REVISITING NOTICE 2012-39

• Published in: Practical Tax Strategies 2017-09, Vol.99 (3), p.41
• Main Authors: Peng, Stephen, Stenger, Allen, Vyas, Rahul, Murillo, Jose
• Format: Article
• Language: English
• Subjects: Controlled foreign corporations; Cross border transactions; Fair market value; Foreign subsidiaries; Foreign tax credits; Intangible assets; Internal Revenue Code; Prepayments; Property transfers; Repatriation
• ISSN: 1523-6250

Section 367(d) basics Except as provided in the regulations, Section 367(d), and not Section 367(a), applies to outbound transfers of IP by a UST to a TFC in an exchange described in Sections 351 or 361.5 When Section 367(d) applies, UST is treated as: (1) having sold the IP [presumably to the TFC] in exchange for contingent payments based on the productivity, use, or disposition of the IP, and (2) receiving amounts that reasonably reflect the amounts which would have been received annually over the IP's useful life of such property, or, in the case of a subsequent disposition of the IP (directly or indirectly), at the time of the subsequent disposition.6 The amounts included with respect to the IP under Section 367(d) must be commensurate with the income attributable to the intangible, are treated as ordinary income, and are sourced like royalties for foreign tax credit purposes.7 If the TFC does not actually pay any annual Section 367(d) amounts, UST is permitted to annually establish a noninterest bearing account receivable from the TFC.8 The UST is also permitted to establish an account receivable, if required, to recognize gain as a result of a subsequent direct disposition of the transferred IP by TFC. With respect to the former, the annual inclusion regime continues to apply, either to the original UST or to any related U.S. person that acquires an indirect interest in the IP in the subsequent disposition.12 With respect to the latter, however, UST is required to recognize gain (but not loss) equal to the excess, if any, of the fair market value of the transferred IP at the time of the subsequent disposition over UST's adjusted basis in the transferred IP at the time of the initial outbound transfer.13 Prepayments under Notice 2012-39 To prevent the "excess" repatriation that can result from an outbound asset reorganization similar to the one described in the Notice, the regulations issued would require UST, with respect to each of its shareholders that is a qualified successor,14 to recognize a prepayment of the annual Section 367(d) amounts, to be determined with respect to the transferred IP, to the extent that any such qualified successor receives "boot" (within the meaning of Section 356) with respect to its UST stock, or if UST has any nonqualifying liabilities that are assumed (within the meaning of Section 357) by the TFC or settled with property (within the meaning of Section 361) provided by the TFC.15 UST includes the prepayment amount in