81 FR 91012 - Treatment of Certain Transfers of Property to Foreign Corporations
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 81, Issue 242 (December 16, 2016)
Internal Revenue Service
Federal Register Volume 81, Issue 242 (December 16, 2016)
| Page Range | 91012-91032 | |
| FR Document | 2016-29791 |
[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)] [Rules and Regulations] [Pages 91012-91032] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-29791] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9803] RIN 1545-BL87 Treatment of Certain Transfers of Property to Foreign Corporations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. ----------------------------------------------------------------------- SUMMARY: This document contains final regulations relating to certain transfers of property by United States persons to foreign corporations. The final regulations affect United States persons that transfer certain property, including foreign goodwill and going concern value, to foreign corporations in nonrecognition transactions described in section 367 of the Internal Revenue Code (Code). The regulations also combine certain sections of the existing regulations under section 367(a) into a single section. This document also withdraws certain temporary regulations. DATES: Effective date: These regulations are effective on December 16, 2016. Applicability date: For dates of applicability, see Sec. Sec. 1.367(a)-1(g)(5), 1.367(a)-2(k), 1.367(a)-4(b), and 1.367(a)-6(j); 1.367(d)-1(j); and 1.6038B-1(g)(7). FOR FURTHER INFORMATION CONTACT: Ryan A. Bowen, (202) 317-6937 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information contained in the regulations have been submitted for review and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-0026. The collections of information are in Sec. 1.6038B-1(c)(4) and (d)(1). The collections of information are mandatory. The likely respondents are domestic corporations. Burdens [[Page 91013]] 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. Estimates for completing the Form 926 can be located in the form instructions. 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. Books and records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background This document contains final regulations issued under sections 367 and 6038B of the Code. Temporary regulations were published on May 16, 1986 (TD 8087, 51 FR 17936) (the 1986 temporary regulations). Proposed regulations under these sections were published on September 16, 2015 (80 FR 55568) (the proposed regulations). Written comments to the proposed regulations were received, and a public hearing was held on February 8, 2016. All comments are available at www.regulations.gov or upon request. The proposed regulations generally provided five substantive changes from the 1986 temporary regulations: (1) Eliminating the favorable treatment for foreign goodwill and going concern value by narrowing the scope of the active trade or business exception under section 367(a)(3) (ATB exception) and eliminating the exception under Sec. 1.367(d)-1T(b) that provides that foreign goodwill and going concern value is not subject to section 367(d); (2) allowing taxpayers to apply section 367(d) to certain property that otherwise would be subject to section 367(a); (3) removing the twenty-year limitation on useful life for purposes of section 367(d) under Sec. 1.367(d)- 1T(c)(3); (4) removing the exception under Sec. 1.367(a)-5T(d)(2) that permits certain property denominated in foreign currency to qualify for the ATB exception; and (5) changing the valuation rules under Sec. 1.367(a)-1T to better coordinate the regulations under sections 367 and 482 (including temporary regulations under section 482 issued with the proposed regulations (see Sec. 1.482-1T(f)(2)(i), TD 9738, 80 FR 55538). Specifically with regard to the ATB exception, the proposed regulations revised the categories of property that are eligible for the ATB exception so that foreign goodwill and going concern value cannot qualify for the exception. Under the 1986 temporary regulations, all property was eligible for the ATB exception, subject only to five narrowly tailored exceptions. In addition to limiting the scope of the ATB exception, the proposed regulations also implemented changes to the ATB exception that were intended to consolidate various provisions and update the 1986 temporary regulations in response to subsequent changes to the Code. The proposed regulations did not resolve the extent to which property, including foreign goodwill and going concern value, that is not explicitly enumerated in section 936(h)(3)(B)(i) through (v) (enumerated section 936 intangibles) is described in section 936(h)(3)(B) and therefore subject to section 367(d) or instead is subject to section 367(a) and not eligible for the ATB exception. All property that is described in section 936(h)(3)(B) is referred to at times in this preamble as ``section 936 intangibles.'' Nonetheless, the proposed regulations permitted taxpayers to apply section 367(d) to such property. Under this rule, a taxpayer that has historically taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) could apply section 367(d) to such property. These regulations generally finalize the proposed regulations, as well as portions of the 1986 temporary regulations, as amended by this Treasury decision. Although minor wording changes have been made to certain aspects of those portions of the 1986 temporary regulations, the final regulations are not intended to be interpreted as making substantive changes to those regulations. Further explanation of the proposed regulations can be found in the Explanation of Provisions section of the preamble to the proposed regulations. That Explanation of Provisions section is hereby incorporated as appropriate into this preamble. Summary of Comments and Explanation of Revisions Nineteen sets of comments were received in response to the proposed regulations, and three speakers presented at the public hearing. In drafting the final regulations, the Treasury Department and the IRS carefully considered all of the comments received. This section of the preamble is comprised of five parts that discuss, in turn, the comments received with respect to (i) the elimination of the favorable treatment of transfers of foreign goodwill and going concern value, (ii) the useful life of property for purposes of applying section 367(d), (iii) the applicability date of the final regulations, (iv) the qualification of property denominated in foreign currency for the ATB exception, and (v) other issues. I. Foreign Goodwill and Going Concern Value A. Overview The Treasury Department and the IRS received a variety of comments in response to the proposed elimination of the favorable treatment of transfers of foreign goodwill and going concern value provided by the 1986 temporary regulations. Two comments supported the treatment of foreign goodwill and going concern value under the proposed regulations. One comment asserted that allowing intangible property to be transferred outbound in a tax-free manner is inconsistent with the policies of section 367. Other comments acknowledged the concerns about tax avoidance described in the preamble to the proposed regulations, but requested specific exceptions for transfers of foreign goodwill and going concern value in situations that the comments asserted were not abusive. Other comments disagreed more fundamentally with the approach taken and stated that the Treasury Department and the IRS should withdraw the proposed regulations entirely. Many of these comments asserted that eliminating the favorable treatment of transfers of foreign goodwill and going concern value would be an invalid exercise of regulatory authority under section 367. Overall, the comments indicated widely divergent understandings of the nature of foreign goodwill and going concern value. Accordingly, the comments also widely differed in their proffered justifications for an exception for foreign goodwill and going concern value and in the recommended contours of an appropriate exception. The variance in the comments regarding these fundamental issues highlights the difficulty of permitting some form of favorable treatment for foreign goodwill and going concern value while preventing tax avoidance. As described in greater detail in Part I.B of this Summary of Comments and Explanation of Revisions, and consistent with the proposed regulations, the final regulations eliminate the favorable treatment of foreign goodwill and going concern value contained in the 1986 temporary regulations. The Treasury Department and the IRS have [[Page 91014]] determined that this change is necessary to carry out the tax policy embodied in section 367 in a fair, impartial, and reasonable manner, taking into account the intent of Congress, the realities of relevant transactions, the need for the IRS to administer the rules and monitor compliance, and the overall integrity of the federal tax system. In particular, the final regulations are consistent with the policy and intent of the statute, which does not reference foreign goodwill or going concern value, and with Congress' expectation that the Secretary would exercise the regulatory authority under section 367 to require gain recognition when property is transferred offshore under circumstances that present a potential for tax avoidance. B. Interpretation of Section 367 1. Summary of Comments Challenging Authority The Treasury Department and the IRS received numerous comments addressing the proposed regulations' treatment of foreign goodwill and going concern value. One comment asserted that the ATB exception must apply to transfers of foreign goodwill and going concern value, because (i) foreign goodwill and going concern value is not a section 936(h)(3)(B) intangible, and so is subject to section 367(a) rather than section 367(d), and (ii) the legislative history indicates that Congress expected that the transfer of such value should be tax-free. The comment further asserted that, because goodwill and going concern value is inextricably linked to the conduct of an active trade or business, the ATB exception necessarily encompasses such transfers. Other comments asserted that finalizing the proposed regulations would represent an unreasonable exercise of regulatory authority because the proposed regulations eliminated the favorable treatment of all transfers of purported foreign goodwill and going concern value, rather than just those transfers that the Treasury Department and the IRS determine are abusive. Several comments asserted that the proposed regulations are inconsistent with Congressional intent and cited statements from the legislative history to section 367, such as the following: The committee does not anticipate that the transfer of goodwill or going concern value developed by a foreign branch to a newly organized foreign corporation will result in abuse of the U.S. tax system. . . . The committee contemplates that the transfer of goodwill or going concern value developed by a foreign branch will be treated under [the exception for transfers of property for use in the active conduct of a foreign trade or business] rather than a separate rule applicable to intangibles. H.R. Rep. No. 98-432, pt. 2, at 1317-19 (1984). Comments also asserted that it is inappropriate to use regulatory authority under section 367 to address transfer pricing concerns under section 482. 2. Response The Treasury Department and the IRS do not agree with the foregoing comments. Section 367 generally provides for income recognition on transfers of property to a foreign corporation in certain transactions that otherwise would qualify for nonrecognition. While section 367(a)(3)(A) includes a broad exception to this general rule for property used in the active conduct of a trade or business outside of the United States, grants of rulemaking authority in section 367(a)(3)(A) and (B) authorize the Secretary to exercise administrative discretion in determining the property to which nonrecognition treatment applies under the ATB exception. Moreover, section 367(d) reflects a clear policy that income generally should be recognized with respect to transfers of section 936 intangibles. The 1984 legislative history to section 367 explains that Congress intended for the Secretary to use his ``regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.'' S. Rep. No. 98-169, at 364 (1984) (emphasis added). The Treasury Department and the IRS have determined that the proposed regulations and these final regulations are consistent with that intention and the authority granted to the Secretary under section 367, based on the fact that the statute does not refer to foreign goodwill and going concern value and the determination that, as described in the preamble to the proposed regulations, the favorable treatment of foreign goodwill and going concern value contravenes the policy that income generally should be recognized with respect to transfers of section 936 intangibles. The remainder of this section discusses subsequent changes to the regulatory, statutory, and market context in which the 1984 legislative history was drafted, in order to reconcile the statements in the 1984 legislative history expressing the expectation that an exception for foreign goodwill and going concern value would not result in abuse with the IRS's contrary experience administering the statute during the intervening years. a. The 1980s and Early 1990s The Treasury Department and the IRS considered the 1984 legislative history to section 367 in issuing the 1986 temporary regulations. The 1986 temporary regulations gave effect to the statements in the legislative history indicating that Congress anticipated that the transfer of goodwill and going concern value developed by a foreign branch to a newly organized foreign corporation generally would not result in abuse of the U.S. tax system, and, on that basis, that such transfers would benefit from nonrecognition treatment. As a result, the 1986 temporary regulations provide nonrecognition treatment for foreign goodwill and concern value. The 1986 temporary regulations did not provide a conceptual definition of foreign goodwill and going concern value but, in effect, provided a rule for valuing it by describing foreign goodwill and going concern value as the residual value of a business operation conducted outside of the United States after all other tangible and intangible assets have been identified and valued. Sec. 1.367(a)-1T(d)(5)(iii). The Treasury Department and the IRS also took into account the 1984 legislative history in issuing the proposed regulations and these final regulations. In doing so, the Treasury Department and the IRS also considered that, in amending section 367 in 1984, Congress did not choose to statutorily mandate any particular treatment of foreign goodwill and going concern value and instead delegated broad authority to the Secretary to promulgate regulations under section 367 to carry out its purposes in this complex area. The Treasury Department and the IRS further considered that the legal and factual context in which the 1984 legislative history was drafted has changed significantly over the last 32 years. Before 1993, goodwill and going concern value was not amortizable. As a result, in 1984, much of the case law and policy debate regarding goodwill and going concern value involved sales of business operations at arm's length between unrelated parties, where the taxpayer attempted to minimize the value of goodwill in order to maximize the value of amortizable intangibles. See, for example, Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993). In 1989, the General Accounting Office analyzed data with respect to unresolved tax cases involving purchased intangibles and found that, presumably in order to minimize the amount of unamortizable goodwill, taxpayers had identified 175 [[Page 91015]] different types of customer-based intangibles that were distinct from goodwill. See General Accounting Office, Report to the Joint Committee on Taxation: Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, at 3 (Aug. 1991). b. Statutory and Regulatory Changes In 1993, Congress addressed these valuation disputes between taxpayers and the IRS by enacting section 197, which, similar to the approach taken by the proposed regulations, did not directly address the underlying disagreement about the relative size of goodwill but substantially reduced the stakes of the disagreement. That is, by generally providing for the amortization of goodwill over 15 years, the enactment of section 197 generally eliminated the incentive that existed in 1984, when Congress enacted section 367(d) in its present form, for taxpayers to argue that goodwill has relatively minor value. Other law changes since 1984 have increased the relevance of section 367(d) and the incentive for taxpayers to overstate the value attributable to goodwill and going concern value. Before 1997, amounts received under section 367(d) were treated as ordinary income from U.S. sources. In 1997, Congress amended section 367(d)(2)(C) to provide that amounts received under section 367(d) are treated as ordinary income that is sourced in the same manner as a royalty, and thus potentially as from sources outside the United States. Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788. The 1997 amendments increased the relevance of section 367(d) and the exception for foreign goodwill and going concern value because, before 1997, the consequences under the foreign tax credit limitation of the treatment of section 367(d) deemed royalties as U.S. source income represented a substantial disincentive for taxpayers to structure transactions in a way that would be subject to section 367(d). Additionally, the so-called ``check-the-box'' regulations of Sec. 301.7701-3, published December 18, 1996 (TD 8697, 61 FR 66584), and Congress's enactment in 2006 of the subpart F ``look-thru'' rule in section 954(c)(6) (Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109-222, 120 Stat. 345), increased the potential benefit to taxpayers from transferring high-value intangibles offshore by reducing obstacles to redeploying cash earned in overseas operations among foreign affiliates without incurring U.S. tax. Both of these changes also facilitate, in certain circumstances, the ability of foreign subsidiaries to license transferred intangibles to affiliates without incurring subpart F income. Finally, on January 5, 2009, the Treasury Department and the IRS issued temporary regulations under section 482 (TD 9441, 74 FR 340) related to cost sharing arrangements (subsequently finalized at TD 9568, 76 FR 80082 (Dec. 22, 2011)). The 2009 cost sharing regulations, in particular the supplemental guidance in Sec. 1.482-7T(g) on transfer pricing methods applicable in determining the arm's length price for a platform contribution transaction or PCT (so-called ``buy- in payments''), were intended, in part, to address inappropriate income shifting from intangible transfers under the prior cost sharing regulations. Although the prior cost sharing regulations did not provide any favorable treatment for foreign goodwill and going concern value, in the experience of the IRS, taxpayers took positions under those regulations that allowed a domestic cost sharing participant to transfer intangibles to a foreign cost sharing participant for development under a cost sharing arrangement without fully compensating the domestic cost sharing participant for the value of the transferred intangibles. It is also the experience of the IRS that the 2009 cost sharing regulations limited taxpayers' ability to use PCTs in cost sharing arrangements to shift high value intangibles offshore without appropriate compensation, thereby increasing the relative appeal of transferring intangibles in a transaction subject to section 367. Thus, taxpayers began using transactions subject to section 367 to transfer intangibles intended for development under a cost sharing arrangement rather than as part of a PCT. c. Changing Markets for Intangibles Moreover, since Congress enacted section 367(d) in its current form in 1984, the relative importance of intangibles in the economy and in the profitability of business has increased greatly. According to a joint report issued by the Economic and Statistics Administration and the U.S. Patent and Trademark Office, ``IP use permeates all aspects of the economy with increasing intensity and extends to all parts of the U.S.'' Justin Antonipillai, Economics and Statistics Administration, & Michelle K. Lee, U.S. Patent and Trademark Office, Intellectual Property and the U.S. Economy, at p.30 (2016). This growing importance is reflected in the significant increase in the portion of business values attributable to intangible assets in the years since 1984, with one study indicating that intangibles accounted for only 32 percent of the market value of the S&P 500 in 1985, but accounted for 84 percent by 2015. Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC (Mar. 4, 2015, 12:00 a.m.), http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/. Growth in the share of business values attributable to section 936 intangibles during this period, together with the statutory and regulatory changes discussed in the preceding paragraphs, have increased the incentives for taxpayers to transfer such valuable intangibles to related offshore affiliates in transactions subject to section 367(d) and to misattribute intangible value from enumerated section 936 intangibles to foreign goodwill and going concern value in the context of such transactions. d. The Potential for Abuse Since 1984, taxpayers have reversed their positions regarding the significance of goodwill and going concern value in response to the enactment of sections 197 and 367(d), and now commonly assert that such value constitutes a large percentage--even the vast majority--of an enterprise's value. The IRS's experience administering section 367(d) has, once again, highlighted the abuse potential that arises from the need to distinguish value attributable to nominally distinct intangibles that are used together in a single trade or business. Specifically, the uncertainty inherent in distinguishing between value attributable to goodwill and going concern value and value attributable to other intangible property makes any exception to income recognition for the outbound transfer of goodwill and going concern value unduly difficult to administer and prone to tax avoidance. Of course, any rule that provides for the tax-free transfer of one type of property, while the transfer of other types of property remains taxable, provides an incentive to improperly allocate value away from the taxable property and onto the tax-free property. This problem is acute, however, in cases involving the offshore reorganization of entire business divisions that include high-value, interrelated intangibles, because goodwill and going concern value are particularly difficult to distinguish (perhaps are even indistinguishable) from the enumerated section 936 intangibles. See, for example, International Multifoods Corp. v. Commissioner, 108 T.C. 25, 42 (1997) (noting that it ``is well established that trademarks embody goodwill''). See also Joint Committee on Taxation, Present [[Page 91016]] Law and Background Related to Possible Income Shifting and Transfer Pricing, (JCX-37-10) July 20, 2010, at 110 (noting that unique intangible property is difficult to value because it is rarely, if ever, transferred to third parties). e. Legislative Intent and the Broad Grant of Authority To Limit Potential Abuses These statutory, regulatory, and market developments since Congress amended section 367(d) in 1984, as well as the experience of the IRS in administering section 367 over that period, inform the manner in which the Treasury Department and the IRS seek to give effect to the intent of Congress in this complex area of law. As a starting point, the Treasury Department and the IRS observe that the statutory grants of authority in section 367(a) and (d), coupled with the absence of any specific statutory protection for transfers of goodwill and going concern value, form the basis for the broad authority of the Treasury Department and the IRS to design the appropriate parameters for the taxation of outbound transfers. The 1984 legislative history expressed an expectation that outbound transfers of foreign goodwill and going concern value would not lead to abuse of the U.S. tax system and, on the basis of that expectation, anticipated that the Secretary would exercise the regulatory authority under section 367 in a manner that would allow taxpayers to transfer foreign goodwill and going concern value outbound without current U.S. tax. The legislative history also explains that Congress expected the Secretary to use the ``regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.'' Accordingly, the administrative discretion to determine the contours of nonrecognition treatment must be exercised in light of the income recognition objectives of the statute and informed by the IRS's experience in administering the exception. The Treasury Department and the IRS have determined that the premise of the expectation noted in the legislative history that an exception to recognition treatment would apply to foreign goodwill and going concern value--namely, that outbound transfers of foreign goodwill and going concern value would not lead to abuse--is inconsistent with the experience of the IRS in administering section 367(d), and consequently no longer supports such an exception. Rather, based on the IRS's experience over the past three decades, the Treasury Department and the IRS have determined that the favorable treatment of foreign goodwill and going concern value has interfered with the application of the general rule in section 367(d) that requires income recognition upon the outbound transfer of section 936 intangibles due to the inherent difficulty of distinguishing value attributable to goodwill and going concern value from value attributable to enumerated section 936 intangibles, coupled with taxpayer efforts to maximize the value allocated to goodwill and going concern value. The Treasury Department and the IRS also observe that the 1984 legislative history explains that the 1984 amendments to section 367(d) were made in response to challenges the IRS faced in administering the prior regime. That regime required a taxpayer to clear its purpose for transferring property offshore with the IRS. See H.R. Rep. 98-432, pt. 2, at 1315. The 1984 reworking of section 367 was intended to promote administrability by making the analysis of outbound transfers more objective. Other passages from the legislative history show that the general purpose of the amendments to section 367 was to close ``serious loopholes,'' and that the 1984 revisions were intended to strengthen the application of that section. Id. Accordingly, the Treasury Department and the IRS do not view the legislative history as mandating an exception for transfers of goodwill and going concern value developed by a foreign branch, or as indicating that Congress anticipated, or would have condoned, the extent of the claims regarding foreign goodwill and going concern value that the IRS has in fact encountered. To the contrary, the Treasury Department and the IRS have concluded that the statutory purpose of the income recognition provisions in section 367(d) is incompatible with the favorable treatment of foreign goodwill and going concern value reflected in the 1986 temporary regulations. In particular, taking into account the statutory, regulatory, and market developments since 1984 and the experience of the IRS in administering section 367(d) under the 1986 temporary regulations, the Treasury Department and the IRS have determined that, at this juncture, the approach most consistent with the intent of Congress in 1984, including the directive to use regulatory authority ``to provide for recognition in cases of transfers involving the potential of tax avoidance,'' is to remove the favorable treatment for foreign goodwill and going concern value in the 1986 temporary regulations. The Treasury Department and the IRS also disagree with the notion expressed in comments that the proposed regulations inappropriately attempt to solve section 482 transfer pricing problems under the authority of section 367. Congress made clear in adding the commensurate with income language to both sections 367(d) and 482 in 1986 that the provisions are closely related, and it is within the authority of the Treasury Department and the IRS to consider valuation concerns in administering section 367. Section 1231(e)(1) and (2) of the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085, 2562-3. For these reasons, the Treasury Department and the IRS disagree with comments asserting that the Treasury Department and the IRS lack the authority to eliminate the favorable treatment that applied to foreign goodwill and going concern value under the 1986 temporary regulations. C. Other Comments Suggesting That Some Favorable Treatment for Transfers of Foreign Goodwill and Going Concern Value Be Maintained Several comments generally favored retaining both the nonrecognition treatment for foreign goodwill and going concern value and its current measurement as the residual value of a foreign business operation. Other comments, however, acknowledged the problems associated with the residual valuation approach but supported an exception determined on some other basis. Some of these comments included suggestions for other ways to define goodwill and going concern value and for determining the amount that should qualify for nonrecognition. The Treasury Department and the IRS have determined that none of the comments provided a sufficiently administrable approach that would reliably ensure that section 367 applies with respect to the full value of all section 936 intangibles. 