[Federal Register Volume 64, Number 152 (Monday, August 9, 1999)]
[Rules and Regulations]
[Pages 43072-43083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20092]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8834]
RIN 1545-AU22 and 1545-AX30


Treatment of Distributions to Foreign Persons Under Sections 
367(e)(1) and 367(e)(2)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document amends the Income Tax Regulations by removing 
temporary regulations on the treatment of distributions to foreign 
persons under section 367(e) of the Internal Revenue Code and adding 
final regulations under section 367(e). These final regulations are 
necessary to implement section 367(e)(1) and (2), as added to the 
Internal Revenue Code by the Tax Reform Act of 1986, which affects U.S. 
corporations.

DATES: These regulations are effective August 9, 1999.

FOR FURTHER INFORMATION CONTACT: Guy A. Bracuti, 202-622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information in this final rule has been reviewed 
and, pending receipt and evaluation of public comments, approved by the 
Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned 
control number 1545-1487.
    The collections of information in this regulation are in 
Secs. 1.367(e)-1(d)(2), 1.367(e)-1(d)(3), 1.367(e)-2(b)(2), and 
1.6038B-1(e). This information is required to obtain certain exemptions 
from taxation and to satisfy other information reporting requirements 
imposed by the Internal Revenue Code (Code). This information will be 
used by the Internal Revenue Service to verify whether a taxpayer is 
entitled to an exemption from income tax. The likely respondents are 
large corporations.
    Comments on the collections of information should be sent 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, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. 
Comments on the collection of information should be received by October 
8, 1999.
    Comments are specifically requested concerning: Whether the 
collections of information are necessary for the proper performance of 
the functions of the IRS, including whether the information will have 
practical utility; The accuracy of the estimated burden associated with 
the collection of information (see below); How the quality, utility, 
and clarity of the information to be collected may be enhanced; How the 
burden of complying with the collections of information may be 
minimized, including through the application of automated collection 
techniques or other forms of information technology; and Estimates of 
capital or start-up costs and costs of operation, maintenance, and 
purchase of services to provide information. The estimated total annual 
reporting and/or recordkeeping burden is 2,471 hours. The estimated 
average annual burden hours per respondent and/or recordkeeper is 11 
hours. The estimated number of respondents and/or recordkeepers is 217. 
The estimated annual frequency of responses is once.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books 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

    Section 367(e)(1) amended the Code by providing regulatory 
authority to tax gain on a domestic distributing corporation's section 
355 distribution of stock or securities to foreign persons. Section 
367(e)(2) amended the Code by requiring a liquidating corporation to 
recognize gain (or loss) attributable to property distributed in a 
section 332 liquidation to a foreign parent corporation, except to the 
extent regulations provide otherwise.
    On January 16, 1990, temporary regulations under section 367(e)(1) 
and (2) were published in the Federal Register (55 FR 1406 (TD 8280, 
1990-1 C.B. 80)). A cross-referenced Notice of Proposed Rulemaking was 
published on that same date under RIN 1545-AL35 (55 FR 1472 (1990-1 
C.B. 678)). The temporary regulations were proposed and issued to 
implement section 367(e) of the Internal Revenue Code of 1986 (Code), 
as amended by sections 631(d)(1) and 1810(g) of the Tax Reform Act of 
1986 (100 Stat. 2085, 2272, Public

[[Page 43073]]

Law 99-514 (1986-3 C.B.)). On January 25, 1993, final regulations under 
section 367(e)(1) were published in the Federal Register (58 FR 5927 
(TD 8472, 1993-1 C.B. 51)). RIN 1545-AL35 was thereby closed. The 
preamble of TD 8472 stated that final regulations under section 
367(e)(2) would be promulgated in a separate Treasury decision and that 
taxpayers could apply the provisions contained in Sec. 1.367(e)-2T to 
distributions occurring on or after January 16, 1993, and prior to the 
date that is 30 days after final regulations under section 367(e)(2) 
are published in the Federal Register. The final regulations under 
section 367(e)(1) were removed and replaced with temporary regulations 
that were published in the Federal Register on August 14, 1996 (61 FR 
42165 (TD 8682, 1996-2 C.B. 12)). A cross-referenced Notice of Proposed 
Rulemaking was published on August 14, 1996 under RIN 1545-AU22 (61 FR 
42217). A new RIN (RIN 1545-AX30) has been issued under which the 
section 367(e)(2) proposed regulations will be finalized.
    No significant comments were received with respect to the 1996 
Notice of Proposed Rulemaking with respect to section 367(e)(1). 
Comments were received with respect to the 1990 Notice of Proposed 
Rulemaking with respect to sections 367(e)(1) and 367(e)(2). No 
hearings were held on either Notice of Proposed Rulemaking.

Explanation of Revisions and Summary of Comments

I. Overview

    These final regulations address the tax consequences of a 
distribution by a domestic corporation of its subsidiary's stock to 
foreign shareholders in a transaction described in section 355 
(outbound section 355 distribution), a liquidation of a domestic 
corporation into a foreign parent corporation in a transaction 
described in section 332 (outbound liquidation), and a liquidation of a 
foreign corporation into a foreign parent corporation in a transaction 
described in section 332 (foreign-to-foreign liquidation).
    Section 367(e) grants the Secretary authority to provide the extent 
to which a distributing corporation in an outbound section 355 
distribution or liquidation or foreign-to-foreign liquidation may 
obtain the benefit of nonrecognition treatment when it makes the 
distribution to a foreign shareholder. The purpose of section 367 is to 
prevent the inappropriate avoidance of U.S. tax that can arise from the 
application of nonrecognition provisions in the cross-border context.

A. Outbound Section 355 Distributions

    Section 367(e)(1) provides that a distribution under section 355 
(or so much of section 356 as relates to section 355) by a U.S. 
corporation to its foreign shareholders is accorded nonrecognition 
treatment except to the extent provided in regulations. Section 
1.367(e)-1 provides the circumstances under which such a distribution 
is taxable.
    The legislative history to section 367(e)(1) provides that 
``transfers of stock by domestic corporations to foreign persons 
pursuant to Code section 355 * * * will give rise to the recognition of 
gain under Code section 367(e), to the extent provided in regulations. 
The committee expects that the Secretary will carefully consider the 
extent to which it is appropriate, in view of the purpose of section 
367(e), to require the recognition of gain upon the transfer of the 
stock of a domestic corporation to foreign persons under section 355.'' 
H.R. Rep. 426, 99th Cong., 1st Sess. 931 (1985); S. Rep. 313, 99th 
Cong., 2nd Sess. 950 (1986).
    The temporary regulations under section 367(e)(1) provide a general 
rule that a domestic distributing corporation is taxed on a 
distribution of controlled stock to foreign shareholders, regardless of 
whether the controlled corporation is a domestic corporation or a 
foreign corporation. Several exceptions are provided in the current 
temporary regulations in the case of an outbound distribution of stock 
of a domestic controlled corporation.
    Consistent with the legislative history above and the temporary 
regulations, the final regulations continue to provide that an outbound 
section 355 distribution of a foreign controlled corporation is taxable 
to the distributing corporation. See also sections 367(b) and 1248(f) 
of the Code. In the case of an outbound section 355 distribution of a 
domestic controlled corporation, however, the final regulations amend 
the temporary regulations by providing that the distributing 
corporation shall obtain the benefit of nonrecognition treatment. In 
weighing the administrative burdens to taxpayers and the Government in 
connection with rules requiring gain recognition agreements and similar 
arrangements, the IRS and Treasury believe that adequate protections 
are in place to protect the policies of section 367(e)(1). 
Specifically, significant protections are provided in sections 355(d) 
and (e) and the device and continuity of interest requirements of 
section 355.

B. Outbound and Foreign-to-Foreign Liquidations

    Generally, a liquidating corporation does not recognize gain or 
loss on a distribution in complete liquidation into a parent 
corporation that meets the ownership requirements of section 332(b). 
See Section 337(a) of the Code. Section 367(e)(2) provides that a 
section 332 liquidation into a foreign parent is taxed to the 
liquidating corporation, except to the extent provided in regulations. 
Section 1.367(e)-2 provides the circumstances under which gain or loss 
on assets distributed in a section 332 liquidation into a foreign 
parent is not currently recognized.
    Section 332 was enacted in 1935 to encourage the simplification of 
corporate structures and was retained in 1986 as an exception to the 
repeal of the General Utilities doctrine. Consistent with the policies 
of section 332, the final regulations generally tax the distribution of 
assets in an outbound liquidation but provide exceptions for assets 
over which the United States retains adequate taxing jurisdiction. The 
final regulations retain the exceptions in the proposed regulations for 
a distribution of assets used in the conduct of a U.S. trade or 
business and for a distribution of a U.S. real property interest 
(USRPI). In addition, the final regulations provide a new exception for 
a distribution of stock of a domestic subsidiary that is 80 percent 
owned by vote and value directly by the liquidating corporation.
    In a foreign-to-foreign liquidation, the final regulations 
generally adopt the rules provided in the proposed regulations. Thus, 
the regulations generally provide that the liquidation is not taxable, 
except to the extent that assets used in a U.S. trade or business are 
distributed and not used in a U.S. trade or business over the 
subsequent ten-year period. The ten-year period (which is also used in 
the U.S. trade or business exception for outbound liquidations) 
supplements the principles contained in section 864(c)(7). The 
regulations also tax a distribution of assets that had formerly been 
used in the conduct of a U.S. trade or business by the liquidating 
corporation.

