International Income Taxation

Key: N = page in notes (B = second side of that page)

TP = Taxpayer

I. Jurisdiction to TaxI

A. Based on CitizenshipA (tax on worldwide income)

1. US is in a minority of governments exerting a plenary taxing jurisdiction (based on citizenship) rather than territorial jurisdiction

a. This difference is exploited in tax planning

2. Cook v. Tait2, 265 U.S. 47 (1924) 3/N1

a. US citizen moved to Mexico. His only income came from Mexico.

b. I: Whether the US had the power to tax that Mexican income.

c. H: Yes. Does not matter where the income was made or where the citizen lives. US has the jurisdiction to tax citizens on their world-wide income.

d. Rationale: The US government benefits its citizens and their property no matter where located.

(1) E.g., citizen to go to US consulate wherever and be safe inside those walls if necessary

3. Rexach v. U.S.3, 390 F.2d 631 (1968) 7

a. Naturalized citizen renounced his citizenship in 1958. In 1962, he reapplied for citizenship saying that his original rejection had been compelled. Application granted.

b. I: Whether IRS could tax Rexach for his income between 1958 and 1962.

c. H: Yes. The decision to grant him citizenship acted as if he had been a citizen all along. Benefits of citizenship exist whether the individual used them or not; they exist by the mere nature of government

d. If power to tax is from "status" of citizenship, then Rexach is right.

e. If instead it is from something else (e.g., substantive connection; substantial benefit) then Rexach is wrong.

B. Residence Jurisdiction over AliensB

1. Park v. Comm'r1, 79 T.C. 252 (1982) 9

a. Park owned considerable property in the US, entertained frequently, and was listed in DC's green book (of socially prominent individuals). Also had a home in Korea.

b. I: Whether residence in another country eliminates ability to be a resident in the US

c. H: No. The duration and nature of his presence in the US, as evidenced by his deep and continuing involvement in business, etc., affairs, were sufficient to establish the kind of attachment and relationship to the US that constitutes residence within the § 871 Regs's requirements

d. Resident taxed on worldwide income (Non-Resident Alien (NRA) only taxed on US-source income)

e. Rebuttable presumption: NRA

f. Neither termination or abandonment of a residence in another country is considered a prerequisite to finding of US residence

g. Facts and Circumstances Test

2. Brittingham v. Comm'r2, 66 T.C. 373 (1976) 21

a. TP moved to Mexico when 5 years old. Citizen at birth. Had an apartment in California, had a checking account, held a Mexican passport. She paid state tax, not federal, on basis of nonresidency

b. I: Whether she was an alien resident from 1960-1966.

c. H: Yes. She was able to reside continuously for 20 years in the US despite immigration restrictions.

d. Both physical presence plus the definite intent to make one's home at that place is necessary to establish a residence

(1) Mere physical presence in a country does not by itself establish residence

e. Presumption of non-residence is rebutted by showing that the alien's stay in the US has been of such an extended nature as to constitute him a resident

f. Facts and Circumstances Test

3. Treaty Tiebreakers (in order) (See US-Canada Treaty) N8

a. where he has a permanent home available to him (intends to return eventually)

b. where his personal and economic relations are closer

c. has a habitual abode (where he is most of the time)

d. where he is a citizen

e. shall be settled by mutual agreement

4. Savings Clause

a. saves the US from losing taxing jurisdiction over its own citizens as a result of the Treaty

b. not intended to soften the full worldwide tax of US citizens

c. Merely benefits the other country's citizens (eg., Canadians in US-Canada treaty)

d. Treaty provides foreign tax credit

(1) even if US repealed it in the tax code, it would still be effective

C. Analysis for Taxing Non-CitizensC N3B

1. Are they citizens?

a. if yes, then subject to full US tax on worldwide income

b. if no, then go to #2

2. Are they US residents?

a. if yes, then full US tax, like a citizen

3. Are they non-resident aliens? (NRA)

a. taxed only on US-source income (§ 871)

b. if ordinary income, taxed at flat rate of 30%

c. capital gains are not taxed

(1) § 871(a)(2) provided that if in the US for more than 182 days, the would be taxed on US-source capital gains

(2) In 1984, § 7701(b) provided that if in the US for more than 182 days and passed the substantial presence test or green card test, then would be treated as a resident (subject to tax on worldwide income)

