At your request, we have researched whether client American Beef Conglomerate, Inc.

MEMORANDUM TO: Senior Partner FROM: LL.M. Team Number DATE: November 6, 2015 SUBJECT: 2015-2016 Law Student Tax Challenge Problem At your request, we have researched whether client American Beef Conglomerate, Inc. ( ABC-US ) can claim foreign tax credits on its U.S. federal income tax liability in the event that its Kazakhstan subsidiary settles a tax dispute with the government of Kazakhstan. Furthermore, we have researched the federal income tax consequences of electing disregarded entity status for ABC-US s United Kingdom subsidiary in order to use that subsidiary s projected 2015 net operating loss to lower ABC-US s tax liability. For purposes of this memorandum, all figures have been converted to U.S. dollars based on the applicable exchange rates pursuant to I.R.C. 986 and rounded to the nearest dollar. Our analysis on the two issues, and potential planning strategies and questions for the client, follow below. SUMMARY OF FACTS ABC-US, a United States corporation, is a producer and seller of high quality beef. We assume ABC-US is a calendar year taxpayer, and uses the accrual method of accounting pursuant to I.R.C. 448(a). ABC-US controls multiple foreign operations, all of which are treated as independent enterprises. In the late 1990s, ABC-US organized a holding company in the Netherlands, ABC Holdings, B.V. ( ABC-BV ), which is treated as a corporation for U.S. federal income tax purposes. ABC-US also organized ABC Australia Ltd. ( ABC-AUS ) and ABC Mexico S. de R.L. ( ABC-MEX ) in Australia and Mexico, respectively. ABC-US elected to treat both as disregarded entities for U.S. federal income tax purposes. ABC-AUS and ABC-MEX had generated combined retained earnings of $520 million as of 2005. On January 1, 2006, ABC-US organized ABC Limited ( ABC-UK ), a United Kingdom limited

company. On January 1, 2007, ABC-UK organized ABC Kazakhstan ( ABC-KAZ ), financed with a $100 million loan from Big Bank, a U.S. bank, with a 6.5 percent interest rate and a maturity date of December 31, 2016. To secure these terms, Big Bank required ABC-BV to guarantee the loan to ABC-UK. I. ABC-US MAY CLAIM INDIRECT FOREIGN TAX CREDIT FOR RESIDUAL TAX, BUT NOT FOR FIELD TAX There are two channels to claim a foreign tax credit as a domestic corporation under I.R.C. 901: as a direct tax credit, or as an indirect tax credit. Under I.R.C. 901(b)(1), a domestic corporation may claim a direct foreign tax credit if it has paid or accrued a tax on income, war profits, and excess profits taxes to a foreign country during the taxable year. Treas. Reg. 1.901-1(a)(2)(i). For purposes of determining whether a domestic corporation has paid taxes, the Service considers the person who is liable for the taxes under foreign law to be the taxpayer. Treas. Reg. 1.901-2(f)(1). As a disregarded entity, the Service considers ABC-KAZ to be a branch of ABC-UK and its earnings and profits are part of ABC-UK s for U.S. federal income tax purposes. For that reason, the Service considers ABC-UK to be liable for the taxes of ABC-KAZ, and ABC-US will not be eligible for a direct foreign tax credit. Despite ABC-US s ineligibility for a direct foreign tax credit, I.R.C. 901(a) allows for an indirect foreign tax credit under I.R.C. 902. A domestic corporation owning at least ten percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year may elect to take an indirect foreign tax credit in the amount of the foreign taxes paid on those dividends in proportion to the foreign corporation s undistributed earnings. I.R.C. 902(a)(1), (2). The indirect foreign tax credit is limited to the same proportion of U.S. taxes paid as the domestic corporation s foreign source income bears to its worldwide income. I.R.C. 904. Such amount is then included in the gross income of the domestic corporation as a 2

