49278 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–209006–89] 

RIN 1545–AM97 

Transfers by Domestic Corporations 

That Are Subject to Section 367(a)(5); 

Distributions by Domestic 

Corporations That Are Subject to 

Section 1248(f) 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations under sections 

367(a), 367(a)(5), 367(b), 1248(a), 

1248(e), 1248(f), and 6038B of the 

Internal Revenue Code (Code). The 

proposed regulations under sections 

367(a)(5) and 367(b) apply when a 

domestic corporation transfers certain 

property to a foreign corporation in an 

exchange described in section 361(a) or 

(b). The proposed regulations under 

section 1248(e) suspend the application 

of section 1248(e) when capital gains are 

taxed at a rate equal to or greater than 

the rate at which ordinary income is 

taxed. The proposed regulations under 

section 1248(f) apply when a domestic 

corporation distributes stock of certain 

foreign corporations in a distribution to 

which section 337, 355, or 361 applies. 

The proposed regulations under section 

1248(f) include regulations described in 

Notice 87–64 (1987–2 CB 375). The 

proposed regulations under section 

6038B establish reporting requirements 

for certain transfers of property by a 

domestic corporation to a foreign 

corporation in certain exchanges 

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

Finally, the proposed regulations under 

section 367(a) include the regulations 

described in Notice 2008–10 (2008–3 

IRB 277). 

The proposed regulations included in 

this document affect domestic 

corporations that transfer property to 

foreign corporations in certain 

transactions, or that distribute the stock 

of certain foreign corporations, and 

certain shareholders of such domestic 

corporations. The proposed regulations 

are necessary, in part, to provide 

guidance on changes to the law made by 

the Technical and Miscellaneous 

Revenue Act of 1988 (Pub. L. 100–647, 

102 Stat. 3342). 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by November 18, 2008. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–209006–89), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–209006– 

89), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC 20224, or sent 

electronically, via the Federal 

eRulemaking Portal at 

www.regulations.gov (IRS REG–209006– 

89). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the regulations, Daniel 

McCall, (202) 622–3860; concerning 

submissions of comments, requests for a 

public hearing, and/or to be placed on 

the building access list to attend a 

hearing, Richard Hurst 

(Richard.A.Hurst@irscounsel.treas.gov), 

or (202) 622–7180 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collections of information should be 

sent to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collections of 

information should be received by 

October 20, 2008. 

Comments are requested concerning: 

Whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collections 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collections of information 

may be minimized, including through 

the application or automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

The collections of information in 

these proposed regulations are in 

§§ 1.367(a)–7(c)(4) and (5); 1.1248(f)– 

2(b)(1) and (c)(1); and 1.6038B–1(c)(6). 

The collections of information are 

mandatory. The likely respondents are 

domestic corporations. 

Estimated total annual reporting 

burden: 3260. 

Estimated average annual burden 

hours per respondent: 10.69. 

Estimated number of respondents: 

305. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books and records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains proposed 

amendments to 26 CFR part 1 under 

sections 367(a), 367(a)(5), 367(b), 

1248(a), 1248(e), 1248(f), and 6038B of 

the Code. 

Section 367(a)(1) generally provides 

that if a United States person transfers 

property to foreign corporation in 

connection with an exchange described 

in section 332, 351, 354, 356, or 361, 

then the foreign corporation shall not be 

considered a corporation for purposes of 

determining the extent to which the 

United States person recognizes gain on 

the transfer. Sections 367(a)(2) and 

367(a)(3), respectively, provide 

exceptions to the general rule of section 

367(a)(1) for transfers of stock or 

securities of a foreign corporation that is 

a party to the exchange or a party to the 

reorganization, and for certain property 

used in an active foreign trade or 

business. However, section 367(a)(5) 

provides that, except to the extent 

provided in regulations, the exceptions 

to the general rule of section 367(a)(1) 

provided by section 367(a)(2) and (a)(3) 

do not apply to a transfer of property by 

a domestic corporation to a foreign 

corporation in an exchange described in 

section 361(a) or (b). 

Section 367(b)(1) provides that in the 

case of any exchange described in 

section 332, 351, 354, 355, 356, or 361 

in connection with which there is no 

transfer of property described in section 

367(a)(1), a foreign corporation shall be 

considered to be a corporation except to 


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Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49279 

the extent provided in regulations 

prescribed by the Secretary which are 

necessary or appropriate to prevent the 

avoidance of Federal income taxes. A 

fundamental policy of section 367(b) is 

to preserve the potential application of 

section 1248 following the acquisition 

of the stock or assets of a foreign 

corporation by another foreign 

corporation. H.R. Rep. No. 94–658, at 

242 (1975). 

Section 367(c)(1) provides that for 

purposes of section 367, any 

distribution described in section 355 (or 

so much of section 356 as relates to 

section 355) shall be treated as an 

exchange whether or not it is an 

exchange. 

Section 1248(a) provides that a United 

States person shall include in gross 

income as a dividend any gain 

recognized on the sale or exchange of 

stock of a foreign corporation that was 

a controlled foreign corporation (CFC) 

(as defined in section 957(a)) at any time 

during the five-year period ending on 

the date of the sale or exchange but only 

if the United States person owned (or is 

considered to have owned, within the 

meaning of section 958) 10 percent or 

more of the total combined voting 

power of the foreign corporation at any 

time during that five-year period (a 

section 1248 shareholder). The amount 

of the gain recognized by the United 

States person on the sale or exchange 

that is recharacterized as a dividend is 

limited to the earnings and profits of the 

foreign corporation, and of certain 

foreign subsidiaries of such corporation, 

attributable to the stock sold or 

exchanged that were accumulated in 

taxable years of the foreign corporation 

beginning after December 31, 1962, and 

during the period or periods the stock 

was held by the United States person 

while the foreign corporation was a 

CFC. 

Section 1248(e) provides that, except 

as provided in regulations, if a United 

States person sells or exchanges stock of 

a domestic corporation that was formed 

or availed of principally for the holding, 

directly or indirectly, of stock of one or 

more foreign corporations, such sale or 

exchange shall be treated for purposes 

of section 1248 as a sale or exchange of 

the stock of the foreign corporations 

held by the domestic corporation. 

Section 1248(f)(1) provides that, 

except as provided in regulations, a 

domestic corporation that distributes 

stock of a foreign corporation in a 

distribution to which section 311(a), 

337, 355(c)(1), or 361(c)(1) applies, shall 

include in gross income as a dividend 

an amount equal to the excess of the fair 

market value of such stock over its 

adjusted basis, but only to the extent of 

the earnings and profits of the foreign 

corporation attributable (under 

regulations prescribed by the Secretary) 

to such stock which were accumulated 

in taxable years of such foreign 

corporation beginning after December 

31, 1962, and during the period or 

periods the stock was held by the 

domestic corporation while the foreign 

corporation was a CFC. 

Explanation of Provisions 

A. Section 367(a)(5) 

1. Overview 

As noted in the Background part of 

this preamble, section 367(a)(2) and (3) 

provide exceptions to the general rule of 

section 367(a)(1). Section 367(a)(2) 

provides that, except to the extent 

provided in regulations, section 

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

of stock or securities of a foreign 

corporation that is a party to the 

exchange or a party to the 

reorganization. Section 367(a)(3) 

provides that, except to the extent 

provided in regulations, section 

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

of property used in an active foreign 

trade or business. Sections 1.367(a)–2T 

and § 1.367(a)–3, along with other 

related provisions, implement the 

exceptions in section 367(a)(2) and 

(a)(3). In addition, section 367(a)(6) 

grants the Secretary authority to 

promulgate regulations providing 

additional exceptions to the general rule 

of section 367(a)(1). 

Section 367(a)(5) provides that the 

exceptions to the general rule of section 

367(a)(1) provided under section 

367(a)(2) and (3) shall not apply in the 

case of a transfer of property by a 

domestic corporation (U.S. transferor) to 

a foreign corporation (foreign acquiring 

corporation) in an exchange described 

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

exchange). The general rule under 

section 367(a)(5), therefore, is that a 

transfer of property by a U.S. transferor 

to a foreign acquiring corporation in a 

section 361 exchange is subject to the 

general rule of section 367(a)(1). In that 

case, the U.S. transferor recognizes gain 

with respect to the transfer of 

appreciated property in the section 361 

exchange. See section 367(a)(1) and the 

regulations under that section. 

Section 367(a)(5), however, further 

provides that subject to such basis 

adjustments and such other conditions 

as shall be provided in regulations the 

general rule of section 367(a)(5) shall 

not apply (and therefore the exceptions 

to the general rule of section 367(a)(1) 

may be available) if the U.S. transferor 

is controlled (within the meaning of 

section 368(c)), by five or fewer 

domestic corporations. For purposes of 

the control requirement, members of the 

same affiliated group (within the 

meaning of section 1504) are treated as 

a single corporation. The legislative 

history to section 367(a)(5) explains that 

regulations are expected to provide 

relief from the general rule only if the 

‘‘U.S. corporate shareholders in the 

transferor agree to take a basis in the 

stock they receive in a foreign 

corporation that is a party to the 

reorganization equal to the lesser of (a) 

the U.S. corporate shareholders’ basis in 

such stock received pursuant to section 

358, or (b) their proportionate share of 

the basis in the assets of the transferor 

corporation transferred to the foreign 

corporation.’’ S. Rep. No. 100–445, at 62 

(1988). 

The legislative history explains that 

‘‘the requirement that five or fewer 

domestic corporations own at least 80 

percent of the U.S. transferor’s stock 

assures that the bulk of the built-in gain 

[in the transferred property] remains 

subject to U.S. taxing jurisdiction.’’ The 

legislative history further states that ‘‘it 

is expected that regulations [issued 

under section 367(a)(5)] will require the 

U.S. corporate transferor to recognize 

immediately any built-in gain that does 

not remain subject to U.S. taxing 

jurisdiction by virtue of a substituted 

stock basis.’’ For example, the U.S. 

transferor would recognize gain ‘‘where 

20 percent or less of the U.S. corporate 

transferor is owned by foreign 

shareholders who receive substituted 

basis stock in the transferee corporation, 

which stock would not be subject to 

U.S. taxing jurisdiction on disposition.’’

The U.S. transferor would also 

recognize gain to the extent each 

controlling domestic corporate 

shareholder does not receive an amount 

of stock of the issuing corporation in the 

reorganization sufficient to preserve its 

share of the built-in gain in the property 

transferred by the U.S. transferor in the 

section 361 exchange. 

2. Explanation of Proposed Regulations 

The proposed regulations confirm the 

general rule of section 367(a)(5), but 

provide an elective exception to the 

general rule pursuant to which the 

exceptions provided by section 367(a) 

and the regulations under that section 

may be available. 

(a) General Rule of Section 367(a)(5) 

Consistent with section 367(a)(5), the 

proposed regulations confirm that the 

exceptions to the general rule of section 

367(a)(1) provided in section 367(a) 

generally are not available to a transfer 

of property by a U.S. transferor to a 

foreign acquiring corporation in a 


dwashington3 on PRODPC61 with PROPOSALS3
49280 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

section 361 exchange. As noted, under 

the general rule of section 367(a)(5), 

section 367(a)(1) would require the U.S. 

transferor to recognize gain on the 

transfer of appreciated property to the 

foreign acquiring corporation in the 

section 361 exchange. This general rule 

applies even if the conditions and 

requirements for the application of such 

exceptions would otherwise be met. The 

proposed regulations clarify that the 

general rule of section 367(a)(5) applies 

to a transfer of property pursuant to an 

exchange described in section 351 

(section 351 exchange) that qualifies as 

both a section 351 exchange and a 

section 361 exchange. See Notice 2008–

10, 2008–3 IRB 277. 

(b) Elective Exception to the General 

Rule 

The proposed regulations provide an 

elective exception to the general rule of 

section 367(a)(5) if certain conditions 

and requirements are satisfied 

(discussed in parts A.2.b.i through v of 

this preamble). If the exception applies, 

then the exceptions to the general rule 

of section 367(a)(1) provided in section 

367(a) and the regulations under that 

section are available to the transfer of 

property by the U.S. transferor to the 

foreign acquiring corporation in the 

section 361 exchange, subject to any 

conditions and requirements for the 

application of such exceptions. In 

addition, even if the exception provided 

by the proposed regulations applies, the 

U.S. transferor may still recognize gain 

on the section 361 exchange in certain 

circumstances (discussed in part A.2.b.ii 

of this preamble), including any gain 

otherwise required to be recognized 

under section 367(a). See, for example, 

section 367(a)(3)(B) and (C). 

The conditions and requirements of 

the elective exception carry out the 

policy of section 367(a)(5) by ensuring 

that the exceptions to the general rule of 

section 367(a)(1) are available only to 

the extent the net built-in gain in certain 

property transferred by the U.S. 

transferor in the section 361 exchange 

remains subject to corporate-level 

taxation in the hands of the controlling 

domestic corporate shareholders of the 

U.S. transferor through their ownership 

of stock received in the transaction. 

References to ‘‘stock received’’ in this 

preamble include stock deemed 

received in the transaction. 

The proposed regulations apply to all 

property transferred by the U.S. 

transferor in the section 361 exchange, 

other than property to which section 

367(d) applies (section 367(d) property). 

But see part D.2 of this preamble 

regarding proposed regulations under 

section 367(a) that require section 

367(d) property to be treated as property 

to which section 367(a) applies (section 

367(a) property) in transactions that 

may be eligible for the exception to the 

coordination rule of § 1.367(a)–

3(d)(2)(vi)(A) provided by § 1.367(a)–

3(d)(2)(vi)(B)(1). For purposes of these 

proposed regulations, section 367(a) 

property includes any property 

transferred by the U.S. transferor in the 

section 361 exchange (other than section 

367(d) property), whether the property 

is appreciated (built-in gain property) or 

depreciated (built-in loss property) at 

the time of the section 361 exchange. 

The proposed regulations preserve (or 

require the recognition of) the net builtin gain in the section 367(a) property 

transferred in the section 361 exchange 

(generally defined as ‘‘inside gain’’ by 

the proposed regulations). In this regard, 

a transfer of section 367(a) property 

pursuant to a section 361 exchange to 

which the elective exception applies is 

treated differently than a transfer of 

built-in gain property and built-in loss 

property by a U.S. person to a foreign 

corporation in a section 351 exchange 

that is not also a section 361 exchange. 

In the latter transaction, only the builtin gain property would be subject to 

section 367(a)(1), and the U.S. transferor 

would be required to recognize gain 

with respect to such property without 

offsetting the gain with losses related to 

the built-in loss property. 

The proposed regulations contain an 

anti-stuffing rule pursuant to which any 

property that would otherwise 

constitute section 367(a) property shall 

not be considered section 367(a) 

property for purposes of any 

determination under the proposed 

regulations for which the amount of 

section 367(a) property is relevant, if the 

U.S. transferor acquires such property in 

connection with the section 361 

exchange with a principle purpose of 

affecting any such determination (for 

example, inside gain and inside basis). 

This rule may apply, for example, if the 

U.S. transferor acquires built-in loss 

property or cash proceeds from 

indebtedness incurred in connection 

with the transaction. 

The conditions and requirements for 

the application of the exception 

provided by the proposed regulations 

ensure that, in the aggregate, the inside 

gain is recognized currently by the U.S. 

transferor or preserved for future 

taxation in the stock received in the 

transaction by the controlling domestic 

corporate shareholders of the U.S. 

transferor. If the entire inside gain is 

preserved in the stock received by the 

controlling domestic corporate 

shareholders, the basis adjustment 

required by the exception (discussed in 

part A.2.b.iii of this preamble) 

effectively results in the section 361 

exchange being treated similarly to a 

transfer of the section 367(a) property in 

a section 351 exchange insofar as, in the 

aggregate, the controlling domestic 

corporate shareholders’ adjusted basis 

in the stock received in the transaction 

generally would reflect the aggregate 

bases of the section 367(a) property and 

the net built-in gain in such property on 

the date of the section 361 exchange. 

The inside gain equals the amount by 

which the aggregate gross fair market 

value of the section 367(a) property 

transferred by the U.S. transferor in the 

section 361 exchange exceeds the sum 

of the aggregate bases of such property 

and a proportionate amount of any 

liabilities of the U.S. transferor assumed 

in the section 361 exchange or satisfied 

in the reorganization pursuant to section 

361(c)(3), but only to the extent the 

payment of any such liability would 

give rise to a deduction (deductible 

liabilities). For this purpose, gross fair 

market value means fair market value 

determined without regard to mortgages, 

liens, pledges, or other liabilities. 

However, the fair market value of any 

property subject to nonrecourse 

indebtedness shall not be less than the 

amount of such indebtedness. In 

addition, the aggregate bases of the 

section 367(a) property is determined 

after taking into account any gain 

otherwise required to be recognized by 

the U.S. transferor under section 367(a). 

See, for example, section 367(a)(3)(B) 

and (C). The proposed regulations 

provide rules for determining the 

proportionate amount of any deductible 

liabilities taken into account in 

determining the inside gain. The IRS 

and Treasury Department believe that 

taking deductible liabilities into account 

in determining inside gain comports 

with the policy of section 367(a)(5) to 

protect the corporate tax base following 

the repeal of the ‘‘General Utilities’’

doctrine, insofar as the U.S. transferor 

would have received the benefit of any 

deductible liabilities if it had disposed 

of its assets in a taxable transaction in 

which the deductible liabilities were 

assumed by the acquirer. 

In determining the inside gain, the 

IRS and Treasury Department declined 

to consider attributes (for example, net 

operating losses and foreign tax credits) 

of the U.S. transferor other than the tax 

bases of the section 367(a) property and 

deductible liabilities allocable to section 

367(a) property. These attributes are not 

considered for this purpose because of 

concerns regarding the complexity for 

determining how any limitations on the 

use of such attributes should be taken 

into account and the potential for 


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Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49281 

duplicating the benefit of such 

attributes. Comments are requested 

regarding whether and how other 

attributes of the U.S. transferor should 

be taken into account for determining 

inside gain. 

If the section 361 exchange is part of 

a divisive reorganization described in 

section 368(a)(1)(D) in which the U.S. 

transferor distributes the stock of the 

foreign acquiring corporation in a 

distribution to which section 355 

applies (section 355 distribution) and, 

as part of a plan or series of related 

transactions, such stock is subsequently 

distributed in one or more section 355 

distributions, in addition to the 

conditions discussed in parts A.2.b.i 

through v of this preamble, two 

additional conditions must be satisfied. 

First, each section 355 distribution must 

be to a member of the affiliated group 

(within the meaning of section 1504) 

that includes the U.S. transferor at the 

time of the 361 exchange. Second, each 

affiliated group member that receives 

stock of the foreign acquiring 

corporation in the final section 355 

distribution must adjust the basis of the 

stock received (as determined under 

section 358 and the regulations under 

that section) as required by the 

proposed regulations (discussed in part 

A.2.b.iii of this preamble). These two 

additional conditions ensure that the 

amount of inside gain attributable to the 

U.S. transferor’s controlling domestic 

corporate shareholders remains subject 

to corporate-level taxation following the 

final section 355 distribution and permit 

section 355 distributions of the stock of 

the foreign acquiring corporation within 

an affiliated group. 

(i) Control Requirement 

At the time of the section 361 

exchange, the U.S. transferor must be 

controlled (within the meaning of 

section 368(c)) by five or fewer, but at 

least one, domestic corporations (the 

control group). For this purpose, 

members of the same affiliated group 

(within the meaning of section 1504) are 

treated as one corporation. If the U.S. 

transferor is controlled (within the 

meaning of section 368(c)) by more than 

five domestic corporations, but some 

combination of five or fewer domestic 

corporations control the U.S. transferor 

within the meaning of section 368(c), 

the U.S. transferor must designate the 

five or fewer domestic corporations that 

comprise the control group on Form 

926, ‘‘Return by a U.S. Transferor of 

Property to a Foreign Corporation.’’

Although a regulated investment 

company (as defined in section 851(a)) 

(RIC), a real estate investment trust (as 

defined in section 856(a)) (REIT), and a 

subchapter S corporation (as defined in 

section 1361(a)) is each generally treated 

as a domestic corporation for purposes 

of the Code, such entities are not 

generally subject to corporate-level 

taxation. Therefore, the proposed 

regulations provide that these entities 

cannot be members of the control group. 

The proposed regulations confirm that 

because the stock ownership threshold 

for the control requirement is 

determined by reference to section 

368(c), only direct ownership of the 

stock of the U.S. transferor is taken into 

account. The IRS and Treasury 

Department declined to exercise the 

authority under section 367(a)(6) to 

permit indirect ownership (through a 

partnership or other entity) to be taken 

into account for this purpose, in part, 

because of the complexity and 

administrative difficulties that would 

arise from the basis adjustments 

(discussed in part A.2.b.iii of this 

preamble) that would be needed to 

account for the intervening partnership 

or other entity. For example, in the case 

of indirect ownership through a 

partnership, basis adjustments would 

need to account for differences between 

a partner’s basis in its partnership 

interest and the partnership’s basis in 

the stock of the U.S. transferor. 

Comments are requested regarding the 

manner in which indirect ownership 

could be taken into account for this 

purpose without undue complexity. 

(ii) Gain Recognition by U.S. Transferor 

Even if the exception provided by the 

proposed regulations applies, in two 

instances the U.S. transferor must 

recognize gain on the transfer of section 

367(a) property in the section 361 

exchange. This is the case even if an 

exception to the general rule of section 

367(a)(1) would otherwise apply to such 

transfer. 

First, the U.S. transferor must 

recognize gain equal to the aggregate 

amount of inside gain allocable to noncontrol group members. The inside gain 

is allocated among control group 

members and non-control group 

members based on each shareholder’s 

ownership interest (by value) in the U.S. 

transferor at the time of the section 361 

exchange. The U.S. transferor must 

recognize gain with respect to noncontrol group members even if the 

entire inside gain could be preserved in 

the stock received by the control group 

members as a group. 

Second, the U.S. transferor must 

recognize gain to the extent any control 

group member cannot preserve its share 

of inside gain in the stock received that 

is allocable to the section 367(a) 

property transferred in the section 361 

exchange. The amount of a control 

group member’s share of inside gain that 

cannot be preserved in the stock 

received is the amount by which the 

control group member’s share of inside 

gain exceeds the fair market value of the 

stock received by the control group 

member that is allocable to section 

367(a) property. Gain is required to be 

recognized in such a case because the 

fair market value of the stock equals the 

maximum amount of the control group 

member’s share of inside gain that can 

be preserved in such stock (if the basis 

of such stock were zero). Under this 

rule, stock received that is allocable to 

property other than section 367(a) 

property is not available to preserve any 

portion of the control group member’s 

share of inside gain. The U.S. transferor 

may be required to recognize gain under 

this rule when, for example, nonqualifying property (property other than 

stock or securities permitted to be 

received under section 361(a)) is 

received or when the foreign acquiring 

corporation assumes certain liabilities of 

the U.S. transferor in the section 361 

exchange. 

The proposed regulations provide 

rules for determining the portion of the 

stock received by a control group 

member that is attributable to section 

367(a) property that are consistent with 

general tax principles, including Rev. 

Rul. 68–55, 1968–1 CB 140, and the 

authorities cited therein. Under these 

rules, stock received by a control group 

member is allocated between the 

aggregate section 367(a) property and all 

other property transferred in the section 

361 exchange based on relative gross 

fair market value. 

The U.S. transferor must recognize 

gain with respect to any control group 

member that cannot preserve its entire 

share of inside gain in the stock 

received in the transaction even if the 

control group members’ aggregate share 

of inside gain can be preserved in the 

stock received by the control group 

members as a group. For example, 

assume that the U.S. transferor is wholly 

owned by two domestic corporations 

(US1 and US2) and that each control 

group member’s share of inside gain is 

$40x. If in the transaction US1 received 

stock with a value of $30x and $20x of 

non-qualifying property, the U.S. 

transferor would recognize $10x gain 

with respect to US1, even if US2 

received sufficient stock to preserve 

$50x gain (the sum of US2’s $40x share 

of inside gain and the portion of US1’s 

share of inside gain ($10x) that cannot 

be preserved in the stock received by 

US1). 


dwashington3 on PRODPC61 with PROPOSALS3
49282 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

(iii) Adjustments To Basis of Stock 

Received by Control Group Members 

Under the proposed regulations, each 

control group member’s basis in the 

stock received in the transaction as 

determined under section 358 and the 

regulations under that section (section 

358 basis) that is allocable to the section 

367(a) property transferred by the U.S. 

transferor in the section 361 exchange is 

reduced to the extent necessary to 

preserve the control group member’s 

share of inside gain. As a general matter, 

if the U.S. transferor must recognize 

gain with respect to a control group 

member because the control group 

member’s entire share of inside gain 

cannot be preserved in the stock 

received by the control group member 

in the transaction (see part A.2.b.ii of 

this preamble), the control group 

member’s section 358 basis in the stock 

received that is attributable to section 

367(a) property is reduced to zero. 

