PORTFOLIO

Other Transfers Under Section 367 (Portfolio 920)

Tax Management Portfolio, Other Transfers Subject to Section 367, examines the rules that apply to various forms of foreign corporate or partnership formations or restructurings under §367 and under related provisions such as §6038B. These rules sometimes require the recognition of gain with respect to transactions that otherwise generally could have qualified for nonrecognition of gain under provisions such as §§332, 351, 354, 361 or 721.

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DESCRIPTION

The objectives of this Portfolio and its companion are to describe the intent and operation of §367 and related provisions, and to highlight various planning techniques used by taxpayers to cope with the rules in the context of particular types of transactions.


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AUTHORS

Other Transfers Subject to Section 367 was authored by the following experts.
BRUCE N. DAVIS, ESQ.
Bruce N. Davis, Esq., Partner (Retired), White & Case LLP, Washington, D.C. B. A., University of Virginia (high honors 1980, Phi Beta Kappa); J.D., Harvard Law School (1983); LL.M. (in taxation), Southern Methodist University (1987); Former Chairman, Subcommittee on §§338, 367 and 1491, Committee on Foreign Activities of U.S. Taxpayers, American Bar Association; Principal Special Assistant to the Associate Chief Counsel (International), Internal Revenue Service (1988–1991); member of board of advisors of various international tax publications, and frequent speaker and writer on international tax issues.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Section 367(b) Transactions

Introductory Material

A. Background Summary

B. Domestication Transactions Under § 367(b)

1. Policy and General Operation of § 367(b) as Applied to Domestication Transactions

2. Requirement for Certain Shareholders to Include All E& P Amount in Income

a. In General

b. 10% U.S. Shareholders

c. 10% U.S.-Owned Foreign Corporate Shareholders

d. Gain Recognition if § 332 or § 354 Not Applicable

3. Recognition of Exchange Gain and Loss on Capital

4. Taxable Exchange Election, and Collateral Effects

a. Limits on § 367(b) Authority

b. Making of Election and Recognition of Gain

c. Attribute Reduction if Election Is Made

(1) NOL Carryovers

(2) Capital Loss Carryovers

(3) Basis in Assets

5. Treatment of U.S. Persons That Are Not 10% U.S. Shareholders

a. Gain Recognition Regime

b. Election to Include All E& P Amount

c. De Minimis Exception

6. Nonrecognition by Foreign Person That Is Not 10% U.S.-Owned Foreign Corporate Shareholder

7. All E& P Amount and Related Rules

a. Determination of § 964 E& P - Differences Between Computation: Taxable Income Present Planning Opportunities

b. Adjustments to § 964 E& P Under § 367(b)

(1) Exclusion of § 1248(d) Amounts

(2) Other § 1248 Limitations

(a) CFC Status

(b) No Gain Limitation

(c) Effect of Change in Law Defining CFC

(3) Adjustments Resulting from Property Distributions in Liquidation

(4) Treatment of Deficits in All E& P Amount

(5) No "Nimble" Dividend Inclusion from Current E& P

c. Attribution of the All E& P Amount to Stock

(1) Limitation Based on Foreign Shareholder Holding Period

(2) Limitation Based on Tacking of Foreign Shareholder Holding Period

(3) Exclusion of Lower Tier E& P

(4) Allocating E& P for Change of Ownership

d. NOL and Capital Loss Carryovers to Domestic Corporation

e. E& P Carryovers to Domestic Corporation

f. Domesticating Divisive "D" Reorganization

8. Certain "Deemed" Domestication Transactions

a. Corporate Migrations and Other § 368(a)(1)(F) Reorganizations

b. Reclassification of Foreign Entity as Partnership or Disregarded Entity

c. Domestication Election Under § 1504(d)

d. Obtaining Stapled Entity Status

e. Domestication Election Under § 953(d)