II. Details of Provisions

A. Outbound Section 355 Distributions

    The final regulations amend the rule in the temporary regulations 
and do not require gain recognition on an outbound section 355 
distribution of the stock or securities of a domestic corporation. The 
final regulations continue to require gain recognition on an outbound 
section

[[Page 43074]]

355 distribution of the stock or securities of a foreign corporation.
    Where gain recognition is required, the final regulations amend the 
rules for determining the residency status of distributees of stock or 
securities in an outbound section 355 distribution. A distributee is 
presumed to be a person who is not a qualified U.S. person (i.e., a 
person that is not a U.S. citizen, resident, or corporation), except to 
the extent that the distributing corporation certifies that the 
distributee is a qualified U.S. person. A publicly traded distributing 
corporation may use a reasonable analysis with respect to distributees 
who are not five percent shareholders of publicly traded stock to 
demonstrate the number of distributees that are qualified U.S. persons. 
A reasonable analysis includes a determination of the actual number of 
distributees that are qualified U.S. persons or a reasonable 
statistical analysis of shareholder records and other relevant 
information. The final regulations also broaden the look-through rule 
in the temporary regulations for determining the identity of the 
distributees of stock or securities of a controlled corporation 
received by a partnership, trust or estate to include stock or 
securities received by a disregarded entity.
    Section 1.367(e)-1 is applicable to distributions occurring in 
taxable years ending after August 8, 1999.

B. Outbound and Foreign-to-Foreign Liquidations

1. General Rule
    The final regulations under section 367(e)(2) contain two sets of 
rules, depending upon whether the liquidating corporation is domestic 
or foreign. The final regulations retain the rules of the proposed 
regulations with respect to foreign-to-foreign liquidations with only 
minor modification.
    In the case of an outbound liquidation, a domestic liquidating 
corporation is generally required to recognize gain (or loss) on the 
distributed assets. In determining the amount of gain or loss 
recognized under the general rule, the proposed regulations contain an 
anti-netting rule and an anti-stuffing rule that limit the domestic 
liquidating corporation's ability to recognize losses.
    Several commentators criticized the anti-netting rule contained in 
the proposed regulations as overly broad because the rule prohibits the 
netting of ordinary losses against capital gains. The final regulations 
take this into account and allow the netting of ordinary or capital 
losses against ordinary or capital gains to the same extent allowed 
under general rules of the Code, including section 1211.
    Commentators also questioned the propriety of the anti-stuffing 
rule in the proposed regulations and argued that the anti-stuffing 
rules contained in section 336(d) and the loss limitation rules of 
section 382 should sufficiently address loss trafficking concerns. The 
anti-stuffing rule contained in the proposed regulations disallows the 
recognition of losses attributable to property acquired in capital 
contributions, section 332 liquidations, and exchanges under sections 
351 and 361 within five years of the distribution.
    The IRS and Treasury do not believe that sections 336(d) and 382 
alone adequately address the Government's loss trafficking concerns. 
For example, neither section 336(d) nor 382 would limit a liquidating 
corporation's ability to recognize a loss that is acquired in a 
reorganization among affiliates even though the loss could not have 
been recognized if those corporations were liquidated individually. The 
anti-stuffing rule in the proposed regulations also does not adequately 
protect against the use of losses to offset gains where the loss 
corporation acquires the gain property.
    After considering the issue, the Treasury and the IRS have amended 
the anti-stuffing rule in the final regulations to limit the 
recognition of built-in gains and losses attributable to property 
received by the domestic liquidating corporation in a reorganization or 
liquidation occurring within two years prior to the distribution. 
Sections 336(d) and 382 also limit loss recognition in applicable 
circumstances.
    Comments also requested clarification on the treatment of a 
distribution of an interest in a publicly traded partnership (PTP). The 
final regulations provide that an interest in a PTP that is treated as 
a corporation under section 7704(a) shall be treated in the same manner 
as stock.
    The final regulations retain the look-through rule for a domestic 
liquidating corporation's distribution of a partnership interest to its 
foreign parent. The look-through rule provides that, for purposes of 
the regulation, a domestic liquidating corporation is treated as 
distributing its proportionate share of the partnership property. The 
Treasury and the IRS hereby request comments on the proper method of 
calculating such gain or loss and reserve a section in the final 
regulations with respect to this issue. Comments should consider the 
application of similar rules in other cross-border contexts, such as 
Treas. Reg. Sec. 1.367(a)-1T(c)(3).
2. Exceptions to General Rule
    The proposed regulations contain exceptions to the general gain 
recognition rule for the distribution of property used in a U.S. trade 
or business and the distribution of a USRPI. The final regulations 
retain the two exceptions with some modifications and add an additional 
exception for stock of a domestic subsidiary corporation.
    Under the proposed regulations, a domestic liquidating corporation 
does not recognize gain (or loss) on the distribution of property used 
in a U.S. trade or business, if: (1) The foreign parent is not a 
controlled foreign corporation; (2) the foreign parent continues to use 
the property in a U.S. trade or business for a ten-year period 
following the distribution of such property; and (3) the domestic 
liquidating corporation and the foreign parent attach a statement to 
their U.S. income tax returns for the year of distribution. If within 
the ten-year period following a distribution, the property ceases to be 
used in the foreign parent's U.S. trade or business other than by a 
disposition, then the foreign parent is required to file an amended 
U.S. income tax return on behalf of the domestic liquidating 
corporation and recognize gain thereon. If the foreign parent disposes 
of such property, then the foreign parent recognizes gain (or loss) on 
its U.S. income tax return for the year of disposition in lieu of the 
domestic liquidating corporation recognizing gain on an amended return 
for the year of distribution. Also, under the proposed regulations, 
gain recognition is not triggered on involuntary conversions of such 
property under section 1033, like-kind exchanges of such property under 
section 1031, and the abandonment of obsolete or worthless property.
    The final regulations modify the U.S. trade or business property 
exception in response to comments in several respects. First, the final 
regulations make the exception available to a domestic liquidating 
corporation that liquidates into a controlled foreign corporation. 
Second, the final regulations no longer require that the foreign parent 
file an amended return on behalf of the liquidating corporation when 
property ceases to be used in the conduct of a U.S. trade or business 
(whether by disposition or otherwise), provided that the foreign parent 
properly recognizes gain (or loss in the case of a disposition) as if 
the property had been sold for fair market value at the time the 
property ceases to be used in the conduct of a U.S. trade or business. 
Third, the final regulations

[[Page 43075]]

expand the types of dispositions that will not trigger gain 
recognition. U.S. trade or business property may be transferred to 
another person without gain recognition, if the transfer is a 
disposition normally entitled to nonrecognition under the Code and the 
transferor and transferee satisfy various procedural requirements.
    The final regulations retain the exception for a distribution of a 
USRPI contained in the proposed regulation with only minor 
modification.
    The final regulations add a new exception that allows for 
nonrecognition of gain on a distribution of stock of a domestic 
subsidiary that is 80 percent owned (by vote and value) directly by the 
domestic liquidating corporation, provided that the liquidation does 
not have as a principal purpose the avoidance of U.S. tax on a 
subsequent disposition of the domestic subsidiary.
3. General Anti-abuse Rule
    The final regulations contain a new anti-abuse rule that allows the 
Commissioner to require the liquidating corporation to recognize gain 
(or treat the liquidating corporation as if it had recognized loss) on 
the distribution of property pursuant to the liquidation if a principal 
purpose of the liquidation is the avoidance of U.S. tax. The rule would 
apply, for example, if a principal purpose of a liquidation is the 
distribution of a domestic liquidating corporation's earnings and 
profits without a U.S. withholding tax. In certain circumstances, the 
Service is also concerned about a liquidation of a domestic corporation 
into a U.S. branch of a foreign corporation in a manner that 
facilitates the avoidance of U.S. tax, including the inappropriate use 
of attributes such as net operating losses. Liquidations used to 
facilitate the avoidance of tax may be challenged under existing law. 
The Treasury and the IRS hereby solicit comments, however, as to other 
measures that should be taken to adequately address such transactions, 
including the more specific identification of the conditions under 
which liquidated property, particularly securities and other financial 
instruments, may be considered to be used in a U.S. trade or business.
4. Effective Date
    Section 1.367(e)-2 is applicable to distributions occurring 30 days 
after August 9, 1999 or, if a taxpayer elects, to distributions in 
taxable years ending after August 8, 1999. In addition, taxpayers may 
rely on the principles contained in the temporary regulations issued 
under section 367(e)(2) on January 16, 1990 for distributions occurring 
prior to 30 days after August 9, 1999.

