A guide to the new proposed regulations under Sections 367(a) and (b).

OVERVIEW

New proposed regulations under section 367(a) and (b) of the Internal Revenue Code (1) were published in the Federal Register on August 26, 1991. The proposed regulations would apply to a variety of stock and asset transfers involving foreign corporations that, but for

the potential application of section 367(a) or 367(b), would qualify for tax-free treatment under certain statutory nonrecognition provisions. More specifically, the new proposed rules would apply to (i) certain direct or indirect transfers of stock or securities (in a domestic or a foreign corporation) by a U.S. person to a foreign corporation ("outbound" transfers described in section 367(a)), (ii) certain transfers of stock or assets of a foreign corporation to a foreign or domestic corporation ("foreign-to-foreign" or "inbound" transfers described in section 367(b)), and (iii) certain distributions otherwise governed by section 355 (relating to tax-free spin-offs, split-offs, and split-ups), also under section 367(b).

Following the general approach of existing rules, under the proposed regulations outbound transfers generally would not be subject to tax under section 367(a) if a 5- or 10-year gain recognition agreement were filed. U.S. transferors owning less than 5 percent of the foreign transferee would not be required to file such an agreement. By contrast, certain liquidations or reorganizations of foreign corporations into U.S. corporations (inbound transfers) generally would constitute taxable events to the shareholders exchanging stock in the transaction (though not to the foreign corporation that liquidated or reorganized). So-called foreign-to-foreign reorganizations generally would be tax-free unless the transferor were a controlled foreign corporation (CFC) and the transferee were not. Finally, certain section 355 distributions would be taxable events to either the distributing corporation or its shareholders.

The proposed regulations under sections 367(a) and (b) are not necessarily exclusive; some transfers would be subject to both sets of rules. In addition, certain transactions subject to the new outbound stock transfer rules might also be subject to a separate set of existing rules under section 367(a) governing non-stock asset transfers to foreign corporations.

With two exceptions, the proposed regulations would apply only prospectively, to transfers occurring on or after the 30th day after final regulations are published in the Federal Register. The first exception is discretionary: at the taxpayer's election, certain of the new rules relating to outbound stock transfers could be applied to transfers occurring after December 16, 1987. The second exception is mandatory but narrow in scope: a revised definition of the "all earnings and profits amount" (the measure of taxable income in certain inbound asset transfers under section 367(b)) would apply to exchanges occurring on or after August 26, 1991.