The Treasury Department and the IRS released Notice 2014-52 (the “Notice”) on September 22nd to limit expatriation transactions. The Notice states that Treasury will issue regulations intended to limit the tax benefits of certain post-expatriation transactions and also narrow exceptions to the expatriation rules of Section 7874. The post-expatriation transactions that are the subject of the Notice are transactions in which previously untaxed earnings of the acquired U.S. corporation might otherwise escape U.S. tax. The Notice states that these Treasury regulations generally will apply to transactions completed on or after September 22, 2014 (i.e., no grandfathering).

Generally, a corporate inversion subject to Section 7874 is a transaction where a foreign corporation acquires a U.S. corporation (or they combine under a new foreign parent corporation), the shareholders of the U.S. corporation receive 60% or more of the stock of the foreign corporation and the foreign corporation does not have 25% or more of its worldwide operations in its country of organization. Under Section 7874(a)(1), such an inverted U.S. corporation could not use pre-acquisition losses to offset gain recognized during an “applicable period” of 10 years following the inversion. Under Section 7874(b), if the shareholders of the U.S. corporation received 80% or more of the stock of the foreign corporation, the foreign corporation would be taxable as a U.S. corporation.