The Service generally has three years after a return is filed to assess any tax due for that year.1 There are a number of exceptions to this general rule, such as where a taxpayer files a false return or omits more than 25 percent of its gross income from the return. There are no exceptions, however, that would allow the Service to keep the statute of limitations open indefinitely with respect to an amount actually received in the current year, but constructively received in a prior year with respect to which the statute of limitations is now expired. Notwithstanding the lack of any statutory support, the Service has attempted within the cross-border setting to take two proverbial bites of the apple in such cases.
Section 956 and Constructive Dividends, in General
In general, U.S. shareholders of foreign corporations, like U.S. shareholders of domestic corporations, are taxable on the earnings and profits (E&P) of such corporations only when that E&P is distributed in the form of a dividend. If the corporation is classified as a “controlled foreign corporation” or “CFC,” however, any U.S. shareholders owning 10 percent or more of the voting power of the CFC (“U.S. Shareholders”) are taxable annually on their pro rata shares of (1) the CFC’s “Subpart F income” and (2) the CFC’s earnings invested in U.S. property (“Section 956 inclusions”). Continue Reading