AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
COMMENTS ON NOTICE 2005-74 REGARDING
THE EFFECT OF CERTAIN EXCHANGES
ON GAIN RECOGNITION AGREEMENTS (GRAs)
UNDER SECTION 367(a)
Approved by
International Taxation Technical Resource Panel (TRP)
and
Tax Executive Committee
Developed by
The International Tax TRP’s Cross Border Merger’s and Acquisitions Task Force
Joseph M. Calianno, Chair
Peter H. Blessing
Ron Dabrowski
Atul Deshmukh
Sherry Hawn
Jim Lynch
Joseph Sardella
Neil A.J. Sullivan
Kenneth Wood, International Tax TRP Chair
Eileen R. Sherr, AICPA Technical Manager
Submitted to Treasury and IRS
February 21, 2006
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
COMMENTS ON NOTICE 2005-74 REGARDING
THE EFFECT OF CERTAIN EXCHANGES
ON GAIN RECOGNITION AGREEMENTS (GRAs)
UNDER SECTION 367(a)
EXECUTIVE SUMMARY
Notice 2005-74 announced rules to be included in the current section 367(a) regulations on the
treatment of gain recognition agreements (GRAs) resulting from certain common asset
reorganizations involving a U.S. transferor, a transferee foreign corporation, and a transferred
corporation. Although the Notice provides much needed guidance, it also results in GRAs being
triggered in several common corporate restructurings involving a U.S. transferor that previously
filed a GRA.
These comments focus on section 3.02 of Notice 2005-74,1 including an analysis of how the
Notice applies to certain asset reorganizations and our recommended changes.
The AICPA recommends that a successor U.S. transferor in an asset reorganization (or the
consolidated group’s parent, where the successor U.S. transferor is a consolidated group
member) be permitted to assume the obligations associated with an original GRA for the
remaining term of that GRA without triggering gain recognition. We also recommend that,
under certain circumstances, a successor foreign corporation in the asset reorganization be
permitted to assume the obligations associated with the original GRA for the remaining term of
the GRA without triggering gain recognition. Finally, if the IRS and Treasury decide to provide
relief for the types of transactions described in these comments, we recommend that taxpayers be
allowed to elect the same type of retroactive relief that is provided in section 5 of the Notice.
I. Background
Section 367(a)(1) generally provides that a U.S. person must recognize gain on the transfer of
appreciated property (including stock or securities) to a foreign corporation in certain
enumerated exchanges (e.g., sections 351, 354, 356 and 361). In the case of transfers of stock or
securities, section 367(a)(2) provides that, except to the extent provided in regulations, section
367(a)(1) shall not apply to any transfer of stock or securities of a foreign corporation which is a
party to the exchange or a party to the reorganization.
The section 367(a) regulations specifically address the treatment of a U.S. person’s transfer of
both foreign stock or securities and domestic stock or securities to a foreign corporation pursuant
to a section 367(a) exchange. In general, reg. section 1.367(a)-3(a) reiterates the general gain
1
2005-42 I.R.B. 726.
1
recognition rule of section 367(a)(1), subject to certain exceptions.2 The regulations contain
separate exceptions to the general gain recognition rule for transfers of foreign stock or securities
and domestic stock or securities, if certain conditions are satisfied. 3 One of the conditions a U.S.
transferor may need to satisfy in order to avoid recognizing gain on the transfer is that it or the
U.S. parent of the consolidated group (in the case of a U.S. transferor that is a member of a
consolidated group) may need to enter into a 5-year gain recognition agreement (GRA). For
instance, reg. section 1.367(a)-3(b) addresses transfers of appreciated foreign stock. It provides
in part that, except as provided in section 367(a)(5)4, a U.S. person that owns 5 percent or more
(applying section 318 attribution principles as modified by section 958(b)) of either the voting
power or the total value of the transferee foreign corporation’s stock immediately after the
transfer must enter into a 5-year GRA to avoid gain recognition under section 367(a)(1).