C. Section 6038B

    The regulations under section 6038B are also revised to require 
reporting for transactions described in section 367(e)(1) and (2) in 
accordance with the final regulations under section 367(e)(1) and (2).

Special Analyses

    It has been determined that these regulations are not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It is hereby certified that the 
collections 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 the number of section 
367(e) distributions that require reporting under these regulations is 
estimated to be only 400 per year. Moreover, because these regulations 
will primarily affect large multinational corporations, it is estimated 
that out of the 400 transactions very few, if any, will involve small 
entities. Thus, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on the impact of the proposed regulations on small business.
    Drafting Information: The principal author of these regulations is 
Guy A. Bracuti of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for 1.367(e)-1T and by adding entries in numerical 
order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * * Section 1.367(e)-1 also issued 
under 26 U.S.C. 367(e)(1). Section 1.367(e)-2 also issued under 26 
U.S.C. 367(e)(2). * * *


Sec. 1.367(e)-0T through Sec. 1.367(e)-2T  [Removed]

    Par. 2. Sections 1.367(e)-0T, 1.367(e)-1T, and 1.367(e)-2T are 
removed.
    Par. 3. Sections 1.367(e)-0, 1.367(e)-1, and 1.367(e)-2 are added 
to read as follows:


Sec. 1.367(e)-0  Outline of Secs. 1.367(e)-1 and 1.367(e)-2.

    This section lists captioned paragraphs contained in 
Secs. 1.367(e)-1 and 1.367(e)-2 as follows:


Sec. 1.367(e)-1  Distributions described in section 367(e)(1).

(a) Purpose and scope.
(b) Gain recognition.
(1) General rule.
(2) Stock owned through partnerships, disregarded entities, trusts, 
and estates.
(3) Gain computation.
(4) Treatment of distributee.
(c) Nonrecognition of gain.
(d) Determining whether distributees are qualified U.S. persons.
(1) General rule--presumption of foreign status.
(2) Non-publicly traded distributing corporations.
(3) Publicly traded distributing corporations.
(i) Five percent shareholders.
(ii) Other distributees.
(4) Qualified exchange or other market.
(e) Reporting under section 6038B.
(f) Effective date.


Sec. 1.367(e)-2  Distributions described in section 367(e)(2).

(a) Purpose and scope.
(1) In general.
(2) Nonapplicability of section 367(a).
(b) Distribution by a domestic corporation.
(1) General rule.
(i) Recognition of gain and loss.
(ii) Operating rules.
(A) General rule.
(B) Overall loss limitation.
(1) Overall loss limitation rule.
(2) Example.
(C) Special rules for built-in gains and losses attributable to 
property received in liquidations and reorganizations.
(iii) Distribution of partnership interest.
(A) General rule.
(B) Gain or loss calculation. [Reserved]
(C) Basis adjustments.
(D) Publicly traded partnerships.
(2) Exceptions.
(i) Distribution of property used in a U.S. trade or business.
(A) Conditions for nonrecognition.
(B) Qualifying property.
(C) Required statement.
(1) Declaration and certification.
(2) Property description.

[[Page 43076]]

(3) Distributee identification.
(4) Treaty benefits waiver.
(5) Statute of limitations extension.
(D) Failure to file statement.
(E) Operating rules.
(1) Gain or loss recognition by the foreign distributee corporation.
(i) Taxable dispositions.
(ii) Other triggering events.
(2) Gain recognition by the domestic liquidating corporation.
(i) General rule.
(ii) Amended return.
(iii) Interest.
(iv) Joint and several liability.
(3) Schedule for property no longer used in a U.S. trade or 
business.
(4) Nontriggering events.
(i) Conversions, certain exchanges, and abandonment.
(ii) Amendment to Master Property Description
(5) Nontriggering transfers to qualified transferees.
(ii) Distribution of certain U.S. real property interests.
(iii) Distribution of stock of domestic subsidiary corporations.
(A) Conditions for nonrecognition.
(B) Exceptions when the liquidating corporation is a U.S. real 
property holding corporation.
(C) Anti-abuse rule.
(D) Required statement.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Reporting under section 6038B.
(iii) Other rules.
(c) Distribution by a foreign corporation.
(1) General rule--gain and loss not recognized.
(2) Exceptions.
(i) Property used in a U.S. trade or business.
(A) General rule.
(B) Ten-year active U.S. business exception.
(C) Required statement.
(D) Operating rules.
(ii) Property formerly used in a U.S. trade or business.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Other rules.
(d) Anti-abuse rule.
(e) Effective date.


Sec. 1.367(e)-1  Distributions described in section 367(e)(1).

    (a) Purpose and scope. This section provides rules for recognition 
(and nonrecognition) of gain by a domestic corporation (distributing 
corporation) on a distribution of stock or securities of a corporation 
(controlled corporation) to foreign persons that is described in 
section 355. Paragraph (b) of this section contains the general rule 
that gain is recognized on the distribution to the extent stock or 
securities of controlled are distributed to foreign persons. Paragraph 
(c) of this section provides an exception to the gain recognition rule 
for distributions of stock or securities of a domestic corporation. 
Paragraph (d) of this section contains rules for determining whether 
distributees of stock or securities in a section 355 distribution are 
qualified U.S. persons. Paragraph (e) of this section cross-references 
section 6038B for certain reporting obligations. Finally, paragraph (f) 
of this section specifies the effective date of this section.
    (b) Gain recognition--(1) General rule. If a domestic corporation 
makes a distribution of stock or securities of a corporation that 
qualifies for nonrecognition under section 355 to a person who is not a 
qualified U.S. person, then, except as provided in paragraph (c) of 
this section, the distributing corporation shall recognize gain (but 
not loss) on the distribution under section 367(e)(1). A distributing 
corporation shall not recognize gain under this section with respect to 
a section 355 distribution to a qualified U.S. person. For purposes of 
this section, a qualified U.S. person is--
    (A) A citizen or resident of the United States; or
    (B) A domestic corporation.
    (2) Stock owned through partnerships, disregarded entities, trusts, 
and estates. For purposes of this section, distributing corporation 
stock or securities owned by or for a partnership (whether foreign or 
domestic) are owned proportionately by its partners. A partner's 
proportionate share of the stock or securities of the distributing 
corporation shall be equal to the partner's distributive share of the 
gain that would have been recognized had the partnership sold the stock 
or securities (at a taxable gain) immediately before the distribution. 
The partner's distributive share of gain shall be determined under the 
rules and principles of sections 701 through 761 and the regulations 
thereunder. For purposes of this section, stock or securities owned by 
or for an entity that is disregarded as an entity (disregarded entity) 
under Sec. 1.7701-3(b)(1)(ii) or (b)(2)(i)(C) are owned directly by the 
owner of such disregarded entity. For purposes of this section, stock 
or securities owned by or for a trust or estate (whether foreign or 
domestic) are owned proportionately by the persons who would be treated 
as owning such stock or securities under section 318(a)(2)(A) and (B). 
In applying section 318(a)(2)(B)(i), if a trust includes interests that 
are not actuarially ascertainable, all such interests shall be 
considered to be owned by foreign persons. In a case where an interest 
holder in a partnership, a disregarded entity, trust, or estate that 
(directly or indirectly) owns stock of the distributing corporation is 
itself a partnership, disregarded entity, trust, or estate, the rules 
of this paragraph (b)(2) apply to such interest holder.
    (3) Gain computation. Gain recognized under paragraph (b)(1) of 
this section shall be equal to the excess of the fair market value of 
the stock or securities distributed to persons who are not qualified 
U.S. persons (determined as of the time of the distribution) over the 
distributing corporation's adjusted basis in the stock or securities 
distributed to such distributees. For purposes of the preceding 
sentence, the distributing corporation's adjusted basis in each unit of 
each class of stock or securities distributed to a distributee shall be 
equal to the distributing corporation's total adjusted basis in all of 
the units of the respective class of stock or securities owned 
immediately before the distribution, divided by the total number of 
units of the class of stock or securities owned immediately before the 
distribution.
    (4) Treatment of distributee. If the distribution otherwise 
qualifies for nonrecognition under section 355, each distributee shall 
be considered to have received stock or securities in a distribution 
qualifying for nonrecognition under section 355, even though the 
distributing corporation may recognize gain on the distribution under 
this section. Thus, the distributee shall not be considered to have 
received a distribution described in section 301 or a distribution in 
an exchange described in section 302(b) upon the receipt of the stock 
or securities of the controlled corporation, and the domestic 
distributing corporation shall have no withholding responsibilities 
under section 1441. Except where section 897(e)(1) and the regulations 
thereunder cause gain to be recognized by the distributee, the basis of 
the distributed domestic or foreign corporation stock in the hands of 
the foreign distributee shall be the basis of the distributed stock 
determined under section 358 without any increase for any gain 
recognized by the domestic corporation on the distribution.
    (c) Nonrecognition of gain. A domestic distributing corporation 
shall not recognize gain under paragraph (b)(1) of this section on the 
distribution of stock or securities of a domestic corporation.
    (d) Determining whether distributees are qualified U.S. persons--
(1) General rule--presumption of foreign status. Except as provided in 
paragraphs (d)(2) and (3) of this section, all distributions of stock 
or securities in a distribution described in paragraph (b)(1) of this 
section are presumed to be to persons who are not qualified U.S. 
persons, as