9. Avoiding Domestication Transaction Treatment

C. Outbound and Foreign-To-Foreign Exchanges Under § 367(b)

1. Loss of Status as § 1248 Shareholder

a. Definition of § 1248 Shareholder

b. Section 1248 Shareholder Status Immediately Before the Exchange

(1) Exchanging Shareholder Is U.S. Person

(2) Exchanging Shareholder Is Foreign Corporation

(3) Other Exchanging Shareholders

c. Section 1248 Shareholder Status Immediately After the Exchange

(1) Status with Respect to Issuer of Stock

(2) Status with Respect to Acquiring Corporation

(3) Status with Respect to Acquired Corporation

(4) No Successor Rule

d. Special Treatment of Transfer in Exchange for Domestic Stock

(1) Domestic Stock Under Prior Regulations

(2) Domestic Stock Under the 1991 Proposed Regulations

(3) Domestic Stock Under the 2000 Final Regulations

e. Consequences of Loss of § 1248 Shareholder Status

2. Excessive Potential Shifting of E& P

a. Whether Shifting Is Within or Outside of Affiliated Group

b. Potential Effect on § 902 Credit

c. Insufficient Business Risk

(1) Receipt of Preferred Stock

(2) Receipt of Tracking Stock

(3) Special Rule for Pre-Exchange or Post-Exchange Recapitalization

d. Consequences of Excessive Potential Shifting of E& P

3. Consequences of Loss of § 1248 Shareholder Status or Excessive Potential Shifting of E& P

a. Consequences if Exchanging Shareholder Is U.S. Person

b. Consequences if Exchanging Shareholder Is Foreign Corporation

(1) Foreign Corporate Shareholders Under the 2000 Final Regulations

(2) Foreign Corporate Shareholders Under the Prior Regulations

(a) General Rule

(b) Special Rule if In-House Domestic Stock Is Received

c. Consequences if Exchanging Shareholder Is Foreign Partnership, Trust or Estate

d. Determination of the § 1248 Amount

4. Post-Exchange E& P Computations

a. Post-Exchange E& P Adjustments for Exchanging Shareholder

b. Post-Exchange E& P Adjustments for Acquiring Foreign Corporation

5. Shareholder E& P Accounts (Attribution) Under the Prior § 367(b) Regulations

6. E& P and Other Adjustments Under the 2006 Regulations

a. Acquiring Foreign Corporation Is a "Pooling Corporation"

(1) E& P and Taxes in Post-1986 Pools

(2) E& P and Taxes in Pre-Pooling Annual Layers

(3) Hovering Deficit

(a) Hovering Deficit That Would Go into Post-1986 Pool

(b) Hovering Deficit That Would Go into Pre-1987 Profits

(c) Hovering Deficit That Would Go into Pre-Pooling Annual Layer

(i) Separate Year Deficit But No Aggregate Deficit

(ii) Aggregate Deficit in Pre-1987 Accumulated Profits

(iii) Treatment of Pre-1987 § 960 E& P and Taxes

(d) Special Exceptions to Hovering Deficit Rules

(4) Post-Transaction Ordering and Absorption Rules

b. Acquiring Foreign Corporation Is a "Nonpooling Corporation"

(1) E& P and Taxes in Pre-Pooling Annual Layers

(2) Hovering Deficit

(a) Hovering Deficit That Would Go into Pre-1987 Profits

(b) Hovering Deficit That Would Go into Pre-Pooling Annual Layer

(i) Separate Year Deficit But No Aggregate Deficit

(ii) Aggregate Deficit in Pre-1987 Accumulated Profits

(iii) Treatment of Pre-1987 § 960 E& P and Taxes

(c) Special Exceptions to Hovering Deficit Rules

D. Section 355 Exchanges Under § 367(b)

1. Distribution by a Domestic Corporation

a. Application of § 367(e)(1) and § 1248(f)

b. Application of § 367(b)