Reg. section 1.367(a)-8 outlines when a GRA will be triggered or terminated. Triggering events
under reg. section 1.367(a)-8(e)(1) include a taxable sale or any disposition of the stock of the
transferred corporation treated as an exchange. Additionally, any deemed disposition of the
stock of the transferred corporation as described in reg. section 1.367(a)-8(e)(3) generally will
trigger the GRA. A deemed disposition of stock of the transferred corporation under reg. section
1.367(a)-8(e)(3) will occur if, within the term of the GRA, the transferred corporation makes a
disposition of substantially all (within the meaning of section 368(a)(1)(C)) of its assets
(including stock of a subsidiary corporation or an interest in a partnership). This rule is subject
to an exception contained in reg. section 1.367(a)-8(e)(3)(i)(B).5 If the transferee foreign
corporation disposes of (or is deemed to dispose of) only a portion of the transferred stock or
securities, then the U.S. transferor is required to recognize only a proportionate amount of the
gain realized but not recognized upon the initial transfer of the transferred property.6
When a GRA is triggered, the U.S. transferor must file an amended return for the year of the
transfer and recognize the gain realized but not recognized upon the initial transfer, with
interest.7 An election may be made to recognize the gain (with interest) in the year of the
triggering event.8
2
The regulations exempt certain transfers of stock from the stock transfer rules in the case of “straight,” nontriangular asset reorganizations. See generally, reg. section 1.367(a)-3(a).
3
For the exceptions, see generally reg. sections 1.367(a)-3(b) (transfers of foreign stock or securities) and -3(c)
(transfers of domestic stock or securities).
4
Section 367(a)(5): “Section 367(a)(2) and (3) shall not apply in the case of an exchange described in (a) or (b)
of section 361. Subject to such basis adjustments and such other conditions as shall be provided in regulations,
the preceding sentence shall not apply if the transferor corporation is controlled (within the meaning of section
368(c)), by 5 or fewer domestic corporations. For purposes of the preceding sentence, all members of the same
affiliated group (within the meaning of section 1504) shall be treated as 1 corporation.”
5
This exception applies to certain nonrecognition and compulsory transfers, if certain conditions are satisfied.
6
Reg. section 1.367(a)-8(e)(2). The proportion required to be recognized is determined by reference to the
relative fair market values of the transferred stock or securities disposed of and retained. Id.
7
Reg. section 1.367(a)-8(b).
8
Reg. section 1.367(a)-8(b)(1)(vii).
2
Reg. section 1.367(a)-8(g)(1) addresses dispositions of the stock of the transferee foreign
corporation by the U.S. transferor in nonrecognition transfers. Specifically, if the U.S. transferor
disposes of any stock of the transferee foreign corporation in a nonrecognition transfer and the
U.S. transferor complies with reporting requirements similar to those contained in reg. section
1.367(a)-8(g)(2), then the U.S. transferor continues to be subject to the terms of the GRA in its
entirety. Reg. section 1.367(a)-8(g)(2) details when certain nonrecognition transfers of the stock
or securities of the transferred corporation by the transferee foreign corporation will not be
treated as dispositions under reg. section 1.367(a)-8(e). 9
In Notice 2005-74, the IRS and Treasury elaborated on the treatment of nonrecognition
transactions and their impact on previously filed GRAs, including the consequences of a U.S.
transferor’s transfer of the stock of the transferee foreign corporation pursuant to an asset
reorganization.
II. Notice 2005-74
The Notice announced that the IRS and Treasury will amend the regulations under section 367(a)
of the Internal Revenue Code regarding the application of reg. section 1.367(a)-8, including the
provisions addressing the treatment of GRAs as a result of certain common asset reorganizations
involving the U.S. transferor, the transferee foreign corporation, and the transferred corporation.
These amended regulations would supplement the existing rules under reg. section 1.367(a)-8,
9
Reg. section 1.367(a)-8(e): Certain nonrecognition transfers of stock or securities of the transferred
corporation by the transferee foreign corporation. (i) If, during the period the GRA is in effect, the transferee
foreign corporation disposes of all or a portion of the stock of the transferred corporation in a transaction in
which gain or loss would not be required to be recognized by the transferee foreign corporation under U.S.
income tax principles, such disposition will not be treated as a disposition within the meaning of paragraph (e)
of this section if the transferee foreign corporation receives (or is deemed to receive), in exchange for the
property disposed of, stock in a corporation, or an interest in a partnership, that acquired the transferred
property (or receives stock in a corporation that controls the corporation acquiring the transferred property);
and the U.S. transferor complies with the requirements of paragraphs (g)(2)(ii) through (iv) of this section.
