Cross Border Transactions Current Developments

Transcription

1 Cross Border Transactions Current Developments

2 Your presenters Brett Enzor Glenn Leishner Amy Ritchie

3 Outbound Asset Reorganizations After Notice and TDs 9614 and 9615 (367/1248 Regs) Page 3

4 Summary of Notice The IRS believes that taxpayers have engaged in certain outbound reorganizations transactions which result in the improper repatriation or use of foreign cash. The Notice provides that regulations will be issued, effective July 13, 2012, which cause such reorganizations to result in immediate income recognition with respect to transferred IP. The Notice provides two distinct rules for the recognition of income or gain with respect to transferred IP. In an outbound reorganization, the U.S. transferor will recognize gain on its IP if there is not a qualified successor (i.e., a shareholder of the transferor which is a domestic corporation). In an outbound reorganization with boot (or the assumption of certain liabilities), the U.S. transferor (or its qualified successor) will treat the boot as a prepayment of the deemed royalty due pursuant to Section 367(d). Page 4

5 Application of Notice CFC Purchaser with Outbound F U.S. Purchaser with Outbound Cash D U.S. Purchaser with Leveraged Outbound F CFC Boot Dividend of note U.S. Target Outbound CFC Newco U.S. Target Outbound Existing CFC U.S. Target Outbound CFC Newco CFC not a qualified successor. U.S. Target recognizes gain on all IP. Receipt of boot treated as a prepayment of deemed royalty under Section 367(d). Assumption of liability treated as prepayment of deemed royalty under Section 367(d). Page 5

6 Transactions not subject to Notice purchases stock of U.S. Target. U.S. Target reorganized as foreign company in an outbound F ( CFC Newco ). Gain on tangible assets Sec. 367(d) on IP Year 1 U.S. Target 1 Outbound CFC Newco Dividend of note 2 U.S. Subsidiary CFC Newco pays dividend in the form of a note. CFC Holdco 80% DRD to the extent of U.S. E&P Return of capital Year 2 CFC Newco acquires CFC Holdco in stock D reorganization. Not subject to Notice because is a QS, and there is no boot. Consider alternatives for monetizing the note or basis CFC Newco CFC Holdco Stock U.S. Subsidiary Page 6

7 TDs 9614 and 9615 (367/1248 Regulations) T.D and T.D. 9615, each including regulations under sections 367, 1248, and 6038B published March 19, 2013 T.D includes final and temporary regulations concerning outbound asset reorganizations Final regulations permit non-recognition to domestic target corporation if certain US corporate shareholders assume obligation for the gain realized but not recognized (so-called inside gain ) by the target corporation in the reorganization Non-recognition is elective because in most cases will result in stock basis reduction to US corporate shareholders of the domestic target corporation (including possibly eliminating built-in loss) Modify existing Treas. Reg (b)-4(b)(1) so that domestic target corporation no longer automatically required to include section 1248 amounts attributable to transferred foreign stock T.D includes temporary regulations addressing transfers of stock in outbound assets reorganization and, importantly, eliminating an exception applicable to outbound transfers of property in certain indirect stock transfers Page 7

8 367(a)(5) General Rules 367(a)(1): Gain generally recognized in outbound 351, 354, 356, or 361 exchange - foreign acquiring not treated as a corporation Several exceptions to general 367(a)(1) treatment 367(a)(2): Stock/securities transfers of a foreign corporation a party to the exchange or reorganization 367(a)(3): Asset transfers for use in active foreign trade or business (ATB) 367(a)(5): ATB and stock/securities exceptions generally not available to outbound transfer of property in a 361 exchange But ATB and stock/securities available, Subject to basis adjustments other conditions in regulations and Domestic transferor controlled ( 368(c)) by 5 or less domestic corporations Page 8

