Treasury and the IRS announced in Notice 2014-32 that they will be making changes to the regulations under section 367 that were enacted to target so-call “Killer B” transactions.  The “Killer B” regulations were made final in 2011 and apply to certain triangular reorganizations in which a subsidiary (S) acquires stock in its parent corporation (P) and uses the stock in a triangular reorganization to acquire the stock or assets of a third corporation.  These transactions were intended to allow repatriation of funds from a foreign subsidiary to a U.S. parent without U.S. tax.  The final regulations in Treas. Reg. § 1.367(b)-10 generally require that S be treated as making a deemed distribution to P in an amount equal to the amount of property that was transferred by S to acquire the P stock, and that P be treated as making a deemed contribution to S in the same amount in a separate transaction.

In Notice 2014-32, Treasury and the IRS stated that they are aware that taxpayers are engaging in transactions designed to avoid U.S. tax by exploiting the deemed contribution provided under Treas. Reg. § 1.367(b)-10.  As a result, they will remove the deemed contribution rules under § 1.367(b)-10(b)(2) and (c)(2), and make other conforming changes to the final regulations. 

In addition, Notice 2014-32 states that Treasury and the IRS will make other changes to combat other perceived abuses.  Treasury and the IRS will modify the section 367(a) priority rule under § 1.367(b)-10 and the section 367(b) priority rule in Treas. Reg. § 1.367(a)-3(a)(2)(iv) to change the definition of section 367(b) income for purposes of determining whether section 367(a) or section 367(b) applies.  Treasury and the IRS will also modify the application of the no-U.S-tax exception in the rules under Treas. Reg. § 1.367(b)-10 to provide that this exception is not available if P is a controlled foreign corporation and will clarify that the no-U.S. tax exception will apply if a deemed distribution would not be treated as a dividend subject to U.S. tax (e.g., by reason of an applicable treaty or by reason of an absence of earnings and profits).  Finally, Treasury and the IRS will clarify the application of the anti-abuse rule in the final regulations to provide that the anti-abuse rule may apply to S’s acquisition of P stock or securities in exchange for a note and that under the anti-abuse rule the earnings and profits  of a corporation may be taken into account for purposes of determining the consequences of the adjustments provided in the final regulations regardless of whether such corporation is related to P or S before the triangular reorganization to which the regulations apply. 

The changes announced in Notice 2014-32 will be applied retroactively to today, the date of the notice.  The changes will not apply to certain transactions that were entered into pursuant to a binding written agreement before today and that meet other requirements.

The notice can be accessed via: Notice 2014-32