[Federal Register Volume 89, Number 197 (Thursday, October 10, 2024)]
[Rules and Regulations]
[Pages 82160-82170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23132]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9994]
RIN 1545-BP55
Section 367(d) Rules for Certain Repatriations of Intangible
Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations that terminate the
continued application of certain tax provisions arising from a previous
transfer of intangible property to a foreign corporation when the
intangible property is repatriated to certain United States persons.
The final regulations affect certain United States persons that
previously transferred intangible property to a foreign corporation.
DATES:
Effective date: These regulations are effective on October 10,
2024.
Applicability date: For dates of applicability, see Sec. Sec.
1.367(d)-1(j)(2), 1.904-(q)(3), 1.951A-7(e), and 1.6038B-1(g)(8).
FOR FURTHER INFORMATION CONTACT: Concerning the final regulations other
than Sec. 1.904-4, Brittany N. Dobi (202) 317-6937; concerning Sec.
1.904-4, Jeffrey L. Parry, (202) 317-6936 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document contains final additions and amendments to 26 CFR
part 1 (final regulations) under section 367(d) of the Internal Revenue
Code (Code) regarding the termination of the continued application of
certain tax provisions arising from a previous transfer of intangible
property to a foreign corporation when the intangible property is
repatriated to certain United States persons. The primary provisions of
the final regulations are issued pursuant to the express delegations of
authority to the Secretary of the Treasury (or her delegate) provided
under sections 367(d) and 6038B. The provisions of the final
regulations related to foreign branch income are issued pursuant to the
express delegations of authority provided under sections 904(d)(2)(J)
and (d)(7). The final regulations are also issued under the express
delegation of authority under section 7805(a).
Background
On May 3, 2023, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
124064-19) in the Federal Register (88 FR 27819) under section 367 (the
proposed regulations). The proposed regulations were intended to
address simple, common fact patterns involving repatriations of
intangible property by terminating the continued application of section
367(d) when a transferee foreign corporation repatriates intangible
property subject to section 367(d) to a qualified domestic person when
certain reporting requirements are satisfied. The proposed regulations
also included a rule coordinating the application of section 367(d) and
the provisions in Sec. 1.904-4(f)(2)(vi)(D) that apply the principles
of section 367(d) to determine the appropriate amount of gross income
attributable to a foreign branch. A ``repatriation'' denotes a
subsequent transfer of intangible property to the U.S. transferor or a
United States person (U.S. person) related to the U.S. transferor.
Summary of Comments and Explanation of Revisions
I. In General
Five comments were submitted on the proposed regulations, which are
available at https://www.regulations.gov or upon request. No public
hearing on the proposed regulations was requested or held.
This Summary of Comments and Explanation of Revisions describes
those comments and the revisions made in response to those comments.
The comments also made various requests for future guidance, which the
Treasury Department and the IRS will consider as part of a potential
future rulemaking addressing, among other things, general issues under
section 367(d).
II. Definition of Qualified Domestic Person
A. In General
To terminate the continued application of section 367(d) upon a
[[Page 82161]]
repatriation of intangible property, the proposed regulations required
the recipient of the intangible property to be a qualified domestic
person. The proposed regulations defined a qualified domestic person by
reference to an ``initial U.S. transferor,'' a ``qualified successor,''
or a U.S. person that is either an individual or ``qualified
corporation'' related to either the initial U.S. transferor or
qualified successor. See proposed Sec. 1.367(d)-1(f)(4)(iii).
As the preamble to the proposed regulations explained in part I.C
of the Explanation of Provisions, the definition of qualified domestic
person was based on the principle that it is generally appropriate to
terminate the continued application of section 367(d) only when all the
income produced by the intangible property during its useful life, and
all gain recognized on a disposition of the intangible property, will
be subject to current tax in the United States as to the qualified
domestic person while that person holds the property. See 88 FR 27819,
27824. The proposed regulations further described how, in the case of a
repatriation to an initial U.S. transferor, the repatriation restored
the circumstances that existed at the time of the original section
367(d) transfer. See Id.
B. Partnerships
The proposed regulations neither treated a domestic partnership as
a qualified domestic person, nor adopted an approach that would treat a
partnership as an aggregate of its partners (aggregate approach) for
purposes of determining qualified domestic person status. One comment
suggested that the Treasury Department and the IRS modify the
definition of qualified domestic person to include partnerships in
which all of the partners in the partnership would themselves be
qualified domestic persons, or partnerships that made the original
outbound transfer of the intangible property subject to section 367(d)
when there is substantial continuity of ownership of that partnership
during the period beginning on the date of the initial section 367(d)
transfer and ending on the date of the repatriation of the intangible
property. As part of the modification, the comment also described
various approaches for addressing the concerns identified in the
proposed regulations regarding, for example, the potential for post-
repatriation changes to partnership allocations or liquidation rights
to frustrate the purposes of the proposed regulations if a partnership,
or a partner in the partnership, were permitted as a qualified domestic
person in certain cases. See 88 FR 27819, 27824 for a discussion of
those concerns. Specifically, the comment suggested that the final
regulations, in adopting the modification, could limit its application
by requiring a specific period after the repatriation during which the
ownership or interests in the partnership could not change.
Additionally, the comment suggested that, to provide flexibility while
protecting against the concerns outlined in the proposed regulations,
the final regulations could allow the Commissioner to exercise
discretion at a taxpayer's request to determine that a post-
distribution change in the ownership of the partnership, or in the
economic rights of the partners with respect to the intangible
property, would not taint the partnership's status as a qualified
domestic person. Finally, the comment also described more general,
long-standing issues under section 367(d) related to the treatment of
partnerships within the section 367(d) regime, and ultimately suggested
that resolution of those issues should not impede finalizing the
proposed regulations.
The final regulations do not adopt this comment and therefore adopt
the definition of qualified domestic person from the proposed
regulations without change. The issues identified by the comment, along
with potential solutions to those issues, were acknowledged in the
preamble to the proposed regulations, and the Treasury Department and
the IRS have determined that the approach outlined in the proposed
regulations continues to strike the appropriate balance between
implementing the general purpose and scope of the proposed regulations
(ensuring that only appropriate repatriations terminate the continued
application of section 367(d)) and concerns regarding administrability
and compliance. The solutions described in the comment, like the
alternatives described in the proposed regulations, would not achieve
this balance because the solutions would either expand the scope of the
proposed regulations in an inappropriate manner (that is, by expanding
the basic principle upon which the proposed regulations rests), or the
solutions would, given the relatively narrow scope of the proposed
regulations, impose an undue burden on taxpayers and the IRS. See 88 FR
27819, 27824 (describing, with respect to the latter, an approach
modeled off of the rules in Sec. Sec. 1.367(a)-3 and 1.367(a)-8
regarding gain recognition agreements and noting that approach would be
``unworkable due to the compliance and administrative burden.'').
Another comment described general, long-standing issues under
section 367(d) related to the treatment of partnerships. These issues
were generally identified in the proposed regulations. See id. For
example, the comment pointed to Sec. Sec. 1.367(a)-1T(c)(3)(i) and
1.367(d)-1T(a), which apply an aggregate approach upon an initial
outbound transfer. The comment did not include any explicit suggestion
for change regarding the proposed regulations, but the Treasury
Department and the IRS may consider these issues as part of future
rulemaking.
C. S Corporations
As described in part I.A of this Summary of Comments and
Explanation of Revisions, the proposed regulations limited qualified
domestic person status to ``qualified corporations'' in the case of a
qualified successor or in the case of a U.S. person related to either
the initial U.S. transferor or qualified successor. See proposed Sec.
1.367(d)-1(f)(4)(iii). A qualified corporation, in relevant part, did
not include an S corporation (as defined in section 1361(a)). See Id.
