Proposed Rule2023-08843
Section 367(d) Rules for Certain Repatriations of Intangible Property
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Published
May 3, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that, in certain cases, would terminate the continued application of certain tax provisions arising from a previous transfer of intangible property to a foreign corporation when the intangible property is repatriated to certain United States persons. The proposed regulations would affect certain United States persons that previously transferred intangible property to a foreign corporation.
Full Text
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<title>Federal Register, Volume 88 Issue 85 (Wednesday, May 3, 2023)</title>
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[Federal Register Volume 88, Number 85 (Wednesday, May 3, 2023)]
[Proposed Rules]
[Pages 27819-27832]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-08843]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-124064-19]
RIN 1545-BP55
Section 367(d) Rules for Certain Repatriations of Intangible
Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that, in certain
cases, would terminate the continued application of certain tax
provisions arising from a previous transfer of intangible property to a
foreign corporation when the intangible property is repatriated to
certain United States persons. The proposed regulations would affect
certain United States persons that previously transferred intangible
property to a foreign corporation.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 3, 2023. Requests for a public hearing must be
submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and
REG-124064-19) by following the online instructions for submitting
comments. Once submitted to the Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The Department of the Treasury (the
``Treasury Department'') and the IRS will publish for public
availability any comments submitted electronically or on paper to its
public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-124064-19), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
other than Sec. 1.904-4, Chadwick Rowland and L. Ulysses Chatman,
(202) 317-6937; concerning Sec. 1.904-4, Jeffrey L. Parry, (202) 317-
6936; concerning submissions of comments and requests for a public
hearing, Vivian Hayes at (202) 317-6901 (not toll-free numbers) or by
sending an email to <a href="/cdn-cgi/l/email-protection#166663747a7f757e7377647f787165567f646538717960"><span class="__cf_email__" data-cfemail="9eeeebfcf2f7fdf6fbffecf7f0f9eddef7ecedb0f9f1e8">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
I. Sections 367(d) and 6038B
A. Statute
Section 367(d) of the Internal Revenue Code (the ``Code'') provides
rules for outbound transfers of intangible property (as defined in
section 367(d)(4)) by a United States person (a ``U.S. person'') to a
foreign corporation.\1\ Section 367(d)(1) provides that, except as
provided in regulations, if a U.S. person (a ``U.S. transferor'')
transfers any intangible property to a foreign corporation (the
``transferee foreign corporation'') in an exchange described in section
351 or 361, section 367(d) (and not section 367(a)) applies to the
transfer. Section 367(d)(2)(A) provides that a U.S. transferor that
transfers intangible property subject to section 367(d) is treated as
having sold the intangible property in exchange for payments that are
contingent upon the productivity, use, or disposition of the intangible
property.
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\1\ For purposes of these regulations, a U.S. person is defined
in Sec. 1.367(a)-1(d)(1), which defines a U.S. person, in part, by
reference to persons described in section 7701(a)(30). Section
7701(a)(30) defines a U.S. person as a citizen or resident of the
United States, a domestic partnership, a domestic corporation, and
certain estates and trusts.
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Specifically, the U.S. transferor is treated as receiving amounts
that reasonably reflect the amounts that would have been received
annually in the form of such payments over the useful life of the
intangible property (an ``annual inclusion''), or, in the case of a
[[Page 27820]]
direct or indirect disposition of the intangible property following the
transfer, at the time of the disposition (a ``lump-sum inclusion,'' and
each inclusion, a ``section 367(d) inclusion''). See section
367(d)(2)(A)(ii)(I) and (II). The amounts taken into account by the
U.S. transferor must be commensurate with the income attributable to
the transferred intangible property. See section 367(d)(2)(A) (flush
language). Section 367(d)(2)(B) provides that, for purposes of chapter
1 of subtitle A of the Code, the earnings and profits (``E&P'') of the
transferee foreign corporation are reduced by the amount required to be
included in the income of the U.S. transferor as a section 367(d)
inclusion.
Section 6038B(a)(1)(A) grants the Secretary regulatory authority to
require information reporting related to certain outbound transfers of
property by a U.S. person to a foreign corporation, including rules
related to outbound transfers of intangible property. Section 6038B(c)
generally provides rules for failures to furnish the required
information.
B. Legislative History
Congress enacted section 367(d) in substantially its present form
to address ``specific and unique problems'' that exist with respect to
outbound transfers of intangible property. See S. Rep. No 169, 98th
Cong., 2d Sess., at 360 (1984); H.R. Rept. No. 432, 98th Cong., 2d
Sess., at 1315 (1984). Congress generally identified the cause of such
problems as follows:
[T]ransferor U.S. companies hope to reduce their U.S. taxable
income by deducting substantial research and experimentation
expenses associated with the development of the transferred
intangible and, by transferring the intangible to a foreign
corporation at the point of profitability, to ensure deferral of
U.S. tax on the profits generated by the intangible.
Id.
Congress also explained that, after the initial outbound transfer
of intangible property, these problems could arise by reason of certain
subsequent direct or indirect dispositions of the intangible property.
See S. Rept. No 169, 98th Cong., 2d Sess., at 368 (1984) (``[G]ain on a
disposition of stock in a [transferee foreign corporation] will be
treated as being attributable, in part, to the transferred intangible .
. . ; similarly, upon a disposition of the intangible by the
[transferee foreign corporation], the U.S. transferor will be treated
as receiving a payment [with respect to that intangible]'').
C. Regulations
1. In General
Temporary regulations were published under sections 367(d) and
6038B(a)(1)(A) on May 16, 1986 (51 FR 17936). Proposed regulations were
also published under these sections on September 16, 2015 (80 FR
55568), and the related final regulations were published on December
16, 2016 (81 FR 91012) (these final regulations and the temporary
regulations, together, the ``section 367(d) regulations'').
Consistent with section 367(d) and its legislative history, the
section 367(d) regulations provide rules for determining a U.S.
transferor's section 367(d) inclusion and a transferee foreign
corporation's required adjustments for its deemed payment to the U.S.
transferor. In general, the U.S. transferor takes into account an
annual inclusion over the useful life of the intangible property, as
determined in accordance with the provisions of section 482 and
regulations thereunder. See Sec. 1.367(d)-1T(c)(1). For this purpose,
the useful life is the entire period during which exploitation of the
intangible property is reasonably anticipated to affect the
determination of taxable income, as of the time of transfer. See Sec.
1.367(d)-1(c)(3)(i).
Additionally, for purposes of chapter 1 of subtitle A of the Code,
the transferee foreign corporation reduces its E&P by the amount of the
deemed payment to the U.S. transferor, and, for purposes of subpart F
of part III of subchapter N of chapter 1 (``subpart F''), the
transferee foreign corporation may treat the deemed payment as, in
relevant part, an expense properly allocated and apportioned to gross
income subject to subpart F in accordance with the provisions of
Sec. Sec. 1.954-1(c) and 1.861-8. See Sec. 1.367(d)-1T(c)(2); see
also Sec. 1.951A-2(c)(2)(ii) (providing similar treatment for purposes
of determining tested income or tested loss of a controlled foreign
corporation (as defined in section 957, a ``CFC'')).
2. Subsequent Transfer Rules
If the U.S. transferor subsequently transfers the stock of the
transferee foreign corporation it received in exchange for the
intangible property, or if the transferee foreign corporation
subsequently transfers the intangible property it received in exchange
for its stock, the section 367(d) regulations provide different rules
based on whether the transferee in the subsequent transfer is a U.S.
person or a foreign person and whether the transferee is a related
person or an unrelated person as to the U.S. transferor. See Sec.
1.367(d)-1T(d), (e), and (f); see also Notice 2012-39, 2012-31 I.R.B.
95 (describing regulations that would apply in lieu of Sec. 1.367(d)-
1T(c), (d), (e), and (g) with respect to certain outbound transfers of
intangible property by a domestic corporation to a foreign corporation
in an exchange described in section 361(a) or (b)). These subsequent
transfer rules treat certain subsequent transfers of the stock of the
transferee foreign corporation or the intangible property as a
disposition of the intangible property (within the meaning of section
367(d)(2)(A)(ii)(II)) that can accelerate a section 367(d) inclusion,
and corresponding adjustments, by reason of the deemed payment. See,
for example, Sec. 1.367(d)-1T(d).
If the U.S. transferor subsequently transfers stock of the
transferee foreign corporation to a related U.S. person (a ``successor
U.S. transferor''), the transfer is not treated as a disposition of the
intangible property, and the successor U.S. transferor is treated as
receiving a right to receive a proportionate share (determined under
Sec. 1.367(d)-1T(e)(4)) of the annual inclusion that would otherwise
be taken into account by the U.S. transferor under Sec. 1.367(d)-
1T(c). Therefore, the successor U.S. transferor is required to take
into account that proportionate share of the annual section 367(d)
inclusion over the remaining useful life of the intangible property,
and the transferee foreign corporation takes into account any
adjustments from the successor U.S. transferor's annual section 367(d)
inclusion. See Sec. 1.367(d)-1T(e)(1) and (2). If the U.S. transferor
transfers a portion of the stock of the transferee foreign corporation
to one or more successor U.S. transferors and retains a portion of the
stock of the transferee foreign corporation, the U.S. transferor
continues to take into account the portion of the annual section 367(d)
inclusion that is not taken into account by a successor U.S.
transferor.\2\ See Sec. 1.367(d)-1T(c)(1).
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\2\ The section 367(d) regulations apply separately as to each
U.S. person treated as a U.S. transferor. Any reference to a ``U.S.
transferor'' in the remainder of this Preamble includes a reference
to a ``successor U.S. transferor'' unless otherwise noted.
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Alternatively, if a U.S. transferor subsequently transfers stock of
the transferee foreign corporation to an unrelated person (U.S. or
foreign), the transfer is treated as an indirect disposition of the
transferred intangible property that triggers a lump-sum section 367(d)
inclusion. As a result, the U.S. transferor recognizes gain immediately
(determined based on the fair market value of the intangible
[[Page 27821]]
property at the time of the indirect disposition and the U.S.
transferor's adjusted basis in the intangible property at the time of
the initial section 367(d) transfer), as if the U.S. transferor had
sold the intangible property to the unrelated person, and the
transferee foreign corporation makes corresponding adjustments. See
Sec. 1.367(d)-1T(d); see also Sec. 1.367(d)-1T(e)(1)(iii) and (e)(2)
(providing pro rata rules for cases in which there is a subsequent
transfer of stock of the transferee foreign corporation to both an
unrelated person(s) and a successor U.S. transferor(s)).
