United States: U.S. Companies Leading M&A Surge Despite Treasury Action To Limit Transactional Options

​David Forst and Jim Fuller of Fenwick & West summarise numerous developments in the U.S. M&A tax landscape after a record year for dealmaking – driven by healthcare and technology industries – which puts 2015 on par with 2007 numbers, adjusted for inflation.

Anti-inversion rules

Inversion transactions continue in the U.S., despite the U.S. Treasury Department continuing to attempt to prevent them – or at least make them unattractive to the extent that taxpayers are discouraged from pursuing the restructuring option.

In November 2015, the Treasury issued Notice 2015-79, which imposes additional restrictions on these transactions. The Notice changes the rules by which the relative ownership of the surviving company is computed.

One rule seeks to prevent new foreign parent corporations from being tax resident in a jurisdiction different from the foreign acquisition partner. Under this rule, the stock of the foreign surviving company, which would otherwise 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 by reason of holding stock in the foreign target. This rule only applies if the shareholders of the U.S. target own at least 60% of the stock of the foreign surviving corporation.

Another rule provides that stock of the foreign acquirer is not counted in the denominator of the ownership fraction if it is received in exchange for 'non-qualified property'. Non-qualified property includes property acquired with a principal purpose of avoiding the intent of section 7874, regardless of whether the transaction involves an indirect transfer of other non-qualified property.

Under the Notice, 'inversion gain', as defined in the Internal Revenue Code, includes income or gain recognised by an expatriated entity from an indirect transfer or license of property. This includes an expatriated entity's subpart F inclusions that are attributable to a transfer of stock or other properties or a license of property, either as part of the acquisition or after the acquisition if the transfer or license is to a related person.

Reorganisation rulings

Revenue Ruling 2015-9 reflects new IRS thinking on certain triangular organisations. The ruling revokes an earlier ruling, Rev. Rul. 78-130. The rulings describe P, a U.S. company that owns foreign corporations S-1 and S-2. S-1 is an operating company and S-2 is a holding company.

S-2 owns foreign subsidiaries X, Y and Z. In the transaction, P transfers the stock of S-1 to S-2 in exchange for additional S-2 voting stock. In a second pre-arranged step, S-1, X, Y and Z transfer their assets to S-2's newlyformed foreign subsidiary, N, in exchange for N common stock. Thereafter, S-1, X, Y and Z liquidate.

Rev. Rul. 78-130 treated the S-1 transaction as a triangular C reorganisation. Rev. Rul. 2015-9 offers a new approach, characterising the transaction as a § 351 transfer by P of the S-1 stock to S-2. The subsequent transactions in which S-1, X, Y and Z transfer their assets to N and then liquidate are treated as D reorganisations.

The ruling states that a transfer of property may be respected as a § 351 exchange, even if it is followed by subsequent transfers of property as part of a pre-arranged, integrated plan. However, the ruling also states that a transfer of property in an exchange otherwise described in § 351 will not qualify as a § 351 exchange if, for example, a different treatment is warranted to reflect the substance of the transaction as a whole.

Under the facts of the ruling, even though P's transfer is part of a pre-arranged, integrated plan involving successive transfers, P's transfer satisfies the formal requirements of § 351. The ruling states that an analysis of the transaction as a whole does not dictate that P's transfer be treated other than in accordance with its form, in order to reflect the substance of the transaction.

The IRS also issued Rev. Rul. 2015-10. In this ruling, P owns a limited liability company (LLC), treated as a corporation, and a first-tier subsidiary (S-1). S-1 owns second-tier sub S-2 which in turn owns third-tier sub S-3. P transfers the ownership interests in LLC to S-1 and on down the chain to S-3. The LLC then becomes disregarded under the check-the-box rules. This transaction is treated as two § 351 transfers with the final step treated as a D reorganisation.

Cash D reorganisations

The IRS finalised temporary regulations issued in 2011 that provided 'clarifications' to the nominal share concept in the 2009 final all-cash D reorganisation regulations. The new final regulation 'clarifies' that the nominal-share basis-designation rule only applies if an actual shareholder of the issuing corporation receives the nominal share pursuant to Treasury Regulation § 1.368-2(d).

