On May 23, 2008, the Service issued final, temporary, and proposed regulations that implement earlier guidance that shut down cross-border triangular reorganizations, popularly known as “Killer B” transactions (TD 9400 and REG-136020-07).
Killer B transactions are designed to allow corporations to repatriate foreign subsidiary earnings tax free, in violation of Sec. 367. In the past two years, the IRS issued two notices, Notices 2006-85 and 2007-48, dealing with two different versions of the transaction and generally treating repatriation of a foreign subsidiary’s earnings as a taxable transaction.
Notice 2006-85 dealt with nonpublic deals and Notice 2007-48 dealt with public stock buybacks. Both notices involved a subsidiary’s purchase of its parent’s stock for property, where the parent or the subsidiary (or both) is foreign. The subsidiary would then exchange the parent stock for the stock and assets of a target corporation, employing a triangular reorganization under Sec. 368(a)(1)(B). The notices treated this as a taxable transaction.
The regulations confirm the notices’ treatment of such transactions and provide more detail. The regulations are retroactively effective back to the dates of each notice. In the case of transactions described in Notice 2006-85, the regulations apply to transactions occurring after September 22, 2006, with some transition relief. In the case of transactions described in Notice 2007-48, the regulations apply to transactions occurring after May 31, 2007, with some transition relief.
The rules apply regardless of whether the parent controlled the subsidiary at the time of the subsidiary’s purchase of the parent’s stock.
If the transfer of property is from the subsidiary to the parent, it is treated as a deemed distribution under Sec. 301. The amount of the deemed distribution equals the amount of money plus the fair market value of other property that the subsidiary used to buy the parent’s stock.
If the transfer of property is from the subsidiary to a third party (such as a purchase of the parent’s stock on the open market), it is treated as a deemed distribution from the subsidiary to the parent under Sec. 301 and then a deemed contribution from the parent to the subsidiary.
