Reflections on Section 367(b) Regulations and Inbound Transactions

Cross-border combinations of U.S. and foreign public companies are unusual but happen from time to time. Our broad and often arbitrary anti-inversion rules discourage such transactions utilizing a foreign parent company for the combined group. But using a U.S. parent company can also be painful to the foreign company shareholders. Our section 367(b) regulations require gain recognition for the foreign company’s material shareholders subject to U.S. tax. That seems to be a high price to pay for the pleasure of bringing the foreign corporate group into the U.S. tax net. Much has been discussed and written about the section 367(b) regulations that compel this result since the regulation’s finalization in 2000 and especially since the enactment of the 2017 Tax Cuts and Jobs Act. This article reflects our exploration into what led the original regulation writers down the path they took and suggests that maybe they were wrong in their thinking. Our hope is that it will stimulate a broader discussion of the goals of the section 367(b) regulations as applied to inbound transactions and how they should be implemented in the current regime of section 245A deductions and GILTI and Subpart F inclusions.