Most US companies take care to structure foreign investments so that US taxes can be deferred on the earnings for as long as the earnings are kept offshore. Financial officers then press the tax directors for ways to bring the money back to the US without triggering taxes. US clothing retailer The Limited thought it had a way to do this. Its Hong Kong subsidiary had $179.5 million in earnings that it wanted to repatriate to the US. The Hong Kong subsidiary incorporated another company one tier below it in the Netherlands Antilles and then made a “capital contribution” of the $179.5 million. The Dutch Antilles company then loaned the money to the US parent. A loan of “earnings” back to the US would trigger income taxes on the earnings under section 956 of the US tax code. However, The Limited argued that the Dutch Antilles company making the loan had no earnings.

The tax court said the loan was essentially a dividend by the Hong Kong company. The IRS has reserved the right in regulations under section 956 to attribute such money transfers to the real party in interest