Recent Developments Make It Easier For U.S.-Based Multinationals To Dispose Of Foreign Subsidiaries
Published: March 01, 2005
Source: Canadian Tax Journal
Recent Developments Make it Easier for US Based Multinationals to Dispose of Foreign Subsidiaries By: Abraham Leitnerƒx One area of tax planning that has benefited greatly from the flexibility provided by the US check-the-box rules for classifying eligible entities is planning for the disposition of foreign subsidiaries. This article describes the so-called "check-and-sell" technique, and explores two recent developments that have favorably impacted that strategy. Introduction One of the central features of the US income tax regime applicable to US based multinational companies is that operating income of the group's foreign subsidiaries or a sale of their operating assets is generally not subject to US taxation until the earnings are repatriated to the US. In contrast, gain from a sale by a foreign subsidiary of the stock of a lower-tier foreign subsidiary is subject to current taxation as "subpart F income," even if the proceeds of the sale are retained by the selling subsidiary. One technique that taxpayers have utilized to achieve deferral of the gain on such a sale of a foreign subsidiary makes use of the US elective regime for classifying eligible entities as corporations or pass-through entities for US federal tax purposes (the "check-the-box" rules). In May, 2004, this so-called "check-and-sell" technique survived a court challenge by the Internal Revenue Service (IRS). In yet a more recent development, the American Jobs Creation Act of 2004 (the "Jobs Creation Act") included an amendment to Code section 954 that significantly expanded the scope of transactions that may benefit from the check-and-sell technique. Background Code section 951 requires the United States shareholders of a controlled foreign corporation ("CFC") to include in their income for the taxable year their proportionate share of the CFC's "subpart F income." The subpart F income of a CFC includes various categories of income specified in section 952 including, in particular, "foreign base company income." The term "foreign base company income" in turn is defined to include, among other things, certain passive income constituting "foreign personal holding company income" (or "FPHCI") including dividends, interest, royalties, rents, and annuities. Of particular importance to the topic of this column, FPHCI also includes the excess of gains over losses from the sale or exchange of property that: (i) gives rise to such passive income; (ii) is an interest in a trust, partnership, or REMIC; or (iii) does not give rise to any income. The applicable Treasury Regulations significantly expand the categories of gain that will result in FPHCI to include not only gain from property that actually does not give rise to any income (as described in the statute), but also property that does give rise to income (even to active income) unless the property is "used or held for use in" the CFC's trade or business. How do these rules apply to a sale of an operating subsidiary? Consider the following example, in which a US corporation owns a two-tier structure of CFCs. [Insert Diagram I] If Opco sells all of its assets, the gain recognized from the sale of those business assets will not constitute FPHCI and USCo will not be required to include the gain in its income until the proceeds are distributed by Opco. In contrast, if Holdco sells all of the stock of Opco, the transaction will result in FPHCI, which will cause USCo, the US shareholder of the selling CFC, to be subject to subpart F income inclusions. However, there are often competing considerations that can make a direct sale of the operating subsidiary's assets impracticable or undesirable. First, there may be regulatory restrictions (e.g., banking or insurance laws) that prevent the subsidiary from transferring its assets or that prevent the business of the subsidiary from being conducted by another entity. In addition, a sale of the subsidiary's assets may have more adverse foreign income tax consequences than a sale of its stock, as well as adverse real property or other local transfer tax consequences. Check-and-Sell While the foregoing issues may preclude an actual sale of the operating subsidiary's assets, it is often possible to achieve the desired US federal tax treatment by filing a "check-the-box election" under Treasury Regulation ¡±301.7701-3(c). For US federal tax purposes, the classification of an entity as a separate body corporate or as a fiscally transparent pass-through may be changed by the entity or its owners' filing an election designating how the entity wishes to be classified (unless the entity is of a type enumerated in the applicable regulations as constituting a per se corporation). An entity that elects pass-through treatment will be treated as a partnership if it has more than one owner and will be disregarded as an entity separate from its owner (in a manner similar to a branch) if it has a single owner. If an entity is disregarded, its activities are treated in the same manner as a branch or division of the CFC parent and the parent is treated as directly owning all of the subsidiary's assets. In Diagram I, since Opco is 100% owned by Holdco, assuming Opco is an eligible entity it can elect to be treated for US tax purposes