[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Rules and Regulations]
[Pages 66739-66746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30829]



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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602

[TD 8638]
RIN 1545-AT44


Certain Transfers of Domestic Stock or Securities by U.S. Persons 
to Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: These temporary regulations provide the public with guidance 
necessary to comply with the Tax Reform Act of 1984. These regulations 
amend the Income Tax Regulations with respect to certain transfers of 
stock or securities of domestic corporations by United States persons 
to foreign corporations pursuant to the corporate organization, 
reorganization, or liquidation provisions of the Internal Revenue Code. 
This Treasury decision also removes certain of the existing temporary 
regulations regarding transfers by U.S. persons of stock or securities 
of both domestic and foreign corporations. This action is necessary to 
update the existing temporary regulations and to reflect certain of the 
changes announced by Notice 87-85 (1987-2 C.B. 395) (with respect to 
transfers of both domestic and foreign stock or securities) and by 
Notice 94-46 (1994-1 C.B. 356) (with respect to transfers of stock or 
securities of a domestic corporation). The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section of this issue of the Federal Register. When 
finalized, the regulations under section 367(a) relating to the 
transfer of stock or securities will integrate the regulations herein 
with the 1991 proposed regulations relating to transfers of stock or 
securities (see Proposed Rule Secs. 1.367(a)-3 and 1.367(a)-8, 
published at 56 FR 41993, August 26, 1991).

EFFECTIVE DATE: April 17, 1994. For further information, see the 
Applicability and Effective Dates section under SUPPLEMENTARY 
INFORMATION. 

FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 622-3860 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Applicability and Effective Dates

    These regulations are generally applicable to transfers occurring 
after April 17, 1994, the effective date of Notice 94-46. However, the 
active trade or business requirement (described in Sec. 1.367(a)-
3T(c)(1)(iii) of the temporary regulations herein), which was not 
contained in Notice 94-46, is effective for transfers occurring January 
25, 1996. Moreover, these regulations remove as ``deadwood'' paragraphs 
(c)(1) through (c)(4), (d), (e), (f), (g)(1)(iii) and (h)(1) of 
Sec. 1.367(a)-3T of the existing temporary regulations with respect to 
transfers occurring after December 16, 1987, the effective date of 
Notice 87-85.

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collection of information contained in these 
regulations has been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget under 
control number 1545-1478. Responses to this collection of information 
are required in order for U.S. shareholders that transfer stock or 
securities in section 367(a) exchanges to qualify for an exception to 
the general rule of taxation under section 367(a)(1).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register. Books or records relating to a 
collection of information must be retained as long as their contents 
may become material in the administration of any internal revenue law. 
Generally, tax returns and tax return information are confidential, as 
required by 26 U.S.C. 6103.

Background

    On May 16, 1986, temporary and proposed regulations under sections 
367 (a) and (d) and section 6038B were published in the Federal 
Register (51 FR 17936). These regulations were published to provide the 
public with guidance necessary to comply with changes made to the 
Internal Revenue Code by the Tax Reform Act of 1984. Included in the 
1986 temporary regulations was Sec. 1.367(a)-3T, concerning transfers 
of stock or securities of domestic or foreign corporations by U.S. 
persons to foreign corporations. Subsequently, the IRS and the Treasury 
Department issued Notice 87-85 (1987-2 C.B. 395), which set forth 
substantial changes to be made to Sec. 1.367(a)-3T, effective with 
respect to transfers occurring after December 16, 1987. A further 
notice of proposed rulemaking, containing rules under section 367(a), 
as well as under section 367(b), was published in the Federal Register 
on August 26, 1991 (56 FR 41993). The 1991 proposed section 367(a) 
regulations were generally based upon the positions announced in Notice 
87-85, but the regulations made certain modifications to Notice 87-85, 
particularly with respect to transfers of stock or securities of 
foreign corporations.
    Most recently, the IRS and the Treasury Department issued Notice 
94-46 (1994-1 C.B. 356), announcing modifications to the positions set 
forth in Notice 87-85 (and the 1991 proposed regulations) with respect 
to transfers of stock or securities of domestic corporations occurring 
after April 17, 1994. The temporary regulations set forth herein 
generally incorporate the modifications announced in Notice 94-46. The 
notice of proposed rulemaking on this subject in the Proposed Rules 
section of this issue of the Federal 

[[Page 66740]]
Register supplements and, where inconsistent with, supersedes, the 1991 
proposed regulations with respect to transfers of domestic stock or 
securities occurring after April 17, 1994.
    Notice 94-46 announced that the regulations under section 367(a) 
would be amended to deny nonrecognition treatment to the transfer of 
stock or securities of a domestic corporation by a U.S. person to a 
foreign corporation if all U.S. transferors owned in the aggregate 50 
percent or more of either the total voting power or the total value of 
the stock of the transferee foreign corporation immediately after the 
exchange. (Under the approach taken in Notice 87-85, transfers of 
domestic stock or securities occurring prior to April 18, 1994 (and 
after December 16, 1987) were generally denied nonrecognition treatment 
only in the case of a single U.S. transferor that owned more than 50 
percent of the total voting power or the total value of the stock of 
the transferee foreign corporation immediately after the transfer or of 
a U.S. transferor that held at least 5 percent (but no more than 50 
percent) of the total voting power or the total value of the stock of 
the transferee foreign corporation immediately after the transfer and 
that failed to enter into a gain recognition agreement.)
    In Notice 94-46, the IRS and the Treasury Department invited 
comments on possible exceptions to the general rule set forth in the 
Notice, specifically with respect to cases where (i) a domestic 
corporation is acquired by a foreign corporation that is engaged in an 
active trade or business and that, prior to the transaction, is 
unrelated to the acquired corporation or its shareholders, or (ii) the 
transferee foreign corporation is a controlled foreign corporation 
(within the meaning of section 957) after the transfer. After 
consideration of the comments received, the IRS and the Treasury 
Department have concluded that no exceptions to the general rule are 
warranted.
    In the Notice, the IRS and the Treasury Department also invited 
specific comment on whether special rules should be provided to 
determine the ownership of the transferee foreign corporation in cases 
where the corporation is publicly traded. As described below, in 
response to comments received, the ``cross-ownership'' rules of Notice 
94-46 have been modified in a way that will ameliorate the burdens of 
identifying shareholders of publicly traded (or widely-held) 
corporations and that should reduce the impact of the general rule on 
business combinations involving unrelated U.S. and foreign corporations 
that are engaged in the active conduct of a trade or business.