Only the basis of stock received by the 

control group member that is 

attributable to section 367(a) property 

transferred in the section 361 exchange 

is reduced (for example, the basis of 

stock attributable to section 367(d) 

property is not reduced). The reduction 

to a control group member’s section 358 

basis in the stock received that is 

attributable to section 367(a) property 

equals the amount, if any, by which the 

control group member’s share of inside 

gain (reduced by the amount of any gain 

recognized by the U.S. transferor with 

respect to the control group member 

(discussed in part A.2.b.ii of this 

preamble)) exceeds the built-in gain in 

such stock (outside gain). The outside 

gain is the amount by which the fair 

market value of such stock exceeds the 

section 358 basis of the stock (as 

determined before any required 

adjustment to such basis under the 

proposed regulations). The proposed 

regulations provide special rules that 

apply if the control group member holds 

more than one block of stock received 

in the transaction. 

If the section 361 exchange is part of 

a divisive reorganization described in 

section 368(a)(1)(D) that is eligible for 

the exception (see part A.2.b of this 

preamble for additional conditions that 

must be satisfied in such a case), each 

affiliated group member that receives 

stock of the foreign acquiring 

corporation in the final section 355 

distribution must reduce the section 358 

basis of such stock to the same extent 

that the control group member that 

initially received the stock from the U.S. 

transferor would have reduced its 

section 358 basis in such stock. In such 

a case, the control group member that 

received the stock of the foreign 

acquiring corporation from the U.S. 

transferor is not required to reduce the 

section 358 basis of such stock. 

A section 361 exchange that is subject 

to section 367(a)(5) may be part of a 

triangular reorganization in which the 

control group members receive stock of 

the corporation that controls the foreign 

acquiring corporation (the controlling 

corporation). In such a case, the 

proposed regulations require the control 

group members to adjust (if necessary) 

the section 358 basis of the stock of the 

controlling corporation (whether foreign 

or domestic) received in the transaction. 

The IRS and Treasury Department 

believe adjusting the basis of such stock 

to be appropriate even if the controlling 

corporation is domestic because the 

control group members’ aggregate share 

of inside gain may not be preserved in 

the stock of the foreign acquiring 

corporation held by the controlling 

corporation in all cases. For example, 

liabilities assumed or incurred by the 

foreign acquiring corporation in 

connection with the transaction could 

reduce the amount of inside gain 

preserved in such stock. Moreover, even 

if the control group members’ aggregate 

share of inside gain could be preserved 

in such stock, such an approach would 

shift the inside gain to the domestic 

controlling corporation, rather than to 

the control group members as intended 

by section 367(a)(5). 

(iv) Agreement To Recognize Gain and 

File Amended Tax Return 

The proposed regulations require the 

U.S. transferor to include a statement 

with its U.S. income tax return for the 

year of the section 361 exchange 

certifying that if the foreign acquiring 

corporation disposes of a significant 

amount of the section 367(a) property 

transferred in the section 361 exchange 

in one or more related transactions 

entered into with a principal purpose of 

avoiding the U.S. tax that would have 

been imposed on a sale of such property 

by the U.S. transferor at the time of the 

section 361 exchange, then the U.S. 

transferor (or the foreign acquiring 

corporation on behalf of the U.S. 

transferor) shall file a U.S. income tax 

return (or amended U.S. income tax 

return, as the case may be) for the year 

of the section 361 exchange reporting 

the gain realized but not recognized on 

the section 361 exchange. This 

requirement is intended to prevent the 

potential use of reorganizations subject 

to section 367(a)(5) to avoid the repeal 

of the ‘‘General Utilities’’ doctrine. 

Interest must be paid (determined under 

section 6621) on the amount of any 

additional tax due on such return. For 

this purpose, a disposition of a 

significant amount of the section 367(a) 

property occurs if the foreign acquiring 

corporation disposes of an amount of 

the section 367(a) property transferred 

in the section 361 exchange that is 

greater than forty percent of the fair 

market value of the section 367(a) 

property at the time of the section 361 

exchange. Comments are requested 

regarding whether an exception from 

this rule should be provided for 

dispositions of section 367(a) property 

occurring in the ordinary course of 

business. 

(v) Election and Reporting Requirements 

To elect to apply the exception, the 

proposed regulations require the U.S. 

transferor and the control group 

members to enter into a written 

agreement to make such election on or 

before the due date for the U.S. 

transferor’s timely-filed return for the 

taxable year in which the section 361 

exchange occurs. Each party to the 

written agreement must also include a 

statement with its timely-filed return for 

the year of the section 361 exchange 

reporting the election and other 

specified information. If the section 361 

exchange is part of a divisive 

reorganization described in section 

368(a)(1)(D) that is eligible for the 

exception (see part A.2.b of this 

preamble for additional conditions that 

must be satisfied in such a case), each 

affiliated group member that receives 

stock of the foreign acquiring 

corporation in the final section 355 

distribution must enter into the written 

agreement and include the reporting 

statement with its timely-filed return 

(instead of the control group member 

that initially received the stock of the 

foreign acquiring corporation from the 

U.S. transferor.) Relief for reasonable 

cause may be available for the failure to 

comply with the election and reporting 

requirements. 

3. Special Entities 

The proposed regulations apply to 

property transfers by U.S. transferors, 

including RICs, REITs, and subchapter S 

corporations. Comments are requested 

regarding whether and the extent to 

which the IRS and Treasury Department 

should exercise the authority under 

section 367(a)(6) to provide an 

exception from the general rule of 

section 367(a)(5) for a transfer of 

property by a RIC, a REIT, or a 

subchapter S corporation to a foreign 

corporation pursuant to a section 361 

exchange. 


dwashington3 on PRODPC61 with PROPOSALS3
Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49283 

B. Section 367(b) 

1. Overview 

Section 367(b)(1) provides that in the 

case of any exchange described in 

section 332, 351, 354, 355, 356, or 361 

in connection with which there is no 

transfer of property described in section 

367(a)(1), a foreign corporation shall be 

considered to be a corporation except to 

the extent provided in regulations 

prescribed by the Secretary which are 

necessary or appropriate to prevent the 

avoidance of Federal income taxes. 

A fundamental policy of section 

367(b) is to preserve the potential 

application of section 1248 following 

certain section 367(b) exchanges. H.R. 

Rep. No. 94–658, at 242 (1975). Thus, if 

the potential application of section 1248 

cannot be preserved immediately 

following the acquisition of the stock or 

assets of a foreign acquired corporation 

by a foreign acquiring corporation in a 

section 367(b) exchange, the final 

regulations (TD 8862) under section 

367(b) issued on January 24, 2000 (2000 

final regulations) require certain 

shareholders of the foreign acquired 

corporation to include in income as a 

dividend the section 1248 amount 

attributable to the stock of the foreign 

acquired corporation. See § 1.367(b)–

4(b). For example, the inclusion in 

income of the section 1248 amount is 

required if the section 367(b) exchange 

results in the loss of section 1248 

shareholder status or if the foreign 

acquired corporation or foreign 

acquiring corporation is not a CFC 

immediately after the section 367(b) 

exchange. See § 1.367(b)–4(b)(1)(i). 

2. Outbound Asset Reorganizations—In 

General 

The 2000 final regulations require a 

U.S. transferor that is a section 1248 

shareholder of a foreign acquired 

corporation and that transfers the stock 

of such corporation to a foreign 

acquiring corporation in a section 361 

exchange to include in income the 

section 1248 amount attributable to the 

stock of the foreign acquired 

corporation. The U.S. transferor must 

include the section 1248 amount in 

income even if the foreign acquiring 

corporation and the foreign acquired 

corporation are CFCs with respect to 

which the U.S. transferor is a section 

1248 shareholder immediately after the 

section 361 exchange. See § 1.367(b)–

4(b)(1)(iii), Example 4. Moreover, under 

section 1248(f)(1) the U.S. transferor 

generally would be required to include 

in income the section 1248 amount 

attributable to the stock of the foreign 

acquiring corporation distributed under 

section 361(c)(1). The section 1248 

amount attributable to the stock of the 

foreign acquiring corporation would 

generally include the section 1248 

amount attributable to the stock of the 

foreign acquired corporation. See 

generally § 1.1248–8. 

The final regulations (TD 9243) under 

section 367(b) issued on January 26, 

2006 (2006 final regulations) provided 

an exception to the general rule of 

§ 1.367(b)–4(b)(1)(i) that applies in 

certain triangular reorganizations where 

the exchanging shareholder receives 

stock of a domestic corporation that 

controls the foreign acquiring 

corporation. This exception only 

applies, however, to a shareholder that 

exchanges stock of the foreign acquired 

corporation for stock of the domestic 

corporation in an exchange described 

under section 354 or 356. Thus, the 

exception provided by the 2006 final 

regulations does not apply where the 

U.S. transferor receives stock of a 

domestic controlling corporation for 

stock of a foreign acquired corporation 

in a section 361 exchange. 

After studying the issue further and in 

response to comments received, the IRS 

and Treasury Department have 

determined that requiring the U.S. 

transferor to include the section 1248 

amount in income may not be necessary 

in cases where the section 1248 amount 

attributable to the stock of the foreign 

acquired corporation can be preserved. 

Accordingly, the proposed regulations 

under section 367(b) included in this 

document provide an additional 

exception to the general rule of the 2000 

final regulations that applies to certain 

transfers of stock of a foreign acquired 

corporation by a U.S. transferor to a 

foreign acquiring corporation in a 

section 361 exchange. 

In such a case, the proposed 

regulations provide that the U.S. 

transferor must include in income the 

section 1248 amount attributable to the 

stock of the foreign acquired corporation 

only if immediately after the section 361 

exchange the foreign acquiring 

corporation or the foreign acquired 

corporation is not a CFC with respect to 

which the U.S. transferor is a section 

1248 shareholder. Example 4 in 

§ 1.367(b)–4(b)(1)(iii) is modified 

accordingly. The proposed regulations 

under section 1248(f) included in this 

document supplement this exception to 

ensure that the section 1248 amount can 

be preserved in the hands of a corporate 

section 1248 shareholder following the 

distribution of the stock of the foreign 

acquiring corporation by the U.S. 

transferor. See part C of this preamble 

for discussion of the proposed 

regulations under section 1248(f). 

3. Special Rules for Outbound 

Triangular Asset Reorganizations 

As noted, the 2000 final regulations 

also require the U.S. transferor to 

include in income the section 1248 

amount attributable to stock of a foreign 

acquired corporation transferred to a 

foreign acquiring corporation in a 

section 361 exchange that is part of 

triangular asset reorganization, even if 

the corporation that controls the foreign 

acquiring corporation is domestic. The 

provisions of § 1.367(b)–13 (TD 9243) do 

not apply to preserve the section 1248 

amount attributable to the stock of the 

foreign acquired corporation in such a 

case. The proposed regulations under 

section 367(b) included in this 

document, however, would provide an 

exception to the general rule of the final 

2000 regulations in such triangular asset 

reorganizations. 

If the controlling corporation is 

foreign, the exception applies if, 

immediately after the section 361 

exchange, the foreign controlling 

corporation, the foreign acquiring 

corporation, and the foreign acquired 

corporation are CFCs with respect to 

which the U.S. transferor is a section 

1248 shareholder. If the controlling 

corporation is domestic, the exception 

applies if, immediately after the section 

361 exchange, the foreign acquired 

corporation is a CFC with respect to 

which the domestic controlling 

corporation is a section 1248 

shareholder. In addition, in either case, 

the controlling corporation (foreign or 

domestic) must apply the principles of 

§ 1.367(b)–13 to determine the 

adjustment to the basis of the stock of 

the foreign acquiring corporation 

(instead of the over-the-top basis 

adjustment rules of § 1.358–6) to ensure 

that the section 1248 amount 

attributable to the stock of the foreign 

acquired corporation at the time of the 

section 361 exchange is preserved in the 

stock of the foreign acquiring 

corporation immediately after the 

section 361 exchange. Under these 

principles, each share of stock of the 

foreign acquiring corporation would 

generally be divided into the portions 

necessary to preserve the pre-exchange 

section 1248 amounts attributable to the 

stock of the foreign acquired corporation 

and the foreign acquiring corporation, 

respectively. If the controlling 

corporation is foreign, the proposed 

regulations under section 1248(f) 

included in this document supplement 

this exception to ensure that the section 

1248 amount can be preserved following 

the distribution of the stock of the 

foreign controlling corporation by the 

U.S. transferor to its shareholders. 


dwashington3 on PRODPC61 with PROPOSALS3
49284 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

C. Section 1248(f) 

1. Overview 

Section 1248(f)(1) provides that, 

except as provided in regulations, if a 

domestic corporation (domestic 

distributing corporation) that is a 

section 1248 shareholder with respect to 

a foreign corporation distributes the 

stock of such foreign corporation in a 

distribution described in section 311(a), 

337, 355(c)(1), or 361(c)(1), then 

notwithstanding any other provisions of 

the Code, the domestic distributing 

corporation must include in income as 

a dividend the section 1248 amount 

attributable to such stock. Section 

1248(f)(1) requires the inclusion of the 

section 1248 amount because the 

section 1248 amount attributable to the 

stock distributed may not be preserved 

in the hands of the distributee 

shareholders following the distribution. 

Section 1248(f)(1) does not apply to the 

extent the domestic distributing 

corporation otherwise recognizes gain 

on the distribution, in which case the 

gain recognized would be 

recharacterized as a dividend under 

section 1248(a), as appropriate. 

Section 1248(f)(2), however, provides 

that section 1248(f)(1) shall not apply to 

a domestic distributing corporation’s 

distribution of stock of a foreign 

corporation to a domestic corporation 

that is treated as holding the stock for 

the period during which the stock was 

held by the domestic distributing 

corporation and that, immediately after 

the distribution, is a section 1248 

shareholder with respect to the foreign 

corporation. The legislative history 

explains that where ‘‘the corporate 

distribute[e] does not receive a stepped 

up basis as a result of the distribution 

and* * *the potential for the future 

application of section 1248 still exists, 

it is not necessary to [apply section 

1248(f)(1) to] override the 

nonrecognition provisions which 

otherwise apply to a corporate 

distribution.’’ S. Rep. No. 94–938, at 270 

(1976). 

The legislative history provides that 

the Treasury Department may exercise 

the regulatory authority granted under 

section 1248(f)(1) to provide that, where 

section 1248(f)(2) does not otherwise 

apply, ‘‘the recipient corporation may 

be required to take a carryover basis in 

the stock received (rather than a 

substituted basis under section 358, for 

example, in the case of a section 355 or 

361 distribution) and section 1248(f)(1) 

will not apply to such distribution.’’ S. 

Rep. No. 100–445, at 64 (1988). 

In Notice 87–64 (1987–2 CB 375), the 

IRS and Treasury Department 

announced that, in the case of section 

355 distributions of CFC stock, 

regulations under section 1248(f) may 

limit the application of section 

1248(f)(1) to distributions in which the 

CFC is no longer a CFC after the 

distribution or in which one or more of 

the distributees are not United States 

shareholders (within the meaning of 

section 951(b)) of the CFC after the 

distribution. The notice further states 

that the regulations would ensure that, 

subsequent to a section 355 distribution 

of CFC stock that would not be subject 

to section 1248(f)(1) under the 

regulations, the amount of gain 

recognized from a disposition of the 

CFC stock that would be recharacterized 

as a dividend under section 1248(a) 

would include the earnings and profits 

attributable to the CFC stock under 

section 1248 as of the date of the section 

355 distribution. To achieve this result, 

the notice provides that the regulations 

may require appropriate adjustments to 

the basis and holding period of the CFC 

stock received by one or more of the 

distributees. 

2. General Rules 

The proposed regulations under 

section 1248(f) included in this 

document provide that a domestic 

distributing corporation that is a section 

1248 shareholder of a foreign 

corporation and that distributes stock of 

such foreign corporation in a 

distribution to which section 337 

applies (section 337 distribution), shall 

generally include in income as a 

dividend the section 1248 amount 

attributable to the stock distributed. 

The proposed regulations further 

provide that a domestic distributing 

corporation that is a section 1248 

shareholder of a foreign corporation and 

that distributes stock of such foreign 

corporation in a section 355 

distribution, other than stock received 

by the domestic distributing corporation 

in a section 361 exchange, shall 

generally include in income as a 

dividend the section 1248 amount 

attributable to the stock distributed. 

This rule applies, however, only to the 

extent the domestic distributing 

corporation does not otherwise 

recognize gain on the section 355 

distribution, in which case the gain 

recognized would be recharacterized as 

a dividend under section 1248(a), as 

appropriate. 

Finally, the proposed regulations 

provide that a domestic distributing 

corporation that is a section 1248 

shareholder of a foreign distributed 

corporation and that distributes stock of 

such corporation received in a section 

361 exchange, in a section 355 

distribution or a distribution to which 

section 361 applies (section 361 

distribution), shall, notwithstanding any 

other provision of the Code, include in 

income as a dividend the ‘‘section 

1248(f) amount’’ attributable to the stock 

distributed. The section 1248(f) amount 

equals the aggregate amount that would 

be included in income as a dividend by 

the foreign distributed corporation 

under section 964(e) if, immediately 

after the section 361 exchange that 

preceded the section 355 distribution or 

section 361 distribution, the foreign 

distributed corporation sold the stock of 

each foreign corporation received in the 

section 361 exchange. This rule 

supplements the proposed regulations 

under section 367(b) which provide an 

exception to the general rule of 

§ 1.367(b)–4(b)(1)(i) in certain cases 

where stock of a foreign acquired 

corporation is transferred by a U.S. 

transferor in a section 361 exchange. 

3. Exceptions to the General Rules 

The proposed regulations incorporate 

the statutory exception provided by 

section 1248(f)(2) for distributions that 

meet certain conditions. The proposed 

regulations also provide elective 

exceptions for section 355 distributions 

and section 361 distributions. The 

exceptions for such distributions are 

elective because applying the 

exceptions may reduce a corporate 

distributee’s section 358 basis in the 

stock received in the distribution. The 

conditions of the exceptions carry out 

the policy of section 1248(f) by limiting 

the exceptions to distributions where 

the potential application of section 1248 

and the relevant section 1248 amounts 

can be preserved following the 

distribution. 

(a) Section 337 Distributions 

The general rule will not apply to a 

section 337 distribution of the stock of 

a foreign corporation if immediately 

after the distribution the 80-percent 

distributee (described in section 337(c)) 

is a section 1248 shareholder with 

respect to the foreign corporation, the 

80-percent distributee’s holding period 

in the stock received in the distribution 

is the same as the domestic distributing 

corporation’s holding period in such 

stock at the time of the distribution, and 

the 80-percent distributee’s basis in the 

stock received in the distribution is not 

greater than the domestic distributing 

corporation’s basis in such stock at the 

time of the distribution. 

The IRS and Treasury Department 

believe the conditions should be 

satisfied in most section 337 

distributions because of the application 

of sections 334 and 1223. However, 

comments are requested regarding any 


dwashington3 on PRODPC61 with PROPOSALS3
Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49285 

cases where these conditions may not be 

met and whether the 80-percent 

distributee should be permitted to 

adjust the basis or holding period of the 

stock received so that the conditions can 

be met. 

(b) Certain Section 355 Distributions 

The proposed regulations provide an 

elective exception to the general rule for 

a section 355 distribution of stock of a 

foreign corporation not received by the 

domestic distributing corporation in a 

section 361 exchange to a domestic 

corporation that is a section 1248 

shareholder with respect to the foreign 

corporation immediately after the 

distribution. The election to apply the 

exception is irrevocable and must be 

made by the domestic distributing 

corporation and all such section 1248 

shareholders. If the election is made, 

adjustments may be made to each 

section 1248 shareholder’s section 358 

basis and holding period in the stock 

received to preserve the section 1248 

amount attributable to such stock at the 

time of the distribution. 

To apply the exception, the proposed 

regulations require the domestic 

distributing corporation and the section 

1248 shareholders to enter into a written 

agreement on or before the due date 

(including extensions) of the domestic 

distributing corporation’s tax return for 

the taxable year during which the 

section 355 distribution occurs. The 

proposed regulations also require the 

domestic distributing corporation and 

each section 1248 shareholder to 

include a statement with its tax return 

for the taxable year during which the 

distribution occurs reporting that the 

election to apply the exception has been 

made and any required adjustments to 

stock basis or holding period. Each 

party to the agreement must retain the 

original or a copy of the agreement as 

part of its records. The proposed 

regulations provide relief for reasonable 

cause for the failure to comply with the 

election and reporting requirement. 

If the exception applies, two 

adjustments may be required with 

respect to each section 1248 

shareholder. First, solely for purposes of 

section 1248, immediately following the 

distribution the section 1248 

shareholder’s holding period in the 

stock received in the distribution shall 

equal the domestic distributing 

corporation’s holding period in such 

stock at the time of the distribution. 

Second, if the section 1248 amount 

attributable to the stock of the foreign 

corporation at the time of the 

distribution exceeds the section 1248 

shareholder’s postdistribution amount 

attributable to such stock (excess 

amount), the section 1248 shareholder’s 

section 358 basis in such stock is 

reduced by the excess amount. The 

postdistribution amount is the section 

1248 shareholder’s section 1248 amount 

attributable to the stock received in the 

distribution, computed immediately 

after the distribution and taking into 

account the adjustment to the 

shareholder’s holding period in such 

stock. 

(c) Distributions Pursuant to a Plan of 

Reorganization 

The proposed regulations provide an 

elective exception to the general rule for 

a section 355 distribution or section 361 

distribution of stock of a foreign 

corporation received by the domestic 

distributing corporation in the section 

361 exchange that precedes such 

distribution to a domestic corporation 

that is a section 1248 shareholder with 

respect to the foreign corporation 

immediately after the distribution. The 

election to apply the exception is 

irrevocable and must be made by the 

domestic distributing corporation and 

all such section 1248 shareholders. If 

the exception applies, adjustments may 

be made to each section 1248 

shareholder’s section 358 basis (as 

adjusted under the proposed regulations 

under section 367(a)(5)) and the amount 

of earnings and profits attributable to 

the stock received for purposes of 

section 1248 to preserve the section 

1248(f) amount attributable to such 

stock at the time of the distribution. 

To apply the exception, the proposed 

regulations require the domestic 

distributing corporation and the section 

1248 shareholders to enter into a written 

agreement on or before the due date 

(including extensions) of the domestic 

distributing corporation’s tax return for 

the taxable year during which the 

distribution occurs. The proposed 

regulations also require the domestic 

distributing corporation and each 

section 1248 shareholder to include a 

statement with its tax return for the 

taxable year during which the 

distribution occurs reporting that the 

election to apply the exception has been 

made and any required adjustments to 

stock basis or the amount of earnings 

and profits attributable to the stock 

received for purposes of section 1248. 

Each party to the agreement must 

include the original or a copy of the 

agreement as part of its records. The 

proposed regulations provide relief for 

reasonable cause for the failure to 

comply with the election and reporting 

requirements. 

