[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58275-58286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15232]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10004]
RIN 1545-BM19
Guidance Under Section 367(b) Related to Certain Triangular
Reorganizations and Inbound Nonrecognition Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations regarding the
treatment of property used to acquire parent stock or securities in
connection with certain triangular reorganizations involving one or
more foreign corporations; the consequences to persons that receive
parent stock or securities pursuant to such reorganizations; and the
treatment of certain subsequent inbound nonrecognition transactions
following such reorganizations and certain other transactions. The
final regulations affect corporations engaged in certain triangular
reorganizations involving one or more foreign corporations, certain
shareholders of foreign corporations acquired in such reorganizations,
and foreign corporations that participate in certain inbound
nonrecognition transactions.
DATES:
Effective date: These regulations are effective on July 17, 2024.
Applicability dates: For dates of applicability, see Sec. Sec.
1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), 1.367(b)-
6(a)(1)(v) and (vi), 1.367(b)-10(e)(2), (3), and (5), and 1.1411-10(i).
FOR FURTHER INFORMATION CONTACT: Brady Plastaras at (202) 317-6937 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On October 6, 2023, the Department of the Treasury (Treasury
Department) and the IRS published proposed regulations (REG-117614-14)
in the Federal Register (88 FR 69559) under section 367(b) of the
Internal Revenue Code (the ``Proposed Regulations'') that would
implement the regulations announced and described in Notice 2014-32
(2014-20 IRB 1006) and Notice 2016-73 (2016-52 IRB 908), with
modifications. This document finalizes the Proposed Regulations without
substantive change. Terms used but not defined in this preamble have
the
[[Page 58276]]
meaning provided in the Proposed Regulations.
In response to a request for comments in the Proposed Regulations,
one comment was received and is discussed in the Summary of Comment and
Explanation of Revisions. This comment is available at https://www.regulations.gov or upon request. No public hearing was held on the
Proposed Regulations because there were no requests to speak.
Summary of Comment and Explanation of Revisions
I. Sec. 1.367(b)-10(d) Anti-Abuse Rule
As the preamble to the Proposed Regulations explained, the existing
regulations in Sec. 1.367(b)-10 (the ``2011 Final Regulations'')
contain an anti-abuse rule under which ``appropriate adjustments'' are
made if, ``in connection with a triangular reorganization, a
transaction is engaged in with a view to avoid the purpose'' of the
2011 Final Regulations. See Sec. 1.367(b)-10(d). The anti-abuse rule
contains an example illustrating that the earnings and profits of S
may, under certain circumstances, be deemed to include the earnings and
profits of a corporation related to P or S for purposes of determining
the consequences of the adjustments provided for in the 2011 Final
Regulations.
Notice 2014-32 described certain clarifications with respect to the
scope of the anti-abuse rule and illustrated certain of those
clarifications with an additional example. See Notice 2014-32, sections
4.03 and 4.04. The Proposed Regulations proposed to implement those
clarifications along with two new examples that further illustrate the
broad scope of the anti-abuse rule. See proposed Sec. 1.367(b)-
10(d)(3) (Example 2) (relating to a downstream property transfer) and
(d)(4) (Example 3) (relating to a taxable debt exchange). The Proposed
Regulations did not propose to alter the anti-abuse rule's operative
text, which remains unchanged from the 2011 Final Regulations. Because
Examples 2 and 3 (as well as Example 1, which was described in Notice
2014-32) merely illustrate applications of the same operative rule
finalized in the 2011 Final Regulations, the adjustments described in
those examples reflect adjustments that would be made under the 2011
Final Regulations. That is, these examples illustrate fact patterns to
which the anti-abuse rule already applies, independent of the inclusion
of the examples in the Proposed Regulations. The additional language
that was proposed to be added to Sec. 1.367(b)-10(d)(1) similarly
clarifies potential situations to which the anti-abuse rule applies,
and therefore also reflects adjustments that would be made under the
2011 Final Regulations, notwithstanding that that language was first
described in Notice 2014-32.
The comment asserted that Examples 2 and 3 are an expansion of the
operative anti-abuse rule because they involve fact patterns and impose
corrective adjustments that were not described in prior guidance and
implicate concerns that were not present when the 2011 Final
Regulations were issued. The comment claimed that the anti-abuse rule
has a narrow application that is limited to scenarios described by the
one example in Sec. 1.367(b)-10(d) of the 2011 Final Regulations. In
that example, S's earnings and profits are increased where S is
``created, organized, or funded to avoid the application of [the 2011
Final Regulations] with respect to the earnings and profits of [a
related corporation].'' As the comment correctly observed, this
adjustment increases the likelihood that the 2011 Final Regulations
will apply to treat the P acquisition as a deemed distribution. The
comment also argued, however, that the only type of adjustments
permitted under the anti-abuse rule are adjustments that increase S's
earnings and profits and, moreover, that the anti-abuse rule may impose
those adjustments only if they bear on the P acquisition, because the P
acquisition is the only type of transaction that can be ``in connection
with'' an applicable triangular reorganization.
The comment contended that Example 3 effectively introduces a new
rule by, for the first time, applying the anti-abuse rule to
``override'' the Sec. 1.367(b)-10(a)(2)(iii) priority rule, which in
the example would otherwise prevent the P acquisition from being
treated as a deemed distribution. The comment also argued that Example
3 further expands the scope of the anti-abuse rule by applying it ``in
connection with'' a transaction that occurs after the applicable
triangular reorganization rather than in connection with the P
acquisition itself. The comment similarly asserted that Example 2
presents a fact pattern that is not within the purview of the anti-
abuse rule because that example references a regulation that was issued
after the TCJA, and as such cannot reflect an abuse that the 2011 Final
Regulations contemplate. Therefore, the comment recommended that
Examples 2 and 3 should either be eliminated from the final regulations
or made to apply only prospectively as of October 5, 2023, the date the
Proposed Regulations were filed with the Federal Register.
The Treasury Department and the IRS maintain that Examples 2 and 3
are simply illustrations of the same operative anti-abuse rule--
unchanged since it was published in the 2011 Final Regulations--and
therefore decline to adopt the comment's recommendation. The comment
misunderstands the nature and purpose of the anti-abuse rule, which is
intended to serve as a backstop to Sec. 1.367(b)-10 in cases where
taxpayers purposely attempt to structure around the application of
those regulations. That structuring may take many forms and implicate
other technical provisions in ways that are not foreseeable, including
by taking advantage of changes in law that create novel planning
opportunities. The anti-abuse rule is designed to be adaptable to such
changing or unforeseen circumstances and, as such, is not limited to a
particular type of avoidance transaction.
This adaptability is reflected in the wording of the anti-abuse
rule, which, as described above, applies (i) ``if, in connection with a
triangular reorganization,'' (ii) ``a transaction is engaged in with a
view to avoid the purpose'' of Sec. 1.367(b)-10. Neither of those two
elements limit the anti-abuse rule to a specific form of avoidance
transaction, as doing so would undercut the adaptability that is
essential to the proper functioning of the rule. Moreover, the preamble
to temporary regulations issued in 2008 (TD 9400, 73 FR 30301), the
predecessor regulations to the 2011 Final Regulations in Sec.
1.367(b)-10, explains that the phrase ``in connection with'' is ``a
broad standard that includes any transaction related to the
reorganization even if the transaction is not part of the plan of
reorganization'' (73 FR 30302). The P acquisition is not the exclusive
type of transaction that may implicate the anti-abuse rule, nor is
there any requirement that such transaction precede the applicable
triangular reorganization.
Once the anti-abuse rule applies, ``appropriate'' adjustments may
be made. The types of corrective adjustments that may be appropriate
are not circumscribed to a particular set of adjustments for the same
reason that the anti-abuse rule is not limited to a particular form of
avoidance transaction. That is, the anti-abuse rule naturally
accommodates a range of adjustments because the nature of the
corrective adjustment will depend on the form of the abusive
transaction. These adjustments necessarily include adjustments that may
have the effect of
[[Page 58277]]
modifying the application of technical rules, including the priority
rule, as almost any avoidance transaction involves the exploitation of
some technical provision. The Treasury Department and the IRS have long
maintained that the anti-abuse rule is not defined by the one example
described in the 2011 Final Regulations, which uses the phrase ``for
example'' to indicate explicitly that the example is just one possible
illustration of the rule and not, as the comment argues, the only
possible illustration. See Notice 2014-32, section 3 (expressing the
concern that taxpayers ``may be interpreting the anti-abuse rule too
narrowly . . . .'').
