n-14-32.pdf

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Treatment of Property Used To Acquire Parent Stock or Securities in Certain Triangular
Reorganizations Involving Foreign Corporations

Notice 2014-32

SECTION 1. OVERVIEW
This notice announces that the Internal Revenue Service (IRS) and the
Department of the Treasury (Treasury Department) will issue regulations under section
367 of the Internal Revenue Code (Code) relating to the treatment of property used to
acquire parent stock or securities in certain triangular reorganizations involving one or
more foreign corporations.
SECTION 2. BACKGROUND
.01 Issuance of Regulations
On May 27, 2008, the IRS and the Treasury Department published temporary
and proposed regulations (T.D. 9400, 2008-1 C.B. 1139 [73 FR 30301]) (2008
regulations) under section 367 that applied to certain triangular reorganizations in which
a subsidiary (S) acquires stock of its parent corporation (P) in exchange for property
(the P acquisition), and S exchanges the P stock so acquired for stock or property of a
target corporation (T), but only if P or S (or both) is a foreign corporation. On May 19,
2011, the IRS and the Treasury Department finalized the proposed 2008 regulations
(T.D. 9526, 2011-24 I.R.B. 869 [76 FR 28890]), with certain modifications (final

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regulations).
.02 Deemed Distribution and Contribution Rules
In the case of a triangular reorganization subject to §1.367(b)-10, the final
regulations require that adjustments be made that are consistent with the adjustments
that would have been made if S had in fact distributed property to P under section 301
(deemed distribution). §1.367(b)-10(b)(1). For this purpose, the amount of the deemed
distribution generally is the amount of property that was transferred by S to acquire the
P stock and securities in the P acquisition. In addition, the final regulations require that
adjustments be made that are consistent with the adjustments that would have been
made if P had in fact contributed that same property to S (deemed contribution).
§1.367(b)-10(b)(2). The deemed contribution has the effect of increasing P’s basis in its
S stock by the amount of the deemed distribution. §1.367(b)-10(c)(2). For purposes of
making the required adjustments, the deemed distribution and deemed contribution are
treated as separate transactions that occur before the P acquisition or, if P does not
control S at the time of the P acquisition, immediately after P acquires control of S, but
before the triangular reorganization. §1.367(b)-10(b)(3). Furthermore, the final
regulations provide that P’s adjustment to the basis in its S stock under §1.358-6 is
determined consistent with treating S as having acquired the P stock or securities in
exchange for property from P or a person other than P, as the case may be. §1.367(b)-
10(b)(4).
.03 Triangular Reorganizations Exempt from Final Regulations

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Under §1.367(b)-10(a)(2), the final regulations do not apply to a triangular
reorganization if:
(i) P and S are foreign corporations and neither P nor S is a controlled foreign
corporation (within the meaning of §1.367(b)-2(a)) immediately before or
immediately after the triangular reorganization;
(ii) S is a domestic corporation, P’s stock in S is not a United States real property
interest (within the meaning of section 897(c)), and P would not be subject to
U.S. tax on a dividend from S under either section 881 (for example, by reason of
an applicable treaty) or section 882 (no-U.S.-tax exception); or
(iii) In an exchange under section 354 or 356, one or more U.S. persons
exchange stock or securities of T and the amount of gain in the T stock or
securities recognized by such U.S. persons under section 367(a)(1) is equal to or
greater than the sum of the amount of the deemed distribution that would be
treated by P as a dividend under section 301(c)(1) and the amount of such
deemed distribution that would be treated by P as gain from the sale or exchange
of property under section 301(c)(3) (together, section 367(b) income) if
§1.367(b)-10 would otherwise apply to the triangular reorganization (section
367(a) priority rule).
As the corollary to the section 367(a) priority rule, the final regulations under
section 367(a) also provide a priority rule in §1.367(a)-3(a)(2)(iv) (section 367(b) priority
rule). The section 367(b) priority rule turns off the application of section 367(a)(1) to an

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exchange under section 354 or 356 that occurs in connection with a triangular
reorganization described in §1.367(b)-10 if the amount of gain that would otherwise be
recognized under section 367(a)(1) (without regard to any exceptions thereto) is less
than the amount of the section 367(b) income recognized under §1.367(b)-10.
.04 Anti-Abuse Rule
The final regulations provide that appropriate adjustments shall be made if, in
connection with a triangular reorganization, a transaction is engaged in with a view to
avoid the purpose of §1.367(b)-10 (anti-abuse rule). §1.367(b)-10(d). One example is
given where the earnings and profits of S will be deemed to include the earnings and
profits of a corporation related to P or S for purposes of determining the consequences
of the adjustments provided in the final regulations, if S is created, organized, or funded
to avoid the application of this section with respect to the earnings and profits of that
related corporation.
SECTION 3. TRANSACTIONS AT ISSUE
The IRS and the Treasury Department are aware that taxpayers are engaging in
transactions designed to avoid U.S. tax by exploiting the deemed contribution provided
under the final regulations. The IRS and the Treasury Department believe that the
deemed contribution is inconsistent with the purpose of §1.367(b)-10, regardless of
whether S acquires P stock or securities from P or from a person other than P.
The IRS and the Treasury Department also are aware that the priority rules may
facilitate certain transactions designed to avoid recognizing gain under §1.367(a)-3(c).

