33550 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

Issued: June 9, 1998.

Kenneth R. Wykle,

Federal Highway Administrator.

[FR Doc. 98–15882 Filed 6–18–98; 8:45 am]

BILLING CODE 4910–22–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 7, and 602

[TD 8770]

RIN Nos. 1545–AP81 and 1545–AI32

Certain Transfers of Stock or

Securities by U.S. Persons to Foreign

Corporations and Related Reporting

Requirements

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document contains

regulations relating to certain transfers

of stock or securities by U.S. persons to

foreign corporations pursuant to the

corporate organization and

reorganization provisions of the Internal

Revenue Code, and the reporting

requirements related to such transfers.

The regulations provide the public with

guidance necessary to comply with the

Tax Reform Act of 1984.

DATES: These regulations are effective

July 20, 1998.

FOR FURTHER INFORMATION CONTACT:

Philip L. Tretiak at (202) 622–3860 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1271. Responses

to these collections of information are

required in order for certain U.S.

shareholders that transfer stock or

securities in section 367(a) exchanges to

qualify for an exception to the general

rule of taxation under section 367(a)(1).

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated burden per respondent

varies from .5 to 8 hours, depending

upon individual circumstances, with an

estimated average of 4 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FS:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On May 16, 1986, temporary and

proposed regulations under sections 367

(a) and (d), and 6038B were published

in the Federal Register (51 FR 17936).

These regulations, which addressed

transfers of stock or securities and other

assets, as well as related reporting

requirements, were published to

provide the public with guidance

necessary to comply with changes made

to the Internal Revenue Code by the Tax

Reform Act of 1984. The IRS and the

Treasury Department later issued Notice

87–85 (1987–2 C.B. 395), which set forth

substantial changes to the 1986

regulations, effective with respect to

transfers of domestic or foreign stock or

securities occurring after December 16,

1987. A further notice of proposed

rulemaking containing rules under

section 367(a) with respect to transfers

of domestic or foreign stock or

securities, as well as section 367(b), was

published in the Federal Register on

August 26, 1991 (56 FR 41993). The

section 367(a) portion of the 1991

proposed regulations was generally

based upon the positions announced in

Notice 87–85, but the regulations

proposed certain modifications to

Notice 87–85, particularly with respect

to transfers of stock or securities of

foreign corporations.

Subsequently, the IRS and the

Treasury Department have issued

guidance focusing on the transfers of

stock or securities of domestic

corporations. Notice 94–46 (1994–1 C.B.

356) announced modifications to the

positions set forth in Notice 87–85 (and

the 1991 proposed regulations) with

respect to transfers of stock or securities

of domestic corporations occurring after

April 17, 1994. Temporary and

proposed regulations (referred to as the

inversion regulations) implementing

Notice 94–46 (with certain

modifications) were published in the

Federal Register on December 26, 1995

(60 FR 66739 and 66771). Final

inversion regulations, published in the

Federal Register on December 27, 1996

(61 FR 61849), generally followed the

rules contained in the temporary

regulations, with modifications.

The final regulations herein address

transfers of foreign stock or securities,

and other matters addressed in the 1991

proposed regulations under section

367(a) that were not addressed in the

1996 final inversion regulations.

In addition, these final regulations

address those portions of the 1991

proposed section 367(b) regulations that

relate to transactions that are subject to

both sections 367 (a) and (b). The

remainder of the 1991 proposed section

367(b) regulations will be finalized at a

later date.

This document also contains final

regulations under section 6038B with

respect to reporting requirements

applicable to transfers of stock or

securities described under section

367(a). Rules regarding outbound

transfers to corporations of assets other

than stock (including intangibles), and

outbound transfers to foreign

partnerships will be addressed in

separate guidance.

Finally, these final regulations

contain a clarification with respect to

the scope of certain outbound transfers

of intangibles that are subject to section

367(d).

Explanation of Provisions

Sections 367 (a) and (b): Introduction

Section 367(a)(1) generally treats a

transfer of property (including stock or

securities) by a U.S. person to a foreign

corporation (an outbound transfer) in an

exchange described in section 332, 351,

354, 356 or 361 as a taxable exchange

unless the transfer qualifies for an

exception to this general rule.

Section 367(a)(2) provides that, except

as provided by regulations, section

367(a)(1) shall not apply to the transfer

of stock or securities of a foreign

corporation which is a party to the

exchange or a party to the

reorganization. Section 367(a)(3)

contains an exception to section

367(a)(1) for certain outbound transfers

of tangible assets other than stock or

securities. Section 367(a)(5) contains

limitations on any exceptions to section

367(a)(1) in certain instances.

Section 367(b) provides that, with

respect to certain nonrecognition

transfers in connection with which

there is no transfer of property

described in section 367(a)(1), a foreign

corporation will retain its status as a

corporation unless regulations provide

otherwise.

These final regulations address

transactions described in both sections
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33551

367 (a) and (b), and are prescribed under

the authority of both sections 367 (a)

and (b).

Stock Transfers Under Sections 367 (a)

and (b): Scope

Outbound transfers of stock that are

subject to section 367(a) may be either

direct (such as an outbound transfer of

stock described under section 351),

indirect (as described below with

respect to certain transfers) or

constructive (such as an outbound stock

transfer that may occur pursuant to a

change in an entity’s classification). See

§ 1.367(a)–3(a) (as amended) for the

general rules regarding the scope of

stock transfers that are subject to section

367(a).

Indirect Stock Transfers: in General

The current temporary regulations

contain illustrative examples of certain

transactions, including triangular

reorganizations described under section

368(a)(1)(A) and either section

368(a)(2)(D) or (E), section 368(a)(1)(B)

or (C), that are treated as indirect stock

transfers subject to section 367(a) where

the acquired company and the acquiring

company are domestic corporations and

the shareholders of the acquired

company receive stock of the acquiring

company’s foreign parent in the

exchange. (Under the terminology used

in the proposed and final regulations, in

the case of a reorganization described in

sections 368(a)(1)(A) and (a)(2)(E), U.S.

shareholders exchange their stock for

stock of the acquired company’s foreign

parent.)

The proposed regulations clarified the

treatment of indirect stock transfers, and

provided extensive examples of the

rules. The proposed regulations

provided that transactions that are

treated as indirect stock transfers

include: (i) successive section 351

exchanges, and (ii) section 368(a)(1)(C)

reorganizations followed by section

368(a)(2)(C) exchanges. In addition, the

reorganizations illustrated under the

existing temporary regulations are also

treated as indirect stock transfers under

the proposed regulations where the

acquired and/or acquiring corporations

are foreign corporations.

The proposed regulations requested

comments as to the scope of the indirect

stock transfer rules. The IRS and the

Treasury Department carefully

considered comments received with

respect to the scope of the indirect stock

transfer rules and have decided to retain

the rules set forth in the proposed

regulations. These rules are contained in

§ 1.367(a)–3(d), and additional examples

are provided in the final regulations.

Indirect Stock Transfer Rules and

Section 367(d)

In the case of a triangular section

368(a)(1)(C) reorganization in which a

U.S. target company (UST) transfers its

assets to a foreign acquiring company

(FA) and UST’s U.S. parent company

(USP) receives stock of FA’s foreign

parent (the transferee foreign

corporation or TFC) in exchange for the

UST stock, the indirect stock transfer

rules and the asset transfer rules will

apply contemporaneously.

If UST is taxable under section 367(a)

with respect to its outbound (section

361) transfer of all or a portion of its

tangible assets (because such assets do

not qualify for an exception to section

367(a)(1)), USP will receive a step up in

the basis of its stock in UST, provided

that USP and UST file a consolidated

Federal income tax return. See § 1.1502–

32. USP will also be deemed to make an

indirect transfer of the stock of UST for

TFC stock. See § 1.367(a)–3(d)(1)(iv).

Thus, if USP receives at least five

percent of either the total value or the

total voting power of the stock of TFC

(i.e., USP is a 5-percent shareholder

(which is also referred to as a 5-percent

transferee shareholder in § 1.367(a)–

3(c)(5)(ii)) and the value of the UST

stock exceeds USP’s basis in UST

(taking into account basis adjustments

relating to the asset transfer), USP may

qualify for nonrecognition treatment by

entering into a gain recognition

agreement (GRA), described below,

provided that the requirements of

§ 1.367(a)–3(c)(1) are satisfied. See, e.g.,

§ 1.367(a)–3(d)(3), Example 7 through

Example 7C.

If the asset transfer involves tangible

assets and the transfer is fully taxable

(so that USP’s basis in its UST stock

equals the value of the UST stock), the

indirect stock transfer would not be

taxable under section 367(a), and,

hence, no GRA would be required. In

contrast, if the assets transferred by UST

include intangibles that are taxable

under section 367(d), the exact manner

in which section 367(d) operates is less

certain.

The regulations under section 367(d)

do not address the tax consequences

when the U.S. transferor goes out of

existence pursuant to the transaction.

The IRS and the Treasury Department

are studying the manner in which the

rules under section 367(d) should

operate when the U.S. transferor goes

out of existence contemporaneously

with (or subsequent to) its outbound

transfer of an intangible. Comments are

requested with respect to this issue.

Transactions Subject to Sections 367(a)

and (b)

An outbound transfer of foreign stock

or securities can be subject to both

sections 367(a) and (b). Pursuant to

section 367(a)(2), § 1.367(a)–3T(b) of the

current temporary regulations provides

that, if an exchange is described in

section 354 or 361, an outbound transfer

of stock or securities of a foreign

corporation that is a party to the

reorganization is not subject to section

367(a). Thus, for example, an outbound

transfer in which a U.S. person

exchanges stock in one controlled

foreign corporation (CFC) for another

CFC that qualifies as a reorganization

under section 368(a)(1)(B) (a B

reorganization), including a transfer that

qualifies as both a B reorganization and

a section 351 exchange, is subject only

to section 367(b), not section 367(a). In

such case, no GRA, described below, is

required under the current temporary

regulations to preserve nonrecognition

treatment. In contrast, an outbound

transfer of foreign stock that qualifies as

a section 351 exchange but not a B

reorganization is currently subject to

only section 367(a), not section 367(b),

and, thus, a GRA may be required to

preserve nonrecognition treatment.

The IRS and the Treasury Department

believe that substantially similar

transactions, such as these, should not

be treated in markedly different

manners. Thus, these final regulations

adopt the approach contained in the

proposed regulations: that all outbound

transfers of foreign stock will be subject

to sections 367(a) and (b) concurrently,

except to the extent that the exchange is

fully taxable under section 367(a)(1).

See § 1.367(a)–3(b)(2).

Sections 367(a) and (b): Exceptions to

Taxation

Once a determination is made that a

particular outbound transfer of stock or

securities is subject to section 367(a),

the next determination is the tax

treatment of such transfer. In general,

the current rules regarding the outbound

transfer of stock or securities under

section 367(a) provide for three different

tax consequences depending upon the

particular facts: (i) certain transfers

retain nonrecognition treatment without

condition, (ii) certain transfers retain

nonrecognition treatment only if the

U.S. transferor enters into a GRA, and

(iii) certain transfers of stock are taxable

to the U.S. transferor under section

367(a)(1) with no option to file a GRA

to secure nonrecognition treatment.

These final regulations retain this

general framework.
33552 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

The current rules governing whether

a taxpayer may qualify for an exception

under section 367(a) in the case of an

outbound transfer of stock are described

in § 1.367(a)–3(c) of the final inversion

regulations (in the case of domestic

stock or securities) and Notice 87–85 (in

the case of foreign stock or securities).

Notice 87–85 provides that in the case

of an outbound transfer of foreign stock

or securities to which section 367(a)

applies, a U.S. transferor may generally

qualify for nonrecognition treatment if it

either (i) is not a 5-percent shareholder,

or (ii) is a 5-percent shareholder but

enters into a GRA for a term of 5 or 10

years, depending upon the TFC stock

owned by all U.S. transferors. Under

current law, a 5-percent shareholder

that qualifies for nonrecognition

treatment under section 367(a) by filing

a GRA agrees that if the TFC disposes

of the stock of the transferred

corporation in a taxable transaction

during the term of the GRA, the 5-

percent shareholder must amend its

return for the year of the transfer and

include in income the amount that it

realized but did not recognize with

respect to the stock of the transferred

corporation, and pay the tax due, plus

interest, on this amount. (Under Notice

87–85, the term of the GRA is 5 years

if all U.S. transferors, in the aggregate,

own less than 50 percent of both the

total voting power and the total value of

the TFC immediately after the transfer,

or 10 years if all U.S. transferors, in the

aggregate, own 50 percent or more of

either the total voting power or the total

value of the TFC immediately after the

transfer.) Although GRAs are currently

used solely with respect to outbound

transfers of stock or securities, the IRS

and the Treasury Department may, at a

later date, permit taxpayers to secure

nonrecognition treatment under section

367(a) with respect to other types of

assets by entering into GRAs.

Notice 87–85, however, provides no

exception to section 367(a)(1) if a U.S.

transferor transfers stock in a CFC in

which it is a United States shareholder

(as defined in § 7.367(b)–2(b) or section

953(c)) but does not receive back stock

in a CFC in which it is a United States

shareholder.

The final regulations, following the

proposed regulations on this point,

provide that a transfer described in the

preceding paragraph, such as a section

351 exchange in which a U.S. transferor

exchanges stock of a CFC in which it is

a United States shareholder for stock of

a non-CFC, is not automatically taxable.

Instead, both sections 367(a) and (b)

apply to the exchange. If the U.S.

transferor is required under section

367(a) to enter into a GRA to preserve

nonrecognition treatment and fails to do

so, the transaction is fully taxable under

section 367(a) (and, as a consequence,

the section 1248 amount that would be

included as a dividend under section

367(b) had a GRA been filed is instead

treated as a dividend under section

1248). If the U.S. transferor is required

to enter into a GRA and properly does

so, the U.S. transferor is required under

section 367(b) to include in income the

section 1248 amount attributable to the

stock exchanged. The amount of the

GRA equals the gain realized on the

transfer less the inclusion under section

367(b). See § 1.367(a)–3(b)(2).

As noted above, Notice 87–85

addressed outbound transfers of both

domestic and foreign stock. The (1996)

final inversion regulations superseded

Notice 87–85 with respect to outbound

transfers of domestic stock. The rules in

Notice 87–85 with respect to outbound

transfers of foreign stock have been

incorporated into these final regulations

with respect to transfers that occur prior

to July 20, 1998. See § 1.367(a)–3(g).

Notice 87–85 will be obsolete when

these final regulations are effective.

Section 367(a): Post-GRA Transactions

Section 1.367(a)–8 provides general

rules regarding terms and conditions

relating to GRAs, and the manner in

which post-GRA transactions impact the

GRA. The general terms and conditions

for GRAs have not changed significantly

from the terms and conditions set forth

in § 1.367(a)–3T(g) of the current

temporary regulations, except that the

final regulations contain an election (the

GRA election), described below, to

permit the taxpayer to include the GRA

amount in income in the year of the

triggering event (with interest on the tax

due from the year of the transfer) rather

than on an amended return for the year

of the initial transfer. In addition, the

final regulations generally follow the

proposed regulations by providing a

more comprehensive explanation of the

manner in which the GRA is affected by

both taxable and nontaxable

dispositions by the U.S. transferor, the

TFC, and the transferred corporation.

The current temporary regulations

provide that the GRA is triggered if (i)

the TFC disposes of all or a portion of

the stock of the transferred corporation,

or (ii) the transferred corporation

disposes of a substantial portion of its

assets. The term substantial portion was

not defined in the regulations.

Both the final and the proposed

regulations use the rule from the current

temporary regulations that a GRA is

triggered to the extent that the TFC

disposes of all or a portion of the stock

of the transferred corporation. The final

regulations also adopt the rule

contained in the proposed regulations

that a GRA is triggered if the transferred

corporation disposes of substantially all

of its assets (within the meaning of

section 368(a)(1)(C)). In addition, the

final regulations provide that a GRA

will be triggered if the U.S. transferor is

either a U.S. citizen or long-term

resident (as defined in section 877(e)(2))

at the time of the initial transfer and

such person ceases to be a U.S. citizen

or long-term resident during the GRA

term.

Under the current temporary

regulations, if a GRA is triggered, the

U.S. transferor must amend its tax

return for the year of the initial transfer,

include in income the gain that was

realized but not recognized, and pay the

tax due thereon with interest. The

proposed regulations would have

maintained the amended return/interest

charge requirement, but requested

comments as to (i) the amount of gain

to be recognized by the U.S. transferor

upon a triggering event, (ii) the year in

which the gain should be included in

the income of the U.S. transferor, and

(iii) whether an interest charge is

appropriate.

A number of commentators have

suggested that the 10-year GRA term

under Notice 87–85 in certain instances

is too restrictive because a disposition of

the stock of the transferred corporation

in year 8, for example, would likely not

be a tax avoidance transfer but the

interest charges would be burdensome

in such case. Other commentators

suggested a deferred income approach

similar to that applicable in the

consolidated return deferred

intercompany context.

In response to these comments, these

final regulations contain two significant

modifications to the current temporary

regulations. First, in conformity with

the final inversion regulations, these

regulations provide that the GRA term

will be 5 years in all cases involving

outbound transfers of foreign stock.