That shareholder must add the nominal share's basis to a share of the issuing corporation's stock that the particular shareholder actually owns. Thus, share basis can be lost in an all-cash D reorganisation – the basis will disappear completely – unless planning is considered.

F reorganisations

The IRS adopted final regulations on F reorganisations, involving a mere change in corporate identity of form. The preamble states that, like earlier proposed regulations, the final regulations are based on the premise that it is appropriate to treat the resulting corporation in an F reorganisation as the functional equivalent of the transferor corporation and to give its corporate enterprise roughly the same freedom of action as would be accorded a corporation that remains within its original corporate shell.

There are two new requirements for F reorganisation treatment compared with the proposed regulations. First, that immediately after the F reorganisation, no corporation other than a resulting corporation may hold property that was held by the transferor corporation immediately before the F reorganisation if the other corporation would, as a result, succeed to and take into account the items of the transferor corporation described in § 381. Second, that immediately after the F reorganisation, the resulting corporation may not hold property acquired from a corporation other than a transferor corporation if the resulting corporation would, as a result, succeed to and take into account the items of the other corporation described in § 381(c).

The final regulations reiterated a rule in the proposed regulations that an F reorganisation can have independent significance from related transactions, but the preamble to the regulations states that notwithstanding this rule, in a cross-border context, related events preceding or following an F reorganisation may be related to the tax consequences under certain international provisions that apply to F reorganisations. For example, such events may be relevant for purposes of applying certain rules under § 7874 (inversions) and for purposes of determining whether stock of the resulting corporation should be treated as stock of a controlled foreign corporation for purposes of § 367(b).

Outbound transfers to foreign corporations

Treasury and the IRS released important proposed regulations on the treatment of transfers of intangible property by U.S. persons to foreign corporations subject to § 367(d). The proposed regulations eliminate the so-called foreign goodwill exception from the § 367(d) regulations, and limit the § 367(a) active trade or business exception to certain tangible property and financial assets. The regulations, once finalised, would have a retroactive effective date to apply to transfers occurring on or after September 14 2015, and to transfer occurring before that date, resulting from entity classification elections that are filed on or after that date.

The preamble states that the proposed regulations would eliminate the foreign goodwill exception under Temp. Treas. Reg. § 1.367(d)-1T and limit the scope of property that is eligible for the active foreign trade or business exception generally to certain tangible property and financial assets. Accordingly, under the proposed regulations, when there is an outbound transfer of foreign goodwill or going concern value, the U.S. transferor will be subject to either current gain recognition under § 367(a) or the tax treatment provided under § 367(d).

This would be a major change in the law, and one that is at odds with the clear legislative history, which states that "no gain will be recognised on the transfer of goodwill and going concern value for use in an active trade or business". Note that the Obama Administration has proposed to change the law to include goodwill, going concern value and workforce-in-place in § 936(h)(3)(B). At first, the Administration's description referred to this change as a "clarification". However, in the two most recent Administration Budgets, the assertion that this change would be a 'clarification' was dropped. These proposals were never enacted by Congress.

In addition, the proposed regulations eliminate the existing rule that limits the useful life of intangible property to 20 years. The preamble states that if the useful life of transferred intangible property exceeds 20 years, the limitation might result in less than all of the income attributable to the property being taken into account by the U.S. transferor. Accordingly, proposed Treas. Reg. § 1.367(d)-1(c)(3) provides that the useful life of intangible property is the entire period during which the exploitation of the intangible is reasonably anticipated to occur, as of the time of the transfer.

Transfers to partnerships with foreign partners

New rules apply on transfers to partnerships with foreign partners. In joint venture contexts, a partnership has traditionally been a vehicle where the outbound IP transfer rules under section 367(d) would not apply. These rules make partnerships a less flexible vehicle. As a general matter, no gain or loss is recognised on a transfer of property to a partnership in exchange for a partnership interest. However, section 721(c) authorises the IRS to write regulations treating certain transfers of property to a partnership with foreign partners as taxable. The IRS and Treasury issued Notice 2015-54, exercising its authority under Section 721(c).

