n-15-79.pdf

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Additional Rules Regarding Inversions and Related Transactions

Notice 2015-79

SECTION 1. OVERVIEW
On September 22, 2014, the Department of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS) issued Notice 2014-52, 2014-42 IRB 712.
Notice 2014-52 announced that the Treasury Department and the IRS intend to issue
regulations that will address certain transactions that are structured to avoid the
purposes of sections 7874 and 367 of the Internal Revenue Code (Code), as well as
certain post-inversion tax avoidance transactions. Notice 2014-52 also announced that
the Treasury Department and the IRS expect to issue additional guidance to further limit
(i) inversion transactions that are contrary to the purposes of section 7874 and (ii) the
benefits of post-inversion tax avoidance transactions. This notice announces some of
the additional guidance referred to in Notice 2014-52.
Section 2 of this notice describes regulations that the Treasury Department and
the IRS intend to issue that will address transactions that are structured to avoid the
purposes of section 7874 by (i) requiring the foreign acquiring corporation to be subject
to tax as a resident of the relevant foreign country in order to have substantial business
activities in the relevant foreign country; (ii) disregarding certain stock of the foreign
acquiring corporation in “third-country” transactions; and (iii) clarifying the definition of
nonqualified property for purposes of disregarding certain stock of the foreign acquiring
corporation.

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Section 3 of this notice describes regulations that the Treasury Department and
the IRS intend to issue that will address certain post-inversion tax avoidance
transactions by (i) defining inversion gain for purposes of section 7874 to include certain
income or gain recognized by an expatriated entity from an indirect transfer or license of
property and providing for aggregate treatment of certain transfers or licenses of
property by foreign partnerships for purposes of determining inversion gain; and (ii)
requiring an exchanging shareholder to recognize all of the gain realized upon an
exchange of stock of a controlled foreign corporation (as defined in section 957) (CFC),
without regard to the amount of the CFC’s undistributed earnings and profits, if the
transaction terminates the status of the foreign subsidiary as a CFC or substantially
dilutes the interest of a United States shareholder (as defined in section 951(b)) (U.S.
shareholder) in the CFC.
Section 4 of this notice describes corrections and clarifications that the Treasury
Department and the IRS intend to make with respect to certain rules announced in
Notice 2014-52.
Section 5 of this notice provides the effective dates of the regulations described
in this notice, and section 6 of this notice requests comments and provides contact
information.
SECTION 2. REGULATIONS TO ADDRESS TRANSACTIONS CONTRARY TO THE
PURPOSES OF SECTION 7874
.01 Section 7874 Background
Under section 7874(a)(2)(B), a foreign corporation (foreign acquiring corporation)
generally is treated as a surrogate foreign corporation if, pursuant to a plan (or a series

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of related transactions), three conditions are satisfied. First, the foreign acquiring
corporation completes, after March 4, 2003, the direct or indirect acquisition of
substantially all of the properties held directly or indirectly by a domestic corporation
(acquisition). Second, after the acquisition, at least 60 percent of the stock (by vote or
value) of the foreign acquiring corporation is held by former shareholders of the
domestic corporation by reason of holding stock in the domestic corporation (at times
this notice refers to such percentage as the “ownership percentage,” and the fraction
used to calculate such percentage as the “ownership fraction”). And third, after the
acquisition, the expanded affiliated group that includes the foreign acquiring corporation
(EAG) does not have substantial business activities in the foreign country in which, or
under the law of which, the foreign acquiring corporation is created or organized
(relevant foreign country) when compared to the total business activities of the EAG.
Similar provisions apply if a foreign acquiring corporation acquires substantially all of the
properties constituting a trade or business of a domestic partnership. The domestic
corporation or the domestic partnership described in this paragraph is referred to in this
notice at times as the “domestic entity.” For purposes of this notice, a reference to a
domestic corporation, a domestic partnership, or a domestic entity includes a
successor, and the term “EAG” has the meaning provided in §1.7874-3(d)(4).
The tax treatment of an acquisition in which the EAG does not have substantial
business activities in the relevant foreign country varies depending on the level of owner
continuity. If the ownership percentage is at least 80, the foreign acquiring corporation
is treated as a domestic corporation for all purposes of the Code pursuant to section
7874(b). If, instead, the ownership percentage is at least 60 but less than 80 (in which

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case the acquisition is referred to in this notice as an “inversion transaction”), the foreign
acquiring corporation is respected as a foreign corporation, but the domestic entity and
certain related U.S. persons are treated as expatriated entities under section
7874(a)(2)(A). In the case of an inversion transaction, section 7874(a)(1) and (e)
prevent the use of certain tax attributes to reduce the U.S. tax owed with respect to
certain income or gain (referred to as “inversion gain”) recognized by an expatriated
entity with respect to certain transfers or licenses of property that occur as part of, or
after, the inversion transaction. See section 3.01(a) of this notice for additional
discussion of the taxation of inversion gain.
Under section 7874(c)(4), a transfer of properties or liabilities (including by
contribution or distribution) is disregarded if the transfer is part of a plan a principal
purpose of which is to avoid the purposes of section 7874.
Section 7874(c)(6) grants the Secretary authority to prescribe regulations as may
be appropriate to determine whether a corporation is a surrogate foreign corporation,
including regulations to treat stock as not stock. In addition, section 7874(g) grants the
Secretary authority to provide regulations necessary to carry out section 7874, including
regulations adjusting the application of section 7874 as necessary to prevent the
avoidance of the purposes of section 7874, including the avoidance of such purposes
through (i) the use of related persons, pass-through or other non-corporate entities, or
other intermediaries, or (ii) transactions designed to have persons cease to be (or not
become) members of EAGs or related persons.
Congress enacted section 7874 because it believed that “inversion transactions
resulting in a minimal presence in a foreign country of incorporation are a means of

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avoiding U.S. tax and should be curtailed.” S. Rep. No. 192, 108th Cong., 1st. Sess.
142 (Nov. 7, 2003) (Senate Report); Joint Committee on Taxation, General Explanation
of Tax Legislation Enacted in the 108th Congress (JCS-5-05) 343 (May 31, 2005) (JCT
Explanation). Congress expressed particular concern about how inversion transactions
“permit corporations and other entities to continue to conduct business in the same
manner as they did prior to the inversion, but with the result that the inverted entity
avoids U.S. tax on foreign operations and may engage in earnings stripping techniques
to avoid U.S. tax on domestic operations.” Senate Report at 142; JCT Explanation at
343.
.02 Transactions at Issue and Regulations to be Issued
(a) Substantial Business Activities of a Foreign Acquiring Corporation that is not Subject
to Tax as a Resident of the Relevant Foreign Country
The Treasury Department and the IRS are aware of transactions in which the
taxpayer asserts that the EAG has substantial business activities in the relevant foreign
country (that is, the foreign country in which, or under the law of which, the foreign
acquiring corporation is created or organized) when compared to the EAG’s total
business activities, but the foreign acquiring corporation is not subject to income
taxation in the relevant foreign country as a resident. This could occur, for example, if
the relevant foreign country determines the tax residency of an entity based on criteria
other than the place of creation or formation, such as the location in which the entity is
managed or controlled. If the foreign acquiring corporation is managed and controlled
in a third country, the foreign acquiring corporation may not be subject to tax as a
resident of the relevant foreign country (or, in some cases, of any foreign country).

