio 900)

Tax Management Portfolio, Foundations of U.S. International Taxation, provides an introduction to and overview of the application of the U.S. income tax system in the international environment. U.S. international taxation extends to two fundamental types of transactions: (1) investments or undertakings of U.S. persons outside the United States (outbound transactions); and (2) investments or undertakings of foreign persons in the United States (inbound transactions).

To view this Portfolio, take a free trial to Bloomberg BNA Tax & Accounting


This Portfolio is available with a subscription to Bloomberg BNA Tax & Accounting, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news.



The Portfolio begins by reviewing the terminology of U.S. international taxation, focusing on the types of entities subject to U.S. tax and how the nature of the entity often determines the imposition of tax. It also discusses the difference between worldwide and territorial systems of taxation, and how the United States has modified its worldwide system to use a residence-based system for certain foreign taxpayers. The Portfolio also addresses the issues of nationality, residence, and expatriation.
An important issue in international taxation is the sourcing and allocation of business income and expenses. The Portfolio reviews the U.S. approach in these areas with discussions of the source of income rules, transfer pricing, and expense allocation. The Portfolio then reviews the basic U.S. income tax rules for inbound transactions of foreign taxpayers. Areas addressed are effectively connected income taxed at the graduated U.S. income tax rates; fixed or determinable income taxed at a flat rate; and the special provisions for the taxation of gains of foreign persons on sales of U.S. real estate. Also addressed is the U.S. taxation of outbound transactions by U.S. citizens and residents. This section explains the foreign tax credit, Subpart F, passive foreign investment companies (PFICs), the exclusion for foreign-source earned income, and foreign currency transactions.
The Portfolio reviews the U.S. tax provisions for international corporate reorganizations, focusing on §367(a) and (b) and the extensive regulations issued thereunder. It also discusses the role of tax treaties in the U.S. tax system, examining the provisions of the U.S. Model Income Tax Treaty and explaining where and why the Model Treaty deviates from the Code provisions. The role of characterization is also explained, with the Portfolio describing how the characterization of income can have a critical effect on the application of U.S. income tax to transactions in an international setting. The tax implications of characterization of entities under the “check-the-box” regulations are also discussed. The Portfolio concludes with a review of international tax shelters, describing Treasury efforts to eliminate such shelters as well as remaining opportunities for tax shelters in the international context.


Foundations of U.S. International Taxation was authored by the following experts.
Joseph Isenbergh, Professor of Law, University of Chicago, Foundations of U.S. International Taxation.


Detailed Analysis

I. Essential Elements of U.S. International Taxation

A. Introduction

1. What the Reader Should Know

2. Outline of U.S. Income Taxation

B. Basic Terms and Concepts

1. Inbound and Outbound Taxation

2. Persons and Entities in Relation to U.S. Taxation

3. "Subsidiary" Versus "Branch"

4. Worldwide and Territorial Taxation

5. Implications of Worldwide U.S. Taxation for Foreign Persons

6. The U.S. Taxing Power

a. Taxing "Jurisdiction"

b. Limitations in Practice

C. Nationality in Taxation

1. Dual Nationals

2. Loss of Citizenship

3. Expatriation to Avoid Tax

D. Situs of Corporations and Partnerships

1. Corporations

2. Partnerships

E. Residence for Taxation

1. Residence in General

a. Domicile and Residence

b. Before 1984

2. Section 7701(b)

a. Immigration Status

b. Substantial Presence

(1) Actual Physical Presence

(2) Substantial Presence by Carryover of Days

(3) Foreign "Tax Home" and "Closer Connection"

(4) Exceptions

(a) "Foreign Government-Related Individuals"

(b) Teachers, Trainees, and Students

(c) Professional Athletes Temporarily in the United States to Compete in Charitable Sports Events

