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Federal Editorial Materials

WG&L Journals

Corporate Taxation/Journal of Corporate Taxation (WG&L)

Corporate Taxation (WG&L)

2016

Volume 43, Number 02, March/April 2016

Articles

Recent Developments in the Taxation of IP Transactions: A Quickly Changing

Landscape for U.S. Taxpayers, Corporate Taxation (WG&L), Mar/Apr 2016

DEVELOPMENTS IN THE TAXATION OF IP TRANSACTIONS

Recent Developments in the Taxation of IP Transactions: AQuickly Changing Landscape for U.S. Taxpayers

Recent Guidance will profoundly change how outbound transfers of intangibles will be treated for U.S.

tax purposes and, in some cases, overturn decades of practice.

Author: JEFFREY S. KORENBLATT

JEFFREY S. KORENBLATT is an international tax partner in the Washington, D.C. office of Reed

Smith LLP. He is a frequent contributor to the Journal. The opinions in this article are those of

the author and do not necessarily reflect those of his firm. Copyright Korenblatt.

[pg. 3]

In August and September 2015, the IRS and Treasury ("Treasury") released three tranches of

interrelated guidance (via notice, via proposed regulations, and via temporary regulations). Common to

each of these pieces of guidance are new and important changes to the rules concerning how

intangibles are identified, valued, and, ultimately, taxed. The new rules will profoundly change how

outbound transfers of intangibles will be treated for U.S. tax purposes and, in some cases, overturn

decades of practice. The rules are also animated by ambiguous terms and concepts that may lead to

significant new uncertainties for taxpayers. This may, in turn, lead to significant new controversy with

Treasury. Further, the likelihood for controversy may be exacerbated by both the introduction of new or

expanded substantive opportunities for Treasury to challenge taxpayers (including through the

application of modified valuation methodologies) and by the extension, either directly or indirectly, of the

statutes of limitations during which Treasury may pursue such challenges. This article explores these

issues and rules, which under any circumstances will require a thorough analysis and response from the

many affected taxpayers.

Notice 2015-54

General gain recognition/parity with Section 367 . On August 6, 2015, Treasury issued Notice

2015-54 , 1 the first part of its August/September 2015 effort to further curtail tax-free transfers of

intellectual property to related foreign persons and to expand the transfer pricing valuation tools at

Treasury's disposal. Notably, the rules announced in the Notice will apply to transfers occurring on or

after August 6, 2015, and to transfers occurring before August 6, 2015, resulting from entity classification

elections made under Reg. 301.7701-3 that are filed on or after August 6, 2015, and that are effective

on or before August 6, 2015. Thus, Treasury not only announced a fundamental change to long-standing

rules relating to the taxation of contributions to partnership; they also made the changes effective

immediately. 2

To achieve Treasury's desired results, the Notice announced an intent to issue regulations that will

generally require immediate gain recognition by a contributing partner upon contributions of appreciated

property (so-called " Section 721(c) Property") 3 to a domestic or foreign partnership that meets certain

[pg. 4]

ownership thresholds (consisting of both foreign ownership and related-party ownership thresholds)

(such a partnership is referred to as a " Section 721(c) Partnership"). 4 In essence, the rules will turn off

the relief otherwise generally available under Section 721(a) in the case of certain

controlled-partnership transactions involving related U.S. and foreign partners. To avoid this immediate

taxation, taxpayers either must (1) confirm that, during the U.S. Transferor's tax year the sum of the

Built-in Gain 5 with respect to all Section 721(c) Property contributed in that year to the Section 721(c)

Partnership by the U.S. Transferor and all other U.S. Transferors that are Related Persons does not

exceed $1 million (i.e., satisfy a $1million "De Minimis Rule" 6 ) or (2) elect to apply the "Gain Deferral

Method," as described in the Notice (as may be modified in final regulations), with respect to the

Section 721(c) Property. As described in the Notice, the requirements for applying the Gain Deferral

Method are as follows:

(1) The Section 721(c) Partnership adopts the remedial allocation method described in

[Reg.] § 1.704-3(d) for Built-in Gain with respect to all Section 721(c) Property

contributed to the Section 721(c) Partnership pursuant to the same plan by a U.S.

Transferor and all other U.S. Transferors that are Related Persons.

(2) During any taxable year in which there is remaining Built-in Gain with respect to an

item of Section 721(c) Property, the Section 721(c) Partnership allocates all items of

section 704(b) income, gain, loss, and deduction with respect to that Section 721(c)

Property in the same proportion (for example, if income with respect to an item of Section

721(c) Property is allocated 60 percent to the U.S. Transferor and 40 percent to a

Related Foreign Person in a taxable year, then gain, deduction, and loss with respect to

that Section 721(c) Property must also be allocated 60 percent to the U.S. Transferor

and 40 percent to the Related Foreign Person).

(3) The reporting requirements described in section 4.06 of [the Notice] are satisfied.

(4) The U.S. Transferor recognizes Built-in Gain with respect to any item of Section

721(c) property upon an Acceleration Event described in section 4.05 of [the Notice].

(5) The Gain Deferral Method is adopted for all Section 721(c) Property subsequently

contributed to the Section 721(c) Partnership by the U.S. Transferor and all other U.S.

Transferors that are Related Persons until the earlier of: (i) the date that no Built-in Gain

remains with respect to any Section 721(c) Property to which the Gain Deferral Method

first applied; or (ii) the date that is 60 months after the date of the initial contribution of

Section 721(c) Property to which the Gain Deferral Method first applied. 7

Thus, to avoid immediate taxation under Section 721(a) , the parties must agree to (1) utilize the

remedial allocation method, (2) make proportional Section 704(c) allocations for all items with respect

to the relevant Section 721(c) Property, (3) comply with specified reporting requirements, (4) respect de

facto consistency rules, and (5) avoid "Acceleration Events." The last item-avoidance of Acceleration

Events-bears further explanation: generally, and subject to certain exceptions typically involving

transfers of Section 721(c) Partnership interests or indirect transfers of Section 721(c) Property to

domestic corporations in transactions to which Section 351(a) or Section 381(a) apply, an

"Acceleration Event" with respect to an item of Section 721(c) Property is any transaction that either

would reduce the amount of remaining Built-in Gain that a U.S. Transferor would recognize under the

Gain Deferral Method if the transaction had not occurred or could defer the recognition of the Built-in

Gain.

Importantly, an Acceleration Event is deemed to occur with respect to all Section 721(c) Property of a

Section 721(c) Partnership for the tax year of the Section 721(c) Partnership in which any party fails to

comply with all of the requirements for applying the Gain Deferral Method. An example in the Notice

suggests that this rule will be applied strictly.

Example 2. (i) Facts. In Year 1, USP, a U.S. Transferor, contributes Section 721(c)

Property (Asset 1) with Built-in Gain of more than $1 million to a Section 721(c)

Partnership in which FS, a Related Foreign Person, is also a partner. The partnership

allocates all items of income, gain, deduction, and loss with respect to Asset 1 60% to

USP and 40% to FS and adopts the remedial allocation method with respect to Asset 1.

The parties comply with the applicable reporting requirements under sections 6038,

6038B, and 6046A and the regulations thereunder. The parties properly apply the Gain

Deferral Method with respect to Asset 1 in Years 1 through 3.

In an unrelated transaction in Year 4, USP contributes Section 721(c) Property (Asset 2)

with a Built-in Gain of $100,000 to the partnership. The partnership allocates all items of

income, gain, and loss with respect to Asset 2 20% to USP and 80% to FS, but allocates

deductions with respect to Asset 2 90% to USP and 10% to FS. The partnership adopts

the remedial allocation method with respect to Asset 2.

