Court Opinion

ID: 6114081
Source: CourtListenerOpinion
Date Created: 2022-01-31 20:01:24.612974+00
Date Added: 2024-06-11T08:13:26.863499
License: Public Domain

158 T.C. No. 1

                  UNITED STATES TAX COURT

TBL LICENSING LLC f.k.a. THE TIMBERLAND COMPANY, AND
   SUBSIDIARIES (A CONSOLIDATED GROUP), Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21146-15.                         Filed January 31, 2022.

      F1, a foreign corporation, transferred to F2, its foreign
subsidiary, the sole member interest in DE, an entity disregarded for
Federal tax purposes. DE owned P, a domestic limited liability
company then treated as a corporation for Federal tax purposes. P
owned intangible property, within the meaning of I.R.C.
§ 936(h)(3)(B). P then elected to be disregarded as a separate entity
for Federal tax purposes. P and R agree that F1’s transfer of DE to F2
and P’s election to be disregarded constituted a “reorganization”
within the meaning of I.R.C. § 368(a)(1)(F) and that, as part of that
reorganization, P constructively transferred intangible property to F2.
For the taxable years 2011 through 2017, US1, a domestic corporation
and indirect parent of F1 and F2, included in its income deemed
annual payments under I.R.C. § 367(d)(2)(A)(ii)(I) attributable to that
constructive transfer.

      Held: In order for the operative nonrecognition rules of I.R.C.
§§ 354, 356, and 361 to apply to a reorganization described in I.R.C.

                           Served 01/31/22
                                   -2-

§ 368(a)(1)(F), the transaction--however actually effected--should be
treated as involving (1) a transfer of the old corporation’s assets to the
new corporation, in exchange for stock of the new corporation and the
new corporation’s assumption of any liabilities of the old corporation,
and (2) the old corporation’s distribution to its shareholders of the
stock of the new corporation in cancellation of their stock in the old
corporation.

       Held, further, the constructive distribution by P to F1 of F2
stock that occurred as part of the reorganization by which F2 acquired
P was a “disposition” within the meaning of I.R.C.
§ 367(d)(2)(A)(ii)(II).

      Held, further, P’s constructive distribution of F2 stock to F1
necessarily followed the constructive transfer of intangible property
by P to F2 that occurred as part of the reorganization; consequently, in
the absence of a provision in the regulations to the contrary, P is
required to recognize gain in the intangible property under I.R.C.
§ 367(d)(2)(A)(ii)(II).

       Held, further, no provision in the regulations allows reporting
of deemed annual payments under I.R.C. § 367(d)(2)(A)(ii)(I) rather
than immediate gain recognition under I.R.C. § 367(d)(2)(A)(ii)(II) by
reason of P’s constructive transfer of intangible property. Because P
was no longer recognized as a separate entity for Federal tax purposes
after the reorganization, it could not report the deemed annual
payments described in I.R.C. § 367(d)(2)(A)(ii)(I), and US1 was
neither the U.S. transferor of the intangible property nor the recipient
of the FS2 stock.

       Held, further, the fair market value of transferred intangible
property, for the purpose of determining gain that must be recognized
under I.R.C. § 367(d)(2)(A)(ii)(II), should be determined on the basis
of the property’s entire expected useful life, without regard to the
20-year limit imposed, for some purposes, by Temp. Treas. Reg.
§ 1.367(d)-1T(c)(3).
                                         -3-

      James P. Fuller, Kenneth B. Clark, Larissa B. Neumann, Julia V. Ushakova-

Stein, and Sean P. McElroy, for petitioner.

      John E. Budde, Gretchen A. Kindel, Kimberly B. Tyson, and James M.

Cascino, for respondent.

                                      OPINION

      HALPERN, Judge: In a notice dated May 11, 2015, respondent advised

petitioner that he had determined a deficiency of $504,691,690 in the income tax of

the affiliated group of corporations of which petitioner had been the common

parent for the group’s taxable year ended September 23, 2011. We must decide

whether petitioner is required to recognize ordinary income under section

367(d)(2)(A)(ii)(II)1 as a result of a constructive transfer of intangible property to

TBL Investment Holdings GmbH (TBL GmbH), a Swiss corporation, and, if so,

whether, in determining the amount of that income, the property should be treated,

as a matter of law, as having a useful life limited to 20 years. Each party has

      1
        Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect for the year in issue, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect
for the year in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                          -4-

moved for summary judgment. In addition, respondent has submitted a motion in

limine seeking to exclude stipulations set forth in the parties’ stipulations of fact

and exhibits offered by petitioner. Respondent has also submitted a motion to

strike material included in the memorandum petitioner submitted in support of its

motion for summary judgment. For the reasons explained below, we will grant

respondent’s motion for summary judgment and deny petitioner’s motion for

summary judgment. Because we conclude that the materials subject to

respondent’s motion in limine or motion to strike neither demonstrate petitioner’s

entitlement to summary judgment nor call into question respondent’s entitlement to

summary judgment, we will deny as moot respondent’s motion in limine and

motion to strike.

                                     Background

      The events that gave rise to the dispute before us occurred as part of a

postacquisition restructuring carried out after a business combination involving VF

Corp. (VF) and the Timberland Co. (Timberland). Through its subsidiaries, VF

designs, manufactures, and sells apparel and footwear under brands such as Lee,

Wrangler, Nautica, Vans, and the North Face. Timberland’s business involved the

design, development, manufacture, marketing, and sale of footwear, apparel, and

accessories under its own brand and others, such as SmartWool.
                                        -5-

      The VF and Timberland businesses were combined on September 13, 2011,

by means of a merger into Timberland of an acquisition subsidiary of TBL

International Properties, LLC (International Properties). In the merger, the former

Timberland shareholders received cash in exchange for their Timberland stock.

      VF had organized International Properties in August 2011 as a limited

liability company under Delaware law. The parties have stipulated that

International Properties “has been a disregarded entity from the time of its

formation.”

      Petitioner is also a Delaware limited liability company whose sole member

interest was owned, throughout the events in issue, by International Properties.

The parties have stipulated that “[p]etitioner was treated as a corporation for U.S.

federal income tax purposes at all times during the taxable year at issue.”

      Before the merger in which International Properties acquired Timberland,

VF transferred its membership interest in International Properties to VF

Enterprises S.à.r.l. (VF Enterprises), an indirect foreign subsidiary of VF. As part

of the postacquisition restructuring, petitioner came to own Timberland’s

intangible property, including trademarks, foreign workforce, and foreign customer

relationships.
                                        -6-

      On September 22, 2011, after the close of the merger by which International

Properties acquired the Timberland stock and after petitioner had acquired

Timberland’s intangible property, VF Enterprises contributed to TBL GmbH the

sole member interest in International Properties.2 About a week later, petitioner

elected under Treasury Regulation § 301.7701-3(c)(1)(i) to be disregarded as an

entity separate from its owner, effective September 24, 2011.

      On the Form 926, Return by a U.S. Transferor of Property to a Foreign

Corporation, included with its Federal income tax return for the taxable year ended

September 23, 2011, petitioner reported that the trademarks it acquired from

Timberland had a fair market value of $1,274,100,000. Respondent assigned the

same value to the trademarks in computing the deficiency in issue.

      The parties have stipulated that Lee Bell, Inc. (Lee Bell), an indirect

domestic subsidiary of VF and indirect parent of VF Enterprises, reported income

under section 367(d)(2)(A)(ii)(I) in specified amounts for the taxable years 2011

through 2017. The stipulation does not attribute those amounts to petitioner’s

constructive transfer of intangible property to TBL GmbH, but the materials the

      2
        The record provides no indication that TBL GmbH owned any material
assets before it acquired the sole member interest in International Properties. The
parties stipulated that VF Enterprises capitalized TBL GmbH with cash equal to
“the minimum capital amount for a GmbH under Swiss law.”
                                         -7-

parties have submitted in support of and opposition to the pending motions for

summary judgment demonstrate that each accepts that the inclusions in Lee Bell’s

income relate to that transfer.3 The parties also stipulated that Lee Bell never

owned the intangible property that petitioner constructively transferred to TBL

GmbH.

                                     Discussion

I.    Introduction

      Petitioner and respondent agree that, in the restructuring that followed the

acquisition of Timberland by VF Enterprises, through International Properties,4

      3
        For example, respondent acknowledges that the income reported by Lee
Bell is “attributable to the IP.” And petitioner states that Lee Bell included deemed
annual payments in income “[a]s a result of the Outbound F Reorganization” by
which TBL GmbH acquired petitioner.
      4
        The parties apparently disagree as to how the Timberland acquisition was
financed. In the memorandum it submitted in support of its motion for summary
judgment, petitioner proposed a finding of fact that VF Enterprises “funded the
acquisition of Timberland from existing sources of cash, collecting receivables,
and through related party borrowings.” Respondent objects to petitioner’s
proposed finding. Respondent alleges that VF was the ultimate source of the funds
VF Enterprises used to acquire Timberland. And the materials petitioner cites in
support of its proposed finding are among those covered by respondent’s motion in
limine and motion to strike. Respondent’s principal policy objection to the
transaction in issue, however, seems to be that, in his view, the transaction
involved the use of “untaxed foreign earnings and profits to acquire an unrelated
domestic target.” We see no respect in which the application of section 367(d) to
the transaction should turn on whether it occurred as part of a larger transaction
                                         -8-

petitioner came to own Timberland’s intangible property and then made a

constructive transfer of that property to TBL GmbH, a subsidiary of VF

Enterprises. They agree that petitioner’s constructive transfer of intangible

property occurred as part of a “reorganization” described in section 368(a)(1)(F).

And they agree that, because petitioner--then treated as a U.S. corporation--

constructively transferred intangible property to a foreign corporation in a

transaction that would otherwise qualify for nonrecognition treatment under

section 361(a), section 367(d) applies to the transfer. The parties disagree,

however, on the consequences of section 367(d)’s application.

      The rules of section 367 provide an overlay to the corporate nonrecognition

provisions found in subchapter C of subtitle A, chapter 1 of the Code. When one

of the parties to a transaction is a foreign corporation, affording the transaction the

same nonrecognition treatment it would receive if the parties were domestic could

that may have involved a tax-free repatriation of foreign earnings. In any event, if
VF was the ultimate source of the funds used to acquire Timberland, as respondent
alleges, we do not see how the transaction could be viewed as having effected a
repatriation of earnings of VF Enterprises that had not previously been subject to
U.S. tax. More generally, each party’s motion for summary judgment necessarily
rests on the premise that the case presents “no genuine dispute as to any material
fact.” Rule 121(b). Therefore, each party has implicitly represented that any
factual dispute concerning the source of the funds VF Enterprises used to acquire
Timberland is not material to the legal issue before us. And we, as well, see no
respect in which the financing of the acquisition would affect the question of how
section 367(d) applies to the transaction in issue.
                                          -9-

lead to inappropriate results. When foreign corporations are involved, property can

move in and out of the U.S. tax jurisdiction. Reflecting those changes in status

requires adjustments to the normal nonrecognition rules. In particular, a

U.S. person who makes an “outbound” transfer of property to a foreign corporation

might be required to recognize gain even if, had the transfer been made to a

U.S. corporation, it would have been entitled to nonrecognition treatment. Section

367(a), which applies to outbound transfers of most types of property, achieves

that result by providing, subject to significant exceptions, that the foreign

corporation that receives the property is not treated as a corporation. Outbound

transfers of intangible property are not covered by section 367(a) but are instead

addressed by section 367(d). Section 367(d) generally requires the U.S. transferor

of intangible property to recognize gain in the form of ordinary income, but the

timing of that income recognition varies depending on the circumstances. The

principal dispute between the parties centers on the timing of the income

recognition required by section 367(d).

II.   Recharacterizing the Transaction

      The parties’ disagreement concerning the effect of section 367(d) turns, in

part, on the proper characterization of the larger transaction of which petitioner’s

constructive transfer of intangible property was a part. The parties agree that the
                                        - 10 -

actual transaction should be recharacterized for Federal income tax purposes but

disagree on how. Therefore, we begin our analysis by describing the actual

transaction and deciding on the appropriate recharacterization.

      A.     The Actual Transaction

      The actual events that gave rise to petitioner’s constructive transfer of

intangible property were quite simple. First, VF Enterprises, an indirect foreign

subsidiary of VF, contributed to TBL GmbH, its own foreign subsidiary, the sole

member interest in International Properties. At that time, International Properties

owned the sole member interest in petitioner, and petitioner owned assets,

including intangible property, that it had acquired from Timberland. Petitioner

then elected to be disregarded as an entity separate from its owner, International

Properties (which, in turn, was disregarded as an entity separate from TBL GmbH).

That is the extent of the actual events that gave rise to the dispute before us. Those

events did not include a transfer of intangible property. Upon the completion of

those events, petitioner continued to own the Timberland intangible property. Yet,

the parties agree that petitioner should be treated as having made a transfer of

intangible property to which section 367(d) applies. Therefore, both parties accept

that the actual transaction must be recharacterized in some fashion.
                                         - 11 -

      Adding further complexity, the necessary recharacterization must proceed in

stages. The first stage takes into account various fictions resulting from

application of the entity classification regulations.

      B.     Impact of the Entity Classification Regulations

      As a domestic “eligible entity” with a single owner, International Properties

would have been classified as a disregarded entity unless it had made an election to

be classified as a corporation.5 See Treas. Reg. § 301.7701-3(b)(1)(ii). We infer

from the parties’ stipulation that International Properties has always been

disregarded that it made no election to be classified as a corporation.

      As a domestic eligible entity, petitioner would have been classified, in the

absence of an election to the contrary, as either a partnership or a disregarded

entity, depending on the number of its owners. Id. subpara. (1). We thus infer

from the parties’ stipulation that petitioner was treated as a corporation throughout

the taxable year in issue (ended September 23, 2011) that petitioner initially filed

      5
        The regulations use the term “eligible entity” to refer to a “business entity”
other than a state law corporation or other entity that is required to be classified as
a corporation for Federal tax purposes. Treas. Reg. § 301.7701-3(a). An entity is a
business entity if it is recognized for Federal tax purposes and not classified as a
trust “or otherwise subject to special treatment under the Internal Revenue Code.”
Treas. Reg. § 301.7701-2(a). Thus, limited liability companies like International
Properties are generally eligible entities.
                                         - 12 -

an election under Treasury Regulation § 301.7701-3(c)(1)(i) to be classified as an

“association” (and thus as a corporation). See Treas. Reg. § 301.7701-2(b)(2)

(including within the definition of “corporation” any “association (as determined

under § 301.7701-3)”).

      Because International Properties was disregarded as an entity separate from

its owner and petitioner was, on September 22, 2011, classified as a corporation,

VF Enterprises’ contribution to TBL GmbH of the sole member interest in

International Properties should be treated, in the first instance, as a contribution of

“stock” in petitioner.

