[Federal Register Volume 76, Number 122 (Friday, June 24, 2011)]
[Rules and Regulations]
[Pages 36993-36995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-15741]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9530]
RIN 1545-BH56


Guidance Under Section 956 for Determining the Basis of Property 
Acquired in Certain Nonrecognition Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 956 of the Internal Revenue Code (Code) regarding the 
determination of basis in certain United States property acquired by a 
controlled foreign corporation in certain nonrecognition transactions 
that are intended to repatriate earnings and profits of the controlled 
foreign corporation without U.S. income taxation. The regulations 
affect United States shareholders of a controlled foreign corporation 
that acquires United States property in certain nonrecognition 
transactions.

DATES: Effective Date: These regulations are effective on June 24, 
2011.
    Applicability Date: For dates of applicability, see Sec.  1.956-
1(e)(6)(vii).

FOR FURTHER INFORMATION CONTACT: Kristine A. Crabtree at (202) 622-3840 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    On June 24, 2008, the IRS published final and temporary regulations 
under section 956 (TD 9402) in the Federal Register (73 FR 35580). On 
the same date, the IRS published a notice of proposed rulemaking (REG-
102122-08) (the proposed regulations) in the Federal Register (73 FR 
35606) cross-referencing the temporary regulations. The temporary and 
proposed regulations provided guidance regarding the determination of 
basis in certain United States property (as defined in section 956(c)) 
acquired by a controlled foreign corporation (as defined in section 
957(a)) in certain nonrecognition

[[Page 36994]]

transactions that are intended to repatriate earnings and profits of 
the controlled foreign corporation without an income inclusion by its 
United States shareholders under section 951(a)(1)(B). The purpose of 
these regulations is to prevent a United States shareholder of a 
controlled foreign corporation from avoiding an income inclusion under 
section 951(a)(1)(B) where the controlled foreign corporation acquires 
United States property in an exchange to which these regulations apply 
and claims a basis in the United States property that is less than the 
amount of earnings and profits repatriated. No comments in response to 
the proposed regulations were received and no public hearing was 
requested or held. This Treasury decision adopts the proposed 
regulations with minor changes, described below, as final regulations 
and removes the corresponding temporary regulations.
    Language was added to Sec.  1.956-1(e)(6)(iii) to clarify the 
effect of the assumption of a liability by a controlled foreign 
corporation in connection with an exchange to which Sec.  1.956-1(e)(6) 
applies. The final regulations also modify Sec.  1.956-1(e)(6)(v) to 
address the situation in which the controlled foreign corporation 
exchanges specified United States property the adjusted basis in which 
has been determined under Sec.  1.956-1(e)(6) for other United States 
property, by providing that for purposes of applying section 956 the 
controlled foreign corporation's adjusted basis in the other United 
States property is no less than its adjusted basis in the specified 
United States property as determined under Sec.  1.956-1(e)(6)(iii). A 
cross-reference to the anti-abuse rule of Sec.  1.956-1T(b)(4) was also 
added to Sec.  1.956-1(e)(6)(vi), Example 3.

Effective/Applicability Dates

    These final regulations apply to property acquired in exchanges 
occurring on or after June 24, 2011. For transactions that occur prior 
to June 24, 2011, see Sec.  1.956-1T(e)(6) 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 also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, these regulations have 
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 Kristine A. Crabtree, 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and the 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 adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.956-1(e)(6) also issued under 26 U.S.C. 367(b) and 
956(e).


0
Par. 2. Section 1.956-1 is amended by revising the last sentence of 
paragraph (e)(1), revising paragraphs (e)(5) and (e)(6), and removing 
paragraph (f).
    The revisions read as follows:


Sec.  1.956-1   Shareholder's pro rata share of a controlled foreign 
corporation's increase in earnings invested in United States property.

