[Federal Register Volume 78, Number 53 (Tuesday, March 19, 2013)]
[Rules and Regulations]
[Pages 17053-17065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05696]



  Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules 
and Regulations  

[[Page 17053]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9615]
RIN 1545-BJ75


Indirect Stock Transfers and the Coordination Rule Exceptions; 
Transfers of Stock or Securities in Outbound Asset Reorganizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations. These 
regulations eliminate one of two exceptions to the coordination rule 
between asset transfers and indirect stock transfers for certain 
outbound asset reorganizations. The regulations also modify the third 
exception to the coordination rule for certain outbound exchanges so 
that this exception is consistent with the remaining asset 
reorganization exception. In addition, the regulations modify, in 
various contexts, procedures for obtaining reasonable cause relief. 
Finally, the regulations implement certain changes with respect to 
transfers of stock or securities by a domestic corporation to a foreign 
corporation in a section 361 exchange. The regulations primarily affect 
domestic corporations that transfer property to foreign corporations in 
certain outbound nonrecognition exchanges. The text of these temporary 
regulations serves as the text of the proposed regulations (REG-132702-
10) published in the notice of proposed rulemaking on this subject in 
the Proposed Rules section of this issue of the Federal Register.

DATES: Effective Date: The final and temporary regulations are 
effective on March 19, 2013.
    Applicability Date: For dates of applicability, see Sec.  1.367(a)-
3T(g), Sec.  1.367(a)-6T(e)(4), 1.367(a)-7T(e)(2)(iv), 1.1248(f)-
3T(a)(3), and 1.6038B-1T(f)(3)(iii).

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

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in the 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 1545-2183.
    The collections of information are in Sec. Sec.  1.367(a)-3(d)(2), 
1.367(a)-3T(e)(3) and (e)(6), 1.367(a)-7T(e), 1.1248(f)-3T, and 1.6038-
1T(f). The collections of information are mandatory. The likely 
respondents are domestic corporations.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number. Books and records relating to a collection of 
information must be retained as long as their contents might 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 August 20, 2008, the Department of the Treasury (Treasury 
Department) and the Internal Revenue Service (IRS) issued proposed 
regulations under sections 367, 1248, and 6038B of the Internal Revenue 
Code (Code) (2008 proposed regulations) concerning transfers of 
property by a domestic corporation to a foreign corporation in an 
exchange described in section 361(a) or (b) (section 361 exchange), and 
certain nonrecognition distributions of stock of a foreign corporation 
by a domestic corporation (REG-209006-89, 73 FR 49278; 2008-41 IRB 
867). A correction to the 2008 proposed regulations was published in 
the Federal Register on September 26, 2008; 73 FR 56535 (2008-41 IRB 
867). No public hearing on the 2008 proposed regulations was requested 
or held; however, comments were received. All comments are available at 
www.regulations.gov or upon request. Based, in part, on comments 
received, the Treasury Department and the IRS adopt portions of the 
2008 proposed regulations, with modifications, as final regulations 
elsewhere in this issue of the Federal Register. A portion of the 2008 
proposed regulations is adopted, with modifications, in this Treasury 
decision as temporary regulations.
    On February 11, 2009, the Treasury Department and the IRS issued 
final regulations under section 367 (2009 final regulations) concerning 
gain recognition agreements with respect to certain transfers of stock 
or securities by United States persons to foreign corporations (TD 
9446, 74 FR 6952; 2009-9 IRB 607). A correction to the 2009 final 
regulations was published in the Federal Register on March 27, 2009 (74 
FR 13340; 2009-13 IRB 731). The 2009 final regulations included 
regulations addressing the transfer of stock or securities by a 
domestic corporation to a foreign corporation in a section 361 
exchange. The portion of the 2009 final regulations concerning outbound 
transfers of stock or securities in a section 361 exchange is 
withdrawn, revised, and issued in this Treasury decision as temporary 
regulations.

Explanation of Provisions

A. Coordination Rule and Exceptions--In General

    Section 1.367(a)-3(d)(2)(vi)(A) (coordination rule) provides that 
if in connection with an indirect stock transfer, as defined in Sec.  
1.367(a)-3(d)(1), a U.S. person transfers assets to a foreign 
corporation (direct asset transfer) in an exchange described in section 
351 or section 361, the rules of section 367 and the regulations under 
that section apply first to the direct asset transfer and then to the 
indirect stock transfer. There are three exceptions to the coordination 
rule, as described in this preamble.
    Two exceptions to the coordination rule provide that section 367(a) 
and (d) do not apply to any assets transferred by a domestic acquired 
corporation to a foreign acquiring corporation in an asset 
reorganization that are re-transferred to a domestic corporation that 
is controlled by the foreign acquiring corporation (domestic controlled 
corporation). These exceptions only apply, however, if the domestic 
controlled corporation's basis in the re-transferred assets is not 
greater than the domestic acquired corporation's basis in such assets 
(the basis comparison rule), and the conditions described in Sec.  
1.367(a)-3(d)(2)(vi)(B)(1)(i) (section 367(a)(5) exception) or 
(d)(2)(vi)(B)(1)(ii) (indirect domestic stock transfer exception) are 
satisfied. See Sec.  1.367(a)-3(d)(2)(vi)(B)(1). The section 367(a)(5) 
exception applies only if the reorganization satisfies the conditions 
described in section 367(a)(5) and any regulations issued pursuant to 
section 367(a)(5). For example, the domestic acquired corporation must 
be controlled (within the meaning of section 368(c)) by 5 or fewer 
domestic corporations, and basis adjustments must be made to the stock 
of the foreign acquiring corporation received in the reorganization. 
See Sec.  1.367(a)-7(c).
    The indirect domestic stock transfer exception applies only if the 
requirements of Sec.  1.367(a)-3(c)(1)(i), (c)(1)(ii), and (c)(1)(iv) 
are satisfied with respect to the indirect stock transfer of stock in 
the domestic acquired corporation, and certain filing requirements are 
satisfied.

[[Page 17054]]

    The third exception (section 351 exception) to the coordination 
rule applies if a U.S. person (U.S. transferor) transfers assets to a 
foreign corporation in a section 351 exchange, to the extent that such 
assets are transferred by such foreign corporation to a domestic 
corporation in another section 351 exchange. See Sec.  1.367(a)-
3(d)(2)(vi)(B)(2). Consistent with the section 367(a)(5) exception and 
the indirect domestic stock transfer exception, the section 351 
exception only applies if the domestic transferee's basis in the assets 
is not greater than the basis that the U.S. transferor had in such 
assets.

B. Notice 2008-10 and 2008 Proposed Regulations

    On December 28, 2007, the Treasury Department and the IRS issued 
Notice 2008-10 (2008-1 CB 277) in response to outbound asset 
reorganization transactions that relied on the section 367(a)(5) 
exception to repatriate earnings of a foreign corporation without the 
recognition of a corresponding amount of gain or income inclusion. 
Notice 2008-10 announced that the section 367(a) exception would be 
revised to clarify that any adjustment to basis required under section 
367(a)(5) can only be made to stock of the foreign acquiring 
corporation received by the controlling domestic corporate shareholders 
in the asset reorganization. In addition, the notice states that the 
revised regulations would confirm that to the extent the appropriate 
amount of built-in gain in the property transferred by the domestic 
acquired corporation cannot be preserved in the stock received by the 
controlling domestic corporate shareholders in the reorganization, the 
domestic acquired corporation's transfer of property to the foreign 
acquiring corporation is subject to section 367(a) and (d) (see Sec.  
601.601(d)(2)(ii)(b)).
    The 2008 proposed regulations would amend the current regulations 
to incorporate, with modifications, the clarifications to the section 
367(a)(5) exception announced in Notice 2008-10. In addition, the 
preamble to the 2008 proposed regulations states that the Treasury 
Department and the IRS continue to study transactions that have the 
effect of repatriating earnings and profits of a foreign corporation 
without the recognition of gain or a dividend inclusion.
    The 2008 proposed regulations also would modify the section 
367(a)(5) exception and the indirect domestic stock transfer exception 
to provide that for purposes of determining whether the domestic 
controlled corporation's basis in the re-transferred assets is not 
greater than the domestic acquired corporation's basis in such assets, 
any increase in basis that results from gain recognized by the domestic 
acquired corporation on the transfer of the re-transferred assets to 
the foreign acquiring corporation is not taken into account.

C. Elimination of Section 367(a)(5) Exception

    The Treasury Department and the IRS have become aware of additional 
transactions involving outbound asset reorganizations that involve the 
repatriation of earnings and profits of a foreign corporation where 
taxpayers take the position that the transaction does not require the 
recognition of gain or a dividend inclusion. These transactions, which 
rely on the section 367(a)(5) exception and are structured to avoid 
gain recognition under section 367(a), may not be affected by the 
clarifications made to the section 367(a)(5) exception in Notice 2008-
10. In one such transaction, for example, the foreign acquiring 
corporation issues stock and property other than qualified property 
(within the meaning of section 361(c)(2)(B)) in the reorganization and 
transfers property that is not eligible for an exception to section 
367(a)(1) (such as property used in the United States) to a domestic 
controlled corporation. The amount of stock issued by the foreign 
acquiring corporation is sufficient to preserve the built-in gain in 
the property transferred to it by the domestic acquired corporation in 
the section 361 exchange. Thus, the parties take the position that the 
section 367(a)(5) exception applies and that no gain is recognized on 
the transfer under section 367(a).
    Although these types of transactions are not directly covered by 
Notice 2008-10, they give rise to the same repatriation concerns that 
the notice was intended to address.
    The Treasury Department and the IRS have, over time, clarified and 
modified the coordination rule exceptions to address various 
transactions that give rise to policy concerns. See, for example, TD 
9243 (2006-1 CB 475) and Notice 2008-10. These transactions typically 
do not involve transactions with unrelated parties, but instead arise 
in connection with transactions with affiliates that appear to be 
primarily motivated to achieve U.S. tax benefits. After studying these 
issues further, including in light of the transactions discussed above, 
the Treasury Department and the IRS no longer believe the section 
367(a)(5) exception is appropriate. As a result, the section 367(a)(5) 
exception is eliminated by the temporary regulations. The indirect 
domestic stock transfer exception, however, which involves transactions 
between unrelated parties, is retained.
    The Treasury Department and the IRS continue to study 
nonrecognition transactions that are intended to repatriate earnings 
and profits of foreign corporations without the recognition of gain or 
a dividend inclusion.

D. Domestic Transferee's Basis in Assets for Purposes of the Section 
351 Exception

    In response to a comment, the temporary regulations modify the 
basis comparison rule in the section 351 exception so that it is 
consistent with the basis comparison rule in the indirect domestic 
stock transfer exception, as modified by the 2008 proposed regulations. 
Thus, the section 351 exception is modified in the temporary 
regulations to provide that for purposes of determining whether the 
domestic transferee's basis in the assets is not greater than the U.S. 
transferor's basis in the assets, any increase in basis that results 
from gain recognized by the U.S. transferor with respect to such assets 
in the initial section 351 exchange is not taken into account.

E. Transfers of Stock or Securities in an Outbound Section 361 Exchange

    The current final regulations under Sec.  1.367(a)-3(e) provide the 
general rule that the outbound transfer of stock or securities in a 
section 361 exchange is subject to section 367(a)(1), unless specified 
conditions are satisfied. One condition is that the requirements of 
section 367(a)(5) and any regulations thereunder must be satisfied. 
Another condition is that any control group member that owns (with 
attribution) five percent or more of the stock (by vote or value) of 
the transferee foreign corporation immediately after the transaction 
must enter into a gain recognition agreement with respect to the 
control group member's share of the gain (based on its ownership 
interest in the U.S. transferor) (GRA requirement).
    In connection with final regulations under section 367(a)(5), 
published elsewhere in this issue of the Federal Register, these 
temporary regulations make conforming modifications to the GRA 
requirement such that the five-percent ownership threshold is 
determined by reference to the U.S. transferor's ownership of the 
transferee foreign corporation (rather than by reference to ownership 
of the transferee foreign corporation by control group members). For 
this purpose, ownership is determined immediately after the U.S.

