Firm Claims Debt-Equity Regs Would 'Hamstring' U.S. Companies

We are writing on behalf of one of our clients, a Fortune 500 company, to recommend changes to certain aspects of the proposed Treasury regulations under Section 385 of the Internal Revenue Code,¹ published in the Federal Register on April 9, 2016 (the "Proposed Regulations"). The comments below do not relate to the Treasury regulations under Section 7874 of the Code that were issued on the same day.

Our client, like many other U.S. multinational corporations ("MNCs"), routinely engages in related-party lending transactions as part of its ordinary business activities, with no intent to erode the U.S. tax base. Our client is concerned that the Proposed Regulations, if finalized in their current form, would effectively prohibit these transactions, hamstringing the normal business activities of U.S. companies and thereby put them at a competitive disadvantage relative to non-U.S. MNCs. This concern is particularly acute for our client, which operates in an industry in which their competitors are, with only a few limited exceptions, incorporated outside of the United States.

As drafted, the Proposed Regulations will be costly and burdensome to comply with, requiring significant operational and infrastructure changes to our client's tax, treasury, and legal functions, controller and business development departments, and financial information systems. Our client's goal in making the recommendations below is to reduce the expense and difficulties of complying with the Proposed Regulations, without frustrating their intended purpose.

Executive Summary

The recommendations set forth below contain two important structural suggestions, both in Section I:

• First, our client suggests an overall change in scope to more particularly target earnings stripping transactions. Specifically, our client recommends that Treasury and the Service modify the "general rule" and the "funding rule" contained in Prop. Treas. Reg. § 1.385-3 (the "per sestock rule")² by adding an exemption to recharacterization if the taxpayer elects to forego its U.S. federal interest deductions on the potentially recharacterized debt instrument.

• Second, our client recommends that the final regulations provide an exception to the per se stock rule and the documentation rules in Prop. Treas. Reg. § 1.385-2 for indebtedness between related controlled foreign corporations ("CFCs"). Such an exception would bring the final regulations in line with clear Congressional intent to permit tax-free movement of non-Subpart F earnings between related CFCs, as evidenced by Section 954(c)(6).

• Our client recommends in Section II below that cash pooling arrangements like our client's notional cash pooling arrangement be wholly excluded from the final regulations. As described in greater detail below, our client's notional cash pooling arrangement is critical to our client's ability to manage and control its global cash, and should be respected as the third-party banking and lending arrangement that it is.

• In Section III, our client asks that a grandfathering provision be added for related-party debt of a foreign corporation that is not a CFC, if such debt exists at the time such corporation is acquired by a U.S. expanded group -- a grandfathering provision that our client believes is essential to its global acquisition strategy.

• In Section IV, our client asks that the effective date of the documentation rules be postponed for 18 months so as to allow it to develop the information systems required for compliance.

Our comments are structured as follows: (1) Section I provides the two general structural recommendations referenced above; (2) Section II provides various recommendations with respect to cash pooling, including our client's recommendation that the final regulations include an exemption for notional cash pooling arrangements; (3) Section III contains recommendations with respect to transactions governed by Subchapter C of the Code and the ancillary impacts of the Proposed Regulations on those transactions and (4) Section IV contains other specific recommendations with respect to the Proposed Regulations.

I. General Structural Recommendations

Include an exception to the per se stock rule in Prop. Treas. Reg. § 1.385-3 where the taxpayer elects to forego interest deductions

Our client believes that the primary aim of the per se stock rule is to limit the ability of taxpayers to engage in earnings stripping transactions. This purpose is highlighted in the preamble to the Proposed Regulations,³ and reiterated again in the associated Treasury Fact Sheet.⁴ However, the consequences of recharacterizing related-party debt as equity for all purposes of the Code reach far beyond preventing earnings stripping. For example, the recharacterization of a related-party loan as equity could implicate non-U.S. anti-hybrid instrument provisions enacted in response to the OECD's Base Erosion and Profit Shifting (BEPS) project and the final recommendations for Action 2.⁵ Recharacterization also has far-reaching impacts on our client's treasury operations and organizational structure, with adverse consequences well beyond the denial of an interest deduction.