If the exception applies, two 

adjustments may be required with 

respect to each section 1248 

shareholder. First, each share of stock of 

the foreign corporation received by the 

section 1248 shareholder is divided into 

portions attributable to each block of 

stock of a foreign acquired corporation 

transferred by the domestic distributing 

corporation in the section 361 exchange 

with respect to which the domestic 

distributing corporation was a section 

1248 shareholder at the time of the 

section 361 exchange, and to all other 

property transferred by the domestic 

distributing corporation in the section 

361 exchange. For example, if in the 

section 361 exchange the domestic 

distributing corporation transfers a 

block of stock in each of three foreign 

corporations with respect to which it is 

a section 1248 shareholder, then each 

share of stock of the foreign distributed 

corporation received by the section 1248 

shareholder must be divided into three 

portions. Alternatively, if multiple 

blocks of stock in each of the three 

foreign corporations were transferred in 

the section 361 exchange, then each 

share of the stock of the foreign 

distributed corporation would be 

divided into additional portions to 

account for the additional blocks of 

stock transferred. The proposed 

regulations further provide that, for 

purposes of section 1248, the earnings 

and profits attributable to each block of 

stock of a foreign acquired corporation 

transferred in the section 361 exchange 

that results in a divided portion of a 

share of stock of the foreign acquiring 

corporation (or whole share, if no 

division is required) are attributable to 

such portion (or whole share, if no 

division is required) based on the 

section 1248 shareholder’s ownership 

interest (by value) in the domestic 

distributing corporation at the time of 

the section 361 exchange. 

Second, if the section 1248(f) amount 

attributable to a portion of a share (or 

whole share, if no division is required) 

of stock of the foreign distributed 

corporation received in the distribution 

exceeds the section 1248 shareholder’s 

postdistribution amount attributable to 

such portion (or whole share) (excess 

amount), then the section 1248 

shareholder’s section 358 basis in such 

portion (or whole share, if no division 

is required), as adjusted under the 

proposed regulations under section 

367(a)(5) (discussed in part A.2.b.iii of 

this preamble), is reduced by such 

excess amount. This adjustment ensures 

that the section 1248 shareholder’s 

share of the section 1248 amount 

attributable to the stock of each foreign 

acquired corporation transferred in the 

section 361 exchange is preserved in the 

stock of the foreign distributed 


dwashington3 on PRODPC61 with PROPOSALS3
49286 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

corporation received by such 

shareholder in the distribution. 

The IRS and Treasury Department 

declined to adopt rules that would not 

require the division of shares to 

preserve section 1248 amounts because 

such rules could inappropriately 

increase or decrease the section 1248 

amount attributable to the stock of the 

foreign distributed corporation received 

by a section 1248 shareholder in the 

distribution. For example, if in the 

section 361 exchange the domestic 

distributing corporation transferred 

appreciated tangible property and stock 

of a CFC with earnings and profits for 

purposes of section 1248(a) in excess of 

the built-in gain in such stock, then the 

appreciation in the tangible property 

could inappropriately increase the 

section 1248 amount attributable to the 

stock of the foreign distributed 

corporation received by a section 1248 

shareholder in the distribution (to the 

extent the CFC’s earnings and profits 

exceed the section 1248 amount 

attributable to the CFC stock at the time 

of the section 361 exchange). A similar 

inappropriate increase would result if 

the domestic distributing corporation 

transferred appreciated stock of two 

CFCs in the section 361 exchange, one 

CFC without a section 1248 amount and 

the other CFC with a section 1248 

amount but with earnings and profits for 

purposes of section 1248 in excess of 

such section 1248 amount. 

The IRS and Treasury Department 

also declined to adopt rules that would 

preserve any reduction to a section 1248 

shareholder’s section 358 basis in a 

portion of a share (or whole share, if no 

division is required) of stock of the 

foreign distributed corporation received 

in the distribution by increasing the 

basis of other portions of the share (or 

other whole shares, if no division is 

required) of stock or by establishing a 

suspended basis account equal to the 

basis reduction. Those rules were not 

adopted because a capital loss would be 

created that could economically offset 

the section 1248 amount, which would 

not be consistent with the policy 

underlying section 1248(f) and the 

regulations described in Notice 87–64. 

S. Rep. No. 94–938, at 270 (1976). 

Comments are requested on how the 

rules of the proposed regulations can be 

simplified and how the rules should 

apply to different classes of stock. 

4. Section 964(e) and Inclusions Under 

Section 367(b) 

Comments are requested regarding 

whether the IRS and Treasury 

Department should exercise the 

authority under section 367(b) to apply 

the principles of section 1248(f)(1) to 

section 355 distributions or section 361 

distributions of stock of a foreign 

corporation by a CFC, to the extent the 

transaction does not otherwise result in 

an income inclusion to the exchanging 

shareholders of the CFC under section 

367(b) and the regulations under that 

section. Comments should consider the 

appropriate balance between the policy 

of sections 1248(a) and 964(e) and the 

associated complexity and compliance 

burdens. 

D. Changes to Exception to 

Coordination Rule of § 1.367(a)– 

3(d)(2)(vi)(A) 

1. Overview 

Section 1.367(a)–3(d)(2)(vi)(A) (the 

coordination rule) provides that if, in 

connection with an indirect stock 

transfer, a U.S. person transfers assets to 

a foreign corporation (direct asset 

transfer) in an exchange described in 

section 351 or section 361, the rules of 

section 367 and the regulations under 

that section shall first apply to the direct 

asset transfer and then to the indirect 

stock transfer. However, an exception to 

the coordination rule (coordination rule 

exception) provides that section 367(a) 

and (d) shall not apply to a direct asset 

transfer otherwise subject to the 

coordination rule to the extent that 

assets transferred by a domestic 

acquired corporation to a foreign 

acquiring corporation in an asset 

reorganization are re-transferred to a 

domestic corporation controlled by the 

foreign acquiring corporation (domestic 

controlled corporation), but only if the 

domestic controlled corporation’s basis 

in the retransferred assets is not greater 

than the domestic acquired 

corporation’s basis in such assets and 

other conditions are satisfied. See 

§ 1.367(a)–3(d)(2)(vi)(B)(1). 

The 2006 final regulations established 

the conditions for the application of the 

coordination rule exception. The 

preamble to the notice of proposed 

rulemaking that preceded the 2006 final 

regulations explained that the 

conditions were adopted to limit the use 

of asset reorganizations subject to the 

coordination rule that might facilitate 

inversion transactions and certain 

divisive transactions. See REG–125628–

01 (issued January 5, 2005). 

2. Clarification of Conditions for 

Application of the Coordination Rule 

Exception 

In response to transactions intended 

to use the coordination rule exception 

inappropriately to repatriate earnings 

and profits of foreign corporations 

without the recognition of gain or a 

dividend inclusion, the IRS and 

Treasury Department issued Notice 

2008–10 (2008–3 IRB 277). The notice 

announced that the conditions for the 

application of the coordination rule 

exception would be revised to clarify 

that any adjustment to basis required 

under section 367(a)(5) must be made to 

the basis of stock of the foreign 

acquiring corporation received by the 

control group members in the asset 

reorganization such that the appropriate 

amount of built-in gain in the property 

transferred by the domestic acquired 

corporation to the foreign acquiring 

corporation is reflected in such stock. 

The notice clarifies that the control 

group members cannot satisfy the basis 

adjustment requirement by adjusting the 

basis of stock of the foreign acquiring 

corporation held before the 

reorganization. The notice further states 

that the revised regulations would 

confirm that to the extent the 

appropriate amount of built-in gain in 

the property transferred by the domestic 

acquired corporation cannot be 

preserved in the stock received by the 

control group members in the 

reorganization, then the domestic 

acquired corporation’s transfer of 

property to the foreign acquiring 

corporation shall be subject to section 

367(a) and (d). 

The proposed regulations included in 

this document incorporate, with 

modifications, the clarifications to the 

conditions for the application of the 

coordination rule exception announced 

in the notice. The proposed regulations 

also provide that to the extent any of the 

re-transferred assets constitutes section 

367(d) property, the coordination rule 

exception shall apply only if the section 

367(d) property is treated as section 

367(a) property for purposes of 

satisfying the conditions and 

requirements of section 367(a)(5) and 

the regulations under that section. Thus, 

for example, any gain that the U.S. 

transferor must recognize on the direct 

asset transfer or any adjustment 

required to a control group member’s 

section 358 basis in stock received in 

the transaction must take into account 

any inside gain attributable to section 

367(d) property (treated as section 

367(a) property for purposes of 

determining such inside gain) that is 

part of the re-transferred assets. 

The IRS and Treasury Department 

continue to study transactions that have 

the effect of repatriating earnings and 

profits of foreign corporations without 

the recognition of gain or a dividend 

inclusion. Temporary regulations were 

recently issued (TD 9400 and TD 9402) 

under sections 367(b) and 956(e) to 

address the inappropriate use of certain 

cross-border triangular reorganizations 


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and other nonrecognition transactions to 

repatriate earnings and profits of a 

foreign corporation without the 

recognition of gain or a dividend 

inclusion. The IRS and Treasury 

Department are evaluating other 

transactions that have a similar effect to 

determine whether guidance is 

appropriate. In particular, the IRS and 

Treasury Department are analyzing 

whether it is appropriate for the gain 

limitation rule of section 356(a)(1) to 

apply in an acquisitive asset 

reorganization involving a foreign 

acquiring corporation, considering that 

a policy of section 367(b) is ‘‘to protect 

against tax avoidance in transfers to 

foreign corporations and upon the 

repatriation of previously untaxed 

foreign earnings.’’ H.R. Rep. No. 94–658 

(1975). Comments are requested in this 

regard, including whether the 

application of any such guidance should 

be limited to cases where section 

356(a)(2) would otherwise apply to the 

shareholder’s receipt of non-qualifying 

property. 

The IRS and Treasury Department 

also continue to study whether 

appropriate modifications should be 

made to the ‘‘all earnings and profits’’

inclusion requirement of § 1.367(b)–3(b) 

when a domestic corporation acquires 

the assets of a foreign corporation 

pursuant to an acquisitive asset 

reorganization under section 368(a)(1) 

and then transfers all or part of the 

acquired assets to another foreign 

corporation in a transaction described in 

§ 1.368–2(k). Comments are requested in 

this regard, including regarding the 

appropriate adjustment to the domestic 

corporation’s basis in the stock of the 

foreign corporation to which the 

acquired assets are transferred to ensure 

that the basis of such stock reflects an 

after-tax amount. 

E. Other Proposed Regulations Under 

Section 367(a) 

The proposed regulations under 

section 367(a) would revise current 

§ 1.367(a)–1T(b)(4)(i)(B) to provide that 

an increase to basis for the amount of 

gain recognized by a U.S. person under 

section 367(a) in connection with a 

transfer of property to a foreign 

corporation is allocated among the 

transferred property with respect to 

which gain is recognized in proportion 

to the gain realized by the U.S. person 

on the transfer of such property. The 

IRS and Treasury Department believe 

the current temporary regulation may 

produce inappropriate results because it 

allocates the basis increase among the 

transferred property with respect to 

which gain is recognized in proportion 

to the amount realized by the U.S. 

person on the transfer of such property. 

The proposed regulations also clarify 

that a transfer of property by a U.S. 

person to a foreign corporation that is 

subject to section 367(a) is not 

recharacterized for U.S. Federal tax 

purposes merely because the U.S. 

person is required to recognize gain in 

connection with such transfer under 

section 367(a). For example, if a U.S 

person transfers appreciated stock of a 

CFC to another CFC in a section 351 

exchange, the section 351 exchange is 

not recharacterized as other than a 

section 351 exchange for U.S. Federal 

tax purposes merely because the U.S. 

person recognizes gain in connection 

with the exchange under section 367(a). 

F. Other Proposed Regulations Under 

Section 1248 

The proposed regulations under 

section 1248(a) remove as deadwood an 

exception from the application of 

section 1248(a) for gain recognized 

under section 356. In addition, 

consistent with Notice 87–64, the 

proposed regulations under section 

1248(e) suspend the application of 

section 1248(e) for periods when capital 

gains are taxed at a rate that equals or 

exceeds the rate of tax on ordinary 

income. 

G. Effective/Applicability Dates 

1. Sections 367(a)(5) and 6038B 

Section 1.367(a)–7 and the revisions 

to § 1.6038B–1 apply to transfers 

occurring on or after the date that is 30 

days after the date these regulations are 

published as final regulations in the 

Federal Register. 

2. Section 1248(e) 

In accordance with Notice 87–64 

(1987–2 CB 375), § 1.1248–6(d) 

(suspending application of section 

1248(e)) applies to sales, exchanges, or 

other dispositions of stock of a domestic 

corporation occurring on or after 

September 21, 1987. 

3. Changes to Coordination Rule 

Exception 

The revisions to § 1.367(a)–

3(d)(2)(vi)(B)(1) and (2) described in 

Notice 2008–10 (2008–3 IRB 277) 

generally apply to transactions 

occurring on or after December 28, 2007. 

The requirement to treat section 367(d) 

property as section 367(a) property for 

purposes of the coordination rule 

exception (as discussed in part D.2 of 

this preamble) applies to transactions 

occurring on or after August 19, 2008. 

4. Sections 1248(f) and 367(b) 

Section 1.1248–8(b)(2)(iv), 

§§ 1.1248(f)–1 through 1.1248(f)–3, and 

the modifications to § 1.367(b)–4 apply 

to transfers or distributions occurring on 

or after the date that is 30 days after the 

date these regulations are published as 

final regulations in the Federal Register. 

H. Adjustments Under Section 367(a)(5) 

Before Final Regulations Are Published 

The general rule of section 367(a)(5) is 

that the exceptions to section 367(a)(1) 

provided by section 367(a)(2) and (a)(3) 

are not available for a transfer of 

property by a domestic corporation to a 

foreign corporation in a section 361 

exchange, including a section 351 

exchange that also qualifies as a section 

361 exchange. However, until the date 

that is 30 days after the date these 

regulations are published as final 

regulations, taxpayers may make 

reasonable adjustments, as described in 

the legislative history to section 

367(a)(5), that are consistent with the 

policy of section 367(a)(5) so that the 

exceptions provided by section 367(a)(2) 

and (a)(3) may apply to the transfer of 

property by a U.S. transferor to a foreign 

corporation in a section 361 exchange. 

Reasonable adjustments must include 

adjusting the basis of the stock received 

by the control group members in the 

transaction that is attributable to section 

367(a) property so that each control 

group member’s basis of such stock 

equals the lesser of (1) the control group 

member’s section 358 basis in the stock 

or (2) the control group member’s 

proportionate share of the basis of the 

section 367(a) property transferred by 

the U.S. transferor in the section 361 

exchange. Adjusting the basis of stock of 

the foreign acquiring corporation held 

by a control group member before the 

section 361 exchange shall not be a 

reasonable adjustment. 

In addition, the U.S. transferor must 

recognize gain to the extent it has 

shareholders that are not control group 

members and to the extent any built-in 

gain in the section 367(a) property 

transferred in the section 361 exchange 

cannot be preserved in the hands of the 

control group members through their 

ownership of stock received in the 

transaction in exchange for the stock or 

securities of the U.S. transferor. For 

example, the U.S. transferor may 

recognize gain if the control group 

members receive non-qualifying 

property in the transaction, if the 

foreign acquiring corporation assumes 

liabilities of the U.S. transferor in the 

section 361 exchange, or if the U.S. 

transferor distributes the stock received 

in the section 361 exchange 


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disproportionately to its shareholders. 

For this purpose, the stock or other 

property received by the U.S. transferor 

in the section 361 exchange must be 

allocated between the section 367(a) 

property and all other property 

transferred in the section 361 exchange 

consistent with general tax principles, 

including the principles of Rev. Rul. 68–

55, 1968–1 CB 140, and the authorities 

cited therein. 

Adjustments made in accordance with 

the proposed regulations under section 

367(a)(5) included in this document 

shall be considered reasonable and in 

accordance with the policy of section 

367(a)(5). 

Availability of IRS Documents 

IRS notices cited in this preamble are 

made available by the Superintendent of 

Documents, U.S. Government Printing 

Office, Washington, DC 20402. 

Effect on Other Documents 

The following publications are 

proposed to be obsolete as of the date 

30 days after the date these regulations 

are published as final regulations in the 

Federal Register: 

Notice 87–64 (1987–2 CB 375). 

Notice 2008–10 (2008–3 IRB 277). 

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. 

Section 553(b) of the Administrative 

Procedure Act (5 U.S.C. chapter 5) and 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) apply to these regulations. 

It is hereby certified that the 

collection of information contained in 

this regulation will not have a 

significant economic impact on a 

substantial number of small entities. 

Accordingly, a regulatory flexibility 

analysis is not required. This regulation 

primarily will affect large domestic 

corporations engaged in cross-border 

corporate transactions. Thus, the 

number of affected small entities will 

not be substantial. A certain number of 

small domestic corporations may be 

shareholders of a larger domestic 

corporation the stock or assets of which 

are acquired by a foreign corporation in 

connection with an asset reorganization, 

and such shareholders may be required 

to make certain adjustments in the stock 

of the foreign acquiring corporation. 

Nonetheless, the IRS and Treasury 

Department do not anticipate the 

number of such shareholders to be 

substantial. Furthermore, the IRS and 

Treasury Department estimate that any 

small entities that are affected by the 

regulations will likely face a burden of 

approximately ten hours (at an hourly 

rate of $200) from the adjustments made 

to the basis of the stock received in the 

reorganization. Considering that the 

collections of information enable 

taxpayers to defer or avoid the 

recognition of potentially large amounts 

of gain, the IRS and Treasury 

Department believe that $2000 is not a 

significant economic impact. Comments 

about the accuracy of this certification 

may be submitted to the addresses 

provided in the preamble. Pursuant to 

section 7805(f) of the Internal Revenue 

Code, this regulation has been 

submitted to the Administrator of the 

Small Business Administration for 

comment on their impact on small 

business. 

Comments and Request for a Public 

Hearing 

Before these regulations are adopted 

as final regulations, consideration will 

be given to any written comments (a 

signed original and eight (8) copies) or 

electronic comments that are submitted 

timely to the IRS. The IRS and Treasury 

Department request comments on the 

clarity of the proposed rules and how 

they can be made easier to understand. 

All comments will be available for 

public inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person that timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place for the public hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal author of these 

regulations is Daniel McCall of the 

Office of Associate Chief Counsel 

(International), within the Office of 

Chief Counsel, Internal Revenue 

Service. Other personnel from offices of 

the IRS and Treasury Department 

participated in developing the 

regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Corporations, Corporate 

distributions, Corporate adjustments, 

Reorganizations. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order to read in part as 

follows: 

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

Section 1.367(a)–3(d)(2)(vi)(B)(1)(i) also 

issued under 26 U.S.C. 367(d). 

Section 1.367(a)–7 also issued under 26 

U.S.C. 367(a), (b), (c), and 337(d). 

Section 1.1248–6 also issued under 26 

U.S.C. 1248(e). 

Section 1.1248–8(b)(2)(iv) also issued 

under 26 U.S.C. 1248(a), (c), and (f). 

Section 1.1248(f)–1 also issued under 26 

U.S.C. 367(b) and 1248(f). 

Section 1.1248(f)–2 also issued under 26 

U.S.C. 367(b) and 1248(f). 

Section 1.1248(f)–3 also issued under 26 

U.S.C. 367(b) and 1248(f).* * * 

Par. 2. Section 1.358–6 is amended by 

adding a new sentence at the end of 

paragraph (e) to read as follows: 

§ 1.358–6 Stock basis in certain triangular 

reorganizations. 

* * * * * 

(e) * * * For rules relating to certain 

triangular reorganizations involving 

transfers to which the exception 

provided in § 1.367(a)–7(c) applies, see 

§ 1.367(b)–4(b)(1)(ii)(B). 

* * * * * 

Par. 3. Section 1.367(a)–1T is 

amended by: 

1. Revising the second sentence of 

paragraph (b)(4)(i)(B). 

2. Adding new paragraphs (b)(4)(i)(C) 

and (g)(4). 

The revision and additions to read as 

follows: 

§ 1.367(a)–1T Transfers to foreign 

corporations subject to section 367(a): In 

general (temporary). 

* * * * * 

(b) * * * 

(4) * * * 

(i) * * * 

(B) * * * Any increase in the basis of 

the property received by the foreign 

corporation under section 362(a) or (b) 

for gain recognized by a U.S. person due 

to the application of section 367(a) shall 

be allocated to the transferred property 

with respect to which gain is recognized 

in proportion to the gain realized by the 

U.S. person on the transfer of such 

property. * * * 

(C) A transfer of property by a U.S. 

person to a foreign corporation shall not 

be recharacterized for U.S. Federal tax 

purposes solely because the U.S. person 

recognizes gain in connection with the 

transfer under section 367(a)(1). For 

example, if a U.S. person transfers 

appreciated stock or securities to a 

foreign corporation in an exchange 

described in section 351, the transfer is 

not recharacterized as other than an 

exchange described in section 351 

solely because the U.S. person 

recognizes gain in connection with the 

transfer under section 367(a)(1). 

* * * * * 


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(g) * * * 

(4) The rules in paragraphs (b)(4)(i)(B) 

and (C) of this section apply to transfers 

occurring on or after the date 30 days 

after the date these regulations are 

published as final regulations in the 

Federal Register. For guidance with 

respect to paragraph (b)(4)(i)(B) of this 

section before the date 30 days after the 

date these regulations are published as 

final regulations in the Federal Register, 

see 26 CFR part 1 revised as of April 1 

for the year before the date these 

regulations are published as final 

regulations in the Federal Register. 

Par. 4. Section 1.367(a)–3 is amended 

by: 

1. Revising the third to the last 

sentence of paragraph (a). 

2. Revising paragraphs (b)(1) and 

(c)(1). 

3. Revising paragraphs (d)(2)(vi)(B)(1) 

and (d)(2)(vi)(B)(1)(i). 

4. Adding two new sentences at the 

end of paragraph (d)(2)(vi)(B)(2). 

5. Revising the first and fourth 

sentences of paragraph (d)(3), Example 

6A (ii). 

6. Revising the second and fifth 

sentences of paragraph (d)(3), Example 

6B (ii), and add two new sentences after 

the fifth sentence. 

7. Revising the second and fourth 

sentences of paragraph (d)(3), Example 

6C (ii). 

8. Adding a new sentence between the 

second and third sentences of paragraph 

(d)(3), Example 8 (ii). 

9. Revising the first sentence of 

paragraph (d)(3), Example 8B (ii). 

10. Revising the first sentence of 

paragraph (d)(3), Example 8C (ii). 

11. Revising the second sentence of 

paragraph (d)(3), Example 9 (ii), and 

removing the third sentence. 

12. Revising the third sentence of 

paragraph (d)(3), Example 10 (ii). 

13. Revising the second to last 

sentence of paragraph (d)(3), Example 

11 (ii), and adding a new sentence after 

the second to last sentence. 

14. Revising the second sentence of 

paragraph (d)(3), Example 12 (ii), and 

removing the last sentence. 

15. The heading for paragraph (g) is 

revised. 

16. Paragraph (g)(1)(E) is revised. 

The revisions and additions to read as 

follows: 

§ 1.367(a)–3 Treatment of transfers of 

stock or securities to foreign corporations. 

(a) * * * For additional rules 

regarding a transfer of stock or securities 

in an exchange described in section 

361(a) or (b), see section 367(a)(5) and 

§ 1.367(a)–7. * * * 

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

or securities of foreign corporations to 

foreign corporations—(1) General rule. 

Except as provided in § 1.367(a)–7, a 

transfer of stock or securities of a foreign 

corporation by a U.S. person to a foreign 

corporation that would otherwise be 

subject to section 367(a)(1) under 

paragraph (a) of this section shall not be 

subject to section 367(a)(1) if either—

* * * * * 

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

or securities of domestic corporations to 

foreign corporations—(1) In general. 