(ii) The U.S. transferor must provide a notice of the transfer with its next annual certification under paragraph
(b)(5) of this section, setting forth— (A) A description of the transfer; (B) The applicable nonrecognition
provision; and (C) The name, address, and taxpayer identification number (if any) of the new transferee of the
transferred property.
(iii) The U.S. transferor must provide with its next annual certification a new agreement to recognize gain (in
accordance with the rules of paragraph (b) of this section) if, prior to the close of the fifth full taxable year
following the taxable year of the initial transfer, either— (A) The initial transferee foreign corporation disposes
of the interest (if any) which it received in exchange for the transferred property (other than in a disposition
which itself qualifies under the rules of this paragraph (g)(2)); or (B) The corporation or partnership that
acquired the property disposes of such property (other than in a disposition which itself qualifies under the
rules of this paragraph (g)(2)); or (C) There is any other disposition that has the effect of an indirect disposition
of the transferred property.
(iv) If the U.S. transferor is required to enter into a new GRA, as provided in paragraph (g)(2)(iii) of this
section, the U.S. transferor must provide with its next annual certification (described in paragraph (b)(5) of this
section) a statement that arrangements have been made, in connection with the nonrecognition transfer,
ensuring that the U.S. transferor will be informed of any subsequent disposition of property with respect to
which recognition of gain would be required under the agreement.
3
including the rules under reg. section 1.367(a)-8(f) through (h). Taxpayers could rely on the
notice for exchanges occurring on or after July 20, 1998 (the effective date of reg. section
1.367(a)-8).
Section 3.02 of Notice 2005-74 provides a list of specific requirements that must be satisfied in
order for the U.S. transferor to avoid triggering the gain (and interest charge) associated with the
original GRA when it transfers the stock of the transferee foreign corporation to another
corporation in an asset reorganization.10 That section provides that if, during the period a GRA
is in effect, the original U.S. transferor transfers all or a portion of the stock of the transferee
foreign corporation to an acquiring corporation (i.e., successor U.S. transferor) pursuant to an
asset reorganization, the exchanges made pursuant to such asset reorganization will trigger the
GRA, unless the following conditions are satisfied:
(A) In the year of the transfer for which the original GRA was executed, the U.S. transferor
was a member of a consolidated group (original consolidated group), and the common
parent of such group (U.S. parent corporation) entered into the original GRA pursuant to
Treas. Reg. section 1.367(a)-8(a)(3);
(B) Immediately after the asset reorganization, the successor U.S. transferor is a member of
the original consolidated group;
(C) The U.S. parent corporation of the original consolidated group (or new U.S. parent
corporation, if such corporation became the new common parent of the original consolidated
group in a transaction in which the group remained in existence) enters into a new GRA
pursuant to which it agrees to recognize gain (during the remaining term of the original
GRA), in accordance with the rules of Treas. Reg. section 1.367(a)-8(b), with respect to the
transfer subject to the original GRA, modified by substituting the successor U.S. transferor
in place of the original U.S. transferor and agreeing to treat the successor U.S. transferor as
the original U.S. transferor for purposes of Treas. Reg. section 1.367(a)-8 and the Notice;
and
(D) The successor U.S. transferor provides with its next annual certification (described in
Treas. Reg. section 1.367(a)-8(b)(5)) the new GRA and a notice of the transfer setting forth
the following:
(i) A description of the transfer (including the date of such transfer), and the successor
U.S. transferor’s name, address, and taxpayer identification number; and
(ii) A statement that arrangements have been made, in connection with the asset
reorganization, ensuring that the successor U.S. transferor will be informed of any
subsequent disposition of property with respect to which recognition of gain would be
required under the new GRA (and any related information that is necessary to comply
with Treas. Reg. section 1.367(a)-8 and this notice).11
10
For purposes of section 3.02, the term asset reorganization means a reorganization described in section
368(a)(1) involving the transfer of assets by a corporation to another corporation pursuant to section 361,
except that such term shall include reorganizations described in section 368(a)(1)(D) or (G) only if the
requirements of section 354(b)(1)(A) and (B) are met.
11
The Notice provides the following example illustrating its application.
