Rev. Proc. 68-23

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth guidelines for taxpayers and their representatives in connection with requests for advance rulings required under section 367 of the Internal Revenue Code of 1954 in respect of certain types of transactions involving foreign corporations.

SEC. 2. BACKGROUND.

.01 Section 367 of the Code provides as follows:

In determining the extent to which gain shall be recognized in the case of any of the exchange described in sections 332, 351, 354, 355, 356, or 361, a foreign corporation shall not be considered as a corporation unless, before such exchange, it has been established to the satisfaction of the Secretary or his delegate that such exchange is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes. For purposes of this section, any distribution described in section 355 (or so much of section 356 as relates to section 355) shall be treated as an exchange whether or not it is an exchange.

.02 Whether an exchange or distribution described in sections 332, 351, 354, 355, 356, or 361 of the Code involving a foreign corporation is pursuant to a plan, one of the principal purposes of which is the avoidance of Federal income tax, depends upon all the facts and circumstances of each case. This Revenue Procedure describes certain guidelines which will be used by the Service in considering requests for rulings under section 367 of the Code. However, this Revenue Procedure in no way affects the requirement that before a taxpayer may claim that any of the nonrecognition provisions relating to an exchange enumerated in section 367 of the Code will apply to a transaction the taxpayer must obtain a ruling under section 367 of the Code, before such exchange, to the effect that the proposed transaction is not in pursuance of a plan one of the principal purposes of which is the avoidance of Federal income tax. See Section 1.367-1 of the Income Tax Regulations and Revenue Procedure 67-1, C.B. 1967-1, 544, for requirements and procedures in obtaining such a ruling. In reviewing each request for ruling to determine whether a favorable section 367 ruling should be issued under the guidelines, the Service reserves the right to issue an adverse ruling if, based on all the facts and circumstances of a case, it is determined that the taxpayer has not established that tax avoidance is not one of the principal purposes of the transaction. Similarly, a taxpayer shall be free to establish that based on all the facts and circumstances of the taxpayer's case a favorable ruling under section 367 of the Code should be issued, not withstanding a contrary statement or implication contained in the guidelines. For the effect on a transaction in respect of which the Service issues a ruling under section 367 of the Code, see Revenue Procedure 67-1, and for the effect on a transaction in respect of which a ruling under section 367 of the Code is not obtained from the Service before an exchange, see Revenue Ruling 64-177, C.B. 1964-1 (Part I), 141.

.03 The transactions referred to in this Revenue Procedure are not all inclusive of transactions for which an advance ruling may be required under section 367 of the Code.

SEC. 3. TRANSACTIONS WHICH ORDINARILY RECEIVE FAVORABLE CONSIDERATION UNDER SECTION 367 OF THE CODE.

.01 Section 332 of the Code. Complete liquidation of subsidiaries.

(1) Where a foreign corporation is liquidated into a domestic parent corporation and the latter agrees to include in its gross income as a dividend deemed paid in money for its taxable year in which the distribution in liquidation occurs the portion of the accumulated earnings and profits, if any, of the foreign corporation for all taxable years of such foreign corporation properly attributable to such domestic parent corporation's stock in such foreign corporation. (See Sec. 4 below.) In such cases, the foreign tax credit provisions (sections 78, and 901 through 905 of the Code) will be applied as if immediately before the liquidation such earnings and profits were distributed as a dividend by the foreign corporation to the domestic parent corporation.

(2) Where a domestic corporation is liquidated into a foreign parent corporation and the domestic corporation agrees to include in its gross income for its taxable year in which the distribution in liquidation occurs an appropriate amount to reflect realization of income or gain in respect of those transferred assets the transfer of which by a taxpayer to a foreign corporation in an exchange described in section 351 of the Code would not be accorded a favorable ruling under section 367 of the Code. (See Sec. 3.02(1) below.) If income or gain is required to be taken into gross income under this paragraph, the character of the income or gain shall be determined, and adjustments in basis made, as though the assets transferred by the domestic corporation were acquired by the acquiring foreign corporation from the transferor domestic corporation in a taxable exchange.

