- 4.61.11 Transfers of Property by and to Foreign Corporations
- 18.104.22.168 Transfers of property By and To Foreign Corporations
- 22.214.171.124 Background
- 126.96.36.199 Section 367(a)
- 188.8.131.52 Section 367(b)
- 184.108.40.206 Section 367(d)
- 220.127.116.11 Section 367(e)
- 18.104.22.168 Steps to Consider When you Analyze an IRC Section 367 Transaction
- 22.214.171.124 International Technical Advisor
Part 4. Examining Process
Chapter 61. International Program Audit Guidelines
Section 11. Transfers of Property by and to Foreign Corporations
A general rule of taxation is that a sale or exchange of property by a taxpayer is a taxable event. There are exceptions to IRC § 1001 for exchanges made when a corporation is formed (IRC § 351), reorganized (IRC § 354, IRC § 355, or IRC § 361), or liquidated (IRC § 332). However, if these provisions which provide for exceptions to IRC § 1001 were not modified, a U.S. person would gain U.S. tax advantages when the controlled foreign corporations is formed, reorganized, or liquidated.
Section 367 was enacted to prevent use of the non-recognition provisions in sub-chapter C to avoid taxation on the transfer of property by and to controlled foreign corporations in transactions which would otherwise be covered by those non-recognition provisions. It does so by providing, in the situations that it covers, that the entity will not be considered to be a corporation for the purposes of IRC §§ 332, 351, 354, 356, and 361. Since the provisions of these sections are available only to corporations, the non-recognition provisions would not apply. IRC § 367 has two broad purposes:
To prevent the tax free removal of appreciated stock, assets, or other property from U.S. tax jurisdiction, and
To preserve the ability to impose U.S. income tax currently, or at a later time, on the accumulated E&P of certain foreign corporations.
IRC section 367(a) is intended to prevent U.S. persons from avoiding U.S. tax by transferring appreciated property to a foreign corporation in a tax-free organization or reorganization, and then selling the appreciated property outside the tax jurisdiction of the United States.
IRC section 367(a) generally treats a transfer of property (including stock) by a U.S. person to a foreign corporation (an "outbound transfer" ) in connection with an exchange described in sections 351, 354, 356 or 361 as a taxable exchange unless the transfer qualifies for an exception to this general rule. (An outbound transfer of an intangible asset is subject to the rules of IRC section 367(d) and not IRC section 367(a).)
Under IRC section 367(a)(3), an outbound transfer of assets (other than stock) qualifies for an exception from taxation if the assets are to be used in the active conduct of a trade or business outside the United States. Limitations on the IRC section 367(a)(3) exception are contained in Regs. 1.367(a) –4T through –6T.
Pursuant to IRC section 367(a)(2), Reg. 1.367(a)–3T(b) contains exceptions to the general rule of taxability for certain outbound transfers of stock or securities. Section 1.367(a)-3(b) deals with such exceptions where transfers of foreign stock are involved and section 1.367(a)-3(c) relates to transfers of domestic stock. Section 1.367(a)-3(d) deals with indirect transfers of either foreign or domestic stock.
If the outbound transfer is described in IRC section 361(a) or (b) (non-recognition for transfer by a corporation that is a party to a reorganization of property for stock or securities in another corporation a party to a reorganization), IRC section 367(a)(5) limits the exceptions to taxation that may otherwise be applicable under IRC section 367(a)(2) or (3).
A taxpayer that makes an outbound transfer that is subject to IRC section 367(a) may be required to report the transfer under IRC section 6038B. Failure to report the transfer may subject the taxpayer to penalties and an extended statute of limitations under IRC section 6501(c)(8). [See Reg. 1.6038B–1T.]
IRC section 367(b) is principally concerned with monitoring the earnings and profits of a controlled foreign corporation.
IRC section 367(b) provides that in the case of any exchange described in IRC sections 332, 351, 354, 355, 356 or 361 in connection with which there is no transfer of property described in IRC section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes.
