On December 28, 2009, the Treasury Department and the Internal Revenue Service (IRS) published Notice 2010-12, which extends for another taxable year the current liberalized rules that permit a foreign subsidiary to make short-term loans to its US parent to ease liquidity.¹ The IRS previously issued Notice 2008-91, discussed in our client update of October 9, 2008, “IRS Liberalizes the Rules for a Foreign Subsidiary to Make Short-Term Loans to its US Parent to Ease Liquidity.” Notice 2008-91 generally extended the amount of time controlled foreign corporations (CFCs) may lend money to related US persons without the loan being treated as an investment in United States property. Specifically, Notice 2008-91 increased the amount of days that any one loan could remain outstanding from 30 days (limited to a total of 59 lending days during the year) to 60 days for any one loan (limited to a total of 179 lending days during the year).
Because Notice 2008-91 was intended as a limited response to the liquidity crisis, it only applied to the first two taxable years of a CFC ending after October 3, 2008. Notice 2009-10, issued on January 14, 2009, extended the period to which Notice 2008-91 applies to include the third consecutive taxable year of a CFC that ends after October 3, 2008, and on or before December 31, 2009; in essence Notice 2009-10 extends the liberalized rule to a “third” short year, if any, for a company ending before December 31, 2009.
Notice 2010-12 further extends this exception by providing that Notice 2008-91 will also apply to the taxable year of a CFC which immediately follows the last taxable year of that CFC to which Notice 2008-91 applies, taking into account the extended period (i.e., for a third full taxable year, or a possible fourth taxable year, if one of the years was a short year that met the required dates). Further, Notice 2010-12 provides that Notice 2008-91 shall not apply to taxable years beginning on or after January 1, 2011, and that “[t]he Treasury Department and the [IRS] do not anticipate extending the application of the regulations described in Notice 2008-91 to any additional periods.” This statement may indicate optimism on the part of Treasury and the IRS that the credit markets will make a sufficient recovery before the end of 2010.
When choosing to apply these Notices, taxpayers should ensure that the 60-day and the 179-day limits of Notice 2008-91 are satisfied under all aspects of current law. In particular, taxpayers should confirm that two or more independent loans are not stepped together and treated as a single loan outstanding beyond either the 60-day single loan limit or the 179-day total limit of Notice 2008-91. The IRS has refused to provide additional guidance or a safe harbor with respect to this issue.