(d) Individuals Unable to Leave the United States for Medical Reasons

(5) Caveat

c. Beginning and End of U.S. Residence

(1) The Beginning

(2) First-Year Election

(3) The End of U.S. Residence

(4) U.S. Residence Confined to a Self-Contained Part of a Single Year

d. Interrupted U.S. Residence

e. Split Years

3. Sailing Permits

4. Residence of Corporations

5. Residence of Partnerships

6. The Situs of Trusts

a. The "Court" Test

b. The "Control" Test

7. The Situs of Estates

F. Source of Income

1. Source in General

2. Code Provisions on Source of Income

3. Source and Characterization

a. Source of Interest

(1) Interest Paid by Individuals

(2) Interest Paid by Partnerships

(3) Interest Paid by Corporations

(a) The 80-Percent Rule

(b) "Look-Through" Rules

(c) Interest Paid by U.S. Branch Businesses of Foreign Corporations

(d) Interest Paid by Foreign Branches of U.S. Banks

(4) Characterization of Interest

(a) "Repos"

(b) Interest-Rate Swaps

b. Source of Dividends

(1) The 25-Percent Rule

(2) The "Second Tax" of Old

c. Source of Compensation for Personal Services

(1) The 90-Day Rule

(2) The Place of Performance of Services

(a) In General

(b) Performance by Entities

(c) Performance by Individuals

(3) Source of Deferred Compensation

d. Source of Rentals and Royalties

(1) The Place of Use

(2) Cascading Royalties

e. Source of Gains from Sales of Property

(1) Sales of Real Property

(2) Sales of Personal Property

(a) The Rule of Residence of Section 865

(b) Limited Reach of Section 865-Exceptions

(i) Depreciable Property

(ii) Intangible Property

(iii) Contingent Sales of Intangible Property

(iv) Sales of Good Will

(v) Stock of Related Foreign Corporations

(c) Sales Attributable to an Office or Fixed Place of Business-Section 865(e)

(i) U.S. Residents

(ii) Foreign Residents

(d) Losses from the Sale of Property

(e) Practical Scope of Section 865

(3) Gains from the Sale of Inventory

(a) The Place of Sale

(b) Passage of Title

(i) Where Does Title Pass?

(ii) Taxpayer Advantage

f. Additional Statutory Source Rules

(1) Underwriting Gains of Insurers

(2) Social Security Benefits

g. Miscellaneous Nonstatutory Source Rules

(1) Alimony

(2) Cancellation of Indebtedness

(3) Covenants not to Compete

(4) Damage Recoveries

(5) Expropriation Gains and Losses

(6) Insurance Recoveries

(7) Prizes, Awards, and Scholarship Grants

h. Income of Compound Source

(1) Section 863(b)

(2) Income from Production and Sale under the Regulations

(a) The 50/50 Apportionment Formula

(i) Apportionment of Production Income

(ii) Apportionment of Sales Income

(b) Election of Independent Factory Price

(c) The Taxpayer's Books

(d) The Significance of 50/50 Apportionment

G. International Transfer Pricing

1. Transfer Pricing in Taxation

2. Section 482

a. Transfer Pricing Regulations

(1) In General

(2) Arm's Length Standard

(3) Common Control Defined

(4) Arm's Length Results

(5) The Best Method

(6) Comparability

(7) Factors Underlying Comparability

(8) Arm's Length Range

b. Specific Transactions under the Regulations

(1) Sales of Tangible Property

(a) Comparable Uncontrolled Price Method

(b) Resale Price Method

(c) Cost Plus Method

(d) Other Methods

(2) Transfers of Intangible Property

(a) Comparable Uncontrolled Transaction Method

(b) "Commensurate with Income"

(c) Comparable Profits Method

(d) Profit Split Methods

(i) Comparable Profits Split

(ii) Residual Profits Split

c. Advance Pricing Agreements (APAs)

(1) Overview

(2) Procedures

H. Expense Allocation

1. In General

2. The Statutory Framework

3. Regulations

a. General Principles of Allocation and Apportionment

b. "Classes" of Income

c. "Operative Sections"

d. "Statutory" and "Residual" Groupings

e. Allocation to "Classes" of Income

(1) In General

(2) "Definitely Related" Expenses

f. Apportionment of Allocated Expenses

4. Allocation and Apportionment of Interest Expense

a. Allocation of Interest

(1) Personal Interest

(2) Allocation of Interest among Related Corporations

b. Apportionment of Specific Types of Interest

(1) Interest Paid by Individuals

(a) Business Interest

(b) Investment Interest

(c) Nonresident Aliens

(2) Interest Paid by Partnerships

(a) In General

(b) Foreign Partners

(3) Interest Paid by Corporations

(a) Domestic Corporations

(b) Controlled Foreign Corporations

(c) Foreign Corporations with U.S. Branches

c. The "Asset" Method of Apportionment of Interest under Section 864(e)(2)

