[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.367(d)-1T]

[Page 313-320]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.367(d)-1T  Transfers of intangible property to foreign corporations 
(temporary).

    (a) Purpose and scope. This section provides rules under section 
367(d) concerning transfers of intangible property by U.S. persons to 
foreign corporations pursuant to section 351 or 361. Paragraph (b) of 
this section specifies the transfers that are subject to section 367(d) 
and the rules of this section, while paragraph (c) provides rules 
concerning the consequences of such a transfer. In general, the U.S. 
transferor will be treated as receiving annual payments contingent on 
productivity or use of the transferred property, over the useful life of 
the property (regardless of whether such payments are in

[[Page 314]]

fact made by the transferee). Paragraphs (d), (e), and (f) of this 
section provide rules for cases in which there is a later direct or 
indirect disposition of the intangible property transferred. In general, 
deemed annual license payments will continue if a transfer is made to a 
related person, while gain must be recognized immediately if the 
transfer is to an unrelated person. Paragraph (g) of this section 
provides several special rules, including a rule allowing appropriate 
adjustments where deemed payments under section 367(d) are not in fact 
received by the U.S. transferor of the intangible property, and a rule 
providing for a limited election to treat certain transfers of 
intangible property as sales at fair market value (in lieu of applying 
the general useful life-contingent payment rule). In addition, paragraph 
(g) of this section provides rules coordinating the application of 
section 367(d) with other relevant Code sections. Paragraph (h) of this 
section defines the term related person for purposes of this section. 
Finally, paragraph (i) of this section provides the effective date of 
this section. For rules concerning transfers of intangible property 
pursuant to section 332, see Sec. 1.367(a)-5T(e). For purposes of 
determining whether a U.S. person has made a transfer of intangible 
property that is subject to the rules of section 367(d), the rules of 
Sec. 1.367(a)-1T(c) shall apply.
    (b) Intangible property subject to section 367(d). Section 367(d) 
and the rules of this section shall apply to the transfer of any 
intangible property, as defined in Sec. 1.367(a)-1T(d)(5)(i). However, 
section 367(d) and the rules of this section shall not apply to the 
transfer of foreign goodwill or going concern value, as defined in 
Sec. 1.367(a)-1T(d)(5)(iii), or to the transfer of intangible property 
described in Sec. 1.367(a)-5T(b)(2). However, the transfer of those 
items to a foreign corporation is subject to the rules set forth in 
Sec. 1.367(a)-6T, and the transfer of intangible property described in 
Sec. 1.367(a)-5T(b)(2) is subject to the rules set forth in Sec. 
1.367(a)-5T. For a special rule relating to the transfer of operating 
intangibles, as defined in Sec. 1.367(a)-1T(d)(5)(ii), see paragraph 
(g)(3) of this section. Transfers of intangible property to foreign 
corporations pursuant to section 351 or 361 are subject to the rules of 
this section regardless of whether the property is to be used in the 
United States, in connection with goods to be sold or consumed in the 
United States, or in connection with a trade or business outside the 
United States.
    (c) Deemed payments upon transfer of intangible property to foreign 
corporation--(1) In general. If a U.S. person transfers intangible 
property that is subject to section 367(d) and the rules of this section 
to a foreign corporation in an exchange described in section 351 or 361, 
then such person shall be treated as having transferred that property in 
exchange for annual payments contingent on the productivity or use of 
the property. Such person shall, over the useful life of the property, 
annually include in gross income an amount that represents an 
appropriate arms-length charge for the use of the property. The 
appropriate charge shall be determined in accordance with the provisions 
of section 482 and regulations thereunder. See Sec. 1.482-2(d). The 
amount of the deemed payment thus calculated shall be reduced by any 
royalty or other periodic payment made or accrued by the transferee to 
an unrelated person during that taxable year for the right to use the 
intangible property. Amounts so included in the transferor's income 
shall be treated as ordinary income from sources within the United 
States. For purposes of computing estimated tax payments, deemed 
payments under this paragraph (c) shall be treated as received by the 
transferor on the last day of its taxable year.
    (2) Required adjustments. The following adjustments shall be made 
with respect to a U.S. person's recognition of a deemed payment for the 
use of intangible property under this paragraph (c):
    (i) For purposes of chapter 1 of the Code, the earnings and profits 
of the transferee foreign corporation shall be reduced by the amount of 
such deemed payment; and
    (ii) For purposes of subpart F of part III of subchapter N of the 
Code, the transferee foreign corporation may treat such deemed payment 
as an expense (whether or not that amount is

[[Page 315]]

actually paid), properly allocated and apportioned to gross income 
subject to subpart F, in accordance with the provisions of Sec. Sec. 
1.954-1(c) and 1.861-8.

