[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Rules and Regulations]
[Pages 4276-4294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-587]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9243]
RIN 1545-BA65


Revision of Income Tax Regulations Under Sections 367, 884, and 
6038B Dealing With Statutory Mergers or Consolidations Under Section 
368(a)(1)(A) Involving One or More Foreign Corporations, and Guidance 
Necessary To Facilitate Business Electronic Filing Under Section 6038B

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final 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 such reorganizations described in 
section 368(a)(2)(D) or (E)) involving one or more foreign 
corporations. These final regulations are issued concurrently with 
final regulations (TD 9242) that define a reorganization under section 
368(a)(1)(A) to include certain statutory mergers or consolidations 
effected pursuant to foreign law. This document also contains final 
regulations under section 6038B which facilitate the electronic filing 
of Form 926 ``Return by a U.S. Transferor of Property to a Foreign 
Corporation.''

DATES: Effective Date: These regulations are effective on January 23, 
2006.
    Applicability Dates: For dates of applicability, see Sec.  
1.367(a)-3(e); Sec.  1.367(b)-6(a)(1); Sec.  1.367(b)-13(f); Sec.  
1.884-2(g); and Sec.  1.6038B-1(b)(1)(i) and (g).

FOR FURTHER INFORMATION CONTACT: Robert W. Lorence, Jr., (202) 622-3918 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(d)) 
under control numbers 1545-1478 and 1545-1617.
    The collection of information in these final regulations is in 
Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii) and Sec.  1.6038B-1(b)(1)(i). The 
information under Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii) is required to 
inform the IRS of a domestic corporation (domestic acquired 
corporation) that is claiming an exception from the application of 
section 367(a) and (d) for 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 (domestic 
controlled corporation). The information is in the form of a statement 
attached to the domestic acquired 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 acquired corporation will file an 
income tax return (or amended return, as the case may be) reporting 
gain. The collection of information is mandatory.
    The information under Sec.  1.6038B-1(b)(1)(i) is required to 
inform the IRS of transfers described in section 6038B(a)(1)(A) or 
section 367(d) or (e) by filing Form 926 ``Return by a U.S. Transferor 
of Property to a Foreign Corporation'' and any information attached to 
the form with the U.S. transferor's income tax return for the taxable 
year of the transfer. The collection of information is mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless 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

    On January 24, 2003, the IRS and Treasury issued proposed 
regulations (REG-126485-01, 2003-1 C.B. 542, 68 FR 3477) and temporary 
regulations (TD 9038, 2003-1 C.B. 524, 68 FR 3384), that would revise 
the definition of a statutory merger or consolidation under section 
368(a)(1)(A). On January 5, 2005, the IRS and Treasury issued proposed 
regulations (REG-117969-00, 2005-7 I.R.B. 533, 70 FR 746) that would 
revise the definition of a section 368(a)(1)(A) reorganization to 
include transactions effected pursuant to foreign law and transactions 
involving entities organized under foreign law. Final regulations 
incorporating the temporary regulations and both sets of proposed 
regulations, as modified to reflect comments, are being published 
concurrently with this document.
    On January 5, 2005, the IRS and Treasury also issued proposed 
regulations under sections 358, 367 and 884 (the 2005 proposed 
regulations) that would account for section 368(a)(1)(A) 
reorganizations involving one or more foreign corporations. The 
regulations also proposed changes to other aspects of the section 
367(a) and (b) regulations that would address additional issues. This 
document contains final regulations that incorporate the 2005 proposed 
regulations amending sections 358, 367, and 884.
    The public hearing with respect to the 2005 proposed regulations 
was cancelled because no request to speak was received. However, the 
IRS and Treasury received several written comments, which are discussed 
below.
    On December 19, 2003, the IRS and Treasury issued temporary and 
final regulations (TD 9100, 2004-1 C.B. 297, 68 FR 70701) modifying 
regulations under section 6038B to eliminate regulatory impediments to 
the electronic submission of Form 926 ``Return by a U.S. Transferor of 
Property to a Foreign Corporation.'' In the same issue of the Federal 
Register, the IRS and Treasury issued a notice of proposed rulemaking 
(REG-116664-01, 2004-1 C.B. 319, 68 FR 70747) cross-referencing the 
temporary regulations under section 6038B. This document contains final 
regulations incorporating certain provisions of the temporary 
regulations under section 6038B. No public hearing regarding the notice 
of proposed rulemaking was requested or held and no comments were 
received.

[[Page 4277]]

Summary of Comments and Explanation of Provisions

A. Basis and Holding Period Rules

1. Section 354 Exchanges
    On May 3, 2004, the IRS and Treasury published a notice of proposed 
rulemaking (REG-116564-03) in the Federal Register (69 FR 24107) that 
included regulations under section 358 that would provide guidance 
regarding the determination of the basis of stock or securities 
received in either a reorganization described in section 368 (e.g., in 
a section 354 exchange) or a distribution to which section 355 applies. 
The proposed section 358 regulations would adopt a tracing regime for 
determining the basis of each share of stock or security received in an 
exchange under section 354 (or section 356). Related provisions in the 
2005 proposed regulations followed that general tracing regime, with 
modifications. See Prop. Treas. Reg. Sec.  1.367(b)-13(b). Comments 
were received in response to the proposed regulations under section 
358. The IRS and Treasury have issued final regulations under section 
358 that adopted the section 358 proposed regulations, with 
modifications to reflect the comments received. See TD 9244.
    The final section 358 regulations retained the general tracing 
regime for determining basis in an exchange under section 354 (or 
section 356). This tracing regime is consistent with the policies and 
requirements underlying the international provisions of the Code, 
including those under section 1248. As a result, these final 
regulations do not include the rules set forth in Sec.  1.367(b)-13(b) 
of the 2005 proposed regulations that would determine the basis and 
holding period in stock as a result of certain exchanges under section 
354 (or section 356) involving foreign corporations. Instead, the final 
regulations cross-reference the regulations under section 358 to 
determine the exchanging shareholder's basis in stock or securities 
received in an exchange under section 354 (and section 356). Special 
rules for certain triangular reorganizations are discussed below.
2. Triangular Asset Reorganizations
    In contrast to the above, the application of the stock basis rules 
of Sec.  1.358-6 in certain triangular asset reorganizations involving 
foreign corporations does not accurately preserve a shareholder's 
section 1248 amount (within the meaning of Sec.  1.367(b)-2(c)). 
Therefore, the 2005 proposed regulations would provide special basis 
and holding period rules for certain triangular asset reorganizations 
involving foreign corporations that have section 1248 shareholders 
(within the meaning of Sec.  1.367(b)-2(b)). See Prop. Treas. Reg. 
Sec.  1.367(b)-13(c) through (e). These rules would apply to certain 
reorganizations described in section 368(a)(1)(A) and (a)(2)(D) 
(forward triangular merger), triangular reorganizations described in 
section 368(a)(1)(C), and reorganizations described in section 
368(a)(1)(A) and (a)(2)(E) (reverse triangular merger).
    The 2005 proposed regulations would provide that, in determining 
the stock basis of the surviving corporation in certain triangular 
asset reorganizations, the exchanging shareholder's basis in the stock 
of the target corporation will be taken into account, rather than 
target corporation's basis in its assets. Further, where applicable, 
the 2005 proposed regulations would provide for a divided basis and 
holding period in each share of stock in the surviving corporation to 
reflect the relevant section 1248 amounts, if any, in the stock of the 
target corporation and the surviving corporation. If there are two or 
more blocks of stock in the target corporation with section 1248 
amounts, then each share of the surviving corporation would be 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 1248 
shareholders, then shares in these blocks would be aggregated into one 
divided portion for basis purposes. If none of the shareholders is a 
section 1248 shareholder, then the asset basis rules of Sec.  1.358-6 
would apply.
    Commentators stated that the application of the special basis rules 
would cause unjustified complexity. One commentator stated that such 
complexity arises in cases where the shares of the target corporation 
are widely held or where section 1248 shareholders hold less than 50 
percent of the target corporation. The commentator recommended that if 
the special basis rules are retained, Sec.  1.358-6 should continue to 
apply where section 1248 shareholders hold less than 50 percent of the 
stock of the target corporation. The commentator further recommended 
that the controlling corporation be allowed to elect to apply the rules 
under Sec.  1.358-6 in return for all exchanging section 1248 
shareholders including in income the section 1248 amounts with respect 
to their stock. The IRS and Treasury have considered these comments. On 
balance, the IRS and Treasury have concluded that creating exceptions 
to the application of the special basis rules (e.g., by election) would 
create significant uncertainty for the IRS and would not meaningfully 
reduce administrative complexity. While the IRS and Treasury recognize 
the complexity of the rules, the IRS and Treasury nevertheless believe 
it is important to preserve section 1248 amounts and avoid unnecessary 
income inclusions that might otherwise be required. As a result, the 
final regulations do not adopt this recommendation. However, the IRS 
and Treasury will continue to study alternative methods for preserving 
the section 1248 amounts in such transactions.
    One commentator suggested that the IRS and Treasury consider 
applying the special basis rules to section 368(a) asset 
reorganizations followed by asset transfers to a corporation controlled 
(within the meaning of section 368(c)) by the acquiring corporation 
pursuant to the same transaction (controlled asset transfer), because 
these transactions are similar to triangular reorganizations under 
section 368(a)(1)(C) and section 368(a)(1)(A) and (a)(2)(D). If this 
suggestion were adopted, the basis in the stock of the controlled 
subsidiary would reflect the basis in the stock of the target 
corporation and not the basis of the contributed assets. Because the 
IRS and Treasury are continuing to study the application of section 358 
to such transactions, and because such controlled asset transfers may 
involve only a portion of the acquired assets, this comment is not 
adopted at this time.
    Finally, commentators noted that the special basis rules of Sec.  
1.367(b)-13(c) of the 2005 proposed regulations would not apply, by 
their terms, to a forward triangular merger or a triangular section 
368(a)(1)(C) reorganization where no shareholder of the target 
corporation is a section 1248 shareholder, but the parent of the 
acquiring corporation is either a domestic corporation that is a 
section 1248 shareholder of the acquiring corporation or a foreign 
corporation that has a section 1248 shareholder that is also a section 
1248 shareholder of the acquiring corporation. This result was not 
intended, as illustrated by Example 3 of Sec.  1.367(b)-13(e) of the 
2005 proposed regulations, which applies the special basis rules of 
Sec.  1.367(b)-13(c) of the 2005 proposed regulations to such a 
transaction. As a result, the text of the final regulations has been 
modified to apply the special basis rules to this type of transaction.

