AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains regulations relating to certain transfers of stock or securities by U.S. persons to foreign corporations pursuant to the corporate organization and reorganization provisions of the Internal Revenue Code, and the reporting requirements related to such transfers. The regulations provide the public with guidance necessary to comply with the Tax Reform Act of 1984.
DATES: These regulations are effective July 20, 1998.
FOR FURTHER INFORMATION CONTACT:
Philip L. Tretiak at (202) 622-3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1271. Responses to these collections of information are required in order for certain U.S. shareholders that transfer stock or securities in section 367(a) exchanges to qualify for an exception to the general rule of taxation under section 367(a)(1).
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.
The estimated burden per respondent varies from .5 to 8 hours, depending upon individual circumstances, with an estimated average of 4 hours.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FS:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and proposed regulations under sections 367(a) and (d), and 6038B were published in the Federal Register (51 FR 17936). These regulations, which addressed transfers of stock or securities and other assets, as well as related reporting requirements, were published to provide the public with guidance necessary to comply with changes made to the Internal Revenue Code by the Tax Reform Act of 1984. The IRS and the Treasury Department later issued Notice 87-85 (1987-2 C.B. 395), which set forth substantial changes to the 1986 regulations, effective with respect to transfers of domestic or foreign stock or securities occurring after December 16, 1987. A further notice of proposed rulemaking containing rules under section 367(a) with respect to transfers of domestic or foreign stock or securities, as well as section 367(b), was published in the Federal Register on August 26, 1991 (56 FR 41993). The section 367(a) portion of the 1991 proposed regulations was generally based upon the positions announced in Notice 87-85, but the regulations proposed certain modifications to Notice 87-85, particularly with respect to transfers of stock or securities of foreign corporations.
Subsequently, the IRS and the Treasury Department have issued guidance focusing on the transfers of stock or securities of domestic corporations. Notice 94-46 (1994-1 C.B. 356) announced modifications to the positions set forth in Notice 87-85 (and the 1991 proposed regulations) with respect to transfers of stock or securities of domestic corporations occurring after April 17, 1994. Temporary and proposed regulations (referred to as the inversion regulations) implementing Notice 94-46 (with certain modifications) were published in the Federal Register on December 26, 1995 (60 FR 66739 and 66771). Final inversion regulations, published in the Federal Register on December 27, 1996 (61 FR 61849), generally followed the rules contained in the temporary regulations, with modifications. The final regulations herein address transfers of foreign stock or securities, and other matters addressed in the 1991 proposed regulations under section 367(a) that were not addressed in the 1996 final inversion regulations.
In addition, these final regulations address those portions of the 1991 proposed section 367(b) regulations that relate to transactions that are subject to both sections 367(a) and (b). The remainder of the 1991 proposed section 367(b) regulations will be finalized at a later date.
This document also contains final regulations under section 6038B with respect to reporting requirements applicable to transfers of stock or securities described under section 367(a). Rules regarding outbound transfers to corporations of assets other than stock (including intangibles), and outbound transfers to foreign partnerships will be addressed in separate guidance.
Finally, these final regulations contain a clarification with respect to the scope of certain outbound transfers of intangibles that are subject to section 367(d).
Explanation of Provisions
Sections 367(a) and (b): introduction
Section 367(a)(1) generally treats a transfer of property (including stock or securities) by a U.S. person to a foreign corporation (an outbound transfer) in an exchange described in section 332, 351, 354, 356 or 361 as a taxable exchange unless the transfer qualifies for an exception to this general rule.
Section 367(a)(2) provides that, except as provided by regulations, section 367(a)(1) shall not apply to the transfer of stock or securities of a foreign corporation which is a party to the exchange or a party to the reorganization. Section 367(a)(3) contains an exception to section 367(a)(1) for certain outbound transfers of tangible assets other than stock or securities. Section 367(a)(5) contains limitations on any exceptions to section 367(a)(1) in certain instances.
Section 367(b) provides that, with respect to certain nonrecognition transfers in connection with which there is no transfer of property described in section 367(a)(1), a foreign corporation will retain its status as a corporation unless regulations provide otherwise.