9 367(a)(5) Outbound Reorganization Example Outbound F Reorganization Result Before Applying 367(a)(5) Basis /FMV = $100 Basis /FMV = $100 Basis /FMV = $100 $100 FA stock FA UST Foreign DE 361 transfer Foreign DE Basis: $20 Value: $100 FA Foreign DE Foreign DE Basis: $20 Value: $ transfer subject to general rule of 367(a)(5) UST recognizes $80 gain But, ATB exception available if reduces adjusted basis of its FA stock to $20 s FA stock preserves UST s pre-reorganization $80 inside gain Page 9

10 1248(f) General Rules 1248(f)(1): Except as provided in regulations, a domestic corporation (DC) must recognize the 1248 amount, if any, attributable to stock of a foreign corporation (FC) distributed under 337, 355, or (f)(2): general rule of 1248(f)(1) not applicable if distribution is to a domestic corporation (domestic distributee), and Domestic distributee is treated as holding FC stock for period for which DC held the stock, and Domestic distributee is 1248 shareholder of FC immediately after distribution Notice 87-64, C.B (f)(1) will not apply to distributions of CFC stock to a domestic corporation where no gain recognized under 337 Regulations may limit 1248(f)(1) in 355 context to where FC is not a CFC, or one or more distributees are not U.S. shareholders of FC, after the distribution Regulations to be effective after September 21, 1987 Page 10

11 367/1248 Regulations - Vitals TD 9614: Final regulations under 367, 1248, and 6038B Generally effective for transfers occurring on or after April 18, 2013 Exception for position announced in Notice Exception for rules requiring 367(d) property to be considered when coordination rule exception applied TD 9615: Temporary regulations under 367, 1248, and 6038B Removes 367(a)(5) exception to indirect stock transfer coordination rule Coordinates GRAs/ 367(a)(5) in outbound asset reorganizations Removes 120 day rule under reasonable cause relief procedures Effective March 18, 2013 REG : Proposed regulation issued with temporary regulations Page 11

12 Final 367(a)(5)Regulations Highlights Elective exception to retain ability to use ATB and stock/securities transfer exceptions in outbound asset reorganizations Election available if five requirements met: Control group: 5 or fewer domestic corporations directly control US domestic target corporation (UST) Direct 368(c) control S-corporation, RIC, or REIT not included Determined immediately before reorganization Affiliated group members treated as one corporation Gain recognition: UST recognizes gain currently in certain instances Gain on 367(a) assets transferred if no exception applies (e.g., inventory) UST s inside gain attributable to non-control group members Inside gain not preserved by a control group member in stock received in reorganization Page 12

13 Final 367(a)(5)Regulations Highlights (cont d) Each control group member reduces its adjusted basis in stock received in the reorganization to preserve its share of UST s inside gain not recognized BIL stock, after adjustment, must reflect share of inside gain Ownership percentage key in computing share of inside gain UST agrees to recognize gain if transferee foreign corporation disposes of significant part of assets received in reorganization with a principal purpose of avoiding tax Dispositions within two years presumed with a principal purpose Significant only if 40% or more of 367(a) property value disposed of Disposition must be within 60 months of date of reorganization GRA exceptions applicable for certain dispositions Dispositions in the ordinary course of business not taken into account Election/reporting requirements for UST and control group members Page 13

14 Final 367(a)(5) Regulations Example US1 40% ATB Assets BIG: $40x 40% US2 UST 20% Solely FA stock 361 transfer All Assets Inventory BIG: $20x FP New FA Result Under Final Regulations Step 1: UST Gain recognition $20 gain recognized on transfer of hot assets (inventory); inventory basis increased by $20x $8x gain recognized on transfer of ATB Assets attributable to FP (noncontrol group member); basis in ATB assets increased by $8x Step 2: Required basis adjustments in New FA Stock received by US1 and US2 Each of US1 and US2 must adjust the basis of their New FA stock to preserve their share of UST s inside gain, determined by accounting for the effects of Step 1 $32x remaining inside gain; so each of US1 and US2 must preserve $16x gain in their New FA stock Page 14

