On October 5, 2023, Treasury and the IRS issued proposed regulations under section 367(b) addressing so-called "Killer B" triangular reorganizations and inbound reorganizations. The proposed regulations largely follow Notice 2014-32 and Notice 2016-73, in which the IRS targeted certain "transactions designed to repatriate earnings and basis of foreign corporations without incurring U.S. tax." However, the proposed regulations reflect notable differences from the prior Notices, including a narrowed scope of the excess asset basis rule and rules addressing the application of the section 1411 net investment income tax to inbound transactions.
Notice 2016-73 provided that in the case of an inbound reorganization or liquidation, the "all earnings and profits amount" may be increased by certain earnings and profits of lower-tier foreign corporations if the foreign corporation's inside asset basis exceeded the sum of its earnings and profits, outside stock basis, and liabilities assumed. This rule would have applied to any inbound nonrecognition transaction. In response to comments that highlighted the significant compliance burden that would be imposed on legitimate business transactions, the proposed regulations provide that this excess asset basis rule applies only to inbound nonrecognition transactions that follow a triangular reorganization or a transaction undertaken with a principal purpose to create excess asset basis.
In addition, the proposed regulations also provide rules addressing the application of the net investment income tax under section 1411 to section 367(b) inbound transactions. In particular, the proposed regulations provide that earnings and profits that are characterized as previously taxed earnings and profits (PTEP) and otherwise excluded from inclusion as a deemed dividend under section 367(b) are nonetheless included in the all earnings and profits amount and the section 1248 amount for purposes of section 1411.
To the extent the proposed regulations implement the rules announced in Notice 2014-32 and Notice 2016-73, they are proposed to be applicable to transactions completed as of the dates of those Notices, i.e., they will apply to transactions completed on or after April 25, 2014, for rules described in Notice 2014-32 and December 2, 2016, for rules described in Notice 2016-73. To the extent the proposed regulations contain rules not previously announced in the Notices, they would be applicable to transactions completed on or after October 6, 2023. While barriers to the repatriation of earnings into the U.S. have decreased since 2017, the issuance of the proposed regulations now and their retroactive applicability dates are likely in response to transactions that the IRS is currently challenging. If finalized, the proposed regulations will likely be challenged on various grounds, including the extent to which they would be retroactive. At a minimum, basing retroactive regulations on IRS notices issued more than seven years earlier seems to conflict with a 2019 Treasury Policy Statement on the Tax Regulatory Process. That statement signaled that Treasury and the IRS would not take a position adverse to taxpayers based on a notice issued more than 18 months before proposed regulations are issued.
Comments are due by December 5, 2023.
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.