For this reason, our client recommends that the Proposed Regulations be modified to adopt a more targeted approach. Specifically, our client recommends that an exception be added to the recharacterization provided by Prop. Treas. Reg. § 1.385-3: if the taxpayer elects to forego any U.S. federal interest deductions on a debt instrument that would otherwise be recharacterized by Prop. Treas. Reg. § 1.385-3, the recharacterization will not apply.⁶ Assuming that Treasury and the IRS believe that authority exists under Section 385 to finalize the Proposed Regulations, our client believes that Treasury and the IRS necessarily must conclude that equal, if not greater, authority exists under Section 385 to adopt such an elective interest disallowance regime.⁷ Specifically, the factors cited in the preamble as supporting the recharacterization of debt to equity would presumably equally support an elective interest disallowance regime.

Our client appreciates that such an election to forego interest deductions would not address one fact pattern described as a concern by Treasury and the IRS: the situation in which a CFC distributes a note in a year in which it has no earnings and profits ("E&P") and then repays the note when it has E&P, thereby effecting a repatriation of untaxed earnings without the recognition of income. However, our client believes that the Proposed Regulations were primarily motivated by inversion related planning⁸ and that the Proposed Regulations should therefore be tailored to this concern. Our client appreciates that Treasury and the IRS may have concerns about the adoption of a regime that does not comprehensively address the taxation of intercompany debt. However, given the substantial issues that have been highlighted since the release of the Proposed Regulations, our client recommends that Treasury and the IRS finalize a more limited regime addressing the core base erosion concerns implicated by inversion transactions -- with an elective interest disallowance exception -- and reconsider the general approach adopted in the Proposed Regulation before finalizing a comprehensive regime.

The remainder of this letter assumes that the Proposed Regulations include their current comprehensive regime and offers comments on the basis of that assumption.

Include a "foreign-to-foreign" exception

As noted above, in addition to the prevention of earnings stripping, another aim of the per se stock rule contained in Prop. Treas. Reg. § 1.385-3 is to prevent U.S.-parented groups from using related-party debt to repatriate untaxed earnings of CFCs without the recognition of income. However, as currently drafted, the per se stock rule does not apply solely to transactions between CFCs and their U.S. parents. Instead, it applies broadly to related-party debt between CFCs -- transactions that do not result in a repatriation of earnings without tax.⁹

Our client routinely uses related-party debt issued between its CFCs to efficiently redeploy capital offshore. The application of Prop. Treas. Reg. § 1.385-3 to these instruments would restrict our client's ability to move capital to where it is most needed, materially and adversely impacting its ability to compete with other members of its industry, many of whom are incorporated outside of the United States.

This is one example of where the Proposed Regulations are not only overbroad and burdensome, but are also in direct contravention of a clear Congressional intent to permit tax-free movement of non-Subpart F foreign earnings between related CFCs.

Congress enacted the "look-through rule" of Section 954(c)(6) in 2006 because it believed that Subpart F imposed undue restrictions on the ability of U.S.-parented groups to deploy foreign earnings offshore in an efficient manner.¹⁰ Legislative history shows that Congress was concerned that restrictions on the movement of capital offshore could harm the competitiveness of U.S.-based MNCs against similar companies not located in the United States.¹¹ Congress has extended this provision on five separate occasions, most recently in December, 2015.¹² The fact that Congress has made the extension of the look-through rule a priority clearly demonstrates that Congress views the policy animating the look-through rule as important. The absence of an exception to the per se stock rule for debt arrangements between related CFCs frustrates this clear Congressional intent.¹³

For similar reasons, the application of the documentation rules in Prop. Treas. Reg. § 1.385-2 is unnecessarily burdensome in the foreign-to-foreign context, given the limited potential for abuse. In addition, the potential for a foot fault resulting from inadequate documentation (and the possible outsized impact from such foot fault) is particularly acute in the foreign-to-foreign context.

Our client therefore recommends that the final regulations provide that a debt instrument issued by one CFC to a related¹⁴ CFC be exempt from recharacterization under both the per se stock rule of Prop. Treas. Reg. § 1.385-3 and the documentation rules contained in Prop. Treas. Reg. § 1.385-2. However, our client recognizes that there are fact patterns in which a taxpayer could use an exception to the per se stock rule for transactions between related CFCs to circumvent the policies underlying the Proposed Regulations. To prevent this occurrence, our client believes it may be advisable to couple this exemption with an anti-abuse rule similar to that contained in Prop. Treas. Reg. § 1.385-3(b)(4) apply to debt instruments between related CFCs.

