Many jurisdictions have special provisions that apply when two businesses owned by a corporation or corporate group are divided and shares of group members are distributed to shareholders.  Sometimes referred to as a “demerger” in Europe and other times as a “butterfly” in Canada, in the U.S. these transactions are called Code §355 spin-offs, split-ups, and split-offs.  In the U.S., several hurdles must be overcome for the transaction to be free of tax at the level of the company making the distribution and the shareholder receiving the distribution.  The I.R.S. recently issued proposed regulations clarifying the application of two of these hurdles: the transaction must not be a “device” to distribute earnings, and companies conducting two or more active business must be involved.  The proposed regulations were motivated by a proposal by Yahoo! to distribute shares of Alibaba.  Rusudan Shervashidze and Andrew P. Mitchel analyze the proposed regulations and how they will apply to circumstances involving a spin-off of a corporation operating a small business but having a large investment asset.

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review the rules embodied in Code §1248, a provision that converts capital gain from the sale of shares in a C.F.C. into dividend income for certain shareholders.  Although for individuals, the tax rates for qualified dividends and gains are the same, the source of the income is changed in a way that may allow a benefit for unused foreign taxes.  If the dividend is not qualified, tax is imposed at a much greater rate.  For corporations that are shareholders, dividend income may bring along indirect foreign tax credits.  Code §1248 also defines the extent of a toll charge if a foreign corporation undergoes a tax-free reorganization that eliminates C.F.C. status.

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review rules applicable to the liquidation of a wholly-owned domestic subsidiary corporation into its foreign parent corporation. Also discussed is the toll charge imposed on asset reorganizations that result in the domestication of a foreign subsidiary.

The U.S. has extensive rules regarding tax-free reorganizations in a domestic context. When the transaction involves cross-border exchanges, these rules are supplemented by Code §367(a). Rusudan Shervashidze and Andrew P. Mitchel explain how the rules work when shares of a U.S. corporation are transferred to a foreign corporation in a §351 exchange.

Continuing their series on the basic rules that must be met for a transaction to be treated as tax-free reorganization under U.S. tax law, Rusudan Shervashidze and Andrew P. Mitchel discuss practical mergers, acquisitive D-reorganizations, recapitalizations, and changes to the identity, form, or place of organization of a single corporation.

Tax 101 is back, this time addressing the basic concepts of tax-free A- and B-reorganizations. The first relates to statutory mergers and the latter relates to share-for-share exchanges. Rusudan Shervashidze and Andrew P. Mitchel explain the basic concepts for non-tax savvy readers.

The question of the proper treatment of a contract transferring exclusive rights to the use of a patent – as a sale or a license – is one that has been addressed many times in U.S. jurisprudence.  It has recently popped up again in a case before the U.S. Tax Court involving the generic pharmaceutical giant Mylan Inc., a company that has been the subject of much negative publicity arising from its inversion and subsequent re-immersion as a U.S. domestic company. In September, the I.R.S. filed a memorandum in support of a motion for summary judgment. We explain the basis for the I.R.S. position and comment on its merits.

We analyze a recent U.S. Court of Appeals case, Albemarle Corp. v. United States, that affirmed certain refund claims were barred by the statute of limitations. The case involved withholding taxes on payments of interest to Albemarle Corp. from its Belgian subsidiary during the years 1997 to 2001. The court held that the taxpayer’s claims for refunds, attributable to foreign tax credits, were time-barred in certain years.

The I.R.S. recently released temporary and proposed regulations to limit the use of foreign partnerships to avoid income inclusions under Code §956. The Temporary Regulations are more limited in their scope while the Proposed Regulations are quite broad. If finalized in the current form, the Proposed Regulations would cause most C.F.C. loans to partnerships with related U.S. partners to be investments in U.S. property.

As Democrats and Republicans attempt to revamp the U.S. tax system, there is renewed discussion of lowering the corporate tax rate. In other national news, U.S. expatriation numbers are down in Q2 of 2015, the I.R.S. Transfer Pricing Operations Unit is officially here to stay, and three more banks agree to disclose activities to D.O.J.

The I.R.S. proposal to deny refunds of excess withholding tax in cases were the withheld tax is stolen by the withholding agent was harshly criticized by the Information Reporting Program Advisory Committee. It seems the I.R.S. does not have the authority to pass the loss onto the party that suffered withholding. Elizabeth V. Zanet and Andrew P. Mitchel discuss the issue in detail.

The I.R.S. has discovered that related taxpayers have been renegotiating existing intercompany loans to allow operating companies within the group to pay a higher rate of interest to a related party benefitting from favorable tax attributes without violating Code §482 principles. Andrew P. Mitchel and Sheryl Shah explain how the I.R.S. is taking aim at this new approach to self-help.

In April, the I.R.S. proposed regulations (REG-108214-15) that provide exceptions for P.F.I.C. treatment for offshore insurance companies, unless they are formed by hedge funds intending to defer or reduce tax. Andrew P. Mitchel and Christine Long look at comments of industry representatives. Many professionals deem these regulations too restrictive, needlessly subjecting legitimate insurance businesses to the harsh tax treatment of P.F.I.C.’s.