(ii) Analysis. In Year 4, although Asset 2 has Built-in Gain of less than $1 million, the de

minimis rule will not apply because the parties are applying the Gain Deferral Method with

respect to Asset 1. Because the deductions with respect to Asset 2 are allocated in a

different proportion than the other section 704(b) items with respect to Asset 2, the

requirements for satisfying the Gain Deferral Method are not met with respect to Asset 2,

and USP must recognize the Built-in Gain with respect to Asset 2. Furthermore, because

the Gain Deferral Method does not apply to Asset 2, which was contributed within 60

months of Asset 1 (the Section 721(c) Property to which the Gain Deferral Method was

first applied), an Acceleration Event is deemed to occur with respect to Asset 1 under

section 4.05(1) of this notice, and USP must recognize any remaining Built-in Gain with

respect to Asset 1.

[pg. 5]

Observe that, in the example, the value of Asset 2 is 10% or less of the value of the previously

contributed property (potentially much less; the example simply states that Asset 1 has more than $1

million of Built-in Gain, whereas the Built-in Gain in Asset 2 is merely $100,000). The parties also

consistently adopt the remedial method. But they fail to make proportional Section 704(c) allocations for

all items with respect to Asset 2 and this is enough to trigger full recognition of any remaining Built-in

Gain with respect to Asset 1. This rule could be seen by some as harsh and punitive; in cases such as

those prevailing in the example, why not simply require taxpayers to come into compliance with the

proportional allocation rule, particularly where the non-proportionally allocated items are small relative to

the remaining Built-in Gain? Moreover, as discussed below, this new rule is accompanied by important

changes and arguable expansions to the Section 482 rules that may well lead to increased uncertainty

and controversy concerning the amount of the Built-in Gain and the period during which the Gain

Deferral Method may apply to any given Section 721(c) Property. Thus, for example, if a taxpayer

reasonably takes the position that all of the Built-in Gain with respect to a given contribution of Section

721(c) Property is properly allocated in accordance with the remedial method within a given period, the

taxpayer would seem to be justified in making non-proportional allocations with respect to a de minimis

amount of other Section 721(c) Property subsequent to its recognition of the reported Built-In Gain

calculated with respect to the original contribution. If, however and under such circumstances (which

might easily arise), Treasury were subsequently to successfully assert a different valuation (such as to,

effectively, lengthen the period during which the application of the Gain Deferral Method would be

expected), this adjustment to value would almost certainly result in an immediate inclusion of the full

amount of such additional Built-in Gain, even if a similarly situated taxpayer who had not made a de

minimis non-proportional allocation would have been allowed to continue to recover the Built-in Gain

over a multi-year period.

These concerns are exacerbated by notable expansions of the statue of limitations. In the first instance,

the Notice indicates Treasury's intent that "as an additional requirement for applying the Gain Deferral

Method, a U.S. Transferor (and, in certain cases, a Section 721(c) Partnership) must extend the period

on limitations of assessment of tax with respect to all items related to the Section 721(c) Property

contributed to the Section 721(c) Partnership through the close of the eighth full taxable year following

the taxable year of the contribution." 8 Yet the actual extension of the statute may, in some cases, be

indefinite. This result is at least implied by a separate statement, specifically:

When intangible property within the meaning of section 936(h)(3)(B) is contributed to a

partnership, the IRS may consider making periodic adjustments under [Reg.]

§1.482-4(f)(2) in years subsequent to the contribution, without regard to whether the

taxable year of the original transfer remains open for statute of limitations purposes. 9

[pg. 6]

To police these rules, the Notice indicates that it will require taxpayers to fulfill any reporting

requirements imposed under Sections 6038 , 6038B, and 6046A and the existing regulations

thereunder with respect to the contribution of the Section 721(c) Property to the Section 721(c)

Partnership. 10 Further, the Notice states that Treasury intends to issue regulations describing additional

reporting requirements for a U.S. Transferor for each tax year in which the Gain Deferral Method applies.

Unlike the general body of the rules announced in the Notice, the new reporting regulations will not

require any new filings for tax years that end before the date of publication of the regulations.

The rules, while representing a broad and significant change in current tax practice, seem built upon a

stable statutory foundation. Prior to their repeal under the Taxpayer Relief Act of 1997 (the 1997 Act),

Sections 1491 through 1494 imposed a significant excise tax on certain transfers of appreciated property

by a U.S. person to a foreign partnership. Congress repealed these rules based on the belief that the

general framework of subchapter K, augmented by enhanced information reporting obligations, obviated

the need for the excise tax. But at the same time as the repeal, Congress granted Treasury regulatory

authority in Section 721(c) to override the application of the nonrecognition provision of Section 721(a)

to gain realized on the transfer of property to a partnership (domestic or foreign) if the gain, when

recognized, would be includable in the gross income of a person other than a U.S. person. Further and

at the same time, Congress also enacted Section 367(d)(3) , which provides Treasury regulatory

authority to apply the rules of Section 367(d)(2) to transfers of intangible property to partnerships in

circumstances consistent with the purposes of Section 367(d) . 11 Thus, while regulations had not been

issued under these provisions, the grant of regulatory authority to deny nonrecognition under some

circumstances seems clear.

Of course, having authority and exercising it are two different things. What motivated the sudden

issuance of the Notice after nearly two decades of forbearance, accompanied by an immediate effective

date? The tone of the Notice implies that these newly announced rules can be seen as part of Treasury's

ongoing and seemingly accelerating efforts to halt the expatriation of U.S. assets (particularly intangible

assets) and businesses. For example, the Notice announces that "[t]he Treasury Department and the

IRS are aware that certain taxpayers purport to be able to contribute, consistently with sections 704(b),

704(c), and 482, property to a partnership that allocates the income or gain from the contributed property

to related foreign partners that are not subject to U.S. tax." 12 The Notice immediately adds that "[m]any

of these taxpayers choose a section 704(c) method other than the remedial method and/or use valuation

techniques that are inconsistent with the arm's length standard." 13 These statements should give a

reader pause: the problem, according to Treasury, arises because of (1) the use a Section 704(c)

method other than the remedial method (presumably because of the "distortions" caused by the ceiling

rule) and/or (2) the use of valuation techniques that are inconsistent with the arm's-length standard of

Section 482 . One might ask why, if these were the problems, Treasury did not respond with a more

measured approach of (1) challenging the Section 704(c)

[pg. 7]

allocations under existing rules, including adjustments under the anti-abuse rule in Reg. 1.704-3(a)(10) ,

and (2) challenging taxpayers' Section 482 valuations. The latter is discussed in more detail below. With

respect to the former, one wonders whether there are other areas (whether or not involving foreign

partners and partnerships) in which Treasury believes that the use of methods other than the remedial

method consistently are problematic and, if so, whether additional guidance will be forthcoming

(accompanied, perhaps, by an immediate effective date). For example, the Notice states that "[a]lthough

section 704(b) provides partnerships a measure of flexibility to make special allocations of partnership

income, the Treasury Department and the IRS believe that in some cases partnership transactions

involving special allocations lead to inappropriate results." Does Treasury believe this to be uniquely the

case in transactions involving foreign related partners? If not, should taxpayers expect a general

reassessment of the Section 704(b) rules? Since such an assessment would not be facilitated outside

of the cross-border arena by Section 721(c) or Section 367(d)(3) , would such an assessment

potentially give rise to rules less likely to result in immediate taxation than those announced in the Notice

which might, nonetheless, broadly address Treasury's purported discomfort with the operation of the

Section 704(c) rules? Of course, one might reasonably conclude that the real goal here is not to

eliminate all "inappropriate" results under subchapter K, but rather to introduce a toll-charge mechanism

akin to Section 367(d) and to introduce it as quickly and broadly as possible. 14

Section 482 aspects. While the Notice certainly commands attention for its introduction of substantially

new and, arguably, severe technical rules under subchapter K, its discussions and proposals relating to

Section 482 , both generally and specifically with respect to its interaction with the partnership rules,

also bear close reading. The Notice sets the stage for a deep exploration of Section 482 with this

statement:

Section 1.704-1(b)(1)(iii) provides that an allocation that is respected under section 704(b)

and the regulations promulgated thereunder may still be reallocated under other

provisions, such as section 482. See also Rodebaugh v. Commissioner, TC Memo

1974-36 PH TCM ¶74036 33 CCH TCM 169 (holding that the Commissioner could make

allocations under section 482 that differed from the formula set forth in the partnership

agreement), aff'd, 36 AFTR 2d 75-5123 518 F2d 73 75-2 USTC ¶9526 (6th Cir. 1975).

