[Federal Register Volume 88, Number 193 (Friday, October 6, 2023)]
[Proposed Rules]
[Pages 69559-69578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22061]



[[Page 69559]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-117614-14]
RIN 1545-BM19


Guidance Under Section 367(b) Related to Certain Triangular 
Reorganizations and Inbound Nonrecognition Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes regulations announced and described in 
Notice 2014-32 and Notice 2016-73, with modifications. The proposed 
regulations relate to the treatment of property used to acquire parent 
stock or securities in connection with certain triangular 
reorganizations involving one or more foreign corporations; the 
consequences to persons that receive parent stock or securities 
pursuant to such reorganizations; and the treatment of certain 
subsequent inbound nonrecognition transactions following such 
reorganizations and certain other transactions. The proposed 
regulations affect corporations engaged in certain triangular 
reorganizations involving one or more foreign corporations, certain 
shareholders of foreign corporations acquired in such reorganizations, 
and foreign corporations that participate in certain inbound 
nonrecognition transactions.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 5, 2023. Requests for a public hearing 
must be submitted as prescribed in the ``Comments and Request for 
Public Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-117614-
14) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comments submitted 
electronically and on paper, to its public docket. Send paper 
submissions to: CC:PA:LPD:PR (REG-117614-14), Room 5203, Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 
20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Brady Plastaras at (202) 317-6937; concerning submission of comments, 
requests for a public hearing, and access to a public hearing, Vivian 
Hayes at (202) 317-5306 (not toll-free numbers) or by email at 
<a href="/cdn-cgi/l/email-protection#7d0d081f11141e15181c0f14131a0e3d140f0e531a120b"><span class="__cf_email__" data-cfemail="38484d5a54515b505d594a51565f4b78514a4b165f574e">[email protected]</span></a> (preferred).

SUPPLEMENTARY INFORMATION:

Background

    On May 19, 2011, the Treasury Department and the IRS published 
final regulations (TD 9526) in the Federal Register (76 FR 28890) under 
section 367(b) that relate to the treatment of property used to acquire 
parent stock or securities in certain triangular reorganizations 
involving one or more foreign corporations (the Final Regulations). On 
April 25, 2014, the Treasury Department and the IRS issued Notice 2014-
32 (2014-20 IRB 1006), which identified transactions designed to 
exploit certain aspects of the Final Regulations and announced that 
regulations would be issued under section 367 to address these 
transactions. On December 2, 2016, the Treasury Department and the IRS 
issued Notice 2016-73 (2016-52 IRB 908), which identified other 
transactions designed to exploit the Final Regulations, as modified by 
the rules announced in Notice 2014-32, and announced that additional 
regulations would be issued under section 367. The Treasury Department 
and the IRS believe that the transactions described in each notice 
raise significant policy concerns.
    This document sets forth the regulations described in Notice 2014-
32 and Notice 2016-73, modified as discussed in this preamble. In 
response to a request for comments in Notice 2016-73, one comment was 
received and is discussed in this preamble. No comments were received 
on Notice 2014-32.

Explanation of Provisions; Summary of Comment in Response to Notice 
2016-73

I. Overview

A. Section 367--In General

    Section 367(a)(1) provides that if, in connection with any exchange 
described in section 332, 351, 354, 356, or 361, 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. 
Under section 367(a)(5), the Secretary has broad authority to exempt 
transactions from the application of section 367(a)(1) in order to 
carry out the purposes of section 367(a).
    Section 367(b)(1) provides that, in the case of any exchange 
described in section 332, 351, 354, 355, 356, or 361 in connection with 
which there is no transfer of property described in section 367(a)(1), 
a foreign corporation shall be considered to be a corporation except to 
the extent provided in regulations prescribed by the Secretary which 
are necessary or appropriate to prevent the avoidance of Federal income 
taxes. Section 367(b)(2) provides that the regulations prescribed 
pursuant to section 367(b)(1) shall include (but shall not be limited 
to) regulations dealing with the sale or exchange of stock or 
securities in a foreign corporation by a United States person, 
including regulations providing the circumstances under which gain is 
recognized currently, amounts are included in gross income as a 
dividend, or both; and the extent to which adjustments are made to 
earnings and profits, the basis of stock or securities, and the basis 
of assets.

B. Policies of Section 367(b)

    Section 367(b) was enacted to help ensure that international tax 
considerations are adequately addressed when the provisions in chapter 
1, subchapter C, of subtitle A of the Internal Revenue Code (the Code) 
apply to an exchange involving a foreign corporation. Thus, the 
regulations under section 367(b) require that adjustments or inclusions 
be made to prevent the material distortions of income that can occur 
when the subchapter C provisions apply to an exchange involving a 
foreign corporation.
    The legislative history to section 367(b) describes Congress's 
particular concern with the need ``to protect against tax avoidance . . 
. upon the repatriation of previously untaxed foreign earnings'' and 
its intent to grant the Treasury Department broad authority to 
promulgate regulations to prevent the avoidance of Federal income 
taxes. H.R. Rep. No. 94-658, at 241 (1975). Moreover, Congress 
specifically identified ``transfers constituting a repatriation of 
foreign earnings'' as a type of transfer to be covered by such 
regulations. Id. at 245. The Final Regulations were promulgated in part 
to address these concerns. More specifically, one of the purposes of 
the Final Regulations is to require adjustments to address the 
avoidance of U.S. tax, including the repatriation of foreign earnings 
without

[[Page 69560]]

being subject to U.S. tax, through the separation of earnings and 
profits of a corporation from property distributed by such corporation 
in connection with certain triangular reorganizations.

C. Effect of the Tax Cuts and Jobs Act

    In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) (Pub. L. 
115-97), which added and amended a number of international tax 
provisions. One effect of these new provisions, and in particular 
sections 951A and 965, was to increase the amount of foreign earnings 
or income subject to immediate U.S. taxation. Section 965 imposed a 
one-time transition tax on certain earnings and profits of foreign 
corporations, and section 951A subjects certain income of a controlled 
foreign corporation (CFC) (as defined in section 957(a)) to current 
U.S. taxation in the hands of the CFC's United States shareholders (as 
defined in section 951(b)). The TCJA also generally retained the 
existing anti-deferral rules in subpart F of the Code (sections 951 
through 965, as amended), under which, for example, a CFC's passive 
income, subject to certain exceptions, is similarly subject to current 
U.S. taxation. The combined effect of sections 951, 951A, and 965 is 
that an increased amount of foreign earnings and profits will have been 
subject to U.S. tax regardless of whether the earnings and profits are 
in fact repatriated. Under section 959, such previously taxed earnings 
and profits (PTEP) are not again subject to U.S. tax upon their 
repatriation.
    The TCJA also added section 245A to the Code, under which certain 
United States shareholders of a specified 10-percent owned foreign 
corporation (SFC) (as defined in section 245A(b)(1)) generally are 
entitled to a 100-percent dividends received deduction with respect to 
dividends received from the SFC. As a result of the TCJA, an increased 
amount of earnings and profits of foreign corporations are thus not 
taxable when distributed--either because the earnings and profits 
constitute PTEP or give rise to dividends (including deemed dividends 
under section 367(b)) that are eligible for the section 245A dividends 
received deduction.
    Although as a result of the TCJA a lesser amount of earnings and 
profits of foreign corporations may give rise to taxable dividends when 
distributed, the Final Regulations remain necessary to carry out the 
policies of section 367(b). The adjustments required by the Final 
Regulations are intended to ensure that property transfers that are in 
substance distributions are treated as such, and thus give rise to 
income, capital gain, or a reduction in basis under section 301(c). 
Furthermore, incentives to avoid treating property transfers as 
distributions remain. For example, a taxpayer may seek to avoid 
distribution treatment because the distribution would not qualify for 
the section 245A dividends received deduction due to the application of 
the hybrid dividend rules under section 245A(e) or the extraordinary 
disposition rules under Sec.  1.245A-5, or because the taxpayer seeks 
to, for example, preserve PTEP or other earnings and profits to cover a 
future distribution.

D. The Final Regulations

    The Final Regulations apply to certain triangular reorganizations 
in which a subsidiary (S) purchases, in connection with the 
reorganization, stock or securities of its parent corporation (P) in 
exchange for property and exchanges the stock or securities of P for 
the stock or property of a target corporation (T), but only if P or S 
(or both) is a foreign corporation. The Final Regulations and this 
preamble refer to such exchange of stock or securities of P for 
property as the ``P acquisition.'' This preamble also refers to the P 
acquisition together with the related triangular reorganization as an 
``applicable triangular reorganization.''
    When applicable, the Final Regulations require that adjustments be 
made that have the effect of a distribution of property from S to P 
under section 301 (deemed distribution), followed by a contribution 
from P to S of an amount equal to the deemed distribution (deemed 
contribution). The amount of the deemed distribution is the sum of the 
amount of money transferred by S, the amount of any liabilities that 
are assumed by S and constitute property, and the fair market value of 
other property that S transferred to P in the P acquisition. The deemed 
distribution is treated as a dividend to the extent of S's earnings and 
profits.
    There are several exceptions to the application of the Final 
Regulations. Under Sec.  1.367(b)-10(a)(2)(iii) (the section 367(a) 
priority rule), the Final Regulations do not apply to transactions 
otherwise described in the Final Regulations if the amount of gain that 
T's shareholders would recognize under section 367(a)(1) is at least 
equal to the sum of the amount of the deemed distribution that P would 
treat as a dividend under section 301(c)(1) and the amount of the 
deemed distribution that P would treat as gain under section 301(c)(3) 
were the Final Regulations to apply. This preamble refers to the 
hypothetical amount of gain recognized under section 367(a)(1) and the 
hypothetical amount of the deemed distribution treated either as 
dividend or gain under section 301(c) as ``section 367(a) income'' and 
``section 367(b) income,'' respectively. Section 1.367(a)-3(a)(2)(iv) 
provides a similar priority rule (the section 367(b) priority rule) 
that turns off the application of section 367(a)(1) with respect to 
transactions described in the Final Regulations if the amount of 
section 367(a) income that T's shareholders would otherwise recognize 
under section 367(a)(1) (without regard to any exceptions thereto) is 
less than the amount of section 367(b) income that would result from 
the deemed distribution. In this way, the priority rules subject an 
applicable triangular reorganization to whichever section 367 regime 
would give rise to the most income under section 367.
    Section 1.367(b)-10(a)(2)(ii) provides another exception to the 
application of the Final Regulations. Under this exception, the Final 
Regulations generally do not apply if S is a domestic corporation and P 
would not be subject to U.S. tax on a dividend received from S. This 
preamble refers to this exception as the ``no-U.S.-tax exception.''
    The Final Regulations also contain a broad anti-abuse rule under 
which appropriate adjustments are made if, in connection with a 
triangular reorganization, a transaction is engaged in with a view to 
avoid the purpose of the Final Regulations. See Sec.  1.367(b)-10(d). 
The anti-abuse rule contains an example illustrating that the earnings 
and profits of S may, under certain circumstances, be deemed to include 
the earnings and profits of a corporation related to P or S for 
purposes of determining the consequences of the adjustments provided 
for in the Final Regulations.

E. Notice 2014-32

    Notice 2014-32 identified transactions designed to exploit certain 
aspects of the Final Regulations. In particular, Notice 2014-32 
described transactions in which taxpayers applied the section 367(a) 
and (b) priority rules and no-U.S.-tax exception in a manner that, 
contrary to their intended operation, resulted in the taxpayer being 
subject to the more favorable of the section 367(a) or (b) regimes. 
Notice 2014-32 accordingly announced that regulations would be issued 
under section 367(b) to (i) modify the priority rules such that only 
section 367(b) income that would actually be subject to U.S. tax would 
be considered and (ii) narrow the scope of the no-U.S.-tax exception. 
Notice 2014-32 further

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announced that regulations would be issued to remove the deemed 
contribution rule in Sec.  1.367(b)-10(b)(2) and clarify the broad 
application of the anti-abuse rule in Sec.  1.367(b)-10(d).

F. Notice 2016-73

    Notice 2016-73 identified additional transactions designed to 
exploit the Final Regulations, as modified by the rules announced in 
Notice 2014-32. The transactions identified in Notice 2016-73 include, 
as one example, a two-step transaction where an applicable triangular 
reorganization is followed by a purportedly unrelated inbound 
nonrecognition transaction to which Sec.  1.367(b)-3 applies.
    In that example, USP, a domestic corporation, owns all of the stock 
of FP, and FP owns all of the stock of FS. Both FP and FS are foreign 
corporations. USP also owns all of the stock of USS, a domestic 
corporation, and USS owns all of the stock of FT, a foreign 
corporation. In step one of the example transaction, FP, FS, and FT 
engage in an applicable triangular reorganization that is designed to 
result in no section 367(b) income and only a de minimis amount of 
section 367(a) income. Specifically, FS acquires newly issued stock of 
FP for property and transfers the stock of FP to USS in exchange for 
all the stock of FT in a triangular reorganization described in section 
368(a)(1)(B). In addition, USS files a gain recognition agreement with 
respect to its transfer of the stock of FT. The taxpayer takes the 
position that the section 367(a) priority rule applies to turn off the 
Final Regulations with respect to the applicable triangular 
reorganization and therefore does not treat FP as having received a 
deemed distribution. Under this position, the effect of this first step 
of the transaction is a transfer of property from FS to FP without a 
distribution that would result in a corresponding decrease in the 
earnings and profits of FS and increase in the earnings and profits of 
FP associated with that property.
    In step two of the example transaction, on a later date FP 
transfers its assets (including the cash, note, or other property 
received from FS) to USP or a domestic corporation whose stock is owned 
directly or indirectly by USP in a nonrecognition transaction described 
in Sec.  1.367(b)-3. The taxpayer asserts that USP accordingly includes 
in its income a deemed dividend of the ``all earnings and profits 
amount'' (as described in Sec.  1.367(b)-2(d)) with respect to its 
stock in FP, but, because that amount does not take into account the 
earnings and profits of lower-tier foreign corporations, the deemed 
dividend does not include the earnings and profits associated with the 
property that FP received from FS in the P acquisition (because such 
earnings and profits remain at FS under the position taken by the 
taxpayer). The desired effect of the overall transaction is a 
repatriation of property from FS to USP (or a domestic corporation held 
by USP) without a corresponding income inclusion attributable to 
untaxed earnings and profits of FS.
    Notice 2016-73 announced that additional regulations would be 
issued under section 367(b) to address transactions such as these types 
of two-step transactions. To address step one of the transaction, the 
regulations would, in addition to the modifications described in Notice 
2014-32, prevent the section 367(a) priority rule from applying where T 
is foreign and instead subject certain T shareholders to rules under 
Sec.  1.367(b)-4 that could result in an income inclusion or gain 
recognition with respect to their exchange of T stock. To address step 
two of the transaction, the regulations would subject any inbound 
nonrecognition transaction to a new set of ``excess asset basis'' (EAB) 
rules to be issued under Sec.  1.367(b)-3 that, for purposes of 
determining the all earnings and profits amount, would take into 
account certain earnings and profits of lower-tier foreign 
corporations. Step two of the transaction was subject to the EAB rules 
because a taxpayer may have completed an applicable triangular 
reorganization described in step one (but not yet an inbound 
nonrecognition transaction described in step two) before the issuance 
of Notice 2016-73. Such partially completed transactions would go 
unaddressed if the regulations were limited to modifying the section 
367(a) priority rule. Notice 2016-73 further announced that the EAB 
rules would apply to any inbound nonrecognition transaction, regardless 
of whether the taxpayer had previously engaged in an applicable 
triangular reorganization, out of concern that transactions other than 
applicable triangular reorganizations might also position taxpayers to 
achieve an improper repatriation of property through a subsequent 
inbound nonrecognition transaction.
    Notice 2016-73 also described a variation of the foregoing two-step 
transaction where the P acquisition is between FP and USP. In this 
variation of the transaction, FP (which has no earnings and profits) 
acquires stock of USP in exchange for nonqualified preferred stock of 
FP, and FP uses the stock of USP to acquire the stock of FT in an 
applicable triangular reorganization. After the applicable triangular 
reorganization, the taxpayer causes FP to redeem its nonqualified 
preferred stock from USP in exchange for cash or a note. The taxpayer 
takes the position that (i) the Final Regulations do not apply to FP's 
transfer of nonqualified preferred stock to USP because nonqualified 
preferred stock is not ``property'' under the Final Regulations, and 
(ii) FP's redemption of the nonqualified preferred stock does not cause 
USP to have an income inclusion because FP has no earnings and profits. 
The desired effect of this variation is similarly a repatriation of 
property from FP to USP at no U.S. tax cost.
    To address this type of transaction, Notice 2016-73 announced that 
future regulations would modify the definition of property in Sec.  
1.367(b)-10(a)(3)(ii) to include stock of S that is nonqualified 
preferred stock (as defined in section 351(g)(2)).

