Case $16-7$

Show Me the Money

Harbor Solutions Inc. $($HSI$)$ is a U$.$S$.$ publicly traded company with headquarters in Boston, MA$,$ and a June $30$ year$-$end. HSI provides insurance claims processing solutions to businesses. In addition to its U$.$S$.$ locations, HSI also has subsidiaries in several regions around the world. HSI has historically provided evidence that all undistributed earnings of its European subsidiaries are indefinitely reinvested, and thus, no deferred taxes have been recognized for the excess of the financial reporting amounts of HSI's investment in the stock of those subsidiaries over the tax basis of those investments. These undistributed eamings include earnings in high$-$tax rate countries that under U$.$S$.$ federal tax law would generate significant foreign tax credits $($FTCs$)$ when distributed to HSL

$20$X$2$ Event

In the fourth quarter of fiscal year $20$X$2,$ a cash distribution was made from the European subsidiaries to HSI, the U$.$S$.$ parent entity. The decision to make this distribution was in anticipation of a proposed change in U$.$S$.$ tax law expected to be enacted later in the $20$X$2$ calendar year that would limit certain FTCs that were available in the event of a distribution from its foreign subsidiaries; if passed, the new law would negatively affect HSI's ability to utilize these FTCs$.$ The proposed change in U$.$S$.$ tax law was enacted shortly after HSI's fiscal $20x2$ year end.

After the $202$ cash distribution, management reevaluated its assertion about whether all undistributed eamings of the European subsidiaries were indefinitely reinvested. Management concluded that all historical undistributed earnings of the European subsidiaries will be indefinitely reinvested, in part because the change in U$.$S$.$ tax laws resulted in a lower FTC benefit than was available under the prior law. In addition, management provided evidence through a specific documented plan for reinvestment of all historical undistributed eamings $($i$.$e$.,$ those earnings that remained undistributed at the end of $20$X$2)$ of these European subsidiaries. Historically, management has complied with its specific documented plan for reinvestment of undistributed foreign eamings, investing the eamings to both expand its European operations and to acquire Europeanbased entities operating in similar lines of business. In the last $10$ years, no other distributions of foreign eamings from the European subsidiaries have taken place.