Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations that affect domestic corporations that transfer property to foreign corporations in certain transactions or that distribute the stock of certain foreign corporations, and certain shareholders of such domestic corporations.

Regulations Under Code Sec. 367(a)(5) and (b)

  Regulations proposed under Code Sec. 367(a)(5) and
(b) apply when a domestic corporation transfers certain property to a foreign corporation in an exchange described in Code Sec. 361(a) or (b). The regulations apply to property transfers by U.S. transferors, including RICs, REITs and S corporations.

  Generally, under Code Sec. 367(a)(5) a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange recognizes gain with respect to the transfer of appreciated property under
Code Sec. 367(a)(1). This rule does not apply if the U.S. transferor is controlled by five or fewer domestic corporations. The proposed regulations confirm the general rule, but provide an elective exception, under which the exceptions provided by Code Sec. 367(a) and associated regulations may be available. The proposed regulations apply to all property transferred by a U.S. transferor in a Code Sec. 361 exchange, other than property to which Code Sec. 367(d) applies, and preserve or recognize the net built-in gain in Code Sec. 367(a) property transferred in the exchange. The regulations also contain an anti-stuffing rule with respect to Code Sec. 367(a) property. Inside gain is recognized currently by the U.S. transferor or preserved for future taxation in the stock received in the transaction by the controlling domestic corporate shareholder of the transferor.

  The proposed regulations include a control requirement regarding the U.S. transferor. Instances where a U.S. transferor must recognize gain on the transfer of the Code Sec. 367(a) property are also clarified, as are adjustments to the basis of stock received by control group members. Moreover, the U.S. transferor must include a statement with its U.S. income tax return for the year of the exchange under which it agrees to recognize gain and file an amended tax return if it enters into certain transactions with a principal purpose of avoiding U.S. tax.

  Proposed regulations under Code Sec. 367(b) provide an additional exception to the general rules that apply to certain transfers of stock of a foreign acquired corporation by a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange. The proposed regulations provide that the U.S. transferor must include in income the Code Sec. 1248 amount attributable to the stock of the foreign acquired corporation only if immediately after the exchange, the foreign acquiring corporation or the foreign acquired corporation is not a CFC with respect to which the U.S. transferor is a
Code Sec. 1248 shareholder. The Code Sec. 1248 amount can be preserved in the hands of a corporate Code Sec. 1248 shareholder following the distribution of the stock of the foreign acquiring corporation by the U.S. transferor. Special rules for outbound triangular asset reorganizations are also proposed.

Regs Under the Code Sec. 367 Coordination Rule

  The coordination rule, found at
Reg. §1.367(a)-3(d)(2)(vi)(A), has been used inappropriately in transactions intended to repatriate earnings and profits of foreign corporations without the recognition of gain or a dividend inclusion. In response, the IRS issued Notice 2008-10, I.R.B. 2008-3, 277 (TAXDAY, 2007/12/31, I.7), which announced the revision of the application of the coordination rule exception. The proposed regulations incorporate, with modifications, the provisions of that IRS guidance.

Regs Under Code Sec. 1248(f)

  The proposed regulations under Code Sec. 1248(f) apply when a domestic corporation distributes stock of certain foreign corporations in a distribution to which Code Sec. 337, 355 or 361 applies. The proposed regulations include regulations described in Notice 87-64, 1987-2 CB 375. Under the proposed regulations:

  --A domestic distributing corporation that is a section 1248 shareholder of a foreign corporation and that distributes stock of such foreign corporation in a Code Sec. 337 distribution shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  --If such a domestic distributing corporation distributes such stock in a Code Sec. 355 distribution, other than stock received by the domestic distributing corporation in a
Code Sec. 361 exchange, shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed, but only to the extent the domestic distributing corporation does not otherwise recognize gain on the Code Sec. 355 distribution.

  --If such a domestic distributing corporation distributes stock of such corporation received in a Code Sec. 361 exchange, in a
section 355 distribution or a Code Sec. 361 distribution, it shall include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  The general rule will not apply to certain Code Sec. 337 distributions of the stock of a foreign corporation or certain Code Sec. 355 distributions of a stock of stock of a foreign corporation. An elective exemption to the general rule for certain distributions pursuant to a plan or reorganization is also provided.

Other Changes

  The proposed regulations suspend the application of
Code Sec. 1248(e) when capital gains are taxed at a rate equal to or greater than the rate at which ordinary income is taxed. Changes under Code Sec. 6038B establish reporting requirements for certain transfers of property by a domestic corporation to a foreign corporation in certain Code Sec. 361 exchanges.

Effective Dates

  A number of different effective dates apply with respect to the proposed regulations.

  --Proposed Reg. §1.367(a)-7 and the revisions to §1.6038B-1 apply to transfers occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

  --In accordance with Notice 87-64, §1.1248-6(d) applies to sales, exchanges or other dispositions of stock of a domestic corporation occurring on or after September 21, 1987.

  --The revisions described in Notice 2008-10 generally apply to transactions occurring on or after December 28, 2007.

  --Proposed Reg. §§1.1248-8(b)(2)(iv), 1248(f)-1 through
1.1248(f)-3, and the modifications to Proposed Reg. §1.367(b)-4 apply to transfers or distributions occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

Comments Requested

  The IRS is seeking comments on a number of aspects of these proposed regulations. Written or electronic comments and requests for a public hearing must be received by November 18, 2008.

Proposed Regulations, NPRM REG-209006-89, 2008FED ¶49,829

Other References:

 
Code Sec. 358

  CCH Reference - 2008FED ¶16,552L

 
Code Sec. 367

  CCH Reference - 2008FED ¶16,641F

  CCH Reference - 2008FED ¶16,642E

  CCH Reference - 2008FED ¶16,646E

  CCH Reference - 2008FED ¶16,647FE

  CCH Reference - 2008FED ¶16,647J

 
Code Sec. 1248

  CCH Reference - 2008FED ¶30,961D

  CCH Reference - 2008FED ¶30,963D

  CCH Reference - 2008FED ¶30,966C

  CCH Reference - 2008FED ¶30,967A

  CCH Reference - 2008FED ¶30,967E

  CCH Reference - 2008FED ¶30,967J

  CCH Reference - 2008FED ¶30,967I

  CCH Reference - 2008FED ¶30,967M

 
Code Sec. 6038B

  CCH Reference - 2008FED ¶35,580E

  Tax Research Consultant

  CCH Reference - TRC INTL: 30,076

  CCH Reference - TRC INTLOUT: 9,404