The Internal Revenue Service has issued final regulations restricting multinational corporations from bringing net built-in losses from abroad into the U.S.

The final regulations in TD 9633 apply to certain tax-free transfers of loss property under Section 362(e)(2) of the Tax Code, which was enacted as part of the American Jobs Creation Act of 2004. The final rules essentially echo those in proposed regulations that were issued in 2006, but with some revisions to clarify the structure and framework to better align with those in Section 362(e)(1), along with additional examples to illustrate how they would apply.

The final regulations took effect on Monday, Sept. 3, 2013 and apply to transactions that occur after that same date, according to CCH, unless there is a binding agreement between the corporation and the IRS on how to treat such transactions. Taxpayers can also apply the rules to transactions that occurred after Oct. 22, 2004.

Section 362(e)(2) was enacted in 2004 in order to prevent the duplication of loss in certain corporate nonrecognition transfers. It applies to corporate acquisitions of property with a net built-in loss in transactions, but only if the transaction is not described in Section 362(e)(1), which covers transactions in which there is an importation of built-in loss.

When a transaction is subject to Section 362(e)(2), the acquiring corporation’s basis in loss property is reduced by the property’s allocable portion of the transferor’s net built-in loss. However, under section 362(e)(2)(C), the parties to the transaction can make an irrevocable election to apply the reduction to the transferor’s basis in the stock received in the exchange instead of to the transferee’s basis in the property received in the exchange.

Notice 2005-70 was published on Oct. 11, 2005, to provide interim guidance for making an election to apply Section 362(e)(2)(C). Under Notice 2005-70, an election would be considered effective once a certification was included by the transferor or, if the transferor is a controlled foreign corporation, or CFC, by all of its controlling U.S. shareholders on a timely federal income tax return for the year of the transaction.

Notice 2005-70 expressly permitted taxpayers to make a protective election that would have no effect on a transaction that is ultimately not subject to Section 362(e)(2). The notice also allowed other statements to be treated as effective elections if sufficient information was provided to the IRS with respect to the transfer and parties.

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