[Federal Register Volume 76, Number 97 (Thursday, May 19, 2011)]
[Rules and Regulations]
[Pages 28890-28895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12279]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9526]
RIN 1545-BG96


Treatment of Property Used To Acquire Parent Stock or Securities 
in Certain Triangular Reorganizations Involving 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 of 
the Internal Revenue Code (Code) relating to the treatment of property 
used to acquire parent stock or securities in certain triangular 
reorganizations involving foreign corporations. The regulations 
finalize proposed regulations and withdraw temporary regulations 
published on May 27, 2008 (TD 9400). The regulations affect 
corporations that engage in certain triangular reorganizations 
involving one or more foreign corporations.

DATES: Effective Date: These regulations are effective May 19, 2011.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e).

FOR FURTHER INFORMATION CONTACT: Robert B. Williams, Jr., (202) 622-
3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On May 27, 2008, the IRS and Treasury Department published 
temporary and proposed regulations under section 367(b) that apply to 
certain triangular reorganizations in which a subsidiary (S) purchases, 
in connection with the reorganization, stock of its parent corporation 
(P) in exchange for property, and exchanges the P stock for the stock 
or property of a target corporation (T), but only if P or S (or both) 
is a foreign corporation (the temporary regulations or proposed 
regulations, as applicable, and collectively, the 2008 regulations). 73 
FR 30301 (TD 9400, 2008-24 IRB 1139). Because no requests to speak were 
received, no public hearing was held; however, comments were received. 
After consideration of the comments received, the IRS and Treasury 
Department adopt the proposed regulations as final regulations with the 
modifications described herein. Although the 2008 regulations were 
numbered under Sec.  1.367(b)-14, the final regulations are renumbered 
under Sec.  1.367(b)-10. The temporary regulations are withdrawn.

Summary of Comments and Explanation of Revisions

A. Scope of Regulations and Priority Rule

    Section 367(a)(1) provides that if, in connection with any exchange 
described in section 332, 351, 354, 356, or 361, a United States person 
transfers property to a foreign corporation, such foreign corporation 
shall not, for purposes of determining the extent to which gain is 
recognized on such transfer, be considered to be a corporation. As a 
result, the general rule is the United States person recognizes gain 
(if any) on the transfer of such property, unless an exception to 
section 367(a)(1) applies to the transfer. Furthermore, section 
367(b)(1) provides that in the case of any exchange described in 
section 332, 351, 354, 355, 356, or 361 in connection with which there 
is no transfer of property described in section 367(a)(1), a foreign 
corporation shall be considered to be a corporation except to the 
extent provided in regulations. Thus, section 367(b)(1) will not apply 
to an exchange if gain is recognized on that exchange under section 
367(a)(1).
    Section 367(a)(1) (and the regulations under that section) and the 
2008 regulations could each potentially apply to certain triangular 
reorganizations. For example, section 367(a)(1) and the 2008 
regulations could each potentially apply to a triangular reorganization 
described in section 368(a)(1)(B) if S acquires P stock for property, 
each of P, S, and T are foreign corporations, the T stock is held by a 
U.S. person, and the U.S. person realizes gain on the exchange of the T 
stock. See Sec.  1.367(a)-3(d)(1)(iii)(A) (providing that there is an 
indirect transfer by the U.S. person of the T stock to S).
    The 2008 regulations include a priority rule that applies to 
certain transactions described in section 367(a)(1) and the 2008 
regulations. The priority rule generally provides that if the amount of 
gain in the T stock that would otherwise be recognized under section 
367(a)(1) (absent an exception) is less than the adjustment treated as 
a dividend under the 2008 regulations, then the 2008 regulations, and 
not section 367(a)(1), apply to the triangular reorganization.
    One commentator noted that the priority rule applies simply based 
on comparing the amount of gain that would be recognized under section 
367(a)(1) with the amount of the dividend that would result under the 
2008 regulations, without regard to the amount of resulting U.S. tax. 
The commentator stated that in some cases it may be more appropriate 
for the priority rule to take into account the amount of resulting U.S. 
tax. The commentator cited, as an example, a case where P is foreign, S 
and T are domestic, T is owned by a U.S. person, and any dividend 
received by P from S under the 2008 regulations would not be subject to 
U.S. tax as a result of an applicable treaty. The commentator noted 
that if the dividend in such a case exceeds the amount of gain that 
would otherwise be recognized under section 367(a)(1), it may not be 
appropriate for the 2008 regulations to apply in lieu of section 
367(a)(1) and Sec.  1.367(a)-3(c).
    The IRS and Treasury Department recognize that in some cases it may 
be appropriate for the priority rule to take into account the amount of 
resulting U.S. tax. However, the IRS and Treasury Department do not 
believe it would be administrable to take into account the resulting 
U.S. tax in all cases, because this could require consideration of

