TBL Licensing LLC, f/k/a the Timberland Co.Subsid v. Werfel ( 2023 )

United States Court of Appeals
For the First Circuit
No. 22-1783
TBL LICENSING LLC, f/k/a The Timberland Company, and
subsidiaries (a consolidated group),
Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
APPEAL FROM THE UNITED STATES TAX COURT
[Hon. James S. Halpern, U.S. Tax Court Judge]
Before
Kayatta, Lipez, and Gelpí,
Circuit Judges.
Shay Dvoretzky, with whom Christopher Bowers, Nathan Wacker,
Parker Rider-Longmaid, Sylvia O. Tsakos, Hanaa Khan, Skadden,
Arps, Slate, Meagher & Flom LLP, James Preston Fuller, and Fenwick
& West LLP were on brief, for appellant.
Judith A. Hagley, Tax Division, Department of Justice, with
whom David A. Hubbert, Deputy Assistant Attorney General, Tax
Division, Department of Justice, Francesca Ugolini, Tax Division,
Department of Justice, and Jacob Christensen, Tax Division,
Department of Justice, were on brief, for appellee.
September 8, 2023
KAYATTA, Circuit Judge. In 2011, TBL Licensing LLC
("TBL") transferred intangible property worth approximately
$1.5 billion to an affiliated foreign corporation. The transfer
occurred in the context of a corporate reorganization involving an
exchange as described in section 361 of the Internal Revenue Code.1
TBL took the position that the tax attributable to the transfer
could be paid over time on an annual basis by one of TBL's
affiliates. The IRS disagreed, assessing a deficiency based on
the position that TBL itself was required to pay tax on the entire
gain, and to do so in its tax return for the year of the transfer.
TBL challenged the deficiency, the Tax Court sustained it, and TBL
appeals.
The tax treatment of TBL's transfer of its intangible
property turns on whether the final step of the reorganization was
a "disposition following such transfer" as that phrase is used in
section 367(d)(2)(A)(ii)(II). As we will explain, we agree with
the Commissioner that TBL's transfer of its intangible property
was followed by a disposition of that property, requiring TBL to
pay the tax due in a lump sum.
1 All uses of "section" refer to sections of the Internal
Revenue Code (26 U.S.C.) unless otherwise indicated.
- 2 -
I.
We begin with the basic terminology and background rules
of federal income tax that help frame our reading of
section 367(d). A taxpayer generally "recognizes" gain on
property that has increased in value when the taxpayer sells,
exchanges, or otherwise disposes of the property. See I.R.C.
§ 1001(a)–(c)(1991); Cottage Sav. Ass'n v. Comm'r, 499 U.S. 554,
559, 566. To "recognize" gain simply means to take the gain "into
account in computing income." Boris I. Bittker & Lawrence Lokken,
Federal Taxation of Income, Estates and Gifts ¶ 40.1 (2023). So,
in general, a taxpayer (including a corporation) that exchanges
appreciated property for money or other valuable property
recognizes the gain on the property as a result of the exchange.
The amount of the gain is the excess of the value of the money or
property received in the exchange over the taxpayer's "basis" in
the transferred property (typically, the cost of acquiring the
property). See I.R.C. §§ 1001(a), 1011(a), 1012(a). These are
the same rules that generally require individuals to pay income
tax on the gain from selling stock.
The Internal Revenue Code, however, exempts certain
corporate transactions from these general rules, allowing
taxpayers to exchange property without recognizing any gain at the
time. While these "nonrecognition" provisions permit taxpayers to
- 3 -
avoid paying tax at the time of the transaction, the gain on the
exchanged property does not forever escape taxation. Rather, as
described further below, tax is deferred until a future disposition
occurs that does not qualify for nonrecognition treatment. The
policy underlying such nonrecognition rules is that it is
inappropriate for an exchange to trigger tax where "the new
property received is substantially a continuation of the old
investment." Boris I. Bittker & James S. Eustice, Federal Income
Taxation of Corporations and Shareholders § 12.00[1] (2020).
There are two types of nonrecognition transactions that
are relevant to section 367(d): corporate formations under
section 351 and corporate reorganizations under section 368.
Section 351 generally provides nonrecognition treatment
when a person (i.e., a natural person or a corporation) or group
of persons transfers property to a corporation in exchange for
that corporation's stock, and such person or group is in "control"
of the corporation immediately after the transaction (generally
defined as owning at least 80% of the corporation's stock). See
I.R.C. §§ 351(a); 368(c). A simple example of a section 351
exchange, in which two people each contribute property to a newly
formed corporation, is depicted below:
- 4 -
Section 351 Example
Person A Person B
Stock
A’s Property B’s Property
New Corporation
Absent the special nonrecognition rules, those
transferring property (the "transferors") to the corporation (the
"transferee") would have to recognize gain on any appreciated
property transferred. For example, if a person transfers $100
worth of land with a basis of $75 in exchange for $100 worth of
stock, that transferor would ordinarily recognize $25 of gain.
But, assuming the transaction qualifies under section 351(a),2 no
gain is recognized. Instead, the transferor in this example takes
a "carryover basis" in the stock received -- that is, the
transferor's basis in the stock is the same as its previous basis
in the land ($75). See I.R.C. § 358(a). In accordance with the
2This example assumes that only stock is received for the
property. Different rules apply when the transferor receives both
stock and money (or other property) in exchange for the property
transferred to the corporation. See §§ 351(b), 358(a), 362(a).
- 5 -
general purpose of the nonrecognition rules, the transferor's
economic interest in the land has continued by virtue of the
transferor's stock interest in the corporation that now owns the
land. Taxation of the land's increased value is deferred until a
future disposition.
The transaction at issue in this appeal was a corporate
reorganization under section 368, rather than a corporate
formation under section 351. Corporate reorganizations include a
wide range of transactions in which existing corporations merge,
divide, or otherwise transform. See Bittker & Eustice, supra,
§ 12.00[2]. The transaction here falls into a specific subset of
reorganizations in which one corporation transfers assets to
another in exchange for stock (an "asset reorganization"). As the
parties agree, a basic asset reorganization proceeds in two steps
(which may either actually occur or be deemed to occur for tax
purposes): First, one corporation (the "transferor") transfers all
its assets to another corporation (the "acquiror" or "transferee")
in exchange for some portion of the acquiror's stock. Second, the
transferor transfers the acquiror stock it just received to its
shareholders and ceases to exist for U.S. tax purposes.3 At the
3 However, in "divisive" reorganizations described in
section 368(a)(1)(D), the transferor generally transfers only a
designated portion of its assets to the acquiror (which must be a
subsidiary of the transferor corporation) and then continues
operating -- rather than ceasing to exist -- following the
- 6 -
completion of the transaction, the acquiror owns the transferor's
assets, the transferor no longer exists (at least for tax
purposes), and the historic transferor shareholders own a portion
of the acquiror's stock. A simple example of this type of
transaction and its result is depicted below:
Asset Reorganization Example
A B
Shareholders Shareholders
B Stock
2
1
A Assets
Corporation A Corporation B
(Transferor) (Acquiror)
B Stock
A B
Assets Assets
distribution of the acquiror stock. See Bittker & Eustice, supra,
§ 12.26[1].