Need for Temporary Regulations

    The rules contained in this Treasury decision provide taxpayers 
with guidance necessary to comply with Notice 94-46, which was 
effective with respect to transfers of stock or securities of domestic 
corporations to foreign corporations occurring after April 17, 1994. 
The provisions of Notice 94-46 were made immediately effective to 
forestall certain tax-avoidance transfers by U.S. persons of the stock 
of U.S.-based multinationals to foreign corporations. Because of the 
Notice's immediate effective date, there is a need for implementing 
regulations on which both taxpayers and the Service may rely with 
respect to current transfers.
    Based on these considerations, it is determined that immediate 
regulatory guidance will ensure the efficient administration of the tax 
laws and that it would be impracticable and contrary to the public 
interest to issue this Treasury decision with prior notice under 
section 553(b) or subject to the effective date limitation of section 
553(d) of title 5 of the United States Code.

Explanation of Provisions

    Section 367(a)(1) generally treats a transfer of property 
(including stock or securities) by a U.S. person to a foreign 
corporation in connection with an exchange described in section 332, 
351, 354, 356 or 361 as a taxable exchange unless the transfer 
qualifies for an exception to this general rule. Temporary regulations 
published on May, 16, 1986 (TD 8087) provided exceptions in the case of 
certain transfers of stock or securities of domestic and foreign 
corporations (see Sec. 1.367(a)-3T). Notice 87-85 announced 
modifications to those exceptions for transfers of domestic or foreign 
stock or securities occurring after December 16, 1987. Proposed 
regulations issued on August 26, 1991 largely incorporated the 
positions set forth in Notice 87-85, and expanded the application of 
section 367(a) with respect to certain transfers of stock or securities 
of foreign corporations. Notice 94-46 announced modifications to the 
exceptions originally announced in Notice 87-85, effective with respect 
to certain transfers of stock or securities of domestic corporations 
occurring after April 17, 1994.
    Both the temporary regulations herein and the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register generally incorporate the positions taken in 
Notice 94-46, with modifications as described below. As indicated 
previously, Notice 94-46 did not modify the positions taken in Notice 
87-85 governing the transfer of stock or securities of a foreign 
corporation. Until the 1991 proposed regulations are finalized, the 
positions originally announced in Notice 87-85 will continue to govern 
the availability of section 367(a) exceptions for transfers of stock or 
securities of foreign corporations.
    In addition to implementing the positions announced in Notice 94-
46, this Treasury decision removes those portions of Sec. 1.367(a)-3T 
of the 1986 temporary regulations that Notice 87-85 announced would no 
longer be applicable with respect to stock transfers occurring after 
December 16, 1987. This includes removal of the exceptions in 
paragraphs (c) (1) through (4) (providing exceptions for certain 
transfers of domestic stock or securities); of paragraph (d) (providing 
exceptions for certain transfers of foreign stock or securities, 
including an exception for transfers to a foreign corporation organized 
in the same foreign country as the corporation the stock of which is 
being transferred); of paragraph (e) (involving exceptions where stock 
is an operating asset or where there is a consolidation of an 
integrated business); and of paragraph (f) (exceptions where U.S. 
transferors obtain a limited interest in the transferee foreign 
corporation).
    The temporary regulations herein also incorporate (in paragraph 
(a)) the 1991 proposed regulations' restatement of the general rule 
applicable to outbound stock transfers (see Prop. Reg. Sec. 1.367(a)-
3(a)). This restatement revises the general rule contained in the 1986 
temporary regulations to reflect changes to section 367 made by 
Congress after promulgation of those regulations. For example, the 1986 
temporary regulations' statement of the general rule included transfers 
of stock or securities in section 332 liquidations as one of the 
transactions covered by section 367(a) (see Sec. 1.367(a)-3T(a)). The 
restatement of the general rule in the temporary regulations herein 
removes the reference to section 332 because an outbound transfer of 
stock or securities pursuant to a section 332 liquidation is now 
covered by section 367(e)(2) and the regulations under Sec. 1.367(e)-
2T. Even though the temporary regulations under Sec. 1.367(e)-2T have 
sunset (because they were promulgated as temporary regulations on 
January 12, 1990 (TD 8280) and were not finalized within three years of 
that date), the Service announced its 