One comment suggested that the final regulations allow S
corporations as qualified corporations. The comment noted that the
shareholders of an S corporation must generally be U.S. individuals
subject to U.S. taxation, which ensures that income attributable to
intangible property held by an S corporation would be subject to U.S.
taxation (though the comment noted that the limitation is not absolute,
as certain plans described in section 401(a) may be shareholders of an
S corporation).
Section 512(e)(3) excludes a non-individual shareholder that is an
employee stock ownership plan (ESOP) (as defined in section 4975(e)(7)
from the scope of section 512(e)(1), which provides that, in the case
of certain non-individual shareholders of the S corporation, any item
of income, gain, loss, or deduction, and any gain or loss on the
disposition of stock in the S corporation, is taken into account by
such non-individual shareholders as unrelated business taxable income
(UBTI). As a result, the pro rata share of an S corporation's items of
income taken into account by an ESOP shareholder is not subject to
current taxation as UBTI. As noted in part I.A of this Summary of
Comments and Explanation of Revisions, a principle for the definition
of qualified domestic person is that termination of the continued
application of section 367(d)
[[Page 82162]]
should occur only when all the income produced by the intangible
property, as well as gain recognized on a disposition of the intangible
property, is subject to current tax in the United States. In the case
of an S corporation, that result is not guaranteed.
The final regulations, therefore, do not adopt this comment and
retain the definition of qualified domestic person from the proposed
regulations without change. The Treasury Department and the IRS
considered alternative approaches to address this comment--such as an
aggregate approach, with prohibitions applicable to S corporation
shareholders that are ESOPs--but determined that such approaches were
effectively unworkable due to the compliance and administrative burden
discussed in part II.B of this Summary of Comment and Explanation of
Revisions in connection with the comment on partnerships.
III. Qualified Domestic Person's Adjusted Basis in Repatriated
Intangible Property
Proposed Sec. 1.367(d)-1(f)(4)(iv) provided rules regarding a
qualified domestic person's adjusted basis in the intangible property
it receives in a repatriation. The proposed regulations described how
these rules were intended to achieve an appropriate result regarding a
qualified domestic person's adjusted basis in intangible property upon
a repatriation, but that general rules regarding adjusted basis under
section 367(d) (and not in the context of a repatriation of intangible
property to a qualified domestic person) would be addressed in future
rulemaking. See 88 FR 27819, 27824, and 27825.
One comment described how existing uncertainty regarding the
treatment of adjusted basis of intangible property subject to section
367(d) may be implicated when that intangible property is repatriated.
The comment noted that any solution would necessarily represent a broad
solution to existing section 367(d) issues, instead of one limited to
the proposed regulations, so the comment recommended the Treasury
Department and the IRS address this issue in future rulemaking. Another
comment suggested that, when a transferee foreign corporation incurs
expenditures with respect to repatriated intangible property after the
initial outbound transfer, proposed Sec. 1.367(d)-1(f)(4)(iv) should
be modified to allow a qualified domestic person's adjusted basis in
repatriated intangible property to reflect those expenditures, reduced
by any attributable amortization allowed or allowable to the transferee
foreign corporation.
As noted in the proposed regulations, proposed Sec. 1.367(d)-
1(f)(4)(iv) operated ``in a manner intended to reach an appropriate
result regarding a qualified domestic person's basis in repatriated
intangible property'' until future rulemaking is issued that can
address general basis rules under section 367(d). See id. The Treasury
Department and the IRS, in agreement with the first comment, continue
to believe that any resolution of these issues necessarily implicates
broader issues under section 367(d) and, as such, is beyond the scope
of this rulemaking. Proposed Sec. 1.367(d)-1(f)(4)(iv) is therefore
finalized without change, though the Treasury Department and the IRS
may revisit these issues as part of future rulemaking.
IV. Required Adjustments Related to an Annual Section 367(d) Inclusion
The proposed regulations provided that the deemed annual payment
under section 367(d) by the transferee foreign corporation is treated
as an allowable deduction that must be allocated and apportioned to the
transferee foreign corporation's classes of gross income in accordance
with Sec. Sec. 1.882-4(b)(1), 1.954-1(c), and 1.960-1(c) and (d) (as
applicable). See proposed Sec. 1.367(d)-1(c)(2)(ii) and (e)(2)(ii).
These provisions, described as ``minor clarifications'' in the preamble
to the proposed regulations, clarified ``that the allowable deduction
is allocated and apportioned under the provisions cited in the previous
sentence potentially to any class (or classes) of gross income (as
appropriate) rather than solely to gross income subject to subpart F in
all circumstances.'' See 88 FR 27819, 27822, and 27825.
One comment suggested that the proposed regulations were unclear as
to whether the allowable deduction described in proposed Sec.
1.367(d)-1(c)(2)(ii) and (e)(2)(ii) was limited to the listed
provisions (Sec. Sec. 1.882-4(b)(1), 1.954-1(c), and 1.960-1(c) and
(d)) or whether such deduction was more generally available (for
example, as a deduction under section 162). The comment posited that
the latter approach was more appropriate and requested that the final
regulations clarify that the allowable deduction may be allowed as a
deduction under section 162. In support, the comment described how, in
the case of certain transfers of intangible property to a U.S. person
that is not a qualified domestic person, ``excessive U.S. taxation''
could result if the allowable deduction were limited to the listed
provisions, which are provisions relevant to determinations with
respect to foreign corporations.
The final regulations do not adopt this comment. The proposed
regulations terminated the continued application of section 367(d) upon
certain, rather than all, subsequent transfers of intangible property
to a U.S. person (that is, upon a repatriation to a qualified domestic
person if certain reporting requirements are met). See 88 FR 27819,
27821, and 27822. The comment, if adopted, would effectively terminate
the continued application of section 367(d) by, for example, providing
a deduction under section 162 corresponding to each annual inclusion
under section 367(d). Indeed, as the proposed regulations explained,
the solution contained in the proposed regulations was premised, in
relevant part, on the fact that ``the deemed (substituted) transferee
foreign corporation is not allowed a deduction that could reduce
taxable income, even though that deemed transferee foreign corporation
is the U.S. transferor or a related U.S. person.'' See id. Thus, a
fundamental premise underlying the proposed regulations, and the
existing section 367(d) regulations, is that an allowable deduction,
instead of being generally available, is limited to the provisions
listed in the proposed regulations (Sec. Sec. 1.882-4(b)(1), 1.954-
1(c), and 1.960-1(c) and (d)). To adopt the comment's suggestion would
therefore be inconsistent with the proposed regulations and section
367(d) generally.
The comment also suggested that, when a subsequent transfer of
intangible property results in treating the same entity as U.S.
transferor and transferee foreign corporation under the section 367(d)
regulations, the continued application of section 367(d) should
terminate by reason of that convergence. As support, the comment cited
to a case and guidance involving circumstances in which a taxpayer
acquired its own debt. The Treasury Department and the IRS do not agree
with this suggestion for the reasons described in the preceding
paragraph, and references to cases or guidance involving a taxpayer
acquiring its own debt are not instructive for, nor consistent with,
the statutory and regulatory framework of section 367(d). Section
367(d) relies upon a statutory fiction that imposes a notional regime
with a prescribed payor and payee, and the regulations describe cases
in which a successor succeeds to the notional payment on both sides of
the construct. For example, Sec. 1.367(d)-1T(e)(1) provides that a
related person can succeed an initial U.S. transferor for purposes of
including income under section 367(d), and Sec. 1.367(d)-1T(f)(3)
provides that a related person can
[[Page 82163]]
succeed to the payor side of the deemed payment fiction. Where
intangible property is returned to the original U.S. transferor, that
U.S. transferor is also the successor transferee under the statutory
and regulatory framework of section 367(d), and, under the express
language of Sec. 1.367(d)-1T(f)(3), the annual inclusion under section
367(d) continues. This is precisely the issue the proposed regulations
were intended to address, and new regulations providing a rule for
terminating an annual inclusion stream would have been largely
unnecessary if the deemed payment construct collapsed automatically in
such cases. Instead, this Treasury Decision provides the exclusive
means by which the continued application of section 367(d) may be
terminated by reason of a subsequent transfer of intangible property to
a U.S. person.