4
In section 5 of the Notice, the IRS and Treasury state that the regulations to be issued
incorporating the guidance set forth in the Notice will apply to GRAs filed with respect to
exchanges of stock or securities occurring on or after September 28, 2005. Additionally, they
indicate that taxpayers also may apply the provisions of the Notice to GRAs with respect to
transfers of stock of securities, for all open years, occurring on or after July 20, 1998, and before
September 28, 2005. Taxpayers applying the notice, however, are required to do so consistently,
to all transactions within its scope for all open years. Further, if an exchange that is addressed by
the Notice occurred on or after July 20, 1998, but prior to September 28, 2005, and the taxpayer
chooses to rely on the Notice for purposes of such exchanges, then the taxpayer shall be treated
as having timely satisfied the requirements for filing new GRAs (and related certifications and
reporting), as required by reg. section 1.367(a)-8 and described in section 3 of the Notice, if such
U.S. person attaches such new GRA (and related certifications and reporting) to its timely filed
(including extensions) original tax return for the taxable year that includes September 28, 2005.
Finally, the IRS and Treasury indicate that they are considering issuing subsequent public
guidance that addresses additional issues under reg. section 1.367(a)-8 and request comments
regarding the application of reg. section 1.367(a)-8, including whether other transactions should
be excepted from being treated as triggering events pursuant to rules similar to those contained in
the Notice. They specifically request comments as to the most appropriate treatment of asset
reorganizations that do not satisfy the conditions described in (A) or (B) above.
III. Analysis and Recommendations
Although the Notice provides much needed guidance, it also results in GRAs being triggered in
several common corporate restructurings involving a U.S. transferor that previously filed a GRA.
One of the requirements that must be satisfied in order to avoid triggering the GRA is that,
immediately after the asset reorganization, the successor U.S. transferor be a member of the
original consolidated group. This requirement would never be satisfied if the U.S. transferor is
“Facts. USP, a domestic corporation, is the common parent of a consolidated group. USP owns 100 percent of
the stock of two domestic corporations that are members of the USP group, S1 and S2. S1 owns 100 percent of
two foreign corporations, FC1 and FC2. In year 1, S1 transfers 100 percent of the stock of FC1 to FC2 in an
exchange described in section 351 and, pursuant to Treas. Reg. sections 1.367(a)-3(b)(1)(ii) and 1.367(a)-8,
USP enters into a GRA with respect to such transfer. In Year 4, in a reorganization described in section
368(a)(1)(D), S1 transfers all of its assets, including the stock of FC2, to S2 in exchange for S2 stock. S1
transfers the S2 stock to USP in exchange for the S1 stock held by USP and the S1 stock is canceled. No
taxable years of the USP group are short taxable years.
Analysis. Because USP and S2 are, immediately after the reorganization, members of the consolidated group
of which S1 was a member, and USP was the common parent which entered into the original GRA in year 1
pursuant to Treas. Reg. section 1.367(a)-8(a)(3), the transaction satisfies the requirements of section 3.02(A)
and (B) of this notice. As a result, the transfer of the FC2 stock will not trigger the GRA if, pursuant to section
3.02 of this notice, USP enters into a new GRA, in which it agrees to recognize gain with respect to the transfer
subject to the original GRA as described in section 3.02(C) of this notice, and S2 complies with the reporting
requirements contained in section 3.02(D) of this notice. For purposes of the new GRA, Treas. Reg. section
1.367(a)-8, and this notice, S2 is the successor U.S. transferor and is treated as the original U.S. transferor, FC
2 continues to be the transferee foreign corporation, and FC1 continues to be the transferred corporation. The
new GRA applies through the close of Year 6 (the remaining term of the original GRA filed by USP).”
5
not part of a consolidated group (i.e., the U.S. transferor is a stand-alone domestic corporation).
Stated differently, the GRA is triggered anytime a stand-alone U.S. transferor that previously
filed a GRA engages in an asset reorganization. Additionally, this requirement generally would
not be satisfied when the successor U.S. transferor in the asset reorganization is a stand-alone
corporation or a member of another consolidated group (after giving effect to the reverse
acquisition provisions). Further, by requiring that the successor be a U.S. corporation that is a
member of the original consolidated group, the Notice eliminates any possibility of relief when
the successor in the asset reorganization is a foreign acquiring corporation.
