IRC §367 (Foreign corporations) OVERRIDES the normal tax-free treatment of corporate formations, reorganizations, and liquidations when a US person transfers property to a FOREIGN corporation - treating the foreign corporation as NOT a corporation so that gain is RECOGNIZED. The purpose is to prevent US persons from moving appreciated assets or income-producing intangibles offshore without paying US tax. TWO MAIN REGIMES: §367(a) - OUTBOUND TRANSFERS of TANGIBLE PROPERTY and STOCK; §367(d) - OUTBOUND TRANSFERS of INTANGIBLE PROPERTY. §367(a)(1) GENERAL RULE: if a US person transfers property to a foreign corporation in connection with an exchange under §332 (liquidation), §351 (incorporation), §354/§356 (reorganization stock exchange), or §361 (reorganization asset transfer), the foreign corporation is NOT treated as a corporation for purposes of determining gain - meaning GAIN IS RECOGNIZED on the transfer (loss is not). EXCEPTIONS: (1) ACTIVE TRADE OR BUSINESS exception historically allowed tax-free transfer of business assets used in active foreign trade/business - but the Tax Cuts and Jobs Act (P.L. 115-97 2017) REPEALED the active foreign trade or business exception for most property under §367(a)(3) by eliminating the prior exception, broadly requiring gain recognition; (2) STOCK TRANSFERS - US person transferring stock to foreign corporation can avoid gain by being a 5%+ shareholder and entering a 5-YEAR GAIN RECOGNITION AGREEMENT (GRA) under Reg §1.367(a)-8. §367(d) INTANGIBLES: transfer of intangible property (§367(d)(4) definition includes patents, copyrights, goodwill, going concern value, workforce in place, and any other item with value not attributable to tangible property or services) treated as a SALE in exchange for CONTINGENT PAYMENTS - US transferor includes annual income inclusions over the useful life commensurate with the income attributable to the intangible (the "super-royalty" standard). Final regulations T.D. 10009 (October 9, 2024) address §367(d) repatriation when intangibles returned to US person. §6038B reporting required on Form 926 (Return by a US Transferor of Property to a Foreign Corporation). GAIN RECOGNITION AGREEMENT - 5-year contract with IRS; triggering events (disposition of transferred stock or assets by foreign corp) cause retroactive gain recognition plus interest. §367(b) - INBOUND and FOREIGN-TO-FOREIGN transactions; coordinates with subpart F and PTEP.
The override: Normal tax-free corporate transactions (§332, §351, §354, §356, §361) become TAXABLE when a US person transfers property to a foreign corporation. §367 treats the foreign corporation as "not a corporation" so gain is recognized.
§367(a) - tangible property and stock: Gain recognized on outbound transfer. TCJA repealed the active foreign trade or business exception for most property. Stock transfers can defer gain via a 5-year Gain Recognition Agreement if transferor is 5%+ shareholder.
§367(d) - intangibles: Outbound transfer of intangibles (patents, goodwill, going concern, workforce in place) treated as sale for contingent payments - annual income inclusions commensurate with income over useful life. Final regs T.D. 10009 (October 2024) address repatriation.
Reporting: Form 926 under §6038B. Gain Recognition Agreement under Reg §1.367(a)-8. Failure to file Form 926 - penalty 10% of FMV of property (max $100,000 unless intentional).
Purpose: Prevent untaxed migration of appreciated assets and income-producing intangibles offshore.
