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TAX CLINIC

below examines the use of GRAs to GRA must provide that any future com- this contribution, FC2 and FC1 (by rea-
defer tax on the outbound transfer of plete or partial dispositions of the stock son of the newly issued shares of FSub1)
stock to a foreign corporation. (or partnership interest) received in the own all of the issued and outstanding
A GRA must disclose, among asset exchange shall constitute a trigger- shares of Fsub1.
other items, the manner in which the ing event for purposes of the new GRA The FC1 contribution of the FC1
outbound transfer occurred, the parties (see Regs. Sec. 1.367(a)-8(k)(4)). year 1 assets to Fsub1 is a triggering
involved, a calculation of the built-in event with respect to the initial FC1
gain in the transferred stock, and other Uncertainty regarding GRA under Regs. Sec. 1.367(a)-8(j)(2).
prescribed information (see generally application of ‘substantially all’ USCorp timely enters into a new GRA
Regs. Sec. 1.367(a)-8 (the GRA regula- Treasury and the IRS have significantly (the new FC1 GRA) in accordance with
tions)). Taxpayers must monitor future revised the rules relating to triggering the triggering event exception in Regs.
transactions involving the parties listed events and triggering event exceptions Sec. 1.367(a)-8(k)(4). The transaction is
in the GRA throughout its term, which over the years in light of taxpayer com- depicted in the diagram below.
is a period of 60 months following ments. However, uncertainty remains
the close of the tax year in which the regarding how “substantially all of the Transaction in the example
outbound transfer of stock occurs (the assets of the transferred corporation”
GRA term) (Regs. Sec. 1.367(a)-8(c)). should be determined in the context of
Step 1: Contribution of FC1
A GRA may terminate before the end the triggering event described in Regs.
stock to FC2
of the GRA term if the entire amount of Sec. 1.367(a)-8(j)(2). According to Regs. Contribution
of FC1
gain subject to the GRA is recognized, Sec. 1.367(a)-8(b)(1)(xii), “[t]he deter- shares
USCorp
certain transactions occur that are de- mination of whether substantially all of
(U.S.)
scribed in Regs. Sec. 1.367(a)-8(o), or the assets of the transferred corporation
a new GRA is entered into following a have been disposed of is based on all
triggering event. the facts and circumstances.” No further
FC1 FC2
guidance is provided, however, to under-
Triggering events and triggering stand precisely which assets should be (country X) (country Y)
event exceptions considered when applying this “facts and
Within the GRA term, certain transac- circumstances” standard for purposes of
FC1
tions may require that the gain deferred analyzing whether this triggering event (country X)
under a GRA be recognized (each, has occurred.
a triggering event) (see Regs. Secs.
1.367(a)-8(j)(1) through (10)). Excep- Example: In year 1, a U.S. corpora-
Step 2: Contribution of FC1
tions may be available for triggering tion (USCorp) contributes all the year 1 assets
events if certain conditions are satisfied stock of a country X corporation
(each, a triggering event exception) (see (FC1) to a country Y corporation
USCorp
Regs. Secs. 1.367(a)-8(k)(1) through (FC2) in a transaction that is de-
(U.S.)
(14)). scribed in Sec. 351 (the initial out-
The present discussion focuses on the bound transfer). The initial outbound
rule that a disposition of “substantially transfer is subject to gain recognition FC2
all” of the assets of a transferred corpora- under Sec. 367(a)(1), but USCorp (country Y)
tion is considered a triggering event timely enters into a GRA (the initial
and thus may require the gain deferred FC1 GRA).
under the GRA to be recognized (Regs. FC1
Sec. 1.367(a)-8(j)(2)). A triggering event In year 2, FC1 contributes all of the (country X)
exception may apply, however, if the assets that it held on the date of the
relevant assets are transferred to a corpo- initial outbound transfer (the FC1 year
Contribution
ration or partnership pursuant to an ex- 1 assets) to a country X corporation that of assets
change to which Sec. 351, 354 (but only is a wholly owned subsidiary of FC2
in a Sec. 368(a)(1)(B) reorganization), or (Fsub1) in exchange for newly issued Fsub1 Issuance
721 applies, provided that a “new” GRA shares of Fsub1 in a transaction that is (country X) of shares
is entered into. Specifically, the new described in Sec. 351. Immediately after

10 July 2022 The Tax Adviser