Treatment of Certain Transfers of Property to Foreign Corporations, 91012-91032 [2016-29791]

Download as PDF 91012 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations (v) Commencing with consolidated plans submitted on or after January 1, 2018, agencies whose primary responsibilities include the management of flood prone areas, public land or water resources, and emergency management agencies; and * * * * * ■ 7. Revise § 91.210(a) to read as follows: asabaliauskas on DSK3SPTVN1PROD with RULES § 91.210 Housing market analysis. 17:15 Dec 15, 2016 Jkt 241001 8. In § 91.300, remove the word ‘‘and’’ following the semicolon at the end of paragraph (b)(3)(iii), redesignate paragraph (b)(3)(iv) as paragraph (b)(3)(vi), and add new paragraphs (b)(3)(iv) and (v) to read as follows: ■ § 91.300 General. * * * * (b) * * * (3) * * * (iv) Commencing with consolidated plans submitted on or after January 1, 2018, public and private organizations, including broadband internet service providers and organizations engaged in narrowing the digital divide; (v) Commencing with consolidated plans submitted on or after January 1, 2018, agencies whose primary responsibilities include the management of flood prone areas, public land or water resources, and emergency management agencies; and * * * * * 9. Revise § 91.310(a) to read as follows: ■ § 91.310 Housing market analysis. (a) General characteristics. (1) Based on data available to the State, the plan must describe the significant characteristics of the State’s housing markets (including such aspects as the supply, demand, and condition and cost of housing). (2) Commencing with consolidated plans submitted on or after January 1, 2018, the State must describe the broadband needs of housing in the State based on an analysis of data identified by the State. These needs include the need for broadband wiring and for connection to the broadband service in the household units, the need for increased competition by having more than one broadband Internet service provider serve the jurisdiction. (3) Commencing with consolidated plans submitted on or after January 1, 2018, the State must also describe the vulnerability of housing occupied by low- and moderate-income households to increased natural hazard risks due to climate change based on an analysis of data, findings, and methods identified by the State in its consolidated plan. * * * * * PO 00000 Frm 00064 Fmt 4700 Dated: December 14, 2016. Harriet Tregoning, Principal Deputy Assistant Secretary for Community Planning and Development. Nani A. Coloretti, Deputy Secretary. [FR Doc. 2016–30421 Filed 12–15–16; 8:45 am] BILLING CODE 4210–67–P DEPARTMENT OF THE TREASURY * (a) General characteristics. (1) Based on information available to the jurisdiction, the plan must describe the significant characteristics of the jurisdiction’s housing market, including the supply, demand, and condition and cost of housing and the housing stock available to serve persons with disabilities, and to serve other lowincome persons with special needs, including persons with HIV/AIDS and their families. (2) Data on the housing market should include, to the extent information is available, an estimate of the number of vacant or abandoned buildings and whether units in these buildings are suitable for rehabilitation. (3) The jurisdiction must also identify and describe any areas within the jurisdiction with concentrations of racial/ethnic minorities and/or lowincome families, stating how it defines the terms ‘‘area of low-income concentration’’ and ‘‘area of minority concentration’’ for this purpose. The locations and degree of these concentrations must be identified, either in a narrative or on one or more maps. (4) Commencing with consolidated plans submitted on or after January 1, 2018, the jurisdiction must also describe the broadband needs of housing occupied by low- and moderate-income households based on an analysis of data, identified by the jurisdiction, for its low- and moderate-income neighborhoods. These needs include the need for broadband wiring and for connection to the broadband service in the household units and the need for increased competition by having more than one broadband Internet service provider serve the jurisdiction. (5) Commencing with consolidated plans submitted on or after January 1, 2018, the jurisdiction must also describe the vulnerability of housing occupied by low- and moderate-income households to increased natural hazard risks associated with climate change based on an analysis of data, findings, and methods identified by the jurisdiction in its consolidated plan. * * * * * VerDate Sep<11>2014 Subpart D—State Governments; Contents of Consolidated Plan Sfmt 4700 Internal Revenue Service 26 CFR Part 1 [TD 9803] RIN 1545–BL87 Treatment of Certain Transfers of Property to Foreign Corporations Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations relating to certain transfers of property by United States persons to foreign corporations. The final 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 regulations also combine certain sections of the existing regulations under section 367(a) into a single section. This document also withdraws certain temporary regulations. SUMMARY: Effective date: These regulations are effective on December 16, 2016. Applicability date: For dates of applicability, see §§ 1.367(a)–1(g)(5), 1.367(a)–2(k), 1.367(a)–4(b), and 1.367(a)–6(j); 1.367(d)–1(j); and 1.6038B–1(g)(7). FOR FURTHER INFORMATION CONTACT: Ryan A. Bowen, (202) 317–6937 (not a toll-free number). SUPPLEMENTARY INFORMATION: DATES: 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 § 1.6038B–1(c)(4) and (d)(1). The collections of information are mandatory. The likely respondents are domestic corporations. Burdens E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES associated with these requirements will be reflected in the burden for Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. 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 This document contains final regulations issued under sections 367 and 6038B of the Code. Temporary regulations were published on May 16, 1986 (TD 8087, 51 FR 17936) (the 1986 temporary regulations). Proposed regulations under these sections were published on September 16, 2015 (80 FR 55568) (the proposed regulations). Written comments to the proposed regulations were received, and a public hearing was held on February 8, 2016. All comments are available at www.regulations.gov or upon request. The proposed regulations generally provided five substantive changes from the 1986 temporary regulations: (1) Eliminating the favorable treatment for foreign goodwill and going concern value by narrowing the scope of the active trade or business exception under section 367(a)(3) (ATB exception) and eliminating the exception under § 1.367(d)–1T(b) that provides that foreign goodwill and going concern value is not subject to section 367(d); (2) allowing taxpayers to apply section 367(d) to certain property that otherwise would be subject to section 367(a); (3) removing the twenty-year limitation on useful life for purposes of section 367(d) under § 1.367(d)–1T(c)(3); (4) removing the exception under § 1.367(a)–5T(d)(2) that permits certain property denominated in foreign currency to qualify for the ATB exception; and (5) changing the valuation rules under § 1.367(a)–1T to better coordinate the regulations under sections 367 and 482 (including temporary regulations under section 482 issued with the proposed regulations (see § 1.482–1T(f)(2)(i), TD 9738, 80 FR 55538). Specifically with regard to the ATB exception, the proposed regulations revised the categories of property that are eligible for the ATB exception so that foreign goodwill and going concern VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 value cannot qualify for the exception. Under the 1986 temporary regulations, all property was eligible for the ATB exception, subject only to five narrowly tailored exceptions. In addition to limiting the scope of the ATB exception, the proposed regulations also implemented changes to the ATB exception that were intended to consolidate various provisions and update the 1986 temporary regulations in response to subsequent changes to the Code. The proposed regulations did not resolve the extent to which property, including foreign goodwill and going concern value, that is not explicitly enumerated in section 936(h)(3)(B)(i) through (v) (enumerated section 936 intangibles) is described in section 936(h)(3)(B) and therefore subject to section 367(d) or instead is subject to section 367(a) and not eligible for the ATB exception. All property that is described in section 936(h)(3)(B) is referred to at times in this preamble as ‘‘section 936 intangibles.’’ Nonetheless, the proposed regulations permitted taxpayers to apply section 367(d) to such property. Under this rule, a taxpayer that has historically taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) could apply section 367(d) to such property. These regulations generally finalize the proposed regulations, as well as portions of the 1986 temporary regulations, as amended by this Treasury decision. Although minor wording changes have been made to certain aspects of those portions of the 1986 temporary regulations, the final regulations are not intended to be interpreted as making substantive changes to those regulations. Further explanation of the proposed regulations can be found in the Explanation of Provisions section of the preamble to the proposed regulations. That Explanation of Provisions section is hereby incorporated as appropriate into this preamble. Summary of Comments and Explanation of Revisions Nineteen sets of comments were received in response to the proposed regulations, and three speakers presented at the public hearing. In drafting the final regulations, the Treasury Department and the IRS carefully considered all of the comments received. This section of the preamble is comprised of five parts that discuss, in turn, the comments received with respect to (i) the elimination of the favorable treatment of transfers of PO 00000 Frm 00065 Fmt 4700 Sfmt 4700 91013 foreign goodwill and going concern value, (ii) the useful life of property for purposes of applying section 367(d), (iii) the applicability date of the final regulations, (iv) the qualification of property denominated in foreign currency for the ATB exception, and (v) other issues. I. Foreign Goodwill and Going Concern Value A. Overview The Treasury Department and the IRS received a variety of comments in response to the proposed elimination of the favorable treatment of transfers of foreign goodwill and going concern value provided by the 1986 temporary regulations. Two comments supported the treatment of foreign goodwill and going concern value under the proposed regulations. One comment asserted that allowing intangible property to be transferred outbound in a tax-free manner is inconsistent with the policies of section 367. Other comments acknowledged the concerns about tax avoidance described in the preamble to the proposed regulations, but requested specific exceptions for transfers of foreign goodwill and going concern value in situations that the comments asserted were not abusive. Other comments disagreed more fundamentally with the approach taken and stated that the Treasury Department and the IRS should withdraw the proposed regulations entirely. Many of these comments asserted that eliminating the favorable treatment of transfers of foreign goodwill and going concern value would be an invalid exercise of regulatory authority under section 367. Overall, the comments indicated widely divergent understandings of the nature of foreign goodwill and going concern value. Accordingly, the comments also widely differed in their proffered justifications for an exception for foreign goodwill and going concern value and in the recommended contours of an appropriate exception. The variance in the comments regarding these fundamental issues highlights the difficulty of permitting some form of favorable treatment for foreign goodwill and going concern value while preventing tax avoidance. As described in greater detail in Part I.B of this Summary of Comments and Explanation of Revisions, and consistent with the proposed regulations, the final regulations eliminate the favorable treatment of foreign goodwill and going concern value contained in the 1986 temporary regulations. The Treasury Department and the IRS have E:\FR\FM\16DER1.SGM 16DER1 91014 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations determined that this change is necessary to carry out the tax policy embodied in section 367 in a fair, impartial, and reasonable manner, taking into account the intent of Congress, the realities of relevant transactions, the need for the IRS to administer the rules and monitor compliance, and the overall integrity of the federal tax system. In particular, the final regulations are consistent with the policy and intent of the statute, which does not reference foreign goodwill or going concern value, and with Congress’ expectation that the Secretary would exercise the regulatory authority under section 367 to require gain recognition when property is transferred offshore under circumstances that present a potential for tax avoidance. B. Interpretation of Section 367 1. Summary of Comments Challenging Authority asabaliauskas on DSK3SPTVN1PROD with RULES The Treasury Department and the IRS received numerous comments addressing the proposed regulations’ treatment of foreign goodwill and going concern value. One comment asserted that the ATB exception must apply to transfers of foreign goodwill and going concern value, because (i) foreign goodwill and going concern value is not a section 936(h)(3)(B) intangible, and so is subject to section 367(a) rather than section 367(d), and (ii) the legislative history indicates that Congress expected that the transfer of such value should be tax-free. The comment further asserted that, because goodwill and going concern value is inextricably linked to the conduct of an active trade or business, the ATB exception necessarily encompasses such transfers. Other comments asserted that finalizing the proposed regulations would represent an unreasonable exercise of regulatory authority because the proposed regulations eliminated the favorable treatment of all transfers of purported foreign goodwill and going concern value, rather than just those transfers that the Treasury Department and the IRS determine are abusive. Several comments asserted that the proposed regulations are inconsistent with Congressional intent and cited statements from the legislative history to section 367, such as the following: The committee 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. . . . The committee contemplates that the transfer of goodwill or going concern value developed by a foreign branch will be treated under [the exception for transfers of property for use in the active conduct of a foreign trade or VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 business] rather than a separate rule applicable to intangibles. H.R. Rep. No. 98–432, pt. 2, at 1317–19 (1984). Comments also asserted that it is inappropriate to use regulatory authority under section 367 to address transfer pricing concerns under section 482. 2. Response The Treasury Department and the IRS do not agree with the foregoing comments. Section 367 generally provides for income recognition on transfers of property to a foreign corporation in certain transactions that otherwise would qualify for nonrecognition. While section 367(a)(3)(A) includes a broad exception to this general rule for property used in the active conduct of a trade or business outside of the United States, grants of rulemaking authority in section 367(a)(3)(A) and (B) authorize the Secretary to exercise administrative discretion in determining the property to which nonrecognition treatment applies under the ATB exception. Moreover, section 367(d) reflects a clear policy that income generally should be recognized with respect to transfers of section 936 intangibles. The 1984 legislative history to section 367 explains that Congress intended for the Secretary to use his ‘‘regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.’’ S. Rep. No. 98–169, at 364 (1984) (emphasis added). The Treasury Department and the IRS have determined that the proposed regulations and these final regulations are consistent with that intention and the authority granted to the Secretary under section 367, based on the fact that the statute does not refer to foreign goodwill and going concern value and the determination that, as described in the preamble to the proposed regulations, the favorable treatment of foreign goodwill and going concern value contravenes the policy that income generally should be recognized with respect to transfers of section 936 intangibles. The remainder of this section discusses subsequent changes to the regulatory, statutory, and market context in which the 1984 legislative history was drafted, in order to reconcile the statements in the 1984 legislative history expressing the expectation that an exception for foreign goodwill and going concern value would not result in abuse with the IRS’s contrary experience administering the statute during the intervening years. PO 00000 Frm 00066 Fmt 4700 Sfmt 4700 a. The 1980s and Early 1990s The Treasury Department and the IRS considered the 1984 legislative history to section 367 in issuing the 1986 temporary regulations. The 1986 temporary regulations gave effect to the statements in the legislative history indicating that Congress anticipated that the transfer of goodwill and going concern value developed by a foreign branch to a newly organized foreign corporation generally would not result in abuse of the U.S. tax system, and, on that basis, that such transfers would benefit from nonrecognition treatment. As a result, the 1986 temporary regulations provide nonrecognition treatment for foreign goodwill and concern value. The 1986 temporary regulations did not provide a conceptual definition of foreign goodwill and going concern value but, in effect, provided a rule for valuing it by describing foreign goodwill and 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. § 1.367(a)–1T(d)(5)(iii). The Treasury Department and the IRS also took into account the 1984 legislative history in issuing the proposed regulations and these final regulations. In doing so, the Treasury Department and the IRS also considered that, in amending section 367 in 1984, Congress did not choose to statutorily mandate any particular treatment of foreign goodwill and going concern value and instead delegated broad authority to the Secretary to promulgate regulations under section 367 to carry out its purposes in this complex area. The Treasury Department and the IRS further considered that the legal and factual context in which the 1984 legislative history was drafted has changed significantly over the last 32 years. Before 1993, goodwill and going concern value was not amortizable. As a result, in 1984, much of the case law and policy debate regarding goodwill and going concern value involved sales of business operations at arm’s length between unrelated parties, where the taxpayer attempted to minimize the value of goodwill in order to maximize the value of amortizable intangibles. See, for example, Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993). In 1989, the General Accounting Office analyzed data with respect to unresolved tax cases involving purchased intangibles and found that, presumably in order to minimize the amount of unamortizable goodwill, taxpayers had identified 175 E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES different types of customer-based intangibles that were distinct from goodwill. See General Accounting Office, Report to the Joint Committee on Taxation: Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, at 3 (Aug. 1991). b. Statutory and Regulatory Changes In 1993, Congress addressed these valuation disputes between taxpayers and the IRS by enacting section 197, which, similar to the approach taken by the proposed regulations, did not directly address the underlying disagreement about the relative size of goodwill but substantially reduced the stakes of the disagreement. That is, by generally providing for the amortization of goodwill over 15 years, the enactment of section 197 generally eliminated the incentive that existed in 1984, when Congress enacted section 367(d) in its present form, for taxpayers to argue that goodwill has relatively minor value. Other law changes since 1984 have increased the relevance of section 367(d) and the incentive for taxpayers to overstate the value attributable to goodwill and going concern value. Before 1997, amounts received under section 367(d) were treated as ordinary income from U.S. sources. In 1997, Congress amended section 367(d)(2)(C) to provide that amounts received under section 367(d) are treated as ordinary income that is sourced in the same manner as a royalty, and thus potentially as from sources outside the United States. Taxpayer Relief Act of 1997, Public Law 105–34, 111 Stat. 788. The 1997 amendments increased the relevance of section 367(d) and the exception for foreign goodwill and going concern value because, before 1997, the consequences under the foreign tax credit limitation of the treatment of section 367(d) deemed royalties as U.S. source income represented a substantial disincentive for taxpayers to structure transactions in a way that would be subject to section 367(d). Additionally, the so-called ‘‘checkthe-box’’ regulations of § 301.7701–3, published December 18, 1996 (TD 8697, 61 FR 66584), and Congress’s enactment in 2006 of the subpart F ‘‘look-thru’’ rule in section 954(c)(6) (Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109–222, 120 Stat. 345), increased the potential benefit to taxpayers from transferring high-value intangibles offshore by reducing obstacles to redeploying cash earned in overseas operations among foreign affiliates without incurring U.S. tax. Both of these changes also facilitate, in certain circumstances, the ability of foreign subsidiaries to license VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 transferred intangibles to affiliates without incurring subpart F income. Finally, on January 5, 2009, the Treasury Department and the IRS issued temporary regulations under section 482 (TD 9441, 74 FR 340) related to cost sharing arrangements (subsequently finalized at TD 9568, 76 FR 80082 (Dec. 22, 2011)). The 2009 cost sharing regulations, in particular the supplemental guidance in § 1.482–7T(g) on transfer pricing methods applicable in determining the arm’s length price for a platform contribution transaction or PCT (so-called ‘‘buy-in payments’’), were intended, in part, to address inappropriate income shifting from intangible transfers under the prior cost sharing regulations. Although the prior cost sharing regulations did not provide any favorable treatment for foreign goodwill and going concern value, in the experience of the IRS, taxpayers took positions under those regulations that allowed a domestic cost sharing participant to transfer intangibles to a foreign cost sharing participant for development under a cost sharing arrangement without fully compensating the domestic cost sharing participant for the value of the transferred intangibles. It is also the experience of the IRS that the 2009 cost sharing regulations limited taxpayers’ ability to use PCTs in cost sharing arrangements to shift high value intangibles offshore without appropriate compensation, thereby increasing the relative appeal of transferring intangibles in a transaction subject to section 367. Thus, taxpayers began using transactions subject to section 367 to transfer intangibles intended for development under a cost sharing arrangement rather than as part of a PCT. c. Changing Markets for Intangibles Moreover, since Congress enacted section 367(d) in its current form in 1984, the relative importance of intangibles in the economy and in the profitability of business has increased greatly. According to a joint report issued by the Economic and Statistics Administration and the U.S. Patent and Trademark Office, ‘‘IP use permeates all aspects of the economy with increasing intensity and extends to all parts of the U.S.’’ Justin Antonipillai, Economics and Statistics Administration, & Michelle K. Lee, U.S. Patent and Trademark Office, Intellectual Property and the U.S. Economy, at p.30 (2016). This growing importance is reflected in the significant increase in the portion of business values attributable to intangible assets in the years since 1984, with one study indicating that PO 00000 Frm 00067 Fmt 4700 Sfmt 4700 91015 intangibles accounted for only 32 percent of the market value of the S&P 500 in 1985, but accounted for 84 percent by 2015. Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC (Mar. 4, 2015, 12:00 a.m.), http://www.oceantomo.com/2015/ 03/04/2015-intangible-asset-marketvalue-study/. Growth in the share of business values attributable to section 936 intangibles during this period, together with the statutory and regulatory changes discussed in the preceding paragraphs, have increased the incentives for taxpayers to transfer such valuable intangibles to related offshore affiliates in transactions subject to section 367(d) and to misattribute intangible value from enumerated section 936 intangibles to foreign goodwill and going concern value in the context of such transactions. d. The Potential for Abuse Since 1984, taxpayers have reversed their positions regarding the significance of goodwill and going concern value in response to the enactment of sections 197 and 367(d), and now commonly assert that such value constitutes a large percentage— even the vast majority—of an enterprise’s value. The IRS’s experience administering section 367(d) has, once again, highlighted the abuse potential that arises from the need to distinguish value attributable to nominally distinct intangibles that are used together in a single trade or business. Specifically, the uncertainty inherent in distinguishing between value attributable to goodwill and going concern value and value attributable to other intangible property makes any exception to income recognition for the outbound transfer of goodwill and going concern value unduly difficult to administer and prone to tax avoidance. Of course, any rule that provides for the tax-free transfer of one type of property, while the transfer of other types of property remains taxable, provides an incentive to improperly allocate value away from the taxable property and onto the tax-free property. This problem is acute, however, in cases involving the offshore reorganization of entire business divisions that include highvalue, interrelated intangibles, because goodwill and going concern value are particularly difficult to distinguish (perhaps are even indistinguishable) from the enumerated section 936 intangibles. See, for example, International Multifoods Corp. v. Commissioner, 108 T.C. 25, 42 (1997) (noting that it ‘‘is well established that trademarks embody goodwill’’). See also Joint Committee on Taxation, Present E:\FR\FM\16DER1.SGM 16DER1 91016 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES Law and Background Related to Possible Income Shifting and Transfer Pricing, (JCX–37–10) July 20, 2010, at 110 (noting that unique intangible property is difficult to value because it is rarely, if ever, transferred to third parties). e. Legislative Intent and the Broad Grant of Authority To Limit Potential Abuses These statutory, regulatory, and market developments since Congress amended section 367(d) in 1984, as well as the experience of the IRS in administering section 367 over that period, inform the manner in which the Treasury Department and the IRS seek to give effect to the intent of Congress in this complex area of law. As a starting point, the Treasury Department and the IRS observe that the statutory grants of authority in section 367(a) and (d), coupled with the absence of any specific statutory protection for transfers of goodwill and going concern value, form the basis for the broad authority of the Treasury Department and the IRS to design the appropriate parameters for the taxation of outbound transfers. The 1984 legislative history expressed an expectation that outbound transfers of foreign goodwill and going concern value would not lead to abuse of the U.S. tax system and, on the basis of that expectation, anticipated that the Secretary would exercise the regulatory authority under section 367 in a manner that would allow taxpayers to transfer foreign goodwill and going concern value outbound without current U.S. tax. The legislative history also explains that Congress expected the Secretary to use the ‘‘regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.’’ Accordingly, the administrative discretion to determine the contours of nonrecognition treatment must be exercised in light of the income recognition objectives of the statute and informed by the IRS’s experience in administering the exception. The Treasury Department and the IRS have determined that the premise of the expectation noted in the legislative history that an exception to recognition treatment would apply to foreign goodwill and going concern value— namely, that outbound transfers of foreign goodwill and going concern value would not lead to abuse—is inconsistent with the experience of the IRS in administering section 367(d), and consequently no longer supports such an exception. Rather, based on the IRS’s experience over the past three decades, the Treasury Department and the IRS have determined that the favorable treatment of foreign goodwill and going VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 concern value has interfered with the application of the general rule in section 367(d) that requires income recognition upon the outbound transfer of section 936 intangibles due to the inherent difficulty of distinguishing value attributable to goodwill and going concern value from value attributable to enumerated section 936 intangibles, coupled with taxpayer efforts to maximize the value allocated to goodwill and going concern value. The Treasury Department and the IRS also observe that the 1984 legislative history explains that the 1984 amendments to section 367(d) were made in response to challenges the IRS faced in administering the prior regime. That regime required a taxpayer to clear its purpose for transferring property offshore with the IRS. See H.R. Rep. 98– 432, pt. 2, at 1315. The 1984 reworking of section 367 was intended to promote administrability by making the analysis of outbound transfers more objective. Other passages from the legislative history show that the general purpose of the amendments to section 367 was to close ‘‘serious loopholes,’’ and that the 1984 revisions were intended to strengthen the application of that section. Id. Accordingly, the Treasury Department and the IRS do not view the legislative history as mandating an exception for transfers of goodwill and going concern value developed by a foreign branch, or as indicating that Congress anticipated, or would have condoned, the extent of the claims regarding foreign goodwill and going concern value that the IRS has in fact encountered. To the contrary, the Treasury Department and the IRS have concluded that the statutory purpose of the income recognition provisions in section 367(d) is incompatible with the favorable treatment of foreign goodwill and going concern value reflected in the 1986 temporary regulations. In particular, taking into account the statutory, regulatory, and market developments since 1984 and the experience of the IRS in administering section 367(d) under the 1986 temporary regulations, the Treasury Department and the IRS have determined that, at this juncture, the approach most consistent with the intent of Congress in 1984, including the directive to use regulatory authority ‘‘to provide for recognition in cases of transfers involving the potential of tax avoidance,’’ is to remove the favorable treatment for foreign goodwill and going concern value in the 1986 temporary regulations. The Treasury Department and the IRS also disagree with the notion expressed in comments that the proposed PO 00000 Frm 00068 Fmt 4700 Sfmt 4700 regulations inappropriately attempt to solve section 482 transfer pricing problems under the authority of section 367. Congress made clear in adding the commensurate with income language to both sections 367(d) and 482 in 1986 that the provisions are closely related, and it is within the authority of the Treasury Department and the IRS to consider valuation concerns in administering section 367. Section 1231(e)(1) and (2) of the Tax Reform Act of 1986, Public Law 99–514, 100 Stat. 2085, 2562–3. For these reasons, the Treasury Department and the IRS disagree with comments asserting that the Treasury Department and the IRS lack the authority to eliminate the favorable treatment that applied to foreign goodwill and going concern value under the 1986 temporary regulations. C. Other Comments Suggesting That Some Favorable Treatment for Transfers of Foreign Goodwill and Going Concern Value Be Maintained Several comments generally favored retaining both the nonrecognition treatment for foreign goodwill and going concern value and its current measurement as the residual value of a foreign business operation. Other comments, however, acknowledged the problems associated with the residual valuation approach but supported an exception determined on some other basis. Some of these comments included suggestions for other ways to define goodwill and going concern value and for determining the amount that should qualify for nonrecognition. The Treasury Department and the IRS have determined that none of the comments provided a sufficiently administrable approach that would reliably ensure that section 367 applies with respect to the full value of all section 936 intangibles. 1. Local Pressure To Incorporate; Industry-Based Exception The proposed regulations specifically requested comments on a potential exception that would apply to situations where there is limited potential for abuse. As an example, the comment solicitation posited the incorporation, in response to regulatory pressure or compulsion, of a financial services business that previously had operated as a branch in another country. The Treasury Department and the IRS received several comments in response to this solicitation. Several comments suggested that the final regulations provide an exception that would continue to permit favorable treatment of transfers of foreign E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations goodwill and going concern value that occur as a result of the incorporation of a branch in a country that exerts regulatory pressure (either implicit or explicit) upon the U.S. transferor to conduct its operations in that country in corporate form. According to these comments, the incorporation of a branch in these circumstances is not motivated by tax considerations but rather occurs in order to comply with local law or regulations. The regulations under section 367 provide that certain property is deemed to be transferred for use in the active conduct of a trade or business outside of the United States when the transfer is either legally required by the local foreign government as a necessary condition of doing business or is compelled by a genuine threat of immediate expropriation by the local foreign government. Section 367 and the regulations thereunder do not, however, provide exceptions to the requirement to recognize income or gain when assets that are not eligible for the ATB exception, such as section 936 intangibles and assets described in section 367(a)(3)(B), are transferred in this circumstance. Accordingly, the policy of section 367 and the regulations thereunder is not to expand on the types of assets that are eligible for the ATB exception in this circumstance. Moreover, the mere fact that a taxpayer is compelled or pressured to incorporate its branch does not mean that the taxpayer has any less incentive to reduce the tax consequences of such incorporation by adopting the aggressive valuation positions that the proposed regulations were intended to prevent. Therefore, the final regulations do not provide a special exception to continue the favorable treatment of foreign goodwill and going concern value in this circumstance. Notably, some taxpayers that are pressured to incorporate branch operations in these circumstances can avoid being subject to section 367 by incorporating the branch using an eligible entity described in § 301.7701–2 that could elect to be treated as a disregarded entity for U.S. federal income tax purposes. Several comments recommended an exception for transfers of foreign goodwill and going concern value by taxpayers in certain industries, such as banking and finance, life insurance, and industries that primarily provide services to third parties, asserting that such businesses do not possess the types of highly valuable intangibles about which they believe the Treasury Department and the IRS are concerned. The comments did not provide any basis, however, for the Treasury VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 Department and the IRS to conclude that taxpayers in particular industries consistently lack valuable intangibles of the kind listed in section 936(h)(3)(B), even though the prevalence of specific types of intangibles may differ across industries. Additionally, the ability and incentive to allocate value away from other intangibles, such as trademarks, and toward goodwill or going concern value is not limited to particular industries. As a general matter, the Treasury Department and the IRS attempt, to the extent possible, to avoid issuing guidance based on industry classifications that are not clearly and closely tied to specific tax policy concerns. Accordingly, the final regulations do not provide any industryspecific exceptions. Based on these comments, the Treasury Department and the IRS considered whether it would be possible to provide an exception for tax-free transfers of foreign goodwill and going concern value developed by a foreign branch that did not possess or otherwise benefit from the use of any highly valuable enumerated section 936 intangibles. If the absence of such highly valuable intangibles could be reliably determined, the concerns regarding the potential to attribute value away from such intangibles and toward goodwill and going concern value would be mitigated. However, such an exception would require the development and administration of standards to determine whether any enumerated section 936 intangible was highly valuable, an exercise that would be as difficult (and in many circumstance would be no different) than the exercise of distinguishing value attributable to foreign goodwill and going concern value from value attributable to other intangibles transferred together with it. Such an exception also would require a careful examination of the particular facts of a transferor’s assets and business as a threshold matter to confirm that valuable enumerated section 936 intangibles are not made available for the benefit of the transferee foreign corporation, either through a separate but related transfer to the foreign corporation or through a service provided to the foreign corporation using such intangibles. Accordingly, the Treasury Department and the IRS did not adopt this potential exception in these final regulations. 2. Foreign Branch Exception Several comments suggested maintaining the favorable treatment of foreign goodwill and going concern value in situations in which section 367 PO 00000 Frm 00069 Fmt 4700 Sfmt 4700 91017 applies to the incorporation of a longstanding foreign branch or a branch that conducts an active foreign business operation. The Treasury Department and the IRS acknowledge that conditioning favorable treatment for foreign goodwill and going concern value on the presence of a robust foreign branch would increase the likelihood that the business at issue has substantive foreign operations. However, in situations where the exception would continue to apply, the requirement of a robust foreign branch would not address the potential for tax avoidance that motivated the proposed regulations when value must be allocated between foreign goodwill and going concern value, on the one hand, and enumerated section 936 intangibles, on the other hand. Thus, the final regulations do not adopt the comments suggesting an exception for goodwill and going concern value developed by a foreign branch that is subsequently incorporated because, when applicable, such an exception would not address the administrative difficulties in identifying and separately valuing the property that is and is not eligible for the exception, and therefore would be insufficient to prevent the potential for tax avoidance. 3. New Rules for Valuing Foreign Goodwill and Going Concern Value Other comments suggested that the regulations provide new rules for determining foreign goodwill and going concern value, such that an exception for such transfers could be provided that would be less susceptible to the abuses described in the preamble to the proposed regulations. That is, the comments suggested determining goodwill and going concern value using an approach that differs from that in existing § 1.367(a)–1T(d)(5)(iii), which treats it as the residual after other intangibles are valued. Several of these comments suggested determining foreign goodwill and going concern value by classifying intangibles as routine and non-routine and permitting value attributable to routine intangibles to be transferred tax-free under an exception. One comment asserted that goodwill is relatively easy to value as compared to certain enumerated section 936 intangibles but did not explain why or how goodwill is more easily valued or how to reliably allocate value between goodwill and enumerated section 936 intangibles. Another comment asserted that goodwill can be valued based on the premise that it is the kind of asset that enables an existing business to produce ‘‘routine’’ or ‘‘normal’’ operating profits E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES 91018 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations or cash flow during the period that a new business would be assembling its assets and workforce and attracting a customer base, but the comment did not explain how to determine ‘‘routine’’ or ‘‘normal’’ operating profits. Another comment recommended determining foreign goodwill and going concern value using a formulaic approach based on sales and general and administrative expenses, asserting that routine expenses for operational costs and compensation are closely associated with the business activities that give rise to goodwill and going concern value. The comment did not provide any support for this premise. As a general matter, cost-based methods (in comparison with market-based and income-based methods) are not a reliable means of valuing intangible property because the value of intangible property does not necessarily bear any predictable relationship to the costs of developing the property. The comment suggesting a cost-based approach did not demonstrate that determining goodwill and going concern value in the section 367(d) context is a situation where costs are a reliable measure of value (regardless of whether goodwill and going concern value are section 936(h)(3)(B) intangibles). Accordingly, the Treasury Department and the IRS have determined that a rule that determined foreign goodwill and going concern value based on certain expenses would be inappropriate. Another comment proposed, for branches incorporated in a jurisdiction with which the United States has an income tax treaty in effect, using the earnings before interest, taxes, depreciation, and amortization of the branch as reported to foreign tax authorities as reliable data on which to base a valuation. An exception based on information reported to a foreign country’s tax authority, which may be based on that jurisdiction’s generally accepted accounting standards, does not address the concerns expressed by the Treasury Department and the IRS in the preamble to the proposed regulations. Most significantly, the comment does not explain how this information would be useful in determining the value of foreign goodwill and going concern value or distinguishing value attributable to enumerated section 936 intangibles from that of other property, nor have the Treasury Department and the IRS been able to identify how it would be useful. Accordingly, this recommendation has not been adopted. In summary, none of the proposed approaches for more directly valuing foreign goodwill and going concern value offer a principled and VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 administrable basis for allocating value between foreign goodwill and going concern value that would be subject to an exception and other intangibles that would not. The Treasury Department and the IRS therefore concluded that the proposed approaches would not provide a meaningful improvement over the residual value approach in the 1986 temporary regulations as a conceptual or administrative matter. 4. Formulaic Caps on Foreign Goodwill and Going Concern Value Several comments suggested that the favorable treatment for transfers of foreign goodwill and going concern value could be maintained while addressing the concerns that prompted the issuance of the proposed regulations by capping the amount that can qualify for the exception, either on a nonrebuttable basis or in the absence of a ruling. For example, one comment suggested that the excepted amount should not exceed 25 percent of the branch’s net enterprise value, unless a ruling is obtained from the IRS. The comment asserted that 25 percent represents a modest portion of a branch’s value that is likely to be attributable to branch goodwill and going concern value. Another comment suggested that the excepted amount should not exceed 50 percent of the total value of the assets transferred to the foreign corporation. Although such formulaic caps would limit the potential tax avoidance from improperly attributing value from enumerated section 936 intangibles to foreign goodwill and going concern value that is eligible for an exception, the amount excepted under such an approach would still potentially reflect value properly attributable to enumerated section 936 intangibles. That is, with respect to amounts claimed below the cap, a formulaic cap would not relieve the IRS of the need to distinguish foreign goodwill and going concern value from enumerated section 936 intangibles, a key challenge that motivated the approach of the proposed regulations. Moreover, the Treasury Department and the IRS have determined that the discretionary ruling practice proposed by one comment would require an onerous commitment of IRS resources (which the comment acknowledged are constrained), and, without detailed procedures for both identifying and valuing foreign goodwill and going concern value, would simply accelerate the disputes that occur under the 1986 temporary regulations. As a result, the final regulations do not adopt the recommendations to use a formulaic PO 00000 Frm 00070 Fmt 4700 Sfmt 4700 cap to limit the amount of foreign goodwill and going concern value. 5. Professional Services Exception One comment stated that U.S. citizens may conduct professional services outside the United States as sole practitioners, or in partnership with other practitioners, and observed that the incorporation of such a business would entail a section 351 contribution subject to section 367 (assuming the transferee entity was classified as a corporation for U.S. federal income tax purposes). According to the comment, because any goodwill in such a scenario would relate to foreign customers and a foreign business or professional license, there could be no abuse warranting taxation under section 367. The Treasury Department and the IRS do not agree that the outbound transfer of value developed in such cases will necessarily not result in abuse of the U.S. tax system. The potential for abuse in a transfer subject to section 367 arises not just from the possibility that value associated with U.S. customers would be denominated as foreign goodwill, but also from the fundamental difficulty in reliably distinguishing value attributable to enumerated section 936 intangibles from value attributable to other intangibles, an issue that is no different in the professional services context. Therefore, the final regulations do not adopt this comment. 