V. Multiple Transfers Before Repatriation
One comment suggested changes to the proposed regulations to
accommodate repatriations preceded by certain transfers of intangible
property subject to section 367(d) between related foreign
corporations. To illustrate this suggestion, the comment posited an
example pursuant to which a repatriation was first preceded by a
distribution under section 311 of the intangible property (first
section 311 distribution) from one CFC (original transferee foreign
corporation, or TFC) to another CFC (successor TFC). The successor TFC
then distributes the intangible property under section 311 to a
qualified domestic person (second 311 distribution) in a transaction
with respect to which the successor TFC did not recognize gain or loss
(under the theory that successor TFC's adjusted basis in the intangible
property equaled the intangible property's fair market value).
On those modified facts, the comment described how the original TFC
could recognize gain subject to U.S. taxation by reason of the first
section 311 distribution (not under section 367(d), but rather under,
for example, section 951A(a) as to a United States shareholder), and
the qualified domestic person could recognize that same amount of gain
upon the repatriation after the second 311 distribution under the
proposed regulations (by reason of the application of the gain
recognition rule in proposed Sec. 1.367(d)-1(f)(4)(ii)(B), under which
gain is determined by reference to the U.S. transferor's former
adjusted basis in the property). And, because the successor TFC is the
TFC at the time of the repatriation (that is, at the time of the second
section 311 distribution), the required adjustments described in
proposed Sec. 1.367(d)-1(f)(2) would apply by reference to the
successor TFC, which did not recognize gain or loss on the repatriation
under the theory described above, rather than to the original TFC,
which recognized gain on the first section 311 distribution. To address
this concern, the comment suggested modifying the proposed regulations
in a manner that would effectively negate a prior transfer that was
subject to tax under a separate regime (for example, section 951A).
The example provided in the comment highlights significant
potential interactions between the operation of section 367(d) and
other generally operative provisions in the Code and regulations. For
example, Sec. 1.367(d)-1T(f)(3) explicitly provides that the ongoing
annual royalty construct is unaffected by the taxable distribution of
intangible property from the original TFC to the successor TFC in the
first section 311 distribution, and Sec. 1.367(d)-1T(d)(1) and (f)(1)
are clear that the amount of income recognized by the U.S. transferor
upon a later indirect or direct disposition of intangible property to
an unrelated person is determined using the transferor's original basis
in the property. However, the distribution of the intangible property
from the original TFC to the successor TFC described in the comment's
example might result in taxable gain to the original TFC that would be
treated as tested income under section 951A, notwithstanding the lack
of an acceleration of income under section 367(d). Similarly, the
successor TFC might take the intangible property with a fair market
value basis under section 301(d), even though that increased basis
would not be available to reduce gain under section 367(d).
Essentially, the example posited in the comment highlights that it may
be possible to recognize income under both sections 951A and 367(d)
with respect to the same property in some fact patterns where separate
transactions occur in separate foreign corporations, notwithstanding
that that result would not occur in cases where the property is not
transferred among multiple foreign corporations. Coordinating potential
disparities between income recognition under section 367(d) as compared
to other generally applicable provisions of the Code, and potential
disparities in tax basis for purposes of section 367(d) as compared to
adjusted basis for other purposes, is beyond the scope of this
rulemaking. The request for additional guidance addressing multiple
related transfers, therefore, is not adopted.
VI. Reporting
As a condition for terminating the application of section 367(d)
with respect to repatriated intangible property, proposed Sec.
1.367(d)-1(f)(4)(i)(B) would have required a U.S. transferor to provide
the information described in proposed Sec. 1.6038B-1(d)(2)(iv). If a
U.S. transferor failed to provide that information, the repatriation
was subject to proposed Sec. 1.367(d)-1(f)(3) such that the section
367(d) regulations, including the requirement to take an annual
inclusion into account over the useful life of the intangible property,
continued to apply. However, a U.S. transferor was eligible for relief
under the proposed regulations if proposed Sec. 1.367(d)-
1(f)(4)(i)(B)(2) would have applied to the subsequent transfer of
intangible property but for the fact that the required information was
not provided and the U.S. transferor, upon becoming aware of the
failure, promptly provided the required information, explained its
failure to comply, and met certain other requirements (if applicable).
One comment requested clarifications of the reporting and relief
provisions. First, the comment requested that the final regulations
clarify whether relief for a failure to comply is, in relevant part,
also conditioned on the U.S. transferor timely filing one or more
amended returns for the taxable year in which the subsequent transfer
occurred and succeeding years, and, if the U.S. transferor is under
examination when an amended return is filed, providing a copy of the
amended return(s) to the IRS personnel conducting the examination. The
Treasury Department and the IRS adopt this comment by revising of Sec.
1.367(d)-1(f)(5) to clarify that the relief for a failure to comply is
conditioned upon the requirements listed in the previous sentence (if
applicable).
The comment also requested that the Treasury Department and the IRS
consider prescribing in the future a particular form for filing the
required information under proposed Sec. 1.367(d)-1(f)(5). The
Treasury Department and the IRS will consider prescribing a particular
form as part of future improvements to reporting with respect to
section 367(d) generally. However, to provide taxpayers with additional
guidance on the manner for providing a U.S. transferor's explanation
for its failure to comply to the IRS, the final regulations provide an
eFax number for such purpose (and, if a taxable year of the U.S.
transferor is under examination, that information should
[[Page 82164]]
instead be provided to the IRS personnel conducting the examination).
Finally, the comment suggested clarifications or modifications to
the requirements in proposed Sec. 1.367(d)-1(f)(5) that a U.S.
transferor ``promptly'' address its failure to file and to the way the
U.S. transferor provides the remedial information (that is, to the
Director of Field Operations, Cross Border Activities Practice Area of
Large Business & International, or any successor to that role). The
comment suggested that ``promptly'' does not provide sufficient
guidance to taxpayers (the comment requested a prescribed period) and
the comment asserted that it is unusual for regulations to require a
taxpayer to provide information directly to a specified official within
the IRS. The final regulations do not adopt these suggestions. The
Treasury Department and the IRS believe that ``promptly'' requiring the
U.S. transferor to address its failure to comply, rather than providing
a specific period, allows flexibility so that the relief may apply as
appropriate to a taxpayer's particular facts and circumstances.
Additionally, proposed Sec. 1.367(d)-1(f)(5) is modeled on similar
relief provisions in other contexts (for example, Sec. Sec. 1.367(a)-
8(p) and 1.721(c)-6(f)).
The Treasury Department and the IRS clarify proposed Sec.
1.367(d)-1(f)(5) by striking the last clause that appeared in the
second sentence. That sentence described the consequences of a failure
to comply, namely the continued application of the annual inclusion
stream pursuant to proposed Sec. 1.367(d)-1(f)(3) and application of
the gain recognition rule of proposed Sec. 1.367(d)-1(f)(4)(i)(A). If
the failure to comply is remedied, the rules of the proposed
regulations are treated as satisfied as of the date of the repatriation
(so, the repatriation terminates the continued application of section
367(d) and the U.S. transferor, if applicable, would take a partial
annual inclusion into account pursuant to proposed Sec. 1.367(d)-
1(f)(4)(i)(B)(1)).
VII. Clarification to Example 3
Proposed Sec. 1.367(d)-1(f)(6)(ii)(C) (Example 3) illustrated the
determination of a qualified domestic person's adjusted basis in
intangible property under the proposed regulations. In that example,
TFC transferred the intangible property to USS (a qualified domestic
person as defined in proposed Sec. 1.367(d)-1(f)(4)(iii)) in an
exchange described in section 351(b) pursuant to which TFC recognized
$50x of gain and USP recognized $50x of gain under proposed Sec.