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Alternatively, the foreign acquiring corporation may not be subject to tax as a resident of
the relevant foreign country because of disparate entity classification rules in the United
States and the relevant foreign country. For example, the foreign acquiring corporation
may be treated as a corporation for U.S. tax purposes under the entity classification
regulations promulgated under section 7701 (including by reason of a “check-the-box”
election), but as a fiscally transparent entity under the tax law of the relevant foreign
country. In such a case, the foreign acquiring corporation would not be subject to tax as
a resident of the relevant foreign country.
The Treasury Department and the IRS have determined that the policy
underlying the exception to section 7874 when there are substantial business activities
in the relevant foreign country is premised on the foreign acquiring corporation being
subject to tax as a resident of the relevant foreign country. For this purpose, the
statute’s reference to country of creation or organization reflects the U.S. standard for
determining tax residency. However, the U.S. standard for determining tax residency
does not always align with foreign countries' standards. Allowing the exception to apply
when the foreign acquiring corporation is not subject to tax as a resident of the relevant
foreign country effectively permits an EAG to replace its U.S. tax residence with tax
residence in any other country (or, in certain cases, in no other country), without regard
to the location of any substantial business activities conducted by the EAG. The
Treasury Department and the IRS believe that this result is contrary to the policy
underlying the substantial business activities test.
Accordingly, the Treasury Department and the IRS intend to issue regulations
under section 7874 to provide that an EAG cannot have substantial business activities

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in the relevant foreign country when compared to the EAG’s total business activities
unless the foreign acquiring corporation is subject to tax as a resident of the relevant
foreign country.
(b) Third-Country Transactions
The Treasury Department and the IRS are aware that certain acquisitions in
which a domestic entity combines with an existing foreign corporation are structured by
establishing a new foreign parent corporation for the combined group with a tax
residence that is different from that of the existing foreign corporation. In other words,
the parent corporation of the combined group will be a tax resident of a “third country.”
In such transactions, the stock or assets of the existing foreign corporation are acquired
by the new third-country parent, and the shareholders of the existing foreign corporation
receive more than 20 percent of the stock of the new third-country parent. Similarly, the
stock or assets of the domestic entity are acquired by the new third-country parent, and
the shareholders of the domestic entity receive less than 80 percent of the stock of the
new third-country parent.
In enacting section 7874, Congress believed that certain transactions in which a
U.S. parent corporation is replaced with a new foreign parent corporation have little or
no non-tax effect or purpose and should be disregarded for U.S. tax purposes, while in
other cases such transactions may have sufficient non-tax effect and purpose to be
respected, but warrant that any applicable corporate-level “toll charges” for establishing
the inverted structure not be offset by tax attributes such as net operating losses or
foreign tax credits. See Senate Report at 142, 143; JCT Explanation at 343. The
Treasury Department and the IRS have considered whether certain stock issued in an

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acquisition structured with a third-country parent should be disregarded pursuant to the
authority under sections 7874(c)(6) and (g) in order to effectuate this general purpose.
In particular, the Treasury Department and the IRS are concerned that a decision to
locate the tax residence of a new foreign parent corporation outside of both the United
States and the jurisdiction in which the existing foreign corporation is tax resident
generally is driven by tax planning, including the facilitation of U.S. tax avoidance
following the acquisition. For example, the third country may have a more favorable
income tax treaty with the United States than the country in which the existing foreign
corporation is tax resident, with the result that U.S. withholding taxes on dividends,
interest, and royalties paid by the domestic entity may be reduced or eliminated. The
third country may also have a more favorable tax system than the country in which the
existing foreign parent corporation is tax resident, including a less restrictive regime for
controlled foreign corporations than the country in which the existing foreign corporation
is tax resident. Thus, a third-country parent typically is chosen to facilitate the use of
low- or no-taxed entities to erode the U.S. tax base following the acquisition.
The Senate Report and the JCT Explanation indicate that the 80-percent
threshold under section 7874(b) for treating a foreign acquiring corporation as a
domestic corporation reflects an assumption that, when the existing foreign
corporation’s shareholders will own more than 20 percent of the interests in the
combined group, there is a sufficient likelihood of a non-tax business purpose for
replacing the U.S. parent with a foreign parent to warrant respecting the new foreign
parent. However, the Treasury Department and the IRS have concluded that, when a
domestic entity combines with an existing foreign corporation by establishing a new

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parent for the combined group that is tax resident in a third country, the likelihood that
there is a sufficient non-tax business purpose for replacing the U.S. parent with a
foreign parent is significantly lower than Congress assumed in establishing the 80-
percent threshold.
The Treasury Department and the IRS have accordingly determined that, in
certain circumstances, the use of a third-country parent is contrary to the policy
underlying the 80-percent threshold of section 7874(b) and is an appropriate
circumstance for the exercise of regulatory authority under sections 7874(c)(6) and (g).
The Treasury Department and the IRS therefore intend to issue regulations under
sections 7874(c)(6) and (g) to address these transactions by disregarding certain stock
of a foreign acquiring corporation that is issued to the shareholders of the existing
foreign corporation for purposes of determining whether the 80-percent threshold is met.
The regulations will apply to an acquisition that satisfies four requirements.
First, in a transaction related to the acquisition (referred to in this notice as the
“foreign target acquisition”), the foreign acquiring corporation directly or indirectly
acquires substantially all of the properties held directly or indirectly by another foreign
corporation (foreign target corporation). For purposes of determining if there is a foreign
target acquisition with respect to a foreign corporation, the principles of section
7874(a)(2)(B)(i) (defining an acquisition) and §1.7874-2(c) (regarding acquisitions of
properties of a domestic entity and stock of a foreign corporation) apply with the
following modifications: (i) the principles of §1.7874-2(c)(1) (providing rules for
determining whether there is an indirect acquisition of properties of a domestic entity)
shall be applied by substituting the term “foreign target” for “domestic” wherever it