(1) Gain Recognition on Distributions to Individuals But Not to Corporations

(2) Determination Whether Distributee Is Not an Individual

(a) Distributing That Is Publicly Traded

(i) Definition of Qualified Exchange or Other Market

(ii) Five Percent Shareholders

(iii) Less-Than-Five Percent Shareholders

(b) Distributing That Is Not Publicly Traded

c. Avoidance of Gain Recognition Rule

(1) Non-Pro-Rata Split-Offs

(2) Pre-Distribution Drop-Downs

(3) Distribution of Less Appreciated Business

2. Distribution by a Foreign Corporation

a. Pro-Rata Distribution

(1) Preservation of Potential Application of § 1248

(2) Collateral Basis Increase

b. Non-Pro-Rata Distribution

(1) Preservation of Potential Application of § 1248

(2) No Taxable Distribution Election

(3) Collateral Basis Increase

c. Determination of the Pre-Distribution and Post-Distribution Amounts

(1) Pre-Distribution Amount

(2) Post-Distribution Amount

d. Treatment of Divisive Reorganizations

3. E& P and Other Adjustments Under the 2000 Proposed Regulations

a. Distributing's E& P

(1) Adjustments to Amount of Distributing's E& P

(a) E& P Increase Arising from Gain or Income

(b) Distributing's E& P Reductions Arising from Distribution

(i) Distribution That Is Not Pursuant to Reorganization

(ii) Distribution That Is Pursuant to Reorganization

(iii) Deficits

(iv) Effectively Connected E& P

(2) Character of Distributing's E& P Reductions

(3) Related Foreign Income Taxes

b. Controlled's E& P

(1) Adjustments to Amount of Controlled's E& P

(2) Character of Controlled's E& P Adjustments

(3) Related Foreign Income Taxes

(4) Newco Transactions Involving E& P Deficits

c. Domesticating Divisive "D" Reorganization

E. Special Rules for Deemed Dividends

F. Notice Requirement Under the § 367(b) Regulations

1. Requirement to File Notice

a. Domestication with Requirement to Include All E& P Amount

b. Domestication with Election to Include All E& P Amount

c. Outbound or Foreign-to-Foreign Exchange with § 1248 Shareholder

d. Section 355 Distribution with § 1248 Shareholder

e. Corporations Affected by E& P Regulations

2. Procedure for Filing of Notice

a. Exchanging Shareholder Is U.S. Person

b. Exchanging Shareholder Is Foreign Corporation

3. Contents of Notice

a. Exchange Statement

b. Description of Exchange

c. Description of Consideration Received

d. Statement of Income and Adjustments

e. Information Under Subchapter C

f. Information Such as Under IRS Form 5471

g. Statement of Election to Include All E& P Amount

4. Supplemental Guidance

5. Effect of Failure to File Notice

G. Other Special Rules Under the § 367(b) Regulations

1. Prohibition of Loss Recognition and Income Nonrecognition

2. Flow-Through and Disregarded Entities

3. Capital Translation and Deemed PTI Distribution

4. Dollar Translation Cap on Dividends Received Deduction

III. Section 367(d) Transactions

Introductory Material

A. Background of § 367(d)

1. The 1968 Guidelines

2. Enactment of § 367(d)

3. Issuance of the 1986 Regulations

4. 1986 Enactment of the Commensurate-With-Income Requirement

5. Post-1986 § 482 Guidance

6. The 1997 Removal of the U.S. Source Rule

B. Section 367(d) Transfers Under the Regulations

1. Scope of § 367(d)

a. Intangible Property Within the Scope of § 367(d)

(1) The § 936 List and § 482 Interpretations

(2) Exclusion of Foreign Goodwill and Going Concern Value

(3) Manufacturing versus Marketing Intangibles

(4) The "Property" Limitation

(5) The "Copyrights, Etc." Limitation

(6) Exclusion of Mineral Interests

b. Outbound § 351 or § 361 Transfer

(1) Non-Application to Actual Sales and Licenses

(2) Non-Application Even to Royalty-Free Licenses

(3) Application to "Sham" Sales and Licenses

(4) Reconciling the Du Pont Case

(5) Needed Clarifications in the § 482 Regulations

(6) Avoiding § 367(d) Through Foreign Ownership Arrangements

c. Interaction with § 367(a) and § 904(f)

(1) General Priority of § 367(d)

(2) Priority of Loss Recapture Rules

(a) Crediting of Loss Recapture Amount

(b) Determination of Recapture Amount

(c) Reporting of Loss Recapture

d. Special Rules for Partnerships, Trusts and Estates

e. Indirect Transfer Rules

(1) Application of the § 367(a) Indirect Stock Transfer Rules

(2) Special Anti-Abuse § 367(d) Rule for Outbound Stock Transfer

2. Deemed Annual Payments

a. Amount

(1) Contingent on Productivity, Etc.