15 Final 367(a)(5) Regulations Other Changes Clarifies definition of 367(d) property from property to which 367(d) applies to property described in 936(h)(3)(B) Definition now consistent with Notice Page 15

16 Final 367(b)Regulations Highlights Revise 1.367(b)-4(b)(1) to test for inclusion of 1248 amount immediately after the 361(a)/(b) exchange and without taking into account the 361(c) stock distribution Not a snapshot test must consider related transactions Treas. Reg (b)-4, Example 4, modified accordingly If triangular reorganization, all relevant FCs need to be CFCs Effective April 18, 2013 Triangular reorganization exception expanded to include foreign target 361 transfer of foreign stock in exchange for stock of a domestic controlling corporation Principles of 1.367(b)-13 basis rules must be applied to outbound triangular reorganizations if stock of a domestic controlling corporation Page 16

17 Final 367(b)Regulations Modified Exceptions Outbound F Reorganization Resulting Structure $100 FA stock FA UST 361 transfer Foreign DE FA FT FT Basis: $20 Value: $ amount: $75 FT Under new 1.367(b)-4(b)(1) (ii)(a) UST not required to include $ amount attributable to its CFC stock, if, immediately after the 361(a) exchange, FA and FT are CFCs as to which UST is a 1248 shareholder But see 1248(f)(1), which generally requires UST to include 1248 amount attributable to FA stock upon 361(c)distribution Page 17

18 Temporary 367(a) Regulations: Removal of 367(a)(5) exception to Coordination Rule Removes deemed reasonable cause if IRS fails to respond within 120 days of acknowledging receipt of submission Rule removed in 367, 1248, and 6038B regulations Removes 367(a)(5) exception to indirect stock transfer coordination rule Coordination rule: direct asset transfer rules ( 367(a) and (d)) apply before application of indirect stock transfer rules Former exception: 367(a) and (d) do not apply to assets retransferred by acquiring FC to a controlled domestic corporation 367(a)(5) conditions must be met Controlled domestic corporation s basis in retransferred assets generally cannot exceed UST s basis in such assets Exception now removed preamble cites repatriation concerns 367(a) or (d) will apply to each asset transferred by UST Page 18

19 Temporary 367(a) Regulations: Removal of 367(a)(5) exception to Coordination Rule Outbound D Reorganization Resulting Structure Basis /FMV = $100 Basis /FMV = $100 1 $100 FA stock FA UST 361 exchange Assets 3 UST Liquidates FA 2 Controlled asset transfer US NewCo US NewCo Result under Temporary Regulations 367(a), (d) apply to 361 transfer to FA despite asset retransfer to US NewCo Page 19

20 Temporary 367(a) Regulations: Coordination of GRA rules and Final 367(a)(5) Regulations Coordinates GRA rules with new 367(a)(5) final regulations Applies to UST s outbound 361 transfer of stock or securities Rules set forth in Temp. Treas. Reg (a)-3T(e) Nonrecognition permitted if Meet 1.367(a)-7(c) control group, basis adjustments, gain recognition etc. If stock of a domestic corporation transferred, 50% tests and ATB test in 1.367(a)-3(c)(1)(i), (ii), and (iv) met and certain reporting requirements met UST shareholders enter into GRA GRA required if UST owns 5% or more (vote or value) of TFC stock immediately after exchange and before 361(c) distribution Each qualified U.S. person with at least 5% ownership executes GRA Qualified person-not partnership, RIC, REIT, or S-corporation Change consistent with 1.367(b)-4 and Example 4 If UST owns 5% or more of TFC, UST recognizes gain on stock attributable to Non-qualified persons Persons that do not meet 5% ownership Page 20

21 Final 1248(f)(1) Regulations Highlights Provide elective exceptions to general rule of 1248(f)(1) for 355 and 361(c) distributions Election generally permits distributing domestic corporation to avoid 1248 amount inclusion if domestic distributee corporation adjusts basis/holding period of stock received to the extent necessary to preserve 1248 amounts With respect to 337, election needed only if the holding period and basis requirements of the statute not otherwise met With respect to new stock distributions, the election will generally result in bifurcated basis in separate shares of FA stock, similar to existing rules under 1.367(b)-13 Page 21

