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Regulation 127380-02 - Outbound Liquidations to Foreign


									Notice of Proposed                             lations, Aaron A. Farmer (202) 622–3860;        ing on the date of distribution and would
Rulemaking and Notice of                       concerning submissions of comments, the         have been subject to section 864(c)(7) had
                                               hearing, and/or to be placed on the build-      it been disposed. The final regulations in-
Public Hearing                                                                                 clude an exception to this gain recogni-
                                               ing access list to attend the hearing, Lanita
                                               Van Dyke, (202) 622–7180 (not toll-free         tion rule in certain circumstances where the
                                               numbers).                                       property is distributed to a foreign corpo-
Outbound Liquidations to                                                                       ration that uses such property in a U.S. trade
Foreign Corporations                           SUPPLEMENTARY INFORMATION:                      or business for the ten-year period follow-
                                                                                               ing the distribution, provided that certain
REG–127380–02                                  Background                                      requirements are satisfied.
AGENCY: Internal Revenue Service                   Generally, a liquidating corporation does   § 1.367(e)–2(c)(2).
(IRS), Treasury.                               not recognize gain or loss under section
                                               337(a) on a distribution of any property to         The final regulations included an anti-
ACTION: Notice of proposed rulemak-                                                            abuse rule providing that the Commis-
                                               an 80-percent distributee (as defined in sec-
ing and notice of public hearing.                                                              sioner may require a foreign or domestic
                                               tion 337(c)) in a complete liquidation to
                                               which section 332 applies. Section 367(e)(2)    liquidating corporation to recognize gain (or
SUMMARY: This document contains pro-           provides that, in the case of any liquida-      treat the liquidating corporation as if it had
posed regulations that provide guidance re-    tion to which section 332 applies, section      recognized a loss) on a liquidating distri-
garding the application of section 367(e)(2)   337(a) and (b)(1) shall not apply where the     bution if a principal purpose of the liqui-
to certain outbound liquidations. The regu-    80-percent distributee is a foreign corpo-      dation is the avoidance of U.S. tax. The
lations amend the anti-abuse rule of           ration except as provided in regulations. The   final regulations further provide that a liq-
§ 1.367(e)–2(d) by narrowing the scope of      purpose of section 367(e)(2) generally is to    uidation may have a principal purpose of
the rule to apply only to outbound trans-      prevent the removal of appreciated assets       tax avoidance even though the tax avoid-
fers to a foreign corporation in a com-        from U.S. taxing jurisdiction without the       ance purpose is outweighed by other pur-
plete liquidation of a domestic corporation    imposition of a U.S. corporate level tax. See   poses (taken together or separately).
in which a principal purpose of the liqui-     H.R. Conf. Rep. No. 99–841, at II–202               The preamble to the final regulations
dation is the avoidance of U.S. tax. This      (1986).                                         states that the anti-abuse rule would ap-
document also provides a notice of a pub-          On August 9, 1999, the IRS and Trea-        ply, for example, if a principal purpose of
lic hearing on these proposed regulations.     sury published final regulations (T.D. 8834,    a liquidation is the distribution of a do-
                                               1999–2 C.B. 251 [64 FR 43072]) under sec-       mestic liquidating corporation’s earnings and
DATES: Written or electronic comments          tion 367(e)(2) regarding distributions of       profits without a U.S. withholding tax. The
must be received by February 18, 2003. Re-     property in a complete liquidation under        preamble to the final regulations also states
quests to speak and outlines of topics to be   section 332 by a domestic corporation to        that, in certain circumstances, the IRS is
discussed at the public hearing scheduled      a foreign parent corporation (outbound liq-     also concerned about a liquidation of a do-
for March 3, 2003, at 10 a.m. must be re-      uidation) and by a foreign corporation to       mestic corporation into a U.S. branch of a
ceived by February 11, 2003.                   a foreign parent corporation (foreign-to-       foreign corporation in a manner that fa-
                                               foreign liquidations).                          cilitates the avoidance of U.S. tax, includ-
ADDRESSES: Send submissions to:                    With regard to foreign-to-foreign liqui-    ing the inappropriate use of attributes such
CC:ITA:RU (REG–127380–02), room 5226,          dations, § 1.367(e)–2(c) generally pro-         as net operating losses. The preamble does
Internal Revenue Service, P.O. Box 7604,       vides that nonrecognition treatment applies     not address the potential application of the
Ben Franklin Station, Washington, DC           under section 337(a) and (b)(1) when a for-     anti-abuse rule to foreign-to-foreign liqui-
20044. Submissions may be hand deliv-          eign corporation (foreign liquidating cor-      dations.
ered Monday through Friday between the         poration) makes a distribution of property      Explanation of Provisions
hours of 8 a.m. and 5 p.m. to: CC:ITA:RU       in complete liquidation under section 332
(REG–127380–02), Courier’s Desk, Inter-        to a foreign corporation that meets the own-       Since the final regulations were issued,
nal Revenue Service, 1111 Constitution Av-     ership requirements of section 332(b). The      various commentators have expressed con-
enue, NW, Washington, DC 20044.                regulations require gain to be recognized in    cern that the anti-abuse rule is overly broad
Alternatively, taxpayers may submit com-       a foreign-to-foreign liquidation if the for-    because it is not limited by its express terms
ments electronically directly to the IRS In-   eign liquidating corporation makes a dis-       to outbound liquidations. Specifically, it has
ternet site at The public    tribution of property which either is used      been brought to the attention of Treasury
hearing will be held in room 4718, Inter-      by the foreign liquidating corporation in the   and the IRS that uncertainty regarding the
nal Revenue Building, 1111 Constitution        conduct of a trade or business within the       potential application of the anti-abuse rule
Avenue, NW, Washington, DC.                    United States (a U.S. trade or business) at     is preventing taxpayers from engaging in
                                               the time of the distribution or which ceased    legitimate business transactions involving
FOR  FURTHER        INFORMATION                to be used in the conduct of a U.S. trade       foreign-to-foreign liquidations. Although the
CONTACT: Concerning the proposed regu-         or business within the ten-year period end-     preamble to the final regulations does not
address any circumstances in which the anti-     ity of the proposed rules and how they can        gether or separately)” and adding “when
abuse rule would apply to a foreign-to-          be made easier to understand. All com-            taken together” in its place.
foreign liquidation, the rule by its express     ments will be available for public inspec-           2. Paragraph (d) is revised.
terms could so apply. Application of this        tion and copying.                                    The revision reads as follows:
rule to require gain recognition in a foreign-       A public hearing has been scheduled for
to-foreign liquidation is not consistent with    March 3, 2003, beginning at 10:00 a.m. in         § 1.367(e)–2 Distributions described in
the approach of the final regulations that re-   room 4718, Internal Revenue Building, 1111        section 367(e)(2).
quire gain recognition in the case of a          Constitution Avenue, NW, Washington, DC.          *****
foreign-to-foreign liquidation only in par-      Due to building security procedures, visi-            (d) Anti-abuse rule. The Commissioner
ticular and limited circumstances. Accord-       tors must enter at the Constitution Av-           may require a domestic liquidating corpo-
ingly, these proposed regulations would          enue entrance. In addition, all visitors must     ration to recognize gain on a distribution
amend the anti-abuse rule to limit its ap-       present photo identification to enter the         in liquidation described in paragraph (b) of
plication only to outbound liquidations.         building. Because of access restrictions, visi-   this section (or treat the liquidating corpo-
   The proposed regulations also would           tors will not be admitted beyond the im-          ration as if it had recognized loss on a dis-
clarify what constitutes a principal pur-        mediate entrance area more than 30 minutes        tribution in liquidation), if a principal
pose of tax avoidance for purposes of the        before the hearing starts. For information        purpose of the liquidation is the avoid-
anti-abuse rule. The proposed regulations        about having your name placed on the              ance of U.S. tax (including, but not lim-
similarly would clarify the anti-abuse rule      building access list to attend the hearing,       ited to, the distribution of a liquidating
in § 1.367(e)–2(b)(2)(iii)(C)(1).                see the FOR FURTHER INFORMATION                   corporation’s earnings and profits with a
                                                 CONTACT portion of this preamble.                 principal purpose of avoiding U.S. tax). A
Effective Date
                                                     The rules of 26 CFR 601.601(a)(3) ap-         liquidation may have a principal purpose of
    These regulations are proposed to ap-        ply to the hearing. Persons who wish to           tax avoidance even though the tax avoid-
ply to distributions occurring on or after       present oral comments must submit writ-           ance purpose is outweighed by other pur-
September 7, 1999, or to distributions in        ten comments and an outline of the top-           poses when taken together.
taxable years ending after August 8, 1999,       ics to be discussed and the time to be
if the taxpayer has elected to apply the fi-     devoted to each topic (a signed original and      *****
nal regulations to such distributions. The       eight (8) copies) by February 11, 2003. A
IRS intends that, prior to the publication of    period of 10 minutes will be allotted to each                                   Robert E. Wenzel,
these regulations in final form, the Com-        person for making comments. An agenda                                      Deputy Commissioner of
missioner will exercise its authority un-        showing the scheduling of the speakers will                                      Internal Revenue.
der the anti-abuse rules in § 1.367(e)–          be prepared after the deadline for review-
                                                                                                   (Filed by the Office of Federal Register on November 19,
2(b)(2)(iii)(C)(1) and (d) in a manner that      ing outlines has passed. Copies of the            2002, 8:45 a.m., and published in the issue of the Federal Reg-
is consistent with these proposed regula-        agenda will be available free of charge at        ister for November 20, 2002, 67 F.R. 70031)
tions.                                           the hearing.

