6952 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9446] 

RIN 1545–BG09 

Gain Recognition Agreements With 

Respect to Certain Transfers of Stock 

or Securities by United States Persons 

to Foreign Corporations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations under section 367(a) of the 

Internal Revenue Code (Code) 

concerning gain recognition agreements 

filed by United States persons with 

respect to transfers of stock or securities 

to foreign corporations. The regulations 

finalize temporary regulations 

published on February 5, 2007 (TD 

9311). The regulations primarily affect 

United States persons that transfer (or 

have transferred) stock or securities to 

foreign corporations and that will enter 

(or have entered) into a gain recognition 

agreement with respect to such a 

transfer. 

DATES: Effective Date: These regulations 

are effective February 11, 2009. 

Applicability Dates: For dates of 

applicability, see §§ 1.367(a)–3(g) and 

1.367(a)–8(r). 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–147144–06), 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–147144– 

06), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically via the Federal 

eRulemaking Portal at 

www.regulations.gov (IRS REG–147144– 

06). 

FOR FURTHER INFORMATION CONTACT: S. 

James Hawes, (202) 622–3860 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information in 

these regulations have been reviewed 

and approved by the Office of 

Management and Budget in accordance 

with the Paperwork Reduction Act of 

1995 (44 U.S.C. 3507(d)) under control 

number 1545–2056. 

The collections of information in 

these final regulations are in § 1.367(a)– 

8(d), (g), (k), and (o). Responses to the 

collections of information are required 

to avoid recognizing gain under an 

existing gain recognition agreement and 

to facilitate electronic filing. The 

regulations also require the amount of 

any gain recognized under a gain 

recognition agreement and applicable 

interest due with respect to any 

additional tax due with respect to such 

gain to be reflected on a schedule 

included with the electronically-filed 

return of the taxpayer. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information, 

unless the collection of information 

displays a valid control number. 

Books and records relating to these 

collections of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

On February 5, 2007, the IRS and 

Treasury Department issued temporary 

and proposed regulations under section 

367(a) concerning the terms and 

conditions for a gain recognition 

agreement (GRA) filed by a United 

States person (the U.S. transferor) in 

connection with a transfer of stock or 

securities to a foreign corporation 

(transferee foreign corporation) and the 

impact of certain transactions on an 

existing GRA (the 2007 regulations). 72 

FR 5184 (T.D. 9311) (2007–10 IRB 635). 

No public hearing on the 2007 

regulations was requested or held; 

however, numerous comments were 

received. After considering the 

comments received, the IRS and 

Treasury Department adopt the 2007 

regulations, with modifications, as final 

regulations under section 367(a). This 

Treasury decision also removes the 

temporary regulations and revises crossreferences where appropriate to reflect 

the removal and replacement of the 

temporary regulations with final 

regulations. 

Summary of Comments and 

Explanation of Revisions 

A. Subsequent Nonrecognition 

Transfers—In General 

The 2007 regulations provide specific 

exceptions for certain dispositions or 

other events that would otherwise 

require gain to be recognized under an 

existing GRA (triggering event). The 

exceptions generally apply to 

dispositions that qualify for 

nonrecognition treatment under the 

Code and require the U.S. transferor to 

enter into a new GRA with respect to 

the initial transfer for the remaining 

term of the existing GRA. 

Several commentators asserted that 

the exceptions provided by the 2007 

regulations did not literally apply to 

various dispositions qualifying for 

nonrecognition treatment because the 

entity making the transfer is not 

described in the relevant exception, 

thus inappropriately resulting in gain 

recognition under a GRA. For example, 

assume that in year 1 a domestic 

corporation, USP, transfers stock of a 

foreign corporation, FS1, to another 

foreign corporation, FS2, pursuant to an 

exchange to which section 351 applies 

(the initial transfer). USP files a GRA 

with respect to the initial transfer. In 

year 2, FS2 transfers the FS1 stock 

received from USP in year 1 to another 

foreign corporation, FS3, solely in 

exchange for stock of FS3 under section 

351. The year 2 transfer of the FS1 stock 

by FS2 would constitute a triggering 

event for purposes of the GRA filed by 

USP with respect to the initial transfer, 

but the transfer qualifies for an 

exception under the 2007 regulations. 

USP complies with the requirements of 

the 2007 regulations with respect to the 

GRA filed for the initial transfer. In year 

3, FS3 contributes the FS1 stock 

received from FS2 in year 2 to another 

foreign corporation, FS4, solely in 

exchange for stock of FS4 under section 

351. The year 3 transfer of the FS1 stock 

by FS3 is a triggering event with respect 

to the GRA entered into by USP in 

connection with the initial transfer. 

The 2007 regulations provide an 

exception for certain subsequent 

transfers of the transferred stock in a 

transaction to which section 351 applies 

(section 351 exchange), but the 

exception does not clearly apply when 

the transferor in the section 351 

exchange is not the transferee foreign 

corporation. Commentators expressed 

similar concerns with respect to other 

nonrecognition transactions, including 

liquidations described in section 332 

(section 332 liquidation), transactions to 

which section 355 applies (section 355 

transactions), and transactions involving 

partnerships. The commentators 

suggested various alternatives for 

avoiding the inappropriate triggering of 

a GRA in such cases. 

The IRS and Treasury Department 

agree that certain nonrecognition 

transactions that may not qualify for an 

exception under the 2007 regulations 

should not trigger an existing GRA. 

Because specific exceptions provide 

certainty to the relevant transactions, 


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the final regulations retain the 

exceptions of the 2007 regulations with 

modifications so that the exceptions 

apply to transactions involving one or 

more entities not clearly described in 

the 2007 regulations. For example, 

under the final regulations the 

exception for a section 351 exchange of 

the transferred stock applies to any 

transfer of the transferred stock 

regardless of the identity of the 

transferor. The final regulations include 

additional specific exceptions and a 

general exception for certain 

transactions that cannot be adequately 

covered by a specific exception because 

of the myriad factual permutations. 

The general exception provided by 

the final regulations applies generally to 

any disposition or other event that 

would otherwise constitute a triggering 

event if the disposition is a 

nonrecognition transaction (as defined 

in section 7701(a)(45), but including an 

exchange described in section 351(b) or 

356 even if all gain realized is 

recognized); a U.S. transferor retains a 

direct or indirect interest in the 

transferred stock or securities (or the 

assets of the transferred corporation, 

such as where the transferred 

corporation has liquidated in the 

interim); and the U.S. transferor that 

retains such direct or indirect interest 

enters into a new GRA with respect to 

the initial transfer. However, if, as a 

result of the disposition or other event, 

a foreign corporation acquires all or part 

of the transferred stock or securities (or 

substantially all the assets of the 

transferred corporation) the general 

exception shall apply only if the U.S. 

transferor owns at least five percent 

(applying the attribution rules of section 

318, as modified by section 958(b)) of 

the total voting power and the total 

value of the outstanding stock of such 

foreign corporation immediately after 

the disposition or other event. This five 

percent ownership condition is 

intended to limit the application of the 

general exception in transactions where 

the U.S. transferor retains a minimal 

interest in the transferred stock or 

securities (or substantially all the assets 

of the transferred corporation). The final 

regulations include examples to 

illustrate the application of the general 

exception. 

A disposition or other event to which 

the general exception applies shall be 

subject to the provisions of the final 

regulations to the same extent and in the 

same manner as a disposition or event 

to which a specific exception applies. 

For example, even though a specific 

exception is generally available for a 

section 351 exchange of the transferred 

stock by the transferee foreign 

corporation, the U.S. transferor must 

still recognize gain under the existing 

GRA to the extent the transferee foreign 

corporation would otherwise recognize 

gain in the exchange under section 

351(b). The U.S. transferor must 

therefore similarly recognize gain in 

connection with a disposition or other 

event to which the general exception 

applies to the extent that the transferee 

foreign corporation would otherwise 

recognize gain in the exchange under 

section 351(b). 

A new GRA filed under the general 

exception is generally subject to the 

same terms and conditions as the 

existing GRA, but must also describe the 

subsequent dispositions that would 

constitute triggering events (based on 

the principles of the final regulations, 

but not including any triggering event 

otherwise described in the final 

regulations) and include a statement 

that the U.S. transferor agrees to treat 

such dispositions as triggering events. In 

addition, the final regulations provide 

that, with respect to a new GRA filed 

under the general exception, a triggering 

event shall also include any other 

disposition or event that is inconsistent 

with the principles of the triggering 

event exceptions including, for 

example, an indirect disposition of the 

transferred stock or securities or of 

substantially all of the assets of the 

transferred corporation. This additional 

condition is similar to the condition 

applicable to a GRA filed in connection 

with an indirect stock transfer described 

in § 1.367(a)–3(d). 

One commentator requested that an 

exception be provided for a securities 

lending transaction to which section 

1058 applies. The final regulations do 

not provide such an exception. 

B. Dispositions Pursuant to an 

Intercompany Transaction 

Under the 2007 regulations, a 

complete or partial disposition by the 

U.S. transferor of the stock of the 

transferee foreign corporation received 

in the initial transfer generally requires 

the U.S. transferor to recognize gain 

under the GRA. Exceptions to this 

general rule are provided for certain 

nonrecognition transfers to which 

sections 351, 354, or 721 applies. As 

described further in part D. of this 

Preamble, the 2007 regulations provide 

further that a GRA shall instead 

terminate (in whole or in part) if the 

U.S. transferor disposes of all or part of 

the stock of the transferee foreign 

corporation received in the initial 

transfer pursuant to a transaction in 

which all gain realized is recognized 

currently and included in taxable 

income as a result of the disposition, but 

only if the basis of the stock disposed 

of (excluding certain adjustments to 

such basis) is not greater than the basis 

in the transferred stock or securities at 

the time of the initial transfer. 

If the U.S. transferor disposes of stock 

of the transferee foreign corporation 

pursuant to an intercompany 

transaction (within the meaning of 

§ 1.1502–13) that is not described in 

section 351 or 354, the conditions for 

terminating the existing GRA (in whole 

or in part) are not satisfied because, 

under the provisions of § 1.1502–13, the 

U.S. transferor generally defers taking 

into account any gain realized and 

recognized on the disposition. Thus, 

such a disposition would be a triggering 

event. 

Several commentators asserted that it 

is inappropriate to require the U.S. 

transferor to recognize gain under the 

GRA in such cases because the stock of 

the transferee foreign corporation 

remains within the consolidated group 

of which the U.S. transferor is a 

member. It is also inappropriate to 

terminate the GRA because the 

intercompany item has not been taken 

into account. Instead, the commentators 

recommended that the GRA remain in 

effect for its remaining term. The IRS 

and Treasury Department agree with 

this recommendation, and the final 

regulations provide a specific exception 

for dispositions of stock of the transferee 

foreign corporation pursuant to an 

intercompany transaction 

(intercompany transaction exception) to 

which a specific triggering event 

exception does not apply. If the 

intercompany transaction exception 

applies, the U.S. transferor remains 

subject to the existing GRA. But see the 

discussion below when the 

intercompany transaction is a 

nonrecognition transaction in which an 

amount of gain is recognized. 

The intercompany transaction 

exception is available if two conditions 

are satisfied. The first condition is that 

the basis of the stock of the transferee 

foreign corporation disposed of in the 

intercompany transaction is not greater 

than the sum of the aggregate basis in 

the transferred stock or securities at the 

time of the initial transfer, any increase 

to the basis of the transferred stock or 

securities by reason of gain recognized 

by the U.S. transferor in connection 

with the initial transfer, and any 

increase to the basis of the stock of the 

transferee foreign corporation by reason 

of income inclusions by the U.S. 

transferor (for example, pursuant to 

section 961). To satisfy this basis 

condition, the U.S. transferor can elect 

to reduce the basis of the stock of the 

transferee foreign corporation, effective 


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immediately before the intercompany 

transaction. 

The second condition is that the 

annual certification filed with respect to 

the existing GRA for the taxable year 

during which the intercompany 

transaction occurs includes a complete 

description of the intercompany 

transaction and a schedule illustrating 

how the basis condition is satisfied. 

Because the final regulations provide 

specific exceptions for certain 

nonrecognition transfers of stock of the 

transferee foreign corporation (for 

example, pursuant to a section 351 

exchange), the new intercompany 

transaction exception applies only to 

the extent the intercompany transaction 

gives rise to an intercompany item (as 

defined in § 1.1502–13(b)(2)). If the 

intercompany item is a gain, the existing 

GRA must be divided into two separate 

agreements—one that remains with the 

U.S. transferor (of an amount equal to 

the intercompany item) and another that 

moves to the acquiring member (of an 

amount equal to the remaining amount 

of the existing GRA amount). For 

example, assume the amount of the 

existing GRA is $100x, the 

intercompany transaction is described 

in section 351(b), and the U.S. transferor 

recognizes $20x gain (the intercompany 

item) in the intercompany transaction. 

The intercompany transaction exception 

applies to the extent of the $20x 

intercompany item, and the exception 

for section 351 exchanges applies to the 

remainder of the transfer. Thus, the U.S. 

transferor remains subject to a $20x 

GRA (to the extent of the $20x 

intercompany item), and the acquiring 

member becomes subject to an $80x 

GRA. This result is similar to that of a 

transfer of the stock of the transferee 

foreign corporation to a domestic 

acquiring corporation in a section 351 

exchange that is not an intercompany 

transaction but in which the U.S. 

transferor recognizes gain under section 

351(b). In such a case, the amount of the 

new GRA entered into by the domestic 

acquiring corporation is reduced by the 

amount of gain recognized by the U.S. 

transferor on the transfer under section 

351(b). The U.S. transferor does not 

remain subject to a GRA because the 

gain recognized under section 351(b) is 

taken into account. By contrast, if the 

section 351 exchange were an 

intercompany transaction, the U.S. 

transferor must remain subject to a GRA 

in an amount equal to the gain 

recognized under section 351(b) because 

the gain has not been taken into 

account. 

If the intercompany item is a loss, 

however, the U.S. transferor shall 

remain subject to the entire GRA. In 

addition, in such a case, the termination 

rule that applies to dispositions of the 

stock of the transferee foreign 

corporation in which all realized gain is 

recognized and included in taxable 

income during the taxable year of the 

disposition shall not apply. 

The final regulations provide rules to 

coordinate the subsequent inclusion in 

taxable income of an intercompany item 

and an amount of gain recognized under 

the GRA. Generally, under the 

coordination rule, if subsequent to an 

intercompany transaction to which the 

intercompany transaction exception 

applies, a disposition or other event 

occurs that requires the U.S. transferor 

to take into account the intercompany 

item related to the intercompany 

transaction (under the provisions of 

§ 1.1502–13), the disposition shall not 

constitute a triggering event. Instead the 

GRA shall terminate without further 

effect or the amount of gain subject to 

the GRA shall be reduced based on the 

principles of the termination rule that 

applies to certain dispositions of the 

stock of the transferee foreign 

corporation received in the initial 

transfer. The final regulations include 

an example illustrating this rule. 

C. Divisive Reorganizations 

The preamble to the 2007 regulations 

requested comments concerning 

whether specific exceptions should be 

provided for divisive reorganizations 

involving the U.S. transferor, the 

transferee foreign corporation, or the 

transferred corporation. No comments 

were received. However, the final 

regulations provide a specific exception 

for divisive reorganizations involving a 

transfer of the stock of the transferee 

foreign corporation received in the 

initial transfer to a domestic corporation 

(domestic controlled corporation) before 

the distribution of the stock of the 

domestic controlled corporation. The 

specific exception applies if the 

domestic controlled corporation enters 

into a new GRA with respect to the 

initial transfer. The IRS and Treasury 

Department expect the general 

exception to apply to other divisive 

reorganizations, as appropriate. The 

final regulations include examples 

illustrating the application of the 

general exception to divisive 

reorganizations. 

D. GRA Termination Events 

If certain conditions are met, under 

the 2007 regulations an existing GRA 

terminates without further effect 

(termination rule) if the U.S. transferor 

(or other specified United States 

persons) re-acquires the transferred 

stock or securities, or the U.S. transferor 

disposes of the stock of the transferee 

foreign corporation received in the 

initial transfer. One condition for the 

application of the termination rule is 

that, with certain adjustments, the basis 

of the transferred stock or securities in 

the hands of the U.S. transferor (or other 

specified United States person) 

immediately following the acquisition 

or the basis of stock of the transferee 

foreign corporation disposed of by the 

U.S. transferor, as relevant, must not be 

greater than the basis of the transferred 

stock or securities at the time of the 

initial transfer. To satisfy this basis 

condition, the 2007 regulations 

generally permit the U.S. transferor (or 

other United States person) to reduce 

the basis of the transferred stock or 

securities (or the stock of the transferee 

foreign corporation, as applicable). The 

2007 regulations further permit an 

increase to basis of other stock or 

securities in the transferred corporation 

(or stock of the transferee foreign 

corporation, as applicable) by a 

corresponding amount, but not in excess 

of fair market value. 

The final regulations retain the 

termination rule and the conditions for 

its application, including the option to 

reduce basis. However, the IRS and 

Treasury Department have determined 

that it is inappropriate to permit the 

shifting of basis to other stock or 

securities in the case of an election to 

reduce the basis of stock or securities. 

The final regulations, therefore, do not 

permit the U.S. transferor (or other 

United States person) to increase the 

basis of other stock or securities of the 

transferred corporation (or stock of the 

transferee foreign corporation, as 

applicable). The general exception, 

however, may apply allowing the U.S. 

transferor (or other United States 

person) to enter into a new GRA in 

connection with a transaction in which 

the transferred stock or securities are reacquired in lieu of reducing the basis of 

the transferred stock or securities. 

One commentator questioned whether 

the termination rule applies in the case 

of a downstream asset reorganization of 

the transferee foreign corporation into 

the transferred corporation because the 

U.S. transferor receives newly-issued 

stock of the transferred corporation in 

the transaction and not the stock 

transferred in the initial transfer. The 

IRS and Treasury Department believe it 

is appropriate for the termination rule to 

apply in the case of such downstream 

asset reorganizations. Accordingly, by 

revising the location of a rule contained 

in the 2007 regulations, the final 

regulations clarify that the term 

transferred stock or securities includes 

any stock or securities of the transferred 


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corporation with a basis determined, in 

whole or in part, by reference to the 

basis of the stock or securities 

transferred in the initial transfer. Thus, 

in the case of a downstream asset 

reorganization, for purposes of the 

termination rule, the newly-issued stock 

of the transferred corporation deemed 

distributed by the transferee foreign 

corporation to the U.S. transferor under 

section 361(c) is the stock transferred in 

the initial transfer. 

The 2007 regulations provide an 

exception for certain expropriation 

losses that would otherwise constitute 

triggering events. The final regulations 

modify the rule to provide instead that 

the amount of gain subject to a GRA is 

reduced to the extent a loss is sustained 

with respect to stock of the transferee 

foreign corporation, the transferred 

stock or securities, or substantially all 

the assets of the transferred corporation 

by reason of an expropriation of such 

property by the government of a foreign 

country, any political subdivision 

thereof, or any agency or 

instrumentality of the foregoing. 

E. Transfers by U.S. Transferor Pursuant 

to an Outbound Asset Reorganization 

The 2007 regulations provide an 

exception for a transfer of stock of the 

transferee foreign corporation by the 

U.S. transferor to a domestic corporation 

pursuant to an asset reorganization 

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

§ 1.367(a)–8T(e)(3)(i). The preamble to 

the 2007 regulations requested 

comments concerning whether an 

exception should also be provided for 

an outbound transfer of the stock of the 

transferee foreign corporation by the 

U.S. transferor to a foreign corporation 

pursuant to an asset reorganization 

described in section 368(a)(1). No 

comments were received. However, after 

studying the issue further and 

considering the principles of the 

proposed regulations recently issued 

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

1248(f) (73 FR 49278), the IRS and 

Treasury Department have determined 

that it is appropriate for an exception to 

apply to such an outbound transfer. The 

final regulations do not include a 

specific exception for such outbound 

transfers, but the IRS and Treasury 

Department expect the general 

exception provided by the final 

regulations to apply to such transfers, as 

appropriate. The final regulations 

include an example illustrating the 

application of the general exception to 

such a transfer. 

F. Ordering Rule if Triggering Event 

Affects Multiple GRAs 

The final regulations provide an 

ordering rule to determine the amount 

of gain recognized under a GRA when 

a disposition or other event requires 

gain to be recognized under more than 

one GRA. The ordering rule adopts a 

‘‘first-in-time’’ approach, providing that 

gain must first be recognized under the 

GRA that relates to the earliest initial 

transfer, then under the GRA that relates 

to the transfer immediately following 

the initial transfer, and so forth until the 

appropriate amount of gain under each 

GRA has been recognized. This ordering 

rule clarifies that the gain recognized 

under a GRA is determined after taking 

into account any increase to the basis of 

the transferred stock or securities 

resulting from gain recognized under 

another GRA that relates to an earlier 

initial transfer. The final regulations 

include an example to illustrate the 

ordering rule. 

G. Section 301 Distributions 

The 2007 regulations define a 

disposition as any transfer that would 

constitute a disposition for any purpose 

of the Code and the regulations under 

the Code, but exclude a stock 

redemption described under section 

302(d) (dividend equivalent 

redemption) to the extent section 

301(c)(1) applies. One commentator 

requested that the final regulations 

clarify whether the rule for dividend 

equivalent redemptions applies to 

redemptions of stock of the transferee 

foreign corporation, the transferred 

corporation, or both. The commentator 

also requested that the final regulations 

confirm that a distribution of property 

to which section 301(c)(2) applies 

(including in the case of a dividend 

equivalent redemption) does not 

constitute a disposition of the relevant 

stock. 

The final regulations provide that a 

disposition generally does not include 

the receipt of a distribution of property 

with respect to stock to which section 

301 applies, including by reason of 

section 302(d). The final regulations 

provide further that a dividend 

equivalent redemption shall constitute a 

disposition if the U.S. transferor does 

not enter into a new GRA that includes 

appropriate provisions to account for 

the redemption. The final regulations 

include an example illustrating this rule 

and describing the types of appropriate 

provisions that should be included in 

the new GRA. The provisions to be 

included in the GRA are necessary, for 

example, to account for a dividend 

equivalent redemption that occurs 

pursuant to a transaction to which 

section 304(a)(1) applies and in which 

the transferor does not retain a direct or 

indirect interest in the acquiring 

corporation. In such a case, the GRA 

would need to provide appropriate 

provisions to account for indirect 

dispositions of the transferred stock that 

should require gain to be recognized 

under the new GRA. 

