[Federal Register Volume 74, Number 27 (Wednesday, February 11, 2009)]
[Rules and Regulations]
[Pages 6952-6976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1512]



[[Page 6951]]

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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 602



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Gain Recognition Agreements With Respect to Certain Transfers of Stock 
or Securities by United States Persons to Foreign Corporations; Final 
Rule

  Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / 
Rules and Regulations  

[[Page 6952]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9446]
RIN 1545-BG09


Gain Recognition Agreements With Respect to Certain Transfers of 
Stock or Securities by United States Persons to Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 367(a) 
of the Internal Revenue Code (Code) concerning gain recognition 
agreements filed by United States persons with respect to transfers of 
stock or securities to foreign corporations. The regulations finalize 
temporary regulations published on February 5, 2007 (TD 9311). The 
regulations primarily affect United States persons that transfer (or 
have transferred) stock or securities to foreign corporations and that 
will enter (or have entered) into a gain recognition agreement with 
respect to such a transfer.

DATES: Effective Date: These regulations are effective February 11, 
2009.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3(g) and 1.367(a)-8(r).

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-147144-06), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
147144-06), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-147144-06).

FOR FURTHER INFORMATION CONTACT: S. James Hawes, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information in these regulations have been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control number 1545-2056.
    The collections of information in these final regulations are in 
Sec.  1.367(a)-8(d), (g), (k), and (o). Responses to the collections of 
information are required to avoid recognizing gain under an existing 
gain recognition agreement and to facilitate electronic filing. The 
regulations also require the amount of any gain recognized under a gain 
recognition agreement and applicable interest due with respect to any 
additional tax due with respect to such gain to be reflected on a 
schedule included with the electronically-filed return of the taxpayer.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information, unless the collection of 
information displays a valid control number.
    Books and records relating to these collections 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 February 5, 2007, the IRS and Treasury Department issued 
temporary and proposed regulations under section 367(a) concerning the 
terms and conditions for a gain recognition agreement (GRA) filed by a 
United States person (the U.S. transferor) in connection with a 
transfer of stock or securities to a foreign corporation (transferee 
foreign corporation) and the impact of certain transactions on an 
existing GRA (the 2007 regulations). 72 FR 5184 (T.D. 9311) (2007-10 
IRB 635). No public hearing on the 2007 regulations was requested or 
held; however, numerous comments were received. After considering the 
comments received, the IRS and Treasury Department adopt the 2007 
regulations, with modifications, as final regulations under section 
367(a). This Treasury decision also removes the temporary regulations 
and revises cross-references where appropriate to reflect the removal 
and replacement of the temporary regulations with final regulations.

Summary of Comments and Explanation of Revisions

A. Subsequent Nonrecognition Transfers--In General

    The 2007 regulations provide specific exceptions for certain 
dispositions or other events that would otherwise require gain to be 
recognized under an existing GRA (triggering event). The exceptions 
generally apply to dispositions that qualify for nonrecognition 
treatment under the Code and require the U.S. transferor to enter into 
a new GRA with respect to the initial transfer for the remaining term 
of the existing GRA.
    Several commentators asserted that the exceptions provided by the 
2007 regulations did not literally apply to various dispositions 
qualifying for nonrecognition treatment because the entity making the 
transfer is not described in the relevant exception, thus 
inappropriately resulting in gain recognition under a GRA. For example, 
assume that in year 1 a domestic corporation, USP, transfers stock of a 
foreign corporation, FS1, to another foreign corporation, FS2, pursuant 
to an exchange to which section 351 applies (the initial transfer). USP 
files a GRA with respect to the initial transfer. In year 2, FS2 
transfers the FS1 stock received from USP in year 1 to another foreign 
corporation, FS3, solely in exchange for stock of FS3 under section 
351. The year 2 transfer of the FS1 stock by FS2 would constitute a 
triggering event for purposes of the GRA filed by USP with respect to 
the initial transfer, but the transfer qualifies for an exception under 
the 2007 regulations. USP complies with the requirements of the 2007 
regulations with respect to the GRA filed for the initial transfer. In 
year 3, FS3 contributes the FS1 stock received from FS2 in year 2 to 
another foreign corporation, FS4, solely in exchange for stock of FS4 
under section 351. The year 3 transfer of the FS1 stock by FS3 is a 
triggering event with respect to the GRA entered into by USP in 
connection with the initial transfer.
    The 2007 regulations provide an exception for certain subsequent 
transfers of the transferred stock in a transaction to which section 
351 applies (section 351 exchange), but the exception does not clearly 
apply when the transferor in the section 351 exchange is not the 
transferee foreign corporation. Commentators expressed similar concerns 
with respect to other nonrecognition transactions, including 
liquidations described in section 332 (section 332 liquidation), 
transactions to which section 355 applies (section 355 transactions), 
and transactions involving partnerships. The commentators suggested 
various alternatives for avoiding the inappropriate triggering of a GRA 
in such cases.
    The IRS and Treasury Department agree that certain nonrecognition 
transactions that may not qualify for an exception under the 2007 
regulations should not trigger an existing GRA. Because specific 
exceptions provide certainty to the relevant transactions,

[[Page 6953]]

the final regulations retain the exceptions of the 2007 regulations 
with modifications so that the exceptions apply to transactions 
involving one or more entities not clearly described in the 2007 
regulations. For example, under the final regulations the exception for 
a section 351 exchange of the transferred stock applies to any transfer 
of the transferred stock regardless of the identity of the transferor. 
The final regulations include additional specific exceptions and a 
general exception for certain transactions that cannot be adequately 
covered by a specific exception because of the myriad factual 
permutations.
    The general exception provided by the final regulations applies 
generally to any disposition or other event that would otherwise 
constitute a triggering event if the disposition is a nonrecognition 
transaction (as defined in section 7701(a)(45), but including an 
exchange described in section 351(b) or 356 even if all gain realized 
is recognized); a U.S. transferor retains a direct or indirect interest 
in the transferred stock or securities (or the assets of the 
transferred corporation, such as where the transferred corporation has 
liquidated in the interim); and the U.S. transferor that retains such 
direct or indirect interest enters into a new GRA with respect to the 
initial transfer. However, if, as a result of the disposition or other 
event, a foreign corporation acquires all or part of the transferred 
stock or securities (or substantially all the assets of the transferred 
corporation) the general exception shall apply only if the U.S. 
transferor owns at least five percent (applying the attribution rules 
of section 318, as modified by section 958(b)) of the total voting 
power and the total value of the outstanding stock of such foreign 
corporation immediately after the disposition or other event. This five 
percent ownership condition is intended to limit the application of the 
general exception in transactions where the U.S. transferor retains a 
minimal interest in the transferred stock or securities (or 
substantially all the assets of the transferred corporation). The final 
regulations include examples to illustrate the application of the 
general exception.
    A disposition or other event to which the general exception applies 
shall be subject to the provisions of the final regulations to the same 
extent and in the same manner as a disposition or event to which a 
specific exception applies. For example, even though a specific 
exception is generally available for a section 351 exchange of the 
transferred stock by the transferee foreign corporation, the U.S. 
transferor must still recognize gain under the existing GRA to the 
extent the transferee foreign corporation would otherwise recognize 
gain in the exchange under section 351(b). The U.S. transferor must 
therefore similarly recognize gain in connection with a disposition or 
other event to which the general exception applies to the extent that 
the transferee foreign corporation would otherwise recognize gain in 
the exchange under section 351(b).
    A new GRA filed under the general exception is generally subject to 
the same terms and conditions as the existing GRA, but must also 
describe the subsequent dispositions that would constitute triggering 
events (based on the principles of the final regulations, but not 
including any triggering event otherwise described in the final 
regulations) and include a statement that the U.S. transferor agrees to 
treat such dispositions as triggering events. In addition, the final 
regulations provide that, with respect to a new GRA filed under the 
general exception, a triggering event shall also include any other 
disposition or event that is inconsistent with the principles of the 
triggering event exceptions including, for example, an indirect 
disposition of the transferred stock or securities or of substantially 
all of the assets of the transferred corporation. This additional 
condition is similar to the condition applicable to a GRA filed in 
connection with an indirect stock transfer described in Sec.  1.367(a)-
3(d).
    One commentator requested that an exception be provided for a 
securities lending transaction to which section 1058 applies. The final 
regulations do not provide such an exception.

B. Dispositions Pursuant to an Intercompany Transaction

    Under the 2007 regulations, a complete or partial disposition by 
the U.S. transferor of the stock of the transferee foreign corporation 
received in the initial transfer generally requires the U.S. transferor 
to recognize gain under the GRA. Exceptions to this general rule are 
provided for certain nonrecognition transfers to which sections 351, 
354, or 721 applies. As described further in part D. of this Preamble, 
the 2007 regulations provide further that a GRA shall instead terminate 
(in whole or in part) if the U.S. transferor disposes of all or part of 
the stock of the transferee foreign corporation received in the initial 
transfer pursuant to a transaction in which all gain realized is 
recognized currently and included in taxable income as a result of the 
disposition, but only if the basis of the stock disposed of (excluding 
certain adjustments to such basis) is not greater than the basis in the 
transferred stock or securities at the time of the initial transfer.
    If the U.S. transferor disposes of stock of the transferee foreign 
corporation pursuant to an intercompany transaction (within the meaning 
of Sec.  1.1502-13) that is not described in section 351 or 354, the 
conditions for terminating the existing GRA (in whole or in part) are 
not satisfied because, under the provisions of Sec.  1.1502-13, the 
U.S. transferor generally defers taking into account any gain realized 
and recognized on the disposition. Thus, such a disposition would be a 
triggering event.
    Several commentators asserted that it is inappropriate to require 
the U.S. transferor to recognize gain under the GRA in such cases 
because the stock of the transferee foreign corporation remains within 
the consolidated group of which the U.S. transferor is a member. It is 
also inappropriate to terminate the GRA because the intercompany item 
has not been taken into account. Instead, the commentators recommended 
that the GRA remain in effect for its remaining term. The IRS and 
Treasury Department agree with this recommendation, and the final 
regulations provide a specific exception for dispositions of stock of 
the transferee foreign corporation pursuant to an intercompany 
transaction (intercompany transaction exception) to which a specific 
triggering event exception does not apply. If the intercompany 
transaction exception applies, the U.S. transferor remains subject to 
the existing GRA. But see the discussion below when the intercompany 
transaction is a nonrecognition transaction in which an amount of gain 
is recognized.
    The intercompany transaction exception is available if two 
conditions are satisfied. The first condition is that the basis of the 
stock of the transferee foreign corporation disposed of in the 
intercompany transaction is not greater than the sum of the aggregate 
basis in the transferred stock or securities at the time of the initial 
transfer, any increase to the basis of the transferred stock or 
securities by reason of gain recognized by the U.S. transferor in 
connection with the initial transfer, and any increase to the basis of 
the stock of the transferee foreign corporation by reason of income 
inclusions by the U.S. transferor (for example, pursuant to section 
961). To satisfy this basis condition, the U.S. transferor can elect to 
reduce the basis of the stock of the transferee foreign corporation, 
effective

[[Page 6954]]

immediately before the intercompany transaction.
    The second condition is that the annual certification filed with 
respect to the existing GRA for the taxable year during which the 
intercompany transaction occurs includes a complete description of the 
intercompany transaction and a schedule illustrating how the basis 
condition is satisfied.
    Because the final regulations provide specific exceptions for 
certain nonrecognition transfers of stock of the transferee foreign 
corporation (for example, pursuant to a section 351 exchange), the new 
intercompany transaction exception applies only to the extent the 
intercompany transaction gives rise to an intercompany item (as defined 
in Sec.  1.1502-13(b)(2)). If the intercompany item is a gain, the 
existing GRA must be divided into two separate agreements--one that 
remains with the U.S. transferor (of an amount equal to the 
intercompany item) and another that moves to the acquiring member (of 
an amount equal to the remaining amount of the existing GRA amount). 
For example, assume the amount of the existing GRA is $100x, the 
intercompany transaction is described in section 351(b), and the U.S. 
transferor recognizes $20x gain (the intercompany item) in the 
intercompany transaction. The intercompany transaction exception 
applies to the extent of the $20x intercompany item, and the exception 
for section 351 exchanges applies to the remainder of the transfer. 
Thus, the U.S. transferor remains subject to a $20x GRA (to the extent 
of the $20x intercompany item), and the acquiring member becomes 
subject to an $80x GRA. This result is similar to that of a transfer of 
the stock of the transferee foreign corporation to a domestic acquiring 
corporation in a section 351 exchange that is not an intercompany 
transaction but in which the U.S. transferor recognizes gain under 
section 351(b). In such a case, the amount of the new GRA entered into 
by the domestic acquiring corporation is reduced by the amount of gain 
recognized by the U.S. transferor on the transfer under section 351(b). 
The U.S. transferor does not remain subject to a GRA because the gain 
recognized under section 351(b) is taken into account. By contrast, if 
the section 351 exchange were an intercompany transaction, the U.S. 
transferor must remain subject to a GRA in an amount equal to the gain 
recognized under section 351(b) because the gain has not been taken 
into account.
    If the intercompany item is a loss, however, the U.S. transferor 
shall remain subject to the entire GRA. In addition, in such a case, 
the termination rule that applies to dispositions of the stock of the 
transferee foreign corporation in which all realized gain is recognized 
and included in taxable income during the taxable year of the 
disposition shall not apply.
    The final regulations provide rules to coordinate the subsequent 
inclusion in taxable income of an intercompany item and an amount of 
gain recognized under the GRA. Generally, under the coordination rule, 
if subsequent to an intercompany transaction to which the intercompany 
transaction exception applies, a disposition or other event occurs that 
requires the U.S. transferor to take into account the intercompany item 
related to the intercompany transaction (under the provisions of Sec.  
1.1502-13), the disposition shall not constitute a triggering event. 
Instead the GRA shall terminate without further effect or the amount of 
gain subject to the GRA shall be reduced based on the principles of the 
termination rule that applies to certain dispositions of the stock of 
the transferee foreign corporation received in the initial transfer. 
The final regulations include an example illustrating this rule.

C. Divisive Reorganizations

    The preamble to the 2007 regulations requested comments concerning 
whether specific exceptions should be provided for divisive 
reorganizations involving the U.S. transferor, the transferee foreign 
corporation, or the transferred corporation. No comments were received. 
However, the final regulations provide a specific exception for 
divisive reorganizations involving a transfer of the stock of the 
transferee foreign corporation received in the initial transfer to a 
domestic corporation (domestic controlled corporation) before the 
distribution of the stock of the domestic controlled corporation. The 
specific exception applies if the domestic controlled corporation 
enters into a new GRA with respect to the initial transfer. The IRS and 
Treasury Department expect the general exception to apply to other 
divisive reorganizations, as appropriate. The final regulations include 
examples illustrating the application of the general exception to 
divisive reorganizations.

D. GRA Termination Events

    If certain conditions are met, under the 2007 regulations an 
existing GRA terminates without further effect (termination rule) if 
the U.S. transferor (or other specified United States persons) re-
acquires the transferred stock or securities, or the U.S. transferor 
disposes of the stock of the transferee foreign corporation received in 
the initial transfer. One condition for the application of the 
termination rule is that, with certain adjustments, the basis of the 
transferred stock or securities in the hands of the U.S. transferor (or 
other specified United States person) immediately following the 
acquisition or the basis of stock of the transferee foreign corporation 
disposed of by the U.S. transferor, as relevant, must not be greater 
than the basis of the transferred stock or securities at the time of 
the initial transfer. To satisfy this basis condition, the 2007 
regulations generally permit the U.S. transferor (or other United 
States person) to reduce the basis of the transferred stock or 
securities (or the stock of the transferee foreign corporation, as 
applicable). The 2007 regulations further permit an increase to basis 
of other stock or securities in the transferred corporation (or stock 
of the transferee foreign corporation, as applicable) by a 
corresponding amount, but not in excess of fair market value.
    The final regulations retain the termination rule and the 
conditions for its application, including the option to reduce basis. 
However, the IRS and Treasury Department have determined that it is 
inappropriate to permit the shifting of basis to other stock or 
securities in the case of an election to reduce the basis of stock or 
securities. The final regulations, therefore, do not permit the U.S. 
transferor (or other United States person) to increase the basis of 
other stock or securities of the transferred corporation (or stock of 
the transferee foreign corporation, as applicable). The general 
exception, however, may apply allowing the U.S. transferor (or other 
United States person) to enter into a new GRA in connection with a 
transaction in which the transferred stock or securities are re-
acquired in lieu of reducing the basis of the transferred stock or 
securities.
    One commentator questioned whether the termination rule applies in 
the case of a downstream asset reorganization of the transferee foreign 
corporation into the transferred corporation because the U.S. 
transferor receives newly-issued stock of the transferred corporation 
in the transaction and not the stock transferred in the initial 
transfer. The IRS and Treasury Department believe it is appropriate for 
the termination rule to apply in the case of such downstream asset 
reorganizations. Accordingly, by revising the location of a rule 
contained in the 2007 regulations, the final regulations clarify that 
the term transferred stock or securities includes any stock or 
securities of the transferred

[[Page 6955]]

corporation with a basis determined, in whole or in part, by reference 
to the basis of the stock or securities transferred in the initial 
transfer. Thus, in the case of a downstream asset reorganization, for 
purposes of the termination rule, the newly-issued stock of the 
transferred corporation deemed distributed by the transferee foreign 
corporation to the U.S. transferor under section 361(c) is the stock 
transferred in the initial transfer.
    The 2007 regulations provide an exception for certain expropriation 
losses that would otherwise constitute triggering events. The final 
regulations modify the rule to provide instead that the amount of gain 
subject to a GRA is reduced to the extent a loss is sustained with 
respect to stock of the transferee foreign corporation, the transferred 
stock or securities, or substantially all the assets of the transferred 
corporation by reason of an expropriation of such property by the 
government of a foreign country, any political subdivision thereof, or 
any agency or instrumentality of the foregoing.

E. Transfers by U.S. Transferor Pursuant to an Outbound Asset 
Reorganization

    The 2007 regulations provide an exception for a transfer of stock 
of the transferee foreign corporation by the U.S. transferor to a 
domestic corporation pursuant to an asset reorganization described in 
section 368(a)(1). See Sec.  1.367(a)-8T(e)(3)(i). The preamble to the 
2007 regulations requested comments concerning whether an exception 
should also be provided for an outbound transfer of the stock of the 
transferee foreign corporation by the U.S. transferor to a foreign 
corporation pursuant to an asset reorganization described in section 
368(a)(1). No comments were received. However, after studying the issue 
further and considering the principles of the proposed regulations 
recently issued under sections 367(a)(5), 367(b), and 1248(f) (73 FR 
49278), the IRS and Treasury Department have determined that it is 
appropriate for an exception to apply to such an outbound transfer. The 
final regulations do not include a specific exception for such outbound 
transfers, but the IRS and Treasury Department expect the general 
exception provided by the final regulations to apply to such transfers, 
as appropriate. The final regulations include an example illustrating 
the application of the general exception to such a transfer.

F. Ordering Rule if Triggering Event Affects Multiple GRAs

    The final regulations provide an ordering rule to determine the 
amount of gain recognized under a GRA when a disposition or other event 
requires gain to be recognized under more than one GRA. The ordering 
rule adopts a ``first-in-time'' approach, providing that gain must 
first be recognized under the GRA that relates to the earliest initial 
transfer, then under the GRA that relates to the transfer immediately 
following the initial transfer, and so forth until the appropriate 
amount of gain under each GRA has been recognized. This ordering rule 
clarifies that the gain recognized under a GRA is determined after 
taking into account any increase to the basis of the transferred stock 
or securities resulting from gain recognized under another GRA that 
relates to an earlier initial transfer. The final regulations include 
an example to illustrate the ordering rule.

G. Section 301 Distributions

    The 2007 regulations define a disposition as any transfer that 
would constitute a disposition for any purpose of the Code and the 
regulations under the Code, but exclude a stock redemption described 
under section 302(d) (dividend equivalent redemption) to the extent 
section 301(c)(1) applies. One commentator requested that the final 
regulations clarify whether the rule for dividend equivalent 
redemptions applies to redemptions of stock of the transferee foreign 
corporation, the transferred corporation, or both. The commentator also 
requested that the final regulations confirm that a distribution of 
property to which section 301(c)(2) applies (including in the case of a 
dividend equivalent redemption) does not constitute a disposition of 
the relevant stock.
    The final regulations provide that a disposition generally does not 
include the receipt of a distribution of property with respect to stock 
to which section 301 applies, including by reason of section 302(d). 
The final regulations provide further that a dividend equivalent 
redemption shall constitute a disposition if the U.S. transferor does 
not enter into a new GRA that includes appropriate provisions to 
account for the redemption. The final regulations include an example 
illustrating this rule and describing the types of appropriate 
provisions that should be included in the new GRA. The provisions to be 
included in the GRA are necessary, for example, to account for a 
dividend equivalent redemption that occurs pursuant to a transaction to 
which section 304(a)(1) applies and in which the transferor does not 
retain a direct or indirect interest in the acquiring corporation. In 
such a case, the GRA would need to provide appropriate provisions to 
account for indirect dispositions of the transferred stock that should 
require gain to be recognized under the new GRA.
    The final regulations provide that the U.S. transferor must 
recognize gain under a GRA to the extent gain is recognized under 
section 301(c)(3) with respect to the transferred stock and that the 
amount of gain subject to the GRA is reduced to the extent the U.S. 
transferor recognizes gain under section 301(c)(3) with respect to the 
stock of the transferee foreign corporation received in the initial 
transfer.

