Beware of Section 956 Constructive Dividends Resulting from Short-Term Cross-Border Intercompany Loans
By Anthony DiosdiInternal Revenue Code Section 956 provides that a U.S. shareholder of a controlled foreign corporation or “CFC” must include in his or her income his or her pro rata share of the CFC’s increase in its earnings and profits or E&P invested in U.S. property for the taxable year. For purposes of Section 956, U.S. property includes most tangible and intangible property owned by the CFC. In enacted Section 956, Congress concluded that if any CFC loaned its accumulated earnings to its U.S. shareholders, earnings to the U.S. shareholders had occurred and, consequently, the loan should be treated as a constructive dividend. This treatment tax is based on the theory that, because the U.S. shareholder has use of the money loaned to it, it could reasonably be treated…