These final regulations do, however, make a minor change to the
facts of Example 3. As described in the Proposed Regulations, that
example stated that USP did not satisfy the holding period requirement
with respect to section 245A because ``USP has held its stock in FP for
fewer than 365 days.'' The Treasury Department and the IRS did not
intend for that statement to create any inference as to how the holding
period requirement could be satisfied and accordingly revise the
example's facts to provide that USP simply ``will not'' satisfy the
holding period requirement.
The comment also questioned why the clarifications to the
application of the anti-abuse rule that were described in Notice 2014-
32, such as Example 1, were not included among the rules listed in
proposed Sec. 1.367(b)-10(e)(2) as having an April 25, 2014,
applicability date. Section 1.367(b)-10(e)(2) does not explicitly
reference those clarifications because, as noted above, they simply
clarify potential situations to which the anti-abuse rule applies. On
the other hand, the other changes described in Notice 2014-32 modify
substantive rules and are therefore listed under Sec. 1.367(b)-
10(e)(2) as having an April 25, 2014, applicability date.
II. Definition of ``Foreign Subsidiary''
Under the Proposed Regulations, the excess asset basis (``EAB'')
rules create a deemed distribution of specified earnings to the foreign
acquired corporation from foreign subsidiaries, with specified earnings
drawn from each subsidiary on a pro rata basis. See proposed Sec.
1.367(b)-3(g)(1) and (3). A ``foreign subsidiary'' is defined by
reference to the ownership requirements of section 1248(c)(2)(B).
Section 1248(c)(2)(B) describes a 10-percent ownership threshold,
taking into account the constructive ownership rules in section 958(b).
Under that definition, therefore, a foreign subsidiary could include a
foreign corporation that the foreign acquired corporation is treated as
owning solely through constructive ownership and in which it has no
direct or indirect ownership interest. These final regulations make a
minor change to Sec. 1.367(b)-3(g)(1) to clarify that possible result.
See Sec. 1.367(b)-3(g)(1), fourth sentence (``the distribution is
treated as being made through any intermediate owners, or directly from
any constructively owned foreign subsidiaries, where applicable'')
(emphasis added).
The Treasury Department and the IRS believe this rule appropriately
balances the need for a comprehensive mechanism to correct a foreign
acquired corporation's basis imbalance with administrability concerns.
For example, while in many cases the basis imbalance could be corrected
by taking into account the earnings and profits of the particular
subsidiary that participated in an applicable triangular
reorganization, that subsidiary may no longer be identifiable or exist
when the EAB rules are applied to the foreign acquired corporation.
Thus, sourcing specified earnings on a pro rata basis from related
foreign corporations provides an administrable rule while reducing the
possibility that the basis imbalance goes uncorrected.
Effect on Other Documents
The following publications are obsoleted as of July 17, 2024:
Notice 2014-32 (2014-20 IRB 1006)
Notice 2016-73 (2016-52 IRB 908)
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of the Office of
Management and Budget (OMB) before collecting information from the
public, whether such collection of information is mandatory, voluntary,
or required to obtain or retain a benefit. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid control number assigned by the
OMB.
The collections of information in Sec. 1.367(b)-1(c)(4)(viii) and
(ix) apply to taxpayers that engage in transactions described in Sec.
1.367(b)-3(g) or Sec. 1.367(b)-10. These reporting requirements are
necessary for the IRS's audit and examination purposes, and in
particular to identify transactions that should be subject to these
final regulations.
The information collection is a statement by corporations attached
to their timely filed Federal tax returns (or Form 5471, as applicable)
that describes certain transactions and computations, as described in
Sec. Sec. 1.367(b)-3(g) and 1.367(b)-10, that are relevant to these
final regulations. Any collection burden will be accounted for in OMB
control number 1545-0123.
Taxpayers should keep copies of their filed returns and associated
documentation as required by section 6001 of the Internal Revenue Code
(the Code). These general tax records are already approved by the OMB
under control number 1545-0123. Books or records relating to a
collection of information must be retained as long as their contents
may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as
required by section 6103 of the Code.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this rulemaking will not have a significant
economic impact on a substantial number of small entities within the
meaning of section 601(6) of the Regulatory Flexibility Act. As
discussed in the preamble to the Proposed Regulations, this
certification is based on the expectation that the taxpayers affected
by these final regulations will generally be domestic and foreign
corporations that participate in certain triangular reorganizations.
The triangular reorganizations at issue represent a narrow set of
abusive transactions that have typically been engaged in by large,
publicly traded corporations. Such transactions are highly
sophisticated and are thus unlikely to involve small domestic entities.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Internal Revenue Code, the
proposed regulations (REG-117614-14) preceding these final regulations
were submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on the impact on small
[[Page 58278]]
business, and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These final regulations do not include any Federal mandate
that may result in expenditures by State, local, or Tribal governments,
or by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications, do not impose substantial direct compliance
costs on State and local governments, and do not preempt State law
within the meaning of the Executive order.
Statement of Availability of IRS Documents
Any IRS Revenue Procedure, Revenue Ruling, Notice, or other
guidance cited in this document is published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.
Drafting Information
The principal author of these regulations is Brady Plastaras of the
Office of the 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 is amended by adding an
entry for Sec. 1.1411-10 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1411-10 also issued under 26 U.S.C. 367.
* * * * *
0
Par. 2. Section 1.367(a)-3 is amended by revising paragraphs (a)(2)(iv)
and (g)(1)(viii) to read as follows:
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) * * *
(2) * * *
(iv) Certain triangular reorganizations described in Sec.
1.367(b)-10. If, in an exchange under section 354 or 356, one or more
U.S. persons exchange stock or securities of T (as defined in Sec.
1.367(b)-10(a)(3)(i)) in connection with a transaction described in
Sec. 1.367(b)-10 (applying to certain acquisitions of parent stock or
securities for property in triangular reorganizations), section
367(a)(1) does not apply to such U.S. persons with respect to the
exchange of the stock or securities of T if the condition in paragraph
(a)(2)(iv)(A) or (B) of this section is satisfied. See Sec. 1.367(b)-
10(a)(2)(iii) (providing a similar rule that excludes certain
transactions from the application of Sec. 1.367(b)-10).
(A) The amount of gain in the T stock or securities that would
otherwise be recognized under section 367(a)(1) (without regard to any
exceptions thereto) pursuant to the indirect stock transfer rules of
paragraph (d) of this section is less than the sum of the amount of the
deemed distribution under Sec. 1.367(b)-10 that would be treated and
subject to U.S. tax as a dividend under section 301(c)(1) (or would
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that
would be subject to U.S. tax) and the amount of such deemed
distribution that would be treated and subject to U.S. tax as gain from
the sale or exchange of property under section 301(c)(3) (or would give
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would
be subject to U.S. tax) if Sec. 1.367(b)-10 would otherwise apply to
the triangular reorganization.
(B) T is a foreign corporation, but only to the extent that the
stock or securities of T are exchanged for stock or securities of P
that were acquired by S in exchange for property in the P acquisition
(as the terms P, S, property, and P acquisition are defined in Sec.
1.367(b)-10(a)). Such exchange of T stock or securities is subject to
the rules under Sec. 1.367(b)-4(g). Section 367(a) applies to the
exchange of T stock or securities to the extent that such stock or
securities are exchanged for P stock or securities that were not
acquired by S in exchange for property in the P acquisition.
* * * * *
(g) * * *
(1) * * *
(viii) Except as provided in this paragraph (g)(1)(viii), paragraph
(a)(2)(iv) of this section applies to exchanges occurring on or after
May 17, 2011. For exchanges that occur prior to May 17, 2011, see Sec.
1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR part 1 revised as of
April 1, 2011. Paragraph (a)(2)(iv)(A) of this section, to the extent
it relates to amounts that would be subject to U.S. tax or give rise to
an inclusion under section 951(a)(1)(A) that would be subject to U.S.
tax, applies to triangular reorganizations that are completed on or
after April 25, 2014, unless T was not related to P or S (within the
meaning of section 267(b)) immediately before the triangular
reorganization; the triangular reorganization was entered into either
pursuant to a written agreement that was (subject to customary
conditions) binding before April 25, 2014, and at all times afterwards,
or pursuant to a tender offer announced before April 25, 2014, that is
subject to section 14(d) of the Securities and Exchange Act of 1934 (15
U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through
240.14d-101) or that is subject to comparable foreign laws; and to the
extent the P acquisition that occurs pursuant to the plan of
reorganization is not completed before April 25, 2014, the P
acquisition was included as part of the plan before April 25, 2014.
