US Outbound: IRS Releases comprehensive package of section 367(a)(5) Regulations

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Outbound: IRS Releases comprehensive package of section 367(a)(5) Regulations

foley.jpg

mcgrew.jpg

Sean Foley


Landon McGrew

The US Treasury Department and Internal Revenue Service (IRS) recently released a comprehensive set of final, temporary and proposed regulations under section 367(a)(5), addressing the US taxation of outbound transfers of assets by a US corporation as part of a reorganisation transaction (TD 9614 and TD 9615). The new regulations generally adopt and replace the previous set of regulations that were proposed in 2008, with certain modifications. In general, section 367(a)(5) provides that certain exceptions to section 367(a)(1) gain recognition do not apply in the case of a reorganisation where a US corporation transfers assets to a foreign corporation, unless the US corporation is controlled by five or fewer (but at least one) US corporations (a control group) and certain basis adjustments and other conditions are satisfied as provided in regulations.

The preamble to the new regulations states that the policy of section 367(a)(5) is the protection of corporate-level gain on appreciated property (net inside gain). The regulations further this policy by providing an election that is intended to ensure that any net inside gain realised by the US corporation is preserved in the stock of the foreign corporation received in the reorganisation. If such an election is made, the US corporation's net inside gain is deferred. However, the basis in the stock of the foreign corporation received in the reorganisation must be reduced by the amount by which net inside gain exceeds gain or loss in that stock. A few key points addressed in the new regulations are discussed below.

Computation of net inside gain

The final regulations compute net inside gain by taking into account only deductible liabilities assumed in the reorganisation. The IRS and Treasury Department rejected comments suggesting that other tax attributes, such as net operating losses and foreign tax credits, should be taken into account because it was thought that this would substantially increase the complexity of the regulations.

Built-in loss in stock

As mentioned above, the final regulations provide that if an election is made to defer net inside gain, the basis in the stock of the foreign corporation received in the reorganisation must be reduced by the amount by which net inside gain exceeds gain or loss in that stock. In certain cases, this adjustment could result in the conversion of built-in loss stock into built-in gain stock. The Treasury Department and IRS rejected comments that this result was inappropriate, stating that they believe that the amount of any outside built-in loss or gain should not affect the required reduction to the basis of the stock received.

Application to RICs, REITs and S corporations

According to the preamble to the new regulations, the IRS and Treasury Department considered whether regulated investment companies (RICs), real estate investment trusts (REITs), and S corporations should be exempted from the application of section 367(a)(5) or allowing such entities to be included in a control group because those entities are not generally subject to corporate-level tax. These recommendations, however, were not adopted in the final regulations. Accordingly, these types of entities will need to be mindful of the regulations when engaging in these types of transactions.

The new regulations are very complex and exhaustive, consisting of over 150 pages of text. Taxpayers engaging in outbound reorganisations would be well-advised to carefully consider the application of these rules in their transaction planning and whether an election pursuant to the regulations would be beneficial to their specific facts. The new regulations are generally applicable to transactions occurring on or after April 18 2013.

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 (sffoley@kpmg.com) and Landon McGrew (lmcgrew@kpmg.com)

KPMG, Washington, DC

Tel: +1 202 533 5588

Fax: +1 202 315 3087

Website: www.us.kpmg.com

more across site & shared bottom lb ros

More from across our site

The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
Gift this article