26 C.F.R. § 1.367(a)-4T Special rules applicable to specified transfers of property (temporary).
Title 26 - Internal Revenue
(a) In general. This section provides special rules for determining the applicability of section 367(a)(1) to specified transfers of property. Paragraph (b) of this section provides a special rule requiring the recapture of depreciation upon the transfer abroad of property previously used in the United States. Paragraphs (c) through (f) of this section provide rules for determining whether certain types of property are transferred for use in the active conduct of a trade or business outside of the United States. Paragraph (g) excepts certain transfers to FSCs from the operation of section 367(a)(1). The treatment of any transfer of property described in this section shall be determined exclusively under the rules of this section. (b) Depreciated property used in the U.S.—(1) In general. If a U.S. person transfers U.S. depreciated property (as defined in paragraph (b)(2) of this section) to a foreign corporation in an exchange described in section 367(a)(1), then that person shall include in its gross income for the taxable year in which the transfer occurs ordinary income equal to the gain realized that would have been includible in the transferor's gross income as ordinary income under section 617(d)(1), 1245(a), 1250(a), 1252(a), or 1254(a), whichever is applicable, if at the time of the transfer the transferor had sold the property at its fair market value. Recapture of depreciation under this paragraph (b) shall be required regardless of whether any exception to section 367(a)(1) (such as the exception for property transferred for use in the active conduct of a foreign trade or business) would otherwise apply to the transfer. However, any applicable exception shall apply with respect to realized gain that is not included in ordinary income pursuant to this paragraph (b). (2) U.S. depreciated property. U.S. depreciated property subject to the rules of this paragraph (b) is any property that— (i) Is either mining property (as defined in section 617(f)(2)), section 1245 property (as defined in section 1245(a)(3)), section 1250 property (as defined in section 1250(c)), farm land (as defined in section 1252(a)(2)), or oil, gas, or geothermal property (as defined in section 1254(a)(3)); and (ii) Has been used in the United States or has qualified as section 38 property by virtue of section 48(a)(2)(B) prior to its transfer. (3) Property used within and without the U.S. If U.S. depreciated property has been used partly within and partly without the United States, then the amount required to be included in ordinary income pursuant to this paragraph (b) shall be reduced to an amount determined in accordance with the following formula: For purposes of the above fraction, the full recapture amount is the amount that would otherwise be included in the transferor's income under paragraph (b)(1) of this section. U.S. use is the number of months that the property either was used within the United States or qualified as section 38 property by virtue of section 48(a)(2)(B), and was subject to depreciation by the transferor or a related person. Total use is the total number of months that the property was used (or available for use), and subject to depreciation, by the transferor or a related person. For purposes of this paragraph (b)(3), property shall not be considered to have been in use outside of the United States during any period in which such property was, for purposes of section 48 or 168, treated as property not used predominantly outside the United States pursuant to the provisions of section 48(a)(2)(B). For purposes of this paragraph (b)(3) the term related person shall have the meaning set forth in §1.367(d)–1T(h). (4) [Reserved] (5) Effective date. This paragraph (b) applies to transfers occurring on or after June 16, 1986. (c) Property to be leased—(1) Leasing business of transferee. Tangible property transferred to a foreign corporation that will be leased to other persons by the foreign corporation shall be considered to be transferred for use in the active conduct of a trade or business outside of the United States only if— (i) The transferee's leasing of the property constitutes the active conduct of a leasing business; (ii) The lessee of the property is not expected to, and does not, use the property in the United States; and (iii) The transferee has need for substantial investment in assets of the type transferred. The active conduct of a leasing business requires that the employees of the foreign corporation perform substantial marketing, customer service, repair and maintenance, and other substantial operational activities with respect to the transferred property outside of the United States. Tangible property subject to the rules of this paragraph (c) includes real property located outside of the United States. The rules of §1.367(a)–5T(b) shall apply to transfers of property described in that section regardless of satisfaction of the rules of this paragraph (c). (2) De minimis leasing by transferee. Tangible property transferred to a foreign corporation that will be leased to other persons by the foreign corporation and that does not satisfy the conditions of paragraph (b)(1) of this section shall, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if either— (i) The property transferred will be used by the transferee foreign corporation in the active conduct of a trade or business but will be leased during occasional brief periods when the property would otherwise be idle, such as an airplane leased during periods of excess capacity; or (ii) The property transferred is real property located outside the United States and— (A) The property will be used primarily in the active conduct of a trade or business of the transferee foreign corporation; and (B) Not more than ten percent of the square footage of the property will be leased to others. (d) Property to be sold. Property shall not be considered to be