1. Local Pressure To Incorporate; Industry-Based Exception The proposed regulations specifically requested comments on a potential exception that would apply to situations where there is limited potential for abuse. As an example, the comment solicitation posited the incorporation, in response to regulatory pressure or compulsion, of a financial services business that previously had operated as a branch in another country. The Treasury Department and the IRS received several comments in response to this solicitation. Several comments suggested that the final regulations provide an exception that would continue to permit favorable treatment of transfers of foreign [[Page 91017]] goodwill and going concern value that occur as a result of the incorporation of a branch in a country that exerts regulatory pressure (either implicit or explicit) upon the U.S. transferor to conduct its operations in that country in corporate form. According to these comments, the incorporation of a branch in these circumstances is not motivated by tax considerations but rather occurs in order to comply with local law or regulations. The regulations under section 367 provide that certain property is deemed to be transferred for use in the active conduct of a trade or business outside of the United States when the transfer is either legally required by the local foreign government as a necessary condition of doing business or is compelled by a genuine threat of immediate expropriation by the local foreign government. Section 367 and the regulations thereunder do not, however, provide exceptions to the requirement to recognize income or gain when assets that are not eligible for the ATB exception, such as section 936 intangibles and assets described in section 367(a)(3)(B), are transferred in this circumstance. Accordingly, the policy of section 367 and the regulations thereunder is not to expand on the types of assets that are eligible for the ATB exception in this circumstance. Moreover, the mere fact that a taxpayer is compelled or pressured to incorporate its branch does not mean that the taxpayer has any less incentive to reduce the tax consequences of such incorporation by adopting the aggressive valuation positions that the proposed regulations were intended to prevent. Therefore, the final regulations do not provide a special exception to continue the favorable treatment of foreign goodwill and going concern value in this circumstance. Notably, some taxpayers that are pressured to incorporate branch operations in these circumstances can avoid being subject to section 367 by incorporating the branch using an eligible entity described in Sec. 301.7701-2 that could elect to be treated as a disregarded entity for U.S. federal income tax purposes. Several comments recommended an exception for transfers of foreign goodwill and going concern value by taxpayers in certain industries, such as banking and finance, life insurance, and industries that primarily provide services to third parties, asserting that such businesses do not possess the types of highly valuable intangibles about which they believe the Treasury Department and the IRS are concerned. The comments did not provide any basis, however, for the Treasury Department and the IRS to conclude that taxpayers in particular industries consistently lack valuable intangibles of the kind listed in section 936(h)(3)(B), even though the prevalence of specific types of intangibles may differ across industries. Additionally, the ability and incentive to allocate value away from other intangibles, such as trademarks, and toward goodwill or going concern value is not limited to particular industries. As a general matter, the Treasury Department and the IRS attempt, to the extent possible, to avoid issuing guidance based on industry classifications that are not clearly and closely tied to specific tax policy concerns. Accordingly, the final regulations do not provide any industry-specific exceptions. Based on these comments, the Treasury Department and the IRS considered whether it would be possible to provide an exception for tax-free transfers of foreign goodwill and going concern value developed by a foreign branch that did not possess or otherwise benefit from the use of any highly valuable enumerated section 936 intangibles. If the absence of such highly valuable intangibles could be reliably determined, the concerns regarding the potential to attribute value away from such intangibles and toward goodwill and going concern value would be mitigated. However, such an exception would require the development and administration of standards to determine whether any enumerated section 936 intangible was highly valuable, an exercise that would be as difficult (and in many circumstance would be no different) than the exercise of distinguishing value attributable to foreign goodwill and going concern value from value attributable to other intangibles transferred together with it. Such an exception also would require a careful examination of the particular facts of a transferor's assets and business as a threshold matter to confirm that valuable enumerated section 936 intangibles are not made available for the benefit of the transferee foreign corporation, either through a separate but related transfer to the foreign corporation or through a service provided to the foreign corporation using such intangibles. Accordingly, the Treasury Department and the IRS did not adopt this potential exception in these final regulations. 2. Foreign Branch Exception Several comments suggested maintaining the favorable treatment of foreign goodwill and going concern value in situations in which section 367 applies to the incorporation of a long-standing foreign branch or a branch that conducts an active foreign business operation. The Treasury Department and the IRS acknowledge that conditioning favorable treatment for foreign goodwill and going concern value on the presence of a robust foreign branch would increase the likelihood that the business at issue has substantive foreign operations. However, in situations where the exception would continue to apply, the requirement of a robust foreign branch would not address the potential for tax avoidance that motivated the proposed regulations when value must be allocated between foreign goodwill and going concern value, on the one hand, and enumerated section 936 intangibles, on the other hand. Thus, the final regulations do not adopt the comments suggesting an exception for goodwill and going concern value developed by a foreign branch that is subsequently incorporated because, when applicable, such an exception would not address the administrative difficulties in identifying and separately valuing the property that is and is not eligible for the exception, and therefore would be insufficient to prevent the potential for tax avoidance. 3. New Rules for Valuing Foreign Goodwill and Going Concern Value Other comments suggested that the regulations provide new rules for determining foreign goodwill and going concern value, such that an exception for such transfers could be provided that would be less susceptible to the abuses described in the preamble to the proposed regulations. That is, the comments suggested determining goodwill and going concern value using an approach that differs from that in existing Sec. 1.367(a)-1T(d)(5)(iii), which treats it as the residual after other intangibles are valued. Several of these comments suggested determining foreign goodwill and going concern value by classifying intangibles as routine and non- routine and permitting value attributable to routine intangibles to be transferred tax-free under an exception. One comment asserted that goodwill is relatively easy to value as compared to certain enumerated section 936 intangibles but did not explain why or how goodwill is more easily valued or how to reliably allocate value between goodwill and enumerated section 936 intangibles. Another comment asserted that goodwill can be valued based on the premise that it is the kind of asset that enables an existing business to produce ``routine'' or ``normal'' operating profits [[Page 91018]] or cash flow during the period that a new business would be assembling its assets and workforce and attracting a customer base, but the comment did not explain how to determine ``routine'' or ``normal'' operating profits. Another comment recommended determining foreign goodwill and going concern value using a formulaic approach based on sales and general and administrative expenses, asserting that routine expenses for operational costs and compensation are closely associated with the business activities that give rise to goodwill and going concern value. The comment did not provide any support for this premise. As a general matter, cost-based methods (in comparison with market-based and income- based methods) are not a reliable means of valuing intangible property because the value of intangible property does not necessarily bear any predictable relationship to the costs of developing the property. The comment suggesting a cost-based approach did not demonstrate that determining goodwill and going concern value in the section 367(d) context is a situation where costs are a reliable measure of value (regardless of whether goodwill and going concern value are section 936(h)(3)(B) intangibles). Accordingly, the Treasury Department and the IRS have determined that a rule that determined foreign goodwill and going concern value based on certain expenses would be inappropriate. Another comment proposed, for branches incorporated in a jurisdiction with which the United States has an income tax treaty in effect, using the earnings before interest, taxes, depreciation, and amortization of the branch as reported to foreign tax authorities as reliable data on which to base a valuation. An exception based on information reported to a foreign country's tax authority, which may be based on that jurisdiction's generally accepted accounting standards, does not address the concerns expressed by the Treasury Department and the IRS in the preamble to the proposed regulations. Most significantly, the comment does not explain how this information would be useful in determining the value of foreign goodwill and going concern value or distinguishing value attributable to enumerated section 936 intangibles from that of other property, nor have the Treasury Department and the IRS been able to identify how it would be useful. Accordingly, this recommendation has not been adopted. In summary, none of the proposed approaches for more directly valuing foreign goodwill and going concern value offer a principled and administrable basis for allocating value between foreign goodwill and going concern value that would be subject to an exception and other intangibles that would not. The Treasury Department and the IRS therefore concluded that the proposed approaches would not provide a meaningful improvement over the residual value approach in the 1986 temporary regulations as a conceptual or administrative matter. 4. Formulaic Caps on Foreign Goodwill and Going Concern Value Several comments suggested that the favorable treatment for transfers of foreign goodwill and going concern value could be maintained while addressing the concerns that prompted the issuance of the proposed regulations by capping the amount that can qualify for the exception, either on a non-rebuttable basis or in the absence of a ruling. For example, one comment suggested that the excepted amount should not exceed 25 percent of the branch's net enterprise value, unless a ruling is obtained from the IRS. The comment asserted that 25 percent represents a modest portion of a branch's value that is likely to be attributable to branch goodwill and going concern value. Another comment suggested that the excepted amount should not exceed 50 percent of the total value of the assets transferred to the foreign corporation. Although such formulaic caps would limit the potential tax avoidance from improperly attributing value from enumerated section 936 intangibles to foreign goodwill and going concern value that is eligible for an exception, the amount excepted under such an approach would still potentially reflect value properly attributable to enumerated section 936 intangibles. That is, with respect to amounts claimed below the cap, a formulaic cap would not relieve the IRS of the need to distinguish foreign goodwill and going concern value from enumerated section 936 intangibles, a key challenge that motivated the approach of the proposed regulations. Moreover, the Treasury Department and the IRS have determined that the discretionary ruling practice proposed by one comment would require an onerous commitment of IRS resources (which the comment acknowledged are constrained), and, without detailed procedures for both identifying and valuing foreign goodwill and going concern value, would simply accelerate the disputes that occur under the 1986 temporary regulations. As a result, the final regulations do not adopt the recommendations to use a formulaic cap to limit the amount of foreign goodwill and going concern value. 5. Professional Services Exception One comment stated that U.S. citizens may conduct professional services outside the United States as sole practitioners, or in partnership with other practitioners, and observed that the incorporation of such a business would entail a section 351 contribution subject to section 367 (assuming the transferee entity was classified as a corporation for U.S. federal income tax purposes). According to the comment, because any goodwill in such a scenario would relate to foreign customers and a foreign business or professional license, there could be no abuse warranting taxation under section 367. The Treasury Department and the IRS do not agree that the outbound transfer of value developed in such cases will necessarily not result in abuse of the U.S. tax system. The potential for abuse in a transfer subject to section 367 arises not just from the possibility that value associated with U.S. customers would be denominated as foreign goodwill, but also from the fundamental difficulty in reliably distinguishing value attributable to enumerated section 936 intangibles from value attributable to other intangibles, an issue that is no different in the professional services context. Therefore, the final regulations do not adopt this comment. 6. Joint Venture Exception One comment proposed maintaining the favorable treatment of foreign goodwill and going concern value for transfers to joint venture companies, particularly cases in which the U.S. transferor is going into business with one or more unrelated foreign parties (third parties) and in which the U.S. transferor's interest in the joint venture is equal to or less than 50 percent. According to the comment, the U.S. transferor in this situation has a financial incentive to segregate its intangibles contributed to the joint venture from its other property. The presence of a third party, however, would not necessarily reduce the U.S. transferor's incentive to attribute value to foreign goodwill and going concern value, rather than to enumerated section 936 intangibles, in order to minimize the tax consequences of the transfer, since such a distinction may be irrelevant to the third party. Accordingly, the final regulations do not adopt this proposal. [[Page 91019]] D. Classifying Foreign Goodwill and Going Concern Value as Subject to Section 367(a) or (d) Several comments requested that the Treasury Department and the IRS address whether goodwill and going concern value should be characterized as a section 936(h)(3)(B) intangible, and thus subject to section 367(d), or instead as property subject to section 367(a). Comments also requested that the regulations provide certainty to taxpayers that have taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) by providing that such taxpayers will be permitted to treat goodwill and going concern value as property subject to section 367(a) rather than section 367(d). As discussed in the preamble to the proposed regulations, the Treasury Department and the IRS acknowledge that taxpayers have taken different positions regarding the scope of section 936(h)(3)(B) and that the issue is more significant following the elimination of the favorable treatment for foreign goodwill and going concern value. Any enumerated section 936 intangible, and any item similar to such specifically enumerated intangibles, is subject to the regime provided by section 367(d). The Treasury Department and the IRS have determined that it would be inconsistent with the policy underlying section 367(d) to permit intangible property that is described in section 936(h)(3)(B) to be subject to section 367(a). Accordingly, the Treasury Department and the IRS have determined that it is appropriate to retain the approach provided in the proposed regulations, which allows taxpayers to apply section 367(d) to certain property that otherwise would be taxed under section 367(a) but which continues to require taxpayers to apply section 367(d) to all property described in section 936(h)(3)(B). Because the identification of items that are neither explicitly listed in section 936(h)(3)(B)(i) through (v) nor explicitly listed as potentially qualifying for the ATB exception generally will require a case-by-case functional and factual analysis, the final regulations do not address the characterization of such items as similar items (within the meaning of section 936(h)(3)(B)(vi)) or as something else. In general, potential rules under section 367 for identifying and valuing transferred property are beyond the scope of these final regulations. II. Useful Life The proposed regulations eliminated the 20-year limitation on useful life for intangible property subject to section 367(d) that was included in Sec. 1.367(d)-1T(c)(3), because of concerns that the limitation results in less than all of the income attributable to transferred intangible property being taken into account by the U.S. transferor. In the preamble to the proposed regulations, the Treasury Department and the IRS solicited comments on how to simplify the administration of section 367(d) inclusions for property with a very long useful life in the absence of the 20-year limitation. In response to this comment solicitation, several comments requested that the final regulations restore the 20-year limitation on useful life because it promotes administrability for both taxpayers and the IRS. After considering the comments received, the Treasury Department and the IRS agree that a 20-year limitation on inclusions may promote administrability for both taxpayers and the IRS in cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years. Accordingly, in such cases, the final regulations provide that taxpayers may, in the year of transfer, choose to take into account section 367(d) inclusions only during the 20-year period beginning with the first year in which the U.S. transferor takes into account income pursuant to section 367(d). However, the Treasury Department and the IRS have determined that this optional limitation should not affect the present value of all amounts included by the taxpayer under section 367(d). Accordingly, the final regulations specifically require a taxpayer that chooses to limit section 367(d) inclusions to a 20-year period to include, during that period, amounts that reasonably reflect amounts that, in the absence of the limitation, would be required to be included over the useful life of the transferred property following the end of the 20-year period. This requirement is consistent with the requirement in section 367(d) to include amounts that are commensurate with the income attributable to the transferred intangible during its full useful life, without limitation. The requirement of the final regulations that inclusions during the limited 20-year period begin in the first year in which in which the U.S. transferor takes into account income pursuant to section 367(d) reflects the possibility of delays between the year the intangible property is transferred and the first year in which exploitation of the transferred property results in taxable income being earned by the transferee and included under section 367(d) by the transferor. One comment also suggested that the IRS be precluded from making commensurate-with-income adjustments for taxable years beginning more than 20 years after the outbound transfer. In response to this comment, the final regulations provide that, if a taxpayer chooses to limit inclusions under section 367(d) to a 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. Thus, after the statute of limitations expires for taxable years during the 20-year period, a taxpayer will have no further section 367(d) inclusions as a result of the Commissioner's examination of taxable years that begin after the end of the 20-year period. However, consistent with the commensurate-with-income principle, for purposes of determining whether income inclusions during the 20-year period are commensurate with the income attributable to the transferred property, and whether adjustments should be made for taxable years during that period while the statute of limitations for such taxable years is open, the Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years. The final regulations revise the definition of useful life to provide that useful life includes the entire period during which exploitation of the transferred intangible property is reasonably anticipated to affect the determination of taxable income, in order to appropriately account for the fact that exploitation of intangible property can result in both revenue increases and cost decreases. A comment asserted that including use in subsequently developed intangibles within the useful life of the transferred intangible property would be too difficult to administer and was not consistent with the arm's length standard. The Treasury Department and the IRS disagree with this comment. The value of many types of intangible property is derived not only from use of the intangible property in its present form, but also from its use in further development of the next generation of that intangible and other property. For example, if a software developer were to sell all of its copyright rights in its software to an unrelated party, and the copyright rights are expected to derive value both from the exclusive right to use the current generation computer code to make and sell current generation [[Page 91020]] software products and from the exclusive right to use the current generation code in the development of other versions of the software, which will then be used to make and sell future generation software products, the software developer would expect to be compensated for the latter right. That is, if the software has value in developing a future generation of products, the software developer would not ignore the value of the use of the software in future research and development and hand over those rights free of charge, and an uncontrolled purchaser would be willing to