| §367(a) Element | Detail |
|---|---|
| General rule §367(a)(1) | US person transferring property to foreign corp in §332/§351/§354/§356/§361 exchange - foreign corp NOT treated as corporation; GAIN recognized (loss not recognized) |
| Covered exchanges | §332 (subsidiary liquidation), §351 (transfer to controlled corp), §354 (stock-for-stock reorganization), §356 (boot in reorganization), §361 (corporation's transfer in reorganization) |
| Gain only | Only realized GAIN recognized; losses NOT recognized; computed item-by-item (loss property does not offset gain property) |
| Active trade or business exception (HISTORIC) | Pre-TCJA §367(a)(3) allowed tax-free transfer of property used in active foreign trade or business; TCJA P.L. 115-97 §14102 REPEALED this exception effective for transfers after December 31, 2017 |
| Current treatment of business assets | Post-TCJA, most tangible business property transferred outbound triggers gain recognition; the broad ATB exception is gone |
| Excepted property (still) | Certain property remains excepted per regulations - but the broad active business exception eliminated |
| Tainted assets §367(a)(3)(B) (historic) | Inventory, installment obligations, accounts receivable, foreign currency property, leased property never qualified for ATB exception even when it existed |
| Branch loss recapture §367(a)(3)(C) | Prior branch losses recaptured on incorporation of foreign branch |
| Basis to foreign corporation | Foreign corp takes carryover basis increased by gain recognized by US transferor |
| Reporting Form 926 | Required under §6038B; due with transferor's tax return; describes property, value, gain recognized |
| GRA Element | Detail |
|---|---|
| Authority | Reg §1.367(a)-3, §1.367(a)-8 |
| General rule for stock transfers | US person transferring stock/securities to foreign corp triggers §367(a)(1) gain UNLESS exception applies |
| 5% shareholder GRA option | If US transferor owns 5%+ of transferee foreign corp after transfer, may enter 5-year GRA to DEFER gain |
| Less than 5% shareholder | Generally automatic nonrecognition (no GRA required) if other requirements met under Reg §1.367(a)-3(c) |
| GRA definition | Contract with IRS - taxpayer agrees to recognize gain retroactively if triggering event occurs during 5-year period |
| 5-year term | GRA covers 5 full taxable years following the year of transfer |
| Triggering events §1.367(a)-8(j) | Disposition of transferred stock by foreign corp; disposition of substantially all assets; another §367 transfer; failure to comply with annual certification |
| Annual certification | GRA requires annual statement attached to tax return certifying no triggering event; failure can trigger gain |
| Consequence of triggering event | US transferor recognizes deferred gain RETROACTIVELY to year of original transfer plus INTEREST |
| Reasonable cause relief Reg §1.367(a)-8(p) | Late or defective GRA - reasonable cause relief available; willful failure precludes relief |
| Form 8838 | Consent to Extend the Time to Assess Tax Under Section 367 - extends statute for GRA period |
| §367(d) Element | Detail |
|---|---|
| General rule §367(d)(1) | US person transferring INTANGIBLE property to foreign corp in §351 or §361 exchange treated as having sold the intangible in exchange for CONTINGENT PAYMENTS |
| Intangible property definition §367(d)(4) | Cross-references §367(d)(4) - patents, inventions, formulas, processes, designs, patterns, know-how, copyrights, literary/musical/artistic compositions, trademarks, trade names, brand names, franchises, licenses, contracts, methods, programs, systems, procedures, surveys, studies, forecasts, estimates, customer lists, technical data, GOODWILL, GOING CONCERN VALUE, WORKFORCE IN PLACE, and any similar item with value not attributable to tangible property or services |
| TCJA expansion | TCJA P.L. 115-97 expanded §367(d)(4) intangible definition to include goodwill, going concern value, and workforce in place - closing the prior "foreign goodwill exception" |
| Deemed payment structure | US transferor includes ANNUAL income amounts commensurate with the income attributable to the intangible over its useful life ("super-royalty") |
| Commensurate with income standard | §482 / §367(d)(2) - payments must reflect actual income generated by the intangible; periodic adjustments if income differs from projections |
| Character | Deemed payments treated as ordinary income (royalty-like); US-source income |
| Useful life | Income inclusions over useful life of intangible; if indefinite (goodwill), 20-year default under regulations |
| Repatriation T.D. 10009 | Final regs (October 9, 2024) - when foreign corp transfers intangible back to US person, terminates §367(d) inclusions; addresses gain recognition on repatriation; coordinates with §904 FTC |
| Lump-sum election (limited) | Certain dispositions allow lump-sum gain recognition instead of continuing inclusions |
| Coordination with §482 | Transfer pricing rules apply to ensure arm's length payments; §367(d) and §482 work together |
Facts: USCo, a US C-corporation, expands into Germany. It transfers to newly formed German subsidiary (GmbH):
- Manufacturing equipment: basis $2,000,000, FMV $5,000,000 (built-in gain $3,000,000)
- Patent portfolio: basis $500,000, FMV $20,000,000
- US-developed customer relationships and goodwill: FMV $10,000,000
In exchange for 100% of GmbH stock (§351 transaction).
§367(a) analysis - manufacturing equipment:
Outbound transfer of tangible property to foreign corp. Post-TCJA, no active trade or business exception. USCo RECOGNIZES gain of $3,000,000 on the equipment transfer.
Federal tax (21% corporate): $630,000
GmbH takes basis $5,000,000 (carryover $2,000,000 + $3,000,000 gain recognized)
§367(d) analysis - patent portfolio and goodwill:
Patents and goodwill are intangibles under §367(d)(4). USCo treated as selling intangibles for contingent payments. Must include ANNUAL income commensurate with income generated by patents and goodwill over useful life.
If patents generate $3,000,000/year of income attributable to them, USCo includes approximately $3,000,000/year as ordinary US-source income (deemed royalty).
This continues over useful life of the intangibles.
TCJA goodwill change:
Pre-TCJA, foreign goodwill and going concern value were exempt from §367(d). Post-TCJA, the $10,000,000 customer relationships/goodwill are now SUBJECT to §367(d) annual inclusions. This significantly increased the cost of offshoring intangible value.