II. Rules Applicable to Inbound Nonrecognition Transactions

A. Sec.  1.367(b)-3 and Notice 2016-73

    Section 1.367(b)-3 generally applies to an acquisition by a 
domestic corporation (the domestic acquiring corporation) of the assets 
of a foreign corporation (the foreign acquired corporation) in a 
liquidation described in section 332 or an asset acquisition described 
in section 368(a)(1) (in each case, an inbound nonrecognition 
transaction). Upon an inbound nonrecognition transaction, Sec.  
1.367(b)-3 requires certain shareholders of the foreign acquired 
corporation to include in income as a deemed dividend the all earnings 
and profits amount with respect to their stock in the foreign acquired 
corporation.\1\ Under Sec.  1.367(b)-2(d), that amount is generally 
determined under the principles of section 1248 when computing the 
amount of earnings and profits attributable to stock, subject to 
certain adjustments. For example, the all earnings and profits amount 
does not take into account earnings and profits of subsidiaries of the 
foreign acquired corporation notwithstanding section 1248(c)(2). See 
Sec.  1.367(b)-2(d)(3)(ii).
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    \1\ Certain other shareholders of the foreign acquired 
corporation may be required to recognize realized gain with respect 
to their exchanged stock. See Sec.  1.367(b)-3(c)(2).
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    Section 1.367(b)-3 is intended to ensure the appropriate carryover 
of tax attributes from the foreign acquired corporation to the domestic 
acquiring corporation. The preamble to proposed regulations issued in 
1991 describes the section 367(b) principles relevant to inbound 
nonrecognition transactions and specifically identifies the

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prevention of ``the repatriation of earnings and profits without tax'' 
as one such principle. 56 FR 41993, 41996. The 1991 proposed 
regulations accordingly introduced the concept of including in income 
the all earnings and profits amount, which was intended to reflect 
``the proper measure of the earnings and profits [of the foreign 
acquired corporation] that should be subject to tax.'' Id. The preamble 
to final regulations issued in 2000 further explained that the 
inclusion of the all earnings and profit amount ``generally ensures 
that the section 381 carryover basis reflects an after-tax amount'' and 
describes ``the appropriate carryover of attributes from foreign to 
domestic corporations'' as ``the principal policy consideration of 
section 367(b) with respect to inbound nonrecognition transactions.'' 
TD 8862, 65 FR 3589, 3590. Section 1.367(b)-3 therefore ensures that 
when asset basis is repatriated the basis either reflects after-tax 
earnings and profits or is accompanied by an income inclusion 
attributable to the untaxed earnings and profits that gave rise to that 
basis.
    As illustrated in Notice 2016-73 and summarized above in Part I.F 
of the Explanation of Provisions section of this preamble, there are 
some circumstances where the earnings and profits of the foreign 
acquired corporation do not accurately reflect the basis in its assets. 
In particular, the earnings and profits of the foreign acquired 
corporation may be insufficient to the extent that earnings and profits 
that gave rise to the foreign acquired corporation's asset basis reside 
in lower-tier foreign corporations as a result of an applicable 
triangular reorganization that does not give rise to a deemed 
distribution. Because the all earnings and profits amount does not 
account for the earnings and profits of lower-tier foreign 
corporations, a deemed dividend of the all earnings and profits amount 
will not have the intended effect of ensuring the appropriate carryover 
of asset basis in such cases.
    To address this concern, Notice 2016-73 announced that Sec.  
1.367(b)-3 would be modified to require certain shareholders of the 
foreign acquired corporation to adjust their all earnings and profits 
amount upon an inbound nonrecognition transaction. Specifically, an 
exchanging shareholder that exchanges stock in a foreign acquired 
corporation with respect to which there is EAB would increase its all 
earnings and profits amount by certain earnings and profits of lower-
tier foreign corporations, referred to in Notice 2016-73 as ``specified 
earnings.'' Notice 2016-73 defined EAB as the amount by which the 
inside asset basis of the foreign acquired corporation exceeded the sum 
of its earnings and profits, its outside stock basis, and its 
liabilities assumed by the domestic acquiring corporation. The EAB 
concept is in furtherance of a balanced tax-basis balance sheet. In 
other words, the EAB concept recognizes that the tax basis in a 
corporation's assets generally is derived from these three sources, 
with outside stock basis serving as a proxy for contributed capital. 
While basis derived from contributed capital reflects after-tax amounts 
(or, in the case of liabilities assumed by the domestic acquiring 
corporation, is expected to be satisfied by after-tax amounts of the 
domestic acquiring corporation), basis derived from a foreign 
corporation's untaxed earnings and profits might not be subject to U.S. 
tax until those earnings are repatriated. For this reason, a foreign 
corporation's untaxed earnings and profits are subject to tax via a 
deemed dividend of the all earnings and profits amount. This deemed 
dividend inclusion in effect requires that the exchanging shareholder 
``pay for'' the tax basis in repatriated assets before that basis is 
used within the U.S. tax system.
    Specified earnings are defined in Notice 2016-73 as the least of 
the following amounts: (i) the aggregate earnings and profits of 
foreign subsidiaries of the foreign acquired corporation attributable 
to the exchanging shareholder, (ii) the amount of the foreign acquired 
corporation's EAB attributable to the exchanging shareholder, and (iii) 
the exchanging shareholder's built-in gain in the stock of the foreign 
acquired corporation. The addition of specified earnings to the all 
earnings and profits amount is thereby intended to correct the basis 
imbalance of the foreign acquired corporation by taking into account 
certain earnings and profits residing in foreign subsidiaries that are 
presumed to have given rise to the EAB. Thus, the all earnings and 
profits amount, after taking into account specified earnings, should 
more accurately reflect the asset basis of the foreign acquired 
corporation that is repatriated pursuant to the inbound nonrecognition 
transaction.
    The proposed regulations generally would adopt the rules described 
in Notice 2016-73, modified as discussed in the remainder of this 
preamble. This preamble uses the term ``EAB rules'' to refer 
collectively to the modifications that are proposed to be made to Sec.  
1.367(b)-3.

B. General Scope of the EAB Rules

    As described in Notice 2016-73, the EAB rules would apply to any 
inbound nonrecognition transaction regardless of whether the taxpayer 
had previously engaged in an applicable triangular reorganization. This 
scope reflected the possibility that EAB policy concerns could arise as 
a result of other transactions and that taxpayers may attempt to 
achieve similar results through such other transactions.
    The comment recommended that the EAB rules be applied to a narrower 
set of transactions, citing, among other reasons, the significant 
compliance burden that would otherwise be imposed on legitimate 
business transactions. The comment thus recommended that the EAB rules 
be applied only to taxpayers that had completed an applicable 
triangular reorganization before the issuance of Notice 2016-73 that 
involved a foreign target corporation; did not make adjustments that 
have the effect of a distribution of property from S to P; and engage 
in a future inbound nonrecognition transaction. If narrowed in this 
way, the comment further suggested that the EAB rules apply on only a 
transitional basis; for example, for the 10-year period following 
Notice 2016-73. The comment asserted that a broader application of the 
EAB rules would be unnecessary in light of Notice 2016-73's proposed 
modification to the section 367(a) priority rule, which, by requiring 
adjustments for a deemed distribution whenever the target is a foreign 
corporation, should prevent taxpayers from separating basis from 
earnings and profits in future transactions. As an alternative, the 
comment suggested that the EAB rules be applied only to inbound 
nonrecognition transactions that follow an applicable triangular 
reorganization or other specifically enumerated transactions.
    The Treasury Department and the IRS agree that it would be 
appropriate to narrow the scope of the EAB rules for the reasons noted 
in the comment. In general, the proposed regulations accordingly would 
limit the application of the EAB rules to those inbound nonrecognition 
transactions where (i) S previously acquired stock or securities of P 
in exchange for property in connection with a triangular reorganization 
and (ii) adjustments were not made that have the effect of a 
distribution of property from S to P under section 301. See proposed 
Sec.  1.367(b)-3(g)(1)(i). However, to address avoidance situations 
that would have been subject to the EAB rules under the broad scope 
announced in Notice 2016-73 (which did not predicate the application of 
the EAB rules on there having been an applicable

[[Page 69563]]

triangular reorganization), the proposed regulations would also provide 
that the EAB rules apply to inbound nonrecognition transactions where 
EAB was previously created in connection with a transaction other than 
a triangular reorganization if the principal purpose of such other 
transaction was to create EAB. See proposed Sec.  1.367(b)-3(g)(1)(ii). 
This more limited application of the EAB rules is anticipated to 
relieve taxpayers from the need to comply with the EAB rules with 
respect to non-tax motivated transactions while still addressing the 
policy concerns identified in Notice 2016-73.
    The proposed regulations would not adopt the comment's suggestion 
to apply the EAB rules only to situations where an applicable 
triangular reorganization involving a foreign target was completed 
before the issuance of Notice 2016-73. The Treasury Department and the 
IRS are concerned that such a limitation would prevent the application 
of the EAB rules to future transactions designed to create EAB. For 
example, a subsequent applicable triangular reorganization could give 
rise to EAB where the target corporation is domestic because the 
section 367(a) priority rule continues to apply in that context. EAB 
could thus arise if the section 367(a) priority rule applies to prevent 
the application of the Final Regulations and P and S are both foreign 
corporations. An ongoing application of the EAB rules is also necessary 
to address the case where the target is a foreign corporation but the 
taxpayer asserts that its transaction is not subject to Sec.  1.367(b)-
10 under a novel or unforeseen theory. For this reason, the proposed 
regulations also would not condition the applicability of the EAB rules 
on the taxpayer having participated in an applicable triangular 
reorganization. The proposed regulations instead would provide that the 
EAB rules may apply to EAB created by any triangular reorganization 
(provided that the other conditions described in the preceding 
paragraph are met--that is, S acquired stock or securities of P for 
property in connection with the reorganization, and adjustments were 
not made that have the effect of a distribution of property from S to P 
under section 301) and to EAB created in other transactions that have a 
principal purpose of creating EAB. See proposed Sec.  1.367(b)-3(g)(1).

C. EAB Reduction Rule

    Under Notice 2016-73, all EAB with respect to a foreign acquired 
corporation is taken into account upon an inbound nonrecognition 
transaction, regardless of how the EAB arose. However, if the taxpayer 
could demonstrate that EAB was not attributable to property provided by 
a foreign subsidiary, then EAB is reduced to the extent of such EAB 
(the EAB reduction rule).
    The comment asserted that the EAB reduction rule amounted to a 
presumption that all EAB originated from the earnings and profits of 
foreign subsidiaries. The comment stated that overcoming this 
presumption would place a significant burden on taxpayers because it 
would require a comprehensive review of the foreign acquired 
corporation's historic transactions to determine the extent to which 
EAB should be reduced. The comment therefore recommended that the EAB 
rules be revised such that taxpayers be permitted to take into account 
only the EAB created by an applicable triangular reorganization (or any 
other specifically identified transaction).
    The Treasury Department and the IRS expect that the more limited 
scope of the EAB rules set forth in the proposed regulations would 
address the concern reflected in the comment. As proposed in these 
regulations and discussed in Part II.B of the Explanation of Provisions 
section of this preamble, the EAB rules would apply only to those 
inbound nonrecognition transactions that follow certain triangular 
reorganizations (or other transactions having a principal purpose of 
creating EAB) as opposed to any inbound nonrecognition transaction. 
This narrower scope would substantially reduce the burden of complying 
with the proposed EAB rules by eliminating the need for many taxpayers 
to determine whether EAB exists with respect to a foreign acquired 
corporation.
    This narrowed scope also would obviate the rationale for the EAB 
reduction rule, which was intended to provide relief where a taxpayer 
could demonstrate that EAB was not attributable to an avoidance 
transaction. Such a relief measure would not be appropriate under the 
proposed regulations, however, because the proposed regulations would 
apply only to tax-motivated transactions. The EAB reduction rule would 
therefore be removed with respect to transactions completed after the 
issuance of the proposed regulations. But see the EAB reduction rule in 
proposed Sec.  1.367(b)-3(g)(7)(ii)(C) for certain transactions 
completed before the issuance of the proposed regulations. The proposed 
regulations accordingly would provide that a taxpayer subject to the 
EAB rules by reason of having engaged in a triangular reorganization 
must take into account all EAB with respect to the foreign acquired 
corporation, regardless of how that EAB arose and without the ability 
to reduce EAB to the extent it is not attributable, directly or 
indirectly, to property provided by a foreign subsidiary of the foreign 
acquired corporation.

D. Treatment of Unrelated Minority Shareholders

    As discussed in Part II.A of the Explanation of Provisions section 
of this preamble, one element of the EAB computation is the amount of 
aggregate outside basis in the stock of the foreign acquired 
corporation. An exchanging shareholder that would be subject to the EAB 
rules would thus potentially need to identify the outside bases of 
other, unrelated shareholders of the foreign acquired corporation to 
calculate the amounts of EAB and specified earnings. The comment 
asserted that it may not be possible for an exchanging shareholder to 
obtain this information and accordingly suggested that the outside 
bases of such unrelated minority shareholders be disregarded (along 
with any related share of inside basis, liabilities, and earnings and 
profits) when calculating EAB and specified earnings.
    The Treasury Department and the IRS recognize that the presence of 
unrelated minority shareholders may create some uncertainty but expect 
that narrowing the application of the EAB rules to only a limited set 
of inbound nonrecognition transactions would appropriately address the 
concern reflected in the comment. The transactions of which the 
Treasury Department and the IRS are aware, and which the proposed 
regulations are generally intended to address, are typically internal 
restructurings that by their nature are unlikely to involve unrelated 
shareholders. See Notice 2016-73, Section 3. Moreover, modifying the 
EAB rules as the comment suggests would require additional rules to 
specify how an exchanging shareholder would disregard unrelated 
minority shareholders, thereby adding complexity to the EAB 
calculations to accommodate an unlikely fact pattern. Therefore, the 
proposed regulations would not adopt this suggestion.