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appears, and (ii) the principles of §1.7874-2(c)(2) (regarding acquisitions of stock of a
foreign corporation that owns a domestic corporation or partnership) shall be applied by
substituting the term “domestic” for “foreign” and the term “foreign” for “domestic”
wherever such terms appear. Furthermore, except as provided in this paragraph, if
there is a foreign target acquisition of a foreign corporation (upper-tier foreign
corporation) that owns directly stock of another foreign corporation (lower-tier foreign
corporation), for purposes of this section 2.02(b) there is not also a foreign target
acquisition with respect to the lower-tier foreign corporation (or any foreign corporation
owned directly or indirectly by the lower-tier foreign corporation). However, if the upper-
tier foreign corporation acquired the stock of the lower-tier foreign corporation in a
transaction related to the acquisition, then there would also be a foreign target
acquisition with respect to the lower-tier foreign corporation (which would be treated as
an upper-tier foreign corporation for purposes of further applying the rules of this
paragraph).
Second, the gross value of all property directly or indirectly acquired by the
foreign acquiring corporation in the foreign target acquisition exceeds 60 percent of the
gross value of all foreign group property (as defined in section 2.01(b) of Notice 2014-
52), but, for this purpose, gross value shall not include any property that is foreign group
nonqualified property (as defined in section 2.01(b) of Notice 2014-52, but taking into
account the corrections to the definition of foreign group nonqualified property described
in section 4.01(b) of this notice).
Third, the tax residence of the foreign acquiring corporation is not the same as
that of the foreign target corporation, as determined before the foreign target acquisition

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and any transaction related to the foreign target acquisition. A change in the location of
the management and control of a foreign target corporation is treated as a transaction
for this purpose.
Fourth, not taking into account the rules announced in this section 2.02(b), the
ownership percentage is at least 60 but less than 80.
When these four requirements are satisfied, the regulations will provide that
stock of the foreign acquiring corporation that otherwise would be included in the
denominator of the ownership fraction will be excluded from the denominator to the
extent the stock is held by former owners of the foreign target corporation by reason of
holding stock in the foreign target corporation (based on the principles of section
7874(a)(2)(B)(ii)).
If, in one or more transactions related to the acquisition described in section
7874(a)(2)(B)(i), the foreign acquiring corporation directly or indirectly acquires multiple
foreign target corporations that are tax residents of the same foreign country, then, for
purposes of applying the regulations described in this section 2.02(b), all such
transactions that otherwise would separately qualify as a foreign target acquisition will
be treated as a single foreign target acquisition and those foreign target corporations
will be treated as a single entity.
The following examples illustrate the regulations described in this section 2.02(b):
Example 1. (i) Facts. FA, a newly formed foreign corporation that is a tax
resident of Country Y, acquires all the stock of DT, a domestic corporation that is wholly
owned by Individual A, solely in exchange for 65 shares of newly issued FA stock (DT
acquisition). In a transaction related to the DT acquisition, FA acquires all the stock of
FT, a foreign corporation that is a tax resident of Country X and wholly owned by
Individual B, solely in exchange for the remaining 35 shares of newly issued FA stock
(FT acquisition).

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(ii) Analysis. A portion of the FA stock is excluded from the denominator of the
ownership fraction because the DT acquisition satisfies the four requirements set forth
in section 2.02(b) of this notice. The first requirement is satisfied because under the
principles of section 7874(a)(2)(B)(i) and §1.7874-2(c) (as modified by section 2.02(b) of
this notice), FA is treated as acquiring 100 percent of the properties held by FT as a
result of the FT acquisition. Therefore, the FT acquisition is a foreign target acquisition
with respect to FT. The second requirement (that the gross value of all property directly
or indirectly acquired in the FT acquisition exceeds 60 percent of the gross value of all
foreign group property) is also satisfied because the foreign group property is comprised
solely of the property acquired in the FT acquisition. The third requirement is satisfied
because the foreign country in which FA is a tax resident (Country Y) is not the foreign
country in which FT is a tax resident (Country X). Finally, the fourth requirement is
satisfied because, absent the rules described in section 2.02(b) of this notice, the
ownership fraction would be 65/100 and the ownership percentage would be 65.
Accordingly, section 2.02(b) of this notice excludes from the denominator of the
ownership fraction the 35 shares of FA stock held by the former shareholder of FT by
reason of holding stock in FT. As a result, the ownership fraction is 65/65 and the
ownership percentage is 100. The result would be the same if FA instead had directly
acquired all of the properties held by FT in exchange for FA stock, for example, in a
transaction that would qualify for U.S. income tax purposes as an asset reorganization
under section 368.

Example 2. (i) Facts. The facts are the same as in Example 1 except that,
before the FT acquisition, but in a transaction related to the FT acquisition, FT
reincorporates in Country Y and, consequently, becomes a tax resident of Country Y.

(ii) Analysis. The analysis is the same as in Example 1 with respect to the first,
second, and fourth requirements set forth in section 2.02(b) of this notice. The third
requirement is applied by comparing the foreign country in which FA is a tax resident,
which is Country Y, to the country in which FT was a tax resident prior to the FT
acquisition and any transaction related to the FT acquisition, which is Country X. As a
result, the third requirement is also satisfied because FA and FT are not tax residents of
the same country for this purpose. Accordingly, section 2.02(b) of this notice excludes
from the denominator of the ownership fraction the 35 shares of FA stock held by the
former shareholder of FT by reason of holding stock in FT. Consequently, the
ownership fraction is 65/65 and the ownership percentage is 100.

.03 Clarification of Regulations under §1.7874-4T That Disregard Certain Stock
Transferred in Exchange for Nonqualified Property
(a) Background
Under section 7874(c)(2)(B) (statutory public offering rule), stock of the foreign
acquiring corporation that is sold in a public offering related to the acquisition is

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excluded from the denominator of the ownership fraction. Section 1.7874-4T modifies
the statutory public offering rule. Specifically, §1.7874-4T(b) provides that, subject to a
de minimis exception, “disqualified stock” is not included in the denominator of the
ownership fraction. Disqualified stock generally includes stock of the foreign acquiring
corporation that is transferred in exchange for “nonqualified property” when that
exchange is related to the acquisition. Section 1.7874-4T(i)(7) provides that the term
nonqualified property means: (i) cash or cash equivalents, (ii) marketable securities, (iii)
certain obligations (for example, obligations owed by members of the EAG that includes
the foreign acquiring corporation), or (iv) any other property acquired in a transaction (or
series of transactions) related to the acquisition with a principal purpose of avoiding the
purposes of section 7874. Section 1.7874-4T(i)(6) provides that, for this purpose, the
term marketable securities has the meaning set forth in section 453(f)(2), except that
the term does not include stock of a corporation or an interest in a partnership that
becomes a member of the expanded affiliated group that includes the foreign acquiring
corporation in a transaction (or series of transactions) related to the acquisition, unless
a principal purpose for acquiring such stock or partnership interest is to avoid the
purposes of section 7874. This notice refers at times to the property described in
clauses (i), (ii), and (iii) of this paragraph collectively as “specified nonqualified property”
and to the property described in clause (iv) as “avoidance property.”
Example 2 of §1.7874-4T(j) illustrates a transfer of stock of the foreign acquiring
corporation in exchange for avoidance property. In this example, PRS, a partnership
with individual partners, transfers marketable securities to FT, a newly formed foreign
corporation, in exchange solely for all of the FT stock. PRS then transfers the FT stock