- 7 -
Result
Historic A Historic B
Shareholders Shareholders
Corporation B
A B
Assets Assets
Nonrecognition and carryover basis rules apply to this
type of transaction as well.4 In the first step, under
section 361(a), the transferor recognizes no gain on the exchange
of its assets for acquiror stock. As will become relevant later,
we refer to this step as a "section 361 exchange." The acquiror
takes a carryover basis in the assets it receives (i.e., the same
basis the transferor had in such assets). See I.R.C. § 362(b).
In the second step, under section 361(c), the transferor does not
4As is the case with section 351, different rules apply when
the transferor receives both stock and money (or other property)
in exchange for the assets transferred to the acquiror. See I.R.C.
§§ 356(a), 358(a), 361(b), 362(b).
- 8 -
recognize any gain on the distribution of acquiror stock to its
shareholders, and under section 354(a), the transferor's historic
shareholders do not recognize any gain upon the receipt of acquiror
stock (which they are treated as receiving in exchange for their
transferor stock). We refer to this step as the "second-step
distribution." The transferor's historic shareholders take a
carryover basis in the acquiror stock they receive (i.e., the same
basis they had in their transferor stock). See I.R.C. § 354(a).
When the dust settles, the historic transferor shareholders (by
virtue of their stock in the acquiror) have a continuing economic
interest in the transferor's historic assets -- and the recognition
of any gain on those assets has been deferred until a future
transaction, such as a sale of the assets by the acquiror.
As noted above, the nonrecognition provisions are
premised in part on the fact that gain recognition is deferred to
some future transaction. Because the gain recognition is merely
deferred, any gain not recognized upon the exchange of the
transferor's assets for the acquiror's stock does not forever
escape U.S. taxation. But the involvement of foreign corporations
in nonrecognition transactions undermines this premise, as foreign
corporations are not generally subject to U.S. tax. If the
nonrecognition rules applied to a section 351 exchange or an asset
reorganization involving a foreign corporation, there would be no
- 9 -
tax on the transfer of those assets to the foreign corporation (a
so-called "outbound transfer"), and the foreign corporation would
also owe no U.S. tax if it later sold those assets.
Section 367 addresses this concern. Section 367(a)
provides that, in general: "If, in connection with any exchange
described in section [351 or 361],5 a United States person
transfers property to a foreign corporation, such foreign
corporation shall not, for purposes of determining the extent to
which gain shall be recognized on such transfer, be considered to
be a corporation." I.R.C. § 367(a)(1). In other words,
section 367(a) provides that foreign transferees in property-for-
stock exchanges are not to be treated as corporations. And since
the nonrecognition rules of sections 351 and 361 only apply to
exchanges involving corporations, section 367 renders those
nonrecognition rules inapplicable to property-for-stock exchanges
with foreign corporations.6
Section 367(a)
5 also applies to other corporate
nonrecognition transactions not relevant here.
6 Section 351(a) provides:
No gain or loss shall be recognized if property is
transferred to a corporation by one or more persons
solely in exchange for stock in such corporation and
immediately after the exchange such person or persons
are in control (as defined in section 368(c)) of the
corporation.
I.R.C. § 351(a) (emphasis added).
- 10 -
Without the benefit of a nonrecognition rule, the
transferor must recognize gain on the transfer of the assets to
the foreign corporation based on the value of the assets at the
time of the transfer. See I.R.C. § 1001. Thus, section 367(a)
prevents taxpayers from using the nonrecognition rules to transfer
appreciated assets to foreign corporations and escape U.S. tax on
the gain.
II.
With the foregoing terminology and background rules in
mind, we turn now to section 367(d), the specific provision at the
heart of this appeal. Section 367(d) provides special rules (in
place of the rules contained in section 367(a)) that apply to
intangible property transferred by a U.S. person to a foreign
corporation.7 It provides:
(d) Special rules relating to transfers of
intangibles
(1) In general--Except as provided in regulations
prescribed by the Secretary, if a United States
And section 361(a) provides:
No gain or loss shall be recognized to a corporation if
such corporation is a party to a reorganization and
exchanges property, in pursuance of the plan of
reorganization, solely for stock or securities in
another corporation a party to the reorganization.
I.R.C. § 361(a) (emphasis added).
7 No amendments material to this appeal have been made to
section 367 since the 2011 transaction, and thus all references
are to the current version of section 367.
- 11 -
person transfers any intangible property to a
foreign corporation in an exchange described in
section 351 or 361--
(A) subsection (a) shall not apply to the
transfer of such property, and
(B) the provisions of this subsection shall
apply to such transfer.
(2) Transfer of intangibles treated as transfer
pursuant to sale of contingent payments--
(A) In general--If paragraph (1) applies to
any transfer, the United States person
transferring such property shall be treated
as--
(i) having sold such property in exchange
for payments which are contingent upon
the productivity, use, or disposition of
such property, and
(ii) receiving amounts which reasonably
reflect the amounts which would have been
received--
(I) annually in the form of such
payments over the useful life of
such property, or
(II) in the case of a disposition
following such transfer (whether
direct or indirect), at the time of
the disposition.
The amounts taken into account under
clause (ii) shall be commensurate with
the income attributable to the
intangible.
I.R.C. § 367(d)(1)–(2)(A) (emphasis added).
In simpler terms, if a U.S. person transfers intangible
property to a foreign corporation in an exchange that would
- 12 -
otherwise receive nonrecognition treatment under section 351 or
361, then that person is treated as having sold the intangible
property in exchange for certain taxable payments. The timing of
those payments depends on whether there is "a disposition following
such transfer." If there is no such disposition, then the payments
are deemed to be received "annually . . . over the useful life of
such property," I.R.C. § 367(d)(2)(A)(ii)(I), and must reflect "an
appropriate arms-length charge for the use of the property." Temp.
Treas. Reg. § 1.367(d)-1T(c)(1). But "in the case of a disposition
following such transfer (whether direct or indirect)," the U.S.
person is deemed to receive a lump-sum payment reflecting the value
of the property "at the time of the disposition." I.R.C.
§ 367(d)(2)(A)(ii)(II). We refer to the former rule as the
"annual-payment rule" and the latter rule as the "disposition-
payment rule."
Before moving on to how section 367(d) applies in the
context of an asset reorganization (the type of transaction
relevant to this appeal), it is helpful to first understand how it
works in the more straightforward context of a corporate formation
under section 351. As described above, the basic section 351
transaction involves the transfer of property by a person or group
in exchange for corporate stock, where the person or group controls
the corporation immediately following the transaction. In the
- 13 -
purely domestic context, a person who transferred intangible
property to a corporation in a section 351 transaction would not
recognize any gain due to the nonrecognition rules provided by
that section. But, if section 367(d) applied, the transferor would
be treated as having sold the intangible property. Assuming no
further transactions occurred after the conclusion of the
section 351 exchange, the annual-payment rule would apply, and the
transferor would be deemed to receive as income annual payments
over the intangible property's useful life.