      Next, we consider the effects of what we infer to have been petitioner’s

second entity classification election: the election that became effective on

September 24, 2011, to be disregarded as an entity separate from its owner. As a

general matter, an eligible entity cannot make more than one entity classification

election every five years. Treas. Reg. § 301.7701-3(c)(1)(iv). That limitation,

however, does not apply to “[a]n election by a newly formed eligible entity that is

effective on the date of formation.” Id. Because the parties accept the validity of

petitioner’s election to be a disregarded entity, we assume that its prior

classification as a corporation resulted from an election that was effective on the

date of its formation.
                                         - 13 -

      The regulations provide a series of constructs to explain an entity’s change

in classification for Federal tax purposes. Treasury Regulation § 301.7701-

3(g)(1)(iii) supplies the construct for cases in which an entity with a single owner

that had been classified as an association elects to be disregarded. In that event,

“the following is deemed to occur: The association distributes all of its assets and

liabilities to its single owner in liquidation of the association.” Treas. Reg.

§ 301.7701-3(g)(1)(iii).

      Taking into account only the constructs required to explain the Federal tax

classifications of the participating entities, the actual transaction would be

recharacterized as a (1) contribution by VF Enterprises to TBL GmbH of the stock

of petitioner (then a corporation), followed by (2) petitioner’s distribution of all of

its assets and liabilities to TBL GmbH in liquidation. Under that construct,

petitioner would be treated as having transferred intangible property. But that

transfer--a liquidating distribution to TBL GmbH--would not have been a transfer

to which section 367(d) applies. Section 367(d) applies to a transfer of intangible

property by a U.S. person to a foreign corporation only if the transfer takes the

form of “an exchange described in section 351 or 361.” For an exchange to be

described in section 351 or 361, it must be a transfer of property in exchange--at

least in part--for stock of the recipient. Under the construct supplied by the entity
                                        - 14 -

classification regulations, petitioner would not be treated as having received TBL

GmbH stock in exchange for the transferred intangible property. Instead,

petitioner would be treated as having distributed the intangible property in

liquidation--in cancellation of its own stock. Because the parties agree that

petitioner made a transfer of intangible property to which section 367(d) applies, it

follows that our recharacterization of the actual transfer remains incomplete.

      C.     Further Recharacterization Under the Reorganization Rules

      The next stage of recharacterization results from the application of the

reorganization rules to the transactions imputed under the entity classification

regulations. The parties stipulated that “[t]he contribution by VF Enterprises

S.à.r.l. of TBL International Properties LLC to TBL Investment Holdings GmbH

. . . combined with the check-the-box election for Petitioner to be treated as a

disregarded entity . . . was an F reorganization under Section 368(a)(1)(F).”

Section 368(a)(1)(F) includes within the definition of “reorganization” “a mere

change in identity, form, or place of organization of one corporation, however

effected.” In 2015, the Treasury Department issued regulations that elaborate on

that sparse statutory definition. Treas. Reg. § 1.368-2(m). By its terms, however,

paragraph (m) of Treasury Regulation § 1.368-2 “applies to transactions occurring

on or after September 21, 2015.” Id. subpara. (5). The regulations thus do not
                                        - 15 -

apply to the transaction in issue. For periods before the current regulations were

effective, elaboration on the statutory definition was left to the courts. One leading

case stated:

             Although the exact function and scope of the (F) reorganization
      in the scheme of tax-deferred transactions described in section
      368(a)(1) have never been clearly defined, it is apparent from the
      language of subparagraph (F) that it is distinguishable from the five
      preceding types of reorganizations as encompassing only the simplest
      and least significant of corporate changes. The (F)-type
      reorganization presumes that the surviving corporation is the same
      corporation as the predecessor in every respect, except for minor or
      technical differences. . . . For instance, the (F) reorganization
      typically has been understood to comprehend only such insignificant
      modifications as the reincorporation of the same corporate business
      with the same assets and the same stockholders surviving under a new
      charter either in the same or in a different State, the renewal of a
      corporate charter having a limited life, or the conversion of a U.S.-
      chartered savings and loan association to a State-chartered institution.

             The decisions involving subparagraph (F) or its counterpart in
      prior revenue acts consistently have imposed at least one major
      limitation on transactions that have been claimed to qualify
      thereunder: if a change in stock ownership or a shift in proprietary
      interest occurs, the transaction will fail to qualify as an (F)
      reorganization. . . .

Berghash v. Commissioner, 43 T.C. 743, 752 (1965) (footnote omitted), aff’d, 361

F.2d 257 (2d Cir. 1966).

      The parties’ stipulation that VF Enterprises’ contribution to TBL GmbH of

the sole member interest in International Properties and petitioner’s election to be a

disregarded entity resulted in a reorganization described in section 368(a)(1)(F) is
                                        - 16 -

consistent with the caselaw interpreting that section. Accordingly, we see no

reason to set aside the parties’ stipulation. TBL GmbH emerged from the construct

imposed by the entity classification regulations as “the same corporation” as

petitioner “except for minor or technical differences.” Id. VF Enterprises’ transfer

to TBL GmbH of the stock of petitioner and the deemed liquidation of petitioner

into TBL GmbH simply “reincorporat[ed]” petitioner’s business. Id. After the

transactions, TBL GmbH owned “the same assets” and had “the same

stockholder[]” as petitioner. Id. Petitioner’s business survived in a new legal

form, incorporated in Switzerland rather than Delaware.

      That the constructive transactions resulting from the application of the entity

classification regulations effected a reorganization described in section

368(a)(1)(F) requires further recharacterization. Section 368(a) is only a

definitional provision; it describes those transactions that qualify as reorganizations

but does not itself prescribe their tax consequences. The operative rules are found

elsewhere. Sections 354 and 356 provide nonrecognition treatment, in whole or in

part, at the shareholder level, and section 361 provides nonrecognition treatment at

the corporate level. Fitting an F reorganization within the operative

nonrecognition rules requires that the transaction--however actually effected--be

treated as a transfer of assets by the old corporation to the new in exchange for
                                        - 17 -

stock of the new corporation and the old corporation’s distribution of that stock to

its shareholders. Under that construct, the old corporation’s asset transfer will

qualify for nonrecognition treatment under section 361(a) and the stock

distribution will qualify for nonrecognition treatment under section 361(c). 6 The

shareholders’ exchange of stock of the old corporation for that of the new will

receive nonrecognition treatment under section 354(a). 7

      Treasury Regulation § 1.367(a)-1(f) confirms that the above construct

applies at least to those reorganizations described in section 368(a)(1)(F) in which

“the transferor corporation is a domestic corporation, and the acquiring corporation

is a foreign corporation.” In those circumstances

      6
          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.” Under section 361(c), a
corporation that is a party to a reorganization does not recognize gain or loss on a
distribution of “qualified property” in pursuance of the plan of reorganization. For
purposes of section 361(c), the term “qualified property” includes “any stock in (or
right to acquire stock in) another corporation which is a party to the reorganization
. . . if such stock (or right) . . . is received by the distributing corporation in the
exchange.” § 361(c)(2)(B)(ii).
      7
        Section 354(a) provides: “No gain or loss shall be recognized if stock or
securities in a corporation a party to a reorganization are, in pursuance of the plan
of reorganization, exchanged solely for stock or securities . . . in another
corporation a party to the reorganization.”
                                        - 18 -

      there is considered to exist--

            (i) A transfer of assets by the transferor corporation to the
      acquiring corporation under section 361(a) in exchange for stock (or
      stock and securities) of the acquiring corporation and the assumption
      by the acquiring corporation of the transferor corporation’s liabilities;

             (ii) A distribution of the stock (or stock and securities) of the
      acquiring corporation by the transferor corporation to the shareholders
      (or shareholders and security holders) of the transferor corporation;
      and

             (iii) An exchange by the transferor corporation’s shareholders
      (or shareholders and security holders) of their stock (or stock and
      securities) of the transferor corporation for stock (or stock and
      securities) of the acquiring corporation under section 354(a).

Treas. Reg. § 1.367(a)-1(f)(1).

      Although the Treasury Department adopted the rule quoted above in final

form in September 2015, T.D. 9739, 2015-41 I.R.B. 528, the rule applies “to

transactions occurring on or after January 1, 1985,” Treas. Reg. § 1.367(a)-1(g)(4).

The rule first appeared in proposed and temporary regulations issued in January

1990. T.D. 8280, 1990-1 C.B. 80.

      The preamble to the 1990 temporary regulations states that they were

intended to “clarify” that reorganizations described in section 368(a)(1)(F) include

“exchanges under sections 354(a) and 361(a).” Id. at 80. The Treasury

Department provided the guidance “to apprise taxpayers of the transfers occurring

in a reorganization and to prevent tax avoidance in these transactions.” Id.
                                         - 19 -

      As explained above, the construct described in Treasury Regulation

§ 1.367(a)-1(f) would be necessary, regardless of the jurisdictions in which the

parties are incorporated, to allow for the application to the transaction of the

operative nonrecognition rules provided in sections 354 and 361. Taxpayers would

have no apparent incentive to argue for an alternative construct. Any construct that

would avoid a section 367 transfer would also avoid a section 361(a) exchange,

thereby calling into question the eligibility of the transaction for nonrecognition

treatment in the first instance. The parties involved in an outbound

F reorganization, however, might have argued that their transaction, having

effected “only the simplest and least significant of corporate changes,” Berghash,

43 T.C. at 752, did not involve any transfers or distributions at all--that the

reorganization was a nonevent. Treasury Regulation § 1.367(a)-1(f) forecloses any

such argument.8

      8
        An argument that an outbound F reorganization involves no actual or
constructive exchanges or distributions would have been difficult to sustain in any
event in the face of United States v. Phellis, 257 U.S. 156 (1921), and Marr v.
United States, 268 U.S. 536 (1925). In those cases, the Supreme Court concluded
that participating shareholders recognized income or gain from transactions in
which New Jersey corporations reincorporated in Delaware. As Justice Brandeis
observed in Marr, 268 U.S. at 541: “[T]he new corporation is essentially different
from the old. A corporation organized under the laws of Delaware does not have
the same rights and powers as one organized under the laws of New Jersey.” If a
New Jersey corporation is “essentially different” from a Delaware corporation, so
                                        - 20 -

      Respondent relies on Treasury Regulation § 1.367(a)-1(f) to establish that

the constructive events that the parties agree constituted an F reorganization

included a distribution of TBL GmbH stock by petitioner to VF Enterprises.

Petitioner describes respondent’s reliance on that regulation as “erroneous[].”

According to petitioner, “Treas. Reg. § 1.367(a)-1 applies to § 367(a), not § 367(d)

or the § 367(d) Regulations.”9

that a reincorporation from one state to the other would be a taxable transaction in
the absence of an applicable nonrecognition rule, then, a fortiori, a Swiss
corporation cannot be viewed as the same entity as a Delaware corporation (much
less a Delaware limited liability company that has elected, for Federal tax
purposes, to be treated as a corporation). A year after the issuance of the 1990
proposed and temporary regulations, the Court relied on Phellis and Marr to hold
that “an exchange of property gives rise to a realization event so long as the
exchanged properties are ‘materially different’--that is, so long as they embody
legally distinct entitlements.” Cottage Sav. Ass’n v. Commissioner, 499 U.S. 554,
566 (1991).
      9
        Petitioner’s submissions display a marked penchant for defined terms,
demonstrated by the four-page glossary included with its motion for summary
judgment. Petitioner’s glossary defines “§ 367(d) Regulations” as “Temp. Treas.
Reg. § 1.367(d)-1T that was in effect throughout the calendar year 2011.”
Respondent purports to “object[]” to petitioner’s use of its own defined terms “on
the ground that they are not neutral terms with neutral definitions to assist the
reader, but rather carry embedded interpretations or connotations which skew their
meaning.” To the extent that our quotations of petitioner’s arguments include
petitioner’s own defined terms, we intend those quotations only to indicate what
petitioner argues. We recognize that the definitions petitioner offers of the terms
of its own creation, like the arguments of parties generally, may not be “neutral.”
                                        - 21 -

      Petitioner’s position, as we understand it, rests on paragraph (a) of

Temporary Treasury Regulation § 1.367(a)-1T (captioned “Purpose and scope of

regulations”), as adopted in 1986. Temporary Treasury Regulation § 1.367(a)-

1T(a), when initially adopted, began as follows: “These regulations set forth rules

relating to the provisions of section 367(a) concerning certain transfers of property

to foreign corporations. This § 1.367(a)-1T provides general rules explaining the

effect of section 367(a)(1) and describing the transfers of property that are subject

to the rule of that section.” T.D. 8087, 1986-1 C.B. 175, 177. When the Treasury

Department added paragraph (f) to Temporary Treasury Regulation § 1.367(a)-1T

in 1990, it did not revise paragraph (a). T.D. 8280, 1990-1 C.B. at 82. Therefore,

petitioner apparently reasons, the rule that now appears in Treasury Regulation

§ 1.367(a)-1(f), when initially adopted, applied only for the purpose of

implementing section 367(a) and had no application to section 367(d). And when

the rule was adopted in its current form, the Treasury Department did not indicate

an intent to broaden the provision’s scope.

      From a narrow, technical standpoint, petitioner’s argument might have some

merit. But the argument raises difficult questions that petitioner neither addresses

nor even acknowledges. As noted above, the Treasury Department added

paragraph (f) to Temporary Treasury Regulation § 1.367(a)-1T “to prevent tax
                                         - 22 -

avoidance” in outbound F reorganizations. T.D. 8280, 1990-1 C.B. at 80. The

preamble to the 1990 amendments did not limit their purpose to preventing the

avoidance of section 367(a). We can think of no reason why concerns about tax

avoidance in outbound F reorganizations would be limited to those involving

tangible property. Moreover, as respondent observes, petitioner’s argument

suggests that its transfer of intangible property was governed by a construct

different from that applicable to its transfer of other property. Petitioner offers no

explanation for why and how an outbound F reorganization would be treated as

having been effected by two different and contrary constructs.

      Even if we were to leave policy considerations (and perhaps common sense)

aside and accept petitioner’s technical argument that the construct provided in

Treasury Regulation § 1.367(a)-1(f) does not apply to the F reorganization in issue,

we would need to identify an alternative construct to explain the transaction. That

construct would necessarily include an asset transfer described in section 361(a).

(Otherwise, section 367(d) would not apply to the transaction in the first place.)

Thus, petitioner would necessarily be treated as having transferred its intangible

property to TBL GmbH in exchange for TBL GmbH stock. Upon the completion

of the transaction, however, petitioner no longer owned any TBL GmbH stock. In

fact, petitioner was no longer recognized as a corporation or any other type of
                                        - 23 -

entity for Federal tax purposes. As a result of its second entity classification

election, petitioner was disregarded as an entity separate from TBL GmbH. Upon

completion of the transaction, VF Enterprises owned all of the TBL GmbH stock.

Therefore, any TBL GmbH stock constructively issued to petitioner must have

found its way--by some means--to VF Enterprises. The circumstances do not

allow for treating petitioner as having received consideration in exchange for the

TBL GmbH stock that ended up with VF Enterprises. It follows that petitioner’s

constructive disposition of that stock necessarily took the form of a distribution by

petitioner to VF Enterprises in respect of the stock of petitioner that VF Enterprises

was treated as having owned while petitioner was classified as a corporation. If

that distribution was not “in pursuance of the plan of reorganization,” and therefore

not covered by section 361(c), petitioner would have recognized gain on the

distribution in an amount equal to the gain in the property it constructively

transferred to TBL GmbH. See § 311(b) (requiring recognition of gain on

distributions by a corporation of appreciated property), § 358(a)(1) (providing as a

general rule that the basis of nonrecognition property received in a section 361

exchange equals the basis of the property exchanged).
                                        - 24 -

      On balance, we find unpersuasive petitioner’s argument about the scope of

Treasury Regulation § 1.367(a)-1(f). Treasury Regulation § 1.367(a)-1(a)

provides:

      Section 367(a)(1) provides the general rule concerning transfers of
      property by a United States person . . . to a foreign corporation.
      Paragraph (b) of this section provides general rules explaining the
      effect of section 367(a)(1). Paragraph (c) of this section describes
      transfers of property that are described in section 367(a)(1).
      Paragraph (d) of this section provides definitions that apply for
      purposes of sections 367(a) and (d) and the regulations thereunder.
      Paragraphs (e) and (f) of this section provide rules that apply to
      certain reorganizations described in section 368(a)(1)(F). Paragraph
      (g) of this section provides dates of applicability. For rules
      concerning the reporting requirements under section 6038B for certain
      transfers of property to a foreign corporation, see § 1.6038B-1.

While paragraphs (b) and (c) of Treasury Regulation § 1.367(a)-1 are limited to the

interpretation of section 367(a), no such limitation applies to paragraph (f). Even if

petitioner were correct that Temporary Treasury Regulation § 1.367(a)-1T(f)

applied only for the purpose of implementing section 367(a), that temporary

provision expired three years after its issuance. See § 7805(e)(2). Petitioner’s

transaction is governed not by the expired temporary provision but by the

provision proposed in 1990 and adopted in final form in 2015. We reject as

contrary to the stated purpose of the provision any inference that might otherwise

be drawn from the failure to amend Temporary Treasury Regulation § 1.367(a)-
                                        - 25 -

1T(a) when the provision in question was initially adopted as paragraph (f) of that

same regulation.10

      In any event, we do not regard the applicability of Treasury Regulation

§ 1.367(a)-1(f) as dispositive. As we read that provision, it simply clarifies that the

construct that necessarily applies to an F reorganization to allow for the application

of the operative nonrecognition provisions of sections 354 and 361 applies without

regard to whether the transaction is “inbound, outbound, [or] foreign to foreign.”

T.D. 8280, 1990-1 C.B. at 80. To ensure that the operative nonrecognition

provisions apply, we would characterize the transaction that the parties agree to

      10
         Petitioner has no cause for complaint about the retroactive effect of
Treasury Regulation § 1.367(a)-1(f). Until a 1996 amendment of section 7805(b),
regulations generally applied retroactively unless the Secretary of the Treasury
exercised his discretion to apply them prospectively. As amended in 1996, section
7805(b) limits the extent to which regulations can apply retroactively. The
amendment, however, applies only to regulations that relate to statutory provisions
enacted on or after July 30, 1996. Taxpayer Bill of Rights 2, Pub. L. No. 104-168,
§ 1101(b), 110 Stat. 1452, 1469. While Congress has amended section 367(d)
several times since July 30, 1996, those amendments have no apparent bearing on
the issue before us. Therefore, it is not clear whether the 1996 amendment of
section 7805(b) limits the extent to which Treasury Regulation § 1.367(a)-1(f) can
be applied retroactively. Moreover, respondent’s application of Treasury
Regulation § 1.367(a)-1(f) to the transaction in issue would not violate section
7805(b) even if that provision, in its current form, were applicable. The statute
allows regulations to apply retroactively back to “the date on which any proposed
or temporary regulation to which such final regulation relates was filed with the
Federal Register.” § 7805(b)(1)(B).
                                         - 26 -

have been an F reorganization as involving both a transfer of property described in

section 361(a) and a distribution of the stock of the acquiring corporation described

in section 361(c). We would apply that construct regardless of whether Treasury

Regulation § 1.367(a)-1(f) directs us to do so.

      We thus need not address petitioner’s argument that the circumstances

surrounding the adoption of Treasury Regulation § 1.367(a)-1(f) require us to

disregard it. Petitioner contends that “[t]he facts here lead to the reasonable

inference that Respondent finalized Treas. Reg. § 1.367(a)-1 to support his

argument that Treas. Reg. § 1.367(a)-1(f) applies in this case.” On the basis of

such an inference, petitioner argues that “Respondent’s interpretation and

application of Treas. Reg. § 1.367(a)-1(f) to the transaction at issue is therefore a

litigating position that should be disregarded.” In support of that argument,

petitioner seeks to submit two sets of materials that are covered by respondent’s

motion in limine and motion to strike. First, petitioner proffered materials from the

legal file relating to the adoption of Treasury Regulation § 1.367(a)-1(f) that it

received in response to requests made under the Freedom of Information Act

(FOIA). Second, petitioner seeks to submit the annual priority guidance plans for

2010-2011 through 2017-2018 published by the Treasury Department’s Office of

Tax Policy and the Internal Revenue Service (IRS).
                                        - 27 -

      It is perhaps unsurprising that petitioner is unable to point to any material

obtained in response to its FOIA requests that acknowledges that respondent’s

schedule in adopting Treasury Regulation § 1.367(a)-1(f) was motivated by an

effort to improve his position in the case before us. Petitioner’s only citation of

that material in the arguments it advanced concerning the motions for summary

judgment is to a “Case History” that states that the “case” (relating to the

regulation project) was opened on May 15, 2015--four days after respondent issued

the notice of deficiency in the present case. From that coincidence in timing,

petitioner surmises that “Respondent was developing his litigation position . . .

[when] he began the process for finalizing Treas. Reg. § 1.367(a)-1(f).” And on

the basis of that surmise, petitioner then infers that respondent’s purpose in

adopting the regulation in final form when he did was to bolster his litigating

position in the present case.

      In his motion in limine, respondent observes that petitioner did not cite the

so-called business plans in the memorandum it submitted in support of its motion

for summary judgment. In its opposition to respondent’s motion in limine,

petitioner advised us that those documents are relevant, in its view, because of

respondent’s reliance on Treasury Regulation § 1.367(a)-1(f). Petitioner observes

that “Treas. Reg. § 1.367(a)-1(f) was not on the IRS Priority Guidance Plan
                                         - 28 -

between 2010 and 2016.” Thus, the annual business plans for that period,

petitioner suggests, “help confirm that the three decades late, retroactive, and

surprising finalization of Treas. Reg. § 1.367(a)-1(f) in the course of this litigation

was not an ordinary, planned event.”

      The mere coincidence in timing between the initiation of the present case

and the adoption in final form of Treasury Regulation § 1.367(a)-1(f) hardly

establishes that the agency’s purpose in finalizing the regulation when it did was to

bolster its position in the case before us. Moreover, the rule had been proposed in

1990--long before petitioner engaged in the transaction in issue.

      In any event, for the reasons explained above, our conclusion that the

F reorganization included a constructive distribution of TBL GmbH stock does not

depend on Treasury Regulation § 1.367(a)-1(f). Consequently, we need not

address further petitioner’s argument concerning the circumstances that

precipitated the adoption of the regulation in final form.

      D.     Conclusion: Result of Recharacterization

      We conclude that VF Enterprises’ transfer to TBL GmbH of the sole

member interest in International Properties and petitioner’s election to be

disregarded as an entity separate from TBL GmbH effected a reorganization

described in section 368(a)(1)(F). As part of that reorganization, petitioner should
                                          - 29 -

be treated as having transferred its intangible and other properties to TBL GmbH in

exchange for TBL GmbH stock and as having distributed that TBL GmbH stock to

VF Enterprises in cancellation of the stock VF Enterprises had been treated as

holding in petitioner during the time that petitioner was classified as a corporation

for Federal tax purposes. We now turn to the question of how section 367(d)

applies to those constructive transactions.

III.   Application of Section 367(d)

       Section 367(d)(1) applies, “[e]xcept as provided in regulations . . . if a

United States person transfers any intangible property (within the meaning of

section 936(h)(3)(B)) to a foreign corporation in an exchange described in section

351 or 361.” § 367(d)(1). The parties agree that petitioner’s constructive transfer

of property to TBL GmbH as part of the F reorganization was subject to section

367(d). Thus, the parties apparently agree that petitioner was a United States

person, that the property petitioner constructively transferred to TBL GmbH in the

F reorganization included intangible property, within the meaning of section

936(h)(3)(B), and that the transfer was an exchange described in section 361.

       When section 367(d)(1) applies to a transfer,

       the United States person transferring . . . [the intangible] property . . .
       [is] treated as--
                                        - 30 -

            (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.

§ 367(d)(2)(A). Section 367(d)(2)(C) provides: “For purposes of this chapter, any

amount included in gross income by reason of this subsection shall be treated as

ordinary income. For purposes of applying section 904(d) [related to the foreign

tax credit], any such amount shall be treated in the same manner as if such amount

were a royalty.”

      Given the parties’ agreement on the application of section 367(d), it follows

that they agree that petitioner is treated under section 367(d)(2)(A)(i) as having

sold its intangible property for one or more contingent payments. Their

disagreement centers on when petitioner should be treated as having received

payment and thus when the resulting income should be recognized. The answer to

that question turns on which of the two subclauses of section 367(d)(2)(A)(ii)
                                         - 31 -

applies. 11 Respondent argues that subclause (II) applies, with the result that

petitioner recognized all of the income from its deemed sale of intangible property

for the taxable year in issue. Petitioner disputes the application of the immediate

gain recognition rule provided in that subclause.

      A.     Did a “Disposition” Occur?

      Subclause (II) applies only in the event of a “disposition following [the]

transfer” of intangible property. Respondent argues that petitioner’s constructive

distribution to VF Enterprises of the stock of TBL GmbH that it (constructively)

received in exchange for its intangible property was a “disposition” within the

meaning of subclause (II). In support of his position, respondent invokes the

conference report on the Deficit Reduction Act of 1984, which states the

conferees’ intent “that disposition of (1) the transferred intangible by a transferee

corporation, or (2) the transferor’s interest in the transferee corporation will result

      11
        Respondent accepts the framing of the issue presented in the text, but
petitioner does not. Respondent describes the parties’ dispute as being “over
which rule of section 367(d)(2)(A)(ii) applies.” That is how we see the dispute as
well. Petitioner, however, contends that respondent’s “statement of the issue . . . is
an apparent attempt to dodge . . . specific provisions” in the applicable regulations.
Petitioner suggests that the analysis should “start[] with” the regulations, rather
than the statute that those regulations serve to interpret. Petitioner’s reframing of
the issue, however, would have no apparent consequence. Even if we were to start
our analysis with the regulations, that analysis would be incomplete without
considering the statute as well.
                                          - 32 -

in recognition of U.S.-source ordinary income to the original transferor.” H.R.

Rep. No. 98-861, at 955 (1984) (Conf. Rep.). As respondent reads the conference

report, it establishes that, when subclause (II) refers to a “direct disposition,” it

means “a disposition of the IP [intangible property] itself by the transferee foreign

corporation,” and its reference to “indirect” dispositions encompasses “a

disposition by the domestic corporation of an interest in, i.e., the stock of, the

transferee foreign corporation that owns the IP.”

      Although petitioner alludes to the prospect that any distribution of TBL

GmbH stock deemed to have occurred as part of the reorganization was not a

“disposition” within the meaning of section 367(d)(2)(A)(ii)(II), it does not

develop a coherent argument to that effect. Petitioner suggests that “[t]he deemed

distribution is a constructive transaction that occurs only for purposes of applying

certain reorganization rules.” Petitioner offers no explanation, however, for why

the constructive distribution should be taken into account in applying section

361(c) but not section 367(d). In fact, the deemed transfer of intangible property

that petitioner accepts as the basis for section 367(d)’s application was just as

much a construct of the reorganization rules as the deemed distribution. We see no

reason to take one aspect of the reorganization construct into account in applying

section 367(d) but not the other.
                                         - 33 -

      We agree with respondent’s reading of the 1984 conference report and

conclude, in the absence of any credible argument to the contrary, that petitioner’s

constructive distribution to VF Enterprises of the stock of TBL GmbH, the

transferee foreign corporation, was a “disposition” within the meaning of section

367(d)(2)(A)(ii)(II).

      B.     Did the Disposition “Follow” the Section 367(d) Transfer?

      We next take up the question of whether the disposition “followed” the

section 367(d) transfer. Petitioner accuses respondent of “slic[ing]” the

F reorganization “into its component parts . . . so that there is first a deemed asset

transfer of the IP and then there is a separate, subsequent deemed indirect

disposition of that same intangible property in the same reorganization

transaction.” Relying on the step transaction doctrine, petitioner asserts that,

because any deemed distribution of TBL GmbH stock was, along with the section

367(d) transfer, part of a single reorganization, both steps should be treated as

having occurred simultaneously.

      We are unpersuaded by petitioner’s step transaction argument. That the

asset transfer and stock distribution were elements of a single overall

reorganization does not require treating them as having occurred in precise

simultaneity. As respondent observes, petitioner cannot have distributed the stock
                                         - 34 -

it received in exchange for its intangible property until it first received that stock:

Its constructive exchange of intangible property for TBL GmbH stock necessarily

preceded--if only by a moment--its distribution of that stock to VF Enterprises. 12

The stock distribution might not have “follow[ed]” the transfer of intangible

property by much, but, as a matter of logic, it had to “follow[].”13

      The principal authority petitioner relies on in support of its step transaction

argument, Commissioner v. Clark, 489 U.S. 726 (1989), is readily distinguishable

from the present case. Clark involved the question of whether a shareholder’s

receipt of cash “boot” in a reorganization “ha[d] the effect of the distribution of a

dividend” and thus should have been taxed as ordinary income rather than capital

      12
         Petitioner accuses respondent of “conflat[ing] a deemed distribution with
an actual distribution.” “If a deemed event is created,” petitioner reasons, “there is
nothing illogical or improper about providing for simultaneity.” We question the
appropriateness of deeming circumstances whose actual occurrence would be
impossible. Moreover, petitioner’s reasoning would draw an unjustifiable
distinction among F reorganizations depending on the manner in which they were
implemented.
      13
         We therefore view it as being of no moment that, as petitioner observes,
“Treas. Reg. § 1.367(a)-1(f) . . . does not contain a timing sequence for when the
distribution is deemed to occur.” The relative timing of the three steps in the
construct adopted in the regulation to explain an outbound F reorganization was
apparently unimportant to the drafters of the regulation. Therefore, the regulation
states only that the three components are “considered to exist.” Id. But we need
not rely on the specific terms of the regulation for the proposition that the U.S.
transferor’s distribution of stock of the transferee foreign corporation necessarily
follows its receipt of that stock in exchange for the transferred intangible property.
                                         - 35 -

gain. See § 356(a)(2). The taxpayer in Clark had been the sole shareholder of

Basin Surveys, Inc. (Basin). N.L. Industries, Inc. (NL), acquired Basin by means

of a merger of Basin into an acquisition subsidiary of NL (a “forward triangular

merger”). The taxpayer received both NL stock and cash in exchange for his Basin

stock.

