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

82 F.4th 12

• Court: Court of Appeals for the First Circuit
• Decided: September 8, 2023
• Docket: 22-1783
• Status: Published

Opinion

United States Court of Appeals For the First Circuit

No. 22-1783

TBL LICENSING LLC, f/k/a The Timberland Company, and subsidiaries (a consolidated group),

Petitioner, Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent, Appellee.

APPEAL FROM THE UNITED STATES TAX COURT

[Hon. James S. Halpern, U.S. Tax Court Judge]

Before

Kayatta, Lipez, and Gelpí, Circuit Judges.

Shay Dvoretzky, with whom Christopher Bowers, Nathan Wacker, Parker Rider-Longmaid, Sylvia O. Tsakos, Hanaa Khan, Skadden, Arps, Slate, Meagher & Flom LLP, James Preston Fuller, and Fenwick & West LLP were on brief, for appellant. Judith A. Hagley, Tax Division, Department of Justice, with whom David A. Hubbert, Deputy Assistant Attorney General, Tax Division, Department of Justice, Francesca Ugolini, Tax Division, Department of Justice, and Jacob Christensen, Tax Division, Department of Justice, were on brief, for appellee.

September 8, 2023 KAYATTA, Circuit Judge. In 2011, TBL Licensing LLC

("TBL") transferred intangible property worth approximately

$1.5 billion to an affiliated foreign corporation. The transfer

occurred in the context of a corporate reorganization involving an

exchange as described in section 361 of the Internal Revenue Code.1

TBL took the position that the tax attributable to the transfer

could be paid over time on an annual basis by one of TBL's

affiliates. The IRS disagreed, assessing a deficiency based on

the position that TBL itself was required to pay tax on the entire

gain, and to do so in its tax return for the year of the transfer.

TBL challenged the deficiency, the Tax Court sustained it, and TBL

appeals.

The tax treatment of TBL's transfer of its intangible

property turns on whether the final step of the reorganization was

a "disposition following such transfer" as that phrase is used in

section 367(d)(2)(A)(ii)(II). As we will explain, we agree with

the Commissioner that TBL's transfer of its intangible property

was followed by a disposition of that property, requiring TBL to

pay the tax due in a lump sum.

1 All uses of "section" refer to sections of the Internal Revenue Code (26 U.S.C.) unless otherwise indicated.

- 2 - I.

We begin with the basic terminology and background rules

of federal income tax that help frame our reading of

section 367(d). A taxpayer generally "recognizes" gain on

property that has increased in value when the taxpayer sells,

exchanges, or otherwise disposes of the property. See I.R.C.

§ 1001(a)–(c)(1991); Cottage Sav. Ass'n v. Comm'r, 499 U.S. 554,

559, 566. To "recognize" gain simply means to take the gain "into

account in computing income." Boris I. Bittker & Lawrence Lokken,

Federal Taxation of Income, Estates and Gifts ¶ 40.1 (2023). So,

in general, a taxpayer (including a corporation) that exchanges

appreciated property for money or other valuable property

recognizes the gain on the property as a result of the exchange.

The amount of the gain is the excess of the value of the money or

property received in the exchange over the taxpayer's "basis" in

the transferred property (typically, the cost of acquiring the

property). See I.R.C. §§ 1001(a), 1011(a), 1012(a). These are

the same rules that generally require individuals to pay income

tax on the gain from selling stock.

The Internal Revenue Code, however, exempts certain

corporate transactions from these general rules, allowing

taxpayers to exchange property without recognizing any gain at the

time. While these "nonrecognition" provisions permit taxpayers to

- 3 - avoid paying tax at the time of the transaction, the gain on the

exchanged property does not forever escape taxation. Rather, as

described further below, tax is deferred until a future disposition

occurs that does not qualify for nonrecognition treatment. The

policy underlying such nonrecognition rules is that it is

inappropriate for an exchange to trigger tax where "the new

property received is substantially a continuation of the old

investment." Boris I. Bittker & James S. Eustice, Federal Income

Taxation of Corporations and Shareholders § 12.00[1] (2020).

There are two types of nonrecognition transactions that

are relevant to section 367(d): corporate formations under

section 351 and corporate reorganizations under section 368.

Section 351 generally provides nonrecognition treatment

when a person (i.e., a natural person or a corporation) or group

of persons transfers property to a corporation in exchange for

that corporation's stock, and such person or group is in "control"

of the corporation immediately after the transaction (generally

defined as owning at least 80% of the corporation's stock). See

I.R.C. §§ 351(a); 368(c). A simple example of a section 351

exchange, in which two people each contribute property to a newly

formed corporation, is depicted below:

- 4 - Section 351 Example

Person A Person B

Stock A’s Property B’s Property

New Corporation

Absent the special nonrecognition rules, those

transferring property (the "transferors") to the corporation (the

"transferee") would have to recognize gain on any appreciated

property transferred. For example, if a person transfers $100

worth of land with a basis of $75 in exchange for $100 worth of

stock, that transferor would ordinarily recognize $25 of gain.

But, assuming the transaction qualifies under section 351(a),2 no

gain is recognized. Instead, the transferor in this example takes

a "carryover basis" in the stock received -- that is, the

transferor's basis in the stock is the same as its previous basis

in the land ($75). See I.R.C. § 358(a). In accordance with the

2This example assumes that only stock is received for the property. Different rules apply when the transferor receives both stock and money (or other property) in exchange for the property transferred to the corporation. See §§ 351(b), 358(a), 362(a).

- 5 - general purpose of the nonrecognition rules, the transferor's

economic interest in the land has continued by virtue of the

transferor's stock interest in the corporation that now owns the

land. Taxation of the land's increased value is deferred until a

future disposition.

The transaction at issue in this appeal was a corporate

reorganization under section 368, rather than a corporate

formation under section 351. Corporate reorganizations include a

wide range of transactions in which existing corporations merge,

divide, or otherwise transform. See Bittker & Eustice, supra,

§ 12.00[2]. The transaction here falls into a specific subset of

reorganizations in which one corporation transfers assets to

another in exchange for stock (an "asset reorganization"). As the

parties agree, a basic asset reorganization proceeds in two steps

(which may either actually occur or be deemed to occur for tax

purposes): First, one corporation (the "transferor") transfers all

its assets to another corporation (the "acquiror" or "transferee")

in exchange for some portion of the acquiror's stock. Second, the

transferor transfers the acquiror stock it just received to its

shareholders and ceases to exist for U.S. tax purposes.3 At the

3 However, in "divisive" reorganizations described in section 368(a)(1)(D), the transferor generally transfers only a designated portion of its assets to the acquiror (which must be a subsidiary of the transferor corporation) and then continues operating -- rather than ceasing to exist -- following the

- 6 - completion of the transaction, the acquiror owns the transferor's

assets, the transferor no longer exists (at least for tax

purposes), and the historic transferor shareholders own a portion

of the acquiror's stock. A simple example of this type of

transaction and its result is depicted below:

Asset Reorganization Example

A B Shareholders Shareholders B Stock

A Assets Corporation A Corporation B (Transferor) (Acquiror) B Stock

A B Assets Assets

distribution of the acquiror stock. See Bittker & Eustice, supra, § 12.26[1].

