Academic journal article Journal of Accountancy

The IRS Closes Another Tax Loophole

Academic journal article Journal of Accountancy

The IRS Closes Another Tax Loophole

Article excerpt

Transfers of domestic corporations' stock to foreign corporations no longer are tax-free if the U.S. transferors collectively own more than 50% of the stock.

Tax code section 367(a) covers nonrecognition transactions involving transfers by U.S. individuals to foreign corporations. Even if a transaction appears to be tax-free (for example, under Internal Revenue Code section 351 or its reorganization provisions), the involvement of a foreign corporation makes it taxable.

According to notice 87-85, however, a transfer of stock to a foreign corporation by a U.S. individual is not taxable even if he or she (1) owns less than 5% of the foreign company's stock or (2) owns 5% or more of the foreign corporation's stock but executes a gain-recognition agreement. In the latter case, the tax exemption is predicated on the U.S. transferee's agreement not to sell the U.S. corporation's stock for a specified period of time--typically, 5 to 10 years, depending on the U.S. transferors' level of ownership as a group.

Helen of Troy Corp. was a Texas corporation until it reincorporated as a Bermuda company in February 1994 and changed its name to Helen of Troy Ltd. Since the original Helen of Troy's operations were, for the most part, conducted overseas, its subsidiaries were considered controlled foreign corporations (CFCs). …

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