5174 Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 

List of Subjects 

18 CFR 35 

Electric power rates, Electric utilities, 

Reporting and recordkeeping 

requirements. 

18 CFR 366 

Electric power, Natural gas, Reporting 

and recordkeeping requirements. 

18 CFR 375 

Authority delegations (Government 

Agencies), Seals and insignia, Sunshine 

Act. 

By the Commission. 

Magalie R. Salas, 

Secretary. 

■ In consideration of the foregoing, the 

Commission amends parts 35, 366, and 

375, Chapter I, Title 18, Code of Federal 

Regulations, as follows: 

PART 35—FILING OF RATE 

SCHEDULES AND TARIFFS 

■ 1. The authority citation for part 35 

continues to read as follows: 

Authority: 16 U.S.C. 791–825r, 2601–2645; 

31 U.S.C. 9701; 42 U.S.C. 7101–7352. 

■ 2. Amend § 35.35 by revising 

paragraph (h)(3) to read as follows: 

§ 35.35 Transmission infrastructure 

investment. 

* * * * * 

(h) * * * 

(3) For good cause shown, the 

Commission may extend the time 

within which any FERC–730 filing is to 

be filed or waive the requirements 

applicable to any such filing. 

* * * * * 

PART 366—PUBLIC UTILITY HOLDING 

COMPANY ACT OF 2005 

■ 3. The authority citation for part 366 

continues to read as follows: 

Authority: Pub. L. No. 109–58, 1261 et 

seq., 119 Stat. 594, 972 et seq. 

■ 4. Amend § 366.23 by revising 

paragraph (a)(3), to read as follows: 

§ 366.23 FERC Form No. 60, annual report 

of service companies, and FERC–61, 

narrative description of service company 

functions. 

(a) * * * 

(3) For good cause shown, the 

Commission may extend the time 

within which any such report or 

narrative description required to be filed 

pursuant to paragraphs (a)(1) or (2) of 

this section is to be filed or waive the 

requirements applicable to any such 

report or narrative description. 

* * * * * 

PART 375—THE COMMISSION 

■ 5. The authority citation for part 375 

continues to read as follows: 

Authority: 5 U.S.C. 551–557; 15 U.S.C. 

717–717w, 3301–3432; 16 U.S.C. 791–825r, 

2601–2645; 42 U.S.C. 7101–7352. 

■ 6. Amend § 375.303 by revising 

paragraphs (f) and (g) to read as follows: 

§ 375.303 Delegations to the Chief 

Accountant. 

* * * * * 

(f) Deny or grant, in whole or in part, 

motions for extension of time to file, or 

requests for waiver of the requirements 

of the following forms, data collections, 

and reports: Annual Reports (Form Nos. 

1, 1–F, 2, 2–A, and 6); Quarterly Reports 

(Form Nos. 3–Q and 6–Q); Annual 

Report of Centralized Service 

Companies (Form No. 60); Narrative 

Description of Service Company 

Functions (FERC–61); Report of 

Transmission Investment Activity 

(FERC–730); and Electric Quarterly 

Reports, as well as, where required, the 

electronic filing of such information 

(§ 385.2011 of this chapter, Procedures 

for filing on electronic media, 

paragraphs (a)(6), (c), and (e)). 

(g) Provide notification if a submitted 

Annual Report (Form Nos. 1, 1–F, 2, 2–

A, and 6), Quarterly Report (Form Nos. 

3–Q and 6–Q), Annual Report of 

Centralized Service Companies (Form 

No. 60), Narrative Description of Service 

Company Functions (FERC–61), Report 

of Transmission Investment Activity 

(FERC–730), or Electric Quarterly 

Report fails to comply with applicable 

statutory requirements, and with all 

applicable Commission rules, 

regulations, and orders for which a 

waiver has not been granted, or, when 

appropriate, notify a party that a 

submission is acceptable. 

* * * * * 

■ 7. Amend § 375.307 as follows: 

■ A. Remove paragraphs (a), (c), (d), and 

(i)(8) and redesignate paragraphs (b) and 

(e) through (p) as paragraphs (a) through 

(m). 

■ B. Revise redesignated paragraph 

(h)(3) to read as follows: 

§ 375.307 Delegations to the Director of 

the Office of Markets, Tariffs and Rates. 

* * * * * 

(h) * * * 

(3) Accept for filing, data and reports 

required by Commission orders, or 

presiding officers’ initial decisions upon 

which the Commission has taken no 

further action, if such filings are in 

compliance with such orders or 

decisions and, when appropriate, notify 

the filing party of such acceptance. 

* * * * * 

§ 375.314 [Amended] 

■ 8. In § 375.314, remove the words 

‘‘Office of Market Oversight and 

Investigation’’ and add, in their place, 

the words ‘‘Office of Enforcement’’ in 

the following sections: 

A. Section 375.314 section heading; 

B. Section 375.314(b); 

C. Section 375.314(c); and 

D. Section 375.314(d). 

[FR Doc. E7–1737 Filed 2–2–07; 8:45 am] 

BILLING CODE 6717–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9311] 

RIN 1545–BG10 

Certain Transfers of Stock or 

Securities by U.S. Persons to Foreign 

Corporations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final and temporary 

regulations. 

SUMMARY: This document contains final 

and temporary regulations under section 

367(a) of the Internal Revenue Code 

(Code) regarding gain recognition 

agreements. The final regulations are 

necessary to update cross-references in 

the current regulations. The temporary 

regulations are necessary to respond to 

comments requested in Notice 2005–74. 

The regulations primarily affect U.S. 

persons that transfer stock or securities 

to foreign corporations or corporations 

engaged in transactions that affect 

existing gain recognition agreements. 

The text of these temporary regulations 

also serves as the text of the proposed 

regulations (REG–147144–06) set forth 

in the notice of proposed rulemaking on 

this subject published elsewhere in this 

issue of the Federal Register. 

DATES: Effective Date: These regulations 

are effective February 5, 2007. 

Applicability Dates: For dates of 

applicability, see §§ 1.367(a)–3T(f) and 

1.367(a)–8T(h). 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–147144–06), room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington, 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

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Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 5175 

to CC:PA:LPD:PR (REG–147144–06), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically, via the IRS Internet site 

at http://www.irs.gov/regs or via the 

Federal eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–147144–

06). 

FOR FURTHER INFORMATION CONTACT: 

Daniel McCall, (202) 622–3860 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

These temporary regulations are being 

issued without prior notice and public 

procedure pursuant to the 

Administrative Procedure Act (5 U.S.C. 

553). For this reason, the collections of 

information contained in these 

regulations have been reviewed and 

pending receipt and evaluation of 

public comments, approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

2056. Response to these collections of 

information is mandatory. 

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. 

For further information concerning 

this collection of information, and 

where to submit comments on the 

collection of information and the 

accuracy of the estimated burden, and 

suggestions for reducing the burden, 

please refer to the preamble to the crossreferencing notice of proposed 

rulemaking published elsewhere in the 

Proposed Rules section of this issue of 

the Federal Register. 

Books and records relating to these 

collections 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 

Section 367(a)(1) provides that if, in 

connection with any exchange 

described in section 332, 351, 354, 356, 

or 361, a United States person (U.S. 

transferor) transfers property to a foreign 

corporation (transferee foreign 

corporation), such foreign corporation 

shall not, for purposes of determining 

the extent to which gain shall be 

recognized on such transfer, be 

considered to be a corporation. Section 

367(a)(2), (3) and (6) provides 

exceptions to this general rule and 

grants regulatory authority to provide 

additional exceptions and to limit the 

statutory exceptions. 

Exceptions to the general rule of 

section 367(a)(1) for certain transfers by 

a U.S. transferor of the stock or 

securities of a corporation (transferred 

corporation) to a transferee foreign 

corporation are provided in § 1.367(a)–

3 (initial transfer). In some cases, these 

exceptions require, among other things, 

that the U.S. transferor file a gain 

recognition agreement (GRA), as 

provided in § 1.367(a)–8. Section 

1.367(a)–3(b)(1)(ii) and (c)(1)(iii)(B). 

Pursuant to a GRA, the U.S. transferor 

agrees, among other things, to include in 

income the gain realized, but not 

recognized, on the initial transfer of the 

stock or securities, and pay any 

applicable interest, upon certain events 

(triggering events) that occur before the 

close of the fifth full taxable year 

following the year of the initial transfer. 

Section 1.367(a)–8(b)(1)(iii) and (3)(i). 

Section 1.367(a)–8(e)(1) and (2) 

provides that dispositions of the stock 

or securities of the transferred 

corporation are generally triggering 

events. Similarly, § 1.367(a)–8(e)(3) 

provides that dispositions of 

substantially all (within the meaning of 

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

transferred corporation are generally 

treated as deemed dispositions of the 

stock or securities of the transferred 

corporation and therefore are also 

triggering events. Finally, dispositions 

of stock of the transferee foreign 

corporation can also be triggering 

events. See § 1.367(a)–8(f)(2)(ii). 

Notwithstanding these rules, 

§ 1.367(a)–8 provides that various 

nonrecognition transactions are not 

triggering events if certain requirements 

are satisfied. For example, § 1.367(a)–

8(g) provides exceptions for certain 

transactions involving the U.S. 

transferor, the transferee foreign 

corporation, and the transferred 

corporation. Although these exceptions 

clearly contemplate some 

nonrecognition transactions, the current 

regulations are unclear whether, and if 

so how, the exceptions apply to various 

asset reorganizations involving section 

361 exchanges by the U.S. transferor, 

the transferee foreign corporation, and 

the transferred corporation. 

Section 1.367(a)–8 also provides that 

certain nonrecognition transactions are 

not triggering events because the GRA is 

terminated without further effect. For 

example, § 1.367(a)–8(h)(3) lists certain 

nonrecognition transactions that 

terminate the GRA, provided that 

immediately after the transaction the 

basis in the transferred stock is not 

greater than the U.S. transferor’s basis in 

the stock that, immediately before the 

initial transfer, necessitated the GRA. 

On September 28, 2005, the IRS and 

the Treasury Department issued Notice 

2005–74 (2005–42 IRB 726), see 

§ 601.601(d)(2), which announced the 

intention to amend the regulations 

under section 367(a) to address the 

effect on GRAs of certain asset 

reorganizations involving the U.S. 

transferor, the transferee foreign 

corporation, and the transferred 

corporation. The notice was issued in 

response to comments that the current 

regulations do not adequately address 

various asset reorganizations involving 

the U.S. transferor, the transferee foreign 

corporation, and the transferred 

corporation. Notice 2005–74 addressed 

the most common of these 

reorganizations and requested 

comments on other transactions (for 

example, certain upstream and 

downstream reorganizations). 

Notice 2005–74 generally provided 

that, if particular requirements are 

satisfied, certain asset reorganizations of 

the U.S. transferor, the transferee foreign 

corporation, or the transferred 

corporation will not constitute 

triggering events. A key premise of the 

notice was that the covered transactions 

involved situations where the ability to 

collect tax is sufficiently preserved in 

the event of a subsequent trigger of the 

GRA (that is, the obligor under the GRA 

remains unchanged as a result of the 

asset reorganization). In light of 

taxpayer comments and further study, 

however, the IRS and Treasury 

Department have determined that there 

are additional instances where the 

ability to collect tax after these asset 

reorganizations and certain other 

nonrecognition transactions (as defined 

in section 7701(a)(45)) is sufficiently 

preserved so that these transactions also 

should not constitute a triggering event 

if particular requirements are met. The 

IRS and Treasury Department also have 

concluded that other portions of the 

current section 367(a) regulations 

addressing GRAs should be revised. 

Explanation of Provisions 

A. Overview 

The temporary regulations adopt the 

rules announced in Notice 2005–74, 

with a number of modifications 

discussed below. Notice 2005–74 only 

provided guidance on a particular range 

of transactions, namely certain asset 

reorganizations, that are insufficiently 

addressed in the current regulations. 

The temporary regulations respond to 

comments and provide guidance on the 

effect on GRAs of transactions that are 

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5176 Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 

not addressed in the current regulation 

or Notice 2005–74. The temporary 

regulations also make additional 

changes to the existing regulations. For 

example, the temporary regulations 

modify and clarify procedural 

requirements attendant to entering into 

GRAs. Finally, the temporary 

regulations reorganize the current 

regulation so that distinct paragraphs 

address triggering events, exceptions to 

triggering events, and events that 

terminate a GRA. The IRS and Treasury 

Department continue to consider issuing 

additional public guidance that further 

revises § 1.367(a)–8. 

B. Effect of Certain Asset 

Reorganizations and Nontaxable 

Liquidations on Gain Recognition 

Agreements 

1. Transfers of Transferee Foreign 

Corporation Stock by U.S. Transferor 

(a) Asset Reorganizations 

Notice 2005–74 provided that if, in a 

section 361 transaction, a U.S. transferor 

transfers all or a portion of the stock or 

securities of the transferee foreign 

corporation to an acquiring domestic 

corporation (successor U.S. transferor) 

pursuant to certain asset 

reorganizations, the exchanges made 

pursuant to the asset reorganization will 

trigger the gain recognition agreement, 

unless various conditions are satisfied. 

These conditions are: (1) The U.S. 

transferor must have been a member of 

a consolidated group (original 

consolidated group) at the time of the 

initial transfer and the common parent 

of such group (original common parent) 

entered into the original GRA; (2) 

immediately after the asset 

reorganization, the successor U.S. 

transferor is a member of the original 

consolidated group (consolidation 

continuity requirement); and (3) the 

original common parent enters into a 

new GRA with respect to the transfer 

subject to the original GRA, modified by 

substituting the successor U.S. 

transferor for the original U.S. 

transferor. A notice of the asset 

reorganization also must be provided 

with the successor U.S. transferor’s next 

annual certification. 

For this purpose, an asset 

reorganization is defined as a 

reorganization described in section 

368(a)(1) involving the transfer of assets 

by a corporation to another corporation 

pursuant to section 361, except that 

such term shall include reorganizations 

described in section 368(a)(1)(D) or (G) 

only if the requirements of section 

354(b)(1)(A) and (B) are met. 

The IRS and Treasury Department 

received several comments that the 

consolidation continuity requirement 

was unduly restrictive because it 

focused on maintaining the same obligor 

for a GRA following the asset 

reorganization. Commentators asserted 

that an equal or better ability to collect 

the tax due as a result of a triggering 

event subsequent to such a 

reorganization may be preserved in 

certain instances where the 

consolidation continuity requirement 

would not be satisfied. However, these 

same commentators noted that if there 

were no consolidation continuity 

requirement, such that a U.S. transferor 

that is a member of a consolidated group 

at the time of the initial transfer could 

be acquired in a later asset 

reorganization by a corporation 

(successor corporation) that is not a 

member of such group without 

triggering the GRA, the actions of the 

successor corporation could 

inappropriately affect the liability of the 

original consolidated group under the 

GRA. As a result, the commentators 

requested that the consolidation 

continuity requirement be curtailed or 

eliminated, while at the same time not 

inappropriately exposing the original 

consolidated group to the liabilities 

arising from the actions of the successor 

corporation. 

The IRS and Treasury Department 

generally agree with these views. 

Therefore, the temporary regulations 

eliminate the consolidation continuity 

requirement and address concerns about 

the liability of a consolidated group that 

disposes of a U.S. transferor subject to 

a GRA. 

Specifically, the temporary 

regulations provide that when a U.S. 

transferor transfers all or a portion of the 

stock of the transferee foreign 

corporation to an acquiring corporation 

in an asset reorganization, the 

exchanges made pursuant to the 

reorganization will not be triggering 

events and the GRA will terminate 

without further effect, but only if certain 

requirements are satisfied. These 

requirements ensure that the ability to 

collect tax is sufficiently preserved and 

that the terms of the GRA are 

administrable. 

First, the acquiring corporation 

(successor U.S. transferor) must be a 

domestic corporation, and the successor 

U.S. transferor or the common parent of 

the consolidated group of which the 

successor U.S. transferor is a member 

(as applicable) must enter into a new 

GRA to recognize gain with respect to 

the initial transfer during the remaining 

term of the original GRA (with certain 

modifications). 

Second, with its next certification, the 

successor U.S. transferor must provide 

to the IRS the new GRA, notice of the 

transaction, and Form 8838 (Consent to 

Extend Time to Assess Tax Under 

Section 367) to extend the period of 

assessment of tax on the initial transfer. 

Third, unless the successor U.S. 

transferor is a member of the same 

consolidated group of which the U.S. 

transferor was a member immediately 

before the asset reorganization, the 

person entering into the new GRA must 

elect that, if the new GRA is triggered 

in whole or in part, the person will 

include the required amount in the year 

of the triggering event (as opposed to the 

year of the initial transfer). Requiring an 

inclusion in these circumstances only in 

the year of a subsequent triggering event 

when the U.S. transferor is no longer 

owned by the same consolidated group 

is necessary, among other reasons, 

because the successor U.S. transferor 

may not have existed in the year of the 

initial transfer. In such a case, the 

successor U.S. transferor would not be 

able to amend a return for the year of 

the initial transfer to include any tax 

due as a result of a subsequent triggering 

event. Moreover, the requirement is 

appropriate even if the successor U.S. 

transferor did exist in the year of the 

initial transfer because its tax year for 

the year of the initial transfer may be 

closed. In sum, this requirement assures 

the GRA rules are administrable and 

that the ability to collect tax is 

sufficiently preserved. If these 

requirements are met, the original GRA 

will terminate without further effect. 

The IRS and Treasury Department 

have decided to eliminate the 

consolidation continuity requirement 

because these three requirements 

adequately address the government’s 

concern in this area by, among other 

things, preserving the ability to collect 

the tax due as a result of a triggering 

event subsequent to a covered asset 

reorganization. In many asset 

reorganizations, the successor U.S. 

transferor will have an equal or greater 

ability to pay the tax due in the case of 

a subsequent triggering event than 

would the original U.S. transferor. 

Furthermore, the current regulations 

generally do not impose any financial or 

other requirements on the ability of a 

U.S. transferor to enter into a GRA. But 

see § 1.367(a)–8(d) (imposing a security 

requirement in certain situations). 

Consequently, the IRS and Treasury 

Department believe that even if in some 

circumstances an acquisition of a U.S. 

transferor may affect the ability to 

collect the tax due as a result of a 

subsequent triggering event (for 

example, the U.S. transferor is acquired 

from a consolidated group by another 

consolidated group whose value is less 

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Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 5177 

than that of the original consolidated 

group), the requirements above 

nonetheless sufficiently preserve the 

ability to collect the tax that would be 

due if the new GRA were triggered and 

ensure that the terms of the GRA are 

administrable. 

As described in this section, the 

temporary regulations require that the 

acquirer be a domestic corporation 

because, among other reasons, the IRS 

and Treasury Department are concerned 

that if a foreign acquirer is allowed to 

enter into a new GRA, it may be difficult 

for the IRS to collect any tax due in the 

event of a subsequent trigger of the 

GRA. However, the IRS and Treasury 

Department continue to study whether 

it would be appropriate to allow a 

domestic corporate shareholder of the 

U.S. transferor to enter into a new GRA 

when a U.S. transferor is acquired by a 

foreign corporation in an asset 

reorganization under conditions similar 

to those provided in § 1.367(a)–3T(e). 

The IRS and Treasury Department 

welcome more detailed comments on 

specific approaches that could extend 

these rules to foreign acquisitions of the 

U.S. transferor. 

(b) Nontaxable Liquidations 

The current regulations provide that, 

if a corporate U.S. transferor liquidates 

in a transaction that qualifies under 

sections 332 and 337, the GRA is 

triggered unless (1) The U.S. transferor 

filed a consolidated income tax return 

with a U.S. parent corporation both in 

the year of the initial transfer and the 

year of the liquidation, and (2) the 

common parent enters into a new GRA, 

with certain modifications. Section 

1.367(a)–8(f)(2)(ii). 