dividend received gross up from the foreign corporation. I.R.C. 78. Additionally, a taxpayer may only claim foreign tax credits for up to ten years from the filing date of the return for the year in which the foreign taxes were accrued. I.R.C. 6511(d)(3)(A). The issue is whether ABC-US is eligible to claim an indirect foreign tax credit for the Residual Tax and Field Tax imposed by the Kazakhstan government. A. TO CLAIM INDIRECT FOREIGN TAX CREDIT, TAX PAID MUST BE INCOME TAX OR IN LIEU OF INCOME TAX For purposes of I.R.C. 902, a foreign income tax is income, war profits, and excess profits taxes as defined in Treas. Reg. 1.901-2(a), including taxes in lieu of income taxes under I.R.C. 903, that are imposed by a foreign country, including any such taxes deemed paid by a foreign corporation. Treas. Reg. 1.902-1(a)(7). Under I.R.C 901(b)(1), two types of foreign taxes create an opportunity for a tax credit: (1) if the tax is an income tax; or (2) if the tax is in lieu of an income tax under I.R.C. 903. A tax in lieu of an income tax must be a tax imposed in substitution for, and not in addition to, an income tax or a series of income taxes otherwise generally imposed. Treas. Reg. 1.903-1(b)(1). A foreign tax is an income tax if and only if: (1) it is a tax; and (2) the predominant character of that tax is that of an income tax in the U.S. sense. Treas. Reg. 1.901-2(a)(1). As to the first requirement, a foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes. Treas. Reg. 1.901-2(a)(2)(i). An amount is not compulsory if it exceeds the true amount of liability. Treas. Reg. 1.901-2(e)(5)(i). An amount paid will not exceed the amount of liability if the taxpayer exhausts all effective and practical remedies to reduce the taxpayer's liability for foreign tax. Id. An interpretation of foreign law is not reasonable if there is actual or constructive notice, such as a published court decision, that the 3

interpretation is likely to be erroneous, or if contrary to advice obtained in good faith from competent foreign tax advisors to whom the taxpayer has disclosed the relevant facts. Id. As to the second requirement, whether the predominant character of a tax is that of an income tax in the U.S. sense is analyzed under the net gain test. Treas. Reg. 1.901-2(a)(3). A foreign tax is likely to reach net gain if it is imposed after a realization event, imposed on the basis of gross receipts, and computed by reducing gross receipts to permit recovery of significant costs and expenses to gross receipts. Treas. Reg. 1.901-2(b)(1)-(4). Each tax must be analyzed separately. Treas. Reg. 1.901-2(d)(1). i. Residual Tax Is Income Tax The Residual Tax is an income tax for purposes of I.R.C. 901. The Residual Tax is a reformed version of the old tax regime and there seems to be no issue that it is a compulsory payment made pursuant to Kazakhstan s authority to tax. Furthermore, the Residual Tax taxes net income even though the tax rate was lowered to five percent. It is imposed upon a realization event based upon the gross receipts less certain expenses, which means the predominant character of the tax is that of an income tax in the U.S. sense. Meeting both requirements of Treas. Reg. 1.901-2(a)(1), the Residual Tax is an income tax. ii. Field Tax Is Not Income Tax or Tax in Lieu of Income Tax The Field Tax is not an income tax within the meaning of I.R.C. 901 and 903. The Field Tax is not a tax within the meaning of Treas. Reg. 1.901-2(a)(2)(i) because it is not a compulsory payment. If the Field Tax is paid by settlement, it likely will be found to exceed the amount of tax liability under Kazakhstan law. See Treas. Reg. 1.901-2(e)(5)(i). ABC-KAZ has not exhausted all of its remedies under Kazakhstan law because its case is still pending in the Kazakhstan Supreme Court. ABC-KAZ has actual notice through the decisions of the lower courts that the Field Tax is likely to be held unconstitutional because the government explicitly 4

