The IRS, in response to the current financial crisis, issued Notice 2008-91 on October 3, 2008, which temporarily expands the short-term financing exception to section 956 in order to facilitate liquidity. The expansion allows controlled foreign corporations ("CFCs") to make short-term (60-days under the Notice) loans to their U.S. shareholders without creating an income inclusion. Section 956 generally taxes U.S. shareholders that are effectively repatriating amounts from CFCs. Absent the exception provided in the Notice, section 956 generally would require the U.S. shareholder to include such amounts in its taxable income because the amounts are considered "obligations" of U.S. persons.
The Notice excludes from the definition of "obligation" a loan that is repaid within 60 days from the time it is incurred, so long as the CFC does not hold such obligations for 180 days or more during the tax year. This Notice expands an exception previously provided in Notice 88-108, which provided an exception for obligations that are repaid within 30 days so long as the CFC does not hold such obligations for more than 60 days during the year.
This new "60-day rule" will be applicable for two tax years ending after October 3, 2008. For calendar year taxpayers, therefore, it would apply to 2008 and 2009. Taxpayers may rely on either the 30-day rule contained in Notice 88-108 or the new 60-day rule in Notice 2008-91, but not both.
While Notice 2008-91 liberalizes the 30-day rule from Notice 88-108, a corporation that is a U.S. shareholder of a CFC that consistently borrows and repays obligations within a matter of days, but consistently has obligations outstanding to that CFC may be at risk. The IRS has previously challenged such transactions on substance-over-form grounds. Such transactions may be characterized as a single, long-term loan that does not qualify for the short-term exception.