The Notice then briefly references the controlling "arm's-length" standard of Section 482 , 15 the best

method rule, and the extent of Treasury's current ability, under regulations existing as of the date of the

Notice, to impute contractual terms, 16 to aggregate transactions, 17 and to consider alternative

transactions available to taxpayers. 18 The Notice also observes that, under the regulations as they

existed on August 6, 2015, the principles, methods, comparability, and reliability considerations set forth

in Reg. 1.482-7 are relevant (as appropriately adjusted) for determining the best method, including an

unspecified method, applicable to arrangements, expressly including transactions involving partnerships,

for sharing the costs and risks of developing intangibles other than cost sharing arrangements covered

by Reg. 1.482-7 .

The Notice then states that, notwithstanding this array of tools currently at the government's disposal

under Section 482 , "the Treasury Department and the IRS ... are aware that certain taxpayers may be

valuing property contributed to partnerships, or the property or services involved in related controlled

transactions, in a manner contrary to section 482." One response to such a state of affairs might be for

Treasury to initiate and succeed, where it can, with audit and litigation efforts. The Notice, however,

claims that:

Even though the IRS has broad authority under section 482 to make allocations to

properly reflect the economics of a controlled transaction, administrative challenges arise,

for example, when the IRS must make adjustments years after a transaction occurred.

Because taxpayers have better access to information about their businesses and risk

profiles, the IRS may be at a disadvantage in evaluating the transactions.

Accordingly, announces the Notice, "along with providing rules under section 721(c), the Treasury

Department and the IRS intend to augment the section 482 rules as they apply to controlled transactions

involving partnerships." Of course, as discussed below, part of the "augmentation" ultimately will extend

far beyond the partnership arena. 19 With respect to

[pg. 8]

more specific issues relating to the interaction of the partnership rules and Section 482 , a significant

expansion of guidance would be welcome. As a general matter, the circumstances under which Section

482 should generally apply to reallocate income or deduction or override nonrecognition in the

partnership arena would be welcome. Subchapter K already enjoys a complex statutory and regulatory

framework, as well as its own specific anti-abuse rules. If taxpayers are likely to satisfy all of these rules

yet still face adjustment pursuant to Section 482 , detailed guidance would be welcome. Additionally, it

would appear that Treasury anticipates applying these "augmented" Section 482 rules to any

"controlled transaction," not merely to transactions involving Section 721(c) Partnerships. Again,

confirmation and clarification would be welcome.

Within the confines of the Notice, however, perhaps the most remarkable aspect of the discussion of

Section 482 principles is the announcement that Treasury intends to issue regulations regarding the

application of certain rules in Reg. 1.482-7 that are currently applicable to cost sharing arrangements to

controlled transactions involving partnerships. "In particular," states the Notice, "the Treasury

Department and the IRS intend to issue regulations that provide specified methods for such controlled

transactions based on the specified methods in §1.482-7(g) as appropriately adjusted in light of the

differences in the facts and circumstances between such partnerships and cost sharing arrangements."

The Notice also makes clear that these rules will include periodic adjustment rules that are based on the

principles of Reg. 1.482-7(i)(6) . Finally, the Notice puts taxpayers on guard with respect to possible

regulations under Reg. 1.6662-6(d) to require additional documentation for certain controlled

transactions involving partnerships. 20

This promised expansion of the cost sharing rules is quite noteworthy. Treasury invested significant

efforts in crafting a cost sharing regulatory framework, including the income method of Reg.

1.482-7(g)(4) and the periodic adjustment rules of Reg. 1.482-7(i)(6) , that they anticipate will lead to an

improvement of their position vis-a-vis taxpayers with respect to valuing intangibles. Further, they have

aggressively tried to expand the applications of aspects of this framework beyond the confines of the

current Reg. 1.482-7 rules, 21 not always with success. 22 Aspects of this framework have been

deemed to deviate inappropriately from the arm's-length standard. 23 Practitioners have questioned

whether other portions, including Reg. 1.482-7(i)(6) , would be upheld by a court as consistent with the

arm's-length standard. 24 These concerns and ambiguities now seem to be extended into the

partnership arena.

It may be counted that, as discussed in the Notice, the existing regulations already provide for some

application of the principles, methods, comparability, and reliability considerations set forth in Reg.

1.482-7 to arrangements for sharing the costs and risks of developing intangibles that fall outside of the

formal cost sharing arena. But the rules announced in the Notice may be argued to constitute an

aggressive and material expansion of the Reg. 1.482-7 methodologies and mechanisms-such as the

periodic adjustment rules-more broadly within the Section 482 framework. Moreover, the Notice notably

states that the expansion will apply to "to controlled transactions involving partnerships." There is no

indication, on the face of it, that the transactions must involve the partners' agreement to "share costs

and risk to develop intangibles," in a manner that would resemble what is expected of parties under the

cost sharing regulations for the proposed rules to apply. If such a broad application is, indeed,

anticipated, one might also anticipate quite extensive guidance concerning what will constitute

"appropriate adjustments in light of the differences in the facts and circumstances between such

partnerships and cost sharing arrangements."

Proposed Section 367 Regulations

On September 16, 2015, a little over a month after the issuance of Notice 2014-54 , Treasury issued

two more salvos of guidance that promise potentially profound effects on the taxation and valuation of

outbound transfers of intangibles. The first of these consisted of a proposal to materially modify the rules

under Sections 367(a) and (d) and the elimination of a long-standing regulatory exemption from

taxation available to transfers of goodwill and going concern value ("GW/GCV"), an exemption that many

would argue had clear support in the legislative history. 25

By way of background, Section 367(a)(1) essentially "turns off" the gain nonrecognition rules generally

available under Sections 332 , 351, 354, 356, and 361, where (1) the transferor is a U.S. person and (2)

the transferee is a foreign corporation. In an important exception,

[pg. 9]

Section 367(a)(3)(A) provides that, subject to regulations to the contrary, the general rule of Section

367(a)(1) will not apply to any property transferred to a foreign corporation for use by such foreign

corporation in the "active conduct of a trade or business" outside of the United States (the so-called

"ATB exception"). Under the statute and current regulatory scheme, the ATB exception is available to all

property other than that which is specifically excluded. 26 In addition, Section 367(a)(6) provides that

Section 367(a)(1) will not apply to an outbound transfer of any property that the Secretary, in order to

carry out the purposes of Section 367(a) , designates by regulation. Detailed regulations provide rules

for determining whether property is transferred for use by a transferee foreign corporation in the active

conduct of a trade or business outside of the United States for purposes of the ATB exception and for

determining whether certain property satisfies the ATB exception.

