October 03, 2023

Code §367 and Unassuming Outbound Transfers

October 03, 2023/ Ruchelman P.L.L.C.

U.S. tax law provides for the deferral of taxation for a person transferring assets in connection with certain tax-free corporate reorganizations or transactions. However, the same may not be true when the reorganization or transaction involves a U.S. person who transfers shares to a foreign corporation. In these situations, the Code causes gain to be triggered for the U.S. person unless the transferred assets consist solely of shares of stock of a target corporation and certain arrangements are made by the U.S. transferor to grant the I.R.S. the right to collect deferred tax on a retroactive basis in the event of a future (i) retransfer of those shares by the foreign corporation or (ii) a transfer by the target corporation of its underlying assets. These rules appear in Code §367(a) – which imposes tax – and I.R.S. regulations related to a gain recognition agreement (“G.R.A.”) – which allows tax deferral for the original transfer. Not all transfers that are subject to the rules of Code §367(a) are obvious. To illustrate, a U.S. person that is a passive investor in a foreign partnership may face U.S. tax immediately by reason of Code §367(a) when that partnership transfers shares of stock to a foreign corporation in return for shares of that corporation in a transaction that ordinarily is tax-free under Code §351 or 368(a)(1)(B). While the transaction is effected between two foreign entities, the transferor foreign partnership is tax transparent in the U.S., meaning that the partner is deemed to have made an indirect transfer of assets. In his article, Michael Bennett describes the tax issue and explains how a G.R.A. is a simple way to obtain the benefit of deferral.

April 28, 2017

Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

April 28, 2017/ Ruchelman P.L.L.C.

In the 21st century, the method of apportioning income from intangible property (“I.P.”), between the various jurisdictions in which the I.P. is developed, owned, and used or consumed, is contentious. This was evidenced in a recent Tax Court case, Amazon.com, Inc. & Subsidiaries v. Commr., which dealt with transfer pricing rules applicable to an outbound transfer of I.P. and a related cost sharing agreement. Philip R. Hirschfeld discusses the case in the context of Code §367(d), which relates to outbound transfers of I.P., and Treas. Reg. §1.482-7, which addresses qualified cost sharing agreements.

March 15, 2015

Using a §897(i) Non-Discrimination Election to Avoid F.I.R.P.T.A.

March 15, 2015/ Web Developer

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Mistakes happen. Often nonresident alien individuals buy U.S. real property, often personal use property, in their individual names. This can be a costly mistake. With certain exceptions, if such an individual were to die while owning the property, a U.S. estate tax of approximately 40% of the value of the property could be imposed.

There is one method to restructure this investment in the case of a foreign individual, or an entity owned by a foreign individual, if such a person is eligible to claim the benefit of an income tax treaty with the United States and the treaty contains a so-called “Nondiscrimination Clause.” These clauses provide that a resident of a treaty state will not be treated any less favorably than a U.S. resident carrying on the same activities. This article will look at how a Nondiscrimination Clause can be used to avoid onerous F.I.R.P.T.A. provisions when a foreign person invests in U.S. real property.

The technique described in this article essentially permits a nonresident alien individual to transfer U.S. real property on a tax-free basis to a foreign entity, which will be treated as a domestic entity for income tax purposes and as a foreign (non-taxable) entity for U.S. estate tax purposes.