(3) Where a foreign corporation is liquidated into another foreign corporation.

.02 Section 351 of the Code. Transfer to foreign corporation controlled by transferor.

(1) Where property is transferred to a foreign corporation and such property is to be devoted by the transferee foreign corporation to the active conduct, in any foreign country, of a trade or business or is property described in the exception stated in Sec. 3.02(a)(iii) below. It is contemplated that the transferee foreign corporation, in addition to the active conduct of a trade or business, will have need for a substantial investment in fixed assets in such business or will be engaged in the purchase and sale abroad of manufactured goods.

(a) However, a favorable ruling under section 367 of the Code will not be issued for an exchange described in section 351 of the Code where the property to be transferred to the foreign corporation is one of the following kinds of property:

(i) Property described in section 1221(1) of the Code (relating to inventory or other property held for sale to customers) or section 1221(3) of the Code (relating to copyrights, etc.);

(ii) Property, such as accounts receivable or installment obligations, in respect of which income has been earned, unless the income attributable to such property has been or will be included in the gross income of the transferor for Federal income tax purposes;

(iii) Stock or securities, except that a favorable ruling under section 367 of the Code may be issued with respect to the following:

(A) Stock or securities of less developed country corporations described in section 955(c)(1) of the Code to be transferred to a controlled foreign corporation (as defined in section 957(a) of the Code) which immediately after the exchange will be a less developed country corporation holding company described in section 902(d)(2) of the Code without regard to the holding period referred to in section 1.902-4(a)(2)(i) of the regulations. This exception shall apply only on the condition that these requirements which must be met immediately after the exchange will continue to be met in the reasonably foreseeable future.

(B) Stock of a foreign corporation which immediately after the exchange is (1) controlled (within the meaning of section 368(c) of the Code) by the transferee foreign corporation and (2) meets the requirements of subsections 954(c)(4)(A)(i) and (ii) of the Code and the transferee foreign corporation is controlled (within the meaning of section 954(d)(3) of the Code) by a person or persons who immediately prior to such exchange controlled the foreign corporation whose stock is transferred. This exception shall apply only on the condition that these requirements which must be met immediately after the exchange will continue to be met in the reasonably foreseeable future.

(iv) Property to be transferred under circumstances which make it reasonable to believe that its sale or other disposition by the transferee foreign corporation is one of the principal purposes of its transfer.

(b) In addition, a favorable ruling under section 367 of the Code generally will not be issued for an exchange described in section 351 of the Code where the property to be transferred to the foreign corporation is one of the following kinds of property:

(i) Property in respect of which the transferor is a lessor or licensor at the time of transfer. The preceding clause shall not apply to property in respect of which the transferee foreign corporation is the lessee or licensee.

(ii) Property to be transferred under circumstances which make it reasonable to believe that the property transferred will be licensed or leased by the transferee foreign corporation after such transfer.

(iii) United States patents, trade-marks and similar intangibles to be used in connection with (1) conduct of a trade or business in the United States or (2) the manufacture in the United States or a foreign country of goods for sale or consumption in the United States.

(iv) Foreign patents, trade-marks and similar intangibles to be used in connection with the sale of goods manufactured in the United States.

(c) The following examples illustrate the applications of Sec. 3.02(1)(b)(iii) Sec. 3.02(1)(b)(iv) above:

(i) X , a domestic corporation, produces a product in the United States which it sells to unrelated parties in the United States and abroad for a stated price per unit without X's trademark affixed and for a higher price per unit with X's trademark affixed. X organizes foreign corporation Y to sell the product to parties to which X had previously sold the product with X's trademark affixed, and X proposes to transfer its United States and foreign trademark to Y in a transaction described in section 351 of the Code. Irrespective of the extent of or absence of any price differential, a favorable ruling under section 367 of the Code will be denied in respect of such a transfer since the principal purpose for the transfer will be considered to be the avoidance of Federal income taxes by means of the purchase and resale by Y of a product produced in the United States.

