[Federal Register Volume 65, Number 15 (Monday, January 24, 2000)]
[Rules and Regulations]
[Pages 3586-3589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1379]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8863]
RIN 1545-AX64


Stock Transfer Rules: Supplemental Rules

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Temporary regulations.

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SUMMARY:  This document contains temporary regulations that provide an 
election for certain taxpayers engaged in certain exchanges described 
in section 367(b). These regulations provide guidance for taxpayers 
that make the specified election in order to determine the extent to 
which income must be included and certain corresponding adjustments 
must be made. The text of the temporary regulations also serves as the 
text of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES:  Effective Date. These regulations are effective as of February 
23, 2000.
    Applicability Date. These regulations apply to section 367(b) 
exchanges that occur on or after February 23, 2000.

FOR FURTHER INFORMATION CONTACT:  Mark D. Harris, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the

[[Page 3587]]

Administrative Procedure Act (5 U.S.C. 553). For this reason, the 
collection of information contained in these regulations has been 
reviewed and, pending receipt and evaluation of public comments, 
approved by the Office of Management and Budget under control number 
1545-1666. Responses to this collection of information is mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On December 27, 1977, the IRS and Treasury issued proposed and 
temporary regulations under section 367(b) of the Internal Revenue Code 
(Code). Subsequent guidance updated and amended the 1977 temporary 
regulations (the 1977 regulations) several times over the next 14 
years. On August 26, 1991, the IRS and Treasury issued proposed 
regulations Secs. 1.367(b)-1 through 1.367(b)-6 (the 1991 proposed 
regulations). Comments to the 1991 proposed regulations were received, 
and a public hearing was held on November 22, 1991. In June of 1998, 
the IRS and Treasury issued final regulations under sections 367(a) and 
(b) (the 1998 regulations). The 1998 regulations addressed transactions 
under section 367(b) only to the extent the transactions are also 
subject to the stock transfer rules of section 367(a). Thus, the 1977 
regulations have remained in effect to the extent not superseded by the 
1998 regulations. The preamble to the 1998 regulations stated that the 
IRS and Treasury would issue guidance at a later date to address the 
portions of the 1991 proposed regulations related to section 367(b) 
that were not addressed in the 1998 regulations.
    The IRS and Treasury adopted Secs. 1.367(b)-1 through 1.367(b)-6 as 
final regulations under section 367(b) (see final section 367(b) 
regulations published elsewhere in this issue of the Federal Register). 
These temporary regulations relate to certain provisions of the 1991 
proposed regulations not adopted in the final section 367(b) 
regulations (published elsewhere in this issue of the Federal 
Register).

General Purpose

    These temporary regulations address the elimination of an election 
available to certain taxpayers under the 1991 proposed regulations that 
was not adopted in the final section 367(b) regulations (published 
elsewhere in this issue of the Federal Register). 

Specific Provisions

A. Sec. 1.367(b)-3T(b)(4): Election of Taxable Exchange Treatment

    Section 1.367(b)-3 of the 1991 proposed regulations addressed 
transactions in which a foreign corporation transfers assets to a 
domestic corporation pursuant to a Subchapter C nonrecognition 
provision. These transactions include a section 332 liquidation of a 
foreign corporation into a domestic parent corporation and an asset 
reorganization, such as a C, D or F reorganization, of a foreign 
corporation into a domestic corporation. The 1991 proposed regulations 
required a U.S. shareholder of a foreign acquired corporation (or, in 
certain cases, a foreign subsidiary of the U.S. shareholder) to 
currently include in income the allocable portion of the foreign 
acquired corporation's earnings and profits accumulated during the U.S. 
shareholder's holding period (all earnings and profits amount). The 
final section 367(b) regulations (published elsewhere in this issue of 
the Federal Register) adopted this general rule.
    Sections 7.367(b)-5(b) and 7.367(b)-7(c)(2)(ii) of the 1977 
regulations and Sec. 1.367(b)-3(b)(2)(iii) of the 1991 proposed 
regulations provided an exception to this rule, which permitted an 
exchanging shareholder to elect to recognize the gain (but not the 
loss) that it realizes in the exchange (taxable exchange election), 
rather than include the all earnings and profits amount in income. To 
the extent the all earnings and profits amount exceeds a shareholder's 
stock gain, the 1991 proposed regulations further required the foreign 
acquired corporation to reduce various tax attributes that would 
otherwise carryover to the domestic acquiring corporation (attribute 
reduction regime). The final regulations (published elsewhere in this 
issue of the Federal Register) did not adopt the taxable exchange 
election.
    In order to provide taxpayers an opportunity to comment on this 
change, these temporary regulations provide the taxable exchange 
election in modified form. The modified election permits an exchanging 
shareholder to elect to treat a transaction as a taxable exchange, but 
limits application of the attribute reduction regime to a section 332 
liquidation or to an inbound asset reorganization in which the foreign 
acquired corporation is wholly owned (directly or indirectly) by one 
U.S. person.
    These temporary regulations apply to section 367(b) exchanges that 
occur between February 23, 2000, and February 23, 2001.