(Moreover, taxpayers may elect to apply

these final regulations to past

transactions so that any 10-year GRA

that is in existence (i.e., has not been

triggered) on July 20, 1998 will be a 5-

year GRA. Thus, the 10-year GRA will

be considered to be a 5-year GRA by the

IRS, and, such GRA will terminate on

the fifth full taxable year following the

close of the taxable year of the initial

transfer.) Second, because the IRS and

the Treasury Department are concerned

that the amended return requirement

can be burdensome to taxpayers in the

event that a GRA is triggered, the final

regulations contain an election (the GRA

election), which must be filed with the
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33553

U.S. transferor’s tax return that includes

the date of the initial transfer, that

permits taxpayers to report a triggering

event in the year of the triggering event

rather than on an amended return for

the year of the initial transfer. (No such

election is available with respect to

GRAs that are in existence when these

final regulations become effective.)

Even if a transferor makes a GRA

election, such person is still required to

extend the statute of limitations, comply

with all of the applicable GRA reporting

requirements (such as filing annual

certifications) and, in the case of a

triggering event, include in income the

GRA amount plus interest in the same

manner as under the current temporary

regulations, except that (i) the GRA

amount and interest would be included

on the U.S. transferor’s tax return for the

year that includes the triggering event,

and (ii) other computations, such as the

section 1248 amount (if any) attributable

to the transferred stock, will be

determined on the triggering date rather

than the date of the initial transfer.

Consistent with the proposed

regulations, the final regulations clarify

that post-GRA nonrecognition

transactions (e.g., nonrecognition

transactions in which the U.S. transferor

transfers the stock of the TFC, the TFC

transfers the stock of the transferred

corporation, or the transferred

corporation transfers substantially all of

its assets) generally do not trigger the

GRA, provided that the U.S. transferor

reports the transaction and amends the

GRA to reflect the post-GRA transaction.

The current temporary regulations do

not provide instances that would cause

the GRA to be terminated (i.e.,

extinguished). The proposed regulations

would have provided that the GRA

would be terminated if either (i) the U.S.

transferor disposed of all of its TFC

stock in a taxable transaction, or (ii) the

transferred company is a U.S. company

that sold substantially all of its assets in

a taxable transaction (but only if the

transferred company was affiliated with

the U.S. transferor under section

1504(a)(2) prior to the initial transfer).

The final regulations retain these two

rules. In addition, the final regulations

also provide that a GRA will be

terminated if (i) the TFC distributes the

stock of the transferred corporation back

to the U.S. transferor in a section 355

exchange, or (ii) the TFC liquidates into

the U.S. transferor under section 332,

provided that, immediately after the

section 355 distribution or section 332

liquidation, the U.S. transferor’s basis in

the transferred stock is less than or

equal to the basis that it had in the

transferred stock immediately prior to

the initial transfer of such stock.

Finally, the current temporary

regulations provide (and the 1991

proposed regulations would have

provided) certain restrictions on

taxpayers’ ability to use net operating

losses and credits to offset the amount

of gain recognized upon the trigger of a

GRA. In response to suggestions from

commentators, the final regulations

remove these restrictions.

Section 367(a) and ‘‘Check-the-Box’’

Rules

The IRS and the Treasury Department

are aware that taxpayers may attempt to

use the entity classification (i.e., checkthe-box) regulations to avoid entering

into GRAs. For example, assume that a

U.S. transferor (USP) owns all of the

stock of two CFCs, CFC1 and CFC2. USP

transfers the stock of CFC2 to CFC1 in

an exchange otherwise described as

both a section 351 exchange and a B

reorganization. USP elects under

§ 301.7701–3(c) to treat CFC2 as a

disregarded entity, and such election is

effective immediately prior to the

transfer.

Provided that the election is

respected, USP would, for Federal

income tax purposes, transfer the assets

(and not the stock) of CFC2 to CFC1 in

a section 351 exchange. If the assets will

be used by CFC1 in the active conduct

of a trade or business outside the United

States, the transfer of the assets by USP

will qualify for the exception contained

in section 367(a)(3) and § 1.367(a)–2T

(as limited by certain provisions,

including §§ 1.367(a)–4T through

1.367(a)–6T). If the assets are disposed

of (either directly by CFC2 or because

the stock of CFC2 is disposed of by

CFC1) in connection with the transfer to

CFC1, the step transaction doctrine may

apply to deny nonrecognition treatment

to the outbound transfer to the extent it

is treated as an asset transfer. In

addition, the active trade or business

exception under § 1.367(a)–2T is

inapplicable if, as part of the same

transaction in which the TFC received

the assets, it disposes of such assets. See

§ 1.367(a)–2T(c). Thus, if USP intended

to sell CFC2 or its business at the time

of the election or the asset transfer, the

transfer would be treated as a taxable

exchange under section 367(a)(1). If the

step transaction doctrine and the active

trade or business anti-avoidance rule do

not apply, however, the use of the

‘‘check-the-box’’ regulations in this

context will not be viewed as

inconsistent with the purposes of

section 367(a), and, therefore, the

transaction will be respected as an asset

transfer.

Section 367(a) and Tax-Motivated

Transactions

The IRS and the Treasury Department

are aware that certain taxpayers have

entered into (or are contemplating)

transactions that are designed to avoid

the inversion regulations under

§ 1.367(a)–3(c). In these transactions

(where a foreign corporation acquires

the stock of a domestic corporation), one

or more U.S. transferors attempt to

avoid taxation under the inversion

regulations by retaining an equity

interest (or receiving a modified equity

interest) in the domestic target

corporation. Such interest, however, is

typically coupled with an interest in the

foreign acquirer, or a right to convert the

interest in the domestic target into stock

of the foreign acquirer.

The IRS and the Treasury Department

are currently scrutinizing these

transactions on a case-by-case basis

using substance over form (or other)

principles, and are studying whether it

is appropriate to issue specific guidance

with respect to these transactions.

Comments are requested as to the

instances in which a U.S. transferor that

receives (or maintains) a stock interest

in the domestic target in circumstances

similar to those described above should

not be treated as having received stock

in the foreign acquirer for purposes of

section 367(a).

Section 367(b)

This document finalizes the 1991

proposed section 367(b) regulations to

the extent necessary to address those

transfers of foreign stock subject to both

sections 367(a) and (b) under the 1991

proposed regulations.

In addition, this document contains a

number of other miscellaneous

provisions, at the request of

commentators.

First, under current law, if a United

States shareholder (defined under

§ 7.367(b)–2(b) as a 10 percent

shareholder of a CFC within the past 5

years) exchanges, under section 351,

stock of a foreign corporation for stock

of a domestic corporation, the U.S.

transferor is not taxable under section

367(b). However, if the transaction

constitutes a section 354 exchange,

under § 7.367(b)–7(c)(1) the United

States shareholder must include in

income the section 1248 amount

attributable to the stock exchanged.

Consistent with the 1991 proposed

regulations as well as the purpose of

these final regulations to harmonize the

Federal income tax consequences of

substantially similar transactions, the

final section 367(b) regulations provide

that a section 1248 inclusion generally
33554 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

is not required in the case of the section

354 exchange described above. (This

result is accomplished by excluding

domestic stock from the categories of

nonqualifying consideration described

in § 1.367(b)–4(b)(1). Thus, these

transfers will generally be respected as

nonrecognition exchanges under

367(b).)

Second, consistent with the principles

of section 367(b), in cases where the

final regulations do not require that the

section 1248 amount be included in

income, the regulations clarify the

appropriate treatment of postreorganization exchanges under section

1248 or 367(b). See § 1.367(b)–4(b)(5).

Third, in an effort to reduce the

reporting burdens of U.S. persons that

make outbound transfers of foreign

stock or securities, the section 367(b)

regulations are amended to provide that,

to the extent that a transaction is

described in both sections 367(a) and

(b), and the exchanging shareholder is

not a United States shareholder of the

corporation whose stock is exchanged,

reporting under section 367(b) is not

required. See § 1.367(b)–1(c).

Finally, the proposed section 367(b)

regulations provided that final

regulations generally would be effective

for exchanges that occur on or after 30

days after the final regulations were

published in the Federal Register.

However, § 1.367(b)–2(d) (relating to the

definition of the all earnings and profits

amount) was proposed to be effective for

transfers occurring on or after August

26, 1991. In response to comments

regarding this provision and its effective

date, a separate notice of proposed

rulemaking is issued with these final

regulations to delete the August 26,

1991, effective date with respect to the

all earnings and profits amount. Thus,

the definition of the all earnings and

profits amount that will be included in

forthcoming section 367(b) final

regulations will apply to exchanges that

occur on or after 30 days after the

issuance of those final regulations.

The IRS and the Treasury Department

will issue guidance at a later date to

address section 367(b) provisions

described in the 1991 proposed

regulations that are not addressed

herein.

Section 6038B: In General

Section 6038B, as enacted under the

Deficit Reduction Act of 1984 (Public

Law 98–369), provided that U.S.

persons that made certain outbound

transfers of property to foreign

corporations were required to report

those transfers in the manner prescribed

by regulations. The penalty for failure to

comply with the regulations was 25

percent of the gain realized on the

exchange, unless the failure was due to

reasonable cause and not to willful

neglect. (The penalty was modified by

the Taxpayer Relief Act of 1997 (TRA

’97).)

Section 1.6038B–1T, promulgated on

May 15, 1986, by TD 8087 (together

with regulations under sections 367(a)

and (d)), provided rules concerning the

information that was required to be

reported under section 6038B with

respect to transfers of property to

foreign corporations.

Section 6038B: Transfers of Stock or

Securities

Section 1.6038B–1T(b)(2)(i) of the

current temporary regulations provides,

inter alia, that no notice is required

under section 6038B with respect to a

transfer of stock or securities described

in § 1.367(a)–3T(f)(1) of the current

temporary regulations. Section 1.367(a)–

3T(f)(1) had provided that an outbound

transfer of stock or securities of a

domestic or foreign corporation was not

taxable under section 367(a)(1) if

immediately after the transfer (i) all U.S.

transferors owned in the aggregate less

than 20 percent of both the total voting

power and the total value of the stock

of the TFC, or (ii) all U.S. transferors

owned in the aggregate 20 percent or

more of either the total voting power or

the total value of the stock of the TFC,

but less than 50 percent of that total

voting power and total value and the

subject U.S. transferor was not a 5-

percent shareholder.

Notice 87–85 superseded the 1986

temporary regulations under section

367(a) (including § 1.367(a)–3T(f)(1))

with respect to the exceptions available

for outbound stock transfers. Notice 87–

85 provided that final regulations would

incorporate the rules contained in the

Notice, for transfers occurring after

December 16, 1987. The exceptions in

the 1986 temporary regulations,

including § 1.367(a)–3T(f)(1) of the

current temporary regulations, were

removed as deadwood (for transfers

occurring after December 16, 1987) by

the 1995 temporary inversion

regulations (TD 8638).

Prior to the issuance of these final

regulations, however, section 6038B had

not been amended with respect to

outbound transfers of stock or securities.

Thus, there was uncertainty whether a

U.S. transferor that qualified under the

inversion regulations or Notice 87–85

for nonrecognition treatment without

filing a GRA (i.e., such U.S. transferor

was not a 5-percent shareholder) was

required to comply with section 6038B.

To reduce the reporting burdens on

U.S. taxpayers that make outbound

transfers of stock subject to section

6038B, the final section 6038B

regulations provide that, with respect to

transfers occurring after December 16,

1987, and before these final regulations

are generally effective, a U.S. transferor

that makes an outbound transfer subject

to section 367(a) will not be subject to

section 6038B with respect to such

transfer if (i) such person was not a 5-

percent shareholder and the transfer

qualified for nonrecognition treatment

under section 367(a), or (ii) such person

was not a 5-percent shareholder in the

case of a taxable transaction but such

person included the gain on its Federal

income tax return for the taxable year

that included the date of the transfer.

With respect to transfers occurring

after these final regulations are effective,

these regulations contain the two

exceptions described above. In addition,

a 5-percent shareholder that is required

to file a GRA is not subject to section

6038B provided that a GRA is properly

filed. Moreover, U.S. transferors that are

taxable on their outbound transfers of

stock or securities (such as under the

inversion regulations or because a 5-

percent shareholder that was eligible to

qualify for nonrecognition treatment

chose not to file a GRA) are not subject

to section 6038B if they properly report

the gain recognized on the transfer on

their tax returns that include the date of

the transfer.

Thus, a U.S. transferor that does not

properly report the gain recognized on

its outbound stock transfer has not met

its section 6038B filing obligation with

respect to such transfer, and will be

subject to the penalty under section

6038B, unless the transferor’s failure to

report the gain from the outbound

transfer was due to reasonable cause

and not willful neglect. Such person

will also be subject to the extended

statute of limitations under section

6501(c)(8).

Section 6038B: Transfers of Cash and

Unappreciated Property

As noted above, prior to the

enactment of TRA ’97, the penalty for

failure to comply with section 6038B

was 25 percent of the gain realized on

the outbound transfer. Thus, in the case

of an outbound transfer of cash or

unappreciated property required to be

reported under section 6038B, no

penalty was imposed upon the failure to

report the transfer.

Pursuant to the TRA ’97, the penalty

for failure to report under section 6038B

is revised from 25 percent of the gain

realized in the property transferred to 10

percent of the fair market value of the

property transferred, but limited to

$100,000 unless the failure to report the
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33555

exchange was due to intentional

disregard. (The final regulations reflect

the modification to the penalty

provision under section 6038B.)

In response to the TRA ’97 change to

the penalty structure under section

6038B, these final regulations clarify

that transfers of unappreciated property

are required to be reported, or the 10

percent penalty will apply. These final

regulations, however, do not require

outbound transfers of cash to be

reported. Rules regarding outbound

transfers of cash will be provided in

future regulations.

Section 6038B: Other Transfers

Pursuant to TRA ’97, certain

outbound transfers to foreign

partnerships are required to be reported

under section 6038B. Rules regarding

outbound transfers to foreign

corporations of assets not covered in

these final regulations (such as

intangibles), and outbound transfers to

foreign partnerships, will be addressed

in separate guidance.

Section 367(d) and Other TRA ’97

Matters

A clarification provides that certain

rules under section 367(a) will also

apply under section 367(d) for purposes

of determining the identity of the

transferor that makes an outbound

transfer of an intangible subject to

section 367(d). Section 367(a)(4) and

§ 1.367(a)–1T(c)(5) provide that, for

purposes of section 367(a), a partnership

is treated as an aggregate in cases where

a U.S. person transfers a partnership

interest or a partnership makes an

outbound transfer of stock (or other

assets).

The IRS and the Treasury Department

believe that the identity of the transferor

has been and must be consistent under

both sections 367(a) and (d).

Consequently, a U.S. person may not

attempt the use of a foreign partnership

as an intermediary (in light of the repeal

of section 1491) for an outbound

transfer of an intangible by a U.S.

person to a foreign corporation to avoid

section 367(d). In the case of a transfer

of an intangible by a partnership to a

foreign corporation that qualifies as a

section 351 exchange, each partner that

is a U.S. person is treated as transferring

its share of the intangible in a transfer

that is subject to section 367(d).

Guidance under TRA ’97 relating to

the repeal of section 1491 may address

situations in which inappropriate

results can be achieved through

transactions facilitated by such repeal.

For example, guidance may address the

appropriate tax consequences when a

U.S. person who is a United States

shareholder of a CFC transfers stock in

the CFC to a foreign partnership, and

immediately after the transfer the

foreign corporation loses its status as a

CFC. Guidance is generally not,

however, expected to require gain

recognition under section 721(c) in

cases where gain is not inappropriately

shifted to foreign persons.

Effective Dates

The final regulations contained herein

are generally effective for transfers

occurring on or after July 20, 1998.

However, taxpayers generally may elect

to apply the final regulations under

§ 1.367(a)–3(b) and (d) to transfers of

foreign stock or securities occurring

after December 17, 1987. A taxpayer that

makes the election must apply section

367(b) and the regulations thereunder to

such transfers. In the case of a transfer

described in section 351, an electing

transferor must apply section 367(b) and

the regulations thereunder as if the

exchange was described in § 7.367(b)–7.

Thus, for example, in a case of a section

351 exchange in which a U.S. person

exchanges stock of a CFC in which it is

a United States shareholder but does

receive back stock of a CFC in which it

is a United States shareholder, the

electing transferor must include in

income the section 1248 amount with

respect to the transferred stock.

Special Analyses

It has been determined that this

regulation is not a significant regulatory

action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It is hereby certified that the

collection of information contained in

this regulation will not have a

significant economic impact on a

substantial number of small entities.

This certification is based upon the fact

that these final regulations generally

reduce the reporting requirements in

comparison with the requirements

contained under current law and the

proposed sections 367(a) and (b)

regulations. For example, the maximum

term of the GRA under section 367(a) is

reduced from 10 to 5 years, thus

eliminating the need for annual

certifications in years 5 through 9.

Moreover, the requirements under

section 6038B have been substantially

revised for outbound transfers of stock

described in section 367(a) so that the

amount of filing required under that

section will be significantly reduced. In

addition, as a general matter, these

regulations will primarily affect large

shareholders and U.S. multinational

corporations with foreign operations.

Thus, a Regulatory Flexibility Analysis

under the Regulatory Flexibility Act (5

U.S.C. chapter 6) is not required.

Drafting Information

The principal author of these

regulations is Philip L. Tretiak of the

Office of Associate Chief Counsel

(International), within the Office of

Chief Counsel, IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects

26 CFR Parts 1 and 7

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 7 and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by revising the

entry for section 1.367(b)–7 and adding

new entries to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.367(a)–3 also issued under 26

U.S.C. 367(a) and (b).

Section 1.367(a)–8 also issued under 26

U.S.C. 367(a) and (b).

Section 1.367(b)–1 also issued under 26

U.S.C. 367(a) and (b). * * *

Section 1.367(b)–4 also issued under 26

U.S.C. 367(a) and (b).

