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Merger and acquisition regulations issued.

The IRS has released long-awaited proposed regulations under section 367. The proposals deal with outbound transfers of stock or securities to a foreign corporation, inbound reorganizations and liquidations, "foreign-to-foreign" transfers and section 355 transactions.

The most important change includes expansion of the stock transfer rules under section 367(a) and elimination of a very complex set of attribution rules under section 367(b).

Section 367(a) generally denies nonrecognition treatment to property transfers to foreign corporations, taxing any appreciation in the transferred property. Under IRS notice 87-35, however, a U.S. corporation that transfers U.S. or foreign stock and that owns 5% or more of the transferee foreign corporation can avoid these taxes by entering into a gain recognition agreement. Gain is triggered proportionately if the transferee disposes of any of the transferred stock (except in a nontaxable transaction). Interest is imposed on the tax.

Although the proposed regulations adopt the principles of notice 87-85, they expand the class of transactions subject to gain recognition agreements. Certain foreign-to-foreign transactions, such as the transfer of stock of a controlled foreign corporation (CFC) to another CFC are now covered. The class of transactions treated as indirect stock transfers, and hence subject to the gain recognition agreement, also has been expanded.

The IRS also made an interesting--and most welcome--change to the regulations under section 367(b). Currently, certain foreign-to-foreign nonrecognition transactions are taxable unless status as a CFC and a U.S. shareholder are maintained. If maintained, recognition is not required if the taxpayer complies with a very complex set of attribution rules intended to preserve U.S. taxing jurisdiction. These rules are now eliminated. However, when there are significant distortions relative to the exchanging shareholder's pre- and postacquisition earnings and profits, the transaction is taxable even if status is maintained as a CFC and U.S. shareholder.

Observation: The IRS is to be commended for its welcome simplification of foreign-to-foreign transfers. However, with respect to the stock transfer rules, the IRS should have eliminated the interest charge provisions in order to make their expanded scope more palatable. In the preamble to the proposed regulations, the IRS requested comments on the appropriateness of continuation of the rule.

Edited by Herbert Paul, CPA, New York City (individual); Andrew R. Biebl, CPA, partner of Biebl, Ranweiler & Co., New Ulm, Minnesota (small business); Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Marylouise Dionne, Esq., international tax manager, at Price Waterhouse, New York City (international).
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Title Annotation:foreign-to-foreign stock or securities transfers
Author:Dionne, Marylouise
Publication:Journal of Accountancy
Date:Jan 1, 1992
Words:428
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