Federal Register / Vol. 88, No. 193 / Friday, October 6, 2023 / Proposed Rules 69559 

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. 

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cannot be edited or withdrawn.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 publichearings@irs.gov 

(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 


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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 onetime 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 antideferral 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 

§ 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 § 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 § 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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1Certain other shareholders of the foreign 

acquired corporation may be required to recognize 

realized gain with respect to their exchanged stock. 

See § 1.367(b)–3(c)(2). 

announced that regulations would be 

issued to remove the deemed 

contribution rule in § 1.367(b)–10(b)(2) 

and clarify the broad application of the 

anti-abuse rule in § 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 

§ 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 § 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 § 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 twostep 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 § 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 

§ 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 § 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. § 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, § 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 

§ 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 § 1.367(b)–2(d)(3)(ii). 

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 aftertax 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 § 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 aftertax 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 

§ 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 

§ 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 


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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 § 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 § 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 § 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 § 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 


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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 

§ 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 § 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 lowertier 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 § 1.367(b)–3(g)(3). In 

addition, and consistent with 

§ 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 § 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 § 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 § 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 

§ 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 antiabuse 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 § 1.367(b)– 

3 is intended to ensure that a domestic 

acquiring corporation does not succeed 


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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 

§ 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 § 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 § 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 § 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, § 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 § 1.367(b)–3 or the 

section 1248 amount under § 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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 1.367(b)–4, 

or section 355 distributions described in 

§ 1.367(b)–5, could similarly fail to 

preserve the NII tax base because PTEP 

is also excluded from the section 1248 

amount. See § 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 § 1.1411–10(c)(3) such 

that (with respect to stock of a foreign 

corporation for which an election under 

§ 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 § 1.1411– 

10(c)(3)(ii). The proposed regulations 


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2The Treasury Department and the IRS recognize 

that certain rules in § 1.1411–10 involving domestic 

partnerships and certain S corporations have not 

been updated to reflect changes made to the 

application of § 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. 

also would provide for conforming basis 

adjustments for purposes of section 

1411. See proposed § 1.1411–10(d)(5).2

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 

§ 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 

§§ 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. § 1.367(b)–4 and Notice 2016–73 

1. Overview 

Notice 2016–73 announced that 

regulations to be issued under 

§ 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 § 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 § 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 § 1.367(a)– 

3(b)(2), under which transactions that 

could be subject to tax under both 


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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 § 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 § 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 

§ 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 § 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 antiabuse 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 § 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 


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69568 Federal Register / Vol. 88, No. 193 / Friday, October 6, 2023 / Proposed Rules 

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 § 1.367(b)–10(d)(3) (Example 

2). The proposed regulations also would 

add an example illustrating that certain 

debt exchanges may implicate the antiabuse rule. See proposed § 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 antiabuse 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 § 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 § 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 

§ 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 

§ 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 § 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 

§ 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 

§ 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 

§ 1.367(b)–10. See proposed § 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 

§§ 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 

§§ 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 §§ 1.367(b)– 

3(g)(7)(i), 1.367(b)–6(a)(1)(v) and (vi), 

and 1.1411–10(i); see also proposed 

§ 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 § 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 


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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 

§ 1.367(b)–1(c)(4)(viii) and (ix) and 

apply to taxpayers that engage in 

transactions described in § 1.367(b)–3(g) 

or § 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 § 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 § 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 taxpayertype basis rather than a provisionspecific 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 

pra.comments@irs.gov (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. 


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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 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding an entry 

for § 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). 

* * * * * 

■ Par. 2. Section 1.367(a)–3 is amended 

by revising paragraphs (a)(2)(iv) and 

(g)(1)(viii) to read as follows: 

§ 1.367(a)–3 Treatment of transfers of 

stock or securities to foreign corporations. 

(a) * * * 

(2) * * * 

(iv) Certain triangular reorganizations 

described in § 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 § 1.367(b)– 

10(a)(3)(i)) in connection with a 

transaction described in § 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 

§ 1.367(b)–10(a)(2)(iii) (providing a 

similar rule that excludes certain 

transactions from the application of 

§ 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 § 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 

§ 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 

§ 1.367(b)–10(a)). Such exchange of T 

stock or securities is subject to the rules 

under § 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 § 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. 