Section 1.367(b)–7 also issued under 26

U.S.C. 367(a) and (b). * * *

Par. 2. Section 1.367(a)–1T is

amended as follows:

1. Paragraph (a), fourth sentence is

amended by removing the reference

‘‘§ 1.367(a)–3T’’ and adding ‘‘§ 1.367(a)–

3’’ in its place.

2. Paragraph (a), last sentence is

amended by removing the reference

‘‘§ 1.6038B–1T’’ and adding

‘‘§§ 1.6038B–1 and 1.6038B–1T’’ in its

place.

3. Paragraph (b)(2)(i) is removed and

reserved.

4. Paragraph (b), the concluding text

immediately following paragraph

(b)(2)(iii) is removed.

5. Paragraph (c)(1), the last sentence is

removed.

6. Paragraph (c)(2) is revised to read

as set forth below.

7. Paragraph (c)(3)(ii)(C), the second

sentence of the concluding text

immediately following paragraph

(c)(3)(ii)(C)(2) is amended by removing

the language ‘‘§ 1.367(a)–3T’’ and

adding ‘‘§ 1.367(a)–3’’ in its place.
33556 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

§ 1.367(a)–1T Transfers to foreign

corporations subject to section 367(a): in

general (temporary).

* * * * *

(c) * * *

(2) Indirect transfers in certain

reorganizations. [Reserved] For further

guidance, see § 1.367(a)–3(d).

* * * * *

Par. 3. Section 1.367(a)–3 is amended

as follows:

1. Paragraphs (a) and (b) are revised.

2. Paragraph (c)(1)(iii)(B) is amended

by removing the reference ‘‘§ 1.367(a)–

3T(g)’’ and adding ‘‘§ 1.367(a)–8’’ in its

place.

3. Revising paragraph (d).

4. Removing paragraphs (e) through

(h) and adding paragraphs (e), (f) and

(g).

The revisions and additions read as

follows:

§ 1.367(a)–3 Treatment of transfers of

stock or securities to foreign corporations.

(a) In general. This section provides

rules concerning the transfer of stock or

securities by a U.S. person to a foreign

corporation in an exchange described in

section 367(a). In general, a transfer of

stock or securities by a U.S. person to

a foreign corporation that is described in

section 351, 354 (including a

reorganization described in section

368(a)(1)(B) and including an indirect

stock transfer described in paragraph (d)

of this section), 356 or section 361(a) or

(b) is subject to section 367(a)(1) and,

therefore, is treated as a taxable

exchange, unless one of the exceptions

set forth in paragraph (b) of this section

(regarding transfers of foreign stock or

securities) or paragraph (c) of this

section (regarding transfers of domestic

stock or securities) applies. However, if

in an exchange described in section 354,

a U.S. person exchanges stock of one

foreign corporation for stock of another

foreign corporation in a reorganization

described in section 368(a)(1)(E), or a

U.S. person exchanges stock of a

domestic corporation for stock of a

foreign corporation pursuant to an asset

reorganization described in section

368(a)(1)(C), (D) or (F) that is not treated

as an indirect stock transfer under

paragraph (d) of this section, such

section 354 exchange is not a transfer to

a foreign corporation subject to section

367(a). See, e.g., paragraph (d)(3)

Example 12. For rules regarding other

indirect or constructive transfers of

stock or securities subject to section

367(a), see § 1.367(a)–1T(c). For

additional rules relating to an exchange

involving a foreign corporation in

connection with which there is a

transfer of stock, see section 367(b) and

the regulations under that section. For

additional rules regarding a transfer of

stock or securities in an exchange

described in section 361(a) or (b), see

section 367(a)(5) and any regulations

under that section. For rules regarding

reporting requirements with respect to

transfers described under section 367(a),

see section 6038B and the regulations

thereunder.

(b) Transfers by U.S. persons of stock

or securities of foreign corporations to

foreign corporations—(1) General rule.

Except as provided in section 367(a)(5),

a transfer of stock or securities of a

foreign corporation by a U.S. person to

a foreign corporation that would

otherwise be subject to section 367(a)(1)

under paragraph (a) of this section shall

not be subject to section 367(a)(1) if

either—

(i) Less than 5-percent shareholder.

The U.S. person owns less than five

percent (applying the attribution rules

of section 318, as modified by section

958(b)) of both the total voting power

and the total value of the stock of the

transferee foreign corporation

immediately after the transfer; or

(ii) 5-percent shareholder. The U.S.

person enters into a five-year gain

recognition agreement with respect to

the transferred stock or securities as

provided in § 1.367(a)–8.

(2) Certain transfers subject to

sections 367(a) and (b)—(i) In general. A

transfer of foreign stock or securities

described in section 367(a) or any

regulations thereunder as well as in

section 367(b) or any regulations

thereunder shall be concurrently subject

to sections 367(a) and (b) and the

regulations thereunder, except to the

extent that the transferee foreign

corporation is not treated as a

corporation under section 367(a)(1). The

example in paragraph (b)(2)(ii) of this

section illustrates the rules of this

paragraph (b)(2). For an illustration of

the interaction of the indirect stock

transfer rules under section 367(a)

(described under paragraph (d) of this

section) and the rules of section 367(b),

see paragraph (d)(3) Example 11 of this

section.

(ii) Example. The following example

illustrates the provisions of this

paragraph (b)(2):

Example. (i) Facts. DC, a domestic

corporation, owns all of the stock of FC1, a

controlled foreign corporation within the

meaning of section 957(a). DC’s basis in the

stock of FC1 is $50, and the value of such

stock is $100. The section 1248 amount with

respect to such stock is $30. FC2, also a

foreign corporation, is owned entirely by

foreign individuals who are not related to DC

or FC1. In a reorganization described in

section 368(a)(1)(B), FC2 acquires all of the

stock of FC1 from DC in exchange for 20

percent of the voting stock of FC2. FC2 is not

a controlled foreign corporation after the

reorganization.

(ii) Result without gain recognition

agreement. Under the provisions of this

paragraph (b), if DC fails to enter into a gain

recognition agreement, DC is required to

recognize in the year of the transfer the $50

of gain that it realized upon the transfer, $30

of which will be treated as a dividend under

section 1248.

(iii) Result with gain recognition

agreement. If DC enters into a gain

recognition agreement under § 1.367(a)–8

with respect to the transfer of FC1 stock, the

exchange will also be subject to the

provisions of section 367(b) and the

regulations thereunder to the extent that it is

not subject to tax under section 367(a)(1). In

such case, DC will be required to recognize

the section 1248 amount of $30 on the

exchange of FC1 for FC2 stock. See

§ 1.367(b)–4(b). The deemed dividend of $30

recognized by DC will increase its basis in

the FC1 stock exchanged in the transaction

and, therefore, the basis of the FC2 stock

received in the transaction. The remaining

gain of $20 realized by DC (otherwise

recognizable under section 367(a)) in the

exchange of FC1 stock will not be recognized

if DC enters into a gain recognition agreement

with respect to the transfer. (The result

would be unchanged if, for example, the

exchange of FC1 stock for FC2 stock qualified

as a section 351 exchange, or as an exchange

described in both sections 351 and

368(a)(1)(B).)

* * * * *

(d) Indirect stock transfers in certain

nonrecognition transfers—(1) In general.

For purposes of this section, a U.S.

person who exchanges, under section

354 (or section 356) stock or securities

in a domestic or foreign corporation for

stock or securities in a foreign

corporation in connection with one of

the following transactions described in

paragraphs (d)(1)(i) through (v) of this

section (or who is deemed to make such

an exchange under paragraph (d)(1)(vi)

of this section) shall be treated as having

made an indirect transfer of such stock

or securities to a foreign corporation

that is subject to the rules of this

section, including, for example, the

requirement, where applicable, that the

U.S. transferor enter into a gain

recognition agreement to preserve

nonrecognition treatment under section

367(a). If the U.S. person exchanges

stock or securities of a foreign

corporation, see also section 367(b) and

the regulations thereunder. For an

example of the concurrent application

of the indirect stock transfer rules under

section 367(a) and the rules of section

367(b), see, e.g., paragraph (d)(3)

Example 11 of this section.

(i) Mergers described in sections

368(a)(1)(A) and (a)(2)(D). A U.S. person

exchanges stock or securities of a

corporation (the acquired corporation)
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33557

for stock or securities of a foreign

corporation that controls the acquiring

corporation in a reorganization

described in sections 368(a)(1)(A) and

(a)(2)(D). See, e.g., paragraph (d)(3)

Example 1 of this section.

(ii) Mergers described in sections

368(a)(1)(A) and (a)(2)(E). A U.S. person

exchanges stock or securities of a

corporation (the acquiring corporation)

for stock or securities in a foreign

corporation that controls the acquired

corporation in a reorganization

described in sections 368(a)(1)(A) and

(a)(2)(E).

(iii) Triangular reorganizations

described in section 368(a)(1)(B). A U.S.

person exchanges stock of the acquired

corporation for voting stock of a foreign

corporation that is in control (as defined

in section 368(c)) of the acquiring

corporation in connection with a

reorganization described in section

368(a)(1)(B). See, e.g., paragraph (d)(3)

Example 4 of this section.

(iv) Triangular reorganizations

described in section 368(a)(1)(C). A U.S.

person exchanges stock or securities of

a corporation (the acquired corporation)

for voting stock or securities of a foreign

corporation that controls the acquiring

corporation in a reorganization

described in section 368(a)(1)(C). See,

e.g., paragraph (d)(3) Example 5 of this

section (for an example of a triangular

section 368(a)(1)(C) reorganization

involving domestic acquired and

acquiring corporations), and paragraph

(d)(3) Example 7 of this section (for an

example involving a domestic acquired

corporation and a foreign acquiring

corporation). If the acquired corporation

is a foreign corporation, see paragraph

(d)(3) Example 11 of this section, and

section 367(b) and the regulations

thereunder.

(v) Reorganizations described in

sections 368(a)(1)(C) and (a)(2)(C). A

U.S. person exchanges stock or

securities of a corporation (the acquired

corporation) for voting stock or

securities of a foreign acquiring

corporation in a reorganization

described in sections 368(a)(1)(C) and

(a)(2)(C) (other than a triangular section

368(a)(1)(C) reorganization described in

paragraph (d)(1)(iv) of this section). In

the case of a reorganization in which

some but not all of the assets of the

acquired corporation are transferred

pursuant to section 368(a)(2)(C), the

transaction shall be considered to be an

indirect transfer of stock or securities

subject to this paragraph (d) only to the

extent of the assets so transferred.

(Other assets shall be treated as having

been transferred in an asset transfer

rather than an indirect stock transfer,

and such asset transfer would be subject

to the other provisions of section 367,

including sections 367(a)(1), (3), (5) and

(d) if the acquired corporation is a

domestic corporation). See, e.g.,

paragraph (d)(3) Example 5B of this

section.

(vi) Successive transfers of property to

which section 351 applies. A U.S.

person transfers property (other than

stock or securities) to a foreign

corporation in an exchange described in

section 351, and all or a portion of such

assets transferred to the foreign

corporation by such person are, in

connection with the same transaction,

transferred to a second corporation that

is controlled by the foreign corporation

in one or more exchanges described in

section 351. For purposes of this

paragraph (d)(1) and § 1.367(a)–8, the

initial transfer by the U.S. person shall

be deemed to be a transfer of stock

described in section 354. (Any assets

transferred to the foreign corporation

that are not transferred by the foreign

corporation to a second corporation

shall be treated as a transfer of assets

subject to the general rules of section

367, including sections 367(a)(1), (3), (5)

and (d), and not as an indirect stock

transfer under the rules of this

paragraph (d).) See, e.g., paragraph

(d)(3) Example 10 and Example 10A of

this section.

(2) Special rules for indirect transfers.

If a U.S. person is considered to make

an indirect transfer of stock or securities

described in paragraph (d)(1) of this

section, the rules of this section and

§ 1.367(a)–8 shall apply to the transfer.

For purposes of applying the rules of

this section and § 1.367(a)–8:

(i) Transferee foreign corporation. The

transferee foreign corporation shall be

the foreign corporation that issues stock

or securities to the U.S. person in the

exchange.

(ii) Transferred corporation. The

transferred corporation shall be the

acquiring corporation, except that in the

case of a triangular section 368(a)(1)(B)

reorganization described in paragraph

(d)(1)(iii) of this section, the transferred

corporation shall be the acquired

corporation; in the case of a triangular

section 368(a)(1)(C) reorganization

described in paragraph (d)(1)(iv) of this

section followed by a section

368(a)(2)(C) transfer or a section

368(a)(1)(C) reorganization followed by

a section 368(a)(2)(C) transfer described

in paragraph (d)(1)(v) of this section, the

transferred corporation shall be the

transferee corporation; and in the case

of successive section 351 transfers

described in paragraph (d)(1)(vi) of this

section, the transferred corporation shall

be the transferee corporation in the final

section 351 transfer. The transferred

property shall be the stock or securities

of the transferred corporation, as

appropriate in the circumstances.

(iii) Amount of gain. The amount of

gain that a U.S. person is required to

include in income in the event of a

disposition (or a deemed disposition) of

some or all of the stock or securities of

the transferred corporation shall be the

proportionate share (as determined

under § 1.367(a)–8(e)) of the U.S.

person’s gain realized but not

recognized in the initial exchange (or

deemed exchange) of stock or securities

under section 354.

(iv) Gain recognition agreements

involving multiple parties. The U.S.

transferor’s agreement to recognize gain,

as provided in § 1.367(a)–8, shall

include appropriate provisions,

consistent with the principles of these

rules, requiring the transferor to

recognize gain in the event of a direct

or indirect disposition of the stock or

assets of the transferred corporation. For

example, in the case of a triangular

section 368(a)(1)(B) reorganization

described in paragraph (d)(1)(iii) of this

section, a disposition of the transferred

stock shall include an indirect

disposition of such stock by the

transferee foreign corporation, such as a

disposition of such stock by the

acquiring corporation or a disposition of

the stock of the acquiring corporation by

the transferee foreign corporation. See,

e.g., paragraph (d)(3) Example 4 of this

section.

(v) Determination of whether the

transferred corporation disposed of

substantially all of its assets. For

purposes of applying § 1.367(a)–

8(e)(3)(i) to determine whether the

transferred corporation has disposed of

substantially all of its assets, the

following assets shall be taken into

account (but only if such assets are not

fully taxable under section 367 in the

taxable year that includes the indirect

transfer)—

(A) In the case of a sections

368(a)(1)(A) and (a)(2)(D)

reorganization, and a triangular section

368(a)(1)(C) reorganization described in

paragraph (d)(1)(i) or (iv) of this section,

respectively, the assets of the acquired

corporation;

(B) In the case of a sections

368(a)(1)(A) and (a)(2)(E) reorganization

described in paragraph (d)(1)(ii) of this

section, the assets of the acquiring

corporation immediately prior to the

transaction;

(C) In the case of a sections

368(a)(1)(C) and (a)(2)(C) reorganization

described in paragraph (d)(1)(v) of this

section, the assets of the acquired

corporation that are subject to a transfer

described in section 368(a)(2)(C); and
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(D) In the case of successive section

351 exchanges described in paragraph

(d)(1)(vi) of this section, the assets that

are both transferred initially to the

foreign corporation, and transferred by

the foreign corporation to a second

corporation.

(vi) Coordination between asset

transfer rules and indirect stock transfer

rules. If, pursuant to any of the

transactions described in paragraph

(d)(1) of this section, a domestic

corporation transfers (or is deemed to

transfer) assets to a foreign corporation

(other than in an exchange described in

section 354), the rules of section 367,

including sections 367(a)(1), (a)(3) and

(a)(5), as well as section 367(d), and the

regulations thereunder shall apply prior

to the application of the rules of this

section. However, if a transaction is

described in this paragraph (d), section

367(a) shall not apply in the case of a

domestic acquired corporation that

transfers its assets to a foreign acquiring

corporation, to the extent that such

assets are re-transferred to a domestic

corporation in a transfer described in

section 368(a)(2)(C) or paragraph

(d)(1)(vi) of this section, but only if the

domestic transferee’s basis in the assets

is no greater than the basis that the

domestic acquired company had in such

assets. See, e.g., paragraph (d)(3)

Example 8 and Example 10A of this

section.

(3) Examples. The rules of this

paragraph (d) and § 1.367(a)–8 are

illustrated by the following examples:

Example 1. Section 368(a)(1)(A)/(a)(2)(D)

reorganization—(i) Facts. F, a foreign

corporation, owns all the stock of Newco, a

domestic corporation. A, a domestic

corporation, owns all of the stock of W, also

a domestic corporation. A and W file a

consolidated Federal income tax return. A

does not own any stock in F (applying the

attribution rules of section 318, as modified

by section 958(b)). In a reorganization

described in sections 368(a)(1)(A) and

(a)(2)(D), Newco acquires all of the assets of

W, and A receives 40% of the stock of F in

an exchange described in section 354.

(ii) Result. Pursuant to paragraph (d)(1)(i)

of this section, the reorganization is subject

to the indirect stock transfer rules. F is

treated as the transferee foreign corporation,

and Newco is treated as the transferred

corporation. Provided that the requirements

of paragraph (c)(1) of this section are

satisfied, including the requirement that A

enter into a five-year gain recognition

agreement as described in § 1.367(a)–8, A’s

exchange of W stock for F stock under

section 354 will not be subject to section

367(a)(1). If F disposes (within the meaning

of § 1.367(a)–8(e)) of all (or a portion) of

Newco’s stock within the five-year term of

the agreement (and A has not made a valid

election under § 1.367(a)–8(b)(1)(vii)), A is

required to file an amended return for the

year of the transfer and include in income,

with interest, the gain realized but not

recognized on the initial section 354

exchange. If A has made a valid election

under § 1.367(a)–8(b)(1)(vii) to include the

amount subject to the gain recognition

agreement in the year of the triggering event,

A would instead include the gain on its tax

return for the taxable year that includes the

triggering event, together with interest.