By requiring gain to be recognized in these situations, the IRS and Treasury are imposing a
substantial obstacle to corporations that are engaging in legitimate business restructurings. This
Notice is likely to have a chilling effect on such transactions. For instance, one common
transaction that is impacted by the Notice is an internal restructuring involving the U.S.
transferor following the acquisition of the consolidated group of which it was a member. As is
often the case, one consolidated group may acquire another consolidated group with the
acquiring consolidated group surviving. The original U.S. transferor may, after such an
acquisition and during the period of the GRA, transfer its assets, including the stock of the
transferee foreign corporation, as part of asset reorganization to a member of the acquiring
consolidated group. If this occurs, the GRA would be trigged because the acquiring corporation
would not satisfy the above requirement that it be a member of the original consolidated group.
This may prevent the transaction from ever occurring, or worse, result in an unforeseen
triggering event.
In these types of situations, the government’s interests can be adequately protected without
triggering the GRA. This can be achieved, in the case of an acquisition by a U.S. corporation, by
having the successor U.S. transferor or the parent of the new consolidated group, as the case may
be, file a “new” GRA assuming the obligations associated with the original GRA (e.g., to
recognize gain plus an interest charge upon a triggering event) for the remaining term of the
original GRA.12 In such an instance, the successor U.S. transferor or the parent of the new
consolidated group, will step into the shoes of the U.S. transferor and will be solely liable for any
subsequent transaction or event that triggers the GRA.
The IRS and Treasury have provided similar relief in recently proposed regulations under section
1503(d) dealing with the recapture of dual consolidated losses (DCLs).13 More specifically, the
12
In some instances, such as a state law merger of the U.S. transferor, the obligations associated with the GRA
may carry over to the successor U.S. transferor in connection with the asset reorganization. Additionally, it
should be noted that the IRS and Treasury have permitted a taxpayer to avoid recognizing gain in similar types
of transactions if there is a “successor” corporation in the nonrecognition transaction. See e.g., reg. sections
1.367(e)-2(b)(2)(i) and -2(b)(2)(i)(E)(5).
13
See REG-102144-04: “Generally speaking, under section 1503(d) and the regulations thereunder, a DCL (as
defined in Treas. Reg. section 1.1503-2(c)(5)) of a dual resident corporation (DRC) (as defined in Treas. Reg.
section 1.1503-2(c)(2)-(4)) cannot offset the taxable income of any domestic affiliate in the current taxable
year in which the loss is recognized or any other taxable year. The current regulations provide an exception to
this general rule if the consolidated group, unaffiliated dual resident corporation or unaffiliated domestic owner
files an agreement pursuant to Treas. Reg. section 1.1503-2(g)(2) (a “(g)(2) agreement”) for the tax year for
which the DCL is incurred. The (g)(2) agreement requires that the taxpayer certify that the DCL has not been,
and will not be, used to offset the income of another person under the laws of a foreign country. This filing of a
6
proposed regulations address several different types of acquisitions by an unaffiliated domestic
corporation or new consolidated group, as well as events that result in the disaffiliation of a
member of a consolidated group, that normally would result in triggering events requiring a
recapture of the DCLs of a consolidated group, unaffiliated dual resident corporation or
unaffiliated domestic owner, as the case may be, absent a closing agreement with the IRS in
which the respective parties have joint and several liability if there is a subsequent triggering
event.14 Expanding on regulations published in 2003,15 the IRS and Treasury have proposed
regulations that would eliminate the requirement for a closing agreement to avoid a triggering
event if (1) the unaffiliated domestic corporation or new consolidated group (a subsequent
elector) enters into a domestic use agreement (an agreement which requires the subsequent
elector, among other things, to assume the obligations associated with DCLs including
recapturing the DCL in income upon a subsequent triggering event); and (2) the corporation or
consolidated group that filed the original domestic use agreement (original elector) files a
statement with its tax return for the year of the event.16 Therefore, to avoid a triggering event,
the subsequent elector must agree to assume the obligations with regard to the DCL.
