Treasury releases proposed Section 367(d) regulations on subsequent inbound transfers of intangible property

In brief

Treasury and the IRS on May 2 released proposed regulations under Section 367(d) (‘proposed Section 367(d) regulations’) that address the application of Section 367(d), which applies when a US person (‘US transferor’) transfers intangible property described in Section 367(d)(4) (‘Section 367(d) intangibles’) to a foreign corporation (‘transferee foreign corporation’) in a Section 351 or 361 exchange. The proposed regulations address the consequences that arise when the transferee foreign corporation subsequently transfers the intangibles to a US person (‘repatriated’), including when the US transferor would recognize gain upon the repatriation and when the paradigm under Section 367(d) requiring annual income inclusions over the useful life of the intangibles (‘Section 367(d) inclusions’) should terminate.  

In general, under the proposed regulations, the US federal income tax consequences under Section 367(d), including the US transferor’s gain and income inclusions, as well as adjustments to the transferee foreign corporation’s earnings and profits (E&P) and gross income, would depend on the form of the transaction in which the Section 367(d) intangibles are repatriated, and the US person to whom the intangibles are repatriated.  

Under the proposed Section 367(d) regulations, if the Section 367(d) intangibles are considered ‘transferred basis property’ under Section 7701(a)(43) by reason of a repatriation (determined without regard to the rules of Section 367(d)) (‘transferred basis property’) to a ‘qualified domestic person,’ the transferee foreign corporation does not recognize gain under general Subchapter C principles, and certain reporting requirements are met, then the original US transferor (or its successor) would generally not recognize gain as a result of the transaction. In addition, the US transferor would include in income its deemed Section 367(d) inclusion amount up to the date of the repatriation transaction, and the repatriated intangible would cease to be subject to Section 367(d) after the transaction. A qualified US person includes the original US transferor, a US person treated as US transferor under existing final and temporary Section 367(d) regulations (‘current Section 367(d) regulations’), as well as certain related US individuals and domestic corporations.  

If the repatriation of the Section 367(d) intangibles occurs in a wholly or partly taxable transaction (e.g., a Section 311(b) distribution or a Section 351 exchange with ‘boot’), however, not only would the distributing foreign corporation recognize gain under general tax principles, the US transferor (or its successors) would also recognize gain under the proposed Section 367(d) regulations. The proposed regulations would then adjust (reduce) the distributing corporation’s E&P and gross income to account for the US transferor’s gain, and the repatriated intangibles would no longer be subject to Section 367(d). 

The proposed Section 367(d) regulations fill a gap in the current Section 367(d) regulations with respect to subsequent transfers of Section 367(d) intangibles, which do not appear to contemplate the repatriation of such intangibles to a US person (e.g., the original US transferor), and do not address the termination of the annual Section 367(d) inclusion rules, which has led to uncertainty and potentially excessive US taxation. The IRS has attempted to address some of these cases through private letter rulings and the application of the ‘discretionary rule’ of Treas. Reg. sec. 1.1502-13(c)(6)(ii)(D),[i] and has now opted for general guidance to address these circumstances.  

In addition to the proposed Section 367(d) regulations, the proposed regulation package would revise the regulations under Section 904 (related to the foreign branch category income provisions), Section 951A (related to the determination of tested income and tested loss), and Section 6038B (related to reporting of certain transfers to foreign corporations).  

The proposed Section 367(d) regulations, if finalized, would apply to subsequent dispositions of Section 367(d) intangibles that occur after the date the final regulations are published in the Federal Register. The proposed changes to the Section 904 and Section 951A regulations have varying effective dates.  

Comments on the proposed Section 367(d) regulations are due by July 3, 2023. 

The takeaway: In recent years, numerous taxpayers have repatriated intellectual property to the United States for a variety of reasons (e.g., to obtain favorable treatment under the foreign-derived intangible income regime, mitigate expected foreign tax increases, and a view on the part of some taxpayers that the United States is a strong partner in treaty and transfer pricing discussions with other countries).  

The proposed Section 367(d) regulations are limited in scope and generally do not alter the tax treatment of the transaction by which the intangible property is repatriated. The consequences of repatriating Section 367(d) intangibles depend in large part on whether the intangibles constitute transferred basis property, which affect the application of the proposed Section 367(d) regulations, as well as the form of the repatriation such as tax-free liquidations and reorganizations, distributions, and other transfers and exchanges, which lead to other consequences under general tax principles.  

The proposed Section 367(d) regulations specifically decline to address certain long-debated Section 367(d) questions, such as whether the US transferor’s tax basis in the transferred intangible property can reduce the Section 367(d) inclusion amount associated with the initial outbound transfer. The regulation package notes that Treasury and the IRS will address this and other questions in a future rulemaking.  

[i] See PLR 201936004 and PLR 202107011.