         The Court reasoned that the question of whether the boot the taxpayer

received was equivalent to a dividend “should be answered by examining the effect

of the exchange as a whole.” Commissioner v. Clark, 489 U.S. at 737. The Court

found support for its reading of the statute in the “well-established ‘step-

transaction’ doctrine.” Id. at 738. It described that doctrine as providing that

“interrelated yet formally distinct steps in an integrated transaction may not be

considered independently of the overall transaction.” Id.

         Because it concluded that the characterization of the boot had to be made

looking at the overall transaction, the Court rejected the Commissioner’s analogy

to a cash distribution before the reorganization. Had the taxpayer received the cash

in redemption of part of his stock in the target corporation before the

reorganization, his receipt of the cash would have been equivalent to a dividend

because it would not have reduced his proportionate ownership of the target. The

taxpayer would have owned fewer shares in the target but would still have owned
                                        - 36 -

100% of the target’s stock. See § 302(d) (treating redemptions not qualifying for

exchange treatment under section 302(a) and (b) as distributions in respect of

stock); United States v. Davis, 397 U.S. 301, 307 (1970) (holding that a

redemption of stock from a sole shareholder is always equivalent to a dividend).

As the Court explained in Clark:

             Viewing the exchange in this case as an integrated whole, we
      are unable to accept the Commissioner’s prereorganization analogy.
      The analogy severs the payment of boot from the context of the
      reorganization. Indeed, only by straining to abstract the payment of
      boot from the context of the overall exchange, and thus imagining that
      Basin made a distribution to the taxpayer independently of NL’s
      planned acquisition, can we reach the rather counterintuitive
      conclusion urged by the Commissioner--that the taxpayer suffered no
      meaningful reduction in his ownership interest as a result of the cash
      payment. . . .

Commissioner v. Clark, 489 U.S. at 738. Measuring the effect of the taxpayer’s

receipt of cash by the extent to which it required him to forgo an increased

proportionate interest in NL, the Court concluded that the taxpayer was not

required to recognize ordinary income as a result of his receipt of boot.

      Respondent’s position in the case before us is not contrary to Clark.

Respondent accepts that petitioner’s section 361(a) transfer of intangible property

and its section 361(c) distribution of the stock it received in exchange for that

property occurred as part of an overall reorganization. Respondent is hardly

considering the asset transfer and stock distribution separately. Indeed, respondent
                                        - 37 -

has determined the tax consequences of petitioner’s constructive transfer of

intangible property taking into account the distribution of TBL GmbH stock that

occurred as part of the same overall transaction. He simply recognizes that, as a

logical matter, petitioner’s receipt of the TBL GmbH stock in exchange for the

transferred intangible property was a precondition to its distribution of that stock to

VF Enterprises. The distribution could not have occurred until the exchange of

property for stock had been completed: One cannot distribute what one does not

have. Characterizing one step by reference to other steps that occur as part of a

larger transaction does not require viewing the steps as having occurred

simultaneously. Nothing in Clark suggests otherwise. 14

      Petitioner also invokes Treasury Regulation § 301.7701-3(g)(3)(i) in support

of its claim that “[t]he Outbound F Reorganization[15] and its deemed component

parts . . . all occurred simultaneously.” That section provides: “Any transactions

that are deemed to occur under this paragraph (g) as a result of a change in

      14
        Clark raised no issue of temporal sequence: It involved a single exchange
of Basin stock for NL stock and cash.
      15
        In regard to the term “Outbound F Reorganization,” petitioner’s glossary
states: “TBL (Petitioner) was reorganized into TBL GmbH, a Swiss controlled
foreign corporation within the VF Controlled Group, in an outbound § 368(a)(1)(F)
reorganization transaction.” Regarding “VF Controlled Group,” the glossary
states: “VF is the ultimate U.S. parent company, and the direct or indirect owner,
of an affiliated group of global corporations.”
                                          - 38 -

classification are treated as occurring immediately before the close of the day

before the election is effective.” Petitioner reasons that its election to be

disregarded “caused” the outbound F reorganization. Consequently, the

constituent elements of that reorganization necessarily occurred “immediately

before the close of” September 23, 2011, the day before its election to be

disregarded became effective. If the constituent elements of the F reorganization

all happened immediately before the close of that day, petitioner concludes, they

must all have occurred simultaneously.

       Again, petitioner’s argument is flawed in several respects. First, the timing

rule provided in Treasury Regulation § 301.7701-3(g)(3)(i) applies only to

“transactions that are deemed to occur under this paragraph (g).” The transaction

that would have been “deemed to occur” under Treasury Regulation § 301.7701-

3(g)(1)(iii) as a result of petitioner’s election to be a disregarded entity was

petitioner’s “distribut[ion of] all of its assets and liabilities to its single owner in

liquidation.” That liquidation, viewed in isolation, would have been subject to

section 332, which addresses the liquidation of a subsidiary corporation into a

parent corporation that owns at least 80% of the subsidiary’s stock. But petitioner

accepts that the transaction in issue “cannot possibly be characterized as a parent-

subsidiary liquidation governed by § 332.” So petitioner necessarily accepts that
                                          - 39 -

the transactions “deemed to occur” in the outbound F reorganization are not those

described in paragraph (g) of Treasury Regulation § 301.7701-3. Instead, because

petitioner’s election to be disregarded resulted in a reorganization described in

section 368(a)(1)(F), the construct that would otherwise have been supplied by the

entity classification regulations is superseded by a construct necessary to apply to

the reorganization the operative nonrecognition provisions of sections 354 and 361.

       Even when applicable, the “end-of-the-prior-day” timing rule provided in

Treasury Regulation § 301.7701-3(g)(3)(i) does not treat all of the transactions

“deemed to occur under . . . paragraph (g)” as having occurred simultaneously.

For example, Treasury Regulation § 301.7701-3(g)(1)(i) provides: “If an eligible

entity classified as a partnership elects . . . to be classified as an association, the

following is deemed to occur: The partnership contributes all of its assets and

liabilities to the association . . . , and immediately thereafter, the partnership

liquidates by distributing the stock of the association to its partners.”16 Under

Treasury Regulation § 301.7701-3(g)(3)(i) the contribution of the partnership’s

assets and liabilities and its distribution of the stock of the association are both

        A similar two-step construct applies when an entity classified as a
       16

corporation elects to change its classification to partnership. See Treas. Reg.
§ 301.7701-3(g)(1)(ii).
                                         - 40 -

“treated as occurring immediately before the close of the day before the election is

effective.” Even so, the two steps are not treated as having occurred at the same

time. The drafters of the regulation, in specifying that the partnership’s liquidation

occurs “immediately []after” its contribution to the corporation of its assets and

liabilities, recognized that the second step could not have happened until

completion of the first: The partnership could not have distributed to its partners

the stock of the association until it first received that stock in exchange for its

assets and liabilities. Both the contribution and the distribution may occur

“immediately before the close of the day before” the partnership’s election to be

treated as a corporation becomes effective, but one step is more “immediately

before” than the other. The distribution does not--and cannot--occur until after the

contribution. The same is true of petitioner’s distribution to VF Enterprises of the

stock of TBL GmbH that it was treated as having received in exchange for its

intangible property.

      C.     Was the Disposition Within the Property’s Useful Life?

      Under the terms of section 367(d)(2)(A)(ii)(II), a “disposition” requires the

U.S. transferor of intangible property to recognize gain when it “follow[s]” the

transfer. Although a disposition after the end of the property’s useful life would

“follow” the transfer, it would make no sense in that circumstance to require the
                                         - 41 -

U.S. transferor to recognize gain under subclause (II) after already having included

in income all of the deemed annual payments contemplated by subclause (I). In

recognition of that point, Temporary Treasury Regulation § 1.367(d)-1T(d)(1)

requires a U.S. transferor to recognize gain under section 367(d)(2)(A)(ii)(II) upon

disposing of stock of the transferee foreign corporation to a person unrelated to the

U.S. transferor only if the disposition occurs “within the useful life of the

intangible property.” Petitioner relies on that regulation for a novel argument that,

even if its distribution of TBL GmbH stock “follow[ed]” its section 367(d) transfer

of intangible property, the distribution nonetheless did not require immediate gain

recognition because it occurred before the intangible property’s useful life began.

As explained below, the authorities petitioner relies on do not support its argument.

      Petitioner asserts that “[t]he useful life of property commences when the

new owner places the property into service.” Petitioner cites no authority specific

to section 367(d) in support of that proposition. Instead, petitioner looks to a

regulation dealing with depreciation allowances for intangible assets. Treasury

Regulation § 1.167(a)-3 allows the cost of an intangible asset to be recovered over

either 15 or 25 years. Treasury Regulation § 1.167(a)-3(b)(3) provides that a

taxpayer who depreciates an intangible asset over the specified 15- or 25-year

useful life “must determine the allowance by amortizing the basis of the intangible
                                         - 42 -

asset . . . ratably over the useful life beginning on the first day of the month in

which the intangible asset is placed in service by the taxpayer.” Petitioner draws

out its argument as follows:

      The reorganization transaction in issue was completed immediately
      before midnight on September 23, 2011[,] pursuant to a check-the-box
      election that was effective on September 24, 2011. Therefore, the
      earliest that the useful life of the Timberland Intangible Assets[17]
      could begin with TBL GmbH was Saturday, September 24, 2011.
      However, since that was a Saturday, the earliest possible placed in
      service date here would be Monday, September 26, 2011.

Petitioner apparently reasons that, because any distribution it made of TBL GmbH

stock to VF Enterprises occurred before September 26, 2011, the distribution did

not occur within the useful life of the transferred intangible property and thus

cannot have required immediate gain recognition under section

367(d)(2)(A)(ii)(II).

      Treasury Regulation § 1.167(a)-3 manifestly has no bearing on the useful

life of intangible property for purposes of section 367(d). Treasury Regulation

      17
         Petitioner’s glossary defines “Timberland Intangible Assets” as “[t]he
Timberland and SmartWool intangible assets, consisting of trademarks, customer
relationships, and foreign workforce, subject to the license of the domestic rights in
the intangible assets to Vans, Inc., a member of the VF Consolidated Group.” In
regard to “VF Consolidated Group,” petitioner’s glossary states: “VF is the parent
of an affiliated group of domestic corporations on behalf of which it files
consolidated U.S. federal income tax returns.”
                                        - 43 -

§ 1.167(a)-3 deals with cost recovery deductions allowable in respect of intangible

assets--a question that would be irrelevant to a transferee foreign corporation that

received intangible property in a section 367(d) transfer unless that foreign

corporation were engaged in a U.S. trade or business or subject to the rules of

subpart F of part III, subchapter N of chapter 1 of subtitle A of the Code (sections

951-965).18 More specifically, Treasury Regulation § 1.167(a)-3 prescribes a

general useful life of 15 years, although specified assets are assigned 25-year lives.

By contrast, Temporary Treasury Regulation § 1.367(d)-1T(c)(3) as in effect for

the taxable year in issue, provided: “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.”19

      18
         Foreign corporations are generally subject to U.S. tax at the regular
graduated rates on income effectively connected with a U.S. trade or business. See
§ 882(a)(1). The so-called subpart F provisions require significant U.S.
shareholders of “controlled foreign corporations” (CFCs) to pay current U.S. tax
on investment income and other types of mostly “portable” income earned through
the foreign corporations.
      19
        As discussed in more detail infra part V, the apparent intent of Temporary
Treasury Regulation § 1.367(d)-1T(c)(3) was to limit the period during which a
U.S. transferor was required to take deemed annual payments into account under
section 367(d)(2)(A)(ii)(I). Temporary Treasury Regulation § 1.367(d)-1T(c)(3)
was removed and reserved by T.D. 9803, 2017-3 I.R.B. 384.
                                        - 44 -

      Finally, even if we were to accept that (1) a disposition requires immediate

gain recognition under section 367(d)(2)(A)(ii)(II) only if it occurs after the

beginning of the useful life of the transferred intangible property and (2) the useful

life of the intangible property that petitioner transferred to TBL GmbH is defined

by Treasury Regulation § 1.167(a)-3(b)(3), rather than Temporary Treasury

Regulation § 1.367(d)-1T(c)(3), it would not follow that petitioner’s distribution of

TBL GmbH stock to VF Enterprises occurred before the useful life of the

transferred intangible property began. Under the plain terms of Treasury

Regulation § 1.167(a)-3(b)(3) the useful life of the intangible property in TBL

GmbH’s hands would have begun on September 1, 2011--the first day of the

month in which TBL GmbH placed the property in service. Even accepting that

petitioner’s distribution of TBL GmbH stock occurred before the end of the day on

September 23, 2011, that distribution would have occurred after the useful life of

the intangible property, as defined by Treasury Regulation § 1.167(a)-3(b)(3), had

already begun.20

      20
         Petitioner’s argument, if accepted, would mean that a U.S. transferor with
the foresight to transfer intangible property late in the day on a Friday would have
until the following Monday to dispose of the stock of the transferee foreign
corporation without triggering gain recognition under section 367(d)(2)(A)(ii)(II).
Petitioner makes no effort to explain how that prospect makes any sense.
                                        - 45 -

      D.     Failure of “No Disposition” Arguments To Explain Reporting

      Petitioner’s various arguments that any “disposition” did not occur within

the relevant period share a fundamental problem: They fail to explain the tax

reporting undertaken in regard to petitioner’s constructive transfer of intangible

property. Under the terms of the statute, in the absence of a “disposition following

[the section 367(d)] transfer,” the annual payments described in section

367(d)(2)(A)(ii)(I) are to be reported by “the United States person transferring such

property.” Petitioner, then classified as a corporation, was the United States person

who transferred the intangible property in issue. Lee Bell did not transfer the

intangible property that TBL GmbH acquired in the F reorganization. Indeed, Lee

Bell never owned that property.

      E.     Conclusion

      For the reasons explained above, we conclude that petitioner’s constructive

distribution to VF Enterprises of the TBL GmbH stock was a “disposition,” within

the meaning of section 367(d)(2)(A)(ii)(II), and that the disposition “follow[ed]”

petitioner’s transfer of intangible property to TBL GmbH. Therefore, unless the

regulations provide for a different result, petitioner was required to recognize its

Therefore, we would be loath to accept the argument even without regard to its
several technical problems.
                                         - 46 -

gain in the transferred intangible property “at the time of the disposition.”

§ 367(d)(2)(A)(ii)(II).

IV.   Impact of the Regulations

      We find nothing in the regulations that would allow petitioner to avoid

immediate gain recognition under section 367(d)(2)(A)(ii)(II). Because petitioner

was no longer recognized as a separate entity for Federal tax purposes after the

completion of the F reorganization that included the section 367(d) transfer, it

could not report the deemed annual payments described in section

367(d)(2)(A)(ii)(I). And, as explained below, no provision in the regulations

allows Lee Bell to assume responsibility for reporting those payments: Lee Bell

was neither the U.S. transferor of the intangible property nor the recipient of the

stock of TBL GmbH, the transferee foreign corporation.

      A.     Propriety of Lee Bell’s Reporting

             1.     Temporary Treasury Regulation § 1.367(d)-1T(c)(1)

      Petitioner contends that Lee Bell’s inclusion in income of deemed annual

payments was “proper[]” under the terms of Temporary Treasury Regulation

§ 1.367(d)-1T(c)(1). That section essentially restates the annual inclusion rule of

section 367(d)(2)(A)(ii)(I). The regulation provides: “If a U.S. person transfers

intangible property that is subject to section 367(d) and the rules of this section to a
                                             - 47 -

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).