[[Page 4278]]

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

1. Exchanges of Stock or Securities in Certain Triangular Asset 
Reorganizations
    A U.S. person recognizes gain under section 367(a) on the transfer 
of property to a foreign corporation in an exchange described in 
section 351, 354, 356, or 361, unless an exception applies. Under Sec.  
1.367(a)-3(a), section 367(a) does not apply if, pursuant to a section 
354 exchange, a U.S. person transfers stock of a domestic or foreign 
corporation ``for stock of a foreign corporation'' in an asset 
reorganization described in section 368(a)(1) that is not treated as an 
indirect stock transfer.
    Notwithstanding the language in the current regulations, this 
exception is intended to apply to any section 354 (or section 356) 
exchange made pursuant to an asset reorganization under section 
368(a)(1) that is not treated as an indirect stock transfer under Sec.  
1.367(a)-3(d). However, commentators noted that in certain triangular 
asset reorganizations where a U.S. person transfers stock of a foreign 
acquired corporation to such foreign corporation in a section 354 (or 
section 356) exchange, but receives stock of the domestic parent of the 
foreign acquiring corporation pursuant to such exchange, the transfer 
by the U.S. person might be subject to section 367(a). This would be 
the case because, under Sec.  1.367(a)-3(a), the U.S. person does not 
receive ``stock of a foreign corporation.'' This result was not 
intended. Accordingly, the final regulations clarify the application of 
this rule by removing the phrase ``for stock of a foreign 
corporation.'' Thus, section 367(a) will not apply to any section 354 
(or section 356) exchange of stock or securities of a domestic or 
foreign corporation pursuant to an asset reorganization under section 
368(a)(1), unless the exchange is considered an indirect stock transfer 
pursuant to Sec.  1.367(a)-3(d). A conforming change also is made to 
the section 6038B reporting rules (see part J. of this preamble).
2. Exchanges of Securities in Certain Recapitalizations and Other 
Reorganizations
    Prior to the issuance of the 2005 proposed regulations, several 
commentators noted that the exception to the application of section 
367(a) contained in Sec.  1.367(a)-3(a) applied to exchanges of stock, 
but not exchanges of securities, in section 368(a)(1)(E) 
reorganizations and certain asset reorganizations. In response, the IRS 
and Treasury issued Notice 2005-6 (2005-5 I.R.B. 448) concurrently with 
the 2005 proposed regulations, and announced the plan to amend Sec.  
1.367(a)-3(a) to apply the exception to exchanges of stock or 
securities. These final regulations incorporate the rule announced in 
Notice 2005-6, including the dates of applicability as discussed below 
in part K.3. of this preamble.
    Consistent with these changes, these final regulations also amend 
the indirect stock transfer rules of Sec.  1.367(a)-3(d) to provide 
that exchanges by a U.S. person of stock or securities of an acquired 
corporation for stock or securities of the corporation that controls 
the acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization will be treated as an indirect transfer of such stock or 
securities subject to the rules of section 367(a). This amendment 
conforms the treatment of triangular section 368(a)(1)(B) 
reorganizations with the other indirect stock transfers described in 
Sec.  1.367(a)-3(d). Although this amendment has a prospective 
effective date, no inference is intended as to the application of 
current law to such exchanges.
    Other provisions of the section 367 regulations also contain 
references to exchanges of stock but not to securities. See, e.g., 
Sec.  1.367(a)-8(e)(1)(i). The IRS and Treasury are studying these 
references and intend to amend these provisions if these omissions are 
not appropriate.

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

    The 2005 proposed regulations would modify the concurrent 
application of section 367(a) and (b) to exchanges that require the 
inclusion in income of the exchanging United States shareholder's all 
earnings and profits amount under section 367(b). The 2005 proposed 
regulations would provide that the rules of section 367(b), and not 
section 367(a), apply to such exchanges in cases where the all earnings 
and profits amount attributable to the stock of an exchanging 
shareholder is greater than the amount of gain in such stock subject to 
section 367(a) pursuant to the indirect stock transfer rules. In such a 
case, the shareholder would be required to include in income as a 
deemed dividend the all earnings and profits amount pursuant to Sec.  
1.367(b)-3, without regard to whether the exchanging shareholder files 
a gain recognition agreement as provided under Sec. Sec.  1.367(a)-3(b) 
and 1.367(a)-8. This change was proposed because the IRS and Treasury 
determined that it was contrary to the policy of section 367(b) to 
allow a shareholder effectively to elect to be taxed on the lesser 
amount of gain under section 367(a) simply by failing to file a gain 
recognition agreement.
    Two comments were received with respect to this overlap rule. One 
commentator questioned, as a general matter, the application of Sec.  
1.367(b)-3 and the all earnings and profits rule to inbound asset 
acquisitions and, more specifically, the broadening of the 
circumstances under the 2005 proposed regulations where a taxpayer 
would be required to include in income as a deemed dividend the all 
earnings and profits amount. The commentator suggested an alternative 
means to taxing the earnings and profits of the foreign acquired 
corporation, such as reducing the basis of assets brought into the 
United States to the extent of any previously untaxed earnings and 
profits. The IRS and Treasury, at this time, do not believe that a 
comprehensive revision of the all earnings and profits rule is 
necessary or appropriate. Alternative approaches to the all earnings 
and profits rule are beyond the scope of this regulation project, 
because, for example, any such revision would have to take into account 
recently enacted section 362(e). As a result, this comment is not 
adopted.
    The second comment stated that the overlap rule adds unnecessary 
complexity to the section 367 regulations, because it is unlikely that 
a transaction will occur that would invoke the rule (i.e., where a 
foreign acquired corporation transfers its assets to a domestic 
subsidiary of a foreign parent corporation in a triangular 
reorganization). The overlap rule in the 2005 proposed regulations was 
intended to address cases that are affected by this rule. The IRS and 
Treasury continue to believe that the rule is necessary to preserve the 
policies of section 367(b), and that the rule as applied in these 
contexts does not create undue complexity. For this reason, the comment 
is not adopted.

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

    In a triangular section 368(a)(1)(B) reorganization, if a U.S. 
person 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. person 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). Sec.  1.367(a)-3(d)(1)(iii). The current regulations do not, 
however, treat as an indirect stock transfer a triangular section 
368(a)(1)(B) reorganization where the acquiring

[[Page 4279]]

corporation is foreign and the controlling corporation is domestic. The 
2005 proposed regulations would extend the indirect stock transfer 
rules to include triangular section 368(a)(1)(B) reorganizations in 
which a U.S. person exchanges stock of the acquired corporation for 
voting stock of a domestic corporation that controls the foreign 
acquiring corporation. In such a case, the 2005 proposed regulations 
would provide that a gain recognition agreement filed pursuant to such 
transaction is 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.
    Commentators stated that because any built-in gain in the stock of 
the acquired corporation is reflected in the stock of the foreign 
acquiring corporation held by the domestic controlling corporation 
under Sec.  1.358-6(c)(3), a gain recognition agreement should not be 
triggered if the domestic controlling corporation disposes of the stock 
of the foreign acquiring corporation. The IRS and Treasury agree, in 
part, with this comment. Accordingly, the final regulations provide 
that, in certain cases, the disposition of the stock of the foreign 
acquiring corporation is not a triggering event. For example, the gain 
recognition agreement terminates in such a case if the domestic 
controlling corporation disposes of the stock of the foreign acquiring 
corporation in a taxable exchange. See Sec.  1.367(a)-8(h)(1).