[[Page 66741]]
intention to follow the principles of those regulations in the preamble 
to the final regulations under section 367(e)(1) (see the preamble to 
the final section 367(e)(1) regulations in TD 8472, adopted January 15, 
1993).
    The revised statement of the general rule herein refers explicitly 
to transfers that may be indirect or constructive. Thus, transactions 
that are recharacterized as indirect or constructive stock transfers 
will be subject to the section 367(a) stock transfer regulations and 
will be taxable unless an exception applies.
    The restatement of the general rule herein is not intended to 
change the 1986 temporary regulations' treatment of a case in which 
stock or securities of a foreign corporation are transferred pursuant 
to a reorganization described in section 368(a)(1)(B), including a 
transaction that is described in both section 368(a)(1)(B) and section 
351. It is anticipated, however, that the final regulations issued with 
respect to an outbound transfer of foreign stock or securities will 
incorporate the principles of the 1991 proposed regulations, and thus, 
for example, a transaction described in both section 368(a)(1)(B) and 
section 351 will be subject to section 367(a).

Notice 87-85 and the 1991 Proposed Regulations

    Under Notice 87-85 and the 1991 proposed regulations, a U.S. 
transferor of stock or securities that owns five percent or more of 
either the total voting power or the total value of the transferee 
foreign corporation immediately after the transfer generally is not 
subject to current taxation under section 367(a)(1) if that transferor 
enters into a gain recognition agreement (GRA). The term of the GRA is 
five years if all U.S. transferors, in the aggregate, own less than 50 
percent of both the total voting power and the total value of the stock 
of the transferee foreign corporation immediately after the transfer, 
or ten years if the U.S. transferors, in the aggregate, own 50 percent 
or more of either the total voting power or the total value of the 
stock of the transferee foreign corporation immediately after the 
transfer. U.S. transferors that own an interest of less than 5 percent 
in the transferee foreign corporation immediately after the transfer 
are not taxable under section 367(a)(1) and are not required to enter 
into a GRA. If a single U.S. transferor transfers stock or securities 
of a domestic corporation and owns directly or by attribution more than 
50 percent of either the total voting power or the total value of the 
stock of the transferee foreign corporation immediately after the 
transfer, gain is recognized on the exchange.
    The determination whether (i) a U.S. transferor owns five percent 
or more of the transferee foreign corporation immediately after the 
transfer, (ii) U.S. transferors own in the aggregate 50 percent or more 
of the transferee foreign corporation (and, thus, whether a 10-year GRA 
is required), or (iii) a single U.S. transferor owns more than 50 
percent of the transferee foreign corporation (and, thus, whether gain 
is recognized) takes into account both stock of the transferee foreign 
corporation received by the U.S. transferor(s) in the exchange and 
stock in the transferee foreign corporation owned by the U.S. 
transferor(s) independent of the exchange (referred to as cross-
ownership).
    Notice 87-85 and the 1991 proposed regulations presume that U.S. 
transferors own in the aggregate 50 percent or more of the total voting 
power or the total value of the transferee foreign corporation 
immediately after the transfer (and thus a ten-year GRA is required), 
unless U.S. transferors can demonstrate otherwise (referred to as the 
ownership presumption). The ownership presumption contained in both the 
Notice and the 1991 proposed regulations actually consists of two 
rebuttable presumptions, one relating to ownership of stock in the U.S. 
corporation the stock or securities of which are transferred (referred 
to as the U.S. target company) and the other relating to ownership of 
stock in the transferee foreign corporation.
    Under the first presumption, all persons that exchange U.S. target 
company stock (or other property) for stock of the transferee foreign 
corporation in the exchange are presumed to be U.S. persons. Thus, if 
shareholders of the U.S. target company receive 50 percent or more of 
the stock of the transferee foreign corporation in the exchange, U.S. 
transferors are presumed to own 50 percent or more of the stock of the 
transferee foreign corporation immediately after the transfer. Even if 
application of this first presumption does not result in U.S. 
transferors being deemed to own at least 50 percent of the total voting 
power or the total value of the transferee foreign corporation 
immediately after the transfer, the second presumption may do so. The 
second presumption is that U.S. transferors also own stock of the 
transferee foreign corporation independent of the exchange in an amount 
sufficient to bring their total ownership immediately after the 
exchange up to 50 percent. This second component of the ownership 
presumption is referred to as the cross-ownership presumption.

Notice 94-46

    Notice 94-46 modified the exceptions set forth in Notice 87-85 with 
respect to post-April 17, 1994 transfers of stock or securities of 
domestic corporations. The purpose of Notice 94-46 was to forestall 
outbound transfers that are structured to avoid or that lay a 
foundation for future avoidance of the Internal Revenue Code anti-
deferral regimes by imposing a shareholder-level tax on such transfers. 
Notice 94-46 stated that regulations would provide that the transfer of 
stock or securities of a domestic corporation by a U.S. person to a 
foreign corporation described in section 367(a) would be taxable if all 
U.S. transferors owned, in the aggregate, 50 percent or more of either 
the total voting power or the total value of the stock of the 
transferee corporation immediately after the exchange. All U.S. 
transferors, regardless of their level of ownership, would be subject 
to tax in such a case.
    The rules of Notice 94-46 incorporated the ownership presumption of 
Notice 87-85. As a result of the cross- ownership aspect of that 
presumption, even if U.S. shareholders receive significantly less than 
50 percent of the stock of a transferee foreign corporation in an 
exchange described in section 367(a), the transaction could still be 
taxable. If, for example, U.S. shareholders of a U.S. target company 
received 30 percent of the stock of a transferee foreign corporation in 
an exchange described in section 367(a)(1), those shareholders would be 
presumed to own independently at least an additional 20 percent of the 
stock of the transferee foreign corporation immediately after the 
transfer, with the result that the exchange would be taxable (unless 
the cross-ownership presumption were rebutted). Commentators argued 
that where a U.S. target company and a foreign acquirer were publicly 
traded or widely-held, taxpayers' ability to rebut the cross-ownership 
aspect of the ownership presumption was limited. As a result, Notice 
94-46 potentially had the effect of forestalling acquisitions of U.S. 
public companies by larger foreign corporations in cases where they 
were unrelated and both engaged in the active conduct of a trade or 
business.
    In response to comments received from taxpayers, and in particular 
with respect to the difficulties of rebutting the cross-ownership 
presumption, these temporary regulations modify positions taken in 
Notice 94-46 in two significant ways. First, the regulations shift the 
ownership threshold from ``50 percent 