* * * * * 

■ Par. 3. Section 1.367(b)–1 is amended 

by: 

■ 1. Removing the language ‘‘and’’ at the 

end of paragraph (c)(2)(iv)(B); 

■ 2. Removing the period at the end of 

paragraph (c)(2)(v) and adding the 

language ‘‘; and’’ in its place; 

■ 3. Adding paragraph (c)(2)(vi); 

■ 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)’’; 

■ 5. Revising paragraph (c)(4)(v); 

■ 6. Removing the language ‘‘and’’ at the 

end of paragraph (c)(4)(vi); 

■ 7. Removing the period at the end of 

paragraph (c)(4)(vii)(B) and adding a 

semicolon in its place; and 


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Federal Register / Vol. 88, No. 193 / Friday, October 6, 2023 / Proposed Rules 69571 

■ 8. Adding paragraphs (c)(4)(viii) and 

(ix). 

The additions and revision read as 

follows: 

§ 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 § 1.367(b)–10(a)(1), without 

regard to the exceptions in § 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 

§ 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 § 1.367(b)–3(g) applies, a 

statement describing how any excess 

asset basis (as defined in § 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. 

* * * * * 

■ Par. 4. Section 1.367(b)–2 is amended 

by: 

■ 1. In paragraph (c)(1), adding a 

sentence after the current first sentence; 

■ 2. Adding a sentence to the end of 

paragraph (d)(2)(ii); 

■ 3. In paragraph (d)(3)(ii), removing the 

language ‘‘subsidiaries of’’ and adding 

in its place the language ‘‘corporations 

owned by’’; 

■ 4. Adding a sentence to the end of 

paragraph (d)(3)(ii); 

■ 5. In paragraph (e)(4) Example 2, 

removing the language ‘‘foreign 

subsidiary’’ and adding in its place the 

language ‘‘foreign corporation’’; and 

■ 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 

§ 1.367(b)–3 or 1.367(b)–4’’ and adding 

in its place the language ‘‘exchanges 

stock pursuant to a transaction 

described in § 1.367(b)–3 or § 1.367(b)– 

4(b)(1)(i), (b)(2)(i), (b)(3), (e), or (g)’’. 

The additions read as follows: 

§ 1.367(b)–2 Definitions and special rules. 

* * * * * 

(c) * * * 

(1) * * * But see § 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 § 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 § 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. 

* * * * * 

■ Par. 5. Section 1.367(b)–3 is amended 

by adding paragraph (g) to read as 

follows: 

§ 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 § 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 

§ 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 § 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 § 1.367(b)– 


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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 § 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 § 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 § 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 § 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 × ($30x/$100x)) of FS1’s earnings 

and profits and $35x ($50x × ($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 


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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 § 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 § 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 § 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 § 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 

§ 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 


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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 § 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 § 1.367(b)–1(c)(4)(ix) for 

such years. 

■ Par. 6. Section 1.367(b)–4 is amended 

by: 

■ 1. In paragraph (a), adding a sentence 

after the fifth sentence; 

■ 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)’’; 

■ 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)’’; 

■ 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)’’; 

■ 5. Redesignating paragraph (h) as 

paragraph (i); 

■ 6. Redesignating paragraph (g) as 

paragraph (h) and adding a new 

paragraph (g); 

■ 7. Adding a sentence to the end of 

newly redesignated paragraph (i); and 

■ 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: 

§ 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 § 1.367(b)–10(a)(1), without 

regard to the exceptions in § 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 § 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 § 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 § 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 

§ 1.367(b)–10. The triangular B 

reorganization is described in 

§ 1.367(b)–10, and the $60x of cash 

constitutes property under § 1.367(b)– 

10(a)(3)(ii). Pursuant to § 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 § 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 


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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 builtin 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 §§ 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. 

■ Par. 7. Section 1.367(b)–6 is amended 

by adding paragraphs (a)(1)(v) and (vi) 

to read as follows: 

§ 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 

§ 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 § 1.367(b–3(g) for such years. 