(ii) Assume the same facts as in example (i) except that X organizes foreign corporation Y to manufacture and sell the product either directly to United States consumers or to X for resale to United States consumers. Irrespective of the extent of or absence of any price differential, a favorable ruling under section 367 of the Code will be denied in respect of a transfer by X of the United States trademark to Y in a transaction described in section 351 of the Code because the principal purpose for the transfer will be considered to be the avoidance of Federal income taxes by means of the manufacture by Y of a product for sale or consumption in the United States.

(d) Where property described in Sec. 3.02(1)(a)(1) through Sec. 3.02(1)(a)(iv) and Sec. 3.02(1)(b)(i) through Sec. 3.02(1)(b)(iv) above (or other property which would not be accorded a favorable ruling under this subsection) is to be transferred to a foreign corporation in an exchange described in section 351 of the Code, and other property which is to be devoted by the transferee foreign corporation to the active conduct, in any foreign country, of a trade or business (it is contemplated that the transferee foreign corporation will have need for a substantial investment in fixed assets in such business or will be engaged in the purchase and sale abroad of manufactured goods), or is property described in the exception stated in Sec. 3.02(1)(a)(iii) above, also is to be transferred to such foreign corporation, a favorable ruling will be issued only upon the condition that the transferor agrees to include in its gross income for its taxable year in which the transfer occurs an appropriate amount to reflect realization of income or gain in respect of those transferred assets the transfer of which would not be accorded a favorable ruling under this subsection. If gain or income is required to be taken into gross income under this paragraph, the character of the income or gain shall be determined, and adjustments in basis made, as though the assets transferred by the United States transferor were acquired by the transferee foreign corporation in a taxable exchange.

(2) Where property is transferred from one foreign corporation to another foreign corporation. However, if stock of a foreign corporation is part of the property transferred see Sec. 5.02 below.

.03 Section 354 of the Code (Exchanges of stock and securities in certain reorganizations); section 355 of the Code (Distribution of stock and securities of a controlled corporation); section 356 of the Code (Receipt of additional consideration); and section 361 of the Code (Nonrecognition of gain or loss to corporations).

(1) This category encompasses all exchanges described in sections 354, 355, 356, or 361 of the Code which relate to the acquisition of all or part of the assets or stock of one corporation by another corporation in a transaction in which one or more of the parties to the reorganization or other transaction is a foreign corporation. For this purpose, therefore, asset acquisitions include corporate divisions and reincorporations as well as so-called practical mergers. The guidelines for issuing rulings in these cases will differ depending upon whether the acquiring corporation, the acquired corporation, or both are foreign corporations.

(a) Where assets of a domestic corporation are acquired by a foreign corporation, and the domestic corporate transferor agrees to include in its gross income for its taxable year in which the transfer occurs an appropriate amount to reflect realization of income or gain in respect of those transferred assets the transfer of which by a domestic taxpayer to a foreign corporation in an exchange described in section 351 of the Code would not be accorded a favorable ruling under section 367 of the Code. (See Sec. 3.02(1) above.) If income or gain is required to be taken into gross income under this paragraph, the character of the income or gain shall be determined, and adjustments in basis made, as though the assets transferred by the domestic corporation were acquired by the acquiring foreign corporation from the transferor domestic corporation in a taxable exchange.

