Ernst & Young Online.

• Author: Harris, Mark

Online Tax Advisor

Submitted By: John Doe

Subject: Treas. Reg. 1.367(b)-3(c)(3) Election Where Foreign Corporation has E&P Deficit

Date/Time: Wed June 5 15:55:23 EDT 2002

FACTS

Canco is a publicly traded Canadian company whose shares are estimated to be held 30 percent by U.S. persons and 70 percent by Canadian persons. Canco is believed to have a current and accumulated deficit in earnings and profits.

Canco wishes to structure itself with a U.S. corporate parent. Assume that this would be accomplished by means of a migration of the Canadian company treated as section 368(a)(1)(F) reorganization into a U.S. corporation. Thus, from a U.S. tax perspective, there would be a reorganization of a foreign corporation into a U.S. corporation (inbound reorganization under section 1.367(b)-2(f)).

Treas. Reg. 1.367(b)-2(f) treats a section 368(a)(1)(F) reorganization, including a mere change in the place of organization or incorporation, as a deemed asset transfer. As such, the transaction would obtain nonrecognition treatment only by being characterized as a C or D reorganization. Thus, the transaction would be subject to Treas. Reg. 1.367(b)-3, which is applicable to an acquisition by a domestic corporation of the assets of a foreign corporation in a liquidation described in section 332 or an asset acquisition described in section 368(a)(1).

U.S. Persons that ARE U.S. Shareholders

Treas. Reg. 1.367(b)-3(b)(3) requires an exchanging shareholder that is a []United States Shareholder[] of the foreign acquired corporation to include in income as a deemed dividend the all earnings and profits amount with respect to its stock in the foreign acquired corporation, Canco.

The term []United States Shareholder[] means any shareholder described in section 951(b) without regard to whether the foreign corporation is a controlled foreign corporation. Treas. Reg. 1.367(b)-3(b)(2), Section 951(b) defines []United States Shareholder[] as a U.S. person who owns or is considered to own by applying the attribution rules, 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation. Thus, if Canco has U.S. shareholders that hold 10 percent or more of the vote of Canco, then such shareholders would be required to recognize their share of the all earnings and profits amount of Canco. Assuming that Canco has a deficit in E&P, such shareholders would have no income inclusion.

U.S. Persons that ARE NOT U.S...