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December 28, 2023

BREAKING TAX NEWS | Treasury issues interim guidance on the treatment of basis adjustments under IRC Section 961(c) on an inbound liquidation or asset reorganization

Today, the Treasury Department issued interim guidance (Notice 2024-16) allowing domestic acquiring corporations in certain inbound liquidations and asset reorganizations (inbound transactions) to determine basis in the stock of a controlled foreign corporation (CFC) acquired in the transaction (an acquired CFC) as if a transferor CFC's basis from subpart F and GILTI inclusions (IRC Section 961(c) basis) is adjusted basis in the acquired CFC and carries over under IRC Sections 334(b) and 362(b).

IRC Section 961(c) basis applies, by statute, solely for purposes of IRC Section 951(a). Thus, without the new rule in Notice 2024-16, many advisors were concerned that IRC Section 961(c) did not convert into adjusted basis. This has complicated inbound transactions for CFCs with significant previously taxed earnings and profits in lower-tier CFCs, potentially resulting in non-economic gain upon distributions of those earnings and profits or sales of stock of those lower-tier CFCs in the future.

Notice 2024-16 covers inbound transactions only to the extent certain stock ownership thresholds are met. Domestic acquiring corporations cannot treat IRC Section 961(c) basis as adjusted basis if:

  • Money or other property (boot) exceeding 1% of the total fair value of the stock of the transferor CFC is received in the transaction
  • The transferor CFC has a loss (taking into account IRC Section 961(c) basis) in the stock of the acquired CFC immediately before the transaction
  • Stock of the acquired CFC is transferred outside of the consolidated group in a transaction described in IRC Section 368(a)(2)(C) or Treas. Reg. Section 1.368-2(k)(1)
  • Stock of the acquired corporation is transferred to a partnership or foreign corporation under a plan, which is deemed to exist for transfers within two years of the inbound transaction
  • The domestic acquiring corporation(s) are regulated investment companies, real estate investment trusts or S corporations

Taxpayers may rely on the interim guidance in the Notice for transactions completed before the date of the forthcoming regulations, provided the taxpayer and all related parties consistently apply all the rules in the Notice.