Guidance Under Section 367(b) Related to Certain Triangular Reorganizations and Inbound Nonrecognition Transactions

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10004]</DEPDOC> <RIN>RIN 1545-BM19</RIN> <SUBJECT>Guidance Under Section 367(b) Related to Certain Triangular Reorganizations and Inbound Nonrecognition Transactions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations regarding the treatment of property used to acquire parent stock or securities in connection with certain triangular reorganizations involving one or more foreign corporations; the consequences to persons that receive parent stock or securities pursuant to such reorganizations; and the treatment of certain subsequent inbound nonrecognition transactions following such reorganizations and certain other transactions. The final regulations affect corporations engaged in certain triangular reorganizations involving one or more foreign corporations, certain shareholders of foreign corporations acquired in such reorganizations, and foreign corporations that participate in certain inbound nonrecognition transactions. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on July 17, 2024. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), 1.367(b)-6(a)(1)(v) and (vi), 1.367(b)-10(e)(2), (3), and (5), and 1.1411-10(i). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Brady Plastaras at (202) 317-6937 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> On October 6, 2023, the Department of the Treasury (Treasury Department) and the IRS published proposed regulations (REG-117614-14) in the <E T="04">Federal Register</E> (88 FR 69559) under section 367(b) of the Internal Revenue Code (the “Proposed Regulations”) that would implement the regulations announced and described in Notice 2014-32 (2014-20 IRB 1006) and Notice 2016-73 (2016-52 IRB 908), with modifications. This document finalizes the Proposed Regulations without substantive change. Terms used but not defined in this preamble have the meaning provided in the Proposed Regulations. In response to a request for comments in the Proposed Regulations, one comment was received and is discussed in the Summary of Comment and Explanation of Revisions. This comment is available at <E T="03">https://www.regulations.gov</E> or upon request. No public hearing was held on the Proposed Regulations because there were no requests to speak. <HD SOURCE="HD1">Summary of Comment and Explanation of Revisions</HD> <HD SOURCE="HD2">I. § 1.367(b)-10(d) Anti-Abuse Rule</HD> As the preamble to the Proposed Regulations explained, the existing regulations in § 1.367(b)-10 (the “2011 Final Regulations”) contain an anti-abuse rule under which “appropriate adjustments” are made if, “in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose” of the 2011 Final Regulations. <E T="03">See</E> § 1.367(b)-10(d). The anti-abuse rule contains an example illustrating that the earnings and profits of S may, under certain circumstances, be deemed to include the earnings and profits of a corporation related to P or S for purposes of determining the consequences of the adjustments provided for in the 2011 Final Regulations. Notice 2014-32 described certain clarifications with respect to the scope of the anti-abuse rule and illustrated certain of those clarifications with an additional example. <E T="03">See</E> Notice 2014-32, sections 4.03 and 4.04. The Proposed Regulations proposed to implement those clarifications along with two new examples that further illustrate the broad scope of the anti-abuse rule. <E T="03">See</E> proposed § 1.367(b)-10(d)(3) ( <E T="03">Example</E> 2) (relating to a downstream property transfer) and (d)(4) ( <E T="03">Example 3</E> ) (relating to a taxable debt exchange). The Proposed Regulations did not propose to alter the anti-abuse rule's operative text, which remains unchanged from the 2011 Final Regulations. Because <E T="03">Examples 2</E> and <E T="03">3</E> (as well as <E T="03">Example 1,</E> which was described in Notice 2014-32) merely illustrate applications of the same operative rule finalized in the 2011 Final Regulations, the adjustments described in those examples reflect adjustments that would be made under the 2011 Final Regulations. That is, these examples illustrate fact patterns to which the anti-abuse rule already applies, independent of the inclusion of the examples in the Proposed Regulations. The additional language that was proposed to be added to § 1.367(b)-10(d)(1) similarly clarifies potential situations to which the anti-abuse rule applies, and therefore also reflects adjustments that would be made under the 2011 Final Regulations, notwithstanding that that language was first described in Notice 2014-32. The comment asserted that <E