Notice 2012-39, 2012-31 IRB 95, 07/13/2012, IRC Sec(s). 367
Foreign corporations—transfers of intangibles.
Headnote:
IRS announced that it will amend Code Sec. 367(d); regs in
order to address “significant policy concerns” surrounding outbound Code Sec.
367(d); transactions that repatriate earnings from foreign corps. without
appropriate recognition of income in Code Sec. 361; exchange. Regs will apply
to transfers occurring on or after 7/13/2012.
Reference(s): ¶ 3615.05(40); Code Sec. 367;
Full Text:
1. Overview
This notice provides guidance under section 367(d) of the
Internal Revenue Code (Code). The guidance addresses transactions that raise
significant policy concerns involving certain transfers of intangible property
by a domestic corporation to a foreign corporation in an exchange described in
section 361(a) or (b) (section 361 exchange). The Internal Revenue Service
(IRS) and the Department of the Treasury (Treasury Department) will issue
regulations that incorporate the guidance described in this notice. The
regulations will apply to transfers occurring on or after July 13, 2012.
2. Background
Subject to certain exceptions, section 367(a) generally
applies to the transfer of property by a United States person to a foreign
corporation in an exchange described in section 332, 351, 354, 356, or 361.
Section 367(d)(1) provides that, except as provided in regulations, if a United
States person transfers any intangible property (within the meaning of section
936(h)(3)(B)) to a foreign corporation in an exchange described in section 351
or 361, section 367(d) (and not section 367(a)) applies to such transfer.
Accordingly, income or gain attributable to the transfer of property by a U.S.
person to a foreign corporation in an exchange described in section 351 or 361
is taken into account either in accordance with section 367(d)(2)(A)(ii)(I) or
(II) (as described below), or in accordance with section 367(a).
Section 367(d)(2)(A) provides that the United States person
transferring the intangible property is treated as having sold the property in
exchange for payments that are contingent upon the productivity, use, or disposition
of such property. The transferor is treated as receiving amounts that
reasonably reflect the amounts that would have been received: (1) annually in
the form of such payments over the useful life of such property (section
367(d)(2)(A)(ii)(I)), or (2) in the case of a disposition of the intangible
property following such transfer (whether direct or indirect), at the time of
the disposition (section 367(d)(2)(A)(ii)(II)). For this purpose, an indirect
disposition of the intangible property following the transfer includes a
disposition of the transferor's interest in the transferee corporation. S. Rep.
No. 169, 98th Cong., 2d Sess., at 367 (1984). The amounts taken into account
under section 367(d)(2)(A)(ii) must be commensurate with the income attributable
to the intangible. Section 367(d)(2)(A)
(flush language).
Section 367(d)(2)(B) provides that for purposes of chapter 1
of the Code the earnings and profits of a foreign corporation to which the
intangible property was transferred are reduced by the amount required to be
included in the income of the transferor of the intangible property. Section 367(d)(2)(C) provides that for
purposes of chapter 1 of the Code any amount included in gross income pursuant
to section 367(d) is treated as ordinary income. For purposes of applying
section 904(d), any amount included in income under section 367(d) is treated
in the same manner as if such amount were a royalty. Section 367(d)(2)(C).
Section 1.367(d)-1T(c)(1) provides that if a U.S. person
transfers intangible property that is subject to section 367(d) to a foreign
corporation (transferee foreign corporation) in an exchange described in
section 351 or 361, then such person is treated as having transferred that
property in exchange for annual payments contingent on the productivity or use
of the property. The regulation further provides that such person shall, over
the useful life of the property, annually include in gross income an amount
that represents an appropriate arm's-length charge for the use of the property. §1.367(d)-1T(c)(1). For this purpose, the
appropriate charge is determined under section 482 and the regulations
thereunder. Id.