Section 367(a) does not apply to intangible property within the meaning of Section 936(h)(3)(B) . 27 A

taxpayer subject to Section 367(d) is treated as having sold the property in exchange for annual

payments that are contingent upon the productivity, use, or disposition of the property. The amounts

taken into account under Section 367(d) must be "commensurate with the income" attributable to the

intangible. 28 Thus, the statute typically produces a de facto royalty stream over the "useful life" of the

transferred intangible property. For these purposes, the regulations provide that the useful life of

intangible property is limited to 20 years. Section 367(d) , despite its promulgation decades ago,

continues to be characterized by numerous unresolved issues and uncertainties 29 and Treasury has

had substantial revisions to the regulations under Section 367(d) on its Priority Guidance Plan for some

years. 30

When enacting Sections 367(a) and (d), Congress made important statements regarding its

expectations with respect to GW/GCV. Specifically, the legislative history explains that "[t]he committee

contemplates that, ordinarily, no gain will be recognized on the transfer of goodwill or going concern

value for use in an active trade or business." 31 It was further observed that "[Congress] does not

anticipate that the transfer of goodwill or going concern value developed by a foreign branch to a newly

organized foreign corporation will result in abuse of the U.S. tax system." 32 While not cited in the

Notice, the relevant House Report stated that "[t]he committee contemplates that the transfer of goodwill

or going concern value developed by a foreign branch will be treated under this exception [the ATB

exception] rather than a separate rule applicable to intangibles." 33 In a similar vein, the Joint Committee

on Taxation stated that "[the Section 367(d) ] intangibles rule does not apply to good will or going

concern value developed by a foreign branch" 34 because "[g]oodwill and going concern value are

generated by earning income, not by

[pg. 10]

incurring deductions" and, as a result, "ordinarily, the transfer of these (or similar) intangibles does not

result in the avoidance of Federal income tax." 35 In reliance upon these clear statements of legislative

intent, the current regulations generally exempt foreign GW/GCV from current taxation under both

Section 367(a) or Section 367(d) . There is some ambiguity as to how the exclusion is reached, but

seemingly no question that it is, as a matter of law, available. One approach to arriving at the exclusion

is to conclude that GW/GCV is not Section 936(h)(3)(B) intangible property in the first instance and,

therefore, not subject to Section 367(d) . Under this approach, gain realized with respect to the

outbound transfer of GW/GCV is not recognized under the general rule of Section 367(a)(1) to the

extent it qualifies for the ATB exception under Section 367(a)(3)(A) . Under an alternative approach,

GW/GCV is treated as though it were, as a general matter, 936(h)(3)(B) intangible property (and

therefore not subject to Section 367(a) ) but nonetheless exempt from the application of the income

inclusion rules of Section 367(d) by virtue of the so-called "foreign goodwill exception," a specific

exclusion of GW/GCV from taxation under Section 367(d) . 36

Notwithstanding the long-standing rule, firmly supported by legislative history, that foreign GW/GCV

should be exempt from taxation when transferred to a foreign corporation, Treasury states in the

Preamble to the Proposed Section 367 Regulations that it has become aware of certain taxpayer

positions and interpretations that "raise significant policy concerns." Specifically, the Preamble cites as

objectionable:

• Certain taxpayers attempt to avoid recognizing gain or income attributable to high-value

intangible property in outbound transfers by asserting that an inappropriately large share (in

many cases, the majority) of the value of the property transferred is foreign goodwill or going

concern value that is eligible for favorable treatment under Section 367 ;

• Certain taxpayers value the property transferred in a manner contrary to Section 482 in order

to minimize the value of the property transferred that they identify as Section 936(h)(3)(B)

intangible property for which a deemed income inclusion is required under Section 367(d) and

to maximize the value of the property transferred that they identify as exempt from current tax;

• Some taxpayers (1) use valuation methods that value items of intangible property on an

item-by-item basis, when valuing the items on an aggregate basis would achieve a more

reliable result under the arm's-length standard of the Section 482 regulations, or (2) do not

properly perform a full factual and functional analysis of the business in which the intangible

property is employed;

• Some taxpayers broadly interpret the meaning of foreign goodwill and going concern value for

purposes of Section 367 , asserting in some cases (1) that they have transferred significant

foreign goodwill or going concern value when a large share of that value was associated with a

business operated primarily by employees in the United States, where the business simply

earned income remotely from foreign customers, and (2) in other cases, taking the position

that value created through customer-facing activities occurring within the United States is

foreign goodwill or going concern value. 37

One might reasonably observe that, as with respect to the taxpayer behavior identified in Notice

2015-54 , Treasury's most appropriate path of redress would be to successfully pursue its audit and, if

necessary, litigation functions.

[pg. 11]

Instead, again as in the case of the Notice, the response was to introduce sweeping changes to

long-standing rules that, it may be argued, will certainly increase incidents of taxation but seemingly will

not reduce opportunities for controversy or administrative burdens. Further, unlike the rules introduced

under Section 721 , the changes set forth in the Proposed Section 367 Regulations seem to rest on a

far less secure delegation of rule-making authority and may, as a matter of law, be in direct conflict with

the legislative history.

The response in the Proposed Section 367 Regulations is to cause GW/GCV to be taxable in all cases,

either under Section 367(a) (for which it can now no longer qualify for the ATB Exception under any

circumstances) or under Section 367(d) (where the foreign goodwill exception has been removed and

taxpayers essentially "opt" into the statute's deemed income methodology. More specifically, under a

new (and, admittedly, helpful) consolidation of the rules pertaining to the ATB Exception, the exception is

no long widely available to all property other than specifically excluded property. Instead, under the new

paradigm, the ATB Exception is available only to certain types of specified property, limited to (1)

tangible property, (2) working interests in oil and gas property, and (3) certain financial assets. 38 All

other property-including GW/GCV-is ineligible.

In a parallel move, the foreign goodwill exception is removed under proposed revisions to the regulations

under Section 367(d) . Further, the definition of "intangible property" to which such provision is now

made applicable includes not only Section 936(h)(3)(B) property, but also "property to which a U.S.

person applies section 367(d) pursuant to [ Prop. Reg. 1.367(a)-1(b)(5) ]." That proposed regulation, in

turn, allows a U.S. transferor to apply Section 367(d) and the associated regulations "to a transfer of

property to a foreign corporation that otherwise would be subject to section 367(a)," subject to certain

limitations and consistency requirements. Thus, the Proposed Section 367 Regulations still do not take

a position on whether or not GW/GCV are Section 936(h)(3)(B) intangibles. Instead, they simply make

such property taxable in any event, either at the time of transfer under Section 367(a) or over multiple

years under Section 367(d) .

Along with the proposed changes to the framework of Section 367 , the Proposed Section 367

Regulations introduce important changes (either directly or via the Preamble) regarding the interaction of

Section 367 (and Section 367(d) , in particular) and Section 482 . Thus, Prop. Reg. 1.367(a)-1(b)(3)

provides that, in cases where an outbound transfer of property subject to Section 367(a) constitutes a

controlled transaction, as defined in Reg. 1.482-1(i)(8) (which will frequently be the case), the value of

the property transferred is determined in accordance with Section 482 and the regulations thereunder.

The introduction of this rule is accompanied by the proposed removal of (1) Temp. Reg.

1.367(a)-1T(b)(3)(i) (which Treasury was concerned might support taxpayer interpretations of the

wording "if sold individually" as inconsistent with the aggregation rule of Temp. Reg.

1.482-1T(f)(2)(i)(B) (as clarified in temporary regulations published on the same date as the Proposed

Section 367 Regulations and discussed below), (2) a duplicative loss disallowance rule, and (3) a rule

obviated by the proposed removal of Temp. Reg. 1.367(a)-1T(b)(3)(i) .

