SECTION 2. BACKGROUND

Subject to certain exceptions, section 367(a) generally applies to the transfer of property by a United States person to a foreign corporation in an exchange described in section 332, 351, 354, 356, or 361. Section 367(d)(1) provides that, except as provided in regulations, if a United States person transfers any intangible property (within the meaning of section 936(h)(3)(B)) to a foreign corporation in an exchange described in section 351 or 361, section 367(d) (and not section 367(a)) applies to such transfer. Accordingly, income or gain attributable to the transfer of property by a U.S. person to a foreign corporation in an exchange described in section 351 or 361 is taken into account either in accordance with section 367(d)(2)(A)(ii)(I) or (II) (as described below), or in accordance with section 367(a).

Section 367(d)(2)(A) provides that the United States person transferring the intangible property is treated as having sold the property in exchange for payments that are contingent upon the productivity, use, or disposition of such property. The transferor is treated as receiving amounts that reasonably reflect the amounts that

would have been received: (1) annually in the form of such payments over the useful life of such property (section 367(d)(2)(A)(ii)(I)), or (2) in the case of a disposition of the intangible property following such transfer (whether direct or indirect), at the time of the disposition (section 367(d)(2)(A)(ii)(II)). For this purpose, an indirect disposition of the intangible property following the transfer includes a disposition of the transferor’s interest in the transferee corporation. S. Rep. No. 169, 98th Cong., 2d Sess., at 367 (1984). The amounts taken into account under section 367(d)(2)(A)(ii) must be commensurate with the income attributable to the intangible. Section 367(d)(2)(A) (flush language). Section 367(d)(2)(B) provides that for purposes of chapter 1 of the Code the earnings and profits of a foreign corporation to which the intangible property was transferred are reduced by the amount required to be included in the income of the transferor of the intangible property. Section 367(d)(2)(C) provides that for purposes of chapter 1 of the Code any amount included in gross income pursuant to section 367(d) is treated as ordinary income. For purposes of applying section 904(d), any amount included in income under section 367(d) is treated in the same manner as if such amount were a royalty. Section 367(d)(2)(C). Section 1.367(d)–1T(c)(1) provides that if a U.S. person transfers intangible property that is subject to section 367(d) to a foreign corporation (transferee foreign corporation) in an exchange described in section 351 or 361, then such person is treated as having transferred that property in exchange for annual payments contingent on the productivity or use of the property. The regulation further provides that such person shall, over the useful life of the property, annually include in gross income an amount that represents an appropriate arm’s-length charge for the use of the property. §1.367(d)–1T(c)(1). For this purpose, the appropriate charge is determined under section 482 and the regulations thereunder. Id.

Section 1.367(d)–1T(d)(1) provides rules that apply when a U.S. person transfers intangible property that is subject to

section 367(d) to a transferee foreign corporation in an exchange described in section 351 or 361 and, within the useful life of the intangible property, that U.S. transferor subsequently disposes of the stock of the transferee foreign corporation to a person that is not a related person (within the meaning of §1.367(d)–1T(h)). The rules generally provide that the U.S. transferor is treated as having simultaneously sold the intangible property to the unrelated person acquiring the stock of the transferee foreign corporation. §1.367(d)–1T(d)(1). The U.S. transferor recognizes gain (but not loss) in an amount equal to the difference between the fair market value of the transferred intangible property on the date of the subsequent disposition and the U.S. transferor’s former adjusted basis in that property. Id.

Section 1.367(d)–1T(e)(1) provides rules that apply when a U.S. person transfers intangible property that is subject to section 367(d) to a transferee foreign corporation in an exchange described in section 351 or 361 and, within the useful life of the transferred intangible property, the U.S. transferor subsequently transfers the stock of the transferee foreign corporation to U.S. persons that are related to the transferor (within the meaning of §1.367(d)–1T(h)). These rules generally provide, in part, that the related U.S. persons, over the useful life of the property, annually include in gross income a proportionate share of the contingent annual payments that would otherwise be deemed to be received by the U.S. transferor under §1.367(d)–1T(c). §1.367(d)–1T(e)(1).

Section 1.367(d)–1T(g)(1)(i) provides that if a U.S. person is required to recognize income under certain provisions of the regulations under section 367(d), including §1.367(d)–1T(c), and the amount deemed to be received is not actually paid by the transferee foreign corporation, then the U.S. person may establish an account receivable from the transferee foreign corporation equal to the amount deemed paid that was not actually paid. Such account receivable may be established and paid without further U.S. income tax consequences to the U.S. transferor or the transferee foreign corporation. §1.367(d)–1T(g)(1)(i).

2012–31 I.R.B. 95 July 30, 2012

eign corporation in the reorganization or satisfied by the U.S. transferor with money or other property (within the meaning of section 361) provided by the transferee foreign corporation. As a prepayment of such income, the amount is included in income by the U.S. transferor in the year of the outbound section 367(d) transfer, regardless of the productivity of the transferred section 367(d) property in the year of the transfer or in subsequent years.

.03 U.S. Transferor Takes into Account Income under Section 367(d)(2)(A)(ii)(II)

In an outbound section 367(d) transfer, the U.S. transferor will also take into account income under section 367(d)(2)(A)(ii)(II) in an amount equal to the product of: (i) the sum of the ownership interest percentages of all non-qualified successors, if any, multiplied by (ii) the amount of gain realized on all of the section 367(d) property transferred in the section 361 exchange.

.04 Treatment of Qualified Successors

Consistent with the principles of §1.367(d)–1T(e)(1)(ii) and (iii), except as provided in this paragraph 4.04, each qualified successor will take into account the income attributable to a proportionate share of the contingent annual payments that the U.S. transferor would have been treated as receiving under section 367(d)(2)(A)(ii)(I) and §1.367(d)–1T(c) had the U.S. transferor remained in existence and retained the qualified stock (or, in the case of certain distributions under section 355, had the U.S. transferor retained the qualified stock) received in the reorganization (assuming for this purpose that the transfer continues to qualify as an exchange described in section 361), and had the U.S. transferor not recognized any income under section 4 of this notice. A qualified successor’s proportionate share of such contingent annual payments is the product of the contingent annual payments multiplied by the qualified successor’s ownership interest percentage. The income attributable to a qualified successor’s proportionate share of the contingent annual payments is excluded from gross income to the extent of the income included by the U.S. transferor under section 4.02 of this notice that is attributable to the qualified successor (credit amount).