New ‘Killer B’ Regulations Shed Little Light on Anti-Abuse Rules

Now that the Treasury Department and IRS have released final regulations attempting to rein in certain cross-border triangular reorganizations known as “Killer B” transactions, taxpayers have more clarity on one of the government’s latest attempts to pursue additional revenue.

However, the new rules still leave room for ambiguity when it comes to its anti-abuse provisions and details about the definition of a foreign subsidiary. Taxpayers and the tax professionals who serve them will need to be mindful of these two issues until and unless the government offers clarification.

Prior to the government’s guidance, taxpayers structured transactions so a foreign subsidiary would transfer funds to its direct US parent in return for newly issued parent stock. The taxpayer assumed that the receipt of funds by the parent weren’t taxable under tax code Section 1032. As part of the same plan, the subsidiary would exchange the recently acquired parent stock in return for target corporation stock, in an exchange that qualifies as a triangular reorganization under Section 368(a)(1)(B).

Regulations issued in 2011 made these transactions taxable, but taxpayers found ways to circumvent them. The IRS issued notices in 2014 and 2016 stating it would propose regulations, which it finally did in October 2023. The unresolved questions in the final regulations, issued July 17, are worth noting.

Anti-Abuse Provision

The final regulations retain the proposed anti-abuse provision, under which “appropriate adjustments” are made if, “in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose” of the regulations.

The regulations contain an example showing that earnings and profit of a subsidiary may be deemed to include earnings and profit of a related corporation.

In the preamble to the final regulations, the Treasury and IRS rejected a comment to narrow the application of the anti-abuse rule and stated the anti-abuse rule is intended to serve as a backstop to the rule where taxpayers attempt to structure around the application of the rules.

The preamble continues that such structuring may take many different forms and therefore the anti-abuse provisions shouldn’t be limited to a particular type of avoidance transaction nor to a specific adjustment, which effectively may modifying the application of the technical rules, including the priority rule.

The IRS and Treasury intentionally left open the types of transactions that might be “engaged in with a view to avoid the purpose” of the regulations, which leaves taxpayers uncertain as to its scope.

The examples are helpful, but the preamble makes clear that the examples aren’t exclusive types of transactions that can be abusive. It also left uncertain the types of adjustments (in addition to earnings and profit adjustments) that the government can make if a transaction is abusive.

As a result, taxpayers weren’t given guidance for:

• How to determine if parties engaged in a transaction with a view to avoid the rules
• Applying different types of transactions
• The types of adjustments that can be made

Without guidance, taxpayers can’t be certain that legitimate tax planning they may engage in doesn’t run afoul of this subjective requirement.

There also may be challenges to this new guidance following the US Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which limited the power of federal agencies to interpret the laws they administer. In striking down the landmark 1984 decision in Chevron v. NRDC, the court signaled that taxpayers could challenge final regulations.

This means relief may be especially justified for the vague anti-abuse rule that allows an IRS auditor to unilaterally overturn legitimate planning based solely on the auditor’s view that the planning was abusive.

Foreign Subsidiary Definition

When the IRS proposed the regulations, it said an excess asset basis could be created in a foreign parent to the extent that it transferred property from a foreign subsidiary to a foreign parent as part of a triangular reorganization.

To the extent an excess asset basis exists, the government considers a foreign parent to have received a distribution of “specified earnings” pro rata from all foreign subsidiaries.

The final regulations clarify the proposed regulation by stating that “the distribution is treated as being made through any intermediate owners, or directly from any constructively owned foreign subsidiaries, where applicable.”

By clarifying the definition of “foreign subsidiaries” that such subsidiaries include any constructively owned foreign subsidiaries, taxpayers will have to determine specified earnings of all 10% owned foreign entities in the structure—even if a foreign parent doesn’t own such subsidiaries.

This can create challenges for the calculation of the pro rata amount of specified earnings to all foreign entities related to a foreign parent. As a result, taxpayers may find themselves subject to these rules due to actions of companies they don’t directly own or control.

Due to the complexity and breadth of the constructive ownership rules, taxpayers need to fully understand the companies they invest in both directly and indirectly and may in turn be required to understand what companies they own. Preparing a comprehensive structure chart can help ensure no company is overlooked.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jason Sullivan is partner at Forvis Mazars focused on international and M&A tax issues.

Philip Hirschfeld is counsel at Buchanan Ingersoll & Rooney with extensive experience in corporate tax matters.

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