These synopses are intended only as aids to the reader in

Internal Revenue

bulletin

Bulletin No. 2000–6

February 7, 2000

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EMPLOYEE PLANS

Rev. Rul. 2000–9, page 497.

Federal rates; adjusted federal rates; adjusted federal

long-term rate, and the long-term exempt rate. For

purposes of section 1274, 1288, 382, and other sections

of the Code, tables set forth the rates for February 2000.

T.D. 8862, page 466.

Final regulations under section 367(b) of the Code relate to

the transactions involving certain foreign corporations and

the application of nonrecognition exchange provisions under

subchapter C of the Code.

T.D. 8863, page 488.

REG–116048–99, page 584.

Temporary and proposed regulations under section 367(b)

of the Code relate to transactions involving certain foreign

corporations and the application of nonrecognition exchange

provisions under subchapter C of the Code. A public hearing

is scheduled for April 20, 2000.

T.D. 8866, page 495.

Final regulations under section 1092 of the Code relate to

equity options with flexible terms and qualified covered calls.

T.D. 8868, page 491.

Final regulations under section 936 of the Code relate to the

termination of the Puerto Rico and possession tax credit.

T.D. 8869, page 498.

Final regulations under section 1361 of the Code relate to the

treatment of corporate subsidiaries of S corporations and interpret the rules added to the Internal Revenue Code by section 1308 of the Small Business Job Protection Act of 1996.

Rev. Proc. 2000–16, page 518.

Administrative programs; closing agreements. This

procedure consolidates and expands upon the following current employee plans programs: the Administrative Policy Regarding Self-Correction, the Walk-in Closing Agreement Program, the Closing Agreement Program, the Voluntary

Compliance Resolution Program, the Standardized VCR Procedure, and the Tax-sheltered Voluntary Correction Program.

Rev. Procs. 98–22, 99–13, and 99–31 modified and superseded. Rev. Proc. 2000–8 modified.

Rev. Proc. 2000–20, page 553.

Master and prototype plans. This procedure combines

prior revenue procedures pertaining to master and prototype plans and regional prototype plans. It also provides that

mass submitters and sponsors may apply for opinion letters

that reflect current law beginning April 7, 2000, and May 8,

2000, respectively. Volume submitter practitioners may

apply for current law advisory letters beginning March 8, 2000. Rev. Procs. 89–9, 89–13, 90–21,

91–66, 92–41, 93–9, 93–10, and 95–42 superseded. Rev.

Procs. 2000–6 and 2000–8 modified. Announcement

99–50 modified.

Notice 2000–11, page 572.

Safe harbor explanation; certain qualified plan distributions. This notice provides a “Safe Harbor Explanation”

that plan administrators may provide to recipients of eligible

rollover distributions from qualified plans in order to satisfy

section 402(f) of the Code. Notice 92–48 obsoleted.

(Continued on the next page )

Finding Lists begin on page ii.

Index for January begins on page iv.

Department of the Treasury

Internal Revenue Service

EMPLOYEE PLANS—continued

required for election workers earning less than $600 annually. Rev. Rul. 88–36 modified.

Announcement 2000–7, page 586.

Mortality table; retirement plans. This announcement

seeks public comments with respect to the mortality table

in effect under section 412(1)(7)(C) of the Code.

EXEMPT ORGANIZATIONS

Announcement 2000–8, page 586.

A list is given of organizations now classified as private

foundations.

ADMINISTRATIVE

REG–208254–90, page 577.

Proposed regulations under section 861 of the Code relate

to the source of compensation for labor or personal services. A public hearing is scheduled for April 19, 2000.

REG–105089–99, page 580.

EMPLOYMENT TAX

Proposed regulations under section 356 of the Code relate

to the treatment of nonqualified preferred stock and other

preferred stock in certain exchanges and distributions. A

public hearing is scheduled for May 31, 2000.

Rev. Rul. 2000–6, page 512.

Rev. Proc. 2000–13, page 515.

Information reporting requirements applicable to

election workers. The requirements for information reporting applicable to election workers whose compensation is not subject to FICA tax are found under section

6041(a) of the Code. As a result, reporting is generally not

This prodedure provides guidance on the application of Articles 10(2) and 23 of the United States-United Kingdom income tax treaty after the repeal of the U.K. advance corporation tax (ACT) and reduction of the U.K. Shareholder tax

credit. Rev. Proc. 80–18 modified.

February 7, 2000

2000–6 I.R.B.

The IRS Mission

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness to

all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents are consolidated semiannually into

Cumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis,

and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2000–6 I.R.B.

February 7, 2000

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income

Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of February 2000. See Rev. Rul. 2000–9, page 497.

FOR FURTHER INFORMATION CONTACT: Mark D. Harris, (202) 622-3860

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

Section 280G.—Golden

Parachute Payments

Federal short-term, mid-term, and long-term

rates are set forth for the month of February 2000.

See Rev. Rul, 2000–9, page 497.

Section 367.—Foreign

Corporations

26 CFR 1.367(a)–3: Treatment of transfers of stock

or securities to foreign corporations.

T.D. 8862

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 7, and 602

Stock Transfer Rules

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final regulations addressing the application of nonrecognition exchange provisions in Subchapter C of the Internal Revenue Code to transactions that involve

one or more foreign corporations. These

regulations provide guidance for taxpayers engaging in those transactions in order

to determine the extent to which income

shall be included and appropriate corresponding adjustments shall be made.

DATES: Effective Date. These regulations are effective as of February 23,

2000.

Applicability Dates. These regulations

apply to section 367(b) exchanges that

occur on or after February 23, 2000.

However, taxpayers may choose to apply

these regulations to section 367(b) exchanges that occur before February 23,

2000, as specified in §1.367(b)–6(a)(2).

February 7, 2000

The collections of information contained in these final regulations have been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number 15451271. Responses to these collections of

information are mandatory.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

control number.

The estimated average annual reporting

burden in these final regulations is 4

hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224, and to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to these collections 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 26 U.S.C. 6103.

Background

On December 27, 1977, the IRS and

Treasury issued proposed and temporary

regulations under section 367(b) of the Internal Revenue Code (Code). Subsequent

guidance updated and amended the 1977

temporary regulations (the 1977 regulations) several times over the next 14

years. On August 26, 1991, the IRS and

Treasury issued proposed regulations

§§1.367(b)–1 through 1.367(b)–6 (the

1991 proposed regulations). Comments

to the 1991 proposed regulations were received, and a public hearing was held on

November 22, 1991. In June of 1998, the

466

IRS and Treasury issued final regulations

under sections 367(a) and (b) (the 1998

regulations). The 1998 regulations addressed transactions under section 367(b)

only to the extent the transactions are also

subject to the stock transfer rules of section 367(a). Thus, the 1977 regulations

have remained in effect to the extent not

superseded by the 1998 regulations. The

preamble to the 1998 regulations stated

that the IRS and Treasury would issue

guidance at a later date to address the portions of the 1991 proposed regulations related to section 367(b) that were not addressed in the 1998 regulations.

After consideration of the 1977 regulations and their updates and amendments,

the 1991 proposed regulations and their

updates and amendments, the 1998 regulations, and all comments received with

respect to such regulations, the IRS and

Treasury adopt §§1.367(b)–1 through

1.367(b)–6 as final regulations under section 367(b).

Overview

A. General Policies of Section 367(b)

Section 367(b) governs corporate restructurings under sections 332, 351, 354,

355, 356, and 361 (except to the extent

described in section 367(a)(1)) in which

the status of a foreign corporation as a

“corporation” is necessary for application

of the relevant nonrecognition provisions.

Section 367(b) provides that a foreign

corporation that is a party to one of the

enumerated nonrecognition transactions

shall be respected as a corporation, and

thereby the parties involved in the transaction shall obtain the benefits of the applicable nonrecognition exchange provisions and their related provisions (such as

section 381) (together, the Subchapter C

provisions), except to the extent provided

in regulations.

The principal purpose of section 367(b)

is to prevent the avoidance of U.S. tax

that can arise when the Subchapter C provisions apply to transactions involving

foreign corporations. The potential for

tax avoidance arises because of differences between the manner in which the

United States taxes foreign corporations

and their shareholders and the manner in

which the United States taxes domestic

2000–6 I.R.B.

corporations and their U.S. shareholders.

The Subchapter C provisions generally

have been drafted to apply to domestic

corporations and U.S. shareholders, and

thus do not fully take into account the

cross-border aspects of U.S. taxation

(such as deferral, foreign tax credits, and

section 1248). Section 367(b) was enacted to help ensure that international tax

considerations in the Code are adequately

addressed when the Subchapter C provisions apply to an exchange involving a

foreign corporation. Because determining the proper interaction of the Code’s

international and Subchapter C provisions

is “necessarily highly technical,” Congress granted the Secretary broad regulatory authority to provide the “necessary or

appropriate” rules, rather than enacting a

complex statutory regime. H.R. Rep. No.

658, 94th Cong., 1st Sess. 241 (1975).

Accordingly, as the preamble to the

1991 proposed regulations stated, the section 367(b) regulations require adjustments or inclusions in order to prevent the

material distortion of income that can

occur when the Subchapter C provisions

apply to an exchange involving a foreign

corporation. The 1991 proposed regulations simplified the 1977 regulations and

were generally favorably received by taxpayers. The final regulations adopt the

1991 proposed regulations with modifications. The modifications are based on

further considerations of fairness, simplicity, and administrability.

The final regulations also incorporate

the section 367(b) rules contained in the

1998 regulations. The 1998 regulations

finalized portions of the 1991 proposed

regulations to the extent necessary to address the overlap between section 367(b)

and the section 367(a) stock transfer

rules. Because the scope of the final regulations is broader than that overlap, the

final regulations adopt the 1998 section

367(b) provisions in a manner appropriate

to their incorporation into the final regulations.

The IRS and Treasury are also issuing

other guidance under section 367(b). Temporary and proposed regulations (T.D.

8862, page 466 and REG–116048–99, page

584) address the elimination of an election

available to certain taxpayers under the

1977 regulations and the 1991 proposed

regulations. In addition, the IRS and Treasury intend to issue other proposed regula-

2000–6 I.R.B.

tions that provide rules regarding the combination and separation of corporate-level

tax attributes in applicable section 367(b)

exchanges.

B. Specific Policies in Context of

Inbound Nonrecognition Transactions

Section 1.367(b)–3 addresses transactions in which a foreign corporation transfers assets to a domestic corporation pursuant to a Subchapter C provision. These

transactions include a section 332 liquidation of a foreign corporation into a domestic parent corporation and an asset reorganization, such as a C, D or F

reorganization, of a foreign corporation

into a domestic corporation (inbound nonrecognition transactions). Section 381

generally provides rules regarding the extent to which corporate attributes carry

over in such transactions.

The principal policy consideration of

section 367(b) with respect to inbound

nonrecognition transactions is the appropriate carryover of attributes from foreign

to domestic corporations. This consideration has interrelated shareholder-level and

corporate-level components. At the

shareholder level, the section 367(b) regulations are concerned with the proper

taxation of previously deferred earnings

and profits. At the corporate level, the

section 367(b) regulations are concerned

with both the extent and manner in which

tax attributes carry over in light of the

variations between the Code’s taxation of

foreign and domestic corporations.

The section 367(b) regulations have

historically focused on the carryover of

earnings and profits and bases of assets,

simultaneously addressing the shareholder and corporate level concerns by

accounting for any necessary adjustments

through an income inclusion by the U.S.

shareholders of the foreign acquired corporation (and without limiting the extent

to which the domestic acquiring corporation succeeds to the attributes). The 1991

proposed regulations required a U.S.

shareholder of the foreign acquired corporation (or, in certain cases, a foreign subsidiary of the U.S. shareholder) to currently include in income the allocable

portion of the foreign acquired corporation’s earnings and profits accumulated

during the U.S. shareholder’s holding period (all earnings and profits amount).

The requirement to include in income the

467

all earnings and profits amount results in

the taxation of previously unrepatriated

earnings accumulated during a U.S.

shareholder’s (direct or indirect) holding

period. This income inclusion prevents

the conversion of a deferral of tax into a

forgiveness of tax and generally ensures

that the section 381 carryover basis reflects an after-tax amount. However, the

all earnings and profits amount inclusion

does not consider tax attributes that accrue during a non-U.S. person’s holding

period.

Commentators criticized the scope of

the 1991 proposed regulations, arguing

that the all earnings and profits amount

should be limited to the amount that a

shareholder would include in income as a

deemed dividend under section 1248.

The scope of the all earnings and profits

amount is broader than the section 1248

amount because, for example, the all

earnings and profits amount is calculated

without regard to whether the foreign corporation is a CFC and without regard to a

shareholder’s gain in the stock. However,

this view too narrowly construes the role

of section 367(b) by focusing on potential

shareholder-level consequences without

adequately considering the section 367(b)

policy of determining the appropriate carryover of corporate-level attributes in inbound nonrecognition transactions. Thus,

the final regulations retain the 1991 proposed regulations’ definition of all earnings and profits amount. The final regulations also generally retain (subject to a

new de minimis exception) the taxation of

all exchanging U.S. shareholders in inbound nonrecognition transactions.

In finalizing these regulations, the IRS

and Treasury considered whether future

section 367(b) regulations should limit

the extent to which tax attributes carry

over from foreign to domestic corporations. Such a limitation would more directly implement the section 367(b) policy related to the carryover of attributes

and, as a result, reduce the class of U.S.

persons required to have an income inclusion in connection with an inbound nonrecognition transaction. Such a limitation

would also enable the section 367(b) regulations to address the carryover of attributes attributable to a non-U.S. person’s

holding period. The IRS and Treasury request comments as to the merits of an attribute carryover limitation, as well as

February 7, 2000

other approaches that could address the

carryover of tax attributes related to a

non-U.S. person’s holding period under

section 367(b).

C. Specific Policies in Context of

Foreign-to-Foreign Nonrecognition

Transactions and Section 355

Distributions

Section 1.367(b)–4 addresses transactions in which a foreign corporation acquires the stock or assets of another foreign corporation in an exchange described

in section 351 or a section 368(a)(1)(B),

(C), (D), (E), (F) or (G) reorganization

(foreign-to-foreign nonrecognition transactions). Section 1.367(b)–5 provides

rules regarding a distribution by a foreign

corporation of the stock or securities of a

domestic or foreign corporation described

in section 355. The historic policy objective of section 367(b) in both of these

contexts has been to preserve the potential

application of section 1248. Thus, the

amount that would have been recharacterized as a dividend under section 1248

upon a disposition of the stock (section

1248 amount) generally must be included

in income as a dividend at the time of the

section 367(b) exchange to the extent

such section 1248 amount would not be

preserved immediately following the section 367(b) exchange.

