[Federal Register Volume 63, Number 118 (Friday, June 19, 1998)]
[Rules and Regulations]
[Pages 33550-33570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15454]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 7, and 602
[TD 8770]
RIN Nos. 1545-AP81 and 1545-AI32
Certain Transfers of Stock or Securities by U.S. Persons to
Foreign Corporations and Related Reporting Requirements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains regulations relating to certain
transfers of stock or securities by U.S. persons to foreign
corporations pursuant to the corporate organization and reorganization
provisions of the Internal Revenue Code, and the reporting requirements
related to such transfers. The regulations provide the public with
guidance necessary to comply with the Tax Reform Act of 1984.
DATES: These regulations are effective July 20, 1998.
FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 622-3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1271. Responses to these collections of information
are required in order for certain U.S. shareholders that transfer stock
or securities in section 367(a) exchanges to qualify for an exception
to the general rule of taxation under section 367(a)(1).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated burden per respondent varies from .5 to 8 hours,
depending upon individual circumstances, with an estimated average of 4
hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and proposed regulations under sections
367 (a) and (d), and 6038B were published in the Federal Register (51
FR 17936). These regulations, which addressed transfers of stock or
securities and other assets, as well as related reporting requirements,
were published to provide the public with guidance necessary to comply
with changes made to the Internal Revenue Code by the Tax Reform Act of
1984. The IRS and the Treasury Department later issued Notice 87-85
(1987-2 C.B. 395), which set forth substantial changes to the 1986
regulations, effective with respect to transfers of domestic or foreign
stock or securities occurring after December 16, 1987. A further notice
of proposed rulemaking containing rules under section 367(a) with
respect to transfers of domestic or foreign stock or securities, as
well as section 367(b), was published in the Federal Register on August
26, 1991 (56 FR 41993). The section 367(a) portion of the 1991 proposed
regulations was generally based upon the positions announced in Notice
87-85, but the regulations proposed certain modifications to Notice 87-
85, particularly with respect to transfers of stock or securities of
foreign corporations.
Subsequently, the IRS and the Treasury Department have issued
guidance focusing on the transfers of stock or securities of domestic
corporations. Notice 94-46 (1994-1 C.B. 356) announced modifications to
the positions set forth in Notice 87-85 (and the 1991 proposed
regulations) with respect to transfers of stock or securities of
domestic corporations occurring after April 17, 1994. Temporary and
proposed regulations (referred to as the inversion regulations)
implementing Notice 94-46 (with certain modifications) were published
in the Federal Register on December 26, 1995 (60 FR 66739 and 66771).
Final inversion regulations, published in the Federal Register on
December 27, 1996 (61 FR 61849), generally followed the rules contained
in the temporary regulations, with modifications.
The final regulations herein address transfers of foreign stock or
securities, and other matters addressed in the 1991 proposed
regulations under section 367(a) that were not addressed in the 1996
final inversion regulations.
In addition, these final regulations address those portions of the
1991 proposed section 367(b) regulations that relate to transactions
that are subject to both sections 367 (a) and (b). The remainder of the
1991 proposed section 367(b) regulations will be finalized at a later
date.
This document also contains final regulations under section 6038B
with respect to reporting requirements applicable to transfers of stock
or securities described under section 367(a). Rules regarding outbound
transfers to corporations of assets other than stock (including
intangibles), and outbound transfers to foreign partnerships will be
addressed in separate guidance.
Finally, these final regulations contain a clarification with
respect to the scope of certain outbound transfers of intangibles that
are subject to section 367(d).
Explanation of Provisions
Sections 367 (a) and (b): Introduction
Section 367(a)(1) generally treats a transfer of property
(including stock or securities) by a U.S. person to a foreign
corporation (an outbound transfer) in an exchange described in section
332, 351, 354, 356 or 361 as a taxable exchange unless the transfer
qualifies for an exception to this general rule.
Section 367(a)(2) provides that, except as provided by regulations,
section 367(a)(1) shall not apply to the transfer of stock or
securities of a foreign corporation which is a party to the exchange or
a party to the reorganization. Section 367(a)(3) contains an exception
to section 367(a)(1) for certain outbound transfers of tangible assets
other than stock or securities. Section 367(a)(5) contains limitations
on any exceptions to section 367(a)(1) in certain instances.
Section 367(b) provides that, with respect to certain
nonrecognition transfers in connection with which there is no transfer
of property described in section 367(a)(1), a foreign corporation will
retain its status as a corporation unless regulations provide
otherwise.
These final regulations address transactions described in both
sections
[[Page 33551]]
367 (a) and (b), and are prescribed under the authority of both
sections 367 (a) and (b).
Stock Transfers Under Sections 367 (a) and (b): Scope
Outbound transfers of stock that are subject to section 367(a) may
be either direct (such as an outbound transfer of stock described under
section 351), indirect (as described below with respect to certain
transfers) or constructive (such as an outbound stock transfer that may
occur pursuant to a change in an entity's classification). See
Sec. 1.367(a)-3(a) (as amended) for the general rules regarding the
scope of stock transfers that are subject to section 367(a).
Indirect Stock Transfers: in General
The current temporary regulations contain illustrative examples of
certain transactions, including triangular reorganizations described
under section 368(a)(1)(A) and either section 368(a)(2)(D) or (E),
section 368(a)(1)(B) or (C), that are treated as indirect stock
transfers subject to section 367(a) where the acquired company and the
acquiring company are domestic corporations and the shareholders of the
acquired company receive stock of the acquiring company's foreign
parent in the exchange. (Under the terminology used in the proposed and
final regulations, in the case of a reorganization described in
sections 368(a)(1)(A) and (a)(2)(E), U.S. shareholders exchange their
stock for stock of the acquired company's foreign parent.)
The proposed regulations clarified the treatment of indirect stock
transfers, and provided extensive examples of the rules. The proposed
regulations provided that transactions that are treated as indirect
stock transfers include: (i) successive section 351 exchanges, and (ii)
section 368(a)(1)(C) reorganizations followed by section 368(a)(2)(C)
exchanges. In addition, the reorganizations illustrated under the
existing temporary regulations are also treated as indirect stock
transfers under the proposed regulations where the acquired and/or
acquiring corporations are foreign corporations.
The proposed regulations requested comments as to the scope of the
indirect stock transfer rules. The IRS and the Treasury Department
carefully considered comments received with respect to the scope of the
indirect stock transfer rules and have decided to retain the rules set
forth in the proposed regulations. These rules are contained in
Sec. 1.367(a)-3(d), and additional examples are provided in the final
regulations.
Indirect Stock Transfer Rules and Section 367(d)
In the case of a triangular section 368(a)(1)(C) reorganization in
which a U.S. target company (UST) transfers its assets to a foreign
acquiring company (FA) and UST's U.S. parent company (USP) receives
stock of FA's foreign parent (the transferee foreign corporation or
TFC) in exchange for the UST stock, the indirect stock transfer rules
and the asset transfer rules will apply contemporaneously.
If UST is taxable under section 367(a) with respect to its outbound
(section 361) transfer of all or a portion of its tangible assets
(because such assets do not qualify for an exception to section
367(a)(1)), USP will receive a step up in the basis of its stock in
UST, provided that USP and UST file a consolidated Federal income tax
return. See Sec. 1.1502-32. USP will also be deemed to make an indirect
transfer of the stock of UST for TFC stock. See Sec. 1.367(a)-
3(d)(1)(iv). Thus, if USP receives at least five percent of either the
total value or the total voting power of the stock of TFC (i.e., USP is
a 5-percent shareholder (which is also referred to as a 5-percent
transferee shareholder in Sec. 1.367(a)-3(c)(5)(ii)) and the value of
the UST stock exceeds USP's basis in UST (taking into account basis
adjustments relating to the asset transfer), USP may qualify for
nonrecognition treatment by entering into a gain recognition agreement
(GRA), described below, provided that the requirements of
Sec. 1.367(a)-3(c)(1) are satisfied. See, e.g., Sec. 1.367(a)-3(d)(3),
Example 7 through Example 7C.
If the asset transfer involves tangible assets and the transfer is
fully taxable (so that USP's basis in its UST stock equals the value of
the UST stock), the indirect stock transfer would not be taxable under
section 367(a), and, hence, no GRA would be required. In contrast, if
the assets transferred by UST include intangibles that are taxable
under section 367(d), the exact manner in which section 367(d) operates
is less certain.
The regulations under section 367(d) do not address the tax
consequences when the U.S. transferor goes out of existence pursuant to
the transaction. The IRS and the Treasury Department are studying the
manner in which the rules under section 367(d) should operate when the
U.S. transferor goes out of existence contemporaneously with (or
subsequent to) its outbound transfer of an intangible. Comments are
requested with respect to this issue.
Transactions Subject to Sections 367(a) and (b)
An outbound transfer of foreign stock or securities can be subject
to both sections 367(a) and (b). Pursuant to section 367(a)(2),
Sec. 1.367(a)-3T(b) of the current temporary regulations provides that,
if an exchange is described in section 354 or 361, an outbound transfer
of stock or securities of a foreign corporation that is a party to the
reorganization is not subject to section 367(a). Thus, for example, an
outbound transfer in which a U.S. person exchanges stock in one
controlled foreign corporation (CFC) for another CFC that qualifies as
a reorganization under section 368(a)(1)(B) (a B reorganization),
including a transfer that qualifies as both a B reorganization and a
section 351 exchange, is subject only to section 367(b), not section
367(a). In such case, no GRA, described below, is required under the
current temporary regulations to preserve nonrecognition treatment. In
contrast, an outbound transfer of foreign stock that qualifies as a
section 351 exchange but not a B reorganization is currently subject to
only section 367(a), not section 367(b), and, thus, a GRA may be
required to preserve nonrecognition treatment.
The IRS and the Treasury Department believe that substantially
similar transactions, such as these, should not be treated in markedly
different manners. Thus, these final regulations adopt the approach
contained in the proposed regulations: that all outbound transfers of
foreign stock will be subject to sections 367(a) and (b) concurrently,
except to the extent that the exchange is fully taxable under section
367(a)(1). See Sec. 1.367(a)-3(b)(2).
Sections 367(a) and (b): Exceptions to Taxation
Once a determination is made that a particular outbound transfer of
stock or securities is subject to section 367(a), the next
determination is the tax treatment of such transfer. In general, the
current rules regarding the outbound transfer of stock or securities
under section 367(a) provide for three different tax consequences
depending upon the particular facts: (i) certain transfers retain
nonrecognition treatment without condition, (ii) certain transfers
retain nonrecognition treatment only if the U.S. transferor enters into
a GRA, and (iii) certain transfers of stock are taxable to the U.S.
transferor under section 367(a)(1) with no option to file a GRA to
secure nonrecognition treatment. These final regulations retain this
general framework.
[[Page 33552]]
The current rules governing whether a taxpayer may qualify for an
exception under section 367(a) in the case of an outbound transfer of
stock are described in Sec. 1.367(a)-3(c) of the final inversion
regulations (in the case of domestic stock or securities) and Notice
87-85 (in the case of foreign stock or securities).
Notice 87-85 provides that in the case of an outbound transfer of
foreign stock or securities to which section 367(a) applies, a U.S.
transferor may generally qualify for nonrecognition treatment if it
either (i) is not a 5-percent shareholder, or (ii) is a 5-percent
shareholder but enters into a GRA for a term of 5 or 10 years,
depending upon the TFC stock owned by all U.S. transferors. Under
current law, a 5-percent shareholder that qualifies for nonrecognition
treatment under section 367(a) by filing a GRA agrees that if the TFC
disposes of the stock of the transferred corporation in a taxable
transaction during the term of the GRA, the 5-percent shareholder must
amend its return for the year of the transfer and include in income the
amount that it realized but did not recognize with respect to the stock
of the transferred corporation, and pay the tax due, plus interest, on
this amount. (Under Notice 87-85, the term of the GRA is 5 years if all
U.S. transferors, in the aggregate, own less than 50 percent of both
the total voting power and the total value of the TFC immediately after
the transfer, or 10 years if all U.S. transferors, in the aggregate,
own 50 percent or more of either the total voting power or the total
value of the TFC immediately after the transfer.) Although GRAs are
currently used solely with respect to outbound transfers of stock or
securities, the IRS and the Treasury Department may, at a later date,
permit taxpayers to secure nonrecognition treatment under section
367(a) with respect to other types of assets by entering into GRAs.
Notice 87-85, however, provides no exception to section 367(a)(1)
if a U.S. transferor transfers stock in a CFC in which it is a United
States shareholder (as defined in Sec. 7.367(b)-2(b) or section 953(c))
but does not receive back stock in a CFC in which it is a United States
shareholder.
The final regulations, following the proposed regulations on this
point, provide that a transfer described in the preceding paragraph,
such as a section 351 exchange in which a U.S. transferor exchanges
stock of a CFC in which it is a United States shareholder for stock of
a non-CFC, is not automatically taxable. Instead, both sections 367(a)
and (b) apply to the exchange. If the U.S. transferor is required under
section 367(a) to enter into a GRA to preserve nonrecognition treatment
and fails to do so, the transaction is fully taxable under section
367(a) (and, as a consequence, the section 1248 amount that would be
included as a dividend under section 367(b) had a GRA been filed is
instead treated as a dividend under section 1248). If the U.S.
transferor is required to enter into a GRA and properly does so, the
U.S. transferor is required under section 367(b) to include in income
the section 1248 amount attributable to the stock exchanged. The amount
of the GRA equals the gain realized on the transfer less the inclusion
under section 367(b). See Sec. 1.367(a)-3(b)(2).
As noted above, Notice 87-85 addressed outbound transfers of both
domestic and foreign stock. The (1996) final inversion regulations
superseded Notice 87-85 with respect to outbound transfers of domestic
stock. The rules in Notice 87-85 with respect to outbound transfers of
foreign stock have been incorporated into these final regulations with
respect to transfers that occur prior to July 20, 1998. See
Sec. 1.367(a)-3(g). Notice 87-85 will be obsolete when these final
regulations are effective.
Section 367(a): Post-GRA Transactions
Section 1.367(a)-8 provides general rules regarding terms and
conditions relating to GRAs, and the manner in which post-GRA
transactions impact the GRA. The general terms and conditions for GRAs
have not changed significantly from the terms and conditions set forth
in Sec. 1.367(a)-3T(g) of the current temporary regulations, except
that the final regulations contain an election (the GRA election),
described below, to permit the taxpayer to include the GRA amount in
income in the year of the triggering event (with interest on the tax
due from the year of the transfer) rather than on an amended return for
the year of the initial transfer. In addition, the final regulations
generally follow the proposed regulations by providing a more
comprehensive explanation of the manner in which the GRA is affected by
both taxable and nontaxable dispositions by the U.S. transferor, the
TFC, and the transferred corporation.
The current temporary regulations provide that the GRA is triggered
if (i) the TFC disposes of all or a portion of the stock of the
transferred corporation, or (ii) the transferred corporation disposes
of a substantial portion of its assets. The term substantial portion
was not defined in the regulations.
Both the final and the proposed regulations use the rule from the
current temporary regulations that a GRA is triggered to the extent
that the TFC disposes of all or a portion of the stock of the
transferred corporation. The final regulations also adopt the rule
contained in the proposed regulations that a GRA is triggered if the
transferred corporation disposes of substantially all of its assets
(within the meaning of section 368(a)(1)(C)). In addition, the final
regulations provide that a GRA will be triggered if the U.S. transferor
is either a U.S. citizen or long-term resident (as defined in section
877(e)(2)) at the time of the initial transfer and such person ceases
to be a U.S. citizen or long-term resident during the GRA term.
Under the current temporary regulations, if a GRA is triggered, the
U.S. transferor must amend its tax return for the year of the initial
transfer, include in income the gain that was realized but not
recognized, and pay the tax due thereon with interest. The proposed
regulations would have maintained the amended return/interest charge
requirement, but requested comments as to (i) the amount of gain to be
recognized by the U.S. transferor upon a triggering event, (ii) the
year in which the gain should be included in the income of the U.S.
transferor, and (iii) whether an interest charge is appropriate.
A number of commentators have suggested that the 10-year GRA term
under Notice 87-85 in certain instances is too restrictive because a
disposition of the stock of the transferred corporation in year 8, for
example, would likely not be a tax avoidance transfer but the interest
charges would be burdensome in such case. Other commentators suggested
a deferred income approach similar to that applicable in the
consolidated return deferred intercompany context.
In response to these comments, these final regulations contain two
significant modifications to the current temporary regulations. First,
in conformity with the final inversion regulations, these regulations
provide that the GRA term will be 5 years in all cases involving
outbound transfers of foreign stock. (Moreover, taxpayers may elect to
apply these final regulations to past transactions so that any 10-year
GRA that is in existence (i.e., has not been triggered) on July 20,
1998 will be a 5-year GRA. Thus, the 10-year GRA will be considered to
be a 5-year GRA by the IRS, and, such GRA will terminate on the fifth
full taxable year following the close of the taxable year of the
initial transfer.) Second, because the IRS and the Treasury Department
are concerned that the amended return requirement can be burdensome to
taxpayers in the event that a GRA is triggered, the final regulations
contain an election (the GRA election), which must be filed with the
[[Page 33553]]
U.S. transferor's tax return that includes the date of the initial
transfer, that permits taxpayers to report a triggering event in the
year of the triggering event rather than on an amended return for the
year of the initial transfer. (No such election is available with
respect to GRAs that are in existence when these final regulations
become effective.)