No other special adjustments to earning the profits, basis, or gross 
income shall be permitted by reason of the recognition of a deemed 
payment under this paragraph (c). However, see paragraph (g)(1) of this 
section for rules permitting the establishment of an account receivable 
with respect to deemed payments not actually received by the U.S. 
person.
    (3) Useful life. For purposes of this section, the useful life of 
intangible property is the entire period during which the property has 
value. However, in no event shall the useful life of an item of 
intangible property be considered to exceed twenty years. If intangible 
property derives its value from secrecy or from protections afforded by 
law, the useful life of such property shall terminate when the property 
is no longer secret or no longer legally protected.
    (4) Blocked income. No deemed payment included in a taxpayer's 
income under paragraph (c)(1) of this section shall be treated as 
deferrable income for purposes of applying rules relating to blocked 
foreign income. See Revenue Ruling 74-351, 1974-2 C.B. 144.
    (d) Subsequent transfer of stock of transferee foreign corporation 
to unrelated person--(1) Treatment as sale of intangible property. If a 
U.S. person transfers intangible property that is subject to section 
367(d) and the rules of this section to a foreign corporation in an 
exchange described in section 351 or 361, and within the useful life of 
the intangible property that U.S. transferor subsequently disposes of 
the stock of the transferee foreign corporation to a person that is not 
a related person (within the meaning of paragraph (h) of this section), 
then the U.S. transferor shall be treated as having simultaneously sold 
the intangible property to the person acquiring the stock of the 
transferee foreign corporation. The U.S. transferor shall be required to 
recognize gain (but not loss) from sources within the United States in 
an amount equal to the difference between the fair market value of the 
transferred intangible property on the date of the subsequent 
disposition and the U.S. transferor's former adjusted basis in that 
property (determined as of the original transfer). If the U.S. 
transferor's disposition of the stock of the transferee foreign 
corporation is subject to U.S. tax other than by reason of this 
paragraph (d), then the amount of gain otherwise required to be 
recognized with respect to the stock of the transferee foreign 
corporation shall be reduced by the amount of gain recognized with 
respect to the intangible property pursuant to this paragraph (d).
    (2) Required adjustments. If a U.S. person disposes of the stock of 
a transferee foreign corporation, and under paragraph (d)(1) of this 
section is treated as having simultaneously sold intangible property, 
then, for purposes of computing basis and earnings and profits, the 
person acquiring the stock of the transferee foreign corporation shall 
be deemed to have purchased that property at fair market value and to 
have immediately thereafter contributed it to the transferee foreign 
corporation in a transaction not covered by section 367(d). Therefore, 
for purposes of chapter 1 of the Code--
    (i) The transferee foreign corporation's basis in the intangible 
property will be equal to its fair market value (as calculated for 
purposes of determining the gain required to be recognized by the U.S. 
transferor);
    (ii) The acquiring person's basis in the stock of the transferee 
foreign corporation shall be determined as if no portion of the 
consideration given by the acquiring person for the stock is 
attributable to the intangible property; and
    (iii) The earnings and profits of the transferee foreign corporation 
will not be affected by the transfer of its stock or the deemed transfer 
to it of the intangible property.
    (e) Subsequent transfer of stock of transferee foreign corporation 
to related person--(1) Transfer to related U.S. person treated as 
disposition of intangible property. If a U.S. person transfers 
intangible property that is subject to section 367(d) and the rules of 
this section to a foreign corporation in an exchange described in 
section 351 or 361 and, within the useful life of the transferred 
intangible property, that U.S.