E. Identifying the Stock Transferred in Indirect Stock Transfers 
Involving a Change in Domestic or Foreign Status of the Acquired 
Corporation

    Under the current section 367(a) regulations, if a U.S. person 
exchanges stock or securities of an acquired corporation for stock or 
securities of a foreign acquiring corporation in, for example, a 
section 368(a)(1)(C) reorganization, and the foreign acquiring 
corporation transfers all or part of the assets of the acquired 
corporation to a corporation in a controlled asset transfer, the U.S. 
person is treated, for purposes of section 367(a), as transferring the 
stock or securities 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); see also Sec.  
1.367(a)-3(d)(3), Example 5A.
    A commentator stated that the indirect stock transfer rules should 
apply to such a transaction 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, U.S. persons that exchange stock or 
securities of the domestic acquired corporation would be treated as 
having made an indirect stock transfer of stock or securities of a 
foreign corporation to a foreign corporation subject to Sec.  1.367(a)-
3(b), rather than of stock or securities of a domestic corporation that 
would be subject to the more restrictive rules of Sec.  1.367(a)-3(c).
    The IRS and Treasury agree, in part, with this comment and believe 
that Sec.  1.367(a)-3(c) should not apply to certain indirect stock 
transfers that occur by reason of transactions involving a subsidiary 
member of a consolidated group to the extent that the assets of the 
domestic acquired corporation are ultimately transferred to a foreign 
corporation. Accordingly, the final regulations provide that where a 
subsidiary member of a consolidated group transfers its assets to a 
foreign corporation pursuant to an asset reorganization, and an 
indirect stock transfer described in Sec.  1.367(a)-3(d)(1)(i) (mergers 
described in section 368(a)(1)(A) and (a)(2)(D) and reorganizations 
described in section 368(a)(1)(G) and (a)(2)(D)), (iv) (triangular 
reorganizations described in section 368(a)(1)(C)), or (v) (asset 
reorganizations followed by a controlled asset transfer) occurs in 
connection with such transfer, the U.S. persons that exchange stock or 
securities in the domestic acquired corporation pursuant to section 354 
(or section 356) will be treated for purposes of Sec.  1.367(a)-3 as 
having made an indirect transfer of foreign stock or securities subject 
to the rules of Sec.  1.367(a)-3(b) (and not domestic stock or 
securities subject to Sec.  1.367(a)-3(c)). In the case where the 
foreign acquiring corporation transfers assets in a controlled asset 
transfer to a foreign corporation, the exception applies only to the 
extent of the assets transferred to the foreign corporation. Further, 
the exception does not apply to the extent that the assets of the 
domestic acquired corporation are ultimately transferred in one or more 
successive controlled asset transfers to a domestic corporation. Thus, 
in such a case, the indirect stock transfer remains subject to Sec.  
1.367(a)-3(c). The rules relating to foreign acquired corporations 
remain the same as under current law (that is, the indirect stock 
transfer rules are based on the status of the foreign acquired 
corporation).
    The IRS and Treasury are studying in a separate project the 
interaction of section 7874 and Sec.  1.367(a)-3(c). In connection with 
this study, the IRS and Treasury will continue to examine whether the 
recommended change should also apply to other transactions. The results 
of this study may be addressed in a future regulations project. At this 
time, however, the final regulation will continue to apply to other 
transactions based on the stock that is owned and exchanged by the U.S. 
person in the transaction (rather than based on stock of the 
corporation in which the assets of the acquired corporation are 
ultimately transferred). Comments are requested as to whether the 
exception, described above, should be expanded to other ownership 
structures (e.g., where the domestic target corporation is an 
affiliated but not consolidated group member).

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

    Under the current regulations, when an indirect stock transfer also 
involves a transfer of assets by a domestic corporation to a foreign 
corporation, section 367(a) and (d) apply to the domestic corporation's 
transfer of assets prior to the application of the indirect stock 
transfer rules. However, section 367(a) and (d) do not apply to the 
domestic corporation's transfer to the extent that the foreign 
acquiring corporation re-transfers the assets received in the asset 
transfer to a controlled domestic corporation, provided that the 
controlled domestic corporation's basis in the assets is no greater 
than the basis that the domestic acquired corporation had in such 
assets.
    The 2005 proposed regulations would modify the scope of the 
coordination rule as it applies to asset reorganizations such that 
section 367(a) and (d) generally would apply to the domestic 
corporation's transfer of assets to the foreign corporation, even if 
the foreign corporation re-transfers all or part of the assets received 
to a domestic corporation in a controlled asset transfer. However, the 
2005 proposed regulations would provide two exceptions to this general 
rule. The first exception generally would apply 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 as provided 
in regulations under section 367(a)(5) are satisfied.
    The second exception would apply if the controlled domestic 
corporation's basis in the assets is no greater than the domestic 
acquired corporation's basis in such assets and the following two

[[Page 4280]]

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 to its tax return for the 
taxable year of the transfer. The statement must certify that the 
domestic acquired corporation will recognize gain (as described below) 
if the foreign acquiring corporation disposes of any stock of the 
domestic controlled corporation with a principal purpose of avoiding 
the U.S. tax that would have been imposed on the domestic acquired 
corporation had it disposed of the re-transferred assets. The 2005 
proposed regulations contain a rebuttable presumption that the 
disposition of stock has a principal purpose of tax avoidance if the 
disposition occurs within 2 years of the transfer.
    When applicable, under this second exception, the domestic acquired 
corporation would be required to recognize gain as if, immediately 
prior to the exchange, it had transferred the re-transferred assets, 
including any intangible assets, directly to a domestic corporation in 
an exchange qualifying under section 351, and immediately sold the 
stock to an unrelated party for its fair market value in a transaction 
in which it recognizes gain, if any (but not loss). The 2005 proposed 
regulations would provide that the basis that the foreign acquiring 
corporation has in the stock of the domestic controlled corporation is 
increased immediately prior to its disposition by the amount of gain 
recognized by the domestic acquired corporation. However, the basis of 
the re-transferred assets held by the domestic controlled corporation 
would not be increased by such gain.
    Several comments were received with respect to the second 
exception. Commentators stated that the final regulations should 
provide that the amount of gain recognized by the domestic acquired 
corporation under the second exception should also increase the basis 
of the re-transferred assets held by the domestic controlled 
corporation. As stated in the preamble to the 2005 proposed 
regulations, the IRS and Treasury believe that the concerns raised by 
the construct that results from a controlled asset transfer to a 
domestic subsidiary after an outbound asset transfer are analogous to 
the concerns raised in other divisive transactions where gain is 
recognized on the stock of a corporation without a corresponding 
increase in the basis of the assets of such corporation. See section 
355(e) and Sec.  1.367(e)-2(b)(2)(iii). The tax consequences set forth 
in the final regulations are intended to be consistent with the tax 
consequences that result in these other transactions. As a result, the 
final regulations do not adopt this comment.
    Commentators also questioned whether the proposed modification to 
the coordination rule is necessary in light of the enactment of section 
7874 and whether any new limitations to the rule should await an 
analysis of how section 7874 affects the rules of Sec.  1.367(a)-3(c). 
Because of the divisive concerns present in these types of 
transactions, the IRS and Treasury believe that the modifications to 
the coordination rule continue to be necessary and therefore are 
retained. Nevertheless, the IRS and Treasury are studying the effect of 
section 7874 on the coordination rule, as well as the direct and 
indirect transfer of domestic stock under Sec.  1.367(a)-3(c). The 
results of this study may be addressed in a future regulation project.
    Finally, in light of the enactment of section 7874, Example 6D of 
Sec.  1.367(a)-3(d)(3) of the 2005 proposed regulations has not been 
retained. Compare Sec.  1.367(a)-3(d)(3) Example 6B.

G. Treatment of a Controlled Asset Transfer Following a Section 
368(a)(1)(F) Reorganization as an Indirect Stock Transfer

    The 2005 proposed regulations would revise Sec.  1.367(a)-
3(d)(1)(v) so that any non-triangular asset reorganization followed by 
a controlled asset transfer will be considered an indirect stock 
transfer under Sec.  1.367(a)-3(d)(1).
    Commentators stated, however, that a section 368(a)(1)(F) 
reorganization followed by a controlled asset transfer should not be 
treated as an indirect stock transfer. According to the commentators, 
because a section 368(a)(1)(F) reorganization involves only a 
``single'' corporation, it should be treated in effect as a ``non-
event'' for purposes of the indirect stock transfer rules. As a result, 
the commentators believe that the transaction should be treated as a 
mere section 351 transfer of assets to the controlled subsidiary and 
not as an indirect stock transfer.
    In response to this comment, the final regulations exclude from the 
application of the indirect stock transfer rules same-country 
368(a)(1)(F) reorganizations followed by controlled asset transfers. 
For this purpose, a same-country section 368(a)(1)(F) reorganization is 
a reorganization described in section 368(a)(1)(F) in which both the 
acquired corporation and the acquiring corporation are foreign 
corporations and are created or organized under the laws of the same 
foreign country. This would include, for example, situations where the 
foreign corporation changes its name, changes its location within the 
foreign country, or changes its form within the foreign country. The 
IRS and Treasury will continue to examine whether other foreign-to-
foreign section 368(a)(1)(F) reorganizations followed by controlled 
asset transfers should be treated as indirect stock transfers, however, 
as the general treatment of section 368(a)(1)(F) reorganizations is 
further considered. Outbound reorganizations under section 368(a)(1)(F) 
followed by controlled asset transfers are treated as indirect stock 
transfers under the final regulations. See Sec.  1.367(a)-1T(f).

