Section 367(d) of the Internal Revenue Code (the “Code”) provides rules for outbound transfers of intangible property (as defined in section 367(d)(4)) by a United States person (a “U.S. person”) to a foreign corporation.¹ Section 367(d)(1) provides that, except as provided in regulations, if a U.S. person (a “U.S. transferor”) transfers any intangible property to a foreign corporation (the “transferee foreign corporation”) in an exchange described in section 351 or 361, section 367(d) (and not section 367(a)) applies to the transfer. Section 367(d)(2)(A) provides that a U.S. transferor that transfers intangible property subject to section 367(d) is treated as having sold the intangible property in exchange for payments that are contingent upon the productivity, use, or disposition of the intangible property.

Specifically, the U.S. transferor is treated as receiving amounts that reasonably reflect the amounts that would have been received annually in the form of such payments over the useful life of the intangible property (an “annual inclusion”), or, in the case of a direct or indirect disposition of the intangible property following the transfer, at the time of the disposition (a “lump-sum inclusion,” and each inclusion, a “section 367(d) inclusion”). See section 367(d)(2)(A)(ii)(I) and (II). The amounts taken into account by the U.S. transferor must be commensurate with the income attributable to the transferred intangible property. See section 367(d)(2)(A) (flush language). Section 367(d)(2)(B) provides that, for purposes of chapter 1 of subtitle A of the Code, the earnings and profits (“E&P”) of the transferee foreign corporation are reduced by the amount required to be included in the income of the U.S. transferor as a section 367(d) inclusion.

Section 6038B(a)(1)(A) grants the Secretary regulatory authority to require information reporting related to certain outbound transfers of property by a U.S. person to a foreign corporation, including rules related to outbound transfers of intangible property. Section 6038B(c) generally provides rules for failures to furnish the required information.

Congress enacted section 367(d) in substantially its present form to address “specific and unique problems” that exist with respect to outbound transfers of intangible property. See S. Rep. No 169, 98th Cong., 2d Sess., at 360 (1984); H.R. Rept. No. 432, 98th Cong., 2d Sess., at 1315 (1984). Congress generally identified the cause of such problems as follows:

[T]ransferor U.S. companies hope to reduce their U.S. taxable income by deducting substantial research and experimentation expenses associated with the development of the transferred intangible and, by transferring the intangible to a foreign corporation at the point of profitability, to ensure deferral of U.S. tax on the profits generated by the intangible.

Id.

Congress also explained that, after the initial outbound transfer of intangible property, these problems could arise by reason of certain subsequent direct or indirect dispositions of the intangible property. See S. Rept. No 169, 98th Cong., 2d Sess., at 368 (1984) (“[G]ain on a disposition of stock in a [transferee foreign corporation] will be treated as being attributable, in part, to the transferred intangible . . . ; similarly, upon a disposition of the intangible by the [transferee foreign corporation], the U.S. transferor will be treated as receiving a payment [with respect to that intangible]”).

1. In general

Temporary regulations were published under sections 367(d) and 6038B(a)(1)(A) on May 16, 1986 (51 FR 17936). Proposed regulations were also published under these sections on September 16, 2015 (80 FR 55568), and the related final regulations were published on December 16, 2016 (81 FR 91012) (these final regulations and the temporary regulations, together, the “section 367(d) regulations”).

Consistent with section 367(d) and its legislative history, the section 367(d) regulations provide rules for determining a U.S. transferor’s section 367(d) inclusion and a transferee foreign corporation’s required adjustments for its deemed payment to the U.S. transferor. In general, the U.S. transferor takes into account an annual inclusion over the useful life of the intangible property, as determined in accordance with the provisions of section 482 and regulations thereunder. See §1.367(d)-1T(c)(1). For this purpose, the useful life is the entire period during which exploitation of the intangible property is reasonably anticipated to affect the determination of taxable income, as of the time of transfer. See §1.367(d)-1(c)(3)(i).

