[Federal Register Volume 81, Number 55 (Tuesday, March 22, 2016)]
[Rules and Regulations]
[Pages 15159-15170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06404]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9760]
RIN 1545-BJ74


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 regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under sections 367, 
1248, and 6038B of the Internal Revenue Code (Code). These regulations 
finalize the elimination of one of two exceptions to the coordination 
rule between asset transfers and indirect stock transfers for certain 
outbound asset reorganizations. The regulations also finalize 
modifications to the exception to the coordination rule for section 351 
exchanges so that it is consistent with the remaining asset 
reorganization exception. In addition, the regulations finalize 
modifications to the procedures for obtaining relief for failures to 
satisfy certain reporting requirements. Finally, the regulations 
finalize certain changes with respect to transfers of stock or 
securities by a domestic corporation to a foreign corporation in a 
section 361

[[Page 15160]]

exchange. These regulations primarily affect domestic corporations that 
transfer property to foreign corporations in certain outbound 
nonrecognition exchanges.

DATES: Effective Date: These regulations are effective on March 22, 
2016.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3(g)(1)(vii), 1.367(a)-3(g)(1)(ix), 1.367(a)-6(e)(4), 
1.1248(f)-3(b)(1), and 1.6038B-1(g)(5).

FOR FURTHER INFORMATION CONTACT: Joshua G. Rabon at (202) 317-6937 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    On August 20, 2008, the Department of the Treasury (Treasury 
Department) and the IRS published proposed regulations (REG-209006-89) 
under sections 367, 1248, and 6038B of the Code (2008 proposed 
regulations) in the Federal Register (73 FR 49278) concerning transfers 
of property by a domestic corporation to a foreign corporation in an 
exchange described in section 361(a) or (b) and certain nonrecognition 
distributions of stock of a foreign corporation by a domestic 
corporation. The 2008 proposed regulations were substantially finalized 
on March 19, 2013, when the Treasury Department and the IRS published 
final regulations (TD 9614) in the Federal Register (78 FR 17024). 
However, the Treasury Department and the IRS simultaneously published 
the temporary regulations (TD 9615) in the Federal Register on March 
19, 2013 (78 FR 17,053) (2013 temporary regulations) eliminating one of 
the two exceptions to the coordination rule between asset transfers and 
indirect stock transfers for certain outbound asset reorganizations, as 
well as modifying the one exception to the coordination rule for 
section 351 exchanges so that it is consistent with the remaining 
outbound asset reorganization exception. The 2013 temporary regulations 
also addressed the transfer of stock or securities by a domestic 
corporation to a foreign corporation in a section 361 exchange, as well 
as modified, in various contexts, procedures for obtaining relief for 
failures to satisfy certain reporting requirements. A notice of 
proposed rulemaking (REG-132702-10) cross-referencing the 2013 
temporary regulations and incorporating the text of the 2013 temporary 
regulations was also published in the Federal Register on March 19, 
2013 (78 FR 17066). A portion of the 2013 temporary regulations 
modifying the procedures for obtaining relief for failures to satisfy 
certain reporting requirements was amended and removed by final 
regulations (TD 9704) that were published in the Federal Register on 
November 19, 2014 (79 FR 68763). No requests for a public hearing were 
received regarding the 2013 temporary regulations, and accordingly no 
hearing was held. The text of these regulations is substantially 
identical to to the 2013 temporary regulations.
    The Treasury Department and the IRS received one comment regarding 
the remaining exceptions to the coordination rule. In general, the 
coordination rule provides that if, in connection with an indirect 
stock transfer, a U.S. person (U.S. transferor) transfers assets to a 
foreign corporation (foreign acquiring corporation) in an exchange 
