FOR LIVE PROGRAM ONLY Repatriation Tax Planning: Inbound ...media.straffordpub.com › products ›...

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Repatriation Tax Planning: Inbound Asset Transfers, Cash

Dividends and Other Strategies for Tax Professionals

TUESDAY, OCTOBER 30, 2018, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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OCTOBER 30, 2018

Repatriation Tax Planning

Michael Knobler, Attorney

Fenwick & West, Mountain View, Calif.

[email protected]

William R. Skinner, Partner

Fenwick & West, Mountain View, Calif.

[email protected]



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Inbound Liquidations and Repatriation Issues Post-TCJA

Strafford Webinar

October 30, 2018

By: William Skinner, Michael Knobler

Fenwick & West LLP

TAX GROUP

William R. Skinner, Esq. is a tax partner with Fenwick

& West LLP, in Mountain View, CA. He focuses his

practice on U.S. international tax in both the planning

and controversy settings, and has experience with a

wide range of inbound and outbound tax issues. He has

also represented numerous corporate taxpayers in IRS

tax controversies.

He attended the University of California at Berkeley,

graduating in 2001, and Stanford Law School

graduating with distinction in 2005 and serving as a

member of Stanford Law Review. Prior to joining

Fenwick & West, Will clerked for the Hon. Carlos T.

Bea, at the Ninth Circuit Court of Appeals.

William R. Skinner

Partner, Tax Group

Phone: 650.335.7669

Fax: 650.938.5200

E-mail:

[email protected]

Emphasis:

International Tax

Tax Planning

Tax Controversy

6

TAX GROUP7

Michael Knobler

Associate, Tax Group

Phone: 650.335.7717

Email:

[email protected]

Michael Knobler focuses his practice on a broad variety of

tax matters.

Mike received his J.D. in 2012 from Yale Law School,

where he was an Articles Editor for the Yale Law Journal.

Mike received an A.B. in English from Harvard University.

Prior to joining Fenwick, Mike was an associate in the

Washington, D.C. office of a global law firm, where he

worked on issues arising in all areas of the firm’s

international corporate tax practice. He clerked for the

Honorable Susan G. Braden at the U.S. Court of Federal

Claims.

TAX GROUP

Repatriation of Foreign Cash in the Post-TCJA

Environment

▪ TCJA significantly changed the stakes for a US corporation repatriating cash of its CFCs to the United States.

• Transition tax under Section 965 and repeal of deferral

• New GILTI tax / full inclusion system

• Section 245A Participation Exemption for income not subject to GILTI

• Repeal of Section 902 Indirect Credit

8

TAX GROUP

Repatriation of Foreign Cash in the Post-TCJA

Environment

▪ TCJA, however, introduced new rules and issues to be considered, including:

• FX gain or loss on large amounts of Previously Taxed Income

• Foreign tax credit limitation issues given the increased number of baskets under Section 904(d)

• Application of haircuts to some FTCs (GILTI, Section

965)

• Participation Exemption System of 245A

• Continued application of deemed dividend rules – e.g., Section 367(b), Section 956.

9

TAX GROUP

Previously Taxed Income – the Basics

10

TAX GROUP

Previously Taxed Income - Review

▪ Subpart F has long included rules for preventing double taxation

with respect to actual repatriation of income previously taxed as

subpart F income.

• Section 959(a) – allowing actual dividends of PTI to be excluded

from gross income

• Section 961 basis adjustment rules to reflect the inclusion of Subpart

F income and distribution of PTI

▪ Due to the Transition Tax and GILTI relying on Subpart F

mechanics, the PTI rules will be expected to have major

importance in the future.

11

TAX GROUP

Basic Example of PTI

Year 1

12

USP

CFC 1

$50x Cost Basis

+ $100x Basis Adjustment under §961

$100x Inclusion

$100x Subpart F Income

TAX GROUP

Basic Example of PTI Continued

Year 2

13

USP

CFC 1

$150x Basis

- $100x Basis Adjustment under §961(b)$100x Distribution Excluded

from Gross Income

Earnings & Profits

$100x Previously Taxed Income (PTI)

?x Other Earnings

TAX GROUP

Implications for Section 965 and GILTI

▪ The transition dividend under Section 965(a) was effected by

treating the CFC’s undistributed earnings as an inclusion of subpart

F income. By normal operation of Section 959, this caused the

earnings to become PTI.

