Two Potential Strategies to Avoid the Section 367 “Toll Charge” on the Outbound Transfer of Intellectual Property
By Anthony Diosdi In response to changing business conditions, U.S. corporations routinely organize new subsidiaries and divide, merge, and liquidate existing subsidiaries. These routine corporate adjustments generally are tax-free transactions, based on the principle that the transactions involve a change in the form of the corporation’s investment, not the parent corporation’s ultimate control of the investment. For example, in a wholly-domestic context, if a domestic corporation transfers appreciated property to a newly-organized subsidiary in exchange for all the shares of that subsidiary, the gain on that exchange is not recognized immediately, but instead postponed by having the subsidiary take a carryover basis in the property received. See IRC Section 351(a) and 362. However, if the subsidiary is a foreign corporation, then the ultimate disposition of the appreciated property may occur…