* * * * * 

■ Par. 8. Section 1.367(b)–10 is 

amended by: 

■ 1. Adding two sentences to the end of 

paragraph (a)(1); 

■ 2. Revising paragraphs (a)(2)(ii) and 

(iii); 

■ 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; 

■ 4. Adding paragraph (a)(3)(ii)(C); 

■ 5. Removing paragraph (b)(2); 

■ 6. Redesignating paragraphs (b)(3), (4), 

and (5) as paragraphs (b)(2), (3), and (4), 

respectively; 

■ 7. Revising newly redesignated 

paragraph (b)(2); 

■ 8. Adding two sentences to the end of 

newly redesignated paragraph (b)(3); 

■ 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 

■ 10. Revising paragraphs (c), (d), and 

(e). 

The revisions and additions read as 

follows: 

§ 1.367(b)–10 Acquisition of parent stock 

or securities for property in triangular 

reorganizations. 

(a) * * * 

(1) * * * See § 1.367(b)–3(g) for the 

treatment of certain inbound 

nonrecognition transactions following 

transactions described in this section. 

See § 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 § 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 

§ 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 § 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 § 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. * * * 


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US1’s transfer of its FT stock in 

exchange for P stock is subject to 

§ 1.367(b)–4(g). If, contrary to the facts 

in this paragraph (b)(4), US1 had builtin gain with respect to its FT stock, then 

such gain would be recognized in 

accordance with § 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 § 1.358–6. Under paragraph 

(b)(3) of this section, FP’s adjustment to 

the basis in its stock of USS under 

§ 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 § 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, 

§ 1.367(b)–13 applies by treating USS 

Newco as P (within the meaning of 

§ 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 § 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 


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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 § 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 

§ 1.358–6. Under paragraph (b)(3) of this 

section, FP’s adjustment to the basis in 

its stock of FS under § 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 § 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. 

■ Par. 9. Section 1.1248–1 is amended 

by adding a sentence to the end of 

paragraph (a)(1) to read as follows: 

§ 1.1248–1 Treatment of gain from certain 

sales or exchanges of stock in certain 

foreign corporations. 

(a) * * * 

(1) * * * See § 1.1411–10(c)(3) for 

additional rules concerning the 

application of section 1248 for purposes 

of section 1411. 

* * * * * 

■ Par. 10. Section 1.1411–10 is 

amended by: 

■ 1. Revising the heading of paragraph 

(c)(3); 

■ 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)’’; 

■ 3. Revising paragraph (c)(3)(i) and the 

introductory text of paragraph (c)(3)(ii); 

■ 4. Adding paragraph (d)(5); and 

■ 5. Adding a sentence to the end of 

paragraph (i). 

The revisions and additions read as 

follows: 

§ 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 § 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 § 1.367(b)– 

2(c)(1) and (d)(2)(ii) apply without 

regard to the exclusions for certain 


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69578 Federal Register / Vol. 88, No. 193 / Friday, October 6, 2023 / Proposed Rules 

1Under section 18 of the AIA, the transitional 

program for post-grant review of CBM patents 

sunset on September 16, 2020. AIA 18(a). Although 

the program has sunset, existing CBM proceedings, 

based on petitions filed before September 16, 2020, 

remain pending on appeal at the Federal Circuit 

Court of Appeals. 

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 § 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 

§ 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 

DEPARTMENT OF COMMERCE 

Patent and Trademark Office 

37 CFR Part 43 

[Docket No. PTO–P–2023–0012] 

RIN 0651–AD68 

Rules Governing Pre-Issuance Internal 

Circulation and Review of Decisions 

Within the Patent Trial and Appeal 

Board 

AGENCY: United States Patent and 

Trademark Office, Department of 

Commerce. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The United States Patent and 

Trademark Office (‘‘USPTO’’ or 

‘‘Office’’) proposes regulations to govern 

the pre-issuance circulation and review 

of decisions within the Patent Trial and 

Appeal Board (‘‘PTAB’’ or ‘‘Board’’). 

The Office proposes these provisions to 

refine the current interim process in 

light of stakeholder feedback received in 

response to a Request for Comments 

(RFC). This proposed rule promotes the 

efficient delivery of reliable intellectual 

property rights by promoting consistent, 

clear, and open decision-making 

processes at the PTAB. 

DATES: Comments must be received by 

December 5, 2023 to ensure 

consideration. 