These final regulations address transactions described in both sections 367(a) and (b), and are prescribed under the authority of both sections 367(a) and (b).
Stock transfers under sections 367(a) and (b): scope
Outbound transfers of stock that are subject to section 367(a) may be either direct (such as an outbound transfer of stock described under section 351), indirect (as described below with respect to certain transfers) or constructive (such as an outbound stock transfer that may occur pursuant to a change in an entity's classification). See section 1.367(a)-3(a) (as amended) for the general rules regarding the scope of stock transfers that are subject to section 367(a).
Indirect stock transfers: in general
The current temporary regulations contain illustrative examples of certain transactions, including triangular reorganizations described under section 368(a)(1)(A) and either section 368(a)(2)(D) or (E), section 368(a)(1)(B) or (C), that are treated as indirect stock transfers subject to section 367(a) where the acquired company and the acquiring company are domestic corporations and the shareholders of the acquired company receive stock of the acquiring company's foreign parent in the exchange. (Under the terminology used in the proposed and final regulations, in the case of a reorganization described in sections 368(a)(1)(A) and (a)(2)(E), U.S. shareholders exchange their stock for stock of the ACQUIRED company's foreign parent.)
The proposed regulations clarified the treatment of indirect stock transfers, and provided extensive examples of the rules. The proposed regulations provided that transactions that are treated as indirect stock transfers include: (i) successive section 351 exchanges, and (ii) section 368(a)(1)(C) reorganizations followed by section 368(a)(2)(C) exchanges. In addition, the reorganizations illustrated under the existing temporary regulations are also treated as indirect stock transfers under the proposed regulations where the acquired and/or acquiring corporations are foreign corporations.
The proposed regulations requested comments as to the scope of the indirect stock transfer rules. The IRS and the Treasury Department carefully considered comments received with respect to the scope of the indirect stock transfer rules and have decided to retain the rules set forth in the proposed regulations. These rules are contained in section 1.367(a)-3(d), and additional examples are provided in the final regulations.
Indirect stock transfer rules and section 367(d)
In the case of a triangular section 368(a)(1)(C) reorganization in which a U.S. target company (UST) transfers its assets to a foreign acquiring company (FA) and UST's U.S. parent company (USP) receives stock of FA's foreign parent (the transferee foreign corporation or TFC) in exchange for the UST stock, the indirect stock transfer rules and the asset transfer rules will apply contemporaneously.
If UST is taxable under section 367(a) with respect to its outbound (section 361) transfer of all or a portion of its tangible assets (because such assets do not qualify for an exception to section 367(a)(1)), USP will receive a step up in the basis of its stock in UST, provided that USP and UST file a consolidated Federal income tax return. See section 1.1502-32. USP will also be deemed to make an indirect transfer of the stock of UST for TFC stock. See section 1.367(a)-3(d)(1)(iv). Thus, if USP receives at least five percent of either the total value or the total voting power of the stock of TFC (i.e., USP is a 5-percent shareholder (which is also referred to as a 5-percent transferee shareholder in section 1.367(a)-3(c)(5)(ii)) and the value of the UST stock exceeds USP's basis in UST (taking into account basis adjustments relating to the asset transfer), USP may qualify for nonrecognition treatment by entering into a gain recognition agreement (GRA), described below, provided that the requirements of section 1.367(a)-3(c)(1) are satisfied. See, e.g., section 1.367(a)-3(d)(3), Example 7 through Example 7C.
If the asset transfer involves tangible assets and the transfer is fully taxable (so that USP's basis in its UST stock equals the value of the UST stock), the indirect stock transfer would not be taxable under section 367(a), and, hence, no GRA would be required. In contrast, if the assets transferred by UST include intangibles that are taxable under section 367(d), the exact manner in which section 367(d) operates is less certain.
The regulations under section 367(d) do not address the tax consequences when the U.S. transferor goes out of existence pursuant to the transaction. The IRS and the Treasury Department are studying the manner in which the rules under section 367(d) should operate when the U.S. transferor goes out of existence contemporaneously with (or subsequent to) its outbound transfer of an intangible. Comments are requested with respect to this issue.