[[Page 316]]

transferor subsequently transfers the stock of the transferee foreign 
corporation to U.S. persons that are related to the transferor within 
the meaning of paragraph (h) of this section, then the following rules 
shall apply:
    (i) Each such related U.S. person shall be treated as having 
received (with the stock of the transferee foreign corporation) a right 
to receive a proportionate share of the contingent annual payments that 
would otherwise be deemed to be received by the U.S. transferor under 
paragraph (c) of this section.
    (ii) Each such related U.S. person shall, over the useful life of 
the property, annually include in gross income a proportionate share of 
the amount that would have been included in the income of the U.S. 
transferor pursuant to paragraph (c) of this section. Such amounts shall 
be treated as ordinary income from sources within the United States.
    (iii) The amount of income required to be recognized by the U.S. 
transferor pursuant to the rule of paragraph (d)(1) of this section 
shall be reduced to the amount determined in accordance with the 
following formula:

(d)(1) amountx(100%-(e) percentage)


For purposes of the above formula, the (d)(1) amount is the income that 
would otherwise be required to be recognized by the transferor 
corporation pursuant to paragraph (d)(1) of this section, and the (e) 
percentage is the percentage of the transferor corporation's total 
deemed rights to receive contingent annual payments under paragraph (c) 
of this section that is deemed to be transferred to related U.S. persons 
under the rules of this paragraph (e).
    (iv) The rules of paragraphs (d) and (e) of this section shall be 
reapplied in the case of any later transfer of the stock of the 
transferee foreign corporation by a related U.S. person that received 
such stock in a transfer that was subject to the rules of this paragraph 
(e). For purposes of reapplying the rules of paragraphs (d) and (e), 
each such related U.S. person shall be treated as a U.S. transferor of 
intangible property to the transferee foreign corporation (to the extent 
of the interest attributed to such person pursuant to subdivision (i) of 
this paragraph (e)(1)).
    (2) Required adjustments. If a U.S. person transfers stock of a 
transferee foreign corporation to a U.S. related person in a transaction 
that is subject to the rules of paragraph (e)(1) of this section, the 
following adjustments shall be made:
    (i) For purposes of chapter 1 of the Code, the earnings and profits 
of the transferee foreign corporation shall be reduced by the amount of 
any payment deemed to be received by a related U.S. person under 
paragraph (e)(1)(ii) of this section;
    (ii) For purposes of subpart F of part III of subchapter N of the 
Code, the transferee foreign corporation may allocate and apportion such 
deemed payments (whether or not such payments are actually made to gross 
income subject to subpart F to the extent appropriate under the 
provisions of Sec. Sec. 1.954-1(c) and 1.861-8;
    (iii) For purposes of reapplying the rules of paragraph (d) and (e) 
of this section, if the related U.S. person is deemed to have received a 
right to contingent annual payments for the use of intangible property, 
then the U.S. related person shall be deemed to have held a 
proportionate share of the property with a basis equal to a 
proportionate share of the U.S. transferor's adjusted basis plus the 
gain, if any, recognized by the U.S. transferor on the earlier transfer 
of the stock to the U.S. related person, and then to have transferred 
that proportionate share of the property to the foreign corporation in a 
transfer subject to section 367(d); and
    (iv) If the U.S. transferor is itself required to recognize gain 
upon the transfer by reason of the operation of paragraphs (d)(1) and 
(e)(1)(iii) of this section (because stock of the transferee foreign 
corporation is also transferred to unrelated persons), then those 
unrelated persons shall be deemed to have purchased a proportionate 
share of the transferred intangible property at fair market value and 
immediately contributed that property to the transferee foreign 
corporation, consistent with the general rule of paragraph (d)(2) of 
this section concerning transfers of

