[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)]
[Rules and Regulations]
[Pages 40810-40812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14649]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9761]
RIN 1545-BM88


Inversions and Related Transactions; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations; correcting amendment.

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SUMMARY: This document contains corrections to final and temporary 
regulations (TD 9761) that were published in the Federal Register on 
April 8, 2016 (81 FR 20858). The temporary regulations address 
transactions that are structured to avoid the purposes of sections 7874 
and 367 of the Internal Revenue Code and certain post-inversion tax 
avoidance transactions.

DATES: This correction is effective on June 23, 2016 and applicable on 
April 8, 2016.

FOR FURTHER INFORMATION CONTACT: Rose E. Jenkins at (202) 317-6934 (not 
a toll free number).

SUPPLEMENTARY INFORMATION: 

Background

    The final and temporary regulations (TD 9761) that are the subject 
of this correction are under sections 304, 367, 956, 7701(l), and 7874 
of the Internal Revenue Code.

Need for Correction

    As published, the final and temporary regulations (TD 9761) contain 
errors that may prove to be misleading and are in need of 
clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

    Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

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 * * *

0
Par. 2. Section 1.304-7T is amended by revising paragraph (f) to read 
as follows:


Sec.  1.304-7T  Certain acquisitions by foreign acquiring corporations 
(temporary).

* * * * *
    (f) Expiration date. This section expires on or before April 4, 
2019.
0
Par. 3. Section 1.367(a)-3T is amended by revising paragraph (k) to 
read as follows:


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

* * * * *

[[Page 40811]]

    (k) Expiration date. Paragraph (c)(3)(iii)(C) of this section 
expires on or before April 4, 2019.


Sec.  1.367(b)-4  [Amended]

0
Par. 4. For each entry in Sec.  1.367(b)-4 in the ``Paragraph'' column 
remove the language in the ``Remove'' column and add in its place the 
language in the ``Add'' column as set forth below:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                Paragraph                                         Remove                                                    Add
--------------------------------------------------------------------------------------------------------------------------------------------------------
(b)(1)(i)(B)(2).........................  foreign acquiring corporation.........................  transferee foreign corporation.
(b)(1)(ii)(A), first sentence...........  foreign acquiring corporation.........................  transferee foreign corporation.
(b)(2)(i)(A)............................  foreign acquiring corporations........................  transferee foreign corporation.
(b)(2)(i)(B)............................  foreign acquiring corporation.........................  transferee foreign corporation.
(b)(2)(i)(C)............................  foreign acquiring corporation.........................  transferee foreign corporation.
(b)(3)(i)...............................  foreign acquiring corporation.........................  transferee foreign corporation.
(d)(2), Example, heading................  foreign acquiring corporation.........................  transferee foreign corporation.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Sec.  1.367(b)-4T  [Amended]

0
Par. 5. Section 1.367(b)-4T(d)(1) is amended by removing the language 
``Sec.  1.367(b)-(3)'' and adding in its place the language ``Sec.  
1.367(b)-3''.
0
Par. 6. Section 1.956-2T is amended by revising the first sentence of 
paragraph (a)(4)(iii) Example 3.(A), the second sentence of paragraph 
(a)(4)(iii) Example 3.(B), and the third sentence of paragraph 
(a)(4)(iii) Example 4.(B) to read as follows:


Sec.  1.956-2T  Definition of United States property (temporary).

* * * * *
    (a) * * *
    (4) * * *
    (iii) * * *

    Example 3.  (A) Facts. Before the inversion transaction, FA also 
wholly owns USP, a domestic corporation, which, in turn, wholly 
owns, LFS, a foreign corporation that is a controlled foreign 
corporation. * * *
    (B) * * * Because LFS was a controlled foreign corporation and a 
member of the EAG with respect to the inversion transaction on the 
completion date, and DT was not a United States shareholder with 
respect to LFS on or before the completion date, LFS is excluded 
from the definition of expatriated foreign subsidiary pursuant to 
Sec.  1.7874-12T(a)(9)(ii). * * *
    Example 4.  * * *
    (B) * * * Because LFSS was not a member of the EAG with respect 
to the inversion transaction on the completion date, LFSS is not 
excluded from the definition of expatriated foreign subsidiary 
pursuant to Sec.  1.7874-12T(a)(9)(ii). * * *
* * * * *
0
Par. 7. Section 1.7701(l)-4T is amended by revising the ninth sentence 
of paragraph (a), the fourth sentence of paragraph (g) Example 
3.(ii)(B), and the third sentence of paragraph (g) Example 11.(ii) to 
read as follows:


Sec.  1.7701(l)-4T  Rules regarding inversion transactions (temporary).

