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Recent Developments in the Section 956 Deemed Dividend Rules<br></font>
As companies seek to capitalize on today's rapidly globalizing economy, they often look into doing business in foreign countries. Even the largest and most firmly established U.S. corporations, such as Apple, Microsoft and Pfizer, have recently expanded their footprints offshore. See, “Apple, Microsoft and Eight Other Corporations Each Increased Their Offshore Profit Holdings by $5 Billion or More in 2012: 92 Fortune 500 Corporations Boosted Their Offshore Stash by Over $500 Million Each,” Citizens for Tax Justice (March 11, 2013). A popular conduit for operating in a foreign country is a controlled foreign corporation (CFC). In 2012, U.S.-controlled foreign corporation earnings topped $793 billion as the world economy became increasingly interconnected. See, IRS, Statistics of Income.
How does the aforementioned trend impact the legal profession? That question was answered when a prominent New York-based law firm was sued over a credit agreement it drafted for its client Overseas Shipping Group (Overseas). Overseas brought suit to make the law firm pay for the legal services rendered attributed to Overseas, incurring an estimated $463 million tax liability. See, Overseas Shipholding Group, Inc. v. Proskauer Rose, LLP, 130 A.D.3d 415 (2015). The central issue in the case was whether the law firm gave due warning to Overseas of the potential tax ramifications of Internal Revenue Code (Code) Section 956. Section 956 governs the taxation of CFCs. See, 26 U.S.C. §956.
This article takes an in-depth look at Section 956. It sheds light on the critical aspects of the conflict between Overseas and its attorneys related to the tax laws applicable to CFCs. Guidance is provided on how to advise clients endeavoring to compete in today's global marketplace.
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