as a disregarded entity. As a result, a sale of the stock of Opco following a check-the-box election would be treated for US tax purposes as a sale of the subsidiary's assets. Thus, the check-and-sell technique converts what would otherwise be subpart F income into "good" income that is eligible for deferral until the gain is distributed by Holdco to USCo. Canadian Variation. The list of entities treated as per se corporations is drawn fairly narrowly and for most foreign jurisdictions the regulations treat only public limited companies or their equivalents as per se corporations. In the case of Canada, however, the entity classification rules treat any Canadian corporation or company as a per se corporation for US tax purposes unless the entity is a Nova Scotia unlimited company (NSULC) or the owners of the entity otherwise have unlimited liability under Canadian federal or provincial law. Therefore, a typical Canadian company is not eligible to file a check-the-box election and avail itself of the check-and-sell technique. However, an alternative that may lead to a similar result would be to convert the Canadian subsidiary into an NSULC by continuing it into Nova Scotia (unless it was formed under Nova Scotia law) and then amalgamating it into an NSULC. Such a transaction could be structured to qualify for tax-free treatment in Canada, but would be treated as a liquidation of the Company for US tax purposes. Note that an NSULC would be treated as a pass-through entity by default, so no check-the box election would be necessary here. IRS Position on Check-and-Sell Strategy The first pronouncement by the IRS on the check-and-sell technique was a technical assistance memorandum issued in 1999. The fact pattern addressed in the memorandum was substantially identical to the one described above and involved a sale by a CFC (FC1) of the assets of a former foreign subsidiary (FC2) following a liquidation of the subsidiary. The memorandum described two situations, one in which the subsidiary was actually liquidated and another in which a check-the-box election was made to treat the subsidiary as a disregarded entity (in either case immediately before the sale was completed). Largely foreshadowing the arguments made by the IRS in Dover v. Comm'r, described below, the IRS reasoned that since FC1 acquired the assets of FC2 after it had entered into a commitment for the sale of those assets, FC1 did not use or hold the assets for use in its trade or business. Therefore, the gain would not be excludible from FC1's subpart F income. Later in the same year, Treasury issued proposed regulations (the "extraordinary transaction rule") amending the check-the-box regulations. The proposed amendments would have invalidated any election made to treat a foreign eligible entity as a disregarded entity if (1) a 10-percent or greater interest in the foreign eligible entity is sold, exchanged, transferred or otherwise disposed of in one or more transactions that occur in the period commencing one day before and ending 12 months after the effective date of the foreign eligible entity's change in classification to a disregarded entity; and (2) the entity was previously classified as a corporation at any time during the preceding 12-month period. The preamble to the proposed regulations explained that the proposed rule was intended to address inappropriate Federal tax consequences that would otherwise result under a number of international provisions of the Code, including "the disposition of ownership interests under Subpart F." The new rules were proposed to be effective on a prospective basis following the date final regulations would be published in the Federal Register. The IRS subsequently issued two field service advice memoranda addressing situations in which CFCs had made check-the-box elections for a foreign subsidiary immediately before a sale of the subsidiaries' stock. In both cases, the IRS concluded that the assets deemed to have been sold by the CFCs were not used or held for use by the CFCs in their trade or business and that the gain results in FPHCI. Reportedly, Dover Corporation was the subject of one of those FSAs. The proposed extraordinary transaction rule was widely criticized by commentators. One of the strongest criticisms directed against the proposed rule was that the perceived abuses targeted by the rule are not specific to deemed liquidations under the check-the-box regulations, but rather would equally arise from the tax treatment of actual liquidations in those situations. Commentators argued that if the IRS' view is that such transactions constitute impermissible tax avoidance, then it should promulgate rules under the specific provisions involved shutting down the abuses for both actual and deemed liquidations. On the other hand, if the IRS believes that the targeted transactions are permissible techniques where the entity to be sold is actually liquidated, then preventing taxpayers from being able to access the permitted benefits solely in the case of deemed liquidations resulting from a check-the-box election would appear to be devoid of any policy justification. In the face of this criticism, the IRS, in Notice 2003-46, announced that it would withdraw the proposed extraordinary transaction rule. The proposed regulations were formally withdrawn on October 22, 2003. However, the withdrawal of the proposed