Rev. Proc. 75-29

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the changes to the closing agreement that the Internal Revenue Service will generally enter into in certain transactions as a condition to issuing favorable rulings pursuant to section 367 of the Internal Revenue Code of 1954.

Sec. 2. Background.

Rev. Proc. 68-23, 1968-1 C.B. 821, establishes guidelines in connection with requests for advance rulings required under section 367 of the Code. Section 3.03(1)(c) thereof provides that a favorable ruling will generally be issued pursuant to section 367 in situations where assets of a controlled foreign corporation are acquired by another foreign corporation if the shareholders of the acquired corporation agree to include in their gross income, as a dividend deemed paid in money for their taxable year in which the exchange of stock occurs, the portion of the earnings and profits, if any, of the acquired foreign corporation properly attributable under section 1248 to such shareholders' stock in such corporation, which would have been included in their gross income under section 1248 if at the time of such acquisition the stock of such corporation was exchanged in a taxable exchange.

After the publication of Rev. Proc. 68-23, the Service began to enter into closing agreements with the shareholders of acquired corporations whose assets are acquired by a controlled foreign corporation as an alternative to requiring them to include amounts in income pursuant to section 3.03(1)(c) of Rev. Proc. 68-23. The effect of the closing agreement is to defer the inclusion of such amounts until the occurrence of certain specified events.

The present closing agreement provides the circumstances under which a shareholder will not be required to include in gross income, for the taxable year in which the reorganization occurs, the amount specified in section 3.03(1)(c) of Rev. Proc. 68-23. This amount, however, is required to be included, in full or in part, upon the occurrence of specified events and is not diminished by the occurrence of subsequent events with the result that the amount is effectively "locked-in" by the closing agreement.

The present closing agreement requires the shareholder to include in gross income as a dividend deemed paid in money the total amount determined under section 3.03(1)(c) upon the occurrence of any of the following, so called "triggering events":

(1) The acquiring corporation ceases to be a controlled foreign corporation within the meaning of section 957 of the Code.

(2) The shareholder entering into the closing agreement ceases to be a United States person for the purposes of section 1248.

(3) The shareholder entering the closing agreement ceases to own, within the meaning of section 958, 10 percent of the total combined voting power of all classes of stock of the acquiring corporation entitled to vote.

(4) The acquiring corporation ceases to be engaged in any trade or business or when the stock of the acquiring corporation becomes worthless within the meaning of section 165(g).

(5) The shareholder entering into the closing agreement in any manner disposes (including but not limited to by means of a sale, taxable or nontaxable exchange, transfer by operation of law, or otherwise) of all of the stock of the acquiring corporation received by the shareholder in the reorganization.

The present closing agreement further requires that in the event of a disposition (as described in (5) above) of part of the stock of the acquiring corporation received in the reorganization the shareholder shall include in gross income as a dividend deemed paid in money, an amount equal to the amount specified in section 3.03(1)(c) of Rev. Proc. 68-23, multiplied by a fraction, the numerator of which is the number of shares of the acquiring corporation disposed of, and the denominator of which is the total number of shares of the acquiring corporation received by the shareholder in the reorganization.

Sec. 3. New Closing Agreement.

Under the new type of closing agreement the earnings and profits (determined in accordance with sections 1248(c) and (d) of the Code) of the acquired corporation to the date of the reorganization which are properly attributable to the shareholder's stock in the acquired corporation shall be determined. These "pre-reorganization earnings" will be used in determining the amount to be taken into income, as a dividend deemed paid in money, by the shareholder upon the occurrence of certain specified events. Unlike the previous type of closing agreement, the amount of "pre-reorganization earnings" is not "locked-in." Rather, the "pre-reorganization earnings" may be decreased under the terms of the closing agreement, by:

(a) The amount of dividends received by the shareholder from the acquiring corporation with respect to the stock of the acquiring corporation received by the shareholder in the reorganization, to the extent that such dividends are paid out of "pre-reorganization earnings" of the acquired corporation.

(b) If, at the time a shareholder is required to include amounts in gross income pursuant to the closing agreement, the sum of the current and accumulated earnings and profits of the acquiring corporation after the reorganization is a deficit figure, the portion of such deficit attributable to the shares of the acquiring corporation received by the shareholder in the reorganization may be used to offset the "pre-reorganization earnings." Only deficits incurred by the acquiring corporation while it is a controlled foreign corporation within the meaning of section 957 of the Code can be utilized in this manner.

Upon the occurrence of any of the "triggering events" specified in the new type closing agreement, the shareholder will be required to include in gross income, as a dividend deemed paid in money, the total amount of the "pre-reorganization earnings" adjusted for dividends and post-reorganization deficits. The amount to be included is, however, limited to the excess, at the time of the "trigerring event," of the fair market value over the adjusted basis of the stock of the acquiring corporation received by the shareholder in the reorganization.

The "triggering events" specified in the new closing agreement will be the same as those set forth in the present closing agreement (see paragraphs (1) through (5) of section 2 above), except that the shareholder will not be required to include the total amount of the "pre-reorganization earnings" upon failure of the acquiring corporation to maintain its status as a controlled foreign corporation if such failure is due solely to a disposition by the shareholder of part of its stock in the acquiring corporation in a taxable sale or exchange. However, if the "triggering event" falls within this exception, the shareholder cannot take advantage of the five year period limitation referred to in section 1248(a)(2) of the Code.

In the event that the shareholder entering into the closing agreement disposes of part of the shares of the acquiring corporation received in the reorganization, in any manner (including but not limited to by means of a sale, taxable or nontaxable exchange, transfer by operation of law, or otherwise), and such disposition does not constitute a "triggering event," then the shareholder shall include in gross income, as a dividend deemed paid in money, that portion of the "pre-reorganization earnings", as adjusted, which bears the same ratio to such "pre-reorganization earnings" as the number of shares of stock in the acquiring corporation disposed of bears to the total number of shares of stock in the acquiring corporation received by the shareholder in the reorganization. The amount included, however, shall not exceed the excess, at the time of such disposition, of the fair market value over the adjusted basis of the stock disposed of.

Sec. 4. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Assistant Commissioner (Technical), Attention: T:C:R, Internal Revenue Service, Washington, D.C. 20224.

Sec. 5. Effect on Other Documents.

Section 3.03(1)(c) of Rev. Proc. 68-23, is amplified by this Revenue Procedure.

Sec. 6. Effective Date.

The changes described above became effective March 26, 1975, and will not authorize reexecution of, or in any way affect closing agreements that have been entered into and approved by the Secretary or his delegate or closing agreements which are based on transactions that have already been consummated.

At the option of the taxpayer, a taxpayer whose ruling request has been received by the National Office on or before July 31, 1975, may enter into either the present closing agreement described in section 2 of this Revenue Procedure or the new closing agreement described in section 3 of this Revenue Procedure.

For taxpayers submitting ruling requests after July 31, 1975, the new closing agreement will be the only alternative to including in gross income in the year of the exchange the amount specified in section 3.03(1)(c) of Rev. Proc. 68-23.

¹ Based on TIR-1354, dated March 26, 1975.