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IRS Releases Memorandum Regarding Advance Payments of Section 367(d) Inclusions

On September 23, 2022, the Internal Revenue Service (IRS) released a memorandum (AM 2022-003) concluding that taxpayers cannot make advance payments of section 367(d) inclusions except in the limited situation in which the US transferor receives boot in connection with the initial transfer of intangible property (IP) to a foreign corporation. The memorandum is relevant to any taxpayers who made, or are considering making, advance payments of section 367(d) amounts. In our view, the memorandum (which does not have precedential value) is not persuasive, and both its reasoning and its conclusion are inconsistent with prior IRS guidance and analogous long-standing case law.


Section 367(d) generally provides that when a US person (USP) transfers IP to a foreign corporation in an otherwise tax-free exchange under sections 351 or 361, the US transferor is treated as having sold the IP in exchange for contingent payments and receiving amounts which would have been received annually in the form of such payments. The amounts included in the US transferor’s income (i.e., the section 367(d) inclusions) are treated as ordinary income and royalties for purposes of determining the source and foreign tax credit limitation category. See sections 865(d)(1)(B) (source); 367(d)(2)(C) (foreign tax credit limitation category). See also section 904(d)(3)(A); Reg. §1.904-5(b) (look-through rules).

In Notice 2012-39, the IRS treated boot received in an outbound section 367(d) transaction as an advance payment of the section 367(d) inclusion. In the Notice, the IRS described a situation in which a US Parent (USP) owns a US company (UST) with a basis and value of $100, and UST owns IP with a basis of $0 and a value of $100. Pursuant to an “all-cash D” reorganization, UST transferred IP with a value equal to $100 to a controlled foreign corporation (CFC) owned by USP in exchange for $100 and then UST distributed the cash to its USP in liquidation. As described in the Notice, UST would report the $100 received from CFC as tax free under section 361, and USP would report no dividend income or gain from receiving the $100 cash under the “gain within boot” rule in section 356(a)(1) (because there was no built-in gain in the stock of UST). According to the Notice, taxpayers would take the position that “the transactions have resulted in a repatriation in excess of $100x ($100x at the time of the reorganization and then through repayment of the receivable in the amount of USP’s income inclusions over time) while only recognizing income in the amount of the inclusions over time.” Thus, USP could receive, for example, $200 of cash ($100 from the initial transfer and $100 over time related to the section 367(d) inclusions) but only include $100 in income (over time on the section 367(d) inclusions).

To address what the IRS and the US Department of the Treasury perceived to be an inappropriate repatriation of cash, the Notice provided that in such a situation, the $100 received by UST in the initial outbound [...]

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