Rev. Rul. 80-163

ISSUE

Is the amount of ordinary foreign source income that a domestic transferor (P) must include in its income in accordance with Rev. Rul. 78-201, 1978-1 C.B. 91, limited to the amount of gain that the transferor would have recognized if all of the transferred assets were transferred in a taxable sale or exchange?

FACTS

The facts are the same as those set forth in Rev. Rul. 78-201. In addition, each asset transferred had a fair market value in excess of its basis, and, if the transferred assets were sold in the aggregate, in a taxable sale or exchange, the amount of gain that P would have realized would have been less than the aggregate amount of the net losses that were incurred by the branch.

LAW AND ANALYSIS

The specific sections of the Code that are applicable are section 351(a), relating to the nonrecognition of gain or loss on the transfer of property to a corporation controlled by the transferor, and, section 367(a)(1), relating to the requirement that a ruling be obtained that an exchange described in section 351 is not in pursuance of a plan having as one of its principal purposes the avoidance of federal income taxes in order for a foreign corporation to be considered a corporation for purposes of determining gain on the transfer.

Rev. Rul. 78-201 required the United States transferor (P) to include in income an amount of ordinary foreign source income (the sum of the branch losses previously incurred) as a condition for obtaining a ruling that the exchange was not in pursuance of a plan having as one of its principal purposes the avoidance of federal income taxes within the meaning of section 367(a)(1) of the Code. In the instant situation, the amount of ordinary foreign source income that P must include in its income in accordance with Rev. Rul. 78-201 will not be limited to the gain that would have been recognized if the transferred assets were sold in the aggregate, in a taxable sale or exchange, since such a limitation would not take into consideration the full amount of the losses associated with the transferred assets that P used to reduce its income subject to federal income tax, and therefore would not prevent the potential mismatching of related income and losses, the tax avoidance at which Rev. Rul. 78-201 is directed.

HOLDING

The amount of ordinary foreign source income that P must include in its income in accordance with Rev. Rul. 78-201 is not limited to the amount of gain that P would have recognized if all of the transferred assets were transferred in a taxable sale or exchange.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 78-201 is amplified.