Further Explanation

    For a more detailed discussion regarding section 367(b), see the 
final section 367(b) regulations published elsewhere in this issue of 
the Federal Register.

Special Analyses

    It has been determined that these Temporary regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Further it is 
hereby certified pursuant to sections 603(a) and 605(b) of the 
Regulatory Flexibility Act that the collection of information in these 
regulations 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(b) exchanges that require 
reporting under these regulations is estimated to be only 20 per year. 
Therefore, 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, these temporary 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact.
    Drafting Information. The principal author of these regulations is 
Mark Harris of the Office of Associate Chief Counsel (International). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

[[Page 3588]]

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 adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.367(b)-3T also issued under 26 U.S.C. 367(a) and (b). 
* * *

    Par. 2. Section 1.367(b)-3T is added to read as follows:


Sec. 1.367(b)-3T  Repatriation of foreign corporate assets in certain 
nonrecognition transactions (temporary).

    (a) through (b)(3). [Reserved]. For further guidance, see 
Sec. 1.367(b)-3(a) through (b)(3).
    (4) Election of taxable exchange treatment--(i) Rules--(A) In 
general. In lieu of the treatment prescribed by Sec. 1.367(b)-
3(b)(3)(i), an exchanging shareholder described in Sec. 1.367(b)-
3(b)(1) may instead elect to recognize the gain (but not loss) that it 
realizes in the exchange (taxable exchange election). To make a taxable 
exchange election, the following requirements must be satisfied--
    (1) The exchanging shareholder (and its direct or indirect owners 
that would be affected by the election, in the case of an exchanging 
shareholder that is a foreign corporation) reports the exchange in a 
manner consistent therewith (see, e.g., sections 954(c)(1)(B)(i), 1001 
and 1248);
    (2) The notification requirements of paragraph (b)(4)(i)(C) of this 
section are satisfied; and
    (3) The adjustments described in paragraph (b)(4)(i)(B) of this 
section are made when the following circumstances are present--
    (i) The transaction is described in section 332 or is an asset 
acquisition described in section 368(a)(1), with regard to which one 
U.S. person owns (directly or indirectly) 100 percent of the foreign 
acquired corporation; and
    (ii) The all earnings and profits amount described in 
Sec. 1.367(b)-3(b)(3)(i) with respect to the exchange exceeds the gain 
recognized by the exchanging shareholder.
    (B) Attribute reduction--(1) Reduction of NOL carryovers. The 
amount by which the all earnings and profits amount exceeds the gain 
recognized by the exchanging shareholder (the excess earnings and 
profits amount) shall be applied to reduce the net operating loss 
carryovers (if any) of the foreign acquired corporation to which the 
domestic acquiring corporation would otherwise succeed under section 
381(a) and (c)(1). See also Rev. Rul. 72-421 (1972-2 C.B. 166) (see 
Sec. 601.601(d)(2) of this chapter).
    (2) Reduction of capital loss carryovers. After the application of 
paragraph (b)(4)(i)(B)(1) of this section, any remaining excess 
earnings and profits amount shall be applied to reduce the capital loss 
carryovers (if any) of the foreign acquired corporation to which the 
domestic acquiring corporation would otherwise succeed under section 
381(a) and (c)(3).
    (3) Reduction of basis. After the application of paragraph 
(b)(4)(i)(B)(2) of this section, any remaining excess earnings and 
profits amount shall be applied to reduce (but not below zero) the 
basis of the assets (other than dollar-denominated money) of the 
foreign acquired corporation that are acquired by the domestic 
acquiring corporation. Such remaining excess earnings and profits 
amount shall be applied to reduce the basis of such assets in the 
following order: first, tangible depreciable or depletable assets, 
according to their class lives (beginning with those assets with the 
shortest class life); second, other non-inventory tangible assets; 
third, intangible assets that are amortizable; and finally, the 
remaining assets of the foreign acquired corporation that are acquired 
by the domestic acquiring corporation. Within each of these categories, 
if the total basis of all assets in the category is greater than the 
excess earnings and profits amount to be applied against such basis, 
the taxpayer may choose to which specific assets in the category the 
basis reduction first applies.
    (C) Notification. The exchanging shareholder shall elect to apply 
the rules of this paragraph (b)(4)(i) by attaching a statement of its 
election to its section 367(b) notice. See Sec. 1.367(b)-1(c) For the 
rules concerning filing a section 367(b) notice.
    (D) Example. The following example illustrates the rules of this 
paragraph (b)(4)(i):

