Treatment of Certain Transfers of Property to Foreign Corporations, 55568-55583 [2015-23279]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 179 (Wednesday, September 16, 2015)]
[Proposed Rules]
[Pages 55568-55583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23279]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-139483-13]
RIN 1545-BL87


Treatment of Certain Transfers of Property to Foreign 
Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of proposed rulemaking by 
cross-reference to temporary regulation.

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SUMMARY: This document contains proposed regulations relating to 
certain transfers of property by United States persons to foreign 
corporations. The proposed regulations affect United States persons 
that transfer certain property, including foreign goodwill and going 
concern value, to foreign corporations in nonrecognition transactions 
described in section 367 of the Internal Revenue Code (Code). The 
proposed regulations also combine portions of the existing regulations 
under section 367(a) into a single regulation. In addition, in the 
Rules and Regulations section of this issue of the Federal Register, 
temporary regulations are being issued under section 482 to clarify the 
coordination of the transfer pricing rules with other Code provisions. 
The text of those temporary regulations serves as the text of a portion 
of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 15, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-139483-13), Internal 
Revenue Service, Room 5203, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
139483-13), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224; or sent electronically via the 
Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
139483-13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Ryan A. Bowen, (202) 317-6937; concerning submissions of comments or 
requests for a public hearing, Regina Johnson, (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in the regulations have 
been submitted for review and approved by the Office of Management and 
Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507 (d)) under control number 1545-0026.
    The collections of information are in Sec.  1.6038B-1(c)(4) and 
(d)(1). The collections of information are mandatory. The likely 
respondents are domestic corporations. Burdens associated with these 
requirements will

[[Page 55569]]

be reflected in the burden for Form 926. Estimates for completing the 
Form 926 can be located in the form instructions.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books and records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

I. Current Law

A. Section 367(a)
    Section 367(a)(1) provides that if, in connection with any exchange 
described in section 332, 351, 354, 356, or 361, a United States person 
(U.S. transferor) transfers property to a foreign corporation (outbound 
transfer), the transferee foreign corporation will not, for purposes of 
determining the extent to which gain shall be recognized on such 
transfer, be considered to be a corporation. As a result, under section 
367(a)(1), the U.S. transferor recognizes any gain (but not loss) on 
the outbound transfer of the property. Section 367(a)(2) provides an 
exception to the application of section 367(a)(1) for certain transfers 
of stock or securities, and section 367(a)(3) provides an exception for 
transfers of certain property used in a trade or business.
    Specifically, section 367(a)(3)(A) provides that, except as 
provided in regulations prescribed by the Secretary, the general rule 
of section 367(a)(1) will not apply to any property transferred to a 
foreign corporation for use by such foreign corporation in the active 
conduct of a trade or business outside of the United States (ATB 
exception). Section 367(a)(3)(B) provides that, except as provided in 
regulations prescribed by the Secretary, certain property is not 
eligible for the ATB exception. The statute describes five categories 
of property that are not eligible for the ATB exception: (i) Property 
described in paragraph (1) or (3) of section 1221(a) (relating to 
inventory and copyrights, etc.); (ii) installment obligations, accounts 
receivable, or similar property; (iii) foreign currency or other 
property denominated in foreign currency; (iv) intangible property 
within the meaning of section 936(h)(3)(B); and (v) property with 
respect to which the U.S. transferor is a lessor at the time of the 
transfer, unless the foreign corporation was the lessee.
    Section 367(a)(3)(C) provides that, except as provided in 
regulations prescribed by the Secretary, the ATB exception will not 
apply to gain realized on an outbound transfer of the assets of a 
foreign branch to the extent that previously deducted losses of the 
branch exceed the taxable income earned by the branch after the losses 
were incurred (branch loss recapture rule). However, any realized gain 
in the property transferred that exceeds the branch losses that must be 
recaptured under this rule may qualify for the ATB exception.
    Section 367(a)(6) provides that section 367(a)(1) will not apply to 
an outbound transfer of any property that the Secretary, in order to 
carry out the purposes of section 367(a), designates by regulation.
    Sections 1.367(a)-2 and 1.367(a)-2T provide general rules for 
determining whether property is transferred for use by a transferee 
foreign corporation in the active conduct of a trade or business 
outside of the United States for purposes of the ATB exception.
    Sections 1.367(a)-4 and 1.367(a)-4T provide special rules for 
determining whether certain property satisfies the ATB exception, 
including rules that apply to (i) property to be leased by the 
transferee foreign corporation, (ii) oil and gas working interests, 
(iii) compulsory transfers of property, and (iv) property to be sold by 
the foreign corporation. Section 1.367(a)-4T also provides special 
rules requiring the recapture of depreciation upon an outbound transfer 
of U.S. depreciated property and exempting outbound transfers of 
property to a FSC (within the meaning of section 922(a)) from the 
application of paragraphs (a) and (d) of section 367.
    Sections 1.367(a)-5 and 1.367(a)-5T address the five categories of 
property ineligible for the ATB exception that are described in section 
367(a)(3)(B) and provide narrow exceptions to certain of those 
categories. Section 1.367(a)-5T(d) (which addresses foreign currency 
and other property denominated in a foreign currency) allows certain 
property denominated in the foreign currency of the country in which 
the foreign corporation is organized to qualify under the ATB exception 
if that property was acquired in the ordinary course of the business of 
the U.S. transferor that will be carried on by the foreign corporation. 
Section 1.367(a)-5T(e) (which addresses intangible property) contains a 
deadwood reference to the application of section 367(a)(1) to a 
transfer of intangible property pursuant to section 332. In this 
regard, see Sec.  1.367(e)-2(a)(2), providing that section 367(a) does 
not apply to a liquidation described in section 332 of a U.S. 
subsidiary into a foreign parent corporation. Section 1.367(a)-5T(e) 
also provides a cross reference to section 367(d) for transfers of 
intangible property described in section 351 or 361.
    Sections 1.367(a)-6 and 1.367(a)-6T provide rules for applying the 
branch loss recapture rule of section 367(a)(3)(C).
B. Section 367(d)
    Section 367(d) provides rules for certain outbound transfers of 
intangible property. Section 367(d)(1) provides that, except as 
provided in regulations, if a U.S. transferor transfers any intangible 
property, within the meaning of section 936(h)(3)(B), to a foreign 
corporation in an exchange described in section 351 or 361, section 
367(d) (and not section 367(a)) applies to such transfer.
    Section 936(h)(3)(B) defines intangible property broadly to mean 
any:
    (i) patent, invention, formula, process, design, pattern, or know-
how;
    (ii) copyright, literary, musical, or artistic composition;
    (iii) trademark, trade name, or brand name;
    (iv) franchise, license, or contract;
    (v) method, program, system, procedure, campaign, survey, study, 
forecast, estimate, customer list, or technical data; or
    (vi) any similar item, which has substantial value independent of 
the services of any individual (section 936(h)(3)(B) intangible 
property).
    Section 367(d)(2)(A) provides that a U.S. transferor that transfers 
intangible property subject to section 367(d) is treated as having sold 
the property in exchange for payments that are contingent upon the 
productivity, use, or disposition of the property. Specifically, the 
U.S. transferor is treated as receiving amounts that reasonably reflect 
the amounts that would have been received annually in the form of such 
payments over the useful life of such property (section 
367(d)(2)(A)(ii)(I)), or in the case of a disposition of the intangible 
property following such transfer (whether direct or indirect), at the 
time of the disposition (section 367(d)(2)(A)(ii)(II)). The amounts 
taken into account under section 367(d)(2)(A)(ii) must be commensurate 
with the income attributable to the intangible. Section 367(d)(2)(A) 
(flush language).

[[Page 55570]]

    Section 1.367(d)-1T(b) generally provides that section 367(d) and 
Sec.  1.367(d)-1T apply to the transfer of any intangible property, but 
not to the transfer of foreign goodwill or going concern value, as 
defined in Sec.  1.367(a)-1T(d)(5)(iii) (foreign goodwill exception). 
Section 1.367(a)-1T(d)(5)(i) generally defines ``intangible property,'' 
for purposes of section 367, as knowledge, rights, documents, and any 
other intangible item within the meaning of section 936(h)(3)(B) that 
constitutes property for purposes of section 332, 351, 354, 355, 356, 
or 361, as applicable. The regulation further provides that a working 
interest in oil and gas property will not be considered to be 
intangible property for purposes of section 367 and the regulations 
thereunder.
    Section 1.367(a)-1T(d)(5)(iii) defines ``foreign goodwill or going 
concern value'' as the residual value of a business operation conducted 
outside of the United States after all other tangible and intangible 
assets have been identified and valued. Section 1.367(a)-1T(d)(5)(iii) 
also provides that, for purposes of section 367 and the regulations 
thereunder, the value of a right to use a corporate name in a foreign 
country is treated as foreign goodwill or going concern value.
    In addition to providing the foreign goodwill exception, Sec.  
1.367(d)-1T(b) also excepts from section 367(d) property that is 
described in Sec.  1.367(a)-5T(b)(2), which, in general, consists of 
copyrights and other items described in section 1221(a)(3). Those 
items, however, are not eligible for the ATB exception by reason of 
Sec.  1.367(a)-5T.
    For purposes of Sec.  1.367(d)-1T, the useful life of intangible 
property is limited to 20 years under Sec.  1.367(d)-1T(c)(3).
C. Legislative History of Section 367(d)
    Congress amended section 367 in 1984 to create objective statutory 
rules because, among other reasons, the IRS was experiencing challenges 
administering the prior version of the statute. The prior version 
provided that certain outbound transfers of property qualified for tax-
free treatment only if the U.S. transferor established that the 
outbound transfer was ``not in pursuance of a plan having as one its 
principal purposes the avoidance of Federal income taxes.''
    In amending section 367, Congress also noted that ``specific and 
unique problems exist'' with respect to outbound transfers of 
intangible property and enacted section 367(d) in substantially its 
present form to address these transfers. S. Rep. No 169, 98th Cong., 2d 
Sess., at 360 (1984); H.R. Rep. No. 432, 98th Cong., 2d Sess., at 1315 
(1984). Congress identified problems as arising when ``transferor U.S. 
companies hope to reduce their U.S. taxable income by deducting 
substantial research and experimentation expenses associated with the 
development of the transferred intangible and, by transferring the 
intangible to a foreign corporation at the point of profitability, to 
ensure deferral of U.S. tax on the profits generated by the 
intangible.'' Id.
    The favorable treatment of foreign goodwill and going concern value 
available under existing law is premised on statements in the 
legislative history of section 367(d). ``The committee contemplates 
that, ordinarily, no gain will be recognized on the transfer of 
goodwill or going concern value for use in an active trade or 
business.'' S. Rep. No. 169, 98th Cong., 2d Sess., at 364; H.R. Rep. 
No. 432, 98th Cong., 2d Sess., at 1319. The Senate Finance Committee 
and the House Committee on Ways and Means each noted, without 
explanation, that it ``does not anticipate that the transfer of 
goodwill or going concern value developed by a foreign branch to a 
newly organized foreign corporation will result in abuse of the U.S. 
tax system.'' S. Rep. No. 169, 98th Cong., 2d Sess., at 362; H.R. Rep. 
No. 432, 98th Cong., 2d Sess., at 1317. However, neither section 367 
nor its legislative history defines goodwill or going concern value of 
a foreign branch or discusses how goodwill or going concern value is 
attributed to a foreign branch.
D. Taxpayer Interpretations Regarding Foreign Goodwill and Going 
Concern Value Under Section 367
    In general, taxpayers interpret section 367 and the regulations 
under section 367(a) and (d) in one of two alternative ways when 
claiming favorable treatment for foreign goodwill and going concern 
value.
    Under one interpretation, taxpayers take the position that goodwill 
and going concern value are not section 936(h)(3)(B) intangible 
property and therefore are not subject to section 367(d) because 
section 367(d) applies only to section 936(h)(3)(B) intangible 
property. Under this interpretation, taxpayers assert that the foreign 
goodwill exception has no application. Furthermore, these taxpayers 
assert that gain realized with respect to the outbound transfer of 
goodwill or going concern value is not recognized under the general 
rule of section 367(a)(1) because the goodwill or going concern value 
is eligible for, and satisfies, the ATB exception under section 
367(a)(3)(A).
    Under a second interpretation, taxpayers take the position that, 
although goodwill and going concern value are section 936(h)(3)(B) 
intangible property, the foreign goodwill exception applies. These 
taxpayers also assert that section 367(a)(1) does not apply to foreign 
goodwill or going concern value, either because of section 367(d)(1)(A) 
(providing that, except as provided in regulations, section 367(d) and 
not section 367(a) applies to section 936(h)(3)(B) intangible property) 
or because of the ATB exception.