[[Page 17055]]

transferor's transfer of the stock or securities to the transferee 
foreign corporation in the section 361 exchange, but prior to and 
without taking into account the U.S. transferor's distribution under 
section 361(c) of the stock received. If the U.S. transferor meets the 
five-percent ownership threshold with respect to the transferee foreign 
corporation, then two conditions must be satisfied in order to be 
eligible to file a GRA. The first condition is that each shareholder of 
the U.S. transferor that is a ``qualified U.S. person'' (generally, any 
U.S. person except domestic partnerships or special corporate entities 
that are not subject to tax) and satisfies the five-percent ownership 
threshold must enter into a gain recognition agreement, unless the 
amount of gain that would otherwise be subject to the gain recognition 
agreement is zero. The gain recognition agreement is subject to rules 
in addition to those required under Sec.  1.367(a)-8, including special 
rules for determining the amount of gain subject to the gain 
recognition agreement. The second condition is that the U.S. transferor 
must recognize gain realized on the transferred stock or securities 
attributable to shareholders that are not qualified U.S. persons or do 
not satisfy the five-percent ownership threshold.
    The Treasury Department and the IRS believe that applying the five-
percent ownership threshold at the U.S. transferor-level is more 
consistent with the policy underlying gain recognition agreements. In 
addition, this change is consistent with the application of Sec.  
1.367(b)-4(b)(1) to outbound transfers of foreign stock in a section 
361 exchange. See Sec.  1.367(b)-4(b)(1)(iii), Example 4.
    Other changes to the current final regulations under Sec.  
1.367(a)-3(e) conform the rules under Sec.  1.367(a)-3T(e) with other 
provisions, such as the final regulations under Sec. Sec.  1.367(a)-7, 
1.367(b)-4, 1.1248(f)-1, and 1.1248(f)-2. For example, the regulations 
provide that Sec.  1.367(a)-3T(e) is applied prior to taking into 
account gain or deemed dividends under any other provisions of section 
367, such as under Sec. Sec.  1.367(a)-6T, 1.367(a)-7, or 1.367(b)-4.
    The other requirements necessary for nonrecognition under the 
current final regulations of Sec.  1.367(a)-3(e) are generally 
retained, with certain modifications. For example, if the transferred 
stock or securities are of a domestic corporation, the reporting 
requirements under Sec.  1.367(a)-3(c)(6) must be satisfied, in 
addition to the requirements under Sec.  1.367(a)-3(c)(1)(i), 
(c)(1)(ii), and (c)(1)(iv).

F. Coordination of Gain Recognition Rules

    In connection with final regulations under section 367(a)(5), 
published elsewhere in this issue of the Federal Register, these 
temporary regulations make a conforming modification to the current 
temporary regulations under Sec.  1.367(a)-6T by adding a sentence 
providing that the amount of gain recognized under the branch loss 
recapture rules is determined prior to determining the amount of any 
gain recognized under Sec.  1.367(a)-7. Accordingly, any gain 
recognized under the branch loss recapture rules is taken into account 
in determining the amount of any gain recognized under Sec.  1.367(a)-
7.

G. Reasonable Cause Relief Procedures

    The 2008 proposed regulations contain reasonable cause relief 
provisions in Sec.  1.367(a)-7(e)(2), Sec.  1.1248(f)-3, and Sec.  
1.6038B-1(f)(3) (reasonable cause procedures), pursuant to which a 
taxpayer's failure to timely comply with certain requirements will be 
deemed not to have occurred if the failure was due to reasonable cause 
and not willful neglect. These reasonable cause procedures include a 
provision that a taxpayer will be deemed to have established that the 
failure to comply was due to reasonable cause and not willful neglect 
if the taxpayer requesting relief is not notified by the IRS within 120 
days of IRS acknowledgement of receipt of the request. The Treasury 
Department and the IRS do not believe that the IRS's processing time 
with respect to a relief request should be a determining factor in 
whether a taxpayer has satisfied its filing obligations. Accordingly, 
these temporary regulations eliminate the 120-day provision from the 
reasonable cause procedures. Other than the elimination of the 120-day 
provision, the reasonable cause procedures are retained in the 
temporary regulations.

Effective/Applicability Dates

    The regulations apply to transactions occurring on or after March 
18, 2013.

Effect on Other Documents

    The following publication is obsolete as of March 19, 2013:
    Notice 2008-10 (2008-1 CB 277).

Special Analyses

    It has been determined that these temporary regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. 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 
corporate transactions among their controlled corporations. 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 the Treasury Department estimate that small 
organizations and small governmental jurisdictions are likely to be 
affected only insofar as they transfer the stock of a controlled 
corporation to a related corporation. While a certain number of small 
entities may engage in such transactions, the IRS and the Treasury 
Department do not anticipate the number to be substantial. 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 Treasury Department and the IRS participated 
in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    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 adding an 
entry in numerical order to read in part as follows:

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

0
Par. 2. Section 1.367(a)-3 is amended by:
0
1. Revising paragraph (d)(2)(vi)(B).
0
2. Revising paragraph (d)(3) Examples 6B, 6C, and 9.
0
3. Revising paragraph (e).

[[Page 17056]]

0
4. Revising paragraph (g)(1)(vii)(A).
0
5. Adding paragraph (g)(1)(ix).
0
6. Adding paragraph (k).
    The revisions and additions read as follows:


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

* * * * *
    (d) * * *
    (2) * * *
    (vi) * * *
    (B) [Reserved]. For further guidance, see Sec.  1.367(a)-
3T(d)(2)(vi)(B).
* * * * *
    (3) * * *
    Example 6B. [Reserved]. For further guidance, see Sec.  1.367(a)-
3T(d)(3), Example 6B.
    Example 6C. [Reserved]. For further guidance, see Sec.  1.367(a)-
3T(d)(3), Example 6C.
* * * * *
    Example 9. [Reserved]. For further guidance, see Sec.  1.367(a)-
3T(d)(3), Example 9.
* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.367-3T(e).
* * * * *
    (g) * * *
    (1) * * *
    (vii)(A) [Reserved]. For further guidance, see Sec.  1.367-
3T(g)(1)(vii)(A).
* * * * *
    (ix) [Reserved]. For further guidance, see Sec.  1.367-
3T(g)(1)(ix).
* * * * *
    (k) [Reserved]. For further guidance, see Sec.  1.367-3T(k).
    Par. 3. Section 1.367(a)-3T is added to read as follows:


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

    (a) through (d)(2)(vi)(A) [Reserved].--For further guidance, see 
Sec.  1.367(a)-3(a) through (d)(2)(vi)(A).
    (B) Exceptions. (1) If a transaction is described in paragraph 
(d)(2)(vi)(A) of this section, section 367(a) and (d) will not apply to 
the extent a domestic corporation (domestic acquired corporation) 
transfers assets to a foreign corporation (foreign acquiring 
corporation) in an asset reorganization, and those assets (re-
transferred assets) are transferred to a domestic corporation (domestic 
controlled corporation) in a controlled asset transfer, provided that 
each of the following conditions is satisfied:
    (i) The domestic controlled corporation's adjusted basis in the re-
transferred assets is not greater than the domestic acquired 
corporation's adjusted basis in those assets. For this purpose, any 
increase in basis in the re-transferred assets that results because the 
domestic acquired corporation recognized gain or income with respect to 
the re-transferred assets in the transaction is not taken into account.
    (ii) The domestic acquired corporation includes a statement 
described in paragraph (d)(2)(vi)(C) of this section with its U.S. 
income tax return for the taxable year of the transfer; and
    (iii) The requirements of paragraphs (c)(1)(i), (c)(1)(ii), 
(c)(1)(iv), and (c)(6) of this section are satisfied with respect to 
the indirect transfer of stock in the domestic acquired corporation.
    (2) Sections 367(a) and (d) shall not apply to transfers described 
in paragraph (d)(1)(vi) of this section if a U.S. person transfers 
assets to a foreign corporation in a section 351 exchange, to the 
extent that such assets are transferred by such foreign corporation to 
a domestic corporation in another section 351 exchange, but only if the 
domestic transferee's adjusted basis in the assets is not greater than 
the adjusted basis that the U.S. person had in such assets. Any 
increase in adjusted basis in the assets that results because the U.S. 
person recognized gain or income with respect to such assets in the 
initial section 351 exchange is not taken into account for purposes of 
determining whether the domestic transferee's adjusted basis in the 
assets is not greater than the U.S. person's adjusted basis in such 
assets. This paragraph (d)(2)(vi)(B)(2) will not, however, apply to an 
exchange described in section 351 that is also an exchange described in 
section 361(a) or (b). An exchange described in section 351 that is 
also an exchange described in section 361(a) or (b) is only eligible 
for the exception in paragraph (d)(2)(vi)(B)(1) of this section.
    (C) through (d)(3), Example 6A [Reserved]. For further guidance, 
see Sec.  1.367(a)-3(d)(2)(vi)(C) through (d)(3), Example 6A.
    Example 6B.  Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer to a domestic controlled corporation--(i) 
Facts. The facts are the same as in paragraph (d)(3), Example 6A of 
this section, except that R is a domestic corporation.
    (ii) Result. As in paragraph (d)(3) Example 6A of this section, 
the outbound transfer of the Business A assets to F is not affected 
by the rules of Sec.  1.367-3(d) and is subject to the general rules 
under section 367. Subject to the conditions and requirements of 
section 367(a)(5) and Sec.  1.367(a)-7(c), the Business A assets 
qualify for the section 367(a)(3) active trade or business exception 
and are not subject to section 367(a)(1). The Business B and C 
assets are part of an indirect stock transfer under Sec.  1.367-
3(d), but must first be tested under section 367(a) and (d). The 
Business B assets qualify for the active trade or business exception 
under section 367(a)(3); the Business C assets do not. However, 
pursuant to paragraph (d)(2)(vi)(B)(1) of this section, the Business 
B and C assets are not subject to section 367(a) or (d), provided 
that the basis of the Business B and C assets in the hands of R is 
not greater than the basis of the assets in the hands of Z, the 
requirements of paragraphs (c)(1)(i), (c)(1)(ii), (c)(1)(iv), and 
(c)(6) of this section are satisfied, and Z attaches a statement 
described in paragraphs (d)(2)(vi)(C) of this section to its U.S. 
income tax return for the taxable year of the transfer. V also is 
deemed to make an indirect transfer of Z stock under the rules of 
paragraph (d) of this section to the extent the assets are 
transferred to R. To preserve non-recognition treatment, and 
assuming the other requirements of paragraph (c) of this section are 
satisfied, V must enter into a gain recognition agreement in the 
amount of $50, which equals the aggregate gain in the Business B and 
C assets, because the transfer of those assets by Z was not taxable 
under section 367(a)(1) and constitute an indirect stock transfer.
    Example 6C. Section 368(a)(1)(C) reorganization followed by a 
controlled asset transfer to a domestic controlled corporation--(i) 
Facts. The facts are the same as in Example 6B, except that Z is 
owned by U.S. individuals, none of whom qualify as five-percent 
target shareholders with respect to Z within the meaning of 
paragraph (c)(5)(iii) of this section. The following additional 
facts are present. No U.S. persons that are either officers or 
directors of Z own any stock of F immediately after the transfer. F 
is engaged in an active trade or business outside the United States 
that satisfies the test set forth in paragraph (c)(3) of this 
section.
    (ii) Result. The Business A assets transferred to F are not re-
transferred to R and therefore Z's transfer of these assets is not 
subject to the rules of paragraph (d) of this section. However, gain 
must be recognized on the transfer of those assets under section 
367(a)(1) because the section 367(a)(3) active trade or business 
exception is inapplicable pursuant to section 367(a)(5) and Sec.  
1.367(a)-7(b). The Business B and C assets are part of an indirect 
stock transfer under paragraph (d) of this section, but must first 
be tested with respect to Z under section 367(a) and (d), as 
provided in paragraph (d)(2)(vi) of this section. The transfer of 
the Business B assets (which otherwise would satisfy the section 
367(a)(3) active trade or business exception) generally is subject 
to section 367(a)(1) pursuant to section 367(a)(5) and Sec.  
1.367(a)-7(b). The transfer of the Business C assets generally is 
subject to section 367(a)(1) because these assets do not qualify for 
the active trade or business exception under section 367(a)(3). 
However, pursuant to paragraph (d)(2)(vi)(B) of this section, the 
transfer of the Business B and C assets is not subject to sections 
367(a)(1) and (d), provided the basis of the Business B and C assets 
in the hands of R is no greater than the basis in the hands of Z and 
certain other requirements are satisfied. Z may avoid immediate gain 
recognition under section 367(a) and (d) on the transfers of the 
Business

