IRS Finalizes Regs on F Reorgs

istock-tax-blog-cliffBy: Amanda Wilson

The IRS has finalized its regulations  on Section 368(a)(1)(F) reorganizations.  An F reorganization is characterized as a mere change in the identity, form, or place of organization of one corporation.

The final regulations provide clarity as to what other changes can occur before, during or after the mere change in identity, form, or place of organization without jeopardizing the tax-free qualification of the reorganization.  The regulations also address the treatment of an outbound F reorganization.

The regulations apply to transactions occurring on or after September 21, 2015.

Proposed Regs Shutdown Exception for Offshore Transfers of Foreign Goodwill

istock-tax-blog-cliffBy:  Amanda Wilson

Yesterday, the IRS and Treasury released proposed regulations governing the treatment of certain transfers of foreign goodwill and going concern value.

When a U.S. person contributes property to a foreign corporation, Section 367 applies to deny the non-recognition treatment  that may otherwise apply.  Section 367(a) generally requires immediate gain recognition on the transfer.  In the case of intangibles, though, Section 367(d)  applies to treat the transfer as a sale with payments contingent upon the productivity, use, or disposition of the intangible.  The regulations, though, provide a special exception to these rules for transfers of foreign goodwill or going concern value .

The IRS and Treasury have learned that some taxpayers try to take advantage of this regulatory exception by allocating an inappropriately large amount of the value of the property transferred to foreign goodwill and going concern value.   As a result, the proposed regulation eliminates the foreign goodwill exception.  It also limits the scope of property that qualifies for the active trade or business exception of Section 367(a) to certain tangible property and financial assets.

The result is that, if the proposed regulations are finalized, outbound transfers of foreign goodwill or going concern value will result in the U.S. transferor being subject to either current gain recognition under Section 367(a) or the special tax treatment of Section 367(d).

It is important to note that the IRS and Treasury intend for the effective date of the regulations, if finalized, to be September 16, 2015.


Further Crackdown on Offshore Corporations

New law ahead road signBy:  Amanda Wilson

In their continued effort to crackdown on offshore activity, the IRS and Treasury released proposed regulations yesterday that target debt held by foreign partnerships.  These regulations provide that debt held by foreign partnerships will be treated as an obligation of the partnership’s U.S. partners for purposes of the controlled foreign corporation rules (Section 956).  The allocation of debt to the partners would be based on the partners’ interests in the partnership’s profits.

What is the reason for this change?  If a controlled foreign corporation loans money to its U.S. parent or shareholder, the loan may be treated as a deemed dividend under Section 956, resulting in taxation of the earnings parked offshore.  To avoid this deemed dividend treatment, taxpayers are inserting a foreign partnership between the controlled foreign corporation and the U.S. parent or shareholder, and having the controlled foreign corporation loan the money to the foreign partnership.   The proposed regulations are designed to shut down this loophole.

An exception to this new rule would be available in cases where neither the lending controlled foreign corporation or any person related to the lending controlled foreign corporation is a partner in the partnership.


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