Reporting:
Form 926 filed with USCo return reporting equipment transfer (§367(a)) and intangible transfer (§367(d)). Failure to file - 10% of FMV penalty (max $100,000 unless intentional disregard, then unlimited).
Alternative - stock transfer with GRA:
If instead USCo transferred stock of an existing US subsidiary to GmbH, and USCo is 5%+ shareholder of GmbH, USCo could enter a 5-year GRA to defer gain on the stock - recognizing gain only if GmbH disposes of the transferred stock within 5 years. Annual certification required.
| §367(b) Element | Detail |
|---|---|
| Scope §367(b)(1) | Transactions described in §332, §351, §354, §355, §356, §361 NOT involving outbound transfer to foreign corp - INBOUND (foreign to US) and foreign-to-foreign reorganizations |
| Purpose | Preserve US taxation of accumulated earnings and profits (E&P) of foreign corporations; coordinate with subpart F |
| All earnings and profits amount | On inbound liquidation/reorganization, US shareholder may include "all earnings and profits amount" as deemed dividend |
| §1248 coordination | §1248 recharacterizes gain on sale of CFC stock as dividend to extent of E&P; §367(b) ensures E&P not escaped on reorganization |
| PTEP coordination | Previously taxed E&P (from GILTI/subpart F inclusions) tracked through §367(b) transactions to avoid double tax |
| Inbound liquidation §332 | Foreign subsidiary liquidating into US parent - §367(b) requires inclusion of all E&P amount |
| Foreign-to-foreign §368 | Reorganization between two foreign corps owned by US shareholders - E&P and attributes preserved |
| Notice requirements | §367(b) notice attached to tax return; describes transaction and income inclusions |
| Reg §1.367(b)-1 through -13 | Extensive regulations on inbound/foreign-to-foreign mechanics, E&P, basis |
| GILTI/subpart F interaction | Post-TCJA NCTI (GILTI) regime changes how foreign E&P taxed; §367(b) coordinates with PTEP ordering |
| Form 926 Element | Detail |
|---|---|
| Title | Return by a US Transferor of Property to a Foreign Corporation |
| Authority §6038B | Required reporting of transfers to foreign corporations |
| Who files | US person (individual, corporation, partnership, trust, estate) transferring property to foreign corp in §367 transaction |
| Threshold | Generally required for transfers - cash transfers over $100,000 in 12-month period also reportable; stock/securities; any §367 transfer |
| Due date | Attached to transferor's income tax return for year of transfer (including extensions) |
| Content | Description of property; FMV; adjusted basis; gain recognized; transferee foreign corp details; type of nonrecognition transaction |
| Penalty §6038B(c) | 10% of FMV of property transferred; capped at $100,000 UNLESS failure due to intentional disregard (then no cap) |
| Statute of limitations extension §6501(c)(8) | Failure to file Form 926 keeps statute of limitations OPEN on entire return until 3 years after filing the missing information |
| Reasonable cause | Penalty abated if failure due to reasonable cause and not willful neglect |
| Coordination with GRA | Stock transfers with GRA still require Form 926 plus GRA statement under Reg §1.367(a)-8 |
TCJA REPEALED the active foreign trade or business exception under §367(a)(3) for transfers after December 31, 2017. Practitioner advising tax-free transfer of foreign business assets relies on dead law. Most outbound tangible property transfers now trigger gain.
Pre-TCJA foreign goodwill and going concern value were exempt from §367(d). TCJA expanded §367(d)(4) to INCLUDE goodwill, going concern value, and workforce in place. Practitioner treating foreign goodwill as exempt understates §367(d) inclusions.
Form 926 required for §367 transfers under §6038B. Failure penalty 10% of FMV (max $100,000 unless intentional). §6501(c)(8) keeps statute open on ENTIRE return. Practitioner omitting Form 926 exposes client to penalty and extended audit period.
5-year GRA requires ANNUAL certification attached to tax return. Practitioner failing to file annual statement triggers gain recognition. Calendar all 5 years of certification requirements.
Disposition of transferred stock or substantially all assets by foreign corp during 5-year period triggers retroactive gain plus interest. Practitioner not monitoring foreign corp's transactions misses triggering events.
§367(a) recognizes only GAIN item-by-item; loss property does NOT offset gain property. Practitioner netting gains and losses understates recognized gain.
Tangible property → §367(a) (gain recognition). Intangible property → §367(d) (annual deemed payments). Practitioner misclassifying intangibles as tangible (or vice versa) applies wrong regime. Mixed transfers require allocation.
§367(d) inclusions over useful life; goodwill/going concern with indefinite life uses 20-year default under regulations. Practitioner assuming no inclusions for goodwill misapplies post-TCJA rules.