[[Page 317]]

stock to unrelated persons. Therefore, for purposes of chapter 1 of the 
Code--
    (A) Each unrelated person's basis in the stock of the transferee 
foreign corporation shall be increased to the extent of the gain 
recognized by the U.S. transferor upon the deemed purchase of intangible 
property by that person; and
    (B) The transferee foreign corporation will receive an increase in 
its basis in the transferred intangible property equal to the fair 
market value of that portion of the intangible property deemed to be 
contributed to the transferee foreign corporation by unrelated persons 
(as calculated for purposes of determining the gain required to be 
recognized by the U.S. transferor).
    (3) Transfer to related foreign person not treated as disposition of 
intangible property. If a U.S. person transfers intangible property that 
is subject to section 367(d) and the rules of this section to a foreign 
corporation in an exchange described in section 351 or 361, and within 
the useful life of the transferred intangible property, that U.S. 
transferor subsequently transfers any of the stock of the transferee 
foreign corporation to one or more foreign persons that are related to 
the transferor within the meaning of paragraph (h) of this section, then 
the U.S. transferor shall continue to include in its income the deemed 
payments described in paragraph (c) of this section in the same manner 
as if the subsequent transfer of stock had not occurred. The rule of 
this paragraph (e)(3) shall not apply with respect to the subsequent 
transfer by the U.S. person of any of the remaining stock to any related 
U.S. person or unrelated person.
    (4) Proportionate share. For purposes of this paragraph (e), any 
``proportionate share'' shall be determined by reference to the fair 
market value (at the time of the original transfer) of the stock of the 
transferee foreign corporation that was transferred by the U.S. 
transferor and the fair market value of all of the stock of the 
transferee foreign corporation originally received by the U.S. 
transferor.
    (f) Subsequent disposition of transferred intangible property by 
transferee foreign corporation--(1) In general. If a U.S. person 
transfers intangible property that is subject to section 367(d) and the 
rules of this section to a foreign corporation in an exchange described 
in section 351 or 361, and within the useful life of the intangible 
property that transferee foreign corporation subsequently disposes of 
the intangible property to an unrelated person, then--
    (i) The U.S. transferor of the intangible property (or any person 
treated as such pursuant to paragraph (e)(1) of this section) shall be 
required to recognize gain from U.S. sources (but not loss) in an amount 
equal to the difference between the fair market value of the transferred 
intangible property on the date of the subsequent disposition and the 
U.S. transferor's former adjusted basis in that property (determined as 
of the orginial transfer); and
    (ii) The U.S. transferor shall be required to recognize a deemed 
payment under paragraph (c) of this section for that part of its taxable 
year that the intangible property was held by the transferee foreign 
corporation and thereafter shall not be required to recognize any 
further deemed payments under paragraph (c) or (e)(1) of this section 
with respect to the transferred intangible property disposed of by the 
transferee foreign corporation.
    (2) Required adjustments. If a U.S. transferor is required to 
recognize gain under paragraph (f)(1) of this section, then--
    (i) For purposes of chapter 1 of the Code, the earnings and profits 
of the transferee foreign corporation shall be reduced by the amount of 
gain required to be recognized; and
    (ii) The U.S. transferor's recognition of gain will permit the 
establishment of an account receivable from the transferee foreign 
corporation, in accordance with paragraph (g)(1) of this section.
    (3) Subsequent transfer of intangible property to related person. 
The requirement that a U.S. person recognize gain under paragraph (c) or 
(e) of this section shall not be affected by the transferee foreign 
corporation's subsequent disposition of the transferred intangible 
property to a related person. For purposes of any required adjustments, 
and of any accounts receivable created under paragraph (g)(1) of this 
section,

[[Page 318]]

