Sean Foley		Landon McGrew

The US Treasury Department and Internal Revenue Service (IRS) recently released a comprehensive set of final, temporary and proposed regulations under section 367(a)(5), addressing the US taxation of outbound transfers of assets by a US corporation as part of a reorganisation transaction (TD 9614 and TD 9615). The new regulations generally adopt and replace the previous set of regulations that were proposed in 2008, with certain modifications. In general, section 367(a)(5) provides that certain exceptions to section 367(a)(1) gain recognition do not apply in the case of a reorganisation where a US corporation transfers assets to a foreign corporation, unless the US corporation is controlled by five or fewer (but at least one) US corporations (a control group) and certain basis adjustments and other conditions are satisfied as provided in regulations.

The preamble to the new regulations states that the policy of section 367(a)(5) is the protection of corporate-level gain on appreciated property (net inside gain). The regulations further this policy by providing an election that is intended to ensure that any net inside gain realised by the US corporation is preserved in the stock of the foreign corporation received in the reorganisation. If such an election is made, the US corporation's net inside gain is deferred. However, the basis in the stock of the foreign corporation received in the reorganisation must be reduced by the amount by which net inside gain exceeds gain or loss in that stock. A few key points addressed in the new regulations are discussed below.

Computation of net inside gain

The final regulations compute net inside gain by taking into account only deductible liabilities assumed in the reorganisation. The IRS and Treasury Department rejected comments suggesting that other tax attributes, such as net operating losses and foreign tax credits, should be taken into account because it was thought that this would substantially increase the complexity of the regulations.

Built-in loss in stock

As mentioned above, the final regulations provide that if an election is made to defer net inside gain, the basis in the stock of the foreign corporation received in the reorganisation must be reduced by the amount by which net inside gain exceeds gain or loss in that stock. In certain cases, this adjustment could result in the conversion of built-in loss stock into built-in gain stock. The Treasury Department and IRS rejected comments that this result was inappropriate, stating that they believe that the amount of any outside built-in loss or gain should not affect the required reduction to the basis of the stock received.

Application to RICs, REITs and S corporations

According to the preamble to the new regulations, the IRS and Treasury Department considered whether regulated investment companies (RICs), real estate investment trusts (REITs), and S corporations should be exempted from the application of section 367(a)(5) or allowing such entities to be included in a control group because those entities are not generally subject to corporate-level tax. These recommendations, however, were not adopted in the final regulations. Accordingly, these types of entities will need to be mindful of the regulations when engaging in these types of transactions.

The new regulations are very complex and exhaustive, consisting of over 150 pages of text. Taxpayers engaging in outbound reorganisations would be well-advised to carefully consider the application of these rules in their transaction planning and whether an election pursuant to the regulations would be beneficial to their specific facts. The new regulations are generally applicable to transactions occurring on or after April 18 2013.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley (sffoley@kpmg.com) and Landon McGrew (lmcgrew@kpmg.com)

KPMG, Washington, DC

Tel: +1 202 533 5588

Fax: +1 202 315 3087

Website: www.us.kpmg.com