[[Page 66742]]
or more'' to ``more than 50 percent'' so that a U.S. transferor may 
qualify for an exception to section 367(a) in cases where U.S. 
transferors, in the aggregate, receive exactly 50 percent of the stock 
of the transferee foreign corporation in the exchange. The relaxation 
of the ownership threshold was intended to give 50-50 joint ventures 
involving unrelated U.S. and foreign corporations that are engaged in 
active businesses the option of using a foreign transferee corporation. 
Where a foreign corporation is smaller than a U.S. corporation that it 
acquires, the transaction will still generally be taxable; it would not 
be taxable if the U.S. participant were the acquiring corporation in 
the transaction (or if another U.S. holding company were the acquiring 
corporation). Second, although the regulation retains the presumption 
that shareholders of the U.S. target company are U.S. persons, it does 
not, in general, retain the cross-ownership presumption and no longer, 
as a general matter, takes cross-ownership into account. The regulation 
counts cross-ownership only in the limited circumstance where U.S. 
officers, directors, and 5-percent or greater shareholders of the U.S. 
target company own, in the aggregate, more than 50 percent of the total 
voting power or the total value of the transferee foreign corporation 
immediately after the transfer (a control group case). In such a case, 
the exchange is taxable to all U.S. transferors. The regulation allows 
taxpayers to rely on Schedule 13-D or 13-G filings made under the 
Securities Exchange Act of 1934 (15 U.S.C. 78m) to identify 5-percent 
shareholders of public companies for this purpose.
    Although cross-ownership does not count toward the 50 percent 
ownership threshold (unless the control group case applies), it is 
still relevant in determining whether a U.S. transferor owns five 
percent or more of the transferee foreign corporation under the rules 
originally announced in Notice 87-85. Moreover, cross-ownership 
continues to be relevant for determining whether a 5-year or 10-year 
GRA is required under the rules originally announced in 87-85, and, for 
these purposes, there continues to be a rebuttable presumption.
    In addition to the two modifications described above that were made 
in response to comments received with respect to Notice 94-46, these 
regulations contain a new active trade or business requirement not 
contained in Notice 94-46, which taxpayers must meet in order to 
qualify for an exception to the general rule of taxation under section 
367(a). The IRS and the Treasury Department added the active trade or 
business requirement to address abuse potential, in particular, in a 
case in which a U.S. target company is smaller than a foreign acquirer 
that was formed and capitalized with a view to enabling the smaller 
U.S. company to move offshore. The IRS and the Treasury Department 
believe that this type of transaction presents an inappropriate 
opportunity for avoiding the anti-deferral regime without payment of 
the tax envisioned by Notice 94-46. The IRS and the Treasury Department 
believe that an exception to taxation is proper only in cases where a 
combination of two active businesses is contemplated and that the 
opportunity for tax avoidance is ameliorated when such businesses have 
been conducted for a period of at least 36 months prior to the 
exchange. Under the requirement contained in the regulations, no 
exception to taxation is available unless either the transferee foreign 
corporation or an affiliate of that corporation was engaged in the 
active conduct of a trade or business for the entire 36-month period 
prior to the exchange, and unless such business is substantial in 
relation to the business conducted by the U.S. target company. For this 
purpose, an affiliate is generally defined by reference to the rules in 
section 1504(a) (without the exclusion of foreign corporations), and 
generally includes a parent, subsidiary or brother-sister corporation 
of the transferee foreign corporation.
    To summarize, under the temporary regulations, a U.S. person that 
exchanges stock or securities in a U.S. corporation for stock of a 
foreign corporation in an exchange described in section 367(a) will be 
taxable in cases where:
    (i) The 50 percent ownership threshold is exceeded;
    (ii) The control group case applies;
    (iii) The active trade or business requirement is not met; or
    (iv) The exchanging U.S. shareholder owns five percent or more of 
the stock of the transferee foreign corporation and fails to enter into 
a GRA and/or satisfy the requirements of section 6038B.
    The duration of the GRA in case (iv) is 5 years if the transferor 
can demonstrate that all U.S. transferors in the aggregate own less 
than 50 percent of the total voting power or the total value of the 
stock of the transferee foreign corporation immediately after the 
transfer or 10 years if U.S. transferors own exactly 50 percent (or 
more than 50 percent as a result of cross-ownership) of the transferee 
foreign corporation immediately after the transfer. In all cases other 
than those enumerated in (i) through (iv) above, a U.S. person that 
transfers stock or securities of a domestic corporation in exchange for 
stock of a transferee foreign corporation will not be taxable under 
section 367(a) if certain reporting requirements described in the 
regulations are met.
    Final regulations under section 367(a) are expected to address the 
transfer of stock or securities of foreign corporations and other 
matters contained in the 1991 proposed regulations that are not 
addressed herein.