Section 1.367(d)-1T(d)(1) provides rules that apply when a
U.S. person transfers intangible property that is subject to section 367(d) to
a transferee foreign corporation in an exchange described in section 351 or 361
and, within the useful life of the intangible property, that U.S. transferor
subsequently disposes of the stock of the transferee foreign corporation to a person
that is not a related person (within the meaning of §1.367(d)-1T(h)). The rules
generally provide that the U.S. transferor is treated as having simultaneously
sold the intangible property to the unrelated person acquiring the stock of the
transferee foreign corporation. §1.367(d)-1T(d)(1). The U.S. transferor
recognizes gain (but not loss) in an amount equal to the difference between the
fair market value of the transferred intangible property on the date of the
subsequent disposition and the U.S. transferor's former adjusted basis in that
property. Id.
Section 1.367(d)-1T(e)(1) provides rules that apply when a
U.S. person transfers intangible property that is subject to section 367(d) to
a transferee foreign corporation in an exchange described in section 351 or 361
and, within the useful life of the transferred intangible property, the U.S.
transferor subsequently transfers the stock of the transferee foreign
corporation to U.S. persons that are related to the transferor (within the
meaning of §1.367(d)-1T(h)). These rules generally provide, in part, that the
related U.S. persons, over the useful life of the property, annually include in
gross income a proportionate share of the contingent annual payments that would
otherwise be deemed to be received by the U.S. transferor under
§1.367(d)-1T(c). §1.367(d)-1T(e)(1).
Section 1.367(d)-1T(g)(1)(i) provides that if a U.S. person
is required to recognize income under certain provisions of the regulations
under section 367(d), including §1.367(d)-1T(c), and the amount deemed to be
received is not actually paid by the transferee foreign corporation, then the
U.S. person may establish an account receivable from the transferee foreign
corporation equal to the amount deemed paid that was not actually paid. Such
account receivable may be established and paid without further U.S. income tax
consequences to the U.S. transferor or the transferee foreign corporation.
§1.367(d)-1T(g)(1)(i).
3. Transactions At Issue
The IRS and the Treasury Department are aware that certain
taxpayers are engaging in transactions intended to repatriate earnings from
foreign corporations without the appropriate recognition of income. In one such
transaction, USP, a domestic corporation, owns 100 percent of the stock of UST,
a domestic corporation. USP's basis in its UST stock equals its value of $100x.
UST's sole asset is a patent with a tax basis of zero. UST has no liabilities.
USP also owns 100 percent of the stock of TFC, a foreign corporation. UST
transfers the patent to TFC in exchange for $100x of cash and, in connection
with the transfer, UST distributes the $100x of cash to USP and liquidates.
The taxpayer takes the position that neither USP nor UST
recognizes gain or dividend income on the receipt of the $100x of cash. USP
then applies the section 367(d) regulations to include amounts in gross income
under §1.367(d)-1T(c)(1) in subsequent years. USP also applies the 367(d)
regulations to establish a receivable from TFC in the amount of USP's aggregate
income inclusion. USP takes the position that TFC's repayment of the receivable
does not give rise to income (notwithstanding the prior receipt of $100x in
connection with the reorganization). Accordingly, under these positions, the
transactions have resulted in a repatriation in excess of $100x ($100x at the
time of the reorganization and then through repayment of the receivable in the
amount of USP's income inclusions over time) while only recognizing income in
the amount of the inclusions over time.
The IRS and the Treasury Department understand that other
transactions may be structured to have the same or similar effect, including,
for example, transactions that involve TFC's assumption of liabilities of UST.
Similar results may also be achieved in cases in which a controlled foreign
corporation uses deferred earnings to fund an acquisition of all or part of the
stock of a domestic corporation from an unrelated party for cash, followed by
an outbound asset reorganization of the domestic corporation to avoid an income
inclusion under section 956. The IRS and the Treasury Department believe that
these transactions raise significant policy concerns, and accordingly, intend
to revise the regulations under section 367(d) in the manner described in this
notice.