▪ In future years, GILTI taxed under Section 951A will also give rise

to PTI under Section 959(a).

▪ PTI is equal to the gross amount of the inclusion, not reduced by

the Section 965(c) deduction or the 50% DRD under new Section

250.

14

TAX GROUP

Gain Reduction Rule

▪ To address potential questions about the timing of a Section 961(a)

positive basis adjustment, the Proposed Regulations include a gain

reduction rule for distributions of PTI during the transition year

(generally, 2017). See Prop. Reg. 1.965-2(g).

▪ To the extent a distribution is made out of PTI attributable to a

Section 965 inclusion, and the reduction in the CFC’s stock basis

would otherwise result in gain under Section 961(b)(2), the amount

of gain is reduced in lieu of making a positive basis adjustment in

the following year.

15

TAX GROUP

Example of Distribution of PTI and Gain Reduction

Rule

▪ As a result of the Section 965 transition dividend, $500x of CFC 1’s E&P

becomes Section 965 PTI.

▪ Gain reduction rule would apply if the $500x of Section 965 PTI is distributed in

the same year up through CFC 1.

16

USP

CFC 2 $500x E&P Included under §965

Inclusion at

15.5% / 8%CFC 1

$0 Cost Basis

$0 E&P

TAX GROUP

Section 965(b) – Deficit PTI

▪ Section 965(b) provides that deficits of certain E&P deficit foreign

corporations are offset against positive E&P of other foreign

corporations for computing the transition dividend.

▪ In addition, Section 965(b)(4) provides that the positive E&P shall

become PTI and the deficit corporation’s Section 959(c)(3)

earnings and profits shall be increased to zero.

17

TAX GROUP

Basis Adjustment Election

Prop. Reg. 1.965-2(f)

▪ To enable PTI created under Section 965(b) to be repatriated

without recognition of gain under Section 961(b), the Proposed

Regulations include an election of the taxpayer to increase basis of

the positive E&P corporation’s stock and decrease basis of the

deficit corporation’s stock.

▪ The election is a one-time binding election.

▪ Under the Proposed Regulations, the election is due no later than

the tax return of the taxpayer for the Section 965 transition year.

18

TAX GROUP

Example of Deficit PTI

▪ Discuss results with and without the Section 965(b) stock basis

election.

19

USP

CFC 1

$100 Stock Basis

<$100> Deficit

on 11/2/2017CFC 2

$200 E&P on

11/2/2017

USP includes $100 under Section

965 and Increases CFC 2’s Stock

Basis to $100x

$0 Stock Basis

TAX GROUP

FX Gain or Loss

on Previously Taxed Income

21

TAX GROUP

Section 986(c) – Statutory Mechanics

▪ Section 986(c)(1) – provides for recognition of currency gain or loss with respect to distributions of PTI attributable to exchange rate movements between the date of the inclusion and the date of the distribution.

▪ Gain is ordinary and has same source as underlying subpart F or GILTI inclusion.

▪ Section 986(c)(2) – authorizes regulations to address movements of PTI through tiers of CFCs.

22

TAX GROUP

Section 986(c) Currency Gain or Loss –

Appropriate Exchange Rates

▪ Section 989 and the proposed regulations provide appropriate exchange rates for translating inclusions into US dollars:

• Subpart F income – average annual exchange rate

• GILTI – average annual exchange rate

• Section 965 – spot rate as of 12/31/2017

• Section 956 Inclusion – spot rate as of the last day of the taxable year

23

TAX GROUP

Currency Gain or Loss on PTI

USP

CFC(€)

2018 Year:

€100 GILTI

Translated at Average Rate of €1 : $1.25

June 1, 2019:

€100 Distribution of PTI

Translated at Spot Rate of €1 : $1.10

($15) Difference is a Currency Loss

under Sec. 986(c)

24

TAX GROUP

IRS Notice 88-71

▪ Provided interim guidance to implement Section 986(c).

▪ CFC maintains annual layers of PTI in passive and general category, and sources dividends from most recent layers first.

▪ Dollar basis of PTI in each Section 904(d) basket is then averaged and maintained on a pooled basis.

▪ How should Notice 88-71 apply to the new broader categories of PTI (GILTI, general basket, passive)?

