[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