Special Analyses

    It has been determined that this temporary regulation 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 this regulation does not have a significant impact on a 
substantial number of small entities. Thus, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply to these regulations, and 
therefore, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Internal Revenue Code, a copy of these 
temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal author of these regulations is Philip L. Tretiak of 
the Office of Associate Chief Counsel (International), within the 
Office of Chief Counsel, Internal Revenue Service. However, other 
personnel from the IRS and 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.

Adoption of 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 continues to read in 
part as follows:

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

 
[[Page 66743]]

    Par. 2. Section 1.367(a)-3T is amended by revising paragraphs (a), 
(c), (d), (e), (f), (g)(1) and (h)(1) to read as follows:


Sec. 1.367(a)-3T  Treatment of transfers of stock or securities to 
foreign corporations (temporary).

    (a) In general. This section provides rules concerning the transfer 
of stock or securities by a U.S. person to a foreign corporation in an 
exchange described in section 367(a). In general, a transfer of stock 
or securities by a U.S. person (directly, indirectly or constructively) 
to a foreign corporation that is described in section 351, 354 
(pursuant to a reorganization described in section 368(a)(1)(B)) or 
section 361(a) or (b) is subject to section 367(a)(1) and, therefore, 
is treated as a taxable exchange, unless one of the exceptions set 
forth in paragraph (b), (c) or (d) of this section applies. For 
additional rules relating to an exchange involving a foreign 
corporation in connection with which there is a transfer of stock, see 
section 367(b) and the regulations under that section. For additional 
rules regarding a transfer of stock or securities in an exchange 
described in section 361(a) or (b), see section 367(a)(5) and any 
regulations under that section.
* * * * *
    (c) Transfers by U.S. persons of stock or securities of domestic 
corporations to foreign corporations--(1) In general. Except as 
provided in section 367(a)(5), a transfer of stock or securities of a 
domestic corporation by a U.S. person to a foreign corporation that 
would otherwise be subject to section 367(a)(1) under paragraph (a) of 
this section shall not be subject to section 367(a)(1) if the domestic 
corporation the stock or securities of which are transferred (referred 
to as the U.S. target company) complies with the reporting requirements 
in paragraph (c)(4) of this section and if each of the following four 
conditions is met:
    (i) Fifty percent or less of both the total voting power and the 
total value of the stock of the transferee foreign corporation is 
received in the transaction, in the aggregate, by U.S. transferors 
(i.e., the amount of stock received does not exceed the 50 percent 
threshold).
    (ii) No more than 50 percent of each of the total voting power and 
the total value of the stock of the transferee foreign corporation is 
owned, in the aggregate, immediately after the transfer by U.S. persons 
who are either officers or directors of the U.S. target company or who 
are five-percent target shareholders (as defined in paragraph 
(c)(6)(iii) of this section) (i.e., there is no control group). For 
purposes of this paragraph (c)(1)(ii), any stock of the transferee 
foreign corporation owned by U.S. persons immediately after the 
transfer will be taken into account, whether or not it was received in 
the exchange for stock or securities of the U.S. target company.
    (iii) In the case of a transfer occurring after January 25, 1996, 
the transferee foreign corporation or an affiliate of the transferee 
foreign corporation has been engaged in the active conduct of a trade 
or business, within the meaning of Sec. 1.367(a)-2T(b)(2) and (3), that 
is substantial in comparison to the trade or business of the U.S. 
target company, for the entire 36-month period immediately preceding 
the date of the transfer.
    (iv) Either--
    (A) The U.S. person is not a five-percent transferee shareholder 
(as defined in paragraph (c)(6)(ii) of this section); or
    (B) The U.S. person is a five-percent transferee shareholder and 
enters into an agreement to recognize gain with respect to the U.S. 
target company stock or securities it exchanged in the form provided in 
paragraph (g) of this section, as modified by paragraph (c)(3) of this 
section (setting the duration of the gain recognition agreement).
    (2) Ownership Presumption. For purposes of paragraph (c)(1) of this 
section, persons who transfer stock or securities of the U.S. target 
company or other property in exchange for stock of the transferee 
foreign corporation are presumed to be U.S. persons. This presumption 
may be rebutted in accordance with paragraph (c)(4)(ii) of this 
section.
    (3) Term of the gain recognition agreement. If, immediately after 
the transfer described in section 367(a)(1), all U.S. transferors own 
in the aggregate less than fifty percent of both the total voting power 
and the total value of the stock of the transferee foreign corporation 
(counting both stock of the transferee foreign corporation owned as a 
result of the exchange as well as stock of the transferee foreign 
corporation owned independently by such U.S. transferors), the 
agreement to recognize gain shall be in the form specified in paragraph 
(g)(3) of this section. The term of the agreement shall be ten years, 
rather than the five years specified in paragraph (g)(3) of this 
section, the waiver described in paragraph (g)(4) of this section shall 
extend the period for assessment of tax for an additional five years, 
and the certification and waiver described in paragraph (g)(5) of this 
section must be filed for an additional five years if--
    (i) The five-percent transferee shareholder cannot determine 
whether the condition in the preceding sentence is satisfied; or
    (ii) Immediately after the transfer, all U.S. transferors own in 
the aggregate fifty percent or more of either the total voting power or 
the total value of the stock of the transferee foreign corporation 
(counting both stock of the transferee foreign corporation owned as a 
result of the exchange, as well as stock of the transferee foreign 
corporation owned independently by such U.S. transferors).
    (4) Reporting requirements of U.S. target company. (i) In order for 
a U.S. person that transfers stock or securities of a domestic 
corporation to qualify for the exception to the general rule under 
section 367(a)(1) provided by this paragraph (c), the U.S. target 
company must comply with the reporting requirements contained in this 
paragraph (c)(4). The U.S. target company must attach to its timely 
filed U.S. income tax return (or a subsequent, timely filed amended 
return) for the taxable year in which the transfer occurs a statement 
titled ``Section 367(a)--Reporting of Cross-Border Transfer Under Reg. 
Sec. 1.367(a)-3T(c)(4),'' signed under penalties of perjury by an 
officer of the corporation, disclosing the following information--
    (A) A description of the transaction in which a U.S. person or 
persons transferred stock or securities in the U.S. target company to 
the transferee foreign corporation in a transfer otherwise subject to 
section 367(a)(1);
    (B) The amount (specified as to the percentage of the total voting 
power and the total value) of stock of the transferee foreign 
corporation received in the transaction, in the aggregate, by persons 
who transferred stock or securities of the U.S. target company or other 
property. For additional information that may be required to rebut the 
ownership presumption of paragraph (c)(2) of this section in cases 
where more than 50 percent of either the total voting power or the 
total value of the stock of the transferee foreign corporation is 
received in the transaction, in the aggregate, by persons who 
transferred stock or securities of the U.S. target company or other 
property, see paragraph (c)(4)(ii) of this section;
    (C) The amount (if any) of transferee foreign corporation stock 
owned directly or indirectly (applying the attribution rules of 
sections 267(c)(1) and (5)) immediately after the exchange by the U.S. 
target company; 