Additionally, for purposes of chapter 1 of subtitle A of the Code, the transferee foreign corporation reduces its E&P by the amount of the deemed payment to the U.S. transferor, and, for purposes of subpart F of part III of subchapter N of chapter 1 (“subpart F”), the transferee foreign corporation may treat the deemed payment as, in relevant part, an expense properly allocated and apportioned to gross income subject to subpart F in accordance with the provisions of §§1.954-1(c) and 1.861-8. See §1.367(d)-1T(c)(2); see also §1.951A-2(c)(2)(ii) (providing similar treatment for purposes of determining tested income or tested loss of a controlled foreign corporation (as defined in section 957, a “CFC”)).

2. Subsequent transfer rules

If the U.S. transferor subsequently transfers the stock of the transferee foreign corporation it received in exchange for the intangible property, or if the transferee foreign corporation subsequently transfers the intangible property it received in exchange for its stock, the section 367(d) regulations provide different rules based on whether the transferee in the subsequent transfer is a U.S. person or a foreign person and whether the transferee is a related person or an unrelated person as to the U.S. transferor. See §1.367(d)-1T(d), (e), and (f); see also Notice 2012-39, 2012-31 I.R.B. 95 (describing regulations that would apply in lieu of §1.367(d)-1T(c), (d), (e), and (g) with respect to certain outbound transfers of intangible property by a domestic corporation to a foreign corporation in an exchange described in section 361(a) or (b)). These subsequent transfer rules treat certain subsequent transfers of the stock of the transferee foreign corporation or the intangible property as a disposition of the intangible property (within the meaning of section 367(d)(2)(A)(ii)(II)) that can accelerate a section 367(d) inclusion, and corresponding adjustments, by reason of the deemed payment. See, for example, §1.367(d)-1T(d).

If the U.S. transferor subsequently transfers stock of the transferee foreign corporation to a related U.S. person (a “successor U.S. transferor”), the transfer is not treated as a disposition of the intangible property, and the successor U.S. transferor is treated as receiving a right to receive a proportionate share (determined under §1.367(d)-1T(e)(4)) of the annual inclusion that would otherwise be taken into account by the U.S. transferor under §1.367(d)-1T(c). Therefore, the successor U.S. transferor is required to take into account that proportionate share of the annual section 367(d) inclusion over the remaining useful life of the intangible property, and the transferee foreign corporation takes into account any adjustments from the successor U.S. transferor’s annual section 367(d) inclusion. See §1.367(d)-1T(e)(1) and (2). If the U.S. transferor transfers a portion of the stock of the transferee foreign corporation to one or more successor U.S. transferors and retains a portion of the stock of the transferee foreign corporation, the U.S. transferor continues to take into account the portion of the annual section 367(d) inclusion that is not taken into account by a successor U.S. transferor.² See §1.367(d)-1T(c)(1).

Alternatively, if a U.S. transferor subsequently transfers stock of the transferee foreign corporation to an unrelated person (U.S. or foreign), the transfer is treated as an indirect disposition of the transferred intangible property that triggers a lump-sum section 367(d) inclusion. As a result, the U.S. transferor recognizes gain immediately (determined based on the fair market value of the intangible property at the time of the indirect disposition and the U.S. transferor’s adjusted basis in the intangible property at the time of the initial section 367(d) transfer), as if the U.S. transferor had sold the intangible property to the unrelated person, and the transferee foreign corporation makes corresponding adjustments. See §1.367(d)-1T(d); see also §1.367(d)-1T(e)(1)(iii) and (e)(2) (providing pro rata rules for cases in which there is a subsequent transfer of stock of the transferee foreign corporation to both an unrelated person(s) and a successor U.S. transferor(s)).

If the transferee foreign corporation subsequently transfers the intangible property to a related person, notwithstanding that such subsequent transfer is a direct disposition of the intangible property, the section 367(d) regulations do not trigger a lump-sum inclusion but rather provide that “the requirement that the U.S. transferor recognize gain under [§1.367(d)-1T(c)(1) or (e)(1)] shall not be affected” by such transfer. See §1.367(d)-1T(f)(3). The regulation does not distinguish between a related U.S. or foreign person and provides further that “for purposes of any required adjustments, and of any accounts receivable created under [§1.367(d)-1T(g)] the related person that receives the intangible property shall be treated as the transferee foreign corporation.” See §1.367(d)-1T(f)(3).