(a) THUS, gutted § 871(a)(2)

i) basis for Park, supra at p. 1

a) full taxation v. zero taxation because his income was entirely capital gains

(3) Current Rule: If in US for more than 182 days then a US resident and taxed on all worldwide income

(a) eliminated the Facts and Circumstances Test

(4) Green Card Test § 7701(b)(1)(i)

(a) if lawfully admitted to be a US resident

(b) if you have this status from the INS, then you are a "resident" alien for tax purposes

(c) taxed on worldwide income

(5) Substantial Presence Test § 7701(b)(1)(ii) N7

(a) at least 183 days during 3 years

(b) Regs make it clear that the date of entry and the date of departure are counted as time in the US for the purpose of calculating the 183 days

(c) 122 days in any given year is enough to give a client a problem N9B

i) § 7701(b)(3) over 30 days in current year start worrying about # of days for prior two years

d. Only remedy is to find an exclusion (§ 7701(b)(3)(C))

(1) "Closer Connection" N7

(a) if here less than 183 days in the current year;

i) IRS doesn't round days, but they use fractions

ii) cannot round up or down

(b) has a tax home in foreign country;

i) defined by § 301.7701(b)-2(c)

(c) AND has a closer connection to the foreign country 2(d)

i) it matters whether you are here on vacation or business

(2) exempt individual § 7701(b)(3)(D)(i)

(a) day by day analysis

(b) More information in § 7701(b)(5)(B)

i) Foreign-government related individual

ii) Noriega planning possibility from N10

a) his out: get Panamanian government to make his wife/kid/etc. a diplomat in US, then (5)(B)(iii) will apply

b) may or may not work, but it's a good faith effort

iii) looks to reason for his presence in US

(3) medical exclusion § 7701(b)(3)(D)(ii)

(a) wanted to leave, intended to leave, but was precluded from leaving because of medical condition arising while in US

(4) See § 7701(b) Regulations

(a) To Challenge Interpretive Regs, (e.g., § 7701(b)

i) will be invalid if it's beyond the scope of statute or unreasonable

(b) To Challenge Legislative Regs

i) Congress sets out list of things, gives Treas. right to promulgate Regs under them, and gives Treas. power for "any other that Treasury chooses to regulate"

(c) Either way:

i) file return taking position to the contrary to the Regs

a) must disclose that to avoid penalties

ii) IRS will audit

iii) Notice of deficiency — "90 day letter"

a) must be prepared to litigate

iv) File petition within 90 days in Tax Court

4. Rexach and Cook don't care

a. where you reside

b. if there's any property in the US

c. if the income is from the US

d. To avoid tax, must renounce citizenship

(1) cannot do so with a tax avoidance purpose

(2) § 877 prevents that

(a) will tax you for the next 10 years, but only on US-source income

(b) ONLY IF taxpayer proves non-tax avoidance purpose

D. Residence Jurisdiction Over CorporationsD N10B

1. § 7701(a)(4): Taxpayer chooses tax status based on place of incorp.

a. Available Tests in Code:

(1) Central management test

(2) Place of incorporation

(a) ** THIS IS THE LAW TODAY **

b. Poss. of tax planning:

(1) by choosing to incorp in tax haven country, and having that corp. own the foreign stock, you'd avoid US tax jurisdiction

c. CONSIDER: Subpart F (Controlled Foreign Corporations) Rules

(1) something close to the central management test

(2) taxes U.S. parent as if the CFC distributed a dividend (repatriating the funds)

(3) STRICT RULES

(4) See p. 26 for more info on CFCs

2. § 881 — taxes US-source income for foreign corps

3. § 882 — taxes effectively connected income

II. Taxation of Foreigners (INBOUND)II

A. Income from Business OperationsA

1. Agency Relationship (in the form of Consignment)1

a. Handfield v. Comm'ra, 23 T.C. 633 (1955) 39

(1) Card manufacturer operating solely out of Canada. Spent 24 days in US, but had a consignment contract with American News Co. to sell cards in the US.