Paragraph (a)(2)(iv)(B) of this section applies to transactions
completed on or after December 2, 2016. Paragraph (a)(2)(iv)(A) of this
section, to the extent it relates to amounts that would give rise to an
inclusion under section 951A(a) that would be subject to U.S. tax,
applies to triangular reorganizations that are completed on or after
October 5, 2023.
* * * * *
0
Par. 3. Section 1.367(b)-1 is amended by:
0
1. Removing the language ``and'' at the end of paragraph (c)(2)(iv)(B);
0
2. Removing the period at the end of paragraph (c)(2)(v) and adding the
language ``; and'' in its place;
0
3. Adding paragraph (c)(2)(vi);
0
4. In paragraph (c)(3)(ii)(A), removing the language ``paragraph
(c)(2)(i) or (v)'' and adding in its place the language ``paragraph
(c)(2)(i), (v), or (vi)'';
[[Page 58279]]
0
5. Revising paragraph (c)(4)(v);
0
6. Removing the language ``and'' at the end of paragraph (c)(4)(vi);
0
7. Removing the period at the end of paragraph (c)(4)(vii)(B) and
adding a semicolon in its place; and
0
8. Adding paragraphs (c)(4)(viii) and (ix).
The additions and revision read as follows:
Sec. 1.367(b)-1 Other transfers.
* * * * *
(c) * * *
(2) * * *
(vi) A domestic or foreign corporation (S) that acquires stock or
securities of another corporation (P) in a transaction described in
Sec. 1.367(b)-10(a)(1), without regard to the exceptions in Sec.
1.367(b)-10(a)(2).
* * * * *
(4) * * *
(v) Any information that is or would be required to be furnished
with a Federal income tax return pursuant to regulations or other
guidance under section 332, 351, 354, 355, 356, 361, 368, or 381
(whether or not a Federal income tax return is required to be filed),
if such information has not otherwise been provided by the person
filing the section 367(b) notice;
* * * * *
(viii) In the case of a corporation (S) described in paragraph
(c)(2)(vi) of this section, the rules of this paragraph (c)(4) apply by
treating the acquisition of the stock or securities of P in exchange
for property as the section 367(b) exchange referred to in paragraph
(a) of this section. The section 367(b) notice must also include a
complete description of the acquisition of the stock or securities of P
in exchange for property, including a description of the property
provided in exchange for the stock or securities and any related
transactions involving the acquisition of the stock or securities. The
section 367(b) notice must describe any adjustments made pursuant to
Sec. 1.367(b)-10 or, if no adjustments are made, explain why no such
adjustments were made; and
(ix) In the case of an exchange to which Sec. 1.367(b)-3(g)
applies, a statement describing how any excess asset basis (as defined
in Sec. 1.367(b)-3(g)(2)(i)) arose, the amount of excess asset basis,
and a description of the computation of the amount of excess asset
basis.
* * * * *
0
Par. 4. Section 1.367(b)-2 is amended by:
0
1. In paragraph (c)(1), adding a sentence after the current first
sentence;
0
2. Adding a sentence to the end of paragraph (d)(2)(ii);
0
3. In paragraph (d)(3)(ii), removing the language ``subsidiaries of''
and adding in its place the language ``corporations owned by'';
0
4. Adding a sentence to the end of paragraph (d)(3)(ii);
0
5. In paragraph (e)(4) (Example 2), removing the language ``foreign
subsidiary'' and adding in its place the language ``foreign
corporation''; and
0
6. In paragraphs (j)(2)(i) and (ii), removing the language ``is
required to include in income either the all earnings and profits
amount or the section 1248 amount under the provisions of Sec.
1.367(b)-3 or 1.367(b)-4'' and adding in its place the language
``exchanges stock pursuant to a transaction described in Sec.
1.367(b)-3 or Sec. 1.367(b)-4(b)(1)(i), (b)(2)(i), (b)(3), (e), or
(g)''.
The additions read as follows:
Sec. 1.367(b)-2 Definitions and special rules.
* * * * *
(c) * * *
(1) * * * But see Sec. 1.1411-10(c)(3)(ii), which for certain
exchanges modifies the section 1248 amount for purposes of section
1411. * * *
* * * * *
(d) * * *
(2) * * *
(ii) * * * But see Sec. 1.1411-10(c)(3)(ii), which for certain
exchanges modifies the all earnings and profits amount for purposes of
section 1411.
* * * * *
(3) * * *
(ii) * * * But see Sec. 1.367(b)-3(g)(1), which adjusts the all
earnings and profits amount through a deemed distribution of certain
earnings and profits of foreign subsidiaries owned by the foreign
acquired corporation.
* * * * *
0
Par. 5. Section 1.367(b)-3 is amended by adding paragraph (g) to read
as follows:
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
* * * * *
(g) All earnings and profits amount adjusted for excess asset
basis--(1) General rule. If there is excess asset basis with respect to
a foreign acquired corporation and the condition described in paragraph
(g)(1)(i) or (ii) of this section is satisfied, then, except as
provided in paragraph (g)(5) of this section, an exchanging shareholder
to which paragraph (b)(3)(i) of this section applies must compute the
all earnings and profits amount with respect to its stock in the
foreign acquired corporation as if, immediately before the inbound
nonrecognition transaction, the foreign acquired corporation had
received a distribution of property from a foreign subsidiary under
section 301 in an amount equal to the specified earnings. In addition,
the deemed distribution described in the preceding sentence is treated
as occurring for all purposes of the Internal Revenue Code. For
purposes of this paragraph (g)(1), the amount of the distribution from
a foreign subsidiary is equal to the amount of earnings and profits of
that foreign subsidiary that is designated as specified earnings under
paragraph (g)(3) of this section. In the case of a foreign subsidiary
the stock of which is not held directly by the foreign acquired
corporation, the distribution is treated as being made through any
intermediate owners, or directly from any constructively owned foreign
subsidiaries, where applicable. For purposes of this paragraph (g)(1),
references to the foreign acquired corporation, S, and a foreign
subsidiary include any predecessor corporation.
(i) S previously acquired in exchange for property stock or
securities of the foreign acquired corporation in connection with a
triangular reorganization described in Sec. 1.358-6(b)(2), and the
foreign acquired corporation and S did not make adjustments that have
the effect of a distribution of property from S to the foreign acquired
corporation under Sec. 1.367(b)-10(b)(1).
(ii) The excess asset basis is attributable, directly or
indirectly, to property previously provided by a foreign subsidiary of
the foreign acquired corporation in connection with a transaction not
described in paragraph (g)(1)(i) of this section and undertaken with a
principal purpose to create such excess asset basis.
(2) Definitions. The following definitions apply for purposes of
this paragraph (g).
(i) Excess asset basis. The term excess asset basis means, with
respect to a foreign acquired corporation, the amount by which the
inside asset basis of that corporation exceeds the sum of the following
amounts:
(A) The earnings and profits of the foreign acquired corporation
attributable to its outstanding stock. For purposes of this paragraph
(g)(2)(i)(A), such earnings and profits are determined under the
principles of Sec. 1.367(b)-2(d) but without regard to whether the
exchanging shareholder is described in paragraph (b)(1) of this section
or whether the exchanging shareholder is a U.S. person or a foreign
person. Such earnings and profits include amounts described in section
1248(d)(3) or (4).
[[Page 58280]]
(B) The aggregate basis in the outstanding stock of the foreign
acquired corporation determined immediately before the nonrecognition
transaction described in paragraph (a) of this section (the inbound
nonrecognition transaction) and therefore without regard to any basis
increase described in Sec. 1.367(b)-2(e)(3)(ii) resulting from such
inbound nonrecognition transaction.
(C) The aggregate amount of liabilities of the foreign acquired
corporation that are assumed (determined under the principles of
section 357(d)) by the domestic acquiring corporation in the inbound
nonrecognition transaction.