6. Joint Venture Exception One comment proposed maintaining the favorable treatment of foreign goodwill and going concern value for transfers to joint venture companies, particularly cases in which the U.S. transferor is going into business with one or more unrelated foreign parties (third parties) and in which the U.S. transferor’s interest in the joint venture is equal to or less than 50 percent. According to the comment, the U.S. transferor in this situation has a financial incentive to segregate its intangibles contributed to the joint venture from its other property. The presence of a third party, however, would not necessarily reduce the U.S. transferor’s incentive to attribute value to foreign goodwill and going concern value, rather than to enumerated section 936 intangibles, in order to minimize the tax consequences of the transfer, since such a distinction may be irrelevant to the third party. Accordingly, the final regulations do not adopt this proposal. E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES D. Classifying Foreign Goodwill and Going Concern Value as Subject to Section 367(a) or (d) Several comments requested that the Treasury Department and the IRS address whether goodwill and going concern value should be characterized as a section 936(h)(3)(B) intangible, and thus subject to section 367(d), or instead as property subject to section 367(a). Comments also requested that the regulations provide certainty to taxpayers that have taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) by providing that such taxpayers will be permitted to treat goodwill and going concern value as property subject to section 367(a) rather than section 367(d). As discussed in the preamble to the proposed regulations, the Treasury Department and the IRS acknowledge that taxpayers have taken different positions regarding the scope of section 936(h)(3)(B) and that the issue is more significant following the elimination of the favorable treatment for foreign goodwill and going concern value. Any enumerated section 936 intangible, and any item similar to such specifically enumerated intangibles, is subject to the regime provided by section 367(d). The Treasury Department and the IRS have determined that it would be inconsistent with the policy underlying section 367(d) to permit intangible property that is described in section 936(h)(3)(B) to be subject to section 367(a). Accordingly, the Treasury Department and the IRS have determined that it is appropriate to retain the approach provided in the proposed regulations, which allows taxpayers to apply section 367(d) to certain property that otherwise would be taxed under section 367(a) but which continues to require taxpayers to apply section 367(d) to all property described in section 936(h)(3)(B). Because the identification of items that are neither explicitly listed in section 936(h)(3)(B)(i) through (v) nor explicitly listed as potentially qualifying for the ATB exception generally will require a case-by-case functional and factual analysis, the final regulations do not address the characterization of such items as similar items (within the meaning of section 936(h)(3)(B)(vi)) or as something else. In general, potential rules under section 367 for identifying and valuing transferred property are beyond the scope of these final regulations. VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 II. Useful Life The proposed regulations eliminated the 20-year limitation on useful life for intangible property subject to section 367(d) that was included in § 1.367(d)– 1T(c)(3), because of concerns that the limitation results in less than all of the income attributable to transferred intangible property being taken into account by the U.S. transferor. In the preamble to the proposed regulations, the Treasury Department and the IRS solicited comments on how to simplify the administration of section 367(d) inclusions for property with a very long useful life in the absence of the 20-year limitation. In response to this comment solicitation, several comments requested that the final regulations restore the 20year limitation on useful life because it promotes administrability for both taxpayers and the IRS. After considering the comments received, the Treasury Department and the IRS agree that a 20-year limitation on inclusions may promote administrability for both taxpayers and the IRS in cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years. Accordingly, in such cases, the final regulations provide that taxpayers may, in the year of transfer, choose to take into account section 367(d) inclusions only during the 20year period beginning with the first year in which the U.S. transferor takes into account income pursuant to section 367(d). However, the Treasury Department and the IRS have determined that this optional limitation should not affect the present value of all amounts included by the taxpayer under section 367(d). Accordingly, the final regulations specifically require a taxpayer that chooses to limit section 367(d) inclusions to a 20-year period to include, during that period, amounts that reasonably reflect amounts that, in the absence of the limitation, would be required to be included over the useful life of the transferred property following the end of the 20-year period. This requirement is consistent with the requirement in section 367(d) to include amounts that are commensurate with the income attributable to the transferred intangible during its full useful life, without limitation. The requirement of the final regulations that inclusions during the limited 20-year period begin in the first year in which in which the U.S. transferor takes into account income pursuant to section 367(d) reflects the possibility of delays between the year the intangible property is transferred and the first year in which exploitation of the transferred property PO 00000 Frm 00071 Fmt 4700 Sfmt 4700 91019 results in taxable income being earned by the transferee and included under section 367(d) by the transferor. One comment also suggested that the IRS be precluded from making commensurate-with-income adjustments for taxable years beginning more than 20 years after the outbound transfer. In response to this comment, the final regulations provide that, if a taxpayer chooses to limit inclusions under section 367(d) to a 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. Thus, after the statute of limitations expires for taxable years during the 20-year period, a taxpayer will have no further section 367(d) inclusions as a result of the Commissioner’s examination of taxable years that begin after the end of the 20year period. However, consistent with the commensurate-with-income principle, for purposes of determining whether income inclusions during the 20-year period are commensurate with the income attributable to the transferred property, and whether adjustments should be made for taxable years during that period while the statute of limitations for such taxable years is open, the Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years. The final regulations revise the definition of useful life to provide that useful life includes the entire period during which exploitation of the transferred intangible property is reasonably anticipated to affect the determination of taxable income, in order to appropriately account for the fact that exploitation of intangible property can result in both revenue increases and cost decreases. A comment asserted that including use in subsequently developed intangibles within the useful life of the transferred intangible property would be too difficult to administer and was not consistent with the arm’s length standard. The Treasury Department and the IRS disagree with this comment. The value of many types of intangible property is derived not only from use of the intangible property in its present form, but also from its use in further development of the next generation of that intangible and other property. For example, if a software developer were to sell all of its copyright rights in its software to an unrelated party, and the copyright rights are expected to derive value both from the exclusive right to use the current generation computer code to make and sell current generation E:\FR\FM\16DER1.SGM 16DER1 91020 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES software products and from the exclusive right to use the current generation code in the development of other versions of the software, which will then be used to make and sell future generation software products, the software developer would expect to be compensated for the latter right. That is, if the software has value in developing a future generation of products, the software developer would not ignore the value of the use of the software in future research and development and hand over those rights free of charge, and an uncontrolled purchaser would be willing to compensate the developer to obtain such rights. III. Applicability Date Several comments requested that the final regulations apply to transfers occurring after their date of publication, and not relate back to the date the proposed regulations were issued. These comments asserted that the proposed regulations change long-standing law in a way that would prejudice taxpayers that had arranged their business operations based on the 1986 temporary regulations. Others speculated that the final regulations might deviate from the proposed regulations to such an extent that substantial confusion would result for taxpayers attempting to determine their tax results in the interim period before the final regulations were published. Finally, one comment asserted that an applicability date relating back to the proposed regulations would violate the Administrative Procedure Act (APA), specifically 5 U.S.C. 553, which provides that the effective date of certain final regulations must be at least 30 days after their date of publication. After considering these comments, the Treasury Department and the IRS have determined that the proposed applicability date, under which the final regulations would apply to transfers occurring on or after September 14, 2015, should be retained. The proposed regulations were issued to curtail the potential for abuse that exists under the 1986 temporary regulations from treating value that should be attributed to enumerated section 936 intangibles instead as exempt foreign goodwill or going concern value. The proposed effective date was intended to prevent taxpayers from using the time while the proposed regulations were pending to accelerate transfers subject to section 367 in order to take abusive positions under the 1986 temporary regulations before the finalization of the proposed regulations. The Treasury Department and the IRS have statutory authority to issue VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 regulations applicable at least as of the date the proposed regulations were filed with the Federal Register. The pre-1996 version of section 7805(b)—which governs regulations related to statutory provisions enacted before July 30, 1996, such as section 367—provides express retroactive rulemaking authority by stating that the Secretary may prescribe the extent, if any, to which any ruling or regulation shall be applied without retroactive effect. Section 7805(b) (1995). Because section 7805(b) is the more specific statute, it controls over the general notice requirements of 5 U.S.C. 553. See, for example, Redhouse v. Commissioner, 728 F.2d 1249, 1253 (9th Cir. 1984); Wing v. Commissioner, 81 T.C. 17, 28–30 & n.17 (1983). Finally, the Treasury Department and the IRS disagree with the comment that differences between the proposed and final regulations may create confusion. The final regulations are a logical outgrowth of the proposed regulations in light of the comments received and their consideration by the Treasury Department and the IRS. In particular, the final regulations do not differ from the proposed regulations with respect to the elimination of the favorable treatment for transfers of foreign goodwill and going concern value. Furthermore, a transfer of property that is subject to recognition treatment under section 367 under the final regulations would also have been subject to such treatment under section 367 under the proposed regulations. For these reasons, the final regulations generally apply to transfers occurring on or after September 14, 2015, the date the proposed regulations were filed with the Federal Register, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–2 that are filed on or after September 14, 2015. IV. Qualification of Property Denominated in Foreign Currency for the ATB Exception Although section 367(a)(3)(B)(iii) provides that the ATB exception does not apply, and therefore that section 367(a)(1) applies, to foreign currency or other property denominated in foreign currency, current § 1.367(a)–5T(d)(2) generally provides that section 367(a)(1) nonetheless does not apply to certain transfers of property denominated in the currency of the country in which the transferee foreign corporation is organized. The proposed regulations eliminated this regulatory exception from the general rule in section 367(a)(3)(B)(iii) that turns off the ATB exception for such property. One PO 00000 Frm 00072 Fmt 4700 Sfmt 4700 comment recommended clarifying the regulations under section 367(a) by adopting the language and concepts reflected in the changes to the foreign currency rules in subpart J that were made after the publication of the 1986 temporary regulations. In response to this comment, § 1.367(a)–2(c)(3) of the final regulations, which corresponds to existing § 1.367(a)–5T(d)(2), reflects amendments that increase consistency with the rules in sections 987 and 988. In particular, the terms ‘‘foreign currency’’ and ‘‘property denominated in foreign currency’’ are no longer used. Rather, proposed § 1.367(a)–2(c)(3) is revised to refer to nonfunctional currency and other property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(B), or that would give rise to such a section 988 transaction if it were acquired, accrued, or entered into directly by the taxpayer. The Treasury Department and the IRS consider that these modifications do not substantially change the scope of property subject to the rule at § 1.367(a)–5T(d)(2). V. Other Issues Other comments suggested that regulations address many outstanding issues in the context of section 367 that were not addressed in the proposed regulations. These suggestions include guidance to address the following topics: (i) The valuation of intangibles subject to section 367(d) and the forms that deemed payments should take, including guidance providing parity with the section 482 form-of-payment rules; (ii) whether a receivable is created upon an audit-related adjustment; (iii) the tax basis consequences under section 367(d), including how section 367(d) applies to intangibles subject to the section 197 anti-churning rules; (iv) coordination of the general rules and disposition rules in section 367(d); (v) issues raised in connection with Notice 2012–39 (2012–31 IRB 95); (vi) the definition of ‘‘property’’ for purposes of section 367; and (vii) the subsequent transfer rules under the ATB exception. The Treasury Department and the IRS generally agree that additional guidance under section 367(a) and (d) is desirable and would benefit both taxpayers and the government. However, these issues are beyond the scope of this project. For example, while the Treasury Department and the IRS are aware that there is uncertainty regarding the application of the subsequent transfer rules to transactions involving hybrid partnerships, the Treasury Department and the IRS have determined that transactions involving partnerships merit a more holistic consideration and E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations that this regulation package is not the appropriate vehicle to address the issue. Consequently, the regulations finalize the subsequent transfer rules in § 1.367(a)–2T(c) (located in § 1.367(a)– 2(g) of these final regulations), but the Treasury Department and the IRS expect those rules will be amended after a more detailed consideration of transactions involving partnerships. Special Analyses Certain IRS regulations, including these, 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 is hereby certified that the collection of information contained in these regulations 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 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. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. No comments were received. Drafting Information The principal author of these 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. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: asabaliauskas on DSK3SPTVN1PROD with RULES ■ Authority: 26 U.S.C. 7805 * * * Section 1.367(d)–1 also issued under 26 U.S.C. 367(d). * * * * * * * * ■ Par. 2. Section 1.367(a)–0 is added to read as follows: VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 § 1.367(a)–0 Table of contents. This section lists the paragraphs contained in §§ 1.367(a)–1 through 1.367(a)–8. § 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. (4) In general. (5) Treatment of certain property as subject to section 367(d). (c) [Reserved]. (d) Definitions. (1) United States person. (2) Foreign corporation. (3) Transfer. (4) Property. (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/applicability dates. § 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) Nonfunctional 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]. PO 00000 Frm 00073 Fmt 4700 Sfmt 4700 91021 (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. § 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]. § 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. § 1.367(a)–5 [Reserved]. § 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. E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES 91022 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations (3) [Reserved]. (4) Transfers of certain intangible property. (d) through (i) [Reserved]. (j) Effective/applicability dates. § 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 § 1.367(b)–4. (5) Certain gain under § 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. § 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. VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 (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. PO 00000 Frm 00074 Fmt 4700 Sfmt 4700 (1) General rule. (2) Applicability to transfers occurring before March 13, 2009. (3) Applicability to requests for relief submitted before November 19, 2014. Par. 3. Section 1.367(a)–1 is revised to read as follows: ■ § 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 § 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 corporation, see §§ 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 § 1.482–1(i)(8), the value of E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations the property transferred is determined in accordance with section 482 and the regulations thereunder. (4) Character, source, and adjustments—(i) In general. If a U.S. person is required to recognize gain under section 367 upon a transfer of property to a foreign corporation, then— (A) The character and source of such gain are determined as if the property had been disposed of in a taxable exchange with the transferee foreign corporation (unless otherwise provided by regulation); and (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, §§ 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, § 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 § 1.367(a)–1(c)(3) for rules concerning transfers by partnerships or of partnership interests. (C) The transfer will not be recharacterized for U.S. Federal tax purposes solely because the U.S. person recognizes gain in connection with the transfer under section 367(a)(1). For example, if a U.S. person transfers appreciated stock or securities to a foreign corporation in an exchange described in section 351, the transfer is not recharacterized as other than an exchange described in section 351 solely because the U.S. person recognizes gain in the transfer under section 367(a)(1). VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 (ii) Example. The rules of this paragraph (b)(4) are illustrated by the following example. Example. Domestic corporation DC transfers inventory with a fair market value of $1 million and adjusted basis of $800,000 to foreign corporation FC in exchange for stock of FC that is described in section 351(a). Title passes within the United States. Pursuant to section 367(a), DC is required to recognize gain of $200,000 upon the transfer. Under the rule of this paragraph (b)(4), the gain is treated as ordinary income (sections 1201 and 1221) from sources within the United States (section 861) arising from a taxable exchange with FC. Appropriate adjustments to earnings and profits, basis, etc., will be made as if the transfer were subject to section 351. Thus, for example, DC’s basis in the FC stock received, and FC’s basis in the transferred inventory, will each be increased by the $200,000 gain recognized by DC, pursuant to sections 358(a)(1) and 362(a), respectively. (5) Treatment of certain property as subject to section 367(d). A U.S. transferor may apply section 367(d) and § 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 § 1.367(a)–2(b) but determined without regard to § 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 § 1.6038B–1(d)(1)(iv) and (v). (c)(1) through (c)(3)(i) reserved. For further guidance, see § 1.367(a)–1T(c)(1) through (c)(3)(i). (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 § 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 PO 00000 Frm 00075 Fmt 4700 Sfmt 4700 91023 and principles of sections 701 through 761 and the regulations thereunder. (c)(3)(i)(A) Example through (7) reserved. For further guidance, see § 1.367(a)–1T(c)(3)(i)(A) Example through (7). (d) Definitions. The following definitions apply for purposes of sections 367(a) and (d) and the regulations thereunder. (1) United States person. The term ‘‘United States person’’ includes those persons described in section 7701(a)(30). The term includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and any estate or trust other than a foreign estate or trust. (For definitions of these terms, see section 7701 and the regulations thereunder.) For purposes of this section, an individual with respect to whom an election has been made under section 6013(g) or (h) is considered to be a resident of the United States while such election is in effect. A nonresident alien or a foreign corporation will not be considered a United States person because of its actual or deemed conduct of a trade or business within the United States during a taxable year. (2) Foreign corporation. The term ‘‘foreign corporation’’ has the meaning set forth in section 7701(a)(3) and (5) and § 301.7701–5. (3) Transfer. For purposes of section 367 and regulations thereunder, the term ‘‘transfer’’ means any transaction that constitutes a transfer for purposes of section 332, 351, 354, 355, 356, or 361, as applicable. A person’s entering into a cost sharing arrangement under § 1.482–7 or acquiring rights to intangible property under such an arrangement shall not be considered a transfer of property described in section 367(a)(1). See § 1.6038B–1T(b)(4) for the date on which the transfer is considered to be made. (4) Property. For purposes of section 367 and the regulations thereunder, the term ‘‘property’’ means any item that constitutes property for purposes of section 351, 354, 355, 356, or 361, as applicable. (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 E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES 91024 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations 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. (f) Exchanges under sections 354(a) and 361(a) in certain section 368(a)(1)(F) reorganizations—(1) Rule. In every reorganization under section 368(a)(1)(F), where the transferor corporation is a domestic corporation, and the acquiring corporation is a foreign corporation, there is considered to exist— (i) A transfer of assets by the transferor corporation to the acquiring corporation under section 361(a) in exchange for stock (or stock and securities) of the acquiring corporation and the assumption by the acquiring corporation of the transferor corporation’s liabilities; (ii) A distribution of the stock (or stock and securities) of the acquiring corporation by the transferor corporation to the shareholders (or shareholders and security holders) of the transferor corporation; and (iii) An exchange by the transferor corporation’s shareholders (or shareholders and security holders) of their stock (or stock and securities) of the transferor corporation for stock (or stock and securities) of the acquiring corporation under section 354(a). (2) Rule applies regardless of whether a continuance under applicable law. For purposes of paragraph (f)(1) of this section, it shall be immaterial that the applicable foreign or domestic law treats the acquiring corporation as a continuance of the transferor corporation. (g) Effective/applicability dates. (1) through (3) [Reserved]. For further guidance, see § 1.367(a)–1T(g)(1) through (3). (4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this section apply to transfers occurring on or after April 18, 2013. For guidance with respect to paragraph (b)(4)(i)(B) of this section before April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012. The rules in paragraph (e) of this section apply to transactions occurring on or after March 31, 1987. The rules in paragraph (f) of this section apply to transactions occurring on or after January 1, 1985. (5) Paragraphs (a), (b)(1) through (b)(4)(i)(B), (b)(4)(ii) through (b)(5), (c)(3)(ii)(A), (d) introductory text through (d)(2), (d)(4) through (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 VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–1 and 1.367(a)–1T as contained in 26 CFR part 1 revised as of April 1, 2016. § 1.367(a)–1T [Amended] Par. 4. Section 1.367(a)–1T is amended by removing and reserving paragraphs (a), (b)(1), (b)(2), (b)(3), (b)(4)(i)(A), (b)(4)(ii), (c)(3)(ii)(A), (d) introductory text, (d)(1), (d)(2), (d)(4), and (d)(5), and adding and reserving new paragraphs (b)(5) and (d)(6). ■ Par. 5. Section 1.367(a)–2 is revised to read as follows: ■ § 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) 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 § 1.367(a)–3. (2) General rule. Except as otherwise provided in §§ 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. PO 00000 Frm 00076 Fmt 4700 Sfmt 4700 (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 § 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) Nonfunctional currency, etc.—(i) In general. Property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(A) through (C), without regard to section 988(c)(1)(D) and (E), or that would give rise to such a section 988 transaction if it were acquired, accrued, entered into, or disposed of directly by the taxpayer. (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 § 1.367(a)–1(b)(1). No loss is recognized with respect to property described in this paragraph (c)(3). E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations (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: VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 (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. 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 PO 00000 Frm 00077 Fmt 4700 Sfmt 4700 91025 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 §§ 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 E:\FR\FM\16DER1.SGM 16DER1 asabaliauskas on DSK3SPTVN1PROD with RULES 91026 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations 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 § 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 VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 (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). (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. PO 00000 Frm 00078 Fmt 4700 Sfmt 4700 (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) of this section, the active conduct exception provided by this section shall apply to the initial transfer if— (i) The initial transfer 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 uses the property in the active conduct of a trade or business outside the United States. (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) E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations 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 § 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, Cross Border Activities Practice Area, 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 § 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 § 1.6038B–1(f). (ii) Procedures for establishing that a failure to comply was not willful—(A) Time and manner of submission. A taxpayer’s statement that the failure to comply was not willful will be considered only if, promptly after the taxpayer becomes aware of the failure, an amended return is filed for the taxable year to which the failure relates that includes the information that should have been included with the original return for such taxable year or that otherwise complies with the rules of this section, and that includes a written statement explaining the reasons for the failure to comply. The amended return must be filed with the Internal Revenue Service at the location where the taxpayer filed its original return. The taxpayer may submit a request for relief from the penalty under section 6038B as part of the same submission. See § 1.6038B–1(f). (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). If any taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Internal Revenue Service personnel conducting the examination. If no taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Director. (3) For illustrations of the application of the willfulness standard of this paragraph (j), see the examples in § 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 paragraphs (j)(4) and (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 § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–2, –2T, –4, –4T, –5, and –5T as contained in 26 CFR part 1 revised as of April 1, 2016. (2) Foreign currency exception. Notwithstanding paragraph (c)(3)(i) of this section, § 1.367(a)–5T(d)(2) as contained in 26 CFR part 1 revised as of April 1, 2016, applies to transfers of property denominated in a foreign currency occurring before December 16, 2016, other than transfers occurring before that date resulting from entity classification elections made under § 301.7701–3 that are filed on or after that date. § 1.367(a)–2T § 1.367(a)–3 § 1.367(a)–3(a)(3), first sentence .................................................. § 1.367(a)–3(c)(3)(i)(A) .................................................................. § 1.367(a)–3(c)(3)(ii)(B), last sentence ......................................... § 1.367(a)–3(c)(4)(i), last sentence ............................................... § 1.367(a)–3(c)(5)(iv), first sentence ............................................. § 1.367(a)–3(d)(3) Example 7A(ii), penultimate sentence ............ § 1.367(a)–3(d)(3) Example 13(i), penultimate sentence ............. asabaliauskas on DSK3SPTVN1PROD with RULES [Amended] Par. 7. For each section listed in the following the table, remove the language in the ‘‘Remove’’ column and add in its place the language in the ‘‘Add’’ column. ■ Remove § 1.367(a)–1T(c) ......................................... § 1.367(a)–2T(b)(2) and (3) ........................ § 1.367(a)–2T(b)(2) and (3) ........................ § 1.367(a)–1T(c)(3) ..................................... § 1.367(a)–1T(d)(1) .................................... § 1.367(a)–2T(a)(2) .................................... § 1.367(a)–2T(c)(2) ..................................... Par. 8. Section 1.367(a)–4 is revised to read as follows: § 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 VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 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 PO 00000 Frm 00079 Fmt 4700 Sfmt 4700 [Removed] Par. 6. Section 1.367(a)–2T is removed. ■ Section ■ 91027 Add § 1.367(a)–1(c). § 1.367(a)–2(d)(2), (3), and (4). § 1.367(a)–2(d)(2) and (3). § 1.367(a)–1(c)(3). § 1.367(a)–1(d)(1). § 1.367(a)–2(a)(2)(iii). § 1.367(a)–2(g)(2). paragraph (a) is required regardless of whether the exception to section 367(a)(1) provided by § 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 E:\FR\FM\16DER1.SGM 16DER1 91028 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations 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: (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 has been described in section 168(g)(4), 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 168, treated as property not used predominantly outside the United States pursuant to section 168(g)(4). For purposes of this paragraph (a)(3), the term ‘‘related person’’ has the meaning set forth in § 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 § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–4 and 1.367(a)–4T as contained in 26 CFR part 1 revised as of April 1, 2016. § 1.367(a)–6 Transfer of foreign branch with previously deducted losses. § 1.367(a)–6T ■ [Removed] Par. 9. § 1.367(a)–4T is removed. § 1.367(a)–5 [Removed and Reserved] Par. 10. Section 1.367(a)–5 is removed and reserved. asabaliauskas on DSK3SPTVN1PROD with RULES ■ § 1.367(a)–5T [Removed] Par. 11. § 1.367(a)–5T is removed. ■ Par. 12. Section 1.367(a)–6 is revised to read as follows: ■ VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 PO 00000 Frm 00080 Fmt 4700 Sfmt 4700 Par. 13. Section 1.367(a)–6T is amended by ■ 1. Removing and reserving paragraphs (b)(2), (c)(2), and (c)(4). ■ 2. Adding and reserving paragraph (j). ■ Par. 14. Section 1.367(a)–7 is amended by: ■ 1. Revising paragraph (f)(11). ■ 2. Redesignating paragraph (j) as (j)(1) and revising the first sentence, and adding paragraph (j)(2). The revision and addition read as follows: ■ § 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 § 1.367(a)–1(d)(5). * * * * * (j) Effective/applicability dates—(1) In general. Except for paragraph (e)(2) of this section, and as provided in paragraph (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 § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(a)–7 as contained in 26 CFR part 1 revised as of April 1, 2016. § 1.367(a)–7 [Amended] Par. 15. 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. ■ E:\FR\FM\16DER1.SGM 16DER1 ER16DE16.037</GPH> § 1.367(a)–4T (a) through (b)(1) [Reserved]. For further guidance, see § 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 § 1.367(a)–2(a)(2). (c)(1) [Reserved]. For further guidance, see § 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]. (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 § 1.367(d)–1(g)(3). (d) through (i) [Reserved]. For further guidance, see § 1.367(a)–6T(d) through (i). (j) 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 § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(a)–6T as contained in 26 CFR part 1 revised as of April 1, 2016. [Amended] Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations Section Remove § 1.367(a)–7(a), sixth sentence ......................... § 1.367(a)–7(c), second sentence ..................... § 1.367(a)–7(c), second sentence ..................... § 1.367(a)–7(c), second sentence ..................... § 1.367(a)–7(c)(2)(i)(B) ....................................... § 1.367(a)–7(c)(2)(ii)(A)(2) ................................. § 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–7(e)(1), third sentence ..................... § 1.367(a)–7(e)(1), last sentence ....................... § 1.367(a)–6T ................................................... § 1.367(a)–2T ................................................... § 1.367(a)–4T, 1.367(a)–5T ............................. § 1.367(a)–6T ................................................... § 1.367(a)–6T ................................................... § 1.367(a)–6T ................................................... § 1.367(a)–2T ................................................... § 1.367(a)–4T, 1.367(a)–5T ............................. § 1.367(a)–6T ................................................... § 1.367(a)–1T(b)(4) and § 1.367(a)– 1(b)(4)(i)(B). Director of Field Operations International, Large Business & International. § 1.367(a)–7(e)(2)(i), third sentence .................. § 1.367(a)–7(e)(4)(ii), first and second sentences. § 1.367(a)–7(e)(5), heading ............................... § 1.367(a)–7(e)(5)(i), first sentence ................... § 1.367(a)–7(e)(5)(ii), first sentence ................... § 1.367(a)–7(f)(4)(ii) ........................................... § 1.367(a)–7(g), last sentence ........................... § 1.367(a)–7(g), Example 1 (ii)(A), last sentence. § 1.367(a)–7(g), Example 2 (ii)(A), last sentence. § 1.367(a)–7(h), first sentence ........................... § 1.367(a)–8 [Amended] Par. 16. For each section listed in the following table, remove the language in ■ 91029 Add § 1.367(a)–6. § 1.367(a)–2. § 1.367(a)–4. § 1.367(a)–6. § 1.367(a)–6. § 1.367(a)–6. § 1.367(a)–2. § 1.367(a)–4. § 1.367(a)–6. § 1.367(a)–1(b)(4). § 1.367(a)–6T ................................................... Director of Field Operations, Cross Border Activities Practice Area of Large Business & International. § 1.367(a)–6. § 1.367(a)–6T § 1.367(a)–6T § 1.367(a)–6T § 1.367(a)–6T § 1.367(a)–2T § 1.367(a)–2T ................................................... ................................................... ................................................... ................................................... ................................................... ................................................... § 1.367(a)–6. § 1.367(a)–6. § 1.367(a)–6. § 1.367(a)–6. § 1.367(a)–2. § 1.367(a)–2. § 1.367(a)–2T ................................................... § 1.367(a)–2. § 1.367(a)–1(b)(4)(i)(B) 1T(b)(4). § 1.367(a)–1(b)(4). and § 1.367(a)– the ‘‘Remove’’ column and add in its place the language in the ‘‘Add’’ column. Section Remove Add § 1.367(a)–8(b)(1)(xvii), first sentence ............... § 1.367(a)–8(b)(1)(xvii), second sentence ......... § 1.367(a)–8(c)(3)(viii) ........................................ § 1.367(a)–8(c)(3)(viii) ........................................ § 1.367(a)–8(c)(4)(iv), second sentence ............ § 1.367(a)–8(j)(3) ................................................ § 1.367(a)–8(j)(8), second sentence .................. § 1.367(a)–1T(d)(1) .......................................... § 1.367(a)–1T(c)(3)(i) ....................................... § 1.367(a)–1T(c)(3)(i) ....................................... § 1.367(a)–1T(c)(3)(ii) ....................................... § 1.367(a)–1T(b)(4) .......................................... § 1.367(a)–1T(c)(3)(ii) ....................................... Director of Field Operations International, Large Business & International. § 1.367(a)–1(d)(1). § 1.367(a)–1(c)(3)(i). § 1.367(a)–1(c)(3)(i). § 1.367(a)–1(c)(3)(ii). § 1.367(a)–1(b)(4). § 1.367(a)–1(c)(3)(ii). Director of Field Operations, Cross Border Activities Practice Area of Large Business & International. Par. 17. Section 1.367(d)–1 is added to read as follows: ■ asabaliauskas on DSK3SPTVN1PROD with RULES § 1.367(d)–1 Transfers of intangible property to foreign corporations. (a) [Reserved]. For further guidance, see § 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 § 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) through (2) [Reserved]. For further guidance, see § 1.367(d)–1T(c)(1) and (2). (3) Useful life—(i) In general. For purposes of determining the period of VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 inclusions for deemed payments under § 1.367(d)–1T(c)(1), the useful life of intangible property is the entire period during which exploitation of the intangible property is reasonably anticipated to affect the determination of taxable income, 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 other developed intangible property). (ii) Procedure to limit inclusions to 20 years. In cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed PO 00000 Frm 00081 Fmt 4700 Sfmt 4700 twenty years, taxpayers may, in lieu of including amounts during the entire useful life of the intangible property, choose in the year of transfer to increase annual inclusions during the 20-year period beginning with the first year in which the U.S. transferor takes into account income pursuant to section 367(d), to reflect amounts that, but for this paragraph (c)(3)(ii), would have been required to be included following the end of the 20-year period. See § 1.6038B–1(d)(1)(iv) for guidance on reporting this choice of method. If the taxpayer applies this method during the 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. However, for purposes of determining whether amounts included during the 20-year period are commensurate with the income attributable to the transferred intangible property, the E:\FR\FM\16DER1.SGM 16DER1 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations expected to be $5x, $8x, $11x, $12.5x, and $13x, respectively. Thereafter, for the remainder of the property’s useful life, operating profits are expected to grow by four percent annually. It is determined that the appropriate discount rate for sales and operating profits is 10 percent. The present value of operating profits through the property’s indefinite useful life is $185x. The present value of sales through the property’s indefinite useful life is $2698x. Accordingly, the sales based royalty rate during the property’s useful life is 6.8 percent ($185x/ $2698x). The taxpayer may choose to take income inclusions into account over a 20year period. The present value of sales through the 20-year period is $1787x. Accordingly, the sales based royalty rate under the 20-year option is increased to 10.3 percent ($185x/$1787x). (iii) Example. Property subject to section 367(d) is transferred from USP, a domestic corporation, to FA, a foreign corporation wholly owned by USP. The useful life of the transferred property, inclusive of derivative works, at the time of transfer is indefinite but is reasonably anticipated to exceed 20 years. In the first five years following the transfer, sales related to the property are expected to be $100x, $130x, $160x, $180x and $187.2x, respectively. Thereafter, for the remainder of the property’s useful life, sales are expected to grow by four percent annually. In the first five years following the transfer, operating profits attributable to the property are asabaliauskas on DSK3SPTVN1PROD with RULES Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years. The application of this paragraph (c)(3)(ii) must be reflected in a statement (titled ‘‘Application of 20-Year Inclusion Period to Section 367(d) Transfers’’) attached to a timely filed original federal income tax return (including extensions) for the year of the transfer. An increase to the deemed payment rate made pursuant to this paragraph (c)(3)(ii) will be irrevocable, and a failure to timely file the statement under this paragraph (c)(3)(ii) may not be remedied. (c)(4) through (g)(2) (introductory text) [Reserved]. For further guidance, see § 1.367(d)–1T(c)(4) through (g)(2) (introductory text). (g)(2)(i) The intangible property transferred constitutes an operating intangible, as defined in § 1.367(a)– 1(d)(6). (g)(2)(ii) through (iii)(D) [Reserved]. For further guidance, see § 1.367(d)– 1T(g)(2)(ii) through (iii)(D). (E) The transferred intangible property will be used in the active (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 § 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 § 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 § 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 § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(d)–1T as contained in 26 CFR part 1 revised as of April 1, 2016. VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 § 1.367(d)–1T [Amended] Par. 18. Section 1.367(d)–1T is amended by removing and reserving paragraphs (b), (c)(3), and (g)(2)(i), (g)(2)(iii)(E), and (g)(3). ■ Par. 19. Section 1.367(e)–2 is amended by ■ 1. Revising paragraph (b)(3)(iii). ■ 2. Revising paragraph (e)(4)(ii)(B). The revisions read as follows. ■ conduct of a trade or business outside of the United States within the meaning of § 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. (g)(2)(iii) undesignated concluding paragraph [Reserved]. For further guidance, see § 1.367(d)–1T(g)(2)(iii) undesignated concluding paragraph. (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 § 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 § 1.367(a)–6 with respect to the transferred intangible property is determined in accordance with the following formula: will be extended until the close of the third full taxable year ending after the date on which the domestic liquidating corporation, foreign distributee corporation, or foreign liquidating corporation, as applicable, furnishes to the Director of Field Operations, Cross Border Activities Practice Area of Large Business & International (or any successor to the roles and responsibilities of such position, as appropriate) (Director) the information that should have been provided under this section. * * * * * § 1.367(e)–2 Distributions described in section 367(e)(2). § 1.884–5 * ■ * * * * (b) * * * (3) * * * (iii) Other rules. For other rules that may apply, see sections 381, 897, 1248, and § 1.482–1(f)(2)(i)(C). * * * * * (e) * * * (4) * * * (ii) * * * (B) The period of limitations on assessment of tax for the taxable year in which gain is required to be reported PO 00000 Frm 00082 Fmt 4700 Sfmt 4700 [Amended] Par. 20. 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. § 1.1248–8 [Amended] Par. 21. 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. ■ E:\FR\FM\16DER1.SGM 16DER1 ER16DE16.038</GPH> 91030 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations § 1.1248(f)–2 [Amended] Par. 22. 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. ■ Par. 23. Section 1.6038B–1 is amended by: ■ 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. ■ 2. Revising paragraphs (c)(1) through (5) and (d). ■ 3. Revising the first sentence of paragraph (g)(1). ■ 4. Adding paragraph (g)(7). The additions and revision read as follows: ■ § 1.6038B–1 Reporting of certain transfers to foreign corporations. asabaliauskas on DSK3SPTVN1PROD with RULES * * * * * (c) * * * (1) through (4) introductory text [Reserved]. For further guidance, see § 1.6038B–1T(c)(1) through (4) introductory text. (i) Active business property. Describe any transferred property that qualifies under § 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 § 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 § 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. VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 (iii) Depreciated property. Describe any property that is subject to depreciation recapture under § 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 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 § 1.367(a)–2(b) taking into account the application of § 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 § 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 § 1.367(a)–2(c) and that therefore cannot qualify under § 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 § 1.367(a)–2(c)(1); (B) Installment obligations, etc. Property described in § 1.367(a)–2(c)(2); (C) Foreign currency, etc. Property described in § 1.367(a)–2(c)(3); and (D) Leased property. Property described in § 1.367(a)–2(c)(4). (vii) Other property that is ineligible property. Describe any property, other than property described in § 1.367(a)– 2(c), that cannot qualify under § 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 § 1.367(a)–1(b)(5) (treatment of certain property as subject to section 367(d)). Each item of property must be separately identified. (viii) [Reserved]. For further guidance, see § 1.6038B–1T(c)(4)(viii). (5) Transfer of foreign branch with previously deducted losses. If the property transferred is property of a PO 00000 Frm 00083 Fmt 4700 Sfmt 4700 91031 foreign branch with previously deducted losses subject to §§ 1.367(a)–6 and –6T, provide the following information: (i) through (iv) [Reserved]. For further information, see § 1.6038B–1T(c)(5)(i) through (iv). * * * * * (d)(1) through (1)(iii) [Reserved]. For further guidance, see § 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 § 1.367(d)–1(g)(2)(i). Identify all property that is subject to the rules of section 367(d) under § 1.367(a)–1(b)(5) (treatment of certain property as subject to section 367(d)). Describe any property for which the income required to be taken into account under section 367(d) and the regulations thereunder will be recognized over a 20-year period pursuant to § 1.367(d)–1(c)(3)(ii). Estimate the anticipated income or cost reductions attributable to the intangible property’s use beyond the 20-year period. (v)–(vi) [Reserved]. For further guidance, see § 1.6038B–1T(d)(1)(v) through (1)(vi). (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 §§ 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 § 1.367(d)–1(g)(3). (d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see § 1.6038B– 1T(d)(1)(viii) through (d)(2). * * * * * (g) Effective/applicability dates. (1) This section applies to transfers occurring on or after July 20, 1998, except as provided in paragraphs (g)(2) through (g)(7) of this section, and 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 transfers described in paragraph (e) of this section (which applies to transfers that are subject to §§ 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 E:\FR\FM\16DER1.SGM 16DER1 91032 Federal Register / Vol. 81, No. 242 / Friday, December 16, 2016 / Rules and Regulations elections made under § 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 §§ 1.6038B–1 and 1.6038B–1T as contained in 26 CFR part 1 revised as of April 1, 2016. § 1.6038B–1T [Amended] Par. 24. Section 1.6038B–1T is amended by removing and reserving paragraphs (c)(4)(i) through (c)(5) introductory text, and (d)(1)(iv) and (vii). ■ John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: November 23, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016–29791 Filed 12–15–16; 8:45 am] BILLING CODE 4830–01–P PENSION BENEFIT GUARANTY CORPORATION 29 CFR Part 4022 Benefits Payable in Terminated SingleEmployer Plans; Interest Assumptions for Paying Benefits Pension Benefit Guaranty Corporation. ACTION: Final rule. AGENCY: This final rule amends the Pension Benefit Guaranty Corporation’s regulation on Benefits Payable in Terminated Single-Employer Plans to prescribe interest assumptions under the regulation for valuation dates in January 2017. The interest assumptions are used for paying benefits under terminating single-employer plans covered by the pension insurance system administered by PBGC. As discussed below, PBGC will publish a separate final rule document dealing with interest assumptions under its regulation on Allocation of Assets in Single-Employer Plans for the first quarter of 2017. DATES: Effective January 1, 2017. FOR FURTHER INFORMATION CONTACT: Deborah C. Murphy (Murphy.Deborah@ pbgc.gov), Assistant General Counsel for Regulatory Affairs, Pension Benefit asabaliauskas on DSK3SPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 17:15 Dec 15, 2016 Jkt 241001 Guaranty Corporation, 1200 K Street NW., Washington, DC 20005, 202–326– 4400 ext. 3451. (TTY/TDD users may call the Federal relay service toll-free at 1–800–877–8339 and ask to be connected to 202–326–4400 ext. 3451.) SUPPLEMENTARY INFORMATION: PBGC’s regulation on Benefits Payable in Terminated Single-Employer Plans (29 CFR part 4022) prescribes actuarial assumptions—including interest assumptions—for paying plan benefits under terminating single-employer plans covered by title IV of the Employee Retirement Income Security Act of 1974. The interest assumptions in the regulation are also published on PBGC’s Web site (http://www.pbgc.gov). PBGC uses the interest assumptions in Appendix B to Part 4022 to determine whether a benefit is payable as a lump sum and to determine the amount to pay. Appendix C to Part 4022 contains interest assumptions for private-sector pension practitioners to refer to if they wish to use lump-sum interest rates determined using PBGC’s historical methodology. Currently, the rates in Appendices B and C of the benefit payment regulation are the same. The interest assumptions are intended to reflect current conditions in the financial and annuity markets. Assumptions under the benefit payments regulation are updated monthly. This final rule updates the benefit payments interest assumptions for January 2017.1 PBGC normally updates the assumptions under the benefit payments regulation for January at the same time as PBGC updates assumptions for the first quarter of the year under its regulation on Allocation of Assets in Single-Employer Plans (29 CFR part 4044) in a single rulemaking document. Because of delays in obtaining data used in setting assumptions under Part 4044 for the first quarter of 2017, PBGC is publishing two separate rulemaking documents to update the benefit payments regulation for January 2017 and the allocation regulation for the first quarter of 2017. The January 2017 interest assumptions under the benefit payments regulation will be 1.25 percent for the period during which a benefit is in pay status and 4.00 percent during any years preceding the benefit’s placement in pay status. In comparison with the interest assumptions in effect for December 2016, these interest assumptions represent an increase in the immediate rate of 0.50 percent and are otherwise unchanged. PBGC has determined that notice and public comment on this amendment are impracticable and contrary to the public interest. This finding is based on the need to determine and issue new interest assumptions promptly so that the assumptions can reflect current market conditions as accurately as possible. Because of the need to provide immediate guidance for the payment of benefits under plans with valuation dates during January 2017, PBGC finds that good cause exists for making the assumptions set forth in this amendment effective less than 30 days after publication. PBGC has determined that this action is not a ‘‘significant regulatory action’’ under the criteria set forth in Executive Order 12866. Because no general notice of proposed rulemaking is required for this amendment, the Regulatory Flexibility Act of 1980 does not apply. See 5 U.S.C. 601(2). List of Subjects in 29 CFR Part 4022 Employee benefit plans, Pension insurance, Pensions, Reporting and recordkeeping requirements. In consideration of the foregoing, 29 CFR part 4022 is amended as follows: PART 4022—BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS 1. The authority citation for part 4022 continues to read as follows: ■ Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and 1344. 2. In appendix B to part 4022, Rate Set 279, as set forth below, is added to the table. ■ 1 Appendix B to PBGC’s regulation on Allocation of Assets in Single-Employer Plans (29 CFR part 4044) prescribes interest assumptions for valuing benefits under terminating covered single-employer plans for purposes of allocation of assets under ERISA section 4044. Those assumptions are updated quarterly. PO 00000 Frm 00084 Fmt 4700 Sfmt 4700 Appendix B to Part 4022—Lump Sum Interest Rates for PBGC Payments * E:\FR\FM\16DER1.SGM * * 16DER1 * *

Agencies

[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Rules and Regulations]
[Pages 91012-91032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29791]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9803]
RIN 1545-BL87


Treatment of Certain Transfers of Property to Foreign 
Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to certain 
transfers of property by United States persons to foreign corporations. 
The final 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 regulations also 
combine certain sections of the existing regulations under section 
367(a) into a single section. This document also withdraws certain 
temporary regulations.

DATES: Effective date: These regulations are effective on December 16, 
2016.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.367(a)-1(g)(5), 1.367(a)-2(k), 1.367(a)-4(b), and 1.367(a)-6(j); 
1.367(d)-1(j); and 1.6038B-1(g)(7).

FOR FURTHER INFORMATION CONTACT: Ryan A. Bowen, (202) 317-6937 (not a 
toll-free number).

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

[[Page 91013]]

associated with these requirements will be reflected in the burden for 
Form 926, Return by a U.S. Transferor of Property to a Foreign 
Corporation. 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

    This document contains final regulations issued under sections 367 
and 6038B of the Code. Temporary regulations were published on May 16, 
1986 (TD 8087, 51 FR 17936) (the 1986 temporary regulations). Proposed 
regulations under these sections were published on September 16, 2015 
(80 FR 55568) (the proposed regulations). Written comments to the 
proposed regulations were received, and a public hearing was held on 
February 8, 2016. All comments are available at www.regulations.gov or 
upon request.
    The proposed regulations generally provided five substantive 
changes from the 1986 temporary regulations: (1) Eliminating the 
favorable treatment for foreign goodwill and going concern value by 
narrowing the scope of the active trade or business exception under 
section 367(a)(3) (ATB exception) and eliminating the exception under 
Sec.  1.367(d)-1T(b) that provides that foreign goodwill and going 
concern value is not subject to section 367(d); (2) allowing taxpayers 
to apply section 367(d) to certain property that otherwise would be 
subject to section 367(a); (3) removing the twenty-year limitation on 
useful life for purposes of section 367(d) under Sec.  1.367(d)-
1T(c)(3); (4) removing the exception under Sec.  1.367(a)-5T(d)(2) that 
permits certain property denominated in foreign currency to qualify for 
the ATB exception; and (5) changing the valuation rules under Sec.  
1.367(a)-1T to better coordinate the regulations under sections 367 and 
482 (including temporary regulations under section 482 issued with the 
proposed regulations (see Sec.  1.482-1T(f)(2)(i), TD 9738, 80 FR 
55538).
    Specifically with regard to the ATB exception, the proposed 
regulations revised the categories of property that are eligible for 
the ATB exception so that foreign goodwill and going concern value 
cannot qualify for the exception. Under the 1986 temporary regulations, 
all property was eligible for the ATB exception, subject only to five 
narrowly tailored exceptions. In addition to limiting the scope of the 
ATB exception, the proposed regulations also implemented changes to the 
ATB exception that were intended to consolidate various provisions and 
update the 1986 temporary regulations in response to subsequent changes 
to the Code.
    The proposed regulations did not resolve the extent to which 
property, including foreign goodwill and going concern value, that is 
not explicitly enumerated in section 936(h)(3)(B)(i) through (v) 
(enumerated section 936 intangibles) is described in section 
936(h)(3)(B) and therefore subject to section 367(d) or instead is 
subject to section 367(a) and not eligible for the ATB exception. All 
property that is described in section 936(h)(3)(B) is referred to at 
times in this preamble as ``section 936 intangibles.'' Nonetheless, the 
proposed regulations permitted taxpayers to apply section 367(d) to 
such property. Under this rule, a taxpayer that has historically taken 
the position that goodwill and going concern value is not described in 
section 936(h)(3)(B) could apply section 367(d) to such property.
    These regulations generally finalize the proposed regulations, as 
well as portions of the 1986 temporary regulations, as amended by this 
Treasury decision. Although minor wording changes have been made to 
certain aspects of those portions of the 1986 temporary regulations, 
the final regulations are not intended to be interpreted as making 
substantive changes to those regulations. Further explanation of the 
proposed regulations can be found in the Explanation of Provisions 
section of the preamble to the proposed regulations. That Explanation 
of Provisions section is hereby incorporated as appropriate into this 
preamble.

Summary of Comments and Explanation of Revisions

    Nineteen sets of comments were received in response to the proposed 
regulations, and three speakers presented at the public hearing. In 
drafting the final regulations, the Treasury Department and the IRS 
carefully considered all of the comments received.
    This section of the preamble is comprised of five parts that 
discuss, in turn, the comments received with respect to (i) the 
elimination of the favorable treatment of transfers of foreign goodwill 
and going concern value, (ii) the useful life of property for purposes 
of applying section 367(d), (iii) the applicability date of the final 
regulations, (iv) the qualification of property denominated in foreign 
currency for the ATB exception, and (v) other issues.

I. Foreign Goodwill and Going Concern Value

A. Overview

    The Treasury Department and the IRS received a variety of comments 
in response to the proposed elimination of the favorable treatment of 
transfers of foreign goodwill and going concern value provided by the 
1986 temporary regulations. Two comments supported the treatment of 
foreign goodwill and going concern value under the proposed 
regulations. One comment asserted that allowing intangible property to 
be transferred outbound in a tax-free manner is inconsistent with the 
policies of section 367. Other comments acknowledged the concerns about 
tax avoidance described in the preamble to the proposed regulations, 
but requested specific exceptions for transfers of foreign goodwill and 
going concern value in situations that the comments asserted were not 
abusive. Other comments disagreed more fundamentally with the approach 
taken and stated that the Treasury Department and the IRS should 
withdraw the proposed regulations entirely. Many of these comments 
asserted that eliminating the favorable treatment of transfers of 
foreign goodwill and going concern value would be an invalid exercise 
of regulatory authority under section 367.
    Overall, the comments indicated widely divergent understandings of 
the nature of foreign goodwill and going concern value. Accordingly, 
the comments also widely differed in their proffered justifications for 
an exception for foreign goodwill and going concern value and in the 
recommended contours of an appropriate exception. The variance in the 
comments regarding these fundamental issues highlights the difficulty 
of permitting some form of favorable treatment for foreign goodwill and 
going concern value while preventing tax avoidance.
    As described in greater detail in Part I.B of this Summary of 
Comments and Explanation of Revisions, and consistent with the proposed 
regulations, the final regulations eliminate the favorable treatment of 
foreign goodwill and going concern value contained in the 1986 
temporary regulations. The Treasury Department and the IRS have

[[Page 91014]]

determined that this change is necessary to carry out the tax policy 
embodied in section 367 in a fair, impartial, and reasonable manner, 
taking into account the intent of Congress, the realities of relevant 
transactions, the need for the IRS to administer the rules and monitor 
compliance, and the overall integrity of the federal tax system. In 
particular, the final regulations are consistent with the policy and 
intent of the statute, which does not reference foreign goodwill or 
going concern value, and with Congress' expectation that the Secretary 
would exercise the regulatory authority under section 367 to require 
gain recognition when property is transferred offshore under 
circumstances that present a potential for tax avoidance.

B. Interpretation of Section 367

1. Summary of Comments Challenging Authority
    The Treasury Department and the IRS received numerous comments 
addressing the proposed regulations' treatment of foreign goodwill and 
going concern value. One comment asserted that the ATB exception must 
apply to transfers of foreign goodwill and going concern value, because 
(i) foreign goodwill and going concern value is not a section 
936(h)(3)(B) intangible, and so is subject to section 367(a) rather 
than section 367(d), and (ii) the legislative history indicates that 
Congress expected that the transfer of such value should be tax-free. 
The comment further asserted that, because goodwill and going concern 
value is inextricably linked to the conduct of an active trade or 
business, the ATB exception necessarily encompasses such transfers. 
Other comments asserted that finalizing the proposed regulations would 
represent an unreasonable exercise of regulatory authority because the 
proposed regulations eliminated the favorable treatment of all 
transfers of purported foreign goodwill and going concern value, rather 
than just those transfers that the Treasury Department and the IRS 
determine are abusive.
    Several comments asserted that the proposed regulations are 
inconsistent with Congressional intent and cited statements from the 
legislative history to section 367, such as the following:

    The committee 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. . . . The committee contemplates that the transfer of 
goodwill or going concern value developed by a foreign branch will 
be treated under [the exception for transfers of property for use in 
the active conduct of a foreign trade or business] rather than a 
separate rule applicable to intangibles.

H.R. Rep. No. 98-432, pt. 2, at 1317-19 (1984).
    Comments also asserted that it is inappropriate to use regulatory 
authority under section 367 to address transfer pricing concerns under 
section 482.
2. Response
    The Treasury Department and the IRS do not agree with the foregoing 
comments. Section 367 generally provides for income recognition on 
transfers of property to a foreign corporation in certain transactions 
that otherwise would qualify for nonrecognition. While section 
367(a)(3)(A) includes a broad exception to this general rule for 
property used in the active conduct of a trade or business outside of 
the United States, grants of rulemaking authority in section 
367(a)(3)(A) and (B) authorize the Secretary to exercise administrative 
discretion in determining the property to which nonrecognition 
treatment applies under the ATB exception. Moreover, section 367(d) 
reflects a clear policy that income generally should be recognized with 
respect to transfers of section 936 intangibles. The 1984 legislative 
history to section 367 explains that Congress intended for the 
Secretary to use his ``regulatory authority to provide for recognition 
in cases of transfers involving the potential of tax avoidance.'' S. 
Rep. No. 98-169, at 364 (1984) (emphasis added). The Treasury 
Department and the IRS have determined that the proposed regulations 
and these final regulations are consistent with that intention and the 
authority granted to the Secretary under section 367, based on the fact 
that the statute does not refer to foreign goodwill and going concern 
value and the determination that, as described in the preamble to the 
proposed regulations, the favorable treatment of foreign goodwill and 
going concern value contravenes the policy that income generally should 
be recognized with respect to transfers of section 936 intangibles. The 
remainder of this section discusses subsequent changes to the 
regulatory, statutory, and market context in which the 1984 legislative 
history was drafted, in order to reconcile the statements in the 1984 
legislative history expressing the expectation that an exception for 
foreign goodwill and going concern value would not result in abuse with 
the IRS's contrary experience administering the statute during the 
intervening years.
a. The 1980s and Early 1990s
    The Treasury Department and the IRS considered the 1984 legislative 
history to section 367 in issuing the 1986 temporary regulations. The 
1986 temporary regulations gave effect to the statements in the 
legislative history indicating that Congress anticipated that the 
transfer of goodwill and going concern value developed by a foreign 
branch to a newly organized foreign corporation generally would not 
result in abuse of the U.S. tax system, and, on that basis, that such 
transfers would benefit from nonrecognition treatment. As a result, the 
1986 temporary regulations provide nonrecognition treatment for foreign 
goodwill and concern value. The 1986 temporary regulations did not 
provide a conceptual definition of foreign goodwill and going concern 
value but, in effect, provided a rule for valuing it by describing 
foreign goodwill and 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. 
Sec.  1.367(a)-1T(d)(5)(iii).
    The Treasury Department and the IRS also took into account the 1984 
legislative history in issuing the proposed regulations and these final 
regulations. In doing so, the Treasury Department and the IRS also 
considered that, in amending section 367 in 1984, Congress did not 
choose to statutorily mandate any particular treatment of foreign 
goodwill and going concern value and instead delegated broad authority 
to the Secretary to promulgate regulations under section 367 to carry 
out its purposes in this complex area. The Treasury Department and the 
IRS further considered that the legal and factual context in which the 
1984 legislative history was drafted has changed significantly over the 
last 32 years.
    Before 1993, goodwill and going concern value was not amortizable. 
As a result, in 1984, much of the case law and policy debate regarding 
goodwill and going concern value involved sales of business operations 
at arm's length between unrelated parties, where the taxpayer attempted 
to minimize the value of goodwill in order to maximize the value of 
amortizable intangibles. See, for example, Newark Morning Ledger Co. v. 
United States, 507 U.S. 546 (1993). In 1989, the General Accounting 
Office analyzed data with respect to unresolved tax cases involving 
purchased intangibles and found that, presumably in order to minimize 
the amount of unamortizable goodwill, taxpayers had identified 175

