[Federal Register Volume 70, Number 3 (Wednesday, January 5, 2005)]
[Proposed Rules]
[Pages 749-767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-201]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125628-01]
RIN 1545-BA65


Revision of Income Tax Regulations Under Sections 358, 367, 884, 
and 6038B Dealing With Statutory Mergers or Consolidations Under 
Section 368(a)(1)(A) Involving One or More Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations amending the 
income tax regulations under various provisions of the Internal Revenue 
Code (Code) to account for statutory mergers and consolidations under 
section 368(a)(1)(A) (including reorganizations described in section 
368(a)(2)(D) and (E)) involving one or more foreign corporations. These 
proposed regulations are issued concurrently with proposed regulations 
(REG-117969-00) that would amend the definition of a reorganization 
under section 368(a)(1)(A) to include certain statutory mergers or 
consolidations effected pursuant to foreign law.

DATES: Written and electronic comments and requests to speak and 
outlines of topics to be discussed at the public hearing scheduled for 
May 19, 2005, at 10 a.m. must be received by April 28, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125628-01), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
125628-01), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at: http://www.irs.gov/regs or via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS and REG-125628-
01). The public hearing will be held in the Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Robert W. Lorence, Jr., (202) 622-3860; concerning submissions, the 
hearing, or placement on the building access list to attend the 
hearing, Guy Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act (44 U.S.C. 
3507(d)). Comments on the collection 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, SE:W:CAR:MP:T:T:SP 
Washington, DC 20224. Comments on the collection of information should 
be received no later than March 7, 2005. Comments are specifically 
requested concerning:
    Whether the proposed collection of information is 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 proposed 
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 proposed collection of 
information can 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 collection of information in this proposed regulation is in 
Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii). This information is required to 
inform the IRS of a domestic corporation that is claiming an exception 
from the application of section 367(a) and (d) to certain transfers of 
property to a foreign corporation that is re-transferred by the foreign 
corporation to a domestic corporation controlled by the foreign 
corporation. The information is in the form of a statement attached to 
the domestic corporation's U.S. income tax return for the year of the 
transfer certifying that if the foreign corporation disposes of the 
stock of the domestic controlled corporation with a tax avoidance 
purpose, the domestic corporation will file an income tax return (or 
amended return, as the case may be) reporting gain. The collection of

[[Page 750]]

information is mandatory. The likely respondents are domestic 
corporations.
    Estimated total annual reporting burden: 50 hours.
    Estimated average annual burden hours per respondent: 1 hour.
    Estimated number of respondents: 50.
    Estimated annual frequency of responses: on occasion.
    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 368(a)(1)(A) defines a reorganization to include a 
statutory merger or consolidation (A reorganization). For transactions 
completed before January 24, 2003, regulations under section 
368(a)(1)(A) provided that a reorganization was a merger or 
consolidation effected pursuant to the corporation law of the United 
States or a State or Territory or the District of Columbia. See 1.368-
2(b)(1), as in effect before January 24, 2003.
    On January 24, 2003, the IRS and the Treasury Department issued 
proposed regulations (REG-126485-01, 2003-9 I.R.B. 542, 66 FR 57400) 
and temporary regulations (TD 9038, 2003-9 I.R.B. 524, 68 FR 3384), 
revising the definition of a statutory merger or consolidation. The 
proposed and temporary regulations define a statutory merger or 
consolidation in a manner intended to ensure that those transactions 
are not divisive in nature. Accordingly, the regulations generally 
require that all the assets and liabilities of the merged corporation 
(other than assets distributed or liabilities discharged in the 
transaction) are transferred to the acquiring corporation and that the 
separate legal identity of the merged corporation ceases to exist in 
the transaction.
    Pursuant to a notice of proposed rulemaking (proposed section 368 
regulations) published contemporaneously with this document, the IRS 
and Treasury are proposing further revisions to the definition of a 
statutory merger or consolidation to take into account those 
transactions effected pursuant to foreign law. The proposed section 368 
regulations amend the 2003 proposed regulations and provide that an A 
reorganization may occur, if certain conditions are satisfied, pursuant 
to the laws of a foreign jurisdiction, including a U.S. possession.
    In light of this change, this document contains proposed amendments 
to the regulations under certain international Code provisions 
(sections 367, 884, and 6038B) to account for statutory mergers and 
consolidations involving one or more foreign corporations. Current 
international tax regulations are premised on an A reorganization being 
limited to a statutory merger or consolidation involving domestic 
corporations effected pursuant to domestic law. See, e.g., Rev. Rul. 
57-465 (1957-2 C.B. 250). As a result, conforming changes must be made 
to these international tax regulations to ensure that they apply 
appropriately to statutory mergers and consolidations effected pursuant 
to foreign law. The proposed regulations also modify the section 367(a) 
and (b) regulations to address several other related issues.

Explanation of Provisions

A. Basis and Holding Period Rules

    The proposed regulations provide basis and holding period rules for 
certain transactions involving foreign corporations with section 1248 
shareholders in order to preserve relevant section 1248 amounts. A 
section 1248 shareholder is a U.S. person that satisfies the ownership 
requirements of section 1248(a) with respect to a foreign corporation. 
Section 1248(a) applies to a U.S. person that owns stock (directly, 
indirectly, or constructively) with 10 percent or more of the voting 
power in the foreign corporation at any time during the 5-year period 
ending on the sale or exchange of the stock when the foreign 
corporation was a controlled foreign corporation (CFC). Gain recognized 
by a section 1248 shareholder on the sale or exchange of stock of the 
foreign corporation is included in gross income as a dividend to the 
extent of the earnings and profits of the foreign corporation that are 
attributable to the stock sold or exchanged and that were accumulated 
while the stock was held by the U.S. person when the foreign 
corporation was a CFC (the section 1248 amount).
    The IRS and Treasury believe that it is important to preserve 
section 1248 amounts in certain nonrecognition exchanges of foreign 
corporation stock. Preservation of section 1248 amounts is a function 
of the holding period and basis in the stock of the foreign corporation 
being exchanged. One of the underlying policies of section 367(b) is 
the preservation of the potential application of section 1248 in 
connection with certain nonrecognition exchanges. H. Rep. No. 94-658, 
94th Cong., 1st Sess., at 242 (Nov. 12, 1975). These proposed 
regulations provide basis and holding period rules to preserve section 
1248 amounts in the context of certain section 354 exchanges and 
certain triangular reorganizations.
    The basis and holding period rules of the proposed regulations also 
apply to a foreign corporate shareholder of a foreign corporation that 
is a party to the reorganization, provided that the foreign corporate 
shareholder has at least one U.S. person that is a section 1248 
shareholder with respect to the foreign corporate shareholder and to 
the foreign corporation. This rule is necessary to preserve application 
of section 964(e) to the foreign corporate shareholder with respect to 
lower-tier foreign corporations. Under section 964(e), if a CFC sells 
or exchanges stock in another foreign corporation, gain recognized on 
the sale or exchange is included in the income of the CFC as a dividend 
to the same extent that it would have been included under section 
1248(a) if the CFC were a U.S. person. Such dividend income may be 
treated as subpart F income that is included in the income of U.S. 
shareholders of the CFC.
1. Section 354 Exchanges
    The proposed regulations apply to certain section 354 exchanges 
involving foreign corporations, including exchanges of multiple blocks 
of stock. The proposed regulations preserve the bases and holding 
periods in different blocks of stock in certain foreign target 
corporations by requiring the exchanging shareholder to establish the 
particular shares of stock that were received in exchange for shares of 
a particular block of target stock. If the exchanging shareholder 
cannot establish the particular shares of target stock that were 
received for shares of a particular block of stock, then the 
shareholder must designate which shares of stock were received in 
exchange for shares of a particular block of stock, provided that the 
designation is consistent with the terms of the exchange. These tracing 
methods are used to determine the resulting tax consequences when stock 
received in a nonrecognition exchange is subsequently sold or otherwise 
exchanged. If the exchanging shareholder cannot establish, and does not 
designate, the particular shares received, the shareholder is treated 
as selling or otherwise exchanging a share received in a nonrecognition 
exchange

[[Page 751]]

for a share that was purchased or acquired at the earliest time.
    The IRS and Treasury recently published proposed section 358 
regulations (REG-116564-03) that determine the basis of stock or 
securities received in section 354 exchanges (proposed section 358 
regulations). The proposed section 358 regulations generally provide 
that the basis of each share of stock or security received in an 
exchange to which section 354, 355, or 356 applies will be the same as 
the basis of the share of stock or security exchanged therefor. For 
these purposes, the determination of which share of stock or security 
is received in exchange for a particular share of stock or security is 
made in accordance with the terms of the exchange or distribution.
    These proposed regulations apply the principles of the proposed 
section 358 regulations to certain exchanges of stock of a foreign 
corporation by either a section 1248 shareholder, or a foreign 
corporate shareholder where at least one U.S. person is a section 1248 
shareholder with respect to such foreign corporate shareholder and to 
the foreign corporation whose shares are exchanged (collectively and 
individually, section 367(b) shareholder), to ensure the preservation 
of section 1248 amounts. The proposed regulations also include specific 
guidance on the shareholder's holding period in the stock received in 
the section 354 exchange. The proposed regulations do not, however, 
apply to distributions described in section 355.
    Consistent with the proposed section 358 regulations, the proposed 
regulations hereunder would not apply to section 351 exchanges or to 
exchanges to which both section 351 and section 354 (or section 356) 
apply, if, in addition to stock being received, other property is 
received or liabilities are assumed. This limitation is intended to 
prevent a conflict between the rules for determining basis in a section 
351 exchange (including the application of section 357(c)) and the 
rules proposed in this document. The IRS and Treasury are considering 
approaches for the preservation of section 1248 amounts in section 351 
transactions in which liabilities are assumed or other property is 
received, and comments are requested in this regard.
    In addition, the IRS and Treasury are considering developing 
specific rules for situations in which stock of the foreign acquiring 
corporation is not issued in the exchange (for example, when the 
exchanging shareholder owns all the stock of the foreign acquiring 
corporation). One possible approach may be for each existing share of 
stock in that corporation to be divided into portions to account for 
the different basis and holding periods of the stock of the foreign 
acquiring corporation and the stock of the acquired corporation in 
order to preserve section 1248 amounts. Comments are requested 
regarding this approach or possible alternative approaches.
2. Triangular Reorganizations
    The proposed regulations provide special basis and holding period 
rules for triangular reorganizations where the merging or surviving 
corporation is a foreign corporation with a section 367(b) shareholder. 
These rules apply to reorganizations described in section 368(a)(1)(A) 
and (a)(2)(D) (forward triangular merger) and to parenthetical section 
368(a)(1)(C) reorganizations. In these transactions, the surviving 
corporation (S) acquires substantially all the assets of the acquired 
corporation (T), and the T shareholders exchange their T stock for 
stock of the corporation (P) that is in control (within the meaning of 
section 368(c)) of S. These rules also apply to reorganizations 
described in section 368(a)(1)(A) and (a)(2)(E) (reverse triangular 
merger). In a reverse triangular merger, S, a controlled subsidiary of 
P, merges into T, the surviving corporation, and the T shareholders 
exchange their T stock for stock of P.
    Under current regulations, in a forward triangular merger or a 
parenthetical C reorganization, P's basis in its S stock is adjusted as 
if P had acquired the T assets directly from T in a section 362(b) 
exchange and then had transferred the T assets to S in a transaction in 
which P's basis in S stock is determined under section 358. See Sec.  
1.358-6(c)(1) (commonly referred to as the ``over-the-top'' basis 
rules). Under current regulations, in a reverse triangular merger, P's 
basis in the T stock it receives immediately after the transaction is 
equal to its basis in its S stock immediately before the transaction 
adjusted as if T had merged into S in a forward triangular merger and 
the over-the-top basis rules had applied. See Sec.  1.358-6(c)(2). If a 
reverse triangular merger also qualifies as a section 351 transfer or a 
section 368(a)(1)(B) reorganization, P can determine its basis in its S 
stock either by using the over-the-top basis rules as described in the 
prior sentence or by treating P as if it had acquired the T stock from 
the former shareholders of T in a transaction in which basis is 
determined under section 362(b) (carryover stock basis).
    The IRS and Treasury are concerned that, in certain exchanges 
involving foreign corporations, application of the over-the-top basis 
rules would not properly preserve the section 1248 or 964(e) amounts 
with respect to the stock of S or T. The proposed regulations provide 
that, in determining the stock basis of the surviving corporation in 
certain triangular reorganizations, outside stock basis will be used 
instead of inside asset basis pursuant to Sec.  1.358-6(c). For 
example, in the case of a forward triangular merger (or a parenthetical 
C reorganization), where P is a domestic corporation, S is a foreign 
corporation, T is a foreign corporation, and T has a section 1248 
shareholder, the basis and holding period in the T stock, not the T 
assets, are used to determine P's basis in the S stock. The same rules 
apply to certain reverse triangular mergers, where S merges into T with 
T surviving. In that case, P's basis in the T stock immediately after 
the transaction would reflect the basis and holding period of the T 
stock instead of the T assets.
    Under this stock basis approach for triangular reorganizations, the 
proposed regulations provide for a divided basis and holding period in 
each share of stock in the surviving corporation to reflect the 
relevant section 1248 amounts in the S stock and T stock. In 
particular, each share of S stock in a forward triangular merger, and 
each share of T stock in a reverse triangular merger, where P is a 
section 367(b) shareholder immediately after the transaction, is 
divided into portions reflecting the basis and holding period of the S 
stock and the T stock before the transaction. However, the proposed 
regulations contain a de minimis exception to this rule. Under this 
exception, if the value of the S stock immediately before the 
transaction is de minimis (for example, where S is a corporation formed 
to facilitate the transaction), then each share of the surviving 
corporation is not divided; instead, the basis of the S stock is added 
to the basis of the stock of the surviving corporation held by P. The 
value of the S stock would be de minimis for this purpose if it is less 
than 1 percent of the value of the surviving corporation (S or T) 
immediately after the transaction.
    If there are two or more blocks of stock in T or S held by a 
section 367(b) shareholder immediately before the transaction, then 
each share of the surviving corporation (S or T) is further divided to 
account for each block of stock. If two or more blocks of stock are 
held by one or more shareholders that are not section 367(b) 
shareholders, then shares in these blocks are aggregated into one 
divided portion for basis purposes. If none of the S or T shareholders 
is a section 367(b)

[[Page 752]]

shareholder, then the over-the-top basis rules of Sec.  1.358-6 apply 
instead of the rules in these proposed regulations.
    The proposed regulations provide special rules when stock of the 
surviving corporation has a divided basis and holding period. Earnings 
and profits accumulated prior to the reorganization are attributed to a 
divided portion of a share of stock based on the block of stock whose 
basis and holding period the divided portion reflects. Post-
reorganization earnings and profits are attributed to each divided 
share of stock pursuant to section 1248 and the regulations thereunder. 
The amount of earnings and profits attributed to a divided share of 
stock pursuant to section 1248 are further attributed to a divided 
portion of such share of stock based on its fair market value in 
relation to the other divided portions. Finally, shares of stock are no 
longer divided into separate portions if section 1248 or 964(e) becomes 
inapplicable to a subsequent sale or exchange of the stock.
    The special basis rules in these proposed regulations apply to all 
triangular reorganizations where T has at least one section 367(b) 
shareholder, even if such shareholders own less than a controlling 
interest in T. The IRS and Treasury are considering whether the current 
basis rules of Sec.  1.358-6 should apply in cases where section 367(b) 
shareholders do not own a substantial percentage of the stock of T, or 
whether taxpayers should be permitted to elect to apply the current 
basis rules under Sec.  1.358-6 to determine P's basis in the stock of 
the surviving corporation (S or T), provided that all section 367(b) 
shareholders of T include in income the section 1248 amounts with 
respect to the stock exchanged. Comments are requested in this regard.
    The use of stock basis to determine P's basis in the surviving 
corporation also presents administrative concerns when a portion of the 
stock of T is widely held. In the case of a reorganization described in 
section 368(a)(1)(B), which presents similar issues, Rev. Proc. 81-70 
(1980-2 C.B. 729) provides that statistical sampling techniques, if 
appropriate, are permitted to determine the basis of stock received by 
the acquiring corporation. In this regard, the IRS and Treasury 
recently have requested comments whether Rev. Proc. 81-70 should be 
revised to reflect changes in the marketplace since its publication. 
See Notice 2004-44 (2004-28 I.R.B. 32). Comments are requested on 
expanding this guidance to apply under the proposed regulations, for 
example in cases where blocks of T stock are held by persons that are 
not section 367(b) shareholders and such shares are aggregated into a 
single divided portion for basis and holding period purposes.