If a transaction described in IRC sections 332, 351, 354, 355, 356 or 361 affects the potential U.S. taxation of the earnings and profits of a controlled foreign corporation, consider whether the regulations and other authorities under IRC section 367(b) apply to require current taxation.
In addition to preserving section 1248 amounts, section 367(b) applies in situations in which the foreign corporation involved in the liquidation / reorganization is not a CFC. See e.g., 1.367(b)-3, specifically subparagraphs (b)(2) and (b)(3)(ii), Example 6. Also, see section 1.367(b)-5 for section 367(b) rules that apply to section 355 distributions. Finally, there are proposed regulations under section 367(b) addressing the carryover of earnings and profits and taxes.
If a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC section 351 or 361, the U.S. person is treated as transferring the intangible in exchange for contingent payments (for a period of no more than 20 years) that must be commensurate with the income attributable to the intangible. See 1.367(d)-1T.
Prior to the Taxpayer Relief Act of 1997, the contingent payment (royalty) income included by the U.S. transferrer was a U.S. source income under IRC section 367(d)(2)(C). A transfer of an intangible after August 5,1997 (the date of enactment of the Taxpayer Relief Act of 1997) is governed by the generally applicable sourcing rules.
For rules regarding the coordination of IRC section 367(d) and IRC section 482, see Reg. 1.376(d)–1T(g)(4).
A taxpayer that is subject to IRC section 367(d) with respect to a transfer of intangible property must report the transfer in accordance with IRC section 6038B, or be subject to penalties and an extended statute of limitations under IRC section 6501(c)(8).
If a domestic corporation distributes the stock of a foreign corporation to a foreign person in a distribution described in IRC section 355, the distribution is taxable under IRC section 367(e)(1).
If a domestic corporation distributes the stock of a domestic corporation to a foreign person in a distribution described in IRC section 355, the distribution is non-taxable. IRC section 1.367(e)-1(c).
If a U.S. corporation is liquidated into a foreign parent corporation under IRC section 332, IRC section 367(e)(2) provides in effect that, except as provided by regulations, the U.S. corporation will be treated as if it sold its assets in a taxable transaction (IRC section 337(a) and (b)(1) shall not apply). Reg. 1.367(e)–2(b)(2) contains exceptions to the general recognition rule contained in IRC section 367(e)(2).
Step 1. Determine whether the transaction involves a:
Corporate Formation pursuant to IRC § 351,
Corporate Reorganization pursuant to IRC §§ 354, 355, 356, or 361,
Corporate Liquidation pursuant to sections§§ 331 or 332, or
Sale of stock.
If a U.S. person transferred property to a foreign partnership, estate or trust, then see IRC §§ 684, 721, and 1035(c).
Step 2. Analyze the above by listing the exchanges made in the corporate formations, reorganization, liquidation or sale.
List the entity, classify the entity, characterize the transaction (exchange, distribution, etc.), and identify the applicable Code sections.
DO NOT CONSIDER IRC §§ 367 OR 1248 AT THIS POINT.
When you have a liquidation or reorganization prepare a before and an after organization chart.
. Classify each entity involved in each exchange in step 2 into the following:
U.S. person, not a corporation,
FC, not a CFC, or
Note the date of the transaction
Determine whether the exchanges listed in Step 2 and made by the entities in Step 3 are modified by IRC §§ 367 or 1248. Do the exchanges involve
U.S. person transferring property to a foreign corporation?
Foreign corporation transferring property to a foreign corporation?
Foreign corporation transferring property to U.S. person? Or
Sale of Stock?
If the answer to any of the above is yes, you will have to determine whether regulations under IRC §§ 367 and 1248 apply to the exchange(s) or sale. Also, note that when stock is transferred by a U.S. person, the taxpayer can elect to apply the final regulations prior to the normal effective date. [See Treas. Reg. § 1.367(a)-3(e)(2) Election.]