The final regulations provide that the 

U.S. transferor must recognize gain 

under a GRA to the extent gain is 

recognized under section 301(c)(3) with 

respect to the transferred stock and that 

the amount of gain subject to the GRA 

is reduced to the extent the U.S. 

transferor recognizes gain under section 

301(c)(3) with respect to the stock of the 

transferee foreign corporation received 

in the initial transfer. 

H. Elections Under Section 338 

One commentator requested that the 

final regulations provide an exception 

for a deemed sale of the assets of the 

transferred corporation or the transferee 

foreign corporation by reason of an 

election under section 338(g). The 

commentator posited a fact pattern 

where the U.S. transferor entered into a 

GRA in connection with a transfer of 

less than 20 percent of the outstanding 

stock of the transferred corporation to 

the transferee foreign corporation, and, 

within the GRA term, the transferee 

foreign corporation acquires additional 

stock of the transferred corporation 

constituting a qualified stock purchase 

(within the meaning of section 

338(d)(3)) and makes an election under 

section 338(g) with respect to such 

acquisition. The deemed asset sale that 

results from the section 338(g) election 

is a sale for all purposes of the Code (see 

§ 1.338–2(c)(6)) and thus, under the 

2007 regulations, would require the U.S. 

transferor to recognize the full amount 

of gain subject to the GRA. The 

commentator asserted that providing an 

exception for such a deemed asset sale 

was consistent with the policies of the 

GRA regime because the deemed asset 

sale is not a monetization of the assets 

or stock of the transferred corporation. 

The IRS and Treasury Department 

agree with the commentator, and the 

final regulations provide that a deemed 

sale of assets of the transferred 

corporation or the transferee foreign 

corporation by reason of an election 

under section 338(g) shall not constitute 

a triggering event for purposes of the 

GRA. However, the sale of stock of the 

target corporation pursuant to the 

qualified stock purchase shall be taken 

into account for purposes of a GRA. The 

sale of stock of the transferred or 

transferee foreign corporation by the 


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seller should either require gain to be 

recognized under a GRA or terminate 

the GRA without further effect if the 

conditions for the termination rule are 

satisfied, even if an election under 

section 338(g) is made. 

By contrast, a deemed sale of assets of 

a domestic corporation by reason of an 

election under section 338(h)(10) shall 

continue to be taken into account for 

purposes of § 1.367(a)–8. Thus, for 

example, if an election under section 

338(h)(10) were made with respect to 

the U.S. transferor, the deemed sale of 

the stock of the transferee foreign 

corporation held by the U.S. transferor 

would constitute a disposition of such 

stock that either requires gain to be 

recognized under the GRA or terminates 

the GRA if the conditions for the 

termination rule are satisfied. 

On August 22, 2008, the IRS and 

Treasury Department issued proposed 

regulations under section 336(e) (REG– 

143544–04, 2008–42 IRB 947) that 

provide rules generally consistent with 

the rules that apply to elections under 

section 338(h)(10). The proposed 

regulations under section 336(e) shall be 

applicable to dispositions occurring on 

or after the proposed regulations are 

published as final regulations in the 

Federal Register. The proposed 

regulations do not apply if the selling 

corporation or the target corporation is 

foreign. When final regulations under 

section 336(e) are promulgated, the IRS 

and Treasury Department anticipate that 

a deemed asset sale pursuant to a 

section 336(e) election with respect to a 

domestic corporation shall be taken into 

account for purposes of § 1.367(a)–8, 

similar to a deemed asset sale pursuant 

to an election under section 338(h)(10). 

Comments are requested in this regard, 

including what special rules would be 

required with respect to an existing 

GRA if an election under section 336(e) 

were permitted if the selling corporation 

or the target corporation were foreign. 

I. Expatriation Under Section 877A 

The 2007 regulations provide that a 

GRA shall be triggered immediately 

before the date on which an individual 

U.S. transferor loses United States 

citizenship or ceases to be taxed as a 

lawful permanent resident (as defined 

in section 877(e)(2)). This rule applies 

even if the individual U.S. transferor 

would have recognized gain with 

respect to the stock of the transferee 

foreign corporation under section 877. 

The final regulations generally retain 

this rule, modified for the enactment of 

section 877A. Further, the final 

regulations make clear that the 

termination rule that applies in certain 

cases where the U.S. transferor disposes 

of the stock of the transferee foreign 

corporation is not applicable to an 

individual U.S. transferor that is subject 

to section 877A. 

J. GRA Content 

Comments were received regarding 

whether the information required with a 

GRA could instead be made available by 

the U.S. transferor ‘‘upon request.’’ The 

final regulations confirm that the 

information required with a GRA must 

be included with the GRA as filed with 

the tax return of the U.S. transferor. 

K. Other Changes 

Under the 2007 regulations, certain 

dispositions that qualify for an 

exception nonetheless require the U.S. 

transferor to recognize gain under the 

existing GRA. For example, to the extent 

the transferee foreign corporation would 

be required to recognize gain under 

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

with an exchange of the transferred 

stock, the U.S. transferor must recognize 

gain under the GRA notwithstanding 

that an exception applies to the 

exchange of the transferred stock. The 

final regulations retain this rule; 

however, the final regulations refer to 

any disposition or event that requires 

gain to be recognized under a GRA as 

a ‘‘gain recognition event.’’ A gain 

recognition event includes a triggering 

event, a disposition that would 

constitute a triggering event but for the 

application of an exception (such as the 

section 351(b) or 356 exchange 

described above), and a section 301 

distribution that would require gain to 

be recognized under section 301(c)(3) 

with respect to the transferred stock. 

The final regulations clarify the 

amount of gain subject to a GRA that is 

filed by a domestic corporate 

shareholder of a domestic corporation 

(the U.S. transferor) that transfers stock 

or securities to the transferee foreign 

corporation pursuant to an outbound 

asset reorganization that is subject to 

section 367(a)(5) and the regulations 

under that section. 

The final regulations clarify that, if a 

GRA is entered into in connection with 

a transfer of a partnership interest, a 

complete or partial disposition of such 

partnership interest shall constitute a 

triggering event for purposes of the 

GRA. 

The 2007 regulations provide 

exceptions for certain dispositions of 

stock of the transferee foreign 

corporation or of substantially all the 

assets of the transferred corporation that 

are described in section 351, 354 (but 

only in the case of a reorganization 

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

721, if, in addition to other 

requirements, the U.S. transferor 

complies with requirements similar to 

those for the exception that applies to 

similar dispositions of the transferred 

stock or securities. See § 1.367(a)– 

8T(e)(1)(ii). In response to comments 

requesting certainty concerning the 

requirements that must be satisfied, the 

final regulations identify the specific 

requirements that must be satisfied with 

respect to such dispositions. 

The 2007 regulations provide that, if 

the transferred corporation is domestic 

and at the time of the initial transfer the 

U.S. transferor owned stock in the 

transferred corporation satisfying the 

requirements of section 1504(a)(2), the 

GRA shall terminate without further 

effect if the transferred corporation 

disposes of substantially all of its assets 

in a transaction in which all gain 

realized is recognized currently. The 

final regulations retain this termination 

rule but add, as an additional condition 

for its application, that the U.S. 

transferor and the transferred 

corporation were members of the same 

consolidated group on the date of the 

initial transfer. This change was made 

because the IRS and Treasury 

Department expect a lesser degree of 

inside and outside basis disparity 

within a consolidated group. 

The final regulations provide that, if 

the initial transfer and one or more 

dispositions or other events (even if an 

exception applies) that affect the GRA 

filed by the U.S. transferor with respect 

to the initial transfer occur within the 

same taxable year of such U.S. 

transferor, or if multiple dispositions or 

events that affect an existing GRA (even 

if an exception applies) occur in a 

taxable year of the U.S. transferor that 

does not include the initial transfer, the 

U.S. transferor is only required to enter 

into a single GRA for such taxable year. 

The GRA must describe the initial 

transfer and/or each subsequent 

disposition or other event that affects 

the GRA. This rule does not apply, 

however, if a disposition or other event 

requires a new GRA to be filed by a 

United States person that was not the 

U.S. transferor with respect to the 

existing GRA. 

The final regulations provide that the 

determination of whether a disposition 

of substantially all of the assets of the 

transferred corporation has occurred 

shall be made on the basis of one or 

more related transactions. The final 

regulations provide further that the 

determination shall be made without 

regard to a disposition of assets 

described in section 1221(a)(1) in the 

ordinary course of business. 


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Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Rules and Regulations 6957 

Effective/Applicability Dates 

The final regulations generally apply 

to transfers of stock or securities 

occurring on or after March 13, 2009. 

The final regulations shall not apply to 

transfers of stock or securities occurring 

on or after March 13, 2009 that are 

entered into pursuant to a contract that 

was binding before February 11, 2009 

(subject to customary conditions) and 

all times thereafter. However, taxpayers 

may apply the final regulations to such 

transfers provided the final regulations 

are applied consistently to all such 

transfers. Taxpayers may also apply the 

rules of the final regulations that were 

not already effective under § 1.367(a)–8 

(see 26 CFR part 1, revised April 1, 

2006) and § 1.367(a)–8T to any gain 

recognition agreement filed with respect 

to a transfer of stock or securities 

occurring on a date that is before March 

13, 2009 and during a taxable year for 

which the period of limitations on 

assessments under section 6501(a) of the 

Code has not closed. 

Availability of IRS Documents 

IRS documents 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 publication is obsolete 

as of February 11, 2009: 

Notice 2005–74 (2005–2 CB 726). 

Special Analyses 

It has been determined that this 

Treasury Decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

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

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

regulations. 

It is hereby certified that the 

collections of information contained in 

these regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

Accordingly, a regulatory flexibility 

analysis is not required. These 

regulations primarily will affect United 

States persons that are large 

corporations engaged in cross-border 

corporate transactions. Thus, the 

number of affected small entities—in 

whichever of the three categories 

defined in the Regulatory Flexibility Act 

(small businesses, small organizations, 

and small governmental jurisdictions)— 

will not be substantial. The IRS and 

Treasury Department estimate that small 

organizations and small governmental 

jurisdictions are likely to be affected 

only insofar as they might hold a 

portfolio interest in stock or securities 

and in the unlikely event that they 

transfer such stock or securities to a 

foreign corporation. While a certain 

number of small entities may transfer 

stock or securities to a foreign 

corporation in connection with an 

acquisition or reorganization, the IRS 

and Treasury Department do not 

anticipate the number to be substantial. 

Furthermore, the IRS and Treasury 

Department estimate that those small 

entities that are affected by the 

regulations will likely face a burden of 

approximately two hours at an hourly 

rate of $200. Considering that the 

collections of information enable 

taxpayers to defer the current 

recognition of gain that is subject to a 

gain recognition agreement, the IRS and 

Treasury believe that $400 is not a 

significant economic impact. Pursuant 

to section 7805(f) of the Internal 

Revenue Code, this regulation was 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Drafting Information 

The principal authors of these 

regulations are Daniel McCall, formerly 

of the Office of the Associate Chief 

Counsel (International), and S. James 

Hawes of the Office of Associate Chief 

Counsel (International). However, other 

personnel from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Amendments to the Regulations 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by removing the 

entries for §§ 1.367(a)–3T(e) and 

1.367(a)–8T to read in part as follows: 

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

■ Par. 2. Section 1.338–1 is amended by 

adding a new sentence at the end of 

paragraph (a)(2), to read as follows: 

§ 1.338–1. General principles; status of old 

target and new target. 

(a) * * * 

(2) * * * See also § 1.367(a)–8(k)(13) 

for a rule applicable to gain recognition 

agreements (filed under §§ 1.367(a)– 

3(b)(1)(ii) and 1.367(a)–8) and deemed 

asset sales as a result of an election 

under section 338(g). 

* * * * * 

§ 1.367(a)–3 [Amended] 

■ Par. 3. For each entry in the table in 

the ‘‘Section’’ column, remove the 

language in the ‘‘Remove’’ column and 

add the language in the ‘‘Add’’ column 

in its place. 

Section Remove Add 

1.367(a)–3(c)(3)(iii)(B)(1)(i)(A) ................................. 1296(b) ................................................................... 1297(b). 

1.367(a)–3(d)(2)(iii) .................................................. § 1.367(a)–8T(b)(3)(i) and (d) ................................. § 1.367(a)–8(c)(1)(i). 

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

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

1.367(a)–3(d)(3), Example 1(ii), fourth sentence .... § 1.367(a)–8T(b)(1)(vii) ........................................... § 1.367(a)–8(c)(2)(vi). 

1.367(a)–3(d)(3), Example 1(ii), fifth sentence ....... § 1.367(a)–8T(b)(1)(vii) ........................................... § 1.367(a)–8(c)(2)(vi). 

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

1.367(a)–3(d)(3), Example 1A(ii), second sentence § 1.367(a)–8T(d)(4) ................................................. § 1.367(a)–8(j)(5). 

1.367(a)–3(d)(3), Example 1A(ii), second sentence § 1.367(a)–8T(e)(8) ................................................. § 1.367(a)–8(k)(10). 

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

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

1.367(a)–3(d)(3), Example 4(ii), second sentence § 1.367(a)–8T(g)(2) ................................................. § 1.367(a)–8(o)(4). 

1.367(a)–3(d)(3), Example 5A(ii), second to last 

sentence.

§ 1.367(a)–8T(g)(2) ................................................. § 1.367(a)–8(o)(4). 

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

1.367(a)–3(d)(3), Example 7(ii), second sentence § 1.367(a)–8T(g)(2) ................................................. § 1.367(a)–8(o)(4). 

1.367(a)–3(d)(3), Example 7(ii), third sentence ...... § 1.367(a)–8T(e)(1)(iii) ............................................ § 1.367(a)–8(k)(4). 


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6958 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Rules and Regulations 

Section Remove Add 

1.367(a)–3(d)(3), Example 7A(ii), fourth sentence § 1.367(a)–8T(g)(2) ................................................. § 1.367(a)–8(o)(4). 

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

1.367(a)–3(d)(3), Example 7A(ii), last sentence ..... § 1.367(a)–8T(e)(1)(iii) ............................................ § 1.367(a)–8(k)(4). 

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

sentence.

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

1.367(a)–3(d)(3), Example 9(ii), last sentence ....... § 1.367(a)–8T(d)(2) ................................................. § 1.367(a)–8(j)(2)(i). 

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

1.367(a)–3(d)(3), Example 11(ii), sixth sentence .... § 1.367(a)–8T(b)(1)(vii) ........................................... § 1.367(a)–8(c)(2)(vi). 

1.367(a)–3(d)(3), Example 12(ii), third sentence .... § 1.367(a)–3T(e) ..................................................... § 1.367(a)–3(e). 

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

1.367(b)–13(a)(2)(iii) ................................................ or (iii) or in sections 368(a)(1)(G) and (a)(2)(D) ..... (iii), or (v). 

■ Par. 4. For each entry in the table, 

redesignate the paragraph designated in 

the ‘‘Old Paragraph’’ column as the new 

paragraph designation in the ‘‘New 

Paragraph’’ column to read as follows: 

§ 1.367(a)–3(g) [Redesignated] 

Section 1.367(a)–3(g) is redesignated 

as follows: 

Old paragraph New paragraph 

1.367(a)–3(g)(1)(A) ... 1.367(a)–3(g)(1)(i) 

1.367(a)–3(g)(1)(B) ... 1.367(a)–3(g)(1)(ii) 

1.367(a)–3(g)(1)(B)(1) 1.367(a)–3(g)(1)(ii)(A) 

1.367(a)–3(g)(1)(B)(2) 1.367(a)–3(g)(1)(ii)(B) 

1.367(a)–3(g)(1)(B)(3) 1.367(a)–3(g)(1)(ii)(C) 

1.367(a)–3(g)(1)(B)(4) 1.367(a)–3(g)(1)(ii)(D) 

1.367(a)–3(g)(1)(B)(5) 1.367(a)–3(g)(1)(ii)(E) 

1.367(a)–3(g)(1)(B)(6) 1.367(a)–3(g)(1)(ii)(F) 

1.367(a)–3(g)(1)(C) ... 1.367(a)–3(g)(1)(iii) 

1.367(a)–3(g)(1)(D) ... 1.367(a)–3(g)(1)(iv) 

1.367(a)–3(g)(1)(D)(1) 1.367(a)– 

3(g)(1)(iv)(A) 

1.367(a)–3(g)(1)(D)(2) 1.367(a)– 

3(g)(1)(iv)(B) 

1.367(a)–3(g)(1)(D)(3) 1.367(a)– 

3(g)(1)(iv)(C) 

1.367(a)–3(g)(1)(E) ... 1.367(a)–3(g)(1)(v) 

1.367(a)–3(g)(1)(F) ... 1.367(a)–3(g)(1)(vi) 

1.367(a)–3(g)(2)(G) ... 1.367(a)–3(g)(1)(vii) 

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

by: 

■ 1. In the first sentence of paragraph 

(b)(1), remove the words ‘‘Except as 

provided in section 367(a)(5)’’ and add 

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

and paragraph (e) of this section’’ in 

their place. 

■ 2. In the first sentence of paragraph 

(c)(1), remove the words ‘‘Except as 

provided in section 367(a)(5)’’ and add 

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

and paragraph (e) of this section’’ in 

their place. 

■ 3. Revising paragraphs (d)(2)(iv). 

■ 4. Revising the last sentence of 

paragraph (d)(3), Example 5(ii). 

■ 5. Removing the last sentence of 

paragraph (d)(3), Example 5A(ii). 

■ 6. Revising paragraph (e). 

■ 7. Removing and reserving paragraph 

(f). 

■ 8. Revising the heading for paragraph 

(g) and adding new paragraph 

(g)(1)(viii). 

The revisions and addition read as 

follows: 

§ 1.367(a)–3 Treatment of transfers of 

stock or securities to foreign corporations. 

* * * * * 

(d) * * * 

(2) * * * 

(iv) Gain recognition agreements 

involving multiple parties. The U.S. 

person’s agreement to recognize gain, as 

provided in § 1.367(a)–8, shall include 

appropriate provisions consistent with 

the principles of § 1.367(a)–8. See 

Examples 5 and 5A of this section and 

§ 1.367(a)–8(j)(9). 

* * * * * 

(3) * * * 

Example 5. * * * 

(ii) * * * Under § 1.367(a)–8(j)(9), the gain 

recognition agreement would be triggered if 

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

* * * * * 

(e) Transfers by a domestic 

corporation to a foreign corporation in 

a section 361 exchange—(1) General 

rule. If a domestic corporation (U.S. 

transferor) transfers stock or securities 

to a foreign corporation (transferee 

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), such transfer shall be subject 

to section 367(a)(1), unless the 

conditions of paragraphs (e)(1)(i) 

through (iv) of this section are satisfied. 

(i) The conditions set forth in section 

367(a)(5) and any regulations under that 

section have been satisfied including 

that: 

(A) The U.S. transferor is controlled 

(within the meaning of section 368(c)) 

by five or fewer (but at least one) 

domestic corporations (control group 

members) at the time of the section 361 

exchange; 

(B) The U.S. transferor recognizes the 

amount of the gain realized in the 

section 361 exchange that is allocable to 

any shareholder that is not a control 

group member (based on the value of 

the ownership interest in the U.S. 

transferor held by the shareholder at the 

time of the section 361 exchange); 

(C) The U.S. transferor recognizes the 

amount of the gain realized in the 

section 361 exchange allocable to a 

control group member that cannot be 

preserved in the stock received by the 

control group member in the 

transaction; and 

(D) Appropriate adjustments are made 

to the basis of the stock received by each 

control group member in the 

transaction. 

(ii) If the stock or securities 

transferred in the section 361 exchange 

are of a domestic corporation, the 

conditions in paragraphs (c)(1)(i), (ii), 

and (iv) of this section are satisfied. 

(iii) Each control group member that 

owns five percent or more (applying the 

attribution rules of section 318, as 

modified by section 958(b)) of the total 

voting power or the total fair market 

value of the stock of the transferee 

foreign corporation immediately after 

the transaction enters into a gain 

recognition agreement as provided in 

§ 1.367(a)–8. The amount of gain subject 

to the gain recognition agreement shall 

equal the amount of the gain realized by 

the U.S. transferor on the transfer of the 

stock or securities in the section 361 

exchange that is allocable to such 

control group member (based on the 

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

transferor held by the control group 

member at the time of the section 361 

exchange) reduced by the amount of 

such allocable gain that is recognized by 

the U.S. transferor with respect to the 

control group member. The gain 

recognition agreement shall designate 

the control group member as the U.S. 

transferor for purposes of paragraphs (b) 

and (c) of this section and § 1.367(a)–8. 

(iv) Each control group member that 

enters into a gain recognition agreement 

pursuant to paragraph (e)(1)(iii) of this 

section makes the election described in 

§ 1.367(a)–8(c)(2)(vi). 

(2) Certain triangular asset 

reorganizations. If a transfer of stock or 

securities described in paragraph (e)(1) 

of this section is pursuant to a triangular 


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Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Rules and Regulations 6959 

asset reorganization described in 

§ 1.358–6(b)(2)(i) through (iii), the gain 

recognition agreement filed by a control 

group member pursuant to paragraph 

(e)(1)(iii) of this section shall include 

provisions consistent with the 

principles of § 1.367(a)–8 to account for 

all the parties to the reorganization. See 

§ 1.367(a)–8(j)(9). 

(3) Examples. The following examples 

illustrate the provisions of paragraph 

(e)(1) of this section. Except as 

otherwise indicated, assume US1, US2, 

USP, and UST are domestic 

corporations; US1 and US2 are not 

related; CFC1, CFC2, FA, and FC are 

foreign corporations; the section 1248 

amount attributable to the stock of a 

foreign corporation is zero; and section 

7874 does not apply to the transaction. 

Example 1. Outbound asset reorganization. 

(i) Facts. US1 and US2 own 60% and 40%, 

respectively, of the outstanding stock of UST. 