    (a) * * * See Sec.  1.367(b)-4T(e) and (f) for rules concerning 
certain other exchanges after an inversion transaction. * * *
* * * * *
    (g) * * *

    Example 3.  * * *
    (ii) * * *
    (B) * * * Although FA (a non-CFC foreign related person) 
indirectly owns $4x of FT stock both immediately before and after 
the specified transaction and any related transaction, all of that 
stock is directly owned by DT (a domestic corporation), and as a 
result, under paragraph (f)(4) of this section, none of that stock 
is treated as directly or indirectly owned by FP for purposes of 
calculating the pre-transaction ownership percentage and the post-
transaction ownership percentage with respect to FT. * * *
* * * * *
    Example 11.  * * *
    (ii) * * * However, after the April 30, 2016 transfer, because 
FS ceases to be a foreign related person, it ceases to be a 
specified related person. * * *
* * * * *

0
Par. 8. Section 1.7874-1T is amended by revising paragraph (i) to read 
as follows:


Sec.  1.7874-1T  Disregard of affiliate-owned stock (temporary).

* * * * *
    (i) Expiration date. This section expires on or before April 4, 
2019.
0
Par. 9. Section 1.7874-2T is amended by revising paragraphs (c)(4)(iii) 
and (m) to read as follows:


Sec.  1.7874-2T  Surrogate foreign corporation (temporary).

* * * * *
    (c) * * *
    (4) * * *
    (iii) Additional related transactions. If, pursuant to the same 
plan (or a series of related transactions), a foreign corporation 
directly or indirectly acquires (under the principles of paragraph 
(c)(4)(ii) of this section) substantially all of the properties 
directly or indirectly held by a subsequent acquiring corporation in a 
transaction occurring after the subsequent acquisition, then the 
principles of paragraph (c)(4)(i) of this section apply to such 
transaction (and any subsequent transaction or transactions occurring 
pursuant to the plan (or the series of related transactions)).
* * * * *
    (m) Expiration date. This section expires on or before April 4, 
2019.
0
Par. 10. Section 1.7874-3T is amended by revising paragraph (g) to read 
as follows:


Sec.  1.7874-3T  Substantial business activities (temporary).

* * * * *
    (g) Expiration date. The applicability of paragraphs (b)(4) and 
(d)(10) of this section expires on or before April 4, 2019.
0
Par. 11. Section 1.7874-6T is amended by revising paragraphs (f)(3) and 
(i) to read as follows:


Sec.  1.7874-6T  Stock transferred by members of the EAG (temporary).

* * * * *
    (f) * * *
    (3) A transferring corporation means a corporation that is a former 
domestic entity shareholder or former domestic entity partner.
* * * * *
    (i) Expiration date. This section expires on or before April 4, 
2019.

0
Par. 12. Section 1.7874-7T is amended by revising the first sentence of 
paragraph (g) Example 2.(ii) and paragraph (i) to read as follows:


Sec.  1.7874-7T  Disregard of certain stock attributable to passive 
assets (temporary).

* * * * *
    (g) * * *

    Example 2.  * * *
    (ii) Analysis. Without regard to the application of Sec. Sec.  
1.7874-4T(b) and 1.7874-10T(b) and paragraph (b) of this section, 
the ownership percentage described in section 7874(a)(2)(B)(ii) 
would be less than 5 (by vote and value), or 4 (4/100, or 4 shares 
of FA stock held by Individual B by reason of owning the DT stock, 
determined under Sec.  1.7874-2(f)(2), over 100 shares of FA stock 
outstanding after the DT acquisition).
* * * * *
    (i) Expiration date. The applicability of this section expires on 
or before April 4, 2019.

[[Page 40812]]

0
Par. 13. Section 1.7874-8T is amended by revising the third sentence of 
paragraph (h) Example 1.(ii), the fifth sentence of paragraph (h) 
Example 2.(ii), the ninth sentence of paragraph (h) Example 3.(ii), and 
paragraph (j) to read as follows:


Sec.  1.7874-8T  Disregard of certain stock attributable to multiple 
domestic entity acquisitions (temporary).