Transactions subject to sections 367(a) and (b)
An outbound transfer of foreign stock or securities can be subject to both sections 367(a) and (b). Pursuant to section 367(a)(2), section 1.367(a)-3T(b) of the current temporary regulations provides that, if an exchange is described in section 354 or 361, an outbound transfer of stock or securities of a foreign corporation that is a party to the reorganization is not subject to section 367(a). Thus, for example, an outbound transfer in which a U.S. person exchanges stock in one controlled foreign corporation (CFC) for another CFC that qualifies as a reorganization under section 368(a)(1)(B) (a B reorganization), including a transfer that qualifies as both a B reorganization and a section 351 exchange, is subject only to section 367(b), not section 367(a). In such case, no GRA, described below, is required under the current temporary regulations to preserve nonrecognition treatment. In contrast, an outbound transfer of foreign stock that qualifies as a section 351 exchange but not a B reorganization is currently subject to only section 367(a), not section 367(b), and, thus, a GRA may be required to preserve nonrecognition treatment.
The IRS and the Treasury Department believe that substantially similar transactions, such as these, should not be treated in markedly different manners. Thus, these final regulations adopt the approach contained in the proposed regulations: that all outbound transfers of foreign stock will be subject to sections 367(a) and (b) concurrently, except to the extent that the exchange is fully taxable under section 367(a)(1). See section 1.367(a)-3(b)(2).
Sections 367(a) and (b): exceptions to taxation
Once a determination is made that a particular outbound transfer of stock or securities is subject to section 367(a), the next determination is the tax treatment of such transfer. In general, the current rules regarding the outbound transfer of stock or securities under section 367(a) provide for three different tax consequences depending upon the particular facts: (i) certain transfers retain nonrecognition treatment without condition, (ii) certain transfers retain nonrecognition treatment only if the U.S. transferor enters into a GRA, and (iii) certain transfers of stock are taxable to the U.S. transferor under section 367(a)(1) with no option to file a GRA to secure nonrecognition treatment. These final regulations retain this general framework.
The current rules governing whether a taxpayer may qualify for an exception under section 367(a) in the case of an outbound transfer of stock are described in section 1.367(a)-3(c) of the final inversion regulations (in the case of domestic stock or securities) and Notice 87-85 (in the case of foreign stock or securities).
Notice 87-85 provides that in the case of an outbound transfer of foreign stock or securities to which section 367(a) applies, a U.S. transferor may generally qualify for nonrecognition treatment if it either (i) is not a 5-percent shareholder, or (ii) is a 5-percent shareholder but enters into a GRA for a term of 5 or 10 years, depending upon the TFC stock owned by all U.S. transferors. Under current law, a 5-percent shareholder that qualifies for nonrecognition treatment under section 367(a) by filing a GRA agrees that if the TFC disposes of the stock of the transferred corporation in a taxable transaction during the term of the GRA, the 5-percent shareholder must amend its return for the year of the transfer and include in income the amount that it realized but did not recognize with respect to the stock of the transferred corporation, and pay the tax due, plus interest, on this amount. (Under Notice 87-85, the term of the GRA is 5 years if all U.S. transferors, in the aggregate, own less than 50 percent of both the total voting power and the total value of the TFC immediately after the transfer, or 10 years if all U.S. transferors, in the aggregate, own 50 percent or more of either the total voting power or the total value of the TFC immediately after the transfer.) Although GRAs are currently used solely with respect to outbound transfers of stock or securities, the IRS and the Treasury Department may, at a later date, permit taxpayers to secure nonrecognition treatment under section 367(a) with respect to other types of assets by entering into GRAs.