4. Regulations To Be Issued
.01. In General
.01. The IRS and the Treasury Department will issue
regulations addressing the transfer by a domestic corporation (U.S. transferor)
of section 367(d) property in a section 361 exchange to a transferee foreign
corporation (outbound section 367(d) transfer) that incorporate the rules
described in this notice. The regulations will ensure that, with respect to all
outbound section 367(d) transfers, the total income to be taken into account
under section 367(d) is either included in income by the U.S. transferor in the
year of the reorganization or, where appropriate, over time by one or more
qualified successors. Any income taken into account under this notice must be
commensurate with the income attributable to the section 367(d) property
transferred in the outbound section 367(d) transfer. Section 367(d)(2)(A)
(flush language). Except as provided below, the rules described in this notice,
rather than ,,§1.367(d)-1T(c), (d), (e), and (g), will govern outbound section
367(d) transfers. For purposes of this notice, references to “stock received”
include stock deemed received in a transaction.
.02. U.S. Transferor Takes into Account Income under Section
367(d)(2)(A)(ii)(I)
.02. In an outbound section 367(d) transfer, the U.S.
transferor will take into account income under section 367(d)(2)(A)(ii)(I) with
respect to each qualified successor, if any, by treating as a prepayment of
such income the product of the section 367(d) percentage multiplied by the sum
of: (i) the money and fair market value of other property (within the meaning
of section 356) received by the qualified successor in exchange for, or with
respect to, stock of the U.S. transferor, reduced by the portion of any U.S.
transferor distributions received by the qualified successor; and (ii) the
product of the qualified successor's ownership interest percentage multiplied
by the amount of non-qualifying liabilities that are either assumed (within the
meaning of section 357(d)) by the transferee foreign corporation in the
reorganization or satisfied by the U.S. transferor with money or other property
(within the meaning of section 361) provided by the transferee foreign
corporation. As a prepayment of such income, the amount is included in income
by the U.S. transferor in the year of the outbound section 367(d) transfer,
regardless of the productivity of the transferred section 367(d) property in
the year of the transfer or in subsequent years.
.03. U.S. Transferor Takes into Account Income under Section
367(d)(2)(A)(ii)(II)
.03. In an outbound section 367(d) transfer, the U.S.
transferor will also take into account income under section
367(d)(2)(A)(ii)(II) in an amount equal to the product of: (i) the sum of the
ownership interest percentages of all non-qualified successors, if any,
multiplied by (ii) the amount of gain realized on all of the section 367(d)
property transferred in the section 361 exchange.
.04. Treatment of Qualified Successors
.04. Consistent with the principles of
§1.367(d)-1T(e)(1)(ii) and (iii), except as provided in this paragraph 4.04,
each qualified successor will take into account the income attributable to a
proportionate share of the contingent annual payments that the U.S. transferor
would have been treated as receiving under section 367(d)(2)(A)(ii)(I) and
§1.367(d)-1T(c) had the U.S. transferor remained in existence and retained the
qualified stock (or, in the case of certain distributions under section 355,
had the U.S. transferor retained the qualified stock) received in the
reorganization (assuming for this purpose that the transfer continues to
qualify as an exchange described in section 361), and had the U.S. transferor
not recognized any income under section 4 of this notice. A qualified
successor's proportionate share of such contingent annual payments is the
product of the contingent annual payments multiplied by the qualified
successor's ownership interest percentage. The income attributable to a
qualified successor's proportionate share of the contingent annual payments is
excluded from gross income to the extent of the income included by the U.S.
transferor under section 4.02 of this notice that is attributable to the
qualified successor (credit amount).
A qualified successor may, in accordance with
§1.367(d)-1T(g)(1), establish an account receivable for any contingent annual
payments included in gross income by the qualified successor under this notice.
Qualified successors are subject to the rules of
§1.367(d)-1T, as modified by this paragraph 4.04. Thus, for example, if a
qualified successor subsequently transfers qualified stock received in the
reorganization to a U.S. person that is related (within the meaning of
§1.367(d)-1T(h)) to the qualified successor, §1.367(d)-1T(e) will apply to such
transfer. In this case, a proportionate amount of any remaining credit amount
attributable to the qualified successor can be taken into account by such
related U.S. person in the same manner as it could have been taken into account
by the qualified successor. Alternatively, for example, if a qualified
successor subsequently transfers qualified stock to a U.S. person that is
unrelated to the qualified successor or to a person that is not a U.S. person,
§1.367(d)-1T(d) will apply to such transfer. In this case, a proportionate
amount of any remaining credit amount attributable to the qualified successor
can be taken into account to reduce the amount of gain recognized under
§1.367(d)-1T(d).