Conversely, if the transferee foreign corporation subsequently transfers the intangible property to an unrelated person (U.S. or foreign), the U.S. transferor recognizes gain immediately (in the form of a lump-sum inclusion determined using the U.S. transferor’s former adjusted basis in the intangible property immediately before the transfer to the transferee foreign corporation and a partial annual inclusion), and the transferee foreign corporation makes corresponding adjustments. See §1.367(d)-1T(f)(1) and (2).

As described in the preceding paragraphs of this part I.C.2 of the Background, the consequences of a direct or indirect transfer of the intangible property following an initial outbound transfer of that property depend, in relevant part, on whether the transferee in the subsequent transfer is a related or unrelated person. In determining relatedness, the section 367(d) regulations lower certain thresholds that normally apply in determining whether persons are related, to preserve the application of section 367(d) for cases in which a U.S. transferor retains a sufficient nexus to the intangible property after the subsequent transfer. See §1.367(d)-1T(h)(2). Thus, the section 367(d) regulations generally preserve the application of the annual inclusion stream upon a subsequent transfer, but if the transfer sufficiently severs the U.S. transferor’s nexus to the intangible property, the transfer is treated as a direct or indirect disposition of the intangible property, as applicable, and the section 367(d) regulations provide that the U.S. transferor has a lump-sum inclusion and a partial annual inclusion.

As described in part II of the Background of this Preamble, §1.367(d)-1T(f)(3) provides that a subsequent disposition of intangible property by the transferee foreign corporation to a related person does not affect a U.S. transferor’s annual inclusion under §1.367(d)-1T(c) or (e). This provision further provides that the related person that receives the intangible property is treated as the new transferee foreign corporation for purposes of any required adjustments and any accounts receivable created under §1.367(d)-1T(g). Accordingly, the section 367(d) regulations require the U.S. transferor to recognize annual inclusions even if the income earned from the intangible property is subject to current U.S. taxation in the hands of the U.S. person holding the intangible property. In addition, the deemed (substituted) transferee foreign corporation is not allowed a deduction that could reduce taxable income, even though that deemed transferee foreign corporation is the U.S. transferor or a related U.S. person.

Continuing to apply section 367(d) in such cases could give rise to excessive U.S. taxation and disincentivize taxpayers from repatriating that property. To address these concerns, proposed §1.367(d)-1(f)(4) generally terminates the application of section 367(d) if the transferee foreign corporation repatriates the intangible property to a “qualified domestic person” and certain reporting requirements are satisfied. See proposed §1.367(d)-1(f)(4)(i). See part I.C of this Explanation of Provisions for a discussion of the definition of a qualified domestic person and part III of this Explanation of Provisions for a discussion of the reporting requirements.

1. In General

As noted in part I.A of this Explanation of Provisions, the proposed regulations terminate the continued application of section 367(d) when a transferee foreign corporation repatriates intangible property to a qualified domestic person and the U.S. transferor provides the relevant information described in proposed §1.6038B-1(d)(2) and, when those requirements are met, the proposed regulations require the U.S. transferor to include in gross income a partial annual inclusion attributable to the part of its taxable year that the transferee foreign corporation held the intangible property, after which the intangible property is no longer subject to section 367(d) (thus, for example, the annual inclusion stream terminates). See proposed §1.367(d)-1(f)(4)(i). The proposed regulations also require the U.S. transferor to recognize gain (which amount may be zero in certain cases) as a result of the repatriation. See Id. Additionally, the proposed regulations provide a special rule (discussed in part I.D of this Explanation of Provisions) to determine the qualified domestic person’s basis in the repatriated intangible property. The transferee foreign corporation, on the other hand, makes the required adjustments currently described in §1.367(d)-1T(c)(2), with minor clarifications, for cases in which the section 367(d) repatriation rules apply (that is, the adjustments with respect to the U.S. transferor’s partial annual inclusion for the year of the repatriation). See part I.E of this Explanation of Provisions for a discussion of the modifications made with respect to the required adjustments described in current §1.367(d)-1T(c)(2)(ii) and (e)(2)(ii).