Notice 87-85, however, provides no exception to section 367(a)(1) if a U.S. transferor transfers stock in a CFC in which it is a United States shareholder (as defined in section 7.367(b)-2(b) or section 953(c)) but does not receive back stock in a CFC in which it is a United States shareholder. The final regulations, following the proposed regulations on this point, provide that a transfer described in the preceding paragraph, such as a section 351 exchange in which a U.S. transferor exchanges stock of a CFC in which it is a United States shareholder for stock of a non-CFC, is not automatically taxable. Instead, both sections 367(a) and (b) apply to the exchange. If the U.S. transferor is required under section 367(a) to enter into a GRA to preserve nonrecognition treatment and fails to do so, the transaction is fully taxable under section 367(a) (and, as a consequence, the section 1248 amount that would be included as a dividend under section 367(b) had a GRA been filed is instead treated as a dividend under section 1248). If the U.S. transferor is required to enter into a GRA and properly does so, the U.S. transferor is required under section 367(b) to include in income the section 1248 amount attributable to the stock exchanged. The amount of the GRA equals the gain realized on the transfer less the inclusion under section 367(b). See section 1.367(a)-3(b)(2).
As noted above, Notice 87-85 addressed outbound transfers of both domestic and foreign stock. The (1996) final inversion regulations superseded Notice 87-85 with respect to outbound transfers of domestic stock. The rules in Notice 87-85 with respect to outbound transfers of foreign stock have been incorporated into these final regulations with respect to transfers that occur prior to July 20, 1998. See section 1.367(a)-3(g). Notice 87-85 will be obsolete when these final regulations are effective.
Section 367(a): post-GRA transactions
Section 1.367(a)-8 provides general rules regarding terms and conditions relating to GRAs, and the manner in which post-GRA transactions impact the GRA. The general terms and conditions for GRAs have not changed significantly from the terms and conditions set forth in section 1.367(a)-3T(g) of the current temporary regulations, except that the final regulations contain an election (the GRA election), described below, to permit the taxpayer to include the GRA amount in income in the year of the triggering event (with interest on the tax due from the year of the transfer) rather than on an amended return for the year of the initial transfer. In addition, the final regulations generally follow the proposed regulations by providing a more comprehensive explanation of the manner in which the GRA is affected by both taxable and nontaxable dispositions by the U.S. transferor, the TFC, and the transferred corporation.
The current temporary regulations provide that the GRA is triggered if (i) the TFC disposes of all or a portion of the stock of the transferred corporation, or (ii) the transferred corporation disposes of a substantial portion of its assets. The term substantial portion was not defined in the regulations.
Both the final and the proposed regulations use the rule from the current temporary regulations that a GRA is triggered to the extent that the TFC disposes of all or a portion of the stock of the transferred corporation. The final regulations also adopt the rule contained in the proposed regulations that a GRA is triggered if the transferred corporation disposes of substantially all of its assets (within the meaning of section 368(a)(1)(C)). In addition, the final regulations provide that a GRA will be triggered if the U.S. transferor is either a U.S. citizen or long-term resident (as defined in section 877(e)(2)) at the time of the initial transfer and such person ceases to be a U.S. citizen or long-term resident during the GRA term.
Under the current temporary regulations, if a GRA is triggered, the U.S. transferor must amend its tax return for the year of the initial transfer, include in income the gain that was realized but not recognized, and pay the tax due thereon with interest. The proposed regulations would have maintained the amended return/interest charge requirement, but requested comments as to (i) the amount of gain to be recognized by the U.S. transferor upon a triggering event, (ii) the year in which the gain should be included in the income of the U.S. transferor, and (iii) whether an interest charge is appropriate.
A number of commentators have suggested that the 10-year GRA term under Notice 87-85 in certain instances is too restrictive because a disposition of the stock of the transferred corporation in year 8, for example, would likely not be a tax avoidance transfer but the interest charges would be burdensome in such case. Other commentators suggested a deferred income approach similar to that applicable in the consolidated return deferred intercompany context.