[[Page 43077]]

defined in paragraph (b)(1) of this section.
    (2) Non-publicly traded distributing corporations. If the class of 
stock or securities of the distributing corporation (in respect to 
which stock or securities of the controlled corporation are 
distributed) is not regularly traded on a qualified exchange or other 
market (as defined in paragraph (d)(4) of this section), then the 
distributing corporation may only rebut the presumption contained in 
paragraph (d)(1) of this section by identifying the qualified U.S. 
persons to which controlled corporation stock or securities were 
distributed and by certifying the amount of stock or securities that 
were distributed to the qualified U.S. persons.
    (3) Publicly traded distributing corporations. If the class of 
stock or securities of the distributing corporation (in respect to 
which stock or securities of the controlled corporation are 
distributed) is regularly traded on a qualified exchange or other 
market (as defined in paragraph (d)(4) of this section), then the 
distributing corporation may only rebut the presumption contained in 
paragraph (d)(1) of this section as described in this paragraph (d)(3).
    (i) Five percent shareholders. A publicly traded distributing 
corporation may only rebut the presumption contained in paragraph 
(d)(1) of this section with respect to distributees that are five 
percent shareholders of the class of stock or securities of the 
distributing corporation (in respect to which stock or securities of 
the controlled corporation are distributed) by identifying the 
qualified U.S. persons to which controlled corporation stock or 
securities were distributed and by certifying the amount of stock or 
securities that were distributed to the qualified U.S. persons. A five 
percent shareholder is a distributee who is required under U.S. 
securities laws to file with the Securities and Exchange Commission 
(SEC) a Schedule 13D or 13G under 17 CFR 240.13d-1 or 17 CFR 240.13d-2, 
and provide a copy of same to the distributing corporation under 17 CFR 
240.13d-7.
    (ii) Other distributees. A distributing corporation that has made a 
distribution described in paragraph (d)(3) of this section may rebut 
the presumption contained in paragraph (d)(1) of this section with 
respect to distributees that are not five percent shareholders (as 
defined in this paragraph (d)(3)) by relying on and providing a 
reasonable analysis of shareholder records and other relevant 
information that demonstrates a number of distributees that are 
qualified U.S. persons. Taxpayers may rely on such analysis, unless it 
is subsequently determined that there are actually fewer distributees 
who are qualified U.S. persons than were demonstrated in the analysis.
    (4) Qualified exchange or other market. For purposes of paragraph 
(d) of this section, the term qualified exchange or other market means, 
for any taxable year--
    (i) A national securities exchange which is registered with the SEC 
or the national market system established pursuant to section 11A of 
the Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (ii) A foreign securities exchange that is regulated or supervised 
by a governmental authority of the country in which the market is 
located and which has the following characteristics--
    (A) The exchange has trading volume, listing, financial disclosure, 
and other requirements designed to prevent fraudulent and manipulative 
acts and practices, to remove impediments to and perfect the mechanism 
of a free and open market, and to protect investors; and the laws of 
the country in which the exchange is located and the rules of the 
exchange ensure that such requirements are actually enforced; and
    (B) The rules of the exchange ensure active trading of listed 
stocks.
    (e) Reporting under section 6038B. See the regulations under 
section 6038B for reporting requirements for distributions under this 
section.
    (f) Effective date. This section shall be applicable to 
distributions occurring in taxable years ending after August 8, 1999.


Sec. 1.367(e)-2  Distributions described in section 367(e)(2).

    (a) Purpose and scope--(1) In general. This section provides rules 
requiring gain and loss recognition by a corporation on its 
distribution of property to a foreign corporation in a complete 
liquidation described in section 332. Paragraph (b)(1) of this section 
contains the general rule that gain and loss are recognized when a 
domestic corporation makes a distribution of property in complete 
liquidation under section 332 to a foreign corporation that meets the 
stock ownership requirements of section 332(b) with respect to stock in 
the domestic corporation. Paragraph (b)(2) of this section provides the 
only exceptions to the gain and loss recognition rule of paragraph 
(b)(1) of this section. Paragraph (b)(3) of this section refers to 
other consequences of distributions described in paragraphs (b)(1) and 
(2) of this section. Paragraph (c)(1) of this section contains the 
general rule that gain and loss are not recognized when a foreign 
corporation makes a distribution of property in complete liquidation 
under section 332 to a foreign corporation that meets the stock 
ownership requirements of section 332(b) with respect to stock in the 
foreign liquidating corporation. Paragraph (c)(2) of this section 
provides the only exceptions to the nonrecognition rule of paragraph 
(c)(1) of this section. Paragraph (c)(3) of this section refers to 
other consequences of distributions described in paragraphs (c)(1) and 
(2) of this section. Paragraph (d) of this section contains an anti-
abuse rule. Finally, paragraph (e) of this section specifies the 
effective date for the rules of this section. The rules of this section 
are issued pursuant to the authority conferred by section 367(e)(2).
    (2) Nonapplicability of section 367(a). Section 367(a) shall not 
apply to a complete liquidation described in section 332 by a domestic 
liquidating corporation into a foreign corporation that meets the stock 
ownership requirements of section 332(b).
    (b) Distribution by a domestic corporation--(1) General rule--(i) 
Recognition of gain and loss. If a domestic corporation (domestic 
liquidating) makes a distribution of property in complete liquidation 
under section 332 to a foreign corporation (foreign distributee) that 
meets the stock ownership requirements of section 332(b) with respect 
to stock in the domestic liquidating corporation, then--
    (A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall 
not apply; and
    (B) The domestic liquidating corporation shall recognize gain or 
loss on the distribution of property to the foreign distributee, except 
as provided in paragraph (b)(2) of this section.
    (ii) Operating rules--(A) General rule. Except as provided in 
paragraphs (b)(1)(ii) (B) and (C) of this section, the rules contained 
in section 336 will apply to the gain and loss recognized pursuant to 
this section.
    (B) Overall loss limitation--(1) Overall loss limitation rule. Loss 
in excess of gain from the distribution shall not be recognized. If 
realized losses exceed recognized losses, the losses shall be 
recognized on a pro rata basis with respect to the realized loss 
attributable to each distributed loss asset in the category of assets 
(i.e., capital or ordinary) to which the realized but unrecognized loss 
relates. For additional limitations on the

[[Page 43078]]

recognition of losses, see, e.g., section 1211.
    (2) Example. The following example illustrates the overall loss 
limitation rule, the pro rata loss allocation method, and the general 
capital loss limitation rule in section 1211(a):

    Example. F, a foreign corporation, owns all stock of US1, a 
domestic corporation. US1 owns the following capital assets: Asset 
A, which has a fair market value of $100 and an adjusted basis of 
$40; Asset B, which has a fair market value of $60 and an adjusted 
basis of $80; and, Asset C, which has a fair market value of $40 and 
an adjusted basis of $100. US1 also owns the following business 
assets that will generate ordinary income (or loss) upon 
disposition: Asset D, which has a fair market value of $100 and an 
adjusted basis of $40; Asset E, which has a fair market value of $60 
and an adjusted basis of $100; and, Asset F, which has a fair market 
value of $40 and an adjusted basis of $80. US1 liquidates into F and 
distributes all assets to F in liquidation. None of the assets 
qualify for nonrecognition under paragraph (b)(2) of this section. 
US1's total realized capital loss is $80, but it may only recognize 
$60 of that loss. See section 1211(a). US1's total realized ordinary 
loss is $80, but it may only recognize $60 of that loss. See 
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $45 
(60 X .75) of the recognized capital loss to Asset B and will 
allocate the remaining $15 (60 X .25) of recognized capital loss to 
Asset C. See paragraph (b)(1)(ii)(B)(1) of this section. US1 will 
allocate $30 (60 X .50) of the recognized ordinary loss to Asset E 
and will allocate the remaining $30 (60 X .50) to Asset F. See 
paragraph (b)(1)(ii)(B)(1) of this section.