.05. Definitions
.05. The following definitions apply for purposes of this
notice:
(1) Non-qualifying liabilities–(i) In general. Except as
provided in paragraph (1)(ii) of this section 5, non-qualifying liabilities
include all liabilities of the U.S. transferor other than a liability:
(A) That was incurred in the ordinary course of the U.S.
transferor's active trade or business (within the meaning of section
367(a)(3)), if any,
(B) That did not arise in connection with the reorganization,
and
(C) That is owed to an unrelated person. For this purpose,
an unrelated person is any person that does not have a relationship to the U.S.
transferor described in section 267(b) or 707(b) immediately before the
reorganization.
(ii) Increase for certain distributions. The amount of
non-qualifying liabilities shall be increased (but not in excess of the U.S.
transferor's total liabilities) by an amount equal to the sum of the U.S.
transferor distributions and any other distributions made by the U.S.
transferor (or any predecessor) with respect to its stock, including
distributions in redemption of its stock, during the two-year period
immediately preceding the reorganization.
(2) Ownership interest percentage is the ratio of the value
of the stock in the U.S. transferor owned by a shareholder to the value of all
of the outstanding stock of the U.S. transferor. Except as provided in this
paragraph, the ownership interest percentage of a shareholder is determined
immediately before the reorganization. For purposes of determining the
ownership interest percentage with respect to each shareholder, however, the
numerator of the fraction is first reduced (but not below zero) by U.S.
transferor distributions made to such shareholder, and the denominator is
reduced by the total amount of U.S transferor distributions.
(3) Property is defined in §1.367(a)-1T(d)(4). Section
367(d) property is any property described in section 936(h)(3)(B). Section 367(a) property is any property other
than section 367(d) property.
(4) Qualified stock means stock in the transferee foreign
corporation, including stock received in the transferee foreign corporation
under section 354, 355, or 356 in exchange for, or with respect to, stock of
the U.S. transferor.
(5) Qualified successor means a shareholder of the U.S.
transferor that is a domestic corporation, other than a regulated investment
company (as defined in section 851(a)), a real estate investment trust (as
defined in section 856(a)), or an S corporation (as defined in section
1361(a)), provided such shareholder receives qualified stock in the
reorganization or immediately after the reorganization owns qualified stock
other than qualified stock received in the reorganization. A non-qualified
successor means a shareholder of the U.S. transferor other than a qualified
successor.
(6) Section 367(d)
percentage is the ratio of the aggregate value of the section 367(d) property
transferred by the U.S. transferor to the transferee foreign corporation in the
section 361 exchange to the aggregate value of all property (in other words,
all section 367(a) property and section 367(d) property) transferred by the
U.S. transferor to the transferee foreign corporation in the section 361
exchange.
(7) U.S. transferor distributions are any distributions by
the U.S. transferor of money or other property (within the meaning of section
356) to shareholders pursuant to the plan of reorganization, but only to the
extent such money or other property is not provided by the transferee foreign
corporation in exchange for property of the U.S. transferor acquired in the
section 361 exchange.
.06. Other Rules
.06. Income taken into account under section 4.02 or 4.03 of
this notice is treated as ordinary income and is treated, for purposes of
applying section 904(d), in the same manner as if such amount were a royalty.
For purposes of this notice, stock of the U.S. transferor
held by a partnership (domestic or foreign) is treated as held proportionately
by its partners. Thus, for example, if a partnership is a shareholder of the
U.S. transferor and receives qualified stock in the reorganization, the
partners in the partnership are treated as receiving the qualified stock for
purposes of this notice, including for purposes of identifying a qualified
successor.
