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Wednesday, August 13, 2014

‘F’ REORGANIZATION IS NOT AN INVERSION TRANSACTION

The hot tax policy discussion these days is about corporate inversions. Rather than entice capital to stay in the U.S. with favorable tax rates (i.e., using the carrot), it is being proposed to enhance corporate inversion rules to make it more expensive for U.S. corporations to leave the U.S. taxing jurisdiction via transferring of stock and assets to non-U.S. corporations (i.e., using the stick). I am inclined towards the carrot – but governments being what they are, more often than not prefer the stick.

What those who do not practice in the area may not realize is that there are already anti-inversion rules in place (Section 7874). In a recent private letter ruling, the IRS addressed the question of a change of jurisdiction of a foreign corporation owning stock in a U.S. corporation under what appeared to be an F reorganization (a transfer of the assets and liabilities of a corporation to a corporation in another jurisdiction or the transfer of a corporation from one jurisdiction to another). Applying some of the complex rules applicable under Section 7874, the IRS ruled that there was no inversion transaction under Section 7874. This has nothing to do with the above current policy discussion, but is helpful in limiting the scope of the present Section 7874.

PLR 201432002

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