UST wholly owns FC. The FC stock held by 

UST has a $20x basis and a $100x fair market 

value. UST merges with and into FC in an 

asset reorganization described in section 

368(a)(1)(A). In the section 361 exchange that 

is part of the reorganization, UST transfers all 

of its FC stock to FA. UST distributes the FA 

stock it received in the section 361 exchange 

to US1 and US2 pursuant to the plan of 

reorganization. The conditions set forth in 

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

the regulations under that section are 

satisfied, including adjusting the basis of the 

FA stock received by US1 and US2 in the 

reorganization, as appropriate. After the 

reorganization, US1 and US2 own 6% and 

4%, respectively, of the outstanding stock of 

FA. 

(ii) Result. If the conditions of paragraph 

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

satisfied, the transfer of the FC stock by UST 

to FA in the section 361 exchange is not 

subject to section 367(a)(1). Because US1 and 

US2 complied with the requirements of 

section 367(a)(5), the requirement of 

paragraph (e)(1)(i) of this section is satisfied. 

Paragraph (e)(1)(ii) of this section is not 

applicable because FC is a foreign 

corporation. Pursuant to paragraph (e)(1)(iii) 

of this section, US1 enters into a gain 

recognition agreement with respect to its 

share of the gain realized by UST on the 

transfer of the FC stock to FA in the section 

361 exchange ($48x, or 60% of $80x). The 

amount of gain subject to the gain recognition 

agreement is $48x because UST did not 

recognize any amount of such gain under 

section 367(a)(5) or the regulations under that 

section with respect to US1. US1 is 

designated as the U.S. transferor on the gain 

recognition agreement for purposes of 

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

8. US1 makes the election described in 

§ 1.367(a)–8(c)(2)(vi) with respect to the gain 

recognition agreement. Because US2 owns 

less than 5% of the stock of FA after the 

reorganization, US2 is not required to enter 

into a gain recognition agreement with 

respect to its share of the gain realized by 

UST on the transfer of the FC stock to FA in 

the section 361 exchange. 

(iii) Alternate facts. The facts are the same 

as in paragraph (i) of this Example, except 

that, in year 4, FA disposes of 25% of the FC 

stock in a taxable exchange. Under 

§ 1.367(a)–8(c)(1)(i) and (j)(1), the partial 

disposition of the FC stock requires US1 to 

include in income 25% of the gain subject to 

the gain recognition agreement filed in year 

1 ($12x, or 25% of $48x) and pay applicable 

interest on any additional tax due on such 

inclusion. 

(iv) Alternate facts. The facts are the same 

as in paragraph (iii) of this Example, except 

that US1 and US2 are members of a 

consolidated group of which USP is the 

common parent. Because US2 is considered 

to own at least 5% of the stock of FA 

following the reorganization by reason of the 

attribution rules of section 318, as modified 

by section 958(b), a gain recognition 

agreement must also be entered into on 

behalf of US2 with respect to the amount of 

the gain realized but not recognized by UST 

on the transfer of the FC stock to FA that is 

allocable to US2 ($32x, or 40% of $80x). 

Under § 1.367(a)–8(d)(3) and § 1.1502– 

77(a)(1), USP enters into the gain recognition 

agreements on behalf of US1 and US2. In 

year 4, US1 and US2 must include in income 

25% of the amount of gain subject to their 

respective gain recognition agreement ($12x 

for US1 and $8x for US2) and pay applicable 

interest on any additional tax due on such 

inclusion. 

Example 2. Divisive reorganization. (i) 

Facts. US1 wholly owns UST. The UST stock 

has a $120x basis and $150x fair market 

value. UST wholly owns CFC2. The CFC2 

stock has a $20x basis and a $50x fair market 

value. UST also owns Business A that has a 

fair market value of $100x. In a divisive 

reorganization that satisfies the requirements 

of section 368(a)(1)(D), UST transfers the 

CFC2 stock to CFC1, a newly-formed 

corporation, in exchange solely for CFC1 

stock. The transfer of the CFC2 stock to CFC1 

is a section 361 exchange. UST then 

distributes the CFC1 stock to US1 in a 

transaction that qualifies under section 355. 

Under section 358, the pre-exchange basis in 

the UST stock ($120x) is allocated between 

the UST stock and the CFC1 stock based on 

the relative fair market values of such stock. 

Therefore, immediately after the transaction, 

the basis of the UST stock is $80x ($120x 

multiplied by $100x/$150x), and the basis of 

the CFC1 stock is $40x ($120x multiplied by 

$50x/$150x). The conditions set forth in 

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

that section are satisfied, including reducing 

the basis of the CFC1 stock received by US1 

in the transaction by $20x so that the $30x 

built-in gain in the CFC2 stock transferred in 

the section 361 exchange is preserved in the 

CFC1 stock received by US1 in the 

transaction. 

(ii) Result. Because US1 complied with the 

requirements of section 367(a)(5) and 

regulations under that section, the 

requirement of paragraph (e)(1)(i) of this 

section is satisfied. Paragraph (e)(1)(ii) of this 

section is not applicable because CFC2 is a 

foreign corporation. Pursuant to paragraph 

(e)(1)(iii) of this section, US1 enters into a 

gain recognition agreement with respect to its 

share of the gain realized by UST on the 

transfer of the CFC2 stock to CFC1 in the 

section 361 exchange ($30x). The amount of 

gain subject to the gain recognition 

agreement is $30x because UST did not 

recognize any amount of such gain under 

section 367(a)(5) or the regulations under that 

section with respect to US1. US1 is 

designated as the U.S. transferor on the gain 

recognition agreement for purposes of 

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

8. US1 makes the election described in 

§ 1.367(a)–8(c)(2)(vi) with respect to the gain 

recognition agreement. 

(4) Cross-references. For other 

examples that illustrate the application 

of this paragraph (e), see § 1.367(a)– 

8(q)(2), Examples 6 and 24. 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(b)(1)(iii), Example 4. 

For rules relating to certain distributions 

of stock of a foreign corporation by a 

domestic corporation, see section 

1248(f) and the regulations under that 

section. 

(f) [Reserved]. 

(g) Effective/applicability date—(1) 

* * * 

(viii)(A) Except as provided in this 

paragraph (g)(1)(viii), the rules of 

paragraph (e) of this section apply to 

transfers of stock or securities occurring 

on or after March 13, 2009. For matters 

covered in this section for periods 

before March 13, 2009, but on or after 

March 7, 2007, the rules of § 1.367(a)– 

3T(e) (see 26 CFR part 1, revised April 

1, 2007) apply. For matters covered in 

this section for periods before March 7, 

2007, but on or after July 20, 1998, the 

rule of § 1.367(a)–8(f)(2)(i) (see 26 CFR 

part 1, revised April 1, 2006) applies. 

(B) Taxpayers may apply the rules of 

§ 1.367(a)–3(e) to transfers occurring 

before March 13, 2009, and during a 

taxable year for which the period of 

limitations on assessments under 

section 6501(a) has not closed, if done 

consistently to all such transfers 

occurring during each taxable year. A 

taxpayer applies the rules of § 1.367(a)– 

3(e) to transfers occurring before March 

13, 2009, and during a taxable year for 

which the period of limitations on 

assessments under section 6501(a) has 

not closed, by including the gain 

recognition agreement, annual 

certification, or other information filing, 

that is required as a result of the rules 

of § 1.367(a)–3(e) applying to such a 

transfer, with an amended tax return for 

the taxable year in which the transfer 

occurs that is filed on or before August 

10, 2009. A taxpayer that wishes to 

apply the rules of § 1.367(a)–3(e) to 

transfers occurring before March 13, 

2009, and during a taxable year for 

which the period of limitations on 

assessments under section 6501(a) has 


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not closed but that fails to meet the 

filing requirement described in the 

preceding sentence must request relief 

for reasonable cause for such failure as 

provided in § 1.367(a)–8. 

* * * * * 

§ 1.367(a)–3T [Removed] 

■ Par. 6 Section 1.367(a)–3T is removed. 

■ Par. 7. Section 1.367(a)–8 is revised to 

read as follows: 

§ 1.367(a)–8 Gain recognition agreement 

requirements. 

(a) Scope. This section provides the 

terms and conditions for a gain 

recognition agreement entered into by a 

United States person pursuant to 

§ 1.367(a)–3(b) through (e) in connection 

with a transfer of stock or securities to 

a foreign corporation pursuant to an 

exchange that would otherwise be 

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

(b) of this section provides definitions 

and special rules. Paragraphs (c) 

through (h) of this section identify the 

form, content, and other conditions of a 

gain recognition agreement. Paragraph 

(i) of this section is reserved. Paragraph 

(j) of this section identifies certain 

events that may require gain to be 

recognized under a gain recognition 

agreement. Paragraph (k) of this section 

provides exceptions for certain events 

that would otherwise require gain to be 

recognized under a gain recognition 

agreement. Paragraph (l) of this section 

is reserved. Paragraph (m) of this section 

provides rules that require gain to be 

recognized under a gain recognition 

agreement in connection with certain 

events to which an exception under 

paragraph (k) of this section otherwise 

applies. Paragraph (n) of this section 

provides special rules in the case of a 

distribution of property with respect to 

stock to which section 301 applies. 

Paragraph (o) of this section provides 

rules for certain transactions that 

terminate or reduce the amount of gain 

subject to a gain recognition agreement. 

Paragraph (p) of this section provides 

relief for reasonable cause for certain 

failures to comply with the 

requirements of this section. Paragraph 

(q) of this section provides examples 

that illustrate the rules of the section. 

Paragraph (r) of this section provides 

effective dates for the provisions of this 

section. 

(b) Definitions and special rules. The 

following definitions and special rules 

apply for purposes of this section. 

(1) Definitions—(i) Asset 

reorganization—(A) General rule. 

Except as provided in paragraph 

(b)(1)(i)(B) of this section, an asset 

reorganization is a reorganization 

described in section 368(a)(1) that 

involves an exchange of property 

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

section 361 exchange). 

(B) Exceptions. An asset 

reorganization does not include the 

following: 

(1) A reorganization described in 

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

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

(B) are not met. 

(2) For purposes of paragraphs 

(j)(2)(ii)(B), (k)(6)(ii), and (k)(6)(iii) of 

this section, a triangular asset 

reorganization. For rules applicable to a 

triangular asset reorganization, see 

paragraph (k)(7) of this section. 

(ii) A consolidated group has the 

meaning set forth in § 1.1502–1(h). 

(iii) Disposition. Except as provided 

in this paragraph (b)(1)(iii), a disposition 

includes any transfer that would 

constitute a disposition for any purpose 

of the Internal Revenue Code. A 

disposition includes an indirect 

disposition of the stock of the 

transferred corporation as described in 

§ 1.367(a)–3(d). Except as provided in 

paragraph (n)(1) of this section, a 

disposition does not include the receipt 

of a distribution of property with 

respect to stock to which section 301 

applies (including by reason of section 

302(d)). See paragraphs (n)(2) and (o)(3) 

of this section for rules that apply if gain 

is recognized under section 301(c)(3). A 

complete or partial disposition by 

installment sale (under section 453) 

shall be treated as a disposition in the 

year of the installment sale. 

(iv) A gain recognition event is an 

event described in paragraphs (j) 

through (o) of this section that requires 

gain to be recognized under a gain 

recognition agreement. 

(v) The initial transfer means a 

transfer of stock or securities 

(transferred stock or securities) to a 

foreign corporation pursuant to an 

exchange that would otherwise be 

subject to section 367(a)(1) but with 

respect to which a gain recognition 

agreement is entered into by a United 

States person pursuant to § 1.367(a)–3(b) 

through (e). 

(vi) An intercompany item has the 

meaning set forth in § 1.1502–13(b)(2). 

(vii) An intercompany transaction has 

the meaning set forth in § 1.1502– 

13(b)(1). 

(viii) A nonrecognition transaction 

has the meaning set forth in section 

7701(a)(45). In addition, a 

nonrecognition transaction includes an 

exchange described in section 351(b) or 

356 even if all gain realized in the 

exchange is recognized. 

(ix) The terms P, S, and T have the 

meanings set forth in § 1.358–6(b)(1)(i), 

(ii), and (iii), respectively. 

(x) The determination of whether 

substantially all of the assets of the 

transferred corporation have been 

disposed of is based on all the facts and 

circumstances. 

(xi) A timely-filed return is a Federal 

income tax return filed by the due date 

set forth in section 6072(a) or (b), plus 

any extension of time to file such return 

granted under section 6081. 

(xii) Transferee foreign corporation. 

Except as provided in this paragraph 

(b)(1)(xii), the transferee foreign 

corporation is the foreign corporation to 

which the transferred stock or securities 

are transferred in the initial transfer. In 

the case of an indirect stock transfer, the 

transferee foreign corporation has the 

meaning set forth in § 1.367(a)– 

3(d)(2)(i). The transferee foreign 

corporation also includes a corporation 

designated as the transferee foreign 

corporation in the case of a new gain 

recognition agreement entered into 

under this section. 

(xiii) Transferred corporation. Except 

as provided in this paragraph 

(b)(1)(xiii), the transferred corporation 

is the corporation the stock or securities 

of which are transferred in the initial 

transfer. In the case of an indirect stock 

transfer, the transferred corporation has 

the meaning set forth in § 1.367(a)– 

3(d)(2)(ii). The transferred corporation 

also includes a corporation designated 

as the transferred corporation in the 

case of a new gain recognition 

agreement entered into under this 

section. 

(xiv) A triangular asset reorganization 

is a reorganization described in § 1.358– 

6(b)(2)(i), (ii), (iii), or (v). 

(xv) The U.S. transferor is the United 

States person (as defined in § 1.367(a)– 

1T(d)(1)) that transfers the transferred 

stock or securities to the transferee 

foreign corporation in the initial 

transfer. For purposes of determining 

the U.S. transferor in the case of a 

transfer by a partnership, see § 1.367(a)– 

1T(c)(3)(i). The U.S. transferor also 

includes the United States person 

designated as the U.S. transferor in the 

case of a new gain recognition 

agreement entered into under this 

section including, for example, under 

paragraph (k)(14) of this section. 

(2) Special rules—(i) Stock deemed 

received or transferred. References to 

stock received include stock deemed 

received (for example, pursuant to 

section 367(c)(2)). References to a 

transfer of stock or securities include a 

deemed transfer of stock or securities. 

(ii) Stock of the transferee foreign 

corporation. References to stock of the 

transferee foreign corporation include 

any stock of the transferee foreign 

corporation the basis of which is 


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determined, in whole or in part, by 

reference to the basis of the stock of the 

transferee foreign corporation received 

by the U.S. transferor in the initial 

transfer. 

(iii) Transferred stock or securities. 

References to transferred stock or 

securities include any stock or securities 

of the transferred corporation the basis 

of which is determined, in whole or in 

part, by reference to the basis of the 

stock or securities transferred in the 

initial transfer. 

(c) Gain recognition agreement—(1) 

Terms of agreement—(i) General rule. 

Except as provided in this paragraph 

(c)(1)(i), if a gain recognition event 

occurs during the period beginning on 

the date of the initial transfer and 

ending as of the close of the fifth full 

taxable year (not less than 60 months) 

following the close of the taxable year 

in which the initial transfer occurs 

(GRA term), the U.S. transferor must 

include in income the gain realized but 

not recognized on the initial transfer by 

reason of entering into the gain 

recognition agreement. In the case of a 

gain recognition event that occurs as a 

result of a partial disposition of stock, 

securities, or a partnership interest, as 

applicable, the U.S. transferor is 

required to recognize a proportionate 

amount of the gain subject to the gain 

recognition agreement, determined 

based on the fair market value of the 

stock, securities, or partnership interest, 

as applicable, disposed of (measured at 

the time of the partial disposition) as 

compared to the fair market value of all 

the stock, securities, or partnership 

interest, as applicable (measured at the 

time of the partial disposition). If the 

U.S. transferor must recognize gain 

under this paragraph as a result of an 

event described in paragraph (m) or (n) 

of this section, see those paragraphs to 

determine the amount of the gain that 

must be recognized. The amount of gain 

subject to the gain recognition 

agreement shall be reduced by the 

amount of gain recognized under this 

paragraph. If the amount of gain subject 

to the gain recognition agreement is 

reduced to zero, the gain recognition 

agreement shall terminate without 

further effect. 

(ii) Ordering rule for gain recognized 

under multiple gain recognition 

agreements. If a gain recognition event 

occurs that requires gain to be 

recognized under multiple gain 

recognition agreements, gain shall first 

be recognized under the gain 

recognition agreement that relates to the 

earliest initial transfer, then under the 

gain recognition agreement that relates 

to the immediately following initial 

transfer and so forth until the 

appropriate amount of gain has been 

recognized under each gain recognition 

agreement. The amount of gain 

recognized under a gain recognition 

agreement shall be determined after 

taking into account, as appropriate, any 

increase to basis (including the basis of 

the transferred stock or securities) under 

paragraph (c)(4) of this section resulting 

from gain recognized under another gain 

recognition agreement. For an 

illustration of this ordering rule, see 

paragraph (q)(2) of this section, Example 

6. 

(iii) Taxable year in which gain is 

reported—(A) Year of initial transfer. 

Except as provided in paragraph 

(c)(1)(iii)(B) of this section, the U.S. 

transferor must report any gain 

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

this section on an amended Federal 

income tax return for the taxable year of 

the initial transfer. The amended return 

must be filed on or before the 90th day 

following the date on which the gain 

recognition event occurs. 

(B) Year of gain recognition event. If 

an election under paragraph (c)(2)(vi) of 

this section is made with the gain 

recognition agreement or if paragraph 

(c)(5)(ii) of this section applies to the 

gain recognition agreement, the U.S. 

transferor must report any gain 

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

this section on its Federal income tax 

return for the taxable year during which 

the gain recognition event occurs. If an 

election under paragraph (c)(2)(vi) of 

this section is made with the gain 

recognition agreement or if paragraph 

(c)(5)(ii) of this section applies to the 

gain recognition agreement but the U.S. 

transferor does not report the gain 

recognized on its Federal income tax 

return for the taxable year during which 

the gain recognition event occurs, the 

Commissioner may require the U.S. 

transferor to report the gain on an 

amended Federal income tax return for 

the taxable year during which the initial 

transfer occurred. 

(iv) Offsets. No special limitations 

apply with respect to offsetting gain 

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

this section with net operating losses, 

capital losses, credits against tax, or 

similar items. 

(v) Payment and reporting of interest. 

Interest must be paid on any additional 

tax due with respect to gain recognized 

by the U.S. transferor under paragraph 

(c)(1)(i) of this section. Any interest due 

shall be determined based on the rates 

under section 6621 for the period 

between the date that was prescribed for 

filing the Federal income tax return of 

the U.S. transferor for the year of the 

initial transfer and the date on which 

the additional tax due is paid. If 

paragraph (c)(1)(iii)(B) of this section 

applies, any interest due must be 

included with the payment of tax due 

with the Federal income tax return of 

the U.S. transferor for the taxable year 

during which the gain recognition event 

occurs (or should reduce the amount of 

any refund due to the U.S. transferor for 

such taxable year). A schedule entitled 

‘‘Calculation of Section 367 Tax and 

Interest’’ that separately identifies and 

calculates any additional tax and 

interest due must be included with the 

Federal income tax return on which any 

interest due is reported. 

(2) Content of gain recognition 

agreement. The gain recognition 

agreement must be entitled ‘‘GAIN 

RECOGNITION AGREEMENT UNDER 

§ 1.367(a)–8’’ and include the 

information described in paragraphs 

(c)(2)(i) through (viii) of this paragraph 

with the corresponding paragraph 

numbers. The information required 

under this paragraph (c)(2) and 

paragraph (c)(3) of this section must be 

included in the gain recognition 

agreement as filed. 

(i) A statement that the document 

constitutes an agreement by the U.S. 

transferor to recognize gain in 

accordance with the requirements of 

this section. 

(ii) A description of the transferred 

stock or securities and other information 

as required in paragraph (c)(3) of this 

section. 

(iii) A statement that the U.S. 

transferor agrees to comply with all the 

conditions and requirements of this 

section, including to recognize gain 

under the gain recognition agreement in 

accordance with paragraph (c)(1)(i) of 

this section, extend the statute of 

limitations on assessments of tax as 

provided in paragraph (f) of this section, 

and file the certification described in 

paragraph (g) of this section. 

(iv) A statement that arrangements 

have been made to ensure that the U.S. 

transferor is informed of any events that 

affect the gain recognition agreement, 

including triggering events or other gain 

recognition events. 

(v) In the case of a new gain 

recognition agreement filed under this 

section— 

(A) A description of the event (such 

as a triggering event) and the applicable 

exception, if any, that gave rise to the 

new gain recognition agreement (such as 

a triggering event exception), including 

the date of the event and the name, 

address, and taxpayer identification 

number (if any) of each person that is a 

party to the event; 

(B) As applicable, a description of the 

class, amount, and characteristics of the 


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stock, securities or partnership interest 

received in the transaction; and 

(C) As applicable, a calculation of the 

amount of gain that remains subject to 

the new gain recognition agreement as 

a result of the application of paragraph 

(m), (n), or (o) of this section. 

(vi) A statement whether the U.S. 

transferor elects to include in income 

any gain recognized under paragraph 

(c)(1)(i) of this section in the taxable 

year during which a gain recognition 

event occurs. See paragraph (c)(5)(ii) of 

this section for a rule that requires, in 

certain cases, for the gain recognized 

pursuant to a new gain recognition 

agreement to be included in income 

during the taxable year in which the 

gain recognition event occurs. 

(vii) A statement whether a gain 

recognition event has occurred during 

the taxable year of the initial transfer. 

(viii) A statement describing any 

disposition of assets of the transferred 

corporation during such taxable year 

other than in the ordinary course of 

business. 

(3) Description of transferred stock or 

securities and other information. The 

gain recognition agreement shall 

include the following: 

(i) A description of the transferred 

stock or securities including— 

(A) The type or class, amount, and 

characteristics of the transferred stock or 

securities; 

(B) A calculation of the amount of the 

built-in gain in the transferred stock or 

securities that are subject to the gain 

recognition agreement, reflecting the 

basis and fair market value on the date 

of the initial transfer; 

(C) The amount of any gain 

recognized by the U.S. transferor on the 

initial transfer; and 

(D) The percentage (by voting power 

and value) that the transferred stock (if 

any) represents of the total stock 

outstanding of the transferred 

corporation on the date of the initial 

transfer. 

