Daily Tax Update - July 28, 2005

Treasury and the IRS Issue Final Stapled Stock Regulations:
Today, the Treasury Department and the IRS issued final regulations regarding the U.S. Federal income tax treatment of arrangements involving stapled foreign corporations. In general, a foreign corporation is considered "stapled" if its shares may only be transferred together with the shares of a domestic corporation (i.e., shares of the two corporations are "stapled" together). Under section 269B, a stapled foreign corporation generally is treated as a domestic corporation for U.S. Federal income tax purposes. These final regulations adopt the provisions of previously proposed regulations without amendment and are generally effective for taxable years that begin after July 28, 2005. Certain sections of the final regulations, however, have retroactive effective dates.

  • Consolidated Returns--Includible Corporations: The final regulations provide that, in the absence of a valid election under section 1504(d), a stapled foreign corporation will be treated as a foreign corporation under the consolidated return rules. This provision generally applies beginning on July 18, 1984 (for foreign corporations that became stapled to a domestic corporation after June 30, 1983) and January 1, 1987 (for any foreign corporation that was stapled to a domestic corporation as of June 30, 1983). However, in the absence of a valid election under section 1504(d), a stapled foreign corporation is nonetheless treated as a domestic corporation under Treas. Reg. §§ 1.904(i)-(1) (limiting the use of deconsolidation to avoid foreign tax credit limitations) and 1.861-11T(d)(6) (treating certain corporations as affiliated for purposes of the interest expense allocation rules). This provision generally applies to taxable years beginning after July 22, 2003.
  • Multiple Class of Stock: The final regulations provide guidance on when two corporations will be treated as stapled in cases involving multiple classes of stock.
  • Related Party Ownership: The final regulations include rules to address attempts by taxpayers to use section 269B to produce what the IRS characterizes as "inappropriate" results. The regulations permit the IRS to disregard stapled interests in cases where the same person or related persons hold stapled interests constituting more than 50 percent of the beneficial ownership of both corporations and the principal purpose of the stapled stock arrangement is the avoidance of U.S. tax.
  • Conversions: The final regulations provide that the stapling of a foreign corporation’s shares to those of a domestic corporation causes an "inbound conversion" of the stapled foreign corporation that is to be treated as an "F" reorganization subject to the rules of section 367(b). Similarly, where a stapled foreign corporation ceases to be a stapled foreign corporation (and, therefore ceases to be a domestic corporation), an "outbound conversion" occurs that will be treated as an "F" reorganization subject to the rules of section 367(a). Such conversions will be treated as "F" reorganizations even though all of the technical requirements of an "F" reorganization may not be satisfied.
  • Treaties: The final regulations state that a stapled foreign corporation treated as a domestic corporation under section 269B may not claim an exemption from U.S. tax or a reduction in U.S. tax rates provided under a treaty entered into by the United States. This provision is generally effective beginning on July 18, 1984.
  • Collection: Rules are provided to permit the collection of U.S. tax imposed on a stapled foreign corporation from the domestic corporation to which the foreign corporation is stapled or from the stapled foreign corporation’s 10 percent shareholders.
  • For additional information, contact Philip R. West via email.

The House and Senate are expected to pass the highway reauthorization conference report before adjourning for their month-long August recess either Friday or Saturday. The bill provides $286.4 billion in highway spending over six years. The conference report does not contain the CEO certification provision or the economic substance codification provision, which were originally in the Senate-passed bill.

Details of the tax provisions in the conference report can be accessed here.


  • H.R. 3451 sponsored by Rep. Melissa Hart (R-PA) would provide for the use of redevelopment bonds for environmental remediation.
  • H.R. 3452 sponsored by Rep. Michael Turner (R-OH) would treat regional income tax collection agencies as States for purposes of confidentiality and disclosure requirements relating to tax returns and return information.
  • H.R. 3458 sponsored by Rep. Robert Andrews (D-NJ) would exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations.
  • H.R. 3460 sponsored by Rep. Robert Andrews (D-NJ) would allow married individuals who are legally separated and living apart to exclude from gross income the income from United States savings bonds used to pay higher education tuition and fees.
  • H.R. 3461 sponsored by Rep. Robert Andrews (R-NJ) would exempt from income tax the gain from the sale of a business closely held by an individual who has attained age 62.
  • H.R. 3478 sponsored by Rep. Walter Jones, Jr. (R-NJ) would permit military death gratuities to be contributed to certain tax-favored accounts.
  • S. 1514 sponsored by Sen. Jim DeMint (R-SC) would repeal the medicine and drugs limitation on the deduction for medical care.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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