(2) Periodic Adjustments

(3) Reporting Requirement

b. Timing

(1) Last Day of Year Rule

(2) Estimated Tax Ramifications

(3) Blocked Income

c. Duration

(1) Useful Life of Intangible Property

(2) Limitation to Twenty Years

(3) Dispositions

d. Character

(1) Treatment as Ordinary Income

(2) Relationship to § 1249

e. Source and § 904 Limitation

(1) Source

(2) Section 904 Limitation Category ("Basket")

(3) Allocation of Foreign Taxes Under § 904

3. Reductions for Actual Payments

a. Payments to Unrelated Parties

b. Section 482 Setoffs Distinguished

4. Establishment of Account Receivable

a. Disparity Between Deemed and Actual Payments

b. Reconciling the Disparity

5. Dispositions and Acceleration Events

a. Dispositions of Intangible Property

(1) Property Transfer to Unrelated Person

(2) Property Transfer to Related Person

b. Dispositions of Stock of Transferee

(1) Stock Transfer to Unrelated Person

(2) Stock Transfer to Related Person

(3) Consequences if Transferor Goes Out of Existence

6. Effect on Foreign Corporation

a. Reduction of E& P

b. Reduction of Subpart F Income

c. Timing of Reduction

7. Deemed Sale Election

a. Transfers Eligible for Deemed Sale Election

(1) Transfer of Operating Intangibles

(2) Compulsory Transfer

(3) Formation of Joint Venture

(a) In Connection with Formation

(b) U.S. Transferor's Ownership Percentage

(c) Foreign Ownership Percentage

(d) Intangible Property Percentage of Assets

(e) Use of Intangible Property

b. Amount and Treatment of Gain

c. Election Procedure

IV. Section 367(e) Transactions

Introductory Material

A. Outbound § 355 Distributions Under § 367(e)(1)

1. Background of § 367(e)(1) and Regulations

a. Missing the Mark in § 367(a)(1)

b. 1986 Amendments to Reach Outbound § 355 Distributions

c. Promulgation of Regulations

2. Section 367(e)(1) Transactions Under the Regulations

a. The § 367 Principle of Preserving U.S. Tax Jurisdiction Over Gain

b. Section 355 Distribution of Controlled That Is Domestic

(1) Policy for Nonrecognition of Gain on Domestic Controlled

(2) Anti-Bailout Policy Under Predecessor Regulations

c. Section 355 Distribution of Controlled That Is Foreign

(1) Policy for Gain Recognition on Foreign Controlled

(2) Determination Whether Distributee Is Not a "U.S. Person"

(a) Definition of Qualified U.S. Person

(b) Distributing That Is Publicly Traded

(i) Definition of Qualified Exchange or Other Market

(ii) Five Percent Shareholders

(iii) Less-Than-Five Percent Shareholders

(c) Distributing That Is Not Publicly Traded

(d) Distributee Flow-Through Entities

(i) General Application of Look-Through Approach

(ii) Determining Indirect Owner's Proportionate Ownership

(iii) Application to Both Foreign and Domestic Distributee Flow-Through Entities

(3) Computation of Gain

(a) Averaging of Basis in Stock or Securities

(b) Purpose of the Basis Averaging Rule

(c) Difference Between Computation of Gain Under § 367(e)(1) and § 311(b)

(d) Treatment of the "Disappearing" Basis

(4) No Loss Recognition

(5) Treatment of Distributee

d. Avoidance of § 367(e)(1) Gain Recognition

(1) Non-Pro-Rata Split-Offs

(2) Pre-Distribution Drop-Downs

(3) Cash-Out Distributions

(4) Distribution of Less Appreciated Business

B. Outbound and Foreign-To-Foreign § 332 Liquidations Under § 367(e)(2)

1. Background of § 367(e)(2) and Regulations

a. Relationship to Other § 367 Subsections

(1) Relationship to § 367(a)

