Liquidating the Foreign Personal Holding Company: Alternative Considerations

Prior to 1937, it was common for United states taxpayers to utilize offshore corporate entities, structured in the form of a foreign personal holding company ("FPHC") to avoid United States taxation. As indi- cated by the House Committee Notes accompanying enactment of the Revenue Act of 1937, "[t]he evidence presented to the joint committee has shown that foreign personal holding companies have afforded one of the most flagrant loopholes for tax avoidance."' The primary problem faced by the lawmakers in 1937 was the fact that the United States was unable to acquire direct taxing jurisdiction over such companies due to the fact that such corporate entities were not located within the taxing jurisdiction of the United States.2 As a result, Congress adopted an alter- native approach which in the opinion of the lawmakers was justifiable on constitutional grounds;3 that is, to provide for a method of taxation that will reach the shareholders who own stock in such companies and over whom the United States has direct taxing authority.4 As a result, the FPHC provisions provided an alternative method of taxation which deemed the income of the FPHC to be distributed to the shareholders and required such shareholders to report as their income, the undistrib- uted net income of such FPHC.' Although there are certain similarities that exist between the FPHC provisions6 and the domestic PHC provisions,7 it is not the purpose of this work to address such differences. Rather, this Article will: (1) Dis- cuss and analyze the operative provisions of the FPHC provisions;8 (2) Analyze the methods by which shareholders subject to the United States taxing jurisdiction may minimize the tax impact of liquidating a FPHC and repatriating its earnings to the United States taxing jurisdic- tion;9 and (3) Discuss miscellaneous considerations applicable in the con- text of such alternative liquidation techniques.