[[Page 17057]]

B and Business C assets to F if, pursuant to paragraph (d)(2)(vi)(B) 
of this section, the indirect transfer of Z stock satisfies the 
requirements of paragraphs (c)(1)(i), (c)(1)(ii), (c)(1)(iv), and 
(c)(6) of this section, and Z attaches a statement described in 
paragraph (d)(2)(vi)(C) of this section to its U.S. income tax 
return for the taxable year of the transfer. In general, the 
statement must contain a certification that, if F disposes of the 
stock of R (in a recognition or nonrecognition transaction) and a 
principal purpose of the transfer is the avoidance of U.S. tax that 
would have been imposed on Z on the disposition of the Business B 
and C assets transferred to R, then Z (or F on behalf of Z) will 
file a return (or amended return as the case may be) recognizing 
gain ($50), as if, immediately prior to the reorganization, Z 
transferred the Business B and C assets to a domestic corporation in 
exchange for stock in a transaction treated as a section 351 
exchange and immediately sold such stock to an unrelated party for 
its fair market value. A transaction is deemed to have a principal 
purpose of U.S. tax avoidance if F disposes of R stock within two 
years of the transfer, unless Z (or F on behalf of Z) can rebut the 
presumption to the satisfaction of the Commissioner. See paragraph 
(d)(2)(vi)(D)(2) of this section. With respect to the indirect 
transfer of Z stock, assume the requirements of paragraphs 
(c)(1)(i), (c)(1)(ii), and (c)(1)(iv) of this section are satisfied. 
Thus, assuming Z attaches the statement described in paragraph 
(d)(2)(vi)(C) of this section to its U.S. income tax return and 
satisfies the reporting requirements of paragraph (c)(6) of this 
section, the transfer of Business B and C assets is not subject to 
immediate gain recognition under section 367(a) or (d).

    Example 7 through Example 8(C) [Reserved]. For further guidance, 
see Sec.  1.367(a)-3(d)(3), Example 7 through (d)(3), Example 8(C).
    Example 9. Indirect stock transfer by reason of a controlled 
asset transfer--(i) Facts. The facts are the same as in paragraph 
(d)(3) Example 8 of this section, except that R transfers the 
Business A assets to M, a wholly owned domestic subsidiary of R, in 
a controlled asset transfer. In addition, V's basis in its Z stock 
is $90.
    (ii) Result. Pursuant to paragraph (d)(2)(vi)(B) of this 
section, sections 367(a) and (d) do not apply to Z's transfer of the 
Business A assets to R if M's basis in the Business A assets is not 
greater than the basis of the assets in the hands of Z, the 
requirements of paragraphs (c)(1)(i), (c)(1)(ii), (c)(1)(iv), and 
(c)(6) of this section are satisfied, and Z includes a statement 
described in paragraph (d)(2)(vi)(C) of this section with its U.S. 
income tax return for the taxable year of the transfer. Subject to 
the conditions and requirements of section 367(a)(5) and Sec.  
1.367(a)-7(c), Z's transfer of the Business B assets to R (which are 
not re-transferred to M) qualifies for the active trade or business 
exception under section 367(a)(3). Pursuant to paragraphs (d)(1) and 
(d)(2)(vii)(A)(1) of this section, V is generally deemed to transfer 
the stock of a foreign corporation to F in a section 354 exchange 
subject to the rules of paragraphs (b) and (d) of this section, 
including the requirement that V enter into a gain recognition 
agreement and comply with the requirements of Sec.  1.367(a)-8. 
However, pursuant to paragraph (d)(2)(vii)(B), paragraph 
(d)(2)(vii)(A) of this section does not apply to the extent of the 
transfer of business A assets by R to M, a domestic corporation. As 
a result, to the extent of the business A assets transferred by R to 
M, V is deemed to transfer the stock of Z (a domestic corporation) 
to F in a section 354 exchange subject to the rules of paragraphs 
(c) and (d) of this section. Thus, with respect to V's indirect 
transfer of stock of a domestic corporation to F, such transfer is 
not subject to gain recognition under section 367(a)(1) if the 
requirements of paragraph (c) of this section are satisfied, 
including the requirement that V enter into a gain recognition 
agreement (separate from the gain recognition agreement described 
above with respect to the deemed transfer of stock of a foreign 
corporation to F) and comply with the requirements of Sec.  
1.367(a)-8. Under paragraphs (d)(2)(i) and (d)(2)(ii) of this 
section, the transferee foreign corporation is F and the transferred 
corporation is R (with respect to the transfer of stock of a foreign 
corporation) and M (with respect to the transfer of stock of a 
domestic corporation). Pursuant to paragraph (d)(2)(iv) of this 
section, a disposition by F of the stock of R would trigger both 
gain recognition agreements. In addition, a disposition by R of the 
stock of M would trigger the gain recognition agreement filed with 
respect to the transfer of the stock of a domestic corporation. To 
determine whether there is a triggering event under Sec.  1.367(a)-
8(j)(2)(i) for the gain recognition agreement filed with respect to 
the transfer of stock of the domestic corporation, the Business A 
assets in M must be considered. To determine whether there is such a 
triggering event for the gain recognition agreement filed with 
respect to the transfer of stock of the foreign corporation, the 
Business B assets in R must be considered.

    Example 10 through Example 16 [Reserved]. For further guidance, see 
Sec.  1.367(a)-3(d)(3), Example 10 through Example 16.
    (e) Transfers of stock or securities by a domestic corporation to a 
foreign corporation in a section 361 exchange--(1) Overview--(i) Scope 
and definitions. This paragraph (e) applies to a domestic corporation 
(U.S. transferor) that transfers stock or securities of a domestic or 
foreign corporation (transferred stock or securities) to a foreign 
corporation (foreign acquiring corporation) in a section 361 exchange. 
Except as otherwise provided in this paragraph (e), paragraphs (b) and 
(c) of this section do not apply to the U.S. transferor's transfer of 
the transferred stock or securities in the section 361 exchange. For 
purposes of this paragraph (e), the definitions of control group, 
control group member, and non-control group member in Sec.  1.367(a)-
7(f)(1), ownership interest percentage in Sec.  1.367(a)-7(f)(7), 
section 361 exchange in Sec.  1.367(a)-7(f)(8), and U.S. transferor 
shareholder in Sec.  1.367(a)-7(f)(13), shall apply.
    (ii) Ordering rules. Except as otherwise provided, this paragraph 
(e) shall apply to the transfer of the transferred stock or securities 
in the section 361 exchange prior to the application of any other 
provision of section 367 to such transfer. Furthermore, any gain 
recognized (including gain treated as a deemed dividend pursuant to 
section 1248(a)) by the U.S. transferor under this paragraph (e) shall 
be taken into account for purposes of applying any other provision of 
section 367 (including Sec. Sec.  1.367(a)-6T, 1.367(a)-7, and 
1.367(b)-4) to the transfer of the transferred stock or securities.
    (2) General rule. Except as provided in paragraph (e)(3) of this 
section, the transfer by the U.S. transferor of the transferred stock 
or securities to the foreign acquiring corporation in the section 361 
exchange shall be subject to section 367(a)(1), and therefore the U.S. 
transferor shall recognize any gain (but not loss) realized with 
respect to the transferred stock or securities. Realized gain is 
recognized pursuant to the prior sentence notwithstanding that the 
transfer is described in any other nonrecognition provision enumerated 
in section 367(a)(1) (such as section 351 or 354).
    (3) Exception. The general rule of paragraph (e)(2) of this section 
shall not apply if the conditions of paragraphs (e)(3)(i), (e)(3)(ii), 
and (e)(3)(iii) of this section are satisfied.
    (i) The conditions set forth in Sec.  1.367(a)-7(c) are satisfied 
with respect to the section 361 exchange.
    (ii) If the transferred stock or securities are of a domestic 
corporation, the U.S. target company (as defined in paragraph (c)(1) of 
this section) complies with the reporting requirements of paragraph 
(c)(6) of this section, and the conditions of paragraphs (c)(1)(i), 
(c)(1)(ii), and (c)(1)(iv) of this section are satisfied with respect 
to the transferred stock or securities.
    (iii) If the U.S. transferor owns (applying the attribution rules 
of section 318, as modified by section 958(b)) five percent or more of 
the total voting power or the total value of the stock of the 
transferee foreign corporation immediately after the transfer of the 
transferred stock or securities in the section 361 exchange, then the 
conditions set forth in paragraphs (e)(3)(iii)(A), (e)(3)(iii)(B), and 
(e)(3)(iii)(C) of this section are satisfied.

[[Page 17058]]

