In a chief counsel advice (CCA) memorandum, CCA201436047 (Sept. 5), the IRS considered whether interest that is accrued but not paid is "United States property" under Section 956.
Section 956 generally requires a U.S. person who owns 10% or more of a controlled foreign corporation (CFC) on the last day of the CFC's tax year to include in income the shareholders' pro-rata share of U.S. property held by the CFC. This Section 956 income inclusion is generally limited by the CFC's earnings and profits.
U.S. property generally includes an "obligation" of a domestic corporation that owns 10% or more of a CFC. The regulations under Section 956 provide that the term "obligation" includes any bond, note, debenture, certificate, account receivable, note receivable, open account or other indebtedness, regardless of whether it was issued at a discount and bears interest. Noting that indebtedness arises from a debtor-creditor relationship based a valid obligation to pay a fixed or determinable sum of money, the CCA concludes that this definition of indebtedness encompasses accrued but unpaid interest and therefore that interest is an obligation (and therefore U.S. property) under Section 956.
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