II. Recommendations with Respect to Cash Pooling

Include an exception for "Qualified Pooling Arrangements"

Most U.S. MNCs have non-U.S. treasury centers that focus on the cash management of the MNC, primarily through well-established cash pooling arrangements. Such cash pooling arrangements move cash from CFCs with excess cash to CFCs with cash needs, typically through cash sweeps and borrowing arrangements. One day an entity will be a lender, while on another day it will be borrower, all in order to ensure that the cash needs of businesses are met on an ongoing basis. This invariably leads to countless related-party debt obligations that are entered into, repaid and modified on a daily basis. The Proposed Regulations request comments on their application to such pooling arrangements.

Our client has two cash pooling arrangements in place: one for its U.S. consolidated group members and one for its (several hundred) CFCs. As a general rule, except under exceptional circumstances, one pool does not transact with the other.

Our client's foreign cash pool is a notional one. Under our client's notional pool, each CFC deposits its cash, in its local currency, in ordinary bank accounts (in the CFC's name) with a third-party global bank. The global bank measures the aggregate foreign currency deposits made by the CFC depositors, notionally¹⁵ translates the amount into U.S. dollars ("USDs"), and makes the USD amount available to the pool header to overdraw on its own pool accounts while ensuring that the pool overall remains notionally in credit. The pool header pays the global bank interest on any overdrawn pool position on a currency-by-currency basis. The pool header's borrowing on the overdraft is therefore an unrelated-party bank borrowing, for which arm's-length interest is charged. A more favorable interest rate is obtained on the overdraft due to the fact that the overdraft is effectively "secured" by the deposits made by each CFC though the pool header's direct or indirect ownership of the stock of the CFCs. These borrowings made by the pool header are legally debt with the global bank, a highly regulated enterprise.

Such a centralized cash pool is an efficient cash management program that exists for non-tax reasons and significantly reduces transaction costs. But, more importantly, a centralized cash pool allows an MNC to safeguard its cash through centralized management and control. Centralized treasury functions employ a high level of very specialized expertise and have the technology and know-how to effectively manage bank exposures and other investment risks for the MNC as a whole. This level of expertise cannot be replicated in a widely decentralized structure where hundreds of local operations hold their own cash and the business personnel must allocate part of their time to daily cash management tasks. The financial crisis validated the importance of centralized visibility and direct access to, and control over, global cash in a treasury center with the expertise and decision-making capability to manage such risks. This applies to not only the 'working capital cash' but also to the aggregate total accumulated cash balances that can comprise a significant portion of a company's value and financial resources for ongoing operations and growth. The importance of centralized cash management has come into focus yet again with the United Kingdom's recent decision to leave the European Union, and the need to mitigate the potential destabilizing effect of "Brexit" on the British pound (the functional currency of many of our client's operations).

Our client's notional cash pooling arrangement should not be viewed as giving rise to a "loan" from the depositors to the pool header, nor should the pool header's overdraft be considered a borrowing from the depositors. Each CFC's deposit is treated the same as any other deposit of cash into a bank account, and the ability of the pool header to overdraw is also akin to any other bank customer's ability to overdraw.

It would be unduly and unnecessarily burdensome for the documentation requirements to apply to the cash pooling arrangements. Moreover, the recharacterization that can result from the per se stock rule, if applied to cash pooling arrangements, would create needless complexity, would lead to a convoluted web of cross-ownership, would frustrate the basic business objective of efficient cash management and would eliminate the non-tax benefits of pooling arrangements.

Our client therefore recommends that customary notional pooling arrangements administered by third-party banks ("Qualified Pooling Arrangements") be excluded entirely from the final regulations.

The Proposed Regulations should clarify that the cash pooling arrangement should not be treated as a conduit arrangement

When a CFC within our client's notional cash pool is in need of funds, whether to fund an acquisition, expand an existing business, pay a dividend or fund ordinary business expenses such as paying salaries or seasonal bonuses, the pool header may draw upon the global bank overdraft and on-lend the draw to the CFC in need. Such on-lending could legitimately be viewed as a related-party loan subject to the Proposed Regulations.

The pool header and the bank, however, should not be viewed as "conduits" between the depositing CFCs and the borrowing CFC. Similarly, the pool header may draw upon the global bank overdraft to fund its own expenses. This should be respected as a loan from the third-party bank, not treated as a loan between the depositing CFCs and the pool header.