§367(d) deemed payments must be commensurate with actual income from intangible; periodic adjustments required if income differs from projections. Practitioner using fixed projections without adjustment understates inclusions in high-income years.
Final regs (October 2024) address §367(d) when intangibles repatriated to US. Terminates inclusions; may trigger gain recognition. Practitioner unaware of repatriation regs misses planning opportunities and compliance requirements.
Inbound liquidation/reorganization of foreign corp requires inclusion of "all earnings and profits amount" as deemed dividend under §367(b). Practitioner treating inbound §332 liquidation as fully tax-free misses E&P inclusion.
Previously taxed E&P (from GILTI/subpart F) must be tracked through §367(b) transactions. Practitioner double-taxing PTEP or failing to preserve PTEP basis adjustments creates errors.
GRA requires Form 8838 consent to extend statute of limitations for GRA period. Practitioner omitting Form 8838 may invalidate GRA, triggering immediate gain.
Reg §1.367(a)-1(b)(3) - entering cost sharing arrangement under §1.482-7 is NOT a §367 transfer. Practitioner treating CSA buy-in as §367(d) transfer may misapply; though CSA platform contributions have own §482 rules.
Incorporating a foreign branch that previously generated losses deducted in US triggers branch loss recapture. Practitioner incorporating loss branch without recapture understates income.
Reg §1.367(a)-8(p) provides reasonable cause relief for late/defective GRA. Practitioner who missed GRA should pursue reasonable cause relief rather than concede gain; willful failure precludes relief.
Primary authority: IRC §367 (Foreign corporations). §367(a) (transfers of property from US to foreign corporation). §367(a)(1) (general rule - foreign corp not treated as corporation, gain recognized). §367(a)(2) (exceptions for certain stock or securities). §367(a)(3) (repealed active trade or business exception - TCJA P.L. 115-97 §14102, effective for transfers after December 31, 2017). §367(a)(3)(B) (tainted assets - inventory, receivables, foreign currency, historic). §367(a)(3)(C) (branch loss recapture). §367(a)(4) (special rules for transfers of partnership interests). §367(a)(5) (special rules for §361 transfers). §367(b) (other transfers - inbound and foreign-to-foreign). §367(b)(1) (regulatory authority for §332/§351/§354/§355/§356/§361 not covered by §367(a)). §367(d) (transfers of intangibles). §367(d)(1) (treated as sale for contingent payments). §367(d)(2) (commensurate with income standard; periodic adjustments). §367(d)(2)(A) (annual inclusions). §367(d)(4) (intangible property definition - patents, copyrights, goodwill, going concern value, workforce in place, customer lists, etc.). §367(e) (distributions under §355 and liquidations under §332). §367(e)(1) (§355 distributions to foreign persons). §367(e)(2) (§332 liquidations into foreign parent). §6038B (information reporting - transfers to foreign corporations and partnerships). §6038B(c) (penalty for failure - 10% of FMV, capped $100,000 unless intentional). §6501(c)(8) (statute of limitations open for unreported §6038B). §482 (allocation of income among related parties - transfer pricing; commensurate with income). §1248 (gain on sale of CFC stock recharacterized as dividend). §332 (subsidiary liquidation). §351 (transfer to controlled corporation). §354 (exchanges of stock in reorganization). §355 (distribution of controlled corporation stock). §356 (receipt of additional consideration - boot). §361 (nonrecognition for corporation in reorganization). §368 (reorganization definitions). §721 (partnership contribution - §367 analog for partnerships limited). §951A (GILTI / NCTI). Reg §1.367(a)-1 (transfers subject to §367(a) in general). Reg §1.367(a)-1(b)(3) (cost sharing arrangement not a transfer). Reg §1.367(a)-2 (exceptions for transfers of property for use in active conduct of trade or business - narrowed). Reg §1.367(a)-3 (treatment of transfers of stock or securities). Reg §1.367(a)-3(b) through (e) (GRA requirements for stock transfers). Reg §1.367(a)-3(c) (less than 5% shareholder rules). Reg §1.367(a)-8 (gain recognition agreement requirements). Reg §1.367(a)-8(j) (triggering events). Reg §1.367(a)-8(p) (reasonable cause relief). Reg §1.367(b)-1 through §1.367(b)-13 (inbound and foreign-to-foreign rules). Reg §1.367(d)-1 (transfers of intangible property). Reg §1.6038B-1 (reporting requirements). Treasury Decision 10009 (October 9, 2024 - §367(d) repatriation of intangibles final regulations). Tax Cuts and Jobs Act P.L. 115-97 §14102 (December 22, 2017 - repealed active trade or business exception; expanded intangible definition to include goodwill, going concern, workforce in place). Form 926 (Return by a US Transferor of Property to a Foreign Corporation). Form 8838 (Consent to Extend the Time to Assess Tax Under Section 367 - Gain Recognition Agreement). Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations).