Question

4-5 US Property 1

DC owns CFC, which has $20,000 of earnings and profits. DC borrows $10,000 from a bank in foreign country X. On that same date CFC pledges its assets to the bank as security for DC's performance of its obligation to repay the bank loan.

Does CFC have any investment in US property as the result of its pledge? See reg. 1.956-2(c)(1).

Answer 1

Yes, it will be considered as investment as per the provisions of paragraph (e)(2) of § 1.956-1 of $ 10,000.

As per the wordings of the bare act's paragraph phrased here:

Except as provided in paragraph (c)(4) of this section, for purposes of section 956, anyobligation of a United States person with respect to which a controlled foreign corporation or a partnershipis a pledgor or guarantor will be considered to be held by the controlled foreign corporation or thepartnership, as the case may be. See § 1.956-1(e)(2) for rules that determine the amount of theobligation treated as held by a pledgor or guarantor under this paragraph (c). For rules that treat anobligation of a foreign partnership as an obligation of the partners in the foreign partnership for purposesof section 956, see § 1.956-4(c).