- 7 - Result

Historic A Historic B Shareholders Shareholders

Corporation B

Nonrecognition and carryover basis rules apply to this

type of transaction as well.4 In the first step, under

section 361(a), the transferor recognizes no gain on the exchange

of its assets for acquiror stock. As will become relevant later,

we refer to this step as a "section 361 exchange." The acquiror

takes a carryover basis in the assets it receives (i.e., the same

basis the transferor had in such assets). See I.R.C. § 362(b).

In the second step, under section 361(c), the transferor does not

4As is the case with section 351, different rules apply when the transferor receives both stock and money (or other property) in exchange for the assets transferred to the acquiror. See I.R.C. §§ 356(a), 358(a), 361(b), 362(b).

- 8 - recognize any gain on the distribution of acquiror stock to its

shareholders, and under section 354(a), the transferor's historic

shareholders do not recognize any gain upon the receipt of acquiror

stock (which they are treated as receiving in exchange for their

transferor stock). We refer to this step as the "second-step

distribution." The transferor's historic shareholders take a

carryover basis in the acquiror stock they receive (i.e., the same

basis they had in their transferor stock). See I.R.C. § 354(a).

When the dust settles, the historic transferor shareholders (by

virtue of their stock in the acquiror) have a continuing economic

interest in the transferor's historic assets -- and the recognition

of any gain on those assets has been deferred until a future

transaction, such as a sale of the assets by the acquiror.

As noted above, the nonrecognition provisions are

premised in part on the fact that gain recognition is deferred to

some future transaction. Because the gain recognition is merely

deferred, any gain not recognized upon the exchange of the

transferor's assets for the acquiror's stock does not forever

escape U.S. taxation. But the involvement of foreign corporations

in nonrecognition transactions undermines this premise, as foreign

corporations are not generally subject to U.S. tax. If the

nonrecognition rules applied to a section 351 exchange or an asset

reorganization involving a foreign corporation, there would be no

- 9 - tax on the transfer of those assets to the foreign corporation (a

so-called "outbound transfer"), and the foreign corporation would

also owe no U.S. tax if it later sold those assets.

Section 367 addresses this concern. Section 367(a)

provides that, in general: "If, in connection with any exchange

described in section [351 or 361],5 a United States person

transfers property to a foreign corporation, such foreign

corporation shall not, for purposes of determining the extent to

which gain shall be recognized on such transfer, be considered to

be a corporation." I.R.C. § 367(a)(1). In other words,

section 367(a) provides that foreign transferees in property-for-

stock exchanges are not to be treated as corporations. And since

the nonrecognition rules of sections 351 and 361 only apply to

exchanges involving corporations, section 367 renders those

nonrecognition rules inapplicable to property-for-stock exchanges

with foreign corporations.6

Section 367(a) 5 also applies to other corporate nonrecognition transactions not relevant here. 6 Section 351(a) provides: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. I.R.C. § 351(a) (emphasis added).

- 10 - Without the benefit of a nonrecognition rule, the

transferor must recognize gain on the transfer of the assets to

the foreign corporation based on the value of the assets at the

time of the transfer. See I.R.C. § 1001. Thus, section 367(a)

prevents taxpayers from using the nonrecognition rules to transfer

appreciated assets to foreign corporations and escape U.S. tax on

the gain.

II.

With the foregoing terminology and background rules in

mind, we turn now to section 367(d), the specific provision at the

heart of this appeal. Section 367(d) provides special rules (in

place of the rules contained in section 367(a)) that apply to

intangible property transferred by a U.S. person to a foreign

corporation.7 It provides:

(d) Special rules relating to transfers of intangibles

(1) In general--Except as provided in regulations prescribed by the Secretary, if a United States

And section 361(a) provides: No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. I.R.C. § 361(a) (emphasis added). 7 No amendments material to this appeal have been made to section 367 since the 2011 transaction, and thus all references are to the current version of section 367.

- 11 - person transfers any intangible property to a foreign corporation in an exchange described in section 351 or 361--

(A) subsection (a) shall not apply to the transfer of such property, and

(B) the provisions of this subsection shall apply to such transfer.

(2) Transfer of intangibles treated as transfer pursuant to sale of contingent payments--

(A) In general--If paragraph (1) applies to any transfer, the United States person transferring such property shall be treated as--

(i) having sold such property in exchange for payments which are contingent upon the productivity, use, or disposition of such property, and

(ii) receiving amounts which reasonably reflect the amounts which would have been received--

(I) annually in the form of such payments over the useful life of such property, or

(II) in the case of a disposition following such transfer (whether direct or indirect), at the time of the disposition.

The amounts taken into account under clause (ii) shall be commensurate with the income attributable to the intangible.

I.R.C. § 367(d)(1)–(2)(A) (emphasis added).

In simpler terms, if a U.S. person transfers intangible

property to a foreign corporation in an exchange that would

- 12 - otherwise receive nonrecognition treatment under section 351 or

361, then that person is treated as having sold the intangible

property in exchange for certain taxable payments. The timing of

those payments depends on whether there is "a disposition following

such transfer." If there is no such disposition, then the payments

are deemed to be received "annually . . . over the useful life of

such property," I.R.C. § 367(d)(2)(A)(ii)(I), and must reflect "an

appropriate arms-length charge for the use of the property." Temp.

Treas. Reg. § 1.367(d)-1T(c)(1). But "in the case of a disposition

following such transfer (whether direct or indirect)," the U.S.

person is deemed to receive a lump-sum payment reflecting the value

of the property "at the time of the disposition." I.R.C.

§ 367(d)(2)(A)(ii)(II). We refer to the former rule as the

"annual-payment rule" and the latter rule as the "disposition-

payment rule."

Before moving on to how section 367(d) applies in the

context of an asset reorganization (the type of transaction

relevant to this appeal), it is helpful to first understand how it

works in the more straightforward context of a corporate formation

under section 351. As described above, the basic section 351

transaction involves the transfer of property by a person or group

in exchange for corporate stock, where the person or group controls

the corporation immediately following the transaction. In the

- 13 - purely domestic context, a person who transferred intangible

property to a corporation in a section 351 transaction would not

recognize any gain due to the nonrecognition rules provided by

that section. But, if section 367(d) applied, the transferor would

be treated as having sold the intangible property. Assuming no

further transactions occurred after the conclusion of the

section 351 exchange, the annual-payment rule would apply, and the

transferor would be deemed to receive as income annual payments

over the intangible property's useful life.

However, if within the intangible property's useful life

the transferee corporation sells the intangible property to a third

party (an uncontroversial example of a "direct" disposition under

section 367(d)), or the transferor sells its stock in the foreign

corporation to a third party (an uncontroversial example of an

"indirect" disposition), then the disposition-payment rule would

apply. The transferor would be treated as receiving as income a

lump-sum payment based on the intangible property's value at the

time of the disposition, and would no longer be treated as

receiving the annual payments. See I.R.C. § 367(d)(2)(A)(ii)(II);

Temp. Treas. Reg. § 1.367(d)-1T(d)(1), (f)(1).