regulations did not signal an abandonment by the IRS of its views on check-and-sell transactions. In fact, Notice 2003-46 states that: the IRS and Treasury remain concerned about cases in which a taxpayer, seeking to dispose of an entity, makes an election to disregard it merely to alter the tax consequences of the disposition. The IRS will continue to pursue the application of other principles of existing law (such as the substance over form doctrine) to determine the proper tax consequences in such cases. . . . In addition, the IRS and Treasury are continuing to examine the potential use of the entity classification regulations to achieve results inconsistent with policies and rules of particular Code provisions or U.S. tax treaties. In contrast to the approach of the extraordinary transaction rule, this examination will focus on ensuring that the substantive rules of particular Code provisions and U.S. tax treaties reach appropriate results notwithstanding changes in entity classification. The Notice then singles out two transactions in particular that the IRS is considering. One is the use of a check-the-box election that is effective immediately after an outbound stock-for-stock transfer of a foreign subsidiary, which converts what would otherwise be a "B" reorganization into an asset (a "C" or a "D") reorganization. One benefit of this technique is that in a "B" reorganization, the shareholders are required to enter into a gain recognition agreement to avoid gain recognition under section 367(a), but generally no gain recognition agreement is required under the section 367 regulations for an asset reorganization. The second transaction identified in the Notice as a source of concern to the IRS is the check-and-sell technique. Thus, the Notice made it clear that the IRS had not retreated from its position regarding check-and-sell transactions, as expressed in ITA 199937038, FSA 200049002, and FSA 200046008. Dover v. Commissioner The check-and-sell strategy finally came before the Tax Court in Dover v. Commissioner, which involved the following facts. During 1997, Dover Corporation was the common parent of an affiliated group of US corporations that filed a consolidated return. Dover also owned (directly or indirectly through its US subsidiaries) a number of foreign corporations including a UK corporation, Dover U.K. Holdings Limited ("Dover UK"). Dover UK in turn owned a UK operating subsidiary, Hammond & Champness Limited ("H&C"), which was engaged in the business of installing and servicing elevators in the UK. On June 30, 1997, Dover UK entered into an agreement with a German corporation for the sale by Dover UK to the German corporation of all of the outstanding stock of H&C. The agreement provided that it and related documents would be held in escrow until July 11, 1997, pending the completion of the purchaser's due diligence and the purchaser's determination to proceed with the sale. The agreement provided for the sale to be completed on July 11, 1997, on which date the purchaser was required to deliver the purchase price for the H&C shares. On July 11, 1997, the purchaser notified Dover UK that the escrow conditions had been satisfied and the sale was completed. By letter dated December 3, 1998, Dover Corporation, on behalf of H&C, requested that the IRS grant an extension of time, pursuant to Treas. Regs. ¡±301.9100-1(c) and ¡±301.9100-3, for H&C to file a retroactive check-the-box election to be treated as a disregarded entity effective June 30, 1997, immediately before the sale of the stock of H&C by Dover UK. The IRS was initially reluctant to grant the request for relief because of the potential impact the election would have in enabling Dover UK to take the position that the sale of H&C should be characterized as an asset sale from which no FPHCI would result. Ultimately, the IRS agreed to issue the ruling, with the caveat that no inference was to be drawn from the ruling that the sale of H&C did not result in FPHCI, and a statement to that effect was included in the ruling. The taxpayer did not report any subpart F income from the sale of H&C and the IRS issued a notice of deficiency asserting an increase in the taxpayer's subpart F income in the amount of approximately $25 million in connection with the sale of H&C. The taxpayer made two arguments. First, the taxpayer argued that under the check-the-box regulations Dover UK should be treated not only as selling H&C's assets but also as engaged in H&C's historic business at the time of the sale of the assets. Accordingly, under Treas. Reg. ¡±1.954-2(e)(3)(ii) (quoted above), the assets that were sold should not be treated as "property that does not give rise to income," so the sale should not result in FPHCI. Alternatively, the taxpayer argued that the requirement of Treas. Reg. ¡±1.954-2(e)(3)(ii) that to avoid FPHCI the assets sold have to be used or held for use in a trade or business goes beyond the plain language of the statute. Under the statutory language, FPHCI results only if an asset does not give rise to any income and the regulation is therefore invalid. However, the Tax Court ruled in favor of the taxpayer on the basis of the first argument and, accordingly, the court did not address the issue of the validity of Treas. Reg. ¡±1.954-2(e)(3)(ii). In support of its argument that Dover UK should be treated as having been engaged in