If the transferee foreign corporation subsequently transfers the
intangible property to a related person, notwithstanding that such
subsequent transfer is a direct disposition of the intangible property,
the section 367(d) regulations do not trigger a lump-sum inclusion but
rather provide that ``the requirement that the U.S. transferor
recognize gain under [Sec. 1.367(d)-1T(c)(1) or (e)(1)] shall not be
affected'' by such transfer. See Sec. 1.367(d)-1T(f)(3). The
regulation does not distinguish between a related U.S. or foreign
person and provides further that ``for purposes of any required
adjustments, and of any accounts receivable created under [Sec.
1.367(d)-1T(g)] the related person that receives the intangible
property shall be treated as the transferee foreign corporation.'' See
Sec. 1.367(d)-1T(f)(3).
Conversely, if the transferee foreign corporation subsequently
transfers the intangible property to an unrelated person (U.S. or
foreign), the U.S. transferor recognizes gain immediately (in the form
of a lump-sum inclusion determined using the U.S. transferor's former
adjusted basis in the intangible property immediately before the
transfer to the transferee foreign corporation and a partial annual
inclusion), and the transferee foreign corporation makes corresponding
adjustments. See Sec. 1.367(d)-1T(f)(1) and (2).
As described in the preceding paragraphs of this part I.C.2 of the
Background, the consequences of a direct or indirect transfer of the
intangible property following an initial outbound transfer of that
property depend, in relevant part, on whether the transferee in the
subsequent transfer is a related or unrelated person. In determining
relatedness, the section 367(d) regulations lower certain thresholds
that normally apply in determining whether persons are related, to
preserve the application of section 367(d) for cases in which a U.S.
transferor retains a sufficient nexus to the intangible property after
the subsequent transfer. See Sec. 1.367(d)-1T(h)(2). Thus, the section
367(d) regulations generally preserve the application of the annual
inclusion stream upon a subsequent transfer, but if the transfer
sufficiently severs the U.S. transferor's nexus to the intangible
property, the transfer is treated as a direct or indirect disposition
of the intangible property, as applicable, and the section 367(d)
regulations provide that the U.S. transferor has a lump-sum inclusion
and a partial annual inclusion.
II. Application of Section 367(d) to Repatriations of Intangible
Property
The Treasury Department and the IRS are aware that some taxpayers
are evaluating whether to repatriate to the United States intangible
property that was previously transferred to a foreign corporation in a
transaction subject to section 367(d).
Because, in relevant part, the section 367(d) regulations do not
distinguish between subsequent transfers of intangible property made to
a related U.S. or foreign person, as described in part I.C.2 of this
Background, there is a concern that, in certain cases, the section
367(d) regulations can inappropriately require the U.S. transferor to
continue recognizing an annual section 367(d) inclusion even if the
subsequent transfer is to a related U.S. person that will recognize the
income derived from the intangible property. Specifically, the section
367(d) regulations do not terminate the required annual section 367(d)
inclusion even if the intangible property is transferred to a related
U.S. person that is subject to U.S. taxation on income earned from the
intangible property. As a result, if the section 367(d) inclusion
stream continues, the income earned from the intangible property would
be subject to excessive U.S. taxation. Because the continued
application of section 367(d) in these situations could result in
excessive U.S. taxation and may disincentivize certain repatriations of
intangible property, the Treasury Department and the IRS are proposing,
in certain cases, to terminate the application of section 367(d) if the
intangible property is repatriated to certain U.S. persons that are
subject to U.S. taxation with respect to the income derived from the
intangible property. The term ``repatriation'' is, unless otherwise
noted, used in this Preamble to generally denote a subsequent transfer
of the intangible property to the U.S. transferor or a U.S. person
related to the U.S. transferor.
Where the U.S. transferor is a member of a consolidated group, and
the intangible property is repatriated to another member of the same
consolidated group (``transferee member''), some taxpayers have asked
whether the U.S. transferor's annual inclusions could be redetermined
to be excluded from gross income under Sec. 1.1502-13(c)(6)(ii)(A)
(the ``Automatic Relief Rule''). For that to occur, the transferee
member's corresponding item must be a deduction or loss that is
``permanently and explicitly disallowed'' under another provision of
the Code or regulations. See Sec. 1.1502-13(c)(6)(ii)(A). However, the
U.S. transferor's annual inclusions may not be excluded under the
Automatic Relief Rule, because Sec. 1.367(d)-1T(c)(2) does not
explicitly disallow the transferee member's deduction for its expense
tied to its deemed payment. Rather, in appropriate factual situations,
the IRS has ruled that the U.S. transferor's annual inclusions may be
excluded from income under the Commissioner's discretionary rule of
Sec. 1.1502-13(c)(6)(ii)(D).
To address repatriations of intangible property more generally, and
not just those where the related U.S. person is a member of the same
consolidated group as the U.S. transferor (and to avoid the need to
obtain a ruling in such a case), these proposed regulations provide
rules that more broadly apply section 367(d) to the repatriation of
intangible property, including the circumstances in which the
application of section 367(d) is terminated (these rules, collectively,
the ``section 367(d) repatriation rules'').
III. Section 904(d) Foreign Branch Income
Section 904 provides for the application of separate foreign tax
credit limitations to certain categories of income under section
904(d). One of those categories is the separate category for foreign
branch income under section 904(d)(1)(B). Section 1.904-4(f)(1)(i)
provides that foreign branch category income means the gross income of
a United States person (as defined in section 7701(a)(30), other than a
pass-through entity) that is attributable to foreign branches (as
defined in Sec. 1.904-4(f)(3)(vii)) held directly or indirectly
through disregarded entities by the United States person.
In general, Sec. 1.904-4(f)(2)(vi)(A) adjusts the attribution of
gross income when disregarded payments are made between a foreign
branch and a foreign branch owner, or between foreign branches.
Disregarded remittances or contributions, however, do not result in the
reattribution of gross income. Accordingly, when a disregarded
transaction with a foreign branch may
[[Page 27822]]
be structured as either a remittance or contribution, on the one hand,
or as a sale, exchange, or license, on the other hand, the amount of
gross income attributed to a foreign branch could be manipulated. This
concern is heightened when the property in question is highly mobile
and highly valuable, as is generally true of intangible property (and
less frequently true of tangible property).
To address these concerns Sec. 1.904-4(f)(2)(vi)(D) provides that
the amount of gross income attributable to a foreign branch (and the
amount of gross income attributable to its foreign branch owner) that
is not passive category income must be adjusted to reflect all
transactions that are disregarded for U.S. tax purposes in which
property described in section 367(d)(4) is transferred to or from a
foreign branch or between foreign branches, whether or not a
disregarded payment is made in connection with the transfer. In
determining the amount of gross income that is attributable to a
foreign branch that must be adjusted, the principles of sections 367(d)
and 482 apply. For example, if a foreign branch owner transfers
property described in section 367(d)(4) to a foreign branch, the
principles of section 367(d) are applied by treating the foreign branch
as a separate foreign corporation to which the property is transferred
in exchange for stock of the corporation in a transaction described in
section 351. Similarly, if a foreign branch remits property described
in section 367(d)(4) to its foreign branch owner, the foreign branch is
treated as having sold the transferred property to the foreign branch
owner in exchange for annual payments contingent on the productivity or
use of the property, the amounts of which are determined under the
principles of sections 367(d) and 482.
Explanation of Provisions
I. Section 367(d) Repatriation Rules
A. In General
As described in part II of the Background of this Preamble, Sec.
1.367(d)-1T(f)(3) provides that a subsequent disposition of intangible
property by the transferee foreign corporation to a related person does
not affect a U.S. transferor's annual inclusion under Sec. 1.367(d)-
1T(c) or (e). This provision further provides that the related person
that receives the intangible property is treated as the new transferee
foreign corporation for purposes of any required adjustments and any
accounts receivable created under Sec. 1.367(d)-1T(g). Accordingly,
the section 367(d) regulations require the U.S. transferor to recognize
annual inclusions even if the income earned from the intangible
property is subject to current U.S. taxation in the hands of the U.S.
person holding the intangible property. In addition, the deemed
(substituted) transferee foreign corporation is not allowed a deduction
that could reduce taxable income, even though that deemed transferee
foreign corporation is the U.S. transferor or a related U.S. person.
Continuing to apply section 367(d) in such cases could give rise to
excessive U.S. taxation and disincentivize taxpayers from repatriating
that property. To address these concerns, proposed Sec. 1.367(d)-
1(f)(4) generally terminates the application of section 367(d) if the
transferee foreign corporation repatriates the intangible property to a
``qualified domestic person'' and certain reporting requirements are
satisfied. See proposed Sec. 1.367(d)-1(f)(4)(i). See part I.C of this
Explanation of Provisions for a discussion of the definition of a
qualified domestic person and part III of this Explanation of
Provisions for a discussion of the reporting requirements.
B. Consequences of Repatriating Intangible Property
1. In General
As noted in part I.A of this Explanation of Provisions, the
proposed regulations terminate the continued application of section
367(d) when a transferee foreign corporation repatriates intangible
property to a qualified domestic person and the U.S. transferor
provides the relevant information described in proposed Sec. 1.6038B-
1(d)(2) and, when those requirements are met, the proposed regulations
require the U.S. transferor to include in gross income a partial annual
inclusion attributable to the part of its taxable year that the
transferee foreign corporation held the intangible property, after
which the intangible property is no longer subject to section 367(d)
(thus, for example, the annual inclusion stream terminates). See
proposed Sec. 1.367(d)-1(f)(4)(i). The proposed regulations also
require the U.S. transferor to recognize gain (which amount may be zero
in certain cases) as a result of the repatriation. See Id.
Additionally, the proposed regulations provide a special rule
(discussed in part I.D of this Explanation of Provisions) to determine
the qualified domestic person's basis in the repatriated intangible
property. The transferee foreign corporation, on the other hand, makes
the required adjustments currently described in Sec. 1.367(d)-
1T(c)(2), with minor clarifications, for cases in which the section
367(d) repatriation rules apply (that is, the adjustments with respect
to the U.S. transferor's partial annual inclusion for the year of the
repatriation). See part I.E of this Explanation of Provisions for a
discussion of the modifications made with respect to the required
adjustments described in current Sec. 1.367(d)-1T(c)(2)(ii) and
(e)(2)(ii).