    (A) Except as otherwise provided in this paragraph (e)(3)(iii)(A), 
each U.S. transferor shareholder that is a qualified U.S. person (as 
defined in paragraph (e)(6)(vii) of this section) owning (applying the 
attribution rules of section 318, as modified by section 958(b)) five 
percent or more of the total voting power or the total value of the 
stock of the transferee foreign corporation immediately after the 
reorganization enters into a gain recognition agreement that satisfies 
the conditions of paragraph (e)(6) of this section and Sec.  1.367(a)-
8. A U.S. transferor shareholder is not required to enter into a gain 
recognition agreement pursuant to this paragraph if the amount of gain 
that would be subject to the gain recognition agreement (as determined 
under paragraph (e)(6)(i) of this section) is zero.
    (B) With respect to non-control group members that are not 
described in paragraph (e)(3)(iii)(A) of this section, the U.S. 
transferor recognizes gain equal to the product of the aggregate 
ownership interest percentage of such non-control group members 
multiplied by the gain realized by the U.S. transferor on the transfer 
of the transferred stock or securities.
    (C) With respect to each control group member that is not described 
in paragraph (e)(3)(iii)(A) of this section, the U.S. transferor 
recognizes gain equal to the product of the ownership interest 
percentage of such control group member multiplied by the gain realized 
by the U.S. transferor on the transfer of the transferred stock or 
securities.
    (4) Application of certain rules at U.S. transferor-level. For 
purposes of paragraphs (c)(5)(iii), (e)(3)(ii), and (e)(3)(iii) of this 
section, ownership of the stock of the transferee foreign corporation 
is determined by reference to stock owned by the U.S. transferor 
immediately after the transfer of the transferred stock or securities 
to the foreign acquiring corporation in the section 361 exchange, but 
prior to and without taking into account the U.S. transferor's 
distribution under section 361(c)(1) of the stock received.
    (5) Transferee foreign corporation--(i) General rule. Except as 
provided in paragraph (e)(5)(ii) of this section, the transferee 
foreign corporation for purposes of applying paragraph (e) of this 
section and Sec.  1.367(a)-8 shall be the foreign corporation that 
issues stock or securities to the U.S. transferor in the section 361 
exchange.
    (ii) Special rule for triangular asset reorganizations involving 
the receipt of stock or securities of a domestic corporation. In the 
case of a triangular asset reorganization described in Sec. Sec.  
1.358-(6)(b)(2)(i), (b)(2)(ii) or (b)(2)(iii), or Sec.  1.358-
6(b)(2)(v) (triangular asset reorganization) in which the U.S. 
transferor receives stock or securities of a domestic corporation that 
is in control (within the meaning of section 368(c)) of the foreign 
acquiring corporation, the transferee foreign corporation shall be the 
foreign acquiring corporation.
    (6) Special requirements for gain recognition agreements. A gain 
recognition agreement filed by a U.S. transferor shareholder pursuant 
to paragraph (e)(3)(iii)(A) of this section is, in addition to the 
terms and conditions of Sec.  1.367(a)-8, subject to the conditions of 
this section (e)(6).
    (i) The amount of gain subject to the gain recognition agreement 
shall equal the product of the ownership interest percentage of the 
U.S. transferor shareholder multiplied by the gain realized by the U.S. 
transferor on the transfer of the transferred stock or securities, 
reduced (but not below zero) by the sum of the amounts described in 
paragraphs (e)(6)(i)(A), (e)(6)(i)(B), (e)(6)(i)(C), and (e)(6)(i)(D) 
of this section.
    (A) Gain recognized by the U.S. transferor with respect to the 
transferred stock or securities under section 367(a)(1) (including any 
portion treated as a deemed dividend under section 1248(a)) that is 
attributable to such U.S. transferor shareholder pursuant to Sec.  
1.367(a)-7(c)(2) or Sec.  1.367(a)-7(e)(5).
    (B) A deemed dividend included in the income of the U.S. transferor 
with respect to the transferred stock under Sec.  1.367(b)-4(b)(1)(i) 
that is attributable to such U.S. transferor shareholder pursuant to 
Sec.  1.367(a)-(e)(4).
    (C) If the U.S. transferor shareholder is subject to an election 
under Sec.  1.1248(f)-2(c)(1), a deemed dividend included in the income 
of the U.S. transferor pursuant to Sec.  1.1248(f)-2(c)(3) that is 
attributable to the U.S. transferor shareholder.
    (D) If the U.S. transferor shareholder is not subject to an 
election under Sec.  1.1248(f)-2(c)(1), the hypothetical section 1248 
amount (as defined in Sec.  1.1248(f)-1(c)(4)) with respect to the 
stock of each foreign corporation transferred in the section 361 
exchange attributable to the U.S. transferor shareholder.
    (ii) The gain recognition agreement shall include the election 
described in Sec.  1.367(a)-8(c)(2)(vi).
    (iii) The gain recognition agreement shall designate the U.S. 
transferor shareholder as the U.S. transferor for purposes of Sec.  
1.367(a)-8.
    (iv) If the transfer of the transferred stock or securities in the 
section 361 exchange is pursuant to a triangular asset reorganization, 
the gain recognition agreement shall include appropriate provisions 
that are consistent with the principles of Sec.  1.367(a)-8 for gain 
recognition agreements involving multiple parties. See Sec.  1.367(a)-
8(j)(9).
    (v) The gain recognition agreement shall not be eligible for 
termination upon a taxable disposition pursuant to Sec.  1.367(a)-
8(o)(1) unless the value of the stock or securities received by the 
U.S. transferor shareholder in exchange for the stock or securities of 
the U.S. transferor under section 354 or 356 is at least equal to the 
amount of gain subject to the gain recognition agreement filed by such 
U.S. transferor shareholder.
    (vi) Except as otherwise provided in this paragraph (e)(6)(vi), if 
gain is subsequently recognized by the U.S. transferor shareholder 
under the terms of the gain recognition agreement pursuant to Sec.  
1.367(a)-8(c)(1)(i), the increase in stock basis provided under Sec.  
1.367(a)-8(c)(4)(i) with respect to the stock received by the U.S. 
transferor shareholder shall not exceed the amount of the stock basis 
adjustment made pursuant to Sec.  1.367(a)-7(c)(3) with respect to the 
stock received by the U.S. transferor shareholder. This paragraph 
(e)(6)(vi) shall not apply if the U.S. transferor shareholder and the 
U.S. transferor are members of the same consolidated group at the time 
of the reorganization.
    (vii) For purposes of this section, a qualified U.S. person means a 
U.S. person, as defined in Sec.  1.367(a)-1T(d)(1), but for this 
purpose does not include domestic partnerships, regulated investment 
companies (as defined in section 851(a)), real estate investment trusts 
(as defined in section 856(a)), and S corporations (as defined in 
section 1361(a)).
    (7) Gain subject to section 1248(a). If the U.S. transferor 
recognizes gain under paragraphs (e)(3)(iii)(B) or (e)(3)(iii)(C) of 
this section with respect to transferred stock that is stock in a 
foreign corporation to which section 1248(a) applies, then the portion 
of such gain treated as a deemed dividend under section 1248(a) is the 
product of the amount of the gain multiplied by the section 1248(a) 
ratio. The section 1248(a) ratio is the ratio of the amount that would 
be treated as a deemed dividend under section 1248(a) if all the gain 
in the transferred stock were recognized to the amount of gain realized 
in all the transferred stock.
    (8) Examples. The following examples illustrate the provisions of 
paragraph (e) of this section. Except as otherwise indicated: US1, US2, 
and UST are

[[Page 17059]]

domestic corporations that are not members of a consolidated group; X 
is a United States citizen; US1, US2, and X are unrelated parties; 
CFC1, CFC2, and FA are foreign corporations; each corporation described 
herein has a single class of stock issued and outstanding and a tax 
year ending on December 31; the section 1248 amount (within the meaning 
of Sec.  1.367(b)-2(c)) with respect to the stock of CFC1 and CFC2 is 
zero; Asset A is section 367(a) property that, but for the application 
of section 367(a)(5), would qualify for the active foreign trade or 
business exception under Sec.  1.367(a)-2T; the requirements of Sec.  
1.367(a)-7(c)(2) through 1.367(a)-7(c)(5) are satisfied with respect to 
a section 361 exchange; the provisions of Sec.  1.367(a)-6T (regarding 
branch loss recapture) are not applicable; and none of the foreign 
corporations in the examples is a surrogate foreign corporation (within 
the meaning of section 7874) as a result of the transactions described 
in the examples because one or more of the conditions of section 
7874(a)(2)(B) is not satisfied.

    Example 1. U.S. transferor owns less than 5% of stock of 
transferee foreign corporation. (i) Facts. US1, US2, and X own 80%, 
5%, and 15%, respectively, of the stock of UST with a fair market 
value of $160x, $10x, and $30x, respectively. UST has two assets, 
Asset A and 100% of the stock of CFC1. UST has no liabilities. Asset 
A has a $150x basis and $100x fair market value (as defined in Sec.  
1.367(a)-7(f)(3)), and the CFC1 stock has a $0x basis and $100x fair 
market value. UST transfers Asset A and the CFC1 stock to FA solely 
in exchange for $200x of FA voting stock in a reorganization 
described in section 368(a)(1)(C). UST's transfer of Asset A and the 
CFC1 stock to FA qualifies as a section 361 exchange. UST 
distributes the FA stock received in the section 361 exchange to 
US1, US2, and X pursuant to the plan of reorganization, and 
liquidates. US1 receives $160x of FA stock, US2 receives $10x of FA 
stock, and X receives $30x of FA stock in exchange for the UST 
stock. Immediately after the transfer of Asset A and the CFC1 stock 
to FA in the section 361 exchange, but prior to and without taking 
into account UST's distribution of the FA stock pursuant to section 
361(c)(1), UST does not own (applying the attribution rules of 
section 318, as modified by section 958(b)) five percent or more of 
the total voting power or the total value of the stock of FA.
    (ii) Result. (A) UST's transfer of the CFC1 stock to FA in the 
section 361 exchange is subject to the provisions of this paragraph 
(e), and this paragraph (e) applies to the transfer of the CFC1 
stock prior to the application of any other provision of section 367 
to such transfer. See paragraphs (e)(1)(i) and (e)(1)(ii) of this 
section. Pursuant to the general rule of paragraph (e)(2) of this 
section, UST must recognize the gain realized of $100x on the 
transfer of the CFC1 stock (computed as the excess of the $100x fair 
market value over the $0x basis) unless the requirements for the 
exception provided in paragraph (e)(3) of this section are 
satisfied. In this case, the requirements of paragraph (e)(3) of 
this section are satisfied. First, the requirement of paragraph 
(e)(3)(i) of this section is satisfied because the control 
requirement of Sec.  1.367(a)-7(c)(1) is satisfied, and a stated 
assumption is that the requirements of Sec. Sec.  1.367(a)-7(c)(2) 
through 1.367(a)-7(c)(5) will be satisfied. The control requirement 
is satisfied because US1 and US2, each a control group member, own 
in the aggregate 85% of the stock of UST immediately before the 
reorganization. Second, the requirement of paragraph (e)(3)(ii) of 
this section is not applicable because that paragraph applies to the 
transfer of stock of a domestic corporation and CFC1 is a foreign 
corporation. Third, paragraph (e)(3)(iii) of this section is not 
applicable because immediately after the section 361 exchange, but 
prior to and without taking into account UST's distribution of the 
FA stock pursuant to section 361(c)(1), UST does not own (applying 
the attribution rules of section 318, as modified by section 958(b)) 
5% or more of the total voting power or the total value of the stock 
of FA. See paragraph (e)(4) of this section. Accordingly, UST does 
not recognize the $100x of gain realized in the CFC1 stock pursuant 
to this section.
    (B) In order to meet the requirements of Sec.  1.367(a)-
7(c)(2)(i), UST must recognize gain equal to the portion of the 
inside gain (as defined in Sec.  1.367(a)-7(f)(5)) attributable to 
non-control group members (X), or $7.50x. The $7.50x of gain is 
computed as the product of the inside gain ($50x) multiplied by X's 
ownership interest percentage in UST (15%). Pursuant to Sec.  
1.367(a)-7(f)(5), the $50x of inside gain is the amount by which the 
aggregate fair market value ($200x) of the section 367(a) property 
(as defined in Sec.  1.367(a)-7(f)(10), or Asset A and the CFC1 
stock) exceeds the sum of the inside basis ($150x) of such property 
and the product of the section 367(a) percentage (as defined in 
Sec.  1.367(a)-7(f)(9), or 100%) multiplied by UST's deductible 
liabilities (as defined in Sec.  1.367(a)-7(f)(2), or $0x). Pursuant 
to Sec.  1.367(a)-7(f)(4), the inside basis equals the aggregate 
basis of the section 367(a) property transferred in the section 361 
exchange ($150x), increased by any gain or deemed dividends 
recognized by UST with respect to the section 367(a) property under 
section 367 ($0x), but not including the $7.50x of gain recognized 
by UST under Sec.  1.367(a)-7(c)(2)(i). Pursuant to Sec.  1.367(a)-
7(e)(1), the $7.50x of gain recognized by UST is treated as 
recognized with respect to the CFC1 stock and Asset A in proportion 
to the amount of gain realized in each. However, because there is no 
gain realized by UST with respect to Asset A, all $7.50x of the gain 
is allocated to the CFC1 stock. Furthermore, FA's basis in the CFC1 
stock, as determined under section 362 is increased by the $7.50x of 
gain recognized by UST. See Sec.  1.367(a)-1(b)(4)(i)(B).
    (C) The requirement to recognize gain under Sec.  1.367(a)-
7(c)(2)(ii) is not applicable because the portion of the inside gain 
attributable to US1 and US2 (control group members) can be preserved 
in the stock received by each such shareholder. As described in 
paragraph (ii)(B) of this Example 1, the inside gain is $50x. US1's 
attributable inside gain of $40x (equal to the product of $50x 
inside gain multiplied by US1's 80% ownership interest percentage, 
reduced by $0x, the sum of the amounts described in Sec.  1.367(a)-
7(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3)) does not exceed $160x 
(equal to the product of the section 367(a) percentage of 100% 
multiplied by $160x fair market value of FA stock received by US1). 
Similarly, US2's attributable inside gain of $2.50x (equal to the 
product of $50x inside gain multiplied by US2's 5% ownership 
interest percentage, reduced by $0x, the sum of the amounts 
described in Sec.  1.367(a)-7(c)(2)(ii)(A)(1) through 
(c)(2)(ii)(A)(3))) does not exceed $10x (equal to the product of the 
section 367(a) percentage of 100% multiplied by $10x fair market 
value of FA stock received by US2).
    (D) Each control group member (US1 and US2) must separately 
compute any required adjustment to stock basis under Sec.  1.367(a)-
7(c)(3).
    Example 2. U.S. transferor owns 5% or more of the stock of the 
transferee foreign corporation. (i) Facts. The facts are the same as 
in Example 1, except that immediately after the section 361 
exchange, but prior to and without taking into account UST's 
distribution of the FA stock pursuant to section 361(c)(1), UST owns 
(applying the attribution rules of section 318, as modified by 
section 958(b)) 5% or more of the total voting power or value of the 
stock of FA. Furthermore, immediately after the reorganization, US1 
and X (but not US2) each own (applying the attribution rules of 
section 318, as modified by section 958(b)) five percent or more of 
the total voting power or value of the stock of FA.
    (ii) Result. (A) As is the case with Example 1, UST's transfer 
of the CFC1 stock to FA in the section 361 exchange is subject to 
the provisions of this paragraph (e), and this paragraph (e) applies 
to the transfer of the CFC1 stock prior to the application of any 
other provision of section 367 to such transfer. See paragraphs 
(e)(1)(i) and (e)(1)(ii) of this section. In addition, UST must 
recognize the gain realized of $100x on the transfer of the CFC1 
stock (computed as the excess of the $100x fair market value over 
the $0x basis) unless the requirements for the exception provided in 
paragraph (e)(3) of this section are satisfied. For the same reasons 
provided in Example 1, the requirement in paragraph (e)(3)(i) of 
this section is satisfied and the requirement of paragraph 
(e)(3)(ii) of this section is not applicable.
    (B) Unlike Example 1, however, UST owns 5% or more of the voting 
power or value of the stock of FA immediately after the transfer of 
the CFC1 stock in the section 361 exchange, but prior to and without 
taking into account UST's distribution of the FA stock under section 
361(c)(1). As a result, paragraph (e)(3)(iii) of this section is 
applicable to the section 361 exchange of the CFC1 stock. 
Accordingly, in order to meet the requirements of paragraph 
(e)(3)(iii)(A) of this section US1 and X must enter into gain 
recognition agreements that satisfy the requirements of paragraph 
(e)(6) of this

