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Notice 2012-39 (the Notice)1 is familiar to practitioners who advise taxpayers on the use of cross-border asset reorganizations that involve outbound transfers of intangible property (IP) to which Section 367(d) applies.2 The Notice was a surprising development to most, primarily because instead of correcting deficiencies in the Section 367(d) regulations, the Notice generally targets perceived inappropriate repatriation of deferred foreign earnings, which historically is a policy underlying Section 367(b) rather than Section 367(d).3
To illustrate this concern the Notice includes the following example (simplified for purposes of this column). Assume a domestic corporation (USP) wholly owns another U.S. corporation (UST). USP has a $100x adjusted basis in its UST stock. UST has no liabilities and holds a single asset, a patent with $0x adjusted basis and $100x fair market value. USP also wholly owns a foreign corporation (TFC). In an outbound asset reorganization, UST transfers the patent to TFC in exchange for $ 100x cash, and then distributes the $ 100x to USP in complete dissolution. Under the relevant subchapter C provisions, neither USP nor UST recognize gain or loss in connection with the reorganization. Prior to the Notice, UST also did not recognize income under Section 367(d) on the $100x of cash transferred. Consistent with Reg. 1.367(d)-1T(e), USP assumes UST's obligation to include annual amounts in income under Section 367(d) (a Section 367(d) amount) with respect to the patent. Under Section 367(d), for each annual Section 367(d) amount included in income, USP establishes an account receivable from TFC, which USP collects without additional U.S. tax consequences.
Confirming its repatriation focus, the Notice observes that USP reports no income on the collection of the receivable "notwithstanding the prior receipt of $100x in connection with the reorganization" and, moreover, that the reorganization ultimately will "have resulted in a repatriation in excess of $100x ($100x at the time of the reorganization and then through repayment of the receivable in the amount of USP's income inclusions over time) while only recognizing income in the amount of the inclusions over time." What the Notice fails to acknowledge, however, is that USP effectively paid for the initial $100x cash by reducing its $100x adjusted basis in its UST stock as required under Section 358, and USP will pay for any...