Tax

On July 17, 2024, the Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations under Section 367(b) of the Internal Revenue Code (the “Code”) that provide guidance applicable to: the treatment of property used to acquire parent stock or securities in connection with certain triangular reorganizations involving one or more foreign corporations; the consequences to persons that receive parent stock or securities pursuant to those reorganizations; and the treatment of certain subsequent inbound nonrecognition transactions following those reorganizations and certain other tax-free transactions (the “Final Regulations”). The Final Regulations adopt, without significant modification, the proposed regulations (published in the Federal Register on October 6, 2023) (the “Proposed Regulations”).

• For a further discussion of the Proposed Regulations, see “Killer Bs Get Stung – IRS Issues Proposed Rules Aimed at Triangular Reorganizations and Inbound Non-recognition Transactions” posted on the Weil Tax Blog on October 16, 2023.

Background:

The Proposed Regulations clarified the scope of the anti-abuse rule applicable to certain cross border “triangular B reorganization” under Section 368(a)(1)(B) of the Code that could, but for the anti-abuse rule, enable a U.S. company to repatriate foreign earnings (or transfer other assets) tax-free, and largely adopted the approach taken in Notice 2014-32 and Notice 2016-73, with modifications, including, but not limited to: (i) narrowing the potential scope of the excess asset basis rules (described below); (ii) providing clarity on the definition of “specified earnings” that are included in the all earnings and profits amount upon an inbound transaction; (iii) modifying the priority rules to take into account the extent to which a distribution would give rise to an inclusion under Section 951A(a) that would be subject to U.S. tax (even though it is unlikely that a distribution from the subsidiary to the parent corporation would give rise to a section 951A(a) inclusion); and (iv) certain other adjustments.

The Final Regulations and Scope of Anti-Abuse Rule:

While the Final Regulations do not alter the anti-abuse rule or modify the Proposed Regulations in any significant respect, Treasury notes in the preamble to the Final Regulations that the anti-abuse rule is designed to be adaptable to such changing or unforeseen circumstances and, as such, is not limited to a particular type of avoidance transaction.

Weil Insight: Treasury’s notes in the preamble create an ever-changing and evolving anti-abuse rule. This approach by Treasury will create challenges when structuring otherwise permissible transactions. In light of the recent Loper Bright decision (which overturned Chevron deference), query whether the broad scope of the anti-abuse rule could be subject to challenge and pass muster under the less deferential Skidmore standard.

• For a further discussion of the potential tax implications of the Loper Bright decision, see “Clear as Mud – Chevron Irreverence and Tax Law” posted on the Weil Tax Blog on July 1, 2024.

In response to the Proposed Regulations, Treasury said it had received a comment claiming that two examples were an expansion of the anti-abuse rule because they involved new fact patterns and imposed corrective adjustments that weren’t described in prior guidance. Referred to as Examples 2 and 3, the first hypothetical involved downstream property transfers and the second related to taxable debt exchanges, both of which Treasury retained in the Final Regulations Treasury, with minor adjustments to Example 3’s fact pattern. In rejecting the comment’s recommendation to eliminate the examples or limit their application to the date when the rules were proposed, Treasury cited the purpose of the anti-abuse rule, which is designed to be flexible to changing circumstances.