[[Page 28891]]

numerous tax attributes of various parties, including P, S, and the 
shareholders of T. To address this concern, the scope of the final 
regulations is modified such that the final regulations do not apply in 
two additional cases. First, the final regulations do not apply if P 
and S are foreign corporations and neither P nor S is a controlled 
foreign corporation (within the meaning of Sec.  1.367(b)-2(a)) 
immediately before or immediately after the triangular reorganization. 
Second, the final regulations do not apply if: (1) P is a foreign 
corporation; (2) S is a domestic corporation; (3) P's receipt of a 
dividend from S would not be subject to U.S. tax under either section 
881 (for example, by reason of an applicable treaty) or section 882; 
and (4) P's stock in S is not a United States real property interest 
(within the meaning of section 897(c)).
    In addition, the final regulations modify the scope of the 2008 
regulations to include the acquisition by S, in exchange for property, 
of P securities that are used to acquire the stock, securities, or 
property of T in the triangular reorganization, but only to the extent 
the P securities are treated by T shareholders or securityholders as 
``other property'' under section 356(d). The scope was expanded to 
include P securities because the acquisition of P securities by S for 
property presents the same repatriation concerns as the acquisition of 
P stock by S for property. Furthermore, the scope of the 2008 
regulations is modified to provide that the final regulations apply to 
the acquisition by S, in exchange for property, of P stock to the 
extent such P stock is received by T shareholders or securityholders in 
an exchange to which section 354 or 356 applies.
    Finally, the final regulations modify the priority rule contained 
in the 2008 regulations in three ways. First, the priority rule is 
modified to include exchanges of T securities as well as T stock. 
Second, the priority rule is modified to compare the amount of gain 
that would be recognized under section 367(a)(1) with not only the 
amount of the deemed dividend but also the amount of any gain (applying 
section 301(c)(1) and (3), respectively). Third, the priority rule is 
modified to clarify its application by providing separate priority 
rules in Sec.  1.367(a)-3(a) and Sec.  1.367(b)-10.
    Thus, under the Sec.  1.367(a)-3(a) priority rule, as modified, if 
the amount of gain in the T stock or securities that would otherwise be 
recognized by the T shareholders or securityholders under section 
367(a)(1) (without regard to any exceptions to section 367(a)(1)) is 
less than the sum of the amount of deemed dividend and the amount of 
gain (applying section 301(c)(1) and (3), respectively) under the final 
regulations, section 367(a)(1) does not apply to the section 354 or 356 
exchange by the T shareholders or securityholders of the T stock or 
securities for P stock or securities. Under the Sec.  1.367(b)-10 
priority rule, if the amount of gain recognized by the T shareholders 
or securityholders under section 367(a)(1) (taking into account any 
exception to section 367(a)(1) that is applied) on the section 354 or 
356 exchange of T stock or securities exceeds the sum of the amount of 
deemed dividend and the amount of gain (applying section 301(c)(1) and 
(3), respectively) if the final regulations otherwise applied to the 
triangular reorganization, then the final regulations do not apply.