The question at the center of this appeal is how

section 367(d) applies to an outbound transfer of intangible

property described in section 361. A section 361 exchange of the

- 14 - transferor's assets for acquiror stock occurs in the broader

context of an asset reorganization. This is distinct from a

transfer under section 351, in which the exchange of the intangible

property for stock can constitute the entirety of the transaction.

As the parties here agree, every reorganization that involves a

section 361 exchange of property for stock also includes, as a

required second step, the distribution by the transferor of

acquiror stock to the transferor's shareholders. This type of

transaction poses the following question, the answer to which

resolves this appeal: Is that second-step distribution a

"disposition following such transfer" for purposes of triggering

the disposition-payment rule?

III.

Before answering that question, we summarize the

specifics of the transaction that gives rise to this appeal.

In September 2011, VF Corp. (a domestic corporation)

purchased -- through one of its foreign subsidiaries -- Timberland

Co. (also a domestic corporation) for $2.3 billion in a transaction

that is not directly at issue here. Approximately $1.5 billion of

Timberland's value was attributable to its intangible assets. VF

Corp. sits atop a multinational chain of corporations, and,

following the acquisition, it undertook a variety of corporate

restructuring transactions. As a result, TBL -- a domestic

- 15 - corporation for U.S. tax purposes whose ultimate owner was

VF Corp. -- acquired Timberland's intangible property (the

"Timberland IP"). Then, in the transaction at issue here, TBL was

deemed (for tax purposes) to transfer the Timberland IP to a

foreign corporation and subsequently cease to exist.

Immediately prior to that transaction, TBL was directly

owned by VF Enterprises S.a.r.l. ("VF Foreign"), a Luxembourg

corporation. VF Foreign was indirectly owned (through a chain of

foreign corporations) by Lee Bell, Inc., a domestic corporation

that was in turn ultimately owned by VF Corp. As a result of the

transaction, TBL Investment Holdings ("TBL Foreign"), a foreign

indirect subsidiary of VF Corp., acquired the Timberland IP.

The parties agree that, for tax purposes, the

transaction constituted an asset reorganization8 in which the

following two steps were deemed to occur: First, TBL transferred

its assets (including the Timberland IP) to TBL Foreign in exchange

for TBL Foreign stock; and then, second, TBL distributed the TBL

Foreign stock to VF Foreign and ceased to exist for U.S. tax

purposes.9 The transaction and its result are depicted below:

8 Specifically, the transaction constituted a reorganization described in section 368(a)(1)(F), which is defined as "a mere change in identity, form, or place of organization of one corporation, however effected." I.R.C. § 368(a)(1)(F). 9 The IRS describes a deemed third step, in which VF Foreign exchanged its TBL stock for TBL Foreign stock. See Treas. Reg. § 1.367(a)-1(f)(1)(iii). TBL does not dispute that this deemed

- 16 - The Transaction

VF Corporation

Lee Bell, Inc.

VF Foreign

TBL Foreign Stock 1 TBL Assets

TBL TBL Foreign TBL Foreign Stock

IP

third step occurred; but, because this step is not central to the resolution of this appeal, we have simplified the transaction into the two steps described above.

- 17 - Result

TBL Foreign

TBL, which ceased to exist for U.S. tax purposes as a

result of the transaction, did not report any gain attributable to

the Timberland IP transfer on its final tax return. Instead,

VF Corp. took the position that the disposition-payment rule had

- 18 - not been triggered, and that Lee Bell, Inc. -- as "the closest-

related10 U.S. entity to TBL" -- could report the income based on

the annual-payment rule of section 367(d).11

On May 11, 2015, the IRS issued a notice of deficiency

to TBL for the 2011 tax year, informing TBL of an income tax

shortfall of about $505 million attributable to the transfer of

the Timberland IP to TBL Foreign. The notice stated that TBL

should have reported the full amount of gain on the intangible-

property transfer -- about $1.5 billion -- on its final tax return

pursuant to the disposition-payment rule. TBL petitioned the Tax

Court for redetermination of the deficiency, asserting that it had

appropriately applied the annual-payment rule by including the

deemed payments in Lee Bell's income.

The Tax Court granted summary judgment to the

Commissioner in January 2022, sustaining the deficiency. As is

relevant here, the court analyzed whether there had been a

"disposition following such transfer (whether direct or

indirect)" -- i.e., whether the conditions for triggering the

disposition-payment rule had been satisfied. The court first

10 In this context, a "related entity" generally refers to a major (direct or indirect) shareholder. See I.R.C. § 267(b); Treas. Reg. § 1.367(d)-1T(h). 11 Between 2011 and 2017, Lee Bell reported more than $475 million in income attributable to the transfer.

- 19 - concluded that TBL's distribution of TBL Foreign stock to VF

Foreign constituted an "indirect" "disposition" of the Timberland

intangible property because the transferor of the intangible

property -- TBL -- relinquished its interest in the foreign

corporation that owned the intangible property -- TBL Foreign.

Next, the court concluded that the phrase "following such transfer"

simply means following the transfer of the intangible property.

Accordingly, the court held that the disposition-payment rule

applied because TBL's distribution of TBL Foreign stock

constituted a "disposition following" TBL's "transfer" of the

Timberland IP to a foreign corporation. TBL timely appealed.

IV.

TBL principally argues that, in the event of an asset

reorganization involving the outbound transfer of intangible

property, the disposition-payment rule does not apply unless there

is a disposition following the overall asset reorganization (which

TBL calls a "[section] 361 reorganization"12). In accordance with

this position, TBL maintains "that the word 'transfer' in 'a

disposition following such transfer,' means the completed

[section] 351 transaction or [section] 361 reorganization."

Therefore, reasons TBL, the distribution of TBL Foreign stock to

12 We prefer the term "asset reorganization," as nonrecognition rules beyond those contained in section 361 apply to such transactions. See I.R.C. §§ 354, 356.

- 20 - VF Foreign was the completion of the relevant transfer (i.e., the

overall reorganization), and not a post-transfer disposition

triggering the disposition payment rule. The Commissioner, in

contrast, argues that the relevant "disposition" need only follow

the "transfer" of the intangible property (rather than the overall

reorganization), which is exactly what happened here when TBL

distributed TBL Foreign stock after transferring the Timberland

IP.

To resolve this dispute, "we start with the text of the

statute," Babb v. Wilkie, 140 S. Ct. 1168, 1172 (2020), and then

address TBL's arguments regarding legislative history and the

relevance of the section 367(d) regulations. In so doing, we

review the Tax Court's interpretation of section 367(d) de novo.

See Benenson v. Comm'r, 887 F.3d 511, 516 (1st Cir. 2018).

A.

1.

From the outset, TBL's argument finds no toehold in the

statutory text. The general rule of section 367(a) casts its net

around transactions in which "a United States person transfers

property to a foreign corporation" "in connection with any exchange

described in section [351 or 361]." I.R.C. § 367(a). An "exchange

described in section . . . 361," id., is generally an exchange by

one corporation (that is a party to a reorganization) of property

- 21 - for stock in another corporation (that is also a party to the

reorganization) made "in pursuance of the plan of reorganization."