We encourage the IRS and Treasury to adopt a similar approach in the GRA context to avoid
triggering GRAs in the situations described above by having the successor U.S. transferor or
parent of the consolidated group, as the case may be, assume the obligations associated with the
original GRA for the remaining term of the GRA. Such a taxpayer can assume such obligations
by filing a new GRA. However, in such acquisitions, we encourage having the obligations
associated with the GRA be that of only the successor U.S. transferor or parent of the
consolidated group, as the case may be. Therefore, we do not recommend the joint and several
liability approach taken in the current DCL regulations when there is a closing agreement or the
collection procedure established in the proposed regulations (e.g., prop. reg. section 1.1503(d)-
(g)(2) agreement permits the use of the DCL if certain conditions are satisfied, including an agreement by such
taxpayer to recapture in income the amount of the DCL on its return for the tax year that the triggering event
occurs along with an interest charge. Treas. Reg. section 1.1503-2(g)(2)(iii)(A) provides a list of triggering
events and Treas. Reg. section 1.1503-2(g)(2)(iv) provides certain exceptions to triggering events. Treas. Reg.
section 1.1503-2(g)(2)(iv)(B) provides an exception for certain triggering events if certain conditions are
satisfied, including having the relevant taxpayer that filed the (g)(2) agreement and the unaffiliated domestic
corporation or new consolidated group enter into a closing agreement or new (g)(2) agreement with the IRS.”
14
See generally, reg. section 1.1503-2(g)(2)(iv)(B)(1) for when a closing agreement is required to avoid a
triggering event. For limited exceptions to the closing agreement requirement under the current regulations,
see reg. sections 1.1503-2(g)(2)(iv)(A) and (B)(2). For the proposed changes, see prop. reg. section 1.1502(d)4(f)(2).
15
In 2003, the IRS and Treasury issued final regulations relaxing the closing agreement requirement in certain
situations involving acquisitions by a consolidated group. See reg. section 1.1503-2(g)(2)(iv)(B)(2). The
preamble to the 2003 regulations explained that in certain cases the requirement for a closing agreement
resulted in an unnecessary administrative burden because the several liability imposed by reg. section 1.1502-6,
in conjunction with the original (g)(2) agreement and a new (g)(2) agreement, provided for liability by the
acquiring group sufficiently comparable to that of a closing agreement. See Preamble to T.D. 9084.
16
See generally, prop. reg. sections 1.1503(d)-4(f)(2) and (h)(3). However, unlike prop. reg. section 1.1503(d)4(h)(3)(iv)(B) which permits the IRS to collect against the original elector if the subsequent elector fails to pay
in full the income tax liability that includes a recapture tax amount, we do not advocate any type of secondary
liability in the case of a subsequent triggering of the GRA.
7
4(h)(3)(iv)(B)) which permits the IRS to collect against the original taxpayer in the event a
successor fails to pay the income tax liability associated with a subsequent triggering of a DCL.
If, however, the IRS and Treasury determine that some type of secondary liability may be
necessary to provide relief, we recommend that such liability only be imposed in limited
situations in which, at the time of the asset reorganization, the IRS determines that secondary
liability may be required to ensure the payment of any tax in the case of a subsequent triggering
event. This targeted approach can be patterned after approaches already being taken by the IRS
and Treasury in similar contexts.
For example, reg. section 1.367(a)-8(d) provides that U.S. transferor may be required to furnish a
bond or other security that satisfies the requirements of reg. section 301.7101-1 of this chapter if
the district director determines that such security is necessary to ensure the payment of any tax
on the gain realized but not recognized upon the initial transfer. Such bond or security generally
will be required only if the stock or securities transferred are a principal asset of the U.S.
transferor and the director has reason to believe that a disposition of the stock or securities may
be contemplated. Alternatively, secondary liability could be imposed when the transfer of the
contingent GRA liability to a successor corporation results in a change in payment expectations
with respect to that contingent liability. See generally, reg. section 1.1001-3(e)(4)(the
substitution of a new obligor on a recourse debt instrument is not a significant modification if the
acquiring corporation [within the meaning of section 381] becomes the new obligor pursuant to a
transaction to which section 381(a) applies, the transaction does not result in a change in
payment expectations, and the transaction [other than a reorganization within the meaning of
section 368(a)(1)(F)] does not result in a significant alteration).