B. Application If T Is Unrelated to P or S

    The 2008 regulations apply regardless of whether T is related to P 
or S. Some commentators asserted that the 2008 regulations should not 
apply if T is unrelated to P or S because there is no reduction in S's 
net worth (that is, S replaces its cash with an equal amount of P 
stock). The commentators further stated that, unlike transactions in 
which T is related to P or S, the consideration paid for an unrelated T 
is delivered outside of the P group. The commentators also noted that 
if T is unrelated to P and S, the transaction is distinguishable from a 
transaction subject to section 304, the application of which may result 
in a distribution even if the value of the distributing corporation is 
not diminished as a result of the transaction.
    The IRS and Treasury Department believe that transactions in which 
T is unrelated to P and S present the same concerns, because S's 
purchase of P stock (or P securities under the final regulations) in 
the context of a reorganization allows for a transfer of property from 
S to P that has the effect of a distribution regardless of whether T is 
related to P or S prior to the transaction. Accordingly, the comment 
was not adopted.

C. Adjustments Having the Effect of a Distribution or Contribution

    If the 2008 regulations apply to a triangular reorganization, 
adjustments are made under section 367(b) having the effect of a 
distribution of property from S to P under section 301 (deemed 
distribution). In certain cases, the 2008 regulations similarly provide 
that adjustments are made under section 367(b) that have the effect of 
a contribution of property by P to S (deemed contribution). The 2008 
regulations also provide for collateral adjustments to be made to take 
into account the deemed distribution and deemed contribution.
    Some commentators questioned the extent to which these adjustments 
should be made. In response to these comments, the final regulations 
make clear that the adjustments are made based on a distribution or 
contribution of a notional amount, and therefore without the 
recognition of any built-in gain or loss on the distribution of such 
notional amount. The notional amount is equal to the amount of money 
transferred and liabilities assumed plus the fair market value of other 
property transferred, in connection with the triangular reorganization, 
by S in exchange for the P stock or securities used to acquire the 
stock, securities or property of T. In addition, the final regulations 
clarify that the adjustments that have the effect of a deemed 
distribution or deemed contribution do not affect the characterization 
of the actual transaction as provided under applicable tax provisions. 
Thus, for example, if S uses property with a built-in gain to acquire P 
stock from P, S's exchange of the property for P stock is not affected 
by the regulations. Instead, the regulations require adjustments based 
on a deemed distribution and deemed contribution of the notional amount 
that occur apart from, and in addition to, S exchanging the built-in 
gain property for the P stock. Accordingly, S would not recognize gain 
under section 311(b) with respect to the notional amount. Furthermore, 
S's exchange of the property would continue to be treated as an 
exchange subject to section 1001 in which S recognizes the built-in 
gain.

D. Timing Rules for Deemed Distributions

    The 2008 regulations provide rules that address the timing of the 
deemed distribution resulting from the application of the general rule. 
The 2008 regulations contain separate timing rules for transactions 
involving acquisitions of P stock from P and for acquisitions of P 
stock from persons other than P. The IRS and Treasury Department do not 
believe separate timing rules are necessary. Thus, the final 
regulations combine the two timing rules set forth in the 2008 
regulations into a single rule that applies regardless of the person 
from whom the P stock or securities are acquired.
    The 2008 regulations also contain a special timing rule if P does 
not control

[[Page 28892]]

S at the time S purchases the P stock. The final regulations retain the 
special timing rule contained in the 2008 regulations that applies if P 
does not control S at the time S purchases the P stock or securities.

E. Other Modifications

1. Definition of Property
    The definition of property in the 2008 regulations is modified in 
the final regulations to include rights (for example, options) to 
acquire S stock to the extent such rights are used by S to acquire P 
stock or securities from a person other than P.
2. Deemed Contribution When S Acquires P Stock From P
    The 2008 regulations contain a deemed contribution rule only where 
S acquires P stock from persons other than P. The final regulations 
provide a similar rule in cases where S acquires the P stock or 
securities from P.
3. Section 1.367(a)-3(a)
    In addition to including a priority rule in Sec.  1.367(a)-3(a), 
the final regulations modify the format and organization of Sec.  
1.367(a)-3(a). The final regulations also clarify Sec.  1.367(a)-3(a) 
to provide that exchanges that are subject to section 367(a)(1) (absent 
an applicable exception) result in the recognition of gain, as opposed 
to being ``treated as a taxable exchange'' (as is provided in the 
current regulations).