ADDRESSES: Comments must be 

submitted through the Federal 

eRulemaking Portal at 

www.regulations.gov. To submit 

comments via the portal, one should 

enter docket number PTO–P–2023–0012 

on the homepage and select ‘‘search.’’ 

The site will provide search results 

listing all documents associated with 

this docket. Commenters can find a 

reference to this notice and select the 

‘‘comment’’ icon, complete the required 

fields, and enter or attach their 

comments. Attachments to electronic 

comments will be accepted in Adobe®

portable document format (PDF) or 

Microsoft Word® format. Because 

comments will be made available for 

public inspection, information that the 

submitter does not desire to make 

public, such as an address or phone 

number, should not be included in the 

comments. 

Visit the Federal eRulemaking Portal 

for additional instructions on providing 

comments via the portal. If electronic 

submission of, or access to, comments is 

not feasible due to a lack of access to a 

computer and/or the internet, please 

contact the USPTO using the contact 

information below for special 

instructions. 

FOR FURTHER INFORMATION CONTACT: 

Melissa A. Haapala, Vice Chief 

Administrative Patent Judge, or Stacy B. 

Margolies, Lead Administrative Patent 

Judge, 571–272–9797. 

SUPPLEMENTARY INFORMATION: 

Executive Summary 

Purpose: This proposed rule would 

codify processes and standards to 

govern the internal pre-issuance 

circulation and review of decisions 

within the PTAB. 

Since May of 2022, the USPTO has 

been using an interim process for PTAB 

decision circulation and internal PTAB 

review to promote consistent, clear, and 

open decision-making processes at the 

USPTO. The processes were put in 

place to support a consistent and clear 

approach to substantive areas of patent 

law and PTAB-specific procedures, 

while maintaining open decisionmaking processes. The USPTO 

subsequently issued an RFC seeking 

public input on these processes. After 

reviewing feedback received from the 

public in response to the RFC, the 

USPTO now seeks to formalize its 

processes for circulation and review of 

decisions within the PTAB through 

notice-and-comment rulemaking. 

This proposed rule provides that the 

USPTO Director, Deputy Director, and 

Commissioners for Patents and 

Trademarks are not involved, directly or 

indirectly, in the decision making of 

panels of the PTAB prior to issuance of 

a decision by the panel. In addition, no 

employee of the Office external to the 

Board, nor any member of PTAB 

management, is involved, directly or 

indirectly, in panel decision-making 

unless a panel member has requested 

their input. The adoption of any 

feedback received by the panel is 

entirely optional and solely within the 

discretion of the panel. 

This proposed rule also sets forth that, 

if the Office establishes procedures 

governing the internal circulation and 

review of decisions prior to issuance to 

one or more designated members of the 

Board, no management judge shall 

participate in any such review, either 

directly or indirectly. The adoption of 

any feedback received pursuant to such 

review is entirely optional and solely 

within the discretion of the panel. 

Finally, this proposed rule provides 

that decisions of the Board are expected 

to comport with applicable statutes, 

regulations, binding case law, and 

written agency or Board policy or 

guidance, and that there is no unwritten 

agency or Board policy or guidance that 

is binding on any panel of the Board. 

Background 

On September 16, 2011, the America 

Invents Act (AIA) was enacted into law 

(Pub. L. 112–29, 125 Stat. 284 (2011)). 

The AIA established the PTAB, which is 

made up of administrative patent judges 

(APJs) and four statutory members, 

namely the USPTO Director, the USPTO 

Deputy Director, the USPTO 

Commissioner for Patents, and the 

USPTO Commissioner for Trademarks. 

35 U.S.C. 6(a). The PTAB hears and 

decides ex parte appeals of adverse 

decisions by examiners in applications 

for patents; appeals of adverse decisions 

by examiners in reexamination 

proceedings; and proceedings under the 

AIA, including inter partes reviews, 

post grant reviews, covered business 

method (CBM) patent reviews,1 and 

derivation proceedings, in panels of at 

least three members. 35 U.S.C. 6(b), (c). 

Under the statute, the Director 

designates the members of each panel. 

35 U.S.C. 6(c). The Director has 

delegated that authority to the Chief 


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