H. Elections Under Section 338

    One commentator requested that the final regulations provide an 
exception for a deemed sale of the assets of the transferred 
corporation or the transferee foreign corporation by reason of an 
election under section 338(g). The commentator posited a fact pattern 
where the U.S. transferor entered into a GRA in connection with a 
transfer of less than 20 percent of the outstanding stock of the 
transferred corporation to the transferee foreign corporation, and, 
within the GRA term, the transferee foreign corporation acquires 
additional stock of the transferred corporation constituting a 
qualified stock purchase (within the meaning of section 338(d)(3)) and 
makes an election under section 338(g) with respect to such 
acquisition. The deemed asset sale that results from the section 338(g) 
election is a sale for all purposes of the Code (see Sec.  1.338-
2(c)(6)) and thus, under the 2007 regulations, would require the U.S. 
transferor to recognize the full amount of gain subject to the GRA. The 
commentator asserted that providing an exception for such a deemed 
asset sale was consistent with the policies of the GRA regime because 
the deemed asset sale is not a monetization of the assets or stock of 
the transferred corporation.
    The IRS and Treasury Department agree with the commentator, and the 
final regulations provide that a deemed sale of assets of the 
transferred corporation or the transferee foreign corporation by reason 
of an election under section 338(g) shall not constitute a triggering 
event for purposes of the GRA. However, the sale of stock of the target 
corporation pursuant to the qualified stock purchase shall be taken 
into account for purposes of a GRA. The sale of stock of the 
transferred or transferee foreign corporation by the

[[Page 6956]]

seller should either require gain to be recognized under a GRA or 
terminate the GRA without further effect if the conditions for the 
termination rule are satisfied, even if an election under section 
338(g) is made.
    By contrast, a deemed sale of assets of a domestic corporation by 
reason of an election under section 338(h)(10) shall continue to be 
taken into account for purposes of Sec.  1.367(a)-8. Thus, for example, 
if an election under section 338(h)(10) were made with respect to the 
U.S. transferor, the deemed sale of the stock of the transferee foreign 
corporation held by the U.S. transferor would constitute a disposition 
of such stock that either requires gain to be recognized under the GRA 
or terminates the GRA if the conditions for the termination rule are 
satisfied.
    On August 22, 2008, the IRS and Treasury Department issued proposed 
regulations under section 336(e) (REG-143544-04, 2008-42 IRB 947) that 
provide rules generally consistent with the rules that apply to 
elections under section 338(h)(10). The proposed regulations under 
section 336(e) shall be applicable to dispositions occurring on or 
after the proposed regulations are published as final regulations in 
the Federal Register. The proposed regulations do not apply if the 
selling corporation or the target corporation is foreign. When final 
regulations under section 336(e) are promulgated, the IRS and Treasury 
Department anticipate that a deemed asset sale pursuant to a section 
336(e) election with respect to a domestic corporation shall be taken 
into account for purposes of Sec.  1.367(a)-8, similar to a deemed 
asset sale pursuant to an election under section 338(h)(10). Comments 
are requested in this regard, including what special rules would be 
required with respect to an existing GRA if an election under section 
336(e) were permitted if the selling corporation or the target 
corporation were foreign.

I. Expatriation Under Section 877A

    The 2007 regulations provide that a GRA shall be triggered 
immediately before the date on which an individual U.S. transferor 
loses United States citizenship or ceases to be taxed as a lawful 
permanent resident (as defined in section 877(e)(2)). This rule applies 
even if the individual U.S. transferor would have recognized gain with 
respect to the stock of the transferee foreign corporation under 
section 877. The final regulations generally retain this rule, modified 
for the enactment of section 877A. Further, the final regulations make 
clear that the termination rule that applies in certain cases where the 
U.S. transferor disposes of the stock of the transferee foreign 
corporation is not applicable to an individual U.S. transferor that is 
subject to section 877A.

J. GRA Content

    Comments were received regarding whether the information required 
with a GRA could instead be made available by the U.S. transferor 
``upon request.'' The final regulations confirm that the information 
required with a GRA must be included with the GRA as filed with the tax 
return of the U.S. transferor.

K. Other Changes

    Under the 2007 regulations, certain dispositions that qualify for 
an exception nonetheless require the U.S. transferor to recognize gain 
under the existing GRA. For example, to the extent the transferee 
foreign corporation would be required to recognize gain under section 
351(b) or 356(a)(1) in connection with an exchange of the transferred 
stock, the U.S. transferor must recognize gain under the GRA 
notwithstanding that an exception applies to the exchange of the 
transferred stock. The final regulations retain this rule; however, the 
final regulations refer to any disposition or event that requires gain 
to be recognized under a GRA as a ``gain recognition event.'' A gain 
recognition event includes a triggering event, a disposition that would 
constitute a triggering event but for the application of an exception 
(such as the section 351(b) or 356 exchange described above), and a 
section 301 distribution that would require gain to be recognized under 
section 301(c)(3) with respect to the transferred stock.
    The final regulations clarify the amount of gain subject to a GRA 
that is filed by a domestic corporate shareholder of a domestic 
corporation (the U.S. transferor) that transfers stock or securities to 
the transferee foreign corporation pursuant to an outbound asset 
reorganization that is subject to section 367(a)(5) and the regulations 
under that section.
    The final regulations clarify that, if a GRA is entered into in 
connection with a transfer of a partnership interest, a complete or 
partial disposition of such partnership interest shall constitute a 
triggering event for purposes of the GRA.
    The 2007 regulations provide exceptions for certain dispositions of 
stock of the transferee foreign corporation or of substantially all the 
assets of the transferred corporation that are described in section 
351, 354 (but only in the case of a reorganization described in section 
368(a)(1)(B)), or 721, if, in addition to other requirements, the U.S. 
transferor complies with requirements similar to those for the 
exception that applies to similar dispositions of the transferred stock 
or securities. See Sec.  1.367(a)-8T(e)(1)(ii). In response to comments 
requesting certainty concerning the requirements that must be 
satisfied, the final regulations identify the specific requirements 
that must be satisfied with respect to such dispositions.
    The 2007 regulations provide that, if the transferred corporation 
is domestic and at the time of the initial transfer the U.S. transferor 
owned stock in the transferred corporation satisfying the requirements 
of section 1504(a)(2), the GRA shall terminate without further effect 
if the transferred corporation disposes of substantially all of its 
assets in a transaction in which all gain realized is recognized 
currently. The final regulations retain this termination rule but add, 
as an additional condition for its application, that the U.S. 
transferor and the transferred corporation were members of the same 
consolidated group on the date of the initial transfer. This change was 
made because the IRS and Treasury Department expect a lesser degree of 
inside and outside basis disparity within a consolidated group.
    The final regulations provide that, if the initial transfer and one 
or more dispositions or other events (even if an exception applies) 
that affect the GRA filed by the U.S. transferor with respect to the 
initial transfer occur within the same taxable year of such U.S. 
transferor, or if multiple dispositions or events that affect an 
existing GRA (even if an exception applies) occur in a taxable year of 
the U.S. transferor that does not include the initial transfer, the 
U.S. transferor is only required to enter into a single GRA for such 
taxable year. The GRA must describe the initial transfer and/or each 
subsequent disposition or other event that affects the GRA. This rule 
does not apply, however, if a disposition or other event requires a new 
GRA to be filed by a United States person that was not the U.S. 
transferor with respect to the existing GRA.
    The final regulations provide that the determination of whether a 
disposition of substantially all of the assets of the transferred 
corporation has occurred shall be made on the basis of one or more 
related transactions. The final regulations provide further that the 
determination shall be made without regard to a disposition of assets 
described in section 1221(a)(1) in the ordinary course of business.

[[Page 6957]]

Effective/Applicability Dates

    The final regulations generally apply to transfers of stock or 
securities occurring on or after March 13, 2009. The final regulations 
shall not apply to transfers of stock or securities occurring on or 
after March 13, 2009 that are entered into pursuant to a contract that 
was binding before February 11, 2009 (subject to customary conditions) 
and all times thereafter. However, taxpayers may apply the final 
regulations to such transfers provided the final regulations are 
applied consistently to all such transfers. Taxpayers may also apply 
the rules of the final regulations that were not already effective 
under Sec.  1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) and 
Sec.  1.367(a)-8T to any gain recognition agreement filed with respect 
to a transfer of stock or securities occurring on a date that is before 
March 13, 2009 and during a taxable year for which the period of 
limitations on assessments under section 6501(a) of the Code has not 
closed.

Availability of IRS Documents

    IRS documents cited in this preamble are made available by the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Effect on Other Documents

    The following publication is obsolete as of February 11, 2009:
    Notice 2005-74 (2005-2 CB 726).

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 also has been 
determined that 5 U.S.C. 553(b) and (d) do not apply to these 
regulations.
    It is hereby certified that the collections of information 
contained in these regulations will not have a significant economic 
impact on a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis is not required. These regulations 
primarily will affect United States persons that are large corporations 
engaged in cross-border corporate transactions. Thus, the number of 
affected small entities--in whichever of the three categories defined 
in the Regulatory Flexibility Act (small businesses, small 
organizations, and small governmental jurisdictions)--will not be 
substantial. The IRS and Treasury Department estimate that small 
organizations and small governmental jurisdictions are likely to be 
affected only insofar as they might hold a portfolio interest in stock 
or securities and in the unlikely event that they transfer such stock 
or securities to a foreign corporation. While a certain number of small 
entities may transfer stock or securities to a foreign corporation in 
connection with an acquisition or reorganization, the IRS and Treasury 
Department do not anticipate the number to be substantial. Furthermore, 
the IRS and Treasury Department estimate that those small entities that 
are affected by the regulations will likely face a burden of 
approximately two hours at an hourly rate of $200. Considering that the 
collections of information enable taxpayers to defer the current 
recognition of gain that is subject to a gain recognition agreement, 
the IRS and Treasury believe that $400 is not a significant economic 
impact. Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation 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 authors of these regulations are Daniel McCall, 
formerly of the Office of the Associate Chief Counsel (International), 
and S. James Hawes of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

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 is amended by removing 
the entries for Sec. Sec.  1.367(a)-3T(e) and 1.367(a)-8T to read in 
part as follows:

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


0
Par. 2. Section 1.338-1 is amended by adding a new sentence at the end 
of paragraph (a)(2), to read as follows:


Sec.  1.338-1.  General principles; status of old target and new 
target.

    (a) * * *
    (2) * * * See also Sec.  1.367(a)-8(k)(13) for a rule applicable to 
gain recognition agreements (filed under Sec. Sec.  1.367(a)-
3(b)(1)(ii) and 1.367(a)-8) and deemed asset sales as a result of an 
election under section 338(g).
* * * * *


Sec.  1.367(a)-3  [Amended]

0
Par. 3. For each entry in the table in the ``Section'' column, remove 
the language in the ``Remove'' column and add the language in the 
``Add'' column in its place.

----------------------------------------------------------------------------------------------------------------
              Section                        Remove                                  Add
----------------------------------------------------------------------------------------------------------------
1.367(a)-3(c)(3)(iii)(B)(1)(i)(A)..  1296(b)..............  1297(b).
1.367(a)-3(d)(2)(iii)..............  Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(1)(i).
                                      8T(b)(3)(i) and (d).
1.367(a)-3(d)(2)(v)................  Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
                                      8T(d)(2).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(1).
 fourth sentence.                     8T(d)(1).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 fourth sentence.                     8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 fifth sentence.                      8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(d)(3) and (e)(1)(i).
 first sentence.                      8T(a)(3).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(5).
 second sentence.                     8T(d)(4).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(10).
 second sentence.                     8T(e)(8).
1.367(a)-3(d)(3), Example 4(i),      Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 first sentence.                      8T(d)(2).
1.367(a)-3(d)(3), Example 4(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2).
 first sentence.                      8T(d)(2).
1.367(a)-3(d)(3), Example 4(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 5A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second to last sentence.             8T(g)(2).
1.367(a)-3(d)(3), Example 6(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 last sentence.                       8T(d)(2).
1.367(a)-3(d)(3), Example 7(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 7(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(4).
 third sentence.                      8T(e)(1)(iii).

[[Page 6958]]

 
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 fourth sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(g).
 last sentence.                       8T(b)(5).
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(4).
 last sentence.                       8T(e)(1)(iii).
1.367(a)-3(d)(3), Example 8(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 second to last sentence.             8T(d)(2).
1.367(a)-3(d)(3), Example 9(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 last sentence.                       8T(d)(2).
1.367(a)-3(d)(3), Example 11(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(1).
 sixth sentence.                      8T(d)(1).
1.367(a)-3(d)(3), Example 11(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 sixth sentence.                      8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 12(ii),    Sec.   1.367(a)-3T(e)  Sec.   1.367(a)-3(e).
 third sentence.
1.367(b)-4(b)(1)(iii), Example       Sec.   1.367(a)-3T(e)  Sec.   1.367(a)-3(e).
 4(i), last sentence.
1.367(b)-13(a)(2)(iii).............  or (iii) or in         (iii), or (v).
                                      sections
                                      368(a)(1)(G) and
                                      (a)(2)(D).
----------------------------------------------------------------------------------------------------------------

0
Par. 4. For each entry in the table, redesignate the paragraph 
designated in the ``Old Paragraph'' column as the new paragraph 
designation in the ``New Paragraph'' column to read as follows:


Sec.  1.367(a)-3(g)  [Redesignated]

    Section 1.367(a)-3(g) is redesignated as follows:

------------------------------------------------------------------------
               Old paragraph                        New paragraph
------------------------------------------------------------------------
1.367(a)-3(g)(1)(A).......................  1.367(a)-3(g)(1)(i)
1.367(a)-3(g)(1)(B).......................  1.367(a)-3(g)(1)(ii)
1.367(a)-3(g)(1)(B)(1)....................  1.367(a)-3(g)(1)(ii)(A)
1.367(a)-3(g)(1)(B)(2)....................  1.367(a)-3(g)(1)(ii)(B)
1.367(a)-3(g)(1)(B)(3)....................  1.367(a)-3(g)(1)(ii)(C)
1.367(a)-3(g)(1)(B)(4)....................  1.367(a)-3(g)(1)(ii)(D)
1.367(a)-3(g)(1)(B)(5)....................  1.367(a)-3(g)(1)(ii)(E)
1.367(a)-3(g)(1)(B)(6)....................  1.367(a)-3(g)(1)(ii)(F)
1.367(a)-3(g)(1)(C).......................  1.367(a)-3(g)(1)(iii)
1.367(a)-3(g)(1)(D).......................  1.367(a)-3(g)(1)(iv)
1.367(a)-3(g)(1)(D)(1)....................  1.367(a)-3(g)(1)(iv)(A)
1.367(a)-3(g)(1)(D)(2)....................  1.367(a)-3(g)(1)(iv)(B)
1.367(a)-3(g)(1)(D)(3)....................  1.367(a)-3(g)(1)(iv)(C)
1.367(a)-3(g)(1)(E).......................  1.367(a)-3(g)(1)(v)
1.367(a)-3(g)(1)(F).......................  1.367(a)-3(g)(1)(vi)
1.367(a)-3(g)(2)(G).......................  1.367(a)-3(g)(1)(vii)
------------------------------------------------------------------------

0
Par. 5. Section 1.367(a)-3 is amended by:

0
1. In the first sentence of paragraph (b)(1), remove the words ``Except 
as provided in section 367(a)(5)'' and add ``Except as provided in 
section 367(a)(5) and paragraph (e) of this section'' in their place.
0
2. In the first sentence of paragraph (c)(1), remove the words ``Except 
as provided in section 367(a)(5)'' and add ``Except as provided in 
section 367(a)(5) and paragraph (e) of this section'' in their place.
0
3. Revising paragraphs (d)(2)(iv).
0
4. Revising the last sentence of paragraph (d)(3), Example 5(ii).
0
5. Removing the last sentence of paragraph (d)(3), Example 5A(ii).
0
6. Revising paragraph (e).
0
7. Removing and reserving paragraph (f).
0
8. Revising the heading for paragraph (g) and adding new paragraph 
(g)(1)(viii).
    The revisions and addition read as follows:


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

* * * * *
    (d) * * *
    (2) * * *
    (iv) Gain recognition agreements involving multiple parties. The 
U.S. person's agreement to recognize gain, as provided in Sec.  
1.367(a)-8, shall include appropriate provisions consistent with the 
principles of Sec.  1.367(a)-8. See Examples 5 and 5A of this section 
and Sec.  1.367(a)-8(j)(9).
* * * * *
    (3) * * *

    Example 5. * * *
    (ii) * * * Under Sec.  1.367(a)-8(j)(9), the gain recognition 
agreement would be triggered if F sold all or a portion of the stock 
of S.
* * * * *
    (e) Transfers by a domestic corporation to a foreign corporation in 
a section 361 exchange--(1) General rule. If a domestic corporation 
(U.S. transferor) transfers stock or securities to a foreign 
corporation (transferee foreign corporation) in an exchange described 
in section 361(a) or (b), or in an exchange described in section 351 
that is also described in section 361(a) or (b) (collectively, a 
section 361 exchange), such transfer shall be subject to section 
367(a)(1), unless the conditions of paragraphs (e)(1)(i) through (iv) 
of this section are satisfied.
    (i) The conditions set forth in section 367(a)(5) and any 
regulations under that section have been satisfied including that:
    (A) The U.S. transferor is controlled (within the meaning of 
section 368(c)) by five or fewer (but at least one) domestic 
corporations (control group members) at the time of the section 361 
exchange;
    (B) The U.S. transferor recognizes the amount of the gain realized 
in the section 361 exchange that is allocable to any shareholder that 
is not a control group member (based on the value of the ownership 
interest in the U.S. transferor held by the shareholder at the time of 
the section 361 exchange);
    (C) The U.S. transferor recognizes the amount of the gain realized 
in the section 361 exchange allocable to a control group member that 
cannot be preserved in the stock received by the control group member 
in the transaction; and
    (D) Appropriate adjustments are made to the basis of the stock 
received by each control group member in the transaction.
    (ii) If the stock or securities transferred in the section 361 
exchange are of a domestic corporation, the conditions in paragraphs 
(c)(1)(i), (ii), and (iv) of this section are satisfied.
    (iii) Each control group member that owns five percent or more 
(applying the attribution rules of section 318, as modified by section 
958(b)) of the total voting power or the total fair market value of the 
stock of the transferee foreign corporation immediately after the 
transaction enters into a gain recognition agreement as provided in 
Sec.  1.367(a)-8. The amount of gain subject to the gain recognition 
agreement shall equal the amount of the gain realized by the U.S. 
transferor on the transfer of the stock or securities in the section 
361 exchange that is allocable to such control group member (based on 
the ownership interest (by value) in the U.S. transferor held by the 
control group member at the time of the section 361 exchange) reduced 
by the amount of such allocable gain that is recognized by the U.S. 
transferor with respect to the control group member. The gain 
recognition agreement shall designate the control group member as the 
U.S. transferor for purposes of paragraphs (b) and (c) of this section 
and Sec.  1.367(a)-8.
    (iv) Each control group member that enters into a gain recognition 
agreement pursuant to paragraph (e)(1)(iii) of this section makes the 
election described in Sec.  1.367(a)-8(c)(2)(vi).
    (2) Certain triangular asset reorganizations. If a transfer of 
stock or securities described in paragraph (e)(1) of this section is 
pursuant to a triangular

[[Page 6959]]

asset reorganization described in Sec.  1.358-6(b)(2)(i) through (iii), 
the gain recognition agreement filed by a control group member pursuant 
to paragraph (e)(1)(iii) of this section shall include provisions 
consistent with the principles of Sec.  1.367(a)-8 to account for all 
the parties to the reorganization. See Sec.  1.367(a)-8(j)(9).
    (3) Examples. The following examples illustrate the provisions of 
paragraph (e)(1) of this section. Except as otherwise indicated, assume 
US1, US2, USP, and UST are domestic corporations; US1 and US2 are not 
related; CFC1, CFC2, FA, and FC are foreign corporations; the section 
1248 amount attributable to the stock of a foreign corporation is zero; 
and section 7874 does not apply to the transaction.