H. Treatment of Reorganizations Described in Section 368(a)(1)(G) and 
(a)(2)(D) as Indirect Stock Transfers

    Section 368(a)(2)(D) provides that the acquisition by one 
corporation, in exchange for stock of a corporation which is in control 
of the acquiring corporation, of substantially all the properties of 
another corporation does not disqualify a transaction from qualifying 
as a reorganization under section 368(a)(1)(A) or 368(a)(1)(G), 
provided certain conditions are satisfied.
    Section 1.367(a)-3(d)(1)(i) and (iv) of the 2005 proposed 
regulations would treat certain reorganizations described in section 
368(a)(1)(A) and (a)(2)(D), and certain triangular reorganizations 
described in section 368(a)(1)(C), respectively, as indirect stock 
transfers. Moreover, section 1.367(a)-3(d)(1)(v) of the 2005 proposed 
regulations would include certain reorganizations described in section 
368(a)(1)(G), followed by controlled asset transfers, as indirect stock 
transfers. The 2005 proposed regulations would not explicitly treat 
reorganizations described in section 368(a)(1)(G) and (a)(2)(D) as 
indirect stock transfers, even though they have the same effect as 
these other reorganizations. As a result, the final regulations modify 
Sec.  1.367(a)-3(d)(1)(i), and related provisions, to include as 
indirect stock transfers certain reorganizations described in section 
368(a)(1)(G) and (a)(2)(D). Similar modifications are made in other 
sections of the final regulations to take into account reorganizations 
described in section 368(a)(1)(G) and (a)(2)(D).

I. General Operation of Section 367 Regulations and the Effect of 
Section 7874

    Comments were received regarding the scope of certain portions of 
the section 367 regulations in light of the enactment of section 7874. 
In response

[[Page 4281]]

to the potential overlap of these two provisions, the IRS and Treasury 
are considering possible changes to Sec.  1.367(a)-3(c). Comments are 
requested as to the interaction of section 7874 and Sec.  1.367(a)-
3(c), as well as to other aspects of the section 367 regulations.

J. Section 6038B Reporting

    Section 6038B provides for reporting by U.S. persons that transfer 
property to foreign corporations in an exchange described in section 
332, 351, 354, 355, 356, or 361. Temporary regulations under section 
6038B provide an exception from reporting for certain transactions 
described in Sec.  1.367(a)-3(a). Section 1.367(a)-3(a) provides an 
exception to section 367(a) for certain exchanges under section 354 or 
356 of stock or securities in section 368(a)(1)(E) reorganizations or 
in asset reorganizations that are not indirect stock transfers. These 
exceptions from reporting under section 6038B have been amended to 
conform to the amendments to Sec.  1.367(a)-3(a). These exceptions are 
incorporated in the final regulations. See Part B. of this preamble.
    Section 6038B and the regulations thereunder provide for reporting 
by filing Form 926 ``Return by a U.S. Transferor of Property to a 
Foreign Corporation'' and any attachments with the income tax return 
for the year of the transfer. Temporary regulations under section 6038B 
eliminate the requirement to sign Form 926, thus permitting the 
electronic filing of the form with the U.S. transferor's federal income 
tax return. The temporary regulations provide that Form 926 and any 
attachments are verified by signing the income tax return with which 
the form and attachments are filed. These temporary regulations are 
incorporated in these final regulations, except with respect to certain 
filings by corporations which will be addressed as part of a larger 
final regulation dealing with electronic filing.

K. Effective Dates

1. General Rule
    Except as provided below, the final regulations apply to 
transactions occurring on or after January 23, 2006.
2. Retroactive Application of Sec.  1.367(b)-4(b)(1)(ii) of the 
Proposed Regulations
    Under Sec.  1.367(b)-4(b), certain shareholders of a foreign 
acquired corporation are required to include in income as a deemed 
dividend the section 1248 amount with respect to the stock of the 
foreign acquired corporation if such exchange results in the loss of 
section 1248 shareholder status. This may occur, for example, if the 
exchanging shareholder receives domestic stock in exchange for the 
stock of an acquired foreign corporation in a triangular reorganization 
where a domestic issuing corporation controls the foreign acquiring 
corporation.
    The current regulations consider the section 1248 shareholder 
status to be lost in this case because the domestic acquiring 
corporation's basis in the foreign acquiring corporation is generally 
determined by reference to the assets of the foreign acquired 
corporation, rather than by reference to the stock of the foreign 
acquired corporation. See Sec.  1.358-6. Under the 2005 proposed 
regulations, however, such an exchanging shareholder would not be 
required to include in income as a deemed dividend the section 1248 
amount under Sec.  1.367(b)-4(b), provided that the domestic issuing 
corporation, immediately after the exchange, 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 triangular section 368(a)(1)(C) reorganization, a forward 
triangular merger, a reorganization described in section 368(a)(1)(G) 
and (a)(2)(D), or a reverse triangular merger) and such acquired or 
surviving corporation is a controlled foreign corporation. This change 
was made in the case of triangular asset reorganizations because the 
special basis rules in Sec.  1.367(b)-13(c) of the 2005 proposed 
regulations would preserve the section 1248 amounts attributable to the 
stock of the foreign acquired corporation in the stock of the foreign 
acquiring (or surviving) corporation held by the domestic issuing 
corporation. The special basis rules would not apply to triangular 
reorganizations under section 368(a)(1)(B). The special basis rules are 
not needed for these transactions because section 1248 amounts are 
preserved under the general rules of Sec.  1.358-6.
    Commentators requested that the modification to Sec.  1.367(b)-4 
relating to triangular section 368(a)(1)(B) reorganizations be made 
retroactive to February 23, 2000, the date on which Sec.  1.367(b)-4 
was promulgated, because the basis rules of Sec.  1.358-6 were in 
effect at that time and the transactions never raised concerns about 
preserving section 1248 amounts. The IRS and Treasury agree with this 
comment and therefore the final regulations allow taxpayers to apply 
the modification to Sec.  1.367(b)-4 to a triangular section 
368(a)(1)(B) reorganization occurring on or after February 23, 2000, 
and during any taxable year which is not closed by the period of 
limitations. Taxpayers applying this rule, however, must do so 
consistently with respect to all such transactions.
    Commentators also requested that the modification to Sec.  
1.367(b)-4 apply to other triangular reorganizations on a retroactive 
basis, on the condition that taxpayers also apply the special basis 
rules of Sec.  1.367(b)-13(c) of the 2005 proposed regulations 
retroactively to these transactions. The IRS and Treasury only intend 
for the Sec.  1.367(b)-13(c) basis rules to apply on a prospective 
basis. Elective application of these rules to prior years would be 
complex and difficult to administer. Accordingly, the IRS and Treasury 
have not adopted this comment for other triangular reorganizations.
3. Exchanges of Securities in Certain Recapitalizations and 
Reorganizations
    As stated above in part B.2. of this preamble, the final 
regulations provide an exception to the application of section 367(a) 
to transfers of securities by U.S. persons in a section 354 or 356 
exchange pursuant to a section 368(a)(1)(E) reorganization, or a 
section 368(a)(1) asset reorganization that is not treated as an 
indirect stock transfer. This rule applies to transfers occurring after 
January 5, 2005, although taxpayers may apply the rule to transfers of 
securities occurring on or after July 20, 1998, and on or before 
January 5, 2005, if done consistently to all transactions.
4. Asset Reorganizations Followed by Controlled Asset Transfers
    Commentators stated that because the 2005 proposed regulations did 
not provide an effective date for the rule that treats a section 
368(a)(1)(F) reorganization followed by a controlled asset transfer as 
an indirect stock transfer, such rule could be interpreted as applying 
to transactions occurring on or after July 20, 1998, which is the 
general effective date of Sec.  1.367(a)-3(d). The final regulations 
clarify that a section 368(a)(1)(F) reorganization followed by a 
controlled asset transfer is treated as an indirect stock transfer 
subject to section 367(a) only if the reorganization occurs on or after 
January 23, 2006.
    In general, section 368(a)(1)(D) reorganizations followed by 
controlled asset transfers are treated as indirect stock transfers 
subject to section 367(a) if the reorganization occurs after December 
9, 2002. However, see Rev. Rul. 2002-85 (2002-2 C.B. 986), for special 
retroactive applicability dates.

[[Page 4282]]

5. Electronic Filing Under Section 6038B
    These final regulations provide that Form 926 and any attachments 
will be verified by signing the income tax return with which the form 
and attachments are filed, in order to facilitate the electronic filing 
of Form 926 with the transferor's income tax return. This rule applies 
to taxable years beginning after December 31, 2002. For taxable years 
beginning before January 1, 2003, Form 926 must be signed under 
penalties of perjury declaring that the information submitted is true, 
correct and complete to the best of the transferor's knowledge and 
belief.