1.367(d)-1(f)(4)(i)(A). The analysis under proposed Sec. 1.367(d)-
1(f)(6)(ii)(C)(2) was, and remains in this Treasury decision, limited
to the determination of USS's adjusted basis in the intangible
property.
One comment requested, in relevant part, that the final regulations
clarify that TFC's earnings and profits and gross income arising by
reason of the repatriation are reduced by the amount of gain recognized
by USP under proposed Sec. 1.367(d)-1(f)(4)(i)(A) ($50x). The Treasury
and the IRS adopt the comment by clarifying in the facts of the example
that, under Sec. 1.367(d)-1(f)(2)(i), TFC will reduce its earnings and
profits and gross income by $50x, the amount arising by reason of the
repatriation and the amount of gain recognized by USP under Sec.
1.367(d)-1(f)(4)(i)(A).
VIII. Section 904(d) Foreign Branch Income Rules
Proposed Sec. 1.904-4(f)(2)(vi)(D)(4) described the application of
the principles of section 367(d) to subsequent transfers of intangible
property in determining adjustments to the amount of gross income
attributable to a foreign branch under Sec. 1.904-4(f)(2)(vi)(D).
Specifically, the proposed regulations would have provided that each
transfer to which Sec. 1.904-4(f)(2)(vi)(D) applies is considered
independently from any other preceding or subsequent transfer of the
intangible property, with the result that the subsequent transfer rules
in the regulations under section 367(d), including the rules for
repatriations provided in the proposed regulations, do not apply in
determining gross income attributable to a foreign branch under Sec.
1.904-4(f)(2)(vi)(D). See 88 FR 27819, 27825, and 27826.
One comment requested that the Treasury Department and the IRS
finalize the provisions of the proposed regulations without finalizing
proposed Sec. 1.904-4(f)(2)(vi)(D)(4). The comment suggested that such
an approach could allow for further consideration of ways to simplify
the application of section 367(d) principles in Sec. 1.904-
4(f)(2)(vi)(D). The comment suggested that instead of finalizing
proposed Sec. 1.904-4(f)(2)(vi)(D)(4), that provision could be adopted
as a temporary regulation, or alternatively, this preamble could state
that, until the implementation of final regulations addressing this
issue, the Treasury Department and the IRS intend that rules related to
section 367(d) and subsequent transfer will not apply for purposes of
section 904(d).
A broader reconsideration of the application of section 367(d)
principles in Sec. 1.904-4(f)(2)(vi)(D) is beyond the scope of these
final regulations. The Treasury Department and the IRS believe it is
necessary to finalize proposed Sec. 1.904-4(f)(2)(vi)(D)(4) to ensure
the proper application of the foreign branch income rules under Sec.
1.904-4(f)(2)(vi)(D) as those rules currently stand. This is because,
as explained in the preamble to the proposed regulations, while Sec.
1.904-4(f)(2)(vi)(D) relies on the principles of section 367(d) to
determine the appropriate amount of gross income that is attributable
to a foreign branch, the purposes of section 367(d) and Sec. 1.904-
4(f)(2)(vi)(D) are different. See 88 FR 27819, 27825 (providing that,
with respect to Sec. 1.904-4(f)(2)(vi)(D), ``[i]f there are multiple
transfers of an item of intangible property over time, each transfer
must be separately evaluated and could result in differing amounts of
deemed annual payments depending on any interim changes in the value of
the intangible property between successive transfers . . . these
proposed regulations provide that each successive transfer to which
Sec. 1.904-4(f)(2)(vi)(D) applies is considered independently from any
other preceding or subsequent transfers.''). Accordingly, the final
regulations do not adopt this comment and proposed Sec. 1.904-
4(f)(2)(vi)(D) is finalized without change.
IX. Applicability Dates
The proposed regulations were generally proposed to apply to
subsequent dispositions of intangible property occurring on or after
the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register. See proposed Sec. Sec.
1.367(d)-1(j)(2), 1.904-4(q)(3), and 1.6038B-1(g). Comments recommended
that the proposed regulations apply retroactively.
The Treasury Department and the IRS generally consider several
factors when evaluating whether a rule should apply retroactively on an
elective basis. For example, and as relevant to the proposed
regulations, retroactive application may be more compelling where the
regulations are issued with respect to new legislation, or where
retroactive application is necessary to achieve certain policy
objectives. The Treasury Department and the IRS also evaluate the
additional administrative burden likely to result from retroactive
application. Finally, where the regulations represent a change in
existing regulations, consideration is given to whether retroactive
application could advantage certain taxpayers over similarly situated
taxpayers, based on whether the relevant taxable year remains open for
the taxpayer to amend
[[Page 82165]]
their return to take advantage of the change. The Treasury Department
and the IRS have determined that, on balance, these factors, though not
representing an exhaustive list of factors, weigh against permitting
the retroactive application of the final regulations and therefore do
not adopt these comments.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The collection of information contained in these regulations has
been reviewed 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 collection of information in these
final regulations is in Sec. 1.6038B-1(d)(2)(iv). This information is
necessary to ensure that proposed Sec. 1.367(d)-1(f)(4) is
appropriately applied to the subsequent transfer. The collection of
information is required to comply with section 367(d). The likely
respondents are domestic corporations. Burdens associated with these
requirements will be reflected in the burden for Form 926, Return by a
U.S. Transferor of Property to a Foreign Corporation.
Estimated total annual reporting burden is 1,601 hours.
Estimated average annual burden per respondent is 2.4 hours.
Estimated number of respondents is 667.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget. Books
or records relating to a collection of information must be retained if
their contents may become material in the administration of any
Internal Revenue law. Generally, tax returns and tax return information
are confidential, as required by section 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities.
The Treasury Department and the IRS do not have data readily
available to assess the number of small entities potentially affected
by the final regulations. However, entities potentially affected by
these proposed regulations are generally not small entities, because of
the resources and investment necessary to develop intangible property
and, once so developed, transfer the intangible property to a foreign
corporation. Therefore, the Treasury Department and the IRS have
determined that there will not be a substantial number of domestic
small entities affected by the final regulations. Consequently, the
Treasury Department and the IRS certify that the final regulations will
not have a significant economic impact on a substantial number of small
entities.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the proposed regulations
(REG-113839-22) preceding these final regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business, and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These final regulations do not include any Federal mandate
that may result in expenditures by State, local, or Tribal governments,
or by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
Drafting Information
The principal author of these regulations is Brittany N. Dobi, of
the 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.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.367(d)-1 also issued under 26 U.S.C. 367(d).
* * * * *
Sec. 1.367(a)-1 [Amended]
0
Par. 2. Section 1.367(a)-1 is amended by removing the language
``section 936(h)(3)(B)'' in paragraphs (d)(5) and (6) and adding the
language ``section 367(d)(4)'' in its place.
0
Par. 3. Section 1.367(d)-1 is amended by:
0
a. Removing reserved paragraphs (c)(1) through (2).
0
b. Adding paragraph (c) heading and paragraphs (c)(1) and (2).
0
c. Removing reserved paragraphs (c)(4) through (g)(2) (introductory
text).
0
d. Adding paragraphs (c)(4) and (d) through (f).
0
e. Removing paragraph (g)(2)(i), reserved paragraphs (g)(2)(ii) through
(iii)(D), paragraph (g)(2)(iii)(E), and reserved paragraph (g)(2)(iii)
undesignated concluding paragraph.
0
f. Adding paragraph (g) heading and paragraphs (g)(1) and (2).
0
g. Removing reserved paragraphs (g)(4) through (i).
0
h. Adding paragraphs (g)(4) through (6), (h), and (i).
0
i. Revising paragraph (j).
The additions and revision read as follows:
Sec. 1.367(d)-1 Transfers of intangible property to foreign
corporations.