compensate the developer to obtain such rights. III. Applicability Date Several comments requested that the final regulations apply to transfers occurring after their date of publication, and not relate back to the date the proposed regulations were issued. These comments asserted that the proposed regulations change long-standing law in a way that would prejudice taxpayers that had arranged their business operations based on the 1986 temporary regulations. Others speculated that the final regulations might deviate from the proposed regulations to such an extent that substantial confusion would result for taxpayers attempting to determine their tax results in the interim period before the final regulations were published. Finally, one comment asserted that an applicability date relating back to the proposed regulations would violate the Administrative Procedure Act (APA), specifically 5 U.S.C. 553, which provides that the effective date of certain final regulations must be at least 30 days after their date of publication. After considering these comments, the Treasury Department and the IRS have determined that the proposed applicability date, under which the final regulations would apply to transfers occurring on or after September 14, 2015, should be retained. The proposed regulations were issued to curtail the potential for abuse that exists under the 1986 temporary regulations from treating value that should be attributed to enumerated section 936 intangibles instead as exempt foreign goodwill or going concern value. The proposed effective date was intended to prevent taxpayers from using the time while the proposed regulations were pending to accelerate transfers subject to section 367 in order to take abusive positions under the 1986 temporary regulations before the finalization of the proposed regulations. The Treasury Department and the IRS have statutory authority to issue regulations applicable at least as of the date the proposed regulations were filed with the Federal Register. The pre-1996 version of section 7805(b)--which governs regulations related to statutory provisions enacted before July 30, 1996, such as section 367--provides express retroactive rulemaking authority by stating that the Secretary may prescribe the extent, if any, to which any ruling or regulation shall be applied without retroactive effect. Section 7805(b) (1995). Because section 7805(b) is the more specific statute, it controls over the general notice requirements of 5 U.S.C. 553. See, for example, Redhouse v. Commissioner, 728 F.2d 1249, 1253 (9th Cir. 1984); Wing v. Commissioner, 81 T.C. 17, 28-30 & n.17 (1983). Finally, the Treasury Department and the IRS disagree with the comment that differences between the proposed and final regulations may create confusion. The final regulations are a logical outgrowth of the proposed regulations in light of the comments received and their consideration by the Treasury Department and the IRS. In particular, the final regulations do not differ from the proposed regulations with respect to the elimination of the favorable treatment for transfers of foreign goodwill and going concern value. Furthermore, a transfer of property that is subject to recognition treatment under section 367 under the final regulations would also have been subject to such treatment under section 367 under the proposed regulations. For these reasons, the final regulations generally apply to transfers occurring on or after September 14, 2015, the date the proposed regulations were filed with the Federal Register, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under Sec. 301.7701-2 that are filed on or after September 14, 2015. IV. Qualification of Property Denominated in Foreign Currency for the ATB Exception Although section 367(a)(3)(B)(iii) provides that the ATB exception does not apply, and therefore that section 367(a)(1) applies, to foreign currency or other property denominated in foreign currency, current Sec. 1.367(a)-5T(d)(2) generally provides that section 367(a)(1) nonetheless does not apply to certain transfers of property denominated in the currency of the country in which the transferee foreign corporation is organized. The proposed regulations eliminated this regulatory exception from the general rule in section 367(a)(3)(B)(iii) that turns off the ATB exception for such property. One comment recommended clarifying the regulations under section 367(a) by adopting the language and concepts reflected in the changes to the foreign currency rules in subpart J that were made after the publication of the 1986 temporary regulations. In response to this comment, Sec. 1.367(a)-2(c)(3) of the final regulations, which corresponds to existing Sec. 1.367(a)-5T(d)(2), reflects amendments that increase consistency with the rules in sections 987 and 988. In particular, the terms ``foreign currency'' and ``property denominated in foreign currency'' are no longer used. Rather, proposed Sec. 1.367(a)-2(c)(3) is revised to refer to nonfunctional currency and other property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(B), or that would give rise to such a section 988 transaction if it were acquired, accrued, or entered into directly by the taxpayer. The Treasury Department and the IRS consider that these modifications do not substantially change the scope of property subject to the rule at Sec. 1.367(a)-5T(d)(2). V. Other Issues Other comments suggested that regulations address many outstanding issues in the context of section 367 that were not addressed in the proposed regulations. These suggestions include guidance to address the following topics: (i) The valuation of intangibles subject to section 367(d) and the forms that deemed payments should take, including guidance providing parity with the section 482 form-of-payment rules; (ii) whether a receivable is created upon an audit-related adjustment; (iii) the tax basis consequences under section 367(d), including how section 367(d) applies to intangibles subject to the section 197 anti- churning rules; (iv) coordination of the general rules and disposition rules in section 367(d); (v) issues raised in connection with Notice 2012-39 (2012-31 IRB 95); (vi) the definition of ``property'' for purposes of section 367; and (vii) the subsequent transfer rules under the ATB exception. The Treasury Department and the IRS generally agree that additional guidance under section 367(a) and (d) is desirable and would benefit both taxpayers and the government. However, these issues are beyond the scope of this project. For example, while the Treasury Department and the IRS are aware that there is uncertainty regarding the application of the subsequent transfer rules to transactions involving hybrid partnerships, the Treasury Department and the IRS have determined that transactions involving partnerships merit a more holistic consideration and [[Page 91021]] that this regulation package is not the appropriate vehicle to address the issue. Consequently, the regulations finalize the subsequent transfer rules in Sec. 1.367(a)-2T(c) (located in Sec. 1.367(a)-2(g) of these final regulations), but the Treasury Department and the IRS expect those rules will be amended after a more detailed consideration of transactions involving partnerships. Special Analyses Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. It is hereby certified that the collection of information contained in these regulations will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. This certification is based on the fact that the regulations under section 367(a) and (d) simplify existing regulations, and the regulations under section 6038B make relatively minor changes to existing information reporting requirements. Moreover, these regulations primarily will affect large domestic corporations filing consolidated returns. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. No comments were received. Drafting Information The principal author of these regulations is Ryan Bowen, 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. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.367(d)-1 also issued under 26 U.S.C. 367(d). * * * * * * * * 0 Par. 2. Section 1.367(a)-0 is added to read as follows: Sec. 1.367(a)-0 Table of contents. This section lists the paragraphs contained in Sec. Sec. 1.367(a)- 1 through 1.367(a)-8. Sec. 1.367(a)-1 Transfers to foreign corporations subject to section 367(a): In general. (a) Scope. (b) General rules. (1) Foreign corporation not considered a corporation for purposes of certain transfers. (2) Cases in which foreign corporate status is not disregarded. (3) Determination of value. (4) In general. (5) Treatment of certain property as subject to section 367(d). (c) [Reserved]. (d) Definitions. (1) United States person. (2) Foreign corporation. (3) Transfer. (4) Property. (5) Intangible property. (6) Operating intangibles. (e) Close of taxable year in certain section 368(a)(1)(F) reorganizations. (f) Exchanges under sections 354(a) and 361(a) in certain section 368(a)(1)(F) reorganizations. (1) Rule. (2) Rule applies regardless of whether a continuance under applicable law. (g) Effective/applicability dates. Sec. 1.367(a)-2 Exceptions for transfers of property for use in the active conduct of a trade or business. (a) Scope and general rule. (1) Scope. (2) General rule. (b) Eligible property. (c) Exception for certain property. (1) Inventory. (2) Installment obligations, etc. (3) Nonfunctional currency, etc. (4) Certain leased tangible property. (d) Active conduct of a trade or business outside the United States. (1) In general. (2) Trade or business. (3) Active conduct. (4) Outside of the United States. (5) Use in the trade or business. (6) Active leasing and licensing. (e) Special rules for certain property to be leased. (1) Leasing business of the foreign corporation. (2) De minimis leasing by the foreign corporation. (3) Aircraft and vessels leased in foreign commerce. (f) Special rules for oil and gas working interests. (1) In general. (2) Active use of working interest. (3) Start-up operations. (4) Other applicable rules. (g) Property retransferred by the foreign corporation. (1) General rule. (2) Exception. (h) Compulsory transfers of property. (i) [Reserved]. (j) Failure to comply with reporting requirements of section 6038B. (1) Failure to comply. (2) Relief for certain failures to comply that are not willful. (k) Effective/applicability dates. (1) In general. (2) Foreign currency exception. Sec. 1.367(a)-3 Treatment of transfers of stock or securities to foreign corporations. (a) In general. (1) Overview. (2) Exceptions for certain exchanges of stock or securities. (3) Cross-references. (b) Transfers of stock or securities of foreign corporations. (1) General rule. (2) Certain transfers subject to sections 367(a) and (b). (c) Transfers of stock or securities of domestic corporations. (1) General rule. (2) Ownership presumption. (3) Active trade or business test. (4) Special rules. (5) Definitions. (6) Reporting requirements of U.S. target company. (7) Ownership statements. (8) Certain transfers in connection with performance of services. (9) Private letter ruling option. (10) Examples. (11) Effective date. (d) Indirect stock transfers in certain nonrecognition transfers. (1) In general. (2) Special rules for indirect transfers. (3) Examples. (e) [Reserved]. (f) Failure to file statements. (1) Failure to file. (2) Relief for certain failures to file that are not willful. (g) Effective/applicability dates. (1) Rules of applicability. (2) Election. (h) Former 10-year gain recognition agreements. (i) [Reserved]. (j) Transition rules regarding certain transfers of domestic or foreign stock or securities after December 16, 1987, and prior to July 20, 1998. (1) Scope. (2) Transfers of domestic or foreign stock or securities: Additional substantive rules. (k) [Reserved]. Sec. 1.367(a)-4 Special rule applicable to U.S. depreciated property. (a) Depreciated property used in the United States. (1) In general. (2) U.S. depreciated property. (3) Property used within and without the United States. (b) Effective/applicability dates. Sec. 1.367(a)-5 [Reserved]. Sec. 1.367(a)-6 Transfer of foreign branch with previously deducted losses. (a) through (b)(1) [Reserved]. (2) No active conduct exception. (c)(1) [Reserved]. (2) Gain limitation. [[Page 91022]] (3) [Reserved]. (4) Transfers of certain intangible property. (d) through (i) [Reserved]. (j) Effective/applicability dates. Sec. 1.367(a)-7 Outbound transfers of property described in section 361(a) or (b). (a) Scope and purpose. (b) General rule. (1) Nonrecognition exchanges enumerated in section 367(a)(1). (2) Nonrecognition exchanges not enumerated in section 367(a)(1). (c) Elective exception. (1) Control. (2) Gain recognition. (3) Basis adjustments required for control group members. (4) Agreement to amend or file a U.S. income tax return. (5) Election and reporting requirements. (d) Section 361 exchange followed by successive distributions to which section 355 applies. (e) Other rules. (1) Section 367(a) property with respect to which gain is recognized. (2) Relief for certain failures to comply that are not willful. (3) Anti-abuse rule. (4) Certain income inclusions under Sec. 1.367(b)-4. (5) Certain gain under Sec. 1.367(a)-6. (f) Definitions. (g) Examples. (h) Applicable cross-references. (i) [Reserved]. (j) Effective/applicability dates. (1) In general. (2) Section 367(d) property. Sec. 1.367(a)-8 Gain recognition agreement requirements. (a) Scope. (b) Definitions and special rules. (1) Definitions. (2) Special rules. (c) Gain recognition agreement. (1) Terms of agreement. (2) Content of gain recognition agreement. (3) Description of transferred stock or securities and other information. (4) Basis adjustments for gain recognized. (5) Terms and conditions of a new gain recognition agreement. (6) Cross-reference. (d) Filing requirements. (1) General rule. (2) Special requirements. (3) Common parent as agent for U.S. transferor. (e) Signatory. (1) General rule. (2) Signature requirement. (f) Extension of period of limitations on assessments of tax. (1) General rule. (2) New gain recognition agreement. (g) Annual certification. (h) Use of security. (i) [Reserved]. (j) Triggering events. (1) Disposition of transferred stock or securities. (2) Disposition of substantially all of the assets of the transferred corporation. (3) Disposition of certain partnership interests. (4) Disposition of stock of the transferee foreign corporation. (5) Deconsolidation. (6) Consolidation. (7) Death of an individual; trust or estate ceases to exist. (8) Failure to comply. (9) Gain recognition agreement filed in connection with indirect stock transfers and certain triangular asset reorganizations. (10) Gain recognition agreement filed pursuant to paragraph (k)(14) of this section. (k) Triggering event exceptions. (1) Transfers of stock of the transferee foreign corporation to a corporation or partnership. (2) Complete liquidation of U.S. transferor under sections 332 and 337. (3) Transfers of transferred stock or securities to a corporation or partnership. (4) Transfers of substantially all of the assets of the transferred corporation. (5) Recapitalizations and section 1036 exchanges. (6) Certain asset reorganizations. (7) Certain triangular reorganizations. (8) Complete liquidation of transferred corporation. (9) Death of U.S. transferor. (10) Deconsolidation. (11) Consolidation. (12) Intercompany transactions. (13) Deemed asset sales pursuant to section 338(g) elections. (14) Other dispositions or events. (l) [Reserved]. (m) Receipt of boot in nonrecognition transactions. (1) Dispositions of transferred stock or securities. (2) Dispositions of assets of transferred corporation. (n) Special rules for distributions with respect to stock. (1) Certain dividend equivalent redemptions treated as dispositions. (2) Gain recognized under section 301(c)(3). (o) Dispositions or other events that terminate or reduce the amount of gain subject to the gain recognition agreement. (1) Taxable disposition of stock of the transferee foreign corporation. (2) Gain recognized in connection with certain nonrecognition transactions. (3) Gain recognized under section 301(c)(3). (4) Dispositions of substantially all of the assets of a domestic transferred corporation. (5) Certain distributions or transfers of transferred stock or securities to U.S. persons. (6) Dispositions or other event following certain intercompany transactions. (7) Expropriations under foreign law. (p) Relief for certain failures to file or failures to comply that are not willful. (1) In general. (2) Procedures for establishing that a failure to file or failure to comply was not willful. (3) Examples. (q) Examples. (1) Presumed facts and references. (2) Examples. (r) Effective/applicability date. (1) General rule. (2) Applicability to transfers occurring before March 13, 2009. (3) Applicability to requests for relief submitted before November 19, 2014. 0 Par. 3. Section 1.367(a)-1 is revised to read as follows: Sec. 1.367(a)-1 Transfers to foreign corporations subject to section 367(a): In general. (a) Scope. Section 367(a)(1) provides the general rule concerning certain transfers of property by a United States person (referred to at times in this section as the ``U.S. person'' or ``U.S. transferor'') to a foreign corporation. Paragraph (b) of this section provides general rules explaining the effect of section 367(a)(1). Paragraph (c) of this section describes transfers of property that are described in section 367(a)(1). Paragraph (d) of this section provides definitions that apply for purposes of sections 367(a) and (d) and the regulations thereunder. Paragraphs (e) and (f) of this section provide rules that apply to certain reorganizations described in section 368(a)(1)(F). Paragraph (g) of this section provides dates of applicability. For rules concerning the reporting requirements under section 6038B for certain transfers of property to a foreign corporation, see Sec. 1.6038B-1. (b) General rules--(1) Foreign corporation not considered a corporation for purposes of certain transfers. If a U.S. person transfers property to a foreign corporation in connection with an exchange described in section 351, 354, 356, or 361, then, pursuant to section 367(a)(1), the foreign corporation will not be considered to be a corporation for purposes of determining the extent to which gain is recognized on the transfer. Section 367(a)(1) denies nonrecognition treatment only to transfers of items of property on which gain is realized. Thus, the amount of gain recognized because of section 367(a)(1) is unaffected by the transfer of items of property on which loss is realized (but not recognized). (2) Cases in which foreign corporate status is not disregarded. For circumstances in which section 367(a)(1) does not apply to a U.S. transferor's transfer of property to a foreign corporation, and thus the foreign corporation is considered to be a corporation, see Sec. Sec. 1.367(a)-2, 1.367(a)-3, and 1.367(a)-7. (3) Determination of value. In cases in which a U.S. transferor's transfer of property to a foreign corporation constitutes a controlled transaction as defined in Sec. 1.482-1(i)(8), the value of [[Page 91023]] the property transferred is determined in accordance with section 482 and the regulations thereunder. (4) Character, source, and adjustments--(i) In general. If a U.S. person is required to recognize gain under section 367 upon a transfer of property to a foreign corporation, then-- (A) The character and source of such gain are determined as if the property had been disposed of in a taxable exchange with the transferee foreign corporation (unless otherwise provided by regulation); and (B) Appropriate adjustments to earnings and profits, basis, and other affected items will be made according to otherwise applicable rules, taking into account the gain recognized under section 367(a)(1). For purposes of applying section 362, the foreign corporation's basis in the property received is increased by the amount of gain recognized by the U.S. transferor under section 367(a) and the regulations issued pursuant to that section. To the extent the regulations provide that the U.S. transferor recognizes gain with respect to a particular item of property, the foreign corporation increases its basis in that item of property by the amount of such gain recognized. For example, Sec. Sec. 1.367(a)-2, 1.367(a)-3, and 1.367(a)-4 provide that gain is recognized with respect to particular items of property. To the extent the regulations do not provide that gain recognized by the U.S. transferor is with respect to a particular item of property, such gain is treated as recognized with respect to items of property subject to section 367(a) in proportion to the U.S. transferor's gain realized in such property, after taking into account gain recognized with respect to particular items of property transferred under any other provision of section 367(a). For example, Sec. 1.367(a)-6 provides that branch losses must be recaptured by the recognition of gain realized on the transfer but does not associate the gain with particular items of property. See also Sec. 1.367(a)-1(c)(3) for rules concerning transfers by partnerships or of partnership interests. (C) The transfer will not be recharacterized for U.S. Federal tax purposes solely because the U.S. person recognizes gain in connection with the transfer under section 367(a)(1). For example, if a U.S. person transfers appreciated stock or securities to a foreign corporation in an exchange described in section 351, the transfer is not recharacterized as other than an exchange described in section 351 solely because the U.S. person recognizes gain in the transfer under section 367(a)(1). (ii) Example. The rules of this paragraph (b)(4) are illustrated by the following example. Example. Domestic corporation DC transfers inventory with a fair market value of $1 million and adjusted basis of $800,000 to foreign corporation FC in exchange for stock of FC that is described in section 351(a). Title passes within the United States. Pursuant to section 367(a), DC is required to recognize gain of $200,000 upon the transfer. Under the rule of this paragraph (b)(4), the gain is treated as ordinary income (sections 1201 and 1221) from sources within the United States (section 861) arising from a taxable exchange with FC. Appropriate adjustments to earnings and profits, basis, etc., will be made as if the transfer were subject to section 351. Thus, for example, DC's basis in the FC stock received, and FC's basis in the transferred inventory, will each be increased by the $200,000 gain recognized by DC, pursuant to sections 358(a)(1) and 362(a), respectively. (5) Treatment of certain property as subject to section 367(d). A U.S. transferor may apply section 367(d) and Sec. 1.367(d)-1, rather than section 367(a) and the regulations thereunder, to a transfer of property to a foreign corporation that otherwise would be subject to section 367(a), provided that the property is not eligible property, as defined in Sec. 1.367(a)-2(b) but determined without regard to Sec. 1.367(a)-2(c). A U.S. transferor and any other U.S. transferor that is related (within the meaning of section 267(b) or 707(b)(1)) to the U.S. transferor must consistently apply this paragraph (b)(5) to all property described in this paragraph (b)(5) that is transferred to one or more foreign corporations pursuant to a plan. A U.S. transferor applies the provisions of this paragraph (b)(5) in the form and manner set forth in Sec. 1.6038B-1(d)(1)(iv) and (v). (c)(1) through (c)(3)(i) reserved. For further guidance, see Sec. 1.367(a)-1T(c)(1) through (c)(3)(i). (ii) Transfer of partnership interest treated as transfer of proportionate share of assets--(A) In general. If a U.S. person transfers an interest as a partner in a partnership (whether foreign or domestic) in an exchange described in section 367(a)(1), then that person is treated as having transferred a proportionate share of the property of the partnership in an exchange described in section 367(a)(1). Accordingly, the applicability of the exception to section 367(a)(1) provided in Sec. 1.367(a)-2 is determined with reference to the property of the partnership rather than the partnership interest itself. A U.S. person's proportionate share of partnership property is determined under the rules and principles of sections 701 through 761 and the regulations thereunder. (c)(3)(i)(A) Example through (7) reserved. For further guidance, see Sec. 1.367(a)-1T(c)(3)(i)(A) Example through (7). (d) Definitions. The following definitions apply for purposes of sections 367(a) and (d) and the regulations thereunder. (1) United States person. The term ``United States person'' includes those persons described in section 7701(a)(30). The term includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and any estate or trust other than a foreign estate or trust. (For definitions of these terms, see section 7701 and the regulations thereunder.) For purposes of this section, an individual with respect to whom an election has been made under section 6013(g) or (h) is considered to be a resident of the United States while such election is in effect. A nonresident alien or a foreign corporation will not be considered a United States person because of its actual or deemed conduct of a trade or business within the United States during a taxable year. (2) Foreign corporation. The term ``foreign corporation'' has the meaning set forth in section 7701(a)(3) and (5) and Sec. 301.7701-5. (3) Transfer. For purposes of section 367 and regulations thereunder, the term ``transfer'' means any transaction that constitutes a transfer for purposes of section 332, 351, 354, 355, 356, or 361, as applicable. A person's entering into a cost sharing arrangement under Sec. 1.482-7 or acquiring rights to intangible property under such an arrangement shall not be considered a transfer of property described in section 367(a)(1). See Sec. 1.6038B-1T(b)(4) for the date on which the transfer is considered to be made. (4) Property. For purposes of section 367 and the regulations thereunder, the term ``property'' means any item that constitutes property for purposes of section 351, 354, 355, 356, or 361, as applicable. (5) Intangible property. The term ``intangible property'' means either property described in section 936(h)(3)(B) or property to which a U.S. person applies section 367(d) pursuant to paragraph (b)(5) of this section, but does not include property described in section 1221(a)(3) or a working interest in oil and gas property. (6) Operating intangibles. An operating intangible is any property described in section 936(h)(3)(B) of a type not ordinarily licensed or otherwise transferred in transactions [[Page 91024]] between unrelated parties for consideration contingent upon the licensee's or transferee's use of the property. Examples of operating intangibles may include long-term purchase or supply contracts, surveys, studies, and customer lists. (f) Exchanges under sections 354(a) and 361(a) in certain section 368(a)(1)(F) reorganizations--(1) Rule. In every reorganization under section 368(a)(1)(F), where the transferor corporation is a domestic corporation, and the acquiring corporation is a foreign corporation, there is considered to exist-- (i) A transfer of assets by the transferor corporation to the acquiring corporation under section 361(a) in exchange for stock (or stock and securities) of the acquiring corporation and the assumption by the acquiring corporation of the transferor corporation's liabilities; (ii) A distribution of the stock (or stock and securities) of the acquiring corporation by the transferor corporation to the shareholders (or shareholders and security holders) of the transferor corporation; and (iii) An exchange by the transferor corporation's shareholders (or shareholders and security holders) of their stock (or stock and securities) of the transferor corporation for stock (or stock and securities) of the acquiring corporation under section 354(a). (2) Rule applies regardless of whether a continuance under applicable law. For purposes of paragraph (f)(1) of this section, it shall be immaterial that the applicable foreign or domestic law treats the acquiring corporation as a continuance of the transferor corporation. (g) Effective/applicability dates. (1) through (3) [Reserved]. For further guidance, see Sec. 1.367(a)-1T(g)(1) through (3). (4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this section apply to transfers occurring on or after April 18, 2013. For guidance with respect to paragraph (b)(4)(i)(B) of this section before April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012. The rules in paragraph (e) of this section apply to transactions occurring on or after March 31, 1987. The rules in paragraph (f) of this section apply to transactions occurring on or after January 1, 1985. (5) Paragraphs (a), (b)(1) through (b)(4)(i)(B), (b)(4)(ii) through (b)(5), (c)(3)(ii)(A), (d) introductory text through (d)(2), (d)(4) through (d)(6) of this section apply 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 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see Sec. Sec. 1.367(a)-1 and 1.367(a)-1T as contained in 26 CFR part 1 revised as of April 1, 2016. Sec. 1.367(a)-1T [Amended] 0 Par. 4. Section 1.367(a)-1T is amended by removing and reserving paragraphs (a), (b)(1), (b)(2), (b)(3), (b)(4)(i)(A), (b)(4)(ii), (c)(3)(ii)(A), (d) introductory text, (d)(1), (d)(2), (d)(4), and (d)(5), and adding and reserving new paragraphs (b)(5) and (d)(6). 