B. Exceptions to the Application of Section 367(a)

    Under section 367(a), a U.S. person recognizes gain, but not loss, 
on the transfer of property to a foreign corporation in an exchange 
described in section 351, 354, 356, or 361, unless an exception 
applies. Section 367(a), however, does not apply to a section 354 
exchange by a U.S. person of: (1) Stock of a foreign corporation in a 
section 368(a)(1)(E) reorganization; or (2) stock of a domestic or 
foreign corporation for stock of a foreign corporation in an asset 
reorganization described in section 368(a)(1)(C), (D), or (F) that is 
not treated as an indirect stock transfer under Sec.  1.367(a)-3(a).
    The proposed regulations amend Sec.  1.367(a)-3(a) so that this 
exception to the application of section 367(a) also applies to A 
reorganizations (including forward and reverse triangular mergers). In 
addition, the proposed regulations clarify that Sec.  1.367(a)-3(a) 
applies to exchanges described in section 356, as well as in section 
354. Section 356 applies to an exchange that would qualify as a section 
354 exchange except for the fact that money or other property is 
received in the exchange.
    Taxpayers have questioned why the exception to the application of 
section 367(a) in Sec.  1.367(a)-3(a) includes exchanges of stock but 
not exchanges of securities in section 368(a)(1)(E) reorganizations and 
certain asset reorganizations. The IRS and Treasury believe that it is 
appropriate to provide comparable treatment for exchanges of securities 
in this context. Accordingly, Notice 2005-6 (2005-5 IRB), published 
contemporaneously with these proposed regulations, announces that the 
IRS and Treasury intend to amend Sec.  1.367(a)-3(a) to apply the 
exception from section 367(a) to exchanges of stock or securities. 
Notice 2005-6 provides that the applicable date of the amendment will 
be January 5, 2005.
    The proposed regulations also provide rules concerning the 
application of section 367(a) to reverse triangular mergers, where 
stock of P, a corporation that controls the merging corporation S, is 
treated as transferred (along with any other property of S) to the 
surviving corporation T in a section 361 transfer. If S is a domestic 
corporation and T is a foreign corporation, section 367(a) applies to 
the transfer by S of the P stock to T, unless an exception applies.
    The IRS and Treasury believe that, if the stock of P is provided to 
S pursuant to the plan of reorganization, the section 361 transfer of 
the P stock from S to T should not be subject to section 367(a), and 
the proposed regulations so provide. If P does not provide its stock to 
S pursuant to the plan of reorganization, then the P stock will be 
treated as property of S and the transfer of such stock will be subject 
to section 367(a).
    The IRS and Treasury intend to amend the regulations under section 
6038B to conform with the changes made in these regulations.

C. Concurrent Application of Section 367(a) and (b)

    The proposed regulations modify the current application of section 
367(a) and (b) to transactions that require the inclusion in income of 
the all earnings and profits amount under section 367(b). Section 
1.367(a)-3(b)(2) provides rules for the concurrent application of 
section 367(a) and (b) to transfers of stock of a foreign corporation. 
This may occur, for example, when a U.S. shareholder exchanges stock of 
a foreign corporation (foreign acquired corporation) for stock of 
another foreign corporation (foreign acquiring corporation). See Sec.  
1.367(a)-3(b)(1). It may also occur when an acquiring corporation 
(foreign or domestic) acquires the assets of a foreign acquired 
corporation, and the U.S. shareholder exchanges stock of the foreign 
acquired corporation for stock of the foreign parent of the acquiring 
corporation in a triangular reorganization.
    The U.S. person's exchange of stock of the foreign acquired 
corporation for stock of either the foreign acquiring corporation or 
the foreign parent is subject to section 367(a). See Sec.  1.367(a)-
3(b) and (d). If the exchanging U.S. shareholder owns 5 percent or more 
(by vote or value) of the stock of the foreign acquiring corporation or 
the foreign parent immediately after the exchange, the shareholder 
recognizes gain, if any, under section 367(a), unless the shareholder 
enters into a gain recognition agreement as provided in Sec.  1.367(a)-
8. If the exchanging shareholder is not a 5-percent shareholder, then 
the exchanging shareholder does not recognize gain, if any, on the 
exchange.
    The U.S. shareholder's exchange described above also may be subject 
to section 367(b). If the exchanging U.S. shareholder is a section 1248 
shareholder of the foreign acquired corporation, and the stock of the 
foreign acquiring corporation (or its foreign parent corporation) is 
not stock in a corporation that is a CFC as to which the U.S. 
shareholder is a section 1248

[[Page 753]]

shareholder immediately after the exchange, then the exchanging 
shareholder must include in income the section 1248 amount with respect 
to the stock exchanged. See Sec.  1.367(b)-4. If, instead, a domestic 
acquiring corporation acquires the assets of a foreign acquired 
corporation, and the U.S. shareholder exchanges stock of the foreign 
acquired corporation for stock of the foreign parent of the acquiring 
corporation in a triangular reorganization, then the exchanging 
shareholder must include in income the all earnings and profits amount 
with respect to the stock of the acquired corporation. See Sec.  
1.367(b)-3. Unlike the section 1248 amount, the all earnings and 
profits amount is not limited by the shareholder's gain inherent in the 
stock of the foreign acquired corporation.
    In cases where section 367(a) and (b) apply concurrently to a 
transaction, existing Sec.  1.367(a)-3(b)(2) provides that section 
367(b) will not apply if the transfer is taxable under section 367(a). 
If the transfer is taxable under section 367(a), the exchanging U.S. 
shareholder will recognize gain inherent in the exchanged stock 
(subject to recharacterization as dividend income under section 1248). 
If the transfer is not taxable under section 367(a), because the 
exchanging U.S. shareholder either is not a 5-percent shareholder or 
enters into a gain recognition agreement, then section 367(b) applies 
and the exchange is subject to either Sec.  1.367(b)-3 or 1.367(b)-4 at 
the shareholder level.
    Questions with respect to the concurrent application of section 
367(a) and (b) have arisen in situations that otherwise would require 
inclusion of the all earnings and profits amount under Sec.  1.367(b)-
3. If the all earnings and profits amount is greater than the section 
367(a) gain with respect to the stock of the foreign acquired 
corporation, under current law the exchanging shareholder effectively 
may elect to be taxed on the lesser amount of gain under section 367(a) 
simply by failing to file a gain recognition agreement. In that case, 
section 367(b) would not apply and the shareholder would avoid 
inclusion in income of the greater all earnings and profits amount.
    The ability to elect to recognize the lesser gain inherent in the 
stock exchanged in such cases is inconsistent with the policies of 
section 367(b) that apply to inbound transactions, including preventing 
conversion of tax deferral into tax forgiveness and ensuring that the 
domestic acquiring corporation's section 381 carryover basis reflects 
an after-tax amount. Accordingly, the IRS and Treasury believe that the 
all earnings and profits amount provisions under Sec.  1.367(b)-3 
should not operate electively in these cases. The proposed regulations 
require that, for exchanges subject to Sec.  1.367(b)-3 and section 
367(a), section 367(b) would apply before section 367(a). In that case, 
inclusion of the all earnings and profits amount would increase the 
exchanging shareholder's stock basis for purposes of computing the 
shareholder's gain under section 367(a). Thus, if the all earnings and 
profits amount exceeds the inherent gain in the exchanged stock, gain 
is not recognized under section 367(a). If the transaction does not 
involve inclusion of the all earnings and profits amount (for example, 
if Sec.  1.367(b)-4 applies), the existing ordering rules continue to 
apply.

D. Parenthetical Section 368(a)(1)(B) Reorganizations

    In a parenthetical reorganization under section 368(a)(1)(B), if a 
U.S. shareholder exchanges stock of an acquired corporation for voting 
stock of a foreign corporation that controls (within the meaning of 
section 368(c)) the acquiring corporation, the U.S. shareholder is 
treated as making an indirect transfer of stock of the acquired 
corporation to the foreign controlling corporation in a transfer 
subject to section 367(a). See Sec.  1.367(a)-3(d)(1)(iii). This result 
occurs even if the acquiring corporation is domestic. If the U.S. 
shareholder owns five percent or more (by vote or value) of the stock 
of the foreign controlling corporation, the shareholder must recognize 
gain inherent in the exchanged stock, unless a gain recognition 
agreement is filed. A gain recognition agreement filed with respect to 
the transfer may be triggered (and gain on the initial transfer of 
stock will be recognized) if the foreign controlling corporation 
disposes of the stock of the acquiring corporation, or the acquiring 
corporation disposes of the stock of the acquired corporation, within 5 
years of the initial transfer. See Sec.  1.367(a)-3(d)(2)(ii).
    The proposed regulations revise the indirect stock transfer rules 
to include triangular section 368(a)(1)(B) reorganizations in which a 
U.S. shareholder exchanges stock of the acquired corporation for voting 
stock of a domestic corporation that controls a foreign acquiring 
corporation. In such a case, the gain recognition agreement may be 
triggered if the domestic controlling corporation disposes of the stock 
of the foreign acquiring corporation, or the foreign acquiring 
corporation disposes of the stock of the acquired corporation, within 5 
years of the initial transfer.

E. Transfers of Assets Following Certain Asset Reorganizations

    If a U.S. shareholder exchanges stock or securities of an acquired 
corporation for stock or securities of a foreign acquiring corporation 
in a reorganization described in section 368(a)(1)(C), and the foreign 
acquiring corporation transfers all or part of the assets of the 
acquired corporation to a subsidiary controlled (within the meaning of 
section 368(c)) by the foreign acquiring corporation in a transaction 
described in section 368(a)(2)(C), the U.S. shareholder is treated, for 
purposes of section 367(a), as transferring the stock of the acquired 
corporation to the foreign acquiring corporation to the extent of the 
assets transferred to the controlled subsidiary. Sec.  1.367(a)-
3(d)(1)(v). Section 368(a)(2)(C) provides that a transaction otherwise 
qualifying as a reorganization under section 368(a)(1)(A), (B), (C), 
and (G) will not be disqualified because all or part of the assets or 
stock acquired in the transaction are transferred to a corporation 
controlled by the acquiring corporation.
    On August 16, 2004, the IRS and Treasury issued proposed 
regulations under Sec.  1.368-2(k) that permit assets or stock acquired 
in any reorganization under section 368(a)(1) to be transferred to a 
corporation controlled by the acquiring corporation without 
disqualifying the reorganization. Prior to these proposed regulations, 
the IRS and Treasury issued Rev. Rul. 2002-85 (2002-2 C.B. 986) which 
extended this treatment to section 368(a)(1)(D) reorganizations. Notice 
2002-77 (2002-2 C.B. 997) issued contemporaneously with Rev. Rul. 2002-
85, provided that Sec.  1.367(a)-3(d)(1)(v) would be amended to treat 
transactions described in Rev. Rul. 2002-85 as indirect stock 
transfers, if the transfer of assets by the acquiring corporation to 
its controlled subsidiary occurred pursuant to the plan of 
reorganization.
    The effect of the proposed regulations under Sec.  1.368-2(k) is to 
permit transfers of assets or stock to a controlled subsidiary in 
reorganizations not specifically identified or mentioned in section 
368(a)(2)(C) (section 368(a)(1)(D) and (F) reorganizations). The 
proposed regulations amend the indirect stock transfer rules to conform 
to the changes in the section 368 regulations. As a result, the 
proposed regulations provide that the transfer of assets to a 
controlled subsidiary subsequent to an asset reorganization under 
section 368(a)(1) would constitute an indirect transfer of

[[Page 754]]

stock, provided the transfer of assets by the foreign acquiring 
corporation to its controlled subsidiary occurs as part of the same 
transaction.

F. Indirect Transfers Involving a Change in Domestic or Foreign Status 
of Acquired Corporation

    As indicated above, under existing Sec.  1.367(a)-3(d)(1)(v), a 
U.S. shareholder of an acquired corporation is treated as transferring 
the stock of the acquired corporation to the foreign acquiring 
corporation to the extent of the assets transferred to the controlled 
subsidiary. Thus, if the acquired corporation is foreign, the U.S. 
shareholder is treated as transferring stock of a foreign corporation 
to the foreign acquiring corporation in a transaction that is subject 
to the Sec.  1.367(a)-3(b) stock transfer rules. If the acquired 
corporation is domestic, the U.S. shareholder is treated as 
transferring stock of a domestic corporation to the foreign acquiring 
corporation in a transaction that is subject to Sec.  1.367(a)-3(c). 
This deemed transfer of domestic stock prevails even if the controlled 
subsidiary is foreign. Similar rules apply to parenthetical C 
reorganizations.
    Some commentators have suggested that the determination of whether 
domestic or foreign stock is deemed transferred should be based on the 
status of the controlled subsidiary, rather than the status of the 
acquired corporation. Under this approach, if the acquired corporation 
were domestic and the controlled subsidiary were foreign, the U.S. 
shareholders would be deemed to transfer foreign corporation stock 
subject to Sec.  1.367(a)-3(b), rather than domestic corporation stock 
subject to Sec.  1.367(a)-3(c). The IRS and Treasury believe that, 
consistent with the framework of the current regulations, it is 
appropriate for the rules to continue to apply based on the stock that 
is owned and exchanged by the U.S. person in the transaction (rather 
than on the stock of the controlled subsidiary). The IRS and Treasury 
are considering the application of Sec. Sec.  1.367(a)-3(b), 1.367(a)-
3(c), and 1.367(a)-8 to situations where the foreign acquiring 
corporation transfers assets of the acquired corporation to multiple 
controlled subsidiaries (including both domestic and foreign 
subsidiaries), comments are requested in this regard.

G. Coordination of the Indirect Stock Transfer Rules and the Asset 
Transfer Rules

    In the case of an indirect stock transfer that also involves a 
transfer of assets by a domestic corporation to a foreign corporation, 
Sec.  1.367(a)-3(d)(2)(vi) generally provides that section 367(a) and 
(d) apply to the transfer of assets prior to application of the 
indirect stock transfer rules. However, section 367(a) does not apply 
to such transfers to the extent that the foreign acquiring corporation 
transfers the assets received in the asset transfer to a domestic 
corporation controlled (within the meaning of section 368(c)) by the 
foreign acquiring corporation in a transfer described in section 
368(a)(2)(C) or in a transfer described in section 351, provided the 
domestic transferee's basis in the assets is no greater than the basis 
that the domestic acquired corporation had in such assets. The initial 
asset transfer to the foreign corporation is not subject to section 
367(a) in such cases because the assets re-transferred to the domestic 
corporation remain subject to U.S. corporate tax.
    The IRS and Treasury are concerned that asset reorganizations 
subject to this coordination rule may be used to facilitate corporate 
inversion transactions. An inversion generally involves a U.S. 
multinational corporation reincorporating outside the United States for 
tax purposes (either as a foreign corporation or as a subsidiary of a 
new foreign corporation). The IRS and Treasury also are concerned that 
the coordination rule might be used to facilitate divisive 
transactions. The proposed regulations address both of these concerns 
by modifying the scope of the coordination rule.
    The revised coordination rule operates as follows. Section 367(a) 
and (d) generally apply to the transfer of assets to a foreign 
corporation even if the foreign corporation transfers all or part of 
the assets received to a controlled domestic corporation. This general 
rule, however, is subject to two exceptions which do not require income 
recognition under section 367(a) and (d) on the transfer of assets to 
the foreign corporation to the extent that assets are re-transferred to 
the domestic controlled corporation.
    The first exception applies if the domestic acquired corporation is 
controlled (within the meaning of section 368(c)) by 5 or fewer 
domestic corporations, appropriate basis adjustments as provided in 
section 367(a)(5) are made to the stock of the foreign acquiring 
corporation, and any other conditions provided in regulations under 
section 367(a)(5) are satisfied. Although there currently are no 
regulations under section 367(a)(5), this exception will incorporate 
any conditions or limitations in future regulations once published.
    In cases where the first exception does not apply, the second 
exception applies if the following two conditions are satisfied: (1) 
The indirect transfer of stock of the domestic acquired corporation 
satisfies the requirements of Sec.  1.367(a)-3(c)(1)(i), (ii), and 
(iv), and (c)(6); and (2) the domestic acquired corporation attaches a 
statement (described below) to its tax return for the taxable year of 
the transfer.
    The statement that the domestic acquired corporation files must 
certify that, if the foreign acquiring corporation disposes of any 
stock of the domestic controlled corporation with a principal purpose 
of avoiding U.S. tax that would have been imposed on the domestic 
acquired corporation had it disposed of the re-transferred assets, the 
domestic acquired corporation will amend its return for the year of the 
initial transaction and recognize gain (described below). The 
disposition of stock is presumed to have a principal purpose of tax 
avoidance if the disposition occurs within 2 years of the transfer. The 
presumption may be rebutted, however, if the domestic acquired 
corporation (or the foreign acquiring corporation on its behalf) 
demonstrates to the satisfaction of the Commissioner that the 
transaction did not have a principal purpose of tax avoidance.
    If the domestic acquired corporation recognizes gain pursuant to 
the statement, it is treated as if, immediately prior to the exchange, 
it had transferred the re-transferred assets, including any intangible 
assets, directly to a domestic corporation in exchange for stock of the 
corporation in a transaction that is treated as a section 351 exchange, 
and immediately sold the stock to an unrelated party at fair market 
value in a sale in which it recognizes gain, if any, but not loss. For 
purposes of this rule, the deemed transfer to a domestic corporation is 
treated as a section 351 exchange regardless of whether all the 
requirements for nonrecognition under section 351 are otherwise 
satisfied. Treating the domestic acquired corporation as recognizing 
gain on the disposition of stock, rather than assets, is intended to 
approximate the consequences that would have resulted had the domestic 
acquired corporation transferred the assets to a corporation and sold 
the stock received in such transfer prior to the outbound 
reorganization. In addition, this treatment is consistent with other 
provisions that address divisive transactions. See, e.g., section 
355(e) and Sec.  1.367(e)-(2)(b)(2)(iii).
    The basis that the foreign acquiring corporation has in the stock 
of the

[[Page 755]]

domestic controlled corporation is increased by the amount of gain 
recognized by the domestic acquired corporation under these rules 
immediately prior to its disposition; however, the basis of the re-
transferred assets held by the domestic controlled corporation will not 
be increased by such gain. Finally, the anti-abuse provision under 
Sec.  1.367(d)-1T(g)(6) will not apply to intangible property included 
in the re-transferred assets.

H. Application of Section 367(b) Regulations to Certain Triangular 
Reorganizations

    Section 367(b) applies to exchanges under sections 332, 351, 354, 
355, 356, and 361 (except to the extent described in section 367(a)(1)) 
in which the status of a foreign corporation as a corporation for tax 
purposes is necessary for application of the relevant nonrecognition 
provisions. Except as provided in regulations, under section 367(b) a 
foreign corporation that is a party to such an exchange is considered 
to be a corporation for tax purposes, and therefore the parties 
involved in the transaction are eligible for nonrecognition treatment.
    Section 1.367(b)-4 applies to acquisitions by a foreign corporation 
(the foreign acquiring corporation) of the stock or assets of another 
foreign corporation (the foreign acquired corporation) in certain 
nonrecognition exchanges (a section 367(b) exchange). Consistent with 
section 1248, Sec.  1.367(b)-4(b)(1)(i) addresses exchanges by a 
section 1248 shareholder (or, in certain cases, a CFC shareholder that 
has a section 1248 shareholder), and generally requires such a 
shareholder to include in income its section 1248 amount as a result of 
a section 367(b) exchange, if immediately after the exchange (i) the 
stock received in the exchange is not stock in a corporation that is a 
controlled foreign corporation as to which the section 1248 shareholder 
described above is a section 1248 shareholder, or (ii) the foreign 
acquiring corporation or the foreign acquired corporation (if any, such 
as in a transaction described in section 368(a)(1)(B) or 351), is not a 
controlled foreign corporation as to which the section 1248 shareholder 
described above is a section 1248 shareholder.
    Therefore, in a triangular reorganization (such as a triangular 
reorganization described in section 368(a)(1)(C)) that is within the 
scope of Sec.  1.367(b)-4, a section 367(b) shareholder must include in 
income the section 1248 amount if, for example, it receives stock of a 
domestic corporation in exchange for its stock in a controlled foreign 
corporation. This is the case because, immediately after the exchange, 
the section 367(b) shareholder does not hold stock in a corporation 
that is a controlled foreign corporation as to which such shareholder 
is a section 367(b) shareholder.
    Pursuant to the basis rules contained in this proposed regulation 
under Sec.  1.367(b)-13, the section 1248 amount with respect to the 
stock of the foreign acquired corporation that is exchanged can be 
properly preserved in the stock of a foreign corporation owned by a 
domestic corporation when the section 367(b) shareholder receives stock 
of the domestic corporation in a triangular reorganization. 
Consequently, the proposed regulations provide that a section 367(b) 
shareholder receiving stock of a domestic corporation in a triangular 
reorganization is not required to include in income the section 1248 
amount under Sec.  1.367(b)-4(b)(1)(i), provided that the domestic 
corporation, immediately after the exchange, is a section 1248 
shareholder of the surviving corporation (or in the case of a 
parenthetical section 368(a)(1)(B) reorganization, of the acquired 
corporation) that is itself a controlled foreign corporation.

I. Application of Section 367(b) Regulations to Certain Outbound 
Reorganizations

    If a domestic corporation is a section 1248 shareholder with 
respect to a foreign corporation and transfers the stock in such 
foreign corporation to another foreign corporation in a section 361 
transfer, the domestic corporation must include in income the section 
1248 amount, if any, with respect to the stock of the transferred 
foreign corporation. See section 1248(f)(1) and Sec.  1.367(b)-
4(b)(2)(ii), Example 4.
    Taxpayers have commented that this rule may result in income 
inclusions in some cases where the section 1248 amount could be 
preserved, such that a current inclusion may not be necessary or 
appropriate. The IRS and Treasury are considering the application of 
section 367(a)(5) and section 1248(f)(1) to such transactions, in 
conjunction with Sec.  1.367(b)-13 of these regulations, to preserve 
section 1248 amounts, and comments are requested in this regard. The 
IRS and Treasury also are considering, and request comments, on 
situations in which there are multiple shareholders (including minority 
shareholders) of the domestic corporation; multiple assets (including 
appreciated and depreciated assets being transferred as part of the 
section 361 transfer); and liabilities being assumed in connection with 
the transaction.

J. Nonrecognition Transactions Under the FIRPTA and PFIC Provisions

    Section 897(a) generally treats gain or loss from the disposition 
of a U.S. real property interest by a nonresident alien individual or a 
foreign corporation as gain or loss that is effectively connected with 
the conduct of a trade or business within the United States. Sections 
897(d) and (e) provide rules that apply section 897 in the context of 
distributions and nonrecognition exchanges of U.S. real property 
interests. Temporary regulations were issued under sections 897(d) and 
(e) providing guidance on the application of section 897 to certain 
corporate transactions involving U.S. real property interests. See 
Sec.  1.897-5T, 1.897-6T, and Notice 89-85 (1989-2 C.B. 403). These 
rules do not specifically address A reorganizations because such 
regulations were based on A reorganizations being limited to statutory 
mergers between domestic corporations. The IRS and Treasury intend to 
revise these regulations to reflect A reorganizations and welcome 
comments on revisions that are necessary to apply these regulations to 
A reorganizations, as well as comments on other issues under the 
regulations.
    Section 1291(f) provides authority to issue regulations concerning 
the exchange of stock in a passive foreign investment company (PFIC) in 
a nonrecognition transaction. Proposed regulations were published in 
the Federal Register (57 FR 11047) on April 1, 1992, providing rules 
for the disposition of PFIC stock by U.S. shareholders in 
nonrecognition exchanges. See Sec.  1.1291-6 of the proposed 
regulations. The application of these proposed regulations is based on 
A reorganizations being limited to statutory mergers between domestic 
corporations. The IRS and Treasury intend to revise these proposed 
regulations to reflect A reorganizations and welcome comments on 
revisions that are necessary in this regard, as well as comments on 
other issues under these regulations.

Proposed Effective Date

    Except as otherwise specified, these regulations are proposed to 
apply to transactions occurring after the date these regulations are 
published as final regulations in the Federal Register.

Special Analyses

    The IRS and the Treasury Department have determined that this 
notice of proposed rulemaking is not a significant

[[Page 756]]

regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment pursuant to that Order is not required. It has 
also been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, 
and that because this regulation does not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, 
this regulation will be submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department specifically request 
comments on the clarity of the proposed regulations and on how they can 
be made easier to understand. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for May 19, 2005, beginning at 
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (a signed original and eight (8) copies) by 
April 28, 2005. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Robert W. Lorence, 
Jr., of the Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes. Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In section 1.358-1, paragraph (a) is amended by adding a 
sentence at the end of the paragraph to read as follows:


Sec.  1.358-1  Basis to distributes.

    (a) * * * In the case of certain section 354 or 356 exchanges of 
stock in a foreign corporation, Sec.  1.367(b)-13 applies instead of 
the rules of Sec.  1.358-2.
* * * * *
    Par. 3. In Sec.  1.358-6, paragraph (e) is amended by adding a 
sentence at the end of the paragraph to read as follows:


Sec.  1.358-6  Stock basis in certain triangular reorganizations.

* * * * *
    (e) * * * For certain triangular reorganizations where the 
surviving corporation (S or T) is foreign, see Sec.  1.367(b)-13.
* * * * *
    Par. 4. Section 1.367(a)-3 is amended as follows:
    1. In paragraph (a), remove the third and fourth sentences, and add 
five sentences in their place.
    2. Revise paragraph (b)(2)(i).
    3. Revise paragraph (c)(5)(vi).
    4. In paragraph (d)(1), introductory text, first sentence, add the 
parenthetical ``(or in a domestic corporation in control of a foreign 
acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization)'' after the words ``for stock or securities in a 
foreign corporation''.
    5. In paragraph (d)(1), introductory text, remove the last sentence 
and add three sentences in its place.
    6. In paragraph (d)(1)(i), remove the last sentence and add a 
sentence in its place.
    7. In paragraph (d)(1)(ii), add a sentence at the end of the 
paragraph.
    8. Paragraph (d)(1)(iii) is revised.
    9. In paragraph (d)(1)(iv), remove the language ``Example 7'' and 
add ``Example 8'' in its place, and remove ``Example 11'' and add 
``Example 14'' in its place.
    10. Revise paragraph (d)(1)(v).
    11. Revise paragraphs (d)(2)(i) and (ii).
    12. In paragraph (d)(2)(iv), last sentence, remove the language 
``Example 4'' and add ``Examples 5 and 5A'' in its place.
    13. Revise paragraph (d)(2)(v)(C).
    14. Redesignate paragraph (d)(2)(v)(D) as paragraph (d)(2)(v)(F).
    15. Add new paragraphs (d)(2)(v)(D) and (E).
    16. Revise paragraph (d)(2)(vi).
    17. In paragraph (d)(3), redesignate the examples as follows and 
add the following new examples:

----------------------------------------------------------------------------------------------------------------
              Redesignate                             As                                   Add
----------------------------------------------------------------------------------------------------------------
Example 12............................  Example 16....................
---------------------------------------
                                                                        Example 15.
---------------------------------------
Examples 11 and 11A...................  Examples 14 and 14A...........
---------------------------------------
Examples 10 and 10A...................  Examples 13 and 13A...........
---------------------------------------
Example 9.............................  Example 12....................
---------------------------------------
                                                                        Examples 10 and 11.
---------------------------------------
Example 8.............................  Example 9.....................
---------------------------------------

[[Page 757]]

 
Examples 7, 7A, 7B, and 7C............  Examples 8, 8A, 8B, and 8C....
---------------------------------------
Examples 6 and 6A.....................  Examples 7 and 7A.............
---------------------------------------
Examples 5, 5A, and 5B................  Examples 6, 6A, and 6B........
---------------------------------------
                                                                        Examples 6C and 6D.
---------------------------------------
Example 4.............................  Example 5.....................
---------------------------------------
                                                                        Example 5A.
---------------------------------------
Example 3.............................  Example 4.....................
---------------------------------------
Example 2.............................  Example 3.....................
---------------------------------------
                                                                        Example 2.
----------------------------------------------------------------------------------------------------------------

    18. In paragraph (d)(3), newly designated Example 6A, paragraph 
(i), the first and last sentences are revised.
    19. In paragraph (d)(3), newly designated Example 6B and Example 9 
are revised.
    20. In paragraph (d)(3), for each of the newly designated Examples 
listed in the first column, replace the language in the second column 
with the language in the third column:

------------------------------------------------------------------------
     Redesignated examples             Remove                Add
------------------------------------------------------------------------
Example 6A, paragraph (i),       Example 5........  Example 6.
 first sentence.
--------------------------------
Example 7, paragraph (i).......  Example 5........  Example 6.
--------------------------------
Example 7A, paragraph (i) and    Example 6........  Example 7.
 paragraph (ii), penultimate
 sentence.
--------------------------------
Example 8, paragraph (i).......  Example 5........  Example 6.
--------------------------------
Example 8A, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 8B, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 8C, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 12, paragraph (i),       Example 9........  Example 12.
 third sentence.
--------------------------------
Example 13A, paragraph (i) and   Example 10.......  Example 13.
 paragraph (ii), first sentence.
--------------------------------
Example 14A, paragraph (i).....  Example 11.......  Example 14.
------------------------------------------------------------------------

    22. In paragraph (e)(1), remove the first sentence and add two 
sentences in its place.
    The revisions and additions are as follows:


Sec.  1.367(a)-3  Treatment of transfers of stock or securities to 
foreign corporations.

