Incorporating a Foreign Branch: Part Ii
| Publication year | 1984 |
| Pages | 1627 |
| Citation | Vol. 13 No. 9 Pg. 1627 |
1984, September, Pg. 1627. Incorporating a Foreign Branch: Part II
The United States tax consequences of the creation of a foreign subsidiary are primarily determined under § 367(a) of the Internal Revenue Code ("IRC"). The Tax Reform Act of 1984 ("TRA"), to be effective December 31, 1984, rewrites IRC § 367(a) and makes it more restrictive. Part I of this two-part article(fn1) examined the transfer of assets under current law of a foreign branch of CD Corporation to a new foreign corporation, CD Europe ("CDE"). This second part of the article uses the same example as a tool to analyze the provisions of new § 367(a) and to illustrate the tax increase generated by its application. Before restating the case of CD Corporation, this article examines the procedural changes embodied in new IRC § 367(a).
The revision of IRC § 367(a) accords with much of the remainder of the TRA. In large measure, the TRA constitutes a Congressional reaction to perceived "abuses" brought to light by the Treasury and the Internal Revenue Service ("Service"). In new § 367(a), the judicial defeats suffered by the Service have been reversed by Congress, transforming a "winter" of fiscal loss into a bountiful "summer" of revenue harvest.
New IRC § 367(a) does away with the ruling requirement of the current statute and, as a result, also does away with the declaratory judgment procedure of IRC § 7477.(fn2) In lieu of obtaining a ruling, taxpayers will be required to notify the Service of the occurrence of a § 367(a) transaction under IRC § 6038B. If the transferor fails to notify the Service and to furnish the information required at the time and in the manner provided by new regulations, § 6038B(b)(1) imposes a penalty of 25 percent of the amount of gain realized on the exchange. In addition to the penalty, IRC § 6501(c)(8) extends the statute of limitations until the expiration of three years after the date of notification.
The purpose of this new notification requirement is unclear, since taxpayers are already required to notify the Service of the organization or reorganization of foreign corporations pursuant to IRC § 6046. Presumably, the regulations to be issued under § 6038B will take the § 6046 requirements into account.
Under the general rule of new § 367(a), the transfer of assets to a foreign corporation from a United States transferor in a § 351 transaction will be taxable. However, exceptions to this general recognition of income are provided for much of the property which was not tainted under Revenue Procedure 68-23 (the "Guidelines").(fn3) The most important exception under the Guidelines and the new law is for property used in an active trade or business.
The committee reports specify that the activities conducted by the taxpayer in Dittler Bros. Inc. v. Commissioner(fn4) will not constitute an active trade or business. Both reports also express the expectation of the committees that the Service will issue regulations by January 1, 1985, which will define the term "active trade or business." In the event such regulations are not promulgated, taxpayers may rely on the current practice of the Service under the Guidelines in determining the existence of an active trade or business. While the legislative history does not reflect a Congressional intention to tighten the Service's current definition of assets used in the
To continue reading
Request your trial