The manner in which the repatriation occurs will determine whether
the U.S. transferor must recognize gain in connection with the
repatriation transaction, with corresponding adjustments being made as
to the transferee foreign corporation. For example, the U.S. transferor
would not recognize gain in the case of a repatriation occurring by
reason of a nonrecognition transaction pursuant to which no gain or
loss is recognized as to the transferee foreign corporation. See part
I.B.2 of this Explanation of Provisions for a discussion of the rules
that apply based on the form of the transaction by which the intangible
property is repatriated. The proposed regulations, therefore, address
the tax consequences under section 367(d) as to the intangible
property, but do not otherwise alter the tax treatment of the
transaction by which the intangible property is repatriated.
2. Gain Recognition as to the U.S. Transferor
Consistent with section 367(d)(2)(A)(ii)(II), proposed Sec.
1.367(d)-1(f)(4)(i)(A) (the ``gain recognition rule'') requires the
U.S. transferor to recognize gain equal to the amount described in
proposed Sec. 1.367(d)-1(f)(4)(ii). The gain recognition rule, in
conjunction with the rules described in parts I.B.3 (Required
adjustments for certain gain recognized) and I.D (Qualified domestic
person's adjusted basis in repatriated intangible property) of this
Explanation of Provisions, generally ensures that a qualified domestic
person does not receive a tax-free increase to the adjusted basis in
the repatriated intangible property.
Thus, as noted in part I.B.1 of this Explanation of Provisions,
whether the U.S. transferor recognizes gain under the gain recognition
rule depends on the form of the repatriation transaction. Specifically,
the gain recognition rule focuses on whether the intangible property is
transferred basis property (as defined in section 7701(a)(43)) by
reason of the repatriation, without regard to the application of
section 367(d) and the section 367(d)
[[Page 27823]]
regulations. See proposed Sec. 1.367(d)-1(f)(4)(ii). The proposed
regulations incorporate the definition of transferred basis property
for this purpose, as opposed to other approaches for distinguishing the
form of the repatriation transaction, to ensure the appropriate
application of these proposed rules in all circumstances.\3\
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\3\ For example, if the form of the repatriation transaction
were distinguished by reference to whether the repatriation occurred
pursuant to a nonrecognition transaction (as described in section
7701(a)(45)), uncertainty could arise in certain cases, such as
repatriations that occur pursuant to exchanges involving boot (such
as cash). This uncertainty would impact the proposed rules for
determining a qualified domestic person's adjusted basis in the
repatriated intangible property, which relies on the form of the
repatriation as described in this paragraph.
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If the intangible property is transferred basis property as
described in the preceding paragraph, the amount of gain the U.S.
transferor will recognize pursuant to the gain recognition rule is the
amount of gain the transferee foreign corporation would recognize, if
any, upon the repatriation under general subchapter C rules if its
adjusted basis in the intangible property were equal to the U.S.
transferor's former adjusted basis in the property. See proposed Sec.
1.367(d)-1(f)(4)(ii)(A). This amount may be zero in the case of certain
repatriations, for example, a repatriation by a transferee foreign
corporation of intangible property to the U.S. transferor in a complete
liquidation described in sections 332 and 337, in which case the U.S.
transferor will not recognize any gain under the gain recognition rule.
Alternatively, if, for example, the repatriation occurs in an exchange
described in section 351(b) in which the transferee in the exchange is
a qualified domestic person (as defined in proposed Sec. 1.367(d)-
1(f)(4)(iii)), the amount of gain determined under this rule may be
greater than zero, even though the intangible property is transferred
basis property, because the amount of gain is determined by reference
to the gain the transferee foreign corporation would recognize upon the
transaction if the adjusted basis in the intangible property were equal
to the U.S. transferor's former adjusted basis in the intangible
property.
If the intangible property is not transferred basis property by
reason of the repatriation, the amount of gain a U.S. transferor will
recognize pursuant to the gain recognition rule is the excess, if any,
of the fair market value of the intangible property on the date of the
repatriation over the U.S. transferor's former adjusted basis in the
property. See proposed Sec. 1.367(d)-1(f)(2)(ii)(B). For example, if
the transferee foreign corporation repatriates the intangible property
to the U.S. transferor in a distribution described in section 311, the
intangible property is not transferred basis property, and therefore
the rule described in this paragraph applies to determine the amount of
gain recognized by the U.S. transferor under the gain recognition rule.
3. Required Adjustments Related to Certain Gain Recognized
Current Sec. 1.367(d)-1T(f)(2)(i) provides that a transferee
foreign corporation's E&P are reduced, in relevant part, by the amount
of gain recognized by a U.S. transferor under Sec. 1.367(d)-1T(f)(1).
Because a U.S. transferor recognizes gain in these cases in the form of
a lump-sum inclusion, the corresponding adjustment to the transferee
foreign corporation's E&P is generally intended to reduce the E&P that
arises for the transferee foreign corporation by reason of the
disposition (and, in so doing, the adjustment prevents potential
excessive E&P arising from that disposition). To achieve this goal,
Sec. 1.367(d)-1T(f)(2) necessarily implies a preceding increase to the
transferee foreign corporation's E&P by reason of the disposition that
is then offset by the corresponding reduction. For example, consider a
case in which a U.S. transferor contributed intangible property with an
adjusted basis of $0 to a wholly owned transferee foreign corporation
in an exchange described in section 351(a) that was subject to section
367(d). In a later year, the transferee foreign corporation disposes of
the intangible property to an unrelated person when the fair market
value of the intangible property is $100x, which causes the U.S.
transferor to recognize $100x of gain under Sec. 1.367(d)-1T(f)(1);
also, assume the transferee foreign corporation has $50x of other E&P
unrelated to the subsequent disposition of the intangible property.
Section 1.367(d)-1T(f)(2) does not simply reduce the transferee foreign
corporation's E&P by $100x, but rather the corresponding reduction
would offset the $100x of E&P that arises as to the transferee foreign
corporation by reason of the disposition, thereby preventing potential
excessive E&P and leaving the transferee foreign corporation's other
E&P unaffected.
Similarly, and in order to prevent excessive E&P and gross income
as to the transferee foreign corporation because of the gain
recognition rule or Sec. 1.367(d)-1T(f)(1), proposed Sec. 1.367(d)-
1(f)(2)(i) provides certain adjustments to the transferee foreign
corporation's E&P and gross income that arise by reason of any gain the
U.S. transferor recognizes under the gain recognition rule or Sec.
1.367(d)-1T(f)(1). Specifically, for purposes of chapter 1 of the
Code--that is, chapter 1 (relating to normal taxes and surtaxes) of
subtitle A (relating to income taxes) of the Code--the transferee
foreign corporation reduces (but not below zero) the portion of its E&P
and gross income arising from the transaction to take into account the
gain recognized by the U.S. transferor. See proposed Sec. 1.367(d)-
1(f)(2)(i). And, as provided currently under the section 367(d)
regulations, any gain so recognized can be received by the U.S.
transferor without further U.S. tax consequences pursuant to the
account receivable mechanism provided in Sec. 1.367(d)-1T(g)(1). See
proposed Sec. 1.367(d)-1(f)(2)(ii).
Because section 367(d) effectively shifts certain gain a transferee
foreign corporation would recognize as to intangible property directly
to a U.S. transferor under the gain recognition rule or Sec. 1.367(d)-
1T(f)(1) (as applicable), these rules are intended to provide
appropriate reductions to offset, as to the transferee foreign
corporation, the impact of a U.S. transferor's recognition of gain
under section 367(d). In most cases, the proper reduction described in
proposed Sec. 1.367(d)-1(f)(2)(i) will equal the amount of gain
recognized by the U.S. transferor under the provisions described in the
preceding sentence. But the proper reduction may diverge from the
amount of gain recognized by the U.S. transferor in certain cases,
depending on the position taken with respect to the transferee foreign
corporation's basis in the intangible property during the time the
intangible property is subject to section 367(d). See part I.D of this
Explanation of Provisions for additional discussion of this issue.
4. Special Rule for Related Transactions
Proposed Sec. 1.367(d)-1(f)(4)(v) provides a special rule that
applies if the intangible property is transferred in two or more
related transactions. If this special rule applies, whether and how the
proposed regulations apply depends on the ultimate recipient of the
intangible property. See proposed Sec. 1.367(d)-1(f)(6)(ii)(D) and (E)
(Examples 4 and 5) for illustrations of this rule.
C. Qualified Domestic Person
Proposed Sec. 1.367(d)-1(f)(4)(iii) defines a qualified domestic
person for purposes of the proposed regulations. First, a qualified
domestic person includes the U.S. transferor that initially transferred
the intangible property subject to section 367(d) that is
[[Page 27824]]
repatriated (an ``initial U.S. transferor'') and a U.S. person treated
as the U.S. transferor pursuant to Sec. 1.367(d)1T(e)(1) as applied
with certain limitations (a ``qualified successor''). See proposed
Sec. 1.367(d)-1(f)(4)(iii)(A) and (B). Specifically, these limitations
require that a qualified successor must be either an individual or a
corporation other than a corporation exempt from tax under section
501(a), a regulated investment company (as defined in section 851(a)),
a real estate investment trust (as defined in section 856(a)), a
domestic international sales corporation (DISC) (as defined in section
992(a)(1)), or an S corporation (as defined in section 1361(a)) (a
domestic corporation meeting these requirements, a ``qualified
corporation''). Second, a qualified domestic person also includes a
U.S. person that is an individual or a qualified corporation related to
the U.S. transferor within the meaning of Sec. 1.367(d)-1T(h). See
proposed Sec. 1.367(d)-1(f)(4)(iii)(C) and (D).
The proposed regulations define a qualified domestic person in this
manner based on the principle that it is generally appropriate to
terminate the continued application of section 367(d) only when all the
income produced by the intangible property, as well as gain recognized
on a disposition of the intangible property, will be subject to current
tax in the United States as to the qualified domestic person while that
person holds the property. It is also appropriate to terminate the
continued application of section 367(d) for a repatriation to an
initial U.S. transferor because such a transfer merely restores the
circumstances that existed at the time of the original outbound
transfer subject to section 367(d).