* * * * *
    (a) * * * However, if, in an exchange described in section 354 or 
356, a U.S. person exchanges stock of a foreign corporation in a 
reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock of a domestic or foreign corporation for stock of a 
foreign corporation pursuant to an asset reorganization that is not 
treated as an indirect stock transfer under paragraph (d) of this 
section, such section 354 or 356 exchange is not a transfer to a 
foreign corporation subject to section 367(a). See paragraph (d)(3), 
Example 16, of this section. For purposes of this section, an asset 
reorganization is defined as a reorganization described in section 
368(a)(1) involving a transfer of assets under section 361. If, in a 
transfer described in section 361, a domestic merging corporation 
transfers stock of a controlling corporation to a foreign surviving 
corporation in a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(E), such section 361 transfer is not subject to section 367(a) 
if the stock of the controlling corporation is provided to the merging 
corporation by the controlling corporation pursuant to the plan of 
reorganization; a section 361 transfer of other property, including 
stock of the controlling corporation not provided by the controlling 
corporation pursuant to the plan of reorganization, by the domestic 
merging corporation to the foreign surviving corporation pursuant to 
such a reorganization is subject to section 367(a). For special basis 
and holding period rules involving foreign corporations that are 
parties to certain reorganizations under section 368(a)(1), see Sec.  
1.367(b)-13. * * *
    (b) * * *
    (2) * * *
    (i) In general. A transfer of foreign stock or securities described 
in section 367(a) and the regulations thereunder as well as in section 
367(b) and the regulations thereunder shall be subject concurrently to 
sections 367(a) and (b) and the regulations thereunder, except as 
provided in paragraph (b)(2)(i)(A) or (B) of this section. See 
paragraph (d)(3), Example 11, of this section.
    (A) If a foreign corporation transfers assets to a domestic 
corporation in a transaction to which Sec.  1.367(b)-3(a) and

[[Page 758]]

(b) and the indirect stock transfer rules of paragraph (d) of this 
section apply, then the section 367(b) rules shall apply prior to the 
section 367(a) rules. See paragraph (d)(3), Example 15, of this 
section. This paragraph (b)(2)(i)(A) applies only to transactions 
occurring after the date these regulations are published as final 
regulations in the Federal Register.
    (B) Except as provided in paragraph (b)(2)(i)(A) of this section, 
section 367(b) and the regulations thereunder shall not apply if the 
foreign corporation is not treated as a corporation under section 
367(a)(1). See paragraph (d)(3), Example 14, of this section.
* * * * *
    (c) * * *
    (5) * * *
    (vi) Transferee foreign corporation. Except as provided in 
paragraph (d)(1)(iii)(B) of this section, the transferee foreign 
corporation shall be the foreign corporation that issues stock or 
securities to the U.S. person in the exchange.
* * * * *
    (d) * * *
    (1) * * * For examples of the concurrent application of the 
indirect stock transfer rules under section 367(a) and the rules of 
section 367(b), see paragraph (d)(3), Examples 14 and 15 of this 
section. For purposes of this paragraph (d), if a corporation acquiring 
assets in a reorganization described in section 368(a)(1) transfers all 
or a portion of such assets to a corporation controlled (within the 
meaning of section 368(c)) by the acquiring corporation as part of the 
same transaction, the subsequent transfer of assets to the controlled 
corporation will be referred to as a controlled asset transfer. See 
section 368(a)(2)(C).
    (i) * * * See paragraph (d)(3), Example 1 of this section for an 
example of a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(D) involving domestic acquired and acquiring corporations, and 
see paragraph (d)(3), Example 10 of this section for an example 
involving a domestic acquired corporation and a foreign acquiring 
corporation.
    (ii) * * * See paragraph (d)(3), Example 2 of this section for an 
example of a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(E) involving domestic acquired and acquiring corporations, and 
see paragraph (d)(3), Example 11 of this section for an example 
involving a domestic acquired corporation and a foreign acquiring 
corporation.
    (iii) Triangular reorganizations described in section 
368(a)(1)(B)--(A) A U.S. person exchanges stock of the acquired 
corporation for voting stock of a foreign corporation that is in 
control (as defined in section 368(c)) of the acquiring corporation in 
a reorganization described in section 368(a)(1)(B). See paragraph 
(d)(3), Example 5 of this section.
    (B) A U.S. person exchanges stock of the acquired corporation for 
voting stock of a domestic corporation that is in control (as defined 
in section 368(c)) of a foreign acquiring corporation in a 
reorganization described in section 368(a)(1)(B).
    (1) For purposes of paragraphs (b) and (c) of this section, the 
foreign acquiring corporation is considered to be the transferee 
foreign corporation even though the U.S. transferor receives stock of 
the domestic controlling corporation in the exchange.
    (2) If stock of a foreign acquired corporation is exchanged for the 
voting stock of a domestic corporation in control of a foreign 
acquiring corporation, then the exchange will be subject to the rules 
of paragraph (b) of this section. If the exchanging shareholder is a 
section 1248 shareholder with respect to the foreign acquired 
corporation, the indirect transfer will be subject to sections 367(a) 
and (b) concurrently. For the application of section 367(b) to the 
exchange, see Sec. Sec.  1.367(b)-4 and 1.367(b)-13(c).
    (3) If stock of a domestic acquired corporation is exchanged for 
the voting stock of a domestic corporation in control of a foreign 
acquiring corporation, then the exchange will be subject to the rules 
of paragraph (c) of this section.
    (4) For purposes of applying the gain recognition agreement 
provisions of paragraph (d)(2) of this section and Sec.  1.367(a)-8, 
the domestic controlling corporation will be treated as the transferee 
foreign corporation. Thus, a disposition of foreign acquiring 
corporation stock by the domestic controlling corporation, or a 
disposition of acquired corporation stock by the foreign acquiring 
corporation, will trigger the gain recognition agreement. See paragraph 
(d)(3), Example 5A of this section.
    (5) This paragraph (d)(1)(iii)(B) applies only to transactions 
occurring after the date these regulations are published as final 
regulations in the Federal Register.
* * * * *
    (v) Transfers of assets to subsidiaries in certain section 
368(a)(1) reorganizations. A U.S. person exchanges stock or securities 
of a corporation (the acquired corporation) for stock or securities of 
a foreign acquiring corporation in an asset reorganization (other than 
a triangular section 368(a)(1)(C) reorganization described in paragraph 
(d)(1)(iv) of this section or a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D) or (a)(2)(E) described in paragraphs 
(d)(1)(i) or (ii) of this section) that is followed by a controlled 
asset transfer. In the case of a transaction described in this 
paragraph (d)(1)(v) in which some but not all of the assets of the 
acquired corporation are transferred in a controlled asset transfer, 
the transaction shall be considered to be an indirect transfer of stock 
or securities subject to this paragraph (d) only to the extent of the 
assets so transferred. The remaining assets shall be treated as having 
been transferred in an asset transfer rather than an indirect stock 
transfer, and such asset transfer shall be subject to the other 
provisions of section 367, including sections 367(a)(1), (3), and (5), 
and (d) if the acquired corporation is a domestic corporation. See 
paragraph (d)(3), Examples 6A and 6B of this section.
* * * * *
    (2) * * *
    (i) Transferee foreign corporation. Except as provided in paragraph 
(d)(1)(iii)(B) of this section, the transferee foreign corporation 
shall be the foreign corporation that issues stock or securities to the 
U.S. person in the exchange.
    (ii) Transferred corporation. The transferred corporation shall be 
the acquiring corporation, except as provided in this paragraph 
(d)(2)(ii). In the case of a triangular section 368(a)(1)(B) 
reorganization described in paragraph (d)(1)(iii) of this section, the 
transferred corporation shall be the acquired corporation. In the case 
of an indirect stock transfer described in paragraph (d)(1)(i), (ii), 
or (iv) of this section followed by a controlled asset transfer, or an 
indirect stock transfer described in paragraph (d)(1)(v) of this 
section, the transferred corporation shall be the controlled 
corporation to which the assets are transferred. In the case of 
successive section 351 transfers described in paragraph (d)(1)(vi) of 
this section, the transferred corporation shall be the corporation to 
which the assets are transferred in the final section 351 transfer. The 
transferred property shall be the stock or securities of the 
transferred corporation, as appropriate under the circumstances.
* * * * *
    (v) * * *

[[Page 759]]

    (C) In the case of an asset reorganization followed by a controlled 
asset transfer, as described in paragraph (d)(1)(v) of this section, 
the assets of the acquired corporation that are transferred to the 
corporation controlled by the acquiring corporation;
    (D) In the case of a triangular reorganization described in section 
368(a)(1)(C) followed by a controlled asset transfer, or a 
reorganization described in sections 368(a)(1)(A) and (a)(2)(D) 
followed by a controlled asset transfer, the assets of the acquired 
corporation including those transferred to the corporation controlled 
by the acquiring corporation;
    (E) In the case of a reorganization described in sections 
368(a)(1)(A) and (a)(2)(E) followed by a controlled asset transfer, the 
assets of the acquiring corporation including those transferred to the 
corporation controlled by the acquiring corporation; and
* * * * *
    (vi) Coordination between asset transfer rules and indirect stock 
transfer rules-- (A) General rule. If, pursuant to any of the 
transactions described in paragraph (d)(1) of this section, a U.S. 
person transfers (or is deemed to transfer) assets to a foreign 
corporation in an exchange described in section 351 or 361, the rules 
of section 367, including sections 367(a)(1), (a)(3), and (a)(5), as 
well as section 367(d), and the regulations thereunder shall apply 
prior to the application of the rules of this section.
    (B) Exceptions. (1) If a transaction is described in paragraph 
(d)(2)(vi)(A) of this section, sections 367(a) and (d) shall not apply 
to the extent a domestic corporation (domestic acquired corporation) 
transfers its assets to a foreign corporation (foreign acquiring 
corporation) in an asset reorganization, and such assets (re-
transferred assets) are transferred to a domestic corporation (domestic 
controlled corporation) controlled (within the meaning of section 
368(c)) by the foreign acquiring corporation as part of the same 
transaction, provided that the domestic controlled corporation's basis 
in such assets is no greater than the basis that the domestic acquired 
corporation had in such assets and the conditions contained in either 
of the following paragraphs are satisfied:
    (i) The domestic acquired corporation is controlled (within the 
meaning of section 368(c)) by 5 or fewer domestic corporations, 
appropriate basis adjustments as provided in section 367(a)(5) are made 
to the stock of the foreign acquiring corporation, and any other 
conditions as provided in regulations under section 367(a)(5) are 
satisfied. For purposes of determining whether the domestic acquired 
corporation is controlled by 5 or fewer domestic corporations, all 
members of the same affiliated group within the meaning of section 1504 
shall be treated as 1 corporation.
    (ii) The requirements of paragraphs (c)(1)(i), (ii), and (iv), and 
(c)(6) of this section are satisfied with respect to the indirect 
transfer of stock in the domestic acquired corporation, and the 
domestic acquired corporation attaches a statement described in 
paragraph (d)(2)(vi)(C) of this section to its U.S. income tax return 
for the taxable year of the transfer.
    (2) Sections 367(a) and (d) shall not apply to transfers described 
in paragraph (d)(1)(vi) of this section where a U.S. person transfers 
assets to a foreign corporation in a section 351 exchange, to the 
extent that such assets are transferred by such foreign corporation to 
a domestic corporation in another section 351 exchange, but only if the 
domestic transferee's basis in the assets is no greater than the basis 
that the U.S. transferor had in such assets.
    (C) Required statement. The statement required by paragraph 
(d)(2)(vi)(B)(1)(ii) of this section shall be entitled ``Required 
Statement under Sec.  1.367(a)-3(d) for Assets Transferred to a 
Domestic Corporation'' and shall be signed under penalties of perjury 
by an authorized officer of the domestic acquired corporation and by an 
authorized officer of the foreign acquiring corporation. The required 
statement shall contain a certification that, if the foreign acquiring 
corporation disposes of any stock of the domestic controlled 
corporation in a transaction described in paragraph (d)(2)(vi)(D) of 
this section, the domestic acquired corporation shall recognize gain as 
described in paragraph (d)(2)(vi)(E)(1) of this section. The domestic 
acquired corporation (or the foreign acquiring corporation on behalf of 
the domestic acquired corporation) shall file a U.S. income tax return 
(or an amended U.S. tax return, as the case may be) for the year of the 
transfer reporting such gain.
    (D) Gain recognition transaction. (1) A transaction described in 
this paragraph (d)(2)(vi)(D) is one where a principal purpose of the 
transfer by the domestic acquired corporation is the avoidance of U.S. 
tax that would have been imposed on the domestic acquired corporation 
on the disposition of the re-transferred assets. A transfer may have a 
principal purpose of tax avoidance even though the tax avoidance 
purpose is outweighed by other purposes when taken together.
    (2) For purposes of paragraph (d)(2)(vi)(D)(1) of this section, a 
transaction is deemed to have a principal purpose of tax avoidance if 
the foreign acquiring corporation disposes of any stock of the domestic 
controlled corporation (whether in a recognition or non-recognition 
transaction) within 2 years of the transfer. The rule in this paragraph 
(d)(2)(vi)(D)(2) shall not apply if the domestic acquired corporation 
(or the foreign acquiring corporation on behalf of the domestic 
acquired corporation) demonstrates to the satisfaction of the 
Commissioner that the avoidance of U.S. tax was not a principal purpose 
of the transaction.
    (E) Amount of gain recognized and other matters. (1) In the case of 
a transaction described in paragraph (d)(2)(vi)(D) of this section, 
solely for purposes of this paragraph (d)(2)(vi)(E), the domestic 
acquired corporation shall be treated as if, immediately prior to the 
transfer, it transferred the re-transferred assets, including any 
intangible assets, directly to a domestic corporation in exchange for 
stock of such domestic corporation in a transaction that is treated as 
a section 351 exchange, and immediately sold such stock to an unrelated 
party for its fair market value in a sale in which it shall recognize 
gain, if any (but not loss). Any gain recognized by the domestic 
acquired corporation pursuant to this paragraph (d)(2)(vi)(E) will 
increase the basis that the foreign acquiring corporation has in the 
stock of the domestic controlled corporation immediately before the 
transaction described in paragraph (d)(2)(vi)(D) of this section, but 
will not increase the basis of the re-transferred assets held by the 
domestic controlled corporation. Section 1.367(d)-1T(g)(6) shall not 
apply with respect to any intangible property included in the re-
transferred assets described in the preceding sentence.
    (2) If additional tax is required to be paid as a result of a 
transaction described in paragraph (d)(2)(vi)(D) of this section, then 
interest must be paid on that amount at rates determined under section 
6621 with respect to the period between the date prescribed for filing 
the domestic acquired corporation's income tax return for the year of 
the transfer and the date on which the additional tax for that year is 
paid.
    (F) Examples. For illustrations of the rules in paragraph 
(d)(2)(vi) of this section, see paragraph (d)(3), Examples 6B, 6C, 6D, 
9, and 13A of this section.
    (G) Effective dates. Paragraph (d)(2)(vi) of this section applies 
only to transactions occurring after the date these regulations are 
published as final

[[Page 760]]

regulations in the Federal Register. See Sec.  1.367(a)-3(d)(2)(vi), as 
contained in 26 CFR part 1 revised as of April 1, 2004, for 
transactions occurring on or after July 20, 1998, until the date these 
regulations are published as final regulations in the Federal Register.
    (3) * * *

    Example 2. Section 368(a)(1)(A)/(a)(2)(E) reorganization--(i) 
Facts. The facts are the same as in Example 1, except that Newco 
merges into W and Newco receives stock of W which it distributes to 
F in a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(E). Pursuant to the reorganization, A receives 40 percent of 
the stock of F in an exchange described in section 354.
    (ii) Result. The consequences of the transfer are similar to 
those described in Example 1. Pursuant to paragraph (d)(1)(ii) of 
this section, the reorganization is subject to the indirect stock 
transfer rules. F is treated as the transferee foreign corporation, 
and W is treated as the transferred corporation. Provided that the 
requirements of paragraph (c)(1) of this section are satisfied, 
including the requirement that A enter into a five-year gain 
recognition agreement as described in Sec.  1.367(a)-8, A's exchange 
of W stock for F stock under section 354 will not be subject to 
section 367(a)(1).
* * * * *
    Example 5A. Triangular section 368(a)(1)(B) reorganization--(i) 
Facts. The facts are the same as in Example 5, except that F is a 
domestic corporation and S is a foreign corporation.
    (ii) Result. U's exchange of Y stock for stock of F, a domestic 
corporation in control of S, the foreign acquiring corporation, is 
treated as an indirect transfer of Y stock to a foreign corporation 
under paragraph (d)(1)(iii) of this section. U's exchange of Y stock 
for F stock will not be subject to section 367(a)(1) provided that 
all of the requirements of paragraph (c)(1) are satisfied, including 
the requirement that U enter in a five-year gain recognition 
agreement. In satisfying the 50 percent or less ownership 
requirements of paragraph (c)(1)(i) and (ii) of this section, U's 
indirect ownership of S stock (through its direct ownership of F 
stock) will determine whether the requirement of paragraph (c)(1)(i) 
is satisfied and will be taken into account in determining whether 
the requirement of paragraph (c)(1)(ii) is satisfied. (See paragraph 
(c)(4)(iv)). For purposes of applying the gain recognition agreement 
provisions of paragraph (d)(2) of this section and Sec.  1.367(a)-8, 
F is treated as the transferee foreign corporation. The gain 
recognition agreement would be triggered if F sold all or a portion 
of the stock of S, or if S sold all or a portion of the stock of Y.
* * * * *
    Example 6A. Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer--(i) Facts. The facts are the same as in 
Example 6, except that the transaction is structured as a section 
368(a)(1)(C) reorganization, followed by a controlled asset 
transfer, and R is a foreign corporation. * * * F then contributes 
Businesses B and C to R in a controlled asset transfer. * * *
* * * * *
    Example 6B. Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer to a domestic controlled corporation--(i) 
Facts. The facts are the same as in Example 6A, except that R is a 
domestic corporation.
    (ii) Result. As in Example 6A, the outbound transfer of the 
Business A assets to F is not affected by the rules of this 
paragraph (d) and is subject to the general rules under section 367. 
However, the Business A assets qualify for the section 367(a)(3) 
active trade or business exception. The Business B and C assets are 
part of an indirect stock transfer under this paragraph (d) but must 
first be tested under sections 367(a) and (d). The Business B assets 
qualify for the active trade or business exception under section 
367(a)(3); the Business C assets do not. However, pursuant to 
paragraph (d)(2)(vi)(B) of this section, the Business C assets are 
not subject to section 367(a) or (d), provided that the basis of the 
Business C assets in the hands of R is no greater than the basis of 
the assets in the hands of Z, and appropriate basis adjustments are 
made pursuant to section 367(a)(5) to the stock of F held by V. (In 
this case, no adjustments are required because, pursuant to section 
358, V takes a basis of $30 in the stock of F, which is equal to V's 
proportionate share of the basis in the assets of Z ($30) 
transferred to F.) V also is deemed to make an indirect transfer of 
stock under the rules of paragraph (d). To preserve non-recognition 
treatment under section 367(a), V must enter into a 5-year gain 
recognition agreement in the amount of $50, the amount of the 
appreciation in the Business B and C assets, as the transfer of such 
assets by Z was not taxable under section 367(a)(1) and constituted 
an indirect stock transfer.
    Example 6C. Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer to a domestic controlled corporation--(i) 
Facts. The facts are the same as in Example 6B, except that Z is 
owned by individuals, none of whom qualify as five-percent target 
shareholders with respect to Z within the meaning of paragraph 
(c)(5)(iii) of this section. The following additional facts are 
present. No U.S. persons that are either officers or directors of Z 
own any stock of F immediately after the transfer. F is engaged in 
an active trade or business outside the United States that satisfies 
the test set forth in paragraph (c)(3) of this section.
    (ii) Result. The transfer of the Business A assets is not 
affected by the rules of this paragraph (d). However, the transfer 
of such assets is subject to gain recognition under section 
367(a)(1), because the section 367(a)(3) active trade or business 
exception is inapplicable pursuant to section 367(a)(5). The 
Business B and C assets are part of an indirect stock transfer under 
this paragraph (d) but must first be tested under sections 367(a) 
and (d). The transfer of the Business B assets (which otherwise 
would satisfy the section 367(a)(3) active trade or business 
exception) generally is subject to section 367(a)(1) pursuant to 
section 367(a)(5). The transfer of the Business C assets generally 
is subject to sections 367(a)(1) and (d). However, pursuant to 
paragraph (d)(2)(vi)(B) of this section, the transfer of the 
Business B and C assets is not subject to sections 367(a)(1) and 
(d), provided the basis of the Business B and C assets in the hands 
of R is no greater than the basis in the hands of Z and certain 
other requirements are satisfied. Since Z is not controlled within 
the meaning of section 368(c) by 5 or fewer domestic corporations, 
the indirect transfer of Z stock must satisfy the requirements of 
paragraphs (c)(1)(i), (ii), and (iv), and (c)(6) of this section, 
and Z must attach a statement described in paragraph (d)(2)(vi)(C) 
of this section to its U.S. income tax return for the taxable year 
of the transfer. In general, the statement must contain a 
certification that, if F disposes of the stock of R (in a 
recognition or nonrecognition transaction) and a principal purpose 
of the transfer is the avoidance of U.S. tax that would have been 
imposed on Z on the disposition of the Business B and C assets 
transferred to R, then Z (or F on behalf of Z) will file a return 
(or amended return as the case may be) recognizing gain ($50), as 
if, immediately prior to the reorganization, Z transferred the 
Business B and C assets to a domestic corporation in exchange for 
stock in a transaction treated as a section 351 exchange and 
immediately sold such stock to an unrelated party for its fair 
market value. A transaction is deemed to have a principal purpose of 
U.S. tax avoidance if F disposes of R stock within two years of the 
transfer, unless Z (or F on behalf of Z) can rebut the presumption 
to the satisfaction of the Commissioner. See paragraph 
(d)(2)(vi)(D)(2) of this section. With respect to the indirect 
transfer of Z stock, the requirements of paragraphs (c)(1)(i), (ii), 
and (iv) of this section are satisfied. Thus, assuming Z attaches 
the statement described in paragraph (d)(2)(vi)(C) of this section 
to its U.S. income tax return and satisfies the reporting 
requirements of (c)(6) of this section, the transfer of Business B 
and C assets is not subject to section 367(a) or (d).
    Example 6D. Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer to a domestic controlled corporation--(i) 
Facts. The facts are the same as in Example 6C, except that the Z 
shareholders receive 60 percent of the F stock in exchange for their 
Z stock in the reorganization.
    (ii) Result. The requirement of paragraph (c)(1)(i) of this 
section is not satisfied because the Z shareholders that are U.S. 
persons do not receive 50 percent or less of the total voting power 
and the total value of the stock of F in the transaction. 
Accordingly, Z shareholders that are U.S. persons are subject to 
section 367(a)(1) on their exchange of Z stock for F stock pursuant 
to the reorganization. For the same reason, the conditions of 
paragraph (d)(2)(vi)(B)(1)(ii) of this section are not met. 
Accordingly, the transfer of Business B and C assets is subject to 
sections 367(a)(1) and (d), even though such assets are re-
transferred to R, a domestic corporation. As in Example 6C, the 
transfer of Business A assets, which is not affected by the rules of 
paragraph (d) of this section, is

[[Page 761]]

subject to gain recognition under sections 367(a)(1) and (5).
* * * * *
    Example 9. Concurrent application with a controlled asset 
transfer--(i) Facts. The facts are the same as in Example 8, except 
that R transfers the Business A assets to M, a wholly owned domestic 
subsidiary of R, in a controlled asset transfer. In addition, V's 
basis in its Z stock is $90.
    (ii) Result. Pursuant to paragraph (d)(2)(vi)(B) of this 
section, sections 367(a) and (d) do not apply to Z's transfer of the 
Business A assets to R, because such assets are re-transferred to M, 
a domestic corporation, provided that the basis of the Business A 
assets in the hands of M is no greater than the basis of the assets 
in the hands of Z, and certain other requirements are satisfied. 
Because Z is controlled (within the meaning of section 368(c)) by V, 
a domestic corporation, appropriate basis adjustments must be made 
pursuant to section 367(a)(5) to the stock of F held by V. (In this 
case, no adjustments are required because, pursuant to section 358, 
V takes a basis of $90 in the stock of F, which is less than V's 
proportionate share of the basis in the assets of Z ($100) 
transferred to R.) Section 367(a)(1) does not apply to Z's transfer 
of its Business B assets to R (which are not re-transferred to M) 
because such assets qualify for an exception to gain recognition 
under section 367(a)(3). With respect to the indirect transfer of Z 
stock, such transfer is not subject to gain recognition under 
section 367(a)(1) if the requirements of paragraph (c) of this 
section are satisfied, including the requirement that V enter into a 
5-year gain recognition agreement and comply with the requirements 
of Sec.  1.367(a)-8 with respect to the gain ($100) realized on the 
Z stock. Under paragraphs (d)(2)(i) and (ii) of this section, the 
transferee foreign corporation is F and the transferred corporation 
is M. Pursuant to paragraph (d)(2)(iv) of this section, a 
disposition by F of the stock of R, or a disposition by R of the 
stock of M, will trigger the gain recognition agreement. To 
determine whether an asset disposition constitutes a deemed 
disposition of the transferred corporation's stock under the rules 
of Sec.  1.367(a)-8(e)(3)(i), both the Business A assets in M and 
the Business B assets in R must be considered.
    Example 10. Concurrent application in section 368(a)(1)(A)/
(a)(2)(D) reorganization--(i) Facts. The facts are the same as in 
Example 8, except that R acquires all of the assets of Z in a 
reorganization described in sections 368(a)(1)(A) and (a)(2)(D). 
Pursuant to the reorganization, V receives 30 percent of the stock 
of F in a section 354 exchange.
    (ii) Result. The consequences of the transaction are similar to 
those in Example 8. The assets of Businesses A and B that are 
transferred to R must be tested under section 367(a) prior to the 
consideration of the indirect stock transfer rules of this paragraph 
(d). The Business B assets qualify for the active trade or business 
exception under section 367(a)(3). Because the Business A assets do 
not qualify for the exception, Z must recognize $40 of gain under 
section 367(a) on the transfer of Business A assets to R. Because V 
and Z file a consolidated return, V's basis in the stock of Z is 
increased from $100 to $140 as a result of Z's $40 gain. V's 
indirect transfer of Z stock will be taxable under section 367(a) 
unless V enters into a gain recognition agreement in the amount of 
$60 ($200 value of Z stock less $140 adjusted basis) and the other 
requirements of paragraph (c)(1) of this section are satisfied.
    Example 11. Section 368(a)(1)(A)/(a)(2)(E) reorganization--(i) 
Facts. F, a foreign corporation, owns all the stock of D, a domestic 
corporation. V, a domestic corporation, owns all the stock of Z, a 
foreign corporation. V has a basis of $100 in the stock of Z which 
has a fair market value of $200. D is an operating corporation with 
assets valued at $100 with a basis of $60. In a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(E), D merges into Z, 
and V exchanges its Z stock for 55 percent of the outstanding F 
stock.
    (ii) Result. Under paragraph (d)(1)(ii) of this section, V is 
treated as making an indirect transfer of Z stock to F. V's exchange 
of Z stock for F stock will be taxable under section 367(a) (and 
section 1248 will be applicable) if V fails to enter into a 5-year 
gain recognition agreement in accordance with the requirements of 
Sec.  1.367(a)-8. Under paragraph (b)(2) of this section, if V 
enters into a gain recognition agreement, the exchange will be 
subject to the provisions of section 367(b) and the regulations 
thereunder as well as section 367(a). Under Sec.  1.367(b)-4(b) of 
this chapter, however, no income inclusion is required because both 
F and Z are controlled foreign corporations with respect to which V 
is a section 1248 shareholder immediately after the exchange. Under 
paragraphs (d)(2)(i) and (ii) of this section, the transferee 
foreign corporation is F, and the transferred corporation is Z (the 
acquiring corporation). If F disposes (within the meaning of Sec.  
1.367(a)-8(e)) of all (or a portion) of Z stock within the 5-year 
term of the agreement (and V has not made a valid election under 
Sec.  1.367(a)-8(b)(1)(vii)), V is required to file an amended 
return for the year of the transfer and include in income, with 
interest, the gain realized but not recognized on the initial 
section 354 exchange. To determine whether Z (the transferred 
corporation) disposes of substantially all of its assets, the assets 
of Z immediately prior to the transaction are taken into account, 
pursuant to paragraph (d)(2)(v)(B) of this section. Because D is 
owned by F, a foreign corporation, section 367(a)(5) precludes any 
assets of D from qualifying for nonrecognition under section 
367(a)(3). Thus, D recognizes $40 of gain on the transfer of its 
assets to Z under section 367(a)(1).
* * * * *
    Example 15. Concurrent application of indirect stock transfer 
rules and section 367(b)-- (i) Facts. F, a foreign corporation, owns 
all of the stock of Newco, a domestic corporation. P, a domestic 
corporation, owns all of the stock of FC, a foreign corporation. P's 
basis in the stock of FC is $50 and the value of FC stock is $100. 
The all earnings and profits amount with respect to the FC stock 
held by P is $60. See Sec.  1.367(b)-2(d). In a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(D) (and paragraph 
(d)(1)(i) of this section), Newco acquires all of the properties of 
FC, and P exchanges its stock in FC for 20 percent of the stock in 
F.
    (ii) Result. Because a domestic corporation, Newco, acquires the 
assets of a foreign corporation, FC, in an asset reorganization to 
which Sec.  1.367(b)-3(a) and (b) and the indirect stock rules of 
paragraph (d) of this section apply, the section 367(b) rules apply 
before the section 367(a) rules apply. See Sec.  1.367(a)-
3(b)(2)(i)(A). Under the rules of section 367(b), P must include in 
income the all earnings and profits amount of $60 with respect to 
its FC stock. See Sec.  1.367(b)-3. Although P's exchange of FC 
stock for F stock under section 354 is an indirect stock transfer, 
no gain is recognized under section 367(a), because P's basis in the 
FC stock is increased by the amount ($60) included in income under 
the rules of section 367(b). See Sec.  1.367(b)-2(e)(3)(ii). 
Alternatively, if P's all earnings and profits amount were $30, then 
the amount of the income inclusion and basis adjustment under the 
rules of section 367(b) would be $30, and the amount of gain subject 
to section 367(a)(1) would be $20 unless P entered into a 5-year 
gain recognition agreement in accordance with Sec.  1.367(a)-8.

