CFCs — Investment of Earnings in United States Property (Portfolio 6260)

Be a trusted advisor to your clients with Bloomberg Tax. In this Portfolio, our expert authors analyze the U.S. income tax consequences under §956 of the Internal Revenue Code of investments of earnings and profits by controlled foreign corporations in United States property. 

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The CFCs — Investment of Earnings in United States Property Portfolio discusses the circumstances under which such investments may result in the taxation to the company's U.S. shareholders of a portion of the company's earnings and profits, and it explains the rules governing the computation of such income inclusion. It describes the possibility of unexpected results from the operation of the §956 rules, and it suggests planning possibilities to avoid pitfalls.

Among the matters discussed are the definition of the term “United States property” and the exceptions thereto; calculations of the amount of a controlled foreign corporation's earnings and profits invested in United States property and the effect of distributions on such calculations; special rules regarding the taxation of U.S. shareholders, including the applicable foreign tax credit rules; and tax planning opportunities.


Bloomberg Tax Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The CFCs — Investment of Earnings in United States Property Portfolio was authored by the following attorneys.  


Philip Fried, Esq.

Credentials / Philip received his B.A., Stanford University (1987); J.D., Harvard Law School (1990); LL.M. in Taxation, New York University School of Law (1997); Member, New York Bar.

Kevin J. Liss, Esq.

Credentials / Kevin received his B.A., Columbia College (1984); J.D., Columbia University School of Law (1988); LL.M. in Taxation, New York University School of Law (1994); Member, New York Bar.

Table of Contents

Portfolio 6260-1st: CFCs — Investment of Earnings in United States Property

Portfolio Description


Technical Advisors


Detailed Analysis

I. Introduction

A. History of § 956 in Subpart F

1. Subpart F Income

2. Withdrawals of Previously Excluded Subpart F Income from Qualified Investments

3. Section 956

B. Historical Perspective on § 956

C. General Structure of § 956

1. Relationship to § 951

2. Definitions Common to Subpart F Rules

a. Controlled Foreign Corporation

b. U.S. Shareholder

3. Categories of Investment in U.S. Property

4. Computation of Average Amount of Investment in U.S. Property

5. Section 956 Formula

6. Distributions to U.S. Shareholders

7. Foreign Tax Credit

8. Miscellaneous

a. Pre-1963 Earnings May Be Taxed

b. Constitutionality of § 956

D. Coordination with Other Anti-Deferral Provisions

1. Subpart F Income

2. PFIC Provisions

3. Miscellaneous Repealed Anti-Deferral Regimes

a. FPHC Rules

b. Foreign Investment Company Provisions

c. Excess Passive Assets Rules for Pre-1997 Years

II. “United States Property” — Definition and Exceptions

A. Definition of “United States Property”

B. Exceptions

1. Statutory Exceptions

2. Regulatory Exception for Tax-Free Exchanges of Grandfathered (Pre-1963) Property

3. Statement Required if Exception Applies

III. Tangible Property Located in the United States

A. General Rule

B. Exceptions

1. Property Purchased in the United States for Export

a. Export Trade Assets

(1) Eligibility Rules

(2) Property for Use in Foreign Countries

(3) Warehousing: How Long May Export Property Remain Within the United States?

(4) Property Imported into the United States

b. Property in Transit Through the United States

2. Property Used in International Transportation

a. Statutory Exception for Use Predominantly Outside the United States in Foreign Commerce

(1) Transportation of Persons or Property

(2) Foreign Commerce

(3) Use Predominantly Outside the United States

b. Regulatory Exception for Aircraft and Vessels that Qualify for Active Leasing Exception to FPHCI

3. Property Physically Located Outside the United States

4. Property Used on the U.S. Continental Shelf

5. Export-Related Property of an FSC

6. Money

IV. Intangible Property Used in the United States

A. General Rule

B. When Is an Intangible Acquired for Use in the United States?

C. Adjusted Basis of the Property Right

V. Stock of Domestic Corporations

A. General Rule

B. Exception for Unrelated Domestic Corporations

VI. Obligations of U.S. Persons

Introductory Material

A. General Rules

B. Definition of Obligation

C. Definition of United States Person

D. Exceptions to § 956(c)(1)(C)

1. Obligations of Unrelated Corporations

2. Obligations of Short Duration

a. Pre-1988 — Obligations Collected or Maturing Within One Year

b. Obligations Collected Within 30 Days

c. Applying the 30-Day Rule in the Context of Quarterly Averaging

d. Abuses Involving Rollover of Loans with Brief Disinvestment Periods

e. Year of Inclusion if Loan Fails 30-Day Rule in Following Taxable Year

f. Obligations Collected Within 60 Days — Temporary Liberalization of 30-Day Rule

g. Optimizing Use of the 60-Day Rule in Light of Other Potentially Conflicting Legal Doctrines