          Temporary Treasury Regulation § 1.367(d)-1T(c)(1) does not require or

allow Lee Bell to include in income the annual payments described in section

367(d)(2)(A)(ii)(I) as a result of petitioner’s constructive transfer of intangible

property to TBL GmbH. As noted above, Lee Bell was not the United States

person that transferred intangible property subject to section 367(d).

          Petitioner contends that its interpretation of Temporary Treasury Regulation

§ 1.367(d)-1T(c)(1) was reasonable because “Lee Bell indirectly owned the

transferred Timberland Intangible Assets and was a reasonable U.S. person to

include the Annual section 367(d) Payments[21] as it was the first U.S. person that

          21
               In regard to the term “Annual § 367(d) Payments,” petitioner’s glossary
states:
          Section 367(d) and Temp. Treas. Reg. § 1.367(d)-1T provide that in
          an exchange described in §§ 351 or 361 in which a United States
          person (U.S. transferor) transfers IP to a foreign corporation
          (transferee foreign corporation) the United States person transferring
          the IP (the U.S. transferor) will be treated as having sold the IP in
          exchange for payments that are contingent on the productivity, use, or
          disposition of the IP. The U.S. person is treated as receiving or
                                        - 48 -

owned both TBL (Petitioner) and TBL GmbH.” Petitioner’s professedly

reasonable interpretation of the regulations, however, is contrary to its plain terms.

Temporary Treasury Regulation § 1.367(d)-1T(c)(1) does not require the deemed

annual payments to be reported by the U.S. transferor of intangible property or,

instead, a “reasonable” substitute. When applicable, it requires annual income

inclusions by the U.S. transferor. Because Temporary Treasury Regulation

§ 1.367(d)-1T(c)(1) simply restates the statutory annual inclusion rule provided in

section 367(d)(2)(A)(ii)(I), that regulation cannot be read to override the

immediate gain recognition rule provided in section 367(d)(2)(A)(ii)(II). Both

subclauses of section 367(d)(2)(A)(ii) must be given effect: Each is an alternative

to the other. Subclause (I) requires the U.S. transferor, in the absence of a

“disposition,” to include in income deemed annual payments that reflect the

“productivity, use, or disposition” of the transferred intangible property.

§ 367(d)(2)(A)(i) and (ii)(I). And subclause (II) provides that, in the event of a

disposition, the U.S. transferor must recognize gain at the time of the disposition--

      having received these amounts (I) annually over the useful life of the
      property (“Annual § 367(d) Payments”), or (II) in the case of a
      disposition following such transfer [the temporary regulations define
      this as “a subsequent transfer during the transferred IP’s useful life” to
      an unrelated person], at the time of the disposition (“Lump-Sum
      Exception”).
                                        - 49 -

essentially taking into account at that time the deemed payments that it would

otherwise have taken into account over the remaining useful life of the transferred

intangible property. § 367(d)(2)(A)(ii)(II). For petitioner to avoid immediate gain

recognition, it must find a provision, applicable to its circumstances, that allows

continued reporting of deemed annual payments notwithstanding its “disposition”

of TBL GmbH stock. Temporary Treasury Regulation § 1.367(d)-1T(c)(1) is not

that provision.

             2.     Temporary Treasury Regulation § 1.367(d)-1T(e)(3)

      Petitioner also claims that Lee Bell’s reporting complied with Temporary

Treasury Regulation § 1.367(d)-1T(e)(3). In relevant part that section 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 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. . . .

Petitioner views it as “quite obvious[]” that Temporary Treasury Regulation

§ 1.367(d)-1T(e)(3) would apply if its constructive distribution of TBL GmbH

stock to VF Enterprises were treated as a disposition because, it contends, VF

Enterprises was “related” to petitioner. “Under the circumstances of this case,”
                                         - 50 -

petitioner alleges, “the inclusion of Annual § 367(d) Payments by Lee Bell

constituted compliance with Temporary Treas. Reg. § 1.367(d)-1T(e)(3).”

      We disagree. Lee Bell’s reporting of the deemed annual payments as a

result of petitioner’s section 367(d) transfer of intangible property could not have

“compl[ied]” with Temporary Treasury Regulation § 1.367(d)-1T(e)(3) because--

to reiterate--Lee Bell was not the U.S. transferor of the intangible property. Under

the plain terms of the regulation, it is of no consequence that Lee Bell is, in

petitioner’s description, “a closely related U.S. party” that might be viewed as a

“reasonable proxy” for petitioner. Temporary Treasury Regulation § 1.367(d)-

1T(e)(3) does not contemplate the reporting of deemed annual payments by U.S.

persons who are “reasonable proxies” for the U.S. transferor.

      Petitioner argues that “Temp. Treas. Reg. § 1.367(d)-1T(e)(3) . . . does not

limit the inclusion of Annual § 367(d) Payments to the initial ‘U.S. transferor.’”

We find petitioner’s reference to an “initial ‘U.S. transferor’” puzzling. A section

367(d) transfer occurs only once. It can have only one U.S. transferor--not an

“initial” U.S. transferor who may be replaced (or joined) by another. In specified

circumstances, a U.S. person related to the U.S. transferor of intangible property in

a section 367(d) exchange must assume the obligation to report the deemed annual

payments described in section 367(d)(2)(A)(ii)(I). See Temp. Treas. Reg.
                                        - 51 -

§ 1.367(d)-1T(e)(1). Temporary Treasury Regulation § 1.367(d)-1T(e)(1) applies

when the U.S. transferor of the intangible property “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.” Nothing in Temporary

Treasury Regulation § 1.367(d)-1T(e)(1), however, describes as a “subsequent

U.S. transferor” the related U.S. person who receives the stock of the transferee

foreign corporation from the “initial” U.S. transferor. Moreover, that regulation

does not apply to the present case because VF Enterprises, even if “related” to

petitioner within the meaning of Temporary Treasury Regulation § 1.367(d)-1T(h)

was not a “U.S. person.” See § 7701(a)(30) (defining “United States person” to

include domestic but not foreign corporations), § 7701(a)(4) (“The term ‘domestic’

when applied to a corporation . . . means created or organized in the United States

or under the law of the United States or of any State.”).22

      22
        If petitioner’s shareholder had been a U.S. person, Temporary Treasury
Regulation § 1.367(d)-1T(e)(1) would have allowed petitioner to avoid immediate
gain recognition under section 367(d)(2)(A)(ii)(II). Therefore, contrary to
petitioner’s claim, respondent’s position that the section 361(c) distribution that
necessarily occurs in an outbound reorganization is a “disposition” within the
meaning of section 367(d)(2)(A)(ii)(II) does not mean that immediate gain
recognition is required “in every outbound § 361 reorganization.”
                                        - 52 -

      More generally, Temporary Treasury Regulation § 1.367(d)-1T(e)(3), as we

read it, does “limit the inclusion of Annual § 367(d) Payments to the . . . ‘U.S.

transferor.’” When applicable, that section provides that “the U.S. transferor shall

continue to include in its income the deemed payments described in paragraph (c)

of this section.” Temp. Treas. Reg. § 1.367(d)-1T(e)(3) (emphasis added). As

petitioner observes, “[t]he regulation does not contain limitation language.” “[I]t

does not say that the income inclusion contemplated by the section can ‘only be by

the U.S. transferor’ or that the Annual § 367(d) Payments must be included

‘exclusively [by] the U.S. transferor.” But “limitation language” of the type

petitioner posits is unnecessary. When the regulation provides that, in specified

circumstances, the U.S. transferor must continue to include in its income the

deemed annual payments described in section 367(d)(2)(A)(ii)(I) and gives no

indication that any other person would be allowed to take on that reporting

obligation, the regulation should be read to “limit” the required income inclusions

to the U.S. transferor.23 As paragraph (e)(1) of Temporary Treasury Regulation

      23
         While Temporary Treasury Regulation § 1.367(d)-1T(e)(3) does not
include the limiting language petitioner imagines, it also does not provide that the
deemed annual payments must continue to be reported by (1) the U.S. transferor or
(2) in the event that the U.S. transferor is no longer recognized as a separate entity
for Federal tax purposes following its disposition of the stock of the transferee
                                         - 53 -

§ 1.367(d)-1T demonstrates, when the drafters of the regulation intended to allow

or require a person other than the U.S. transferor to take on the reporting obligation

they knew how to say so.

      Petitioner contends that its “reasonable interpretation of Temp. Treas. Reg.

§ 1.367(d)-1T(e)(3), requiring Lee Bell to include the Annual § 367(d) Payments,

is consistent with Respondent’s administrative practice.” In its motion for

summary judgment, petitioner singled out Priv. Ltr. Rul. 9731039 (Aug. 1, 1997)

as illustrative of that practice. Petitioner’s reply to respondent’s response to its

motion refers to an earlier ruling: Priv. Ltr. Rul. 9024004 (June 15, 1990).

      Petitioner sought to include copies of each of those rulings along with the

parties’ first stipulation of facts. In his motion in limine, respondent asked to

“exclude” the proffered copies of the rulings. Respondent objected to the

“admission” of the private letter rulings because “they are not relevant or material

to any issue in the case.” Respondent observes that neither ruling was issued to

petitioner or addressed a transaction in which petitioner engaged. Those rulings,

respondent argues, “do not have any tendency to make a fact more or less probable

in Petitioner’s case than it would be without such evidence.”

foreign corporation, then by any other U.S. taxpayer of the U.S. transferor’s
choosing that is sufficiently related to the U.S. transferor.
                                        - 54 -

      We agree with respondent that “admission of . . . [the private letter] rulings

into evidence is inappropriate.” But respondent misunderstands petitioner’s

purpose in submitting copies of the rulings. As petitioner explained in its

opposition to respondent’s motion in limine, “these exhibits were included in the

record for the Court’s convenience.”

      On the merits, respondent reminds us, citing section 6110(k)(3), that

“Private Letter Rulings may not be used or cited as precedent.” We have accepted,

however, that “[p]rivate letter rulings may be cited to show the practice of the

Commissioner.” Dover Corp. & Subs. v. Commissioner, 122 T.C. 324, 341 n.12

(2004). Even so, two private letter rulings do not an established administrative

practice make. See Lucky Stores, Inc. & Subs. v. Commissioner, 153 F.3d 964,

966 n.5 (9th Cir. 1998) (declining to allow taxpayer to rely on “several private

letter rulings and one technical advice memorandum”), aff’g 107 T.C. 1 (1996).

Moreover, the transactions addressed in the rulings petitioner cites appear to be

distinguishable from its case.

      Priv. Ltr. Rul. 9731039 involved a section 355 distribution by Distributing to

its shareholders of the stock of New Controlled. New Controlled was a foreign

corporation that had succeeded to Controlled, a domestic corporation, in a

reorganization described in section 368(a)(1)(F). Before that reorganization,
                                        - 55 -

Controlled had transferred intangible property to its foreign subsidiary, Subsidiary.

Among other things, the ruling held that Controlled’s transfer of intangible

property to Subsidiary was subject to section 367(d). It also held that “the transfer

of the stock of Subsidiary from Controlled to New Controlled [in the F

reorganization] is governed by § 1.367(d)-1T(e)(3).” And it held that

“Distributing’s distribution of its stock in New Controlled to Distributing’s

shareholders is governed by § 1.367(d)-1T(d) to the extent Distributing’s

shareholders are not related persons within the meaning of § 1.367(d)-1T(h).”

Thus, in the transaction addressed in the ruling, the section 367(d) transfer of

intangible property preceded the outbound F reorganization. In the outbound F

reorganization, the U.S. transferor of the intangible property transferred the stock

of the transferee foreign corporation that it had received in exchange for the

intangible property. That transfer did not cause the U.S. transferor (Controlled) to

go out of existence. If one froze the action at that point, one might say that

Temporary Treasury Regulation § 1.367(d)-1T(e)(3) could apply. The U.S.

transferor of the intangible property (Controlled) transferred the stock of the

foreign transferee corporation (Subsidiary) to a related foreign person (New

Controlled). After that specific step, Controlled could continue reporting deemed

annual payments under Temporary Treasury Regulation § 1.367(d)-1T(e)(3). But
                                        - 56 -

in the very next step in the outbound F reorganization, Controlled distributed to

Distributing the stock of New Controlled and, in so doing, went out of existence.

Thus, upon completion of the outbound F reorganization, it would no longer be

possible for Controlled to continue reporting deemed annual payments. It is

therefore unclear what was meant by the holding that Controlled’s transfer of

Subsidiary stock to New Controlled was “governed by § 1.367(d)-1T(e)(3).”

Perhaps Distributing was allowed to step (momentarily) into Controlled’s shoes.

But Distributing promptly distributed the stock of New Controlled to its

shareholders, thereby requiring the recognition of gain under section

367(d)(2)(A)(ii)(II) and Temporary Treasury Regulation § 1.367(d)-1T(d), except

to the extent that a shareholder of Distributing owned enough Distributing stock to

be related to Distributing. That all or most of the gain in the transferred intangible

property may well have been triggered before the completion of the overall

transaction renders of little consequence the prospect that Temporary Treasury

Regulation § 1.367(d)-1T(e)(3) might have allowed the reporting of deemed annual

payments to continue between interim steps in that overall transaction.

      Priv. Ltr. Rul. 9024004 involved a transaction in which Target, a domestic

corporation, transferred its assets to Acquiring, a foreign corporation, in exchange

for Acquiring voting stock and Acquiring’s assumption of Target’s liabilities.
                                        - 57 -

Target then liquidated. The ruling held that the transaction “constitute[d] a

reorganization within the meaning of section 368(a)(1)(C) of the Code.” It also

held that the goodwill included among the transferred assets would be “treated as

having been transferred in exchange for annual payments contingent on the

productivity or use of such property” and that “[s]uch payments” would be

“imputed” to Target’s shareholders. Because each of Target’s three shareholders

was a U.S. citizen who owned more than 10% of Target’s stock, the conclusion

that the shareholders could succeed to Target’s obligation to report deemed annual

payments was a straightforward application of Temporary Treasury Regulation

§ 1.367(d)-1T(e)(3). See § 267(b)(2); Temp. Treas. Reg. § 1.367(d)-1T(h).

Petitioner alleges that “PLR 9024004 . . . shows that Respondent’s consistent

administrative practice was to fit transactions within the § 367(d) regulatory

structure.” That the transaction addressed in Priv. Ltr. Rul. 9024004 “fit . . . within

the § 367(d) regulatory structure” does not establish that any provision therein

allows petitioner to avoid the recognition of gain under section 367(d)(2)(A)(ii)(II).

      Petitioner also observes that, “regardless of the interpretation of the phrase

‘U.S. transferor,’ no language in Temporary Treas. Reg. § 1.367(d)-1T(e)(3)

provides for a lump-sum inclusion.” Petitioner’s observation is accurate but beside

the point. The relevant question is not whether Temporary Treasury Regulation
                                        - 58 -

§ 1.367(d)-1T(e)(3) requires petitioner to include in income the excess of the fair

market value of the transferred intangible property over its basis. Instead, the

question is whether that regulation section or any other allows petitioner,

notwithstanding its “disposition” of TBL GmbH stock, to avoid gain recognition

under section 367(d)(2)(A)(ii)(II) by continued reporting of the deemed annual

payments described in section 367(d)(2)(A)(ii)(I).