Except as provided in § 1.367(a)–7, a 

transfer of stock or securities of a 

domestic corporation by a U.S. person 

to a foreign corporation that would 

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

under paragraph (a) of this section shall 

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

domestic corporation the stock or 

securities of which are transferred 

(referred to as the U.S. target company) 

complies with the reporting 

requirements in paragraph (c)(6) of this 

section and if each of the following four 

conditions is met: 

* * * * * 

(d) * * * 

(2) * * * 

(vi) * * * 

(B) Exceptions. (1) If a transaction is 

described in paragraph (d)(2)(vi)(A) of 

this section, section 367(a) and (d) shall 

not apply to the extent a domestic 

corporation (domestic acquired 

corporation) transfers assets to a foreign 

corporation (foreign acquiring 

corporation) in an asset reorganization, 

and such assets (re-transferred assets) 

are transferred to a domestic corporation 

(domestic controlled corporation) in a 

controlled asset transfer, provided that 

the domestic controlled corporation’s 

basis in the re-transferred assets is not 

greater than the domestic acquired 

corporation’s basis in such assets and 

the conditions contained in paragraphs 

(d)(2)(vi)(B)(1)(i) or (d)(2)(vi)(B)(1)(ii) of 

this section are satisfied. For purposes 

of determining whether the domestic 

controlled corporation’s basis in the retransferred assets is not greater than the 

domestic acquired corporation’s basis in 

such assets, the domestic acquired 

corporation’s basis in the re-transferred 

assets shall reflect any increase in basis 

due to gain recognized by the domestic 

acquired corporation on the transfer of 

the re-transferred assets to the foreign 

acquiring corporation. 

(i) The conditions and requirements 

of section 367(a)(5) and § 1.367(a)–7(c) 

are satisfied with respect to the 

domestic acquired corporation’s transfer 

of assets to the foreign acquiring 

corporation. To the extent any of the retransferred assets constitutes property to 

which section 367(d) applies (section 

367(d) property), however, the 

exception under paragraph 

(d)(2)(iv)(B)(1) shall apply only if such 

property is treated as property subject to 

section 367(a) for purposes of satisfying 

the conditions and requirements of 

section 367(a)(5) and § 1.367(a)–7(c). 

The preceding sentences shall apply 

before the application of the exception 

under paragraph (d)(2)(vi)(B)(1) of this 

section. See paragraph (g)(1)(E)(3) of this 

section for rules under this paragraph 

(d)(2)(vi)(B)(1)(i) that apply to 

transactions that occur on or after 

December 28, 2007, and before the date 

30 days after the date these regulations 

are published as final regulations in the 

Federal Register. 

* * * * * 

(2) * * * This paragraph 

(d)(2)(vi)(B)(2) shall not, however, apply 

to an exchange described in section 351 

that is also an exchange described in 

section 361(a) or (b). An exchange 

described in section 351 that is also an 

exchange described in section 361(a) or 

(b) is only eligible for the exception in 

paragraph (d)(2)(vi)(B)(1) of this section. 

* * * * * 

(3) * * * 

Example 6A. * * * 

(ii) * * * The transfer of the Business 

A assets by Z to F does not constitute 

an indirect stock transfer under 

paragraph (d) of this section, and, 

subject to the conditions and 

requirements of section 367(a)(5) and 

§ 1.367(a)–7(c), the Business A assets 

qualify for the section 367(a)(3) active 

trade or business exception and are not 

subject to section 367(a)(1). * * * 

* * * Subject to the conditions and 

requirements of section 367(a)(5) and 

§ 1.367(a)–7(c), the Business B assets 

qualify for the active trade or business 

exception under section 367(a)(3). 

* * * 

Example 6B. * * * 

(ii) * * * However, subject to the 

conditions and requirements of section 

367(a)(5) and § 1.367(a)–7(c), the 

Business A assets qualify for the section 

367(a)(3) active trade or business 

exception and are not subject to section 

367(a)(1). * * * 

* * * However, pursuant to 

paragraph (d)(2)(vi)(B)(1) of this section 

and subject to the conditions and 

requirements of section 367(a)(5) and 

§ 1.367(a)–7(c), the Business B and C 

assets are not subject to section 367(a) 

or (d), provided that the basis of the 

Business B and C assets in the hands of 

R is no greater than the basis of the 

assets in the hands of Z. If all or a 

portion of the Business B and C assets 

constituted section 367(d) property, as 

defined in § 1.367(a)–7(f)(10), then 


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paragraph (d)(2)(vi)(B)(1) of this section 

would apply to Z’s transfer of such 

property only if such property is treated 

as property subject to section 367(a) for 

purposes of satisfying the conditions 

and requirements of section 367(a)(5) 

and § 1.367(a)–7(c). Treating such 

section 367(d) property as property 

subject to section 367(a) for this purpose 

could further reduce V’s basis in the F 

stock received in the reorganization, or 

result in the recognition of additional 

gain by Z, under section 367(a)(5) and 

§ 1.367(a)–7(c). * * * 

Example 6C. * * * 

(ii) * * * However, gain must be 

recognized on the transfer of such assets 

under section 367(a)(1) because the 

section 367(a)(3) active trade or business 

exception is inapplicable pursuant to 

section 367(a)(5) and § 1.367(a)–7(b). 

* * * 

* * * The transfer of the Business B 

assets (which otherwise would satisfy 

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

business exception) generally is subject 

to section 367(a)(1) pursuant to section 

367(a)(5) and § 1.367(a)–7(b). * * * 

* * * * * 

Example 8. * * * 

(ii) * * * Subject to the conditions 

and requirements of section 367(a)(5) 

and § 1.367(a)–7(c), the Business B 

assets qualify for the active trade or 

business exception under section 

367(a)(3). * * * 

Example 8B. * * * 

(ii) * * * Under section 367(a)(5) and 

§ 1.367(a)–7(b), the active trade or 

business exception under section 

367(a)(3) does not apply to Z’s transfer 

of assets to R. * * * 

Example 8C. * * * 

(ii) * * * Under section 367(a)(5) and 

§ 1.367(a)–7(b), the active trade or 

business exception under section 

367(a)(3) does not apply to Z’s transfer 

of assets to R. * * * 

Example 9. * * * 

(ii) * * * Subject to the conditions 

and requirements of section 367(a)(5) 

and § 1.367(a)–7(c), Z’s transfer of the 

Business B assets to R (which are not retransferred to M) qualifies for the active 

trade or business exception under 

section 367(a)(3). * * * 

Example 10. * * * 

(ii) * * * Subject to the conditions 

and requirements of section 367(a)(5) 

and § 1.367(a)–7(c), the Business B 

assets qualify for the active trade or 

business exception under section 

367(a)(3). * * * 

Example 11. * * * 

(ii) * * * Because D is owned by F, 

a foreign corporation, the control 

requirement of section 367(a)(5) and 

§ 1.367(a)–7(c)(1) cannot be satisfied. 

Therefore, section 367(a)(5) and 

§ 1.367(a)–7(b) preclude the application 

of the active trade or business exception 

under section 367(a)(3) from applying to 

any assets transferred by D to Z. * * * 

Example 12. * * * 

(ii) * * * Subject to the conditions 

and requirements of section 367(a)(5) 

and § 1.367(a)–7(c), the active trade or 

business exception under section 

367(a)(3) applies to E’s transfer of 

Business X assets. * * * 

* * * * * 

(g) Effective/applicability dates. 

(1) * * * 

(E)(1) Except as provided in 

paragraphs (g)(1)(E)(2) through 

(g)(1)(E)(4) of this section, the rules of 

paragraph (d)(2)(vi) of this section apply 

only to transactions occurring on or 

after January 23, 2006. See § 1.367(a)–

3(d)(2)(vi), as contained in 26 CFR part 

1 revised as of April 1, 2005, for 

transactions occurring on or after July 

20, 1998 and before January 23, 2006. 

(2) Except to the extent provided in 

paragraph (g)(1)(E)(3) of this section, 

paragraph (d)(2)(vi)(B)(1)(i) of this 

section applies to transactions occurring 

on or after the date 30 days after the date 

these regulations are published as final 

regulations in the Federal Register. 

(3)(i) For purposes of paragraph 

(d)(2)(vi)(B)(1) of this section, except as 

provided in paragraph (g)(1)(E)(3)(iii) of 

this section, the conditions of paragraph 

(d)(2)(vi)(B)(1)(i) of this section shall be 

satisfied for transactions occurring on or 

after December 28, 2007, and before the 

date 30 days after the date these 

regulations are published as final 

regulations in the Federal Register, 

provided the conditions in paragraph 

(g)(1)(E)(3)(ii) are satisfied. 

(ii) The domestic acquired corporation 

is controlled (within the meaning of 

section 368(c)) by five or fewer (but at 

least one) domestic corporations 

(controlling domestic corporations) at 

the time of the section 361 exchange, 

appropriate basis adjustments under 

section 367(a)(5) are made to the stock 

received (or deemed received) by the 

controlling domestic corporations in the 

reorganization, and any other conditions 

as provided in regulations under section 

367(a)(5) are satisfied. For purposes of 

determining whether the domestic 

acquired corporation is controlled by 

five or fewer domestic corporations, all 

members of the same affiliated group 

within the meaning of section 1504 

shall be treated as one corporation. Any 

adjustments to stock basis required 

under section 367(a)(5) must be made to 

the stock received (or deemed received) 

by the controlling domestic corporations 

in the reorganization such that the 

appropriate amount of built-in gain in 

the property transferred by the domestic 

acquired corporation to the foreign 

acquiring corporation in the section 361 

exchange is reflected in such stock. The 

basis adjustment requirement cannot be 

satisfied by adjusting the basis in stock 

of the foreign acquiring corporation held 

by the controlling domestic corporations 

before the reorganization. To the extent 

the appropriate amount of built-in gain 

in the property transferred by the 

domestic acquired corporation to the 

foreign acquiring corporation in the 

section 361 exchange cannot be 

preserved in the stock received (or 

deemed received) by the controlling 

domestic corporations in the 

reorganization, the domestic acquired 

corporation’s transfer of property to the 

foreign acquiring corporation shall be 

subject to sections 367(a) and (d). 

(iii) The second sentence of paragraph 

(d)(2)(vi)(B)(1)(i) shall apply to 

transactions occurring on or after 

August 19, 2008 and before the date 30 

days after the date these regulations are 

published as final regulations in the 

Federal Register. 

(4) The last two sentences of 

paragraph (d)(2)(vi)(B)(2) shall apply to 

transactions occurring on or after 

December 28, 2007. 

* * * * * 

Par. 5. Section 1.367(a)–7 is added to 

read as follows: 

§ 1.367(a)–7 Rules under section 367(a)(5) 

applicable to exchanges described in 

section 361(a) or (b). 

(a) Scope and purpose. This section 

provides rules under section 367(a)(5) 

that apply to a transfer of certain 

property, including stock and securities, 

by a domestic corporation (U.S. 

transferor) to a foreign corporation 

(foreign acquiring corporation) in an 

exchange described in section 361(a) or 

(b), or in an exchange described in 

section 351 that is also described in 

section 361(a) or (b) (collectively, a 

section 361 exchange). The purpose of 

this section is to ensure that the net gain 

realized by the U.S. transferor in 

connection with the transfer of certain 

property to the foreign acquiring 

corporation in the section 361 exchange 

is, in the aggregate, recognized currently 

by the U.S. transferor or, to the extent 

permitted under the rules of this 

section, preserved in the stock received 

(or deemed received) in the 

reorganization by certain domestic 

corporate shareholders of the U.S. 

transferor in exchange for stock or 

securities of the U.S. transferor. This 

section applies only to the transfer of 

section 367(a) property in the section 

361 exchange. See section 367(d) and 


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Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49291 

the regulations under that section for 

rules applicable to transfers of section 

367(d) property. 

(b) General rule. Except as provided 

in paragraph (c) of this section, the 

exceptions to section 367(a)(1) provided 

in section 367(a) and the regulations 

under that section shall not apply to a 

transfer of section 367(a) property by a 

U.S. transferor to a foreign acquiring 

corporation in a section 361 exchange. 

(c) Exception. Except to the extent 

provided in paragraph (d) of this 

section, paragraph (b) of this section 

shall not apply to the transfer of section 

367(a) property in a section 361 

exchange if the conditions of paragraphs 

(c)(1) through (c)(4) of this section are 

satisfied and an election to apply the 

exception provided by this paragraph (c) 

is made in the manner provided by 

paragraph (c)(5) of this section. If 

paragraph (b) of this section does not 

apply to a section 361 exchange, see, for 

example, §§ 1.367(a)–2T, 1.367(a)–3, 

1.367(a)–4T, or 1.367(a)–5T, as 

applicable, for additional requirements 

that must be satisfied to avoid the 

application of section 367(a)(1) to the 

transfer of section 367(a) property in the 

section 361 exchange. Nothing in this 

section shall permit the nonrecognition 

of gain not otherwise permitted under 

another provision of the Internal 

Revenue Code or the regulations under 

that section. See, for example, section 

367(a)(3)(B) and § 1.367(a)–5T. 

(1) Control. At the time of the section 

361 exchange, the U.S. transferor is 

controlled (within the meaning of 

section 368(c)) by five or fewer, but at 

least one, control group members. 

(2) Gain recognition—(i) Gain 

recognition due to non-control group 

members. The U.S. transferor recognizes 

gain equal to the product of the inside 

gain and the aggregate ownership 

interest (by value) in the U.S. transferor 

by all shareholders of the U.S. transferor 

at the time of the section 361 exchange 

that are not control group members. 

(ii) Gain recognition where control 

group member is unable to preserve 

gain. With respect to each control group 

member, the U.S. transferor recognizes 

gain equal to the amount, if any, by 

which—

(A) The product of the inside gain and 

the control group member’s ownership 

interest (by value) in the U.S. transferor 

at the time of the section 361 exchange; 

exceeds 

(B) The product of the section 367(a) 

percentage and the fair market value of 

the stock received (or deemed received) 

by the control group member in 

exchange for stock or securities of the 

U.S. transferor under section 354, 355, 

or 356. For an illustration of gain 

recognition under this paragraph, see 

paragraph (g) of this section, Example 2. 

(3) Basis adjustments—(i) General 

rule. Except as provided in paragraphs 

(c)(3)(ii)(A) and (C) of this section, each 

control group member’s aggregate basis 

in the stock received (or deemed 

received) in exchange for stock or 

securities of the U.S. transferor under 

section 354, 355, or 356, as determined 

under section 358 and the regulations 

under that section (section 358 basis), is 

reduced by the amount, if any, by 

which—

(A) The product of the inside gain and 

the control group member’s ownership 

interest (by value) in the U.S. transferor 

at the time of the section 361 exchange, 

reduced by any gain recognized by the 

U.S. transferor with respect to such 

control group member under paragraph 

(c)(2)(ii) of this section; exceeds 

(B) The control group member’s 

outside gain. 

(ii) Special rules—(A) General 

applicability. Paragraph (c)(3)(i) of this 

section shall apply only to stock that 

was received by the U.S. transferor in 

the section 361 exchange and 

distributed to the control group 

member. 

(B) Multiple blocks of stock. If a 

control group member holds multiple 

blocks of stock received (or deemed 

received) in the transaction, the section 

358 basis of each block of stock must be 

reduced pro rata based on the relative 

section 358 basis of each block of stock. 

(C) Successive distributions to which 

section 355 applies. Paragraph (c)(3)(i) 

of this section shall not apply to a 

control group member that distributes 

the stock of a foreign acquiring 

corporation received from the U.S. 

transferor in a distribution to which 

section 355 applies (section 355 

distribution), that is in connection with 

a transaction described in paragraph (d) 

of this section. If paragraph (c)(3)(i) of 

this section does not apply to a control 

group member pursuant to the previous 

sentence, then paragraph (c)(3)(i) of this 

section shall apply to the final 

distributee (as defined in paragraph (d) 

of this section) that receives the stock of 

the foreign acquiring corporation in the 

final section 355 distribution described 

in paragraph (d) of this section. If the 

final distributee holds multiple blocks 

of stock of the foreign acquiring 

corporation after the final section 355 

distribution, the rules of paragraph 

(c)(3)(ii)(B) of this section shall apply to 

reduce the section 358 basis of such 

blocks of stock. 

(iii) Applicable cross-references. For 

illustrations of the adjustment to stock 

basis under paragraph (c)(3)(i) of this 

section, see paragraph (g) of this section, 

Example 1 and Example 2, and 

§ 1.1248(f)–2(d), Example 2. For an 

illustration of the adjustment to stock 

basis under paragraph (c)(3)(ii)(A) of 

this section, see § 1.1248(f)–2(d), 

Example 4. For an illustration of the 

adjustment to stock basis under 

paragraph (c)(3)(ii)(B) of this section, see 

paragraph (g) of this section, Example 3. 

(4) Agreement to amend or file a U.S. 

income tax return—(i) General rule. 

Except as provided in paragraph 

(c)(4)(ii) of this section, the U.S. 

transferor complies with the 

requirements of § 1.6038B–1(c)(6)(iii). 

(ii) Exception. Section 1.6038B–

1(c)(6)(iii) shall not apply to the extent 

any section 367(a) property transferred 

in the section 361 exchange is 

transferred in connection with a 

transaction described in § 1.367(a)–3(e) 

and a gain recognition agreement is filed 

pursuant to § 1.367(a)–8 with respect to 

the transfer of such property. 

(5) Election and reporting 

requirements—(i) General rule. The U.S. 

transferor and each control group 

member elect to apply the provisions of 

paragraph (c) of this section in the 

manner provided under paragraph 

(c)(5)(ii) or (iii) of this section, as 

applicable, and by entering into a 

written agreement described in 

paragraph (c)(5)(iv) of this section. If a 

control group member distributes the 

stock of the foreign acquiring 

corporation received from the U.S. 

transferor in a section 355 distribution 

that is in connection with a transaction 

described in paragraph (d) of this 

section, the final distributee that 

receives such stock in the final section 

355 distribution elects to apply the 

provisions of this paragraph (c) and 

enters into the written agreement 

instead of the control group member. 

(ii) Election and reporting by control 

group member or final distributee—(A) 

Time and manner of making election. 

Each control group member (or final 

distributee) elects to apply the 

provisions of paragraph (c) of this 

section by including a statement (in the 

form and with the content specified in 

paragraph (c)(5)(ii)(B) of this section) on 

or with its timely-filed return for the 

taxable year in which the section 361 

exchange occurs. If the control group 

member (or final distributee) is a 

member of a consolidated group for the 

taxable year of the section 361 

exchange, the common parent of the 

consolidated group makes the election 

on behalf of the control group member 

(or final distrubutee). 

(B) Form and content of election 

statement. The statement shall be 

entitled, STATEMENT TO ELECT TO 


dwashington3 on PRODPC61 with PROPOSALS3
49292 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

APPLY EXCEPTION UNDER § 1.367(a)–

7(c) and must set forth: 

(1) The name and taxpayer 

identification number of the control 

group member (or final distributee); 

(2) The name and taxpayer 

identification number of the common 

parent of the consolidated group, if any; 

(3) The amount of the adjustment (if 

any) to stock basis required under 

paragraph (c)(3)(i) of this section, the 

resulting adjusted basis in such stock, 

and the fair market value of such stock; 

and 

(4) The date on which the written 

agreement described in paragraph 

(c)(5)(iv) of this section was entered 

into. 

(iii) Statement by U.S. transferor. The 

U.S. transferor elects to apply the 

provisions of paragraph (c) of this 

section in the form and manner set forth 

in § 1.6038B–1(c)(6)(ii). 

(iv) Written agreement. The U.S. 

transferor and each control group 

member (or final distributee) must enter 

into a written agreement on or before 

the due date (including extensions) for 

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

taxable year during which the section 

361 exchange occurs. Each party to the 

agreement must retain the original or a 

copy of the agreement in the manner 

specified by § 1.6001–1(e). Each party to 

the agreement must provide a copy of 

the agreement to the Internal Revenue 

Service within 30 days of the receipt of 

a request for the copy of the agreement 

in connection with an examination of 

the taxable year during which the 

section 361 exchange occurs. The 

written agreement must—

(A) State the document constitutes an 

agreement entered into pursuant to 

paragraph (c)(5) of this section; 

(B) Identify the U.S. transferor and 

each control group member (or final 

distributee); 

(C) State the amount of gain (if any) 

recognized by the U.S. transferor under 

paragraph (c)(2) of this section; and 

(D) With respect to each control group 

member (or final distributee), state the 

amount of the adjustment (if any) to 

stock basis required under paragraph 

(c)(3)(i) of this section, the resulting 

adjusted basis in such stock, and the fair 

market value of such stock. 

(d) Section 361 exchange followed by 

successive distributions to which section 

355 applies. If the U.S. transferor 

distributes stock of the foreign acquiring 

corporation received in the section 361 

exchange to a control group member in 

a section 355 distribution and, as part of 

a plan or series of related transactions, 

such stock is further distributed in one 

or more successive section 355 

distributions, paragraph (c) of this 

section shall apply to the section 361 

exchange only to the extent each 

subsequent section 355 distribution is to 

a member of the affiliated group (within 

the meaning of section 1504) that 

includes the U.S. transferor at the time 

of the section 361 exchange. In such a 

case, each affiliated group member that 

receives stock of the foreign acquiring 

corporation in the final section 355 

distribution (final distributee) shall be 

subject to the requirements of 

paragraphs (c)(3) and (c)(5) of this 

section. 

(e) Other rules—(1) Section 367(a) 

property on which gain is recognized. 

Gain recognized by the U.S. transferor 

pursuant to paragraph (c)(2) of this 

section shall be treated as recognized 

with respect to the section 367(a) 

property transferred in the section 361 

exchange in proportion to the amount of 

gain realized by the U.S. transferor on 

the transfer of each item of section 

367(a) property. This paragraph (e)(1) 

shall be applied after taking into 

account any gain recognized by the U.S. 

transferor on the transfer of the section 

367(a) property in the section 361 

exchange pursuant to all other 

provisions under section 367(a) and the 

regulations under that section. See, for 

example, section 367(a)(3)(B) and 

§ 1.367(a)–4T. See § 1.367(a)–1T(b)(4) 

for additional rules on the character, 

source, and adjustments relating to gain 

recognized under section 367(a). 

(2) Reasonable cause exception for 

failure to comply—(i) Request for relief. 

If a control group member (or final 

distributee) fails to comply with any 

requirement of this section, the control 

group member (or final distributee) shall 

be considered to have complied with 

such requirement if it submits a request 

for relief as provided under paragraph 

(e)(2)(ii) of this section and can 

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 control group member’s (or final 

distributee’s) tax return for the taxable 

year, that such failure was due to 

reasonable cause and not willful 

neglect. Whether the failure to comply 

was due to reasonable cause and not 

willful neglect will be determined by 

the Director after considering all the 

facts and circumstances. The Director 

shall notify the control group member 

(or final distributee) in writing within 

120 days 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 on the date 

the Internal Revenue Service notifies the 

control group member (or final 

distributee) in writing that the request 

for relief has been received and assigned 

for review. Once such period 

commences, if the control group 

member (or final distributee) is not 

again notified within 120 days, then the 

control group member (or final 

distributee) shall be deemed to have 

established reasonable cause. 

(ii) Requirements for reasonable cause 

relief—(A) Time of submission. Requests 

for reasonable cause relief under 

paragraph (e)(2)(i) of this section will be 

considered only if as soon as the control 

group member (or final distributee) 

becomes aware of the failure to comply 

with any requirement of this section, the 

control group member (or final 

distributee) attaches the statements or 

other documents that should have been 

filed, as well as a complete written 

statement setting forth the reasons for 

the failure to comply, to an amended 

return that amends the return to which 

the documents should have been 

attached pursuant to this section. The 

amended return and all required 

attachments must be filed with the 

applicable Internal Revenue Service 

Center with which the control group 

member (or final distributee) filed its 

original return to which the documents 

should have been attached. 

(B) Notice requirement. In addition to 

the requirement of paragraph 

(e)(2)(ii)(A) of this section, the control 

group member (or final distributee) 

must comply with the requirements of 

paragraph (e)(2)(ii)(B)(1) or (2) of this 

section, as applicable. 

(1) If the control group member (or 

final distributee) is under examination 

for any taxable year when the request 

for reasonable cause relief is filed, a 

copy of the amended return and 

attachments must be provided to the 

Internal Revenue Service personnel 

conducting the examination. 

(2) If the control group member (or 

final distributee) is not under 

examination for any taxable year when 

the request for reasonable cause relief is 

filed, a copy of the amended return and 

attachments must be provided to the 

Director having jurisdiction over the 

return. 

(iii) Cross-reference for reasonable 

cause relief requests by U.S. transferor. 

If the U.S. transferor fails to comply 

with any requirement of this section, the 

U.S. transferor shall be treated as having 

complied with such requirement if the 

U.S. transferor (or the foreign acquiring 

corporation on behalf of the U.S. 

transferor) complies with the reasonable 

cause exception procedures described in 

§ 1.6038B–1(f)(3). 


