Effect of certain asset reorgs. on gain recognition agreements.

• Author: Gilbreath, Karen

According to Notice 2005-74, the Service will amend Regs. Sec. 1.367(a)-8, to address the effect of certain reorganizations on gain recognition agreements (GRAs). Under the current Sec. 367(a) regulations, certain nonrecognition transfers of stock, securities or assets are not triggering events with respect to outstanding GRAs, provided that the U.S. transferor complies with certain reporting requirements. Further, certain nonrecognition transactions will terminate a GILA (without triggering gain), provided that immediately after the transaction, the transferred stock's basis is not greater than the U.S. transferor's basis in the stock that, immediately prior to the initial transfer, necessitated the GRA. The current regulation's preamble (in TD 8770, 6/18/98) states that post-GRA nonrecognition transactions generally will not trigger a GRA, if the U.S. transferor reports the transaction properly.

Taxpayers and their advisers have recently expressed concern about the extent to which the regulations' existing exceptions apply to certain nonrecognition transactions involving asset transfers. In particular, the language of the exceptions to GRA triggers does not fit squarely with the exchanges in certain asset reorganizations. Notice 2005-74 is intended to clarify whether and how these exceptions apply to various asset reorganizations.

Generally, the regulations implementing Notice 2005-74 will apply to GRAs filed for exchanges of stock or securities occurring after Sept. 27, 2005. However, taxpayers may elect to apply these rules to exchanges occurring after July 19, 1998, the effective date of the current Sec. 367(a) regulations, as long as they apply the rules consistently to all transactions within the scope of the notice for all open years.

Background

Sec. 367(a)(1) provides that if, in connection with any exchange described in Sec. 332, 351, 354, 356 or 361, a U.S. person transfers property to a foreign corporation, the foreign corporation will not be considered to be a corporation when determining the extent to which gain will be recognized on the transfer, effectively denying nonrecognition treatment in such transactions to the extent it would otherwise apply under U.S. tax rules. Regs. Sec. 1.367(a)-3 provides exceptions to this general rule for certain transfers of stock or securities. Generally, to qualify, the U.S. transferor must enter into a GRA, under which it agrees to include in income any gain realized, but not recognized, on the initial transfer of the stock or securities (plus interest), if certain triggering events occur within five years following the transfer year; see Regs. Sec. 1.367(a)-8(b)(1)(iii) and (3)(i).

Under the current regulations, triggering events include:

* Dispositions of the transferred corporation's stock or securities; see Regs. Sec. 1.367(a)-8(e)(1) and (2);

* Dispositions of substantially all of the transferred corporation's assets, which are generally treated as deemed dispositions of the transferred corporation's stock or securities; see Kegs. Sec. 1.367(a)-8(e)(3); and

* Certain dispositions of the transferee foreign corporation's stock, such as when a U.S. corporate transferor is liquidated during a GRA's term; see, e.g., Regs. Sec. 1.367(a)-8(f) (2) (ii).

Under Regs. Sec. 1.367(a)-8(g), certain nonrecognition transfers of stock, securities or assets are not triggering events, as long as the U.S...