FTC Transaction No Longer a Listed Transaction

Abusive Foreign Tax Credit Intermediary Transactions

This notice withdraws Notice 2004-20, 2004-1 C.B. 608, thereby removing the identification of transactions that are the same as, or substantially similar to, the transaction described in that notice as “listed transactions” for purposes of §1.6011-4(b)(2) of the Income Tax Regulations and sections 6111 and 6112 of the Internal Revenue Code.

BACKGROUND

Notice 2004-20 describes a transaction generally involving four parties: (1) a person or persons (X) that plans to sell the stock or assets of (2) a foreign corporation or group of foreign corporations (Target) that is not engaged in a U.S. trade or business, (3) a domestic corporation that acts as an intermediary (Midco), and (4) a person or persons (Y) that plans to purchase the assets of Target. Pursuant to a prearranged plan, the parties undertake the following steps. X purports to sell the stock of Target to Midco. Midco then makes an election under section 338 to treat the stock purchase as resulting in a deemed sale by Target (Old Target) of its assets and an acquisition of those assets by a deemed new corporation (New Target), providing New Target with a stepped-up basis in the assets. Midco then may cause New Target to liquidate, either in a liquidation under local law or by making an election under §301.7701-3 to treat New Target as a disregarded entity. As a result of the liquidation (or deemed liquidation), Midco inherits New Target's assets with a stepped-up basis. Shortly thereafter, pursuant to the prearranged plan, Y purchases all or substantially all of New Target's assets. Alternatively, if Midco does not liquidate New Target (or elect to treat New Target as a disregarded entity), New Target pays a dividend to Midco after the asset sale.

The asset sale to Y generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes), and Midco claims a credit under section 901 with respect to the foreign income tax imposed on the asset sale. If Midco does not liquidate New Target (or elect to treat New Target as a disregarded entity), Midco claims a credit under section 902 (as in effect on December 21, 2017) for the foreign income tax imposed on the asset sale when New Target pays a dividend.

Notice 2004-20 alerts taxpayers that, in appropriate cases, the IRS intends to challenge the purported tax results from the transaction on a number of grounds. Notice 2004-20 also identifies transactions that are the same as, or substantially similar to, the transaction described in Notice 2004-20 as “listed transactions” for purposes of the disclosure, registration, and list maintenance requirements then in §1.6011-4(b)(2) of the Income Tax Regulations and §§301.6111-2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations.¹

Section 212 of the Education, Jobs and Medicaid Assistance Act of 2010, P.L. 111-226, 124 Stat. 2389, added section 901(m) to the Internal Revenue Code, effective for “covered asset acquisitions” after December 30, 2010. Section 901(m)(1) provides that, in the case of a covered asset acquisition, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the disposition of relevant foreign assets will not be taken into account in determining the foreign tax credit allowed under section 901(a), and in the case of foreign income tax paid by a foreign corporation, will not be taken into account for purposes of section 960.² Section 901(m)(2) defines a covered asset acquisition to include a qualified stock purchase to which section 338(a) applies. Section 901(m) does not affect the ability to claim a deduction with respect to the disqualified portion of any foreign income tax.

DISCUSSION

The Treasury Department and the IRS have concluded that these transactions no longer should be identified as “listed transactions” for purposes of the disclosure, registration, and list maintenance requirements currently under §1.6011-4(b)(2) and sections 6111 and 6112. The Treasury Department and the IRS believe that the enactment of section 901(m) has curtailed the use of these transactions because it effectively denies the foreign tax credits claimed by Midco under section 901 or 902 (as in effect on December 21, 2017), as described in Notice 2004-20, or section 960. Accordingly, transactions will no longer be identified as “listed transactions” for purposes of §1.6011-4(b)(2) and sections 6111 and 6112 solely because they are the same as, or substantially similar to, the transaction described in Notice 2004-20. Although a transaction is no longer a “listed transaction” solely because the transaction is described in Notice 2004-20, the transaction may still otherwise be subject to the requirements of sections 6011, 6111, and 6112, and the regulations thereunder.

EFFECT ON OTHER DOCUMENTS

Notice 2004-20 is withdrawn effective for transactions entered into after April 6, 2020.

DRAFTING INFORMATION

The principal author of this notice is Jeffrey L. Parry, of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Parry at (202) 317-6936 (not a toll-free number).