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Firm Seeks Safe Harbors Under Proposed Regs on Gain Recognition Agreements in Asset Reorganizations

OCT. 8, 2008

Firm Seeks Safe Harbors Under Proposed Regs on Gain Recognition Agreements in Asset Reorganizations

DATED OCT. 8, 2008
DOCUMENT ATTRIBUTES
  • Authors
    Fuller, James P.
    Neumann, Larissa
  • Institutional Authors
    Fenwick & West LLP
  • Cross-Reference
    For REG-147144-06, see Doc 2007-2673 or 2007 TNT 23-11 2007 TNT 23-11: IRS Proposed Regulations.

    For McDermott Will & Emery's August 8, 2008, comment letter, see

    Doc 2008-18043 or 2008 TNT 163-5 2008 TNT 163-5: Public Comments on Regulations.

    For Ernst & Young LLP's June 5, 2008, comment letter, see Doc

    2008-12929 or 2008 TNT 115-25 2008 TNT 115-25: Public Comments on Regulations.

    For PricewaterhouseCoopers LLP's March 1, 2007, comment letter, see

    Doc 2007-5828 or 2007 TNT 46-19 2007 TNT 46-19: Treasury Tax Correspondence.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2008-22129
  • Tax Analysts Electronic Citation
    2008 TNT 204-14

 

October 8, 2008

 

 

CC:PA:LPD:PR (REG-147144-06)

 

Room 5203

 

Internal Revenue Service

 

P.O. Box 7604

 

Ben Franklin Station

 

Washington, DC 20044

 

 

Re: Comments on the § 367 Temporary Gain Recognition Agreement Regulations

Dear Sir or Madam:

We respectfully submit the following comments with respect to the temporary regulations under § 367(a) of the Code regarding gain recognition agreements ("GRAs"). In this regard, we write to second, and lend support to, certain previous commentators in whose letters excellent simplifying suggestions were made. The temporary regulations clarify some of the issues that existed under the previous GRA regulations. Nevertheless, as illustrated in these commentators' letters, many outstanding questions remain under the temporary regulations regarding instances where the GRA triggering event exceptions ought to apply but do not or seem not to apply.

In seconding these previous comment letters, we suggest that to enhance the certainty of the GRA rules and to reduce the administrative burdens imposed upon the IRS and taxpayers, a general safe-harbor permit post-GRA internal business restructurings where the same U.S. parent company owns the business and the assets of the transferred corporation and is responsible to the IRS for any triggering event involving the taxable transfer of stock or assets of the transferred corporation outside of the corporate group. Triggering gain recognition certainly seems unnecessary when the interests of the government are protected and there has been no disposition of stock of assets outside of the corporate group.

Lowell Yoder and Damon Lyon, in their comment letter date August 8, 2008,1 propose that a similar general exception should be drafted that prevents non-recognition transactions from constituting triggering events. They highlight three types of post-GRA restructuring transactions that, from a policy perspective, should not result in gain recognition. They state that there is a substantial risk that these restructuring transactions could trigger a GRA even though the transactions are very similar to transactions which are covered by the temporary regulation's exceptions.

Messers Yoder and Lyon state that "rather than provide a general exception that prevents non-recognition transactions from constituting triggering events, the Temporary Regulations attempt to identify the universe of post-GRA restructuring transactions that could potentially be effectuated and the parties to such transaction." They state that it is not surprising that several types of transactions are not addressed by the temporary regulations in light of the difficulty associated with attempting to identify every possible post-GRA transaction that should not trigger a GRA. This creates concerns when U.S. multinationals try to undertake restructuring transactions after entering into a GRA.

We agree with Messers Yoder and Lyon, but would not limit the general safe-harbor to the type of restructuring transaction involved (tax free or taxable) given the necessary interaction between U.S. and foreign laws. Rather we suggest that as long as the relevant assets remain within the affiliated corporate group and the U.S. parent company is still on the hook under the GRA, the government is protected and there should not be any need to create taxable income.

Nardi Bress also wrote regarding the effect of certain nonrecognition transfers on existing GRAs.2 Mr. Bress stated that any ambiguity in the regulations "will have a most serious adverse impact on taxpayers' ability to enter into post-GRA restructuring transactions -- resulting in not only a trap for the unwary, but also a trap for the wary."