0 Par. 5. Section 1.367(a)-2 is revised to read as follows: Sec. 1.367(a)-2 Exceptions for transfers of property for use in the active conduct of a trade or business. (a) Scope and general rule--(1) Scope. Paragraph (a)(2) of this section provides the general exception to section 367(a)(1) for certain property transferred for use in the active conduct of a trade or business. Paragraph (b) of this section describes property that is eligible for the exception provided in paragraph (a)(2) of this section. Paragraph (c) of this section describes property that is not eligible for the exception provided in paragraph (a)(2) of this section. Paragraph (d) of this section provides general rules, and paragraphs (e) through (h) of this section provide special rules, for determining whether property is used in the active conduct of a trade or business outside of the United States. Paragraph (i) of this section is reserved. Paragraph (j) of this section provides relief for certain failures to comply with the reporting requirements under paragraph (a)(2)(iii) of this section that are not willful. Paragraph (k) of this section provides dates of applicability. The rules of this section do not apply to a transfer of stock or securities in an exchange subject to Sec. 1.367(a)-3. (2) General rule. Except as otherwise provided in Sec. Sec. 1.367(a)-4, 1.367(a)-6, and 1.367(a)-7, section 367(a)(1) does not apply to property transferred by a United States person (U.S. transferor) to a foreign corporation if-- (i) The property constitutes eligible property; (ii) The property is transferred for use by the foreign corporation in the active conduct of a trade or business outside of the United States, as determined under paragraph (d), (e), (f), (g), or (h) of this section, as applicable; and (iii) The U.S. transferor complies with the reporting requirements of section 6038B and the regulations thereunder. (b) Eligible property. Except as provided in paragraph (c) of this section, eligible property means-- (1) Tangible property; (2) A working interest in oil and gas property; and (3) A financial asset. For purposes of this section, a financial asset is-- (i) A cash equivalent; (ii) A security within the meaning of section 475(c)(2), without regard to the last sentence of section 475(c)(2) (referencing section 1256) and without regard to section 475(c)(4), but excluding an interest in a partnership; (iii) A commodities position described in section 475(e)(2)(B), 475(e)(2)(C), or 475(e)(2)(D); and (iv) A notional principal contract described in Sec. 1.446- 3(c)(1). (c) Exception for certain property. Notwithstanding paragraph (b) of this section, property described in paragraph (c)(1), (2), (3), or (4) of this section does not constitute eligible property. (1) Inventory. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business (including raw materials and supplies, partially completed goods, and finished products). (2) Installment obligations, etc. Installment obligations, accounts receivable, or similar property, but only to the extent that the principal amount of any such obligation has not previously been included by the taxpayer in its taxable income. (3) Nonfunctional currency, etc.--(i) In general. Property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(A) through (C), without regard to section 988(c)(1)(D) and (E), or that would give rise to such a section 988 transaction if it were acquired, accrued, entered into, or disposed of directly by the taxpayer. (ii) Limitation of gain required to be recognized. If section 367(a)(1) applies to a transfer of property described in paragraph (c)(3)(i) of this section, then the gain required to be recognized is limited to the gain realized as part of the same transaction upon the transfer of property described in paragraph (c)(3)(i) of this section, less any loss realized as part of the same transaction upon the transfer of property described in paragraph (c)(3)(i) of this section. This limitation applies in lieu of the rule in Sec. 1.367(a)-1(b)(1). No loss is recognized with respect to property described in this paragraph (c)(3). [[Page 91025]] (4) Certain leased tangible property. Tangible property with respect to which the transferor is a lessor at the time of the transfer, unless either the foreign corporation is the lessee at the time of the transfer or the foreign corporation will lease the property to third persons. (d) Active conduct of a trade or business outside the United States--(1) In general. Except as provided in paragraphs (e), (f), (g), and (h) of this section, to determine whether property is transferred for use by the foreign corporation in the active conduct of a trade or business outside of the United States, four factual determinations must be made: (i) What is the trade or business of the foreign corporation (see paragraph (d)(2) of this section); (ii) Do the activities of the foreign corporation constitute the active conduct of that trade or business (see paragraph (d)(3) of this section); (iii) Is the trade or business conducted outside of the United States (see paragraph (d)(4) of this section); and (iv) Is the transferred property used or held for use in the trade or business (see paragraph (d)(5) of this section)? (2) Trade or business. Whether the activities of the foreign corporation constitute a trade or business is determined based on all the facts and circumstances. In general, a trade or business is a specific unified group of activities that constitute (or could constitute) an independent economic enterprise carried on for profit. For example, the activities of a foreign selling subsidiary could constitute a trade or business if they could be independently carried on for profit, even though the subsidiary acts exclusively on behalf of, and has operations fully integrated with, its parent corporation. To constitute a trade or business, a group of activities must ordinarily include every operation which forms a part of, or a step in, a process by which an enterprise may earn income or profit. In this regard, one or more of such activities may be carried on by independent contractors under the direct control of the foreign corporation. (However, see paragraph (d)(3) of this section.) The group of activities must ordinarily include the collection of income and the payment of expenses. If the activities of the foreign corporation do not constitute a trade or business, then the exception provided by this section does not apply, regardless of the level of activities carried on by the corporation. The following activities are not considered to constitute by themselves a trade or business for purposes of this section: (i) Any activity giving rise to expenses that would be deductible only under section 212 if the activities were carried on by an individual; or (ii) The holding for one's own account of investments in stock, securities, land, or other property, including casual sales thereof. (3) Active conduct. Whether a trade or business is actively conducted by the foreign corporation is determined based on all the facts and circumstances. In general, a corporation actively conducts a trade or business only if the officers and employees of the corporation carry out substantial managerial and operational activities. A corporation may be engaged in the active conduct of a trade or business even though incidental activities of the trade or business are carried out on behalf of the corporation by independent contractors. In determining whether the officers and employees of the corporation carry out substantial managerial and operational activities, however, the activities of independent contractors are disregarded. On the other hand, the officers and employees of the corporation are considered to include the officers and employees of related entities who are made available to and supervised on a day-to-day basis by, and whose salaries are paid by (or reimbursed to the lending related entity by), the foreign corporation. See paragraph (d)(6) of this section for the standard that applies to determine whether a trade or business that produces rents or royalties is actively conducted. The rule of this paragraph (d)(3) is illustrated by the following example. Example. X, a domestic corporation, and Y, a foreign corporation not related to X, transfer property to Z, a newly formed foreign corporation organized for the purpose of combining the research activities of X and Y. Z contracts all of its operational and research activities to Y for an arm's-length fee. Z's activities do not constitute the active conduct of a trade or business. (4) Outside of the United States. Whether the foreign corporation conducts a trade or business outside of the United States is determined based on all the facts and circumstances. Generally, the primary managerial and operational activities of the trade or business must be conducted outside the United States and immediately after the transfer the transferred assets must be located outside the United States. Thus, the exception provided by this section would not apply to the transfer of the assets of a domestic business to a foreign corporation if the domestic business continued to operate in the United States after the transfer. In such a case, the primary operational activities of the business would continue to be conducted in the United States. Moreover, the transferred assets would be located in the United States. However, it is not necessary that every item of property transferred be used outside of the United States. As long as the primary managerial and operational activities of the trade or business are conducted outside of the United States and substantially all of the transferred assets are located outside the United States, incidental items of transferred property located in the United States may be considered to have been transferred for use in the active conduct of a trade or business outside of the United States. (5) Use in the trade or business. Whether property is used or held for use by the foreign corporation in a trade or business is determined based on all the facts and circumstances. In general, property is used or held for use in the foreign corporation's trade or business if it is-- (i) Held for the principal purpose of promoting the present conduct of the trade or business; (ii) Acquired and held in the ordinary course of the trade or business; or (iii) Otherwise held in a direct relationship to the trade or business. Property is considered held in a direct relationship to a trade or business if it is held to meet the present needs of that trade or business and not its anticipated future needs. Thus, property will not be considered to be held in a direct relationship to a trade or business if it is held for the purpose of providing for future diversification into a new trade or business, future expansion of trade or business activities, future plant replacement, or future business contingencies. (6) Active leasing and licensing. For purposes of paragraph (d)(3) of this section, whether a trade or business that produces rents or royalties is actively conducted is determined under the principles of section 954(c)(2)(A) and the regulations thereunder, but without regard to whether the rents or royalties are received from an unrelated party. See Sec. Sec. 1.954-2(c) and (d). (e) Special rules for certain property to be leased--(1) Leasing business of the foreign corporation. Except as otherwise provided in this paragraph (e), tangible property that will be leased to another person by the foreign corporation will be considered to be transferred for use by the foreign corporation in an active trade or business outside the United States only if-- (i) The foreign corporation's leasing of the property constitutes the active [[Page 91026]] conduct of a leasing business, as determined under paragraph (d)(6) of this section; (ii) The lessee of the property is not expected to, and does not, use the property in the United States; and (iii) The foreign corporation has a need for substantial investment in assets of the type transferred. (2) De minimis leasing by the foreign corporation. Tangible property that will be leased to another person by the foreign corporation but that does not satisfy the conditions of paragraph (e)(1) of this section will, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if either-- (i) The property transferred will be used by the foreign corporation in the active conduct of a trade or business but will be leased during occasional brief periods when the property would otherwise be idle, such as an airplane leased during periods of excess capacity; or (ii) The property transferred is real property located outside the United States and-- (A) The property will be used primarily in the active conduct of a trade or business of the foreign corporation; and (B) Not more than ten percent of the square footage of the property will be leased to others. (3) Aircraft and vessels leased in foreign commerce. For purposes of satisfying paragraph (e)(1) of this section, an aircraft or vessel, including component parts such as an engine leased separately from the aircraft or vessel, that will be leased to another person by the foreign corporation will be considered to be transferred for use in the active conduct of a trade or business if-- (i) The employees of the foreign corporation perform substantial managerial and operational activities of leasing aircraft or vessels outside the United States; and (ii) The leased property is predominantly used outside the United States, as determined under Sec. 1.954-2(c)(2)(v). (f) Special rules for oil and gas working interests--(1) In general. A working interest in oil and gas property will be considered to be transferred for use in the active conduct of a trade or business if-- (i) The transfer satisfies the conditions of paragraph (f)(2) or (f)(3) of this section; (ii) At the time of the transfer, the foreign corporation has no intention to farm out or otherwise transfer any part of the transferred working interest; and (iii) During the first three years after the transfer there are no farmouts or other transfers of any part of the transferred working interest as a result of which the foreign corporation retains less than a 50-percent share of the transferred working interest. (2) Active use of working interest. A working interest in oil and gas property that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of this section will be considered to be transferred for use in the active conduct of a trade or business if-- (i) The U.S. transferor is regularly and substantially engaged in exploration for and extraction of minerals, either directly or through working interests in joint ventures, other than by reason of the property that is transferred; (ii) The terms of the working interest transferred were actively negotiated among the joint venturers; (iii) The working interest transferred constitutes at least a five percent working interest; (iv) Before and at the time of the transfer, through its own employees or officers, the U.S. transferor was regularly and actively engaged in-- (A) Operating the working interest, or (B) Analyzing technical data relating to the activities of the venture; (v) Before and at the time of the transfer, through its own employees or officers, the U.S. transferor was regularly and actively involved in decision making with respect to the operations of the venture, including decisions relating to exploration, development, production, and marketing; and (vi) After the transfer, the foreign corporation will for the foreseeable future satisfy the requirements of subparagraphs (iv) and (v) of this paragraph (f)(2). (3) Start-up operations. A working interest in oil and gas property that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of this section but that does not satisfy all the requirements of paragraph (f)(2) of this section will, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if-- (i) The working interest was acquired by the U.S. transferor immediately before the transfer and for the specific purpose of transferring it to the foreign corporation; (ii) The requirements of paragraphs (f)(2)(ii) and (iii) of this section are satisfied; and (iii) The foreign corporation will for the foreseeable future satisfy the requirements of paragraph (f)(2)(iv) and (v) of this section. (4) Other applicable rules. A working interest in oil and gas property that is not described in paragraph (f)(1) of this section may nonetheless qualify for the exception to section 367(a)(1) contained in this section depending upon the facts and circumstances. (g) Property retransferred by the foreign corporation--(1) General rule. Property will not be considered to be transferred for use in the active conduct of a trade or business outside of the United States if-- (i) At the time of the transfer, it is reasonable to believe that, in the reasonably foreseeable future, the foreign corporation will sell or otherwise dispose of any material portion of the property other than in the ordinary course of business; or (ii) Except as provided in paragraph (g)(2) of this section, the foreign corporation receives the property in an exchange described in section 367(a)(1), and, as part of the same transaction, transfers the property to another person. For purposes of the preceding sentence, a subsequent transfer within six months of the initial transfer will be considered to be part of the same transaction, and a subsequent transfer more than six months after the initial transfer may be considered to be part of the same transaction under step-transaction principles. (2) Exception. Notwithstanding paragraph (g)(1) of this section, the active conduct exception provided by this section shall apply to the initial transfer if-- (i) The initial transfer is followed by one or more subsequent transfers described in section 351 or 721; and (ii) Each subsequent transferee is either a partnership in which the preceding transferor is a general partner or a corporation in which the preceding transferor owns common stock; and (iii) The ultimate transferee uses the property in the active conduct of a trade or business outside the United States. (h) Compulsory transfers of property. Property is presumed to be transferred for use in the active conduct of a trade or business outside of the United States, if-- (1) The property was previously in use in the country in which the foreign corporation is organized; and (2) The transfer is either: (i) Legally required by the foreign government as a necessary condition of doing business; or (ii) Compelled by a genuine threat of immediate expropriation by the foreign government. (i) [Reserved]. (j) Failure to comply with reporting requirements of section 6038B--(1) [[Page 91027]] Failure to comply. For purposes of the exception to the application of section 367(a)(1) provided in paragraph (a)(2) of this section, a failure to comply with the reporting requirements of section 6038B and the regulations thereunder (failure to comply) has the meaning set forth in Sec. 1.6038B-1(f)(2). (2) Relief for certain failures to comply that are not willful--(i) In general. A failure to comply described in paragraph (j)(1) of this section will be deemed not to have occurred for purposes of satisfying the requirements of this section if the taxpayer demonstrates that the failure was not willful using the procedure set forth in this paragraph (j)(2). For this purpose, willful is to be interpreted consistent with the meaning of that term in the context of other civil penalties, which would include a failure due to gross negligence, reckless disregard, or willful neglect. Whether a failure to comply was a willful failure will be determined by the Director of Field Operations, Cross Border Activities Practice Area, Large Business & International (or any successor to the roles and responsibilities of such position, as appropriate) (Director) based on all the facts and circumstances. The taxpayer must submit a request for relief and an explanation as provided in paragraph (j)(2)(ii)(A) of this section. Although a taxpayer whose failure to comply is determined not to be willful will not be subject to gain recognition under this section, the taxpayer will be subject to a penalty under section 6038B if the taxpayer fails to demonstrate that the failure was due to reasonable cause and not willful neglect. See Sec. 1.6038B-1(b)(1) and (f). The determination of whether the failure to comply was willful under this section has no effect on any request for relief made under Sec. 1.6038B-1(f). (ii) Procedures for establishing that a failure to comply was not willful--(A) Time and manner of submission. A taxpayer's statement that the failure to comply was not willful will be considered only if, promptly after the taxpayer becomes aware of the failure, an amended return is filed for the taxable year to which the failure relates that includes the information that should have been included with the original return for such taxable year or that otherwise complies with the rules of this section, and that includes a written statement explaining the reasons for the failure to comply. The amended return must be filed with the Internal Revenue Service at the location where the taxpayer filed its original return. The taxpayer may submit a request for relief from the penalty under section 6038B as part of the same submission. See Sec. 1.6038B-1(f). (B) Notice requirement. In addition to the requirements of paragraph (j)(2)(ii)(A) of this section, the taxpayer must comply with the notice requirements of this paragraph (j)(2)(ii)(B). If any taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Internal Revenue Service personnel conducting the examination. If no taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Director. (3) For illustrations of the application of the willfulness standard of this paragraph (j), see the examples in Sec. 1.367(a)- 8(p)(3). (4) Paragraph (j) applies to requests for relief submitted on or after November 19, 2014. (k) Effective/applicability dates--(1) In general. Except as provided in paragraphs (j)(4) and (k)(2) of this section, the rules of this section apply 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 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see Sec. Sec. 1.367(a)-2, -2T, -4, -4T, -5, and -5T as contained in 26 CFR part 1 revised as of April 1, 2016. (2) Foreign currency exception. Notwithstanding paragraph (c)(3)(i) of this section, Sec. 1.367(a)-5T(d)(2) as contained in 26 CFR part 1 revised as of April 1, 2016, applies to transfers of property denominated in a foreign currency occurring before December 16, 2016, other than transfers occurring before that date resulting from entity classification elections made under Sec. 301.7701-3 that are filed on or after that date. Sec. 1.367(a)-2T [Removed] 0 Par. 6. Section 1.367(a)-2T is removed. Sec. 1.367(a)-3 [Amended] 0 Par. 7. For each section listed in the following the table, remove the language in the ``Remove'' column and add in its place the language in the ``Add'' column. ---------------------------------------------------------------------------------------------------------------- Section Remove Add ---------------------------------------------------------------------------------------------------------------- Sec. 1.367(a)-3(a)(3), first Sec. 1.367(a)-1T(c).. Sec. 1.367(a)-1(c). sentence. Sec. 1.367(a)-3(c)(3)(i)(A)........ Sec. 1.367(a)- Sec. 1.367(a)-2(d)(2), (3), and (4). 2T(b)(2) and (3). Sec. 1.367(a)-3(c)(3)(ii)(B), last Sec. 1.367(a)- Sec. 1.367(a)-2(d)(2) and (3). sentence. 