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International Transfers Of Property: The Tax Pitfalls To Look Out For
However, other proposed amendments intended to clarify and streamline the regulations were not adopted, leaving a few traps for the unwary. Taxand USA discusses the key updates which could take taxpayers by surprise.
Not subject to corporate-level tax? Keep reading: the section 367(a)(5) regulations could still apply to you
Despite the stated policy that Section 367(a)(5) is intended to preserve corporate-level gains, the Treasury Department and IRS declined to adopt recommendations from commentators to exempt special corporate entities, such as regulated investment companies (RICs), real estate investment trusts (REITs) and S corporations, from the application of Section 367(a)(5). The Government expressed concern that exempting special entities from Section 367(a)(5) may undermine the preservation of corporate-level tax.
Preservation of inside gain requires obliteration of outside stock loss - how could that be?
The Treasury Department and IRS believe that the amount of outside built-in gain or loss should not affect the required basis adjustments of the foreign corporation stock received in the transaction. Therefore, the final regulations require basis adjustments to both built-in gain shares and built-in loss shares. Without proper planning, taxpayers may find themselves in the unpleasant situation of realising (but not recognising) an outside stock loss in the reorganisation but ending up with built-in gain stock.
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