IRS Announces Additional Revisions To “Anti-Inversion” Regulations Under Code Section 7874

On September 17, 2009, the Internal Revenue Service

("IRS") issued Notice 2009-78 ("Notice")

announcing its intention to issue additional regulations under the

"anti-inversion" rules of Section 7874 of the Internal

Revenue Code of 1986, as amended ("Code"). The most

recent previous guidance by the IRS under Code Section 7874 was

final and temporary regulations issued in June, 2009.1

The additional new regulations will incorporate the rules described

in the Notice that will identify certain stock of a foreign

corporation that is disregarded for determining ownership of the

foreign corporation in applying the anti-inversion rules.

Background

Generally, Code Section 7874 targets certain inversion

transactions that seek to avoid U.S. tax by merely shifting the

place of organization of a domestic corporation (or partnership) to

an offshore jurisdiction. Under current law, a foreign corporation

is generally treated as a "surrogate foreign corporation"

for this purpose if, pursuant to a plan (or a series of related

transactions), the following three conditions are satisfied:

(1) the foreign corporation directly or indirectly acquires

substantially all of the properties of a domestic corporation;

(2) after the acquisition, at least 60% of the stock (by vote or

value) of the foreign corporation is held by former shareholders of

the domestic corporation by reason of holding stock in the domestic

corporation; and

(3) after the acquisition, the expanded affiliated group

("EAG") (as defined in Code Section 7874(c)(1)) that

includes the foreign corporation does not have substantial business

activities in the foreign country in which, or under the laws of

which, the foreign corporation is created or organized, when

compared to the total business activities of the EAG.

Similar provisions apply to transactions involving the

acquisition by a foreign corporation of substantially all of the

properties constituting a trade or business of a domestic

partnership.

The U.S. tax consequences of surrogate foreign corporation

status depend upon the degree of ownership of the surrogate foreign

corporation by former shareholders of the domestic corporation. If

the former shareholders own at least 60% but less than 80%, the

inversion transaction is respected, but certain additional U.S. tax

burdens are imposed on the acquired domestic corporation and its

affiliates with respect to the inversion transaction itself,

certain related restructuring steps and transactions...