Loan guarantees by CFCs in taxpayer’s gross income | KPMG | US
Share with your friends

Loan guarantees by CFCs includible in taxpayer’s gross income

Loan guarantees by CFCs in taxpayer’s gross income

The U.S. Tax Court today issued an opinion finding that a U.S. shareholder of two controlled foreign corporations (CFCs) that in turn had guaranteed loans made to a U.S. person, must include in its gross income the CFCs' applicable earnings and that the amount included in gross income is subject to tax as ordinary income.


Related content

In granting the government’s motion for summary judgment, the Tax Court rejected a taxpayer contention that regulations promulgated under section 956 were invalid. Instead, the court held the regulations were valid.


The case is: SIH Partners LLLP v. Commissioner, 150 T.C. No. 3 (January 18, 2018). Read the Tax Court’s 54-page opinion [PDF 181 KB]


The Tax Court provided the following summary of this case.

  • The taxpayer (a passthrough entity) was the U.S. shareholder of two CFCs (one established in Ireland and the other in the Cayman Islands).
  • These two CFCs guaranteed loans made to a U.S. person. 
  • The IRS issued a final partnership administrative adjustment (FPAA) determining that the U.S. shareholder must include in its gross income for the tax years in issue the CFCs’ applicable earnings under sections 951(a)(1)(B) and 956(d)—and specifically under regulations promulgated under section 956. 
  • The IRS also determined that the amount included in the U.S. shareholder’s gross income was taxable as ordinary income.

The taxpayer contended that the regulations were invalid. Alternatively, the taxpayer asserted that the amounts included in income under sections 951(a)(1)(B) and 956(d) were to be taxed as qualified dividend income.

The Tax Court granted summary judgment for the government finding that:

  • The regulations at issue were valid.
  • The IRS had correctly determined that the taxpayer must include in gross income the CFCs’ applicable earnings for the tax years in issue. 
  • The amounts were not qualified dividend income.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal