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US Outbound: IRS Proposes New GRA Regulations

Sean Foley
Landon McGrew
The US Treasury Department and Internal Revenue Service (IRS) recently proposed new regulations that, if enacted, would amend existing rules addressing the consequences for failing to file gain recognition agreements (GRAs) and other related documents that are required to be filed in connection with certain outbound transfers of stock under sections 367(a) and 6038B (REG-140649-11).

Under the current regulations, a US 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, upon discovering the failure, promptly files an amended return that includes a corrected GRA or other required information. The taxpayer must also demonstrate that the failure was because of reasonable cause and not willful neglect, and must notify the IRS of the amended return.

Ordinarily, the timely filing of a GRA satisfies the reporting requirements of section 6038B for the outbound transfer of the stock. Section 6038B reporting is otherwise generally satisfied through the filing of a Form, 926 Return by a US Transferor of Property to a Foreign Corporation. When a taxpayer fails to file a GRA for an outbound stock transfer, however, the foregoing coordination rule is not satisfied and therefore the taxpayer can be treated as having failed to satisfy the section 6038B reporting requirement as well. The penalty for failure to comply with this requirement is 10% of the fair market value of the transferred property, but not to exceed $100,000 (per transfer) unless the failure was because of intentional disregard. The section 6038B penalty is not imposed if the taxpayer can demonstrate that the failure was because of reasonable cause and not willful neglect – the same standard as that of the section 367(a) regulations.

If enacted, the proposed regulations would revise the section 367(a) regulations to require that the US taxpayer demonstrate only that the failure was not a "willful failure". Whether a failure is willful is determined based on all of the facts and circumstances. The proposed regulations provide a number of examples of what constitutes a willful failure. One important example provides that a taxpayer is intentionally not including the fair market value or adjusted US tax basis of the transferred property, including noting that the information is "available upon request," would constitute a willful failure.

While the standard for relief under the 367(a) regulations would be relaxed (from reasonable cause to no willful failure), the proposed regulations would retain the reasonable cause standard for purposes of the section 6038B reporting requirements. The government notes in the preamble that it believes that full gain recognition under section 367(a)(1) should only apply where a failure to file a GRA is willful, and that the penalty imposed under section 6038B is sufficient to encourage proper reporting and compliance.

The new regulations were proposed just over two and half years after the IRS issued a directive (LMSB-4-0510-017; the GRA Directive), which provided taxpayers with a favourable opportunity to correct certain errors in a timely filed gain recognition agreement (GRA) without having to request reasonable cause relief (for a more detailed discussion of the GRA Directive, see our November 2010 column, IRS Directive Offers Opportunity to Correct GRA Mistakes). Notably, the proposed regulations do not revoke the GRA Directive and do not announce a timetable for the revoking the Directive. It is, however, widely speculated that the Directive will be revoked upon finalisation of the proposed regulations, if not earlier.

As the new regulations are in proposed format only (and not temporary), taxpayers cannot rely on them until when and if finalised. In the meantime, taxpayers should follow the process set out in the GRA Directive to correct deficient GRAs as soon as possible given that it potentially could be revoked at any time.

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.

Sean Foley ( and Landon McGrew (, Washington, DC, KPMG.
Tel: +1 202 533 5588
Fax: +1 202 315 3087

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