Even if a transferor makes a GRA election, such person is still
required to extend the statute of limitations, comply with all of the
applicable GRA reporting requirements (such as filing annual
certifications) and, in the case of a triggering event, include in
income the GRA amount plus interest in the same manner as under the
current temporary regulations, except that (i) the GRA amount and
interest would be included on the U.S. transferor's tax return for the
year that includes the triggering event, and (ii) other computations,
such as the section 1248 amount (if any) attributable to the
transferred stock, will be determined on the triggering date rather
than the date of the initial transfer.
Consistent with the proposed regulations, the final regulations
clarify that post-GRA nonrecognition transactions (e.g., nonrecognition
transactions in which the U.S. transferor transfers the stock of the
TFC, the TFC transfers the stock of the transferred corporation, or the
transferred corporation transfers substantially all of its assets)
generally do not trigger the GRA, provided that the U.S. transferor
reports the transaction and amends the GRA to reflect the post-GRA
transaction.
The current temporary regulations do not provide instances that
would cause the GRA to be terminated (i.e., extinguished). The proposed
regulations would have provided that the GRA would be terminated if
either (i) the U.S. transferor disposed of all of its TFC stock in a
taxable transaction, or (ii) the transferred company is a U.S. company
that sold substantially all of its assets in a taxable transaction (but
only if the transferred company was affiliated with the U.S. transferor
under section 1504(a)(2) prior to the initial transfer).
The final regulations retain these two rules. In addition, the
final regulations also provide that a GRA will be terminated if (i) the
TFC distributes the stock of the transferred corporation back to the
U.S. transferor in a section 355 exchange, or (ii) the TFC liquidates
into the U.S. transferor under section 332, provided that, immediately
after the section 355 distribution or section 332 liquidation, the U.S.
transferor's basis in the transferred stock is less than or equal to
the basis that it had in the transferred stock immediately prior to the
initial transfer of such stock.
Finally, the current temporary regulations provide (and the 1991
proposed regulations would have provided) certain restrictions on
taxpayers' ability to use net operating losses and credits to offset
the amount of gain recognized upon the trigger of a GRA. In response to
suggestions from commentators, the final regulations remove these
restrictions.
Section 367(a) and ``Check-the-Box'' Rules
The IRS and the Treasury Department are aware that taxpayers may
attempt to use the entity classification (i.e., check-the-box)
regulations to avoid entering into GRAs. For example, assume that a
U.S. transferor (USP) owns all of the stock of two CFCs, CFC1 and CFC2.
USP transfers the stock of CFC2 to CFC1 in an exchange otherwise
described as both a section 351 exchange and a B reorganization. USP
elects under Sec. 301.7701-3(c) to treat CFC2 as a disregarded entity,
and such election is effective immediately prior to the transfer.
Provided that the election is respected, USP would, for Federal
income tax purposes, transfer the assets (and not the stock) of CFC2 to
CFC1 in a section 351 exchange. If the assets will be used by CFC1 in
the active conduct of a trade or business outside the United States,
the transfer of the assets by USP will qualify for the exception
contained in section 367(a)(3) and Sec. 1.367(a)-2T (as limited by
certain provisions, including Secs. 1.367(a)-4T through 1.367(a)-6T).
If the assets are disposed of (either directly by CFC2 or because the
stock of CFC2 is disposed of by CFC1) in connection with the transfer
to CFC1, the step transaction doctrine may apply to deny nonrecognition
treatment to the outbound transfer to the extent it is treated as an
asset transfer. In addition, the active trade or business exception
under Sec. 1.367(a)-2T is inapplicable if, as part of the same
transaction in which the TFC received the assets, it disposes of such
assets. See Sec. 1.367(a)-2T(c). Thus, if USP intended to sell CFC2 or
its business at the time of the election or the asset transfer, the
transfer would be treated as a taxable exchange under section
367(a)(1). If the step transaction doctrine and the active trade or
business anti-avoidance rule do not apply, however, the use of the
``check-the-box'' regulations in this context will not be viewed as
inconsistent with the purposes of section 367(a), and, therefore, the
transaction will be respected as an asset transfer.
Section 367(a) and Tax-Motivated Transactions
The IRS and the Treasury Department are aware that certain
taxpayers have entered into (or are contemplating) transactions that
are designed to avoid the inversion regulations under Sec. 1.367(a)-
3(c). In these transactions (where a foreign corporation acquires the
stock of a domestic corporation), one or more U.S. transferors attempt
to avoid taxation under the inversion regulations by retaining an
equity interest (or receiving a modified equity interest) in the
domestic target corporation. Such interest, however, is typically
coupled with an interest in the foreign acquirer, or a right to convert
the interest in the domestic target into stock of the foreign acquirer.
The IRS and the Treasury Department are currently scrutinizing
these transactions on a case-by-case basis using substance over form
(or other) principles, and are studying whether it is appropriate to
issue specific guidance with respect to these transactions. Comments
are requested as to the instances in which a U.S. transferor that
receives (or maintains) a stock interest in the domestic target in
circumstances similar to those described above should not be treated as
having received stock in the foreign acquirer for purposes of section
367(a).
Section 367(b)
This document finalizes the 1991 proposed section 367(b)
regulations to the extent necessary to address those transfers of
foreign stock subject to both sections 367(a) and (b) under the 1991
proposed regulations.
In addition, this document contains a number of other miscellaneous
provisions, at the request of commentators.
First, under current law, if a United States shareholder (defined
under Sec. 7.367(b)-2(b) as a 10 percent shareholder of a CFC within
the past 5 years) exchanges, under section 351, stock of a foreign
corporation for stock of a domestic corporation, the U.S. transferor is
not taxable under section 367(b). However, if the transaction
constitutes a section 354 exchange, under Sec. 7.367(b)-7(c)(1) the
United States shareholder must include in income the section 1248
amount attributable to the stock exchanged. Consistent with the 1991
proposed regulations as well as the purpose of these final regulations
to harmonize the Federal income tax consequences of substantially
similar transactions, the final section 367(b) regulations provide that
a section 1248 inclusion generally
[[Page 33554]]
is not required in the case of the section 354 exchange described
above. (This result is accomplished by excluding domestic stock from
the categories of nonqualifying consideration described in
Sec. 1.367(b)-4(b)(1). Thus, these transfers will generally be
respected as nonrecognition exchanges under 367(b).)
Second, consistent with the principles of section 367(b), in cases
where the final regulations do not require that the section 1248 amount
be included in income, the regulations clarify the appropriate
treatment of post-reorganization exchanges under section 1248 or
367(b). See Sec. 1.367(b)-4(b)(5).
Third, in an effort to reduce the reporting burdens of U.S. persons
that make outbound transfers of foreign stock or securities, the
section 367(b) regulations are amended to provide that, to the extent
that a transaction is described in both sections 367(a) and (b), and
the exchanging shareholder is not a United States shareholder of the
corporation whose stock is exchanged, reporting under section 367(b) is
not required. See Sec. 1.367(b)-1(c).
Finally, the proposed section 367(b) regulations provided that
final regulations generally would be effective for exchanges that occur
on or after 30 days after the final regulations were published in the
Federal Register. However, Sec. 1.367(b)-2(d) (relating to the
definition of the all earnings and profits amount) was proposed to be
effective for transfers occurring on or after August 26, 1991. In
response to comments regarding this provision and its effective date, a
separate notice of proposed rulemaking is issued with these final
regulations to delete the August 26, 1991, effective date with respect
to the all earnings and profits amount. Thus, the definition of the all
earnings and profits amount that will be included in forthcoming
section 367(b) final regulations will apply to exchanges that occur on
or after 30 days after the issuance of those final regulations.
The IRS and the Treasury Department will issue guidance at a later
date to address section 367(b) provisions described in the 1991
proposed regulations that are not addressed herein.
Section 6038B: In General
Section 6038B, as enacted under the Deficit Reduction Act of 1984
(Public Law 98-369), provided that U.S. persons that made certain
outbound transfers of property to foreign corporations were required to
report those transfers in the manner prescribed by regulations. The
penalty for failure to comply with the regulations was 25 percent of
the gain realized on the exchange, unless the failure was due to
reasonable cause and not to willful neglect. (The penalty was modified
by the Taxpayer Relief Act of 1997 (TRA '97).)
Section 1.6038B-1T, promulgated on May 15, 1986, by TD 8087
(together with regulations under sections 367(a) and (d)), provided
rules concerning the information that was required to be reported under
section 6038B with respect to transfers of property to foreign
corporations.
Section 6038B: Transfers of Stock or Securities
Section 1.6038B-1T(b)(2)(i) of the current temporary regulations
provides, inter alia, that no notice is required under section 6038B
with respect to a transfer of stock or securities described in
Sec. 1.367(a)-3T(f)(1) of the current temporary regulations. Section
1.367(a)-3T(f)(1) had provided that an outbound transfer of stock or
securities of a domestic or foreign corporation was not taxable under
section 367(a)(1) if immediately after the transfer (i) all U.S.
transferors owned in the aggregate less than 20 percent of both the
total voting power and the total value of the stock of the TFC, or (ii)
all U.S. transferors owned in the aggregate 20 percent or more of
either the total voting power or the total value of the stock of the
TFC, but less than 50 percent of that total voting power and total
value and the subject U.S. transferor was not a 5-percent shareholder.
Notice 87-85 superseded the 1986 temporary regulations under
section 367(a) (including Sec. 1.367(a)-3T(f)(1)) with respect to the
exceptions available for outbound stock transfers. Notice 87-85
provided that final regulations would incorporate the rules contained
in the Notice, for transfers occurring after December 16, 1987. The
exceptions in the 1986 temporary regulations, including Sec. 1.367(a)-
3T(f)(1) of the current temporary regulations, were removed as deadwood
(for transfers occurring after December 16, 1987) by the 1995 temporary
inversion regulations (TD 8638).
Prior to the issuance of these final regulations, however, section
6038B had not been amended with respect to outbound transfers of stock
or securities. Thus, there was uncertainty whether a U.S. transferor
that qualified under the inversion regulations or Notice 87-85 for
nonrecognition treatment without filing a GRA (i.e., such U.S.
transferor was not a 5-percent shareholder) was required to comply with
section 6038B.
To reduce the reporting burdens on U.S. taxpayers that make
outbound transfers of stock subject to section 6038B, the final section
6038B regulations provide that, with respect to transfers occurring
after December 16, 1987, and before these final regulations are
generally effective, a U.S. transferor that makes an outbound transfer
subject to section 367(a) will not be subject to section 6038B with
respect to such transfer if (i) such person was not a 5-percent
shareholder and the transfer qualified for nonrecognition treatment
under section 367(a), or (ii) such person was not a 5-percent
shareholder in the case of a taxable transaction but such person
included the gain on its Federal income tax return for the taxable year
that included the date of the transfer.
With respect to transfers occurring after these final regulations
are effective, these regulations contain the two exceptions described
above. In addition, a 5-percent shareholder that is required to file a
GRA is not subject to section 6038B provided that a GRA is properly
filed. Moreover, U.S. transferors that are taxable on their outbound
transfers of stock or securities (such as under the inversion
regulations or because a 5-percent shareholder that was eligible to
qualify for nonrecognition treatment chose not to file a GRA) are not
subject to section 6038B if they properly report the gain recognized on
the transfer on their tax returns that include the date of the
transfer.
Thus, a U.S. transferor that does not properly report the gain
recognized on its outbound stock transfer has not met its section 6038B
filing obligation with respect to such transfer, and will be subject to
the penalty under section 6038B, unless the transferor's failure to
report the gain from the outbound transfer was due to reasonable cause
and not willful neglect. Such person will also be subject to the
extended statute of limitations under section 6501(c)(8).
Section 6038B: Transfers of Cash and Unappreciated Property
As noted above, prior to the enactment of TRA '97, the penalty for
failure to comply with section 6038B was 25 percent of the gain
realized on the outbound transfer. Thus, in the case of an outbound
transfer of cash or unappreciated property required to be reported
under section 6038B, no penalty was imposed upon the failure to report
the transfer.
Pursuant to the TRA '97, the penalty for failure to report under
section 6038B is revised from 25 percent of the gain realized in the
property transferred to 10 percent of the fair market value of the
property transferred, but limited to $100,000 unless the failure to
report the
[[Page 33555]]
exchange was due to intentional disregard. (The final regulations
reflect the modification to the penalty provision under section 6038B.)
In response to the TRA '97 change to the penalty structure under
section 6038B, these final regulations clarify that transfers of
unappreciated property are required to be reported, or the 10 percent
penalty will apply. These final regulations, however, do not require
outbound transfers of cash to be reported. Rules regarding outbound
transfers of cash will be provided in future regulations.
Section 6038B: Other Transfers
Pursuant to TRA '97, certain outbound transfers to foreign
partnerships are required to be reported under section 6038B. Rules
regarding outbound transfers to foreign corporations of assets not
covered in these final regulations (such as intangibles), and outbound
transfers to foreign partnerships, will be addressed in separate
guidance.
Section 367(d) and Other TRA '97 Matters
A clarification provides that certain rules under section 367(a)
will also apply under section 367(d) for purposes of determining the
identity of the transferor that makes an outbound transfer of an
intangible subject to section 367(d). Section 367(a)(4) and
Sec. 1.367(a)-1T(c)(5) provide that, for purposes of section 367(a), a
partnership is treated as an aggregate in cases where a U.S. person
transfers a partnership interest or a partnership makes an outbound
transfer of stock (or other assets).
The IRS and the Treasury Department believe that the identity of
the transferor has been and must be consistent under both sections
367(a) and (d). Consequently, a U.S. person may not attempt the use of
a foreign partnership as an intermediary (in light of the repeal of
section 1491) for an outbound transfer of an intangible by a U.S.
person to a foreign corporation to avoid section 367(d). In the case of
a transfer of an intangible by a partnership to a foreign corporation
that qualifies as a section 351 exchange, each partner that is a U.S.
person is treated as transferring its share of the intangible in a
transfer that is subject to section 367(d).
Guidance under TRA '97 relating to the repeal of section 1491 may
address situations in which inappropriate results can be achieved
through transactions facilitated by such repeal. For example, guidance
may address the appropriate tax consequences when a U.S. person who is
a United States shareholder of a CFC transfers stock in the CFC to a
foreign partnership, and immediately after the transfer the foreign
corporation loses its status as a CFC. Guidance is generally not,
however, expected to require gain recognition under section 721(c) in
cases where gain is not inappropriately shifted to foreign persons.
Effective Dates
The final regulations contained herein are generally effective for
transfers occurring on or after July 20, 1998. However, taxpayers
generally may elect to apply the final regulations under Sec. 1.367(a)-
3(b) and (d) to transfers of foreign stock or securities occurring
after December 17, 1987. A taxpayer that makes the election must apply
section 367(b) and the regulations thereunder to such transfers. In the
case of a transfer described in section 351, an electing transferor
must apply section 367(b) and the regulations thereunder as if the
exchange was described in Sec. 7.367(b)-7. Thus, for example, in a case
of a section 351 exchange in which a U.S. person exchanges stock of a
CFC in which it is a United States shareholder but does receive back
stock of a CFC in which it is a United States shareholder, the electing
transferor must include in income the section 1248 amount with respect
to the transferred stock.
Special Analyses
It has been determined that this regulation is not a significant
regulatory action as defined in EO 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that the collection
of information contained in this regulation will not have a significant
economic impact on a substantial number of small entities. This
certification is based upon the fact that these final regulations
generally reduce the reporting requirements in comparison with the
requirements contained under current law and the proposed sections
367(a) and (b) regulations. For example, the maximum term of the GRA
under section 367(a) is reduced from 10 to 5 years, thus eliminating
the need for annual certifications in years 5 through 9. Moreover, the
requirements under section 6038B have been substantially revised for
outbound transfers of stock described in section 367(a) so that the
amount of filing required under that section will be significantly
reduced. In addition, as a general matter, these regulations will
primarily affect large shareholders and U.S. multinational corporations
with foreign operations. Thus, a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Drafting Information
The principal author of these regulations is Philip L. Tretiak of
the Office of Associate Chief Counsel (International), within the
Office of Chief Counsel, IRS. However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects
26 CFR Parts 1 and 7
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 7 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
revising the entry for section 1.367(b)-7 and adding new entries to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)-3 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(a)-8 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-1 also issued under 26 U.S.C. 367(a) and (b). *
* *
Section 1.367(b)-4 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-7 also issued under 26 U.S.C. 367(a) and (b). *
* *
Par. 2. Section 1.367(a)-1T is amended as follows:
1. Paragraph (a), fourth sentence is amended by removing the
reference ``Sec. 1.367(a)-3T'' and adding ``Sec. 1.367(a)-3'' in its
place.