d. Specific Allocation of Interest Expense

(1) Qualified Nonrecourse Indebtedness

(2) Integrated Financial Transactions

e. U.S. Multinational Groups

f. Allocation of Interest Paid by Foreign Corporations

(1) Regulations under Section 882

(2) Interest Allocation for Foreign Branch Banks

(3) NatWest Decision

II. Inbound U.S. Taxation

A. Summary of Inbound U.S. Taxation

B. U.S. Taxation of Inbound Passive Investment

1. Flat Rate Taxation

a. Sections 871(a) and 881

b. No Deductions

c. Fixed or Determinable Income

d. Gains from the Sale of Property

e. Other Gains Subject to Flat Rate Taxation

f. Exception for Dividends from 80/20 Companies

g. Exception for Certain Wagering Gains

2. Interest

a. U.S. Bank Deposits

b. Exempt Portfolio Interest

(1) Registered Debt

(2) Unregistered Debt

(3) Limitation to Foreign Owners

(4) Exceptions

(a) 10-Percent Shareholders

(b) Interest Paid to Foreign Banks

(c) Exception for Contingent Interest

3. Income from Intangible Property

a. Contingent Gains from the Sale of Intangible Property

b. Fixed Gains

4. The 183-Day Tax on Capital Gains

C. "Trade or Business" in the United States

1. Overview

2. Business versus Passive Investment

3. Activity Constituting a Trade or Business

a. Real Property

b. Sales of Property

c. Lending Money

d. Manufacturing

4. The Location of a Trade or Business

5. Statutory Rules

a. Personal Services

b. Trading in Securities and Commodities

(1) Trading through an Independent Agent

(2) Trading for the Taxpayer's Own Account

6. The Imputation of a Trade or Business

a. Statutory Imputation-Partnerships and Trusts

b. Imputation from Employees and Other Agents

D. Effectively Connected Income

1. Taxation on a Net Basis

a. In General

b. Deductions

(1) Personal Deductions

(2) Deductions Contingent on Filing Returns

2. Definition of Effectively Connected Income

a. Tests for U.S.-Source Income

(1) Fixed or Determinable Income and Capital Gains

(a) Asset Use

(b) Activities

(2) "Other" U.S.-Source Income-Section 864(c)(3)

(a) Sales of Inventory

(b) Pitfalls

b. Foreign Source Income

(1) In General

(2) U.S. "Office" or Fixed Place of Business

(a) Imputation

(b) Income "Attributable" to a U.S. Office

c. Deferred Income from Services and Sales

(1) In General

(2) Retirement Income

(a) Deferred Compensation

(b) Pension Plans

(c) Civil Service Pensions

(d) Private Pensions

d. Property Formerly Used in a U.S. Business

3. Election with Respect to Income from Real Property

E. Gains from Sales of U.S. Real Property

1. Section 897

a. U.S. "Real Property Interest" and "RPHC"

b. Publicly Traded Stock

2. Foreign Corporations

F. Branch Profits Tax

1. In Overview

2. Operating Elements of the Branch Profits Tax

a. Dividend Equivalent Amount

b. "ECEP"

c. "U.S. Net Equity"

(1) "U.S. Assets"

(2) "U.S. Liabilities"

3. Ending a U.S. Branch

4. Branch-Level Interest Tax

a. "Branch Interest" Defined

b. Excess "Branch Interest" Taxed

III. Outbound U.S. Taxation

A. Outbound U.S. Taxation in Overview

1. Double Taxation

2. Undertaxation

3. Response of the U.S. Tax System

4. Deferral

5. Foreign Corporations

6. Controlled Foreign Corporations

7. Noncontrolled Foreign Corporations

8. Foreign Trusts in Outbound Taxation

a. Foreign Trusts with U.S. Grantors

b. True Trusts

B. The Foreign Tax Credit in Overview

1. The Early Years

a. The 1918 Credit

b. The 1921 Limitation on the Foreign Tax Credit

c. Import of the Credit Limitation

2. The Allowance of the Foreign Tax Credit

a. Section 901

b. Credit Versus Deduction

c. Coordination with Alternative Minimum Tax

d. Minimum Holding Period

e. The Election of the Credit

f. Foreign Income Taxes "Paid or Accrued"