2T(b)(2) and (3). Sec. 1.367(a)-3(c)(4)(i), last Sec. 1.367(a)- Sec. 1.367(a)-1(c)(3). sentence. 1T(c)(3). Sec. 1.367(a)-3(c)(5)(iv), first Sec. 1.367(a)- Sec. 1.367(a)-1(d)(1). sentence. 1T(d)(1). Sec. 1.367(a)-3(d)(3) Example Sec. 1.367(a)- Sec. 1.367(a)-2(a)(2)(iii). 7A(ii), penultimate sentence. 2T(a)(2). Sec. 1.367(a)-3(d)(3) Example Sec. 1.367(a)- Sec. 1.367(a)-2(g)(2). 13(i), penultimate sentence. 2T(c)(2). ---------------------------------------------------------------------------------------------------------------- 0 Par. 8. Section 1.367(a)-4 is revised to read as follows: Sec. 1.367(a)-4 Special rule applicable to U.S. depreciated property. (a) Depreciated property used in the United States--(1) In general. A U.S. person that transfers U.S. depreciated property (as defined in paragraph (a)(2) of this section) to a foreign corporation in an exchange described in section 367(a)(1), must include in its gross income for the taxable year in which the transfer occurs ordinary income equal to the gain realized that would have been includible in the transferor's gross income as ordinary income under section 617(d)(1), 1245(a), 1250(a), 1252(a), 1254(a), or 1255(a), whichever is applicable, if at the time of the transfer the U.S. person had sold the property at its fair market value. Recapture of depreciation under this paragraph (a) is required regardless of whether the exception to section 367(a)(1) provided by Sec. 1.367(a)-2(a)(2) applies to the transfer of the U.S. depreciated property. However, the transfer of the U.S. depreciated property may qualify for the exception with respect to realized gain that is not included in ordinary income pursuant to this paragraph (a). (2) U.S. depreciated property. U.S. depreciated property subject to the rules [[Page 91028]] of this paragraph (a) is any property that-- (i) Is either mining property (as defined in section 617(f)(2)), section 1245 property (as defined in section 1245(a)(3)), section 1250 property (as defined in section 1250(c)), farm land (as defined in section 1252(a)(2)), section 1254 property (as defined in section 1254(a)(3)), or section 126 property (as defined in section 1255(a)(2)); and (ii) Has been used in the United States or has been described in section 168(g)(4) before its transfer. (3) Property used within and without the United States. (i) If U.S. depreciated property has been used partly within and partly without the United States, then the amount required to be included in ordinary income pursuant to this paragraph (a) is reduced to an amount determined in accordance with the following formula: [GRAPHIC] [TIFF OMITTED] TR16DE16.037 (ii) For purposes of the fraction in paragraph (a)(3)(i) of this section, the ``full recapture amount'' is the amount that would otherwise be included in the transferor's income under paragraph (a)(1) of this section. ``U.S. use'' is the number of months that the property either was used within the United States or has been described in section 168(g)(4), and was subject to depreciation by the transferor or a related person. ``Total use'' is the total number of months that the property was used (or available for use), and subject to depreciation, by the transferor or a related person. For purposes of this paragraph (a)(3), property is not considered to have been in use outside of the United States during any period in which such property was, for purposes of section 168, treated as property not used predominantly outside the United States pursuant to section 168(g)(4). For purposes of this paragraph (a)(3), the term ``related person'' has the meaning set forth in Sec. 1.367(d)-1(h). (b) Effective/applicability dates. The rules of this section apply 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 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see Sec. Sec. 1.367(a)-4 and 1.367(a)-4T as contained in 26 CFR part 1 revised as of April 1, 2016. Sec. 1.367(a)-4T [Removed] 0 Par. 9. Sec. 1.367(a)-4T is removed. Sec. 1.367(a)-5 [Removed and Reserved] 0 Par. 10. Section 1.367(a)-5 is removed and reserved. Sec. 1.367(a)-5T [Removed] 0 Par. 11. Sec. 1.367(a)-5T is removed. 0 Par. 12. Section 1.367(a)-6 is revised to read as follows: Sec. 1.367(a)-6 Transfer of foreign branch with previously deducted losses. (a) through (b)(1) [Reserved]. For further guidance, see Sec. 1.367(a)-6T(a) through (b)(1). (b)(2) No active conduct exception. The rules of this paragraph (b) apply regardless of whether any of the assets of the foreign branch satisfy the active trade or business exception of Sec. 1.367(a)- 2(a)(2). (c)(1) [Reserved]. For further guidance, see Sec. 1.367(a)- 6T(c)(1). (2) Gain limitation. The gain required to be recognized under paragraph (b)(1) of this section will not exceed the aggregate amount of gain realized on the transfer of all branch assets (without regard to the transfer of any assets on which loss is realized but not recognized). (3) [Reserved]. (4) Transfers of certain intangible property. Gain realized on the transfer of intangible property (computed with reference to the fair market value of the intangible property as of the date of the transfer) that is an asset of a foreign branch is taken into account in computing the limitation on loss recapture under paragraph (c)(2) of this section. For rules relating to the crediting of gain recognized under this section against income deemed to arise by operation of section 367(d), see Sec. 1.367(d)-1(g)(3). (d) through (i) [Reserved]. For further guidance, see Sec. 1.367(a)-6T(d) through (i). (j) Effective/applicability dates. The rules of this section apply 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 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see Sec. 1.367(a)-6T as contained in 26 CFR part 1 revised as of April 1, 2016. Sec. 1.367(a)-6T [Amended] 0 Par. 13. Section 1.367(a)-6T is amended by 0 1. Removing and reserving paragraphs (b)(2), (c)(2), and (c)(4). 0 2. Adding and reserving paragraph (j). 0 Par. 14. Section 1.367(a)-7 is amended by: 0 1. Revising paragraph (f)(11). 0 2. Redesignating paragraph (j) as (j)(1) and revising the first sentence, and adding paragraph (j)(2). The revision and addition read as follows: Sec. 1.367(a)-7 Outbound transfers of property described in section 361(a) or (b). * * * * * (f) * * * (11) Section 367(d) property is intangible property as defined in Sec. 1.367(a)-1(d)(5). * * * * * (j) Effective/applicability dates--(1) In general. Except for paragraph (e)(2) of this section, and as provided in paragraph (j)(2) of this section, this section applies to transfers occurring on or after April 18, 2013. * * * (2) Section 367(d) property. The definition provided in paragraph (f)(11) of 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 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see Sec. 1.367(a)-7 as contained in 26 CFR part 1 revised as of April 1, 2016. Sec. 1.367(a)-7 [Amended] 0 Par. 15. For each section listed in the following table, remove the language in the ``Remove'' column and add in its place the language in the ``Add'' column. [[Page 91029]] ------------------------------------------------------------------------ Section Remove Add ------------------------------------------------------------------------ Sec. 1.367(a)-7(a), sixth Sec. 1.367(a)-6T Sec. 1.367(a)-6. sentence. Sec. 1.367(a)-7(c), second Sec. 1.367(a)-2T Sec. 1.367(a)-2. sentence. Sec. 1.367(a)-7(c), second Sec. 1.367(a)- Sec. 1.367(a)-4. sentence. 4T, 1.367(a)-5T. Sec. 1.367(a)-7(c), second Sec. 1.367(a)-6T Sec. 1.367(a)-6. sentence. Sec. 1.367(a)-7(c)(2)(i)(B)... Sec. 1.367(a)-6T Sec. 1.367(a)-6. Sec. 1.367(a)- Sec. 1.367(a)-6T Sec. 1.367(a)-6. 7(c)(2)(ii)(A)(2). Sec. 1.367(a)-7(e)(1), third Sec. 1.367(a)-2T Sec. 1.367(a)-2. sentence. Sec. 1.367(a)-7(e)(1), third Sec. 1.367(a)- Sec. 1.367(a)-4. sentence. 4T, 1.367(a)-5T. Sec. 1.367(a)-7(e)(1), third Sec. 1.367(a)-6T Sec. 1.367(a)-6. sentence. Sec. 1.367(a)-7(e)(1), last Sec. 1.367(a)- Sec. 1.367(a)- sentence. 1T(b)(4) and Sec. 1(b)(4). 1.367(a)- 1(b)(4)(i)(B). Sec. 1.367(a)-7(e)(2)(i), Director of Field Director of Field third sentence. Operations Operations, Cross International, Border Activities Large Business & Practice Area of International. Large Business & International. Sec. 1.367(a)-7(e)(4)(ii), Sec. 1.367(a)-6T Sec. 1.367(a)-6. first and second sentences. Sec. 1.367(a)-7(e)(5), heading Sec. 1.367(a)-6T Sec. 1.367(a)-6. Sec. 1.367(a)-7(e)(5)(i), Sec. 1.367(a)-6T Sec. 1.367(a)-6. first sentence. Sec. 1.367(a)-7(e)(5)(ii), Sec. 1.367(a)-6T Sec. 1.367(a)-6. first sentence. Sec. 1.367(a)-7(f)(4)(ii)..... Sec. 1.367(a)-6T Sec. 1.367(a)-6. Sec. 1.367(a)-7(g), last Sec. 1.367(a)-2T Sec. 1.367(a)-2. sentence. Sec. 1.367(a)-7(g), Example 1 Sec. 1.367(a)-2T Sec. 1.367(a)-2. (ii)(A), last sentence. Sec. 1.367(a)-7(g), Example 2 Sec. 1.367(a)-2T Sec. 1.367(a)-2. (ii)(A), last sentence. Sec. 1.367(a)-7(h), first Sec. 1.367(a)- Sec. 1.367(a)- sentence. 1(b)(4)(i)(B) and 1(b)(4). Sec. 1.367(a)- 1T(b)(4). ------------------------------------------------------------------------ Sec. 1.367(a)-8 [Amended] 0 Par. 16. For each section listed in the following table, remove the language in the ``Remove'' column and add in its place the language in the ``Add'' column. ------------------------------------------------------------------------ Section Remove Add ------------------------------------------------------------------------ Sec. 1.367(a)-8(b)(1)(xvii), Sec. 1.367(a)- Sec. 1.367(a)- first sentence. 1T(d)(1). 1(d)(1). Sec. 1.367(a)-8(b)(1)(xvii), Sec. 1.367(a)- Sec. 1.367(a)- second sentence. 1T(c)(3)(i). 1(c)(3)(i). Sec. 1.367(a)-8(c)(3)(viii)... Sec. 1.367(a)- Sec. 1.367(a)- 1T(c)(3)(i). 1(c)(3)(i). Sec. 1.367(a)-8(c)(3)(viii)... Sec. 1.367(a)- Sec. 1.367(a)- 1T(c)(3)(ii). 1(c)(3)(ii). Sec. 1.367(a)-8(c)(4)(iv), Sec. 1.367(a)- Sec. 1.367(a)- second sentence. 1T(b)(4). 1(b)(4). Sec. 1.367(a)-8(j)(3)......... Sec. 1.367(a)- Sec. 1.367(a)- 1T(c)(3)(ii). 1(c)(3)(ii). Sec. 1.367(a)-8(j)(8), second Director of Field Director of Field sentence. Operations Operations, Cross International, Border Activities Large Business & Practice Area of International. Large Business & International. ------------------------------------------------------------------------ 0 Par. 17. Section 1.367(d)-1 is added to read as follows: Sec. 1.367(d)-1 Transfers of intangible property to foreign corporations. (a) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(a). (b) Property subject to section 367(d). Section 367(d) and the rules of this section apply to the transfer of intangible property, as defined in Sec. 1.367(a)-1(d)(5), by a U.S. person to a foreign corporation in an exchange described in section 351 or 361. See section 367(a) and the regulations thereunder for the rules that apply to the transfer of any property other than intangible property. (c)(1) through (2) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(c)(1) and (2). (3) Useful life--(i) In general. For purposes of determining the period of inclusions for deemed payments under Sec. 1.367(d)-1T(c)(1), the useful life of intangible property 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. Exploitation of intangible property includes any direct or indirect use or transfer of the intangible property, including use without further development, use in the further development of the intangible property itself (and any exploitation of the further developed intangible property), and use in the development of other intangible property (and any exploitation of the other developed intangible property). (ii) Procedure to limit inclusions to 20 years. In cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years, taxpayers may, in lieu of including amounts during the entire useful life of the intangible property, choose in the year of transfer to increase annual inclusions during the 20-year period beginning with the first year in which the U.S. transferor takes into account income pursuant to section 367(d), to reflect amounts that, but for this paragraph (c)(3)(ii), would have been required to be included following the end of the 20-year period. See Sec. 1.6038B-1(d)(1)(iv) for guidance on reporting this choice of method. If the taxpayer applies this method during the 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. However, for purposes of determining whether amounts included during the 20-year period are commensurate with the income attributable to the transferred intangible property, the [[Page 91030]] Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years. The application of this paragraph (c)(3)(ii) must be reflected in a statement (titled ``Application of 20-Year Inclusion Period to Section 367(d) Transfers'') attached to a timely filed original federal income tax return (including extensions) for the year of the transfer. An increase to the deemed payment rate made pursuant to this paragraph (c)(3)(ii) will be irrevocable, and a failure to timely file the statement under this paragraph (c)(3)(ii) may not be remedied. (iii) Example. Property subject to section 367(d) is transferred from USP, a domestic corporation, to FA, a foreign corporation wholly owned by USP. The useful life of the transferred property, inclusive of derivative works, at the time of transfer is indefinite but is reasonably anticipated to exceed 20 years. In the first five years following the transfer, sales related to the property are expected to be $100x, $130x, $160x, $180x and $187.2x, respectively. Thereafter, for the remainder of the property's useful life, sales are expected to grow by four percent annually. In the first five years following the transfer, operating profits attributable to the property are expected to be $5x, $8x, $11x, $12.5x, and $13x, respectively. Thereafter, for the remainder of the property's useful life, operating profits are expected to grow by four percent annually. It is determined that the appropriate discount rate for sales and operating profits is 10 percent. The present value of operating profits through the property's indefinite useful life is $185x. The present value of sales through the property's indefinite useful life is $2698x. Accordingly, the sales based royalty rate during the property's useful life is 6.8 percent ($185x/$2698x). The taxpayer may choose to take income inclusions into account over a 20-year period. The present value of sales through the 20-year period is $1787x. Accordingly, the sales based royalty rate under the 20-year option is increased to 10.3 percent ($185x/$1787x). (c)(4) through (g)(2) (introductory text) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(c)(4) through (g)(2) (introductory text). (g)(2)(i) The intangible property transferred constitutes an operating intangible, as defined in Sec. 1.367(a)-1(d)(6). (g)(2)(ii) through (iii)(D) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(g)(2)(ii) through (iii)(D). (E) The transferred intangible property will be used in the active conduct of a trade or business outside of the United States within the meaning of Sec. 1.367(a)-2 and will not be used in connection with the manufacture or sale of products in or for use or consumption in the United States. (g)(2)(iii) undesignated concluding paragraph [Reserved]. For further guidance, see Sec. 1.367(d)-1T(g)(2)(iii) undesignated concluding paragraph. (3) Intangible property transferred from branch with previously deducted losses. (i) If income is required to be recognized under section 904(f)(3) and the regulations thereunder or under Sec. 1.367(a)-6 upon the transfer of intangible property of a foreign branch that had previously deducted losses, then the income recognized under those sections with respect to that property is credited against amounts that would otherwise be required to be recognized with respect to that same property under paragraphs (c) through (f) of this section in either the current or future taxable years. The amount recognized under section 904(f)(3) or Sec. 1.367(a)-6 with respect to the transferred intangible property is determined in accordance with the following formula: [GRAPHIC] [TIFF OMITTED] TR16DE16.038 (ii) For purposes of the formula in paragraph (g)(3)(i) of this section, the ``loss recapture income'' is the total amount required to be recognized by the U.S. transferor pursuant to section 904(f)(3) or Sec. 1.367(a)-6. The ``gain from intangible property'' is the total amount of gain realized by the U.S. transferor pursuant to section 904(f)(3) and Sec. 1.367(a)-6 upon the transfer of items of property that are subject to section 367(d). ``Gain from intangible property'' does not include gain realized with respect to intangible property by reason of an election under paragraph (g)(2) of this section. The ``gain from all branch assets'' is the total amount of gain realized by the transferor upon the transfer of items of property of the branch for which gain is realized. (g)(4) through (i) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(g)(4) through (i). (j) Effective/applicability dates. 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 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. Sec. 1.367(d)-1T [Amended] 0 Par. 18. Section 1.367(d)-1T is amended by removing and reserving paragraphs (b), (c)(3), and (g)(2)(i), (g)(2)(iii)(E), and (g)(3). 0 Par. 19. Section 1.367(e)-2 is amended by 0 1. Revising paragraph (b)(3)(iii). 0 2. Revising paragraph (e)(4)(ii)(B). The revisions read as follows. Sec. 1.367(e)-2 Distributions described in section 367(e)(2). * * * * * (b) * * * (3) * * * (iii) Other rules. For other rules that may apply, see sections 381, 897, 1248, and Sec. 1.482-1(f)(2)(i)(C). * * * * * (e) * * * (4) * * * (ii) * * * (B) The period of limitations on assessment of tax for the taxable year in which gain is required to be reported will be extended until the close of the third full taxable year ending after the date on which the domestic liquidating corporation, foreign distributee corporation, or foreign liquidating corporation, as applicable, furnishes 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) (Director) the information that should have been provided under this section. * * * * * Sec. 1.884-5 [Amended] 0 Par. 20. Section 1.884-5 is amended in paragraph (e)(3)(ii)(A) by removing the citation ``Sec. 1.367(a)-2T(b)(5),'' and adding the citation ``Sec. 1.367(a)-2(d)(5)'' in its place. Sec. 1.1248-8 [Amended] 0 Par. 21. Section 1.1248-8 is amended in paragraph (b)(2)(iv)(B)(1)(ii) by removing the citation ``Sec. Sec. 1.367(a)-6T,'' and adding the citation ``Sec. 1.367(a)-6'' in its place. [[Page 91031]] Sec. 1.1248(f)-2 [Amended] 0 Par. 22. Section 1.1248(f)-2 is amended in the last sentence of paragraph (e) by removing the citation ``Sec. 1.367(a)-2T,'' and adding the citation ``Sec. 1.367(a)-2'' in its place. 0 Par. 23. Section 1.6038B-1 is amended by: 0 1. Removing the citation ``Sec. 1.367(a)-1T(c),'' in the fourth sentence of paragraph (b)(1)(i) and adding the citation ``Sec. 1.367(a)-1(c)'' in its place. 0 2. Revising paragraphs (c)(1) through (5) and (d). 0 3. Revising the first sentence of paragraph (g)(1). 0 4. Adding paragraph (g)(7). The additions and revision read as follows: Sec. 1.6038B-1 Reporting of certain transfers to foreign corporations. * * * * * (c) * * * (1) through (4) introductory text [Reserved]. For further guidance, see Sec. 1.6038B-1T(c)(1) through (4) introductory text. (i) Active business property. Describe any transferred property that qualifies under Sec. 1.367(a)-2(a)(2). Provide here a general description of the business conducted (or to be conducted) by the transferee, including the location of the business, the number of its employees, the nature of the business, and copies of the most recently prepared balance sheet and profit and loss statement. Property listed within this category may be identified by general type. For example, upon the transfer of the assets of a manufacturing operation, a reasonable description of the property to be used in the business might include the categories of office equipment and supplies, computers and related equipment, motor vehicles, and several major categories of manufacturing equipment. However, any property that is includible in both paragraphs (c)(4)(i) and (iii) of this section (property subject to depreciation recapture under Sec. 1.367(a)-4(a)) must be identified in the manner required in paragraph (c)(4)(iii) of this section. If property is considered to be transferred for use in the active conduct of a trade or business under a special rule in paragraph (e), (f), or (g) of Sec. 1.367(a)-2, specify the applicable rule and provide information supporting the application of the rule. (ii) Stock or securities. Describe any transferred stock or securities, including the class or type, amount, and characteristics of the transferred stock or securities, as well as the name, address, place of incorporation, and general description of the corporation issuing the stock or securities. (iii) Depreciated property. Describe any property that is subject to depreciation recapture under Sec. 1.367(a)-4(a). Property within this category must be separately identified to the same extent as was required for purposes of the previously claimed depreciation deduction. Specify with respect to each such asset the relevant recapture provision, the number of months that such property was in use within the United States, the total number of months the property was in use, the fair market value of the property, a schedule of the depreciation deduction taken with respect to the property, and a calculation of the amount of depreciation required to be recaptured. (iv) Property not transferred for use in the active conduct of a trade or business. Describe any property that is eligible property, as defined in Sec. 1.367(a)-2(b) taking into account the application of Sec. 1.367(a)-2(c), that was transferred to the foreign corporation but not for use in the active conduct of a trade or business outside the United States (and was therefore not listed under paragraph (c)(4)(i) of this section). (v) Property transferred under compulsion. If property qualifies for the exception of Sec. 1.367(a)-2(a)(2) under the rules of paragraph (h) of that section, provide information supporting the claimed application of such exception. (vi) Certain ineligible property. Describe any property that is described in Sec. 1.367(a)-2(c) and that therefore cannot qualify under Sec. 1.367(a)-2(a)(2) regardless of its use in the active conduct of a trade or business outside of the United States. The description must be divided into the relevant categories, as follows: (A) Inventory, etc. Property described in Sec. 1.367(a)-2(c)(1); (B) Installment obligations, etc. Property described in Sec. 1.367(a)-2(c)(2); (C) Foreign currency, etc. Property described in Sec. 1.367(a)- 2(c)(3); and (D) Leased property. Property described in Sec. 1.367(a)-2(c)(4). (vii) Other property that is ineligible property. Describe any property, other than property described in Sec. 1.367(a)-2(c), that cannot qualify under Sec. 1.367(a)-2(a)(2) regardless of its use in the active conduct of a trade or business outside of the United States and that is not subject to the rules of section 367(d) under Sec. 1.367(a)-1(b)(5) (treatment of certain property as subject to section 367(d)). Each item of property must be separately identified. (viii) [Reserved]. For further guidance, see Sec. 1.6038B- 1T(c)(4)(viii). (5) Transfer of foreign branch with previously deducted losses. If the property transferred is property of a foreign branch with previously deducted losses subject to Sec. Sec. 1.367(a)-6 and -6T, provide the following information: (i) through (iv) [Reserved]. For further information, see Sec. 1.6038B-1T(c)(5)(i) through (iv). * * * * * (d)(1) through (1)(iii) [Reserved]. For further guidance, see Sec. 1.6038B-1T(d)(1) through (1)(iii). (iv) Intangible property transferred. Provide a description of the intangible property transferred, including its adjusted basis. Generally, each item of intangible property must be separately identified, including intangible property described in Sec. 1.367(d)- 1(g)(2)(i). Identify all property that is subject to the rules of section 367(d) under Sec. 1.367(a)-1(b)(5) (treatment of certain property as subject to section 367(d)). Describe any property for which the income required to be taken into account under section 367(d) and the regulations thereunder will be recognized over a 20-year period pursuant to Sec. 1.367(d)-1(c)(3)(ii). Estimate the anticipated income or cost reductions attributable to the intangible property's use beyond the 20-year period. (v)-(vi) [Reserved]. For further guidance, see Sec. 1.6038B- 1T(d)(1)(v) through (1)(vi). (vii) Coordination with loss rules. List any intangible property subject to section 367(d) the transfer of which also gives rise to the recognition of gain under section 904(f)(3) or Sec. Sec. 1.367(a)-6 or -6T. Provide a calculation of the gain required to be recognized with respect to such property, in accordance with the provisions of Sec. 1.367(d)-1(g)(3). (d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see Sec. 1.6038B-1T(d)(1)(viii) through (d)(2). * * * * * (g) Effective/applicability dates. (1) This section applies to transfers occurring on or after July 20, 1998, except as provided in paragraphs (g)(2) through (g)(7) of this section, and except for transfers of cash made in tax years beginning on or before February 5, 1999 (which are not required to be reported under section 6038B), and transfers described in paragraph (e) of this section (which applies to transfers that are subject to Sec. Sec. 1.367(e)-1(f) and 1.367(e)- 2(e)). * * * * * * * * (7) Paragraphs (c)(4)(i) through (vii), (c)(5), and (d)(1)(iv) and (vii) of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification [[Page 91032]] elections made under Sec. 301.7701-3 that are filed on or after September 14, 2015. For guidance with respect to paragraphs (c)(4), (c)(5), and (d)(1) of this section before this section is applicable, see Sec. Sec. 1.6038B-1 and 1.6038B-1T as contained in 26 CFR part 1 revised as of April 1, 2016. Sec. 1.6038B-1T [Amended] 0 Par. 24. Section 1.6038B-1T is amended by removing and reserving paragraphs (c)(4)(i) through (c)(5) introductory text, and (d)(1)(iv) and (vii). John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: November 23, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016-29791 Filed 12-15-16; 8:45 am] BILLING CODE 4830-01-P
![91012 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations
(v) Commencing with consolidated Subpart D—State Governments; Dated: December 14, 2016.