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to FA, a newly formed foreign corporation, in exchange solely for 25 shares of FA stock.
Individual A, who is unrelated to PRS, transfers all of the stock of DT, a domestic
corporation of which Individual A is the sole shareholder, to FA in exchange solely for
75 shares of FA stock. The facts of the example state that FA acquires the FT stock
with a principal purpose of avoiding the purposes of section 7874. Accordingly, the
example concludes that the FT stock is nonqualified property, and, therefore, that the 25
shares of FA stock transferred to PRS in exchange for the FT stock are disqualified
stock and are not included in the denominator of the ownership fraction.
(b) Transactions at Issue and Regulations to be Issued

The Treasury Department and the IRS are concerned that some taxpayers may
be narrowly interpreting the definition of avoidance property. In particular, taxpayers
may be asserting that avoidance property is limited to property, such as stock, that is
used to indirectly transfer specified nonqualified property to the foreign acquiring
corporation, as in the transaction described in Example 2 of §1.7874-4T(j).
This interpretation of §1.7874-4T is inconsistent with both the plain language and
purpose of the regulation. In addition, section 7874(c)(4) separately provides that a
transfer of properties or liabilities is disregarded if the transfer is part of a plan a
principal purpose of which is to avoid the purposes of section 7874. Accordingly, the
Treasury Department and the IRS intend to issue regulations that will clarify §1.7874-4T
to provide that avoidance property means any property (other than specified
nonqualified property) acquired with a principal purpose of avoiding the purposes of
section 7874, regardless of whether the transaction involves an indirect transfer of
specified nonqualified property. Furthermore, the regulations will remove the phrase “in

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a transaction (or series of transactions) related to the acquisition” from the definition of
avoidance property. The inclusion of that phrase in the definition is redundant with
language contained in the operative rule in §1.7874-4T(c)(1) for identifying disqualified
stock, which itself requires, in relevant part, that there be an exchange of nonqualified
property for stock of the foreign acquiring corporation in a transaction that is related to
the acquisition. The regulations also will remove the phrase “unless a principal purpose
for acquiring such stock or partnership interest is to avoid the purposes of section 7874”
from the definition of marketable securities. The inclusion of that phrase in the definition
is redundant with the rule for avoidance property, because if stock of a corporation or a
partnership interest described in section 453(f)(2) does not constitute marketable
securities due to the corporation or partnership becoming a member of the EAG, the
stock or partnership interest is not specified nonqualified property and, therefore, may
be avoidance property under §1.7874-4T(i)(7)(iv).
In addition, Example 1 and Example 2 of §1.7874-4T(j) (which illustrate transfers
of stock of the foreign acquiring corporation in exchange for marketable securities and
avoidance property, respectively) will be clarified to include a reference to section
7874(c)(4). Finally, in light of section 2.02(b) of this notice, which applies to certain
third-country transactions, all the examples described in §1.7874-4T(j) will be modified
to provide that, unless otherwise indicated, FA, FMS, FS, and FT are tax residents of
the same foreign country.
The following example illustrates the clarification described in this section
2.03(b):
Example. (i) Facts. DT is a publicly traded domestic corporation. PRS is a
foreign partnership that is unrelated to DT. PRS transfers certain business assets (PRS

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properties) to FA, a newly formed foreign corporation, in exchange solely for 25 shares
of FA stock. The shareholders of DT transfer all of their DT stock to FA in exchange
solely for the remaining 75 shares of FA stock. None of the PRS properties is specified
nonqualified property, but FA acquires the PRS properties with a principal purpose of
avoiding the purposes of section 7874.

(ii) Analysis. Under §1.7874-4T(i)(7)(iv), the PRS properties transferred to FA
are nonqualified property, because FA acquires the PRS properties in a transaction
related to the DT acquisition with a principal purpose of avoiding the purposes of section
7874. Accordingly, the 25 shares of FA stock transferred by FA to PRS in exchange for
the PRS properties are disqualified stock described in §1.7874-4T(c)(1)(i). Section
1.7874-4T(c)(2) does not apply to reduce the amount of disqualified stock described in
§1.7874-4T(c)(1)(i) because the transfer of FA stock in exchange for the PRS properties
increases the fair market value of FA’s assets by the fair market value of the PRS
properties. Accordingly, pursuant to §1.7874-4T(b), the 25 shares of FA stock
transferred to PRS in exchange for the PRS properties are not included in the
denominator of the ownership fraction. Furthermore, even in the absence of §1.7874-
4T(i)(7)(iv), the transfer of the PRS properties to FA would be disregarded pursuant to
section 7874(c)(4). Therefore, the only FA stock included in the ownership fraction is
the FA stock transferred to DT’s former shareholders in exchange for their DT stock,
and that FA stock is included in both the numerator and the denominator of the
ownership fraction. Thus, the ownership fraction is 75/75.

SECTION 3. REGULATIONS TO ADDRESS POST-INVERSION TAX AVOIDANCE
TRANSACTIONS
.01 Regulations under Section 7874 Defining Inversion Gain
(a) Background
If an acquisition is an inversion transaction, section 7874(a)(1) requires that the
taxable income of an “expatriated entity” for any taxable year that includes any portion
of the “applicable period” be no less than the “inversion gain” of the entity for the taxable
year. Section 7874(a)(2)(A) provides that the term “expatriated entity” means a
domestic corporation or a domestic partnership referred to in section 7874(a)(2)(B)(i)
(which describes the acquisition) or any U.S. person that is related (within the meaning
of section 267(b) or 707(b)(1)) to such domestic corporation or domestic partnership.
Section 7874(d)(1) defines the term “applicable period” as the period beginning on the

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first date properties are acquired as part of the acquisition, and ending on the date that
is 10 years after the last date properties are acquired as part of the acquisition. In
addition, section 7874(d)(2) provides that the term “inversion gain” means:
The income or gain recognized by reason of the transfer during the applicable
period of stock or other properties by an expatriated entity, and any income
received or accrued during the applicable period by reason of a license of any
property by an expatriated entity—
(A) as part of the acquisition described in subsection (a)(2)(B)(i), or
(B) after such acquisition if the transfer or license is to a foreign related
person.
Subparagraph (B), however, does not apply to property described in section 1221(a)(1)
(generally, property that is inventory) in the hands of the expatriated entity.
Section 7874(d)(3) provides that the term “foreign related person” means, with
respect to any expatriated entity, a foreign person that is (i) related (within the meaning
of section 267(b) or 707(b)(1)) to the entity, or (ii) under the same common control
(within the meaning of section 482) as the entity.
Finally, section 7874(e)(2)(A) provides that, in the case of an expatriated entity
that is a partnership, section 7874(a)(1) shall apply at the partner rather than the
partnership level.
Section 7874(a)(1), together with section 7874(e)(1) (which prevents the use of
certain credits to offset U.S. tax on inversion gain), ensure that an expatriated entity
generally pays current U.S. tax with respect to inversion gain. These rules are intended
to ensure that an appropriate “toll charge” is paid on transactions that accompany or