(1) Extended Statute of Limitations

(2) Redeterminations of U.S. and Foreign Tax under Section 905(c)

3. Extension of Foreign Tax Credit to Foreign Persons

C. Creditable Foreign Taxes

1. Is It an "Income" Tax?

a. Biddle

b. Bank of America

2. Regulations on Creditable "Income" Taxes

a. Realization

b. Gross Receipts

c. Net Income

d. Taxes "Paid"

e. Subsidies

3. Royalties and Other Similar Payments to Foreign Governments

a. State-Owned Resources

b. Regulations on "Dual Capacity Taxpayers"

c. Splitting Payments into Taxes and Royalties

(1) Qualifying Taxes

(2) The Splitting Rules

(a) Facts and Circumstances

(b) The Safe Harbor Method

4. "In Lieu of" Taxes

D. The Limitation on the Foreign Tax Credit

1. Section 904(d)

2. De Minimis Rule for Certain Individual Taxpayers

3. The Separate Limitation Baskets

a. Passive Income

b. High Withholding Tax Interest

c. Financial Services Income

d. Shipping Income

e. 10/50 Baskets

(1) The 10/50 Baskets Until 2003

(2) No 10/50 Baskets After 2002

f. General Limitation Income

g. Priorities Among Baskets

4. Look-Through Rules for Controlled Foreign Corporations

a. Income Originating in CFCs

b. Interest, Rents, and Royalties from CFCs

c. Dividends from CFCs

d. Inclusions Under Subpart F

e. Operating Rules

5. Carryovers of Excess Credits

a. Credits Curtailed by the Limitation

b. Carryovers Within Separate Baskets

c. Mechanics of Credit Carryovers Under Section 904(c)

d. The Treatment of Overall Foreign Losses

(1) Overall Foreign Losses

(2) Dispositions of Property

e. The Treatment of Overall Domestic Losses

6. Losses in the Separate Limitation Baskets

a. Section 904(f)(5)

b. Recharacterization of Subsequent Gains

E. The Indirect Foreign Tax Credit

1. The "Deemed Paid" System

a. Section 902 In Overview

b. Section 902(a)

c. "Gross-up" Under Section 78

d. Overall Mechanics of Deemed Paid Taxes

2. Stock Ownership Requirements

a. Ten-Percent Ownership

b. Lower-Tier Subsidiaries: Qualified Groups

c. Five-Percent Minimum Beneficial Ownership

3. Pooling of Post-1986 Earnings and Taxes

a. Further Elaboration on Section 902(a)

b. Post-1986 Earnings

c. Post-1986 Taxes

F. Foreign Personal Holding Companies

1. Separate Identity of Corporations

2. Foreign Personal Holding Companies

a. Definition

b. Foreign Personal Holding Company Income

3. Taxation of U.S. Shareholders

a. Entire Income of Holding Company Taxed to U.S. Shareholders

b. Dividends and Consent Dividend

c. Basis of Shares at Death

d. Constructive Stock Ownership-Section 554

e. Coordination with Subpart F

G. Controlled Foreign Corporations: The Element of "Control"

1. "Controlled Foreign Corporation" Defined

a. "United States Shareholder"

b. Patterns of Ownership of CFCs

2. The Constituent Elements of "Control"

a. Voting Power

b. Case Law on Voting Power

c. Indirect and Constructive Ownership of CFCs

(1) Indirect Ownership of Stock

(2) Constructive Ownership of Stock

H. Controlled Foreign Corporations: Mechanics of Subpart F

1. Current Taxation

a. Section 951(a)

