Financial Services Companies Seek Exceptions to 367(d) Rules

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By Dolores W. Gregory

Dec. 28 — Major financial institutions and trade groups, in a series of comments to the Internal Revenue Service, lodged a plea for an industry exception to proposed regulations that would impose tax on the outbound transfer of foreign goodwill and going concern value.

Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. filed a joint letter Dec. 15; American Express Co., the American Council of Life Insurers and the Clearing House Association, a banking trade group, filed separate comments the same day.

Each commenter noted that financial institutions operating abroad have been under increasing pressure to reorganize foreign branch operations into locally incorporated subsidiaries. Since the financial crisis, they said, foreign regulators have shifted from favoring branch operations, while the financial institutions continue to prefer the branch structure.

“The operation of a banking business in subsidiary form allows the local regulator to regulate the entity under its own rules rather than relying on a foreign regulator,” Bank of America, Citigroup and JPMorgan said in their joint letter. “In addition, some foreign regulators are requiring that certain types of businesses that were once part of a branch must be operated in corporate form, thus potentially leading to partial incorporations of a banking branch.”

Because such reorganizations are undertaken for non-tax reasons, they said, the transfer of any foreign goodwill and going concern value by bank holding companies, insurers and credit card operations shouldn't be subject to tax.

Proposed Regulations

The IRS proposed the regulations (REG-139483-13) to eliminate the foreign goodwill and going concern exceptions under Treasury Regulations Section 1.367(d)-1T and limit the scope of property eligible for the active trade or business exception provided for in tax code Section 367(a) (178 DTR G-4, 9/15/15).

The proposed regulations are effective as of Sept. 14.

Current law allows foreign goodwill and going concern value to be transferred free of tax; the proposed regulations eliminate that benefit retroactively. According to the IRS, the proposed regulations are intended to combat situations where excess value is attributed to these intangibles.

Bank of America, Citigroup and JP Morgan called on the IRS to adopt a “gateway test” to determine when the transfer of foreign goodwill or going concern value should fall under the active trade or business exception of Section 367(a). Such a test would apply to an “eligible financial services branch” if:

• it has been in continuous operation for no less than 10 years;
• it is a direct or indirect branch of U.S. corporation treated as a bank holding company under U.S. law;
• more than 70 percent of its gross income is derived directly or indirectly from transactions with unrelated customers abroad; and
• it has been predominantly engaged in the active conduct of a banking, financing or similar business.


American Express proposed a similar test and suggested a cost-based approach to valuing “hot intangibles” used by foreign branch operations that are required to incorporate.

The Clearing House noted that a narrow exception would minimize the burden on Treasury and the IRS to administer it. For instance, U.S. taxpayers are required to file IRS Form 926, Filing Requirement for U. S. Transferors of Property to a Foreign Corporation, to report transfers of property to a foreign corporation in a tax-free exchange. The form could be amended to include a checkbox for taxpayers to mark when relying on the proposed exception.

The ACLI urged the IRS to treat goodwill as property eligible for the active trade or business exception if certain requirements are met and requested additional relief for taxpayers that were previously required to operate in branch form.

Silicon Valley Group: Pull Rules

The Silicon Valley Tax Directors Group submitted comments on the proposed regulations Dec. 14, urging that they be withdrawn because they are contrary to the intent of Congress.

“The legislative history of §§367(a) & (d) shows clearly that Congress intended that GW/GVC not be treated as intangible property subject to 367(d),” the group said, adding that “Regulations contrary to the expressed intent of Congress cannot be the result of reasoned decisionmaking. If finalized, the validity of any such regulations would be subject to challenges” and should, “accordingly, be withdrawn.”

In a second Dec. 14 comment letter, the group addressed proposed changes to Section 482 regulations that it maintains deviate from the arm's-length standard by establishing rules that must taken into account in determining the “true taxable income” of a controlled taxpayer.

To contact the reporter on this story: Dolores W. Gregory in Washington at

To contact the editor responsible for this story: Molly Moses at

For More Information

Texts of the comment letters from Bank of America, Citigroup and JPMorgan Chase; American Express; the American Council of Life Insurers; the Clearing House Association; and the Silicon Valley Tax Directors Group are in TaxCore.

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