On October 10, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) published final regulations addressing the tax consequences under section 367(d) of repatriating certain intangible property (IP). The final rules closely track the proposed regulations released in May 2023, which established a detailed framework for terminating annual inclusions under section 367(d), if IP is repatriated to qualified U.S. persons. 

Consistent with the proposed rules, the final regulations apply only to dispositions of IP occurring on or after the final regulations were published in the Federal Register. Treasury and the IRS rejected numerous comments requesting that the rules apply to dispositions of IP occurring after the proposed regulations were released, concluding that retroactive application would heighten "administrative burden," and risk inequity between "similarly situated taxpayers" depending on "whether the relevant taxable year remains open for the taxpayer to amend their return to take advantage of the change." 

In addition to refraining from providing retroactive application, the preamble rejects the position that, under the existing statute and prior regulations, the "continued application of section 367(d)" would terminate when IP was transferred to the original U.S. transferor or a successor U.S. transferor. Instead, Treasury and the IRS posit that "this Treasury Decision provides the exclusive means by which the continued application of section 367(d) may be terminated by reason of a subsequent transfer of intangible property to a U.S. person." Under the Supreme Court's recent decision in Loper Bright v. Raimondo, statutes have a "single, best meaning" rather than a range of permissible interpretations, and it may be challenging for Treasury and IRS to persuade a court that section 367(d) yielded a different outcome for otherwise identical dispositions of IP before October 10, 2024. Any such dispute would likely hinge on the unchartered boundary between when rulemaking is an exercise of statutory interpretation and when rulemaking is a permissible exercise of an explicit delegation of authority (here, the preamble invokes the "express delegation" in section 367(d)(1)). 

In an effort to maintain the targeted scope of the rules, and thereby ensure that guidance was released on a timely basis, Treasury and the IRS declined to modify the rulemaking in response to comments on several additional issues. The final regulations continue to exclude domestic partnerships from the definition of a "qualified domestic person," even if each partner in the partnership would have been a qualified domestic person. In addition, the final regulations refrain from engaging on "broader issues under section 367(d)" including "uncertainty regarding the treatment of adjusted basis of intangible property subject to section 367(d)," during the period that section 367(d) applies. The preamble indicates that Treasury and the IRS may revisit certain issues in future rulemaking. 

For more information, please contact:

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Katherine Lewis, klewis@milchev.com, 202-626-5894

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