- 35 -
effect to the dividend equivalence theory that underlies the
repatriation provision.13 If we find that the purchase of the
MFE N.V. CDs amounts to the use of the earnings of a controlled
corporation by a U.S. shareholder, we believe that such purchase
must be regarded as an increase of earnings invested in U.S.
property (and not a section 956 deposit).
On January 28, 1993, MFE N.V. purchased the (eight) MFE N.V.
CDs from WFNNB for $174.9 million, Each CD was for a term of
1 year, showed an annual interest rate of 3.1 percent, and
provided that it was a “nonnegotiable and nontransferable time
13 Petitioner argues that a limitation of the sec. 956 deposits
exception to unrelated-party deposits would render that exception
"superfluous" in light of sec. 956(b)(2)(F). According to
petitioner, because sec. 956(b)(2)(F) permits a controlled
foreign corporation's earnings to escape U.S. taxation when
invested in the obligations of an unrelated U.S. corporation, it
would serve no purpose to interpret the sec. 956 deposits
exception as accomplishing the same result with respect to
obligations in the form of deposits with a domestic corporation
carrying on the banking business. The sec. 956(b)(2)(A)
exception, however, applies to "deposits with persons carrying on
the banking business", whereas the sec. 956(b)(2)(F) exception
applies to "obligations of a domestic corporation." A person
carrying on the banking business need not be a corporation. See,
e.g., Mass. Gen. Laws Ann. ch. 167, sec. 1 (1997) defining "Bank"
to include "any individuals, association, partnership or
corporation * * * doing a banking business in the commonwealth";
see also N.D. Cent. Code sec. 6-01-02 (1995) defining the terms
"banking association" and "state banking association" to include
"limited liability companies, partnerships, firms, or
associations whose business in whole or in part consists of the
taking of money on deposit". Although our interpretation of the
sec. 956 deposits exception narrows its scope, we conclude that
it cannot be interpreted to permit deposits by controlled foreign
corporations with a related person carrying on the banking
business to go untaxed and still remain consistent with the clear
overall legislative intent to tax investments in related U.S.
persons.
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