3. Receivables: Obligations Arising in Connection with the Sale or Processing of Property

a. In General

b. Length of Time During Which Receivable May Be Outstanding

c. Exception Limited to Sale and Processing Transactions

d. Partially Excessive Obligations May Taint Entire Receivable

4. Obligations Arising in Connection with the Provision of Services

5. Bank Deposits

6. Obligations of Domestic Partnerships and Other Noncorporate U.S. Persons

7. Securities or Commodities Dealers Exception for “For Sale” Securities, Repos, and Collateral or Other Margin Arrangements When Acting in the Ordinary Course of Business

8. Obligations of § 1504(d) Contiguous Country Corporations

9. Obligations Arising Out of Involuntary Conversion of Non-U.S. Property

10. Money and U.S. Government Obligations

11. Obligations of States and Municipalities

12. Obligations Inherent in Futures Contracts

13. Warrants and Options

14. Prepaid Executory Contracts

15. Standardized Credit Default Swaps

16. Obligations of Foreign Partnerships

17. U.S. Parent's Guarantee of CFC's Borrowing

VII. Special Problems Involving Payables and Receivables

A. U.S. Parent Functioning as a Treasury Center or as Clearinghouse for CFC Accounts

B. CFC Factoring of Related Party's Trade Receivables

1. In General

2. Indirect Factoring of Related-Party Receivables

3. Financing Arrangements to Circumvent Restrictions on Related-Party Factoring

4. Substitution of Obligor to Circumvent Restrictions on Related-Party Factoring

VIII. Pledges and Guarantees

A. The General Rule of § 956(d)

B. The Amount Taken into Account

1. General Rule

2. Irrelevance of the Value of the CFC's Assets

3. Multiple CFC Guarantees of a Single Obligation: The Potential for Double Counting

C. Indirect Pledges: When a U.S. Shareholder Pledges Shares of CFC Stock

D. Tiering Up of Earnings and Profits of Lower-Tier CFCs

E. Arrangements Functionally Equivalent to Guarantees and Pledges

F. Pledges of Shares of a Domestic Entity that Owns Shares of a CFC

G. Pledges of Debt Obligations of CFCs

H. Cross-Collateralization

I. Special Case: On-Loan of the Proceeds from a Third-Party Borrowing to a CFC the Stock of Which Is Pledged

IX. Substance-Over-Form, Conduit, and Anti-Avoidance Rules in the § 956 Context

Introductory Material

A. Statutory Support and Legislative History

B. “Formed or Funded” Anti-Abuse Regulations: Use of Intermediate CFCs for Tax Avoidance Purposes

1. Control

2. A Principal Purpose of Tax Avoidance

3. Third-Tier or Lower-Tier CFC

4. Use of a Trust

5. Nominees

C. Conduit Arrangements, Including Back-to-Back Loans, and Circular Cash Flows

D. CFC Borrows Abroad on Behalf of U.S. Parent and On-Lends the Proceeds to U.S. Parent

E. Swap-and-Assign Transactions Recharacterized as Obligations of a U.S. Person

F. Aggregate Approach to Partnerships that Own U.S. Property

G. Loans to Related Foreign Partnerships that Have Investments in U.S. Property

H. Loans to Related Foreign Partnerships that Make Distributions to U.S. Partners

I. CFC's Temporary Divestment of U.S. Property

J. Notice 2007-9 and Anti-Avoidance Rule Using § 954(c)(6)

X. Exclusion for U.S. Property Investments Attributable to Specified Categories of Earnings

A. General

B. Earnings and Profits Derived from Effectively Connected Income

1. General Rule

2. Distributions by a CFC Traced First to Other Earnings

3. Only Post-1962 Effectively Connected Income Qualifies

4. Discharge of Pre-1963 Liabilities

C. Exception for Subpart F Income

D. Insurance Reserves

XI. Subpart F Exceptions that Are Not Available for § 956 Purposes

A. General

B. Section 952(c) Rules

