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KPMG Suggests Amending Final Regs on Distributions to Foreign Shareholders

DEC. 9, 1999

KPMG Suggests Amending Final Regs on Distributions to Foreign Shareholders

DATED DEC. 9, 1999
DOCUMENT ATTRIBUTES
  • Authors
    Liquerman, Robert
  • Institutional Authors
    KPMG LLP
  • Cross-Reference
    For the full text of T.D. 8834, see Doc 1999-26392 (53 original pages)

    or 1999 TNT 152-21 Database 'Tax Notes Today 1999', View '(Number';

    For a summary of T.D. 8682 and REG-209827-96, see Tax Notes, Aug. 19,

    1996, p. 974; for the full text, see Doc 96-22656 (67 pages) or 96 TNT

    157-6 Database 'Tax Notes Today 1996', View '(Number'.

    For a summary of T.D. 8280 and RIN 1545-AL35, see Tax Notes, Jan. 22,

    1990, p. 393; for the full text, see 90 TNT 12-1 or H&D, Jan. 16,

    1990, p. 395.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    foreign transfers
    reorganizations, controlled firm stock
    distributions
    liquidations, complete subsidiary
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-39149 (3 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 242-9

 

=============== SUMMARY ===============

 

Robert Liquerman of KPMG LLP, Washington, has expressed approval of the final regs (T.D. 8834) allowing U.S. companies to make tax-free distributions of their U.S. subsidiaries' stock or securities to their foreign shareholders, but recommended adding language on the cancellation of gain recognition agreements (GRAs). (For the full text of the regs, see Doc 1999-26392 (53 original pages) or 1999 TNT 152- 21 Database 'Tax Notes Today 1999', View '(Number'.)

Liquerman advocates amending the final regs to cancel any GRA that a distributing company filed for a stock distribution if the transaction is subject to section 355(e) or was made before that section's effective date. Taxpayers should not be penalized, he says, simply because they filed their GRAs before the final regs' effective date.

 

=============== FULL TEXT ===============

 

December 9, 1999

 

 

Guy Bracuti, Esq.

 

CC:INTL:Br 4, Room 4563

 

Internal Revenue Service

 

1111 Constitution Avenue, N.W.

 

Washington, D.C. 20036

 

 

Dear Mr. Bracuti:

[1] We are writing to comment on the final section 367(e)(1) regulations that were recently issued by Treasury and the IRS to replace former temporary regulations. 1 The final regulations address the tax treatment to a domestic corporation (Distributing) upon the distribution of stock of a subsidiary (Controlled) to Distributing's foreign shareholders in a transaction described in section 355.

[2] The former temporary regulations allowed Distributing to distribute the stock of DOMESTIC Controlled tax-free to Distributing's foreign shareholders only if certain requirements were met. These requirements included, in many cases, that Distributing file a 10-year GRA. Former final regulations generally required Distributing to file a 5-year GRA. Under both sets of former regulations, the foreign distributee was generally required to own the stock of Distributing and the stock of Controlled for the term of the GRA. 2 GRAs filed pursuant to either set of former regulations will not necessarily have expired as of the effective date of the newly issued final regulations.

[3] The new final regulations continue the prior general rule that Distributing is taxed on the distribution of stock or securities of Controlled to Distributing's foreign shareholders in a transaction described in section 355. The final regulations, however, provide a new exception to the general rule: Distributing is not subject to section 367(e)(1) and the final regulations if Controlled is a DOMESTIC corporation. According to the preamble to the final regulations, the IRS and Treasury included this exception because they believe the policies of section 367(e)(1) are adequately protected by other provisions, including section 355(e). 3

[4] We join the chorus of others who applaud this exception. We recommend, however, that Treasury and the IRS cancel any existing GRAs filed by Distributing for a distribution of stock of domestic Controlled that is also subject to section 355(e) (generally distributions after April 16, 1997). 4 Enforcing these GRAs does not further the policies of section 367(e)(1). Taxpayers should not be penalized simply because their GRAs were filed prior to the effective date of the new final section 367 regulations.

[5] We also recommend that Treasury and the IRS cancel any existing GRAs filed for a distribution of stock of domestic Controlled that occurred prior to the effective date of section 355(e). In these cases, the foreign shareholders will generally have held the stock of both Distributing and domestic Controlled for more than 2 years after the section 355 distribution. 5 A foreign shareholder's disposition of stock of Distributing or Controlled more than two years after the distribution should not violate the principles of section 355, because the 2-year presumption period of section 355(e) will have elapsed. 6 Moreover, the distribution will remain subject to other protections afforded by section 355. 7 If Treasury and the IRS are concerned about canceling GRAs for pre- section 355(e) distributions, an alternative is to cancel a GRA only if the taxpayer agrees to apply the principles of section 355(e) to the distribution. For the reasons stated above, we believe this alternative is unnecessary.