The manner in which the repatriation occurs will determine whether the U.S. transferor must recognize gain in connection with the repatriation transaction, with corresponding adjustments being made as to the transferee foreign corporation. For example, the U.S. transferor would not recognize gain in the case of a repatriation occurring by reason of a nonrecognition transaction pursuant to which no gain or loss is recognized as to the transferee foreign corporation. See part I.B.2 of this Explanation of Provisions for a discussion of the rules that apply based on the form of the transaction by which the intangible property is repatriated. The proposed regulations, therefore, address the tax consequences under section 367(d) as to the intangible property, but do not otherwise alter the tax treatment of the transaction by which the intangible property is repatriated.

2. Gain Recognition as to the U.S. Transferor

Consistent with section 367(d)(2)(A)(ii)(II), proposed §1.367(d)-1(f)(4)(i)(A) (the “gain recognition rule”) requires the U.S. transferor to recognize gain equal to the amount described in proposed §1.367(d)-1(f)(4)(ii). The gain recognition rule, in conjunction with the rules described in parts I.B.3 (Required adjustments for certain gain recognized) and I.D (Qualified domestic person’s adjusted basis in repatriated intangible property) of this Explanation of Provisions, generally ensures that a qualified domestic person does not receive a tax-free increase to the adjusted basis in the repatriated intangible property.

Thus, as noted in part I.B.1 of this Explanation of Provisions, whether the U.S. transferor recognizes gain under the gain recognition rule depends on the form of the repatriation transaction. Specifically, the gain recognition rule focuses on whether the intangible property is transferred basis property (as defined in section 7701(a)(43)) by reason of the repatriation, without regard to the application of section 367(d) and the section 367(d) regulations. See proposed §1.367(d)-1(f)(4)(ii). The proposed regulations incorporate the definition of transferred basis property for this purpose, as opposed to other approaches for distinguishing the form of the repatriation transaction, to ensure the appropriate application of these proposed rules in all circumstances.³

If the intangible property is transferred basis property as described in the preceding paragraph, the amount of gain the U.S. transferor will recognize pursuant to the gain recognition rule is the amount of gain the transferee foreign corporation would recognize, if any, upon the repatriation under general subchapter C rules if its adjusted basis in the intangible property were equal to the U.S. transferor’s former adjusted basis in the property. See proposed §1.367(d)-1(f)(4)(ii)(A). This amount may be zero in the case of certain repatriations, for example, a repatriation by a transferee foreign corporation of intangible property to the U.S. transferor in a complete liquidation described in sections 332 and 337, in which case the U.S. transferor will not recognize any gain under the gain recognition rule. Alternatively, if, for example, the repatriation occurs in an exchange described in section 351(b) in which the transferee in the exchange is a qualified domestic person (as defined in proposed §1.367(d)-1(f)(4)(iii)), the amount of gain determined under this rule may be greater than zero, even though the intangible property is transferred basis property, because the amount of gain is determined by reference to the gain the transferee foreign corporation would recognize upon the transaction if the adjusted basis in the intangible property were equal to the U.S. transferor’s former adjusted basis in the intangible property.

If the intangible property is not transferred basis property by reason of the repatriation, the amount of gain a U.S. transferor will recognize pursuant to the gain recognition rule is the excess, if any, of the fair market value of the intangible property on the date of the repatriation over the U.S. transferor’s former adjusted basis in the property. See proposed §1.367(d)-1(f)(2)(ii)(B). For example, if the transferee foreign corporation repatriates the intangible property to the U.S. transferor in a distribution described in section 311, the intangible property is not transferred basis property, and therefore the rule described in this paragraph applies to determine the amount of gain recognized by the U.S. transferor under the gain recognition rule.

3. Required Adjustments Related to Certain Gain Recognized

Current §1.367(d)-1T(f)(2)(i) provides that a transferee foreign corporation’s E&P are reduced, in relevant part, by the amount of gain recognized by a U.S. transferor under §1.367(d)-1T(f)(1). Because a U.S. transferor recognizes gain in these cases in the form of a lump-sum inclusion, the corresponding adjustment to the transferee foreign corporation’s E&P is generally intended to reduce the E&P that arises for the transferee foreign corporation by reason of the disposition (and, in so doing, the adjustment prevents potential excessive E&P arising from that disposition). To achieve this goal, §1.367(d)-1T(f)(2) necessarily implies a preceding increase to the transferee foreign corporation’s E&P by reason of the disposition that is then offset by the corresponding reduction. For example, consider a case in which a U.S. transferor contributed intangible property with an adjusted basis of $0 to a wholly owned transferee foreign corporation in an exchange described in section 351(a) that was subject to section 367(d). In a later year, the transferee foreign corporation disposes of the intangible property to an unrelated person when the fair market value of the intangible property is $100x, which causes the U.S. transferor to recognize $100x of gain under §1.367(d)-1T(f)(1); also, assume the transferee foreign corporation has $50x of other E&P unrelated to the subsequent disposition of the intangible property. Section 1.367(d)-1T(f)(2) does not simply reduce the transferee foreign corporation’s E&P by $100x, but rather the corresponding reduction would offset the $100x of E&P that arises as to the transferee foreign corporation by reason of the disposition, thereby preventing potential excessive E&P and leaving the transferee foreign corporation’s other E&P unaffected.

Similarly, and in order to prevent excessive E&P and gross income as to the transferee foreign corporation because of the gain recognition rule or §1.367(d)-1T(f)(1), proposed §1.367(d)-1(f)(2)(i) provides certain adjustments to the transferee foreign corporation’s E&P and gross income that arise by reason of any gain the U.S. transferor recognizes under the gain recognition rule or §1.367(d)-1T(f)(1). Specifically, for purposes of chapter 1 of the Code – that is, chapter 1 (relating to normal taxes and surtaxes) of subtitle A (relating to income taxes) of the Code — the transferee foreign corporation reduces (but not below zero) the portion of its E&P and gross income arising from the transaction to take into account the gain recognized by the U.S. transferor. See proposed §1.367(d)-1(f)(2)(i). And, as provided currently under the section 367(d) regulations, any gain so recognized can be received by the U.S. transferor without further U.S. tax consequences pursuant to the account receivable mechanism provided in §1.367(d)-1T(g)(1). See proposed §1.367(d)-1(f)(2)(ii).

Because section 367(d) effectively shifts certain gain a transferee foreign corporation would recognize as to intangible property directly to a U.S. transferor under the gain recognition rule or §1.367(d)-1T(f)(1) (as applicable), these rules are intended to provide appropriate reductions to offset, as to the transferee foreign corporation, the impact of a U.S. transferor’s recognition of gain under section 367(d). In most cases, the proper reduction described in proposed §1.367(d)-1(f)(2)(i) will equal the amount of gain recognized by the U.S. transferor under the provisions described in the preceding sentence. But the proper reduction may diverge from the amount of gain recognized by the U.S. transferor in certain cases, depending on the position taken with respect to the transferee foreign corporation’s basis in the intangible property during the time the intangible property is subject to section 367(d). See part I.D of this Explanation of Provisions for additional discussion of this issue.

4. Special Rule for Related Transactions

Proposed §1.367(d)-1(f)(4)(v) provides a special rule that applies if the intangible property is transferred in two or more related transactions. If this special rule applies, whether and how the proposed regulations apply depends on the ultimate recipient of the intangible property. See proposed §1.367(d)-1(f)(6)(ii)(D) and (E) (Examples 4 and 5) for illustrations of this rule.

Proposed §1.367(d)-1(f)(4)(iii) defines a qualified domestic person for purposes of the proposed regulations. First, a qualified domestic person includes the U.S. transferor that initially transferred the intangible property subject to section 367(d) that is repatriated (an “initial U.S. transferor”) and a U.S. person treated as the U.S. transferor pursuant to §1.367(d)1T(e)(1) as applied with certain limitations (a “qualified successor”). See proposed §1.367(d)-1(f)(4)(iii)(A) and (B). Specifically, these limitations require that a qualified successor must be either an individual or a corporation other than a corporation exempt from tax under section 501(a), a regulated investment company (as defined in section 851(a)), a real estate investment trust (as defined in section 856(a)), a domestic international sales corporation (DISC) (as defined in section 992(a)(1)), or an S corporation (as defined in section 1361(a)) (a domestic corporation meeting these requirements, a “qualified corporation”). Second, a qualified domestic person also includes a U.S. person that is an individual or a qualified corporation related to the U.S. transferor within the meaning of §1.367(d)-1T(h). See proposed §1.367(d)-1(f)(4)(iii)(C) and (D).