II. Reasons for Change

    The Treasury Department and the IRS are aware that, in the context 
of outbound transfers, certain taxpayers attempt to avoid recognizing 
gain or income attributable to high-value intangible property by 
asserting that an inappropriately large share (in many cases, the 
majority) of the value of the property transferred is foreign goodwill 
or going concern value that is eligible for favorable treatment under 
section 367.
    Specifically, the Treasury Department and the IRS are aware that 
some taxpayers value the property transferred in a manner contrary to 
section 482 in order to minimize the value of the property transferred 
that they identify as section 936(h)(3)(B) intangible property for 
which a deemed income inclusion is required under section 367(d) and to 
maximize the value of the property transferred that they identify as 
exempt from current tax. For example, some taxpayers (i) use valuation 
methods that value items of intangible property on an item-by-item 
basis, when valuing the items on an aggregate basis would achieve a 
more reliable result under the arm's length standard of the section 482 
regulations, or (ii) do not properly perform a full factual and 
functional analysis of the business in which the intangible property is 
employed.
    The Treasury Department and the IRS also are aware that some 
taxpayers broadly interpret the meaning of foreign goodwill and going 
concern value for purposes of section 367. Specifically, although the 
existing regulations under section 367 define foreign goodwill or going 
concern value by reference to a business operation conducted outside of 
the United States, some taxpayers have asserted that they have 
transferred significant foreign goodwill or going concern value when a 
large share of that value was associated with a business operated 
primarily by employees in the United States, where the business simply 
earned income remotely from

[[Page 55571]]

foreign customers. In addition, some taxpayers take the position that 
value created through customer-facing activities occurring within the 
United States is foreign goodwill or going concern value.
    The Treasury Department and the IRS have concluded that the 
taxpayer positions and interpretations described in this section of the 
preamble raise significant policy concerns and are inconsistent with 
the expectation, expressed in legislative history, that the transfer of 
foreign goodwill or going concern value developed by a foreign branch 
to a foreign corporation was unlikely to result in abuse of the U.S. 
tax system. See S. Rep. No. 169, 98th Cong., 2d Sess., at 362; H.R. 
Rep. No. 432, 98th Cong., 2d Sess., at 1317. The Treasury Department 
and the IRS considered whether the favorable treatment for foreign 
goodwill and going concern value under current law could be preserved 
while protecting the U.S. tax base through regulations expressly 
prescribing parameters for the portion of the value of a business that 
qualifies for the favorable treatment. For example, regulations could 
require that, to be eligible for the favorable treatment, the value 
must have been created by activities conducted outside of the United 
States through an actual foreign branch that had been in operation for 
a minimum number of years and be attributable to unrelated foreign 
customers. The Treasury Department and the IRS ultimately determined, 
however, that such an approach would be impractical to administer. In 
particular, while the temporary regulations under section 482 that are 
published in the Rules and Regulations section of this issue of the 
Federal Register clarify the proper application of section 482 in 
important respects, there will continue to be challenges in 
administering the transfer pricing rules whenever the transfer of 
different types of intangible property gives rise to significantly 
different tax consequences. Given the amounts at stake, as long as 
foreign goodwill and going concern value are afforded favorable 
treatment, taxpayers will continue to have strong incentives to take 
aggressive transfer pricing positions to inappropriately exploit the 
favorable treatment of foreign goodwill and going concern value, 
however defined, and thereby erode the U.S. tax base.
    For the reasons discussed in this section of the preamble, the 
Treasury Department and the IRS have determined that allowing 
intangible property to be transferred outbound in a tax-free manner is 
inconsistent with the policies of section 367 and sound tax 
administration and therefore will amend the regulations under section 
367 as described in the Explanation of Provisions section of this 
preamble.

III. Coordination with Section 482

    The temporary regulations under section 482 published in the Rules 
and Regulations section of this issue of the Federal Register clarify 
the coordination of the application of the arm's length standard and 
the best method rule in the regulations under section 482 in 
conjunction with other Code provisions, including section 367, in 
determining the proper tax treatment of controlled transactions. The 
text of the temporary regulations under section 482 also serves as the 
text of a portion of these proposed regulations. The preamble to the 
temporary regulations explains the temporary regulations and the 
corresponding proposed regulations.

Explanation of Provisions

I. Eliminating the Foreign Goodwill Exception and Limiting the Scope of 
the ATB Exception

A. In General
    The proposed regulations eliminate the foreign goodwill exception 
under Sec.  1.367(d)-1T and limit the scope of property that is 
eligible for the ATB exception generally to certain tangible property 
and financial assets. Accordingly, under the proposed regulations, upon 
an outbound transfer of foreign goodwill or going concern value, a U.S. 
transferor will be subject to either current gain recognition under 
section 367(a)(1) or the tax treatment provided under section 367(d).
B. Modifications to Sec.  1.367(d)-1T
    Proposed Sec.  1.367(d)-1(b) provides that section 367(d) and Sec.  
1.367(d)-1 apply to an outbound transfer of intangible property, as 
defined in proposed Sec.  1.367(a)-1(d)(5). Proposed Sec.  1.367(d)-
1(b) does not provide an exception for any intangible property. Rather, 
as described in part II. of the Explanation of Provisions section of 
this preamble, proposed Sec.  1.367(a)-1(d)(5) modifies the definition 
of intangible property that applies for purposes of section 367(a) and 
(d). The modified definition facilitates both the elimination of the 
foreign goodwill exception as well as the addition of a rule under 
which U.S. transferors may apply section 367(d) with respect to certain 
outbound transfers of property that otherwise would be subject to 
section 367(a) under the U.S. transferor's interpretation of section 
936(h)(3)(B). The proposed regulations make certain coordinating 
changes to Sec.  1.367(d)-1T to take into account the elimination of 
the foreign goodwill exception and the revised definition of intangible 
property. The proposed regulations also eliminate the definition of 
foreign goodwill and going concern value under existing Sec.  1.367(a)-
1T(d)(5)(iii) because it is no longer needed.
    In addition, the proposed regulations eliminate the existing rule 
under Sec.  1.367(d)-1T(c)(3) that limits the useful life of intangible 
property to 20 years. When the useful life of the intangible property 
transferred exceeds 20 years, the limitation might result in less than 
all of the income attributable to the property being taken into account 
by the U.S. transferor. Accordingly, proposed Sec.  1.367(d)-1(c)(3) 
provides that the useful life of intangible property is the entire 
period during which the exploitation of the intangible property is 
reasonably anticipated to occur, as of the time of transfer. For this 
purpose, exploitation includes use of the intangible property in 
research and development. Consistent with the guidance for cost sharing 
arrangements in Sec.  1.482-7(g)(2)(ii)(A), if the intangible property 
is reasonably anticipated to contribute to its own further development 
or to developing other intangibles, then the period includes the 
period, reasonably anticipated at the time of the transfer, of 
exploiting (including use in research and development) such further 
development. Consequently, depending on the facts, the cessation of 
exploitation activity after a specific period of time may or may not be 
reasonably anticipated. See, e.g., Sec.  1.482-7(g)(4)(viii), Examples 
1 (cessation anticipated after 15 years) and 7 (cessation not 
anticipated at any determinable date).
C. Modifications Relating to the ATB Exception
    The rules for determining whether property is eligible for the ATB 
exception and whether the property satisfies the ATB exception 
currently are found in numerous regulations, namely Sec. Sec.  
1.367(a)-2, 1.367(a)-2T, 1.367(a)-4, 1.367(a)-4T, 1.367(a)-5, and 
1.367(a)-5T (collectively, the ATB regulations). To make the 
regulations more accessible, the proposed regulations combine the ATB 
regulations, other than the depreciation recapture rule, into a single 
regulation under proposed Sec.  1.367(a)-2. The proposed regulations 
retain a coordination rule pursuant to which a transfer of stock or 
securities in an exchange subject to Sec.  1.367(a)-3 is not subject to 
Sec.  1.367(a)-2. See Sec.  1.367(a)-

[[Page 55572]]

2(a)(1). The proposed regulations make conforming changes to the 
depreciation recapture rule, which is moved from Sec.  1.367(a)-4T to 
Sec.  1.367(a)-4, and the branch loss recapture rule, which remains 
under Sec. Sec.  1.367(a)-6 and 1.367(a)-6T. Although minor wording 
changes have been made to certain aspects of the ATB regulations as 
part of consolidating them into a single regulation, the proposed 
regulations are not intended to be interpreted as making substantive 
changes to the ATB regulations except as otherwise described in this 
section of the preamble.
    Under existing regulations, all property is eligible for the ATB 
exception, unless the property is specifically excluded. Under this 
structure, taxpayers have an incentive to take the position that 
certain intangible property is not described in section 936(h)(3)(B) 
and therefore not subject to section 367(d) and is instead subject to 
section 367(a) but eligible for the ATB exception because the 
intangible property is not specifically excluded from the ATB 
exception. The Treasury Department and the IRS have concluded that 
providing an exclusive list of property eligible for the ATB exception 
will reduce the incentives for taxpayers to undervalue intangible 
property subject to section 367(d).
    Thus, the proposed regulations provide that only certain types of 
property (as described in the next paragraph) are eligible for the ATB 
exception. However, in order for eligible property to satisfy the ATB 
exception, that property must also be considered transferred for use in 
the active conduct of a trade or business outside of the United States. 
Specifically, proposed Sec.  1.367(a)-2(a)(2) provides the general rule 
that an outbound transfer of property satisfies the ATB exception if 
(i) the property constitutes eligible property, (ii) the property is 
transferred for use by the foreign corporation in the active conduct of 
a trade or business outside of the United States, and (iii) certain 
reporting requirements under section 6038B are satisfied.
    Under proposed Sec.  1.367(a)-2(b), eligible property is tangible 
property, working interests in oil and gas property, and certain 
financial assets, unless the property is also described in one of four 
categories of ineligible property. Proposed Sec.  1.367(a)-2(c) lists 
four categories of property not eligible for the ATB exception, which, 
in general, are (i) inventory or similar property; (ii) installment 
obligations, accounts receivable, or similar property; (iii) foreign 
currency or certain other property denominated in foreign currency; and 
(iv) certain leased tangible property. These four categories of 
property not eligible for the ATB exception include four of the five 
categories described in existing regulations under Sec. Sec.  1.367(a)-
5 and 1.367-5T. The category for intangible property is not retained 
because it is not relevant: Intangible property transferred to a 
foreign corporation pursuant to section 351 or 361 is not eligible 
property under proposed Sec.  1.367(a)-2(b) without regard to the 
application of proposed Sec.  1.367(a)-2(c).
    The proposed regulations also eliminate the exception in existing 
Sec.  1.367(a)-5T(d)(2) that allows certain property denominated in the 
foreign currency of the country in which the foreign corporation is 
organized to qualify under the ATB exception if that property was 
acquired in the ordinary course of the business of the U.S. transferor 
that will be carried on by the foreign corporation. The Treasury 
Department and the IRS have determined that removing the exception is 
consistent with the general policy of section 367(a)(3)(B)(iii) to 
require gain to be recognized on an outbound transfer of foreign 
currency denominated property. Removing the exception will preserve the 
character, source, and amount of gain attributable to section 988 
transactions that otherwise could be lost or changed if such gain were 
not immediately recognized but instead were reflected only in the U.S. 
transferor's basis in the stock of the foreign corporation.
    The general rules for determining whether eligible property is 
transferred for use in the active conduct of a trade or business 
outside of the United States are described in proposed Sec.  1.367(a)-
2(d). Also, paragraphs (e) through (h) of proposed Sec.  1.367(a)-2 
provide special rules for certain property to be leased after the 
transfer, a working interest in oil and gas property, property that is 
re-transferred by the transferee foreign corporation to another person, 
and certain compulsory transfers of property, respectively. The 
proposed regulations also combine existing Sec.  1.367(a)-2T(c) 
(relating to property that is re-transferred by the foreign 
corporation) and a portion of Sec.  1.367(a)-4T(d) (relating to 
property to be sold by the foreign corporation) into proposed Sec.  
1.367(a)-2(g), because both of these existing provisions relate to 
subsequent transfers of property by the foreign corporation. See 
proposed Sec.  1.367(a)-2(g)(1) and (2), respectively. Proposed Sec.  
1.367(a)-2(g)(2) does not retain the portion of existing Sec.  
1.367(a)-4T(d) that applies to certain transfers of stock or 
securities. The Treasury Department and the IRS have determined that 
Sec. Sec.  1.367(a)-3 and 1.367(a)-8 (generally requiring U.S. 
transferors that own five-percent or more of the stock of the foreign 
corporation to enter into a gain recognition agreement to avoid 
recognizing gain under section 367(a)(1) upon the outbound transfer of 
stock or securities) adequately carry out the policy of section 367(a) 
with respect to the transfer of stock or securities.
    The proposed regulations modify the scope of the term U.S. 
depreciated property for purposes of the depreciation recapture rule to 
include section 126 property (as defined in section 1255(a)(2)).
    The proposed regulations eliminate the special rules for outbound 
transfers of property to a FSC, because the FSC provisions have been 
repealed. Tax Increase Prevention and Reconciliation Act of 2005, Pub 
L. 109-222, Sec.  513, 120 Stat. 366 (2006); FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000, Pub. L. 106-519, Sec.  
2, 114 Stat. 2423 (2000).
    Finally, the proposed regulations make conforming changes to the 
reporting requirements under Sec.  1.6038B-1(c)(4) to take into account 
the proposed regulations under Sec.  1.367(a)-2. The proposed 
regulations retain a rule providing relief for certain failures to 
comply with the reporting requirements of section 6038B and the 
regulations thereunder for qualification under the ATB exception, but 
that rule is moved to proposed Sec.  1.367(a)-2(j).

