IRS Clamps Down on Corporate Inversions and Related Transactions.
(Parker Tax Publishing September 26, 2014)

The IRS intends to issue regulations, which will generally be effective with respect to transactions completed on or after September 22,2014, to address recent inversion transactions that the IRS feels are tax avoidance transactions and are inconsistent with certain provisions in the Code. Notice 2014-52 (9/23/14).

In light of the ongoing concern over U.S. companies engaging in inversion transactions, the IRS has issued Notice 2014-52 in an effort to stem the tide of inversion transactions. Notice 2014-52 describes regulations that the IRS intends to issue with respect to inversion transactions. In an inversion transaction, a U.S. company reincorporates for tax purposes in a foreign country but keeps most of its operations in the United States. Typically, the U.S. company reincorporates in a country with a lower tax rates with the aim of paying less U.S. taxes.

An inversion transaction may permit the top corporate parent in the newly inverted group, a group still principally comprised of U.S. shareholders and their controlled foreign corporations (CFCs), to avoid Code Sec. 956 by accessing the untaxed earnings and profits of the CFCs without a current tax to the U.S. shareholders. This is a result that the U.S. shareholders could not achieve before the inversion. The ability of the new foreign parent to access deferred CFC earnings and profits would in many cases eliminate the need for the CFCs to pay dividends to the U.S. shareholders, thereby circumventing the purposes of Code Sec. 956. Inversion transactions also facilitate the avoidance of Code Sec. 956 through other techniques. After an inversion transaction, the inverted group may cause an expatriated foreign subsidiary to cease to be a CFC using transactions that avoid the imposition of U.S. income tax, so as to avoid U.S. tax on the CFC's pre-inversion earnings and profits.

In Notice 2014-52, the IRS states that it intends to issue regulations that will;

disregard certain stock of a foreign acquiring corporation that holds a significant amount of passive assets;

disregard certain non-ordinary course distributions;

provide guidance on the treatment of certain transfers of stock of a foreign acquiring corporation (through a spin-off or otherwise) that occur after an acquisition;

prevent the avoidance of Code Sec. 956 through post-inversion acquisitions by CFCs of obligations of (or equity investments in) the new foreign parent corporation or its non-CFC foreign affiliates;

prevent the avoidance of U.S. tax on pre-inversion earnings and profits of CFCs through post-inversion transactions that otherwise would terminate the CFC status of foreign subsidiaries and/or substantially dilute the U.S. shareholder's interest in those earnings and profits; and

limit the ability to remove untaxed foreign earnings and profits of CFCs through related party stock sales subject to Code Sec. 304.

Notice 2014-52 provides that the regulations to be issued will apply to transactions completed on or after September 22, 2014.

For a discussion of the U.S. taxation of foreign corporations, see Parker Tax ¶201,100. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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