IRS provides guidance on certain inbound transactions

The IRS issued Notice 2024-16 on Dec. 28, 2023 announcing its intent to propose regulations addressing the treatment of basis provided under Section 961(c) in certain covered inbound transactions, including liquidations described in Section 332 and asset reorganizations described in Section 368(a)(1).

In a transaction in which a domestic corporation acquires all of the stock of a CFC from another CFC in a liquidation described in Section 332 or an asset reorganization described in Section 368(a)(1), the domestic acquiring corporation generally obtains a basis of the stock of the acquired CFC that is determined by reference to the basis of the stock in the hands of the transferor CFC pursuant to Section 334(b) or 362(b), as applicable.

The regulations announced in the notice will provide that, in the case of an inbound transaction, a domestic acquiring corporation’s adjusted basis of the stock of an acquired CFC generally will include the transferor CFC’s Section 961(c) basis (i.e., the imported basis will include the traditional stock basis, and generally, also an adjustment for any basis created under Section 961(c)). A corporate transferor’s Section 961(c) basis is generated from gross income inclusions by the lower-tier CFCs under Sections 951(a) or 951A.

Taxpayers may rely on the notice for transactions completed on or before the date that the proposed regulations are published in the Federal Register, provided that the taxpayer and its related parties follow the rules in their entirety and in a consistent manner.

The notice also establishes de minimis rules, provides scope limitations, and includes transition rules for taxpayers that maintained Section 961(c) basis in a currency that is not the U.S. dollar.