Additionally, we encourage the IRS and Treasury to provide relief in certain asset
reorganizations involving a successor foreign corporation. However, in the case of an outbound
asset reorganization in which the target is a U.S. transferor subject to a GRA, additional issues
would need to be considered.17 For instance, if the U.S. transferor is required to recognize gain
on the transfer of the stock of the transferee foreign corporation, then the GRA associated with
the transferred corporation generally will be terminated under reg. section 1.367(a)-8(h).18
Therefore, as a preliminary matter, the outbound asset reorganization would need to be tested
under section 367(a) and, in particular section 367(a)(5)19 and reg. section 1.367(a)-3(b), to
17
For purposes of this letter, it is assumed that section 7874 does not apply to the transaction to treat the
acquiring foreign corporation as a domestic corporation.
18
Reg. section 1.367(a)-8(h) provides that, if the U.S. transferor disposes of all of the stock of the transferee
foreign corporation that it received in the initial transfer in a transaction in which all realized gain (if any) is
recognized currently, the GRA is terminated and has no further effect. If the transferor disposes of a portion of
the stock of the transferee foreign corporation that it received in the initial transfer in a taxable transaction, then
in the event that the GRA is later triggered, the transferor shall be required to recognize only a proportionate
amount of the gain subject to the GRA that would otherwise be required to be recognized on a subsequent
disposition of the transferred property under the rules of paragraph (b)(2) of this section. The proportion
required to be recognized shall be determined by reference to the percentage of stock (by value) of the
transferee foreign corporation received in the initial transfer that is retained by the U.S. transferor.
19
Section 367(a)(5): “Section 367(a)(2) and (3) shall not apply in the case of an exchange described in (a) or (b)
of section 361. Subject to such basis adjustments and such other conditions as shall be provided in regulations,
8
determine whether the U.S. transferor is required to recognize gain on the transfer of the stock of
the transferee foreign corporation. Additionally, the possible application of section 367(b) would
need to be considered.20
The regulations dealing with GRAs have a provision that is applicable to outbound asset
reorganizations that is consistent with section 367(a)(5). Reg. section 1.367(a)-8(f)(2)(ii)
provides that “(i)f the transferor is a U.S. corporation that goes out of existence in a transaction
in which the transferor's gain would have qualified for nonrecognition treatment under reg.
section 1.367(a)-3(b) or (c) had the U.S. transferor remained in existence and entered into a
GRA, then the gain may generally qualify for nonrecognition treatment only if the U.S.
transferor is owned by a single U.S. parent corporation and the U.S. transferor and its parent
corporation file a consolidated federal income tax return for the taxable year that includes the
transfer, and the parent of the consolidated group enters into the GRA. However,
notwithstanding the preceding sentence, a U.S. transferor that was controlled (within the
meaning of section 368(c)) by five or fewer domestic corporations may request a ruling that, if
certain conditions prescribed by the IRS are satisfied, the transaction may qualify for
nonrecognition treatment.” This provision is consistent with the requirements under section
367(a)(5).
Assuming the GRA is not terminated, the successor foreign corporation should be able to assume
the obligations of the U.S. transferor associated with the GRA. The fact that the acquiring
corporation in the asset reorganization is a foreign corporation should not prevent the IRS and
Treasury from providing relief. Additionally, it should be recognized that the IRS and Treasury
have permitted successor foreign acquiring corporations to agree to assume certain obligations of
a U.S. transferor in other similar contexts. See, e.g., reg. section 1.367(a)-3(d)(2)(vi)(B) and (C),
reg. section 1.367(e)-2(b)(2)(i) and -2(b)(2)(iii)(A) and (D).
Finally, if the IRS and Treasury decide to provide relief for the types of transactions described in
these comments, we recommend that taxpayers be allowed to elect the same type of retroactive
relief that is provided in section 5 of the Notice.
the preceding sentence shall not apply if the transferor corporation is controlled (within the meaning of section
368(c)), by 5 or fewer domestic corporations. For purposes of the preceding sentence, all members of the same
affiliated group (within the meaning of section 1504) shall be treated as 1 corporation. Additionally, the
regulations dealing with outbound stock transfers require that section 367(a)(5) be satisfied in order to for the
transaction to qualify for nonrecognition treatment under section 367(a). See Reg. section 1.367(a)-3(b) and
(c).”
20
See generally, reg. section 1.367(b)-4 and, in particular, reg. section 1.367(b)-4(b)(1)(ii), Example 4.
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