    Example 1. Outbound asset reorganization. (i) Facts. US1 and US2 
own 60% and 40%, respectively, of the outstanding stock of UST. UST 
wholly owns FC. The FC stock held by UST has a $20x basis and a 
$100x fair market value. UST merges with and into FC in an asset 
reorganization described in section 368(a)(1)(A). In the section 361 
exchange that is part of the reorganization, UST transfers all of 
its FC stock to FA. UST distributes the FA stock it received in the 
section 361 exchange to US1 and US2 pursuant to the plan of 
reorganization. The conditions set forth in the second sentence of 
section 367(a)(5) and the regulations under that section are 
satisfied, including adjusting the basis of the FA stock received by 
US1 and US2 in the reorganization, as appropriate. After the 
reorganization, US1 and US2 own 6% and 4%, respectively, of the 
outstanding stock of FA.
    (ii) Result. If the conditions of paragraph (e)(1)(i) through 
(iv) of this section are satisfied, the transfer of the FC stock by 
UST to FA in the section 361 exchange is not subject to section 
367(a)(1). Because US1 and US2 complied with the requirements of 
section 367(a)(5), the requirement of paragraph (e)(1)(i) of this 
section is satisfied. Paragraph (e)(1)(ii) of this section is not 
applicable because FC is a foreign corporation. Pursuant to 
paragraph (e)(1)(iii) of this section, US1 enters into a gain 
recognition agreement with respect to its share of the gain realized 
by UST on the transfer of the FC stock to FA in the section 361 
exchange ($48x, or 60% of $80x). The amount of gain subject to the 
gain recognition agreement is $48x because UST did not recognize any 
amount of such gain under section 367(a)(5) or the regulations under 
that section with respect to US1. US1 is designated as the U.S. 
transferor on the gain recognition agreement for purposes of 
paragraph (b) of this section and Sec.  1.367(a)-8. US1 makes the 
election described in Sec.  1.367(a)-8(c)(2)(vi) with respect to the 
gain recognition agreement. Because US2 owns less than 5% of the 
stock of FA after the reorganization, US2 is not required to enter 
into a gain recognition agreement with respect to its share of the 
gain realized by UST on the transfer of the FC stock to FA in the 
section 361 exchange.
    (iii) Alternate facts. The facts are the same as in paragraph 
(i) of this Example, except that, in year 4, FA disposes of 25% of 
the FC stock in a taxable exchange. Under Sec.  1.367(a)-8(c)(1)(i) 
and (j)(1), the partial disposition of the FC stock requires US1 to 
include in income 25% of the gain subject to the gain recognition 
agreement filed in year 1 ($12x, or 25% of $48x) and pay applicable 
interest on any additional tax due on such inclusion.
    (iv) Alternate facts. The facts are the same as in paragraph 
(iii) of this Example, except that US1 and US2 are members of a 
consolidated group of which USP is the common parent. Because US2 is 
considered to own at least 5% of the stock of FA following the 
reorganization by reason of the attribution rules of section 318, as 
modified by section 958(b), a gain recognition agreement must also 
be entered into on behalf of US2 with respect to the amount of the 
gain realized but not recognized by UST on the transfer of the FC 
stock to FA that is allocable to US2 ($32x, or 40% of $80x). Under 
Sec.  1.367(a)-8(d)(3) and Sec.  1.1502-77(a)(1), USP enters into 
the gain recognition agreements on behalf of US1 and US2. In year 4, 
US1 and US2 must include in income 25% of the amount of gain subject 
to their respective gain recognition agreement ($12x for US1 and $8x 
for US2) and pay applicable interest on any additional tax due on 
such inclusion.
    Example 2. Divisive reorganization. (i) Facts. US1 wholly owns 
UST. The UST stock has a $120x basis and $150x fair market value. 
UST wholly owns CFC2. The CFC2 stock has a $20x basis and a $50x 
fair market value. UST also owns Business A that has a fair market 
value of $100x. In a divisive reorganization that satisfies the 
requirements of section 368(a)(1)(D), UST transfers the CFC2 stock 
to CFC1, a newly-formed corporation, in exchange solely for CFC1 
stock. The transfer of the CFC2 stock to CFC1 is a section 361 
exchange. UST then distributes the CFC1 stock to US1 in a 
transaction that qualifies under section 355. Under section 358, the 
pre-exchange basis in the UST stock ($120x) is allocated between the 
UST stock and the CFC1 stock based on the relative fair market 
values of such stock. Therefore, immediately after the transaction, 
the basis of the UST stock is $80x ($120x multiplied by $100x/
$150x), and the basis of the CFC1 stock is $40x ($120x multiplied by 
$50x/$150x). The conditions set forth in section 367(a)(5) and the 
regulations under that section are satisfied, including reducing the 
basis of the CFC1 stock received by US1 in the transaction by $20x 
so that the $30x built-in gain in the CFC2 stock transferred in the 
section 361 exchange is preserved in the CFC1 stock received by US1 
in the transaction.
    (ii) Result. Because US1 complied with the requirements of 
section 367(a)(5) and regulations under that section, the 
requirement of paragraph (e)(1)(i) of this section is satisfied. 
Paragraph (e)(1)(ii) of this section is not applicable because CFC2 
is a foreign corporation. Pursuant to paragraph (e)(1)(iii) of this 
section, US1 enters into a gain recognition agreement with respect 
to its share of the gain realized by UST on the transfer of the CFC2 
stock to CFC1 in the section 361 exchange ($30x). The amount of gain 
subject to the gain recognition agreement is $30x because UST did 
not recognize any amount of such gain under section 367(a)(5) or the 
regulations under that section with respect to US1. US1 is 
designated as the U.S. transferor on the gain recognition agreement 
for purposes of paragraph (b) of this section and Sec.  1.367(a)-8. 
US1 makes the election described in Sec.  1.367(a)-8(c)(2)(vi) with 
respect to the gain recognition agreement.
    (4) Cross-references. For other examples that illustrate the 
application of this paragraph (e), see Sec.  1.367(a)-8(q)(2), Examples 
6 and 24. For rules relating to an acquisition of the stock of a 
foreign corporation by another foreign corporation in a section 361 
exchange, see Sec.  1.367(b)-4(b)(1)(iii), Example 4. For rules 
relating to certain distributions of stock of a foreign corporation by 
a domestic corporation, see section 1248(f) and the regulations under 
that section.
    (f) [Reserved].
    (g) Effective/applicability date--(1) * * *
    (viii)(A) Except as provided in this paragraph (g)(1)(viii), the 
rules of paragraph (e) of this section apply to transfers of stock or 
securities occurring on or after March 13, 2009. For matters covered in 
this section for periods before March 13, 2009, but on or after March 
7, 2007, the rules of Sec.  1.367(a)-3T(e) (see 26 CFR part 1, revised 
April 1, 2007) apply. For matters covered in this section for periods 
before March 7, 2007, but on or after July 20, 1998, the rule of Sec.  
1.367(a)-8(f)(2)(i) (see 26 CFR part 1, revised April 1, 2006) applies.
    (B) Taxpayers may apply the rules of Sec.  1.367(a)-3(e) to 
transfers occurring before March 13, 2009, and during a taxable year 
for which the period of limitations on assessments under section 
6501(a) has not closed, if done consistently to all such transfers 
occurring during each taxable year. A taxpayer applies the rules of 
Sec.  1.367(a)-3(e) to transfers occurring before March 13, 2009, and 
during a taxable year for which the period of limitations on 
assessments under section 6501(a) has not closed, by including the gain 
recognition agreement, annual certification, or other information 
filing, that is required as a result of the rules of Sec.  1.367(a)-
3(e) applying to such a transfer, with an amended tax return for the 
taxable year in which the transfer occurs that is filed on or before 
August 10, 2009. A taxpayer that wishes to apply the rules of Sec.  
1.367(a)-3(e) to transfers occurring before March 13, 2009, and during 
a taxable year for which the period of limitations on assessments under 
section 6501(a) has

[[Page 6960]]

not closed but that fails to meet the filing requirement described in 
the preceding sentence must request relief for reasonable cause for 
such failure as provided in Sec.  1.367(a)-8.
* * * * *


Sec.  1.367(a)-3T  [Removed]

0
Par. 6 Section 1.367(a)-3T is removed.
0
Par. 7. Section 1.367(a)-8 is revised to read as follows:


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

    (a) Scope. This section provides the terms and conditions for a 
gain recognition agreement entered into by a United States person 
pursuant to Sec.  1.367(a)-3(b) through (e) in connection with a 
transfer of stock or securities to a foreign corporation pursuant to an 
exchange that would otherwise be subject to section 367(a)(1). 
Paragraph (b) of this section provides definitions and special rules. 
Paragraphs (c) through (h) of this section identify the form, content, 
and other conditions of a gain recognition agreement. Paragraph (i) of 
this section is reserved. Paragraph (j) of this section identifies 
certain events that may require gain to be recognized under a gain 
recognition agreement. Paragraph (k) of this section provides 
exceptions for certain events that would otherwise require gain to be 
recognized under a gain recognition agreement. Paragraph (l) of this 
section is reserved. Paragraph (m) of this section provides rules that 
require gain to be recognized under a gain recognition agreement in 
connection with certain events to which an exception under paragraph 
(k) of this section otherwise applies. Paragraph (n) of this section 
provides special rules in the case of a distribution of property with 
respect to stock to which section 301 applies. Paragraph (o) of this 
section provides rules for certain transactions that terminate or 
reduce the amount of gain subject to a gain recognition agreement. 
Paragraph (p) of this section provides relief for reasonable cause for 
certain failures to comply with the requirements of this section. 
Paragraph (q) of this section provides examples that illustrate the 
rules of the section. Paragraph (r) of this section provides effective 
dates for the provisions of this section.
    (b) Definitions and special rules. The following definitions and 
special rules apply for purposes of this section.
    (1) Definitions--(i) Asset reorganization--(A) General rule. Except 
as provided in paragraph (b)(1)(i)(B) of this section, an asset 
reorganization is a reorganization described in section 368(a)(1) that 
involves an exchange of property described in section 361(a) or (b) (a 
section 361 exchange).
    (B) Exceptions. An asset reorganization does not include the 
following:
    (1) A reorganization described in section 368(a)(1)(D) or (G) if 
the requirements of section 354(b)(1)(A) and (B) are not met.
    (2) For purposes of paragraphs (j)(2)(ii)(B), (k)(6)(ii), and 
(k)(6)(iii) of this section, a triangular asset reorganization. For 
rules applicable to a triangular asset reorganization, see paragraph 
(k)(7) of this section.
    (ii) A consolidated group has the meaning set forth in Sec.  
1.1502-1(h).
    (iii) Disposition. Except as provided in this paragraph 
(b)(1)(iii), a disposition includes any transfer that would constitute 
a disposition for any purpose of the Internal Revenue Code. A 
disposition includes an indirect disposition of the stock of the 
transferred corporation as described in Sec.  1.367(a)-3(d). Except as 
provided in paragraph (n)(1) of this section, a disposition does not 
include the receipt of a distribution of property with respect to stock 
to which section 301 applies (including by reason of section 302(d)). 
See paragraphs (n)(2) and (o)(3) of this section for rules that apply 
if gain is recognized under section 301(c)(3). A complete or partial 
disposition by installment sale (under section 453) shall be treated as 
a disposition in the year of the installment sale.
    (iv) A gain recognition event is an event described in paragraphs 
(j) through (o) of this section that requires gain to be recognized 
under a gain recognition agreement.
    (v) The initial transfer means a transfer of stock or securities 
(transferred stock or securities) to a foreign corporation pursuant to 
an exchange that would otherwise be subject to section 367(a)(1) but 
with respect to which a gain recognition agreement is entered into by a 
United States person pursuant to Sec.  1.367(a)-3(b) through (e).
    (vi) An intercompany item has the meaning set forth in Sec.  
1.1502-13(b)(2).
    (vii) An intercompany transaction has the meaning set forth in 
Sec.  1.1502-13(b)(1).
    (viii) A nonrecognition transaction has the meaning set forth in 
section 7701(a)(45). In addition, a nonrecognition transaction includes 
an exchange described in section 351(b) or 356 even if all gain 
realized in the exchange is recognized.
    (ix) The terms P, S, and T have the meanings set forth in Sec.  
1.358-6(b)(1)(i), (ii), and (iii), respectively.
    (x) The determination of whether substantially all of the assets of 
the transferred corporation have been disposed of is based on all the 
facts and circumstances.
    (xi) A timely-filed return is a Federal income tax return filed by 
the due date set forth in section 6072(a) or (b), plus any extension of 
time to file such return granted under section 6081.
    (xii) Transferee foreign corporation. Except as provided in this 
paragraph (b)(1)(xii), the transferee foreign corporation is the 
foreign corporation to which the transferred stock or securities are 
transferred in the initial transfer. In the case of an indirect stock 
transfer, the transferee foreign corporation has the meaning set forth 
in Sec.  1.367(a)-3(d)(2)(i). The transferee foreign corporation also 
includes a corporation designated as the transferee foreign corporation 
in the case of a new gain recognition agreement entered into under this 
section.
    (xiii) Transferred corporation. Except as provided in this 
paragraph (b)(1)(xiii), the transferred corporation is the corporation 
the stock or securities of which are transferred in the initial 
transfer. In the case of an indirect stock transfer, the transferred 
corporation has the meaning set forth in Sec.  1.367(a)-3(d)(2)(ii). 
The transferred corporation also includes a corporation designated as 
the transferred corporation in the case of a new gain recognition 
agreement entered into under this section.
    (xiv) A triangular asset reorganization is a reorganization 
described in Sec.  1.358-6(b)(2)(i), (ii), (iii), or (v).
    (xv) The U.S. transferor is the United States person (as defined in 
Sec.  1.367(a)-1T(d)(1)) that transfers the transferred stock or 
securities to the transferee foreign corporation in the initial 
transfer. For purposes of determining the U.S. transferor in the case 
of a transfer by a partnership, see Sec.  1.367(a)-1T(c)(3)(i). The 
U.S. transferor also includes the United States person designated as 
the U.S. transferor in the case of a new gain recognition agreement 
entered into under this section including, for example, under paragraph 
(k)(14) of this section.
    (2) Special rules--(i) Stock deemed received or transferred. 
References to stock received include stock deemed received (for 
example, pursuant to section 367(c)(2)). References to a transfer of 
stock or securities include a deemed transfer of stock or securities.
    (ii) Stock of the transferee foreign corporation. References to 
stock of the transferee foreign corporation include any stock of the 
transferee foreign corporation the basis of which is

[[Page 6961]]

determined, in whole or in part, by reference to the basis of the stock 
of the transferee foreign corporation received by the U.S. transferor 
in the initial transfer.
    (iii) Transferred stock or securities. References to transferred 
stock or securities include any stock or securities of the transferred 
corporation the basis of which is determined, in whole or in part, by 
reference to the basis of the stock or securities transferred in the 
initial transfer.
    (c) Gain recognition agreement--(1) Terms of agreement--(i) General 
rule. Except as provided in this paragraph (c)(1)(i), if a gain 
recognition event occurs during the period beginning on the date of the 
initial transfer and ending as of the close of the fifth full taxable 
year (not less than 60 months) following the close of the taxable year 
in which the initial transfer occurs (GRA term), the U.S. transferor 
must include in income the gain realized but not recognized on the 
initial transfer by reason of entering into the gain recognition 
agreement. In the case of a gain recognition event that occurs as a 
result of a partial disposition of stock, securities, or a partnership 
interest, as applicable, the U.S. transferor is required to recognize a 
proportionate amount of the gain subject to the gain recognition 
agreement, determined based on the fair market value of the stock, 
securities, or partnership interest, as applicable, disposed of 
(measured at the time of the partial disposition) as compared to the 
fair market value of all the stock, securities, or partnership 
interest, as applicable (measured at the time of the partial 
disposition). If the U.S. transferor must recognize gain under this 
paragraph as a result of an event described in paragraph (m) or (n) of 
this section, see those paragraphs to determine the amount of the gain 
that must be recognized. The amount of gain subject to the gain 
recognition agreement shall be reduced by the amount of gain recognized 
under this paragraph. If the amount of gain subject to the gain 
recognition agreement is reduced to zero, the gain recognition 
agreement shall terminate without further effect.
    (ii) Ordering rule for gain recognized under multiple gain 
recognition agreements. If a gain recognition event occurs that 
requires gain to be recognized under multiple gain recognition 
agreements, gain shall first be recognized under the gain recognition 
agreement that relates to the earliest initial transfer, then under the 
gain recognition agreement that relates to the immediately following 
initial transfer and so forth until the appropriate amount of gain has 
been recognized under each gain recognition agreement. The amount of 
gain recognized under a gain recognition agreement shall be determined 
after taking into account, as appropriate, any increase to basis 
(including the basis of the transferred stock or securities) under 
paragraph (c)(4) of this section resulting from gain recognized under 
another gain recognition agreement. For an illustration of this 
ordering rule, see paragraph (q)(2) of this section, Example 6.
    (iii) Taxable year in which gain is reported--(A) Year of initial 
transfer. Except as provided in paragraph (c)(1)(iii)(B) of this 
section, the U.S. transferor must report any gain recognized under 
paragraph (c)(1)(i) of this section on an amended Federal income tax 
return for the taxable year of the initial transfer. The amended return 
must be filed on or before the 90th day following the date on which the 
gain recognition event occurs.
    (B) Year of gain recognition event. If an election under paragraph 
(c)(2)(vi) of this section is made with the gain recognition agreement 
or if paragraph (c)(5)(ii) of this section applies to the gain 
recognition agreement, the U.S. transferor must report any gain 
recognized under paragraph (c)(1)(i) of this section on its Federal 
income tax return for the taxable year during which the gain 
recognition event occurs. If an election under paragraph (c)(2)(vi) of 
this section is made with the gain recognition agreement or if 
paragraph (c)(5)(ii) of this section applies to the gain recognition 
agreement but the U.S. transferor does not report the gain recognized 
on its Federal income tax return for the taxable year during which the 
gain recognition event occurs, the Commissioner may require the U.S. 
transferor to report the gain on an amended Federal income tax return 
for the taxable year during which the initial transfer occurred.
    (iv) Offsets. No special limitations apply with respect to 
offsetting gain recognized under paragraph (c)(1)(i) of this section 
with net operating losses, capital losses, credits against tax, or 
similar items.
    (v) Payment and reporting of interest. Interest must be paid on any 
additional tax due with respect to gain recognized by the U.S. 
transferor under paragraph (c)(1)(i) of this section. Any interest due 
shall be determined based on the rates under section 6621 for the 
period between the date that was prescribed for filing the Federal 
income tax return of the U.S. transferor for the year of the initial 
transfer and the date on which the additional tax due is paid. If 
paragraph (c)(1)(iii)(B) of this section applies, any interest due must 
be included with the payment of tax due with the Federal income tax 
return of the U.S. transferor for the taxable year during which the 
gain recognition event occurs (or should reduce the amount of any 
refund due to the U.S. transferor for such taxable year). A schedule 
entitled ``Calculation of Section 367 Tax and Interest'' that 
separately identifies and calculates any additional tax and interest 
due must be included with the Federal income tax return on which any 
interest due is reported.
    (2) Content of gain recognition agreement. The gain recognition 
agreement must be entitled ``GAIN RECOGNITION AGREEMENT UNDER Sec.  
1.367(a)-8'' and include the information described in paragraphs 
(c)(2)(i) through (viii) of this paragraph with the corresponding 
paragraph numbers. The information required under this paragraph (c)(2) 
and paragraph (c)(3) of this section must be included in the gain 
recognition agreement as filed.
    (i) A statement that the document constitutes an agreement by the 
U.S. transferor to recognize gain in accordance with the requirements 
of this section.
    (ii) A description of the transferred stock or securities and other 
information as required in paragraph (c)(3) of this section.
    (iii) A statement that the U.S. transferor agrees to comply with 
all the conditions and requirements of this section, including to 
recognize gain under the gain recognition agreement in accordance with 
paragraph (c)(1)(i) of this section, extend the statute of limitations 
on assessments of tax as provided in paragraph (f) of this section, and 
file the certification described in paragraph (g) of this section.
    (iv) A statement that arrangements have been made to ensure that 
the U.S. transferor is informed of any events that affect the gain 
recognition agreement, including triggering events or other gain 
recognition events.
    (v) In the case of a new gain recognition agreement filed under 
this section--
    (A) A description of the event (such as a triggering event) and the 
applicable exception, if any, that gave rise to the new gain 
recognition agreement (such as a triggering event exception), including 
the date of the event and the name, address, and taxpayer 
identification number (if any) of each person that is a party to the 
event;
    (B) As applicable, a description of the class, amount, and 
characteristics of the