Effective/Applicability Dates

    These final regulations apply to transactions occurring on or after 
May 17, 2011. For transactions that occur prior to May 17, 2011, see 
Sec.  1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 
2011.

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 is hereby certified that these regulations will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. This 
certification is based on the fact that the regulations will primarily 
affect large multi-national corporations that engage in triangular 
reorganizations subject to the regulations. The regulations apply to 
triangular reorganizations, involving one or more foreign corporations, 
to the extent that, in connection with the reorganization, the 
acquiring corporation purchases, in exchange for property, all or a 
portion of the stock or securities used to acquire the stock, 
securities or property of the target corporation. Therefore, the IRS 
and Treasury Department expect only a de minimis number of small 
business entities to be subject to the regulations. Pursuant to section 
7805(f) of the Code, this regulation has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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(b)(2)(i)(C) and 1.367(b)-14T, 
revising the entry for Sec.  1.367(a)-3, and adding an entry for Sec.  
1.367(b)-10 in numerical order to read, in part, as follows:

    Authority:  26 U.S.C. 7805 * * *.
    Section 1.367(a)-3 also issued under 26 U.S.C. 367(a). Section 
1.367(b)-10 also issued under 26 U.S.C. 367(b). * * *


0
Par. 2. Section 1.367(a)-3 is amended by revising paragraph (a), 
removing paragraph (g)(1)(vii), redesignating paragraph (g)(1)(viii) as 
paragraph (g)(1)(vii) and adding new paragraph (g)(1)(viii) to read as 
follows:


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

    (a) In general--(1) Overview. This section provides rules 
concerning the transfer of stock or securities by a U.S. person to a 
foreign corporation in an exchange described in section 367(a)(1). In 
general, a transfer of stock or securities (including an indirect stock 
transfer described in paragraph (d) of this section) by a U.S. person 
to a foreign corporation that is described in section 351, 354 
(including a section 354 exchange pursuant to a reorganization 
described in section 368(a)(1)(B)), 356, or section 361(a) or (b) is 
subject to section 367(a)(1). Therefore, gain is recognized on such a 
transfer unless one of the exceptions set forth in paragraph (a)(2) of 
this section (regarding general exceptions for certain exchanges of 
stock or securities), paragraph (b) of this section (regarding 
transfers of foreign stock or securities), paragraph (c) of this 
section (regarding transfers of domestic stock or securities), or 
paragraph (e) of this section (regarding transfers of stock or 
securities in a section 361 exchange) applies to the transfer. For 
rules applicable when, pursuant to section 304(a)(1), a U.S. person is 
treated as transferring stock of a domestic or foreign corporation to a 
foreign corporation in exchange for stock of such foreign corporation 
in a transaction to which section 351(a) applies, see Sec.  1.367(a)-
9T.
    (2) Exceptions for certain exchanges of stock or securities. Unless 
otherwise provided, the following exchanges are not subject to section 
367(a)(1) and therefore gain is not recognized under section 367(a)(1).
    (i) Section 368(a)(1)(E) reorganizations. In an exchange under 
section 354 or 356, a U.S. person exchanges stock or securities of a 
foreign corporation in a reorganization described in section 
368(a)(1)(E).
    (ii) Certain section 368(a)(1) asset reorganizations. In an 
exchange under section 354 or 356, a U.S. person exchanges stock or 
securities of a domestic or foreign corporation pursuant to an asset 
reorganization that is not treated as an indirect stock transfer under 
paragraph (d) of this section. See paragraph (d)(3) Example 16 of this 
section. For purposes of this section, an asset reorganization is 
defined as a reorganization described in section 368(a)(1) involving a 
transfer of property under section 361.
    (iii) Certain reorganizations described in sections 368(a)(1)(A) 
and (a)(2)(E). If, in an exchange described in section 361, a domestic 
merging corporation transfers stock of a controlling corporation to a 
foreign surviving corporation in a reorganization described in section 
368(a)(1)(A) and (a)(2)(E), the stock of the controlling corporation 
transferred in such section 361 exchange is not subject to section 
367(a)(1) if the stock of the controlling corporation is provided to 
the merging corporation by the controlling corporation pursuant to the 
plan of reorganization. However, a section 361 exchange of other 
property, including stock of the controlling corporation not provided 
by the controlling corporation pursuant to the plan of reorganization, 
by the domestic merging corporation to