b. Current Taxation Limited to United States Shareholders

c. Taxable Year of CFCs-Section 898

d. Subpart F Income Limited to Current Earnings and Profits

2. Distributions of Previously Taxed Income from CFCs

a. Ordering of Distributions

b. Character of Excluded Amounts

3. Earnings Deficits of CFCs

a. Qualified Deficits

b. Recharacterization of Nonqualified Deficits

c. Deficits in Chains of CFCs

4. Foreign Income Taxes Deemed Paid Under Subpart F

a. Section 960

b. Coordination with Sections 902 and 78

5. Operating Rules of Subpart F

a. Basis Adjustments

b. Election of Corporate Tax Rates

6. Temporary Dividends Received Deduction

I. Controlled Foreign Corporations: Insurance Operations and Income

1. Insurance Operations of CFCs

2. Special Definition of an Insurance CFC

3. Insurance Income

4. Exempt Insurance Income

a. Exempt Contract

b. Qualifying Insurance Company

5. Captive Insurance Companies

J. Controlled Foreign Corporations: Foreign Base Company Income

1. Foreign Personal Holding Company Income

a. Gains from the Sale of Income-Producing Property

b. Exceptions

(1) Active Financing and Similar Businesses

(a) "Lending or Finance" Business

(b) "Qualified Banking or Financing Income"

(c) "Qualified Insurance Income"

(2) Rents and Royalties from an Active Business

(3) Dividends, Interest, Rents, and Royalties from Certain Related Entities

(4) Dealers in Property

2. Foreign Base Company Sales Income

a. Essentials

b. Property and Transactions Involved

c. Only Pure Sales Income Included

d. "On Behalf of" Transactions

e. The "Branch" Rule of Section 954(d)(2)

(1) "Sales or Purchase" Branches

(2) "Manufacturing" Branches

f. Contract Manufacturing Arrangements of CFCs

(1) Ashland Oil and VETCO

(2) Rev. Rul. 97-48

3. Foreign Base Company Services Income

4. Foreign Base Company Shipping Income

5. Foreign Base Company Oil Related Income

6. Operating Rules in the Determination of Foreign Base Company Income

a. The 5-Percent/$1 Million Rule

b. The 70-Percent "Full Inclusion" Rule

c. High-Taxed Foreign Income

d. Ordering

K. Controlled Foreign Corporations: Investment of Earnings in United States Property

1. Section 956

2. United States Property

3. Exceptions

4. Guarantees and Pledges

L. Controlled Foreign Corporations: Character of Subpart F Inclusions

1. In General

2. Sales of Stock by CFCs

M. Sales and Liquidations of CFCs: Section 1248

1. Section 1248(a)

2. Import of Section 1248

N. Passive Foreign Investment Companies (PFICs)

1. PFICs Defined

a. Passive Income and Passive Assets

(1) Passive Income

(2) Passive Assets

b. Look-Through Rules

c. Attribution Rules

2. Taxation of U.S. Shareholders of PFICS Under Section 1291

a. The Pure PFIC Regime

b. Section 1291

c. Taxation of Excess Distributions

3. Qualified Electing Funds

a. Election of Section 1295

b. Taxation of U.S. Shareholders of QEFs

4. The Mark-to-Market Election of Section 1296

5. Coordination with Subpart F

O. Americans Living and Working Abroad

1. The Exclusion of Section 911

a. Qualified Foreign Residents

(1) Foreign "Tax Home"

(2) An Individual's "Abode"

(3) Bona Fide Foreign Residence

b. Foreign Earned Income

(1) Artists and Writers

(2) Exceptions

c. Amount of the Exclusion

2. The Allowance for Housing Costs

P. Foreign Currency Questions

1. Currency "Transactions" and Currency "Translation"

2. Functional Currency

a. Qualified Business Units

b. Choosing the Dollar as Functional Currency

c. The Dollar as a Compulsory Functional Currency

d. Inflationary Environments

3. Translating the Income of Qualified Business Units

a. Section 987

(1) Separate Translation of Dividends

(2) Remittances from a Branch

b. The "Appropriate Exchange Rate"

4. Foreign Currency Transactions

a. Section 988

b. Section 988 Transactions

c. Transactions Outside Section 988

d. "Foreign Currency Gain"

e. The Character of Foreign Currency Gain

(1) Ordinary Income or Loss

(2) Source of Currency Gains and Losses

IV. International Corporate Reorganizations

A. Corporate Transactions in the International Setting

1. Overview

2. Section 367

B. Outbound Transfers under Section 367(a)

1. Transfers Subject to Section 367(a)

a. General Rule of Recognition

b. Exceptions

(1) Property Used in an Active Business

(2) Qualifications and Limitations

2. Outbound Transfers of Stock under Section 367(a)

a. Transfers of Domestic Corporation Stock

b. Transfers of Foreign Corporation Stock

3. Outbound Transactions under Section 367(e)

a. Section 367(e)(1)

b. Section 367(e)(2)