These rules apply when a U.S. person transfers property to either a domestic or foreign partnership where income or gain derived from property contributed by a U.S. partner could be allocated to a foreign partner. The purpose of these rules, which are linked to the § 367(a) outbound transfer regime, is to impose an 'exit tax' on appreciated tangible property and intangible property (whether appreciated or not) that leaves the U.S. taxing jurisdiction.

The regulations under § 721 would require a U.S. partner contributing built-in gain property to a partnership (whether domestic or foreign) with a related foreign partner either immediately or periodically to take the gain into account. The regulations will do this by forcing a partner to elect the remedial allocation method under § 704(c) with respect to the built-in gain property or otherwise forego the application of 721(a). The new rules apply to both tangible and intangible property with a built-in gain. In the Notice, the IRS states that it has elected to exercise its regulatory authority granted in section 721(c) to override the application of section 721(a) in certain cases where the transfer of property to a partnership (domestic or foreign) would result in built-in gain on the property being includible in the gross income of a foreign person. The Notice states that the IRS has elected not to act on section 367(d)(3) because the transactions at issue are not limited to transfers of intangible property. The Notice states that Treasury and the IRS intend to issue regulations providing that § 721(a) will not apply when a U.S. transferor contributes an item of Section 721(c) property (or portion thereof) to a Section 721(c) partnership, unless the 'gain deferral method' is applied with respect to such property. The portion of the Notice addressing the gain deferral method does not apply to transactions to which § 721(a) otherwise would not apply.

The Notice defines Section 721(c) property generally as any property with a 'built-in gain'. Built-in gain is the excess section 704(b) book value of the property, over the contributing partner's adjusted tax basis in the property at the time of the contribution. It does not include gain created when a partnership revalues partnership property. The Notice does not state how to determine the book value of an item of property, but presumably a book value amount will be respected if it reflects amounts that would be reasonably agreed to by partners acting at arm's-length.

A Section 721(c) Partnership is generally a partnership (domestic or foreign) if a U.S. person contributes Section 721(c) property to the partnership, and, after the contribution and any transactions related to the contribution, (i) a related foreign person is a direct or indirect partner in the partnership, and (ii) the U.S. transferor and one or more related persons own more than fifty percent of the interests in partnership's capital, profits, deductions or losses. Relatedness is defined by reference to § 267(b) or 707(b)(1).

The gain deferral method contains five requirements, the most notable of which is that the Section 721(c) partnership must adopt the remedial allocation method described in Treasury Reg. § 1.704-3(d) for built-in gain with respect to all Section 721(c) property contributed to the partnership. It effectively requires the taxpayer to elect between including its built-in gain in respect of the section 721(c) property immediately (if it does not choose the remedial method and also follow the other requirements below) or including the built-in gain in installments (by choosing the remedial method and following the other requirements of the gain deferral method).

The Notice also states that § 482 and related penalties apply to controlled transactions involving partnerships. For example, when U.S. and foreign persons under common control enter into a partnership, the amounts of their contributions to and distributions from, the partnership are subject to adjustment in order to reflect arm's-length results. Partnership allocations, including allocations under § 704(c), also are subject to adjustment.

Originally published in the International Tax R​eview​ on March 18, 2016.​

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
25 Sep 2018, Conference, California, United States

We're excited to introduce Women's IP Strategy, a 2-day conference that tackles both the IP, legal as well as broader career development obstacles, risks and rewards for women lawyers working in male-dominant industries.

2 Oct 2018, Webinar, California, United States

This CLE webinar will offer suggestions to litigators to help them comply with the new GDPR during e-discovery.

10 Oct 2018, Webinar, California, United States

For the past years, 3D printing has significantly revolutionized the business industry as it provides innovations and improvement to pre-existing processes.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions