This IRM provides general guidelines in the development of IRC 367 issues. The guidelines are intended to apply to both inbound and outbound transactions. Unless otherwise noted, this IRM has not yet been amended to reflect changes made by the 2017 Tax Cuts and Jobs Act (P.L. 115-97) ("2017 TCJA" ) or regulations issued thereunder.

Purpose: The purpose of this IRM is to provide an introduction to IRC 367 and preliminary techniques for IRC 367 examinations.

Audience: The intended audience is all LB&I personnel.

Policy Owner: TTPO, LB&I

Program Owner: TTPO

Primary Stakeholders: LB&I personnel

Program Goals: The goal of this program is to provide processes to assist with the planning, execution and resolution of IRC 367 examinations.

See IRM 4.46.1.2.1.2 , Issue Teams. The IRC 367 issue team may include a:

In accordance with IRM 4.46.1.1.3, Roles and Responsibilities, there should be coordination and collaboration among team members, specialists and advisors, including the:

IRC 367(a) is intended to prevent a U.S. person from transferring appreciated property to a foreign corporation in a tax-free organization/contribution or reorganization, whereby the untaxed appreciation may escape the tax jurisdiction of the United States.

IRC 332, 351, 354, 356 and 361 only apply if the transferee is a corporation. Subject to certain exceptions, IRC 367(a)(1) generally provides that if a U.S. person transfers appreciated property (including stock) to a foreign corporation (an “outbound transfer”) in connection with an exchange described in IRC 332, 351, 354, 356 or 361 the foreign corporation will not be treated as a corporation for purposes of determining the extent to which gain (but not loss) will be recognized. Consequently, by deeming the foreign corporation not to be a foreign corporation, IRC 367(a)(1) deprives the U.S. transferor of the tax-free treatment afforded under these provisions.

An outbound transfer of intangible property in an exchange described in IRC 351 or 361 is subject to the rules of IRC 367(d) and not IRC 367(a).

IRC 367(a)(3)(A) and Treas. Reg. 1.367(a)-2(a)(2) provide that IRC 367(a)(1) does not apply to "eligible" property transferred to a foreign corporation for use by the foreign corporation in the active conduct of a trade or business outside the United States (“active trade or business exception”). Treas. Reg. 1.367(a)-2(b) provides that "eligible" property for purpose of the active trade or business exception is limited to tangible property, a working interest in oil and gas property and a financial asset.

Treas. Reg. 1.367(a)-3 contains exceptions to the general rule of gain recognition under IRC 367(a) for certain outbound exchanges/transfers of stock or securities:

IRC 367(a)(5), redesignated IRC 367(a)(4) by the 2017 TCJA, provides that in the case of an exchange described in IRC 361(a) or (b) (an exchange of property by a corporation that is a party to a reorganization of property solely for stock or securities in another corporation that is a party to the reorganization), the exceptions to IRC 367(a)(1) provided under IRC 367(a)(2) and (a)(3) are "turned off." However, IRC 367(a)(5) (now IRC 367(a)(4)) also provides that if certain basis adjustments and other conditions provided in regulations are satisfied, the exceptions are not "turned off."

A taxpayer that makes an outbound transfer that is subject to IRC 367(a) may be required to report the transfer in accordance with IRC 6038B. Failure to properly report the transfer under IRC 6038B may subject the taxpayer to a penalty, as well as an extended statute of limitations under IRC 6501(c)(8). See IRC 6038B and Treas. Reg. 1.6038B-1.

The primary purpose of IRC 367(b) is to preserve the U.S.’s ability to tax earnings accumulated by a CFC.

IRC 367(b) provides that in the case of any exchange described in IRC 332, 351, 354, 355, 356 or 361 in connection with which there is no transfer of property described in IRC 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations which are necessary or appropriate to prevent the avoidance of federal income taxes.

Regulations generally require the current recognition of all or a portion of a CFC’s E&P for exchanges subject to IRC 367(b).

If a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC 351 or 361, IRC 367(a) does not apply. Rather, IRC 367(d) provides that the U.S. person is treated as having sold such property in exchange for payments which are contingent upon the productivity, use or disposition of such property.