The final regulations do not address all

of the policy considerations raised by the

application of the Subchapter C provisions to transactions described in

§§1.367(b)–4 and 1.367(b)–5. For example, current rules regarding the carryover

or separation of foreign corporations’

earnings and profits do not adequately

consider the international aspects of the

Code, most notably the foreign tax credit.

Forthcoming proposed regulations will

consider these issues. Until the IRS and

Treasury promulgate such regulations,

taxpayers should use a reasonable method

(consistent with existing law and taking

proper account of the purposes of the foreign tax credit regime) to determine the

carryover and separation of earnings and

profits and related foreign taxes.

Explanation of Provisions

The IRS received numerous comments

on the 1991 proposed regulations. The

following discussion summarizes the

comments and changes to the 1991 pro-

February 7, 2000

posed regulations.

A. §1.367(b)–1(c): Notice Requirements

Section 1.367(b)–1(c) of the 1991 proposed regulations required any person

that realizes income in a section 367(b)

exchange to file a notice with respect to

the exchange, regardless of such person’s

status as a U.S. person and its percentage

ownership in the corporation that is a

party to the section 367(b) exchange.

Commentators criticized this notice requirement as overly broad. The 1998 regulations limited the notice requirement to

shareholders that realize income and file a

tax return under section 6012. The final

regulations further revise the notice requirement and generally narrow its scope

by requiring notice only with respect to

persons and transactions that may be subject to an inclusion under the final regulations’ operative provisions.

B. §1.367(b)–2: Definitions and Special

Rules

1. §1.367(b)–2(d): All Earnings and

Profits Amount

Section 1.367(b)–2(d) of the 1991 proposed regulations generally defined “all

earnings and profits amount” as the allocable share of net positive earnings and

profits accrued by a foreign corporation

during a shareholder’s holding period.

The 1991 proposed regulations provided

that the all earnings and profits amount is

determined according to the attribution

principles of section 1248. Because the

section 1248 attribution rules incorporate

the section 1223 holding period rules,

commentators were concerned that the

definition of all earnings and profits

amount inappropriately included earnings

and profits attributable to the holding period of non-U.S. persons by virtue of the

rules of section 1223(2).

In response, the final regulations

amend the definition of all earnings and

profits amount to exclude amounts attributable to the holding period of non-U.S.

persons. This modification applies to the

extent the non-U.S. person was not directly or indirectly owned by U.S. persons

with a 10 percent or greater interest when

the earnings and profits accumulated. An

example in the final regulations illustrates

this new rule.

When applying the attribution princi-

468

ples of section 1248 for purposes of determining the all earnings and profits

amount, the requirements of section 1248

unrelated to computing the amount of

earnings and profits attributable to a

shareholder’s block of stock should not

apply. The final regulations explicitly

state this principle. The 1991 proposed

regulations applied this principle, for example, when they provided that the all

earnings and profits amount is calculated

without regard to whether the foreign corporation is a controlled foreign corporation (CFC). The final regulations further

specify that the all earnings and profits

amount includes earnings attributable to

an exchanging shareholder’s stock, without regard to whether the exchanging

shareholder owned 10 percent of the stock

of the foreign acquired corporation. A

new example in the final regulations illustrates these rules.

2. §1.367(b)–2(e): Treatment of Deemed

Dividends

Section 1.367(b)–2(e) of the 1991 proposed regulations provided that a deemed

dividend shall be treated as an actual dividend. Thus, a deemed dividend was considered as paid out of the earnings and

profits of a foreign corporation and was

considered as having been paid through

intermediate owners (when appropriate).

One commentator noted that an inclusion

under the 1991 proposed regulations

could yield a different result from an inclusion under section 1248 because section 1248 treats a corporation as having

paid the section 1248 amount directly to

an exchanging shareholder despite any intermediate owners.

A deemed dividend under section

367(b) is distinguishable from a section

1248 inclusion because a section 1248 inclusion is not treated as a dividend at the

corporate level. Thus, a corporation does

not reduce its earnings and profits with regard to an inclusion under section 1248.

Instead, the shareholder-level inclusion is

considered eligible to be treated as previously taxed earnings and profits (PTI)

upon a subsequent distribution. In light

of this distinction between section 367(b)

and section 1248, the final regulations retain the rule in §1.367(b)–2(e) of the 1991

proposed regulations.

3. Final Regulation §1.367(b)–2(j): Sections 985 through 989

2000–6 I.R.B.

Section 1.367(b)–2(k) of the 1991 proposed regulations provided rules regarding currency exchange inclusions or adjustments that result from a section 367(b)

exchange. The final regulations apply the

principles of the 1991 proposed regulations, but provide the following modifications.

The 1991 proposed regulations required an acquired corporation that participates in a transaction described in section

381(a) to change its functional currency if

the acquiring corporation has a different

functional currency. The rule was intended to ensure that taxpayers use the

correct functional currency after a section

367(b) exchange. However, functional

currency is determined separately for

each qualified business unit (QBU). In

addition, the functional currency of a

QBU of either the acquired or acquiring

corporation may change as a result of a

section 367(b) exchange. Accordingly,

the final regulations provide that a QBU

is deemed to have automatically changed

its functional currency when its functional

currency, as determined after a section

367(b) exchange, is different than before

the exchange. Thus, the QBU is required

to make appropriate adjustments under

§1.985–5.

The 1991 proposed regulations provided that, if an exchanging shareholder

is required to include in income either the

all earnings and profits amount or the section 1248 amount, then immediately before the exchange and solely for purposes

of computing exchange gain or loss under

section 986(c), the shareholder is treated

as receiving a distribution of PTI from the

appropriate foreign corporation. The purpose of this provision was to ensure that

exchange gain or loss under section

986(c) is subject to current inclusion

when the earnings of the foreign corporation are no longer deferred or to the extent

a taxpayer does not retain its interest in

PTI.

Section 1.367(b)–2(j)(2) of the final

regulations expands the rules regarding

the treatment of exchange gain or loss on

PTI under section 986(c). An exchanging

shareholder that is a U.S. person is required to recognize its section 986(c) gain

or loss to the extent that deferral has

ended with respect to a foreign corporation’s earnings (as can occur in the case of

an inbound or foreign-to-foreign non-

2000–6 I.R.B.

recognition transaction) or the U.S. person has a diminished interest in the PTI

after the exchange (as can occur in the

case of a section 355 distribution by a foreign corporation). A different rule applies

when a U.S. person indirectly holds

(through a foreign exchanging shareholder) its interest in the foreign corporation with regard to which the PTI inclusion is measured. In that case, the indirect

U.S. shareholder does not recognize section 986(c) gain or loss at the time of the

section 367(b) exchange. In order to preserve such section 986(c) gain or loss for

future inclusion by the indirect U.S.

shareholder, the foreign exchanging

shareholder is treated as having received a

distribution of the PTI.

Other rules under sections 985 through

989, such as the branch termination rules,

may also apply to the transaction.

C. §1.367(b)–3: Repatriation of Foreign

Corporate Assets in Certain

Nonrecognition Transactions

Section 1.367(b)–3 provides rules with

respect to inbound nonrecognition transactions.

1. §1.367(b)–3(b): Exchanges of Stock

Section 1.367(b)–3(b) of the 1991 proposed regulations generally provided that

if an exchanging shareholder is either (i) a

10 percent U.S. shareholder of the foreign

acquired corporation or (ii) a foreign corporation with respect to which a U.S. person is either a section 1248 shareholder or

a domestic corporation that meets the

stock ownership requirements of section

902, the shareholder must include in income as a deemed dividend the all earnings and profits amount attributable to its

stock in the foreign acquired corporation.

The final regulations generally retain this

rule. However, in order to provide greater

consistency among its various ownership

thresholds, the final regulations revise

§1.367(b)–3(b)(ii) so that §1.367(b)–3(b)

applies to a foreign corporation with respect to which there is, in general, a 10

percent U.S. shareholder.

The 1991 proposed regulations provided that the same country dividend exception in section 954(c)(3)(A)(i) does

not apply to an exchanging shareholder

that is a CFC. Commentators criticized

this rule, stating that a deemed dividend

469

under section 367(b) should not be treated

more harshly than an actual dividend and

that taxpayers can circumvent this rule by

having a lower-tier foreign corporation

distribute a dividend before an asset transfer. However, unlike a dividend distribution that qualifies for the same country

dividend exception, an inbound asset

transfer represents a current repatriation

of earnings into the United States. Accordingly, the final regulations retain the

rule in the 1991 proposed regulations that

the same country dividend exception does

not apply to an exchanging shareholder

that is a CFC.

The 1991 proposed regulations generally required the recognition of exchange

gain (or loss) to the extent that an exchanging shareholder’s capital account in

a foreign acquired corporation appreciated (or depreciated) as a result of

changes in currency exchange rates. Such

gain (or loss) is reflected in the basis of

assets when translated at the spot rate.

The preamble to the 1991 proposed regulations invited comments regarding the

calculation of such exchange gain (or

loss), particularly in cases when a shareholder acquired the foreign corporate

stock by purchase rather than in connection with the corporation’s formation.

None of the comments suggested a

method for determining and tracking

shareholder capital accounts. Most comments focused on the potential complexity and compliance burdens created by the

rule. After considering the administrability issues associated with the exchange

gain (or loss) calculation, the final regulations do not adopt the provision requiring

the recognition of exchange gain (or loss)

on a shareholder’s capital account. However, the final regulations reserve the

issue for further consideration.

Sections

7.367(b)–5(b)

and

7.367(b)–7(c)(2)(ii) of the 1977 regulations, and §1.367(b)–3(b)(2)(iii) of the

1991 proposed regulations provided an

exchanging shareholder with an opportunity to recognize the gain (but not the

loss) that it realizes in the exchange (taxable exchange election), rather than including the all earnings and profits

amount in income as a deemed dividend.

This taxable exchange election, however,

is inconsistent with the policies of section

367(b) that apply to inbound transactions.

These policies, as previously discussed,

February 7, 2000

are unrelated to an exchanging shareholder’s outside gain on its stock.

Moreover, when the all earnings and

profits amount exceeds a shareholder’s

gain on its stock, merely limiting the

shareholder’s inclusion to its outside

stock gain creates the potential for the duplication and importation of losses. See

TAM 9003005 (September 28, 1989) (interpreting the 1977 regulations) (available

at IRS Freedom of Information Act Reading Room, 1111 Constitution Avenue,

NW., Washington, DC 20224). The 1991

proposed regulations attempted to address

this aspect of the taxable exchange election by requiring various attributes of the

foreign acquired corporation (such as

basis in its assets) to be reduced (attribute

reduction regime) to the extent the all

earnings and profits amount exceeds an

exchanging shareholder’s stock gain.

However, the taxable exchange election in the 1991 proposed regulations had

other shortcomings. The election added

substantial complexity to the regulations

by requiring timely coordination between

electing shareholders and the acquiring

corporation to carry out the required attribute reductions. In addition, the attribute reduction regime can be unfair in

situations involving more than one exchanging U.S. shareholder. For example,

consider an inbound C, D, or F reorganization involving two U.S. shareholders of

the foreign acquired corporation, one that

makes the taxable exchange election (because its gain on the stock is less than its

all earnings and profits amount) and one

that does not. In connection with the

electing shareholder’s taxable exchange

election, the 1991 proposed regulations

required a proportionate reduction in certain tax attributes of the foreign acquired

corporation. This reduction effectively

allowed the electing shareholder to transfer to the acquiring corporation the burden created by its decision not to include

in income its full all earnings and profits

amount and, thereby, to effectively shift a

portion of this burden to the non-electing

shareholder (that has already paid U.S.

tax on its full share of the foreign corporation’s earnings and profits).

Finally, a taxable exchange election is

not required by the statute. Section

367(b) directs the Secretary to prescribe

regulations that provide the necessary or

appropriate tax consequences that should

February 7, 2000

accompany the application of the Subchapter C provisions to transactions involving foreign corporations. Section

367(b)(2) specifically provides that the

section 367(b) regulations may include

the circumstances under which “gain shall

be recognized currently or amounts included in gross income currently as a dividend, or both . . . .” Thus, the statute authorizes the IRS and Treasury to require

an inclusion of amounts, as distinct from

gain. As previously discussed, the all

earnings and profits amount appropriately

measures an exchanging shareholder’s income inclusion in connection with an inbound nonrecognition transaction.

After balancing the above considerations against the benefits of the taxable

exchange election, the final regulations

do not adopt the taxable exchange election. However, in order to provide taxpayers an opportunity to comment on this

change to the 1977 regulations and the

1991 proposed regulations, the IRS and

Treasury are concurrently issuing temporary and proposed regulations that provide the taxable exchange election in

modified form. This election permits an

exchanging shareholder to elect to treat a

transaction as a taxable exchange, but

modifies the attribute reduction regime by

limiting its application to a section 332

liquidation or to an inbound asset reorganization in which the foreign acquired

corporation is wholly owned (directly or

indirectly) by one U.S. person. This limited application of the attribute reduction

regime eliminates the potentially unfair

results that can arise when attributes are

reduced in a transaction involving multiple exchanging shareholders. This also

reduces (although does not eliminate) the

potential for the duplication and importation of losses that can arise in the absence

of attribute reduction. The temporary regulation is effective for one year from the

effective date of the final regulations.

2. §1.367(b)–3(c): Exchanges of Stock

by Other U.S. Persons

Section 1.367(b)–3(c) of the 1991 proposed regulations provided a special rule

for U.S. persons that are not subject to the

§1.367(b)–3(b) requirement to include in

income the all earnings and profits

amount (generally, shareholders owning

less than 10 percent of the foreign acquired corporation, hereinafter small

470

shareholders). The 1991 proposed regulations required these small shareholders to

recognize the gain on their stock in the

foreign acquired corporation. This rule

was included because of administrative

concerns, since small shareholders may

not have sufficient information to calculate their all earnings and profits amounts.

In addition, a foreign acquired corporation may not have adequate information

about its small shareholders’ inclusions to

properly adjust its earnings and profits for

the deemed dividends that would arise in

these situations.

Commentators requested that the final

regulations provide small shareholders

the option of including in income the all

earnings and profits amount, rather than

recognizing the gain on their stock. In response, the final regulations include such

an election, provided that a small shareholder has sufficient information to substantiate its all earnings and profits

amount and provided that the small shareholder furnishes proper certification to the

foreign acquired corporation (or its successor in interest) so that the corporation

can properly reduce its earnings and profits. Electing small shareholders must also

comply with the section 367(b) notice requirement. A less extensive section

367(b) notice procedure is available if the

foreign acquired corporation has never

had earnings and profits that would result

in any shareholder having an all earnings

and profits amount.