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(f) Definitions. The following 

definitions apply for purposes of this 

section: 

(1) Block of stock is a group of shares 

of the same class of stock and that have 

an identical basis. 

(2) Control group and control group 

member—(i) General rule. Except as 

provided in paragraph (f)(2)(ii) of this 

section, the control group is the five or 

fewer, but at least one, domestic 

corporations that control (within the 

meaning of section 368(c)) the U.S. 

transferor at the time of the section 361 

exchange. If the U.S. transferor is 

controlled by more than five domestic 

corporations at the time of the section 

361 exchange, but some combination of 

five or fewer domestic corporations 

control the U.S. transferor at such time, 

the U.S. transferor shall designate the 

five domestic corporations that 

comprise the control group on Form 

926, ‘‘Return by a U.S. Transferor of 

Property to a Foreign Corporation.’’ For 

purposes of this paragraph, members of 

the same affiliated group (within the 

meaning of section 1504) shall be 

treated as one corporation. Except as 

provided in paragraph (f)(2)(ii) of this 

section, a control group member is a 

domestic corporation that is part of the 

control group. 

(ii) Exception for certain entities. 

Neither a regulated investment company 

(as defined in section 851(a)), nor a real 

estate investment trust (as defined in 

section 856(a)), nor an S corporation (as 

defined in section 1361(a)) shall be a 

control group member. 

(3) Deductible liability is any liability 

of the U.S. transferor that is assumed in 

the section 361 exchange or satisfied in 

connection with the reorganization 

(within the meaning of section 

361(c)(3)), but only if the payment of 

such liability would give rise to a 

deduction. 

(4) Gross fair market value means fair 

market value determined without regard 

to mortgages, liens, pledges, or other 

liabilities. The fair market value of any 

property subject to a nonrecourse 

indebtedness shall not be less than the 

amount of such indebtedness. 

(5) Inside basis is the amount equal to 

the aggregate bases of the section 367(a) 

property transferred by the U.S. 

transferor in the section 361 exchange, 

increased by any gain recognized by the 

U.S. transferor on the transfer of such 

property in the section 361 exchange, 

including gain treated as a dividend 

under section 1248(a), but not including 

any gain recognized under paragraph 

(c)(2) of this section (including any such 

gain treated as a dividend under section 

1248(a)). 

(6) Inside gain is the amount by which 

the aggregate gross fair market value of 

the section 367(a) property transferred 

in the section 361 exchange exceeds the 

sum of the inside basis and the product 

of the section 367(a) percentage and the 

aggregate deductible liabilities of the 

U.S. transferor. 

(7) Outside gain is the product of the 

section 367(a) percentage and the 

amount by which—

(i) The aggregate fair market value of 

the stock received (or deemed received) 

by a control group member in exchange 

for stock or securities of the U.S. 

transferor under section 354, 355, or 

356; exceeds 

(ii) The control group member’s 

aggregate section 358 basis of such stock 

(as determined without regard to any 

adjustment to such basis required under 

paragraph (c)(3) of this section). 

(8) Section 367(a) percentage is the 

ratio of the aggregate gross fair market 

value of the section 367(a) property 

transferred by the U.S. transferor in the 

section 361 exchange to the aggregate 

gross fair market value of all property 

transferred by the U.S. transferor in the 

section 361 exchange. 

(9) Section 367(a) property—(i) 

General rule. Except as provided in 

paragraph (f)(9)(ii) of this section, 

section 367(a) property is any property 

other than section 367(d) property. 

(ii) Special rule. Any property that 

would otherwise constitute section 

367(a) property under paragraph (f)(9)(i) 

of this section shall not constitute 

section 367(a) property for purposes of 

any determination under this section for 

which the amount of section 367(a) 

property transferred in the section 361 

exchange is relevant, if such property is 

acquired by the U.S. transferor in 

connection with the section 361 

exchange with a principal purpose of 

affecting any such determination, 

including, for example, the section 

367(a) percentage, inside gain, and 

inside basis. 

(10) Section 367(d) property is 

property to which section 367(d) 

applies. 

(11) Timely-filed return is a U.S. 

income tax return filed on or before the 

due date set forth in section 6072(b), 

plus any extension of time to file such 

return granted under section 6081. 

(g) Examples. The rules of this section 

are illustrated by the following 

examples. The analysis of the following 

examples is limited to a discussion of 

issues under this section. Unless 

otherwise indicated, for purposes of the 

following examples assume: DP1, DP2, 

and DC are domestic corporations that 

do not join in the filing of a 

consolidated return; FP and FA are 

foreign corporations that are unrelated 

to DP1, DP2, and DC; each corporation 

has a single class of stock outstanding; 

each shareholder of DC owns one block 

of stock in DC; DC’s Business A 

constitutes section 367(a) property that 

could qualify for the exception to 

section 367(a)(1) under § 1.367(a)–2T; 

DC has no liabilities, and the 

requirements in paragraph (c)(5) of this 

section and § 1.6038B–1(c)(6)(ii) are 

satisfied. 

Example 1. Tainted assets and non-control 

group ownership. (i) Facts. DP1, DP2, and FP 

own 50%, 30%, and 20%, respectively, of the 

outstanding stock of DC. DP1’s DC stock has 

a $80x basis and $100x fair market value. 

DP2’s DC stock has a $50x basis and $60x fair 

market value. DC owns inventory with a $40x 

basis and a $100x fair market value. DC also 

owns Business A with a $10x basis and 

$100x fair market value. In a reorganization 

described in section 368(a)(1)(F), DC transfers 

the inventory and Business A to FA, a newly 

formed corporation, in exchange for all of the 

outstanding stock of FA. DC’s transfer of the 

inventory and Business A to FA qualifies as 

a section 361 exchange. DP1, DP2, and FP 

exchange the DC stock for a proportionate 

amount of FA stock pursuant to section 354. 

(ii) Result. (A) Under section 367(a)(3)(B), 

DC must recognize $60x gain on the transfer 

of the inventory to FA. Under § 1.367(a)–

1T(b)(4)(i)(B), the section 362 basis increase 

is allocated to the inventory such that FA’s 

basis in the inventory is $100x. Under 

section 367(a)(5) and paragraph (b) of this 

section, DC’s transfer of Business A to FA is 

subject to the general rule of section 

367(a)(1). As a result, DC must also generally 

recognize $90x gain on the transfer of 

Business A to FA notwithstanding the 

application of section 351 or section 361. 

However, if the conditions and requirements 

of paragraph (c) of this section are met, DC’s 

transfer of Business A to FA may be partially 

eligible for the active foreign trade or 

business exception provided by section 

367(a)(3) and § 1.367(a)–2T. See § 1.367(a)–

2T for the requirements of the active foreign 

trade or business exception. 

(B) The requirement of paragraph (c)(1) of 

this section is satisfied because DC is 

controlled (within the meaning of section 

368(c)) by DP1 and DP2 at the time of the 

section 361 exchange. 

(C) Under paragraph (c)(2)(i) of this 

section, DC must recognize $18x gain on the 

transfer of Business A with respect to FP, a 

non-control group member. The $18x gain 

equals the product of the inside gain ($90x) 

and FP’s 20% ownership interest (by value) 

in DC at the time of the section 361 exchange. 

Under paragraph (f)(6) of this section, the 

$90x inside gain is the amount by which the 

aggregate gross fair market value ($200x) of 

the section 367(a) property (the inventory 

and Business A) exceeds the $110x inside 

basis. Under paragraph (f)(5) of this section, 

the inside basis equals the $50x aggregate 

basis of the section 367(a) property 

transferred in the section 361 exchange, 

increased by the $60x gain recognized by DC 

on the transfer of the inventory to FA, but not 


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by the $18x gain recognized by DC under 

paragraph (c)(2)(i) of this section with respect 

to FP. Under paragraph (e)(1) of this section, 

the $18x gain recognized under paragraph 

(c)(2)(i) of this section is treated as 

recognized with respect to Business A. 

(D) DC is not required to recognize gain 

under paragraph (c)(2)(ii) of this section with 

respect to either DP1 or DP2. DP1’s share of 

inside gain ($45x) does not exceed the 

product of the section 367(a) percentage 

(100%) and the fair market value of the FA 

stock ($100x) received in exchange for its DC 

stock. DP1’s share of inside gain is 

determined based on its 50% ownership 

interest (by value) in DC at the time of the 

section 361 exchange. DP2’s share of inside 

gain ($27x) does not exceed the product of 

the section 367(a) percentage (100%) and the 

fair market value of the FA stock ($60x) 

received in exchange for its DC stock. DP2’s 

share of inside gain is determined based on 

its 30% ownership interest (by value) in DC 

at the time of the section 361 exchange. 

(E) Under paragraph (c)(3) of this section, 

DP1’s section 358 basis in the FA stock 

($80x) received in exchange for its DC stock 

must be reduced by $25x, the amount by 

which DP1’s share of inside gain ($45x) 

exceeds DP1’s $20x outside gain. DP1’s share 

of inside gain is determined based on its 50% 

ownership interest (by value) in DC at the 

time of the section 361 exchange. Because DC 

does not recognize gain on the section 361 

exchange with respect to DP1, DP1’s share of 

inside gain is not reduced under paragraph 

(c)(3)(i)(A) of this section. DP1’s $20x outside 

gain equals the product of the section 367(a) 

percentage (100%) and the amount by which 

the fair market value ($100x) of the FA stock 

received by DP1 in exchange for its DC stock 

exceeds the section 358 basis of such FA 

stock ($80x). As adjusted, DP1’s basis in its 

FA stock is $55x. Similarly, under paragraph 

(c)(3) of this section, DP2’s section 358 basis 

in the FA stock ($50x) received in exchange 

for its DC stock must be reduced by $17x, the 

amount by which DP2’s share of inside gain 

($27x) exceeds DP1’s $10x outside gain. 

DP2’s share of inside gain is determined 

based on its 30% ownership interest (by 

value) in DC at the time of the section 361 

exchange. Because DC does not recognize 

gain on the section 361 exchange with 

respect to DP2, DP2’s share of inside gain is 

not reduced under paragraph (c)(3)(i)(A) of 

this section. DP2’s $10x outside gain equals 

the product of the section 367(a) percentage 

(100%) and the amount by which the fair 

market value ($60x) of the FA stock received 

by DP2 in exchange for its DC stock exceeds 

the section 358 basis of such stock ($50x). As 

adjusted, DP2’s basis in its FA stock is $33x. 

(F) Under paragraph (c)(4) of this section, 

DC must comply with the requirements of 

§ 1.6038B–1(c)(6)(iii). 

Example 2. Triangular reorganization 

involving the exchange of section 367(d) 

property for stock and cash. (i) Facts. (A) DP1 

wholly owns DC. DP1 and DC file a 

consolidated return. DP1’s DC stock has a 

$175x basis and $200x fair market value. DC 

owns Business A ($10x basis and $150x fair 

market value) and a patent ($0x basis and 

$50x fair market value). The patent is section 

367(d) property. FP wholly owns FA. 

(B) In a triangular reorganization described 

in section 368(a)(1)(A) by reason of section 

368(a)(2)(D), DC transfers Business A and the 

patent to FA in exchange for $180x of FP 

stock and $20x cash. DC’s transfer of 

Business A and the patent to FA is a section 

361 exchange. DP1 exchanges its DC stock for 

the $180x of FP stock and the $20x cash 

pursuant to section 356. The triangular 

reorganization constitutes an indirect stock 

transfer under § 1.367(a)–3(d)(1)(i), and DP1 

files a gain recognition agreement under 

§ 1.367(a)–8 with respect to such transfer. 

(ii) Result. (A) Under section 367(a)(5) and 

paragraph (b) of this section, DC’s transfer of 

Business A to FA is subject to the general 

rule of section 367(a)(1). As a result, DC must 

generally recognize $140x gain on the 

transfer of Business A to FA notwithstanding 

the application of section 361. However, if 

the requirements of paragraph (c) of this 

section are satisfied, DC’s transfer of Business 

A to FA may be eligible for the active foreign 

trade or business exception provided by 

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

§ 1.367(a)–2T for the requirements of the 

active foreign trade or business exception. 

For rules applicable to DC’s transfer of the 

patent to FA, see section 367(d) and the 

regulations under that section. 

(B) The requirement of paragraph (c)(1) of 

this section is satisfied because DC is 

controlled (within the meaning of section 

368(c)) by DP1 at the time of the section 361 

exchange. 

(C) DC is not required to recognize gain 

under paragraph (c)(2)(i) of this section 

because at the time of the section 361 

exchange DC is wholly owned by DP1, a 

control group member. Under paragraph 

(c)(2)(ii) of this section, DC must recognize 

$5x gain, the amount by which the product 

of the inside gain ($140x) and DP1’s 100% 

ownership interest (by value) in DC at the 

time of the section 361 exchange exceeds the 

product of the section 367(a) percentage 

(75%) and the fair market value ($180x) of 

the FP stock received by DP1 in exchange for 

DC stock. The $140x inside gain equals the 

aggregate gross fair market value of Business 

A ($150x) less the inside basis ($10x). Under 

paragraph (e)(1) of this section, the $5x gain 

recognized is allocated to Business A. Under 

§ 1.1502–32(b)(2), DP1 increases the basis of 

its DC stock by $5x. 

(D) Under paragraph (c)(3) of this section, 

DP1’s section 358 basis ($180x) in the FP 

stock ($180x basis of DC stock, decreased by 

$20x cash received, and increased by the 

$20x gain recognized under section 356) is 

reduced by $135x, the amount by which the 

product of the $140x inside gain, reduced by 

the $5x recognized by DC under paragraph 

(c)(2)(ii) ($135x) and DP1’s 100% ownership 

interest (by value) in DC at the time of the 

exchange exceeds DP1’s outside gain ($0x). 

The $0x outside gain equals the product of 

the section 367(a) percentage (75%) and the 

amount by which the fair market value of the 

FP stock received by DP1 ($180x) exceeds the 

section 358 basis of such stock ($180x). As 

adjusted, DP1’s basis in the FP stock is $45x. 

(E) Under paragraph (c)(4)(i) of this section, 

DC must comply with the requirements of 

§ 1.6038B–1(c)(6)(iii). 

Example 3. Adjustment to basis of multiple 

blocks of stock. (i) Facts.(A) DP1 wholly 

owns DC. DP1’s DC stock is divided into two 

blocks of stock (Block 1 and Block 2). Block 

1 has a $60x basis and $100x fair market 

value. Block 2 has a $120x basis and $100x 

fair market value. DC owns Business A ($15x 

basis and $150x fair market value) and a 

patent ($0x basis and $50x fair market value). 

The patent is section 367(d) property. 

(B) In a reorganization described in section 

368(a)(1)(F), DC transfers Business A and the 

patent to FA, a newly-formed corporation, in 

exchange for 2 shares of FA stock. DC’s 

transfer of Business A and the patent to FA 

qualifies as a section 361 exchange. DP1 

exchanges Block 1 and Block 2 for the two 

shares of FA stock pursuant to section 354. 

Pursuant to § 1.358–2(a)(2)(i), one share of 

the FA stock corresponds to Block 1 (Share 

1) and the other share of FA stock 

corresponds to Block 2 (Share 2). The basis 

and holding period of Share 1 and Share 2 

correspond to the basis and holding period 

of Block 1 and Block 2, respectively. 

(ii) Result. (A) Under section 367(a)(5) and 

paragraph (b) of this section, DC’s transfer of 

Business A to FA is subject to the general 

rule of section 367(a)(1). As a result, DC must 

generally recognize $135x gain on the 

transfer of Business A to FA notwithstanding 

the application of section 351 or section 361. 

However, if the requirements of paragraph (c) 

of this section are met, DC’s transfer of 

Business A to FA may be eligible for the 

active foreign trade or business exception 

provided in section 367(a)(3). See § 1.367(a)–

2T for the requirements of the active foreign 

trade or business exception. For rules 

applicable to DC’s transfer of the patent to 

FA, see section 367(d) and the regulations 

under that section. 

(B) The requirement of paragraph (c)(1) of 

this section is satisfied because DC is 

controlled (within the meaning of section 

368(c)) by DP1 at the time of the section 361 

exchange. 

(C) DC is not required to recognize gain 

under paragraph (c)(2)(i) of this section 

because, at the time of the section 361 

exchange, DC is wholly owned by DP1. DC 

is not required to recognize gain under 

paragraph (c)(2)(ii) of this section because 

DP1’s 100% share of inside gain ($135x) does 

not exceed the product of the section 367(a) 

percentage (75%) and the fair market value 

($200x) of the FA stock received by DP1 in 

exchange for its DC stock ($150x). Under 

paragraph (f)(6) of this section, the $135x 

inside gain equals the aggregate gross fair 

market value of the section 367(a) property 

($150x) less the inside basis ($15x). 

(D) Under paragraph (c)(3) of this section, 

DP1’s aggregate section 358 basis in Share 1 

($60x) and Share 2 ($120x) must be reduced 

by $120x, the amount by which DP1’s 100% 

share of inside gain ($135x) exceeds DP1’s 

$15x outside gain. The $15x outside gain 

equals the product of the section 367(a) 

percentage (75%) and the amount by which 

the fair market value of the FA stock received 

by DP1 ($200x) exceeds the section 358 basis 

of the FA stock ($180x) (75% of $20x). 

(E) Under paragraph (c)(3)(ii)(B) of this 

section, the $120x reduction to basis is 

allocated between Share 1 and Share 2 based 

on the relative section 358 basis of each 

share. Therefore, the basis in Share 1 is 


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reduced by $40x ($120x multiplied by $60x/ 

$180x). As adjusted, DP1’s basis in Share 1 

is $20x. The basis in Share 2 is reduced by 

$80x ($120x multiplied by $120x/$180x). As 

adjusted, DP1’s basis in Share 2 is $40x. 

(F) Under paragraph (c)(4)(i) of this section, 

DC must comply with the requirements of 

§ 1.6038B–1(c)(6)(iii). 

(h) Applicable cross-references. For 

rules relating to the character, source, 

and adjustments resulting from gain 

recognized by a U.S. transferor under 

section 367(a), see § 1.367(a)–1T(b)(4). 

For rules relating to the acquisition of 

the stock or assets of a foreign 

corporation by another foreign 

corporation, see § 1.367(b)–4. For rules 

relating to transfers of section 367(d) 

property by a U.S. transferor to a foreign 

corporation, see section 367(d) and the 

regulations under that section. For rules 

relating to distributions of stock of a 

foreign corporation by a domestic 

corporation under section 355 or 361, 

see §§ 1.1248(f)–1 through –3. For 

additional rules relating to certain 

reporting requirements of a U.S. 

transferor, see § 1.6038B–1. 

(i) [Reserved.] 

(j) Effective/applicability date. This 

section shall apply to transfers 

occurring on or after the date 30 days 

after the date these regulations are 

published as final regulations in the 

Federal Register. 

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

by: 

1. Revising paragraphs (b)(1)(i)(B)(2), 

(b)(1)(ii), and (b)(1)(iii), Example 4 (ii). 

2. Adding paragraph (b)(1)(iii), 

Example 5. 

The revisions and additions to read as 

follows: 

§ 1.367(b)–4 Acquisition of foreign 

corporate stock or assets by a foreign 

corporation in certain nonrecognition 

transactions. 

* * * * * 

(b) * * * 

(1) * * * 

(i) * * * 

(B) * * * 

(2) Immediately after the exchange, 

the foreign acquiring corporation or the 

foreign acquired corporation (if any, 

such as in the case of the acquisition of 

the stock of a foreign acquired 

corporation) is not a controlled foreign 

corporation as to which the United 

States person described in paragraph 

(b)(1)(i)(A) of this section is a section 

1248 shareholder. 

(ii) Special rules for certain triangular 

reorganizations—(A) Exception for 

receipt of domestic stock. In the case of 

a triangular reorganization described in 

§ 1.358–6(b)(2), or a reorganization 

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

(a)(2)(D), an exchange is not described 

in paragraph (b)(1)(i) of this section if—

(1) The stock received in the exchange 

is stock of a domestic corporation that 

immediately after the exchange is a 

section 1248 shareholder of—

(i) The foreign acquired corporation, 

in the case of a triangular B 

reorganization or a reorganization in 

which stock of the foreign acquired 

corporation is acquired pursuant to a 

transfer to which the exception 

provided in § 1.367(a)–7(c) applies; or 

(ii) The surviving corporation, in the 

case of a transaction that is not 

described in paragraph (b)(1)(ii)(A)(1)(i) 

of this section and that is a triangular C 

reorganization, a forward triangular 

merger, a reorganization described in 

section 368(a)(1)(G) and (a)(2)(D), or a 

reverse triangular merger; and 

(2) The foreign acquired corporation 

or surviving corporation is a controlled 

foreign corporation. See paragraph 

(b)(1)(iii) of this section, Example 3B for 

an illustration of this rule. 

(B) Adjustments to basis of stock of 

foreign acquiring corporation—(1) 

Transfers to which exception under 

§ 1.367(a)–7(c) applies. If the stock of 

the foreign acquired corporation is 

acquired by the foreign acquiring 

corporation pursuant to a triangular 

reorganization described in § 1.358–

6(b)(2)(i) through (iii), or a 

reorganization described in section 

368(a)(1)(G) and (a)(2)(D), to which the 

exception provided in § 1.367(a)–7(c) 

applies and that is not described in 

paragraph (b)(1)(i) of this section, the 

corporation (foreign or domestic) that 

controls the foreign acquiring 

corporation shall apply the principles of 

§ 1.367(b)–13 to adjust the basis of the 

stock of the foreign acquiring 

corporation so that the section 1248 

amount attributable to the stock of the 

foreign acquired corporation 

(determined when the foreign acquiring 

corporation acquires such stock) is 

reflected in the stock of the foreign 

acquiring corporation immediately after 

the exchange. See paragraph (b)(1)(iii) of 

this section, Example 5, for an 

illustration of this rule. 

(2) Other triangular reorganizations. 

See § 1.367(b)–13(c) for rules regarding 

the adjustment to the basis of the stock 

of the foreign acquiring corporation in 

other triangular reorganizations 

described in paragraph (b)(1)(ii)(A)(1)(ii) 

of this section. 

(iii) * * * 

Example 4. * * * 

(ii) Result. DC2, the exchanging 

shareholder, is a U.S. person and a section 

1248 shareholder with respect to FC2, the 

foreign acquired corporation. Whether DC2 is 

required to include in income the section 

1248 amount attributable to the FC2 stock 

under paragraph (b)(1)(i) of this section 

depends on whether, immediately after DC2’s 

exchange of the FC2 stock for FC1 stock (and 

before the distribution of the FC1 stock to 

DC1 under section 361(c)(1)), FC1 and FC2 

are controlled foreign corporations as to 

which DC2 is a section 1248 shareholder. If, 

immediately after the exchange, FC1 and FC2 

are both controlled foreign corporations as to 

which DC2 is a section 1248 shareholder, 

then DC2 is not required to include in 

income the section 1248 amount attributable 

to the FC2 stock under paragraph (b)(1)(i) 

because neither condition in paragraph 

(b)(1)(i)(B) is satisfied. Alternatively, if 

immediately after the exchange either FC1 or 

FC2 is not a controlled foreign corporation as 

to which DC2 is a section 1248 shareholder 

then, pursuant to paragraph (b)(1)(i) of this 

section, DC2 must include in income the 

section 1248 amount attributable to the FC2 

stock exchanged. For the treatment of DC2’s 

transfer of assets to FC1, see also section 

367(a)(1) and (a)(3) and the regulations under 

that section. Because DC2’s transfer of assets 

to FC1 is described in section 361(a) or (b), 

see section 367(a)(5) and § 1.367(a)–7. If any 

of the assets transferred are intangible assets, 

see section 367(d) and the regulations under 

that section. With respect to DC2’s 

distribution of the FC1 stock to DC1 under 

section 361(c)(1), see section 1248(f)(1), 

§ 1.1248(f)–1 and § 1.1248(f)–2. 