A qualified domestic person, as noted above, also includes certain
U.S. persons (individuals and qualified corporations) related to either
the initial U.S. transferor or qualified successor, as applicable. See
proposed Sec. 1.367(d)-1(f)(4)(iii)(C) and (D). This aspect of the
definition of qualified domestic person implements the same principle
described in the preceding paragraph; that is, to terminate the
continued application of section 367(d), all of the income or gain from
the intangible property must be subject to current tax in the United
States as to the qualified domestic person after the repatriation or
the repatriation must restore the circumstances that existed at the
time of the original outbound transfer subject to section 367(d).
In the case of a domestic partnership, Sec. 1.367(d)-1T(h) defines
a related person for purposes of the section 367(d) regulations by
reference to certain relationships described in section 267 or
707(b)(1). Thus, if a U.S. transferor owns more than 50 percent of the
capital or profits interest in a domestic partnership, the U.S.
transferor and the domestic partnership are related within the meaning
of section 707(b)(1) and, therefore, the U.S. transferor and the
domestic partnership are related for purposes of Sec. 1.367(d)-1T(h),
even if the domestic partnership has one or more foreign partners. The
proposed regulations, however, do not treat the domestic partnership as
a qualified domestic person. The Treasury Department and the IRS
considered addressing such cases by including rules in the proposed
regulations treating a partnership as an aggregate of its partners (an
``aggregate approach''), with the analysis for qualified domestic
person status occurring under such an aggregate approach. See, for
example, Sec. Sec. 1.367(a)-1T(c)(3)(i) and 1.367(d)-1T(a) for similar
rules that apply to certain transfers of intangible property by a
partnership to a foreign corporation. The proposed regulations do not
adopt an aggregate approach because that approach could allow taxpayers
to circumvent the purposes of these proposed regulations and other
related regulations following a repatriation to a domestic partnership.
This could occur if, for example, partnership allocations are changed
after the repatriation or if the transferee foreign corporation (or a
related foreign corporation) has liquidation rights to the intangible
property following the transfer. Additionally, in the case of a
partnership with one or more partners that are qualified domestic
persons and one or more partners that are not, an aggregate approach
would necessitate rules to measure the extent to which proposed Sec.
1.367(d)-1(f)(4)(i) applies by reason of a repatriation (and, by
extension, the extent to which the annual inclusion stream under
section 367(d) should continue to apply after the repatriation). To
address this concern, the Treasury Department and the IRS also
considered including, as part of an aggregate approach in the proposed
regulations, rules like those provided in Sec. Sec. 1.367(a)-3 and
1.367(a)-8 regarding gain recognition agreements to ensure that, to the
extent the relief provided in proposed Sec. 1.367(d)-1(f)(4)(i)
applies as to a repatriation, a corresponding amount of income from the
intangible property would be, and would continue to be, subject to tax
in the United States. After consideration, however, the Treasury
Department and the IRS are not proposing such an approach, because it
would be unworkable due to the compliance and administrative burden.
D. Qualified Domestic Person's Adjusted Basis in Repatriated Intangible
Property
Proposed Sec. 1.367(d)-1(f)(4)(iv) provides rules regarding a
qualified domestic person's basis in the intangible property it
receives in a repatriation. Specifically, the proposed regulations
provide that, in the case of repatriation pursuant to which the
intangible property qualifies as transferred basis property, a
qualified domestic person's adjusted basis in the intangible property
will equal, subject to any applicable limitations that may apply under
the Code, the lesser of the U.S. transferor's former adjusted basis in
the intangible property or the transferee foreign corporation's
adjusted basis in that property (immediately before the repatriation),
increased by the greater of the amount of gain recognized by the U.S.
transferor under the proposed regulations upon the repatriation (if
any) or the amount of gain recognized by the transferee foreign
corporation upon the repatriation (if any). See Sec. 1.367(d)-
1(f)(4)(v)(A). The result in most cases will track the result that
would occur under generally applicable rules, like section 334(b) or
362, while appropriately accounting for situations in which the gain a
U.S. transferor recognizes under the gain recognition rule differs from
the gain the transferee foreign corporation recognizes by reason of the
repatriation. Alternatively, if the intangible property does not
qualify as transferred basis property, a qualified domestic person's
adjusted basis in the intangible property will equal the fair market
value of the intangible property as of the date of the subsequent
disposition. See proposed Sec. 1.367(d)-1(f)(4)(iv)(B).
The Treasury Department and the IRS are aware of the uncertainty
regarding the treatment of adjusted basis in intangible property
subject to section 367(d) while section 367(d) applies, particularly
when the U.S. transferor's former adjusted basis is greater than zero.
The proposed regulations are intended to address basis consequences
solely when intangible property is repatriated in a transaction that
eliminates the continued application of section 367(d). In this manner,
the effect of proposed Sec. 1.367(d)-1(f)(4)(iv) is prospective
insofar as it provides for a qualified domestic person's adjusted basis
in the intangible property after the property is no longer subject to
section 367(d). Thus, the proposed regulations do not address, nor is
any implication intended as to, the appropriate treatment of adjusted
basis as to the
[[Page 27825]]
transferee foreign corporation in intangible property subject to
section 367(d) while section 367(d) applies; instead, the Treasury
Department and the IRS will address general basis rules under section
367(d) in future rulemaking. Until such general rules are issued,
proposed Sec. 1.367(d)-1(f)(4)(iv) would operate in a manner intended
to reach an appropriate result regarding a qualified domestic person's
basis in repatriated intangible property. See proposed Sec. 1.367(d)-
1(f)(6)(ii)(C) (Example 3) for an illustration of this rule.
E. Required Adjustments Related to an Annual Section 367(d) Inclusion
As noted in part I.A of this Explanation of Provisions, the
transferee foreign corporation makes the required adjustments currently
described in Sec. 1.367(d)-1T(c)(2) for cases in which the section
367(d) repatriation rules apply (that is, the adjustments with respect
to the U.S. transferor's partial annual inclusion for the year of the
repatriation). Current Sec. 1.367(d)-1T(c)(2)(ii) provides that, as to
a U.S. transferor's annual inclusion, the transferee foreign
corporation may treat that deemed payment as an expense (whether or not
paid) properly allocated and apportioned against gross income subject
to subpart F, in accordance with Sec. Sec. 1.954-1(c) and 1.861-8.
The proposed regulations provide that the deemed payment by the
transferee foreign corporation is treated as an allowable deduction
that must be allocated and apportioned to such corporation's classes of
gross income in accordance with Sec. Sec. 1.882-4(b)(1), 1.954-1(c),
and 1.960-1(c) and (d) (as appropriate). See proposed Sec. 1.367(d)-
1(c)(2)(ii). Proposed Sec. 1.367(d)-1(c)(2)(ii) thus clarifies that
the allowable deduction is allocated and apportioned under the
provisions cited in the previous sentence potentially to any class (or
classes) of gross income (as appropriate) rather than solely to gross
income subject to subpart F in all circumstances. The proposed
regulations make identical clarifications in proposed Sec. 1.367(d)-
1(e)(2)(ii) (required adjustments in the case of a subsequent transfer
of stock of the transferee foreign corporation to a successor U.S.
transferor). The proposed regulations change the reference to
``expense'' in the current regulations to ``allowable deduction'' for
clarity; this modification is not intended to be a substantive change.
F. Multiple U.S. Transferors
As noted in part I.C of the Background section of this Preamble,
there may be multiple U.S. transferors with respect to the same
intangible property, which may occur, for example, if a U.S. transferor
subsequently transfers a portion of its stock in the transferee foreign
corporation to a successor U.S. transferor. In these cases, because the
section 367(d) regulations apply separately as to each U.S. transferor,
the requirements of proposed Sec. 1.367(d)-1(f)(4)(i) also apply
separately with respect to each U.S. transferor. That is, to terminate
the continued application of section 367(d) with respect to a
particular U.S. transferor, the recipient of the transferred intangible
property must be a qualified domestic person with respect to that U.S.
transferor and the information described in proposed Sec. 1.6038B-
1(d)(2)(iv) must be provided.
To illustrate, assume that a transferee foreign corporation
(``TFC'') holds intangible property that is subject to section 367(d),
and TFC repatriates that intangible property on date X. Also assume
that two domestic corporations (``US1'' and ``US2'') are treated as
U.S. transferors under the section 367(d) regulations by reason of
owning stock of TFC (US1 was the original U.S. transferor and US2 is a
successor U.S. transferor by reason of its acquisition of a portion of
the stock of TFC from US1). Therefore, if the recipient of the
transferred intangible property on date X is a qualified domestic
person (for example, a related domestic corporation) with respect to
US1, but is an unrelated person with respect to US2, the following
occurs: proposed Sec. 1.367(d)-1(f)(4)(i) would apply with respect to
US1, if the information described in proposed Sec. 1.6038B-1(d)(2)(iv)
is provided, and US2 would recognize gain under Sec. 1.367(d)-1T(f)(1)
by reason of the transaction.
G. Other Modifications
The proposed regulations update the references to section
936(h)(3)(B) that appear in the applicable regulations under section
367 with references to section 367(d)(4), which was added as part of
the Consolidated Appropriations Act in 2018. See Public Law 115-141 and
Sec. Sec. 1.367(a)-1(d)(5) and (6) and 1.367(e)-2(b)(2)(i)(B). The
proposed regulations do not update all references to section
936(h)(3)(B) that appear in regulations issued under other sections of
the Code, but such an update will be included as part of future
rulemaking.
The proposed regulations provide that proposed Sec. 1.367(d)-
1(f)(3) would not apply as to a repatriation meeting the requirements
of proposed Sec. 1.367(d)-1(f)(4)(i)(B); instead, proposed Sec.
1.367(d)-1(f)(4)(i) applies, and, thereafter, the intangible property
is no longer subject to section 367(d). The language in proposed Sec.
1.367(d)-1(f)(3) also reflects minor editorial differences from the
language currently in Sec. 1.367(d)-1T(f)(3) that are not intended to
be substantive. See proposed Sec. 1.367(d)-1(f)(3).
The proposed regulations fix a longstanding typographical error by
replacing the reference to ``section 267(d)'' in current Sec.
