CFC Look-Through Rule Extended and Reinstated

January 25, 2011, 07:15 PM

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Middle Class Tax Act of 2010”). Most people are familiar with the Middle Class Tax Act of 2010 as being the act that extends 1) the Bush Tax Acts of 2001 and 2003, 2) unemployment benefits and 3) some of the stimulus measures. An additional extension that received less attention is the extension of the controlled foreign corporation (“CFC”) look-through rule (the “Look-Through Rule”). This temporary rule (which began in 2006) expired after December 31, 2009 for calendar year taxpayers. Thanks to the Middle Class Tax Act of 2010, the Look-Through rule is now retroactively reinstated for 2010 and through 2011. The Look-Through Rule is found in I.R.C. 954(c)(6) and generally provides that, a CFC that receives or accrues dividends, interest, rents, and/or royalties from a related CFC is not required to report the income as a foreign personal holding company income provided that the income is properly allocable or attributable to income of the payer that is not subpart F income and not treated as effectively connected with the conduct of a trade or business in the United States. In 2007 (after the original enactment of the rule), the IRS provided guidance on the application of the Look-Through Rule in Notice 2007-9. Click here for the Notice. –Elaina L. Blanks