E. Computation of Specified Earnings

    As discussed in Part II.A of the Explanation of Provisions section 
of this preamble, the rules described in Notice 2016-73 seek to correct 
the basis imbalance of the foreign acquired corporation by increasing 
an exchanging shareholder's all earnings and profits amount by the 
amount of ``specified

[[Page 69564]]

earnings.'' Specified earnings are limited, in part, to the sum of the 
earnings and profits with respect to each foreign subsidiary of the 
foreign acquired corporation that are attributable under section 
1248(c)(2) to the stock of the foreign acquired corporation that is 
exchanged pursuant to the inbound nonrecognition transaction. 
Accordingly, specified earnings under the notice are not sourced from 
PTEP of foreign subsidiaries of the foreign acquired corporation 
because PTEP is not included in earnings and profits for purposes of 
section 1248. See section 1248(d)(1). In other words, the rules 
described in Notice 2016-73 would not allow the foreign acquired 
corporation's basis imbalance to be corrected by a deemed distribution 
of lower-tier PTEP, even though a taxpayer may have created EAB by 
separating asset basis from earnings and profits that are characterized 
as PTEP.
    In light of the TCJA, which increased the prevalence of PTEP, the 
Treasury Department and the IRS are of the view that the policies of 
the EAB rules are better served if, instead of adjusting an exchanging 
shareholder's all earnings and profits amount as described in Notice 
2016-73, the foreign acquired corporation is treated as receiving a 
deemed distribution under section 301 from its foreign subsidiaries, 
and the exchanging shareholder then accounts for the effects of the 
deemed distribution in the inbound nonrecognition transaction. Such a 
deemed distribution more accurately addresses the basis imbalance of 
the foreign acquired corporation because the deemed distribution may be 
sourced from both PTEP and non-PTEP earnings and profits, reflecting 
that the basis imbalance may be associated with either type of earnings 
and profits. A deemed distribution from a foreign subsidiary to the 
foreign acquired corporation is also more likely to align the EAB rules 
with the substance of the taxpayer's transaction because EAB generally 
arises where a taxpayer fails to treat a property transfer as a 
distribution under section 301. Furthermore, taking into account the 
effects of a section 301 distribution is consistent with the Final 
Regulations, which address applicable triangular reorganizations by 
taking into account the effects of a deemed distribution under section 
301 from S to P.
    The proposed regulations accordingly would modify the EAB rules by 
providing that an exchanging shareholder of the foreign acquired 
corporation computes its all earnings and profits amount after 
accounting for the effects of a deemed distribution from the foreign 
subsidiaries of the foreign acquired corporation to the foreign 
acquired corporation. See proposed Sec.  1.367(b)-3(g)(1). The deemed 
distribution, which occurs immediately before the inbound 
nonrecognition transaction, would be equal to the amount of ``specified 
earnings.'' The term specified earnings would be defined under the 
proposed regulations as the lesser of (i) the aggregate earnings and 
profits of foreign subsidiaries of the foreign acquired corporation 
(with no exclusion for those earnings and profits characterized as 
PTEP) (collectively, lower-tier earnings), and (ii) the EAB of the 
foreign acquired corporation. See proposed Sec.  1.367(b)-2(g)(2)(vii). 
The limitations on specified earnings described in Notice 2016-73 and 
Part II.A of the Explanation of Provisions section of this preamble 
(other than the EAB limitation, which is retained with modification) 
are removed because those limitations, which were designed in part to 
approximate a reasonable allocation of EAB among the shareholders of 
the foreign acquired corporation, are not necessary where the foreign 
acquired corporation's basis imbalance is addressed by a deemed 
distribution. Thus, for example, the definition of specified earnings 
in the proposed regulations would not be limited to the earnings and 
profits of each foreign subsidiary attributable under section 
1248(c)(2) to the stock of the foreign acquired corporation exchanged, 
but instead would include all of the earnings and profits of lower-tier 
foreign subsidiaries (and therefore does not exclude PTEP). The 
proposed regulations would adopt this approach because under the deemed 
distribution model all such earnings and profits would be available to 
increase the earnings and profits of the foreign acquired corporation 
if actually distributed to it through the chain of ownership.
    Where specified earnings are drawn from multiple foreign 
subsidiaries, specified earnings would be drawn from all foreign 
subsidiaries on a pro rata basis (in proportion to each foreign 
subsidiary's share of aggregate earnings and profits of the foreign 
subsidiaries). See proposed Sec.  1.367(b)-3(g)(3). In addition, and 
consistent with Sec.  1.367(b)-2(e)(2), specified earnings drawn from 
foreign subsidiaries would be treated as being distributed to the 
foreign acquired corporation through all tiers of intermediate owners, 
rather than directly to the foreign acquired corporation. See proposed 
Sec.  1.367(b)-3(g)(1).
    The Treasury Department and the IRS are aware that limiting the 
amount of the deemed distribution by the amount of lower-tier earnings 
would preclude the deemed distribution from giving rise to a return of 
basis under section 301(c)(2) or gain recognition under section 
301(c)(3) and in that respect would differ from the deemed distribution 
described in the Final Regulations. See Sec.  1.367(b)-10(b). The 
approach taken in the proposed regulations reflects administrability 
concerns that could arise from adopting a more complete distribution 
model which could require, for example, rules to allocate the 
appropriate amount of basis recovery and section 301(c)(3) gain among 
tiers of foreign subsidiaries. That additional complexity may not be 
justified when balanced against the limited application of the EAB 
rules, which apply only where a taxpayer has previously engaged in a 
transaction described in proposed Sec.  1.367(b)-3(g)(1). The Treasury 
Department and the IRS continue to study transactions that could give 
rise to EAB, including whether EAB principles should be applied to 
other types of inbound nonrecognition transactions.

F. Definition of Foreign Subsidiary

    Notice 2016-73 used, but did not define, the term ``foreign 
subsidiary'' when referring to entities held by the foreign acquired 
corporation for purposes of computing specified earnings and making 
adjustments to EAB. The proposed regulations similarly use the term 
``foreign subsidiary'' for purposes of the EAB rules and would define 
the term based, in part, on the ownership rules in section 
1248(c)(2)(B). See proposed Sec.  1.367(b)-3(g)(2)(ii).

G. EAB Anti-Abuse Rule and Prohibition Against Affirmative Use

    Notice 2016-73 announced that an anti-abuse rule would address 
transactions engaged in with a view to avoid the purposes of the EAB 
rules. As described in Notice 2016-73, the anti-abuse rule would 
provide for adjustments, including disregarding the effects of 
transactions, to carry out the purposes of the EAB rules. As one 
example, the anti-abuse rule stated that a transaction engaged in with 
a view to reduce EAB would be disregarded for purposes of computing 
EAB.
    The comment requested that the Treasury Department and the IRS 
clarify the scope of the anti-abuse rule and purpose of the EAB rules. 
While the comment acknowledged that Sec.  1.367(b)-3 is intended to 
ensure that a domestic acquiring corporation does not succeed

[[Page 69565]]

to the asset basis of the foreign acquired corporation unless the 
earnings and profits associated with such basis have been subject to 
U.S. tax, the comment asserted that it was unclear if certain 
transactions that would reduce EAB would violate this purpose. The 
comment provided several examples of such transactions, including a 
section 332 liquidation of a foreign subsidiary into the foreign 
acquired corporation. The comment explained that, if the liquidated 
subsidiary has high outside basis in its stock but low inside basis in 
its assets, then the liquidation would reduce the foreign acquired 
corporation's EAB because the subsidiary's high outside stock basis 
would be eliminated and replaced with its low inside asset basis.
    The Treasury Department and the IRS are of the view that the more 
limited scope of the EAB rules set forth in the proposed regulations 
would largely mitigate the concern reflected in the comment, because 
under the proposed regulations, the EAB rules would apply only where a 
taxpayer has created EAB in an earlier tax-motivated transaction, 
thereby significantly narrowing the context in which the anti-abuse 
rule may apply. With respect to the limited cases that would be subject 
to the EAB rules, the Treasury Department and the IRS continue to see a 
need to prevent transactions engaged in with a view to reducing EAB, 
which could lead to results inconsistent with the purposes articulated 
in Notice 2016-73 and in Part II.A of the Explanation of Provisions 
section of this preamble; that is, ensuring the appropriate carryover 
of tax attributes from the foreign acquired corporation to the domestic 
acquiring corporation.
    The Treasury Department and the IRS are also aware of transactions 
that may attempt to affirmatively apply the EAB rules to avoid Federal 
income tax. The proposed regulations accordingly would provide that a 
taxpayer may not apply the EAB rules to a transaction if the taxpayer 
created EAB with a principal purpose of avoiding any tax imposed under 
the Code. See proposed Sec.  1.367(b)-3(g)(5).

H. Notice Reporting

    Section 1.367(b)-1(c) requires that certain participants to a 
``section 367(b) exchange'' (as defined in Sec.  1.367(b)-1(a)) 
disclose information concerning such exchange on a statement attached 
to a timely filed Federal tax return or Form 5471 (Information Return 
of U.S. Persons With Respect to Certain Foreign Corporations), as 
applicable, in the taxable year in which income is realized in the 
exchange (such statement, the section 367(b) notice). To enhance 
compliance and administration with respect to the EAB rules, the 
proposed regulations would require that the section 367(b) notice 
include certain information related to EAB, including how it arose and 
how the amount was determined. See proposed Sec.  1.367(b)-1(c)(4)(ix). 
The proposed regulations also would extend the section 367(b) notice 
requirement to participants in transactions that implicate Sec.  
1.367(b)-10, as discussed in Part III.E of the Explanation of 
Provisions section of this preamble.

I. Exchange Gain or Loss With Respect to PTEP

    In general, Sec.  1.367(b)-2(j)(2)(ii) provides that, if an 
exchanging shareholder that is a foreign corporation includes in income 
a deemed dividend of either the all earnings and profits amount under 
Sec.  1.367(b)-3 or the section 1248 amount under Sec.  1.367(b)-4, the 
exchanging shareholder is treated as receiving a deemed distribution of 
PTEP from the appropriate foreign corporation (deemed PTEP 
distribution). However, if the exchanging shareholder that has an 
income inclusion is a United States person, the exchanging shareholder 
is treated as receiving the deemed PTEP distribution solely for the 
purpose of computing exchange gain or loss under section 986(c). See 
Sec.  1.367(b)-2(j)(2)(i). Because the deemed PTEP distribution is 
created where there is an income inclusion, however, a taxpayer might 
assert that no exchange gain or loss is recognized under Sec.  
1.367(b)-2(j)(2)(i) where the all earnings and profits amount or 
section 1248 amount is zero, even though the exchange gain or loss 
would have been recognized had all the earnings and profits or the 
section 1248 amount been a positive number. The proposed regulations 
therefore would clarify that there is a deemed PTEP distribution under 
Sec.  1.367(b)-2(j)(2)(i) regardless of whether the all earnings and 
profits amount or the section 1248 amount is greater than zero. A 
similar change would be made to Sec.  1.367(b)-2(j)(2)(ii).
    The Treasury Department and the IRS are studying more broadly the 
treatment of section 986(c) amounts and PTEP in transactions subject to 
section 367(b) and request comments on the application of Sec.  
1.367(b)-2(j)(2) more generally.

J. Calculation of Net Investment Income Under Section 1411

    The Treasury Department and the IRS are also concerned that in 
certain exchanges subject to section 367(b), earnings and profits that 
are characterized as PTEP might not be taken into account for purposes 
of calculating net investment income (NII) under section 1411. In cases 
where an exchanging shareholder does not make the election described in 
Sec.  1.1411-10(g), a distribution that would otherwise constitute a 
distribution of PTEP under section 959(a)--and thus would not be 
treated as a dividend for purposes of chapter 1 of the Code under 
section 959(d)--generally is treated as a dividend for purposes of 
calculating NII. See Sec.  1.1411-10(c)(1)(i)(A)(1). This rule seeks to 
preserve the NII tax base, as amounts that are characterized as PTEP 
will not also have been previously taxed under section 1411 (absent the 
election in Sec.  1.1411-10(g)) and so should be included in NII.
    The NII tax base may not be fully preserved, however, in certain 
exchanges subject to section 367(b). For example, an inbound asset 
reorganization subject to Sec.  1.367(b)-3 will eliminate earnings and 
profits that are characterized as PTEP without creating a deemed 
distribution of those earnings, because PTEP is excluded from the all 
earnings and profits amount. See Sec.  1.367(b)-2(d)(2)(ii). An 
exchanging shareholder would thus never recognize a dividend of those 
earnings for purposes of calculating NII; further, gain that the 
exchanging shareholder may recognize on a subsequent sale of stock of 
the domestic acquiring corporation may be netted against certain losses 
(as NII includes net gains, but gross income from dividends). Certain 
foreign-to-foreign transactions described in Sec.  1.367(b)-4, or 
section 355 distributions described in Sec.  1.367(b)-5, could 
similarly fail to preserve the NII tax base because PTEP is also 
excluded from the section 1248 amount. See Sec.  1.367(b)-2(c)(1). For 
example, while an exchanging shareholder's annual PTEP accounts would 
not be eliminated as a result of a foreign-to-foreign transaction that 
results in a loss of section 1248 shareholder or CFC status, an 
exchanging shareholder could nevertheless distort the character of its 
NII by selling its stock in the foreign acquiror before its PTEP is 
distributed. The proposed regulations therefore would modify Sec.  
1.1411-10(c)(3) such that (with respect to stock of a foreign 
corporation for which an election under Sec.  1.1411-10(g) is not in 
effect) the all earnings and profits amount and the section 1248 amount 
include PTEP for purposes of section 1411, consistent with how section 
1248 is applied in this context. See proposed Sec.  1.1411-
10(c)(3)(ii). The proposed regulations

[[Page 69566]]

also would provide for conforming basis adjustments for purposes of 
section 1411. See proposed Sec.  1.1411-10(d)(5).\2\
---------------------------------------------------------------------------

    \2\ The Treasury Department and the IRS recognize that certain 
rules in Sec.  1.1411-10 involving domestic partnerships and certain 
S corporations have not been updated to reflect changes made to the 
application of Sec.  1.958-1 pursuant to TD 9866, 84 FR 29288, and 
TD 9960, 87 FR 3648, and intend to update them in a future guidance 
project.
---------------------------------------------------------------------------