However, if within the intangible property's useful life
the transferee corporation sells the intangible property to a third
party (an uncontroversial example of a "direct" disposition under
section 367(d)), or the transferor sells its stock in the foreign
corporation to a third party (an uncontroversial example of an
"indirect" disposition), then the disposition-payment rule would
apply. The transferor would be treated as receiving as income a
lump-sum payment based on the intangible property's value at the
time of the disposition, and would no longer be treated as
receiving the annual payments. See I.R.C. § 367(d)(2)(A)(ii)(II);
Temp. Treas. Reg. § 1.367(d)-1T(d)(1), (f)(1).
The question at the center of this appeal is how
section 367(d) applies to an outbound transfer of intangible
property described in section 361. A section 361 exchange of the
- 14 -
transferor's assets for acquiror stock occurs in the broader
context of an asset reorganization. This is distinct from a
transfer under section 351, in which the exchange of the intangible
property for stock can constitute the entirety of the transaction.
As the parties here agree, every reorganization that involves a
section 361 exchange of property for stock also includes, as a
required second step, the distribution by the transferor of
acquiror stock to the transferor's shareholders. This type of
transaction poses the following question, the answer to which
resolves this appeal: Is that second-step distribution a
"disposition following such transfer" for purposes of triggering
the disposition-payment rule?
III.
Before answering that question, we summarize the
specifics of the transaction that gives rise to this appeal.
In September 2011, VF Corp. (a domestic corporation)
purchased -- through one of its foreign subsidiaries -- Timberland
Co. (also a domestic corporation) for $2.3 billion in a transaction
that is not directly at issue here. Approximately $1.5 billion of
Timberland's value was attributable to its intangible assets. VF
Corp. sits atop a multinational chain of corporations, and,
following the acquisition, it undertook a variety of corporate
restructuring transactions. As a result, TBL -- a domestic
- 15 -
corporation for U.S. tax purposes whose ultimate owner was
VF Corp. -- acquired Timberland's intangible property (the
"Timberland IP"). Then, in the transaction at issue here, TBL was
deemed (for tax purposes) to transfer the Timberland IP to a
foreign corporation and subsequently cease to exist.
Immediately prior to that transaction, TBL was directly
owned by VF Enterprises S.a.r.l. ("VF Foreign"), a Luxembourg
corporation. VF Foreign was indirectly owned (through a chain of
foreign corporations) by Lee Bell, Inc., a domestic corporation
that was in turn ultimately owned by VF Corp. As a result of the
transaction, TBL Investment Holdings ("TBL Foreign"), a foreign
indirect subsidiary of VF Corp., acquired the Timberland IP.
The parties agree that, for tax purposes, the
transaction constituted an asset reorganization8 in which the
following two steps were deemed to occur: First, TBL transferred
its assets (including the Timberland IP) to TBL Foreign in exchange
for TBL Foreign stock; and then, second, TBL distributed the TBL
Foreign stock to VF Foreign and ceased to exist for U.S. tax
purposes.9 The transaction and its result are depicted below:
8 Specifically, the transaction constituted a reorganization
described in section 368(a)(1)(F), which is defined as "a mere
change in identity, form, or place of organization of one
corporation, however effected." I.R.C. § 368(a)(1)(F).
9 The IRS describes a deemed third step, in which VF Foreign
exchanged its TBL stock for TBL Foreign stock. See Treas. Reg.
§ 1.367(a)-1(f)(1)(iii). TBL does not dispute that this deemed
- 16 -
The Transaction
VF Corporation
Lee Bell, Inc.
VF Foreign
2
TBL Foreign Stock 1
TBL Assets
TBL TBL Foreign
TBL Foreign Stock
IP
third step occurred; but, because this step is not central to the
resolution of this appeal, we have simplified the transaction into
the two steps described above.
- 17 -
Result
VF Corporation
Lee Bell, Inc.
VF Foreign
TBL Foreign
IP
TBL, which ceased to exist for U.S. tax purposes as a
result of the transaction, did not report any gain attributable to
the Timberland IP transfer on its final tax return. Instead,
VF Corp. took the position that the disposition-payment rule had
- 18 -
not been triggered, and that Lee Bell, Inc. -- as "the closest-
related10 U.S. entity to TBL" -- could report the income based on
the annual-payment rule of section 367(d).11
On May 11, 2015, the IRS issued a notice of deficiency
to TBL for the 2011 tax year, informing TBL of an income tax
shortfall of about $505 million attributable to the transfer of
the Timberland IP to TBL Foreign. The notice stated that TBL
should have reported the full amount of gain on the intangible-
property transfer -- about $1.5 billion -- on its final tax return
pursuant to the disposition-payment rule. TBL petitioned the Tax
Court for redetermination of the deficiency, asserting that it had
appropriately applied the annual-payment rule by including the
deemed payments in Lee Bell's income.
The Tax Court granted summary judgment to the
Commissioner in January 2022, sustaining the deficiency. As is
relevant here, the court analyzed whether there had been a
"disposition following such transfer (whether direct or
indirect)" -- i.e., whether the conditions for triggering the
disposition-payment rule had been satisfied. The court first
10 In this context, a "related entity" generally refers to a
major (direct or indirect) shareholder. See I.R.C. § 267(b);
Treas. Reg. § 1.367(d)-1T(h).
11 Between 2011 and 2017, Lee Bell reported more than
$475 million in income attributable to the transfer.
- 19 -
concluded that TBL's distribution of TBL Foreign stock to VF
Foreign constituted an "indirect" "disposition" of the Timberland
intangible property because the transferor of the intangible
property -- TBL -- relinquished its interest in the foreign
corporation that owned the intangible property -- TBL Foreign.
Next, the court concluded that the phrase "following such transfer"
simply means following the transfer of the intangible property.
Accordingly, the court held that the disposition-payment rule
applied because TBL's distribution of TBL Foreign stock
constituted a "disposition following" TBL's "transfer" of the
Timberland IP to a foreign corporation. TBL timely appealed.
IV.
TBL principally argues that, in the event of an asset
reorganization involving the outbound transfer of intangible
property, the disposition-payment rule does not apply unless there
is a disposition following the overall asset reorganization (which
TBL calls a "[section] 361 reorganization"12). In accordance with
this position, TBL maintains "that the word 'transfer' in 'a
disposition following such transfer,' means the completed
[section] 351 transaction or [section] 361 reorganization."
Therefore, reasons TBL, the distribution of TBL Foreign stock to
12 We prefer the term "asset reorganization," as
nonrecognition rules beyond those contained in section 361 apply
to such transactions. See I.R.C. §§ 354, 356.
- 20 -
VF Foreign was the completion of the relevant transfer (i.e., the
overall reorganization), and not a post-transfer disposition
triggering the disposition payment rule. The Commissioner, in
contrast, argues that the relevant "disposition" need only follow
the "transfer" of the intangible property (rather than the overall
reorganization), which is exactly what happened here when TBL
distributed TBL Foreign stock after transferring the Timberland
IP.