[[Page 66744]]

    (D) A statement that there is no control group within the meaning 
of paragraph (c)(1)(ii) of this section;
    (E) A list of U.S. persons who are officers, directors or five-
percent target shareholders and the percentage of the total voting 
power and the total value of the stock of the transferee foreign 
corporation owned by such persons both immediately before and 
immediately after the transaction; and
    (F) A statement that the active trade or business test described in 
paragraph (c)(1)(iii) of this section is satisfied by the transferee 
foreign corporation or an affiliate and a description of such business.
    (ii) To rebut the ownership presumption of paragraph (c)(2) of this 
section, the U.S. target company must obtain ownership statements 
(described in paragraph (c)(6)(i) of this section) from a sufficient 
number of persons that transfer U.S. target company stock or securities 
(or other property) in the transaction that are not U.S. persons to 
demonstrate that the 50 percent threshold is not exceeded. In addition, 
the U.S. target company must attach to its timely filed U.S. income tax 
return (or a subsequent, timely filed amended return) for the taxable 
year in which the transfer occurs a statement, titled ``Section 
367(a)--Compilation of Ownership Statements under Reg. Sec. 1.367(a)- 
3T(c),'' signed under penalties of perjury by an officer of the 
corporation, disclosing the following information:
    (A) The amount (specified as to the percentage of the total voting 
power and the total value) of stock of the transferee foreign 
corporation received, in the aggregate, by U.S. transferors;
    (B) The amount (specified as to the percentage of total voting 
power and total value) of stock of the transferee foreign corporation 
received, in the aggregate, by foreign persons that filed ownership 
statements;
    (C) A summary of the information tabulated from the ownership 
statements, including--
    (1) The names of the persons that filed ownership statements 
stating that they are not U.S. persons;
    (2) The countries of residence and citizenship of such persons; and
    (3) The ownership of such persons (by voting power and by value) in 
the U.S. target company prior to the exchange and the amount of stock 
of the transferee foreign corporation (by voting power and value) 
received by such persons in the exchange.
    (iii) For purposes of paragraph (c)(4), an income tax return 
(including an amended return) will be considered timely filed if it is 
filed prior to the time that the Internal Revenue Service discovers 
that the reporting requirements of this paragraph have not been 
satisfied.
    (5) Special Rules--(i) Treatment of partnerships. For purposes of 
paragraph (c), if a partnership (whether domestic or foreign) owns or 
transfers stock or securities or other property in an exchange 
described in section 367(a), each partner in the partnership, and not 
the partnership itself, is treated as owning and as having transferred 
a proportionate share of the stock or securities or other property. See 
Sec. 1.367(a)-1T(c)(3).
    (ii) Treatment of options. For purposes of paragraph (c) of this 
section, one or more options (or an interest similar to an option) will 
be treated as exercised and thus will be counted as stock for purposes 
of determining whether the 50 percent threshold is exceeded or whether 
a control group exists if a principal purpose of the issuance or the 
acquisition of the option (or other interest) was the avoidance of the 
general rule contained in section 367(a).
    (iii) U.S. target has a vestigial ownership interest in transferee 
foreign corporation. In cases where, immediately after the transfer, 
the U.S. target company owns, directly or indirectly (applying the 
attribution rules of sections 267(c) (1) and (5)) stock of the 
transferee foreign corporation, that stock will not in any way be taken 
into account (and, thus, will not be treated as outstanding) in 
determining whether the 50 percent threshold under paragraph (c)(1)(i) 
of this section is exceeded or whether a control group under paragraph 
(c)(1)(ii) of this section exists.
    (iv) Attribution rule. The rules of section 958 shall apply for 
purposes of determining the ownership of stock, securities or other 
property under this paragraph (c).
    (6) Definitions--(i) Ownership statement. An ownership statement is 
a statement, signed under penalties of perjury, stating--
    (A) The identity and taxpayer identification number, if any, of the 
person making the statement;
    (B) That the person making the statement is not a U.S. person (as 
defined in paragraph (c)(6)(iv) of this section);
    (C) That the person making the statement is not related to any U.S. 
person to whom the stock or securities owned by the person making the 
statement are attributable under the rules of section 958, or, if stock 
or securities are so attributable, the identity and taxpayer 
identification number of the relevant U.S. person;
    (D) The citizenship, permanent residence, home address, and U.S. 
address, if any, of the person making the statement; and
    (E) The ownership such person has (by voting power and by value) in 
the U.S. target company prior to the exchange and the amount of stock 
of the transferee foreign corporation (by voting power and value) 
received by such person in the exchange.
    (ii) Five-percent transferee shareholder. A five-percent transferee 
shareholder is a person that owns at least five percent of either the 
total voting power or the total value of the stock of the transferee 
foreign corporation immediately after the transfer described in section 
367(a)(1). For special rules involving cases in which stock is held by 
a partnership, see paragraph (c)(5)(i) of this section.
    (iii) Five-percent target shareholder. A five-percent target 
shareholder is a person that owns at least five percent of either the 
total voting power or the total value of the stock of the U.S. target 
company immediately prior to the transfer described in section 
367(a)(1). If the stock of the U.S. target company is described in Rule 
13d-1(d) of Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or 
regulation to generally the same effect), promulgated by the Securities 
and Exchange Commission under the Securities Exchange Act of 1934 (15 
USC 78m), the existence or absence of filings of Schedule 13-D or 13-G 
(or any similar schedules) may be relied upon for purposes of 
identifying five-percent target shareholders. For special rules 
involving cases in which U.S. target company stock is held by a 
partnership, see paragraph (c)(5)(i) of this section.
    (iv) U.S. Person. For purposes of this section, a U.S. person is 
defined by reference to Sec. 1.367(a)-1T(d)(1). For application of the 
rules of this section to stock or securities owned or transferred by a 
partnership that is a U.S. person, however, see paragraph (c)(5)(i) of 
this section.
    (v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined 
in paragraph (c)(6)(iv) of this section) who transfers directly, 
indirectly or constructively stock or securities of the U.S. target 
company or other property in exchange for stock of the transferee 
foreign corporation in an exchange described in section 367.
    (vi) Transferee foreign corporation. A transferee foreign 
corporation is the foreign corporation whose stock is received in the 
exchange by U.S. persons. 

