Corporation Wants Answers on Treatment of Outbound Transfers

September 14, 2018

Lafayette "Chip" G. Harter III
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Re: Modification of Section 367 Regulations in Response to Executive Order 13789

Dear Mr. Harter,

Steptoe represents the Brunswick Corporation. On Brunswick's behalf, I would like to reiterate Brunswick's prior comments, in a letter dated June 2, 2017 (attached for your reference), regarding the need for guidance to expand the scope of the active trade or business exception of section 367 to provide relief for non-abusive outbound transfers of foreign goodwill and going-concern value attributable to a foreign branch. Although the 2017 tax legislation repealed the active trade or business exception beginning in 2018, guidance is needed to provide relief to taxpayers who relied on long-standing law prior to the finalization of the regulations under section 367 in December 2016.

Brunswick Corporation is a leading global designer, manufacturer, and marketer of recreation products including marine engines, boats, fitness equipment, and active recreation products. Brunswick began its business in 1845 manufacturing billiards tables in Cincinnati, Ohio, and to this day it remains a predominately U.S. manufacturer employing 10,874 American workers (73% of our total workforce) across the country. Its headquarters is in Lake Forest, Illinois, and our largest manufacturing facility is in Fond du Lac, Wisconsin. Brunswick is a net exporter of products, embracing market opportunities throughout the world. To facilitate the export of its products overseas, Brunswick Corporation has a network of distribution subsidiaries and branches in many foreign jurisdictions. Those subsidiaries/branches sell millions of dollars of U.S.-made products to foreign customers every year.

On September 16, 2015, Treasury and the IRS issued proposed regulations under section 367(d) that proposed to eliminate the favorable treatment of foreign goodwill and going concern value under section 367(d). This proposed regulation was a reversal of the rule provided by the regulation in force at the time, Temp. Treas. Reg. § 1.367(d)-1T(b), which generally provided that section 367(d) did not apply to the transfer of foreign goodwill or going concern value.

These proposed regulations were finalized on December 16, 2016, retroactive to transfers occurring on or after September 14, 2015. Although the September 14, 2015, applicable date had been previewed in proposed regulations, taxpayers making outbound transfers on or after that date faced a difficult choice: comply with existing law and risk the possible retroactive application of the new rule, or comply with a proposed regulation that was not yet law, which conflicted directly with the regulation then still in effect, and could be withdrawn or changed before finalization.

Executive Order 13789 required the Department of Treasury to identify regulations that “(i) impose an undue financial burden on United States taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed the statutory authority of the Internal Revenue Service.” In its report dated October 2, 2017, Treasury identified the section 367 regulations for modification:

6. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)

Section 367 of the Internal Revenue Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions, including an exception for certain property transferred for use in the active conduct of a trade or business outside of the United States. Prior regulations provided favorable treatment for foreign goodwill and going concern value. To address difficulties in administering these exceptions, these regulations eliminated the ability of taxpayers to transfer foreign goodwill and going-concern value to a foreign corporation without immediate or future U.S. income tax. However, no active trade or business exception was provided for such transfers. Commenters noted that the legislative history to Section 367 indicated that Congress anticipated that outbound transfers of foreign goodwill and going-concern value would generally not be subject to Section 367. Some commenters requested, if the regulations were not revoked, that transfers of foreign goodwill and going-concern value be made eligible for the active trade or business exception in circumstances not ripe for abuse.

After considering the comments and studying further the legal and policy issues, Treasury and the IRS have concluded that an exception to the current regulations may be justified by both the structure of the statute and its legislative history. Thus, to address taxpayers' concerns about the breadth of the regulations, the Office of Tax Policy and IRS are actively working to develop a proposal that would expand the scope of the active trade or business exception described above to include relief for outbound transfers of foreign goodwill and going-concern value attributable to a foreign branch under circumstances with limited potential for abuse and administrative difficulties, including those involving valuation.

Treasury and the IRS currently expect to propose regulations providing such an exception in the near term.

We commend Treasury for its thoughtful consideration given to the comments received on the section 367 regulations.

The act often referred to as the Tax Cuts and Jobs Act of 2017 (Pub. L. No. 115-97) repealed the active trade or business exception in section 367. However, the provision is effective only prospectively, to transfers after December 31, 2017. As such, the active trade or business exception continues to apply to transfers occurring before that date. We note that the Priority Guidance Plan continues to list “[p]roposed modification of regulations under §367 regarding the treatment of certain transfers of property to foreign corporations” among it priority projects.

In the interest of sound tax administration, we urge Treasury to act quickly to modify the final regulations under section 367 regarding the active trade or business exception. For taxpayers who took return positions for their 2015 tax years, the statute of limitations to seek a refund will expire in 2019. Leaving the question open will therefore create an administrative burden on both the IRS and taxpayers that would be avoided by resolving the issue before the statute of limitations expires for the 2015 tax year. We appreciate your consideration of this request.

Sincerely,

Lisa M. Zarlenga
Steptoe & Johnson LLP
Washington, DC

cc:
Doug Poms, International Tax Counsel