Part IV. Items — Internal Revenue Bulletin 2014-22

Notice of proposed rulemaking Acquiring Corporation for Purposes of Section 381

REG–131239–13

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations under section 381 of the Internal Revenue Code (Code). The proposed regulations modify the definition of an acquiring corporation for purposes of section 381 with regard to certain acquisitions of assets. The proposed regulations affect corporations that acquire the assets of other corporations in corporate reorganizations.

DATES: Written or electronic comments and requests for a public hearing must be received by August 5, 2014.

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–131239–13), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–131239–13), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Submissions may also be sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–131239–13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Stephanie D. Floyd at (202) 317-6065 or Isaac W. Zimbalist at (202) 317-5363; concerning submissions of comments and/or requests for a public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 under section 381 of the Code. Section 381(a) generally provides that in certain acquisitions of the assets of a distributor or transferor corporation by another corporation, the acquiring corporation succeeds to the tax attributes, including the earnings and profits, of the distributor or transferor corporation. For this purpose, § 1.381(a)– 1(b)(2) defines the acquiring corporation with regard to transactions described in section 381(a)(2) (relating to certain reorganizations under section 368), as either the corporation that ultimately acquires all of the assets transferred by the transferor corporation, or the corporation that directly acquires the assets transferred by the transferor corporation if no single corporation ultimately acquires all of the assets so transferred.

1. Proposed Section 312 Regulations

A notice of proposed rulemaking containing proposed regulations (REG– 141268–11) under section 312 was published in the Federal Register on April 16, 2012 (77 FR 22515) (proposed section 312 regulations) to clarify the regulations under § 1.312–11 regarding the allocation of earnings and profits in non-recognition transfers of property from one corporation to another. The proposed section 312 regulations provide that, in a transfer described in section 381(a), the acquiring corporation, as defined in § 1.381(a)– 1(b)(2), succeeds to the earnings and profits of the distributor or transferor corporation. For example, if in a reorganization under section 368(a)(1) by reason of section 368(a)(2)(C), the transferee corporation that directly acquires a transferor corporation’s assets transfers some, but not all, of the acquired assets to a controlled subsidiary, the transferee corporation (the acquiring corporation under § 1.381(a)– 1(b)(2)) retains the earnings and profits. However, if the transferee corporation instead transfers all of the transferor corporation’s assets to a controlled subsidiary, then that controlled subsidiary (the acquir

ing corporation under § 1.381(a)–1(b)(2)) would succeed to the transferor corporation’s earnings and profits. Comments responding to the notice of proposed rulemaking were received. No public hearing was requested or held.

2. Summary of Comments Received with Respect to the Proposed Section 312 Regulations

Some commenters recommended that the definition of acquiring corporation under § 1.381(a)–1(b)(2) be changed for purposes of determining the location of the transferor corporation’s earnings and profits. These commenters believed that the rule in the proposed section 312 regulations allowing the section 381 acquiring corporation to succeed to the earnings and profits of the transferor inappropriately allows electivity of the location of the transferor corporation’s earnings and profits in connection with section 381(a)(2) transactions based on whether the transferee corporation that directly acquires the transferor corporation’s assets retains a single asset. These commenters also expressed concern that this rule raises difficult practical issues in determining whether all of the acquired assets have been transferred to a controlled subsidiary.

As an alternative to the proposed section 312 regulations, some commenters recommended adopting a rule that provides that the corporation that acquires substantially all of the assets transferred by a transferor corporation in a section 381(a)(2) transfer succeeds to the transferor’s earnings and profits. One commenter recommended that earnings and profits remain with the direct acquiring corporation even if all of the acquired assets are transferred to another corporation pursuant to the plan of reorganization. Another commenter suggested that there should not be disparate treatment of earnings and profits in non-recognition transfers to controlled subsidiaries merely because a reorganization has occurred, and therefore the rule for determining the location of earnings and profits in connection with section 381(a)(2) transfers should be consistent

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with rules that govern non-recognition transfers to controlled subsidiaries.