* * * * *
(c) Deemed payments upon transfer of intangible property to foreign
[[Page 82166]]
corporation--(1) In general. For further guidance, see Sec. 1.367(d)-
1T(c)(1).
(2) Required adjustments. For further guidance, see Sec. 1.367(d)-
1T(c)(2) introductory text and (c)(2)(i).
(i) [Reserved]
(ii) The deemed payment is treated as an allowable deduction
(whether or not that amount is paid) of the transferee foreign
corporation properly allocated and apportioned to the appropriate
classes of gross income in accordance with Sec. Sec. 1.882-4(b)(1),
1.951A-2(c)(3), 1.954-1(c), and 1.960-1(c) and(d), as applicable.
* * * * *
(4) Blocked income. For further guidance, see Sec. 1.367(d)-
1T(c)(4).
(d) Subsequent transfer of stock of transferee corporation to
unrelated person. For further guidance, see Sec. 1.367(d)-1T(d).
(e) Subsequent transfer of stock of transferee foreign corporation
to related person--(1) Transfer to related U.S. person treated as
disposition of intangible property. For further guidance, see Sec.
1.367(d)-1T(e)(1).
(2) Required adjustments. For further guidance, see Sec. 1.367(d)-
1T(e)(2) introductory text and (e)(2)(i).
(i) [Reserved]
(ii) The deemed payment is treated as an allowable deduction
(whether or not that amount is paid) of the transferee foreign
corporation properly allocated and apportioned to the appropriate
classes of gross income in accordance with Sec. Sec. 1.882-4(b)(1),
1.951A-2(c)(3), 1.954-1(c), and 1.960-1(c) and(d), as applicable.
(iii) For further guidance, see Sec. 1.367(d)-1T(e)(2)(iii)
through (e)(4).
(iv) [Reserved]
(3) through (4) [Reserved]
(f) Subsequent disposition of transferred intangible property by
transferee foreign corporation--(1) In general. For further guidance,
see Sec. 1.367(d)-1T(f)(1).
(2) Required adjustments. If a U.S. transferor is required to
recognize gain under paragraph (f)(4)(i)(A) of this section or Sec.
1.367(d)-1T(f)(1), then, in addition to the adjustments described in
paragraph (c)(2)(ii) of this section and Sec. 1.367(d)-1T(c)(2) with
respect to the deemed payment described in Sec. 1.367(d)-
1T(f)(1)(ii)--
(i) For purposes of chapter 1 of the Code, the transferee foreign
corporation reduces (but not below zero) the portion of its earnings
and profits and gross income arising by reason of the subsequent
disposition of the intangible property by the amount of gain recognized
by the U.S. transferor under paragraph (f)(4)(i)(A) of this section or
Sec. 1.367(d)-1T(f)(1); and
(ii) The U.S. transferor may establish an account receivable from
the transferee foreign corporation equal to the amount of gain
recognized under paragraph (f)(4)(i)(A) of this section or Sec.
1.367(d)-1T(f)(1) in accordance with Sec. 1.367(d)-1T(g)(1).
(3) Subsequent transfer of intangible property to related person.
Except as provided in paragraph (f)(4)(i)(B) of this section, a U.S.
person's requirement to recognize income under Sec. 1.367(d)-1T(c) or
(e) is not affected by the transferee foreign corporation's subsequent
disposition of the transferred intangible property to a related person.
For purposes of any required adjustments, and of any accounts
receivable created under Sec. 1.367(d)-1T(g)(1), the related person
that receives the intangible property is treated as the transferee
foreign corporation.
(4) Subsequent transfer of intangible property to qualified
domestic person--(i) In general. Except as provided in paragraph
(f)(4)(v) of this section, if a U.S. person transfers intangible
property subject to section 367(d) and the rules of this section and
Sec. 1.367(d)-1T to a foreign corporation in an exchange described in
section 351 or 361 and, within the useful life of the intangible
property, that transferee foreign corporation subsequently disposes of
the intangible property to a qualified domestic person, then--
(A) The U.S. transferor of the intangible property (or any person
treated as such pursuant to Sec. 1.367(d)-1T(e)(1)) is required to
recognize gain, as applicable, equal to the amount described in
paragraph (f)(4)(ii) of this section; and
(B) If the U.S. transferor provides the information described in
Sec. 1.6038B-1(d)(2)(iv), then--
(1) The U.S. transferor is required to recognize a deemed payment
as provided in Sec. 1.367(d)-1T(f)(1)(ii); and
(2) The intangible property is no longer subject to section 367(d),
this section, or Sec. 1.367(d)-1T after applying paragraphs
(f)(4)(i)(A) and (f)(4)(i)(B)(1) of this section.
(ii) Gain recognition for U.S. transferor. The amount of gain a
U.S. transferor must recognize under paragraph (f)(4)(i)(A) of this
section is determined as follows--
(A) If the intangible property is transferred basis property (as
defined in section 7701(a)(43)) by reason of the subsequent disposition
(determined without regard to section 367(d), this section, and Sec.
1.367(d)-1T), the amount of gain, if any, the transferee foreign
corporation would recognize if its adjusted basis in the intangible
property were equal to the U.S. transferor's former adjusted basis in
the property; or
(B) If the intangible property is not transferred basis property by
reason of the subsequent disposition (determined without regard to
section 367(d), this section, and Sec. 1.367(d)-1T), the excess, if
any, of the fair market value of the intangible property on the date of
the subsequent disposition over the U.S. transferor's former adjusted
basis in that property.
(iii) Qualified domestic person. For purposes of this paragraph
(f)(4), a qualified domestic person means--
(A) The U.S. transferor that initially transferred intangible
property subject to section 367(d);
(B) A U.S. person treated as a U.S. transferor under Sec.
1.367(d)-1T(e)(1), provided such person is an individual or a
corporation other than a corporation exempt from tax under section
501(a), a regulated investment company (as defined in section 851(a)),
a real estate investment trust (as defined in section 856(a)), a DISC
(as defined in section 992(a)(1)), or an S corporation (as defined in
section 1361(a));
(C) A U.S. person that is an individual related, within the meaning
of paragraph (h)(2)(ii) of this section and Sec. 1.367(d)-1T(h), to
the person described in paragraph (f)(4)(iii)(A) or (B) of this
section; or
(D) A U.S. person that is a corporation related, within the meaning
of paragraph (h)(2)(ii) of this section and Sec. 1.367(d)-1T(h), to
the person described in paragraph (f)(4)(iii)(A) or (B) of this
section, other than a corporation exempt from tax under section 501(a),
a regulated investment company (as defined in section 851(a)), a real
estate investment trust (as defined in section 856(a)), a DISC (as
defined in section 992(a)(1)), or an S corporation (as defined in
section 1361(a)).
(iv) Qualified domestic person's basis in the intangible property.
The qualified domestic person's adjusted basis in the intangible
property is--
(A) In the case of a subsequent disposition of intangible property
described in paragraph (f)(4)(ii)(A) of this section, and subject to
any applicable limitations that may apply under the Code, the lesser of
the U.S. transferor's former adjusted basis in the intangible property
or the transferee foreign corporation's adjusted basis in the
intangible property (as determined immediately before the subsequent
disposition), in each case increased by the greater of the amount of
gain (if any) described in paragraph (f)(4)(ii)(A) of this section and
recognized by the U.S. transferor or the amount of gain (if any)
recognized by the transferee foreign
[[Page 82167]]
corporation as to the intangible property by reason of the subsequent
disposition; or
(B) In the case of a subsequent disposition of intangible property
described in paragraph (f)(4)(ii)(B) of this section, the fair market
value of the intangible property (as determined on the date of the
subsequent disposition).