Perhaps more alarmingly for most taxpayers, the Proposed Section 367 Regulations also eliminate the

long-standing rule that the useful life of intangible property is limited to 20 years. Treasury's reasoning

was that "[w]hen the useful life of the intangible property transferred exceeds 20 years, the limitation

might result in less than all of the income attributable to the property being taken into account by the

U.S. transferor." Under a newly proposed rule, the useful life of intangible property is the "entire period

during which the exploitation of the intangible property is reasonably anticipated to occur, as of the time

of transfer." Prop. Reg. 1.367(d)-1(c)(3) provides that "[e]xploitation of intangible property includes any

direct or indirect use or transfer of the intangible property, including use without further development, use

in the further development of the intangible property itself (and any exploitation of the further developed

intangible property), and use in the development of other intangible property (and any exploitation of the

developed other intangible property)." This language should resonate with readers as a second notable

attempt, in so many months, to expand the availability of Treasury's preferred valuation methods

formerly confined to the cost sharing regulations. Indeed, Treasury states in the Preamble to the

Proposed Section 367 Regulations that:

[pg. 12]

For this purpose, exploitation includes use of the intangible property in research and

development. Consistent with the guidance for cost sharing arrangements in §

1.482-7(g)(2)(ii)(A), if the intangible property is reasonably anticipated to contribute to its

own further development or to developing other intangibles, then the period includes the

period, reasonably anticipated at the time of the transfer, of exploiting (including use in

research and development) such further development. Consequently, depending on the

facts, the cessation of exploitation activity after a specific period of time may or may not

be reasonably anticipated. See, e.g., § 1.482-7(g)(4)(viii), Examples 1 (cessation

anticipated after 15 years) and 7 (cessation not anticipated at any determinable date).

A number of important observations may be made regarding the Proposed Section 367 Regulations.

Perhaps chief among these is that it is hard to imagine that the administrative burdens that Treasury

identified in connection with both the taxpayer behavior that motivated the new proposals and with

alternative solutions rejected by Treasury were greater than those which will arise under the newly

proposed regulatory regime. To review, Treasury predicates its proposals upon purported mis-valuation

and mischaracterization of GW/GCV under present law. Clearly one means of countering this would be

to pursue audit and litigation options. A second would be to craft specific rules preserving "the favorable

treatment for foreign goodwill and going concern value under current law ... while protecting the U.S. tax

base through regulations expressly prescribing parameters for the portion of the value of a business that

qualifies for the favorable treatment." 39 Nonetheless, Treasury rejected such a solution:

The Treasury Department and the IRS ultimately determined, however, that such an

approach would be impractical to administer. In particular, while the temporary regulations

under section 482 that are published in the Rules and Regulations section of this issue of

the Federal Register clarify the proper application of section 482 in important respects,

there will continue to be challenges in administering the transfer pricing rules whenever

the transfer of different types of intangible property gives rise to significantly different tax

consequences.

This explanation-impracticality of administration-seems dubious given the solution at which the proposed

regulations actually arrive. Under the Proposed Section 367 Regulations, particularly when coupled with

the "clarification to the Section 482 rules" (discussed in more detail below), one can imagine that

administrative and compliance burdens will escalate. In the first instance, while taxpayers are now

presented with an option of taxation under Section 367(a) or (d) for GW/GCV, this optionality is not

extended to Section 936(h)(3)(B) intangibles (which, by statute, are governed exclusively by Section

367(d) ). On the assumption that a given taxpayer may desire current taxation under Section 367(a) for

a variety of reasons, the proposed regulations (which continue to leave GW/GCV undefined) offer no

lessening of administrative burdens: taxpayers and Treasury still must distinguish foreign GW/GCV from

other assets and properly value foreign GW/GCV. Further, the valuation tools introduced by the dual

"clarification" of the Section 482 rules and (again) the seeming expansion of the application of Reg.

1.482-7 methodologies to Section 367(d) transactions seem to provide an opportunity to increase,

rather than decrease, both controversy and the associated administrative burdens. Indeed, it is very hard

to imagine that the removal of the 20-year useful life rule and its replacement by the tremendously

open-ended definition of "useful life" found in Prop. Reg. 1.367(d)-1 could be deemed to be less

administratively burdensome than properly quantifying and valuing GW/GCV under current law.

A second point is that the solution proposed by Treasury-taxation of GW/GCV under all

circumstances-seems directly adverse to the legislative history. 40 While the Preamble to the Proposed

Section 367 Regulations selectively quotes a limited bit of the congressional record on the anticipated

nontaxation of transfers of GW/GCV, even this narrow reading suggests that GW/GCV clearly

attributable to a foreign branch should not be taxed under Section 367 . In response, the Preamble

does not seem to argue that the legislative history does not support an exception for GC/GWV per se,

but rather argues that Treasury's practical experience is that such an exception is unacceptable, in any

form. 41 What is particularly notable is the argument that any exception would be undesirable because it

will, necessarily, invite taxpayer efforts (including aggressive efforts) to fit into the exception. 42 This is

true of every taxpayer-beneficial rule in the tax law. Yet the fact that such favorable rules will invite

taxpayer efforts to qualify for such rules has never been a valid reason for removing these rules in the

absence of an act of Congress. Ultimately, this seeming substitution of Treasury's judgment for that of

Congress may invite significant scrutiny (and possible rejection) by a court. 43

[pg. 13]

Finally, in a point that relates to all of the Section 482 changes wrought in the rules discussed herein

(and also relating to the first point, above, concerning comparative burdens of administrability), the

proposed regulations seem to introduce substantial new valuation complexities and associated promises

of controversy. This is inherent in (1) the removal of the certainty of a deemed 20-year useful life, (2) the

emphasis on characterization and definitional approaches with respect to intangibles that implicate

uncertainty and disagreement between taxpayers and Treasury (e.g., the appropriate circumstances

under which aggregation should occur, the extent to which an intangible could reasonably be considered

a "platform" for other intangibles), and (3) the cross-references to Temp. Reg. 1.482-1T(f)(2)(i)

(announced on the same day as the Proposed Section 367 Regulations), implicit in Prop. Reg.

1.367(a)-1(b)(3) and explicit in the Preamble to Proposed Section 367 Regulations, that import all of

the uncertainties (discussed below) of that new, temporary regulation. One conclusion that might be

suggested by this is that Treasury is willing to accept uncertainty and an associated expansion of

administrative burdens and potential controversy with taxpayers in order to achieve either a greater

likelihood of increased taxation or of chilling and discouraging transactions of which Treasury

disapproves. In connection with the latter, it is curious that the new regulations are proposed to apply to

transfers occurring on or after September 14, 2015, and to transfers occurring before September 14,

2015, resulting from entity classification elections made under Reg. 301.7701-3 that are filed on or after

September 14, 2015. This type of retroactive effective date is more typical of notices that are issued to

close down transactions that Treasury deems abusive through the exploitation of a loophole in the rules,

rather than of proposed changes to long-established, affirmative exceptions firmly grounded in legislative

history.

Temporary Section 482 Regulations

In the final tranche of August/September 2015 guidance in the intangibles taxation arena, Treasury

released new temporary regulations under Section 482 on September 16, 2015-the same day it

released the Proposed Section 367 Regulations ("Temporary Section 482 Regulations"). 44 The new

rules apply to tax years ending on or after September 14, 2015. As discussed below, the regulations,

which consist of material changes to current Reg. 1.482-1(f)(2)(i) and the introduction of 11 new

examples under that provision (as well as a conforming example under Temp. Reg. 1.482-1T(f)(2)(ii) ),

may be argued to introduce new uncertainties, both with respect to terminology and methodology, that

may be expected to result in increased controversy between taxpayers and Treasury, more complicated,

resource-consuming pricing efforts by both parties, and, ultimately, increased tax revenues to Treasury.