* * * * *
    (e) * * *
    (1) In general. Except as provided in paragraphs (b)(2)(i)(A), 
(d)(1)(iii)(B), and (d)(2)(vi)(G), or in this paragraph (e), the rules 
in paragraphs (a), (b), and (d) of this section apply to transfers 
occurring on or after July 20, 1998. The rules in paragraphs (a) and 
(d) of this section, as they apply to section 368(a)(1)(A) 
reorganizations (including reorganizations described in section 
368(a)(2)(D) or (E)) involving a foreign acquiring or acquired 
corporation, apply only to transfers occurring after the date these 
regulations are published as final regulations in the Federal Register. 
* * *
* * * * *
    Par. 5. Section 1.367(a)-8 is amended as follows:
    1. In paragraphs (c)(2) and (d), remove the words ``district 
director'' and add ``Director of Field Operations'' in their place.
    2. In paragraph (e)(1)(i), a sentence is added after the first 
sentence.
    The addition reads as follows:


Sec.  1.367(a)-8  Gain recognition agreement requirements.

* * * * *
    (e) * * *
    (1) * * *
    (i) * * * It also includes an indirect disposition of the stock of 
the transferred corporation as described in Sec.  1.367(a)-3(d)(2)(iv). 
* * *
* * * * *
    Par. 6. In Sec.  1.367(b)-1(a), remove the third and fourth 
sentences and add a sentence in their place to read as follows:

[[Page 762]]

Sec.  1.367(b)-1  Other transfers.

    (a) * * * For rules coordinating the concurrent application of 
sections 367(a) and (b), including the extent to which section 367(b) 
does not apply if the foreign corporation is not treated as a 
corporation under section 367(a), see Sec.  1.367(a)-3(b)(2)(i). * * *
* * * * *
    Par. 7. In Sec.  1.367(b)-3(b)(3)(ii), revise paragraph (i) of 
Example 5 to read as follows:


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

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *

    Example 5--(i) Facts. DC1, a domestic corporation, owns all of 
the outstanding stock of FC1, a foreign corporation. FC1 owns all of 
the outstanding stock of FC2, a foreign corporation. The all 
earnings and profits amount with respect to the FC2 stock owned by 
FC1 is $20. In a reorganization described in section 368(a)(1)(A), 
DC2, a domestic corporation unrelated to FC1 or FC2, acquires all of 
the assets and liabilities of FC2 pursuant to a State W merger. FC2 
receives DC2 stock and distributes such stock to FC1. The FC2 stock 
held by FC1 is canceled, and FC2 ceases its separate legal 
existence.

* * * * *
    Par. 8. Section 1.367(b)-4 is amended as follows.
    1. Paragraph (a) is revised.
    2. Redesignate paragraph (b)(1)(ii) as paragraph (b)(1)(iii), and 
add new paragraph (b)(1)(ii).
    3. In newly designated paragraph (b)(1)(iii), after Example 3, add 
Examples 3A and 3B.
    The revisions and additions read as follows:


Sec.  1.367(b)-4  Acquisition of foreign corporate stock or assets by a 
foreign corporation in certain nonrecognition transactions.

    (a) Scope. This section applies to an acquisition by a foreign 
corporation (the foreign acquiring corporation) of the stock or assets 
of a foreign corporation (the foreign acquired corporation) in an 
exchange described in section 351 or a reorganization described in 
section 368(a)(1). In the case of a reorganization described in 
sections 368(a)(1)(A) and (a)(2)(E), this section applies if stock of 
the foreign surviving corporation is exchanged for stock of a foreign 
corporation in control of the merging corporation; in such a case, the 
foreign surviving corporation is treated as a foreign acquired 
corporation for purposes of this section. A foreign corporation that 
undergoes a reorganization described in section 368(a)(1)(E) is treated 
as both the foreign acquired corporation and foreign acquiring 
corporation for purposes of this section. See Sec.  1.367(a)-3(b)(2) 
for transactions subject to the concurrent application of this section 
and section 367(a).
    (b) * * *
    (1) * * *
    (ii) Exception. In the case of a triangular reorganization 
described in section 368(a)(1)(B) or (C), or a reorganization described 
in sections 368(a)(1)(A) and (a)(2)(D) or (E), an exchange is not 
described in paragraph (b)(1)(i) of this section if the stock received 
in the exchange is stock of a domestic corporation and, immediately 
after the exchange, such domestic corporation is a section 1248 
shareholder of the acquired corporation (in the case of a triangular 
section 368(a)(1)(B) reorganization) or the surviving corporation (in 
the case of a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(D) or (E)) and such acquired or surviving corporation is a 
controlled foreign corporation. See paragraph (b)(1)(iii) of this 
section, Example 3B for an illustration of this rule.
    (iii) * * *

    Example 3A. (i) Facts. The facts are the same as in Example 3, 
except that FC1 merges into FC2 in a reorganization described in 
sections 368(a)(1)(A) and (a)(2)(E). Pursuant to the reorganization, 
DC exchanges its FC2 stock for stock of FP.
    (ii) Result. The result is similar to the result in Example 3. 
The transfer is an indirect stock transfer subject to section 
367(a). See Sec.  1.367(a)-3(d)(1)(ii). Accordingly, DC's exchange 
of FC2 stock for FP stock will be taxable under section 367(a) (and 
section 1248 will be applicable) if DC fails to enter into a gain 
recognition agreement. If DC enters into a gain recognition 
agreement, the exchange will be subject to the provisions of section 
367(b) and the regulations thereunder, as well as section 367(a). If 
FP and FC2 are controlled foreign corporations as to which DC is a 
(direct or indirect) section 1248 shareholder immediately after the 
reorganization, then paragraph (b)(1)(i) of this section does not 
apply to require inclusion in income of the section 1248 amount and 
the amount of the gain recognition agreement is the amount of gain 
realized on the indirect stock transfer. If FP or FC2 is not a 
controlled foreign corporation as to which DC is a (direct or 
indirect) section 1248 shareholder immediately after the exchange, 
then DC must include in income the section 1248 amount ($20) 
attributable to the FC2 stock that DC exchanged. Under these 
circumstances, the gain recognition agreement would be the amount of 
gain realized on the indirect transfer, less the $20 section 1248 
income inclusion.
    Example 3B. (i) Facts. The facts are the same as Example 3, 
except that USP, a domestic corporation, owns the controlling 
interest (within the meaning of section 368(c)) in FC1 stock. FC2 
merges into FC1 in a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D). Pursuant to the reorganization, DC 
exchanges its FC2 stock for USP stock.
    (ii) Result. Because DC receives stock of a domestic 
corporation, USP, in the section 354 exchange, the transfer is not 
an indirect stock transfer subject to section 367(a). Accordingly, 
the exchange will be subject only to the provisions of section 
367(b) and the regulations thereunder. Under paragraph (b)(1)(ii)(A) 
of this section, because the stock received is stock of a domestic 
corporation (USP) and, immediately after the exchange, USP is a 
section 1248 shareholder of FC1 (the acquiring corporation) and FC1 
is a controlled foreign corporation, the exchange is not described 
in paragraph (b)(1)(i) of this section and DC includes no amount in 
its gross income. See Sec.  1.367(b)-13(b) and (c) for the basis and 
holding period rules applicable to this transaction, which cause 
USP's adjusted basis and holding period in the stock of FC1 after 
the transaction to reflect the basis and holding period that DC had 
in its FC2 stock.
* * * * *

    Par. 9. In Sec.  1.367(b)-6, paragraph (a)(1), add a sentence to 
the end to read as follows:


Sec.  1.367(b)-6  Effective dates and coordination rules.

    (a) * * *
    (1) * * * The rules of Sec. Sec.  1.367(b)-3 and 1.367(b)-4, as 
they apply to reorganizations described in section 368(a)(1)(A) 
(including reorganizations described in section 368(a)(2)(D) or (E)) 
involving a foreign acquiring or foreign acquired corporation, apply 
only to transfers occurring after the date these regulations are 
published as final regulations in the Federal Register.
* * * * *
    Par. 10. Section 1.367(b)-13 is added to read as follows:


Sec.  1.367(b)-13  Special rules for determining basis and holding 
period.

    (a) Scope and definitions--(1) Scope. This section provides special 
basis and holding period rules for certain transactions involving the 
acquisition of property by a foreign acquiring corporation in 
nonrecognition exchanges. Special rules apply to determine the basis 
and holding period of stock in a foreign corporation received by 
certain shareholders in a section 354 or 356 exchange. In addition, 
special rules apply to determine the basis and holding period of stock 
of certain foreign surviving corporations held by a controlling 
corporation whose stock is issued in an exchange under section 354 or 
356 in a triangular reorganization. This section

[[Page 763]]

applies to transactions that are subject to section 367(b) as well as 
section 367(a), including transactions concurrently subject to sections 
367(a) and (b).
    (2) Definitions. For purposes of this section, the following 
definitions apply:
    (i) A foreign acquired corporation is a foreign corporation whose 
stock or assets are acquired by a foreign corporation in a 
reorganization described in section 368(a)(1). In a reverse triangular 
merger, where T is a foreign corporation, T is treated as a foreign 
acquired corporation. A foreign corporation that undergoes a 
reorganization described in section 368(a)(1)(E) is treated as a 
foreign acquired corporation.
    (ii) A block of stock has the meaning provided in Sec.  1.1248-
2(b).
    (iii) A triangular reorganization is a reorganization described in 
Sec.  1.358-6(b)(2)(i), (ii), or (iii) (but not a reorganization 
described in Sec.  1.358-6(b)(2)(iv)). A triangular C reorganization, a 
forward triangular merger, and a reverse triangular merger each is a 
reorganization described in Sec.  1.358-6(b)(2)(i), (ii), or (iii), 
respectively. For purposes of triangular reorganizations--
    (A) P is a corporation that is a party to a reorganization that is 
in control (within the meaning of section 368(c)) of another party to 
the reorganization and whose stock is transferred pursuant to the 
reorganization;
    (B) S is a corporation that is a party to the reorganization and 
that is controlled by P; and
    (C) T is a corporation that is another party to the reorganization.
    (b) Determination of basis and holding period for exchanges of 
foreign stock--(1) Application. Except as provided in paragraph (b)(4) 
of this section, this paragraph (b) applies to a shareholder that 
exchanges stock of a foreign acquired corporation in an exchange under 
section 354 or 356 for stock of a controlled foreign corporation, if--
    (i) Immediately before the exchange either such shareholder is a 
section 1248 shareholder with respect to the foreign acquired 
corporation, or such shareholder is a foreign corporation and a United 
States person is a section 1248 shareholder with respect to both such 
foreign corporation and the foreign acquired corporation; and
    (ii) The exchange is not described in Sec.  1.367(b)-4(b)(1)(i), 
(2)(i), or (3).
    (2) Basis and holding period rules--(i) If a shareholder surrenders 
a share of stock in an exchange under the terms of section 354 or 356, 
the basis and holding period of each share of stock received in the 
exchange shall be the same as the basis and holding period of the 
allocable portion of the share or shares of stock exchanged therefor, 
as adjusted under Sec.  1.358-1 (such that the section 1248 amount of 
each share of stock exchanged is preserved in the share or shares of 
stock received). If more than one share of stock is received in 
exchange for one share of stock, the basis of the share of stock 
surrendered shall be allocated to the shares of stock received in the 
exchange in proportion to the fair market value of the shares of stock 
received. If one share of stock is received in respect of more than one 
share of stock or a fraction of a share of stock is received, the basis 
of the shares of stock surrendered must be allocated to the share of 
stock received, or a fraction thereof received, in a manner that 
reflects, to the greatest extent possible, that a share of stock is 
received in respect of shares of stock acquired on the same date and at 
the same price. The provisions of this paragraph may be applied, to the 
extent possible, on the basis of blocks of stock.
    (ii) If a shareholder that purchased or acquired shares of stock in 
a corporation on different dates or at different prices exchanges such 
shares of stock under the terms of section 354 or 356, and the 
shareholder is not able to identify which particular share or shares of 
stock (or portion of a share of stock) is received in exchange for a 
particular share or shares of stock, the shareholder may designate 
which share or shares of stock is received in exchange for a particular 
share or shares of stock, provided that such designation is consistent 
with the terms of the exchange or distribution. The designation must be 
made on or before the first date on which the basis of a share of stock 
received is relevant. The basis of a share received, for example, is 
relevant when such share is sold or otherwise transferred. The 
designation will be binding for purposes of determining the Federal tax 
consequences of any sale or transfer of a share received. If the 
shareholder fails to make a designation, then the shareholder will not 
be able to identify which share is sold or transferred for purposes of 
determining the basis of property sold or transferred under section 
1012 and Sec.  1.1012-1(c) and, instead, will be treated as selling or 
transferring the share received in respect of the earliest share 
purchased or acquired. See paragraph (e), Example 1 of this section for 
an illustration of this paragraph (b).
    (3) In the case of a triangular reorganization, this paragraph (b) 
applies only to the exchange of T stock for P stock by T shareholders. 
See paragraph (c) of this section to determine the basis and holding 
period of stock of the surviving corporation (S or T) held by P 
immediately after a triangular reorganization.
    (4) Paragraphs (b)(1) through (3) of this section shall not apply 
to determine the basis of a share of stock received by a shareholder in 
an exchange described in both section 351 and section 354 or 356, if, 
in connection with the exchange, the shareholder exchanges property for 
stock in an exchange to which neither section 354 nor 356 applies or 
liabilities of the shareholder are assumed.
    (c) Determination of basis and holding period for triangular 
reorganizations--(1) Application. In the case of a triangular 
reorganization, this paragraph (c) applies, if--
    (i) In the case of a reverse triangular merger--
    (A) Immediately before the transaction, either P is a section 1248 
shareholder with respect to S, or P is a foreign corporation and a 
United States person is a section 1248 shareholder with respect to both 
P and S; and
    (B) P's exchange of S stock is not described in Sec.  1.367(b)-3(a) 
and (b) or in Sec.  1.367(b)-4(b)(1)(i), (2)(i), or (3); or
    (ii)(A) Immediately before the transaction, a shareholder of T is 
either a section 1248 shareholder with respect to T or a foreign 
corporation and a United States person is a section 1248 shareholder 
with respect to both such foreign corporation and T; and
    (B) With respect to at least one of the exchanging shareholders 
described in paragraph (c)(1)(ii)(A) of this section, the exchange of T 
stock is not described in Sec.  1.367(b)-3(a) and (b) or in Sec.  
1.367(b)-4(b)(1)(i), (2)(i), or (3).
    (2) Basis and holding period rules. In the case of a triangular 
reorganization described in this paragraph (c), each share of stock of 
the surviving corporation (S or T) held by P must be divided into 
portions attributable to the S stock and the T stock immediately before 
the exchange. See paragraph (e) of this section, Examples 2 through 5 
for illustrations of this rule.
    (i) Portions attributable to S stock--(A) In the case of a forward 
triangular merger or a triangular C reorganization, the basis and 
holding period of the portion of each share of surviving corporation 
stock attributable to the S stock is the basis and holding period of 
such share of stock immediately before the exchange.
    (B) In the case of a reverse triangular merger, the basis and 
holding period of the portion of each share of surviving corporation 
stock attributable to the S stock is the basis and the holding period