    (C) Special rules for built-in gains and losses attributable to 
property received in liquidations and reorganizations. Built-in losses 
attributable to property received in a transaction described in 
sections 332 or 361 (during the two-year period ending on the date of 
the distribution in liquidation covered by this section) shall not 
offset gain from property not received in the same transaction. Built-
in gains attributable to property received in a transaction described 
in sections 332 or 361 (during the two-year period ending on the date 
of the distribution in liquidation covered by this section) shall not 
offset loss from property not received in the same transaction. Built-
in gain or loss is that amount of gain or loss on property that existed 
at the time the domestic liquidating corporation acquired such 
property. See sections 336(d) and 382 for additional limitations on the 
recognition of losses.
    (iii) Distribution of partnership interest--(A) General rule. If a 
domestic corporation distributes a partnership interest (whether 
foreign or domestic) in a distribution described in paragraph (b)(1)(i) 
of this section, then for purposes of applying this section the 
domestic liquidating corporation shall be treated as having distributed 
a proportionate share of partnership property. Accordingly, the 
applicability of the recognition rules of paragraphs (b)(1) (i) and 
(ii) of this section, and of any exception to recognition provided in 
this section shall be determined with reference to the partnership 
property, rather than to the partnership interest itself. Where the 
partnership property includes an interest in a lower-tier partnership, 
the applicability of any exception with respect to the interest in the 
lower-tier partnership shall be determined with reference to the lower-
tier partnership property. In the case of multiple tiers of 
partnerships, the applicability of an exception shall be determined 
with reference to the property of each partnership, applying the rule 
contained in the preceding sentence. A domestic liquidating 
corporation's proportionate share of partnership property shall be 
determined under the rules and principles of sections 701 through 761 
and the regulations thereunder.
    (B) Gain or loss calculation. [Reserved]
    (C) Basis adjustments. The foreign distributee corporation's basis 
in the distributed partnership interest shall be equal to the domestic 
liquidating corporation's basis in such partnership interest 
immediately prior to the distribution, increased by the amount of gain 
and reduced by the amount of loss recognized by the domestic 
liquidating corporation on the distribution of the partnership 
interest. Solely for purposes of sections 743 and 754, the foreign 
distributee corporation shall be treated as having purchased the 
partnership interest for an amount equal to the foreign corporation's 
adjusted basis therein.
    (D) Publicly traded partnerships. The distribution by a domestic 
liquidating corporation of an interest in a publicly traded partnership 
that is treated as a corporation for U.S. income tax purposes under 
section 7704(a) shall not be subject to the rules of paragraphs 
(b)(1)(iii) (A) and (B) of this section. Instead, the distribution of 
such an interest shall be treated in the same manner as a distribution 
of stock. Thus, a transfer of an interest in a publicly traded 
partnership that is treated as a U.S. corporation for U.S. income tax 
purposes shall be treated in the same manner as stock in a domestic 
corporation, and a transfer of an interest in a publicly traded 
partnership that is treated as a foreign corporation for U.S. income 
tax purposes shall be treated in the same manner as stock in a foreign 
corporation.
    (2) Exceptions--(i) Distribution of property used in a U.S. trade 
or business--(A) Conditions for nonrecognition. A domestic liquidating 
corporation shall not recognize gain or loss under paragraph (b)(1) of 
this section on its distribution of property (including inventory) used 
by the domestic liquidating corporation in the conduct of a trade or 
business within United States, if--
    (1) The foreign distributee corporation, immediately thereafter and 
for the ten-year period beginning on the date of the distribution of 
such property, uses the property in the conduct of a trade or business 
within the United States;
    (2) The domestic liquidating corporation attaches the statement 
described in paragraph (b)(2)(i)(C) of this section to its U.S. income 
tax returns for the taxable years that include the distributions in 
liquidation; and
    (3) The foreign distributee corporation attaches a copy of the 
property description contained in paragraph (b)(2)(i)(C)(2) of this 
section to its U.S. income tax return for the tax year that includes 
the date of distribution.
    (B) Qualifying property. Property is used by the foreign 
distributee corporation in the conduct of a trade or business in the 
United States within the meaning of this paragraph (b)(2)(i) only if 
all income from the use of the property and all income or gain from the 
sale or exchange of the property would be subject to taxation under 
section 882(a) as effectively connected income. Also, stock held by a 
dealer as inventory or for sale in the ordinary course of its trade or 
business shall be treated as inventory and not as stock in the hands of 
both the domestic liquidating corporation and the distributee foreign 
corporation. Notwithstanding the foregoing, the exception provided in 
this paragraph (b)(2)(i) shall not apply to intangibles described in 
section 936(h)(3)(B).
    (C) Required statement. The statement required by paragraph 
(b)(2)(i)(A) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(b)(2)(i)'' and shall be prepared by the domestic 
liquidating corporation and signed under penalties of perjury by an 
authorized officer of the domestic liquidating corporation and by an 
authorized officer of the foreign distributee corporation. The 
statement shall contain the following items:
    (1) Declaration and certification. A declaration that the 
distribution to the foreign distributee corporation is one to which the 
rules of this paragraph

[[Page 43079]]