(v) Special rule for related transactions. If the transferee
foreign corporation subsequently disposes of the transferred intangible
property to a person that would, absent this paragraph (f)(4)(v), be a
qualified domestic person (initial transferee) and, as part of a series
of related transactions, the intangible property is subsequently
disposed of to any other person, including by reason of multiple
dispositions, then the initial transferee is treated as a qualified
domestic person only if the ultimate recipient of the intangible
property is a qualified domestic person. See paragraphs (f)(6)(ii)(D)
and (E) of this section (Examples 4 and 5) for illustrations of the
application of this paragraph (f)(4)(v).
(5) Relief for certain failures to comply. This paragraph (f)(5)
provides relief if paragraph (f)(4)(i)(B)(2) of this section would
apply but for the U.S. transferor's failure to provide the information
required by paragraph (f)(4)(i)(B) of this section (a ``failure to
comply''). When a failure to comply occurs, the subsequent disposition
of the transferred intangible property is generally subject to
paragraphs (f)(3) and (f)(4)(i)(A) of this section. Nevertheless, a
failure to comply is deemed not to have occurred (regardless of whether
the U.S. transferor continued to include amounts in gross income under
Sec. 1.367(d)-1T(c) or (e) after the subsequent disposition), and the
requirements of paragraph (f)(4)(i)(B) of this section are treated as
satisfied as of the date of the subsequent disposition if--
(i) Promptly after the U.S. transferor becomes aware of the
failure, the U.S. transferor provides such information and provides a
reasonable explanation for its failure to comply to the Director of
Field Operations, Cross Border Activities Practice Area of Large
Business & International (or any successor to the roles and
responsibilities of such position, as appropriate), by eFax at (855)
582-4842 (or as otherwise directed on irs.gov), or, if any taxable year
of the U.S. transferor is under examination when the discovery is made,
to the Internal Revenue Service personnel conducting the examination;
(ii) The U.S. transferor timely files an amended return for the
taxable year in which the subsequent disposition occurred (and, if
applicable, for each taxable year starting with the taxable year
immediately after the taxable year in which the subsequent disposition
occurred and ending with the taxable year in which the U.S. transferor
seeks relief under this paragraph (f)(5)) that includes the information
required by paragraph (f)(4)(i)(B) of this section; and
(iii) If any taxable year of the U.S. transferor is under
examination when an amended return is filed, the U.S. transferor
provides a copy of the amended return (or, if applicable, amended
returns) to the Internal Revenue Service personnel conducting the
examination.
(6) Examples--(i) Assumed facts. For purposes of the examples in
paragraph (f)(6)(ii) of this section, and except where otherwise
indicated, the following facts are assumed.
(A) USP and USS are domestic corporations that each use a calendar
taxable year.
(B) TFC is a foreign corporation whose functional currency is the
U.S. dollar.
(C) In year 1, USP transfers intangible property, as defined in
section 367(d)(4), with a $0 adjusted basis, to TFC in a section 351
exchange (the transferred IP), and such transfer is subject to section
367(d).
(D) Each annual inclusion (including any amount described in Sec.
1.367(d)-1T(f)(1)(ii)) is taken into account under section
367(d)(2)(A)(ii)(I) and Sec. 1.367(d)-1T(c)(1).
(E) Any subsequent transfer or disposition of stock of TFC or the
transferred IP occurs within the useful life of the transferred IP.
(F) All transactions are respected under general principles of tax
law.
(ii) Examples. The following examples illustrate the application of
paragraph (f)(4) of this section and other paragraphs of this section
that relate to paragraph (f)(4).
(A) Example 1: Complete liquidation of transferee foreign
corporation into a qualified domestic person--(1) Facts. In year 2, USP
transfers all the stock of TFC to USS, a related person within the
meaning of Sec. 1.367(d)-1T(h) and paragraph (h)(2)(ii) of this
section, in a section 351 exchange to which Sec. 1.367(d)-1T(e)(1)
applies (the year 2 transfer). In year 3, TFC distributes all its
property (including the transferred IP) to USS pursuant to a complete
liquidation to which sections 332 and 337 apply (the year 3
liquidation). The all earnings and profits amount determined under
Sec. 1.367(b)-2(d) with respect to the stock of TFC held by USS is $0.
The information described in Sec. 1.6038B-1(d)(2) is provided by USS
for the taxable year in which the year 3 liquidation occurs.
(2) Analysis--(i) The year 2 transfer. Because the year 2 transfer
involves a transfer of all the stock of TFC by USP (the initial U.S.
transferor) to a related U.S. person (USS), under Sec. 1.367(d)-
1T(e)(1)(i) USS (a successor U.S. transferor) is treated as receiving
the right to receive a proportionate share of the contingent annual
payments that USP would have otherwise taken into account under Sec.
1.367(d)-1T(c). As determined under Sec. 1.367(d)-1T(e)(4), USS's
proportionate share of such payments is 100 percent. Accordingly, USS
will annually include in its gross income the full amount of each of
the annual payments that USP would otherwise have taken into account
under Sec. 1.367(d)-1T(c) over the useful life of the transferred IP,
and USP will not recognize any gain upon the year 2 transfer. See Sec.
1.367(d)-1T(e)(1)(ii) and (iii).
(ii) The year 3 liquidation. The year 3 liquidation results in a
subsequent disposition of the transferred IP to USS. USS, a U.S. person
treated as the U.S. transferor pursuant to Sec. 1.367(d)-1T(e)(1), is
a qualified domestic person within the meaning of paragraph (f)(4)(iii)
of this section. Pursuant to paragraph (f)(4)(i)(A) of this section,
USS must recognize the amount of gain described in paragraph (f)(4)(ii)
of this section. Because the year 3 liquidation is a complete
liquidation to which sections 332 and 337 apply, the intangible
property is transferred basis property (as defined in section
7701(a)(43) and determined without regard to section 367(d), this
section, and Sec. 1.367(d)-1T), and therefore paragraph (f)(4)(ii)(A)
of this section applies to determine the amount of any gain USS must
recognize. Because TFC does not recognize gain with respect to the
transferred IP (regardless of the adjusted basis in the intangible
property) by reason of the year 3 liquidation, the amount of gain
described in paragraph (f)(4)(ii)(A) of this section is $0.
Accordingly, USS does not recognize gain pursuant to paragraph
(f)(4)(i)(A) of this section by reason of the year 3 liquidation.
Additionally, because USS provides the information described in Sec.
1.6038B-1(d)(2), paragraph (f)(4)(i)(B) of this section applies to the
year 3 liquidation. USS therefore recognizes a deemed payment
representing the part of USS's taxable year during which TFC held the
transferred IP pursuant to paragraph (f)(4)(i)(B)(1) of this section,
and the
[[Page 82168]]
required adjustments described in paragraph (c)(2)(ii) of this section
and Sec. 1.367(d)-1T(c)(2)(i) apply as to the deemed payment. Also,
because USS does not recognize gain pursuant to paragraph (f)(4)(i)(A)
of this section, the required adjustments described in paragraph (f)(2)
of this section do not apply. Pursuant to paragraph (f)(4)(i)(B)(2) of
this section, after taking the deemed payment into account, the
transferred IP is no longer subject to section 367(d), this section,
and Sec. 1.367(d)-1T. Finally, pursuant to paragraph (f)(4)(iv)(A) of
this section, USS's adjusted basis in the transferred IP is $0, which
is equal to USP's former adjusted basis in the transferred IP ($0),
increased by the greater of the amount of gain recognized by USS under
paragraph (f)(4)(i)(A) of this section ($0) or the amount of gain
recognized by TFC upon the year 3 liquidation ($0).
(B) Example 2: Taxable distribution of the transferred intangible
property to a qualified domestic person--(1) Facts. The facts are the
same as in paragraph (f)(6)(ii)(A) of this section (Example 1), except
that, instead of in year 3 TFC distributing all its property to USS
pursuant to a complete liquidation, in year 3 TFC distributes the
transferred IP to USS in a distribution described in section 311(b)
when the fair market value of the transferred IP is $100x (the year 3
distribution). TFC's adjusted basis in the transferred IP immediately
before the distribution is $0.