[[Page 6962]]

stock, securities or partnership interest received in the transaction; 
and
    (C) As applicable, a calculation of the amount of gain that remains 
subject to the new gain recognition agreement as a result of the 
application of paragraph (m), (n), or (o) of this section.
    (vi) A statement whether the U.S. transferor elects to include in 
income any gain recognized under paragraph (c)(1)(i) of this section in 
the taxable year during which a gain recognition event occurs. See 
paragraph (c)(5)(ii) of this section for a rule that requires, in 
certain cases, for the gain recognized pursuant to a new gain 
recognition agreement to be included in income during the taxable year 
in which the gain recognition event occurs.
    (vii) A statement whether a gain recognition event has occurred 
during the taxable year of the initial transfer.
    (viii) A statement describing any disposition of assets of the 
transferred corporation during such taxable year other than in the 
ordinary course of business.
    (3) Description of transferred stock or securities and other 
information. The gain recognition agreement shall include the 
following:
    (i) A description of the transferred stock or securities 
including--
    (A) The type or class, amount, and characteristics of the 
transferred stock or securities;
    (B) A calculation of the amount of the built-in gain in the 
transferred stock or securities that are subject to the gain 
recognition agreement, reflecting the basis and fair market value on 
the date of the initial transfer;
    (C) The amount of any gain recognized by the U.S. transferor on the 
initial transfer; and
    (D) The percentage (by voting power and value) that the transferred 
stock (if any) represents of the total stock outstanding of the 
transferred corporation on the date of the initial transfer.
    (ii) The name, address, place of incorporation, and taxpayer 
identification number (if any) of the transferred corporation.
    (iii) The date on which the U.S. transferor acquired the 
transferred stock or securities.
    (iv) The name, address and place of incorporation of the transferee 
foreign corporation, and a description of the stock or securities 
received by the U.S. transferor in the initial transfer, including the 
percentage of stock (by vote and value) of the transferee foreign 
corporation received in such exchange.
    (v) If the initial transfer is described in Sec.  1.367(a)-3(e), a 
statement that the conditions of section 367(a)(5) and any regulations 
under that section have been satisfied, and a description of any 
adjustments to the basis of the stock received in the transaction or 
other adjustments made pursuant to section 367(a)(5) and any 
regulations under that section.
    (vi) If the transferred corporation is domestic, a statement 
describing the application of section 7874 to the transaction, and 
indicating that the requirements of Sec.  1.367(a)-3(c)(1) are 
satisfied.
    (vii) If the transferred corporation is foreign, a statement 
indicating whether the U.S. transferor was a section 1248 shareholder 
(as defined in Sec.  1.367(b)-2(b)) of the transferred corporation 
immediately before the initial transfer, and whether the U.S. 
transferor is a section 1248 shareholder with respect to the transferee 
foreign corporation immediately after the initial transfer, and whether 
any reporting requirements or other rules contained in regulations 
under section 367(b) are applicable, and, if so, whether they have been 
satisfied.
    (viii) If the initial transfer involves a transfer by a partnership 
(see Sec.  1.367(a)-1T(c)(3)(i)) or a transfer of a partnership 
interest (see section 367(a)(4) and Sec.  1.367(a)-1T(c)(3)(ii)) a 
complete description of the transfer, including a description of the 
partners in the partnership.
    (ix) If the transaction involved the transfer of property other 
than the transferred stock or securities and the transaction was 
subject to the indirect stock transfer rules of Sec.  1.367(a)-3(d), a 
statement indicating whether--
    (A) The reporting requirements under section 6038B have been 
satisfied with respect to the transfer of such other property;
    (B) Whether gain was recognized under section 367(a)(1);
    (C) Whether section 367(d) applied to the transfer of such 
property; and
    (D) Whether the other property transferred qualified for the active 
foreign trade or business exception under section 367(a)(3).
    (4) Basis adjustments for gain recognized. The following basis 
adjustments shall be made if gain is recognized under paragraph 
(c)(1)(i) of this section.
    (i) Stock or securities of transferee foreign corporation. The 
basis of the stock or securities, as applicable, of the transferee 
foreign corporation received by the U.S. transferor in the initial 
transfer shall be increased as of the date of the initial transfer by 
the amount of gain recognized.
    (ii) Transferred stock or securities. The basis of the transferred 
stock or securities shall be increased as of the date of the initial 
transfer by the amount of the gain recognized.
    (iii) Other appropriate adjustments. The basis of other stock, 
securities, or a partnership interest shall be increased, as 
appropriate, in accordance with the principles of this paragraph 
(c)(4). Under no circumstances shall the basis of stock, securities, or 
of a partnership interest held by a U.S. person that does not recognize 
gain under paragraph (c)(1)(i) of this section be increased under this 
paragraph (c)(4). In addition, under no circumstances shall the basis 
of any property be increased by the amount of any additional tax due or 
interest paid with respect to such tax, nor shall the basis of the 
assets of the transferred corporation be increased as a result of gain 
recognized by the U.S. transferor under paragraph (c)(1)(i) of this 
section.
    (iv) Cross-reference. See paragraph (q)(2) of this section, 
Examples 1, 2, 3, and 5 for illustrations of the rules of this 
paragraph (c)(4). See also Sec.  1.367(a)-1T(b)(4) for rules that 
determine the increase to basis of property resulting from the 
application of section 367(a).
    (5) Terms and conditions of a new gain recognition agreement--(i) 
General rule. A new gain recognition agreement entered into pursuant to 
this section shall replace the existing gain recognition agreement, 
which shall terminate without further effect. The term of the new gain 
recognition agreement shall be the remaining term of the existing gain 
recognition agreement. The amount of gain subject to the new gain 
recognition agreement shall equal the amount of gain subject to the 
existing gain recognition agreement, reduced by any gain recognized 
under paragraph (c)(1)(i) of this section with respect to the existing 
gain recognition agreement by reason of the gain recognition event that 
gives rise to the new gain recognition agreement. The new gain 
recognition agreement shall, as applicable, be subject to the 
conditions and requirements of this section to the same extent as the 
existing gain recognition agreement. For example, a triggering event 
with respect to the new gain recognition agreement will generally 
include a disposition of the transferred stock or securities or of 
substantially all the assets of the transferred corporation. If, 
however, the transferred stock is canceled or redeemed pursuant to the 
disposition or other event that gives rise to the new gain recognition 
agreement (for example, pursuant to a liquidation where the transferee 
foreign corporation is the corporate distributee (within the meaning of 
section 334(b)(2)), or an

[[Page 6963]]

asset reorganization where the transferee foreign corporation is the 
acquiring corporation) the transferred stock is not subject to the new 
gain recognition agreement.
    (ii) Special rule for inclusion of gain. If the U.S. transferor 
with respect to the new gain recognition agreement is not the U.S. 
transferor with respect to the existing gain recognition agreement, or 
a member of the consolidated group of which the U.S. transferor with 
respect to the existing gain recognition agreement was a member on the 
date of the initial transfer, then any gain recognized under paragraph 
(c)(1)(i) of this section with respect to the new gain recognition 
agreement must be included in income in the taxable year during which 
the gain recognition event occurs.
    (d) Filing requirements--(1) General rule. A gain recognition 
agreement entered into with respect to an initial transfer must be 
included with the timely-filed return of the U.S. transferor for the 
taxable year during which the initial transfer occurs.
    (2) Special requirements--(i) New gain recognition agreement. A new 
gain recognition agreement entered into under this section must be 
included with the timely-filed return of the U.S. transferor (as 
identified in the new gain recognition agreement) for the taxable year 
during which the disposition or event that requires the new gain 
recognition agreement occurs. If the new gain recognition agreement is 
entered into by the U.S. transferor that entered into the existing gain 
recognition agreement, the new gain recognition agreement is in lieu of 
the annual certification otherwise required for such taxable year under 
paragraph (g) of this section with respect to the existing gain 
recognition agreement.
    (ii) Multiple events within a taxable year. Except as otherwise 
provided in this paragraph (d)(2)(ii), if the initial transfer and one 
or more dispositions or other events (even if a triggering event 
exception applies) that affect the gain recognition agreement entered 
into by the U.S. transferor with respect to the initial transfer occur 
within the same taxable year of such U.S. transferor, or if multiple 
dispositions or other events occur in a taxable year of the U.S. 
transferor that does not include the initial transfer, only one gain 
recognition agreement is required to be entered into and included with 
the timely-filed return of the U.S. transferor for such taxable year. 
The gain recognition agreement must describe the initial transfer and/
or each disposition or other event that affects the gain recognition 
agreement (even if a triggering event exception applies). This 
paragraph does not apply, however, if any such disposition or other 
event requires a new gain recognition agreement to be entered into by a 
United States person other than the U.S. transferor with respect to the 
initial transfer or that entered into the existing gain recognition 
agreement, as applicable.
    (3) Common parent as agent for U.S. transferor. If the U.S. 
transferor is a member but not the common parent of a consolidated 
group, the common parent of the consolidated group is the agent for the 
U.S. transferor under Sec.  1.1502-77(a)(1). Thus, the common parent 
must file the gain recognition agreement on behalf of the U.S. 
transferor. References in this section to the timely-filed return of 
the U.S. transferor include the timely-filed return of the consolidated 
group of which the U.S. transferor is a member, as applicable.
    (e) Signatory--(1) General rule. The gain recognition agreement 
must be signed under penalties of perjury by an agent of the U.S. 
transferor that is authorized to sign under a general or specific power 
of attorney, or by the appropriate party based on the category of the 
U.S. transferor described in this paragraph (e)(1).
    (i) If the U.S. transferor is a corporation but not a member of a 
consolidated group, a responsible officer of the U.S. transferor. If 
the U.S. transferor is a member of a consolidated group, a responsible 
officer of the common parent of the consolidated group.
    (ii) If the U.S. transferor is an individual, the individual.
    (iii) If the U.S. transferor is a trust or estate, a trustee, 
executor, or equivalent fiduciary of the U.S. transferor.
    (iv) In a bankruptcy case under Title 11, United States Code, a 
debtor in possession or trustee.
    (2) Signature requirement. The inclusion of an unsigned copy of the 
gain recognition agreement with the timely-filed return of the U.S. 
transferor shall satisfy the signature requirement of paragraph (e)(1) 
of this section if the U.S. transferor retains the original signed gain 
recognition agreement in the manner specified by Sec.  1.6001-1(e).
    (f) Extension of period of limitations on assessments of tax--(1) 
General rule. In connection with the filing of a gain recognition 
agreement, the U.S. transferor must extend the period of limitations on 
assessments of tax with respect to the gain realized but not recognized 
on the initial transfer through the close of the eighth full taxable 
year following the taxable year during which the initial transfer 
occurs. The U.S. transferor extends the period of limitations by filing 
Form 8838 ``Consent to Extend the Time to Assess Tax Under Section 
367--Gain Recognition Agreement.'' The Form 8838 must be signed by a 
person authorized to sign the gain recognition agreement under 
paragraph (e)(1) of this section.
    (2) New gain recognition agreement. If a new gain recognition 
agreement is entered into under this section, the U.S. transferor must 
extend the period of limitations on assessments of tax on the initial 
transfer through the close of the eighth full taxable year following 
the taxable year during which the initial transfer occurs, consistent 
with paragraph (f)(1) of this section, unless the U.S. transferor with 
respect to the new gain recognition agreement is the U.S. transferor 
with respect to the existing gain recognition agreement, or a member of 
the consolidated group of which the U.S. transferor with respect to the 
existing gain recognition agreement was a member on the date of the 
initial transfer.
    (g) Annual certification. Except as provided in paragraph (d)(2)(i) 
of this section, the U.S. transferor must include with its timely-filed 
return for each of the five full taxable years following the taxable 
year of the initial transfer a certification (annual certification) 
that includes the information described in paragraphs (g)(1) through 
(3) of this section, as appropriate. The annual certification must be 
signed by a person authorized under paragraph (e)(1) of this section to 
sign the gain recognition agreement for the initial transfer. The 
inclusion of an unsigned copy of the annual certification with the 
relevant timely-filed return of the U.S. transferor shall satisfy the 
signature requirement of paragraph (e)(1) of this section provided the 
U.S. transferor retains the original signed certification in the manner 
specified by Sec.  1.6001-1(e).
    (1) A statement of whether a gain recognition event has or has not 
occurred during such taxable year. If a gain recognition event has 
occurred during such taxable year, the annual certification must state:
    (i) The amount of gain subject to the gain recognition agreement at 
the time of the gain recognition event;
    (ii) The amount of gain recognized under the gain recognition 
agreement by reason of the gain recognition event; and
    (iii) A calculation of the reduction to the amount of gain subject 
to the gain recognition agreement by reason of the gain recognition 
event (for example, in the case of a gain recognition event described 
in paragraph (n)(2) of this section).

[[Page 6964]]

    (2) A complete description of any event occurring during such 
taxable year that has terminated or reduced the amount of gain subject 
to the gain recognition agreement (for example, an event described in 
paragraph (o) of this section), including a calculation of any 
reduction to the amount of gain subject to the gain recognition 
agreement.
    (3) A statement describing any disposition of assets of the 
transferred corporation during the taxable year not in the ordinary 
course of business.
    (h) Use of security. The U.S. transferor may be required to furnish 
a bond or other security that satisfies the requirements of Sec.  
301.7101-1 if the Area Director, Field Examination, Small Business/Self 
Employed or the Director of Field Operations, Large and Mid-Size 
Business (Director) determines that such security is necessary to 
ensure the payment of any tax on the gain realized, but not recognized, 
upon the initial transfer. Such bond or security generally will be 
required only if the transferred stock or securities are a principal 
asset of the U.S. transferor and the Director has reason to believe 
that a disposition of the stock or securities may be contemplated.
    (i) [Reserved.]
    (j) Triggering events. Except as provided in this section, if an 
event described in paragraphs (j)(1) through (10) of this section 
(triggering event) occurs during the GRA term, the U.S. transferor must 
recognize gain under the gain recognition agreement in accordance with 
paragraph (c)(1)(i) of this section. This paragraph (j) generally 
requires the U.S. transferor to recognize gain (and pay applicable 
interest with respect to any additional tax due as provided in 
paragraph (c)(1)(v) of this section) under the gain recognition 
agreement to the extent the transferred stock or securities are 
disposed of, directly or indirectly. This paragraph (j) also requires 
the U.S. transferor to recognize gain under the gain recognition 
agreement in certain cases where it is not appropriate for the gain 
recognition agreement to continue. See paragraph (k) of this section 
for exceptions available for certain events that would otherwise 
constitute triggering events under this paragraph (j). See paragraph 
(o) of this section for certain events that terminate or reduce the 
amount of gain subject to a gain recognition agreement.
    (1) Disposition of transferred stock or securities. A complete or 
partial disposition of the transferred stock or securities. See 
paragraph (q)(2) of this section, Example 2 for an illustration of the 
rule of this paragraph (j)(1).
    (2) Disposition of substantially all of the assets of the 
transferred corporation--(i) General rule. Except as provided in 
paragraph (j)(2)(ii) of this section, a disposition in one or more 
related transactions of substantially all of the assets of the 
transferred corporation (including stock or securities in a subsidiary 
corporation or a partnership interest). If the transferred corporation 
is domestic, see paragraph (o)(4) of this section.
    (ii) Exceptions. For purposes of paragraph (j)(2)(i) of this 
section, the following dispositions shall be disregarded--
    (A) Dispositions of property described in section 1221(a)(1) 
occurring in the ordinary course of business;
    (B) An exchange of stock or securities described in section 354 
that is pursuant to an asset reorganization; and
    (C) An exchange of stock by a corporate distributee (as defined in 
section 334(b)(2)) pursuant to a complete liquidation to which section 
332 applies.
    (3) Disposition of certain partnership interests. If the initial 
transfer occurs by reason of the transfer of a partnership interest, a 
complete or partial disposition of such partnership interest. See 
section 367(a)(4) and Sec.  1.367(a)-1T(c)(3)(ii).
    (4) Disposition of stock of the transferee foreign corporation. A 
complete or partial disposition of the stock of the transferee foreign 
corporation received by the U.S. transferor in the initial transfer. 
For purposes of this section, an individual U.S. transferor that loses 
U.S. citizenship or ceases to be a lawful permanent resident of the 
United States (within the meaning of section 7701(b)(6)) shall be 
treated as disposing of all the stock of the transferee foreign 
corporation received in the initial transfer as of the date before the 
loss of such status.
    (5) Deconsolidation. A U.S. transferor that is a member of a 
consolidated group ceases to be a member of the consolidated group, 
other than by reason of an acquisition of the assets of the U.S. 
transferor in a transaction to which section 381(a) applies, or by 
reason of the U.S. transferor joining another consolidated group as 
part of the same transaction.
    (6) Consolidation. A U.S. transferor becomes a member of a 
consolidated group, including a U.S. transferor that is a member of a 
consolidated group and that becomes a member of another consolidated 
group.
    (7) Death of an individual; trust or estate ceases to exist. A U.S. 
transferor that is an individual dies, or a U.S. transferor that is a 
trust or estate ceases to exist.
    (8) Failure to comply. The U.S. transferor fails to comply in any 
material respect with any requirement of this section or with the terms 
of the gain recognition agreement, including failure to file an annual 
certification under paragraph (g) of this section. If a failure to 
include information in a gain recognition agreement as filed 
constitutes a failure to comply in a material respect, the U.S. 
transferor cannot avoid the application of this paragraph (j)(8) by 
subsequently making such information available. A material failure 
under this paragraph (j)(8) shall extend the period of limitations on 
assessments of tax until the close of the third full taxable year 
ending after the date on which the Director of Field Operations or Area 
Director receives actual notice of the failure to comply from the U.S. 
transferor.
    (9) Gain recognition agreement filed in connection with indirect 
stock transfers and certain triangular asset reorganizations. With 
respect to a gain recognition agreement entered into in connection with 
an indirect stock transfer (as defined in Sec.  1.367(a)-3(d)), or a 
triangular asset reorganization under Sec.  1.367(a)-3(e)(2), an 
indirect disposition of the transferred stock or securities. For 
example, in the case of an indirect stock transfer described in Sec.  
1.367(a)-3(d)(1)(iii)(A), a complete or partial disposition of the 
stock of the acquiring corporation.
    (10) Gain recognition agreement filed pursuant to paragraph (k)(14) 
of this section. In the case of a gain recognition agreement entered 
into pursuant to paragraph (k)(14) of this section, in addition to any 
disposition or other event described in paragraphs (j)(1) through (9) 
of this section,--
    (i) Any disposition or other event identified as a triggering event 
in a new gain recognition agreement as required under paragraph 
(k)(14)(iii) of this section; and
    (ii) Any disposition or other event that is inconsistent with the 
principles of paragraph (k) of this section including, for example, an 
indirect disposition of the transferred stock or securities.
    (k) Triggering event exceptions. Notwithstanding paragraph (j) of 
this section, a disposition or other event described in paragraphs 
(k)(1) through (14) of this section shall not constitute a triggering 
event. This paragraph (k) generally provides exceptions for certain 
dispositions that constitute nonrecognition transactions but only if, 
immediately after the disposition, a U.S. transferor retains, as 
applicable, a direct

[[Page 6965]]

or indirect interest in the transferred stock or securities, or in the 
assets of the transferred corporation, and a new gain recognition 
agreement is entered into with respect to the initial transfer in 
accordance with this paragraph (k). Notwithstanding the application of 
this paragraph (k), if a gain recognition event described under 
paragraphs (m) and (n) of this section occurs during the GRA term the 
U.S. transferor may be required to recognize gain under the gain 
recognition agreement in accordance with paragraph (c)(1)(i) of this 
section. See paragraph (o) of this section which provides that, 
notwithstanding paragraph (j) of this section, certain dispositions or 
other events shall instead terminate or reduce the amount of gain 
subject to a gain recognition agreement.
    (1) Transfers of stock of the transferee foreign corporation to a 
corporation or partnership. A disposition of stock of the transferee 
foreign corporation received in the initial transfer pursuant to an 
exchange to which section 351, 354 (but only in a reorganization 
described in section 368(a)(1)(B) that is not a triangular 
reorganization), 361 (but only in a divisive reorganization to which 
section 355 applies), or 721 applies, shall not constitute a triggering 
event if a new gain recognition agreement is entered into in accordance 
with paragraphs (k)(1)(i) through (iv) of this section, as applicable. 
In the case of an exchange to which section 354 applies that is 
pursuant to a triangular reorganization described in section 
368(a)(1)(B), see paragraph (k)(14) of this section and paragraph 
(q)(2) of this section, Example 4.
    (i) In the case of an exchange to which section 351 or 354 applies 
in which stock of a foreign acquiring corporation is received, the U.S. 
transferor includes with the new gain recognition agreement a statement 
that a complete or partial disposition of the stock of the foreign 
acquiring corporation received in the exchange shall constitute a 
triggering event. The principles of paragraph (o)(1)(i) or (ii), as 
appropriate, shall be applied to determine whether a subsequent 
complete or partial disposition of the stock of the foreign acquiring 
corporation received in the exchange shall instead terminate or reduce 
the amount of the new gain recognition agreement.
    (ii) In the case of an exchange to which section 351 or 354 applies 
in which stock of a domestic acquiring corporation is received, the 
domestic acquiring corporation enters into the new gain recognition 
agreement, which must designate the domestic acquiring corporation as 
the U.S. transferor for purposes of this section. For an illustration 
of the rule provided by this paragraph (k)(1)(ii), see paragraph (q)(2) 
of this section, Example 3.
    (iii) In the case of a section 361 exchange that is pursuant to a 
divisive reorganization to which section 355 applies and in which stock 
of a domestic corporation (domestic controlled corporation) is 
received, the domestic controlled corporation enters into the new gain 
recognition agreement, which must designate the domestic controlled 
corporation as the U.S. transferor for purposes of this section. For an 
illustration of the rule provided by this paragraph (k)(1)(iii), see 
paragraph (q)(2) of this section, Example 11.
    (iv) In the case of an exchange to which section 721 applies, the 
U.S. transferor includes with the new gain recognition agreement a 
statement that a complete or partial disposition of the partnership 
interest received in the exchange shall constitute a triggering event 
for purposes of the new gain recognition agreement.
    (2) Complete liquidation of U.S. transferor under sections 332 and 
337. A distribution by the U.S. transferor of the stock of the 
transferee foreign corporation received in the initial transfer to 
which section 337 applies, that is pursuant to a complete liquidation 
under section 332, shall not constitute a triggering event if the 
corporate distributee (as defined in section 334(b)(2)) is a domestic 
corporation (domestic corporate distributee) and the domestic corporate 
distributee enters into a new gain recognition agreement. The new gain 
recognition agreement must designate the domestic corporate distributee 
as the U.S. transferor for purposes of this section.
    (3) Transfers of transferred stock or securities to a corporation 
or partnership. A disposition of the transferred stock or securities 
pursuant to an exchange to which section 351, 354 (but only in a 
reorganization described in section 368(a)(1)(B)), or 721 applies, 
shall not constitute a triggering event if the U.S. transferor enters 
into a new gain recognition agreement that provides that the 
dispositions described in paragraphs (k)(3)(i) and (ii) of this section 
shall constitute triggering events for purposes of the new gain 
recognition.
    (i) A complete or partial disposition of the stock, securities, or 
partnership interest (as applicable) received in exchange for the 
transferred stock or securities.
    (ii) Any other event that is inconsistent with the principles of 
this paragraph (k), including the indirect disposition of the 
transferred stock or securities.
    (4) Transfers of substantially all of the assets of the transferred 
corporation. A disposition of substantially all of the assets of the 
transferred corporation pursuant to an exchange to which section 351, 
354 (but only in a reorganization described in section 368(a)(1)(B)), 
or 721 applies, shall not constitute a triggering event if the U.S. 
transferor enters into a new gain recognition agreement that provides 
that a complete or partial disposition of the stock, securities, or 
partnership interest (as applicable) received in exchange for the 
assets shall constitute a triggering event for purposes of the new gain 
recognition agreement.
    (5) Recapitalizations and section 1036 exchanges. A complete or 
partial disposition of the transferred stock or securities, or of the 
stock of the transferee foreign corporation received in the initial 
transfer, pursuant to a reorganization described under section 
368(a)(1)(E), or pursuant to a transaction to which section 1036 
applies, shall not constitute a triggering event if the U.S. transferor 
enters into a new gain recognition agreement.
    (6) Certain asset reorganizations--(i) Stock of transferee foreign 
corporation. If stock of the transferee foreign corporation received in 
the initial transfer is transferred to a domestic acquiring corporation 
in a section 361 exchange that is pursuant to an asset reorganization, 
the exchanges made pursuant to the asset reorganization shall not 
constitute triggering events if the domestic acquiring corporation 
enters into a new gain recognition agreement that designates the 
domestic acquiring corporation as the U.S. transferor for purposes of 
this section. For an illustration of the rule provided by this 
paragraph (k)(6), see paragraph (q)(2) of this section, Example 5. If 
the acquiring corporation is foreign, see paragraph (k)(14) of this 
section and paragraph (q)(2) of this section, Example 6.
    (ii) Transferred stock or securities. If the transferred stock or 
securities are transferred to a foreign acquiring corporation in a 
section 361 exchange that is pursuant to an asset reorganization, the 
exchanges made pursuant to the asset reorganization shall not 
constitute triggering events if the U.S. transferor enters into a new 
gain recognition agreement that designates the foreign acquiring 
corporation as the transferee foreign corporation for purposes of this 
section. For an illustration of the rule provided by this paragraph, 
see paragraph (q)(2)