(b)(2)(i) apply and a certification that the domestic liquidating 
corporation and the foreign distributee corporation agree to all of the 
terms and conditions set forth in this paragraph (b)(2)(i).
    (2) Property description. A description of all property distributed 
by the domestic liquidating corporation (irrespective of whether the 
property qualifies for nonrecognition). Such description shall be 
entitled ``Master Property Description'' and shall identify the 
property that continues to be used by the foreign distributee 
corporation in the conduct of a trade or business within the United 
States, including the location, adjusted basis, estimated fair market 
value, a summary of the method (including appraisals if any) used for 
determining such value, and the date of distribution of such items of 
property. The description shall also identify the property excepted 
from gain recognition under paragraphs (b)(2)(ii) and (iii) of this 
section.
    (3) Distributee identification. An identification of the foreign 
distributee corporation, including its name and address, taxpayer 
identification number, residence, and place of incorporation.
    (4) Treaty benefits waiver. With respect to property entitled to 
nonrecognition pursuant to this paragraph (b)(2)(i), a declaration by 
the foreign distributee corporation that it irrevocably waives any 
right under any treaty (whether or not currently in force at the time 
of the liquidation) to sell or exchange any item of such property 
without U.S. income taxation or at a reduced rate of taxation, or to 
derive income from the use of any item of such property without U.S. 
income taxation or at a reduced rate of taxation.
    (5) Statute of limitations extension. An agreement by the domestic 
liquidating corporation and the foreign distributee corporation to 
extend the statute of limitations on assessments and collections (under 
section 6501) with respect to the domestic liquidating corporation on 
the distribution of each item of property until three years after the 
date on which all such items of property have ceased to be used in a 
trade or business within the United States, but in no event shall the 
extension be for a period longer than 13 years from the filing of the 
original U.S. income tax return for the taxable year of the last 
distribution of any such item of property. The agreement to extend the 
statute of limitation shall be executed on a Form 8838, ``Consent to 
Extend the Time to Assess Tax Under Section 367--Gain Recognition 
Agreement.''
    (D) Failure to file statement. If a domestic liquidating 
corporation that would otherwise qualify for nonrecognition on the 
distribution of property under this paragraph (b)(2)(i) fails to file 
the statement described in paragraph (b)(2)(i)(C) of this section or 
files a statement that does not comply with the requirements of 
paragraph (b)(2)(i)(C) of this section, the Commissioner may treat the 
domestic liquidating corporation as if it had claimed nonrecognition 
under this paragraph (b)(2)(i) and met all the requirements of 
paragraph (b)(2)(i)(C) of this section, if such treatment is necessary 
to prevent the domestic liquidating corporation or the foreign 
distributee corporation from otherwise deriving a tax benefit by such 
failure.
    (E) Operating rules. By the domestic liquidating corporation's 
claiming nonrecognition under this paragraph (b)(2)(i) and filing a 
statement described in paragraph (b)(2)(i)(C) of this section, the 
domestic liquidating corporation and the foreign distributee 
corporation agree to be subject to the rules of this paragraph 
(b)(2)(i)(E).
    (1) Gain or loss recognition by the foreign distributee 
corporation--(i) Taxable dispositions. If, within the ten-year period 
from the date of a distribution of qualifying property, the foreign 
distributee corporation disposes of any qualifying property in a 
transaction subject to tax under section 882(a), then the foreign 
distributee corporation shall recognize such gain (or loss) and 
properly report it on a timely filed U.S. income tax return. If the 
foreign distributee corporation recognizes gain (or loss) under this 
paragraph (b)(2)(i)(E)(1)(i) and properly reports such gain (or loss) 
on its U.S. income tax return, then the domestic liquidating 
corporation shall not recognize gain attributable to such property 
under paragraph (b)(2)(i)(E)(2) of this section.
    (ii) Other triggering events. If, within the ten-year period from 
the date of distribution, any qualifying property ceases to be used by 
the foreign distributee corporation in the conduct of a trade or 
business in the United States (other than by reason of a taxable 
disposition described in paragraph (b)(2)(i)(E)(1)(i) of this section, 
a nontriggering event described in paragraph (b)(2)(i)(E)(4) of this 
section, or a nontriggering transfer described in paragraph 
(b)(2)(i)(E)(5) of this section), then the foreign distributee 
corporation shall recognize gain (but not loss) attributable to such 
property and properly report it on a timely filed U.S. income tax 
return. If the foreign distributee corporation properly reports gain 
under this paragraph (or if such qualified property is not gain 
property on the date that it ceases to be used in the foreign 
distributee corporation's U.S. trade or business), then the domestic 
liquidating corporation shall not recognize gain attributable to such 
property under paragraph (b)(2)(i)(E)(2) of this section. The gain 
recognized under this paragraph (b)(2)(i)(E)(1)(ii) shall be an amount 
equal to the fair market value of the property on the date it ceases to 
be used in the foreign distributee corporation's U.S. trade or business 
less the foreign distributee corporation's adjusted basis in such 
property.
    (2) Gain recognition by the domestic liquidating corporation--(i) 
General rule. If, within the ten-year period from the date of 
distribution, any qualifying property described in paragraph 
(b)(2)(i)(B) of this section ceases to be used by the foreign 
distributee corporation (or a qualifying transferee described in 
paragraph (b)(2)(i)(E)(5) of this section) in the conduct of a trade or 
business in the United States for any reason (including but not limited 
to the sale or exchange of such property or the removal of the property 
from conduct of the trade or business), then, except to the extent gain 
(or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this 
section, the domestic liquidating corporation shall recognize the gain 
(but not loss) realized but not recognized upon the initial 
distribution of such item of property. The domestic liquidating 
corporation shall recognize gain pursuant to this paragraph 
(b)(2)(i)(E)(2)(i) on the amended U.S. income tax return described in 
paragraph (b)(2)(i)(E)(2)(ii) of this section.
    (ii) Amended return. If gain recognition is required pursuant to 
paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign distributee 
corporation shall file an amended U.S. income tax return on behalf of 
the domestic liquidating corporation for the year of the distribution 
of such item of property. On the amended return, the domestic 
liquidating corporation may use any losses (or credits) existing in the 
year of the distribution to offset the gain recognized pursuant to 
paragraph (b)(2)(i)(E)(2)(i) of this section (or the tax thereon), 
provided that the losses (or credits) were otherwise available in the 
year distribution and were not used in another year. The amended return 
shall be filed no later than the due date (including extensions) for 
the return of the foreign distributee corporation for the taxable year 
in which the property ceases to be used by the foreign distributee 
corporation in the conduct of a trade or business in the United States.
    (iii) Interest. If the domestic liquidating corporation owes 
additional

[[Page 43080]]

tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section for the 
year of liquidation, then interest must be paid on that amount at the 
rates determined under section 6621. The interest due will be 
calculated from the due date of the domestic liquidating corporation's 
U.S. income tax return for the year of the distribution to the date on 
which the additional tax for that year is paid.
    (iv) Joint and several liability. The foreign distributee 
corporation shall be jointly and severally liable for any tax owed by 
the domestic liquidating corporation as a result of the application of 
this section, and shall succeed to the domestic liquidating 
corporation's agreement to extend the statute of limitations on 
assessments and collections under section 6501.
    (3) Schedule for property no longer used in a U.S. trade or 
business. If qualifying property (other than inventory) ceases to be 
used by the foreign distributee corporation in the conduct of a U.S. 
trade or business in the ten-year period beginning on the date of 
distribution of such property from the domestic liquidating corporation 
to the foreign distributee corporation, then the foreign distributee 
corporation shall list on a separate schedule (attached to its U.S. 
income tax return for the year of cessation) all such qualifying 
property. For purposes of this paragraph (b)(2)(i)(E)(3), property 
ceases to be used in a U.S. trade or business whenever such property is 
sold, exchanged, or otherwise removed from the U.S. trade or business, 
irrespective of whether the domestic liquidating corporation filed an 
amended return under paragraph (b)(2)(i)(E)(2) of this section, and 
irrespective of whether the property ceases to be used in the foreign 
distributee corporation's U.S. trade or business by virtue of a 
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this 
section or a nontriggering transfer described in paragraph 
(b)(2)(i)(E)(5) of this section.
    (4) Nontriggering events--(i) Conversions, certain exchanges, and 
abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall not 
be triggered if qualifying property described in paragraph (b)(2)(i)(B) 
of this section is involuntarily converted into, or exchanged for, 
similar qualifying property used in the conduct of a trade or business 
in the United States, to the extent such conversion or exchange 
qualifies for nonrecognition under section 1033 or 1031. Also, the 
abandonment or disposal of worthless or obsolete property shall not 
trigger gain (or loss) under this paragraph (b)(2)(i)(E).
    (ii) Amendment to Master Property Description. If the foreign 
distributee corporation acquires replacement property by virtue of a 
conversion or exchange of the qualifying property under this paragraph 
(b)(2)(i)(E)(4), then the foreign distributee corporation shall attach 
to its U.S. income tax return for the year of the acquisition such 
replacement property a schedule entitled ``Amendment to Master Property 
Description Required by Sec. 1.367(e)-2(b)(2)(i)'' that lists the 
replacement property and the property being replaced.
    (5) Nontriggering transfers to qualified transferees. Gain (or 
loss) under this paragraph (b)(2)(i)(E) will not be triggered if 
qualifying property described in paragraph (b)(2)(i)(B) of this section 
is transferred to another person (qualified transferee) in a 
transaction qualifying for nonrecognition under the Internal Revenue 
Code (other than transactions described in paragraphs 
(b)(2)(i)(E)(4)(i) and (c)(1) of this section), if--
    (i) The qualified transferee (and all other subsequent qualified 
transferees), immediately thereafter and for the ten-year period 
beginning on the date of the initial distribution of such qualifying 
property from the domestic liquidating corporation to the foreign 
distributee corporation, uses the property in the conduct of a trade or 
business in the United States;
    (ii) The foreign distributee corporation (or its successor in 
interest) prepares and attaches to its U.S. income tax return for the 
year of transfer a statement entitled ``Required Statement under 
Sec. 1.367(e)-2(b)(2)(i)(E)(5) for Property Transferred to a Qualified 
Transferee'' that is signed under penalties of perjury by an authorized 
officer of the foreign distributee corporation and by a person 
similarly authorized by the qualified transferee;
    (iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of 
this section shall contain a description of all qualifying property 
transferred by the foreign distributee corporation (or qualified 
transferee) to the qualified transferee (or subsequent qualified 
transferee);
    (iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of 
this section shall also contain an identification of the qualified 
transferee (or subsequent qualified transferee), including its name and 
address, taxpayer identification number, residence, and place of 
incorporation (if applicable);
    (v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of 
this section shall also contain a declaration by the qualifying 
transferee (or subsequent qualifying transferee) that it irrevocably 
waives any right under any treaty (whether or not currently in force at 
the time of the liquidation) to sell or exchange any item of such 
property without U.S. income taxation or at a reduced rate of taxation, 
or to derive income from the use of any item of such qualifying 
property without U.S. income taxation or at a reduced rate of taxation; 
and
    (vi) A declaration that the transfer to the qualifying transferee 
(or subsequent qualifying transferee) is one to which the rules of this 
paragraph (b)(2)(i)(E)(5) apply and a certification that the foreign 
distributee corporation (or its successor in interest) and the 
qualifying transferee (or subsequent qualifying transferee) agree to 
all of the terms and conditions set forth in paragraph (b)(2)(i)(E)(1) 
of this section, replacing ``foreign distributee corporation'' with 
``qualifying transferee'' and replacing references to ``section 
882(a)'' with ``section 871(b)'' (as the case may be).
    (ii) Distribution of certain U.S. real property interests. A 
domestic liquidating corporation shall not recognize gain (or loss) 
under paragraph (b)(1) of this section on the distribution of a U.S. 
real property interest (other than stock in a former U.S. real property 
holding corporation that is treated as a U.S. real property interest 
for five years under section 897(c)(1)(A)(ii)). If property distributed 
by the domestic liquidating corporation is a U.S. real property 
interest that qualifies for nonrecognition under this paragraph 
(b)(2)(ii) in addition to nonrecognition provided by paragraph 
(b)(2)(i) of this section, then the domestic liquidating corporation 
shall secure nonrecognition pursuant to this paragraph (b)(2)(ii) and 
not pursuant to the provisions of paragraph (b)(2)(i) of this section.
    (iii) Distribution of stock of domestic subsidiary corporations--
(A) Conditions for nonrecognition. A domestic liquidating corporation 
shall not recognize gain or loss under paragraph (b)(1) of this section 
on a distribution of stock of an 80 percent domestic subsidiary 
corporation, if the domestic liquidating corporation attaches a 
statement described in paragraph (b)(2)(iii)(D) of this section to its 
U.S. income tax return for the year of the distribution of such stock. 
For purposes of this paragraph (b)(2)(iii), a corporation is an 80 
percent domestic subsidiary corporation, if--
    (1) The subsidiary corporation is a domestic corporation (but not a 
foreign