[[Page 91015]]

different types of customer-based intangibles that were distinct from 
goodwill. See General Accounting Office, Report to the Joint Committee 
on Taxation: Issues and Policy Proposals Regarding Tax Treatment of 
Intangible Assets, at 3 (Aug. 1991).
b. Statutory and Regulatory Changes
    In 1993, Congress addressed these valuation disputes between 
taxpayers and the IRS by enacting section 197, which, similar to the 
approach taken by the proposed regulations, did not directly address 
the underlying disagreement about the relative size of goodwill but 
substantially reduced the stakes of the disagreement. That is, by 
generally providing for the amortization of goodwill over 15 years, the 
enactment of section 197 generally eliminated the incentive that 
existed in 1984, when Congress enacted section 367(d) in its present 
form, for taxpayers to argue that goodwill has relatively minor value.
    Other law changes since 1984 have increased the relevance of 
section 367(d) and the incentive for taxpayers to overstate the value 
attributable to goodwill and going concern value. Before 1997, amounts 
received under section 367(d) were treated as ordinary income from U.S. 
sources. In 1997, Congress amended section 367(d)(2)(C) to provide that 
amounts received under section 367(d) are treated as ordinary income 
that is sourced in the same manner as a royalty, and thus potentially 
as from sources outside the United States. Taxpayer Relief Act of 1997, 
Public Law 105-34, 111 Stat. 788. The 1997 amendments increased the 
relevance of section 367(d) and the exception for foreign goodwill and 
going concern value because, before 1997, the consequences under the 
foreign tax credit limitation of the treatment of section 367(d) deemed 
royalties as U.S. source income represented a substantial disincentive 
for taxpayers to structure transactions in a way that would be subject 
to section 367(d).
    Additionally, the so-called ``check-the-box'' regulations of Sec.  
301.7701-3, published December 18, 1996 (TD 8697, 61 FR 66584), and 
Congress's enactment in 2006 of the subpart F ``look-thru'' rule in 
section 954(c)(6) (Tax Increase Prevention and Reconciliation Act of 
2005, Public Law 109-222, 120 Stat. 345), increased the potential 
benefit to taxpayers from transferring high-value intangibles offshore 
by reducing obstacles to redeploying cash earned in overseas operations 
among foreign affiliates without incurring U.S. tax. Both of these 
changes also facilitate, in certain circumstances, the ability of 
foreign subsidiaries to license transferred intangibles to affiliates 
without incurring subpart F income.
    Finally, on January 5, 2009, the Treasury Department and the IRS 
issued temporary regulations under section 482 (TD 9441, 74 FR 340) 
related to cost sharing arrangements (subsequently finalized at TD 
9568, 76 FR 80082 (Dec. 22, 2011)). The 2009 cost sharing regulations, 
in particular the supplemental guidance in Sec.  1.482-7T(g) on 
transfer pricing methods applicable in determining the arm's length 
price for a platform contribution transaction or PCT (so-called ``buy-
in payments''), were intended, in part, to address inappropriate income 
shifting from intangible transfers under the prior cost sharing 
regulations. Although the prior cost sharing regulations did not 
provide any favorable treatment for foreign goodwill and going concern 
value, in the experience of the IRS, taxpayers took positions under 
those regulations that allowed a domestic cost sharing participant to 
transfer intangibles to a foreign cost sharing participant for 
development under a cost sharing arrangement without fully compensating 
the domestic cost sharing participant for the value of the transferred 
intangibles. It is also the experience of the IRS that the 2009 cost 
sharing regulations limited taxpayers' ability to use PCTs in cost 
sharing arrangements to shift high value intangibles offshore without 
appropriate compensation, thereby increasing the relative appeal of 
transferring intangibles in a transaction subject to section 367. Thus, 
taxpayers began using transactions subject to section 367 to transfer 
intangibles intended for development under a cost sharing arrangement 
rather than as part of a PCT.
c. Changing Markets for Intangibles
    Moreover, since Congress enacted section 367(d) in its current form 
in 1984, the relative importance of intangibles in the economy and in 
the profitability of business has increased greatly. According to a 
joint report issued by the Economic and Statistics Administration and 
the U.S. Patent and Trademark Office, ``IP use permeates all aspects of 
the economy with increasing intensity and extends to all parts of the 
U.S.'' Justin Antonipillai, Economics and Statistics Administration, & 
Michelle K. Lee, U.S. Patent and Trademark Office, Intellectual 
Property and the U.S. Economy, at p.30 (2016). This growing importance 
is reflected in the significant increase in the portion of business 
values attributable to intangible assets in the years since 1984, with 
one study indicating that intangibles accounted for only 32 percent of 
the market value of the S&P 500 in 1985, but accounted for 84 percent 
by 2015. Annual Study of Intangible Asset Market Value from Ocean Tomo, 
LLC (Mar. 4, 2015, 12:00 a.m.), http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/. Growth in the share of 
business values attributable to section 936 intangibles during this 
period, together with the statutory and regulatory changes discussed in 
the preceding paragraphs, have increased the incentives for taxpayers 
to transfer such valuable intangibles to related offshore affiliates in 
transactions subject to section 367(d) and to misattribute intangible 
value from enumerated section 936 intangibles to foreign goodwill and 
going concern value in the context of such transactions.
d. The Potential for Abuse
    Since 1984, taxpayers have reversed their positions regarding the 
significance of goodwill and going concern value in response to the 
enactment of sections 197 and 367(d), and now commonly assert that such 
value constitutes a large percentage--even the vast majority--of an 
enterprise's value. The IRS's experience administering section 367(d) 
has, once again, highlighted the abuse potential that arises from the 
need to distinguish value attributable to nominally distinct 
intangibles that are used together in a single trade or business. 
Specifically, the uncertainty inherent in distinguishing between value 
attributable to goodwill and going concern value and value attributable 
to other intangible property makes any exception to income recognition 
for the outbound transfer of goodwill and going concern value unduly 
difficult to administer and prone to tax avoidance. Of course, any rule 
that provides for the tax-free transfer of one type of property, while 
the transfer of other types of property remains taxable, provides an 
incentive to improperly allocate value away from the taxable property 
and onto the tax-free property. This problem is acute, however, in 
cases involving the offshore reorganization of entire business 
divisions that include high-value, interrelated intangibles, because 
goodwill and going concern value are particularly difficult to 
distinguish (perhaps are even indistinguishable) from the enumerated 
section 936 intangibles. See, for example, International Multifoods 
Corp. v. Commissioner, 108 T.C. 25, 42 (1997) (noting that it ``is well 
established that trademarks embody goodwill''). See also Joint 
Committee on Taxation, Present

[[Page 91016]]

Law and Background Related to Possible Income Shifting and Transfer 
Pricing, (JCX-37-10) July 20, 2010, at 110 (noting that unique 
intangible property is difficult to value because it is rarely, if 
ever, transferred to third parties).
e. Legislative Intent and the Broad Grant of Authority To Limit 
Potential Abuses
    These statutory, regulatory, and market developments since Congress 
amended section 367(d) in 1984, as well as the experience of the IRS in 
administering section 367 over that period, inform the manner in which 
the Treasury Department and the IRS seek to give effect to the intent 
of Congress in this complex area of law. As a starting point, the 
Treasury Department and the IRS observe that the statutory grants of 
authority in section 367(a) and (d), coupled with the absence of any 
specific statutory protection for transfers of goodwill and going 
concern value, form the basis for the broad authority of the Treasury 
Department and the IRS to design the appropriate parameters for the 
taxation of outbound transfers. The 1984 legislative history expressed 
an expectation that outbound transfers of foreign goodwill and going 
concern value would not lead to abuse of the U.S. tax system and, on 
the basis of that expectation, anticipated that the Secretary would 
exercise the regulatory authority under section 367 in a manner that 
would allow taxpayers to transfer foreign goodwill and going concern 
value outbound without current U.S. tax. The legislative history also 
explains that Congress expected the Secretary to use the ``regulatory 
authority to provide for recognition in cases of transfers involving 
the potential of tax avoidance.'' Accordingly, the administrative 
discretion to determine the contours of nonrecognition treatment must 
be exercised in light of the income recognition objectives of the 
statute and informed by the IRS's experience in administering the 
exception.
    The Treasury Department and the IRS have determined that the 
premise of the expectation noted in the legislative history that an 
exception to recognition treatment would apply to foreign goodwill and 
going concern value--namely, that outbound transfers of foreign 
goodwill and going concern value would not lead to abuse--is 
inconsistent with the experience of the IRS in administering section 
367(d), and consequently no longer supports such an exception. Rather, 
based on the IRS's experience over the past three decades, the Treasury 
Department and the IRS have determined that the favorable treatment of 
foreign goodwill and going concern value has interfered with the 
application of the general rule in section 367(d) that requires income 
recognition upon the outbound transfer of section 936 intangibles due 
to the inherent difficulty of distinguishing value attributable to 
goodwill and going concern value from value attributable to enumerated 
section 936 intangibles, coupled with taxpayer efforts to maximize the 
value allocated to goodwill and going concern value.
    The Treasury Department and the IRS also observe that the 1984 
legislative history explains that the 1984 amendments to section 367(d) 
were made in response to challenges the IRS faced in administering the 
prior regime. That regime required a taxpayer to clear its purpose for 
transferring property offshore with the IRS. See H.R. Rep. 98-432, pt. 
2, at 1315. The 1984 reworking of section 367 was intended to promote 
administrability by making the analysis of outbound transfers more 
objective. Other passages from the legislative history show that the 
general purpose of the amendments to section 367 was to close ``serious 
loopholes,'' and that the 1984 revisions were intended to strengthen 
the application of that section. Id.
    Accordingly, the Treasury Department and the IRS do not view the 
legislative history as mandating an exception for transfers of goodwill 
and going concern value developed by a foreign branch, or as indicating 
that Congress anticipated, or would have condoned, the extent of the 
claims regarding foreign goodwill and going concern value that the IRS 
has in fact encountered. To the contrary, the Treasury Department and 
the IRS have concluded that the statutory purpose of the income 
recognition provisions in section 367(d) is incompatible with the 
favorable treatment of foreign goodwill and going concern value 
reflected in the 1986 temporary regulations. In particular, taking into 
account the statutory, regulatory, and market developments since 1984 
and the experience of the IRS in administering section 367(d) under the 
1986 temporary regulations, the Treasury Department and the IRS have 
determined that, at this juncture, the approach most consistent with 
the intent of Congress in 1984, including the directive to use 
regulatory authority ``to provide for recognition in cases of transfers 
involving the potential of tax avoidance,'' is to remove the favorable 
treatment for foreign goodwill and going concern value in the 1986 
temporary regulations.
    The Treasury Department and the IRS also disagree with the notion 
expressed in comments that the proposed regulations inappropriately 
attempt to solve section 482 transfer pricing problems under the 
authority of section 367. Congress made clear in adding the 
commensurate with income language to both sections 367(d) and 482 in 
1986 that the provisions are closely related, and it is within the 
authority of the Treasury Department and the IRS to consider valuation 
concerns in administering section 367. Section 1231(e)(1) and (2) of 
the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085, 2562-3.
    For these reasons, the Treasury Department and the IRS disagree 
with comments asserting that the Treasury Department and the IRS lack 
the authority to eliminate the favorable treatment that applied to 
foreign goodwill and going concern value under the 1986 temporary 
regulations.

C. Other Comments Suggesting That Some Favorable Treatment for 
Transfers of Foreign Goodwill and Going Concern Value Be Maintained

    Several comments generally favored retaining both the 
nonrecognition treatment for foreign goodwill and going concern value 
and its current measurement as the residual value of a foreign business 
operation. Other comments, however, acknowledged the problems 
associated with the residual valuation approach but supported an 
exception determined on some other basis. Some of these comments 
included suggestions for other ways to define goodwill and going 
concern value and for determining the amount that should qualify for 
nonrecognition. The Treasury Department and the IRS have determined 
that none of the comments provided a sufficiently administrable 
approach that would reliably ensure that section 367 applies with 
respect to the full value of all section 936 intangibles.
1. Local Pressure To Incorporate; Industry-Based Exception
    The proposed regulations specifically requested comments on a 
potential exception that would apply to situations where there is 
limited potential for abuse. As an example, the comment solicitation 
posited the incorporation, in response to regulatory pressure or 
compulsion, of a financial services business that previously had 
operated as a branch in another country. The Treasury Department and 
the IRS received several comments in response to this solicitation.
    Several comments suggested that the final regulations provide an 
exception that would continue to permit favorable treatment of 
transfers of foreign

[[Page 91017]]

goodwill and going concern value that occur as a result of the 
incorporation of a branch in a country that exerts regulatory pressure 
(either implicit or explicit) upon the U.S. transferor to conduct its 
operations in that country in corporate form. According to these 
comments, the incorporation of a branch in these circumstances is not 
motivated by tax considerations but rather occurs in order to comply 
with local law or regulations.
    The regulations under section 367 provide that certain property is 
deemed to be transferred for use in the active conduct of a trade or 
business outside of the United States when the transfer is either 
legally required by the local foreign government as a necessary 
condition of doing business or is compelled by a genuine threat of 
immediate expropriation by the local foreign government. Section 367 
and the regulations thereunder do not, however, provide exceptions to 
the requirement to recognize income or gain when assets that are not 
eligible for the ATB exception, such as section 936 intangibles and 
assets described in section 367(a)(3)(B), are transferred in this 
circumstance. Accordingly, the policy of section 367 and the 
regulations thereunder is not to expand on the types of assets that are 
eligible for the ATB exception in this circumstance. Moreover, the mere 
fact that a taxpayer is compelled or pressured to incorporate its 
branch does not mean that the taxpayer has any less incentive to reduce 
the tax consequences of such incorporation by adopting the aggressive 
valuation positions that the proposed regulations were intended to 
prevent. Therefore, the final regulations do not provide a special 
exception to continue the favorable treatment of foreign goodwill and 
going concern value in this circumstance. Notably, some taxpayers that 
are pressured to incorporate branch operations in these circumstances 
can avoid being subject to section 367 by incorporating the branch 
using an eligible entity described in Sec.  301.7701-2 that could elect 
to be treated as a disregarded entity for U.S. federal income tax 
purposes.
    Several comments recommended an exception for transfers of foreign 
goodwill and going concern value by taxpayers in certain industries, 
such as banking and finance, life insurance, and industries that 
primarily provide services to third parties, asserting that such 
businesses do not possess the types of highly valuable intangibles 
about which they believe the Treasury Department and the IRS are 
concerned. The comments did not provide any basis, however, for the 
Treasury Department and the IRS to conclude that taxpayers in 
particular industries consistently lack valuable intangibles of the 
kind listed in section 936(h)(3)(B), even though the prevalence of 
specific types of intangibles may differ across industries. 
Additionally, the ability and incentive to allocate value away from 
other intangibles, such as trademarks, and toward goodwill or going 
concern value is not limited to particular industries. As a general 
matter, the Treasury Department and the IRS attempt, to the extent 
possible, to avoid issuing guidance based on industry classifications 
that are not clearly and closely tied to specific tax policy concerns. 
Accordingly, the final regulations do not provide any industry-specific 
exceptions.
    Based on these comments, the Treasury Department and the IRS 
considered whether it would be possible to provide an exception for 
tax-free transfers of foreign goodwill and going concern value 
developed by a foreign branch that did not possess or otherwise benefit 
from the use of any highly valuable enumerated section 936 intangibles. 
If the absence of such highly valuable intangibles could be reliably 
determined, the concerns regarding the potential to attribute value 
away from such intangibles and toward goodwill and going concern value 
would be mitigated. However, such an exception would require the 
development and administration of standards to determine whether any 
enumerated section 936 intangible was highly valuable, an exercise that 
would be as difficult (and in many circumstance would be no different) 
than the exercise of distinguishing value attributable to foreign 
goodwill and going concern value from value attributable to other 
intangibles transferred together with it. Such an exception also would 
require a careful examination of the particular facts of a transferor's 
assets and business as a threshold matter to confirm that valuable 
enumerated section 936 intangibles are not made available for the 
benefit of the transferee foreign corporation, either through a 
separate but related transfer to the foreign corporation or through a 
service provided to the foreign corporation using such intangibles. 
Accordingly, the Treasury Department and the IRS did not adopt this 
potential exception in these final regulations.
2. Foreign Branch Exception
    Several comments suggested maintaining the favorable treatment of 
foreign goodwill and going concern value in situations in which section 
367 applies to the incorporation of a long-standing foreign branch or a 
branch that conducts an active foreign business operation. The Treasury 
Department and the IRS acknowledge that conditioning favorable 
treatment for foreign goodwill and going concern value on the presence 
of a robust foreign branch would increase the likelihood that the 
business at issue has substantive foreign operations. However, in 
situations where the exception would continue to apply, the requirement 
of a robust foreign branch would not address the potential for tax 
avoidance that motivated the proposed regulations when value must be 
allocated between foreign goodwill and going concern value, on the one 
hand, and enumerated section 936 intangibles, on the other hand. Thus, 
the final regulations do not adopt the comments suggesting an exception 
for goodwill and going concern value developed by a foreign branch that 
is subsequently incorporated because, when applicable, such an 
exception would not address the administrative difficulties in 
identifying and separately valuing the property that is and is not 
eligible for the exception, and therefore would be insufficient to 
prevent the potential for tax avoidance.
3. New Rules for Valuing Foreign Goodwill and Going Concern Value
    Other comments suggested that the regulations provide new rules for 
determining foreign goodwill and going concern value, such that an 
exception for such transfers could be provided that would be less 
susceptible to the abuses described in the preamble to the proposed 
regulations. That is, the comments suggested determining goodwill and 
going concern value using an approach that differs from that in 
existing Sec.  1.367(a)-1T(d)(5)(iii), which treats it as the residual 
after other intangibles are valued.
    Several of these comments suggested determining foreign goodwill 
and going concern value by classifying intangibles as routine and non-
routine and permitting value attributable to routine intangibles to be 
transferred tax-free under an exception. One comment asserted that 
goodwill is relatively easy to value as compared to certain enumerated 
section 936 intangibles but did not explain why or how goodwill is more 
easily valued or how to reliably allocate value between goodwill and 
enumerated section 936 intangibles. Another comment asserted that 
goodwill can be valued based on the premise that it is the kind of 
asset that enables an existing business to produce ``routine'' or 
``normal'' operating profits

