Yesterday, the IRS issued proposed regulations that eliminate the “foreign goodwill exception” under the Section 367(d) regulations and also limit the scope of property that is eligible for the so-called “active trade or business” exception generally to certain tangible property and financial assets. Thus, upon an outbound transfer of foreign goodwill or going concern value, a U.S. transferor will be subject to either current gain recognition under section 367(a)(1) or the tax treatment provided under section 367(d). The regulation preamble explains that this taxpayer-adverse change is in response to certain taxpayers attempting to avoid recognizing gain or income attributable to high-value intangible property by asserting that an inappropriately large share of the value of the property transferred is currently subject to the favorable treatment for foreign goodwill or going concern value. The proposed regulations also eliminate the rule that limits the useful life of intangible property to 20 years and provide that the useful life of intangible property is the entire period during which the exploitation of the intangible property is reasonably anticipated to occur, as of the time of transfer.

The text of the proposed regulations are incorporated into new TD 9738 (clarifying of the coordination of the transfer pricing rules with other Code provisions).  The proposed regulations are proposed to apply to transfers occurring on or after September 16, 2015, and to transfers occurring before September 16, 2015, resulting from entity classification elections made under regulation section 301.7701-3 that are filed on or after September 16, 2015.