In response to these comments, these final regulations contain two significant modifications to the current temporary regulations. First, in conformity with the final inversion regulations, these regulations provide that the GRA term will be 5 years in all cases involving outbound transfers of foreign stock. (Moreover, taxpayers may elect to apply these final regulations to past transactions so that any 10-year GRA that is in existence (i.e., has not been triggered) on July 20, 1998 will be a 5-year GRA. Thus, the 10-year GRA will be considered to be a 5-year GRA by the IRS, and, such GRA will terminate on the fifth full taxable year following the close of the taxable year of the initial transfer.) Second, because the IRS and the Treasury Department are concerned that the amended return requirement can be burdensome to taxpayers in the event that a GRA is triggered, the final regulations contain an election (the GRA election), which must be filed with the U.S. transferor's tax return that includes the date of the initial transfer, that permits taxpayers to report a triggering event in the year of the triggering event rather than on an amended return for the year of the initial transfer. (No such election is available with respect to GRAs that are in existence when these final regulations become effective.)
Even if a transferor makes a GRA election, such person is still required to extend the statute of limitations, comply with all of the applicable GRA reporting requirements (such as filing annual certifications) and, in the case of a triggering event, include in income the GRA amount plus interest in the same manner as under the current temporary regulations, except that (i) the GRA amount and interest would be included on the U.S. transferor's tax return for the year that includes the triggering event, and (ii) other computations, such as the section 1248 amount (if any) attributable to the transferred stock, will be determined on the triggering date rather than the date of the initial transfer.
Consistent with the proposed regulations, the final regulations clarify that post-GRA nonrecognition transactions (e.g., nonrecognition transactions in which the U.S. transferor transfers the stock of the TFC, the TFC transfers the stock of the transferred corporation, or the transferred corporation transfers substantially all of its assets) generally do not trigger the GRA, provided that the U.S. transferor reports the transaction and amends the GRA to reflect the post-GRA transaction.
The current temporary regulations do not provide instances that would cause the GRA to be terminated (i.e., extinguished). The proposed regulations would have provided that the GRA would be terminated if either (i) the U.S. transferor disposed of all of its TFC stock in a taxable transaction, or (ii) the transferred company is a U.S. company that sold substantially all of its assets in a taxable transaction (but only if the transferred company was affiliated with the U.S. transferor under section 1504(a)(2) prior to the initial transfer).
The final regulations retain these two rules. In addition, the final regulations also provide that a GRA will be terminated if (i) the TFC distributes the stock of the transferred corporation back to the U.S. transferor in a section 355 exchange, or (ii) the TFC liquidates into the U.S. transferor under section 332, provided that, immediately after the section 355 distribution or section 332 liquidation, the U.S. transferor's basis in the transferred stock is less than or equal to the basis that it had in the transferred stock immediately prior to the initial transfer of such stock.
Finally, the current temporary regulations provide (and the 1991 proposed regulations would have provided) certain restrictions on taxpayers' ability to use net operating losses and credits to offset the amount of gain recognized upon the trigger of a GRA. In response to suggestions from commentators, the final regulations remove these restrictions.
Section 367(a) and "check-the-box" rules
The IRS and the Treasury Department are aware that taxpayers may attempt to use the entity classification (i.e., check-the-box) regulations to avoid entering into GRAs. For example, assume that a U.S. transferor (USP) owns all of the stock of two CFCs, CFC1 and CFC2. USP transfers the stock of CFC2 to CFC1 in an exchange otherwise described as both a section 351 exchange and a B reorganization. USP elects under section 301.7701-3(c) to treat CFC2 as a disregarded entity, and such election is effective immediately prior to the transfer.
Provided that the election is respected, USP would, for Federal income tax purposes, transfer the assets (and not the stock) of CFC2 to CFC1 in a section 351 exchange. If the assets will be used by CFC1 in the active conduct of a trade or business outside the United States, the transfer of the assets by USP will qualify for the exception contained in section 367(a)(3) and section 1.367(a)-2T (as limited by certain provisions, including section section 1.367(a)-4T through 1.367(a)-6T). If the assets are disposed of (either directly by CFC2 or because the stock of CFC2 is disposed of by CFC1) in connection with the transfer to CFC1, the step transaction doctrine may apply to deny nonrecognition treatment to the outbound transfer to the extent it is treated as an asset transfer. In addition, the active trade or business exception under section 1.367(a)-2T is inapplicable if, as part of the same transaction in which the TFC received the assets, it disposes of such assets. See section 1.367(a)-2T(c). Thus, if USP intended to sell CFC2 or its business at the time of the election or the asset transfer, the transfer would be treated as a taxable exchange under section 367(a)(1). If the step transaction doctrine and the active trade or business anti-avoidance rule do not apply, however, the use of the "check-the-box" regulations in this context will not be viewed as inconsistent with the purposes of section 367(a), and, therefore, the transaction will be respected as an asset transfer.
