Anti-abuse rule may include target earnings in triangular reorganization dividend

Plain-English summary

An examination team planned to challenge a taxpayer's calculation of a deemed distribution arising from a triangular reorganization under Treasury Regulation section 1.367(b)-10. The taxpayer counted only the acquiring corporation's current earnings and profits when determining how much of the distribution was a dividend. The examination team proposed applying the regulation's anti-abuse rule to also count the target's accumulated earnings and profits. Chief Counsel supported that approach, which would increase the deemed dividend and related withholding tax by taking all relevant U.S. earnings and profits into account. The office offered to help draft the notice of proposed adjustment and defend the position if challenged.

Ruling snapshot

• Question: Could the section 1.367(b)-10 anti-abuse rule require target accumulated earnings and profits to be included in the deemed dividend from a triangular reorganization?
• Outcome: Advice given: yes, Chief Counsel supported including the target's accumulated earnings and profits
• Key authorities: Treas. Reg. § 1.367(b)-10(d)

Full text (IRS public release)

ID: CCA_2015061715355033 [Third Party Communication:

UILC: 367.06-07 Date of Communication: Month DD, YYYY]

Number: 201530020
Release Date: 7/24/2015
From:
Sent: Wednesday, June 17, 2015 3:35:50 PM
To:
Cc:
Bcc:
Subject: - case

-----------and ----------,

We understand that the exam team for ------------------------. intends to challenge the
taxpayer’s reporting of a deemed distribution to its new -----parent corporation under
Treas. Reg. section 1.367(b)-10 in connection with -------------------------------combination
with -------------------------. In this transaction, a newly formed domestic subsidiary of the -
-----parent acquired ------------------------. in exchange for stock of the -----parent. The
taxpayer’s position is that only the current earnings and profits of the acquiring
corporation for the taxable year ending December 31, -------are taken into account in
determining the amount of the deemed distribution that is a dividend. The exam team
intends to challenge the taxpayer’s position under the “anti-abuse” rule of Treas. Reg.
section 1.367(b)-10(d). Treas. Reg. section 1.367(b)-10(d) provides in part that
“[a]ppropriate adjustments shall be made pursuant to this section if, in connection with a
triangular reorganization, a transaction is engaged in with a view to avoid the purpose of
this section.” The exam team intends to assert that the accumulated earnings and
profits of the target (------------------------.) also must be taken into account in determining
the amount of the deemed distribution that is a dividend.

As our attorneys have indicated previously, ACCI supports Exam’s proposed application
of the anti-abuse rule in Treas. Reg. section 1.367(b)-10(d), under which the amount of
the -----parent’s deemed dividend (and withholding tax) would be measured taking into
account all of ----------------------U.S. earnings and profits (including the accumulated
earnings and profits of the target). ACCI will assist the exam team and field counsel in
drafting the NOPA that describes this adjustment, and will support them if the taxpayer
challenges it.

Please let us know if you would like to discuss further.

Thanks,