plans submitted on or after January 1, Contents of Consolidated Plan Harriet Tregoning,
2018, agencies whose primary Principal Deputy Assistant Secretary for
responsibilities include the management ■ 8. In § 91.300, remove the word ‘‘and’’ Community Planning and Development.
of flood prone areas, public land or following the semicolon at the end of Nani A. Coloretti,
water resources, and emergency paragraph (b)(3)(iii), redesignate Deputy Secretary.
management agencies; and paragraph (b)(3)(iv) as paragraph [FR Doc. 2016–30421 Filed 12–15–16; 8:45 am]
* * * * * (b)(3)(vi), and add new paragraphs BILLING CODE 4210–67–P
■ 7. Revise § 91.210(a) to read as (b)(3)(iv) and (v) to read as follows:
follows:
§ 91.300 General. DEPARTMENT OF THE TREASURY
§ 91.210 Housing market analysis. * * * * *
(a) General characteristics. (1) Based Internal Revenue Service
(b) * * *
on information available to the
jurisdiction, the plan must describe the (3) * * * 26 CFR Part 1
significant characteristics of the (iv) Commencing with consolidated [TD 9803]
jurisdiction’s housing market, including plans submitted on or after January 1,
the supply, demand, and condition and 2018, public and private organizations, RIN 1545–BL87
cost of housing and the housing stock including broadband internet service
Treatment of Certain Transfers of
available to serve persons with providers and organizations engaged in Property to Foreign Corporations
disabilities, and to serve other low- narrowing the digital divide;
income persons with special needs, (v) Commencing with consolidated AGENCY: Internal Revenue Service (IRS),
including persons with HIV/AIDS and Treasury.
plans submitted on or after January 1,
their families. ACTION: Final regulations.
2018, agencies whose primary
(2) Data on the housing market should responsibilities include the management
include, to the extent information is SUMMARY: This document contains final
of flood prone areas, public land or regulations relating to certain transfers
available, an estimate of the number of
water resources, and emergency of property by United States persons to
vacant or abandoned buildings and
management agencies; and foreign corporations. The final
whether units in these buildings are
suitable for rehabilitation. * * * * * regulations affect United States persons
(3) The jurisdiction must also identify ■ 9. Revise § 91.310(a) to read as that transfer certain property, including
and describe any areas within the foreign goodwill and going concern
follows:
jurisdiction with concentrations of value, to foreign corporations in
racial/ethnic minorities and/or low- § 91.310 Housing market analysis. nonrecognition transactions described
income families, stating how it defines in section 367 of the Internal Revenue
(a) General characteristics. (1) Based Code (Code). The regulations also
the terms ‘‘area of low-income
on data available to the State, the plan combine certain sections of the existing
concentration’’ and ‘‘area of minority
must describe the significant regulations under section 367(a) into a
concentration’’ for this purpose. The
locations and degree of these characteristics of the State’s housing single section. This document also
concentrations must be identified, either markets (including such aspects as the withdraws certain temporary
in a narrative or on one or more maps. supply, demand, and condition and cost regulations.
(4) Commencing with consolidated of housing).
DATES: Effective date: These regulations
plans submitted on or after January 1, (2) Commencing with consolidated are effective on December 16, 2016.
2018, the jurisdiction must also describe plans submitted on or after January 1, Applicability date: For dates of
the broadband needs of housing 2018, the State must describe the applicability, see §§ 1.367(a)–1(g)(5),
occupied by low- and moderate-income broadband needs of housing in the State 1.367(a)–2(k), 1.367(a)–4(b), and
households based on an analysis of data, based on an analysis of data identified 1.367(a)–6(j); 1.367(d)–1(j); and
identified by the jurisdiction, for its by the State. These needs include the 1.6038B–1(g)(7).
low- and moderate-income need for broadband wiring and for FOR FURTHER INFORMATION CONTACT:
neighborhoods. These needs include the connection to the broadband service in Ryan A. Bowen, (202) 317–6937 (not a
need for broadband wiring and for the household units, the need for toll-free number).
connection to the broadband service in increased competition by having more SUPPLEMENTARY INFORMATION:
the household units and the need for than one broadband Internet service
increased competition by having more provider serve the jurisdiction. Paperwork Reduction Act
than one broadband Internet service The collections of information
provider serve the jurisdiction. (3) Commencing with consolidated
plans submitted on or after January 1, contained in the regulations have been
(5) Commencing with consolidated submitted for review and approved by
plans submitted on or after January 1, 2018, the State must also describe the
vulnerability of housing occupied by the Office of Management and Budget in
2018, the jurisdiction must also describe accordance with the Paperwork
low- and moderate-income households
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the vulnerability of housing occupied by Reduction Act of 1995 (44 U.S.C.
low- and moderate-income households to increased natural hazard risks due to
3507(d)) under control number 1545–
to increased natural hazard risks climate change based on an analysis of
0026.
associated with climate change based on data, findings, and methods identified The collections of information are in
an analysis of data, findings, and by the State in its consolidated plan. § 1.6038B–1(c)(4) and (d)(1). The
methods identified by the jurisdiction in * * * * * collections of information are
its consolidated plan. mandatory. The likely respondents are
* * * * * domestic corporations. Burdens
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determined that this change is necessary business] rather than a separate rule a. The 1980s and Early 1990s
to carry out the tax policy embodied in applicable to intangibles.
The Treasury Department and the IRS
section 367 in a fair, impartial, and considered the 1984 legislative history
reasonable manner, taking into account H.R. Rep. No. 98–432, pt. 2, at 1317–19
(1984). to section 367 in issuing the 1986
the intent of Congress, the realities of temporary regulations. The 1986
relevant transactions, the need for the Comments also asserted that it is temporary regulations gave effect to the
IRS to administer the rules and monitor inappropriate to use regulatory statements in the legislative history
compliance, and the overall integrity of authority under section 367 to address indicating that Congress anticipated that
the federal tax system. In particular, the transfer pricing concerns under section the transfer of goodwill and going
final regulations are consistent with the 482. concern value developed by a foreign
policy and intent of the statute, which branch to a newly organized foreign
2. Response
does not reference foreign goodwill or corporation generally would not result
going concern value, and with Congress’ The Treasury Department and the IRS in abuse of the U.S. tax system, and, on
expectation that the Secretary would do not agree with the foregoing that basis, that such transfers would
exercise the regulatory authority under comments. Section 367 generally benefit from nonrecognition treatment.
section 367 to require gain recognition provides for income recognition on As a result, the 1986 temporary
when property is transferred offshore transfers of property to a foreign regulations provide nonrecognition
under circumstances that present a corporation in certain transactions that treatment for foreign goodwill and
potential for tax avoidance. otherwise would qualify for concern value. The 1986 temporary
B. Interpretation of Section 367 nonrecognition. While section regulations did not provide a conceptual
367(a)(3)(A) includes a broad exception definition of foreign goodwill and going
1. Summary of Comments Challenging to this general rule for property used in concern value but, in effect, provided a
Authority the active conduct of a trade or business rule for valuing it by describing foreign
The Treasury Department and the IRS outside of the United States, grants of goodwill and going concern value as the
received numerous comments rulemaking authority in section residual value of a business operation
addressing the proposed regulations’ 367(a)(3)(A) and (B) authorize the conducted outside of the United States
treatment of foreign goodwill and going Secretary to exercise administrative after all other tangible and intangible
concern value. One comment asserted discretion in determining the property assets have been identified and valued.
that the ATB exception must apply to to which nonrecognition treatment § 1.367(a)–1T(d)(5)(iii).
transfers of foreign goodwill and going applies under the ATB exception. The Treasury Department and the IRS
concern value, because (i) foreign Moreover, section 367(d) reflects a clear also took into account the 1984
goodwill and going concern value is not policy that income generally should be legislative history in issuing the
a section 936(h)(3)(B) intangible, and so recognized with respect to transfers of proposed regulations and these final
is subject to section 367(a) rather than section 936 intangibles. The 1984 regulations. In doing so, the Treasury
section 367(d), and (ii) the legislative legislative history to section 367 Department and the IRS also considered
history indicates that Congress expected explains that Congress intended for the that, in amending section 367 in 1984,
that the transfer of such value should be Secretary to use his ‘‘regulatory Congress did not choose to statutorily
tax-free. The comment further asserted authority to provide for recognition in mandate any particular treatment of
that, because goodwill and going cases of transfers involving the potential foreign goodwill and going concern
concern value is inextricably linked to of tax avoidance.’’ S. Rep. No. 98–169, value and instead delegated broad
the conduct of an active trade or at 364 (1984) (emphasis added). The authority to the Secretary to promulgate
business, the ATB exception necessarily Treasury Department and the IRS have regulations under section 367 to carry
encompasses such transfers. Other determined that the proposed out its purposes in this complex area.
comments asserted that finalizing the regulations and these final regulations The Treasury Department and the IRS
proposed regulations would represent are consistent with that intention and further considered that the legal and
an unreasonable exercise of regulatory the authority granted to the Secretary factual context in which the 1984
authority because the proposed under section 367, based on the fact that legislative history was drafted has
regulations eliminated the favorable the statute does not refer to foreign changed significantly over the last 32
treatment of all transfers of purported goodwill and going concern value and years.
foreign goodwill and going concern the determination that, as described in Before 1993, goodwill and going
value, rather than just those transfers the preamble to the proposed concern value was not amortizable. As
that the Treasury Department and the regulations, the favorable treatment of a result, in 1984, much of the case law
IRS determine are abusive. foreign goodwill and going concern and policy debate regarding goodwill
value contravenes the policy that and going concern value involved sales
Several comments asserted that the income generally should be recognized of business operations at arm’s length
proposed regulations are inconsistent with respect to transfers of section 936 between unrelated parties, where the
with Congressional intent and cited intangibles. The remainder of this taxpayer attempted to minimize the
statements from the legislative history to section discusses subsequent changes to value of goodwill in order to maximize
section 367, such as the following: the regulatory, statutory, and market the value of amortizable intangibles.
The committee does not anticipate that the context in which the 1984 legislative See, for example, Newark Morning
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transfer of goodwill or going concern value history was drafted, in order to Ledger Co. v. United States, 507 U.S.
developed by a foreign branch to a newly reconcile the statements in the 1984 546 (1993). In 1989, the General
organized foreign corporation will result in legislative history expressing the Accounting Office analyzed data with
abuse of the U.S. tax system. . . . The
committee contemplates that the transfer of
expectation that an exception for foreign respect to unresolved tax cases
goodwill or going concern value developed goodwill and going concern value involving purchased intangibles and
by a foreign branch will be treated under [the would not result in abuse with the IRS’s found that, presumably in order to
exception for transfers of property for use in contrary experience administering the minimize the amount of unamortizable
the active conduct of a foreign trade or statute during the intervening years. goodwill, taxpayers had identified 175
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![Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations 91021
that this regulation package is not the § 1.367(a)–0 Table of contents. (j) Failure to comply with reporting
appropriate vehicle to address the issue. requirements of section 6038B.
This section lists the paragraphs
Consequently, the regulations finalize (1) Failure to comply.
contained in §§ 1.367(a)–1 through (2) Relief for certain failures to comply that
the subsequent transfer rules in 1.367(a)–8. are not willful.
§ 1.367(a)–2T(c) (located in § 1.367(a)– (k) Effective/applicability dates.
§ 1.367(a)–1 Transfers to foreign
2(g) of these final regulations), but the corporations subject to section 367(a): In (1) In general.
Treasury Department and the IRS expect general. (2) Foreign currency exception.
those rules will be amended after a more (a) Scope. § 1.367(a)–3 Treatment of transfers of stock
detailed consideration of transactions (b) General rules. or securities to foreign corporations.
involving partnerships. (1) Foreign corporation not considered a (a) In general.
Special Analyses corporation for purposes of certain transfers. (1) Overview.
(2) Cases in which foreign corporate status (2) Exceptions for certain exchanges of
Certain IRS regulations, including is not disregarded. stock or securities.
these, are exempt from the requirements (3) Determination of value. (3) Cross-references.
of Executive Order 12866, as (4) In general. (b) Transfers of stock or securities of
supplemented and reaffirmed by (5) Treatment of certain property as subject foreign corporations.
Executive Order 13563. Therefore, a to section 367(d). (1) General rule.
(c) [Reserved]. (2) Certain transfers subject to sections
regulatory impact assessment is not 367(a) and (b).
(d) Definitions.
required. It is hereby certified that the (1) United States person. (c) Transfers of stock or securities of
collection of information contained in (2) Foreign corporation. domestic corporations.
these regulations will not have a (3) Transfer. (1) General rule.
significant economic impact on a (4) Property. (2) Ownership presumption.
substantial number of small entities. (5) Intangible property. (3) Active trade or business test.
Accordingly, a regulatory flexibility (6) Operating intangibles. (4) Special rules.
analysis is not required. This (e) Close of taxable year in certain section (5) Definitions.
368(a)(1)(F) reorganizations. (6) Reporting requirements of U.S. target
certification is based on the fact that the
(f) Exchanges under sections 354(a) and company.
regulations under section 367(a) and (d) (7) Ownership statements.
361(a) in certain section 368(a)(1)(F)
simplify existing regulations, and the reorganizations. (8) Certain transfers in connection with
regulations under section 6038B make (1) Rule. performance of services.
relatively minor changes to existing (2) Rule applies regardless of whether a (9) Private letter ruling option.
information reporting requirements. continuance under applicable law. (10) Examples.
Moreover, these regulations primarily (g) Effective/applicability dates. (11) Effective date.
will affect large domestic corporations (d) Indirect stock transfers in certain
§ 1.367(a)–2 Exceptions for transfers of
nonrecognition transfers.
filing consolidated returns. Pursuant to property for use in the active conduct of
(1) In general.
section 7805(f) of the Code, the notice a trade or business.
(2) Special rules for indirect transfers.
of proposed rulemaking that preceded (a) Scope and general rule. (3) Examples.
this regulation was submitted to the (1) Scope. (e) [Reserved].
Chief Counsel for Advocacy of the Small (2) General rule. (f) Failure to file statements.
Business Administration for comment (b) Eligible property. (1) Failure to file.
on their impact on small business. No (c) Exception for certain property. (2) Relief for certain failures to file that are
(1) Inventory. not willful.
comments were received. (2) Installment obligations, etc. (g) Effective/applicability dates.
Drafting Information (3) Nonfunctional currency, etc. (1) Rules of applicability.
(4) Certain leased tangible property. (2) Election.
The principal author of these (d) Active conduct of a trade or business (h) Former 10-year gain recognition
regulations is Ryan Bowen, Office of outside the United States. agreements.
Associate Chief Counsel (International). (1) In general. (i) [Reserved].
However, other personnel from the (2) Trade or business. (j) Transition rules regarding certain
Treasury Department and the IRS (3) Active conduct. transfers of domestic or foreign stock or
participated in their development. (4) Outside of the United States. securities after December 16, 1987, and prior
(5) Use in the trade or business. to July 20, 1998.
List of Subjects in 26 CFR Part 1 (6) Active leasing and licensing. (1) Scope.
Income taxes, Reporting and (e) Special rules for certain property to be (2) Transfers of domestic or foreign stock
recordkeeping requirements. leased. or securities: Additional substantive rules.
(1) Leasing business of the foreign (k) [Reserved].
Amendments to the Regulations corporation. § 1.367(a)–4 Special rule applicable to U.S.
(2) De minimis leasing by the foreign depreciated property.
Accordingly, 26 CFR part 1 is corporation.
amended as follows: (a) Depreciated property used in the United
(3) Aircraft and vessels leased in foreign States.
commerce. (1) In general.
PART 1—INCOME TAXES (f) Special rules for oil and gas working (2) U.S. depreciated property.
interests. (3) Property used within and without the
■ Paragraph 1. The authority citation (1) In general.
for part 1 is amended by adding an entry United States.
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(2) Active use of working interest. (b) Effective/applicability dates.
in numerical order to read as follows: (3) Start-up operations.
§ 1.367(a)–5 [Reserved].
Authority: 26 U.S.C. 7805 * * * (4) Other applicable rules.
Section 1.367(d)–1 also issued under 26 (g) Property retransferred by the foreign § 1.367(a)–6 Transfer of foreign branch with
U.S.C. 367(d). * * * corporation. previously deducted losses.
(1) General rule. (a) through (b)(1) [Reserved].
* * * * *
(2) Exception. (2) No active conduct exception.
■ Par. 2. Section 1.367(a)–0 is added to (h) Compulsory transfers of property. (c)(1) [Reserved].
read as follows: (i) [Reserved]. (2) Gain limitation.
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(3) [Reserved]. (4) Disposition of stock of the transferee (1) General rule.
(4) Transfers of certain intangible property. foreign corporation. (2) Applicability to transfers occurring
(d) through (i) [Reserved]. (5) Deconsolidation. before March 13, 2009.
(j) Effective/applicability dates. (6) Consolidation. (3) Applicability to requests for relief
§ 1.367(a)–7 Outbound transfers of property (7) Death of an individual; trust or estate submitted before November 19, 2014.
described in section 361(a) or (b). ceases to exist.
(8) Failure to comply. ■ Par. 3. Section 1.367(a)–1 is revised to
(a) Scope and purpose. read as follows:
(b) General rule. (9) Gain recognition agreement filed in
(1) Nonrecognition exchanges enumerated connection with indirect stock transfers and
§ 1.367(a)–1 Transfers to foreign
in section 367(a)(1). certain triangular asset reorganizations.
corporations subject to section 367(a): In
(2) Nonrecognition exchanges not (10) Gain recognition agreement filed
general.
enumerated in section 367(a)(1). pursuant to paragraph (k)(14) of this section.
(k) Triggering event exceptions. (a) Scope. Section 367(a)(1) provides
(c) Elective exception.