(ii) Foreign subsidiary. The term foreign subsidiary means, with
respect to a foreign acquired corporation, a foreign corporation with
respect to which the foreign acquired corporation satisfies the
ownership requirements of section 1248(c)(2)(B) but for this purpose
treating the foreign acquired corporation as the United States person
referred to in section 1248(c)(2)(B).
(iii) Inbound nonrecognition transaction. The term inbound
nonrecognition transaction has the meaning set forth in paragraph
(g)(2)(i)(B) of this section.
(iv) Inside asset basis. The term inside asset basis means, with
respect to a foreign acquired corporation, the aggregate of the
adjusted basis of all the assets of that corporation in the hands of
the domestic acquiring corporation determined immediately after the
inbound nonrecognition transaction.
(v) Lower-tier earnings. The term lower-tier earnings means, with
respect to a foreign acquired corporation, the sum of the earnings and
profits (including deficits) of each foreign subsidiary.
(vi) Property. The term property has the same meaning as in Sec.
1.367(b)-10(a)(3)(ii).
(vii) S. The term S has the same meaning as in Sec. 1.367(b)-
10(a)(3)(i).
(viii) Specified earnings. The term specified earnings means, with
respect to a foreign acquired corporation, the lesser of the following
amounts:
(A) Lower-tier earnings; and
(B) The excess asset basis of the foreign acquired corporation.
(3) Designation of specified earnings. If lower-tier earnings
exceed specified earnings, then the portion of lower-tier earnings that
is designated as specified earnings is determined by reference to the
earnings and profits of each foreign subsidiary on a pro rata basis in
proportion to each foreign subsidiary's share of lower-tier earnings.
(4) Anti-abuse rule. Appropriate adjustments are made pursuant to
this section if a transaction is engaged in with a view to avoid the
purposes of this paragraph (g). For example, if a transaction is
engaged in with a view to reduce excess asset basis, including by
increasing the basis in the stock of the foreign acquired corporation
without a corresponding increase in the basis of the assets of the
foreign acquired corporation, that increase in the basis in the stock
of the foreign acquired corporation will be disregarded for purposes of
computing excess asset basis.
(5) Prohibition against affirmative use. This paragraph (g) does
not apply to an inbound nonrecognition transaction if a transaction
described in paragraph (g)(1) of this section was entered into with a
principal purpose of subjecting the inbound nonrecognition transaction
to this paragraph (g). For example, this paragraph (g) will not apply
to an inbound nonrecognition transaction if a taxpayer engaged in a
transaction described in paragraph (g)(1) of this section with a
principal purpose of accessing tax attributes of lower-tier foreign
subsidiaries by reason of a deemed distribution of lower-tier earnings
of the foreign acquired corporation.
(6) Examples. The application of this paragraph (g) is illustrated
by the examples in this paragraph (g)(6). In each example, all
corporations have a calendar year-end and use the United States dollar
as their functional currency.
(i) Example 1: Excess asset basis from triangular reorganization--
(A) Facts. USP, a domestic corporation, owns all of the stock of USS,
also a domestic corporation, and 80 percent of the stock of FP, a
foreign corporation. USS owns the remaining 20 percent of the stock of
FP. FP owns all of the stock of FS1, which in turn owns all of the
stock of FS2. Both FS1 and FS2 are foreign corporations. In a
reorganization described in section 368(a)(1)(F) (F reorganization), US
Newco, a newly formed domestic corporation, acquires all of the assets
of FP solely in exchange for stock of US Newco, which FP distributes to
USP and USS in liquidation. Immediately before the F reorganization,
the stock of FP owned by USP has a fair market value of $80x and an
adjusted basis of $4x. The stock of FP owned by USS has a fair market
value of $20x and an adjusted basis of $1x. The all earnings and
profits amounts with respect to USP's stock of FP and USS's stock of
FP, determined before any adjustments required by paragraph (g)(1) of
this section, are $32x and $8x, respectively. FP holds assets with an
adjusted basis of $95x, has no liabilities, and has $40x of earnings
and profits attributable to its outstanding stock. FS1 and FS2 have
$30x and $70x of earnings and profits, respectively, all of which are
described in section 959(c)(3). Dividends paid by FS2 to FS1, and by
FS1 to FP, would qualify for the exception to foreign personal holding
company income under section 954(c)(6). Before the applicability date
described in paragraph (g)(7)(i) of this section, and separate from the
F reorganization, FS1 provided property to FP in exchange for stock of
FP in connection with a triangular reorganization described in Sec.
1.358-6(b)(2), and neither FP nor FS1 made adjustments that had the
effect of a distribution of property from FS1 to FP under Sec.
1.367(b)-10(b)(1).
(B) Analysis--(1) All earnings and profits amount. The F
reorganization is an asset acquisition described in section 368(a)(1)
and is thus subject to section 367(b) and this section. Under paragraph
(b)(3) of this section, USP and USS each must include in income as a
deemed dividend the all earnings and profits amount with respect to
their stock of FP. Because there is excess asset basis with respect to
FP (as determined in paragraph (g)(6)(i)(B)(2) of this section), USP
and USS must compute the all earnings and profits amounts attributable
to their stock of FP as if FP had received a distribution of specified
earnings, immediately before the F reorganization. See paragraph (g)(1)
of this section. Because the stock of FS2 is indirectly owned by FP, to
the extent the specified earnings are determined by reference to the
earnings and profits of FS2, FS2 is treated as making a distribution to
FS1 under section 301, and FS1 is then treated as making a distribution
to FP under section 301 in an amount equal to the sum of the amount of
specified earnings determined by reference to the earnings and profits
of FS1 (determined without regard to the deemed distribution from FS2)
and the amount of the deemed distribution received from FS2. See id.
(2) Excess asset basis. The amount of excess asset basis is $50x,
calculated as the amount by which FP's inside asset basis ($95x)
exceeds the sum of FP's earnings and profits ($40x), the aggregate
basis in the outstanding stock of FP ($5x), and the amount of
liabilities of FP assumed by US Newco in the F reorganization ($0). See
paragraph (g)(2)(i) of this section.
(3) Deemed distribution of specified earnings. The amount of
specified earnings equals $50x, the lesser of the following amounts:
the sum of the earnings and profits of FS1 and FS2 ($100x); and the
amount of excess asset
[[Page 58281]]
basis with respect to FP ($50x). See paragraph (g)(2)(viii) of this
section. FP is accordingly treated as receiving a distribution of $50x
from FS1. See paragraph (g)(1) of this section. Under paragraph (g)(3)
of this section, $15x ($50x x ($30x/$100x)) of FS1's earnings and
profits and $35x ($50x x ($70x/$100x)) of FS2's earnings and profits
are designated as specified earnings. FS2 is treated as distributing
$35x to FS1. See paragraph (g)(1) of this section. Under sections
301(c)(1) and 954(c)(6), the $35x deemed distribution from FS2 to FS1
is treated as a dividend that does not give rise to foreign personal
holding company income. FS1 must accordingly increase its earnings and
profits described in section 959(c)(3) by $35x to $65x, and FS2 must
decrease its earnings and profits described in section 959(c)(3) by the
same amount. FS1 is then treated as making a distribution of $50x to
FP. See paragraph (g)(1) of this section. Under sections 301(c)(1) and
954(c)(6), the $50x deemed distribution is also treated as a dividend
that does not give rise to foreign personal holding company income. FP
must accordingly increase its earnings and profits described in section
959(c)(3) by $50x to $90x, and FS1 must decrease its earnings and
profits described in section 959(c)(3) by the same amount.
(4) Adjusted all earnings and profits amount attributable to USP's
FP stock. USP must compute the all earnings and profits amount
attributable to its stock of FP after taking into account the $50x
increase to FP's earnings and profits that resulted from the deemed
distribution of specified earnings. See paragraph (g)(1) of this
section. Because USP owns 80% of the stock of FP, $40x (calculated as
80% of $50x) of the specified earnings are attributable to USP's stock
of FP and are included in the all earnings and profits amount
attributable to USP's stock of FP. The all earnings and profits amount
that USP must include in income as a deemed dividend is therefore $72x
($32x + $40x).
(5) Adjusted all earnings and profits amount attributable to USS's
FP stock. USS must compute the all earnings and profits amount
attributable to its stock of FP after taking into account the $50x
increase to FP's earnings and profits that resulted from the deemed
distribution of specified earnings. See paragraph (g)(1) of this
section. Because USS owns 20% of the stock of FP, $10x (calculated as
20% of $50x) of the specified earnings are attributable to USS's stock
of FP and are included in the all earnings and profits amount
attributable to USS's stock of FP. The all earnings and profits amount
that USS must include in income as a deemed divided is therefore $18x
($8x + $10x).