If Qualified Pooling Arrangements are not excluded entirely from the final regulations, our client recommends that the final regulations clarify that an overdraft borrowing by a pool header is respected as a borrowing from the third-party bank, and that the notional cash pool is not considered a "conduit" arrangement for purposes of the final regulations.¹⁶

Reduced documentation requirements for cash pools

If Qualified Pooling Arrangements are not excluded entirely from the final regulations, our client recommends that the final regulations provide that an executed multi-entity cash pooling agreement with a third-party financial institution will be deemed to satisfy the regulation's documentation requirements with respect to the deposits and withdrawals by the participants and any overdraft by the pool header. Documentation would, however, continue to be required with respect to any on-lending from the pool header to the other participants (subject to any other applicable exceptions).

III. Recommendations with Respect to Subchapter C and Related Matters

Include a grandfathering rule for pre-acquisition debt

If the Proposed Regulations are finalized, U.S. MNCs, and non-U.S. MNCs with U.S. operations will be forced to expend significant resources to build the technology systems that are necessary to comply with the regulations, including technology systems to avoid the application of the per se stock rule and systems to ensure compliance with the documentation rules. However, companies with no presence in the United States will not have similar systems in place. Our client, like many MNCs, is highly acquisitive, and often buys businesses that operate entirely outside of the United States.

Our client therefore recommends that the final regulations contain a "pre-acquisition debt exception" that provides that, in the context of an acquisition of one expanded group by another expanded group, the per se stock rule and the documentation rules will not apply to pre-existing debt of any acquired foreign corporations that were not CFCs for U.S. federal income tax purposes in pre-acquisition years. This exception would operate as for as long as the debt remains outstanding under its original terms, regardless of whether a Section 338 election is made in connection with the acquisition.

Without this exception, an acquisitive MNC would be required to undertake extensive diligence to determine compliance with the regulations after the closing, and is likely to find scenarios where the relevant information simply does not exist. This could have the collateral effect of discouraging acquisitions of non-U.S. companies by U.S. MNCs, transactions that expand the U.S. tax base.

Include a "Section 368(c) exception"

If finalized in their current form, a recharacterization of debt as stock under the Proposed Regulations will create crisscrossing ownership across a corporate structure. When combined with the fact that, as discussed above, it is very unusual for an ordinary debt instrument to contain voting rights, the recharacterization of debt as stock could make it difficult to determine whether an entity has control of another entity under Section 368(c). Our client recommends that the final regulations include an exception that provides that recharacterized stock will not be taken into account when determining Section 368(c) control (for example, in determining whether a transaction qualifies as a tax-free exchange under Section 351 or a tax-free distribution governed by Section 355).

Include an exception for Section 331 and Section 332 liquidating distributions

Our client recommends that the final regulations include a provision clarifying that a liquidating distribution caused by the operation of Section 331 or Section 332 is not considered a "distribution" for purposes of the per se stock rule in Prop. Treas. Reg. § 1.385-3. Our client believes it would be appropriate to treat liquidations consistently with upstream reorganizations, which are not treated as distributions for purposes of the per se stock rule.

IV. Other Specific Recommendations with Respect to the Proposed Regulations

Postpone the effective date of the documentation requirements by 18 months to allow systems to be put in place

If finalized in their current form, the documentation requirements in Prop. Treas. Reg. § 1.385-2 will require significant changes to our client's internal systems and processes. Our client recommends an 18-month delay in the effective date of Prop. Treas. Reg. § 1.385-2. Our client believes that an 18-month delay would balance the government's desire to timely implement the documentation requirements with taxpayers' need for sufficient time to implement the necessary systems to comply with the requirements on day one.

Include a "Section 902 exception"

If debt is recharacterized as stock under the Proposed Regulations and the U.S. holder of that re-characterized instrument owns less than 10 percent of the voting power of the issuer, foreign tax credits under Section 902 would not be available to the U.S. holder when it receives an interest or principal payment (recast as a "dividend" or other distribution) on that instrument. Moreover, even if the U.S. holder of the instrument does not receive foreign tax credits under Section 902 with respect to such recast dividends, the payment of the dividends is still taken into account in calculating the payor's post-1986 foreign tax pool.¹⁷ This means that the other holders of the foreign corporation's voting stock (which likely include other members of the U.S. holder's expanded group) will be required to pay tax on future dividends, without the benefit of the Section 902 credits they otherwise would have been able to use to offset such tax. The foreign taxes allocable to the deemed dividends would be permanently lost for foreign tax credit purposes, resulting in double taxation.