[[Page 28893]]

the foreign surviving corporation pursuant to such a reorganization is 
described in section 367(a)(1) and therefore subject to section 
367(a)(1) unless an exception to section 367(a)(1) applies.
    (iv) Certain triangular reorganizations described in Sec.  
1.367(b)-10. If, in an exchange under section 354 or 356, one or more 
U.S. persons exchange stock or securities of T (as defined in Sec.  
1.358-6(b)(1)(iii)) in connection with a transaction described in Sec.  
1.367(b)-10 (applying to certain acquisitions of parent stock or 
securities for property in triangular reorganizations), section 
367(a)(1) shall not apply to such U.S. persons with respect to the 
exchange of the stock or securities of T if the condition specified in 
this paragraph (iv) is satisfied. The condition specified in this 
paragraph (iv) is that the amount of gain in the T stock or securities 
that would otherwise be recognized under section 367(a)(1) (without 
regard to any exceptions thereto) pursuant to the indirect stock 
transfer rules of paragraph (d) of this section is less than the sum of 
the amount of the deemed distribution under Sec.  1.367(b)-10 treated 
as a dividend under section 301(c)(1) and the amount of such deemed 
distribution treated as gain from the sale or exchange of property 
under section 301(c)(3). See Sec.  1.367(b)-10(a)(2)(iii) (providing a 
similar rule that excludes certain transactions from the application of 
Sec.  1.367(b)-10).
    (3) Cross-references. For rules regarding other indirect or 
constructive transfers of stock or securities subject to section 
367(a)(1) (unless an exception applies) see Sec.  1.367(a)-1T(c). For 
additional rules regarding a transfer of stock or securities in an 
exchange described in section 361(a) or (b), see section 367(a)(5) and 
any regulations under that section. For special basis and holding 
period rules involving foreign corporations that are parties to certain 
triangular reorganizations under section 368(a)(1), see Sec.  1.367(b)-
13. For additional rules relating to certain nonrecognition exchanges 
involving a foreign corporation, see section 367(b) and the regulations 
under that section. For rules regarding reporting requirements with 
respect to transfers described under section 367(a), see section 6038B 
and the regulations thereunder. For rules related to expatriated 
entities, see section 7874 and the regulations thereunder.
* * * * *
    (g) * * *
    (1) * * *
    (viii) Paragraph (a)(2)(iv) of this section applies to exchanges 
occurring on or after May 17, 2011. For exchanges that occur prior to 
May 17, 2011, see Sec.  1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR 
part 1 revised as of April 1, 2011.
* * * * *