Commentators also requested an election that would permit a domestic acquiring corporation to include in income the

all earnings and profits amounts on behalf

of the foreign acquired corporation’s

small shareholders. The final regulations

do not adopt this suggestion because of its

substantial administrative difficulties.

For example, it is unlikely that a publicly

traded foreign corporation (or its domestic acquirer) could ascertain each small

shareholder’s correct holding period in

the stock of the foreign acquired corporation, which would be necessary to properly determine such a cumulative all earnings and profits amount inclusion.

The final regulations also include a

new de minimis exception, which applies

to small shareholders whose stock in the

foreign acquired corporation has a fair

market value below $50,000 on the date

of the exchange. These shareholders are

2000–6 I.R.B.

not required to include gain or a deemed

dividend under the section 367(b) regulations.

3. §1.367(b)-3(d): Carryover of Certain

Attributes

Section 1.367(b)–3(d) of the 1991 proposed regulations clarified that a domestic

acquiring corporation may succeed to foreign taxes paid or accrued by a foreign acquired corporation that are eligible for

credit under section 906. A domestic acquiring corporation may not succeed to

any other foreign taxes paid or accrued by

a foreign acquired corporation because

the earnings that carry over to a domestic

acquiring corporation (other than earnings

related to the taxes eligible for credit

under section 906) are not subject to double taxation at the corporate level. This

rule is consistent with the general policy

of section 367(b) to permit the carryover

of corporate tax attributes only when appropriate. The final regulations retain the

rules of §1.367(b)–3(d), and add an example that illustrates their application.

D. §1.367(b)–4: Acquisition of Foreign

Corporate Stock or Assets by a Foreign

Corporation in Certain Nonrecognition

Transactions

Section 1.367(b)–4 of the 1991 proposed regulations addressed foreign-toforeign nonrecognition transactions. In

general, if the exchange in such a transaction results in a section 1248 shareholder

of the foreign acquired corporation losing

its section 1248 shareholder status,

§1.367(b)–4(b) required the exchanging

shareholder to currently include its section 1248 amount in income as a deemed

dividend. The 1991 proposed regulations

generally did not require an income inclusion in circumstances when a section

1248 shareholder retains its status. In the

case of a lower-tier transaction (where the

exchanging shareholder is a foreign corporation), the section 1248 amount was

not included as foreign personal holding

company income (FPHCI) under section

954(c). This provision permitted deferral

of the section 1248 amount by preserving

such earnings and profits as earnings of

the foreign corporation that is the exchanging shareholder. The final regulations retain these general rules.

1. §1.367(b)–4(b): Recognition of Income

2000–6 I.R.B.

Section 1.367(b)–4(b) of the 1991 proposed regulations provided an exception

to its general rule if an exchanging shareholder receives stock of a domestic corporation. This provision, which the 1991

proposed regulations included in response

to a criticism of the 1977 regulations, was

intended to provide relief in cases when a

domestic acquiring corporation issues its

own stock in exchange for CFC stock and

succeeds to the section 1248 amount allocable to the transferor U.S. shareholder.

Because §1.367(b)–4(a) of the 1991 proposed regulations already limited the application of §1.367(b)–4 to an acquisition

by a foreign corporation, such relief was

unnecessary.

Moreover, the provision inadvertently

did not require an inclusion of a section

1248 amount that may not be preserved

immediately after the exchange. This

could occur, for example, if a foreign acquiring corporation uses the stock of its

domestic parent corporation to acquire the

stock or assets of a foreign target corporation from a section 1248 shareholder. Accordingly, the final regulations do not

adopt the 1991 proposed regulations’ provision regarding receipt of stock of a domestic corporation in a transaction described in §1.367(b)–4.

2. §1.367(b)–4(d): Special Rule for Applying Section 1248 to Subsequent Exchanges

The 1998 regulations revised the rules

of the 1991 proposed regulations regarding the application of section 367(b) and

section 1248 to exchanges that follow a

§1.367(b)–4 exchange in which an exchanging shareholder is not required to

include a section 1248 amount in income.

Because of the limited scope of the 1998

regulations, its rule only addressed the application of section 367(b) and section

1248 following a stock transfer by a direct

U.S. shareholder. The final regulations

incorporate the principles of the 1998 regulations and expand their application to

the class of transactions subject to

§1.367(b)–4, including asset transfers and

transactions in which the exchanging

shareholder is a foreign corporation. The

final regulations also address the interaction of these rules with section 964(e), by

providing the extent to which they apply

to subsequent section 964(e) sales and exchanges. Two new examples in the final

471

regulations, as well as an expanded restatement of the example provided in the

1998 regulations, illustrate the application

of these rules.

Commentators also requested that the

IRS and Treasury clarify the carryover of

earnings and profits and tax accounts in

transactions where an exchanging shareholder is not required to include a section

1248 amount, as well as the application of

section 902 to distributions by a foreign

acquiring corporation after such a section

367(b) exchange. The IRS and Treasury

will address these issues in forthcoming

proposed regulations.

E. §1.367(b)–5: Distributions of Stock

Described in Section 355

1. §1.367(b)–5(b): Distribution by a Domestic Corporation

Section 1.367(b)–5(b) of the 1991 proposed regulations generally provided that

a domestic corporation must recognize

gain on a section 355 distribution of foreign stock to individuals. The final regulations retain this general rule, consistent

with the recently promulgated final regulations under section 367(e) (governing a

section 355 distribution by a domestic

corporation of foreign stock to foreign

persons).

Commentators requested that the final

regulations clarify the proper method for

determining whether a distributee is an individual. The same issue arises under

section 367(e), and the final regulations

adopt the approach of the section 367(e)

regulations. Thus, a distributee is presumed to be an individual except to the

extent that the distributing corporation

certifies that the distributee is not an individual. However, a publicly traded distributing corporation may use a reasonable analysis with respect to distributees

that are not five percent shareholders of

publicly traded stock to demonstrate the

number of distributees that are not individuals. A reasonable analysis includes a

determination of the actual number of distributees that are not individuals or a reasonable statistical analysis of shareholder

records and other relevant information.

Section 1.367(b)–2(k) (§1.367(b)–2(l) of

the 1991 proposed regulations) has also

been amended to adopt the look-through

provisions provided in §1.367(e)–1(b)(2)

for purposes of determining the identity

February 7, 2000

of distributees when the domestic distributing corporation stock is held by a partnership, trust or estate.

2. §1.367(b)–5(c): Pro Rata Distribution

by a CFC

Section 1.367(b)–5(c) of the 1991 proposed regulations provided that, when a

CFC distributes stock of a controlled corporation on a pro rata basis in a section

355 transaction, a distributee must reduce

its post-distribution basis in either the distributing or controlled corporation stock

to the extent its section 1248 amount attributable to such corporation is reduced

as a result of the distribution. To the extent the reduction of the section 1248

amount exceeds the stock basis, the distributee must include the difference in income as a deemed dividend. The final

regulations retain this general rule, subject to the following refinements.

The final regulations add new

§1.367(b)–5(c)(3), which provides that

the basis adjustment provided in

§1.367(b)–2(e)(3)(ii) shall not apply if a

deemed dividend is included in income

pursuant to §1.367(b)–5(c). Under

§1.367(b)–2(e)(3)(ii), a shareholder’s

basis is increased by the amount of a

deemed dividend inclusion. In the context of a §1.367(b)–5(c) inclusion, the

§1.367(b)–2(e)(3)(ii) basis increase

would undermine the purpose of the section 367(b) regulations, because the basis

increase would correspondingly decrease

the shareholder’s built-in gain, thereby reducing the section 1248 amount that is intended to be preserved after the transaction.

Furthermore, some taxpayers commented that the §1.367(b)–5(c)(2) basis

reduction can lead to the creation of phantom gain; that is, it can leave a shareholder with a cumulative amount of postdistribution built-in gain in the stock of

the distributing and controlled corporations that exceeds its predistribution builtin gain. As a result, commentators requested that a reduction in the basis in one

of the corporations give rise to a corresponding increase in the basis of the stock

of the other corporation. In response,

§1.367(b)–5(c)(4) of the final regulations

provides a basis redistribution rule, under

which the basis of the stock of the distributing or controlled corporation (as applicable) is increased by the amount of the required decrease in basis in the other stock

February 7, 2000

under §1.367(b)–5(c)(2). However, basis

cannot be increased above the fair market

value of the stock and also cannot be increased to the extent the increase diminishes the postdistribution section 1248

amount with respect to such stock. This

basis redistribution rule also applies with

regard to deemed dividend inclusions

under §1.367(b)–5(c)(2). An example in

the final regulations illustrates the application of these new rules.

3. §1.367(b)–5(d): Non-Pro Rata Distribution by Controlled Foreign Corporation

Section 1.367(b)–5(d) of the 1991 proposed regulations provided that, if a CFC

distributes controlled corporation stock

on a non-pro rata basis, each distributee

must include in income the amount of

any reduction in its section 1248 amount

with regard to either the distributing or

controlled corporation. For this purpose,

the 1991 proposed regulations treated a

shareholder of the distributing corporation that does not exchange stock in the

distributing corporation for stock in the

controlled corporation (non-participating

shareholder) as a distributee. The 1991

proposed regulations provided that a nonparticipating shareholder may make an

election (taxable distribution election),

under which the distributing and controlled corporations are not treated as corporations for purposes of gain (but not

loss) recognition by all persons affected

by the taxable status of the transaction.

The preamble to the 1991 proposed regulations invited comments as to whether

the benefits of the taxable distribution

election to non-participating shareholders

are outweighed by the potential adverse

effects on the other shareholders.

In response, commentators uniformly

criticized the taxable distribution election.

They argued that the election was inequitable because it enabled a non-participating shareholder (who may be a small

shareholder) to unilaterally and retroactively invalidate the section 355 transaction for all parties involved. Commentators also pointed out that the taxable

distribution election could distort the economic incentives in cross-border restructurings by requiring participating shareholders to consider identifying and

making contractual arrangements (which

could include monetary arrangements)

with each non-participating shareholder

in order to prevent them from electing to

472

invalidate the section 355 transaction.

Commentators thus argued in favor of not

adopting the taxable distribution election

in the final regulations.

The taxable distribution election is also

not required by the statute. Section

367(b) directs the Secretary to prescribe

regulations that provide the necessary or

appropriate tax consequences that should

accompany the application of the Subchapter C provisions to transactions involving foreign corporations. Section

367(b)(2) specifically provides that the

section 367(b) regulations “shall include

(but shall not be limited to) regulations

dealing with the sale or exchange of stock

or securities in a foreign corporation by a

U.S. person. . . .” Accordingly, the section 367(b) regulations may address the

tax consequences of a non-pro rata distribution to both participating and non-participating shareholders. In both cases, the

diminution in a shareholder’s potential

section 1248 amount following a section

355 transaction appropriately measures

the shareholder’s inclusion with regard to

a section 355 transaction involving a distributing corporation that is a controlled

foreign corporation. Differing results depending on whether a shareholder is a

participating shareholder or a non-participating shareholder can also be viewed as

artificial, given that the distinction is

often merely a function of alternative

planning strategies.

In light of all of the above considerations, the final regulations do not adopt

the taxable distribution election. As a result, all shareholders of a CFC that distributes stock on a non-pro rata basis must

include in income the amount of any reduction in their section 1248 amount with

respect to either the distributing or controlled corporation.

4. Final Regulation §1.367(b)–5(f):

Exclusion of Deemed Dividend from

FPHCI

Commentators noted that the 1991 proposed regulations did not automatically

exclude a §1.367(b)–5(c) or (d) deemed

dividend inclusion by an exchanging foreign corporate shareholder from FPHCI.

Accordingly, the deemed dividend generally would be subpart F income and currently includible in income by a U.S.

shareholder of the exchanging foreign

corporation. As in the case of a lower-tier

foreign-to-foreign transaction described

2000–6 I.R.B.

in §1.367(b)–4, the potential application

of section 1248 can be preserved by excluding the deemed dividend from

FPHCI. Thus, the final regulations adopt

the suggestion and provide that a

§1.367(b)–5(c) or (d) deemed dividend

inclusion by a foreign corporation is not

included in FPHCI under section 954(c).

5. 1991 Proposed Regulation §1.367(b)–5(f):

Adjustments to Earnings and Profits

Section 1.367(b)–5(f) of the 1991 proposed regulations provided rules regarding the allocation of earnings and profits

of a foreign transferor corporation in connection with a section 355 distribution.

After further consideration, the IRS and

Treasury

have

not

included

§1.367(b)–5(f) of the 1991 proposed regulations in the final regulations. Forthcoming proposed regulations will more

fully consider the allocation of earnings

and profits in section 355 distributions

where either (or both) the distributing or

controlled corporation is a foreign corporation.

F. §1.367(b)–6: Effective Date

The final regulations apply to section

367(b) exchanges that occur on or after

February 23, 2000. The preamble to the

1991 proposed regulations solicited

comments on whether the final regulations should provide an election to apply

the regulations retroactively to exchanges that occur on or after August

26, 1991 (the date the 1991 proposed

regulations were published in the Federal Register). Given the length of time

that has elapsed since the issuance of the

1991 proposed regulations, the IRS and

Treasury do not believe that such an

election would be appropriate. This determination is consistent with the 1998

revision to §1.367(b)–2(d) of the 1991

proposed regulations, which deleted the

proposed special retroactive effective

date for the definition of the all earnings

and profits amount. A taxpayer may,

however, elect to apply the final regulations to section 367(b) exchanges that

occur (or occurred) before February 23,

2000, if the due date for the taxpayer’s

timely filed Federal tax return (including extensions) for the taxable year in

which the section 367(b) exchange occurs (or occurred) is after February 23,

2000.

2000–6 I.R.B.

Removed Provisions

These regulations finalize substantially

all of the 1991 proposed regulations. In

connection with the finalization of these

regulations, the 1977 regulations (other

than §7.367(b)–12) and the section 367(b)

provisions contained in the 1998 regulations are removed. Section 7.367(b)–12

is retained to address distributions with

respect to (or a disposition of) stock that

was subject to certain provisions of the

1977 regulations in effect prior to February 23, 2000.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations, and because the notice of proposed

rulemaking preceding the regulations was

issued prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6)

does not apply.

Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy of

the Small Business Administration for

comment on the impact of the proposed

regulations on small business.

Drafting Information

The principal author of these regulations is Mark Harris of the Office of Associate Chief Counsel (International).