Section 367(a) and tax-motivated transactions
The IRS and the Treasury Department are aware that certain taxpayers have entered into (or are contemplating) transactions that are designed to avoid the inversion regulations under section 1.367(a)-3(c). In these transactions (where a foreign corporation acquires the stock of a domestic corporation), one or more U.S. transferors attempt to avoid taxation under the inversion regulations by retaining an equity interest (or receiving a modified equity interest) in the domestic target corporation. Such interest, however, is typically coupled with an interest in the foreign acquirer, or a right to convert the interest in the domestic target into stock of the foreign acquirer.
The IRS and the Treasury Department are currently scrutinizing these transactions on a case-by-case basis using substance over form (or other) principles, and are studying whether it is appropriate to issue specific guidance with respect to these transactions. Comments are requested as to the instances in which a U.S. transferor that receives (or maintains) a stock interest in the domestic target in circumstances similar to those described above should not be treated as having received stock in the foreign acquirer for purposes of section 367(a).
Section 367(b)
This document finalizes the 1991 proposed section 367(b) regulations to the extent necessary to address those transfers of foreign stock subject to both sections 367(a) and (b) under the 1991 proposed regulations.
In addition, this document contains a number of other miscellaneous provisions, at the request of commentators.
First, under current law, if a United States shareholder (defined under section 7.367(b)-2(b) as a 10 percent shareholder of a CFC within the past 5 years) exchanges, under section 351, stock of a foreign corporation for stock of a domestic corporation, the U.S. transferor is not taxable under section 367(b). However, if the transaction constitutes a section 354 exchange, under section 7.367(b)-7(c)(1) the United States shareholder must include in income the section 1248 amount attributable to the stock exchanged. Consistent with the 1991 proposed regulations as well as the purpose of these final regulations to harmonize the Federal income tax consequences of substantially similar transactions, the final section 367(b) regulations provide that a section 1248 inclusion generally is not required in the case of the section 354 exchange described above. (This result is accomplished by excluding domestic stock from the categories of nonqualifying consideration described in section 1.367(b)-4(b)(1). Thus, these transfers will generally be respected as nonrecognition exchanges under 367(b).)
Second, consistent with the principles of section 367(b), in cases where the final regulations do not require that the section 1248 amount be included in income, the regulations clarify the appropriate treatment of post-reorganization exchanges under section 1248 or 367(b). See section 1.367(b)-4(b)(5).
Third, in an effort to reduce the reporting burdens of U.S. persons that make outbound transfers of foreign stock or securities, the section 367(b) regulations are amended to provide that, to the extent that a transaction is described in both sections 367(a) and (b), and the exchanging shareholder is not a United States shareholder of the corporation whose stock is exchanged, reporting under section 367(b) is not required. See section 1.367(b)-1(c).
Finally, the proposed section 367(b) regulations provided that final regulations generally would be effective for exchanges that occur on or after 30 days after the final regulations were published in the Federal Register. However, section 1.367(b)-2(d) (relating to the definition of the all earnings and profits amount) was proposed to be effective for transfers occurring on or after August 26, 1991. In response to comments regarding this provision and its effective date, a separate notice of proposed rulemaking is issued with these final regulations to delete the August 26, 1991, effective date with respect to the all earnings and profits amount. Thus, the definition of the all earnings and profits amount that will be included in forthcoming section 367(b) final regulations will apply to exchanges that occur on or after 30 days after the issuance of those final regulations.
The IRS and the Treasury Department will issue guidance at a later date to address section 367(b) provisions described in the 1991 proposed regulations that are not addressed herein.
