The Limited, Inc. - Page 19




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                    on the Continental Shelf of the United States;                    
               [Emphasis added.]                                                      
               In pertinent part, section 1.956-1T(b)(4), Temporary Income            
          Tax Regs. 53 Fed. Reg. 22163, 22165 (June 14, 1988), provides:              
               Treatment of certain investments of earnings in United                 
               States property.  (i) Special Rule.  For purposes of                   
               1.956-1(b)(1) of the regulations [which, as pertinent,                 
               paraphrases section 956(a)(1)], a controlled foreign                   
               corporation will be considered to hold indirectly * * *                
               at the discretion of the District Director, investments                
               in U.S. property acquired by any other foreign                         
               corporation that is controlled by the controlled                       
               foreign corporation, if one of the principal purposes                  
               for creating, organizing, or funding (through capital                  
               contributions or debt) such other foreign corporation                  
               is to avoid the application of section 956 with respect                
               to the controlled foreign corporation.  * * *                          
          III.  Summary of Arguments of the Parties                                   
               A.  Respondent’s Arguments                                             
               MFE controls MFE N.V., and respondent argues that a                    
          principal purpose for creating, organizing, or funding MFE N.V.             
          was to avoid the application of section 956.  Thus, respondent              
          would exercise his discretion to consider MFE as owning                     
          (indirectly) any investment in U.S. property acquired by MFE N.V.           
          See sec. 1.956-1T(b)(4), Temporary Income Tax Regs.  Respondent             
          considers the MFE N.V. CDs to be U.S. property within the meaning           
          of section 956(b)(1)(C) (U.S. property).  Thus, respondent                  
          concludes that (1) MFE, a controlled foreign corporation,                   
          increased its earnings invested in U.S. property and                        








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