[[Page 6966]]

of this section, Example 7. If the transfer is to a domestic acquiring 
corporation, or is pursuant to a triangular asset reorganization, see 
paragraph (k)(14) or (o)(5) of this section.
    (iii) Assets of transferred corporation. If substantially all of 
the assets of the transferred corporation are transferred to a foreign 
or domestic acquiring corporation in a section 361 exchange that is 
pursuant to an asset reorganization, the exchanges made pursuant to the 
asset reorganization shall not constitute triggering events if the U.S. 
transferor enters into a new gain recognition agreement that, unless 
the acquiring corporation is the transferee foreign corporation, 
designates the acquiring corporation as the transferred corporation for 
purposes of this section. Only the assets of the transferred 
corporation received by the acquiring corporation shall be treated as 
assets of the transferred corporation for purposes of this section (for 
example, only such assets will be taken into account for purposes of 
paragraph (j)(2) of this section). For an illustration of the rule 
provided by this paragraph, see paragraph (q)(2) of this section, 
Example 8. If the transferred corporation is domestic, see section 
367(a)(1) and (a)(5), and paragraph (o)(4) of this section. If the 
transfer is pursuant to a triangular asset reorganization, see 
paragraph (k)(14) of this section.
    (7) Certain triangular reorganizations--(i) Transferee foreign 
corporation. If substantially all of the assets of the transferee 
foreign corporation are transferred to a foreign acquiring corporation 
in a section 361 exchange that is pursuant to a triangular asset 
reorganization, the exchanges made pursuant to the reorganization shall 
not constitute triggering events if a new gain recognition agreement is 
entered into in accordance with paragraphs (k)(7)(i)(A) through (C) of 
this section. If the acquiring corporation is domestic, see paragraph 
(k)(14) of this section. For rules that apply to gain recognition 
agreements entered into as a result of an indirect stock transfer, see 
Sec.  1.367(a)-3(d)(2)(iv) and paragraph (j)(9) of this section.
    (A) If P is foreign, the new gain recognition agreement designates 
P as the transferee foreign corporation and includes a statement that 
the U.S. transferor agrees to treat a complete or partial disposition 
of the S stock held by P as a triggering event.
    (B) Except as provided in paragraph (k)(7)(i)(C) of this section, 
if P is domestic, P enters into the new gain recognition agreement that 
designates P as the U.S. transferor and S as the transferee foreign 
corporation.
    (C) If the triangular asset reorganization is described in section 
368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferee 
foreign corporation is the merged corporation, the U.S. transferor 
enters into the new gain recognition agreement and designates the 
surviving corporation as the transferee foreign corporation.
    (ii) Transferred corporation. If substantially all of the assets of 
the transferred corporation are transferred in a section 361 exchange 
pursuant to a triangular asset reorganization, the exchanges made 
pursuant to the reorganization shall not constitute triggering events 
if the U.S. transferor enters into a new gain recognition agreement in 
accordance with paragraph (k)(7)(ii)(A) of this section and, as 
applicable, paragraph (k)(7)(ii)(B) or (C) of this section.
    (A) The new gain recognition agreement includes a statement that 
the U.S. transferor agrees to treat a complete or partial disposition 
of the P stock received in the reorganization as a triggering event.
    (B) If the triangular asset reorganization is described in section 
368(a)(1)(C), or section 368(a)(1)(A) or (G) by reason of section 
368(a)(2)(D), the new gain recognition agreement includes a statement 
that the U.S. transferor agrees to treat a complete or partial 
disposition of the S stock held by P as a triggering event.
    (C) If the triangular asset reorganization is described in section 
368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferred 
corporation is the merged corporation, the new gain recognition 
agreement includes a statement that the U.S. transferor agrees to treat 
a complete or partial disposition of the stock of the surviving 
corporation as a triggering event.
    (8) Complete liquidation of transferred corporation. A distribution 
of substantially all of the assets of the transferred corporation to 
which section 337 applies, and the related exchange of the transferred 
stock to which section 332 applies, shall not constitute triggering 
events, if the U.S. transferor enters into a new gain recognition 
agreement. If the transferred corporation is domestic, see Sec.  
1.367(e)-2 and paragraph (o)(4) of this section. See paragraph (q)(2) 
of this section, Example 9 for an illustration of the rules provided in 
this paragraph (k)(8).
    (9) Death of U.S. transferor. The death of a U.S. transferor shall 
not constitute a triggering event if the person winding up the affairs 
of the U.S. transferor--
    (i) Retains sufficient assets of the U.S. transferor to satisfy any 
possible Federal tax liability of the U.S. transferor under the gain 
recognition agreement for the duration of the extended period of 
limitations on assessments of tax on the gain realized but not 
recognized in the initial transfer;
    (ii) Provides security as required under paragraph (h) of this 
section for any possible Federal tax liability of the U.S. transferor 
under the gain recognition agreement; or
    (iii) Obtains a ruling from the Internal Revenue Service providing 
for one or more successors to the U.S. transferor under the gain 
recognition agreement.
    (10) Deconsolidation. A deconsolidation of the U.S. transferor 
shall not constitute a triggering event if the U.S. transferor enters 
into a new gain recognition agreement.
    (11) Consolidation. A consolidation of the U.S. transferor shall 
not constitute a triggering event if the U.S. transferor enters into a 
new gain recognition agreement. See paragraph (d)(3) of this section.
    (12) Intercompany transactions--(i) General rule. If, pursuant to 
an intercompany transaction, the U.S. transferor disposes of stock of 
the transferee foreign corporation received in the initial transfer, 
this paragraph (k)(12) applies to such disposition to the extent the 
intercompany transaction creates an intercompany item that is not taken 
into account in the taxable year during which the intercompany 
transaction occurs. To the extent this paragraph (k)(12) applies, the 
disposition shall not constitute a triggering event, and the U.S. 
transferor shall remain subject to the gain recognition agreement if 
the conditions of paragraphs (k)(12)(i)(A) and (B) of this section are 
satisfied. To the extent the intercompany transaction does not create 
an intercompany item see, for example, paragraph (k)(1) and paragraph 
(q)(2) of this section, Example 20. See paragraph (o)(6) of this 
section for the effect on a gain recognition agreement when an 
intercompany item from an intercompany transaction to which this 
paragraph (k)(12)(i) applies is taken into account.
    (A) At the time of the disposition, the basis of the stock of the 
transferee foreign corporation received in the initial transfer that is 
disposed of in the intercompany transaction is not greater than the sum 
of the amounts described in paragraphs (k)(12)(i)(A)(1) through (3) of 
this section. If only a portion of the stock of the transferee foreign 
corporation received in the initial transfer is disposed of, then the 
basis of such stock shall be compared with a proportionate amount 
(measured by value as determined at the time of the

[[Page 6967]]

disposition) of the amounts described in paragraph (k)(12)(i)(A)(1) 
through (3) of this section. To satisfy the basis condition of this 
paragraph (k)(12)(i)(A), the U.S. transferor may reduce the basis of 
the stock of the transferee foreign corporation received in the initial 
transfer that is disposed of in the intercompany transaction in 
accordance with the principles of paragraph (o)(1)(iii) of this 
section.
    (1) The aggregate basis of the transferred stock or securities at 
the time of the initial transfer;
    (2) The amount of any increase to the basis of the transferred 
stock or securities by reason of gain recognized by the U.S. transferor 
on the initial transfer; and
    (3) The amount of any increase to the basis of the stock disposed 
of by reason of an income inclusion by the U.S. transferor with respect 
to such stock (for example, pursuant to section 961(a)).
    (B) The annual certification filed with respect to the existing 
gain recognition agreement for the taxable year during which the 
intercompany transaction occurs includes a complete description of the 
intercompany transaction and a schedule illustrating how the basis 
condition of paragraph (k)(12)(i)(A) of this section is satisfied.
    (ii) Certain dispositions following intercompany transaction. A 
subsequent disposition of stock of the transferee foreign corporation 
that is transferred in an intercompany transaction to which the 
exception provided by paragraph (k)(12)(i) of this section applies 
shall not constitute a triggering event if--
    (A) The stock is transferred to a member of the consolidated group 
that includes the U.S. transferor immediately after the disposition, 
and
    (B) The annual certification filed with respect to the existing 
gain recognition agreement for the taxable year during which the 
subsequent disposition occurs includes a complete description of the 
disposition.
    (13) Deemed asset sales pursuant to section 338(g) elections. A 
deemed sale of the assets of the transferred corporation or the 
transferee foreign corporation as a result of an election under section 
338(g) shall not constitute a triggering event. This paragraph does not 
apply to the sale of the stock of the target corporation (within the 
meaning of section 338(d)(2)) with respect to which such election is 
made.
    (14) Other dispositions or events. A disposition or other event 
that would constitute a triggering event, without regard to this 
paragraph (k)(14), shall not constitute a triggering event if the 
conditions of paragraph (k)(14)(i) through (iii) of this section, as 
applicable, are satisfied. See paragraph (q)(2), Examples 4, 6, 10, 12, 
17, 21, and 23 of this section for illustrations of the rules provided 
by this paragraph (k)(14).
    (i) The disposition qualifies as a nonrecognition transaction.
    (ii) Immediately after the disposition or other event, a U.S. 
transferor retains a direct or indirect interest in the transferred 
stock or securities or, as applicable, in substantially all of the 
assets of the transferred corporation (for example, in a case where the 
transferred corporation has been liquidated pursuant to section 332). 
If, as a result of the disposition or other event, a foreign 
corporation acquires the transferred stock or securities or, as 
applicable, substantially all the assets of the transferred 
corporation, the condition of this paragraph (k)(14)(ii) shall be 
satisfied only if the U.S. transferor owns at least five percent 
(applying the attribution rules of section 318, as modified by section 
958(b)) of the total voting power and the total value of the 
outstanding stock of such foreign corporation.
    (iii) A new gain recognition agreement is entered into by the U.S. 
transferor described in paragraph (k)(14)(ii) of this section that 
includes--
    (A) An explanation of why this paragraph (k)(14) applies to the 
disposition or other event; and
    (B) A description of each subsequent disposition or other event 
that would constitute a triggering event, other than those described in 
paragraph (j) of this section, with respect to the new gain recognition 
agreement based on the principles of paragraphs (j) and (k) of this 
section including, for example, an indirect disposition of the 
transferred stock or securities.
    (l) [Reserved.]
    (m) Receipt of boot in nonrecognition transactions--(1) 
Dispositions of transferred stock or securities. Notwithstanding 
paragraph (k) of this section, if gain is required to be recognized 
(not including any gain that would be treated as a dividend under 
section 356(a)(2)) in connection with a disposition of the transferred 
stock or securities to which an exception under paragraph (k) of this 
section otherwise applies (triggering event exception), the U.S. 
transferor shall recognize gain under paragraph (c)(1)(i) of this 
section equal to the amount of gain required to be recognized in 
connection with the disposition, but not in excess of the amount of 
gain subject to the gain recognition agreement. For purposes of this 
paragraph (m)(1), the amount of gain required to be recognized in 
connection with the disposition shall be determined before taking into 
account any increase to the basis of the transferred stock or 
securities under paragraph (c)(4)(ii) of this section. See paragraph 
(q)(2) of this section, Example 13, for an illustration of the rule 
provided by this paragraph (m)(1).
    (2) Dispositions of assets of transferred corporation. If gain is 
required to be recognized (not including any gain that would be treated 
as a dividend under section 356(a)(2)) in connection with a disposition 
of substantially all of the assets of the transferred corporation to 
which a triggering event exception otherwise applies, the U.S. 
transferor shall recognize gain under paragraph (c)(1)(i) of this 
section equal to the amount of gain required to be recognized in 
connection with the disposition, but not in excess of the amount of 
gain subject to the gain recognition agreement.
    (n) Special rules for distributions with respect to stock--(1) 
Certain dividend equivalent redemptions treated as dispositions. A 
redemption of the transferred stock or of stock of the transferee 
foreign corporation received in the initial transfer that is treated by 
reason of section 302(d) as a distribution of property to which section 
301 applies shall constitute a disposition for purposes of this section 
unless the U.S. transferor enters into a new gain recognition agreement 
that includes appropriate provisions to account for the redemption. For 
an illustration of the rule of this paragraph (n)(1), see paragraph 
(q)(2) of this section, Example 14.
    (2) Gain recognized under section 301(c)(3). If gain is required to 
be recognized under section 301(c)(3) with respect to the transferred 
stock, the U.S. transferor shall recognize gain under the gain 
recognition agreement in accordance with paragraph (c)(1)(i) of this 
section in an amount equal to the gain required to be recognized under 
section 301(c)(3), but not in excess of the amount of gain subject to 
the gain recognition agreement. For this purpose, the amount of gain 
required to be recognized under section 301(c)(3) shall be determined 
before taking into account any increase in the basis of the transferred 
stock under paragraph (c)(4)(ii) of this section.
    (o) Dispositions or other events that terminate or reduce the 
amount of gain subject to the gain recognition agreement. 
Notwithstanding paragraph (j) of this section, the following 
dispositions or other events shall not constitute triggering events but 
instead shall terminate or reduce the amount of gain subject to the 
gain recognition agreement.

[[Page 6968]]

    (1) Taxable disposition of stock of the transferee foreign 
corporation--(i) Complete disposition. Except as otherwise provided in 
this paragraph (o)(1)(i), if the U.S. transferor disposes of all the 
stock of the transferee foreign corporation received in the initial 
transfer in a transaction in which all gain realized is recognized and 
included in taxable income during the taxable year of the disposition, 
the gain recognition agreement shall terminate without further effect 
if, at the time of the disposition, the aggregate basis of such stock 
is not greater than the sum of the amounts described in paragraphs 
(o)(1)(i)(A) through (C) of this section. This paragraph shall not 
apply to a disposition of stock of the transferee foreign corporation 
pursuant to an intercompany transaction to which paragraph (k)(12) of 
this section applies. This paragraph shall also not apply to an 
individual U.S. transferor that loses U.S. citizenship or ceases to be 
a lawful permanent resident of the United States (within the meaning of 
section 7701(b)(6)).
    (A) The aggregate basis of the transferred stock or securities at 
the time of the initial transfer;
    (B) The amount of any increase to the basis of the transferred 
stock or securities by reason of gain recognized by the U.S. transferor 
on the initial transfer; and
    (C) The amount of any increase to the basis of the stock disposed 
of by reason of an income inclusion by the U.S. transferor with respect 
to such stock (for example, pursuant to section 961(a)).
    (ii) Partial dispositions. A partial disposition by the U.S. 
transferor of the stock of the transferee foreign corporation received 
in the initial transfer in a transaction otherwise described in 
paragraph (o)(1)(i) of this section shall reduce the amount of gain 
subject to the gain recognition agreement based on the relative fair 
market value of the stock disposed of (measured at the time of the 
disposition) compared to the fair market value of all of the stock of 
the transferee foreign corporation received in the initial transfer 
(measured at the time of the disposition). For determining whether the 
basis condition of paragraph (o)(1)(i) of this section is satisfied in 
the case of a partial disposition, the aggregate basis of the stock 
disposed of is compared to a proportionate amount (based on fair market 
value, as measured at the time of the partial disposition) of the 
amounts described in paragraphs (o)(1)(i)(A) through (C) of this 
section. For an illustration of the rules of this paragraph (o)(1)(ii), 
see paragraph (q)(2), Example 15, of this section.
    (iii) Reduction of stock basis. For purposes of satisfying the 
basis condition of paragraph (o)(1)(i) or (ii) of this section, the 
U.S. transferor may reduce the aggregate basis of the stock of the 
transferee foreign corporation received in the initial transfer, 
effective immediately before the disposition. For an illustration of 
the rules of this paragraph (o)(1)(iii), see paragraph (q)(2), Example 
16, of this section. The U.S. transferor reduces the basis of the stock 
of the transferee foreign corporation by including a statement with the 
timely-filed return of the U.S. transferor for the taxable year in 
which the disposition occurs, entitled ``Election to Reduce Stock Basis 
Under Sec.  1.367(a)-8(o)(1)(iii)'' and that includes--
    (A) A description, including the date, of the disposition;
    (B) A description of the stock of the transferee foreign 
corporation disposed of and the basis adjustments made under this 
paragraph (o)(1)(iii); and
    (C) The fair market value of all the stock of the transferee 
foreign corporation held by the U.S. transferor at the time of the 
disposition.
    (2) Gain recognized in connection with certain nonrecognition 
transactions. If the U.S. transferor recognizes gain in connection with 
a complete or partial disposition of stock of the transferee foreign 
corporation received in the initial transfer that is described in 
paragraph (k) of this section, and the basis condition of paragraph 
(o)(1)(i) or (ii) of this section, as applicable, is satisfied with the 
respect to such disposition, the amount of gain subject to the new gain 
recognition agreement filed under paragraph (k) of this section as a 
result of such disposition shall equal the amount of gain subject to 
the existing gain recognition agreement reduced by the amount of gain 
recognized by the U.S. transferor on the disposition. If the U.S. 
transferor recognizes gain in connection with a complete or partial 
disposition of the stock of the transferee foreign corporation received 
in the initial transfer that is described in paragraph (k) of this 
section, and the condition of paragraph (o)(1)(i) or (ii) of this 
section, as applicable, is satisfied with the respect to the 
disposition, but a new gain recognition agreement is not filed with 
respect to such disposition so that a triggering event exception does 
not apply to the disposition, the amount of gain required to be 
recognized by the U.S. transferor under the existing gain recognition 
agreement shall be reduced by the amount of the gain recognized on the 
disposition.
    (3) Gain recognized under section 301(c)(3). If the U.S. transferor 
recognizes gain under section 301(c)(3) with respect to the stock of 
the transferee foreign corporation received in the initial transfer, 
the amount of gain subject to the gain recognition agreement shall be 
reduced by the amount of such recognized gain.
    (4) Dispositions of substantially all of the assets of a domestic 
transferred corporation. Except as otherwise provided in this paragraph 
(o)(4), the gain recognition agreement shall terminate without further 
effect if substantially all of the assets of the transferred 
corporation are disposed of in a transaction in which all gain realized 
is recognized and included in taxable income during the taxable year of 
the disposition, but only if, at the time of the initial transfer, the 
U.S. transferor owned stock in the transferred corporation satisfying 
the requirements of section 1504(a)(2) and the U.S. transferor and the 
transferred corporation were members of the same consolidated group. If 
the initial transfer was part of an indirect stock transfer, the gain 
recognition agreement shall terminate without further effect if 
substantially all of the assets of the transferred corporation (taking 
into account Sec.  1.367(a)-3(d)(2)(v)) are disposed of in a 
transaction in which all gain realized is recognized and included in 
taxable income during the taxable year of the disposition, but only if 
at the time of the initial transfer the U.S. transferor owned stock in 
the transferred corporation satisfying the requirements of section 
1504(a)(2) (for example, in the case of a reorganization described in 
section 368(a)(1)(A) by reason of section 368(a)(2)(E)) and the U.S. 
transferor and the transferred corporation were members of the same 
consolidated group.
    (5) Certain distributions or transfers of transferred stock or 
securities to U.S. persons. To the extent a distribution or transfer of 
the transferred stock or securities satisfies the conditions of 
paragraphs (o)(5)(i) through (iii) of this section, the gain 
recognition agreement shall terminate without further effect, or the 
amount of gain subject to the gain recognition agreement shall be 
reduced, as appropriate.
    (i) Distributions or transfers described in section 337, 355, or 
361. The transferred stock or securities are distributed or transferred 
pursuant to a transaction described in paragraph (o)(5)(i)(A) through 
(D) of this section, as appropriate.
    (A) A distribution described in section 337 that is pursuant to a 
complete liquidation described in