22 Final 1248(f) Regulations Example Outbound F Reorganization UST Block #2 Block #1 FT Block #1: 1248 amount: $75 Block #2: 1248 amt: $25 Solely FA stock 361 transfer FT Stock FA FT Anticipated Results Under new 1.367(b)-4(b)(1) (ii)(a), UST not required to include 1248 amounts attributable to its two blocks of CFC stock Under 1248(f)(1), UST required to include section 1248(f) amount attributable to FA upon its distribution of such stock to However, inclusion is not required if UST and elect to apply exception provided under (f)- 2(d)(1) If election is made, steps in the shoes of UST as to the 1248(f) amounts, which requires to bifurcate each FA share into two portions, a portion related to block of FT stock transferred by UST in the outbound reorganization The basis of each portion must then be reduced if necessary to preserve the section 1248 amount attributable to each block in all such portions. For example, the aggregate section 1248 amounts attributable to the Block #1 portions must not be less than the section 1248 attributable to Block #1 pre-reorg Page 22

23 Basis Recovery in Stock Redemptions Page 23

24 Basis recovery in dividend equivalent redemptions block 1 FMV - $100 basis - $100 block 2 FMV - $100 basis - $25 Distribution $100 Under Johnson, if FSub makes a $100 distribution to, would recognize $41.66 of gain under 301(c)(3) [$0 on block 1 (basis reduction of $33.33), $8.33 on block 2 ($33.33 $25) and $33.33 on block 3 ($ $0)]. block 3 FMV - $100 basis - $0 FSub No E&P Redemption FSub No E&P $100 What if instead caused FSub to redeem block 1? The redemption would be dividend equivalent and tax consequences of such the redemption would be determined under 301. See 302(b) and (d). Page 24

25 Basis recovery models See New York State Bar Association, Tax Section Report on Basis Recovery in a Dividend Equivalent Redemption (June 13, 2006). Facts: Analysis: Basis FMV Transaction Block Block 1 is redeemed for $100 Block Block Approach Available Basis Section 301(c)(3) Gain Remaining Basis Redeemed Shares 100 basis in Block in Block 2 Non-Redeemed Shares 75 basis in Block 2; 50 basis in Block in Block 2 Aggregate Basis 125 basis in Blocks 1 and in Blocks(s)? All Shares basis in Block 1 against 1/3 of the distribution; 25 basis in Block 2 against 1/3 of the distribution Recap basis in Block 1 against 1/3 of the distribution; 25 basis in Block 2 against 1/3 of the distribution [$0 on block 1 (basis reduction of $33.33), $8.33 on block 2 ($33.33 $25) and $33.33 on block 3 ($ $0) [$0 on block 1 (basis reduction of $33.33), $8.33 on block 2 ($33.33 $25) and $33.33 on block 3 ($ $0)] in Block in Block 1 Page 25

26 Triangular Reorganization Planning Using Treas. Reg (b)-10 Page 26

27 Triangular reorganization planning Basic transaction under Treas. Reg (b)-10 1 $1,000 note $1,000 stock b $1,000 v $2,000 E&P: $100 Existing CFC CFC HoldCo Target CFC stock Target CFC 2 stock USS Target CFC b $500 v $1,000 CFC HoldCo has $100 E&P and has $1,000 basis in its CFC HoldCo stock. Target CFC stock has $1,000 value. Transaction steps: CFC HoldCo acquires $1,000 of voting stock from in exchange for $1,000 property (note or cash). CFC HoldCo acquires the Target CFC stock in exchange for the voting stock. Tax consequences: Triangular B reorganization CFC HoldCo deemed to distribute $1,000 to ($100 dividend, $900 return of basis) deemed to contribute $1,000 property to CFC HoldCo; s basis in CFC HoldCo increased by $1,000 Non-recognition of gain (assuming GRA is filed) by USS Page 27