      B.     Petitioner’s Inability To Comply With Temporary Treasury
             Regulation § 1.367(d)-1T(e)(3)

      That said, Temporary Treasury Regulation § 1.367(d)-1T(e)(3), when

applicable, does allow a U.S. transferor to continue reporting deemed annual

payments instead of recognizing immediate gain. Moreover, the conditions for the

application of that rule--at least those expressly stated--have been met in the

present case. Petitioner, a U.S. person, did transfer intangible property that is

subject to section 367(d) and the rules of Temporary Treasury Regulation

§ 1.367(d)-1T to TBL GmbH, a foreign corporation, in an exchange described in

section 361. And before the end of the useful life of that property, petitioner

transferred the TBL GmbH stock that it received for the property to VF

Enterprises, a foreign person whom the parties seem to accept was “related” to

petitioner within the meaning of Temporary Treasury Regulation
                                        - 59 -

§ 1.367(d)-1T(h).24 Nonetheless, we conclude that Temporary Treasury

Regulation § 1.367(d)-1T(e)(3) does not apply to petitioner’s case. We reach that

conclusion not because of a failure to satisfy the express conditions for the rule’s

application but instead because the rule cannot be applied. When applicable,

Temporary Treasury Regulation § 1.367(d)-1T(e)(3) requires the U.S. transferor--

      24
         A parent corporation and its subsidiary are related, within the meaning of
Temporary Treasury Regulation § 1.367(d)-1T(h), if the parent owns at least 10%
of the subsidiary’s stock. Temporary Treasury Regulation § 1.367(d)-1T(h) cross-
references section 267(b), (c), and (f) in defining related persons. Section 267(f),
in turn, cross-references the “controlled group” rules of section 1563(a). Under the
controlled group rules, a parent and its subsidiary are members of the same group
if the parent owns at least 80% of the subsidiary’s stock. For purposes of section
267(b)(3) and (f), however, the ownership threshold is reduced to 50%. And for
purposes of Temporary Treasury Regulation § 1.367(d)-1T(h) the threshold is
further reduced, to 10%. Temp. Treas. Reg. § 1.367(d)-1T(h)(2)(i). Because VF
Enterprises was treated as having owned all of petitioner’s stock before petitioner’s
distribution of TBL GmbH stock, VF Enterprises was related to petitioner before
the distribution. The parties apparently agree that, at least in the circumstances of
the present case, “relatedness,” for purposes of Temporary Treasury Regulation
§ 1.367(d)-1T(h), is determined before the completion of the disposition in
question. In other circumstances, however, that approach could lead to arguably
inappropriate results. For example, a disposition of stock of the transferee foreign
corporation in the form of a U.S. transferor’s nonliquidating distribution of that
stock to a distributee shareholder would sever the parties’ relationship if the
distribution were made in redemption of all of the stock in the U.S. transferor held
by the distributee shareholder. Thereafter, both the U.S. transferor and the
distributee shareholder would remain in existence but would have no ongoing
relationship. In such a case, it might be inappropriate to allow continued reporting
of deemed annual payments by either the U.S. transferor or distributee shareholder
in lieu of immediate gain recognition.
                                         - 60 -

not some other U.S. person of the taxpayer’s choosing--to continue including in its

income the deemed annual payments described in section 367(d)(2)(A)(ii)(I).

Petitioner cannot comply with that provision because it is no longer recognized as

a separate entity for Federal tax purposes.25 By directing a U.S. transferor to

“continue to include in its income the deemed payments described in

paragraph (c),” Temporary Treasury Regulation § 1.367(d)-1T(e)(3) implicitly

requires the U.S. transferor to remain a person with cognizable income. It is that

implicit requirement that has not been met in the present case. After the deemed

liquidation resulting from its election to be a disregarded entity, petitioner itself

had no income in which to include the deemed annual payments.

      In support of its argument that, if Lee Bell is not an acceptable substitute, it

should itself be required to include in its own income the deemed annual payments

described in section 367(d)(2)(A)(ii)(I), petitioner observes that “[t]here is no

requirement under Temp. Treas. Reg. § 1.367(d)-1T(e)(3) that the U.S. transferor

remain a U.S. entity.” Strictly speaking, that is true. Nothing in the section 367(d)

regulations impinged on petitioner’s freedom to participate in a reincorporation in

       Petitioner argues that “[t]he U.S. transferor’s continuing to include the
      25

Annual § 367(d) Payments is a result [of the application of Temporary Treasury
Regulation § 1.367(d)-1T(e)(3)], not a condition.” Whatever label one applies, it
remains the case that petitioner is unable to comply with the regulation.
                                        - 61 -

which the surviving corporation was foreign. But exercising that choice left

petitioner unable to comply with Temporary Treasury Regulation

§ 1.367(d)-1T(e)(3). As a result of the reincorporation, petitioner ceased to exist as

a recognized taxable entity and, thereafter, had no income to report.

      Petitioner posits that, were it to “report” the deemed annual payments

described in section 367(d)(2)(A)(ii)(I), “Lee Bell would be taxed on the same

amounts that it reported directly, but . . . under Subpart F instead.” We are

unconvinced by petitioner’s speculations about the potential impact of subpart F.

Section 951(a)(1)(A) requires each “United States shareholder” of a CFC to

include in its gross income its pro rata share of the CFC’s “subpart F income.”

After petitioner distributed to VF Enterprises the TBL GmbH stock that it

constructively received in exchange for its intangible property, petitioner was not a

CFC. See § 957(a) (defining “controlled foreign corporation” to mean specified

foreign corporations). Petitioner is no longer recognized for Federal tax purposes

as any type of entity. It can no longer be required to “report” anything. Accepting

that TBL GmbH is a CFC and that Lee Bell is a United States shareholder of TBL

GmbH, Lee Bell would indeed be required under section 951(a)(1) to include in its
                                        - 62 -

income its pro rata share of TBL GmbH’s subpart F income. 26 But Temporary

Treasury Regulation § 1.367(d)-1T(e)(3) does not authorize treating TBL GmbH as

the recipient of the deemed payments described in section 367(d)(2)(A)(ii)(I).

TBL GmbH was not the U.S. transferor in the section 367(d) transfer at issue. It

was, instead, the transferee foreign corporation. It was not the seller of the

intangible property but the purchaser. Designating TBL GmbH as the recipient of

the payments deemed to be made in exchange for the transferred property would

treat it as paying itself.

       26
         Petitioner cites no authority for the proposition that the deemed annual
payments described in section 367(d)(2)(A)(ii)(I) would, if treated as received by a
CFC, be included in the CFC’s subpart F income. Section 954(c)(1)(A) includes
“royalties” in foreign personal holding company income, which is an element of
subpart F income. See § 952(a)(2) (providing that subpart F income includes
“foreign base company income”), § 954(a)(1) (defining “foreign base company
income” to include foreign personal holding company income). While amounts
described in section 367(d)(2)(A)(ii)(I) may be akin to royalties, they are expressly
treated as such only “[f]or purposes of applying section 904(d)” (dealing with the
foreign tax credit). § 367(d)(2)(C). Moreover, the subpart F income of a CFC for
a taxable year is limited to the corporation’s earnings and profits. § 952(c)(1)(A).
Therefore, if a CFC were treated as having received the payments described in
section 367(d)(2)(A)(ii)(I), those amounts, even if included within the definition of
foreign personal holding company income, would not be subpart F income for any
year for which the CFC had sufficient expenses to offset them.
                                        - 63 -

      C.     TBL GmbH as Successor to Petitioner

      Petitioner suggests that, under Temporary Treasury Regulation § 1.367(d)-

1T(e)(3), TBL GmbH could be allowed or required to include in its income the

deemed annual payments described in section 367(d)(2)(A)(ii)(I) because TBL

GmbH is petitioner’s “successor” and, “even more to the point, under the direction

of section 368(a)(1)(F), is one in the same entity” as petitioner. Petitioner contends

that it “did not go out of existence” but instead merely “changed form.”

      In some reincorporation transactions, the identity between the old and new

corporations may be so strong as to allow treating the two as a single corporation.

See, e.g., Weiss v. Stearn, 265 U.S. 242 (1924) (holding that, in reincorporation in

which both corporations were organized under the laws of the same State,

participating shareholders realized gain only to the extent of the cash they

received). In those situations, the shareholders’ exchange of stock of the old

corporation for that of the new corporation would not be a realization event. The

shareholders would have no need for section 354(a)’s nonrecognition rule. And, in

that circumstance, the corporate-level nonrecognition rules provided in section 361

might be unnecessary because no transfer of assets or stock distribution need be

imputed.
                                        - 64 -

      The transaction in which TBL GmbH acquired petitioner, however, is not of

the type in which the participating entities can be viewed, for all purposes, as one

and the same. See, e.g., Marr, 268 U.S. 536; Phellis, 257 U.S. 156. Because TBL

GmbH was organized under the laws of Switzerland, it is “essentially different”

from a limited liability company organized under the laws of Delaware that is

treated as a corporation for Federal tax purposes by reason of the entity’s election.

See Marr, 268 U.S. at 541. 27

      D.     Temporary Treasury Regulation § 1.367(d)-1T(d)(1)

      Petitioner also argues that “[t]he § 367(d) Regulations provide that a lump-

sum inclusion under the Lump-Sum Exception results only where there is a

      27
         Petitioner’s “same entity” argument may rest on section 368(a)(1)(F)’s
reference to “one corporation.” Congress added the phrase “of one corporation” to
that section to deny F reorganization treatment to fusions of two commonly owned
operating corporations. The amendment was part of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, § 225(a), 96 Stat. 324,
490. The TEFRA conference report describes the amendment as “limit[ing] the
F reorganization definition to a change in identity, form, or place of organization of
a single operating corporation.” H.R. Rep. No. 97-760, at 541 (1982) (Conf. Rep.).
The conferees explained: “This limitation does not preclude the use of more than
one entity to consummate the transaction provided only one operating company is
involved. The reincorporation of an operating company in a different State, for
example, is an F reorganization that requires that more than one corporation be
involved.” Id. Therefore, Congress’ addition of the phrase “of one corporation” to
section 368(a)(1)(F) should not be understood to mean that, when an F
reorganization involves two corporate entities, the successor must be treated for all
purposes as one and the same as its predecessor.
                                        - 65 -

subsequent transfer to an unrelated party.” Petitioner apparently has in mind

Temporary Treasury Regulation § 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 (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). . . .

      Contrary to petitioner’s description, Temporary Treasury Regulation

§ 1.367(d)-1T(d)(1) does not provide that a U.S. transferor recognizes gain upon a

disposition of the stock of the transferee foreign corporation only if that disposition

is to an unrelated party. Instead, it says that when the disposition is to an unrelated

party, the U.S. transferor must recognize gain. Temporary Treasury Regulation

§ 1.367(d)-1T(d)(1) says nothing about the consequences of a U.S. transferor’s

disposition of the stock of the transferee foreign corporation to a related person.

Those dispositions are addressed elsewhere in the regulations--in particular,

Temporary Treasury Regulation § 1.367(d)-1T(e)(1) and (3). As explained above,
                                        - 66 -

subparagraph (1) does not apply to petitioner’s case and petitioner cannot comply

with the mandate of subparagraph (3).

      E.     Notice 2012-39

      Petitioner suggests that “Respondent’s position in this case” “is directly at

odds” with a notice respondent issued in 2012. Notice 2012-39, § 1, 2012-31

I.R.B. 95, 95, announced plans for the issuance of regulations to address

“significant policy concerns” about outbound reorganizations that involve transfers

of intangible property. 28 According to the notice, the forthcoming regulations

would “apply to transfers occurring on or after July 13, 2012.” Id. The notice goes

on to state: “No inference is intended as to the treatment of transactions described

in this notice under current law, and the IRS may challenge such transactions under

applicable Code provisions or judicial doctrines.” Id. § 5, 2012-31 I.R.B. at 98.

      The notice describes the transactions of concern as having the “inten[t] to

repatriate earnings from foreign corporations without the appropriate recognition

of income.” Id. § 3, 2012-31 I.R.B. at 96. Among the examples given of those

transactions are “cases in which a controlled foreign corporation uses deferred

      28
         A copy of Notice 2012-39 that petitioner sought to include with the
parties’ first stipulation of facts is also covered by respondent’s motion in limine
and motion to strike.
                                         - 67 -

earnings [an apparent reference to earnings not previously subject to U.S. tax] to

fund an acquisition of all or part of the stock of a domestic corporation from an

unrelated party for cash, followed by an outbound asset reorganization of the

domestic corporation to avoid an income inclusion under section 956.”29 Id.

      Under one of the rules that would be added to the regulations, the U.S.

transferor of intangible property would “take into account income under section

367(d)(2)(A)(ii)(II)” to the extent that the stock of the transferee foreign

corporation that the U.S. transferor distributes in the reorganization is received by

“non-qualified successors.” Id. § 4.03. For that purpose, foreign corporations,

individuals, and some domestic corporations subject to special tax treatment would

be nonqualified successors. Id. § 4.07, 2012-31 I.R.B. at 97. Therefore, if a

domestic target corporation, after being acquired by a CFC, transferred intangible

property in a subsequent outbound reorganization, the target would recognize

immediate gain under section 367(d)(2)(A)(ii)(II) because its shareholder, as a

foreign corporation, would be a nonqualified successor.