(2) I: Whether the tp, a nonresident Canadian was engaged in business in the US during the year in controversy

(3) H: Yes. The News Co. was an agent in the US for TP. THUS, through his agent, TP was engaged in a trade or business in the US; his US-source income is thus taxable (§ 871(b))

(4) Factors:

(a) cards were fully returnable

i) TP thus assumed the risk

ii) TP would allow credit on all unsold cards, regardless of condition

(b) TP pays shipping on returned cards

(c) TP set the end price to the retail customer

(d) TP gave exclusive rights to News Co. to distribute in US

(5) How to advise:

(a) who is assuming the risk

(b) restructure based on the court's factors

i) try to change terms of contract

a) so that US co. assumes the risk

b) US co. may not want to do this

ii) need an independent agent

iii) look to treaty for help

a) Article VII

b) only taxed in US if has a permanent establishment (treaty-based concept)

*) other than an independent agent if person can conclude contracts in TP's name; AND

*) habitually exercises this power

c) Code concept is "effectively connected"

(6) If TP had sold the cards to News Co., perhaps a different result

(a) would have needed to know:

i) where title passes (perhaps would not be US-source income if title passed in Canada)

2. US Subsidiary Deemed an Agent 2

a. Inverworld v. Comm'ra, TC Memo (June 27, 1996) Supp 2A

(1) LTD was an investment company organized in the Caymans, which owned all of the stock of INC (a Texas Corp.). LTD was organized to provide US and foreign investment opportunities to InverMexico clients. INC invested the funds deposited by clients in US according to LTD's instructions.

(2) I: Whether INC was an agent of LTD thus making LTR engaged in the conduct of a trade or business through an agent (pursuant to § 864(b) or (c).

(3) H: Yes. INC is a dependent agent who had the authority to negotiate and conclude contracts in the name of LTD and regularly did so. LTD's trading in stocks was not entitled to the Higgins exception for trading on one's own account because LTD was a dealer in securities.

(4) Factors under Reg §1.864-7(a)(2) to determine whether TP has an office or other fixed place of business in US Supp 6

(a) fixed facilities

i) can be considered such even if TP does not use it continuously

(b) management activity

i) where top management decision-making happens vs. the day-to-day trade or business of the foreign corp

(c) agent activity

i) office of agent shall be disregarded unless agent has the authority to negotiate and conclude contracts in the name of NRA or foreign corp and regularly does so, OR agent has stock of merchandise of NRA or fc from which orders are filled regularly

ii) uses frequency tests

(d) employee activity

(e) office or other fixed place of business of related person

(5) * Facts and Circumstances Test * to determine whether engaged in the conduct of a trade or business

(6) SUBSTANCE OVER FORM

3. Partnerships3

a. Cokes v. Comm'ra, 91 T.C. 222 (1988) 43

(1) TP received working interest in Indiana oil field following the death of her husband (who owned the interest before). She had no involvement with any decisions in the oil field.

(2) I: Whether TP was subject to self-employment tax as a result of her earnings from the oil field

(3) H: Yes. Her formal arrangement by contract was a partnership agreement. THUS, even though she had nothing to do with the decisions, she was a partner and should be taxed accordingly

(4) Not an international tax case, but the principles translate to define how partnerships are held responsible

(a) Partnerships (Pships) are treated as pass-throughs

(b) THUS, if Pship would be engaged in trade or business in US, then tp would be liable for US tax as if tp was individually involved in a trade or business

(5) Determine:

(a) if TP is in US as a partner in a partnership, then . . .

(b) implications? TP will be deemed engaged in the conduct of a trade or business in US (§ 875)

i) if get § 875 treatment, then get US tax on all US source income effectively connected to that trade or business

(6) If partnership is engaged in the conduct of a trade or business at any time during the taxable year, then will be deemed engaged in the conduct of a trade or business for the entire year

(a) applies when TP liquidates corp 1/2-way through year and uses cap gains from liquidation to start partnership

4. Trading in Securities4

a. Higgins v. Comm'ra, 312 U.S. 212 (1941) 46

(1) TP was engaged in the business of managing his own investments as well as a real estate investment firm. Claimed deductions for expenses for ordinary and necessary business expenses. IRS wanted to apportion the expenses between personal and business. TP resided in Paris and did this business over phone, cable and mail.