[[Page 764]]

immediately before the exchange of a proportionate amount of the S 
stock to which the portion relates. If P is a shareholder described in 
paragraph (c)(1)(i)(A) of this section with respect to S, and P 
exchanges two or more blocks of S stock pursuant to the transaction, 
then each share of the surviving corporation (T) attributable to the S 
stock must be further divided into separate portions to account for the 
separate blocks of stock in S.
    (C) If the value of S stock immediately before the triangular 
reorganization is less than one percent of the value of the surviving 
corporation stock immediately after the triangular reorganization, then 
P may determine its basis in the surviving corporation stock by 
applying the rules of paragraph (c)(2)(ii) of this section to determine 
the basis and holding period of the surviving corporation stock 
attributable to the T stock, and then increasing the basis of each 
share of surviving corporation stock by the proportionate amount of P's 
aggregate basis in the S stock immediately before the exchange (without 
dividing the stock of the surviving corporation into separate portions 
attributable to the S stock).
    (ii) Portions attributable to T stock--(A) If any exchanging 
shareholder of T stock is described in paragraph (c)(1)(ii) of this 
section, the basis and holding period of the portion of each share of 
stock in the surviving corporation attributable to the T stock is the 
basis and holding period immediately before the exchange of a 
proportionate amount of the T stock to which such portion relates. If 
any exchanging shareholder of T stock is described in paragraph 
(c)(1)(ii) of this section, and such shareholder exchanges two or more 
blocks of T stock pursuant to the transaction, then each share of 
surviving corporation stock attributable to the T stock must be further 
divided into separate portions to account for the separate blocks of T 
stock.
    (B) If no exchanging shareholder of T stock is described in 
paragraph (c)(1)(ii) of this section, the rules of Sec.  1.358-6(c) 
apply to determine the basis of the portion of each share of the 
surviving corporation attributable to T immediately before the 
exchange.
    (d) Special rules applicable to divided shares of stock --(1) In 
general--(i) Shares of stock in different blocks can be aggregated into 
one divided portion for basis purposes, if such shares immediately 
before the exchange are owned by one or more shareholders that are--
    (A) Neither section 1248 shareholders with respect to the 
corporation nor foreign corporate shareholders; or
    (B) Foreign corporate shareholders, provided that no United States 
persons are section 1248 shareholders with respect to both such foreign 
corporate shareholders and the corporation.
    (ii) For purposes of determining the amount of gain realized on the 
sale or exchange of stock that has a divided portion pursuant to 
paragraph (c) of this section, any amount realized on such sale or 
exchange will be allocated to each divided portion of the stock based 
on the relative fair market value of the stock to which the portion is 
attributable at the time the portions were created.
    (iii) Shares of stock will no longer be required to be divided if 
section 1248 or section 964(e) would not apply to a disposition or 
exchange of such stock.
    (2) Pre-exchange earnings and profits. All earnings and profits (or 
deficits) accumulated by a foreign corporation before the 
reorganization and attributable to a share (or block) of stock for 
purposes of section 1248 are attributable to the divided portion of 
stock with the basis and holding period of that share (or block). See 
Sec.  1.367(b)-4(d).
    (3) Post-exchange earnings and profits. Any earnings and profits 
(or deficits) accumulated by the surviving corporation subsequent to 
the reorganization are attributed to each divided share of stock 
pursuant to section 1248 and the regulations thereunder. The amount of 
earnings and profits (or deficits) attributable to a divided share of 
stock is further attributed to the divided portions of such share of 
stock based on the relative fair market value of each divided portion 
of stock.
    (e) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i) Facts. US1 is a domestic corporation that owns 
all the stock of FT, a foreign corporation with 100 shares of stock 
outstanding. Each share of FT stock is valued at $10x. Because US1 
acquired the stock of FT at two different dates, US1 owns two blocks 
of FT stock for purposes of section 1248. The first block consists 
of 60 shares. The shares in the first block have a basis of $300x 
($5x per share), a holding period of 10 years, and $240x ($4x per 
share) of earnings and profits attributable to the shares for 
purposes of section 1248. The second block consists of 40 shares. 
The shares in the second block have a basis of $600x ($15x per 
share), a holding period of 2 years, and $80x ($2x per share) of 
earnings and profits attributable to the shares for purposes of 
section 1248. US2, a domestic corporation, owns all of the stock of 
FP, a foreign corporation, which owns all of the stock of FS, a 
foreign corporation. FT merges into FS with FS surviving in a 
reorganization described in section 368(a)(1)(A). Pursuant to the 
reorganization, US1 receives 50 shares of FS stock with a value of 
$1,000x for its FT stock in an exchange that qualifies for 
nonrecognition under section 354.
    (ii) Basis and holding period determination--(A) US1 is a 
section 1248 shareholder of FT immediately before the exchange and 
exchanges its FT stock for stock of a controlled foreign corporation 
(FS) as to which US1 is a section 1248 shareholder immediately after 
the exchange. US1 is not required to include income under Sec.  
1.367(b)-4(b) with respect to the exchange. Accordingly, the basis 
and holding period of the FS stock received by US1 is determined 
pursuant to paragraph (b) of this section.
    (B) Pursuant to paragraph (b) of this section, 30 shares of the 
FS stock received by US1 in the reorganization (valued at $20x per 
share and exchanged for US1's first block of 60 shares of FT stock) 
have a basis of $300x ($10x per share), a holding period of 10 
years, and $240x of earnings and profits ($8x per share) 
attributable to such shares for purposes of section 1248. In 
addition, 20 shares of the FS stock (valued at $20 per share and 
exchanged for US1's second block of 40 shares of FT stock) have a 
basis of $600x ($30x per share), a holding period of 2 years, and 
$80x of earnings and profits ($4x per share) attributable to such 
shares for purposes of section 1248.
    (iii) Subsequent Disposition. Assume, subsequent to the 
exchange, US1 disposes of 20 shares of FS stock. On or before the 
date of the disposition when the basis of the F1 shares received by 
US1 becomes relevant, US1 can designate the 20 shares from the first 
block, the second block, or from any combination of shares in both 
blocks.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that US1 receives 50 shares of FP stock (instead of FS stock) 
with a value of $1,000x in exchange for its FT stock. Accordingly, 
the merger of FT into FS qualifies as forward triangular merger, and 
immediately after the exchange US1 is a section 1248 shareholder 
with respect to FP and FS. Additionally, prior to the transaction, 
FP owned two blocks of FS stock. Each block consisted of 10 shares 
with a value of $200x ($20x per share). The shares in the first 
block had a basis of $50x ($5x per share), a holding period of 10 
years, and $50x ($5x per share) of earnings and profits attributable 
to such shares for purposes of section 1248. The shares in the 
second block had a basis of $100x ($10x per share), a holding period 
of 5 years, and $20x ($2x per share) of earnings and profits 
attributable to such shares for purposes of section 1248.
    (ii) Basis and holding period determination. (A) The basis and 
holding period of the FP shares received by US1 in the exchange are 
determined pursuant to paragraph (b) of this section and are 
identical to the results in Example 1.
    (B)(1) US1 is a section 1248 shareholder of FT immediately 
before the transaction. Moreover, US1 is not required to include 
income under Sec.  1.367(b)-3(b) or 1.367(b)-4(b) as described in 
paragraph (c)(2) of this section. Accordingly, the basis and holding 
period of the FS stock held by FP immediately after the triangular 
reorganization is determined pursuant to paragraph (c) of this 
section.

[[Page 765]]