(2) Analysis. The consequence of the year 2 transfer is the same as
described in paragraph (f)(6)(ii)(A)(2)(i) of this section (Example 1).
Like the consequences described in paragraph (f)(6)(ii)(A)(2) of this
section (Example 1), the year 3 distribution is a subsequent
disposition of the transferred IP to USS, a qualified domestic person.
Pursuant to paragraph (f)(4)(i)(A) of this section, USS must recognize
the amount of gain described in paragraph (f)(4)(ii) of this section.
Because the year 3 distribution is described in section 311(b) the
intangible property is not transferred basis property (as defined in
section 7701(a)(43) and determined without regard to section 367(d),
this section, and Sec. 1.367(d)-1T), and therefore USS must recognize
$100x gain under paragraph (f)(4)(ii)(B) of this section. The $100x
gain amount equals the excess of the fair market value of the
transferred IP on the date of the year 3 distribution ($100x) over
USP's former adjusted basis in the property ($0). TFC, because of USS's
gain recognition under paragraph (f)(4)(i)(A) of this section, reduces
(but not below zero) the portion of its earnings and profits and gross
income arising by reason of the year 3 distribution by the amount of
such gain under paragraph (f)(2)(i) of this section. Specifically,
because the year 3 distribution requires USS to recognize $100x of
gain, TFC reduces the portion of its earnings and profits and gross
income that arise by reason of the year 3 distribution, which is $100x
(the excess of the fair market value of the transferred IP ($100x) over
TFC's adjusted basis in the transferred IP ($0)), by $100x (the amount
of gain USS recognizes pursuant to paragraph (f)(4)(i)(A) of this
section). As a result, after taking into account the reduction, TFC has
no earnings and profits or gross income that arise by reason of the
year 3 distribution. Furthermore, USS may establish an account
receivable from TFC equal to $100x under paragraph (f)(2)(ii) of this
section. Additionally, and as described in paragraph (f)(6)(ii)(A)(2)
of this section (Example 1), pursuant to paragraph (f)(4)(i)(B)(1) of
this section, USS recognizes a deemed payment for the portion of USS's
taxable year during which TFC held the transferred IP, and the required
adjustments described in paragraph (c)(2)(ii) of this section and Sec.
1.367(d)-1T(c)(2) apply to this deemed payment. After taking these
consequences into account, pursuant to paragraph (f)(4)(i)(B)(2) of
this section, the transferred IP is no longer subject to section
367(d), this section, and Sec. 1.367(d)-1T. Finally, pursuant to
paragraph (f)(4)(iv)(B) of this section, USS's adjusted basis in the
transferred IP is $100x, which is the fair market value of the
transferred IP on the date of the year 3 distribution.
(C) Example 3: Qualified domestic person's basis in intangible
property when intangible property is repatriated in an exchange
described in section 351(b)--(1) Facts. The facts are the same as in
paragraph (f)(6)(ii)(A) of this section (Example 1), except that the
transfer of stock of TFC to USS in year 2 does not occur and instead of
the year 3 liquidation, in year 3 TFC transfers the intangible property
to USS (a qualified domestic person as defined in paragraph (f)(4)(iii)
of this section) in an exchange described in section 351(b) pursuant to
which TFC recognizes $50x of gain and USP recognizes $50x of gain under
paragraph (f)(4)(i)(A) of this section (the year 3 exchange), which
amount will reduce TFC's earnings and profits and gross income by $50x
under paragraph (f)(2)(i) of this section.
(2) Analysis. Pursuant to paragraph (f)(4)(iv)(A) of this section,
USS's adjusted basis in the intangible property is $50x, which is the
amount equal to the lesser of USP's former adjusted basis in the
property ($0) or TFC's adjusted basis in the property ($0), increased
by the greater of the amount of gain recognized by USP under paragraph
(f)(4)(i)(A) of this section ($50x) or the amount of gain recognized by
TFC upon the year 3 exchange ($50x).
(D) Example 4: Repatriation as part of a series of related
transactions culminating in transfer to a foreign corporation--(1)
Facts. The facts are the same as in paragraph (f)(6)(ii)(A)(1) of this
section (Example 1), except that the year 3 liquidation occurs as part
of a series of related transactions pursuant to which USS transfers the
transferred IP that it receives from TFC to a related foreign
corporation (FC1) in exchange for stock in FC1.
(2) Analysis. Because the year 3 liquidation occurs as part of a
series of related transactions pursuant to which the transferred IP is
ultimately contributed to a FC1, a foreign corporation, and because a
foreign corporation is not a qualified domestic person pursuant to
paragraph (f)(4)(iii) of this section, then, under paragraph (f)(4)(v)
of this section, the year 3 liquidation is not treated as a subsequent
disposition described in paragraph (f)(4)(i) of this section, but is
instead treated as a subsequent disposition described in paragraph
(f)(3) of this section.
(E) Example 5: Repatriation as part of a series of related
transactions culminating in transfer to a qualified domestic person--
(1) Facts. The facts are the same as in paragraph (f)(6)(ii)(B)(1) of
this section (Example 2), except that the year 3 distribution occurs as
part of a series of related transactions pursuant to which USS disposes
of the transferred IP that it receives from TFC to USP.
(2) Analysis. Because the year 3 distribution occurs as part of a
series of related transactions pursuant to which the transferred IP is
distributed to USP, and because USP is a qualified domestic person
pursuant to paragraph (f)(4)(iii) of this section, paragraph (f)(4)(v)
of this section does not prevent paragraph (f)(4)(i) of this section
from applying to the year 3 distribution. Accordingly, the consequences
under section 367(d) of the year 3 distribution are the same as those
described in paragraph (f)(6)(ii)(B)(2) of this section (Example 2),
and the consequences of the subsequent disposition of the transferred
IP by USS to USP are determined after applying paragraph (f)(4) of this
section to the transfer of the transferred IP by TFC to USS.
(g) Special rules--(1) Establishment of accounts receivable. For
further guidance, see Sec. 1.367(d)-1T(g)(1).
[[Page 82169]]
(2) Election to treat transfer as sale. For further guidance, see
Sec. 1.367(d)-1T(g)(2) introductory text.
(i) The intangible property transferred constitutes an operating
intangible, as defined in Sec. 1.367(a)-1(d)(6).
(ii) For further guidance, see Sec. 1.367-1T(g)(2)(ii) through
(g)(2)(iii)(D).
(iii)(A) through (D) [Reserved]
(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.
(F) For further guidance, see Sec. 1.367(d)-1T(g)(2)(iii)(F).
* * * * *
(4) Coordination with section 482. For further guidance, see Sec.
1.367(d)-1T(g)(4)
(5) Determination of fair market value. For further guidance, see
Sec. 1.367(d)-1T(g)(5).
(6) Anti-abuse rule. For further guidance, see Sec. 1.367(d)-
1T(g)(6).
(h) Related person. For further guidance, see Sec. 1.367(d)-1T(h)
introductory text through (h)(1).
(1) [Reserved]
(2) For further guidance, see Sec. 1.367(d)-1T(h)(2) introductory
text and (h)(2)(i).
(i) [Reserved]
(ii) Section 1563 applies (for purposes of section 267(f)) without
regard to section 1563(b)(2).
(i) Effective date. For further guidance, see Sec. 1.367(d)-1T(i).
(j) Applicability dates--(1) In general. This section applies to
transfers occurring on or after September 14, 2015, and to transfers
occurring before September 14, 2015, resulting from entity
classification elections made under Sec. 301.7701-3 of this chapter
that are filed on or after September 14, 2015. For transfers occurring
before this section is applicable, see Sec. 1.367(d)-1T as contained
in 26 CFR part 1 revised as of April 1, 2016.
(2) Certain subsequent dispositions of intangible property.