Example 1A. Transferor is a subsidiary in

consolidated group—(i) Facts. The facts are

the same as in Example 1, except that A is

owned by P, a domestic corporation, and for

the taxable year in which the transaction

occurred, P, A and W filed a consolidated

Federal income tax return.

(ii) Result. Even though A is the U.S.

transferor, P is required under § 1.367(a)–

8(a)(3) to enter into the gain recognition

agreement and comply with the requirements

under § 1.367(a)–8. In the event that A leaves

the P group, A would make the annual

certifications required under § 1.367(a)–

8(b)(5)(ii). P would remain liable with A

under the gain recognition agreement.

Example 2. Taxable inversion pursuant to

indirect stock transfer rules—(i) Facts. The

facts are the same as in Example 1, except

that A receives more than fifty percent of

either the total voting power or the total

value of the stock of F in the transaction.

(ii) Result. A is required to include in

income in the year of the exchange the

amount of gain realized on such exchange.

See paragraph (c)(1)(i) of this section. If A

fails to include the income on its timely-filed

return, A will also be liable for the penalty

under section 6038B (together with interest

and other applicable penalties) unless A’s

failure to include the income is due to

reasonable cause and not willful neglect. See

§ 1.6038B–1(f).

Example 3. Disposition by U.S. transferred

corporation of substantially all of its assets—

(i) Facts. The facts are the same as in

Example 1, except that, during the third year

of the gain recognition agreement, Newco

disposes of substantially all (as described in

§ 1.367(a)–8(e)(3)(i)) of the assets described in

paragraph (d)(2)(v)(A) of this section for cash

and recognizes currently all of the gain

realized on the disposition.

(ii) Result. Under § 1.367(a)–8(e)(3)(i), the

gain recognition agreement is generally

triggered when the transferred corporation

disposes of substantially all of its assets.

However, under the special rule contained in

§ 1.367(a)–8(h)(2), because A and W filed a

consolidated Federal income tax return prior

to the transaction, and Newco, the transferred

corporation, is a domestic corporation, the

gain recognition agreement is terminated and

has no further effect.

Example 4. Triangular section 368(a)(1)(B)

reorganization—(i) Facts. F, a foreign

corporation, owns all the stock of S, a

domestic corporation. U, a domestic

corporation, owns all of the stock of Y, also

a domestic corporation. U does not own any

of the stock of F (applying the attribution

rules of section 318, as modified by section

958(b)). In a triangular reorganization

described in section 368(a)(1)(B) and

paragraph (d)(1)(iii) of this section, S

acquires all the stock of Y, and U receives

10% of the voting stock of F.

(ii) Result. U’s exchange of Y stock for F

stock will not be subject to section 367(a)(1),

provided that all of the requirements of

paragraph (c)(1) are satisfied, including the

requirement that U enter into a five-year gain

recognition agreement. For purposes of this

section, F is treated as the transferee foreign

corporation and Y is treated as the

transferred corporation. See paragraphs

(d)(2)(i) and (ii) of this section. Under

paragraph (d)(2)(iv) of this section, the gain

recognition agreement would be triggered if

F sold all or a portion of the stock of S, or

if S sold all or a portion of the stock of Y.

Example 5. Triangular section 368(a)(1)(C)

reorganization—(i) Facts. F, a foreign

corporation, owns all of the stock of R, a

domestic corporation that operates an

historical business. V, a domestic

corporation, owns all of the stock of Z, also

a domestic corporation. V does not own any

of the stock of F (applying the attribution

rules of section 318 as modified by section

958(b)). In a triangular reorganization

described in section 368(a)(1)(C) (and

paragraph (d)(1)(iv) of this section), R

acquires all of the assets of Z, and V receives

30% of the voting stock of F.

(ii) Result. The consequences of the

transfer are similar to those described in

Example 1; V is required to enter into a 5-

year gain recognition agreement under

§ 1.367(a)–8 to secure nonrecognition

treatment under section 367(a). Under

paragraphs (d)(2)(i) and (ii) of this section, F

is treated as the transferee foreign

corporation and R is treated as the transferred

corporation. In determining whether, in a

later transaction, R has disposed of

substantially all of its assets under

§ 1.367(a)–8(e)(3)(i), see paragraph

(d)(2)(v)(A) of this section.

Example 5A. Section 368(a)(1)(C)

reorganization followed by section

368(a)(2)(C) exchange—(i) Facts. The facts

are the same as in Example 5, except that the

transaction is structured as a section

368(a)(1)(C) reorganization, followed by a

section 368(a)(2)(C) exchange, and R is a

foreign corporation. The following additional

facts are present. Z has 3 businesses:

Business A with a basis of $10 and a value

of $50, Business B with a basis of $10 and

a value of $40, and Business C with a basis

of $10 and a value of $30. V and Z file a

consolidated Federal income tax return and

V has a basis of $30 in the Z stock, which

has a value of $120. Assume that Businesses

A and B consist solely of assets that will

satisfy the section 367(a)(3) active trade or

business exception; none of Business C’s

assets will satisfy the exception. Z transfers

all 3 businesses to F in exchange for 30

percent of the F stock, which Z distributes to

V pursuant to a section 368(a)(1)(C)

reorganization. F then contributes Businesses

B and C to R pursuant to section 368(a)(2)(C).

(ii) Result. The transfer of the Business A

assets by Z to F is subject to the general rules

under section 367, as such transfer does not

constitute an indirect stock transfer. The

transfer by Z of the Business B and C assets

to F must first be tested under sections

367(a)(1), (3) and (5). Z recognizes $20 of gain

on the outbound transfer of the Business C
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assets, as such assets do not qualify for an

exception to section 367(a)(1). The Business

B assets, which will be used by R in an active

trade or business outside the United States,

qualify for the exception under section

367(a)(3) and § 1.367(a)–2T(c)(2). V is

deemed to transfer the stock of Z to F in a

section 354 exchange subject to the rules of

paragraph (d). V must enter into the gain

recognition agreement in the amount of $30

to preserve Z’s nonrecognition treatment

with respect to its transfer of Business B

assets. Under paragraphs (d)(2)(i) and (ii) of

this section, F is the transferee foreign

corporation and R is the transferred

corporation.

Example 5B. Section 368(a)(1)(C)

reorganization followed by section

368(a)(2)(C) exchange with U.S. transferee—

(i) Facts. The facts are the same as in

Example 5A, except that R is a U.S.

corporation.

(ii) Result. As in Example 5A, the

outbound transfer of Business A assets to F

is subject to section 367(a) and is not affected

by the rules of this paragraph (d). The

Business B assets qualified for

nonrecognition treatment; the Business C

assets did not. However, pursuant to

paragraph (d)(2)(vi) of this section, the

Business C assets are not subject to section

367(a)(1), provided that the basis of the assets

in the hands of R is no greater than the basis

of the assets in the hands of Z. V is deemed

to make an indirect transfer under the rules

of this paragraph (d). To preserve

nonrecognition treatment under section

367(a), V must enter into a 5-year gain

recognition agreement in the amount of $50,

the amount of the appreciation in the

Business B and C assets, as the transfer of

such assets by Z were not taxable under

section 367(a)(1) but were treated as an

indirect stock transfer.

Example 6. Triangular section 368(a)(1)(C)

reorganization followed by 351 exchange—(i)

Facts. The facts are the same as in Example

5, except that, during the fourth year of the

gain recognition agreement, R transfers

substantially all of the assets received from

Z to K, a wholly-owned domestic subsidiary

of R, in an exchange described in section 351.

(ii) Result. The disposition by R, the

transferred corporation, of substantially all of

its assets would trigger the gain recognition

agreement if the assets were disposed of in

a taxable transaction. However, because the

assets were transferred in a nonrecognition

transaction, such transfer does not trigger the

gain recognition agreement if V satisfies the

reporting requirements contained in

§ 1.367(a)–8(g)(3)(i) (which includes the

requirement that V amend its gain

recognition agreement to reflect the

transaction). See also paragraph (d)(2)(iv) of

this section. To determine whether

substantially all of the assets are disposed of,

any assets of Z that were transferred by Z to

R and then contributed by R to K are taken

into account.

Example 6A. Triangular section

368(a)(1)(C) reorganization followed by

section 351 exchange with foreign

transferee—(i) Facts. The facts are the same

as in Example 6 except that K is a foreign

corporation.

(ii) Result. This transfer of assets by R to

K must be analyzed to determine its effect

upon the gain recognition agreement, and

such transfer is also an outbound transfer of

assets that is taxable under section 367(a)(1)

unless the active trade or business exception

under section 367(a)(3) applies. If the transfer

is fully taxable under section 367(a)(1), the

transfer is treated as if the transferred

company, R, sold substantially all of its

assets. Thus, the gain recognition agreement

would be triggered (but see § 1.367(a)–

8(b)(3)(ii) for potential offsets to the gain to

be recognized). If each asset transferred

qualifies for nonrecognition treatment under

section 367(a)(3) and the regulations

thereunder (which require, under § 1.367(a)–

2T(a)(2), the transferor to comply with the

reporting requirements under section 6038B),

the result is the same as in Example 6. If a

portion of the assets transferred qualify for

nonrecognition treatment under section

367(a)(3) and a portion are taxable under

section 367(a)(1) (but such portion does not

result in the disposition of substantially all

of the assets), the gain recognition agreement

will not be triggered if such information is

reported as required under § 1.367(a)–8(b)(5)

and (e)(3)(i).

Example 7. Concurrent application of asset

transfer and indirect stock transfer rules in

consolidated return setting—(i) Facts.

Assume the same facts as in Example 5,

except that R is a foreign corporation and V

and Z file a consolidated return for Federal

income tax purposes. The properties of Z

consist of Business A assets, with an adjusted

basis of $50 and fair market value of $90, and

Business B assets, with an adjusted basis of

$50 and a fair market value of $110. Assume

that the Business A assets do not qualify for

the active trade or business exception under

section 367(a)(3), but that the Business B

assets do qualify for the exception. V’s basis

in the Z stock is $100, and the value of such

stock is $200.

(ii) Result. Under paragraph (d)(2)(vi), the

assets of Businesses A and B that are

transferred to R must be tested under sections

367(a)(3) and (a)(5) prior to consideration of

the indirect stock transfer rules of this

paragraph (d). Thus, Z must recognize $40 of

income under section 367(a)(1) on the

outbound transfer of Business A assets.

Under § 1.1502–32, because V and Z file a

consolidated return, V’s basis in its Z stock

increases from $100 to $140 as a result of Z’s

$40 gain. Provided that all of the other

requirements under paragraph (c)(1) of this

section are satisfied, to qualify for

nonrecognition treatment with respect to V’s

indirect transfer of Z stock, V must enter into

a gain recognition agreement in the amount

of $60 (the gain realized but not recognized

by V in the stock of Z after the $40 basis

adjustment). If F sells a portion of its stock

in R during the term of the agreement, V will

be required to recognize a portion of the $60

gain subject to the agreement. To determine

whether R disposes of substantially all of its

assets (under § 1.367(a)–8(e)(3)(i)), only the

Business B assets will be considered (because

the transfer of the Business A assets was

taxable to Z under section 367). See

paragraph (d)(2)(v)(A) of this section.

Example 7A. Concurrent application

without consolidated returns—(i) Facts. The

facts are the same as in Example 7, except

that V and Z do not file consolidated income

tax returns.

(ii) Result. Z would still recognize $40 of

gain on the transfer of its Business A assets,

and the Business B assets would still qualify

for the active trade or business exception

under section 367(a)(3). However, V’s basis

in its stock of Z would not be increased by

the amount of Z’s gain. V’s indirect transfer

of stock will be taxable unless V enters into

a gain recognition agreement (as described in

§ 1.367(a)–8) for the $100 of gain realized but

not recognized with respect to the stock of Z.

Example 7B. Concurrent application with

individual U.S. shareholder—(i) Facts. The

facts are the same as in Example 7, except

that V is an individual U.S. citizen.

(ii) Result. Section 367(a)(5) would prevent

the application of the active trade or business

exception under section 367(a)(3). Thus, Z’s

transfer of assets to R would be fully taxable

under section 367(a)(1). Z would recognize

$100 of income. V’s basis in its stock of Z is

not increased by this amount. V is taxable

with respect to its indirect transfer of its Z

stock unless V enters into a gain recognition

agreement in the amount of the $100, the

gain realized but not recognized with respect

to its Z stock.

Example 7C. Concurrent application with

nonresident alien shareholder—(i) Facts. The

facts are the same as in Example 7, except

that V is a nonresident alien.

(ii) Result. Pursuant to section 367(a)(5),

the active trade or business exception under

section 367(a)(3) is not available with respect

to Z’s transfer of assets to R. Thus, Z has $100

of gain with respect to the Business A and

B assets. Because V is a nonresident alien,

however, V is not subject to section 367(a)

with respect to its indirect transfer of Z stock.

Example 8. Concurrent application with

section 368(a)(2)(C) Exchange—(i) Facts. The

facts are the same as in Example 7, except

that R transfers the Business A assets to M,

a wholly-owned domestic subsidiary of R, in

an exchange described in section

368(a)(2)(C).

(ii) Result. Pursuant to paragraph (d)(2)(vi)

of this section, section 367(a)(1) does not

apply to Z’s transfer of Business A assets to
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R, because such assets are transferred to M,

a domestic corporation. Sections 367(a)(1),

(3) and (5), as well as section 367(d), apply

to Z’s transfer of assets to R to the extent that

such assets are not transferred to M.

However, the Business B assets qualify for an

exception to taxation under section 367(a)(3).

Thus, if the requirements of paragraph (c)(1)

of this section are satisfied, including the

requirement that V enter into a 5-year gain

recognition agreement and comply with the

requirements of § 1.367(a)–8 with respect to

the gain realized on the Z stock, $100, the

entire transaction qualifies for

nonrecognition treatment under section

367(a)(1). See also section 367(a)(5) and any

regulations issued thereunder. Under

paragraphs (d)(2)(i) and (ii) of this section,

the transferee foreign corporation is F and the

transferred corporation is M. Pursuant to

paragraph (d)(2)(iv) of this section, a

disposition by F of the stock of R, or a

disposition by R of the stock of M, will

trigger the gain recognition agreement. To

determine whether substantially all of the

assets have been disposed of (as described

under § 1.367(a)–8(e)(3)(i)), the Business A

assets in M and the Business B assets in R

must both be considered.

Example 9. Concurrent application of

direct and indirect stock transfer rules—(i)

Facts. F, a foreign corporation, owns all of

the stock of O, also a foreign corporation. D,

a domestic corporation, owns all of the stock

of E, also a domestic corporation, which

owns all of the stock of N, also a domestic

corporation. Prior to the transactions

described in this Example 9, D, E and N filed

a consolidated income tax return. D has a

basis of $100 in the stock of E, which has a

fair market value of $160. The N stock has

a fair market value of $100, and E has a basis

of $60 in such stock. In addition to the stock

of N, E owns the assets of Business X. The

assets of Business X have a fair market value

of $60, and E has a basis of $50 in such

assets. Assume that the Business X assets

qualify for nonrecognition treatment under

section 367(a)(3). D does not own any stock

in F (applying the attribution rules of section

318 as modified by section 958(b)). In a

triangular reorganization described in section

368(a)(1)(C) and paragraph (d)(1)(iv) of this

section, O acquires all of the assets of E, and

D exchanges its stock in E for 40% of the

voting stock of F.

(ii) Result. E’s transfer of its assets,

including the N stock, must be tested under

the general rules of section 367(a) before

consideration of D’s indirect transfer of the

stock of E. E’s transfer of the assets of

Business X qualify for nonrecognition under

section 367(a)(3). E could qualify for

nonrecognition treatment with respect to its

transfer of N stock if it enters into a gain

recognition agreement (and all of the

requirements of paragraph (c)(1)(i) of this

section are satisfied); however under

§ 1.367(a)–8(f)(2)(i), D, the parent of the

consolidated group, must enter into the

agreement. O is the transferee foreign

corporation; N is the transferred corporation.

D may also qualify for nonrecognition with

respect to its indirect transfer of the stock of

E if it enters into a separate gain recognition

agreement with respect to the E stock (and all

of the requirements of paragraph (c)(1)(i) of

this section are satisfied). As to this transfer,

F is the transferee foreign corporation; O is

the transferred corporation. The amount of

the gain recognition agreement is $60. See

also section 367(a)(5) and any regulations

issued thereunder.

Example 10. Successive section 351

exchanges—(i) Facts. D, a domestic

corporation, owns all the stock of X, a

controlled foreign corporation that operates

an historical business, which owns all the

stock of Y, a controlled foreign corporation

that also operates an historical business. The

properties of D consist of Business A assets,

with an adjusted basis of $50 and a fair

market value of $90, and Business B assets,

with an adjusted basis of $50 and a fair

market value of $110. Assume that the

Business B assets qualify for the exception

under section 367(a)(3) and § 1.367(a)–

2T(c)(2), but that the Business A assets do not

qualify for the exception. In an exchange

described in section 351, D transfers the

assets of Businesses A and B to X, and, in

connection with the same transaction, X

transfers the assets of Business B to Y in

another exchange described in section 351.