The temporary regulations provide a 

similar rule. However, the temporary 

regulations eliminate the consolidation 

continuity requirement, so the U.S. 

transferor is no longer required to be a 

member of the same consolidated group 

in the year of the initial transfer and the 

year of the liquidation. Consequently, 

the temporary regulations provide that 

where a U.S. transferor disposes of the 

stock of the foreign transferee 

corporation in a liquidation that 

qualifies under sections 332 and 337, 

the disposition will not constitute a 

triggering event provided that: (1) The 

distributee (successor U.S. transferor) is 

a domestic corporation described in 

section 332(b)(1); (2) the successor U.S. 

transferor or, if the successor U.S. 

transferor is a member of a consolidated 

group, the common parent of the 

successor U.S. transferor’s group, enters 

into a new GRA covering the remaining 

term of the original GRA (with certain 

modifications); (3) where the successor 

U.S. transferor is not a member of the 

original consolidated group 

immediately after the liquidation, the 

person entering into the GRA agrees that 

if there is a subsequent triggering event, 

the taxpayer will recognize the gain in 

the year of the triggering event (as 

opposed to the year of the initial 

transfer); and (4) the successor U.S. 

transferor provides, with its next annual 

certification, Form 8838 to extend the 

period of assessment of the tax on the 

initial transfer. If these conditions are 

satisfied, the original GRA will 

terminate without further effect. 

For reasons similar to those discussed 

above in the context of asset 

reorganizations involving the U.S. 

transferor, the IRS and Treasury 

Department believe that the temporary 

regulations sufficiently address the 

government’s concerns in this area, 

including preserving the ability to 

collect tax due as a result of a 

subsequent triggering event. As a result, 

it is not necessary for the U.S. transferor 

to be a member of the same consolidated 

group in the year of the transfer and the 

year of the liquidation. In addition, the 

IRS and Treasury Department believe 

that it is appropriate to require an 

inclusion in the year of a subsequent 

triggering event if the successor U.S. 

transferor was not a member of a 

consolidated group with the U.S. 

transferor immediately before the 

liquidation for reasons similar to those 

discussed regarding asset 

reorganizations involving the U.S. 

transferor. 

2. Transfers of Transferred Corporation 

Stock or Securities by Transferee 

Foreign Corporation in an Asset 

Reorganization 

Notice 2005–74 provided that if, in a 

section 361 transaction, a transferee 

foreign corporation transfers stock or 

securities of a transferred corporation to 

a foreign acquiring corporation in an 

asset reorganization, the exchanges 

made pursuant to the reorganization 

will be a triggering event, unless certain 

conditions are met. These conditions 

require that the U.S. transferor, common 

parent, or new common parent 

corporation, as applicable, enter into a 

new GRA, with certain modifications. In 

addition, the U.S. transferor also is 

required to provide the new GRA and a 

notice of the asset reorganization with 

its next annual certification. 

For purposes of this rule, Notice 

2005–74 retained the same definition of 

asset reorganization as used for the 

provision dealing with transfers of 

transferee corporation stock, with 

certain modifications. Specifically, 

Notice 2005–74 excludes the following 

asset reorganizations: (1) Triangular 

asset reorganizations described in 

§ 1.358–6(b); and (2) asset 

reorganizations where, after the 

reorganization, the same corporation is 

both the transferee foreign corporation 

(or successor transferee foreign 

corporation, as applicable) and the 

transferred corporation (or the successor 

transferred corporation, as applicable). 

The temporary regulations generally 

incorporate these rules and provide that 

if the above conditions are satisfied the 

original GRA will terminate without 

further effect. However, even if these 

conditions are satisfied, the temporary 

regulations provide specific gain 

recognition rules if the transferee 

foreign corporation transfers stock or 

securities of the transferred corporation 

in an asset reorganization and the U.S. 

transferor recognizes gain under section 

356(a)(1). See section C of this 

preamble. 

As noted in this preamble, Notice 

2005–74 excluded from the definition of 

the term asset reorganization any 

triangular asset reorganizations of the 

transferee foreign corporation and 

transferred corporation and certain 

upstream and downstream 

reorganizations. In response to 

comments and upon further study by 

the IRS and Treasury Department, the 

temporary regulations address the 

treatment of triangular asset 

reorganizations of the transferee foreign 

corporation and certain upstream and 

downstream reorganizations. See 

sections G and H of this preamble. 

3. Transfers of Substantially All of a 

Transferred Corporation’s Assets 

Notice 2005–74 provides that if a 

transferred corporation transfers 

substantially all its assets in an asset 

reorganization, the exchanges made 

pursuant to the reorganization will be a 

triggering event, unless certain 

conditions are met. These conditions 

require that the U.S. transferor, U.S. 

parent corporation or new U.S. parent 

corporation, as applicable, enters into a 

new GRA, with certain modifications. 

The U.S. transferor also is required to 

provide the new GRA and the notice of 

the asset reorganization with its next 

annual certification. The definition of 

asset reorganization is the same as that 

used in asset reorganizations involving 

the transferee foreign corporation. 

The temporary regulations generally 

incorporate these rules and provide that 

if these conditions are met, the original 

GRA will terminate without further 

effect. However, even if these conditions 

are satisfied, the temporary regulations 

provide specific gain recognition rules 

(described in section C of this preamble) 

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5178 Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 

if the transferred corporation transfers 

substantially all of its assets in an asset 

reorganization and the transferee foreign 

corporation recognizes gain under 

section 356(a)(1). In addition, although 

the definition of asset reorganization 

excludes triangular asset reorganizations 

and downstream mergers of the 

transferee foreign corporation, the 

temporary regulations address the tax 

treatment of these transactions. See 

sections G and H of this preamble. 

C. Special Rules Regarding 

Nonrecognition Transactions Involving 

Money or Other Property 

The current regulations provide that 

certain nonrecognition transactions are 

not triggering events if particular 

requirements are satisfied. However, 

commentators have stated that the 

current regulations provide that certain 

nonrecognition transactions at the 

transferee foreign corporation or 

transferred corporation level in which 

any money or other property (as 

described in sections 351(b) or 356(a)) is 

received in exchange are triggering 

events without exception. These 

commentators assert that it is not 

appropriate to trigger an entire GRA as 

a result of receiving a relatively minor 

amount of ‘‘boot’’ in the nonrecognition 

transaction. These commentators also 

note that the current regulations do not 

address clearly the treatment of transfers 

of transferee foreign corporation stock 

by a U.S. transferor in a nonrecognition 

transaction in which the U.S. transferor 

receives boot. 

The IRS and Treasury Department 

agree that the receipt of boot under 

section 351(b) or 356(a)(1) in connection 

with the disposition of transferred 

corporation stock or securities, or 

substantially all of a transferred 

corporation’s assets, should not 

automatically trigger all the gain under 

a GRA. Accordingly, the temporary 

regulations provide that if certain 

conditions are met, the entire GRA will 

not be triggered when a transferee 

foreign corporation disposes of 

transferred corporation stock or 

securities in a nonrecognition 

transaction simply because the 

transferee foreign corporation receives 

boot. 

However, the IRS and Treasury 

Department believe that the GRA should 

be triggered to the extent that gain 

would be recognized in such a 

transaction by a transferee foreign 

corporation or a transferred corporation, 

before taking into account basis 

increases that may apply to the stock or 

securities disposed of as a result of 

triggering the GRA. The current, as well 

as the temporary regulations, provide 

that if a U.S. transferor is required to 

recognize gain because of a triggering 

event, then certain basis increases are 

allowed as of the date of the initial 

transfer. Therefore, in determining the 

amount of gain that is recognized under 

the GRA in such a transaction, the 

temporary regulations provide that the 

U.S. transferor first must recognize that 

amount of gain that the transferee 

foreign corporation or transferred 

corporation would have recognized 

under 351(b) or 356(a)(1), before taking 

into account the basis increases that are 

allowed under the regulations as of the 

date of the initial transfer. Second, if the 

U.S. transferor has not recognized all 

the gain realized, but not recognized, on 

the initial transfer, then its new GRA 

will reflect any remaining unrecognized 

gain on the initial transfer. Third, after 

the consequences of the transaction are 

determined under the temporary 

regulations, then the taxpayer must 

determine the amount of gain, if any, 

that the transferee foreign corporation or 

transferred corporation must recognize 

under 351(b) or 356(a)(1). In 

determining the amount to be 

recognized, the basis of the stock 

disposed of shall reflect the basis 

increase allowed as a result of the gain 

recognized under the GRA by the U.S. 

transferor. 

This special rule limiting recognition 

of gain in otherwise nonrecognition 

transactions involving boot applies only 

if the U.S. transferor complies with the 

otherwise applicable requirements of 

the exception to recognizing all of the 

gain subject to the GRA when there is 

a triggering event. This special rule is 

intended to require the U.S. transferor to 

recognize only an appropriate amount of 

income, without automatically 

triggering the entire GRA. 

The IRS and Treasury Department 

also believe that additional guidance is 

needed on the treatment of transfers of 

transferee foreign corporation stock by a 

U.S. transferor in a nonrecognition 

exchange in which the U.S. transferor 

receives boot. Therefore, the temporary 

regulations treat the disposition of 

transferee foreign corporation stock in a 

nonrecognition transaction by the U.S. 

transferor when the U.S. transferor 

receives money or other property as 

described in section 351(b) or 356(a) as 

a termination of the GRA in whole or in 

part. Consequently, if a new GRA is 

filed, then the U.S. transferor will 

recognize gain under the new GRA in 

the event of a subsequent triggering 

event in the amount of the gain realized, 

but not recognized, in the initial transfer 

less any gain recognized by the U.S. 

transferor under section 351(b) and 

356(a)(1) in connection with the 

nonrecognition transaction. If, however, 

a new GRA is not filed in connection 

with the nonrecognition transaction, 

then the original GRA is triggered, and 

the U.S. transferor must recognize the 

gain that was realized, but not 

recognized, on the initial transfer less 

any gain recognized by the U.S. 

transferor under section 351(b) or 

356(a)(1) in connection with the 

nonrecognition transaction. 

D. Effect of Consolidation and 

Deconsolidation on Gain Recognition 

Agreements 

Commentators noted that the current 

regulation does not adequately address 

the effect on GRAs of certain 

transactions involving consolidated 

groups. For example, the commentators 

noted that it is not clear what effect a 

U.S. transferor becoming a member of a 

consolidated group has on an existing 

GRA. The current regulations do 

provide, however, that if a U.S. 

transferor is a member of a consolidated 

group at the time of the initial transfer 

and ceases to be a member of the group 

during the term of the GRA, the 

common parent of such group that 

entered into the GRA continues to be 

liable under the original GRA. Section 

1.367(a)–8(b)(5)(ii). Several 

commentators have raised concerns that 

such a result is not appropriate because 

the actions of an acquirer could 

unilaterally affect the liability of the 

original consolidated group under the 

GRA. 

The IRS and Treasury Department 

agree that the effect of these transactions 

needs to be clarified and rationalized. 

Accordingly, in response to these 

concerns, the temporary regulations 

provide specific rules addressing these 

transactions. In particular, the IRS and 

Treasury Department believe that the 

U.S. parent corporation of a 

consolidated group should not continue 

to be liable under a GRA with respect 

to a U.S. transferor that is no longer a 

member of such group. 

The temporary regulations provide 

that when a U.S. transferor becomes a 

member of a consolidated group 

(including a transaction where it joins 

such a group after being a member of 

another consolidated group) the 

transaction is a triggering event unless 

certain conditions are met. If these 

conditions are satisfied, the original 

GRA is terminated without further 

effect. These conditions require the U.S. 

parent corporation of the consolidated 

group that the U.S. transferor joins (1) 

To enter into a new GRA for the 

remaining term of the original GRA and 

(2) to elect to recognize gain in the 

taxable year of any subsequent 

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triggering event (as opposed to the year 

of the initial transfer). A notice of the 

consolidation transaction must also be 

filed with the next annual certification. 

The IRS and Treasury Department 

believe that these requirements ensure 

that a GRA remains in effect after a U.S. 

transferor joins a consolidated group. 

These requirements are also consistent 

with § 1.1502–77(a), which provides 

that the common parent is the sole agent 

for each member of the consolidated 

group. 

In addition, the temporary regulations 

also cover situations in which a U.S. 

transferor ceases to be a member of a 

consolidated group and does not 

become a member of a new consolidated 

group. In these cases, the transaction is 

a triggering event, unless certain 

conditions are met. If these conditions 

are satisfied, the original GRA is 

terminated without further effect. These 

conditions require the U.S. transferor (1) 

To enter into a new GRA for the 

remaining term of the original gain 

recognition agreement and (2) to elect 

that in the event of a subsequent 

triggering event the U.S. transferor will 

recognize gain in the year of the 

triggering event. The U.S. transferor 

must also provide notice of the 

deconsolidation with the next annual 

certification. 

E. U.S. Transferor Goes Out of Existence 

in a Transaction Giving Rise to a Gain 

Recognition Agreement 

The current regulation provides that 

when a U.S. transferor goes out of 

existence in a transaction giving rise to 

a GRA, gain generally qualifies for 

nonrecognition treatment only if the 

U.S. transferor is owned by a single U.S. 

parent corporation, 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 a GRA. 

Section 1.367(a)–8(f)(2)(i). The current 

regulation provides that a U.S. 

transferor that is controlled by five or 

fewer domestic corporations may 

request a ruling that the transaction 

qualifies for nonrecognition treatment. 

Section 1.367(a)–8(f)(2)(i). 

Notice 2005–74, in turn, provides a 

rule that treats all members of the U.S. 

parent’s consolidated group for the 

taxable year that includes the transfer as 

a single corporation for purposes of 

§ 1.367(a)–8(f)(2)(i). Thus, a U.S. 

transferor that is not directly owned by 

a single U.S. parent corporation may 

still qualify for nonrecognition, without 

requesting a ruling, when the U.S. 

transferor goes out of existence in a 

transaction giving rise to a GRA, if it is 

indirectly wholly owned by members of 

a consolidated group. 

The IRS and Treasury Department 

believe it is necessary to provide 

additional guidance on how GRAs are 

entered into when a U.S. transferor is 

controlled by multiple corporate 

shareholders with which the U.S. 

transferor does not join in filing a 

consolidated return. Moreover, the IRS 

and Treasury Department believe that in 

this area a single rule should apply both 

in consolidated and nonconsolidated 

situations. As a result, the temporary 

regulations provide unified rules, 

replacing both the current regulations 

and Notice 2005–74, in situations in 

which a U.S. transferor goes out of 

existence in a transaction giving rise to 

a GRA. 

The temporary regulations generally 

provide that when a U.S. transferor goes 

out of existence in a transaction giving 

rise to a GRA, the gain may qualify for 

nonrecognition treatment if (1) The 

requirements of section 367(a)(5) and 

any regulations under that paragraph are 

satisfied such that five or fewer 

domestic corporations control the U.S. 

transferor and appropriate basis 

adjustments are made, (2) the 

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

satisfied if the transferred corporation is 

domestic, (3) all domestic corporate 

shareholders of the U.S. transferor that 

own at least five percent of either the 

total voting power or the total fair 

market value of the stock of the 

transferee foreign corporation 

immediately after the transaction enter 

into GRAs with respect to their pro rata 

share of the gain in the transferred stock 

or securities that designate such 

domestic corporate shareholders as U.S. 

transferors for purposes of §§ 1.367(a)–

3(b) and (c) and 1.367(a)–8T, and (4) all 

domestic corporate shareholders that 

enter into GRAs elect to recognize any 

gain upon a subsequent trigger of the 

GRA in the year of the triggering event. 

The temporary regulations eliminate 

the current regulation’s option to 

request a private letter ruling because 

guidance is now provided on how GRAs 

are entered into by five or fewer 

domestic corporations that control a 

U.S. transferor satisfying section 

367(a)(5). In addition, the temporary 

regulations clarify that the terms of 

section 367(a)(5) must be satisfied 

(along with other requirements) to avoid 

gain recognition on the U.S. transferor’s 

section 361 transfer of stock or 

securities to a foreign acquiring 

corporation. Therefore, the rule in 

Notice 2005–74 treating consolidated 

group members as a single corporation 

is incorporated by reference to section 

367(a)(5), which provides that all 

members of the same affiliated group are 

treated as one corporation. Lastly, 

because these rules address how gain 

recognition may be avoided under 

section 367(a)(1) on the initial transfer 

itself, rather than the effect of 

subsequent transactions on existing 

GRAs, these rules have been removed 

from § 1.367(a)–8 and included instead 

in § 1.367(a)–3T(e). 

F. Transfers of Transferred 

Corporation’s Assets 

Under the current regulations, 

dispositions of substantially all of the 

assets of the transferred corporation 

(within the meaning of section 

368(a)(1)(C)) are generally treated as 

deemed dispositions of the stock or 

securities of the transferred corporation 

and therefore are triggering events. 

Section 1.367(a)–8(e)(3). In Revenue 

Ruling 57–518 (1957–2 CB 253), see 

§ 601.601(d)(2), the IRS stated that what 

constitutes ‘‘substantially all of the 

properties’’ as the term is used in 

section 368(a)(1)(C) ‘‘will depend upon 

the facts and circumstances in each case 

rather than upon any particular 

percentage.’’ However, Revenue 

Procedure 77–37 (1977–2 CB 586), see 

§ 601.601(d)(2), provides that for ruling 

purposes, the transfer by a corporation 

of 70 percent of its gross assets or 90 

percent of its assets net of liabilities will 

generally be deemed to be a transfer of 

substantially all of the assets of a 

corporation. 

Commentators have noted that 

defining substantially all by reference to 

section 368(a)(1)(C) may not be 

appropriate in the context of the GRA 

rules. The IRS and Treasury 

Department, however, generally believe 

that defining ‘‘substantially all’’ for 

these purposes by reference to the 

definition of the term under section 

368(a)(1)(C) is appropriate. Nonetheless, 

the IRS and Treasury Department 

believe that it is important to clarify the 

scope of the term ‘‘substantially all,’’ as 

used in the current regulation and the 

temporary regulations. One 

commentator suggested that if a 

transferred corporation disposes of less 

than 70 percent of its gross assets or 90 

percent of its assets net of liabilities, the 

transfer will not be treated as a 

disposition of substantially all of the 

assets of the transferred corporation for 

purposes of § 1.367(a)–8(e)(3), and thus, 

such a disposition would not trigger a 

GRA. This suggestion is not correct. If, 

upon considering the facts and 

circumstances, a transferred corporation 

has disposed of substantially all its 

assets, such a transaction is a triggering 

event, even if the transferred 

corporation disposes of less than 70 

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percent of a corporation’s gross assets or 

90 percent of its assets net of liabilities. 

The ‘‘substantially all’’ safe harbor 

provided in Revenue Procedure 77–37 is 

intentionally high so that the IRS does 

not need to engage in a factually 

detailed analysis before issuing a letter 

ruling. As a result, in the context of 

GRAs, the Revenue Procedure’s 

threshold does not mean that a 

disposition of substantially all the assets 

does not occur upon the disposition of 

a lesser amount of assets. Therefore, the 

temporary regulations provide that 

whether a transferred corporation has 

disposed of substantially all of its assets 

is determined under all the facts and 

circumstances. 

G. Transactions That Terminate the 

GRA 

1. Taxable Dispositions of Transferee 

Foreign Corporation Stock 

Section 1.367(a)–8(h)(1) provides that 

a GRA will terminate, in whole or in 

part, as a result of certain taxable 

dispositions of the transferee foreign 

corporation stock by the U.S. transferor. 

A key premise for this termination rule 

is that the basis in the transferee foreign 

corporation stock received by the U.S. 

transferor in the initial transfer is 

assumed to reflect the basis in the 

transferred stock or securities. 