Further, the

[pg. 14]

fact that the Temporary Section 482 Regulations are incorporated by cross-reference into both Notice

2015-54 and the Proposed Section 367 Regulations may be argued to exacerbate the already

significant uncertainties animating those two tranches of guidance, as discussed above.

The Temporary Section 482 Regulations, which purport to "clarify" the "coordination of Section 482

and the regulations thereunder with such other Code and regulatory provisions, are notable on a number

of grounds. 45 First, they, like the other two tranches of guidance discussed herein, seem motivated by

Treasury's frustrations with its ability to obtain the results it desires under current law. Second, the

expansive discussions of (1) capturing "value" and "synergies," (2) aggregating (or, it is implied,

recasting) transactions, and (3) valuing transactions "independent of form or character," seem focused

on reaching specific results, namely achieving higher remuneration for U.S. transferors and higher tax

revenue for the Treasury. Third, consistent with this point, the regulations (via certain of the examples)

represent yet a further expansion of the cost sharing rules, which Treasury clearly feels provide it with

more favorable valuation tools than those available under other portions of the Section 482 regulations.

Finally, the Temporary Section 482 Regulations, even relative to Notice 2015-54 and the Proposed

Section 367 Regulations, are characterized by reliance upon a proliferation of ambiguous terminology

and an arguably open-ended characterization of assets and transactions that may impose significant

new uncertainties on taxpayers and increase controversy between such taxpayers and Treasury.

The Preamble to the Temporary Section 482 Regulations provides a revealing insight into Treasury's

frustrations under current law and its ultimate vision of how transfer pricing analyses should be

conducted. It explains:

Based upon taxpayer positions that the IRS has encountered in examinations and

controversy, the Treasury Department and the IRS are concerned that certain results

reported by taxpayers reflect an asserted form or character of the parties' arrangement

that involves an incomplete assessment of relevant functions, resources, and risks and an

inappropriately narrow analysis of the scope of the transfer pricing rules.

The Preamble continues that "[i]n particular, the Treasury Department and the IRS are concerned about

situations in which controlled groups evaluate economically integrated transactions involving

economically integrated contributions, synergies, and interrelated value on a separate basis in a manner

that results in a misapplication of the best method rule and fails to reflect an arm's length result." This is

indicative of a clash of valuation philosophies, not simply a disagreement over which specific rules are

applicable or how they are to be applied. In essence, Treasury believes that taxpayers are engaged in

serial under-valuation of transferred assets as a result of focusing on the values attributable to each

single asset transferred, rather than treating and valuing the transferred assets as a collective "business"

or "enterprise." 46 It would appear that Treasury believes that focusing on the latter would produce a

greater value of the combined transfers, on the basis of the concept that the whole is greater than the

sum of its parts.

To achieve its purposes, the Temporary Section 482 Regulations first introduce new Temp. Reg.

1.482-1T(f)(2)(i)(A) , stating that "[a]ll value provided between controlled taxpayers in a controlled

transaction requires an arm's length amount of compensation determined under the best method rule of

§ 1.482-1(c)."

[pg. 15]

The same provision continues, stating "[s]uch amount must be consistent with, and must account for all

of, the value provided between the parties in the transaction, without regard to the form or character of

the transaction." These statements set the tone for the rest of the temporary regulations. First, they

champion the concept that nothing of "value"-even, implicitly, if that "thing of value" cannot be identified

as a separable asset that would be subject to the extensive, prescribed valuation methodologies already

enshrined in the existing Section 482 regulations-will escape taxation upon transfer in a controlled

transaction. Indeed, the Preamble makes this point clear, stating that "no inference may be drawn from

any provision in the section 482 regulations that any transfer of value may be made without arm's length

compensation."

Second, Temp. Reg. 1.482-1T(f)(2)(i)(A) begins the introduction of uncertain terms, in this case

"value," into the regulatory framework. The existing Section 482 regulations seek to identify the "value"

of various assets and services and provide detailed pricing guidance depending upon the nature of

those assets and services. But they do not, prior to the introduction of the Temporary Section 482

Regulations, focus on transfers of "value" in of themselves. Taxpayers and even those administering

these rules can be expected to wrestle with what is meant by "value." The fact that the Temporary

Section 482 Regulations also refer to "overall value," and "full value" simply exacerbates the

uncertainty.

Perhaps most surprising is the reference to the rule that amounts will be determined "without regard to

the form or character of the transaction." While it might be concluded that what Treasury is concerned

with here is the artificial segregation of transactions and transfers in an effort to avoid appropriate

valuations and applicable rules, including the existing Reg. 1.482-1(f)(2)(i) aggregation rules, the

manner in which the rule is phrased seems antithetical to the structure of the Section 482 regulations.

The existing regulations generally require careful identification of specific transfers of assets and

services and then the valuation of such transfers in accordance with specified valuation methodologies

(or, in certain circumstances, with unspecified methods applied in accordance with the general rules of

Reg. 1.482-1 . While form is not binding in this practice and Treasury may impute contractual terms, 47

or explore realistic alternatives, 48 ultimately identifying the actual character of the transfer is vital, rather

than something to be disregarded.

The Temporary Section 482 Regulations' advocacy of a broad aggregation (and, it may be argued,

imputation or transactional recast) rule is further advanced in Temp. Reg. 1.482-1T(f)(2)(i)(B) . The

potential breadth of the rule is striking:

The combined effect of two or more separate transactions (whether before, during, or

after the year under review), including for purposes of an analysis under multiple

provisions of the Code or regulations, may be considered if the transactions, taken as a

whole, are so interrelated that an aggregate analysis of the transactions provides the

most reliable measure of an arm's length result determined under the best method rule of

§ 1.482-1(c). (Emphasis added.)

The provision continues:

Whether two or more transactions are evaluated separately or in the aggregate depends

on the extent to which the transactions are economically interrelated and on the relative

reliability of the measure of an arm's length result provided by an aggregate analysis of

the transactions as compared to a separate analysis of each transaction. For example,

consideration of the combined effect of two or more transactions may be appropriate to

determine whether the overall compensation in the transactions is consistent with the

value provided, including any synergies among items and services provided. (Emphasis

added.)

Consider: aggregation may occur across Code sections and across multiple years, based upon the

arguably loose and undefined standard of being "interrelated" (or, alternatively, "economically

interrelated"). 49 Further, the uncertainties inherent in this seem heightened by the continued use of

terms such as "value," "items," and "synergies." 50 Clarification of these terms, including additional

illustrative examples, would be welcome.

The remainder of the Temporary Section 482 Regulations essentially elaborate on these themes of

potential aggregation of transactions and identification of taxable "value" as a result of such aggregation

(whether via "synergies" or through other drivers) that may result in additional taxation to transferors.

The 11 examples, many of which arguably are result-driven rather than illustrative, also support the

impression that the temporary regulations will lead to broader, more open-ended controversies regarding

what is to be valued and how it is to be valued. Perhaps not surprisingly (particularly given similar

references in Notice 2015-54 and the Proposed Section 367 Regulations), the cost sharing regulations

are again directly imported and their potential impact seemingly

[pg. 16]

expanded. In Examples 6, 8, and 9, transactions that taxpayers might have reasonably concluded fell

outside of a cost sharing arrangement under current law are subjected to analysis under Reg. 1.482-7 .

51 It is not clear whether this expansion is solely for valuation purposes or whether the integrated

transactions are subject to all of the other aspects of the cost sharing regulations, such that

non-compliance with those regulations with respect to the previously un-integrated transaction might

result in a defective cost sharing arrangement.