[[Page 43081]]

corporation that has made an election under section 897(i) to be 
treated as a U.S. corporation for purposes of section 897);
    (2) The domestic liquidating corporation owns (directly) at least 
80 percent of the total voting power of the stock of such corporation; 
and
    (3) The domestic liquidating corporation owns (directly) at least 
80 percent of the total value of all stock of such corporation.
    (B) Exceptions when the liquidating corporation is a U.S. real 
property holding corporation. If the domestic liquidating corporation 
is a U.S. real property holding corporation (as defined in section 
897(c)(2)) at the time of liquidation (or was a U.S. real property 
holding corporation with respect to the foreign distributee corporation 
during the five year period ending on the date of liquidation), then 
the exception in paragraph (b)(2)(iii)(A) of this section shall apply 
only to the distribution of stock of an 80 percent domestic subsidiary 
corporation that is a U.S. real property holding corporation (as 
defined in section 897(c)(2)) at the time of the liquidation and 
immediately thereafter.
    (C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A) 
of this section shall not apply, if a principal purpose of the 
distribution of the 80 percent domestic subsidiary corporation's stock 
is the avoidance of U.S. tax that would have been imposed on the 
domestic liquidating corporation's disposition of such stock (directly 
or indirectly) to an unrelated party. A distribution may have a 
principal purpose of tax avoidance even though the tax avoidance 
purpose is outweighed by other purposes (taken together or separately).
    (2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a 
distribution of stock of the 80 percent domestic subsidiary corporation 
will be deemed to have been made pursuant to a plan, one of the 
principal purposes of which was the avoidance of U.S. tax, if the 
foreign distributee corporation disposes of any such stock within two 
years of such distribution. The rule in this paragraph 
(b)(2)(iii)(C)(2) will not apply if the foreign distributee corporation 
can demonstrate to the satisfaction of the Commissioner that a 
principal purpose of the liquidation was not the avoidance of U.S. tax.
    (D) Required statement. The statement required by paragraph 
(b)(2)(iii)(A) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic 
Subsidiary Corporations'' and shall be prepared by the domestic 
liquidating corporation and shall be signed under penalties of perjury 
by an authorized officer of the domestic liquidating corporation and by 
an authorized officer of the foreign distributee corporation. The 
required statement shall contain a certification that states that if 
the foreign distributee corporation disposes of any stock subject to 
paragraph (b)(2)(iii)(A) of this section in a transaction described in 
paragraph (b)(2)(iii)(C) of this section, then the domestic liquidating 
corporation shall recognize all realized gain attributable to such 
stock at the time of distribution, and the domestic liquidating 
corporation (or the foreign distributee corporation on behalf of the 
domestic liquidating corporation) shall file a U.S. income tax return 
(or amended U.S. income tax return, as the case may be) for the year of 
distribution reporting the gain attributable to such stock.
    (3) Other consequences--(i) Distributee basis in property. The 
foreign distributee corporation's basis in property subject to this 
paragraph (b) shall be the same as the domestic liquidating 
corporation's basis in such property immediately before the 
liquidation, increased by any gain, or reduced by any loss recognized 
by the domestic liquidating corporation on such property pursuant to 
paragraph (b)(1) of this section. In no case, however, will the foreign 
distributee corporation's adjusted basis in distributed property exceed 
the fair market value of such property at the time of liquidation.
    (ii) Reporting under section 6038B. Section 6038B and the 
regulations thereunder apply to a domestic liquidating corporation's 
transfer of property to a foreign distributee corporation under section 
367(e)(2).
    (iii) Other rules. For other rules that may be applicable, see 
sections 1248, 897, and 381.
    (c) Distribution by a foreign corporation--(1) General rule--gain 
and loss not recognized. If a foreign corporation (foreign liquidating) 
makes a distribution of property in complete liquidation under section 
332 to a foreign corporation (foreign distributee) that meets the stock 
ownership requirements of section 332(b) with respect to stock in the 
foreign liquidating corporation, then, except as provided in paragraph 
(c)(2) of this section, section 337 (a) and (b)(1) shall apply and the 
foreign liquidating corporation shall not recognize gain (or loss) on 
the distribution under section 367(e)(2). If a foreign liquidating 
corporation distributes a partnership interest (whether foreign or 
domestic), then such corporation shall be treated as having distributed 
a proportionate share of partnership property in accordance with the 
principles of paragraph (b)(1)(iii) of this section.
    (2) Exceptions--(i) Property used in a U.S. trade or business--(A) 
General rule. A foreign liquidating corporation (including a 
corporation that has made an effective election under section 897(i)) 
that makes a distribution described in paragraph (c)(1) of this section 
shall recognize gain on the distribution of qualified property, as 
described in paragraph (b)(2)(i)(B) of this section (other than U.S. 
real property interests), that is used by the foreign liquidating 
corporation in the conduct of a trade or business within the United 
States at the time of distribution.
    (B) Ten-year active U.S. business exception. A foreign liquidating 
corporation shall not recognize gain under paragraph (c)(2)(i)(A) of 
this section, if--
    (1) The foreign distributee corporation, immediately thereafter and 
for the ten-year period beginning on the date of the distribution of 
such property, uses the property in the conduct of a trade or business 
in the United States;
    (2) The foreign distributee corporation is not entitled to benefits 
under a comprehensive income tax treaty (this requirement shall apply 
only if the foreign liquidating corporation (or predecessor 
corporation) was not entitled to benefits under a comprehensive income 
tax treaty); and
    (3) The foreign liquidating corporation and foreign distributee 
corporation attach the statement described in paragraph (c)(2)(i)(C) of 
this section to their U.S. income tax returns for their taxable years 
that include the distribution.
    (C) Required statement. The statement required by paragraph 
(c)(2)(i)(B)(3) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(c)(2)(i),'' shall be prepared by foreign 
liquidating corporation, shall be signed under penalties of perjury by 
an authorized officer of the foreign liquidating corporation and by an 
authorized officer of the foreign distributee corporation, and shall be 
identical to the statement described in paragraph (b)(2)(i)(C) of this 
section, except that ``Sec. 1.367(e)-2(c)(2)(i)(B)'' shall be 
substituted for references to ``Sec. 1.367(e)-2(b)(2)(i)'' and 
``foreign liquidating corporation'' shall be substituted for ``domestic 
liquidating corporation'' each time it appears. References in the rules 
of paragraph (b)(2)(i)(C) of this section to various rules in paragraph 
(b) of this section shall be applied as if such references were to this 
paragraph (c). However, the

[[Page 43082]]

statement described in this paragraph (c)(2)(i)(C) shall be modified as 
follows:
    (1) The foreign distributee corporation shall not be required to 
waive its income tax treaty benefits as required by Sec. 1.367(e)-
2(b)(2)(i)(C)(4), unless--
    (i) The foreign liquidating corporation was required to waive its 
treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in 
connection with the distribution of such property in a prior 
liquidation distribution subject to the provisions of this section; or 
(ii) The foreign distributee corporation is entitled benefits under a 
treaty to which the foreign liquidating corporation was not entitled.
    (2) If the foreign distributee is required to waive treaty benefits 
because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the 
foreign distributee shall only be required to waive benefits that were 
not available to the foreign liquidating corporation (or a predecessor 
corporation) prior to liquidation.
    (3) The property description described in paragraph (b)(2)(i)(C)(2) 
of this section shall include only the qualified U.S. trade or business 
property described in paragraph (c)(2)(i) of this section.
    (D) Operating rules. By the foreign liquidating corporation's 
claiming nonrecognition under paragraph (c)(2)(i)(B) of this section 
and filing a statement described in paragraph (c)(2)(i)(C) of this 
section, the foreign liquidating corporation and the foreign 
distributee corporation agree to be subject to the rules of paragraph 
(c)(2)(i) of this section, as well as the rules of paragraphs 
(b)(2)(i)(D) and (E) of this section. In applying the rules of 
paragraphs (b)(2)(i)(D) and (E) of this section, ``foreign liquidating 
corporation'' shall be used instead of ``domestic liquidating 
corporation'' each time it appears. References in the rules of 
paragraphs (b)(2)(i)(D) and (E) of this section to various rules in 
paragraph (b) of this section shall be applied as if such references 
were to this paragraph (c).
    (ii) Property formerly used in a United States trade or business. A 
foreign liquidating corporation that makes a distribution described in 
paragraph (c)(1) of this section shall recognize gain (but not loss) on 
the distribution of property (other than U.S. real property interests) 
that had ceased to be used by the foreign liquidating corporation in 
the conduct of a U.S. trade or business within the ten-year period 
ending on the date of distribution and that would have been subject to 
section 864(c)(7) had it been disposed. Section 864(c)(7) shall govern 
the treatment of any gain recognized on the distribution of assets 
described in this paragraph as income effectively connected with the 
conduct of a trade or business within the United States.
    (3) Other consequences--(i) Distributee basis in property. The 
foreign distributee corporation's basis in property subject to this 
paragraph (c) shall be the same as the foreign liquidating 
corporation's basis in such property immediately before the 
liquidation, increased by any gain, or reduced by any loss recognized 
by the foreign liquidating corporation on such property, pursuant to 
paragraph (c)(2) of this section. In no event, however, will the 
foreign distributee corporation's adjusted basis in distributed 
property exceed the fair market value of such property at the time of 
liquidation.
    (ii) Other rules. For other rules that may apply, see sections 
367(b) and 381.
    (d) Anti-abuse rule. The Commissioner may require either a domestic 
liquidating corporation or a foreign liquidating corporation to 
recognize gain on a distribution in liquidation described in paragraph 
(b) or (c) of this section (or treat the liquidating corporation as if 
it had recognized loss on a distribution in liquidation), if a 
principal purpose of the liquidation is the avoidance of U.S. tax 
(including, but not limited to, the distribution of a liquidating 
corporation's earnings and profits with a principal purpose of avoiding 
U.S. tax). A liquidation may have a principal purpose of tax avoidance 
even though the tax avoidance purpose is outweighed by other purposes 
(taken together or separately).
    (e) Effective date. This section shall be applicable to 
distributions occurring 30 days after August 9, 1999 or, if taxpayer so 
elects, to distributions in taxable years ending after August 8, 1999.
    Par. 4. Section 1.6038B-1 is amended by revising the fourth 
sentence of paragraph (a), the first sentence of paragraph (b)(1)(i), 
and paragraphs (d), (e), and (g) to read as follows:


Sec. 1.6038B-1  Reporting of certain transactions to foreign 
corporations.

    (a) * * * Section 1.6038B-1(e) describes the filing requirements 
for property transfers described in section 367(e). * * *
    (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 
subject to special rules contained in paragraph (b)(3) of this section, 
any U.S. person that makes a transfer described in section 
6038B(a)(1)(A), 367(d), or 367(e), 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.'' * * *
* * * * *
    (d) [Reserved]. For further guidance, see Sec. 1.6038B-1T(d).
    (e) Transfers subject to section 367(e)--(1) In general. If a 
domestic corporation (distributing corporation) makes a distribution 
described in section 367(e)(1) or section 367(e)(2), the distributing 
corporation must comply with the reporting requirements of this 
paragraph (e). Unless otherwise provided in this section, a 
distributing corporation making a distribution described in sections 
367(e)(1) or 367(e)(2) must file a Form 926, ``Return by a U.S. 
Transferor of Property to a Foreign Corporation (under section 367),'' 
as amended and modified by this section.
    (2) Reporting requirements for section 367(e)(1) distributions of 
domestic controlled corporations. A domestic distributing corporation 
making a distribution of the stock or securities of a domestic 
corporation under section 355 is not required to file a Form 926, as 
described in paragraph (e)(1) of this section, and shall have no other 
reporting requirements under section 6038B.
    (3) Reporting requirements for section 367(e)(1) distributions of 
foreign controlled corporations. If the distributing corporation makes 
a section 355 distribution of the stock or securities of a foreign 
controlled corporation to distributee shareholders who are not 
qualified U.S. persons, as defined in Sec. 1.367(e)-1(b)(1), then the 
distributing corporation shall complete Part 1 of the Form 926 and 
attach a signed copy of such form to its U.S. income tax return for the 
year of the distribution. The distributing corporation shall also 
attach to its U.S. income tax return for the year of distribution a 
statement signed under the penalties of perjury entitled, ``Addendum to 
Form 926.'' The addendum shall contain a brief description of the 
transaction, state the number of shares distributed to distributees who 
are not qualified U.S. persons (applying the rules contained in 
Sec. 1.367(e)-1(d)), and state the basis and fair market value of the 
distributed stock or securities (including a list stating the amounts 
that were distributed to distributees who were not qualified U.S. 
persons and distributees who were qualified U.S. persons).
    (4) Reporting rules for section 367(e)(2) distributions by domestic

[[Page 43083]]

liquidating corporations. If the distributing corporation makes a 
distribution of property in complete liquidation under section 332 to a 
foreign distributee corporation that meets the stock ownership 
requirements of section 332(b) with respect to the stock of the 
distributing corporation, then the distributing corporation shall 
complete a Form 926 and attach a signed copy of such form to its U.S. 
income tax return for the year of the distribution. The property 
description contained in Part III of the Form 926 shall contain a 
description of all property distributed by the liquidating corporation 
(regardless of whether the property qualifies for nonrecognition). The 
description shall also identify the property excepted from gain 
recognition under Sec. 1.367(e)-2(b)(2)(ii) and (iii). If the 
distributing corporation distributes property that will be used by the 
foreign distributee corporation in a U.S. trade or business and the 
distributing corporation does not recognize gain on such distribution 
under Sec. 1.367(e)-2(b)(2)(i), then the distributing corporation may 
satisfy the requirements of this section by completing Part 1 of the 
Form 926, noting thereon that the information required by the Form 926 
is contained in the statement required by Sec. 1.367(e)-
2(b)(2)(i)(C)(2), and attaching a signed copy of the Form 926 to its 
U.S. income tax return for the year of the distribution.
* * * * *
    (g) Effective dates. This section applies to transfers occurring on 
or after July 20, 1998, except paragraph (e) of this section, which 
applies to transfers that are subject to Secs. 1.367(e)-1(f) and 
1.367(e)-2(e). See Sec. 1.6038B-1T for transfers occurring prior to 
July 20, 1998- See also Sec. 1.6038B-1T(e) in effect prior to August 9, 
1999, (as contained in 26 CFR part 1 revised April 1, 1999) for 
transfers described in section 367(e) that are not subject to 
Secs. 1.367(e)-1(f) and 1.367(e)-2(e).
    Par. 5. Section 1.6038B-1T is amended by revising the section 
heading, revising paragraph (e) and revising the first sentence of 
paragraph (g), to read as follows.


Sec. 1.6038B-1T  Reporting of certain transactions to foreign 
corporations (temporary).

* * * * *
    (e) [Reserved] For further guidance, see Sec. 1.6038B-1(e).
* * * * *
    (g) Effective date. This section applies to transfers occurring 
after December 31, 1984. * * *

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

    Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 7. In Sec. 602.101, paragraph (b) is amended in the table by 
removing the entries for 1.367(e)-1T and 1.367(e)-2T, revising the 
entry for 1.6038B-1, and adding entries in numerical order to read as 
follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       Control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.367(e)-1..............................................       1545-1487
1.367(e)-2..............................................       1545-1487
 
                  *        *        *        *        *
1.6038B-1...............................................       1545-1487
                                                               1545-1615
 
                  *        *        *        *        *
------------------------------------------------------------------------

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: July 29, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-20092 Filed 8-6-99; 8:45 am]
BILLING CODE 4830-01-P