(ii) Result. Under paragraph (d)(1)(vi) of

this section, this transaction is treated as an

indirect stock transfer for purposes of section

367(a), but the transaction is not

recharacterized for purposes of section

367(b). Moreover, under paragraph (d)(2)(vi)

of this section, the assets of Businesses A and

B that are transferred to X must be tested

under section 367(a)(3). The Business A

assets, which were not transferred to Y, are

subject to the general rules of section 367(a),

and not the indirect stock transfer rules

described in this paragraph (d). D must

recognize $40 of income on the outbound

transfer of Business A assets. The transfer of

the Business B assets is subject to both the

asset transfer rules (under section 367(a)(3))

and the indirect stock transfer rules of this

paragraph (d) and § 1.367(a)–8. Thus, D’s

transfer of the Business B assets will not be

subject to section 367(a)(1) if D enters into a

five-year gain recognition agreement with

respect to the stock of Y. Under paragraphs

(d)(2)(i) and (ii) of this section, X will be

treated as the transferee foreign corporation

and Y will be treated as the transferred

corporation for purposes of applying the

terms of the agreement. If X sells all or a

portion of the stock of Y during the term of

the agreement, D will be required to

recognize a proportionate amount of the $60

gain that was realized by D on the initial

transfer of the Business B assets.

Example 10A. Successive section 351

exchanges with ultimate domestic

transferee—(i) Facts. The facts are the same

as in Example 10, except that Y is a domestic

corporation.

(ii) Result. As in Example 10, D must

recognize $40 of income on the outbound

transfer of the Business A assets. Although

the Business B assets qualify for the

exception under section 367(a)(3) (and end

up in U.S. corporate solution, in Y), the $60

of gain realized on the Business B assets is

nevertheless taxable under paragraphs (c)(1)

and (d)(1)(vi) of this section because the

transaction is considered to be a transfer by

D of stock of a domestic corporation, Y, in

which D receives more than 50 percent of the

stock of the transferee foreign corporation, X.

A gain recognition agreement is not

permitted.

Example 11. Concurrent application of

indirect stock transfer rules and section

367(b)—(i) Facts. F, a foreign corporation,

owns all of the stock of Newco, which is also

a foreign corporation. P, a domestic

corporation, owns all of the stock of S, a

foreign corporation that is a controlled

foreign corporation within the meaning of

section 957(a). P’s basis in the stock of S is

$50 and the value of S is $100. The section

1248 amount with respect to S stock is $30.

In a reorganization described in section

368(a)(1)(C) (and paragraph (d)(1)(iv) of this

section), Newco acquires all of the properties

of S, and P exchanges its stock in S for 49

percent of the stock of F.

(ii) Result. P’s exchange of S stock for F

stock under section 354 will be taxable under

section 367(a) (and section 1248 will be

applicable) if P fails to enter into a 5-year

gain recognition agreement in accordance

with § 1.367(a)–8. Under paragraph (b)(2) of

this section, if P enters into a gain

recognition agreement, the exchange will be

subject to the provisions of section 367(b)

and the regulations thereunder as well as

section 367(a). Under § 7.367(b)–7(c)(1)(i) of

this chapter, P must recognize the section

1248 amount of $30 because P exchanged

stock of a controlled foreign corporation, S,

for stock of a foreign corporation that is not

a controlled foreign corporation, F. The

indirect stock transfer rules do not apply

with respect to section 367(b). The deemed

dividend of $30 recognized by P will increase

P’s basis in the F stock received in the

transaction, and F’s basis in the Newco stock.

Thus, the amount of the gain recognition

agreement is $20 ($50 gain realized on the

transfer less the $30 inclusion under section

367(b)). Under paragraphs (d)(2)(i) and (ii) of

this section, F is treated as the transferee

foreign corporation and Newco is the

transferred corporation.

Example 11A. Triangular section

368(a)(1)(C) reorganization involving foreign

acquired corporation—(i) Facts. Assume the

same facts as in Example 11, except that P

receives 51 percent of the stock of F.

(ii) Result. P may still enter into a gain

recognition agreement to avoid taxation

under section 367(a). There is, however, no

inclusion under section 367(b) because P

would be exchanging stock in one controlled

foreign corporation for another. The amount

of the gain recognition agreement is $50. See,

also, § 1.367(b)–4(b)(4).

Example 12. Direct asset reorganization

not subject to stock transfer rules—(i) Facts.

D is a publicly traded domestic corporation.

D’s assets consist of tangible assets, including

stock or securities. In a reorganization

described in section 368(a)(1)(F), D becomes

a foreign corporation, F.

(ii) Result. The reorganization is

characterized under § 1.367(a)–1T(f). D’s

outbound transfer of assets is taxable under

section 367(a)(1). Even if any of D’s assets

would have otherwise qualified for an

exception to section 367(a)(1), section

367(a)(5) provides that no exception can
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33561

apply. The section 368(a)(1)(F) reorganization

is not an indirect stock transfer described in

paragraph (d) of this section. Moreover, the

exchange by D’s shareholders of D stock for

F stock in an exchange described under

section 354 is not an exchange described

under section 367(a). See paragraph (a) of

this section.

(e) Effective dates—(1) In general. The

rules in paragraphs (a), (b) and (d) of

this section apply to transfers occurring

on or after July 20, 1998. The rules in

paragraph (c) of this section with

respect to transfers of domestic stock or

securities are generally applicable for

transfers occurring after January 29,

1997. See § 1.367(a)–3(c)(11). For rules

regarding transfers of domestic stock or

securities after December 16, 1987, and

before January 30, 1997, and transfers of

foreign stock or securities after

December 16, 1987, and before July 20,

1998, see paragraph (g) of this section.

(2) Election. Notwithstanding

paragraphs (e)(1) and (g) of this section,

taxpayers may, by timely filing an

original or amended return, elect to

apply paragraphs (b) and (d) of this

section to all transfers of foreign stock

or securities occurring after December

16, 1987, and before July 20, 1998,

except to the extent that a gain

recognition agreement has been

triggered prior to July 20, 1998. If an

election is made under this paragraph

(e)(2), the provisions of § 1.367(a)–3T(g)

(see 26 CFR part 1, revised April 1,

1998) shall apply, and, for this purpose,

the term substantial portion under

§ 1.367(a)–3T(g)(3)(iii) (see 26 CFR part

1, revised April 1, 1998) shall be

interpreted to mean substantially all as

defined in section 368(a)(1)(C). In

addition, if such an election is made,

the taxpayer must apply the rules under

section 367(b) and the regulations

thereunder to any transfers occurring

within that period as if the election to

apply § 1.367(a)–3(b) and (d) to transfers

occurring within that period had not

been made, except that in the case of an

exchange described in section 351 the

taxpayer must apply section 367(b) and

the regulations thereunder as if the

exchange was described in § 7.367(b)–7

of this chapter. For example, if a U.S.

person, pursuant to a section 351

exchange, transfers stock of a controlled

foreign corporation in which it is a

United States shareholder but does not

receive back stock of a controlled

foreign corporation in which it is a

United States shareholder, the U.S.

person must include in income under

§ 7.367(b)–7 of this chapter the section

1248 amount attributable to the stock

exchanged (to the extent that the fair

market value of the stock exchanged

exceeds its adjusted basis). Such

inclusion is required even though

§ 7.367(b)–7 of this chapter, by its terms,

did not apply to section 351 exchanges.

(f) Former 10-year gain recognition

agreements. If a taxpayer elects to apply

the rules of this section to all prior

transfers occurring after December 16,

1987, any 10-year gain recognition

agreement that remains in effect (has not

been triggered in full) on July 20, 1998

will be considered by the Internal

Revenue Service to be a 5-year gain

recognition agreement with a duration

of five full taxable years following the

close of the taxable year of the initial

transfer.

(g) Transition rules regarding certain

transfers of domestic or foreign stock or

securities after December 16, 1987, and

prior to July 20, 1998—(1) Scope.

Transfers of domestic stock or securities

described under section 367(a) that

occurred after December 16, 1987, and

prior to April 17, 1994, and transfers of

foreign stock or securities described

under section 367(a) that occur after

December 16, 1987, and prior to July 20,

1998 are subject to the rules contained

in section 367(a) and the regulations

thereunder, as modified by the rules

contained in paragraph (g)(2) of this

section. For transfers of domestic stock

or securities described under section

367(a) that occurred after April 17, 1994

and before January 30, 1997, see

Temporary Income Regulations under

section 367(a) in effect at the time of the

transfer (§ 1.367(a)–3T(a) and (c), 26

CFR part 1, revised April 1, 1996) and

paragraph (c)(11) of this section. For

transfers of domestic stock or securities

described under section 367(a) that

occur after January 29, 1997, see

§ 1.367(a)–3(c).

(2) Transfers of domestic or foreign

stock or securities: additional

substantive rules—(i) Rule for less than

5-percent shareholders. Unless

paragraph (g)(2)(iii) of this section

applies (in the case of domestic stock or

securities) or paragraph (g)(2)(iv) of this

section applies (in the case of foreign

stock or securities), a U.S. transferor that

transfers stock or securities of a

domestic or foreign corporation in an

exchange described in section 367(a)

and owns less than 5 percent of both the

total voting power and the total value of

the stock of the transferee foreign

corporation immediately after the

transfer (taking into account the

attribution rules of section 958) is not

subject to section 367(a)(1) and is not

required to enter into a gain recognition

agreement.

(ii) Rule for 5-percent shareholders.

Unless paragraph (g)(2)(iii) or (iv) of this

section applies, a U.S. transferor that

transfers domestic or foreign stock or

securities in an exchange described in

section 367(a) and owns at least 5

percent of either the total voting power

or the total value of the stock of the

transferee foreign corporation

immediately after the transfer (taking

into account the attribution rules under

section 958) may qualify for

nonrecognition treatment by filing a

gain recognition agreement in

accordance with § 1.367(a)–3T(g) in

effect prior to July 20, 1998 (see 26 CFR

part 1, revised April 1, 1998) for a

duration of 5 or 10 years. The duration

is 5 years if the U.S. transferor (5-

percent shareholder) determines that all

U.S. transferors, in the aggregate, own

less than 50 percent of both the total

voting power and the total value of the

transferee foreign corporation

immediately after the transfer. The

duration is 10 years in all other cases.

See, however, § 1.367(a)–3(f). If a 5-

percent shareholder fails to properly

enter into a gain recognition agreement,

the exchange is taxable to such

shareholder under section 367(a)(1).

(iii) Gain recognition agreement

option not available to controlling U.S.

transferor if U.S. stock or securities are

transferred. Notwithstanding the

provisions of paragraph (g)(2)(ii) of this

section, in no event will any exception

to section 367(a)(1) apply to the transfer

of stock or securities of a domestic

corporation where the U.S. transferor

owns (applying the attribution rules of

section 958) more than 50 percent of

either the total voting power or the total

value of the stock of the transferee

foreign corporation immediately after

the transfer (i.e., the use of a gain

recognition agreement to qualify for

nonrecognition treatment is unavailable

in this case).

(iv) Loss of United States shareholder

status in the case of a transfer of foreign

stock. Notwithstanding the provisions of

paragraphs (g)(2)(i) and (ii) of this

section, in no event will any exception

to section 367(a)(1) apply to the transfer

of stock of a foreign corporation in

which the U.S. transferor is a United

States shareholder (as defined in

§ 7.367(b)–2(b) of this chapter or section

953(c)) unless the U.S. transferor

receives back stock in a controlled

foreign corporation (as defined in

section 953(c), section 957(a) or section

957(b)) as to which the U.S. transferor

is a United States shareholder

immediately after the transfer.

§ 1.367(a)–3T [Removed]

Par. 4. Section 1.367(a)–3T is

removed.

Par. 5. Section 1.367(a)–8 is added to

read as follows:
33562 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

§ 1.367(a)–8 Gain recognition agreement

requirements.

(a) In general. This section specifies

the general terms and conditions for an

agreement to recognize gain entered into

pursuant to § 1.367(a)–3(b) or (c) to

qualify for nonrecognition treatment

under section 367(a).

(1) Filing requirements. A transferor’s

agreement to recognize gain (described

in paragraph (b) of this section) must be

attached to, and filed by the due date

(including extensions) of, the

transferor’s income tax return for the

taxable year that includes the date of the

transfer.

(2) Gain recognition agreement forms.

Any agreement, certification, or other

document required to be filed pursuant

to the provisions of this section shall be

submitted on such forms as may be

prescribed therefor by the

Commissioner (or similar statements

providing the same information that is

required on such forms). Until such

time as forms are prescribed, all

necessary filings may be accomplished

by providing the required information to

the Internal Revenue Service in

accordance with the rules of this

section.

(3) Who must sign. The agreement to

recognize gain must be signed under

penalties of perjury by a responsible

officer in the case of a corporate

transferor, except that if the transferor is

a member but not the parent of an

affiliated group (within the meaning of

section 1504(a)(1)), that files a

consolidated Federal income tax return

for the taxable year in which the transfer

was made, the agreement must be

entered into by the parent corporation

and signed by a responsible officer of

such parent corporation; by the

individual, in the case of an individual

transferor (including a partner who is

treated as a transferor by virtue of

§ 1.367(a)–1T(c)(3)); by a trustee,

executor, or equivalent fiduciary in the

case of a transferor that is a trust or

estate; and by a debtor in possession or

trustee in a bankruptcy case under Title

11, United States Code. An agreement

may also be signed by an agent

authorized to do so under a general or

specific power of attorney.

(b) Agreement to recognize gain—(1)

Contents. The agreement must set forth

the following information, with the

heading ‘‘GAIN RECOGNITION

AGREEMENT UNDER § 1.367(a)–8’’,

and with paragraphs labeled to

correspond with the numbers set forth

as follows—

(i) A statement that the document

submitted constitutes the transferor’s

agreement to recognize gain in

accordance with the requirements of

this section;

(ii) A description of the property

transferred as described in paragraph

(b)(2) of this section;

(iii) The transferor’s agreement to

recognize gain, as described in

paragraph (b)(3) of this section;

(iv) A waiver of the period of

limitations as described in paragraph

(b)(4) of this section;

(v) An agreement to file with the

transferor’s tax returns for the 5 full

taxable years following the year of the

transfer a certification as described in

paragraph (b)(5) of this section;

(vi) A statement that arrangements

have been made in connection with the

transferred property to ensure that the

transferor will be informed of any

subsequent disposition of any property

that would require the recognition of

gain under the agreement; and

(vii) A statement as to whether, in the

event all or a portion of the gain

recognition agreement is triggered under

paragraph (e) of this section, the

taxpayer elects to include the required

amount in the year of the triggering

event rather than in the year of the

initial transfer. If the taxpayer elects to

include the required amount in the year

of the triggering event, such statement

must be included with all of the other

information required under this

paragraph (b), and filed by the due date

(including extensions) of the transferor’s

income tax return for the taxable year

that includes the date of the transfer.

(2) Description of property

transferred—(i) The agreement shall

include a description of each property

transferred by the transferor, an estimate

of the fair market value of the property

as of the date of the transfer, a statement

of the cost or other basis of the property

and any adjustments thereto, and the

date on which the property was

acquired by the transferor.

(ii) If the transferred property is stock

or securities, the transferor must

provide the information contained in

paragraphs (b)(2)(ii)(A) through (F) of

this section as follows—

(A) The type or class, amount, and

characteristics of the stock or securities

transferred, as well as the name,

address, and place of incorporation of

the issuer of the stock or securities, and

the percentage (by voting power and

value) that the stock (if any) represents

of the total stock outstanding of the

issuing corporation;

(B) The name, address and place of

incorporation of the transferee foreign

corporation, and the percentage of stock

(by voting power and value) that the

U.S. transferor received or will receive

in the transaction;

(C) If stock or securities are

transferred in an exchange described in

section 361(a) or (b), a statement that the

conditions set forth in the second

sentence of section 367(a)(5) and any

regulations under that section have been

satisfied, and an explanation of any

basis or other adjustments made

pursuant to section 367(a)(5) and any

regulations thereunder;

(D) If the property transferred is stock

or securities of a domestic corporation,

the taxpayer identification number of

the domestic corporation whose stock or

securities were transferred, together

with a statement that all of the

requirements of § 1.367(a)–3(c)(1) are

satisfied;

(E) If the property transferred is stock

or securities of a foreign corporation, a

statement as to whether the U.S.

transferor was a United States

shareholder (a U.S. transferor that

satisfies the ownership requirements of

section 1248(a)(2) or (c)(2)) of the

corporation whose stock was

exchanged, and, if so, a statement as to

whether the U.S. transferor is a United

States shareholder with respect to the

stock received, and whether any

reporting requirements contained in

regulations under section 367(b) are

applicable, and, if so, whether they have

been satisfied; and

(F) If the transaction involved the

transfer of assets other than stock or

securities and the transaction was

subject to the indirect stock transfer

rules of § 1.367(a)–3(d), a statement as to

whether the reporting requirements

under section 6038B have been satisfied

with respect to the transfer of property

other than stock or securities, and an

explanation of whether gain was

recognized under section 367(a)(1) and

whether section 367(d) was applicable

to the transfer of such assets, or whether

any tangible assets qualified for

nonrecognition treatment under section

367(a)(3) (as limited by section 367(a)(5)

and §§ 1.367(a)–4T, 1.367(a)–5T and

1.367(a)–6T).

