Proposed Rules on Property Transfers Offer ‘Dramatic Change'

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Nov. 12 — Proposed regulations changing the definition of property that qualifies for the active trade or business exception mark a “dramatic change” but one designed to uphold Congress’ original intent, an Internal Revenue Service official said.

The proposed regulations under Section 367 would limit the active trade or business exception to an enumerated list of property, including tangible property, interests in oil and gas property, and some financial assets, Robert B. Williams Jr., senior counsel in Branch 4 of the IRS Office of the Associate Chief Counsel (International), said Nov. 10.
This contrasts to current law, where the presumption is the reverse, and the active trade or business exception isn't held to apply to certain enumerated types of property.

In addition, the proposed regulations eliminate any exception for foreign goodwill, going concern value or other intangibles, he said.

“There was a potential with the way that 367(a) and 367(d) rules fit together for a lot of value to fit into the active trade or business exception, and that was happening,” Williams said. “And it was a lot more value than we thought was appropriate. So we decided to affirmatively describe types of property that could qualify for the exception and restrict the ability to move value offshore to the types of things we thought the exception was intended to apply to all along.”

Williams was speaking on a panel at a Practising Law Institute tax conference in Chicago.

Foreign Goodwill

The regulations also have the effect of eliminating an exception from taxation for foreign goodwill and going-concern value, Williams said. This change resulted from the elimination of a clause providing for an exemption from the Section 367(d) rules of transfers of foreign goodwill and going-concern value.

Foreign goodwill and going-concern value also aren't included on the enumerated list of property that is eligible for the active trade or business exception under the new regulations, he said.

“The elimination of the exception for foreign goodwill is a big deal, we recognize that,” he said.

Williams said that the exception wasn't to be found in statute, but rather in the legislative history to the 1984 amendments to Section 367, which shows that Congress didn't anticipate that this exception would develop into an abuse of the U.S. tax system. “The history shows that Congress did not intend the transfer of foreign goodwill to ordinarily result in taxation,” he said.

‘Royalty Regime.'

And later legislative changes, particularly those associated with Section 367(d) where specific and unique valuation problems associated with intangibles led Congress to set up a “royalty regime” in which intangible property is taxed over time, show that Congress was very concerned to make sure “all of the income associated with intangible property was taxed,” he said.

“We've had a regime going back to the beginning of Section 367 which was trying to police deferral,” he said. “It was trying to separate where we think there could be problems from places where there were fewer problems. So we look at transfers of foreign stock, where we're not very worried; transfers of U.S. stock, where we're more worried; transfers of assets, where we're more worried still, and have this active trade or business test; and then, for intangibles we have this super-royalty regime, where we're going to pick up all of the income, where we have to make sure that we get it right, it's that essential.”

It was becoming clear to the Service that the exception for foreign goodwill and going-concern value was “disrupting the model,” he said. “We looked at it closely, and we concluded that preserving the exception for foreign goodwill—what with labeling problems and moving things between 367(a) and 367(d)—was too disruptive to what was essential to the statute,” he said. “So we decided to move away from that.”

To contact the reporter on this story: Christopher Brown in Chicago at
To contact the editor responsible for this story: Brett Ferguson at

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