Section 367(d) Rules for Certain Repatriations of Intangible Property

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 9994]</DEPDOC> <RIN>RIN 1545-BP55</RIN> <SUBJECT>Section 367(d) Rules for Certain Repatriations of Intangible Property</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on October 10, 2024. <E T="03">Applicability date:</E> For dates of applicability, <E T="03">see</E> §§ 1.367(d)-1(j)(2), 1.904-(q)(3), 1.951A-7(e), and 1.6038B-1(g)(8). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the final regulations other than § 1.904-4, Brittany N. Dobi (202) 317-6937; concerning § 1.904-4, Jeffrey L. Parry, (202) 317-6936 (not toll-free numbers). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> 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). <HD SOURCE="HD1">Background</HD> 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 <E T="04">Federal Register</E> (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 § 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. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD2">I. In General</HD> Five comments were submitted on the proposed regulations, which are available at <E T="03">https://www.regulations.gov</E> 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). <HD SOURCE="HD2">II. Definition of Qualified Domestic Person</HD> <HD SOURCE="HD3">A. In General</HD> To terminate the continued application of section 367(d) upon a 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. <E T="03">See</E> proposed § 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. <E T="03">See</E> 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. <E T="03">See Id.</E> <HD SOURCE="HD3">B. Partnerships</HD> 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. <E T="03">See</E> 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. <E T="03">See</E> 88 FR 27819, 27824 (describing, with respect to the latter, an approach modeled off of the rules in §§ 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. <E T="03">See id.</E> For example, the comment pointed to §§ 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. <HD ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 78k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━