The IRS and Treasury Department 

continue to believe this termination rule 

is appropriate. As a result, the 

temporary regulations generally retain 

this rule. However, the temporary 

regulations modify the termination rule 

to ensure that a GRA terminates only 

when the transferee foreign corporation 

stock disposed of in fact reflects the 

basis of the transferred stock or 

securities. This termination rule only 

applies to transferee foreign corporation 

stock that is received (or deemed 

received) in the initial transfer. The IRS 

and Treasury Department understand 

that in some cases, taxpayers may take 

the position that the basis in the 

transferee foreign corporation stock does 

not reflect the basis of the transferred 

stock or securities. For example, 

taxpayers may take the position that the 

basis in such transferee foreign 

corporation stock received also reflects 

the basis of other property that had a 

built-in loss when it was transferred to 

the transferee foreign corporation. Thus, 

the termination rule in the temporary 

regulations will apply only when the 

basis of the transferee foreign 

corporation stock received (or deemed 

received) in the initial transfer properly 

reflects the sum of the aggregate basis of 

the transferred stock or securities 

immediately before the initial transfer, 

plus any increase in the basis of such 

stock or securities as a result of 

recognizing gain on the transfer. In 

addition, for purposes of this basis 

determination, basis increases to the 

transferee foreign corporation stock as a 

result of income inclusions (for 

example, pursuant to section 961) shall 

not be taken into account. 

In cases where the basis of the 

relevant transferee foreign corporation 

stock exceeds the basis of the 

transferred stock or securities, however, 

the temporary regulations allow the U.S. 

transferor to take advantage of this 

termination rule if it elects to reduce its 

basis in the transferee foreign 

corporation stock such that it does not 

exceed the basis it had in the transferred 

stock or securities. If the U.S. transferor 

makes this election, the basis reduction 

will be effective immediately before the 

taxable disposition that terminates the 

GRA. In addition, if the U.S. transferor 

makes this election, it may increase its 

basis in other stock of the transferee 

foreign corporation it holds, if any, by 

a corresponding amount but not above 

the fair market value of such stock. 

Similar rules apply in the case of 

partial dispositions of transferee foreign 

corporation stock and dispositions of 

transferee foreign corporation stock in 

nonrecognition transactions in which a 

portion of the realized gain is 

recognized. 

2. Certain Inbound Distributions or 

Transfers of the Transferred Stock 

Section 1.367(a)–8(h)(3) provides that 

a distribution of the transferred stock in 

a transaction qualifying under section 

355 or sections 332 and 337 will 

terminate the GRA if the U.S. 

transferor’s basis in the transferred stock 

or securities that it receives in the 

section 355 or 332 and 337 transaction 

does not exceed the basis the U.S. 

transferor had in the transferred stock or 

securities immediately before the initial 

transfer. In response to comments, 

however, the temporary regulations 

allow the U.S. transferor to take 

advantage of this termination rule if it 

elects to reduce the basis of the 

transferred stock or securities if the 

basis exceeds the basis the U.S. 

transferor had in the transferred stock or 

securities immediately before the initial 

transfer. For purposes of this basis 

determination, basis increases to the 

transferred stock as a result of income 

inclusions (for example, pursuant to 

section 961) shall not be taken into 

account. If the U.S. transferor elects to 

reduce basis in the transferred stock or 

securities it receives, the U.S. transferor 

shall increase its basis in other 

transferee foreign corporation stock (if 

any) by a corresponding amount but not 

above the fair market value of such 

stock. 

Although the temporary regulations 

generally provide that a GRA terminates 

in certain section 332 liquidations of the 

transferee foreign corporation, the IRS 

and Treasury Department are studying 

to what extent this rule should apply 

when the transferee foreign corporation 

has a minority shareholder and 

therefore recognizes gain under section 

336 in connection with the section 332 

liquidation. As noted in the request for 

comments, although the IRS and 

Treasury Department generally believe 

it is appropriate to terminate entirely 

the GRA in a section 332 liquidation, in 

other circumstances it may not be 

appropriate. For example, if after an 

initial transfer, a wholly-owned 

transferee foreign corporation issues a 

minority interest to a foreign 

shareholder, completely terminating the 

GRA upon a section 332 liquidation of 

the transferee foreign corporation does 

not account for the fact that the U.S. 

transferor has indirectly disposed of up 

to 20 percent of its interest in the 

transferred stock or securities. 

Therefore, when the temporary 

regulations are finalized, the IRS and 

Treasury Department may address the 

effect that section 336 gain has on a gain 

recognition agreement when a transferee 

foreign corporation with a minority 

shareholder liquidates under section 

332. 

The temporary regulations expand the 

current rule to terminate GRAs when 

certain U.S. persons other than the 

original U.S. transferor receive the stock 

or securities that was transferred in the 

initial transfer. For example, if the 

transferred corporation is distributed to 

a domestic corporation or U.S. 

individual other than the U.S. transferor 

in a section 355 ‘‘split off,’’ the GRA 

would terminate if the domestic 

corporation or U.S. individual receives 

the transferred stock or securities with 

a basis that is not greater than the basis 

the U.S. transferor had in the transferred 

stock or securities immediately before 

the initial transfer. 

Finally, and in response to comments 

requested in Notice 2005–74, the 

temporary regulations also expand the 

current rule to provide that the GRA 

will terminate in additional transactions 

where the U.S. transferor or a domestic 

corporation receives the transferred 

stock or securities with a basis that is 

not greater than the basis the U.S. 

transferor had in the transferred stock or 

securities immediately before the initial 

transfer. These transactions are 

upstream asset reorganizations where 

the U.S. transferor acquires the assets of 

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the transferee foreign corporation, 

downstream asset reorganizations where 

the transferred corporation acquires the 

assets of the transferee foreign 

corporation, and certain other asset 

reorganizations where a domestic 

corporation acquires the assets of the 

transferee foreign corporation. 

Consequently, the temporary regulations 

generally provide that the GRA 

terminates in particular circumstances 

when the transferred stock or securities 

are held with the correct basis by certain 

U.S. persons, even if the U.S. person is 

not the original U.S. transferor. 

However, the IRS and Treasury 

Department believe that it is not 

appropriate for the GRA to terminate 

when the transferred stock or securities 

may then be disposed of, directly or 

indirectly, by a foreign shareholder 

without being subject to U.S. tax. 

Therefore, this termination rule is 

limited to section 332 liquidations, 

section 355 distributions, and asset 

reorganizations where the domestic 

corporation that holds the transferred 

stock or securities after the transaction 

is either the U.S. transferor or a member 

of the same consolidated group of which 

the U.S. transferor is then a member. 

The IRS and Treasury Department 

continue to study whether it would be 

appropriate to expand the scope of the 

rule to transactions where the acquirer 

is not a member of the same 

consolidated group of which the U.S. 

transferor is then a member and request 

comments regarding such a rule. 

H. Triangular Reorganizations of 

Transferee Foreign Corporation and 

Transferred Corporation 

Notice 2005–74 provides rules that 

allow a U.S. transferor to avoid gain 

recognition on certain asset 

reorganizations of the transferee foreign 

corporation and transferred corporation. 

However, Notice 2005–74 restricts the 

definition of ‘‘asset reorganization’’ to 

exclude triangular asset reorganizations 

of the transferee foreign corporation and 

transferred corporation. 

In response to comments and after 

further study, the temporary regulations 

address the treatment of certain 

triangular asset reorganizations. 

Specifically, they provide that if the 

transferee foreign corporation or 

transferred corporation is acquired in a 

triangular asset reorganization, the 

exchanges made pursuant to the 

reorganization will not be triggering 

events if certain requirements are 

satisfied. For purposes of this rule, a 

triangular asset reorganization is limited 

to a transaction in which the acquiring 

subsidiary is foreign. The additional 

requirements are as follows. First, the 

U.S. transferor or common parent must 

enter into a new GRA to recognize gain 

with respect to the initial transfer 

during the remaining term of the 

original GRA, with certain 

modifications. In the case of a triangular 

asset reorganization of the transferee 

foreign corporation, the U.S. transferor 

also must make certain designations 

depending on whether the parent 

corporation of the foreign acquiring 

subsidiary is foreign or domestic and 

depending on the type of triangular 

asset reorganization. Finally, the U.S. 

transferor must provide notice of the 

transaction with its next annual 

certification. 

I. Other Changes 

The current regulations refer to ‘‘stock 

of the transferred corporation’’ in some 

paragraphs but refer to ‘‘stock or 

securities of the transferred 

corporation’’ in other paragraphs. The 

temporary regulations refer to ‘‘stock or 

securities of the transferred 

corporation’’ because either stock or 

securities, or both, may be subject to a 

GRA when transferred to a transferee 

foreign corporation by a U.S. person. In 

contrast, the temporary regulations 

generally refer only to stock, and not 

securities, of the transferee foreign 

corporation. The rules applying to a 

disposition of the transferee foreign 

corporation are concerned primarily 

with transactions in which the U.S. 

transferor loses or decreases its control 

of the transferee foreign corporation, 

which does not occur when a U.S. 

transferor disposes of securities of the 

transferee foreign corporation. 

The current regulation provides a 

reasonable cause exception to triggering 

a GRA when the person required to file 

the GRA fails to comply in any material 

respect with the terms of a GRA, or 

when the person fails to meet the 

timeliness requirement for submitting a 

GRA. The temporary regulations retain 

this reasonable cause exception but 

provide additional guidance on how the 

person should submit a request for 

reasonable cause relief. The temporary 

regulations also provide that the Area 

Director or Director of Field Operations, 

as applicable, shall notify the person in 

writing within 120 days of the filing if 

the person will be granted reasonable 

cause relief or if additional time is 

required to make the determination. The 

120-day period runs from the date that 

the IRS notifies the person that its 

request has been received. Once this 

period begins, the person shall be 

deemed to have established reasonable 

cause if it is not again notified within 

120 days. 

Effective Dates 

With the exception of the special boot 

rules described in section C of this 

preamble, these temporary regulations 

apply to GRAs filed with respect to 

transfers of stock or securities occurring 

on or after March 7, 2007. The boot 

rules described in section C of this 

preamble apply to GRAs filed with 

respect to transfers of stock or securities 

occurring on or after 180 days after 

February 5, 2007. However, GRAs that 

are filed after March 7, 2007 in 

connection with transactions entered 

into pursuant to a contract that was 

binding before February 5, 2007 are not 

subject to these regulations, but 

taxpayers may elect to apply the rules 

of these regulations to such a GRA. For 

all open years, taxpayers may apply 

rules of these regulations that were not 

already effective under § 1.367(a)–8 to 

GRAs filed before March 7, 2007. 

Similar effective date rules are provided 

for those transfers discussed in section 

E of this preamble (regarding a U.S. 

transferor that goes out of existence in 

a transaction giving rise to a GRA). 

Special Analyses 

It has been determined that this 

Treasury Decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that 5 U.S.C. 

553(b) and (d) do not apply to these 

regulations. For applicability of the 

Regulatory Flexibility Act, please refer 

to the cross-referenced notice of 

proposed rulemaking published 

elsewhere in this Federal Register. 

Pursuant to section 7805(f) of the 

Internal Revenue Code, this regulation 

has been submitted to the Chief Counsel 

for Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Request for Comments 

The IRS and Treasury Department are 

considering issuing subsequent public 

guidance to address additional issues 

under section 367(a). Accordingly, 

comments are requested regarding the 

application of § 1.367(a)–8, including 

whether other transactions should be 

excepted from being treated as triggering 

events pursuant to rules similar to those 

contained in the temporary regulations. 

For example, comments are requested as 

to the most appropriate treatment of 

divisive reorganizations qualifying 

under section 368(a)(1)(D) or (G), 

involving the U.S. transferor 

corporation, the transferee foreign 

corporation, and the transferred 

corporation. Comments also are 

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requested on how a GRA is affected by 

a subsequent transaction to which 

section 304 applies involving transferee 

foreign corporation stock or transferred 

corporation stock. The IRS and Treasury 

Department believe that the rules in the 

temporary regulations generally deal 

with many transactions to which section 

304 applies but request specific 

comments on any issues raised. 

In addition, the IRS and Treasury 

Department request comments on the 

rule in § 1.367(a)–8T(b)(3)(iii), which 

imposes interest on the additional tax, 

if any, that is required to be paid as a 

result of a triggering event. Specifically, 

comments are requested on whether 

interest should be imposed even when 

no additional tax is ultimately due as a 

result of a triggering event because, for 

example, a taxpayer has sufficient net 

operating losses to offset the tax that 

would otherwise be due as a result of a 

triggering event. If an interest charge is 

not required in such a case, a taxpayer 

may be viewed as inappropriately 

benefiting from deferring the realized 

but unrecognized gain on the initial 

transfer until a later year. However, 

there are other instances where the 

current regulations clearly permit such 

a benefit (for example, under § 1.367(a)–

8(h)(1)(i) in certain taxable dispositions 

of the stock of the transferee foreign 

corporation). 

As described in section B.1.a of this 

preamble, comments are requested on 

whether a GRA should not be triggered, 

if certain conditions similar to those 

provided in § 1.367(a)–3T(e) are met, 

when a U.S. transferor is acquired by a 

foreign corporation in an asset 

reorganization. Specifically, the IRS and 

Treasury Department request comments 

on how to reconcile the terms of the 

GRA that would be filed pursuant to 

§ 1.367(a)–3T(e) with the terms of a new 

GRA that would be filed to avoid 

triggering the original GRA. For 

example, the transferee foreign 

corporation under the outstanding GRA 

(and under the new GRA filed to avoid 

triggering the outstanding GRA) would 

be the transferred corporation with 

respect to the GRA filed pursuant to 

§ 1.367(a)–3T(e). 

Finally, and as described in section 

G.2 of this preamble, the IRS and 

Treasury Department are studying to 

what extent the GRA termination rule 

should apply when the transferee 

foreign corporation liquidates in a 

transaction described in section 332 but 

also recognizes gain under section 336 

because of a minority shareholder. 

Comments are requested on how the 

termination rule should address such a 

transaction, taking into consideration 

potentially different results depending 

on whether the minority shareholder is 

also subject to a GRA or is, for example, 

instead a foreign person who was issued 

transferee foreign corporation stock after 

the initial transfer. 

For information on how to submit 

comments or request a public heading, 

see the section ‘‘Comments and 

Requests for a Public Hearing,’’ set forth 

in the notice of proposed rulemaking 

published elsewhere in this issue of the 

Federal Register. 

Drafting Information 

The principal author of these 

temporary regulations is Daniel McCall 

of the Office of Associate Chief Counsel 

(International). However, other 

personnel from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Amendments to the Regulations 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding new 

entries to read as follows: 

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

Section 1.367(a)–3T(e) also issued under 

367(a) and (b).* * * 

Section 1.367(a)–8T also issued under 

367(a) and (b).* * * 

■ Par. 2. For each entry in the table in 

the ‘‘Section’’ column, remove the 

language in the ‘‘Remove’’ column and 

add the language in the ‘‘Add’’ column 

in its place. 

Section Remove Add 

1.367(a)–3(d)(3), Example 1(ii), fourth sentence § 1.367(a)–8(e) ................................................. § 1.367(a)–8T(d)(1). 

1.367(a)–3(d)(3), Example 1(ii), fourth sentence § 1.367(a)–8(b)(1)(vii) ....................................... § 1.367(a)–8T(b)(1)(vii). 

1.367(a)–3(d)(3), Example 1(ii), fifth sentence .. § 1.367(a)–8(b)(1)(vii) ....................................... § 1.367(a)–8T(b)(1)(vii). 

1.367(a)–3(d)(3), Example 1A(ii), first sentence § 1.367(a)–8(a)(3) ............................................ § 1.367(a)–8T(a)(3). 

1.367(a)–3(d)(3), Example 4(i), first sentence ... § 1.367(a)–8(e)(3)(i) ......................................... § 1.367(a)–8T(d)(2). 

1.367(a)–3(d)(3), Example 4(ii), first sentence .. § 1.367(a)–8(e)(3)(i) ......................................... § 1.367(a)–8T(d)(2). 

1.367(a)–3(d)(3), Example 4(ii), second sentence.§ 1.367(a)–8(h)(2), because A and W filed a 

consolidated Federal income tax return 

prior to the transaction.

§ 1.367(a)–8T(g)(2), because A owned an 

amount of stock in W described in section 

1504(a)(2) immediately before the transaction. 

1.367(a)–3(d)(3), Example 6(ii), last sentence ... § 1.367(a)–8(e)(3)(i) ......................................... § 1.367(a)–8T(d)(2). 

1.367(a)–3(d)(3), Example 7A(ii), last sentence § 1.367(a)–8(b)(5) ............................................ § 1.367(a)–8T(b)(5). 

paragraph (d)(3), Example 7A(ii), last sentence and (e)(3)(i) ...................................................... and V satisfies the requirements contained in 

§ 1.367(a)– 8T(e)(1)(iii). 

1.367(a)–3(d)(3), Example 8(ii), second to last 

sentence.

§ 1.367(a)–8(e)(3)(i) ......................................... § 1.367(a)–8T(d)(2). 

1.367(a)–3(d)(3), Example 11(ii), sixth sentence § 1.367(a)–8(e) ................................................. § 1.367(a)–8T(d)(1). 

1.367(a)–3(d)(3), Example 11(ii), sixth sentence § 1.367(a)–8(b)(1)(vii) ....................................... § 1.367(a)–8T(b)(1)(vii). 

1.367(a)–3(e)(1)(A), first sentence ..................... (e) ..................................................................... (g). 

1.367(a)–3(e)(1)(F), third sentence .................... (g) ..................................................................... (j). 

1.367(a)–3(e)(2), first sentence .......................... (e)(1) and (g) .................................................... (g)(1) and (j). 

1.367(a)–3(e)(2), second sentence .................... (e)(2) ................................................................ (g)(2). 

1.367(a)–3(e)(2)(G), first sentence ..................... (e)(1)(G) ........................................................... (g)(1)(G). 

1.367(a)–3(g)(1), first sentence .......................... (g)(2) ................................................................ (j)(2). 

1.367(a)–3(g)(2)(i), first sentence ....................... (g)(2)(iii), (g)(2)(iv) ............................................ (j)(2)(iii), (j)(2)(iv). 

1.367(a)–3(g)(2)(ii), first sentence ...................... (g)(2)(iii) or (iv) ................................................. (j)(2)(iii) or (iv). 

1.367(a)–3(g)(2)(ii), fourth sentence .................. § 1.367(a)–3(f) .................................................. § 1.367(a)–3(h). 

1.367(a)–3(g)(2)(iii), first sentence ..................... (g)(2)(ii) ............................................................ (j)(2)(ii). 

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Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 5183 

Section Remove Add 

1.367(a)–3(g)(2)(iv), first sentence ..................... (g)(2)(i) and (ii) ................................................. (j)(2)(i) and (ii). 

1.367(b)–4(b)(1)(iii), Example 4(i), last sentence § 1.367(a)–8(f)(2) ............................................. § 1.367(a)–3T(e). 

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

as follows: 

■ 1. The second sentence of paragraph 

(a) is revised. 

■ 2. The first sentence of paragraph 

(d)(2)(iii) is revised. 

■ 3. Paragraph (d)(2)(iv) is revised. 

■ 4. The title and introductory text of 

paragraph (d)(2)(v) is revised. 

■ 5. The last two sentences of paragraph 

(d)(3), Example 1A(ii) are revised. 

■ 6. The last two sentences of paragraph 

(d)(3), Example 5A(ii) are revised. 

■ 7. The first and second sentences of 

paragraph (d)(3), Example 7(ii) are 

revised. 

■ 8. The third sentence of paragraph 

(d)(3), Example 7A(ii) is revised. 

■ 9. The last sentence of paragraph 

(d)(3), Example 9(ii) is revised. 

■ 10. The title of paragraph (d)(3), 

Example 10 is revised. 

■ 11. The third sentence of paragraph 

(d)(3), Example 12(ii) is revised. 

■ 12. Redesignating paragraphs (e), (f), 

and (g) as paragraphs (g), (h), and (j), 

respectively. 