II. Treatment of Certain Property as Subject to Section 367(d)

    Taxpayers take different positions as to whether goodwill and going 
concern value are section 936(h)(3)(B) intangible property, as 
discussed in part I.D. of the Background section of this preamble. The 
proposed regulations do not address this issue. However, the proposed 
regulations under Sec.  1.367(a)-1(b)(5) provide that a U.S. transferor 
may apply section 367(d) to a transfer of property, other than certain 
property described below, that otherwise would be subject to section 
367(a) under the U.S. transferor's interpretation of section 
936(h)(3)(B). Under this rule, a U.S. transferor that takes the 
position that goodwill and going concern value are not section 
936(h)(3)(B) intangible property may nonetheless apply section 367(d) 
to goodwill and going concern value. This rule furthers sound tax 
administration by reducing the consequences of uncertainty as to 
whether value is attributable to property subject to section 367(a) or 
property subject to section 367(d). The application of section 367(d) 
in lieu of

[[Page 55573]]

section 367(a) is available only for property that is not eligible 
property, as defined in proposed Sec.  1.367(a)-2(b) but, for this 
purpose, determined without regard to Sec.  1.367(a)-2(c) (which 
describes four categories of property explicitly excluded from the ATB 
exception). A U.S. transferor must disclose whether it is applying 
section 367(a) or (d) to a transfer of such property. See proposed 
Sec. Sec.  1.6038B-1(c)(4)(vii) and -1(d)(1)(iv).
    To implement this new rule under proposed Sec.  1.367(a)-1(b)(5) 
and the removal of the foreign goodwill exception, the proposed 
regulations revise the definition of ``intangible property'' that 
applies for purposes of sections 367(a) and (d). As revised, the term 
means either property described in section 936(h)(3)(B) or property to 
which a U.S. transferor applies section 367(d) (in lieu of applying 
section 367(a)). However, for this purpose and consistent with existing 
regulations, intangible property does not include property described in 
section 1221(a)(3) (generally relating to certain copyrights) or a 
working interest in oil and gas property.
    The regulations under Sec.  1.367(a)-7 (concerning outbound 
transfers of property subject to section 367(a) in certain asset 
reorganizations) use the term ``section 367(d) property'' to describe 
property that is not subject to section 367(a) and is therefore not 
subject to Sec.  1.367(a)-7. The proposed regulations modify the 
definition of section 367(d) property in Sec.  1.367(a)-7(f)(11) (which 
currently defines section 367(d) property as property described in 
section 936(h)(3)(B)) by reference to the new definition of 
``intangible property'' under the proposed regulations. When the 
Treasury Department and the IRS issue regulations to implement the 
guidance described in Notice 2012-39 (IRB 2012-31) (announcing 
regulations to be issued addressing outbound transfers of intangible 
property subject to section 367(d) in certain asset reorganizations), 
the definition of ``section 367(d) property'' provided in section 
4.05(3) of the notice will be similarly modified.

III. Modifications to Sec.  1.367(a)-1T

    Section 1.482-1T(f)(2)(i) of the temporary regulations published 
elsewhere in the Rules and Regulations section of this issue of the 
Federal Register clarify the coordination of the application of the 
arm's length standard and the best method rule in the regulations under 
section 482 in conjunction with other Code provisions, including 
section 367, in determining the proper tax treatment of controlled 
transactions. Proposed Sec.  1.367(a)-1(b)(3) provides that, in cases 
where an outbound transfer of property subject to section 367(a) 
constitutes a controlled transaction, as defined in Sec.  1.482-
1(i)(8), the value of the property transferred is determined in 
accordance with section 482 and the regulations thereunder. This rule 
replaces existing Sec.  1.367(a)-1T(b)(3), which includes three rules.
    First, Sec.  1.367(a)-1T(b)(3)(i) provides that ``the gain required 
to be recognized . . . shall in no event exceed the gain that would 
have been recognized on a taxable sale of those items of property if 
sold individually and without offsetting individual losses against 
individual gains'' (emphasis added). The Treasury Department and the 
IRS are concerned that in controlled transactions, taxpayers might have 
interpreted the wording ``if sold individually'' as inconsistent with 
Sec.  1.482-1T(f)(2)(i)(B) (as clarified in temporary regulations 
published elsewhere in the Rules and Regulations section in this issue 
of the Federal Register), which provides that an aggregate analysis of 
transactions may provide the most reliable measure of an arm's length 
result in certain circumstances.
    Second, Sec.  1.367(a)-1T(b)(3)(ii) provides that no loss may be 
recognized by reason of section 367. That rule duplicates a loss 
disallowance rule in Sec.  1.367(a)-1T(b)(1), which provides that 
section 367(a)(1) denies nonrecognition only to transfers of items of 
property on which gain is realized and that losses do not affect the 
amount of the gain recognized because of section 367(a)(1).
    Third, Sec.  1.367(a)-1T(b)(3)(iii) provides a rule to address a 
scenario in which ordinary income and capital gain could exceed the 
amount described in Sec.  1.367(a)-1T(b)(3)(i). Because these 
regulations replace Sec.  1.367(a)-1T(b)(3)(i), Sec.  1.367(a)-
1T(b)(3)(iii) is no longer necessary.

IV. Proposed Effective/Applicability Dates

    The proposed regulations are proposed to apply to transfers 
occurring on or after September 14, 2015 and to transfers occurring 
before September 14, 2015 resulting from entity classification 
elections made under Sec.  301.7701-3 that are filed on or after 
September 14, 2015. However, the removal of the exception currently 
provided in Sec.  1.367(a)-5T(d)(2) will apply to transfers occurring 
on or after the date that the rules proposed in this section are 
adopted as final regulations in a Treasury decision published in the 
Federal Register and to transfers occurring before that date resulting 
from entity classification elections made under Sec.  301.7701-3 that 
are filed on or after that date. For proposed dates of applicability, 
see Sec.  1.367(a)-1(g)(5), -2(k), -4(b), -6(k), -7(j)(2), 1.367(d)-
1(j), and 1.6038B-1(g)(7). No inference is intended as to the 
application of the provisions proposed to be amended by these proposed 
regulations under current law. The IRS may, where appropriate, 
challenge transactions under applicable provisions or judicial 
doctrines.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has been determined that section 553(b) and (d) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations. It is hereby certified that the collection of 
information contained in this regulation will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis is not required. This certification 
is based on the fact that the proposed regulations under section 367(a) 
and (d) simplify existing regulations, and the regulations under 
section 6038B make relatively minor changes to existing information 
reporting requirements. Moreover, these regulations primarily will 
affect large domestic corporations filing consolidated returns. In 
addition, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply to the regulations under section 482 that are proposed herein, 
and published as temporary regulations in the Rules and Regulations 
section of this issue of the Federal Register, because those 
regulations do not impose a collection of information requirement on 
small entities. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the Addresses heading. 
The Treasury Department and the IRS request comments on all aspects of 
the

[[Page 55574]]

proposed rules. In particular, comments are requested on whether, with 
respect to the proposed elimination of the foreign goodwill exception 
and narrowing of the scope of the ATB exception, a limited exception 
should be provided for certain narrow cases where there is limited 
potential for abuse. One such case, for example, might be a financial 
services business that operates in true branch form and for which there 
is regulatory pressure or compulsion to incorporate the assets of the 
branch in a foreign corporation. Comments should discuss how the IRS 
would administer any such exception. With respect to the ATB exception, 
comments are requested as to whether the definition of ``financial 
asset'' under proposed Sec.  1.367(a)-2(b)(3) should be expanded to 
include other items. With respect to the proposed elimination of the 
20-year limitation on the useful life of intangible property under 
Sec.  1.367(d)-1T(c)(3), comments are requested on ways to simplify the 
administration of inclusions that section 367(d) requires for property 
with a very long useful life. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is Ryan Bowen, 
Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department 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

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Sections 1.367(a)-1 through 1.367(a)-7 also issued under 26 
U.S.C. 367(a). * * *
    Section 1.367(d)-1 also issued under 26 U.S.C. 367(d). * * *
    Section 1.482-1 also issued under 26 U.S.C. 482.
    Section 1.6038B-1 also issued under 26 U.S.C. 6038B. * * *

0
 Par. 2. Section 1.367(a)-0 is added to read as follows:


Sec.  1.367(a)-0  Table of Contents.

    This section lists the paragraphs contained in Sec. Sec.  1.367(a)-
1 through 1.367(a)-8.

Sec.  1.367(a)-1 Transfers to foreign corporations subject to 
section 367(a): In general.

    (a) Scope.
    (b) General rules.
    (1) Foreign corporation not considered a corporation for 
purposes of certain transfers.
    (2) Cases in which foreign corporate status is not disregarded.
    (3) Determination of value.
    (b)(4)(i)(A) [Reserved].
    (b)(4)(ii) [Reserved].
    (5) Treatment of certain property as subject to section 367(d).
    (c) [Reserved].
    (d) Definitions.
    (d)(1) through (d)(2) [Reserved].
    (3) Transfer.
    (d)(4) [Reserved].
    (5) Intangible property.
    (6) Operating intangibles.
    (e) Close of taxable year in certain section 368(a)(1)(F) 
reorganizations.
    (f) Exchanges under sections 354(a) and 361(a) in certain 
section 368(a)(1)(F) reorganizations.
    (1) Rule
    (2) Rule applies regardless of whether a continuance under 
applicable law.
    (g) Effective date of certain sections.
    (1) In general.
    (g)(2) through (3) [Reserved].
    (4)
    (5) Effective/applicability dates.