(ii) Example 2: Principal purpose of creating excess asset basis--
(A) Facts. USP, a domestic corporation, owns all of the stock of FP,
which in turn owns all of the stock of FS. Both FP and FS are foreign
corporations. The all earnings and profits amount with respect to USP's
stock of FP, determined before any adjustments required by paragraph
(g)(1) of this section, is $50x. FP has no other earnings and profits
other than the $50x that reflect USP's all earnings and profits amount.
FS has $200x of earnings and profits, all of which are earnings and
profits described in section 959(c)(2) (PTEP) because those earnings
and profits gave rise to an earlier income inclusion under section 951
with respect to USP. Increases in stock basis were made under section
961 by reason of USP's section 951 inclusion. FP has excess asset basis
of $100x as a result of a previous transaction that was undertaken with
a principal purpose of creating excess asset basis in which FS provided
$100x of property to FP. At the time of that transaction, FP did not
also have a principal purpose of subjecting an inbound nonrecognition
transaction to this paragraph (g) and thus paragraph (g)(5) of this
section is not applicable. Subsequently, in a liquidation described in
section 332, FP distributes all of its assets to USP and the stock of
FP is cancelled (the FP liquidation).
(B) Analysis--(1) All earnings and profits amount. The FP
liquidation is subject to section 367(b) and this section. Under
paragraph (b)(3) of this section, USP must include in income as a
deemed dividend the all earnings and profits amount with respect to its
stock of FP. Because there is excess asset basis with respect to FP,
USP must compute the all earnings and profits amount attributable to
its stock of FP as if FP had received a distribution of specified
earnings immediately before the FP liquidation. See paragraph (g)(1) of
this section.
(2) Deemed distribution of specified earnings. The amount of
specified earnings equals $100x, the lesser of the following amounts:
the earnings and profits of FS ($200); and the amount of excess asset
basis with respect to FP ($100x). See paragraph (g)(2)(viii) of this
section. FS is accordingly treated as making a distribution of $100x to
FP. See paragraph (g)(1) of this section. Under sections 301(c)(1) and
959(b), the $100x deemed distribution from FS to FP is treated as a
distribution of PTEP that is not included in the gross income of FP for
purposes of section 951. The distribution reduces FS's earnings and
profits and PTEP with respect to USP by $100x and increases FP's
earnings and profits and PTEP with respect to USP by $100x.
Furthermore, appropriate adjustments are made under section 961 for the
distribution of PTEP.
(3) Adjusted all earnings and profits amount attributable to USP's
stock of FP. USP must compute the all earnings and profits amount
attributable to its stock of FP after taking into account the $100x
increase to FP's earnings and profits that resulted from the deemed
distribution of specified earnings. See paragraph (g)(1) of this
section. Because the deemed distribution consisted entirely of PTEP
with respect to USP, the deemed distribution does not affect USP's all
earnings and profits amount of $50x. See Sec. 1.367(b)-2(d)(2)(ii).
USP must therefore include $50x in income as a deemed dividend under
this section. USP must also recognize any foreign currency gain or loss
under section 986(c) with respect to the $100x of PTEP of FP. See Sec.
1.367(b)-2(j)(2).
(7) Applicability date--(i) In general. This paragraph (g) (other
than paragraphs (g)(2)(viii), (g)(3) and (5) of this section) applies
to transactions completed on or after December 2, 2016, and to any
transactions treated as completed before December 2, 2016, as a result
of an entity classification election made under Sec. 301.7701-3 of
this chapter that is filed on or after December 2, 2016. Paragraphs
(g)(2)(viii), (g)(3) and (5) of this section apply to transactions
completed on or after October 5, 2023.
(ii) Transactions completed (or elections made) on or after
December 2, 2016, and before October 5, 2023. Except as provided in
paragraph (g)(7)(iii) of this section, the following definitions (in
lieu of the corresponding definitions or in addition to the definitions
in paragraph (g)(2) of this section) and rules apply with respect to
transactions completed on or after December 2, 2016, and to any
transactions treated as completed before December 2, 2016, as a result
of an entity classification election made under Sec. 301.7701-3 of
this chapter that is filed on or after December 2, 2016, but before
October 5, 2023:
(A) The term specified earnings means, with respect to the stock of
a foreign acquired corporation that is exchanged by an exchanging
shareholder, the lesser of the following amounts (but not below zero):
(1) The sum of the earnings and profits (including a deficit) with
respect to each foreign subsidiary of the foreign acquired corporation
that are attributable under section 1248(c)(2) to the stock of the
foreign acquired
[[Page 58282]]
corporation exchanged (lower-tier earnings). For purposes of the
preceding sentence, the modifications described in Sec. 1.367(b)-
2(d)(2) and (d)(3)(i) apply. Thus, for example, the amount of the
earnings and profits of a foreign subsidiary that are attributable to
stock of the foreign acquired corporation is determined without regard
to whether the foreign subsidiary was a controlled foreign corporation
at any time during the five years preceding the inbound nonrecognition
transaction.
(2) The product of the excess asset basis of the foreign acquired
corporation, multiplied by the exchanging shareholder's specified
percentage.
(3) The amount of gain that would be realized by the exchanging
shareholder if, immediately before the inbound nonrecognition
transaction, the exchanging shareholder had sold the stock of the
foreign acquired corporation for fair market value, reduced by the
exchanging shareholder's all earnings and profits amount (for this
purpose, determined without regard to the modifications described in
this paragraph (g)) (specified stock gain).
(B) The term specified percentage means, with respect to an
exchanging shareholder, a fraction (expressed as a percentage), the
numerator of which is the sum of the aggregate of the specified stock
gain with respect to all exchanging shareholders to which paragraph
(b)(3) of this section applies and the aggregate of the gain realized
(regardless of whether such gain is recognized) with respect to the
stock exchanged by all other exchanging shareholders.
(C) If there is excess asset basis with respect to a foreign
acquired corporation, as determined under paragraph (g)(2)(i) of this
section, a taxpayer may reduce the excess asset basis to the extent
that the excess asset basis is not attributable, directly or
indirectly, to property provided by a foreign subsidiary of the foreign
acquired corporation. For example, if there was a transfer of property
to the foreign acquired corporation described in section 362(e)(2), and
the election described in section 362(e)(2)(C) was made to limit the
basis in the stock received in the foreign acquired corporation to its
fair market value, then, for purposes of determining excess asset
basis, the basis in the stock of the foreign acquiring corporation may
be determined without regard to the application of section 362(e)(2).
(iii) Early application. A taxpayer and its related parties (within
the meaning of sections 267(b) and 707(b)(1)) may choose to apply
paragraphs (g)(1) through (6) of this section to all open taxable years
beginning before July 17, 2024, provided that the taxpayer and its
related parties consistently apply paragraphs (g)(1) through (6) of
this section and Sec. 1.367(b)-1(c)(4)(ix) for such years.
0
Par. 6. Section 1.367(b)-4 is amended by:
0
1. In paragraph (a), adding a sentence after the fifth sentence;
0
2. In paragraph (a), removing the language ``paragraph (g)'' in the
current sixth sentence and adding in its place the language ``paragraph
(h)'' and removing the language ``paragraph (h)'' in the current
seventh sentence and adding in its place the language ``paragraph
(i)'';
0
3. In paragraph (e)(5) Example 2 (ii)(B), removing the language
``paragraph (g)(1)'' wherever it appears and adding in its place the
language ``paragraph (h)(1)'';
0
4. In paragraph (f)(3) Example 2 (ii), removing the language
``paragraph (g)(1)'' wherever it appears and adding in its place the
language ``paragraph (h)(1)'';
0
5. Redesignating paragraphs (g) and (h) as paragraphs (h) and (i),
respectively;
0
6. Adding a new paragraph (g);
0
7. In newly redesignated paragraph (i), adding a sentence after the
sixth sentence; and
0
8. In newly redesignated paragraph (i), removing the language
``paragraph (h), paragraphs (a), (b) introductory text, (b)(1)(i)(C),
(d)(1), (e), (f), and (g)'' and adding in its place the language
``paragraph (i), paragraphs (a), (b) introductory text, (b)(1)(i)(C),
(d)(1), (e), (f), and (h)'', and removing the language ``paragraphs (f)
and (g)(5)'' and adding in its place the language ``paragraphs (f) and
(h)(5)''.