2. Paragraph (a), last sentence is amended by removing the
reference ``Sec. 1.6038B-1T'' and adding ``Secs. 1.6038B-1 and 1.6038B-
1T'' in its place.
3. Paragraph (b)(2)(i) is removed and reserved.
4. Paragraph (b), the concluding text immediately following
paragraph (b)(2)(iii) is removed.
5. Paragraph (c)(1), the last sentence is removed.
6. Paragraph (c)(2) is revised to read as set forth below.
7. Paragraph (c)(3)(ii)(C), the second sentence of the concluding
text immediately following paragraph (c)(3)(ii)(C)(2) is amended by
removing the language ``Sec. 1.367(a)-3T'' and adding ``Sec. 1.367(a)-
3'' in its place.
[[Page 33556]]
Sec. 1.367(a)-1T Transfers to foreign corporations subject to section
367(a): in general (temporary).
* * * * *
(c) * * *
(2) Indirect transfers in certain reorganizations. [Reserved] For
further guidance, see Sec. 1.367(a)-3(d).
* * * * *
Par. 3. Section 1.367(a)-3 is amended as follows:
1. Paragraphs (a) and (b) are revised.
2. Paragraph (c)(1)(iii)(B) is amended by removing the reference
``Sec. 1.367(a)-3T(g)'' and adding ``Sec. 1.367(a)-8'' in its place.
3. Revising paragraph (d).
4. Removing paragraphs (e) through (h) and adding paragraphs (e),
(f) and (g).
The revisions and additions read as follows:
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) In general. This section provides rules concerning the transfer
of stock or securities by a U.S. person to a foreign corporation in an
exchange described in section 367(a). In general, a transfer of stock
or securities by a U.S. person to a foreign corporation that is
described in section 351, 354 (including a reorganization described in
section 368(a)(1)(B) and including an indirect stock transfer described
in paragraph (d) of this section), 356 or section 361(a) or (b) is
subject to section 367(a)(1) and, therefore, is treated as a taxable
exchange, unless one of the exceptions set forth in paragraph (b) of
this section (regarding transfers of foreign stock or securities) or
paragraph (c) of this section (regarding transfers of domestic stock or
securities) applies. However, if in an exchange described in section
354, a U.S. person exchanges stock of one foreign corporation for stock
of another foreign corporation in a reorganization described in section
368(a)(1)(E), or a U.S. person exchanges stock of a domestic
corporation for stock of a foreign corporation pursuant to an asset
reorganization described in section 368(a)(1)(C), (D) or (F) that is
not treated as an indirect stock transfer under paragraph (d) of this
section, such section 354 exchange is not a transfer to a foreign
corporation subject to section 367(a). See, e.g., paragraph (d)(3)
Example 12. For rules regarding other indirect or constructive
transfers of stock or securities subject to section 367(a), see
Sec. 1.367(a)-1T(c). For additional rules relating to an exchange
involving a foreign corporation in connection with which there is a
transfer of stock, see section 367(b) and the regulations under that
section. For additional rules regarding a transfer of stock or
securities in an exchange described in section 361(a) or (b), see
section 367(a)(5) and any regulations under that section. For rules
regarding reporting requirements with respect to transfers described
under section 367(a), see section 6038B and the regulations thereunder.
(b) Transfers by U.S. persons of stock or securities of foreign
corporations to foreign corporations--(1) General rule. Except as
provided in section 367(a)(5), a transfer of stock or securities of a
foreign corporation by a U.S. person to a foreign corporation that
would otherwise be subject to section 367(a)(1) under paragraph (a) of
this section shall not be subject to section 367(a)(1) if either--
(i) Less than 5-percent shareholder. The U.S. person owns less than
five percent (applying the attribution rules of section 318, as
modified by section 958(b)) of both the total voting power and the
total value of the stock of the transferee foreign corporation
immediately after the transfer; or
(ii) 5-percent shareholder. The U.S. person enters into a five-year
gain recognition agreement with respect to the transferred stock or
securities as provided in Sec. 1.367(a)-8.
(2) Certain transfers subject to sections 367(a) and (b)--(i) In
general. A transfer of foreign stock or securities described in section
367(a) or any regulations thereunder as well as in section 367(b) or
any regulations thereunder shall be concurrently subject to sections
367(a) and (b) and the regulations thereunder, except to the extent
that the transferee foreign corporation is not treated as a corporation
under section 367(a)(1). The example in paragraph (b)(2)(ii) of this
section illustrates the rules of this paragraph (b)(2). For an
illustration of the interaction of the indirect stock transfer rules
under section 367(a) (described under paragraph (d) of this section)
and the rules of section 367(b), see paragraph (d)(3) Example 11 of
this section.
(ii) Example. The following example illustrates the provisions of
this paragraph (b)(2):
Example. (i) Facts. DC, a domestic corporation, owns all of the
stock of FC1, a controlled foreign corporation within the meaning of
section 957(a). DC's basis in the stock of FC1 is $50, and the value
of such stock is $100. The section 1248 amount with respect to such
stock is $30. FC2, also a foreign corporation, is owned entirely by
foreign individuals who are not related to DC or FC1. In a
reorganization described in section 368(a)(1)(B), FC2 acquires all
of the stock of FC1 from DC in exchange for 20 percent of the voting
stock of FC2. FC2 is not a controlled foreign corporation after the
reorganization.
(ii) Result without gain recognition agreement. Under the
provisions of this paragraph (b), if DC fails to enter into a gain
recognition agreement, DC is required to recognize in the year of
the transfer the $50 of gain that it realized upon the transfer, $30
of which will be treated as a dividend under section 1248.
(iii) Result with gain recognition agreement. If DC enters into
a gain recognition agreement under Sec. 1.367(a)-8 with respect to
the transfer of FC1 stock, the exchange will also be subject to the
provisions of section 367(b) and the regulations thereunder to the
extent that it is not subject to tax under section 367(a)(1). In
such case, DC will be required to recognize the section 1248 amount
of $30 on the exchange of FC1 for FC2 stock. See Sec. 1.367(b)-4(b).
The deemed dividend of $30 recognized by DC will increase its basis
in the FC1 stock exchanged in the transaction and, therefore, the
basis of the FC2 stock received in the transaction. The remaining
gain of $20 realized by DC (otherwise recognizable under section
367(a)) in the exchange of FC1 stock will not be recognized if DC
enters into a gain recognition agreement with respect to the
transfer. (The result would be unchanged if, for example, the
exchange of FC1 stock for FC2 stock qualified as a section 351
exchange, or as an exchange described in both sections 351 and
368(a)(1)(B).)
* * * * *
(d) Indirect stock transfers in certain nonrecognition transfers--
(1) In general. For purposes of this section, a U.S. person who
exchanges, under section 354 (or section 356) stock or securities in a
domestic or foreign corporation for stock or securities in a foreign
corporation in connection with one of the following transactions
described in paragraphs (d)(1)(i) through (v) of this section (or who
is deemed to make such an exchange under paragraph (d)(1)(vi) of this
section) shall be treated as having made an indirect transfer of such
stock or securities to a foreign corporation that is subject to the
rules of this section, including, for example, the requirement, where
applicable, that the U.S. transferor enter into a gain recognition
agreement to preserve nonrecognition treatment under section 367(a). If
the U.S. person exchanges stock or securities of a foreign corporation,
see also section 367(b) and the regulations thereunder. For an example
of the concurrent application of the indirect stock transfer rules
under section 367(a) and the rules of section 367(b), see, e.g.,
paragraph (d)(3) Example 11 of this section.
(i) Mergers described in sections 368(a)(1)(A) and (a)(2)(D). A
U.S. person exchanges stock or securities of a corporation (the
acquired corporation)
[[Page 33557]]
for stock or securities of a foreign corporation that controls the
acquiring corporation in a reorganization described in sections
368(a)(1)(A) and (a)(2)(D). See, e.g., paragraph (d)(3) Example 1 of
this section.
(ii) Mergers described in sections 368(a)(1)(A) and (a)(2)(E). A
U.S. person exchanges stock or securities of a corporation (the
acquiring corporation) for stock or securities in a foreign corporation
that controls the acquired corporation in a reorganization described in
sections 368(a)(1)(A) and (a)(2)(E).
(iii) Triangular reorganizations described in section 368(a)(1)(B).
A U.S. person exchanges stock of the acquired corporation for voting
stock of a foreign corporation that is in control (as defined in
section 368(c)) of the acquiring corporation in connection with a
reorganization described in section 368(a)(1)(B). See, e.g., paragraph
(d)(3) Example 4 of this section.
(iv) Triangular reorganizations described in section 368(a)(1)(C).
A U.S. person exchanges stock or securities of a corporation (the
acquired corporation) for voting stock or securities of a foreign
corporation that controls the acquiring corporation in a reorganization
described in section 368(a)(1)(C). See, e.g., paragraph (d)(3) Example
5 of this section (for an example of a triangular section 368(a)(1)(C)
reorganization involving domestic acquired and acquiring corporations),
and paragraph (d)(3) Example 7 of this section (for an example
involving a domestic acquired corporation and a foreign acquiring
corporation). If the acquired corporation is a foreign corporation, see
paragraph (d)(3) Example 11 of this section, and section 367(b) and the
regulations thereunder.
(v) Reorganizations described in sections 368(a)(1)(C) and
(a)(2)(C). A U.S. person exchanges stock or securities of a corporation
(the acquired corporation) for voting stock or securities of a foreign
acquiring corporation in a reorganization described in sections
368(a)(1)(C) and (a)(2)(C) (other than a triangular section
368(a)(1)(C) reorganization described in paragraph (d)(1)(iv) of this
section). In the case of a reorganization in which some but not all of
the assets of the acquired corporation are transferred pursuant to
section 368(a)(2)(C), the transaction shall be considered to be an
indirect transfer of stock or securities subject to this paragraph (d)
only to the extent of the assets so transferred. (Other assets shall be
treated as having been transferred in an asset transfer rather than an
indirect stock transfer, and such asset transfer would be subject to
the other provisions of section 367, including sections 367(a)(1), (3),
(5) and (d) if the acquired corporation is a domestic corporation).
See, e.g., paragraph (d)(3) Example 5B of this section.
(vi) Successive transfers of property to which section 351 applies.
A U.S. person transfers property (other than stock or securities) to a
foreign corporation in an exchange described in section 351, and all or
a portion of such assets transferred to the foreign corporation by such
person are, in connection with the same transaction, transferred to a
second corporation that is controlled by the foreign corporation in one
or more exchanges described in section 351. For purposes of this
paragraph (d)(1) and Sec. 1.367(a)-8, the initial transfer by the U.S.
person shall be deemed to be a transfer of stock described in section
354. (Any assets transferred to the foreign corporation that are not
transferred by the foreign corporation to a second corporation shall be
treated as a transfer of assets subject to the general rules of section
367, including sections 367(a)(1), (3), (5) and (d), and not as an
indirect stock transfer under the rules of this paragraph (d).) See,
e.g., paragraph (d)(3) Example 10 and Example 10A of this section.
(2) Special rules for indirect transfers. If a U.S. person is
considered to make an indirect transfer of stock or securities
described in paragraph (d)(1) of this section, the rules of this
section and Sec. 1.367(a)-8 shall apply to the transfer. For purposes
of applying the rules of this section and Sec. 1.367(a)-8:
(i) Transferee foreign corporation. The transferee foreign
corporation shall be the foreign corporation that issues stock or
securities to the U.S. person in the exchange.
(ii) Transferred corporation. The transferred corporation shall be
the acquiring corporation, except that in the case of a triangular
section 368(a)(1)(B) reorganization described in paragraph (d)(1)(iii)
of this section, the transferred corporation shall be the acquired
corporation; in the case of a triangular section 368(a)(1)(C)
reorganization described in paragraph (d)(1)(iv) of this section
followed by a section 368(a)(2)(C) transfer or a section 368(a)(1)(C)
reorganization followed by a section 368(a)(2)(C) transfer described in
paragraph (d)(1)(v) of this section, the transferred corporation shall
be the transferee corporation; and in the case of successive section
351 transfers described in paragraph (d)(1)(vi) of this section, the
transferred corporation shall be the transferee corporation in the
final section 351 transfer. The transferred property shall be the stock
or securities of the transferred corporation, as appropriate in the
circumstances.
(iii) Amount of gain. The amount of gain that a U.S. person is
required to include in income in the event of a disposition (or a
deemed disposition) of some or all of the stock or securities of the
transferred corporation shall be the proportionate share (as determined
under Sec. 1.367(a)-8(e)) of the U.S. person's gain realized but not
recognized in the initial exchange (or deemed exchange) of stock or
securities under section 354.
(iv) Gain recognition agreements involving multiple parties. The
U.S. transferor's agreement to recognize gain, as provided in
Sec. 1.367(a)-8, shall include appropriate provisions, consistent with
the principles of these rules, requiring the transferor to recognize
gain in the event of a direct or indirect disposition of the stock or
assets of the transferred corporation. For example, in the case of a
triangular section 368(a)(1)(B) reorganization described in paragraph
(d)(1)(iii) of this section, a disposition of the transferred stock
shall include an indirect disposition of such stock by the transferee
foreign corporation, such as a disposition of such stock by the
acquiring corporation or a disposition of the stock of the acquiring
corporation by the transferee foreign corporation. See, e.g., paragraph
(d)(3) Example 4 of this section.
(v) Determination of whether the transferred corporation disposed
of substantially all of its assets. For purposes of applying
Sec. 1.367(a)-8(e)(3)(i) to determine whether the transferred
corporation has disposed of substantially all of its assets, the
following assets shall be taken into account (but only if such assets
are not fully taxable under section 367 in the taxable year that
includes the indirect transfer)--
(A) In the case of a sections 368(a)(1)(A) and (a)(2)(D)
reorganization, and a triangular section 368(a)(1)(C) reorganization
described in paragraph (d)(1)(i) or (iv) of this section, respectively,
the assets of the acquired corporation;
(B) In the case of a sections 368(a)(1)(A) and (a)(2)(E)
reorganization described in paragraph (d)(1)(ii) of this section, the
assets of the acquiring corporation immediately prior to the
transaction;
(C) In the case of a sections 368(a)(1)(C) and (a)(2)(C)
reorganization described in paragraph (d)(1)(v) of this section, the
assets of the acquired corporation that are subject to a transfer
described in section 368(a)(2)(C); and
[[Page 33558]]
(D) In the case of successive section 351 exchanges described in
paragraph (d)(1)(vi) of this section, the assets that are both
transferred initially to the foreign corporation, and transferred by
the foreign corporation to a second corporation.
(vi) Coordination between asset transfer rules and indirect stock
transfer rules. If, pursuant to any of the transactions described in
paragraph (d)(1) of this section, a domestic corporation transfers (or
is deemed to transfer) assets to a foreign corporation (other than in
an exchange described in section 354), the rules of section 367,
including sections 367(a)(1), (a)(3) and (a)(5), as well as section
367(d), and the regulations thereunder shall apply prior to the
application of the rules of this section. However, if a transaction is
described in this paragraph (d), section 367(a) shall not apply in the
case of a domestic acquired corporation that transfers its assets to a
foreign acquiring corporation, to the extent that such assets are re-
transferred to a domestic corporation in a transfer described in
section 368(a)(2)(C) or paragraph (d)(1)(vi) of this section, but only
if the domestic transferee's basis in the assets is no greater than the
basis that the domestic acquired company had in such assets. See, e.g.,
paragraph (d)(3) Example 8 and Example 10A of this section.
(3) Examples. The rules of this paragraph (d) and Sec. 1.367(a)-8
are illustrated by the following examples:
Example 1. Section 368(a)(1)(A)/(a)(2)(D) reorganization--(i)
Facts. F, a foreign corporation, owns all the stock of Newco, a
domestic corporation. A, a domestic corporation, owns all of the
stock of W, also a domestic corporation. A and W file a consolidated
Federal income tax return. A does not own any stock in F (applying
the attribution rules of section 318, as modified by section
958(b)). In a reorganization described in sections 368(a)(1)(A) and
(a)(2)(D), Newco acquires all of the assets of W, and A receives 40%
of the stock of F in an exchange described in section 354.
(ii) Result. Pursuant to paragraph (d)(1)(i) of this section,
the reorganization is subject to the indirect stock transfer rules.
F is treated as the transferee foreign corporation, and Newco is
treated as the transferred corporation. Provided that the
requirements of paragraph (c)(1) of this section are satisfied,
including the requirement that A enter into a five-year gain
recognition agreement as described in Sec. 1.367(a)-8, A's exchange
of W stock for F stock under section 354 will not be subject to
section 367(a)(1). If F disposes (within the meaning of
Sec. 1.367(a)-8(e)) of all (or a portion) of Newco's stock within
the five-year term of the agreement (and A has not made a valid
election under Sec. 1.367(a)-8(b)(1)(vii)), A is required to file an
amended return for the year of the transfer and include in income,
with interest, the gain realized but not recognized on the initial
section 354 exchange. If A has made a valid election under
Sec. 1.367(a)-8(b)(1)(vii) to include the amount subject to the gain
recognition agreement in the year of the triggering event, A would
instead include the gain on its tax return for the taxable year that
includes the triggering event, together with interest.