This is a harsh result, and another instance where the Proposed Regulations have an effect that does not appear to further the underlying policy concerns. This is also one instance where the Proposed Regulations create a trap for the unwary. Sophisticated taxpayers can avoid this collateral consequence by amending the terms of debt instruments to provide such debt with a vote. However, it would be more equitable to address this issue in the text of the regulations.

Our client recommends that the final regulations provide that, in cases where the 10-percent voting threshold is not met with respect to a recast instrument, any dividend paid on such instrument will not carry Section 902 taxes and will not diminish the payor's post-1986 foreign tax pool. If Treasury and the IRS are concerned that this proposal could result in a dislocation of foreign taxes from the associated earnings and profits, an alternative would be for the regulations underlying Section 902 to be revised to provide that, for purposes of determining whether a holder of a recast instrument holds the requisite voting interest in the issuer, a rule similar to that of Treas. Reg. § 1.1502-34 will apply.¹⁸

Short-term loans of less than one year should be exempt from the per se stock rule

Our client and its subsidiaries regularly enter into short-term loans with related parties for legitimate business reasons, including managing working capital and filling short-term funding gaps. Often these loans are between U.S. and non-U.S. entities. If recharacterized as equity, each issuance and repayment of the loan would result in a dividend, potentially incurring withholding tax, making it difficult to track the location of E&P, and adding a considerable administrative burden.

Our client recommends that the final regulations include an exemption from the per se stock rule for short-term debt (i.e. debt with a maturity date that is not more than one year from the date of issue).¹⁹ The short-term nature of these loans makes them more likely to be driven by cash management needs rather than tax avoidance purposes.

Exemption of transactions from the per se stock rule where they do not have the effect of a distribution of expanded group indebtedness or the use thereof to acquire stock

There are a number of instances in the Code where a tax fiction is created but has no economic significance. For example, in an ordinary course Section 351 capital contribution to a wholly-owned subsidiary, the issuance of shares to the contributor has no economic significance. Similarly, deemed dividends under Section 304 and Section 482 and the deemed issuance of a nominal share of stock in connection with certain D reorganizations have no true economic effect. However, as currently drafted, such distributions could trigger the application of the per se stock rule in the Proposed Regulations. This puts an extraordinary burden on the systems and recordkeeping of an entity that engages in such transactions, with no discernible purpose or value to be gained by Treasury and the IRS.

Our client recommends that the final regulations contain exception to the per se stock rule for transactions in which there is a deemed transaction (such as a distribution or issuance) pursuant to another Code provision or regulation, but such transaction does not have the economic effect of a distribution of a debt instrument or the use thereof to acquire expanded group stock.

Include a rebuttable presumption rule for long-term loans used for third-party acquisitions, capital expansions, and the repayment of third-party debt

Our client recommends that the funding rule contained in Prop. Treas. Reg. § 1.385-3(b)(3) be modified from a non-rebuttable per se rule to a rebuttable presumption pursuant to which a taxpayer may demonstrate that the proceeds of a loan were not used to fund a proscribed distribution or acquisition, but rather to make third-party acquisitions, capital investments, or to repay third-party debt. Our client understands that Treasury and the IRS proposed a per se rule because of concerns with the fungibility of money and the difficulties in proving the purpose of a related-party transaction. Nonetheless, a rebuttable presumption is more consistent with Congress's mandate that debt and equity should be determined based upon a consideration of factors. Putting the burden on the taxpayer to show that the loan was not used to fund a proscribed distribution or acquisition should be a sufficient backstop to the general rule of Prop. Treas. Reg. § 1.385-3(b)(2).

We appreciate your consideration of our client's views on this subject. We hope that they prove helpful in the formulation of a revised regulations package. Please feel free to call Rachel Kleinberg at 650-752-2054 or Neil Barr at 212-450-4125 regarding any aspect of the above. We would be happy to answer any questions you might have.

² The per se stock rule provides that a debt instrument is treated as per se stock to the extent that it is issued to a member of the issuing corporation's expanded group in certain enumerated transactions.

³ "In many contexts, a distribution of a debt instrument similar to the one at issue in Kraft lacks meaningful non-tax significance, such that respecting the distributed instrument as indebtedness for federal tax purposes produces inappropriate results. For example, inverted groups and other foreign-parented groups use these types of transactions to create interest deductions that reduce U.S. source income without investing any new capital in the U.S. operations. In addition, U.S.-parented groups obtain distortive results by, for example, using these types of transactions to create interest deductions that reduce the earnings and profits of controlled foreign corporations."