■ 13. Adding new paragraphs (e) and (i). 

The revisions and addition read as 

follows: 

§ 1.367(a)–3 Treatment of transfers of 

stock or securities to foreign corporations. 

(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), paragraph (c) of this section 

(regarding transfers of domestic stock or 

securities), or paragraph (e) of this 

section (regarding transfers of stock or 

securities in a section 361 exchange) 

applies. * * * 

* * * * * 

(d) * * * 

(2)(iii) * * * For purposes of 

determining the amount of gain that a 

U.S. person is required to include in 

income as a result of a triggering event, 

see § 1.367(a)–8T(b)(3)(i) and (d). 

(iv) * * * 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 § 1.367(a)–3 and 

§ 1.367(a)–8, including, for example, as 

an additional triggering event an 

indirect disposition of the transferred 

stock or securities. For example, in the 

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

reorganization described in paragraph 

(d)(1)(iii)(A) of this section, a triggering 

event shall include an indirect 

disposition of the transferred stock or 

securities by the transfer6ee foreign 

corporation, such as a disposition of the 

stock of the acquiring corporation 

(either foreign or domestic) by the 

transferee foreign corporation. In the 

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

reorganization described in paragraph 

(d)(1)(iii)(B) of this section, a 

disposition of the stock of the acquiring 

corporation by the domestic issuing 

corporation in a taxable transaction 

shall, for example, terminate the gain 

recognition agreement if the principles 

of § 1.367(a)–8T(g)(1)(i)(A) and (B) are 

satisfied. See Examples 5 and 5A of this 

section. 

(v) Determination of whether 

substantially all of the transferred 

corporation’s assets are disposed of. For 

purposes of applying § 1.367(a)–8T(d)(2) 

to determine whether substantially all of 

the assets of the transferred corporation 

have been disposed of, 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)—

* * * * * 

(3) * * * 

Example 1A. * * * 

(ii) * * * If A leaves the P group, the gain 

recognition agreement would be triggered 

pursuant to § 1.367(a)–8T(d)(4), unless the 

exception provided under § 1.367(a)–8T(e)(8) 

applies. 

* * * * * 

Example 5A * * * 

(ii) * * * If Y sold substantially all of its 

assets (within the meaning of section 

368(a)(1)(C)), the gain recognition agreement 

would be terminated because U owned an 

amount of stock in Y described in section 

1504(a)(2) immediately before the transaction 

and Y is a domestic corporation. See 

§ 1.367(a)–8T(g)(2). In addition, if F disposed 

of the stock of S in a taxable transaction the 

gain recognition agreement would be 

terminated if the principles of § 1.367(a)–

8T(g)(1)(i)(A) and (B) are satisfied. 

* * * * * 

Example 7. * * * 

(ii) * * * The disposition by R, the 

transferred corporation, of substantially all of 

its assets would terminate the gain 

recognition agreement if the assets were 

disposed of in a taxable transaction because 

V owned an amount of stock in Z described 

in section 1504(a)(2) immediately before the 

transaction, and R is a domestic corporation. 

See § 1.367(a)–8T(g)(2). Because the assets 

were transferred in an exchange to which 

section 351 applies, such transfer does not 

trigger the gain recognition agreement if V 

complies with the requirements contained in 

§ 1.367(a)–8T(e)(1)(iii). * * * 

Example 7A. * * * 

(ii) * * * Thus, the gain recognition 

agreement would terminate because V owned 

an amount of stock in Z described in section 

1504(a)(2) immediately before the 

transaction, and R is a domestic corporation. 

See § 1.367(a)–8T(g)(2).* * * 

* * * * * 

Example 9. * * * 

(ii) * * * To determine whether there is a 

triggering event under § 1.367(a)–8T(d)(2), 

both the Business A assets in M and the 

Business B assets in R must be considered. 

Example 10. Concurrent application of 

asset transfer and indirect stock transfer 

rules in section 368(a)(1)(A)/(a)(2)(D) 

reorganization—(i) Facts. * * * 

* * * * * 

Example 12. * * * 

(ii) * * * E’s transfer of its N stock could 

qualify for nonrecognition treatment if D 

satisfies the requirements in § 1.367(a)–

3T(e).* * * 

* * * * * 

(e) [Reserved] For further guidance, 

see § 1.367(a)—3T(e). 

(f) [Reserved] For further guidance, 

see § 1.367(a)–3T(f). 

* * * * * 

(i) [Reserved]. 

* * * * * 

■ Par. 4. Section 1.367(a)–3T is added 

to read as follows: 

§ 1.367(a)–3T Treatment of transfers of 

stock or securities to foreign corporations 

(temporary). 

(a) through (d) [Reserved]. For further 

guidance, see § 1.367(a)–3(a) through 

(d). 

(e) Transfers by a domestic 

corporation to a foreign corporation in 

a section 361 exchange—(1) General 

rule. Notwithstanding paragraphs (b) 

and (c) of this section, if the U.S. 

transferor is a domestic corporation that 

transfers stock or securities to a foreign 

corporation in a section 361 exchange 

that would otherwise be subject to 

section 367(a)(1) under paragraph (a) of 

this section, such transfer shall not be 

subject to section 367(a)(1) if—

(i) The conditions set forth in the 

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

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5184 Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 

any regulations under that section have 

been satisfied, such that, for example, 

the U.S. transferor is controlled (within 

the meaning of section 368(c)) by 5 or 

fewer domestic corporations and 

appropriate basis adjustments are made; 

(ii) In the case of transferred property 

that is stock or securities of a domestic 

corporation, the conditions set forth in 

paragraph (c) of this section are 

satisfied; 

(iii) All domestic corporate 

shareholders of the U.S. transferor 

immediately before the transaction that 

own 5 percent or more (applying the 

attribution rules of section 318, as 

modified by section 958(b)) of the total 

voting power or the total fair market 

value of the stock of the transferee 

foreign corporation immediately after 

the transaction enter into gain 

recognition agreements as provided in 

§ 1.367(a)–8T with respect to their pro 

rata share (determined by the relative 

fair market value of the U.S. transferor 

stock or securities owned) of the gain 

that was realized but not recognized on 

the transfer of the stock or securities of 

the transferred corporation that, in 

addition to the terms of § 1.367(a)–

8T(b), designate such domestic 

corporate shareholders as U.S. 

transferors for purposes of paragraphs 

(b) and (c) of this section and § 1.367(a)–

8T; and 

(iv) All domestic corporate 

shareholders that enter into gain 

recognition agreements pursuant to 

paragraph (e)(1)(iii) of this section make 

the election described in § 1.367(a)–

8T(b)(1)(vii). 

(2) Certain triangular asset 

reorganizations. If a transaction 

described in paragraph (e)(1) of this 

section qualifies as a triangular asset 

reorganization described in § 1.358–

6(b)(2)(i) through (iii), or in sections 

368(a)(1)(G) and (a)(2)(D), the principles 

of § 1.367(a)–3(d)(2)(iv) shall apply with 

respect to any gain recognition 

agreements filed in connection with 

such transaction. 

(3) Example. The provisions of 

paragraph (e)(1) of this section are 

illustrated in the following example: 

Example. (i) Facts. US1 and US2, domestic 

corporations, own 60% and 40%, 

respectively, of the fair market value of UST, 

also a domestic corporation. US1 and US2 

are not members of the same consolidated 

group and are unrelated. UST owns 100% of 

FC, a foreign corporation. In year 1, UST 

transfers 100% of the stock of FC to FA, a 

foreign corporation, in a reorganization 

described in section 368(a)(1)(A) after which 

US1 and US2 own 6% and 4%, respectively, 

of the stock of FA. At the time of the initial 

transfer, the section 1248 amount with 

respect to the FC stock is $0. The notice 

requirement under § 1.367(b)–1(c) is 

satisfied. Section 7874 does not apply to FA’s 

acquisition of the stock of FC. US1 and US2 

satisfy the conditions set forth in the second 

sentence of section 367(a)(5), including 

making appropriate basis adjustments. 

Pursuant to paragraph (e)(1) of this section, 

US1 enters into a gain recognition agreement 

to recognize its pro rata share of the gain 

realized but not recognized on UST’s transfer 

of the stock of FC to FA, designates itself as 

a U.S. transferor for purposes of paragraph (b) 

of this section and § 1.367(a)–8T, and makes 

the election described in § 1.367(a)–

8T(b)(1)(vii). US2 does not enter into a gain 

recognition agreement with respect to its pro 

rata share of the gain realized but not 

recognized on UST’s transfer of the stock of 

FC to FA because US2 owns less than 5 

percent of the stock of FA. In year 4, FA sells 

30% of the FC stock for cash. 

(ii) Result. Because the requirements of 

paragraph (e)(1)(i) through (iv) of this section 

are satisfied, the transfer of the FC stock by 

UST to FA in the year 1 reorganization is not 

subject to section 367(a)(1). In addition, 

because FA partially disposes of the stock of 

FC in year 4, US1 must recognize 30% of its 

pro rata share of the gain realized but not 

recognized on the initial transfer of the FC 

stock to FA pursuant to § 1.367(a)–

8T(d)(1)(iii). The proportion of gain 

recognized by US1 is determined by 

reference to the relative fair market value of 

the UST stock owned by US1 at the time of 

the initial transfer. Thus, US1 must include 

18% of the gain realized, but not recognized, 

on the initial transfer (the 30% of the 

transferred property that was disposed of 

multiplied by the amount of gain subject to 

the gain recognition agreement 

(corresponding to the 60% of the fair market 

value of UST stock that US1 held 

immediately before the initial transfer)), and 

pay any applicable interest. 

(iii) Alternate facts. The facts are the same 

as in paragraph (i) of this Example, except 

that US1 and US2 are members of a 

consolidated group in which USP is the 

common parent. US2 is also a 5-percent 

transferee shareholder as a result of applying 

the attribution rules of section 318, as 

modified by section 958(b). The result is the 

same as in paragraph (ii) of this Example, 

except that under § 1.367(a)–8T(a)(3)(i)(A) 

USP files gain recognition agreements on 

behalf of both US1 and US2. Thus, US1 and 

US2 must include in income in year 4 18% 

and 12%, respectively, of the gain realized, 

but not recognized, on the initial transfer (the 

30% of the transferred property that was 

disposed of multiplied by the amount of gain 

subject to the gain recognition agreement 

(corresponding to the 60% and 40% of the 

fair market value of UST stock that US1 and 

US2, respectively, held immediately before 

the initial transfer)), and pay any applicable 

interest. 

(f) Effective date—(1) General rule. 

The rules of this § 1.367(a)–3T(e) apply 

to transfers of stock or securities 

occurring on or after March 7, 2007. 

However, these rules do not apply to 

transfers of stock or securities occurring 

on or after March 7, 2007, if such 

transfer was entered into pursuant to a 

written agreement which was (subject to 

customary conditions) binding before 

February 5, 2007, and at all times 

thereafter. Solely for purposes of this 

paragraph (f), a transfer described in the 

preceding sentence shall be deemed to 

be a transfer occurring before March 7, 

2007. For matters covered in this section 

for periods before March 7, 2007 but on 

or after July 20, 1998, the rule of 

§ 1.367(a)–8(f)(2)(i) (see 26 CFR part 1, 

revised April 1, 2006) applies. 

(2) Transfers before effective date—(i) 

General rule. Taxpayers may apply the 

rules of § 1.367(a)–3T(e) to transfers 

before March 7, 2007 and after July 20, 

1998, for all open taxable years ending 

on or after July 20, 1998. This paragraph 

(f)(2)(i) applies only to rules in 

§ 1.367(a)–3T(e) that were not already 

effective under the rules of § 1.367(a)–

8(f)(2)(i). 

(ii) Special filing rule. This paragraph 

(f)(2)(ii) provides the time and manner 

in which taxpayers may apply 

paragraph (f)(2)(i) of this section. 

Notwithstanding the rules provided in 

§ 1.367(a)–8T(a)(2), all agreements, 

certifications, or other information 

related to the gain recognition 

agreement that should have been filed 

on or before March 7, 2007 with respect 

to a transfer shall be treated as having 

been timely filed, provided they are 

attached to a Federal income tax return 

amending the taxpayer’s Federal income 

tax return for the taxable year in which 

they should have been attached. The 

amended return described in the 

preceding sentence must be filed before 

August 6, 2007. A taxpayer that wishes 

to apply paragraph (f)(2)(i) of this 

section but that fails to meet the filing 

requirement described in the preceding 

sentence must request reasonable cause 

relief as provided in § 1.367(a)–

8T(e)(10). 

(3) Expiration. The applicability of 

this section expires on or before 

February 1, 2010. 

* * * * * 

■ Par. 5. Section 1.367(a)–8 is amended 

by revising paragraphs (a) through (i) to 

read as follows: 

§ 1.367(a)–8 Gain recognition agreement 

requirements. 

(a) through (i) [Reserved]. For further 

guidance, see § 1.367(a)–8T(a) through 

(h). 

■ Par. 6. Section 1.367(a)–8T is added 

to read as follows: 

§ 1.367(a)–8T Gain recognition agreement 

requirements (temporary). 

(a) In general. This section specifies 

the terms and conditions for an 

agreement to recognize gain entered into 

pursuant to §§ 1.367(a)–3(b) through (d) 

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Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 5185 

and 1.367(a)–3T(e) to qualify for 

nonrecognition treatment under section 

367(a). 

(1) Definitions. The following 

definitions apply for purposes of this 

section: 

(i) Asset reorganization. Except as 

otherwise provided in this paragraph 

(a)(1)(i), the term asset reorganization 

means a reorganization described in 

section 368(a)(1) involving the transfer 

of assets by a corporation to another 

corporation pursuant to section 361, 

except that such term shall include 

reorganizations described in section 

368(a)(1)(D) or (G) only if the 

requirements of section 354(b)(1)(A) and 

(B) are met. For purposes of paragraphs 

(e)(3)(ii) and (e)(3)(iii) of this section, 

the following reorganizations are 

excluded from the term ‘‘asset 

reorganization’’: 

(A) Triangular asset reorganizations 

described in § 1.358–6(b)(2)(i) through 

(iii) or in sections 368(a)(1)(G) and 

(a)(2)(D). For rules applicable to 

triangular asset reorganizations 

described in § 1.358–6(b)(2)(i) through 

(iii) or in sections 368(a)(1)(G) and 

(a)(2)(D), see paragraph (e)(4) of this 

section. 

(B) Asset reorganizations where, after 

the reorganization, the same corporation 

is both the transferee foreign 

corporation (or successor transferee 

foreign corporation, as applicable) and 

the transferred corporation (or the 

successor transferred corporation, as 

applicable); for example, the acquisition 

of the transferee foreign corporation’s 

assets by the transferred corporation in 

a reorganization described in section 

368(a)(1). For rules applicable to certain 

upstream and downstream 

reorganizations involving the transferee 

foreign corporation and transferred 

corporation, see paragraphs (e)(6) and 

(g)(3) of this section. 

(ii) The term common parent means a 

corporation that controls an affiliated 

group of corporations that files its 

Federal income tax returns on a 

consolidated basis. 

(iii) The term consolidated group has 

the meaning set forth in § 1.1502–1(h). 

(iv) The term disposition means any 

transfer that would constitute a 

disposition for any purpose of the 

Internal Revenue Code and the 

regulations thereunder. It also includes 

an indirect disposition of the stock of 

the transferred corporation as described 

in § 1.367(a)–3(d). It does not, however, 

include a redemption of stock under 

section 302(d) to the extent the 

redemption is treated as a distribution 

to which section 301(c)(1) applies. 

(v) The term gain recognition 

agreement means an agreement 

described in paragraph (b) of this 

section. 

(vi) The term initial transfer means a 

transfer in connection with which a gain 

recognition agreement is filed in 

connection with an exchange described 

in §§ 1.367(a)–3(b) through (d) and 

1.367(a)–3T(e). 

(vii) The term nonrecognition 

transaction means any disposition of 

property in a transaction in which gain 

or loss is not recognized in whole or in 

part for purposes of subtitle A. 

(viii) The term transferee foreign 

corporation means the foreign 

corporation the stock of which is 

received in an exchange described in 

section 367(a) by a U.S. transferor. 

(ix) Transferred corporation. Other 

than in the case of an indirect stock 

transfer, the term transferred 

corporation means the corporation the 

stock or securities of which are 

transferred by a U.S. transferor to a 

foreign corporation in an exchange 

described in section 367(a)(1). In the 

case of an indirect stock transfer, the 

term transferred corporation has the 

meaning set forth in § 1.367(a)–

3(d)(2)(ii). 

(x) The term triggering event means an 

event described in paragraph (d) of this 

section, except as provided in 

paragraphs (e) (exceptions to triggering 

events) and (g) (terminations of gain 

recognition agreements) of this section. 

(xi) The term U.S. transferor means a 

U.S. person (as defined in § 1.367(a)–

1T(d)(1)) that transfers stock or 

securities of the transferred corporation 

in exchange for stock or securities of the 

transferee foreign corporation in an 

exchange described in section 367(a). 

For the application of the rules of this 

section to indirect transfers involving 

partnerships and interests therein, see 

§ 1.367(a)–1T(c)(3). 

(2) Filing requirements for gain 

recognition agreements. A U.S. 

transferor’s gain recognition agreement 

must be attached to, and filed by the 

due date (including extensions) of, the 

U.S. transferor’s income tax return for 

the taxable year that includes the date 

of the initial transfer, except that if the 

U.S. transferor is a member of a 

consolidated group for the taxable year 

in which the transfer was made, the 

agreement must be attached to the 

consolidated group’s tax return. If a new 

gain recognition agreement is entered 

into pursuant to an exception in 

paragraph (e) of this section, the 

agreement must be attached to, and filed 

by the due date (including extensions) 

of, the applicable income tax return for 

the taxable year that includes the date 

of the triggering event. If the timeliness 

requirement of this paragraph (a)(2) is 

not satisfied, see paragraph (e)(10) of 

this section. 

(3) Who must sign—(i) General rule. 

The gain recognition agreement must be 

signed under penalties of perjury by the 

appropriate party corresponding to the 

following categories of U.S. transferor. A 

gain recognition agreement may also be 

signed by an agent authorized to do so 

under a general or specific power of 

attorney. 

(A) In the case of a corporate U.S. 

transferor, a responsible officer, except 

that if the U.S. transferor (or successor 

U.S. transferor designated in a new gain 

recognition agreement entered into 

under paragraph (e) of this section) is a 

member, but not the common parent of 

a consolidated group for the taxable year 

in which the transfer was made (or for 

the taxable year in which a new gain 

recognition agreement is entered into 

under paragraph (e) of this section) the 

agreement must be entered into by the 

common parent and signed by a 

responsible officer of such common 

parent. 

(B) In the case of an individual U.S. 

transferor (including a partner who is 

treated as a U.S. transferor by virtue of 

§ 1.367(a)–1T(c)(3)), the individual. 

(C) In the case of a trust or estate, a 

trustee, executor, or equivalent 

fiduciary. 

(D) In the case of a bankruptcy case 

under Title 11, United States Code, a 

debtor in possession or trustee. 

(ii) Signature requirement. When a 

gain recognition agreement, 

certification, or other information is 

required under this section to be 

attached to and filed by the due date 

(including extensions) of a U.S. Federal 

income tax return and signed under 

penalties of perjury by the person who 

signs the return, the attachment and 

filing of an unsigned copy is considered 

to satisfy such requirement, provided 

the taxpayer retains the original in its 

records in the manner specified by 

§ 1.6001–1(e). 

(b) Gain recognition agreement—(1) 

Contents. The gain recognition 

agreement must set forth the following 

information, with the heading ‘‘GAIN 

RECOGNITION AGREEMENT UNDER 

§ 1.367(a)–8T’’ and with paragraphs 

labeled to correspond with the numbers 

set forth as follows: 

(i) A statement that the document 

submitted constitutes the U.S. 

