Section 396 to escape Congress but not IRS: Congressional attacks may run out of time in 1992, but IRS ruling won't; proponenets preparing for 'haircut' next year.

Congressional attacks may run out of time in 1992, but IRS ruling won't; proponents preparing for |haircut' next year

Section 936 is likely to emerge from the U.S. Congress this year relatively unscathed. Other than the repeated criticisms by Sen. David Pryor, all attempts against 936 have fizzled.

And even Pryor, who lost a key vote on the Senate floor recently that would have restricted 936, will run out of time to do any damage in the little time remaining in this year's short legislative session. Section 936 exempts from federal taxes the profits of local subsidiaries of mainland-based corporations.

But while surviving Congress, 936 benefits will probably be restricted significantly this year by the Internal Revenue Service (IRS), which is in the process of issuing a key rule change that's expected to reduce the level of profits eligible for the 936 tax credit.

The time to comment on the proposed change will be up tomorrow, and IRS officials will then determine if public hearings are called for. If so, as expected, it will take several more months before the ruling is implemented. "We'll have a better idea of how long this process will take once we take a look at all the comments we've received," said Dan Roberts, an IRS spokesman.

As proposed by IRS, the rule change would result in a "drastic reduction in the tax-spared profits" of 936 companies, according to an opinion issued by the San Juan office of Ernst & Young. The change to Section 482 of the IRS Code, which deals with how companies report their earnings, favors the so-called profit-split method and restricts the cost-sharing method favored by most 936 companies. The latter allows companies to shift a higher level of earnings to Puerto Rico and thus to exempt more of their profits from federal taxes. The IRS, which has been working on the ruling since the enactment of the 1986 federal tax reform, is proposing that the change be made retroactive to 1987.

The move is likely to reduce the total pool of 936 funds in Puerto Rico, which are the ...