International Tax Controversies: New Subpart F Income Pro Rata Allocation Rules - Apache's Last Ride

Proposed changes to Reg. 1.951-1(e) introduce a valuation-based test for determining a US shareholder's pro rata share of the controlled foreign corporation's income for situations in which a CFC has multiple classes of stock outstanding and the distribution of earnings among two or more classes of stock is dependent upon the exercise of discretion by the corporation's board of directors or other similar governing body. The proposed changes to Reg. 1.951-1(e) are intended to address structuring techniques such as the so-called Apache transaction that was utilized by Enron Corp. The proposed regulations provide the revised rules will apply to the tax years of a CFC beginning on or after January 1, 2005.