    Example--(i) Facts. DC, a domestic corporation, owns all of the 
outstanding stock of FC, a foreign corporation. The stock of FC has 
a value of $100, and DC has a basis of $80 in such stock. The assets 
of FC are one parcel of land with a value of $60 and a basis of $30, 
and tangible depreciable assets with a value of $40 and a basis of 
$80. FC has no net operating loss carryovers or capital loss 
carryovers. The all earnings and profits amount with respect to the 
FC stock owned by DC is $30, of which $19 is described in section 
1248(a) and the remaining $11 is not (for example, because it was 
earned prior to 1963). In a liquidation described in section 332, FC 
distributes all of its property to DC, and the FC stock held by DC 
is canceled. Rather than including in income as a deemed dividend 
the all earnings and profits amount of $30 as provided in 
Sec. 1.367(b)-3(b)(3)(i), DC instead elects taxable exchange 
treatment under paragraph (b)(4)(i)(A) of this section.
    (ii) Result. DC recognizes the $20 of gain it realizes on its 
stock in FC. Of this $20 amount, $19 is included in income by DC as 
a dividend pursuant to section 1248(a). (For the source of the 
remaining $1 of gain recognized by DC, see section 865. For the 
treatment of the $1 for purposes of the foreign tax credit 
limitation, see generally section 904(d)(2)(A)(i).) Because the 
transaction is described in section 332 and because the all earnings 
and profits amount with respect to the FC stock held by DC ($30) 
exceeds by $10 the income recognized by DC ($20), the attribute 
reduction rules of paragraph (b)(4)(i)(B) of this section apply. 
Accordingly, the $10 excess earnings and profits amount is applied 
to reduce the basis of the tangible depreciable assets of FC, 
beginning with those assets with the shortest class lives. Under 
section 337(a) FC does not recognize gain or loss in the assets that 
it distributes to DC, and under section 334(b) (which is applied 
taking into account the basis reduction prescribed by paragraph 
(b)(4)(i)(A)(3) of this section) DC takes a basis of $30 in the land 
and $70 in the tangible depreciable assets that it receives from FC.
    (ii) Effective date. This paragraph (b)(4) applies for section 
367(b) exchanges that occur between February 23, 2000, and February 
23, 2001.
    (c) and (d) [Reserved]. For further guidance, see Sec. 1.367(b)-
3(c) through (d).

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.

    Par. 4. In Sec. 602.101, paragraph (b) is amended as follows:
    1. Removing the following entries from the table:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

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                                                            Current OMB
   CFR part or section where identified and described       Control No.
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                  *        *        *        *        *
7.367(b)-1..............................................       1545-0026
7.367(b)-3..............................................       1545-0026
7.367(b)-7..............................................       1545-0026
7.367(b)-9..............................................       1545-0026
7.367(b)-10.............................................       1545-0026
 
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[[Page 3589]]

    2. Adding the following entry in numerical order to the table to 
read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

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                                                            Current OMB
   CFR part or section where identified and described       control No.
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                  *        *        *        *        *
1.367(b)-3T.............................................       1545-1666
 
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John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.

    Approved: December 22, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-1379 Filed 1-21-00; 8:45 am]
BILLING CODE 4830-01-U