In Notice 2012-39, the IRS issued rules to govern certain outbound asset reorganizations involving the transfer of intangibles under Sec. 367(d) occurring on or after July 13, 2012, and that will apply instead of existing regulations (Temp. Regs. Secs. 1.367(d)-1T(c), (d), (e), and (g)). The IRS intends to issue regulations incorporating the guidance in the notice.
Under Sec. 367(d)(2)(A), the U.S. person transferring intangible property in an exchange described in Sec. 351 or 361 is treated as having sold the property in exchange for payments that are contingent upon the productivity, use, or disposition of the property. The transferor is treated as receiving amounts that reasonably reflect the amounts that would have been received: (1) annually in the form of payments over the useful life of the property, or (2) if the property is disposed of (indirectly or directly) after the transfer, at the time of the disposition. An indirect disposition of the intangible property following the transfer includes a disposition of the transferor’s interest in the transferee corporation.
The rules in the notice are intended to stop certain transactions that taxpayers are engaging in under Sec. 367(d)(2) and Temp. Regs. Sec. 1.367(d)-1T to repatriate earnings from foreign corporations without the appropriate recognition of income—transactions that the IRS says, “raise significant policy concerns.”
An example of such a transaction involves a U.S. parent corporation that holds all the stock in its U.S. subsidiary, which in turn holds a patent with a tax basis of zero. The subsidiary transfers the patent to a foreign corporation wholly owned by its parent in exchange for $100 cash, then distributes the cash to its parent and liquidates.
According to the IRS, the taxpayer takes the position that neither of the U.S. corporations recognizes gain on the receipt of the cash, and the parent also applies the existing rule under Temp. Regs. Sec. 1.367(d)-1T(c)(1) to include these amounts in income over time and establish a receivable from the foreign corporation. This transaction results in a repatriation of more than $100 ($100 at reorganization and then through repayment of the receivable), but income is only recognized in the amount of the inclusions over time.
The notice states that regulations to be issued will ensure that, for all outbound Sec. 367(d) transfers, the total income to be taken into account is either included in income by the U.S. transferor in the year of the reorganization or, where appropriate, over time by one or more qualified successors. The rules included in the notice explain when income must be included in the year of the reorganization or over time and how to determine the amount that the transferor or qualified successor must include in income in the required period. The notice also contains an example illustrating the application of the rules.
