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Marie Leone

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---- It's not just Federal Reserve Board that's intervening to prop up ailing companies hit by the credit crisis. The Internal Revenue Service, too, is doing its part to beat back corporate liquidity problems, by easing rules governing short-term borrowing by parent companies from their foreign subsidiaries.

------Last week, the IRS issued a notice allowing companies to borrow cash from so-called controlled foreign corporations (CFC) for up to 60 days without having to record the income at the parent level, explains tax expert Robert Willens, who runs an eponymous consultancy. The temporary measure is in effect for the first two taxable years ending after Oct. 3, 2008. So for calendar-year companies, that includes loans taken in 2008 and 2009.


---------Under the tax code, a CFC is any foreign corporation in which more than 50 percent of the voting power — or value of the stock — is owned by U.S. shareholders on any day during the taxable year.

----------In a tax advisory to his clients, Willens points out that the emergency measure extended the loan payback periods for parent companies. Under the new rule, a foreign subsidiary may loan its parent funds for up to 60 days without triggering tax consequences. Before the rule was issued, loans had to be paid back within 30 days to retain their tax-free status. If a loan is not paid back within the prescribe period, the parent is required to pay taxes on the income at its effective marginal rate — which could reach 35 percent.

---------A parent company may accept more than one loan from a foreign subsidiary without paying taxes on the funds, as long as the loan periods do not exceed a total of 180 days in any one year. Under the old rule, the aggregate loan period totaled 60 days.

--------The guidance, based on Section 959 of the tax code, considers the funds being moved from subsidiary to parent a true loan, and not a dividend payout to a U.S. shareholder — the parent in this case. A dividend payout would be considered income and therefore taxed. A loan is not taxed.

---------The IRS "is taking measured steps to ease the credit crunch," adds Willens. "It is doing its part to ameliorate the hardships engendered by recent economic developments."

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