(ii) The name, address, place of 

incorporation, and taxpayer 

identification number (if any) of the 

transferred corporation. 

(iii) The date on which the U.S. 

transferor acquired the transferred stock 

or securities. 

(iv) The name, address and place of 

incorporation of the transferee foreign 

corporation, and a description of the 

stock or securities received by the U.S. 

transferor in the initial transfer, 

including the percentage of stock (by 

vote and value) of the transferee foreign 

corporation received in such exchange. 

(v) If the initial transfer is described 

in § 1.367(a)–3(e), a statement that the 

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

regulations under that section have been 

satisfied, and a description of any 

adjustments to the basis of the stock 

received in the transaction or other 

adjustments made pursuant to section 

367(a)(5) and any regulations under that 

section. 

(vi) If the transferred corporation is 

domestic, a statement describing the 

application of section 7874 to the 

transaction, and indicating that the 

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

satisfied. 

(vii) If the transferred corporation is 

foreign, a statement indicating whether 

the U.S. transferor was a section 1248 

shareholder (as defined in § 1.367(b)– 

2(b)) of the transferred corporation 

immediately before the initial transfer, 

and whether the U.S. transferor is a 

section 1248 shareholder with respect to 

the transferee foreign corporation 

immediately after the initial transfer, 

and whether any reporting requirements 

or other rules contained in regulations 

under section 367(b) are applicable, 

and, if so, whether they have been 

satisfied. 

(viii) If the initial transfer involves a 

transfer by a partnership (see § 1.367(a)– 

1T(c)(3)(i)) or a transfer of a partnership 

interest (see section 367(a)(4) and 

§ 1.367(a)–1T(c)(3)(ii)) a complete 

description of the transfer, including a 

description of the partners in the 

partnership. 

(ix) If the transaction involved the 

transfer of property other than the 

transferred stock or securities and the 

transaction was subject to the indirect 

stock transfer rules of § 1.367(a)–3(d), a 

statement indicating whether— 

(A) The reporting requirements under 

section 6038B have been satisfied with 

respect to the transfer of such other 

property; 

(B) Whether gain was recognized 

under section 367(a)(1); 

(C) Whether section 367(d) applied to 

the transfer of such property; and 

(D) Whether the other property 

transferred qualified for the active 

foreign trade or business exception 

under section 367(a)(3). 

(4) Basis adjustments for gain 

recognized. The following basis 

adjustments shall be made if gain is 

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

this section. 

(i) Stock or securities of transferee 

foreign corporation. The basis of the 

stock or securities, as applicable, of the 

transferee foreign corporation received 

by the U.S. transferor in the initial 

transfer shall be increased as of the date 

of the initial transfer by the amount of 

gain recognized. 

(ii) Transferred stock or securities. 

The basis of the transferred stock or 

securities shall be increased as of the 

date of the initial transfer by the amount 

of the gain recognized. 

(iii) Other appropriate adjustments. 

The basis of other stock, securities, or a 

partnership interest shall be increased, 

as appropriate, in accordance with the 

principles of this paragraph (c)(4). 

Under no circumstances shall the basis 

of stock, securities, or of a partnership 

interest held by a U.S. person that does 

not recognize gain under paragraph 

(c)(1)(i) of this section be increased 

under this paragraph (c)(4). In addition, 

under no circumstances shall the basis 

of any property be increased by the 

amount of any additional tax due or 

interest paid with respect to such tax, 

nor shall the basis of the assets of the 

transferred corporation be increased as 

a result of gain recognized by the U.S. 

transferor under paragraph (c)(1)(i) of 

this section. 

(iv) Cross-reference. See paragraph 

(q)(2) of this section, Examples 1, 2, 3, 

and 5 for illustrations of the rules of this 

paragraph (c)(4). See also § 1.367(a)– 

1T(b)(4) for rules that determine the 

increase to basis of property resulting 

from the application of section 367(a). 

(5) Terms and conditions of a new 

gain recognition agreement—(i) General 

rule. A new gain recognition agreement 

entered into pursuant to this section 

shall replace the existing gain 

recognition agreement, which shall 

terminate without further effect. The 

term of the new gain recognition 

agreement shall be the remaining term 

of the existing gain recognition 

agreement. The amount of gain subject 

to the new gain recognition agreement 

shall equal the amount of gain subject 

to the existing gain recognition 

agreement, reduced by any gain 

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

this section with respect to the existing 

gain recognition agreement by reason of 

the gain recognition event that gives rise 

to the new gain recognition agreement. 

The new gain recognition agreement 

shall, as applicable, be subject to the 

conditions and requirements of this 

section to the same extent as the 

existing gain recognition agreement. For 

example, a triggering event with respect 

to the new gain recognition agreement 

will generally include a disposition of 

the transferred stock or securities or of 

substantially all the assets of the 

transferred corporation. If, however, the 

transferred stock is canceled or 

redeemed pursuant to the disposition or 

other event that gives rise to the new 

gain recognition agreement (for 

example, pursuant to a liquidation 

where the transferee foreign corporation 

is the corporate distributee (within the 

meaning of section 334(b)(2)), or an 


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asset reorganization where the 

transferee foreign corporation is the 

acquiring corporation) the transferred 

stock is not subject to the new gain 

recognition agreement. 

(ii) Special rule for inclusion of gain. 

If the U.S. transferor with respect to the 

new gain recognition agreement is not 

the U.S. transferor with respect to the 

existing gain recognition agreement, or 

a member of the consolidated group of 

which the U.S. transferor with respect to 

the existing gain recognition agreement 

was a member on the date of the initial 

transfer, then any gain recognized under 

paragraph (c)(1)(i) of this section with 

respect to the new gain recognition 

agreement must be included in income 

in the taxable year during which the 

gain recognition event occurs. 

(d) Filing requirements—(1) General 

rule. A gain recognition agreement 

entered into with respect to an initial 

transfer must be included with the 

timely-filed return of the U.S. transferor 

for the taxable year during which the 

initial transfer occurs. 

(2) Special requirements—(i) New 

gain recognition agreement. A new gain 

recognition agreement entered into 

under this section must be included 

with the timely-filed return of the U.S. 

transferor (as identified in the new gain 

recognition agreement) for the taxable 

year during which the disposition or 

event that requires the new gain 

recognition agreement occurs. If the new 

gain recognition agreement is entered 

into by the U.S. transferor that entered 

into the existing gain recognition 

agreement, the new gain recognition 

agreement is in lieu of the annual 

certification otherwise required for such 

taxable year under paragraph (g) of this 

section with respect to the existing gain 

recognition agreement. 

(ii) Multiple events within a taxable 

year. Except as otherwise provided in 

this paragraph (d)(2)(ii), if the initial 

transfer and one or more dispositions or 

other events (even if a triggering event 

exception applies) that affect the gain 

recognition agreement entered into by 

the U.S. transferor with respect to the 

initial transfer occur within the same 

taxable year of such U.S. transferor, or 

if multiple dispositions or other events 

occur in a taxable year of the U.S. 

transferor that does not include the 

initial transfer, only one gain 

recognition agreement is required to be 

entered into and included with the 

timely-filed return of the U.S. transferor 

for such taxable year. The gain 

recognition agreement must describe the 

initial transfer and/or each disposition 

or other event that affects the gain 

recognition agreement (even if a 

triggering event exception applies). This 

paragraph does not apply, however, if 

any such disposition or other event 

requires a new gain recognition 

agreement to be entered into by a United 

States person other than the U.S. 

transferor with respect to the initial 

transfer or that entered into the existing 

gain recognition agreement, as 

applicable. 

(3) Common parent as agent for U.S. 

transferor. If the U.S. transferor is a 

member but not the common parent of 

a consolidated group, the common 

parent of the consolidated group is the 

agent for the U.S. transferor under 

§ 1.1502–77(a)(1). Thus, the common 

parent must file the gain recognition 

agreement on behalf of the U.S. 

transferor. References in this section to 

the timely-filed return of the U.S. 

transferor include the timely-filed 

return of the consolidated group of 

which the U.S. transferor is a member, 

as applicable. 

(e) Signatory—(1) General rule. The 

gain recognition agreement must be 

signed under penalties of perjury by an 

agent of the U.S. transferor that is 

authorized to sign under a general or 

specific power of attorney, or by the 

appropriate party based on the category 

of the U.S. transferor described in this 

paragraph (e)(1). 

(i) If the U.S. transferor is a 

corporation but not a member of a 

consolidated group, a responsible officer 

of the U.S. transferor. If the U.S. 

transferor is a member of a consolidated 

group, a responsible officer of the 

common parent of the consolidated 

group. 

(ii) If the U.S. transferor is an 

individual, the individual. 

(iii) If the U.S. transferor is a trust or 

estate, a trustee, executor, or equivalent 

fiduciary of the U.S. transferor. 

(iv) In a bankruptcy case under Title 

11, United States Code, a debtor in 

possession or trustee. 

(2) Signature requirement. The 

inclusion of an unsigned copy of the 

gain recognition agreement with the 

timely-filed return of the U.S. transferor 

shall satisfy the signature requirement 

of paragraph (e)(1) of this section if the 

U.S. transferor retains the original 

signed gain recognition agreement in the 

manner specified by § 1.6001–1(e). 

(f) Extension of period of limitations 

on assessments of tax—(1) General rule. 

In connection with the filing of a gain 

recognition agreement, the U.S. 

transferor must extend the period of 

limitations on assessments of tax with 

respect to the gain realized but not 

recognized on the initial transfer 

through the close of the eighth full 

taxable year following the taxable year 

during which the initial transfer occurs. 

The U.S. transferor extends the period 

of limitations by filing Form 8838 

‘‘Consent to Extend the Time to Assess 

Tax Under Section 367—Gain 

Recognition Agreement.’’ The Form 

8838 must be signed by a person 

authorized to sign the gain recognition 

agreement under paragraph (e)(1) of this 

section. 

(2) New gain recognition agreement. If 

a new gain recognition agreement is 

entered into under this section, the U.S. 

transferor must extend the period of 

limitations on assessments of tax on the 

initial transfer through the close of the 

eighth full taxable year following the 

taxable year during which the initial 

transfer occurs, consistent with 

paragraph (f)(1) of this section, unless 

the U.S. transferor with respect to the 

new gain recognition agreement is the 

U.S. transferor with respect to the 

existing gain recognition agreement, or 

a member of the consolidated group of 

which the U.S. transferor with respect to 

the existing gain recognition agreement 

was a member on the date of the initial 

transfer. 

(g) Annual certification. Except as 

provided in paragraph (d)(2)(i) of this 

section, the U.S. transferor must include 

with its timely-filed return for each of 

the five full taxable years following the 

taxable year of the initial transfer a 

certification (annual certification) that 

includes the information described in 

paragraphs (g)(1) through (3) of this 

section, as appropriate. The annual 

certification must be signed by a person 

authorized under paragraph (e)(1) of this 

section to sign the gain recognition 

agreement for the initial transfer. The 

inclusion of an unsigned copy of the 

annual certification with the relevant 

timely-filed return of the U.S. transferor 

shall satisfy the signature requirement 

of paragraph (e)(1) of this section 

provided the U.S. transferor retains the 

original signed certification in the 

manner specified by § 1.6001–1(e). 

(1) A statement of whether a gain 

recognition event has or has not 

occurred during such taxable year. If a 

gain recognition event has occurred 

during such taxable year, the annual 

certification must state: 

(i) The amount of gain subject to the 

gain recognition agreement at the time 

of the gain recognition event; 

(ii) The amount of gain recognized 

under the gain recognition agreement by 

reason of the gain recognition event; and 

(iii) A calculation of the reduction to 

the amount of gain subject to the gain 

recognition agreement by reason of the 

gain recognition event (for example, in 

the case of a gain recognition event 

described in paragraph (n)(2) of this 

section). 


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(2) A complete description of any 

event occurring during such taxable 

year that has terminated or reduced the 

amount of gain subject to the gain 

recognition agreement (for example, an 

event described in paragraph (o) of this 

section), including a calculation of any 

reduction to the amount of gain subject 

to the gain recognition agreement. 

(3) A statement describing any 

disposition of assets of the transferred 

corporation during the taxable year not 

in the ordinary course of business. 

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

may be required to furnish a bond or 

other security that satisfies the 

requirements of § 301.7101–1 if the Area 

Director, Field Examination, Small 

Business/Self Employed or the Director 

of Field Operations, Large and Mid-Size 

Business (Director) determines that such 

security is necessary to ensure the 

payment of any tax on the gain realized, 

but not recognized, upon the initial 

transfer. Such bond or security generally 

will be required only if the transferred 

stock or securities are a principal asset 

of the U.S. transferor and the Director 

has reason to believe that a disposition 

of the stock or securities may be 

contemplated. 

(i) [Reserved.] 

(j) Triggering events. Except as 

provided in this section, if an event 

described in paragraphs (j)(1) through 

(10) of this section (triggering event) 

occurs during the GRA term, the U.S. 

transferor must recognize gain under the 

gain recognition agreement in 

accordance with paragraph (c)(1)(i) of 

this section. This paragraph (j) generally 

requires the U.S. transferor to recognize 

gain (and pay applicable interest with 

respect to any additional tax due as 

provided in paragraph (c)(1)(v) of this 

section) under the gain recognition 

agreement to the extent the transferred 

stock or securities are disposed of, 

directly or indirectly. This paragraph (j) 

also requires the U.S. transferor to 

recognize gain under the gain 

recognition agreement in certain cases 

where it is not appropriate for the gain 

recognition agreement to continue. See 

paragraph (k) of this section for 

exceptions available for certain events 

that would otherwise constitute 

triggering events under this paragraph 

(j). See paragraph (o) of this section for 

certain events that terminate or reduce 

the amount of gain subject to a gain 

recognition agreement. 

(1) Disposition of transferred stock or 

securities. A complete or partial 

disposition of the transferred stock or 

securities. See paragraph (q)(2) of this 

section, Example 2 for an illustration of 

the rule of this paragraph (j)(1). 

(2) Disposition of substantially all of 

the assets of the transferred 

corporation—(i) General rule. Except as 

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

section, a disposition in one or more 

related transactions of substantially all 

of the assets of the transferred 

corporation (including stock or 

securities in a subsidiary corporation or 

a partnership interest). If the transferred 

corporation is domestic, see paragraph 

(o)(4) of this section. 

(ii) Exceptions. For purposes of 

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

following dispositions shall be 

disregarded— 

(A) Dispositions of property described 

in section 1221(a)(1) occurring in the 

ordinary course of business; 

(B) An exchange of stock or securities 

described in section 354 that is pursuant 

to an asset reorganization; and 

(C) An exchange of stock by a 

corporate distributee (as defined in 

section 334(b)(2)) pursuant to a 

complete liquidation to which section 

332 applies. 

(3) Disposition of certain partnership 

interests. If the initial transfer occurs by 

reason of the transfer of a partnership 

interest, a complete or partial 

disposition of such partnership interest. 

See section 367(a)(4) and § 1.367(a)– 

1T(c)(3)(ii). 

(4) Disposition of stock of the 

transferee foreign corporation. A 

complete or partial disposition of the 

stock of the transferee foreign 

corporation received by the U.S. 

transferor in the initial transfer. For 

purposes of this section, an individual 

U.S. transferor that loses U.S. 

citizenship or ceases to be a lawful 

permanent resident of the United States 

(within the meaning of section 

7701(b)(6)) shall be treated as disposing 

of all the stock of the transferee foreign 

corporation received in the initial 

transfer as of the date before the loss of 

such status. 

(5) Deconsolidation. A U.S. transferor 

that is a member of a consolidated group 

ceases to be a member of the 

consolidated group, other than by 

reason of an acquisition of the assets of 

the U.S. transferor in a transaction to 

which section 381(a) applies, or by 

reason of the U.S. transferor joining 

another consolidated group as part of 

the same transaction. 

(6) Consolidation. A U.S. transferor 

becomes a member of a consolidated 

group, including a U.S. transferor that is 

a member of a consolidated group and 

that becomes a member of another 

consolidated group. 

(7) Death of an individual; trust or 

estate ceases to exist. A U.S. transferor 

that is an individual dies, or a U.S. 

transferor that is a trust or estate ceases 

to exist. 

(8) Failure to comply. The U.S. 

transferor fails to comply in any 

material respect with any requirement 

of this section or with the terms of the 

gain recognition agreement, including 

failure to file an annual certification 

under paragraph (g) of this section. If a 

failure to include information in a gain 

recognition agreement as filed 

constitutes a failure to comply in a 

material respect, the U.S. transferor 

cannot avoid the application of this 

paragraph (j)(8) by subsequently making 

such information available. A material 

failure under this paragraph (j)(8) shall 

extend the period of limitations on 

assessments of tax until the close of the 

third full taxable year ending after the 

date on which the Director of Field 

Operations or Area Director receives 

actual notice of the failure to comply 

from the U.S. transferor. 

(9) Gain recognition agreement filed 

in connection with indirect stock 

transfers and certain triangular asset 

reorganizations. With respect to a gain 

recognition agreement entered into in 

connection with an indirect stock 

transfer (as defined in § 1.367(a)–3(d)), 

or a triangular asset reorganization 

under § 1.367(a)–3(e)(2), an indirect 

disposition of the transferred stock or 

securities. For example, in the case of an 

indirect stock transfer described in 

§ 1.367(a)–3(d)(1)(iii)(A), a complete or 

partial disposition of the stock of the 

acquiring corporation. 

(10) Gain recognition agreement filed 

pursuant to paragraph (k)(14) of this 

section. In the case of a gain recognition 

agreement entered into pursuant to 

paragraph (k)(14) of this section, in 

addition to any disposition or other 

event described in paragraphs (j)(1) 

through (9) of this section,— 

(i) Any disposition or other event 

identified as a triggering event in a new 

gain recognition agreement as required 

under paragraph (k)(14)(iii) of this 

section; and 

(ii) Any disposition or other event 

that is inconsistent with the principles 

of paragraph (k) of this section 

including, for example, an indirect 

disposition of the transferred stock or 

securities. 

(k) Triggering event exceptions. 

Notwithstanding paragraph (j) of this 

section, a disposition or other event 

described in paragraphs (k)(1) through 

(14) of this section shall not constitute 

a triggering event. This paragraph (k) 

generally provides exceptions for 

certain dispositions that constitute 

nonrecognition transactions but only if, 

immediately after the disposition, a U.S. 

transferor retains, as applicable, a direct 


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or indirect interest in the transferred 

stock or securities, or in the assets of the 

transferred corporation, and a new gain 

recognition agreement is entered into 

with respect to the initial transfer in 

accordance with this paragraph (k). 

Notwithstanding the application of this 

paragraph (k), if a gain recognition event 

described under paragraphs (m) and (n) 

of this section occurs during the GRA 

term the U.S. transferor may be required 

to recognize gain under the gain 

recognition agreement in accordance 

with paragraph (c)(1)(i) of this section. 

See paragraph (o) of this section which 

provides that, notwithstanding 

paragraph (j) of this section, certain 

dispositions or other events shall 

instead terminate or reduce the amount 

of gain subject to a gain recognition 

agreement. 

(1) Transfers of stock of the transferee 

foreign corporation to a corporation or 

partnership. A disposition of stock of 

the transferee foreign corporation 

received in the initial transfer pursuant 

to an exchange to which section 351, 

354 (but only in a reorganization 

described in section 368(a)(1)(B) that is 

not a triangular reorganization), 361 (but 

only in a divisive reorganization to 

which section 355 applies), or 721 

applies, shall not constitute a triggering 

event if a new gain recognition 

agreement is entered into in accordance 

with paragraphs (k)(1)(i) through (iv) of 

this section, as applicable. In the case of 

an exchange to which section 354 

applies that is pursuant to a triangular 

reorganization described in section 

368(a)(1)(B), see paragraph (k)(14) of 

this section and paragraph (q)(2) of this 

section, Example 4. 

(i) In the case of an exchange to which 

section 351 or 354 applies in which 

stock of a foreign acquiring corporation 

is received, the U.S. transferor includes 

with the new gain recognition 

agreement a statement that a complete 

or partial disposition of the stock of the 

foreign acquiring corporation received 

in the exchange shall constitute a 

triggering event. The principles of 

paragraph (o)(1)(i) or (ii), as appropriate, 

shall be applied to determine whether a 

subsequent complete or partial 

disposition of the stock of the foreign 

acquiring corporation received in the 

exchange shall instead terminate or 

reduce the amount of the new gain 

recognition agreement. 

(ii) In the case of an exchange to 

which section 351 or 354 applies in 

which stock of a domestic acquiring 

corporation is received, the domestic 

acquiring corporation enters into the 

new gain recognition agreement, which 

must designate the domestic acquiring 

corporation as the U.S. transferor for 

purposes of this section. For an 

illustration of the rule provided by this 

paragraph (k)(1)(ii), see paragraph (q)(2) 

of this section, Example 3. 

(iii) In the case of a section 361 

exchange that is pursuant to a divisive 

reorganization to which section 355 

applies and in which stock of a 

domestic corporation (domestic 

controlled corporation) is received, the 

domestic controlled corporation enters 

into the new gain recognition 

agreement, which must designate the 

domestic controlled corporation as the 

U.S. transferor for purposes of this 

section. For an illustration of the rule 

provided by this paragraph (k)(1)(iii), 

see paragraph (q)(2) of this section, 

Example 11. 

(iv) In the case of an exchange to 

which section 721 applies, the U.S. 

transferor includes with the new gain 

recognition agreement a statement that a 

complete or partial disposition of the 

partnership interest received in the 

exchange shall constitute a triggering 

event for purposes of the new gain 

recognition agreement. 

(2) Complete liquidation of U.S. 

transferor under sections 332 and 337. 

A distribution by the U.S. transferor of 

the stock of the transferee foreign 

corporation received in the initial 

transfer to which section 337 applies, 

that is pursuant to a complete 

liquidation under section 332, shall not 

constitute a triggering event if the 

corporate distributee (as defined in 

section 334(b)(2)) is a domestic 

corporation (domestic corporate 

distributee) and the domestic corporate 

distributee enters into a new gain 

recognition agreement. The new gain 

recognition agreement must designate 

the domestic corporate distributee as the 

U.S. transferor for purposes of this 

section. 