The U.S. person shall, over the useful life of the intangible property, annually include in gross income an amount that represents an appropriate arm’s-length charge for the property determined in accordance with IRC 482 and the accompanying regulations. Treas. Reg. 1.367(d)-1T(c)(1). If there is a direct or indirect disposition of intangible property following the outbound transfer, the U.S. person is treated as receiving the amount that would have been received upon a sale of the intangible property had the intangible property been sold at the time of the disposition. See IRC 367(d)(2)(A)(ii)(II).

The useful life of the property is the entire period during which exploitation of the intangible property is reasonably anticipated to affect the determination of taxable income. In cases where the useful life is indefinite or reasonably anticipated to exceed 20 years, a taxpayer may choose to increase the annual inclusions during the 20-year period beginning with the first year in which the U.S. transferor takes into account income pursuant to IRC 367(d) to reflect amounts that otherwise would have been required to be included following the end of the 20-year period. Treas. Reg. 1.367(d)-1(c)(3).

The amounts included in income must be commensurate with the income attributable to the intangible. IRC 367(d)(2) and Treas. Reg. 1.367(d)-1 and -1T.

For rules regarding the coordination of IRC 367(d) and IRC 482, see Treas. Reg. 1.376(d)-1T(g)(4).

A taxpayer that makes an outbound transfer of intangible property subject to IRC 367(d) must report the transfer in accordance with IRC 6038B. Failure to properly report the transfer may subject the taxpayer to a penalty and an extended statute of limitations under IRC 6501(c)(8).

If a domestic corporation distributes the stock of a foreign corporation to a foreign person in a distribution described in IRC 355, the distributing corporation recognizes gain under IRC 367(e)(1) and Treas. Reg. 1.367(e)-1(b)(1).

If a domestic corporation distributes the stock of a domestic corporation to a foreign person in a distribution described in IRC 355, the distributing corporation does not recognize gain under Treas. Reg. 1.367(e)-1. See Treas. Reg. 1.367(e)-1(c).

If a domestic corporation is liquidated under IRC 332 into a foreign parent corporation, (an "80-percent distributee" as defined in IRC 337(c)), generally the domestic corporation will be treated as if it sold its assets in a taxable transaction (i.e., IRC 337(a) and (b)(1) are "turned off" ). See IRC 367(e)(2) and Treas. Reg. 1.367(e)-2(b)(1). Treas. Reg. 1.367(e)-2(b)(2) contains exceptions to the general rule (e.g., if an exception applies IRC 337(a) and (b)(1) are not "turned off" ).

If a foreign corporation is liquidated under IRC 332 into a foreign parent corporation, (an "80-percent distributee" as defined in IRC 337(c)), generally the foreign liquidating corporation shall not recognize gain or loss (i.e., IRC 337(a) and (b)(1) are not "turned off" ). See IRC 367(e)(2) and Treas. Reg. 1.367(e)-2(c)(1). Treas. Reg. 1.367(e)-2(c)(2) contains exceptions to the general rule (i.e., if an exception applies, IRC 337(a) and (b)(1) are "turned off" ).

Before a complete assessment of an IRC 367 transaction can be performed, it must first be determined whether the transaction itself falls within the scope of IRC 367. This will include identifying the specific parties involved, their classification for U.S. tax purposes both before and after the transaction and the nature of any property being transferred in the transaction. The following describes preliminary audit steps to consider in identifying an IRC 367 transaction.

Step 1. Determine which transactions involve a transfer of property by or to a foreign corporation. As part of step 1, confirm for each transaction:

Step 2. Determine whether, for U.S. federal tax purposes, the transaction involves or is deemed to involve:

Step 3. Obtain or create organizational charts depicting, in chronological order, the transactions for U.S. federal tax purposes. This is an important consideration since a specific transaction may only be a single step made as part of a multi-step plan. For example, an internal restructuring planned by a multinational corporation may involve numerous related transactions undertaken over a period of time. The symbols commonly used to represent the different types of entities on organizational charts are shown at IRM 4.61.13.2.1.1(3).

Step 4. Determine whether any transaction, alone or in connection with one or more other transactions, is described in IRC 332, 351, 361, 354, 355, 356 or 361.

Step 5. If the determination under step 4 is “yes,” consider the application of IRC 367 to the transaction.

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