    (2) Pursuant to paragraph (c) of this section, each share of FS 
stock is divided into portions attributable to the basis and holding 
period of the FS stock held by FP immediately before the exchange 
(the FS portion) and the FT stock held by US1 immediately before the 
exchange (the FT portion). The basis and holding period of the FS 
portion is the basis and holding period of the FS stock held by FP 
immediately before the exchange. Thus, each share of FS stock in the 
first block has a portion with a basis of $5x, a value of $20x, a 
holding period of 10 years, and $5x of earnings and profits 
attributable to such portion for purposes of section 1248. Each 
share of FS stock in the second block has a portion with a basis of 
$10x, a value of $20x, a holding period of 5 years, and $2x of 
earnings and profits attributable to such portion for purposes of 
section 1248.
    (3) Because the exchanging shareholder of FT stock (US1) is a 
section 1248 shareholder, the holding period and basis of the FT 
portion is the holding period and the proportionate amount of the 
basis of the FT stock immediately before the exchange to which such 
portion relates. Further, because US1 exchanged two blocks of FT 
stock, the FT portion must be divided into two separate portions 
attributable to the two blocks of FT stock. Thus, each share of FS 
stock will have a second portion with a basis of $15x ($300x basis / 
20 shares), a value of $30x ($600x value / 20 shares), a holding 
period of 10 years, and $12x of earnings and profits ($240x / 20 
shares) attributable to such portion for purposes of section 1248. 
Each share of FS stock will have a third portion with a basis of 
$30x ($600x basis / 20 shares), a value of $20x ($400x value / 20 
shares), a holding period of 2 years, and $4x of earnings and 
profits ($80x / 20 shares) attributable to such portion for purposes 
of section 1248.
    (iii) Assume, immediately after the transaction, FP disposes of 
a share of FS stock from the first block. When FP disposes of any 
share of its FS stock, it is treated as disposing of each divided 
portion of such share. With respect to the first portion 
(attributable to the FS stock), FP recognizes a gain of $15x ($20x 
value-$5x basis), $5x of which is treated as a dividend under 
section 1248. With respect to the second portion (attributable to 
the first block of FT stock), FP recognizes a gain of $15x ($30x 
value-$15x basis), $12x of which is treated as a dividend under 
section 1248. With respect to the third portion (attributable to the 
second block of FT stock), FP recognizes a capital loss of $10x 
($20x value-$30x basis).
    (iv) Assume further, immediately after the transaction, FP also 
disposes of a share of stock from the second block of FS stock. With 
respect to the first portion (attributable to the FS stock), FP 
recognizes a gain of $10x ($20x value-$10x basis), $2x of which is 
treated as a dividend under section 1248. With respect to the second 
portion (attributable to the first block of FT stock), FP recognizes 
a gain of $15x ($30x value-$15x basis), $12x of which is treated as 
a dividend under section 1248. With respect to the third portion 
(attributable to the second block of FT stock), FP recognizes a 
capital loss of $10x ($20x value-$30x basis).
    Example 2A. (i) Facts. The facts are the same as in Example 2, 
except that FS merges into FT with FT surviving in a reverse 
triangular merger. Pursuant to the merger, US1 receives FP stock 
with a value of $1,000x in exchange for its FT stock, and FP 
receives 10 shares of FT stock with a value of $1,400x in exchange 
for its FS stock. Immediately after the exchange, US1 is a section 
1248 shareholder with respect to FP and FT.
    (ii) Basis and holding period determination--(A) The basis and 
holding period of the FP shares received by US1 and the stock of the 
surviving corporation held by FP are the same as in Example 2, 
except that each share of the surviving corporation (FT, instead of 
FS) will be divided into four portions instead of three portions. 
Because FP exchanges two blocks of FS stock, the FS portion must be 
divided into two separate portions attributable to the two blocks of 
FS stock. Because US1 exchanges two blocks of FT stock, the FT 
portion must be divided into two separate portions attributable to 
the two blocks of FT stock.
    (B) Thus, each share of the surviving corporation (FT) will have 
a first portion (attributable to the first block of FS stock) with a 
basis of $5x ($50x / 10 shares), a value of $20x ($200x / 10 
shares), a holding period of 10 years, and $5x of earnings and 
profits ($50x / 10 shares) attributable to such portion for purposes 
of section 1248. Each share of FT stock will have a second portion 
(attributable to the second block of FS stock) with a basis of $10x 
($100x / 10 shares), a value of $20x ($200x / 10 shares), a holding 
period of 5 years, and $2x of earnings and profits ($20x / 10 
shares) attributable to such portion for purposes of section 1248. 
Moreover, each share of FT stock will have a third portion 
(attributable to the first block of FT stock) with a basis of $30x 
($300x basis / 10 shares), a value of $60x ($600x value / 10 
shares), a holding period of 10 years, and $24x of earnings and 
profits ($240x / 10 shares) attributable to such portion for 
purposes of section 1248. Lastly, each share of FT stock will have a 
fourth portion (attributable to the second block of FT stock) with a 
basis of $60x ($600x basis / 10 shares), a value of $40x ($400x 
value / 10 shares), a holding period of 2 years, and $8x of earnings 
and profits ($80x / 10 shares) attributable to such portion for 
purposes of section 1248.
    Example 3. (i) Facts. USP, a domestic corporation, owns all the 
stock of FS, a foreign corporation with 10 shares of stock 
outstanding. Each share of FS stock has a value of $10x, a basis of 
$5x, a holding period of 10 years, and $7x of earnings and profits 
attributable to such share for purposes of section 1248. FP, a 
foreign corporation, owns the stock of FT, another foreign 
corporation. FP and FT do not have any section 1248 shareholders. FT 
has assets with a value of $100x, a basis of $50x, and no 
liabilities. The FT stock held by FP has a value of $100x and a 
basis of $75x. FT merges into FS with FS surviving in a forward 
triangular merger. Pursuant to the reorganization, FP receives USP 
stock with a value of $100x in exchange for its FT stock.
    (ii) Basis and holding period determination--(A) Because USP is 
a section 1248 shareholder of FS immediately before the transaction, 
the basis and holding period of the FS stock held by USP immediately 
after the triangular reorganization is determined pursuant to 
paragraph (c) of this section.
    (B) Pursuant to paragraph (c) of this section, each share of FS 
stock is divided into portions attributable to the basis and holding 
period of the FS stock held by USP immediately before the exchange 
(the FS portion) and the basis of FT's net assets (the FT portion) 
immediately before the exchange. The basis of FT's net assets (and 
not FT stock) is used to determine the FT portion because FT does 
not have a section 1248 shareholder immediately before the 
transaction. As a result, the rules of Sec.  1.358-6(c) apply to 
determine the basis of the FT portion of each share of FS stock. The 
basis and holding period of the FS portion is the basis and holding 
period of the FS stock held by USP immediately before the exchange. 
Thus, each share of FS stock has a portion with a basis of $5x, a 
value of $10x, and a holding period of 10 years. The basis of the FT 
portion is the basis of the FT assets to which such portion relates. 
Thus, each share of FS stock has a second portion with a basis of 
$5x ($50x basis in FT's assets / 10 shares) and a value of $10x 
($100x value of FT's assets / 10 shares). All of FS's earnings and 
profits prior to the transaction ($70x) is attributed solely to the 
FS portion in each share of FS stock. The FS portion of each share 
of FS stock has earnings and profits of $7x ($70x / 10 shares) 
attributable to such portion for purposes of section 1248. As a 
result of each share of stock being divided into portions, the basis 
of the FS stock is not averaged with the basis of the FT assets to 
increase the section 1248 amount with respect to the stock of the 
surviving corporation (FS).
    Example 4. (i) Facts. US, a domestic corporation, owns all of 
the stock of FT, a foreign corporation. The FT stock held by US 
constitutes a single block of stock with a value of $1,000x, a basis 
of $600x, and holding period of 5 years. USP, a domestic 
corporation, forms FS, a foreign corporation, pursuant to the plan 
of reorganization and capitalizes it with $10x of cash. FS merges 
into FT with FT surviving in a reverse triangular merger and a 
reorganization described in section 368(a)(1)(B). Pursuant to the 
reorganization, US receives USP stock with a value of $1,000x in 
exchange for its FT stock, and USP receives 10 shares of FT stock 
with a value of $1,010x in exchange for its FS stock.
    (ii) Basis and holding period determination. (A) U.S. and USP 
are section 1248 shareholders of FT and FS, respectively, 
immediately before the transaction. Neither US nor USP is required 
to include income under Sec.  1.367(b)-3(b) or 1.367(b)-4(b) as 
described in paragraph (c)(2) of this section. The basis and holding 
period of the FT stock held by USP is determined pursuant to 
paragraph (c) of this section.
    (B) Pursuant to paragraph (c) of this section, because the 
exchanging shareholder of FT stock (US) is a section 1248

[[Page 766]]

shareholder of FT, each share of the surviving corporation (FT) has 
a proportionate amount of the basis and holding period of the FT 
stock immediately before the exchange to which such share relates. 
Thus, the portion of each share of FT stock attributable to the FT 
stock has a basis of $60x ($600x basis / 10 shares), a value of 
$100x ($1,000x value / 10 shares), and a holding period of 5 years. 
Because the value of FS stock immediately before the triangular 
reorganization ($10x) is less than one percent of the value of the 
surviving corporation (FT) immediately after the triangular 
reorganization ($1,010x), USP may determine its basis in the stock 
of the surviving corporation (FT) by increasing the basis of each 
share of FT stock by the proportionate amount of USP's aggregate 
basis in the FS stock immediately before the exchange (without 
dividing each share of FT stock into separate portions to account 
for FS and FT). If USP so elects, USP's basis in each share of FT 
stock is increased by $1x ($10x basis in FS stock / 10 shares). As a 
result, each share of FT stock has a basis of $61x, a value of 
$101x, and a holding period of 5 years.
    Example 5. (i) Facts. U.S., a domestic corporation, owns all of 
the stock of FT, a foreign corporation. The FT stock held by U.S. 
constitutes one block of stock with a basis of $170x, a value of 
$200x, a holding period of 5 years, and $10x of earnings and profits 
attributable to such stock for purposes of section 1248. FP, a 
foreign corporation, owns all the stock of FS, a foreign 
corporation. FS has 10 shares of stock outstanding. No United States 
person is a section 1248 shareholder with respect to FP or FS. The 
FS stock held by FP has a value of $100x and a basis of $50x ($5x 
per share). FT merges into FS with FS surviving in a forward 
triangular merger. Pursuant to the merger, U.S. receives FP stock 
with a value of $200x for its FT stock in an exchange that qualifies 
for non-recognition under section 354. FP is a controlled foreign 
corporation and U.S. is a section 1248 shareholder with respect to 
FP and FS immediately after the exchange.
    (ii) Basis and holding period determination. (A) Because U.S. is 
a section 1248 shareholder of FT immediately before the transaction, 
and U.S. is not required to include income under Sec. Sec.  
1.367(b)-3(b) and 1.367(b)-4(b) as described in paragraph (c)(2) of 
this section, the basis and holding period of the FS stock held by 
FP immediately after the triangular reorganization is determined 
pursuant to paragraph (c) of this section.
    (B) Pursuant to paragraph (c) of this section, each share of FS 
stock is divided into portions attributable to the basis and holding 
period of the FS stock held by FP immediately before the exchange 
(the FS portion) and the FT stock held by U.S. immediately before 
the exchange (the FT portion). The basis and holding period of the 
FS portion is the basis and holding period of the FS stock held by 
FP immediately before the exchange. Thus, each share of FS stock has 
a portion with a basis of $5x and a value of $10x. Because the 
exchanging shareholder of FT stock (U.S.) is a section 1248 
shareholder of FT, the basis and holding period of the FT portion is 
the proportionate amount of the basis and the holding period of the 
FT stock immediately before the exchange to which such portion 
relates. Thus, each share of FS stock will have a second portion 
with a basis of $17x ($170x basis/10 shares), a value of $20x ($200x 
value/10 shares), a holding period of 5 years, and $1x of earnings 
and profits ($10x earnings and profits/10 shares) attributable to 
such portion for purposes of section 1248.
    (iii) Subsequent disposition. (A) Several years after the 
merger, FP disposes of all of its FS stock in a transaction governed 
by section 964(e). At the time of the disposition, FS stock has 
decreased in value to $210x (a post-merger reduction in value of 
$90x), and FS has incurred a post-merger deficit in earnings and 
profits of $30x.
    (B) Pursuant to paragraph (d)(1)(ii) of this section, for 
purposes of determining the amount of gain realized on the sale or 
exchange of stock that has a divided portion, any amount realized on 
such sale or exchange is allocated to each divided portion of the 
stock based on the relative fair market value of the stock to which 
the portion is attributable at the time the portions were created. 
Immediately before the merger, the value of the FS stock in relation 
to the value of both the FS stock and the FT stock was one-third 
($100x/($100x plus $200x)). Likewise, immediately before the merger, 
the value of the FT stock in relation to the value of both the FT 
stock and the FS stock was two-thirds ($200x/$100x plus $200x). 
Accordingly, one-third of the $210x amount realized is allocated to 
the FS portion of each share and two-thirds to the FT portion of 
each share. Thus, the amount realized allocated to the FS portion of 
each share is $7x (one-third of $210x divided by 10 shares). The 
amount realized allocated to the FT portion of each share is $14x 
(two-thirds of $210x divided by 10 shares).
    (C) Pursuant to paragraph (d)(3) of this section, any earnings 
and profits (or deficits) accumulated by the surviving corporation 
subsequent to the reorganization are attributed to the divided 
portions of shares of stock based on the relative fair market value 
of each divided portion of stock. Accordingly, one-third of the 
post-merger earnings and profits deficit of $30x is allocated to the 
FS portion of each share and two-thirds to the FT portion of each 
share. Thus, the deficit in earnings and profits allocated to the FS 
portion of each share is $1x (one-third of $30x divided by 10 
shares). The deficit in earnings and profits allocated to the FT 
portion of each share is $2x (two-thirds of $30x divided by 10 
shares).
    (D) When FP disposes of its FS stock, FP is treated as disposing 
of each divided portion of a share of stock. With respect to the FS 
portion of each share of stock, FP recognizes a gain of $2x ($7x 
value-$5x basis), which is not recharacterized as a dividend because 
a deficit in earnings and profits of $1x is attributable to such 
portion for purposes of section 1248. With respect to the FT portion 
of each share of stock, FP recognizes a loss of $3x ($14x value-$17x 
basis).

    (e) Effective date. This section applies to exchanges occurring 
after the date these regulations are published as final regulations in 
the Federal Register.
    Par. 11. Section 1.884-2 is amended as follows:
    1. Paragraphs (c)(3) through (c)(6)(i)(A) are revised.
    2. Paragraphs (c)(6)(i)(B), (C), and (D) are added.
    3. Paragraphs (c)(6)(ii) through (f) are revised.
    4. Paragraph (g) is amended by adding a sentence at the end.
    The revisions and additions read as follows:


Sec.  1.884-2  Special rules for termination or incorporation of a U.S. 
trade or business or liquidation or reorganization of a foreign 
corporation or its domestic subsidiary.

* * * * *
    (c)(3) through (c)(6)(i)(A) [Reserved]. For further guidance, see 
Sec.  1.884-2T(c)(3) through (c)(6)(i)(A).
    (c)(6)(i)(B) Shareholders of the transferee (or of the transferee's 
parent in the case of a triangular reorganization described in section 
368(a)(1)(C) or a reorganization described in sections 368(a)(1)(A) and 
368(a)(2)(D) or (E)) who in the aggregate owned more than 25 percent of 
the value of the stock of the transferor at any time within the 12-
month period preceding the close of the year in which the section 
381(a) transaction occurs sell, exchange or otherwise dispose of their 
stock or securities in the transferee at any time during a period of 
three years from the close of the taxable year in which the section 
381(a) transaction occurs.
    (c)(6)(i)(C) In the case of a triangular reorganization described 
in section 368(a)(1)(C) or a reorganization described in sections 
368(a)(1)(A) and 368(a)(2)(D) or (E), the transferee's parent sells, 
exchanges, or otherwise disposes of its stock or securities in the 
transferee at any time during a period of three years from the close of 
the taxable year in which the section 381(a) transaction occurs.
    (c)(6)(i)(D) A corporation related to any such shareholder or the 
shareholder itself if it is a corporation (subsequent to an event 
described in paragraph (c)(6)(i)(A) or (B) of this section) or the 
transferee's parent (subsequent to an event described in paragraph 
(c)(6)(i)(C) of this section), uses, directly or indirectly, the 
proceeds or property received in such sale, exchange or disposition, or 
property attributable thereto, in the conduct of a trade or business in 
the United States at any time during a period of three years from the 
date of sale in the case of a disposition of stock in the transferor, 
or from the close of the taxable year in which the section 381(a) 
transaction

[[Page 767]]

occurs in the case of a disposition of the stock or securities in the 
transferee (or the transferee's parent in the case of a triangular 
reorganization described in section 368(a)(1)(C) or a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(D) or (E)). Where this 
paragraph (c)(6)(i) applies, the transferor's branch profits tax 
liability for the taxable year in which the section 381(a) transaction 
occurs shall be determined under Sec.  1.884-1, taking into account all 
the adjustments in U.S. net equity that result from the transfer of 
U.S. assets and liabilities to the transferee pursuant to the section 
381(a) transaction, without regard to any provisions in this paragraph 
(c). If an event described in paragraph (c)(6)(i)(A), (B), or (C) of 
this section occurs after the close of the taxable year in which the 
section 381(a) transaction occurs, and if additional branch profits tax 
is required to be paid by reason of the application of this paragraph 
(c)(6)(i), then interest must be paid on that amount at the 
underpayment rates determined under section 6621(a)(2), with respect to 
the period between the date that was prescribed for filing the 
transferor's income tax return for the year in which the section 381(a) 
transaction occurs and the date on which the additional tax for that 
year is paid. Any such additional tax liability together with interest 
thereon shall be the liability of the transferee within the meaning of 
section 6901 pursuant to section 6901 and the regulations thereunder.
    (c)(6)(ii) through (f) [Reserved]. For further guidance, see Sec.  
1.884-2T(c)(6)(ii) through (f).
    (g) * * * Paragraphs (c)(6)(i)(B), (C), and (D), are applicable for 
tax years beginning after December 31, 1986, except that such 
paragraphs are applicable to transactions occurring after the date 
these regulations are published as final regulations in the Federal 
Register in the case of reorganizations described in sections 
368(a)(1)(A) and 368(a)(2)(D) or (E).
    Par. 12. In Sec.  1.884-2T, paragraphs (c)(6)(i)(B), (C), and (D) 
are revised to read as follows:


Sec.  1.884-2T  Special rules for termination or incorporation of a 
U.S. trade or business or liquidation or reorganization of a foreign 
corporation or its domestic subsidiary (Temporary).

* * * * *
    (c) * * *
    (6) * * *
    (i) * * *
    (B), (C), and (D) [Reserved]. For further guidance, see Sec.  
1.884-2(c)(6)(i)(B), (C), and (D).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-201 Filed 1-4-05; 8:45 am]
BILLING CODE 4830-01-P