On March 2nd, we’re offering a free 1-hour CPE course titled “An Introduction to the U.S. Controlled Foreign Corporation Statute.” You can sign up at this link:
A CFC is a foreign corporation where a U.S. shareholder owns “more than” 50% of the offshore company. After passage of the CFC statute, practitioners quickly noted the 50% ownership requirement and correctly deduced that, if a non-U.S. shareholder owned the remaining 50%, the foreign corporation could escape being a CFC.
This was the tact taken by the taxpayer in Garlock, a case where a U.S. corporation owned a Panamanian company, formed before passage of the CFC statute. In an attempt to prevent CFC classification, the U.S. parent recapitalized the Panamanian subsidiary with a preferred share which was callable at any time. In addition, the foreign shareholder agreed not to exercise his ownership rights. From the case: “The report mentioned specifically two foreign investors who had been approached and had said that they "understood the situation," and expressed the belief that one of them would "invest" in the new preferred stock when issued.”
The above structure contains two key flaws. The first was that the preferred could called at any time. For the sake of argument, assume the foreign partner exercised its right to participate in management in a way that threatened the U.S. parent. Should that happen, the U.S. company would simply call the stock to remove the threat. The second flaw was the back-door deal between the partners. This fact made the recapitalization a tax sham.
Garlock offers planners several lessons. First of all, the attorneys advising the U.S. company correctly interpreted the statute: if a U.S. shareholder owns only 50% of the foreign company, it’s not a CFC. However, this means that the U.S. shareholder must give up control, or at least exercise control on an equal footing with a foreign partner. Second, backroom deals between taxpayers are never a good idea; should the Service investigate, they almost always come to light, thereby giving the IRS ample justification to shut down a transaction.
If you're a CPA on CFP, we're offering free continuing education courses on captive insurance, tax treaties, international tax and controlled foreign corporations.
While the duty of loyalty could be the subject of its own legal textbook, below are some pithy case law quotes that go a long way to encapsulating its basic tenants. These are taken from Earl Hoover's 1956 article, Basic Principles Underlying Duty of Loyalty
Rising Inflationary Pressures Mean Trustees Need to Re-examine Their Portfolio Yield and Asset Allocation
The top chart shows that core and overall CPI are both above 2%. The bottom chart shows that the CPE price deflator -- the Fed's preferred inflation measure -- is rising. We're also seeing inflation increase in other countries: the latest inflation figures from Germany, France, the EU and Canada all indicate that energy prices are rising at strong rates. While these increases have not bled into overall inflation measures yet, it's only a matter of time before companies can no longer absorb these cost increases, forcing them to raise prices.
The Prudent Investor Rule (Section 90 of the 3rd Restatement of Trusts) requires trustees to consider inflation when making investment decisions:
e. General requirement of caution. In addition to the duty to use care and skill, the trustee must exercise the caution of a prudent investor managing similar funds, in similar circumstances, for similar purposes. See § 77, Comment b. And see discussion in the Reporter’s Note to this Comment e. In the absence of contrary provisions in the terms of the trust, this requirement of caution requires the trustee to invest with a view both to safety of the capital and to securing a reasonable return. See generally
§ 79 on the duty of impartiality. Safety of capital includes not only the objective of protecting the trust property from the risk of loss of nominal value but, ordinarily, also a goal of preserving its real value--that is, seeking to avoid or reduce loss of the trust estate’s purchasing power as a result of inflation. This objective will also normally tend to protect the purchasing power of the income flow in the future.
Therefore, with inflation rising, trustees would be advised to re-evaluate their overall portfolio return and potentially readjusting parts of the their fixed income allocation.
Link From Our Previous Blog