The IRS and the Treasury Department believe that adopting a substantially all approach would introduce unnecessary uncertainty surrounding the measurement of “substantially all.” The IRS and the Treasury Department, however, agree with the recommendation that the direct acquiring corporation should succeed to the earnings and profits. The IRS and the Treasury Department believe that this approach addresses the other comments received regarding consistency among nonrecognition transactions. Moreover, after considering all comments received with regard to the proposed section 312 regulations, the IRS and the Treasury Department have concluded that this recommended change is appropriate not merely with respect to the determination of the location of the transferor corporation’s earnings and profits but also with respect to the other tax attributes governed by section 381. Accordingly, this notice of proposed rulemaking (proposed section 381 regulations) revises the definition of acquiring corporation as described under the Explanation of Provisions. Because the proposed section 312 regulations merely cross-reference the section 381 regulations, those proposed regulations will remain outstanding. It is anticipated that the proposed section 312 regulations and the proposed section 381 regulations will be concurrently published as final regulations in the Federal Register after the comment period for the proposed section 381 regulations has closed on August 5, 2014 and the IRS and the Treasury Department have had an opportunity to consider the comments received.

Explanation of Provisions

1. Direct Transferee Corporation is the Acquiring Corporation

The proposed section 381 regulations provide that, in a transaction described in section 381(a)(2), the acquiring corporation is the corporation that directly acquires the assets transferred by the transferor corporation, even if the transferee corporation ultimately retains none of the assets so transferred. The current regulations under section 381 yield an identical result, except when a single controlled

subsidiary of the direct transferee corporation acquires all of the assets transferred by the transferor corporation pursuant to a plan of reorganization. In that case, the current regulations treat the subsidiary as the acquiring corporation, a result that effectively permits a taxpayer to choose the location of a transferor corporation’s attributes by causing the direct transferee corporation either to retain or not to retain a single asset. The IRS and the Treasury Department believe the proposed rule produces more appropriate results because it would eliminate this electivity. The proposed rule also eliminates the administrative burden under the current regulations associated with determining whether a particular corporation in fact has acquired all of the assets transferred by the transferor corporation pursuant to a plan of reorganization. In addition, it eliminates the disparate effect of the presence or absence of a plan of reorganization and produces results consistent with those obtained if a corporation that has not engaged in a reorganization transfers assets to a controlled subsidiary in a nonrecognition transaction.

Finally, the IRS and the Treasury Department believe the proposed rule is appropriate with respect to determining the location of the earnings and profits of a transferor corporation because the proposed rule generally maintains such earnings and profits at the corporation closest to the transferor corporation’s former shareholders, except in the case of triangular reorganizations. The IRS and the Treasury Department considered an alternative approach that would achieve this result in all cases by treating the corporation that issues stock pursuant to a plan of reorganization (the “issuing corporation”) as the acquiring corporation. An issuing corporation approach would, however, present complex considerations in the context of cross-border transactions, potentially requiring a number of special rules to preclude opportunities for the avoidance of tax. Accordingly, the IRS and the Treasury Department believe that the proposed rule produces more appropriate results than the current regulations (including in the context of cross-border transactions) while preserving simplicity and administrability.

2. Removal of § 1.381(a)–1(b)(3)(ii)

The proposed section 381 regulations also remove § 1.381(a)–1(b)(3)(ii) relating to a transfer by the acquiring corporation of the acquired assets to a controlled subsidiary. Section 1.381(a)–1(b)(3)(ii) provides that if the corporation that directly acquires the assets transferred by the transferor corporation is the acquiring corporation, and it transfers any acquired assets to one or more controlled subsidiaries, then the carryover of items described in section 381(c) to any controlled subsidiary is not governed by section 381. Although that rule is correct, it is unnecessary in light of the proposed section 381 regulations. Accordingly, the paragraph is removed.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these proposed regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department request comments on all aspects of the proposed regulations. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written or electronic comments. If a public hearing is sched