To resolve this dispute, "we start with the text of the
statute," Babb v. Wilkie, 140 S. Ct. 1168, 1172 (2020), and then
address TBL's arguments regarding legislative history and the
relevance of the section 367(d) regulations. In so doing, we
review the Tax Court's interpretation of section 367(d) de novo.
See Benenson v. Comm'r, 887 F.3d 511, 516 (1st Cir. 2018).
A.
1.
From the outset, TBL's argument finds no toehold in the
statutory text. The general rule of section 367(a) casts its net
around transactions in which "a United States person transfers
property to a foreign corporation" "in connection with any exchange
described in section [351 or 361]." I.R.C. § 367(a). An "exchange
described in section . . . 361," id., is generally an exchange by
one corporation (that is a party to a reorganization) of property
- 21 -
for stock in another corporation (that is also a party to the
reorganization) made "in pursuance of the plan of reorganization."
I.R.C. § 361(a). Put more simply, in the context of a section 361
exchange, the object of section 367(a) is the transfer of property
to a foreign corporation in connection with an exchange made in
pursuance of a plan of reorganization. The object is not the
distribution of stock that necessarily must follow the section 361
exchange. The first step of the TBL asset reorganization exactly
fits this description: In pursuance of a plan of reorganization,
TBL (a United States person) transferred property to TBL Foreign
(a foreign corporation) in exchange for TBL Foreign's stock.
It is thus clear that TBL's transfer of its property to
TBL Foreign neatly falls within the reach of the section 367(a)
general rule. And by deeming TBL Foreign not to be a corporation,
that general rule would require TBL to recognize and pay as a lump
sum a tax on the transfer. Not surprisingly, TBL therefore
acknowledges that it must qualify under an exception to that
general rule if it wants to have a different treatment.
Section 367(d)(1) creates the only relevant exception,
which applies when "a United States person transfers any intangible
property to a foreign corporation in an exchange described in
section 351 or 361." I.R.C. § 367(d)(1). Section 367(d)(2) in
turn spells out the required tax treatment if "[section 367(d)(1)]
- 22 -
applies to any transfer." I.R.C. § 367(d)(2). TBL claims to
qualify for such treatment, based on the position that it
transferred intangible property to TBL Foreign in an exchange
described in section 361. And the IRS agrees that TBL did make
such a transfer. Hence, both parties agree that TBL escapes the
general rule of section 367(a) and that the tax treatment of its
transfer of intangible property is to be found instead in
section 367(d)(2). Exactly how section 367(d)(2) applies to TBL's
transfer is the nub of the parties' dispute.
What should be clear from the foregoing is that the term
"such transfer" in the disposition-payment rule of
section 367(d)(2) ("in the case of a disposition following such
transfer") has only one possible antecedent. That antecedent is
the "transfer" that is the express object of both the general rule
of section 367(a) and the exception of section 367(d) in which TBL
seeks haven. That is to say, it is the transfer of intangible
property to TBL Foreign, not the asset reorganization as a whole.
See IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005) (stating that
under "the normal rule of statutory interpretation," "identical
words used in different parts of the same statute are generally
presumed to have the same meaning," and further concluding that an
"explicit reference to the use of the identical term" earlier in
the statute by use of the phrase "said [term]" confirms consistent
- 23 -
meaning). And the fact that section 367 elsewhere uses the term
"reorganization," see I.R.C. § 367(a)(2), demonstrates that
Congress knew how to say "reorganization" when it meant it.
TBL's response pays little heed to the statutory text.
TBL maintains that we cannot characterize an outbound transfer of
intangible property as having been part of "an exchange described
in section . . . 361," I.R.C. § 367(d)(1), until the overall
reorganization is complete. TBL, in turn, asserts that
section 367(d) does not "kick in" -- i.e., the conditions required
for its application are not met -- until the reorganization is
completed at the time of the second-step distribution. And if
that is so, reasons TBL, the second-step distribution cannot serve
as the relevant trigger for the disposition-payment rule.
Otherwise, the disposition-payment rule would be triggered at the
same time that section 367(d) in general kicks in, which in TBL's
view apparently could not be so. There are two glaring defects
with this argument.
First, and most simply, we need not wait until a
reorganization is complete to determine whether a particular
exchange is described in section 361. Section 361(a) generally
applies when the transferor "exchanges property, in pursuance of
the plan of reorganization, solely for stock" in the acquiror.
I.R.C. § 361(a) (emphasis added). Nothing in this language or the
- 24 -
language of section 367(d) suggests that the pursued plan of
reorganization need be complete in order to view the transfer of
intangible property as occurring in "an exchange described in
section . . . 361."13 I.R.C. § 367(d)(1); see Bittker & Eustice,
supra, § 12.02[6]. Section 367(d), therefore, does "kick in"
before the planned reorganization is complete.
Second, even if TBL were correct that one must await the
completion of the reorganization before deeming the transfer of
the assets to have occurred in a section 361 exchange, it would
still be clear that the belatedly classified transfer occurred
when it did, i.e., before the second-step distribution. So, TBL's
view that the taxpayer must wait until the conclusion of the
transaction to finally determine whether and how section 367(d)
applies is not at all inconsistent with the plain-text reading of
"such transfer" we outlined above.
Trying out another theory, TBL argues that an asset
reorganization "must be understood as a consistent whole, from
initial asset transfer until after the stock is distributed to
shareholders," and thus there is no part of the reorganization
"that can serve as 'a disposition following such transfer.'"
Accordingly, TBL asserts, "[a] 'disposition following' must refer
13 Of course, we do not suggest that the IRS could not
recharacterize a previous transaction if a future step necessary
to the plan of reorganization never ended up occurring.
- 25 -
to something that happens after" the completed reorganization.
But simply because separate steps of an asset reorganization form
part of a unified whole does not mean section 367(d) cannot
reference one of those steps individually. The phrase "exchange
described in section . . . 361" refers to the first step of an
asset reorganization, and, as elaborated further below, TBL does
not argue otherwise. So it is entirely unclear why the term "such
transfer" as used in the disposition-payment rule could not also
refer to that same individual step.
For similar reasons, we reject TBL's attempt to ground
its argument in Commissioner v. Clark, 489 U.S. 726 (1989), which
held that "interrelated yet formally distinct steps in an
integrated transaction may not be considered independently of the
overall transaction." Id. at 738. Here, we certainly treat the
second-step distribution of TBL Foreign stock as part of the
overall plan of reorganization; without that step, the transfer of
the Timberland IP would not qualify as a section 361 exchange, and
we would have no occasion to be discussing section 367(d) at all.
But the fact that distinct steps are "interrelated" does not mean
that all distinctions between those steps are erased. For example,
we know that the two steps occur at different times (one after the
other, rather than simultaneously), and that different provisions
- 26 -
of the Internal Revenue Code operate to grant nonrecognition
treatment to each step. See, e.g., §§ 361(a), 361(c), 354.