Example 1A. Transferor is a subsidiary in consolidated group--
(i) Facts. The facts are the same as in Example 1, except that A is
owned by P, a domestic corporation, and for the taxable year in
which the transaction occurred, P, A and W filed a consolidated
Federal income tax return.
(ii) Result. Even though A is the U.S. transferor, P is required
under Sec. 1.367(a)-8(a)(3) to enter into the gain recognition
agreement and comply with the requirements under Sec. 1.367(a)-8. In
the event that A leaves the P group, A would make the annual
certifications required under Sec. 1.367(a)-8(b)(5)(ii). P would
remain liable with A under the gain recognition agreement.
Example 2. Taxable inversion pursuant to indirect stock transfer
rules--(i) Facts. The facts are the same as in Example 1, except
that A receives more than fifty percent of either the total voting
power or the total value of the stock of F in the transaction.
(ii) Result. A is required to include in income in the year of
the exchange the amount of gain realized on such exchange. See
paragraph (c)(1)(i) of this section. If A fails to include the
income on its timely-filed return, A will also be liable for the
penalty under section 6038B (together with interest and other
applicable penalties) unless A's failure to include the income is
due to reasonable cause and not willful neglect. See Sec. 1.6038B-
1(f).
Example 3. Disposition by U.S. transferred corporation of
substantially all of its assets--(i) Facts. The facts are the same
as in Example 1, except that, during the third year of the gain
recognition agreement, Newco disposes of substantially all (as
described in Sec. 1.367(a)-8(e)(3)(i)) of the assets described in
paragraph (d)(2)(v)(A) of this section for cash and recognizes
currently all of the gain realized on the disposition.
(ii) Result. Under Sec. 1.367(a)-8(e)(3)(i), the gain
recognition agreement is generally triggered when the transferred
corporation disposes of substantially all of its assets. However,
under the special rule contained in Sec. 1.367(a)-8(h)(2), because A
and W filed a consolidated Federal income tax return prior to the
transaction, and Newco, the transferred corporation, is a domestic
corporation, the gain recognition agreement is terminated and has no
further effect.
Example 4. Triangular section 368(a)(1)(B) reorganization--(i)
Facts. F, a foreign corporation, owns all the stock of S, a domestic
corporation. U, a domestic corporation, owns all of the stock of Y,
also a domestic corporation. U does not own any of the stock of F
(applying the attribution rules of section 318, as modified by
section 958(b)). In a triangular reorganization described in section
368(a)(1)(B) and paragraph (d)(1)(iii) of this section, S acquires
all the stock of Y, and U receives 10% of the voting stock of F.
(ii) Result. U's exchange of Y stock for F stock will not be
subject to section 367(a)(1), provided that all of the requirements
of paragraph (c)(1) are satisfied, including the requirement that U
enter into a five-year gain recognition agreement. For purposes of
this section, F is treated as the transferee foreign corporation and
Y is treated as the transferred corporation. See paragraphs
(d)(2)(i) and (ii) of this section. Under paragraph (d)(2)(iv) of
this section, the gain recognition agreement would be triggered if F
sold all or a portion of the stock of S, or if S sold all or a
portion of the stock of Y.
Example 5. Triangular section 368(a)(1)(C) reorganization--(i)
Facts. F, a foreign corporation, owns all of the stock of R, a
domestic corporation that operates an historical business. V, a
domestic corporation, owns all of the stock of Z, also a domestic
corporation. V does not own any of the stock of F (applying the
attribution rules of section 318 as modified by section 958(b)). In
a triangular reorganization described in section 368(a)(1)(C) (and
paragraph (d)(1)(iv) of this section), R acquires all of the assets
of Z, and V receives 30% of the voting stock of F.
(ii) Result. The consequences of the transfer are similar to
those described in Example 1; V is required to enter into a 5-year
gain recognition agreement under Sec. 1.367(a)-8 to secure
nonrecognition treatment under section 367(a). Under paragraphs
(d)(2)(i) and (ii) of this section, F is treated as the transferee
foreign corporation and R is treated as the transferred corporation.
In determining whether, in a later transaction, R has disposed of
substantially all of its assets under Sec. 1.367(a)-8(e)(3)(i), see
paragraph (d)(2)(v)(A) of this section.
Example 5A. Section 368(a)(1)(C) reorganization followed by
section 368(a)(2)(C) exchange--(i) Facts. The facts are the same as
in Example 5, except that the transaction is structured as a section
368(a)(1)(C) reorganization, followed by a section 368(a)(2)(C)
exchange, and R is a foreign corporation. The following additional
facts are present. Z has 3 businesses: Business A with a basis of
$10 and a value of $50, Business B with a basis of $10 and a value
of $40, and Business C with a basis of $10 and a value of $30. V and
Z file a consolidated Federal income tax return and V has a basis of
$30 in the Z stock, which has a value of $120. Assume that
Businesses A and B consist solely of assets that will satisfy the
section 367(a)(3) active trade or business exception; none of
Business C's assets will satisfy the exception. Z transfers all 3
businesses to F in exchange for 30 percent of the F stock, which Z
distributes to V pursuant to a section 368(a)(1)(C) reorganization.
F then contributes Businesses B and C to R pursuant to section
368(a)(2)(C).
(ii) Result. The transfer of the Business A assets by Z to F is
subject to the general rules under section 367, as such transfer
does not constitute an indirect stock transfer. The transfer by Z of
the Business B and C assets to F must first be tested under sections
367(a)(1), (3) and (5). Z recognizes $20 of gain on the outbound
transfer of the Business C
[[Page 33559]]
assets, as such assets do not qualify for an exception to section
367(a)(1). The Business B assets, which will be used by R in an
active trade or business outside the United States, qualify for the
exception under section 367(a)(3) and Sec. 1.367(a)-2T(c)(2). V is
deemed to transfer the stock of Z to F in a section 354 exchange
subject to the rules of paragraph (d). V must enter into the gain
recognition agreement in the amount of $30 to preserve Z's
nonrecognition treatment with respect to its transfer of Business B
assets. Under paragraphs (d)(2)(i) and (ii) of this section, F is
the transferee foreign corporation and R is the transferred
corporation.
Example 5B. Section 368(a)(1)(C) reorganization followed by
section 368(a)(2)(C) exchange with U.S. transferee--(i) Facts. The
facts are the same as in Example 5A, except that R is a U.S.
corporation.
(ii) Result. As in Example 5A, the outbound transfer of Business
A assets to F is subject to section 367(a) and is not affected by
the rules of this paragraph (d). The Business B assets qualified for
nonrecognition treatment; the Business C assets did not. However,
pursuant to paragraph (d)(2)(vi) of this section, the Business C
assets are not subject to section 367(a)(1), provided that the basis
of the assets in the hands of R is no greater than the basis of the
assets in the hands of Z. V is deemed to make an indirect transfer
under the rules of this paragraph (d). To preserve nonrecognition
treatment under section 367(a), V must enter into a 5-year gain
recognition agreement in the amount of $50, the amount of the
appreciation in the Business B and C assets, as the transfer of such
assets by Z were not taxable under section 367(a)(1) but were
treated as an indirect stock transfer.
Example 6. Triangular section 368(a)(1)(C) reorganization
followed by 351 exchange--(i) Facts. The facts are the same as in
Example 5, except that, during the fourth year of the gain
recognition agreement, R transfers substantially all of the assets
received from Z to K, a wholly-owned domestic subsidiary of R, in an
exchange described in section 351.
(ii) Result. The disposition by R, the transferred corporation,
of substantially all of its assets would trigger the gain
recognition agreement if the assets were disposed of in a taxable
transaction. However, because the assets were transferred in a
nonrecognition transaction, such transfer does not trigger the gain
recognition agreement if V satisfies the reporting requirements
contained in Sec. 1.367(a)-8(g)(3)(i) (which includes the
requirement that V amend its gain recognition agreement to reflect
the transaction). See also paragraph (d)(2)(iv) of this section. To
determine whether substantially all of the assets are disposed of,
any assets of Z that were transferred by Z to R and then contributed
by R to K are taken into account.
Example 6A. Triangular section 368(a)(1)(C) reorganization
followed by section 351 exchange with foreign transferee--(i) Facts.
The facts are the same as in Example 6 except that K is a foreign
corporation.
(ii) Result. This transfer of assets by R to K must be analyzed
to determine its effect upon the gain recognition agreement, and
such transfer is also an outbound transfer of assets that is taxable
under section 367(a)(1) unless the active trade or business
exception under section 367(a)(3) applies. If the transfer is fully
taxable under section 367(a)(1), the transfer is treated as if the
transferred company, R, sold substantially all of its assets. Thus,
the gain recognition agreement would be triggered (but see
Sec. 1.367(a)-8(b)(3)(ii) for potential offsets to the gain to be
recognized). If each asset transferred qualifies for nonrecognition
treatment under section 367(a)(3) and the regulations thereunder
(which require, under Sec. 1.367(a)-2T(a)(2), the transferor to
comply with the reporting requirements under section 6038B), the
result is the same as in Example 6. If a portion of the assets
transferred qualify for nonrecognition treatment under section
367(a)(3) and a portion are taxable under section 367(a)(1) (but
such portion does not result in the disposition of substantially all
of the assets), the gain recognition agreement will not be triggered
if such information is reported as required under Sec. 1.367(a)-
8(b)(5) and (e)(3)(i).
Example 7. Concurrent application of asset transfer and indirect
stock transfer rules in consolidated return setting--(i) Facts.
Assume the same facts as in Example 5, except that R is a foreign
corporation and V and Z file a consolidated return for Federal
income tax purposes. The properties of Z consist of Business A
assets, with an adjusted basis of $50 and fair market value of $90,
and Business B assets, with an adjusted basis of $50 and a fair
market value of $110. Assume that the Business A assets do not
qualify for the active trade or business exception under section
367(a)(3), but that the Business B assets do qualify for the
exception. V's basis in the Z stock is $100, and the value of such
stock is $200.
(ii) Result. Under paragraph (d)(2)(vi), the assets of
Businesses A and B that are transferred to R must be tested under
sections 367(a)(3) and (a)(5) prior to consideration of the indirect
stock transfer rules of this paragraph (d). Thus, Z must recognize
$40 of income under section 367(a)(1) on the outbound transfer of
Business A assets. Under Sec. 1.1502-32, because V and Z file a
consolidated return, V's basis in its Z stock increases from $100 to
$140 as a result of Z's $40 gain. Provided that all of the other
requirements under paragraph (c)(1) of this section are satisfied,
to qualify for nonrecognition treatment with respect to V's indirect
transfer of Z stock, V must enter into a gain recognition agreement
in the amount of $60 (the gain realized but not recognized by V in
the stock of Z after the $40 basis adjustment). If F sells a portion
of its stock in R during the term of the agreement, V will be
required to recognize a portion of the $60 gain subject to the
agreement. To determine whether R disposes of substantially all of
its assets (under Sec. 1.367(a)-8(e)(3)(i)), only the Business B
assets will be considered (because the transfer of the Business A
assets was taxable to Z under section 367). See paragraph
(d)(2)(v)(A) of this section.
Example 7A. Concurrent application without consolidated
returns--(i) Facts. The facts are the same as in Example 7, except
that V and Z do not file consolidated income tax returns.
(ii) Result. Z would still recognize $40 of gain on the transfer
of its Business A assets, and the Business B assets would still
qualify for the active trade or business exception under section
367(a)(3). However, V's basis in its stock of Z would not be
increased by the amount of Z's gain. V's indirect transfer of stock
will be taxable unless V enters into a gain recognition agreement
(as described in Sec. 1.367(a)-8) for the $100 of gain realized but
not recognized with respect to the stock of Z.
Example 7B. Concurrent application with individual U.S.
shareholder--(i) Facts. The facts are the same as in Example 7,
except that V is an individual U.S. citizen.
(ii) Result. Section 367(a)(5) would prevent the application of
the active trade or business exception under section 367(a)(3).
Thus, Z's transfer of assets to R would be fully taxable under
section 367(a)(1). Z would recognize $100 of income. V's basis in
its stock of Z is not increased by this amount. V is taxable with
respect to its indirect transfer of its Z stock unless V enters into
a gain recognition agreement in the amount of the $100, the gain
realized but not recognized with respect to its Z stock.
Example 7C. Concurrent application with nonresident alien
shareholder--(i) Facts. The facts are the same as in Example 7,
except that V is a nonresident alien.
(ii) Result. Pursuant to section 367(a)(5), the active trade or
business exception under section 367(a)(3) is not available with
respect to Z's transfer of assets to R. Thus, Z has $100 of gain
with respect to the Business A and B assets. Because V is a
nonresident alien, however, V is not subject to section 367(a) with
respect to its indirect transfer of Z stock.
Example 8. Concurrent application with section 368(a)(2)(C)
Exchange--(i) Facts. The facts are the same as in Example 7, except
that R transfers the Business A assets to M, a wholly-owned domestic
subsidiary of R, in an exchange described in section 368(a)(2)(C).
(ii) Result. Pursuant to paragraph (d)(2)(vi) of this section,
section 367(a)(1) does not apply to Z's transfer of Business A
assets to
[[Page 33560]]
R, because such assets are transferred to M, a domestic corporation.
Sections 367(a)(1), (3) and (5), as well as section 367(d), apply to
Z's transfer of assets to R to the extent that such assets are not
transferred to M. However, the Business B assets qualify for an
exception to taxation under section 367(a)(3). Thus, if the
requirements of paragraph (c)(1) of this section are satisfied,
including the requirement that V enter into a 5-year gain
recognition agreement and comply with the requirements of
Sec. 1.367(a)-8 with respect to the gain realized on the Z stock,
$100, the entire transaction qualifies for nonrecognition treatment
under section 367(a)(1). See also section 367(a)(5) and any
regulations issued thereunder. Under paragraphs (d)(2)(i) and (ii)
of this section, the transferee foreign corporation is F and the
transferred corporation is M. Pursuant to paragraph (d)(2)(iv) of
this section, a disposition by F of the stock of R, or a disposition
by R of the stock of M, will trigger the gain recognition agreement.
To determine whether substantially all of the assets have been
disposed of (as described under Sec. 1.367(a)-8(e)(3)(i)), the
Business A assets in M and the Business B assets in R must both be
considered.
Example 9. Concurrent application of direct and indirect stock
transfer rules--(i) Facts. F, a foreign corporation, owns all of the
stock of O, also a foreign corporation. D, a domestic corporation,
owns all of the stock of E, also a domestic corporation, which owns
all of the stock of N, also a domestic corporation. Prior to the
transactions described in this Example 9, D, E and N filed a
consolidated income tax return. D has a basis of $100 in the stock
of E, which has a fair market value of $160. The N stock has a fair
market value of $100, and E has a basis of $60 in such stock. In
addition to the stock of N, E owns the assets of Business X. The
assets of Business X have a fair market value of $60, and E has a
basis of $50 in such assets. Assume that the Business X assets
qualify for nonrecognition treatment under section 367(a)(3). D does
not own any stock in F (applying the attribution rules of section
318 as modified by section 958(b)). In a triangular reorganization
described in section 368(a)(1)(C) and paragraph (d)(1)(iv) of this
section, O acquires all of the assets of E, and D exchanges its
stock in E for 40% of the voting stock of F.
(ii) Result. E's transfer of its assets, including the N stock,
must be tested under the general rules of section 367(a) before
consideration of D's indirect transfer of the stock of E. E's
transfer of the assets of Business X qualify for nonrecognition
under section 367(a)(3). E could qualify for nonrecognition
treatment with respect to its transfer of N stock if it enters into
a gain recognition agreement (and all of the requirements of
paragraph (c)(1)(i) of this section are satisfied); however under
Sec. 1.367(a)-8(f)(2)(i), D, the parent of the consolidated group,
must enter into the agreement. O is the transferee foreign
corporation; N is the transferred corporation. D may also qualify
for nonrecognition with respect to its indirect transfer of the
stock of E if it enters into a separate gain recognition agreement
with respect to the E stock (and all of the requirements of
paragraph (c)(1)(i) of this section are satisfied). As to this
transfer, F is the transferee foreign corporation; O is the
transferred corporation. The amount of the gain recognition
agreement is $60. See also section 367(a)(5) and any regulations
issued thereunder.