The additions read as follows:
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by
a foreign corporation in certain nonrecognition transactions.
(a) * * * Paragraph (g) of this section provides rules regarding
exchanges that occur pursuant to a transaction described in Sec.
1.367(b)-10(a)(1), without regard to the exceptions in Sec. 1.367(b)-
10(a)(2). * * *
* * * * *
(g) Income inclusion and gain recognition in exchanges occurring in
connection with certain triangular reorganizations--(1) Rule. If, in an
exchange under section 354 or 356 that occurs in connection with a
transaction described in Sec. 1.367(b)-10, an exchanging shareholder
exchanges stock or securities of a foreign acquired corporation, then,
to the extent that the exchanging shareholder receives stock or
securities of P acquired by S in exchange for property in the P
acquisition, the shareholder must--
(i) Include in income as a deemed dividend the section 1248 amount
attributable to the stock that the shareholder exchanges; and
(ii) After taking into account the increase in basis in the stock
provided in Sec. 1.367(b)-2(e)(3)(ii) resulting from the deemed
dividend (if any), recognize all realized gain with respect to the
stock or securities that would not otherwise be recognized.
(2) Special rules and definitions. For the purposes of this
paragraph (g), an exchanging shareholder means a United States person
or foreign person that exchanges stock of a foreign acquired
corporation in a prescribed exchange, regardless of whether such United
States person is a section 1248 shareholder or such foreign person is a
foreign corporation in which a United States person is a section 1248
shareholder. As used in this paragraph (g), the terms P, S, property,
and P acquisition have the meanings provided in Sec. 1.367(b)-10(a),
and the term foreign person means a person that is not a United States
person.
(3) Example. The following example illustrates the rules of this
paragraph (g):
(i) Facts. USP, a domestic corporation, owns all of the stock of FP
and USS. FP is a foreign corporation that owns all of the stock of FS,
a foreign corporation. USS is a domestic corporation that owns all of
the stock of FT, a foreign corporation. USS owns 100 shares of stock of
FT, which constitutes a single block of stock with a fair market value
of $100x, an adjusted basis of $20x, and a section 1248 amount of $50x.
FS has earnings and profits of $60x. A dividend from FS to FP would
qualify for the exception to foreign personal holding company income
under section 954(c)(6). FP issues 100 shares of voting stock with a
fair market value of $100x to FS, $40x of which (the 40-percent FP
block) is issued in exchange for $40x of newly issued common stock of
FS and $60x of which (the 60-percent FP block) is issued in exchange
for $60x of cash. FS acquires all of the stock of FT held by USS solely
in exchange for the $100x of voting stock of FP (that is, FS exchanges
both the 40-percent FP block and the 60-percent FP block) in a
triangular reorganization described in section 368(a)(1)(B) (triangular
B reorganization).
(ii) Analysis--(A) Application of Sec. 1.367(b)-10. The triangular
B reorganization is described in Sec. 1.367(b)-10, and the $60x of
cash constitutes property under Sec. 1.367(b)-
[[Page 58283]]
10(a)(3)(ii). Pursuant to Sec. 1.367(b)-10(b)(1), adjustments must be
made that have the effect of a distribution of property in the amount
of $60x from FS to FP under section 301. The $60x deemed distribution
is treated as separate from, and occurring immediately before, FS's
acquisition of the 60-percent FP block used in the triangular B
reorganization. The $60x deemed distribution from FS to FP results in
$60x of dividend income to FP under section 301(c)(1) that is not
foreign personal holding company income under section 954(c)(6).
(B) Application of paragraph (g) of this section. Pursuant to Sec.
1.367(a)-3(a)(2)(iv)(B), this paragraph (g) applies to $60x of the
stock of FT (the 60-percent FT block) exchanged for the 60-percent FP
block. Thus, under paragraph (g)(1)(i) of this section, USS must
include in income a $30x deemed dividend (representing 60 percent of
USS's $50x section 1248 amount) with respect to the 60-percent FT block
exchanged for the 60-percent FP block. In addition, under paragraph
(g)(1)(ii) of this section, USS must recognize its realized gain that
would not otherwise be recognized with respect to the 60-percent FT
block. USS's fair market value and adjusted basis in the 60-percent FT
block are $60x (60 percent of the $100x fair market value of the stock
of FT) and $12x (60 percent of the $20x adjusted basis of the stock of
FT), respectively. USS's initial built-in gain with respect to the 60-
percent FT block is accordingly $48x ($60x fair market value less $12x
adjusted basis). The $30x deemed dividend increases USS's basis in the
60-percent FT block to $42 ($12x + $30x), leaving $18x ($60x-$42x) of
built-in gain. USS must therefore recognize the remaining $18x of gain
with respect to the 60-percent FT block.
(C) Application of paragraph (b) of this section and regulations
under section 367(a). USS has $32x of built-in gain in the remaining
$40x of stock of FT (the 40-percent FT block) that USS exchanged for
the 40-percent FP block, calculated as USS's initial $80 of built-in
gain in all of its stock of FT less the $48x of initial built-in gain
attributable to the 60-percent FT block. USS's section 1248 amount in
the 40-percent FT block is $20x, calculated as 40 percent of USS's $50x
section 1248 amount. USS does not recognize a deemed dividend of the
$20x section 1248 amount under paragraph (b) of this section because FT
remains a controlled foreign corporation with respect to which USS is a
section 1248 shareholder immediately after the triangular B
reorganization. Unless USS properly files a gain recognition agreement
pursuant to Sec. Sec. 1.367(a)-3(b) and 1.367(a)-8, USS recognizes the
$32x of built-in gain under section 367(a)(1) with respect to the 40-
percent FT block.
* * * * *
(i) * * * Paragraph (g) of this section applies to transactions
completed on or after December 2, 2016. * * *
0
Par. 7. Section 1.367(b)-6 is amended by adding paragraphs (a)(1)(v)
and (vi) to read as follows:
Sec. 1.367(b)-6 Effective/applicability dates and coordination
rules.
(a) * * *
(1) * * *
(v) Section 1.367(b)-2(j)(2) applies to transactions completed on
or after October 5, 2023, and to any transactions treated as completed
before October 5, 2023, as a result of an entity classification
election made under Sec. 301.7701-3 of this chapter that is filed on
or after October 5, 2023.
(vi) Section 1.367(b)-1(c)(2)(vi), (c)(4)(viii), and (c)(4)(ix)
apply to taxable years ending on or after October 5, 2023. However, a
taxpayer and its related parties (within the meaning of sections 267(b)
and 707(b)(1)) may choose to apply the rules referred to in the
preceding sentence to all open taxable years ending before October 5,
2023, provided that the taxpayer and its related parties consistently
apply such rules and Sec. 1.367(b)-3(g) for such years.
* * * * *
0
Par. 8. Section 1.367(b)-10 is amended by:
0
1. Adding two sentences to the end of paragraph (a)(1);
0
2. Revising paragraphs (a)(2)(ii) and (iii);
0
3. Removing the language ``and'' at the end of paragraph (a)(3)(ii)(A);
0
4. Removing the period at the end of paragraph (a)(3)(ii)(B) and adding
the language ``; and'' in its place;
0
5. Adding paragraph (a)(3)(ii)(C);
0
6. Removing paragraph (b)(2);
0
7. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(2),
(3), and (4), respectively;
0
8. Revising newly redesignated paragraph (b)(2);
0
9. Adding two sentences to the end of newly redesignated paragraph
(b)(3);
0
10. In newly redesignated paragraph (b)(4)(ii), removing the sixth
sentence, revising the current seventh sentence, and adding two
sentences at the end of the paragraph; and
0
11. Revising paragraphs (c), (d), and (e).
The revisions and additions read as follows:
Sec. 1.367(b)-10 Acquisition of parent stock or securities for
property in triangular reorganizations.
(a) * * *
(1) * * * See Sec. 1.367(b)-3(g) for the treatment of certain
inbound nonrecognition transactions following transactions described in
this section. See Sec. 1.367(b)-4(g) for rules applicable to certain
exchanging shareholders that exchange stock of T in connection with a
transaction described in this section.
