[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