IRS Regs Kill Foreign Goodwill Exception

Final IRS Regs Kill Foreign Goodwill Exception, Curb Active Trade Exception

The IRS issued final regs that affect U.S. taxpayers who transfer property to foreign corporations in nonrecognition transactions.

The regs are aimed at preventing taxpayers from avoiding recognition of gains or income attributable to high-value intangible property by claiming that a large share of the transferred property’s value is foreign goodwill or of going concern value.

The regulations contain the following changes to Section 367 of the Internal Revenue Code:

  1. Eliminate the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception and eliminating the exception that provides that foreign goodwill and going concern value aren’t subject to Section 367(d).
  2. Allow taxpayers to apply the special rules relating to transfers of intangibles to certain property that would otherwise be subject to the provisions relating to transfers from the United States.
  3. Remove the 20-year limitation on useful life.
  4. Do away with the exception that permits certain property denominated in a foreign currency to qualify for the active trade or business exception.

The rules include a retroactive effective date for transfers on or after September 14.

For more information, contact Rick Gimbert Leader of Brady Ware’s International Tax Practice, at or 678.350.9518.

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