The proposed regulations define a qualified domestic person in this manner based on the principle that it is generally appropriate to terminate the continued application of section 367(d) only when all the income produced by the intangible property, as well as gain recognized on a disposition of the intangible property, will be subject to current tax in the United States as to the qualified domestic person while that person holds the property. It is also appropriate to terminate the continued application of section 367(d) for a repatriation to an initial U.S. transferor because such a transfer merely restores the circumstances that existed at the time of the original outbound transfer subject to section 367(d).

A qualified domestic person, as noted above, also includes certain U.S. persons (individuals and qualified corporations) related to either the initial U.S. transferor or qualified successor, as applicable. See proposed §1.367(d)-1(f)(4)(iii)(C) and (D). This aspect of the definition of qualified domestic person implements the same principle described in the preceding paragraph; that is, to terminate the continued application of section 367(d), all of the income or gain from the intangible property must be subject to current tax in the United States as to the qualified domestic person after the repatriation or the repatriation must restore the circumstances that existed at the time of the original outbound transfer subject to section 367(d).

In the case of a domestic partnership, §1.367(d)-1T(h) defines a related person for purposes of the section 367(d) regulations by reference to certain relationships described in section 267 or 707(b)(1). Thus, if a U.S. transferor owns more than 50 percent of the capital or profits interest in a domestic partnership, the U.S. transferor and the domestic partnership are related within the meaning of section 707(b)(1) and, therefore, the U.S. transferor and the domestic partnership are related for purposes of §1.367(d)-1T(h), even if the domestic partnership has one or more foreign partners. The proposed regulations, however, do not treat the domestic partnership as a qualified domestic person. The Treasury Department and the IRS considered addressing such cases by including rules in the proposed regulations treating a partnership as an aggregate of its partners (an “aggregate approach”), with the analysis for qualified domestic person status occurring under such an aggregate approach. See, for example, §§1.367(a)-1T(c)(3)(i) and 1.367(d)-1T(a) for similar rules that apply to certain transfers of intangible property by a partnership to a foreign corporation. The proposed regulations do not adopt an aggregate approach because that approach could allow taxpayers to circumvent the purposes of these proposed regulations and other related regulations following a repatriation to a domestic partnership. This could occur if, for example, partnership allocations are changed after the repatriation or if the transferee foreign corporation (or a related foreign corporation) has liquidation rights to the intangible property following the transfer. Additionally, in the case of a partnership with one or more partners that are qualified domestic persons and one or more partners that are not, an aggregate approach would necessitate rules to measure the extent to which proposed §1.367(d)-1(f)(4)(i) applies by reason of a repatriation (and, by extension, the extent to which the annual inclusion stream under section 367(d) should continue to apply after the repatriation). To address this concern, the Treasury Department and the IRS also considered including, as part of an aggregate approach in the proposed regulations, rules like those provided in §§1.367(a)-3 and 1.367(a)-8 regarding gain recognition agreements to ensure that, to the extent the relief provided in proposed §1.367(d)-1(f)(4)(i) applies as to a repatriation, a corresponding amount of income from the intangible property would be, and would continue to be, subject to tax in the United States. After consideration, however, the Treasury Department and the IRS are not proposing such an approach, because it would be unworkable due to the compliance and administrative burden.

Proposed §1.367(d)-1(f)(4)(iv) provides rules regarding a qualified domestic person’s basis in the intangible property it receives in a repatriation. Specifically, the proposed regulations provide that, in the case of repatriation pursuant to which the intangible property qualifies as transferred basis property, a qualified domestic person’s adjusted basis in the intangible property will equal, subject to any applicable limitations that may apply under the Code, the lesser of the U.S. transferor’s former adjusted basis in the intangible property or the transferee foreign corporation’s adjusted basis in that property (immediately before the repatriation), increased by the greater of the amount of gain recognized by the U.S. transferor under the proposed regulations upon the repatriation (if any) or the amount of gain recognized by the transferee foreign corporation upon the repatriation (if any). See §1.367(d)-1(f)(4)(v)(A). The result in most cases will track the result that would occur under generally applicable rules, like section 334(b) or 362, while appropriately accounting for situations in which the gain a U.S. transferor recognizes under the gain recognition rule differs from the gain the transferee foreign corporation recognizes by reason of the repatriation. Alternatively, if the intangible property does not qualify as transferred basis property, a qualified domestic person’s adjusted basis in the intangible property will equal the fair market value of the intangible property as of the date of the subsequent disposition. See proposed §1.367(d)-1(f)(4)(iv)(B).