Example 10. Successive section 351 exchanges--(i) Facts. D, a
domestic corporation, owns all the stock of X, a controlled foreign
corporation that operates an historical business, which owns all the
stock of Y, a controlled foreign corporation that also operates an
historical business. The properties of D consist of Business A
assets, with an adjusted basis of $50 and a fair market value of
$90, and Business B assets, with an adjusted basis of $50 and a fair
market value of $110. Assume that the Business B assets qualify for
the exception under section 367(a)(3) and Sec. 1.367(a)-2T(c)(2),
but that the Business A assets do not qualify for the exception. In
an exchange described in section 351, D transfers the assets of
Businesses A and B to X, and, in connection with the same
transaction, X transfers the assets of Business B to Y in another
exchange described in section 351.
(ii) Result. Under paragraph (d)(1)(vi) of this section, this
transaction is treated as an indirect stock transfer for purposes of
section 367(a), but the transaction is not recharacterized for
purposes of section 367(b). Moreover, under paragraph (d)(2)(vi) of
this section, the assets of Businesses A and B that are transferred
to X must be tested under section 367(a)(3). The Business A assets,
which were not transferred to Y, are subject to the general rules of
section 367(a), and not the indirect stock transfer rules described
in this paragraph (d). D must recognize $40 of income on the
outbound transfer of Business A assets. The transfer of the Business
B assets is subject to both the asset transfer rules (under section
367(a)(3)) and the indirect stock transfer rules of this paragraph
(d) and Sec. 1.367(a)-8. Thus, D's transfer of the Business B assets
will not be subject to section 367(a)(1) if D enters into a five-
year gain recognition agreement with respect to the stock of Y.
Under paragraphs (d)(2)(i) and (ii) of this section, X will be
treated as the transferee foreign corporation and Y will be treated
as the transferred corporation for purposes of applying the terms of
the agreement. If X sells all or a portion of the stock of Y during
the term of the agreement, D will be required to recognize a
proportionate amount of the $60 gain that was realized by D on the
initial transfer of the Business B assets.
Example 10A. Successive section 351 exchanges with ultimate
domestic transferee--(i) Facts. The facts are the same as in Example
10, except that Y is a domestic corporation.
(ii) Result. As in Example 10, D must recognize $40 of income on
the outbound transfer of the Business A assets. Although the
Business B assets qualify for the exception under section 367(a)(3)
(and end up in U.S. corporate solution, in Y), the $60 of gain
realized on the Business B assets is nevertheless taxable under
paragraphs (c)(1) and (d)(1)(vi) of this section because the
transaction is considered to be a transfer by D of stock of a
domestic corporation, Y, in which D receives more than 50 percent of
the stock of the transferee foreign corporation, X. A gain
recognition agreement is not permitted.
Example 11. Concurrent application of indirect stock transfer
rules and section 367(b)--(i) Facts. F, a foreign corporation, owns
all of the stock of Newco, which is also a foreign corporation. P, a
domestic corporation, owns all of the stock of S, a foreign
corporation that is a controlled foreign corporation within the
meaning of section 957(a). P's basis in the stock of S is $50 and
the value of S is $100. The section 1248 amount with respect to S
stock is $30. In a reorganization described in section 368(a)(1)(C)
(and paragraph (d)(1)(iv) of this section), Newco acquires all of
the properties of S, and P exchanges its stock in S for 49 percent
of the stock of F.
(ii) Result. P's exchange of S stock for F stock under section
354 will be taxable under section 367(a) (and section 1248 will be
applicable) if P fails to enter into a 5-year gain recognition
agreement in accordance with Sec. 1.367(a)-8. Under paragraph (b)(2)
of this section, if P enters into a gain recognition agreement, the
exchange will be subject to the provisions of section 367(b) and the
regulations thereunder as well as section 367(a). Under
Sec. 7.367(b)-7(c)(1)(i) of this chapter, P must recognize the
section 1248 amount of $30 because P exchanged stock of a controlled
foreign corporation, S, for stock of a foreign corporation that is
not a controlled foreign corporation, F. The indirect stock transfer
rules do not apply with respect to section 367(b). The deemed
dividend of $30 recognized by P will increase P's basis in the F
stock received in the transaction, and F's basis in the Newco stock.
Thus, the amount of the gain recognition agreement is $20 ($50 gain
realized on the transfer less the $30 inclusion under section
367(b)). Under paragraphs (d)(2)(i) and (ii) of this section, F is
treated as the transferee foreign corporation and Newco is the
transferred corporation.
Example 11A. Triangular section 368(a)(1)(C) reorganization
involving foreign acquired corporation--(i) Facts. Assume the same
facts as in Example 11, except that P receives 51 percent of the
stock of F.
(ii) Result. P may still enter into a gain recognition agreement
to avoid taxation under section 367(a). There is, however, no
inclusion under section 367(b) because P would be exchanging stock
in one controlled foreign corporation for another. The amount of the
gain recognition agreement is $50. See, also, Sec. 1.367(b)-4(b)(4).
Example 12. Direct asset reorganization not subject to stock
transfer rules--(i) Facts. D is a publicly traded domestic
corporation. D's assets consist of tangible assets, including stock
or securities. In a reorganization described in section
368(a)(1)(F), D becomes a foreign corporation, F.
(ii) Result. The reorganization is characterized under
Sec. 1.367(a)-1T(f). D's outbound transfer of assets is taxable
under section 367(a)(1). Even if any of D's assets would have
otherwise qualified for an exception to section 367(a)(1), section
367(a)(5) provides that no exception can
[[Page 33561]]
apply. The section 368(a)(1)(F) reorganization is not an indirect
stock transfer described in paragraph (d) of this section. Moreover,
the exchange by D's shareholders of D stock for F stock in an
exchange described under section 354 is not an exchange described
under section 367(a). See paragraph (a) of this section.
(e) Effective dates--(1) In general. The rules in paragraphs (a),
(b) and (d) of this section apply to transfers occurring on or after
July 20, 1998. The rules in paragraph (c) of this section with respect
to transfers of domestic stock or securities are generally applicable
for transfers occurring after January 29, 1997. See Sec. 1.367(a)-
3(c)(11). For rules regarding transfers of domestic stock or securities
after December 16, 1987, and before January 30, 1997, and transfers of
foreign stock or securities after December 16, 1987, and before July
20, 1998, see paragraph (g) of this section.
(2) Election. Notwithstanding paragraphs (e)(1) and (g) of this
section, taxpayers may, by timely filing an original or amended return,
elect to apply paragraphs (b) and (d) of this section to all transfers
of foreign stock or securities occurring after December 16, 1987, and
before July 20, 1998, except to the extent that a gain recognition
agreement has been triggered prior to July 20, 1998. If an election is
made under this paragraph (e)(2), the provisions of Sec. 1.367(a)-3T(g)
(see 26 CFR part 1, revised April 1, 1998) shall apply, and, for this
purpose, the term substantial portion under Sec. 1.367(a)-3T(g)(3)(iii)
(see 26 CFR part 1, revised April 1, 1998) shall be interpreted to mean
substantially all as defined in section 368(a)(1)(C). In addition, if
such an election is made, the taxpayer must apply the rules under
section 367(b) and the regulations thereunder to any transfers
occurring within that period as if the election to apply Sec. 1.367(a)-
3(b) and (d) to transfers occurring within that period had not been
made, except that in the case of an exchange described in section 351
the taxpayer must apply section 367(b) and the regulations thereunder
as if the exchange was described in Sec. 7.367(b)-7 of this chapter.
For example, if a U.S. person, pursuant to a section 351 exchange,
transfers stock of a controlled foreign corporation in which it is a
United States shareholder but does not receive back stock of a
controlled foreign corporation in which it is a United States
shareholder, the U.S. person must include in income under
Sec. 7.367(b)-7 of this chapter the section 1248 amount attributable to
the stock exchanged (to the extent that the fair market value of the
stock exchanged exceeds its adjusted basis). Such inclusion is required
even though Sec. 7.367(b)-7 of this chapter, by its terms, did not
apply to section 351 exchanges.
(f) Former 10-year gain recognition agreements. If a taxpayer
elects to apply the rules of this section to all prior transfers
occurring after December 16, 1987, any 10-year gain recognition
agreement that remains in effect (has not been triggered in full) on
July 20, 1998 will be considered by the Internal Revenue Service to be
a 5-year gain recognition agreement with a duration of five full
taxable years following the close of the taxable year of the initial
transfer.
(g) Transition rules regarding certain transfers of domestic or
foreign stock or securities after December 16, 1987, and prior to July
20, 1998--(1) Scope. Transfers of domestic stock or securities
described under section 367(a) that occurred after December 16, 1987,
and prior to April 17, 1994, and transfers of foreign stock or
securities described under section 367(a) that occur after December 16,
1987, and prior to July 20, 1998 are subject to the rules contained in
section 367(a) and the regulations thereunder, as modified by the rules
contained in paragraph (g)(2) of this section. For transfers of
domestic stock or securities described under section 367(a) that
occurred after April 17, 1994 and before January 30, 1997, see
Temporary Income Regulations under section 367(a) in effect at the time
of the transfer (Sec. 1.367(a)-3T(a) and (c), 26 CFR part 1, revised
April 1, 1996) and paragraph (c)(11) of this section. For transfers of
domestic stock or securities described under section 367(a) that occur
after January 29, 1997, see Sec. 1.367(a)-3(c).
(2) Transfers of domestic or foreign stock or securities:
additional substantive rules--(i) Rule for less than 5-percent
shareholders. Unless paragraph (g)(2)(iii) of this section applies (in
the case of domestic stock or securities) or paragraph (g)(2)(iv) of
this section applies (in the case of foreign stock or securities), a
U.S. transferor that transfers stock or securities of a domestic or
foreign corporation in an exchange described in section 367(a) and owns
less than 5 percent of both the total voting power and the total value
of the stock of the transferee foreign corporation immediately after
the transfer (taking into account the attribution rules of section 958)
is not subject to section 367(a)(1) and is not required to enter into a
gain recognition agreement.
(ii) Rule for 5-percent shareholders. Unless paragraph (g)(2)(iii)
or (iv) of this section applies, a U.S. transferor that transfers
domestic or foreign stock or securities in an exchange described in
section 367(a) and owns at least 5 percent of either the total voting
power or the total value of the stock of the transferee foreign
corporation immediately after the transfer (taking into account the
attribution rules under section 958) may qualify for nonrecognition
treatment by filing a gain recognition agreement in accordance with
Sec. 1.367(a)-3T(g) in effect prior to July 20, 1998 (see 26 CFR part
1, revised April 1, 1998) for a duration of 5 or 10 years. The duration
is 5 years if the U.S. transferor (5-percent shareholder) determines
that all U.S. transferors, in the aggregate, own less than 50 percent
of both the total voting power and the total value of the transferee
foreign corporation immediately after the transfer. The duration is 10
years in all other cases. See, however, Sec. 1.367(a)-3(f). If a 5-
percent shareholder fails to properly enter into a gain recognition
agreement, the exchange is taxable to such shareholder under section
367(a)(1).
(iii) Gain recognition agreement option not available to
controlling U.S. transferor if U.S. stock or securities are
transferred. Notwithstanding the provisions of paragraph (g)(2)(ii) of
this section, in no event will any exception to section 367(a)(1) apply
to the transfer of stock or securities of a domestic corporation where
the U.S. transferor owns (applying the attribution rules of section
958) more than 50 percent of either the total voting power or the total
value of the stock of the transferee foreign corporation immediately
after the transfer (i.e., the use of a gain recognition agreement to
qualify for nonrecognition treatment is unavailable in this case).
(iv) Loss of United States shareholder status in the case of a
transfer of foreign stock. Notwithstanding the provisions of paragraphs
(g)(2)(i) and (ii) of this section, in no event will any exception to
section 367(a)(1) apply to the transfer of stock of a foreign
corporation in which the U.S. transferor is a United States shareholder
(as defined in Sec. 7.367(b)-2(b) of this chapter or section 953(c))
unless the U.S. transferor receives back stock in a controlled foreign
corporation (as defined in section 953(c), section 957(a) or section
957(b)) as to which the U.S. transferor is a United States shareholder
immediately after the transfer.
Sec. 1.367(a)-3T [Removed]
Par. 4. Section 1.367(a)-3T is removed.
Par. 5. Section 1.367(a)-8 is added to read as follows:
[[Page 33562]]
Sec. 1.367(a)-8 Gain recognition agreement requirements.
(a) In general. This section specifies the general terms and
conditions for an agreement to recognize gain entered into pursuant to
Sec. 1.367(a)-3(b) or (c) to qualify for nonrecognition treatment under
section 367(a).
(1) Filing requirements. A transferor's agreement to recognize gain
(described in paragraph (b) of this section) must be attached to, and
filed by the due date (including extensions) of, the transferor's
income tax return for the taxable year that includes the date of the
transfer.
(2) Gain recognition agreement forms. Any agreement, certification,
or other document required to be filed pursuant to the provisions of
this section shall be submitted on such forms as may be prescribed
therefor by the Commissioner (or similar statements providing the same
information that is required on such forms). Until such time as forms
are prescribed, all necessary filings may be accomplished by providing
the required information to the Internal Revenue Service in accordance
with the rules of this section.
(3) Who must sign. The agreement to recognize gain must be signed
under penalties of perjury by a responsible officer in the case of a
corporate transferor, except that if the transferor is a member but not
the parent of an affiliated group (within the meaning of section
1504(a)(1)), that files a consolidated Federal income tax return for
the taxable year in which the transfer was made, the agreement must be
entered into by the parent corporation and signed by a responsible
officer of such parent corporation; by the individual, in the case of
an individual transferor (including a partner who is treated as a
transferor by virtue of Sec. 1.367(a)-1T(c)(3)); by a trustee,
executor, or equivalent fiduciary in the case of a transferor that is a
trust or estate; and by a debtor in possession or trustee in a
bankruptcy case under Title 11, United States Code. An agreement may
also be signed by an agent authorized to do so under a general or
specific power of attorney.
(b) Agreement to recognize gain--(1) Contents. The agreement must
set forth the following information, with the heading ``GAIN
RECOGNITION AGREEMENT UNDER Sec. 1.367(a)-8'', and with paragraphs
labeled to correspond with the numbers set forth as follows--
(i) A statement that the document submitted constitutes the
transferor's agreement to recognize gain in accordance with the
requirements of this section;
(ii) A description of the property transferred as described in
paragraph (b)(2) of this section;
(iii) The transferor's agreement to recognize gain, as described in
paragraph (b)(3) of this section;
(iv) A waiver of the period of limitations as described in
paragraph (b)(4) of this section;
(v) An agreement to file with the transferor's tax returns for the
5 full taxable years following the year of the transfer a certification
as described in paragraph (b)(5) of this section;
(vi) A statement that arrangements have been made in connection
with the transferred property to ensure that the transferor will be
informed of any subsequent disposition of any property that would
require the recognition of gain under the agreement; and
(vii) A statement as to whether, in the event all or a portion of
the gain recognition agreement is triggered under paragraph (e) of this
section, the taxpayer elects to include the required amount in the year
of the triggering event rather than in the year of the initial
transfer. If the taxpayer elects to include the required amount in the
year of the triggering event, such statement must be included with all
of the other information required under this paragraph (b), and filed
by the due date (including extensions) of the transferor's income tax
return for the taxable year that includes the date of the transfer.
(2) Description of property transferred--(i) The agreement shall
include a description of each property transferred by the transferor,
an estimate of the fair market value of the property as of the date of
the transfer, a statement of the cost or other basis of the property
and any adjustments thereto, and the date on which the property was
acquired by the transferor.
(ii) If the transferred property is stock or securities, the
transferor must provide the information contained in paragraphs
(b)(2)(ii)(A) through (F) of this section as follows--
(A) The type or class, amount, and characteristics of the stock or
securities transferred, as well as the name, address, and place of
incorporation of the issuer of the stock or securities, and the
percentage (by voting power and value) that the stock (if any)
represents of the total stock outstanding of the issuing corporation;
(B) The name, address and place of incorporation of the transferee
foreign corporation, and the percentage of stock (by voting power and
value) that the U.S. transferor received or will receive in the
transaction;
(C) If stock or securities are transferred in an exchange described
in section 361(a) or (b), a statement that the conditions set forth in
the second sentence of section 367(a)(5) and any regulations under that
section have been satisfied, and an explanation of any basis or other
adjustments made pursuant to section 367(a)(5) and any regulations
thereunder;
(D) If the property transferred is stock or securities of a
domestic corporation, the taxpayer identification number of the
domestic corporation whose stock or securities were transferred,
together with a statement that all of the requirements of
Sec. 1.367(a)-3(c)(1) are satisfied;
(E) If the property transferred is stock or securities of a foreign
corporation, a statement as to whether the U.S. transferor was a United
States shareholder (a U.S. transferor that satisfies the ownership
requirements of section 1248(a)(2) or (c)(2)) of the corporation whose
stock was exchanged, and, if so, a statement as to whether the U.S.
transferor is a United States shareholder with respect to the stock
received, and whether any reporting requirements contained in
regulations under section 367(b) are applicable, and, if so, whether
they have been satisfied; and
(F) If the transaction involved the transfer of assets other than
stock or securities and the transaction was subject to the indirect
stock transfer rules of Sec. 1.367(a)-3(d), a statement as to whether
the reporting requirements under section 6038B have been satisfied with
respect to the transfer of property other than stock or securities, and
an explanation of whether gain was recognized under section 367(a)(1)
and whether section 367(d) was applicable to the transfer of such
assets, or whether any tangible assets qualified for nonrecognition
treatment under section 367(a)(3) (as limited by section 367(a)(5) and
Secs. 1.367(a)-4T, 1.367(a)-5T and 1.367(a)-6T).