forbids discrimination between industries when imposing taxes. The Field Tax is imposed only upon the agricultural industry, including ranchers like our client, and therefore will likely be struck down. Furthermore, ABC-KAZ s local tax counsel has given its opinion that the Field Tax is likely to be found unconstitutional. Payment of the Field Tax likely is not compulsory for purposes of determining whether a foreign levy constitutes a tax for U.S. federal income tax purposes. The Field Tax also fails to meet the net gain test under Treas. Reg. 1.901-2(b). First, the Field Tax, which taxes companies based on the quantum of open fields they occupy during a given year, is not a tax on realization events. No realization needs to occur in order for the tax to be imposed. Second, the tax is not a tax upon gross receipts, but only upon the quantum of land held. Third, the tax does not permit recovery of any significant costs and expenses attributable to gross receipts. Because the Field Tax fails to meet the three requirements of the net gain test, it is not an income tax. Furthermore, the Field Tax is not a tax in lieu of an income tax because it does not meet the substitution test under Treas. Reg. 1.903-1(b)(1). The tax is not a substitute for a generally-imposed income tax, but is instead an additional tax targeting the agriculture industry in accordance with the industry s impact on society. Because the Field Tax is not a tax in lieu of an income tax, it fails the substitution test provided by Treas. Reg. 1.903-1(b)(1). B. TO CLAIM INDIRECT FOREIGN TAX CREDIT, ABC-US MUST RECEIVE DIVIDEND FROM ABC-UK S UNDISTRIBUTED EARNINGS ABC-KAZ is a disregarded entity; it is treated as a branch of ABC-UK for U.S. federal income tax purposes, and its earnings are considered part of ABC-UK s for each taxable year. We assume ABC-US has not received any dividend from ABC-UK since its incorporation in 2006. For any taxable year in which ABC-UK did not distribute a dividend to ABC-US, 5

ABC-US cannot claim a credit. If a dividend distribution is made, ABC-US may claim an indirect foreign tax credit up to the amount of foreign income taxes paid by ABC-UK and ABC-KAZ, multiplied by the ratio of the dividend over the subsidiaries undistributed earnings. There is a targeted dividend of $16,496,460 set to be distributed on January 1, 2016. Assuming the 2015 projections in Attachments 2 and 3 prove to be correct, the undistributed earnings of ABC-UK and ABC-KAZ as of the end of 2015 would equal $187,827,929. If the amount of undistributed earnings remains unchanged through the end of the 2016 taxable year, under I.R.C. 902(c)(2), ABC-US would be entitled to claim an indirect foreign tax credit in the amount of foreign income taxes paid in 2016 by ABC-UK and ABC-KAZ, multiplied by the ratio of the $16,496,460 targeted dividend over the $187,827,929 undistributed earnings of the subsidiaries. That amount would then be included as a gross-up in the taxable income of ABC-US for the year 2016. I.R.C. 78. Since ABC-UK was incorporated in 2006, ABC-US will be able to use all foreign taxes paid by ABC-UK and ABC-KAZ because the ten-year limitation has yet to run. I.R.C. 6511(d)(3)(A). The amount of credit could be limited by virtue of I.R.C. 904. The limit of available credit would be the U.S. tax liability for the 2016 taxable year, multiplied by the ratio of the dividend paid to ABC-US s worldwide income for that year. If the indirect foreign tax credit available is limited by I.R.C. 904, the unused amount of foreign tax credit could be carried to later years. See I.R.C. 904(c) (allowing carryback of one year and carryover of ten years). Generally, when the U.S. tax rate is higher than a foreign tax rate, I.R.C. 904 will not limit the amount of foreign tax credit available to use, and it is not expected to limit the credit available to ABC-US in 2016. Furthermore, because ABC-US has at least 80 percent ownership of ABC-UK, the dividend would not be subject to the U.K. dividend withholding tax in accordance 6

with the U.K.-U.S. Tax Treaty. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, U.K.-U.S., art. 10, 3, July 24, 2001, T.I.A.S. No. 13,161 (entered into force Mar. 31, 2003). Alternatively, ABC-US instead could take the 85 percent dividends received deduction under I.R.C. 965 after repatriating earnings and profits from the subsidiaries. This benefit would likely be greater than that of claiming indirect foreign tax credits only for the Residual Tax paid. II. ABC-UK CAN ELECT DISREGARDED ENTITY STATUS, BUT ABC-US WOULD RECOGNIZE ADDITIONAL INCOME Based on Attachment 1 of the file, we have concluded that ABC-UK is a business entity for U.S. federal income tax purposes and did not elect a status at formation. Based on its single-member limited liability status, ABC-UK is treated as a corporation for U.S. federal income tax purposes in the absence of any previous election. Treas. Reg. 301.7701-3(b). However, because ABC-UK is an eligible business entity, it has the option to check the box, by filing Form 8832, and be treated as a disregarded entity for U.S. federal income tax purposes. Treas. Reg. 301.7701-3(c)(1)(i). ABC-UK is eligible to make this election because this would be its initial election. See Treas. Reg. 301.7701-3(c)(1)(iv) (applying 60-month limitation rule only to entities with election in place). A. ABC-US WOULD RECOGNIZE ABC-UK S ALL EARNINGS AND PROFITS AS DEEMED DIVIDEND If ABC-UK elects to be treated as a disregarded entity for U.S. federal income tax purposes, it would be deemed to have distributed all of its assets and liabilities to ABC-US in liquidation. See Treas. Reg. 301.7701-3(g)(1)(iii). The tax treatment of the liquidation is governed by I.R.C. 332. No gain or loss would be recognized by ABC-US for the receipt of property distributed in the complete liquidation of ABC-UK. See I.R.C. 332(a). 7

