SERVICE TO ISSUE REGULATIONS EXCEPTING FOREIGN-TO-FOREIGN CORPORATE LIQUIDATIONS FROM REPEAL OF GENERAL UTILITIES RULE

Notice 87-5

The Internal Revenue Service today announced that regulations under section 367 of the Internal Revenue Code will be promulgated to address foreign-to-foreign liquidations in the context of the repeal of the General Utilities rule.

The General Utilities rule, as codified by sections 336 and 337 of the Code, provided that a corporation recognizes no gain or loss on a distribution of its assets to shareholders in liquidation. Section 631(a) of the Tax Reform Act of 1986 repeals the General Utilities rule by amending sections 336 and 337 of the Code.

Section 336, as amended, generally provides that gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation. Section 337, as amended, provides an exception to new section 336 by providing that no gain or loss shall be recognized to the liquidating corporation on the distribution of property to an 8-percent shareholder in complete liquidation as defined in section 332.

Section 367(e)(2), as adopted by section 631(d)(1) of the Tax Reform Act of 1986, overrides new section 337 if the 80-percent shareholder distributee is a foreign corporation, unless regulations are adopted that provide otherwise. Therefore, except as provided by regulations, gain or loss shall be recognized to a liquidating corporation on the distribution of property to an 80-percent foreign corporate shareholder in a section 3322 liquidation.

Regulations to be promulgated under section 367(e) of the Code will provide that section 367(e)(2) is inapplicable to liquidating distributions by a foreign subsidiary to a foreign parent corporation of assets other than (i) United States real property interests within the meaning of section 897(c) or (ii) assets used or held for use by the foreign subsidiary in the conduct of a trade or business within the United States. Foreign-to-foreign liquidations to which section 367(e)(2) will be inapplicable under these regulations would continue to be governed by section 367(b) of the Code and the existing temporary regulations under that section. The U.S. tax treatment of distributions of U.S. real property interests by foreign corporations are determined under section 897(d) and (e).

The regulations to be published will also provide that section 367(e)(2) will be inapplicable to liquidations of domestic subsidiaries where application of that section would violate a treaty non-discrimination provision based on capital ownership similar to Article 24, paragraph 5 of the 1981 draft United States model income tax convention. The Treasury Department nevertheless continues to be concerned that certain United States tax treaties fail to contain an adequate limitation of benefits provision. If the Treasury Department is not successful in renegotiating such treaties within a reasonable period of time, it will reconsider the U.S. tax on liquidations of domestic subsidiaries of foreign corporations in treaty shopping situations. The regulations to be promulgated under section 367(e)will be effective for taxable years beginning after 1986.