Final regulations issued on coordination rule for outbound asset reorganizations under Section 367

The Treasury Department and the IRS recently released T.D. 9760. These final regulations generally adopt temporary regulations (T.D. 9615) and proposed regulations (REG-132702-10) issued in 2013. The final regulations do not include substantive changes and do not change the tax consequences under the temporary and proposed rules, which were set to expire on March 18, 2016.

The final regulations were issued under Sections 367, 1248 and 6038B and primarily affect domestic corporations that transfer property to foreign corporations in certain outbound nonrecognition exchanges.  The regulations finalize the elimination of one of two exceptions to the coordination rule between asset transfers and indirect stock transfers for certain outbound asset reorganizations. Among other things, the IRS and Treasury were concerned that asset reorganizations subject to this coordination rule may be used to facilitate corporate inversion transactions, which generally involve a U.S.-based multinational’s restructuring so that the U.S. parent is replaced by a foreign parent, to avoid U.S. taxes.

The exception eliminated is commonly referred to as the “Section 367(a)(5) exception.” This exception, in certain circumstances, allowed for nonrecognition treatment in an outbound asset reorganization to the extent that basis adjustments could be made to the stock received in the reorganization and provided certain conditions were satisfied. In T.D. 9615, the IRS noted the elimination of the Section 367(a)(5) exception was in response to certain transactions involving outbound asset reorganizations and repatriation of a foreign corporation’s earnings and profits without the recognition of gain or a dividend inclusion.

The final regulations also adopt modifications to the exception to the coordination rule for Section 351 exchanges. This change was made to harmonize the exception to the coordination rule for Section 351 exchanges with the remaining asset reorganization exception. In general, the coordination rule provides that if in connection with an indirect stock transfer, a U.S. person transfers assets to a foreign corporation in an exchange described in Sections 351 or 361, Section 367 applies first to the asset transfer and then to the indirect stock transfer. Finally, the regulations adopt modifications to the procedures for obtaining relief for failures to satisfy certain reporting requirements, and also finalize certain changes with respect to transfers of stock or securities by a domestic corporation to a foreign corporation in a Section 361 exchange.
The final regulations are generally effective on March 22, 2016; however, the regulations have varying applicability dates.

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