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

0
Par. 3. Section 1.367(a)-3T is removed.

0
Par. 4. Section 1.367(b)-0 is amended by:
0
1. Revising the introductory text.
0
2. Removing the entry for Sec.  1.367(b)-2(d)(3)(ii), and redesignating 
the entries for Sec.  1.367(b)-2(d)(3)(iii), (d)(3)(iii)(A), and 
(d)(3)(iii)(B) as Sec.  1.367(b)-2(d)(3)(ii), (d)(3)(ii)(A), and 
(d)(3)(ii)(B) respectively.
0
3. Revising the entry for Sec.  1.367(b)-4(b)(1)(i), redesignating the 
entry for Sec.  1.367(b)-4(b)(1)(ii) as the entry for Sec.  1.367(b)-
4(b)(1)(iii), and adding a new entry for Sec.  1.367(b)-4(b)(1)(ii).
0
4. Revising the entries for Sec.  1.367(b)-4(d)(1) and (2), and 
removing the entry for Sec.  1.367(b)-4(d)(3).
0
5. Adding entries for Sec.  1.367(b)-10.
0
6. Adding entries for Sec.  1.367(b)-13.
    The revisions and additions read as follows:


Sec.  1.367(b)-0  Table of contents.

    This section lists the paragraphs contained in Sec. Sec.  1.367(b)-
1 through 1.367(b)-13.
* * * * *
Sec.  1.367(b)-4 Acquisition of foreign corporate stock or assets by 
a foreign corporation in certain nonrecognition transactions.
* * * * *
    (b) * * *
    (1) * * *
    (i) General rule.
    (ii) Exception.
* * * * *
    (d) * * *
    (1) Rule.
    (2) Example.
Sec.  1.367(b)-10 Acquisition of parent stock or securities for 
property in triangular reorganizations.
    (a) In general.
    (1) Scope.
    (2) Exceptions.
    (3) Definitions.
    (b) General rules.
    (1) Deemed distribution.
    (2) Deemed contribution.
    (3) Timing of deemed distribution and deemed contribution.
    (4) Application of other provisions.
    (5) Example.
    (c) Collateral adjustments.
    (1) Deemed distribution.
    (2) Deemed contribution.
    (d) Anti-abuse rule.
    (e) Effective/applicability date.
Sec.  1.367(b)-13 Special rules for determining basis and holding 
period.
    (a) Scope and definitions.
    (1) Scope.
    (2) Definitions.
    (b) Determination of basis for exchanges of foreign stock or 
securities under section 354 or 356.
    (c) Determination of basis and holding period for triangular 
reorganizations.
    (1) Application.
    (2) Basis and holding period rules.
    (i) Portions attributable to S stock.
    (ii) Portions attributable to T stock.
    (d) Special rules applicable to divided shares of stock.
    (1) In general.
    (2) Pre-exchange earnings and profits.
    (3) Post-exchange earnings and profits.
    (e) Examples.
    (f) Effective date.


0
Par. 5. Section 1.367(b)-10 is added to read as follows:


Sec.  1.367(b)-10  Acquisition of parent stock or securities for 
property in triangular reorganizations.

    (a) In general--(1) Scope. Except as provided in paragraphs 
(a)(2)(i) through (iii) of this section, this section applies to a 
triangular reorganization if P or S (or both) is a foreign corporation 
and, in connection with the reorganization, S acquires in exchange for 
property all or a portion of the P stock or P securities (P 
acquisition) that are used to acquire the stock, securities or property 
of T in the triangular reorganization. This section applies to a 
triangular reorganization regardless of whether P controls (within the 
meaning of section 368(c)) S at the time of the P acquisition.
    (2) Exceptions. This section shall not apply if--
    (i) P and S are foreign corporations and neither P nor S is a 
controlled foreign corporation (within the meaning of Sec.  1.367(b)-
2(a)) immediately before or immediately after the triangular 
reorganization;
    (ii) S is a domestic corporation, P's stock in S is not a United 
States real property interest (within the meaning of section 897(c)), 
and P would not be subject to U.S. tax on a dividend (as determined 
under section 301(c)(1)) from S under either section 881 (for example, 
by reason of an applicable treaty) or section 882; or
    (iii) In an exchange under section 354 or 356, one or more U.S. 
persons exchange stock or securities of T and the amount of gain in the 
T stock or securities recognized by such U.S. persons under section 
367(a)(1) is equal to or greater than the sum of the amount of the 
deemed distribution that would be treated by P as a dividend under 
section 301(c)(1) and the amount of such deemed distribution that would 
be treated by P as gain from the sale or exchange of property under 
section 301(c)(3) if this section would otherwise

