Post by Sapphire Capital on Oct 29, 2008 20:42:12 GMT 4
US Outbound: IRS publishes proposals on property transfers to foreign companies
The IRS has issued a broad package of proposed regulations (REG-209006-89) under sections 367, 1248 and 6038B. The proposed regulations affect US 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.
The proposed regulations make several changes to the existing regulations. The most notable changes are:
Changes to the indirect stock transfer rules of regulation section 1.367(a)-3(d) that implement notice 2008-10 and address transactions the IRS views as inappropriate tax-free repatriations;
Rules under section 367(a)(5) which provide an elective regime for non-recognition treatment as to "outbound" section 361 asset transfers that is conditional upon (1) the built-in gain in the transferred assets being preserved within the US tax system and (2) the relevant parties meeting certain compliance requirements;
Modifications to the regulation section 1.367(b)-4 rules regarding when an income inclusion is necessary when a US transferor ceases to be a "section 1248 shareholder" of a foreign corporation; and
Provisions that implement notice 87-64 by (1) confirming the retroactive suspension of section 1248(e) when capital gains are taxed at a rate equal to or greater than the rate at which ordinary income is taxed, and (2) providing guidance under section 1248(f) as to the section 1248 implications of a domestic corporation's transfer of stock of certain foreign corporations in a section 337, 355 or 361 distribution.
There are several effective dates of which taxpayers must be aware. The portion of the proposed regulations that addresses the new elective regime under section 367(a)(5) (including the related section 6038B provisions), as well as the portions issued under sections 367(b) and 1248(f) are scheduled to become effective 30 days after their eventual finalisation. The preamble to the proposed regulations also indicates that taxpayers may, before that date, make "reasonable adjustments" for section 367(a)(5) purposes in order to re-access the exceptions provided by section 367(a)(2) and (a)(3).
In this regard, and in accordance with notice 2008-10 (see the April 2008 Outbound column), adjusting the basis of pre-existing stock of the foreign acquiring corporation will not be considered a "reasonable" adjustment. Furthermore, the US transferor must recognise gain (1) to the extent it has shareholders that are not "control group" members (for example, minority shareholders that are foreign or not otherwise part of the relevant group of five or fewer domestic corporate owners) and (2) to the extent it is not possible to preserve, in the hands of control group members through their ownership of stock received in their section 354/356 exchange as to the stock of the US transferor, any built-in gain in the property transferred by the US transferor in the outbound section 361 exchange.
The portion of the proposed regulations that modifies the indirect stock transfer rules pursuant to notice 2008-10 is generally retroactively effective to transactions occurring on or after December 28 2007 (in other words, the date of the notice's issuance,) except for a modification to the regulation section 1.367(a)-3(d)(2)(vi) coordination rule that was not mentioned in notice 2008-10 and is effective as of the date the proposed regulations were filed with the federal register.
Finally, the portion of the proposed regulations relating to the suspension of section 1248(e) in certain instances is retroactively effective to transactions occurring on or after September 21 1987, in accordance with notice 87-64.
Although it is not expected that the proposed regulations will affect a broad range of taxpayers, taxpayers nevertheless should review the past transactions they entered into and evaluate whether their facts are similar to the transactions that the IRS is targeting in the proposed regulations.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Source: ITR - Sean Foley (sffoley@kpmg.com), Washington DC +1 202 533 5588
The IRS has issued a broad package of proposed regulations (REG-209006-89) under sections 367, 1248 and 6038B. The proposed regulations affect US 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.
The proposed regulations make several changes to the existing regulations. The most notable changes are:
Changes to the indirect stock transfer rules of regulation section 1.367(a)-3(d) that implement notice 2008-10 and address transactions the IRS views as inappropriate tax-free repatriations;
Rules under section 367(a)(5) which provide an elective regime for non-recognition treatment as to "outbound" section 361 asset transfers that is conditional upon (1) the built-in gain in the transferred assets being preserved within the US tax system and (2) the relevant parties meeting certain compliance requirements;
Modifications to the regulation section 1.367(b)-4 rules regarding when an income inclusion is necessary when a US transferor ceases to be a "section 1248 shareholder" of a foreign corporation; and
Provisions that implement notice 87-64 by (1) confirming the retroactive suspension of section 1248(e) when capital gains are taxed at a rate equal to or greater than the rate at which ordinary income is taxed, and (2) providing guidance under section 1248(f) as to the section 1248 implications of a domestic corporation's transfer of stock of certain foreign corporations in a section 337, 355 or 361 distribution.
There are several effective dates of which taxpayers must be aware. The portion of the proposed regulations that addresses the new elective regime under section 367(a)(5) (including the related section 6038B provisions), as well as the portions issued under sections 367(b) and 1248(f) are scheduled to become effective 30 days after their eventual finalisation. The preamble to the proposed regulations also indicates that taxpayers may, before that date, make "reasonable adjustments" for section 367(a)(5) purposes in order to re-access the exceptions provided by section 367(a)(2) and (a)(3).
In this regard, and in accordance with notice 2008-10 (see the April 2008 Outbound column), adjusting the basis of pre-existing stock of the foreign acquiring corporation will not be considered a "reasonable" adjustment. Furthermore, the US transferor must recognise gain (1) to the extent it has shareholders that are not "control group" members (for example, minority shareholders that are foreign or not otherwise part of the relevant group of five or fewer domestic corporate owners) and (2) to the extent it is not possible to preserve, in the hands of control group members through their ownership of stock received in their section 354/356 exchange as to the stock of the US transferor, any built-in gain in the property transferred by the US transferor in the outbound section 361 exchange.
The portion of the proposed regulations that modifies the indirect stock transfer rules pursuant to notice 2008-10 is generally retroactively effective to transactions occurring on or after December 28 2007 (in other words, the date of the notice's issuance,) except for a modification to the regulation section 1.367(a)-3(d)(2)(vi) coordination rule that was not mentioned in notice 2008-10 and is effective as of the date the proposed regulations were filed with the federal register.
Finally, the portion of the proposed regulations relating to the suspension of section 1248(e) in certain instances is retroactively effective to transactions occurring on or after September 21 1987, in accordance with notice 87-64.
Although it is not expected that the proposed regulations will affect a broad range of taxpayers, taxpayers nevertheless should review the past transactions they entered into and evaluate whether their facts are similar to the transactions that the IRS is targeting in the proposed regulations.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Source: ITR - Sean Foley (sffoley@kpmg.com), Washington DC +1 202 533 5588