The Treasury Department and the IRS are aware of the uncertainty regarding the treatment of adjusted basis in intangible property subject to section 367(d) while section 367(d) applies, particularly when the U.S. transferor’s former adjusted basis is greater than zero. The proposed regulations are intended to address basis consequences solely when intangible property is repatriated in a transaction that eliminates the continued application of section 367(d). In this manner, the effect of proposed §1.367(d)-1(f)(4)(iv) is prospective insofar as it provides for a qualified domestic person’s adjusted basis in the intangible property after the property is no longer subject to section 367(d). Thus, the proposed regulations do not address, nor is any implication intended as to, the appropriate treatment of adjusted basis as to the transferee foreign corporation in intangible property subject to section 367(d) while section 367(d) applies; instead, the Treasury Department and the IRS will address general basis rules under section 367(d) in future rulemaking. Until such general rules are issued, proposed §1.367(d)-1(f)(4)(iv) would operate in a manner intended to reach an appropriate result regarding a qualified domestic person’s basis in repatriated intangible property. See proposed §1.367(d)-1(f)(6)(ii)(C) (Example 3) for an illustration of this rule.

As noted in part I.A of this Explanation of Provisions, the transferee foreign corporation makes the required adjustments currently described in §1.367(d)-1T(c)(2) for cases in which the section 367(d) repatriation rules apply (that is, the adjustments with respect to the U.S. transferor’s partial annual inclusion for the year of the repatriation). Current §1.367(d)-1T(c)(2)(ii) provides that, as to a U.S. transferor’s annual inclusion, the transferee foreign corporation may treat that deemed payment as an expense (whether or not paid) properly allocated and apportioned against gross income subject to subpart F, in accordance with §§1.954-1(c) and 1.861-8.

The proposed regulations provide that the deemed payment by the transferee foreign corporation is treated as an allowable deduction that must be allocated and apportioned to such corporation’s classes of gross income in accordance with §§1.882-4(b)(1), 1.954-1(c), and 1.960-1(c) and (d) (as appropriate). See proposed §1.367(d)-1(c)(2)(ii). Proposed §1.367(d)-1(c)(2)(ii) thus clarifies that the allowable deduction is allocated and apportioned under the provisions cited in the previous sentence potentially to any class (or classes) of gross income (as appropriate) rather than solely to gross income subject to subpart F in all circumstances. The proposed regulations make identical clarifications in proposed §1.367(d)-1(e)(2)(ii) (required adjustments in the case of a subsequent transfer of stock of the transferee foreign corporation to a successor U.S. transferor). The proposed regulations change the reference to “expense” in the current regulations to “allowable deduction” for clarity; this modification is not intended to be a substantive change.

As noted in part I.C of the Background section of this Preamble, there may be multiple U.S. transferors with respect to the same intangible property, which may occur, for example, if a U.S. transferor subsequently transfers a portion of its stock in the transferee foreign corporation to a successor U.S. transferor. In these cases, because the section 367(d) regulations apply separately as to each U.S. transferor, the requirements of proposed §1.367(d)-1(f)(4)(i) also apply separately with respect to each U.S. transferor. That is, to terminate the continued application of section 367(d) with respect to a particular U.S. transferor, the recipient of the transferred intangible property must be a qualified domestic person with respect to that U.S. transferor and the information described in proposed §1.6038B-1(d)(2)(iv) must be provided.

To illustrate, assume that a transferee foreign corporation (“TFC”) holds intangible property that is subject to section 367(d), and TFC repatriates that intangible property on date X. Also assume that two domestic corporations (“US1” and “US2”) are treated as U.S. transferors under the section 367(d) regulations by reason of owning stock of TFC (US1 was the original U.S. transferor and US2 is a successor U.S. transferor by reason of its acquisition of a portion of the stock of TFC from US1). Therefore, if the recipient of the transferred intangible property on date X is a qualified domestic person (for example, a related domestic corporation) with respect to US1, but is an unrelated person with respect to US2, the following occurs: proposed §1.367(d)-1(f)(4)(i) would apply with respect to US1, if the information described in proposed §1.6038B-1(d)(2)(iv) is provided, and US2 would recognize gain under §1.367(d)-1T(f)(1) by reason of the transaction.