Sec.  1.367(a)-2 Exceptions for transfers of property for use in the 
active conduct of a trade or business.

    (a) Scope and general rule.
    (1) Scope.
    (2) General rule.
    (b) Eligible property.
    (c) Exception for certain property.
    (1) Inventory.
    (2) Installment obligations, etc.
    (3) Foreign currency, etc.
    (4) Certain leased tangible property.
    (d) Active conduct of a trade or business outside the United 
States.
    (1) In general.
    (2) Trade or business.
    (3) Active conduct.
    (4) Outside of the United States.
    (5) Use in the trade or business.
    (6) Active leasing and licensing.
    (e) Special rules for certain property to be leased.
    (1) Leasing business of the foreign corporation.
    (2) De minimis leasing by the foreign corporation.
    (3) Aircraft and vessels leased in foreign commerce.
    (f) Special rules for oil and gas working interests.
    (1) In general.
    (2) Active use of working interest.
    (3) Start-up operations.
    (4) Other applicable rules.
    (g) Property retransferred by the foreign corporation.
    (1) General rule.
    (2) Exception.
    (h) Compulsory transfers of property.
    (i) [Reserved].
    (j) Failure to comply with reporting requirements of section 
6038B.
    (1) Failure to comply.
    (2) Relief for certain failures to comply that are not willful.
    (k) Effective/applicability dates.
    (1) In general.
    (2) Foreign currency exception.

Sec.  1.367(a)-3 Treatment of transfers of stock or securities to 
foreign corporations.

    (a) In general.
    (1) Overview.
    (2) Exceptions for certain exchanges of stock or securities.
    (3) Cross-references.
    (b) Transfers of stock or securities of foreign corporations.
    (1) General rule.
    (2) Certain transfers subject to sections 367(a) and (b).
    (c) Transfers of stock or securities of domestic corporations.
    (1) General rule.
    (2) Ownership presumption.
    (3) Active trade or business test.
    (4) Special rules.
    (5) Definitions.
    (6) Reporting requirements of U.S. target company.
    (7) Ownership statements.
    (8) Certain transfers in connection with performance of 
services.
    (9) Private letter ruling option.
    (10) Examples.
    (11) Effective date.
    (d) Indirect stock transfers in certain nonrecognition 
transfers.
    (1) In general.
    (2) Special rules for indirect transfers.
    (3) Examples.
    (e) [Reserved].
    (f) Failure to file statements.
    (1) Failure to file.
    (2) Relief for certain failures to file that are not willful.
    (g) Effective/applicability dates.
    (1) Rules of applicability.
    (2) Election.
    (h) Former 10-year gain recognition agreements.
    (i) [Reserved].
    (j) Transition rules regarding certain transfers of domestic or 
foreign stock or securities after December 16, 1987, and prior to 
July 20, 1998.
    (1) Scope.
    (2) Transfers of domestic or foreign stock or securities: 
Additional substantive rules.
    (k) [Reserved].

Sec.  1.367(a)-4 Special rule applicable to U.S. depreciated 
property.

    (a) Depreciated property used in the United States.
    (1) In general.
    (2) U.S. depreciated property.
    (3) Property used within and without the United States.
    (b) Effective/applicability dates.

Sec.  1.367(a)-5 [Reserved].


[[Page 55575]]


Sec.  1.367(a)-6 Transfer of foreign branch with previously deducted 
losses.

    (a) through (b)(1) [Reserved].
    (2) No active conduct exception.
    (c)(1) [Reserved].
    (2) Gain limitation.
    (3) [Reserved].
    (c)(4) through (j) [Reserved].
    (k) Effective/applicability dates.

Sec.  1.367(a)-7 Outbound transfers of property described in section 
361(a) or (b).

    (a) Scope and purpose.
    (b) General rule.
    (1) Nonrecognition exchanges enumerated in section 367(a)(1).
    (2) Nonrecognition exchanges not enumerated in section 
367(a)(1).
    (c) Elective exception.
    (1) Control.
    (2) Gain recognition.
    (3) Basis adjustments required for control group members.
    (4) Agreement to amend or file a U.S. income tax return.
    (5) Election and reporting requirements.
    (d) Section 361 exchange followed by successive distributions to 
which section 355 applies.
    (e) Other rules.
    (1) Section 367(a) property with respect to which gain is 
recognized.
    (2) Relief for certain failures to comply that are not willful.
    (3) Anti-abuse rule.
    (4) Certain income inclusions under Sec.  1.367(b)-4.
    (5) Certain gain under Sec.  1.367(a)-6.
    (f) Definitions.
    (g) Examples.
    (h) Applicable cross-references.
    (i) [Reserved].
    (j) Effective/applicability dates.
    (1) In general.
    (2) Section 367(d) property.

Sec.  1.367(a)-8 Gain recognition agreement requirements.

    (a) Scope.
    (b) Definitions and special rules.
    (1) Definitions.
    (2) Special rules.
    (c) Gain recognition agreement.
    (1) Terms of agreement.
    (2) Content of gain recognition agreement.
    (3) Description of transferred stock or securities and other 
information.
    (4) Basis adjustments for gain recognized.
    (5) Terms and conditions of a new gain recognition agreement.
    (6) Cross-reference.
    (d) Filing requirements.
    (1) General rule.
    (2) Special requirements.
    (3) Common parent as agent for U.S. transferor.
    (e) Signatory.
    (1) General rule.
    (2) Signature requirement.
    (f) Extension of period of limitations on assessments of tax.
    (1) General rule.
    (2) New gain recognition agreement.
    (g) Annual certification.
    (h) Use of security.
    (i) [Reserved].
    (j) Triggering events.
    (1) Disposition of transferred stock or securities.
    (2) Disposition of substantially all of the assets of the 
transferred corporation.
    (3) Disposition of certain partnership interests.
    (4) Disposition of stock of the transferee foreign corporation.
    (5) Deconsolidation.
    (6) Consolidation.
    (7) Death of an individual; trust or estate ceases to exist.
    (8) Failure to comply.
    (9) Gain recognition agreement filed in connection with indirect 
stock transfers and certain triangular asset reorganizations.
    (10) Gain recognition agreement filed pursuant to paragraph 
(k)(14) of this section.
    (k) Triggering event exceptions.
    (1) Transfers of stock of the transferee foreign corporation to 
a corporation or partnership.
    (2) Complete liquidation of U.S. transferor under sections 332 
and 337.
    (3) Transfers of transferred stock or securities to a 
corporation or partnership.
    (4) Transfers of substantially all of the assets of the 
transferred corporation.
    (5) Recapitalizations and section 1036 exchanges.
    (6) Certain asset reorganizations.
    (7) Certain triangular reorganizations.
    (8) Complete liquidation of transferred corporation.
    (9) Death of U.S. transferor.
    (10) Deconsolidation.
    (11) Consolidation.
    (12) Intercompany transactions.
    (13) Deemed asset sales pursuant to section 338(g) elections.
    (14) Other dispositions or events.
    (l) [Reserved].
    (m) Receipt of boot in nonrecognition transactions.
    (1) Dispositions of transferred stock or securities.
    (2) Dispositions of assets of transferred corporation.
    (n) Special rules for distributions with respect to stock.
    (1) Certain dividend equivalent redemptions treated as 
dispositions.
    (2) Gain recognized under section 301(c)(3).
    (o) Dispositions or other events that terminate or reduce the 
amount of gain subject to the gain recognition agreement.
    (1) Taxable disposition of stock of the transferee foreign 
corporation.
    (2) Gain recognized in connection with certain nonrecognition 
transactions.
    (3) Gain recognized under section 301(c)(3).
    (4) Dispositions of substantially all of the assets of a 
domestic transferred corporation.
    (5) Certain distributions or transfers of transferred stock or 
securities to U.S. persons.
    (6) Dispositions or other event following certain intercompany 
transactions.
    (7) Expropriations under foreign law.
    (p) Relief for certain failures to file or failures to comply 
that are not willful.
    (1) In general.
    (2) Procedures for establishing that a failure to file or 
failure to comply was not willful.
    (3) Examples.
    (q) Examples.
    (1) Presumed facts and references.
    (2) Examples.
    (r) Effective/applicability date.
    (1) General rule.
    (2) Applicability to transfers occurring before March 13, 2009.
    (3) Applicability to requests for relief submitted before 
November 19, 2014.

0
 Par. 3. Section 1.367(a)-1 is amended by revising paragraphs (a), 
(b)(1) through (3), (b)(4)(i)(B), (b)(5), (c)(3)(ii), (d) introductory 
text, (d)(5), (d)(6), and (g)(1) and (5) to read as follows:


Sec.  1.367(a)-1  Transfers to foreign corporations subject to section 
367(a): In general.

    (a) Scope. Section 367(a)(1) provides the general rule concerning 
certain transfers of property by a United States person (referred to at 
times in this section as the ``U.S. person'' or ``U.S. transferor'') to 
a foreign corporation. Paragraph (b) of this section provides general 
rules explaining the effect of section 367(a)(1). Paragraph (c) of this 
section describes transfers of property that are described in section 
367(a)(1). Paragraph (d) of this section provides definitions that 
apply for purposes of sections 367(a) and (d) and the regulations 
thereunder. Paragraphs (e) and (f) of this section provide rules that 
apply to certain reorganizations described in section 368(a)(1)(F). 
Paragraph (g) of this section provides dates of applicability. For 
rules concerning the reporting requirements under section 6038B for 
certain transfers of property to a foreign corporation, see Sec.  
1.6038B-1.
    (b) General rules--(1) Foreign corporation not considered a 
corporation for purposes of certain transfers. If a U.S. person 
transfers property to a foreign corporation in connection with an 
exchange described in section 351, 354, 356, or 361, then, pursuant to 
section 367(a)(1), the foreign corporation will not be considered to be 
a corporation for purposes of determining the extent to which gain is 
recognized on the transfer. Section 367(a)(1) denies nonrecognition 
treatment only to transfers of items of property on which gain is 
realized. Thus, the amount of gain recognized because of section 
367(a)(1) is unaffected by the transfer of items of property on which 
loss is realized (but not recognized).
    (2) Cases in which foreign corporate status is not disregarded. For 
circumstances in which section 367(a)(1) does not apply to a U.S. 
transferor's transfer of property to a foreign corporation, and thus 
the foreign corporation is considered to be a