(3) Terms of agreement—(i) General

rule. If prior to the close of the fifth full

taxable year (i.e., not less than 60

months) following the close of the

taxable year of the initial transfer, the

transferee foreign corporation disposes

of the transferred property in whole or

in part (as described in paragraphs (e)(1)

and (2) of this section), or is deemed to

have disposed of the transferred

property (under paragraph (e)(3) of this

section), then, unless an election is

made in paragraph (b)(1)(vii) of this

section, by the 90th day thereafter the

U.S. transferor must file an amended

return for the year of the transfer and

recognize thereon the gain realized but
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33563

not recognized upon the initial transfer,

with interest. If an election under

paragraph (b)(1)(vii) of this section was

made, then, if a disposition occurs, the

U.S. transferor must include the gain

realized but not recognized on the

initial transfer in income on its Federal

income tax return for the period that

includes the date of the triggering event.

In accordance with paragraph (b)(3)(iii)

of this section, interest must be paid on

any additional tax due. (If a taxpayer

properly makes the election under

paragraph (b)(1)(vii) of this section but

later fails to include the gain realized in

income, the Commissioner may, in his

discretion, include the gain in the

taxpayer’s income in the year of the

initial transfer.)

(ii) Offsets. No special limitations

apply with respect to net operating

losses, capital losses, credits against tax,

or similar items.

(iii) Interest. If additional tax is

required to be paid, then interest must

be paid on that amount at the rates

determined under section 6621 with

respect to the period between the date

that was prescribed for filing the

transferor’s income tax return for the

year of the initial transfer and the date

on which the additional tax for that year

is paid. If the election in paragraph

(b)(1)(vii) of this section is made,

taxpayers should enter the amount of

interest due, labelled as ‘‘sec. 367

interest’’ at the bottom right margin of

page 1 of the Federal income tax return

for the period that includes the date of

the triggering event (page 2 if the

taxpayer files a Form 1040), and include

the amount of interest in their payment

(or reduce the amount of any refund due

by the amount of the interest). If the

election in paragraph (b)(1)(vii) of this

section is made, taxpayers should, as a

matter of course, include the amount of

gain as taxable income on their Federal

income tax returns (together with other

income or loss items). The amount of

tax relating to the gain should be

separately stated at the bottom right

margin of page 1 of the Federal income

tax return (page 2 if the taxpayer files a

Form 1040), labelled as ‘‘sec. 367 tax.’’

(iv) Basis adjustments—(A)

Transferee. If a U.S. transferor is

required to recognize gain under this

section on the disposition by the

transferee foreign corporation of the

transferred property, then in

determining for U.S. income tax

purposes any gain or loss recognized by

the transferee foreign corporation upon

its disposition of such property, the

transferee foreign corporation’s basis in

such property shall be increased (as of

the date of the initial transfer) by the

amount of gain required to be

recognized (but not by any tax or

interest required to be paid on such

amount) by the U.S. transferor. In the

case of a deemed disposition of the

stock of the transferred corporation

described in paragraph (e)(3)(i) of this

section, the transferee foreign

corporation’s basis in the transferred

stock deemed disposed of shall be

increased by the amount of gain

required to be recognized by the U.S.

transferor.

(B) Transferor. If a U.S. transferor is

required to recognize gain under this

section, then the U.S. transferor’s basis

in the stock of the transferee foreign

corporation shall be increased by the

amount of gain required to be

recognized (but not by any tax or

interest required to be paid on such

amount).

(C) Other adjustments. Other

appropriate adjustments to basis that are

consistent with the principles of this

paragraph (b)(3)(iv) may be made if the

U.S. transferor is required to recognize

gain under this section.

(D) Example. The principles of this

paragraph (b)(3) are illustrated by the

following example:

Example—(i) Facts. D, a domestic

corporation owning 100 percent of the stock

of S, a foreign corporation, transfers all of the

S stock to F, a foreign corporation, in an

exchange described in section 368(a)(1)(B).

The section 1248 amount with respect to the

S stock is $0. In the exchange, D receives 20

percent of the voting stock of F. All of the

requirements of § 1.367(a)–3(c)(1) are

satisfied, and D enters into a five-year gain

recognition agreement to qualify for

nonrecognition treatment and does not make

the election contained in paragraph (b)(1)(vii)

of this section. One year after the initial

transfer, F transfers all of the S stock to F1

in an exchange described in section 351, and

D complies with the requirements of

paragraph (g)(2) of this section. Two years

after the initial transfer, D transfers its entire

20 percent interest in F’s voting stock to a

domestic partnership in exchange for an

interest in the partnership. Three years after

the initial exchange, S disposes of

substantially all (as described in paragraph

(e)(3)(i) of this section) of its assets in a

transaction that would be taxable under U.S.

income tax principles, and D is required by

the terms of the gain recognition agreement

to recognize all the gain that it realized on

the initial transfer of the stock of S.

(ii) Result. As a result of this gain

recognition and paragraph (b)(3)(iv) of this

section, D is permitted to increase its basis

in the partnership interest by the amount of

gain required to be recognized (but not by

any tax or interest required to be paid on

such amount), the partnership is permitted to

increase its basis in the 20 percent voting

stock of F, F is permitted to increase its basis

in the stock of F1, and F1 is permitted to

increase its basis in the stock of S. S,

however, is not permitted to increase its basis

in its assets for purposes of determining the

direct or indirect U.S. tax results, if any, on

the sale of its assets.

(4) Waiver of period of limitation. The

U.S. transferor must file, with the

agreement to recognize gain, a waiver of

the period of limitation on assessment

of tax upon the gain realized on the

transfer. The waiver shall be executed

on Form 8838 (Consent to Extend the

Time to Assess Tax Under Section

367—Gain Recognition Agreement) and

shall extend the period for assessment

of such tax to a date not earlier than the

eighth full taxable year following the

taxable year of the transfer. Such waiver

shall also contain such other terms with

respect to assessment as may be

considered necessary by the

Commissioner to ensure the assessment

and collection of the correct tax liability

for each year for which the waiver is

required. The waiver must be signed by

a person who would be authorized to

sign the agreement pursuant to the

provisions of paragraph (a)(3) of this

section.

(5) Annual certification—(i) In

general. The U.S. transferor must file

with its income tax return for each of

the five full taxable years following the

taxable year of the transfer a

certification that the property

transferred has not been disposed of by

the transferee in a transaction that is

considered to be a disposition for

purposes of this section, including a

disposition described in paragraph (e)(3)

of this section. The U.S. transferor must

include with its annual certification a

statement describing any taxable

dispositions of assets by the transferred

corporation that are not in the ordinary

course of business. The annual

certification pursuant to this paragraph

(b)(5) must be signed under penalties of

perjury by a person who would be

authorized to sign the agreement

pursuant to the provisions of paragraph

(a)(3) of this section.

(ii) Special rule when U.S. transferor

leaves its affiliated group. If, at the time

of the initial transfer, the U.S. transferor

was a member of an affiliated group

(within the meaning of section

1504(a)(1)) filing a consolidated Federal

income tax return but not the parent of

such group, the U.S. transferor will file

the annual certification (and provide a

copy to the parent corporation) if it

leaves the group during the term of the

gain recognition agreement,

notwithstanding the fact that the parent

entered into the gain recognition

agreement, extended the statute of

limitations pursuant to this section, and

remains liable (with other corporations

that were members of the group at the

time of the initial transfer) under the
33564 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

gain recognition agreement in the case

of a triggering event.

(c) Failure to comply—(1) General

rule. If a person that is required to file

an agreement under paragraph (b) of this

section fails to file the agreement in a

timely manner, or if a person that has

entered into an agreement under

paragraph (b) of this section fails at any

time to comply in any material respect

with the requirements of this section or

with the terms of an agreement

submitted pursuant hereto, then the

initial transfer of property is described

in section 367(a)(1) (unless otherwise

excepted under the rules of this section)

and will be treated as a taxable

exchange in the year of the initial

transfer (or in the year of the failure to

comply if the agreement was filed with

a timely-filed (including extensions)

original (not amended) return and an

election under paragraph (b)(1)(vii) of

this section was made). Such a material

failure to comply shall extend the

period for assessment of tax until three

years after the date on which the

Internal Revenue Service receives actual

notice of the failure to comply.

(2) Reasonable cause exception. If a

person that is permitted under

§ 1.367(a)–3(b) or (c) to enter into an

agreement (described in paragraph (b) of

this section) fails to file the agreement

in a timely manner, as provided in

paragraph (a)(1) of this section, or fails

to comply in any material respect with

the requirements of this section or with

the terms of an agreement submitted

pursuant hereto, the provisions of

paragraph (c)(1) of this section shall not

apply if the person is able to show that

such failure was due to reasonable cause

and not willful neglect and if the person

files the agreement or reaches

compliance as soon as he becomes

aware of the failure. Whether a failure

to file in a timely manner, or materially

comply, was due to reasonable cause

shall be determined by the district

director under all the facts and

circumstances.

(d) Use of security. The U.S. transferor

may be required to furnish a bond or

other security that satisfies the

requirements of § 301.7101–1 of this

chapter if the district director

determines that such security is

necessary to ensure the payment of any

tax on the gain realized but not

recognized upon the initial transfer.

Such bond or security will generally be

required only if the stock or securities

transferred are a principal asset of the

transferor and the director has reason to

believe that a disposition of the stock or

securities may be contemplated.

(e) Disposition (in whole or in part) of

stock of transferred corporation—(1) In

general—(i) Definition of disposition.

For purposes of this section, a

disposition of the stock of the

transferred corporation that triggers gain

under the gain recognition agreement

includes any taxable sale or any

disposition treated as an exchange

under this subtitle, (e.g., under sections

301(c)(3)(A), 302(a), 311, 336, 351(b) or

section 356(a)(1)), as well as any

deemed disposition described under

paragraph (e)(3) of this section. It does

not include a disposition that is not

treated as an exchange, (e.g., under

section 302(d) or 356(a)(2)). A

disposition of all or a portion of the

stock of the transferred corporation by

installment sale is treated as a

disposition of such stock in the year of

the installment sale. A disposition of the

stock of the transferred corporation does

not include certain transfers treated as

nonrecognition transfers (under

paragraph (g) of this section) in which

the gain recognition agreement is

retained but modified, or certain

transfers (under paragraph (h) of this

section) in which the gain recognition

agreement is terminated and has no

further effect.

(ii) Example. The provisions of this

paragraph (e) are illustrated by the

following example:

Example. Interaction between trigger of

gain recognition agreement and subpart F

rules—(i) Facts. A U.S. corporation (USP)

owns all of the stock of two foreign

corporations, CFC1 and CFC2. USP’s section

1248 amount with respect to CFC2 is $30.

USP has a basis of $50 in its stock of CFC2;

CFC2 has a value of $100. In a transaction

described in section 351 and 368(a)(1)(B),

USP transfers the stock of CFC2 in exchange

for additional stock of CFC1. The transaction

is subject to both sections 367 (a) and (b). See

§§ 1.367(a)–3(b) and 1.367(b)–1(a). To qualify

for nonrecognition treatment under section

367(a), USP enters into a 5-year gain

recognition agreement for $50 under this

section. No election under paragraph

8(b)(1)(vii) of this section is made. USP also

complies with the notice requirement under

§ 1.367(b)–1(c).

(ii) Trigger of gain recognition agreement

with no election. Assume that in year 2, CFC1

sells the stock of CFC2 for $120, and that

there were no distributions by CFC2 prior to

the sale. USP must amend its return for the

year of the initial transfer and include $50 in

income (with interest), $30 of which will be

recharacterized as a dividend pursuant to

section 1248. As a result, CFC1 has a basis

of $100 in CFC2. As a result of the sale of

CFC2 stock by CFC1, USP will have $20 of

subpart F foreign personal holding company

income. See section 951, et. seq., and the

regulations thereunder.

(iii) Trigger of gain recognition agreement

with election. Assume the same facts as in

paragraphs (i) and (ii) of this Example, except

that when USP attached the gain recognition

agreement to its timely filed Federal income

tax return for the year of the initial transfer,

it elected under paragraph (b)(1)(vii) of this

section to include the amount of gain

realized but not recognized on the initial

transfer, $50, in the year of the triggering

event rather than in the year of the initial

transfer. In such case, the result is the same

as in paragraph (e)(1)(ii)(B) of this section,

except that USP will include the $50 of gain

on its year 2 return, together with interest.

For purposes of determining the dividend

component, if any, of the $50 inclusion, USP

will take into account the section 1248

amount of CFC2 at the time of the disposition

in Year 2.

(2) Partial disposition. If the transferee

foreign corporation disposes of (or is

deemed to dispose of) only a portion of

the transferred stock or securities, then

the U.S. transferor is required to

recognize only a proportionate amount

of the gain realized but not recognized

upon the initial transfer of the

transferred property. The proportion

required to be recognized shall be

determined by reference to the relative

fair market values of the transferred

stock or securities disposed of and

retained. Solely for purposes of

determining whether the U.S. transferor

must recognize income under the

agreement described in paragraph (b) of

this section, in the case of transferred

property (including stock or securities)

that is fungible with other property

owned by the transferee foreign

corporation, a disposition by such

corporation of any such property shall

be deemed to be a disposition of no less

than a ratable portion of the transferred

property.

(3) Deemed dispositions of stock of

transferred corporation—(i) Disposition

by transferred corporation of

substantially all of its assets—(A) In

general. Unless an exception applies (as

described in paragraph (e)(3)(i)(B) of

this section), a transferee foreign

corporation will be treated as having

disposed of the stock or securities of the

transferred corporation if, within the

term of the gain recognition agreement,

the transferred corporation makes a

disposition of substantially all (within

the meaning of section 368(a)(1)(C)) of

its assets (including stock in a

subsidiary corporation or an interest in

a partnership). If the initial transfer that

necessitated the gain recognition

agreement was an indirect stock

transfer, see § 1.367(a)–3(d)(2)(v). If the

transferred corporation is a U.S.

corporation, see paragraph (h)(2) of this

section.

(B) The transferee foreign corporation

will not be deemed to have disposed of

the stock of the transferred corporation

if the transferred corporation is

liquidated into the transferee foreign

corporation under sections 337 and 332,
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provided that the transferee foreign

corporation does not dispose of

substantially all of the assets formerly

held by the transferred corporation (and

considered for purposes of the

substantially all determination) within

the remaining period during which the

gain recognition agreement is in effect.

A nonrecognition transfer is not counted

for purposes of the substantially all

determination as a disposition if the

transfer satisfies the requirements of

paragraph (g)(3) of this section. A

disposition does not include a

compulsory transfer as described in

§ 1.367(a)–4T(f) that was not reasonably

forseeable by the U.S. transferor at the

time of the initial transfer.

(ii) U.S. transferor becomes a noncitizen nonresident. If a U.S. transferor

loses U.S. citizenship or a long-term

resident ceases to be taxed as a lawful

permanent resident (as defined in

section 877(e)(2)), then immediately

prior to the date that the U.S. transferor

loses U.S. citizenship or ceases to be

taxed as a long-term resident, the gain

recognition agreement will be triggered

as if the transferee foreign corporation

disposed of all of the stock of the

transferred corporation in a taxable

transaction on such date. No additional

inclusion is required under section 877,

and a gain recognition agreement under

section 877 may not be used to avoid

taxation under section 367(a) resulting

from the trigger of the section 367(a)

gain recognition agreement.

(f) Effect on gain recognition

agreement if U.S. transferor goes out of

existence—(1) In general. If an

individual transferor that has entered

into an agreement under under

paragraph (b) of this section dies, or if

a U.S. trust or estate that has entered

into an agreement under paragraph (b)

of this section goes out of existence and

is not required to recognize gain as a

consequence thereof with respect to all

of the stock of the transferee foreign

corporation received in the initial

transfer and not previously disposed of,

then the gain recognition agreement will

be triggered unless one of the following

requirements is met—

(i) The person winding up the affairs

of the transferor retains, for the duration

of the waiver of the statute of limitations

relating to the gain recognition

agreement, assets to meet any possible

liability of the transferor under the

duration of the agreement;

(ii) The person winding up the affairs

of the transferor provides security as

provided under paragraph (d) of this

section for any possible liability of the

transferor under the agreement; or

(iii) The transferor obtains a ruling

from the Internal Revenue Service

providing for successors to the

transferor under the gain recognition

agreement.

(2) Special rule when U.S. transferor

is a corporation—(i) U.S. transferor goes

out of existence pursuant to the

transaction. If the transferor is a U.S.

corporation that goes out of existence in

a transaction in which the transferor’s

gain would have qualified for

nonrecognition treatment under

§ 1.367(a)–3(b) or (c) had the U.S.

transferor remained in existence and

entered into a gain recognition

agreement, then the gain may generally

qualify for nonrecognition treatment

only if the U.S. transferor is owned by

a single U.S. parent corporation and the

U.S. transferor and its parent

corporation file a consolidated Federal

income tax return for the taxable year

that includes the transfer, and the

parent of the consolidated group enters

into the gain recognition agreement.

However, notwithstanding the

preceding sentence, a U.S. transferor

that was controlled (within the meaning

of section 368(c)) by five or fewer

domestic corporations may request a

ruling that, if certain conditions

prescribed by the Internal Revenue

Service are satisfied, the transaction

may qualify for nonrecognition

treatment.

