The Deferral Effects of Passing Through Foreign Subsidiaries’ Passive Income

Chris William Sanchirico, University of Pennsylvania Carey Law School
Reed Shuldiner, University of Pennsylvania Carey Law School


The immediate U.S. taxation of foreign subsidiaries’ passive, but not active income is a scenario of increasing practical importance. This paper builds on Alvin Warren’s recent analysis of this partially deferral-tempering case. It clarifies some of the legal and economic mechanics behind Warren’s formula. It also makes several points de novo. It highlights the conceptual relationship between passive-income pass-through and delayed realization of accrued gains. It points out that delayed realization inside the subsidiary effectively deactivates passive-income pass-through. And it describes when it does and does not matter that the parent takes interim distributions from the subsidiary, as when it uses such distributions to pay its interim pass-through tax liability.