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IRS Regs on Failure to File Gain Recognition Agreements Relaxes Standards for Penalty Relief. (Parker Tax Publishing December 1, 2014)

The IRS has issued final and temporary regulations relaxing the existing reasonable cause standard for obtaining relief from penalties for failure to timely file an initial gain recognition agreement (GRA), or to satisfy other reporting obligations associated with certain transfers of property to foreign corporations in nonrecognition exchanges. The regulations, which finalize proposed regulations issued last year, affect U.S. persons that transfer property to foreign corporations. T.D. 9704 (11/19/14).

According to the IRS, the existing reasonable cause standard may not be satisfied by U.S. transferors in many common situations even though the failure was not intentional and not due to willful neglect. The IRS believes that full gain recognition under Code Sec. 367(a)(1) should apply only if a failure to timely file an initial GRA or a failure to comply with the Code Sec. 367(a) GRA regulations with respect to an existing GRA is willful. The IRS further believes that the penalty imposed by Code Sec. 6038B generally should be sufficient to encourage proper reporting and compliance.

Accordingly, the IRS has issued final and temporary regulations that provide that a U.S. transferor seeking either to (1) avoid recognizing gain under Code Sec. 367(a)(1) on the initial transfer as a result of a failure to timely file an initial GRA, or (2) avoid triggering gain as a result of a failure to comply in all material respects with the GRA regulations or the terms of an existing GRA, must demonstrate that the failure was not a willful failure. For this purpose, willful is to be interpreted consistent with the meaning of that term in the context of other civil penalties (for example, Code Sec. 6672), which would include a failure due to gross negligence, reckless disregard, or willful neglect. Whether a failure is willful will be determined based on all the relevant facts and circumstances. For example, the GRA regulations require a GRA to include information about the adjusted basis and fair market value of the property transferred. Filing a GRA and intentionally not providing such information, including noting on the GRA that this information is ''available upon request,'' would be a willful failure.

In addition, the regulations modify the process through which requests for relief from a failure to file or a failure to comply are evaluated by eliminating the requirement for the IRS to respond to such relief requests within 120 days.

The regulations clarify that the Code Sec. 6038B penalty will apply to a failure to comply in any material respect with the Code Sec. 367(a) GRA regulations or the terms of an existing GRA, such as a failure to properly file a GRA document (including an annual certification or new GRA). Under the regulations, a failure to comply would have the same meaning for purposes of the Code Sec. 367(a) GRA regulations and the Code Sec. 6038B regulations; however, the current reasonable cause standard will continue to apply to U.S. transferors seeking relief from the Code Sec. 6038B penalty.

In addition, the Code Sec. 6038B penalty will continue to apply, as provided under the current Code Sec. 6038B regulations, if both (1) a Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is not filed with respect to the initial transfer, and (2) there is a failure to file an initial GRA. In this case, the current reasonable cause standard would continue to apply to U.S. transferors seeking relief from the Code Sec. 6038B penalty.

Compared with the 2013 proposed regulations, the final regulations require more detailed information with respect to a transfer of stock or securities to be reported on Form 926. The U.S. transferor must report on the Form 926 the fair market value, adjusted tax basis, and gain recognized with respect to the transferred stock or securities, as well as any other information that the form, its accompanying instructions, or other applicable guidance requires.

As in the proposed regulations, the final regulations provide rules similar to those that apply to to GRAs for (1) failures to file the required documents or statements and otherwise comply with the regulations under Code Sec. 367(e)(2) (relating to liquidating distributions to foreign parent corporations) and related Code Sec. 6038B regulations and (2) failures to file certain other statements required under Reg. Sec. 1.367(a)3 in connection with certain transfers of stock or securities to foreign corporations.

In addition, the final regulations extend relief for failures that are not willful to certain other reporting obligations under Code Sec. 367(a) that were not covered by the proposed regulations. Specifically, Reg. Sec. 1.367(a)2 (providing an exception to gain recognition under Code Sec. 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. Sec. 1.367(a)7 (regarding application of Code Sec. 367(a) to an outbound transfer of assets by a domestic target corporation in an exchange described in Code Sec. 361) are revised so that a taxpayer may, solely for purposes of Code Sec. 367(a), be deemed not to have failed to comply with reporting obligations under Reg. Secs. 1.367(a)2 and 1.367(a)7 by demonstrating that the failure was not willful.

The new regulations are generally effective on November 19, 2014. and generally apply to documents required to be filed on or after that date. However, Reg. Sec. 1.367(a)-7 applies to transfers occurring on or after April 18, 2013 (with certain exceptions discussed in Reg. Sec. 1.367(a)-7(j)).

For a discussion of gain recognition agreements see Parker Tax ¶47,460. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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