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March 25 — Final rules to prevent corporations from importing losses into the U.S. include minor changes from a 2013 proposal, and reject many of the taxpayer comments seeking simplification.
The final rules (T.D. 9759, RINs 1545-BF43, 1545-BC88) aim at restricting U.S. companies from importing losses from offshore depreciated assets through tax-free transfers. The rules, which mostly adopt the 2013 proposed rules (REG-161948-05), must be consulted when conducting a tax code Section 332 inbound liquidation, Section 368 reorganization or Section 351 exchange, Joseph Calianno, a partner with BDO USA LLP in Washington, told Bloomberg BNA March 25 (174 DTR G-3, 9/9/13).
The rules require corporations and their shareholders to report separately fair market value and basis of property transferred in a tax-free transaction. The rules are issued under anti-loss importation sections 334(b)(1)(B) and 362(e)(1).
What was most notable were the requests that weren't adopted, Lisa Zarlenga, a partner at Steptoe & Johnson LLP, said.
Despite several taxpayer comments to revise a rule that looks through to the beneficial owners of grantor trusts, partnerships and S corporations to determine the taxation of a hypothetical sale, the Internal Revenue Service said it was keeping the rule intact and acknowledged it could impose a significant burden.
The IRS and Treasury Department opted not to heed a request to not apply the look-through rule to publicly traded partnerships. The government determined that PTPs are treated as partnerships for all other purposes and that the Section 706 rules take into account changes in partners over the year, Zarlenga said.
The IRS also said it wasn't adopting a suggestion to use a closing-of-the-books approach for partnerships, saying the allocation of partnership items on the transfer date could differ from the allocation at the end of the partnership tax year. The regulations clarify that a partnership agreement and any applicable laws should be taken into account to determine how an item is allocated to a partner.
The rules also said the government will provide clarification about the interaction of Sections 362(e) and 704(c)(1)(C) when it issues final regulations in a 2014 proposal addressing contributions of built-in loss property to partnerships (11 DTR G-1, 1/16/14).
The rules also didn't include a comment to reduce basis under Section 334(b)(1)(B) or 362(e)(1) tied to earnings and profits under Section 367(b). The regulations state that the basis reduction doesn't affect the calculation of all the earnings and profits amount.
The final regulations make a slight change to the treatment of debt-financed property, saying the inclusion of such assets can't shield a person from the rules. If a transfer includes debt-financed assets, it will be bifurcated and the rest of the property will be subject to the regulations.
“The final regulations provide that portions of property determined under this rule are generally treated under the anti-loss importation provisions in the same manner as portions of property tentatively divided to reflect multiple owners of gain or loss on the property,” the rules said.
The final regulations are scheduled to be published in the Federal Register on March 28. The rules are effective on that day.
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