In SIH Partners, LLLP, the Tax Court upheld the validity of Treas. Reg. Sec. 1.956-2(c)(1), which provides that any obligation of a U.S. person with respect to which a controlled foreign corporation (CFC) as a pledgor or guarantor is considered U.S. property held by the CFC, and that amounts included in income under the reg are not qualified dividends.
The court’s summary is as follows:
S was the U.S. shareholder of two CFCs that guaranteed loans made to a U.S. person. R determined that S must include in its gross income for the tax years in issue the CFCs’ applicable earnings pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d). R’s determination relied on regulations promulgated under I.R.C. sec. 956 (regulations). R also determined that the amounts included in S’s gross income should be taxed as ordinary income.
P contends that the regulations are invalid and that in the absence of valid regulations R’s determination cannot be sustained. If we sustain R’s determination of the amounts included under I.R.C. secs. 951(a)(1)(B) and 956(d), P contends that the amounts should be taxed as qualified dividend income under I.R.C. sec. 1(h)(11).
Held: The regulations are valid, and R correctly determined that S must include in gross income the CFCs’ applicable earnings for the tax years in issue.
Held, further, the amounts included in P’s gross income pursuant to I.R.C. secs. 951(a)(1)(B) and 956(d) are not qualified dividend income under I.R.C. sec. 1(h)(11).
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.