(3) Transfers of transferred stock or 

securities to a corporation or 

partnership. A disposition of the 

transferred stock or securities pursuant 

to an exchange to which section 351, 

354 (but only in a reorganization 

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

applies, shall not constitute a triggering 

event if the U.S. transferor enters into a 

new gain recognition agreement that 

provides that the dispositions described 

in paragraphs (k)(3)(i) and (ii) of this 

section shall constitute triggering events 

for purposes of the new gain 

recognition. 

(i) A complete or partial disposition of 

the stock, securities, or partnership 

interest (as applicable) received in 

exchange for the transferred stock or 

securities. 

(ii) Any other event that is 

inconsistent with the principles of this 

paragraph (k), including the indirect 

disposition of the transferred stock or 

securities. 

(4) Transfers of substantially all of the 

assets of the transferred corporation. A 

disposition of substantially all of the 

assets of the transferred corporation 

pursuant to an exchange to which 

section 351, 354 (but only in a 

reorganization described in section 

368(a)(1)(B)), or 721 applies, shall not 

constitute a triggering event if the U.S. 

transferor enters into a new gain 

recognition agreement that provides that 

a complete or partial disposition of the 

stock, securities, or partnership interest 

(as applicable) received in exchange for 

the assets shall constitute a triggering 

event for purposes of the new gain 

recognition agreement. 

(5) Recapitalizations and section 1036 

exchanges. A complete or partial 

disposition of the transferred stock or 

securities, or of the stock of the 

transferee foreign corporation received 

in the initial transfer, pursuant to a 

reorganization described under section 

368(a)(1)(E), or pursuant to a transaction 

to which section 1036 applies, shall not 

constitute a triggering event if the U.S. 

transferor enters into a new gain 

recognition agreement. 

(6) Certain asset reorganizations—(i) 

Stock of transferee foreign corporation. 

If stock of the transferee foreign 

corporation received in the initial 

transfer is transferred to a domestic 

acquiring corporation in a section 361 

exchange that is pursuant to an asset 

reorganization, the exchanges made 

pursuant to the asset reorganization 

shall not constitute triggering events if 

the domestic acquiring corporation 

enters into a new gain recognition 

agreement that designates the domestic 

acquiring corporation as the U.S. 

transferor for purposes of this section. 

For an illustration of the rule provided 

by this paragraph (k)(6), see paragraph 

(q)(2) of this section, Example 5. If the 

acquiring corporation is foreign, see 

paragraph (k)(14) of this section and 

paragraph (q)(2) of this section, Example 

6. 

(ii) Transferred stock or securities. If 

the transferred stock or securities are 

transferred to a foreign acquiring 

corporation in a section 361 exchange 

that is pursuant to an asset 

reorganization, the exchanges made 

pursuant to the asset reorganization 

shall not constitute triggering events if 

the U.S. transferor enters into a new 

gain recognition agreement that 

designates the foreign acquiring 

corporation as the transferee foreign 

corporation for purposes of this section. 

For an illustration of the rule provided 

by this paragraph, see paragraph (q)(2) 


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of this section, Example 7. If the transfer 

is to a domestic acquiring corporation, 

or is pursuant to a triangular asset 

reorganization, see paragraph (k)(14) or 

(o)(5) of this section. 

(iii) Assets of transferred corporation. 

If substantially all of the assets of the 

transferred corporation are transferred 

to a foreign or domestic acquiring 

corporation in a section 361 exchange 

that is pursuant to an asset 

reorganization, the exchanges made 

pursuant to the asset reorganization 

shall not constitute triggering events if 

the U.S. transferor enters into a new 

gain recognition agreement that, unless 

the acquiring corporation is the 

transferee foreign corporation, 

designates the acquiring corporation as 

the transferred corporation for purposes 

of this section. Only the assets of the 

transferred corporation received by the 

acquiring corporation shall be treated as 

assets of the transferred corporation for 

purposes of this section (for example, 

only such assets will be taken into 

account for purposes of paragraph (j)(2) 

of this section). For an illustration of the 

rule provided by this paragraph, see 

paragraph (q)(2) of this section, Example 

8. If the transferred corporation is 

domestic, see section 367(a)(1) and 

(a)(5), and paragraph (o)(4) of this 

section. If the transfer is pursuant to a 

triangular asset reorganization, see 

paragraph (k)(14) of this section. 

(7) Certain triangular 

reorganizations—(i) Transferee foreign 

corporation. If substantially all of the 

assets of the transferee foreign 

corporation are transferred to a foreign 

acquiring corporation in a section 361 

exchange that is pursuant to a triangular 

asset reorganization, the exchanges 

made pursuant to the reorganization 

shall not constitute triggering events if 

a new gain recognition agreement is 

entered into in accordance with 

paragraphs (k)(7)(i)(A) through (C) of 

this section. If the acquiring corporation 

is domestic, see paragraph (k)(14) of this 

section. For rules that apply to gain 

recognition agreements entered into as a 

result of an indirect stock transfer, see 

§ 1.367(a)–3(d)(2)(iv) and paragraph 

(j)(9) of this section. 

(A) If P is foreign, the new gain 

recognition agreement designates P as 

the transferee foreign corporation and 

includes a statement that the U.S. 

transferor agrees to treat a complete or 

partial disposition of the S stock held by 

P as a triggering event. 

(B) Except as provided in paragraph 

(k)(7)(i)(C) of this section, if P is 

domestic, P enters into the new gain 

recognition agreement that designates P 

as the U.S. transferor and S as the 

transferee foreign corporation. 

(C) If the triangular asset 

reorganization is described in section 

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

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

corporation is the merged corporation, 

the U.S. transferor enters into the new 

gain recognition agreement and 

designates the surviving corporation as 

the transferee foreign corporation. 

(ii) Transferred corporation. If 

substantially all of the assets of the 

transferred corporation are transferred 

in a section 361 exchange pursuant to a 

triangular asset reorganization, the 

exchanges made pursuant to the 

reorganization shall not constitute 

triggering events if the U.S. transferor 

enters into a new gain recognition 

agreement in accordance with paragraph 

(k)(7)(ii)(A) of this section and, as 

applicable, paragraph (k)(7)(ii)(B) or (C) 

of this section. 

(A) The new gain recognition 

agreement includes a statement that the 

U.S. transferor agrees to treat a complete 

or partial disposition of the P stock 

received in the reorganization as a 

triggering event. 

(B) If the triangular asset 

reorganization is described in section 

368(a)(1)(C), or section 368(a)(1)(A) or 

(G) by reason of section 368(a)(2)(D), the 

new gain recognition agreement 

includes a statement that the U.S. 

transferor agrees to treat a complete or 

partial disposition of the S stock held by 

P as a triggering event. 

(C) If the triangular asset 

reorganization is described in section 

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

368(a)(2)(E) and the transferred 

corporation is the merged corporation, 

the new gain recognition agreement 

includes a statement that the U.S. 

transferor agrees to treat a complete or 

partial disposition of the stock of the 

surviving corporation as a triggering 

event. 

(8) Complete liquidation of 

transferred corporation. A distribution 

of substantially all of the assets of the 

transferred corporation to which section 

337 applies, and the related exchange of 

the transferred stock to which section 

332 applies, shall not constitute 

triggering events, if the U.S. transferor 

enters into a new gain recognition 

agreement. If the transferred corporation 

is domestic, see § 1.367(e)–2 and 

paragraph (o)(4) of this section. See 

paragraph (q)(2) of this section, Example 

9 for an illustration of the rules 

provided in this paragraph (k)(8). 

(9) Death of U.S. transferor. The death 

of a U.S. transferor shall not constitute 

a triggering event if the person winding 

up the affairs of the U.S. transferor— 

(i) Retains sufficient assets of the U.S. 

transferor to satisfy any possible Federal 

tax liability of the U.S. transferor under 

the gain recognition agreement for the 

duration of the extended period of 

limitations on assessments of tax on the 

gain realized but not recognized in the 

initial transfer; 

(ii) Provides security as required 

under paragraph (h) of this section for 

any possible Federal tax liability of the 

U.S. transferor under the gain 

recognition agreement; or 

(iii) Obtains a ruling from the Internal 

Revenue Service providing for one or 

more successors to the U.S. transferor 

under the gain recognition agreement. 

(10) Deconsolidation. A 

deconsolidation of the U.S. transferor 

shall not constitute a triggering event if 

the U.S. transferor enters into a new 

gain recognition agreement. 

(11) Consolidation. A consolidation of 

the U.S. transferor shall not constitute a 

triggering event if the U.S. transferor 

enters into a new gain recognition 

agreement. See paragraph (d)(3) of this 

section. 

(12) Intercompany transactions—(i) 

General rule. If, pursuant to an 

intercompany transaction, the U.S. 

transferor disposes of stock of the 

transferee foreign corporation received 

in the initial transfer, this paragraph 

(k)(12) applies to such disposition to the 

extent the intercompany transaction 

creates an intercompany item that is not 

taken into account in the taxable year 

during which the intercompany 

transaction occurs. To the extent this 

paragraph (k)(12) applies, the 

disposition shall not constitute a 

triggering event, and the U.S. transferor 

shall remain subject to the gain 

recognition agreement if the conditions 

of paragraphs (k)(12)(i)(A) and (B) of 

this section are satisfied. To the extent 

the intercompany transaction does not 

create an intercompany item see, for 

example, paragraph (k)(1) and paragraph 

(q)(2) of this section, Example 20. See 

paragraph (o)(6) of this section for the 

effect on a gain recognition agreement 

when an intercompany item from an 

intercompany transaction to which this 

paragraph (k)(12)(i) applies is taken into 

account. 

(A) At the time of the disposition, the 

basis of the stock of the transferee 

foreign corporation received in the 

initial transfer that is disposed of in the 

intercompany transaction is not greater 

than the sum of the amounts described 

in paragraphs (k)(12)(i)(A)(1) through (3) 

of this section. If only a portion of the 

stock of the transferee foreign 

corporation received in the initial 

transfer is disposed of, then the basis of 

such stock shall be compared with a 

proportionate amount (measured by 

value as determined at the time of the 


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disposition) of the amounts described in 

paragraph (k)(12)(i)(A)(1) through (3) of 

this section. To satisfy the basis 

condition of this paragraph (k)(12)(i)(A), 

the U.S. transferor may reduce the basis 

of the stock of the transferee foreign 

corporation received in the initial 

transfer that is disposed of in the 

intercompany transaction in accordance 

with the principles of paragraph 

(o)(1)(iii) of this section. 

(1) The aggregate basis of the 

transferred stock or securities at the 

time of the initial transfer; 

(2) The amount of any increase to the 

basis of the transferred stock or 

securities by reason of gain recognized 

by the U.S. transferor on the initial 

transfer; and 

(3) The amount of any increase to the 

basis of the stock disposed of by reason 

of an income inclusion by the U.S. 

transferor with respect to such stock (for 

example, pursuant to section 961(a)). 

(B) The annual certification filed with 

respect to the existing gain recognition 

agreement for the taxable year during 

which the intercompany transaction 

occurs includes a complete description 

of the intercompany transaction and a 

schedule illustrating how the basis 

condition of paragraph (k)(12)(i)(A) of 

this section is satisfied. 

(ii) Certain dispositions following 

intercompany transaction. A subsequent 

disposition of stock of the transferee 

foreign corporation that is transferred in 

an intercompany transaction to which 

the exception provided by paragraph 

(k)(12)(i) of this section applies shall not 

constitute a triggering event if— 

(A) The stock is transferred to a 

member of the consolidated group that 

includes the U.S. transferor immediately 

after the disposition, and 

(B) The annual certification filed with 

respect to the existing gain recognition 

agreement for the taxable year during 

which the subsequent disposition 

occurs includes a complete description 

of the disposition. 

(13) Deemed asset sales pursuant to 

section 338(g) elections. A deemed sale 

of the assets of the transferred 

corporation or the transferee foreign 

corporation as a result of an election 

under section 338(g) shall not constitute 

a triggering event. This paragraph does 

not apply to the sale of the stock of the 

target corporation (within the meaning 

of section 338(d)(2)) with respect to 

which such election is made. 

(14) Other dispositions or events. A 

disposition or other event that would 

constitute a triggering event, without 

regard to this paragraph (k)(14), shall 

not constitute a triggering event if the 

conditions of paragraph (k)(14)(i) 

through (iii) of this section, as 

applicable, are satisfied. See paragraph 

(q)(2), Examples 4, 6, 10, 12, 17, 21, and 

23 of this section for illustrations of the 

rules provided by this paragraph (k)(14). 

(i) The disposition qualifies as a 

nonrecognition transaction. 

(ii) Immediately after the disposition 

or other event, a U.S. transferor retains 

a direct or indirect interest in the 

transferred stock or securities or, as 

applicable, in substantially all of the 

assets of the transferred corporation (for 

example, in a case where the transferred 

corporation has been liquidated 

pursuant to section 332). If, as a result 

of the disposition or other event, a 

foreign corporation acquires the 

transferred stock or securities or, as 

applicable, substantially all the assets of 

the transferred corporation, the 

condition of this paragraph (k)(14)(ii) 

shall be satisfied only if the U.S. 

transferor owns at least five percent 

(applying the attribution rules of section 

318, as modified by section 958(b)) of 

the total voting power and the total 

value of the outstanding stock of such 

foreign corporation. 

(iii) A new gain recognition agreement 

is entered into by the U.S. transferor 

described in paragraph (k)(14)(ii) of this 

section that includes— 

(A) An explanation of why this 

paragraph (k)(14) applies to the 

disposition or other event; and 

(B) A description of each subsequent 

disposition or other event that would 

constitute a triggering event, other than 

those described in paragraph (j) of this 

section, with respect to the new gain 

recognition agreement based on the 

principles of paragraphs (j) and (k) of 

this section including, for example, an 

indirect disposition of the transferred 

stock or securities. 

(l) [Reserved.] 

(m) Receipt of boot in nonrecognition 

transactions—(1) Dispositions of 

transferred stock or securities. 

Notwithstanding paragraph (k) of this 

section, if gain is required to be 

recognized (not including any gain that 

would be treated as a dividend under 

section 356(a)(2)) in connection with a 

disposition of the transferred stock or 

securities to which an exception under 

paragraph (k) of this section otherwise 

applies (triggering event exception), the 

U.S. transferor shall recognize gain 

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

equal to the amount of gain required to 

be recognized in connection with the 

disposition, but not in excess of the 

amount of gain subject to the gain 

recognition agreement. For purposes of 

this paragraph (m)(1), the amount of 

gain required to be recognized in 

connection with the disposition shall be 

determined before taking into account 

any increase to the basis of the 

transferred stock or securities under 

paragraph (c)(4)(ii) of this section. See 

paragraph (q)(2) of this section, Example 

13, for an illustration of the rule 

provided by this paragraph (m)(1). 

(2) Dispositions of assets of 

transferred corporation. If gain is 

required to be recognized (not including 

any gain that would be treated as a 

dividend under section 356(a)(2)) in 

connection with a disposition of 

substantially all of the assets of the 

transferred corporation to which a 

triggering event exception otherwise 

applies, the U.S. transferor shall 

recognize gain under paragraph (c)(1)(i) 

of this section equal to the amount of 

gain required to be recognized in 

connection with the disposition, but not 

in excess of the amount of gain subject 

to the gain recognition agreement. 

(n) Special rules for distributions with 

respect to stock—(1) Certain dividend 

equivalent redemptions treated as 

dispositions. A redemption of the 

transferred stock or of stock of the 

transferee foreign corporation received 

in the initial transfer that is treated by 

reason of section 302(d) as a distribution 

of property to which section 301 applies 

shall constitute a disposition for 

purposes of this section unless the U.S. 

transferor enters into a new gain 

recognition agreement that includes 

appropriate provisions to account for 

the redemption. For an illustration of 

the rule of this paragraph (n)(1), see 

paragraph (q)(2) of this section, Example 

14. 

(2) Gain recognized under section 

301(c)(3). If gain is required to be 

recognized under section 301(c)(3) with 

respect to the transferred stock, the U.S. 

transferor shall recognize gain under the 

gain recognition agreement in 

accordance with paragraph (c)(1)(i) of 

this section in an amount equal to the 

gain required to be recognized under 

section 301(c)(3), but not in excess of 

the amount of gain subject to the gain 

recognition agreement. For this purpose, 

the amount of gain required to be 

recognized under section 301(c)(3) shall 

be determined before taking into 

account any increase in the basis of the 

transferred stock under paragraph 

(c)(4)(ii) of this section. 

(o) Dispositions or other events that 

terminate or reduce the amount of gain 

subject to the gain recognition 

agreement. Notwithstanding paragraph 

(j) of this section, the following 

dispositions or other events shall not 

constitute triggering events but instead 

shall terminate or reduce the amount of 

gain subject to the gain recognition 

agreement. 


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(1) Taxable disposition of stock of the 

transferee foreign corporation—(i) 

Complete disposition. Except as 

otherwise provided in this paragraph 

(o)(1)(i), if the U.S. transferor disposes 

of all the stock of the transferee foreign 

corporation received in the initial 

transfer in a transaction in which all 

gain realized is recognized and included 

in taxable income during the taxable 

year of the disposition, the gain 

recognition agreement shall terminate 

without further effect if, at the time of 

the disposition, the aggregate basis of 

such stock is not greater than the sum 

of the amounts described in paragraphs 

(o)(1)(i)(A) through (C) of this section. 

This paragraph shall not apply to a 

disposition of stock of the transferee 

foreign corporation pursuant to an 

intercompany transaction to which 

paragraph (k)(12) of this section applies. 

This paragraph shall also not apply to 

an individual U.S. transferor that loses 

U.S. citizenship or ceases to be a lawful 

permanent resident of the United States 

(within the meaning of section 

7701(b)(6)). 

(A) The aggregate basis of the 

transferred stock or securities at the 

time of the initial transfer; 

(B) The amount of any increase to the 

basis of the transferred stock or 

securities by reason of gain recognized 

by the U.S. transferor on the initial 

transfer; and 

(C) The amount of any increase to the 

basis of the stock disposed of by reason 

of an income inclusion by the U.S. 

transferor with respect to such stock (for 

example, pursuant to section 961(a)). 

(ii) Partial dispositions. A partial 

disposition by the U.S. transferor of the 

stock of the transferee foreign 

corporation received in the initial 

transfer in a transaction otherwise 

described in paragraph (o)(1)(i) of this 

section shall reduce the amount of gain 

subject to the gain recognition 

agreement based on the relative fair 

market value of the stock disposed of 

(measured at the time of the disposition) 

compared to the fair market value of all 

of the stock of the transferee foreign 

corporation received in the initial 

transfer (measured at the time of the 

disposition). For determining whether 

the basis condition of paragraph (o)(1)(i) 

of this section is satisfied in the case of 

a partial disposition, the aggregate basis 

of the stock disposed of is compared to 

a proportionate amount (based on fair 

market value, as measured at the time of 

the partial disposition) of the amounts 

described in paragraphs (o)(1)(i)(A) 

through (C) of this section. For an 

illustration of the rules of this paragraph 

(o)(1)(ii), see paragraph (q)(2), Example 

15, of this section. 

(iii) Reduction of stock basis. For 

purposes of satisfying the basis 

condition of paragraph (o)(1)(i) or (ii) of 

this section, the U.S. transferor may 

reduce the aggregate basis of the stock 

of the transferee foreign corporation 

received in the initial transfer, effective 

immediately before the disposition. For 

an illustration of the rules of this 

paragraph (o)(1)(iii), see paragraph 

(q)(2), Example 16, of this section. The 

U.S. transferor reduces the basis of the 

stock of the transferee foreign 

corporation by including a statement 

with the timely-filed return of the U.S. 

transferor for the taxable year in which 

the disposition occurs, entitled 

‘‘Election to Reduce Stock Basis Under 

§ 1.367(a)–8(o)(1)(iii)’’ and that 

includes— 

(A) A description, including the date, 

of the disposition; 

(B) A description of the stock of the 

transferee foreign corporation disposed 

of and the basis adjustments made 

under this paragraph (o)(1)(iii); and 

(C) The fair market value of all the 

stock of the transferee foreign 

corporation held by the U.S. transferor 

at the time of the disposition. 

(2) Gain recognized in connection 

with certain nonrecognition 

transactions. If the U.S. transferor 

recognizes gain in connection with a 

complete or partial disposition of stock 

of the transferee foreign corporation 

received in the initial transfer that is 

described in paragraph (k) of this 

section, and the basis condition of 

paragraph (o)(1)(i) or (ii) of this section, 

as applicable, is satisfied with the 

respect to such disposition, the amount 

of gain subject to the new gain 

recognition agreement filed under 

paragraph (k) of this section as a result 

of such disposition shall equal the 

amount of gain subject to the existing 

gain recognition agreement reduced by 

the amount of gain recognized by the 

U.S. transferor on the disposition. If the 

U.S. transferor recognizes gain in 

connection with a complete or partial 

disposition of the stock of the transferee 

foreign corporation received in the 

initial transfer that is described in 

paragraph (k) of this section, and the 

condition of paragraph (o)(1)(i) or (ii) of 

this section, as applicable, is satisfied 

with the respect to the disposition, but 

a new gain recognition agreement is not 

filed with respect to such disposition so 

that a triggering event exception does 

not apply to the disposition, the amount 

of gain required to be recognized by the 

U.S. transferor under the existing gain 

recognition agreement shall be reduced 

by the amount of the gain recognized on 

the disposition. 

(3) Gain recognized under section 

301(c)(3). If the U.S. transferor 

recognizes gain under section 301(c)(3) 

with respect to the stock of the 

transferee foreign corporation received 

in the initial transfer, the amount of gain 

subject to the gain recognition 

agreement shall be reduced by the 

amount of such recognized gain. 

