Definition of U.S. Property Exception Modified (Notice 2018-46)

The IRS modified the exception from the definition of U.S. property under Code Sec. 956 for obligations that arise in connection with derivative financial instruments. In addition, under Code Sec. 956, U.S. shareholders of controlled foreign corporations (CFCs) may be taxed on their share of the CFC’s earnings invested in U.S. property.

Definition of U.S. Property Exception Modified

Taxpayers can exclude an obligation that arises in connection with a derivative financial instrument from the definition of U.S. property. This exception applies without regard to the status of the instrument as a notional principal contract. However, the exception will apply only when:

  1. the principal amount of the obligation does not exceed the fair market value of cash or readily marketable securities,
  2. a U.S. or foreign dealer in securities or commodities posted or received the obligation as margin or collateral,
  3. in the ordinary course of its business.

This exception is similar to the one in Code Sec. 956(c)(2)(J) for obligations for which readily marketable securities are posted as collateral.

Moreover, taxpayers may rely on this rule until the IRS issues regulations, including for obligations arising before May 4, 2018. Alternatively, taxpayers can continue to apply the full margin or cash collateral exception in Temporary Reg. §1.956-2T(b)(1)(xi).

Notice 2018-46

 

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CCHTaxGroup

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