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For example, FP, a foreign corporation, intends to acquire all the stock of UST, a
domestic corporation owned by U.S. persons, in exchange for FP stock in a
reorganization described in section 368(a)(1)(B). FP forms USS, a domestic
corporation. USS generates a small amount of earnings and profits. USS acquires FP
stock from FP in exchange for a note and uses the FP stock to acquire all the stock of
UST. The shareholders of UST receive 75 percent of the outstanding FP stock. The
stock in USS is not a United States real property interest (within the meaning of section
897(c)), and FP would not be subject to U.S. tax under section 882 on a disposition of
the stock of USS. The transaction is structured to result in a small amount of dividend
income that would be subject to U.S. withholding tax on a distribution and in a
significant amount of section 367(b) income in the form of section 301(c)(3) gain. The
taxpayer takes the position that the transaction avoids the application of the no-U.S.-tax
exception because of the small amount of dividend income. In addition, the taxpayer
takes the position that the section 367(b) priority rule applies because the section
367(b) income recognized by FP by reason of the application of §1.367(b)-10 exceeds
the amount of gain that would be recognized by shareholders of UST under section
367(a)(1) with respect to the UST stock. This position is taken even though the section
301(c)(3) gain that FP recognizes by reason of the application of §1.367(b)-10 (and
therefore takes into account in determining section 367(b) income) is not subject to U.S.
tax. Finally, the taxpayer takes the position that the anti-abuse rule does not apply with
respect to the earnings and profits of UST (see further discussion of this position

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below).
Based on the policy underlying the priority rules, the IRS and the Treasury
Department believe that section 367(b) income should include only dividend income and
gain that are subject to U.S. tax or dividend income and gain that give rise to an income
inclusion under section 951(a)(1)(A) that is subject to U.S. tax.
The IRS and the Treasury Department are also concerned that some taxpayers
may be taking the position that the no-U.S.-tax exception is inapplicable when S (the
stock of which is not a United States real property interest) has no current or
accumulated earnings and profits based on the fact that if S instead did have current or
accumulated earnings and profits, the resulting dividend would be subject to U.S. tax.
The IRS and the Treasury Department disagree with this interpretation of the
no-U.S.-tax exception.
Finally, the IRS and the Treasury Department are concerned that some
taxpayers may be interpreting the anti-abuse rule too narrowly, including with respect to
what constitutes a funding for purposes of invoking the anti-abuse rule. In addition, the
IRS and the Treasury Department understand that taxpayers may be taking the position
that the anti-abuse rule does not apply with respect to the earnings and profits of T,
including in cases where T is unrelated to P and S before the triangular reorganization
or where T is acquired pursuant to a triangular asset reorganization. The IRS and the
Treasury Department disagree with these interpretations.
The IRS and the Treasury Department believe that these transactions raise

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significant policy concerns and will revise the final regulations in the manner described
in Section 4 of this notice.
SECTION 4. REGULATIONS TO BE ISSUED
.01 Deemed Distribution and Contribution Rules
The rules in §1.367(b)-10(b)(2) and -10(c)(2) (regarding deemed contributions)
will be removed. Conforming changes will be made to other parts of the final
regulations. For example, the rule in §1.367(b)-10(b)(3) will be modified so that it refers
only to a deemed distribution occurring as a separate transaction. In addition, the rule
in §1.367(b)-10(b)(4) will be modified to provide that P’s adjustment to the basis in its S
stock under §1.358-6 will be determined as if P provided the P stock or securities
pursuant to the plan of reorganization, notwithstanding that S in fact acquired the P
stock or securities in exchange for property in the P acquisition.
.02 Triangular Reorganizations Exempt from the Final Regulations
The section 367(a) priority rule under §1.367(b)-10 will be modified by adjusting
the amount of income or gain that is considered section 367(b) income for this purpose.
Regulations will provide that section 367(b) income includes a section 301(c)(1)
dividend or section 301(c)(3) gain that would arise if §1.367(b)-10 applied to the
triangular reorganization only to the extent such dividend income or gain would be
subject to U.S. tax or would give rise to an income inclusion under section 951(a)(1)(A)
that would be subject to U.S. tax. A conforming change will be made to the section
367(b) priority rule under §1.367(a)-3(a)(2)(iv).

