Regulations Finalize Coordination Rules for Outbound Reorganizations

The IRS finalized regulations that eliminate one exception to the coordination rule that applies to certain asset transfers and indirect stock transfers in outbound asset reorganizations, modify another exception to the coordination rule, and modify the procedures for obtaining reasonable-cause relief for failing to comply with certain requirements of the regulations (T.D. 9760). The final regulations remove temporary regulations that were issued in 2013 (T.D. 9615).

The final regulations eliminate the Sec. 367(a)(5) exception to the Regs. Sec. 1.367(a)-3(d)(2)(vi)(A) coordination rule between asset transfers and indirect stock transfers for certain outbound asset reorganizations. The Sec. 367(a)(5) exception had been applied by taxpayers to avoid gain recognition under Sec. 367(a). As an example, the foreign acquiring corporation issues stock and property other than qualified property (under Sec. 361(c)(2)(B)) in the reorganization and transfers property that is not eligible for an exception to Sec. 367(a)(1) (such as property used in the United States) to a domestic controlled corporation. The amount of stock issued by the foreign acquiring corporation is sufficient to preserve the built-in gain in the property transferred to it by the domestic acquired corporation in the Sec. 361 exchange. Thus, the taxpayers would take the position that the Sec. 367(a)(5) exception applies and that no gain is recognized on the transfer.

The regulations also modify the exception to the coordination rule for certain outbound exchanges so that the exception is consistent with the remaining asset reorganization exception. Under the modified exception, a transferee domestic corporation’s adjusted basis in the retransferred assets cannot be greater than the U.S. transferor’s adjusted basis in those assets, disregarding any basis increase attributable to gain or income recognized by the U.S. transferor on the outbound asset transfer (basis comparison test).

In addition, the final rules modify the procedures for obtaining reasonable-cause relief for failing to comply with certain requirements of the regulations.

The regulations are effective on March 22, 2016, but have varied applicability dates.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.