Taiyo Hawaii Company, Ltd. - Page 30

                                       - 30 -                                         

          Income Tax Regs.  In the second step, the amount of U.S.-                   
          connected liabilities is determined based on a "fixed" or                   
          "actual" ratio.  The latter is the ratio of the foreign                     
          corporation's worldwide liabilities to its worldwide assets.                
          Sec. 1.882-5(b)(2), Income Tax Regs.  In the third step, the                
          U.S.-connected liabilities are multiplied by an appropriate                 
          interest rate to arrive at the interest expense allocable to                
          ECI.17  Sec. 1.882-5(b)(3), Income Tax Regs.  The branch interest           
          is subtracted from the interest so allocable to ECI to determine            
          the excess interest.  The parties disagree over the application             
          of the three-step process; in particular, whether the Ginter and            
          Gomes properties are step 1 assets (assets that produce income              
          effectively connected with the conduct of a U.S. trade or                   

               17  Sec. 1.882-5(b), Income Tax Regs., was amended for                 
          taxable years beginning on or after June 6, 1996.  Amended sec.             
          1.882-5(b)(1), Income Tax Regs., retains the three-step process             
          for allocation of interest expense to ECI but relies on sec.                
          1.884-1(d), Income Tax Regs., for the definition of a step 1                
          "U.S. asset".  Sec. 1.884-1(d)(1), Income Tax Regs., provides               
          that an asset is a U.S. asset if "All income produced by the                
          asset on the determination date is ECI * * * and * * * All gain             
          from the disposition of the asset would be ECI if the asset were            
          disposed of on * * * [the determination date] and the disposition           
          produced gain."  As an example of real property which is not                
          connected to a U.S. business, the regulation describes a U.S.               
          condominium apartment owned by the foreign corporation which                
          would not produce ECI if sold.  See sec. 1.884-1(d)(2)(xi),                 
          Example (3), Income Tax Regs.                                               

Page:  Previous  20  21  22  23  24  25  26  27  28  29  30  31  32  33  34  35  36  37  38  39  Next

Last modified: May 25, 2011