T="03">Examples 2</E> and <E T="03">3</E> are an expansion of the operative anti-abuse rule because they involve fact patterns and impose corrective adjustments that were not described in prior guidance and implicate concerns that were not present when the 2011 Final Regulations were issued. The comment claimed that the anti-abuse rule has a narrow application that is limited to scenarios described by the one example in § 1.367(b)-10(d) of the 2011 Final Regulations. In that example, S's earnings and profits are increased where S is “created, organized, or funded to avoid the application of [the 2011 Final Regulations] with respect to the earnings and profits of [a related corporation].” As the comment correctly observed, this adjustment increases the likelihood that the 2011 Final Regulations will apply to treat the P acquisition as a deemed distribution. The comment also argued, however, that the only type of adjustments permitted under the anti-abuse rule are adjustments that increase S's earnings and profits and, moreover, that the anti-abuse rule may impose those adjustments only if they bear on the P acquisition, because the P acquisition is the only type of transaction that can be “in connection with” an applicable triangular reorganization. The comment contended that <E T="03">Example 3</E> effectively introduces a new rule by, for the first time, applying the anti-abuse rule to “override” the § 1.367(b)-10(a)(2)(iii) priority rule, which in the example would otherwise prevent the P acquisition from being treated as a deemed distribution. The comment also argued that <E T="03">Example 3</E> further expands the scope of the anti-abuse rule by applying it “in connection with” a transaction that occurs after the applicable triangular reorganization rather than in connection with the P acquisition itself. The comment similarly asserted that <E T="03">Example 2</E> presents a fact pattern that is not within the purview of the anti-abuse rule because that example references a regulation that was issued after the TCJA, and as such cannot reflect an abuse that the 2011 Final Regulations contemplate. Therefore, the comment recommended that <E T="03">Examples 2</E> and <E T="03">3</E> should either be eliminated from the final regulations or made to apply only prospectively as of October 5, 2023, the date the Proposed Regulations were filed with the <E T="04">Federal Register</E> . The Treasury Department and the IRS maintain that <E T="03">Examples 2</E> and <E T="03">3</E> are simply illustrations of the same operative anti-abuse rule—unchanged since it was published in the 2011 Final Regulations—and therefore decline to adopt the comment's recommendation. The comment misunderstands the nature and purpose of the anti-abuse rule, which is intended to serve as a backstop to § 1.367(b)-10 in cases where taxpayers purposely attempt to structure around the application of those regulations. That structuring may take many forms and implicate other technical provisions in ways that are not foreseeable, including by taking advantage of changes in law that create novel planning opportunities. The anti-abuse rule is designed to be adaptable to such changing or unforeseen circumstances and, as such, is not limited to a particular type of avoidance transaction. This adaptability is reflected in the wording of the anti-abuse rule, which, as described above, applies (i) “if, in connection with a triangular reorganization,” (ii) “a transaction is engaged in with a view to avoid the purpose” of § 1.367(b)-10. Neither of those two elements limit the anti-abuse rule to a specific form of avoidance transaction, as doing so would undercut the adaptability that is essential to the proper functioning of the rule. Moreover, the preamble to temporary regulations issued in 2008 (TD 9400, 73 FR 30301), the predecessor regulations to the 2011 Final Regulations in § 1.367(b)-10, explains that the phrase “in connection with” is “a broad standard that includes any transaction related to the reorganization even if the transaction is not part of the plan of reorganization” (73 FR 30302). The P acquisition is not the exclusive type of transaction that may implicate the anti-abuse rule, nor is there any requirement that such transaction precede the applicable triangular reorganization. Once the anti-abuse rule applies, “appropriate” adjustments may be made. The types of corrective adjustments that may be appropriate are not circumscribed to a particular set of adjustments for the same reason that the anti-abuse rule is not limited to a particular form of avoidance transaction. That is, the anti-abuse rule naturally accommoda ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 82k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━