[[Page 55576]]

corporation, see Sec. Sec.  1.367(a)-2, 1.367(a)-3, and 1.367(a)-7.
    (3) Determination of value. In cases in which a U.S. transferor's 
transfer of property to a foreign corporation constitutes a controlled 
transaction as defined in Sec.  1.482-1(i)(8), the value of the 
property transferred is determined in accordance with section 482 and 
the regulations thereunder.
    (4)(i)(A) [Reserved]. For further guidance, see Sec.  1.367(a)-
1T(b)(4)(i)(A).
    (B) Appropriate adjustments to earnings and profits, basis, and 
other affected items will be made according to otherwise applicable 
rules, taking into account the gain recognized under section 367(a)(1). 
For purposes of applying section 362, the foreign corporation's basis 
in the property received is increased by the amount of gain recognized 
by the U.S. transferor under section 367(a) and the regulations issued 
pursuant to that section. To the extent the regulations provide that 
the U.S. transferor recognizes gain with respect to a particular item 
of property, the foreign corporation increases its basis in that item 
of property by the amount of such gain recognized. For example, 
Sec. Sec.  1.367(a)-2, 1.367(a)-3, and 1.367(a)-4, provide that gain is 
recognized with respect to particular items of property. To the extent 
the regulations do not provide that gain recognized by the U.S. 
transferor is with respect to a particular item of property, such gain 
is treated as recognized with respect to items of property subject to 
section 367(a) in proportion to the U.S. transferor's gain realized in 
such property, after taking into account gain recognized with respect 
to particular items of property transferred under any other provision 
of section 367(a). For example, Sec.  1.367(a)-6 provides that branch 
losses must be recaptured by the recognition of gain realized on the 
transfer but does not associate the gain with particular items of 
property. See also Sec.  1.367(a)-1(c)(3) for rules concerning 
transfers by partnerships or of partnership interests.
* * * * *
    (b)(4)(ii) [Reserved]. For further guidance, see Sec.  1.367(a)-
1T(b)(4)(ii).
    (5) Treatment of certain property as subject to section 367(d). A 
U.S. transferor may apply section 367(d) and Sec.  1.367(d)-1, rather 
than section 367(a) and the regulations thereunder, to a transfer of 
property to a foreign corporation that otherwise would be subject to 
section 367(a), provided that the property is not eligible property, as 
defined in Sec.  1.367(a)-2(b) but determined without regard to Sec.  
1.367(a)-2(c). A U.S. transferor and any other U.S. transferor that is 
related (within the meaning of section 267(b) or 707(b)(1)) to the U.S. 
transferor must consistently apply this paragraph (b)(5) to all 
property described in this paragraph (b)(5) that is transferred to one 
or more foreign corporations pursuant to a plan. A U.S. transferor 
applies the provisions of this paragraph (b)(5) in the form and manner 
set forth in Sec.  1.6038B-1(d)(1)(iv) and (v).
    (c)(1) through (3)(i) [Reserved]. For further guidance, see Sec.  
1.367(a)-1T(c)(1) through (3)(i).
    (c)(3)(ii) Transfer of partnership interest treated as transfer of 
proportionate share of assets--(A) In general. If a U.S. person 
transfers an interest as a partner in a partnership (whether foreign or 
domestic) in an exchange described in section 367(a)(1), then that 
person is treated as having transferred a proportionate share of the 
property of the partnership in an exchange described in section 
367(a)(1). Accordingly, the applicability of the exception to section 
367(a)(1) provided in Sec.  1.367(a)-2 is determined with reference to 
the property of the partnership rather than the partnership interest 
itself. A U.S. person's proportionate share of partnership property is 
determined under the rules and principles of sections 701 through 761 
and the regulations thereunder.
    (c)(3)(ii)(B) through (7) [Reserved]. For further guidance, see 
Sec.  1.367(a)-1T(c)(3)(ii)(B) through (7).
* * * * *
    (d) Definitions. The following definitions apply for purposes of 
sections 367(a) and (d) and the regulations thereunder.
    (1) and (2) [Reserved]. For further guidance, see Sec.  1.367(a)-
1T(d)(1) and (2).
* * * * *
    (4) [Reserved]. For further guidance, see Sec.  1.367(a)-1T(d)(4).
    (5) Intangible property. The term ``intangible property'' means 
either property described in section 936(h)(3)(B) or property to which 
a U.S. person applies section 367(d) pursuant to paragraph (b)(5) of 
this section, but does not include property described in section 
1221(a)(3) or a working interest in oil and gas property.
    (6) Operating intangibles. An operating intangible is any property 
described in section 936(h)(3)(B) of a type not ordinarily licensed or 
otherwise transferred in transactions between unrelated parties for 
consideration contingent upon the licensee's or transferee's use of the 
property. Examples of operating intangibles may include long-term 
purchase or supply contracts, surveys, studies, and customer lists.
* * * * *
    (g) Effective date of certain sections--(1) In general. Except as 
specifically provided to the contrary elsewhere in these sections, 
Sec. Sec.  1.367(a)-1T and 1.367(a)-6T apply to transfers occurring 
after December 31, 1984.
    (2) and (3) [Reserved]. For further guidance, see Sec.  1.367(a)-
1T(g)(2) and (3).
* * * * *
    (5) Effective/applicability dates. Paragraphs (a), (b)(1), (b)(2), 
(b)(3), (b)(5), (d) introductory text, (d)(5), and (d)(6) of this 
section apply to transfers occurring on or after September 14, 2015, 
and to transfers occurring before September 14, 2015, resulting from 
entity classification elections made under Sec.  301.7701-3 that are 
filed on or after September 14, 2015. For transfers occurring before 
this section is applicable, see Sec. Sec.  1.367(a)-1 and 1.367(a)-1T 
as contained in 26 CFR part 1 revised as of April 1, 2015.
0
Par. 4. Section 1.367(a)-2 is amended by:
0
1. Revising paragraphs (a) through (d).
0
2. Redesignating paragraph (e)(1) as paragraph (d)(6) and revising, and 
removing paragraph (e)(2).
0
3. Redesignating paragraph (f) as paragraph (j), and revising newly 
redesignated paragraphs (j)(1), (j)(2)(i), the first sentence of 
paragraph (j)(2)(ii)(B), and (j)(3) and (4).
0
4. Adding paragraphs (e) through (i) and (k).
    The revisions and additions read as follows:


Sec.  1.367(a)-2  Exceptions for transfers of property for use in the 
active conduct of a trade or business.

    (a) Scope and general rule--(1) Scope. Paragraph (a)(2) of this 
section provides the general exception to section 367(a)(1) for certain 
property transferred for use in the active conduct of a trade or 
business. Paragraph (b) of this section describes property that is 
eligible for the exception provided in paragraph (a)(2) of this 
section. Paragraph (c) of this section describes property that is not 
eligible for the exception provided in paragraph (a)(2) of this 
section. Paragraph (d) of this section provides general rules, and 
paragraphs (e) through (h) of this section provide special rules, for 
determining whether property is used in the active conduct of a trade 
or business outside of the United States. Paragraph (i) of this section 
is reserved. Paragraph (j) of this section provides relief for certain 
failures to comply with the reporting requirements under paragraph 
(a)(2)(iii)

[[Page 55577]]

of this section that are not willful. Paragraph (k) of this section 
provides dates of applicability. The rules of this section do not apply 
to a transfer of stock or securities in an exchange subject to Sec.  
1.367(a)-3.
    (2) General rule. Except as otherwise provided in Sec. Sec.  
1.367(a)-4, 1.367(a)-6, and 1.367(a)-7, section 367(a)(1) does not 
apply to property transferred by a United States person (U.S. 
transferor) to a foreign corporation if--
    (i) The property constitutes eligible property;
    (ii) The property is transferred for use by the foreign corporation 
in the active conduct of a trade or business outside of the United 
States, as determined under paragraph (d), (e), (f), (g), or (h) of 
this section, as applicable; and
    (iii) The U.S. transferor complies with the reporting requirements 
of section 6038B and the regulations thereunder.
    (b) Eligible property. Except as provided in paragraph (c) of this 
section, eligible property means--
    (1) Tangible property;
    (2) A working interest in oil and gas property; and
    (3) A financial asset. For purposes of this section, a financial 
asset is--
    (i) a cash equivalent;
    (ii) a security within the meaning of section 475(c)(2), without 
regard to the last sentence of section 475(c)(2) (referencing section 
1256) and without regard to section 475(c)(4), but excluding an 
interest in a partnership;
    (iii) a commodities position described in section 475(e)(2)(B), 
475(e)(2)(C), or 475(e)(2)(D); and
    (iv) a notional principal contract described in Sec.  1.446-
3(c)(1).
    (c) Exception for certain property. Notwithstanding paragraph (b) 
of this section, property described in paragraph (c)(1), (2), (3), or 
(4) of this section does not constitute eligible property.
    (1) Inventory. Stock in trade of the taxpayer or other property of 
a kind which would properly be included in the inventory of the 
taxpayer if on hand at the close of the taxable year, or property held 
by the taxpayer primarily for sale to customers in the ordinary course 
of its trade or business (including raw materials and supplies, 
partially completed goods, and finished products).
    (2) Installment obligations, etc. Installment obligations, accounts 
receivable, or similar property, but only to the extent that the 
principal amount of any such obligation has not previously been 
included by the taxpayer in its taxable income.
    (3) Foreign currency, etc.--(i) In general. Foreign currency or 
other property denominated in foreign currency, including installment 
obligations, futures contracts, forward contracts, accounts receivable, 
or any other obligation entitling its payee to receive payment in a 
currency other than U.S. dollars.
    (ii) Limitation of gain required to be recognized. If section 
367(a)(1) applies to a transfer of property described in paragraph 
(c)(3)(i) of this section, then the gain required to be recognized is 
limited to the gain realized as part of the same transaction upon the 
transfer of property described in paragraph (c)(3)(i) of this section, 
less any loss realized as part of the same transaction upon the 
transfer of property described in paragraph (c)(3)(i) of this section. 
This limitation applies in lieu of the rule in Sec.  1.367(a)-1(b)(1). 
No loss is recognized with respect to property described in this 
paragraph (c)(3).
    (4) Certain leased tangible property. Tangible property with 
respect to which the transferor is a lessor at the time of the 
transfer, unless either the foreign corporation is the lessee at the 
time of the transfer or the foreign corporation will lease the property 
to third persons.
    (d) Active conduct of a trade or business outside the United 
States--(1) In general. Except as provided in paragraphs (e), (f), (g), 
and (h) of this section, to determine whether property is transferred 
for use by the foreign corporation in the active conduct of a trade or 
business outside of the United States, four factual determinations must 
be made:
    (i) What is the trade or business of the foreign corporation (see 
paragraph (d)(2) of this section);
    (ii) Do the activities of the foreign corporation constitute the 
active conduct of that trade or business (see paragraph (d)(3) of this 
section);
    (iii) Is the trade or business conducted outside of the United 
States (see paragraph (d)(4) of this section); and
    (iv) Is the transferred property used or held for use in the trade 
or business (see paragraph (d)(5) of this section)?
    (2) Trade or business. Whether the activities of the foreign 
corporation constitute a trade or business is determined based on all 
the facts and circumstances. In general, a trade or business is a 
specific unified group of activities that constitute (or could 
constitute) an independent economic enterprise carried on for profit. 
For example, the activities of a foreign selling subsidiary could 
constitute a trade or business if they could be independently carried 
on for profit, even though the subsidiary acts exclusively on behalf 
of, and has operations fully integrated with, its parent corporation. 
To constitute a trade or business, a group of activities must 
ordinarily include every operation which forms a part of, or a step in, 
a process by which an enterprise may earn income or profit. In this 
regard, one or more of such activities may be carried on by independent 
contractors under the direct control of the foreign corporation. 
(However, see paragraph (d)(3) of this section.) The group of 
activities must ordinarily include the collection of income and the 
payment of expenses. If the activities of the foreign corporation do 
not constitute a trade or business, then the exception provided by this 
section does not apply, regardless of the level of activities carried 
on by the corporation. The following activities are not considered to 
constitute by themselves a trade or business for purposes of this 
section:
    (i) Any activity giving rise to expenses that would be deductible 
only under section 212 if the activities were carried on by an 
individual; or
    (ii) The holding for one's own account of investments in stock, 
securities, land, or other property, including casual sales thereof.
    (3) Active conduct. Whether a trade or business is actively 
conducted by the foreign corporation is determined based on all the 
facts and circumstances. In general, a corporation actively conducts a 
trade or business only if the officers and employees of the corporation 
carry out substantial managerial and operational activities. A 
corporation may be engaged in the active conduct of a trade or business 
even though incidental activities of the trade or business are carried 
out on behalf of the corporation by independent contractors. In 
determining whether the officers and employees of the corporation carry 
out substantial managerial and operational activities, however, the 
activities of independent contractors are disregarded. On the other 
hand, the officers and employees of the corporation are considered to 
include the officers and employees of related entities who are made 
available to and supervised on a day-to-day basis by, and whose 
salaries are paid by (or reimbursed to the lending related entity by), 
the foreign corporation. See paragraph (d)(6) of this section for the 
standard that applies to determine whether a trade or business that 
produces rents or royalties is actively conducted. The rule of this 
paragraph (d)(3) is illustrated by the following example.

    Example. X, a domestic corporation, and Y, a foreign corporation 
not related to X, transfer property to Z, a newly formed foreign 
corporation organized for the purpose of combining the research 
activities of X and Y.