(ii) U.S. corporate transferor is

liquidated after gain recognition

agreement is filed. If a U.S. transferor

files a gain recognition agreement but is

liquidated during the term of the gain

recognition agreement, such agreement

will be terminated if the liquidation

does not qualify as a tax-free liquidation

under sections 337 and 332 and the U.S.

transferor includes in income any gain

from the liquidation. If the liquidation

qualifies for nonrecognition treatment

under sections 337 and 332, the gain

recognition agreement will be triggered

unless the U.S. parent corporation and

the U.S. transferor file a consolidated

Federal income tax return for the

taxable year that includes the dates of

the initial transfer and the liquidation of

the U.S. transferor, and the U.S. parent

enters into a new gain recognition

agreement and complies with reporting

requirements similar to those contained

in paragraph (g)(2) of this section.

(g) Effect on gain recognition

agreement of certain nonrecognition

transactions—(1) Certain

nonrecognition transfers of stock or

securities of the transferee foreign

corporation by the U.S. transferor. If the

U.S. transferor disposes of any stock of

the transferee foreign corporation in a

nonrecognition transfer and the U.S.

transferor complies with reporting

requirements similar to those contained

in paragraph (g)(2) of this section, the

U.S. transferor shall continue to be

subject to the terms of the gain

recognition agreement in its entirety.

(2) Certain nonrecognition transfers of

stock or securities of the transferred

corporation by the transferee foreign

corporation. (i) If, during the period the

gain recognition agreement is in effect,

the transferee foreign corporation

disposes of all or a portion of the stock

of the transferred corporation in a

transaction in which gain or loss would

not be required to be recognized by the

transferee foreign corporation under

U.S. income tax principles, such

disposition will not be treated as a

disposition within the meaning of

paragraph (e) of this section if the

transferee foreign corporation receives

(or is deemed to receive), in exchange

for the property disposed of, stock in a

corporation, or an interest in a

partnership, that acquired the

transferred property (or receives stock in

a corporation that controls the

corporation acquiring the transferred

property); and the U.S. transferor

complies with the requirements of

paragraphs (g)(2)(ii) through (iv) of this

section.

(ii) The U.S. transferor must provide

a notice of the transfer with its next

annual certification under paragraph

(b)(5) of this section, setting forth—

(A) A description of the transfer;

(B) The applicable nonrecognition

provision; and

(C) The name, address, and taxpayer

identification number (if any) of the

new transferee of the transferred

property.

(iii) The U.S. transferor must provide

with its next annual certification a new

agreement to recognize gain (in

accordance with the rules of paragraph

(b) of this section) if, prior to the close

of the fifth full taxable year following

the taxable year of the initial transfer,

either—

(A) The initial transferee foreign

corporation disposes of the interest (if

any) which it received in exchange for

the transferred property (other than in a

disposition which itself qualifies under

the rules of this paragraph (g)(2)); or

(B) The corporation or partnership

that acquired the property disposes of

such property (other than in a

disposition which itself qualifies under

the rules of this paragraph (g)(2)); or

(C) There is any other disposition that

has the effect of an indirect disposition

of the transferred property.

(iv) If the U.S. transferor is required

to enter into a new gain recognition
33566 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

agreement, as provided in paragraph

(g)(2)(iii) of this section, the U.S.

transferor must provide with its next

annual certification (described in

paragraph (b)(5) of this section) a

statement that arrangements have been

made, in connection with the

nonrecognition transfer, ensuring that

the U.S. transferor will be informed of

any subsequent disposition of property

with respect to which recognition of

gain would be required under the

agreement.

(3) Certain nonrecognition transfers of

assets by the transferred corporation. A

disposition by the transferred

corporation of all or a portion of its

assets in a transaction in which gain or

loss would not be required to be

recognized by the transferred

corporation under U.S. income tax

principles, will not be treated as a

disposition within the meaning of

paragraph (e)(3) of this section if the

transferred corporation receives in

exchange stock or securities in a

corporation or an interest in a

partnership that acquired the assets of

the transferred corporation (or receives

stock in a corporation that controls the

corporation acquiring the assets). If the

transaction would be treated as a

disposition of substantially all of the

transferred corporation’s assets, the

preceding sentence shall only apply if

the U.S. transferor complies with

reporting requirements comparable to

those of paragraphs (g)(2)(ii) through (iv)

of this section, providing for notice, an

agreement to recognize gain in the case

of a direct or indirect disposition of the

assets previously held by the transferred

corporation, and an assurance that

necessary information will be provided

to appropriate parties.

(h) Transactions that terminate the

gain recognition agreement—(1)

Taxable disposition of stock or

securities of transferee foreign

corporation by U.S. transferor. (i) If the

U.S. transferor disposes of all of the

stock of the transferee foreign

corporation that it received in the initial

transfer in a transaction in which all

realized gain (if any) is recognized

currently, then the gain recognition

agreement shall terminate and have no

further effect. If the transferor disposes

of a portion of the stock of the transferee

foreign corporation that it received in

the initial transfer in a taxable

transaction, then in the event that the

gain recognition agreement is later

triggered, the transferor shall be

required to recognize only a

proportionate amount of the gain subject

to the gain recognition agreement that

would otherwise be required to be

recognized on a subsequent disposition

of the transferred property under the

rules of paragraph (b)(2) of this section.

The proportion required to be

recognized shall be determined by

reference to the percentage of stock (by

value) of the transferee foreign

corporation received in the initial

transfer that is retained by the United

States transferor.

(ii) The rule of this paragraph (h) is

illustrated by the following example:

Example. A, a United States citizen, owns

100 percent of the outstanding stock of

foreign corporation X. In a transaction

described in section 351, A exchanges his

stock in X (and other assets) for 100 percent

of the outstanding voting and nonvoting

stock of foreign corporation Y. A submits an

agreement under the rules of this section to

recognize gain upon a later disposition. In

the following year, A disposes of 60 percent

of the fair market value of the stock of Y, thus

terminating 60 percent of the gain

recognition agreement. One year thereafter, Y

disposes of 50 percent of the fair market

value of the stock of X. A is required to

include in his income in the year of the later

disposition 20 percent (40 percent interest in

Y multiplied by a 50 percent disposition of

X) of the gain that A realized but did not

recognize on his initial transfer of X stock to

Y.

(2) Certain dispositions by a domestic

transferred corporation of substantially

all of its assets. If the transferred

corporation is a domestic corporation

and the U.S. transferor and the

transferred corporation filed a

consolidated Federal income tax return

at the time of the transfer, the gain

recognition agreement shall terminate

and cease to have effect if, during the

term of such agreement, the transferred

corporation disposes of substantially all

of its assets in a transaction in which all

realized gain is recognized currently. If

an indirect stock transfer necessitated

the filing of the gain recognition

agreement, such agreement shall

terminate if, immediately prior to the

indirect transfer, the U.S. transferor and

the acquired corporation filed a

consolidated return (or, in the case of a

section 368(a)(1)(A) and (a)(2)(E)

reorganization described in § 1.367(a)–

3(d)(1)(ii), the U.S. transferor and the

acquiring corporation filed a

consolidated return) and the transferred

corporation disposes of substantially all

of its assets (taking into account

§ 1.367(a)–3(d)(2)(v)) in a transaction in

which all realized gain is recognized

currently.

(3) Distribution by transferee foreign

corporation of stock of transferred

corporation that qualifies under section

355 or section 337. If, during the term

of the gain recognition agreement, the

transferee foreign corporation

distributes to the U.S. transferor, in a

transaction that qualifies under section

355, or in a liquidating distribution that

qualifies under sections 332 and 337,

the stock that initially necessitated the

filing of the gain recognition agreement

(and any additional stock received after

the initial transfer), the gain recognition

agreement shall terminate and have no

further effect, provided that

immediately after the section 355

distribution or section 332 liquidation,

the U.S. transferor’s basis in the

transferred stock is less than or equal to

the basis that it had in the transferred

stock immediately prior to the initial

transfer that necessitated the GRA.

(i) Effective date. The rules of this

section shall apply to transfers that

occur on or after July 20, 1998. For

matters covered in this section for

periods before July 20, 1998, the

corresponding rules of § 1.367(a)–3T(g)

(see 26 CFR part 1, revised April 1,

1998) and Notice 87–85 ((1987–2 C.B.

395); see § 601.601(d)(2)(ii) of this

chapter) apply. In addition, if a U.S.

transferor entered into a gain

recognition agreement for transfers prior

to July 20, 1998, then the rules of

§ 1.367(a)–3T(g) (see 26 CFR part 1,

revised April 1, 1998) shall continue to

apply in lieu of this section in the event

of any direct or indirect nonrecognition

transfer of the same property. See, also,

§ 1.367(a)–3(f).

Par. 6. Section 1.367(b)–1 is added to

read as follows:

§ 1.367(b)–1 Other transfers.

(a) Scope. Section 367(b) and the

regulations thereunder set forth certain

rules regarding the extent to which a

foreign corporation shall be considered

to be a corporation in connection with

an exchange to which section 367(b)

applies. An exchange to which section

367(b) applies is any exchange

described in section 332, 351, 354, 355,

356 or 361, with respect to which the

status of a foreign corporation as a

corporation is relevant for determining

the extent to which income shall be

recognized or for determining the effect

of the transaction on earnings and

profits, basis of stock or securities, or

basis of assets. Notwithstanding the

preceding sentence, a section 367(b)

exchange does not include a transfer to

the extent that the foreign corporation

fails to be treated as a corporation by

reason of section 367(a)(1). See

§ 1.367(a)–3(b)(2)(ii) for an illustration

of the interaction of sections 367 (a) and

(b). This paragraph applies for transfers

occurring on or after July 20, 1998.

(b) [Reserved]. For further guidance,

see § 7.367(b)–1(b) of this chapter.

(c) Notice required—(1) In general. If

any person referred to in section 6012
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(relating to the requirement to make

returns of income) realized gain or other

income (whether or not recognized) on

account of any exchange to which

section 367(b) applies, such person

must file a notice of such exchange on

or before the last date for filing a Federal

income tax return (taking into account

any extensions of time therefor) for the

person’s taxable year in which such gain

or other income is realized. This notice

must be filed with the district director

with whom the person would be

required to file a Federal income tax

return for the taxable year in which the

exchange occurs. Notwithstanding

anything in this paragraph (c)(1) to the

contrary, no notice under this paragraph

(c)(1) is required to the extent a

transaction is described in both section

367(a) and (b), and the exchanging

person is not a United States

shareholder of the corporation whose

stock is exchanged. This paragraph

applies to transfers occurring on or after

July 20, 1998.

(c)(2) through (f) [Reserved]. For

further guidance, see § 7.367(b)–1(c)(2)

through (f) of this chapter.

Par. 6a. Section 1.367(b)–4 is added

to read as follows:

§ 1.367(b)–4 Certain exchanges of stock

described in section 354, 351, or sections

354 and 351.

(a) In general. This section applies to

an exchange of stock in a foreign

corporation by a United States

shareholder if the exchange is described

in section 351, or is described in section

354 and is made pursuant to a

reorganization described in section

368(a)(1)(B) (including an exchange that

is also described in section 351),

without regard to whether the exchange

may also be described in section 361.

(b) Recognition of income. If an

exchange is described in paragraph

(b)(1), (2) or (3) of this section, the

exchanging shareholder shall include in

income as a deemed dividend the

section 1248 amount attributable to the

stock that it exchanges. See, also,

§ 1.367(a)–3(b)(2). However, in the case

of a recapitalization described in

paragraph (b)(3) of this section that

occurred prior to July 20, 1998, the

exchanging shareholder shall include

the section 1248 amount on its tax

return for the taxable year that includes

the exchange described in paragraph

(b)(2)(iii) of this section (and not in the

taxable year of the recapitalization),

except that no inclusion is required if

both the recapitalization and the

exchange described in paragraph

(b)(2)(iii) of this section occurred prior

to July 20, 1998.

(1) Loss of United States shareholder

or controlled foreign corporation status.

An exchange is described in this

paragraph (b)(1) if—

(i) An exchanging shareholder

receives stock of a foreign corporation

that is not a controlled foreign

corporation;

(ii) An exchanging shareholder

receives stock of a controlled foreign

corporation as to which the exchanging

United States shareholder is not a

United States shareholder; or

(iii) The corporation whose stock is

exchanged is not a controlled foreign

corporation immediately after the

transfer.

(2) Receipt by domestic corporation of

preferred or other stock in certain

instances. An exchange is described in

this paragraph (b)(2) if—

(i) Immediately before the exchange,

the foreign acquired corporation and the

foreign acquiring corporations are not

members of the same affiliated group

(within the meaning of section 1504(a),

but without regard to the exceptions set

forth in section 1504(b), and

substituting the words ‘‘more than 50’’

in place of the words ‘‘at least 80’’ in

sections 1504(a)(2)(A) and (B));

(ii) Immediately after the exchange, a

domestic corporation meets the

ownership threshold specified by

section 902(a) or (b) such that it may

qualify for a deemed paid foreign tax

credit if it receives from the foreign

acquiring corporation a distribution

(directly or through tiers) of its earnings

and profits; and

(iii) The exchanging shareholder

receives preferred stock (other than

preferred stock that is fully participating

with respect to dividends, redemptions

and corporate growth) in consideration

for common stock or preferred stock that

is fully participating with respect to

dividends, redemptions and corporate

growth, or, in the discretion of the

District Director (and without regard to

whether the stock exchanged is common

stock or preferred stock), receives stock

that entitles it to participate (through

dividends, redemption payments or

otherwise) disproportionately in the

earnings generated by particular assets

of the foreign acquired corporation or

foreign acquiring corporation. See, e.g.,

paragraph (b)(4) Example 1 through

Example 3 of this section.

(3) Certain exchanges involving

recapitalizations. An exchange pursuant

to a recapitalization under section

368(a)(1)(E) shall be deemed to be an

exchange described in this paragraph

(b)(3) if the following conditions are

satisfied—

(i) During the 24-month period

immediately preceding or following the

date of the recapitalization, the

corporation that undergoes the

recapitalization (or a predecessor of, or

successor to, such corporation) also

engages in a transaction that would be

described in paragraph (b)(2) of this

section but for paragraph (b)(2)(iii) of

this section, either as the foreign

acquired corporation or the foreign

acquiring corporation; and

(ii) The exchange in the

recapitalization is described in

paragraph (b)(2)(iii) of this section.

(4) Examples. The rules of paragraph

(b)(2) of this section are illustrated by

the following examples:

Example 1—(i) Facts. FC1 is a foreign

corporation. DC is a domestic corporation

that is unrelated to FC1. DC owns all of the

outstanding stock of FC2, a foreign

corporation, and FC2 has no outstanding

preferred stock. The value of FC2 is $100 and

DC has a basis of $50 in the stock of FC2. The

section 1248 amount attributable to the stock

of FC2 held by DC is $20. In a reorganization

described in section 368(a)(1)(B), FC1

acquires all of the stock of FC2 and, in

exchange, DC receives FC1 voting preferred

stock that constitutes 10 percent of the

outstanding voting stock of FC1 for purposes

of section 902(a). Immediately after the

exchange, FC1 and FC2 are controlled foreign

corporations and DC is a United States

shareholder of FC1, so paragraph (b)(1) of

this section does not require inclusion in

income of the section 1248 amount.

(ii) Result. Pursuant to § 1.367(a)–3(b)(2),

the transfer is subject to both section 367(a)

and section 367(b). Under § 1.367(a)–3(b)(1),

DC will not be subject to tax under section

367(a)(1) if it enters into a gain recognition

agreement in accordance with § 1.367(a)–8.

The amount of the gain recognition

agreement is $50 less any inclusion under

section 367(b). Even though paragraph (b)(1)

of this section does not apply to require

inclusion in income by DC of the section

1248 amount, DC must nevertheless include

the $20 section 1248 amount in income as a

deemed dividend from FC2 under paragraph

(b)(2) of this section. Thus, if DC enters into

a gain recognition agreement, the amount is

$30 (the $50 gain realized less the $20

recognized under section 367(b)). (If DC fails

to enter into a gain recognition agreement, it

must include in income under section

367(a)(1) the $50 of gain realized; $20 of

which is treated as a dividend. Section 367(b)

does not apply in such case.)

Example 2—(i) Facts. The facts are the

same as in Example 1, except that DC owns

all of the outstanding stock of FC1

immediately before the transaction.

(ii) Result. Both section 367(a) and section

367(b) apply to the transfer. Paragraph (b)(2)

of this section does not apply to require

inclusion of the section 1248 amount. Under

paragraph (b)(2)(i) of this section, the

transaction is outside the scope of paragraph

(b)(2) of this section, because FC1 and FC2

are, immediately before the transaction,

members of the same affiliated group (within

the meaning of such paragraph). Thus, if DC

enters into a gain recognition agreement in
33568 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

accordance with § 1.367(a)–8, the amount of

such agreement is $50. As in Example 1, if

DC fails to enter into a gain recognition

agreement, it must include in income $50,

$20 of which will be treated as a dividend.

Example 3—(i) Facts. FC1 is a foreign

corporation. DC is a domestic corporation

that is unrelated to FC1. DC owns all of the

stock of FC2, a foreign corporation. The

section 1248 amount attributable to the stock

of FC2 held by DC is $20. In a reorganization

described in section 368(a)(1)(B), FC1

acquires all of the stock of FC2 in exchange

for FC1 voting stock that constitutes 10

percent of the outstanding voting stock of

FC1 for purposes of section 902(a). The FC1

voting stock received by DC in the exchange

carries voting rights in FC1, but by agreement

of the parties the shares entitle the holder to

dividends, amounts to be paid on

redemption, and amounts to be paid on

liquidation, which are to be determined by

reference to the earnings or value of FC2 as

of the date of such event, and which are

affected by the earnings or value of FC1 only

if FC1 becomes insolvent or has insufficient

capital surplus to pay dividends.

