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IRS Issues Final Regulations on Transfers of Foreign Goodwill

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Jan 18th 2017
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The IRS recently issued final regulations under Section 367 of the Internal Revenue Code that affect US taxpayers who transfer property to foreign corporations in nonrecognition transactions.

TD 9803 is meant to prevent taxpayers from avoiding recognition of gain or income attributable to high-value intangible property by claiming that a large share of the transferred property’s value is foreign goodwill or of going concern value under Section 367.

According to an article by RSM US LLP, under special provisions of temporary IRS regulations issued in 1986, the transfer of goodwill and going concern value associated with a foreign branch operation was not taxable upon the incorporation of the branch.

So, the final regulations ensure that outbound transfers of foreign goodwill and going concern value are subject to either Section 367(a) or (d), according to an article by The Tax Adviser.

The regulations contain five substantial changes from the 1986 temporary regulations:

  1. Eliminates the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception under Section 367(a)(3) and eliminating the exception under Section 1.367(d)-1T(b) that provides that foreign goodwill and going concern value are not subject to Section 367(d).
  2. Allows taxpayers to apply Section 367(d) to certain property that would otherwise be subject to Section 367(a).
  3. Removes the 20-year limitation on useful life for purposes of Section 367(d) under Section 1.367(d)-1T(c)(3).
  4. Removes the exception under Section 1.367(a)-5T(d)(2) that permits certain property denominated in a foreign currency to qualify for the active trade or business exception.
  5. Changes the valuation rules under Section 1.367(a)-1T to better coordinate the regulations under sections 367 and 482.

The rules include a retroactive effective date for transfers on or after Sept. 14, 2015.

But that may leave taxpayers who already filed tax returns under prior regulations “in an uncertain situation,” Deloitte says in a tax brief.

The decision to treat foreign goodwill and going concern value as subject to Section 367 is made with the tax return for the year of the transfer, the Big Four firm states.

But the regulations don’t specify a procedure for taxpayers who “missed the deadline” because of the retroactive date, so it’s unclear how the IRS will handle this, Deloitte says.

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