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IRS Finalizes Section 367 Regulations

The Internal Revenue Service (IRS) has finalized regulations that tax transfers of certain property, including goodwill and going concern value, to foreign corporations in nonrecognition transactions described in Internal Revenue Code Section 367.  The final regulations replace proposed regulations published on September 16, 2015 and temporary regulations published in 1986.

We previously discussed the 2015 proposed regulations and why they were viewed as controversial when issued given the elimination of favorable tax treatment for transfers of foreign goodwill and going concern value to foreign corporations. The final regulations followed the proposed regulations on this point, which may lead to future litigation over the validity of the final regulations. Taxpayers should carefully review these final regulations and be aware of potential arguments that may exist for challenging the positions taken by the IRS.

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Proposed Code Sec. 367 Regulations Attempt to Tax Foreign Goodwill and Going Concern Value

The transfer of foreign goodwill and going concern value by a domestic corporation to a foreign subsidiary for use in a trade or business outside the United States has never been subject to taxation under Code Sec. 367. Without any legislative change, the Internal Revenue Service and the Treasury in proposed regulations would seek to tax such transfers.

In his recent article in the International Tax Journal, Lowell Yoder, global head of McDermott’s Tax Practice, discusses the sweeping changes proposed under the new 367 regulations and the problems posed by the IRS’ approach.  He recommends that the IRS withdraw the proposed regulations, which go far beyond (and actually contradict) legislative intent.

Read the full article.

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