(4) Dispositions of substantially all of 

the assets of a domestic transferred 

corporation. Except as otherwise 

provided in this paragraph (o)(4), the 

gain recognition agreement shall 

terminate without further effect if 

substantially all of the assets of the 

transferred corporation are disposed of 

in a transaction in which all gain 

realized is recognized and included in 

taxable income during the taxable year 

of the disposition, but only if, at the 

time of the initial transfer, the U.S. 

transferor owned stock in the 

transferred corporation satisfying the 

requirements of section 1504(a)(2) and 

the U.S. transferor and the transferred 

corporation were members of the same 

consolidated group. If the initial transfer 

was part of an indirect stock transfer, 

the gain recognition agreement shall 

terminate without further effect if 

substantially all of the assets of the 

transferred corporation (taking into 

account § 1.367(a)–3(d)(2)(v)) are 

disposed of in a transaction in which all 

gain realized is recognized and included 

in taxable income during the taxable 

year of the disposition, but only if at the 

time of the initial transfer the U.S. 

transferor owned stock in the 

transferred corporation satisfying the 

requirements of section 1504(a)(2) (for 

example, in the case of a reorganization 

described in section 368(a)(1)(A) by 

reason of section 368(a)(2)(E)) and the 

U.S. transferor and the transferred 

corporation were members of the same 

consolidated group. 

(5) Certain distributions or transfers of 

transferred stock or securities to U.S. 

persons. To the extent a distribution or 

transfer of the transferred stock or 

securities satisfies the conditions of 

paragraphs (o)(5)(i) through (iii) of this 

section, the gain recognition agreement 

shall terminate without further effect, or 

the amount of gain subject to the gain 

recognition agreement shall be reduced, 

as appropriate. 

(i) Distributions or transfers described 

in section 337, 355, or 361. The 

transferred stock or securities are 

distributed or transferred pursuant to a 

transaction described in paragraph 

(o)(5)(i)(A) through (D) of this section, as 

appropriate. 

(A) A distribution described in 

section 337 that is pursuant to a 

complete liquidation described in 


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section 332. See paragraph (q)(2) of this 

section, Example 18, for an illustration 

of the rule provided by this paragraph 

(o)(5)(i)(A). 

(B) A distribution to which section 

355 applies. See paragraph (q)(2) of this 

section, Example 19, for an illustration 

of the rule provided by this paragraph 

(o)(5)(i)(B). 

(C) A section 361 exchange that is 

pursuant to an asset reorganization. See 

paragraph (q)(2) of this section, Example 

22, for an illustration of the rule 

provided by this paragraph (o)(5)(i)(C). 

(D) A distribution to which section 

361(c) applies that is pursuant to an 

asset reorganization. See paragraph 

(q)(2) of this section, Example 22, for an 

illustration of the rule provided by this 

paragraph (o)(5)(i)(D). 

(ii) Qualified recipient. The recipient 

of the transferred stock or securities in 

the relevant transaction described in 

paragraph (o)(5)(i) of this section 

(qualified recipient) is— 

(A) The U.S. transferor; 

(B) A member of the consolidated 

group that includes the U.S. transferor 

immediately after the transaction; or 

(C) An individual that is a United 

States person. 

(iii) Basis requirement—(A) General 

rule. Immediately after the relevant 

transaction described in paragraph 

(o)(5)(i) of this section, the aggregate 

basis of the transferred stock or 

securities received by the qualified 

recipient is not greater than the 

aggregate basis of such stock or 

securities at the time of the initial 

transfer (as adjusted for gain recognized 

by the U.S. transferor on the initial 

transfer attributable to such stock or 

securities). For this purpose, the basis of 

the transferred stock in the hands of the 

qualified recipient shall be determined 

without regard to any basis attributable 

to income inclusions with respect to the 

stock (for example, under section 

961(a)). In the case of a distribution to 

which section 355 applies, any 

adjustments to basis under § 1.367(b)– 

5(c) shall be made before determining 

whether the basis condition of this 

paragraph is satisfied. 

(B) Election to reduce basis in 

transferred stock or securities. If the 

basis condition of paragraph 

(o)(5)(iii)(A) of this section is not 

satisfied, each qualified recipient may 

reduce the basis of the transferred stock 

or securities received in the transaction 

to the extent necessary to satisfy the 

basis condition. A qualified recipient 

reduces the basis of the transferred stock 

or securities by including a statement 

with its timely-filed return for the 

taxable year during which the 

distribution or transfer occurs entitled 

‘‘Election to Reduce Stock Basis Under 

§ 1.367(a)–8(o)(5)(iii)(B)’’ and that 

includes— 

(1) A complete description and the 

date of the distribution or transfer; 

(2) The fair market value of the 

transferred stock or securities received 

by the qualified recipient in the 

transaction; and 

(3) The basis of the transferred stock 

or securities received by the qualified 

recipient immediately before and after 

the basis reduction. 

(6) Dispositions or other event 

following certain intercompany 

transactions. If, subsequent to an 

intercompany transaction to which 

paragraph (k)(12) of this section applies, 

a disposition or other event occurs that 

requires the U.S. transferor to take into 

account the intercompany item related 

to the intercompany transaction (under 

the provisions of § 1.1502–13), the gain 

recognition agreement shall terminate 

without further effect or the amount of 

gain subject to the gain recognition 

agreement shall be reduced based on the 

principles of paragraph (o)(1)(i) or (ii) of 

this section, as appropriate. For an 

illustration of the rules of this paragraph 

(o)(6), see paragraph (q)(2) of this 

section, Example 20. 

(7) Expropriations under foreign law. 

The amount of gain subject to the gain 

recognition agreement shall be reduced 

to the extent the stock or securities of 

the transferee foreign corporation 

received in the initial transfer, the 

transferred stock or securities, or 

substantially all the assets of the 

transferred corporation, are 

expropriated, seized, or subjected to a 

similar taking of such property by the 

government of a foreign country, any 

political subdivision thereof, or any 

agency or instrumentality of the 

foregoing. Principles similar to those of 

paragraph (o)(1)(i) or (o)(1)(ii) of this 

paragraph, as relevant, shall be applied 

to determine the amount of the 

reduction. 

(p) Relief for reasonable cause for 

failure to comply—(1) Request for relief. 

A U.S. transferor that fails to file timely 

a gain recognition agreement, waiver of 

period of limitations on assessments of 

tax, annual certification, or other 

information required under this section 

shall be considered to have satisfied the 

timeliness requirement with respect to 

such filing, and a failure to comply in 

any material respect with any 

requirement of this section or with the 

terms of the gain recognition agreement 

that would otherwise constitute a 

triggering event shall not constitute a 

triggering event, if a request for relief is 

filed as provided under paragraph (p)(2) 

of this section and the U.S. transferor is 

able to demonstrate to the Area Director, 

Field Examination, Small Business/Self 

Employed or the Director of Field 

Operations, Large and Mid-Size 

Business (Director) having jurisdiction 

of the tax return of the U.S. transferor 

for the taxable year to which the failure 

relates, that such failure was due to 

reasonable cause and not willful 

neglect. Whether the failure 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 

was not due to reasonable cause, or if 

additional time will be needed to make 

a 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 reasonable cause relief has 

been received and assigned for review. 

If the U.S. transferor is not again 

notified before the close of the 120-day 

period, the U.S. transferor shall be 

deemed to have established that the 

failure to file timely or comply was due 

to reasonable cause and not willful 

neglect. 

(2) Procedures for filing requests for 

relief—(i) Time of submission. Requests 

for relief under paragraph (p)(1) of this 

section shall be considered only if, as 

soon as the U.S. transferor becomes 

aware of the failure to file timely or 

comply in any material respect with any 

requirement of this section, an amended 

return is filed for the taxable year to 

which the failure relates that includes 

the information that should have been 

included with the original return for 

such taxable year or otherwise complies 

with the rules of this section and that 

includes a written statement explaining 

the reasons for the failure to file timely 

or comply. The amended return must be 

filed with the applicable Internal 

Revenue Service Center with which the 

U.S. transferor filed its original return 

for such taxable year. 

(ii) Notice requirement. In addition to 

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

this section, the U.S. transferor must 

comply with the requirements of 

paragraph (p)(2)(ii)(A) or (B) of this 

section, as applicable. 

(A) If any taxable year of the U.S. 

transferor is under examination when 

the amended return is filed, a copy of 

the amended return and any 

information required to be included 

with such return must be delivered to 

the Internal Revenue Service personnel 

conducting the examination. 

(B) If no taxable year of the U.S. 

transferor is under examination when 

the amended return is filed, a copy of 


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the amended return and any 

information required to be included 

with such return must be delivered to 

the Director having jurisdiction over the 

return. 

(q) Examples—(1) Presumed facts and 

references. For purposes of the 

examples in paragraph (q)(2) of this 

section, and except where otherwise 

indicated, the following is presumed. 

(i) UST, USP, and DC are domestic 

corporations that each use a calendar 

taxable year. 

(ii) USP wholly owns UST and is the 

common parent of the consolidated 

group of which UST is a member. 

(iii) TFC, TFD, F1, and FA are foreign 

corporations. 

(iv) UST wholly owns TFD. 

(v) In a section 351 exchange, UST 

transfers all of the stock of TFD (TFD 

stock) to TFC in exchange solely for 

stock of TFC (the initial transfer). 

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

and this section, UST enters into a gain 

recognition agreement in connection 

with the initial transfer and makes the 

election described under paragraph 

(c)(2)(vi) of this section with respect to 

the gain recognition agreement. 

(vii) As applicable, the section 1248 

amount (within the meaning of 

§ 1.367(b)–2(c)) or all earnings and 

profits amount (within the meaning of 

§ 1.367(b)–2(d)) attributable to the stock 

of a foreign corporation is zero. 

(viii) All transactions are respected 

under general principles of tax law, 

including the step transaction doctrine. 

(ix) References to a U.S. transferor 

entering into a gain recognition 

agreement mean, where applicable, that 

the common parent of the consolidated 

group of which the U.S. transferor is a 

member has filed the gain recognition 

agreement on behalf of the U.S. 

transferor in accordance with paragraph 

(d)(3) of this section. 

(x) Taxable years during the GRA term 

are referred to, for example, as year 1 

and year 2. 

(2) Examples. The following examples 

illustrate the application of the rules of 

this section. 

Example 1. Basis adjustments from gain 

recognized under the gain recognition 

agreement. (i) Facts. TFC wholly owns F1. In 

year 3, pursuant to a section 351 exchange, 

TFC transfers all of the TFD stock to F1 in 

exchange solely for voting stock of F1. UST 

enters into a new gain recognition agreement 

with respect to the initial transfer under 

paragraph (k)(3) of this section, and therefore 

the transfer by TFC of the TFD stock to F1 

is not a triggering event. Under paragraph 

(c)(5)(i) of this section, the existing gain 

recognition agreement terminates without 

further effect. In year 4, in an exchange to 

which section 721 applies, UST contributes 

the TFC stock received in the initial transfer 

to PRS, a domestic partnership, in exchange 

for a partnership interest. UST enters into a 

new gain recognition agreement with respect 

to the initial transfer under paragraph (k)(1) 

of this section, and therefore the transfer by 

UST of the TFC stock to PRS is not a 

triggering event. Under paragraph (c)(5)(i) of 

this section, the new gain recognition 

agreement filed by UST in year 3 terminates 

without further effect. In year 5, TFD 

disposes of substantially all of its assets in a 

transaction that constitutes a triggering event 

under paragraph (j)(2)(i) of this section. 

Under paragraph (c)(1)(i) of this section, UST 

recognizes the gain realized but not 

recognized on the initial transfer by reason of 

entering into the gain recognition agreement. 

(ii) Result. Under paragraph (c)(4) of this 

section, the basis of the PRS interest held by 

UST, the TFC stock held by PRS that was 

received from UST in year 4, the F1 stock 

held by TFC that was received in exchange 

for the TFD stock in year 3, and the TFD 

stock held by F1 that was received from TFC 

in year 3 is increased by the amount of gain 

recognized by UST (but not by the additional 

tax or interest paid as result of such gain) 

with respect to the initial transfer under the 

gain recognition agreement. However, the 

basis of the assets of TFD (including the 

assets disposed of in year 5) is not increased 

as a result of the gain recognized by UST. 

Example 2. Impact of gain recognition 

event on computation of income. (i) Facts. At 

the time of the initial transfer, the TFD stock 

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

and a $30x section 1248 amount. The amount 

of gain subject to the gain recognition 

agreement is $50x. UST did not make an 

election under paragraph (c)(2)(vi) of this 

section with respect to the gain recognition 

agreement. In year 3, TFC disposes of the 

TFD stock received in the initial transfer in 

exchange for $120x cash. 

(ii) Result—(A) Gain recognition without 

an election. The disposition by TFC of the 

TFD stock in year 3 is a triggering event 

under paragraph (j)(1) of this section. As a 

result, under paragraph (c)(1)(i) of this 

section, UST must recognize and include in 

income $50x gain under the gain recognition 

agreement. Under paragraph (c)(1)(iii)(A) of 

this section, UST must report the $50x gain 

on an amended return filed for the taxable 

year of the initial transfer. Under paragraph 

(c)(1)(v) of this section, UST must pay 

applicable interest on any additional tax due 

with respect to the $50x gain recognized. 

Under section 1248(a), $30x of the gain 

recognized by UST under the gain 

recognition agreement is recharacterized as a 

dividend. Under paragraph (c)(4) of this 

section, as of the date of the initial transfer, 

the basis of the TFC stock received by UST 

in the initial transfer and the TFD stock 

received by TFC in the initial transfer, 

respectively, is increased by $50x. After 

taking into account the increase to the basis 

of the TFD stock, TFC recognizes $20x gain 

on the disposition of the TFD stock in year 

3. 

(B) Gain recognition with an election. If 

UST made an election under paragraph 

(c)(2)(vi) of this section with the gain 

recognition agreement filed for the initial 

transfer, the result would be the same as in 

paragraph (ii)(A) of this Example 2, except 

that UST must include in income the $50x 

gain recognized under the gain recognition 

agreement on its tax return filed for year 3. 

Any additional tax due with respect to the 

$50x gain and applicable interest on the 

additional tax due must be included with 

such return. The amount, if any, of the $50x 

gain recognized by UST under the gain 

recognition agreement that is characterized as 

a dividend under section 1248(a) is 

determined in year 3. 

Example 3. Transfer of stock of the 

transferee foreign corporation to a domestic 

corporation in a section 351 exchange. (i) 

Facts. UST wholly owns DC. In year 3, 

pursuant to a section 351 exchange, UST 

transfers all of the TFC stock received in the 

initial transfer to DC in an exchange solely 

for voting stock of DC. 

(ii) Result. The year 3 transfer of the TFC 

stock by UST to DC constitutes a triggering 

event under paragraph (j)(4) of this section. 

However, the transfer shall not constitute a 

triggering event pursuant to paragraph 

(k)(1)(ii) of this section if DC enters into a 

new gain recognition agreement with respect 

to the initial transfer that designates DC as 

the U.S. transferor for purposes of this 

section. Pursuant to paragraphs (c)(4)(i) and 

(ii) of this section, if DC is required to 

recognize gain under the new gain 

recognition agreement, the basis of the stock 

of TFC and TFD would be increased by the 

amount of gain recognized. However, 

pursuant to paragraph (c)(4)(iii) of this 

section, no adjustment would be made to the 

basis of the DC voting stock received by UST 

in year 3 as a result of such gain recognition. 

Alternatively, if the conditions for the 

application of paragraph (k)(14) of this 

section are satisfied UST could instead enter 

into the new gain recognition agreement with 

respect to the initial transfer. 

Example 4. Transfer of stock of the 

transferee foreign corporation in a triangular 

section 368(a)(1)(B) reorganization. (i) Facts. 

DC wholly owns FA. In year 3, pursuant to 

a triangular reorganization described in 

section 368(a)(1)(B), UST transfers all of the 

TFC stock received in the initial transfer to 

FA in exchange solely for 20% of the 

outstanding voting stock of DC. At the time 

of the reorganization, the TFC stock has a 

basis in excess of fair market value. 

(ii) Result. (A) The transfer by UST of the 

TFC stock to FA is an indirect stock transfer 

under § 1.367(a)–3(d)(1)(iii)(B). Accordingly, 

to preserve nonrecognition treatment, UST 

must enter into a separate gain recognition 

agreement under this section with respect to 

such transfer. 

(B) With respect to the gain recognition 

agreement filed for the initial transfer of the 

TFD stock, the transfer by UST of the TFC 

stock to FA is a triggering event under 

paragraph (j)(4) of this section. However, the 

transfer shall not constitute a triggering event 

if the conditions of the exception provided 

by paragraph (k)(14) of this section are 

satisfied. 

(1) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the transfer 

qualifies as a nonrecognition transaction 

(assuming UST enters into a gain recognition 

agreement as described in paragraph (ii)(A) of 

this Example 4). 


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(2) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the transfer DC, a domestic corporation 

that is eligible to be a U.S. transferor, owns 

at least 5% (applying the attribution rules of 

section 318, as modified by section 958(b)) of 

the total voting power and total fair market 

value of the outstanding stock of FA. As a 

result, DC is treated as retaining an indirect 

interest in the TFD stock immediately 

following the transfer. 

(3) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if DC enters into 

a new gain recognition agreement with 

respect to the initial transfer of the TFD stock 

that, based on the principles of paragraph (j) 

of this section, describes the subsequent 

dispositions or other events that would 

constitute triggering events for purposes of 

the new gain recognition agreement (other 

than the dispositions and other events 

described in paragraph (j) of this section). For 

example, a complete or partial disposition of 

the stock of FA would constitute a triggering 

event for purposes of the new gain 

recognition agreement. 

Example 5. Transfer of stock of the 

transferee foreign corporation to a domestic 

corporation pursuant to an asset 

reorganization. (i) Facts. At the time of the 

initial transfer the TFD stock has a $50x basis 

and a $100x fair market value. Therefore, the 

amount of gain subject to the gain recognition 

agreement is $50x. In year 3, pursuant to an 

asset reorganization described in section 

368(a)(1)(A), UST transfers its assets to DC in 

exchange solely for 20% of the outstanding 

stock of DC. UST distributes the stock of DC 

to USP pursuant to the plan of 

reorganization. 

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

stock to DC constitutes a triggering event 

under paragraph (j)(4) of this section. 

However, pursuant to paragraph (k)(6)(i) of 

this section, if DC enters into a new gain 

recognition agreement with respect to the 

initial transfer that designates DC as the U.S. 

transferor, the transfer shall not constitute a 

triggering event. 

Example 6. Transfer of stock of the 

transferee foreign corporation to a foreign 

corporation pursuant to an asset 

reorganization. (i) Facts. The facts are the 

same as in Example 5, except the acquiring 

corporation in the asset reorganization is FA, 

and, at the time of the asset reorganization, 

the TFC stock transferred by UST to FA has 

a $50x basis and a $150x fair market value. 

All of the conditions under section 367(a)(5) 

and the regulations under that section are 

satisfied, and no adjustment is required to 

the basis of the FA stock received by USP in 

the transaction. 

(ii) Result. (A) The transfer by UST of the 

TFC stock to FA is described in section 

361(a) and is therefore subject to section 

367(a)(5). In general, UST cannot file a gain 

recognition agreement with respect to such 

transfer, and the transfer therefore is subject 

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

However, if the conditions of § 1.367(a)– 

3(e)(1)(i) through (iv) are satisfied, USP can 

enter into a gain recognition agreement with 

respect to the transfer to avoid the 

recognition of gain by UST on the transfer 

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

provided by paragraph (k)(14) of this section 

applies so that the transfer by UST of the TFC 

stock to FA is not a triggering event with 

respect to the gain recognition agreement 

filed for the initial transfer (discussed in 

paragraph (ii)(B) of this Example 6), the 

amount of gain subject to the gain recognition 

agreement (if entered into) with respect to the 

transfer by UST of the TFC stock to FA in the 

asset reorganization is $100x. 

(B) Under paragraph (j)(4) of this section, 

the transfer of the TFC stock by UST to FA 

is a triggering event with respect to the gain 

recognition agreement for the initial transfer. 

The exception provided by paragraph (k)(6)(i) 

of this section does not apply to such transfer 

because FA, the acquiring corporation in the 

asset reorganization, is foreign. However, the 

transfer shall not constitute a triggering event 

if the conditions of the exception provided 

by paragraph (k)(14) of this section are 

satisfied. 

(1) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the transfer 

of the TFC stock to FA qualifies as a 

nonrecognition transaction (assuming USP 

enters into a gain recognition agreement with 

respect to such transfer). 

(2) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the transfer USP, a domestic corporation 

that is eligible to be a U.S. transferor, owns 

at least 5% (applying the attribution rules of 

section 318, as modified by section 958(b)) of 

the total voting power and total fair market 

value of the outstanding stock of FA. As a 

result, USP is treated as retaining an indirect 

interest in the TFD stock immediately 

following the transfer. 

(3) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if USP enters into 

a new gain recognition agreement with 

respect to the initial transfer of the TFD stock 

that, based on the principles of paragraph (j) 

of this section, describes the subsequent 

dispositions or other events that would 

constitute triggering events for purposes of 

the new gain recognition agreement, other 

than those already provided in paragraph (j) 

of this section. For example, a disposition of 

the stock of FA would constitute such a 

triggering event for purposes of the new gain 

recognition agreement. 

(iii) Alternate facts. Assume the same facts 

as in paragraph (i) of this Example 6, 

including that paragraph (k)(14) of this 

section applies to the year 3 reorganization 

so that USP enters into a new gain 

recognition agreement with respect to the 

initial transfer of the TFD stock that occurred 

in year 1 (GRA 1), and that under § 1.367(a)– 

3(e) USP enters into a separate gain 

recognition agreement with respect to the 

initial transfer of the TFC stock by UST to FA 

pursuant to the year 3 asset reorganization 

(GRA 2). Assume further that in year 4 TFC 

disposes of 10% of the TFD stock pursuant 

to a transaction that constitutes a triggering 

event with respect to GRA 1. The disposition 

of the TFD stock is not a triggering event with 

respect to GRA 2 because the TFD stock 

disposed of does not constitute substantially 

all the assets of TFC. Under paragraphs (j)(1) 

and (c)(1)(i) of this section, USP must 

recognize $5x gain (10% of $50x) under GRA 

1. Under paragraph (c)(4)(i) and (ii) of this 

section, as of the date of the initial transfer 

(with respect to which GRA 1 was filed), the 

basis of the TFC stock and TFD stock, 

respectively, is increased by $5x. Under 

paragraph (c)(1)(i) of this section, the amount 

of gain subject to GRA 1 is reduced from 

$50x to $45x. Similarly, because the 

transferred stock for purposes of GRA 2 is the 

TFC stock, the amount of gain subject to GRA 

2 is reduced from $100x to $95x to reflect the 

increase to the basis of the TFC stock. 