H&C's historic trade or business, the taxpayer argued that the sale of H&C actually occurred on July 11, 1997, while the check-the-box election approved by the IRS was effective on June 30, 1997. Thus, there was an 11-day intervening period during which the H&C business should be treated as having been operated by Dover UK. However, the court held this issue to be moot since it concluded that Dover UK should be viewed as engaged in H&C's historic business and as using H&C's assets in that business even if the check-the-box election were effective immediately before the sale. At the outset of its analysis, the Tax Court looked to a pair of published rulings issued under former Code section 346(a)(2). The court held that those rulings stand for the proposition that a corporation that receives a distribution of assets from a subsidiary in a section 332 liquidation is treated as stepping into the shoes of the subsidiary with respect to the subsidiary's trade or business and is therefore treated as having used the subsidiary's assets in its trade or business. Section 346(a)(2) was the predecessor to the provisions that currently appear in Code section 302(b)(4) and section 302(e), which allow capital gain treatment for a partial liquidation of a corporation following the termination of an active trade or business of the corporation. Rev. Rul. 75-223 addressed whether the active trade or business requirement of section 346(a) is satisfied in the following three situations where the qualified business was conducted by a subsidiary of the distributing corporation: (1) the subsidiary is liquidated immediately before the business is sold by the distributing corporation; (2) the subsidiary is liquidated immediately after it sells the business; or (3) the business is not sold at all, but rather the stock of the subsidiary is distributed to the shareholders of the distributing corporation. In its analysis, the IRS focused on the statutory scheme of Code section 381, under which the parent corporation in a section 332 liquidation succeeds to, among other attributes, the earnings and profits, net operating loss carryovers, and accounting methods of the liquidated subsidiary. The IRS reasoned that for most practical purposes, the parent corporation, after the liquidation of the subsidiary, is viewed as if it had always operated the business of the subsidiary and that consequently there is no meaningful distinction, for purposes of section 346(a)(2), between a corporation that distributes the assets of a division (or the proceeds of a sale of those assets) and one that distributes the assets of a liquidated subsidiary (or the proceeds of the subsidiary's assets). Based on this analysis, the IRS concluded that both the first and second situations should satisfy the requirements of section 346(a)(2). Rev. Rul. 75-223 was followed by the IRS in a second published ruling and in a number of private letter rulings involving partial liquidations. The Tax Court noted that the IRS has reached similar conclusions in other contexts. Rev. Rul. 72-356, addressed whether the surviving corporation in a statutory merger must take into account the history of the merged corporation in satisfying the requirements of former Code section 921. In order to qualify as a Western Hemisphere trade corporation, 95% of the corporation's gross income for the three preceding years was required to be from foreign sources and 90% of such income had to be derived from the active conduct of a trade or business. By analogy to the rules of section 381 (and the cases preceding the enactment of that section), the IRS ruled that not only should the surviving corporation be treated as having succeeded to the historical gross income of the merged corporation but also as having earned that gross income in the active trade or business previously conducted by the merged corporation. The court also discussed a private ruling issued by the IRS under subpart F, in which the IRS followed Rev. Rul. 72-356. That ruling involved a CFC that exchanged its shares in a foreign subsidiary for stock and debentures in a newly formed corporation (Newco). The transaction qualified as a reorganization, but the debentures resulted in a dividend under Code section 356. Other related corporations were also reorganized into Newco. The ruling addressed the consequences of the dividend under the "same country exception" of section 954(c)(3)(A) and Treas. Reg. ¡±1.954-2(b)(4) (the predecessor of Treas. Reg. ¡±1.954-2(b)(4)), under which a dividend paid to a CFC by a corporation that: (1) is related to the CFC; (2) is formed under the laws of the same country as the CFC; and (3) has a substantial part of its assets used in its trade or business located in the same foreign country is excluded from FPHCI. This exception only applies if the earnings out of which the dividend is paid were accumulated during a period when all of the three foregoing requirements were satisfied. The IRS ruled that if the dividend paid by Newco is paid out of earnings of a foreign subsidiary to which Newco succeeded under section 381, the dividend would be eligible for the exception from FPHCI as long as the earnings were accumulated during a period in which the predecessor of Newco met the three specified requirements. In other words, the IRS viewed Newco as succeeding to the attribute of its predecessor with respect its