(ii) Result. Under § 1.367(a)–3(b)(1), DC

will not be subject to tax under section

367(a)(1) if it enters into a gain recognition

agreement with respect to the transfer of FC2

stock to FC1. Under § 1.367(a)–3(b)(2), the

exchange will be subject to the provisions of

section 367(b) and the regulations thereunder

to the extent that it is not subject to tax under

section 367(a)(1). Furthermore, even if DC

would not otherwise be required to recognize

income under this section, the District

Director may nevertheless require that DC

include the $20 section 1248 amount in

income as a deemed dividend from FC2

under paragraph (b)(2) of this section.

(5) Special rules for applying section

1248 to subsequent exchanges. (i) If

income is not required to be recognized

under paragraph (b) of this section in a

transaction described in paragraph (b)(1)

of this section involving a foreign

acquiring corporation, then, for

purposes of applying section 1248 or

367(b) to subsequent exchanges, the

earnings and profits attributable to an

exchanging shareholder’s stock received

in the transaction shall be determined

by reference to the exchanging

shareholder’s pro rata interest in the

earnings and profits of the foreign

acquiring corporation and foreign

acquired corporation that accrue after

the transaction, as well as its pro rata

interest in the earnings and profits of

the foreign acquired corporation that

accrued prior to the transaction. See

also section 1248(c)(2)(D)(ii). The

earnings and profits attributable to an

exchanging shareholder’s stock received

in the transaction shall not include any

earnings and profits of the foreign

acquiring corporation that accrued prior

to the transaction.

(ii) The following example illustrates

this paragraph (b)(5):

Example. (i) Facts. DC1, a domestic

corporation, owns all of the stock of FC1, a

foreign corporation. DC1 has owned all of the

stock of FC1 since FC1’s formation. DC2, a

domestic corporation, owns all of the stock

of FC2, a foreign corporation. DC2 has owned

all of the stock of FC2 since FC2’s formation.

DC1 and DC2 are unrelated. In a

reorganization described in section

368(a)(1)(B), DC1 transfers all of the stock of

FC1 to FC2 in exchange for 40 percent of

FC2. DC1 enters into a five-year gain

recognition agreement under the provisions

of §§ 1.367(a)–3(b) and 1.367(a)–8 with

respect to the transfer of FC1 stock to FC2.

(ii) Result. DC1’s transfer of FC1 to FC2 is

an exchange described in paragraph (b) of

this section. Because the transfer is not

described in paragraph (b)(1), 2) or (3) of this

section, DC1 is not required to include in

income the section 1248 amount attributable

to the exchanged FC1 stock and the special

rule of this paragraph (b)(5) applies. Thus, for

purposes of applying section 1248 or section

367(b) to subsequent exchanges, the earnings

and profits attributable to DC1’s interest in

FC2 will be determined by reference to 40

percent of the post-reorganization earnings

and profits of FC1 and FC2, and by reference

to 100 percent of the pre-reorganization

earnings and profits of FC1. The earnings and

profits attributable to DC1’s interest in FC2

do not include any earnings and profits

accrued by FC2 prior to the transaction.

Those earnings and profits are attributed to

DC2 under section 1248.

(6) Effective date. This section applies

to transfers occurring on or after July 20,

1998.

(c) and (d) [Reserved]. For further

guidance, see § 7.367(b)–4(c) and (d) of

this chapter.

Par. 7. In § 1.367(b)–7, paragraphs (a)

and (b) are added to read as follows:

§ 1.367(b)–7 Exchange of stock described

in section 354.

(a) Scope. (1) This section applies to

an exchange of stock in a foreign

corporation (other than a foreign

investment company as defined in

section 1246(b)) occurring on or after

July 20, 1998.

(i) The exchange is described in

section 354 or 356 and is made pursuant

to a reorganization described in section

368(a)(1)(B) through (F); and

(ii) The exchanging person is either a

United States shareholder or a foreign

corporation having a United States

shareholder who is also a United States

shareholder of the corporation whose

stock is exchanged.

(2) However, this section shall not

apply if a United States shareholder

exchanges stock of a foreign corporation

in an exchange described in section

368(a)(1)(B). For further guidance, see

§ 1.367(b)–4.

(b) [Reserved]. For further guidance,

see § 7.367(b)–7(b) of this chapter.

* * * * *

Par. 8. Section 1.367(d)–1T is

amended by adding a sentence at the

end of paragraph (a) to read as follows:

§ 1.367(d)–1T Transfers of intangible

property to foreign corporations

(temporary).

(a) * * * For purposes of determining

whether a U.S. person has made a

transfer of intangible property that is

subject to the rules of section 367(d), the

rules of § 1.367(a)–1T(c) shall apply.

* * * * *

Par. 9. Section 1.6038B–1 is added to

read as follows:

§ 1.6038B–1 Reporting of certain

transactions.

(a) Purpose and scope. This section

sets forth information reporting

requirements under section 6038B

concerning certain transfers of property

to foreign corporations. Paragraph (b) of

this section provides general rules

explaining when and how to carry out

the reporting required under section

6038B with respect to the transfers to

foreign corporations. Paragraph (c) of

this section and § 1.6038B–1T(d) specify

the information that is required to be

reported with respect to certain transfers

of property that are described in section

6038B(a)(1)(A) and 367(d), respectively.

Section 1.6038B–1T(e) specifies the

limited reporting that is required with

respect to transfers of property

described in section 367(e)(1).

Paragraph (f) of this section sets forth

the consequences of a failure to comply

with the requirements of section 6038B

and this section. For effective dates, see

paragraph (g) of this section. For rules

regarding transfers to foreign

partnerships, see section 6038B(a)(1)(B)

and any regulations thereunder.

(b) Time and manner of reporting—(1)

In general—(i) Reporting procedure.

Except for stock or securities qualifying

under the special reporting rule of

paragraph (b)(2) of this section, or cash,

which is currently not required to be

reported, any U.S. person that makes a

transfer described in section

6038B(a)(1)(A), 367(d) or (e)(1) is

required to report pursuant to section

6038B and the rules of this section and

must attach the required information to

Form 926 (Return by Transferor of

Property to a Foreign Corporation,

Foreign Estate or Trust, or Foreign

Partnership). For purposes of

determining a U.S. transferor that is

subject to section 6038B, the rules of

§ 1.367(a)–1T(c) and § 1.367(a)–3(d)

shall apply with respect to a transfer

described in section 367(a), and the

rules of § 1.367(a)–1T(c) shall apply

with respect to a transfer described in

section 367(d). Notwithstanding any
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations 33569

statement to the contrary on Form 926,

the form and attachments must be

attached to, and filed by the due date

(including extensions) of, the

transferor’s income tax return for the

taxable year that includes the date of the

transfer (as defined in § 1.6038B–

1T(b)(4)). Any attachment to Form 926

required under the rules of this section

is filed subject to the transferor’s

declaration under penalties of perjury

on Form 926 that the information

submitted is true, correct, and complete

to the best of the transferor’s knowledge

and belief.

(ii) Reporting by corporate transferor.

If the transferor is a corporation, Form

926 must be signed by an authorized

officer of the corporation. If, however,

the transferor is a member of an

affiliated group under section 1504(a)(1)

that files a consolidated Federal income

tax return, but the transferor is not the

common parent corporation, an

authorized officer of the common parent

corporation must sign Form 926.

(iii) Transfers of jointly-owned

property. If two or more persons transfer

jointly-owned property to a foreign

corporation in a transfer with respect to

which a notice is required under this

section, then each person must report

with respect to the particular interest

transferred, specifying the nature and

extent of the interest. However, a

husband and wife who jointly file a

single Federal income tax return may

file a single Form 926 with their tax

return.

(2) Exceptions and special rules for

transfers of stock or securities under

section 367(a)—(i) Transfers on or after

July 20, 1998. A U.S. person that

transfers stock or securities on or after

July 20, 1998 in a transaction described

in section 6038(a)(1)(A) will be

considered to have satisfied the

reporting requirement under section

6038B and paragraph (b)(1) of this

section if either—

(A) The U.S. transferor owned less

than 5 percent of both the total voting

power and the total value of the

transferee foreign corporation

immediately after the transfer (taking

into account the attribution rules of

section 318 as modified by section

958(b)), and either:

(1) The U.S. transferor qualified for

nonrecognition treatment with respect

to the transfer (i.e., the transfer was not

taxable under §§ 1.367(a)–3(b) or (c)); or

(2) The U.S. transferor is a tax-exempt

entity and the income was not unrelated

business income; or

(3) The transfer was taxable to the

U.S. transferor under § 1.367(a)–3(c),

and such person properly reported the

income from the transfer on its timelyfiled (including extensions) Federal

income tax return for the taxable year

that includes the date of the transfer; or

(B) The U.S. transferor owned 5

percent or more of the total voting

power or the total value of the transferee

foreign corporation immediately after

the transfer (taking into account the

attribution rules of section 318 as

modified by section 958(b)) and either:

(1) The transferor (or one or more

successors) properly entered into a gain

recognition agreement under § 1.367(a)–

8; or

(2) The transferor is a tax-exempt

entity and the income was not unrelated

business income; or

(3) The transferor properly reported

the income from the transfer on its

timely-filed (including extensions)

Federal income tax return for the

taxable year that includes the date of the

transfer.

(ii) Transfers before July 20, 1998.

With respect to transfers occurring after

December 16, 1987, and prior to July 20,

1998, a U.S. transferor that transferred

U.S. or foreign stock or securities in a

transfer described in section 367(a) is

not subject to section 6038B if such

person is described in paragraph

(b)(2)(i)(A) of this section.

(3) Special rule for transfers of cash.

[Reserved].

(4) [Reserved]. For further guidance,

see § 1.6038B–1T(b)(4).

(c) Information required with respect

to transfers described in section

6038B(a)(1)(A). A U.S. person that

transfers property to a foreign

corporation in an exchange described in

section 6038B(a)(1)(A) (including

unappreciated property other than cash)

must provide the following information,

in paragraphs labelled to correspond

with the number or letter set forth in

this paragraph (c) and § 1.6038B–

1T(c)(1) through (5). If a particular item

is not applicable to the subject transfer,

the taxpayer must list its heading and

state that it is not applicable. For special

rules applicable to transfers of stock or

securities, see paragraph (b)(2)(ii) of this

section.

(1) through (5) [Reserved]. For further

guidance, see § 1.6038B–1T(c)(1)

through (5).

(6) Application of section 367(a)(5). If

the asset is transferred in an exchange

described in section 361(a) or (b), a

statement that the conditions set forth in

the second sentence of section 367(a)(5)

and any regulations under that section

have been satisfied, and an explanation

of any basis or other adjustments made

pursuant to section 367(a)(5) and any

regulations thereunder.

(d) and (e) [Reserved]. For further

guidance, see § 1.6038B–1T(d) and (e).

(f) Failure to comply with reporting

requirements—(1) Consequences of

failure. If a U.S. person is required to

file a notice (or otherwise comply)

under paragraph (b) of this section and

fails to comply with the applicable

requirements of section 6038B and this

section, then with respect to the

particular property as to which there

was a failure to comply—

(i) That property shall not be

considered to have been transferred for

use in the active conduct of a trade or

business outside of the United States for

purposes of section 367(a) and the

regulations thereunder;

(ii) The U.S. person shall pay a

penalty under section 6038B(b)(1) equal

to 10 percent of the fair market value of

the transferred property at the time of

the exchange, but in no event shall the

penalty exceed $100,000 unless the

failure with respect to such exchange

was due to intentional disregard

(described under paragraph (g)(4) of this

section); and

(iii) The period of limitations on

assessment of tax upon the transfer of

that property does not expire before the

date which is 3 years after the date on

which the Secretary is furnished the

information required to be reported

under this section. See section

6501(c)(8) and any regulations

thereunder.

(2) Failure to comply. A failure to

comply with the requirements of section

6038B is—

(i) The failure to report at the proper

time and in the proper manner any

material information required to be

reported under the rules of this section;

or

(ii) The provision of false or

inaccurate information in purported

compliance with the requirements of

this section. Thus, a transferor that

timely files Form 926 with the

attachments required under the rules of

this section shall, nevertheless, have

failed to comply if, for example, the

transferor reports therein that property

will be used in the active conduct of a

trade or business outside of the United

States, but in fact the property continues

to be used in a trade or business within

the United States.

(3) Reasonable cause exception. The

provisions of paragraph (f)(1) of this

section shall not apply if the transferor

shows that a failure to comply was due

to reasonable cause and not willful

neglect. The transferor may do so by

providing a written statement to the

district director having jurisdiction of

the taxpayer’s return for the year of the

transfer, setting forth the reasons for the

failure to comply. Whether a failure to

comply was due to reasonable cause
33570 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 /Rules and Regulations

shall be determined by the district

director under all the facts and

circumstances.

(4) Definition of intentional disregard.

If the transferor fails to qualify for the

exception under paragraph (f)(3) of this

section and if the taxpayer knew of the

rule or regulation that was disregarded,

the failure will be considered an

intentional disregard of section 6038B,

and the monetary penalty under

paragraph (f)(1)(ii) of this section will

not be limited to $100,000. See

§ 1.6662–3(b)(2).

(g) Effective date. This section applies

to transfers occurring on or after July 20,

1998. See § 1.6038B–1T for transfers

occurring prior to July 20, 1998.

Par. 10. Section 1.6038B–1T is

amended as follows:

1. The section heading is revised.

2. Paragraphs (a) through (b)(2) are

revised.

3. Paragraph (b)(3) is redesignated as

paragraph (b)(4).

4. New paragraph (b)(3) is added and

reserved.

5. Paragraph (c) introductory text is

revised and paragraph (c)(6) is added.

6. Paragraph (f) is revised.

7. Paragraph (g) is added.

The revisions and additions read as

follows:

§ 1.6038B–1T Reporting of certain

transactions (temporary).

(a) through (b)(2) [Reserved]. For

further guidance, see § 1.6038B–1(a)

through (b)(2).

(b)(3) [Reserved].

* * * * *

(c) Introductory text [Reserved]. For

further guidance, see § 1.6038B–1(c).

* * * * *

(6) [Reserved]. For further guidance,

see § 1.6038B–1(c)(6).

* * * * *

(f) [Reserved]. For further guidance,

see § 1.6038B–1(f).

(g) Effective date. This section applies

to transfers occurring after December 31,

1984, except paragraph (e)(1) applies to

transfers occurring on or after

September 13, 1996. See § 1.6038B–

1T(a) through (b)(2), (c) introductory

text, and (f) (26 CFR part 1, revised

April 1, 1998) for transfers occurring

prior to July 20, 1998. See § 1.6038B–1

for transfers occurring on or after July

20, 1998.

PART 7—TEMPORARY INCOME TAX

REGULATIONS UNDER THE TAX

REFORM ACT OF 1976

Par. 11. The authority citation for part

7 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 12. Section 7.367(b)–1 is

amended as follows:

1. Paragraphs (a) and (c)(1) are

revised.

2. The authority citation at the end of

the section is removed.

The revisions read as follows:

§ 7.367(b)–1 Other transfers.

(a) [Reserved] For guidance relating to

transfers occurring on or after July 20,

1998, see § 1.367(b)–1(a) of this chapter.

* * * * *

(c)(1) [Reserved] For guidance relating

to transfers occurring on or after July 20,

1998, see § 1.367(b)–1(c) of this chapter.

* * * * *

Par. 13. Section 7.367(b)–4 is

amended as follows:

1. Paragraphs (a) and (b) are revised.

2. The authority citation at the end of

the section is removed.

The revision reads as follows:

§ 7.367(b)–4 Certain changes described in

more than one Code provision.

(a) and (b) [Reserved]. For guidance

relating to transfers occurring on or after

July 20, 1998, see § 1.367(b)–4(a) and (b)

of this chapter.

* * * * *

Par 14. Section 7.367(b)–7 is amended

as follows:

1. Paragraph (a) is revised.

2. The authority citation at the end of

the section is removed.

The revision reads as follows:

§ 7.367(b)–7 Exchange of stock described

in section 354.

* * * * *

(a) [Reserved] For guidance relating to

transfers occurring on or after July 20,

1998, see § 1.367(b)–7(a) of this chapter.

* * * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par 15. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par 16. In § 602.101, paragraph (c) is

amended by:

1. Removing the following entry from

the table:

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.367(a)–3T .............................. 1545–0026

* * * * *

2. Adding the following entry to the

table in numerical order to read as

follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.367(a)–8 ................................. 1545–1271

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: May 13, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98–15454 Filed 6–18–98; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Parts 62 and 66

[USCG 97–3112; CGD 97–018]

RIN 2115–AF45

Merger of the Uniform States Waterway

Marking System With the United States

Aids to Navigation

AGENCY: Coast Guard, DOT.

ACTION: Final rule.

SUMMARY: The Coast Guard commences

a five year phased-in merger of the

Uniform State Waterway Marking

System with the United States Aids to

Navigation System. This merger

eliminates distinctions between the two

systems and creates safer, less confusing

waterways.

DATES: This final rule is effective July

20, 1998.

ADDRESSES: Documents as indicated in

this preamble are available for

inspection or copying at the Docket

Management Facility, [USCG–97–3112],

U.S. Department of Transportation,

room PL–401, 400 Seventh Street SW.,

Washington, DC 20590–0001.

FOR FURTHER INFORMATION CONTACT:

For questions on this rule contact Dan

Andrusiak, OPN–2 Short Range Aids to

Navigation Division, USCG

Headquarters, telephone (202) 267–

0327, For questions on viewing material

in the docket, contact Carol Kelley,

Coast Guard Dockets Team Leader, or