[[Page 28894]]

apply to the triangular reorganization. See Sec.  1.367(a)-3(a)(2)(iv) 
(providing a similar rule that excludes certain transactions from the 
application of section 367(a)(1)).
    (3) Definitions. For purposes of this section, the following 
definitions apply:
    (i) The terms P, S, and T have the meanings set forth in Sec.  
1.358-6(b)(1)(i), (ii), and (iii), respectively.
    (ii) The term property has the meaning set forth in section 317(a), 
except that the term property also includes--
    (A) A liability assumed by S to acquire the P stock or securities; 
and
    (B) S stock (or any rights to acquire S stock) to the extent such S 
stock (or rights to acquire S stock) is used by S to acquire P stock or 
securities from a person other than P.
    (iii) The term security means an instrument that constitutes a 
security for purposes of section 354 or 356.
    (iv) The term triangular reorganization has the meaning set forth 
in Sec.  1.358-6(b)(2).
    (b) General rules--(1) Deemed distribution. If this section 
applies, adjustments shall be made that have the effect of a 
distribution of property (with no built-in gain or loss) from S to P 
under section 301 (deemed distribution). The amount of the deemed 
distribution shall equal the sum of the amount of money transferred by 
S, the amount of any liabilities that are assumed by S and constitute 
property, and the fair market value of other property transferred by S 
in the P acquisition in exchange for the P stock or P securities 
described in paragraph (i) or (ii), respectively, of this paragraph 
(b)(1)--
    (i) P stock received by T shareholders or securityholders in an 
exchange to which section 354 or 356 applies.
    (ii) P securities received by T shareholders or securityholders to 
the extent such securities are ``other property'' (within the meaning 
of section 356(d)).
    (2) Deemed contribution. If this section applies, adjustments shall 
be made that have the effect of a contribution of property (with no 
built-in gain or loss) by P to S in an amount equal to the amount of 
the deemed distribution from S to P under paragraph (b)(1) of this 
section (deemed contribution).
    (3) Timing of deemed distribution and deemed contribution. If P 
controls (within the meaning of section 368(c)) S at the time of the P 
acquisition, the adjustments described in paragraphs (b)(1) and (2) of 
this section shall be made as if the deemed distribution and deemed 
contribution, respectively, are separate transactions occurring 
immediately before the P acquisition. If P does not control (within the 
meaning of section 368(c)) S at the time of the P acquisition, the 
adjustments described in paragraphs (b)(1) and (2) of this section 
shall be made as if the deemed distribution and deemed contribution, 
respectively, are separate transactions occurring immediately after P 
acquires control of S, but prior to the triangular reorganization.
    (4) Application of other provisions. Nothing in this section shall 
prevent the application of other provisions of the Internal Revenue 
Code from applying to the P acquisition. For example, section 304 may 
apply to the P acquisition. Furthermore, section 1001 or 267 may apply 
to S's transfer of property to acquire P stock or securities from P or 
a person other than P. In addition, generally applicable provisions 
that apply to triangular reorganizations, such as Sec.  1.358-6 and 
Sec.  1.1032-2, shall apply to the triangular reorganization in a 
manner consistent with S acquiring the P stock or securities in 
exchange for property from P or a person other than P, as the case may 
be.