Example 5. (i) Facts. DC1, a domestic 

corporation, wholly owns DC2, a domestic 

corporation. DC1’s DC2 stock has a $30 basis 

and a $100 fair market value. DC2’s only 

asset is all the outstanding stock of FC2, a 

foreign corporation. DC2’s FC2 stock has a 

$30 basis, $100 fair market value and a $20 

section 1248 amount. USP, a domestic 

corporation unrelated to DC1, DC2 or FC2, 

wholly owns FC1, a foreign corporation. In 

a triangular reorganization described in 

section 368(a)(1)(C), DC2 transfers all the FC2 

stock to FC1 in exchange solely for voting 

stock of USP and then distributes the USP 

stock to DC1 under section 361(c)(1). DC1 

exchanges its DC2 stock for the USP stock 

under section 354. DC2’s transfer of the FC2 

stock to FC1 is described in section 361(a) 

and therefore, under section 367(a)(5) and 

§ 1.367(a)–7, is generally subject to section 

367(a)(1). However, DC2’s transfer of the FC2 

stock to FC1 qualifies for the exception 

provided in § 1.367(a)–7(c). DC1 and DC2 

elect to apply the rules of § 1.367(a)–7(c) in 

accordance with § 1.367(a)–7(c)(5). DC1 is 

not required to adjust the basis of its USP 

stock (determined under section 358) under 

section 367(a)(5) and § 1.367(a)–7(c)(3). 

(ii) Result. Under paragraph (b)(1)(ii)(A) of 

this section, because the stock received by 

DC2 in exchange for its FC2 stock is stock of 

a domestic corporation (USP) and, 

immediately after the exchange, USP is a 

section 1248 shareholder of FC2 (the foreign 

acquired corporation) and FC2 is a controlled 

foreign corporation, DC2’s exchange of its 

FC2 stock for USP stock is not described in 

paragraph (b)(1)(i) of this section. Therefore, 

DC2 is not required to include in income the 

section 1248 amount attributable to the FC2 

stock. Under paragraph (b)(1)(ii)(B)(1) of this 

section, USP must apply the principles of 


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§ 1.367(b)–13 to adjust the basis of its FC1 

stock so that the $20 section 1248 amount 

attributable to the FC2 stock at the time of 

the exchange is reflected in the FC1 stock 

immediately after the exchange. Under the 

principles of § 1.367(b)–13, each share of FC1 

stock held by USP after the exchange must 

be divided into one portion attributable to 

the FC1 stock immediately before the 

exchange and one portion attributable to the 

FC2 stock acquired in the exchange. The $30 

basis in the FC2 stock and the earnings and 

profits attributable to the FC2 stock before 

the exchange are attributable to the divided 

portions of the FC1 stock to which the FC2 

stock relates. 

* * * * * 

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

by revising paragraph (a)(1) to read as 

follows: 

§ 1.367(b)–6 Effective dates and 

coordination rules. 

(a) Effective date—(1) In general—(A) 

Except as otherwise provided in this 

paragraph (a)(1) and paragraph (a)(2) of 

this section, §§ 1.367(b)–1 through 

1.367(b)–5, and this section, apply to 

section 367(b) exchanges that occur on 

or after February 23, 2000. 

(B) The rules of §§ 1.367(b)–3 and 

1.367(b)–4, as they apply to 

reorganizations described in section 

368(a)(1)(A) (including reorganizations 

described in section 368(a)(2)(D) or (E)) 

involving a foreign acquiring or foreign 

acquired corporation, apply only to 

transfers occurring on or after January 

23, 2006. 

(C) The second sentence of paragraph 

(a) in § 1.367(b)–4 applies to section 

304(a)(1) transactions occurring on or 

after February 23, 2006; however, 

taxpayers may rely on this sentence for 

all section 304(a)(1) transactions 

occurring in open taxable years. 

(D) Section 1.367(b)–1(c)(2)(v), 

(c)(3)(ii)(A), (c)(4)(iv), (c)(4)(v), 

§ 1.367(b)–2(j)(1)(i), (l), and § 1.367(b)–

3(e) and (f), apply to section 367(b) 

exchanges that occur on or after 

November 6, 2006. For guidance with 

respect to § 1.367(b)–1(c)(3)(ii)(A) and 

(c)(4)(iv) and (v) and § 1.367(b)–2(j)(1)(i) 

for exchanges that occur before 

November 6, 2006, see 26 CFR part 1 

revised as of April 1, 2006. 

(E) Section 1.367(b)–4(b)(1)(ii) and 

§ 1.367(b)–4(b)(1)(iii), Examples 4 and 5 

apply to section 367(b) exchanges that 

occur on or after the date that is 30 days 

after the date these regulations are 

published as final regulations in the 

Federal Register. For guidance with 

respect to § 1.367(b)–4(b)(1)(ii) and 

§ 1.367(b)–4(b)(1)(iii), Example 4, for 

exchanges that occur before the date 30 

days after the date these regulations are 

published as final regulations in the 

Federal Register, see 26 CFR part 1 

revised as of April 1 for the year before 

the date these regulations are published 

as final regulations in the Federal 

Register. 

* * * * * 

Par. 8. 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 

1.1248–1(a)(1), second to last sentence.1248(f) 1248(g) 

1.1248–1(a)(1), last 

sentence.

1248(g) 1248(h) 

1.1248–3(a)(6), first 

sentence.

1.1248–4 1.1248–2 

1.1248–3(a)(6), first 

sentence.

1.1248–7 1.1248–8 

1.1248–7(a)(1), second to last sentence.1248(g) 1248(h) 

Par. 9. Section 1.1248–1 is amended 

by: 

1. Revising paragraphs (b) and (e). 

2. Revising the second sentence of 

paragraph (c). 

The revisions to read as follows. 

§ 1.1248–1 Treatment of gain from certain 

sales or exchanges of stock in certain 

foreign corporations. 

* * * * * 

(b) Sale or exchange. For purposes of 

this section and §§ 1.1248–2 through 

1.1248–8, the term sale or exchange 

includes the receipt of a distribution 

that is treated as in exchange for stock 

under section 302(a) (relating to 

distributions in redemption of stock) or 

section 331(a) (relating to distributions 

in complete liquidation of a 

corporation). 

(c) * * * Thus, for example, if a 

United States person exchanges stock in 

a foreign corporation and no gain is 

recognized on such exchange under 

section 332, 351, 354, 355, or 361, 

taking into account the application of 

section 367, then no amount is 

includible in the gross income of such 

person as a dividend under section 

1248(a). 

* * * * * 

(e) Exceptions. Under section 1248(g), 

this section and §§ 1.1248–2 through 

1.1248–8 shall not apply to: 

(1) Distributions to which section 303 

(relating to distributions in redemption 

of stock to pay death taxes) applies; or 

(2) Any amount to the extent that 

such amount is, under any other 

provision of the Internal Revenue Code 

(Code), treated as (i) a dividend, (ii) gain 

from the sale of an asset which is not 

a capital asset, or (iii) gain from the sale 

of an asset held for not more than 1 

year. 

* * * * * 

Par. 10. Section 1.1248–6 is amended 

by: 

1. Adding a new sentence at the end 

of paragraph (a). 

2. Adding paragraphs (d) and (e). 

The additions to read as follows: 

1.1248–6 Sale or exchange of stock in 

certain domestic corporations. 

(a) * * * See paragraph (d) of this 

section for a rule suspending the 

application of this section in certain 

circumstances. 

* * * * * 

(d) Temporary suspension of section 

1248(e). Section 1248(e) and the rules of 

this section shall not apply to a sale, 

exchange, or other disposition of the 

stock of a domestic corporation during 

a period when capital gains are taxed at 

a rate that equals or exceeds the rate at 

which ordinary income is taxed. 

(e) Effective/applicability date. 

Paragraph (d) of this section shall apply 

to a sale, exchange, or other disposition 

of the stock of a domestic corporation 

on or after September 21, 1987. 

Par. 11. Section 1.1248–8 is amended 

by: 

1. Revising paragraphs (a)(3), 

(b)(1)(iv)(A), (b)(2)(i), and (d). 

2. Adding new paragraph (b)(2)(iv). 

The revisions and addition to read as 

follows: 

§ 1.1248–8 Earnings and profits 

attributable to stock following certain nonrecognition transactions. 

(a) * * * 

(3) Application of section 381. Stock 

of a foreign corporation that receives 

assets in a transfer to which section 

361(a) or (b) applies in connection with 

a reorganization described in section 

368(a)(1)(A), (C), (D), (F), or (G), or in a 

distribution to which section 332 

applies, and to which section 

381(c)(2)(A) and § 1.381(c)(2)–1(a) 

apply. See paragraph (b)(6) of this 

section; or 

* * * * * 

(b) * * * 

(1) * * * 

(iv) * * * 

(A) In a restructuring transaction 

qualifying as a nonrecognition 

transaction within the meaning of 

section 7701(a)(45) and described in 

section 354, 356, or 361(a) or (b), stock 

in an acquired corporation for stock in 

either a foreign acquiring corporation or 

a foreign corporation that is in control, 

within the meaning of section 368(c), of 

an acquiring corporation (whether 

domestic or foreign); or 

* * * * * 


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(2) * * * 

(i) Exchanging shareholder exchanges 

property that is not stock of a foreign 

acquired corporation with respect to 

which the exchanging shareholder is a 

section 1248 shareholder or a foreign 

corporate shareholder. Except as 

provided in paragraph (b)(2)(iv) of this 

section, where the exchanging 

shareholder exchanges in a restructuring 

transaction property that is not stock of 

a foreign acquired corporation with 

respect to which the exchanging 

shareholder is a section 1248 

shareholder or a foreign corporate 

shareholder immediately before such 

transaction, the earnings and profits 

attributable to the stock that the 

exchanging shareholder receives in the 

restructuring transaction shall be 

determined in accordance with 

§ 1.1248–2 or § 1.1248–3, whichever is 

applicable, without regard to any 

portion of the section 1223(1) holding 

period in that stock that is before the 

restructuring transaction. See paragraph 

(b)(7) Example 1 of this section. 

* * * * * 

(iv) Exchanging shareholder 

exchanges stock of a domestic acquired 

corporation for stock of a foreign 

corporation with respect to which the 

exchanging shareholder is a section 

1248 shareholder after the exchange. If 

in a restructuring transaction described 

in § 1.1248(f)–2(c) and to which the 

exception provided by § 1.1248(f)–

2(c)(1) applies, the earnings and profits 

attributable to a portion of a share of 

stock of a foreign corporation created 

pursuant to § 1.1248(f)–2(c)(2) (or a 

whole share, if no division is required) 

shall be determined pursuant to 

paragraphs (b)(2)(iv)(A) and (B) of this 

section. 

(A) The earnings and profits 

attributable to a portion of a share of 

stock created pursuant to § 1.1248(f)–

2(c)(2)(i) (or a whole share, if no 

division is required) shall be the 

earnings and profits attributable to the 

stock of the foreign corporation received 

by the section 1248 shareholder under 

section 354, 355, or 356 determined in 

accordance with § 1.1248–2 or § 1.1248–

3, whichever is applicable, without 

regard to any portion of the section 

1223(1) holding period in that stock that 

is before the restructuring transaction. 

(B) The earnings and profits 

attributable to a portion of a share of 

stock created under § 1.1248(f)–

2(c)(2)(ii) (or whole share, if no division 

is required) shall be the sum of—

(1) The earnings and profits 

attributable to the stock of the foreign 

corporation transferred in the section 

361 exchange that relates to such 

portion (or share) multiplied by the 

section 1248 shareholder’s ownership 

interest (by value) in the domestic 

distributing corporation at the time of 

the restructuring transaction; and 

(2) The earnings and profits 

attributable to the stock of the foreign 

corporation received by the section 1248 

shareholder under section 354, 355, or 

356 determined in accordance with 

§ 1.1248–2 or § 1.1248–3, whichever is 

applicable, without regard to any 

portion of the section 1223(1) holding 

period in that stock that is before the 

restructuring transaction. See 

§ 1.1248(f)–2(d), Examples 2 through 4. 

* * * * * 

(d) Effective/applicability dates—(1) 

General rule. Except as provided in 

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

section applies to income inclusions 

that occur on or after July 30, 2007. 

(2) Exception. Paragraph (b)(2)(iv) of 

this section applies to restructuring 

transactions occurring on or after the 

date 30 days after the date these 

regulations are published as final 

regulations in the Federal Register. 

Par. 12. Section 1.1248(f)–1 is added 

to read as follows: 

§ 1.1248(f)–1 Certain nonrecognition 

distributions. 

(a) Scope and purpose. This section 

and §§ 1.1248(f)–2 and 1.1248(f)–3 

provide rules that apply when a 

domestic corporation (domestic 

distributing corporation) distributes 

stock of a foreign corporation (foreign 

distributed corporation) in a 

distribution to which section 337, 355, 

or 361 applies. The purpose of this 

section is to confirm the general rule of 

section 1248(f)(1) that requires the 

domestic distributing corporation to 

include in gross income the section 

1248 amount or section 1248(f) amount, 

as applicable, that is attributable to the 

stock of the foreign distributed 

corporation distributed under section 

337, 355, or 361, and to provide 

exceptions to the general rule to the 

extent the section 1248 amount or 

section 1248(f) amount, as applicable, 

can be preserved immediately following 

the distribution in the hands of a 

distributee that is a domestic 

corporation. This section provides the 

general rule and definitions. Section 

1.1248(f)–2 provides the exceptions to 

the general rule. Section 1.1248(f)–3 

provides a reasonable cause exception 

for a failure to comply with certain 

requirements of § 1.1248(f)–2. Section 

1.1248(f)–3 also provides the effective 

dates of this section and § 1.1248(f)–2. 

(b) General rule—(1) Section 337 

distributions. Except as provided in 

§ 1.1248(f)–2(a), a domestic distributing 

corporation that is a section 1248 

shareholder of a foreign distributed 

corporation and that distributes stock of 

such corporation in a distribution to 

which section 337 applies (section 337 

distribution), shall, notwithstanding any 

other provision of subtitle A, include in 

gross income as a dividend the section 

1248 amount attributable to the 

distributed stock. This paragraph (b)(1) 

shall apply only to the extent the 

domestic distributing corporation does 

not recognize gain on the section 337 

distribution under any other provision 

of subtitle A. 

(2) Certain section 355 distributions. 

Except as provided in § 1.1248(f)–2(b), a 

domestic distributing corporation that is 

a section 1248 shareholder of a foreign 

distributed corporation and that 

distributes stock of such corporation, 

other than stock received in a section 

361 exchange, in a distribution to which 

section 355 applies (section 355 

distribution), shall, notwithstanding any 

other provision of subtitle A, include in 

gross income as a dividend the section 

1248 amount attributable to the 

distributed stock. This paragraph (b)(2) 

shall apply only to the extent the 

domestic distributing corporation does 

not recognize gain on the section 355 

distribution under any other provision 

of subtitle A. 

(3) Distributions pursuant to a plan of 

reorganization. Except as provided in 

§ 1.1248(f)–2(c), a domestic distributing 

corporation that is a section 1248 

shareholder of a foreign distributed 

corporation and that distributes stock of 

such corporation received in a section 

361 exchange in a section 355 

distribution or a distribution to which 

section 361 applies (section 361 

distribution), shall, notwithstanding any 

other provision of subtitle A, include in 

gross income as a dividend the section 

1248(f) amount attributable to the stock 

distributed. This paragraph (b)(3) shall 

apply without regard to the amount of 

gain realized by the domestic 

distributing corporation on the 

distribution. 

(c) Definitions. Except as otherwise 

provided, the following definitions 

apply for purposes of this section and 

§§ 1.1248(f)–2 and 1.1248(f)–3. 

(1) 80-percent distributee is a 

corporation described in section 337(c). 

(2) Block of stock has the meaning set 

forth in § 1.1248–2(b). 

(3) Distributee is a shareholder of the 

domestic distributing corporation that 

receives stock of a foreign distributed 

corporation in a section 355 distribution 

or section 361 distribution. 

(4) Postdistribution amount is the 

section 1248 amount attributable to the 

stock of a foreign distributed 


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corporation received (or deemed 

received) by a distributee, computed 

immediately after the distribution but 

without taking into account any 

adjustments to the basis of such stock 

under § 1.1248(f)–2(b)(3) or (c)(3). The 

postdistribution amount attributable to 

stock of a foreign distributed 

corporation received in a section 355 

distribution described in paragraph 

(b)(2) of this section shall be determined 

based on the distributee’s holding 

period in such stock as adjusted under 

§ 1.1248(f)–2(b)(2). The postdistribution 

amount attributable to stock of a foreign 

distributed corporation received in a 

section 355 distribution or section 361 

distribution described in paragraph 

(b)(3) of this section shall be determined 

after applying the rules in §§ 1.1248–

8(b)(2)(iv) and 1.1248(f)–2(c)(2). 

(5) Section 358 basis is the basis of 

stock determined under section 358 and 

the regulations under that section. 

(6) Section 361 exchange is an 

exchange described in section 361(a) or 

(b). 

(7) Section 1248 amount is the net 

positive earnings and profits (if any) 

attributable to the stock of the foreign 

distributed corporation under § 1.1248–

2 or § 1.1248–3 (as adjusted by § 1.1248–

8) and that would be included in gross 

income as a dividend under section 

1248(a) if the stock were sold by the 

holder of such stock. 

(8) Section 1248(f) amount is the 

aggregate amount of the net positive 

earnings and profits (if any) attributable 

to the stock of each foreign corporation, 

under § 1.1248–2 or § 1.1248–3 (as 

adjusted by § 1.1248–8), transferred by 

the domestic distributing corporation to 

the foreign distributed corporation in 

the section 361 exchange that precedes 

the section 355 distribution or section 

361 distribution of the stock of the 

foreign distributed corporation, and that 

would be included in gross income as 

a dividend under section 964(e) by the 

foreign distributed corporation if it sold 

such stock immediately after the section 

361 exchange. The section 1248(f) 

amount is attributable to the stock of the 

foreign distributed corporation received 

in the section 361 exchange. 

(9) Section 1248 shareholder is a 

domestic corporation that satisfies the 

ownership requirements of section 

1248(a)(2) with respect to a foreign 

corporation. 

(10) Timely-filed return is a U.S. 

income tax return filed on or before the 

due date set forth in section 6072(b), 

plus any extension of time to file such 

return granted under section 6081. 

Par. 13. Section 1.1248(f)–2 is added 

to read as follows: 

§ 1.1248(f)–2 Exceptions for certain 

distributions. 

(a) Section 337 distributions. Section 

1.1248(f)–1(b)(1) shall not apply to a 

section 337 distribution of stock of the 

foreign distributed corporation if the 

conditions of paragraphs (a)(1) through 

(a)(3) of this section are satisfied. 

(1) 80-percent distributee is a section 

1248 shareholder. Immediately after the 

section 337 distribution, the 80-percent 

distributee is a section 1248 shareholder 

with respect to the foreign distributed 

corporation. 

(2) Holding period. The 80-percent 

distributee is treated as holding the 

stock of the foreign distributed 

corporation received in the section 337 

distribution for the period during which 

the stock was held by the domestic 

distributing corporation. 

(3) Basis. The 80-percent distributee’s 

basis in the stock of the foreign 

distributed corporation received in the 

section 337 distribution does not exceed 

the domestic distributing corporation’s 

basis in such stock at the time of the 

section 337 distribution. 

(b) Certain section 355 distributions. 

Section 1.1248(f)–1(b)(2) shall not apply 

to a section 355 distribution of stock of 

the foreign distributed corporation not 

received by the domestic distributing 

corporation in a section 361 exchange to 

a distributee that is a section 1248 

shareholder with respect to the foreign 

distributed corporation immediately 

after the distribution, if the domestic 

distributing corporation and all such 

section 1248 shareholders elect to apply 

the provisions of this paragraph (b) in 

accordance with paragraph (b)(1) of this 

section. See paragraphs (b)(2) and (b)(3) 

of this section for adjustments that 

occur as a result of electing to apply the 

provisions of this paragraph (b). 

(1) Election and reporting—(i) 

Statement required by section 1248 

shareholders and domestic distributing 

corporation—(A) In general. The 

domestic distributing corporation and 

the section 1248 shareholders elect to 

apply the provisions of paragraph (b) of 

this section by each including a 

statement, described in paragraph 

(b)(1)(i)(B) of this section, with its 

timely-filed return for the taxable year 

during which the section 355 

distribution occurs and by entering into 

a written agreement described in 

paragraph (b)(1)(ii) of this section. If the 

domestic distributing corporation or a 

section 1248 shareholder is a member of 

a consolidated group at the time of the 

section 355 distribution, the common 

parent of the consolidated group makes 

the election on behalf of the domestic 

distributing corporation or section 1248 

shareholder. The election made under 

this paragraph (b)(1) is irrevocable. 

(B) Form and content. The statement 

of election must be entitled, 

STATEMENT TO ELECT TO APPLY 

EXCEPTION UNDER § 1.1248(f)–2(b). 

The statement must state that the 

domestic distributing corporation and 

each section 1248 shareholder have 

entered into a written agreement 

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

section and must set forth the 

adjustment to each section 1248 

shareholder’s holding period or section 

358 basis (if any) in the stock of the 

foreign distributed corporation received 

in the section 355 distribution required 

under paragraph (b)(2) or (b)(3) of this 

section. 

(ii) Written agreement. The domestic 

distributing corporation and the section 

1248 shareholders must enter into a 

written agreement described in this 

paragraph (b)(1)(ii) on or before the due 

date (including extensions) of the 

domestic distributing corporation’s U.S. 

income tax return for the taxable year 

during which the section 355 

distribution occurs. Each party to the 

agreement must retain the original or a 

copy of the agreement as part of its 

records in the manner specified by 

§ 1.6001–1(e). Each party to the 

agreement must provide a copy of the 

agreement to the Internal Revenue 

Service within 30 days of the receipt of 

a request for the agreement in 

connection with an examination of the 

taxable year during which the section 

355 distribution occurs. The agreement 

must—

(A) State the document is an 

agreement under paragraph (b)(1)(ii) of 

this section; 

(B) Identify the domestic distributing 

corporation and each section 1248 

shareholder; 

(C) With respect to each section 1248 

shareholder, state the holding period in 

the stock of the foreign distributed 

corporation received in the section 355 

distribution as adjusted under 

paragraph (b)(2) of this section; and 

(D) With respect to each section 1248 

shareholder, identify the section 358 

basis of the stock of the foreign 

distributed corporation received in the 

section 355 distribution and the 

adjustment (if any) to such basis under 

paragraph (b)(3) of this section. 

(2) Holding period adjustment. For 

purposes of section 1248, immediately 

after the section 355 distribution, each 

section 1248 shareholder’s holding 

period in the stock of the foreign 

distributed corporation received in the 

section 355 distribution shall equal the 

domestic distributing corporation’s 


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holding period in such stock at the time 

of the distribution. 

(3) Basis adjustments. If the domestic 

distributing corporation’s section 1248 

amount attributable to the stock of the 

foreign distributed corporation received 

by a section 1248 shareholder in the 

section 355 distribution exceeds the 

section 1248 shareholder’s 

postdistribution amount attributable to 

such stock (excess amount), the section 

1248 shareholder’s section 358 basis in 

such stock is reduced by such excess 

amount. For an illustration of the rule 

in this paragraph (b)(3), see paragraph 

(d) of this section, Examples 1 and 4. 

(c) Distributions pursuant to a plan of 

reorganization. Section 1.1248(f)–1(b)(3) 

shall not apply to a section 355 

distribution or section 361 distribution 

of stock of the foreign distributed 

corporation received by the domestic 

distributing corporation in the section 

361 exchange that precedes the 

distribution, to a distributee that is a 

section 1248 shareholder with respect to 

the foreign distributed corporation 

immediately after the distribution, if the 

domestic distributing corporation and 

all such section 1248 shareholders elect 

to apply the provisions of this paragraph 

(c) in accordance with paragraph (c)(1) 

of this section. See paragraphs (c)(2) and 

(c)(3) of this section for the adjustments 

that result from electing to apply the 

provisions of this paragraph (c). The 

adjustments provided in paragraphs 

(c)(2) and (c)(3) of this section shall 

apply after any adjustments required 

under section 367(a)(5) and § 1.367(a)–

7(c). For illustrations of this exception, 

see paragraph (d) of this section, 

Examples 2 through 4. 

