Final rules on Sec. 367 transfers of intangibles apply retroactively

The treatment of foreign goodwill or going concern value is clarified.
By Sally P. Schreiber, J.D.

The IRS issued final regulations intended to prevent taxpayers from avoiding the recognition of gain or income attributable to high-value intangible property by asserting that an inappropriately large share of the value of the property transferred is foreign goodwill or going concern value that is eligible for favorable treatment under Sec. 367.

The regulations finalize proposed rules (REG-139483-13) issued on Sept. 14, 2015, with minor changes and clarifications in response to comments.

In the preamble to the proposed regulations, the IRS had noted that some taxpayers were using two interpretations of Secs. 367(a) and (d) to conclude that outbound transfers of foreign goodwill and going concern value do not result in taxation under either Sec. 367(a) or (d) (for more, see "New Developments in Outbound Transfers of Intangible Property," The Tax Adviser, Jan. 2017. The final regulations are designed to ensure that outbound transfers of foreign goodwill and going concern value will be subject to either Sec. 367(a) or (d). The regulations:

1. Eliminate the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception and eliminating the exception under Temp. Regs. Sec. 1.367(d)-1T(b) that provides that foreign goodwill and going concern value are not subject to Sec. 367(d);

2. Allow taxpayers to apply Sec. 367(d) to property that would otherwise be subject to Sec. 367(a);

3. Remove the 20-year limitation on useful life;

4. Remove the exception that permits certain property denominated in a foreign currency to qualify for the active trade or business exception; and

5. Change the Sec. 367 valuation rules to coordinate better with regulations under Secs. 367 and 482.

The final regulations also remove temporary regulations under Sec. 367 that provided favorable treatment for transfers of foreign goodwill and going concern value.

The final regulations apply to transfers occurring on or after Sept. 14, 2015, the date the proposed regulations were posted on the Federal Register, and to transfers occurring before that date, resulting from entity classification elections under Regs. Sec. 301.7701-2 filed on or after that date.

  • T.D. 9803

—By Sally P. Schreiber, J.D., a JofA senior editor. 

 

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