However, other personnel from the IRS

and Treasury Department participated in

their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 7, and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by revising the entry for

§1.367(b)–2 and by adding entries in numerical order to read in part as follows:

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

473

Section 1.367(b)–2 also issued under

26 U.S.C. 367(a) and (b).

Section 1.367(b)–3 also issued under

26 U.S.C. 367(a) and (b). * * *

Section 1.367(b)–5 also issued under

26 U.S.C. 367(a) and (b).

Section 1.367(b)–6 also issued under

26 U.S.C. 367(a) and (b). * * *

Par. 2. Section 1.367(a)–3 is amended

as follows:

1. Paragraph (d)(3) Example 11, paragraph (ii), the third sentence, the reference “§7.367(b)–7(c)(1)(i) of this chapter” is removed and “§1.367(b)–4(b)” is

added in its place.

2. Paragraph (d)(3) Example 11A,

paragraph (ii), the second, third and

fourth sentences are removed and a sentence is added in their place.

3. Paragraph (e)(2), in the third, fourth,

and fifth sentences, the parenthetical “(as

in effect before February 23, 2000, see 26

CFR part 1 revised as of April 1, 1999)” is

added immediately after “§7.367(b)–7 of

this chapter” each place it appears.

4. Paragraph (g)(2)(iv), the parenthetical “(as in effect before February 23,

2000, see 26 CFR part 1 revised as of

April 1, 1999)” is added immediately

after “7.367(b)–2(b) of this chapter.”

The revisions read as follows:

§1.367(a)–3 Treatment of transfers of

stock or securities to foreign corporations.

*****

(d) * * *

(3) * * *

Example 11A. * * *

(ii) Result. * * * Assuming

§1.367(b)–4(b) does not apply, there is no

income inclusion under section 367(b),

and the amount of the gain recognition

agreement is $50.

Par. 3. Section 1.367(b)–0 is added to

read as follows:

§1.367(b)–0 Table of contents.

This section lists the paragraphs contained in §§1.367(b)–0 through

1.367(b)–6.

February 7, 2000

§1.367(b)–1 Other transfers.

(a) Scope.

(b) General rules.

(1) Rules.

(2) Example.

(c) Notice required.

(1) In general.

(2) Persons subject to section 367(b) notice.

(3) Time and manner for filing notice.

(i) United States persons described in

§1.367(b)–1(c)(2).

(ii) Foreign corporations described in

§1.367(b)–1(c)(2).

(4) Information required.

(5) Abbreviated notice provision.

(6) Supplemental published guidance.

§1.367(b)–2 Definitions and special

rules.

(a) Controlled foreign corporation.

(b) Section 1248 shareholder.

(c) Section 1248 amount.

(1) Rule.

(2) Examples.

(d) All earnings and profits amount.

(1) General rule.

(2) Rules for determining earnings and

profits.

(i) Domestic rules generally applicable.

(ii) Certain adjustments to earnings and

profits.

(iii)Effect of section 332 liquidating distribution.

(3) Amount attributable to a block of

stock.

(i) Application of section 1248 principles.

(A) In general.

(1) Rule.

(2) Example.

(B) Foreign shareholders.

(ii) Limitation on amounts attributable to

holding periods determined under section

1223.

(A) Rule.

(B) Example.

(iii)Exclusion of lower-tier earnings.

(e) Treatment of deemed dividends.

(1) In general.

(2) Consequences of dividend characterization.

(3) Ordering rules.

(4) Examples.

(f) Deemed asset transfer and closing of

taxable year in certain section

368(a)(1)(F) reorganizations.

(1) Scope.

(2) Deemed asset transfer.

February 7, 2000

(3) Other applicable rules.

(4) Closing of taxable year.

(g) Stapled stock under section 269B.

(h) Section 953(d) domestication elections.

(1) Effect of election.

(2) Post-election exchanges.

(i) Section 1504(d) elections.

(j) Sections 985 through 989.

(1) Change in functional currency of a

qualified business unit.

(i) Rule.

(ii) Example.

(2) Previously taxed earnings and profits.

(i) Exchanging shareholder that is a

United States person.

(ii) Exchanging shareholder that is a foreign corporation.

(3) Other rules.

(k) Partnerships, trusts and estates.

§1.367(b)–3 Repatriation of foreign corporate assets in certain nonrecognition

transactions.

(a) Scope.

(b) Exchange of stock owned directly by a

United States shareholder or by certain

foreign corporate shareholders.

(1) Scope.

(2) United States shareholder.

(3) Income inclusion.

(i) Inclusion of all earnings and profits

amount.

(ii) Examples.

(iii) Recognition of exchange gain or loss

with respect to capital [reserved].

(4) [Reserved].

(c) Exchange of stock owned by a United

States person that is not a United States

shareholder.

(1) Scope.

(2) Requirement to recognize gain.

(3) Election to include all earnings and

profits amount.

(4) De minimis exception.

(5) Examples.

(d) Carryover of certain foreign taxes.

(1) Rule.

(2) Example.

§1.367(b)–4 Acquisition of foreign corporate stock or assets by a foreign corporation in certain nonrecognition transactions.

(a) Scope.

(b) Income inclusion.

(1) Exchange that results in loss of status

as section 1248 shareholder.

474

(i) Rule.

(ii) Examples.

(2) Receipt by exchanging shareholder of

preferred or other stock in certain instances.

(i) Rule.

(ii) Examples.

(3) Certain recapitalizations.

(c) Exclusion of deemed dividend from

foreign personal holding company income.

(1) Rule.

(2) Example.

(d) Rules for subsequent exchanges.

(1) In general.

(2) Subsequent dispositions by a foreign

acquiring corporation.

(3) Examples.

§1.367(b)–5 Distributions of stock described in section 355.

(a) In general.

(1) Scope.

(2) Treatment of distributees as exchanging shareholders.

(b) Distribution by a domestic corporation.

(1) General rule.

(2) Section 367(e) transactions.

(3) Determining whether distributees are

individuals.

(4) Applicable cross-references.

(c) Pro rata distribution by a controlled

foreign corporation.

(1) Scope.

(2) Adjustment to basis in stock and income inclusion.

(3) Interaction with §1.367(b)–2(e)(3)(ii).

(4) Basis redistribution.

(d) Non-pro rata distribution by a controlled foreign corporation.

(1) Scope.

(2) Treatment of certain shareholders as

distributees.

(3) Inclusion of excess section 1248

amount by exchanging shareholder.

(4) Interaction with §1.367(b)–2(e)(3)(ii).

(i) Limited application.

(ii) Interaction with predistribution

amount.

(e) Definitions.

(1) Predistribution amount.

(2) Postdistribution amount.

(f) Exclusion of deemed dividend from

foreign personal holding company income.

(g) Examples.

2000–6 I.R.B.

§ 1.367(b)–6 Effective dates and coordination rules.

(a) Effective date.

(1) In general.

(2) Exception.

(b) Certain recapitalizations described in

§1.367(b)–4(b)(3).

(c) Use of reasonable method to comply

with prior published guidance.

(1) Prior exchanges.

(2) Future exchanges.

(d) Effect of removal of attribution rules.

Par. 4. Sections 1.367(b)–1 and

1.367(b)–2 are revised to read as follows:

§1.367(b)–1 Other transfers.

(a) Scope. The regulations promulgated under section 367(b) (the section

367(b) regulations) set forth rules regarding the proper inclusions and adjustments

that must be made as a result of an exchange described in section 367(b) (a section 367(b) exchange). A section 367(b)

exchange is any exchange described in

section 332, 351, 354, 355, 356 or 361,

with respect to which the status of a foreign corporation as a corporation is relevant for determining the extent to which

income shall be recognized or for determining the effect of the transaction on

earnings and profits, basis of stock or securities, basis of assets, or other relevant

tax attributes. Notwithstanding the preceding sentence, a section 367(b) exchange does not include a transfer to the

extent the foreign corporation fails to be

treated as a corporation by reason of section 367(a)(1). See §1.367(a)–3(b)(2)(ii)

for an illustration of the interaction of section 367(a) and (b).

(b) General rules—(1) Rules. The

following general rules apply under the

section 367(b) regulations—

(i) A foreign corporation in a section

367(b) exchange is considered to be a corporation and, as a result, all of the related

provisions (e.g., section 381) shall apply,

except to the extent provided in the section 367(b) regulations; and

(ii) Nothing in the section 367(b) regulations shall permit—

(A) The nonrecognition of income that

would otherwise be required to be recognized under another provision of the Internal Revenue Code or the regulations

thereunder; or

(B) The recognition of a loss or deduction that would otherwise not be recognized under another provision of the In-

2000–6 I.R.B.

ternal Revenue Code or the regulations

thereunder.

(2) Example. The following example

illustrates the rules of this paragraph (b):

Example—(i) Facts. DC, a domestic corporation, owns 90 percent of P, a partnership. The remaining 10 percent of P is owned by a person unrelated to DC. P owns all of the outstanding stock of

FC, a controlled foreign corporation. FC liquidates

into P.

(ii) Result. FC’s liquidation is not a transaction

described in section 332. Nothing in the section

367(b) regulations, including §1.367(b)–2(k), permits FC’s liquidation to qualify as a liquidation described in section 332.

(c) Notice Required—(1) In general.

A notice under this paragraph (c) (section

367(b) notice) must be filed with regard

to any person described in paragraph

(c)(2) of this section. A section 367(b)

notice must be filed in the time and manner described in paragraph (c)(3) of this

section and must include the information

described in paragraph (c)(4) of this section.

(2) Persons subject to section 367(b)

notice. The following persons are described in this paragraph (c)(2)—

(i) A shareholder described in

§1.367(b)–3(b)(1) that realizes income in

a transaction described in §1.367(b)–3(a);

(ii) A shareholder that makes the election described in §1.367(b)–3(c)(3);

(iii) A shareholder described in

§1.367(b)–4(b)(1)(i)(A)(1) or (2) that realizes income in a transaction described in

§1.367(b)–4(a); and

(iv) A shareholder that realizes income

in a transaction described in

§1.367(b)–5(c) or 1.367(b)–5(d) and that

is either–

(A) A section 1248 shareholder of the

distributing or controlled corporation; or

(B) A foreign corporation with one or

more shareholders that are described in

paragraph (c)(2)(iv)(A) of this section.

(3) Time and manner for filing notice—

(i) United States persons described in

§1.367(b)–1(c)(2). A United States person described in paragraph (c)(2) of this

section must file a section 367(b) notice

attached to a timely filed Federal tax return (including extensions) for the person’s taxable year in which income is realized in the section 367(b) exchange. In

the case of a shareholder that makes the

election described in §1.367(b)–3(c)(3),

notification of such election must be sent

to the foreign acquired corporation (or its

475

successor in interest) on or before the date

the section 367(b) notice is filed, so that

appropriate corresponding adjustments

can be made in accordance with the rules

of §1.367(b)–2(e).

(ii) Foreign corporations described in

§1.367(b)–1(c)(2). Each United States

person listed in this paragraph (c)(3)(ii)

must file a section 367(b) notice with regard to a foreign corporation described in

paragraph (c)(2) of this section. Such notice must be attached to a timely filed

Federal tax return (including extensions)

for the United States person’s taxable year

in which income is realized in the section

367(b) exchange and, if the United States

person is required to file a Form 5471 (Information Return of U.S. Persons With

Respect To Certain Foreign Corporations), the section 367(b) notice must be

attached to the Form 5471. The following

persons are listed in this paragraph

(c)(3)(ii)—

(A) United States shareholders (as defined in §1.367(b)–3(b)(2)) of foreign

corporations described in paragraph

(c)(2)(i) of this section; and

(B) Section 1248 shareholders of foreign corporations described in paragraph

(c)(2)(iii) or (iv) of this section.

(4) Information required. Except as

provided in paragraph (c)(5) of this section, a section 367(b) notice shall include

the following information—

(i) A statement that the exchange is a

section 367(b) exchange;

(ii) A complete description of the exchange;

(iii) A description of any stock, securities or other consideration transferred or

received in the exchange;

(iv) A statement that describes any

amount required, under the section 367(b)

regulations, to be taken into account as income or loss or as an adjustment to basis,

earnings and profits, or other tax attributes as a result of the exchange;

(v) Any information that is or would be

required to be furnished with a Federal income tax return pursuant to regulations

under section 332, 351, 354, 355, 356,

361 or 368 (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;

(vi) Any information required to be

furnished with respect to the exchange

February 7, 2000

under sections 6038, 6038A, 6038B,

6038C or 6046, or the regulations under

those sections, if such information has not

otherwise been provided by the person filing the section 367(b) notice; and

(vii) If applicable, a statement that the

shareholder is making the election described in §1.367(b)–3(c)(3). This statement must include—

(A) A copy of the information the

shareholder received from the foreign acquired corporation (or its successor in interest) establishing and substantiating the

shareholder’s all earnings and profits

amount with respect to the shareholder’s

stock in the foreign acquired corporation;

and

(B) A representation that the shareholder has notified the foreign acquired

corporation (or its successor in interest)

that the shareholder is making the election

described in §1.367(b)–3(c)(3).

(5) Abbreviated notice provision. In

the case of a foreign acquired corporation

that has never had earnings and profits

that would result in any shareholder having an all earnings and profits amount, a

shareholder making the election described

in §1.367(b)–3(c)(3) may satisfy the information requirements of paragraph

(c)(4) of this section by filing a section

367(b) notice that includes–

(i) A statement from the foreign acquired corporation (or its successor in interest) that the foreign acquired corporation has never had any earnings and

profits that would result in any shareholder having an all earnings and profits

amount; and

(ii) The information described in paragraphs (c)(4)(i) through (iii) of this section.

(6) Supplemental published guidance.

The section 367(b) notice requirements

may be updated or amended by revenue

procedure or other published guidance.

§1.367(b)–2 Definitions and special

rules.

(a) Controlled foreign corporation.

The term controlled foreign corporation

means a controlled foreign corporation as

defined in section 957 (taking into account section 953(c)).

(b) Section 1248 shareholder. The

term section 1248 shareholder means any

United States person that satisfies the

ownership requirements of section

1248(a)(2) or (c)(2) with respect to a for-

February 7, 2000

eign corporation.

(c) Section 1248 amount—(1) Rule.

The term section 1248 amount with respect to stock in a foreign corporation

means the net positive earnings and profits (if any) that would have been attributable to such stock and includible in income as a dividend under section 1248

and the regulations thereunder if the stock

were sold by the shareholder. In the case

of a transaction in which the shareholder

is a foreign corporation (foreign shareholder), the following additional rules

shall apply–

(i) The foreign shareholder shall be

deemed to be a United States person for

purposes of this paragraph (c), except that

the foreign shareholder shall not be considered a United States person for purposes of determining whether the stock

owned by the foreign shareholder is stock

of a controlled foreign corporation, and

(ii) The foreign shareholder’s holding

period in the stock of the foreign corporation shall be determined by reference to

the period that the foreign shareholder’s

section 1248 shareholders held (directly

or indirectly) an interest in the foreign

corporation. This paragraph (c)(1)(ii) applies in addition to the section 1248 regulations’ incorporation of section 1223

holding periods, as modified by

§1.367(b)–4(d) (as applicable).