Relatedly, TBL argues in its reply brief that because
section 367(d) refers to "section . . . 361" as a whole -- rather
than those specific provisions of section 361 that apply to
section 361 exchanges -- the relevant disposition must necessarily
occur after the completed reorganization. Recall that
section 361(a) provides nonrecognition treatment for the
transferor in a basic section 361 exchange of property for stock.
Further, when the transferor receives both stock and money (or
other property) in exchange for the property transferred to the
acquiror, section 361(b) applies to the exchange instead of
section 361(a). Section 361(c), in contrast, applies to the
second-step distribution rather than the first-step exchange,
generally providing nonrecognition treatment for the distribution
by the transferor of the acquiror's stock. And so, TBL argues,
the reference to section 361 in section 367(d) -- rather than to
section 361(a) or section 361(b), specifically -- "mean[s] the
entire [section] 361 reorganization must occur to trigger
[section] 367(d) before the statute asks if there has been a
'disposition following' that reorganization." As TBL puts it,
"when Congress wanted to provide rules for specific steps of a
§ 361 reorganization, it cross-referenced the subsections
- 27 -
associated with those particular steps," pointing to a provision
within section 367(a) that does specifically refer to "an exchange
described in subsection (a) or (b) of section 361." I.R.C.
§ 367(a)(4).
This argument does little to move the needle. TBL does
not frame its position as arguing that an "exchange described in
section . . . 361," as used in section 367(d)(1), refers to the
overall reorganization. Instead, we are left with the conclusory
assertion that the use of "section 361" rather than its more
specific subsections ipso facto tips the scales in TBL's favor.14
Further, any argument that the relevant "exchange" refers to the
overall reorganization would sit in direct tension with TBL's
earlier recognition in its opening brief that that term refers to
a section "361 exchange" rather than, as TBL calls it, a
section "361 reorganization." As noted above, the first-step
exchange in an asset reorganization qualifies for section 361
nonrecognition treatment so long as the exchange is in pursuance
of a plan of reorganization that involves a second-step
distribution. The fact that a second-step distribution must follow
The fact that section 361 did not address distributions
14
of acquiror stock until 1986, two years after section 367(d)'s
enactment, further diminishes the force of TBL's point. See I.R.C.
§ 361 (1982); Tax Reform Act of 1986, Pub. L. No. 99-514,
§ 1804(g), 100 Stat. 2085, 2805–06.
- 28 -
does not transform the word "exchange" into a term describing the
reorganization as a whole.
A separate aspect of section 367(d) further undermines
TBL's argument. The text indicates a clear expectation that it is
the U.S. transferor of the intangible property, and not some other
party in the corporate chain, that must account for the income
arising from the transfer. Granted, section 367(d) does not
explicitly require the U.S. transferor to be the entity that
recognizes the gain under that section, but it comes awfully close.
Section 367(d)(2)(A) states that it is the U.S. transferor that is
"treated as" "having sold" the intangible property and "receiving"
the deemed payments from that sale. I.R.C. § 367(d)(2)(A)(i)–
(ii). Additionally, section 367(d)(2)(B) -- which addresses the
effect of the section 367(d)(2)(A) deemed payments on the earnings
and profits15 of the foreign corporation that received the
intangible property -- provides that such foreign corporation's
earnings and profits "shall be reduced by the amount required to
be included in the income of the transferor of the intangible
property under [the annual-payment or disposition-payment rules]."
15The term "earnings and profits" (E&P) refers to the pool
of money out of which a corporation pays taxable dividends to its
shareholders. See I.R.C. § 316(a); Bittker & Eustice, supra,
§ 8.03[1]. This concept is relevant here only insofar as
corporations must keep track of earnings and profits, and make the
adjustments required under the Internal Revenue Code.
- 29 -
I.R.C. § 367(d)(2)(B) (emphasis added). Although this provision
is not directly addressed to the U.S. transferor, it at the very
least strongly implies that the statute's drafters intended that
the deemed payments under either rule would be included in the
U.S. transferor's income.
And if, as the text suggests, the U.S. transferor must
account for such payments, then TBL's reading of the disposition-
payment rule would be entirely unworkable. Recall that, in most
types of asset reorganizations -- including the one at issue
here -- the U.S. transferor ceases to exist as a result of the
transaction.16 Plainly in such circumstances the U.S. transferor
could not include any amounts under the annual-payment rule in its
income after the transaction. So, in a typical asset
reorganization, the only way that the U.S. transferor could include
the required section 367(d) gain is through the disposition-
payment rule -- by including a lump-sum gain in its income just
before it disappears. And that is exactly what results from giving
the term "such transfer" its ordinary meaning based on the
statute's plain text.
2.
Of course, "the words of a statute must be read in their
context and with a view to their place in the overall statutory
16 See supra note 3 and accompanying text.
- 30 -
scheme." See Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 320
(2014) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S.
120, 133 (2000)). Thus, to confirm our reading of "such transfer,"
we examine section 367(d)'s broader role within the structure of
section 367.
As TBL stresses repeatedly, Congress, in enacting
section 367(d), expressed a view that the annual-payment rule is
"the most accurate way of assessing the value" of intangible
property and is thus the preferred method of taxing the gain on
outbound transfers of such property. TBL argues that only its
reading "gives full effect" to the annual-payment rule by having
the rule broadly apply to asset reorganizations; the
Commissioner's reading, in contrast, would result in lump-sum
treatment at the conclusion of every asset reorganization.
Relatedly, TBL contends that if the Commissioner's reading of
section 367(d) were right, "it would mean that Congress chose an
awfully roundabout way to write the statute."
On this last point, we agree with TBL. Recall that every
reorganization involving a section 361 exchange has, by
definition, a disposition at the end of the reorganization. This
means that every asset reorganization will have a section 361
exchange followed by a disposition. So the lump-sum, disposition-
payment rule will arguably always apply (putting aside the
- 31 -
application of regulations to the contrary). That is to say, under
the Commissioner's reading, section 367(d) creates an exception to
the general lump-sum rule of section 367(a) by calling for annual
payments, and then essentially creates an exception to that
exception, the operation of which -- in the context of asset
reorganizations -- simply returns the taxpayer to the general rule.
So it is true that the Commissioner's reading of
section 367(d) as applied to asset reorganization more or less
takes with one hand what it gives with the other. On the whole,
though, we find that fact insufficient to warrant our
"interpreting" the statute in a manner that would at the very least
border on re-writing its plain language. Our reasons are several.
First, it is not entirely clear that the annual-payment
rule would not apply to at least some asset reorganizations. As
the Commissioner points out, the annual-payment rule still applies
to any section 361 exchange that occurs in a tax year different
from the second-step distribution, with the annual-payment rule
applying in the tax years preceding the distribution. TBL does
not dispute that the second-step distribution can occur "months or
even years" after the section 361 exchange. So while the
Commissioner does not argue that such multiyear reorganizations
- 32 -
are typical, there is still at least some work for the annual-
payment rule to do with respect to section 361 exchanges.17
Second, this is not a case in which the Commissioner's
reading treats any provision of the statute as surplusage.
