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deduction to capitalization is treated Takeaway To address this concern, Sec. 367(a)
as made with the IRS’s consent. This Technical questions concerning the (1) provides that a transfer of prop-
change would be made on a cutoff basis definition and treatment of R&E ex- erty from a U.S. person to a foreign
for costs paid or incurred as of the first penditures remain. The current lack of corporation (an outbound transfer)
day of the year of change, and no adjust- guidance from the IRS and Treasury in an exchange described in Sec. 332,
ment would be made to the treatment poses a challenge to taxpayers, who must 351, 354, 356, or 361 is treated as not
of prior years’ R&E costs. At least one make reasonable interpretations when made to a corporation for purposes of
case, however, has challenged the validity modeling the impact of the new rules determining whether the U.S. person
of similar legislative provisions allowing under Sec. 174 for purposes of financial recognizes gain on the transfer. Any
method changes without IRS consent statements and estimated tax payments. realized gain, therefore, is not afforded
(see Capital One Financial Corp., 659 From Emily Schenk, CPA, Washing- tax-deferred treatment.
F.3d 316 (4th Cir. 2011)). The IRS has ton, D.C. Certain exceptions may suspend the
removed Sec. 174 method changes from applicability of Sec. 367(a)(1) and make
the automatic procedures but is expected it possible to defer tax on a transfer of
to issue new procedural rules to effectu- Gains & Losses property from a U.S. person to a foreign
ate these changes. Guidance under Sec. corporation. For example, Sec. 367(a)(2)
174 is included in the IRS and Treasury Gain recognition agreements: allows tax deferral for outbound trans-
Priority Guidance Plan for 2021–2022. US corporation’s transfer of a fers of stock in a foreign corporation that is
Guidance also is needed to address foreign corporation followed a party to a reorganization. In addition,
other areas affected by the nondeduct- by the foreign corporation’s under Regs. Sec. 1.367(a)-3(b)(1), a U.S.
ibility of Sec. 174 costs. For example, disposition of its assets person’s outbound transfer of stock in a
Sec. 263A, which generally requires U.S. corporations regularly transfer foreign corporation to a foreign transfer-
taxpayers to capitalize all direct and property to subsidiaries in transactions ee corporation will not be subject to Sec.
allocable indirect costs to inventory or that qualify for tax-deferred treatment 367(a)(1)’s rule against tax deferral if (1)
self-constructed property, does not apply for U.S. federal income tax purposes (see, the U.S. person owns less than 5% of the
to an amount “allowable as a deduction e.g., Secs. 351 and 354). If a subsidiary total voting power and value of the stock
under Sec. 174.” The required capitaliza- to which property is transferred is a of the foreign transferee corporation
tion and amortization of Sec. 174 costs foreign corporation, however, there is immediately after the transfer (applying
makes it uncertain whether costs recov- a risk that untaxed appreciation in the certain attribution rules) or (2) the U.S.
ered as amortization are “allowable as a assets could permanently escape the tax person enters into a “gain recognition
deduction” for this purpose. jurisdiction of the United States. agreement” (GRA). The discussion

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