Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued temporary and proposed regulations governing the determination of basis of U.S. property acquired by a controlled foreign corporation (CFC) in certain nonrecognition transactions that are intended to repatriate earnings and profits of the CFC without a corresponding income inclusion by the U.S. shareholders of the CFC under Code Sec. 951(a)(1)(. The regulations apply when a CFC acquires the stock or obligations of a domestic corporation in an exchange with the domestic corporation, the stock or obligations constitute U.S. property under Code Sec. 956(c), and the CFC's basis in the stock or obligations is determined under Code Sec. 362(a).
If the temporary regulations apply, then, solely for purposes of determining the income inclusion required by the U.S. shareholders, the CFC's basis in the stock or obligations is not less than the fair market value of the property transferred by the CFC in exchange for the stock or obligations of the domestic corporation. Consequently, the income inclusion cannot be avoided by claiming a basis in the stock or obligations less than the amount of earnings and profits effectively repatriated. The basis rule and consequent income inclusion required by the temporary regulations cannot be avoided by a subsequent transfer of the stock or obligations of the domestic corporation by the CFC to a related person in another nonrecognition transaction.
In one typical transaction covered by the regulations, a domestic corporation that is the common parent of an affiliated group which files a consolidated return owns 100 percent of the stock of two domestic corporations (A and that are part of the consolidated group. A owns 100 percent of the stock of a CFC. B issues $100x of its stock to the CFC in exchange for $10x of CFC stock and $90x cash. The parent takes the position that (1) Code Sec. 351
applies to the exchange between and B and the CFC; (2) B recognizes no gain by reason of receipt of the $10x stock and $90x cash and the CFC recognizes no gain upon issuance of the stock to B under Code Sec. 1032(a); and (3) the CFC's basis in B's stock is zero under Code Sec. 362(a), and A and B do not have an income inclusion under Code Sec. 951(a)(1)( as a result of the CFC holding B's stock. Under the temporary regulations, however, the CFC will be treated as having acquired B's stock with a basis of no less than $90x, thereby triggering an income inclusion.
The regulations apply to United States property acquired in exchanges occurring on or after June 24, 2008. The IRS may, however, challenge earlier transactions that would otherwise be subject to the temporary regulations under other applicable provisions or judicial doctrines.
The text of the temporary regulations also serves as the text of the proposed regulations. Written or electronic comments and requests for a public hearing must be received by September 22, 2008.
T.D. 9402, 2008FED ¶47,039
Proposed Regulations, NPRM REG-102122-08, 2008FED ¶49,810
Other References:
Code Sec. 956
CCH Reference - 2008FED ¶28,571
CCH Reference - 2008FED ¶28,572
Tax Research Consultant
CCH Reference - TRC INTL: 9,250