(1) Control. (1) Transfers of stock of the transferee the general rule concerning certain
(2) Gain recognition. foreign corporation to a corporation or transfers of property by a United States
(3) Basis adjustments required for control partnership. person (referred to at times in this
group members. (2) Complete liquidation of U.S. transferor section as the ‘‘U.S. person’’ or ‘‘U.S.
(4) Agreement to amend or file a U.S. under sections 332 and 337. transferor’’) to a foreign corporation.
income tax return. (3) Transfers of transferred stock or
securities to a corporation or partnership.
Paragraph (b) of this section provides
(5) Election and reporting requirements. general rules explaining the effect of
(d) Section 361 exchange followed by (4) Transfers of substantially all of the
successive distributions to which section 355 assets of the transferred corporation. section 367(a)(1). Paragraph (c) of this
applies. (5) Recapitalizations and section 1036 section describes transfers of property
(e) Other rules. exchanges. that are described in section 367(a)(1).
(1) Section 367(a) property with respect to (6) Certain asset reorganizations. Paragraph (d) of this section provides
which gain is recognized. (7) Certain triangular reorganizations. definitions that apply for purposes of
(2) Relief for certain failures to comply that (8) Complete liquidation of transferred sections 367(a) and (d) and the
are not willful. corporation.
regulations thereunder. Paragraphs (e)
(3) Anti-abuse rule. (9) Death of U.S. transferor.
(10) Deconsolidation. and (f) of this section provide rules that
(4) Certain income inclusions under
§ 1.367(b)–4. (11) Consolidation. apply to certain reorganizations
(5) Certain gain under § 1.367(a)–6. (12) Intercompany transactions. described in section 368(a)(1)(F).
(f) Definitions. (13) Deemed asset sales pursuant to section Paragraph (g) of this section provides
(g) Examples. 338(g) elections. dates of applicability. For rules
(h) Applicable cross-references. (14) Other dispositions or events. concerning the reporting requirements
(i) [Reserved]. (l) [Reserved]. under section 6038B for certain transfers
(j) Effective/applicability dates. (m) Receipt of boot in nonrecognition of property to a foreign corporation, see
(1) In general. transactions.
§ 1.6038B–1.
(2) Section 367(d) property. (1) Dispositions of transferred stock or
(b) General rules—(1) Foreign
§ 1.367(a)–8 Gain recognition agreement securities.
(2) Dispositions of assets of transferred corporation not considered a
requirements.
corporation. corporation for purposes of certain
(a) Scope. transfers. If a U.S. person transfers
(b) Definitions and special rules. (n) Special rules for distributions with
(1) Definitions. respect to stock. property to a foreign corporation in
(2) Special rules. (1) Certain dividend equivalent connection with an exchange described
(c) Gain recognition agreement. redemptions treated as dispositions. in section 351, 354, 356, or 361, then,
(1) Terms of agreement. (2) Gain recognized under section pursuant to section 367(a)(1), the foreign
(2) Content of gain recognition agreement. 301(c)(3). corporation will not be considered to be
(3) Description of transferred stock or (o) Dispositions or other events that
a corporation for purposes of
securities and other information. terminate or reduce the amount of gain
subject to the gain recognition agreement. determining the extent to which gain is
(4) Basis adjustments for gain recognized. recognized on the transfer. Section
(5) Terms and conditions of a new gain (1) Taxable disposition of stock of the
recognition agreement. transferee foreign corporation. 367(a)(1) denies nonrecognition
(6) Cross-reference. (2) Gain recognized in connection with treatment only to transfers of items of
(d) Filing requirements. certain nonrecognition transactions. property on which gain is realized.
(1) General rule. (3) Gain recognized under section Thus, the amount of gain recognized
(2) Special requirements. 301(c)(3). because of section 367(a)(1) is
(3) Common parent as agent for U.S. (4) Dispositions of substantially all of the unaffected by the transfer of items of
transferor. assets of a domestic transferred corporation.
property on which loss is realized (but
(e) Signatory. (5) Certain distributions or transfers of
transferred stock or securities to U.S. not recognized).
(1) General rule.
persons. (2) Cases in which foreign corporate
(2) Signature requirement.
(f) Extension of period of limitations on (6) Dispositions or other event following status is not disregarded. For
assessments of tax. certain intercompany transactions. circumstances in which section
(1) General rule. (7) Expropriations under foreign law. 367(a)(1) does not apply to a U.S.
(2) New gain recognition agreement. (p) Relief for certain failures to file or transferor’s transfer of property to a
(g) Annual certification. failures to comply that are not willful. foreign corporation, and thus the foreign
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(h) Use of security. (1) In general. corporation is considered to be a
(i) [Reserved]. (2) Procedures for establishing that a corporation, see §§ 1.367(a)–2, 1.367(a)–
(j) Triggering events. failure to file or failure to comply was not
willful.
3, and 1.367(a)–7.
(1) Disposition of transferred stock or
securities. (3) Examples. (3) Determination of value. In cases in
(2) Disposition of substantially all of the (q) Examples. which a U.S. transferor’s transfer of
assets of the transferred corporation. (1) Presumed facts and references. property to a foreign corporation
(3) Disposition of certain partnership (2) Examples. constitutes a controlled transaction as
interests. (r) Effective/applicability date. defined in § 1.482–1(i)(8), the value of
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between unrelated parties for elections made under § 301.7701–3 that (b) Eligible property. Except as
consideration contingent upon the are filed on or after September 14, 2015. provided in paragraph (c) of this
licensee’s or transferee’s use of the For transfers occurring before this section, eligible property means—
property. Examples of operating section is applicable, see §§ 1.367(a)–1 (1) Tangible property;
intangibles may include long-term and 1.367(a)–1T as contained in 26 CFR (2) A working interest in oil and gas
purchase or supply contracts, surveys, part 1 revised as of April 1, 2016. property; and
studies, and customer lists. (3) A financial asset. For purposes of
(f) Exchanges under sections 354(a) § 1.367(a)–1T [Amended]
this section, a financial asset is—
and 361(a) in certain section ■ Par. 4. Section 1.367(a)–1T is (i) A cash equivalent;
368(a)(1)(F) reorganizations—(1) Rule. amended by removing and reserving (ii) A security within the meaning of
In every reorganization under section paragraphs (a), (b)(1), (b)(2), (b)(3), section 475(c)(2), without regard to the
368(a)(1)(F), where the transferor (b)(4)(i)(A), (b)(4)(ii), (c)(3)(ii)(A), (d) last sentence of section 475(c)(2)
corporation is a domestic corporation, introductory text, (d)(1), (d)(2), (d)(4), (referencing section 1256) and without
and the acquiring corporation is a and (d)(5), and adding and reserving regard to section 475(c)(4), but
foreign corporation, there is considered new paragraphs (b)(5) and (d)(6). excluding an interest in a partnership;
to exist— (iii) A commodities position
(i) A transfer of assets by the ■ Par. 5. Section 1.367(a)–2 is revised to
described in section 475(e)(2)(B),
transferor corporation to the acquiring read as follows:
475(e)(2)(C), or 475(e)(2)(D); and
corporation under section 361(a) in
§ 1.367(a)–2 Exceptions for transfers of (iv) A notional principal contract
exchange for stock (or stock and property for use in the active conduct of a described in § 1.446–3(c)(1).
securities) of the acquiring corporation trade or business. (c) Exception for certain property.
and the assumption by the acquiring
(a) Scope and general rule—(1) Scope. Notwithstanding paragraph (b) of this
corporation of the transferor
Paragraph (a)(2) of this section provides section, property described in paragraph
corporation’s liabilities;
(ii) A distribution of the stock (or the general exception to section (c)(1), (2), (3), or (4) of this section does
stock and securities) of the acquiring 367(a)(1) for certain property transferred not constitute eligible property.
corporation by the transferor for use in the active conduct of a trade (1) Inventory. Stock in trade of the
corporation to the shareholders (or or business. Paragraph (b) of this section taxpayer or other property of a kind
shareholders and security holders) of describes property that is eligible for the which would properly be included in
the transferor corporation; and exception provided in paragraph (a)(2) the inventory of the taxpayer if on hand
(iii) An exchange by the transferor of this section. Paragraph (c) of this at the close of the taxable year, or
corporation’s shareholders (or section describes property that is not property held by the taxpayer primarily
shareholders and security holders) of eligible for the exception provided in for sale to customers in the ordinary
their stock (or stock and securities) of paragraph (a)(2) of this section. course of its trade or business (including
the transferor corporation for stock (or Paragraph (d) of this section provides raw materials and supplies, partially
stock and securities) of the acquiring general rules, and paragraphs (e) completed goods, and finished
corporation under section 354(a). through (h) of this section provide products).
(2) Rule applies regardless of whether special rules, for determining whether (2) Installment obligations, etc.
a continuance under applicable law. For property is used in the active conduct Installment obligations, accounts
purposes of paragraph (f)(1) of this of a trade or business outside of the receivable, or similar property, but only
section, it shall be immaterial that the United States. Paragraph (i) of this to the extent that the principal amount
applicable foreign or domestic law treats section is reserved. Paragraph (j) of this of any such obligation has not
the acquiring corporation as a section provides relief for certain previously been included by the
continuance of the transferor failures to comply with the reporting taxpayer in its taxable income.
corporation. requirements under paragraph (a)(2)(iii) (3) Nonfunctional currency, etc.—(i)
(g) Effective/applicability dates. (1) of this section that are not willful. In general. Property that gives rise to a
through (3) [Reserved]. For further Paragraph (k) of this section provides section 988 transaction of the taxpayer
guidance, see § 1.367(a)–1T(g)(1) dates of applicability. The rules of this described in section 988(c)(1)(A)
through (3). section do not apply to a transfer of through (C), without regard to section
(4) The rules in paragraphs (b)(4)(i)(B) stock or securities in an exchange 988(c)(1)(D) and (E), or that would give
and (b)(4)(i)(C) of this section apply to subject to § 1.367(a)–3. rise to such a section 988 transaction if
transfers occurring on or after April 18, (2) General rule. Except as otherwise it were acquired, accrued, entered into,
2013. For guidance with respect to provided in §§ 1.367(a)–4, 1.367(a)–6, or disposed of directly by the taxpayer.
paragraph (b)(4)(i)(B) of this section and 1.367(a)–7, section 367(a)(1) does (ii) Limitation of gain required to be
before April 18, 2013, see 26 CFR part not apply to property transferred by a recognized. If section 367(a)(1) applies
1 revised as of April 1, 2012. The rules United States person (U.S. transferor) to to a transfer of property described in
in paragraph (e) of this section apply to a foreign corporation if— paragraph (c)(3)(i) of this section, then
transactions occurring on or after March the gain required to be recognized is
(i) The property constitutes eligible limited to the gain realized as part of the
31, 1987. The rules in paragraph (f) of
property; same transaction upon the transfer of
this section apply to transactions
occurring on or after January 1, 1985. (ii) The property is transferred for use property described in paragraph (c)(3)(i)
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(5) Paragraphs (a), (b)(1) through by the foreign corporation in the active of this section, less any loss realized as
(b)(4)(i)(B), (b)(4)(ii) through (b)(5), conduct of a trade or business outside part of the same transaction upon the
(c)(3)(ii)(A), (d) introductory text of the United States, as determined transfer of property described in
through (d)(2), (d)(4) through (d)(6) of under paragraph (d), (e), (f), (g), or (h) paragraph (c)(3)(i) of this section. This
this section apply to transfers occurring of this section, as applicable; and limitation applies in lieu of the rule in
on or after September 14, 2015, and to (iii) The U.S. transferor complies with § 1.367(a)–1(b)(1). No loss is recognized
transfers occurring before September 14, the reporting requirements of section with respect to property described in
2015, resulting from entity classification 6038B and the regulations thereunder. this paragraph (c)(3).
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conduct of a leasing business, as (iii) During the first three years after (4) Other applicable rules. A working
determined under paragraph (d)(6) of the transfer there are no farmouts or interest in oil and gas property that is
this section; other transfers of any part of the not described in paragraph (f)(1) of this
(ii) The lessee of the property is not transferred working interest as a result section may nonetheless qualify for the
expected to, and does not, use the of which the foreign corporation retains exception to section 367(a)(1) contained
property in the United States; and less than a 50-percent share of the in this section depending upon the facts
(iii) The foreign corporation has a transferred working interest. and circumstances.
need for substantial investment in assets (2) Active use of working interest. A (g) Property retransferred by the
of the type transferred. working interest in oil and gas property foreign corporation—(1) General rule.
(2) De minimis leasing by the foreign that satisfies the conditions in Property will not be considered to be
corporation. Tangible property that will paragraphs (f)(1)(ii) and (iii) of this transferred for use in the active conduct
be leased to another person by the section will be considered to be of a trade or business outside of the
foreign corporation but that does not transferred for use in the active conduct United States if—
satisfy the conditions of paragraph (e)(1) of a trade or business if— (i) At the time of the transfer, it is
of this section will, nevertheless, be (i) The U.S. transferor is regularly and reasonable to believe that, in the
considered to be transferred for use in substantially engaged in exploration for reasonably foreseeable future, the
the active conduct of a trade or business and extraction of minerals, either foreign corporation will sell or
if either— directly or through working interests in otherwise dispose of any material
(i) The property transferred will be joint ventures, other than by reason of portion of the property other than in the
used by the foreign corporation in the the property that is transferred; ordinary course of business; or
active conduct of a trade or business but (ii) The terms of the working interest (ii) Except as provided in paragraph
will be leased during occasional brief transferred were actively negotiated (g)(2) of this section, the foreign
periods when the property would among the joint venturers; corporation receives the property in an
otherwise be idle, such as an airplane (iii) The working interest transferred exchange described in section 367(a)(1),
leased during periods of excess constitutes at least a five percent and, as part of the same transaction,
capacity; or working interest; transfers the property to another person.
(ii) The property transferred is real (iv) Before and at the time of the For purposes of the preceding sentence,
property located outside the United transfer, through its own employees or a subsequent transfer within six months
States and— officers, the U.S. transferor was of the initial transfer will be considered
(A) The property will be used to be part of the same transaction, and
regularly and actively engaged in—
primarily in the active conduct of a a subsequent transfer more than six
(A) Operating the working interest, or
trade or business of the foreign months after the initial transfer may be
(B) Analyzing technical data relating
corporation; and considered to be part of the same
(B) Not more than ten percent of the to the activities of the venture;
(v) Before and at the time of the transaction under step-transaction
square footage of the property will be principles.
leased to others. transfer, through its own employees or
officers, the U.S. transferor was (2) Exception. Notwithstanding
(3) Aircraft and vessels leased in paragraph (g)(1) of this section, the
foreign commerce. For purposes of regularly and actively involved in
decision making with respect to the active conduct exception provided by
satisfying paragraph (e)(1) of this this section shall apply to the initial
section, an aircraft or vessel, including operations of the venture, including
decisions relating to exploration, transfer if—
component parts such as an engine (i) The initial transfer is followed by
leased separately from the aircraft or development, production, and
one or more subsequent transfers
vessel, that will be leased to another marketing; and
described in section 351 or 721; and
person by the foreign corporation will (vi) After the transfer, the foreign
(ii) Each subsequent transferee is
be considered to be transferred for use corporation will for the foreseeable
either a partnership in which the
in the active conduct of a trade or future satisfy the requirements of
preceding transferor is a general partner
business if— subparagraphs (iv) and (v) of this
or a corporation in which the preceding
(i) The employees of the foreign paragraph (f)(2).
transferor owns common stock; and
corporation perform substantial (3) Start-up operations. A working (iii) The ultimate transferee uses the
managerial and operational activities of interest in oil and gas property that property in the active conduct of a trade
leasing aircraft or vessels outside the satisfies the conditions in paragraphs or business outside the United States.
United States; and (f)(1)(ii) and (iii) of this section but that (h) Compulsory transfers of property.
(ii) The leased property is does not satisfy all the requirements of Property is presumed to be transferred
predominantly used outside the United paragraph (f)(2) of this section will, for use in the active conduct of a trade
States, as determined under § 1.954– nevertheless, be considered to be or business outside of the United States,
2(c)(2)(v). transferred for use in the active conduct if—
(f) Special rules for oil and gas of a trade or business if— (1) The property was previously in
working interests—(1) In general. A (i) The working interest was acquired use in the country in which the foreign
working interest in oil and gas property by the U.S. transferor immediately corporation is organized; and
will be considered to be transferred for before the transfer and for the specific (2) The transfer is either:
use in the active conduct of a trade or purpose of transferring it to the foreign (i) Legally required by the foreign
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business if— corporation; government as a necessary condition of
(i) The transfer satisfies the conditions (ii) The requirements of paragraphs doing business; or
of paragraph (f)(2) or (f)(3) of this (f)(2)(ii) and (iii) of this section are (ii) Compelled by a genuine threat of
section; satisfied; and immediate expropriation by the foreign
(ii) At the time of the transfer, the (iii) The foreign corporation will for government.
foreign corporation has no intention to the foreseeable future satisfy the (i) [Reserved].
farm out or otherwise transfer any part requirements of paragraph (f)(2)(iv) and (j) Failure to comply with reporting
of the transferred working interest; and (v) of this section. requirements of section 6038B—(1)
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Failure to comply. For purposes of the willful under this section has no effect (3) For illustrations of the application
exception to the application of section on any request for relief made under of the willfulness standard of this
367(a)(1) provided in paragraph (a)(2) of § 1.6038B–1(f). paragraph (j), see the examples in
this section, a failure to comply with the (ii) Procedures for establishing that a § 1.367(a)–8(p)(3).
reporting requirements of section 6038B failure to comply was not willful—(A) (4) Paragraph (j) applies to requests
and the regulations thereunder (failure Time and manner of submission. A for relief submitted on or after
to comply) has the meaning set forth in taxpayer’s statement that the failure to November 19, 2014.
§ 1.6038B–1(f)(2). comply was not willful will be (k) Effective/applicability dates—(1)
(2) Relief for certain failures to considered only if, promptly after the In general. Except as provided in
comply that are not willful—(i) In taxpayer becomes aware of the failure, paragraphs (j)(4) and (k)(2) of this
general. A failure to comply described an amended return is filed for the section, the rules of this section apply
in paragraph (j)(1) of this section will be taxable year to which the failure relates to transfers occurring on or after
deemed not to have occurred for that includes the information that September 14, 2015, and to transfers
purposes of satisfying the requirements should have been included with the occurring before September 14, 2015,
of this section if the taxpayer original return for such taxable year or resulting from entity classification
demonstrates that the failure was not that otherwise complies with the rules elections made under § 301.7701–3 that
willful using the procedure set forth in of this section, and that includes a are filed on or after September 14, 2015.
this paragraph (j)(2). For this purpose, written statement explaining the reasons For transfers occurring before this
willful is to be interpreted consistent for the failure to comply. The amended section is applicable, see §§ 1.367(a)–2,
with the meaning of that term in the return must be filed with the Internal –2T, –4, –4T, –5, and –5T as contained
context of other civil penalties, which Revenue Service at the location where in 26 CFR part 1 revised as of April 1,
would include a failure due to gross the taxpayer filed its original return. 2016.
negligence, reckless disregard, or willful The taxpayer may submit a request for (2) Foreign currency exception.
neglect. Whether a failure to comply relief from the penalty under section Notwithstanding paragraph (c)(3)(i) of
was a willful failure will be determined 6038B as part of the same submission. this section, § 1.367(a)–5T(d)(2) as
by the Director of Field Operations, See § 1.6038B–1(f). contained in 26 CFR part 1 revised as of
Cross Border Activities Practice Area, (B) Notice requirement. In addition to April 1, 2016, applies to transfers of
Large Business & International (or any the requirements of paragraph property denominated in a foreign
successor to the roles and (j)(2)(ii)(A) of this section, the taxpayer currency occurring before December 16,
responsibilities of such position, as must comply with the notice 2016, other than transfers occurring
appropriate) (Director) based on all the requirements of this paragraph before that date resulting from entity
facts and circumstances. The taxpayer (j)(2)(ii)(B). If any taxable year of the classification elections made under
must submit a request for relief and an taxpayer is under examination when the § 301.7701–3 that are filed on or after
explanation as provided in paragraph amended return is filed, a copy of the that date.
(j)(2)(ii)(A) of this section. Although a amended return and any information
taxpayer whose failure to comply is required to be included with such § 1.367(a)–2T [Removed]
determined not to be willful will not be return must be delivered to the Internal ■ Par. 6. Section 1.367(a)–2T is
subject to gain recognition under this Revenue Service personnel conducting removed.
section, the taxpayer will be subject to the examination. If no taxable year of
a penalty under section 6038B if the the taxpayer is under examination when § 1.367(a)–3 [Amended]
taxpayer fails to demonstrate that the the amended return is filed, a copy of ■ Par. 7. For each section listed in the
failure was due to reasonable cause and the amended return and any following the table, remove the language
not willful neglect. See § 1.6038B– information required to be included in the ‘‘Remove’’ column and add in its
1(b)(1) and (f). The determination of with such return must be delivered to place the language in the ‘‘Add’’
whether the failure to comply was the Director. column.