[[Page 17060]]

section and Sec.  1.367(a)-8. See paragraph (ii)(G) of this Example 
2 for the computation of the amount of gain subject to each gain 
recognition agreement.
    (C) In order to meet the requirements of paragraph 
(e)(3)(iii)(C) of this section, UST must recognize $5x of gain 
attributable to US2 (computed as the product of the $100x of gain 
realized with respect to the transfer of the CFC1 stock multiplied 
by the 5% ownership interest percentage of US2). The $5x of gain 
recognized is not included in the computation of inside basis (see 
Sec.  1.367(a)-7(f)(4)(i)), but reduces (but not below zero) the 
amount of gain recognized by UST pursuant to Sec.  1.367(a)-
7(c)(2)(ii) that is attributable to US2. Furthermore, FA's basis in 
the CFC1 stock as determined under section 362 is increased for the 
$5x of gain recognized. See Sec.  1.367(a)-1(b)(4)(i)(B). Assuming 
US1 and X enter into the gain recognition agreements described in 
paragraph (ii)(B) of this Example 2, and UST recognizes the $5x of 
gain described in this example, the requirements of paragraph (e)(3) 
are satisfied and, accordingly, UST does not recognize the remaining 
$95x of gain realized in the CFC1 stock pursuant to this section.
    (D) As described in paragraph (ii)(B) of Example 1, UST must 
recognize $7.50x of gain pursuant to Sec.  1.367(a)-7(c)(2)(i), the 
amount of the $50x of inside gain attributable to X. Pursuant to 
Sec.  1.367(a)-7(e)(1), the $7.50x of gain recognized by UST is 
treated as recognized with respect to the CFC1 stock and Asset A in 
proportion to the amount of gain realized in each. However, because 
there is no gain realized by UST with respect to Asset A, all $7.50x 
of the gain is allocated to the CFC1 stock. Furthermore, FA's basis 
in the CFC1 stock as determined under section 362 is increased for 
the $7.50x of gain recognized. See Sec.  1.367(a)-1(b)(4)(i)(B).
    (E) As described in paragraph (ii)(C) of Example 1, the 
requirement to recognize gain pursuant to Sec.  1.367(a)-7(c)(2)(ii) 
is not applicable because the attributable inside gain of US1 and 
US2 can be preserved in the stock received by each shareholder. 
However, if UST were required to recognize gain pursuant to Sec.  
1.367(a)-7(c)(2)(ii) for inside gain attributable to US2 (for 
example, if US2 received solely cash rather than FA stock in the 
reorganization), the amount of such gain would be reduced (but not 
below zero) by the amount of gain recognized by UST pursuant to 
paragraph (e)(3)(iii)(C) of this section that is attributable to US2 
(computed as $5x in paragraph (ii)(C) of this Example 2). See Sec.  
1.367(a)-7(c)(2)(ii)(A)(1).
    (F) Each control group member (US1 and US2) must separately 
compute any required adjustment to stock basis under Sec.  1.367(a)-
7(c)(3).
    (G) The amount of gain subject to the gain recognition agreement 
filed by each of US1 and X is determined pursuant to paragraph 
(e)(6)(i) of this section. With respect to US1, the amount of gain 
subject to the gain recognition agreement is $80x. The $80x is 
computed as the product of US1's ownership interest percentage (80%) 
multiplied by the gain realized by UST in the CFC1 stock as 
determined prior to taking into account the application of any other 
provision of section 367 ($100x), reduced by the sum of the amounts 
described in paragraphs (e)(6)(i)(A) through (e)(6)(i)(D) of this 
section attributable to US1 ($0x). With respect to X, the amount of 
gain subject to the gain recognition agreement is $7.50x. The $7.50x 
is computed as the product of X's ownership interest percentage 
(15%) multiplied by the gain realized by UST in the CFC1 stock as 
determined prior to taking into account the application of any other 
provision of section 367 ($100x), reduced by the sum of the amounts 
described in paragraphs (e)(6)(i)(A) through (e)(6)(i)(D) of this 
section attributable to X ($7.50x, as computed in paragraph (ii)(D) 
of this Example 2).
    (H) In order the meet the requirements of paragraph (e)(6)(ii) 
of this section, each gain recognition agreement must include the 
election described in Sec.  1.367(a)-8(c)(2)(vi). Furthermore, 
pursuant to paragraph (e)(6)(iii) of this section, US1 and X must be 
designated as the U.S. transferor on their respective gain 
recognition agreements for purposes of Sec.  1.367(a)-8.
    Example 3. U.S. transferor owns 5% or more of the stock of the 
transferee foreign corporation; interaction with section 1248(f). 
(i) Facts. US1, US2, and X own 50%, 30%, and 20%, respectively, of 
the stock of UST. The UST stock owned by US1 has a $180x basis and 
$200x fair market value; the UST stock owned by US2 has a $100x 
basis and $120x fair market value; and the UST stock owned by X has 
a $80x fair market value. UST owns Asset A, and all the stock of 
CFC1 and CFC2. UST has no liabilities. Asset A has a $10x basis and 
$200x fair market value. The CFC1 stock is a single block of stock 
(as defined in Sec.  1.1248(f)-1(c)(2)) with a $20x basis, $40x fair 
market value, and $30x of earnings and profits attributable to it 
for purposes of section 1248 (with the result that the section 1248 
amount (as defined in Sec.  1.1248(f)-1(c)(9)) is $20x). The CFC2 
stock is also a single block of stock with a $30x basis, $160x fair 
market value, and $150x of earnings and profits attributable to it 
for purposes of section 1248 (with the result that the section 1248 
amount is $130x). On December 31, Year 3, in a reorganization 
described in section 368(a)(1)(D), UST transfers the CFC1 stock, 
CFC2 stock, and Asset A to FA in exchange for 60 shares of FA stock 
with a $400x fair market value. UST's transfer of the CFC1 stock, 
CFC2 stock, and Asset A to FA in exchange for the 60 shares of FA 
stock qualifies as a section 361 exchange. UST distributes the FA 
stock received in the section 361 exchange to US1, US2, and X 
pursuant to section 361(c)(1). US1, US2, and X exchange their UST 
stock for 30, 18, and 12 shares, respectively, of FA stock pursuant 
to section 354. Immediately after the reorganization, FA has 100 
shares of stock outstanding, and US1 and US2 are each a section 1248 
shareholder with respect to FA.
    (ii) Result. (A) UST's transfer of the CFC1 stock and CFC2 stock 
to FA in the section 361 exchange is subject to the provisions of 
this paragraph (e), and this paragraph (e) applies to the transfer 
of the CFC1 stock and CFC2 stock prior to the application of any 
other provision of section 367 to such transfer. See paragraphs 
(e)(1)(i) and (e)(1)(ii) of this section. Pursuant to the general 
rule of paragraph (e)(2) of this section, UST must recognize the 
gain realized of $20x on the transfer of the CFC1 stock (the excess 
of $40x fair market value over $20x basis) and the gain realized of 
$130x on the transfer of the CFC2 stock (the excess of $160x fair 
market value over $30x basis), subject to the application of section 
1248(a), unless the requirements for the exception provided in 
paragraph (e)(3) of this section are satisfied. In this case, the 
requirement of paragraph (e)(3)(i) of this section is satisfied 
because the control requirement of Sec.  1.367(a)-7(c)(1) is 
satisfied, and a stated assumption is that the requirements of 
Sec. Sec.  1.367(a)-7(c)(2) through 1.367(a)-7(c)(5) will be 
satisfied. The control requirement is satisfied because US1 and US2, 
each a control group member, own in the aggregate 80% of the UST 
stock immediately before the reorganization. The requirement of 
paragraph (e)(3)(ii) of this section is not applicable because that 
paragraph applies to the transfer of stock of a domestic 
corporation, and CFC1 and CFC2 are foreign corporations. UST owns 5% 
or more of the total voting power or value of the stock of FA (60%, 
or 60 of the 100 shares of FA stock outstanding) immediately after 
the transfer of the CFC1 stock and CFC2 stock in the section 361 
exchange, but prior to and without taking into account UST's 
distribution of the FA stock under section 361(c)(1). As a result, 
paragraph (e)(3)(iii) of this section is applicable to the section 
361 exchange of the CFC1 stock and CFC2 stock. US1, US2, and X each 
own (applying the attribution rules of section 318, as modified by 
section 958(b)) 5% or more of the total voting power or value of the 
FA stock immediately after the reorganization, or 30%, 18%, and 12%, 
respectively. Accordingly, in order to meet the requirements of 
paragraph (e)(3)(iii)(A) of this section, US1 and US2 must enter 
into gain recognition agreements with respect to the CFC1 stock and 
CFC2 stock that satisfy the requirements of paragraph (e)(6) of this 
section and Sec.  1.367(a)-8. X is not required to enter into a gain 
recognition agreement because the amount of gain that would be 
subject to the gain recognition agreement is zero. See paragraph 
(ii)(J) of this Example 3 for the computation of the amount of gain 
subject to each gain recognition agreement. Assuming US1 and US2 
enter into the gain recognitions agreements described above, the 
requirements of paragraph (e)(3) are satisfied and accordingly, UST 
does not recognize the gain realized of $20x in the stock of CFC1 or 
the gain realized of $130x in the stock of CFC2 pursuant to this 
section.
    (B) UST's transfer of the CFC1 stock and CFC2 stock to FA 
pursuant to the section 361 exchange is subject to Sec.  1.367(b)-
4(b)(1)(i), which applies prior to the application of Sec.  
1.367(a)-7(c). See paragraph (e)(1) of this section. UST (the 
exchanging shareholder) is a U.S. person and a section 1248 
shareholder with respect to CFC1 and CFC2 (each a foreign acquired 
corporation). However, UST is not required to include in income as a 
deemed dividend the section 1248 amount with respect to the CFC1 
stock ($20x) or CFC2 stock ($130x) under Sec.  1.367(b)-4(b)(1)(i) 
because, immediately after UST's section 361 exchange of the CFC1 
stock and