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follow an inversion transaction and are designed to “remove income from foreign
operations from the U.S. taxing jurisdiction.” See H.R. Rep. No. 755, 108th Cong., 2nd
Sess. 568, 574 (2004) (Conf. Rep.); JCT Explanation at 342, 345.
(b) Transactions at Issue and Regulations to be Issued
The Treasury Department and the IRS are concerned that certain indirect
transfers of stock or other property by an expatriated entity (rather than direct transfers
by the expatriated entity itself) may have the effect of removing foreign operations from
U.S. taxing jurisdiction while avoiding current U.S. tax, contrary to the policy underlying
sections 7874(a)(1) and (e)(1). This is because under current law the income is not
inversion gain and therefore could be offset by tax attributes. For example, following an
inversion transaction, an expatriated entity that wholly owns a CFC could cause the
CFC to transfer property (including stock of a lower-tier CFC) to a specified related
person (as defined in section 3.02(e)(i) of Notice 2014-52) in a fully taxable transaction.
Gain from the transfer may be subpart F income of the transferor CFC and, as a result,
the expatriated entity may have an income inclusion under section 951(a)(1)(A)
attributable to the transfer. However, such an inclusion is not inversion gain under
current law, and therefore the expatriated entity’s income can be offset by tax attributes
(such as net operating losses). Similar concerns arise in connection with a license of
property by a CFC of an expatriated entity to a specified related person.
The Treasury Department and the IRS have determined that it is inconsistent
with the purposes of sections 7874(a)(1) and (e) to exclude from the definition of
inversion gain income or gain recognized by an expatriated entity from an indirect
transfer or license of property in circumstances analogous to those set forth in sections

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7874(d)(2)(A) and (B). Accordingly, the Treasury Department and the IRS intend to
issue regulations under section 7874(g) that will provide that inversion gain includes
income or gain recognized by an expatriated entity from an indirect transfer or license of
property, such as an expatriated entity’s section 951(a)(1)(A) gross income inclusions
taken into account during the applicable period that are attributable to a transfer of stock
or other properties or a license of property, either (i) as part of the acquisition, or (ii)
after such acquisition if the transfer or license is to a specified related person. However,
clause (ii) of the preceding sentence will not apply to property described in section
1221(a)(1) in the hands of the CFC.
In addition, the Treasury Department and the IRS intend to issue regulations that
will provide that, if a partnership that is a foreign related person transfers or licenses
property, a partner of the partnership shall be treated as having transferred or licensed
its proportionate share of that property, as determined under the rules and principles of
sections 701 through 777, for purposes of determining inversion gain.
The following example illustrates the regulations described in this section 3.01(b):
Example. (i) Facts. On July 1, 2016, FA, a foreign corporation, acquires all the
stock of DT, a domestic corporation, in an inversion transaction. When the inversion
transaction occurred, DT wholly owned FS, a foreign corporation that is a CFC. During
the applicable period, FS sells to FA property that is not described in section 1221(a)(1)
in the hands of FS. Under section 951(a)(1)(A), DT has a $100x gross income inclusion
that is attributable to FS’s sale of the property.

(ii) Analysis. Pursuant to section 7874(a)(2)(A), DT is an expatriated entity.
Under section 3.01(b) of this notice, DT’s $100x gross income inclusion under section
951(a)(1)(A) is inversion gain, because it is taken into account during the applicable
period and is attributable to a transfer of property after the inversion transaction to a
specified related person (FA). Sections 7874(a)(1) and (e) therefore prevent the use of
certain tax attributes (such as net operating losses) to reduce the U.S. tax owed with
respect to DT’s $100x gross income inclusion under section 951(a)(1)(A).

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.02 Regulations under Section 367(b) Regarding Certain Exchanges of Stock of an
Expatriated Foreign Subsidiary
(a) Background
Section 367(b)(1) provides that, in the case of an exchange described in section
332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property
described in section 367(a)(1), a foreign corporation shall be considered to be a
corporation except to the extent provided in regulations prescribed by the Secretary
which are necessary or appropriate to prevent the avoidance of Federal income taxes.
Section 367(b)(2) provides that the regulations prescribed pursuant to section 367(b)(1)
shall include (but shall not be limited to) regulations dealing with the sale or exchange of
stock or securities in a foreign corporation by a United States person, including
regulations providing the circumstances under which gain is recognized or deferred,
amounts are included in gross income as a dividend, adjustments are made to earnings
and profits, or adjustments are made to the basis of stock or securities.
In general, current regulations under §1.367(b)-4(b), without regard to the
regulations described in Notice 2014-52, require a shareholder that exchanges stock of
a foreign corporation in an exchange subject to section 367(b) to include in income as a
deemed dividend the section 1248 amount (as defined in §1.367(b)-2(c)(1)) with respect
to the stock exchanged if the exchange results in either a loss of CFC status of the
foreign corporation whose stock is exchanged or a loss of section 1248 shareholder
status of the exchanging shareholder (or of a shareholder of the exchanging
shareholder when there is an exchange of stock of a lower-tier CFC). See §1.367(b)-
4(b)(1)(i)(A) and (B), which describe an exchanging shareholder subject to these

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regulations and the conditions under which an income inclusion is required,
respectively.
Notice 2014-52 announced that the regulations under §1.367(b)-4(b) would be
amended to require an income inclusion in certain nonrecognition transactions that
occur after an inversion transaction and that dilute the interest of a U.S. shareholder in a
CFC, because such transactions could allow the U.S. shareholder to avoid tax on the
CFC’s earnings and profits. Specifically, subject to a de minimis rule, section 3.02(e)(ii)
of Notice 2014-52 provides that an exchanging shareholder described in §1.367(b)-
4(b)(1)(i)(A) will be required to include in income as a deemed dividend the section
1248 amount with respect to stock of an expatriated foreign subsidiary that is
exchanged in a specified exchange during the applicable period, without regard to
whether any condition of §1.367(b)-4(b)(1)(i)(B) is satisfied. The terms “expatriated
foreign subsidiary” and “specified exchange” are defined in sections 3.01(b) and
3.02(e)(ii), respectively, of Notice 2014-52.
(b) Transactions at Issue and Regulations to be Issued
The Treasury Department and the IRS are concerned that certain nonrecognition
transactions that dilute a U.S. shareholder’s ownership of an expatriated foreign
subsidiary may allow the U.S. shareholder to avoid U.S. tax on unrealized appreciation
in property held by the expatriated foreign subsidiary at the time of the exchange. This
could occur when the amount of realized gain in the stock of the expatriated foreign
subsidiary that is exchanged in the specified exchange exceeds the earnings and profits
attributable to such stock for purposes of section 1248. For example, at the time of the
exchange, the expatriated foreign subsidiary could hold valuable self-developed