I.R.C. § 361(a). Put more simply, in the context of a section 361

exchange, the object of section 367(a) is the transfer of property

to a foreign corporation in connection with an exchange made in

pursuance of a plan of reorganization. The object is not the

distribution of stock that necessarily must follow the section 361

exchange. The first step of the TBL asset reorganization exactly

fits this description: In pursuance of a plan of reorganization,

TBL (a United States person) transferred property to TBL Foreign

(a foreign corporation) in exchange for TBL Foreign's stock.

It is thus clear that TBL's transfer of its property to

TBL Foreign neatly falls within the reach of the section 367(a)

general rule. And by deeming TBL Foreign not to be a corporation,

that general rule would require TBL to recognize and pay as a lump

sum a tax on the transfer. Not surprisingly, TBL therefore

acknowledges that it must qualify under an exception to that

general rule if it wants to have a different treatment.

Section 367(d)(1) creates the only relevant exception,

which applies when "a United States person transfers any intangible

property to a foreign corporation in an exchange described in

section 351 or 361." I.R.C. § 367(d)(1). Section 367(d)(2) in

turn spells out the required tax treatment if "[section 367(d)(1)]

- 22 - applies to any transfer." I.R.C. § 367(d)(2). TBL claims to

qualify for such treatment, based on the position that it

transferred intangible property to TBL Foreign in an exchange

described in section 361. And the IRS agrees that TBL did make

such a transfer. Hence, both parties agree that TBL escapes the

general rule of section 367(a) and that the tax treatment of its

transfer of intangible property is to be found instead in

section 367(d)(2). Exactly how section 367(d)(2) applies to TBL's

transfer is the nub of the parties' dispute.

What should be clear from the foregoing is that the term

"such transfer" in the disposition-payment rule of

section 367(d)(2) ("in the case of a disposition following such

transfer") has only one possible antecedent. That antecedent is

the "transfer" that is the express object of both the general rule

of section 367(a) and the exception of section 367(d) in which TBL

seeks haven. That is to say, it is the transfer of intangible

property to TBL Foreign, not the asset reorganization as a whole.

See IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005) (stating that

under "the normal rule of statutory interpretation," "identical

words used in different parts of the same statute are generally

presumed to have the same meaning," and further concluding that an

"explicit reference to the use of the identical term" earlier in

the statute by use of the phrase "said [term]" confirms consistent

- 23 - meaning). And the fact that section 367 elsewhere uses the term

"reorganization," see I.R.C. § 367(a)(2), demonstrates that

Congress knew how to say "reorganization" when it meant it.

TBL's response pays little heed to the statutory text.

TBL maintains that we cannot characterize an outbound transfer of

intangible property as having been part of "an exchange described

in section . . . 361," I.R.C. § 367(d)(1), until the overall

reorganization is complete. TBL, in turn, asserts that

section 367(d) does not "kick in" -- i.e., the conditions required

for its application are not met -- until the reorganization is

completed at the time of the second-step distribution. And if

that is so, reasons TBL, the second-step distribution cannot serve

as the relevant trigger for the disposition-payment rule.

Otherwise, the disposition-payment rule would be triggered at the

same time that section 367(d) in general kicks in, which in TBL's

view apparently could not be so. There are two glaring defects

with this argument.

First, and most simply, we need not wait until a

reorganization is complete to determine whether a particular

exchange is described in section 361. Section 361(a) generally

applies when the transferor "exchanges property, in pursuance of

the plan of reorganization, solely for stock" in the acquiror.

I.R.C. § 361(a) (emphasis added). Nothing in this language or the

- 24 - language of section 367(d) suggests that the pursued plan of

reorganization need be complete in order to view the transfer of

intangible property as occurring in "an exchange described in

section . . . 361."13 I.R.C. § 367(d)(1); see Bittker & Eustice,

supra, § 12.02[6]. Section 367(d), therefore, does "kick in"

before the planned reorganization is complete.

Second, even if TBL were correct that one must await the

completion of the reorganization before deeming the transfer of

the assets to have occurred in a section 361 exchange, it would

still be clear that the belatedly classified transfer occurred

when it did, i.e., before the second-step distribution. So, TBL's

view that the taxpayer must wait until the conclusion of the

transaction to finally determine whether and how section 367(d)

applies is not at all inconsistent with the plain-text reading of

"such transfer" we outlined above.

Trying out another theory, TBL argues that an asset

reorganization "must be understood as a consistent whole, from

initial asset transfer until after the stock is distributed to

shareholders," and thus there is no part of the reorganization

"that can serve as 'a disposition following such transfer.'"

Accordingly, TBL asserts, "[a] 'disposition following' must refer

13 Of course, we do not suggest that the IRS could not recharacterize a previous transaction if a future step necessary to the plan of reorganization never ended up occurring.

- 25 - to something that happens after" the completed reorganization.

But simply because separate steps of an asset reorganization form

part of a unified whole does not mean section 367(d) cannot

reference one of those steps individually. The phrase "exchange

described in section . . . 361" refers to the first step of an

asset reorganization, and, as elaborated further below, TBL does

not argue otherwise. So it is entirely unclear why the term "such

transfer" as used in the disposition-payment rule could not also

refer to that same individual step.

For similar reasons, we reject TBL's attempt to ground

its argument in Commissioner v. Clark, 489 U.S. 726 (1989), which

held that "interrelated yet formally distinct steps in an

integrated transaction may not be considered independently of the

overall transaction." Id. at 738. Here, we certainly treat the

second-step distribution of TBL Foreign stock as part of the

overall plan of reorganization; without that step, the transfer of

the Timberland IP would not qualify as a section 361 exchange, and

we would have no occasion to be discussing section 367(d) at all.

But the fact that distinct steps are "interrelated" does not mean

that all distinctions between those steps are erased. For example,

we know that the two steps occur at different times (one after the

other, rather than simultaneously), and that different provisions

- 26 - of the Internal Revenue Code operate to grant nonrecognition

treatment to each step. See, e.g., §§ 361(a), 361(c), 354.

Relatedly, TBL argues in its reply brief that because

section 367(d) refers to "section . . . 361" as a whole -- rather

than those specific provisions of section 361 that apply to

section 361 exchanges -- the relevant disposition must necessarily

occur after the completed reorganization. Recall that

section 361(a) provides nonrecognition treatment for the

transferor in a basic section 361 exchange of property for stock.

Further, when the transferor receives both stock and money (or

other property) in exchange for the property transferred to the

acquiror, section 361(b) applies to the exchange instead of

section 361(a). Section 361(c), in contrast, applies to the

second-step distribution rather than the first-step exchange,

generally providing nonrecognition treatment for the distribution

by the transferor of the acquiror's stock. And so, TBL argues,

the reference to section 361 in section 367(d) -- rather than to

section 361(a) or section 361(b), specifically -- "mean[s] the

entire [section] 361 reorganization must occur to trigger

[section] 367(d) before the statute asks if there has been a

'disposition following' that reorganization." As TBL puts it,

"when Congress wanted to provide rules for specific steps of a

§ 361 reorganization, it cross-referenced the subsections

- 27 - associated with those particular steps," pointing to a provision

within section 367(a) that does specifically refer to "an exchange

described in subsection (a) or (b) of section 361." I.R.C.