28 Issues to consider What happens to the tax basis in Target CFC? Application of Treas. Reg Loss of basis - potential basis tracing Application of anti-abuse provision Other considerations Deconsolidation Debt / equity analysis Taxpayer with OFL Page 28

29 Section 304 Planning Page 29

30 Section 304 Planning Example E&P -99 E&P 1 E&P 100 FMV 0 Basis 100 FMV 100 Basis FA $99 + $1 FA Stock FT Stock FSub 100 FMV 0 Basis 100 FMV 100 Basis 100 E&P + 99 E&P 199 E&P Section 304(a)(1) should apply. FSub should recognize dividend income of $99 subject to Section 954(c)(6). FSub should increase its E&P by $99. FA should be treated as distributing $99 to FSub and should reduce its E&P by $99. FA should have a tax basis in FT equal to $100. What happens to Fsub s basis in its FT stock? FT FT Page 30

31 Section 304 Planning Example E&P -100 E&P 0 E&P 100 FMV 0 Basis 100 FMV FA FS FT Stock CFC1 35% $100 FAcq FT 100 FMV CFC2 65% E&P CFC1 and CFC2 organize FAcq to acquire FT. A 338(g) election is made with respect to FT. A CTB election is made to treat FT as a disregarded entity. FT sells its FS stock to FA in exchange for $100. Section 304(a)(1) should apply to the sale. FAcq should recognize dividend income of $100 subject to Section 954(c)(6). FSub should increase its E&P by $100, and FA should decrease its E&P by $100. What happens to FAcq s E&P if it s subsequently liquidated? FS Page 31

32 Section 304 Planning Example 3 Section 304(a)(1) should apply. 0 Basis 100 FMV FSub should recognize dividend income of $100 subject to Section 954(c)(6). FSub should increase its E&P by $ E&P -100 E&P 0 E&P FA FT $100 FT Stock FSub FT 100 FMV 100 Basis 100 E&P E&P 200 E&P FA should be treated as distributing $100 to FSub and should reduce its E&P by $100. FA should have a tax basis in FT equal to $100. What happens to FSub s basis in its FT stock? Page 32

33 Section 304 Guidance - Proposed Treasury Regulations October 18, 2002, Proposed Treasury Regulations (REG ) The basis of redeemed stock would not shift Loss would be suspended until future events Proposed regulations would apply to Section 304 Announcement ( C.B. 879) Withdrawal of October 18, 2002, Proposed Treasury Regulations Response to comments Unwarranted departure from current law Risk of double tax in certain consolidated return transactions Solicited comments regarding Section 304 transactions January 19, 2009 Proposed Treasury Regulations (REG ) Adopts same approach as 2002 Proposed Treasury Regulations, i.e., no basis shift and suspended loss Section 302 Proposed Treasury Regulations specifically apply to Section 304 Treasury Regulation (c) removed, reserved Page 33

34 Notice Considerations Fact Pattern Device (including option) employed to treat redeemed shareholder as related under attribution rules of Section 318 Redeemed shareholder is not subject to U.S. tax or is otherwise indifferent to the U.S. tax consequences of the redemption Taxpayer used shifted basis to claim a loss to reduce income upon the disposition of the stock of the redeeming corporation Analysis Basis adjustment is not proper in every case in which the redeemed shareholder retains no stock in the redeeming corporation Service intends to disallow losses claimed or to create taxable income or gains Reasons for disallowance may include that the basis shift was not a proper adjustment as contemplated by Treasury Regulation (c) Is the Section 304 transaction substantially similar to the transaction described in the Notice? Page 34

35 Questions?

36 CONTACTS Brett Enzor Ernst & Young LLP Dallas Glenn Leishner Ernst & Young LLP Houston Amy Ritchie Ernst & Young LLP Houston