III. Rules Applicable to Triangular Reorganizations

A. Priority Rules

    As discussed in Notice 2016-73 and summarized in Part I.F of the 
Explanation of Provisions section of this preamble, the Treasury 
Department and the IRS are aware of transactions that are designed to 
repatriate basis without a corresponding repatriation of the earnings 
and profits associated with that basis. As part of these transactions, 
the taxpayer exploits the section 367(a) priority rule by filing a gain 
recognition agreement with respect to all, or all but a de minimis 
amount, of the foreign target corporation stock exchanged in the 
applicable triangular reorganization. The taxpayer accordingly 
recognizes no, or a de minimis amount of, section 367(a) income with 
respect to the target stock. Because the taxpayer also takes the 
position that a deemed distribution would not result in any section 
367(b) income, the taxpayer applies the section 367(a) priority rule to 
prevent the application of the Final Regulations. The taxpayer also 
takes the position that the anti-abuse rule would not apply to cause 
this transaction to be subject to Sec.  1.367(b)-10 and therefore does 
not make adjustments that have the effect of a distribution of property 
from S to P, with the result that S would have transferred property to 
P without a corresponding transfer of the earnings and profits 
associated with that property.
    Notice 2016-73 announced that future regulations would modify the 
section 367(a) priority rule such that it would not apply to an 
applicable triangular reorganization involving a foreign target 
corporation. Any such applicable triangular reorganization would thus 
be subject to the Final Regulations with the result that adjustments 
would be made that have the effect of a distribution of property from S 
to P under section 301. A similar modification was announced with 
respect to the section 367(b) priority rule.
    The comment supported the proposed modification to the section 
367(a) priority rule. As an alternative, the comment suggested that the 
existing formulation of the section 367(a) priority rule (that is, 
without taking into account the modifications described in Notice 2014-
32 that would limit the ``amount'' of section 367(a) income to the 
amount giving rise to U.S. tax) be retained in cases where the target 
is a foreign corporation. Under that formulation, the ``amount'' of 
section 367(a) income is compared to the ``amount'' of section 367(b) 
income, regardless of whether such amounts are subject to U.S. tax. The 
comment asserted that this formulation would cause a greater amount of 
section 367(b) income to be taken into account, thereby making it more 
difficult for taxpayers to exploit the section 367(a) priority rule to 
avoid the Final Regulations.
    The Treasury Department and the IRS expect that the modification to 
the section 367(a) priority rule described in Notice 2016-73 would best 
address such exploitation by ensuring that adjustments that have the 
effect of a deemed distribution of property from S to P are made 
whenever the target is a foreign corporation. This result would 
reinforce one of the purposes of the Final Regulations by ensuring that 
property transfers that are in substance distributions are treated as 
such, thereby preventing the separation of property from the earnings 
and profits associated with that property. The comment's alternative 
approach could also, as the comment acknowledged, invite the avoidance 
of section 301(c)(2) basis reduction in situations where a small amount 
of section 367(a) income is compared to a large amount of section 
301(c)(2) basis reduction. Because a return of basis is not considered 
section 367(b) income, a small amount of section 367(a) income could be 
sufficient to trigger the section 367(a) priority rule. Accordingly, 
the proposed regulations would adopt the modifications to the section 
367(a) and section 367(b) priority rules described in Notice 2016-73. 
See proposed Sec. Sec.  1.367(a)-3(a)(2)(iv) and 1.367(b)-
10(a)(2)(iii).
    As discussed in Part I.E of the Explanation of Provisions section 
of this preamble, Notice 2014-32 announced that the section 367(a) and 
section 367(b) priority rules would be modified to take into account 
only the portion of a distribution that would be actually subject to 
U.S. tax, including the extent to which a distribution would give rise 
to an inclusion under section 951(a) that would be subject to U.S. tax. 
In light of the TCJA, the proposed regulations also would modify the 
priority rules to take into account the extent to which a distribution 
would give rise to an inclusion under section 951A(a) that would be 
subject to U.S. tax (even though it is unlikely that a distribution 
from S to P would give rise to a section 951A(a) inclusion).

B. Sec.  1.367(b)-4 and Notice 2016-73

1. Overview
    Notice 2016-73 announced that regulations to be issued under Sec.  
1.367(b)-4 would apply to the exchange of a foreign target 
corporation's stock that occurs in connection with an applicable 
triangular reorganization. As described in Notice 2016-73, the 
regulations under Sec.  1.367(b)-4 would require all shareholders of 
the target corporation to both include in income as a deemed dividend 
the section 1248 amount with respect to the target stock exchanged and, 
after taking into account the increase in basis resulting from such 
deemed dividend, recognize all realized gain with respect to such stock 
that would not otherwise be recognized. This treatment would be 
required only to the extent that the target shareholders exchanged 
target stock for P stock or securities that S previously acquired for 
property in the P acquisition (tainted P stock or securities); section 
367(a) would continue to apply to the exchange of target stock to the 
extent the target shareholders did not receive such tainted P stock or 
securities. The proposed regulations would adopt the rules as described 
in Notice 2016-73 without significant modification. See proposed Sec.  
1.367(b)-4(g).
2. Authority Under Section 367
    The comment questioned whether section 367(b) could be applied to 
an applicable triangular reorganization in a manner that both requires 
adjustments that have the effect of a distribution of property from S 
to P and requires the shareholders of a foreign target corporation to 
recognize the full amount of gain with respect to the target 
corporation stock that is exchanged for tainted P stock or securities. 
The comment asserted that this application of section 367(b) 
effectively achieves the same result as if the applicable triangular 
reorganization were concurrently subject to taxation under both section 
367(b) (with respect to the P acquisition) and section 367(a) (with 
respect to the target shareholders' exchange of target stock). 
According to the comment, section 367 may not apply to cause such 
concurrent taxation because the statutory language in section 367(b)(1) 
provides that section 367(b) may apply only where there is no transfer 
of property described in section 367(a). The comment cited to Sec.  
1.367(a)-3(b)(2), under which transactions that could be subject to tax 
under both

[[Page 69567]]

section 367(a) and (b) are subject to taxation under only one of those 
sections. The comment also noted that the section 367(a) and (b) 
priority rules, as currently effective, likewise operate in a manner 
that results in only one or the other of section 367(a) or (b) applying 
to an applicable triangular reorganization.
    The Treasury Department and the IRS are of the view that the 
proposed application of Sec.  1.367(b)-4 is appropriate and within 
section 367's statutory grant of authority. Under section 367(a)(5), 
the Secretary has broad authority to exempt certain transactions from 
the application of section 367(a)(1) in order to carry out the purposes 
of section 367(a). Deliberately failing to file a gain recognition (or 
filing a partial gain recognition agreement) to exploit the section 
367(a) priority rule is inconsistent with the purposes of section 
367(a), and section 367(b) is better suited to address these 
transactions. Accordingly, it is appropriate to exercise the authority 
in section 367(a)(5) to make the section 367(a) priority rule 
inapplicable to certain exchanges of target stock. Section 367(b) may 
therefore apply to the target shareholders' exchange of target stock 
because the exchange, by virtue of section 367(a)(5), is not described 
in section 367(a)(1). See section 367(b)(1). Furthermore, section 
367(b)(1) is clear that the Secretary may issue any regulations ``which 
are necessary or appropriate to prevent the avoidance of Federal income 
taxes.'' Section 367(b)(2) provides that such regulations ``shall 
include . . . the circumstances under which gain shall be recognized 
currently, or amounts included in gross income currently as a dividend, 
or both . . . .'' Nothing within this broad grant of rulemaking 
authority prevents section 367(b) from concurrently applying to both 
the P acquisition and the exchange of target stock such that both of 
these components of an applicable triangular reorganization give rise 
to income or gain.
3. Section 367(b) Policy
    The comment further asserted that requiring adjustments that have 
the effect of a distribution of property from S to P where the target 
is a foreign corporation sufficiently addresses the concerns raised in 
Notice 2016-73 and thus questioned the rationale in also subjecting the 
target shareholders to current taxation under Sec.  1.367(b)-4. 
According to the comment, the target shareholders remain subject to 
U.S. taxing jurisdiction through their carryover basis in the stock of 
P and continued indirect equity interest in the target. The comment 
claimed that historic section 367(b) policy has recognized the 
permissibility of deferral where U.S. taxing rights remain intact, and 
in particular where section 1248 amounts are preserved.
    The Treasury Department and the IRS maintain that it is appropriate 
for the proposed regulations to require all target shareholders to 
recognize the full amount of their gain with respect to the stock of 
target exchanged for tainted stock or securities of P. As noted above, 
section 367(b) provides the Secretary with a broad grant of authority 
to issue regulations applicable to nonrecognition transactions that are 
subject to section 367(b), and the exercise of this broad rulemaking 
authority is not conditioned on addressing a particular or historic 
policy concern. The Treasury Department and the IRS further note that 
applicable triangular reorganizations have long been identified as tax-
motivated transactions, not only with respect to S's acquisition of the 
stock of P but also with respect to the exchange of stock of T. See 
Notice 2006-85; Notice 2014-32 (addressing situations where taxpayers 
attempted to manipulate the section 367(b) priority rule to effectuate 
an inversion without the T shareholders being subject to Sec.  
1.367(a)-3(c)). Moreover, a more limited application of the rules under 
section 367 has led to repeated attempts by taxpayers to structure 
around the rules. Requiring all target shareholders to recognize the 
full amount of their gain in the stock of the target corporation in 
connection with such transactions limits opportunities to selectively 
trigger this gain.

C. Deemed Contribution Rule

    Initially proposed in Notice 2007-48 (2007-25 IRB 1428), the deemed 
contribution rule in Sec.  1.367(b)-10(b)(2) was intended to address 
the scenario where S purchases P stock or securities from a person 
other than P (for example, from the public on the open market) instead 
of directly from P itself. In such cases, the adjustments required by 
the deemed distribution effectively adopt a ``consent dividend'' model, 
which would treat P as receiving a distribution of property from S even 
though P did not actually receive the property transferred in the P 
acquisition. The deemed contribution rule, under this model, accounts 
for P's lack of property by requiring adjustments that have the effect 
of a contribution of property (with no built-in gain or loss) by P to S 
in an amount equal to the amount of the deemed distribution. In 
particular, these adjustments require that P increase its basis in its 
S stock by the amount of the deemed contribution. Under the Final 
Regulations, the deemed contribution rule applies regardless of whether 
S acquires P stock or securities from P or from a person other than P.
    As discussed in Notice 2014-32, the Treasury Department and the IRS 
are aware of transactions designed to avoid U.S. tax by exploiting the 
deemed contribution rule. In one such transaction, for example, S has 
no earnings and profits but a high outside stock basis. The taxpayer 
effects an applicable triangular reorganization where the amount of 
property transferred to P in the P acquisition is less than the amount 
of the outside stock basis in S. The taxpayer applies the Final 
Regulations to make the adjustments required by the deemed 
distribution, which results solely in a return of the outside stock 
basis in S under section 301(c)(2). The adjustments required by the 
deemed contribution rule, however, immediately restore that basis. The 
applicable triangular reorganization thus does not result in a net 
reduction to the outside stock basis in S, effectively negating the 
intended consequences of the deemed distribution. Further, the taxpayer 
could attempt to repeatedly effect applicable triangular 
reorganizations to transfer property from S to P with no net reduction 
to the outside stock basis in S despite each transaction being treated 
as a deemed distribution. As a result, and consistent with the 
regulations announced in Notice 2014-32, the proposed regulations 
remove the deemed contribution rule.

D. Anti-Abuse Rule

    The Final Regulations contain an anti-abuse rule under which 
appropriate adjustments are made if, in connection with a triangular 
reorganization, a transaction is engaged in with a view to avoid the 
purpose of the Final Regulations. See Sec.  1.367(b)-10(d). The anti-
abuse rule contains an example illustrating that the earnings and 
profits of S may, under certain circumstances, be deemed to include the 
earnings and profits of a corporation related to P or S for purposes of 
determining the consequences of the adjustments provided for in the 
Final Regulations.
    As illustrated in Notice 2014-32 and Notice 2016-73, taxpayers have 
taken the position that the anti-abuse rule does not apply to a given 
transaction under the theory that the one example provided by the anti-
abuse rule does not explicitly describe the transaction. Notice 2014-32 
accordingly announced that future regulations would clarify

[[Page 69568]]

that the anti-abuse rule may apply broadly to support a variety of 
adjustments, including adjusting earnings and profits between 
previously unrelated corporations. The proposed regulations would 
implement the clarifications to the anti-abuse rule described in Notice 
2014-32.
    To illustrate the broad application of the anti-abuse rule, the 
proposed regulations would include additional examples. First, the 
proposed regulations would add an example illustrating that the anti-
abuse rule may apply to a ``downstream'' transfer of property made in 
connection with a triangular reorganization. Because a downstream 
transfer (whereby property being separated from earnings and profits is 
initially transferred downstream, rather than upstream from S to P) can 
be structured so as not to fall within the literal application of the 
Final Regulations, which equate the P acquisition with a section 301 
distribution, taxpayers otherwise might assert that a downstream 
transfer of property made in connection with a triangular 
reorganization cannot be subject to the Final Regulations. See proposed 
Sec.  1.367(b)-10(d)(3) (Example 2). The proposed regulations also 
would add an example illustrating that certain debt exchanges may 
implicate the anti-abuse rule. See proposed Sec.  1.367(b)-10(d)(4) 
(Example 3).
    For the avoidance of doubt, the application of the anti-abuse rule 
is not limited to the particular fact patterns described in the 
examples. In addition, the proposed regulations would not modify the 
operative text of the anti-abuse rule, which remains unchanged from the 
Final Regulations, such that the examples included in the proposed 
regulations would illustrate transactions subject to the anti-abuse 
rule.

E. Other Rules

    Notice 2014-32 described transactions designed to avoid the 
application of the no-U.S.-tax exception in Sec.  1.367(b)-10(a)(2)(ii) 
and also expressed a concern that taxpayers may attempt to interpret 
that exception in a narrower manner than was intended or is 
appropriate. Notice 2014-32 accordingly announced that future 
regulations would modify the no-U.S.-tax exception, in part to clarify 
its scope. The proposed regulations would adopt the modifications to 
the no-U.S.-tax exception described in Notice 2014-32. See proposed 
Sec.  1.367(b)-10(a)(2)(ii).
    As noted above in Part I.F of the Explanation of Provisions section 
of this preamble, Notice 2016-73 announced that the definition of 
``property'' in Sec.  1.367(b)-10(a)(3)(ii) would be modified to 
include nonqualified preferred stock of S. The proposed regulations 
would adopt this rule without modification. See proposed Sec.  
1.367(b)-10(a)(3)(ii)(C).
    Section 1.367(b)-10(b)(3) provides that the deemed distribution is 
generally treated as occurring immediately before the P acquisition, 
and Notice 2016-73 requested comments on whether this rule should be 
modified in light of the modifications announced in the notice. The 
comment suggested that the current rule be retained because no reason 
has been identified to warrant its modification. The Treasury 
Department and the IRS agree with the comment and therefore no changes 
would be made with respect to this rule.
    The proposed regulations also would modify the reporting 
requirements under Sec.  1.367(b)-1(c) to require corporations that 
acquire stock or securities of P in a transaction described in the 
Final Regulations to disclose such acquisitions by attaching a section 
367(b) notice (within the meaning of Sec.  1.367(b)-1(c)) to the 
corporation's tax return (or Form 5471, as applicable) for the year in 
which the stock or securities of P are acquired. See proposed Sec.  
1.367(b)-1(c)(2)(vi). Under the proposed regulations, corporations 
would be required to describe the circumstances of the acquisition of 
stock or securities of P, any related transactions involving the 
acquired stock or securities, and whether any adjustments were made 
pursuant to Sec.  1.367(b)-10. See proposed Sec.  1.367(b)-
1(c)(4)(viii). The information required to be disclosed would 
supplement (rather than replace) any information already required to be 
disclosed in the section 367(b) notice.