[[Page 6969]]

section 332. See paragraph (q)(2) of this section, Example 18, for an 
illustration of the rule provided by this paragraph (o)(5)(i)(A).
    (B) A distribution to which section 355 applies. See paragraph 
(q)(2) of this section, Example 19, for an illustration of the rule 
provided by this paragraph (o)(5)(i)(B).
    (C) A section 361 exchange that is pursuant to an asset 
reorganization. See paragraph (q)(2) of this section, Example 22, for 
an illustration of the rule provided by this paragraph (o)(5)(i)(C).
    (D) A distribution to which section 361(c) applies that is pursuant 
to an asset reorganization. See paragraph (q)(2) of this section, 
Example 22, for an illustration of the rule provided by this paragraph 
(o)(5)(i)(D).
    (ii) Qualified recipient. The recipient of the transferred stock or 
securities in the relevant transaction described in paragraph (o)(5)(i) 
of this section (qualified recipient) is--
    (A) The U.S. transferor;
    (B) A member of the consolidated group that includes the U.S. 
transferor immediately after the transaction; or
    (C) An individual that is a United States person.
    (iii) Basis requirement--(A) General rule. Immediately after the 
relevant transaction described in paragraph (o)(5)(i) of this section, 
the aggregate basis of the transferred stock or securities received by 
the qualified recipient is not greater than the aggregate basis of such 
stock or securities at the time of the initial transfer (as adjusted 
for gain recognized by the U.S. transferor on the initial transfer 
attributable to such stock or securities). For this purpose, the basis 
of the transferred stock in the hands of the qualified recipient shall 
be determined without regard to any basis attributable to income 
inclusions with respect to the stock (for example, under section 
961(a)). In the case of a distribution to which section 355 applies, 
any adjustments to basis under Sec.  1.367(b)-5(c) shall be made before 
determining whether the basis condition of this paragraph is satisfied.
    (B) Election to reduce basis in transferred stock or securities. If 
the basis condition of paragraph (o)(5)(iii)(A) of this section is not 
satisfied, each qualified recipient may reduce the basis of the 
transferred stock or securities received in the transaction to the 
extent necessary to satisfy the basis condition. A qualified recipient 
reduces the basis of the transferred stock or securities by including a 
statement with its timely-filed return for the taxable year during 
which the distribution or transfer occurs entitled ``Election to Reduce 
Stock Basis Under Sec.  1.367(a)-8(o)(5)(iii)(B)'' and that includes--
    (1) A complete description and the date of the distribution or 
transfer;
    (2) The fair market value of the transferred stock or securities 
received by the qualified recipient in the transaction; and
    (3) The basis of the transferred stock or securities received by 
the qualified recipient immediately before and after the basis 
reduction.
    (6) Dispositions or other event following certain intercompany 
transactions. If, subsequent to an intercompany transaction to which 
paragraph (k)(12) of this section applies, a disposition or other event 
occurs that requires the U.S. transferor to take into account the 
intercompany item related to the intercompany transaction (under the 
provisions of Sec.  1.1502-13), the gain recognition agreement shall 
terminate without further effect or the amount of gain subject to the 
gain recognition agreement shall be reduced based on the principles of 
paragraph (o)(1)(i) or (ii) of this section, as appropriate. For an 
illustration of the rules of this paragraph (o)(6), see paragraph 
(q)(2) of this section, Example 20.
    (7) Expropriations under foreign law. The amount of gain subject to 
the gain recognition agreement shall be reduced to the extent the stock 
or securities of the transferee foreign corporation received in the 
initial transfer, the transferred stock or securities, or substantially 
all the assets of the transferred corporation, are expropriated, 
seized, or subjected to a similar taking of such property by the 
government of a foreign country, any political subdivision thereof, or 
any agency or instrumentality of the foregoing. Principles similar to 
those of paragraph (o)(1)(i) or (o)(1)(ii) of this paragraph, as 
relevant, shall be applied to determine the amount of the reduction.
    (p) Relief for reasonable cause for failure to comply--(1) Request 
for relief. A U.S. transferor that fails to file timely a gain 
recognition agreement, waiver of period of limitations on assessments 
of tax, annual certification, or other information required under this 
section shall be considered to have satisfied the timeliness 
requirement with respect to such filing, and a failure to comply in any 
material respect with any requirement of this section or with the terms 
of the gain recognition agreement that would otherwise constitute a 
triggering event shall not constitute a triggering event, if a request 
for relief is filed as provided under paragraph (p)(2) of this section 
and the U.S. transferor is able to demonstrate to the Area Director, 
Field Examination, Small Business/Self Employed or the Director of 
Field Operations, Large and Mid-Size Business (Director) having 
jurisdiction of the tax return of the U.S. transferor for the taxable 
year to which the failure relates, that such failure was due to 
reasonable cause and not willful neglect. Whether the failure was due 
to reasonable cause and not willful neglect will be determined by the 
Director after considering all the facts and circumstances. The 
Director shall notify the U.S. transferor in writing within 120 days if 
it is determined that the failure was not due to reasonable cause, or 
if additional time will be needed to make a determination. For this 
purpose, the 120-day period shall begin on the date the Internal 
Revenue Service notifies the U.S. transferor in writing that the 
request for reasonable cause relief has been received and assigned for 
review. If the U.S. transferor is not again notified before the close 
of the 120-day period, the U.S. transferor shall be deemed to have 
established that the failure to file timely or comply was due to 
reasonable cause and not willful neglect.
    (2) Procedures for filing requests for relief--(i) Time of 
submission. Requests for relief under paragraph (p)(1) of this section 
shall be considered only if, as soon as the U.S. transferor becomes 
aware of the failure to file timely or comply in any material respect 
with any requirement of this section, an amended return is filed for 
the taxable year to which the failure relates that includes the 
information that should have been included with the original return for 
such taxable year or otherwise complies with the rules of this section 
and that includes a written statement explaining the reasons for the 
failure to file timely or comply. The amended return must be filed with 
the applicable Internal Revenue Service Center with which the U.S. 
transferor filed its original return for such taxable year.
    (ii) Notice requirement. In addition to the requirement of 
paragraph (p)(2)(i) of this section, the U.S. transferor must comply 
with the requirements of paragraph (p)(2)(ii)(A) or (B) of this 
section, as applicable.
    (A) If any taxable year of the U.S. transferor is under examination 
when the amended return is filed, a copy of the amended return and any 
information required to be included with such return must be delivered 
to the Internal Revenue Service personnel conducting the examination.
    (B) If no taxable year of the U.S. transferor is under examination 
when the amended return is filed, a copy of

[[Page 6970]]

the amended return and any information required to be included with 
such return must be delivered to the Director having jurisdiction over 
the return.
    (q) Examples--(1) Presumed facts and references. For purposes of 
the examples in paragraph (q)(2) of this section, and except where 
otherwise indicated, the following is presumed.
    (i) UST, USP, and DC are domestic corporations that each use a 
calendar taxable year.
    (ii) USP wholly owns UST and is the common parent of the 
consolidated group of which UST is a member.
    (iii) TFC, TFD, F1, and FA are foreign corporations.
    (iv) UST wholly owns TFD.
    (v) In a section 351 exchange, UST transfers all of the stock of 
TFD (TFD stock) to TFC in exchange solely for stock of TFC (the initial 
transfer).
    (vi) Pursuant to Sec.  1.367(a)-3(b)(1)(ii) and this section, UST 
enters into a gain recognition agreement in connection with the initial 
transfer and makes the election described under paragraph (c)(2)(vi) of 
this section with respect to the gain recognition agreement.
    (vii) As applicable, the section 1248 amount (within the meaning of 
Sec.  1.367(b)-2(c)) or all earnings and profits amount (within the 
meaning of Sec.  1.367(b)-2(d)) attributable to the stock of a foreign 
corporation is zero.
    (viii) All transactions are respected under general principles of 
tax law, including the step transaction doctrine.
    (ix) References to a U.S. transferor entering into a gain 
recognition agreement mean, where applicable, that the common parent of 
the consolidated group of which the U.S. transferor is a member has 
filed the gain recognition agreement on behalf of the U.S. transferor 
in accordance with paragraph (d)(3) of this section.
    (x) Taxable years during the GRA term are referred to, for example, 
as year 1 and year 2.
    (2) Examples. The following examples illustrate the application of 
the rules of this section.

    Example 1. Basis adjustments from gain recognized under the gain 
recognition agreement. (i) Facts. TFC wholly owns F1. In year 3, 
pursuant to a section 351 exchange, TFC transfers all of the TFD 
stock to F1 in exchange solely for voting stock of F1. UST enters 
into a new gain recognition agreement with respect to the initial 
transfer under paragraph (k)(3) of this section, and therefore the 
transfer by TFC of the TFD stock to F1 is not a triggering event. 
Under paragraph (c)(5)(i) of this section, the existing gain 
recognition agreement terminates without further effect. In year 4, 
in an exchange to which section 721 applies, UST contributes the TFC 
stock received in the initial transfer to PRS, a domestic 
partnership, in exchange for a partnership interest. UST enters into 
a new gain recognition agreement with respect to the initial 
transfer under paragraph (k)(1) of this section, and therefore the 
transfer by UST of the TFC stock to PRS is not a triggering event. 
Under paragraph (c)(5)(i) of this section, the new gain recognition 
agreement filed by UST in year 3 terminates without further effect. 
In year 5, TFD disposes of substantially all of its assets in a 
transaction that constitutes a triggering event under paragraph 
(j)(2)(i) of this section. Under paragraph (c)(1)(i) of this 
section, UST recognizes the gain realized but not recognized on the 
initial transfer by reason of entering into the gain recognition 
agreement.
    (ii) Result. Under paragraph (c)(4) of this section, the basis 
of the PRS interest held by UST, the TFC stock held by PRS that was 
received from UST in year 4, the F1 stock held by TFC that was 
received in exchange for the TFD stock in year 3, and the TFD stock 
held by F1 that was received from TFC in year 3 is increased by the 
amount of gain recognized by UST (but not by the additional tax or 
interest paid as result of such gain) with respect to the initial 
transfer under the gain recognition agreement. However, the basis of 
the assets of TFD (including the assets disposed of in year 5) is 
not increased as a result of the gain recognized by UST.
    Example 2. Impact of gain recognition event on computation of 
income. (i) Facts. At the time of the initial transfer, the TFD 
stock has a $50x basis, a $100x fair market value, and a $30x 
section 1248 amount. The amount of gain subject to the gain 
recognition agreement is $50x. UST did not make an election under 
paragraph (c)(2)(vi) of this section with respect to the gain 
recognition agreement. In year 3, TFC disposes of the TFD stock 
received in the initial transfer in exchange for $120x cash.
    (ii) Result--(A) Gain recognition without an election. The 
disposition by TFC of the TFD stock in year 3 is a triggering event 
under paragraph (j)(1) of this section. As a result, under paragraph 
(c)(1)(i) of this section, UST must recognize and include in income 
$50x gain under the gain recognition agreement. Under paragraph 
(c)(1)(iii)(A) of this section, UST must report the $50x gain on an 
amended return filed for the taxable year of the initial transfer. 
Under paragraph (c)(1)(v) of this section, UST must pay applicable 
interest on any additional tax due with respect to the $50x gain 
recognized. Under section 1248(a), $30x of the gain recognized by 
UST under the gain recognition agreement is recharacterized as a 
dividend. Under paragraph (c)(4) of this section, as of the date of 
the initial transfer, the basis of the TFC stock received by UST in 
the initial transfer and the TFD stock received by TFC in the 
initial transfer, respectively, is increased by $50x. After taking 
into account the increase to the basis of the TFD stock, TFC 
recognizes $20x gain on the disposition of the TFD stock in year 3.
    (B) Gain recognition with an election. If UST made an election 
under paragraph (c)(2)(vi) of this section with the gain recognition 
agreement filed for the initial transfer, the result would be the 
same as in paragraph (ii)(A) of this Example 2, except that UST must 
include in income the $50x gain recognized under the gain 
recognition agreement on its tax return filed for year 3. Any 
additional tax due with respect to the $50x gain and applicable 
interest on the additional tax due must be included with such 
return. The amount, if any, of the $50x gain recognized by UST under 
the gain recognition agreement that is characterized as a dividend 
under section 1248(a) is determined in year 3.
    Example 3. Transfer of stock of the transferee foreign 
corporation to a domestic corporation in a section 351 exchange. (i) 
Facts. UST wholly owns DC. In year 3, pursuant to a section 351 
exchange, UST transfers all of the TFC stock received in the initial 
transfer to DC in an exchange solely for voting stock of DC.
    (ii) Result. The year 3 transfer of the TFC stock by UST to DC 
constitutes a triggering event under paragraph (j)(4) of this 
section. However, the transfer shall not constitute a triggering 
event pursuant to paragraph (k)(1)(ii) of this section if DC enters 
into a new gain recognition agreement with respect to the initial 
transfer that designates DC as the U.S. transferor for purposes of 
this section. Pursuant to paragraphs (c)(4)(i) and (ii) of this 
section, if DC is required to recognize gain under the new gain 
recognition agreement, the basis of the stock of TFC and TFD would 
be increased by the amount of gain recognized. However, pursuant to 
paragraph (c)(4)(iii) of this section, no adjustment would be made 
to the basis of the DC voting stock received by UST in year 3 as a 
result of such gain recognition. Alternatively, if the conditions 
for the application of paragraph (k)(14) of this section are 
satisfied UST could instead enter into the new gain recognition 
agreement with respect to the initial transfer.
    Example 4. Transfer of stock of the transferee foreign 
corporation in a triangular section 368(a)(1)(B) reorganization. (i) 
Facts. DC wholly owns FA. In year 3, pursuant to a triangular 
reorganization described in section 368(a)(1)(B), UST transfers all 
of the TFC stock received in the initial transfer to FA in exchange 
solely for 20% of the outstanding voting stock of DC. At the time of 
the reorganization, the TFC stock has a basis in excess of fair 
market value.
    (ii) Result. (A) The transfer by UST of the TFC stock to FA is 
an indirect stock transfer under Sec.  1.367(a)-3(d)(1)(iii)(B). 
Accordingly, to preserve nonrecognition treatment, UST must enter 
into a separate gain recognition agreement under this section with 
respect to such transfer.
    (B) With respect to the gain recognition agreement filed for the 
initial transfer of the TFD stock, the transfer by UST of the TFC 
stock to FA is a triggering event under paragraph (j)(4) of this 
section. However, the transfer shall not constitute a triggering 
event if the conditions of the exception provided by paragraph 
(k)(14) of this section are satisfied.
    (1) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the transfer qualifies as a nonrecognition 
transaction (assuming UST enters into a gain recognition agreement 
as described in paragraph (ii)(A) of this Example 4).

[[Page 6971]]

    (2) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the transfer DC, a domestic 
corporation that is eligible to be a U.S. transferor, owns at least 
5% (applying the attribution rules of section 318, as modified by 
section 958(b)) of the total voting power and total fair market 
value of the outstanding stock of FA. As a result, DC is treated as 
retaining an indirect interest in the TFD stock immediately 
following the transfer.
    (3) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if DC enters into a new gain recognition agreement with 
respect to the initial transfer of the TFD stock that, based on the 
principles of paragraph (j) of this section, describes the 
subsequent dispositions or other events that would constitute 
triggering events for purposes of the new gain recognition agreement 
(other than the dispositions and other events described in paragraph 
(j) of this section). For example, a complete or partial disposition 
of the stock of FA would constitute a triggering event for purposes 
of the new gain recognition agreement.
    Example 5. Transfer of stock of the transferee foreign 
corporation to a domestic corporation pursuant to an asset 
reorganization. (i) Facts. At the time of the initial transfer the 
TFD stock has a $50x basis and a $100x fair market value. Therefore, 
the amount of gain subject to the gain recognition agreement is 
$50x. In year 3, pursuant to an asset reorganization described in 
section 368(a)(1)(A), UST transfers its assets to DC in exchange 
solely for 20% of the outstanding stock of DC. UST distributes the 
stock of DC to USP pursuant to the plan of reorganization.
    (ii) Result. The transfer by UST of the TFC stock to DC 
constitutes a triggering event under paragraph (j)(4) of this 
section. However, pursuant to paragraph (k)(6)(i) of this section, 
if DC enters into a new gain recognition agreement with respect to 
the initial transfer that designates DC as the U.S. transferor, the 
transfer shall not constitute a triggering event.
    Example 6. Transfer of stock of the transferee foreign 
corporation to a foreign corporation pursuant to an asset 
reorganization. (i) Facts. The facts are the same as in Example 5, 
except the acquiring corporation in the asset reorganization is FA, 
and, at the time of the asset reorganization, the TFC stock 
transferred by UST to FA has a $50x basis and a $150x fair market 
value. All of the conditions under section 367(a)(5) and the 
regulations under that section are satisfied, and no adjustment is 
required to the basis of the FA stock received by USP in the 
transaction.
    (ii) Result. (A) The transfer by UST of the TFC stock to FA is 
described in section 361(a) and is therefore subject to section 
367(a)(5). In general, UST cannot file a gain recognition agreement 
with respect to such transfer, and the transfer therefore is subject 
to the general rule of section 367(a)(1). However, if the conditions 
of Sec.  1.367(a)-3(e)(1)(i) through (iv) are satisfied, USP can 
enter into a gain recognition agreement with respect to the transfer 
to avoid the recognition of gain by UST on the transfer under 
section 367(a)(1). If the exception provided by paragraph (k)(14) of 
this section applies so that the transfer by UST of the TFC stock to 
FA is not a triggering event with respect to the gain recognition 
agreement filed for the initial transfer (discussed in paragraph 
(ii)(B) of this Example 6), the amount of gain subject to the gain 
recognition agreement (if entered into) with respect to the transfer 
by UST of the TFC stock to FA in the asset reorganization is $100x.
    (B) Under paragraph (j)(4) of this section, the transfer of the 
TFC stock by UST to FA is a triggering event with respect to the 
gain recognition agreement for the initial transfer. The exception 
provided by paragraph (k)(6)(i) of this section does not apply to 
such transfer because FA, the acquiring corporation in the asset 
reorganization, is foreign. However, the transfer shall not 
constitute a triggering event if the conditions of the exception 
provided by paragraph (k)(14) of this section are satisfied.
    (1) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the transfer of the TFC stock to FA qualifies as a 
nonrecognition transaction (assuming USP enters into a gain 
recognition agreement with respect to such transfer).
    (2) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the transfer USP, a domestic 
corporation that is eligible to be a U.S. transferor, owns at least 
5% (applying the attribution rules of section 318, as modified by 
section 958(b)) of the total voting power and total fair market 
value of the outstanding stock of FA. As a result, USP is treated as 
retaining an indirect interest in the TFD stock immediately 
following the transfer.
    (3) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if USP enters into a new gain recognition agreement with 
respect to the initial transfer of the TFD stock that, based on the 
principles of paragraph (j) of this section, describes the 
subsequent dispositions or other events that would constitute 
triggering events for purposes of the new gain recognition 
agreement, other than those already provided in paragraph (j) of 
this section. For example, a disposition of the stock of FA would 
constitute such a triggering event for purposes of the new gain 
recognition agreement.
    (iii) Alternate facts. Assume the same facts as in paragraph (i) 
of this Example 6, including that paragraph (k)(14) of this section 
applies to the year 3 reorganization so that USP enters into a new 
gain recognition agreement with respect to the initial transfer of 
the TFD stock that occurred in year 1 (GRA 1), and that under Sec.  
1.367(a)-3(e) USP enters into a separate gain recognition agreement 
with respect to the initial transfer of the TFC stock by UST to FA 
pursuant to the year 3 asset reorganization (GRA 2). Assume further 
that in year 4 TFC disposes of 10% of the TFD stock pursuant to a 
transaction that constitutes a triggering event with respect to GRA 
1. The disposition of the TFD stock is not a triggering event with 
respect to GRA 2 because the TFD stock disposed of does not 
constitute substantially all the assets of TFC. Under paragraphs 
(j)(1) and (c)(1)(i) of this section, USP must recognize $5x gain 
(10% of $50x) under GRA 1. Under paragraph (c)(4)(i) and (ii) of 
this section, as of the date of the initial transfer (with respect 
to which GRA 1 was filed), the basis of the TFC stock and TFD stock, 
respectively, is increased by $5x. Under paragraph (c)(1)(i) of this 
section, the amount of gain subject to GRA 1 is reduced from $50x to 
$45x. Similarly, because the transferred stock for purposes of GRA 2 
is the TFC stock, the amount of gain subject to GRA 2 is reduced 
from $100x to $95x to reflect the increase to the basis of the TFC 
stock.
    Example 7. Transfer of transferred stock to a foreign 
corporation pursuant to an asset reorganization. (i) Facts. UST 
wholly owns FA. In year 4, pursuant to a reorganization described in 
section 368(a)(1)(D), TFC transfers all of the TFD stock to FA in 
exchange solely for stock of FA. TFC distributes the FA stock to UST 
pursuant to the plan of reorganization.
    (ii) Analysis. In general, the year 4 transfer by TFC of the TFD 
stock to FA and the exchange by UST of the TFC stock for FA stock 
constitute triggering events under paragraphs (j)(1) and (4) of this 
section, respectively. However, under paragraph (k)(6)(ii) of this 
section, the transfers shall not constitute triggering events if UST 
enters into a new gain recognition agreement with respect to the 
initial transfer that designates FA as the transferee foreign 
corporation.
    Example 8. Transfer of substantially all the assets of the 
transferred corporation pursuant to an asset reorganization. (i) 
Facts. In year 4, pursuant to an asset reorganization described in 
section 368(a)(1)(C), TFD transfers all of its assets to FA in 
exchange solely for voting stock of FA. TFD distributes the FA 
voting stock to TFC pursuant to the plan of reorganization.
    (ii) Analysis. The year 4 transfer by TFD of all its assets to 
FA and the exchange by TFC of its TFD stock for FA voting stock 
pursuant to the reorganization constitute triggering events under 
paragraphs (j)(2) and (j)(1) of this section, respectively. However, 
under paragraph (k)(6)(iii) of this section, the transfers shall not 
constitute triggering events if UST enters into a new gain 
recognition agreement with respect to the initial transfer that 
designates FA as the transferred corporation. In addition, under 
paragraph (k)(6)(iii) of this section only the assets of TFD 
acquired by FA in the asset reorganization shall be treated as 
assets of the transferred corporation for purposes of the new gain 
recognition agreement.
    Example 9. Complete liquidation of transferred corporation into 
transferee foreign corporation. (i) Facts. UST does not make an 
election under paragraph (c)(2)(vi) of this section in connection 
with the gain recognition agreement entered into with respect to the 
initial transfer. In year 3, TFD distributes all of its assets to 
TFC pursuant to a complete liquidation to which sections 332 and 337 
apply. Under paragraph (k)(8) of this section, UST enters into a new 
gain recognition agreement with respect to the initial transfer such 
that the liquidation is not a triggering event. Under paragraph 
(c)(5)(i) of this section, the new gain recognition agreement is 
subject to the conditions and requirements of this section to the 
same extent as the existing gain recognition agreement, except that 
the transferred stock