.07. Example
.07. The following example illustrates the rules and
guidance provided in this notice.
Example. (i) Facts. USP, a domestic corporation (that is not
a regulated investment company, a real estate investment trust, or an S
corporation), owns 100% of the outstanding stock of UST, a domestic
corporation, and 100% of the outstanding stock of TFC, a foreign corporation.
UST owns a patent with a tax basis of $0x and a value of $60x. UST also owns
Asset A, which is section 367(a) property, with a value of $40x. UST has no
liabilities. In a reorganization described in section 368(a)(1)(D), UST transfers
the patent and Asset A to TFC in exchange for $70x of TFC stock and $30x of
cash. In connection with the transfer, UST distributes the $70x of TFC stock
and $30x of cash to USP and liquidates. UST's transfer of the patent and Asset
A to TFC qualifies as a section 361 exchange. USP is treated as exchanging its
UST stock for $70x of TFC stock and $30x of cash pursuant to section 356.
(ii) Analysis. UST's transfer of the patent to TFC in the
section 361 exchange is an outbound section 367(d) transfer subject to section
367(d) and the regulations thereunder, as modified by this notice. Under
section 4.02 of this notice, the income that UST will take into account as a
prepayment is $18x, the product of the section 367(d) percentage (60%)
multiplied by the amount of cash ($30x) received by USP, a qualified successor.
UST must include this amount in income regardless of whether income is being
generated by the patent at the time of the outbound section 367(d) transfer.
USP is a qualified successor because USP (a domestic corporation) is a
shareholder of UST that receives qualified stock (newly issued stock of TFC)
under section 356 in exchange for stock of UST. USP is also a qualified
successor because USP (a domestic corporation) is a shareholder of UST that owns
qualified stock (existing stock in TFC) other than the qualified stock received
in the reorganization. Under section 4.05 of this notice, the section 367(d)
percentage of 60% is computed as the $60x aggregate value of the section 367(d)
property transferred in the section 361 exchange, divided by $100x aggregate
value of all property transferred in the section 361 exchange. USP, as a
qualified successor to UST, will take into account the income attributable to
the contingent annual payments that UST would have received under
§1.367(d)-1T(c) over the remaining useful life of the intangible property,
determined as if UST had remained in existence and not taken into account the
$18x of income. Under §1.367(d)-1T(c)(1), such contingent annual payments must
be determined in accordance with section 482 and the regulations thereunder,
and therefore must be consistent with the arm's-length standard. The first $18x
of contingent annual payments (if otherwise taken into account by USP under
section 4.04 of this notice) are excluded from USP's gross income under section
4.04 of this notice, and any additional contingent annual payments are included
in USP's gross income. In accordance with §1.367(d)-1T(g)(1), USP may establish
an account receivable with respect to any contingent annual payments included
in gross income by USP under this notice. For rules applicable to the transfer
of Asset A, see section 367(a) and any regulations thereunder.
5. Effective Date
The regulations described in this notice will apply to outbound
section 367(d) transfers occurring on or after July 13, 2012. No inference is
intended as to the treatment of transactions described in this notice under
current law, and the IRS may challenge such transactions under applicable Code
provisions or judicial doctrines.
6. Comments
The IRS and the Treasury Department request comments on the
regulations to be issued under this notice. Specifically, comments are
requested regarding whether certain domestic corporations that are related to
the U.S. transferor but not subject to section 4.04 of this notice (relating to
qualifying successors) should nevertheless be subject to section 4.04. For
example, the IRS and the Treasury Department are considering whether the rules
described in section 4.04 of this notice should apply to transactions in which
a domestic corporation is not a qualified successor because it indirectly owns
the U.S. transferor through a controlled foreign corporation. In addition,
comments are requested as to the proper recovery of basis in the section 367(d)
property transferred.
7. Drafting Information
The principal author of this notice is Robert B. Williams,
Jr. of the Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in its
development. For further information regarding this notice contact Robert B.
Williams, Jr. at (202) 622-3860 (not a toll-free call).
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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