25

TAX GROUP

IRS Notice 88-71 – Example 4

CFC

(€)

USP2019Distributes € 100 of PTISpot rate is € 1 : $0.80

Gen Limitation

PTI

Exchange

Rate

Dollar

Basis

2017 150 € 1 $150

2018 50 € 1 $50

2019 200 € 0.9 $180

Total Dollar Basis Pool $380

Gain / Loss on Distribution

$80 Value - $95 Basis ($380 Total Basis * 100 € / 400 € ) = ($15) Loss

26

TAX GROUP

IRS Notice 88-71 – Example 4 (Alt. Facts)

CFC(€)


For Section 986(c) Purposes, 150 € is sourced from 2019 PTI. (100 € General, 50 € Passive). 100 € is sourced from 2018 PTI proportionately to amounts of PTI in each category in that year. (20 € General, 80 € Passive)

Therefore, total of 120 € General and 130 € Passive PTI is distributed.

Gen

Limitation

PTI

Exchange

Rate Dollar Basis

Passive

Limitation

PTI

Exchange

Rate

Dollar

Basis

2017 150 € 1 $150 2017 0 € 1 $0

2018 50 € 0.9 $45 2018 200 € 0.9 $180

2019 100 € 0.8 $80 2019 50 € 0.8 $40

Total Dollar Basis Pool $275 Total Dollar Basis Pool $220

27

TAX GROUP


CFC

(€)


Gen

Limitation

PTI

Exchange

Rate Dollar Basis

Passive

Limitation PTI

Exchange

Rate Dollar Basis

2017 150 € 1 $150 2017 0 € 1 $0

2018 50 € 0.9 $45 2018 200 € 0.9 $180

2019 100 € 0.8 $80 2019 50 € 0.8 $40


Gain / Loss on Distribution of General Limitation PTI

$96 Value (120 € * 0.8) - $110 Basis ($275 Total Basis * 120 € / 300 € ) = ($14) Loss

28

TAX GROUP


CFC

(€)


Gen

Limitation

PTI

Exchange

Rate Dollar Basis

Passive

Limitation

PTI

Exchange

Rate

Dollar

Basis

2017 150 € 1 $150 2017 0 € 1 $0

2018 50 € 0.9 $45 2018 200 € 0.9 $180

2019 100 € 0.8 $80 2019 50 € 0.8 $40


Gain / Loss on Distribution of Passive Limitation PTI

$104 Value (130 € * 0.8) - $114.4 Basis ($220 Total Basis * 130 € / 250 € ) = ($10.40) Loss

29

TAX GROUP

Prop. Reg. § 1.959-3(b) (2006)

▪ General rule. Maintain separate annual Dollar basis accounts for Section 959(c)(1) and 959(c)(2) PTI. SeeProp. Reg. § 1.959-3(b)(1).

▪ Under Section 959 ordering rules, distributions are generally allocated on a LIFO basis from each layer of PTI, rather than the averaging method of the Notice.

▪ Dollar Basis Pooling Election. Alternatively, the taxpayer may take into account the aggregate dollar basis of all Section 959(c)(1) and 959(c)(2) PTI. See Prop. Reg. §1.959-3(b)(3)(ii).

30

TAX GROUP

Prop. Reg. § 1.959-3(b)(4), Ex. 2

CFC

(€)



$130 Value - $100 Basis (Basis of 100 € of year 1 Section 959(c)(1) PTI) = $30 Gain

General Limitation PTI

Exchange Rate

Sec. 959(c)(1)

PTI

Dollar

Basis

Sec. 959(c)(2)

PTI

Dollar

Basis

2017 1 100 € $100 0 € $0

2018 1.2 0 € $0 100 € $120

2019 1.3 0 € $0 0 € $0

USP uses separate annual layers to translate PTI

31

TAX GROUP

Prop. Reg. § 1.959-3(b)(4), Ex. 3

CFC(€)



$130 Value - $110 Basis ($220 Dollar Basis * € 100 / € 200 Total 959(c)(1) and 959(c)(2) PTI) = $20 Gain

General Limitation PTI

Exchange Rate

Sec. 959(c)(1)

PTI

Dollar

Basis

Sec. 959(c)(2)

PTI

Dollar

Basis

2017 1 100 € $100 0 € $0

2018 1.2 0 € $0 100 € $120

2010 1.3 0 € $0 0 € $0

USP uses dollar basis poolingelection to translate PTI

32

TAX GROUP

Translation - Section 961 Basis Adjustments

▪ As discussed above, Section 961(a) provides for an increase in CFC stock basis to reflect the amount of earnings included in gross income under Section 951(a)(1)(A) or 951(a)(1)(B). Section 961(b) provides for stock basis reduction on a distribution excluded under Section 959.