Mr. Bress suggests replacing the Treas. Reg. § 1.367(a)-8T(e) exceptions with a simple exception. He proposes an exception which provides that a restructuring will not constitute a triggering event provided the parties to the GRA are members of the U.S. transferor's expanded affiliated group, as defined in Treas. Reg. § 1.367(a)-8, immediately after the restructuring and provided that the parties execute a new GRA and provide other appropriate notice, reporting and certifications requirements.

We agree with Mr. Bress that his approach is simple but elegant and "should address all of the government's issues and concerns regarding post-GRA restructuring, such as triangular reorganizations, liquidations, upstream, downstream, brother-sister asset reorganizations, and transfers of stock of the parties to the GRA; and at the same time afford taxpayer the necessary flexibility to restructure their holdings post-GRA within the expanded affiliated group."

We also suggest a similar simplified approach on the domestic side. An EY comment letter dated June 5, 20083 provides a number of excellent suggestions in this regard. EY's first recommendation, for example, is to add a new exception under Treas. Reg. § 1.367(a)-8T(e) to allow for dispositions of stock of the foreign transferee corporation among members of the same U.S. consolidated group.

We agree with EY: "From a policy perspective, there would seem to be no reason why such a distribution among members of the same U.S. consolidated group should be treated as a triggering even since the stock of the transferee foreign corporation continues to be owned by the U.S. consolidated group." Yet a simple distribution of stock of the transferee foreign corporation by a U.S. subsidiary to its U.S. parent company triggers a GRA under the temporary regulations. This distribution may be advisable, for example, for purposes of § 902, yet it is not a transaction that is covered by the current triggering event exceptions. An intercompany transfer such as this should not trigger a GRA. It makes no sense.

We suggest that these safe-harbors have an effective date that is the same date that the temporary regulations became effective. Taxing these transactions, does not make for good policy. Internal business restructuring safe harbors are consistent with the GRA policy and purpose because there is no cashing out by the U.S. transferor. The U.S. transferor's direct or indirect ownership interest in the transferred corporation is maintained and the ability to collect tax is preserved in the event of a subsequent trigger of the GRA.

Sincerely,

 

 

James P. Fuller

 

Larissa B. Neumann

 

Fenwick & West LLP

 

Mountain View. CA

 

cc:

 

Steven A. Musher,

 

Associate Chief Counsel (International),

 

Internal Revenue Service

 

 

John Merrick,

 

Special Counsel to the Associate Chief Counsel (International),

 

Internal Revenue Service

 

 

Daniel McCall,

 

Attorney-Advisor Branch 4,

 

Office of Associate Chief Counsel (International),

 

Internal Revenue Service

 

 

John Harrington,

 

International Tax Counsel,

 

U.S. Treasury Department

 

FOOTNOTES

 

 

1 Letter from Lowell Yoder and Damon Lyon, McDermott Will & Emery, to Department of U.S. Treasury and Internal Revenue Service, 2008 TNT 163-5 2008 TNT 163-5: Public Comments on Regulations (Aug. 8, 2008).

2 Letter from Bernard Bress, PricewaterhouseCoopers, LLP, to Department of U.S. Treasury and Internal Revenue Service, 2007 TNT 46-19 2007 TNT 46-19: Treasury Tax Correspondence (Mar. 1, 2007).

3 Letter from Ernst & Young LLP to Department of U.S. Treasury and Internal Revenue Service, 2008 TNT 115-25 2008 TNT 115-25: Public Comments on Regulations (June 5, 2008).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Fuller, James P.
    Neumann, Larissa
  • Institutional Authors
    Fenwick & West LLP
  • Cross-Reference
    For REG-147144-06, see Doc 2007-2673 or 2007 TNT 23-11 2007 TNT 23-11: IRS Proposed Regulations.

    For McDermott Will & Emery's August 8, 2008, comment letter, see

    Doc 2008-18043 or 2008 TNT 163-5 2008 TNT 163-5: Public Comments on Regulations.

    For Ernst & Young LLP's June 5, 2008, comment letter, see Doc

    2008-12929 or 2008 TNT 115-25 2008 TNT 115-25: Public Comments on Regulations.

    For PricewaterhouseCoopers LLP's March 1, 2007, comment letter, see

    Doc 2007-5828 or 2007 TNT 46-19 2007 TNT 46-19: Treasury Tax Correspondence.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2008-22129
  • Tax Analysts Electronic Citation
    2008 TNT 204-14
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