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intangible property that has not yet been brought to market and therefore has not
generated any significant earnings and profits. Any unrealized appreciation in the
intangible property, when recognized by the expatriated foreign subsidiary after the
exchange, would create earnings and profits that are attributable to gain that
economically had accrued at the time of the exchange.
The Treasury Department and the IRS have determined that net unrealized built-
in gain in property held by an expatriated foreign subsidiary at the time of the exchange
gives rise to the same policy concerns that arise with respect to earnings and profits of
the expatriated foreign subsidiary that exist at the time of the exchange. Therefore, to
prevent the avoidance of U.S. tax on such net unrealized gain, it is appropriate to
require the exchanging shareholder to recognize all of the gain in the stock of the
expatriated foreign subsidiary that is exchanged, without regard to the amount of the
expatriated foreign subsidiary’s undistributed earnings and profits. Accordingly, the
Treasury Department and the IRS intend to amend the regulations under section 367(b)
to provide that, if an exchanging shareholder would be required under the rules
announced in section 3.02(e)(ii) of Notice 2014-52 to include in income as a deemed
dividend the section 1248 amount (if any) with respect to stock of an expatriated foreign
subsidiary, the exchanging shareholder also must recognize all realized gain with
respect to such stock, after taking into account any increase in basis resulting from a
deemed dividend with respect to the exchange provided in §1.367(b)-2(e)(3)(ii). For this
purpose, the amount of realized gain that would be recognized is reduced by the
amount of gain recognized under other applicable provisions of the Code, such as
section 356.

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Furthermore, a conforming change will be made to the regulations described in
section 3.02(e)(i) of Notice 2014-52, which will recharacterize under section 7701(l)
certain transfers of “specified stock” (as defined in section 3.02(e)(i) of Notice 2014-52),
subject to the exceptions described in section 3.02(e)(i)(C) of Notice 2014-52.
Specifically, the first exception described in section 3.02(e)(i)(C) applies either when a
transfer of specified stock gives rise to a deemed dividend to the exchanging
shareholder under §1.367(b)-4 (including by reason of the regulations described in
section 3.02(e)(ii) of Notice 2014-52), or when the exchanging shareholder is required
to recognize and include in income all of the gain in the specified stock. Consistent with
the modification described in this section 3.02(b), when the regulations described in
Notice 2014-52 are issued, the first exception described in section 3.02(e)(i)(C) will be
modified to be applicable only if, as a result of the transfer, all the gain in the specified
stock is recognized. See section 4.03 of this notice for additional discussion of the
application of this notice and Notice 2014-52 to transfers of specified stock.
The following example illustrates the regulations described in this section 3.02(b):
Example 1. (i) Facts. FA, a foreign corporation, wholly owns DT, a domestic
corporation, which in turn, wholly owns FT, a foreign corporation that is a CFC. FA
wholly owns FS, a foreign corporation. FA acquired all the stock of DT in an inversion
transaction that was completed on July 1, 2016. Accordingly, DT is a domestic entity,
FT is an expatriated foreign subsidiary, and FA and FS are each a specified related
person with respect to FT. During the applicable period, DT transfers to FS all of the
stock of FT solely in exchange for FS voting stock representing 60% of the outstanding
stock of FS, pursuant to a reorganization described in section 368(a)(1)(B).
Immediately before the exchange, FT is a CFC in which DT is a section 1248
shareholder. Immediately after the exchange, FS and FT are CFCs in which DT is a
section 1248 shareholder. At the time of the exchange, the FT stock owned by DT has
a fair market value of $150x and a tax basis of $50x (such that the FT stock has a built-
in gain of $100x). In addition, the earnings and profits of FT attributable to DT’s FT
stock is $60x and therefore the section 1248 amount with respect to the FT stock is
$60x (the lesser of the $60x of earnings and profits attributable to the FT stock and the
$100x gain in the FT stock).

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(ii) Analysis. Under §1.367(b)-4(b)(1)(i), as modified by the regulations described
in section 3.02(e)(ii) of Notice 2014-52, DT must include in income as a deemed
dividend $60x, the section 1248 amount with respect to its FT stock. Because DT is
required to include in income as a deemed dividend the section 1248 amount, if any,
with respect to its FT stock under section 3.02(e)(ii) of Notice 2014-52, the rules in
section 3.02(b) of this notice apply. As a result, DT must also recognize all realized
gain with respect to its FT stock after taking into account the $60x increase in basis in
the FT stock under §1.367(b)-2(e)(3)(ii), or $40x ($150x – ($50x + $60x)). If instead the
section 1248 amount with respect to the FT stock were zero (because, for example, FT
had no earnings and profits), DT would recognize all $100x of realized gain with respect
to its FT stock.

SECTION 4. CORRECTIONS AND CLARIFYING CHANGES TO CERTAIN RULES IN
NOTICE 2014-52
.01 Regulations under Section 7874 to Disregard Certain Stock Attributable to Passive
Assets
(a) Background
Notice 2014-52 announced that the Treasury Department and the IRS intend to
issue regulations under section 7874(c)(6) that will exclude from the denominator of the
ownership fraction certain stock of a foreign acquiring corporation that is attributable to
passive assets. Specifically, section 2.01(b) of Notice 2014-52 provides that a portion
of the stock of a foreign acquiring corporation will be excluded from the denominator of
the ownership fraction when more than 50 percent of the gross value of all “foreign
group property” is “foreign group nonqualified property.” For this purpose, section
2.01(b) of Notice 2014-52 provides the general rule that foreign group nonqualified
property is foreign group property (as defined in section 2.01(b) of Notice 2014-52) that
is described in §1.7874-4T(i)(7), other than property that gives rise to income described
in section 1297(b)(2)(A) (PFIC banking exception) or section 954(h) or (i) (subpart F
exceptions for qualified banking or financing income and for qualified insurance income,