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment 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 because the 
regulations do 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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

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 participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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

    Sec.  1.367(a)-3(b) also issued under 26 U.S.C. 367(a) * * *
    Sec.  1.367(b)-13 also issued under 26 U.S.C. 367(b) * * *


0
Par. 2. 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.
* * * * *

0
Par. 3. Section 1.367(a)-3 is amended as follows:
0
1. In paragraph (a), remove the third and fourth sentences, and add 
five sentences in their place.
0
2. In paragraph (a), add a sentence at the end of the paragraph.
0
3. Revise paragraph (b)(2)(i).
0
4. Revise paragraph (c)(5)(vi).
0
5. Revise paragraph (d)(1), introductory text.
0
6. Revise paragraph (d)(1)(i).
0
7. In paragraph (d)(1)(ii), add a sentence at the end of the paragraph.
0
8. Revise paragraph (d)(1)(iii).
0
9. In paragraph (d)(1)(iv), remove the language ``Example 5'' and add 
``Example 6'' in its place, remove ``Example 7'' and add ``Example 8'' 
in its place, and remove ``Example 11'' and add ``Example 14'' in its 
place.
0
10. Revise paragraph (d)(1)(v).
0
11. In paragraph (d)(1)(vi), remove the language ``Example 10 and 
Example 10A'' and add ``Example 13 and Example 13A'' in its place.
0
12. Revise paragraphs (d)(2)(i), (ii), and (iv).
0
13. Revise paragraph (d)(2)(v)(A) and (C).
0
14. Redesignate paragraph (d)(2)(v)(D) as paragraph (d)(2)(v)(F).
0
15. Add new paragraphs (d)(2)(v)(D) and (E).
0
16. Revise paragraph (d)(2)(vi).
0
17. Add new paragraph (d)(2)(vii).
0
18. In paragraph (d)(3), remove the first sentence, and add two 
sentences in its place.
0
19. 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.
Examples 7, 7A, 7B, and 7C......  Examples 8, 8A,
                                   8B, and 8C.
Examples 6 and 6A...............  Examples 7 and
                                   7A.
                                  .................  Example 6C.
Examples 5, 5A, and 5B..........  Examples 6, 6A,
                                   and 6B.
                                  .................  Example 5A.
Example 4.......................  Example 5.
Example 3.......................  Example 4.
Example 2.......................  Example 3.
                                  .................  Example 2.
------------------------------------------------------------------------

0
20. In paragraph (d)(3), newly designated Example 3, the heading and 
paragraph (i) are revised.
0
21. In paragraph (d)(3), newly designated Example 5, paragraph (i), 
remove the language ``paragraph (d)(1)(iii)'' and add ``paragraph 
(d)(1)(iii)(A)'' in its place.
0
22. In paragraph (d)(3), newly designated Example 5, paragraph (ii), 
last sentence, remove the language ``, or if S sold all or a portion of 
the stock of Y''.
0
23. In paragraph (d)(3), newly designated Example 6A, paragraph (i), 
the first and last sentences, and paragraph (ii), the first, fourth, 
and fifth sentences are revised.
0
24. In paragraph (d)(3), newly designated Example 6B is revised.
0
25. In paragraph (d)(3), newly designated Example 8, paragraph (ii), 
the fourth sentence is revised.
0
26. In paragraph (d)(3), newly designated Example 9 is revised.
0
27. In paragraph (d)(3), newly designated Example 12, paragraph (ii), 
the fifth sentence is revised.
0
28. In paragraph (d)(3), revise newly designated Example 16.
0
29. 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 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.

[[Page 4283]]

 
Example 8B, paragraph (i).......  Example 7.........  Example 8.
Example 8C, paragraph (i).......  Example 7.........  Example 8.
Example 12, paragraph (i), third  Example 9.........  Example 12.
 sentence.
Example 13A, paragraph (i) and    Example 10........  Example 13.
 paragraph (ii), first sentence.
Example 14A, paragraph (i)......  Example 11........  Example 14.
------------------------------------------------------------------------

0
30. Paragraph (e)(1) is revised.
    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 or securities of a foreign 
corporation in a reorganization described in section 368(a)(1)(E), or a 
U.S. person exchanges stock or securities of a domestic or 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 triangular reorganizations under section 368(a)(1), see Sec.  
1.367(b)-13. * * * For rules related to expatriated entities, see 
section 7874 and the regulations thereunder.
    (b) * * *
    (2) * * *
    (i) In general. A transfer of foreign stock or securities described 
in section 367(a) or the regulations thereunder as well as in section 
367(b) or 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) Examples 11 and 14 of this section.
    (A) Section 367(b) and the regulations thereunder shall not apply 
if a foreign corporation is not treated as a corporation under section 
367(a)(1). See the example in paragraph (b)(2)(ii) of this section and 
paragraph (d)(3) Example 14 of this section.
    (B) If a foreign corporation transfers assets to a domestic 
corporation in a transaction to which Sec.  1.367(b)-3(a) and (b) and 
the indirect stock transfer rules of paragraph (d) of this section 
apply, and all the earnings and profits amount attributable to the 
stock of an exchanging shareholder under Sec.  1.367(b)-3(b) is greater 
than the amount of gain in such stock subject to section 367(a) 
pursuant to the indirect stock transfer rules of paragraph (d) of this 
section, then the rules of section 367(b), and not the rules of section 
367(a), shall apply to the exchange. See paragraph (d)(3) Example 15 of 
this section.
* * * * *
    (c) * * *
    (5) * * *
    (vi) Transferee foreign corporation. Except as provided in 
paragraph (d)(2)(i)(B) of this section, a transferee foreign 
corporation is the foreign corporation whose stock is received in the 
exchange by U.S. persons.
* * * * *
    (d) * * *
    (1) In general. For purposes of this section, a U.S. person who 
exchanges, under section 354 (or section 356) stock or securities in a 
domestic or foreign corporation for stock or securities in a foreign 
corporation (or in a domestic corporation in control of a foreign 
acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization) in connection with a transaction described in 
paragraphs (d)(1)(i) through (v) of this section (or who is deemed to 
make such an exchange under paragraph (d)(1)(vi) of this section) 
shall, except as provided in paragraph (d)(2)(vii) of this section, be 
treated as having made an indirect transfer of such stock or securities 
to a foreign corporation that is subject to the rules of this section, 
including, for example, the requirement, where applicable, that the 
U.S. transferor enter into a gain recognition agreement to preserve 
nonrecognition treatment under section 367(a). If the U.S. person 
exchanges stock or securities of a foreign corporation, see also 
section 367(b) and the regulations thereunder. For 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 an asset reorganization 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) Mergers described in sections 368(a)(1)(A) and (a)(2)(D) and 
reorganizations described in sections 368(a)(1)(G) and (a)(2)(D). A 
U.S. person exchanges stock or securities of a corporation (the 
acquired corporation) for stock or securities of a foreign corporation 
that controls the acquiring corporation in a reorganization described 
in either sections 368(a)(1)(A) and (a)(2)(D), or in sections 
368(a)(1)(G) and (a)(2)(D). 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 or securities of the 
acquired corporation for voting stock or securities 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.

[[Page 4284]]

    (B) A U.S. person exchanges stock or securities of the acquired 
corporation for voting stock or securities 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). See paragraph (d)(3) Example 5A of this section.
* * * * *
    (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, a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D) 
described in paragraph (d)(1)(i) of this section, a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(E) described in paragraph 
(d)(1)(ii) of this section, or a same-country section 368(a)(1)(F) 
reorganization) that is followed by a controlled asset transfer. For 
purposes of this section, a same-country section 368(a)(1)(F) 
reorganization is a reorganization described in section 368(a)(1)(F) in 
which both the acquired corporation and the acquiring corporation are 
foreign corporations and are created or organized under the laws of the 
same foreign country. 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 by the acquired corporation in an asset transfer 
rather than an indirect stock transfer, and, if the acquired 
corporation is a domestic corporation, such asset transfer shall be 
subject to the other provisions of section 367, including sections 
367(a)(1), (3), and (5), and (d). See paragraph (d)(3) Examples 6A and 
6B of this section.
* * * * *
    (2) * * *
    (i) Transferee foreign corporation--(A) General rule. Except as 
provided in paragraph (d)(2)(i)(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.
    (B) Special rule for triangular reorganizations described in 
paragraph (d)(1)(iii)(B) of this section. In the case of a triangular 
reorganization described in paragraph (d)(1)(iii)(B) of this section, 
the transferee foreign corporation shall be the foreign acquiring 
corporation. See paragraph (d)(3) Example 5A of this section.
    (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.
* * * * *
    (iv) Gain recognition agreements involving multiple parties. The 
U.S. transferor's agreement to recognize gain, as provided in Sec.  
1.367(a)-8, shall include appropriate provisions consistent with the 
principles of these rules, including a requirement that the transferor 
recognize gain in the event of a direct or indirect disposition of the 
stock or assets of the transferred corporation. For example, in the 
case of a triangular section 368(a)(1)(B) reorganization described in 
paragraph (d)(1)(iii)(A) of this section, a disposition of the 
transferred stock or securities requiring the U.S. transferor to 
recognize gain shall include a direct or indirect disposition of such 
stock or securities by the transferee foreign corporation, such as a 
disposition of such stock or securities by a foreign acquiring 
corporation or a disposition of the stock of the acquiring corporation 
(either foreign or domestic) by the transferee foreign corporation. In 
the case of a triangular section 368(a)(1)(B) reorganization described 
in paragraph (d)(1)(iii)(B) of this section, a disposition of the 
transferred stock or securities requiring the U.S. transferor to 
recognize gain shall occur, for example, upon the disposition of such 
stock or securities by the acquiring corporation. Moreover, a 
disposition of the stock of the acquiring corporation by the domestic 
issuing corporation in a taxable transaction shall, for example, 
terminate the gain recognition agreement. See Sec.  1.367(a)-8(h)(1) 
and paragraph (d)(3) Examples 5 and 5A of this section.
    (v) * * *
    (A) In the case of a reorganization described in paragraph 
(d)(1)(i) of this section (a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D)) or a 
reorganization described in section (d)(1)(iv) of this section (a 
triangular section 368(a)(1)(C) reorganization), the assets of the 
acquired corporation;
* * * * *
    (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, a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(D) followed by a 
controlled asset transfer, or a reorganization described in sections 
368(a)(1)(G) 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. Except as otherwise provided in this 
paragraph (d)(2)(vi), 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 section 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