(b) Where assets of a foreign corporation are acquired by a domestic corporation and stock of the acquired foreign corporation is exchanged (or treated as exchanged under section 355 of the Code) for stock of the domestic corporation incident to the plan of reorganization if the shareholders of the foreign corporation agree to include in their gross income, as gain from the sale of a noncapital asset (in the case of a foreign investment company as defined in section 1246 of the Code) or as a dividend deemed paid in money for their taxable year in which the exchange of stock occurs, the portion of the earnings and profits, if any, of the foreign corporation properly attributable under section 1246 or 1248 of the Code to such shareholders' stock in such foreign corporation which would have been includible in their gross income under section 1246 or 1248 of the Code if at the time of such acquisition the stock of such foreign corporation was exchanged in a taxable exchange. In addition, if 20 percent or more of the outstanding stock of the foreign corporation is owned by a domestic corporation, such domestic corporation must agree to include in its gross income, as gain from the sale of a noncapital asset (in the case of a foreign investment company as defined in section 1246 of the Code) or as a dividend deemed paid in money for its taxable year in which the exchange of stock occurs, its portion of the accumulated earnings and profits, if any, of the foreign corporation for all taxable years of such corporation properly attributable to the stock which such domestic corporation owns in such foreign corporation. (See Sec. 4 below.) In cases described in this subparagraph in which shareholders agree to include earnings and profits in gross income as a dividend deemed paid in money, the foreign tax credit provisions (sections 78, and 901 through 905 of the Code) will be applied as if immediately before the acquisition such earnings and profits were distributed as a dividend. The 20 percent principle may be illustrated by the following example:

Domestic corporation X owns more than 20%of the outstanding stock of foreign corporation Y (which is not a foreign investment company). A favorable section 367 ruling will be issued in connection with the reincorporation of Y into a newly organized domestic corporation Z only if domestic corporation X agrees to include in its gross income as a dividend deemed paid in money for its taxable years in which the exchange of stock occurs its portion of the accumulated earnings and profits, if any, of Y for all taxable years of Y properly attributable to the stock which X owns in Y . This is because, after reincorporation of Y as a domestic corporation, the gross amount of dividends paid by Y will be subject to United States income tax in the hands of domestic corporation X only after being reduced by the dividends received deduction contained in section 243 of the Code.

(c) Where assets of a foreign corporation are acquired by another foreign corporation and stock of the acquired foreign corporation is exchanged (or treated as exchanged under section 355) for stock of the acquiring foreign corporation incident to the plan of reorganization, if in the event that the acquired foreign corporation is a controlled foreign corporation (as defined in section 957(a) of the Code) at the time of the exchange of stock or at any time within five years prior thereto, the shareholders of such corporation agree to include in their gross income, as a dividend deemed paid in money for their taxable year in which the exchange of stock occurs, the portion of the earnings and profits, if any, of the acquired foreign corporation properly attributable under section 1248 of the Code to such shareholders' stock in such corporation which would have been includible in their gross income under section 1248 of the Code if at the time of such acquisition the stock of such corporation was exchanged in a taxable exchange. In cases described in this subparagraph in which shareholders agree to include earnings and profits in gross income as a dividend deemed paid in money, the foreign tax credit provisions (sections 78, and 901 through 905 of the Code) will be applied as if immediately before the acquisition such earnings and profits were distributed as a dividend.

(d) Where the stock of a domestic corporation is acquired in exchange for stock of a foreign corporation and immediately after the exchange the shareholders of the acquired domestic corporation do not own directly or indirectly, within the meaning of section 958 of the Code, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of the acquiring foreign corporation, unless the assets of the acquired domestic corporation consist principally of stock or securities. For the effect of section 367 of the Code in cases in which stock of a domestic corporation is acquired by a foreign corporation and where, immediately after the exchange, shareholders of the domestic corporation are in control (as defined in section 368(c) of the Code) of the acquiring foreign corporation see Sec. 3.02(1)(a)(iii) above.

(e) Where the stock of a foreign corporation is acquired by a domestic corporation.

