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US Outbound: IRS releases final GRA regulations



Sean Foley

Landon McGrew

The US Treasury Department and Internal Revenue Service (IRS) recently released final regulations addressing the treatment of US and foreign persons that fail to file gain recognition agreements (GRAs) and other related documents required to be filed in connection with certain outbound transfers of stock under sections 367(a) and 6038B (TD 9704). The final regulations generally adopt proposed regulations that were issued in January 2013 with certain modifications. (See our April 2013 column, IRS Proposes New GRA Regulations, for a more detailed discussion of the proposed regulations.) As expected, the final regulations also revoke a GRA Directive (LMSB-4-0510-017) issued by the IRS in July 2010. (See our November 2010 column, IRS Directive Offers Opportunity to Correct GRA Mistakes, for a more detailed discussion of the GRA Directive) The final regulations are generally effective for documents required to be filed on or after November 19 2014.

Like the proposed regulations, the final regulations provide that a taxpayer that fails to either timely file an initial GRA or comply with the requirements of an existing GRA is generally subject to full gain recognition under section 367(a)(1) unless the taxpayer demonstrates that the failure was not wilful. This wilful standard is in contrast to the more onerous reasonable cause standard that was required under the previous regulations. The final regulations provide several examples of what constitutes a wilful failure. One important example in the regulations provides that intentionally not including the fair market value or adjusted US tax basis of the transferred property, including noting that such information is "available upon request," would constitute a wilful failure.

Among the changes from the proposed regulations, the final regulations extend the more generous wilful standard to certain failures to file or to comply that were the subject of requests for relief submitted before the effective date of the final regulations. Thus, the regulations provide a mechanism for US transferors to resubmit previously filed requests, even if those requests were previously denied under the reasonable cause standard. It should be noted that if a taxpayer resubmits a previously filed request, penalties under section 6038B will still apply unless the reasonable cause standard is satisfied. The preamble states that this is intended to provide parity between similarly situated taxpayers by ensuring that a taxpayer that establishes its failure was not wilful under the final section 367 regulations is still subject to penalties under the final section 6038B regulations.

The final regulations also extend the wilful standard to relief for certain other reporting obligations under section 367(a) that were not covered by the proposed regulations, including transfers under Treasury regulation section 1.367(a)-2 (providing an exception to gain recognition under section 367(a)(1) for assets transferred outbound for use in an active trade or business outside the US) and Treasury regulation section 1.367(a)-7 (regarding application of section 367(a) to an outbound transfer of assets by a domestic target corporation in an exchange described in section 361).

In addition, the final regulations modify the proposed regulations to require a US transferor to report on its Form, 926 "Return by a US Transferor of Property to a Foreign Corporation," the fair market value, adjusted tax basis, and gain recognised with respect to the transferred stock or securities.

As noted above, the new regulations also revoke a GRA Directive that temporarily provided taxpayers with an opportunity to correct errors in GRAs without having to request reasonable cause relief. Under the GRA Directive, a taxpayer was not required to provide an explanation of the reasons for the failure to timely file or comply. With the removal of the GRA Directive, satisfaction of the wilful standard is now required in all cases to correct a deficient GRA.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley ( and Landon McGrew (, Washington, DC


Tel: +1 202 533 5588

Fax: +1 202 315 3087


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