[Federal Register: November 20, 2002 (Volume 67, Number 224)]
[Proposed Rules]
[Page 70031-70032]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no02-20]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-127380-02]
RIN 1545-BA79
Outbound Liquidations to Foreign Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that provide
guidance regarding the application of section 367(e)(2) to certain
outbound liquidations. The regulations amend the anti-abuse rule of
Sec. 1.367(e)-2(d) by narrowing the scope of the rule to apply only to
outbound transfers to a foreign corporation in a complete liquidation
of a domestic corporation in which a principal purpose of the
liquidation is the avoidance of U.S. tax. This document also provides a
notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by February 18,
2003. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for March 3, 2003, at 10 a.m. must be received
by February 11, 2003.
ADDRESSES: Send submissions to CC:ITA:RU (REG-127380-02), room 5226,
Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 am and 5 pm to: CC:ITA:RU (REG-127380-
02), Courier's desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC 20044. Alternatively, taxpayers may submit
comments electronically directly to the IRS Internet site at
www.irs.gov/regs. The public hearing will be held in room 4718,
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Aaron A. Farmer (202) 622-3860; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the
hearing, Lanita Van Dyke, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Generally, a liquidating corporation does not recognize gain or
loss under section 337(a) on a distribution of any property to an 80-
percent distributee (as defined in section 337(c)) in a complete
liquidation to which section 332 applies. Section 367(e)(2) provides
that, in the case of any liquidation to which section 332 applies,
section 337(a) and (b)(1) shall not apply where the 80-percent
distributee is a foreign corporation except as provided in regulations.
The purpose of section 367(e)(2) generally is to prevent the removal of
appreciated assets from U.S. taxing jurisdiction without the imposition
of a U.S. corporate level tax. See H.R. Conf. Rep. No. 99-841, at II-
202 (1986).
On August 9, 1999, the IRS and Treasury published final regulations
(TD 8834 in the Federal Register at 64 FR 43072) under section
367(e)(2) regarding distributions of property in a complete liquidation
under section 332 by a domestic corporation to a foreign parent
corporation (outbound liquidation) and by a foreign corporation to a
foreign parent corporation (foreign-to-foreign liquidations).
With regard to foreign-to-foreign liquidations, Sec. 1.367(e)-2(c)
generally provides that nonrecognition treatment applies under section
337(a) and (b)(1) when a foreign corporation (foreign liquidating
corporation) makes a distribution of property in complete liquidation
under section 332 to a foreign corporation that meets the ownership
requirements of section 332(b). The regulations require gain to be
recognized in a foreign-to-foreign liquidation if the foreign
liquidating corporation makes a distribution of property which either
is used by the foreign liquidating corporation in the conduct of a
trade or business within the United States (a U.S. trade or business)
at the time of the distribution or which ceased to be used in the
conduct of a U.S. trade or business within the ten-year period ending
on the date of distribution and would have been subject to section
864(c)(7) had it been disposed. The final regulations include an
exception to this gain recognition rule in certain circumstances where
the property is distributed to a foreign corporation that uses such
property in a U.S. trade or business for the ten-year period following
the distribution, provided that certain requirements are satisfied.
Sec. 1.367(e)-2(c)(2).
The final regulations included an anti-abuse rule providing that
the Commissioner may require a foreign or domestic liquidating
corporation to recognize gain (or treat the liquidating corporation as
if it had recognized a loss) on a liquidating distribution if a
principal purpose of the liquidation is the avoidance of U.S. tax. The
final regulations further provide that a liquidation may have a
principal purpose of tax avoidance even though the tax avoidance
purpose is outweighed by other purposes (taken together or separately).
The preamble to the final regulations states that the anti-abuse
rule would apply, for example, if a principal purpose of a liquidation
is the distribution of a domestic liquidating corporation's earnings
and profits without a U.S. withholding tax. The preamble to the final
regulations also states that, in certain circumstances, the IRS is also
concerned about a liquidation of a domestic corporation into a U.S.
branch of a foreign corporation in a manner that facilitates the
avoidance of U.S. tax, including the inappropriate use of attributes
such as net operating losses. The preamble does not address the
potential application of the anti-abuse rule to foreign-to-foreign
liquidations.
Explanation of Provisions
Since the final regulations were issued, various commentators have
expressed concern that the anti-abuse rule is overly broad because it
is not limited by its express terms to outbound liquidations.
Specifically, it has been brought to the attention of Treasury and the
IRS that uncertainty regarding the potential application of the anti-
abuse rule is preventing taxpayers from
[[Page 70032]]
engaging in legitimate business transactions involving foreign-to-
foreign liquidations. Although the preamble to the final regulations
does not address any circumstances in which the anti-abuse rule would
apply to a foreign-to-foreign liquidation, the rule by its express
terms could so apply. Application of this rule to require gain
recognition in a foreign-to-foreign liquidation is not consistent with
the approach of the final regulations that require gain recognition in
the case of a foreign-to-foreign liquidation only in particular and
limited circumstances. Accordingly, these proposed regulations would
amend the anti-abuse rule to limit its application only to outbound
liquidations.
The proposed regulations also would clarify what constitutes a
principal purpose of tax avoidance for purposes of the anti-abuse rule.
The proposed regulations similarly would clarify the anti-abuse rule in
Sec. 1.367(e)-2(b)(2)(iii)(C)(1).
Effective Date
These regulations are proposed to apply to distributions occurring
on or after September 7, 1999, or to distributions in taxable years
ending after August 8, 1999, if the taxpayer has elected to apply the
final regulations to such distributions. The IRS intends that, prior to
the publication of these regulations in final form, the Commissioner
will exercise its authority under the anti-abuse rules in Sec.
1.367(e)-2(b)(2)(iii)(C)(1) and (d) in a manner that is consistent with
these proposed regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight copies) that are submitted timely to the IRS. Alternatively,
taxpayers may submit comments electronically directly to the IRS
Internet site at www.irs.gov/regs. The IRS and Treasury Department
request comments on the clarity of the proposed rules and how they can
be made easier to understand. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for March 3, 2003, beginning at
10 a.m. in room 4718, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the Constitution Avenue entrance. In addition,
all visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written comments and an
outline of the topics to be discussed and the time to be devoted to
each topic (a signed original and eight (8) copies) by February 11,
2003. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for reviewing outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is Aaron A.
Farmer of the Office of the Associate Chief Counsel (International),
IRS. However, other personnel from the Treasury and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
1. The authority citation for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
2. Section 1.367(e)-2, is amended as follows:
1. Paragraph (b)(2)(iii)(C)(1) is amended by removing the
parenthetical ``(taken together or separately)'' and adding ``when
taken together'' in its place.
2. Paragraph (d) is revised.
The revision reads as follows:
Sec. 1.367(e)-2 Distributions described in section 367(e)(2).
* * * * *
(d) Anti-abuse rule. The Commissioner may require a domestic
liquidating corporation to recognize gain on a distribution in
liquidation described in paragraph (b) of this section (or treat the
liquidating corporation as if it had recognized loss on a distribution
in liquidation), if a principal purpose of the liquidation is the
avoidance of U.S. tax (including, but not limited to, the distribution
of a liquidating corporation's earnings and profits with a principal
purpose of avoiding U.S. tax). A liquidation may have a principal
purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes when taken together.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-29508 Filed 11-19-02; 8:45 am]
BILLING CODE 4830-01-P