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uled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is Stephanie D. Floyd of the Office of Associate Chief Counsel (Corporate). Other personnel from the IRS and the Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 - - Par. 2. Section 1.381(a)–1 is amended by:

Removing the third, fourth, and fifth sentences of paragraph (b)(2)(i) and adding one sentence in its place.
Removing from the last sentence of paragraph (b)(2)(ii) Example 2 “Y” and adding “X” in its place.
Redesignating paragraph (b)(3)(i) as paragraph (b)(3).
Removing paragraph (b)(3)(ii).
Adding a sentence at the end of paragraph (e).

The revisions and additions read as follows:

§ 1.381(a)–1 General rule relating to carryovers in certain corporate acquisitions .

- - - (b) - - (2) - - - (i) - - - In a transaction to which section 381(a)(2) applies, the acquiring corporation is the corporation that, pursuant to the plan of reorganization, directly acquires the assets transferred by the transferor corporation, even if that corporation ultimately retains none of the assets so transferred.

(e) - - - Paragraph (b)(2) of this section applies to transactions occurring on or after the date of publication of the Treasury decision adopting this rule as a final regulation in the Federal Register .

John Dalrymple, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on May 6, 2014, 8:45 a.m., and published in the issue of the Federal Register for May 7, 2014, 79 F.R. 26190)

Definitions and Reporting Requirements for Shareholders of Passive Foreign Investment Companies; Insurance Income of a Controlled Foreign Corporation for Taxable Years Beginning After December 31, 1986; Correction

Announcement 2014–22

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

SUMMARY: This document contains corrections to final and temporary regulations (TD 9650) that were published in the Federal Register on Tuesday, December 31, 2013 (78 FR 79602). The regulations provide guidance on determining ownership of a passive foreign investment company (“PFIC”) and on the annual filing requirements for shareholders of PFICs.

DATES: This correction is effective May 12, 2014 and applicable beginning December 31, 2013.

FOR FURTHER INFORMATION CONTACT: Susan Massey at (202) 3176934 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations (TD 9650) that are the subject of this correction are under sections 1291, 1298,

6038, and 6046 of the Internal Revenue Code.

Need for Correction

As published, the final and temporary regulations (TD 9650) contain errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 - - Par. 2. The section heading for § 1.6038–2T is revised to read as follows:

§ 1.6038–2T Information returns re- quired of United States persons with respect to annual accounting periods of certain foreign corporations beginning after December 31, 1962 (temporary).

- - - Par. 3. Section 1.6046–1 is amended as follows:

Paragraphs (a)(2)(i)( a ) and ( b ) and (c)(1) and (3) are revised.
The language “in value” is removed wherever it appears in paragraphs (a)(3) Example 2 .(i), (a)(3) Example 3 ., and (c)(2).
The language “M” in the first sentence of paragraphs (a)(3) Example 2 .(i), (c)(2) Example 3 .(i), and (c)(2) Example 5 .(i) is removed and the language “M Corporation” added in its place.
The language “liability” in paragraph (a)(3) Example 2 . (ii) is removed and the language “liability for A” added in its place.
The language “U.S.” in paragraph (c) introductory text and paragraph (c)(1) introductory text is removed and the language “United States” added in its place.
Paragraph (l)(2) is revised.

The revisions read as follows:

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§ 1.6046–1 Returns as to organizations or reorganizations of foreign corporations and as to acquisitions of their stock.