Section 6038B: in general
Section 6038B, as enacted under the Deficit Reduction Act of 1984 (Public Law 98-369), provided that U.S. persons that made certain outbound transfers of property to foreign corporations were required to report those transfers in the manner prescribed by regulations. The penalty for failure to comply with the regulations was 25 percent of the gain realized on the exchange, unless the failure was due to reasonable cause and not to willful neglect. (The penalty was modified by the Taxpayer Relief Act of 1997 (TRA '97).)
Section 1.6038B-1T, promulgated on May 15, 1986, by TD 8087 (together with regulations under sections 367(a) and (d)), provided rules concerning the information that was required to be reported under section 6038B with respect to transfers of property to foreign corporations.
Section 6038B: transfers of stock or securities
Section 1.6038B-1T(b)(2)(i) of the current temporary regulations provides, inter alia, that no notice is required under section 6038B with respect to a transfer of stock or securities described in section 1.367(a)-3T(f)(1) of the current temporary regulations. Section 1.367(a)-3T(f)(1) had provided that an outbound transfer of stock or securities of a domestic or foreign corporation was not taxable under section 367(a)(1) if immediately after the transfer (i) all U.S. transferors owned in the aggregate less than 20 percent of both the total voting power and the total value of the stock of the TFC, or (ii) all U.S. transferors owned in the aggregate 20 percent or more of either the total voting power or the total value of the stock of the TFC, but less than 50 percent of that total voting power and total value and the subject U.S. transferor was not a 5-percent shareholder.
Notice 87-85 superseded the 1986 temporary regulations under section 367(a) (including section 1.367(a)-3T(f)(1)) with respect to the exceptions available for outbound stock transfers. Notice 87-85 provided that final regulations would incorporate the rules contained in the Notice, for transfers occurring after December 16, 1987. The exceptions in the 1986 temporary regulations, including section 1.367(a)-3T(f)(1) of the current temporary regulations, were removed as deadwood (for transfers occurring after December 16, 1987) by the 1995 temporary inversion regulations (TD 8638).
Prior to the issuance of these final regulations, however, section 6038B had not been amended with respect to outbound transfers of stock or securities. Thus, there was uncertainty whether a U.S. transferor that qualified under the inversion regulations or Notice 87-85 for nonrecognition treatment without filing a GRA (i.e., such U.S. transferor was not a 5-percent shareholder) was required to comply with section 6038B.
To reduce the reporting burdens on U.S. taxpayers that make outbound transfers of stock subject to section 6038B, the final section 6038B regulations provide that, with respect to transfers occurring after December 16, 1987, and before these final regulations are generally effective, a U.S. transferor that makes an outbound transfer subject to section 367(a) will not be subject to section 6038B with respect to such transfer if (i) such person was not a 5-percent shareholder and the transfer qualified for nonrecognition treatment under section 367(a), or (ii) such person was not a 5-percent shareholder in the case of a taxable transaction but such person included the gain on its Federal income tax return for the taxable year that included the date of the transfer.
With respect to transfers occurring after these final regulations are effective, these regulations contain the two exceptions described above. In addition, a 5-percent shareholder that is required to file a GRA is not subject to section 6038B provided that a GRA is properly filed. Moreover, U.S. transferors that are taxable on their outbound transfers of stock or securities (such as under the inversion regulations or because a 5-percent shareholder that was eligible to qualify for nonrecognition treatment chose not to file a GRA) are not subject to section 6038B if they properly report the gain recognized on the transfer on their tax returns that include the date of the transfer.
Thus, a U.S. transferor that does not properly report the gain recognized on its outbound stock transfer has not met its section 6038B filing obligation with respect to such transfer, and will be subject to the penalty under section 6038B, unless the transferor's failure to report the gain from the outbound transfer was due to reasonable cause and not willful neglect. Such person will also be subject to the extended statute of limitations under section 6501(c)(8).
Section 6038B: transfers of cash and unappreciated property
As noted above, prior to the enactment of TRA '97, the penalty for failure to comply with section 6038B was 25 percent of the gain realized on the outbound transfer. Thus, in the case of an outbound transfer of cash or unappreciated property required to be reported under section 6038B, no penalty was imposed upon the failure to report the transfer.