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. 

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(iii) The U.S. 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 U.S. 

transferor’s tax returns for the five full 

taxable years following the year of the 

initial 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 

U.S. transferor will be informed of any 

triggering events. 

(vii) A statement as to whether, if all 

or a portion of the gain recognition 

agreement is triggered under paragraph 

(d) 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. 

(2) Description of property 

transferred. (i) The agreement shall 

include a description of each property 

transferred by the U.S. transferor, an 

estimate of the fair market value of the 

property as of the date of the initial 

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 

U.S. transferor. 

(ii) The U.S. transferor must provide 

the following information: 

(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 

transferred 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 pursuant to § 1.367(a)–3T(e), 

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 under that 

paragraph. 

(D) If the transferred corporation is a 

domestic corporation, the taxpayer 

identification number of the transferred 

corporation, together with a statement 

describing whether, and if so, how, 

section 7874 applies to the transfer, and 

a statement that all of the requirements 

of § 1.367(a)–3(c)(1) are satisfied. 

(E) If the transferred corporation is a 

foreign corporation, a statement as to 

whether the U.S. transferor was a 

section 1248 shareholder, as defined in 

§ 1.367(b)–2(b), of the transferred 

corporation immediately before the 

exchange, and, if so, a statement as to 

whether the U.S. transferor is a section 

1248 shareholder with respect to the 

transferee foreign corporation stock 

received, and whether any reporting 

requirements or other rules contained in 

regulations under section 367(b) are 

applicable, and, if so, whether they have 

been satisfied. 

(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 through 1.367(a)–

6T). 

(3) Terms of agreement—(i) General 

rule. If before the close of the fifth full 

taxable year (not less than 60 months) 

following the close of the taxable year 

of the initial transfer, there is a 

triggering event, then, unless an election 

is made under paragraph (b)(1)(vii) of 

this section, by the 90th day thereafter 

the U.S. transferor must file an amended 

Federal income tax return for the year 

of the initial transfer and recognize 

thereon the gain realized, but not 

recognized, upon the initial transfer, 

with interest. If an election under 

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

made, then, if a triggering event 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 taxable year 

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 in 

income the gain realized, but not 

recognized, on the initial transfer, 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) Reporting of interest and gain. If 

additional tax is required to be paid 

pursuant to paragraph (b)(3)(i) of this 

section, 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 U.S. transferor’s 

Federal 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, a 

taxpayer should include the amount of 

gain as taxable income on its Federal 

income tax return (together with other 

income or loss items) and include the 

amount of interest in its payment (or 

reduce the amount of any refund due by 

the amount of the interest). A taxpayer 

must also attach to its Federal income 

tax return a separate schedule with the 

heading ‘‘Calculation of Section 367 Tax 

and Interest,’’ on which the amount of 

tax attributable to the gain and the 

interest required to be paid under this 

section are separately identified and 

calculated. 

(iv) Basis adjustments—(A) 

Transferee foreign corporation. If a U.S. 

transferor is required to recognize gain 

under this section as a result of a 

triggering event, then the transferee 

foreign corporation’s basis in the 

transferred stock or securities 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. 

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

is required to recognize gain as a result 

of a triggering event, then the U.S. 

transferor’s basis in the stock of the 

transferee foreign corporation received 

(or deemed received) in the initial 

transfer shall be increased by the 

amount of gain required to be 

recognized (as of the date of the initial 

transfer) (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. In no case, 

however, shall the transferred 

corporation’s net asset basis be 

increased as a result of the U.S. 

transferor recognizing gain under this 

section as a result of a triggering event. 

(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 

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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 at the time of the transfer is $0. In 

the exchange, D receives 20 percent of the 

voting stock of F. The transaction is subject 

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

§§ 1.367(a)–3(b) and 1.367(b)–1(a). All of the 

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

satisfied, and D enters into a gain recognition 

agreement to qualify for nonrecognition 

treatment and does not make the election 

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

section. Two years after the initial transfer, 

F transfers all of the S stock to F1, a foreign 

corporation, in an exchange to which section 

351 applies, and D complies with the 

requirements of paragraph (e)(1)(ii) of this 

section. Four 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 

and complies with the requirements of 

paragraph (e)(1)(i) of this section. D complies 

with the notice requirement under 

§ 1.367(b)–1(c) for each transaction subject to 

section 367(b). Because D complies with the 

requirements of paragraph (e) for each 

transaction that would otherwise be a 

triggering event, D is not required to 

recognize the gain that was realized, but not 

recognized, on the initial transfer. Five years 

after the initial transfer, S disposes of 

substantially all (as described in paragraph 

(d)(2) of this section) of its assets, 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 the triggering 

event and paragraph (b)(3)(iv) of this section, 

the amount of gain required to be recognized 

as a result of S’s disposition of substantially 

all its assets (but not the tax or interest 

required to be paid on such amount) is 

reflected by an increased basis (as of the date 

of the initial transfer) in D’s partnership 

interest, the partnership’s interest in the 20 

percent voting stock of F, F’s stock of F1, and 

F1’s 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 gain 

recognition agreement, a waiver of the 

period of limitation on assessment of tax 

upon the gain realized on the initial 

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 initial transfer. The 

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. 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 

initial transfer a certification that there 

has not been a triggering event, and a 

description of any exception under 

paragraph (e) of this section if such an 

exception is relied upon for the position 

that there has not been a triggering 

event. The U.S. transferor must include 

with its annual certification a statement 

describing any dispositions of assets by 

the transferred corporation that are not 

made in the ordinary course of business. 

The annual certification pursuant to this 

paragraph (b)(5) 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. 

(c) 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 Area Director, Field 

Examination, Small Business/Self 

Employed or the Director of Field 

Operations, Large and Mid-Size 

Business (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 generally 

will be required only if the stock or 

securities transferred are a principal 

asset of the U.S. transferor and the 

Director has reason to believe that a 

disposition of the stock or securities 

may be contemplated. 

(d) Triggering events. If there is a 

triggering event described in this 

paragraph (d) during the term of the 

gain recognition agreement, the U.S. 

transferor must include in income the 

gain realized, but not recognized, upon 

the initial transfer as provided in 

paragraph (b)(3)(i) of this section. In 

addition, the U.S. transferor must pay 

any interest required by paragraph 

(b)(3)(iii) of this section. See § 1.367(a)–

3(d)(2)(iv) for additional triggering 

events when a gain recognition 

agreement has been filed in connection 

with an indirect stock transfer. Except to 

the extent provided in paragraphs (e) 

and (g) of this section, if any of the 

following events occur during the term 

of the gain recognition agreement, it 

shall constitute a triggering event: 

(1) Disposition of stock or securities of 

the transferred corporation—(i) In 

general. A disposition, in whole or in 

part, by the transferee foreign 

corporation (or any other person) of the 

transferred stock or securities received 

by the transferee foreign corporation in 

the initial transfer. For purposes of this 

section, a reference to transferred stock 

or securities shall also include stock or 

securities of the transferred corporation 

the basis of which is determined 

(directly or indirectly) in whole or in 

part, by reference to the basis of the 

stock or securities transferred in the 

initial transfer. A disposition of all or a 

portion of the stock or securities of the 

transferred corporation by installment 

sale is treated as a disposition of the 

stock or securities in the year of the 

installment sale. 

(ii) Example. The provisions of this 

paragraph (d)(1)(i) are illustrated by the 

following example: 

Example. Interaction between trigger of 

gain recognition agreement and subpart F 

rules—(i) Facts. USP, a domestic corporation, 

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; 

the stock of CFC2 has a fair market value of 

$100. In a transaction described in sections 

351 and 368(a)(1)(B), USP transfers the stock 

of CFC2 to CFC1 in exchange for additional 

stock of CFC1 with a basis of $50. 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 gain 

recognition agreement for $50 under this 

section. No election under paragraph 

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

complies with the notice requirement under 

§ 1.367(b)–1(c). Two years after the initial 

transfer, CFC1 sells the stock of CFC2 for 

$120. At the time of the sale, the section 1248 

amount with respect to the CFC2 stock 

continues to be $30. The $70 of gain 

recognized on the sale of CFC2 stock would 

give rise to a $70 subpart F inclusion to USP 

under section 951(a)(1)(A). 

(ii) Result—(A) Trigger of gain recognition 

agreement with no election. CFC1’s sale of 

CFC2 stock is a triggering event. As a result, 

USP must amend its return for the year of the 

initial transfer and include $50 in income (as 

well as pay any applicable interest), $30 of 

which will be recharacterized as a dividend 

pursuant to section 1248. Under paragraph 

(b)(3)(iv) of this section, as of the date of the 

initial transfer, CFC1 has a basis of $100 in 

its CFC2 stock, and USP has a basis in its 

CFC1 stock of $100. As a result of the sale 

of CFC2 stock by CFC1, USP will have a $20 

subpart F inclusion under section 

951(a)(1)(A). 

(B) Trigger of gain recognition agreement 

with election. Assume the same facts as in 

paragraph (i) of this Example, except that 

USP 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. The result is the same as above, 

except that USP will include the $50 of gain 

on its tax return for the year of the triggering 

event, together with interest. For purposes of 

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determining the amount of the $50 gain 

characterized as a dividend pursuant to 

section 1248, if any, of the $50 inclusion, 

USP will take into account the section 1248 

amount of CFC2 at the time of the disposition 

in the year of the triggering event. 

(iii) Partial dispositions. If the 

transferee foreign corporation or any 

other person disposes of only a portion 

of the stock or securities of the 

transferred corporation, then the U.S. 

transferor is required to recognize only 

a proportionate amount of the gain 

realized, but not recognized, upon the 

initial transfer. The proportion required 

to be recognized shall be determined by 

reference to the fair market value of the 

transferred stock or securities disposed 

of and the total fair market value of the 

transferred stock or securities 

immediately before the disposition. 

(2) Disposition of substantially all of 

the transferred corporation’s assets. A 

disposition of substantially all of the 

transferred corporation’s assets 

(including stock in a subsidiary 

corporation or an interest in a 

partnership) by the transferred 

corporation or any other person. Solely 

for purposes of this section, the term 

substantially all has the meaning 

provided under section 368(a)(1)(C). 

Accordingly, the determination of 

whether substantially all of the 

transferred corporation’s assets have 

been disposed of shall be made under 

all the facts and circumstances. For 

purposes of this paragraph (d)(2), 

dispositions of stock in connection with 

an asset reorganization of a corporation 

all or a portion the stock of which is 

owned by the transferred corporation, or 

a liquidation of a corporation the stock 

of which is owned by the transferred 

corporation in an amount satisfying the 

requirements of section 1504(a)(2) and 

to which sections 332 and 337 apply, 

shall not be taken into account. If the 

initial transfer was an indirect stock 

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

transferred corporation is a domestic 

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

section. For an example of when a 

disposition of substantially all the 

transferred corporation’s assets by a 

person other than the transferred 

corporation is a triggering event under 

this paragraph (d)(2), see paragraph 

(e)(6)(ii) of this section. 

(3) Disposition of the stock of the 

transferee foreign corporation—(i) 

General rule. A disposition in whole or 

in part, by the U.S. transferor of the 

stock of the transferee foreign 

corporation that is received (or deemed 

received) in the initial transfer. For 

purposes of this section, a reference to 

stock described in the preceding 

sentence shall also include stock of the 

transferee foreign corporation the basis 

of which is determined, directly or 

indirectly, in whole or in part, by 

reference to the basis of the stock of the 

transferee foreign corporation that is 

received (or deemed received) in the 

initial transfer. 

(ii) Partial dispositions. If the U.S. 

transferor disposes of only a portion of 

the stock of the transferee foreign 

corporation that is received (or deemed 

received) in the initial transfer, then the 

U.S. transferor is required to recognize 

only a proportionate amount of the gain 

realized, but not recognized, upon the 

initial transfer. The proportion required 

to be recognized shall be determined by 

reference to the fair market value of the 

transferee foreign corporation stock 

disposed of and the total fair market 

value of the transferee foreign 

corporation stock immediately before 

the disposition. 

(4) Deconsolidation. A U.S. transferor 

that is a member of a consolidated group 

ceases to be a member of the 

consolidated group, other than by 

reason of an acquisition of the assets of 

the U.S. transferor in a transaction to 

which section 381(a) applies, or by 

reason of joining a new consolidated 

group as part of the same transaction. 

However, in the case of a transaction to 

which section 381(a) applies, see 

paragraph (d)(3) of this section 

(providing that a triggering event 

includes a disposition of the stock of the 

transferee foreign corporation). 

(5) Consolidation. A U.S. transferor 

becomes a member of a consolidated 

group. 

(6) Individual U.S. transferor becomes 

a non-citizen nonresident. A U.S. 

transferor that is an individual loses 

U.S. citizenship, or a U.S. transferor that 

is a long-term resident ceases to be 

taxed as a lawful permanent resident (as 

defined in section 877(e)(2)). 

Immediately before 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. No additional 

inclusion is required under section 877 

with respect to the transferred stock or 

securities, 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. 

(7) Death of an individual; trust or 

estate goes out of existence. An 

individual U.S. transferor dies, or a U.S. 

transferor that is a trust or estate goes 

out of existence. 

(8) Failure to comply. The failure to 

comply in any material respect with the 

requirements of this section or with the 

terms of a gain recognition agreement 

(for example, a failure to file an annual 

certification or Form 8838). Such a 

material failure to comply shall extend 

the period for assessment of tax until 

three years after the date on which the 

Director of Field Operations or Area 

Director receives actual notice of the 

failure to comply. 

(e) Exceptions. Notwithstanding 

paragraph (d) of this section, the 

following events shall not constitute 

triggering events: 

(1) Certain nonrecognition 

transactions—(i) Dispositions of stock of 

the transferee foreign corporation by the 

U.S. transferor—(A) Transfers to a 

corporation or partnership. Except to 

the extent provided in paragraph 

(g)(1)(iv) of this section, a disposition of 

stock of the transferee foreign 

corporation by the U.S. transferor in an 

exchange to which section 351, 354 (but 

only in a reorganization described in 

section 368(a)(1)(B)), or 721 applies, 

will not be a triggering event under 

paragraph (d)(3) of this section, and the 

original gain recognition agreement 

shall terminate without further effect, if 

the U.S. transferor complies with 

requirements similar to those contained 

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

providing for notice and an agreement 

to recognize gain in the case of a direct 

or indirect disposition of the stock 

previously held by the U.S. transferor. 

See paragraph (e)(3)(i) of this section for 

dispositions of the transferee foreign 

corporation stock in certain asset 

reorganizations. 

(B) Liquidations of the U.S. transferor 

under sections 332 and 337. The 

disposition of the transferee foreign 

corporation stock pursuant to a 

liquidation of the U.S. transferor under 

sections 332 and 337 will not be a 

triggering event under paragraph (d)(3) 

of this section, and the original gain 

recognition agreement shall terminate 

without further effect, if the following 

conditions are satisfied: 

(1) The distributee is a domestic 

corporation described in section 

332(b)(1). 

(2) The domestic distributee 

corporation (successor U.S. transferor) 

enters into a new gain recognition 

agreement pursuant to which it agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement), with respect to the initial 

transfer, modified by substituting the 

successor U.S. transferor in place of the 

original U.S. transferor, and agreeing to 

treat the successor U.S. transferor as the 

original U.S. transferor for purposes of 

this section. If, however, in connection 

with a liquidation described in section 

332, the U.S. transferor recognizes gain 

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under section 336 with respect to a 

portion of the stock of the transferee 

foreign corporation, and the conditions 

described in paragraph (g)(1) of this 

section are satisfied, the new gain 

recognition agreement that the successor 

U.S. transferor enters into shall reflect 

the gain realized, but not recognized, on 

the initial transfer (subject to adjustment 

for prior partial dispositions) less that 

proportion corresponding to gain 

recognized under section 336. The 

proportion is determined by reference to 

the relative fair market values of the 

transferee foreign corporation stock 

received (or deemed received) in the 

initial transfer on which the U.S. 

transferor recognized gain under section 

336 and the total fair market value of the 

transferee foreign corporation stock 

received (or deemed received) by the 

U.S. transferor in the initial transfer that 

is distributed by the U.S. transferor in 

the liquidation. 

(3) The successor U.S. transferor 

makes the election described in 

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

However, if the U.S. transferor was a 

member of a consolidated group in the 

year of the initial transfer, and the 

successor U.S. transferor is also a 

member of the original consolidated 

group immediately after the liquidation, 

no such election must be made. 

(4) The successor U.S. transferor 

provides with its next annual 

certification (described in paragraph 

(b)(5) of this section) the new gain 

recognition agreement, a notice of the 

liquidation, and Form 8838 to extend 

the period for assessment of the tax on 

the initial transfer to a date not earlier 

than the eighth full taxable year 

following the taxable year of the initial 

transfer. 

(ii) Transfers of stock or securities of 

the transferred corporation by the 

transferee foreign corporation to a 

corporation or partnership. Except to 

the extent provided in paragraph (f)(1)(i) 

of this section, a disposition of stock or 

securities of the transferred corporation 

by the transferee foreign corporation in 

an exchange to which section 351, 354 

(but only in a reorganization described 

in section 368(a)(1)(B)), or 721 applies, 

will not be a triggering event described 

in paragraph (d)(1) of this section, and 

the original gain recognition agreement 

shall terminate without further effect, if 

the following conditions are satisfied: 

(A) 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 stock or securities (or 

receives stock in a corporation that 

controls the corporation acquiring the 

transferred stock or securities in the 

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

reorganization). 

(B) The U.S. transferor provides a 

notice of the transfer with its next 

annual certification under paragraph 

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

(1) A full description of the transfer; 

(2) The applicable nonrecognition 

provision; and 

(3) The name, address, and taxpayer 

identification number (if any) of the 

new transferee of the transferred stock 

or securities. 

(C) The U.S. transferor provides with 

its next annual certification a new gain 

recognition agreement pursuant to 

which it agrees to recognize gain (during 

the remaining term of the original gain 

recognition agreement) with respect to 

the initial transfer, and in which it 

agrees that any of the following events 

also constitutes a triggering event: 

(1) A disposition of the stock or 

securities or partnership interest that 

the transferee foreign corporation 

received in exchange for the transferred 

stock or securities (other than in a 

disposition which itself qualifies under 

the rules of paragraph (e) of this 

section). 

(2) The corporation or partnership 

that acquired the transferred stock or 

securities disposes of such property 

(other than in a disposition which itself 

qualifies under the rules of paragraph 

(e) of this section). 

(3) Any other disposition that has the 

effect of an indirect disposition of the 

transferred stock or securities. 

(iii) Transfers of the transferred 

corporation’s assets to a corporation or 

partnership. Except to the extent 

provided in paragraph (f)(1)(ii) of this 

section, a disposition of substantially all 

of the transferred corporation’s assets by 

the transferred corporation in an 

exchange to which section 351, 354 (but 

only in a reorganization described in 

section 368(a)(1)(B)—for example, 

where stock in a subsidiary corporation 

comprises substantially all of the 

transferred corporation’s assets), or 721 

applies, will not be a triggering event 

under paragraph (d)(2) of this section, 

and the original gain recognition 

agreement shall terminate without 

further effect, if the transferred 

corporation receives (or is deemed to 

receive) in exchange for all or a portion 

of its assets stock 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) and the U.S. transferor complies 

with requirements similar to those 

contained in paragraph (e)(1)(ii) of this 

section, (providing for notice and an 

agreement to recognize gain in the case 

of a direct or indirect disposition of the 

assets previously held by the transferred 

corporation). See paragraph (e)(3)(iii) of 

this section for dispositions of 

substantially all of the transferred 

corporation’s assets in certain asset 

reorganizations. 

