The Internal Revenue Service is modifying and clarifying the regulations under Section 367(b) of the Tax Code relating to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations, colloquially referred to as the “Killer B regulations,” to close loopholes in the anti-abuse rules.
Notice 2014-32 eliminates the deemed contribution model under the existing regulations. In addition, the notice modifies the amount of income and gain taken into account for purposes of applying the priority rules of Section 367(a) and (b).
In addition, the notice clarifies the application of the anti-abuse rules. The final regulations provide that appropriate adjustments shall be made if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of the anti-abuse rules. The IRS said it and the Treasury Department are aware that taxpayers are engaging in transactions designed to avoid U.S. tax by exploiting the deemed contribution provided under the final regulations.
The IRS and the Treasury believe that the deemed contribution is inconsistent with the purpose of Section 1.367(b)-10, regardless of whether a subsidiary acquires the stock or securities of a parent corporation from the parent or from someone other than the parent. The IRS and the Treasury also are aware that the priority rules may facilitate certain transactions designed to avoid recognizing gain under Section 1.367(a)-3(c).