C. Section 954(b)(4) Rule

D. The “70-5” Full Inclusion-De Minimis Rules

XII. Changes in CFC Status

A. Introduction

B. Acquisition of CFC Stock During the Year

C. Non-CFC Status During Part of the Year

D. Property Acquired Prior to CFC Status

E. Short (Less than 12-Month) Taxable Years

XIII. Calculation of Amount of U.S. Property Held by the CFC

Introductory Material

A. Adjusted Basis of U.S. Property

B. Liabilities to Which the U.S. Property Is Subject

1. General Rule

2. Liability in Excess of Basis

3. Artificial Liabilities

4. Reduction of Liability

5. Statement Required

C. Combined Effects of Depreciation and Amortization of Related Liability

D. Special Rules Proscribing Repatriations Involving Zero-Basis U.S. Property

XIV. Calculations of Amount of § 951(a)(1)(B) Gross Income

Introductory Material

A. Basic Principles

B. Calculation Where No Prior Year U.S. Property

C. Effect of § 959(c)(1) Previously Taxed Income Adjustment

D. Effect of Earnings and Profits Deficits

E. Effect of Fluctuations in Amount of U.S. Property

F. Previously Taxed Subpart F Income

G. Previously Taxed FPHC Income Under Former § 551(b)

H. Coordination of § § 955 and 956 Calculations Under Prior Law

XV. Effect of Distributions to Shareholders on § 956 Calculations

A. General Rule of § 959(a)

B. Effect of Distributions on § 956 Previously Taxed Income Account

1. Summary of Rules

2. Comprehensive Example

C. Effect of In-Kind Distributions

XVI. Adjusted Tax Basis, Earnings and Profits, and Foreign Tax Credit Considerations

A. Correlative Adjustment of Basis of CFC Stock

B. Earnings and Profits Considerations

1. Dollar-Based CFC, No Foreign Income Tax

2. Foreign Currency-Based CFC, No Foreign Income Tax

3. Foreign Currency-Based CFC, Foreign Income Tax Accrued

4. Subsequent Distributions by the CFC

C. Impact of Anti-Hopscotch Rule

1. Former Hopscotch Rule/Foreign Tax Credit Planning Strategy

2. Section 960(c) Overview

3. Excess Foreign Tax Credits and IRS Authority to Prevent Abuse

4. Mechanical Operation of § 960(c)

5. Numerical Illustration of Operation of § 960(c)

6. Potential Trap for the Unwary — Hypothetical Distributions that Would Be Nontaxable

7. Collateral Effects of Actual Distributions in Same Year as § 956 Inclusion

8. Prospective Effective Date and Grandfathering of Pre-2011 Acquisitions of U.S. Property

9. Effective Date Tax Planning Strategies

10. Continuing Viability of Affirmative Use of § 956

D. Section 1248 Dispositions

XVII. Compliance Considerations

A. Form 5471

B. Statements Attached to U.S. Shareholder's Return

Working Papers

Working Papers

Table of Worksheets

Additional Resources

Worksheet 1 H.R. Rep. No. 87-1447, at 57–60, 63–66 (1962)

Worksheet 2 S. Rep. No. 87-1881, at 78–81; 87–88 (1962)

Worksheet 3 H.R. Rep. No. 87-2508, at 29–30, 33 (1962) (Conf. Rep.)

Worksheet 4 H.R. Rep. No. 94-658, at 216–18 (1976)

Worksheet 5 S. Rep. No. 94-938, at 225–28 (1976)

Worksheet 6 S. Rep. No. 103-36, at 319–21, 323–24, 327–38, 343 (1993)

Worksheet 7 H.R. Rep. No. 103-213, at 639–40, 642–44 (1993) (Conf. Rep.)

Worksheet 8 Internal Revenue Manual–7.41

Worksheet 9 Exclusions from Definition of U.S. Property (Summary of Rules and Sample Exclusion Statement)

Worksheet 10 Reduction of Adjusted Basis of U.S. Property Subject to Liabilities (Summary of Rules and Sample Reduction Statement)

Worksheet 11 Exclusion for Income Previously Taxed to Predecessor-in-Interest (Summary of Rules and Sample Entitlement Statement)

Worksheet 12 Sample § 956 Calculations (Prior Law)

Worksheet 13 Pre-OBRA Calculations of Amount of § 951(a)(1)(B) Gross Income (Prior Law)