described in section 351 or 361, section 367 applies first to the asset 
transfer and then to the indirect stock transfer. Pursuant to the 
exceptions to the coordination rule, sections 367(a) and (d) will not 
apply to the outbound transfer of assets by the U.S. transferor to the 
foreign acquiring corporation to the extent those assets (re-
transferred assets) are transferred by the foreign acquiring 
corporation to a domestic corporation in certain nonrecognition 
transactions, provided certain conditions are satisfied. Both of the 
remaining exceptions require that the transferee domestic corporation's 
adjusted basis in the re-transferred assets not be greater than the 
U.S. transferor's adjusted basis in those assets, disregarding any 
basis increase attributable to gain or income recognized by the U.S. 
transferor on the outbound asset transfer (basis comparison test).
    The commenter first inquired whether the remaining coordination 
rule exceptions apply on a transaction-by-transaction basis such that 
the conditions of an exception, including the basis comparison test, 
must be satisfied with respect to all the re-transferred assets, or, 
alternatively, whether the exceptions apply on an asset-by-asset basis 
such that the conditions of an exception may be satisfied with respect 
to a portion of the re-transferred assets. The Treasury Department and 
the IRS have determined that the regulations clearly provide that the 
coordination rule exceptions apply to a transaction in its entirety and 
not on an asset-by-asset basis. See, for example, paragraph (d)(3) of 
Example 6C of the 2013 temporary regulations, illustrating the 
application of the coordination rule and the relevant exception using a 
transaction-based analysis. Thus, the 2013 temporary regulations are 
not clarified in response to this comment.
    Given this transaction-based treatment, the commenter then 
requested a modification to the aspect of the basis comparison test 
that disregards an increase in basis in the re-transferred assets in 
the hands of the transferee domestic corporation that is attributable 
to gain or income recognized by the U.S. transferor on the outbound 
transfer of the re-transferred assets to the foreign acquiring 
corporation. The comment requested that the rule be extended to 
disregard a basis increase in the re-transferred assets that is 
attributable to gain or income recognized by the foreign acquiring 
corporation on the transfer of the re-transferred assets to the 
transferee domestic corporation when that gain or income is subject to 
U.S. tax (such as gain recognized by the foreign acquiring corporation 
with respect to U.S. real property that is subject to U.S. tax under 
section 897). These regulations do not provide for such an extension.
    The coordination rule exceptions were first introduced in proposed 
regulations (INTL-54-91) published in the Federal Register on August 
26, 1991 (56 FR 41993). The basis comparison test was introduced later, 
in final regulations (TD 8770) published in the Federal Register on 
June 19, 1998 (63 FR 33550). Proposed regulations (REG-125628-01) 
published in the Federal Register on January 5, 2005 (70 FR 746) 
proposed further revisions to the coordination rule exceptions in 
response to concerns ``that asset reorganizations subject to this 
coordination rule may be used to facilitate corporate inversion 
transactions.'' Those 2005 proposed regulations were finalized on 
January 26, 2006, when the Treasury Department and the IRS published 
final regulations (TD 9243) in the Federal Register (71 FR 4276). 
Although the 2008 proposed regulations included a proposal to further 
refine one of the coordination rule exceptions in response to 
transactions utilizing that exception to inappropriately repatriate 
earnings and profits of foreign corporations, the proposed refinement 
was not included in the final regulations published on March 19, 2013. 
Instead, the 2013 temporary regulations eliminated this particular 
exception to the coordination rule and noted that 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.''
    The Treasury Department and the IRS remain concerned that the 
coordination

[[Page 15161]]