[[Page 55578]]

Z contracts all of its operational and research activities to Y for 
an arm's-length fee. Z's activities do not constitute the active 
conduct of a trade or business.

    (4) Outside of the United States. Whether the foreign corporation 
conducts a trade or business outside of the United States is determined 
based on all the facts and circumstances. Generally, the primary 
managerial and operational activities of the trade or business must be 
conducted outside the United States and immediately after the transfer 
the transferred assets must be located outside the United States. Thus, 
the exception provided by this section would not apply to the transfer 
of the assets of a domestic business to a foreign corporation if the 
domestic business continued to operate in the United States after the 
transfer. In such a case, the primary operational activities of the 
business would continue to be conducted in the United States. Moreover, 
the transferred assets would be located in the United States. However, 
it is not necessary that every item of property transferred be used 
outside of the United States. As long as the primary managerial and 
operational activities of the trade or business are conducted outside 
of the United States and substantially all of the transferred assets 
are located outside the United States, incidental items of transferred 
property located in the United States may be considered to have been 
transferred for use in the active conduct of a trade or business 
outside of the United States.
    (5) Use in the trade or business. Whether property is used or held 
for use by the foreign corporation in a trade or business is determined 
based on all the facts and circumstances. In general, property is used 
or held for use in the foreign corporation's trade or business if it 
is--
    (i) Held for the principal purpose of promoting the present conduct 
of the trade or business;
    (ii) Acquired and held in the ordinary course of the trade or 
business; or
    (iii) Otherwise held in a direct relationship to the trade or 
business. Property is considered held in a direct relationship to a 
trade or business if it is held to meet the present needs of that trade 
or business and not its anticipated future needs. Thus, property will 
not be considered to be held in a direct relationship to a trade or 
business if it is held for the purpose of providing for future 
diversification into a new trade or business, future expansion of trade 
or business activities, future plant replacement, or future business 
contingencies.
    (6) Active leasing and licensing. For purposes of paragraph (d)(3) 
of this section, whether a trade or business that produces rents or 
royalties is actively conducted is determined under the principles of 
section 954(c)(2)(A) and the regulations thereunder, but without regard 
to whether the rents or royalties are received from an unrelated party. 
See Sec. Sec.  1.954-2(c) and (d).
    (e) Special rules for certain property to be leased--(1) Leasing 
business of the foreign corporation. Except as otherwise provided in 
this paragraph (e), tangible property that will be leased to another 
person by the foreign corporation will be considered to be transferred 
for use by the foreign corporation in an active trade or business 
outside the United States only if--
    (i) The foreign corporation's leasing of the property constitutes 
the active conduct of a leasing business, as determined under paragraph 
(d)(6) of this section;
    (ii) The lessee of the property is not expected to, and does not, 
use the property in the United States; and
    (iii) The foreign corporation has a need for substantial investment 
in assets of the type transferred.
    (2) De minimis leasing by the foreign corporation. Tangible 
property that will be leased to another person by the foreign 
corporation but that does not satisfy the conditions of paragraph 
(e)(1) of this section will, nevertheless, be considered to be 
transferred for use in the active conduct of a trade or business if 
either--
    (i) The property transferred will be used by the foreign 
corporation in the active conduct of a trade or business but will be 
leased during occasional brief periods when the property would 
otherwise be idle, such as an airplane leased during periods of excess 
capacity; or
    (ii) The property transferred is real property located outside the 
United States and--
    (A) The property will be used primarily in the active conduct of a 
trade or business of the foreign corporation; and
    (B) Not more than ten percent of the square footage of the property 
will be leased to others.
    (3) Aircraft and vessels leased in foreign commerce. For purposes 
of satisfying paragraph (e)(1) of this section, an aircraft or vessel, 
including component parts such as an engine leased separately from the 
aircraft or vessel, that will be leased to another person by the 
foreign corporation will be considered to be transferred for use in the 
active conduct of a trade or business if--
    (i) The employees of the foreign corporation perform substantial 
managerial and operational activities of leasing aircraft or vessels 
outside the United States; and
    (ii) The leased property is predominantly used outside the United 
States, as determined under Sec.  1.954-2(c)(2)(v).
    (f) Special rules for oil and gas working interests--(1) In 
general. A working interest in oil and gas property will be considered 
to be transferred for use in the active conduct of a trade or business 
if--
    (i) The transfer satisfies the conditions of paragraph (f)(2) or 
(f)(3) of this section;
    (ii) At the time of the transfer, the foreign corporation has no 
intention to farm out or otherwise transfer any part of the transferred 
working interest; and
    (iii) During the first three years after the transfer there are no 
farmouts or other transfers of any part of the transferred working 
interest as a result of which the foreign corporation retains less than 
a 50-percent share of the transferred working interest.
    (2) Active use of working interest. A working interest in oil and 
gas property that satisfies the conditions in paragraphs (f)(1)(ii) and 
(iii) of this section will be considered to be transferred for use in 
the active conduct of a trade or business if--
    (i) The U.S. transferor is regularly and substantially engaged in 
exploration for and extraction of minerals, either directly or through 
working interests in joint ventures, other than by reason of the 
property that is transferred;
    (ii) The terms of the working interest transferred were actively 
negotiated among the joint venturers;
    (iii) The working interest transferred constitutes at least a five 
percent working interest;
    (iv) Before and at the time of the transfer, through its own 
employees or officers, the U.S. transferor was regularly and actively 
engaged in--
    (A) Operating the working interest, or
    (B) Analyzing technical data relating to the activities of the 
venture;
    (v) Before and at the time of the transfer, through its own 
employees or officers, the U.S. transferor was regularly and actively 
involved in decision making with respect to the operations of the 
venture, including decisions relating to exploration, development, 
production, and marketing; and
    (vi) After the transfer, the foreign corporation will for the 
foreseeable future satisfy the requirements of subparagraphs (iv) and 
(v) of this paragraph (f)(2).

[[Page 55579]]

    (3) Start-up operations. A working interest in oil and gas property 
that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of 
this section but that does not satisfy all the requirements of 
paragraph (f)(2) of this section will, nevertheless, be considered to 
be transferred for use in the active conduct of a trade or business 
if--
    (i) The working interest was acquired by the U.S. transferor 
immediately before the transfer and for the specific purpose of 
transferring it to the foreign corporation;
    (ii) The requirements of paragraphs (f)(2)(ii) and (iii) of this 
section are satisfied; and
    (iii) The foreign corporation will for the foreseeable future 
satisfy the requirements of paragraph (f)(2)(iv) and (v) of this 
section.
    (4) Other applicable rules. A working interest in oil and gas 
property that is not described in paragraph (f)(1) of this section may 
nonetheless qualify for the exception to section 367(a)(1) contained in 
this section depending upon the facts and circumstances.
    (g) Property retransferred by the foreign corporation--(1) General 
rule. Property will not be considered to be transferred for use in the 
active conduct of a trade or business outside of the United States if--
    (i) At the time of the transfer, it is reasonable to believe that, 
in the reasonably foreseeable future, the foreign corporation will sell 
or otherwise dispose of any material portion of the property other than 
in the ordinary course of business; or
    (ii) Except as provided in paragraph (g)(2) of this section, the 
foreign corporation receives the property in an exchange described in 
section 367(a)(1), and, as part of the same transaction, transfers the 
property to another person. For purposes of the preceding sentence, a 
subsequent transfer within six months of the initial transfer will be 
considered to be part of the same transaction, and a subsequent 
transfer more than six months after the initial transfer may be 
considered to be part of the same transaction under step-transaction 
principles.
    (2) Exception. Notwithstanding paragraph (g)(1)(ii) of this 
section, property will be considered to be transferred for use in the 
active conduct of a trade or business outside of the United States if--
    (i) The initial transfer to the foreign corporation is followed by 
one or more subsequent transfers described in section 351 or 721; and
    (ii) Each subsequent transferee is either a partnership in which 
the preceding transferor is a general partner or a corporation in which 
the preceding transferor owns common stock; and
    (iii) The ultimate transferee is considered to use the property in 
the active conduct of a trade or business outside of the United States, 
as determined by applying paragraph (d), (e), or (f) of this section, 
as applicable, with respect to the ultimate transferee rather than the 
foreign corporation.
    (h) Compulsory transfers of property. Property is presumed to be 
transferred for use in the active conduct of a trade or business 
outside of the United States, if--
    (1) The property was previously in use in the country in which the 
foreign corporation is organized; and
    (2) The transfer is either:
    (i) Legally required by the foreign government as a necessary 
condition of doing business; or
    (ii) Compelled by a genuine threat of immediate expropriation by 
the foreign government.
    (i) [Reserved].
    (j) Failure to comply with reporting requirements of section 
6038B--(1) Failure to comply. For purposes of the exception to the 
application of section 367(a)(1) provided in paragraph (a)(2) of this 
section, a failure to comply with the reporting requirements of section 
6038B and the regulations thereunder (failure to comply) has the 
meaning set forth in Sec.  1.6038B-1(f)(2).
    (2) Relief for certain failures to comply that are not willful--(i) 
In general. A failure to comply described in paragraph (j)(1) of this 
section will be deemed not to have occurred for purposes of satisfying 
the requirements of this section if the taxpayer demonstrates that the 
failure was not willful using the procedure set forth in this paragraph 
(j)(2). For this purpose, willful is to be interpreted consistent with 
the meaning of that term in the context of other civil penalties, which 
would include a failure due to gross negligence, reckless disregard, or 
willful neglect. Whether a failure to comply was a willful failure will 
be determined by the Director of Field Operations International, Large 
Business & International (or any successor to the roles and 
responsibilities of such position, as appropriate) (Director) based on 
all the facts and circumstances. The taxpayer must submit a request for 
relief and an explanation as provided in paragraph (j)(2)(ii)(A) of 
this section. Although a taxpayer whose failure to comply is determined 
not to be willful will not be subject to gain recognition under this 
section, the taxpayer will be subject to a penalty under section 6038B 
if the taxpayer fails to demonstrate that the failure was due to 
reasonable cause and not willful neglect. See Sec.  1.6038B-1(b)(1) and 
(f). The determination of whether the failure to comply was willful 
under this section has no effect on any request for relief made under 
Sec.  1.6038B 1(f).
    (ii) * * *
    (B) Notice requirement. In addition to the requirements of 
paragraph (j)(2)(ii)(A) of this section, the taxpayer must comply with 
the notice requirements of this paragraph (j)(2)(ii)(B). * * *
    (3) For illustrations of the application of the willfulness 
standard of this paragraph (j), see the examples in Sec.  1.367(a)-
8(p)(3).
    (4) Paragraph (j) applies to requests for relief submitted on or 
after November 19, 2014.
    (k) Effective/applicability dates--(1) In general. Except as 
provided in paragraph (k)(2) of this section, the rules of this section 
apply to transfers occurring on or after September 14, 2015, and to 
transfers occurring before September 14, 2015, resulting from entity 
classification elections made under Sec.  301.7701-3 that are filed on 
or after September 14, 2015. For transfers occurring before this 
section is applicable, see Sec. Sec.  1.367(a)-2, -2T, -4, -4T, -5, and 
-5T as contained in 26 CFR part 1 revised as of April 1, 2015.
    (2) Foreign currency exception. Notwithstanding paragraph (c)(3)(i) 
of this section, Sec.  1.367(a)-5T(d)(2) as contained in 26 CFR part 1 
revised as of April 1, 2015, applies to transfers of property 
denominated in a foreign currency occurring before the date that the 
rules proposed in this section are adopted as final regulations in a 
Treasury decision published in the Federal Register, other than 
transfers occurring before that date resulting from entity 
classification elections made under Sec.  301.7701-3 that are filed on 
or after that date.


Sec.  1.367(a)-3  [Amended]

0
Par. 5. For each section listed in following the table, remove the 
language in the ``Remove'' column and add in its place the language in 
the ``Add'' column.