(2) Recapitalizations—(i) Transferred 

corporation. Except to the extent 

provided in paragraph (f)(1) of this 

section, a transaction described in 

section 368(a)(1)(E) of the transferred 

corporation will not be a triggering 

event under paragraph (d)(1) of this 

section. The description of this 

exception that is required to be filed 

with the annual certification under 

paragraph (b)(5) of this section must 

include a description of the type or 

class, amount, and characteristics of the 

stock or securities that the transferred 

corporation issued in the reorganization. 

(ii) Transferee foreign corporation. A 

section 368(a)(1)(E) reorganization of the 

transferee foreign corporation will not 

be a triggering event under paragraph 

(d)(3) of this section. The description of 

this exception that is required to be filed 

with the annual certification under 

paragraph (b)(5) of this section must 

include a description of the type or 

class, amount, and characteristics of the 

stock or securities that the transferee 

foreign corporation issued in the 

reorganization. See paragraph (g)(1) of 

this section for rules regarding the 

recognition of gain by the U.S. transferor 

in connection with nonrecognition 

exchanges. 

(3) Certain asset reorganizations—(i) 

Transfers of transferee foreign 

corporation’s stock by U.S. transferor. 

Except to the extent provided in 

paragraph (g)(1)(iv) of this section, if the 

U.S. transferor transfers all or a portion 

of the stock of the transferee foreign 

corporation to a domestic acquiring 

corporation (successor U.S. transferor) 

pursuant to an asset reorganization, the 

exchanges made pursuant to such asset 

reorganization will not be triggering 

events described in paragraph (d)(3) of 

this section, and the original gain 

recognition agreement shall terminate 

without further effect, if the following 

conditions are satisfied: 

(A) The common parent of the 

original consolidated group, successor 

U.S. transferor, or new common parent, 

as applicable, enters into a new gain 

recognition agreement pursuant to 

which the successor U.S. transferor 

agrees to recognize gain (during the 

remaining term of the original gain 

recognition agreement) with respect to 

the initial transfer, modified by 

substituting the successor U.S. 

transferor in place of the original U.S. 

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transferor and agreeing to treat the 

successor U.S. transferor as the original 

U.S. transferor for purposes of this 

section. 

(B) The successor U.S. transferor or 

new common parent, as applicable, 

makes the election described in 

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

However, if the U.S. transferor was a 

member of a consolidated group in the 

year of the initial transfer, and the 

successor U.S. transferor is also a 

member of the original consolidated 

group immediately after the asset 

reorganization, no such election must be 

made. 

(C) The successor U.S. transferor 

provides with its next annual 

certification (described in paragraph 

(b)(5) of this section)—

(1) The new gain recognition 

agreement; 

(2) A notice of the transfer setting 

forth a full description of the transfer 

(including the date of such transfer), 

and the successor U.S. transferor’s 

name, address, and taxpayer 

identification number; and 

(3) Form 8838 to extend the period for 

assessment of the tax on the initial 

transfer to a date not earlier than the 

eighth full taxable year following the 

taxable year of the initial transfer. 

(ii) Transfers of transferred 

corporation stock or securities by a 

transferee foreign corporation to a 

foreign acquiring corporation. Except to 

the extent provided in paragraph (f)(1) 

of this section, if the transferee foreign 

corporation transfers all or a portion of 

the stock or securities of the transferred 

corporation to a foreign acquiring 

corporation (successor transferee foreign 

corporation) in an asset reorganization, 

the exchanges made pursuant to such 

reorganization will not be triggering 

events described in paragraph (d)(1) or 

(d)(3) of this section, and the original 

gain recognition agreement shall 

terminate without further effect, if the 

following conditions are satisfied: 

(A) The U.S. transferor or common 

parent, as applicable, enters into a new 

gain recognition agreement pursuant to 

which the U.S. transferor agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement), with respect to the initial 

transfer, substituting the successor 

transferee foreign corporation in place 

of the original transferee foreign 

corporation, and agreeing to treat the 

successor transferee foreign corporation 

as the original transferee foreign 

corporation for purposes of this section. 

(B) The U.S. transferor provides with 

its next annual certification (described 

in paragraph (b)(5) of this section) the 

new gain recognition agreement and a 

notice of the transfer setting forth a full 

description of the transfer (including the 

date of such transfer), and the successor 

transferee foreign corporation’s name, 

address, and taxpayer identification 

number (if any). 

(iii) Transfers of substantially all of 

the transferred corporation’s assets. 

Except to the extent provided in 

paragraph (f)(2) of this section, if the 

transferred corporation transfers 

substantially all of its assets to an 

acquiring corporation (successor 

transferred corporation) pursuant to an 

asset reorganization, the exchanges 

made pursuant to such asset 

reorganization will not be triggering 

events under paragraph (d)(1) or (d)(2) 

of this section, and the original gain 

recognition agreement shall terminate 

without further effect, if the following 

conditions are satisfied: 

(A) The U.S. transferor or common 

parent, as applicable, enters into a new 

gain recognition agreement pursuant to 

which the U.S. transferor agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement), with respect to the initial 

transfer, modified by—

(1) Substituting the successor 

transferred corporation in place of the 

original transferred corporation and 

agreeing to treat the successor 

transferred corporation as the original 

transferred corporation for purposes of 

this section; and 

(2) Treating only the assets acquired 

by the successor transferred corporation 

from the original transferred corporation 

pursuant to the asset reorganization as 

the assets subject to the triggering event 

rules under paragraph (d)(2) of this 

section. 

(B) The U.S. transferor provides with 

its next annual certification (described 

in paragraph (b)(5) of this section) the 

new gain recognition agreement and a 

notice of the transfer setting forth a full 

description of the transfer (including the 

date of such transfer), and the successor 

transferred corporation’s name, address, 

and taxpayer identification number (if 

any). 

(iv) Example. The rules of paragraph 

(e)(3) of this section are illustrated by 

the following examples: 

Example 1. (i) Facts. UST, a domestic 

corporation incorporated under the laws of 

State A, owns 100% of the stock of TFD, a 

foreign corporation. In year 1, UST transfers 

all of the TFD stock to TFC, a foreign 

corporation, in an exchange to which section 

351 applies. In the exchange, UST receives 

100% of the stock of TFC. The transaction is 

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

§§ 1.367(a)–3(b) and 1.367(b)–1(a). All of the 

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

satisfied, and UST enters into a gain 

recognition agreement. UST also complies 

with the notice requirement under 

§ 1.367(b)–1(c). In year 3, UST transfers its 

assets in a section 361(a) exchange to USA, 

a newly formed domestic corporation 

incorporated under the laws of State B, in 

exchange for stock of USA, and UST 

distributes such stock to its shareholders in 

a transaction described in section 

368(a)(1)(F). 

(ii) Result. The transfer of the TFC stock by 

UST to USA pursuant to the section 

368(a)(1)(F) reorganization is a triggering 

event under paragraph (d)(3) of this section. 

If, however, UST complies with the 

requirements contained in paragraph (e)(3)(i) 

of this section, the transfer will not be a 

triggering event. 

(iii) Alternate facts. The facts are the same 

as in paragraph (i) of this Example 1, except 

that the acquiring corporation is foreign 

instead of domestic. Because paragraph 

(e)(3)(i) of this section provides an exception 

to a triggering event under paragraph (d)(3) 

of this section only if the acquiring 

corporation in the asset reorganization is a 

domestic corporation, the section 368(a)(1)(F) 

reorganization is a triggering event without 

exception. See also section 367(a)(5) and 

§§ 1.367(a)–1T(f) and 1.367(a)–3T(e) 

(providing that certain corporate 

shareholders of a U.S. transferor may enter 

into a gain recognition agreement when the 

U.S. transferor goes out of existence in a 

section 361 initial transfer). 

Example 2. (i) Facts. UST, a domestic 

corporation, owns 100% of the stock of three 

foreign corporations, FC1, FC2 and FC3. In 

year 1, USP transfers 100% of the stock of 

FC1 to FC2 in an exchange to which section 

351 applies. The transaction is subject to 

both sections 367(a) and (b). See §§ 1.367(a)–

3(b) and 1.367(b)–1(a). All of the 

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

satisfied, and UST enters into a gain 

recognition agreement. UST also complies 

with the notice requirement under 

§ 1.367(b)–1(c). In year 4, in a reorganization 

described in section 368(a)(1)(D), FC2 

transfers all of its assets, including the stock 

of FC1, to FC3 in exchange for FC3 stock. 

FC2 transfers the FC3 stock to UST in 

exchange for FC2 stock held by UST, and the 

FC2 stock is canceled. 

(ii) Analysis. The transfer of FC1 stock to 

FC3 and the exchange of FC2 stock for FC3 

stock by UST pursuant to the reorganization 

described in section 368(a)(1)(D) are 

triggering events under paragraphs (d)(1) and 

(d)(3) of this section. If, however, UST 

complies with the requirements contained in 

paragraph (e)(3)(ii) of this section, the 

transfers will not be triggering events. 

Example 3. (i) Facts. UST, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, FC1 and FC2. In year 1, 

UST transfers 100% of the stock of FC1 to 

FC2 in an exchange to which section 351 

applies. The transaction is subject to both 

sections 367(a) and (b). See §§ 1.367(a)–3(b) 

and 1.367(b)–1(a). All of the requirements of 

§ 1.367(a)–3(b)(1) are satisfied, and UST 

enters into a gain recognition agreement. UST 

also complies with the notice requirement 

under § 1.367(b)–1(c). In year 4, in a 

reorganization described in section 

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368(a)(1)(C), FC1 transfers all of its assets to 

FC3, an unrelated foreign corporation, in 

exchange for FC3 stock. FC1 transfers the 

FC3 stock to FC2 in exchange for the FC1 

stock held by FC2 and the FC1 stock is 

canceled. 

(ii) Analysis. FC1’s transfer of all of its 

assets to FC3 and FC2’s exchange of FC1 

stock for FC3 stock pursuant to the 

reorganization described in section 

368(a)(1)(C) are triggering events under 

paragraphs (d)(2) and (d)(1) of this section, 

respectively. If, however, UST complies with 

the requirements contained in paragraph 

(e)(3)(iii) of this section, the transfers will not 

be triggering events. 

(4) Certain triangular 

reorganizations—(i) Triangular asset 

reorganizations of the transferee foreign 

corporation. For purposes of this 

paragraph (e)(4), the term triangular 

asset reorganization means a triangular 

reorganization described in § 1.358–

6(b)(2)(i) through (iii) or in sections 

368(a)(1)(G) and (a)(2)(D) where the 

acquiring subsidiary is foreign. Except 

to the extent provided in paragraph 

(f)(1) or (g)(1)(iv) of this section, the 

exchanges made pursuant to a triangular 

asset reorganization of the transferee 

foreign corporation will not be 

triggering events under paragraph (d)(1) 

or (d)(3) of this section, and the original 

gain recognition agreement shall 

terminate without further effect, if the 

following conditions are satisfied: 

(A) The U.S. transferor or common 

parent, as applicable, enters into a new 

gain recognition agreement pursuant to 

which the U.S. transferor agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement), with respect to the initial 

transfer, and in which the U.S. 

transferor agrees to—

(1) If the parent corporation of the 

foreign acquiring subsidiary is foreign, 

treat such foreign parent as the original 

transferee foreign corporation for 

purposes of this section and treat as a 

triggering event a disposition of the 

stock of the foreign acquiring 

subsidiary, or, in the case of a 

reorganization described in section 

368(a)(2)(E), the corporation originally 

identified as the transferee foreign 

corporation; and 

(2) If the parent corporation of the 

foreign acquiring subsidiary is domestic, 

treat the foreign acquiring subsidiary as 

the original transferee foreign 

corporation for purposes of this section, 

and apply the principles of paragraph 

(g) of this section to taxable dispositions 

by the domestic parent corporation of 

the foreign acquiring subsidiary or, in 

the case of a reorganization described in 

section 368(a)(2)(E), the corporation 

originally identified as the transferee 

foreign corporation. In the case of a 

reorganization described in section 

368(a)(2)(E) where the transferee foreign 

corporation is the merged corporation, 

rather than the surviving corporation, 

then the surviving corporation shall be 

treated as the transferee foreign 

corporation for purposes of this section. 

(B) The U.S. transferor provides with 

its next annual certification (described 

in paragraph (b)(5) of this section) the 

new gain recognition agreement and a 

notice of the transfer setting forth a full 

description of the transfer (including the 

date of such transfer) and the name, 

address, and taxpayer identification 

number (if any) for the parent 

corporation of the foreign acquiring 

subsidiary. 

(ii) Triangular asset reorganizations of 

the transferred corporation. Except to 

the extent provided in paragraph (f)(1) 

or (f)(2) of this section, the exchanges 

made pursuant to a triangular asset 

reorganization of the transferred 

corporation will not be triggering events 

in paragraph (d)(1) or (d)(2) of this 

section, and the original gain 

recognition agreement shall terminate 

without further effect, if the following 

conditions are satisfied: 

(A) The U.S. transferor or common 

parent, as applicable, enters into a new 

gain recognition agreement pursuant to 

which the U.S. transferor agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement), in accordance with the rules 

of paragraph (b) of this section, with 

respect to the initial transfer, and in 

which the U.S. transferor agrees to—

(1) Treat a disposition of the stock of 

the acquiring parent as a triggering 

event; 

(2) If the reorganization is a triangular 

C reorganization or a reorganization 

described in section 368(a)(2)(D), treat a 

disposition of the stock of the foreign 

acquiring subsidiary as a triggering 

event; and 

(3) If the reorganization is described 

in section 368(a)(2)(E) and the merged 

corporation is the transferred 

corporation, treat a disposition of the 

stock of the surviving corporation as a 

triggering event. 

(B) The U.S. transferor provides with 

its next annual certification (described 

in paragraph (b)(5) of this section) the 

new gain recognition agreement and a 

notice of the transfer setting forth a full 

description of the transfer (including the 

date of such transfer) and the name, 

address, and taxpayer identification 

number (if any) for the parent 

corporation of the foreign acquiring 

subsidiary. 

(5) Compulsory transfers. A 

compulsory transfer under § 1.367(a)–

4T(f)(2) that is not reasonably 

foreseeable by the U.S. transferor is not 

a triggering event under paragraphs 

(d)(1) through (d)(3) of this section. 

(6) Certain liquidations and upstream 

reorganizations of the transferred 

corporation into the transferee foreign 

corporation—(i) General rule. A transfer 

of assets by the transferred corporation 

to the transferee foreign corporation 

pursuant to a liquidation described in 

section 332, where the transferee foreign 

corporation is described in section 

332(b)(1), or pursuant to a 

reorganization described in section 

368(a), and related exchanges of stock or 

securities of the transferred corporation 

will not be triggering events under 

paragraph (d)(1) or (d)(2) of this section. 

The description of this exception that is 

required to be filed with the annual 

certification under paragraph (b)(5) of 

this section must include a description 

of the transaction. In such a case, the 

original gain recognition agreement 

shall continue to apply during the 

remainder of its term. If, however, in 

connection with a liquidation described 

in section 332, the transferred 

corporation recognizes gain under 

section 336 with respect to a portion of 

its assets, such assets shall be treated as 

disposed of for purposes of paragraph 

(d)(2) of this section. 

(ii) Example. The principles of this 

paragraph (e)(6) are illustrated by the 

following example: 

Example. (i) Facts. UST, a domestic 

corporation, owns 100 percent of the stock of 

TFD, a foreign corporation. UST transfers all 

of the TFD stock to newly-formed TFC, a 

foreign corporation, in an exchange to which 

section 351 applies. In the exchange, UST 

receives 100 percent of the voting stock of 

TFC. The transaction is subject to both 

sections 367(a) and (b). See §§ 1.367(a)–3(b) 

and 1.367(b)–1(a). All of the requirements of 

§ 1.367(a)–3(b)(1) are satisfied, and UST 

enters into a gain recognition agreement to 

qualify for nonrecognition treatment and 

does not make the election described in 

paragraph (b)(1)(vii) of this section. UST also 

complies with the notice requirement under 

§ 1.367(b)–1(c). Two years after the initial 

transfer, TFD liquidates into TFC in a 

transaction described in sections 332 and 

337, and UST complies with the 

requirements of this paragraph (e)(6). Four 

years after the initial transfer, TFC disposes 

of substantially all of the assets previously 

held by TFD. 

(ii) Result. Because paragraph (d)(2) of this 

section provides that a disposition of 

substantially all of the transferred 

corporation’s assets by any person is a 

triggering event, TFC’s disposition of 

substantially all of the assets previously held 

by TFD is a triggering event. Under the terms 

of the gain recognition agreement, UST must 

amend its return for the year of the initial 

transfer and include in income the gain 

realized, but not recognized, on the initial 

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transfer of the stock of TFD to TFC, and pay 

any interest charge. 

(7) Death of an individual U.S. 

transferor. If the U.S. transferor is an 

individual and such individual dies, the 

individual’s death will not be a 

triggering event under paragraph (d)(7) 

of this section, if—

(i) The person winding up the affairs 

of the U.S. 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 U.S. 

transferor under the duration of the gain 

recognition agreement; 

(ii) The person winding up the affairs 

of the U.S. transferor provides security 

as provided under paragraph (c) of this 

section for any possible liability of the 

U.S. transferor under the gain 

recognition agreement; or 

(iii) The person winding up the affairs 

of the U.S. transferor obtains a ruling 

from the Internal Revenue Service 

providing for successors to the U.S. 

transferor under the gain recognition 

agreement. 

(8) Deconsolidation. A 

deconsolidation described in paragraph 

(d)(4) of this section will not be a 

triggering event, and the original gain 

recognition agreement shall terminate 

without further effect, if the following 

conditions are satisfied: 

(i) The U.S. transferor enters into a 

new gain recognition agreement 

pursuant to which the U.S. transferor 

agrees to recognize gain (during the 

remaining term of the original gain 

recognition agreement) with respect to 

the initial transfer and makes the 

election described in paragraph 

(b)(1)(vii) of this section. 

(ii) The U.S. transferor provides with 

its next annual certification (described 

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

notice of the deconsolidation. 

(9) Consolidation. A consolidation 

described in paragraph (d)(5) of this 

section will not be a triggering event, 

and the original gain recognition 

agreement shall terminate without 

further effect, if the following 

conditions are satisfied: 

(i) The common parent of the 

consolidated group that includes the 

U.S. transferor immediately after the 

consolidation enters into a new gain 

recognition agreement pursuant to 

which the U.S. transferor agrees to 

recognize gain (during the remaining 

term of the original gain recognition 

agreement) with respect to the initial 

transfer and in which it makes the 

election described in paragraph 

(b)(1)(vii) of this section. 

(ii) The U.S. transferor provides with 

its next annual certification (described 

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

notice of the consolidation. 

(10) Reasonable cause exception for 

failure to comply—(i) Request for relief. 

A failure to comply described in 

paragraph (d)(8) of this section will not 

be a triggering event, and the timeliness 

requirement with respect to a gain 

recognition agreement shall be 

considered satisfied notwithstanding a 

failure to file the agreement in a timely 

manner, if the person required to file the 

gain recognition agreement, annual 

certification, or Form 8838 is able to 

demonstrate to the Area Director, Field 

Examination, Small Business/Self 

Employed or the Director of Field 

Operations, Large and Mid-Size 

Business (Director) having jurisdiction 

of the taxpayer’s tax return for the 

taxable year, that such failure was due 

to reasonable cause and not willful 

neglect. In determining whether the 

person has reasonable cause, the 

Director shall consider whether the 

person acted reasonably and in good 

faith. Whether the person acted 

reasonably and in good faith will be 

determined after considering all the 

facts and circumstances. The Director 

shall notify the person in writing within 

120 days of the filing if it is determined 

that the failure to comply was not due 

to reasonable cause, or if additional time 

will be needed to make such 

determination. For this purpose, the 

120-day period shall begin to run on the 

date the Service notifies the person in 

writing that the request has been 

received and assigned for review. Once 

such period commences, if the person is 

not again notified within 120 days, then 

the person shall be deemed to have 

established reasonable cause. The 

reasonable cause exception of this 

paragraph (e)(10) shall apply only if, 

once the person becomes aware of the 

failure to file or comply with the 

agreement, the person complies with the 

requirements of paragraph (e)(10)(ii) of 

this section. 

