Articles

IRS Finalizes Regulations for Outgoing Transfers of Intangible Property by Ken Vitek, CPA


Posted on March 01, 2017 by Ken Vitek

The IRS recently issued final regulations regarding the treatment of intangible transfers of property by U.S. persons to foreign corporations. The regulations, proposed in September 2015, aim to prevent U.S. companies from attempting to avoid U.S. taxes on transfers of foreign goodwill and going concern value (FGGCV).

 

Under Internal Revenue Code Section 367, an outbound transfer of appreciated tangible property by a U.S. person to a foreign corporation generally triggers recognition of a gain, unless the transferred property is used in an active trade or business outside of the United States (Sec. 367(a)).  Conversely, when a U.S. person transfers intangible property, such as patents, copyrights, trademarks and customer lists, to a foreign corporation, he or she may treat it as a royalty and recognize the gain, commensurable as income, over the intangible property’s useful life (Sec. 367(d)), which may not exceed 20 years.  According to the IRS, the “need to distinguish value attributable to nominally distinct intangibles that are used together in a single trade or business… makes any exception to income recognition for the outbound transfer of goodwill and going concern value unduly difficult to administer and prone to tax avoidance.”

 

As a result, the final IRS regulations include the following changes to clarify the treatment of outbound transfers of FGGCV. These rules apply to all outbound transfers on or after September 14, 2015.

  1. Eliminate favorable treatment of FGGCV by narrowing the scope of Section 367(a)’s active trade or business exception,
  2. Allow U.S. taxpayers to apply Sec. 367(d)’s royalty regime to certain transferred property that would otherwise be subject to gain recognition under Sec. 367(a),
  3. Provide a 20-year useful life safe harbor to recognize the gain,
  4. Remove the exception that previously allowed the transfer of certain property denominated in foreign currency to qualify for the active trade or business exception, and
  5. Change the Sec. 367 valuation rules to better coordinate with the Treasury regulations under Secs. 367 and 482, which deals with the allocation of income and deductions related to controlled transactions.

About the Author: Ken Vitek, CPA, is a senior manager with Berkowitz Pollack Brant’s International Tax Services practice, where he provides income and estate tax planning and compliance services to high-net-worth families and closely held businesses with an international presence. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at kvitek@bpbcpa.com.