Code Section 7874 seeks to remove the U.S. tax benefits that can apply by inserting a non-U.S. holding company into the ownership structure of businesses formerly conducted through a U.S. holding company. This is a big political issue as several large U.S. multinationals have shifted into a foreign holding company structure in ways that have skirted these rules. Many in the U.S. want to stop such corporate expatriations, and thus the IRS is beefing up the reach of Section 7874 to disincentivize such transfers.
Taxpayers have attempted to work around the technical rules of Section 7874 by breaking up the transactions into numerous steps or conducting ancillary transactions that purport to make the provision inapplicable. New treasury regulations have now been issued to address this planning and to bring such planning into the reach of Section 7874. Both Section 7874 and its existing regulations are quite complex - the new temporary regulations even more so.
The temporary regulations provide new rules under Section 7874 and related provisions: (i) for identifying a foreign acquiring corporation when a domestic entity acquisition involves multiple steps; (ii) that disregard stock of the foreign acquiring corporation that is attributable to certain prior domestic entity acquisitions; (iii) that require a controlled foreign corporation (CFC) to recognize all realized gain upon certain Code Sec. 351 transfers of assets that shift the ownership of those assets to a related foreign person that is not a CFC; and (iv) that clarify the definition of group income for purposes of the substantial business activities test.
T.D. 9761, 04/04/2016