(f) Where stock of a foreign corporation is acquired in exchange for stock of another foreign corporation and immediately after the exchange (1) the acquiring foreign corporation is controlled (within the meaning of section 954(d)(3) of the Code) by a person or persons who immediately prior to such exchange controlled the acquired foreign corporation, and (2) the acquired foreign corporation meets the requirements of subsections 954(c)(4)(A)(i) and (ii) of the Code. Moreover, when the acquiring foreign corporation is not a controlled foreign corporation (as defined in section 957(a) of the Code) the preceding sentence shall apply only if the shareholders of the acquired foreign corporation agree to include in their gross income as a dividend deemed paid in money for their taxable year in which the exchange of stock occurs, the portion of the earnings and profits, if any, of the acquired foreign corporation properly attributable under section 1248 of the Code to such shareholders' stock in such acquired foreign corporation which would have been includible in their income under section 1248 of the Code if at the time of such acquisition the stock of such acquired foreign corporation was exchanged in a taxable exchange.

(g) Where stock of a foreign corporation is acquired in exchange for stock of another foreign corporation and immediately after the exchange the shareholders of the acquired corporation do not own directly or indirectly, within the meaning of section 958 of the Code, more than 50 percent of to total combined voting power of all classes of stock entitled to vote of the acquiring foreign corporation. Moreover, when the acquiring foreign corporation is not a controlled foreign corporation (as defined in section 957(a) of the Code) the preceding sentence shall apply only if the shareholders of the acquired foreign corporation agree to include in their gross income as a dividend deemed paid in money for their taxable year in which the exchange of stock occurs, the portion of the earnings and profits, if any, of the acquired foreign corporation properly attributable under section 1248 of the Code to such shareholders' stock in such acquired foreign corporation which would have been includible in their income under section 1248 of the Code if at the time of such acquisition the stock of such acquired foreign corporation was exchanged in a taxable exchange. For the effect of section 367 of the Code in cases in which stock of a foreign corporation is acquired by another foreign corporation and immediately after the exchange shareholders of the acquired foreign corporation are in control (as defined in section 368(c) of the Code) of the acquiring foreign corporation see Sec. 3.02(1)(a)(iii) above.

(h) A favorable ruling generally will be issued for all exchanges involving the mere recapitalization of a foreign corporation.

SEC. 4. EARNINGS AND PROFITS.

.01 Earnings and profits of a foreign corporation which are to be taken into the gross income of a domestic parent corporation or the United States shareholders of a foreign corporation under circumstances set forth in this Revenue Procedure, are determined (1) for taxable years beginning before January 1, 1963, in accordance with the criteria contained in Revenue Ruling 63-6, C.B. 1963-1, 126; and (2) for taxable years beginning after December 31, 1962, in accordance with the rules contained in subsections 1248(c) and (d) of the Code and the regulations thereunder. However, in determining the earnings and profits of a foreign corporation includible in the income of a domestic parent corporation under Sec. 3.01(1) above (relating to complete liquidation of subsidiaries) or in the income of a domestic corporate shareholder owning 20%or more of the outstanding stock of the foreign corporation under Sec. 3.03(1)(b) above (relating to the acquisition by a domestic corporation of assets of a foreign corporation), the exclusions set forth in section 1248(d)(4) of the Code (`United States Income') apply but the exclusions set forth in section 1248(d)(2) of the Code (`Gain Realized From The Sale Or Exchange Of Property In Pursuance Of A Plan Of Complete Liquidation') and section 1248(d)(3) of the Code (`Less Developed Country Corporations') do not apply. But with respect to the exclusion in section 1248(d)(3) of the Code see Sec. 4.02(1) below. For taxable years beginning after December 31, 1962, the earnings and profits described in section 1248(c)(2) of the Code are taken into gross income in transactions described in Sec. 3.03(1)(c) above (relating to an acquisition of assets of a foreign corporation by another foreign corporation) and Sec. 3.03(1)(f) and (g) above (relating to an acquisition of stock of a foreign corporation by another foreign corporation) in which the acquiring corporation is not a controlled foreign corporation. For purposes of determining the portion of the earnings and profits of a foreign corporation properly attributable to stock in such foreign corporation owned by a U.S. person and the manner in which such portion is includible in the gross income of a United States person, the rules of subsections 1248(a) and (b) of the Code and the regulations thereunder generally apply. See section 1.1248-2 and section 1.1248-3 of the regulations. In applying the provisions of this paragraph, the rules of sections 1248(e) through (g) of the Code are also to be followed.