(1) Election and reporting—(i) 

Statement required by section 1248 

shareholders and domestic distributing 

corporation—(A) In general. The 

domestic distributing corporation and 

the section 1248 shareholders elect to 

apply the provisions of paragraph (c) of 

this section by each including a 

statement, in the form and with the 

content listed in paragraph (c)(1)(i)(B) of 

this section, with its timely-filed return 

for the taxable year during which the 

distribution occurs and by entering into 

a written agreement described in 

paragraph (c)(1)(ii) of this section. If the 

domestic distributing corporation or a 

section 1248 shareholder is a member of 

a consolidated group at the time of the 

distribution, the common parent of the 

consolidated group makes the election 

on behalf of the domestic distributing 

corporation or section 1248 shareholder. 

The election made under this paragraph 

(c)(1) is irrevocable. 

(B) Form and content. The statement 

of election must be entitled, 

STATEMENT TO APPLY EXCEPTION 

UNDER § 1.1248(f)–2(c). The statement 

must state that the domestic distributing 

corporation and each section 1248 

shareholder have entered into a written 

agreement described in paragraph 

(c)(1)(ii) of this section and must 

describe, with respect to each section 

1248 shareholder, the extent to which 

the shares of stock of the foreign 

distributed corporation received in the 

section 361 distribution are divided into 

portions under paragraph (c)(2) of this 

section and any adjustments to the 

section 358 basis of such stock under 

paragraph (c)(3) of this section. 

(ii) Written agreement. The domestic 

distributing corporation and the section 

1248 shareholders must enter into a 

written agreement described in this 

paragraph (c)(1)(ii) on or before the due 

date (including extensions) of the U.S. 

transferor’s U.S. income tax return for 

the taxable year during which the 

distribution occurs. Each party to the 

agreement must retain the original or a 

copy of the agreement as part of its 

records in the manner specified by 

§ 1.6001–1(e). Each party to the 

agreement must provide a copy of the 

agreement to the Internal Revenue 

Service within 30 days of the receipt of 

a request for the agreement in 

connection with an examination of the 

taxable year during which the 

distribution occurs. The agreement 

must—

(A) State the document is an 

agreement under paragraph (c)(1)(ii) of 

this section; 

(B) Identify the domestic distributing 

corporation and each section 1248 

shareholder; 

(C) With respect to each section 1248 

shareholder, describe the extent to 

which the shares of stock of the foreign 

distributed corporation are divided into 

portions under paragraph (c)(2) of this 

section; 

(D) With respect to each section 1248 

shareholder, state the amount of any 

adjustment to the section 358 basis of 

the stock of the foreign distributed 

corporation under paragraph (c)(3) of 

this section; and 

(E) With respect to each section 1248 

shareholder, state the amount of 

earnings and profits attributable to the 

stock of the foreign distributed 

corporation received in the distribution. 

See § 1.1248–8(b)(2)(iv). 

(2) Portions. If the domestic 

distributing corporation transfers 

property to the foreign distributed 

corporation in the section 361 exchange 

that precedes the section 355 

distribution or section 361 distribution, 

other than a single block of stock of a 

foreign corporation with respect to 

which the domestic distributing 

corporation is a section 1248 

shareholder at the time of the section 

361 exchange, then each share of stock 

of the foreign distributed corporation 

received by a section 1248 shareholder 

in the distribution must be divided into 

portions as follows: 

(i) One portion attributable to all 

property transferred in the section 361 

exchange, other than stock of a foreign 

corporation with respect to which the 

domestic distributing corporation is a 

section 1248 shareholder at the time of 

the section 361 exchange; and 

(ii) One portion attributable to each 

block of stock of a foreign corporation 

transferred in the section 361 exchange 

with respect to which the domestic 

distributing corporation is a section 

1248 shareholder at the time of the 

section 361 exchange. For the 

determination of the earnings and 

profits attributable to a portion of a 

share of stock of the foreign distributed 

corporation, see § 1.1248–8(b)(2)(iv). 

(3) Basis adjustments. If the section 

1248(f) amount attributable to a portion 

of a share of stock (or whole share, if no 

division is required) of the foreign 

distributed corporation received (or 

deemed received) by a section 1248 

shareholder in the distribution exceeds 

the section 1248 shareholder’s 

postdistribution amount attributable to 

such portion (or whole share, if no 

division is required) (excess amount), 

then the section 1248 shareholder’s 

section 358 basis in such portion (or 

whole share, if no division is required) 

as adjusted under § 1.367(a)–7(c)(3), is 

reduced by such excess amount. For an 

illustration of this rule, see paragraph 

(d) of this section, Example 3. 

(4) Rules applicable to divided shares 

of stock—(i) Basis. The basis of a 

portion of a share of stock of the foreign 

distributed corporation created under 

paragraph (c)(2) of this section is that 

amount of the section 1248 

shareholder’s section 358 basis (as 

adjusted under § 1.367(a)–7(c)(3)) in the 

share of stock that bears the same ratio 

that the fair market value of the property 

received by the foreign distributed 

corporation in the section 361 exchange 

to which such portion relates bears to 

the aggregate fair market value of all 

property received by the foreign 

distributed corporation in the section 

361 exchange. For illustrations of this 

rule, see paragraph (d) of this section, 

Examples 2 and 3. 

(ii) Fair market value. The fair market 

value of a portion of a share of stock of 

the foreign distributed corporation 

created under paragraph (c)(2) of this 

section is that amount of the fair market 

value of the share of stock of the foreign 


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corporation that bears the same ratio 

that the fair market value of the property 

received by the foreign distributed 

corporation in the section 361 exchange 

to which such portion relates bears to 

the aggregate fair market value of all 

property received by the foreign 

distributed corporation in the section 

361 exchange. For illustrations of this 

rule, see paragraph (d) of this section, 

Examples 2 and 3. 

(iii) Rules for subsequent exchanges. 

For purposes of determining the gain 

realized on the sale or exchange of a 

share of stock of the foreign distributed 

corporation that has a divided portion 

pursuant to paragraph (c)(2) of this 

section, the amount realized on the sale 

or exchange of such share shall be 

allocated to each divided portion based 

on the relative fair market value of the 

property to which such portion relates 

as determined at the time of the section 

361 exchange. 

(iv) Duration of divided shares. Shares 

of stock of the foreign distributed 

corporation that are divided into 

portions under paragraph (c)(2) of this 

section are not required to be divided as 

of the date on which section 1248(a) 

would not apply to a sale or exchange 

of such shares. 

(d) Examples. The rules of this section 

are illustrated by the following 

examples. The analysis of the examples 

is limited to a discussion of issues 

under this section. For purposes of the 

examples, unless otherwise indicated, 

assume: DP1, DP2, DP3, DC, and USD 

are domestic corporations; X is a United 

States resident individual; FP and FA 

are foreign corporations that are not, 

and have never been, controlled foreign 

corporations; CFC1, CFC2, and FC are 

controlled foreign corporations; each 

corporation has a single class of stock 

outstanding and uses the calendar year 

as its taxable year; each shareholder 

owns a single block of stock in each 

corporation; DC owns Business A, 

which consists solely of section 367(a) 

property that could satisfy the 

requirements of the active foreign trade 

or business exception under section 

367(a)(3) and § 1.367(a)–2T; and DC 

owns no other assets and has no 

liabilities. Further assume the 

requirements in § 1.367(a)–7(c)(5) are 

satisfied, any requirement to file a gain 

recognition agreement is satisfied, and 

no earnings and profits of a foreign 

corporation are described in section 

1248(d). 

Example 1. Section 355 distribution, gain 

recognition, and adjustment to stock basis—

(i) Facts. DP1, FP, and X own 80%, 10%, and 

10%, respectively, of the outstanding stock of 

USD. DP1’s USD stock has a $140x basis, a 

$160x fair market value, and a 2 year holding 

period. USD wholly owns FC. USD’s FC 

stock has a $50x basis, a $100x fair market 

value, a $25x section 1248 amount, and a 3 

year holding period. On December 31, Year 

3, USD distributes all of the FC stock to DP1, 

FP, and X on a pro-rata basis in a section 355 

distribution. The fair market value of the FC 

stock received by DP1, FP and X is $80x, 

$10x, and $10x, respectively. After the 

distribution, DP1’s section 358 basis in its FC 

stock is $70x. 

(ii) Result. (A) Under § 1.367(e)–1(b)(1), 

USD must recognize $5x gain on the 

distribution of FC stock to FP (10% of the 

$50x gain in the FC stock). Under § 1.367(b)–

5(b)(1)(ii), USD must recognize $5x gain on 

the distribution of FC stock to X (10% of the 

$50x gain in the FC stock). Of the aggregate 

$10x gain recognized by USD, $5x is 

recharacterized as a dividend under section 

1248(a) (20% of the section 1248 amount 

($25x) attributable to the FC stock). See 

§ 1.1248–1 for additional consequences. 

(B) USD’s distribution of FC stock to DP1 

is described in section 1248(f)(1) and 

§ 1.1248(f)–1(b)(2). As a result, USD must 

generally include in gross income as a 

dividend the section 1248 amount 

attributable to such stock ($20x, or 80% of 

the $25x section 1248 amount). However, if 

DP1 and USD elect to apply the rules of 

paragraph (b) of this section (as provided in 

paragraph (b)(1) of this section), § 1.1248(f)–

1(b)(2) shall not apply to USD’s distribution 

of FC stock to DP1. If DP1 and USD make that 

election, then: 

(1) Under paragraph (b)(2) of this section, 

for purposes of section 1248, immediately 

after the distribution DP1 will have a 3 year 

holding period in the FC stock received in 

the section 355 distribution, the same 

holding period USD had in such stock at the 

time of the distribution. 

(2) Under paragraph (b)(3) of this section, 

DP1’s section 358 basis in the FC stock ($70x) 

received in the distribution is reduced by 

$10x, the amount by which USD’s section 

1248 amount ($20x) attributable to such FC 

stock exceeds DP1’s postdistribution amount 

($10x) attributable to such stock. As adjusted 

under paragraph (b)(3) of this section, DP1’s 

basis in the FC stock is $60x. Under 

§ 1.1248(f)–1(c)(4), DP1’s postdistribution 

amount ($10x) equals the amount that DP1 

would include in gross income as a dividend 

under section 1248(a) if it sold the FC stock 

immediately after the distribution ($80x fair 

market value, $70x basis, and $20x earnings 

and profits attributable to the FC stock for 

purposes of section 1248 taking into account 

DP1’s 3-year holding period in such stock as 

required by paragraph (b)(2) of this section). 

Example 2. Section 361 distribution —(i) 

Facts. DP1, DP2, and FP own 50, 30, and 20, 

respectively, of the 100 outstanding shares of 

stock of DC. DP1’s DC stock has a $180x basis 

and a $200x fair market value. DP2’s DC 

stock has a $100x basis and $120x fair market 

value. DC owns Business A and wholly owns 

CFC1 and CFC2. DC’s Business A has a $10x 

basis and a $200x fair market value. DC’s 

CFC1 stock has a $20x basis, a $40x fair 

market value, and $30x of earnings and 

profits attributable to it for purposes of 

section 1248(a). DC’s CFC2 stock has a $30x 

basis, a $160x fair market value and $150x 

of earnings and profits attributable to it for 

purposes of section 1248(a). On December 31, 

Year 3, in a reorganization described in 

section 368(a)(1)(D), DC transfers CFC1, CFC2 

and Business A to FA in exchange for 60 

shares of FA stock. DC’s transfer of CFC1, 

CFC2 and Business A to FA in exchange for 

the 60 shares of FA stock qualifies as a 

section 361 exchange. DC distributes the FA 

stock to DP1, DP2 and FP on a pro-rata basis 

in a section 361 distribution. DP1, DP2 and 

FP exchange their DC stock for 30, 18, and 

12 shares, respectively, of FA stock pursuant 

to section 354. After the reorganization, FA 

has 100 shares of stock outstanding. DP3 

owns the other 40 shares of FA stock. 

(ii) Result. (A) In general, under section 

367(a)(5) and § 1.367(a)–7(b), DC’s transfer of 

the stock of CFC1 and CFC2 and Business A 

to FA is subject to the general rule of section 

367(a)(1). As a result, DC must generally 

recognize gain on the transfer of such 

property to FA in the section 361 exchange. 

However, if the conditions and requirements 

of § 1.367(a)–7(c) are met (which includes the 

making of the election under § 1.367(a)–

7(c)(5)), DC’s transfer of the stock of CFC1 

and CFC2 and Business A to FA may, in part, 

be eligible for the exceptions to section 

367(a)(1) provided by §§ 1.367(a)–2T and –3. 

See §§ 1.367(a)–2T and –3(b) for additional 

requirements. In addition, DC may not be 

required to include in income the section 

1248 amount attributable to the CFC1 and 

CFC2 stock under § 1.367(b)–4(b)(1). 

However, if the exception provided under 

paragraph (c) of this section does not apply, 

then under § 1.1248(f)–1(b)(3) DC must 

include in gross income as a dividend the 

section 1248(f) amounts attributable to the 

FA stock distributed. DC must include in 

income as a dividend the section 1248(f) 

amount attributable to the FA stock 

distributed to FP even if the exception 

provided by § 1.367(a)–7(c) applies. 

(B) The requirement of § 1.367(a)–7(c)(1) is 

satisfied because DC is controlled (within the 

meaning of section 368(c)) by DP1 and DP2 

at the time of the section 361 exchange. 

(C) Under § 1.367(a)–7(c)(2)(i), DC must 

recognize $68x gain on the section 361 

exchange with respect to FP. The $68x gain 

equals the product of FP’s 20% ownership 

interest in DC (by value) at the time of the 

section 361 exchange and the $340x inside 

gain. The inside gain equals the excess of the 

aggregate gross fair market value of the 

section 367(a) property ($400x) over the $60x 

inside basis. Under § 1.367(a)–7(e)(1), the 

$68x gain recognized is allocated among the 

CFC1 stock, the CFC2 stock and Business A 

in proportion to the amount of gain realized 

by DC on the transfer of such property. The 

amount allocated to the CFC1 stock is $4x 

($68x gain multiplied by $20x/$340x). The 

amount allocated to the CFC2 stock is $26x 

($68x gain multiplied by $130x/$340x). The 

amount allocated to Business A is $38x ($68x 

gain multiplied by $190x/$340x). Under 

§ 1.367(a)–1T(b)(4)(i)(B) and section 362(b), 

the basis of each asset is increased by the 

amount of gain allocated to such asset. Under 

section 1248(a), DC must include in gross 

income as a dividend the $4x gain recognized 

with respect to the CFC1 stock (20% of the 

$20x section 1248 amount attributable to 


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such stock) and the $26x gain recognized 

with respect to CFC2 stock (20% of the $130x 

section 1248 amount attributable to such 

stock). If the built-in gain in the CFC1 stock 

or CFC2 stock exceeded the section 1248 

amount attributable to such stock, the 

amount of the gain recognized by DC on the 

transfer of such stock in the section 361 

exchange recharacterized as a dividend 

under section 1248(a) would be less. 

(D) DC is not required to recognize gain on 

the section 361 exchange under § 1.367(a)–

7(c)(2)(ii) with respect to DP1 or DP2. With 

respect to DP1, the product of the inside gain 

($340x) and DP1’s 50% ownership interest 

(by value) in DC at the time of the section 361 

exchange (or $170x) does not exceed the 

product of the section 367(a) percentage 

(100%) and the fair market value of the FA 

stock received by DP1 ($200x). With respect 

to DP2, the product of the inside gain ($340x) 

and DP2’s 30% ownership percentage (by 

value) in DC at the time of the section 361 

exchange (or $102x) does not exceed the 

product of the section 367(a) percentage 

(100%) and the fair market value of the FA 

stock received by DP2 ($120x). 

(E) Under § 1.367(a)–7(c)(3), DP1’s section 

358 basis ($180x) in the FA stock received in 

the section 361 distribution is reduced by 

$150x, the amount by which DP1’s 50% 

share of inside gain ($170x) exceeds DP1’s 

$20x outside gain. DP1’s share of inside gain 

is not reduced under § 1.367(a)–7(c)(2)(ii) 

because DC did not recognize gain with 

respect to DP1. DP1’s $20x outside gain 

equals the product of the section 367(a) 

percentage (100%) and the excess of the fair 

market value of the FA stock received by DP1 

($200x) over the section 358 basis of such 

stock ($180x). As adjusted, DP1’s basis in the 

FA stock is $30x. Similarly, DP2’s section 

358 basis ($100x) in the FA stock received in 

the section 361 distribution is reduced by 

$82x, the amount by which DP2’s 30% share 

of inside gain ($102x) exceeds DP1’s $20x 

outside gain. DP2’s share of inside gain is not 

reduced under § 1.367(a)–7(c)(2)(ii) because 

DC did not recognize gain with respect to 

DP2. DP2’s $20x outside gain equals the 

product of the section 367(a) percentage 

(100%) and the excess of the fair market 

value of the FA stock received by DP2 

($120x) over the section 358 basis of such 

stock ($100x). As adjusted, DP2’s basis in the 

FA stock is $18x. 

(F) Under § 1.367(a)–7(c)(4)(i), DC must 

comply with the requirements of § 1.6038B–

1(c)(6)(iii) with respect to Business A. Under 

§ 1.367(a)–7(c)(4)(ii), DC is not required to 

comply with the requirements of § 1.6038B–

1(c)(6)(iii) with respect to the stock of CFC1 

or CFC2. 

(G) DC is not required to include in income 

as a dividend the remaining section 1248 

amount attributable to the stock of CFC1 

($16x) or CFC2 ($104x) under § 1.367(b)–

4(b)(1)(i) because immediately after the 

section 361 exchange, FA, CFC1, and CFC2 

are controlled foreign corporations with 

respect to which DC is a section 1248 

shareholder. 

(H) Under § 1.1248(f)–1(b)(3), DC must 

generally include in gross income as a 

dividend the section 1248(f) amount ($120x) 

attributable to the FA stock distributed to 

DP1, DP2 and FA in the section 361 

distribution. The section 1248(f) amount 

equals the sum of the amounts that FA would 

include in income as a dividend under 

section 964(e) if it sold the CFC1 stock ($16x 

gain and $26x earnings and profits 

attributable to such stock—calculated in 

paragraph (K)(3) of this Example) and CFC2 

stock ($104x gain and $124x earnings and 

profits attributable to such stock—calculated 

in paragraph (K)(3) of this Example) 

immediately after the section 361 exchange. 

(I) [Reserved.] 

(J) However, if DP1, DP2, and DC elect to 

apply the provisions of paragraph (c) of this 

section (as provided in paragraph (c)(1) of 

this section), then § 1.1248(f)–1(b)(3) shall 

not apply to DC’s distribution of FA stock to 

DP1 and DP2. Even if such election is made, 

however, DC must include in gross income 

as a dividend the section 1248(f) amount 

($24x) attributable to the 12 shares of FA 

stock distributed to FP (20% of the $120x 

section 1248(f) amount.) 

(K) If DP1, DP2, and DC elect to apply the 

provisions of paragraph (c) of this section, 

then under paragraph (c)(2) of this section 

each share of FA stock received by DP1 (30 

shares) and DP2 (18 shares) is divided into 

portions attributable to the CFC1 stock, the 

CFC2 stock and Business A. Under 

paragraphs (c)(4)(i) and (ii) of this section, 

the basis and fair market value of each 

portion of each share of FA stock is that 

amount of the total basis and fair market 

value of the FA stock that bears the same 

ratio that the fair market value of the 

property (exchanged for such FA stock) to 

which such portion relates bears to the 

aggregate fair market value of all property 

exchanged for the FA stock in the section 361 

exchange. 

(1) With respect to DP1’s 30 shares of FA 

stock, the portions attributable to the CFC1 

stock have an aggregate basis of $3x ($30x 

multiplied by $40x/$400x) and a fair market 

value of $20x ($200x multiplied by $40x/ 

$400x); the portions attributable to the CFC2 

stock have an aggregate basis of $12x ($30x 

multiplied by $160x/$400x) and a fair market 

value of $80x ($200x multiplied by $160x/ 

$400x), and the portions attributable to 

Business A have an aggregate basis of $15x 

($30x multiplied by $200x/$400x) and a fair 

market value of $100x (50% of $200x). 

(2) With respect to DP2’s 18 shares of FA 

stock, the portions attributable to the CFC1 

stock have an aggregate basis of $1.8x ($18x 

multiplied by $40x/$400x) and a fair market 

value of $12x ($120x multiplied by $40x/ 

$400x); the portions attributable to the CFC2 

stock have an aggregate basis of $7.2x ($18x 

multiplied by $160x/$400x) and a fair market 

value of $48x ($120x multiplied by $160x/ 

$400x); and the portions attributable to 

Business A have an aggregate basis of $9x 

($18x multiplied by $200x/$400x) and a fair 

market value of $60x ($120x multiplied by 

$200x/$400x). 

(3) Under § 1.1248–8(b)(2)(iv), the earnings 

and profits of CFC1 attributable to the 

portions of DP1’s 30 shares of FA stock 

attributable to the CFC1 stock is $13x ($26x 

earnings and profits amount multiplied by 

DP1’s 50% ownership interest (by value) in 

DC at the time of the section 361 exchange), 

and the earnings and profits of CFC2 

attributable to the portions of DP1’s 30 shares 

of FA stock attributable to the CFC2 stock is 

$62x ($124x earnings and profits amount 

multiplied by DP1’s 50% ownership interest 

in DC at the time of the section 361 

exchange). Similarly, the earnings and profits 

of CFC1 attributable to the portions of DP2’s 

18 shares of FA stock attributable to the CFC1 

stock is $7.8x ($26x earnings and profits 

amount multiplied by DP2’s 30% ownership 

interest (by value) in DC at the time of the 

section 361 exchange), and the amount of 

earnings and profits of CFC2 attributable to 

the portions of DP2’s 18 shares of FA stock 

attributable to the CFC2 stock is $37.2x 

($124x earnings and profits amount 

multiplied by DP2’s 30% ownership interest 

(by value) in DC at the time of the section 361 

exchange). The $26x earnings and profits 

with respect to the CFC1 stock equals the 

$30x earnings and profits amount attributable 

to the CFC1 stock immediately before the 

section 361 exchange reduced by the $4x 

included in income by DC as a dividend 

under section 1248(a) on the transfer of the 

CFC1 stock to FA in the section 361 

exchange. The $124x earnings and profits 

with respect to CFC2 equals the $150x 

earnings and profits attributable to the CFC2 

stock immediately before the section 361 

exchange reduced by the $26x amount 

included in income by DC as a dividend 

under section 1248(a) on the transfer of the 

CFC2 stock to FA in the section 361 

exchange. See sections 959(e) and 1248(d)(1). 

(L) Under paragraph (c)(3) of this section, 

DP1 is not required to reduce the aggregate 

section 358 basis of the portions of its 30 

shares of FA stock attributable to the CFC1 

stock or CFC2 stock. DP1’s postdistribution 

amount ($13x) attributable to the portions of 

its FA shares attributable to the CFC1 stock 

exceeds its allocable share of the section 

1248(f) amount attributable to the CFC1 stock 

immediately after the section 361 exchange 

($8x, or 50% of $16x). DP1’s postdistribution 

amount ($62x) attributable to the portions of 

its FA shares attributable to the CFC2 stock 

exceeds its allocable share of the section 

1248(f) amount attributable to the CFC2 stock 

immediately after the section 361 exchange 

($52x, or 50% of $104x). 

(M) Similarly, DP2 is not required to 

reduce the aggregate section 358 basis of the 

portions of its 18 shares of FA stock 

attributable to the CFC1 stock or CFC2 stock. 

DP2’s postdistribution amount ($7.8x) 

attributable to the portions of its FA shares 

attributable to the CFC1 stock exceeds its 

allocable share of the section 1248(f) amount 

attributable to the CFC1 stock immediately 

after the section 361 exchange ($4.8x, or 30% 

of $16x). DP2’s postdistribution amount 

($37.2x) attributable to the portions of its FA 

shares attributable to the CFC2 stock exceeds 

its allocable share of the section 1248(f) 

amount attributable to the CFC2 stock 

immediately after the section 361 exchange 

($31.2x, or 30% of $104x). 