* * * * *
    (e) * * *
    (1) * * * See Sec.  1.956-1(e)(6) for a special rule for 
determining amounts attributable to United States property acquired as 
the result of certain nonrecognition transactions.
* * * * *
    (5) [Reserved]. For further guidance, see Sec.  1.956-1T(e)(5).
    (6) Adjusted basis of property acquired in certain nonrecognition 
transactions--(i) Scope. This paragraph (e)(6) provides rules for 
determining, solely for purposes of applying section 956, the adjusted 
basis of specified United States property acquired by a controlled 
foreign corporation pursuant to an exchange in which the controlled 
foreign corporation's basis in such specified United States property is 
determined under section 362(a). This paragraph (e)(6) also applies if 
specified United States property, the adjusted basis in which has been 
determined under these regulations, is transferred (in one or more 
subsequent exchanges) to a related person (within the meaning of 
section 954(d)(3)), pursuant to one or more exchanges in which the 
related person's adjusted basis in such property is determined, in 
whole or in part, by reference to the transferor controlled foreign 
corporation's adjusted basis in such property.
    (ii) Definition of specified United States property. For purposes 
of this paragraph (e)(6), specified United States property is stock of 
a domestic corporation described in section 956(c)(1)(B) or an 
obligation of a domestic corporation described in section 956(c)(1)(C) 
that is acquired by a controlled foreign corporation from the domestic 
issuing corporation. Specified United States property does not include 
property described in section 956(c)(2).
    (iii) Adjusted basis of specified United States property. Solely 
for purposes of applying section 956, the adjusted basis of specified 
United States property acquired by a controlled foreign corporation in 
connection with an exchange to which this paragraph (e)(6) applies 
shall be no less than the fair market value of any property transferred 
by the controlled foreign corporation in exchange for such specified 
United States property. For purposes of this paragraph (e)(6), the term 
property has the meaning set forth in section 317(a), but also includes 
any liability that is assumed by the controlled foreign corporation in 
connection with the exchange notwithstanding the application of section 
357(a). The assumption of a liability by the controlled foreign 
corporation in connection with the exchange will be considered the 
transfer of property. The fair market value of such property will be 
the amount of the liability assumed. The fair market value of any 
property transferred by the controlled foreign corporation in exchange 
for the specified United States property shall be determined at the 
time of the exchange.
    (iv) Timing. For purposes of Sec.  1.956-2(d)(1)(i)(a), a 
controlled foreign corporation that acquires specified United States 
property in an exchange to which this paragraph (e)(6) applies acquires 
an adjusted basis in such property at the time of the controlled 
foreign corporation's exchange of property for such specified United 
States property.
    (v) Transfers to related persons. If a controlled foreign 
corporation transfers specified United States property, the adjusted 
basis in which has been determined under this paragraph (e)(6), to a 
related person (within the meaning

[[Page 36995]]

of section 954(d)(3)) (related person transferee) in one or more 
exchanges pursuant to which the related person transferee's adjusted 
basis in such specified United States property is determined, in whole 
or in part, by reference to the controlled foreign corporation's 
adjusted basis in such specified United States property, then, solely 
for purposes of applying section 956 following such exchange, the 
controlled foreign corporation's adjusted basis in any United States 
property received in the exchange (or exchanges) shall be no less than 
the aggregate adjusted basis of the specified United States property as 
determined under paragraph (e)(6)(iii) of this section, and the related 
person transferee's adjusted basis in such specified United States 
property shall be no less than the adjusted basis of such specified 
United States property in the hands of the controlled foreign 
corporation as determined under paragraph (e)(6)(iii) of this section. 
This paragraph (e)(6)(v) shall also apply in the case of one or more 
successive transfers of the specified United States property by a 
related person transferee to one or more persons related to the 
controlled foreign corporation (within the meaning of section 
954(d)(3)). This paragraph (e)(6)(v) shall apply regardless of whether 
a subsequent transfer was part of a plan (or series of related 
transactions) that includes the controlled foreign corporation's 
acquisition of the specified United States property.
    (vi) Examples. The rules of this paragraph (e)(6) are illustrated 
by the following examples:

    Example 1.  (i) Facts. USP, a domestic corporation, is the 
common parent of an affiliated group that joins in the filing of a 
consolidated return. USP owns 100 percent of the stock of US1 and 
US2, both domestic corporations and members of the USP consolidated 
group. US1 owns 100 percent of the stock of CFC, a controlled 
foreign corporation. US2 issues $100x of its stock to CFC in 
exchange for $10x of CFC stock and $90x cash. US2's transfer of its 
stock to CFC is described in section 351, US2 recognizes no gain in 
the exchange under section 1032(a), and CFC's basis in the US2 stock 
acquired in the exchange is determined under section 362(a).
    (ii) Analysis. The US2 stock acquired by CFC in the exchange 
constitutes specified United States property under paragraph 
(e)(6)(ii) of this section because CFC acquires the US2 stock from 
US2, the issuing corporation. Therefore, because CFC's adjusted 
basis in the US2 stock is determined under section 362(a), then for 
purposes of applying section 956, CFC's adjusted basis in the US2 
stock shall, under paragraph (e)(6)(iii) of this section, be no less 
than $90x, the fair market value of the property exchanged by CFC 
for the US2 stock (the $10x of CFC stock issued in the exchange does 
not constitute property for purposes of paragraph (e)(6)(iii) of 
this section). Pursuant to paragraph (e)(6)(iv) of this section, for 
purposes of Sec.  1.956-2(d)(1)(i)(a) CFC shall be treated as 
acquiring its adjusted basis of no less than $90x in the US2 stock 
at the time of its transfer of property to US2 in exchange for the 
US2 stock. The result would be the same if, instead of CFC 
transferring $90x of cash to US2 in the exchange, CFC assumes a $90x 
liability of US2.
    Example 2. (i) Facts. USP, a domestic corporation, owns 100 
percent of the stock of USS, a domestic corporation. USP also owns 
100 percent of the stock of CFC, a controlled foreign corporation. 
USP's adjusted basis in its USS stock equals the fair market value 
of the USS stock, or $100x. USP transfers its USS stock to CFC in 
exchange for $100x of CFC stock. USP's transfer of its USS stock to 
CFC is described in section 351, USP recognizes no gain in the 
exchange under section 351(a), and CFC's adjusted basis in the USS 
stock acquired in the exchange, determined under section 362(a), 
equals $100x.
    (ii) Analysis. The USS stock acquired by CFC in the exchange 
does not constitute specified United States property under paragraph 
(e)(6)(ii) of this section because CFC acquires the USS stock from 
USP. Therefore, CFC's adjusted basis in the USS stock, for purposes 
of section 956, is not determined under this paragraph (e)(6). 
Instead, CFC's adjusted basis in the USS stock is determined under 
the general rule of section 956(a) and under paragraphs (e)(1) 
through (4) of this section. As determined under section 362(a), 
CFC's adjusted basis in the USS stock is $100x.
    Example 3. (i) Facts. USP, a domestic corporation, owns 100 
percent of the stock of CFC1, a controlled foreign corporation. CFC1 
holds specified United States property (within the meaning of 
paragraph (e)(6)(ii) of this section) with an adjusted basis of $30x 
for purposes of applying section 956 that was determined under 
paragraph (e)(6)(iii) of this section. CFC1 owns 100 percent of the 
stock of CFC2, a controlled foreign corporation. CFC1 transfers the 
specified United States property to CFC2 in an exchange described in 
section 351. CFC2's adjusted basis in the specified United States 
property is determined under section 362(a).
    (ii) Analysis. In the section 351 exchange, CFC1 transferred 
specified United States property to CFC2 with an adjusted basis that 
was determined under paragraph (e)(6)(iii) of this section. Further, 
CFC2's adjusted basis in the specified United States property is 
determined under section 362(a) by reference, in whole or in part, 
to CFC1's adjusted basis in such property. Therefore, for purposes 
of applying section 956, pursuant to paragraph (e)(6)(v) of this 
section CFC2's adjusted basis in the specified United States 
property shall be no less than $30x. Paragraph (e)(6)(v) of this 
section would also apply if CFC2 subsequently transfers the 
specified United States property to another person related to CFC1 
(within the meaning of section 954(d)(3)) if such related person's 
adjusted basis in the specified United States property is determined 
by reference, in whole or in part, to CFC2's adjusted basis in such 
property. See also Sec.  1.956-1T(b)(4) if one of the principal 
purposes of CFC1's transfer of property to CFC2 was the avoidance of 
the application of section 956 with respect to CFC1.

    (vii) Effective/applicability dates. This paragraph (e)(6) applies 
to property acquired in exchanges occurring on or after June 24, 2011. 
For transactions that occur prior to June 24, 2011, see Sec.  1.956-
1T(e)(6) as contained in 26 CFR Part 1 revised as of April 1, 2011.


0
Par. 3. Section 1.956-1T is amended by removing paragraph (e)(6) and 
revising paragraph (f) to read as follows:


Sec.  1.956-1T   Shareholder's pro rata share of a controlled foreign 
corporation's increase in earnings invested in United States property 
(temporary).

* * * * *
    (f) Effective/applicability date. Paragraph (e)(5) of this section 
applies to investments made on or after June 14, 1988.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 11, 2011.
Emily S. Mahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-15741 Filed 6-23-11; 8:45 am]
BILLING CODE 4830-01-P