[[Page 4285]]

corporation) in an asset reorganization, and such assets (re-
transferred assets) are transferred to a domestic corporation (domestic 
controlled corporation) in a controlled asset transfer, 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) 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 described in paragraph 
(d)(2)(vi)(A) of this section. 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 described in paragraph (d)(2)(vi)(A) of this section, 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 this paragraph.
    (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, 9, 
and 13A of this section.
    (vii) Change in status of a domestic acquired corporation to a 
foreign corporation. (A) A U.S. person that exchanges stock or 
securities of a domestic corporation for stock or securities of a 
foreign corporation under section 354 (or section 356) will be treated 
for purposes of this section as having made an indirect stock transfer 
of the stock or securities of a foreign corporation (and not of a 
domestic corporation) to a foreign corporation under paragraph (b) of 
this section (but not paragraph (c) of this section), if the acquired 
domestic corporation is a subsidiary member (within the meaning of 
Sec.  1.1502-1(c)) of a consolidated group (within the meaning of Sec.  
1.1502-1(h)) immediately before the transaction, and if the transaction 
is either of the following:
    (1) Described in paragraph (d)(1)(i) or (iv) of this section, but 
only if the acquiring corporation is foreign. See paragraph (d)(3) 
Examples 8, 9, 10 and 12 of this section.
    (2) Described in paragraph (d)(1)(v) of this section, but only to 
the extent the controlled asset transfer is to a foreign corporation. 
See paragraph (d)(3) Example 6A of this section.
    (B) The rules of paragraph (d)(2)(vii)(A) of this section will not 
apply to the extent assets transferred to the foreign acquiring 
corporation in a transaction described in paragraph (d)(2)(vii)(A)(1) 
of this section, or assets transferred to a foreign corporation in a 
controlled asset transfer in a transaction described in paragraph 
(d)(2)(vii)(A)(2) of this section, are retransferred to a domestic 
controlled corporation in one or more successive transfers as part of 
the same transaction. See paragraph (d)(3) Example 9 of this section.
    (3) * * * The rules of this paragraph (d) and Sec.  1.367(a)-8 are 
illustrated by the following examples. For purposes of these examples, 
assume section 7874 does not apply.
* * * * *


[[Page 4286]]


    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, A is considered to have transferred its W stock to F 
pursuant 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 3. Taxable transaction pursuant to indirect stock 
transfer rules--(i) Facts. The facts are the same as in Example 1, 
except that A receives 55 percent of either the total voting power 
or the total value of the stock of F in the transaction.
* * * * *
    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)(B) 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) of this section are 
satisfied, including the requirement that U enter into a five-year 
gain recognition agreement. In satisfying the 50 percent or less 
ownership requirements of paragraphs (c)(1)(i) and (ii) of this 
section, U's indirect ownership of S stock (through its direct 
ownership of F) will determine whether the requirement of paragraph 
(c)(1)(i) of this section is satisfied and will be taken into 
account in determining whether the requirement of paragraph 
(c)(1)(ii) of this section is satisfied. See paragraph (c)(4)(iv) of 
this section. For purposes of this section, S is treated as the 
transferee foreign corporation (see paragraph (d)(2)(i)(B) of this 
section). The gain recognition agreement would be triggered, for 
example, if S sold all or a portion of the stock of Y, or if Y sold 
substantially all of its assets (within the meaning of section 
368(a)(1)(C)). In addition, if F disposed of the stock of S in a 
taxable transaction the gain recognition agreement would be 
terminated.
* * * * *
    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 with Z transferring its assets to F, 
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.
    (ii) Result. The transfer of the Business A assets by Z to F 
does not constitute an indirect stock transfer under paragraph (d) 
of this section, and, subject to section 367(a)(5), the Business A 
assets qualify for the section 367(a)(3) active trade or business 
exception and are not subject to section 367(a). * * * Subject to 
section 367(a)(5), the Business B assets may qualify for the 
exception under section 367(a)(3) and Sec.  1.367(a)-2T(c)(2) for 
assets that will be used by R in an active trade or business outside 
the United States. Pursuant to paragraphs (d)(1) and 
(d)(2)(vii)(A)(2) of this section, V is deemed to transfer the stock 
of a foreign corporation to F in a section 354 exchange subject to 
the rules of paragraphs (b) and (d) of this section. * * *
* * * * *
    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, subject to section 367(a)(5), the Business A assets qualify 
for the section 367(a)(3) active trade or business exception and are 
not subject to section 367(a). The Business B and C assets are part 
of an indirect stock transfer under this paragraph (d) but must 
first be tested under section 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 B and C assets 
are not subject to section 367(a) or (d), provided that the basis of 
the Business B and 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. V also is deemed to make an indirect transfer of Z stock 
under the rules of paragraph (d) of this section to the extent the 
assets are transferred to R. To preserve non-recognition treatment 
under section 367(a), and assuming the other requirements of 
paragraph (c) of this section are satisfied, 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 U.S. 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 Business A assets transferred to F are not re-
transferred to R and therefore Z's transfer of these assets is not 
subject to the rules of paragraph (d) of this section. 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 with respect to Z under 
section 367(a) and (d), as provided in paragraph (d)(2)(vi) of this 
section. 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 section 367(a)(1) because these assets do not qualify 
for the active trade or business exception under section 367(a)(3). 
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. Even though Z is not 
controlled within the meaning of section 368(c) by 5 or fewer 
domestic corporations, Z may avoid immediate gain recognition under 
section 367(a) and (d) on the transfers of the Business B and 
Business C assets to F if, pursuant to paragraph (d)(3)(vi)(B) of 
this section, the indirect transfer of Z stock satisfies the 
requirements of paragraphs (c)(1)(i), (ii), and (iv), and (c)(6) of 
this section, and Z 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. 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, assume 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

[[Page 4287]]

requirements of (c)(6) of this section, the transfer of Business B 
and C assets is not subject to immediate gain recognition under 
section 367(a) or (d).
* * * * *
    Example 8. Concurrent application of asset transfer and indirect 
stock transfer rules in consolidated return setting--(i) Facts. * * 
*
    (ii) * * * Pursuant to paragraphs (d)(1) and (d)(2)(vii)(A)(1) 
of this section, V is deemed to transfer the stock of a foreign 
corporation to F in a section 354 exchange subject to the rules of 
paragraphs (b) and (d) of this section, and therefore must enter 
into a gain recognition agreement in the amount of $60 (the gain 
realized but not recognized by V in the stock of Z after the $40 
basis adjustment).
* * * * *
    Example 9. Indirect stock transfer by reason of 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. 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), 
subject to section 367(a)(5). Pursuant to paragraphs (d)(1) and 
(d)(2)(vii)(A)(1) of this section, V is generally deemed to transfer 
the stock of a foreign corporation to F in a section 354 exchange 
subject to the rules of paragraphs (b) and (d) of this section, 
including the requirement that V enter into a 5-year gain 
recognition agreement and comply with the requirements of Sec.  
1.367(a)-8. However, pursuant to paragraph (d)(2)(vii)(B) of this 
section, paragraph (d)(2)(vii)(A)(1) of this section does not apply 
to the extent of the transfer of business A assets by R to M, a 
domestic corporation. As a result, to the extent of the business A 
assets transferred by R to M, V is deemed to transfer the stock of Z 
(a domestic corporation) to F in a section 354 exchange subject to 
the rules of paragraphs (c) and (d) of this section. Thus, with 
respect to V's indirect transfer of Z stock to F, 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. 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 of direct stock transfer and 
indirect stock transfer rules 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) and (d) 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), subject to section 
367(a)(5). 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. Further, 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. Pursuant to paragraphs 
(d)(1) and (d)(2)(vii)(A)(1) of this section, V is deemed to 
transfer the stock of a foreign corporation to F in a section 354 
exchange subject to the rules of paragraphs (b) and (d) of this 
section. V's indirect transfer of foreign 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).
    Example 11. Concurrent application of section 367(a) and (b) in 
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), 
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, only 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 12. Concurrent application of direct and indirect stock 
transfer rules--(i) Facts. * * *
    (ii) * * * Pursuant to paragraphs (d)(1) and (d)(2)(vii)(A)(1) 
of this section, D is deemed to transfer the stock of a foreign 
corporation to F in a section 354 exchange subject to the rules of 
paragraphs (b) and (d) of this section, and therefore may enter into 
a gain recognition agreement for such indirect stock transfer as 
provided in paragraph (b) of this section and Sec.  1.367(a)-8. * * 
*
* * * * *
    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. P's section 354 exchange is considered an indirect 
stock transfer under paragraph (d)(1)(i) of this section. Further, 
because the assets of FC were acquired by Newco, a domestic 
corporation, in an asset reorganization, the transaction is within 
Sec.  1.367(b)-3(a) and (b). Because the transaction is subject to 
Sec.  1.367(b)-3 and the indirect stock rules of paragraph (d) of 
this section, and because the all earnings and profits amount with 
respect to the FC stock exchanged by P ($60) is greater than the 
gain in such stock subject to section 367(a) ($50), the section 
367(b) rules (and not the section 367(a) rules) apply to the 
exchange. See Sec.  1.367(a)-3(b)(2)(i)(B). 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. Alternatively, if P's all earnings and profits amount 
with respect to its FC stock were $30 (which is less than the gain 
in such stock subject to section 367(a) ($50)), section 367(b) and 
the regulations thereunder would not