Given that ABC-UK is a foreign corporation, the liquidation transaction also would be subject to additional conditions under I.R.C. 367. When a transaction sends property from a foreign country to the United States, it is subject to I.R.C. 367(b), which directs the taxpayer to the treasury regulations. I.R.C. 367(b)(1). Pursuant to this liquidation, ABC-US would include the all earnings and profits amount of ABC-UK in its income as a deemed dividend. Treas. Reg. 1.367(b)-3(b)(3)(i). The all earnings and profits amount is the net positive earnings of a foreign corporation, determined similarly to the earnings and profits of a domestic corporation, but with consideration to the elements excluded by I.R.C. 1248(d). Treas. Reg. 1.367(b)-2(d). The subsidiaries do not have any such income to exclude from their net positive earnings. For that reason, the all earnings and profits amount is equal to the accumulated earnings and profits of ABC-UK and ABC-KAZ for U.S. federal income tax purposes. As stated in Part I.B, this amount is expected to be $187,827,929 as of year-end 2015. The all earnings and profits amount of the subsidiaries would be included as a deemed dividend to ABC-US. Treas. Reg. 1.367(b)-2(e)(2). The deemed dividend would be eligible for indirect foreign tax credit treatment under I.R.C. 902, as discussed in Part I.A, because ABC-US will have received a dividend on which ABC-UK has already paid foreign income taxes. See Treas. Reg. 1.367(b)-3(b)(3)(ii), Ex. (1). Notably, because the amount of the dividend is equal to the amount of undistributed earnings of ABC-UK and ABC-KAZ, the amount of the foreign tax credit claimable by ABC-US would be the full amount of foreign taxes paid by ABC-UK and ABC-KAZ over the past ten years. I.R.C. 902(a), 6511(d)(3)(A). Consequently, the amount of the foreign tax credit claimable would also be included in ABC-US s income as a gross up under I.R.C. 78. 8

ABC-UK also transfers the tax characteristics listed in I.R.C. 381(c) to ABC-US, including the 2015 projected net operating loss. I.R.C. 381(a), (c)(1). The net operating loss could be carried forward or back to apply against ABC-US s tax liability. See I.R.C. 172(b) (allowing a carryback of two years and a carryover of 20 years). However, the expected net operating loss of ABC-UK must be offset by the net income of ABC-KAZ for 2015. Since ABC-KAZ s net income is $3,474,345, the offset would adjust ABC-UK s net operating loss from $7,659,490 to $4,185,145. Electing disregarded entity status for ABC-UK would have the effect of liquidating ABC-UK into its sole shareholder, ABC-US. Such liquidation would cause ABC-US to recognize income in the all earnings and profits amount of ABC-UK in the form of a deemed dividend. Assuming the 2015 projections prove to be correct, the deemed dividend would be $187,827,929. ABC-US would be eligible to claim an indirect foreign tax credit for the full amount of the taxes paid by ABC-UK over the past ten years. The indirect foreign tax credit amount would be reflected in ABC-US s income as a gross-up under I.R.C. 78. ABC-US would also inherit the projected $4,185,145 net operating loss from ABC-UK. B. ABC-US WOULD RECOGNIZE ABC-BV S GUARANTEE OF BIG BANK LOAN AS SUBPART F INCOME The liquidation of ABC-UK into ABC-US also would cause ABC-US to recognize additional income. Because ABC-US s other foreign subsidiary, ABC-BV, guaranteed the $100 million Big Bank loan to ABC-UK, electing disregarded entity status for ABC-UK prior to the loan maturing would cause Subpart F income to be attributed to ABC-US. Under Subpart F, a foreign corporation is a Controlled Foreign Corporation ( CFC ) if a U.S. person, including a corporation, owns at least 50 percent of the foreign corporation. I.R.C. 957(a)(2). A domestic corporation may recognize Subpart F income when it has at least 9