IV. Applicability Dates

    With respect to those rules described in Notice 2014-32, the 
proposed regulations generally would be applicable to transactions 
completed on or after April 25, 2014, subject to limited exceptions. 
See proposed Sec. Sec.  1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e)(2).
    With respect to those rules described in Notice 2016-73, the 
proposed regulations generally would be applicable to transactions 
completed on or after December 2, 2016. See proposed Sec. Sec.  
1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), and 
1.367(b)-10(e)(3). To the extent the proposed regulations contain rules 
not previously announced in Notice 2016-73, the proposed regulations 
would be applicable to transactions completed on or after the date the 
proposed regulations are filed in the Federal Register. See proposed 
Sec. Sec.  1.367(b)-3(g)(7)(i), 1.367(b)-6(a)(1)(v) and (vi), and 
1.1411-10(i); see also proposed Sec.  1.367(b)-3(g)(7)(ii) for 
transition rules for certain transactions completed before the issuance 
of the proposed regulations.
    Taxpayers and their related parties (within the meaning of sections 
267(b) and 707(b)(1)) may choose to apply the rules of Notice 2014-32 
and Notice 2016-73 or the proposed regulations to any open taxable year 
beginning before the date the proposed regulations are filed as final 
regulations in the Federal Register, provided that taxpayers and their 
related parties consistently apply either the entirety of Notice 2014-
32 and Notice 2016-73 or the entirety of the proposed regulations for 
such years and each subsequent taxable year beginning before the date 
the proposed regulations are filed as final regulations in the Federal 
Register.
    The comment requested that the Treasury Department and IRS 
reconsider the December 2, 2016, applicability date given that Notice 
2016-73 proposed to apply the EAB rules to all inbound nonrecognition 
transactions, regardless of whether the taxpayer had previously 
effected an applicable triangular reorganization. The comment did, 
however, recognize the immediate need for the EAB rules to apply to 
already-completed applicable triangular reorganizations where the 
taxpayer did not apply the Final Regulations. Because the proposed 
regulations would apply the EAB rules only to those inbound 
nonrecognition transactions that follow certain triangular 
reorganizations and other transactions designed to create EAB, the 
Treasury Department and IRS maintain that the December 2, 2016, 
effective date is appropriate.
    No inference is intended regarding the treatment of applicable 
triangular reorganizations, transactions undertaken with a principal 
purpose of creating EAB, or subsequent inbound nonrecognition 
transactions completed before the applicability date of the proposed 
regulations. Such transactions may be subject to challenge before the 
applicability dates, for example, under the anti-abuse rule in Sec.  
1.367(b)-10(d), applicable Code provisions, or judicial doctrines.

Effect on Other Documents

    The proposed regulations would, as of the date they are filed as 
final regulations with the Federal Register, obsolete Notice 2014-32 
and Notice 2016-73. Until such time, taxpayers may continue to rely on 
Notice 2014-32 and Notice 2016-73 as noted in Part IV

[[Page 69569]]

of the Explanation of Provisions section of this preamble.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
requires that a Federal agency obtain the approval of the OMB before 
collecting information from the public, whether such collection of 
information is mandatory, voluntary, or required to obtain or retain a 
benefit.
    The collections of information in the proposed regulations are in 
proposed Sec.  1.367(b)-1(c)(4)(viii) and (ix) and apply to taxpayers 
that engage in transactions described in Sec.  1.367(b)-3(g) or Sec.  
1.367(b)-10. This information is necessary for the IRS's audit and 
examination purposes, and in particular to identify transactions that 
should be subject to the proposed regulations. The proposed information 
collection is a statement by corporations attached to their timely 
filed Federal tax returns (or Form 5471, as applicable) that describes 
certain transactions and computations relevant to the proposed 
regulations. Because such statements have not been required for 
transactions that predate the proposed regulations, the Treasury 
Department and the IRS are limited in their ability to estimate how 
many taxpayers are likely to be affected by the proposed information 
collection. Based on available data and the profile of taxpayers that 
have historically undertaken the types of transactions at issue (large, 
publicly traded corporations), it is estimated that no more than 50 
taxpayers would be affected by the proposed information collection in a 
given year. The likely respondents are foreign and domestic 
corporations.
    Because the collections of information in proposed Sec.  1.367(b)-
1(c)(4)(viii) and (ix) are proposed to apply to taxable years ending on 
or after the date the proposed regulations are filed with the Federal 
Register, the Treasury Department and the IRS have submitted the 
collection of information in proposed Sec.  1.367(b)-1(c)(4)(viii) and 
(ix) to the OMB for review in accordance with the PRA and requested a 
temporary OMB control number (1545-NEW). After the rulemaking is 
finalized, burdens associated with the proposed information collection 
will be incorporated into OMB control number 1545-0123. OMB control 
number 1545-0123 represents a total estimated burden time for all forms 
and schedules and regulations for corporations. REG-117614-14 will be 
included in the future; however, the burden estimates in 1545-0123 will 
not isolate the estimated burden for the information collection 
contained in these proposed, and subsequent final, regulations. The 
Treasury Department and the IRS estimate burdens based on a taxpayer-
type basis rather than a provision-specific basis.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Commenters are strongly encouraged to submit public comments 
electronically. Comments and recommendations for the proposed 
information collection should be sent to www.reginfo.gov/public/do/PRAMain, with electronic copies to the IRS at <a href="/cdn-cgi/l/email-protection#760604175815191b1b13180205361f040558111900"><span class="__cf_email__" data-cfemail="a2d2d0c38cc1cdcfcfc7ccd6d1e2cbd0d18cc5cdd4">[email protected]</span></a> 
(indicate ``REG-117614-14'' on the subject line). This particular 
information collection can be found by selecting ``Currently under 
Review--Open for Public Comments'' then by using the search function. 
Comments can also be mailed to OMB, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies mailed to the IRS, Attn: IRS 
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. 
Comments on the collection of information should be received by 
December 5, 2023.

III. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency ``to 
prepare and make available for public comment an initial regulatory 
flexibility analysis'' that will ``describe the impact of the proposed 
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA 
provides an exception to this requirement if the agency certifies that 
the proposed rulemaking will not have a significant economic impact on 
a substantial number of small entities. A small entity is defined as a 
small business, small nonprofit organization, or small governmental 
jurisdiction. See 5 U.S.C. 601(3) through (6).
    The Treasury Department and the IRS do not have data readily 
available to assess the number of small entities potentially affected 
by the proposed regulations. However, the taxpayers affected by the 
proposed regulations would generally be domestic and foreign 
corporations that participate in certain triangular reorganizations. 
The triangular reorganizations at issue represent a narrow set of 
abusive transactions that have typically been engaged in by large, 
publicly traded corporations. Such transactions are highly 
sophisticated and are thus unlikely to involve small domestic entities. 
Therefore, the Treasury Department and the IRS certify that the 
proposed regulations would not have a significant economic impact on a 
substantial number of small entities. The Treasury Department and the 
IRS invite the public to comment on the impact of these regulations on 
small entities.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This proposed rule does not include any Federal mandate that 
may result in expenditures by State, local, or Tribal governments, or 
by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications, does not impose substantial direct compliance 
costs on State and local governments, and does not preempt State law 
within the meaning of the Executive order.

[[Page 69570]]

Comments and Requests for Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES section. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. The Treasury Department and the IRS also invite 
comments on section 367(b) more generally, including whether, and if 
so, how, any of the existing regulations issued under section 367(b) 
should be modified in light of the Tax Cuts and Jobs Act. Any 
electronic or paper comments submitted will be made available at 
www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are encouraged to be made electronically. If a public 
hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin or Cumulative Bulletin and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Drafting Information

    The principal author of the proposed regulations is Brady Plastaras 
of the Office of the Associate Chief Counsel (International). However, 
other personnel from the Treasury Department and the IRS participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  1.1411-10 in numerical order to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.1411-10 also issued under 26 U.S.C. 367(b).
* * * * *
0
Par. 2. Section 1.367(a)-3 is amended by revising paragraphs (a)(2)(iv) 
and (g)(1)(viii) to read as follows:


Sec.  1.367(a)-3  Treatment of transfers of stock or securities to 
foreign corporations.

    (a) * * *
    (2) * * *
    (iv) Certain triangular reorganizations described in Sec.  
1.367(b)-10. If, in an exchange under section 354 or 356, one or more 
U.S. persons exchange stock or securities of T (as defined in Sec.  
1.367(b)-10(a)(3)(i)) in connection with a transaction described in 
Sec.  1.367(b)-10 (applying to certain acquisitions of parent stock or 
securities for property in triangular reorganizations), section 
367(a)(1) does not apply to such U.S. persons with respect to the 
exchange of the stock or securities of T if the condition in paragraph 
(a)(2)(iv)(A) or (B) of this section is satisfied. See Sec.  1.367(b)-
10(a)(2)(iii) (providing a similar rule that excludes certain 
transactions from the application of Sec.  1.367(b)-10).
    (A) The amount of gain in the T stock or securities that would 
otherwise be recognized under section 367(a)(1) (without regard to any 
exceptions thereto) pursuant to the indirect stock transfer rules of 
paragraph (d) of this section is less than the sum of the amount of the 
deemed distribution under Sec.  1.367(b)-10 that would be treated and 
subject to U.S. tax as a dividend under section 301(c)(1) (or would 
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that 
would be subject to U.S. tax) and the amount of such deemed 
distribution that would be treated and subject to U.S. tax as gain from 
the sale or exchange of property under section 301(c)(3) (or would give 
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would 
be subject to U.S. tax) if Sec.  1.367(b)-10 would otherwise apply to 
the triangular reorganization.
    (B) T is a foreign corporation, but only to the extent that the 
stock or securities of T are exchanged for stock or securities of P 
that were acquired by S in exchange for property in the P acquisition 
(as the terms P, S, property, and P acquisition are defined in Sec.  
1.367(b)-10(a)). Such exchange of T stock or securities is subject to 
the rules under Sec.  1.367(b)-4(g). Section 367(a) applies to the 
exchange of T stock or securities to the extent that such stock or 
securities are exchanged for P stock or securities that were not 
acquired by S in exchange for property in the P acquisition.
* * * * *
    (g) * * *
    (1) * * *
    (viii) Except as provided in this paragraph (g)(1)(viii), paragraph 
(a)(2)(iv) of this section applies to exchanges occurring on or after 
May 17, 2011. For exchanges that occur prior to May 17, 2011, see Sec.  
1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR part 1 revised as of 
April 1, 2011. Paragraph (a)(2)(iv)(A) of this section, to the extent 
it relates to amounts that would be subject to U.S. tax or give rise to 
an inclusion under section 951(a)(1)(A) that would be subject to U.S. 
tax, applies to triangular reorganizations that are completed on or 
after April 25, 2014, unless T was not related to P or S (within the 
meaning of section 267(b)) immediately before the triangular 
reorganization; the triangular reorganization was entered into either 
pursuant to a written agreement that was (subject to customary 
conditions) binding before April 25, 2014, and at all times afterwards, 
or pursuant to a tender offer announced before April 25, 2014, that is 
subject to section 14(d) of the Securities and Exchange Act of 1934 (15 
U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through 
240.14d-101) or that is subject to comparable foreign laws; and to the 
extent the P acquisition that occurs pursuant to the plan of 
reorganization is not completed before April 25, 2014, the P 
acquisition was included as part of the plan before April 25, 2014. 
Paragraph (a)(2)(iv)(B) of this section applies to transactions 
completed on or after December 2, 2016. Paragraph (a)(2)(iv)(A) of this 
section, to the extent it relates to amounts that would give rise to an 
inclusion under section 951A(a) that would be subject to U.S. tax, 
applies to triangular reorganizations that are completed on or after 
October 5, 2023.
* * * * *
0
Par. 3. Section 1.367(b)-1 is amended by:
0
1. Removing the language ``and'' at the end of paragraph (c)(2)(iv)(B);
0
2. Removing the period at the end of paragraph (c)(2)(v) and adding the 
language ``; and'' in its place;
0
3. Adding paragraph (c)(2)(vi);
0
4. In paragraph (c)(3)(ii)(A), removing the language ``paragraph 
(c)(2)(i) or (v)'' and adding in its place the language ``paragraph 
(c)(2)(i), (v), or (vi)'';
0
5. Revising paragraph (c)(4)(v);
0
6. Removing the language ``and'' at the end of paragraph (c)(4)(vi);
0
7. Removing the period at the end of paragraph (c)(4)(vii)(B) and 
adding a semicolon in its place; and

[[Page 69571]]

0
8. Adding paragraphs (c)(4)(viii) and (ix).
    The additions and revision read as follows:


Sec.  1.367(b)-1  Other transfers.

* * * * *
    (c) * * *
    (2) * * *
    (vi) A domestic or foreign corporation (S) that acquires stock or 
securities of another corporation (P) in a transaction described in 
Sec.  1.367(b)-10(a)(1), without regard to the exceptions in Sec.  
1.367(b)-10(a)(2).
* * * * *
    (4) * * *
    (v) Any information that is or would be required to be furnished 
with a Federal income tax return pursuant to regulations or other 
guidance under section 332, 351, 354, 355, 356, 361, 368, or 381 
(whether or not a Federal income tax return is required to be filed), 
if such information has not otherwise been provided by the person 
filing the section 367(b) notice;
* * * * *
    (viii) In the case of a corporation (S) described in paragraph 
(c)(2)(vi) of this section, the rules of this paragraph (c)(4) apply by 
treating the acquisition of the stock or securities of P in exchange 
for property as the section 367(b) exchange referred to in paragraph 
(a) of this section. The section 367(b) notice must also include a 
complete description of the acquisition of the stock or securities of P 
in exchange for property, including a description of the property 
provided in exchange for the stock or securities and any related 
transactions involving the acquisition of the stock or securities. The 
section 367(b) notice must describe any adjustments made pursuant to 
Sec.  1.367(b)-10 or, if no adjustments are made, explain why no such 
adjustments were made; and
    (ix) In the case of an exchange to which Sec.  1.367(b)-3(g) 
applies, a statement describing how any excess asset basis (as defined 
in Sec.  1.367(b)-3(g)(2)(i)) arose, the amount of excess asset basis, 
and a description of the computation of the amount of excess asset 
basis.
* * * * *
0
Par. 4. Section 1.367(b)-2 is amended by:
0
1. In paragraph (c)(1), adding a sentence after the current first 
sentence;
0
2. Adding a sentence to the end of paragraph (d)(2)(ii);
0
3. In paragraph (d)(3)(ii), removing the language ``subsidiaries of'' 
and adding in its place the language ``corporations owned by'';
0
4. Adding a sentence to the end of paragraph (d)(3)(ii);
0
5. In paragraph (e)(4) Example 2, removing the language ``foreign 
subsidiary'' and adding in its place the language ``foreign 
corporation''; and
0
6. In paragraphs (j)(2)(i) and (ii), removing the language ``is 
required to include in income either the all earnings and profits 
amount or the section 1248 amount under the provisions of Sec.  
1.367(b)-3 or 1.367(b)-4'' and adding in its place the language 
``exchanges stock pursuant to a transaction described in Sec.  
1.367(b)-3 or Sec.  1.367(b)-4(b)(1)(i), (b)(2)(i), (b)(3), (e), or 
(g)''.
    The additions read as follows:


Sec.  1.367(b)-2   Definitions and special rules.

