Yum! Brands Challenges IRS on "Killer B" Regulations

Billions of dollars hang in the balance as Yum! Brands takes the IRS to tax court. In 2014, the restaurant giant—and parent company of Taco Bell, KFC, and Pizza Hut—restructured its international divisions to create regional alignment. Yum! structured these in a series of tax-free corporate reorganizations (called ‘B Reorgs’) under Section 368. The IRS sees something different: violations of Section 367's “Killer B” anti-abuse regulations.

The Killer B regulations earned their nickname by 'killing' offshore profits—permanently placing them beyond US taxation. In that type of triangular B Reorg, the US parent sells its shares to a foreign subsidiary, which then uses those shares to buy a related entity. This structure historically satisfied the tax-free reorganization statute while circumventing Section 367.

Tax promoters marketed these structures as shelters, prompting a 25-year IRS enforcement campaign, which is still ongoing. The IRS expanded Section 367 through four notices and five regulations packages since 2000, all enforcing one principle: US corporations cannot permanently escape US taxation on foreign subsidiary earnings.

Without these rules, US parents could repatriate—and utilize—foreign funds tax-free. Treasury Regulation 1.367(b)-10(a) blocks this path by converting tax-free reorganizations into taxable events, forcing the US parent to pay tax on the subsidiary's value. Yum! Brands thinks they've found an exception to that rule: What happens when the foreign subsidiary has no current or accumulated earnings and profits to repatriate?

Yum!'s transaction differs from the typical Killer B in two ways. First, no stock was purchased from a US parent—only from a foreign one. This means no actual repatriation occurred, making it harder to argue this is simply a timing issue. Second, the purchasing foreign subsidiary has no accumulated or current earnings and profits. Yum! argues both points prove the same thing: there’s no reason to create an artificial dividend to the US parent.

At its core, this dispute is about drawing regulatory boundaries. The IRS spent decades crafting rules to prevent the tax-free use of foreign profits by US corporations. Now it must defend the application of those rules where no foreign profits exist, and no cash made it into the US. Yum!'s gambit will determine exactly where the IRS can draw the line.

If you have any questions on this or any other tax issue, please call me at 214-749-2459 or email me at npegelow@meadowscollier.com.