Revisiting Section 367(d): How Treasury Took the Bite Out of Section 367(d) and What Should Be Done About It

65 Pages Posted: 22 Nov 2014 Last revised: 25 Nov 2014

Bret Wells

University of Houston Law Center

Date Written: November 21, 2014


Section 367(d) seeks to prevent residual profits related to U.S. developed intangible assets from migrating out of the U.S. tax jurisdiction via the outbound contribution or transfer of intangibles to a foreign corporation. There has been a great hue and cry over the outbound migration of intangibles in recent years, which by implication has created significant agitation about whether section 367(d) is effective. For at least a decade, the Treasury Department and IRS have identified section 367(d) as an area in need of regulatory reform, and recent comments by government officials indicate that guidance may be forthcoming in the future. Concurrently, the Obama administration has proposed amendments to section 367(d) and the U.S. subpart F rules to address outbound migration of intangible value.

The debate over the efficacy of section 367(d) to prevent IP migration is being waged along two fronts. As to the first front of this debate, the central question is whether a fatal loophole (a “goodwill loophole”) exists within the architecture of section 367(d) that allows the outbound migration of intangible value under the protective cloak of “goodwill” with the consequence that a substantial portion of the ongoing residual profits related to the transferred goodwill items escape the application of section 367(d)’s super royalty obligation. In Subparts II.A. through II.B., this Article addresses why this “goodwill loophole” that has received so much attention is nonexistent. All that is needed is for the courts to correctly apply section 367(d) as it should be applied, and once this is done the “goodwill loophole” should be defrocked of all of its purported cloaking capabilities.

The second front in this ongoing debate about the efficacy of section 367(d) to prevent IP migration concerns the role that cost sharing agreements play in facilitating the outbound migration of residual profits away from the U.S. functions that create the high-profit potential intangibles. Section 367(d) is clear on its face as to what should be the correct outcome in these instances, but the Treasury Department’s existing cost sharing regulations create a “cost sharing loophole” that provides the means for substantial profit-shifting. In Subpart II.C., infra, this Article sets forth how the Treasury Department should amend its existing Treasury regulations in order to close this inappropriate “costs sharing loophole.”

Moreover, as an entirely separate debate, the Treasury Department and IRS have retrofit section 367(a) and (b) as a means to attack the tax-free repatriation of cash from foreign subsidiaries in transactions that utilize the recovery of high stock basis. Part III addresses how section 367(a) and (b) have been substantially altered and how section 367(d) is now being rethought in light of this expanding omnibus strategy that is redefining the contours of all of section 367.

Calm reflection about the contours of section 367(d) is needed because the raging debate about section 367(d) threatens to run it off the road and into a ditch. This Article seeks to provide illumination of the way forward so that section 367(d) achieves its intended purpose.

Keywords: International Taxation, Base Erosion and Profit Shifting, Earning Stripping, Transfer Pricing, Section 367(d), IP migration

Suggested Citation

Wells, Bret, Revisiting Section 367(d): How Treasury Took the Bite Out of Section 367(d) and What Should Be Done About It (November 21, 2014). 16 Florida Tax Review 519 (2014); U of Houston Law Center No. 2014-A-80. Available at SSRN:

Bret Wells (Contact Author)

University of Houston Law Center ( email )

4604 Calhoun Road
Houston, TX 77204-6060
United States

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