* * * * *
    (c) * * *
    (1) * * * But see Sec.  1.1411-10(c)(3)(ii), which for certain 
exchanges modifies the section 1248 amount for purposes of section 
1411. * * *
* * * * *
    (d) * * *
    (2) * * *
    (ii) * * * But see Sec.  1.1411-10(c)(3)(ii), which for certain 
exchanges modifies the all earnings and profits amount for purposes of 
section 1411.
* * * * *
    (3) * * *
    (ii) * * * But see Sec.  1.367(b)-3(g)(1), which adjusts the all 
earnings and profits amount through a deemed distribution of certain 
earnings and profits of foreign subsidiaries owned by the foreign 
acquired corporation.
* * * * *
0
Par. 5. Section 1.367(b)-3 is amended by adding paragraph (g) to read 
as follows:


Sec.  1.367(b)-3   Repatriation of foreign corporate assets in certain 
nonrecognition transactions.

* * * * *
    (g) All earnings and profits amount adjusted for excess asset 
basis--(1) General rule. If there is excess asset basis with respect to 
a foreign acquired corporation and the condition described in paragraph 
(g)(1)(i) or (ii) of this section is satisfied, then, except as 
provided in paragraph (g)(5) of this section, an exchanging shareholder 
to which paragraph (b)(3)(i) of this section applies must compute the 
all earnings and profits amount with respect to its stock in the 
foreign acquired corporation as if the foreign acquired corporation had 
received a distribution of property from a foreign subsidiary under 
section 301 in an amount equal to the specified earnings, immediately 
before the inbound nonrecognition transaction. The deemed distribution 
described in the preceding sentence is treated as occurring for all 
purposes of the Internal Revenue Code. For purposes of this paragraph 
(g)(1), the amount of the distribution from a foreign subsidiary is 
equal to the amount of earnings and profits of that foreign subsidiary 
that is designated as specified earnings under paragraph (g)(3) of this 
section. In the case of a foreign subsidiary the stock of which is not 
held directly by the foreign acquired corporation, the distribution is 
treated as being made through any intermediate owners. For purposes of 
this paragraph (g)(1), references to the foreign acquired corporation, 
S, and a foreign subsidiary include any predecessor corporation.
    (i) S previously acquired in exchange for property stock or 
securities of the foreign acquired corporation in connection with a 
triangular reorganization described in Sec.  1.358-6(b)(2), and the 
foreign acquired corporation and S did not make adjustments that have 
the effect of a distribution of property from S to the foreign acquired 
corporation under Sec.  1.367(b)-10(b)(1).
    (ii) The excess asset basis is attributable, directly or 
indirectly, to property previously provided by a foreign subsidiary of 
the foreign acquired corporation in connection with a transaction not 
described in paragraph (g)(1)(i) of this section and undertaken with a 
principal purpose to create such excess asset basis.
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (g).
    (i) Excess asset basis. The term excess asset basis means, with 
respect to a foreign acquired corporation, the amount by which the 
inside asset basis of that corporation exceeds the sum of the following 
amounts:
    (A) The earnings and profits of the foreign acquired corporation 
attributable to its outstanding stock. For purposes of paragraph 
(g)(2)(i) of this section, such earnings and profits are determined 
under the principles of Sec.  1.367(b)-2(d) but without regard to 
whether the exchanging shareholder is described in paragraph (b)(1) of 
this section or whether the exchanging shareholder is a U.S. person or 
a foreign person; and such earnings and profits include amounts 
described in section 1248(d)(3) or (4).
    (B) The aggregate basis in the outstanding stock of the foreign 
acquired corporation determined immediately before the nonrecognition 
transaction described in paragraph (a) of this section (the inbound 
nonrecognition transaction) and therefore without regard to any basis 
increase described in Sec.  1.367(b)-

[[Page 69572]]

2(e)(3)(ii) resulting from such inbound nonrecognition transaction.
    (C) The aggregate amount of liabilities of the foreign acquired 
corporation that are assumed (determined under the principles of 
section 357(d)) by the domestic acquiring corporation in the inbound 
nonrecognition transaction.
    (ii) Foreign subsidiary. The term foreign subsidiary means, with 
respect to a foreign acquired corporation, a foreign corporation with 
respect to which the foreign acquired corporation satisfies the 
ownership requirements of section 1248(c)(2)(B) but for this purpose 
treating the foreign acquired corporation as the United States person 
referred to in section 1248(c)(2)(B).
    (iii) Inbound nonrecognition transaction. The term inbound 
nonrecognition transaction has the meaning set forth in paragraph 
(g)(2)(i)(B) of this section.
    (iv) Inside asset basis. The term inside asset basis means, with 
respect to a foreign acquired corporation, the aggregate of the 
adjusted basis of all the assets of that corporation in the hands of 
the domestic acquiring corporation determined immediately after the 
inbound nonrecognition transaction.
    (v) Lower-tier earnings. The term lower-tier earnings means, with 
respect to a foreign acquired corporation, the sum of the earnings and 
profits (including deficits) of each foreign subsidiary.
    (vi) S. The term S has the same meaning as in Sec.  1.367(b)-
10(a)(3)(i).
    (vii) Specified earnings. The term specified earnings means, with 
respect to a foreign acquired corporation, the lesser of the following 
amounts:
    (A) Lower-tier earnings; and
    (B) The excess asset basis of the foreign acquired corporation.
    (viii) Property. The term property has the same meaning as in Sec.  
1.367(b)-10(a)(3)(ii).
    (3) Designation of specified earnings. If lower-tier earnings 
exceed specified earnings, then the portion of lower-tier earnings that 
is designated as specified earnings is determined by reference to the 
earnings and profits of each foreign subsidiary on a pro rata basis in 
proportion to each subsidiary's share of lower-tier earnings.
    (4) Anti-abuse rule. Appropriate adjustments are made pursuant to 
this section if a transaction is engaged in with a view to avoid the 
purposes of this paragraph (g). For example, if a transaction is 
engaged in with a view to reduce excess asset basis, including by 
increasing the basis in the stock of the foreign acquired corporation 
without a corresponding increase in the basis of the assets of the 
foreign acquired corporation, that increase in the basis in the stock 
of the foreign acquired corporation will be disregarded for purposes of 
computing excess asset basis.
    (5) Prohibition against affirmative use. This paragraph (g) does 
not apply to an inbound nonrecognition transaction if a transaction 
described in paragraph (g)(1) of this section was entered into with a 
principal purpose of subjecting the inbound nonrecognition transaction 
to this paragraph (g). For example, this paragraph (g) will not apply 
to an inbound nonrecognition transaction if a taxpayer engaged in a 
transaction described in paragraph (g)(1) of this section with a 
principal purpose of accessing tax attributes of lower-tier foreign 
subsidiaries by reason of a deemed distribution of lower-tier earnings 
of the foreign acquired corporation.
    (6) Examples. The application of this paragraph (g) is illustrated 
by the examples in this paragraph (g)(6). In each example, all 
corporations have a calendar year-end and use the United States dollar 
as their functional currency.
    (i) Example 1--(A) Facts. USP, a domestic corporation, owns all of 
the stock of USS, also a domestic corporation, and 80 percent of the 
stock of FP, a foreign corporation. USS owns the remaining 20 percent 
of the stock of FP. FP owns all of the stock of FS1, which in turn owns 
all of the stock of FS2. Both FS1 and FS2 are foreign corporations. In 
a reorganization described in section 368(a)(1)(F) (F reorganization), 
US Newco, a newly formed domestic corporation, acquires all of the 
assets of FP solely in exchange for stock of US Newco, which FP 
distributes to USP and USS in liquidation. Immediately before the F 
reorganization, the stock of FP owned by USP has a fair market value of 
$80x and an adjusted basis of $4x. The stock of FP owned by USS has a 
fair market value of $20x and an adjusted basis of $1x. The all 
earnings and profits amounts with respect to USP's stock of FP and 
USS's stock of FP, determined before any adjustments required by 
paragraph (g) of this section, are $32x and $8x, respectively. FP holds 
assets with an adjusted basis of $95x, has no liabilities, and has $40x 
of earnings and profits attributable to its outstanding stock. FS1 and 
FS2 have $30x and $70x of earnings and profits, respectively, all of 
which are described in section 959(c)(3). Dividends paid by FS2 to FS1, 
and by FS1 to FP, would qualify for the exception to foreign personal 
holding company income under section 954(c)(6). Before the 
applicability date described in paragraph (g)(7)(i) of this section, 
and separate from the F reorganization, FS1 provided property to FP in 
exchange for stock of FP in connection with a triangular reorganization 
described in Sec.  1.358-6(b)(2), and neither FP nor FS1 made 
adjustments that had the effect of a distribution of property from FS1 
to FP under Sec.  1.367(b)-10(b)(1).
    (B) Analysis--(1) All earnings and profits amount. The F 
reorganization is an asset acquisition described in section 368(a)(1) 
and is thus subject to section 367(b) and this section. Under paragraph 
(b)(3) of this section, USP and USS each must include in income as a 
deemed dividend the all earnings and profits amount with respect to 
their stock of FP. Because there is excess asset basis with respect to 
FP (as determined in paragraph (g)(6)(i)(B)(2) of this section), USP 
and USS must compute the all earnings and profits amounts attributable 
to their stock of FP as if FP had received a distribution of specified 
earnings, immediately before the F reorganization. Because the stock of 
FS2 is indirectly owned by FP, to the extent the specified earnings are 
determined by reference to the earnings and profits of FS2, FS2 is 
treated as making a distribution to FS1 under section 301, and FS1 is 
then treated as making a distribution to FP under section 301 in an 
amount equal to the sum of the amount of specified earnings determined 
by reference to the earnings and profits of FS1 (determined without 
regard to the deemed distribution from FS2) and the amount of the 
deemed distribution received from FS2.
    (2) Excess asset basis. The amount of excess asset basis is $50x, 
calculated as the amount by which FP's inside asset basis ($95x) 
exceeds the sum of FP's earnings and profits ($40x), the aggregate 
basis in the outstanding stock of FP ($5x), and the amount of 
liabilities of FP assumed by US Newco in the F reorganization ($0).
    (3) Deemed distribution of specified earnings. The amount of 
specified earnings equals $50x, the lesser of the following amounts: 
$100x, the sum of the earnings and profits of FS1 and FS2; and $50x, 
the amount of excess asset basis with respect to FP. FP is accordingly 
treated as receiving a distribution of $50x from FS1. Under paragraph 
(g)(3) of this section, $15x ($50x x ($30x/$100x)) of FS1's earnings 
and profits and $35x ($50x x ($70x/$100x)) of FS2's earnings and 
profits are designated as specified earnings. FS2 is treated as 
distributing $35x to FS1. Under sections 301(c)(1) and 954(c)(6), the 
$35x deemed distribution from FS2 to FS1 is treated as a dividend that 
does

[[Page 69573]]

not give rise to foreign personal holding company income. FS1 must 
accordingly increase its earnings and profits described in section 
959(c)(3) by $35x to $65x, and FS2 must decrease its earnings and 
profits described in section 959(c)(3) by the same amount. FS1 is then 
treated as making a distribution of $50x to FP. Under sections 
301(c)(1) and 954(c)(6), the $50x deemed distribution is also treated 
as a dividend that does not give rise to foreign personal holding 
company income. FP must accordingly increase its earnings and profits 
described in section 959(c)(3) by $50x to $90x, and FS1 must decrease 
its earnings and profits described in section 959(c)(3) by the same 
amount.
    (4) Adjusted all earnings and profits amount attributable to USP's 
FP stock. Under paragraph (g)(1) of this section, USP must compute the 
all earnings and profits amount attributable to its stock of FP after 
taking into account the $50x increase to FP's earnings and profits that 
resulted from the deemed distribution of specified earnings. Because 
USP owns 80% of the stock of FP, $40x (calculated as 80% of $50x) of 
the specified earnings are attributable to USP's stock of FP and are 
included in the all earnings and profits amount attributable to USP's 
stock of FP. The all earnings and profits amount that USP must include 
in income as a deemed dividend is therefore $72x ($32x + $40x).
    (5) Adjusted all earnings and profits amount attributable to USS's 
FP stock. Under paragraph (g)(1) of this section, USS must compute the 
all earnings and profits amount attributable to its stock of FP after 
taking into account the $50x increase to FP's earnings and profits that 
resulted from the deemed distribution of specified earnings. Because 
USS owns 20% of the stock of FP, $10x (calculated as 20% of $50x) of 
the specified earnings are attributable to USS's stock of FP and are 
included in the all earnings and profits amount attributable to USS's 
stock of FP. The all earnings and profits amount that USS must include 
in income as a deemed divided is therefore $18x ($8x + $10x).
    (ii) Example 2--(A) Facts. USP, a domestic corporation, owns all of 
the stock of FP, which in turn owns all of the stock of FS. Both FP and 
FS are foreign corporations. The all earnings and profits amount with 
respect to USP's stock of FP, determined before any adjustments 
required by paragraph (g) of this section, is $50x. FP has no other 
earnings and profits other than the $50x that reflect USP's all 
earnings and profits amount. FS has $200x of earnings and profits, all 
of which are earnings and profits described in section 959(c)(2) (PTEP) 
because those earnings and profits gave rise to an earlier income 
inclusion under section 951 with respect to USP. Increases in stock 
basis were made under section 961 by reason of USP's section 951 
inclusion. FP has excess asset basis of $100x as a result of a previous 
transaction that was undertaken with a principal purpose of creating 
excess asset basis in which FS provided $100x of property to FP. In a 
liquidation described in section 332, FP distributes all of its assets 
to USP and the stock of FP is cancelled (the FP liquidation).
    (B) Analysis--(1) All earnings and profits amount. The FP 
liquidation is subject to section 367(b) and this section. Under 
paragraph (b)(3) of this section, USP must include in income as a 
deemed dividend the all earnings and profits amount with respect to its 
stock of FP. Because there is excess asset basis with respect to FP, 
USP must compute the all earnings and profits amount attributable to 
its stock of FP as if FP had received a distribution of specified 
earnings immediately before the FP liquidation.
    (2) Deemed distribution of specified earnings. The amount of 
specified earnings equals $100x, the lesser of the following amounts: 
$200x, the earnings and profits of FS; and $100x, the amount of excess 
asset basis with respect to FP. FS is accordingly treated as making a 
distribution of $100x to FP. Under sections 301(c)(1) and 959(b), the 
$100x deemed distribution from FS to FP is treated as a distribution of 
PTEP that is not included in the gross income of FP for purposes of 
section 951. The distribution reduces FS's earnings and profits and 
PTEP with respect to USP by $100x and increases FP's earnings and 
profits and PTEP with respect to USP by $100x. Furthermore, appropriate 
adjustments are made under section 961 for the distribution of PTEP.
    (3) Adjusted all earnings and profits amount attributable to USP's 
stock of FP. Under paragraph (g)(1) of this section, USP must compute 
the all earnings and profits amount attributable to its stock of FP 
after taking into account the $100x increase to FP's earnings and 
profits that resulted from the deemed distribution of specified 
earnings. Because the deemed distribution consisted entirely of PTEP 
with respect to USP, the deemed distribution does not affect USP's all 
earnings and profits amount of $50x. See Sec.  1.367(b)-2(d)(2)(ii). 
USP must therefore include $50x in income as a deemed dividend under 
this section. USP must also recognize any foreign currency gain or loss 
under section 986(c) with respect to the $100x of PTEP of FP. See Sec.  
1.367(b)-2(j)(2).
    (7) Applicability date--(i) In general. Paragraph (g) of this 
section (other than paragraphs (g)(2)(vii), (g)(3), and (5) of this 
section) applies to transactions completed on or after December 2, 
2016, and to any transactions treated as completed before December 2, 
2016, as a result of an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after December 2, 2016. 
Paragraphs (g)(2)(vii), (g)(3), and (5) of this section apply to 
transactions completed on or after October 5, 2023.
    (ii) Transactions completed (or elections made) on or after 
December 2, 2016, and before October 5, 2023. Except as provided in 
paragraph (g)(7)(iii) of this section, the following definitions (in 
lieu of the corresponding definitions or in addition to the definitions 
in paragraph (g)(2) of this section) and rules apply with respect to 
transactions completed on or after December 2, 2016, and to any 
transactions treated as completed before December 2, 2016, as a result 
of an entity classification election made under Sec.  301.7701-3 of 
this chapter that is filed on or after December 2, 2016, but before 
October 5, 2023:
    (A) The term specified earnings means, with respect to the stock of 
a foreign acquired corporation that is exchanged by an exchanging 
shareholder, the lesser of the following amounts (but not below zero):
    (1) The sum of the earnings and profits (including a deficit) with 
respect to each foreign subsidiary of the foreign acquired corporation 
that are attributable under section 1248(c)(2) to the stock of the 
foreign acquired corporation exchanged (lower-tier earnings). For 
purposes of the preceding sentence, the modifications described in 
Sec.  1.367(b)-2(d)(2) and (d)(3)(i) apply. Thus, for example, the 
amount of the earnings and profits of a foreign subsidiary that are 
attributable to stock of the foreign acquired corporation is determined 
without regard to whether the foreign subsidiary was a controlled 
foreign corporation at any time during the five years preceding the 
inbound nonrecognition transaction.
    (2) The product of the excess asset basis of the foreign acquired 
corporation, multiplied by the exchanging shareholder's specified 
percentage.
    (3) The amount of gain that would be realized by the exchanging 
shareholder if, immediately before the inbound nonrecognition 
transaction, the exchanging shareholder had sold the stock of the 
foreign acquired corporation