Example 7. Transfer of transferred stock to 

a foreign corporation pursuant to an asset 

reorganization. (i) Facts. UST wholly owns 

FA. In year 4, pursuant to a reorganization 

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

transfers all of the TFD stock to FA in 

exchange solely for stock of FA. TFC 

distributes the FA stock to UST pursuant to 

the plan of reorganization. 

(ii) Analysis. In general, the year 4 transfer 

by TFC of the TFD stock to FA and the 

exchange by UST of the TFC stock for FA 

stock constitute triggering events under 

paragraphs (j)(1) and (4) of this section, 

respectively. However, under paragraph 

(k)(6)(ii) of this section, the transfers shall not 

constitute triggering events if UST enters into 

a new gain recognition agreement with 

respect to the initial transfer that designates 

FA as the transferee foreign corporation. 

Example 8. Transfer of substantially all the 

assets of the transferred corporation 

pursuant to an asset reorganization. (i) Facts. 

In year 4, pursuant to an asset reorganization 

described in section 368(a)(1)(C), TFD 

transfers all of its assets to FA in exchange 

solely for voting stock of FA. TFD distributes 

the FA voting stock to TFC pursuant to the 

plan of reorganization. 

(ii) Analysis. The year 4 transfer by TFD of 

all its assets to FA and the exchange by TFC 

of its TFD stock for FA voting stock pursuant 

to the reorganization constitute triggering 

events under paragraphs (j)(2) and (j)(1) of 

this section, respectively. However, under 

paragraph (k)(6)(iii) of this section, the 

transfers shall not constitute triggering events 

if UST enters into a new gain recognition 

agreement with respect to the initial transfer 

that designates FA as the transferred 

corporation. In addition, under paragraph 

(k)(6)(iii) of this section only the assets of 

TFD acquired by FA in the asset 

reorganization shall be treated as assets of the 

transferred corporation for purposes of the 

new gain recognition agreement. 

Example 9. Complete liquidation of 

transferred corporation into transferee 

foreign corporation. (i) Facts. UST does not 

make an election under paragraph (c)(2)(vi) 

of this section in connection with the gain 

recognition agreement entered into with 

respect to the initial transfer. In year 3, TFD 

distributes all of its assets to TFC pursuant 

to a complete liquidation to which sections 

332 and 337 apply. Under paragraph (k)(8) of 

this section, UST enters into a new gain 

recognition agreement with respect to the 

initial transfer such that the liquidation is not 

a triggering event. Under paragraph (c)(5)(i) 

of this section, the new gain recognition 

agreement is subject to the conditions and 

requirements of this section to the same 

extent as the existing gain recognition 

agreement, except that the transferred stock 


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is no longer subject to the gain recognition 

agreement because the transferred stock is 

cancelled by reason of the liquidation. In 

year 5 TFC disposes of substantially all of the 

assets received from TFD in the year 3 

liquidation. 

(ii) Result. The year 5 disposition by TFC 

of substantially all of the assets received from 

TFD in the year 3 liquidation is a triggering 

event under paragraph (j)(2) of this section, 

and therefore UST must recognize the gain 

subject to the gain recognition agreement. 

UST must report the gain recognized on an 

amended return for the taxable year during 

which the initial transfer occurred. UST must 

also pay applicable interest on any additional 

tax due with respect to the gain recognized. 

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

basis of the TFC stock received by UST in the 

initial transfer is increased as of the date of 

the initial transfer by the amount of gain 

recognized under the gain recognition 

agreement. The basis of the assets of TFD, 

however, is not increased. 

Example 10. Transfer of transferred stock 

to foreign corporation in section 351 

exchange, followed by a section 332 

liquidation of the foreign corporation. (i) 

Facts. In year 3, pursuant to a section 351 

exchange, TFC transfers the TFD stock to F1, 

a newly formed corporation, in exchange 

solely for voting stock of F1. The transfer by 

TFC of the TFD stock to F1 is not a triggering 

event because UST complies with the 

conditions of paragraph (k)(3) of this section. 

In year 5, F1 distributes all of its assets to 

TFC in a complete liquidation to which 

sections 332 and 337 apply. 

(ii) Result. The distribution of the TFD 

stock by F1, and the exchange of F1 stock by 

TFC pursuant to the year 5 liquidation of F1 

constitute triggering events under paragraphs 

(j)(1) and (k)(3)(i) of this section, respectively. 

However, if paragraph (k)(14) of this section 

applies, neither the distribution of the TFD 

stock by F1, nor the exchange by TFC of the 

F1 stock, shall constitute a triggering event. 

(A) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the 

distribution of the TFD stock, and the 

exchange of F1 stock, both qualify as 

nonrecognition transactions. 

(B) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the distribution UST, a domestic 

corporation that is eligible to be a U.S. 

transferor, owns at least 5% (applying the 

attribution rules of section 318, as modified 

by section 958(b)) of the stock of TFC. As a 

result, UST is treated as retaining an indirect 

interest in the TFD stock following the 

complete liquidation of F1. 

(C) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if UST enters into 

a new gain recognition agreement. Because 

after the complete liquidation of F1, UST 

wholly owns TFC, which wholly owns TFD, 

as was the case immediately after the initial 

transfer, UST is not required to describe, 

with the new gain recognition agreement, 

other dispositions or events that would 

constitute triggering events based on the 

principles of paragraph (j) of this section, 

other than the dispositions or events 

described in paragraph (j) of this section. 

Example 11. Disposition of stock of 

transferee foreign corporation pursuant to a 

divisive reorganization. (i) Facts. In year 3, 

pursuant to a divisive reorganization 

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

transfers all of the TFC stock to DC, a newlyformed corporation, in exchange solely for 

stock of DC. UST then distributes all of the 

DC stock to USP in a transaction to which 

section 355 applies. 

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

UST to DC constitutes a triggering event 

under paragraph (j)(4) of this section. 

However, under paragraph (k)(1)(iii) of this 

section, the transfer of the TFC stock shall 

not constitute a triggering event if DC enters 

into a new gain recognition agreement that 

designates DC as the U.S. transferor for 

purposes of this section. 

(iii) Alternate facts. The facts are the same 

as in paragraph (i) of this Example 11, except 

that UST transfers only 90% of the TFC stock 

to DC. Paragraph (k)(1)(iii) of this section 

applies only with respect to the TFC stock 

transferred to DC. Thus, the conditions of 

paragraph (k)(1)(iii) of this section are 

satisfied if DC enters into a new gain 

recognition agreement with respect to the 

TFC stock received from UST. The amount of 

gain subject to the new gain recognition 

agreement entered into by DC equals 90% of 

the amount of gain subject to the gain 

recognition agreement entered into by UST 

with respect to the initial transfer. The 

amount of gain subject to the gain recognition 

agreement entered into by UST with respect 

to the initial transfer is reduced by the 

amount of gain subject to the new gain 

recognition agreement entered into by DC. 

The gain recognition agreement entered into 

by UST with respect to the initial transfer 

continues to apply to the remaining TFC 

stock held by UST. 

Example 12. Disposition of transferred 

stock pursuant to a divisive reorganization. 

(i) Facts. In year 3, pursuant to a divisive 

reorganization described in section 

368(a)(1)(D), TFC transfers all of the TFD 

stock to F1, a newly formed corporation, in 

exchange solely for all of the outstanding 

stock of F1. TFC then distributes all of the 

F1 stock to UST in a transaction to which 

section 355 applies. 

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

stock to F1 constitutes a triggering event 

under paragraph (j)(1) of this section. 

However, if paragraph (k)(14) of this section 

applies, neither the transfer of the TFD stock 

by TFC to F1, nor the distribution of the F1 

stock by TFC to UST, shall constitute 

triggering events. 

(A) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the 

dispositions of the TFD stock and F1 stock 

qualify as nonrecognition transactions. 

(B) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the transfer UST, an eligible U.S. 

transferor, owns at least 5% (applying the 

attribution rules of section 318, as modified 

by section 958(b)) of the total voting power 

and the total fair market value of the 

outstanding stock of F1. As a result, UST is 

treated as retaining an indirect interest in the 

TFD stock following the dispositions. 

(C) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if UST enters into 

a new gain recognition agreement with 

respect to the initial transfer that describes 

the subsequent dispositions or other events 

that would constitute triggering events based 

on the principles of paragraph (j) of this 

section, other than those described in 

paragraph (j) of this section. For example, a 

complete or partial disposition of the F1 

stock would constitute a triggering event for 

purposes of the new gain recognition 

agreement (subject to the exceptions 

provided by paragraph (k) of this section). 

Example 13. Receipt of boot by the 

transferee foreign corporation in a 

subsequent section 351 exchange. (i) Facts. 

At the time of the initial transfer, the TFD 

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

value. The amount of gain subject to the gain 

recognition agreement is $50x. In year 3, TFC 

and X, an unrelated foreign corporation, form 

F1. TFC transfers the TFD stock to F1 in 

exchange for $35x cash and $65x stock of F1. 

At the time of the transfer, the TFD stock has 

a $50x basis and $100x fair market value. The 

F1 stock received by TFC represents 25% of 

the outstanding stock of F1. Without regard 

to the gain recognized under the gain 

recognition agreement and any adjustments 

to basis under paragraph (c)(4)(ii) of this 

section, under section 351(b) TFC would 

recognize $35x gain in connection with the 

transfer of the TFD stock to F1. UST complies 

with the conditions of paragraph (k)(3) of this 

section, and therefore the disposition by TFC 

of the TFD stock does not constitute a 

triggering event. 

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

section, UST must recognize $35x gain under 

the gain recognition agreement as a result of 

the year 3 disposition by TFC of the TFD 

stock. Thus, the amount of gain subject to the 

new gain recognition agreement entered into 

by UST pursuant to paragraph (k)(3) of this 

section is $15x. Under paragraph (c)(4)(ii) of 

this section, as of the date of the initial 

transfer, the basis of the TFD stock held by 

TFC is increased by $35x, the amount of the 

gain recognized by UST under the gain 

recognition agreement. Under paragraph 

(c)(4)(i) of this section, the basis of the TFC 

stock received by UST in the initial transfer 

is also increased by $35x. After taking into 

account the increase to the basis of the TFD 

stock under paragraph (c)(4)(ii) of this 

section, TFC recognizes $15x gain under 

section 351(b) in connection with the year 3 

transfer of the TFD stock to F1. Under section 

362(a), the basis of the TFD stock in the 

hands of F1 is $100x. 

Example 14. Complete disposition of 

transferred stock pursuant to a section 

304(a)(1) transaction. (i) Facts. UST wholly 

owns FA. In year 3, in a transaction to which 

section 304(a)(1) applies, TFC transfers all of 

the TFD stock to FA in exchange for cash. 

Under section 304(a)(1), TFC and FA are 

treated as if TFC transferred the TFD stock 

to FA in a section 351 exchange in exchange 

solely for FA stock, and then FA redeemed 

the FA stock deemed issued in exchange for 

the cash. Under section 302(d), the 

redemption of the FA stock deemed issued 

by FA to TFC under section 304(a)(1) is 

treated as a distribution to which section 301 

applies. 

(ii) Result. (A) In general, the deemed 

contribution by TFC of the TFD stock to FA 


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in the section 351 exchange is a triggering 

event under paragraph (j)(1) of this section. 

However, under paragraph (k)(3) of this 

section the deemed contribution shall not be 

a triggering event if UST enters into a new 

gain recognition agreement with respect to 

the initial transfer in which it agrees to treat 

as a triggering event a complete or partial 

disposition of the FA stock deemed received 

by TFC. 

(B) Under paragraph (n)(1) of this section, 

the redemption of the FA stock deemed 

received by TFC in exchange for the TFD 

stock shall not constitute a disposition if UST 

enters into a new gain recognition agreement 

with respect to the initial transfer that 

includes appropriate provisions to take into 

account such redemption. Therefore, under 

the new gain recognition agreement UST 

must agree to treat as a triggering event a 

complete or partial disposition of the stock 

of FA. Pursuant to paragraph (d)(2)(ii) of this 

section, UST is permitted to enter into a 

single new gain recognition agreement in 

year 3, but the gain recognition agreement 

must provide a complete description of the 

section 304(a)(1) transaction including the 

deemed section 351 exchange and 

redemption of the FA stock. 

Example 15. Reduction in amount of gain 

subject to gain recognition agreement, 

followed by triggering event. (i) Facts. In year 

3, UST disposes of 60% of the TFC stock 

received in the initial transfer in a 

transaction in which the conditions of 

paragraph (o)(1)(ii) of this section are 

satisfied. Thus, the amount of gain subject to 

the gain recognition agreement is reduced by 

60%. In year 5, TFC disposes of 50% of the 

TFD stock in a transaction that constitutes a 

triggering event. 

(ii) Result. As a result of the year 5 

disposition by TFC of 50% of the TFD stock, 

under paragraphs (j)(1) and (c)(1)(i) of this 

section, UST must recognize and include in 

income 50% of the gain subject to the gain 

recognition agreement (because of the year 3 

disposition of TFC stock, the amount of gain 

subject to the gain recognition agreement 

equals 40% of the gain realized, but not 

recognized, on the initial transfer). UST must 

pay applicable interest on any additional tax 

due with respect to the gain recognized. The 

amount of gain subject to the gain recognition 

agreement is reduced by the amount of gain 

recognized by UST (the remaining gain 

equals 20% of the gain realized, but not 

recognized, by UST on the initial transfer). 

Example 16. Taxable sale of stock of 

transferee foreign corporation and election to 

reduce stock basis. (i) Facts. UST wholly 

owns F1 and TFD. The F1 stock has a $100x 

basis and $90x fair market value, and the 

TFD stock has a $0x basis and $100x fair 

market value. UST also owns real property 

with a $10x basis and $10x fair market value. 

In year 1, pursuant to a section 351 exchange, 

UST transfers the real property, the TFD 

stock, and the F1 stock to TFC in exchange 

solely for 20 shares of TFC stock. UST enters 

into a gain recognition agreement with 

respect to the transfer of the TFD stock. The 

amount of the gain recognition agreement is 

$100x. UST takes the position that the basis 

of each share of TFC stock received in the 

exchange is $5.5x (a proportionate amount of 

the $110x aggregate basis of the transferred 

property). In year 3, UST disposes of all its 

TFC stock in a transaction in which all gain 

realized is recognized and included in 

taxable income. 

(ii) Result. The year 3 disposition of the 

TFC stock is a triggering event under 

paragraph (j)(4) of this section. The 

disposition does not terminate the gain 

recognition agreement pursuant to paragraph 

(o)(1)(i) of this section because the basis of 

each share of TFC stock received in exchange 

for the TFD stock in the initial transfer is 

$5.5x, which exceeds the $0x basis of the 

TFD stock at time of the initial transfer. 

However, under paragraph (o)(1)(iii) of this 

section, to satisfy the basis condition of 

paragraph (o)(1)(i) of this section, UST can 

reduce the basis of the 10 shares of the TFC 

stock received in exchange for the TFD stock 

to $0x. If UST reduces the basis of the 10 

shares of TFC stock to $0x, under paragraph 

(o)(1)(i) of this section the disposition of the 

TFC stock shall not constitute a triggering 

event but instead shall terminate the gain 

recognition agreement without further effect. 

Example 17. Successive section 351 

exchanges, section 301 distributions, and 

transactions involving partnerships. (i) Facts. 

UST owns a 40 percent capital and profits 

interest in a foreign partnership (PRS). PRS 

wholly owns TFD and other assets with basis 

equal to fair market value. The TFD stock has 

a $50x basis and $200x fair market value. 

TFC wholly owns F1. On day 1 of year 1, in 

a section 351 exchange, UST transfers its PRS 

interest to TFC in exchange solely for stock 

of TFC (initial transfer). On that same day, in 

a section 351 exchange, TFC transfers the 

PRS interest received from UST to F1 in 

exchange solely for stock of F1. In year 3, 

PRS receives a $150x distribution from TFD 

to which section 301 applies. Under section 

301(c), $25x of the distribution constitutes a 

dividend, $50x is applied against and 

reduces the basis of the TFD stock held by 

PRS, and the remaining $75x is treated as 

gain from the sale or exchange of property. 

With respect to the TFD stock deemed 

transferred by UST in the initial transfer, 

under section 301(c), $10x (40% of $25x) of 

the distribution constitutes a dividend, $20x 

(40% of $50x) is applied against and reduces 

the basis of TFD stock, and $30x (40% of 

$75x) is treated as gain from the sale or 

exchange of property. In year 5, pursuant to 

a distribution to which section 731 applies, 

PRS distributes all of the TFD stock to F1. 

(ii) Result. (A) Successive section 351 

transfers. Under section 367(a)(4) and 

§ 1.367(a)-1T(c)(3)(ii), the transfer of the PRS 

interest by UST to TFC is treated, for 

purposes of section 367(a), as a transfer by 

UST to TFC of its proportionate share of the 

TFD stock held by PRS (the initial transfer). 

The initial transfer by UST of the TFD stock 

to TFC is subject to the general rule of section 

367(a)(1), unless UST enters into a gain 

recognition agreement with respect to such 

transfer pursuant to § 1.367(a)–3(b)(1)(ii) and 

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

this section, the gain recognition agreement 

must include a complete description of the 

transfer, including a description of the 

partners of PRS. Even if UST enters into a 

gain recognition agreement with respect to 

the initial transfer, under paragraph (j)(3) of 

this section, the subsequent transfer by TFC 

of the PRS interest to F1 is a triggering event 

unless UST enters into a new gain 

recognition agreement with respect to the 

initial transfer under paragraph (k)(14) that 

provides that, in addition to the triggering 

events provided in paragraph (j) of this 

section, a complete or partial disposition of 

the F1 stock received by TFC in exchange for 

the PRS interest shall constitute a triggering 

event for purposes of the gain recognition 

agreement. The new gain recognition 

agreement must also provide that any other 

disposition that is inconsistent with the 

principles of paragraph (k), including an 

indirect disposition of the TFD stock or of 

substantially all of the assets of TFD, shall 

constitute a triggering event for purposes of 

the new gain recognition agreement. Under 

paragraph (d)(2)(ii) of this section, UST is 

permitted to enter into a single gain 

recognition agreement with respect to the 

initial transfer and the subsequent transfer by 

TFC of the PRS interest, but the agreement 

must include a complete description of the 

initial transfer and the subsequent transfer of 

the PRS interest. 

(B) Section 301 distribution from TFD to 

PRS. Under paragraph (b)(1)(iii) of this 

section, the section 301 distribution received 

by PRS from TFD is not a disposition (and 

therefore does not affect the gain recognition 

agreement) to the extent it is described in 

section 301(c)(1) or (2). However, under 

paragraph (n)(2) of this section, to the extent 

the distribution is described in section 

301(c)(3), UST must recognize gain ($30x) 

under the gain recognition agreement. For 

this purpose, the amount of the distribution 

that is described in section 301(c)(3) is 

determined before taking into account the 

increase to the basis of the TFD stock under 

paragraph (c)(4)(ii) of this section. 

(C) Distribution of TFD stock by PRS to F1. 

The year 5 distribution of the TFD stock by 

PRS to F1 is a triggering event under 

paragraph (j)(1) of this section, unless 

paragraph (k)(14) of this section applies. 

(1) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the 

distribution qualifies as a nonrecognition 

transaction. 

(2) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the distribution UST, a domestic 

corporation that is eligible to be a U.S. 

transferor, owns at least 5% (applying the 

attribution rules of section 318, as modified 

by section 958(b)) of the total voting power 

and total value of the outstanding stock of F1. 

As a result, UST is treated as retaining an 

indirect interest in the TFD stock following 

the distribution. 

(3) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if UST enters into 

a new gain recognition agreement with 

respect to the initial transfer. The new gain 

recognition agreement need not describe 

additional dispositions or other events that 

would constitute triggering events because, 

pursuant to paragraph (c)(5) of this section, 

the dispositions or other events described in 

paragraph (j) of this section or in the existing 

gain recognition agreement apply to the new 

gain recognition agreement. 


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Example 18. Complete liquidation of 

transferee foreign corporation. (i) Facts. TFD 

has 10 shares of stock outstanding 

immediately before the initial transfer. On 

the date of the initial transfer, the TFD stock 

has a $0x basis and $90x fair market value. 

In year 2, in exchange for 1 share of TFD 

stock TFC transfers real estate to TFD with 

a $10x basis and $10x fair market value. In 

year 4, TFC distributes the 11 shares of TFD 

stock to UST in a complete liquidation to 

which sections 332 and 337 apply. 

(ii) Result. In determining whether the gain 

recognition agreement entered into by UST 

with respect to the initial transfer is 

terminated under paragraph (o)(5) of this 

section, or triggered under paragraphs (j)(1) 

and (j)(4) of this section, only the 10 shares 

of TFD stock transferred by UST in the initial 

transfer are considered. Thus, the 1 share of 

TFD stock received by TFC in exchange for 

the real estate in year 2 is not taken into 

account. 

Example 19. Spin-off of transferred 

corporation. (i) Facts. Before the initial 

transfer, the TFD stock has an $80x basis and 

a $100x fair market value, and the TFC stock 

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

value. In year 4, TFC distributes all of the 

TFD stock to UST in a transaction to which 

section 355 applies. At the time of the 

distribution, the TFD stock has a $200x fair 

market value, and the TFC stock (without 

regard to the value of the TFD stock held by 

TFC) has a $100x fair market value. At such 

time, the TFC stock has a $180x basis. As 

determined under section 358, immediately 

after the distribution, the TFC stock has a 

$60x basis, and the TFD stock has a $120x 

basis. 

