On January 30, Treasury and the IRS issued proposed regulations relating to the proper filing of gain recognition agreements (GRAs) and other related compliance obligations (the Proposed Regulations). As a general matter, a U.S. person that is a 5% or greater shareholder of a corporation is required to file a GRA with the IRS on the transfer of the corporation’s stock to a foreign corporation or as a result of certain asset transfers by the corporation, and the GRA must include information on the basis and fair market value of the property transferred. Historically, many taxpayers have filed GRAs indicating that this information is “available upon request.” The Proposed Regulations treat a GRA filed with “available upon request” statements as a “willful failure” to comply with the GRA requirements and, as a result, subject the taxpayer to full gain recognition on the transfer as well as potential penalties.

An IRS Industry Director Directive from July 2010 (the Directive) provides relief to taxpayers that timely filed GRAs but did not provide basis or fair market value information as required under the current regulations or otherwise did not satisfy a reasonable cause standard. However, the Directive is effective only until “further notice.” With the issuance of the Proposed Regulations, which do not provide relief for such filings, taxpayers that have filed GRAs that state that basis and fair market value information is “available on request” should consider availing themselves of the Directive as soon as possible.

In brief, the Proposed Regulations address or amend the current rules and practice primarily by...