(2) Examples. The following examples

illustrate the rules of this paragraph (c):

eign corporations (CFCs). See section 1248(a). Because FC1 is not considered a United States person

for purposes of determining whether FC2 is a CFC,

FC1’s section 1248 amount with respect to its FC2

stock is computed by reference to FC2’s earnings

and profits that accumulated on or after January 1,

2001, the date FC2 became an actual CFC.

Example 3—(i) Facts. FC1, a foreign corporation, owns all of the outstanding stock of FC2, a foreign corporation. DC is a domestic corporation that

is unrelated to FC1, FC2, and their direct and indirect owners. On January 1, 2001, DC purchases all

of the outstanding stock of FC1.

(ii) Result. Under this paragraph (c), DC’s section 1248 amount with respect to its FC1 stock is

computed by reference to FC1’s and FC2’s earnings

and profits that accumulated on or after January 1,

2001, the first day DC held the stock of FC1. See

section 1248(a). FC1’s section 1248 amount with

respect to its FC2 stock is computed by reference to

FC2’s earnings and profits that accumulated on or

after January 1, 2001, the first day FC1’s section

1248 shareholder (DC) indirectly held the stock of

FC2.

Example 4—(i) Facts. DC, a domestic corporation, directly owns all of the outstanding stock of

FC1 and FC2, controlled foreign corporations. DC

has always owned all of the stock of FC1 and FC2.

On January 1, 2001, DC contributes all of the stock

of FC2 to FC1 in a nonrecognition exchange that

does not require an income inclusion under the section 367(a) or 367(b) regulations. See §§1.367(a)–8

and 1.367(b)–4.

(ii) Result. Under this paragraph (c), DC’s section 1248 amount with respect to its FC1 stock is

computed by reference to all of FC1’s and FC2’s

earnings and profits. See section 1248(c)(2). Because FC1’s section 1248 shareholder (DC) always

held (directly or indirectly) all of the stock of FC2,

FC1’s section 1248 amount with respect to its FC2

stock is computed by reference to all of FC2’s earnings and profits

Example 1—(i) Facts. DC, a domestic corporation, owns all of the outstanding stock of FC1, a

controlled foreign corporation (CFC). FC1 owns all

of the outstanding stock of FC2, a CFC. DC has always owned all of the stock of FC1, and FC1 has always owned all of the stock of FC2.

(ii) Result. Under this paragraph (c), DC’s section 1248 amount with respect to its FC1 stock is

computed by reference to all of FC1’s and FC2’s

earnings and profits. See section 1248(c)(2). Because FC1’s section 1248 shareholder (DC) always

indirectly held all of the stock of FC2, FC1’s section

1248 amount with respect to its FC2 stock is computed by reference to all of FC2’s earnings and profits.

Example 2—(i) Facts. DC, a domestic corporation, owns 40 percent of the outstanding stock of

FC1, a foreign corporation. The other 60 percent of

FC1 stock is owned (directly and indirectly) by foreign persons that are unrelated to DC. FC1 owns all

of the outstanding stock of FC2, a foreign corporation. On January 1, 2001, DC purchases the remaining 60 percent of FC1 stock.

(ii) Result. Under this paragraph (c), DC’s section 1248 amount with respect to its FC1 stock is

computed by reference to FC1’s and FC2’s earnings

and profits that accumulated on or after January 1,

2001, the date FC1 and FC2 became controlled for-

(d) All earnings and profits amount—

(1) General rule. The term all earnings

and profits amount with respect to stock

in a foreign corporation means the net

positive earnings and profits (if any) determined as provided under paragraph

(d)(2) of this section and attributable to

such stock as provided under paragraph

(d)(3) of this section. The all earnings

and profits amount shall be determined

without regard to the amount of gain that

would be realized on a sale or exchange

of the stock of the foreign corporation.

(2) Rules for determining earnings and

profits—(i) Domestic rules generally applicable. For purposes of this paragraph

(d), except as provided in sections

312(k)(4) and (n)(8), 964 and 986, the

earnings and profits of a foreign corporation for any taxable year shall be determined according to principles substantially similar to those applicable to

domestic corporations.

476

2000–6 I.R.B.

(ii) Certain adjustments to earnings

and profits. Notwithstanding paragraph

(d)(2)(i) of this section, for purposes of

this paragraph (d), the earnings and profits of a foreign corporation for any taxable

year shall not include the amounts specified in section 1248(d). In the case of

amounts specified in section 1248(d)(4),

the preceding sentence requires that the

earnings and profits for any taxable year

be decreased by the net positive amount

(if any) of earnings and profits attributable to activities described in section

1248(d)(4), and increased by the net reduction (if any) in earnings and profits attributable to activities described in section

1248(d)(4).

(iii) Effect of section 332 liquidating

distribution. The all earnings and profits

amount with respect to stock of a corporation that distributes all of its property in a

liquidation described in section 332 shall

be determined without regard to the adjustments prescribed by section 312(a)

and (b) resulting from the distribution of

such property in liquidation, except that

gain or loss realized by the corporation on

the distribution shall be taken into account to the extent provided in section

312(f)(1). See §1.367(b)–3(b)(3)(ii) Example 3.

(3) Amount attributable to a block of

stock—(i) Application of section 1248

principles—(A) In general—(1) Rule.

The all earnings and profits amount with

respect to stock of a foreign corporation is

determined according to the attribution

principles of section 1248 and the regulations thereunder. The attribution principles of section 1248 shall apply without

regard to the requirements of section 1248

that are not relevant to the determination

of a shareholder’s pro rata portion of

earnings and profits. Thus, for example,

the all earnings and profits amount is determined without regard to whether the

foreign corporation was a controlled foreign corporation at any time during the

five years preceding the section 367(b)

exchange in question, without regard to

whether the shareholder owned a 10 percent or greater interest in the stock, and

without regard to whether the earnings

and profits of the foreign corporation

were accumulated in post-1962 taxable

years or while the corporation was a controlled foreign corporation.

(2) Example. The following example

2000–6 I.R.B.

illustrates the rules of this paragraph

(d)(3)(i)(A):

Example—(i) Facts. On January 1, 2001, DC, a

domestic corporation, purchases 9 percent of the

outstanding stock of FC, a foreign corporation. On

January 1, 2002, DC purchases an additional 1 percent of FC stock. On January 1, 2003, DC exchanges its stock in FC in a section 367(b) exchange

in which DC is required to include the all earnings

and profits amount in income. FC was not a controlled foreign corporation during the entire period

DC held its FC stock.

(ii) Result. The all earnings and profits amount

with respect to DC’s stock in FC is computed by reference to 9 percent of FC’s earnings and profits from

January 1, 2001, through December 31, 2001, and

by reference to 10 percent of FC’s earnings and

profits from January 1, 2002, through January 1,

2003.

(B) Foreign shareholders. In the case

of a transaction in which the exchanging

shareholder is a foreign corporation (foreign shareholder), the following additional rules shall apply–

(1) The attribution principles of section 1248 shall apply without regard to

whether the person directly owning the

stock is a United States person; and

(2) The foreign shareholder’s holding

period in the stock of the foreign acquired

corporation shall be determined by reference to the period that the foreign shareholder’s United States shareholders (as

defined in §1.367(b)–3(b)(2)) held (directly or indirectly) an interest in the foreign acquired corporation. This paragraph (d)(3)(i)(B)(2) applies in addition

to the section 1248 regulations’ incorporation of section 1223 holding periods, as

modified by paragraph (d)(3)(ii) of this

section and §1.367(b)–4(d) (as applicable).

(ii) Limitation on amounts attributable

to holding periods determined under section 1223—(A) Rule. In applying the attribution principles of section 1248 and

the regulations thereunder to determine

the all earnings and profits amount with

respect to the stock of a foreign corporation, earnings and profits attributable to a

section 1223(2) holding period that relates to a period of direct ownership of the

stock of the foreign corporation by a nonUnited States person shall not be included, except to the extent of earnings

and profits attributable to a period when

the stock of the foreign corporation was

indirectly owned by United States shareholders (as defined in §1.367(b)–3(b)(2)).

(B) Example. The following example

illustrates the rules of this paragraph

477

(d)(3)(ii):

Example—(i) Facts. (A) FC1 is a foreign corporation. The outstanding stock of FC1 is directly

owned by the following unrelated persons: 20 percent by DP, a domestic partnership; 20 percent by

DC, a domestic corporation; 20 percent by FC, a foreign corporation that is directly and indirectly

owned by foreign persons; 20 percent by FP, a foreign partnership that is equally owned by 2 partners,

DI, a United States citizen, and FI, a nonresident

alien; and 20 percent by a variety of minority shareholders, none of whom owns, applying the ownership rules of section 958, 10 percent or more of the

outstanding stock of FC (the small shareholders).

(B) FC1 owns all of the outstanding stock of

FC2, a foreign corporation that is not a controlled

foreign corporation subject to the rules of section

953(c). FC2 has net positive earnings and profits.

In a reorganization described in section

368(a)(1)(B), DA, a domestic corporation, acquires

all of the stock of FC2 from FC1 in exchange for

DA voting stock.

(ii) Result. (A) Under section 1223(2), DA holds

the stock of FC2 with a holding period that includes

the period that FC2 was held by FC1. As a result,

the rules of this paragraph (d)(3)(ii) apply for purposes of computing DA’s all earnings and profits

amount.

(B) In applying the attribution principles of section 1248, earnings and profits attributable to a section 1223(2) holding period that refers to a period of

direct ownership of the stock of a foreign corporation by a non-United States person are not included,

except to the extent the stock of the foreign corporation was indirectly owned by United States shareholders as defined in §1.367(b)–3(b)(2). Accordingly, DA’s all earnings and profits amount does not

include the FC2 earnings and profits attributable to

FC, FI, and the small shareholders. DA’s all earnings and profits amount does include the FC2 earnings and profits attributable to DP, DC, and DI. See

§1.367(b)–2(k) for rules concerning the treatment of

partnerships under the section 367(b) regulations.

(iii) Exclusion of lower-tier earnings.

In applying the attribution principles of

section 1248 and the regulations thereunder to determine the all earnings and profits amount with respect to stock of a foreign corporation, the earnings and profits

of subsidiaries of the foreign corporation

shall not be taken into account notwithstanding section 1248(c)(2).

(e) Treatment of deemed dividends—

(1) In general. In certain circumstances

these regulations provide that an exchanging shareholder shall include an amount

in income as a deemed dividend. This

paragraph provides rules for the treatment

of the deemed dividend.

(2) Consequences of dividend characterization. A deemed dividend described

in paragraph (e)(1) of this section shall be

treated as a dividend for purposes of the

Internal Revenue Code. The deemed dividend shall be considered as paid out of

February 7, 2000

the earnings and profits with respect to

which the amount of the deemed dividend

was determined. Thus, for example, a

deemed dividend that is determined by

reference to the all earnings and profits

amount or the section 1248 amount will

never be considered as paid out of (and

therefore will never reduce) earnings and

profits specified in section 1248(d), because such earnings and profits are excluded in computing the all earnings and

profits amount (under paragraph (d)(2)(ii)

of this section) and the section 1248

amount (under section 1248(d) and paragraph (c)(1) of this section). If the

deemed dividend is determined by reference to the earnings and profits of a foreign corporation that is owned indirectly

(i.e., through one or more tiers of intermediate owners) by the person that is required to include the deemed dividend in

income, the deemed dividend shall be

considered as having been paid by such

corporation to such person through the intermediate owners, rather than directly to

such person.

(3) Ordering rules. In the case of an

exchange of stock in which the exchanging shareholder is treated as receiving a

deemed dividend from a foreign corporation, the following ordering rules concerning the timing, treatment, and effect

of such a deemed dividend shall apply.

See also paragraph (j)(2) of this section.

(i) For purposes of the section 367(b)

regulations, the gain realized by an exchanging shareholder shall be determined

before increasing (as provided in paragraph (e)(3)(ii) of this section) the basis in

the stock of the foreign corporation by the

amount of the deemed dividend.

(ii) Except as provided in paragraph

(e)(3)(i) of this section, the deemed dividend shall be considered to be received

immediately before the exchanging shareholder’s receipt of consideration for its

stock in the foreign corporation, and the

shareholder ’s basis in the stock exchanged shall be increased by the amount

of the deemed dividend. Such basis increase shall be taken into account before

determining the gain otherwise recognized on the exchange (for example,

under section 356), the basis that the exchanging shareholder takes in the property that it receives in the exchange

(under section 358(a)(1)), and the basis

that the transferee otherwise takes in the

February 7, 2000

transferred stock (under section 362).

(iii) Except as provided in paragraph

(e)(3)(i) of this section, the earnings and

profits of the appropriate foreign corporation shall be reduced by the deemed dividend amount before determining the consequences of the recognition of gain in

excess of the deemed dividend amount

(for example, under section 356(a)(2) or

sections 356(a)(1) and 1248).

(4) Examples. The following examples illustrate the rules of this paragraph

(e):

Example 1. DC, a domestic corporation, exchanges stock in FC, a foreign corporation, in a section 367(b) exchange in which DC includes the all

earnings and profits amount in income as a deemed

dividend. Under paragraph (e)(2) of this section, a

deemed dividend is treated as a dividend for purposes of the Internal Revenue Code. As a result, if

the requirements of section 902 are met, DC may

qualify for a deemed paid foreign tax credit with respect to the deemed dividend that it receives from

FC.

Example 2. DC, a domestic corporation, exchanges stock in FC1, a foreign corporation that is a

controlled foreign corporation, in a transaction in

which DC is required to include the section 1248

amount in income as a deemed dividend. A portion

of the section 1248 amount is determined by reference to the earnings and profits of FC1 (the uppertier portion of the section 1248 amount), and the remainder of the section 1248 amount is determined

by reference to the earnings and profits of FC2,

which is a wholly owned foreign subsidiary of FC1

(the lower-tier portion of the section 1248 amount).

Under paragraph (e)(2) of this section, DC computes

its deemed paid foreign tax credit as if the lower-tier

portion of the section 1248 amount were distributed

as a dividend by FC2 to FC1, and as if such portion

and the upper-tier portion of the section 1248

amount were then distributed as a dividend by FC1

to DC.

Example 3. DC, a domestic corporation, exchanges stock in FC, a foreign corporation that is a

controlled foreign corporation, in a transaction in

which DC realizes gain of $100 (prior to the application of the section 367(b) regulations). In connection with the transaction, DC is required to include

$40 in income as a deemed dividend under the section 367(b) regulations. In addition to receiving

property permitted to be received under section 354

without the recognition of gain, DC also receives

cash in the amount of $70. Under paragraph (e)(3)

of this section, the $40 deemed dividend increases

DC’s basis in its FC stock before determining the

gain to be recognized under section 356. Thus, in

applying section 356, DC is considered to realize

$60 of gain on the exchange, all of which is recognized under section 356(a)(1).