[[Page 17061]]

CFC2 stock for FA stock (and before the distribution of the FA stock 
to US1, US2, and X under section 361(c)(1), FA, CFC1, and CFC2 are 
controlled foreign corporations as to which UST is a section 1248 
shareholder. See Sec.  1.367(b)-4(b)(1)(ii)(A). However, if UST were 
required to include in income as a deemed dividend the section 1248 
amount with respect to the CFC1 stock or CFC2 stock (for example, if 
FA were not a controlled foreign corporation), such deemed dividend 
would be taken into account prior to the application of Sec.  
1.367(a)-7(c). Furthermore, because US1, US2, and X are all persons 
described in paragraph (e)(3)(iii)(A) of this section, any such 
deemed dividend would increase inside basis. See Sec.  1.367(a)-
7(f)(4).
    (C) In order to meet the requirements of Sec.  1.367(a)-
7(c)(2)(i), UST must recognize gain equal to the portion of the 
inside gain attributable to non-control group members (X), or $68x. 
The $68x of gain is computed as the product of the inside gain 
($340x) multiplied by X's ownership interest percentage in UST 
(20%), reduced (but not below zero) by $0x, the sum of the amounts 
described in Sec.  1.367(a)-7(c)(2)(i)(A) through (c)(2)(i)(C). 
Pursuant to Sec.  1.367(a)-7(f)(5), the $340x of inside gain is the 
amount by which the aggregate fair market value ($400x) of the 
section 367(a) property (Asset A, CFC1 stock, and CFC2 stock) 
exceeds the sum of the inside basis ($60x) and $0x (the product of 
the section 367(a) percentage (100%) multiplied by UST's deductible 
liabilities ($0x)). Pursuant to Sec.  1.367(a)-7(f)(4), the inside 
basis equals the aggregate basis of the section 367(a) property 
transferred in the section 361 exchange ($60x), increased by any 
gain or deemed dividends recognized by UST with respect to the 
section 367(a) property under section 367 ($0x), but not including 
the $68x of gain recognized by UST under Sec.  1.367(a)-7(c)(2)(i). 
Under Sec.  1.367(a)-7(e)(1), the $68x gain recognized is treated as 
being with respect to the CFC1 stock, CFC2 stock, and Asset A in 
proportion to the amount of gain realized by UST on the transfer of 
the property. The amount treated as recognized with respect to the 
CFC1 stock is $4x ($68x gain multiplied by $20x/$340x). The amount 
treated as recognized with respect to the CFC2 stock is $26x ($68x 
gain multiplied by $130x/$340x). The amount treated as recognized 
with respect to Asset A is $38x ($68x gain multiplied by $190x/
$340x). Under section 1248(a), UST must include in gross income as a 
dividend the $4x gain recognized with respect to the CFC1 stock and 
the $26x gain recognized with respect to CFC2 stock. Furthermore, 
FA's basis in the CFC1 stock, CFC2 stock, and Asset A, as determined 
under section 362, is increased by the amount of gain recognized by 
UST with respect to such property. See Sec.  1.367(a)-1(b)(4)(i)(B). 
Thus, FA's basis in the CFC1 stock is $24x ($20x increased by $4x of 
gain), the CFC2 stock is $56x ($30x increased by $26x of gain), and 
Asset A is $48x ($10x increased by $38x of gain).
    (D) The requirement to recognize gain under Sec.  1.367(a)-
7(c)(2)(ii) is not applicable because the portion of the inside gain 
attributable to US1 and US2 (control group members) can be preserved 
in the stock received by each such shareholder. As described in 
paragraph (ii)(C) of this Example 3, the inside gain is $340x. US1's 
attributable inside gain of $170x (equal to the product of $340x 
inside gain multiplied by US1's 50% ownership interest percentage, 
reduced by $0x, the sum of the amounts described in Sec.  1.367(a)-
7(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3)) does not exceed $200x 
(equal to the product of the section 367(a) percentage of 100% 
multiplied by $200x fair market value of FA stock received by US1). 
Similarly, US2's attributable inside gain of $102x (equal to the 
product of $340x inside gain multiplied by US2's 30% ownership 
interest percentage, reduced by $0x, the sum of the amounts 
described in Sec.  1.367(a)-7(c)(2)(ii)(A)(1) through 
(c)(2)(ii)(A)(3)) does not exceed $120x (equal to the product of the 
section 367(a) percentage of 100% multiplied by $120x fair market 
value of FA stock received by US2).
    (E) Each control group member (US1 and US2) separately computes 
any required adjustment to stock basis under Sec.  1.367(a)-7(c)(3). 
US1's section 358 basis in the FA stock received of $180x (equal to 
US1's basis in the UST stock exchanged) is reduced to preserve the 
attributable inside gain with respect to US1, less any gain 
recognized with respect to US1 under Sec.  1.367(a)-7(c)(2)(ii). 
Because UST does not recognize gain on the section 361 exchange with 
respect to US1 under Sec.  1.367(a)-7(c)(2)(ii) (as determined in 
paragraph (ii)(D) of this Example 3), the attributable inside gain 
of $170x with respect to US1 is not reduced under Sec.  1.367(a)-
7(c)(3)(i)(A). US1's outside gain (as defined in Sec.  1.367(a)-
7(f)(6)) in the FA stock is $20x, the product of the section 367(a) 
percentage (100%) multiplied by the $20x gain (equal to the 
difference between $200x fair market value and $180x section 358 
basis in the FA stock). Thus, US1's $180x section 358 basis in the 
FA stock must be reduced by $150x (the excess of $170x attributable 
inside gain, reduced by $0x, over $20x outside gain) to $30x. 
Similarly, US2's section 358 basis in the FA stock received of $100x 
(equal to US2's basis in the UST stock exchanged) is reduced to 
preserve the attributable inside gain with respect to US2, less any 
gain recognized with respect to US2 under Sec.  1.367(a)-
7(c)(2)(ii). Because UST does not recognize gain on the section 361 
exchange with respect to US2 under Sec.  1.367(a)-7(c)(2)(ii) (as 
determined in paragraph (ii)(D) of this Example 3), the attributable 
inside gain of $102x with respect to US2 is not reduced under Sec.  
1.367(a)-7(c)(3)(i)(A). US2's outside gain in the FA stock is $20x, 
the product of the section 367(a) percentage (100%) multiplied by 
the $20x gain (equal to the difference between $120x fair market 
value and $100x section 358 basis in FA stock). Thus, US2's $100x 
section 358 basis in the FA stock must be reduced by $82x (the 
excess of $102x attributable inside gain, reduced by $0x, over $20x 
outside gain) to $18x.
    (F) UST's distribution of the FA stock to US1, US2, and X under 
section 361(c)(1) (new stock distribution) is subject to Sec.  
1.1248(f)-1(b)(3). Except as provided in Sec.  1.1248(f)-2(c), under 
Sec.  1.1248(f)-1(b)(3) UST must include in gross income as a 
dividend the total section 1248(f) amount (as defined in Sec.  
1.1248(f)-1(c)(14)). The total section 1248(f) amount is $120x, the 
sum of the section 1248(f) amount (as defined in Sec.  1.1248(f)-
1(c)(10)) with respect to the CFC1 stock ($16x) and CFC2 stock 
($104x). The $16x section 1248(f) amount with respect to the CFC1 
stock is the amount that UST would have included in income as a 
dividend under Sec.  1.367(b)-4(b)(1)(i) with respect to the CFC1 
stock if the requirements of Sec.  1.367(b)-4(b)(1)(ii)(A) had not 
been satisfied ($20x), reduced by the amount of gain recognized by 
UST under Sec.  1.367(a)-7(c)(2) allocable to the CFC1 stock and 
treated as a dividend under section 1248(a) ($4x, as described in 
paragraph (ii)(C) of this Example 3). Similarly, the section 1248(f) 
amount with respect to the CFC2 stock is $104x ($130x reduced by 
$26x).
    (G) If, however, UST along with US1 and US2 (each a section 1248 
shareholder of FA immediately after the distribution) elect to apply 
the provisions of Sec.  1.1248(f)-2(c) (as provided in Sec.  
1.1248(f)-2(c)(1)), the amount that UST is required to include in 
income as a dividend under Sec.  1.1248(f)-1(b)(3) ($120x total 
section 1248(f) amount as computed in paragraph (ii)(F) of this 
Example 3) is reduced by the sum of the portions of the section 
1248(f) amount with respect to the CFC1 stock and CFC2 stock that is 
attributable (under the rules of Sec.  1.1248(f)-2(d)) to the FA 
stock distributed to US1 and US2. Assume that the election is made 
to apply Sec.  1.1248(f)-2(c).
    (1) Under Sec.  1.1248(f)-2(d)(1), the portion of the section 
1248(f) amount with respect to the CFC1 stock that is attributed to 
the 30 shares of FA stock distributed to US1 is equal to the 
hypothetical section 1248 amount (as defined in Sec.  1.1248(f)-
1(c)(4)) with respect to the CFC1 stock that is attributable to 
US1's ownership interest percentage in UST. US1's hypothetical 
section 1248 amount with respect to the CFC1 stock is the amount 
that UST would have included in income as a deemed dividend under 
Sec.  1.367(b)-4(b)(1)(i) with respect to the CFC1 stock if the 
requirements of Sec.  1.367(b)-4(b)(1)(ii)(A) had not been satisfied 
($20x) and that would be attributable to US1's ownership interest 
percentage in UST (50%), reduced by the amount of gain recognized by 
UST under Sec.  1.367(a)-7(c)(2) attributable to US1 and allocable 
to the CFC1 stock, but only to the extent such gain is treated as a 
dividend under section 1248(a) ($0x, as described in paragraphs 
(ii)(C) and (D) of this Example 3). Thus, US1's hypothetical section 
1248 amount with respect to the CFC1 stock is $10x ($20x multiplied 
by 50%, reduced by $0x). The $10x hypothetical section 1248 amount 
is attributed pro rata (based on relative values) among the 30 
shares of FA stock distributed to US1, and the attributable share 
amount (as defined in Sec.  1.1248(f)-2(d)(1)) is $.33x ($10x/30 
shares). Similarly, US1's hypothetical section 1248 amount with 
respect to the CFC2 stock is $65x ($130x multiplied by 50%, reduced 
by $0x), and the attributable share amount is $2.17x ($65x/30 
shares). Similarly, US2's hypothetical section 1248 amount with 
respect to the CFC1 stock is $6x ($20x multiplied by 30%, reduced by 
$0x), and the attributable share amount is also $.33x ($6x/18 
shares). Finally, US2's