[[Page 4288]]

apply if there is gain recognition under section 367(a). Thus, if P 
failed to enter into a 5-year gain recognition agreement in 
accordance with Sec.  1.367(a)-8, then P would recognize $50 of gain 
under section 367(a) and there would be no income inclusion under 
section 367(b). If, instead, P enters into a 5-year gain recognition 
agreement under Sec.  1.367(a)-8, thereby avoiding immediate gain 
recognition on the entire $50 of section 367(a) gain, P is required 
to include in income the all earnings and profits amount of $30. In 
such a case, P will adjust its basis in the FC stock pursuant to 
Sec.  1.367(b)-2(e)(3)(ii) and enter into a gain recognition 
agreement in the amount of $20.
    Example 16. Direct asset reorganization not subject to stock 
transfer rules--(i) Facts. D is a domestic corporation that owns all 
the stock of F1 and F2, both foreign corporations. In a 
reorganization described in section 368(a)(1)(D), F2 acquires all of 
the assets of F1, and D receives 30 percent of the stock of F2 in an 
exchange described in section 354.
    (ii) Result. The section 368(a)(1)(D) reorganization is not an 
indirect stock transfer described in paragraph (d) of this section. 
Moreover, the section 354 exchange by D of F1 stock for F2 stock is 
not an exchange described under section 367(a). See paragraph (a) of 
this section.

    (e) * * *
    (1) Rules of applicability--(A) Except as otherwise provided 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.
    (B) The following rules apply to transactions occurring on or after 
January 23, 2006--
    (1) 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 foreign acquired corporation;
    (2) The rules in paragraph (b)(2)(i)(B) of this section;
    (3) The rules in paragraph (d) of this section, as they apply to 
section 368(a)(1)(G) reorganizations (including reorganizations 
described in section 368(a)(2)(D));
    (4) The rules of paragraph (d)(1) and (d)(2)(iv), as they relate to 
exchanges by a U.S. person of securities of an acquired corporation for 
voting stock or securities of a foreign corporation in control of the 
acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization;
    (5) The rules in paragraph (d)(1) and (d)(2)(iv) of this section, 
as they relate to exchanges by a U.S. person of stock or securities of 
an acquired corporation for voting stock or securities of a domestic 
corporation in control of the foreign acquiring corporation in a 
triangular section 368(a)(1)(B) reorganization; and
    (6) The rules in paragraph (d)(2)(vii) of this section.
    (C) The rules of paragraph (a) of this section that apply to 
transfers of securities in a section 354 or 356 exchange (pursuant to a 
section 368(a)(1)(E) reorganization or an asset reorganization that is 
not treated as an indirect stock transfer) that is not subject to 
section 367(a) apply only to transfers occurring after January 5, 2005 
(although taxpayers may apply such provision to transfers of securities 
occurring on or after July 20, 1998, and on or before January 5, 2005, 
if done consistently to all transactions).
    (D) The rules in paragraph (d)(1)(v) of this section apply to:
    (1) A reorganization described in section 368(a)(1)(C) followed by 
a controlled asset transfer if such reorganization occurs on or after 
July 20, 1998;
    (2) A reorganization described in section 368(a)(1)(D) followed by 
a controlled asset transfer if such reorganization occurs after 
December 9, 2002 (for additional guidance concerning such 
reorganizations that occur on or after July 20, 1998 and on or before 
December 9, 2002, see Rev. Rul. 2002-85 (2002-2 C.B. 986) and Sec.  
601.601(d)(2) of this chapter); and
    (3) A reorganization described in section 368(a)(1)(A), (F), or (G) 
followed by a controlled asset transfer if such reorganization occurs 
on or after January 23, 2006.
    (E) The rules of paragraph (d)(2)(vi) of this section apply only to 
transactions occurring on or after January 23, 2006. See Sec.  
1.367(a)-3(d)(2)(vi), as contained in 26 CFR part 1 revised as of April 
1, 2005, for transactions occurring on or after July 20, 1998 and 
before January 23, 2006.
    (F) With respect to certain transfers of domestic stock or 
securities, the rules in paragraph (c) of this section are generally 
applicable for transfers occurring after January 29, 1997. See Sec.  
1.367(a)-3(c)(11). For transition rules regarding certain transfers of 
domestic stock or securities after December 16, 1987, and before 
January 30, 1997, and transfers of foreign stock or securities after 
December 16, 1987, and before July 20, 1998, see paragraph (g) of this 
section.
* * * * *

0
Par. 4. Section 1.367(a)-8 is amended as follows:
0
1. In paragraphs (c)(2) and (d), remove the words ``district director'' 
and add ``Director of Field Operations'' in their place.
0
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). 
* * *
* * * * *

0
Par. 5. In Sec.  1.367(b)-1(a), remove the third and fourth sentences 
and add a sentence in their place to read as follows:


Sec.  1.367(b)-1  Other transfers.

    (a) * * * For rules coordinating the concurrent application of 
sections 367(a) and (b), see Sec.  1.367(a)-3(b)(2). * * *
* * * * *

0
Par. 6. 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.
* * * * *

0
Par. 7. Section 1.367(b)-4 is amended as follows.
0
1. Paragraph (a) is revised.
0
2. The heading and first sentence of paragraph (b)(1)(i) are revised.
0
3. Paragraph (b)(1)(ii) is redesignated as paragraph (b)(1)(iii), and 
new paragraph (b)(1)(ii) is added.
0
4. In newly designated paragraph (b)(1)(iii) Examples 3A and 3B are 
added after Example 3.
    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

[[Page 4289]]

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 the 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) * * *
    (i) General rule. Except as provided in paragraph (b)(1)(ii) of 
this section, an exchange is described in this paragraph (b)(1)(i) if--
* * * * *
    (ii) Exception. In the case of a triangular reorganization 
described in Sec.  1.358-6(b)(2), or a reorganization described in 
sections 368(a)(1)(G) and (a)(2)(D), 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 B reorganization) 
or the surviving corporation (in the case of a triangular C 
reorganization, a forward triangular merger, a reorganization described 
in sections 368(a)(1)(G) and (a)(2)(D), or a reverse triangular merger) 
and such acquired or surviving corporation is a controlled foreign 
corporation. See Sec.  1.367(b)-13(c) for rules regarding such domestic 
corporation's basis in the stock of the surviving 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 
section 1248 shareholder immediately after the reorganization, then 
paragraph (b)(1)(i) of this section does not apply to require DC to 
include in income the section 1248 amount attributable to the FC2 
stock that was exchanged 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 section 1248 shareholder immediately after the 
exchange, then DC must include in income as a deemed dividend from 
FC2 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 amount 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. In 
addition, 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) 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 surviving corporation) and FC1 
is a controlled foreign corporation, the exchange is not described 
in paragraph (b)(1)(i) of this section and DC is not required to 
include in income the section 1248 amount attributable to the FC2 
stock that was exchanged. See Sec.  1.367(b)-13(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.

* * * * *

0
Par. 8. In Sec.  1.367(b)-6, paragraph (a)(1), add two sentences 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 on or after January 23, 2006. Section 
1.367(b)-4(b)(1)(ii) applies to triangular B reorganizations occurring 
on or after February 23, 2000 and to all other triangular 
reorganizations and reorganizations described in section 368(a)(1)(G) 
and (a)(2)(D) occurring on or after January 23, 2006.
* * * * *

0
Par. 9. 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 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 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 block of stock has the meaning provided in Sec.  1.1248-2(b).
    (ii) A triangular reorganization is a reorganization described in 
Sec.  1.358-6(b)(2)(i), (ii), or (iii) or in sections 368(a)(1)(G) and 
(a)(2)(D) (a forward triangular merger, triangular C reorganization, 
reverse triangular merger, or triangular G reorganization, 
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 for exchanges of foreign stock or 
securities under section 354 or 356. For rules determining the basis of 
stock or securities in a foreign corporation received in a section 354 
or 356 exchange, see Sec.  1.358-2.
    (c) Determination of basis and holding period for triangular 
reorganizations--(1) Application. In the case of a triangular 
reorganization described in paragraph (a)(2)(ii) of this section, this 
paragraph (c) applies, if--
    (i)(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

[[Page 4290]]

person is a section 1248 shareholder with respect to both P and S; and
    (B) In the case of a reverse triangular merger, 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 a 
section 1248 shareholder with respect to T, or a shareholder of T is 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 paragraph (c)(1) of this section, 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 1 through 4 for illustrations of this rule.
    (i) Portions attributable to S stock--(A) In the case of a forward 
triangular merger, a triangular C reorganization, or a triangular G 
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 
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 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 are 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) Not section 1248 shareholders with respect to the corporation; 
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. See paragraph (e) 
Example 5 of this section.
    (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. See paragraph (e) Example 5 of this section.
    (e) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. Blocks of stock exchanged in a triangular 
reorganization--(i) Facts. (A) US1, a domestic corporation, owns all 
the stock of F1, a foreign corporation. F1 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 F1 acquired the stock 
of FT at two different dates, F1 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.
    (B) 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. FP owns two blocks of FS stock. Each block consists of 
10 shares with a value of $200x ($20x per share). The shares in the 
first block have 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.
    (C) FT merges into FS, with FS surviving, and F1 receives 50 
shares of FP stock with a value of $1,000x in exchange for its FT 
stock. 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 F1, the exchanging shareholder, FP and 
FS, all of which are controlled foreign corporations.
    (ii) Basis and holding period determination. (1) US1 is a 
section 1248 shareholder of F1, the exchanging