having been engaged in a trade or business. The Tax Court also discussed a case that it decided in 1962, Acro Manufacturing Co. v. Comm'r, which the court found to be directly on point. Acro involved a corporation that received an offer to buy the stock or assets of a subsidiary. In order to avoid a capital loss on the sale of the subsidiary's stock, the taxpayer liquidated the subsidiary and sold its assets, reporting the loss as an ordinary loss incurred on a sale of inventory, accounts receivable, and depreciable assets used in a trade or business. Finding that the taxpayer acquired the assets from its subsidiary in order to sell them and not to use them in its trade or business, the court rejected the taxpayer's argument that the character of the assets as assets held for use by the subsidiary in its trade or business carried over to the taxpayer following the section 332 liquidation of the subsidiary. The Tax Court's decision in Acro was subsequently affirmed by the Sixth Circuit on appeal. The court agreed that its prior decision in Acro supported the position of the IRS that Dover UK should not be viewed as having held the assets it received from H&C for use in a trade or business. However, the court held that by issuing Rev. Rul. 75-233 the IRS had conceded that it disagreed with the holding in Acro. Accordingly, the taxpayer was justified in relying on the IRS' stated position in Rev. Rul. 75-233 that a corporation that receives the assets of a subsidiary in a section 332 liquidation is treated as being engaged in the trade or business of the subsidiary and as having used the assets it received from the subsidiary in that trade or business. The court further held that a careful reading of the language of the check-the-box regulations supported the court's conclusion. Treas. Reg. ¡±301.7701-2(a) provides that if an entity is disregarded under the regulations, then "its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner." The court referred to the American Heritage Dictionary and Black's Law Dictionary to define the terms "branch" and "division" as meaning parts of an operating business. The court interpreted the regulations as providing that the owner of a disregarded entity is treated under the regulations as engaged in the disregarded entity's business. Since the regulations do not require any minimum period of time before after the election is effective for the entity to be treated as a branch or division of the owner, reasoned the court, it follows that the approach adopted by the regulations rejects the holding of Acro. Analysis of Dover The court's reading of the phrase in the check-the-box regulations that if an entity is disregarded "its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner" seems overly literal. For example, suppose the entity was owned by an individual on the effective date of the election and the deemed liquidation was not eligible for tax-free treatment under section 332. Alternatively, suppose the disregarded entity does not, and never did, conduct a business at all, but simply holds a passive investment. Is it fair to read the regulations as mandating that the entity be treated as a branch that is engaged in a trade or business? A more reasonable interpretation of the language on which the court focused is that the activities of the disregarded entity are treated as activities of the owner in the same manner that activities of a branch are treated as activities of the owner, but if the activities would not have constituted a trade or business if conducted directly by the owner (whether because the activities are passive or because the owner intends to immediately sell the entity's assets), then the activities should not constitute a trade or business merely because they are conducted inside a disregarded entity. Nevertheless, the court's holding still seems justified in light of the position taken by the IRS in Rev. Rul. 75-223. Even though section 346(a)(2) was removed from the Code in 1982, Rev. Rul. 75-223 is far from a dead letter and continues to be cited as authority in private rulings issued by the IRS under section 302(b)(4), which is the successor to section 346(a)(2). The court's decision also seems correct as a policy matter. The difference in treatment under subpart F of a sale of wholly-owned operating subsidiary and a sale of the assets of the subsidiary is purely a matter of form over substance. As such, it does not seem offensive that taxpayers are able to resort to self-help to adapt the form of their transactions to avoid being trapped by section 954(c)(3)(A). Note that the IRS is not pursuing an appeal in Dover. Impact on Acro. The Tax Court did not overrule its prior decision in Acro, but the rationale for the court's decision appears to foreclose the IRS from relying on Acro in the future unless the IRS issues a regulation or a published ruling concluding that a check-the-box election followed by a sale of disregarded entity will result in FPHCI. Such a ruling would undermine the basis for the court's holding in Dover that taxpayers are entitled to rely on the position of the IRS expressed in Rev. Rul. 75-223. However, as a policy matter it is difficult to see why the trade or business of a subsidiary should be attributed to the shareholder in a section 332 liquidation for purposes of sections 346(a)(2) or 302(b)(4) but not for purposes of section 