"IRS Issues Regs on Determining Surrogate Foreign Corporation Ownership"Tax Notes Today
Layla Asali commented on the Internal Revenue Service's (IRS) recently issued temporary regulations on calculating stock ownership of a foreign corporation in order to determine whether it is a surrogate foreign corporation under Code section 7874, relating to corporate inversion transactions. "In this high-stakes area in particular, taxpayers and the government alike benefit from having concrete rules," Asali said, praising the new rules for the clarity they provide on prior guidance. The regulations provide a de minimis
exception to the exclusion rule, saying that it does not apply to transactions involving unrelated parties when ownership in the foreign acquiring corporation is less than five percent. "Given how the notice was worded, it is helpful for the IRS and Treasury to acknowledge that a predominantly cash transaction really is in substance sale-like, and that a small amount of acquiring stock issued to the shareholders of the target does not make Acquiring anything like a surrogate for the target," Asali said.
The regulations state that the rules apply to acquisitions completed after September 16, 2009, and Asali said that some taxpayers will be disappointed with the lack of any binding contract exception to this effective date. "The preamble addresses this issue by saying that the notice was an antiavoidance rule, and therefore no binding commitment exception is appropriate. Given the statute and the legislative history of section 7874, including the public offering rule and the removal of the language on private placements, one might ask whether, prior to Notice 2009-78, taxpayers were really on notice that their transactions would be considered avoidance," Asali said, adding, "The notice signaled that the IRS and Treasury's view was that the underlying problem is not caused by the magic of public offerings, but rather by the nature of the consideration involved. Whatever we think of the policy judgment, it's different from what taxpayers might have understood from the statute itself, and I can understand why people would be disappointed with the retroactivity as applied to transactions that were already in motion."