one CFC. I.R.C. 951(a)(1). If a CFC holds United States property, then I.R.C. 951 and 956 require that the amount of that investment be included in the U.S. person s income. I.R.C. 951(a)(1)(B), 956(a). Any obligation of a U.S. person with respect to which a CFC is a guarantor shall be considered United States property held by such CFC. I.R.C. 956(c), (d). This amount will be included in the gross income of a U.S. person, but only to the extent a CFC has generated sufficient earnings and profits to cover the amount as if it were an actual dividend distribution. I.R.C. 951(a)(1); Treas. Reg. 1.956-1(b)(1). The amount of income recognized by a U.S. person is equal to the unpaid principal amount of the loan guaranteed by a CFC. Treas. Reg. 1.956-1(e)(2). Any income attributed to a domestic corporation under Subpart F is eligible for an indirect foreign tax credit under I.R.C. 902. I.R.C. 960(a)(1). However, a domestic corporation may only claim an amount that would have been available had it been paid in cash and actually distributed. I.R.C. 960(a)(1), (c). As stated in the introduction of Part I, I.R.C. 6511 sets a ten-year limit to claim foreign tax credits. I.R.C. 6511(d)(3)(A). ABC-US is the sole shareholder of ABC-BV, making ABC-BV a CFC. ABC-UK holds the liability of the $100 million Big Bank loan until the loan matures at year-end 2016. If ABC-UK elects to become a disregarded entity prior to the maturity date of the Big Bank loan, the loan obligation will be among the liabilities distributed from ABC-UK to ABC-US. Since ABC-BV is the guarantor of the loan, this election will attribute Subpart F income to ABC-US. From the available information, we cannot determine the earnings and profits ABC-BV has generated from ABC-MEX and ABC-AUS after 2005. But assuming the $520 million of combined undistributed earnings ABC-MEX and ABC-AUS generated up to 2005 has not diminished below $100 million, ABC-US will recognize as income the full amount of the $100 million loan guarantee held by ABC-BV. 10

ABC-US would be eligible to claim an indirect foreign tax credit under I.R.C. 960 so long as ABC-BV has earnings and profits from the last ten years. See I.R.C. 6511(d)(3)(A). Again, because we cannot determine the earnings and profits of ABC-MEX and ABC-AUS between the 2006 and 2015 taxable years, we would need additional information to assess the indirect foreign tax credit ABC-US could claim upon recognizing the $100 million of Subpart F income. Without additional facts, an indirect foreign tax credit would be available to ABC-US only for taxes paid by ABC-MEX and ABC-AUS for the 2005 taxable year. The taxes paid for prior years would not meet the ten-year statute of limitations requirement of I.R.C. 6511(d)(3)(A). See Albemarle Corp. v. U.S., 797 F.3d 1011 (Fed. Cir. 2015), reh g denied, No. 15-5015 (Fed. Cir. Oct. 22, 2015) (holding that ten-year limitation provided by I.R.C. 6511(d)(3)(A) commences on required filing date for taxes accrued in given year under relation back doctrine). III. CONCLUSION ABC-US likely cannot claim an indirect foreign tax credit for the Field Tax liability if it settles the dispute with Kazakhstan. Such an amount likely would not be considered compulsory, and likely would not be an income tax or in lieu of an income tax for purposes of claiming an indirect foreign tax credit. ABC-US should be able to claim a credit for the Residual Tax paid, but only in the event ABC-UK pays a dividend to ABC-US or elects to be treated as a disregarded entity. The election to treat ABC-UK as a disregarded entity merely for ABC-US to deduct the 2015 projected net operating loss would not benefit ABC-US. First, the net operating loss must be offset by the ABC-KAZ net income for the year, lowering the amount of the available deduction. Second, this election should trigger $100 million of Subpart F income to ABC-US. 11