[[Page 69574]]

for fair market value, reduced by the exchanging shareholder's all 
earnings and profits amount (for this purpose, determined without 
regard to the modifications described in this paragraph (g)) (specified 
stock gain).
    (B) The term specified percentage means, with respect to an 
exchanging shareholder, a fraction (expressed as a percentage), the 
numerator of which is the sum of the aggregate of the specified stock 
gain with respect to all exchanging shareholders to which Sec.  
1.367(b)-3(b)(3) applies and the aggregate of the gain realized 
(regardless of whether such gain is recognized) with respect to the 
stock exchanged by all other exchanging shareholders.
    (C) If there is excess asset basis with respect to a foreign 
acquired corporation, as determined under paragraph (g)(2)(i) of this 
section, a taxpayer may reduce the excess asset basis to the extent 
that the excess asset basis is not attributable, directly or 
indirectly, to property provided by a foreign subsidiary of the foreign 
acquired corporation. For example, if there was a transfer of property 
to the foreign acquired corporation described in section 362(e)(2), and 
the election described in section 362(e)(2)(C) was made to limit the 
basis in the stock received in the foreign acquired corporation to its 
fair market value, then, for purposes of determining excess asset 
basis, the basis in the stock of the foreign acquiring corporation may 
be determined without regard to the application of section 362(e)(2).
    (iii) Early application. A taxpayer and its related parties (within 
the meaning of sections 267(b) and 707(b)(1)) may choose to apply 
paragraphs (g)(1) through (6) of this section to all open taxable years 
beginning before the date these regulations are filed as final 
regulations in the Federal Register, provided that the taxpayer and its 
related parties consistently apply paragraphs (g)(1) through (6) of 
this section and Sec.  1.367(b)-1(c)(4)(ix) for such years.
0
Par. 6. Section 1.367(b)-4 is amended by:
0
1. In paragraph (a), adding a sentence after the fifth sentence;
0
2. In paragraph (a), removing the language ``paragraph (g)'' in the 
current sixth sentence and adding in its place the language ``paragraph 
(h)'' and removing the language ``paragraph (h)'' in the current 
seventh sentence and adding in its place the language ``paragraph 
(i)'';
0
3. In paragraph (e)(5) Example 2 (ii)(B), removing the language 
``paragraph (g)(1)'' wherever it appears and adding in its place the 
language ``paragraph (h)(1)'';
0
4. In paragraph (f)(3) Example 2 (ii), removing the language 
``paragraph (g)(1)'' wherever it appears and adding in its place the 
language ``paragraph (h)(1)'';
0
5. Redesignating paragraph (h) as paragraph (i);
0
6. Redesignating paragraph (g) as paragraph (h) and adding a new 
paragraph (g);
0
7. Adding a sentence to the end of newly redesignated paragraph (i); 
and
0
8. In newly redesignated paragraph (i), removing the language 
``paragraph (h)'' and adding in its place the language ``paragraph 
(i)'', and removing the language ``paragraphs (f) and (g)(5)'' and 
adding in its place the language ``paragraphs (f) and (h)(5)''.
    The additions read as follows:


Sec.  1.367(b)-4   Acquisition of foreign corporate stock or assets by 
a foreign corporation in certain nonrecognition transactions.

    (a) * * * Paragraph (g) of this section provides rules regarding 
exchanges that occur pursuant to a transaction described in Sec.  
1.367(b)-10(a)(1), without regard to the exceptions in Sec.  1.367(b)-
10(a)(2). * * *
* * * * *
    (g) Income inclusion and gain recognition in exchanges occurring in 
connection with certain triangular reorganizations--(1) Rule. If, in an 
exchange under section 354 or 356 that occurs in connection with a 
transaction described in Sec.  1.367(b)-10, an exchanging shareholder 
exchanges stock or securities of a foreign acquired corporation, then, 
to the extent that the exchanging shareholder receives stock or 
securities of P acquired by S in exchange for property in the P 
acquisition, the shareholder must:
    (i) Include in income as a deemed dividend the section 1248 amount 
attributable to the stock that the shareholder exchanges; and
    (ii) After taking into account the increase in basis in the stock 
provided in Sec.  1.367(b)-2(e)(3)(ii) resulting from the deemed 
dividend (if any), recognize all realized gain with respect to the 
stock or securities that would not otherwise be recognized.
    (2) Special rules and definitions. For the purposes of this 
paragraph (g), an exchanging shareholder is a United States person or 
foreign person that exchanges stock of a foreign acquired corporation 
in a prescribed exchange, regardless of whether such United States 
person is a section 1248 shareholder or such foreign person is a 
foreign corporation in which a United States person is a section 1248 
shareholder. As used in this paragraph (g), the terms P, S, property, 
and P acquisition have the meanings provided in Sec.  1.367(b)-10(a), 
and the term foreign person means a person that is not a United States 
person.
    (3) Example. The following example illustrates the rules of this 
paragraph (g):
    (i) Facts. USP, a domestic corporation, owns all of the stock of FP 
and USS. FP is a foreign corporation that owns all of the stock of FS, 
a foreign corporation. USS is a domestic corporation that owns all of 
the stock of FT, a foreign corporation. USS owns 100 shares of stock of 
FT, which constitutes a single block of stock with a fair market value 
of $100x, an adjusted basis of $20x, and a section 1248 amount of $50x. 
FS has earnings and profits of $60x. A dividend from FS to FP would 
qualify for the exception to foreign personal holding company income 
under section 954(c)(6). FP issues 100 shares of voting stock with a 
fair market value of $100x to FS, $40x of which (the 40-percent FP 
block) is issued in exchange for $40x of newly issued common stock of 
FS and $60x of which (the 60-percent FP block) is issued in exchange 
for $60x of cash. FS acquires all of the stock of FT held by USS solely 
in exchange for the $100x of voting stock of FP (that is, FS exchanges 
both the 40-percent FP block and the 60-percent FP block) in a 
triangular reorganization described in section 368(a)(1)(B) (triangular 
B reorganization).
    (ii) Analysis--(A) Application of Sec.  1.367(b)-10. The triangular 
B reorganization is described in Sec.  1.367(b)-10, and the $60x of 
cash constitutes property under Sec.  1.367(b)-10(a)(3)(ii). Pursuant 
to Sec.  1.367(b)-10(b)(1), adjustments must be made that have the 
effect of a distribution of property in the amount of $60x from FS to 
FP under section 301. The $60x deemed distribution is treated as 
separate from, and occurring immediately before, FS's acquisition of 
the 60-percent FP block used in the triangular B reorganization. The 
$60x deemed distribution from FS to FP results in $60x of dividend 
income to FP under section 301(c)(1) that is not foreign personal 
holding company income under section 954(c)(6).
    (B) Application of paragraph (g) of this section. Pursuant to Sec.  
1.367(a)-3(a)(2)(iv)(B), paragraph (g) of this section applies to $60x 
of the stock of FT (the 60-percent FT block) exchanged for the 60-
percent FP block. Thus, under paragraph (g)(1)(i) of this section, USS 
must include in income a $30x deemed dividend (representing 60 percent 
of USS's $50x section 1248 amount) with

[[Page 69575]]

respect to the 60-percent FT block exchanged for the 60-percent FP 
block. In addition, under paragraph (g)(1)(ii) of this section, USS 
must recognize its realized gain that would not otherwise be recognized 
with respect to the 60-percent FT block. USS's fair market value and 
adjusted basis in the 60-percent FT block are $60x (60 percent of the 
$100x fair market value of the stock of FT) and $12x (60 percent of the 
$20x adjusted basis of the stock of FT), respectively. USS's initial 
built-in gain with respect to the 60-percent FT block is accordingly 
$48x ($60x fair market value less $12x adjusted basis). The $30x deemed 
dividend increases USS's basis in the 60-percent FT block to $42 ($12x 
+ $30x), leaving $18x ($60x-$42x) of built-in gain. USS must therefore 
recognize the remaining $18x of gain with respect to the 60-percent FT 
block.
    (C) Application of paragraph (b) of this section and regulations 
under section 367(a). USS has $32x of built-in gain in the remaining 
$40x of stock of FT (the 40-percent FT block) that USS exchanged for 
the 40-percent FP block, calculated as USS's initial $80 of built-in 
gain in all of its stock of FT less the $48x of initial built-in gain 
attributable to the 60-percent FT block. USS's section 1248 amount in 
the 40-percent FT block is $20x, calculated as 40 percent of USS's $50x 
section 1248 amount. USS does not recognize a deemed dividend of the 
$20x section 1248 amount under paragraph (b) of this section because FT 
remains a controlled foreign corporation with respect to which USS is a 
section 1248 shareholder immediately after the triangular B 
reorganization. Unless USS properly files a gain recognition agreement 
pursuant to Sec. Sec.  1.367(a)-3(b) and 1.367(a)-8, USS recognizes the 
$32x of built-in gain under section 367(a)(1) with respect to the 40-
percent FT block.
* * * * *
    (i) * * * Paragraph (g) of this section applies to transactions 
completed on or after December 2, 2016.
0
Par. 7. Section 1.367(b)-6 is amended by adding paragraphs (a)(1)(v) 
and (vi) to read as follows:


Sec.  1.367(b)-6   Effective/applicability dates and coordination 
rules.

    (a) * * *
    (1) * * *
    (v) Section 1.367(b)-2(j)(2) applies to transactions completed on 
or after October 5, 2023 and to any transactions treated as completed 
before October 5, 2023 as a result of an entity classification election 
made under Sec.  301.7701-3 of this chapter that is filed on or after 
October 5, 2023.
    (vi) Section 1.367(b)-1(c)(2)(vi), (c)(4)(viii), and (c)(4)(ix) 
apply to taxable years ending on or after October 5, 2023. However, a 
taxpayer and its related parties (within the meaning of sections 267(b) 
and 707(b)(1)) may choose to apply the rules referred to in the 
preceding sentence to all open taxable years ending before October 5, 
2023, provided that the taxpayer and its related parties consistently 
apply such rules and Sec.  1.367(b-3(g) for such years.
* * * * *
0
Par. 8. Section 1.367(b)-10 is amended by:
0
1. Adding two sentences to the end of paragraph (a)(1);
0
2. Revising paragraphs (a)(2)(ii) and (iii);
0
3. Removing the language ``and'' at the end of paragraph (a)(3)(ii)(A), 
removing the period at the end of paragraph (a)(3)(ii)(B) and adding 
the language ``; and'' in its place;
0
4. Adding paragraph (a)(3)(ii)(C);
0
5. Removing paragraph (b)(2);
0
6. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(2), 
(3), and (4), respectively;
0
7. Revising newly redesignated paragraph (b)(2);
0
8. Adding two sentences to the end of newly redesignated paragraph 
(b)(3);
0
9. In newly redesignated paragraph (b)(4)(ii), removing the sixth 
sentence, revising the current seventh sentence, and adding two 
sentences at the end of the paragraph; and
0
10. Revising paragraphs (c), (d), and (e).
    The revisions and additions read as follows:


Sec.  1.367(b)-10  Acquisition of parent stock or securities for 
property in triangular reorganizations.