Special Analyses                                 Drafting Information

   It has been determined that this notice          The principal author of these proposed
of proposed rulemaking is not a signifi-         regulations is Aaron A. Farmer of the Of-
cant regulatory action as defined in Ex-         fice of the Associate Chief Counsel (Inter-
ecutive Order 12866. Therefore, a regulatory     national), IRS. However, other personnel
assessment is not required. Pursuant to sec-     from the Treasury and the IRS partici-
tion 7805(f) of the Internal Revenue Code,       pated in their development.
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-                           *****
cacy of the Small Business Administra-           Proposed Amendments to the
tion for comment on its impact on small          Regulations
                                                    Accordingly, 26 CFR part 1 is proposed
Comments and Public Hearing                      to be amended as follows:
   Before these proposed regulations are         PART 1—INCOME TAXES
adopted as final regulations, consideration
will be given to any written comments (a            Paragraph 1. The authority citation for
signed original and eight (8) copies) that are   part 1 continues to read in part as follows:
submitted timely to the IRS. Alternatively,         Authority: 26 U.S.C. 7805 * * *
taxpayers may submit comments electroni-            Par. 2. Section 1.367(e)–2, is amended
cally directly to the IRS Internet site at       as follows: The IRS and Treasury              1. Paragraph (b)(2)(iii)(C)(1) is amended
Department request comments on the clar-         by removing the parenthetical “(taken to-

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