[[Page 91018]]

or cash flow during the period that a new business would be assembling 
its assets and workforce and attracting a customer base, but the 
comment did not explain how to determine ``routine'' or ``normal'' 
operating profits.
    Another comment recommended determining foreign goodwill and going 
concern value using a formulaic approach based on sales and general and 
administrative expenses, asserting that routine expenses for 
operational costs and compensation are closely associated with the 
business activities that give rise to goodwill and going concern value. 
The comment did not provide any support for this premise. As a general 
matter, cost-based methods (in comparison with market-based and income-
based methods) are not a reliable means of valuing intangible property 
because the value of intangible property does not necessarily bear any 
predictable relationship to the costs of developing the property. The 
comment suggesting a cost-based approach did not demonstrate that 
determining goodwill and going concern value in the section 367(d) 
context is a situation where costs are a reliable measure of value 
(regardless of whether goodwill and going concern value are section 
936(h)(3)(B) intangibles). Accordingly, the Treasury Department and the 
IRS have determined that a rule that determined foreign goodwill and 
going concern value based on certain expenses would be inappropriate.
    Another comment proposed, for branches incorporated in a 
jurisdiction with which the United States has an income tax treaty in 
effect, using the earnings before interest, taxes, depreciation, and 
amortization of the branch as reported to foreign tax authorities as 
reliable data on which to base a valuation. An exception based on 
information reported to a foreign country's tax authority, which may be 
based on that jurisdiction's generally accepted accounting standards, 
does not address the concerns expressed by the Treasury Department and 
the IRS in the preamble to the proposed regulations. Most 
significantly, the comment does not explain how this information would 
be useful in determining the value of foreign goodwill and going 
concern value or distinguishing value attributable to enumerated 
section 936 intangibles from that of other property, nor have the 
Treasury Department and the IRS been able to identify how it would be 
useful. Accordingly, this recommendation has not been adopted.
    In summary, none of the proposed approaches for more directly 
valuing foreign goodwill and going concern value offer a principled and 
administrable basis for allocating value between foreign goodwill and 
going concern value that would be subject to an exception and other 
intangibles that would not. The Treasury Department and the IRS 
therefore concluded that the proposed approaches would not provide a 
meaningful improvement over the residual value approach in the 1986 
temporary regulations as a conceptual or administrative matter.
4. Formulaic Caps on Foreign Goodwill and Going Concern Value
    Several comments suggested that the favorable treatment for 
transfers of foreign goodwill and going concern value could be 
maintained while addressing the concerns that prompted the issuance of 
the proposed regulations by capping the amount that can qualify for the 
exception, either on a non-rebuttable basis or in the absence of a 
ruling. For example, one comment suggested that the excepted amount 
should not exceed 25 percent of the branch's net enterprise value, 
unless a ruling is obtained from the IRS. The comment asserted that 25 
percent represents a modest portion of a branch's value that is likely 
to be attributable to branch goodwill and going concern value. Another 
comment suggested that the excepted amount should not exceed 50 percent 
of the total value of the assets transferred to the foreign 
corporation. Although such formulaic caps would limit the potential tax 
avoidance from improperly attributing value from enumerated section 936 
intangibles to foreign goodwill and going concern value that is 
eligible for an exception, the amount excepted under such an approach 
would still potentially reflect value properly attributable to 
enumerated section 936 intangibles. That is, with respect to amounts 
claimed below the cap, a formulaic cap would not relieve the IRS of the 
need to distinguish foreign goodwill and going concern value from 
enumerated section 936 intangibles, a key challenge that motivated the 
approach of the proposed regulations. Moreover, the Treasury Department 
and the IRS have determined that the discretionary ruling practice 
proposed by one comment would require an onerous commitment of IRS 
resources (which the comment acknowledged are constrained), and, 
without detailed procedures for both identifying and valuing foreign 
goodwill and going concern value, would simply accelerate the disputes 
that occur under the 1986 temporary regulations. As a result, the final 
regulations do not adopt the recommendations to use a formulaic cap to 
limit the amount of foreign goodwill and going concern value.
5. Professional Services Exception
    One comment stated that U.S. citizens may conduct professional 
services outside the United States as sole practitioners, or in 
partnership with other practitioners, and observed that the 
incorporation of such a business would entail a section 351 
contribution subject to section 367 (assuming the transferee entity was 
classified as a corporation for U.S. federal income tax purposes). 
According to the comment, because any goodwill in such a scenario would 
relate to foreign customers and a foreign business or professional 
license, there could be no abuse warranting taxation under section 367.
    The Treasury Department and the IRS do not agree that the outbound 
transfer of value developed in such cases will necessarily not result 
in abuse of the U.S. tax system. The potential for abuse in a transfer 
subject to section 367 arises not just from the possibility that value 
associated with U.S. customers would be denominated as foreign 
goodwill, but also from the fundamental difficulty in reliably 
distinguishing value attributable to enumerated section 936 intangibles 
from value attributable to other intangibles, an issue that is no 
different in the professional services context. Therefore, the final 
regulations do not adopt this comment.
6. Joint Venture Exception
    One comment proposed maintaining the favorable treatment of foreign 
goodwill and going concern value for transfers to joint venture 
companies, particularly cases in which the U.S. transferor is going 
into business with one or more unrelated foreign parties (third 
parties) and in which the U.S. transferor's interest in the joint 
venture is equal to or less than 50 percent. According to the comment, 
the U.S. transferor in this situation has a financial incentive to 
segregate its intangibles contributed to the joint venture from its 
other property. The presence of a third party, however, would not 
necessarily reduce the U.S. transferor's incentive to attribute value 
to foreign goodwill and going concern value, rather than to enumerated 
section 936 intangibles, in order to minimize the tax consequences of 
the transfer, since such a distinction may be irrelevant to the third 
party. Accordingly, the final regulations do not adopt this proposal.

[[Page 91019]]

D. Classifying Foreign Goodwill and Going Concern Value as Subject to 
Section 367(a) or (d)

    Several comments requested that the Treasury Department and the IRS 
address whether goodwill and going concern value should be 
characterized as a section 936(h)(3)(B) intangible, and thus subject to 
section 367(d), or instead as property subject to section 367(a). 
Comments also requested that the regulations provide certainty to 
taxpayers that have taken the position that goodwill and going concern 
value is not described in section 936(h)(3)(B) by providing that such 
taxpayers will be permitted to treat goodwill and going concern value 
as property subject to section 367(a) rather than section 367(d).
    As discussed in the preamble to the proposed regulations, the 
Treasury Department and the IRS acknowledge that taxpayers have taken 
different positions regarding the scope of section 936(h)(3)(B) and 
that the issue is more significant following the elimination of the 
favorable treatment for foreign goodwill and going concern value. Any 
enumerated section 936 intangible, and any item similar to such 
specifically enumerated intangibles, is subject to the regime provided 
by section 367(d). The Treasury Department and the IRS have determined 
that it would be inconsistent with the policy underlying section 367(d) 
to permit intangible property that is described in section 936(h)(3)(B) 
to be subject to section 367(a). Accordingly, the Treasury Department 
and the IRS have determined that it is appropriate to retain the 
approach provided in the proposed regulations, which allows taxpayers 
to apply section 367(d) to certain property that otherwise would be 
taxed under section 367(a) but which continues to require taxpayers to 
apply section 367(d) to all property described in section 936(h)(3)(B). 
Because the identification of items that are neither explicitly listed 
in section 936(h)(3)(B)(i) through (v) nor explicitly listed as 
potentially qualifying for the ATB exception generally will require a 
case-by-case functional and factual analysis, the final regulations do 
not address the characterization of such items as similar items (within 
the meaning of section 936(h)(3)(B)(vi)) or as something else. In 
general, potential rules under section 367 for identifying and valuing 
transferred property are beyond the scope of these final regulations.

II. Useful Life

    The proposed regulations eliminated the 20-year limitation on 
useful life for intangible property subject to section 367(d) that was 
included in Sec.  1.367(d)-1T(c)(3), because of concerns that the 
limitation results in less than all of the income attributable to 
transferred intangible property being taken into account by the U.S. 
transferor. In the preamble to the proposed regulations, the Treasury 
Department and the IRS solicited comments on how to simplify the 
administration of section 367(d) inclusions for property with a very 
long useful life in the absence of the 20-year limitation. In response 
to this comment solicitation, several comments requested that the final 
regulations restore the 20-year limitation on useful life because it 
promotes administrability for both taxpayers and the IRS.
    After considering the comments received, the Treasury Department 
and the IRS agree that a 20-year limitation on inclusions may promote 
administrability for both taxpayers and the IRS in cases where the 
useful life of the transferred property is indefinite or is reasonably 
anticipated to exceed twenty years. Accordingly, in such cases, the 
final regulations provide that taxpayers may, in the year of transfer, 
choose to take into account section 367(d) inclusions only during the 
20-year period beginning with the first year in which the U.S. 
transferor takes into account income pursuant to section 367(d). 
However, the Treasury Department and the IRS have determined that this 
optional limitation should not affect the present value of all amounts 
included by the taxpayer under section 367(d). Accordingly, the final 
regulations specifically require a taxpayer that chooses to limit 
section 367(d) inclusions to a 20-year period to include, during that 
period, amounts that reasonably reflect amounts that, in the absence of 
the limitation, would be required to be included over the useful life 
of the transferred property following the end of the 20-year period. 
This requirement is consistent with the requirement in section 367(d) 
to include amounts that are commensurate with the income attributable 
to the transferred intangible during its full useful life, without 
limitation. The requirement of the final regulations that inclusions 
during the limited 20-year period begin in the first year in which in 
which the U.S. transferor takes into account income pursuant to section 
367(d) reflects the possibility of delays between the year the 
intangible property is transferred and the first year in which 
exploitation of the transferred property results in taxable income 
being earned by the transferee and included under section 367(d) by the 
transferor.
    One comment also suggested that the IRS be precluded from making 
commensurate-with-income adjustments for taxable years beginning more 
than 20 years after the outbound transfer. In response to this comment, 
the final regulations provide that, if a taxpayer chooses to limit 
inclusions under section 367(d) to a 20-year period, no adjustments 
will be made for taxable years beginning after the conclusion of the 
20-year period. Thus, after the statute of limitations expires for 
taxable years during the 20-year period, a taxpayer will have no 
further section 367(d) inclusions as a result of the Commissioner's 
examination of taxable years that begin after the end of the 20-year 
period. However, consistent with the commensurate-with-income 
principle, for purposes of determining whether income inclusions during 
the 20-year period are commensurate with the income attributable to the 
transferred property, and whether adjustments should be made for 
taxable years during that period while the statute of limitations for 
such taxable years is open, the Commissioner may take into account 
information with respect to taxable years after that period, such as 
the income attributable to the transferred property during those later 
years.
    The final regulations revise the definition of useful life to 
provide that useful life includes the entire period during which 
exploitation of the transferred intangible property is reasonably 
anticipated to affect the determination of taxable income, in order to 
appropriately account for the fact that exploitation of intangible 
property can result in both revenue increases and cost decreases. A 
comment asserted that including use in subsequently developed 
intangibles within the useful life of the transferred intangible 
property would be too difficult to administer and was not consistent 
with the arm's length standard. The Treasury Department and the IRS 
disagree with this comment. The value of many types of intangible 
property is derived not only from use of the intangible property in its 
present form, but also from its use in further development of the next 
generation of that intangible and other property. For example, if a 
software developer were to sell all of its copyright rights in its 
software to an unrelated party, and the copyright rights are expected 
to derive value both from the exclusive right to use the current 
generation computer code to make and sell current generation

[[Page 91020]]

software products and from the exclusive right to use the current 
generation code in the development of other versions of the software, 
which will then be used to make and sell future generation software 
products, the software developer would expect to be compensated for the 
latter right. That is, if the software has value in developing a future 
generation of products, the software developer would not ignore the 
value of the use of the software in future research and development and 
hand over those rights free of charge, and an uncontrolled purchaser 
would be willing to compensate the developer to obtain such rights.

III. Applicability Date

    Several comments requested that the final regulations apply to 
transfers occurring after their date of publication, and not relate 
back to the date the proposed regulations were issued. These comments 
asserted that the proposed regulations change long-standing law in a 
way that would prejudice taxpayers that had arranged their business 
operations based on the 1986 temporary regulations. Others speculated 
that the final regulations might deviate from the proposed regulations 
to such an extent that substantial confusion would result for taxpayers 
attempting to determine their tax results in the interim period before 
the final regulations were published. Finally, one comment asserted 
that an applicability date relating back to the proposed regulations 
would violate the Administrative Procedure Act (APA), specifically 5 
U.S.C. 553, which provides that the effective date of certain final 
regulations must be at least 30 days after their date of publication.
    After considering these comments, the Treasury Department and the 
IRS have determined that the proposed applicability date, under which 
the final regulations would apply to transfers occurring on or after 
September 14, 2015, should be retained. The proposed regulations were 
issued to curtail the potential for abuse that exists under the 1986 
temporary regulations from treating value that should be attributed to 
enumerated section 936 intangibles instead as exempt foreign goodwill 
or going concern value. The proposed effective date was intended to 
prevent taxpayers from using the time while the proposed regulations 
were pending to accelerate transfers subject to section 367 in order to 
take abusive positions under the 1986 temporary regulations before the 
finalization of the proposed regulations.
    The Treasury Department and the IRS have statutory authority to 
issue regulations applicable at least as of the date the proposed 
regulations were filed with the Federal Register. The pre-1996 version 
of section 7805(b)--which governs regulations related to statutory 
provisions enacted before July 30, 1996, such as section 367--provides 
express retroactive rulemaking authority by stating that the Secretary 
may prescribe the extent, if any, to which any ruling or regulation 
shall be applied without retroactive effect. Section 7805(b) (1995). 
Because section 7805(b) is the more specific statute, it controls over 
the general notice requirements of 5 U.S.C. 553. See, for example, 
Redhouse v. Commissioner, 728 F.2d 1249, 1253 (9th Cir. 1984); Wing v. 
Commissioner, 81 T.C. 17, 28-30 & n.17 (1983).
    Finally, the Treasury Department and the IRS disagree with the 
comment that differences between the proposed and final regulations may 
create confusion. The final regulations are a logical outgrowth of the 
proposed regulations in light of the comments received and their 
consideration by the Treasury Department and the IRS. In particular, 
the final regulations do not differ from the proposed regulations with 
respect to the elimination of the favorable treatment for transfers of 
foreign goodwill and going concern value. Furthermore, a transfer of 
property that is subject to recognition treatment under section 367 
under the final regulations would also have been subject to such 
treatment under section 367 under the proposed regulations.
    For these reasons, the final regulations generally apply to 
transfers occurring on or after September 14, 2015, the date the 
proposed regulations were filed with the Federal Register, and to 
transfers occurring before September 14, 2015, resulting from entity 
classification elections made under Sec.  301.7701-2 that are filed on 
or after September 14, 2015.

IV. Qualification of Property Denominated in Foreign Currency for the 
ATB Exception

    Although section 367(a)(3)(B)(iii) provides that the ATB exception 
does not apply, and therefore that section 367(a)(1) applies, to 
foreign currency or other property denominated in foreign currency, 
current Sec.  1.367(a)-5T(d)(2) generally provides that section 
367(a)(1) nonetheless does not apply to certain transfers of property 
denominated in the currency of the country in which the transferee 
foreign corporation is organized. The proposed regulations eliminated 
this regulatory exception from the general rule in section 
367(a)(3)(B)(iii) that turns off the ATB exception for such property. 
One comment recommended clarifying the regulations under section 367(a) 
by adopting the language and concepts reflected in the changes to the 
foreign currency rules in subpart J that were made after the 
publication of the 1986 temporary regulations. In response to this 
comment, Sec.  1.367(a)-2(c)(3) of the final regulations, which 
corresponds to existing Sec.  1.367(a)-5T(d)(2), reflects amendments 
that increase consistency with the rules in sections 987 and 988. In 
particular, the terms ``foreign currency'' and ``property denominated 
in foreign currency'' are no longer used. Rather, proposed Sec.  
1.367(a)-2(c)(3) is revised to refer to nonfunctional currency and 
other property that gives rise to a section 988 transaction of the 
taxpayer described in section 988(c)(1)(B), or that would give rise to 
such a section 988 transaction if it were acquired, accrued, or entered 
into directly by the taxpayer. The Treasury Department and the IRS 
consider that these modifications do not substantially change the scope 
of property subject to the rule at Sec.  1.367(a)-5T(d)(2).

V. Other Issues

    Other comments suggested that regulations address many outstanding 
issues in the context of section 367 that were not addressed in the 
proposed regulations. These suggestions include guidance to address the 
following topics: (i) The valuation of intangibles subject to section 
367(d) and the forms that deemed payments should take, including 
guidance providing parity with the section 482 form-of-payment rules; 
(ii) whether a receivable is created upon an audit-related adjustment; 
(iii) the tax basis consequences under section 367(d), including how 
section 367(d) applies to intangibles subject to the section 197 anti-
churning rules; (iv) coordination of the general rules and disposition 
rules in section 367(d); (v) issues raised in connection with Notice 
2012-39 (2012-31 IRB 95); (vi) the definition of ``property'' for 
purposes of section 367; and (vii) the subsequent transfer rules under 
the ATB exception.
    The Treasury Department and the IRS generally agree that additional 
guidance under section 367(a) and (d) is desirable and would benefit 
both taxpayers and the government. However, these issues are beyond the 
scope of this project. For example, while the Treasury Department and 
the IRS are aware that there is uncertainty regarding the application 
of the subsequent transfer rules to transactions involving hybrid 
partnerships, the Treasury Department and the IRS have determined that 
transactions involving partnerships merit a more holistic consideration 
and

[[Page 91021]]

that this regulation package is not the appropriate vehicle to address 
the issue. Consequently, the regulations finalize the subsequent 
transfer rules in Sec.  1.367(a)-2T(c) (located in Sec.  1.367(a)-2(g) 
of these final regulations), but the Treasury Department and the IRS 
expect those rules will be amended after a more detailed consideration 
of transactions involving partnerships.

Special Analyses

    Certain IRS regulations, including these, 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 is hereby certified that the collection of information 
contained in these regulations 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 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. Pursuant to section 
7805(f) of the Code, the notice of proposed rulemaking that preceded 
this regulation was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business. No comments were received.

Drafting Information

    The principal author of these 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.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.367(d)-1 also issued under 26 U.S.C. 367(d). * * *
* * * * *


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.
    (4) In general.
    (5) Treatment of certain property as subject to section 367(d).
    (c) [Reserved].
    (d) Definitions.
    (1) United States person.
    (2) Foreign corporation.
    (3) Transfer.
    (4) Property.
    (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/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) Nonfunctional 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].

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.

[[Page 91022]]

    (3) [Reserved].
    (4) Transfers of certain intangible property.
    (d) through (i) [Reserved].
    (j) 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 revised 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 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

[[Page 91023]]

the property transferred is determined in accordance with section 482 
and the regulations thereunder.
    (4) Character, source, and adjustments--(i) In general. If a U.S. 
person is required to recognize gain under section 367 upon a transfer 
of property to a foreign corporation, then--
    (A) The character and source of such gain are determined as if the 
property had been disposed of in a taxable exchange with the transferee 
foreign corporation (unless otherwise provided by regulation); and
    (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.
    (C) The transfer will not be recharacterized for U.S. Federal tax 
purposes solely because the U.S. person recognizes gain in connection 
with the transfer under section 367(a)(1). For example, if a U.S. 
person transfers appreciated stock or securities to a foreign 
corporation in an exchange described in section 351, the transfer is 
not recharacterized as other than an exchange described in section 351 
solely because the U.S. person recognizes gain in the transfer under 
section 367(a)(1).
    (ii) Example. The rules of this paragraph (b)(4) are illustrated by 
the following example.

    Example. Domestic corporation DC transfers inventory with a fair 
market value of $1 million and adjusted basis of $800,000 to foreign 
corporation FC in exchange for stock of FC that is described in 
section 351(a). Title passes within the United States. Pursuant to 
section 367(a), DC is required to recognize gain of $200,000 upon 
the transfer. Under the rule of this paragraph (b)(4), the gain is 
treated as ordinary income (sections 1201 and 1221) from sources 
within the United States (section 861) arising from a taxable 
exchange with FC. Appropriate adjustments to earnings and profits, 
basis, etc., will be made as if the transfer were subject to section 
351. Thus, for example, DC's basis in the FC stock received, and 
FC's basis in the transferred inventory, will each be increased by 
the $200,000 gain recognized by DC, pursuant to sections 358(a)(1) 
and 362(a), respectively.

    (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 (c)(3)(i) reserved. For further guidance, see Sec.  
1.367(a)-1T(c)(1) through (c)(3)(i).
    (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)(i)(A) Example through (7) reserved. For further guidance, 
see Sec.  1.367(a)-1T(c)(3)(i)(A) Example through (7).
    (d) Definitions. The following definitions apply for purposes of 
sections 367(a) and (d) and the regulations thereunder.
    (1) United States person. The term ``United States person'' 
includes those persons described in section 7701(a)(30). The term 
includes a citizen or resident of the United States, a domestic 
partnership, a domestic corporation, and any estate or trust other than 
a foreign estate or trust. (For definitions of these terms, see section 
7701 and the regulations thereunder.) For purposes of this section, an 
individual with respect to whom an election has been made under section 
6013(g) or (h) is considered to be a resident of the United States 
while such election is in effect. A nonresident alien or a foreign 
corporation will not be considered a United States person because of 
its actual or deemed conduct of a trade or business within the United 
States during a taxable year.
    (2) Foreign corporation. The term ``foreign corporation'' has the 
meaning set forth in section 7701(a)(3) and (5) and Sec.  301.7701-5.
    (3) Transfer. For purposes of section 367 and regulations 
thereunder, the term ``transfer'' means any transaction that 
constitutes a transfer for purposes of section 332, 351, 354, 355, 356, 
or 361, as applicable. A person's entering into a cost sharing 
arrangement under Sec.  1.482-7 or acquiring rights to intangible 
property under such an arrangement shall not be considered a transfer 
of property described in section 367(a)(1). See Sec.  1.6038B-1T(b)(4) 
for the date on which the transfer is considered to be made.
    (4) Property. For purposes of section 367 and the regulations 
thereunder, the term ``property'' means any item that constitutes 
property for purposes of section 351, 354, 355, 356, or 361, as 
applicable.
    (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

[[Page 91024]]

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.
    (f) Exchanges under sections 354(a) and 361(a) in certain section 
368(a)(1)(F) reorganizations--(1) Rule. In every reorganization under 
section 368(a)(1)(F), where the transferor corporation is a domestic 
corporation, and the acquiring corporation is a foreign corporation, 
there is considered to exist--
    (i) A transfer of assets by the transferor corporation to the 
acquiring corporation under section 361(a) in exchange for stock (or 
stock and securities) of the acquiring corporation and the assumption 
by the acquiring corporation of the transferor corporation's 
liabilities;
    (ii) A distribution of the stock (or stock and securities) of the 
acquiring corporation by the transferor corporation to the shareholders 
(or shareholders and security holders) of the transferor corporation; 
and
    (iii) An exchange by the transferor corporation's shareholders (or 
shareholders and security holders) of their stock (or stock and 
securities) of the transferor corporation for stock (or stock and 
securities) of the acquiring corporation under section 354(a).
    (2) Rule applies regardless of whether a continuance under 
applicable law. For purposes of paragraph (f)(1) of this section, it 
shall be immaterial that the applicable foreign or domestic law treats 
the acquiring corporation as a continuance of the transferor 
corporation.
    (g) Effective/applicability dates. (1) through (3) [Reserved]. For 
further guidance, see Sec.  1.367(a)-1T(g)(1) through (3).
    (4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this 
section apply to transfers occurring on or after April 18, 2013. For 
guidance with respect to paragraph (b)(4)(i)(B) of this section before 
April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012. The 
rules in paragraph (e) of this section apply to transactions occurring 
on or after March 31, 1987. The rules in paragraph (f) of this section 
apply to transactions occurring on or after January 1, 1985.
    (5) Paragraphs (a), (b)(1) through (b)(4)(i)(B), (b)(4)(ii) through 
(b)(5), (c)(3)(ii)(A), (d) introductory text through (d)(2), (d)(4) 
through (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, 
2016.


Sec.  1.367(a)-1T  [Amended]

0
Par. 4. Section 1.367(a)-1T is amended by removing and reserving 
paragraphs (a), (b)(1), (b)(2), (b)(3), (b)(4)(i)(A), (b)(4)(ii), 
(c)(3)(ii)(A), (d) introductory text, (d)(1), (d)(2), (d)(4), and 
(d)(5), and adding and reserving new paragraphs (b)(5) and (d)(6).

0
Par. 5. Section 1.367(a)-2 is revised to 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) 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) Nonfunctional currency, etc.--(i) In general. Property that 
gives rise to a section 988 transaction of the taxpayer described in 
section 988(c)(1)(A) through (C), without regard to section 
988(c)(1)(D) and (E), or that would give rise to such a section 988 
transaction if it were acquired, accrued, entered into, or disposed of 
directly by the taxpayer.
    (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).

[[Page 91025]]

    (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. 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

[[Page 91026]]

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).
    (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) of this section, 
the active conduct exception provided by this section shall apply to 
the initial transfer if--
    (i) The initial transfer 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 uses the property in the active 
conduct of a trade or business outside the United States.
    (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)

[[Page 91027]]

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, Cross Border 
Activities Practice Area, 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) Procedures for establishing that a failure to comply was not 
willful--(A) Time and manner of submission. A taxpayer's statement that 
the failure to comply was not willful will be considered only if, 
promptly after the taxpayer becomes aware of the failure, an amended 
return is filed for the taxable year to which the failure relates that 
includes the information that should have been included with the 
original return for such taxable year or that otherwise complies with 
the rules of this section, and that includes a written statement 
explaining the reasons for the failure to comply. The amended return 
must be filed with the Internal Revenue Service at the location where 
the taxpayer filed its original return. The taxpayer may submit a 
request for relief from the penalty under section 6038B as part of the 
same submission. See Sec.  1.6038B-1(f).
    (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). If any taxable 
year of the taxpayer is under examination when the amended return is 
filed, a copy of the amended return and any information required to be 
included with such return must be delivered to the Internal Revenue 
Service personnel conducting the examination. If no taxable year of the 
taxpayer is under examination when the amended return is filed, a copy 
of the amended return and any information required to be included with 
such return must be delivered to the Director.
    (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 paragraphs (j)(4) and (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, 
2016.
    (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, 2016, applies to transfers of property 
denominated in a foreign currency occurring before December 16, 2016, 
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)-2T  [Removed]

0
Par. 6. Section 1.367(a)-2T is removed.


Sec.  1.367(a)-3  [Amended]

0
Par. 7. For each section listed in the following the 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)-3(a)(3), first         Sec.   1.367(a)-1T(c)..  Sec.   1.367(a)-1(c).
 sentence.
Sec.   1.367(a)-3(c)(3)(i)(A)........  Sec.   1.367(a)-         Sec.   1.367(a)-2(d)(2), (3), and (4).
                                        2T(b)(2) and (3).
Sec.   1.367(a)-3(c)(3)(ii)(B), last   Sec.   1.367(a)-         Sec.   1.367(a)-2(d)(2) and (3).
 sentence.                              2T(b)(2) and (3).
Sec.   1.367(a)-3(c)(4)(i), last       Sec.   1.367(a)-         Sec.   1.367(a)-1(c)(3).
 sentence.                              1T(c)(3).
Sec.   1.367(a)-3(c)(5)(iv), first     Sec.   1.367(a)-         Sec.   1.367(a)-1(d)(1).
 sentence.                              1T(d)(1).
Sec.   1.367(a)-3(d)(3) Example        Sec.   1.367(a)-         Sec.   1.367(a)-2(a)(2)(iii).
 7A(ii), penultimate sentence.          2T(a)(2).
Sec.   1.367(a)-3(d)(3) Example        Sec.   1.367(a)-         Sec.   1.367(a)-2(g)(2).
 13(i), penultimate sentence.           2T(c)(2).
----------------------------------------------------------------------------------------------------------------


0
Par. 8. 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

[[Page 91028]]

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] TR16DE16.037

    (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 has been described in 
section 168(g)(4), 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 168, treated as property not used predominantly 
outside the United States pursuant to section 168(g)(4). For purposes 
of this paragraph (a)(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, 2016.


Sec.  1.367(a)-4T  [Removed]

0
Par. 9. Sec.  1.367(a)-4T is removed.


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

0
Par. 10. Section 1.367(a)-5 is removed and reserved.


Sec.  1.367(a)-5T  [Removed]

0
Par. 11. Sec.  1.367(a)-5T is removed.

0
Par. 12. Section 1.367(a)-6 is revised 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].
    (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 (i) [Reserved]. For further guidance, see Sec.  
1.367(a)-6T(d) through (i).
    (j) 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.  1.367(a)-6T as contained in 26 CFR 
part 1 revised as of April 1, 2016.


Sec.  1.367(a)-6T  [Amended]

0
Par. 13. Section 1.367(a)-6T is amended by
0
1. Removing and reserving paragraphs (b)(2), (c)(2), and (c)(4).
0
2. Adding and reserving paragraph (j).

0
Par. 14. 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 for 
paragraph (e)(2) of this section, and as provided in paragraph (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, 2016.


Sec.  1.367(a)-7  [Amended]

0
Par. 15. 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.

[[Page 91029]]



------------------------------------------------------------------------
             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)-    Sec.   1.367(a)-4.
 sentence.                         4T, 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)-7(c)(2)(i)(B)...  Sec.   1.367(a)-6T  Sec.   1.367(a)-6.
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), third    Sec.   1.367(a)-2T  Sec.   1.367(a)-2.
 sentence.
Sec.   1.367(a)-7(e)(1), third    Sec.   1.367(a)-    Sec.   1.367(a)-4.
 sentence.                         4T, 1.367(a)-5T.
Sec.   1.367(a)-7(e)(1), third    Sec.   1.367(a)-6T  Sec.   1.367(a)-6.
 sentence.
Sec.   1.367(a)-7(e)(1), last     Sec.   1.367(a)-    Sec.   1.367(a)-
 sentence.                         1T(b)(4) and Sec.   1(b)(4).
                                     1.367(a)-
                                   1(b)(4)(i)(B).
Sec.   1.367(a)-7(e)(2)(i),       Director of Field   Director of Field
 third sentence.                   Operations          Operations, Cross
                                   International,      Border Activities
                                   Large Business &    Practice Area of
                                   International.      Large Business &
                                                       International.
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), heading  Sec.   1.367(a)-6T  Sec.   1.367(a)-6.
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), Example 1   Sec.   1.367(a)-2T  Sec.   1.367(a)-2.
 (ii)(A), last sentence.
Sec.   1.367(a)-7(g), Example 2   Sec.   1.367(a)-2T  Sec.   1.367(a)-2.
 (ii)(A), last sentence.
Sec.   1.367(a)-7(h), first       Sec.   1.367(a)-    Sec.   1.367(a)-
 sentence.                         1(b)(4)(i)(B) and   1(b)(4).
                                   Sec.   1.367(a)-
                                   1T(b)(4).
------------------------------------------------------------------------

Sec.  1.367(a)-8  [Amended]

0
Par. 16. 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)(xvii),    Sec.   1.367(a)-    Sec.   1.367(a)-
 first sentence.                   1T(d)(1).           1(d)(1).
Sec.   1.367(a)-8(b)(1)(xvii),    Sec.   1.367(a)-    Sec.   1.367(a)-
 second sentence.                  1T(c)(3)(i).        1(c)(3)(i).
Sec.   1.367(a)-8(c)(3)(viii)...  Sec.   1.367(a)-    Sec.   1.367(a)-
                                   1T(c)(3)(i).        1(c)(3)(i).
Sec.   1.367(a)-8(c)(3)(viii)...  Sec.   1.367(a)-    Sec.   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)-
 second sentence.                  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).
Sec.   1.367(a)-8(j)(8), second   Director of Field   Director of Field
 sentence.                         Operations          Operations, Cross
                                   International,      Border Activities
                                   Large Business &    Practice Area of
                                   International.      Large Business &
                                                       International.
------------------------------------------------------------------------


0
Par. 17. 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) through (2) [Reserved]. For further guidance, see Sec.  
1.367(d)-1T(c)(1) and (2).
    (3) Useful life--(i) In general. For purposes of determining the 
period of inclusions for deemed payments under Sec.  1.367(d)-1T(c)(1), 
the useful life of intangible property is the entire period during 
which exploitation of the intangible property is reasonably anticipated 
to affect the determination of taxable income, 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 other developed 
intangible property).
    (ii) Procedure to limit inclusions to 20 years. In cases where the 
useful life of the transferred property is indefinite or is reasonably 
anticipated to exceed twenty years, taxpayers may, in lieu of including 
amounts during the entire useful life of the intangible property, 
choose in the year of transfer to increase annual inclusions during the 
20-year period beginning with the first year in which the U.S. 
transferor takes into account income pursuant to section 367(d), to 
reflect amounts that, but for this paragraph (c)(3)(ii), would have 
been required to be included following the end of the 20-year period. 
See Sec.  1.6038B-1(d)(1)(iv) for guidance on reporting this choice of 
method. If the taxpayer applies this method during the 20-year period, 
no adjustments will be made for taxable years beginning after the 
conclusion of the 20-year period. However, for purposes of determining 
whether amounts included during the 20-year period are commensurate 
with the income attributable to the transferred intangible property, 
the

[[Page 91030]]

Commissioner may take into account information with respect to taxable 
years after that period, such as the income attributable to the 
transferred property during those later years. The application of this 
paragraph (c)(3)(ii) must be reflected in a statement (titled 
``Application of 20-Year Inclusion Period to Section 367(d) 
Transfers'') attached to a timely filed original federal income tax 
return (including extensions) for the year of the transfer. An increase 
to the deemed payment rate made pursuant to this paragraph (c)(3)(ii) 
will be irrevocable, and a failure to timely file the statement under 
this paragraph (c)(3)(ii) may not be remedied.

    (iii) Example. Property subject to section 367(d) is transferred 
from USP, a domestic corporation, to FA, a foreign corporation 
wholly owned by USP. The useful life of the transferred property, 
inclusive of derivative works, at the time of transfer is indefinite 
but is reasonably anticipated to exceed 20 years. In the first five 
years following the transfer, sales related to the property are 
expected to be $100x, $130x, $160x, $180x and $187.2x, respectively. 
Thereafter, for the remainder of the property's useful life, sales 
are expected to grow by four percent annually. In the first five 
years following the transfer, operating profits attributable to the 
property are expected to be $5x, $8x, $11x, $12.5x, and $13x, 
respectively. Thereafter, for the remainder of the property's useful 
life, operating profits are expected to grow by four percent 
annually. It is determined that the appropriate discount rate for 
sales and operating profits is 10 percent. The present value of 
operating profits through the property's indefinite useful life is 
$185x. The present value of sales through the property's indefinite 
useful life is $2698x. Accordingly, the sales based royalty rate 
during the property's useful life is 6.8 percent ($185x/$2698x). The 
taxpayer may choose to take income inclusions into account over a 
20-year period. The present value of sales through the 20-year 
period is $1787x. Accordingly, the sales based royalty rate under 
the 20-year option is increased to 10.3 percent ($185x/$1787x).

    (c)(4) through (g)(2) (introductory text) [Reserved]. For further 
guidance, see Sec.  1.367(d)-1T(c)(4) through (g)(2) (introductory 
text).
    (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.
    (g)(2)(iii) undesignated concluding paragraph [Reserved]. For 
further guidance, see Sec.  1.367(d)-1T(g)(2)(iii) undesignated 
concluding paragraph.
    (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] TR16DE16.038

    (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, 2016.


Sec.  1.367(d)-1T  [Amended]

0
Par. 18. Section 1.367(d)-1T is amended by removing and reserving 
paragraphs (b), (c)(3), and (g)(2)(i), (g)(2)(iii)(E), and (g)(3).

0
Par. 19. Section 1.367(e)-2 is amended by
0
1. Revising paragraph (b)(3)(iii).
0
2. Revising paragraph (e)(4)(ii)(B).
    The revisions 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).
* * * * *
    (e) * * *
    (4) * * *
    (ii) * * *
    (B) The period of limitations on assessment of tax for the taxable 
year in which gain is required to be reported will be extended until 
the close of the third full taxable year ending after the date on which 
the domestic liquidating corporation, foreign distributee corporation, 
or foreign liquidating corporation, as applicable, furnishes to the 
Director of Field Operations, Cross Border Activities Practice Area of 
Large Business & International (or any successor to the roles and 
responsibilities of such position, as appropriate) (Director) the 
information that should have been provided under this section.
* * * * *


Sec.  1.884-5  [Amended]

0
Par. 20. Section 1.884-5 is amended in paragraph (e)(3)(ii)(A) by 
removing the citation ``Sec.  1.367(a)-2T(b)(5),'' and adding the 
citation ``Sec.  1.367(a)-2(d)(5)'' in its place.


Sec.  1.1248-8  [Amended]

0
Par. 21. Section 1.1248-8 is amended in paragraph (b)(2)(iv)(B)(1)(ii) 
by removing the citation ``Sec. Sec.  1.367(a)-6T,'' and adding the 
citation ``Sec.  1.367(a)-6'' in its place.

[[Page 91031]]

Sec.  1.1248(f)-2   [Amended]

0
Par. 22. Section 1.1248(f)-2 is amended in the last sentence of 
paragraph (e) by removing the citation ``Sec.  1.367(a)-2T,'' and 
adding the citation ``Sec.  1.367(a)-2'' in its place.

0
Par. 23. Section 1.6038B-1 is amended by:
0
1. Removing the citation ``Sec.  1.367(a)-1T(c),'' in the fourth 
sentence of paragraph (b)(1)(i) and adding the citation ``Sec.  
1.367(a)-1(c)'' in its place.
0
2. Revising paragraphs (c)(1) through (5) and (d).
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) introductory text [Reserved]. For further guidance, 
see Sec.  1.6038B-1T(c)(1) through (4) introductory text.
    (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 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) (treatment of certain property as subject to section 
367(d)). Each item of property must be separately identified.
    (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). Identify all property that is subject to the rules of 
section 367(d) under Sec.  1.367(a)-1(b)(5) (treatment of certain 
property as subject to section 367(d)). Describe any property for which 
the income required to be taken into account under section 367(d) and 
the regulations thereunder will be recognized over a 20-year period 
pursuant to Sec.  1.367(d)-1(c)(3)(ii). Estimate the anticipated income 
or cost reductions attributable to the intangible property's use beyond 
the 20-year period.
    (v)-(vi) [Reserved]. For further guidance, see Sec.  1.6038B-
1T(d)(1)(v) through (1)(vi).
    (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)(3).
    (d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see 
Sec.  1.6038B-1T(d)(1)(viii) through (d)(2).
* * * * *
    (g) Effective/applicability dates. (1) This section applies to 
transfers occurring on or after July 20, 1998, except as provided in 
paragraphs (g)(2) through (g)(7) of this section, and 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 
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

[[Page 91032]]

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, 2016.


Sec.  1.6038B-1T  [Amended]

0
Par. 24. Section 1.6038B-1T is amended by removing and reserving 
paragraphs (c)(4)(i) through (c)(5) introductory text, and (d)(1)(iv) 
and (vii).

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: November 23, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-29791 Filed 12-15-16; 8:45 am]
 BILLING CODE 4830-01-P