Conclusion and Observations

The guidance released in August and September 2015, consisting of Notice 2015-54 , the Proposed

Section 367 Regulations, and the Temporary Section 482 Regulations, represents a tremendously

significant development in the taxation of transfers of intellectual property by U.S. taxpayers. The rules

introduce significant new circumstances under which tax will be imposed (under Section 721 or Section

482 ) and multiple opportunities where additional tax may be imposed. Some final observations that may

be made include the following:

• As discussed above, all three tranches of this guidance may be argued to introduce significant

uncertainty on the one hand and to have defaulted to the imposition of tax by default (rather

than by offering narrower, more gradual solutions) on the other hand. In this respect, there is a

sense that the guidance should be read as consistent with other efforts in recent years to

introduce a chilling effect to certain disfavored transactions, rather than as an effort to craft

rules, subject to public comment and review, that are meant to resolve areas of uncertainty for

both taxpayers and Treasury.

• The guidance may produce increased controversy regarding what is taxable and the extent of

the tax owed. Some of this may be rectified in final guidance by utilizing more well-defined

terms and providing more detailed, expanded examples of how the final rules will apply to

transactions. But in many cases, the controversy may be an unavoidable characteristic of the

broader, less imprecise methodologies and approaches that Treasury has introduced into

Section 482 and, by extension, the other guidance.

• In the same vein, it is notable that each of the three tranches of guidance appears to advance

the application of the cost sharing rules; clearly Treasury believes that those rules both provide

the most appropriate (and, likely, most fisc-friendly) valuation methods and is eager to apply

them to all transfers of intangibles, whether involving cost sharing or otherwise.

• Treasury has stated that it does not anticipate altering the Section 482 rules in order to

comply with the BEPS final reports. Yet a review of this new guidance and a comparison to the

final reports with respect to Action Items 8 through 10 indicates either that some efforts to

reach conformity are being undertaken or that there is a convergence between U.S. and

OECD rules underway.

1 Notice 2015-54, 2015-34 IRB 210 (August 24, 2015).

2 Some taxpayers were surprised by the effective date under these circumstances, causing Notice

2015-54 to "feel" more like an anti-abuse notice than a measured, methodical change to long-standing

rules. See, e.g., Notice 2015-79 2015-49 IRB 775 (November 20, 2015), Notice 2014-52, 2014-42

IRB 712 (September 22, 2014), and Notice 2012-39, 2012-31 IRB 95 (July 13, 2012).

3 Section 721(c) Property includes any contributed property with excess Section 704(b) book value

over the contributing partner's adjusted tax basis in the property at the time of the contribution (but

does not include gain created when a partnership revalues partnership property) except for (1) cash

equivalents, (2) any asset that is a security within the meaning of Section 475(c)(2) , without regard

to Section 475(c)(4) , and (3) any item of tangible property with Built-in Gain that does not exceed

$20,000. Observe that the security exclusion appears to exclude financial assets, including shares of a

subsidiary, from the definition of Section 721(c) Property. See, e.g., Notice 2015-54 , section 4.07,

Example 5 ("The FC stock received by PRS in the transaction is not subject to the [rules otherwise

applicable to Section 721(c) Property])."

4 The Notice defines a Section 721(c) Partnership as any "partnership (domestic or foreign) ... if a

U.S. Transferor contributes Section 721(c) Property to the partnership, and, after the contribution and

any transactions related to the contribution, (i) a Related Foreign Person is a Direct or Indirect Partner

in the partnership, and (ii) the U.S. Transferor and one or more Related Persons own more than fifty

percent of the interests in partnership capital, profits, deductions or losses." For these purposes, a

"Related Person" is a person that is related (within the meaning of Section 267(b) or Section

707(b)(1) ) to a "U.S. Transferor" (i.e., a United States person within the meaning of Section

7701(a)(30) (U.S. person), other than a domestic partnership). A Direct or Indirect Partner is a person

(other than a partnership) that owns an interest in a partnership directly or indirectly through one or

more partnerships.

5 The Notice provides that "Built-in Gain is the excess section 704(b) book value of the property over

the contributing partner's adjusted tax basis in the property at the time of the contribution (and does

not include gain created when a partnership revalues partnership property)."

6 The De Minimis Rule will not, however, be available if the partnership is already applying the Gain

Deferral Method with respect to a prior contribution of Section 721(c) Property by the U.S. Transferor

or another U.S. Transferor that is a Related Person. The potential complications that this limitation on

the De Minimis Rule may introduce are discussed below.

7 Emphasis added.

8 Notice 2015-54, section 4.06(3) .

9 Notice 2015-54, section 5.02 . The Section 482 elements of the Notice are discussed below.

10 The Notice also states that "the IRS intends to modify Schedule O, Transfer of Property to a

Foreign Partnership, of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign

Partnerships), or its instructions, for tax years beginning in 2015 to require supplemental information

for contributions of Section 721(c) Property to Section 721(c) Partnerships.

11 It should be observed (and, indeed, the Notice does) that Section 721(c) applies to broader

classes of property than does Section 367(d)(3) , although the latter and not the former directly

implicates the "commensurate with income" standard.

12 Emphasis added.

13 Emphasis added.

14 The question of the breadth of the new rules vis-a-vis the Section 367(d) rules is an interesting

one. The Notice specifically states that "[a]lthough Congress also provided specific authority in section

367(d)(3) to address transfers of intangibles to partnerships, the Treasury Department and the IRS

have concluded that acting pursuant to section 721(c) is more appropriate because the transactions at

issue are not limited to transfers of intangible property." But, as a practical matter, the rules will rarely

apply to assets other than intangible property. However, the rules are limited by the Related Party

requirement and De Minimis Rule; no such limitations appear in the current regulations under Section

367(d) .

15 Reg. 1.482-1(b)(1) ("the standard to be applied in every case is that of a taxpayer dealing at arm's

length with an uncontrolled taxpayer") (emphasis added).

16 Regs. 1.482-1(d)(3)(ii)(B) and (iii)(B).

17 Reg. 1.482-1(f)(2)(i) (as in effect prior to TD 9738 ).

18 Reg. 1.482-1(f)(2)(ii)(A) (as in effect prior to TD 9738 ).

19 See TD 9738 , 80 Fed. Reg. 55,538 (September 16, 2015), discussed in detail below.

20 "These regulations may require, for example, documentation of projected returns for property

contributed to a partnership (as well as attributable to related controlled transactions) and of projected

partnership allocations, including projected remedial allocations covered by section 4 of this notice, for

a specified number of years." Notice 2015-54 , section 5.01.

21 See, e.g., LMSB-04-0907-62, "Coordinated Issue Paper- Section 482 CSA Buy-In Adjustments"

(September 27, 2007) (subsequently withdrawn).

22 See, e.g., Veritas Software Corp., 133 TC 297 (2009).

23 Id.

24 See, e.g., Altera, (2015).

25 REG-139483-13, 80 Fed. Reg. 55568 (September 16, 2015) ("Proposed Section 367

Regulations").

26 Section 367(a)(3)(B) specifically excludes: (i) property described in paragraph (1) or (3) of

Section 1221(a) (relating to inventory and copyrights, etc.); (ii) installment obligations, accounts

receivable, or similar property; (iii) foreign currency or other property denominated in foreign currency;

(iv) intangible property within the meaning of Section 936(h)(3)(B) (which, as described below, is

subject instead to Section 367(d) ); and (v) property with respect to which the U.S. transferor is a

lessor at the time of the transfer, unless the foreign corporation was the lessee.

27 Section 936(h)(3)(B) defines intangible property to mean any: "(i) patent, invention, formula,

process, design, pattern, or know-how; (ii) copyright, literary, musical, or artistic composition; (iii)

trademark, trade name, or brand name; (iv) franchise, license, or contract; (v) method, program,

system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; or (vi)

any similar item, which has substantial value independent of the services of any individual" ( Section

936(h)(3)(B) intangible property). Other sections within the Code provide alternative, sometimes

broader definitions of "intangibles." See, e.g., Section 197(d) (providing a broader definition of

intangible, including, notably, GW/GCV).

28 Cf. Section 482 (final sentence).

29 See, e.g., New York State Bar Association, Report of Section 367(d) (October 12, 2010).

30 See, e.g., Treasury, 2015-2016 Priority Guidance Plan, (updated October. 23, 2015) (277 items,

including "Regulations under § 367(d) regarding transfers of intangible property to foreign corporations

and partnerships, including temporary and proposed regulations to implement Notice 2012-39");

Treasury, 2010-2011 Priority Guidance Plan, (December 7, 2010) (310 items, including "Regulations

under § 367(d) regarding transfers of intangible property to foreign corporations").

31 S. Rep't. No. 169, 98th Cong., 2d Sess., at 364; H. Rep't. No. 432, 98th Cong., 2d Sess., at 1319.

32 Id., S. Rep't. at 362; H. Rep't. at 1317.

33 Id., H. Rep't. at 1319.

34 Joint Committee on Taxation, Committee on Ways and Means, and Committee on Finance,

Summary of Tax and Spending Reduction Provisions (within the Jurisdiction of the Committees) on

Ways and Means and Finance of H.R. 4170 (JSC-26-84) at 28 (June 1984).

35 Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit

Reduction Act of 1984 (H.R. 4170, 98th Cong.; P.L. 98-369) (JCS-41-84) at 428 (December 1984).

36 See Temp. Reg. 1.367(d)-1T(b) (providing that Section 367(d) does not apply to the transfer of

foreign GW/GCV); Temp. Reg. 1.367(a)-1T(d)(5)(iii) (defining "foreign GW/GCV" as the residual

value of a business operation conducted outside of the United States after all other tangible and

intangible assets have been identified and valued, including but not limited to the value of a right to

use a corporate name in a foreign country).

37 This may be a circumstance where Treasury should rely upon, rather than ignore, the pertinent

legislative history. There is no general requirement under the ATB exception that property otherwise

qualifying for the Exception be utilized in a foreign branch prior to transfer. Indeed, both the current

regulations and the newly proposed regulations focus on the use of transferred property "immediately

after" the transfer in the determination of foreign use. See Temp. Reg. 1.367(a)-2T(b)(4) . Further,

there is no reason to believe that GW/GCV cannot be created outside of the United States (and

subsequently used by a foreign transferee corporation) even in the instances cited in the Preamble;

such property arises from the successful economic penetration of a foreign market-if such items exist,

the situs of their creation would not seem any more relevant than for any other property susceptible to

tax-free treatment under the ATB Exception. Nonetheless, Treasury in this instance might rely upon

the legislative history's repeated references to excepting from taxation only GW/GCV "developed by a

foreign branch" to narrow, but not eliminate, the current rule.

38 Even these categories of property are further narrowed through the exclusion of (1) inventory or

similar property; (2) installment obligations, accounts receivable, or similar property; (3) foreign

currency or certain other property denominated in foreign currency; and (4) certain leased tangible

property.

39 The Preamble to the Proposed Section 367 Regulations continues that, as an example,

"regulations could require that, to be eligible for the favorable treatment, the value must have been

created by activities conducted outside of the United States through an actual foreign branch that had

been in operation for a minimum number of years and be attributable to unrelated foreign customers."

Why Treasury concluded this was not practical is not clear, given that rules for the attribution of

income, assets, and expense items to offices and branches permeate the Code and the Regulations.

As an alternative, it should be observed that Treasury officials have recently indicated that

consideration might be given to a potential safe harbor regarding a company's routine return on

intangibles. See "Routine Return Foreign Goodwill Safe Harbor Not Off the Table," Tax Notes

(January 14, 2016). The concept that GW/GCV should be capped at a "routine return" in exchange for

exemption from taxation under Section 367 is an interesting one and should be contrasted with

Treasury's long-standing efforts to expand the amount of value allocated to GW/GCV prior to the

enactment of Section 367 .

40 Some taxpayers have argued that it is impossible to reconcile the Proposed Section 367

Regulations with the legislative history. See, e.g., "Silicon Valley Tax Directors Group Comments on

Proposed Rules (REG-139483-13) on Treatment of Certain Transfers of Property to Foreign

Corporations" (document date: December 14, 2015) BNA Daily Tax Rep., December 29, 2015, at Tax

Core ("If finalized, the validity of [the Proposed Section 367 Regulations] would be subject to

challenges. The proposed regulations should accordingly be withdrawn").

41 Implicitly, Treasury seems to suggest that Congress would not have articulated an expectation that

GW/GCV would be exempt from taxation under Section 367 if Congress had enjoyed the benefit of

Treasury's knowledge and experience.

42 "Given the amounts at stake, as long as foreign goodwill and going concern value are afforded

favorable treatment, taxpayers will continue to have strong incentives to take aggressive transfer

pricing positions to inappropriately exploit the favorable treatment of foreign goodwill and going

concern value, however defined, and thereby erode the U.S. tax base."

43 See Korenblatt, "The 'New Section 956 Anti-Hopscotch Rule'-Is Treasury Overreaching?" 42

Corp. Tax'n 21 (January/February 2015) (extensive discussion regarding the application of Chevron

U.S.A., Inc. v. Natural Resource Defense Council, Inc., 467 US 837 81 L Ed 2d 694 (1984) and Mayo

Foundation for Medical Education & Research, 131 S. Ct. 704 (2011) and their progeny to the

question of whether a regulatory exercise of delegated authority exceeds the delegation).

44 TD 9738 , 80 Fed Reg. 55,538 (September 16, 2015). The same regulations were also issued in

proposed form on the same day (REG-139483-13, 80 Fed. Reg. 55568 (September 16, 2015).

45 While "such other Code and regulatory provisions" certainly appear to include Section 351 ,

Section 367 , and, it would seem, the other corporate nonrecognition provisions, there is nothing to

suggest that there is any limit as to which other Code and regulatory provisions Treasury believes

must be coordinated with Section 482 . Given the potentially endless interactions, more practical

examples of "coordination" would be helpful.

46 The Preamble states that: "Taxpayers may assert that, for purposes of section 482, separately

evaluating interrelated transactions is appropriate simply because different statutes or regulations

apply to the transactions (for example, where section 367 and the regulations thereunder apply to one

transaction and the general recognition rules of the Code apply to another related transaction). These

positions are often combined with inappropriately narrow interpretations of § 1.482-4(b)(6), which

provides guidance on when an item is considered similar to the other items identified as constituting

intangibles for purposes of section 482. The interpretations purport to have the effect, contrary to the

arm's length standard, of requiring no compensation for certain value provided in controlled

transactions despite the fact that compensation would be paid if the same value were provided in

uncontrolled transactions." Implicitly, this "value" that Treasury believes is not being compensated is

not a thing that Treasury can identify as a separate asset and subject to the relevant, specified

valuation methodologies set forth in the current Section 482 regulations.

47 Reg. 1.482-1(d)(3)(ii)(B) .

48 Reg. 1.482-1(f)(2)(ii)(A) .

49 In this regard, see also Rev. Proc. 2015-40, 2015-35 IRB 236, section 2.04 ; Rev. Proc.

2015-41, 2015-35 IRB 263, section 2.02(4) .

50 While the term "item" is used elsewhere in the Section 482 regulations, its open-ended use in the

Temporary Section 482 Regulations seems unique; elsewhere it is almost invariably followed by

illustrations of the specific types of items being referenced for the particular purposes of the pertinent

regulatory passage.

51 Temp. Reg. 1.482-1T(f)(2)(E), Examples 6, 8, and 9.

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