Example 3. Section 361 distribution and 

adjustment to stock basis. (i) Facts. DP1 

wholly owns DC. DP1’s DC stock has a $180x 

basis and a $200x fair market value. DC 

wholly owns CFC1 and CFC2. DC’s CFC1 

stock has a $70x basis, a $100x fair market 


dwashington3 on PRODPC61 with PROPOSALS3
49302 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

value, and $40x of earnings and profits 

attributable to it for purposes of section 1248. 

DC’s CFC2 stock has a $130x basis, a $100x 

fair market value, and $80x of earnings and 

profits attributable to it for purposes of 

section 1248. On December 31, Year 1, in a 

reorganization described in section 

368(a)(1)(F), DC transfers the CFC1 stock and 

the CFC2 stock to FA, a newly formed 

corporation, in exchange for 100 shares of FA 

stock. DC distributes the 100 shares of FA 

stock to DP1 in a section 361 distribution. 

DC’s transfer of the stock of CFC1 and CFC2 

to FA in exchange for FA stock qualifies as 

a section 361 exchange. DP1 exchanges its 

DC stock for the 100 shares of FA stock 

pursuant to section 354. DP1 and DC elect to 

apply the rules of § 1.367(a)–7(c) in 

accordance with § 1.367(a)–7(c)(5). DC is not 

required to recognize gain under § 1.367(a)–

7(c)(2), and DP1 is not required to reduce its 

section 358 basis in the FA shares under 

§ 1.367(a)–7(c)(3). 

(ii) Result. (A) DC is not required to 

include in income as a dividend the section 

1248 amount attributable to the CFC1 stock 

under § 1.367(b)–4(b)(1)(i) because, 

immediately after the section 361 exchange, 

FA and CFC1 are controlled foreign 

corporations with respect to which DC is a 

section 1248 shareholder. At the time of the 

section 361 exchange the section 1248 

amount attributable to the CFC2 stock is zero. 

(B) Under § 1.1248(f)–1(b)(3), DC must 

generally include in income as a dividend 

the section 1248(f) amount ($30x) attributable 

to the FA stock upon its distribution of such 

stock to DP1 in the section 361 distribution. 

The section 1248(f) amount is the amount 

that FA would include in income as a 

dividend under section 964(e) if it sold the 

CFC1 stock immediately after the section 361 

exchange. Immediately after the section 361 

exchange, the section 1248(f) amount 

attributable to the CFC2 stock is zero. 

(C) However, if DP1 and DC elect to apply 

the rules of paragraph (c) of this section (as 

provided in paragraph (c)(1) of this section), 

then § 1.1248(f)–1(b)(3) shall not apply to 

DC’s distribution of the FA stock to DP1. If 

that election is made then: 

(1) Under paragraph (c)(2)(ii) of this section 

each share of FA stock received by DP1 is 

divided into one portion attributable to the 

CFC1 stock and one portion attributable to 

the CFC2 stock. Under paragraphs (c)(4)(i) 

and (ii) of this section, the basis and fair 

market value of each portion is that amount 

of the total section 358 basis and fair market 

value, respectively, of the FA stock that bears 

the same ratio that the fair market value of 

the property (the CFC1 stock and CFC2 stock) 

to which such portion relates bears to the 

aggregate fair market value of all property 

exchanged by DC for the FA stock in the 

section 361 exchange. Therefore, the portions 

attributable to the CFC1 stock have an 

aggregate basis of $90x ($180x multiplied by 

$100x/$200x) and a fair market value of 

$100x ($200x multiplied by $100x/$200x). 

The portions attributable to the CFC2 stock 

also have an aggregate basis of $90x ($180x 

multiplied by $100x/$200x) and a fair market 

value of $100x ($200x multiplied by $100x/ 

$200x). 

(2) Under § 1.1248–8(b)(2)(iv), the $40x 

earnings and profits attributable to the CFC1 

stock at the time of the section 361 exchange 

are attributed to the portions of the shares of 

FA stock that relate to the CFC1 stock. 

Similarly, the $80x of earnings and profits 

attributable to the CFC2 stock are attributed 

to the portions of the 100 shares of the FA 

stock that relate to the CFC2 stock. 

(3) Under paragraph (c)(3) of this section, 

DP1’s aggregate section 358 basis in the 

portions of the 100 shares of FA stock 

attributable to the CFC1 stock ($90x) is 

reduced by $20x, the amount by which the 

section 1248(f) amount attributable to the 

CFC1 stock ($30x) exceeds DP1’s 

postdistribution amount ($10x) with respect 

to the portions of the shares of FA stock 

attributable to the CFC1 stock. The 

postdistribution amount is the section 1248 

amount attributable to the portions of the FA 

stock attributable to the CFC1 stock 

immediately after the section 361 

distribution ($100x fair market value less 

$90x basis, and $40x earnings and profits 

attributable to such portions). As adjusted, 

DP1’s aggregate basis in the portions of the 

shares of FA stock attributable to the CFC1 

stock is $70x. No adjustment is required to 

DP1’s aggregate basis in the portions of the 

FA stock attributable to the CFC2 stock 

because no portion of the $30x section 

1248(f) amount is attributable to the CFC2 

stock. 

Example 4. Section 361 exchange followed 

by distribution of stock pursuant to plan of 

reorganization. (i) Facts. DP1 owns all 100 

outstanding shares of stock of DC. DP1’s DC 

stock has a $180x basis, $200x fair market 

value, and 2 year holding period. DC owns 

all 60 shares of the outstanding stock of 

CFC1. DC’s CFC1 stock has a $50x basis, a 

$60x fair market value, $30x of earnings and 

profits attributable to it for purposes of 

section 1248, and a 3 year holding period. DC 

also owns all 40 shares of the outstanding 

stock of CFC2. DC’s CFC2 stock has a $30x 

basis, a $40x fair market value, and $20x of 

earnings and profits attributable to it for 

purposes of section 1248. DC also owns 

Business A that has a fair market value of 

$100x. On December 31, Year 4, in a divisive 

reorganization described in section 

368(a)(1)(D), DC transfers the CFC2 stock to 

CFC1 in exchange for 40 additional shares of 

CFC1 stock. DC then distributes the 100 

shares of CFC1 stock to DP1. DC’s transfer of 

the CFC2 stock to CFC1 qualifies as a section 

361 exchange. DP1 and DC are eligible to and 

make the elections provided in § 1.367(a)–

7(c)(5) and paragraphs (b) and (c) of this 

section. 

(ii) Result. (A) DC is not required to 

recognize gain under § 1.367(a)–7(c)(2). 

(B) Under section 358, DP1 must allocate 

the $180x pre-distribution section 358 basis 

in its DC stock between the shares of DC 

stock and the shares of CFC1 stock held after 

the distribution based on the relative fair 

market values of such shares. After the 

allocation of the pre-distribution basis, the 

basis of DP1’s DC stock is $90x, and the basis 

of DP1’s CFC1 stock is $90x. With respect to 

the $90x basis in the CFC1 stock, $36x is 

attributable to the 40 shares of CFC1 stock 

received by DC in the section 361 exchange, 

and $54x is attributable to the 60 shares of 

CFC1 stock owned by DC before the section 

361 exchange. 

(C) Pursuant to § 1.367(a)–7(c)(3)(ii)(A), 

any adjustment to basis required under 

§ 1.367(a)–7(c)(3) applies only to the 40 

shares of CFC1 stock received by DC in the 

section 361 exchange. Under § 1.367(a)–

7(c)(3)(i), DP1 must reduce its section 358 

basis ($36x) in the 40 shares of CFC1 stock 

by $6x, the amount by which DP1’s 100% 

share of the inside gain ($10x) exceeds DP2’s 

outside gain ($4x). DP1’s share of inside gain 

is not reduced under § 1.367(a)–7(c)(2)(ii) 

because DC does not recognize gain on the 

transfer of the section 367(a) property in the 

section 361 exchange. The outside gain 

equals the product of the section 367(a) 

percentage (100%) and the amount by which 

the fair market value ($40x) of the 40 shares 

of CFC1 stock exceeds DP1’s section 358 

basis of such stock ($36x). After the $6x 

reduction to stock basis required under 

§ 1.367(a)–7(c)(3), but before the application 

of § 1.1248(f)–2(c)(2), DP1’s basis in such 40 

shares of CFC1 stock is $30x. 

(D) DC is not required to include in income 

as a dividend the section 1248 amount 

attributable to the CFC2 stock under 

§ 1.367(b)–4(b)(1)(i), because immediately 

after the section 361 exchange CFC1 and 

CFC2 are both controlled foreign 

corporations with respect to which DC is a 

section 1248 shareholder. 

(E) Because DP1 and DC elect to apply the 

rules under paragraph (c) of this section, 

§ 1.1248(f)–1(b)(3) does not apply to DC’s 

distribution to DP of the 40 shares of CFC1 

stock received in the section 361 exchange. 

(1) Under paragraph (c)(2) of this section, 

the 40 shares of CFC1 stock received by DC 

in the section 361 exchange are attributable 

to the CFC2 stock. Thus, the 40 shares are not 

required to be divided into portions under 

paragraph (c)(2) of this section because DC 

exchanged a single block of stock of CFC2 for 

the 40 shares of CFC1 stock in the section 

361 exchange. The 40 shares of CFC1 stock 

have an aggregate basis of $30x (after the 

adjustment described in paragraph (C) of this 

Example) and fair market value of $40x. 

(2) Under § 1.1248–8(b)(2)(iv), the $20x of 

earnings and profits attributable to the CFC2 

stock at the time of the section 361 exchange 

are attributable to the 40 shares of CFC1 

stock. 

(3) DP1’s basis ($30x) in the 40 shares of 

CFC1 stock attributable to the CFC2 stock is 

not required to be reduced under paragraph 

(c)(3) of this section because the section 

1248(f) amount ($10x) attributable to the 40 

shares of CFC1 stock does not exceed DP1’s 

postdistribution amount ($10x) attributable 

to such stock. The postdistribution amount 

equals the amount that DP1 would be 

required to include in income as a dividend 

under section 1248(a) if it sold the 40 shares 

of CFC1 stock immediately after the 

distribution ($40x fair market value, $30x 

basis, and $20x earnings and profits 

attributable to such stock for purposes of 

section 1248). The $10x section 1248(f) 

amount equals the amount CFC1 would 

include in income as a dividend under 

section 964(e) if it sold the CFC2 stock 

received from DC immediately after the 

section 361 exchange. 

(F) Because DP1 and DC make the election 

provided in paragraph (b)(1) of this section, 


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§ 1.1248(f)–1(b)(2) does not apply to DC’s 

distribution to DP1 of the 60 shares of CFC1 

stock it owned before the section 361 

exchange. 

(1) Under paragraph (b)(2) of this section, 

for purposes of section 1248, DP1 has a 3- 

year holding period in the 60 shares of CFC1 

stock immediately after the distribution, the 

same holding period that DC had in such 

shares at the time of the distribution. 

(2) Under paragraph (b)(3) of this section, 

DP1’s section 358 basis in the 60 shares of 

CFC1 stock ($54x) must be reduced by $4x, 

the amount by which DC’s section 1248 

amount ($10x) attributable to such shares 

immediately before the distribution exceeds 

DP1’s postdistribution amount ($6x) 

attributable to such shares immediately after 

the distribution. The $6x postdistribution 

amount equals the amount that DP1 would be 

required to include in income as a dividend 

under section 1248(a) if it sold the 60 shares 

of CFC1 stock immediately after the 

distribution ($60x fair market value, $54x 

basis, and $30x earnings and profits 

attributable to such stock for purposes of 

section 1248). After the reduction, DP1’s 

basis in the 60 shares of CFC1 stock is $50x. 

(e) Applicable cross-references. For 

rules relating to the attribution of 

earnings and profits to the stock of a 

foreign corporation following certain 

nonrecognition transactions, see 

§ 1.1248–8. For rules relating to a 

transfer of property by a domestic 

corporation to a foreign corporation in 

a section 361 exchange that precedes a 

section 355 distribution or section 361 

distribution to which section 1248(f)(1) 

applies, see § 1.367(a)–7. For rules 

relating to an acquisition of the stock of 

a foreign corporation by another foreign 

corporation in a section 361 exchange, 

see § 1.367(b)–4. For rules relating to a 

section 355 distribution of stock of a 

foreign corporation by a domestic 

corporation, see §§ 1.367(b)–5(b)(1) and 

1.367(e)–1. 

Par. 14. Section 1.1248(f)–3 is added 

to read as follows: 

§ 1.1248(f)–3 Reasonable cause exception 

and effective dates. 

(a) Reasonable cause exception for 

failure to comply—(1) General rule. If a 

section 1248 shareholder or the 

domestic distributing corporation fails 

to comply with any requirement under 

§ 1.1248(f)–2, the section 1248 

shareholder or the domestic distributing 

corporation shall be considered to have 

complied with such requirement if it 

submits a request for relief as provided 

under paragraph (a)(2) of this section 

and can 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 section 1248 shareholder’s or 

domestic distributing corporation’s tax 

return for the taxable year during which 

the distribution occurs, that such failure 

was due to reasonable cause and not 

willful neglect. Whether the failure to 

comply was due to reasonable cause and 

not willful neglect will be determined 

by the Director after considering all the 

facts and circumstances. The Director 

shall notify the section 1248 

shareholder or domestic distributing 

corporation in writing within 120 days 

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 on the date the Internal Revenue 

Service notifies the section 1248 

shareholder or domestic distributing 

corporation in writing that the request 

for relief has been received and assigned 

for review. Once such period 

commences, if the section 1248 

shareholder or domestic distributing 

corporation is not again notified within 

120 days, then the section 1248 

shareholder or domestic distributing 

corporation shall be deemed to have 

established reasonable cause. 

(2) Requirements for reasonable cause 

relief—(i) Time of submission. Requests 

for reasonable cause relief will only be 

considered if as soon as the section 1248 

shareholder or domestic distributing 

corporation becomes aware of the 

failure to comply with any requirement 

of § 1.1248(f)–2, the section 1248 

shareholder or domestic distributing 

corporation attaches the statements or 

other documents that should have been 

filed, as well as a complete written 

statement setting forth the reasons for 

the failure to comply, to an amended 

return that amends the return to which 

the documents should have been 

attached pursuant to § 1.1248(f)–2. The 

amended return and all required 

attachments must be filed with the 

applicable Internal Revenue Service 

Center with which the section 1248 

shareholder or domestic distributing 

corporation filed its original return to 

which the documents should have been 

attached. 

(ii) Notice requirement. In addition to 

the requirement of paragraph (a)(2)(i) of 

this section, the section 1248 

shareholder or domestic distributing 

corporation must comply with the 

requirements of paragraph (a)(2)(ii)(A) 

or (B) of this section, as applicable. 

(A) If the section 1248 shareholder or 

domestic distributing corporation is 

under examination for any taxable year 

when the request for reasonable cause 

relief is filed, a copy of the amended 

return and attachments must be 

provided to the Internal Revenue 

Service personnel conducting the 

examination. 

(B) If the section 1248 shareholder or 

domestic distributing corporation is not 

under examination for any taxable year 

when the request for reasonable cause 

relief is filed, a copy of the amended 

return and attachments must be 

provided to the Director having 

jurisdiction over the return. 

(b) Effective/applicability date. 

Sections 1.1248(f)–1 and 1.1248(f)–2 

and this section shall apply to 

distributions occurring on or after the 

date 30 days after the date these 

regulations are published as final 

regulations in the Federal Register. 

Par. 15. Section 1.6038B–1 is 

amended by revising paragraphs (c)(6), 

(f)(3), and the heading and the first 

sentence of paragraph (g)(1), and adding 

paragraph (g)(5), to read as follows: 

§ 1.6038B–1 Reporting of certain transfers 

to foreign corporations. 

* * * * * 

(c) * * * 

(6) Transfers subject to section 

367(a)(5)—(i) In general. This paragraph 

applies to a domestic corporation (U.S. 

transferor) that transfers section 367(a) 

property (as defined in § 1.367(a)–

7(f)(9)) to a foreign corporation in an 

exchange described in section 361(a) or 

(b) or in an exchange described in 

section 351 that is also described in 

section 361(a) or (b) (collectively, a 

section 361 exchange) and to which the 

provisions of § 1.367(a)–7(c) apply. 

Paragraph (c)(6)(ii) of this section 

establishes the time and manner for the 

U.S. transferor to elect to apply the 

provisions of § 1.367(a)–7(c). Paragraph 

(c)(6)(iii) of this section establishes the 

manner for the U.S. transferor to satisfy 

the requirement of § 1.367(a)–7(c)(4). 

(ii) Election. The U.S. transferor elects 

to apply the provisions of § 1.367(a)–

7(c) by including a statement entitled, 

STATEMENT TO ELECT TO APPLY 

EXCEPTION UNDER § 1.367(a)–7(c) 

with its timely-filed return (within the 

meaning of § 1.367(a)–7(f)(11)) for the 

taxable year during which the section 

361 exchange occurs, that includes the 

information described in paragraphs 

(c)(6)(ii)(A) through (c)(6)(ii)(C) of this 

section. See § 1.367(a)–7(c)(5)(ii) for the 

statement required to be filed by a 

control group member, as defined in 

§ 1.367(a)–7(f)(2), or final distributee, as 

defined in § 1.367(a)–7(d). 

(A) The name and taxpayer 

identification number of each control 

group member and final distributee (if 

any), and the aggregate ownership 

interest (by value) in the U.S. transferor 

of each control group member or final 

distributee. 


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49304 Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 

(B) A calculation of the gain 

recognized (if any) by the U.S. transferor 

under § 1.367(a)–7(c)(2)(i) and (ii). 

(C) The date on which the U.S. 

transferor and each control group 

member or final distributee entered into 

the written agreement described in 

§ 1.367(a)–7(c)(5)(iv). 

(iii) Agreement to amend U.S. 

transferor’s tax return. The U.S. 

transferor complies with the 

requirement of § 1.367(a)–7(c)(4)(i) by 

attaching a statement to its timely-filed 

return (within the meaning of 

§ 1.367(a)–7(f)(11)) for the taxable year 

in which the section 361 exchange 

occurs, entitled STATEMENT UNDER 

§ 1.367(a)–7(c)(4) FOR TRANSFERS OF 

ASSETS TO A FOREIGN 

CORPORATION IN A SECTION 361 

EXCHANGE. The statement must certify 

that if the foreign acquiring corporation 

disposes of a significant amount (as 

defined in paragraph (c)(6)(iii)(A) of this 

section) of the section 367(a) property 

received from the U.S. transferor in the 

section 361 exchange in one or more 

related transactions described in 

paragraph (c)(6)(iii)(B) of this section, 

then the exception provided in 

§ 1.367(a)–7(c) shall not apply to the 

section 361 exchange and the U.S. 

transferor shall recognize the gain 

realized but not recognized in the 

section 361 exchange. The U.S. 

transferor (or the foreign acquiring 

corporation on behalf of the U.S. 

transferor) shall file a U.S. income tax 

return (or amended U.S. income tax 

return, as the case may be) for the year 

of the section 361 exchange, reporting 

such gain. 

(A) Disposition of significant amount. 

For purposes of this paragraph (c)(6)(iii), 

a disposition of a significant amount 

occurs if, in one or more related 

transactions, the foreign acquiring 

corporation disposes of an amount of 

the section 367(a) property received 

from the U.S. transferor in the section 

361 exchange that is greater than 40 

percent of the fair market value of all of 

the property transferred in the section 

361 exchange. 

(B) Gain recognition transaction—(1) 

General rule. A transaction is described 

in this paragraph (c)(6)(iii)(B) if the 

transaction is entered into with a 

principal purpose of avoiding the U.S. 

tax that would have been imposed on 

the U.S. transferor on the disposition of 

the property transferred to the foreign 

acquiring corporation in the section 361 

exchange. A disposition may have a 

principal purpose of tax avoidance even 

if the tax avoidance purpose is 

outweighed by other purposes when 

taken together. 

(2) Presumptive tax avoidance. For 

purposes of this paragraph (c)(6)(iii)(B), 

the principal purpose of the foreign 

acquiring corporation’s disposition of a 

significant amount of the section 367(a) 

property within two years of the section 

361 exchange (whether in a recognition 

or nonrecognition transaction) shall be 

presumed to be the avoidance of the 

U.S. tax that would have been imposed 

on the U.S. transferor on the disposition 

of the property transferred to the foreign 

acquiring corporation in the section 361 

exchange. However, this presumption 

shall not apply if it is demonstrated to 

the satisfaction of the Area Director, 

Field Examination, Small Business/Self 

Employed or the Director of Field 

Operations, Large and Mid-Size 

Business (Director) that the avoidance of 

U.S. tax was not a principal purpose of 

the disposition. 

(3) Interest. If additional tax is 

required to be paid as a result of a 

transaction described in paragraph 

(c)(6)(iii)(B) of this section, then interest 

must be paid on that amount at rates 

determined under section 6621 with 

respect to the period between the date 

prescribed for filing the U.S. transferor’s 

income tax return for the year of the 

section 361 exchange and the date on 

which the additional tax for that year is 

paid. 

* * * * * 

(f) * * * 

(3) Reasonable cause exception for 

failure to comply—(i) Request for relief. 

The provisions of paragraph (f)(1) of this 

section shall not apply if the U.S. 

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

taxable year, that a failure to comply 

was due to reasonable cause and not 

willful neglect. Whether the failure to 

comply was due to reasonable cause and 

not willful neglect will be determined 

by the Director after considering all the 

facts and circumstances. The Director 

shall notify the U.S. transferor in 

writing within 120 days 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 on the 

date the Internal Revenue Service 

notifies the U.S. transferor in writing 

that the request for relief has been 

received and assigned for review. Once 

such period commences, if the U.S. 

transferor is not again notified within 

120 days, then the U.S. transferor shall 

be deemed to have established 

reasonable cause. 

(ii) Requirements for reasonable cause 

relief—(A) Time of submission. Requests 

for reasonable cause relief will only be 

considered if, as soon as the U.S. 

transferor becomes aware of the failure 

to comply, the U.S. transferor 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 6038B and the regulations under 

that section. The amended return and 

all required attachments must be filed 

with the applicable Internal Revenue 

Service Center with which the U.S. 

transferor filed its original return to 

which the documents should have been 

attached. 

(B) Notice requirement. In addition to 

the requirement of paragraph (f)(3)(ii)(A) 

of this section, the U.S. transferor must 

comply with the requirements of 

paragraph (f)(3)(ii)(B)(1) or (2), as 

applicable. 

(1) If the U.S. transferor is under 

examination for any taxable year when 

it requests relief, the U.S. transferor 

must provide a copy of the amended 

return and attachments to the Internal 

Revenue Service personnel conducting 

the examination. 

(2) If the U.S. transferor is not under 

examination for any taxable year when 

it requests relief, the U.S. transferor 

must provide a copy of the amended 

return and attachments to the Director 

having jurisdiction over the U.S. 

transferor’s return. 

* * * * * 

(g) Effective/applicability dates. (1) 

Except as provided in paragraphs (g)(2) 

through (5) of this section, this section 

applies to transfers occurring on or after 

July 20, 1998, except for transfers of 

cash made in tax years beginning on or 

before February 5, 1999 (which are not 

required to be reported under section 

6038B), and except for transfers 

described in paragraph (e) of this 

section, which applies to transfers that 

are subject to §§ 1.367(e)–1(f) and 

1.367(e)–2(e). * * * 

(5) Paragraphs (c)(6) and (f)(3) of this 

section shall apply to transfers 

occurring on or after the date 30 days 

after the date these regulations are 

published as final regulations in the 

Federal Register. For guidance with 

respect to paragraphs (c)(6) and (f)(3) of 

this section before the date 30 days after 

the date these regulations are published 

as final regulations in the Federal 

Register, see 26 CFR part 1 revised as of 


dwashington3 on PRODPC61 with PROPOSALS3
Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules 49305 

April 1 for the year before the date these 

regulations are published as final 

regulations in the Federal Register. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E8–18885 Filed 8–19–08; 8:45 am] 

BILLING CODE 4830–01–P 


dwashington3 on PRODPC61 with PROPOSALS3