⁴ "Under current law, following an inversion or foreign takeover, a U.S. subsidiary can issue its own debt to its foreign parent as a dividend distribution. The foreign parent, in turn, can transfer this debt to a low-tax foreign affiliate. The U.S. subsidiary can then deduct the resulting interest expense on its U.S. income tax return at a significantly higher tax rate than is paid on the interest received by the related foreign affiliate. In fact, the related foreign affiliate may use various strategies to avoid paying any tax at all on the associated interest income. When available, these tax savings incentivize foreign-parented firms to load up their U.S. subsidiaries with related-party debt. Today's action makes it more difficult for foreign-parented groups to quickly load up their U.S. subsidiaries with related-party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions."

⁵Available at http://www.oecd.org/ctp/neutralising-the-effects-of-hybrid-mismatch-arrangements-action-2-2015-final-report-9789264241138-en.htm.

⁶Cf. Prop. Treas. Reg. § 1.367(a)-1(b)(5), which permits a U.S. transferor to elect to treat certain intangible property as Section 367(d) property, provided that the U.S. transferor discloses its election to the IRS.

⁷ Others have noted or specifically commented upon the authority issues presented by the Proposed Regulations. See, e.g., New York State Bar Association Tax Section, Report on Proposed Regulations Under Section 385 (No. 1351), June 29, 2016, available at: http://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Reports_2016/Tax_Section_Report_1351.html; District of Columbia Bar Association Tax Section, Comments Regarding the Proposed Regulations on Related-Party Debt Instruments, June 29, 2016, available at: https://www.dcbar.org/sections/public-statements/upload/Taxation-Section-Public-Statement-June16-Proposed-Treasury-Regulation.pdf. Those issues are beyond the scope of this comment letter.

⁸Available at https://www.treasury.gov/press-center/press-releases/Pages/jl0404.aspx.

⁹ Moreover, debt instruments between related CFCs generally do not reduce or eliminate U.S. federal income tax liability of the U.S. parent. In fact, debt arrangements between CFCs often reduce foreign income tax liability, resulting in increased U.S. taxes due to a reduction in available foreign tax credits. Debt instruments between related CFCs may have the effect of moving E&P between jurisdictions which could have the effect of reducing the U.S. parent's tax liability. However, as discussed below, Congress has expressly sanctioned the movement of excess active earnings between CFCs under Section 954(c)(6) and Section 954(c)(3).

¹⁰See S. Rep. 108-192, 39 ("The Committee believes that taxpayers should be given greater flexibility to move non-Subpart F earnings among controlled foreign corporations as business needs may dictate").

¹¹See H.R. Rep. 108-848, Part 1, 202-03 ("By allowing U.S. companies to reinvest their active foreign earnings where they are most needed without incurring the immediate additional tax that companies based in many other countries never incur, the Committee believes that the provision will enable U.S. companies to make more sales overseas, and thus produce more goods in the United States.").

¹² Congress first passed the look-through rule in 2006, and renewed the rule in 2008, 2010, 2013 and, most recently, in December, 2015 pursuant to the Protecting Americans from Tax Hikes Act of 2015. See Pub. L. No. 114-113, Div. Q, § 128, § 144. The provision is currently effective through for tax years beginning before Jan. 1, 2020.

¹³ The same-country exception in Section 954(c)(3) evidences a similar policy.

¹⁴ To be consistent with the treatment of related CFCs under the Subpart F rules, our client recommends that this exception apply between CFCs that are "related," as such term is defined in Section 954(d)(3).

¹⁵ There is no actual foreign currency conversion.

¹⁶But cf. Rev. Rul. 87-89 and Treas. Reg. § 1.881-3(c) (disregarding certain financing intermediaries as mere conduits).

¹⁷See Treas. Reg. § 1.902-1(a)(8)(i).

¹⁸ ("[f]or purposes of Sections 1.1502-1 through 1.1502-80, in determining the stock ownership of a member of a group in another corporation (the "issuing corporation") for purposes of determining the application of section 165(g)(3)(A), 332(b)(1), 333(b), 351(a), 732(f), or 904(f), in a consolidated return year, there shall be included stock owned by all other members of the group in the issuing corporation.").

¹⁹ This definition of short-term debt as debt with a tenor of one year or less parallels the approach taken by the regulations governing original issue discount. See Treas. Reg. § 1.1272-1(f).