rule exceptions may be utilized to inappropriately reduce U.S. tax, and 
therefore decline to liberalize the basis comparison test. The basis 
comparison test ensures preservation of the gain realized but not 
recognized by a U.S. transferor in re-transferred assets in the hands 
of a transferee domestic corporation by ensuring that the assets re-
transferred into U.S. corporate solution retain identical tax 
attributes to the assets transferred to the foreign acquiring 
corporation. To the extent such assets do not have the same basis in 
the hands of the transferee domestic corporation and the basis 
adjustment is not attributable to gain recognized by the U.S. 
transferor, then the basis adjustment presumably results from 
transactions occurring in foreign corporate solution (including gain 
recognized under section 897). The Treasury Department and the IRS 
believe the coordination rule exceptions should not permit shifting of 
gain or income to a foreign corporation (even when the gain or income 
is subject to U.S. tax) as it may permit the U.S. transferor to 
inappropriately utilize the foreign corporation's favorable tax 
attributes available to offset the gain or income.
    Accordingly, the text of the 2013 temporary regulations is adopted 
without substantive revision. The text is updated where appropriate for 
ministerial purposes. For example, the appropriate title for the LB&I 
officer responsible for determining whether a failure to comply with 
the reporting requirements was due to reasonable cause and not willful 
neglect is ``Director of Field Operations, Cross Border Activities 
Practice Area of Large Business & International.'' It is expected that 
future guidance projects will update titles in other sections of the 
existing regulations as appropriate. The corresponding 2013 temporary 
regulations are removed.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. 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 any of the three 
categories defined in the Regulatory Flexibility Act (small businesses, 
small organizations, and small governmental jurisdictions)--will not be 
substantial. The Treasury Department and the IRS 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 Treasury Department and 
the IRS do not anticipate the number to be substantial. Pursuant to 
section 7805(f) of the Code, the NPRM preceding this regulation was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Joshua G. Rabon 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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Section 1.367(a)-3 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).
0
4. Revising paragraph (g)(1)(vii)(A).
0
5. Adding paragraph (g)(1)(ix).
    The revisions and addition read as follows:


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

* * * * *
    (d) * * *
    (2) * * *
    (vi) * * *
    (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 timely 
filed U.S. income tax return for the taxable year of the transfer; and
    (iii) The requirements of paragraphs (c)(1)(i), (ii), and (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.
* * * * *
    (3) * * *
    Example 6B. Section 368(a)(1)(C) reorganization followed by a 
controlled asset

[[Page 15162]]

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), (ii), and (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 paragraph (d)(3), Example 6B, of 
this section, 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 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), (ii), and (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), (ii), and (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 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), (ii), and (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) of this section, 
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 (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.
* * * * *
    (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

[[Page 15163]]

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), 
apply.
    (ii) Ordering rules. Except as otherwise provided, this paragraph 
(e) applies 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)-6, 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), (ii), and 
(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), 
(ii), and (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), (B), and (C) of this 
section are satisfied.
    (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) and (e)(3)(ii) and (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.  1.358-
(6)(b)(2)(i), (ii), or (iii) or (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 paragraph (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),(B), (C), and (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 (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)-7(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

[[Page 15164]]

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 (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 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 (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 (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.  1.367(a)-7(c)(2) through (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

[[Page 15165]]

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 
(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 
(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 paragraph (e), Example 1, of this section 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 paragraph (e), Example 1, 
of this section, 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 (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 paragraph (e), Example 1, of this section, 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 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) 
of this section 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 of this 
paragraph (e), 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 of this 
paragraph (e), 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 (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 (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

[[Page 15166]]

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 (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.  
1.367(a)-7(c)(2) through (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 paragraph (e)(3)(ii) 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) of this section 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 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). 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 (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 (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)

[[Page 15167]]

(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 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

[[Page 15168]]

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 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) through (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) through (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 by 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.
* * * * *
    (g) * * *
    (1) * * *
    (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.
* * * * *
    (ix) Paragraphs (d)(2)(vi)(B)(1)(i) and (iii), (d)(2)(vi)(B)(2), 
and (d)(3), Examples 6B, 6C, and 9 of this section apply to transfers 
that occur on or after March 18, 2013. See paragraphs 
(d)(2)(vi)(B)(1)(i) and (iii), (d)(2)(vi)(B)(2), and (d)(3), Examples 
6B, 6C, and 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. Paragraph (d)(2)(vi)(B)(1)(ii) of this 
section applies to statements that are required to be filed on or after 
November 19, 2014. See paragraph (d)(2)(vi)(B)(1)(ii) of this section, 
as

[[Page 15169]]

contained in 26 CFR part 1 revised as of April 1, 2014, for statements 
required to be filed on or after March 18, 2013, and before November 
19, 2014.
* * * * *