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respectively, determined by substituting the term “foreign corporation” for the term
“controlled foreign corporation”). In addition, a special rule treats certain property
(referred to as “substitute property”) that would not be foreign group nonqualified
property under the general rule as foreign group nonqualified property if, in a transaction
related to the acquisition, such property is acquired in exchange for other property that
would be foreign group nonqualified property under the general rule.
(b) Modification of the General Definition of Foreign Group Nonqualified Property
(i) Exclusion for property that gives rise to income described in section
1297(b)(2)(B)
Notice 2014-52 did not exclude property that gives rise to income described in
section 1297(b)(2)(B) (PFIC insurance exception) from the general definition of foreign
group nonqualified property. Commenters have noted that certain insurance companies
may not be able to satisfy the requirements of the subpart F exception for qualified
insurance income under section 954(i), which is a narrower provision than section
1297(b)(2)(B). The Treasury Department and the IRS have determined that the rule
described in Notice 2014-52 with respect to insurance companies can lead to
inappropriate results in certain cases. Accordingly, the regulations described in section
2.01(b) of Notice 2014-52 will provide that property that gives rise to income described
in the PFIC insurance exception will be excluded from the general definition of foreign
group nonqualified property, but such property will be subject to the special rule for
substitute property. Nevertheless, the Treasury Department and the IRS have
significant concerns about certain corporations that do not conduct a bona fide active
insurance business or whose investment assets exceed the amount necessary to meet

26

their obligations under insurance and annuity contracts, but that nonetheless take the
position that they earn income described in section 1297(b)(2)(B) with respect to all of
their activities and investment assets. In this regard, on April 24, 2015, proposed
regulations under §1.1297-4 were published in the Federal Register (REG-108214-15)
to provide guidance on when a foreign insurance company’s income is excluded from
the definition of passive income under the PFIC insurance exception. In the preamble
to those proposed regulations, the Treasury Department and the IRS requested
comments on appropriate methodologies for determining the extent to which assets are
held to meet obligations under insurance and annuity contracts. Accordingly, the
Treasury Department and the IRS expect to issue separate guidance under section
1297(b)(2)(B) to prevent companies from inappropriately applying the PFIC insurance
exception.
(ii) Exclusion of property held by certain domestic corporations
Commenters have noted that the general definition of foreign group nonqualified
property in Notice 2014-52 includes certain property held by domestic corporations
engaged in the active conduct of a banking or insurance business. This could occur, for
example, if a foreign acquiring corporation held all the stock of a domestic corporation
prior to an acquisition. The Treasury Department and the IRS have determined that this
definition may lead to inappropriate results in certain cases. Consequently, the
regulations described in section 2.01(b) of Notice 2014-52 will provide that the general
definition of foreign group nonqualified property does not include property held by a
domestic corporation that is subject to tax as an insurance company under subchapter
L, provided that the property is required to support, or is substantially related to, the

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active conduct of an insurance business. Furthermore, the regulations will provide that
the general definition of foreign group nonqualified property does not include property
held by a domestic corporation if that property gives rise to income described in section
954(h), determined by substituting the term “domestic corporation” for the term
“controlled foreign corporation” and without regard to the phrase “located in a country
other than the United States” in section 954(h)(3)(A)(ii)(I) and without regard to any
inference that the tests in section 954(h) should be calculated or determined without
taking into account transactions with customers located in the United States. In these
cases, however, the special rule for substitute property will apply.
.02 Regulations under Section 7874 to Disregard Certain Distributions by the Domestic
Entity
(a) Background
Notice 2014-52 announced that the Treasury Department and the IRS intend to
issue regulations under section 7874 that disregard certain distributions made by a
domestic entity before being acquired by a foreign acquiring corporation. Specifically,
section 2.02(b) of Notice 2014-52 provides that non-ordinary course distributions (as
defined in section 2.02(b) of Notice 2014-52) made by a domestic entity (including a
predecessor) during the 36-month period ending on the acquisition date (within the
meaning of §1.7874-3T(d)(1)) are disregarded for purposes of section 7874.
(b) Addition of a De Minimis Exception
Commenters have noted that the rules announced in section 2.02(b) of Notice
2014-52 could cause section 7874 to apply to an acquisition even though the former
owners of the domestic entity actually own no, or only a de minimis amount of, stock in

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the foreign acquiring corporation after the acquisition. In general, this could occur when
stock of the foreign acquiring corporation is disregarded for purposes of section 7874.
For example, assume that, pursuant to a plan to purchase the stock of a domestic
corporation, which made a non-ordinary course distribution, the purchaser forms a
newly formed foreign acquiring corporation with cash and the foreign acquiring
corporation uses the cash to purchase the stock of the domestic corporation. In
applying the ownership percentage, the stock held by the shareholders of the foreign
acquiring corporation is disregarded under §1.7874-4T(b) (which disregards certain
stock of the foreign acquiring corporation received in exchange for nonqualified
property). This result is similar to a result that could occur under §1.7874-4T(b), absent
the de minimis exception provided in §1.7874-4T(d)(1), when the former shareholders of
the domestic entity in fact acquire a small interest in the foreign acquiring corporation by
reason of having held an interest in the domestic entity. The Treasury Department and
the IRS have determined that the policy reasons for providing the de minimis exception
in §1.7874-4T are equally applicable to the regulations described in section 2.02(b) of
Notice 2014-52.
Accordingly, the Treasury Department and the IRS intend to include in the
regulations described in section 2.02(b) of Notice 2014-52 a de minimis exception that
will implement this policy. This exception will apply to an acquisition that meets two
requirements. First, the ownership percentage, determined without regard to the
application of §1.7874-4T(b) and the rules announced in sections 2.01(b) and 2.02(b) of
Notice 2014-52, must be less than five (by vote and value). Second, after the
acquisition and all transactions related to the acquisition are completed, former

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shareholders (within the meaning of §1.7874-2(b)(2)) or former partners (within the
meaning of §1.7874-2(b)(3)), as applicable, of the domestic entity, in the aggregate,
must own (applying the attribution rules of section 318(a) with the modifications
described in section 304(c)(3)(B)) less than five percent (by vote and value) of the stock
of (or a partnership interest in) any member of the EAG that includes the foreign
acquiring corporation. If these two requirements are satisfied, the rules announced in
section 2.02(b) of Notice 2014-52 will not apply to the acquisition and, as a result, no
distributions will be treated as non-ordinary course distributions that are disregarded
under those rules. However, any distributions that are part of a plan a principal purpose
of which is to avoid the purposes of section 7874 will be disregarded under section
7874(c)(4).
.03 Regulations to Address Transactions to De-Control or Significantly Dilute Ownership
of Certain CFCs
(a) Background
Notice 2014-52 announced that the Treasury Department and the IRS intend to
issue regulations under section 7701(l) that will recharacterize certain post-inversion
transactions that otherwise would de-control or significantly dilute a U.S. shareholder’s
ownership of a CFC that is an expatriated foreign subsidiary. The general rule in
section 3.02(e)(i) of Notice 2014-52 provides that a specified transaction completed
during the applicable period is recharacterized under section 7701(l) in the manner
described in section 3.02(e)(i)(A) of Notice 2014-52. For this purpose, a specified
transaction is a transaction in which stock in an expatriated foreign subsidiary, referred
to as “specified stock,” is transferred (including by issuance) to a specified related