Section Remove Add
§ 1.367(a)–3(a)(3), first sentence .................................................. § 1.367(a)–1T(c) ......................................... § 1.367(a)–1(c).
§ 1.367(a)–3(c)(3)(i)(A) .................................................................. § 1.367(a)–2T(b)(2) and (3) ........................ § 1.367(a)–2(d)(2), (3), and (4).
§ 1.367(a)–3(c)(3)(ii)(B), last sentence ......................................... § 1.367(a)–2T(b)(2) and (3) ........................ § 1.367(a)–2(d)(2) and (3).
§ 1.367(a)–3(c)(4)(i), last sentence ............................................... § 1.367(a)–1T(c)(3) ..................................... § 1.367(a)–1(c)(3).
§ 1.367(a)–3(c)(5)(iv), first sentence ............................................. § 1.367(a)–1T(d)(1) .................................... § 1.367(a)–1(d)(1).
§ 1.367(a)–3(d)(3) Example 7A(ii), penultimate sentence ............ § 1.367(a)–2T(a)(2) .................................... § 1.367(a)–2(a)(2)(iii).
§ 1.367(a)–3(d)(3) Example 13(i), penultimate sentence ............. § 1.367(a)–2T(c)(2) ..................................... § 1.367(a)–2(g)(2).
■ Par. 8. Section 1.367(a)–4 is revised to income for the taxable year in which the paragraph (a) is required regardless of
read as follows: transfer occurs ordinary income equal to whether the exception to section
the gain realized that would have been 367(a)(1) provided by § 1.367(a)–2(a)(2)
§ 1.367(a)–4 Special rule applicable to U.S. applies to the transfer of the U.S.
includible in the transferor’s gross
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depreciated property.
income as ordinary income under depreciated property. However, the
(a) Depreciated property used in the section 617(d)(1), 1245(a), 1250(a), transfer of the U.S. depreciated property
United States—(1) In general. A U.S. 1252(a), 1254(a), or 1255(a), whichever may qualify for the exception with
person that transfers U.S. depreciated is applicable, if at the time of the respect to realized gain that is not
property (as defined in paragraph (a)(2) transfer the U.S. person had sold the included in ordinary income pursuant
of this section) to a foreign corporation to this paragraph (a).
property at its fair market value.
in an exchange described in section (2) U.S. depreciated property. U.S.
Recapture of depreciation under this
367(a)(1), must include in its gross depreciated property subject to the rules
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Section Remove Add
§ 1.367(a)–7(a), sixth sentence ......................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(c), second sentence ..................... § 1.367(a)–2T ................................................... § 1.367(a)–2.
§ 1.367(a)–7(c), second sentence ..................... § 1.367(a)–4T, 1.367(a)–5T ............................. § 1.367(a)–4.
§ 1.367(a)–7(c), second sentence ..................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(c)(2)(i)(B) ....................................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(c)(2)(ii)(A)(2) ................................. § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–2T ................................................... § 1.367(a)–2.
§ 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–4T, 1.367(a)–5T ............................. § 1.367(a)–4.
§ 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(e)(1), last sentence ....................... § 1.367(a)–1T(b)(4) and § 1.367(a)– § 1.367(a)–1(b)(4).
1(b)(4)(i)(B).
§ 1.367(a)–7(e)(2)(i), third sentence .................. Director of Field Operations International, Director of Field Operations, Cross Border Ac-
Large Business & International. tivities Practice Area of Large Business &
International.
§ 1.367(a)–7(e)(4)(ii), first and second sen- § 1.367(a)–6T ................................................... § 1.367(a)–6.
tences.
§ 1.367(a)–7(e)(5), heading ............................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(e)(5)(i), first sentence ................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(e)(5)(ii), first sentence ................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(f)(4)(ii) ........................................... § 1.367(a)–6T ................................................... § 1.367(a)–6.
§ 1.367(a)–7(g), last sentence ........................... § 1.367(a)–2T ................................................... § 1.367(a)–2.
§ 1.367(a)–7(g), Example 1 (ii)(A), last sen- § 1.367(a)–2T ................................................... § 1.367(a)–2.
tence.
§ 1.367(a)–7(g), Example 2 (ii)(A), last sen- § 1.367(a)–2T ................................................... § 1.367(a)–2.
tence.
§ 1.367(a)–7(h), first sentence ........................... § 1.367(a)–1(b)(4)(i)(B) and § 1.367(a)– § 1.367(a)–1(b)(4).
1T(b)(4).
§ 1.367(a)–8 [Amended] the ‘‘Remove’’ column and add in its
■ Par. 16. For each section listed in the place the language in the ‘‘Add’’
following table, remove the language in column.
Section Remove Add
§ 1.367(a)–8(b)(1)(xvii), first sentence ............... § 1.367(a)–1T(d)(1) .......................................... § 1.367(a)–1(d)(1).
§ 1.367(a)–8(b)(1)(xvii), second sentence ......... § 1.367(a)–1T(c)(3)(i) ....................................... § 1.367(a)–1(c)(3)(i).
§ 1.367(a)–8(c)(3)(viii) ........................................ § 1.367(a)–1T(c)(3)(i) ....................................... § 1.367(a)–1(c)(3)(i).
§ 1.367(a)–8(c)(3)(viii) ........................................ § 1.367(a)–1T(c)(3)(ii) ....................................... § 1.367(a)–1(c)(3)(ii).
§ 1.367(a)–8(c)(4)(iv), second sentence ............ § 1.367(a)–1T(b)(4) .......................................... § 1.367(a)–1(b)(4).
§ 1.367(a)–8(j)(3) ................................................ § 1.367(a)–1T(c)(3)(ii) ....................................... § 1.367(a)–1(c)(3)(ii).
§ 1.367(a)–8(j)(8), second sentence .................. Director of Field Operations International, Director of Field Operations, Cross Border Ac-
Large Business & International. tivities Practice Area of Large Business &
International.
■ Par. 17. Section 1.367(d)–1 is added inclusions for deemed payments under twenty years, taxpayers may, in lieu of
to read as follows: § 1.367(d)–1T(c)(1), the useful life of including amounts during the entire
intangible property is the entire period useful life of the intangible property,
§ 1.367(d)–1 Transfers of intangible during which exploitation of the choose in the year of transfer to increase
property to foreign corporations.
intangible property is reasonably annual inclusions during the 20-year
(a) [Reserved]. For further guidance, anticipated to affect the determination period beginning with the first year in
see § 1.367(d)–1T(a). of taxable income, as of the time of which the U.S. transferor takes into
(b) Property subject to section 367(d). transfer. Exploitation of intangible account income pursuant to section
Section 367(d) and the rules of this property includes any direct or indirect 367(d), to reflect amounts that, but for
section apply to the transfer of use or transfer of the intangible this paragraph (c)(3)(ii), would have
intangible property, as defined in property, including use without further been required to be included following
§ 1.367(a)–1(d)(5), by a U.S. person to a development, use in the further the end of the 20-year period. See
foreign corporation in an exchange development of the intangible property § 1.6038B–1(d)(1)(iv) for guidance on
described in section 351 or 361. See itself (and any exploitation of the reporting this choice of method. If the
section 367(a) and the regulations further developed intangible property), taxpayer applies this method during the
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thereunder for the rules that apply to and use in the development of other 20-year period, no adjustments will be
the transfer of any property other than intangible property (and any made for taxable years beginning after
intangible property. exploitation of the other developed the conclusion of the 20-year period.
(c)(1) through (2) [Reserved]. For intangible property). However, for purposes of determining
further guidance, see § 1.367(d)–1T(c)(1) (ii) Procedure to limit inclusions to 20 whether amounts included during the
and (2). years. In cases where the useful life of 20-year period are commensurate with
(3) Useful life—(i) In general. For the transferred property is indefinite or the income attributable to the
purposes of determining the period of is reasonably anticipated to exceed transferred intangible property, the
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§ 1.1248(f)–2 [Amended] (iii) Depreciated property. Describe foreign branch with previously
■ Par. 22. Section 1.1248(f)–2 is any property that is subject to deducted losses subject to §§ 1.367(a)–6
amended in the last sentence of depreciation recapture under § 1.367(a)– and –6T, provide the following
paragraph (e) by removing the citation 4(a). Property within this category must information:
‘‘§ 1.367(a)–2T,’’ and adding the citation be separately identified to the same (i) through (iv) [Reserved]. For further
‘‘§ 1.367(a)–2’’ in its place. extent as was required for purposes of information, see § 1.6038B–1T(c)(5)(i)
■ Par. 23. Section 1.6038B–1 is the previously claimed depreciation through (iv).
amended by: deduction. Specify with respect to each * * * * *
■ 1. Removing the citation ‘‘§ 1.367(a)– such asset the relevant recapture (d)(1) through (1)(iii) [Reserved]. For
1T(c),’’ in the fourth sentence of provision, the number of months that further guidance, see § 1.6038B–1T(d)(1)
paragraph (b)(1)(i) and adding the such property was in use within the through (1)(iii).
citation ‘‘§ 1.367(a)–1(c)’’ in its place. United States, the total number of (iv) Intangible property transferred.
■ 2. Revising paragraphs (c)(1) through months the property was in use, the fair Provide a description of the intangible
(5) and (d). market value of the property, a schedule property transferred, including its
■ 3. Revising the first sentence of of the depreciation deduction taken adjusted basis. Generally, each item of
paragraph (g)(1). with respect to the property, and a intangible property must be separately
■ 4. Adding paragraph (g)(7). calculation of the amount of identified, including intangible property
The additions and revision read as depreciation required to be recaptured. described in § 1.367(d)–1(g)(2)(i).
follows: (iv) Property not transferred for use in Identify all property that is subject to
the active conduct of a trade or the rules of section 367(d) under
§ 1.6038B–1 Reporting of certain transfers
to foreign corporations.
business. Describe any property that is § 1.367(a)–1(b)(5) (treatment of certain
eligible property, as defined in property as subject to section 367(d)).
* * * * * § 1.367(a)–2(b) taking into account the
(c) * * * Describe any property for which the
(1) through (4) introductory text application of § 1.367(a)–2(c), that was income required to be taken into
[Reserved]. For further guidance, see transferred to the foreign corporation account under section 367(d) and the
§ 1.6038B–1T(c)(1) through (4) but not for use in the active conduct of regulations thereunder will be
introductory text. a trade or business outside the United recognized over a 20-year period
(i) Active business property. Describe States (and was therefore not listed pursuant to § 1.367(d)–1(c)(3)(ii).
any transferred property that qualifies under paragraph (c)(4)(i) of this section). Estimate the anticipated income or cost
under § 1.367(a)–2(a)(2). Provide here a (v) Property transferred under reductions attributable to the intangible
general description of the business compulsion. If property qualifies for the property’s use beyond the 20-year
conducted (or to be conducted) by the exception of § 1.367(a)–2(a)(2) under the period.
transferee, including the location of the rules of paragraph (h) of that section, (v)–(vi) [Reserved]. For further
business, the number of its employees, provide information supporting the guidance, see § 1.6038B–1T(d)(1)(v)
the nature of the business, and copies of claimed application of such exception. through (1)(vi).
(vi) Certain ineligible property. (vii) Coordination with loss rules. List
the most recently prepared balance
Describe any property that is described any intangible property subject to
sheet and profit and loss statement.
in § 1.367(a)–2(c) and that therefore section 367(d) the transfer of which also
Property listed within this category may
cannot qualify under § 1.367(a)–2(a)(2) gives rise to the recognition of gain
be identified by general type. For
regardless of its use in the active under section 904(f)(3) or §§ 1.367(a)–6
example, upon the transfer of the assets
conduct of a trade or business outside or –6T. Provide a calculation of the gain
of a manufacturing operation, a
of the United States. The description required to be recognized with respect
reasonable description of the property to
must be divided into the relevant to such property, in accordance with the
be used in the business might include
categories, as follows: provisions of § 1.367(d)–1(g)(3).
the categories of office equipment and (A) Inventory, etc. Property described
supplies, computers and related (d)(1)(viii) through (d)(2) [Reserved].
in § 1.367(a)–2(c)(1); For further guidance, see § 1.6038B–
equipment, motor vehicles, and several (B) Installment obligations, etc.
major categories of manufacturing 1T(d)(1)(viii) through (d)(2).
Property described in § 1.367(a)–2(c)(2);
equipment. However, any property that (C) Foreign currency, etc. Property * * * * *
is includible in both paragraphs (c)(4)(i) (g) Effective/applicability dates. (1)
described in § 1.367(a)–2(c)(3); and
and (iii) of this section (property subject (D) Leased property. Property This section applies to transfers
to depreciation recapture under described in § 1.367(a)–2(c)(4). occurring on or after July 20, 1998,
§ 1.367(a)–4(a)) must be identified in the (vii) Other property that is ineligible except as provided in paragraphs (g)(2)
manner required in paragraph (c)(4)(iii) property. Describe any property, other through (g)(7) of this section, and except
of this section. If property is considered than property described in § 1.367(a)– for transfers of cash made in tax years
to be transferred for use in the active 2(c), that cannot qualify under beginning on or before February 5, 1999
conduct of a trade or business under a § 1.367(a)–2(a)(2) regardless of its use in (which are not required to be reported
special rule in paragraph (e), (f), or (g) the active conduct of a trade or business under section 6038B), and transfers
of § 1.367(a)–2, specify the applicable outside of the United States and that is described in paragraph (e) of this
rule and provide information supporting not subject to the rules of section 367(d) section (which applies to transfers that
the application of the rule. under § 1.367(a)–1(b)(5) (treatment of are subject to §§ 1.367(e)–1(f) and
asabaliauskas on DSK3SPTVN1PROD with RULES
(ii) Stock or securities. Describe any certain property as subject to section 1.367(e)–2(e)). * * *
transferred stock or securities, including 367(d)). Each item of property must be * * * * *
the class or type, amount, and separately identified. (7) Paragraphs (c)(4)(i) through (vii),
characteristics of the transferred stock or (viii) [Reserved]. For further guidance, (c)(5), and (d)(1)(iv) and (vii) of this
securities, as well as the name, address, see § 1.6038B–1T(c)(4)(viii). section apply to transfers occurring on
place of incorporation, and general (5) Transfer of foreign branch with or after September 14, 2015, and to
description of the corporation issuing previously deducted losses. If the transfers occurring before September 14,
the stock or securities. property transferred is property of a 2015, resulting from entity classification
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![91032 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations
elections made under § 301.7701–3 that Guaranty Corporation, 1200 K Street The January 2017 interest
are filed on or after September 14, 2015. NW., Washington, DC 20005, 202–326– assumptions under the benefit payments
For guidance with respect to paragraphs 4400 ext. 3451. (TTY/TDD users may regulation will be 1.25 percent for the
(c)(4), (c)(5), and (d)(1) of this section call the Federal relay service toll-free at period during which a benefit is in pay
before this section is applicable, see 1–800–877–8339 and ask to be status and 4.00 percent during any years
§§ 1.6038B–1 and 1.6038B–1T as connected to 202–326–4400 ext. 3451.) preceding the benefit’s placement in pay
contained in 26 CFR part 1 revised as of SUPPLEMENTARY INFORMATION: PBGC’s status. In comparison with the interest
April 1, 2016. regulation on Benefits Payable in assumptions in effect for December
Terminated Single-Employer Plans (29 2016, these interest assumptions
§ 1.6038B–1T [Amended] represent an increase in the immediate
CFR part 4022) prescribes actuarial
■ Par. 24. Section 1.6038B–1T is assumptions—including interest rate of 0.50 percent and are otherwise
amended by removing and reserving assumptions—for paying plan benefits unchanged.
paragraphs (c)(4)(i) through (c)(5) under terminating single-employer PBGC has determined that notice and
introductory text, and (d)(1)(iv) and plans covered by title IV of the public comment on this amendment are
(vii). Employee Retirement Income Security impracticable and contrary to the public
Act of 1974. The interest assumptions in interest. This finding is based on the
John Dalrymple,
the regulation are also published on need to determine and issue new
Deputy Commissioner for Services and
PBGC’s Web site (http://www.pbgc.gov). interest assumptions promptly so that
Enforcement.
PBGC uses the interest assumptions in the assumptions can reflect current
Approved: November 23, 2016.
Appendix B to Part 4022 to determine market conditions as accurately as
Mark J. Mazur, possible.
whether a benefit is payable as a lump
Assistant Secretary of the Treasury (Tax Because of the need to provide
Policy). sum and to determine the amount to
pay. Appendix C to Part 4022 contains immediate guidance for the payment of
[FR Doc. 2016–29791 Filed 12–15–16; 8:45 am] benefits under plans with valuation
interest assumptions for private-sector
BILLING CODE 4830–01–P
pension practitioners to refer to if they dates during January 2017, PBGC finds
wish to use lump-sum interest rates that good cause exists for making the
determined using PBGC’s historical assumptions set forth in this
PENSION BENEFIT GUARANTY methodology. Currently, the rates in amendment effective less than 30 days
CORPORATION Appendices B and C of the benefit after publication.
payment regulation are the same. PBGC has determined that this action
29 CFR Part 4022 is not a ‘‘significant regulatory action’’
The interest assumptions are intended
to reflect current conditions in the under the criteria set forth in Executive
Benefits Payable in Terminated Single- Order 12866.
Employer Plans; Interest Assumptions financial and annuity markets.
Assumptions under the benefit Because no general notice of proposed
for Paying Benefits rulemaking is required for this
payments regulation are updated
AGENCY: Pension Benefit Guaranty monthly. This final rule updates the amendment, the Regulatory Flexibility
Corporation. benefit payments interest assumptions Act of 1980 does not apply. See 5 U.S.C.
ACTION: Final rule. for January 2017.1 601(2).
PBGC normally updates the List of Subjects in 29 CFR Part 4022
SUMMARY: This final rule amends the assumptions under the benefit payments
Pension Benefit Guaranty Corporation’s Employee benefit plans, Pension
regulation for January at the same time
regulation on Benefits Payable in insurance, Pensions, Reporting and
as PBGC updates assumptions for the
Terminated Single-Employer Plans to recordkeeping requirements.
first quarter of the year under its
prescribe interest assumptions under regulation on Allocation of Assets in In consideration of the foregoing, 29
the regulation for valuation dates in Single-Employer Plans (29 CFR part CFR part 4022 is amended as follows:
January 2017. The interest assumptions 4044) in a single rulemaking document.
are used for paying benefits under PART 4022—BENEFITS PAYABLE IN
Because of delays in obtaining data used
terminating single-employer plans TERMINATED SINGLE-EMPLOYER
in setting assumptions under Part 4044
covered by the pension insurance PLANS
for the first quarter of 2017, PBGC is
system administered by PBGC. As publishing two separate rulemaking
discussed below, PBGC will publish a ■ 1. The authority citation for part 4022
documents to update the benefit continues to read as follows:
separate final rule document dealing payments regulation for January 2017
with interest assumptions under its and the allocation regulation for the first Authority: 29 U.S.C. 1302, 1322, 1322b,
regulation on Allocation of Assets in quarter of 2017.
1341(c)(3)(D), and 1344.
Single-Employer Plans for the first ■ 2. In appendix B to part 4022, Rate Set
quarter of 2017. 1 Appendix 279, as set forth below, is added to the
B to PBGC’s regulation on Allocation
DATES: Effective January 1, 2017. of Assets in Single-Employer Plans (29 CFR part table.
FOR FURTHER INFORMATION CONTACT: 4044) prescribes interest assumptions for valuing
benefits under terminating covered single-employer Appendix B to Part 4022—Lump Sum
Deborah C. Murphy (Murphy.Deborah@ plans for purposes of allocation of assets under Interest Rates for PBGC Payments
pbgc.gov), Assistant General Counsel for ERISA section 4044. Those assumptions are
asabaliauskas on DSK3SPTVN1PROD with RULES
Regulatory Affairs, Pension Benefit updated quarterly. * * * * *
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Document Created: 2018-02-14 09:07:44
Document Modified: 2018-02-14 09:07:44
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final regulations. | |
| Dates | Effective date: These regulations are effective on December 16, 2016. | |
| Contact | Ryan A. Bowen, (202) 317-6937 (not a toll-free number). | |
| FR Citation | 81 FR 91012 | |
| RIN Number | 1545-BL87 | |
| CFR Associated | Income Taxes and Reporting and Recordkeeping Requirements |
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