Eliminating the reference to section 361 in section 367(d) would
have a substantive effect on the rules governing outbound transfers
of intangible property. And this remains true even if one puts
multiyear reorganizations aside. Section 367(d)(2)(C)
specifically treats the gain from intangible property as ordinary
income rather than more taxpayer-favorable capital gains
(regardless of whether the annual-payment or disposition-payment
rule is used). If section 361 were omitted from section 367(d),
then, under section 367(a), the transferor would recognize the
full amount of the gain upon the transfer of the intangible
property (as would occur under the disposition-payment rule upon
the second-step distribution), but no provision within that
section would require ordinary-income treatment of that gain.
17TBL argues that multiyear reorganizations would not
trigger the annual-payment rule because there is no section 361
exchange "to trigger [section] 367(d) at the time of the first
step" until the reorganization is completed in the second step.
As discussed above, this is a plain misreading of section 361.
Section 361(a) requires the property-for-stock exchange to be "in
pursuance of the plan of reorganization." The second-step
distribution need not occur in the same tax year as the first-step
exchange for that exchange to be considered in "pursuance of the
plan."
- 33 -
Accordingly, the inclusion of section 361 exchanges in
section 367(d) has clear import even beyond the application of the
annual-payment rule to the multiyear reorganizations discussed
above. We thus reject TBL's argument that only its reading gives
the statute's terms their proper effect, and we remain unpersuaded
that the statute's somewhat odd structure compels us to read "such
transfer" in a manner different from what the plain text dictates.
Third, and most importantly, if the disposition-payment
rule were not triggered by the second-step distribution in an asset
reorganization, U.S. transferors could completely escape taxation
under section 367. To see why this would be so, it is helpful to
first understand how VF Corp. reported amounts attributable to the
annual-payment rule following the transaction here. Given that
TBL ceased to exist for U.S. tax purposes as a result of the
transaction, TBL plainly could not take into account any deemed
annual payments due in later years. Instead, VF Corp. took the
position that Lee Bell -- one of VF Corp.'s domestic subsidiaries
and "the closest-related U.S. entity to TBL" (at the time TBL
ceased to exist) -- could take the payments into account,
essentially stepping into TBL's shoes. TBL justifies this position
based on the interaction of section 367(d) with a set of
international tax rules known as "subpart F." See I.R.C. §§ 951,
952. For purposes of this opinion, we need not delve into the
- 34 -
details of this justification. We assume that, if TBL's reading
of section 367(d) were correct, then Lee Bell's reporting would
have been proper.18
What is important for purposes of this discussion is not
what Lee Bell did, but what would have happened under TBL's own
understanding of the statute if TBL had no major U.S. shareholder
in its ownership chain at the time of the transaction (e.g., if
TBL were widely held rather than wholly owned, or if TBL were part
of a foreign-only corporate structure). Keep in mind that in an
asset reorganization as here, the domestic transferor (TBL) ends
its tax existence in the year in which the reorganization is
completed. So if it does not pay taxes on the appreciated
intangible property as due that year, it will not be around to
make any annual payments. And without a domestic Lee Bell
equivalent, there would be no U.S. taxpayer for the IRS to hold
responsible for the deemed annual payments, rendering
section 367(d) entirely ineffective.
As the overall text and structure of section 367 makes
clear, and as our discussion of legislative history, infra,
confirms, preventing just such a result was the central purpose of
section 367. Accepting TBL's reading of section 367(d) would
Of course, we reject any argument that we should adopt
18
TBL's reading of section 367(d) simply because Lee Bell was
available to foot the bill.
- 35 -
directly undermine the statute's core purpose: ensuring that the
corporate nonrecognition rules are not abused to avoid U.S. tax.
Clearly, Congress did not intend such a result. However important
one thinks applying the annual-payment rule is, the statute's
central aim is preventing appreciated assets from entirely
escaping U.S. tax.
TBL does not contest that its reading would invite
corporations to eliminate tax liabilities associated with gains on
intangible property. TBL's primary rejoinder is that the Treasury
Department could plug up the resulting massive loophole by
promulgating regulations excepting from section 367(d) asset
reorganizations in which the transferor had no related U.S. entity
to absorb the annual payments, and placing such transactions within
the general rule of section 367(a).19 But that argument fails to
19 In 2012, the Treasury Department issued a notice proposing
regulations that would have provided, among other things, that the
transferor's distribution of foreign acquiror stock to a foreign
shareholder in the final step of an asset reorganization would
trigger the disposition-payment rule. See I.R.S. Notice 2012-39,
2012-31 I.R.B. 95. TBL points to this notice as proof of
"Treasury's understanding" that the statute, standing alone,
"doesn't require a lump-sum payment here." However, the notice
explicitly states that "[n]o inference is intended as to the
treatment of transactions described in this notice under current
law." Second, and relatedly, the issuance of clarifying guidance
does not mean that the statute, standing alone, does not already
yield such a result. Third, the notice covers situations well
beyond the scope of the transaction here, including circumstances
in which the asset reorganization involves cash payments, so
Treasury was doing more than simply addressing a question already
covered by the statute.
- 36 -
address why Congress would have written a law that required
immediate regulation to prevent such an obvious method of escaping
U.S. tax.
TBL also responds that the Commissioner failed to
identify any examples of taxpayers attempting to avoid U.S. tax in
this manner. However, it seems entirely possible that the IRS has
not encountered any such scenarios because the risk of taking such
a position is apparent to most sophisticated taxpayers on the face
of the statute.
Having examined the disposition-payment rule within the
broader context of section 367, we thus find little support for
TBL's contention that "such transfer" refers to the overall asset
reorganization rather than -- as the plain text indicates -- the
transfer of intangible property "to a foreign corporation in an
exchange described in section 351 or 361." I.R.C. § 367(d)(1).
B.
TBL also urges us to look to legislative history to find
support for the proposition that only a disposition following the
overall asset reorganization can trigger the disposition-payment
rule. For the foregoing reasons, the statutory text seems clear
enough in context to preclude recourse to legislative history for
the purpose of supporting a result at odds with the text. See
Penobscot Nation v. Frey, 3 F.4th 484, 491 (1st Cir. 2021) (en
- 37 -
banc). Nevertheless, even assuming (without deciding) that some
relevant ambiguity remains following our discussion above, we see
nothing in the legislative history that could tip the scales in
TBL's favor.
The earliest version of section 367 was enacted as
section 112(k) of the Revenue Act of 1932, Pub. L. No. 72-154,
§ 112(k), 47 Stat. 169, 198. That version of the law, like the
modern one, provided (with one major caveat) that foreign
corporations would generally not be treated as corporations for
purposes of various nonrecognition provisions. See id.; Bittker
& Eustice, supra § 15.80[2]. But, unlike under today's law,
foreign corporations would be treated as corporations in
nonrecognition transactions if, prior to the transaction, the
taxpayer established to the satisfaction of the Commissioner that
the transaction was "not in pursuance of a plan having as one of
its principal purposes the avoidance of Federal income taxes."
