Daily Tax Update - September 14, 2015: IRS Issues Notice and Revenue Procedure Regarding Section 355

IRS Issues Notice and Revenue Procedure Regarding Section 355:  Today, the IRS issued Notice 2015-59, which states that Treasury and the IRS are studying various issues under sections 355 and 337(d) relating to transactions involving one or more of the following characteristics: (i) ownership by the distributing corporation or the controlled corporation of investment assets having substantial value in relation to (a) the value of all of such corporation’s assets and(b) the value of the assets of the active trade(s) or business(es) on which the distributing corporation or the controlled corporation relies to satisfy the requirements of section 355(b) (qualifying business assets); (ii) a significant difference between the distributing corporation’s ratio of investment assets to assets other than investment assets and such ratio of the controlled corporation; (iii) ownership by the distributing corporation or the controlled corporation of a small amount of qualifying business assets in relation to all of its assets; and (iv) an election by the distributing corporation or the controlled corporation (but not both) to be a regulated investment company (RIC) or a real estate investment trust (REIT).  The IRS also issued Revenue Procedure 2015-43, which adds certain of these transactions to the list of no-rule areas. Specifically, the IRS ordinarily will not rule on distributions in which (i) property owned by distributing or controlled become property of a RIC or REIT in a “conversion transaction” for which no deemed sale election is made or (ii) the fair market value of the gross assets relied upon to satisfy the active trade or business requirement is less than five percent of the total fair market value of the gross assets of the corporation.  Revenue Procedure 2015-43 further provides that the IRS will not rule pending further study on distributions in which all of the following conditions exist: (i) the fair market value of investment assets of distributing or controlled is 2/3 or more of the total fair market value of its gross assets; (ii) the fair market value of the gross assets relied upon to satisfy the active trade or business requirement is less than 10% of the fair market value of its investment assets; and (iii) the ratio of the fair market value of the investment assets to the fair market value of non-investment assets of distributing or controlled is three times or more of such ratio for the other corporation.


Treasury, IRS Issue Temporary Regulations Addressing Transfer Pricing:  Today, Treasury and the IRS issued temporary regulations clarifying the coordination of the transfer pricing rules with other provisions.  The preamble to the regulations states that Treasury and the IRS are concerned that “certain results reported by taxpayers reflect an asserted form or character of the parties’ arrangement that involves an incomplete assessment of relevant functions, resources, and risks and an inappropriately narrow analysis of the scope of the transfer pricing rules.”  The temporary regulations provide that arm’s length compensation must be consistent with, and must account for all of, the value provided between the parties in a controlled transaction, without regard to the form or character of the transaction.  The temporary regulations also expand the circumstances in which two or more separate transactions must be aggregated under the transfer pricing rules and other provisions.  The regulations apply to taxable years ending on or after September 14, 2015.


Treasury, IRS Issue Proposed Regulations Under Section 367(a) and (d):  Today, Treasury and the IRS issued proposed regulations making various changes to final and temporary regulations under section 367(a) and (d).  The proposed regulations would eliminate the exception in the temporary section 367(d) regulations for transfers of foreign goodwill.  The proposed regulations would also generally limit the scope of property eligible for the active trade or business exception under section 367(a) to certain tangible property and financial assets.  As a result, upon an outbound transfer of foreign goodwill or going concern value, a U.S. transferor will be subject to either current gain recognition under section 367(a)(1) or the tax treatment provided under section 367(d).  According to the preamble, Treasury and the IRS “have concluded that the taxpayer positions and interpretations described in. . . the preamble raise significant policy concerns and are inconsistent with the expectation, expressed in legislative history, that the transfer of foreign goodwill or going concern value developed by a foreign branch to a foreign corporation was unlikely to result in abuse of the U.S. tax system.”  The proposed regulations also would permit taxpayers to elect to apply section 367(d) to certain goodwill and going concern value even if the taxpayer takes the position that such items are not section 936(h)(3)(B) intangibles and would eliminate the rule that limits the useful life of intangible property to 20 years.  The regulations are generally proposed to apply to transfers occurring on or after September 14, 2015. 


Treasury, IRS Issue Final RIC Guidance:  Today, Treasury and the IRS issued final regulations with revisions to examples that illustrate the controlled group rules applicable to RICs.  The final regulations generally adopt the provisions of proposed regulations released in August 2013 with certain clarifications.  The IRS also issued Revenue Procedure 2015-45, which describes conditions under which the IRS will treat a RIC that invests in one or more other RICs as satisfying the asset diversification requirements of section 851(b)(3)(B).