(ii) Result. The distribution of the TFD 

stock by TFC in year 4 is a triggering event 

under paragraph (j)(1) of this section. The 

distribution does not terminate the gain 

recognition agreement under paragraph (o)(5) 

of this section because after the distribution, 

the basis of the TFD stock in the hands of 

UST ($120x) is greater than the basis of the 

TFD stock at the time of the initial transfer 

($80x). However, if UST reduces the basis of 

the TFD stock to $80x (as provided under 

paragraph (o)(5)(iii) of this section) the gain 

recognition agreement will terminate without 

further effect. If UST does not elect to reduce 

the basis of the TFD stock, see paragraph 

(k)(14) of this section. 

Example 20. Intercompany transaction 

followed by disposition to nonmember. (i) 

Facts. At the time of the initial transfer, the 

TFD stock has a $50x basis and $100x fair 

market value. The amount of the gain 

recognition agreement is $50x. In year 3, UST 

distributes all of the TFC stock to USP in a 

transaction to which section 301 applies. At 

the time of the distribution, the TFC stock 

has a $50x basis and $90x fair market value. 

Under section 311(b), UST must recognize 

$40x gain (the intercompany item) on the 

distribution, but because the distribution is 

an intercompany transaction, under the 

provisions of § 1.1502–13, the $40x gain is 

not taken into account in year 3. In year 4, 

USP sells all of the TFC stock to X, an 

unrelated corporation. Under the provisions 

of § 1.1502–13, in year 4 UST takes into 

account the $40x intercompany item as a 

result of the sale of the TFC stock to X. 

(ii) Result. (A) The year 3 distribution of 

the TFC stock by UST to USP does not 

terminate the gain recognition agreement 

under paragraph (o)(1) of this section because 

UST does not include the $40x gain in 

taxable income during year 3. Under 

paragraph (j)(4) of this section, the year 3 

distribution of the TFC stock by UST to USP 

is generally a triggering event; however, 

because the distribution is an intercompany 

transaction that creates an intercompany 

item, the distribution shall not constitute a 

triggering event if the conditions of 

paragraph (k)(12)(i) of this section are 

satisfied. 

(1) The condition of paragraph (k)(12)(i)(A) 

of this section is satisfied because the 

aggregate basis of the TFC stock distributed 

($50x) is not greater than the sum of the 

aggregate basis of the TFD stock at the time 

of the initial transfer ($50x). 

(2) The condition of paragraph (k)(12)(i)(B) 

of this section is satisfied if the next annual 

certification for the existing gain recognition 

agreement includes a complete description of 

the intercompany transaction and an 

explanation of how the basis condition of 

paragraph (k)(12)(i)(A) of this section is 

satisfied. 

(B) Under paragraph (o)(6) of this section 

and the principles of paragraph (o)(1)(i) of 

this section, because the year 4 sale of the 

TFC stock to X requires UST to take into 

account the $40x gain (the intercompany 

item) from the year 3 distribution, the year 

4 sale terminates the gain recognition 

agreement. If, alternatively, in year 4 USP 

had sold only 30% of the TFC stock, then 

under paragraph (o)(6) of this section and the 

principles of paragraph (o)(1)(ii) of this 

section the amount of gain subject to the gain 

recognition agreement would be reduced by 

30%. 

(iii) Alternate facts. Intercompany 

transaction followed by sale of transferee 

foreign corporation to member. Assume the 

same facts as in paragraph (i) of this Example 

20, except that, instead of USP selling the 

TFC stock to X, in year 4 USP sells the TFC 

stock to USS in exchange for $90x cash. UST 

and USS are members of the USP 

consolidated group immediately after the 

sale. The results of the year 3 distribution of 

the TFC stock by UST to USP are the same 

as in paragraph (ii) of this Example 20. In 

addition, under paragraph (k)(12)(ii) of this 

section, the year 4 sale by USP of the TFC 

stock to USS is not a triggering event, 

provided UST includes a complete 

description of the sale with the annual 

certification filed for the gain recognition 

agreement in year 4. 

(iv) Alternate facts. Intercompany 

transaction followed by complete liquidation 

of transferee foreign corporation. Assume the 

same facts as in paragraph (i) of this Example 

20, except that, instead of USP selling the 

TFC stock to X, in year 4 TFC distributes all 

of its assets to USP in a complete liquidation 

to which sections 332 and 337 apply. The 

result is the same as in paragraph (ii) of this 

Example 20 because, under the provisions of 

§ 1.1502–13, in year 4 UST takes into account 

the $40x gain (the intercompany item) from 

the year 3 distribution. 

(v) Alternate facts. Intercompany 

transaction followed by triggering event. 

Assume the same facts as in paragraph (i) of 

this Example 20, except that instead of USP 

selling the TFC stock to X, in year 4 TFC 

disposes of all of the TFD stock in a 

transaction that constitutes a triggering event 

under paragraph (j)(1) of this section. Under 

paragraph (c)(1)(i) of this section UST must 

recognize $50x gain under the gain 

recognition agreement. Under paragraphs 

(c)(4)(i) and (ii) of this section, as of the date 

of the initial transfer the basis of the TFC 

stock and TFD stock, respectively, is 

increased by $50x. 

(vi) Alternate facts. Intercompany 

transaction followed by section 351 transfer 

to member. The facts are the same as in 

paragraph (i) of this Example 20, except that, 

in year 3, in a section 351 exchange UST 

transfers all of the TFC stock to USS in 

exchange for $10x cash and $80x of stock of 

USS. USS is a member of the USP 

consolidated group immediately after the 

exchange. The transfer of the TFC stock by 

UST to USS is an intercompany transaction. 

Under section 351(b), UST must generally 

recognize $10x gain (intercompany item) in 

connection with the transfer; however, under 

the provisions of § 1.1502–13, UST does not 

take the $10x gain into account in year 3. 

Under paragraph (k)(12) of this section, as 

result of the intercompany transaction 

creating an intercompany item ($10x gain), 

the existing gain recognition agreement ($50x 

gain) must be divided between UST and USS. 

UST shall remain subject to a gain 

recognition agreement of $10x (equal to the 

amount of the intercompany item). The 

amount of the gain recognition agreement 

entered into by USS under paragraph (k)(1) 

of this section is $40x (equal to the amount 

of the existing gain recognition agreement, 

reduced by the amount of the of the gain 

recognition agreement to which UST remains 

subject). 

Example 21. Transfer of transferred stock 

to United States person other than U.S. 

transferor. (i) Facts. An individual (A) that is 

a United States citizen wholly owns TFD, 

TFC, and DC. A transfers the TFD stock to 

TFC in a section 351 exchange and enters 

into a gain recognition agreement with 

respect to such transfer. In year 5, pursuant 

to an asset reorganization, TFC transfers all 

of its assets to DC in exchange solely for DC 

stock. TFC distributes the DC stock to A 

pursuant to the plan of reorganization. 

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

stock to DC and the exchange by A of the 

TFC stock for DC stock pursuant to the asset 

reorganization are triggering events under 

paragraphs (j)(1) and (j)(4) of this section, 

respectively. The gain recognition agreement 

does not terminate under paragraph (o)(5) of 

this section because DC is neither the U.S. 

transferor, nor an individual that is a United 

States person, nor a member of the same 

consolidated group of which the U.S. 

transferor is a member. However, if 

paragraph (k)(14) of this section applies the 

exchanges shall not constitute triggering 

events. 

(A) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the transfer 

of the TFD stock to DC qualifies as a 

nonrecognition transaction. 

(B) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 


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after the transfer DC, a domestic corporation 

that is eligible to be a U.S. transferor, retains 

a direct interest in the TFD stock following 

the transfer. 

(C) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if DC enters into 

a new gain recognition agreement with 

respect to the initial transfer. Under 

paragraph (k)(14)(iii)(B) of this section, DC is 

not required to describe any subsequent 

dispositions or other events that (based on 

the principles of paragraph (j) of this section) 

would constitute triggering events for 

purposes of the new gain recognition 

agreement, other than the dispositions or 

other events described in paragraph (j) of this 

section, because DC holds a direct interest in 

TFD after the asset reorganization. 

Example 22. Transfer of transferred stock 

to consolidated group member. (i) Facts. UST 

wholly owns DC, a member of the USP 

consolidated group that includes UST. In 

year 5, pursuant to an asset reorganization 

described in section 368(a)(1)(A) TFC merges 

with and into DC. Immediately after the asset 

reorganization, DC wholly owns TFD, and 

the basis of the TFD stock is not greater than 

the aggregate basis of such stock at the time 

of the initial transfer. 

(ii) Result. The gain recognition agreement 

filed by UST with respect to the initial 

transfer terminates without further effect if 

the conditions of paragraph (o)(5) of this 

section are satisfied. 

(A) The condition of paragraph (o)(5)(i) of 

this section is satisfied because the transfer 

of the TFD stock is a section 361 exchange. 

(B) The condition of paragraph (o)(5)(ii) of 

this section is satisfied because DC is a 

member of the consolidated group that 

includes UST immediately after the section 

361 exchange. 

(C) The condition of paragraph (o)(5)(iii) of 

this section is satisfied because the aggregate 

basis of the TFD stock immediately after the 

section 361 exchange is not greater than the 

aggregate basis of the TFD stock at the time 

of the initial transfer (as adjusted for any gain 

recognized by UST on such transfer). If the 

basis condition of paragraph (o)(5)(iii) were 

not satisfied, under paragraph (o)(5)(iii) of 

this section, DC could reduce the basis of the 

TFD stock received in the reorganization. 

Alternatively, a new gain recognition 

agreement could be entered into if paragraph 

(k)(14) of this section applied to the 

disposition of the TFD stock pursuant to the 

section 361 exchange. 

(iii) Alternate facts. The facts are the same 

as in paragraph (i) of this Example 22, except 

that instead of TFC merging into DC, TFC 

merges into TFD in a reorganization 

described in section 368(a)(1)(A). The gain 

recognition agreement terminates without 

further effect if the conditions of paragraph 

(o)(5) of this section are satisfied. 

(A) The condition of paragraph (o)(5)(i) of 

this section is satisfied because the TFD stock 

issued by TFD to TFC in the reorganization, 

which is treated as transferred stock under 

paragraph (b)(2)(iii) of this section, is 

distributed by TFC to UST pursuant to 

section 361(c). 

(B) The condition of paragraph (o)(5)(ii) of 

this section is satisfied because UST is the 

U.S. transferor. 

(C) The condition of paragraph (o)(5)(iii) of 

this section is satisfied if the aggregate basis 

of the TFD stock received by UST from TFC 

is not greater than the aggregate basis of the 

TFD stock at the time of the initial transfer 

(as adjusted for any gain recognized by UST 

on such transfer). If the basis condition of 

paragraph (o)(5)(iii) were not satisfied, under 

paragraph (o)(5)(iii) of this section, UST 

could reduce the basis of the TFD stock 

received in the reorganization. 

Example 23. Split-off of transferred stock. 

(i) Facts. X, a domestic corporation that is 

unrelated to USP and UST, wholly owns 

TFC. Pursuant to a reorganization described 

in section 368(a)(1)(B), UST transfers all of 

the TFD stock to TFC in exchange for 50% 

of the outstanding voting stock of TFC. UST 

enters into a gain recognition agreement with 

respect to such transfer. In year 4, in a splitoff transaction to which section 355 applies, 

TFC distributes all of the TFD stock to X in 

exchange for all the TFC stock held by X. 

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

section, the year 4 distribution of the TFD 

stock to X constitutes a triggering event. 

However, the distribution shall not constitute 

a triggering event if paragraph (k)(14) of this 

section applies. The gain recognition 

agreement does not terminate under 

paragraph (o)(5) of this section because X is 

not a recipient described in paragraph 

(o)(5)(ii) of this section. 

(A) The condition of paragraph (k)(14)(i) of 

this section is satisfied because the 

distribution of the TFD stock qualifies as a 

nonrecognition transaction. 

(B) The condition of paragraph (k)(14)(ii) of 

this section is satisfied because immediately 

after the distribution X, a domestic 

corporation that is eligible to be a U.S. 

transferor, retains a direct interest in the TFD 

stock. 

(C) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if X enters into a 

new gain recognition agreement with respect 

to the initial transfer. Under paragraph 

(k)(14)(iii)(B) of this section, X is not required 

to describe, with the new gain recognition 

agreement, any subsequent dispositions or 

other events that (based on the principles of 

paragraph (j) of this section) would constitute 

triggering events, other than the dispositions 

described in paragraph (j) of this section, 

because X directly owns TFD after the 

distribution. 

(D) If X were a United States citizen, the 

gain recognition agreement would terminate 

if the condition of paragraph (o)(5)(iii) of this 

section were satisfied. Alternatively, the gain 

recognition agreement would continue for its 

remaining term if the conditions for the 

application of paragraph (k)(14) of this 

section were satisfied. 

(iii) Alternate facts. Distribution to 

unrelated foreign corporation. The facts are 

the same as in paragraph (i) of this Example 

23, except that X is a foreign corporation 

wholly owned by DC. DC is unrelated to 

UST. The results are the same as in 

paragraph (ii) of this Example 23, except as 

follows. 

(A) The condition of paragraph (k)(14)(ii) 

of this section is satisfied because 

immediately after the distribution DC, a 

domestic corporation that is eligible to be a 

U.S. transferor, owns at least 5% (applying 

the attribution rules of section 318, as 

modified by section 958(b)) of the total voting 

power and total value of the outstanding 

stock of X. As a result, DC is treated as 

retaining an indirect interest in the TFD stock 

immediately following the distribution. 

(B) The condition of paragraph (k)(14)(iii) 

of this section is satisfied if DC enters into 

a new gain recognition agreement with 

respect to the initial transfer. Under 

paragraph (k)(14)(iii)(B) of this section, DC 

must, in addition to the dispositions 

described in paragraph (j) of this section, 

include as a triggering event a complete or 

partial disposition of the stock of X. 

(iv) Alternate facts. Distribution to 

nonresident alien individual. The facts are 

the same as in paragraph (i) of this Example 

23, except that X is a nonresident alien 

individual. Paragraph (k)(14) of this section 

does not apply to the distribution because the 

conditions of paragraph (k)(14)(ii) and (iii) of 

this section cannot be satisfied. Therefore, 

the distribution is a triggering event, and 

UST will recognize gain under the gain 

recognition agreement as required under 

paragraphs (c)(1)(i) and (v) of this section. 

The result would be the same if X were a 

foreign corporation and, immediately after 

the distribution, no United States person 

owned at least 5% (applying the attribution 

rules of section 318, as modified by section 

958(b)) of the total voting power and value 

of the outstanding stock of X. 

Example 24. Applicability of this section to 

gain recognition agreements filed before 

March 13, 2009. (i) Facts. The facts are the 

same as in paragraph (i) of Example 6, except 

that the initial transfer occurred on March 7, 

2007, and the asset reorganization occurred 

on July 1, 2008. 

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

section, the rules of § 1.367(a)-8T (see 26 CFR 

part 1, revised April 1, 2007) apply to the 

transfers pursuant to the asset reorganization 

because the initial transfer occurred on 

March 7, 2007. As a result of the disposition 

of the TFC stock pursuant to the asset 

reorganization, under § 1.367(a)-8T(d), USP is 

required to recognize the gain subject to the 

gain recognition agreement and pay 

applicable interest on any additional tax due 

with respect to such gain. Because the 

acquiring corporation in the asset 

reorganization is foreign, an exception under 

§ 1.367(a)-8T(e) is not available for the 

exchange of TFC stock by USP. However, 

pursuant to paragraph (r)(2)(i) of this section, 

because the exception provided by paragraph 

(k)(14) of this section is not included in 

§ 1.367(a)-8T, USP may apply paragraph 

(k)(14) of this section to such exchange 

(provided the conditions of paragraph (k)(14) 

of this section are satisfied), if the statute of 

limitations on assessments of tax for the 2007 

tax year has not closed. If USP applies 

paragraph (k)(14) of this section to its 

exchange of the TFC stock pursuant to the 

asset reorganization, under paragraph 

(r)(2)(ii) of this section USP must include the 

new gain recognition agreement required 

under paragraph (k)(14)(iii) of this section 

with an amended Federal income tax return 

for its 2008 tax year that is filed August 10, 

2009. 


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Example 25. Applicability of this section to 

gain recognition agreements filed before 

March 13, 2009. (i) Facts. The initial transfer 

occurs in 2004. In 2005, pursuant to a section 

351 exchange, TFC transfers the TFD stock to 

F1 in exchange solely for F1 voting stock. 

UST does not file a new gain recognition 

agreement under § 1.367(a)-8(g)(2) with 

respect to the exchange. 

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

section, the rules of § 1.367(a)-8 (see 26 CFR 

part 1, revised April 1, 2006) apply to the 

year 2005 disposition of the TFD stock 

because UST filed the gain recognition 

agreement after July 20, 1998, but before 

March 7, 2007. Under § 1.367(a)-8(e) (see 26 

CFR part 1, revised April 1, 2006), as a result 

of the disposition of the TFD stock by TFC, 

UST must recognize the amount of gain 

subject to the gain recognition agreement. 

Paragraph (r)(2)(i) of this section does not 

apply because the rule provided by 

paragraph (k)(3) of this section was included 

in § 1.367(a)-8(g)(2) (see 26 CFR part 1, 

revised April 1, 2006). However, UST may 

request relief for reasonable cause under 

§ 1.367(a)-8(c)(2) (see 26 CFR part 1, revised 

April 1, 2006) to file a new gain recognition 

agreement with respect to the disposition of 

the TFD stock by TFC in 2005. 

(r) Effective/applicability date—(1) 

General rule—(i) Transfers occurring on 

or after March 13, 2009. The rules of 

this section apply to gain recognition 

agreements filed with respect to 

transfers of stock or securities occurring 

on or after March 13, 2009. However, 

the rules of this section do not apply to 

gain recognition agreements filed with 

respect to any such transfer occurring 

on or after March 13, 2009, if such 

transfer was entered into pursuant to a 

written agreement that was (subject to 

customary conditions) binding before 

February 11, 2009, and at all times 

thereafter. Solely for purposes of this 

paragraph (r), a transfer described in the 

preceding sentence shall be deemed to 

be a transfer occurring before March 13, 

2009 to which the rules of § 1.367(a)–8 

(see 26 CFR part 1, revised April 1, 

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

this section for the ability to apply the 

rules of this section with respect to gain 

recognition agreements filed for taxable 

years ending before March 13, 2009. 

(ii) Transfers occurring before March 

13, 2009. For matters covered in this 

section for periods before March 13, 

2009 but on or after March 7, 2007, the 

corresponding rules of § 1.367(a)–8T 

(see 26 CFR part 1, revised April 1, 

2007) apply. For matters covered in this 

section for periods before March 7, 2007 

but on or after July 20, 1998, the 

corresponding rules of § 1.367(a)–8 (see 

26 CFR part 1, revised April 1, 2006) 

apply. For matters covered in this 

section for periods before July 20, 1998, 

the corresponding rules of § 1.367(a)– 

3T(g) (see 26 CFR part 1, revised April 

1, 1998) and Notice 87–85 (1987–2 CB 

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

transferor entered into a gain 

recognition agreement for transfers 

before July 20, 1998, then the rules of 

§ 1.367(a)–3T(g) (see 26 CFR part 1, 

revised April 1, 1998) continue to apply 

in lieu of this section in the event of any 

direct or indirect nonrecognition 

transfer of the same property. See also, 

§ 1.367(a)–3(h). 

(2) Applicability to gain recognition 

agreements filed before March 13, 

2009—(i) General rule. Taxpayers may 

apply the rules of this regulation 

§ 1.367(a)–8 that were not included in 

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

April 1, 2007), to gain recognition 

agreements filed with respect to 

transfers of stock or securities for all 

open taxable years, if done consistently 

to all transfers. A U.S. transferor subject 

to section 877 and § 1.367(a)–8T(d)(6) 

shall not apply the rules of this 

regulation to reach a contrary result. A 

taxpayer that failed to file a gain 

recognition agreement for a transfer, or 

to comply materially with any 

requirement of this section with respect 

to an existing gain recognition 

agreement, must obtain relief for 

reasonable cause for such failure under 

§ 1.367(a)–8T(e)(10) before applying the 

rules of this regulation § 1.367(a)–8 that 

were not included in § 1.367(a)–8T as 

permitted by this paragraph (r)(2). See 

paragraph (q)(2) of this section, 

Examples 24 and 25 for illustrations of 

the rule provided by this paragraph 

(r)(2)(i). 

(ii) Taxable years ending before 

March 13, 2009. Notwithstanding the 

requirements of § 1.367(a)–8(d), any 

gain recognition agreement or other 

filing required by reason of electing to 

apply the rules of this regulation 

§ 1.367(a)–8 that were not included in 

§ 1.367(a)–8T, as permitted by this 

paragraph (r)(2), for a taxable year 

ending before March 13, 2009 shall be 

considered filed in accordance with the 

requirements of § 1.367(a)–8(d), 

provided the gain recognition agreement 

or other filing is attached to an original 

or amended return for such taxable year. 

An amended return required to be filed 

by reason of electing to apply the rules 

of this regulation § 1.367(a)–8 that were 

not included in § 1.367(a)–8T, as 

permitted by this paragraph (r)(2), must 

be filed on or before August 10, 2009. 

A taxpayer that wishes to apply the 

rules of this regulation § 1.367(a)–8 that 

were not included in § 1.367(a)–8T, as 

permitted by this paragraph (r)(2), but 

that fails to meet the filing requirement 

described in the preceding sentence 

must request relief for reasonable cause 

under paragraph (p) of this section. 

(iii) Taxable years ending after 

effective date. A taxpayer that entered 

into a gain recognition agreement to 

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

revised April 1, 2007) applies may 

apply the rules of this section in a tax 

year ending on or after March 13, 2009 

by attaching the agreement, 

certification, or other information 

related to such gain recognition 

agreement that the rules of this section 

require in accordance with the rules of 

this section and with the time and 

manner rules provided in § 1.367(a)– 

8(d). 

§ 1.367(a)–8T [Removed] 

■ Par. 8. Section 1.367(a)–8T is 

removed. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 9. The authority citation for part 

602 continues to read as follows: 

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

■ Par. 10. In § 602.101, paragraph (b) is 

amended by removing an entry for 

§ 1.367(a)–8T from the table and adding 

an entry for § 1.367(a)–8 to the table in 

numerical order to read as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

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

* * * * * 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 16, 2009. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E9–1512 Filed 2–9–09; 11:15 am] 

BILLING CODE 4830–01–P 


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