30

person. The term “expatriated foreign subsidiary” is defined in section 3.01(b) of Notice
2014-52, and the terms “specified transaction,” “specified stock,” and “specified related
party” are defined in section 3.02(e)(i) of Notice 2014-52.
This general rule is subject to two exceptions described in section 3.02(e)(i)(C) of
Notice 2014-52. The first exception is discussed in section 3.02(b) of this notice. The
second exception (small dilution exception) applies if (i) the expatriated foreign
subsidiary is a CFC immediately after the specified transaction and all related
transactions and (ii) the amount of stock (by value) in the expatriated foreign subsidiary
(and any lower-tier expatriated foreign subsidiary) that is owned, in the aggregate,
directly or indirectly by the section 958(a) U.S. shareholders (as defined in section
3.02(e)(i)(A) of Notice 2014-52) of the expatriated foreign subsidiary immediately before
the specified transaction and any transactions related to the specified transaction does
not decrease by more than 10 percent as a result of the specified transaction and any
related transactions.
Example 1 of section 3.02(e)(iii) of Notice 2014-52 illustrates a specified
transaction in which neither exception applies and therefore the transaction is
recharacterized in the manner described in section 3.02(e)(i)(A) of Notice 2014-52. In
the example, FA is a foreign corporation that wholly owns DT, a domestic corporation
acquired by FA in an inversion transaction completed on January 1, 2015. In addition,
DT wholly owns FT, a foreign corporation that is a CFC and an expatriated foreign
subsidiary, and FA wholly owns FS, a foreign corporation that is a specified related
person with respect to FT. Shortly after the inversion transaction, FA acquires $10x of
FT stock from FT, representing 60 percent of total voting power and value of the stock

31

of FT, in exchange for $10x of cash.
The example states that FA’s acquisition of the FT stock from FT is a specified
transaction that must be recharacterized. The small dilution exception is not applicable
because the amount of FT stock (by value) that is owned (within the meaning of section
958(a)), in the aggregate, by DT before the specified transaction decreases by more
than 10 percent (in fact, by 60 percent, from 100 percent to 40 percent) as a result of
the specified transaction.
(b) Clarifying Change to Small Dilution Exception
The Treasury Department and the IRS are concerned that some taxpayers may
be inappropriately interpreting the small dilution exception. In particular, some
taxpayers may be comparing the value of the stock of an expatriated foreign subsidiary
owned by a section 958(a) U.S. shareholder immediately before a specified transaction
with the value of the stock owned by the section 958(a) U.S. shareholder immediately
after the specified transaction, rather than comparing the percentage of the stock owned
(by value) by the section 958(a) U.S. shareholder before and after the specified
transaction. This interpretation is plainly inconsistent with the purpose of the rules
described in section 3.02(e)(i) of Notice 2014-52 and the small dilution exception, as
well as the analysis in Example 1 of section 3.02(e)(iii) of Notice 2014-52. Accordingly,
the regulations will clarify the application of the small dilution exception by substituting
the phrase “the percentage of stock (by value)” for the phrase “the amount of stock (by
value).” A similar clarification will be made to the exception described in section
3.02(e)(ii) of Notice 2014-52 (relating to the circumstances in which an exchanging
shareholder is required under section 367(b) to include in income as a deemed dividend

32

the section 1248 amount with respect to stock exchanged in a specified exchange).
SECTION 5. EFFECTIVE DATES
Except as provided in this section 5, the regulations described in section 2.02(a)
(which requires the foreign acquiring corporation to be subject to tax as a resident of the
relevant foreign country in order to have substantial business activities in the relevant
foreign country), section 2.02(b) (which disregards certain stock of the foreign acquiring
corporation in third-country transactions), section 2.03(b) (which clarifies the definition of
nonqualified property in §1.7874-4T), section 4.01(b) (which modifies the definition of
foreign group nonqualified property in Notice 2014-52), and section 4.02(b) (which
provides a de minimis exception to the rules announced in Notice 2014-52 regarding
certain distributions of a domestic entity that are disregarded) will apply to acquisitions
completed on or after November 19, 2015. In addition, except as provided in this
section 5, the regulations described in: (i) section 3.01(b) (which provides that inversion
gain includes certain income or gain recognized by an expatriated entity from an indirect
transfer or license of property and provides aggregate treatment for certain foreign
partnerships for purposes of determining inversion gain) will apply to transfers or
licenses of property occurring on or after November 19, 2015, but only if the inversion
transaction is completed on or after September 22, 2014; (ii) section 3.02(b) (which
requires the recognition of realized stock gain in certain specified exchanges) will apply
to specified exchanges occurring on or after November 19, 2015, but only if the
inversion transaction is completed on or after September 22, 2014; and (iii) section 4.03
(which clarifies certain exceptions to the rules announced in Notice 2014-52 regarding
transactions to de-control or significantly dilute CFCs) will apply to specified

33

transactions and specified exchanges completed on or after November 19, 2015, but
only if the inversion transaction is completed on or after September 22, 2014.
Taxpayers may elect to apply the rules in sections 4.01(b) of this notice (which
modifies the definition of foreign group nonqualified property in Notice 2014-52) and
4.02(b) of this notice (which provides a de minimis exception to the rules announced in
Notice 2014-52 regarding certain distributions of a domestic entity that are disregarded)
to acquisitions completed before November 19, 2015.
No inference is intended regarding the treatment under current law of the
transactions described in this notice. The IRS may challenge such transactions under
applicable Code provisions or judicial doctrines.
SECTION 6. REQUEST FOR COMMENTS AND CONTACT INFORMATION
The Treasury Department and the IRS expect to issue additional guidance to
further limit (i) inversion transactions that are contrary to the purposes of section 7874
and (ii) the benefits of post-inversion tax avoidance transactions. In particular, as
described in section 5 of Notice 2014-52, the Treasury Department and the IRS
continue to consider guidance to address strategies that avoid U.S. tax on U.S.
operations by shifting or “stripping” U.S.-source earnings to lower-tax jurisdictions,
including through intercompany debt. Accordingly, the Treasury Department and the
IRS reiterate the requests for comments made in Notice 2014-52.
Written comments may be submitted to the Office of Associate Chief Counsel
(International), Attention: David A. Levine and Shane M. McCarrick, Internal Revenue
Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively,
taxpayers may submit comments electronically to

34

notice.comments@irscounsel.treas.gov. Comments will be available for public
inspection and copying.
The principal authors of this notice are Mr. Levine and Mr. McCarrick of the
Office of Associate Chief Counsel (International). However, other personnel from the
Treasury Department and the IRS participated in its development. For further
information regarding this notice, contact Mr. Levine or Mr. McCarrick at (202) 317-6934
(not a toll-free number).