Through the Glass [Even More] Darkly: Revisions to the Not-So-Fabulous Branch Rule

Journal of International Taxation
May 2009

Since the promulgation of the first final Regulations under Code section 954(d) in 1964, taxpayers (and their advisors) have struggled mightily to understand the contours and application of the branch rule of Treasury Regulation 1.954-3(b) – how to apply the tax rate disparity test, what is the hypothetical effective tax rate, who is the remainder of the Controlled Foreign Corporation, etc. (hence, the “not-so-fabulous” branch rule). 

On February 27, 2008, the IRS and Treasury issued Proposed Regulations, which provided, inter alia, new rules with respect to the application of the branch rule. On December 24, 2008, the Proposed Regulations were re-issued as Final, Temporary and Proposed Regulations. 

Douglas S. Stransky co-wrote an article entitled ‘“Through the Glass [Even More] Darkly’: Revisions to the Not-So-Fabulous Branch Rule,” that appeared in the May 2009  issue of the Journal of International Taxation. This article first reviews FBCSI, the manufacturing exception and the branch rule (in general). It then examines the IRS’ and Treasury’s response to comments and discusses the modifications to the branch rule provided in TD 9438. The article concludes with a plea to the IRS and Treasury to scrap the branch rules in their current form and formulate rules that can be complied with (by taxpayers and their advisors) and that can be administered (by the IRS).