(2) I: Whether TP's activities were deductible as business expenses

(3) H: Not entirely. His expenses should be apportioned between business and personal

(4) § 864 codifies Higgins

(a) gives authority for "not engaging in the conduct of a trade or business in US" at all

(b) dividends from these investments will not be taxable in US at all

(c) even if have a broker

(d) still not treated as engaged in trade or business

5. Check-the-Box Regs5

a. any non-corporation can elect to be taxed as a corporation

b. must be consistent about their choices

c. codified Dec. 17, 1996, effective Jan. 1, 1997

B. Transfer Pricing: Tax Avoidance by Foreign-Based EntitiesB N/15 & N/18

1. Related-Party Sale1

a. Even if distributor is a pure conduit:

(1) Canadian sub (HC) will be engaged in a trade or business in US

(2) IRS won't get much because the income attributable will be $2

(3) NOT $100 representing the entire profit

b. Can do the same thing economically if incorporate the sub in the US

c. This assumes that Transfer Pricing works (which it doesn't)

d. Defin: the price that the foreign manufacturer charges to subs = "transfer price"

2. Inbound transactions: § 482 prevents this scheme N16

a. deceptively simple section

b. gives Treas. the authority to come in and look at the transaction

c. would reallocate some of the $98 income in Canada and allocate it to the US sub

d. powerful weapon, but requires intense factual analysis

e. Treas. proposed Regs. requiring companies to keep records in English

(1) hard to determine which records should be translated

(2) hue & cry to protest this

3. Outbound transactions: CFC Regulations to prevent abuses

a. US co. wants to sell products in France

b. Title passage is irrelevant because it's a US co (US already has jurisdiction to tax)

c. Transfer pricing between US parent and Cayman sub for $2 and then sale to France would keep the profit in Caymans (tax haven)

d. CFC Rules allocate the profit in Cayman to US parent if Cayman co. is merely a pass-through

(1) See page 26 for more info on CFCs

4. Controversial Ways to Make § 482 Work:

a. APA (advanced pricing agreement procedure)

(1) company can come in to IRS for a ruling on intercompany prices

(2) Barkleys Bank -- first to receive APA

(3) biggest incentive: will work both with the domestic sub and the foreign parent

(4) Problem: Foreign country has already subjected the $$ to foreign tax

(a) THUS, already double taxed

(b) § 482 adjustment makes settlement harder

(c) BUT, if both countries agree to the APA, then you have no problem

b. Allocation of Judicial Resources

(1) § 482 threatening to clog the Tax Court

(2) worse than tax-shelter cases in the mid-1980s.

(3) So, Tax Court offers an alternative: arbitration

(a) baseball-type arbitration

(b) each party chooses a number (arbitrator will pick either one of the numbers -- cannot pick somewhere in the middle)

(c) THUS, makes each party really try to hit the exact number

(4) process designed to force the parties to work it out

(5) resolution is unpublished

5. Determining Arms Length Prices

a. Super Royalty Provision of § 482 N21

(1) Deals with intangible property (intellectual property)

(2) companies can come up with standard info for charging for royalties

(a) Problems: there are at least some patents that are more valuable

i) eg. drug to cure AIDS v. another analgesic

b. Areas targeted by § 482 54-55

(1) rebates

(2) advertising expenses

(3) warranty costs

(4) freight costs

(5) interest

(6) insurance

(7) accelerated ded'ns

c. Ways to Determine Arms Length Price N20B

(1) Comparable, Uncontrolled Price Method

(a) What a CUP would have paid for this item

(b) Problem: Who is comparable to whom?

(c) Economists figure this out (price theory)

(d) There might be no comparable party

i) eg. patent (legal monopoly)

(2) Cost Plus Method

(a) retailer sets the ultimate sales price and normal industry market is X (eg. 10%)

(b) THUS, find out the "normal price" between manufacturer and distributor

(3) Profit Split Method

(a) where manufacturer and distributor agree to split profits 50-50

(b) economists must figure this out

(4) Problems:

(a) how to measure this income

i) offset cost of developing? (R/D)

(b) looking retrospectively (after the income has been made)

(c) product-specific

d. Similar to § 367 (basis to foreign corps)

e. See example of Handfield argument from the outbound side N22

(1) further examples of problems with the arms length test

(2) Blocked Income Doctrine: foreign law provides a limit to the market & IRS can't force foreign companies to break the law

C. Currency Exchange Problem

1. Notes p. 19B

2. Question is When you translate into the new currency

D. Tax TreatiesD N23

1. See page 2 for a list of Treaty Tiebreakers N8

2. Withholding2

a. §§ 1441, 1442 make §§ 871, 881 a problem for US payors

(1) withholding is a method of collection

(2) no need to file a return

b. Aiken Indus. v. Comm'rb, 56 T.C. 925 (1971) 64/N23A

(1) See diagram on 65. MPI borrowed $2.25 million from ECl; agreed to pay interest, but paid it to Industrias (Honduras) instead of ECL. ECL paid Industrias $2.25 million in exchange for notes of the same value.