Revenue Act of 1932, § 112(k).
This principal-purpose test and administrative ruling
framework continued (with various tweaks along the way) until
Congress passed the Tax Reform Act of 1984 (the "1984 Act"), Pub.
L. No. 98-369, § 131, 98 Stat. 494, 663–64. See Bittker & Eustice,
supra § 15.80[2]–[5]. That law replaced the administrative ruling
regime with objective statutory rules that operated to deny
- 38 -
nonrecognition treatment to certain categories of assets, while
granting nonrecognition treatment to others. Id.; Bittker &
Eustice, supra § 15.80[5]. Most relevant to this appeal, the 1984
Act enacted section 367(d) in substantially its current form,
creating the new special rules for intangible property transferred
in section 351 and 361 exchanges.
TBL attempts to portray Congress in 1984 as focused on
switching from a system of immediate gain recognition for outbound
intangible-property transfers to the annual-payment rule. Thus,
TBL argues, we should hesitate to read section 367(d) in a way
that precludes application of the annual-payment rule for most
section 361 exchanges. But, as described above, the 1984
amendments did more than simply add the annual-payment rule to
section 367. Indeed, nothing in the legislative history suggests
Congress was particularly focused on the annual-payment versus
disposition-payment dichotomy, let alone had a view that the
disposition-payment rule should not apply to dispositions that
occur as part of asset reorganizations.
Rather, the House report for the 1984 amendments to
section 367 -- in a discussion regarding the "[r]easons for
[c]hang[ing]" the tax treatment of "[t]ransfers of
intangibles" -- appeared focused on making sure intangible
property was taxed at all in outbound transfers. See H.R. Rep.
- 39 -
No. 98-432, at 1316; see also S. Prt. No. 98-169, at 360–61
(containing the same explanation). The report explained, "[i]n
light of [the IRS's] favorable ruling policy" under the old regime
"for transfers of patents and similar intangibles for use in an
active trade or business of the foreign [transferee] corporation,"
"a number of U.S. companies have adopted a practice of developing
patents . . . in the United States" and then transferring them
abroad once "ready for profitable exploitation." Id. "By engaging
in such a practice, the transferor U.S. companies hope to reduce
their U.S. taxable income by deducting substantial research and
experimentation expenses associated with . . . the development of
the transferred intangible and, by transferring the intangible to
a foreign corporation at the point of profitability, to ensure
deferral of U.S. tax on the profits generated by the intangible."
Id. The amendments sought to end this practice by ensuring all
outbound transfers of intangible property would trigger U.S. tax.
While, of course, Congress must have believed there were
advantages to taxing intangible property on an annual rather than
lump-sum basis -- otherwise it would not have written
section 367(d) as it did -- the legislative history does not
provide much evidence that Congress was particularly concerned
about this distinction. TBL misleadingly explains that "the Joint
Committee on Taxation estimated that the switch to the annual-
- 40 -
payment rule for intangible property would increase IRS tax
collection by over $1 billion within five years." But that
$1 billion figure represented the total increase in revenue from
all the 1984 amendments to section 367, not just from a supposed
"switch" from lump-sum taxation of intangible property to annual
payments. See Joint Comm. Taxation, General Explanation of the
Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-
84, at 1242 (1984).
The closest TBL comes to support in the legislative
history is a House report on the Tax Reform Act of 1985 that
includes a description of section 367(d) as enacted the year prior.
TBL cites the following excerpt from that report: "In general,
the amounts are treated as received over the useful life of the
intangible property on an annual basis. Thus, a single lump-sum
payment, or an annual payment not contingent on productivity, use
or disposition, cannot be used as the measure of the appropriate
transfer price." H.R. Rep. No. 99-426, at 422 (1985). TBL argues
that this description demonstrates that the annual-payment rule
applies after an asset reorganization. But the report simply
describes the general rules under section 367(d), and does nothing
to indicate that Congress intended the annual-payment rule to apply
to transactions like the one before us. Further, in the sentence
immediately preceding the portion TBL cites, the report refers to
- 41 -
the deemed payments as "amounts included in income of the
transferor," adding to the evidence that Congress did not intend
the annual-payment rule as phrased in the statute to apply in
instances when the original transferor liquidated.
Even stronger evidence of Congress's intent in this
regard comes from the conference report for the Tax Reform Act of
1984. See All. to Protect Nantucket Sound, Inc. v. U.S. Dep't of
Army, 398 F.3d 105, 110 (1st Cir. 2005) ("The most dispositive
indicator of congressional intent is the conference report."
(quoting United States v. Commonwealth Energy Sys. & Subsidiary
Cos., 235 F.3d 11, 16 (1st Cir. 2000))). In describing the
mechanics of the disposition-payment rule, the conference report
states: "The conferees intend that disposition of (1) the
transferred intangible by a transferee corporation, or (2) the
transferor's interest in the transferee corporation will result in
recognition of U.S.-source ordinary income to the original
transferor." H.R. Rep. 98-861, at 955 (1984) (Conf. Rep.)
(emphasis added). This statement appears to confirm what the
statute already strongly indicates -- that it is the original U.S.
transferor of intangible property, not some other entity in the
corporate structure, that must recognize gain under
section 367(d). The only way to achieve this in most types of
asset reorganizations -- in which the U.S. transferor ceases to
- 42 -
exist for U.S. tax purposes -- is for the second-step distribution
to trigger the disposition-payment rule, causing the U.S.
transferor to recognize gain under that rule before it disappears.
TBL's reading is plainly inconsistent with that mandate.
C.
Finally, TBL argues that the tax position it took here
is consistent with the Treasury Department's own understanding of
section 367(d) as articulated through regulations, and that
consequently, the Commissioner's "position in this litigation
pulls the rug out from under taxpayers." Notably, however, TBL
has abandoned its argument made to the Tax Court that the
regulations directly apply to the transaction at issue here. But
according to TBL, "that's not the point": "The regulations are
relevant not because they directly apply to the particular facts
of [this] case, but because their very premise is that
[section] 361 exchanges are subject to the annual-payment[] rule
unless a disposition occurs after the reorganization."
Nothing in the regulations, adopted in relevant part in
1986, reveals any such understanding. See Income Taxes; Transfers
of Property by U.S. Persons to Foreign Corporations, 51 Fed.
Reg. 17,936, 17953–56 (May 16, 1986) (codified at Temp. Treas.
Reg. § 1.367(d)-1T). TBL first points to Temp. Treas. Reg.
- 43 -
§ 1.367(d)-1T(c)(1). That section essentially parrots
section 367(d), providing:
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.
Temp. Treas. Reg. § 1.367(d)-1T(c)(1). TBL asserts that the
transferor "shall be treated as having transferred that property
in exchange for annual payments," "[p]eriod, without
qualification." But TBL omits the sentence immediately following:
"Such person [(i.e., the transferor of the intangible property)]
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." Id. So the regulation that
TBL says proves its case "without qualification" in fact rests on
the assumption that the transferor of the intangible property must
continue to exist in order to include the annual payments in its
income.