[[Page 6972]]

is no longer subject to the gain recognition agreement because the 
transferred stock is cancelled by reason of the liquidation. In year 
5 TFC disposes of substantially all of the assets received from TFD 
in the year 3 liquidation.
    (ii) Result. The year 5 disposition by TFC of substantially all 
of the assets received from TFD in the year 3 liquidation is a 
triggering event under paragraph (j)(2) of this section, and 
therefore UST must recognize the gain subject to the gain 
recognition agreement. UST must report the gain recognized on an 
amended return for the taxable year during which the initial 
transfer occurred. UST must also pay applicable interest on any 
additional tax due with respect to the gain recognized. Under 
paragraph (c)(4)(i) of this section, the basis of the TFC stock 
received by UST in the initial transfer is increased as of the date 
of the initial transfer by the amount of gain recognized under the 
gain recognition agreement. The basis of the assets of TFD, however, 
is not increased.
    Example 10. Transfer of transferred stock to foreign corporation 
in section 351 exchange, followed by a section 332 liquidation of 
the foreign corporation. (i) Facts. In year 3, pursuant to a section 
351 exchange, TFC transfers the TFD stock to F1, a newly formed 
corporation, in exchange solely for voting stock of F1. The transfer 
by TFC of the TFD stock to F1 is not a triggering event because UST 
complies with the conditions of paragraph (k)(3) of this section. In 
year 5, F1 distributes all of its assets to TFC in a complete 
liquidation to which sections 332 and 337 apply.
    (ii) Result. The distribution of the TFD stock by F1, and the 
exchange of F1 stock by TFC pursuant to the year 5 liquidation of F1 
constitute triggering events under paragraphs (j)(1) and (k)(3)(i) 
of this section, respectively. However, if paragraph (k)(14) of this 
section applies, neither the distribution of the TFD stock by F1, 
nor the exchange by TFC of the F1 stock, shall constitute a 
triggering event.
    (A) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the distribution of the TFD stock, and the 
exchange of F1 stock, both qualify as nonrecognition transactions.
    (B) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the distribution UST, a domestic 
corporation that is eligible to be a U.S. transferor, owns at least 
5% (applying the attribution rules of section 318, as modified by 
section 958(b)) of the stock of TFC. As a result, UST is treated as 
retaining an indirect interest in the TFD stock following the 
complete liquidation of F1.
    (C) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if UST enters into a new gain recognition agreement. 
Because after the complete liquidation of F1, UST wholly owns TFC, 
which wholly owns TFD, as was the case immediately after the initial 
transfer, UST is not required to describe, with the new gain 
recognition agreement, other dispositions or events that would 
constitute triggering events based on the principles of paragraph 
(j) of this section, other than the dispositions or events described 
in paragraph (j) of this section.
    Example 11. Disposition of stock of transferee foreign 
corporation pursuant to a divisive reorganization. (i) Facts. In 
year 3, pursuant to a divisive reorganization described in section 
368(a)(1)(D), UST transfers all of the TFC stock to DC, a newly-
formed corporation, in exchange solely for stock of DC. UST then 
distributes all of the DC stock to USP in a transaction to which 
section 355 applies.
    (ii) Result. The transfer of the TFC stock by UST to DC 
constitutes a triggering event under paragraph (j)(4) of this 
section. However, under paragraph (k)(1)(iii) of this section, the 
transfer of the TFC stock shall not constitute a triggering event if 
DC enters into a new gain recognition agreement that designates DC 
as the U.S. transferor for purposes of this section.
    (iii) Alternate facts. The facts are the same as in paragraph 
(i) of this Example 11, except that UST transfers only 90% of the 
TFC stock to DC. Paragraph (k)(1)(iii) of this section applies only 
with respect to the TFC stock transferred to DC. Thus, the 
conditions of paragraph (k)(1)(iii) of this section are satisfied if 
DC enters into a new gain recognition agreement with respect to the 
TFC stock received from UST. The amount of gain subject to the new 
gain recognition agreement entered into by DC equals 90% of the 
amount of gain subject to the gain recognition agreement entered 
into by UST with respect to the initial transfer. The amount of gain 
subject to the gain recognition agreement entered into by UST with 
respect to the initial transfer is reduced by the amount of gain 
subject to the new gain recognition agreement entered into by DC. 
The gain recognition agreement entered into by UST with respect to 
the initial transfer continues to apply to the remaining TFC stock 
held by UST.
    Example 12. Disposition of transferred stock pursuant to a 
divisive reorganization. (i) Facts. In year 3, pursuant to a 
divisive reorganization described in section 368(a)(1)(D), TFC 
transfers all of the TFD stock to F1, a newly formed corporation, in 
exchange solely for all of the outstanding stock of F1. TFC then 
distributes all of the F1 stock to UST in a transaction to which 
section 355 applies.
    (ii) Result. The transfer by TFC of the TFD stock to F1 
constitutes a triggering event under paragraph (j)(1) of this 
section. However, if paragraph (k)(14) of this section applies, 
neither the transfer of the TFD stock by TFC to F1, nor the 
distribution of the F1 stock by TFC to UST, shall constitute 
triggering events.
    (A) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the dispositions of the TFD stock and F1 stock 
qualify as nonrecognition transactions.
    (B) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the transfer UST, an eligible 
U.S. transferor, owns at least 5% (applying the attribution rules of 
section 318, as modified by section 958(b)) of the total voting 
power and the total fair market value of the outstanding stock of 
F1. As a result, UST is treated as retaining an indirect interest in 
the TFD stock following the dispositions.
    (C) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if UST enters into a new gain recognition agreement with 
respect to the initial transfer that describes the subsequent 
dispositions or other events that would constitute triggering events 
based on the principles of paragraph (j) of this section, other than 
those described in paragraph (j) of this section. For example, a 
complete or partial disposition of the F1 stock would constitute a 
triggering event for purposes of the new gain recognition agreement 
(subject to the exceptions provided by paragraph (k) of this 
section).
    Example 13. Receipt of boot by the transferee foreign 
corporation in a subsequent section 351 exchange. (i) Facts. At the 
time of the initial transfer, the TFD stock has a $50x basis and 
$100x fair market value. The amount of gain subject to the gain 
recognition agreement is $50x. In year 3, TFC and X, an unrelated 
foreign corporation, form F1. TFC transfers the TFD stock to F1 in 
exchange for $35x cash and $65x stock of F1. At the time of the 
transfer, the TFD stock has a $50x basis and $100x fair market 
value. The F1 stock received by TFC represents 25% of the 
outstanding stock of F1. Without regard to the gain recognized under 
the gain recognition agreement and any adjustments to basis under 
paragraph (c)(4)(ii) of this section, under section 351(b) TFC would 
recognize $35x gain in connection with the transfer of the TFD stock 
to F1. UST complies with the conditions of paragraph (k)(3) of this 
section, and therefore the disposition by TFC of the TFD stock does 
not constitute a triggering event.
    (ii) Result. Under paragraph (m)(1) of this section, UST must 
recognize $35x gain under the gain recognition agreement as a result 
of the year 3 disposition by TFC of the TFD stock. Thus, the amount 
of gain subject to the new gain recognition agreement entered into 
by UST pursuant to paragraph (k)(3) of this section is $15x. Under 
paragraph (c)(4)(ii) of this section, as of the date of the initial 
transfer, the basis of the TFD stock held by TFC is increased by 
$35x, the amount of the gain recognized by UST under the gain 
recognition agreement. Under paragraph (c)(4)(i) of this section, 
the basis of the TFC stock received by UST in the initial transfer 
is also increased by $35x. After taking into account the increase to 
the basis of the TFD stock under paragraph (c)(4)(ii) of this 
section, TFC recognizes $15x gain under section 351(b) in connection 
with the year 3 transfer of the TFD stock to F1. Under section 
362(a), the basis of the TFD stock in the hands of F1 is $100x.
    Example 14. Complete disposition of transferred stock pursuant 
to a section 304(a)(1) transaction. (i) Facts. UST wholly owns FA. 
In year 3, in a transaction to which section 304(a)(1) applies, TFC 
transfers all of the TFD stock to FA in exchange for cash. Under 
section 304(a)(1), TFC and FA are treated as if TFC transferred the 
TFD stock to FA in a section 351 exchange in exchange solely for FA 
stock, and then FA redeemed the FA stock deemed issued in exchange 
for the cash. Under section 302(d), the redemption of the FA stock 
deemed issued by FA to TFC under section 304(a)(1) is treated as a 
distribution to which section 301 applies.
    (ii) Result. (A) In general, the deemed contribution by TFC of 
the TFD stock to FA

[[Page 6973]]

in the section 351 exchange is a triggering event under paragraph 
(j)(1) of this section. However, under paragraph (k)(3) of this 
section the deemed contribution shall not be a triggering event if 
UST enters into a new gain recognition agreement with respect to the 
initial transfer in which it agrees to treat as a triggering event a 
complete or partial disposition of the FA stock deemed received by 
TFC.
    (B) Under paragraph (n)(1) of this section, the redemption of 
the FA stock deemed received by TFC in exchange for the TFD stock 
shall not constitute a disposition if UST enters into a new gain 
recognition agreement with respect to the initial transfer that 
includes appropriate provisions to take into account such 
redemption. Therefore, under the new gain recognition agreement UST 
must agree to treat as a triggering event a complete or partial 
disposition of the stock of FA. Pursuant to paragraph (d)(2)(ii) of 
this section, UST is permitted to enter into a single new gain 
recognition agreement in year 3, but the gain recognition agreement 
must provide a complete description of the section 304(a)(1) 
transaction including the deemed section 351 exchange and redemption 
of the FA stock.
    Example 15. Reduction in amount of gain subject to gain 
recognition agreement, followed by triggering event. (i) Facts. In 
year 3, UST disposes of 60% of the TFC stock received in the initial 
transfer in a transaction in which the conditions of paragraph 
(o)(1)(ii) of this section are satisfied. Thus, the amount of gain 
subject to the gain recognition agreement is reduced by 60%. In year 
5, TFC disposes of 50% of the TFD stock in a transaction that 
constitutes a triggering event.
    (ii) Result. As a result of the year 5 disposition by TFC of 50% 
of the TFD stock, under paragraphs (j)(1) and (c)(1)(i) of this 
section, UST must recognize and include in income 50% of the gain 
subject to the gain recognition agreement (because of the year 3 
disposition of TFC stock, the amount of gain subject to the gain 
recognition agreement equals 40% of the gain realized, but not 
recognized, on the initial transfer). UST must pay applicable 
interest on any additional tax due with respect to the gain 
recognized. The amount of gain subject to the gain recognition 
agreement is reduced by the amount of gain recognized by UST (the 
remaining gain equals 20% of the gain realized, but not recognized, 
by UST on the initial transfer).
    Example 16. Taxable sale of stock of transferee foreign 
corporation and election to reduce stock basis. (i) Facts. UST 
wholly owns F1 and TFD. The F1 stock has a $100x basis and $90x fair 
market value, and the TFD stock has a $0x basis and $100x fair 
market value. UST also owns real property with a $10x basis and $10x 
fair market value. In year 1, pursuant to a section 351 exchange, 
UST transfers the real property, the TFD stock, and the F1 stock to 
TFC in exchange solely for 20 shares of TFC stock. UST enters into a 
gain recognition agreement with respect to the transfer of the TFD 
stock. The amount of the gain recognition agreement is $100x. UST 
takes the position that the basis of each share of TFC stock 
received in the exchange is $5.5x (a proportionate amount of the 
$110x aggregate basis of the transferred property). In year 3, UST 
disposes of all its TFC stock in a transaction in which all gain 
realized is recognized and included in taxable income.
    (ii) Result. The year 3 disposition of the TFC stock is a 
triggering event under paragraph (j)(4) of this section. The 
disposition does not terminate the gain recognition agreement 
pursuant to paragraph (o)(1)(i) of this section because the basis of 
each share of TFC stock received in exchange for the TFD stock in 
the initial transfer is $5.5x, which exceeds the $0x basis of the 
TFD stock at time of the initial transfer. However, under paragraph 
(o)(1)(iii) of this section, to satisfy the basis condition of 
paragraph (o)(1)(i) of this section, UST can reduce the basis of the 
10 shares of the TFC stock received in exchange for the TFD stock to 
$0x. If UST reduces the basis of the 10 shares of TFC stock to $0x, 
under paragraph (o)(1)(i) of this section the disposition of the TFC 
stock shall not constitute a triggering event but instead shall 
terminate the gain recognition agreement without further effect.
    Example 17. Successive section 351 exchanges, section 301 
distributions, and transactions involving partnerships. (i) Facts. 
UST owns a 40 percent capital and profits interest in a foreign 
partnership (PRS). PRS wholly owns TFD and other assets with basis 
equal to fair market value. The TFD stock has a $50x basis and $200x 
fair market value. TFC wholly owns F1. On day 1 of year 1, in a 
section 351 exchange, UST transfers its PRS interest to TFC in 
exchange solely for stock of TFC (initial transfer). On that same 
day, in a section 351 exchange, TFC transfers the PRS interest 
received from UST to F1 in exchange solely for stock of F1. In year 
3, PRS receives a $150x distribution from TFD to which section 301 
applies. Under section 301(c), $25x of the distribution constitutes 
a dividend, $50x is applied against and reduces the basis of the TFD 
stock held by PRS, and the remaining $75x is treated as gain from 
the sale or exchange of property. With respect to the TFD stock 
deemed transferred by UST in the initial transfer, under section 
301(c), $10x (40% of $25x) of the distribution constitutes a 
dividend, $20x (40% of $50x) is applied against and reduces the 
basis of TFD stock, and $30x (40% of $75x) is treated as gain from 
the sale or exchange of property. In year 5, pursuant to a 
distribution to which section 731 applies, PRS distributes all of 
the TFD stock to F1.
    (ii) Result. (A) Successive section 351 transfers. Under section 
367(a)(4) and Sec.  1.367(a)-1T(c)(3)(ii), the transfer of the PRS 
interest by UST to TFC is treated, for purposes of section 367(a), 
as a transfer by UST to TFC of its proportionate share of the TFD 
stock held by PRS (the initial transfer). The initial transfer by 
UST of the TFD stock to TFC is subject to the general rule of 
section 367(a)(1), unless UST enters into a gain recognition 
agreement with respect to such transfer pursuant to Sec.  1.367(a)-
3(b)(1)(ii) and this section. Under paragraph (c)(3)(viii) of this 
section, the gain recognition agreement must include a complete 
description of the transfer, including a description of the partners 
of PRS. Even if UST enters into a gain recognition agreement with 
respect to the initial transfer, under paragraph (j)(3) of this 
section, the subsequent transfer by TFC of the PRS interest to F1 is 
a triggering event unless UST enters into a new gain recognition 
agreement with respect to the initial transfer under paragraph 
(k)(14) that provides that, in addition to the triggering events 
provided in paragraph (j) of this section, a complete or partial 
disposition of the F1 stock received by TFC in exchange for the PRS 
interest shall constitute a triggering event for purposes of the 
gain recognition agreement. The new gain recognition agreement must 
also provide that any other disposition that is inconsistent with 
the principles of paragraph (k), including an indirect disposition 
of the TFD stock or of substantially all of the assets of TFD, shall 
constitute a triggering event for purposes of the new gain 
recognition agreement. Under paragraph (d)(2)(ii) of this section, 
UST is permitted to enter into a single gain recognition agreement 
with respect to the initial transfer and the subsequent transfer by 
TFC of the PRS interest, but the agreement must include a complete 
description of the initial transfer and the subsequent transfer of 
the PRS interest.
    (B) Section 301 distribution from TFD to PRS. Under paragraph 
(b)(1)(iii) of this section, the section 301 distribution received 
by PRS from TFD is not a disposition (and therefore does not affect 
the gain recognition agreement) to the extent it is described in 
section 301(c)(1) or (2). However, under paragraph (n)(2) of this 
section, to the extent the distribution is described in section 
301(c)(3), UST must recognize gain ($30x) under the gain recognition 
agreement. For this purpose, the amount of the distribution that is 
described in section 301(c)(3) is determined before taking into 
account the increase to the basis of the TFD stock under paragraph 
(c)(4)(ii) of this section.
    (C) Distribution of TFD stock by PRS to F1. The year 5 
distribution of the TFD stock by PRS to F1 is a triggering event 
under paragraph (j)(1) of this section, unless paragraph (k)(14) of 
this section applies.
    (1) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the distribution qualifies as a nonrecognition 
transaction.
    (2) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the distribution UST, a domestic 
corporation that is eligible to be a U.S. transferor, owns at least 
5% (applying the attribution rules of section 318, as modified by 
section 958(b)) of the total voting power and total value of the 
outstanding stock of F1. As a result, UST is treated as retaining an 
indirect interest in the TFD stock following the distribution.
    (3) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if UST enters into a new gain recognition agreement with 
respect to the initial transfer. The new gain recognition agreement 
need not describe additional dispositions or other events that would 
constitute triggering events because, pursuant to paragraph (c)(5) 
of this section, the dispositions or other events described in 
paragraph (j) of this section or in the existing gain recognition 
agreement apply to the new gain recognition agreement.