§ 367(a)(4).

This argument does little to move the needle. TBL does

not frame its position as arguing that an "exchange described in

section . . . 361," as used in section 367(d)(1), refers to the

overall reorganization. Instead, we are left with the conclusory

assertion that the use of "section 361" rather than its more

specific subsections ipso facto tips the scales in TBL's favor.14

Further, any argument that the relevant "exchange" refers to the

overall reorganization would sit in direct tension with TBL's

earlier recognition in its opening brief that that term refers to

a section "361 exchange" rather than, as TBL calls it, a

section "361 reorganization." As noted above, the first-step

exchange in an asset reorganization qualifies for section 361

nonrecognition treatment so long as the exchange is in pursuance

of a plan of reorganization that involves a second-step

distribution. The fact that a second-step distribution must follow

The fact that section 361 did not address distributions 14

of acquiror stock until 1986, two years after section 367(d)'s enactment, further diminishes the force of TBL's point. See I.R.C. § 361 (1982); Tax Reform Act of 1986, Pub. L. No. 99-514, § 1804(g), 100 Stat. 2085, 2805–06.

- 28 - does not transform the word "exchange" into a term describing the

reorganization as a whole.

A separate aspect of section 367(d) further undermines

TBL's argument. The text indicates a clear expectation that it is

the U.S. transferor of the intangible property, and not some other

party in the corporate chain, that must account for the income

arising from the transfer. Granted, section 367(d) does not

explicitly require the U.S. transferor to be the entity that

recognizes the gain under that section, but it comes awfully close.

Section 367(d)(2)(A) states that it is the U.S. transferor that is

"treated as" "having sold" the intangible property and "receiving"

the deemed payments from that sale. I.R.C. § 367(d)(2)(A)(i)–

(ii). Additionally, section 367(d)(2)(B) -- which addresses the

effect of the section 367(d)(2)(A) deemed payments on the earnings

and profits15 of the foreign corporation that received the

intangible property -- provides that such foreign corporation's

earnings and profits "shall be reduced by the amount required to

be included in the income of the transferor of the intangible

property under [the annual-payment or disposition-payment rules]."

15The term "earnings and profits" (E&P) refers to the pool of money out of which a corporation pays taxable dividends to its shareholders. See I.R.C. § 316(a); Bittker & Eustice, supra, § 8.03[1]. This concept is relevant here only insofar as corporations must keep track of earnings and profits, and make the adjustments required under the Internal Revenue Code.

- 29 - I.R.C. § 367(d)(2)(B) (emphasis added). Although this provision

is not directly addressed to the U.S. transferor, it at the very

least strongly implies that the statute's drafters intended that

the deemed payments under either rule would be included in the

U.S. transferor's income.

And if, as the text suggests, the U.S. transferor must

account for such payments, then TBL's reading of the disposition-

payment rule would be entirely unworkable. Recall that, in most

types of asset reorganizations -- including the one at issue

here -- the U.S. transferor ceases to exist as a result of the

transaction.16 Plainly in such circumstances the U.S. transferor

could not include any amounts under the annual-payment rule in its

income after the transaction. So, in a typical asset

reorganization, the only way that the U.S. transferor could include

the required section 367(d) gain is through the disposition-

payment rule -- by including a lump-sum gain in its income just

before it disappears. And that is exactly what results from giving

the term "such transfer" its ordinary meaning based on the

statute's plain text.

2.

Of course, "the words of a statute must be read in their

context and with a view to their place in the overall statutory

16 See supra note 3 and accompanying text.

- 30 - scheme." See Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 320

(2014) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S.

120, 133 (2000)). Thus, to confirm our reading of "such transfer,"

we examine section 367(d)'s broader role within the structure of

section 367.

As TBL stresses repeatedly, Congress, in enacting

section 367(d), expressed a view that the annual-payment rule is

"the most accurate way of assessing the value" of intangible

property and is thus the preferred method of taxing the gain on

outbound transfers of such property. TBL argues that only its

reading "gives full effect" to the annual-payment rule by having

the rule broadly apply to asset reorganizations; the

Commissioner's reading, in contrast, would result in lump-sum

treatment at the conclusion of every asset reorganization.

Relatedly, TBL contends that if the Commissioner's reading of

section 367(d) were right, "it would mean that Congress chose an

awfully roundabout way to write the statute."

On this last point, we agree with TBL. Recall that every

reorganization involving a section 361 exchange has, by

definition, a disposition at the end of the reorganization. This

means that every asset reorganization will have a section 361

exchange followed by a disposition. So the lump-sum, disposition-

payment rule will arguably always apply (putting aside the

- 31 - application of regulations to the contrary). That is to say, under

the Commissioner's reading, section 367(d) creates an exception to

the general lump-sum rule of section 367(a) by calling for annual

payments, and then essentially creates an exception to that

exception, the operation of which -- in the context of asset

reorganizations -- simply returns the taxpayer to the general rule.

So it is true that the Commissioner's reading of

section 367(d) as applied to asset reorganization more or less

takes with one hand what it gives with the other. On the whole,

though, we find that fact insufficient to warrant our

"interpreting" the statute in a manner that would at the very least

border on re-writing its plain language. Our reasons are several.

First, it is not entirely clear that the annual-payment

rule would not apply to at least some asset reorganizations. As

the Commissioner points out, the annual-payment rule still applies

to any section 361 exchange that occurs in a tax year different

from the second-step distribution, with the annual-payment rule

applying in the tax years preceding the distribution. TBL does

not dispute that the second-step distribution can occur "months or

even years" after the section 361 exchange. So while the

Commissioner does not argue that such multiyear reorganizations

- 32 - are typical, there is still at least some work for the annual-

payment rule to do with respect to section 361 exchanges.17

Second, this is not a case in which the Commissioner's

reading treats any provision of the statute as surplusage.

Eliminating the reference to section 361 in section 367(d) would

have a substantive effect on the rules governing outbound transfers

of intangible property. And this remains true even if one puts

multiyear reorganizations aside. Section 367(d)(2)(C)

specifically treats the gain from intangible property as ordinary

income rather than more taxpayer-favorable capital gains

(regardless of whether the annual-payment or disposition-payment

rule is used). If section 361 were omitted from section 367(d),

then, under section 367(a), the transferor would recognize the

full amount of the gain upon the transfer of the intangible

property (as would occur under the disposition-payment rule upon

the second-step distribution), but no provision within that

section would require ordinary-income treatment of that gain.

17TBL argues that multiyear reorganizations would not trigger the annual-payment rule because there is no section 361 exchange "to trigger [section] 367(d) at the time of the first step" until the reorganization is completed in the second step. As discussed above, this is a plain misreading of section 361. Section 361(a) requires the property-for-stock exchange to be "in pursuance of the plan of reorganization." The second-step distribution need not occur in the same tax year as the first-step exchange for that exchange to be considered in "pursuance of the plan."