(ii) Requirements for reasonable cause 

relief—(A) Time of submission. Requests 

for reasonable cause relief will only be 

considered if once the person becomes 

aware of the failure to file or comply 

with the agreement, the person attaches 

all the documents that should have been 

filed, as well as a complete written 

statement setting forth the reasons for 

the failure to timely comply, to an 

amended return that amends the return 

to which the documents should have 

been attached pursuant to the rules of 

section 367(a) and the regulations under 

that paragraph. 

(B) Notice requirement. In addition to 

the requirement of paragraph 

(e)(10)(ii)(A) of this section, the person 

must provide a copy of the amended 

return and all required attachments to 

the Director as follows: 

(1) If the taxpayer is under 

examination for any taxable year when 

the person requests relief, the taxpayer 

must provide a copy of the amended 

return and attachments to the personnel 

conducting the examination. 

(2) If the taxpayer is not under 

examination for any taxable year when 

the person requests relief, the taxpayer 

must provide a copy of the amended 

return and attachments to the Director 

having jurisdiction over the taxpayer’s 

return. 

(f) Gain recognized in connection with 

certain nonrecognition transactions—(1) 

Dispositions of transferred stock or 

securities—(i) General rule. If a 

disposition of the transferred stock or 

securities occurs in connection with a 

nonrecognition transaction described in 

paragraph (e)(1)(ii), (e)(2)(i), (e)(3)(ii), 

(e)(3)(iii), or (e)(4) of this section and 

gain is recognized by the transferee 

foreign corporation in connection with 

the transaction (for example, under 

sections 351(b) or 356(a)(1)), the U.S. 

transferor must recognize gain pursuant 

to the gain recognition agreement as 

determined under paragraph (f)(1)(ii) of 

this section. This paragraph (f)(1)(i) 

shall not apply to the extent that the 

gain recognized is treated as a dividend 

under section 356(a)(2). 

(ii) Method for determining amount of 

gain to be recognized. The portion of the 

gain recognition agreement that must be 

recognized under paragraph (f)(1)(i) of 

this section, if any, is the gain that 

would be recognized by the transferee 

foreign corporation on such disposition 

(but not in excess of the amount of the 

gain recognition agreement). For 

purposes of this paragraph (f)(1)(ii), the 

gain that would be recognized in the 

nonrecognition transactions listed in 

paragraph (f)(1)(i) of this section by the 

transferee foreign corporation shall be 

calculated before taking into account 

any basis increase that may apply under 

paragraph (b)(3)(iv) of this section as a 

result of the gain that the U.S. transferor 

is required to recognize. If the amount 

of gain that the transferee foreign 

corporation would be required to 

recognize is less than the amount of the 

gain subject to the gain recognition 

agreement, then the new gain 

recognition agreement filed pursuant to 

paragraph (e)(1)(ii), (e)(2)(i), (e)(3)(ii), 

(e)(3)(iii), or (e)(4) of this section shall 

provide that the U.S. transferor shall 

recognize the remaining portion of the 

gain that was realized, but not 

recognized, on the initial transfer if a 

subsequent triggering event occurs. 

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(iii) Example. The rule of this 

paragraph (f)(1) is illustrated by the 

following example: 

Example. (i) Facts. UST, a domestic 

corporation owning 100% of the stock of 

TFD, a foreign corporation, transfers all of the 

TFD stock to newly formed TFC, a foreign 

corporation, in an exchange to which section 

351 applies. In the exchange, UST receives 

100% of the stock of TFC. The transaction is 

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

§§ 1.367(a)–3(b) and 1.367(b)–1(a). All of the 

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

satisfied, and UST enters into a gain 

recognition agreement to qualify for 

nonrecognition treatment and does not make 

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

of this section. UST also complies with the 

notice requirement under § 1.367(b)–1(c). At 

the time of the initial transfer, UST has a 

basis of $50 in the stock of TFD, which has 

a fair market value of $100. Thus, the amount 

of gain subject to the gain recognition 

agreement is $50. Two years after the initial 

transfer, TFC and X, an unrelated domestic 

corporation, form CFC, a foreign corporation. 

TFC transfers the stock of TFD to CFC in an 

exchange to which section 351 applies. UST 

also complies with the notice requirement 

under § 1.367(b)–1(c). At the time of the 

transfer, TFC’s basis in the TFD stock equals 

$50 and the fair market value remains $100. 

In the exchange, TFC receives 25% of the 

stock of CFC and $35 of cash. Before taking 

into account adjustments made under 

paragraph (b)(3)(iv) of this section, TFC 

would recognize $35 of gain under section 

351(b). X transfers property to CFC in 

exchange for the remaining 75% of the CFC 

stock. Under paragraph (d)(1) of this section, 

TFC’s disposition of the TFD stock is a 

triggering event. However, UST complies 

with the requirements of paragraph (e)(1)(ii) 

of this section providing for an exception to 

the triggering event. 

(ii) Result. Under paragraph (f)(1)(ii) of this 

section, pursuant to the terms of the gain 

recognition agreement, UST must recognize 

$35 of the $50 gain realized, but not 

recognized, on the initial transfer. The new 

gain recognition agreement that UST files 

pursuant to paragraph (e)(1)(ii)(C) of this 

section will reflect the $15 that remains of 

the gain realized, but not recognized, on the 

initial transfer. Under paragraph (b)(3)(iv)(A) 

of this section, TFC’s basis in the TFD stock 

is increased (as of the date of the initial 

transfer) by $35 to $85. Under paragraph 

(b)(3)(iv)(B) of this section, UST’s basis in the 

TFC stock is also increased by $35. Finally, 

after taking account of adjustments under 

paragraph (b)(3)(iv) of this section, TFC must 

recognize $15 of gain under section 351(b). 

(2) Dispositions of substantially all of 

the transferred corporation’s assets. If a 

disposition of substantially all of the 

assets of the transferred corporation 

occurs in connection with a 

nonrecognition transaction described in 

paragraph (e)(1)(iii), (e)(3)(iii), or 

(e)(4)(ii) of this section and gain is 

recognized on such disposition (for 

example, under section 351(b) or 

356(a)(1)), the U.S. transferor must 

recognize gain pursuant to the gain 

recognition agreement to the extent of 

such gain recognized (but not in excess 

of the gain realized, but not recognized, 

on the initial transfer). This paragraph 

(f)(2) shall not apply to the extent that 

recognized gain is treated as a dividend 

under section 356(a)(2). 

(g) Transactions that terminate the 

gain recognition agreement or reduce 

the amount of gain required to be 

recognized pursuant to a gain 

recognition agreement. Notwithstanding 

paragraph (d) of this section, the 

following events shall not constitute 

triggering events and instead shall either 

terminate the gain recognition 

agreement, or reduce the amount of gain 

required to be recognized pursuant to a 

gain recognition agreement: 

(1) Taxable disposition of stock of the 

transferee foreign corporation by U.S. 

transferor—(i) General rule. If the U.S. 

transferor disposes of all the stock of the 

transferee foreign corporation that is 

received (or deemed received) in the 

initial transfer, then the gain recognition 

agreement shall terminate without 

further effect if—

(A) Immediately before the 

disposition, the aggregate basis of the 

transferee foreign corporation stock 

disposed of does not exceed the sum of 

the aggregate basis of the transferred 

stock or securities immediately before 

the initial transfer plus any increase in 

the basis of such stock or securities as 

a result of the recognition of gain on the 

initial transfer. For purposes of this 

paragraph (g)(1)(i)(A), an increase in 

basis of the stock disposed of as a result 

of an income inclusion with respect to 

such stock (for example, pursuant to 

section 961) shall not be taken into 

account; and 

(B) All realized gain (if any) in the 

stock disposed of is recognized 

currently and included in taxable 

income as a result of the disposition. 

(ii) Partial dispositions—(A) General 

rule. If the U.S. transferor disposes of a 

portion of the stock of the transferee 

foreign corporation that is received (or 

deemed received) in the initial transfer 

in a transaction that satisfies the 

conditions described in paragraphs 

(g)(1)(i)(A) and (B) of this section, such 

disposition will not be a triggering event 

and the gain recognition shall remain in 

effect. For purposes of determining 

whether the condition described in 

paragraph (g)(1)(i)(A) of this section is 

satisfied, however, the aggregate basis of 

the stock of the transferee foreign 

corporation disposed of is compared to 

the aggregate basis of the transferred 

stock or securities exchanged for such 

stock at the time of the initial transfer. 

(B) Subsequent triggering event. If the 

gain recognition agreement is triggered 

after a disposition described in 

paragraph (g)(1)(ii)(A) of this section, 

the U.S. transferor shall be required to 

recognize only a proportionate amount 

of the gain subject to the gain 

recognition agreement that otherwise 

would be required to be recognized on 

a subsequent triggering event. Except as 

provided in paragraph (g)(1)(iv) of this 

section, the proportion required to be 

recognized shall be determined by 

reference to the percentage of stock 

(based on relative fair market value) of 

the transferee foreign corporation 

received (or deemed received) in the 

initial transfer that is retained by the 

U.S. transferor. 

(iii) The rule of paragraph (g)(1)(ii) of 

this section is illustrated by the 

following example: 

Example. (1) Facts. A, a United States 

citizen, owns 100% of the outstanding stock 

of foreign corporation X. In a transaction to 

which section 351 applies, A exchanges his 

stock in X (and other assets) for 100% of the 

outstanding stock of foreign corporation Y. 

The transaction is subject to both sections 

367(a) and (b). See §§ 1.367(a)–3(b) and 

1.367(b)–1(a). A enters into a gain recognition 

agreement, makes the election contained in 

paragraph (b)(1)(vii) of this section, and also 

complies with the notice requirement under 

§ 1.367(b)–1(c). In the second year following 

the initial transfer, A disposes of 60% of the 

fair market value of the stock of Y, and the 

requirements of paragraphs (g)(1)(i)(A) and 

(B) are met with respect to such disposition. 

In the fourth year following the initial 

transfer, Y disposes of 50% of the fair market 

value of the stock of X. 

(ii) Result. The disposition of 60% of the 

stock of Y is not a triggering event, and the 

gain recognition agreement continues in 

effect. The disposition of X stock, however, 

is a triggering event under paragraph (d)(1)(i) 

of this section. As a result of the subsequent 

disposition of 50% of the stock of X, under 

paragraphs (d)(1)(iii) and (g)(1)(ii)(B) of this 

section, A is required to include in income 

in the year of such disposition 20% (40% of 

the fair market value of Y multiplied by 50% 

of the fair market value of X) of the gain that 

A realized but did not recognize on the initial 

transfer of the X stock to Y, and pay any 

applicable interest. 

(iv) Certain nonrecognition 

transactions. The rules described in 

these paragraphs (g)(1)(iv)(A) through 

(C) apply if the U.S. transferor disposes 

of all or a portion of the stock of the 

transferee foreign corporation received 

(or deemed received) in the initial 

transfer pursuant to a nonrecognition 

transaction described in paragraph 

(e)(1)(i), (e)(2)(ii), (e)(3)(i), or (e)(3)(ii) of 

this section, the condition described in 

paragraph (g)(1)(i)(A) of this section is 

satisfied with respect to such 

disposition, and gain is recognized in 

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connection with the disposition (for 

example, under sections 351(b), 

356(a)(1), or 336). If, however, only a 

portion of the stock of the transferee 

corporation stock is disposed of 

pursuant to this paragraph (g)(1)(iv), 

then for purposes of determining 

whether the condition described in 

paragraph (g)(1)(i)(A) of this section is 

satisfied, the aggregate basis of the stock 

disposed of is compared to the aggregate 

basis of the transferred stock or 

securities exchanged for such stock at 

the time of the initial transfer. 

(A) U.S. transferor files new gain 

recognition agreement. This paragraph 

(g)(1)(iv)(A) applies if the U.S. transferor 

(or successor U.S. transferor, as 

applicable) enters into a new gain 

recognition agreement as provided in 

paragraph (e)(1)(i), (e)(3)(i), or (e)(3)(ii) 

of this section, as applicable. In such a 

case, the amount of gain subject to the 

new gain recognition agreement shall 

equal the amount of gain realized, but 

not recognized, on the initial transfer, 

less any gain recognized by the U.S. 

transferor in connection with the 

nonrecognition transaction. If the 

amount of gain recognized on the 

transfer is equal to or greater than the 

amount of gain realized, but not 

recognized, on the initial transfer, then 

the original gain recognition agreement 

shall terminate without further effect. 

(B) U.S. transferor does not file a new 

gain recognition agreement. This 

paragraph (g)(1)(iv)(B) applies if the U.S. 

transferor (or successor U.S. transferor, 

as applicable) fails to enter into a new 

gain recognition agreement as provided 

in paragraph (e)(1)(i), (e)(3)(i), or 

(e)(3)(ii) of this section, as applicable. In 

such a case, the amount required to be 

recognized by the U.S. transferor 

pursuant to the gain recognition 

agreement shall be the amount of gain 

realized, but not recognized, on the 

initial transfer, less any gain recognized 

by the U.S. transferor in connection 

with the nonrecognition transaction. 

(C) Special rule for recapitalizations. 

Because paragraph (e)(2)(ii) of this 

section does not require the U.S. 

transferor to enter into a new gain 

recognition agreement, the amount of 

gain subject to the gain recognition 

agreement shall equal the amount of 

gain realized, but not recognized, on the 

initial transfer, less any gain recognized 

by the U.S. transferor in connection 

with the nonrecognition transaction 

described in paragraph (e)(2)(ii) of this 

section. 

(v) Election to reduce basis—(A) 

General rule. For purposes of 

paragraphs (g)(1)(i), (ii) and (iv) of this 

section, the U.S. transferor may elect to 

reduce its aggregate basis in the stock 

disposed of effective immediately before 

the disposition such that the condition 

described in paragraph (g)(1)(i)(A) is 

satisfied. If an election is made pursuant 

to this paragraph (g)(1)(v), the U.S. 

transferor may increase its basis in other 

stock of the transferee foreign 

corporation it holds, if any, by a 

corresponding amount but not above the 

fair market value of such stock. 

(B) Election. The election pursuant to 

this paragraph (g)(1)(v) is made by filing 

with the U.S. transferor’s income tax 

return for the taxable year in which the 

disposition of the transferee foreign 

corporation stock occurs, a statement 

setting forth the following information, 

with the heading ‘‘Election to Reduce 

Stock Basis Under § 1.367(a)–

8T(g)(1)(v)’’: 

(1) A description of the transferee 

foreign corporation stock that the U.S. 

transferor has disposed of. 

(2) An estimate of the fair market 

value of the stock as of the date of the 

disposition. 

(3) A comparison of the basis of the 

transferee foreign corporation stock 

before and after the election that is 

made pursuant to this paragraph 

(g)(1)(v). 

(4) The date on which the transferee 

foreign corporation stock was disposed 

of by the U.S. transferor. 

(vi) The rules of paragraph (g)(1) of 

this section are illustrated by the 

following examples: 

Example 1. (i) Facts. USP, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, FC1 and FC2. The basis 

and fair market value of the FC1 stock is $100 

and $90, respectively. The basis and fair 

market value of the FC2 stock is $0 and $100, 

respectively. USP also owns land that has a 

basis and fair market value of $10. In year 1, 

USP transfers 100% of the stock of FC1 and 

FC2 and the land to FC3, a newly formed 

foreign corporation, in exchange for 20 shares 

of FC3 stock. The transfer of the stock of FC1 

and FC2 qualifies under section 351 and 

section 368(a)(1)(B). The transfer of the land 

qualifies under section 351. The transfer of 

the FC2 stock is subject to both section 367(a) 

and (b). See §§ 1.367(a)–3(b) and 1.367(b)–

1(a). Pursuant to § 1.367(a)–3(b)(1)(ii) and 

this section, USP enters into a gain 

recognition agreement with respect to the 

$100 of gain in the FC2 stock and complies 

with the notice requirement under 

§ 1.367(b)–1(c). USP takes the position that 

its basis in each of the 20 shares of FC3 stock 

received in the transfer equals $5.5 

(($100+$0+10)/20). In year 3, USP sells 100% 

of its FC3 stock to an unrelated person for 

cash. 

(ii) Result. The disposition of the FC3 stock 

is a triggering event described in paragraph 

(d)(3) of this section. The disposition does 

not terminate the gain recognition agreement 

pursuant to paragraph (g)(1)(i) of this section 

because USP takes the position that the basis 

of each of the 10 shares of FC3 stock it 

received in exchange for the FC2 stock in the 

initial transfer equals $5.5. Thus, the total 

basis in the 10 shares received for the FC2 

stock equals $55, which exceeds the $0 basis 

USP had in the FC2 stock it transferred to 

FC3 in the initial transfer. As a result, the 

condition described in paragraph (g)(1)(i)(A) 

of this section is not satisfied. USP may, 

however, elect to reduce its basis in 10 of the 

FC3 shares it disposes of from $5.5 to $0, and 

increase its basis in its remaining 10 shares 

of FC2 stock by $5.5, pursuant to paragraph 

(g)(1)(v) of this section. As a result, the 

condition described in paragraph (g)(1)(i)(A) 

of this section would be satisfied, the 

disposition would not be a triggering event, 

and the gain recognition would terminate 

without further effect. 

Example 2. (i) Facts. USP, a domestic 

corporation, owns 100% of the stock of FC1, 

a foreign corporation. The basis and fair 

market value of the FC1 stock is $0 and $80, 

respectively. In year 1, USP transfers 100% 

of the stock of FC1 to FC2, a newly formed 

foreign corporation, in exchange for 20 shares 

of FC2 stock. The transfer of the stock of FC1 

qualifies under section 351 and section 

368(a)(1)(B). The transfer of the FC1 stock is 

subject to both section 367(a) and (b). See 

§§ 1.367(a)–3(b) and 1.367(b)–1(a). Pursuant 

to § 1.367(a)–3(b)(1)(ii) and this section, USP 

enters into a gain recognition agreement with 

respect to the $80 of gain in the FC1 stock 

and complies with the notice requirement 

under § 1.367(b)–1(c). USP’s basis and fair 

market value in the FC2 stock it receives at 

the time of the transfer is $0 and $80, 

respectively. In year 3, when the fair market 

value of the FC2 stock continues to equal 

$80, USP transfers land that has a basis and 

fair market value of $20 to FC2 in a transfer 

that qualifies under section 351, but does not 

receive additional shares of FC2 in 

connection with such transfer. In year 5, USP 

sells 100% of its FC2 stock to an unrelated 

person for cash. 

(ii) Result. The disposition of the FC3 stock 

is a triggering event described in paragraph 

(d)(3) of this section. The disposition would 

not terminate the gain recognition agreement 

pursuant to paragraph (g)(1)(i) of this section 

if the basis in each of the 20 FC2 shares that 

USP sells equals $1 ($20/20 shares) because 

immediately before the disposition the basis 

in the FC2 shares received for the FC1 shares 

exceeds the basis of the FC1 shares at the 

time of the initial transfer. As a result, the 

condition described in paragraph (g)(1)(i)(A) 

of this section would not be satisfied. USP 

may, however, elect to adjust its basis in its 

FC2 shares such that 16 of the shares have 

zero basis (reflecting the basis of the FC1 

stock) and 4 of the shares have $20 of basis 

(reflecting the basis of the land). In such a 

case, the condition described in paragraph 

(g)(1)(i)(A) of this section would be satisfied, 

the disposition would not be a triggering 

event, and the gain recognition agreement 

would terminate without further effect. 