(1) Liquidations of Domestic Corporations

(2) Liquidations of Foreign Corporations

4. Outbound Transfers of Intangible Property under Section 367(d)

C. Inbound and Wholly Foreign Transactions under Section 367(b)

1. Scope of Inbound and Foreign Transactions

a. Section 367(b)(1)

b. Section 367(b)(2)

2. The Regulations under Section 367(b)

a. The Basic Idea

b. General Rule of Nonrecognition

c. Relevant "Persons" and "Amounts"

(1) Persons

(a) Exchanging Shareholders

(b) Section 1248 Shareholders

(2) Defined "Amounts"

(a) The Section 1248 Amount

(b) The All Earnings and Profits Amount

3. Inbound Liquidations and Reorganizations

a. Exchanging Shareholder's "Deemed Dividend"

b. Immediate Recognition for Certain Shareholders

c. Nonrecognition for Small Shareholders

4. Wholly Foreign Transactions

a. "Deemed Dividend" Cases

(1) Change of Status of a Section 1248 Shareholder

(2) Receipt of Preferred or Other Stock

(3) Certain Recapitalizations

b. "Attribution" Cases

5. Inbound and Foreign Corporate Divisions

a. Divisions of Domestic Corporations

b. Divisions of Controlled Foreign Corporations

(1) Pro Rata Divisions

(2) Non Pro Rata Divisions

6. Effect and Aftermath of Deemed Dividends

V. Income Tax Treaties

A. Income Tax Treaties In Overview

1. Treaty Provisions Concerning Double Taxation

a. The Foreign Tax Credit

(1) Creditable Taxes

(2) No Tax Sparing

b. The Allocating Function of Treaties

2. Tax-Sheltering Possibilities

3. Facilitation of Commerce

4. International Enforcement: Competent Authorities

5. Model Treaties: U.S. and OECD

B. "Residence" in Income Tax Treaties

1. The Importance of Residence

2. Treaty "Residence"

a. The Residence of Corporations

b. "Residence" in Other Treaties

c. Saving Clauses

3. Dual Residence in Income Tax Treaties

a. Tie-Breaking Rules

b. The U.S. Model Treaty

(1) Permanent Home

(2) Center of Vital Interests

(3) Habitual Abode

(4) Nationality and Competent Authority

c. Dual Resident Corporations

4. "Half Resident" Aliens

C. Taxation of Business Profits in Treaties

1. The Notion of an "Enterprise"

2. "Business Profits"

3. Relation of Business Profits to Other Income

a. Permanent Establishments

(1) Different Meanings in Different Treaties

(2) U.S. Model Treaty

(3) Excluded Elements

(4) Imputation of a Permanent Establishment

(a) Imputation from Agents

(b) Independent Agents

b. Business Profits "Attributable" to a Permanent Establishment

(1) U.S. Model Treaty

(2) Relation Between Permanent Establishment and Home Office

(3) The Question of Interest Expense - NatWest

(4) Activities or Assets

c. Business Profits and the Branch Profits Tax

D. Compensation for Personal Services

1. In General

2. Independent Personal Services

a. The "Fixed Base" in the U.S. Model Treaty

b. The 183-Day Rule

3. Dependent Personal Services

4. Performers and Athletes

5. Corporate Directors

6. Students and Scholars

7. Pensions, Annuities, Social Security, Alimony, and Child Support

8. Government Service

E. Interest, Dividends, Royalties, and Gains

1. Interest

a. Basic Norm of Exemption in the Country of Source

b. Interest from a Permanent Establishment

(1) Related Persons

(2) Difference Between the Treaty Regime and U.S. Taxation of "Portfolio Interest"

2. Dividends

a. Reduced Rates of Tax

b. The "Second" Tax on Dividends

c. Relation to Branch Profits Tax

(1) Section 884(e)(2)

