Tax News

CCH (cch.taxgroup.com) reports:

The IRS and Treasury have released final regulations under Code Sec. 7874 relating to the disregard of certain affiliate-owned stock in determining whether a corporation is a surrogate foreign corporation under Code Sec. 7874(a)(2)(. The final regulations provide that all classes of stock, including plain vanilla stock (Code Sec. 1504(a)(4) stock), are included in the ownership fraction and treated as stock for purposes of Code Sec. 7874, other than for purposes of determining the expanded affiliated group (EAG). Taking plain vanilla preferred stock into account for purposes of the definition of an EAG may facilitate the avoidance of the rules regarding EAGs.
The final regulations also provide that stock of a member of an EAG is included in the denominator, but not the numerator, of the ownership fraction if the common parent of the EAG held directly or indirectly at least 80 percent of the stock (by vote and value) of the foreign acquiring corporation after the acquisition. Further, the regulations clarify to exclude "hook stock" from both the numerator and denominator of the fractions that are used to determine whether the exceptions to the general rule apply (that is, the determination of whether an acquisition resulted in the internal group restructuring or a loss of control of the domestic entity).
The IRS and Treasury also disagree with following three taxpayer positions and are considering issuing regulations to clarify the proper application of the rules to such transactions:
(1) that a foreign corporation that acquires substantially all of the properties of a domestic corporation in a title 11 or similar case may not be a surrogate foreign corporation because it fails to satisfy the stock ownership requirement described in Code Sec. 7874(a)(2)((ii);
(2) that where two or more domestic entities described in Code Sec. 7874(a)(2)((i) are acquired pursuant to an overall plan, Code Sec. 7874(a)(2)( is applied separately to each such domestic entity; and
(3) attempts to avoid the application of Code Sec. 7874 by structuring acquisitions of domestic entities by foreign corporations through the use of intervening partnerships.
T.D. 9399, 2008FED ¶47,035
Other References:
Code Sec. 7874
CCH Reference - 2008FED ¶43,970
Tax Research Consultant
CCH Reference - TRC INTL: 30,082