The IRS issued final regulations (T.D. 9803) intended to prevent taxpayers from avoiding the recognition of gain or income attributable to high-value intangible property by asserting that an inappropriately large share of the value of the property transferred is foreign goodwill or going concern value that is eligible for favorable treatment under Sec. 367.
Editor's note: These regulations were identified as burdensome by the Treasury Department in July 2017 and are being reviewed for possible modification or withdrawal. See "Treasury Identifies 8 Regulations as Burdensome."
The regulations finalize proposed rules (REG-139483-13) issued on Sept. 14, 2015, with minor changes and clarifications in response to comments, especially the retention of the 20-year useful life limitation. Most of the comments received were not adopted.
The preamble to the proposed regulations noted that some taxpayers were using two interpretations of Secs. 367(a) and (d) to conclude that outbound transfers of foreign goodwill and going concern value do not result in taxation under either Sec. 367(a) or (d). (For more on this, see Murillo, et al., "Tax Clinic: Taxation of Outbound Transfers of Foreign Goodwill or Going Concern Value Under Secs. 367(a) and (d)," The Tax Adviser (January 2016), and Billings, et al., "New Developments in Outbound Transfers of Intangible Property," The Tax Adviser (January 2017)). The final regulations are designed to ensure that outbound transfers of foreign goodwill and going concern value will be subject to either Sec. 367(a) or (d).
The regulations contain the following changes from existing rules. They:
- Eliminate the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception and eliminating the exception under Temp. Regs. Sec. 1.367(d)-1T(b) that provides that foreign goodwill and going concern value are not subject to Sec. 367(d);
- Allow taxpayers to apply Sec. 367(d) to property that would otherwise be subject to Sec. 367(a);
- Allow taxpayers to choose to take into account Sec. 367(d) inclusions only during the 20-year period beginning with the first year in which the U.S. transferor takes into account income under Sec. 367(d);
- Remove the exception that permits certain property denominated in a foreign currency to qualify for the active trade or business exception; and
- Change the Sec. 367 valuation rules to coordinate better with regulations under Secs. 367 and 482.
The final regulations apply to transfers occurring on or after Sept. 14, 2015, the date the proposed regulations were posted on the Federal Register, and to transfers occurring before that date, resulting from entity classification elections under Regs. Sec. 301.7701-2 filed on or after that date.