the related person that receives the intangible property shall be 
treated as the transferee foreign corporation.
    (g) Special rules--(1) Establishment of accounts receivable--(i) In 
general. If a U.S. person is required to recognize income under the 
provisions of paragraph (c), (e), or (f) of this section, and the amount 
deemed to be received is not actually paid by the transferee foreign 
corporation, then the U.S. person may establish an account receivable 
from the transferee foreign corporation equal to the amount deemed paid 
that was not actually paid. A separate account receivable must be 
established for each taxable year in which payments deemed to be 
received are not actually made. Payments received from the transferee 
foreign corporation must be designated as payments upon a particular 
account and must be deducted from that account. Accounts receivable 
under this paragraph (g)(1) may be established and paid without further 
U.S. income tax consequences to the U.S. transferor or the transferee 
foreign corporation. No interest shall be paid or accrued on an account 
receivable created under this paragraph (g)(1), nor shall any bad debt 
deduction be allowed under section 166 with respect to any failure to 
receive payment on an account.
    (ii) Unpaid receivable treated as contribution to capital. If any 
portion of an account receivable established under this paragraph (g)(1) 
remains unpaid as of the last day of the third taxable year following 
the taxable year to which the account relates, then--
    (A) Such portion shall be deemed to have been paid on that date; and
    (B) The U.S. person shall be deemed to have contributed an 
equivalent amount to the capital of the foreign corporation, and the 
U.S. person's basis in the stock of the foreign corporation shall, 
therefore, be increased by that amount.
    (2) Election to treat transfer as sale. A U.S. person that transfers 
intangible property to a foreign corporation in a transaction subject to 
section 367(d) may elect to recognize income in accordance with the 
rules of this paragraph (g)(2), if--
    (i) The intangible property transferred constitutes an operating 
intangible, as defined in Sec. 1.367(a)-1T(d)(5)(ii); or
    (ii) The transfer of the intangible property is either legally 
required by the government of the country in which the transferee 
corporation is organized as a condition of doing business in that 
country, or compelled by a genuine threat of immediate expropriation by 
the foreign government; or
    (iii)(A) The U.S. person transferred the intangible property to the 
foreign corporation within three months of the organization of that 
corporation and as part of the original plan of capitalization of that 
corporation;
    (B) Immediately after the transfer, the U.S. person owns at least 40 
percent but not more than 60 percent of the total voting power and total 
value of the stock of the transferee foreign corporation;
    (C) Immediately after the transfer, at least 40 percent of the total 
voting power and total value of the stock of the transferee foreign 
corporation is owned by foreign persons unrelated to the U.S. person;
    (D) Intangible property constitutes at least 50 percent of the fair 
market value of the property transferred to the foreign corporation by 
the U.S. transferor; and
    (E) The transferred intangible property will be used in the active 
conduct of a trade or business outside of the United States within the 
meaning of Sec. 1.367(a)-2T and will not be used in connection with the 
manufacture or sale of products in or for use or consumption in the 
United States.

A person that makes the election under this paragraph (g)(2) shall not 
be subject to the provisions of paragraphs (c) through (f) of this 
section. Such person shall instead recognize in the year of the transfer 
ordinary income from sources within the United States in an amount equal 
to the difference between the fair market value of the intangible 
property transferred and its adjusted basis. A U.S. person shall make an 
election under this paragraph (g)(2) by notifying the Internal Revenue 
Service of the election in accordance with the requirements of section 
6038B and regulations thereunder, and subsequently including the 
appropriate amounts in

[[Page 319]]

gross income in a timely filed tax return for the year of the transfer.
    (3) Intangible property transferred from branch with previously 
deducted losses. If income is required to be recognized under section 
904(f)(3) and the regulations thereunder or under Sec. 1.367(a)-6T upon 
the transfer of intangible property of a foreign branch that had 
previously deducted losses, then the income recognized under those 
sections with respect to that property shall be credited against amounts 
that would otherwise be required to be recognized with respect to that 
same property under paragraphs (c) through (f) of this section in either 
the current or future taxable years. The amount recognized under section 
904(f)(3) or Sec. 1.367(a)-6T with respect to the transferred 
intangible property shall be determined in accordance with the following 
formula:
[GRAPHIC] [TIFF OMITTED] TC17OC91.001