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In addition, the no-U.S.-tax exception will be modified to provide that the
exception will not be available if P is a controlled foreign corporation. Furthermore,
where P is not a controlled foreign corporation, S is a domestic corporation, and P’s
stock in S is not a United States real property interest, the regulations will clarify that the
no-U.S.-tax exception will apply if the deemed distribution that would result from
application of §1.367(b)-10 to the triangular reorganization would not be treated as a
dividend under section 301(c)(1) that would be subject to U.S. tax (for example, by
reason of an applicable treaty or by reason of an absence of earnings and profits).
.03 Anti-Abuse Rule
The anti-abuse rule in §1.367(b)-10(d) will be clarified to provide that S’s
acquisition of P stock or securities in exchange for a note may invoke the anti-abuse
rule. In addition, §1.367(b)-10(d) will be clarified to provide that the earnings and profits
of a corporation (or a successor corporation) may be taken into account for purposes of
determining the consequences of the adjustments provided in the final regulations, as
modified by the rules announced in this notice, regardless of whether such corporation
is related to P or S before the triangular reorganization. Thus, the earnings and profits
of T (or a successor to T) or a subsidiary of S or T may be taken into account for
purposes of determining the consequences of the adjustments provided in the final
regulations, as modified by the rules announced in this notice. Section 1.367(b)-10(d)
also will be clarified to provide that a funding of S may occur after the triangular
reorganization and that a funding of S includes capital contributions, loans, and

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distributions.
.04 Example
The following example illustrates certain clarifications and modifications to the
final regulations announced in section 4 of this notice:
(i) Facts
. FP is a foreign corporation that wholly owns USS, a domestic
corporation with no assets and no earnings and profits. FP transfers $100x of newly
issued FP stock to USS in exchange for $10x of USS stock and a $90x note issued by
USS. FP would be subject to U.S. tax under section 881 on a distribution from USS if,
contrary to the facts here, USS had earnings and profits for purposes of applying
section 301(c)(1) to the distribution. USS acquires all the stock of UST, an unrelated
domestic corporation that is wholly owned by a foreign person, in exchange for the
$100x of FP stock in a triangular reorganization described in section 368(a)(1)(B). At
the time of the acquisition, UST has $100x of earnings and profits. USS’s purchase of
the FP stock for its note in connection with the triangular reorganization is engaged in
with a view to avoid the purpose of §1.367(b)-10 because the parties seek to transfer
property to FP without incurring U.S. tax.

(ii) Analysis
. The triangular reorganization is described in §1.367(b)-10(a) of the
final regulations. Pursuant to §1.367(b)-10(b)(1) of the final regulations, as modified by
the rules announced in this notice, adjustments must be made that are consistent with
the adjustments that would have been made if USS had in fact distributed the $90x note
to FP in a distribution to which section 301 would apply. Because USS’s purchase of
the FP stock for its note is engaged in with a view to avoid the purposes of §1.367(b)-
10, the anti-abuse rule applies and therefore appropriate adjustments are made. In
particular, for purposes of determining the consequences of the adjustments provided in
the final regulations, as modified by the rules announced in this notice, the earnings and
profits of USS are deemed to include the earnings and profits of UST. The $90x
deemed distribution is treated as separate from, and occurring immediately before,
USS’s acquisition of the FP stock used in the triangular reorganization. Pursuant to this
notice, §1.367(b)-10(b)(2) and -10(c)(2) of the final regulations (regarding a deemed
contribution) are removed. Therefore, no adjustments are made by FP to its USS stock
except as provided in §1.358-6. Pursuant to this notice, FP’s adjustment to the basis in
its USS stock under §1.358-6 is determined as if FP provided the FP stock pursuant to
the plan of reorganization.

SECTION 5. EFFECTIVE DATE

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Except as otherwise provided in this section 5, the regulations described in
section 4 of this notice will apply to a triangular reorganization that is completed on or
after April 25, 2014. The regulations described in this notice will not apply if (i) T was
not related to P or S (within the meaning of section 267(b)) immediately before the
triangular reorganization; (ii) the triangular reorganization was entered into either
pursuant to a written agreement that was (subject to customary conditions) binding
before April 25, 2014 and all times afterward, or pursuant to a tender offer announced
before April 25, 2014 that is subject to section 14(d) of the Securities and Exchange Act
of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through
240.14d-101) or that is subject to comparable foreign laws; and (iii) to the extent the P
acquisition that occurs pursuant to the plan of reorganization is not completed before
April 25, 2014, the P acquisition was included as part of the plan before April 25, 2014.
No inference is intended regarding the treatment of transactions described in
section 3 of this notice under current law, and the IRS may challenge such transactions
under applicable Code provisions or judicial doctrines.

SECTION 6. DRAFTING INFORMATION
The principal author of this notice is Shane McCarrick of the Office of Associate
Chief Counsel (International). However, other personnel from the IRS and the Treasury
Department participated in its development. For further information regarding this
notice, contact Mr. McCarrick at (202) 317-6937 (not a toll-free call).

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