- 33 - Accordingly, the inclusion of section 361 exchanges in

section 367(d) has clear import even beyond the application of the

annual-payment rule to the multiyear reorganizations discussed

above. We thus reject TBL's argument that only its reading gives

the statute's terms their proper effect, and we remain unpersuaded

that the statute's somewhat odd structure compels us to read "such

transfer" in a manner different from what the plain text dictates.

Third, and most importantly, if the disposition-payment

rule were not triggered by the second-step distribution in an asset

reorganization, U.S. transferors could completely escape taxation

under section 367. To see why this would be so, it is helpful to

first understand how VF Corp. reported amounts attributable to the

annual-payment rule following the transaction here. Given that

TBL ceased to exist for U.S. tax purposes as a result of the

transaction, TBL plainly could not take into account any deemed

annual payments due in later years. Instead, VF Corp. took the

position that Lee Bell -- one of VF Corp.'s domestic subsidiaries

and "the closest-related U.S. entity to TBL" (at the time TBL

ceased to exist) -- could take the payments into account,

essentially stepping into TBL's shoes. TBL justifies this position

based on the interaction of section 367(d) with a set of

international tax rules known as "subpart F." See I.R.C. §§ 951,

952. For purposes of this opinion, we need not delve into the

- 34 - details of this justification. We assume that, if TBL's reading

of section 367(d) were correct, then Lee Bell's reporting would

have been proper.18

What is important for purposes of this discussion is not

what Lee Bell did, but what would have happened under TBL's own

understanding of the statute if TBL had no major U.S. shareholder

in its ownership chain at the time of the transaction (e.g., if

TBL were widely held rather than wholly owned, or if TBL were part

of a foreign-only corporate structure). Keep in mind that in an

asset reorganization as here, the domestic transferor (TBL) ends

its tax existence in the year in which the reorganization is

completed. So if it does not pay taxes on the appreciated

intangible property as due that year, it will not be around to

make any annual payments. And without a domestic Lee Bell

equivalent, there would be no U.S. taxpayer for the IRS to hold

responsible for the deemed annual payments, rendering

section 367(d) entirely ineffective.

As the overall text and structure of section 367 makes

clear, and as our discussion of legislative history, infra,

confirms, preventing just such a result was the central purpose of

section 367. Accepting TBL's reading of section 367(d) would

Of course, we reject any argument that we should adopt 18

TBL's reading of section 367(d) simply because Lee Bell was available to foot the bill.

- 35 - directly undermine the statute's core purpose: ensuring that the

corporate nonrecognition rules are not abused to avoid U.S. tax.

Clearly, Congress did not intend such a result. However important

one thinks applying the annual-payment rule is, the statute's

central aim is preventing appreciated assets from entirely

escaping U.S. tax.

TBL does not contest that its reading would invite

corporations to eliminate tax liabilities associated with gains on

intangible property. TBL's primary rejoinder is that the Treasury

Department could plug up the resulting massive loophole by

promulgating regulations excepting from section 367(d) asset

reorganizations in which the transferor had no related U.S. entity

to absorb the annual payments, and placing such transactions within

the general rule of section 367(a).19 But that argument fails to

19 In 2012, the Treasury Department issued a notice proposing regulations that would have provided, among other things, that the transferor's distribution of foreign acquiror stock to a foreign shareholder in the final step of an asset reorganization would trigger the disposition-payment rule. See I.R.S. Notice 2012-39, 2012-31 I.R.B. 95. TBL points to this notice as proof of "Treasury's understanding" that the statute, standing alone, "doesn't require a lump-sum payment here." However, the notice explicitly states that "[n]o inference is intended as to the treatment of transactions described in this notice under current law." Second, and relatedly, the issuance of clarifying guidance does not mean that the statute, standing alone, does not already yield such a result. Third, the notice covers situations well beyond the scope of the transaction here, including circumstances in which the asset reorganization involves cash payments, so Treasury was doing more than simply addressing a question already covered by the statute.

- 36 - address why Congress would have written a law that required

immediate regulation to prevent such an obvious method of escaping

U.S. tax.

TBL also responds that the Commissioner failed to

identify any examples of taxpayers attempting to avoid U.S. tax in

this manner. However, it seems entirely possible that the IRS has

not encountered any such scenarios because the risk of taking such

a position is apparent to most sophisticated taxpayers on the face

of the statute.

Having examined the disposition-payment rule within the

broader context of section 367, we thus find little support for

TBL's contention that "such transfer" refers to the overall asset

reorganization rather than -- as the plain text indicates -- the

transfer of intangible property "to a foreign corporation in an

exchange described in section 351 or 361." I.R.C. § 367(d)(1).

B.

TBL also urges us to look to legislative history to find

support for the proposition that only a disposition following the

overall asset reorganization can trigger the disposition-payment

rule. For the foregoing reasons, the statutory text seems clear

enough in context to preclude recourse to legislative history for

the purpose of supporting a result at odds with the text. See

Penobscot Nation v. Frey, 3 F.4th 484, 491 (1st Cir. 2021) (en

- 37 - banc). Nevertheless, even assuming (without deciding) that some

relevant ambiguity remains following our discussion above, we see

nothing in the legislative history that could tip the scales in

TBL's favor.

The earliest version of section 367 was enacted as

section 112(k) of the Revenue Act of 1932, Pub. L. No. 72-154,

§ 112(k), 47 Stat. 169, 198. That version of the law, like the

modern one, provided (with one major caveat) that foreign

corporations would generally not be treated as corporations for

purposes of various nonrecognition provisions. See id.; Bittker

& Eustice, supra § 15.80[2]. But, unlike under today's law,

foreign corporations would be treated as corporations in

nonrecognition transactions if, prior to the transaction, the

taxpayer established to the satisfaction of the Commissioner that

the transaction was "not in pursuance of a plan having as one of

its principal purposes the avoidance of Federal income taxes."

Revenue Act of 1932, § 112(k).

This principal-purpose test and administrative ruling

framework continued (with various tweaks along the way) until

Congress passed the Tax Reform Act of 1984 (the "1984 Act"), Pub.

L. No. 98-369, § 131, 98 Stat. 494, 663–64. See Bittker & Eustice,

supra § 15.80[2]–[5]. That law replaced the administrative ruling

regime with objective statutory rules that operated to deny

- 38 - nonrecognition treatment to certain categories of assets, while

granting nonrecognition treatment to others. Id.; Bittker &

Eustice, supra § 15.80[5]. Most relevant to this appeal, the 1984

Act enacted section 367(d) in substantially its current form,

creating the new special rules for intangible property transferred

in section 351 and 361 exchanges.