Pursuant to the TRA '97, the penalty for failure to report under section 6038B is revised from 25 percent of the gain realized in the property transferred to 10 percent of the fair market value of the property transferred, but limited to $100,000 unless the failure to report the exchange was due to intentional disregard. (The final regulations reflect the modification to the penalty provision under section 6038B.)
In response to the TRA '97 change to the penalty structure under section 6038B, these final regulations clarify that transfers of unappreciated property are required to be reported, or the 10 percent penalty will apply. These final regulations, however, do not require outbound transfers of cash to be reported. Rules regarding outbound transfers of cash will be provided in future regulations.
Section 6038B: other transfers
Pursuant to TRA '97, certain outbound transfers to foreign partnerships are required to be reported under section 6038B. Rules regarding outbound transfers to foreign corporations of assets not covered in these final regulations (such as intangibles), and outbound transfers to foreign partnerships, will be addressed in separate guidance.
Section 367(d) and other TRA '97 matters
A clarification provides that certain rules under section 367(a) will also apply under section 367(d) for purposes of determining the identity of the transferor that makes an outbound transfer of an intangible subject to section 367(d). Section 367(a)(4) and section 1.367(a)-1T(c)(5) provide that, for purposes of section 367(a), a partnership is treated as an aggregate in cases where a U.S. person transfers a partnership interest or a partnership makes an outbound transfer of stock (or other assets).
The IRS and the Treasury Department believe that the identity of the transferor has been and must be consistent under both sections 367(a) and (d). Consequently, a U.S. person may not attempt the use of a foreign partnership as an intermediary (in light of the repeal of section 1491) for an outbound transfer of an intangible by a U.S. person to a foreign corporation to avoid section 367(d). In the case of a transfer of an intangible by a partnership to a foreign corporation that qualifies as a section 351 exchange, each partner that is a U.S. person is treated as transferring its share of the intangible in a transfer that is subject to section 367(d).
Guidance under TRA '97 relating to the repeal of section 1491 may address situations in which inappropriate results can be achieved through transactions facilitated by such repeal. For example, guidance may address the appropriate tax consequences when a U.S. person who is a United States shareholder of a CFC transfers stock in the CFC to a foreign partnership, and immediately after the transfer the foreign corporation loses its status as a CFC. Guidance is generally not, however, expected to require gain recognition under section 721(c) in cases where gain is not inappropriately shifted to foreign persons.
Effective Dates
The final regulations contained herein are generally effective for transfers occurring on or after July 20, 1998. However, taxpayers generally may elect to apply the final regulations under section 1.367(a)-3(b) and (d) to transfers of foreign stock or securities occurring after December 17, 1987. A taxpayer that makes the election must apply section 367(b) and the regulations thereunder to such transfers. In the case of a transfer described in section 351, an electing transferor must apply section 367(b) and the regulations thereunder as if the exchange was described in section 7.367(b)-7. Thus, for example, in a case of a section 351 exchange in which a U.S. person exchanges stock of a CFC in which it is a United States shareholder but does not receive back stock of a CFC in which it is a United States shareholder, the electing transferor must include in income the section 1248 amount with respect to the transferred stock.
Special Analyses
It has been determined that this regulation is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It is hereby certified that the collection of information contained in this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these final regulations generally reduce the reporting requirements in comparison with the requirements contained under current law and the proposed sections 367(a) and (b) regulations. For example, the maximum term of the GRA under section 367(a) is reduced from 10 to 5 years, thus eliminating the need for annual certifications in years 5 through 9. Moreover, the requirements under section 6038B have been substantially revised for outbound transfers of stock described in section 367(a) so that the amount of filing required under that section will be significantly reduced. In addition, as a general matter, these regulations will primarily affect large shareholders and U.S. multinational corporations with foreign operations. Thus, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Drafting Information
The principal author of these regulations is Philip L. Tretiak of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, IRS.
However, other personnel from the IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Parts 1 and 7
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
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