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September 22, 2006
HP-109
Treasury and IRS Announce Regulations To Be Issued With
Respect to Certain Triangular
Reorganizations Under Section 368(a) Involving Foreign
Corporations
The Department of the Treasury today issued a notice that announced that the Treasury Department and the Internal Revenue Service will issue regulations under section 367(b) of the Internal Revenue Code (Code) to address certain triangular reorganizations under section 368(a) involving foreign corporations.
The notice states responds to comments and requests for guidance regarding certain triangular reorganizations that are designed to avoid U.S. tax, including tax on the repatriation of a subsidiary's earnings. The notice describes the transactions as involving a parent corporation (P) and a subsidiary corporation (S) where S transfers property to P in exchange for stock of P and then uses the P stock as consideration in an exchange to acquire the stock or assets of another corporation in a triangular reorganization. Taxpayers take the position that S's transfer of property to P for P's stock is treated as the purchase of P stock, and not a distribution from S to P, thereby effecting, in most cases, a tax-free transfer of S's earnings to P without U.S. income tax.
The notice provides that the regulations that will be issued will apply only where P or S (or both) is a foreign corporation. Further, the regulations will make adjustments with respect to P and S such that the property transferred from S to P in exchange for P stock will have the effect of a separate distribution of property from S to P. When issued, the regulations will apply to transactions occurring on or after the date the notice was released for publication. The regulations will not, however, apply to a transaction that was completed on or after the date the notice was released for publication, provided the transaction was entered into pursuant to a written agreement which was binding before the publication of the notice and all times thereafter.
The notice also requests comments with respect to the rules announced in the notice, including appropriate exceptions.
REPORTS