(3) Terms of agreement--(i) General rule. If prior to the close of
the fifth full taxable year (i.e., not less than 60 months) following
the close of the taxable year of the initial transfer, the transferee
foreign corporation disposes of the transferred property in whole or in
part (as described in paragraphs (e)(1) and (2) of this section), or is
deemed to have disposed of the transferred property (under paragraph
(e)(3) of this section), then, unless an election is made in paragraph
(b)(1)(vii) of this section, by the 90th day thereafter the U.S.
transferor must file an amended return for the year of the transfer and
recognize thereon the gain realized but
[[Page 33563]]
not recognized upon the initial transfer, with interest. If an election
under paragraph (b)(1)(vii) of this section was made, then, if a
disposition occurs, the U.S. transferor must include the gain realized
but not recognized on the initial transfer in income on its Federal
income tax return for the period that includes the date of the
triggering event. In accordance with paragraph (b)(3)(iii) of this
section, interest must be paid on any additional tax due. (If a
taxpayer properly makes the election under paragraph (b)(1)(vii) of
this section but later fails to include the gain realized in income,
the Commissioner may, in his discretion, include the gain in the
taxpayer's income in the year of the initial transfer.)
(ii) Offsets. No special limitations apply with respect to net
operating losses, capital losses, credits against tax, or similar
items.
(iii) Interest. If additional tax is required to be paid, then
interest must be paid on that amount at the rates determined under
section 6621 with respect to the period between the date that was
prescribed for filing the transferor's income tax return for the year
of the initial transfer and the date on which the additional tax for
that year is paid. If the election in paragraph (b)(1)(vii) of this
section is made, taxpayers should enter the amount of interest due,
labelled as ``sec. 367 interest'' at the bottom right margin of page 1
of the Federal income tax return for the period that includes the date
of the triggering event (page 2 if the taxpayer files a Form 1040), and
include the amount of interest in their payment (or reduce the amount
of any refund due by the amount of the interest). If the election in
paragraph (b)(1)(vii) of this section is made, taxpayers should, as a
matter of course, include the amount of gain as taxable income on their
Federal income tax returns (together with other income or loss items).
The amount of tax relating to the gain should be separately stated at
the bottom right margin of page 1 of the Federal income tax return
(page 2 if the taxpayer files a Form 1040), labelled as ``sec. 367
tax.''
(iv) Basis adjustments--(A) Transferee. If a U.S. transferor is
required to recognize gain under this section on the disposition by the
transferee foreign corporation of the transferred property, then in
determining for U.S. income tax purposes any gain or loss recognized by
the transferee foreign corporation upon its disposition of such
property, the transferee foreign corporation's basis in such property
shall be increased (as of the date of the initial transfer) by the
amount of gain required to be recognized (but not by any tax or
interest required to be paid on such amount) by the U.S. transferor. In
the case of a deemed disposition of the stock of the transferred
corporation described in paragraph (e)(3)(i) of this section, the
transferee foreign corporation's basis in the transferred stock deemed
disposed of shall be increased by the amount of gain required to be
recognized by the U.S. transferor.
(B) Transferor. If a U.S. transferor is required to recognize gain
under this section, then the U.S. transferor's basis in the stock of
the transferee foreign corporation shall be increased by the amount of
gain required to be recognized (but not by any tax or interest required
to be paid on such amount).
(C) Other adjustments. Other appropriate adjustments to basis that
are consistent with the principles of this paragraph (b)(3)(iv) may be
made if the U.S. transferor is required to recognize gain under this
section.
(D) Example. The principles of this paragraph (b)(3) are
illustrated by the following example:
Example--(i) Facts. D, a domestic corporation owning 100 percent
of the stock of S, a foreign corporation, transfers all of the S
stock to F, a foreign corporation, in an exchange described in
section 368(a)(1)(B). The section 1248 amount with respect to the S
stock is $0. In the exchange, D receives 20 percent of the voting
stock of F. All of the requirements of Sec. 1.367(a)-3(c)(1) are
satisfied, and D enters into a five-year gain recognition agreement
to qualify for nonrecognition treatment and does not make the
election contained in paragraph (b)(1)(vii) of this section. One
year after the initial transfer, F transfers all of the S stock to
F1 in an exchange described in section 351, and D complies with the
requirements of paragraph (g)(2) of this section. Two years after
the initial transfer, D transfers its entire 20 percent interest in
F's voting stock to a domestic partnership in exchange for an
interest in the partnership. Three years after the initial exchange,
S disposes of substantially all (as described in paragraph (e)(3)(i)
of this section) of its assets in a transaction that would be
taxable under U.S. income tax principles, and D is required by the
terms of the gain recognition agreement to recognize all the gain
that it realized on the initial transfer of the stock of S.
(ii) Result. As a result of this gain recognition and paragraph
(b)(3)(iv) of this section, D is permitted to increase its basis in
the partnership interest by the amount of gain required to be
recognized (but not by any tax or interest required to be paid on
such amount), the partnership is permitted to increase its basis in
the 20 percent voting stock of F, F is permitted to increase its
basis in the stock of F1, and F1 is permitted to increase its basis
in the stock of S. S, however, is not permitted to increase its
basis in its assets for purposes of determining the direct or
indirect U.S. tax results, if any, on the sale of its assets.
(4) Waiver of period of limitation. The U.S. transferor must file,
with the agreement to recognize gain, a waiver of the period of
limitation on assessment of tax upon the gain realized on the transfer.
The waiver shall be executed on Form 8838 (Consent to Extend the Time
to Assess Tax Under Section 367--Gain Recognition Agreement) and shall
extend the period for assessment of such tax to a date not earlier than
the eighth full taxable year following the taxable year of the
transfer. Such waiver shall also contain such other terms with respect
to assessment as may be considered necessary by the Commissioner to
ensure the assessment and collection of the correct tax liability for
each year for which the waiver is required. The waiver must be signed
by a person who would be authorized to sign the agreement pursuant to
the provisions of paragraph (a)(3) of this section.
(5) Annual certification--(i) In general. The U.S. transferor must
file with its income tax return for each of the five full taxable years
following the taxable year of the transfer a certification that the
property transferred has not been disposed of by the transferee in a
transaction that is considered to be a disposition for purposes of this
section, including a disposition described in paragraph (e)(3) of this
section. The U.S. transferor must include with its annual certification
a statement describing any taxable dispositions of assets by the
transferred corporation that are not in the ordinary course of
business. The annual certification pursuant to this paragraph (b)(5)
must be signed under penalties of perjury by a person who would be
authorized to sign the agreement pursuant to the provisions of
paragraph (a)(3) of this section.
(ii) Special rule when U.S. transferor leaves its affiliated group.
If, at the time of the initial transfer, the U.S. transferor was a
member of an affiliated group (within the meaning of section
1504(a)(1)) filing a consolidated Federal income tax return but not the
parent of such group, the U.S. transferor will file the annual
certification (and provide a copy to the parent corporation) if it
leaves the group during the term of the gain recognition agreement,
notwithstanding the fact that the parent entered into the gain
recognition agreement, extended the statute of limitations pursuant to
this section, and remains liable (with other corporations that were
members of the group at the time of the initial transfer) under the
[[Page 33564]]
gain recognition agreement in the case of a triggering event.
(c) Failure to comply--(1) General rule. If a person that is
required to file an agreement under paragraph (b) of this section fails
to file the agreement in a timely manner, or if a person that has
entered into an agreement under paragraph (b) of this section fails at
any time to comply in any material respect with the requirements of
this section or with the terms of an agreement submitted pursuant
hereto, then the initial transfer of property is described in section
367(a)(1) (unless otherwise excepted under the rules of this section)
and will be treated as a taxable exchange in the year of the initial
transfer (or in the year of the failure to comply if the agreement was
filed with a timely-filed (including extensions) original (not amended)
return and an election under paragraph (b)(1)(vii) of this section was
made). Such a material failure to comply shall extend the period for
assessment of tax until three years after the date on which the
Internal Revenue Service receives actual notice of the failure to
comply.
(2) Reasonable cause exception. If a person that is permitted under
Sec. 1.367(a)-3(b) or (c) to enter into an agreement (described in
paragraph (b) of this section) fails to file the agreement in a timely
manner, as provided in paragraph (a)(1) of this section, or fails to
comply in any material respect with the requirements of this section or
with the terms of an agreement submitted pursuant hereto, the
provisions of paragraph (c)(1) of this section shall not apply if the
person is able to show that such failure was due to reasonable cause
and not willful neglect and if the person files the agreement or
reaches compliance as soon as he becomes aware of the failure. Whether
a failure to file in a timely manner, or materially comply, was due to
reasonable cause shall be determined by the district director under all
the facts and circumstances.
(d) Use of security. The U.S. transferor may be required to furnish
a bond or other security that satisfies the requirements of
Sec. 301.7101-1 of this chapter if the district director determines
that such security is necessary to ensure the payment of any tax on the
gain realized but not recognized upon the initial transfer. Such bond
or security will generally be required only if the stock or securities
transferred are a principal asset of the transferor and the director
has reason to believe that a disposition of the stock or securities may
be contemplated.
(e) Disposition (in whole or in part) of stock of transferred
corporation--(1) In general--(i) Definition of disposition. For
purposes of this section, a disposition of the stock of the transferred
corporation that triggers gain under the gain recognition agreement
includes any taxable sale or any disposition treated as an exchange
under this subtitle, (e.g., under sections 301(c)(3)(A), 302(a), 311,
336, 351(b) or section 356(a)(1)), as well as any deemed disposition
described under paragraph (e)(3) of this section. It does not include a
disposition that is not treated as an exchange, (e.g., under section
302(d) or 356(a)(2)). A disposition of all or a portion of the stock of
the transferred corporation by installment sale is treated as a
disposition of such stock in the year of the installment sale. A
disposition of the stock of the transferred corporation does not
include certain transfers treated as nonrecognition transfers (under
paragraph (g) of this section) in which the gain recognition agreement
is retained but modified, or certain transfers (under paragraph (h) of
this section) in which the gain recognition agreement is terminated and
has no further effect.
(ii) Example. The provisions of this paragraph (e) are illustrated
by the following example:
Example. Interaction between trigger of gain recognition
agreement and subpart F rules--(i) Facts. A U.S. corporation (USP)
owns all of the stock of two foreign corporations, CFC1 and CFC2.
USP's section 1248 amount with respect to CFC2 is $30. USP has a
basis of $50 in its stock of CFC2; CFC2 has a value of $100. In a
transaction described in section 351 and 368(a)(1)(B), USP transfers
the stock of CFC2 in exchange for additional stock of CFC1. The
transaction is subject to both sections 367 (a) and (b). See
Secs. 1.367(a)-3(b) and 1.367(b)-1(a). To qualify for nonrecognition
treatment under section 367(a), USP enters into a 5-year gain
recognition agreement for $50 under this section. No election under
paragraph 8(b)(1)(vii) of this section is made. USP also complies
with the notice requirement under Sec. 1.367(b)-1(c).
(ii) Trigger of gain recognition agreement with no election.
Assume that in year 2, CFC1 sells the stock of CFC2 for $120, and
that there were no distributions by CFC2 prior to the sale. USP must
amend its return for the year of the initial transfer and include
$50 in income (with interest), $30 of which will be recharacterized
as a dividend pursuant to section 1248. As a result, CFC1 has a
basis of $100 in CFC2. As a result of the sale of CFC2 stock by
CFC1, USP will have $20 of subpart F foreign personal holding
company income. See section 951, et. seq., and the regulations
thereunder.
(iii) Trigger of gain recognition agreement with election.
Assume the same facts as in paragraphs (i) and (ii) of this Example,
except that when USP attached the gain recognition agreement to its
timely filed Federal income tax return for the year of the initial
transfer, it elected under paragraph (b)(1)(vii) of this section to
include the amount of gain realized but not recognized on the
initial transfer, $50, in the year of the triggering event rather
than in the year of the initial transfer. In such case, the result
is the same as in paragraph (e)(1)(ii)(B) of this section, except
that USP will include the $50 of gain on its year 2 return, together
with interest. For purposes of determining the dividend component,
if any, of the $50 inclusion, USP will take into account the section
1248 amount of CFC2 at the time of the disposition in Year 2.
(2) Partial disposition. If the transferee foreign corporation
disposes of (or is deemed to dispose of) only a portion of the
transferred stock or securities, then the U.S. transferor is required
to recognize only a proportionate amount of the gain realized but not
recognized upon the initial transfer of the transferred property. The
proportion required to be recognized shall be determined by reference
to the relative fair market values of the transferred stock or
securities disposed of and retained. Solely for purposes of determining
whether the U.S. transferor must recognize income under the agreement
described in paragraph (b) of this section, in the case of transferred
property (including stock or securities) that is fungible with other
property owned by the transferee foreign corporation, a disposition by
such corporation of any such property shall be deemed to be a
disposition of no less than a ratable portion of the transferred
property.
(3) Deemed dispositions of stock of transferred corporation--(i)
Disposition by transferred corporation of substantially all of its
assets--(A) In general. Unless an exception applies (as described in
paragraph (e)(3)(i)(B) of this section), a transferee foreign
corporation will be treated as having disposed of the stock or
securities of the transferred corporation if, within the term of the
gain recognition agreement, the transferred corporation makes a
disposition of substantially all (within the meaning of section
368(a)(1)(C)) of its assets (including stock in a subsidiary
corporation or an interest in a partnership). If the initial transfer
that necessitated the gain recognition agreement was an indirect stock
transfer, see Sec. 1.367(a)-3(d)(2)(v). If the transferred corporation
is a U.S. corporation, see paragraph (h)(2) of this section.
(B) The transferee foreign corporation will not be deemed to have
disposed of the stock of the transferred corporation if the transferred
corporation is liquidated into the transferee foreign corporation under
sections 337 and 332,
[[Page 33565]]
provided that the transferee foreign corporation does not dispose of
substantially all of the assets formerly held by the transferred
corporation (and considered for purposes of the substantially all
determination) within the remaining period during which the gain
recognition agreement is in effect. A nonrecognition transfer is not
counted for purposes of the substantially all determination as a
disposition if the transfer satisfies the requirements of paragraph
(g)(3) of this section. A disposition does not include a compulsory
transfer as described in Sec. 1.367(a)-4T(f) that was not reasonably
forseeable by the U.S. transferor at the time of the initial transfer.
(ii) U.S. transferor becomes a non-citizen nonresident. If a U.S.
transferor loses U.S. citizenship or a long-term resident ceases to be
taxed as a lawful permanent resident (as defined in section 877(e)(2)),
then immediately prior to the date that the U.S. transferor loses U.S.
citizenship or ceases to be taxed as a long-term resident, the gain
recognition agreement will be triggered as if the transferee foreign
corporation disposed of all of the stock of the transferred corporation
in a taxable transaction on such date. No additional inclusion is
required under section 877, and a gain recognition agreement under
section 877 may not be used to avoid taxation under section 367(a)
resulting from the trigger of the section 367(a) gain recognition
agreement.
(f) Effect on gain recognition agreement if U.S. transferor goes
out of existence--(1) In general. If an individual transferor that has
entered into an agreement under under paragraph (b) of this section
dies, or if a U.S. trust or estate that has entered into an agreement
under paragraph (b) of this section goes out of existence and is not
required to recognize gain as a consequence thereof with respect to all
of the stock of the transferee foreign corporation received in the
initial transfer and not previously disposed of, then the gain
recognition agreement will be triggered unless one of the following
requirements is met--
(i) The person winding up the affairs of the transferor retains,
for the duration of the waiver of the statute of limitations relating
to the gain recognition agreement, assets to meet any possible
liability of the transferor under the duration of the agreement;
(ii) The person winding up the affairs of the transferor provides
security as provided under paragraph (d) of this section for any
possible liability of the transferor under the agreement; or
(iii) The transferor obtains a ruling from the Internal Revenue
Service providing for successors to the transferor under the gain
recognition agreement.
(2) Special rule when U.S. transferor is a corporation--(i) U.S.
transferor goes out of existence pursuant to the transaction. If the
transferor is a U.S. corporation that goes out of existence in a
transaction in which the transferor's gain would have qualified for
nonrecognition treatment under Sec. 1.367(a)-3(b) or (c) had the U.S.
transferor remained in existence and entered into a gain recognition
agreement, then the gain may generally qualify for nonrecognition
treatment only if the U.S. transferor is owned by a single U.S. parent
corporation and the U.S. transferor and its parent corporation file a
consolidated Federal income tax return for the taxable year that
includes the transfer, and the parent of the consolidated group enters
into the gain recognition agreement. However, notwithstanding the
preceding sentence, a U.S. transferor that was controlled (within the
meaning of section 368(c)) by five or fewer domestic corporations may
request a ruling that, if certain conditions prescribed by the Internal
Revenue Service are satisfied, the transaction may qualify for
nonrecognition treatment.