(2) Certain dispositions by a domestic 

transferred corporation of substantially 

all of its assets. If, immediately before 

the initial transfer, the U.S. transferor 

owned an amount of stock in the 

transferred corporation described in 

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section 1504(a)(2), and the transferred 

corporation is domestic, then the gain 

recognition agreement shall terminate 

without further effect if 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 before the 

indirect transfer, the U.S. transferor 

owned an amount of stock in the 

acquired corporation described in 

section 1504(a)(2) (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 owned an 

amount of stock in the acquiring 

corporation described in section 

1504(a)(2)) 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 or transfer by 

transferee foreign corporation of stock 

or securities of transferred corporation 

under section 337, 355 or 361—(i) 

Scope. This paragraph (g)(3) applies if 

the transferee foreign corporation 

distributes or transfers the stock or 

securities that initially necessitated the 

filing of the gain recognition agreement 

(and any additional stock received after 

the initial transfer) pursuant to any of 

the following transactions: 

(A) A liquidating distribution to the 

U.S. transferor or a domestic 

corporation that is a member of the 

same consolidated group of which the 

U.S. transferor is then a member and 

that qualifies under sections 332 and 

337, if such domestic distributee 

corporation is described in section 

332(b)(1). 

(B) A distribution to the U.S. 

transferor, a domestic corporation that is 

a member of the same consolidated 

group of which the U.S. transferor is a 

member, or an individual that is a 

United States person, that qualifies 

under section 355. 

(C) A transfer to the U.S. transferor or 

a domestic corporation that is a member 

of the same consolidated group of which 

the U.S. transferor is then a member and 

to which section 361 applies (but, if in 

connection with a reorganization 

described in section 368(a)(1)(D) or (G), 

only if the requirements of section 

354(b)(1)(A) and (B) are met). 

(ii) General rule. If a distribution or 

transfer is described in paragraph 

(g)(3)(i) of this section, the gain 

recognition agreement shall terminate 

without further effect, provided that 

immediately after such distribution or 

transfer the basis in the transferred stock 

or securities in the hands of the 

domestic corporation or individual, as 

applicable, does not exceed the basis 

that the U.S. transferor had in the 

transferred stock or securities 

immediately before the initial transfer. 

For purposes of this paragraph (g)(3)(ii), 

only the basis in the stock or securities 

transferred shall be taken into account, 

and increases to stock basis as a result 

of income inclusions with respect to 

stock (for example, pursuant to section 

961) shall not be taken into account. In 

the case of a transaction described in 

paragraph (g)(3)(i)(B) of this section, any 

reductions or redistributions of stock 

basis under § 1.367(b)–5(c)(2) or (4), 

respectively, shall be made before 

applying the rules of this paragraph 

(g)(3)(ii). 

(iii) Election to reduce basis in stock 

or securities of transferred corporation. 

For purposes of paragraph (g)(3)(ii) of 

this section, the domestic corporation or 

individual, as applicable, may elect to 

reduce the basis in the stock or 

securities transferred to equal the basis 

the U.S. transferor had in the 

corresponding transferred stock or 

securities immediately before the initial 

transfer, such that the gain recognition 

agreement shall terminate without 

further effect. If such an election is 

made, the domestic corporation or 

individual may increase its basis in 

other stock of the transferred 

corporation it holds, if any, by a 

corresponding amount but not above the 

fair market value of such stock. 

(iv) Election. The election pursuant to 

paragraph (g)(3)(iii) of this section is 

made by filing with the domestic 

corporation’s or individual’s income tax 

return for the taxable year in which the 

distribution or transfer occurs, a 

statement setting forth the following 

information, with the heading ‘‘Election 

to Reduce Stock Basis Under § 1.367(a)–

8T(g)(3)(iii)’’: 

(1) A description of the stock or 

securities received. 

(2) An estimate of the fair market 

value of the stock or securities as of the 

date of their receipt. 

(3) A statement comparing the basis of 

the stock or securities before and after 

the election. 

(4) The date on which the stock or 

securities were received. 

(v) Examples. The rules of paragraph 

(g)(3) of this section are illustrated by 

the following examples: 

Example 1. (i) Facts. USP, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, FC1 and FC2. FC1 has 

10 shares of stock issued and outstanding. In 

year 1, when the basis and fair market value 

of the FC1 stock is $0 and $90, respectively, 

USP transfers its 10 shares of FC1 stock to 

FC2 in an exchange to which section 351 

applies. The transaction is subject to both 

sections 367(a) and (b). See §§ 1.367(a)–3(b) 

and 1.367(b)–1(a). Pursuant to § 1.367(a)–

3(b)(1)(ii) and this section, USP enters into a 

gain recognition agreement with respect to 

such transfer. USP also complies with the 

notice requirement under § 1.367(b)–1(c). In 

year 2, FC2 transfers land with a basis and 

fair market value of $10 to FC1 in exchange 

for one newly issued share of FC1 stock. In 

year 4, FC2 distributes all of its FC1 stock to 

USP in a liquidating distribution that 

qualifies under sections 332 and 337. 

(ii) Result. In determining whether the gain 

recognition agreement entered into by USP is 

terminated under paragraph (g)(3) of this 

section, or in the alternative triggered under 

paragraph (d)(1) of this section, only the 

stock of FC1 transferred by USP to FC2 in 

year 1 is considered. Thus, the basis in the 

one share of FC1 stock issued to FC2 in year 

2 in exchange for land is not taken into 

account. If instead of FC1 actually issuing 

another share of stock to FC2 in exchange for 

the land, FC1 was deemed to issue stock to 

FC2 in such exchange, then the gain 

recognition agreement would terminate only 

if USP elects to adjust the basis in its FC1 

shares such that nine of the shares have zero 

basis and one of the shares has $10 of basis. 

Example 2. (i) Facts. USP, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, FC and FD. In year 1, 

USP transfers 100% of the stock of FC to FD 

in an exchange to which section 351 applies. 

The transaction is subject to both sections 

367(a) and (b). See §§ 1.367(a)–3(b) and 

1.367(b)–1(a). At the time of the initial 

transfer, USP has a basis of $80 in its stock 

of FC; the stock of FC has a fair market value 

of $100. USP’s basis in its stock of FD, and 

the fair market value of the FD stock, are both 

$100. Pursuant to § 1.367(a)–3(b)(1)(ii) and 

this section, USP enters into a gain 

recognition agreement with respect to the 

initial transfer. USP also complies with the 

notice requirement under § 1.367(b)–1(c). In 

year 4, FD distributes all of the stock of FC 

to USP in a pro rata distribution to which 

section 355 applies. At the time of the 

distribution, the fair market value of the FC 

stock has increased to $200, while the fair 

market value of the FD stock has remained 

$100. Under section 358, USP allocates its 

$180 predistribution basis in its FD stock 

between the FD stock and FC stock according 

to the stock blocks’ relative fair market 

values, yielding a $60 basis in the FD stock 

and a $120 basis in the FC stock. 

Immediately before the distribution, USP’s 

section 1248 amount with respect to FC and 

FD is zero. 

(ii) Result. The distribution of FC stock is 

a triggering event under paragraph (d)(1) of 

this section. The distribution does not 

terminate the gain recognition agreement 

under paragraph (g)(3) of this section because 

after the distribution, USP’s basis of $120 in 

the FC stock exceeds the $80 basis that USP 

had in the FC stock at the time of the initial 

transfer. If, however, USP elects to reduce its 

basis in the FC stock it receives to $80, then 

the condition described in paragraph (g)(3) of 

this section will be satisfied, and the gain 

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recognition agreement will terminate without 

further effect. In addition, the $40 of basis 

that USP elected to reduce is redistributed to 

the stock of FD, the result of which is that 

USP has a basis of $100 in its FD stock. 

(h) Effective date—(1) General rule—

(i) Gain recognition agreements filed for 

transfers on or after effective date. With 

the exception of paragraph (f) of this 

section, the rules of this section apply 

to gain recognition agreements filed 

with respect to transfers of stock or 

securities under Treas. Reg. §§ 1.367(a)–

3(b) through (d) and 1.367(a)–3T(e) 

occurring on or after March 7, 2007. The 

rules of paragraph (f) of this section 

apply to gain recognition agreements 

filed with respect to transfers of stock or 

securities under Treas. Reg. §§ 1.367(a)–

3(b) through (d) and 1.367(a)–3T(e) 

occurring on or after August 6, 2007. 

However, the rules of this section do not 

apply to gain recognition agreements 

filed with respect to such a transfer of 

stock or securities occurring on or after 

March 7, 2007, if such transfer was 

entered into pursuant to a written 

agreement which was (subject to 

customary conditions) binding before 

February 5, 2007, and at all times 

thereafter. Solely for purposes of this 

paragraph (h), a transfer described in the 

preceding sentence shall be deemed to 

be a transfer occurring before March 7, 

2007 to which the rules of § 1.367(a)–8 

(see 26 CFR part 1, revised April 1, 

2006) apply. See paragraph (h)(2)(iii) of 

this section for the ability to apply the 

rules of this section with respect to gain 

recognition agreements filed before 

March 7, 2007. 

(ii) Gain recognition agreements filed 

for transfers before effective date. For 

matters covered in this section for 

periods before March 7, 2007 but on or 

after July 20, 1998, the corresponding 

rules of § 1.367(a)–8 (see 26 CFR part 1, 

revised April 1, 2006) apply. 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 CB 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 before July 20, 1998, then the 

rules of § 1.367(a)–3T(g) (see 26 CFR 

part 1, revised April 1, 1998) 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(h). 

(2) Applicability to gain recognition 

agreements filed before effective date—

(i) General rule. This paragraph (h)(2)(i) 

applies only to rules in this regulation 

§ 1.367(a)–8T that were not already 

effective under the rules of § 1.367(a)–8 

(see 26 CFR part 1, revised April 1, 

2006). Taxpayers may apply all or part 

of these regulations to gain recognition 

agreements filed with respect to 

transfers of stock or securities, for all 

open years, on or after July 20, 1998. If 

a taxpayer failed to file a gain 

recognition agreement with respect to a 

transfer of stock or securities on or after 

July 20, 1998 and before March 7, 2007, 

the taxpayer must first obtain reasonable 

cause relief under § 1.367(a)-8(c)(2) to 

file the gain recognition agreement 

before the taxpayer may apply this 

paragraph (h)(2)(i). 

(ii) Special filing rule for tax year 

ending before effective date. This 

paragraph (h)(2)(ii) provides the time 

and manner in which taxpayers may 

apply paragraph (h)(2)(i) of this section. 

Notwithstanding the rules provided in 

§ 1.367(a)–8T(a)(2), all agreements, 

certifications, or other information 

related to such gain recognition 

agreement that should have been filed 

on or before March 7, 2007 shall be 

treated as having been timely filed, 

provided they are attached to a Federal 

income tax return amending the 

taxpayer’s Federal income tax return for 

the taxable year in which they should 

have been attached. The amended 

return described in the preceding 

sentence must be filed before August 6, 

2007. A taxpayer that wishes to apply 

paragraph (h)(2)(i) of this section but 

that fails to meet the filing requirement 

described in the preceding sentence 

must request reasonable cause relief as 

provided in paragraph (e)(10) of this 

section. 

(iii) Tax year ending after effective 

date. A taxpayer that entered into a gain 

recognition agreement to which 

§ 1.367(a)–8 (see 26 CFR part 1, revised 

April 1, 2006) applies may apply the 

rules of this section in a tax year ending 

on or after March 7, 2007 by attaching 

the agreement, certification, or other 

information related to such gain 

recognition agreement that the rules of 

this section require in accordance with 

the rules of this section and with the 

time and manner rules provided in 

§ 1.367(a)–8T(a)(2). 

(iv) Examples. The rules of paragraph 

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

the following examples: 

Example 1. (i) Facts. USP, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, FC and FD. In 2003, 

USP transfers 100% of the stock of FC to FD 

in an exchange to which section 351 applies. 

The transaction is subject to both sections 

367(a) and (b). See §§ 1.367(a)–3(b) and 

1.367(b)–1(a). Pursuant to § 1.367(a)–

3(b)(1)(ii) and this section, USP enters into a 

gain recognition agreement with respect to 

the initial transfer. USP also complies with 

the notice requirement under § 1.367(b)–1(c). 

In 2005, FD distributes all of the stock of FC 

to USP in a pro rata distribution to which 

section 355 applies. Under section 358, 

USP’s basis in its FC stock exceeds the basis 

that USP had in FC immediately before the 

initial transfer. 

(ii) Result. Under paragraph (h)(1)(ii) of 

this section, the rules of § 1.367(a)–8 apply 

because the gain recognition agreement was 

filed before March 7, 2007. As a result of the 

year 2005 transaction, under § 1.367(a)–

8(e)(1), USP is required to recognize all of the 

gain subject to the gain recognition 

agreement, and pay any applicable interest. 

The gain recognition agreement does not 

terminate under § 1.367(a)–8(h)(3) because 

USP’s basis in its FC stock immediately after 

the section 355 distribution exceeds the basis 

USP had in the FC stock immediately before 

the initial transfer. However, paragraph 

(g)(3)(iii) of this section provides a rule that 

would allow USP to elect to reduce its basis 

in the FC stock such that the conditions in 

paragraph (g)(3) of this section would be 

satisfied and the gain recognition agreement 

would terminate without further effect. 

Under paragraph (h)(2)(i) of this section, USP 

may apply paragraph (g)(3)(iii) of this section 

to the 2005 transaction, if 2005 is an open 

year, because the rule provided in paragraph 

(g)(3)(iii) of this section was not already 

effective under § 1.367(a)–8. Under paragraph 

(h)(2)(ii) of this section, USP must submit the 

documents required under paragraph 

(g)(3)(iii) of this section to a Federal income 

tax return amending its 2005 Federal income 

tax return before August 6, 2007. 

Example 2. (i) Facts. UST, a domestic 

corporation, owns 100% of the stock of two 

foreign corporations, TFC and TFD. In 2003, 

USP transfers 100% of the stock of TFD to 

TFC in an exchange to which section 351 

applies. The transaction is subject to both 

sections 367(a) and (b). See §§ 1.367(a)–3(b) 

and 1.367(b)–1(a). All of the requirements of 

§ 1.367(a)–3(b)(1) are satisfied, and UST 

enters into a gain recognition agreement. UST 

also complies with the notice requirement 

under § 1.367(b)–1(c). In 2005, TFC transfers 

its TFD stock to F1, also a foreign 

corporation, in an exchange to which section 

351 applies. UST does not file a new gain 

recognition agreement under § 1.367(a)–

8(g)(2). 

(ii) Result. Under paragraph (h)(1)(ii) of 

this section, the rules of § 1.367(a)–8 apply 

because the gain recognition agreement was 

filed before March 7, 2007. Under § 1.367(a)–

8(e), UST must recognize the gain realized, 

but not recognized, on its initial transfer of 

TFD stock. Paragraph (h)(2)(i) of this section 

does not apply because the rule in paragraph 

(e)(1)(ii) of this section was already effective 

under § 1.367(a)–8(g)(2). Therefore, UST’s 

only recourse from recognizing the gain 

subject to the gain recognition agreement is 

the reasonable cause exception provided in 

§ 1.367(a)–8(c)(2). 

(3) Expiration. The applicability of 

this section expires on or before 

February 1, 2010. 

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Federal Register / Vol. 72, No. 23 / Monday, February 5, 2007 / Rules and Regulations 5197 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 7. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 8. In § 602.101, paragraph (b) is 

revised by adding an entry for 

§ 1.367(a)–8T in numerical order to the 

table to read as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.367(a)–8T .............................. 1545–2056 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 31, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 07–490 Filed 2–1–07; 8:52 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Federal Emergency Management 

Agency 

44 CFR Part 67 

Final Flood Elevation Determinations 

AGENCY: Federal Emergency 

Management Agency, DHS. 

ACTION: Final rule. 

SUMMARY: Base (1% annual chance) 

Flood Elevations (BFEs) and modified 

BFEs are made final for the 

communities listed below. The BFEs 

and modified BFEs are the basis for the 

floodplain management measures that 

each community is required either to 

adopt or to show evidence of being 

already in effect in order to qualify or 

remain qualified for participation in the 

National Flood Insurance Program 

(NFIP). 

DATES: The date of issuance of the Flood 

Insurance Rate Map (FIRM) showing 

BFEs and modified BFEs for each 

community. This date may be obtained 

by contacting the office where the maps 

are available for inspection as indicated 

on the table below. 

ADDRESSES: The final BFEs for each 

community are available for inspection 

at the office of the Chief Executive 

Officer of each community. The 

respective addresses are listed in the 

table below. 

FOR FURTHER INFORMATION CONTACT: 

William R. Blanton, Jr., Engineering 

Management Section, Mitigation 

Division, Federal Emergency 

Management Agency, 500 C Street SW., 

Washington, DC 20472, (202) 646–3151. 

SUPPLEMENTARY INFORMATION: The 

Federal Emergency Management Agency 

(FEMA) makes the final determinations 

listed below for the modified BFEs for 

each community listed. These modified 

elevations have been published in 

newspapers of local circulation and 

ninety (90) days have elapsed since that 

publication. The Mitigation Division 

Director of FEMA has resolved any 

appeals resulting from this notification. 

This final rule is issued in accordance 

with section 110 of the Flood Disaster 

Protection Act of 1973, 42 U.S.C. 4104, 

and 44 CFR part 67. FEMA has 

developed criteria for floodplain 

management in floodprone areas in 

accordance with 44 CFR part 60. 

Interested lessees and owners of real 

property are encouraged to review the 

proof Flood Insurance Study and FIRM 

available at the address cited below for 

each community. The BFEs and 

modified BFEs are made final in the 

communities listed below. Elevations at 

selected locations in each community 

are shown. 

National Environmental Policy Act. 

This final rule is categorically excluded 

from the requirements of 44 CFR part 

10, Environmental Consideration. An 

environmental impact assessment has 

not been prepared. 

Regulatory Flexibility Act. As flood 

elevation determinations are not within 

the scope of the Regulatory Flexibility 

Act, 5 U.S.C. 601–612, a regulatory 

flexibility analysis is not required. 

Regulatory Classification. This final 

rule is not a significant regulatory action 

under the criteria of section 3(f) of 

Executive Order 12866 of September 30, 

1993, Regulatory Planning and Review, 

58 FR 51735. 

Executive Order 13132, Federalism. 

This final rule involves no policies that 

have federalism implications under 

Executive Order 13132. 

Executive Order 12988, Civil Justice 

Reform. This final rule meets the 

applicable standards of Executive Order 

12988. 

List of Subjects in 44 CFR Part 67 

Administrative practice and 

procedure, Flood insurance, Reporting 

and recordkeeping requirements. 

■ Accordingly, 44 CFR part 67 is 

amended as follows: 

PART 67—[AMENDED] 

■ 1. The authority citation for part 67 

continues to read as follows: 

Authority: 42 U.S.C. 4001 et seq.; 

Reorganization Plan No. 3 of 1978, 3 CFR, 

1978 Comp., p. 329; E.O. 12127, 44 FR 19367, 

3 CFR, 1979 Comp., p. 376. 

§ 67.11 [Amended] 

■ 2. The tables published under the 

authority of § 67.11 are amended as 

follows: 

Flooding source(s) Location of referenced elevation 

* Elevation in 

feet (NGVD) 

+ Elevation in 

feet (NAVD) 

# Depth in feet 

above ground 

Modified 

Communities 

affected 

Baldwin County, Alabama and Incorporated Areas 

Docket No.: FEMA–B–7456 

D’Olive Creek ........................ Just upstream of Lake Forest Dam ....................................... +25 City of Daphne. 

Just downstream of U.S. Highway 90 ................................... +35 

Tiawasee Creek .................... Confluence with D’Olive Creek at Lake Forest ..................... +25 City of Daphne. 

Approximately 1,500 feet upstream of Ridgewood Drive ..... +60 

Styx River .............................. Just downstream of Truck Route 17 (Brady Road) .............. +77 Baldwin County (Unincorporated Areas). 

Approximately 3,100 feet upstream of Pinegrove Road ....... +168 

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