[[Page 6974]]

    Example 18. Complete liquidation of transferee foreign 
corporation. (i) Facts. TFD has 10 shares of stock outstanding 
immediately before the initial transfer. On the date of the initial 
transfer, the TFD stock has a $0x basis and $90x fair market value. 
In year 2, in exchange for 1 share of TFD stock TFC transfers real 
estate to TFD with a $10x basis and $10x fair market value. In year 
4, TFC distributes the 11 shares of TFD stock to UST in a complete 
liquidation to which sections 332 and 337 apply.
    (ii) Result. In determining whether the gain recognition 
agreement entered into by UST with respect to the initial transfer 
is terminated under paragraph (o)(5) of this section, or triggered 
under paragraphs (j)(1) and (j)(4) of this section, only the 10 
shares of TFD stock transferred by UST in the initial transfer are 
considered. Thus, the 1 share of TFD stock received by TFC in 
exchange for the real estate in year 2 is not taken into account.
    Example 19. Spin-off of transferred corporation. (i) Facts. 
Before the initial transfer, the TFD stock has an $80x basis and a 
$100x fair market value, and the TFC stock has a $100x basis and a 
$100x fair market value. In year 4, TFC distributes all of the TFD 
stock to UST in a transaction to which section 355 applies. At the 
time of the distribution, the TFD stock has a $200x fair market 
value, and the TFC stock (without regard to the value of the TFD 
stock held by TFC) has a $100x fair market value. At such time, the 
TFC stock has a $180x basis. As determined under section 358, 
immediately after the distribution, the TFC stock has a $60x basis, 
and the TFD stock has a $120x basis.
    (ii) Result. The distribution of the TFD stock by TFC in year 4 
is a triggering event under paragraph (j)(1) of this section. The 
distribution does not terminate the gain recognition agreement under 
paragraph (o)(5) of this section because after the distribution, the 
basis of the TFD stock in the hands of UST ($120x) is greater than 
the basis of the TFD stock at the time of the initial transfer 
($80x). However, if UST reduces the basis of the TFD stock to $80x 
(as provided under paragraph (o)(5)(iii) of this section) the gain 
recognition agreement will terminate without further effect. If UST 
does not elect to reduce the basis of the TFD stock, see paragraph 
(k)(14) of this section.
    Example 20. Intercompany transaction followed by disposition to 
nonmember. (i) Facts. At the time of the initial transfer, the TFD 
stock has a $50x basis and $100x fair market value. The amount of 
the gain recognition agreement is $50x. In year 3, UST distributes 
all of the TFC stock to USP in a transaction to which section 301 
applies. At the time of the distribution, the TFC stock has a $50x 
basis and $90x fair market value. Under section 311(b), UST must 
recognize $40x gain (the intercompany item) on the distribution, but 
because the distribution is an intercompany transaction, under the 
provisions of Sec.  1.1502-13, the $40x gain is not taken into 
account in year 3. In year 4, USP sells all of the TFC stock to X, 
an unrelated corporation. Under the provisions of Sec.  1.1502-13, 
in year 4 UST takes into account the $40x intercompany item as a 
result of the sale of the TFC stock to X.
    (ii) Result. (A) The year 3 distribution of the TFC stock by UST 
to USP does not terminate the gain recognition agreement under 
paragraph (o)(1) of this section because UST does not include the 
$40x gain in taxable income during year 3. Under paragraph (j)(4) of 
this section, the year 3 distribution of the TFC stock by UST to USP 
is generally a triggering event; however, because the distribution 
is an intercompany transaction that creates an intercompany item, 
the distribution shall not constitute a triggering event if the 
conditions of paragraph (k)(12)(i) of this section are satisfied.
    (1) The condition of paragraph (k)(12)(i)(A) of this section is 
satisfied because the aggregate basis of the TFC stock distributed 
($50x) is not greater than the sum of the aggregate basis of the TFD 
stock at the time of the initial transfer ($50x).
    (2) The condition of paragraph (k)(12)(i)(B) of this section is 
satisfied if the next annual certification for the existing gain 
recognition agreement includes a complete description of the 
intercompany transaction and an explanation of how the basis 
condition of paragraph (k)(12)(i)(A) of this section is satisfied.
    (B) Under paragraph (o)(6) of this section and the principles of 
paragraph (o)(1)(i) of this section, because the year 4 sale of the 
TFC stock to X requires UST to take into account the $40x gain (the 
intercompany item) from the year 3 distribution, the year 4 sale 
terminates the gain recognition agreement. If, alternatively, in 
year 4 USP had sold only 30% of the TFC stock, then under paragraph 
(o)(6) of this section and the principles of paragraph (o)(1)(ii) of 
this section the amount of gain subject to the gain recognition 
agreement would be reduced by 30%.
    (iii) Alternate facts. Intercompany transaction followed by sale 
of transferee foreign corporation to member. Assume the same facts 
as in paragraph (i) of this Example 20, except that, instead of USP 
selling the TFC stock to X, in year 4 USP sells the TFC stock to USS 
in exchange for $90x cash. UST and USS are members of the USP 
consolidated group immediately after the sale. The results of the 
year 3 distribution of the TFC stock by UST to USP are the same as 
in paragraph (ii) of this Example 20. In addition, under paragraph 
(k)(12)(ii) of this section, the year 4 sale by USP of the TFC stock 
to USS is not a triggering event, provided UST includes a complete 
description of the sale with the annual certification filed for the 
gain recognition agreement in year 4.
    (iv) Alternate facts. Intercompany transaction followed by 
complete liquidation of transferee foreign corporation. Assume the 
same facts as in paragraph (i) of this Example 20, except that, 
instead of USP selling the TFC stock to X, in year 4 TFC distributes 
all of its assets to USP in a complete liquidation to which sections 
332 and 337 apply. The result is the same as in paragraph (ii) of 
this Example 20 because, under the provisions of Sec.  1.1502-13, in 
year 4 UST takes into account the $40x gain (the intercompany item) 
from the year 3 distribution.
    (v) Alternate facts. Intercompany transaction followed by 
triggering event. Assume the same facts as in paragraph (i) of this 
Example 20, except that instead of USP selling the TFC stock to X, 
in year 4 TFC disposes of all of the TFD stock in a transaction that 
constitutes a triggering event under paragraph (j)(1) of this 
section. Under paragraph (c)(1)(i) of this section UST must 
recognize $50x gain under the gain recognition agreement. Under 
paragraphs (c)(4)(i) and (ii) of this section, as of the date of the 
initial transfer the basis of the TFC stock and TFD stock, 
respectively, is increased by $50x.
    (vi) Alternate facts. Intercompany transaction followed by 
section 351 transfer to member. The facts are the same as in 
paragraph (i) of this Example 20, except that, in year 3, in a 
section 351 exchange UST transfers all of the TFC stock to USS in 
exchange for $10x cash and $80x of stock of USS. USS is a member of 
the USP consolidated group immediately after the exchange. The 
transfer of the TFC stock by UST to USS is an intercompany 
transaction. Under section 351(b), UST must generally recognize $10x 
gain (intercompany item) in connection with the transfer; however, 
under the provisions of Sec.  1.1502-13, UST does not take the $10x 
gain into account in year 3. Under paragraph (k)(12) of this 
section, as result of the intercompany transaction creating an 
intercompany item ($10x gain), the existing gain recognition 
agreement ($50x gain) must be divided between UST and USS. UST shall 
remain subject to a gain recognition agreement of $10x (equal to the 
amount of the intercompany item). The amount of the gain recognition 
agreement entered into by USS under paragraph (k)(1) of this section 
is $40x (equal to the amount of the existing gain recognition 
agreement, reduced by the amount of the of the gain recognition 
agreement to which UST remains subject).
    Example 21. Transfer of transferred stock to United States 
person other than U.S. transferor. (i) Facts. An individual (A) that 
is a United States citizen wholly owns TFD, TFC, and DC. A transfers 
the TFD stock to TFC in a section 351 exchange and enters into a 
gain recognition agreement with respect to such transfer. In year 5, 
pursuant to an asset reorganization, TFC transfers all of its assets 
to DC in exchange solely for DC stock. TFC distributes the DC stock 
to A pursuant to the plan of reorganization.
    (ii) Result. The transfer by TFC of the TFD stock to DC and the 
exchange by A of the TFC stock for DC stock pursuant to the asset 
reorganization are triggering events under paragraphs (j)(1) and 
(j)(4) of this section, respectively. The gain recognition agreement 
does not terminate under paragraph (o)(5) of this section because DC 
is neither the U.S. transferor, nor an individual that is a United 
States person, nor a member of the same consolidated group of which 
the U.S. transferor is a member. However, if paragraph (k)(14) of 
this section applies the exchanges shall not constitute triggering 
events.
    (A) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the transfer of the TFD stock to DC qualifies as a 
nonrecognition transaction.
    (B) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately

[[Page 6975]]

after the transfer DC, a domestic corporation that is eligible to be 
a U.S. transferor, retains a direct interest in the TFD stock 
following the transfer.
    (C) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if DC enters into a new gain recognition agreement with 
respect to the initial transfer. Under paragraph (k)(14)(iii)(B) of 
this section, DC is not required to describe any subsequent 
dispositions or other events that (based on the principles of 
paragraph (j) of this section) would constitute triggering events 
for purposes of the new gain recognition agreement, other than the 
dispositions or other events described in paragraph (j) of this 
section, because DC holds a direct interest in TFD after the asset 
reorganization.
    Example 22. Transfer of transferred stock to consolidated group 
member. (i) Facts. UST wholly owns DC, a member of the USP 
consolidated group that includes UST. In year 5, pursuant to an 
asset reorganization described in section 368(a)(1)(A) TFC merges 
with and into DC. Immediately after the asset reorganization, DC 
wholly owns TFD, and the basis of the TFD stock is not greater than 
the aggregate basis of such stock at the time of the initial 
transfer.
    (ii) Result. The gain recognition agreement filed by UST with 
respect to the initial transfer terminates without further effect if 
the conditions of paragraph (o)(5) of this section are satisfied.
    (A) The condition of paragraph (o)(5)(i) of this section is 
satisfied because the transfer of the TFD stock is a section 361 
exchange.
    (B) The condition of paragraph (o)(5)(ii) of this section is 
satisfied because DC is a member of the consolidated group that 
includes UST immediately after the section 361 exchange.
    (C) The condition of paragraph (o)(5)(iii) of this section is 
satisfied because the aggregate basis of the TFD stock immediately 
after the section 361 exchange is not greater than the aggregate 
basis of the TFD stock at the time of the initial transfer (as 
adjusted for any gain recognized by UST on such transfer). If the 
basis condition of paragraph (o)(5)(iii) were not satisfied, under 
paragraph (o)(5)(iii) of this section, DC could reduce the basis of 
the TFD stock received in the reorganization. Alternatively, a new 
gain recognition agreement could be entered into if paragraph 
(k)(14) of this section applied to the disposition of the TFD stock 
pursuant to the section 361 exchange.
    (iii) Alternate facts. The facts are the same as in paragraph 
(i) of this Example 22, except that instead of TFC merging into DC, 
TFC merges into TFD in a reorganization described in section 
368(a)(1)(A). The gain recognition agreement terminates without 
further effect if the conditions of paragraph (o)(5) of this section 
are satisfied.
    (A) The condition of paragraph (o)(5)(i) of this section is 
satisfied because the TFD stock issued by TFD to TFC in the 
reorganization, which is treated as transferred stock under 
paragraph (b)(2)(iii) of this section, is distributed by TFC to UST 
pursuant to section 361(c).
    (B) The condition of paragraph (o)(5)(ii) of this section is 
satisfied because UST is the U.S. transferor.
    (C) The condition of paragraph (o)(5)(iii) of this section is 
satisfied if the aggregate basis of the TFD stock received by UST 
from TFC is not greater than the aggregate basis of the TFD stock at 
the time of the initial transfer (as adjusted for any gain 
recognized by UST on such transfer). If the basis condition of 
paragraph (o)(5)(iii) were not satisfied, under paragraph 
(o)(5)(iii) of this section, UST could reduce the basis of the TFD 
stock received in the reorganization.
    Example 23. Split-off of transferred stock. (i) Facts. X, a 
domestic corporation that is unrelated to USP and UST, wholly owns 
TFC. Pursuant to a reorganization described in section 368(a)(1)(B), 
UST transfers all of the TFD stock to TFC in exchange for 50% of the 
outstanding voting stock of TFC. UST enters into a gain recognition 
agreement with respect to such transfer. In year 4, in a split-off 
transaction to which section 355 applies, TFC distributes all of the 
TFD stock to X in exchange for all the TFC stock held by X.
    (ii) Result. Under paragraph (j)(1) of this section, the year 4 
distribution of the TFD stock to X constitutes a triggering event. 
However, the distribution shall not constitute a triggering event if 
paragraph (k)(14) of this section applies. The gain recognition 
agreement does not terminate under paragraph (o)(5) of this section 
because X is not a recipient described in paragraph (o)(5)(ii) of 
this section.
    (A) The condition of paragraph (k)(14)(i) of this section is 
satisfied because the distribution of the TFD stock qualifies as a 
nonrecognition transaction.
    (B) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the distribution X, a domestic 
corporation that is eligible to be a U.S. transferor, retains a 
direct interest in the TFD stock.
    (C) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if X enters into a new gain recognition agreement with 
respect to the initial transfer. Under paragraph (k)(14)(iii)(B) of 
this section, X is not required to describe, with the new gain 
recognition agreement, any subsequent dispositions or other events 
that (based on the principles of paragraph (j) of this section) 
would constitute triggering events, other than the dispositions 
described in paragraph (j) of this section, because X directly owns 
TFD after the distribution.
    (D) If X were a United States citizen, the gain recognition 
agreement would terminate if the condition of paragraph (o)(5)(iii) 
of this section were satisfied. Alternatively, the gain recognition 
agreement would continue for its remaining term if the conditions 
for the application of paragraph (k)(14) of this section were 
satisfied.
    (iii) Alternate facts. Distribution to unrelated foreign 
corporation. The facts are the same as in paragraph (i) of this 
Example 23, except that X is a foreign corporation wholly owned by 
DC. DC is unrelated to UST. The results are the same as in paragraph 
(ii) of this Example 23, except as follows.
    (A) The condition of paragraph (k)(14)(ii) of this section is 
satisfied because immediately after the distribution DC, a domestic 
corporation that is eligible to be a U.S. transferor, owns at least 
5% (applying the attribution rules of section 318, as modified by 
section 958(b)) of the total voting power and total value of the 
outstanding stock of X. As a result, DC is treated as retaining an 
indirect interest in the TFD stock immediately following the 
distribution.
    (B) The condition of paragraph (k)(14)(iii) of this section is 
satisfied if DC enters into a new gain recognition agreement with 
respect to the initial transfer. Under paragraph (k)(14)(iii)(B) of 
this section, DC must, in addition to the dispositions described in 
paragraph (j) of this section, include as a triggering event a 
complete or partial disposition of the stock of X.
    (iv) Alternate facts. Distribution to nonresident alien 
individual. The facts are the same as in paragraph (i) of this 
Example 23, except that X is a nonresident alien individual. 
Paragraph (k)(14) of this section does not apply to the distribution 
because the conditions of paragraph (k)(14)(ii) and (iii) of this 
section cannot be satisfied. Therefore, the distribution is a 
triggering event, and UST will recognize gain under the gain 
recognition agreement as required under paragraphs (c)(1)(i) and (v) 
of this section. The result would be the same if X were a foreign 
corporation and, immediately after the distribution, no United 
States person owned at least 5% (applying the attribution rules of 
section 318, as modified by section 958(b)) of the total voting 
power and value of the outstanding stock of X.
    Example 24. Applicability of this section to gain recognition 
agreements filed before March 13, 2009. (i) Facts. The facts are the 
same as in paragraph (i) of Example 6, except that the initial 
transfer occurred on March 7, 2007, and the asset reorganization 
occurred on July 1, 2008.
    (ii) Result. Under paragraph (r)(1)(ii) of this section, the 
rules of Sec.  1.367(a)-8T (see 26 CFR part 1, revised April 1, 
2007) apply to the transfers pursuant to the asset reorganization 
because the initial transfer occurred on March 7, 2007. As a result 
of the disposition of the TFC stock pursuant to the asset 
reorganization, under Sec.  1.367(a)-8T(d), USP is required to 
recognize the gain subject to the gain recognition agreement and pay 
applicable interest on any additional tax due with respect to such 
gain. Because the acquiring corporation in the asset reorganization 
is foreign, an exception under Sec.  1.367(a)-8T(e) is not available 
for the exchange of TFC stock by USP. However, pursuant to paragraph 
(r)(2)(i) of this section, because the exception provided by 
paragraph (k)(14) of this section is not included in Sec.  1.367(a)-
8T, USP may apply paragraph (k)(14) of this section to such exchange 
(provided the conditions of paragraph (k)(14) of this section are 
satisfied), if the statute of limitations on assessments of tax for 
the 2007 tax year has not closed. If USP applies paragraph (k)(14) 
of this section to its exchange of the TFC stock pursuant to the 
asset reorganization, under paragraph (r)(2)(ii) of this section USP 
must include the new gain recognition agreement required under 
paragraph (k)(14)(iii) of this section with an amended Federal 
income tax return for its 2008 tax year that is filed August 10, 
2009.

[[Page 6976]]

    Example 25. Applicability of this section to gain recognition 
agreements filed before March 13, 2009. (i) Facts. The initial 
transfer occurs in 2004. In 2005, pursuant to a section 351 
exchange, TFC transfers the TFD stock to F1 in exchange solely for 
F1 voting stock. UST does not file a new gain recognition agreement 
under Sec.  1.367(a)-8(g)(2) with respect to the exchange.
    (ii) Result. Under paragraph (r)(1)(ii) of this section, the 
rules of Sec.  1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) 
apply to the year 2005 disposition of the TFD stock because UST 
filed the gain recognition agreement after July 20, 1998, but before 
March 7, 2007. Under Sec.  1.367(a)-8(e) (see 26 CFR part 1, revised 
April 1, 2006), as a result of the disposition of the TFD stock by 
TFC, UST must recognize the amount of gain subject to the gain 
recognition agreement. Paragraph (r)(2)(i) of this section does not 
apply because the rule provided by paragraph (k)(3) of this section 
was included in Sec.  1.367(a)-8(g)(2) (see 26 CFR part 1, revised 
April 1, 2006). However, UST may request relief for reasonable cause 
under Sec.  1.367(a)-8(c)(2) (see 26 CFR part 1, revised April 1, 
2006) to file a new gain recognition agreement with respect to the 
disposition of the TFD stock by TFC in 2005.

    (r) Effective/applicability date--(1) General rule--(i) Transfers 
occurring on or after March 13, 2009. The rules of this section apply 
to gain recognition agreements filed with respect to transfers of stock 
or securities occurring on or after March 13, 2009. However, the rules 
of this section do not apply to gain recognition agreements filed with 
respect to any such transfer occurring on or after March 13, 2009, if 
such transfer was entered into pursuant to a written agreement that was 
(subject to customary conditions) binding before February 11, 2009, and 
at all times thereafter. Solely for purposes of this paragraph (r), a 
transfer described in the preceding sentence shall be deemed to be a 
transfer occurring before March 13, 2009 to which the rules of Sec.  
1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) apply. See 
paragraph (r)(2)(iii) of this section for the ability to apply the 
rules of this section with respect to gain recognition agreements filed 
for taxable years ending before March 13, 2009.
    (ii) Transfers occurring before March 13, 2009. For matters covered 
in this section for periods before March 13, 2009 but on or after March 
7, 2007, the corresponding rules of Sec.  1.367(a)-8T (see 26 CFR part 
1, revised April 1, 2007) apply. For matters covered in this section 
for periods before March 7, 2007 but on or after July 20, 1998, the 
corresponding rules of Sec.  1.367(a)-8 (see 26 CFR part 1, revised 
April 1, 2006) apply. For matters covered in this section for periods 
before July 20, 1998, the corresponding rules of Sec.  1.367(a)-3T(g) 
(see 26 CFR part 1, revised April 1, 1998) and Notice 87-85 (1987-2 CB 
395) apply. In addition, if a U.S. transferor entered into a gain 
recognition agreement for transfers before July 20, 1998, then the 
rules of Sec.  1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 
1998) continue to apply in lieu of this section in the event of any 
direct or indirect nonrecognition transfer of the same property. See 
also, Sec.  1.367(a)-3(h).
    (2) Applicability to gain recognition agreements filed before March 
13, 2009--(i) General rule. Taxpayers may apply the rules of this 
regulation Sec.  1.367(a)-8 that were not included in Sec.  1.367(a)-8T 
(see 26 CFR part 1, revised April 1, 2007), to gain recognition 
agreements filed with respect to transfers of stock or securities for 
all open taxable years, if done consistently to all transfers. A U.S. 
transferor subject to section 877 and Sec.  1.367(a)-8T(d)(6) shall not 
apply the rules of this regulation to reach a contrary result. A 
taxpayer that failed to file a gain recognition agreement for a 
transfer, or to comply materially with any requirement of this section 
with respect to an existing gain recognition agreement, must obtain 
relief for reasonable cause for such failure under Sec.  1.367(a)-
8T(e)(10) before applying the rules of this regulation Sec.  1.367(a)-8 
that were not included in Sec.  1.367(a)-8T as permitted by this 
paragraph (r)(2). See paragraph (q)(2) of this section, Examples 24 and 
25 for illustrations of the rule provided by this paragraph (r)(2)(i).
    (ii) Taxable years ending before March 13, 2009. Notwithstanding 
the requirements of Sec.  1.367(a)-8(d), any gain recognition agreement 
or other filing required by reason of electing to apply the rules of 
this regulation Sec.  1.367(a)-8 that were not included in Sec.  
1.367(a)-8T, as permitted by this paragraph (r)(2), for a taxable year 
ending before March 13, 2009 shall be considered filed in accordance 
with the requirements of Sec.  1.367(a)-8(d), provided the gain 
recognition agreement or other filing is attached to an original or 
amended return for such taxable year. An amended return required to be 
filed by reason of electing to apply the rules of this regulation Sec.  
1.367(a)-8 that were not included in Sec.  1.367(a)-8T, as permitted by 
this paragraph (r)(2), must be filed on or before August 10, 2009. A 
taxpayer that wishes to apply the rules of this regulation Sec.  
1.367(a)-8 that were not included in Sec.  1.367(a)-8T, as permitted by 
this paragraph (r)(2), but that fails to meet the filing requirement 
described in the preceding sentence must request relief for reasonable 
cause under paragraph (p) of this section.
    (iii) Taxable years ending after effective date. A taxpayer that 
entered into a gain recognition agreement to which Sec.  1.367(a)-8T 
(see 26 CFR part 1, revised April 1, 2007) applies may apply the rules 
of this section in a tax year ending on or after March 13, 2009 by 
attaching the agreement, certification, or other information related to 
such gain recognition agreement that the rules of this section require 
in accordance with the rules of this section and with the time and 
manner rules provided in Sec.  1.367(a)-8(d).


Sec.  1.367(a)-8T  [Removed]

0
Par. 8. Section 1.367(a)-8T is removed.

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

0
Par. 9. The authority citation for part 602 continues to read as 
follows:

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

0
Par. 10. In Sec.  602.101, paragraph (b) is amended by removing an 
entry for Sec.  1.367(a)-8T from the table and adding an entry for 
Sec.  1.367(a)-8 to the table in numerical order to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                                * * * * *
1.367(a)-8.................................................    1545-2056
 
                                * * * * *
------------------------------------------------------------------------


Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: January 16, 2009.
 Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E9-1512 Filed 2-9-09; 11:15 am]
BILLING CODE 4830-01-P