For purposes of the above formula, the loss recapture income is the 
total amount required to be recognized by the U.S. transferor pursuant 
to section 904(f)(3) or Sec. 1.367(a)-6T. The gain from intangibles is 
the total amount of gain realized by the U.S. transferor pursuant to 
section 904(f)(3) and Sec. 1.367(a)-6T upon the transfer of items of 
intangible property that are subject to section 367(d). (``Gain from 
intangibles'' does not include gain realized upon the transfer of 
property described in Sec. 1.367(a)-5T(b)(2), foreign goodwill or going 
concern value, or intangible property with respect to which the taxpayer 
has made the election provided for in Sec. 1.367(d)-1T(g)(2).) The gain 
from all branch assets is the total amount of gain realized by the 
transferor upon the transfer of items of property of the branch in which 
gain is realized. The fraction shall not exceed 1.
    (4) Coordination with section 482--(i) In general. Section 367(d) 
and the rules of this section shall not apply in the case of an actual 
sale or license of intangible property by a U.S. person to a foreign 
corporation. If an adjustment under section 482 is required with respect 
to an actual sale or license of intangible property, then section 367(d) 
and the rules of this section shall not apply with respect to the 
required adjustment. If a U.S. person transfers intangible property to a 
related foreign corporation without consideration, or in exchange for 
stock or securities of the transferee in a transaction described in 
sections 351 or 361, no sale or license subject to adjustment under 
section 482 will be deemed to have occurred. Instead, the U.S. person 
shall be treated as having made a transfer of the intangible property 
that is subject to section 367(d).
    (ii) Sham licenses and sales. For purposes of paragraph (g)(4)(i) of 
this section, a purported sale or license of intangible property may be 
disregarded, and treated as a transfer subject to section 367(d) and the 
rules of this section, if--
    (A) The purported sale or license is made to a foreign corporation 
in which the transferor holds (or is acquiring) an interest; and
    (B) The terms of the purported sale or license differ so greatly 
from the economic substance of the transaction or the terms that would 
obtain between unrelated persons that the purported sale or license is a 
sham.

The terms of a purported sale or license, for purposes of applying the 
rule of this paragraph (g)(4)(ii), shall be determined by reference not 
only to the nominal terms of the agreement but also to the actual 
practice of the parties under that agreement. A sale or license of 
intangible property shall not be disregarded under this paragraph 
(g)(4)(ii) solely because other property of an integrated business is 
simultaneously transferred to the foreign corporation by the U.S. 
transferor in a transaction described in section 367(a)(1) or any 
statutory or regulatory exception to section 367(a)(1).
    (5) Determination of fair market value. For purposes of determining 
the gain

[[Page 320]]

required to be recognized immediately under paragraph (d), (f), or 
(g)(2) of this section, the fair market value of transferred property 
shall be the single payment arm's-length price that would be paid for 
the property by an unrelated purchaser determined in accordance with the 
principles of section 482 and regulations thereunder. The allocation of 
a portion of the purchase price to intangible property agreed to by the 
parties to the transaction shall not necessarily be controlling for this 
purpose.
    (6) Anti-abuse rule. If a U.S. person--
    (i) Transfers intangible property to a domestic corporation with a 
principal purpose of avoiding the effect of section 367(d) and the rules 
of this section; and
    (ii) Thereafter transfers the stock of that domestic corporation to 
a related foreign corporation,

then solely for purposes of section 367(d) that U.S. person shall be 
treated as having transferred the intangible property directly to the 
foreign corporation. A U.S. person shall be presumed to have transferred 
intangible property for a principal purpose of avoiding the effect of 
section 367(d) if the property is transferred to the domestic 
corporation less than two years prior to the transfer of the stock of 
that domestic corporation to a foreign corporation. The presumption 
created by the previous sentence may be rebutted by clear evidence that 
the subsequent transfer of the stock of the domestic transferee 
corporation was not contemplated at the time the intangible property was 
transferred to that corporation and that avoidance of section 367(d) and 
the rules of this section was not a principal purpose of the 
transaction. A transfer may have more than one principal purpose.
    (h) Related person. For purposes of this section, persons are 
considered to be related if--
    (1) They are partners or partnerships described in section 707(b)(1) 
of the Code; or
    (2) They are related within the meaning of section 267 (b), (c), and 
(f) of the Code, except that--
    (i) ``10 percent or more'' shall be substituted for ``more than 50 
percent'' each place it appears; and
    (ii) Section 1563 shall apply (for purposes of section 267(d)), 
without regard to section 1563(b)(2).
    (i) Effective date. Except as specifically provided to the contrary 
elsewhere in this section, this section applies to transfers occurring 
after December 31, 1984.

[T.D. 8087, 51 FR 17953, May 16, 1986, as amended by T.D. 8770, 63 FR 
33568, June 19, 1998]