tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
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U.S. Tax Review<br />
by James P. Fuller<br />
James P. Fuller is an attorney and a partner at Fenwick & West in Mountain View, Calif.<br />
Contract Manufacturing: Final Regulations<br />
The IRS and Treasury issued final contract manufacturing<br />
regulations that will apply to <strong>tax</strong> years <strong>of</strong><br />
controlled foreign corporations beginning after June 30,<br />
2009. (For the final regulations, see Doc 2008-27115 or<br />
2008 WTD 249-34.) New branch rule regulations were<br />
also issued, albeit in temporary form. Those are discussed<br />
separately below. A <strong>tax</strong>payer may choose to apply<br />
the new contract manufacturing regulations and the<br />
temporary branch rule regulations retroactively for its<br />
open <strong>tax</strong> years. A <strong>tax</strong>payer may so choose only if the<br />
<strong>tax</strong>payer and all members <strong>of</strong> its affiliated group apply<br />
both the contract manufacturing regulations and the<br />
temporary branch rule regulations in their entirety to<br />
the earliest <strong>tax</strong> year <strong>of</strong> each CFC that ends with or<br />
within an open <strong>tax</strong> year <strong>of</strong> the <strong>tax</strong>payer and to all subsequent<br />
<strong>tax</strong> years <strong>of</strong> the <strong>tax</strong>payer.<br />
Substantial Contribution Test: Employees<br />
The proposed regulations provided that a CFC will<br />
satisfy the substantial important contribution test regarding<br />
personal property only if all the facts and circumstances<br />
show that the CFC made a substantial contribution<br />
through the activities <strong>of</strong> its employees to the<br />
manufacture <strong>of</strong> the property. The proposed regulations<br />
provided a nonexclusive list <strong>of</strong> activities to be considered<br />
in determining whether the CFC satisfies the substantial<br />
contribution test.<br />
The final regulation defines employees by reference<br />
to Treas. reg. section 31.3121(d)-1(c). That provision,<br />
entitled ‘‘Common-Law Employees,’’ states that every<br />
individual is an employee if, under the usual commonlaw<br />
rules, the relationship between him and the person<br />
for whom he performs services is the legal relationship<br />
<strong>of</strong> employer and employee. It continues by stating that<br />
generally, such a relationship exists when the person<br />
for whom services are performed has the right to con-<br />
trol and direct the individual who performs the services,<br />
not only as to the result to be accomplished by<br />
the work but also as to the details and means by which<br />
that result is accomplished. That is, the regulation<br />
states, an employee is subject to the will and control <strong>of</strong><br />
the employer and not only as to what will be done but<br />
how it will be done.<br />
It is not necessary under that provision that the employer<br />
direct or control the manner in which the services<br />
are performed; it is sufficient if he has the right to<br />
do so.<br />
The right to discharge is also an important factor<br />
indicating that the person possessing that right is an<br />
employer. Other factors characteristic <strong>of</strong> an employer,<br />
but not necessarily present in every case, are the furnishing<br />
<strong>of</strong> tools, and the furnishing <strong>of</strong> a place to work,<br />
to the individual who performs the services.<br />
If an individual is subject to the control and direction<br />
<strong>of</strong> another merely as to the result to be accomplished<br />
by the work and not as to the means and<br />
methods for accomplishing the result, he generally is<br />
an independent contractor. An individual performing<br />
services as an independent contractor is not as to those<br />
services an employee under the usual common-law<br />
rules. Whether the relationship <strong>of</strong> an employer and<br />
employee exists will be determined upon an examination<br />
<strong>of</strong> the facts <strong>of</strong> each case.<br />
The IRS and Treasury state that this clarification <strong>of</strong><br />
the term ‘‘employee’’ will promote more effective application<br />
<strong>of</strong> the contract manufacturing regulations. The<br />
IRS and Treasury believe that the activities performed<br />
by certain nonpayroll workers should be considered in<br />
determining whether a CFC provides a substantial contribution<br />
through its employees. The IRS and Treasury<br />
concluded that it would be inappropriate to broaden<br />
the definition <strong>of</strong> employee to include anyone in an<br />
agency relationship with the CFC, because it could<br />
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 447<br />
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.