1.367(d)-1T(h)(2)(ii) with a reference to ``267(f).''
Finally, the proposed regulations eliminate Sec. 1.951A-
2(c)(2)(ii), which provides that deductions taken into account in
determining a CFC's tested income and tested loss under section 951A
include the amount of a deemed payment under section 367(d)(2)(A). This
rule is no longer necessary because the proposed regulations provide
that such deemed payments are treated as allowable deductions in
accordance with, in relevant part, Sec. 1.951A-2(c)(3). See proposed
Sec. 1.367(d)-1(c)(2)(ii) and (e)(2)(i).
II. Section 904(d) Foreign Branch Income Rules
As noted in part III of the Background section of this Preamble,
the provisions in Sec. 1.904-4(f)(2)(vi)(D) provide that, in relevant
part, the principles of section 367(d) apply for determining the amount
of gross income that is attributable to a foreign branch that must be
adjusted under Sec. 1.904-4(f)(2)(vi)(D). But those provisions do not
elaborate on how the principles of section 367(d) apply for that
purpose; in particular, there is no mention of how or whether current
Sec. 1.367(d)-1T(f) applies in the foreign branch income context.
The Treasury Department and the IRS believe that due to the
differing scopes and purposes of section 367(d) and Sec. 1.904-
4(f)(2)(vi)(D), the consequences of a subsequent transfer for purposes
of determining a U.S. transferor's section 367(d) inclusion do not
necessarily inform the appropriate treatment for purposes of the
section 904(d) branch income rules. Section 367(d), as a threshold
matter, applies only in the case of certain outbound transfers of
intangible property by a U.S. person to a foreign corporation, whereas
Sec. 1.904-4(f)(2)(vi)(D) applies to outbound transfers by a U.S.
foreign branch owner to a foreign branch, inbound transfers by a
foreign branch to a U.S. foreign branch owner, as well as transfers
between foreign branches with the same U.S. foreign branch owner. If
there are multiple transfers of an item of intangible property over
time, each transfer must be separately evaluated and could result in
differing amounts of
[[Page 27826]]
deemed annual payments depending on any interim changes in the value of
the intangible property between successive transfers. Accordingly,
these proposed regulations provide that each successive transfer to
which Sec. 1.904-4(f)(2)(vi)(D) applies is considered independently
from any other preceding or subsequent transfers. See proposed Sec.
1.904-(f)(2)(vi)(D)(4). Therefore, the subsequent transfer rules in the
regulations under section 367(d), including the rule for repatriations
provided in these proposed regulations, do not apply in the context of
determining gross income attributable to the foreign branch income
category and each successive transfer is separately subject to the
provisions of Sec. 1.904-(f)(2)(vi)(D)(1) and will not terminate or
otherwise impact the application of Sec. 1.904-(f)(2)(vi)(D)(1) to a
prior transfer described in that paragraph.
III. Reporting
A. Reporting Requirements for Subsequent Transfers of Intangible
Property
As described in part I.A of this Explanation of Provisions,
proposed Sec. 1.367(d)-1(f)(4)(i) requires a U.S. transferor to
provide the information described in proposed Sec. 1.6038B-1(d)(2)(iv)
with respect to the repatriation. In general, Sec. Sec. 1.6038B-1 and
1.6038B-1T provide information reporting rules that apply with respect
to transfers of property to foreign corporations, including transfers
of property described in sections 367(a) and (d). See Sec. 1.6038B-
1(c) and (d). Section 1.6038B-1T(d) provides specific information
reporting rules for transfers subject to section 367(d), including
rules that apply to subsequent transfers. See Sec. 1.6038B-1T(d)(2).
These proposed regulations make two conforming changes to the
reporting requirements for subsequent transfers under Sec. 1.6038B-
1T(d)(2) (the ``proposed information reporting rules''). The first
change provides that, to the extent a qualified domestic person
receives intangible property in a subsequent transfer, the subsequent
transfer information described in proposed Sec. 1.6038B-1(d)(2)(iv)
instead of the subsequent transfer information described in Sec.
1.6038B-1T(d)(2)(iii) must be provided.
The second change adds information reporting requirements for a
subsequent transfer of intangible property to a qualified domestic
person. See proposed Sec. 1.6038B-1(d)(2)(iv). These reporting rules
request information that is necessary to ensure that proposed Sec.
1.367(d)-1(f)(4) is appropriately applied to the subsequent transfer.
B. Relief for Certain Failures To Provide Required Information
In general, as a condition for terminating the application of
section 367(d) with respect to the transferred intangible property,
proposed Sec. 1.367(d)-1(f)(4)(i)(B) requires a U.S. transferor to
provide the information described in proposed Sec. 1.6038B-
1(d)(2)(iv). If a U.S. transferor fails to provide that information,
the repatriation is subject to proposed Sec. 1.367(d)-1(f)(3) such
that the section 367(d) regulations, including the requirement to take
an annual inclusion into account over the useful life of the intangible
property, continue to apply. However, a U.S. transferor is eligible for
relief under the proposed regulations if proposed Sec. 1.367(d)-
1(f)(4)(i)(B) would have applied to the subsequent transfer of
intangible property but for the fact that the required information was
not provided and the U.S. transferor, upon becoming aware of the
failure, promptly provides the required information and explains its
failure to comply. See proposed Sec. 1.367(d)-1(f)(5). When it
applies, proposed Sec. 1.367(d)-1(f)(5) treats the requirements of
proposed Sec. 1.367(d)-1(f)(4)(i)(B) as satisfied as of the date of
the transfer of intangible property to the qualified domestic person.
IV. Applicability Dates
The proposed regulations generally apply to subsequent dispositions
of intangible property occurring on or after the date of publication of
the Treasury decision adopting these rules as final regulations in the
Federal Register. See proposed Sec. Sec. 1.367(d)-1(j)(2)), 1.904-
4(q)(3), and 1.6038B-1(g). Proposed Sec. 1.951A-2(c)(2) applies to
taxable years of foreign corporations ending on or after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register, and to taxable years of United
States shareholders in which or with which such taxable years end. See
proposed Sec. 1.951A-7(e).
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
The Administrator of the Office of Information and Regulatory
Affairs (``OIRA''), Office of Management and Budget (``OMB''), has
determined that this proposed rule is not a significant regulatory
action, as that term is defined in section 3(f) of Executive Order
12866. Therefore, OIRA has not reviewed this proposed rule pursuant to
section 6(a)(3)(A) of Executive Order 12866 and the April 11, 2018,
Memorandum of Agreement between the Treasury Department and OMB.
II. Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to OMB for review in accordance with the
Paperwork Reduction Act under control number 1545-0026. Commenters are
strongly encouraged to submit public comments electronically. Written
comments and recommendations for the proposed information collection
should be sent to <a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>, with
copies to the Internal Revenue Service. Find this particular
information collection by selecting ``Currently under Review--Open for
Public Comments'' then by using the search function. Submit electronic
submissions for the proposed information collection to the IRS via
email at <a href="/cdn-cgi/l/email-protection#8ae5e7e8a4ffe4e3fecae3f8f9a4ede5fc"><span class="__cf_email__" data-cfemail="355a58571b405b5c41755c47461b525a43">[email protected]</span></a> (indicate ``REG-124064-19 (1545-0026)'' on
the Subject line). Comments on the collection of information should be
received by July 3, 2023. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the IRS, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation is in
Sec. 1.6038B-1(d)(2)(iv). This information is necessary to ensure that
proposed Sec. 1.367(d)-1(f)(4) is appropriately applied to the
subsequent transfer.
The collection of information is required to comply with section
367(d). The likely respondents are domestic corporations. Burdens
associated with these requirements will be reflected in the burden for
Form 926, Return by a U.S. Transferor of Property to a Foreign
Corporation.
Estimated change in annual reporting burden: 1601 hours.
[[Page 27827]]
Estimated increase in annual burden per respondent: 2.4 hours.
Estimated number of respondents: 667.
Estimated frequency of responses: annually.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (``RFA'') requires the agency ``to
prepare and make available for public comment an initial regulatory
flexibility analysis'' that will ``describe the impact of the proposed
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement if the agency certifies that
the proposed rulemaking will not have a significant economic impact on
a substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS do not have detailed data
readily available to assess the exact number of small entities
potentially affected by the proposed regulations. Based on the limited
data available, it is estimated that there will be less than 700
taxpayers potentially affected by the proposed regulations. But, among
those taxpayers, an even smaller portion will likely be affected by the
proposed regulations as these rules apply to a specific type of
transaction--repatriations of intangible property subject to section
367(d). Moreover, the entities potentially affected by these proposed
regulations are generally not small entities, because of the resources
and investment necessary to develop intangible property and, once so
developed, transfer the intangible property to a foreign corporation.
Therefore, the Treasury Department and the IRS certify that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities. The IRS invites the public to
comment on the impact of these regulations on small entities.
IV. Section 7805(f)
Pursuant to section 7805(f), this notice of proposed rulemaking has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by State, local, or Tribal governments, or by
the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications, does not impose substantial direct compliance
costs on State and local governments, and does not preempt State law
within the meaning of the Executive order.
Comments and Requests for Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the Preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are encouraged to be made electronically. If a public
hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, and Notices cited in this
Preamble are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal authors of these regulations are Chadwick Rowland and
L. Ulysses Chatman, Office of Associate Chief Counsel (International).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1.The authority citation for part 1 continues to read in part
as follows:
Authority: 6 U.S.C. 7805 * * *
Section 1.367(d)-1 also issued under 26 U.S.C. 367(d).
* * * * *
Sec. 1.367(a)-1 [Amended]
0
Par. 2. Section 1.367(a)-1 is amended by removing the language
``section 936(h)(3)(B)'' in paragraphs (d)(5) and (6) and adding the
language ``section 367(d)(4)'' in its place.
0
Par. 3. Section 1.367(d)-1 is amended by:
0
1. Removing reserved paragraphs (c)(1) through (2).
0
2. Adding a heading to paragraph (c) and adding paragraphs (c)(1) and
(2).
0
3. Removing reserved paragraphs (c)(4) through (g)(2) (introductory
text).
0
4. Adding paragraphs (c)(4), (d), (e), and (f).
0
5. Adding a heading to paragraph (g) and adding paragraphs (g)(1) and
(g)(2) introductory text.
0
6. Removing reserved paragraphs (g)(2)(ii) through (g)(2)(iii)(D).
0
7. Adding paragraph (g)(2)(ii) and reserved paragraphs (g)(2)(iii)
introductory text and (g)(2)(iii)(A) through (D).
0
8. Removing reserved paragraphs (g)(4) through (i).
0
9. Adding paragraphs (g)(4), (h), and (i).
[[Page 27828]]
0
10. Revising paragraph (j).
The additions and revision read as follows:
Sec. 1.367(d)-1 Transfers of intangible property to foreign
corporations.
* * * * *
(c) Deemed payments upon transfer of intangible property to foreign
corporation--(1) In general. For further guidance, see Sec. 1.367(d)-
1T(c)(1).
(2) Required adjustments. For further guidance, see Sec. 1.367(d)-
1T(c)(2) introductory text and (c)(2)(i).
(i) [Reserved]
(ii) The deemed payment is treated as an allowable deduction
(whether or not that amount is paid) of the transferee foreign
corporation properly allocated and apportioned to the appropriate
classes of gross income in accordance with Sec. Sec. 1.882-4(b)(1),
1.951A-2(c)(3), 1.954-1(c), 1.960-1(c), and 1.960-1(d), as applicable.
* * * * *
(4) Blocked income. For further guidance, see Sec. 1.367(d)-
1T(c)(4).
(d) Subsequent transfer of stock of transferee corporation to
unrelated person. For further guidance, see Sec. 1.367(d)-1T(d).
(e) Subsequent transfer of stock of transferee foreign corporation
to related person--(1) Transfer to related U.S. person treated as
disposition of intangible property. For further guidance, see Sec. 1.
367(d)-1T(e)(1).
(2) Required adjustments. For further guidance, see Sec. 1.367(d)-
1T(e)(2) introductory text and (e)(2)(i).
(i) [Reserved]
(ii) The deemed payment is treated as an allowable deduction
(whether or not that amount is paid) of the transferee foreign
corporation properly allocated and apportioned to the appropriate
classes of gross income in accordance with Sec. Sec. 1.882-4(b)(1),
1.951A-2(c)(3), 1.954-1(c), 1.960-1(c), and 1.960-1(d), as applicable.
(iii) For further guidance, see Sec. 1.367(d)-1T(e)(2)(iii)
through (e)(4).
(iv) [Reserved]
(3) through (4) [Reserved]
(f) Subsequent disposition of transferred intangible property by
transferee foreign corporation--(1) In general. For further guidance,
see Sec. 1.367(d)-1T(f)(1).
(2) Required adjustments. If a U.S. transferor is required to
recognize gain under paragraph (f)(4)(i)(A) of this section or Sec.
1.367(d)-1T(f)(1), then, in addition to the adjustments described in
paragraph (c)(2)(ii) of this section and Sec. 1.367(d)-1T(c)(2) with
respect to the deemed payment described in Sec. 1.367(d)-
1T(f)(1)(ii)--
(i) For purposes of chapter 1 of the Code, the transferee foreign
corporation reduces (but not below zero) the portion of its earnings
and profits and gross income arising by reason of the subsequent
disposition of the intangible property by the amount of gain recognized
by the U.S. transferor under paragraph (f)(4)(i)(A) of this section or
Sec. 1.367(d)-1T(f)(1); and
(ii) The U.S. transferor may establish an account receivable from
the transferee foreign corporation equal to the amount of gain
recognized under paragraph (f)(4)(i)(A) of this section or Sec.
1.367(d)-1T(f)(1) in accordance with Sec. 1.367(d)-1T(g)(1).
(3) Subsequent transfer of intangible property to related person.
Except as provided in paragraph (f)(4)(i)(B) of this section, a U.S.
person's requirement to recognize income under Sec. 1.367(d)-1T(c) or
(e) is not affected by the transferee foreign corporation's subsequent
disposition of the transferred intangible property to a related person.
For purposes of any required adjustments, and of any accounts
receivable created under Sec. 1.367(d)-1T(g)(1), the related person
that receives the intangible property is treated as the transferee
foreign corporation.
(4) Subsequent transfer of intangible property to qualified
domestic person--(i) In general. Except as provided in paragraph
(f)(4)(v) of this section, if a U.S. person transfers intangible
property subject to section 367(d) and the rules of this section and
Sec. 1.367(d)-1T to a foreign corporation in an exchange described in
section 351 or 361 and, within the useful life of the intangible
property, that transferee foreign corporation subsequently disposes of
the intangible property to a qualified domestic person, then--
(A) The U.S. transferor of the intangible property (or any person
treated as such pursuant to Sec. 1.367(d)-1T(e)(1)) is required to
recognize gain, as applicable, equal to the amount described in
paragraph (f)(4)(ii) of this section; and
(B) If the U.S. transferor provides the information described in
Sec. 1.6038B-1(d)(2)(iv), then--
(1) The U.S. transferor is required to recognize a deemed payment
as provided in Sec. 1.367(d)-1T(f)(1)(ii); and
(2) The intangible property is no longer subject to section 367(d),
this section, and Sec. 1.367(d)-1T after applying paragraphs
(f)(4)(i)(A) and (f)(4)(i)(B)(1) of this section.
(ii) Gain recognition for U.S. transferor. The amount of gain a
U.S. transferor must recognize under paragraph (f)(4)(i)(A) of this
section is determined as follows--
(A) If the intangible property is transferred basis property (as
defined in section 7701(a)(43)) by reason of the subsequent disposition
(determined without regard to section 367(d), this section, and Sec.
1.367(d)-1T), the amount of gain, if any, the transferee foreign
corporation would recognize if its adjusted basis in the intangible
property were equal to the U.S. transferor's former adjusted basis in
the property; or
(B) If the intangible property is not transferred basis property by
reason of the subsequent disposition (determined without regard to
section 367(d), this section, and Sec. 1.367(d)-1T), the excess, if
any, of the fair market value of the intangible property on the date of
the subsequent disposition and the U.S. transferor's former adjusted
basis in that property.
(iii) Qualified domestic person. For purposes of paragraph (f)(4)
of this section, a qualified domestic person means--
(A) The U.S. transferor that initially transferred intangible
property subject to section 367(d);
(B) A U.S. person treated as a U.S. transferor under Sec.
1.367(d)-1T(e)(1), provided such person is an individual or a
corporation other than a corporation exempt from tax under section
501(a), a regulated investment company (as defined in section 851(a)),
a real estate investment trust (as defined in section 856(a)), a
domestic international sales corporation (DISC) (as defined in section
992(a)(1)), or an S corporation (as defined in section 1361(a));
(C) A U.S. person that is an individual related, within the meaning
of paragraph (h)(2)(ii) of this section and Sec. 1.367(d)-1T(h), to
the person described in paragraph (f)(4)(iii)(A) or (B) of this
section; or
(D) A U.S. person that is a corporation related, within the meaning
of paragraph (h)(2)(ii) of this section and Sec. 1.367(d)-1T(h), to
the person described in paragraph (f)(4)(iii)(A) or (B) of this
section, other than a corporation exempt from tax under section 501(a),
a regulated investment company (as defined in section 851(a)), a real
estate investment trust (as defined in section 856(a)), a DISC (as
defined in section 992(a)(1)), or an S corporation (as defined in
section 1361(a)).
(iv) Qualified domestic person's basis in the intangible property.
The qualified domestic person's adjusted basis in the intangible
property is--
(A) In the case of a subsequent disposition of intangible property
described in paragraph (f)(4)(ii)(A) of this section, and subject to
any applicable limitations that may apply
[[Page 27829]]
under the Code, the lesser of the U.S. transferor's former adjusted
basis in the intangible property or the transferee foreign
corporation's adjusted basis in the intangible property (as determined
immediately before the subsequent disposition), in each case increased
by the greater of the amount of gain (if any) described in paragraph
(f)(4)(ii)(A) of this section and recognized by the U.S. transferor or
the amount of gain (if any) recognized by the transferee foreign
corporation as to the intangible property by reason of the subsequent
disposition; or
(B) In the case of a subsequent disposition of intangible property
described in paragraph (f)(4)(ii)(B) of this section, the fair market
value of the intangible property (as determined on the date of the
subsequent disposition).
(v) Special rule for related transactions. If the transferee
foreign corporation subsequently disposes of the transferred intangible
property to a person that would, absent this paragraph (f)(4)(v), be a
qualified domestic person (initial transferee) and, as part of a series
of related transactions, the intangible property is subsequently
disposed of to any other person, including by reason of multiple
dispositions, then the initial transferee is treated as a qualified
domestic person only if the ultimate recipient of the intangible
property is a qualified domestic person. See paragraphs (f)(6)(ii)(D)
and (E) of this section (Examples 4 and 5), for illustrations of the
application of this paragraph (f)(4)(v).
(5) Relief for certain failures to comply. This paragraph (f)(5)
provides relief if paragraph (f)(4)(i)(B)(2) of this section would
apply but for the U.S. transferor's failure to provide the information
required by paragraph (f)(4)(i)(B) of this section (a ``failure to
comply''). When a failure to comply occurs, the subsequent disposition
of the transferred intangible property is generally subject to
paragraphs (f)(3) and (f)(4)(i)(A) of this section, and not paragraph
(f)(4)(i)(B)(2) of this section. Nevertheless, a failure to comply is
deemed not to have occurred (regardless of whether the U.S. transferor
continued to include amounts in gross income under Sec. 1.367(d)-1T(c)
or (e) after the subsequent disposition), and the requirements of
paragraph (f)(4)(i)(B) of this section are treated as satisfied as of
the date of the subsequent disposition if, promptly after the U.S.
transferor becomes aware of the failure, the U.S. transferor provides
such information and provides a reasonable explanation for its failure
to comply to the Director of Field Operations, Cross Border Activities
Practice Area of Large Business & International (or any successor to
the roles and responsibilities of such position, as appropriate).
Additionally, the U.S. transferor must timely file an amended return
for the taxable year in which the subsequent disposition occurred (and,
if applicable, for each taxable year starting with the taxable year
immediately after the taxable year in which the subsequent disposition
occurred and ending with the taxable year in which the U.S. transferor
seeks relief under this paragraph (f)(5)) that includes the information
required by paragraph (f)(4)(i)(B) of this section. If any taxable year
of the U.S. transferor is under examination when an amended return is
filed, a copy of the amended return (or, if applicable, amended
returns) must be provided to the Internal Revenue Service personnel
conducting the examination.
(6) Examples--(i) Assumed facts. For purposes of the examples in
paragraph (f)(6)(ii) of this section, and except where otherwise
indicated, the following facts are assumed.
(A) USP and USS are domestic corporations that each use a calendar
taxable year.
(B) TFC is a foreign corporation whose functional currency is the
U.S. dollar.
(C) In year 1, USP transfers intangible property, as defined in
section 367(d)(4), with a $0 adjusted basis, to TFC in a section 351
exchange (the ``transferred IP''), and such transfer is subject to
section 367(d).
(D) Each annual inclusion (including any amount described in Sec.
1.367(d)-1T(f)(1)(ii)) is taken into account under section
367(d)(2)(A)(ii)(I) and Sec. 1.367(d)-1T(c)(1).
(E) Any subsequent transfer or disposition of stock of TFC or the
transferred IP occurs within the useful life of the transferred IP.
(F) All transactions are respected under general principles of tax
law.
(ii) Examples. The following examples illustrate the application of
paragraph (f)(4) of this section and other paragraphs of this section
that relate to paragraph (f)(4).
(A) Example 1: Complete liquidation of transferee foreign
corporation into a qualified domestic person--(1) Facts. In year 2,
USP transfers all the stock of TFC to USS, a related person within
the meaning of Sec. 1.367(d)-1T(h) and paragraph (h)(2)(ii) of this
section, in a section 351 exchange to which Sec. 1.367(d)-1T(e)(1)
applies (the ``year 2 transfer''). In year 3, TFC distributes all
its property (including the transferred IP) to USS pursuant to a
complete liquidation to which sections 332 and 337 apply (the ``year
3 liquidation''). The all earnings and profits amount determined
under Sec. 1.367(b)-2(d) with respect to the stock of TFC held by
USS is $0. The information described in Sec. 1.6038B-1(d)(2) is
provided by USS for the taxable year in which the year 3 liquidation
occurs.
(2) Analysis--(i) The year 2 transfer. Because the year 2
transfer involves a transfer of all the stock of TFC by USP (the
initial U.S. transferor) to a related U.S. person (USS), under Sec.
1.367(d)-1T(e)(1)(i) USS (a successor U.S. transferor) is treated as
receiving the right to receive a proportionate share of the
contingent annual payments that USP would have otherwise taken into
account under Sec. 1.367(d)-1T(c). As determined under Sec.
1.367(d)-1T(e)(4), USS's proportionate share of such payments is 100
percent. Accordingly, USS will annually include in its gross income
the full amount of each of the annual payments that USP would
otherwise have taken into account under Sec. 1.367(d)-1T(c) over
the useful life of the transferred IP, and USP will not recognize
any gain upon the year 2 transfer. See Sec. 1.367(d)-1T(e)(1)(ii)
and (iii).
(ii) The year 3 liquidation. The year 3 liquidation results in a
subsequent disposition of the transferred IP to USS. USS, a U.S.
person treated as the U.S. transferor pursuant to Sec. 1.367(d)-
1T(e)(1), is a qualified domestic person within the meaning of
paragraph (f)(4)(iii) of this section. Pursuant to paragraph
(f)(4)(i)(A) of this section, USS must recognize the amount of gain
described in paragraph (f)(4)(ii) of this section. Because the year
3 liquidation is a complete liquidation to which sections 332 and
337 apply, the intangible property is transferred basis property (as
defined in section 7701(a)(43) and determined without regard to
section 367(d), this section, and Sec. 1.367(d)-1T), and therefore
paragraph (f)(4)(ii)(A) applies to determine the amount of any gain
USS must recognize. Because TFC does not recognize gain with respect
to the transferred IP (regardless of the adjusted basis in the
intangible property) by reason of the year 3 liquidation, the amount
of gain described in paragraph (f)(4)(ii)(A) of this section is $0.
Accordingly, USS does not recognize gain pursuant to paragraph
(f)(4)(i)(A) of this section by reason of the year 3 liquidation.
Additionally, because USS provides the information described in
Sec. 1.6038B-1(d)(2), paragraph (f)(4)(i)(B) of this section
applies to the year 3 liquidation. USS therefore recognizes a deemed
payment representing the part of USS's taxable year during which TFC
held the transferred IP pursuant to paragraph (f)(4)(i)(B)(1) of
this section, and the required adjustments described in paragraph
(c)(2)(ii) of this section and Sec. 1.367(d)-1T(c)(2)(i) apply as
to the deemed payment. Also, because USS does not recognize gain
pursuant to paragraph (f)(4)(i)(A) of this section, the required
adjustments described in paragraph (f)(2) of this section do not
apply. Pursuant to paragraph (f)(4)(i)(B)(2) of this section, after
taking the deemed payment into account, the transferred IP is no
longer subject to section 367(d), this section, and Sec. 1.367(d)-
1T. Finally, pursuant to paragraph (f)(4)(iv)(A) of this section,
USS's adjusted basis in the
[[Page 27830]]
transferred IP is $0, which is equal to USP's former adjusted basis
in the transferred IP ($0), increased by the greater of the amount
of gain recognized by USS under paragraph (f)(4)(i)(A) of this
section ($0) or the amount of gain recognized by TFC upon the year 3
distribution ($0).
(B) Example 2: Taxable distribution of the transferred
intangible property to a qualified domestic person--(1) Facts. The
facts are the same as in paragraph (f)(6)(ii)(A) of this section
(Example 1), except that, instead of in year 3 TFC distributing all
its property to USS pursuant to a complete liquidation, in year 3
TFC distributes the transferred IP to USS in a distribution
described in section 311(b) when the fair market value of the
transferred IP is $100x (the ``year 3 distribution''). TFC's
adjusted basis in the transferred IP immediately before the
distribution is $0.
(2) Analysis. The consequence of the year 2 transfer is the same
as described in paragraph (f)(6)(ii)(A)(2)(i) of this section
(Example 1). Like the consequences described in paragraph
(f)(6)(ii)(A)(2) of this section (Example 1), the year 3
distribution is a subsequent disposition of the transferred IP to
USS, a qualified domestic person. Pursuant to paragraph (f)(4)(i)(A)
of this section, USS must recognize the amount of gain described in
paragraph (f)(4)(ii) of this section. Because the year 3
distribution is described in section 311(b) the intangible property
is not transferred basis property (as defined in section 7701(a)(43)
and determined without regard to section 367(d), this section, and
Sec. 1.367(d)-1T), and therefore USS must recognize $100x gain
under paragraph (f)(4)(ii)(B) of this section. The $100x gain amount
equals the excess of the fair market value of the transferred IP on
the date of the year 3 distribution ($100x) over USP's former
adjusted basis in the property ($0). TFC, because of USS's gain
recognition under paragraph (f)(4)(i)(A) of this section, reduces
(but not below zero) the portion of its earnings and profits and
gross income arising by reason of the year 3 distribution by the
amount of such gain under paragraph (f)(2)(i) of this section.
Specifically, because the year 3 distribution requires USS to
recognize $100x of gain, TFC reduces the portion of its earnings and
profits and gross income that arise by reason of the year 3
distribution, which is $100x (the excess of the fair market value of
the transferred IP ($100x) over TFC's adjusted basis in the
transferred IP ($0)), by $100x (the amount of gain USS recognizes
pursuant to paragraph (f)(4)(i)(A) of this section). As a result,
after taking into account the reduction, TFC has no earnings and
profits or gross income that arise by reason of the year 3
distribution. Furthermore, USS may establish an account receivable
from TFC equal to $100x under paragraph (f)(2)(ii) of this section.
Additionally, and as described in paragraph (f)(6)(ii)(A)(2) of this
section (Example 1), pursuant to paragraph (f)(4)(i)(B)(1) of this
section, USS recognizes a deemed payment for the portion of USS's
taxable year during which TFC held the transferred IP, and the
required adjustments described in paragraph (c)(2)(ii) of this
section and Sec. 1.367(d)-1T(c)(2) apply to this deemed payment.
After taking these consequences into account, pursuant to paragraph
(f)(4)(i)(B)(2) of this section, the transferred IP is no longer
subject to section 367(d), this section, and Sec. 1.367(d)-1T.
Finally, pursuant to paragraph (f)(4)(iv)(B) of this section, USS's
adjusted basis in the transferred IP is $100x, which is the fair
market value of the transferred IP on the date of the year 3
distribution.
(C) Example 3: Qualified domestic person's basis in intangible
property when intangible property is repatriated in an exchange
described in section 351(b)--(1) Facts. The facts are the same as in
paragraph (f)(6)(ii)(A) of this section (Example 1), except that the
transfer of stock of TFC to USS in year 2 does not occur and instead
of the year 3 liquidation, in year 3 TFC transfers the intangible
property to USS (a qualified domestic person as defined in paragraph
(f)(4)(iii) of this section) in an exchange described in section
351(b) pursuant to which TFC recognizes $50x of gain and USP
recognizes $50x of gain under paragraph (f)(4)(i)(A) of this section
(the ``year 3 exchange'').
(2) Analysis. Pursuant to paragraph (f)(4)(iv)(A) of this
section, USS's adjusted basis in the intangible property is $50x,
which is the amount equal to the lesser of USP's former adjusted
basis in the property ($0) or TFC's adjusted basis in the property
($0), increased by the greater of the amount of gain recognized by
USP under paragraph (f)(4)(i)(A) of this section ($50x) or the
amount of gain recognized by TFC upon the year 3 exchange ($50x).
(D) Example 4: Repatriation as part of a series of related
transactions culminating in transfer to a foreign corporation--(1)
Facts. The facts are the same as in paragraph (f)(6)(ii)(A)(1) of
this section (Example 1), except that the year 3 liquidation occurs
as part of a series of related transactions pursuant to which USS
transfers the transferred IP that it receives from TFC to a related
foreign corporation (FC1) in exchange for stock in FC1.
