Share with your friends

Third Circuit: Loan guarantees by CFCs includible in taxpayer’s gross income

Loan guarantees by CFCs includible in gross income

The U.S. Court of Appeals for the Third Circuit today affirmed U.S. Tax Court’s conclusions that for the years at issue (2007 and 2008) a U.S. shareholder of two controlled foreign corporations (CFCs) that in turn had guaranteed loans made to a U.S. person must include in its gross income the CFCs' applicable earnings and that the amount included in gross income is subject to tax as ordinary income.


Related content

The case is: SIH Partners LLLP v. Commissioner, No. 18-1863 (3d Cir. May 7, 2019). Read the Third Circuit’s decision [PDF 141 KB]  


The taxpayer (a passthrough entity) was the U.S. shareholder of two CFCs (one established in Ireland and the other in the Cayman Islands).

  • These two CFCs guaranteed loans made to a U.S. person. 
  • The IRS issued a final partnership administrative adjustment (FPAA) determining that the U.S. shareholder must include in its gross income, for 2007 and 2008 (the tax years at issue), the CFCs’ applicable earnings under sections 951(a)(1)(B) and 956(d)—and specifically under regulations promulgated under section 956. 
  • The IRS also determined that the amount included in the U.S. shareholder’s gross income was taxable as ordinary income.

The taxpayer contended that the regulations were invalid. Alternatively, the taxpayer asserted that the amounts included in income under sections 951(a)(1)(B) and 956(d) were to be taxed as qualified dividend income.

The Tax Court granted summary judgment for the government finding that:

  • The regulations were valid.
  • The IRS had correctly determined that the taxpayer must include in gross income the CFCs’ applicable earnings for the tax years in issue. 
  • The amounts were not qualified dividend income.

Read TaxNewsFlash

The Third Circuit today affirmed the Tax Court’s “decision and order in its entirety.”

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organization please visit

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal

Stay up to date with what matters to you

Gain access to personalized content based on your interests by signing up today

Sign up today