▪ Question: What rates are used to translate basis adjustments?

▪ Answer: Historic dollar cost of PTI (see TAM 200141003 and

2006 Proposed Regs. § 1.961-1 and -2).

33

TAX GROUP

FSA 199949001 – Simplified Facts

▪ Facts: USP sold stock in CFC 1 to CFC 2 for $50 of proceeds. USP recognized a $25

Section 304 deemed dividend sourced out of CFC 2’s PTI.

▪ USP recognized a $5 Section 986(c) gain on distribution of PTI.

▪ USP reduced basis in CFC 2 by $20 - the amount of PTI distributed.

CFC 2(€)

CFC 1(€)

USP

PTI – 20 € (Dollar basis at 1€ : $1)Live E&P – 0 €

$20 Basis$50 Value $20 Basis

E&P - 0 €

40 € Purchase Price(Spot Rate = 1€ : $1.25)

§ 304 Transaction

34

TAX GROUP

FSA 199949001 – Simplified Facts

▪ Question: Did USP adjust its basis in CFC 2 upward to reflect the Section 986(c) gain on

distribution of PTI?

▪ Answer: No, despite Notice treatment of Section 1248 and Sec. 367(b) transactions.

▪ Result: Of the $25 not covered by PTI, $20 was a recovery of CFC 1 stock basis and $5

was a Section 301(c)(3) gain. Therefore, USP recognized a total of $10 of gain on the

transaction.

CFC 2

(€)

CFC 1

(€)

USP

PTI – 20 € (Dollar basis at 1€ : $1)Live E&P – 0 €

$20 Basis$50 Value $20 Basis

E&P - 0 €

40 € Purchase Price(Spot Rate = 1€ : $1.25)

§ 304 Transaction

35

TAX GROUP

Withholding Taxes on Distributions of

Previously Taxed Income

36

TAX GROUP

Distributions of PTI – Withholding Tax Issues

▪ Actual cash dividends of PTI up a chain of CFCs may

result in withholding taxes imposed on the movement of

the cash to the US Parent.

▪ Taxes may be imposed on US Parent directly or on a

CFC receiving a dividend from a lower-tier foreign

subsidiary.

▪ Relevant considerations include: Basketing of the Taxes,

Foreign tax limitation, and potential application of

haircuts under Section 965(g) or Section 960(d).

37

TAX GROUP

Example of First Tier Withholding Tax

▪ Section 901/903 provides a credit for taxes imposed directly on

USP. See Reg. § 1.904-6 and IRC Section 960(c) for FTC

limitation consequences.

38

USP

CFC 1$500x PTI

$200x Distribution

<$10x> Withholding Tax

TAX GROUP

Distributions of PTI – Withholding Tax Issues

▪ Section 960(b)(1) provides for an indirect credit to a US

shareholder that receives PTI for the taxes imposed on

the CFC that are “attributable to” the portion of earnings

treated as PTI and with respect to which a credit hasn’t

previously been claimed.

▪ Section 960(b)(2) applies the same rule to a distribution

from a lower-tier CFC to a first-tier CFC, where taxes are

imposed on the lower-tier CFC and attributable to its

distribution of PTI.

39

TAX GROUP

Example of Second-Tier Withholding Tax

▪ A Section 960(b)(1) credit for the $40x withholding taxes may be available. See

Pre-TCJA Reg. §1.960-2 for ordering rules.

40

USP

CFC 2

CFC 1

$400x Distribution

No Withholding

$400x PTI from CFC 2

$800x Other PTI

$400x Distribution

<$40x> Withholding Tax

$400x PTI ― GILTI

Basket

TAX GROUP

Section 965(g) Disallowance Ratio

▪ Section 965(g) provides that no foreign tax credit (or

deduction) is allowed for the “applicable portion” of any

foreign taxes imposed with respect to the transition

dividend.

