Proposed regulations address triangular reorganizations and inbound nonrecognition transactions

In brief

Treasury and the IRS on October 5 issued proposed regulations (Proposed Regulations) (REG-117614-14) providing guidance on the taxation of cross-border triangular reorganizations and related transactions. 

The Proposed Regulations modify regulations previously announced in Notice 2014-32 and Notice 2016-73. Notice 2014-32 addressed transactions that Treasury viewed as exploiting certain aspects of final regulations published on May 19, 2011 under Section 367(b) (the 2011 Final Regulations).

Notice 2016-73 contained additional rules to address transactions that Treasury viewed as exploiting the 2011 Final Regulations, as modified by the rules announced in Notice 2014-32, and announced that additional regulations would be issued under Section 367.

With respect to the rules described in Notice 2014-32, the Proposed Regulations generally would apply to transactions completed on or after April 25, 2014, subject to limited exceptions. For the rules described in Notice 2016-73, the Proposed Regulations generally would apply to transactions completed on or after December 2, 2016. To the extent the Proposed Regulations contain rules not previously announced in Notice 2016-73, the Proposed Regulations would be applicable to transactions completed on or after December 6, 2023, the date the Proposed Regulations are filed in the Federal Register.

Comments are due by December 5, 2023.

The takeaway: Treasury and the IRS issued various guidance (regulations and notices) to address certain concerns it had with the use of triangular ‘B’ reorganizations in the cross-border context. The Proposed Regulations, based on prior notices with modifications, therefore may have minimal impact on future transactions. The government may wish to issue final regulations in light of ongoing litigation with respect to past transactions, where the government is asserting positions based on rules contained in Notices 2014-32 and 2016-73. The Proposed Regulations would be legally binding if finalized and might be given retroactive effect based on the rule contained in Section 7805(b)(1)(C), which provides that a regulation may apply to taxable periods ending after the date on which a notice substantially describing the contents of the regulation is issued to the public. The Proposed Regulations also contain new rules that were not part of the original notices.