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

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

0
Par. 4. Section 1.367(a)-6 is added to read as follows:


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

    (a) through (e)(3) [Reserved]. For further guidance, see Sec.  
1.367(a)-6T(a) through (e)(3).
    (4) Gain recognized under section 367(a). The previously deducted 
branch losses shall be reduced by any gain recognized pursuant to 
section 367(a)(1) (other than by reason of the provisions of this 
section) upon the transfer of the assets of the foreign branch to the 
foreign corporation. 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).
    (e)(5) through (i) [Reserved]. For further guidance, see Sec.  
1.367(a)-6T(e)(5) through (i).


Sec.  1.367(a)-6T  [Amended]

0
Par. 5. Section 1.367(a)-6T is amended by removing and reserving 
paragraph (e)(4) and removing paragraph (j).

0
Par. 6. Section 1.1248(f)-3 is revised by adding paragraph (a) and 
adding a sentence at the end of paragraph (b)(1) to read as follows:


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

    (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, Cross Border Activities 
Practice Area of Large Business & International (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.
    (b) * * *
    (1) * * * The provisions of Sec.  1.1248(f)-3(a) apply to 
distributions occurring on or after April 17, 2013.
* * * * *


Sec.  1.1248(f)-3T  [Removed]

0
Par. 7. Section 1.1248(f)-3T is removed.

0
Par. 8. Section 1.6038B-1 is amended by:
0
1. Removing ``or Sec.  1.367(a)-3T'' from paragraph (c)(4)(ii).
0
2. Revising paragraph (f)(3).
    The revision reads as follows:


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

* * * * *
    (f) * * *
    (3) Reasonable cause for failure to comply--(i) Request for relief. 
If the U.S. transferor fails to 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, Cross Border 
Activities Practice Area of Large Business & International (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.
* * * * *


Sec.  1.6038B-1T  [Amended]

0
Par. 9. Section 1.6038B-1T is amended by removing and reserving 
paragraphs (c)(4)(ii)(B) and (f)(3).


Sec. Sec.  1.367(a)-2T, 1.367(a)-3, 1.367(a)-4T, 1.367(a)-7, 1.367(a)-
8, 1.367(b)-4, 1.367(e)-1, 1.1248(f)-1, 1.1248(f)-2, 1.6038B-1, 
1.6038B-1T   [Amended]

0
Par. 10. For each section listed in the table, remove the language in 
the ``Remove'' column and add in its place the language in the ``Add'' 
column as set forth below:

[[Page 15170]]