(ii) U.S. corporate transferor is liquidated after gain recognition
agreement is filed. If a U.S. transferor files a gain recognition
agreement but is liquidated during the term of the gain recognition
agreement, such agreement will be terminated if the liquidation does
not qualify as a tax-free liquidation under sections 337 and 332 and
the U.S. transferor includes in income any gain from the liquidation.
If the liquidation qualifies for nonrecognition treatment under
sections 337 and 332, the gain recognition agreement will be triggered
unless the U.S. parent corporation and the U.S. transferor file a
consolidated Federal income tax return for the taxable year that
includes the dates of the initial transfer and the liquidation of the
U.S. transferor, and the U.S. parent enters into a new gain recognition
agreement and complies with reporting requirements similar to those
contained in paragraph (g)(2) of this section.
(g) Effect on gain recognition agreement of certain nonrecognition
transactions--(1) Certain nonrecognition transfers of stock or
securities of the transferee foreign corporation by the U.S.
transferor. If the U.S. transferor disposes of any stock of the
transferee foreign corporation in a nonrecognition transfer and the
U.S. transferor complies with reporting requirements similar to those
contained in paragraph (g)(2) of this section, the U.S. transferor
shall continue to be subject to the terms of the gain recognition
agreement in its entirety.
(2) Certain nonrecognition transfers of stock or securities of the
transferred corporation by the transferee foreign corporation. (i) If,
during the period the gain recognition agreement is in effect, the
transferee foreign corporation disposes of all or a portion of the
stock of the transferred corporation in a transaction in which gain or
loss would not be required to be recognized by the transferee foreign
corporation under U.S. income tax principles, such disposition will not
be treated as a disposition within the meaning of paragraph (e) of this
section if the transferee foreign corporation receives (or is deemed to
receive), in exchange for the property disposed of, stock in a
corporation, or an interest in a partnership, that acquired the
transferred property (or receives stock in a corporation that controls
the corporation acquiring the transferred property); and the U.S.
transferor complies with the requirements of paragraphs (g)(2)(ii)
through (iv) of this section.
(ii) The U.S. transferor must provide a notice of the transfer with
its next annual certification under paragraph (b)(5) of this section,
setting forth--
(A) A description of the transfer;
(B) The applicable nonrecognition provision; and
(C) The name, address, and taxpayer identification number (if any)
of the new transferee of the transferred property.
(iii) The U.S. transferor must provide with its next annual
certification a new agreement to recognize gain (in accordance with the
rules of paragraph (b) of this section) if, prior to the close of the
fifth full taxable year following the taxable year of the initial
transfer, either--
(A) The initial transferee foreign corporation disposes of the
interest (if any) which it received in exchange for the transferred
property (other than in a disposition which itself qualifies under the
rules of this paragraph (g)(2)); or
(B) The corporation or partnership that acquired the property
disposes of such property (other than in a disposition which itself
qualifies under the rules of this paragraph (g)(2)); or
(C) There is any other disposition that has the effect of an
indirect disposition of the transferred property.
(iv) If the U.S. transferor is required to enter into a new gain
recognition
[[Page 33566]]
agreement, as provided in paragraph (g)(2)(iii) of this section, the
U.S. transferor must provide with its next annual certification
(described in paragraph (b)(5) of this section) a statement that
arrangements have been made, in connection with the nonrecognition
transfer, ensuring that the U.S. transferor will be informed of any
subsequent disposition of property with respect to which recognition of
gain would be required under the agreement.
(3) Certain nonrecognition transfers of assets by the transferred
corporation. A disposition by the transferred corporation of all or a
portion of its assets in a transaction in which gain or loss would not
be required to be recognized by the transferred corporation under U.S.
income tax principles, will not be treated as a disposition within the
meaning of paragraph (e)(3) of this section if the transferred
corporation receives in exchange stock or securities in a corporation
or an interest in a partnership that acquired the assets of the
transferred corporation (or receives stock in a corporation that
controls the corporation acquiring the assets). If the transaction
would be treated as a disposition of substantially all of the
transferred corporation's assets, the preceding sentence shall only
apply if the U.S. transferor complies with reporting requirements
comparable to those of paragraphs (g)(2)(ii) through (iv) of this
section, providing for notice, an agreement to recognize gain in the
case of a direct or indirect disposition of the assets previously held
by the transferred corporation, and an assurance that necessary
information will be provided to appropriate parties.
(h) Transactions that terminate the gain recognition agreement--(1)
Taxable disposition of stock or securities of transferee foreign
corporation by U.S. transferor. (i) If the U.S. transferor disposes of
all of the stock of the transferee foreign corporation that it received
in the initial transfer in a transaction in which all realized gain (if
any) is recognized currently, then the gain recognition agreement shall
terminate and have no further effect. If the transferor disposes of a
portion of the stock of the transferee foreign corporation that it
received in the initial transfer in a taxable transaction, then in the
event that the gain recognition agreement is later triggered, the
transferor shall be required to recognize only a proportionate amount
of the gain subject to the gain recognition agreement that would
otherwise be required to be recognized on a subsequent disposition of
the transferred property under the rules of paragraph (b)(2) of this
section. The proportion required to be recognized shall be determined
by reference to the percentage of stock (by value) of the transferee
foreign corporation received in the initial transfer that is retained
by the United States transferor.
(ii) The rule of this paragraph (h) is illustrated by the following
example:
Example. A, a United States citizen, owns 100 percent of the
outstanding stock of foreign corporation X. In a transaction
described in section 351, A exchanges his stock in X (and other
assets) for 100 percent of the outstanding voting and nonvoting
stock of foreign corporation Y. A submits an agreement under the
rules of this section to recognize gain upon a later disposition. In
the following year, A disposes of 60 percent of the fair market
value of the stock of Y, thus terminating 60 percent of the gain
recognition agreement. One year thereafter, Y disposes of 50 percent
of the fair market value of the stock of X. A is required to include
in his income in the year of the later disposition 20 percent (40
percent interest in Y multiplied by a 50 percent disposition of X)
of the gain that A realized but did not recognize on his initial
transfer of X stock to Y.
(2) Certain dispositions by a domestic transferred corporation of
substantially all of its assets. If the transferred corporation is a
domestic corporation and the U.S. transferor and the transferred
corporation filed a consolidated Federal income tax return at the time
of the transfer, the gain recognition agreement shall terminate and
cease to have effect if, during the term of such agreement, the
transferred corporation disposes of substantially all of its assets in
a transaction in which all realized gain is recognized currently. If an
indirect stock transfer necessitated the filing of the gain recognition
agreement, such agreement shall terminate if, immediately prior to the
indirect transfer, the U.S. transferor and the acquired corporation
filed a consolidated return (or, in the case of a section 368(a)(1)(A)
and (a)(2)(E) reorganization described in Sec. 1.367(a)-3(d)(1)(ii),
the U.S. transferor and the acquiring corporation filed a consolidated
return) and the transferred corporation disposes of substantially all
of its assets (taking into account Sec. 1.367(a)-3(d)(2)(v)) in a
transaction in which all realized gain is recognized currently.
(3) Distribution by transferee foreign corporation of stock of
transferred corporation that qualifies under section 355 or section
337. If, during the term of the gain recognition agreement, the
transferee foreign corporation distributes to the U.S. transferor, in a
transaction that qualifies under section 355, or in a liquidating
distribution that qualifies under sections 332 and 337, the stock that
initially necessitated the filing of the gain recognition agreement
(and any additional stock received after the initial transfer), the
gain recognition agreement shall terminate and have no further effect,
provided that immediately after the section 355 distribution or section
332 liquidation, the U.S. transferor's basis in the transferred stock
is less than or equal to the basis that it had in the transferred stock
immediately prior to the initial transfer that necessitated the GRA.
(i) Effective date. The rules of this section shall apply to
transfers that occur on or after July 20, 1998. For matters covered in
this section for periods before July 20, 1998, the corresponding rules
of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 1998) and
Notice 87-85 ((1987-2 C.B. 395); see Sec. 601.601(d)(2)(ii) of this
chapter) apply. In addition, if a U.S. transferor entered into a gain
recognition agreement for transfers prior to July 20, 1998, then the
rules of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 1998)
shall continue to apply in lieu of this section in the event of any
direct or indirect nonrecognition transfer of the same property. See,
also, Sec. 1.367(a)-3(f).
Par. 6. Section 1.367(b)-1 is added to read as follows:
Sec. 1.367(b)-1 Other transfers.
(a) Scope. Section 367(b) and the regulations thereunder set forth
certain rules regarding the extent to which a foreign corporation shall
be considered to be a corporation in connection with an exchange to
which section 367(b) applies. An exchange to which section 367(b)
applies is any exchange described in section 332, 351, 354, 355, 356 or
361, with respect to which the status of a foreign corporation as a
corporation is relevant for determining the extent to which income
shall be recognized or for determining the effect of the transaction on
earnings and profits, basis of stock or securities, or basis of assets.
Notwithstanding the preceding sentence, a section 367(b) exchange does
not include a transfer to the extent that the foreign corporation fails
to be treated as a corporation by reason of section 367(a)(1). See
Sec. 1.367(a)-3(b)(2)(ii) for an illustration of the interaction of
sections 367 (a) and (b). This paragraph applies for transfers
occurring on or after July 20, 1998.
(b) [Reserved]. For further guidance, see Sec. 7.367(b)-1(b) of
this chapter.
(c) Notice required--(1) In general. If any person referred to in
section 6012
[[Page 33567]]
(relating to the requirement to make returns of income) realized gain
or other income (whether or not recognized) on account of any exchange
to which section 367(b) applies, such person must file a notice of such
exchange on or before the last date for filing a Federal income tax
return (taking into account any extensions of time therefor) for the
person's taxable year in which such gain or other income is realized.
This notice must be filed with the district director with whom the
person would be required to file a Federal income tax return for the
taxable year in which the exchange occurs. Notwithstanding anything in
this paragraph (c)(1) to the contrary, no notice under this paragraph
(c)(1) is required to the extent a transaction is described in both
section 367(a) and (b), and the exchanging person is not a United
States shareholder of the corporation whose stock is exchanged. This
paragraph applies to transfers occurring on or after July 20, 1998.
(c)(2) through (f) [Reserved]. For further guidance, see
Sec. 7.367(b)-1(c)(2) through (f) of this chapter.
Par. 6a. Section 1.367(b)-4 is added to read as follows:
Sec. 1.367(b)-4 Certain exchanges of stock described in section 354,
351, or sections 354 and 351.
(a) In general. This section applies to an exchange of stock in a
foreign corporation by a United States shareholder if the exchange is
described in section 351, or is described in section 354 and is made
pursuant to a reorganization described in section 368(a)(1)(B)
(including an exchange that is also described in section 351), without
regard to whether the exchange may also be described in section 361.
(b) Recognition of income. If an exchange is described in paragraph
(b)(1), (2) or (3) of this section, the exchanging shareholder shall
include in income as a deemed dividend the section 1248 amount
attributable to the stock that it exchanges. See, also, Sec. 1.367(a)-
3(b)(2). However, in the case of a recapitalization described in
paragraph (b)(3) of this section that occurred prior to July 20, 1998,
the exchanging shareholder shall include the section 1248 amount on its
tax return for the taxable year that includes the exchange described in
paragraph (b)(2)(iii) of this section (and not in the taxable year of
the recapitalization), except that no inclusion is required if both the
recapitalization and the exchange described in paragraph (b)(2)(iii) of
this section occurred prior to July 20, 1998.
(1) Loss of United States shareholder or controlled foreign
corporation status. An exchange is described in this paragraph (b)(1)
if--
(i) An exchanging shareholder receives stock of a foreign
corporation that is not a controlled foreign corporation;
(ii) An exchanging shareholder receives stock of a controlled
foreign corporation as to which the exchanging United States
shareholder is not a United States shareholder; or
(iii) The corporation whose stock is exchanged is not a controlled
foreign corporation immediately after the transfer.
(2) Receipt by domestic corporation of preferred or other stock in
certain instances. An exchange is described in this paragraph (b)(2)
if--
(i) Immediately before the exchange, the foreign acquired
corporation and the foreign acquiring corporations are not members of
the same affiliated group (within the meaning of section 1504(a), but
without regard to the exceptions set forth in section 1504(b), and
substituting the words ``more than 50'' in place of the words ``at
least 80'' in sections 1504(a)(2)(A) and (B));
(ii) Immediately after the exchange, a domestic corporation meets
the ownership threshold specified by section 902(a) or (b) such that it
may qualify for a deemed paid foreign tax credit if it receives from
the foreign acquiring corporation a distribution (directly or through
tiers) of its earnings and profits; and
(iii) The exchanging shareholder receives preferred stock (other
than preferred stock that is fully participating with respect to
dividends, redemptions and corporate growth) in consideration for
common stock or preferred stock that is fully participating with
respect to dividends, redemptions and corporate growth, or, in the
discretion of the District Director (and without regard to whether the
stock exchanged is common stock or preferred stock), receives stock
that entitles it to participate (through dividends, redemption payments
or otherwise) disproportionately in the earnings generated by
particular assets of the foreign acquired corporation or foreign
acquiring corporation. See, e.g., paragraph (b)(4) Example 1 through
Example 3 of this section.
(3) Certain exchanges involving recapitalizations. An exchange
pursuant to a recapitalization under section 368(a)(1)(E) shall be
deemed to be an exchange described in this paragraph (b)(3) if the
following conditions are satisfied--
(i) During the 24-month period immediately preceding or following
the date of the recapitalization, the corporation that undergoes the
recapitalization (or a predecessor of, or successor to, such
corporation) also engages in a transaction that would be described in
paragraph (b)(2) of this section but for paragraph (b)(2)(iii) of this
section, either as the foreign acquired corporation or the foreign
acquiring corporation; and
(ii) The exchange in the recapitalization is described in paragraph
(b)(2)(iii) of this section.
(4) Examples. The rules of paragraph (b)(2) of this section are
illustrated by the following examples:
Example 1--(i) Facts. FC1 is a foreign corporation. DC is a
domestic corporation that is unrelated to FC1. DC owns all of the
outstanding stock of FC2, a foreign corporation, and FC2 has no
outstanding preferred stock. The value of FC2 is $100 and DC has a
basis of $50 in the stock of FC2. The section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a
reorganization described in section 368(a)(1)(B), FC1 acquires all
of the stock of FC2 and, in exchange, DC receives FC1 voting
preferred stock that constitutes 10 percent of the outstanding
voting stock of FC1 for purposes of section 902(a). Immediately
after the exchange, FC1 and FC2 are controlled foreign corporations
and DC is a United States shareholder of FC1, so paragraph (b)(1) of
this section does not require inclusion in income of the section
1248 amount.
(ii) Result. Pursuant to Sec. 1.367(a)-3(b)(2), the transfer is
subject to both section 367(a) and section 367(b). Under
Sec. 1.367(a)-3(b)(1), DC will not be subject to tax under section
367(a)(1) if it enters into a gain recognition agreement in
accordance with Sec. 1.367(a)-8. The amount of the gain recognition
agreement is $50 less any inclusion under section 367(b). Even
though paragraph (b)(1) of this section does not apply to require
inclusion in income by DC of the section 1248 amount, DC must
nevertheless include the $20 section 1248 amount in income as a
deemed dividend from FC2 under paragraph (b)(2) of this section.
Thus, if DC enters into a gain recognition agreement, the amount is
$30 (the $50 gain realized less the $20 recognized under section
367(b)). (If DC fails to enter into a gain recognition agreement, it
must include in income under section 367(a)(1) the $50 of gain
realized; $20 of which is treated as a dividend. Section 367(b) does
not apply in such case.)
Example 2--(i) Facts. The facts are the same as in Example 1,
except that DC owns all of the outstanding stock of FC1 immediately
before the transaction.
(ii) Result. Both section 367(a) and section 367(b) apply to the
transfer. Paragraph (b)(2) of this section does not apply to require
inclusion of the section 1248 amount. Under paragraph (b)(2)(i) of
this section, the transaction is outside the scope of paragraph
(b)(2) of this section, because FC1 and FC2 are, immediately before
the transaction, members of the same affiliated group (within the
meaning of such paragraph). Thus, if DC enters into a gain
recognition agreement in
[[Page 33568]]
accordance with Sec. 1.367(a)-8, the amount of such agreement is
$50. As in Example 1, if DC fails to enter into a gain recognition
agreement, it must include in income $50, $20 of which will be
treated as a dividend.