The proposed regulations update the references to section 936(h)(3)(B) that appear in the applicable regulations under section 367 with references to section 367(d)(4), which was added as part of the Consolidated Appropriations Act in 2018. See Public Law 115-141 and §§1.367(a)-1(d)(5) and (6) and 1.367(e)-2(b)(2)(i)(B). The proposed regulations do not update all references to section 936(h)(3)(B) that appear in regulations issued under other sections of the Code, but such an update will be included as part of future rulemaking.

The proposed regulations provide that proposed §1.367(d)-1(f)(3) would not apply as to a repatriation meeting the requirements of proposed §1.367(d)-1(f)(4)(i)(B); instead, proposed §1.367(d)-1(f)(4)(i) applies, and, thereafter, the intangible property is no longer subject to section 367(d). The language in proposed §1.367(d)-1(f)(3) also reflects minor editorial differences from the language currently in §1.367(d)-1T(f)(3) that are not intended to be substantive. See proposed §1.367(d)-1(f)(3).

The proposed regulations fix a longstanding typographical error by replacing the reference to “section 267(d)” in current §1.367(d)-1T(h)(2)(ii) with a reference to “267(f).”

Finally, the proposed regulations eliminate §1.951A-2(c)(2)(ii), which provides that deductions taken into account in determining a CFC’s tested income and tested loss under section 951A include the amount of a deemed payment under section 367(d)(2)(A). This rule is no longer necessary because the proposed regulations provide that such deemed payments are treated as allowable deductions in accordance with, in relevant part, §1.951A-2(c)(3). See proposed §1.367(d)-1(c)(2)(ii) and (e)(2)(i).

As described in part I.A of this Explanation of Provisions, proposed §1.367(d)-1(f)(4)(i) requires a U.S. transferor to provide the information described in proposed §1.6038B-1(d)(2)(iv) with respect to the repatriation. In general, §§1.6038B-1 and 1.6038B-1T provide information reporting rules that apply with respect to transfers of property to foreign corporations, including transfers of property described in sections 367(a) and (d). See §1.6038B-1(c) and (d). Section 1.6038B-1T(d) provides specific information reporting rules for transfers subject to section 367(d), including rules that apply to subsequent transfers. See §1.6038B-1T(d)(2).

These proposed regulations make two conforming changes to the reporting requirements for subsequent transfers under §1.6038B-1T(d)(2) (the “proposed information reporting rules”). The first change provides that, to the extent a qualified domestic person receives intangible property in a subsequent transfer, the subsequent transfer information described in proposed §1.6038B-1(d)(2)(iv) instead of the subsequent transfer information described in §1.6038B-1T(d)(2)(iii) must be provided.

The second change adds information reporting requirements for a subsequent transfer of intangible property to a qualified domestic person. See proposed §1.6038B-1(d)(2)(iv). These reporting rules request information that is necessary to ensure that proposed §1.367(d)-1(f)(4) is appropriately applied to the subsequent transfer.

In general, as a condition for terminating the application of section 367(d) with respect to the transferred intangible property, proposed §1.367(d)-1(f)(4)(i)(B) requires a U.S. transferor to provide the information described in proposed §1.6038B-1(d)(2)(iv). If a U.S. transferor fails to provide that information, the repatriation is subject to proposed §1.367(d)-1(f)(3) such that the section 367(d) regulations, including the requirement to take an annual inclusion into account over the useful life of the intangible property, continue to apply. However, a U.S. transferor is eligible for relief under the proposed regulations if proposed §1.367(d)-1(f)(4)(i)(B) would have applied to the subsequent transfer of intangible property but for the fact that the required information was not provided and the U.S. transferor, upon becoming aware of the failure, promptly provides the required information and explains its failure to comply. See proposed §1.367(d)-1(f)(5). When it applies, proposed §1.367(d)-1(f)(5) treats the requirements of proposed §1.367(d)-1(f)(4)(i)(B) as satisfied as of the date of the transfer of intangible property to the qualified domestic person.