[[Page 66745]]

    (vii) Affiliate. An affiliate is a corporation that is a member of 
the same affiliated group (as defined in section 1504(a), without 
regard to section 1504(b)(3)) as the transferee foreign corporation.
    (7) Certain transfers in connection with performance of services. 
Section 367(a)(1) shall not apply to a domestic corporation's transfer 
of its own stock or securities in connection with the performance of 
services, if the transfer is considered to be to a foreign corporation 
solely by reason of Sec. 1.83-6(d)(1).
    (8) Examples. This paragraph (c) may be illustrated by the 
following examples:

    Example 1. Ownership presumption. (i) FC, a foreign corporation, 
issues 51 percent of its stock to the shareholders of S, a domestic 
corporation, in exchange for their S stock, in a transaction 
described in section 367(a)(1).
    (ii) Under paragraph (c)(2) of this section, all shareholders of S 
who receive stock of FC in the exchange are presumed to be U.S. 
persons. Unless this ownership presumption is rebutted, the condition 
set forth in paragraph (c)(1)(i) of this section will not be satisfied, 
and the exception in paragraph (c)(1) of this section will not be 
available. As a result, all U.S. persons that transferred S stock will 
recognize gain on the exchange. To rebut the ownership presumption, S 
must comply with the reporting requirements contained in paragraph 
(c)(4)(ii) of this section, obtaining ownership statements (described 
in paragraph (c)(6)(i) of this section) from a sufficient number of 
non-U.S. persons who received FC stock in the exchange to demonstrate 
that the amount of FC stock received by U.S. persons in the exchange 
does not exceed 50 percent.
    Example 2. Filing of Gain Recognition Agreement. (i) The facts are 
the same as in Example 1, except that FC issues only 40 percent of its 
stock to the shareholders of S in the exchange. FC satisfies the active 
trade or business test (described in paragraph (c)(1)(iii) of this 
section). A, a U.S. person, owns 10 percent of S's stock immediately 
before the transfer. All other shareholders of S own less than five 
percent of its stock. None of S's officers or directors owns any stock 
in FC immediately after the transfer. A will own 15 percent of the 
stock of FC immediately after the transfer, 4 percent received in the 
exchange, and the balance being stock in FC that A owned prior to and 
independent of the transaction. No S shareholder besides A owns five 
percent or more of FC immediately after the transfer. The reporting 
requirements under paragraph (c)(4)(i) of this section are satisfied.
    (ii) The condition set forth in paragraph (c)(1)(i) of this 
section is satisfied because, even after application of the 
presumption in paragraph (c)(2) of this section, U.S. transferors 
could not receive more than 50 percent of FC's stock in the 
transaction. There is no control group because five-percent target 
shareholders and officers and directors of S do not, in the 
aggregate, own more than 50 percent of the stock of FC immediately 
after the transfer (A, the sole five-percent target shareholder, 
owns 15 percent of the stock of FC immediately after the transfer, 
and no officers or directors of S own any stock of FC immediately 
after the transfer). Therefore, the condition set forth in paragraph 
(c)(1)(ii) of this section is satisfied (and A's cross-ownership of 
FC stock is not taken into account). The facts assume that the 
condition set forth in paragraph (c)(1)(iii) of this section is 
satisfied. Thus, U.S. persons that are not five-percent transferee 
shareholders will not recognize gain on the exchange of S shares for 
FC shares. A, a five-percent transferee shareholder, will not be 
required to include in income any gain realized on the exchange in 
the year of the transfer if he files a gain recognition agreement 
(GRA) and complies with section 6038B. The duration of the GRA is 
five years if all U.S. transferors own in the aggregate less than 50 
percent of the total voting power and the total value of FC 
immediately after the transfer, and ten years if this condition is 
not satisfied. If A lacks the information to determine whether he is 
eligible to file a five-year GRA (because the determination includes 
a cross-ownership inquiry for all U.S. transferors), he is required 
to file a ten-year GRA.
    Example 3. Control Group. (i) The facts are the same as in Example 
2, except that B, another U.S. person, is a 5- percent target 