(f) Deemed asset transfer and closing

of taxable year in certain section

368(a)(1)(F) reorganizations—(1)

Scope. This paragraph applies to a reorganization described in section

368(a)(1)(F) in which the transferor cor-

478

poration is a foreign corporation.

(2) Deemed asset transfer. In a reorganization described in paragraph (f)(1)

of this section, there is considered to

exist—

(i) A transfer of assets by the foreign

transferor corporation to the acquiring

corporation in exchange for stock (or

stock and securities) of the acquiring corporation and the assumption by the acquiring corporation of the foreign transferor corporation’s liabilities;

(ii) A distribution of such stock (or

stock and securities) by the foreign transferor corporation to its shareholders (or

shareholders and security holders); and

(iii) An exchange by the foreign transferor corporation’s shareholders (or shareholders and security holders) of their

stock (or stock and securities) for stock

(or stock and securities) of the acquiring

corporation.

(3) Other applicable rules. For purposes of this paragraph (f), it is immaterial that the applicable foreign or domestic

law treats the acquiring corporation as a

continuation of the foreign transferor corporation.

(4) Closing of taxable year. In a reorganization described in paragraph (f)(1)

of this section, the taxable year of the foreign transferor corporation shall end with

the close of the date of the transfer and the

taxable year of the acquiring corporation

shall end with the close of the date on

which the transferor’s taxable year would

have ended but for the occurrence of the

reorganization if–

(i) The acquiring corporation is a domestic corporation; or

(ii) The foreign transferor corporation

has effectively connected earnings and

profits (as defined in section 884(d)) or

accumulated effectively connected earnings and profits (as defined in section

884(b)(2)(B)(ii)).

(g) Stapled stock under section 269B.

For rules treating a foreign corporation as

a domestic corporation if it and a domestic corporation are stapled entities, see

section 269B. The deemed conversion of

a foreign corporation to a domestic corporation under section 269B is treated as a

reorganization under section 368(a)(1)(F).

(h) Section 953(d) domestication elections—(1) Effect of election. A foreign

corporation that elects under section

953(d) to be treated as a domestic corpo-

2000–6 I.R.B.

ration shall be treated for purposes of section 367(b) as transferring, as of the first

day of the first taxable year for which the

election is effective, all of its assets to a

domestic corporation in a reorganization

described in section 368(a)(1)(F).

Notwithstanding paragraph (d) of this

section, for purposes of determining the

consequences of the reorganization under

§1.367(b)–3, the all earnings and profits

amount shall not be considered to include

earnings and profits accumulated in taxable years beginning before January 1,

1988.

(2) Post-election exchanges. For purposes of applying section 367(b) to postelection exchanges with respect to a corporation that has made a valid election

under section 953(d) to be treated as a domestic corporation, such corporation shall

be treated as a domestic corporation as to

earnings and profits that were taken into

account at the time of the section 953(d)

election or which accrue after such election, and shall be treated as a foreign corporation as to earnings and profits accumulated in taxable years beginning before

January 1, 1988. Thus, for example, if the

section 953(d) corporation subsequently

transfers its assets to a domestic corporation (other than another section 953(d)

corporation) in a transaction described in

section 381(a), the rules of §1.367(b)–3

shall apply to such transaction to the extent of the section 953(d) corporation’s

earnings and profits accumulated in taxable years beginning before January 1,

1988.

(i) Section 1504(d) elections. An election under section 1504(d), which permits

certain foreign corporations to be treated

as domestic corporations, is treated as a

transfer of property to a domestic corporation and will generally constitute a reorganization described in section

368(a)(1)(F). However, if an election

under section 1504(d) is made with respect to a foreign corporation from the

first day of the foreign corporation’s existence, then the foreign corporation shall

be treated as a domestic corporation, and

the section 367(b) regulations will not

apply.

(j) Sections 985 through 989—(1)

Change in functional currency of a qualified business unit—(i) Rule. If, as a result

of a transaction described in section

381(a), a qualified business unit (as de-

2000–6 I.R.B.

fined in section 989(a)) (QBU) has a different functional currency determined

under the rules of section 985(b) than it

used prior to the transaction, then the

QBU shall be deemed to have automatically changed its functional currency immediately prior to the transaction. A

QBU that is deemed to change its functional currency pursuant to this paragraph

(j) must make the adjustments described

in §1.985–5.

(ii) Example. The following example illustrates

the rule of this paragraph (j)(1):

Example—(i) Facts. DC, a domestic corporation, owns 100 percent of FC1, a foreign corporation. FC1 owns and operates a qualified business

unit (QBU) (B1) in France, whose functional currency is the euro. FC2, an unrelated foreign corporation, owns and operates a QBU (B2) in France,

whose functional currency is the dollar. FC2 acquires FC1’s assets (including B1) in a reorganization described in section 368(a)(1)(C). As a part of

the reorganization, B1 and B2 combine their operations into one QBU. Applying the rules of section

985(b), the functional currency of the combined operations of B1 and B2 is the euro.

(ii) Result. FC2’s acquisition of FC1’s assets is a

section 367(b) exchange that is described in section

381(a). Because the functional currency of the combined operations of B1 and B2 after the exchange is

the euro, B2 is deemed to have automatically

changed its functional currency to the euro immediately prior to the section 367(b) exchange. B2 must

make the adjustments described in §1.985–5.

(2) Previously taxed earnings and

profits—(i) Exchanging shareholder that

is a United States person. If an exchanging shareholder that is a United States

person is required to include in income either the all earnings and profits amount or

the section 1248 amount under the provisions of §1.367(b)–3 or 1.367(b)–4, then

immediately prior to the exchange, and

solely for the purpose of computing exchange gain or loss under section 986(c),

the exchanging shareholder shall be

treated as receiving a distribution of previously taxed earnings and profits from

the appropriate foreign corporation that is

attributable (under the principles of section 1248) to the exchanged stock. If an

exchanging shareholder that is a United

States person is a distributee in an exchange described in §1.367(b)–5(c) or

(d), then immediately prior to the exchange, and solely for the purpose of

computing exchange gain or loss under

section 986(c), the exchanging shareholder shall be treated as receiving a distribution of previously taxed earnings and

profits from the appropriate foreign corporation to the extent such shareholder

479

has a diminished interest in such previously taxed earnings and profits after the

exchange. The exchange gain or loss recognized under this paragraph (j)(2)(i) will

increase or decrease the exchanging

shareholder’s adjusted basis in the stock

of the foreign corporation for purposes of

computing gain or loss realized with respect to the stock on the transaction. The

exchanging shareholder’s dollar basis

with respect to each account of previously

taxed income shall be increased or decreased by the exchange gain or loss recognized.

(ii) Exchanging shareholder that is a

foreign corporation. If an exchanging

shareholder that is a foreign corporation is

required to include in income either the

all earnings and profits amount or the section 1248 amount under the provisions of

§1.367(b)–3 or 1.367(b)–4, then, immediately prior to the exchange, the exchanging shareholder shall be treated as receiving a distribution of previously taxed

earnings and profits from the appropriate

foreign corporation that is attributable

(under the principles of section 1248) to

the exchanged stock. If an exchanging

shareholder that is a foreign corporation is

a distributee in an exchange described in

§1.367(b)–5(c) or (d), then the exchanging shareholder shall be treated as receiving (immediately prior to the exchange) a

distribution of previously taxed earnings

and profits from the appropriate foreign

corporation. Such distribution shall be

measured by the extent to which the exchanging shareholder’s direct or indirect

United States shareholders (as defined in

section 951(b)) have a diminished interest

in such previously taxed earnings and

profits after the exchange.

(3) Other rules. See sections 985

through 989 for other currency rules that

may apply in connection with a section

367(b) exchange.

(k) Partnerships, trusts and estates. In

applying the section 367(b) regulations,

stock of a corporation that is owned by a

foreign partnership, trust or estate shall be

considered as owned proportionately by

its partners, owners, or beneficiaries

under the principles of §1.367(e)–1(b)(2).

Stock owned by an entity that is disregarded as an entity separate from its

owner under §301.7701–3 is owned directly by the owner of such entity. In applying §1.367(b)–5(b), the principles of

February 7, 2000

§1.367(e)–1(b)(2) shall also apply to a

domestic partnership, trust or estate.

Par. 5. Section 1.367(b)–3 is added to

read as follows:

§1.367(b)–3 Repatriation of foreign corporate assets in certain nonrecognition

transactions.

(a) Scope. This section applies to an

acquisition by a domestic corporation (the

domestic acquiring corporation) of the assets of a foreign corporation (the foreign

acquired corporation) in a liquidation described in section 332 or an asset acquisition described in section 368(a)(1).

(b) Exchange of stock owned directly

by a United States shareholder or by certain foreign corporate shareholders—(1)

Scope. This paragraph (b) applies in the

case of an exchanging shareholder that is

either—

(i) A United States shareholder of the

foreign acquired corporation; or

(ii) A foreign corporation with respect

to which there are one or more United

States shareholders.

(2) United States shareholder. For purposes of this section (and for purposes of

the other section 367(b) regulation provisions that specifically refer to this paragraph (b)(2)), the term United States

shareholder means any shareholder described in section 951(b) (without regard

to whether the foreign corporation is a

controlled foreign corporation), and also

any shareholder described in section

953(c)(1)(A) (but only if the foreign corporation is a controlled foreign corporation subject to the rules of section 953(c)).

(3) Income inclusion—(i) Inclusion of

all earnings and profits amount. An exchanging shareholder shall include in income as a deemed dividend the all earnings and profits amount with respect to its

stock in the foreign acquired corporation.

For the consequences of the deemed dividend, see §1.367(b)–2(e). Notwithstanding §1.367(b)–2(e), however, a deemed

dividend from the foreign acquired corporation to an exchanging foreign corporate

shareholder shall not qualify for the exception from foreign personal holding

company income provided by section

954(c)(3)(A)(i), although it may qualify

for the look-through treatment provided

by section 904(d)(3) if the requirements

of that section are met with respect to the

deemed dividend.

(ii) Examples. The following exam-

February 7, 2000

ples illustrate the rules of paragraph

(b)(3)(i) of this section:

Example 1—(i) Facts. DC, a domestic corporation, owns all of the outstanding stock of FC, a foreign corporation. The stock of FC has a value of

$100, and DC has a basis of $30 in such stock. The

all earnings and profits amount attributable to the

FC stock owned by DC is $20, of which $15 is described in section 1248(a) and the remaining $5 is

not (for example, because it accumulated prior to

1963). FC has a basis of $50 in its assets. In a liquidation described in section 332, FC distributes all of

its property to DC, and the FC stock held by DC is

canceled.

(ii) Result. Under paragraph (b)(3)(i) of this section, DC must include $20 in income as a deemed

dividend from FC. Under section 337(a) FC does

not recognize gain or loss in the assets that it distributes to DC, and under section 334(b), DC takes a

basis of $50 in such assets. Because the requirements of section 902 are met, DC qualifies for a

deemed paid foreign tax credit with respect to the

deemed dividend that it receives from FC.

Example 2—(i) Facts. DC, a domestic corporation, owns all of the outstanding stock of FC, a foreign corporation. The stock of FC has a value of

$100, and DC has a basis of $30 in such stock. The

all earnings and profits amount attributable to the

FC stock owned by DC is $75. FC has a basis of

$50 in its assets. In a liquidation described in section 332, FC distributes all of its property to DC, and

the FC stock held by DC is canceled.

(ii) Result. Under paragraph (b)(3)(i) of this section, DC must include $75 in income as a deemed

dividend from FC. Under section 337(a) FC does

not recognize gain or loss in the assets that it distributes to DC, and under section 334(b), DC takes a

basis of $50 in such assets. Because the requirements of section 902 are met, DC qualifies for a

deemed paid foreign tax credit with respect to the

deemed dividend that it receives from FC.

Example 3—(i) Facts. DC, a domestic corporation, owns 80 percent of the outstanding stock of

FC, a foreign corporation. DC has owned its 80 percent interest in FC since FC was incorporated. The

remaining 20 percent of the outstanding stock of FC

is owned by a person unrelated to DC (the minority

shareholder). The stock of FC owned by DC has a

value of $80, and DC has a basis of $24 in such

stock. The stock of FC owned by the minority

shareholder has a value of $20, and the minority

shareholder has a basis of $18 in such stock. FC’s

only asset is land having a value of $100, and FC has

a basis of $50 in the land. Gain on the land would

not generate earnings and profits qualifying under

section 1248(d) for an exclusion from earnings and

profits for purposes of section 1248. FC has earnings and profits of $20 (determined under the rules

of §1.367(b)–2(d)(2)(i) and (ii)), $16 of which is attributable to the stock owned by DC under the rules

of §1.367(b)–2(d)(3). FC subdivides the land and

distributes to the minority shareholder land with a

value of $20 and a basis of $10. As part of the same

transaction, in a liquidation described in section 332,

FC distributes the remainder of its land to DC, and

the FC stock held by DC and the minority shareholder is canceled.

(ii) Result. Under section 336, FC must recognize the $10 of gain it realizes in the land it distributes to the minority shareholder, and under section

480

331 the minority shareholder recognizes its gain of

$2 in the stock of FC. Such gain is included in income by the minority shareholder as a dividend to

the extent provided in section 1248 if the minority

shareholder is a United States person that is described in section 1248(a)(2).

Under

§1.367(b)–2(d)(2)(iii), the $10 of gain recognized

by FC increases its earnings and profits for purposes

of computing the all earnings and profits amount

and, as a result, $8 of such increase (80 percent of

$10) is considered to be attributable to the FC stock

owned by DC under §1.367(b)–2(d)(3)(i)(A)(1).

DC’s all earnings and profits amount with respect to

its stock in FC is $24 (the $16 of initial all earnings

and profits amount with respect to the FC stock held

by DC, plus the $8 addition to such amount that results from FC’s recognition of gain on the distribution to the minority shareholder). Under paragraph

(b)(3)(i) of this section, DC must include the $24 all

earnings and profits amount in income as a deemed

dividend from FC.

Example 4—(i) Facts. DC1, a domestic corporation, owns all of the outstanding stock of DC2, a

domestic corporation. DC1 also owns all of the outstanding stock of FC, a foreign corporation. The

stock of FC has a value of $100, and DC1 has a

basis of $30 in such stock. The assets of FC have a

value of $100. The all earnings and profits amount

with respect to the FC stock owned by DC1 is $20.