    (a) * * *
    (1) * * * See Sec.  1.367(b)-3(g) for the treatment of certain 
inbound nonrecognition transactions following transactions described in 
this section. See Sec.  1.367(b)-4(g) for rules applicable to certain 
exchanging shareholders that exchange stock of T in connection with a 
transaction described in this section.
    (2) * * *
    (ii) S is a domestic corporation, P is not a controlled foreign 
corporation (within the meaning of Sec.  1.367(b)-2(a)), P's stock in S 
is not a United States real property interest (within the meaning of 
section 897(c)), and the deemed distribution that would result from the 
application of this section would not be treated as a dividend under 
section 301(c)(1) that would be subject to U.S. tax under either 
section 881 (for example, by reason of an applicable treaty or by 
reason of an absence of earnings and profits) or section 882; or
    (iii) In an exchange under section 354 or 356, one or more U.S. 
persons exchange stock or securities of T and the amount of gain in the 
T stock or securities that would otherwise be recognized under section 
367(a)(1) is equal to or greater than the sum of the amount of the 
deemed distribution under this section that would be treated and 
subject to U.S. tax as a dividend under section 301(c)(1) (or would 
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that 
would be subject to U.S. tax) and the amount of such deemed 
distribution that would be treated and subject to U.S. tax as gain from 
the sale or exchange of property under section 301(c)(3) (or would give 
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would 
be subject to U.S. tax) if this section would otherwise apply to the 
triangular reorganization. The exception provided in this paragraph 
(a)(2)(iii) does not apply if T is a foreign corporation. See Sec.  
1.367(a)-3(a)(2)(iv) (providing a similar rule that excludes certain 
transactions from the application of section 367(a)(1)).
    (3) * * *
    (ii) * * *
    (C) Stock of S that is nonqualified preferred stock (as defined in 
section 351(g)(2)).
* * * * *
    (b) * * *
    (2) Timing of deemed distribution. If P controls (within the 
meaning of section 368(c)) S at the time of the P acquisition, the 
adjustments described in paragraph (b)(1) of this section are made as 
if the deemed distribution is a separate transaction occurring 
immediately before the P acquisition. If P does not control (within the 
meaning of section 368(c)) S at the time of the P acquisition, the 
adjustments described in paragraph (b)(1) of this section are made as 
if the deemed distribution is a separate transaction occurring 
immediately after P acquires control of S, but before the 
reorganization.
    (3) * * * Thus, P's adjustment to the basis in its S stock under 
Sec.  1.358-6 is determined as if P provided the P stock or securities 
pursuant to the plan of reorganization, notwithstanding that S acquired 
the P stock or securities in exchange for property in the P 
acquisition. See also Sec.  1.367(b)-13.
    (4) * * *
    (ii) * * * Pursuant to paragraph (b)(2) of this section, the 
adjustment described in paragraph (b)(1) of this section is made as if 
the deemed distribution is a separate transaction occurring immediately 
before FS's purchase of the P stock on the open market. * * *

[[Page 69576]]

US1's transfer of its FT stock in exchange for P stock is subject to 
Sec.  1.367(b)-4(g). If, contrary to the facts in this paragraph 
(b)(4), US1 had built-in gain with respect to its FT stock, then such 
gain would be recognized in accordance with Sec.  1.367(b)-4(g).
    (c) Collateral adjustments. This paragraph (c) provides additional 
rules that apply by reason of the deemed distribution described in 
paragraph (b)(1) of this section. A deemed distribution described in 
paragraph (b)(1) of this section is treated as occurring for all 
purposes of the Internal Revenue Code. Thus, for example, the ordering 
rules of section 301(c) apply to characterize the deemed distribution 
to P as a dividend from the earnings and profits of S, return of stock 
basis, or gain from the sale or exchange of property, as the case may 
be. Furthermore, section 959 may apply to the deemed distribution if S 
is a foreign corporation, and sections 881, 882, 897, 1442, or 1445 may 
apply to the deemed distribution if S is a domestic corporation. 
Appropriate corresponding adjustments must be made to S's earnings and 
profits consistent with the principles of section 312.
    (d) Anti-abuse rule--(1) Rule. Appropriate adjustments must be made 
pursuant to this section if, in connection with a triangular 
reorganization, a transaction is engaged in with a view to avoid the 
purpose of this section. For example, if S is created, organized, or 
funded to avoid the application of this section with respect to the 
earnings and profits of another corporation, the earnings and profits 
of S (or any successor corporation) may be deemed to include the 
earnings and profits of such other corporation (or any successor 
corporation) for purposes of determining the consequences of the 
adjustments provided in this section, and appropriate corresponding 
adjustments may be made to account for the application of this section 
to the earnings and profits of such other corporation (or any successor 
corporation). Adjustments may be made under this paragraph (d) whether 
S is funded before or after a triangular reorganization, and such 
funding may include capital contributions, loans, and distributions. 
The following examples illustrate the application of this paragraph 
(d), the application of which is not limited to the particular 
situations described in the examples.
    (2) Example 1: Deemed increase to S's earnings and profits--(i) 
Facts. FP is a foreign corporation that owns all of the stock of USS, a 
domestic corporation. USS has no assets, liabilities, or earnings and 
profits. FP issues $10x of voting stock to USS in exchange for $10x of 
newly issued stock of USS, and FP also issues $90x of voting stock to 
USS in exchange for a note newly issued by USS with a fair market value 
of $90x (USS note). FP would be subject to U.S. tax under section 881 
on a distribution from USS if, contrary to the facts, USS had earnings 
and profits for purposes of applying section 301(c) to the 
distribution. USS acquires all the stock of UST, a domestic corporation 
that is unrelated to FP and USS, from a foreign person in exchange for 
the $100x of voting stock of FP in a triangular reorganization 
described in section 368(a)(1)(B) (triangular B reorganization). UST 
has $100x of earnings and profits. USS's purchase of the $90x of stock 
of FP in exchange for the USS note in connection with the triangular B 
reorganization is engaged in with a view to avoid the purpose of this 
section.
    (ii) Analysis. Because USS's purchase of the $90x of stock of FP in 
exchange for the USS note is engaged in with a view to avoid the 
purpose of this section, the anti-abuse rule applies and appropriate 
adjustments are made. In particular, for purposes of determining the 
consequences of the deemed distribution provided for in paragraph 
(b)(1) of this section, the earnings and profits of USS are deemed to 
include the earnings and profits of UST. USS is therefore treated as 
having made a deemed distribution equal to $90x, which reflects the 
portion of the stock of FP that USS acquired in exchange for property 
(the USS note). Because USS is deemed to have $100x of earnings and 
profits, the entire $90x deemed distribution is treated as a dividend 
under section 301(c)(1). The deemed distribution is treated as separate 
from, and occurring immediately before, USS's acquisition of the stock 
of FP used in the triangular B reorganization. No adjustments are made 
by FP to the basis in its stock of USS except as provided in Sec.  
1.358-6. Under paragraph (b)(3) of this section, FP's adjustment to the 
basis in its stock of USS under Sec.  1.358-6 is determined as if FP 
provided all $100x of the stock of FP pursuant to the plan of 
reorganization.
    (3) Example 2: Downstream property transfer--(i) Facts. USP is a 
domestic corporation that owns all of the stock of FS1, a foreign 
corporation, FS1 holds a note receivable issued by USP with a fair 
market value of $100x (USP note), and FS1 has more than $100x of 
earnings and profits. USP has no income inclusion under section 
951(a)(1)(B) with respect to the USP note after the application of 
Sec.  1.956-1(a)(2). FS1 forms USS Newco, a domestic corporation, to 
which it transfers the USP note in exchange for voting stock of USS 
Newco. USS Newco then forms FS2 Newco, a foreign corporation, and FS1 
transfers all of its remaining assets (except for its stock in USS 
Newco) to FS2 Newco in exchange for additional voting stock of USS 
Newco in a transaction intended to qualify as a triangular 
reorganization described in section 368(a)(1)(C) (triangular C 
reorganization). FS1 liquidates into USP pursuant to the triangular C 
reorganization, and USP receives the stock of USS Newco held by FS1. 
FS1's transfer of the USP note to USS Newco in connection with the 
intended triangular C reorganization is engaged in with a view to avoid 
the purpose of this section.
    (ii) Analysis. Because FS1's transfer of the USP note to USS Newco 
is in connection with a triangular reorganization and is engaged in 
with a view to avoid the purpose of this section, the anti-abuse rule 
applies and appropriate adjustments are made. FS1's formation of USS 
Newco and transfer of the USP note to USS Newco, together with the 
distribution of the shares of USS Newco pursuant to the liquidation of 
FS1, is treated under the anti-abuse rule as a distribution of $100x, 
consistent with its substance. Accordingly, adjustments are made 
consistent with there having been such a distribution. Because FS1 has 
more than $100x of earnings and profits, the adjustments made are 
consistent with USS Newco having received a $100x dividend from FS1 
separate from, and immediately before, the triangular C reorganization. 
USS Newco must therefore include $100x in gross income as if it had 
received that amount as a dividend and increase its earnings and 
profits by the same amount. FS1 must decrease its earnings and profits 
by $100x. For purposes of determining USS Newco's basis in its stock of 
FS2 Newco, Sec.  1.367(b)-13 applies by treating USS Newco as P (within 
the meaning of Sec.  1.367(b)-13(a)(2)(ii)). Under paragraph (b)(3) of 
this section, USS Newco's adjustment to the basis in its FS2 Newco 
stock under Sec.  1.367(b)-13 is determined as if USS Newco provided 
the stock of USS Newco stock pursuant to the plan of reorganization.
    (4) Example 3: Taxable debt exchange--(i) Facts. USP is a domestic 
corporation that owns all of the stock of FP, a foreign corporation, 
and USS, a domestic corporation. Furthermore, FP owns all of the stock 
of FS, a foreign corporation, and USS owns all of the stock of UST, a 
domestic corporation. FP has no earnings and profits, and FS has more 
than $100x of earnings and

[[Page 69577]]

profits. USP has held its stock in FP for fewer than 365 days and thus 
does not satisfy the requirements of sections 245A and 246(c) with 
respect to dividends received from FP. FS transfers a note issued by FS 
with a fair market value of $100x (FS note) to FP in exchange for $100x 
of voting stock of FP, and FS then uses the stock of FP to acquire all 
of the stock of UST held by USS in a triangular reorganization 
described in section 368(a)(1)(B) (triangular B reorganization). 
Because a dividend from FS to FP would not constitute foreign personal 
holding company income under section 954(c)(6), the taxpayer asserts 
that the exception in paragraph (a)(2)(iii) of this section applies and 
therefore does not make any adjustments pursuant to this section. FP 
then transfers the FS note to USP in exchange for a note issued by USP 
with a fair market value of $100x (USP note). The USP note constitutes 
United States property within the meaning of section 956(c), and USP 
would otherwise have an inclusion under section 951(a)(1)(B) and Sec.  
1.956-1(a)(2) if FP had earnings and profits. FS's transfer of the FS 
note to FP, and FP's subsequent transfer of the FS note to USP in 
connection with the triangular B reorganization, are engaged in with a 
view to avoid the purpose of this section.
    (ii) Analysis. Because the transfers of the FS note are in 
connection with a triangular reorganization and are engaged in with a 
view to avoid the purpose of this section, the anti-abuse rule applies 
and appropriate adjustments are made. FS is therefore treated as having 
made a distribution to FP of $100x, reflecting the value of the stock 
of FP that FS acquired in exchange for property (the FS note). The 
deemed distribution is treated as separate from, and occurring 
immediately before, FS's acquisition of the stock of FP stock used in 
the triangular B reorganization. Because FS has more than $100x of 
earnings and profits, the entire deemed distribution is treated as a 
dividend under section 301(c)(1). The deemed dividend causes FP to 
increase its earnings and profits by $100x but does not constitute 
foreign personal holding company income to FP under section 954(c)(6). 
FP thus has $100x of earnings and profits available to support 
inclusions under section 951(a)(1)(B) in connection with FP's 
subsequent acquisition of the USP note. No adjustments are made by FP 
to the basis in its stock of FS except as provided in Sec.  1.358-6. 
Under paragraph (b)(3) of this section, FP's adjustment to the basis in 
its stock of FS under Sec.  1.358-6 is determined as if FP provided the 
stock of FP pursuant to the plan of reorganization.
    (e) Applicability dates--(1) General rule. This section applies to 
triangular reorganizations occurring on or after May 17, 2011. For 
triangular reorganizations that occur before May 17, 2011, see Sec.  
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.
    (2) Triangular reorganizations completed on or after April 25, 
2014. The following paragraphs apply to triangular reorganizations that 
are completed on or after April 25, 2014, unless T was not related to P 
or S (within the meaning of section 267(b)) immediately before the 
triangular reorganization; the triangular reorganization was entered 
into either pursuant to a written agreement that was (subject to 
customary conditions) binding before April 25, 2014, and at all times 
afterwards, or pursuant to a tender offer announced before April 25, 
2014, that is subject to section 14(d) of the Securities and Exchange 
Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-
1 through 240.14d-101) or that is subject to comparable foreign laws; 
and to the extent the P acquisition that occurs pursuant to the plan of 
reorganization is not completed before April 25, 2014, the P 
acquisition was included as part of the plan before April 25, 2014:
    (i) Paragraph (a)(2)(ii) of this section, to the extent it does not 
apply where P is a controlled foreign corporation, and to the extent it 
relates to dividends that would be subject to U.S. tax;
    (ii) Paragraph (a)(2)(iii) of this section, to the extent it 
relates to amounts that would be subject to U.S. tax or give rise to an 
inclusion under section 951(a)(1)(A) that would be subject to U.S. tax;
    (iii) Paragraph (b)(3) of this section, to the extent it relates to 
P's provision of its stock or securities pursuant to the plan of 
reorganization; and
    (iv) Paragraphs (b) and (c) of this section, to the extent they do 
not reference the rule described in former paragraph (b)(2) of this 
section (relating to the deemed contribution), as contained in 26 CFR 
part 1 revised as of April 1, 2021.
    (3) Transactions completed on or after December 2, 2016. The 
following paragraphs apply to transactions completed on or after 
December 2, 2016:
    (i) Paragraph (a)(2)(iii) of this section, to the extent it does 
not apply where T is a foreign corporation; and
    (ii) Paragraph (a)(3)(ii)(C) of this section.
    (4) Deemed distributions that occurred in taxable years ending 
before November 2, 2020. Former paragraph (c)(1) of this section, as 
contained in 26 CFR part 1 revised as of April 1, 2021, to the extent 
it references section 902, applies to deemed distributions that occur 
in taxable years ending before November 2, 2020.
    (5) Triangular reorganizations completed on or after October 5, 
2023. Paragraph (a)(2)(iii) of this section, to the extent it relates 
to amounts that would give rise to an inclusion under section 951A(a) 
that would be subject to U.S. tax, applies to triangular 
reorganizations that are completed on or after October 5, 2023.
0
Par. 9. Section 1.1248-1 is amended by adding a sentence to the end of 
paragraph (a)(1) to read as follows:


Sec.  1.1248-1  Treatment of gain from certain sales or exchanges of 
stock in certain foreign corporations.

    (a) * * *
    (1) * * * See Sec.  1.1411-10(c)(3) for additional rules concerning 
the application of section 1248 for purposes of section 1411.
* * * * *
0
Par. 10. Section 1.1411-10 is amended by:
0
1. Revising the heading of paragraph (c)(3);
0
2. In paragraph (c)(3), removing the language ``With respect to stock 
of a CFC'' and adding in its place ``With respect to stock of a foreign 
corporation that is a CFC (or that was a CFC at any time during the 5-
year period ending on the date of sale or exchange)'';
0
3. Revising paragraph (c)(3)(i) and the introductory text of paragraph 
(c)(3)(ii);
0
4. Adding paragraph (d)(5); and
0
5. Adding a sentence to the end of paragraph (i).
    The revisions and additions read as follows:


Sec.  1.1411-10   Controlled foreign corporations and passive foreign 
investment companies.

* * * * *
    (c) * * *
    (3) Application of sections 1248 and 367(b). * * *
    (i) In determining the amount of gain recognized on the sale or 
exchange of stock of a foreign corporation under section 1248(a) or the 
amount of gain realized on the exchange of stock of a foreign 
corporation under Sec.  1.367(b)-4 or 1.367(b)-5, basis is determined 
in accordance with the provisions of paragraph (d) of this section; and
    (ii) Section 1248(a), and Sec.  1.367(b)-2(c)(1) and (d)(2)(ii) 
apply without regard to the exclusions for certain

[[Page 69578]]

earnings and profits under section 1248(d)(1) and (d)(6), except that 
those exclusions will apply with respect to the earnings and profits of 
a foreign corporation that are attributable to:
* * * * *
    (d) * * *
    (5) Basis adjustments under section 367(b). With respect to stock 
of a foreign corporation that is exchanged in a transaction subject to 
section 367(b), the portion of the basis increase provided by Sec.  
1.367(b)-2(e)(3)(ii) by reason of paragraph (c)(3)(ii) of this section 
is made solely for purposes of section 1411.
* * * * *
    (i) * * * Paragraph (c)(3) of this section, to the extent it 
references regulations issued under section 367(b), and paragraph 
(d)(5) of this section, apply to transactions completed on or after 
October 5, 2023 and to any transactions treated as completed before 
October 5, 2023 as a result of an entity classification election made 
under Sec.  301.7701-3 of this chapter that is filed on or after 
October 5, 2023.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-22061 Filed 10-5-23; 8:45 am]
BILLING CODE 4830-01-P


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