Daily Tax Update - April 25, 2014: Treasury and the IRS Issue Notice of Forthcoming Changes to Killer B Regulations

TREASURY AND THE IRS ISSUE NOTICE OF FORTHCOMING CHANGES TO KILLER B REGULATIONS:  Treasury and the IRS announced in Notice 2014-32 that they will be making changes to the regulations under section 367 that were enacted to target so-call “Killer B” transactions.  The “Killer B” regulations were made final in 2011 and apply to certain triangular reorganizations in which a subsidiary (S) acquires stock in its parent corporation (P) and uses the stock in a triangular reorganization to acquire the stock or assets of a third corporation.  These transactions were intended to allow repatriation of funds from a foreign subsidiary to a U.S. parent without U.S. tax.  The final regulations in Treas. Reg. § 1.367(b)-10 generally require that S be treated as making a deemed distribution to P in an amount equal to the amount of property that was transferred by S to acquire the P stock, and that P be treated as making a deemed contribution to S in the same amount in a separate transaction.

In Notice 2014-32, Treasury and the IRS stated that they are aware that taxpayers are engaging in transactions designed to avoid U.S. tax by exploiting the deemed contribution provided under Treas. Reg. § 1.367(b)-10.  As a result, they will remove the deemed contribution rules under § 1.367(b)-10(b)(2) and (c)(2), and make other conforming changes to the final regulations. 

In addition, Notice 2014-32 states that Treasury and the IRS will make other changes to combat other perceived abuses.  Treasury and the IRS will modify the section 367(a) priority rule under § 1.367(b)-10 and the section 367(b) priority rule in Treas. Reg. § 1.367(a)-3(a)(2)(iv) to change the definition of section 367(b) income for purposes of determining whether section 367(a) or section 367(b) applies.  Treasury and the IRS will also modify the application of the no-U.S-tax exception in the rules under Treas. Reg. § 1.367(b)-10 to provide that this exception is not available if P is a controlled foreign corporation and will clarify that the no-U.S. tax exception will apply if a deemed distribution would not be treated as a dividend subject to U.S. tax (e.g., by reason of an applicable treaty or by reason of an absence of earnings and profits).  Finally, Treasury and the IRS will clarify the application of the anti-abuse rule in the final regulations to provide that the anti-abuse rule may apply to S’s acquisition of P stock or securities in exchange for a note and that under the anti-abuse rule the earnings and profits  of a corporation may be taken into account for purposes of determining the consequences of the adjustments provided in the final regulations regardless of whether such corporation is related to P or S before the triangular reorganization to which the regulations apply. 

The changes announced in Notice 2014-32 will be applied retroactively to today, the date of the notice.  The changes will not apply to certain transactions that were entered into pursuant to a binding written agreement before today and that meet other requirements.

The notice can be accessed via: Notice 2014-32

WAYS AND MEANS TO MARK UP SEVERAL EXTENDERS NEXT WEEK:  On April 29, the House Ways and Means Committee will hold a mark up on six of the tax extenders, including the research and experimentation tax credit and expensing under section 179.  Earlier this month, the Committee held a hearing on the research and development credit, small business expensing, active financing exception, depreciation for certain race horses, CFC look-through, and two S-corp provisions. The provision on depreciation for certain race horses will not be included in this mark up.  Chairman Dave Camp (R-MI) has indicated that the Committee intends to hold several mark ups on expired or expiring tax provisions, but no date has been scheduled for additional hearings or mark ups.

MISCELLANEOUS GUIDANCE RELEASED:
Revenue Procedure 2014-31 provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with (1) nationwide average purchase prices for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.

Notice 2014-31 extends the application of Notice 2012-45 to taxable years of foreign corporations beginning in 2014, 2015, and 2016.  Notice 2012-45 provides that for certain taxable years and solely for purposes of section 1297, income from “Qualifying Government Bonds” held by an “Active Bank” qualifies for the active banking exception, as those terms are defined in Notice 2012-45. 

Revenue Procedure 2014-30 provides the 2015 inflation adjusted deduction limitations for annual contributions made to a health savings account (HSA) under section 223.  These deduction limitations are updated annually pursuant to section 223(g) to reflect the cost-of-living adjustments.