[6] We realize that the IRS and Treasury may have concerns about canceling existing GRAs resulting from outbound spin-off transactions. For example, such cancellations could raise questions about how to treat taxpayers whose GRAs have already been triggered. Our response to these concerns is that the government has effectively canceled GRAs in other types of transactions by allowing taxpayers to reduce existing 10-year GRAs to 5-year GRAs in the context of outbound stock transfers. 8 More specifically, the final outbound stock transfer regulations provide that taxpayers can elect to apply the regulations retroactively. Taxpayers that elect to apply the final regulations retroactively can reduce 10-year GRAs, that remained in effect (had not been triggered in full) on the effective date of the final regulations, to 5-year GRAs. Thus, in these cases, 10-year GRAs that are more than five years old are effectively canceled. 9

[7] In summary, canceling existing GRAs will not frustrate the policies of section 367(e)(1) or section 355, and it will provide more equitable treatment to similarly situated taxpayers and remove unnecessary administrative burdens for both the government and taxpayers.

[8] If you or your colleagues have any questions concerning this letter, please do not hesitate to contact me at (202) 533-3054.

Very truly yours,

 

 

KPMG LLP

 

Robert Liquerman

 

Principal

 

Washington, DC

 

FOOTNOTES

 

 

1 The final section 367(e)(1) regulations apply to section 355 distributions occurring in taxable years ending after August 8, 1999. Final regulations were concurrently issued pursuant to section 367(e)(2) to address certain liquidating distributions. Our comments are limited to the section 367(e)(1) outbound spin-off regulations.

2 The temporary regulations were effective for distributions occurring on or after September 13, 1996, unless the taxpayer made an election to apply the temporary regulations to distributions occurring on or after December 31, 1995. The temporary regulations replaced and removed prior final section 367(e)(1) regulations, which were generally effective for distributions on or after January 16, 1993.

3 The preamble also indicates that section 355(d) and the device and continuity of interest requirements of section 355 provide significant protection.

4 Section 355(e) was enacted by the Taxpayer Relief Act of 1997 and was effective for distributions occurring after April 16, 1997, subject to certain transitional rules.

5 We appreciate that there may be exceptions to this statement (e.g., due to the transitional rules of section 355(e)).

6 Section 355(e) applies only if a 50-percent-or-greater change in ownership is part of a plan or series of related transactions. A plan is presumed to exist only if the 50-percent-or- greater change in ownership occurs during the 4-year period beginning 2 years before the date of the distribution. In addition, the proposed section 355(e) regulations relax the standard for acquisitions that occur more than six months after the distribution. Prop. Treas. Reg. section 1.355-7. See also the preamble to the proposed section 355(e) regulations, which states, "[t]o provide certainty for transactions that, because of their separation in time, are unlikely to be part of a plan, the proposed regulations provide that, if there was no agreement, understanding, or arrangement concerning the acquisition at the time of the distribution or within two years thereafter, a distribution and an acquisition occurring more than 2 years afterwards are not part of a plan."

7 See, e.g., section 355(d), which affords significant protection during the two-year pre-distribution period.

8 See, e.g., Treas. Reg. sec. 1.367(a)-(3)(f).

9 By analogy, the government has allowed retroactive application of regulations in other appropriate instances (see, e.g., Treas. Reg. sec. 1.1503-2(h)(2)(ii), allowing taxpayers to elect to replace all existing agreements and certifications filed under prior dual consolidated regulations with agreements and certifications described in new dual consolidated loss regulations). The government has also effectively allowed taxpayers retroactive tax treatment by allowing taxpayers to automatically change their method of accounting as a result of Supreme Court decisions (see, e.g., Rev. Proc. 91-31, 1991-1 C.B. 566, and Rev. Proc. 78-6, 1978-1 C.B. 558).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Liquerman, Robert
  • Institutional Authors
    KPMG LLP
  • Cross-Reference
    For the full text of T.D. 8834, see Doc 1999-26392 (53 original pages)

    or 1999 TNT 152-21 Database 'Tax Notes Today 1999', View '(Number';

    For a summary of T.D. 8682 and REG-209827-96, see Tax Notes, Aug. 19,

    1996, p. 974; for the full text, see Doc 96-22656 (67 pages) or 96 TNT

    157-6 Database 'Tax Notes Today 1996', View '(Number'.

    For a summary of T.D. 8280 and RIN 1545-AL35, see Tax Notes, Jan. 22,

    1990, p. 393; for the full text, see 90 TNT 12-1 or H&D, Jan. 16,

    1990, p. 395.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    foreign transfers
    reorganizations, controlled firm stock
    distributions
    liquidations, complete subsidiary
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-39149 (3 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 242-9
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