Module 5 Transfers Of Property
Transcript of Module 5 Transfers Of Property
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1
367
Thru
1503(d)
Presented by
Edward Umling, CPA, LLM
August 17 – 18, 2009
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Policy Overview
Section 367 of the Code, which originated in the
Revenue Act of 1932, is one of several tax
provisions that gave the Service greater
discretion and flexibility in the application of
other Code provisions in order to prevent the
use of those provisions for tax avoidance.
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Policy Overview
Section 367(a)(1) provides generally that
transfers of appreciated property by a U.S.
person to a foreign corporation will be currently
taxable to the transferor.
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Policy Overview
Section 367 prevents taxpayers from using
various non-recognition provisions to avoid tax
and requires either a payment of tax or in some
cases to enter into gain recognition agreement.
Section 367 does allow tax-free transfers of
certain assets that will be used in the active
conduct of a trade or business.
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Policy Overview
Section 367 also contains a ―foreign branch loss
recapture‖ provision. This provision requires
that the US taxpayers to report as taxable
income any prior foreign branch losses that
were deducted when the branch is incorporated
See 1-34
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Incorporation of Branch Losses
Example on 1-34
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Suppose this Structure
For. Co.
US Hold
Co
See Page 1-35
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Transfer of Share Example
For. Co.
US Hold
Co.
Assume Foreign Patent wishes to obtain a
20% interest in the profitable subsidiary in
exchange for a capital contribution
See Page 1-35
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Transfer of Share Example
For Co
US Hold Co
Hold Co’s transfer of shares to the
Foreign Parent are taxable at the FMV
See Page 1-35
20%
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Reporting Requirements
Form 926
Schedule O on the 5471
Schedule O on the 5472
367 Statements
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Module 6 “Foreign Currency”
What is ―Functional Currency‖ Look at Rules in
§985.
Definition ―QBU‖ –A separate and clearly
identifiable unit of a trade or business which has
a separate set of books.
See Page 1-36
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§ 985 Functional currency
―functional currency‖ means—
the currency of the economic environment in
which a significant part of such unit's activities
are conducted and which is used by such unit in
keeping its books and records.
See 1-36
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Overview of rules
When a taxpayer acquires a non-functional
currency, it acquires an asset with a historical
basis based on the dollar value expended to buy
such currency.
Example: US taxpayer purchase yen to pay a yen
denominated debt. The yen is a non-functional
currency.
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Discussion of Rules
A taxpayers functional currency is the key
determinant as to when a taxable event occurs
with regard to foreign exchange provisions.
SEE Page 1-37
NON-FUNCTIONAL CURRENCY IS NOT MONEY.
IT IS PROPERTY WITH A HISTORICAL BASIS.
See 1-37
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See 1-37 and 1-38
Example US taxpayer purchases 1,000 shares of
Canadian Company for 1M. (Fx is .95:1)
Subsequently sells when Fx 1:1
What is the gain?
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Discussion
Functional currency is defined as the currency of
the economic environment the taxpayer
conducts a significant part of its business
Date of purchase US Co paid $950,000 (1M *.95)
basis is therefore 950K.
Sale is 1.1M when Fx is 1:1
Gain is 150K
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Expense Example 1-40
Invoiced 10K yen when Fx is 130:1
US Co books journal entry (10K/1.3) 76,923
Payment date Fx 1.25:1 80,000
(3,077)
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Debrief
Taxpayers functional currency is the key
determinate whether a taxable event occurred
Acquisition and dispositions of ―non-functional
currency by a US taxpayer are taxable events
Section 988 treats these gains and losses as
ordinary
Non-functional Currency is not money - it is
property with a historical tax basis
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21
Dual Consolidated
Losses
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Policy Concerns
Congress was concerned that allowing the dual
consolidated corporation to use the same loss
deduction in two different groups gave an undue
advantage to certain foreign investors that made
U.S. investments through dual resident
corporations
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What is a Dual Consolidated Loss?
The term “dual consolidated loss” means any net
operating loss incurred in a year in which the
corporation is a dual resident company; AND
in the case of a separate unit, the net loss
attributable to the separate unit
The DCL rules are generally designed to prevent companies
with tax residency in two jurisdictions from using the same
losses to obtain tax benefits in both jurisdictions
I.R.C. 1.1503-1(b)(5)(i)
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Where do I look to find the tax law on “Dual
Consolidated Losses” (“DCL”)?
I.R.C. 1503(d)
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A “dual consolidated loss” shall not include
any loss which, under the foreign income
tax law, does not offset the income of any
foreign corporation.
What is NOT considered a Dual Consolidated Loss
I.R.C. 1503(d)(B)
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Definition Dual Resident Company
Section 1503(d) – a domestic corporation
subject to tax in a foreign country on either a
world wide basis or ―residence‖ basis
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This happens because
A company satisfies a single relations
in both countries simultaneously
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Treas. Reg. 1.1503(d)-5(b)(1)
Any NOL incurred in a year in which the
corporation is a DRC.
Determined under U.S. tax principles
NOL C/F and C/B not included
Capital Loss C/F and C/B not included
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Simple Example
Loss (90)
Income +100
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Definition Dual Resident Company
US Co
LtdUS sub
BVAsp
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US Co
LtdUS sub
BVUK
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Corporation “Double Dip”
UK
US/UK
US
Bank
Third Party
Lender
Interest Expense
included
Interest
Expense
Included
Dual
Resident
Company-
Loss in Both
Jurisdictions
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Branch “Double Dip”
US
FC
Bank
Third Party
Lender
FC
Interest Expense (100)Income 100
Because of this ability to
use losses in both
jurisdictions in
1988, Congress came up
with the “Separate Unit
loss” concept.
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New “DCL” Regulations
Regulations designed to accommodate the proliferation of disregarded entity structures and how to treat them under DCL situations
Dual Resident Companies
Separate Units
Important
Concepts
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35
USCO FCO
DRP
Net Loss (100)
Change in Regulations for 2007
1992 Regs.
DRP is
Separate Unit
and also a
DCL
2007 Regs
DRP is NOT
a Separate
Unit and NO
DCL
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36
USP1 USP2
HE1 HE2
Income 110 Loss (100)
1992
Regs
Separat
e Units
and
DCL
2007
Regs
Combine
into
Single
Separate
Unit with
10 of
income
Separate Unit
Combination Rule
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Reverse Hybrid Application on New Regulations
An Entity that is subject to tax in the United
States as a corporation and is a flow through for
foreign tax purposes is not subject to 1503(d)
because it is neither:
A Separate Unit of a Domestic Corporation
Dual Resident Company
Separate Unit is either:
•A Foreign Branch
•A Hybrid Entity
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Illustration of
Domestic Reverse
Hybrid Not Subject to
1503(d)
FP
USCO
US
Debt located
in US
+100
(100)
+100
Interest
Expense
offsets Taxable
income of
Parent
Interest
Expense
offsets
Consolidated
Taxable
income of US
Group
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39
Let’s do DCL Accounting
USCO
(200)
Foreign
Branch
+100
USCO
(200)
FDE
+100
USCO Loss is allocated
between US and
Foreign under 864(c)
Only Items on the FDE
ledger is used to
compute DCL
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Dual Consolidated Loss
Definition – Section 1503(d) ―dual consolidated
loss‖ any net operating loss of a domestic
corporation incurred in a year in which the
corporation is a ―dual resident corporation‖
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Debrief
Dual consolidated loss is any NOL incurred in a
year that a corporation is a DRC
Determined under U.S. tax principles
A ―dual consolidated loss‖ shall not include any
loss which, under the foreign income tax
law, does not offset the income of any foreign
corporation.
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