U.S. tax law provides for the deferral of taxation for a person transferring assets in connection with certain tax-free corporate reorganizations or transactions. However, the same may not be true when the reorganization or transaction involves a U.S. person who transfers shares to a foreign corporation. In these situations, the Code causes gain to be triggered for the U.S. person unless the transferred assets consist solely of shares of stock of a target corporation and certain arrangements are made by the U.S. transferor to grant the I.R.S. the right to collect deferred tax on a retroactive basis in the event of a future (i) retransfer of those shares by the foreign corporation or (ii) a transfer by the target corporation of its underlying assets. These rules appear in Code §367(a) – which imposes tax – and I.R.S. regulations related to a gain recognition agreement (“G.R.A.”) – which allows tax deferral for the original transfer. Not all transfers that are subject to the rules of Code §367(a) are obvious. To illustrate, a U.S. person that is a passive investor in a foreign partnership may face U.S. tax immediately by reason of Code §367(a) when that partnership transfers shares of stock to a foreign corporation in return for shares of that corporation in a transaction that ordinarily is tax-free under Code §351 or 368(a)(1)(B). While the transaction is effected between two foreign entities, the transferor foreign partnership is tax transparent in the U.S., meaning that the partner is deemed to have made an indirect transfer of assets. In his article, Michael Bennett describes the tax issue and explains how a G.R.A. is a simple way to obtain the benefit of deferral.