The U.S. Treasury Department recently issued regulations with guidance on cross-border reorganizations under I.R.C. Sections 367, 1248 and 6038B. The regulations withdraw and reissue as temporary regulations the final regulations issued on February 11, 2009 (T.D. 9615). The regulations generally affect U.S. corporations and certain shareholders of U.S. corporations that transfer assets (including stock and securities) to a foreign corporation. The temporary regulations provide four key changes to reorganizations involving foreign corporations.
First, the regulations eliminate the so-called Section 367(a)(5) exception under the indirect stock transfer rules of Treas. Reg. Section 1.367(a)-3(d), which applied to an outbound asset reorganization in which, as part of the same plan, all or part of the transferred assets were contributed by the foreign corporation to one or more controlled domestic subsidiaries. The new regulations also modify the Section 351 exception, which addresses outbound transfers to controlled subsidiaries in order to make this exception consistent with the remaining exception relating to the tax basis of the assets transferred.
Secondly, there is a modification to the 5% stock ownership rule. This rule triggers a U.S. taxpayer’s requirement to enter into a gain recognition agreement with the IRS in order to avoid being subject to IRC Section 367(a)(1) taxation for outbound transactions. The stock ownership is now determined by reference to the U.S. transferor’s ownership rather than by applying indirect or constructive ownership rules.
The regulations also introduce coordination rules between gain recognition agreements under the branch loss recapture rules and gain recognized under Section 1.367(a)-7 (property transfers in outbound corporate reorganizations).
Lastly, the regulations eliminate the 120-day provision from the reasonable cause relief procedures. This removal results in the IRS no longer being subject to processing time deadline for taxpayer relief requests.
The modifications made to the provisions of the proposed regulations are relatively minor, and should provide few surprises to taxpayer familiar with the prior regulations.
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