(2) * * *
(ii) S is a domestic corporation, P is not a controlled foreign
corporation (within the meaning of Sec. 1.367(b)-2(a)), P's stock in S
is not a United States real property interest (within the meaning of
section 897(c)), and the deemed distribution that would result from the
application of this section would not be treated as a dividend under
section 301(c)(1) that would be subject to U.S. tax under either
section 881 (for example, by reason of an applicable treaty or by
reason of an absence of earnings and profits) or section 882; or
(iii) In an exchange under section 354 or 356, one or more U.S.
persons exchange stock or securities of T and the amount of gain in the
T stock or securities that would otherwise be recognized under section
367(a)(1) is equal to or greater than the sum of the amount of the
deemed distribution under this section that would be treated and
subject to U.S. tax as a dividend under section 301(c)(1) (or would
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that
would be subject to U.S. tax) and the amount of such deemed
distribution that would be treated and subject to U.S. tax as gain from
the sale or exchange of property under section 301(c)(3) (or would give
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would
be subject to U.S. tax) if this section would otherwise apply to the
triangular reorganization. The exception provided in this paragraph
(a)(2)(iii) does not apply if T is a foreign corporation. See Sec.
1.367(a)-3(a)(2)(iv) (providing a similar rule that excludes certain
transactions from the application of section 367(a)(1)).
(3) * * *
(ii) * * *
(C) Stock of S that is nonqualified preferred stock (as defined in
section 351(g)(2)).
* * * * *
(b) * * *
(2) Timing of deemed distribution. If P controls (within the
meaning of section 368(c)) S at the time of the P acquisition, the
adjustments described in paragraph (b)(1) of this section are made as
if the deemed distribution is a
[[Page 58284]]
separate transaction occurring immediately before the P acquisition. If
P does not control (within the meaning of section 368(c)) S at the time
of the P acquisition, the adjustments described in paragraph (b)(1) of
this section are made as if the deemed distribution is a separate
transaction occurring immediately after P acquires control of S, but
before the reorganization.
(3) * * * Thus, P's adjustment to the basis in its S stock under
Sec. 1.358-6 is determined as if P provided the P stock or securities
pursuant to the plan of reorganization, notwithstanding that S acquired
the P stock or securities in exchange for property in the P
acquisition. See also Sec. 1.367(b)-13.
(4) * * *
(ii) * * * Pursuant to paragraph (b)(2) of this section, the
adjustments described in paragraph (b)(1) of this section are made as
if the deemed distribution is a separate transaction occurring
immediately before FS's purchase of the P stock on the open market. * *
* US1's transfer of its FT stock in exchange for P stock is subject to
Sec. 1.367(b)-4(g). If, contrary to the facts in this paragraph
(b)(4), US1 had built-in gain with respect to its FT stock, then such
gain would be recognized in accordance with Sec. 1.367(b)-4(g).
(c) Collateral adjustments. This paragraph (c) provides additional
rules that apply by reason of the deemed distribution described in
paragraph (b)(1) of this section. A deemed distribution described in
paragraph (b)(1) of this section is treated as occurring for all
purposes of the Internal Revenue Code. Thus, for example, the ordering
rules of section 301(c) apply to characterize the deemed distribution
to P as a dividend from the earnings and profits of S, return of stock
basis, or gain from the sale or exchange of property, as the case may
be. Furthermore, section 959 may apply to the deemed distribution if S
is a foreign corporation, and section 881, 882, 897, 1442, or 1445 may
apply to the deemed distribution if S is a domestic corporation.
Appropriate corresponding adjustments must be made to S's earnings and
profits consistent with the principles of section 312.
(d) Anti-abuse rule--(1) Rule. Appropriate adjustments must be made
pursuant to this section if, in connection with a triangular
reorganization, a transaction is engaged in with a view to avoid the
purpose of this section. For example, if S is created, organized, or
funded to avoid the application of this section with respect to the
earnings and profits of another corporation, the earnings and profits
of S (or any successor corporation) may be deemed to include the
earnings and profits of such other corporation (or any successor
corporation) for purposes of determining the consequences of the
adjustments provided in this section, and appropriate corresponding
adjustments may be made to account for the application of this section
to the earnings and profits of such other corporation (or any successor
corporation). Adjustments may be made under this paragraph (d) whether
S is funded before or after a triangular reorganization, and such
funding may include capital contributions, loans, and distributions.
The following examples illustrate the application of this paragraph
(d), the application of which is not limited to the particular
situations described in the examples.
(2) Example 1: Deemed increase to S's earnings and profits--(i)
Facts. FP is a foreign corporation that owns all of the stock of USS, a
domestic corporation. USS has no assets, liabilities, or earnings and
profits. FP issues $10x of voting stock to USS in exchange for $10x of
newly issued stock of USS, and FP also issues $90x of voting stock to
USS in exchange for a note newly issued by USS with a fair market value
of $90x (USS note). FP would be subject to U.S. tax under section 881
on a distribution from USS if, contrary to the facts, USS had earnings
and profits for purposes of applying section 301(c) to the
distribution. USS acquires all the stock of UST, a domestic corporation
that is unrelated to FP and USS, from a foreign person in exchange for
the $100x of voting stock of FP in a triangular reorganization
described in section 368(a)(1)(B) (triangular B reorganization). UST
has $100x of earnings and profits. USS's purchase of the $90x of stock
of FP in exchange for the USS note in connection with the triangular B
reorganization is engaged in with a view to avoid the purpose of this
section.
(ii) Analysis. Because USS's purchase of the $90x of stock of FP in
exchange for the USS note is engaged in with a view to avoid the
purpose of this section, the anti-abuse rule applies and appropriate
adjustments are made. In particular, for purposes of determining the
consequences of the deemed distribution provided for in paragraph
(b)(1) of this section, the earnings and profits of USS are deemed to
include the earnings and profits of UST. USS is therefore treated as
having made a deemed distribution equal to $90x, which reflects the
portion of the stock of FP that USS acquired in exchange for property
(the USS note). Because USS is deemed to have $100x of earnings and
profits, the entire $90x deemed distribution is treated as a dividend
under section 301(c)(1). The deemed distribution is treated as separate
from, and occurring immediately before, USS's acquisition of the stock
of FP used in the triangular B reorganization. No adjustments are made
by FP to the basis in its stock of USS except as provided in Sec.
1.358-6. Under paragraph (b)(3) of this section, FP's adjustment to the
basis in its stock of USS under Sec. 1.358-6 is determined as if FP
provided all $100x of the stock of FP pursuant to the plan of
reorganization.
(3) Example 2: Downstream property transfer--(i) Facts. USP is a
domestic corporation that owns all of the stock of FS1, a foreign
corporation, FS1 holds a note receivable issued by USP with a fair
market value of $100x (USP note), and FS1 has more than $100x of
earnings and profits. USP has no income inclusion under section
951(a)(1)(B) with respect to the USP note after the application of
Sec. 1.956-1(a)(2). FS1 forms USS Newco, a domestic corporation, to
which it transfers the USP note in exchange for voting stock of USS
Newco. USS Newco then forms FS2 Newco, a foreign corporation, and FS1
transfers all of its remaining assets (except for its stock in USS
Newco) to FS2 Newco in exchange for additional voting stock of USS
Newco in a transaction intended to qualify as a triangular
reorganization described in section 368(a)(1)(C) (triangular C
reorganization). FS1 liquidates into USP pursuant to the triangular C
reorganization, and USP receives the stock of USS Newco held by FS1.
FS1's transfer of the USP note to USS Newco in connection with the
intended triangular C reorganization is engaged in with a view to avoid
the purpose of this section.
(ii) Analysis. Because FS1's transfer of the USP note to USS Newco
is in connection with a triangular reorganization and is engaged in
with a view to avoid the purpose of this section, the anti-abuse rule
applies and appropriate adjustments are made. FS1's formation of USS
Newco and transfer of the USP note to USS Newco, together with the
distribution of the shares of USS Newco pursuant to the liquidation of
FS1, is treated under the anti-abuse rule as a distribution of $100x,
consistent with its substance. Accordingly, adjustments are made
consistent with there having been such a distribution. Because FS1 has
more than $100x of earnings and profits, the adjustments made are
consistent with USS Newco having received a $100x dividend from FS1
separate from, and immediately before, the triangular C reorganization.
