Tax News

CCH (cch.taxgroup.com) reports:

The IRS has announced that it will issue regulations under Code Sec. 367 to clarify how the two exceptions in Reg. §1.367(a)-3(d)(2)(vi)( (the "coordination rule") apply to certain outbound reorganization transactions. The first exception will be modified to require that a basis adjustment for unrecognized gain be made to the stock of the foreign acquiring corporation. Any unrecognized gain that is not preserved in the basis will be subject to Code Sec. 367(a) and (d). The second exception will be modified to limit Code Sec. 351 transfers that also qualify as Code Sec. 361 exchanges so that they are eligible for only the first exception.
The announcement of the planned issuance of regulations is in response to certain transactions designed to avoid U.S. income tax. The regulations will be effective for transactions on or after December 28, 2007. However, the IRS reserves the right to challenge transactions undertaken prior to this announcement where appropriate under appropriate provisions and judicial doctrines.
Specifically, the first exception, contained in Reg. §1.367(a)-3(d)(2)(vi)((1)(i), will be modified to clarify that the basis adjustment required by Code Sec. 367(a)(5) must be made to the stock of the foreign requiring corporation received by domestic corporate shareholders of the U.S. transferror in the reorganization such that the appropriate amount of unrecognized gain in the U.S. transferror's property is reflected in such stock. The result is that the basis adjustment requirement cannot be satisfied by adjusting the basis of the stock of the foreign acquiring corporation held by such shareholders prior to the reorganization. Further, the regulations will clarify that, to the extent the appropriate amount of unrecognized gain in the U.S. transferror's property cannot be preserved in the stock of the foreign acquiring corporation, the U.S. transferror's transfer of property to the foreign acquiring corporation will be subject to Code Sec. 367(a) and (d).
The second exception, found in Reg. §1.367(a)-3(d)(2)(vi)((2), will be modified to clarify that the exception will not apply to a Code Sec. 351 transfer that also qualifies as a Code Sec. 361 exchange. Thus, a Code Sec. 351 transfer that is also a Code Sec. 361 exchange may only qualify, if at all, for the first exception.
Notice 2008-10, 2008FED ¶46,225
Other References:
Code Sec. 367
CCH Reference - 2007FED ¶16,667.01
CCH Reference - 2007FED ¶16,667.021
CCH Reference - 2007FED ¶16,667.024
CCH Reference - 2007FED ¶16,667.028
CCH Reference - 2007FED ¶16,667.28
CCH Reference - 2007FED ¶16,667.57
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