(2) Branch Profits Tax on Permanent Establishments

3. Royalties

a. The Basic Pattern: Exemption or Reduced Rates

b. "Royalties" Defined

c. Royalties Attributable to a Permanent Establishment

4. Miscellaneous Gains

a. Income from Real Property

b. Gains from the Sale of Real Property

c. Capital Gains

d. Income from Ships or Aircraft

5. Taxes on Capital

6. Other Income

F. Operating Rules in Tax Treaties

1. Mutual Agreement Procedures-Competent Authorities

2. Nondiscrimination

a. Treaty Provisions

b. Limitations on Nondiscrimination under National Law

(1) Section 884(e)

(2) Section 897

3. Priorities between Treaties and Statutes

VI. The Question of Characterization

A. Characterization in the International Setting

B. Important Boundaries of Characterization

1. Performance of Services versus Transfer of Property

a. Ingram v. Bowers

b. Implications of Ingram v. Bowers

c. Boulez

d. Oppenheim and Tobey

e. Shifting Forensic Positions

f. Possibilities and Pitfalls Today

2. Other Transactions on the Boundary of Services

3. Sales versus Licenses

a. In General

b. Intangible Property

4. Regulations on Transfers of Software and Software Products

C. Character of Entities for Tax Purposes

1. Separate Identity or "Fiscal Transparency"

2. The Old Regime

3. LLCs and Similar Entities

4. The "Check the Box" Regulations

a. The Existence of a Separate Entity

b. Classification of Entities

(1) Per Se Corporations

(2) Elective Classification

(3) Default Classification

c. Mechanics of the Election

D. "Hybrids" in International Transactions

1. In Inbound Transactions

a. Section 894(c)

b. Foreign Trust Rules

2. In Outbound Transactions

a. In General

b. Hybrid Branches of CFCs

VII. International Tax Shelters

A. Income Shifting in International Tax Shelters

1. General

2. Earnings-Stripping and the Source Rule for Interest Paid by Individuals

a. A Simple Earnings-Stripping Pattern

b. Practical Limitations

c. Check-the-Box to the Rescue

d. The Future of the Source Rule

B. Treaty-Based International Tax Shelters

1. Overview

2. Treaty "Sandwiches" and Back-to-Back Debt

a. Treaty-Based Finance Corporations

b. Sandwiches Sheltering Business Profits

c. Dutch and Luxembourg Sandwiches

3. The U.S. Treasury's Counterattack against Treaty Tax Havens

a. The Aiken Case

b. Limitations on Treaty Benefits

(1) The U.S. Model Treaty

(2) Other Treaties

4. Limitations on Earnings-Stripping Deductions by Corporations

a. Section 163(j)

b. Disqualified Interest and Excess Interest

c. Scope of Section 163(j)

5. Conduit Regulations under Section 7701(l)

a. Section 7701(l)

b. Regulations Under Section 7701(l)

(1) Conduit Treatment of Intermediate Entities

(2) "Financing Arrangement"

(3) "Financing Transaction"

(4) Tax Avoidance Plan

(5) Consequences of Conduit Treatment

c. Effect on Treaty Sandwiches-Their Last Gasp

(1) The Half-Sandwich

(2) Its Limited Prospects

d. Effect of Conduit Rules on Exempt Portfolio Interest

(1) Rodney and Genevieve

(2) Their Limited Room for Maneuver

e. Effect of Conduit Regulations on Other Interest-Stripping Patterns

f. The Last Word

Working Papers

Table of Worksheets

Worksheet 1 Excerpts from Hearings before the Committee on Finance, United States Senate, 67th Congress, First Session, on H.R. 8245 (Revenue Act of 1921)

Worksheet 2 United States Model Income Tax Convention of November 15, 2006 and Technical Explanation




Treasury Regulations:

IRS Rulings:


Tax Treaties:


Tax Management Portfolios:











Working Papers

Table of Worksheets

Worksheet 1 Excerpts from Hearings before the Committee on Finance, United States Senate, 67th Congress, First Session, on H.R. 8245 (Revenue Act of 1921)

Worksheet 2 United States Model Income Tax Convention of November 15, 2006 and Technical Explanation




Treasury Regulations:

IRS Rulings:


Tax Treaties:


Tax Management Portfolios: