The following article is adapted and reprinted from the M&A Tax Report, Vol. 8, No. 9, April 2000, Panel Publishers, New York, NY.


By Robert W. Wood

The IRS has published final regulations (TD 8862) dealing with the Subchapter C nonrecognition provisions as applied to transactions involving one or more foreign corporations. (For the text of the regulations, see 65 Fed. Reg. 3589-3609, Tax Analysts Doc. No. 2000-2568, 2000 TNT 15-14.) These regulations deal with our old friend Section 367(b). Back in June 1998, the IRS published final regulations under Section 367(a), dealing with the transfer of stock or securities in a reorganization by US persons to foreign corporations (TD 8770).

The current 367(b) regulations finalized in Treasury Decision 8862 takes the 1991 proposed regulations under the Section 367(b) and incorporates into them the 1998 final regulations under Section 367(b). This all gets a bit confusing, but Section 367(b) was also the subject of the 1998 final regulations. The regulations just didn't finish up with all of the topics.

The IRS view of Section 367(b) is that it is needed to prevent tax avoidance when the reorg provisions apply to transactions involving foreign corporations. Along other topics, the final Section 367(b) regulations address the appropriate carryover of tax attributes from foreign to domestic corporations on inbound nonrecognition transactions. The proposed regulations released in 1991 required a US shareholder of a foreign acquired corporation to currently include in income the allocable portion of the foreign acquired corporation's earnings and profits accumulated during the US shareholders' holding period. The final rules retained the definition of all earnings and profits, and also generally retain the taxation of all exchanging US shareholders in inbound nonrecognition transactions. There is, though, a new de minimus exception.

For those involved with transactions involving foreign entities, the new final 367(b) regulations deserve a look. They apply to exchanges under Section 367(b) after February 22, 2000. Taxpayers can elect earlier application under the rules contained in Reg. §1.367(b)-6(a)(2) if the due date for the taxpayers' return (including extensions) for the tax year in which the 367(b) exchange occurs is after February 23, 2000.

Foreign Corporation Restructuring Regs Published, Vol. 8, No. 9, The M&A Tax Report (April 2000), p. 6.