[Federal Register Volume 67, Number 224 (Wednesday, November 20, 2002)]
[Proposed Rules]
[Pages 70031-70032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29508]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-127380-02]
RIN 1545-BA79


Outbound Liquidations to Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the application of section 367(e)(2) to certain 
outbound liquidations. The regulations amend the anti-abuse rule of 
Sec.  1.367(e)-2(d) by narrowing the scope of the rule to apply only to 
outbound transfers to a foreign corporation in a complete liquidation 
of a domestic corporation in which a principal purpose of the 
liquidation is the avoidance of U.S. tax. This document also provides a 
notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by February 18, 
2003. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for March 3, 2003, at 10 a.m. must be received 
by February 11, 2003.

ADDRESSES: Send submissions to CC:ITA:RU (REG-127380-02), room 5226, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 am and 5 pm to: CC:ITA:RU (REG-127380-
02), Courier's desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC 20044. Alternatively, taxpayers may submit 
comments electronically directly to the IRS Internet site at 
www.irs.gov/regs. The public hearing will be held in room 4718, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Aaron A. Farmer (202) 622-3860; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Lanita Van Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Generally, a liquidating corporation does not recognize gain or 
loss under section 337(a) on a distribution of any property to an 80-
percent distributee (as defined in section 337(c)) in a complete 
liquidation to which section 332 applies. Section 367(e)(2) provides 
that, in the case of any liquidation to which section 332 applies, 
section 337(a) and (b)(1) shall not apply where the 80-percent 
distributee is a foreign corporation except as provided in regulations. 
The purpose of section 367(e)(2) generally is to prevent the removal of 
appreciated assets from U.S. taxing jurisdiction without the imposition 
of a U.S. corporate level tax. See H.R. Conf. Rep. No. 99-841, at II-
202 (1986).
    On August 9, 1999, the IRS and Treasury published final regulations 
(TD 8834 in the Federal Register at 64 FR 43072) under section 
367(e)(2) regarding distributions of property in a complete liquidation 
under section 332 by a domestic corporation to a foreign parent 
corporation (outbound liquidation) and by a foreign corporation to a 
foreign parent corporation (foreign-to-foreign liquidations).
    With regard to foreign-to-foreign liquidations, Sec.  1.367(e)-2(c) 
generally provides that nonrecognition treatment applies under section 
337(a) and (b)(1) when a foreign corporation (foreign liquidating 
corporation) makes a distribution of property in complete liquidation 
under section 332 to a foreign corporation that meets the ownership 
requirements of section 332(b). The regulations require gain to be 
recognized in a foreign-to-foreign liquidation if the foreign 
liquidating corporation makes a distribution of property which either 
is used by the foreign liquidating corporation in the conduct of a 
trade or business within the United States (a U.S. trade or business) 
at the time of the distribution or which ceased to be used in the 
conduct of a U.S. trade or business within the ten-year period ending 
on the date of distribution and would have been subject to section 
864(c)(7) had it been disposed. The final regulations include an 
exception to this gain recognition rule in certain circumstances where 
the property is distributed to a foreign corporation that uses such 
property in a U.S. trade or business for the ten-year period following 
the distribution, provided that certain requirements are satisfied. 
Sec.  1.367(e)-2(c)(2).
    The final regulations included an anti-abuse rule providing that 
the Commissioner may require a foreign or domestic liquidating 
corporation to recognize gain (or treat the liquidating corporation as 
if it had recognized a loss) on a liquidating distribution if a 
principal purpose of the liquidation is the avoidance of U.S. tax. The 
final regulations further provide that a liquidation may have a 
principal purpose of tax avoidance even though the tax avoidance 
purpose is outweighed by other purposes (taken together or separately).
    The preamble to the final regulations states that the anti-abuse 
rule would apply, for example, if a principal purpose of a liquidation 
is the distribution of a domestic liquidating corporation's earnings 
and profits without a U.S. withholding tax. The preamble to the final 
regulations also states that, in certain circumstances, the IRS is also 
concerned about a liquidation of a domestic corporation into a U.S. 
branch of a foreign corporation in a manner that facilitates the 
avoidance of U.S. tax, including the inappropriate use of attributes 
such as net operating losses. The preamble does not address the 
potential application of the anti-abuse rule to foreign-to-foreign 
liquidations.