(a) - - (2) - - (i) - - ( a ) Acquires (whether in one or more transactions) outstanding stock of such corporation which equals, or which when added to any such stock then owned by him equals, 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

( b ) Acquires (whether in one or more transactions) an additional 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation; or

- - - (c) Returns required of United States when liability to file arises after January 1, 1963 —(1) United States persons re- quired to file . A return on Form 5471, containing the information required by paragraph (c)(4) of this section, shall be made by each United States person when at any time after January 1, 1963:

(i) Such person acquires (whether in one or more transactions) outstanding stock of such foreign corporation which equals, or which when added to any such stock then owned by him equals, 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

(ii) Such person, having already acquired the interest referred to in paragraph (b) of this section or in paragraph (c)(1)(i) of this section ( a ) Acquires (whether in one or more transactions) an additional 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

( b ) Owns 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation when such foreign

corporation is reorganized (as defined in paragraph (f)); or

( c ) Disposes of sufficient stock in such foreign corporation to reduce his interest to less than 10 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation; or

(iii) Such person is, at any time after January 1, 1987, treated as a United States shareholder under section 953(c) with respect to a foreign corporation.

- - - (3) Shareholders who become United States persons . A return on Form 5471, containing the information required by paragraph (c)(4) of this section, shall be made by each person who at any time after January 1, 1963, becomes a United States person while owning 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation.
- - - (l) - - (2) Paragraph (c)(1)(iii) of this section applies to taxable years ending on or after December 31, 2013.
- - - Par. 4. Section 1.6046–1T is amended by revising paragraph (e)(5) to read as follows:

§ 1.6046–1T Returns as to organizations or reorganizations of foreign corporations and as to acquisitions of their stock (temporary) .

- - - (e) - - (5) Persons excepted from furnishing items of information . Any person required to furnish any item of information under paragraph (b) or (c) of this section with respect to a foreign corporation may, if such item of information is furnished by another person having an equal or greater stock interest (measured in terms of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation) in such foreign corporation, satisfy such requirement by filing a statement with his return on Form 5471 indicating that

such liability has been satisfied and identifying the return in which such item of information was included. This paragraph (e)(5) does not apply to persons excepted from filing a return by reason of the provisions of paragraph (e)(4) of this section.

Martin V. Franks, Chief, Publications and

Regulations Branch, Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on May 9, 2014, 8:45 a.m., and published in the issue of the Federal Register for May 12, 2014, 79 F.R. 26837)

Definitions and Reporting Requirements for Shareholders of Passive Foreign Investment Companies; Correction

Announcement 2014–23

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to a notice of proposed rulemaking by cross reference to temporary regulations.

SUMMARY: This document contains corrections to a notice of proposed rulemaking by cross-reference to temporary regulations (REG–140974–11) that was published in the Federal Register on Tuesday, December 31, 2013 (78 FR 79650). The proposed regulations provide guidance on determining the ownership of a passive foreign investment company (PFIC), the annual filing requirements for shareholders of PFICs, and an exclusion from certain filing requirements for shareholders that constructively own interests in certain foreign corporations.

DATES: Written or electronic comments and requests for a public hearing for the notice of proposed rulemaking by cross-reference to temporary regulations published at 78 FR 79650, December 31, 2013, the comment period ended on March 31, 2014.

Bulletin No. 2014–22 1067 May 27, 2014

FOR FURTHER INFORMATION CONTACT: Susan E. Massey at (202) 317-6934 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking by cross-reference to temporary regulations (REG–140974–11) that is the subject of this document is under sections 1297, 1298, 6038, and 6046 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed rulemaking by cross-reference to tempo

rary regulations (REG–140974–11) contains errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the notice of proposed rulemaking (REG–140974–11), that was the subject of FR Doc. 2013–30845, is corrected as follows:

The authority citation for part 1 is amended by correcting the sectional authority for § 1.1298–1 to read in part as follows:

Authority: 26 U.S.C. 7805* - Section 1.1298–1 also issued under 26 U.S.C. 1298(f) and (g) - -

§ 1.1298–1 [Corrected]

On Page 79652, column 1, the seventh line from the top of the page, the language “as the text of § 1.1298–1T(h) published” is corrected to read “as the text of § 1.1298–1T published”.

Martin V. Franks, Chief, Publications and

Regulations Branch Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

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