[[Page 55580]]



------------------------------------------------------------------------
           Section                   Remove                  Add
------------------------------------------------------------------------
Sec.   1.367(a)-3(a)(3),      Sec.   1.367(a)-      Sec.   1.367(a)-
 first sentence.               1T(c).                1(c).
Sec.   1.367(a)-3(c)(4)(i),   Sec.   1.367(a)-      Sec.   1.367(a)-
 last sentence.                1T(c)(3).             1(c)(3).
Sec.   1.367(a)-3(c)(4)(iv),  Sec.   1.367(a)-      Sec.   1.367(a)-
 first sentence.               1T(d)(1).             1(d)(1).
Sec.   1.367(a)-              Sec.   1.367(a)-      Sec.   1.367(a)-
 3(c)(3)(i)(A).                2T(b)(2) and (3).     2(d)(2), (3), and
                                                     (4).
Sec.   1.367(a)-              Sec.   1.367(a)-      Sec.   1.367(a)-
 3(c)(3)(ii)(B), last          2T(b)(2) and (3).     2(d)(2) and (3).
 sentence.
Sec.   1.367(a)-3(d)(3)       Sec.   1.367(a)-      Sec.   1.367(a)-
 Example 7A(ii), penultimate   2T(a)(2).             2(a)(2)(iii).
 sentence.
Sec.   1.367(a)-3(d)(3)       Sec.   1.367(a)-      Sec.   1.367(a)-
 Example 13(i), penultimate    2T(c)(2).             2(g)(2).
 sentence.
------------------------------------------------------------------------

0
Par. 6. Section 1.367(a)-4 is revised to read as follows:


Sec.  1.367(a)-4  Special rule applicable to U.S. depreciated property.

    (a) Depreciated property used in the United States--(1) In general. 
A U.S. person that transfers U.S. depreciated property (as defined in 
paragraph (a)(2) of this section) to a foreign corporation in an 
exchange described in section 367(a)(1), must include in its gross 
income for the taxable year in which the transfer occurs ordinary 
income equal to the gain realized that would have been includible in 
the transferor's gross income as ordinary income under section 
617(d)(1), 1245(a), 1250(a), 1252(a), 1254(a), or 1255(a), whichever is 
applicable, if at the time of the transfer the U.S. person had sold the 
property at its fair market value. Recapture of depreciation under this 
paragraph (a) is required regardless of whether the exception to 
section 367(a)(1) provided by Sec.  1.367(a)-2(a)(2) applies to the 
transfer of the U.S. depreciated property. However, the transfer of the 
U.S. depreciated property may qualify for the exception with respect to 
realized gain that is not included in ordinary income pursuant to this 
paragraph (a).
    (2) U.S. depreciated property. U.S. depreciated property subject to 
the rules of this paragraph (a) is any property that--
    (i) Is either mining property (as defined in section 617(f)(2)), 
section 1245 property (as defined in section 1245(a)(3)), section 1250 
property (as defined in section 1250(c)), farm land (as defined in 
section 1252(a)(2)), section 1254 property (as defined in section 
1254(a)(3)), or section 126 property (as defined in section 
1255(a)(2)); and
    (ii) Has been used in the United States or has been described in 
section 168(g)(4) before its transfer.
    (3) Property used within and without the United States. (i) If U.S. 
depreciated property has been used partly within and partly without the 
United States, then the amount required to be included in ordinary 
income pursuant to this paragraph (a) is reduced to an amount 
determined in accordance with the following formula:

[GRAPHIC] [TIFF OMITTED] TP16SE15.000


    (ii) For purposes of the fraction in paragraph (a)(3)(i) of this 
section, the ``full recapture amount'' is the amount that would 
otherwise be included in the transferor's income under paragraph (a)(1) 
of this section. ``U.S. use'' is the number of months that the property 
either was used within the United States or qualified as section 38 
property by virtue of section 48(a)(2)(B), and was subject to 
depreciation by the transferor or a related person. ``Total use'' is 
the total number of months that the property was used (or available for 
use), and subject to depreciation, by the transferor or a related 
person. For purposes of this paragraph (a)(3), property is not 
considered to have been in use outside of the United States during any 
period in which such property was, for purposes of section 48 or 168, 
treated as property not used predominantly outside the United States 
pursuant to the provisions of section 48(a)(2)(B). For purposes of this 
paragraph (b)(3) the term ``related person'' has the meaning set forth 
in Sec.  1.367(d)-1(h).
    (b) Effective/applicability dates. The rules of this section apply 
to transfers occurring on or after September 14, 2015,] and to 
transfers occurring before September 14, 2015, resulting from entity 
classification elections made under Sec.  301.7701-3 that are filed on 
or after September 14, 2015. For transfers occurring before this 
section is applicable, see Sec. Sec.  1.367(a)-4 and 1.367(a)-4T as 
contained in 26 CFR part 1 revised as of April 1, 2015.


Sec.  1.367(a)-5  [Removed and Reserved]

0
 Par. 7. Section 1.367(a)-5 is removed and reserved.
0
Par. 8. Section 1.367(a)-6 is added to read as follows:


Sec.  1.367(a)-6  Transfer of foreign branch with previously deducted 
losses.

    (a) through (b)(1) [Reserved]. For further guidance, see Sec.  
1.367(a)-6T(a) through (b)(1).
    (b)(2) No active conduct exception. The rules of this paragraph (b) 
apply regardless of whether any of the assets of the foreign branch 
satisfy the active trade or business exception of Sec.  1.367(a)-
2(a)(2).
    (c)(1) [Reserved]. For further guidance, see Sec.  1.367(a)-
6T(c)(1).
    (2) Gain limitation. The gain required to be recognized under 
paragraph (b)(1) of this section will not exceed the aggregate amount 
of gain realized on the transfer of all branch assets (without regard 
to the transfer of any assets on which loss is realized but not 
recognized).
    (3) [Reserved].
    (c)(4) Transfers of certain intangible property. Gain realized on 
the transfer of intangible property (computed with reference to the 
fair market value of the intangible property as of the date of the 
transfer) that is an asset of a foreign branch is taken into account in 
computing the limitation on loss recapture under paragraph (c)(2) of 
this section. For rules relating to the crediting of gain recognized 
under this section against income deemed to arise by operation of 
section 367(d), see Sec.  1.367(d)-1(g)(3).
    (d) through (j) [Reserved]. For further guidance, see Sec.  
1.367(a)-6T(d) through (j).
    (k) Effective/applicability dates. The rules of this section apply 
to transfers occurring on or after September 14, 2015, and to transfers 
occurring before

[[Page 55581]]

September 14, 2015, resulting from entity classification elections made 
under Sec.  301.7701-3 that are filed on or after September 14, 2015. 
For transfers occurring before this section is applicable, see 
Sec. Sec.  1.367(a)-6T as contained in 26 CFR part 1 revised as of 
April 1, 2015.
0
Par. 9. Section 1.367(a)-7 is amended by:
0
1. Revising paragraph (f)(11).
0
2. Redesignating paragraph (j) as (j)(1) and revising the first 
sentence, and adding paragraph (j)(2).
    The revision and addition read as follows:


Sec.  1.367(a)-7  Outbound transfers of property described in section 
361(a) or (b).

* * * * *
    (f) * * *
    (11) Section 367(d) property is intangible property as defined in 
Sec.  1.367(a)-1(d)(5).
* * * * *
    (j) Effective/applicability dates--(1) In general. Except as 
provided in paragraphs (e)(2) and (j)(2) of this section, this section 
applies to transfers occurring on or after April 18, 2013. * * *
    (2) Section 367(d) property. The definition provided in paragraph 
(f)(11) of this section applies to transfers occurring on or after 
September 14, 2015, and to transfers occurring before September 14, 
2015, resulting from entity classification elections made under Sec.  
301.7701-3 that are filed on or after September 14, 2015. For transfers 
occurring before this section is applicable, see Sec.  1.367(a)-7 as 
contained in 26 CFR part 1 revised as of April 1, 2015.


Sec.  1.367(a)-7  [Amended]

0
Par. 10. For each section listed in the following table, remove the 
language in the ``Remove'' column and add in its place the language in 
the ``Add'' column.

------------------------------------------------------------------------
           Section                   Remove                  Add
------------------------------------------------------------------------
Sec.   1.367(a)-7(a), sixth   Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 sentence.
Sec.   1.367(a)-7(c), second  Sec.   1.367(a)-2T..  Sec.   1.367(a)-2.
 sentence.
Sec.   1.367(a)-7(c), second  Sec.   1.367(a)-4T,   Sec.   1.367(a)-4.
 sentence.                     1.367(a)-5T.
Sec.   1.367(a)-7(c), second  Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 sentence.
Sec.   1.367(a)-              Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 7(c)(2)(i)(B).
Sec.   1.367(a)-              Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 7(c)(2)(ii)(A)(2).
Sec.   1.367(a)-7(e)(1),      Sec.   1.367(a)-2T..  Sec.   1.367(a)-2.
 third sentence.
Sec.   1.367(a)-7(e)(1),      Sec.   1.367(a)-4T,   Sec.   1.367(a)-4.
 third sentence.               1.367(a)-5T.
Sec.   1.367(a)-7(e)(1),      Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 third sentence.
Sec.   1.367(a)-7(e)(1),      Sec.   1.367(a)-      Sec.   1.367(a)-
 last sentence.                1T(b)(4) and Sec.     1(b)(4).
                               1.367(a)-1(b)(4)(i)
                               (B).
Sec.   1.367(a)-7(e)(4)(ii),  Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 first and second sentences.
Sec.   1.367(a)-7(e)(5),      Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 heading.
Sec.   1.367(a)-7(e)(5)(i),   Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 first sentence.
Sec.   1.367(a)-7(e)(5)(ii),  Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
 first sentence.
Sec.   1.367(a)-7(f)(4)(ii).  Sec.   1.367(a)-6T..  Sec.   1.367(a)-6.
Sec.   1.367(a)-7(g), last    Sec.   1.367(a)-2T..  Sec.   1.367(a)-2.
 sentence.
Sec.   1.367(a)-7(g),         Sec.   1.367(a)-2T..  Sec.   1.367(a)-2.
 Example 1 (ii)(A), last
 sentence.
Sec.   1.367(a)-7(g),         Sec.   1.367(a)-2T..  Sec.   1.367(a)-2.
 Example 2 (ii)(A), last
 sentence.
------------------------------------------------------------------------

Sec.  1.367(a)-8  [Amended]

0
Par. 11. For each section listed in the following table, remove the 
language in the ``Remove'' column and add in its place the language in 
the ``Add'' column.

------------------------------------------------------------------------
           Section                   Remove                  Add
------------------------------------------------------------------------
Sec.   1.367(a)-8(b)(1)(xv),  Sec.   1.367(a)-      Sec.   1.367(a)-
 first sentence.               1T(d)(1).             1(d)(1).
Sec.   1.367(a)-8(b)(1)(xv),  Sec.   1.367(a)-      Sec.   1.367(a)-
 second sentence.              1T(c)(3)(i).          1(c)(3)(i).
Sec.   1.367(a)-              Sec.   1.367(a)-      Sec.   1.367(a)-
 8(c)(3)(viii).                1T(c)(3)(i) and       1(c)(3)(i) and Sec.
                               Sec.   1.367(a)-        1.367(a)-
                               1T(c)(3)(ii).         1(c)(3)(ii).
Sec.   1.367(a)-8(c)(4)(iv).  Sec.   1.367(a)-      Sec.   1.367(a)-
                               1T(b)(4).             1(b)(4).
Sec.   1.367(a)-8(j)(3).....  Sec.   1.367(a)-      Sec.   1.367(a)-
                               1T(c)(3)(ii).         1(c)(3)(ii).
------------------------------------------------------------------------

0
Par. 12. Section 1.367(d)-1 is added to read as follows:


Sec.  1.367(d)-1  Transfers of intangible property to foreign 
corporations.