▪ The “applicable portion” is intended to apply to the

portion of the Section 965 transition dividend that is not

taxed.

▪ Prop. Reg. §1.965-5 extends the disallowance rule of Section 965(g) to withholding taxes imposed on a

distribution of Section 965(b) PTI.

41

TAX GROUP

Section 245A – Participation Exemption

43

TAX GROUP

Introduction

▪ The exemption provides a 100% deduction for certain dividends

received by a “domestic corporation” that is a “United States

shareholder” under Section 951(b).

• RICs and REITs are not eligible.

▪ Only “specified foreign corporations” with one or more domestic

corporations as a United States shareholder qualify. PFICs are

excluded from Section 245A.

▪ TCJA Conference Report at fn. 1486 notes that CFCs may be

considered domestic corporations for purposes of Section 245A.

44

TAX GROUP

Undistributed Foreign Earnings

▪ Only dividends paid from the “foreign source portion” of the

foreign corporation’s undistributed earnings and profits as of the

end of the taxable year qualify for the exemption.

▪ Undistributed earnings and profits mean the earnings and profits of

the corporation as of the end of the taxable year, without

diminution for dividends distributed during the year.

▪ Earnings from US source income or ECI generally don’t qualify.

▪ Distributions of Previously Taxed Income (PTI) are not dividends

and thus are tax-free regardless of § 245A (see discussion above).

45

TAX GROUP

Basic Example of Section 245A

▪ The first $200 of the distribution is tax-free out of Previously Taxed Income

under Section 959. The balance of $100 is potentially eligible for a DRD under

Section 245A.

46

US Corp

Foreign

Corp

$300 Distribution100%

Earnings & Profits

$200 Previously Taxed Income

$300 Undistributed

TAX GROUP

Disallowance of Foreign Tax Credits

▪ No deduction or credit is allowed for foreign taxes associated with a dividend that qualifies for a Dividends Received Deduction under Section 245A. Section 245A(d).

▪ This disallowance provision applies to foreign withholding taxes on payment of the dividend.

Note – due to the repeal of Section 902, there would generally not be an indirect credit for taxes imposed on the foreign corporation in any event.

47

TAX GROUP

Holding Period Requirements of Section 246

▪ To qualify for a DRD, the domestic corporation must hold the stock of the foreign corporation for at least 365 days of the 731 day period around the ex-dividend date. Section 246(c)(3).

▪ The “taxpayer” must also satisfy the requirements of being a 10% US shareholder in the foreign corporation throughout that period.

▪ Section 246(c) rules for tacked holding periods and transactions that reduce the taxpayer’s risk of loss also apply for this purpose.

48

TAX GROUP

Section 1059 – The Other Holding Period Requirement

▪ In addition to qualifying for the DRD, the taxpayer should also consider potential application of Section 1059 to “extraordinary dividends.”

▪ Where Section 1059 applies, the taxpayer’s basis in the stock is reduced by the amount of the DRD allowed under Section 245A(a). If the basis reductions exceed the taxpayer’s basis in the stock, the taxpayer is required to recognize gain.

49

TAX GROUP

Section 1059 – Thresholds for Application

▪ Section 1059(a) generally applies only where dividend is “extraordinary” – i.e., 10% of taxpayer’s basis (or at the taxpayer’s election, fair market value) in the stock – and the taxpayer did not satisfy a holding period requirement.

▪ The Section 1059 holding period requires the taxpayer to hold the stock for at least 2 years before the ex-dividend date.

• Exception for certain corporations where the taxpayer owns the same % interest throughout the corporation’s entire existence.

▪ Section 1059(e) provides that certain redemptions, Section 304 transactions, and other transactions are subject to Section 1059 even if the taxpayer satisfied the 2-year holding period requirement.

50

TAX GROUP

Section 245A Holding Period – Example 1

51

USP

CFC

Dividend – December 1, 2018

$100x

No Previously Taxed Income

$100x Undistributed Earnings

Assume USP Acquired CFC’s

Stock on November 1, 2017 and

Sells CFC’s Stock on January 1,

2019.

Basis $300x

Value $300x

TAX GROUP

Section 245A Holding Period – Example 2

52

USP

CFC 1

$100x Dividend Paid

on December 1, 2018


USP Acquired CFC’s Stock on

March 1, 2018 and Holds CFC’s

Stock Thereafter.

