In the following, HSI is a U.S. based entity parent with European subsidiaries. HIS has applied the indefinite investment exception under ASC 740-30, relative to their European subsidiaries. In 20X3, HSI initiated and received a distribution of $140 million, from their European subsidiaries. The fund were thought to be needed for a U.S. acquisition but in the end, were not. Had HIS known the monies would not be needed they would not have initiated the distribution. HIS has a historical record of ten years in which no such distributions were initiated nor received and as such, and a solid reinvestment plan in place in which all European subsidiary earning would be reinvested in European operations.

Given the following facts, HSI concluded that the indefinite investment exception under ASC 740-30 should continue to be applied to historical undistributed earnings at the end of 20X3? Is the companys conclusion acceptable, why or why not?

For the European subsidiaries to aggregate the funds that were distributed in the 20X3 earnings repatriation to the U.S. parent, intercompany loans were executed among various HSI subsidiaries around the world. This resulted in intercompany loans payable at various European subsidiaries, including Harbor Europe Holdings Inc. (HEH), an international holding entity with no operations of its own. To service its intercompany debt, HEH will receive dividends from its subsidiaries.

HSI expects that the subsidiary dividends it receives will be taxable in the United States as Subpart F income under IRS Code Section 954(c) because the look through rules in IRS Code Section 954(c)(6) that historically excluded foreign subsidiary dividends from Subpart F income were scheduled to expire at the end of 20X3. Therefore, such amounts are expected to become taxable to HSI in the United States even though they are not distributed to HIS.

Management has stated that interest expense owed by HEH, and the dividends it will receive from its subsidiaries, are not expected to exceed the future earnings of those subsidiaries. Management prepared an analysis showing that the level of historical earnings of HEHs subsidiaries provide evidence that the future earnings of the subsidiaries will be sufficient to cover the necessary dividends to HEH to service the intercompany debt. Further, HSI will provide capital contributions to HEH to cover any interest expense owed by HEH that is greater than its current-year earnings (i.e., dividends from its subsidiaries). Therefore, management does not believe that any historical undistributed earnings would become taxable in the United States, and thus, those earnings are indefinitely reinvested. Management has included this information within its specific documented plan for reinvestment of the historical undistributed earnings