[[Page 17062]]

hypothetical section 1248 amount with respect to the CFC2 stock is 
$39x ($130x multiplied by 30%, reduced by $0x), and the attributable 
share amount is also $2.17x ($39x/18 shares). Thus, the sum of the 
portion of the section 1248(f) amount with respect to the CFC1 stock 
and CFC2 stock attributable to shares of stock of FA distributed to 
US1 and US2 is $120x ($10x plus $65x plus $6x plus $39x).
    (2) If the shares of FA stock are divided into portions, Sec.  
1.1248(f)-2(d)(2) applies to attribute the attributable share amount 
to portions of shares of FA stock distributed to US1 and US2. Under 
Sec.  1.1248(f)-2(c)(2) each share of FA stock received by US1 (30 
shares) and US2 (18 shares) is divided into three portions, one 
attributable to the single block of stock of CFC1, one attributable 
to the single block of stock of CFC2, and one attributable to Asset 
A. Thus, the attributable share amount of $.33x with respect to the 
CFC1 stock is attributed to the portion of each of the 30 shares and 
18 shares of FA stock received by US1 and US2, respectively, that 
relates to the CFC1 stock. Similarly, the attributable share amount 
of $2.17x with respect to the CFC2 stock is attributed to the 
portion of each of the 30 shares and 18 shares of FA stock received 
by US1 and US2, respectively, that relates to the CFC2 stock.
    (3) The total section 1248(f) amount ($120x) that UST is 
otherwise required to include in gross income as a dividend under 
Sec.  1.1248(f)-1(b)(3) is reduced by $120x, the sum of the portions 
of the section 1248(f) amount with respect to the CFC1 stock and 
CFC2 stock that are attributable to the shares of FA stock 
distributed to US1 and US2. Thus, the amount DC is required to 
include in gross income as a dividend under Sec.  1.1248(f)-1(b)(3) 
is $0x ($120x reduced by $120x).
    (H) As stated in paragraph (ii)(G)(2) of this Example 3, under 
Sec.  1.1248(f)-2(c)(2) each share of FA stock received by US1 (30 
shares) and US2 (18 shares) is divided into three portions, one 
attributable to the CFC1 stock, one attributable to the CFC2 stock, 
and one attributable to Asset A. Under Sec.  1.1248(f)-2(c)(4)(i), 
the basis of each portion is the product of US1's and US2's section 
358 basis in the share of FA stock multiplied by the ratio of the 
section 362 basis of the property (CFC1 stock, CFC2 stock, or Asset 
A, as applicable) received by FA in the section 361 exchange to 
which the portion relates, to the aggregate section 362 basis of all 
property received by FA in the section 361 exchange. Under Sec.  
1.1248(f)-2(c)(4)(ii), the fair market value of each portion is the 
product of the fair market value of the share of FA stock multiplied 
by the ratio of the fair market value of the property (CFC1 stock, 
CFC2 stock, or Asset A, as applicable) to which the portion relates, 
to the aggregate fair market value of all property received by FA in 
the section 361 exchange. The section 362 basis of the CFC1 stock, 
CFC2 stock, and Asset A is $24x, $56x, and $48x, respectively, for 
an aggregate section 362 basis of $128x. See paragraph (ii)(C) of 
this Example 3. The fair market value of the CFC1 stock, CFC2 stock, 
and Asset A is $40x, $160x, and $200x, for an aggregate fair market 
value of $400x. Furthermore, US1's 30 shares of FA stock have an 
aggregate fair market value of $200x and section 358 basis of $30x 
(resulting in aggregate gain of $170x), and US2's 18 shares of FA 
stock have an aggregate fair market value of $120x and section 358 
basis of $18x (resulting in aggregate gain of $102x). See paragraph 
(ii)(E) of this Example 3.
    (1) With respect to US1's 30 shares of FA stock, the portions 
attributable to the CFC1 stock have an aggregate basis of $5.63x 
($30x multiplied by $24x/$128x) and fair market value of $20x ($200x 
multiplied by $40x/$400x), resulting in aggregate gain in such 
portions of $14.38x (or $.48x gain in each such portion of the 30 
shares). The portions attributable to the CFC2 stock have an 
aggregate basis of $13.13x ($30x multiplied by $56x/$128x) and fair 
market value of $80x ($200x multiplied by $160x/$400x), resulting in 
aggregate gain in such portions of $66.88x (or $2.23x in each such 
portion of the 30 shares). The portions attributable to Asset A have 
an aggregate basis of $11.25x ($30x multiplied by $48x/$128x) and 
fair market value of $100x ($200x multiplied by $200x/$400x), 
resulting in aggregate gain in such portions of $88.75x (or $2.96x 
in each such portion of the 30 shares). Thus, the aggregate gain in 
all the portions of the 30 shares is $170x ($14.38x plus $66.88x 
plus $88.75x).
    (2) With respect to US2's 18 shares of FA stock, the portions 
attributable to the CFC1 stock have an aggregate basis of $3.38x 
($18x multiplied by $24x/$128x) and fair market value of $12x ($120x 
multiplied by $40x/$400x), resulting in aggregate gain in such 
portions of $8.63x (or $.48x in each such portion of the 18 shares). 
The portions attributable to the CFC2 stock have an aggregate basis 
of $7.88x ($18x multiplied by $56x/$128x) and fair market value of 
$48x ($120x multiplied by $160x/$400x), resulting in aggregate gain 
of $40.13x (or $2.23x in each such portion of the 18 shares). The 
portions attributable to Asset A have an aggregate basis of $6.75x 
($18x multiplied by $48x/$128x) and fair market value of $60x ($120x 
multiplied by $200x/$400x), resulting in aggregate gain of $53.25x 
(or $2.96x in each such portion of the 18 shares). Thus, the 
aggregate gain in all the portions of the 18 shares is $102x ($8.63x 
plus $40.13x plus $53.25x).
    (3) Under Sec.  1.1248-8(b)(2)(iv), the earnings and profits of 
CFC1 attributable to the portions of US1's 30 shares of FA stock 
that relate to the CFC1 stock is $15x (the product of US1's 50% 
ownership interest percentage in UST multiplied by $30x of earnings 
and profits attributable to the CFC1 stock before the section 361 
exchange, reduced by $0x of dividend included in UST's income with 
respect to the CFC1 stock under section 1248(a) attributable to 
US1). The earnings and profits of CFC2 attributable to the portions 
of US1's 30 shares of FA stock that relate to the CFC2 stock is $75x 
(the product of US1's 50% ownership interest percentage in UST 
multiplied by $150x of earnings and profits attributable to the CFC2 
stock before the section 361 exchange, reduced by $0x of dividend 
included in UST's income with respect to the CFC2 stock under 
section 1248(a) attributable to US1). Similarly, the earnings and 
profits of CFC1 attributable to the portions of US2's 18 shares of 
FA stock that relate to the CFC1 stock is $9x (the product of US2's 
30% ownership interest percentage in UST multiplied by $30x of 
earnings and profits attributable to the CFC1 stock before the 
section 361 exchange, reduced by $0x of dividend included in UST's 
income with respect to the CFC1 stock under section 1248(a) 
attributable to US2). Finally, the earnings and profits of CFC2 
attributable to the portions of US2's 18 shares of FA stock that 
relate to the CFC2 stock is $45x (the product of US2's 30% ownership 
interest percentage in UST multiplied by $150x of earnings and 
profits attributable to the CFC2 stock before the section 361 
exchange, reduced by $0x of dividend included in UST's income with 
respect to the CFC2 stock under section 1248(a) attributable to 
US2).
    (I) Under Sec.  1.1248(f)-2(c)(3), neither US1 nor US2 is 
required to reduce the aggregate section 358 basis in the portions 
of their respective shares of FA stock, and UST is not required to 
include in gross income any additional deemed dividend.
    (1) US1 is not required to reduce the aggregate section 358 
basis of the portions of its 30 shares of FA stock that relate to 
the CFC1 stock because the $10x section 1248(f) amount with respect 
to the CFC1 stock attributable to the portions of the shares of FA 
stock received by US1 (as computed in paragraph (ii)(G) of this 
Example 3) does not exceed US1's postdistribution amount (as defined 
in Sec.  1.1248(f)-1(c)(6), or $14.38x) in those portions. The 
$14.38x postdistribution amount equals the amount that US1 would be 
required to include in income as a dividend under section 1248(a) 
with respect to such portion if it sold the 30 shares of FA stock 
immediately after the distribution in a transaction in which all 
realized gain is recognized, without taking into account basis 
adjustments or income inclusions under Sec.  1.1248(f)-2(c)(3) ($20x 
fair market value, $5.63x basis, and $15x earnings and profits 
attributable to the portions for purposes of section 1248). 
Similarly, US1 is not required to reduce the aggregate section 358 
basis of the portions of its 30 shares of FA stock that relate to 
the CFC2 stock because the $65x section 1248(f) amount with respect 
to the CFC2 stock attributable to the portions of the shares of FA 
stock received by US1 (as computed in paragraph (ii)(G) of this 
Example 3) does not exceed US1's postdistribution amount ($66.88x) 
in those portions. The $66.88x postdistribution amount equals the 
amount that US1 would be required to include in income as a dividend 
under section 1248(a) with respect to such portion if it sold the 30 
shares of FA stock immediately after the distribution in a 
transaction in which all realized gain is recognized, without taking 
into account basis adjustments or income inclusions under Sec.  
1.1248(f)-2(c)(3) ($80x fair market value, $13.13x basis, and $75x 
earnings and profits attributable to the portions for purposes of 
section 1248).
    (2) US2 is not required to reduce the aggregate section 358 
basis of the portions of its 18 shares of FA stock that relate to 
the CFC1 stock because the $6x section 1248(f) amount with respect 
to the CFC1 stock attributable to the portions of the shares of

[[Page 17063]]