[[Page 4291]]

shareholder, and FT (both of which are controlled foreign 
corporations) immediately before the transaction. Moreover, F1 is 
not required to include amounts in income under Sec.  1.367(b)-3(b) 
or 1.367(b)-4(b) as described in paragraph (c)(1)(ii)(B) 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.
    (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 F1 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 (F1) has a 
section 1248 shareholder (US1), 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 F1 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) Subsequent disposition--first block. 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) Subsequent disposition--second block. 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 2. (i) Facts. The facts are the same as in Example 1, 
except that FS merges into FT with FT surviving in a reverse 
triangular merger. Pursuant to the merger, F1 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 $1,000x in exchange for its FS 
stock. Immediately after the exchange, US1 is a section 1248 
shareholder with respect to F1, the exchanging shareholder, FP, and 
FT, all of which are controlled foreign corporations.
    (ii) Basis and holding period determination--(A) The basis and 
holding period of the stock of the surviving corporation held by FP 
are the same as in Example 1, 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 F1 
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 FT portion immediately before the exchange. 
Because FT does not have a section 1248 shareholder immediately 
before the transaction, the rules of Sec.  1.358-6 apply to 
determine the basis of the FT portion of each share of FS stock. 
Those rules determine the basis of FS stock held by USP by reference 
to the basis of FT's net assets. 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, a holding period 
of 10 years, and $7x of earnings and profits attributable to such 
portion for section 1248 purposes. 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. 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) US and USP are 
section 1248 shareholders of FT and FS, respectively, immediately 
before the transaction. Neither

[[Page 4292]]

US nor USP is required to include amounts in income under Sec.  
1.367(b)-3(b) or 1.367(b)-4(b) as described in paragraph 
(c)(1)(i)(B) or (c)(1)(ii)(B) 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 
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) attributable to its FS stock basis 
held prior to the reorganization 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. US, a domestic corporation, owns all of 
the stock of F1, a foreign corporation, which owns all the stock of 
FT, a foreign corporation. The FT stock held by F1 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, F1 receives FP stock with a value of $200x for its FT stock 
in an exchange that qualifies for non-recognition under section 354. 
US is a section 1248 shareholder with respect to F1, the exchanging 
shareholder, FP, and FS (all of which are controlled foreign 
corporations) immediately after the exchange.
    (ii) Basis and holding period determination. (A) Because US is a 
section 1248 shareholder of F1, the exchanging shareholder, and FT 
immediately before the transaction, and US is a section 1248 
shareholder of F1, FP, and FS immediately after the transactions, F1 
is not required to include amounts in income under Sec. Sec.  
1.367(b)-3(b) and 1.367(b)-4(b) as described in paragraph 
(c)(1)(ii)(B) of this section. Thus, 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 F1 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 (F1) has a section 1248 
shareholder of both F1 and 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).

    (f) Effective date. This section applies to exchanges occurring on 
or after January 23, 2006.

0
Par. 10. Section 1.884-2 is amended as follows:
0
1. Paragraphs (c)(3) through (c)(6)(i)(A) are revised.
0
2. Paragraphs (c)(6)(i)(B), (C), and (D) are added.
0
3. Paragraphs (c)(6)(ii) through (f) are revised.
0
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).
    (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) 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.
    (D) A corporation related to any such shareholder or the 
shareholder itself if it is a corporation (subsequent to an

[[Page 4293]]

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 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 on or after January 
23, 2006, in the case of reorganizations described in sections 
368(a)(1)(A) and 368(a)(2)(D) or (E).

0
Par. 11. 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).

0
Par. 12. Section Sec.  1.6038B-1 is amended as follows:
0
1. Paragraphs (b)(1)(i) and (b)(1)(ii) are revised.
0
2. The text of paragraph (g) is redesignated as paragraph (g)(1) and 
the first sentence is revised.
0
3. Paragraphs (g)(2), (g)(3), and (g)(4) are added.
    The revisions and addition are as follows:


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

* * * * *
    (b) Time and manner of reporting--(1) In general--(i) Reporting 
procedure. Except for stock or securities qualifying under the special 
reporting rule of Sec.  1.6038B-1(b)(2), and certain exchanges 
described in section 354 or 356 (listed below), any U.S. person that 
makes a transfer described in section 6038B(a)(1)(A), 367(d) or (e), is 
required to report pursuant to section 6038B and the rules of Sec.  
1.6038B-1 and must attach the required information to Form 926, 
``Return by a U.S. Transferor of Property to a Foreign Corporation.'' 
For special rules regarding cash transfers made in tax years beginning 
after February 5, 1999, see paragraphs (b)(3) and (g) of this section. 
For purposes of determining a U.S. transferor that is subject to 
section 6038B, the rules of Sec. Sec.  1.367(a)-1T(c) and 1.367(a)-3(d) 
shall apply with respect to a transfer described in section 367(a), and 
the rules of Sec.  1.367(a)-1T(c) shall apply with respect to a 
transfer described in section 367(d). Additionally, if in an exchange 
described in section 354 or 356, a U.S. person exchanges stock or 
securities of a foreign corporation in a reorganization described in 
section 368(a)(1)(E), or a U.S. person exchanges stock or securities of 
a domestic or foreign corporation pursuant to an asset reorganization 
described in section 368(a)(1) (involving a transfer of assets under 
section 361) that is not treated as an indirect stock transfer under 
Sec.  1.367(a)-3(d), then the U.S. person exchanging stock or 
securities is not required to report under section 6038B. 
Notwithstanding any statement to the contrary on Form 926, the form and 
attachments must be attached to, and filed by the due date (including 
extensions) of the transferor's income tax return for the taxable year 
that includes the date of the transfer (as defined in Sec.  1.6038B-
1T(b)(4)). For taxable years beginning before January 1, 2003, any 
attachment to Form 926 required under the rules of this section is 
filed subject to the transferor's declaration under penalties of 
perjury on Form 926 that the information submitted is true, correct and 
complete to the best of the transferor's knowledge and belief. For 
taxable years beginning after December 31, 2002, Form 926 and any 
attachments shall be verified by signing the income tax return with 
which the form and attachments are filed.
    (ii) [Reserved]. For further guidance, see Sec.  1.6038B-1T(b)(ii).
* * * * *
    (g) Effective dates--(1) This section applies to transfers 
occurring on or after July 20, 1998, except for transfers of cash made 
in tax years beginning on or before February 5, 1999 (which are not 
required to be reported under section 6038B), except for transfers 
described in paragraphs (g)(2) through (4) of this section, and except 
for transfers described in paragraph (e) of this section, which applies 
to transfers that are subject to Sec. Sec.  1.367(e)-1(f) and 1.367(e)-
2(e). * * *
    (2) The rules of paragraph (b)(1)(i) of this section as they apply 
to section 368(a)(1)(A) reorganizations (including reorganizations 
described in section 368(a)(2)(D) or (E)) apply to transfers occurring 
on or after January 23, 2006.
    (3) The rules of paragraph (b)(1)(i) of this section that provide 
an exception from reporting under section 6038B for transfers of stock 
or securities in a section 354 or 356 exchange, pursuant to a section 
368(a)(1)(G) reorganization that is not treated as an indirect stock 
transfer under Sec.  1.367(a)-3(d), apply to transfers occurring on or 
after January 23, 2006.
    (4) The rules of paragraph (b)(1)(i) of this section that provide 
an exception from reporting under section 6038B for transfers of stock 
in a section 354 or 356 exchange, pursuant to a section 368(a)(1)(E) 
reorganization or an asset reorganization under section 368(a)(1) that 
is not treated as an indirect stock transfer under Sec.  1.367(a)-3(d), 
apply to transfers occurring on or after January 23, 2006. The rules of 
paragraph (b)(1)(i) of this section that provide an exception from 
reporting under section 6038B for transfers of securities in a section 
354 or 356 exchange, pursuant to a section 368(a)(1)(E) reorganization 
or an asset

[[Page 4294]]

reorganization under section 368(a)(1) that is not treated as an 
indirect stock transfer under Sec.  1.367(a)-3(d), apply only to 
transfers occurring after January 5, 2005 (although taxpayers may apply 
such provision to transfers of securities occurring on or after July 
20, 1998 and on or before January 5, 2005 if done consistently to all 
transactions). See Sec.  1.6038-1T(b)(i), as contained in 26 CFR part 1 
revised as of April 1, 2005, for transfers occurring prior to the 
effective dates described in paragraphs (g)(2) through (4) of this 
section.

0
Par. 13. In Sec.  1.6038B-1T, paragraph (b)(1)(i) is revised to read as 
follows:


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

* * * * *
    (b) Time and manner of reporting--(1) In general--(i) [Reserved]. 
For further guidance, see Sec.  1.6038B-1(b)(1)(i).
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: January 17, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-587 Filed 1-23-06; 11:43 am]
BILLING CODE 4830-01-P