Explanation of Provisions

    Since the final regulations were issued, various commentators have 
expressed concern that the anti-abuse rule is overly broad because it 
is not limited by its express terms to outbound liquidations. 
Specifically, it has been brought to the attention of Treasury and the 
IRS that uncertainty regarding the potential application of the anti-
abuse rule is preventing taxpayers from

[[Page 70032]]

engaging in legitimate business transactions involving foreign-to-
foreign liquidations. Although the preamble to the final regulations 
does not address any circumstances in which the anti-abuse rule would 
apply to a foreign-to-foreign liquidation, the rule by its express 
terms could so apply. Application of this rule to require gain 
recognition in a foreign-to-foreign liquidation is not consistent with 
the approach of the final regulations that require gain recognition in 
the case of a foreign-to-foreign liquidation only in particular and 
limited circumstances. Accordingly, these proposed regulations would 
amend the anti-abuse rule to limit its application only to outbound 
liquidations.
    The proposed regulations also would clarify what constitutes a 
principal purpose of tax avoidance for purposes of the anti-abuse rule. 
The proposed regulations similarly would clarify the anti-abuse rule in 
Sec.  1.367(e)-2(b)(2)(iii)(C)(1).

Effective Date

    These regulations are proposed to apply to distributions occurring 
on or after September 7, 1999, or to distributions in taxable years 
ending after August 8, 1999, if the taxpayer has elected to apply the 
final regulations to such distributions. The IRS intends that, prior to 
the publication of these regulations in final form, the Commissioner 
will exercise its authority under the anti-abuse rules in Sec.  
1.367(e)-2(b)(2)(iii)(C)(1) and (d) in a manner that is consistent with 
these proposed regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Pursuant to 
section 7805(f) of the Internal Revenue Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight copies) that are submitted timely to the IRS. Alternatively, 
taxpayers may submit comments electronically directly to the IRS 
Internet site at www.irs.gov/regs. The IRS and Treasury Department 
request comments on the clarity of the proposed rules and how they can 
be made easier to understand. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for March 3, 2003, beginning at 
10 a.m. in room 4718, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written comments and an 
outline of the topics to be discussed and the time to be devoted to 
each topic (a signed original and eight (8) copies) by February 11, 
2003. A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for reviewing outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Aaron A. 
Farmer of the Office of the Associate Chief Counsel (International), 
IRS. However, other personnel from the Treasury and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *

    2. Section 1.367(e)-2, is amended as follows:
    1. Paragraph (b)(2)(iii)(C)(1) is amended by removing the 
parenthetical ``(taken together or separately)'' and adding ``when 
taken together'' in its place.
    2. Paragraph (d) is revised.
    The revision reads as follows:


Sec.  1.367(e)-2  Distributions described in section 367(e)(2).

* * * * *
    (d) Anti-abuse rule. The Commissioner may require a domestic 
liquidating corporation to recognize gain on a distribution in 
liquidation described in paragraph (b) of this section (or treat the 
liquidating corporation as if it had recognized loss on a distribution 
in liquidation), if a principal purpose of the liquidation is the 
avoidance of U.S. tax (including, but not limited to, the distribution 
of a liquidating corporation's earnings and profits with a principal 
purpose of avoiding U.S. tax). A liquidation may have a principal 
purpose of tax avoidance even though the tax avoidance purpose is 
outweighed by other purposes when taken together.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-29508 Filed 11-19-02; 8:45 am]
BILLING CODE 4830-01-P