954(c). Note that taxpayers should still be able to rely on Acro when it leads to a taxpayer favorable result, though there is a risk that the IRS will seek to have the Tax Court overrule Acro in the future. Substance-Over-Form and Step Transaction Issues. It is interesting to note that the IRS did not attempt to argue that the transitory ownership of H&C's assets by Dover UK should be ignored for tax purposes under a substance-over-form analysis or the step transaction doctrine. Treas. Reg. ¡±301.7701-3(g)(2)(i) provides that "the tax treatment of a change in the classification of an entity for federal tax purposes by election under paragraph (c)(1)(i) of the section is determined under all relevant provisions of the Code and general principals of tax law, including the step transaction doctrine." However, the IRS may have been reluctant to challenge the form of the transaction, since the court might have concluded that H&C should be treated as having sold its business assets to the seller directly, which would of course not have resulted in any subpart F income. Business Purpose. Dover suggests that in some respects taxpayers may be able to use check-the-box elections to achieve tax results that might not be available if the transactions that are deemed to occur under the regulations were actually undertaken. In particular, there have been a number of cases in which courts have disregarded the tax consequences of a transaction actually undertaken by the taxpayer where the transaction lacked a significant business purpose. The Tax Court in Dover noted (albeit in dicta) that the check-the-box regulations require no business purpose for any election under the regulations. Indeed, given the very nature of a check-the-box election as purely a creature of the tax law, it is hard to see how any such election could ever have a business purpose apart from achieving a reduction in taxes. Expanded Check-and Sell Opportunities for Non-Wholly Owned Subsidiaries The discussion in this article up to this point dealt with a situation in which the subsidiary being sold is a wholly-owned subsidiary of the CFC seller. Suppose instead that a portion of the shares of Opco is owned by a separate foreign subsidiary of USCo. [Insert Second diagram] If Opco files a check-the-box election to be treated as a pass-through entity, then Opco will still be treated as having liquidated. However, unless Holdco owns at least 80% of the voting power and value of Opco's outstanding stock the deemed liquidation of Opco will be taxable under Code section 331. Moreover, any gain recognized by Holdco on the disposition of its stock in Opco in the deemed liquidation of Opco will result in subpart F income. Suppose Holdco does own the requisite 80% of Opco and the deemed liquidation therefore qualifies for tax-free treatment under Code section 332. Since Opco has more than one owner, rather than becoming a wholly-owned disregarded entity of Holdco, Opco will instead become a partnership for US federal tax purposes. If Holdco then sells the stock of Opco, then rather than being treated as directly selling the assets of Opco (as it would be if Opco were wholly owned by Holdco), Holdco will be treated as selling a partnership interest. However, under Code section 954(c)(1(B) (quoted above) gain from a sale of an interest in a partnership would result in subpart F income. Thus, prior to the enactment of the Jobs Creation Act, the check-and-sell strategy could not be used where the subsidiary had more than one owner. The Jobs Creation Act added a look-thru rule under which a sale of a partnership in which a CFC is a 25% owner is treated as a sale by the CFC of its proportionate share of the assets of the partnership. Although this change was not directed toward check-and-sell transactions in particular, taxpayers should now be able to use the check-and-sell strategy for non-wholly owned subsidiaries. However, even though the look-thru rule for sales of partnership interests has a 25% ownership threshold, the check-and-sell technique will not be effective unless the taxpayer meets the 80% ownership requirement of section 332. To what extent does Dover, which involved a sale of a wholly-owned subsidiary, support the position that a check-the-box election made effective immediately before the sale of an 80% owned subsidiary avoids subpart F income? The central holding of the court in Dover was that a shareholder who receives assets from a subsidiary in a section 332 liquidation steps into the subsidiary's shoes and is treated as having been engaged in the trade or business of the subsidiary and has having used the subsidiary's assets in the trade or business. This rationale applies with equal force to an 80% owned subsidiary. Thus, taxpayers should be able to rely on Dover even in situations in where the subsidiary has more than one owner. Conclusion The decision of the Tax Court in Dover should give taxpayers some comfort in utilizing the check-and-strategy to avoid subpart F income on the sale by a CFC of an operating subsidiary. In addition, as a result of the Jobs Creation Act's amendment to section 954(c)(4), taxpayer will be able to make use of the check-and-sell technique even where the subsidiary that is being sold is not 100% owned by the CFC. However, check-and-sell is not be a viable strategy unless the target is at least 80% owned by the selling CFC.