(2) Relationship to § 367(b)

b. Preliminary Guidance in the Notices

c. Promulgation of Regulations

2. Outbound § 332 Liquidations Under the Regulations

a. General Rule Under the Regulations: Gain Recognition

b. The USRPI Exception

(1) Definition of USRPI

(2) Exclusion of Former USRPHC Stock

(3) Relationship to U.S. Business Asset Exception

(4) Relationship to FIRPTA Regulations

c. The U.S. Business Asset Exception

(1) U.S. Business Use Requirements

(a) U.S. Business Use by Distributing

(b) U.S. Business Use by the Distributee

(i) Effectively Connected Income Test

(ii) Effect of Treaty PE Protection

(iii) Consequences of Post-Distribution Failure

(c) No Active Conduct Requirement

(2) Distributee Can Be CFC

(3) Intangibles Excluded

(4) Inventory Can Qualify for Exception

(5) Procedural Requirements and GRA

(a) Claim of Exception, Declaration and Certification

(b) Description of Property

(c) Identity of Distributee

(d) Waiver of Treaty Benefits

(e) Extension of Statute of Limitations

(f) Preparation and Filing of Statement

(g) Consequences of Failure to Comply

(h) Gain Recognition Agreement and Related Procedures

(6) Taxable Disposition, GRA Triggers and Other Events

(a) Taxable Dispositions that Do Not Trigger GRA

(b) Cessation of U.S. Use by Distributee

(c) Certain Events and Nonrecognition Dispositions That Do Not Trigger GRA

(i) § 1031 or § 1033 Exchange

(ii) Worthlessness or Obsolescence

(iii) Certain Other Nonrecognition Exchanges

(d) Reporting of Gain on Amended Return of Distributing

(e) Requirement to File Schedule of Cessation-of-Use Property

d. The U.S. Subsidiary Exception

(1) 80% Direct Ownership Requirement

(2) FIRPTA Limitations

(3) Anti-Abuse Rule

(4) GRA Requirement

e. Limitation on the Recognition of Losses

(1) Failure to Qualify for Nonrecognition

(2) Overall Loss Limitations

(3) Limitation on Acquired Losses

(4) Loss Recognition on GRA

(5) Relationship to § 336 Rules for Losses

(6) Relationship to § 367(a) Loss Disallowance Rule

(7) Relationship to § 267

f. Flow-Through Entities

g. Anti-Abuse Rule and the "Dividend Pump" Technique

3. Foreign-To-Foreign § 332 Liquidations Under the Regulations

a. General Rule Under the Regulations: Nonrecognition of Gain

b. Distribution of Former or Current U.S. Business Assets

(1) Recognition of Gain on Former U.S. Business Assets

(2) Treatment of Distribution of Current U.S. Business Assets

(a) U.S. Use by the Distributee

(b) No Liquidation from Non-Treaty into Treaty Jurisdiction

(c) Filing and Effect of Statement

c. Anti-Abuse Rule

4. The Treaty Nondiscrimination Issue

a. Nondiscrimination Under the Notices

b. Congress Intervenes

c. Nondiscrimination Under the Regulations


WORKING PAPERS

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 House Ways & Means Committee Report on 1976 Tax Act, H.R. Rep. 94-658, 94th Cong., 1st Sess. 239-48 (1975)

Worksheet 2 Senate Finance Committee Report on 1976 Tax Act, S. Prt. 94-938, 94th Cong., 2d Sess. 261-71 (1976)

Worksheet 3 Conference Committee Report on 1976 Tax Act, H.R. Rep. 95-1515, 94th Cong., 2d Sess. 463 (1976).

Worksheet 4 Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, JCS-33-76, 94th Cong., 2d Sess. 256-66 (1976)

Worksheet 5 Preamble to 1977 Temporary Regulations, T.D. 7530, 1978-1 C.B. 92-98

Worksheet 6 Extract from Preamble to 1991 Proposed Regulations, INTL-54-91 and INTL-178-86, 1991-2 C.B. 1070-5

Worksheet 7 Preamble to 1999 Final Regulations, T.D. 8834, 1999-34 I.R.B. 251-55

Worksheet 8 Preamble to 2000 Final Regulations, T.D. 8862, 2000-6 I.R.B. 446-73

Worksheet 9 Preamble to 2000 Proposed Regulations, REG-16050-99, 2000-48 I.R.B. 520-30

Worksheet 10 Materials Used by the IRS in Training its International Examiners Under § 367

Bibliography

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Treasury Regulations:

Committee Reports:

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Cases:

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