* * * * *
    (h) * * *

    Example 1.  * * *
    (ii) * * * As a result, and because there were no redemptions of 
FA stock, the excluded amount is $150x (calculated as 100, the total 
number of prior acquisition shares, multiplied by $1.50x, the fair 
market value of a single share of FA stock on the completion date 
with respect to the DT2 acquisition). * * *
* * * * *
    Example 2.  * * *
    (ii) * * * As a result, the excluded amount is $112.50x, 
calculated as 75 (100, the total number of prior acquisition shares, 
less 25, the allocable redeemed shares) multiplied by $1.50x (the 
fair market value of a single share of FA stock on the completion 
date with respect to the DT2 acquisition). * * *
* * * * *
    Example 3.  * * *
    (ii) * * * Accordingly, the excluded amount is $112.50x, 
calculated as 150 (200, the total number of prior acquisition 
shares, less 50, the allocable redeemed shares) multiplied by $0.75x 
(the fair market value of a single class of FA stock on the 
completion date with respect to the DT2 acquisition). * * *
* * * * *
    (j) Expiration date. The applicability of this section expires on 
or before April 4, 2019.
0
Par. 14. Section 1.7874-9T is amended by revising paragraph (e)(1), the 
first sentence of paragraph (f) Example.(ii)(A), the seventh sentence 
of paragraph (f) Example.(iv) and paragraph (h) to read as follows:


Sec.  1.7874-9T  Disregard of certain stock in third-country 
transactions (temporary).

* * * * *
    (e) * * *
    (1) Acquisition of multiple foreign corporations that are tax 
residents of the same foreign country. When multiple foreign 
acquisitions occur pursuant to the same plan (or a series of related 
transactions) and two or more of the acquired foreign corporations were 
subject to tax as a resident of the same foreign country before the 
foreign acquisitions and all related transactions, then those foreign 
acquisitions are treated as a single foreign acquisition and those 
acquired foreign corporations are treated as a single acquired foreign 
corporation for purposes of this section.
* * * * *
    (f) * * *

    Example.  * * *
    (ii) * * *
    (A) The FT acquisition is a foreign acquisition because, 
pursuant to the FT acquisition, FA (a foreign acquiring corporation) 
acquires 100 percent of the stock of FT and is thus treated as 
indirectly acquiring 100 percent of the properties held by FT (an 
acquired foreign corporation). * * *
* * * * *
    (iv) * * * FA's indirect acquisition of FT's properties is a 
covered foreign acquisition because 35 shares of FA stock (the 
shares received by Individual B) are held by reason of holding stock 
in FT; thus, the foreign ownership percentage is 100 percent (35/
35). * * *
* * * * *
    (h) Expiration date. The applicability of this section expires on 
or before April 4, 2019.
0
Par. 15. Section 1.7874-10T is amended by revising paragraphs (d)(2) 
and (j) to read as follows:


Sec.  1.7874-10T  Disregard of certain distributions (temporary).

* * * * *
    (d) * * *
    (2) On the completion date, former domestic entity shareholders or 
former domestic entity partners, as applicable, in the aggregate, own 
(applying the attribution rules of section 318(a) with the 
modifications described in section 304(c)(3)(B)) less than five percent 
(by vote and value) of the stock of (or a partnership interest in) each 
member of the expanded affiliated group.
* * * * *
    (j) Expiration date. This section expires on or before April 4, 
2019.
0
Par. 16. Section 1.7874-11T is amended by revising paragraphs (b)(1) 
and (2), and (g) to read as follows:


Sec.  1.7874-11T  Rules regarding inversion gain (temporary).

* * * * *
    (b) * * * (1) General rule. Except as provided in paragraphs (b)(2) 
and (3) of this section, inversion gain includes income (including an 
amount treated as a dividend under section 78) or gain recognized by an 
expatriated entity for any taxable year that includes any portion of 
the applicable period by reason of a direct or indirect transfer of 
stock or other properties or license of any property either as part of 
the domestic entity acquisition, or after such acquisition if the 
transfer or license is to a specified related person.
    (2) Exception for property described in section 1221(a)(1). 
Inversion gain does not include income or gain recognized by reason of 
the transfer or license, after the domestic entity acquisition, of 
property that is described in section 1221(a)(1) in the hands of the 
transferor or licensor.
* * * * *
    (g) Expiration date. This section expires on or before April 4, 
2019.
0
Par. 17. Section 1.7874-12T is amended by revising paragraph (c) to 
read as follows:


Sec.  1.7874-12T  Definitions (temporary).

* * * * *
    (c) Expiration date. This section expires on or before April 4, 
2019.

Martin V. Franks,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel (Procedure and Administration).
[FR Doc. 2016-14649 Filed 6-22-16; 8:45 am]
 BILLING CODE 4830-01-P