USS Newco must
[[Page 58285]]
therefore include $100x in gross income as if it had received that
amount as a dividend and increase its earnings and profits by the same
amount. FS1 must decrease its earnings and profits by $100x. For
purposes of determining USS Newco's basis in its stock of FS2 Newco,
Sec. 1.367(b)-13 applies by treating USS Newco as P (within the
meaning of Sec. 1.367(b)-13(a)(2)(ii)). Under paragraph (b)(3) of this
section, USS Newco's adjustment to the basis in its FS2 Newco stock
under Sec. 1.367(b)-13 is determined as if USS Newco provided the
stock of USS Newco stock pursuant to the plan of reorganization.
(4) Example 3: Taxable debt exchange--(i) Facts. USP is a domestic
corporation that owns all of the stock of FP, a foreign corporation,
and USS, a domestic corporation. Furthermore, FP owns all of the stock
of FS, a foreign corporation, and USS owns all of the stock of UST, a
domestic corporation. FP has no earnings and profits, and FS has more
than $100x of earnings and profits. USP will not satisfy the
requirements of sections 245A and 246(c) with respect to dividends
received from FP. FS transfers a note issued by FS with a fair market
value of $100x (FS note) to FP in exchange for $100x of voting stock of
FP, and FS then uses the stock of FP to acquire all of the stock of UST
held by USS in a triangular reorganization described in section
368(a)(1)(B) (triangular B reorganization). Because a dividend from FS
to FP would not constitute foreign personal holding company income
under section 954(c)(6), the taxpayer asserts that the exception in
paragraph (a)(2)(iii) of this section applies and therefore does not
make any adjustments pursuant to this section. FP then transfers the FS
note to USP in exchange for a note issued by USP with a fair market
value of $100x (USP note). The USP note constitutes United States
property within the meaning of section 956(c), and USP would otherwise
have an inclusion under section 951(a)(1)(B) and Sec. 1.956-1(a)(2) if
FP had earnings and profits. FS's transfer of the FS note to FP, and
FP's subsequent transfer of the FS note to USP in connection with the
triangular B reorganization, are engaged in with a view to avoid the
purpose of this section.
(ii) Analysis. Because the transfers of the FS note are in
connection with a triangular reorganization and are engaged in with a
view to avoid the purpose of this section, the anti-abuse rule applies
and appropriate adjustments are made. FS is therefore treated as having
made a distribution to FP of $100x, reflecting the value of the stock
of FP that FS acquired in exchange for property (the FS note). The
deemed distribution is treated as separate from, and occurring
immediately before, FS's acquisition of the stock of FP stock used in
the triangular B reorganization. Because FS has more than $100x of
earnings and profits, the entire deemed distribution is treated as a
dividend under section 301(c)(1). The deemed dividend causes FP to
increase its earnings and profits by $100x but does not constitute
foreign personal holding company income to FP under section 954(c)(6).
FP thus has $100x of earnings and profits available to support
inclusions under section 951(a)(1)(B) in connection with FP's
subsequent acquisition of the USP note. No adjustments are made by FP
to the basis in its stock of FS except as provided in Sec. 1.358-6.
Under paragraph (b)(3) of this section, FP's adjustment to the basis in
its stock of FS under Sec. 1.358-6 is determined as if FP provided the
stock of FP pursuant to the plan of reorganization.
(e) Applicability dates--(1) General rule. This section applies to
triangular reorganizations occurring on or after May 17, 2011. For
triangular reorganizations that occur before May 17, 2011, see Sec.
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.
(2) Triangular reorganizations completed on or after April 25,
2014. The following paragraphs apply to triangular reorganizations that
are completed on or after April 25, 2014, unless T was not related to P
or S (within the meaning of section 267(b)) immediately before the
triangular reorganization; the triangular reorganization was entered
into either pursuant to a written agreement that was (subject to
customary conditions) binding before April 25, 2014, and at all times
afterwards, or pursuant to a tender offer announced before April 25,
2014, that is subject to section 14(d) of the Securities and Exchange
Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-
1 through 240.14d-101) or that is subject to comparable foreign laws;
and to the extent the P acquisition that occurs pursuant to the plan of
reorganization is not completed before April 25, 2014, the P
acquisition was included as part of the plan before April 25, 2014:
(i) Paragraph (a)(2)(ii) of this section, to the extent it does not
apply where P is a controlled foreign corporation, and to the extent it
relates to dividends that would be subject to U.S. tax;
(ii) Paragraph (a)(2)(iii) of this section, to the extent it
relates to amounts that would be subject to U.S. tax or give rise to an
inclusion under section 951(a)(1)(A) that would be subject to U.S. tax;
(iii) Paragraph (b)(3) of this section, to the extent it relates to
P's provision of its stock or securities pursuant to the plan of
reorganization; and
(iv) Paragraphs (b) and (c) of this section, to the extent they do
not reference the rule described in former paragraph (b)(2) of this
section (relating to the deemed contribution), as contained in 26 CFR
part 1 revised as of April 1, 2021.
(3) Transactions completed on or after December 2, 2016. The
following paragraphs apply to transactions completed on or after
December 2, 2016:
(i) Paragraph (a)(2)(iii) of this section, to the extent it does
not apply where T is a foreign corporation; and
(ii) Paragraph (a)(3)(ii)(C) of this section.
(4) Deemed distributions that occurred in taxable years ending
before November 2, 2020. Former paragraph (c)(1) of this section, as
contained in 26 CFR part 1 revised as of April 1, 2021, to the extent
it references section 902, applies to deemed distributions that occur
in taxable years ending before November 2, 2020.
(5) Triangular reorganizations completed on or after October 5,
2023. Paragraph (a)(2)(iii) of this section, to the extent it relates
to amounts that would give rise to an inclusion under section 951A(a)
that would be subject to U.S. tax, applies to triangular
reorganizations that are completed on or after October 5, 2023.
0
Par. 9. Section 1.1248-1 is amended by adding a sentence to the end of
paragraph (a)(1) to read as follows:
Sec. 1.1248-1 Treatment of gain from certain sales or exchanges of
stock in certain foreign corporations.
(a) * * *
(1) * * * See Sec. 1.1411-10(c)(3) for additional rules concerning
the application of section 1248 for purposes of section 1411.
* * * * *
0
Par. 10. Section 1.1411-10 is amended by:
0
1. In paragraph (c)(3), revising the paragraph heading and removing the
language ``With respect to stock of a CFC'' and adding in its place
``With respect to stock of a foreign corporation that is a CFC (or that
was a CFC at any time during the 5-year period ending on the date of
sale or exchange)'';
0
2. Revising paragraph (c)(3)(i) and the introductory text of paragraph
(c)(3)(ii); and
0
3. Adding paragraph (d)(5) and adding a sentence to the end of
paragraph (i).
[[Page 58286]]
The revisions and additions read as follows:
Sec. 1.1411-10 Controlled foreign corporations and passive foreign
investment companies.
* * * * *
(c) * * *
(3) Application of sections 1248 and 367(b). * * *
(i) In determining the amount of gain recognized on the sale or
exchange of stock of a foreign corporation under section 1248(a) or the
amount of gain realized on the exchange of stock of a foreign
corporation under Sec. 1.367(b)-4 or 1.367(b)-5, basis is determined
in accordance with the provisions of paragraph (d) of this section; and
(ii) Section 1248(a), and Sec. 1.367(b)-2(c)(1) and (d)(2)(ii)
apply without regard to the exclusions for certain earnings and profits
under section 1248(d)(1) and (6), except that those exclusions will
apply with respect to the earnings and profits of a foreign corporation
that are attributable to:
* * * * *
(d) * * *
(5) Basis adjustments under section 367(b). With respect to stock
of a foreign corporation that is exchanged in a transaction subject to
section 367(b), the portion of the basis increase provided by Sec.
1.367(b)-2(e)(3)(ii) by reason of paragraph (c)(3)(ii) of this section
is made solely for purposes of section 1411.
* * * * *
(i) * * * Paragraph (c)(3) of this section, to the extent it
references regulations issued under section 367(b), and paragraph
(d)(5) of this section, apply to transactions completed on or after
October 5, 2023, and to any transactions treated as completed before
October 5, 2023, as a result of an entity classification election made
under Sec. 301.7701-3 of this chapter that is filed on or after
October 5, 2023.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: June 26, 2024.
Aviva R. Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-15232 Filed 7-17-24; 8:45 am]
BILLING CODE 4830-01-P