(2) Analysis. Because the year 3 liquidation occurs as part of a
series of related transactions pursuant to which the transferred IP
is ultimately contributed to a FC1, a foreign corporation, and
because a foreign corporation is not a qualified domestic person
pursuant to paragraph (f)(4)(iii) of this section, then, under
paragraph (f)(4)(v) of this section, the year 3 liquidation is not
treated as a subsequent disposition described in paragraph (f)(4)(i)
of this section, but is instead treated as a subsequent disposition
described in paragraph (f)(3) of this section.
(E) Example 5: Repatriation as part of a series of related
transactions culminating in transfer to a qualified domestic
person--(1) Facts. The facts are the same as in paragraph
(f)(6)(ii)(B)(1) of this section (Example 2), except that the year 3
distribution occurs as part of a series of related transactions
pursuant to which USS disposes of the transferred IP that it
receives from TFC to USP.
(2) Analysis. Because the year 3 distribution occurs as part of
a series of related transactions pursuant to which the transferred
IP is distributed to USP, and because USP is a qualified domestic
person pursuant to paragraph (f)(4)(iii) of this section, paragraph
(f)(4)(v) of this section does not prevent paragraph (f)(4)(i) of
this section from applying to the year 3 distribution. Accordingly,
the consequences under section 367(d) of the year 3 distribution are
the same as those described in paragraph (f)(6)(ii)(B)(2) of this
section (Example 2), and the consequences of the subsequent
disposition of the transferred IP by USS to USP are determined after
applying paragraph (f)(4) of this section to the transfer of the
transferred IP by TFC to USS.
(g) Special rules--(1) Establishment of accounts receivable. For
further guidance, see Sec. 1.367(d)-1T(g)(1).
(2) Election to treat transfer as sale. For further guidance, see
Sec. 1.367(d)-1T(g)(2) introductory text.
* * * * *
(ii) For further guidance, see Sec. 1.367-1T(g)(2)(ii) through
(g)(2)(iii)(D).
(iii) [Reserved]
(A) through (D) [Reserved]
* * * * *
(4) Coordination with section 482. For further guidance, see Sec.
1.367(d)-1T(g)(4).
(5) Determination of fair market value. For further guidance, see
Sec. 1.367(d)-1T(g)(5).
(6) Anti-abuse rule. For further guidance, see Sec. 1.367(d)-
1T(g)(6).
(h) Related person. For further guidance, see Sec. 1.367(d)-1T(h)
introductory text and (h)(1).
(1) [Reserved]
(2) For further guidance, see Sec. 1.367(d)-1T(h)(2) introductory
text and (h)(2)(i).
(i) [Reserved]
(ii) Section 1563 applies (for purposes of section 267(f)) without
regard to section 1563(b)(2).
(i) Effective date. For further guidance, see Sec. 1.367(d)-1T(i).
(j) Applicability dates--(1) In general. This section applies to
transfers occurring on or after September 14, 2015, and to transfers
occurring before September 14, 2015, resulting from entity
classification elections made under Sec. 301.7701-3 of this chapter
that are filed on or after September 14, 2015. For transfers occurring
before this section is applicable, see Sec. 1.367(d)-1T as contained
in 26 CFR part 1 revised as of April 1, 2016.
(2) Certain subsequent dispositions of intangible property.
Paragraphs (c)(2)(ii), (e)(2)(ii), (f)(2) through (5), and (h)(2)(ii)
of this section apply to subsequent dispositions of intangible property
occurring on or after [date of publication of final regulations in the
Federal Register]. For subsequent dispositions of intangible property
occurring before
[[Page 27831]]
[date of publication of final regulations in the Federal Register], see
Sec. 1.367(d)-1T (as contained in 26 CFR part 1, revised as of April
1, 2022).
Sec. 1.367(d)-1T [Amended]
0
Par. 4. Section 1.367(d)-1T is amended by:
0
1. Removing ``; and'' at the end of paragraph (c)(2)(i) and adding a
period in its place.
0
2. Removing and reserving paragraphs (c)(2)(ii), (e)(2)(ii), and (f)(2)
and (3).
0
3. Removing ``; and'' at the end of paragraph (h)(2)(i) and adding a
period in its place.
0
4. Removing and reserving paragraph (h)(2)(ii).
Sec. 1.367(e)-2 [Amended]
0
Par. 5. Section 1.367(e)-2 is amended by removing the language
``section 936(h)(3)(B)'' in the last sentence of paragraph (b)(2)(i)(B)
and adding the language ``section 367(d)(4)'' in its place.
0
Par. 6. Section 1.904-4 is amended by adding paragraph (f)(2)(vi)(D)(4)
and revising paragraph (q)(3) to read as follows:
Sec. 1.904-4 Separate application of section 904 with respect to
certain categories of income.
* * * * *
(f) * * *
(2) * * *
(vi) * * *
(D) * * *
(4) Multiple transfers of intangible property. If the same
intangible property is transferred in a series of transfers described
in paragraph (f)(2)(vi)(D)(1) of this section, each successive transfer
is separately subject to the provisions of paragraph (f)(2)(vi)(D)(1)
and will not terminate or otherwise affect the application of paragraph
(f)(2)(vi)(D)(1) to a prior transfer described in paragraph
(f)(2)(vi)(D)(1).
* * * * *
(q) * * *
(3) Except as provided in the following sentence, paragraph (f) of
this section applies to taxable years that begin after December 31,
2019, and end on or after November 2, 2020. Paragraph (f)(vi)(D)(4) of
this section applies to taxable years that begin on or after [date of
publication of final regulations in the Federal Register].
0
Par. 7. Section 1.951A-2 is amended by revising paragraph (c)(2) to
read as follows:
Sec. 1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(2) Determination of gross income and allowable deductions. For
purposes of determining tested income and tested loss, the gross income
and allowable deductions of a controlled foreign corporation for a CFC
inclusion year are determined under the rules of Sec. 1.952-2 for
determining the subpart F income of the controlled foreign corporation,
except, for a controlled foreign corporation which is engaged in the
business of reinsuring or issuing insurance or annuity contracts and
which, if it were a domestic corporation engaged only in such business,
would be taxable as an insurance company to which subchapter L of
chapter 1 of the Code applies, substituting ``the rules of sections 953
and 954(i)'' for ``the principles of Sec. Sec. 1.953-4 and 1.953-5''
in Sec. 1.952-2(b)(2).
* * * * *
0
Par. 8. Section 1.951A-7 is amended by adding paragraph (e) to read as
follows:
Sec. 1.951A-7 Applicability dates.
* * * * *
(e) Determination of gross income and allowable deductions. Section
1.951A-2(c)(2) applies to taxable years of foreign corporations ending
on or after [date of publication of final regulations in the Federal
Register], and to taxable years of United States shareholders in which
or with which such taxable years end. For taxable years of foreign
corporations ending before [date of publication of final regulations in
the Federal Register], and to taxable years of United States
shareholders in which or with which such taxable years end, see Sec.
1.951A-2(c)(2)(i) and (ii) as contained in 26 CFR part 1, revised as of
April 1, 2022.
0
Par. 9. Section 1.6038B-1 is amended by:
0
1. Removing reserved paragraphs (d)(1) through (1)(iii).
0
2. Adding paragraphs (d) heading and (d)(1) introductory text and
reserved paragraphs (d)(1)(i) through (iii).
0
3. Removing reserved paragraphs (d)(1)(viii) through (d)(2).
0
4. Adding paragraphs (d)(1)(viii), (d)(2), and (g)(8).
The additions read as follows:
Sec. 1.6038B-1 Reporting of certain transfers to foreign
corporations.
* * * * *
(d) Transfers subject to section 367 (d)--(1) Initial transfer. For
further guidance, see Sec. 1.6038B-1T(d)(1) introductory text through
(d)(1)(iii).
(i) through (iii) [Reserved]
* * * * *
(viii) Other intangibles. For further guidance, see Sec. 1.6038B-
1T(d)(1)(viii).
(2) Subsequent transfers. For additional, see Sec. 1.6038B-
1T(d)(2) introductory text through (d)(2)(ii).
(i) through (ii) [Reserved]
(iii) Subsequent transfer. Except for a subsequent transfer
described in paragraph (d)(2)(iv) of this section, provide the
following information concerning the subsequent transfer:
(A) For further guidance, see Sec. 1.6038B-1T(d)(2)(iii)(A)
through (C).
(B) through (C) [Reserved]
(iv) Subsequent transfer of intangible property to a qualified
domestic person. Provide the following information concerning a
subsequent transfer of intangible property described in Sec. 1.367(d)-
1(f)(4)(i):
(A) A statement providing that Sec. 1.367(d)-1(f)(4)(i)(B) applies
to the subsequent transfer;
(B) A general description of the subsequent transfer and any wider
transaction of which it forms a part, including the U.S. transferor's
former adjusted basis in the intangible property and the transferee
foreign corporation's adjusted basis in the intangible property (as
determined immediately before the subsequent transfer), the amount and
computation of any gain recognized by the U.S. transferor under Sec.
1.367(d)-1(f)(4)(i)(A), and a description of whether the intangible
property was, or is expected to be, subsequently transferred to one or
more other persons (as described in Sec. 1.367(d)-1(f)(4)(v));
(C) A description of the intangible property;
(D) A copy of the Form 926 with respect to the original transfer of
the intangible property and any attachments identifying the intangible
property as within the scope of section 367(d);
(E) The name, address, and taxpayer identification number of the
qualified domestic person that receives the intangible property,
including a statement describing the relationship between the U.S.
transferor and the qualified domestic person, and, if applicable, such
information regarding any other persons described in Sec. 1.367(d)-
1(f)(4)(v); and
(F) Any other information as may be prescribed by the Commissioner
in publications, forms, instructions, or other guidance.
* * * * *
(g) * * *
(8) Paragraphs (d)(2)(iii) introductory text and (d)(2)(iv) of this
section apply to transfers occurring on or after [date of publication
of final regulations in the Federal Register].
0
Par. 10. Section 1.6038B-1T is amended by revising paragraph
(d)(2)(iii) introductory text to read as follows:
[[Page 27832]]
Sec. 1.6038B-1T Reporting of certain transactions to foreign
corporations (temporary).
* * * * *
(d) * * *
(2) * * *
(iii) Subsequent transfer. For further guidance, see Sec. 1.6038B-
1(d)(2)(iii) introductory text:
* * * * *
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-08843 Filed 5-2-23; 8:45 am]
BILLING CODE 4830-01-P
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