[Federal Register Volume 77, Number 247 (Wednesday, December 26, 2012)]
[Rules and Regulations]
[Pages 75844-75845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30967]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9606]
RIN 1545-BI13


Use of Controlled Corporations To Avoid the Application of 
Section 304

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations addressing sales of 
stock between related corporations. The regulations finalize proposed 
regulations and remove temporary regulations that apply to certain 
sales of stock that are recharacterized as contributions and 
redemptions, but that are structured with a principal purpose of 
redesignating the issuing corporation or the acquiring corporation. The 
regulations affect persons treated as receiving distributions in 
redemption of stock as a result of such transactions.

DATES: Effective Date: These regulations are effective on December 26, 
2012.
    Applicability Date: These regulations apply to acquisitions of 
stock occurring on or after December 29, 2009.

FOR FURTHER INFORMATION CONTACT: Ryan A. Bowen, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 30, 2009, the IRS and the Treasury Department published 
final and temporary regulations and a notice of proposed rulemaking by 
cross-reference to temporary regulations in the Federal Register (74 FR 
69021, TD 9477, 2010-1 CB 385; REG-132232-08, 74 FR 69043) (2009 
regulations) under section 304. A correction to the 2009 regulations 
was published in the Federal Register on February 26, 2010 (75 FR 
8796). The 2009 regulations amended the anti-abuse rule of Sec.  1.304-
4T, which was published in the Federal Register on June 14, 1988 (TD 
8209), to address transactions that are subject to section 304 but are 
structured with a principal purpose of avoiding the application of 
section 304 to certain corporations. No public hearing on the 2009 
regulations was requested or held, and no written comments were 
received. Accordingly, this Treasury decision adopts the 2009 
regulations without change as final regulations and removes the 
temporary regulations under section 304.

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) and (d) of the Administrative Procedure 
Act (5 U.S.C. Chapter 6) do not apply to these regulations. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. Chapter 6), 
it is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities. These 
regulations primarily will affect large corporations. Thus, the number 
of affected small entities will not be substantial. Pursuant to section 
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking 
preceding this regulation was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comments on its 
impact on small business.

Drafting Information

    The principal author of the regulations is Ryan A. Bowen 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 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 continues to read in 
part as follows:


[[Page 75845]]


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


0
Par. 2. Section 1.304-4 is revised to read as follows:


Sec.  1.304-4  Special rules for the use of related corporations to 
avoid the application of section 304.

    (a) Scope and purpose. This section applies to determine the amount 
of a property distribution constituting a dividend (and the source 
thereof) under section 304(b)(2), for certain transactions involving 
controlled corporations. The purpose of this section is to prevent the 
avoidance of the application of section 304 to a controlled 
corporation.
    (b) Amount and source of dividend. For purposes of determining the 
amount constituting a dividend (and source thereof) under section 
304(b)(2), the following rules shall apply:
    (1) Deemed acquiring corporation. A corporation (deemed acquiring 
corporation) shall be treated as acquiring for property the stock of a 
corporation (issuing corporation) acquired for property by another 
corporation (acquiring corporation) that is controlled by the deemed 
acquiring corporation, if a principal purpose for creating, organizing, 
or funding the acquiring corporation by any means (including through 
capital contributions or debt) is to avoid the application of section 
304 to the deemed acquiring corporation. See paragraph (c) Example 1 of 
this section for an illustration of this paragraph.
    (2) Deemed issuing corporation. The acquiring corporation shall be 
treated as acquiring for property the stock of a corporation (deemed 
issuing corporation) controlled by the issuing corporation if, in 
connection with the acquisition for property of stock of the issuing 
corporation by the acquiring corporation, the issuing corporation 
acquired stock of the deemed issuing corporation with a principal 
purpose of avoiding the application of section 304 to the deemed 
issuing corporation. See paragraph (c) Example 2 of this section for an 
illustration of this paragraph.
    (c) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i) Facts. P, a domestic corporation, wholly owns 
CFC1, a controlled foreign corporation with substantial accumulated 
earnings and profits. CFC1 is organized in Country X, which imposes 
a high rate of tax on the income of CFC1. P also wholly owns CFC2, a 
controlled foreign corporation with accumulated earnings and profits 
of $200x. CFC2 is organized in Country Y, which imposes a low rate 
of tax on the income of CFC2. P wishes to own all of its foreign 
corporations in a direct chain and to repatriate the cash of CFC2. 
In order to avoid having to obtain Country X approval for the 
acquisition of CFC1 (a Country X corporation) by CFC2 (a Country Y 
corporation) and to avoid the dividend distribution from CFC2 to P 
that would result if CFC2 were the acquiring corporation, P causes 
CFC2 to form CFC3 in Country X and to contribute $100x to CFC3. CFC3 
then acquires all of the stock of CFC1 from P for $100x.
    (ii) Result. Because a principal purpose for creating, 
organizing, or funding CFC3 (acquiring corporation) is to avoid the 
application of section 304 to CFC2 (deemed acquiring corporation), 
under paragraph (b)(1) of this section, for purposes of determining 
the amount of the $100x distribution constituting a dividend (and 
source thereof) under section 304(b)(2), CFC2 shall be treated as 
acquiring the stock of CFC1 (issuing corporation) from P for $100x. 
As a result, P receives a $100x distribution out of the earnings and 
profits of CFC2 to which section 301(c)(1) applies.
    Example 2. (i) Facts. P, a domestic corporation, wholly owns 
CFC1, a controlled foreign corporation with substantial accumulated 
earnings and profits. The CFC1 stock has a basis of $100x. CFC1 is 
organized in Country X. P also wholly owns CFC2, a controlled 
foreign corporation with zero accumulated earnings and profits. CFC2 
is organized in Country Y. P wishes to own all of its foreign 
corporations in a direct chain and to repatriate the cash of CFC2. 
In order to avoid having to obtain Country X approval for the 
acquisition of CFC1 (a Country X corporation) by CFC2 (a Country Y 
corporation) and to avoid a dividend distribution from CFC1 to P, P 
forms a new corporation (CFC3) in Country X and transfers the stock 
of CFC1 to CFC3 in exchange for CFC3 stock. P then transfers the 
stock of CFC3 to CFC2 in exchange for $100x.
    (ii) Result. Because a principal purpose for the transfer of the 
stock of CFC1 (deemed issuing corporation) by P to CFC3 (issuing 
corporation) is to avoid the application of section 304 to CFC1, 
under paragraph (b)(2) of this section, for purposes of determining 
the amount of the $100x distribution constituting a dividend (and 
source thereof) under section 304(b)(2), CFC2 (acquiring 
corporation) shall be treated as acquiring the stock of CFC1 from P 
for $100x . As a result, P receives a $100x distribution out of the 
earnings and profits of CFC1 to which section 301(c)(1) applies.

    (d) Effective/applicability date. This section applies to 
acquisitions of stock occurring on or after December 29, 2009.


Sec.  1.304-4T  [Removed]

0
Par. 3. Section 1.304-4T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: December 12, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-30967 Filed 12-21-12; 8:45 am]
BILLING CODE 4830-01-P