Anti-Deferral and Anti-Tax Avoidance

On January 27, 2006, the IRS issued Ltr. Rul. 200604020 that, for purposes of the passive foreign investment company (PFIC) rules, characterized gain on the sale of a 25%-owned subsidiary as passive or active by looking through to the passive and active assets owned by the subsidiary. The ruling provides welcome confirmation that the look-through rule of Section 1297(c), which treats a foreign corporation as if it held its proportionate share of the assets of a 25%-owned subsidiary, applies when the foreign corporation disposes of shares of the 25%-owned subsidiary. If the gain taken into account in applying the income test is the deemed asset gain, then look-through treatment should be relatively straightforward. If the gain taken into account in applying the income test is the actual stock gain, however, then a number of additional questions arise for which the ruling provides no answer.