transferred for use in the active conduct of a trade or business and a transfer of stock or securities shall not be excepted from section 367(a)(1) under the rules of §1.367(a)–3T if, at the time of the transfer, it is reasonable to believe that, in the reasonably foreseeable future, the transferee will sell or otherwise dispose of any material portion of the transferred stock, securities, or other property other than in the ordinary course of business. (e) Oil and gas working interests—(1) In general. A working interest in oil and gas properties shall be considered to be transferred for use in the active conduct of a trade or business if— (i) The transfer satisfies the conditions of paragraph (e)(2) of this section; (ii) At the time of the transfer, the transferee has no intention to farmout or otherwise transfer any part of the transferred working interest; and (iii) During the first three years after the transfer there are no farmouts or other transfers of any part of the transferred working interest as a result of which the transferee retains less than a 50 percent share of the transferred working interest. (2) Active use of working interest. Working interests in oil and gas properties shall be considered to be transferred for use in the active conduct of a trade or business if— (i) The transferor is regularly and substantially engaged in exploration for and extraction of minerals, either directly or through working interests in joint ventures, other than by reason of the property that is transferred; (ii) The terms of the working interest transferred were actively negotiated among the joint venturers; (iii) The working interest transferred constitutes at least a five percent working interest; (iv) Prior to and at the time of the transfer, through its own employees or officers, the transferor was regularly and actively engaged in— (A) Operating the working interest, or (B) Analyzing technical data relating to the activities of the venture; (v) Prior to and at the time of the transfer, through its own employees or officers, the transferor was regularly and actively involved in decisionmaking with respect to the operations of the venture, including decisions relating to exploration, development, production, and marketing; and (vi) After the transfer, the transferee foreign corporation will for the foreseeable future satisfy the requirements of subdivisions (iv) and (v) of this paragraph (d)(2). (3) Start-up operations. Working interests in oil and gas properties that do not satisfy the requirements of paragraph (e)(2) of this section shall, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if— (i) The working interest was acquired by the transferor immediately prior to the transfer and for the specific purpose of transferring it to the transferee foreign corporation; (ii) The requirements of paragraph (e)(2)(ii) and (iii) of this section are satisfied; and (iii) The transferee foreign corporation will for the foreseeable future satisfy the requirements of paragraph (e)(2)(iv) and (v) of this section. (4) Other applicable rules. Oil and gas interests not described in this paragraph (e) may nonetheless qualify for the exception to section 367(a)(1) contained in §1.367(a)–2T, relating to transfers of property for use in the active conduct of a trade or business outside of the United States. However, a mere royalty interest in oil and gas properties will not be treated as transferred for use in the active conduct of a trade or business outside the United States. Moreover, a royalty or similar interest that constitutes intangible property will be subject to the rules of §1.367(d)–1T, relating to transfers of intangible property. (f) Compulsory transfers. Property shall be presumed to be transferred for use in the active conduct of a trade or business outside of the United States, if— (1) The property was previously in use in the country in which the transferee foreign corporation is organized; and (2) The transfer is either: (i) Legally required by the foreign government as a necessary condition of doing business in that country; or (ii) Compelled by a genuine threat of immediate expropriation by the foreign government. (g) Relationship to other sections. The rules of §§1.367(a)–5T, 1.367(a)–6T, and 1.367(d)–1T apply to transfers of property whether or not the property is transferred for use in the active conduct of a trade or business outside the United States. See §1.367(d)–1T(g)(2)(ii) for a special election with respect to compulsory transfers of intangible property. (h) Transfers of certain property to FSCs—(1) In general. The provisions of section 367 (a) and (d) and the regulations thereunder shall not apply to a transfer of property by a U.S. person to a foreign corporation that constitutes a FSC, as defined in section 922(a), if— (i) The transferee FSC uses the property to generate exempt foreign trade income, as defined in section 923(a); (ii) The property is not excluded property, as defined in section 927(a)(2); and (iii) The property consists of a corporate name or tangible property that is appropriate for use in the operation of a FSC office. (2) Exception. The general rule in paragraph (g)(1) of this section shall not apply if, within three years after the original transfer, the original transferee FSC (or a subsequent transferee FSC) disposes of the property other than in the ordinary course of business or through a transfer to another FSC. Thus, the U.S. transferor may recognize gain in the taxable year in which the original transfer occurred through the application of section 367 and the regulations thereunder. [T.D. 8087, 51 FR 17947, May 16, 1986, as amended by T.D. 8515, 59 FR 2960, Jan. 20, 1994]
Title 26: Internal Revenue
PART 1—INCOME TAXES
effects on corporation
§ 1.367(a)-4T Special rules applicable to specified transfers of property (temporary).
U.S. use Full recapture amount X ------------- Total use----------------------------------------------------------------------------------------------------------------