(2) I: Whether treaty between US and Honduras exempted the interest paid by MPI to Industrias from tax, thus eliminating the need to withhold at source (MPI)

(3) H: No. In sum, Industrias got back exactly what it paid out and the transaction had no business purpose. Thus, tax avoidance reason here required taxation.

(4) This was interest income that § 881 taxes to ECL as US-source income to non-resident

(a) no mechanism to collect the tax unless use § 1441(a).

(5) US-Honduras treaty does not immunize interest payments from US withholding b/c Ct focuses on words of Art. IX (see fn. 6 on p. 66) (referring back to interpretation of US law)

(a) gives broad authority to interpret meaning of words "received by" consistent with US law

(b) because Treaty does not apply, § 881 allows IRS to withhold

(6) Treaty Shopping

(a) anti-treaty shopping provisions in US treaties

(b) eg., US-Canada treaty

i) Article 29(A) (p. A-34 of Text) N.23D

(c) Lessons

i) advent of anti-treaty shopping provisions did not make Aiken chain of events not possible, impossible to win a tax argument with IRS

ii) Limitation provision like Art 29A would probably have killed Aiken (limited to certain types of residents)

iii) possible to plan around limitations provisions

3. Capital Gains Exempted from Treaty3

a. Botai Corp. v. Comm'ra, TC Memo 1990-475 (1990) 68

(1) Botai, a Netherlands Antilles corp, bought land with a Florida corp with intent to develop it. Changed mind. Sold land for a $4.9 million note. Botai then tried to establish residency in the UK. Sold note for $5 million.

(2) I: Whether the gain from the sale was capital or ordinary (b/c US-UK treaty exempted only ordinary gain)

(3) H: Capital, based on the character of the underlying asset. THUS, US-UK treaty does not apply to exempt the income. (§ 897 acts to override the treaty because the treaty did not contain a cap gains article).

(4) Imp: Botai was a shell corp and had no purpose. Same in UK: managed and controlled outside of UK (no assets or employees in UK)

(5) P'ship consequences:

(a) tax consequences for $2.8 million cash

(b) the $4.9 m. is installment loan

i) no tax consequences on receipt of a note (§ 453 — not in our Supp)

a) deals with purchased money mortgage

b) sale of property on installment basis

c) complicated section because there's a high potential for abuse

ii) Code allows you to elect to be taxed later as an installment sales contract

a) if do nothing, will be deemed to get installment basis

(6) Sample Installment Basis

(a) Amt realized = $5 million (note)

(b) Basis = $2.5 million

(c) Gain is thus $2.5 million (equiv. to 50% of amt realized)

(d) THUS, each time get a payment, will be taxed on 1/2 of payment (represents amount of gain)

(e) Hence, disposition of the NOTE becomes the realization event

(7) Why do we need the treaty to have the cap gains not taxed?

(a) Botai in US only within a partnership (Pship)

i) § 875 in t/b if Pship is so engaged

ii) See Cokes, above

(b) Looks like a Higgins type of investor for his own account (§ 864)

i) THUS, not t/b

(c) Capital asset (land)

i) unlikely to rise to t/b in US

ii) THUS, partners are not engaged in t/b in US

(d) § 881 not connected with US Business

i) no tax on capital gains

ii) § 871 (183 day rule for NRA, but not applicable to corp because corp does not physically exist anywhere

(e) BUT: § 897 overrides lack of tax consequences on capital investments

i) G/R: gain on disposition of real property in US recognized as if Tp were engaged in the conduct of a trade or business

4. Agent of "Independent Status"4

a. Taisei Fire & Marine Co. v. Comm'ra, 104 T.C. 535 (1995) 71

(1) Japanese insurance companies (Petitioners) used Fortress to set up their reinsurance contracts. Petitioners attended monthly industry meetings where each is present, but they have never met to discuss Fortress.

(2) I: Whether petitioners had a US permanent establishment by virtue of the activities of a US agent (Fortress) in accepting reinsurance on behalf of each petitioner.

(3) H: No. Fortress was legally and economically independent of each petitioner, thus meeting the definition of "agent of independent status" under the US-Japan Treaty

(4) Commercial profits of a Japanese resident are exempt from US tax, unless such profits are attributable to a US permanent establishment

(5) Analogy of employee v. independent contractor is of limited use

(6) Sum of $27 million over 3 years was not what you would pay to a subservient company

(7) IRS's best argument: these 12 met together, thus they're acting as one group

(a) contra: this is an example of Merryl Lynch serving multiple clients

5. Alternative Minimum Tax5

a. Lindsey v. Comm'ra, 98 T.C. 672 (1992) 79

(1) TP was a US resident who had retired to Switzerland. He paid $24K in taxes to Switzerland. Filed 1040, claiming tax liab of $14K, which he offset completely using his foreign tax credit. IRS claimed foul; said that he owed the alternative minimum tax (§ 55) of $9156 of which he could only avoid 90% (thus, he should owe $900). TP argued that this was double taxation.

(2) I: Whether the Treaty, proscribing double taxation, supersedes the IR Code requiring that 10% of alt. min. tax must be paid

(3) H: No. The final (most recent) act by the sovereign (US) will supersede. Here, the IR Code wins.

(4) G/R: When a Treaty & an Act of Congress conflict, "the last expression of the sovereign must control."

(5) Treaties do not enjoy status superior to acts of Congress.

6. Kinds of Things Treaties Generally Provide:

a. include taxes covered

(1) typically only cover federal income tax

(2) not SSA tax, state, local, estate, gift, etc.

b. residence tiebreaker provisions

c. definition of permanent establishments

d. look for the real property article (Article XI in US-Canada Treaty)

(1) FIRPTA triggered (see chart for more info on FIRPTA § 897)

e. interest and dividends

(1) if no treaty applies and Canadian citizen receives interest or dividend from US sources, § 871(a)/§ 881 --> 30% flat rate

(2) FDAP income (see table: § 871 ordinary income)

E. Branch TaxE N28

1. § 884 intended to halt this choice of entity being driven on tax reasons

2. Key: Dividend Equivalent Amount2

a. Situation where there's no need to remit a dividend to a foreign parent (because foreign parent already owns the branch's funds)

b. Concept: look at the investments in the US over the course of the year

(1) at the end of the year, we see that you've had $2000 more in US assets (but don't look like you've paid a dividend to a foreign parent)

(2) § 884(a) imposes 2 taxes (§882 corp tax, and an additional 30% on the dividend equivalent amount)

3. Calculation (§ 884(b))3

a. Allows for cases where companies would not have paid a dividend (where all the E&P wouldn't go to the foreign corp)

b. In this case, effectively connected E&P of $2000 is reduced to zero because of § 884(b)

c. Allows for adjustment of E&P to account for reinvestment in the US versus abandonment of US investment in favor of repatriating the assets to foreign corp

d. Examples:

(1) Foreign corp has $100 effectively connected E&P (ECEP), but purchases an additional $100 in US assets (increasing US net equity)

(a) the $100 ECEP is reduced by the $100 new assets to make a $0 (zero) dividend equivalent amount

(b) Takes into account fact that this branch did not remotely repatriate those earnings to the foreign corp (instead reinvested them in the US)

(2) Foreign corp has $1000 of net equity in 1986. Has $100 new assets in 1987 (to counteract $100 new ECEP), and zero ECEP in 1988. But it decreases its US net equity in 1988 by $40.

(a) THUS, has a dividend equivalent amount of $40 in 1988 (subject only to the limitation of $100 accumulated E&P) representing the amount of assets that have been effectively transferred to the foreign parent

4. Limitation § 884(b)(2)(B)4

a. can only increase dividend equivalent amount by the amount of accumulated ECEP previous year

b. if zero accumulated ECEP in previous year, then make no adjustment (dividend equivalent amount would remain at the $2000).

c. Example:

(1) Jan 1 net equity: $3000; Dec 31 $500

(2) ECEP current year is $2000

(3) Difference between Jan 1 & Dec 31 amounts is $2500, want to add the $2500 to dividend equivalent amount so that it all gets taxed twice (as all corp. tax should be)

(a) looks like branch repatriated funds to foreign corp

(4) BUT, if accumulated ECEP from previous year was only $1001, then could only add $1001.

(5) Dividend equivalent amount would be $3001 ($2000 ECEP plus $1001 limitation).

(6) If we taxed on the excess, we'd be taxing on capital contributions

5. Big Difference between Corp & Branch

a. corp has to actually declare a dividend

(1) could defer § 882 tax indefinitely if you don't declare a dividend

(2) could get the E&P to parent by a loan