TBL attempts to portray Congress in 1984 as focused on

switching from a system of immediate gain recognition for outbound

intangible-property transfers to the annual-payment rule. Thus,

TBL argues, we should hesitate to read section 367(d) in a way

that precludes application of the annual-payment rule for most

section 361 exchanges. But, as described above, the 1984

amendments did more than simply add the annual-payment rule to

section 367. Indeed, nothing in the legislative history suggests

Congress was particularly focused on the annual-payment versus

disposition-payment dichotomy, let alone had a view that the

disposition-payment rule should not apply to dispositions that

occur as part of asset reorganizations.

Rather, the House report for the 1984 amendments to

section 367 -- in a discussion regarding the "[r]easons for

[c]hang[ing]" the tax treatment of "[t]ransfers of

intangibles" -- appeared focused on making sure intangible

property was taxed at all in outbound transfers. See H.R. Rep.

- 39 - No. 98-432, at 1316; see also S. Prt. No. 98-169, at 360–61

(containing the same explanation). The report explained, "[i]n

light of [the IRS's] favorable ruling policy" under the old regime

"for transfers of patents and similar intangibles for use in an

active trade or business of the foreign [transferee] corporation,"

"a number of U.S. companies have adopted a practice of developing

patents . . . in the United States" and then transferring them

abroad once "ready for profitable exploitation." Id. "By engaging

in such a practice, the transferor U.S. companies hope to reduce

their U.S. taxable income by deducting substantial research and

experimentation expenses associated with . . . the development of

the transferred intangible and, by transferring the intangible to

a foreign corporation at the point of profitability, to ensure

deferral of U.S. tax on the profits generated by the intangible."

Id. The amendments sought to end this practice by ensuring all

outbound transfers of intangible property would trigger U.S. tax.

While, of course, Congress must have believed there were

advantages to taxing intangible property on an annual rather than

lump-sum basis -- otherwise it would not have written

section 367(d) as it did -- the legislative history does not

provide much evidence that Congress was particularly concerned

about this distinction. TBL misleadingly explains that "the Joint

Committee on Taxation estimated that the switch to the annual-

- 40 - payment rule for intangible property would increase IRS tax

collection by over $1 billion within five years." But that

$1 billion figure represented the total increase in revenue from

all the 1984 amendments to section 367, not just from a supposed

"switch" from lump-sum taxation of intangible property to annual

payments. See Joint Comm. Taxation, General Explanation of the

Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-

84, at 1242 (1984).

The closest TBL comes to support in the legislative

history is a House report on the Tax Reform Act of 1985 that

includes a description of section 367(d) as enacted the year prior.

TBL cites the following excerpt from that report: "In general,

the amounts are treated as received over the useful life of the

intangible property on an annual basis. Thus, a single lump-sum

payment, or an annual payment not contingent on productivity, use

or disposition, cannot be used as the measure of the appropriate

transfer price." H.R. Rep. No. 99-426, at 422 (1985). TBL argues

that this description demonstrates that the annual-payment rule

applies after an asset reorganization. But the report simply

describes the general rules under section 367(d), and does nothing

to indicate that Congress intended the annual-payment rule to apply

to transactions like the one before us. Further, in the sentence

immediately preceding the portion TBL cites, the report refers to

- 41 - the deemed payments as "amounts included in income of the

transferor," adding to the evidence that Congress did not intend

the annual-payment rule as phrased in the statute to apply in

instances when the original transferor liquidated.

Even stronger evidence of Congress's intent in this

regard comes from the conference report for the Tax Reform Act of

1984. See All. to Protect Nantucket Sound, Inc. v. U.S. Dep't of

Army, 398 F.3d 105, 110 (1st Cir. 2005) ("The most dispositive

indicator of congressional intent is the conference report."

(quoting United States v. Commonwealth Energy Sys. & Subsidiary

Cos., 235 F.3d 11, 16 (1st Cir. 2000))). In describing the

mechanics of the disposition-payment rule, the conference report

states: "The conferees intend that disposition of (1) the

transferred intangible by a transferee corporation, or (2) the

transferor's interest in the transferee corporation will result in

recognition of U.S.-source ordinary income to the original

transferor." H.R. Rep. 98-861, at 955 (1984) (Conf. Rep.)

(emphasis added). This statement appears to confirm what the

statute already strongly indicates -- that it is the original U.S.

transferor of intangible property, not some other entity in the

corporate structure, that must recognize gain under

section 367(d). The only way to achieve this in most types of

asset reorganizations -- in which the U.S. transferor ceases to

- 42 - exist for U.S. tax purposes -- is for the second-step distribution

to trigger the disposition-payment rule, causing the U.S.

transferor to recognize gain under that rule before it disappears.

TBL's reading is plainly inconsistent with that mandate.

C.

Finally, TBL argues that the tax position it took here

is consistent with the Treasury Department's own understanding of

section 367(d) as articulated through regulations, and that

consequently, the Commissioner's "position in this litigation

pulls the rug out from under taxpayers." Notably, however, TBL

has abandoned its argument made to the Tax Court that the

regulations directly apply to the transaction at issue here. But

according to TBL, "that's not the point": "The regulations are

relevant not because they directly apply to the particular facts

of [this] case, but because their very premise is that

[section] 361 exchanges are subject to the annual-payment[] rule

unless a disposition occurs after the reorganization."

Nothing in the regulations, adopted in relevant part in

1986, reveals any such understanding. See Income Taxes; Transfers

of Property by U.S. Persons to Foreign Corporations, 51 Fed.

Reg. 17,936, 17953–56 (May 16, 1986) (codified at Temp. Treas.

Reg. § 1.367(d)-1T). TBL first points to Temp. Treas. Reg.

- 43 - § 1.367(d)-1T(c)(1). That section essentially parrots

section 367(d), providing:

If a U.S. person transfers intangible property that is subject to section 367(d) and the rules of this section to a foreign corporation in an exchange described in section 351 or 361, then such person shall be treated as having transferred that property in exchange for annual payments contingent on the productivity or use of the property.

Temp. Treas. Reg. § 1.367(d)-1T(c)(1). TBL asserts that the

transferor "shall be treated as having transferred that property

in exchange for annual payments," "[p]eriod, without

qualification." But TBL omits the sentence immediately following:

"Such person [(i.e., the transferor of the intangible property)]

shall, over the useful life of the property, annually include in

gross income an amount that represents an appropriate arms-length

charge for the use of the property." Id. So the regulation that

TBL says proves its case "without qualification" in fact rests on

the assumption that the transferor of the intangible property must

continue to exist in order to include the annual payments in its

income.

TBL next cites Temp. Treas. Reg. § 1.367(d)-1T(e)(1).

That section provides for the application of a modified version of

the annual-payment rule, rather than the application of the

disposition-payment rule, when a U.S. transferor of intangible

property subsequently transfers the foreign corporation's stock to

- 44 - a related U.S. person. In such a scenario, the disposition-payment

rule is not triggered, and the related U.S. person to which the

stock is transferred generally includes the annual payments in its

income. TBL specifically points to the following language:

If a U.S. person transfers intangible property that is subject to section 367(d) and the rules of this section to a foreign corporation in an exchange described in section 351 or 361 and, within the useful life of the transferred intangible property, that U.S. transferor subsequently transfers the stock of the transferee foreign corporation to U.S. persons that are related to the transferor . . . , [then the modified annual-payment rule applies, rather than the disposition-payment rule].