If ABC-BV has paid foreign income taxes on undistributed earnings from ABC-MEX and ABC-AUS from the last ten years, ABC-US should be able to claim a foreign tax credit for the $100 million. But electing disregarded entity status should increase ABC-US s tax liability so long as the election occurs prior to the maturity date of the Big Bank loan because of the $100 million of Subpart F income. IV. RECOMMENDATIONS Because ABC-US likely would not be able to claim an indirect foreign tax credit for the Field Tax, the company would not benefit from settling that claim. Assuming the likelihood of success as asserted by foreign counsel in Kazakhstan, ABC-US should avoid settling that claim. When the Residual Tax is eventually paid in Kazakhstan, ABC-US should be able to claim a credit under I.R.C. 902 to the extent that dividends are paid to it by ABC-UK. Alternatively, ABC-US should explore taking an I.R.C. 965 dividend received deduction and reinvesting those earnings and profits in the United States because the benefit would likely exceed the indirect foreign tax credits claimable. ABC-US should not elect disregarded entity status for ABC-UK until the entire $100 million loan from Big Bank is paid. Making this election should cause ABC-US to recognize $100 million in Subpart F income because of ABC-BV s guarantee of the loan. Recognizing this income would be avoided by paying the loan before ABC-UK elects disregarded entity status. By electing disregarded entity status for ABC-UK, ABC-US would accrue foreign tax credits and a net operating loss. But those credits and net operating loss would be offset by income that otherwise would not be included in ABC-US s income. ABC-US would not lower its U.S. federal income tax liability by electing disregarded entity status for ABC-UK, and that course of action is not recommended. 12

LAW OFFICES OF LL.M. TEAM NUMBER Tax Town, ABA State, 10000 Client Tax Town, ABA State, 10000 Dear Client, Re: 2015-2016 Law Student Tax Challenge Problem This letter responds to your request for guidance as to whether your company, American Beef Conglomerate, Inc. ( ABC-US ), can use foreign tax credits to reduce its U.S. federal income tax liability in the event it settles the ongoing tax dispute of ABC-US s Kazakhstan subsidiary ( ABC-KAZ ). You also requested guidance on whether ABC-US can use the net operating loss generated by its United Kingdom subsidiary ( ABC-UK ) to reduce its U.S. federal income tax liability by electing to treat ABC-UK as a disregarded entity. We have researched these issues and converted all figures to U.S. dollars, rounded to the nearest dollar, based on the applicable exchange rates. Our analysis and recommendations follow. I. ABC-US CAN CLAIM FOREIGN TAX CREDIT FOR ABC-KAZ S RESIDUAL TAX, BUT NOT FIELD TAX In general, a U.S. corporation can claim foreign tax credits when the corporation itself has actually paid foreign taxes (a direct foreign tax credit), or when a subsidiary has paid foreign taxes (an indirect foreign tax credit). Here, ABC-US has not paid any foreign taxes because ABC-UK is the entity responsible for paying ABC-KAZ s tax liability. Therefore, ABC-US cannot claim a direct foreign tax credit. However, ABC-US may be able to claim an indirect foreign tax credit if its subsidiaries have paid foreign income taxes. To claim this indirect foreign tax credit in a taxable year, a U.S. corporation must have received a dividend from its subsidiary during that year.

In Kazakhstan, there are two separate tax levies at issue to consider: the Field Tax, and the Residual Tax. To be an income tax, a payment to a foreign country must be compulsory, and it must be based on the net gain received by a taxpayer in a given taxable year. The Field Tax is imposed only on the amount of land held in a given year, not on net gain, and therefore is not an income tax. Furthermore, given Kazakhstan s lower court decisions and the reasonable opinion of local tax counsel Valentin Omarov, the Internal Revenue Service ( IRS ) likely would not consider payment of the Field Tax to be compulsory. For these reasons, payment of the Field Tax would not generate an indirect foreign tax credit. The Residual Tax, which is imposed on the net income of a company for each taxable year, is based on the net gain received by ABC-KAZ for each taxable year. The Residual Tax is compulsory because the tax falls within the direct authority of Kazakhstan to levy taxes. Because the Residual Tax is compulsory and is based on net gain, it is considered an income tax and its payment generates a foreign tax credit. ABC-US can only claim an indirect foreign tax credit for payment of ABC-KAZ s tax liability if it receives a dividend from ABC-UK, the entity responsible for payment, during the taxable year. II. ABC-US WOULD NOT LOWER TAX LIABILITY IF ABC-UK ELECTS TO BECOME DISREGARDED ENTITY The IRS currently considers ABC-UK to be an association, meaning it is taxed as a corporation. However, ABC-UK is eligible to elect its own status, and could choose instead to be taxed by the United States as a disregarded entity. By electing disregarded entity status, ABC-UK would be treated for U.S. federal income tax purposes as having liquidated and distributed its assets and liabilities to ABC-US in a non-taxable event. In addition, ABC-UK s all earnings and profits amount would be deemed to transfer to ABC-US. This would be treated for U.S. federal income tax purposes as a dividend even though 2