      If the rules announced in Notice 2012-39, supra, had applied to the outbound

F reorganization in which petitioner constructively transferred intangible property

       Under section 956, investments in U.S. property by CFCs generally result
      29

in deemed repatriation of the CFC’s earnings.
                                        - 68 -

to TBL GmbH, petitioner would clearly have been required to recognize gain

under section 367(d)(2)(A)(ii)(II) as a result of the transfer. Its shareholder, VF

Enterprises, was a foreign corporation and, thus, a “non-qualified successor”

within the meaning of the notice. Respondent asserts that the same result obtains

under the law in effect during 2011. If that were so, petitioner reasons, respondent

would have had no need to issue Notice 2012-39, supra.30

      As respondent observes, however, the notice’s scope extends well beyond

transactions such as petitioner’s. For example, the notice addresses situations in

which the outbound reorganization involves the payment of boot. Even the

specific rule that would address transactions like petitioner’s--applicable to U.S.

transferors owned by nonqualified successors--would apply to circumstances

beyond those of the present case. The nonqualified successor rule would require

the recognition of gain not only by U.S. transferors, like petitioner, owned by

foreign corporations but also those owned by individuals. (The notice reflects the

view that the tax paid by individual shareholders deemed to receive annual

payments described in section 367(d)(2)(A)(ii)(I) would not be an adequate

      30
        In effect, petitioner asks us to draw inferences about the state of the law
before the IRS’ issuance of Notice 2012-39, supra, notwithstanding the customary
“no inference” disclaimer included in the notice.
                                          - 69 -

substitute for the corporate-level tax that would, in the absence of a disposition,

have been paid by the U.S. transferor.) Therefore, the pending amendments to the

regulations announced in Notice 2012-39, supra, would have been necessary, at

least in part, even it if it had already been clear that a transfer of intangible

property in an outbound reorganization by a U.S. transferor owned by a foreign

corporation requires the recognition of gain under section 367(d)(2)(A)(ii)(II). The

notice’s inclusion of foreign corporations in the definition of “non-qualified

successor” could have either restated existing law or addressed an issue on which

existing law was uncertain.31

      31
         For similar reasons, we decline to draw the inferences petitioner would
have us draw from the Office of Tax Policy/IRS business plans that are among the
documents covered by respondent’s motion in limine and motion to strike. As
explained supra part II.C, petitioner views those documents as relevant primarily to
support an inference regarding the purposes behind the timing of the adoption of
Treasury Regulation § 1.367(a)-1(f) in final form. In its opposition to respondent’s
motion in limine, however, petitioner suggests that the proffered business plans are
also relevant because they include regulations under section 367(d) among the
priority guidance projects. Petitioner presumes that “Regulations under
consideration . . . would include regulations identified as necessary by Notice
2012-39.” The announced plans for future guidance, petitioner reasons, “also
support[] that § 367(d) Regulations are needed to achieve Respondent’s litigating
position in this case, and that Treas. Reg. § 1.367(a)-1(f) is insufficient to reach the
result Respondent seeks.” To the extent that the intended regulations would
address petitioner’s transaction and, in particular, would require the recognition of
immediate gain upon the U.S. transferor’s distribution of the stock of the transferee
foreign corporation, those regulations could be understood as simply confirming--
or at least resolving uncertainty in--current law.
                                         - 70 -

      In short, petitioner’s task, again, is to identify one or more provisions of the

regulations that allow it to avoid gain recognition under section 367(d)(2)(A)(ii)(II)

notwithstanding its disposition of TBL GmbH stock. Its invocation of Notice

2012-39, supra, does not accomplish that task. The notice does not give us

grounds to conclude that the law in effect before its issuance allowed petitioner to

avoid gain recognition by means of reporting of deemed annual payments by Lee

Bell, TBL GmbH, or any other person or entity recognized for Federal tax

purposes.

      F.     New York State Bar Association Tax Section Report

      Finally, petitioner suggests that a 2010 report on section 367(d) prepared by

the New York State Bar Association Tax Section (NYSBA report) “supports . . .

[its] reporting position.” See N.Y. State Bar Ass’n (NYSBA), Report on Section

367(d) (2010). As we read the NYSBA report, however, it does not support the

specific reporting undertaken in respect of the transaction at issue in this case--that

is, Lee Bell’s inclusion in income of deemed annual payments under section

367(d)(2)(A)(ii)(I). The NYSBA report does take the position that immediate gain

recognition should not be required in the case of an outbound reorganization

involving a transfer of intangible property by a U.S. corporation owned by a CFC
                                        - 71 -

parent. As explained below, however, we find unpersuasive the analysis offered in

the report in support of that conclusion.

      Before turning to the merits of the report’s recommendation, we first address

the more general question of its status as authority. Petitioner sought to include a

copy of the NYSBA report as part of the parties’ first stipulation of facts.

Respondent dismisses the report as “not authoritative, binding, or otherwise

dispositive” and, in his motion in limine, asks us to disregard the report. Petitioner

responds that it “never claim[ed] the NYSBA Report is binding, but rather that it is

a type of persuasive authority that courts may look to and that it warrants

consideration by this Court.”

      In his motion in limine, respondent accepts that the NYSBA report “should

be viewed as secondary legal authority.” He seeks only to strike the report “as

factual evidence.” But petitioner’s purpose in submitting the report was not to

establish any fact relevant to the case. As petitioner explains in its opposition to

respondent’s motion to strike, it “attached the NYSBA Report to . . . [the parties’

first stipulation of facts] for the Court’s convenience.” We will therefore consider

the report as secondary authority to the extent that it may assist us in resolving the

legal dispute before us.
                                         - 72 -

      The parties offer competing interpretations of the NYSBA report, with each

claiming that the report supports its or his own position. It seems clear that the

drafters of the report believed that a domestic target corporation acquired in an

outbound reorganization should not be required to recognize immediate gain under

section 367(d)(2)(A)(ii)(II) as a result of its distribution of stock of the transferee

foreign corporation if the domestic target is owned by a CFC that, in turn, is owned

entirely by United States shareholders who would be required to include in their

income their ratable shares of the CFC’s subpart F income. It is less clear,

however, whether, in that respect, the report reflects the drafters’ understanding of

then-current law or, instead, their recommendation that new regulations be issued

to achieve that result.

      The drafters begin by acknowledging that “[t]he Temporary Section 367(d)

Regulations do not specifically address what happens if the U.S. transferor goes

out of existence, either in connection with the Section 367(d) transfer or after the

transfer.” NYSBA, supra, at 76. The drafters then consider an outbound

reorganization in which a domestic target corporation is owned by a U.S. parent

corporation. If the transferred assets include intangible property, the drafters

reason, “it should be clear that the U.S. parent should be required to continue to

include deemed Section 367(d) income as a result of the outbound transfer of
                                         - 73 -

Section 936 Intangibles over the life of such Intangibles.” Id. at 77. That

conclusion reflects a relatively straightforward application of Temporary Treasury

Regulation § 1.367(d)-1T(e)(1). If the U.S. parent is viewed as a person “related”

to the U.S. transferor, on the basis of the relationship that existed before the U.S.

transferor’s dissolution, the U.S. parent can step into the shoes of the U.S.

transferor and report the deemed annual payments described in section

367(d)(2)(A)(ii)(I).

      The NYSBA report then considers the consequences of an outbound

reorganization of a domestic target owned by a foreign corporation:

             Somewhat more complicated is the situation where a U.S. target
      owned by a foreign corporation effects an outbound . . . reorganization
      of Section 936 Intangibles. In the easier case, assume U.S. Target is
      owned by a controlled foreign corporation (“CFC”) subject to Subpart
      F. As a statutory construction matter, we would think that Section
      367(d) displaces Section 367(a) only for U.S. Target’s transfer of a
      Section 936 Intangible to the foreign transferee. U.S. Target’s
      subsequent distribution to its parent of the transferee’s stock in
      liquidation should be eligible for non-recognition under Section
      361(c) and Section 367(a)(2).[32] Accordingly, a tax free distribution
      of the transferee’s shares should be available to the U.S. target’s
      CFC/parent. The CFC/parent as successor to U.S. Target’s attributes
      under Section 381(c) would succeed to and recognize subsequent
      Section 367(d) inclusions over the useful life of the transferred
      Section 936 Intangibles or until it ceased to be a CFC. In the case of a

      32
        Section 367(a)(2) provides generally that the gain recognition rule of
section 367(a)(1) “shall not apply to the transfer of stock or securities of a foreign
corporation which is a party to the exchange or a party to the reorganization.”
                                       - 74 -

      CFC, this analysis preserves the widest ambit for Section 367(d) to
      operate and avoids allowing taxpayers to elect current recognition and
      elect out of Section 367(d) by such related person transfers.

             However, in the case of a foreign parent corporation that is not
      a CFC (or to the extent the foreign parent corporation’s shareholders
      are not U.S. Shareholders within the meaning of Section 951(b)),
      continuation of the Section 367(d) regime would ensure that Section
      367(d) income would be taxable. For example, existing Regulation
      § 1.367(d)-1T(e)(3) provides that, in the case of subsequent transfers
      of shares bearing a Section 367(d) obligation to a related CFC, only
      the continuing U.S. transferor continues absorbing the Section 367(d)
      inclusions. Accordingly, new regulations could provide, with respect
      to an outbound . . . reorganization in which the transferor of Section
      936 Intangibles goes out of existence in connection with the
      transaction, that the transferor is taxed currently on its gain as in the
      case of a terminating disposition under Section 367(d)(2)(A)(ii) unless
      the distributee is domestic or, if foreign, is, e.g., a CFC more than
      80% of whose shares are held by U.S. shareholders, in which case the
      distributee would continue recognition of Section 367(d) inclusions.

NYSBA, supra, at 78-79 (footnote omitted).

      Petitioner, apparently referring to the first paragraph quoted above, observes

that “the NYSBA Report . . . concluded that a transaction very similar to the one at

issue does not require a lump-sum inclusion.” More specifically, petitioner

contends that the report “supports Lee Bell’s inclusion of Annual § 367(d)

Payments.”

      Focusing on the second of the above-quoted paragraphs, respondent

interprets the NYSBA report as “saying that the regulations could--but presently do

not--provide an exception to immediate reporting for a situation like Petitioner’s.”
                                         - 75 -

Thus, respondent concludes that “a close reading of the . . . report demonstrates

that it actually confirms that Respondent’s position is correct.”

      We are inclined to accept petitioner’s interpretation of the NYSBA report.

The first of the quoted paragraphs concludes, on the basis of statutory

interpretation, that a target corporation’s distribution of stock of the transferee

foreign corporation to a CFC parent does not require the recognition of immediate

gain under section 367(d)(2)(A)(ii)(II). The report’s reference to possible new

regulations in the second paragraph is unclear. Would those regulations be

necessary to require the recognition of gain on a liquidating distribution of stock of

the transferee foreign corporation or instead to provide that immediate gain

recognition is not required when the distribution is to a CFC a sufficient portion of

whose stock is owned by United States shareholders who would be required to

include in income their respective shares of the CFC’s subpart F income? Even if

the hypothesized regulations would serve the latter purpose--providing an

exemption from the recognition of immediate gain that would otherwise be

required--the drafters may have envisioned those regulations as simply confirming

their interpretation of the statutory provisions they viewed as governing.

      Even so, the NYSBA report does not support the specific reporting

undertaken to reflect the transaction in issue. The report posits that, when a U.S.
                                         - 76 -

target owned by a CFC transfers intangible property in an outbound reorganization,

the target’s CFC parent should assume the obligation to report the deemed annual

payments described in section 367(d)(2)(A)(ii)(I). In the present case, that would

be VF Enterprises. By contrast, Lee Bell--a U.S. corporation other than

petitioner’s CFC parent--voluntarily reported deemed annual payments--apparently

not as its share of subpart F income of VF Enterprises but as income of Lee Bell in

its own right. In support of its motion for summary judgment, petitioner suggested

the alternative possibility of TBL GmbH reporting deemed annual payments as

petitioner’s successor. But that approach would differ from the one recommended

by the NYSBA report.

      Leaving those details aside, we accept that the drafters of the NYSBA report

concluded by means of statutory analysis that a U.S. target’s distribution to a CFC

parent of stock of the transferee foreign corporation as part of an outbound

reorganization should not require immediate gain recognition under section

367(d)(2)(A)(ii)(II). To the extent that that analysis supports petitioner’s position,

however, we find it unpersuasive. The drafters’ conclusion rests on the premise

that, while section 367(d) can override section 361(a) (the nonrecognition rule

applicable to transfers of assets), it should not be interpreted to override section

361(c) (the nonrecognition rule that applies to distributions of the stock received in
                                        - 77 -

exchange for transferred assets). While we agree with that premise, it does not

support the drafters’ conclusion. Treating the target’s distribution of stock of the

transferee foreign corporation as the trigger for the recognition of gain in the

transferred intangible property would not affect the nonrecognition treatment

afforded by section 361(c) on the distribution of stock. The stock distribution itself

would remain eligible for nonrecognition treatment. The occurrence of that

nonrecognition event would simply determine when the gain on the transferred

intangible property must be recognized.

      Moreover, the drafters of the NYSBA report erred in another respect in their

reading of the statutes they relied on. They suggest that section 381(c) supports

having the parent of the target corporation assume responsibility for the reporting

of the deemed annual payments described in section 367(d)(2)(A)(ii)(I). Section

381 does provide for the carryover of the tax attributes of a target corporation

acquired in specified types of reorganizations, including one described in section

368(a)(1)(F). But the entity that succeeds to those attributes is not the target’s

parent corporation (if any), but instead the acquiring corporation. 33 And, as

      33
        Sec. 381(a). General rule.--In the case of the acquisition of assets of
      a corporation by another corporation--

             ....
                                         - 78 -

explained supra part IV.B, it would make no sense to have the acquiring

corporation in the reorganization (the transferee foreign corporation) assume

responsibility for reporting the payments described in section 367(d)(2)(A)(ii)(I).

Doing so would treat that corporation as making payments to itself, as

simultaneously buyer and seller of the transferred intangible property.

      In short, we do not agree that, “[a]s a statutory construction matter,” a U.S.

transferor of intangible property in an outbound reorganization is not required to

recognize gain under section 367(d)(2)(A)(ii)(II) if that corporation was (before its

dissolution) owned by a CFC and that, instead, the CFC parent should be required

to include in income the deemed annual payments described in section

367(d)(2)(A)(ii)(I). On the contrary, for the reasons explained supra part III.A, the

U.S. transferor’s distribution of the stock of the transferee foreign corporation is a

“disposition” within the meaning of section 367(d)(2)(A)(ii)(II). Therefore, the

distribution will require the U.S. transferor to recognize any gain in intangible

property transferred in pursuance of the plan of reorganization in the absence of a

                     (2) in a transfer to which section 361 . . . applies, but only
             if the transfer is in connection with a reorganization described
             in subparagraph (A), (C), (D), (F), or (G) of section 368(a)(1),

      the acquiring corporation shall succeed to and take into account . . .
      the items described in subsection (c) of the . . . transferor corporation
      ....
                                        - 79 -

rule in the regulations providing contrary treatment. The NYSBA report identifies

no provision in the regulations that would allow reporting of deemed annual

payments notwithstanding the U.S. transferor’s “disposition” of the stock of the

transferee foreign corporation.

      G.     Conclusion

      For the reasons explained supra part III, we have concluded that petitioner’s

constructive distribution to VF Enterprises of the TBL GmbH stock that petitioner

constructively received in exchange for its intangible property was a “disposition”

within the meaning of section 367(d)(2)(A)(ii)(II). We also conclude, for the

reasons explained in this part IV, that no provision of the regulations allows

petitioner to avoid the recognition of gain under that statutory provision.

      Petitioner suggests that respondent is to blame for the absence of a provision

in the regulations that can be applied to petitioner’s circumstances. The absence of

an applicable regulatory provision, however, requires that we look to the statute

alone to determine the tax consequences of petitioner’s transaction. For the

reasons explained supra part III, section 367(d)(2)(A)(ii)(II), interpreted in

accordance with the legislative history, requires petitioner to recognize gain. The

absence of a provision in the regulations providing otherwise is petitioner’s

problem--not respondent’s.
                                         - 80 -

      Because respondent’s position is grounded in an interpretation of the

applicable statutory provisions and not on any regulations, we do not understand

petitioner’s argument that respondent’s “litigating position” is “impermissible”

under Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988). Bowen

stands for the proposition that an agency’s litigating position is not entitled to the

same deference a court would give to a position adopted through notice and

comment rulemaking. See id. at 212-13; see also Chevron, U.S.A., Inc. v. Nat.

Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Respondent does not ask

that we grant Chevron deference to the interpretation of the applicable statutes that

he advances in this case.