shareholder, owning 25 percent of S's stock immediately before the 
transfer. B owns 40 percent of the stock of FC immediately after the 
transfer, 10 percent received in the exchange, and the balance being 
stock in FC that B owned prior to and independent of the transaction.
    (ii) A control group exists because A and B, each a five-percent 
target shareholder within the meaning of paragraph (c)(6)(iii) of this 
section, together own more than 50 percent of FC immediately after the 
transfer (counting both stock received in the exchange and stock owned 
prior to and independent of the exchange). As a result, the condition 
set forth in paragraph (c)(1)(ii) of this section is not satisfied, and 
all U.S. persons (not merely A and B) who transferred S stock will 
recognize gain on the exchange.
    Example 4. Partnerships. (i) The facts are the same as in 
Example 3, except that B is a partnership (domestic or foreign) that 
has five equal partners, only two of whom, X and Y, are U.S. 
persons. X and Y are treated as the owners and transferors of 5 
percent each of the S stock owned and transferred by B and as owners 
of 8 percent each of the FC stock owned by B immediately after the 
transfer. Five-percent target shareholders thus own a total of 31 
percent of the stock of FC immediately after the transfer (A's 15 
percent, plus X's 8 percent, plus Y's 8 percent).
    (ii) Because no control group exists, the condition in paragraph 
(c)(1)(ii) of this section is satisfied. The conditions in paragraphs 
(c)(1) (i) and (iii) of this section also are satisfied. Thus, U.S. 
persons that are not five- percent transferee shareholders will not 
recognize gain on the exchange of S shares for FC shares. A, X, and Y, 
each a five-percent transferee shareholder, will not be required to 
include in income in the year of the transfer any gain realized on the 
exchange if they file GRAs and comply with section 6038B. The duration 
of the GRA is five years if all U.S. transferors own in the aggregate 
less than 50 percent of the total voting power and the total value of 
FC immediately after the transfer, and ten years if this condition is 
not satisfied. If A, X, and Y lack the information to determine whether 
they are eligible to file five-year GRAs (because the determination 
includes a cross- ownership inquiry for all U.S. transferors), they are 
required to file ten-year GRAs.

    (9) Effective date. This paragraph (c) applies to transfers 
occurring after April 17, 1994. However, paragraph (c)(1)(iii) of this 
section applies only to transfers occurring after January 25, 1996. For 
transfers occurring before December 17, 1987, see Sec. 1.367(a)-3T(c) 
(1) through (4) as contained in 26 CFR Part 1 revised April 1, 1995.
    (d) Transfers of stock or securities of foreign corporations. For 
guidance, see Notice 87-85 (1987-2 C.B. 395). See Sec. 601.601(d)(2) of 
this chapter.
    (e) [Reserved.] For transfers occurring before December 17, 1987, 
see Sec. 1.367(a)-3T(e) as contained in 26 CFR Part 1 revised April 1, 
1995.
    (f) [Reserved.] For transfers occurring before December 17, 1987, 
see Sec. 1.367(a)-3T(f) as contained in 26 CFR Part 1 revised April 1, 
1995.
    (g) Transferor's agreement to recognize gain upon later disposition 
by transferee--(1) In general. A transfer of stock or securities shall 
not be subject to section 367(a)(1) if--
    (i) The transferor complies with the reporting requirements of 
section 6038B and any regulations thereunder; and
    (ii) The transferor files a binding agreement to recognize gain 
upon the transferee corporation's later disposition of the transferred 
stock or securities, in 

[[Page 66746]]
accordance with the rules of this section.
* * * * *
    (h) Anti-abuse rules.
    (1) [Reserved.] For transfers occurring before December 17, 1987, 
see Sec. 1.367(a)-3T(h)(1) as contained in 26 CFR Part 1 revised April 
1, 1995.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority for citation for part 602 continues to read 
as follows:
    Authority: 26 U.S.C. 7805.
    Par. 4. In Sec. 602.101, paragraph (c) is amended by revising the 
entry in the table for ``1.367(a)-3T'' to read as follows:

``1.367(a)-3T..............................  0026                       
                                             1478''.                    
                                                                        

    Dated: December 13, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30829 Filed 12-22-95; 8:45 am]
BILLING CODE 4830-01-U