In a reorganization described in section

368(a)(1)(D), DC2 acquires all of the assets of FC

solely in exchange for DC2 stock. FC distributes the

DC2 stock to DC1, and the FC stock held by DC1 is

canceled.

(ii) Result. DC1 must include $20 in income as a

deemed dividend from FC under paragraph (b)(3)(i)

of this section. Under section 361, FC does not recognize gain or loss in the assets that it transfers to

DC2 or in the DC2 stock that it distributes to DC1,

and under section 362(b) DC2 takes a basis in the

assets that it acquires from FC equal to the basis that

FC had therein. Under §1.367(b)–2(e)(3)(ii) and

section 358(a)(1), DC1 takes a basis of $50 (its $30

basis in the stock of FC, plus the $20 that was

treated as a deemed dividend to DC1) in the stock of

DC2 that it receives in exchange for the stock of FC.

Under §1.367(b)–2(e)(3)(iii) and section 312(a), the

earnings and profits of FC are reduced by the $20

deemed dividend.

Example 5—(i) Facts. DC1, a domestic corporation, owns all of the outstanding stock of DC2, a

domestic corporation. DC1 also owns all of the outstanding stock of FC1, a foreign corporation. FC1

owns all of the outstanding stock of FC2, a foreign

corporation. The all earnings and profits amount

with respect to the FC2 stock owned by FC1 is $20.

In a reorganization described in section

368(a)(1)(D), DC2 acquires all of the assets and liabilities of FC2 in exchange for DC2 stock. FC2 distributes the DC2 stock to FC1, and the FC2 stock

held by FC1 is canceled.

(ii) Result. FC1 must include $20 in income as a

deemed dividend from FC2 under paragraph

(b)(3)(i) of this section. The deemed dividend is

treated as a dividend for purposes of the Internal

Revenue Code as provided in §1.367(b)–2(e)(2);

however, under paragraph (b)(3)(i) of this section

the deemed dividend cannot qualify for the exception from foreign personal holding company income

provided by section 954(c)(3)(A)(i), even if the pro-

2000–6 I.R.B.

visions of that section would otherwise have been

met in the case of an actual dividend.

Example 6—(i) Facts. DC1, a domestic corporation, owns 99 percent of USP, a domestic partnership. The remaining 1 percent of USP is owned by a

person unrelated to DC1. DC1 and USP each directly own 9 percent of the outstanding stock of FC,

a foreign corporation that is not a controlled foreign

corporation subject to the rule of section 953(c). In

a reorganization described in section 368(a)(1)(C),

DC2, a domestic corporation, acquires all of the assets and liabilities of FC in exchange for DC2 stock.

FC distributes to its shareholders DC2 stock, and the

FC stock held by its shareholders is canceled.

(ii) Result. (A) DC1 and USP are United

States persons that are exchanging shareholders in

a transaction described in paragraph (a) of this

section. As a result, DC1 and USP are subject to

the rules of paragraph (b) of this section if they

qualify as United States shareholders as defined in

paragraph (b)(2) of this section. Alternatively, if

they do not qualify as United States shareholders

as defined in paragraph (b)(2) of this section, DC1

and USP are subject to the rules of paragraph (c)

of this section. Paragraph (b)(2) of this section defines the term United States shareholder to include

any shareholder described in section 951(b) (without regard to whether the foreign corporation is a

controlled foreign corporation). A shareholder described in section 951(b) is a United States person

that is considered to own, applying the rules of

section 958(a) and 958(b), 10 percent or more of

the total combined voting power of all classes of

stock entitled to vote of a foreign corporation.

Under section 958(b), the rules of section 318(a),

as modified by section 958(b) and the regulations

thereunder, apply so that, in general, stock owned

directly or indirectly by a partnership is considered as owned proportionately by its partners, and

stock owned directly or indirectly by a partner is

considered as owned by the partnership. Thus,

under section 958(b), DC1 is treated as owning its

proportionate share of FC stock held by USP, and

USP is treated as owning all of the FC stock held

by DC1.

(B) Accordingly, for purposes of determining

whether DC1 is a United States shareholder under

paragraph (b)(2) of this section, DC1 is considered

as owning 99 percent of the 9 percent of FC stock

held by USP. Because DC1 also owns 9 percent of

FC stock directly, DC1 is considered as owning

more than 10 percent of FC stock. DC1 is thus a

United States shareholder of FC under paragraph

(b)(2) of this section and, as a result, is subject to

the rules of paragraph (b) of this section. However, for purposes of determining DC1’s all earnings and profits amount, DC1 is not treated as

owning the FC stock held by USP. Under

§1.367(b)–2(d)(3), DC1’s all earnings and profits

amount is determined by reference to the 9 percent

of FC stock that it directly owns.

(C) For purposes of determining whether USP

is a United States shareholder under paragraph

(b)(2) of this section, USP is considered as owning

the 9 percent of FC stock held by DC1. Because

USP also owns 9 percent of FC stock directly, USP

is considered as owning more than 10 percent of

FC stock. USP is thus a United States shareholder

of FC under paragraph (b)(2) of this section and,

as a result, is subject to the rules of paragraph (b)

2000–6 I.R.B.

of this section. However, for purposes of determining USP’s all earnings and profits amount,

USP is not treated as owning the FC shares held by

DC1. Under §1.367(b)–2(d)(3), USP’s all earnings and profits amount is determined by reference

to the 9 percent of FC stock that it directly owns.

(iii) Recognition of exchange gain or

loss with respect to capital. [Reserved]

(4) Reserved. For further guidance

concerning section 367(b) exchanges occurring before February 24, 2001, see

§1.367(b)–3T(b)(4).

(c) Exchange of stock owned by a

United States person that is not a United

States shareholder—(1) Scope. This

paragraph (c) applies in the case of an exchanging shareholder that is a United

States person not described in paragraph

(b)(1)(i) of this section (i.e., a United

States person that is not a United States

shareholder of the foreign acquired corporation).

(2) Requirement to recognize gain. An

exchanging shareholder described in

paragraph (c)(1) of this section shall recognize realized gain (but not loss) with respect to the stock of the foreign acquired

corporation.

(3) Election to include all earnings and

profits amount. In lieu of the treatment

prescribed by paragraph (c)(2) of this section, an exchanging shareholder described

in paragraph (c)(1) of this section may instead elect to include in income as a

deemed dividend the all earnings and

profits amount with respect to its stock in

the foreign acquired corporation. For the

consequences of a deemed dividend, see

§1.367(b)–2(e). Such election may be

made only if–

(i) The foreign acquired corporation (or

its successor in interest) has provided the

exchanging shareholder information to

substantiate the exchanging shareholder’s

all earnings and profits amount with respect to its stock in the foreign acquired

corporation; and

(ii) The exchanging shareholder complies with the section 367(b) notice requirement described in §1.367(b)–1(c),

including the specific rules contained

therein concerning the time and manner

for electing to apply the rules of this paragraph (c)(3).

(4) De minimis exception. This paragraph (c) shall not apply in the case of an

exchanging shareholder whose stock in

the foreign acquired corporation has a fair

market value of less than $50,000 on the

481

date of the section 367(b) exchange.

(5) Examples. The following examples

illustrate the rules of this paragraph (c):

Example 1—(i) Facts. DC1, a domestic corporation, owns 5 percent of the outstanding stock of FC,

a foreign corporation that is not a controlled foreign

corporation subject to the rule of section 953(c).

Persons unrelated to DC1 own the remaining 95 percent of the outstanding stock of FC. DC1 has owned

its 5 percent interest in FC since FC was incorporated. DC1’s stock in FC has a basis of $40,000 and

a value of $100,000. The all earnings and profits

amount with respect to DC1’s stock in FC is

$50,000. In a reorganization described in section

368(a)(1)(C), DC2, a domestic corporation, acquires

all of the assets and liabilities of FC in exchange for

DC2 stock. FC distributes DC2 stock to its shareholders, and the FC stock held by its shareholders is

canceled.

(ii) Alternate result 1. If DC1 does not make the

election described in paragraph (c)(3) of this section,

then the general rule of paragraph (c)(2) of this section applies and DC1 must recognize its $60,000

gain in the FC stock. Under section 358(a)(1), DC1

has a $100,000 basis (its $40,000 basis in the FC

stock, plus the $60,000 recognized gain) in the DC2

stock that it receives in exchange for its FC stock.

Because DC1 is not a shareholder described in section 1248(a)(2), section 1248 does not apply to

recharacterize any of DC1’s gain as a dividend.

(iii) Alternate result 2. If DC1 makes a valid

election under paragraph (c)(3) of this section, then

DC1 must include in income as a deemed dividend

the $50,000 all earnings and profits amount with respect to its FC stock. Under §1.367(b)–2(e)(3) and

section 358(a)(1), DC1 has a $90,000 basis (its

$40,000 basis in the FC stock, plus the $50,000 that

was treated as a deemed dividend to DC1) in the

DC2 stock that it receives in exchange for its FC

stock. Because DC1 owns less than 10 percent of

the voting stock of FC, DC1 does not qualify for a

deemed paid foreign tax credit under section 902.

Example 2—(i) Facts. The facts are the same as

in Example 1, except that DC1’s stock in FC has a

fair market value of $48,000 on the date DC1 receives the DC2 stock.

(ii) Result. Because DC1’s stock in FC has a fair

market value of less than $50,000 on the date of the

section 367(b) exchange, the de minimis exception

of paragraph (c)(4) of this section applies. As a result, DC1 is not subject to the gain or income inclusion requirements of this paragraph (c).

(d) Carryover of certain foreign

taxes—(1) Rule. Unused foreign tax

credits allowable to the foreign acquired

corporation under section 906 shall carry

over to the domestic acquiring corporation and become allowable under section

901, subject to the limitations prescribed

by the Internal Revenue Code (for example, sections 383, 904 and 907). The domestic acquiring corporation shall not

succeed to any other foreign taxes paid or

incurred by the foreign acquired corporation.

(2) Example. The following example

February 7, 2000

illustrates the rules of this paragraph (d):

Example—(i) Facts. DC, a domestic corporation

owns 100 percent of the outstanding stock of FC, a

foreign corporation. FC has net positive earnings

and profits, none of which are attributable to DC’s

FC stock under §1.367(b)–2(d)(3). FC has paid foreign taxes that are not eligible for credit under section 906. In a liquidation described in section 332,

FC distributes all of its property to DC, and the FC

stock held by DC is canceled.

(ii) Result. The liquidation of FC into DC is a

section 367(b) exchange. Thus, DC is subject to the

section 367(b) regulations, and must file a section

367(b) notice pursuant to §1.367(b)–1(c). Pursuant

to the provisions of paragraph (d)(1) of this section,

the foreign taxes paid by FC do not carryover to DC

because FC’s foreign taxes are not eligible for credit

under section 906.

Par. 6. Section 1.367(b)–4 is revised to

read as follows:

§1.367(b)–4 Acquisition of foreign corporate stock or assets by a foreign corporation in certain nonrecognition transactions.

(a) Scope. This section applies to an

acquisition by a foreign corporation (the

foreign acquiring corporation) of the

stock or assets of another foreign corporation (the foreign acquired corporation) in

an exchange described in section 351 or a

reorganization described in section

368(a)(1)(B), (C), (D), (E), (F) or (G).

See §1.367(a)–3(b)(2) for additional rules

that may apply.

(b) Income inclusion. If an exchange is

described in paragraph (b)(1)(i), (2)(i) or

(3) of this section, the exchanging shareholder shall include in income as a

deemed dividend the section 1248 amount

attributable to the stock that it exchanges.

(1) Exchange that results in loss of status as section 1248 shareholder—(i)

Rule. An exchange is described in this

paragraph (b)(1)(i) if–

(A) Immediately before the exchange,

the exchanging shareholder is—

(1) A United States person that is a section 1248 shareholder with respect to the

foreign acquired corporation; or

(2) A foreign corporation, and a United

States person is a section 1248 shareholder with respect to such foreign corporation and with respect to the foreign acquired corporation; and

(B) Either of the following conditions

is satisfied—

(1) Immediately after the exchange,

the stock received in the exchange is not

stock in a corporation that is a controlled

foreign corporation as to which the

United States person described in para-

February 7, 2000

graph (b)(1)(i)(A) of this section is a section 1248 shareholder; or

(2) Immediately after the exchange,

the foreign acquiring corporation (or, in

the case of a reorganization described in

section 368(a)(1)(B), the foreign acquired

corporation) is not a controlled foreign

corporation as to which the United States

person described in paragraph

(b)(1)(i)(A) of this section is a section

1248 shareholder.

(ii) Examples. The following examples

illustrate the rules of this paragraph

(b)(1):

Example 1—(i) Facts. FC1 is a foreign corporation that is owned, directly and indirectly (applying

the ownership rules of section 958), solely by foreign persons. DC is a domestic corporation that is

unrelated to FC1. DC owns all of the outstanding

stock of FC2, a foreign corporation. Thus, under

§1.367(b)–2(a) and (b), DC is a section 1248 shareholder with respect to FC2, and FC2 is a controlled

foreign corporation. Under §1.367(b)–2(c)(1), the

section 1248 amount attributable to the stock of FC2

held by DC is $20. In a reorganization described in

section 368(a)(1)(C), FC1 acquires all of the assets

and assumes all of the liabilities of FC2 in exchange

for FC1 voting stock. The FC1 voting stock received does not represent more than 50 percent of

the voting power or value of FC1’s stock. FC2 distributes the FC1 stock to DC, and the FC2 stock held

by DC is canceled.

(ii) Result. FC1 is not a controlled foreign corporation immediately after the exchange. As a result, the exchange is described in paragraph (b)(1)(i)

of this section. Under paragraph (b) of this section,

DC must include in income, as a deemed dividend

from FC2, the section 1248 amount ($20) attributable to the FC2 stock that DC exchanged.

Example 2—(i) Facts. The facts are the same as

in Example 1, except that the voting stock of FC1,

which is received by FC2 in exchange for its assets

and distributed by FC2 to DC, represents more than

50 percent of the voting power of FC1’s stock under

the rules of section 957(a).

(ii) Result. Paragraph (b)(1)(i) of this section

does not apply to require inclusion in income of the

section 1248 amount, because FC1 is a controlled

foreign corporation as to which DC is a section 1248

shareholder immediately after the exchange.

Example 3—(i) Facts. The facts are the same as

in Example 1, except that FC2 receives and distributes voting stock of FP, a foreign corporation that is

in control (within the meaning of section 368(c)) of

FC1, instead of receiving and distributing voting

stock of FC1.

(ii) Result. For purposes of section 367(a), the

transfer is an indirect stock transfer subject to section 367(a). See §1.367(a)–3(d)(1)(iv). Accordingly, DC’s exchange of FC2 stock for FP stock

under section 354 will be taxable under section

367(a) (and section 1248 will be applicable) if DC

fails to enter into a gain recognition agreement in accordance

with

§1.367(a)–8.