      In support of its efforts to cast disfavor on respondent’s litigating position,

petitioner asks us to consider facts concerning the examination of its return for the

year in issue. In the memorandum it submitted in support of its motion for

summary judgment, petitioner proposed a finding to the effect that the team

initially assigned to the examination “did not make an adjustment for Petitioner to

include immediate lump-sum gain under § 367(d)(2)(A)(ii)(II) or Temp. Treas.

Reg. § 1.367(d)-1T.” Respondent does not contest the accuracy of that proposed

finding but nonetheless objects to it as “irrelevant, vague, [and] misleading.” In

addition, respondent has asked us to strike the declaration of a former VF
                                        - 81 -

employee that petitioner submitted in support of its proposed findings concerning

the circumstances of the examination. Petitioner cites no authority for the

proposition that views expressed during the course of the audit bind respondent for

purposes of the present litigation.

      Petitioner suggests that the disputed evidence demonstrates that the position

respondent now advances “was not foreseeable.” The extent to which a taxpayer

might have been subjectively surprised by a position advanced by the

Commissioner has no direct bearing, however, on the position’s merits. Moreover,

as the NYSBA report acknowledges, the regulations “do not specifically address”

cases like petitioner’s, in which a U.S. transferor of intangible property “goes out

of existence” in the act of disposing of the stock of the transferee foreign

corporation. Petitioner chose to carry out a transaction in regard to which the law

was, at best, uncertain. In doing so, it necessarily assumed the risk of an outcome

that, by its lights, would be unfavorable.34

      34
        Petitioner repeatedly invokes our observation in Xilinx Inc. & Consol.
Subs. v. Commissioner, 125 T.C. 37, 62 (2005), aff’d, 598 F.3d 1191 (9th Cir.
2010), that taxpayers “are merely required to be compliant, not prescient.” We
made that observation, however, in regard to a position advanced by the
Commissioner that was contrary to governing regulations.
                                        - 82 -

       We are left with one task remaining. Having determined that petitioner must

recognize gain for the taxable year in issue by reason of the application of section

367(d)(2)(A)(ii)(II), we now determine the amount of that gain.

V.     Amount of Required Income Inclusion

       The parties agree on the amount of income inclusion required under section

367(d)(2)(A)(ii)(II) by reason of petitioner’s transfer of foreign workforce and

foreign customer relationships. They have stipulated that, “[i]f the Court decides

that a lump-sum inclusion of income is required under I.R.C. § 367(d)(2)(A)(ii)(II),

then Petitioner’s increase in income for the transfer of the foreign workforce and

the foreign customer relationships would be $23,400,000 and $174,400,000,

respectively.” The parties agree only in part, however, as to the income inclusion

required by reason of petitioner’s transfer of trademarks. As to that question, their

stipulation states:

              If the Court decides that a lump-sum inclusion of income is
       required under I.R.C. § 367(d)(2)(A)(ii)(II), then Petitioner’s increase
       in income for the transfer of the trademarks is $1,274,100,000, unless
       the Court agrees to reduce the adjustment to income for the
       trademarks based on a 20-year useful life limitation, pursuant to
       Temp. Treas. Reg. § 1.367(d)-1T, in which case the increase in
       income for the transfer of the trademarks is $1,029,200,000, in each
       case less the reported trademark basis of $19,339,000.

       Thus, the parties apparently agree that the income inclusion required by

section 367(d)(2)(A)(ii)(II) is the excess of the fair market value of the transferred
                                         - 83 -

intangible property at the time of petitioner’s disposition of the TBL GmbH stock

over the basis of that property. Cf. Temp. Treas. Reg. § 1.367(d)-1T(d)(1). They

also agree on the values of the foreign workforce and customer relationships that

petitioner constructively transferred to TBL GmbH. And they agree as to

petitioner’s tax basis in the transferred property. And, finally, they agree on the

resolution of the factual question of the trademarks’ value under two alternative

legal assumptions. Their point of disagreement is whether, as a matter of law, the

fair market value of the trademarks must be determined by treating each as having

a useful life of no more than 20 years. That legal question, which petitioner raised

in an amendment to its petition, arises by reason of Temporary Treasury

Regulation § 1.367(d)-1T(c)(3), which, as in effect for 2011, provided: “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.”

      Petitioner argues: “If this Court determines that a subsequent transfer

occurred resulting in a lump-sum inclusion amount under the Lump-Sum

Exception, Temp. Treas. Reg. § 1.367(d)-1T(c)(3) requires that the inclusion be

calculated with a 20-year useful life limitation.” Respondent counters that section

367(d)(2)(A)(ii)(II) “makes no reference whatsoever to ‘useful life’ of the
                                        - 84 -

transferred property.” Respondent characterizes Temporary Treasury Regulation

§ 1.367(d)-1T(c)(3) as a “regulatory grace applicable to the annual inclusion

paradigm.” According to respondent: “Petitioner cannot rely on an administrative

limitation on the time period over which annual inclusions would be taken into

account for purposes of reducing its disposition rule amount. The 20-year

regulatory limitation on the annual inclusion period is not a substitute methodology

overriding settled law concerning the definition of fair market value.” In that

regard, respondent points to Temporary Treasury Regulation § 1.367(d)-1T(g)(5),

which provides: “For purposes of determining the gain 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.” Finally, respondent

suggests that imposing an “artificial limitation” on the value of transferred

intangible property would frustrate Congress’ purpose in enacting section 367(d).

“Because the limitation on useful life in Temp. Treas. Reg. § 1.367(d)-1T(c)(3)

could only have the effect of reducing the amount that would be taxed pursuant to

Congress’s intentions under section 367(d),” respondent reasons, “the limitation

should be read narrowly and applied only to the circumstances specified in the
                                         - 85 -

regulations, i.e., annual inclusions and the time frame within which the intangible

property must be transferred to trigger [section 367(d)(2)(A)(ii)(II)].”

      In response to respondent’s argument, petitioner observes that “Temp. Treas.

Reg. § 1.367(d)-1T(c)(3) does not state that it only applies to Annual § 367(d)

Payments.” Instead, paragraph (c)(3) of Temporary Treasury Regulation

§ 1.367(d)-1T provided that it applied “[f]or purposes of this section.” Petitioner

notes that a property’s useful life is a relevant factor in determining its fair market

value and insists that “the regulations require a 20-year time frame for all useful

life analyses.”

      Our conclusion that petitioner must recognize gain as a result of its

constructive transfer of intangible property to TBL GmbH does not rest on any

provision in Temporary Treasury Regulation § 1.367(d)-1T. The only rule in that

section of the regulations that requires the recognition of gain upon a disposition of

stock of the transferee foreign corporation applies when that disposition is to a

person unrelated to the U.S. transferor. Temp. Treas. Reg. § 1.367(d)-1T(d)(1).

We have accepted the parties’ apparent view that VF Enterprises was related to

petitioner within the meaning of Temporary Treasury Regulation § 1.367(d)-1T(h).

Consequently, Temporary Treasury Regulation § 1.367(d)-1T(d)(1) is not the basis

for our conclusion that petitioner must recognize gain in the transferred intangible
                                        - 86 -

property as a result of its constructive distribution to VF Enterprises of TBL GmbH

stock. Instead, our conclusion rests on the statutory gain recognition rule provided

in section 367(d)(2)(A)(ii)(II).

      Accordingly, we might dismiss petitioner’s argument on that ground that,

regardless of the extent to which Temporary Treasury Regulation § 1.367(d)-

1T(c)(3) applies in implementing other rules of that section of the regulations, it

does not apply when gain recognition is required by the statute and the statute

alone. Under that analysis, however, a U.S. transferor who disposes of stock of the

transferee foreign corporation to a related person and, in so doing, goes out of

existence might be required to recognize gain in a greater amount than if the

disposition had been to an unrelated person. That distinction would be

unsupported by any apparent policy grounds. Therefore, we will accept that, if the

20-year useful life limitation imposed by Temporary Treasury Regulation

§ 1.367(d)-1T(c)(3) can limit the amount of gain required to be taken into account

under Temporary Treasury Regulation § 1.367(d)-1T(d)(1) upon a disposition of

the stock of the transferee foreign corporation to a person unrelated to the U.S.

transferor, it should also reduce the amount of gain petitioner is required to take

into account under the statutory gain recognition rule of section

367(d)(2)(A)(ii)(II).
                                         - 87 -

      As petitioner emphasizes, paragraph (c)(3) applied, by its terms, “[f]or

purposes of” Temporary Treasury Regulation § 1.367(d)-1T. We therefore ask:

For what other provisions within Temporary Treasury Regulation § 1.367(d)-1T is

the useful life of transferred intangible property relevant? “[U]seful life” appears

seven times in provisions of that section, as in effect during 2011, other than

paragraph (c)(3). Each of those instances has to do with the period during which

(1) deemed annual payments must be taken into account and (2) a direct or indirect

disposition of the transferred intangible property can require the recognition of

gain.35 The provisions that require or allow the recognition of gain refer to the fair

      35
         Temporary Treasury Regulation § 1.367(d)-1T(a), captioned “Purpose and
scope,” states the general rule that, as a result of a transfer of intangible property to
which section 367(d) applies, “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 fact
made by the transferee).” Temporary Treasury Regulation § 1.367(d)-1T(c)(1) in
restating that general rule, again refers to the property’s useful life. Temporary
Treasury Regulation § 1.367(d)-1T(d)(1) requires the U.S. transferor to recognize
gain upon disposing of the stock of the transferee foreign corporation to an
unrelated person if the disposition occurs “within the useful life of the intangible
property.” Temporary Treasury Regulation § 1.367(d)-1T(e)(1) applies if the
disposition of the stock of the foreign transferee corporation “within the useful life
of the transferred intangible property” is to a related U.S. person. In that event, the
related U.S. person must include deemed annual payments in income “over the
useful life of the property.” Temp. Treas. Reg. § 1.367(d)-1T(e)(1)(ii). Temporary
Treasury Regulation § 1.367(d)-1T(e)(3) applies when the disposition of transferee
foreign corporation stock, “within the useful life of the transferred intangible
property,” is to a related foreign person. And Temporary Treasury Regulation
                                         - 88 -

market value of the intangible property but do not expressly make the property’s

useful life relevant in determining that value. If the 20-year useful life limitation

applies for that purpose, it does so only implicitly.

      Any implication that the useful life limitation imposed by Temporary

Treasury Regulation § 1.367(d)-1T(c)(3) might apply in determining the amount of

gain that must be recognized under paragraph (d)(1) would conflict with the

definition of “fair market value” provided in paragraph (g)(5). As respondent

observes, Temporary Treasury Regulation § 1.367(d)-1T(g)(5) provides that the

fair market value of transferred property is the amount that an unrelated purchaser

would pay for the property. Temporary Treasury Regulation § 1.367(d)-1T(g)(5)

expressly applies “[f]or purposes of determining the gain . . . recognized

immediately under paragraph (d), (f), or (g)(2)” of Temporary Treasury Regulation

§ 1.367(d)-1T.36 In an arm’s-length transaction, an unrelated purchaser of

intangible property would consider the entire period during which the property

would have value in determining the price it would pay for the property. The

§ 1.367(d)-1T(f)(1) requires the recognition of gain if the transferee foreign
corporation, “within the useful life of the intangible property,” transfers that
property to an unrelated person.
      36
        Temporary Treasury Regulation § 1.367(d)-1T(g)(2) allows a U.S.
transferor of intangible property to a foreign corporation, under specified
circumstances, to elect immediate gain recognition.
                                        - 89 -

terms of paragraph (g)(5), which specifically and expressly govern the

determination of the fair market value of intangible property for the purpose of

determining gain that must be recognized under an immediate gain recognition rule

must take precedence over possible implications of a more general provision

regarding the property’s useful life. As petitioner recognizes, “[s]pecific

regulations govern over general regulations.”

      Petitioner admits that $1,029,200,000 is not “the full fair market value” of

the trademarks it constructively transferred to TBL GmbH. Petitioner

acknowledges that the values it reported on its Form 926, including the

$1,274,100,000 value assigned to the trademarks, were “the fair market values of

the Timberland Intangible Assets . . . without the application of the regulations’

useful life limitation.” Petitioner reported those amounts, it explained, because

“Form 926 states that the full fair market value be stated on the form.”

      By contrast, petitioner offers us no explanation for why the drafters of

Temporary Treasury Regulation § 1.367(d)-1T might have intended that the

amount of gain a U.S. transferor is required to recognize upon a direct or indirect

disposition of transferred intangible property should be computed on the basis of a

value that is less than the property’s “full fair market value.” The useful life

limitation provided in Temporary Treasury Regulation § 1.367(d)-1T(c)(3), when
                                        - 90 -

applicable, allowed a U.S. transferor to recognize less than the full amount of gain

in intangible property transferred to a foreign corporation. As applied to the

requirement to report deemed annual payments, the useful life limitation could

have been understood as a rule of administrative convenience. And it follows that

a U.S. transferor should not be required to recognize gain upon a direct or indirect

disposition of the intangible property that occurs after all required annual deemed

payments have been taken into account. Applying the 20-year useful life limitation

to limit the amount of gain recognized upon a disposition before all deemed annual

payments have been reported, however, cannot be understood as a rule of

convenience. Allowing the U.S. transferor, in that circumstance, to avoid

recognizing the full amount of gain in the transferred intangible property would

have no apparent justification. If the drafters of Temporary Treasury Regulation

§ 1.367(d)-1T had intended that result, we would have expected them to have been

more explicit.

      Therefore, we decline to apply Temporary Treasury Regulation § 1.367(d)-

1T(c)(3) beyond the purposes for which it was expressly relevant (that is, for

purposes of applying other provisions of the regulations that explicitly refer to the

intangible property’s “useful life”). By reason of Temporary Treasury Regulation

§ 1.367(d)-1T(g)(5), the gain that a U.S. transferor must recognize under paragraph
                                         - 91 -

(d)(1) upon disposing of the stock of the transferee foreign corporation to an

unrelated person should take into account the actual fair market value of the

transferred intangible property on the date of the disposition. That fair market

value should reflect the amount that an unrelated purchaser would pay for the

property in an arm’s-length transaction, taking into account the entire period

during which the property may be expected to have value.

      Because we do not “agree[] to reduce the adjustment to income for the

trademarks based on a 20-year useful life limitation, pursuant to Temp. Treas. Reg.

§ 1.367(d)-1T,” we determine, in accordance with the parties’ stipulation, that

“[p]etitioner’s increase in income for the transfer of the trademarks is

$1,274,100,000.” Adding that figure to the agreed value of the foreign workforce

and customer relationships that petitioner transferred to TBL GmbH and reducing

the sum by the agreed trademark basis, we conclude that petitioner’s income for

the taxable year in issue should be increased by $1,452,561,000 ($1,274,100,000 +

$23,400,000 + $174,400,000 − $19,339,000), as determined in the notice of

deficiency. Because petitioner did not assign error to the other two adjustments

reflected in the notice of deficiency, it follows that respondent is entitled to

judgment as a matter of law. Accordingly, we will grant respondent’s motion for
                                      - 92 -

summary judgment and deny petitioner’s corresponding motion. We will also

deny as moot respondent’s motion in limine and motion to strike.

                                               An appropriate order will be issued,

                                     and decision will be entered for respondent.