Final regulations – Failure to satisfy gain recognition agreements (GRAs) reporting requirements

November 18:  The Treasury Department and IRS today released for publication in the Federal Register final and temporary regulations (T.D. 9704) concerning the treatment of U.S. and foreign persons that fail to file gain recognition agreements (GRAs) or that fail to satisfy other reporting requirements associated with transfers of property to foreign corporations in non-recognition exchanges.

Today’s regulations [PDF 263 KB] finalize rules that were proposed in January 2013 with certain changes; amend temporary regulations issued in March 2013; and withdraw a GRA directive (LMSB-4-0510-017) issued by the then-named LMSB division in July 2010. These regulations will be published in the Federal Register on November 19, 2014.

Today’s final and temporary regulations concern the rules relating to the consequences for U.S. and foreign persons that fail to file GRAs or related documents, or that fail to satisfy other reporting obligations, associated with certain transfers of property to foreign corporations in non-recognition exchanges.

KPMG observation

A failure to file or report exposed the person to full gain recognition, which was viewed as a disproportionate consequence for the failure. Tax professionals note that in general, today’s regulations provide for a more proportionate failure-to-file penalty rather than full gain recognition, and that the salubrious nature of these regulations makes more tolerable their new procedural requirements.

Overview

Proposed regulations were issued in January 2013 under sections 367 and 6038B. Those proposed regulations are adopted with certain changes by today’s final regulations. Also, today’s release amends and removes a portion of the temporary regulations published in March 2013.

Among the changes included in today’s regulations:

Because the 2013 proposed regulations did not require a U.S. transferor to report on Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, any specific information regarding the transferred stock or securities, the preamble to today’s release explains that the IRS and Treasury have determined that the U.S. transferor must report on Form 926 the following information: (1) the fair market value; (2) the adjusted tax basis; (3) gain recognized with respect to the transferred stock or securities; and (4) any other information required to be submitted with respect to the transfer of the stock or securities.

In response to a comment requesting relief for certain failures of U.S. transferors to file a GRA document or to comply with the GRA provisions, the preamble explains that relief is being provided for certain failures to file that were not willful and that were the subject of requests for relief submitted under provisions of the then-existing final regulations before November 19, 2014.

Today’s final regulations include procedures by which U.S. transferors may resubmit certain previously filed requests (including requests that were denied). By submitting a previously filed request, a U.S. transferor agrees that these final regulations (under Reg. section 1.6038B-1) will apply to any transfer that is the subject of the request—thereby achieving a degree of parity between similarly situated U.S. transferors by providing that a U.S. transferor that establishes its failure was not willful is still subject to penalties under section 6038B if its failure was not due to reasonable cause.

Today’s regulations extend relief for failures that are not willful to certain other reporting obligations under section 367(a) that were not covered by the proposed regulations. Amendments are made to Reg. section 1.367(a)-2 (providing an exception to gain recognition under section 367(a)(1) for assets transferred outbound for use in the active conduct of a trade or business outside of the United States) and Reg. section 1.367(a)-7 (regarding application of section 367(a) to an outbound transfer of assets by a domestic target corporation in an exchange described in section 361) so that a taxpayer may—solely for purposes of section 367(a)—be deemed not to have failed to comply with these reporting obligations by demonstrating that the failure was not willful. With this, temporary regulations regarding reasonable cause relief are removed.

Today’s release also explains that the IRS and Treasury will study whether a Coordinated Industry Case (CIC) taxpayer may be excused from the requirement to file an amended return promptly after discovering a failure to file or a failure to comply. A comment suggested that CIC taxpayers be allowed to submit the materials when the taxpayer effects a “qualified amended return” under Rev. Proc. 94-69 (i.e., the special procedures for certain taxpayers to show additional tax due or make adequate disclosure with respect to an item or position on a tax return prior to an audit).