.02 Special provisions for the purpose of this Revenue Procedure-

(1) Earnings and profits of less developed country corporations.-Where earnings and profits accumulated by a foreign corporation during taxable years in which such corporation meets the requirements of section 955(c) of the Code, or would have met such requirements if the Revenue Act of 1962 had then been in effect, are required to be included as a dividend in the gross income of a domestic corporation owning 20 percent or more of the outstanding stock of the foreign corporation such earnings and profits are taxed as capital gain to the domestic corporation if it so elects in its request for ruling and the ten-year stock ownership requirement of section 1248(d)(3) of the Code is met with respect to its stock in the foreign corporation at the time of the transaction described in Sec. 3.01(1) above (relating to complete liquidation of subsidiaries) or the transaction described in Sec. 3.03(1)(b) above (where assets of a foreign corporation are acquired by a domestic corporation).

(2) Earnings and profits of foreign investment companies.-Where earnings and profits accumulated by a foreign investment company (as defined in section 1246(b) of the Code) are required to be taken into gross income of shareholders of such a company, such earnings and profits are treated as (i) gain from the sale of a noncapital asset in the case of earnings and profits accumulated in taxable years beginning after December 31, 1962 and (ii) a dividend deemed paid in money in the case of earnings and profits accumulated in taxable years beginning before January 1, 1963.

(3) Earnings and profits of corporations organized in U.S. possessions.-Earnings and profits accumulated by a corporation created or organized in, or under the laws of, the Commonwealth of Puerto Rico, or a possession of the United States, during taxable years in which such corporation meets the requirements of section 957(c) of the Code, or would have met such requirements if the Revenue Act of 1962 had then been in effect, are not required to be taken into gross income under these guidelines.

(4) A corporation which during its first taxable year beginning after December 31, 1962 meets the requirements of section 955(c) or section 957(c) of the Code will be conclusively presumed to have met such requirements during taxable years beginning prior to January 1, 1963.

SEC. 5. OTHER PRINCIPLES AND REQUIREMENTS.

.01 If a proposed transaction is not carried out in accordance with a plan submitted in respect of which a favorable ruling is issued by the Service under section 367 of the Code, such favorable ruling will not make the transaction tax free. See section 1.367-1 of the regulations. If a change in plans is proposed the taxpayer may apply for a supplemental ruling that the change has no effect upon the original ruling and it remains in full force and effect.

.02 In cases in which a favorable ruling is issued under section 367 of the Code, appropriate adjustments to bases, earnings and profits, carryovers, and carrybacks, and other similar adjustments may be required. In addition, in appropriate cases not specifically mentioned in the guidelines but involving an exchange of stock of a foreign corporation within the ambit of section 367, the shareholders participating in such exchange may be required to include in their gross income, as a dividend deemed paid in money for their taxable year in which such exchange occurs, the portion of the earnings and profits, if any, of the foreign corporation properly attributable under section 1248 of the Code to such shareholders' stock in such foreign corporation which would have been includible in their gross income under section 1248 of the Code if at the time of such exchange the stock of such foreign corporation was exchanged in a taxable transaction. The preceding sentence is intended to insure that the tax under section 1248 of the Code will be imposed in any case in which failure to impose such tax may result in the permanent avoidance of such section 1248 tax in respect of post-1962 earnings and profits of a foreign corporation.

SEC. 6. INQUIRIES

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Assistant Commissioner (Technical), Attention:T:I:R, Internal Revenue Service, Washington, D.C. 20224.