money technically would not be changing hands. Thus, ABC-US would recognize the all earnings and profits amount of ABC-UK in its gross income during that taxable year. In total, between ABC-UK and ABC-KAZ, the all earnings and profits amount ABC-US would recognize is $187,827,929. ABC-US would be eligible to claim an indirect foreign tax credit for the deemed dividend. The credit would be the amount of foreign taxes paid by ABC-UK and ABC-KAZ, subject to a ten-year limitation. The amount of the credit would also be included in ABC-US s gross income for the taxable year. If these steps are taken, ABC-US would be able to claim any net operating loss suffered by ABC-UK, offset by the net income of ABC-KAZ, for the current taxable year. Assuming the 2015 projections prove to be correct, ABC-US could claim a net operating loss of $4,185,145, a number lower than your original projection. The net operating loss could be used for the current taxable year, carried back two years, or forward 20 years. But if ABC-UK elects disregarded entity status, ABC-US would recognize the $100 million loan from Big Bank as additional income in the year of election. The loan, with a maturity date of December 31, 2016, is guaranteed by ABC Holdings, B.V. ( ABC-BV ). If the election is made, ABC-UK would distribute its assets and liabilities, including the loan, to ABC-US. Because ABC-BV would still be guarantor of the loan, ABC-US would recognize a $100 million in additional income so long as ABC-BV has sufficient earnings and profits to cover the amount. Although ABC-US would be eligible to take a foreign tax credit for this income, the credit would be subject to the ten-year limitation mentioned previously. We do not have sufficient information to determine the amount of foreign tax credit available, nor would obtaining such information alter our conclusion regarding ABC-UK electing disregarded entity status. 3

III. CONCLUSION & RECOMMENDATIONS ABC-US would not be able to claim an indirect foreign tax credit for the Field Tax because it is not an income tax. ABC-US would be able to claim an indirect foreign tax credit for the Residual Tax when it receives the $16,496,460 targeted dividend from ABC-UK in 2016. ABC-UK is eligible to elect disregarded entity status, but in doing so would recognize additional income from ABC-UK in the all earnings and profits amount of $187,827,929, and from ABC-BV as the guarantor of the Big Bank loan in the amount of $100 million. ABC-US should not seek to settle the tax dispute with the Kazakhstan authorities, but should wait to prevail and avoid paying the amount of the Field Tax. Furthermore, ABC-US should not elect disregarded entity status for ABC-UK until after the Big Bank loan matures because ABC-US will recognize an additional $287,827,929 of income. The net operating loss of $4,185,145 and the indirect foreign tax credits, in whatever amount available, would not be enough to lower ABC-US s overall tax liability in that case. ABC-UK should only elect disregarded entity status after the Big Bank loan matures. Waiting for the loan to mature would mean that ABC-UK will have paid back its liability, which will lower its all earnings and profits amount and eliminate the loan guarantee that would otherwise trigger income to ABC-US. Alternatively, ABC-US could forgo foreign tax credits and reinvest ABC-UK s earnings and profits in the United States. ABC-US could deduct 85 percent of this amount. If any of our assumptions are incorrect, please alert us as soon as possible. To the extent you have information that would correct our assumptions, please forward it to our office at your earliest opportunity. Please do not hesitate to contact us should you have additional questions. Sincerely, LL.M. TEAM NUMBER 4