FA stock received by US2 (as computed in paragraph (ii)(G) of this 
Example 3) does not exceed US2's postdistribution amount ($8.63x) in 
those portions. The $8.63x postdistribution amount equals the amount 
that US2 would be required to include in income as a dividend under 
section 1248(a) with respect to such portion if it sold the 18 
shares of FA stock immediately after the distribution in a 
transaction in which all realized gain is recognized, without taking 
into account basis adjustments or income inclusions under Sec.  
1.1248(f)-2(c)(3) ($12x fair market value, $3.38x basis, and $9x 
earnings and profits attributable to the portions for purposes of 
section 1248). Similarly, US2 is not required to reduce the 
aggregate section 358 basis of the portions of its 18 shares of FA 
stock that relate to the CFC2 stock because the $39x section 1248(f) 
amount with respect to the CFC2 stock attributable to the portions 
of the shares of FA stock received by US2 (as computed in paragraph 
(ii)(G) of this Example 3) does not exceed US1's postdistribution 
amount ($40.13x) in those portions. The $40.13x postdistribution 
amount equals the amount that US2 would be required to include in 
income as a dividend under section 1248(a) with respect to such 
portion if it sold the 18 shares of FA stock immediately after the 
distribution in a transaction in which all realized gain is 
recognized, without taking into account basis adjustments or income 
inclusions under Sec.  1.1248(f)-2(c)(3) ($48x fair market value, 
$7.88x basis, and $45x earnings and profits attributable to the 
portions for purposes of section 1248).
    (J) The amount of gain subject to the gain recognition agreement 
filed by each of US1 and US2 is determined pursuant to paragraph 
(e)(6)(i) of this section. The amount of gain subject to the gain 
recognition agreement filed by US1 with respect to the stock of CFC1 
and CFC2 is $10x and $65x, respectively. The $10x and $65x are 
computed as the product of US1's ownership interest percentage (50%) 
multiplied by the gain realized by UST in the CFC1 stock ($20x) and 
CFC2 stock ($130x), respectively, as determined prior to taking into 
account the application of any other provision of section 367, 
reduced by the sum of the amounts described in paragraphs 
(e)(6)(i)(A), (e)(6)(i)(B), (e)(6)(i)(C), and (e)(6)(i)(D) of this 
section with respect to the CFC1 stock and CFC2 stock attributable 
to US1 ($0x with respect to the CFC1 stock, and $0x with respect to 
the CFC2 stock). The amount of gain subject to the gain recognition 
agreement filed by US2 with respect to the stock of CFC1 and CFC2 is 
$6x and $39x, respectively. The $6x and $39x are computed as the 
product of US2's ownership interest percentage (30%) multiplied by 
the gain realized by UST in the CFC1 stock ($20x) and CFC2 stock 
($130x), respectively, as determined prior to taking into account 
the application of any other provision of section 367, reduced by 
the sum of the amounts described in paragraphs (e)(6)(i)(A), 
(e)(6)(i)(B), (e)(6)(i)(C), and (e)(6)(i)(D) of this section with 
respect to the CFC1 stock and CFC2 stock attributable to US2 ($0x 
with respect to the CFC1 stock, and $0x with respect to the CFC2 
stock). X is not required to enter into a gain recognition agreement 
because the amount of gain that would be subject to the gain 
recognition agreement is $0x with respect to the CFC1 stock, and $0x 
with respect to the CFC2 stock, computed as X's ownership percentage 
(20%) multiplied by the gain realized in the stock of CFC1 ($20x 
multiplied by 20%, or $4x) and CFC2 ($130x multiplied by 20%, or 
$26x), reduced the amount of gain recognized by UST with respect to 
the stock of CFC1 and CFC2 that is attributable to X pursuant to 
Sec.  1.367(a)-7(c)(2) ($4x and $26x, respectively, as determined in 
paragraph (ii)(C) of this Example 3). Pursuant to paragraph 
(e)(6)(ii) of this section, each gain recognition agreement must 
include the election described in Sec.  1.367(a)-8(c)(2)(vi). 
Furthermore, pursuant to paragraph (e)(6)(iii) of this section, US1 
and US2 must be designated as the U.S. transferor on their 
respective gain recognition agreements for purposes of Sec.  
1.367(a)-8.

    (9) Illustration of rules. For rules relating to certain 
distributions of stock of a foreign corporation by a domestic 
corporation, see section 1248(f) and Sec. Sec.  1.1248(f)-1 through 
1.1248(f)-3.
    (f) through (g)(1)(vi) [Reserved]. For further guidance, see 
Sec. Sec.  1.367(a)-3(f) through (g)(1)(vi).
    (vii)(A) Except as provided in this paragraph (g)(1)(vii), the 
rules of paragraph (e) of this section apply to transfers of stock or 
securities occurring on or after April 17, 2013. For matters covered in 
this section for periods before April 17, 2013, but on or after March 
13, 2009, see Sec.  1.367(a)-3(e) as contained in 26 CFR part 1 revised 
as of April 1, 2012. For matters covered in this section for periods 
before March 13, 2009, but on or after March 7, 2007, see Sec.  
1.367(a)-3T(e) as contained in 26 CFR part 1 revised as of April 1, 
2007. For matters covered in this section for periods before March 7, 
2007, but on or after July 20, 1998, see Sec.  1.367(a)-8(f)(2)(i) as 
contained in 26 CFR part 1 revised as of April 1, 2006.
    (g)(1)(vii)(B) through (g)(1)(viii) [Reserved]. For further 
guidance see Sec.  1.367(a)-3(g)(vii)(B) through (g)(viii).
    (ix) Paragraphs (d)(2)(vi)(B) and (d)(3), Example 6B, Example 6C, 
and Example 9 of this section apply to transfers that occur on or after 
March 18, 2013. See paragraphs (d)(2)(vi)(B) and (d)(3), Example 6B, 
Example 6C, and Example 9 of this section, as contained in 26 CFR part 
1 revised as of April 1, 2012, for transfers that occur on or after 
January 23, 2006, and before March 18, 2013.
    (g)(2) through (j) [Reserved]. For further guidance, see Sec.  
1.367(a)-3(g)(2) through (j).
    (k) Expiration date. Paragraphs (d)(2)(vi)(B), (d)(3), Example 6B, 
Example 6C, and Example 9, and paragraph (e) of this section expire on 
March 18, 2016.

0
Par. 4. Section 1.367(a)-6T is amended by:
0
1. Adding a sentence at the end of the paragraph (e)(4).
0
2. Adding paragraph (j).
    The additions to read as follows:


Sec.  1.367(a)-6T  Transfer of foreign branch with previously deducted 
losses (temporary).

* * * * *
    (e) * * *
    (4) * * * For transactions occurring on or after April 17, 2013, 
notwithstanding the prior sentence, this paragraph (e)(4) shall apply 
before the rules of Sec.  1.367(a)-7(c).
* * * * *
    (j) Expiration date. The second sentence of paragraph (e)(4) of 
this section expires on March 18, 2016.

0
Par. 5. Section 1.367(a)-7T is added to read as follows:


Sec.  1.367(a)-7T  Outbound transfers of property described in section 
361(a) or (b).

    (a) through (e)(1) [Reserved]. For further guidance, see Sec.  
1.367(a)-7(a) through (e)(1).
    (2) Reasonable cause for failure to comply (temporary)--(i) Request 
for relief. A control group member's failure to timely comply with any 
requirement of this section shall be deemed not to have occurred if the 
control group member is able to demonstrate that the failure was due to 
reasonable cause and not willful neglect using the procedure set forth 
in paragraph (e)(2)(ii) of this section. Whether the failure to timely 
comply was due to reasonable cause and not willful neglect will be 
determined by the Director of Field Operations International, Large 
Business & International (or any successor to the roles and 
responsibilities of such person) (Director) based on all the facts and 
circumstances.
    (ii) Procedures for establishing that a failure to timely comply 
was due to reasonable cause and not willful neglect--(A) Time of 
submission. A control group member's statement that the failure to 
timely comply was due to reasonable cause and not willful neglect will 
be considered only if, promptly after the control group member becomes 
aware of the failure, 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 
that otherwise complies with the rules of this section, and that 
includes a written statement explaining the reasons for the failure to 
timely comply.
    (B) Notice requirement. In addition to the requirements of 
paragraph

[[Page 17064]]

(e)(2)(ii)(A) of this section, a control group member must comply with 
the notice requirements of this paragraph (e)(2)(ii)(B). If any taxable 
year of the control group member 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. If no 
taxable year of the control group member 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 Director.
    (iii) Cross-reference for reasonable cause relief requests by U.S. 
transferor. If the U.S. transferor fails to timely comply with any 
requirement of this section, the U.S. transferor will be treated as 
having timely complied with the requirement if the U.S. transferor (or 
the foreign acquiring corporation on behalf of the U.S. transferor) 
satisfies the reasonable cause requirements described in Sec.  1.6038B-
1T(f)(3).
    (iv) Effective/applicability date. The rules of paragraphs 
(e)(2)(i) through (e)(2)(iii) of this section shall apply to 
transactions occurring on or after April 17, 2013.
    (v) Expiration date. Paragraphs (e)(2)(i) through (e)(2)(iv) of 
this section expire on March 18, 2016.
    (e)(3) through (j) [Reserved]. For further guidance, see Sec.  
1.367(a)-7(e)(3) through (j).

0
Par. 6. Section 1.1248(f)-3T is added to read as follows:


Sec.  1.1248(f)-3T  Reasonable cause and effective/applicability dates 
(temporary).

    (a) Reasonable cause for failure to comply--(1) Request for relief. 
If an 80-percent distributee, a distributee that is a section 1248 
shareholder, or the domestic distributing corporation (reporting 
person) fails to timely comply with any requirement under Sec.  
1.1248(f)-2, the failure shall be deemed not to have occurred if the 
reporting person is able to demonstrate that the failure was due to 
reasonable cause and not willful neglect using the procedure set forth 
in paragraph (a)(2) of this section. Whether the failure to timely 
comply was due to reasonable cause and not willful neglect will be 
determined by the Director of Field Operations International, Large 
Business & International (or any successor to the roles and 
responsibilities of such person) (Director) based on all the facts and 
circumstances.
    (2) Procedures for establishing that a failure to timely comply was 
due to reasonable cause and not willful neglect--(i) Time of 
submission. A reporting person's statement that the failure to timely 
comply was due to reasonable cause and not willful neglect will be 
considered only if, promptly after the reporting person becomes aware 
of the failure, 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 
that otherwise complies with the rules of this section, and that 
includes a written statement explaining the reasons for the failure to 
timely comply.
    (ii) Notice requirement. In addition to the requirements of 
paragraph (a)(2)(i) of this section, the reporting person must comply 
with the notice requirements of this paragraph (a)(2)(ii). If any 
taxable year of the reporting person 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. 
If no taxable year of the reporting person 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 Director.
    (3) Effective/applicability date. This section applies to 
distributions occurring on or after April 17, 2013.
    (4) Expiration date. Paragraphs (a)(1) through (a)(3) of this 
section expire on March 18, 2016.

0
Par. 7. Section 1.6038B-1T is amended by revising paragraph (f) to 
read:


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

* * * * *
    (f)(1) through (f)(2) [Reserved]. For further guidance, see Sec.  
1.6038B-1(f)(1) through (f)(2).
    (3) Reasonable cause for failure to comply--(i) Request for relief. 
If the U.S. transferor fails comply with any requirement of section 
6038B and this section, the failure shall be deemed not to have 
occurred if the U.S. transferor is able to demonstrate that the failure 
was due to reasonable cause and not willful neglect using the procedure 
set forth in paragraph (f)(3)(ii) of this section. Whether the failure 
to timely comply was due to reasonable cause and not willful neglect 
will be determined by the Director of Field Operations International, 
Large Business & International (or any successor to the roles and 
responsibilities of such person) (Director) based on all the facts and 
circumstances.
    (ii) Procedures for establishing that a failure to timely comply 
was due to reasonable cause and not willful neglect--(A) Time of 
submission. A U.S. transferor's statement that the failure to timely 
comply was due to reasonable cause and not willful neglect will be 
considered only if, promptly after the U.S. transferor becomes aware of 
the failure, 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 that 
otherwise complies with the rules of this section, and that includes a 
written statement explaining the reasons for the failure to timely 
comply.
    (B) Notice requirement. In addition to the requirements of 
paragraph (f)(3)(ii)(A) of this section, the U.S. transferor must 
comply with the notice requirements of this paragraph (f)(3)(ii)(B). 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. 
If no 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 Director.
    (iii) Effective/applicability date. This section applies to 
distributions occurring on or after April 17, 2013.
    (iv) Expiration date. Paragraphs (f)(3)(i) through (f)(3)(iii) of 
this section expire on March 18, 2016.
    (f)(4) [Reserved]. For further guidance, see Sec.  1.6038B-
1T(f)(4).

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

0
Par. 8. The authority citation for part 602 continues to read as 
follows:

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


0
Par. 9. In Sec.  602.101, the table in paragraph (b) is amended by 
adding the following entry numerical order:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.367(a)-3T.............................................       1545-2183

[[Page 17065]]

 
 
                                * * * * *
1.367(a)-7T.............................................       1545-2183
 
                                * * * * *
1.1248(f)-3T............................................       1545-2183
 
                                * * * * *
1.6038B-1T..............................................       1545-2183
 
                                * * * * *
------------------------------------------------------------------------

* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: February 19, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-05696 Filed 3-18-13; 8:45 am]
BILLING CODE 4830-01-P