    (5) Example. The rules of this paragraph (b) are illustrated by the 
following example:
    (i) Facts. P, a publicly traded domestic corporation, owns all 
of the outstanding stock of FS, a foreign corporation, and all of 
the outstanding stock of US1, a domestic corporation that is a 
member of the P consolidated group. US1 owns all of the outstanding 
stock of FT, a foreign corporation, the fair market value of which 
is $100x. US1's basis in the FT stock is $100x, such that there is a 
no built-in gain or loss in the FT stock. FS has earnings and 
profits in excess of $100x. FS purchases $100x of P stock from the 
public on the open market in exchange for $100x of cash. Pursuant to 
foreign law, FT merges with and into FS in a triangular 
reorganization that qualifies under section 368(a)(1)(A) by reason 
of section 368(a)(2)(D). In an exchange to which section 354 
applies, US1 exchanges all the outstanding stock of FT for the $100x 
of P stock purchased by FS on the open market.
    (ii) Analysis. The triangular reorganization is described in 
paragraph (a)(1) of this section. P is a domestic corporation and FS 
is a foreign corporation. In connection with FS purchasing the $100x 
of P stock in exchange for property (cash), FS uses the P stock to 
acquire the FT property in a triangular reorganization, and US1 
receives the P stock in an exchange to which section 354 applies. 
Furthermore, none of the exceptions of paragraphs (a)(2)(i) through 
(iii) of this section apply. Therefore, pursuant to paragraph (b)(1) 
of this section, adjustments are made that have the effect of a 
deemed distribution of property (with no built-in gain or loss) in 
the amount of $100x from FS to P under section 301. Pursuant to 
paragraph (b)(2) of this section, adjustments are made that have the 
effect of a deemed contribution of property (with no built-in gain 
or loss) in the amount of $100x by P to FS. Pursuant to paragraph 
(b)(3) of this section, the adjustments described in paragraphs 
(b)(1) and (2) of this section are made as if the deemed 
distribution and deemed contribution, respectively, are separate 
transactions occurring immediately before FS's purchase of the P 
stock on the open market. Generally applicable provisions apply to 
FS's purchase of the P stock on the open market (see, for example, 
section 304) and in determining certain tax consequences to P and FS 
as a result of the triangular reorganization (see, for example, 
Sec.  1.358-6(d) and Sec.  1.1032-2(c)).
    (c) Collateral adjustments. This paragraph (c) provides additional 
rules that apply by reason of the deemed distribution and deemed 
contribution described in paragraphs (b)(1) and (b)(2), respectively, 
of this section.
    (1) Deemed distribution. A deemed distribution described in 
paragraph (b)(1) of this section shall be treated as occurring for all 
purposes of the Internal Revenue Code. Thus, for example, the ordering 
rules of section 301(c) apply to characterize the deemed distribution 
to P as a dividend from the earnings and profits of S, return of stock 
basis, or gain from the sale or exchange of property, as the case may 
be. Furthermore, sections 902 or 959 may apply to the deemed 
distribution if S is a foreign corporation, and sections 881, 882, 897, 
1442, or 1445 may apply to the deemed distribution if S is a domestic 
corporation. Appropriate corresponding adjustments shall be made to S's 
earnings and profits consistent with the principles of section 312.
    (2) Deemed contribution. A deemed contribution described in 
paragraph (b)(2) of this section shall be treated as occurring for all 
purposes of the Internal Revenue Code. Thus, for example, appropriate 
adjustments shall be made to P's basis in the S stock.
    (d) Anti-abuse rule. Appropriate adjustments shall be made pursuant 
to this section if, in connection with a triangular reorganization, a 
transaction is engaged in with a view to avoid the purpose of this 
section. For example, if S is created, organized, or funded to avoid 
the application of this section with respect to the earnings and 
profits of a corporation related (within the meaning of section 267(b)) 
to P or S, the earnings and profits of S will be deemed to include the 
earnings and profits of such related corporation for purposes of 
determining the consequences of the adjustments provided in this 
section, and appropriate corresponding adjustments will be made to 
account for the application of this section to the earnings and profits 
of such related corporation.

[[Page 28895]]

    (e) Effective/applicability date. This section applies to 
triangular reorganizations occurring on or after May 17, 2011. For 
triangular reorganizations that occur prior to May 17, 2011, see Sec.  
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.


Sec.  1.367(b)-14T  [Removed]

0
Par. 6. Section 1.367(b)-14T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: May 11, 2011.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-12279 Filed 5-17-11; 11:15 am]
BILLING CODE 4830-01-P