Example 3--(i) Facts. FC1 is a foreign corporation. DC is a
domestic corporation that is unrelated to FC1. DC owns all of the
stock of FC2, a foreign corporation. The section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a
reorganization described in section 368(a)(1)(B), FC1 acquires all
of the stock of FC2 in exchange for FC1 voting stock that
constitutes 10 percent of the outstanding voting stock of FC1 for
purposes of section 902(a). The FC1 voting stock received by DC in
the exchange carries voting rights in FC1, but by agreement of the
parties the shares entitle the holder to dividends, amounts to be
paid on redemption, and amounts to be paid on liquidation, which are
to be determined by reference to the earnings or value of FC2 as of
the date of such event, and which are affected by the earnings or
value of FC1 only if FC1 becomes insolvent or has insufficient
capital surplus to pay dividends.
(ii) Result. Under Sec. 1.367(a)-3(b)(1), DC will not be subject
to tax under section 367(a)(1) if it enters into a gain recognition
agreement with respect to the transfer of FC2 stock to FC1. Under
Sec. 1.367(a)-3(b)(2), the exchange will be subject to the
provisions of section 367(b) and the regulations thereunder to the
extent that it is not subject to tax under section 367(a)(1).
Furthermore, even if DC would not otherwise be required to recognize
income under this section, the District Director may nevertheless
require that DC include the $20 section 1248 amount in income as a
deemed dividend from FC2 under paragraph (b)(2) of this section.
(5) Special rules for applying section 1248 to subsequent
exchanges. (i) If income is not required to be recognized under
paragraph (b) of this section in a transaction described in paragraph
(b)(1) of this section involving a foreign acquiring corporation, then,
for purposes of applying section 1248 or 367(b) to subsequent
exchanges, the earnings and profits attributable to an exchanging
shareholder's stock received in the transaction shall be determined by
reference to the exchanging shareholder's pro rata interest in the
earnings and profits of the foreign acquiring corporation and foreign
acquired corporation that accrue after the transaction, as well as its
pro rata interest in the earnings and profits of the foreign acquired
corporation that accrued prior to the transaction. See also section
1248(c)(2)(D)(ii). The earnings and profits attributable to an
exchanging shareholder's stock received in the transaction shall not
include any earnings and profits of the foreign acquiring corporation
that accrued prior to the transaction.
(ii) The following example illustrates this paragraph (b)(5):
Example. (i) Facts. DC1, a domestic corporation, owns all of the
stock of FC1, a foreign corporation. DC1 has owned all of the stock
of FC1 since FC1's formation. DC2, a domestic corporation, owns all
of the stock of FC2, a foreign corporation. DC2 has owned all of the
stock of FC2 since FC2's formation. DC1 and DC2 are unrelated. In a
reorganization described in section 368(a)(1)(B), DC1 transfers all
of the stock of FC1 to FC2 in exchange for 40 percent of FC2. DC1
enters into a five-year gain recognition agreement under the
provisions of Secs. 1.367(a)-3(b) and 1.367(a)-8 with respect to the
transfer of FC1 stock to FC2.
(ii) Result. DC1's transfer of FC1 to FC2 is an exchange
described in paragraph (b) of this section. Because the transfer is
not described in paragraph (b)(1), 2) or (3) of this section, DC1 is
not required to include in income the section 1248 amount
attributable to the exchanged FC1 stock and the special rule of this
paragraph (b)(5) applies. Thus, for purposes of applying section
1248 or section 367(b) to subsequent exchanges, the earnings and
profits attributable to DC1's interest in FC2 will be determined by
reference to 40 percent of the post-reorganization earnings and
profits of FC1 and FC2, and by reference to 100 percent of the pre-
reorganization earnings and profits of FC1. The earnings and profits
attributable to DC1's interest in FC2 do not include any earnings
and profits accrued by FC2 prior to the transaction. Those earnings
and profits are attributed to DC2 under section 1248.
(6) Effective date. This section applies to transfers occurring on
or after July 20, 1998.
(c) and (d) [Reserved]. For further guidance, see Sec. 7.367(b)-
4(c) and (d) of this chapter.
Par. 7. In Sec. 1.367(b)-7, paragraphs (a) and (b) are added to
read as follows:
Sec. 1.367(b)-7 Exchange of stock described in section 354.
(a) Scope. (1) This section applies to an exchange of stock in a
foreign corporation (other than a foreign investment company as defined
in section 1246(b)) occurring on or after July 20, 1998.
(i) The exchange is described in section 354 or 356 and is made
pursuant to a reorganization described in section 368(a)(1)(B) through
(F); and
(ii) The exchanging person is either a United States shareholder or
a foreign corporation having a United States shareholder who is also a
United States shareholder of the corporation whose stock is exchanged.
(2) However, this section shall not apply if a United States
shareholder exchanges stock of a foreign corporation in an exchange
described in section 368(a)(1)(B). For further guidance, see
Sec. 1.367(b)-4.
(b) [Reserved]. For further guidance, see Sec. 7.367(b)-7(b) of
this chapter.
* * * * *
Par. 8. Section 1.367(d)-1T is amended by adding a sentence at the
end of paragraph (a) to read as follows:
Sec. 1.367(d)-1T Transfers of intangible property to foreign
corporations (temporary).
(a) * * * For purposes of determining whether a U.S. person has
made a transfer of intangible property that is subject to the rules of
section 367(d), the rules of Sec. 1.367(a)-1T(c) shall apply.
* * * * *
Par. 9. Section 1.6038B-1 is added to read as follows:
Sec. 1.6038B-1 Reporting of certain transactions.
(a) Purpose and scope. This section sets forth information
reporting requirements under section 6038B concerning certain transfers
of property to foreign corporations. Paragraph (b) of this section
provides general rules explaining when and how to carry out the
reporting required under section 6038B with respect to the transfers to
foreign corporations. Paragraph (c) of this section and Sec. 1.6038B-
1T(d) specify the information that is required to be reported with
respect to certain transfers of property that are described in section
6038B(a)(1)(A) and 367(d), respectively. Section 1.6038B-1T(e)
specifies the limited reporting that is required with respect to
transfers of property described in section 367(e)(1). Paragraph (f) of
this section sets forth the consequences of a failure to comply with
the requirements of section 6038B and this section. For effective
dates, see paragraph (g) of this section. For rules regarding transfers
to foreign partnerships, see section 6038B(a)(1)(B) and any regulations
thereunder.
(b) Time and manner of reporting--(1) In general--(i) Reporting
procedure. Except for stock or securities qualifying under the special
reporting rule of paragraph (b)(2) of this section, or cash, which is
currently not required to be reported, any U.S. person that makes a
transfer described in section 6038B(a)(1)(A), 367(d) or (e)(1) is
required to report pursuant to section 6038B and the rules of this
section and must attach the required information to Form 926 (Return by
Transferor of Property to a Foreign Corporation, Foreign Estate or
Trust, or Foreign Partnership). For purposes of determining a U.S.
transferor that is subject to section 6038B, the rules of
Sec. 1.367(a)-1T(c) and Sec. 1.367(a)-3(d) shall apply with respect to
a transfer described in section 367(a), and the rules of Sec. 1.367(a)-
1T(c) shall apply with respect to a transfer described in section
367(d). Notwithstanding any
[[Page 33569]]
statement to the contrary on Form 926, the form and attachments must be
attached to, and filed by the due date (including extensions) of, the
transferor's income tax return for the taxable year that includes the
date of the transfer (as defined in Sec. 1.6038B-1T(b)(4)). Any
attachment to Form 926 required under the rules of this section is
filed subject to the transferor's declaration under penalties of
perjury on Form 926 that the information submitted is true, correct,
and complete to the best of the transferor's knowledge and belief.
(ii) Reporting by corporate transferor. If the transferor is a
corporation, Form 926 must be signed by an authorized officer of the
corporation. If, however, the transferor is a member of an affiliated
group under section 1504(a)(1) that files a consolidated Federal income
tax return, but the transferor is not the common parent corporation, an
authorized officer of the common parent corporation must sign Form 926.
(iii) Transfers of jointly-owned property. If two or more persons
transfer jointly-owned property to a foreign corporation in a transfer
with respect to which a notice is required under this section, then
each person must report with respect to the particular interest
transferred, specifying the nature and extent of the interest. However,
a husband and wife who jointly file a single Federal income tax return
may file a single Form 926 with their tax return.
(2) Exceptions and special rules for transfers of stock or
securities under section 367(a)--(i) Transfers on or after July 20,
1998. A U.S. person that transfers stock or securities on or after July
20, 1998 in a transaction described in section 6038(a)(1)(A) will be
considered to have satisfied the reporting requirement under section
6038B and paragraph (b)(1) of this section if either--
(A) The U.S. transferor owned less than 5 percent of both the total
voting power and the total value of the transferee foreign corporation
immediately after the transfer (taking into account the attribution
rules of section 318 as modified by section 958(b)), and either:
(1) The U.S. transferor qualified for nonrecognition treatment with
respect to the transfer (i.e., the transfer was not taxable under
Secs. 1.367(a)-3(b) or (c)); or
(2) The U.S. transferor is a tax-exempt entity and the income was
not unrelated business income; or
(3) The transfer was taxable to the U.S. transferor under
Sec. 1.367(a)-3(c), and such person properly reported the income from
the transfer on its timely-filed (including extensions) Federal income
tax return for the taxable year that includes the date of the transfer;
or
(B) The U.S. transferor owned 5 percent or more of the total voting
power or the total value of the transferee foreign corporation
immediately after the transfer (taking into account the attribution
rules of section 318 as modified by section 958(b)) and either:
(1) The transferor (or one or more successors) properly entered
into a gain recognition agreement under Sec. 1.367(a)-8; or
(2) The transferor is a tax-exempt entity and the income was not
unrelated business income; or
(3) The transferor properly reported the income from the transfer
on its timely-filed (including extensions) Federal income tax return
for the taxable year that includes the date of the transfer.
(ii) Transfers before July 20, 1998. With respect to transfers
occurring after December 16, 1987, and prior to July 20, 1998, a U.S.
transferor that transferred U.S. or foreign stock or securities in a
transfer described in section 367(a) is not subject to section 6038B if
such person is described in paragraph (b)(2)(i)(A) of this section.
(3) Special rule for transfers of cash. [Reserved].
(4) [Reserved]. For further guidance, see Sec. 1.6038B-1T(b)(4).
(c) Information required with respect to transfers described in
section 6038B(a)(1)(A). A U.S. person that transfers property to a
foreign corporation in an exchange described in section 6038B(a)(1)(A)
(including unappreciated property other than cash) must provide the
following information, in paragraphs labelled to correspond with the
number or letter set forth in this paragraph (c) and Sec. 1.6038B-
1T(c)(1) through (5). If a particular item is not applicable to the
subject transfer, the taxpayer must list its heading and state that it
is not applicable. For special rules applicable to transfers of stock
or securities, see paragraph (b)(2)(ii) of this section.
(1) through (5) [Reserved]. For further guidance, see Sec. 1.6038B-
1T(c)(1) through (5).
(6) Application of section 367(a)(5). If the asset is transferred
in an exchange described in section 361(a) or (b), a statement that the
conditions set forth in the second sentence of section 367(a)(5) and
any regulations under that section have been satisfied, and an
explanation of any basis or other adjustments made pursuant to section
367(a)(5) and any regulations thereunder.
(d) and (e) [Reserved]. For further guidance, see Sec. 1.6038B-
1T(d) and (e).
(f) Failure to comply with reporting requirements--(1) Consequences
of failure. If a U.S. person is required to file a notice (or otherwise
comply) under paragraph (b) of this section and fails to comply with
the applicable requirements of section 6038B and this section, then
with respect to the particular property as to which there was a failure
to comply--
(i) That property shall not be considered to have been transferred
for use in the active conduct of a trade or business outside of the
United States for purposes of section 367(a) and the regulations
thereunder;
(ii) The U.S. person shall pay a penalty under section 6038B(b)(1)
equal to 10 percent of the fair market value of the transferred
property at the time of the exchange, but in no event shall the penalty
exceed $100,000 unless the failure with respect to such exchange was
due to intentional disregard (described under paragraph (g)(4) of this
section); and
(iii) The period of limitations on assessment of tax upon the
transfer of that property does not expire before the date which is 3
years after the date on which the Secretary is furnished the
information required to be reported under this section. See section
6501(c)(8) and any regulations thereunder.
(2) Failure to comply. A failure to comply with the requirements of
section 6038B is--
(i) The failure to report at the proper time and in the proper
manner any material information required to be reported under the rules
of this section; or
(ii) The provision of false or inaccurate information in purported
compliance with the requirements of this section. Thus, a transferor
that timely files Form 926 with the attachments required under the
rules of this section shall, nevertheless, have failed to comply if,
for example, the transferor reports therein that property will be used
in the active conduct of a trade or business outside of the United
States, but in fact the property continues to be used in a trade or
business within the United States.
(3) Reasonable cause exception. The provisions of paragraph (f)(1)
of this section shall not apply if the transferor shows that a failure
to comply was due to reasonable cause and not willful neglect. The
transferor may do so by providing a written statement to the district
director having jurisdiction of the taxpayer's return for the year of
the transfer, setting forth the reasons for the failure to comply.
Whether a failure to comply was due to reasonable cause
[[Page 33570]]
shall be determined by the district director under all the facts and
circumstances.
(4) Definition of intentional disregard. If the transferor fails to
qualify for the exception under paragraph (f)(3) of this section and if
the taxpayer knew of the rule or regulation that was disregarded, the
failure will be considered an intentional disregard of section 6038B,
and the monetary penalty under paragraph (f)(1)(ii) of this section
will not be limited to $100,000. See Sec. 1.6662-3(b)(2).
(g) Effective date. This section applies to transfers occurring on
or after July 20, 1998. See Sec. 1.6038B-1T for transfers occurring
prior to July 20, 1998.
Par. 10. Section 1.6038B-1T is amended as follows:
1. The section heading is revised.
2. Paragraphs (a) through (b)(2) are revised.
3. Paragraph (b)(3) is redesignated as paragraph (b)(4).
4. New paragraph (b)(3) is added and reserved.
5. Paragraph (c) introductory text is revised and paragraph (c)(6)
is added.
6. Paragraph (f) is revised.
7. Paragraph (g) is added.
The revisions and additions read as follows:
Sec. 1.6038B-1T Reporting of certain transactions (temporary).
(a) through (b)(2) [Reserved]. For further guidance, see
Sec. 1.6038B-1(a) through (b)(2).
(b)(3) [Reserved].
* * * * *
(c) Introductory text [Reserved]. For further guidance, see
Sec. 1.6038B-1(c).
* * * * *
(6) [Reserved]. For further guidance, see Sec. 1.6038B-1(c)(6).
* * * * *
(f) [Reserved]. For further guidance, see Sec. 1.6038B-1(f).
(g) Effective date. This section applies to transfers occurring
after December 31, 1984, except paragraph (e)(1) applies to transfers
occurring on or after September 13, 1996. See Sec. 1.6038B-1T(a)
through (b)(2), (c) introductory text, and (f) (26 CFR part 1, revised
April 1, 1998) for transfers occurring prior to July 20, 1998. See
Sec. 1.6038B-1 for transfers occurring on or after July 20, 1998.
PART 7--TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT
OF 1976
Par. 11. The authority citation for part 7 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 12. Section 7.367(b)-1 is amended as follows:
1. Paragraphs (a) and (c)(1) are revised.
2. The authority citation at the end of the section is removed.
The revisions read as follows:
Sec. 7.367(b)-1 Other transfers.
(a) [Reserved] For guidance relating to transfers occurring on or
after July 20, 1998, see Sec. 1.367(b)-1(a) of this chapter.
* * * * *
(c)(1) [Reserved] For guidance relating to transfers occurring on
or after July 20, 1998, see Sec. 1.367(b)-1(c) of this chapter.
* * * * *
Par. 13. Section 7.367(b)-4 is amended as follows:
1. Paragraphs (a) and (b) are revised.
2. The authority citation at the end of the section is removed.
The revision reads as follows:
Sec. 7.367(b)-4 Certain changes described in more than one Code
provision.
(a) and (b) [Reserved]. For guidance relating to transfers
occurring on or after July 20, 1998, see Sec. 1.367(b)-4(a) and (b) of
this chapter.
* * * * *
Par 14. Section 7.367(b)-7 is amended as follows:
1. Paragraph (a) is revised.
2. The authority citation at the end of the section is removed.
The revision reads as follows:
Sec. 7.367(b)-7 Exchange of stock described in section 354.
* * * * *
(a) [Reserved] For guidance relating to transfers occurring on or
after July 20, 1998, see Sec. 1.367(b)-7(a) of this chapter.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par 15. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par 16. In Sec. 602.101, paragraph (c) is amended by:
1. Removing the following entry from the table:
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.367(a)-3T................................................ 1545-0026
* * * * *
------------------------------------------------------------------------
2. Adding the following entry to the table in numerical order to
read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.367(a)-8................................................. 1545-1271
* * * * *
------------------------------------------------------------------------
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: May 13, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-15454 Filed 6-18-98; 8:45 am]
BILLING CODE 4830-01-U