- 98 -
from a related person, as defined in section 864(d)(4).69 Sec.
881(c)(3)(C).
In connection with the 10-percent foreign shareholder rule,
the conference report for the Deficit Reduction Act of 1984
stated:
taxpayers may attempt to circumvent the foreign share-
holder * * * rule * * * by entering into "back to back"
loans, wherein a foreign affiliate of a U.S. taxpayer *
* * lends money to an unrelated foreign party that
relends that money at discount to the U.S. taxpay-
er.[70] The conferees intend that the Internal Revenue
Service, when appropriate, use means at its disposal to
determine whether back to back loans exist. [H. Conf.
Rept. 98-861 at 937-938, 1984-3 C.B. (Vol. 2) 191-192.]
In connection with the enactment of the exemption from U.S.
taxation for portfolio interest, Congress provided that interest
paid on a "United States affiliate obligation" to an "applicable
CFC" in existence on or before June 22, 1984, is to be treated as
paid to a resident of such CFC's country of incorporation. See
Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 127(g)(3), 98
Stat. 652-653; see also H. Conf. Rept. 98-861 at 938, 1984-3 C.B.
(Vol. 2) 192. A "United States affiliate obligation" is an
obligation issued before June 22, 1984, by a U.S. person related
to an applicable CFC within the meaning of section 482. Deficit
69 Sec. 881(c)(4) prescribes certain rules in the case of port-
folio interest received by a CFC.
70 We note that the U.S. Court of Appeals for the Ninth Circuit
has described a "back-to-back loan" as "a bank loan * * * col-
lateralized with a cash deposit from a third party." Erhard v.
Commissioner, 46 F.3d 1470, 1473 n.2 (9th Cir. 1995), affg. T.C.
Memo. 1992-376 and T.C. Memo. 1991-290.
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