TBL next cites Temp. Treas. Reg. § 1.367(d)-1T(e)(1).
That section provides for the application of a modified version of
the annual-payment rule, rather than the application of the
disposition-payment rule, when a U.S. transferor of intangible
property subsequently transfers the foreign corporation's stock to
- 44 -
a related U.S. person. In such a scenario, the disposition-payment
rule is not triggered, and the related U.S. person to which the
stock is transferred generally includes the annual payments in its
income. TBL specifically points to the following language:
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 the stock of the
transferee foreign corporation to U.S. persons
that are related to the transferor . . . ,
[then the modified annual-payment rule
applies, rather than the disposition-payment
rule].
Temp. Treas. Reg. § 1.367(d)-1T(e)(1) (emphasis added by TBL).
TBL also points to Temp. Treas. Reg. § 1.367(d)-1T(d)(1), which
provides:
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 . . . , then the
[the disposition-payment rule applies to the
U.S. transferor].
Temp. Treas. Reg. § 1.367(d)-1T(d)(1) (emphasis added by TBL).
Analyzing these regulations together, TBL concludes that
"[n]either rule would be necessary, and neither would make any
sense, if the IRS's new position in this case were right." It is
- 45 -
difficult to see how TBL reaches that conclusion. TBL emphasizes
that both rules are triggered by transactions "subsequent[]" to
the "exchange described in section 351 or 361." But, as already
discussed, TBL makes no argument that the "exchange described in
section . . . 361" refers to the asset reorganization as a whole,
and the fact that the regulations refer to transactions
"subsequent[]" to that exchange simply mirrors the structure of
the disposition-payment rule. Further, both rules address
scenarios where the U.S. transferor of intangible property
transfers the stock of the foreign transferee -- a situation that,
obviously, can only arise if the U.S. transferor owns the stock
immediately prior to the disposition. And after an asset
reorganization, the U.S. transferor will no longer own the acquiror
stock (as a result of the necessary second-step distribution), so
there is no way for the U.S. transferor to again dispose of that
same stock, as is necessary to trigger both of the regulations TBL
points to. Accordingly, we can easily dispose of TBL's assertion
that these regulations rest on some premise that the annual-payment
rule must apply after an asset reorganization's completion.
V.
TBL separately argues that, even if "such transfer" does
not refer to the overall asset reorganization, no "disposition" at
all occurred when TBL distributed TBL Foreign stock to VF Foreign.
- 46 -
This is so, TBL argues, because the term "disposition" as used in
section 367(d) refers only to transfers to unrelated parties, and
thus does not apply to a transfer by a wholly owned corporation to
its sole shareholder as occurred here.
The statute does not define the term "disposition," but
TBL does not dispute that the ordinary meaning of the term is
"transferring to the care or possession of another." See
Disposition, Black's Law Dictionary (5th ed. 1979). Instead, TBL
once again hinges its argument on the section 367(d) regulations,
asserting that the regulations are premised on the assumption that
transfers to related parties are not "dispositions."
And, just as above, TBL's argument that an unstated
assumption in the regulations somehow resolves this case in its
favor falls flat. Recall that Temp. Treas. Reg. § 1.367(d)-
1T(e)(1) provides for the application of modified annual-payment
rules when the "U.S. transferor subsequently transfers the stock
of the transferee foreign corporation to U.S. persons that are
related to the transferor," Temp. Treas. Reg. § 1.367(d)-1T(e)(1)
(emphasis added); and that Temp. Treas. Reg. § 1.367(d)-1T(d)(1)
provides that the disposition-payment rule applies when the "U.S.
transferor subsequently disposes of the stock of the transferee
foreign corporation to a person that is not a related person,"
Temp. Treas. Reg. § 1.367(d)-1T(d)(1) (emphasis added). Now add
- 47 -
to the mix Temp. Treas. Reg. § 1.367(d)-1T(e)(3), which provides
that if the U.S. transferor "subsequently transfers any of the
stock of the transferee foreign corporation to one or more
[related] foreign persons . . . , then the U.S. transferor shall
continue to" apply the annual-payment rule "as if the subsequent
transfer of stock had not occurred." Temp. Treas. Reg. § 1.367(d)-
1T(e)(3) (emphasis added).
Putting these regulations together, TBL argues that they
"clarify that 'dispositions' are only to unrelated parties." These
rules do generally provide that "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." Temp. Treas. Reg. § 1.367(d)-1T(a) (addressing
the purpose and scope of the regulations). But nothing indicates
that the reason the regulations so provide is because of a narrow
meaning of the word "disposition" in the statute.
TBL cites the title of Temp. Treas. Reg. § 1.367(d)-
1T(e)(3) -- "Transfer to related foreign person not treated as
disposition of intangible property" -- as support for its position.
The title, however, is perfectly consistent with the general
definition of "disposition." Although transfers to related
persons are dispositions under the statute, certain transfers made
- 48 -
to foreign related persons are not "treated as" dispositions under
the regulations.
Temp. Treas. Reg. § 1.367(d)-1T(f) further undermines
TBL's argument that the regulations are premised on a narrow
definition of "disposition." That regulation addresses what
happens when a foreign corporation directly transfers the
intangible property it received from the U.S. transferor. In
setting out those rules, the regulation refers to a "transferee
foreign corporation's subsequent disposition of the transferred
intangible property to a related person." Temp. Treas. Reg.
§ 1.367(d)-1T(f)(3) (emphasis added). Clearly, simply because the
transfer is to a "related person" does not preclude the transfer
from being described as a "disposition."
Temp. Treas. Reg. § 1.367(d)-1T(a), which describes the
purpose and scope of the section 367(d) regulations, reinforces
this point. That section provides: "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." Temp. Treas. Reg. § 1.367(d)-1T(a) (emphasis added).
Thus, in describing a set of provisions that address transfers to
- 49 -
both related and unrelated parties, the regulation sums them up as
addressing "cases in which there is a later direct or indirect
disposition of the intangible property transferred." Id.(emphasis added). This description leaves little room for TBL's
argument that the regulations described in this section are
premised on the assumption that "disposition" as used in
section 367(d) refers only to transfers to unrelated parties.20
VI.
Finding nothing in that statute that would absolve TBL
of its responsibility under the disposition-payment rule, we
affirm the judgment of the Tax Court.
20TBL also argues that the Commissioner's reading of
"disposition" cannot be right because, if it was, then the
regulations would impermissibly defy the statute and would thus be
outside the scope of the Treasury Department's regulatory
authority. This is so, TBL argues, because the regulations allow
for the continued use of the annual-payment rule following a
"disposition" to a related party, even though the statute, under
the Commissioner's reading, requires use of the disposition-
payment rule. But we need not address the scope of Treasury's
authority in order to put paid to TBL's argument that the
regulations rest on the assumption that a "disposition"
encompasses only transfers to unrelated parties. Rather, it is
sufficient for us to simply say, as we have said above, that the
regulations on their face demonstrate no such assumption and, in
fact, point in the exact opposite direction.
- 50 -