    (a) [Reserved]. For further guidance, see Sec.  1.367(d)-1T(a).
    (b) Property subject to section 367(d). Section 367(d) and the 
rules of this section apply to the transfer of intangible property, as 
defined in Sec.  1.367(a)-1(d)(5), by a U.S. person to a foreign 
corporation in an exchange described in section 351 or 361. See section 
367(a) and the regulations thereunder for the rules that apply to the 
transfer of any property other than intangible property.
    (c)(1) and (2) [Reserved]. For further guidance, see Sec.  
1.367(d)-1T(c)(1) and (2).
    (3) Useful life. For purposes of this section, the useful life of 
intangible property is the entire period during which exploitation of 
the intangible property is reasonably anticipated to occur, as of the 
time of transfer. Exploitation of intangible property includes any 
direct or indirect use or transfer of the intangible property, 
including use without further development, use in the further 
development of the intangible property itself (and any exploitation of 
the further developed intangible property), and use in the development 
of other intangible property (and any exploitation of the developed 
other intangible property).
    (c)(4) through (g)(2) [Reserved]. For further guidance, see Sec.  
1.367(d)-1T(c)(4) through (g)(2).

[[Page 55582]]

    (g)(2)(i) The intangible property transferred constitutes an 
operating intangible, as defined in Sec.  1.367(a)-1(d)(6).
    (g)(2)(ii) through (iii)(D) [Reserved]. For further guidance, see 
Sec.  1.367(d)-1T(g)(2)(ii) through (iii)(D).
    (E) The transferred intangible property will be used in the active 
conduct of a trade or business outside of the United States within the 
meaning of Sec.  1.367(a)-2 and will not be used in connection with the 
manufacture or sale of products in or for use or consumption in the 
United States.
    (3) Intangible property transferred from branch with previously 
deducted losses. (i) If income is required to be recognized under 
section 904(f)(3) and the regulations thereunder or under Sec.  
1.367(a)-6 upon the transfer of intangible property of a foreign branch 
that had previously deducted losses, then the income recognized under 
those sections with respect to that property is credited against 
amounts that would otherwise be required to be recognized with respect 
to that same property under paragraphs (c) through (f) of this section 
in either the current or future taxable years. The amount recognized 
under section 904(f)(3) or Sec.  1.367(a)-6 with respect to the 
transferred intangible property is determined in accordance with the 
following formula:

[GRAPHIC] [TIFF OMITTED] TP16SE15.001


    (ii) For purposes of the formula in paragraph (g)(3)(i) of this 
section, the ``loss recapture income'' is the total amount required to 
be recognized by the U.S. transferor pursuant to section 904(f)(3) or 
Sec.  1.367(a)-6. The ``gain from intangible property'' is the total 
amount of gain realized by the U.S. transferor pursuant to section 
904(f)(3) and Sec.  1.367(a)-6 upon the transfer of items of property 
that are subject to section 367(d). ``Gain from intangible property'' 
does not include gain realized with respect to intangible property by 
reason of an election under paragraph (g)(2) of this section. The 
``gain from all branch assets'' is the total amount of gain realized by 
the transferor upon the transfer of items of property of the branch for 
which gain is realized.
    (g)(4) through (i) [Reserved]. For further guidance, see Sec.  
1.367(d)-1T(g)(4) through (i).
    (j) Effective/applicability dates. This section applies to 
transfers occurring on or after September 14, 2015, and to transfers 
occurring before September 14, 2015, resulting from entity 
classification elections made under Sec.  301.7701-3 that are filed on 
or after September 14, 2015. For transfers occurring before this 
section is applicable, see Sec.  1.367(d)-1T as contained in 26 CFR 
part 1 revised as of April 1, 2015.
0
Par. 13. Section 1.367(e)-2 is amended by revising paragraph 
(b)(3)(iii) to read as follows:


Sec.  1.367(e)-2  Distributions described in section 367(e)(2).

* * * * *
    (b) * * *
    (3) * * *
    (iii) Other rules. For other rules that may apply, see sections 
381, 897, 1248, and Sec.  1.482-1(f)(2)(i)(C).
* * * * *
0
Par. 14. Section 1.482-1 is amended by revising paragraphs (f)(2)(i) 
and (f)(2)(ii)(B) and adding paragraph (j)(7) to read as follows:


Sec.  1.482-1  Allocation of income and deductions among taxpayers.

    [The text of the proposed amendments to Sec.  1.482-1 is the same 
as the text of Sec.  1.482-1T(f)(2)(i), (f)(2)(ii)(B), and (j)(7) 
published elsewhere in this issue of the Federal Register].


Sec.  1.884-5  [Amended]

0
 Par. 15. Section 1.884-5 is amended in paragraph (e)(3)(ii)(A) by 
removing the citation ``1.367(a)-2T(b)(5),'' and adding the citation 
``1.367(a)-2(d)(5)'' in its place.


Sec.  1.1248-8  [Amended]

0
Par. 16. Section 1.1248-8 is amended in paragraph (b)(2)(iv)(B)(1)(ii) 
by removing the citation ``1.367(a)-6T,'' and adding the citation 
``1.367(a)-6'' in its place.


Sec.  1.1248(f)-2  [Amended]

0
Par. 17. Section 1.1248(f)-2 is amended in the last sentence of 
paragraph (e) by removing the citation ``1.367(a)-2T,'' and adding the 
citation ``1.367(a)-2'' in its place.
0
Par. 18. Section 1.6038B-1 is amended by:
0
1. Removing the citation ``1.367(a)-1T(c),'' in the fourth sentence of 
paragraph (b)(1)(i) and adding the citation ``1.367(a)-1(c)'' in its 
place.
0
2. Adding paragraphs (c)(4)(i) through (vii), (c)(5), and (d)(1)(iv) 
and (vii)
0
3. Revising the first sentence of paragraph (g)(1).
0
4. Adding paragraph (g)(7).
    The additions and revision read as follows:


Sec.  1.6038B-1  Reporting of certain transfers to foreign 
corporations.

* * * * *
    (c) * * *
    (1) through (4) [Reserved]. For further guidance, see Sec.  
1.6038B-1T(c)(1) through (4).
    (i) Active business property. Describe any transferred property 
that qualifies under Sec.  1.367(a)-2(a)(2). Provide here a general 
description of the business conducted (or to be conducted) by the 
transferee, including the location of the business, the number of its 
employees, the nature of the business, and copies of the most recently 
prepared balance sheet and profit and loss statement. Property listed 
within this category may be identified by general type. For example, 
upon the transfer of the assets of a manufacturing operation, a 
reasonable description of the property to be used in the business might 
include the categories of office equipment and supplies, computers and 
related equipment, motor vehicles, and several major categories of 
manufacturing equipment. However, any property that is includible in 
both paragraphs (c)(4)(i) and (iii) of this section (property subject 
to depreciation recapture under Sec.  1.367(a)-4(a)) must be identified 
in the manner required in paragraph (c)(4)(iii) of this section. If 
property is considered to be transferred for use in the active conduct 
of a trade or business under a special rule in paragraph (e), (f), or 
(g) of Sec.  1.367(a)-2, specify the applicable rule and provide 
information supporting the application of the rule.
    (ii) Stock or securities. Describe any transferred stock or 
securities, including the class or type, amount, and characteristics of 
the transferred stock or securities, as well as the name, address, 
place of incorporation, and general description of the corporation 
issuing the stock or securities.
    (iii) Depreciated property. Describe any property that is subject 
to depreciation recapture under Sec.  1.367(a)-4(a). Property within 
this category must be separately identified to the same extent as was 
required for purposes of the previously claimed depreciation deduction. 
Specify with respect to each such asset the relevant recapture 
provision, the number of months that such property was in use within 
the

[[Page 55583]]

United States, the total number of months the property was in use, the 
fair market value of the property, a schedule of the depreciation 
deduction taken with respect to the property, and a calculation of the 
amount of depreciation required to be recaptured.
    (iv) Property not transferred for use in the active conduct of a 
trade or business. Describe any property that is eligible property, as 
defined in Sec.  1.367(a)-2(b) taking into account the application of 
Sec.  1.367(a)-2(c), that was transferred to the foreign corporation 
but not for use in the active conduct of a trade or business outside 
the United States (and was therefore not listed under paragraph 
(c)(4)(i) of this section).
    (v) Property transferred under compulsion. If property qualifies 
for the exception of Sec.  1.367(a)-2(a)(2) under the rules of 
paragraph (h) of that section, provide information supporting the 
claimed application of such exception.
    (vi) Certain ineligible property. Describe any property that is 
described in Sec.  1.367(a)-2(c) and that therefore cannot qualify 
under Sec.  1.367(a)-2(a)(2) regardless of its use in the active 
conduct of a trade or business outside of the United States. The 
description must be divided into the relevant categories, as follows:
    (A) Inventory, etc. Property described in Sec.  1.367(a)-2(c)(1);
    (B) Installment obligations, etc. Property described in Sec.  
1.367(a)-2(c)(2);
    (C) Foreign currency, etc. Property described in Sec.  1.367(a)-
2(c)(3); and
    (D) Leased property. Property described in Sec.  1.367(a)-2(c)(4).
    (vii) Other property that is ineligible property. Describe any 
property, other than property described in Sec.  1.367(a)-2(c), that 
cannot qualify under Sec.  1.367(a)-2(a)(2) regardless of its use in 
the active conduct of a trade or business outside of the United States 
and that is not subject to the rules of section 367(d) under Sec.  
1.367(a)-1(b)(5). Each item of property must be separately identified.
    (c)(4)(viii) [Reserved]. For further guidance, see Sec.  1.6038B-
1T(c)(4)(viii).
    (5) Transfer of foreign branch with previously deducted losses. If 
the property transferred is property of a foreign branch with 
previously deducted losses subject to Sec. Sec.  1.367(a)-6 and -6T, 
provide the following information:
    (i) through (iv) [Reserved]. For further information, see Sec.  
1.6038B-1T(c)(5)(i) through (iv).
* * * * *
    (d)(1) through (1)(iii) [Reserved]. For further guidance, see Sec.  
1.6038B-1T(d)(1) through (1)(iii).
    (iv) Intangible property transferred. Provide a description of the 
intangible property transferred, including its adjusted basis. 
Generally, each item of intangible property must be separately 
identified, including intangible property described in Sec.  1.367(d)-
1(g)(2)(i) or that is subject to the rules of section 367(d) under 
Sec.  1.367(a)-1(b)(5).
    (d)(1)(v) through (d)(1)(vi) [Reserved]. For further guidance, see 
Sec.  1.6038B-1T(d)(1)(v) through (1)(vi).
    (d)(1)(vii) Coordination with loss rules. List any intangible 
property subject to section 367(d) the transfer of which also gives 
rise to the recognition of gain under section 904(f)(3) or Sec. Sec.  
1.367(a)-6 or -6T. Provide a calculation of the gain required to be 
recognized with respect to such property, in accordance with the 
provisions of Sec.  1.367(d)-1(g)(4).
    (d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see 
Sec.  1.6038B-1T(d)(1)(viii) through (2).
* * * * *
    (g) Effective/applicability dates. (1) Except as provided in 
paragraphs (g)(2) through (g)(7) of this section, this section applies 
to transfers occurring on or after July 20, 1998, except for transfers 
of cash made in tax years beginning on or before February 5, 1999 
(which are not required to be reported under section 6038B), and except 
for transfers described in paragraph (e) of this section, which applies 
to transfers that are subject to Sec. Sec.  1.367(e)-1(f) and 1.367(e)-
2(e). * * *
* * * * *
    (7) Paragraphs (c)(4)(i) through (vii), (c)(5), and (d)(1)(iv) and 
(vii) of this section apply to transfers occurring on or after 
September 14, 2015, and to transfers occurring before September 14, 
2015, resulting from entity classification elections made under Sec.  
301.7701-3 that are filed on or after September 14, 2015. For guidance 
with respect to paragraphs (c)(4), (c)(5), and (d)(1) of this section 
before this section is applicable, see Sec. Sec.  1.6038B-1 and 
1.6038B-1T as contained in 26 CFR part 1 revised as of April 1, 2015.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-23279 Filed 9-14-15; 11:15 am]
BILLING CODE 4830-01-P