Basis $300x

Value $300x

TAX GROUP

Treatment of Section 1248 Amount

▪ Section 1248 was amended so that a section 1248 deemed dividend is treated as eligible for Section 245A to the same extent as an actual dividend. Section 1248(j).

▪ Similar rules apply at the lower-tier CFC level, where one CFC sells another CFC and the US shareholder satisfies the requirements of Section 245A at the first-tier CFC level. See Section 964(e)(4).

53

TAX GROUP

Example of a Section 1248 Deemed Dividend

▪ Under IRC Section 1248, $100x of USP’s gain on the sale is re-characterized as

a dividend to the extent of USP’s share of CFC’s Section 1248 E&P.

▪ USP may claim a Section 245A DRD of $100x to the same extent as would be

the case for an actual dividend.

54

USP

CFC

$100x Basis

$300x Value


Sale for $300x

Third Party

Buyer

TAX GROUP

Hybrid Dividends

▪ Section 245A(e) denies the participation exemption for “hybrid dividends.” No foreign tax credit is allowed with respect to hybrid dividends, despite the absence of a DRD. See Section 245A(e)(2).

▪ In the case of a CFC receiving a “hybrid dividend” from another CFC, the hybrid dividend is considered to be subpart F income to the US shareholder.

▪ Definition of a Hybrid Dividend:

• An amount received by the shareholder for which there is a deduction under Section 245A, and

• For which the controlled foreign corporation receives a deduction or similar tax benefit for foreign income tax purposes.

55

TAX GROUP

Section 367(b) After the TCJA

56

TAX GROUP

Inbound Liquidations and Reorganizations (Reg. §1.367(b)-3 –

Paradigm case

CFC

USP

“Checks the Box” to become

a Disregarded Entity

Foreign

Disregarded

Entity (DRE)

57

TAX GROUP

Overview of Treas. Reg. § 1.367(b)-3

▪ Reg. § 1.367(b)-3 applies to all transactions in which a domestic corporation acquires the assets of a foreign corporation in a § 332 liquidation or § 368(a)(1) reorganization.

▪ Any United States shareholder (within the meaning of § 951(b)) in a foreign corporation undergoing such a transaction must include in its income, as a deemed dividend, the “all earnings and profits amount” with respect to its stock in the foreign corporation.

▪ All E&P amount generally means the undistributed E&P attributable to the shareholder’s stock under Section 1248.

58

TAX GROUP

DC(U.S.)

FC(Foreign)

Previously Taxed Income 500x

Undistributed E&P 100x

FC checks the box and

liquidates into DC

Example of Inbound Liquidation

Results:

(1)Generally tax-free liquidation

under Section 332.

(2)Inclusion of the $500x of PTI and

$100x of Undistributed E&P

Consider whether§ 245A applies to

the $100x.

Stock Basis $200x

FMV $1,500x

59

TAX GROUP

Inbound Transactions under Reg. § 1.367(b)-3:

Impact on Tax Attributes

▪ Attribute Carryover Rules:

• DC generally takes a carryover basis in the assets of FC under §334 or § 362 (but see discussion of § 362(e)(1) below).

• FC’s earnings and profits are generally eliminated unless attributable to a US trade or business of FC (see Reg. § 1.367(b)-3(f)).

• FC’s net operating losses are eliminated unless connected with a US trade or business. See Reg. § 1.367(b)-3(e).

• Previously taxed income accounts of FC are eliminated; however, DC must recognize currency gain or loss immediately before their elimination under § 986(c). See Reg. § 1.367(b)-2(k).

60

TAX GROUP

Inbound Transactions – Section 362(e)

Limitation on Importation of Net Built-in Loss

▪ General rule (§ 362(e)(1)(A)) . If, in a transaction described in §362(a) or § 362(b), there would be an importation of a net built-in loss, then the basis of all property received in the transaction shall be its fair market value.

▪ Note – Section 334(b) includes a similar rule for inbound

liquidations governed by § 332.

▪ Key Definitions:

• Built-in-gain or loss with respect to property is considered to be “imported” to the extent that a sale by the transferor before the transaction would not be subject to US taxation.

• A net built-in-loss exists if the aggregate adjusted basis of property acquired by the transferee would, but for § 362(e)(1), exceed its aggregate FMV.

61

TAX GROUP

Any Questions?

62

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