Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued final and temporary regulations and proposed amendments concerning the treatment of property used to acquire parent stock in certain triangular reorganizations involving foreign corporations. The text of the temporary regulations also serves as the text of the proposed regulations.

  Under Code Sec. 367(a), foreign corporations are not considered corporations for purposes of applying the corporate organization, reorganization and liquidation rules, and determining the extent to which gain is recognized on the transfer of property by a U.S. person to a foreign corporation. Thus, otherwise tax-free transfers are treated as taxable exchanges. Transfers that are exclusively foreign or transfers into the U.S. are governed by Code Sec. 367(b) and the related regulations with the purpose of preventing avoidance of tax on the repatriation of foreign-generated earnings.

  The temporary regulations address the following types of triangular reorganizations:

  a subsidiary (S) purchases stock of its parent (P) from P in exchange for property and then exchanges the P stock for the stock or assets of a target corporation (T);

  S acquires the P stock from a related party that purchased the P stock in a related transaction; and

  S purchases all or a portion of the P stock exchanged in the reorganization from a person other than P, such as from public shareholders on the open market.

S or P (or both) must be foreign. In any of these transactions, the temporary regulations require adjustments that have the effect of a deemed distribution of property from S to P under Code Sec. 301. When S purchases all or a portion of the P stock from a person other than P, the temporary regulations require an additional adjustment that results in a deemed contribution by P to S of the same property subject to the deemed distribution.

  The amount of the deemed distribution will equal the amount of money, plus the fair market value of other property, including any liability assumed by S, that S uses to acquire P stock. Included in the term property is any S stock used by S to acquire the P stock from a person other than P. The deemed distribution will be treated as a distribution for all purposes of the tax code. Similarly, the deemed contribution of property will be treated as a contribution of property for all purposes of the code. Ordering rules require that the deemed distribution, and in the appropriate cases the deemed contribution, be taken into account before the transfers under the triangular reorganization.

  The temporary regulations adopt the rules announced in
Notice 2006-85, I.R.B. 2006-41, 677, amplified by Notice 2007-48, I.R.B. 2007-25, 1428. The temporary regulations that address triangular reorganizations in which: (1) S purchases stock of P from P in exchange for property and then exchanges the P stock for the stock or assets of a target corporation T (Notice 2006-85), or (2) S acquires the P stock from a related party that purchased the P stock in a related transaction (Notice 2006-85), are generally applicable to transactions occurring on or after September 22, 2006. The temporary regulations that address triangular reorganizations in which S purchases all or a portion of the P stock exchanged in the reorganization from a person other than P (Notice 2007-48) are generally applicable to transactions occurring on or after May 31, 2007.

  The final regulations revise existing final regulations to conform the definitions of the terms P, S, and T in the existing regulations to the definitions of these terms in the temporary regulations. In addition, the final regulations clarify that the definition of earnings and profits in Reg. §1.367(b)-2(l)(8) applies only for purposes of Reg. §1.367(b)-7 (carryover of earnings and profits and foreign income taxes) and Reg. §1.367(b)-9 (F reorganizations).

T.D. 9400, 2008FED ¶47,036

Proposed Regulations, NPRM REG-136020-07, 2008FED ¶49,804

Other References:

 
Code Sec. 367

  CCH Reference - 2008FED ¶16,642B

  CCH Reference - 2008FED ¶16,643C

  CCH Reference - 2008FED ¶16,647CC

  CCH Reference - 2008FED ¶16,647R

  CCH Reference - 2008FED ¶16,647T

  Tax Research Consultant

  CCH Reference - TRC INTL: 30,302