Paragraphs (c)(2)(ii), (e)(2)(ii), (f)(2) through (5), and (h)(2)(ii)
of this section apply to subsequent dispositions of intangible property
occurring on or after October 10, 2024. For subsequent dispositions of
intangible property occurring before October 10, 2024, see Sec.
1.367(d)-1T as contained in 26 CFR part 1 revised as of April 1, 2022.
0
Par. 4. Section 1.367(d)-1T is amended by:
0
a. Revising paragraph (c)(2)(ii).
0
b. Removing the undesignated paragraph following paragraph (c)(2)(ii).
0
d. Revising paragraphs (e)(2)(ii) and (f)(2).
0
e. Removing and reserving paragraph (f)(3) and adding reserved
paragraphs (f)(4) through (6).
0
f. Designating the undesignated paragraph following paragraph
(g)(2)(iii)(E) as paragraph (g)(2)(iii)(F).
0
g. Revising paragraph (h)(2)(ii).
The revisions read as follows:
Sec. 1.367(d)-1T Transfers of intangible property to foreign
corporations (temporary).
* * * * *
(c) * * *
(2) * * *
(ii) For further guidance, see Sec. 1.367(d)-1(c)(2)(ii).
* * * * *
(e) * * *
(2) * * *
(ii) For further guidance, see Sec. 1.367(d)-1(e)(2)(ii);
* * * * *
(f) * * *
(2) Required adjustments. For further guidance, see Sec. 1.367(d)-
1(f)(2) through (6).
(3) through (6) [Reserved]
* * * * *
(h) * * *
(2) * * *
(ii) For further guidance, see Sec. 1.367(d)-1(h)(2)(ii).
* * * * *
Sec. 1.367(e)-2 [Amended]
0
Par. 5. Section 1.367(e)-2 is amended by removing the language
``section 936(h)(3)(B)'' in the last sentence of paragraph (b)(2)(i)(B)
and adding the language ``section 367(d)(4)'' in its place.
0
Par. 6. Section 1.904-4 is amended by adding paragraph (f)(2)(vi)(D)(4)
and revising paragraph (q)(3) to read as follows:
Sec. 1.904-4 Separate application of section 904 with respect to
certain categories of income.
* * * * *
(f) * * *
(2) * * *
(vi) * * *
(D) * * *
(4) Multiple transfers of intangible property. If the same
intangible property is transferred in a series of transfers described
in paragraph (f)(2)(vi)(D)(1) of this section, each successive transfer
is separately subject to the provisions of paragraph (f)(2)(vi)(D)(1)
and will not terminate or otherwise affect the application of paragraph
(f)(2)(vi)(D)(1) to a prior transfer described in paragraph
(f)(2)(vi)(D)(1).
* * * * *
(q) * * *
(3) Except as provided in the following sentence, paragraph (f) of
this section applies to taxable years that begin after December 31,
2019, and end on or after November 2, 2020. Paragraph (f)(2)(vi)(D)(4)
of this section applies to taxable years that begin on or after October
10, 2024.
0
Par. 7. Section 1.951A-2 is amended by revising paragraph (c)(2) to
read as follows:
Sec. 1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(2) Determination of gross income and allowable deductions. For
purposes of determining tested income and tested loss, the gross income
and allowable deductions of a controlled foreign corporation for a CFC
inclusion year are determined under the rules of Sec. 1.952-2 for
determining the subpart F income (as defined in section 952) of the
controlled foreign corporation, except, for a controlled foreign
corporation which is engaged in the business of reinsuring or issuing
insurance or annuity contracts and which, if it were a domestic
corporation engaged only in such business, would be taxable as an
insurance company to which subchapter L of chapter 1 of the Code
applies, the text ``the principles of Sec. Sec. 1.953-4 and 1.953-5''
means ``the rules of sections 953 and 954(i)'' in Sec. 1.952-2(b)(2).
* * * * *
0
Par. 8. Section 1.951A-7 is amended by adding a paragraph (e) to read
as follows:
Sec. 1.951A-7 Applicability dates.
* * * * *
(e) Determination of gross income and allowable deductions. Section
1.951A-2(c)(2) applies to taxable years of foreign corporations ending
on or after October 10, 2024, and to taxable years of United States
shareholders in which or with which such taxable years end. For taxable
years of foreign corporations ending before October 10, 2024, and to
taxable years of United States shareholders in which or with which such
taxable years end, see Sec. 1.951A-2(c)(2)(i) and (ii) as contained in
26 CFR part 1, revised as of April 1, 2022.
0
Par. 9. Section 1.6038B-1 is amended by:
0
a. Removing reserved paragraphs (d)(1) through (1)(iii).
0
b. Adding paragraphs (d) heading and (d)(1) introductory text and
reserved paragraphs (d)(1)(i) through (iii).
0
c. Removing reserved paragraphs (d)(1)(viii) through (d)(2).
0
d. Adding paragraphs (d)(1)(viii), (d)(2), and (g)(8).
[[Page 82170]]
The additions read as follows:
Sec. 1.6038B-1 Reporting of certain transfers to foreign
corporations.
* * * * *
(d) Transfers subject to section 367(d)--(1) Initial transfer. For
further guidance, see Sec. 1.6038B-1T(d)(1) introductory text through
(d)(1)(iii).
(i) through (iii) [Reserved]
* * * * *
(viii) Other intangibles. For further guidance, see Sec. 1.6038B-
1T(d)(1)(viii).
(2) Subsequent transfers. For additional, see Sec. 1.6038B-
1T(d)(2) introductory text through (d)(2)(ii).
(i) through (ii) [Reserved]
(iii) Subsequent transfer. Except for a subsequent transfer
described in paragraph (d)(2)(iv) of this section, provide the
following information concerning the subsequent transfer:
(A) For further guidance, see Sec. 1.6038B-1T(d)(2)(iii)(A)
through (C).
(B) through (C) [Reserved]
(iv) Subsequent transfer of intangible property to a qualified
domestic person. Provide the following information concerning a
subsequent transfer of intangible property described in Sec. 1.367(d)-
1(f)(4)(i):
(A) A statement providing that Sec. 1.367(d)-1(f)(4)(i)(B) applies
to the subsequent transfer;
(B) A general description of the subsequent transfer and any wider
transaction of which it forms a part, including the U.S. transferor's
former adjusted basis in the intangible property and the transferee
foreign corporation's adjusted basis in the intangible property (as
determined immediately before the subsequent transfer), the amount and
computation of any gain recognized by the U.S. transferor under Sec.
1.367(d)-1(f)(4)(i)(A), and a description of whether the intangible
property was, or is expected to be, subsequently transferred to one or
more other persons (as described in Sec. 1.367(d)-1(f)(4)(v));
(C) A description of the intangible property;
(D) A copy of the Form 926 with respect to the original transfer of
the intangible property and any attachments identifying the intangible
property as within the scope of section 367(d);
(E) The name, address, and taxpayer identification number of the
qualified domestic person that receives the intangible property,
including a statement describing the relationship between the U.S.
transferor and the qualified domestic person, and, if applicable, such
information regarding any other persons described in Sec. 1.367(d)-
1(f)(4)(v); and
(F) Any other information as may be prescribed by the Commissioner
in publications, forms, instructions, or other guidance.
* * * * *
(g) * * *
(8) Paragraphs (d)(2)(iii) introductory text and (d)(2)(iv) of this
section apply to transfers occurring on or after October 10, 2024.
0
Par. 10. Section 1.6038B-1T is amended by revising paragraph
(d)(2)(iii) introductory text to read as follows:
Sec. 1.6038B-1T Reporting of certain transactions to foreign
corporations (temporary).
* * * * *
(d) * * *
(2) * * *
(iii) Subsequent transfer. For further guidance, see Sec. 1.6038B-
1T(d)(2)(iii) introductory text:
* * * * *
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: September 23, 2024.
Aviva Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-23132 Filed 10-9-24; 8:45 am]
BILLING CODE 4830-01-P