Temp. Treas. Reg. § 1.367(d)-1T(e)(1) (emphasis added by TBL).

TBL also points to Temp. Treas. Reg. § 1.367(d)-1T(d)(1), which

provides:

If a U.S. person transfers intangible property that is subject to section 367(d) and the rules of this section to a foreign corporation in an exchange described in section 351 or 361, and within the useful life of the intangible property that U.S. transferor subsequently disposes of the stock of the transferee foreign corporation to a person that is not a related person . . . , then the [the disposition-payment rule applies to the U.S. transferor].

Temp. Treas. Reg. § 1.367(d)-1T(d)(1) (emphasis added by TBL).

Analyzing these regulations together, TBL concludes that

"[n]either rule would be necessary, and neither would make any

sense, if the IRS's new position in this case were right." It is

- 45 - difficult to see how TBL reaches that conclusion. TBL emphasizes

that both rules are triggered by transactions "subsequent[]" to

the "exchange described in section 351 or 361." But, as already

discussed, TBL makes no argument that the "exchange described in

section . . . 361" refers to the asset reorganization as a whole,

and the fact that the regulations refer to transactions

"subsequent[]" to that exchange simply mirrors the structure of

the disposition-payment rule. Further, both rules address

scenarios where the U.S. transferor of intangible property

transfers the stock of the foreign transferee -- a situation that,

obviously, can only arise if the U.S. transferor owns the stock

immediately prior to the disposition. And after an asset

reorganization, the U.S. transferor will no longer own the acquiror

stock (as a result of the necessary second-step distribution), so

there is no way for the U.S. transferor to again dispose of that

same stock, as is necessary to trigger both of the regulations TBL

points to. Accordingly, we can easily dispose of TBL's assertion

that these regulations rest on some premise that the annual-payment

rule must apply after an asset reorganization's completion.

TBL separately argues that, even if "such transfer" does

not refer to the overall asset reorganization, no "disposition" at

all occurred when TBL distributed TBL Foreign stock to VF Foreign.

- 46 - This is so, TBL argues, because the term "disposition" as used in

section 367(d) refers only to transfers to unrelated parties, and

thus does not apply to a transfer by a wholly owned corporation to

its sole shareholder as occurred here.

The statute does not define the term "disposition," but

TBL does not dispute that the ordinary meaning of the term is

"transferring to the care or possession of another." See

Disposition, Black's Law Dictionary (5th ed. 1979). Instead, TBL

once again hinges its argument on the section 367(d) regulations,

asserting that the regulations are premised on the assumption that

transfers to related parties are not "dispositions."

And, just as above, TBL's argument that an unstated

assumption in the regulations somehow resolves this case in its

favor falls flat. Recall that Temp. Treas. Reg. § 1.367(d)-

1T(e)(1) provides for the application of modified annual-payment

rules when the "U.S. transferor subsequently transfers the stock

of the transferee foreign corporation to U.S. persons that are

related to the transferor," Temp. Treas. Reg. § 1.367(d)-1T(e)(1)

(emphasis added); and that Temp. Treas. Reg. § 1.367(d)-1T(d)(1)

provides that the disposition-payment rule applies when the "U.S.

transferor subsequently disposes of the stock of the transferee

foreign corporation to a person that is not a related person,"

Temp. Treas. Reg. § 1.367(d)-1T(d)(1) (emphasis added). Now add

- 47 - to the mix Temp. Treas. Reg. § 1.367(d)-1T(e)(3), which provides

that if the U.S. transferor "subsequently transfers any of the

stock of the transferee foreign corporation to one or more

[related] foreign persons . . . , then the U.S. transferor shall

continue to" apply the annual-payment rule "as if the subsequent

transfer of stock had not occurred." Temp. Treas. Reg. § 1.367(d)-

1T(e)(3) (emphasis added).

Putting these regulations together, TBL argues that they

"clarify that 'dispositions' are only to unrelated parties." These

rules do generally provide that "deemed annual license payments

will continue if a transfer is made to a related person, while

gain must be recognized immediately if the transfer is to an

unrelated person." Temp. Treas. Reg. § 1.367(d)-1T(a) (addressing

the purpose and scope of the regulations). But nothing indicates

that the reason the regulations so provide is because of a narrow

meaning of the word "disposition" in the statute.

TBL cites the title of Temp. Treas. Reg. § 1.367(d)-

1T(e)(3) -- "Transfer to related foreign person not treated as

disposition of intangible property" -- as support for its position.

The title, however, is perfectly consistent with the general

definition of "disposition." Although transfers to related

persons are dispositions under the statute, certain transfers made

- 48 - to foreign related persons are not "treated as" dispositions under

the regulations.

Temp. Treas. Reg. § 1.367(d)-1T(f) further undermines

TBL's argument that the regulations are premised on a narrow

definition of "disposition." That regulation addresses what

happens when a foreign corporation directly transfers the

intangible property it received from the U.S. transferor. In

setting out those rules, the regulation refers to a "transferee

foreign corporation's subsequent disposition of the transferred

intangible property to a related person." Temp. Treas. Reg.

§ 1.367(d)-1T(f)(3) (emphasis added). Clearly, simply because the

transfer is to a "related person" does not preclude the transfer

from being described as a "disposition."

Temp. Treas. Reg. § 1.367(d)-1T(a), which describes the

purpose and scope of the section 367(d) regulations, reinforces

this point. That section provides: "Paragraphs (d), (e), and

(f) of this section provide rules for cases in which there is a

later direct or indirect disposition of the intangible property

transferred. In general, deemed annual license payments will

continue if a transfer is made to a related person, while gain

must be recognized immediately if the transfer is to an unrelated

person." Temp. Treas. Reg. § 1.367(d)-1T(a) (emphasis added).

Thus, in describing a set of provisions that address transfers to

- 49 - both related and unrelated parties, the regulation sums them up as

addressing "cases in which there is a later direct or indirect

disposition of the intangible property transferred." Id.

(emphasis added). This description leaves little room for TBL's

argument that the regulations described in this section are

premised on the assumption that "disposition" as used in

section 367(d) refers only to transfers to unrelated parties.20

VI.

Finding nothing in that statute that would absolve TBL

of its responsibility under the disposition-payment rule, we

affirm the judgment of the Tax Court.

20TBL also argues that the Commissioner's reading of "disposition" cannot be right because, if it was, then the regulations would impermissibly defy the statute and would thus be outside the scope of the Treasury Department's regulatory authority. This is so, TBL argues, because the regulations allow for the continued use of the annual-payment rule following a "disposition" to a related party, even though the statute, under the Commissioner's reading, requires use of the disposition- payment rule. But we need not address the scope of Treasury's authority in order to put paid to TBL's argument that the regulations rest on the assumption that a "disposition" encompasses only transfers to unrelated parties. Rather, it is sufficient for us to simply say, as we have said above, that the regulations on their face demonstrate no such assumption and, in fact, point in the exact opposite direction.

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