----------------------------------------------------------------------------------------------------------------
               Section                          Remove                                 Add
----------------------------------------------------------------------------------------------------------------
Sec.   1.367(a)-2T(a)(2), fourth       Sec.   1.367(a)-3T.....  Sec.   1.367(a)-3.
 sentence.
Sec.   1.367(a)-3(d)(3), Example       Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3).
 12(ii), third sentence.                3T(e)(3).
Sec.   1.367(a)-4T(d), first sentence  Sec.   1.367(a)-3T.....  Sec.   1.367(a)-3.
Sec.   1.367(a)-7(c) introductory      Sec.   1.367(a)-3T.....  Sec.   1.367(a)-3.
 text, second sentence.
Sec.   1.367(a)-7(c)(2)(i)(A), first   Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(c)(2)(ii)(A)(1),     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(C).
 first sentence.                        3T(e)(3)(iii)(C).
Sec.   1.367(a)-7(c)(3)(v), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(8).
 sentence.                              3T(e)(8).
Sec.   1.367(a)-7(c)(4)(ii), first     Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
 sentence.
Sec.   1.367(a)-7(e)(1), third         Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
 sentence.
Sec.   1.367(a)-7(e)(1), fourth        Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(4)(i), paragraph  Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 heading.                               3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(4)(i), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(4)(i), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(4)(i), last       Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(4)(ii), first     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(4)(ii), last      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(7).
 sentence.                              3T(e)(7).
Sec.   1.367(a)-7(e)(4)(ii), last      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(5)(i), paragraph  Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 heading.                               3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(5)(i), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(5)(i), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(5)(i), last       Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(e)(5)(ii), first     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(e)(5)(ii), first     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(7).
 sentence.                              3T(e)(7).
Sec.   1.367(a)-7(f)(4), last          Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(f)(4)(i), first      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(B).
 sentence.                              3T(e)(3)(iii)(B).
Sec.   1.367(a)-7(f)(4)(ii), first     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(f)(4)(iii), first    Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.367(a)-7(g) introductory      Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(8).
 text, second sentence.                 3T(e)(8).
Sec.   1.367(a)-7(h), second sentence  Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
Sec.   1.367(a)-8(c)(6), first         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 sentence.                              3T(e)(6).
Sec.   1.367(a)-8(j)(9), first         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6)(iv).
 sentence.                              3T(e)(6)(iv).
Sec.   1.367(b)-4(b)(1)(iii) Example   Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 4(i), ninth sentence.                  3T(e)(6).
Sec.   1.367(b)-4(b)(1)(iii), Example  Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
 4(i), tenth sentence.
Sec.   1.367(b)-4(b)(1)(iii), Example  Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 5(i), penultimate sentence.            3T(e)(6).
Sec.   1.367(b)-4(b)(1)(iii) Example   Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
 5(i), last sentence.
Sec.   1.367(e)-1(e), first sentence.  Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
Sec.   1.1248(f)-1(c)(4)(i), first     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 sentence.                              3T(e)(3)(iii)(A).
Sec.   1.1248(f)-2(e) introductory     Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(8), Example 3.
 text, second sentence.                 3T(e)(8), Example 3.
Sec.   1.1248(f)-2(e), Example 2(i),   Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii)(A).
 last sentence.                         3T(e)(3)(iii)(A).
Sec.   1.1248(f)-2(e), Example 2(i),   Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 last sentence.                         3T(e)(6).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(2).
 2(ii)(A), first sentence.              3T(e)(2).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(i).
 2(ii)(A), first sentence.              3T(e)(3)(i).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(i).
 2(ii)(A), second sentence.             3T(e)(3)(i).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(ii).
 2(ii)(A), third sentence.              3T(e)(3)(ii).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii).
 2(ii)(A), fourth sentence.             3T(e)(3)(iii).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 2(ii)(A), fourth sentence.             3T(e)(6).
Sec.   1.1248(f)-2(e), Example 3(i),   Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 penultimate sentence.                  3T(e)(6).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(2).
 3(ii)(A), first sentence.              3T(e)(2).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(i).
 3(ii)(A), first sentence.              3T(e)(3)(i).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(i).
 3(ii)(A), second sentence.             3T(e)(3)(i).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(ii).
 3(ii)(A), third sentence.              3T(e)(3)(ii).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(3)(iii).
 3(ii)(A), fourth sentence.             3T(e)(3)(iii).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 3(ii)(A), fourth sentence.             3T(e)(6).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6).
 3(ii)(G), first sentence.              3T(e)(6).
Sec.   1.1248(f)-2(e), Example         Sec.   1.367(a)-         Sec.   1.367(a)-3(e)(6)(i)(A).
 3(ii)(G), first sentence.              3T(e)(6)(i)(A).
Sec.   1.1248(f)-2(f), third sentence  Sec.   1.367(a)-3T(e)..  Sec.   1.367(a)-3(e).
Sec.   1.6038B-1T(c)(4)(ii)(A),        Sec.   1.367(a)-         Sec.   1.367(a)-3(d)(2).
 second sentence.                       3T(d)(2).
Sec.   1.6038B-1T(c)(4)(ii)(A),        Sec.   1.367(a)-         Sec.   1.367(a)-3(d)(2).
 second sentence.                       3T(d)(2).
----------------------------------------------------------------------------------------------------------------


John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Dated: March 11, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-06404 Filed 3-18-16; 4:15 pm]
 BILLING CODE 4830-01-P