Under

§1.367(a)–3(b)(2), if DC enters into a gain recognition agreement, the exchange will be subject to the

provisions of section 367(b) and the regulations

482

thereunder, as well as section 367(a). If FP and FC1

are controlled foreign corporations as to which DC

is a (direct or indirect) section 1248 shareholder immediately after the reorganization, then the section

367(b) result is the same as in Example 2— that is,

paragraph (b)(1)(i) of this section does not apply to

require inclusion in income of the section 1248

amount. Under these circumstances, the amount of

the gain recognition agreement would equal the

amount of the gain realized on the indirect stock

transfer. If FP or FC1 is not a controlled foreign corporation as to which DC is a (direct or indirect) section 1248 shareholder immediately after the exchange, then the section 367(b) result is the same as

in Example 1— that is, DC must include in income,

as a deemed dividend from FC2, the section 1248

amount ($20) attributable to the FC2 stock that DC

exchanged. Under these circumstances, the amount

of the gain recognition agreement would equal the

amount of the gain realized on the indirect stock

transfer, less the $20 section 1248 amount inclusion.

Example 4—(i) Facts. DC1, a domestic corporation, owns all of the outstanding stock of DC2, a

domestic corporation. DC2 owns various assets including all of the outstanding stock of FC2, a foreign

corporation. The stock of FC2 has a value of $100,

and DC2 has a basis of $30 in such stock. The section 1248 amount attributable to the FC2 stock held

by DC2 is $20. DC2 does not own any other stock

in a foreign corporation. FC1 is a foreign corporation that is unrelated to DC1, DC2 and FC2. In a reorganization described in section 368(a)(1)(C), FC1

acquires all of the assets and liabilities of DC2 in exchange for FC1 voting stock that represents 20 percent of the outstanding voting stock of FC1. DC2

distributes the FC1 stock to DC1, and the DC2 stock

held by DC1 is canceled. DC1 properly files a gain

recognition agreement under §1.367(a)–8 to qualify

for nonrecognition treatment under section 367(a)

with respect to DC2’s transfer of the FC2 stock to

FC1. See §1.367(a)–8(f)(2).

(ii) Result. Pursuant to paragraph (b)(1)(i)(A) of

this section, DC2 is the exchanging shareholder that

is a section 1248 shareholder with respect to FC2,

the foreign acquired corporation. Immediately after

the exchange, DC2 is not a section 1248 shareholder

with respect to FC1, the corporation whose stock is

received in the exchange (because the DC2 stock is

canceled). Thus, paragraph (b)(1)(i)(B) of this section is satisfied and, as a result, paragraph (b)(1)(i)

of this section applies to DC2’s section 361 exchange of FC2 stock. Accordingly, under paragraph

(b) of this section, DC2 must include in income, as a

deemed dividend from FC2, the section 1248

amount ($20) attributable to the FC2 stock that DC2

exchanges. This result arises without regard to

whether FC1 and FC2 are controlled foreign corporations immediately after the exchange. For the tax

treatment of DC2’s transfer of assets (other than

stock) to FC1, see sections 367(a)(1) and (a)(3), and

the regulations thereunder. Because the exchange is

also described in section 361(a) or (b), see section

367(a)(5) and any regulations thereunder. If any of

the assets transferred are intangible assets, see section 367(d) and the regulations thereunder.

(2) Receipt by exchanging shareholder

of preferred or other stock in certain instances—(i) Rule. An exchange is described in this paragraph (b)(2)(i) if–

2000–6 I.R.B.

(A) Immediately before the exchange,

the foreign acquired corporation and the

foreign acquiring corporations are not

members of the same affiliated group

(within the meaning of section 1504(a),

but without regard to the exceptions set

forth in section 1504(b), and substituting

the words “more than 50” in place of the

words “at least 80” in sections

1504(a)(2)(A) and (B));

(B) Immediately after the exchange, a

domestic corporation meets the ownership threshold specified by section 902(a)

or (b) such that it may qualify for a

deemed paid foreign tax credit if it receives a distribution from the foreign acquiring corporation (directly or through

tiers); and

(C) The exchanging shareholder receives preferred stock (other than preferred stock that is fully participating with

respect to dividends, redemptions and

corporate growth) in consideration for

common stock or preferred stock that is

fully participating with respect to dividends, redemptions and corporate growth,

or, in the discretion of the Commissioner

or the Commissioner’s delegate (and

without regard to whether the stock exchanged is common stock or preferred

stock), receives stock that entitles it to

participate (through dividends, redemption payments or otherwise) disproportionately in the earnings generated by particular assets of the foreign acquired

corporation or foreign acquiring corporation.

(ii) Examples. The following examples illustrate the rules of this paragraph

(b)(2):

Example 1—(i) Facts. FC1 is a foreign corporation. DC is a domestic corporation that is unrelated

to FC1. DC owns all of the outstanding stock of

FC2, a foreign corporation, and FC2 has no outstanding preferred stock. The value of FC2 is $100

and DC has a basis of $50 in the stock of FC2.

Under §1.367(b)–2(c)(1), the section 1248 amount

attributable to the stock of FC2 held by DC is $20.

In a reorganization described in section

368(a)(1)(B), FC1 acquires all of the stock of FC2

and, in exchange, DC receives FC1 voting preferred

stock that constitutes 10 percent of the voting stock

of FC1 for purposes of section 902(a). Immediately

after the exchange, FC1 and FC2 are controlled foreign corporations and DC is a section 1248 shareholder of FC1 and FC2, so paragraph (b)(1)(i) of this

section does not require inclusion in income of the

section 1248 amount.

(ii) Result. Pursuant to §1.367(a)–3(b)(2), the

transfer is subject to both section 367(a) and section

367(b). Under §1.367(a)–3(b)(1), DC will not be

subject to tax under section 367(a)(1) if it enters into

2000–6 I.R.B.

a gain recognition agreement in accordance with

§1.367(a)–8. Even though paragraph (b)(1)(i) of

this section does not apply to require inclusion in income by DC of the section 1248 amount, DC must

nevertheless include the $20 section 1248 amount in

income as a deemed dividend from FC2 under paragraph (b)(2)(i) of this section. Thus, if DC enters

into a gain recognition agreement, the amount is $30

(the $50 gain realized less the $20 recognized under

section 367(b)). If DC fails to enter into a gain

recognition agreement, it must include in income

under section 367(a)(1) the $50 of gain realized ($20

of which is treated as a dividend under section

1248). Section 367(b) does not apply in such case.

Example 2—(i) Facts. The facts are the same as

in Example 1, except that DC owns all of the outstanding stock of FC1 immediately before the transaction.

(ii) Result. Both section 367(a) and section

367(b) apply to the transfer. Paragraph (b)(2)(i) of

this section does not apply to require inclusion of the

section 1248 amount. Under paragraph (b)(2)(i)(A)

of this section, the transaction is outside the scope of

paragraph (b)(2)(i) of this section because FC1 and

FC2 are, immediately before the transaction, members of the same affiliated group (within the meaning of such paragraph). Thus, if DC enters into a

gain recognition agreement in accordance with

§1.367(a)–8, the amount of such agreement is $50.

As in Example 1, if DC fails to enter into a gain

recognition agreement, it must include in income

$50, $20 of which will be treated as a dividend

under section 1248.

Example 3—(i) Facts. FC1 is a foreign corporation. DC is a domestic corporation that is unrelated

to FC1. DC owns all of the outstanding stock of

FC2, a foreign corporation. The section 1248

amount attributable to the stock of FC2 held by DC

is $20. In a reorganization described in section

368(a)(1)(B), FC1 acquires all of the stock of FC2 in

exchange for FC1 voting stock that constitutes 10

percent of the voting stock of FC1 for purposes of

section 902(a). The FC1 voting stock received by

DC in the exchange carries voting rights in FC1, but

by agreement of the parties the shares entitle the

holder to dividends, amounts to be paid on redemption, and amounts to be paid on liquidation, that are

to be determined by reference to the earnings or

value of FC2 as of the date of such event, and that

are affected by the earnings or value of FC1 only if

FC1 becomes insolvent or has insufficient capital

surplus to pay dividends.

(ii) Result. Under §1.367(a)–3(b)(1), DC will

not be subject to tax under section 367(a)(1) if it enters into a gain recognition agreement with respect

to the transfer of FC2 stock to FC1. Under

§1.367(a)–3(b)(2), the exchange will be subject to

the provisions of section 367(b) and the regulations

thereunder to the extent that it is not subject to tax

under section 367(a)(1). Furthermore, even if DC

would not otherwise be required to recognize income under this section, the Commissioner or the

Commissioner’s delegate may nevertheless require

that DC include the $20 section 1248 amount in income as a deemed dividend from FC2 under paragraph (b)(2)(i) of this section.

(3) Certain recapitalizations. An exchange pursuant to a recapitalization

under section 368(a)(1)(E) shall be

483

deemed to be an exchange described in

this paragraph (b)(3) if the following conditions are satisfied—

(i) During the 24-month period immediately preceding or following the date of

the recapitalization, the corporation that

undergoes the recapitalization (or a predecessor of, or successor to, such corporation) also engages in a transaction that

would be described in paragraph (b)(2)(i)

of this section but for paragraph

(b)(2)(i)(C) of this section, either as the

foreign acquired corporation or the foreign acquiring corporation; and

(ii) The exchange in the recapitalization is described in paragraph (b)(2)(i)(C)

of this section.

(c) Exclusion of deemed dividend from

foreign personal holding company income—(1) Rule. In the event the section

1248 amount is included in income as a

deemed dividend by a foreign corporation

under paragraph (b) of this section, such

deemed dividend shall not be included as

foreign personal holding company income under section 954(c).

(2) Example. The following example

illustrates the rule of this paragraph (c):

Example—(i) Facts. FC1 is a foreign corporation that is owned, directly and indirectly (applying

the ownership rules of section 958), solely by foreign persons. DC is a domestic corporation that is

unrelated to FC1. DC owns all of the outstanding

stock of FC2, a foreign corporation. FC2 owns all

of the outstanding stock of FC3, a foreign corporation. Under §1.367(b)–2(c)(1), the section 1248

amount attributable to the stock of FC3 held by FC2

is $20. In a reorganization described in section

368(a)(1)(B), FC1 acquires from FC2 all of the

stock of FC3 in exchange for FC1 voting stock. The

FC1 voting stock received by FC2 does not represent more than 50 percent of the voting power or

value of FC1’s stock.

(ii) Result. FC1 is not a controlled foreign corporation immediately after the exchange. Under

paragraph (b)(1) of this section, FC2 must include in

income, as a deemed dividend from FC3, the section

1248 amount ($20) attributable to the FC3 stock that

FC2 exchanged. The deemed dividend is treated as

a dividend for purposes of the Internal Revenue

Code as provided in §1.367(b)–2(e)(2); however,

under this paragraph (c) the deemed dividend is not

foreign personal holding company income to FC2.

(d) Rules for subsequent exchanges—

(1) In general. If income is not required

to be included under paragraph (b) of

this section in a section 367(b) exchange

described in paragraph (a) of this section

(non-inclusion exchange) then, for purposes of applying section 367(b) or

1248 to subsequent exchanges, the determination of the earnings and profits

February 7, 2000

attributable to an exchanging shareholder’s stock received in the non-inclusion exchange shall include a computation that refers to the exchanging

shareholder’s pro rata interest in the

earnings and profits of the foreign acquiring corporation (and, in the case of a

stock transfer, the foreign acquired corporation) that accumulate after the noninclusion exchange, as well as its pro

rata interest in the earnings and profits

of the foreign acquired corporation that

accumulated before the non-inclusion

exchange.

See also section

1248(c)(2)(D)(ii). The earnings and

profits attributable to the stock received

by an exchanging shareholder in the

non-inclusion exchange shall not include any earnings and profits of the foreign acquiring corporation that accumulated before the non-inclusion exchange.

In the case of a non-inclusion exchange

in which the exchanging shareholder is a

foreign corporation, this paragraph

(d)(1) shall also apply for purposes of

determining the earnings and profits attributable to the exchanging foreign corporation’s shareholders, as well as for

purposes of determining the earnings

and profits attributable to the exchanging foreign corporation when applying

section 964(e) to subsequent sales or exchanges of the stock of the foreign acquiring corporation.

(2) Subsequent dispositions by a foreign acquiring corporation. In the case

of an exchange by a foreign acquiring

corporation that is subject to section

367(b) or 964(e) and that follows a noninclusion exchange (as defined in paragraph (d)(1) of this section), the rules of

paragraph (d)(1) of this section shall not

apply. However, as a result of such a subsequent exchange, proportionate reductions shall be made to the earnings and

profits that accumulated before the noninclusion exchange and that were attributed under paragraph (d)(1) of this section. Such reductions shall be made

without regard to whether gain is recognized on the subsequent sale or exchange.

(3) Examples. The following examples illustrate the rules of this section:

Example 1—(i) Facts. DC1, a domestic corporation, owns all of the outstanding stock of FC1, a

foreign corporation. DC1 has owned all of the

stock of FC1 since FC1’s formation. FC1 has $20

of earnings and profits, all of which is eligible for

inclusion in the section 1248 amount attributable

February 7, 2000

to DC1’s stock in FC1. DC2, a domestic corporation, owns all of the outstanding stock of FC2, a

foreign corporation. DC2 has owned all of the

stock of FC2 since FC2’s formation. FC2 has $40

of earnings and profits, all of which is eligible for

inclusion in the section 1248 amount attributable

to DC2’s stock in FC2. DC1 and DC2 are unrelated. In a reorganization described in section

368(a)(1)(B), DC1 transfers all of the stock of FC1

to FC2 in exchange for 40 percent of FC2 stock.

DC1 enters into a five-year gain recognition agreement under the provisions of §§1.367(a)–3(b) and

1.367(a)–8 with respect to its transfer of FC1 stock

to FC2.

(ii) Result. (A) DC1’s transfer of FC1 to FC2 is

not described in paragraph (b)(1)(i), (2)(i), or (3)

of this section. As a result, DC1 is not required to

include in income the section 1248 amount attributable to its FC1 stock and the rules of paragraph

(d)(1) of this section apply. Thus, for purposes of

applying section 367(b) or 1248 to subsequent exchanges of FC2 stock, the determination of the

earnings and profits attributable to DC1’s stock in

FC2 will include a computation that refers to 40

percent of the post-reorganization earnings and

profits of FC1 and FC2, and that refers to 100 percent of the $20 of pre-reorganization earnings and

profits of FC1. The earnings and profits attributable to DC1’s stock in FC2 will not include any of

the $40 of earnings and profits accumulated by

FC2 prior to the transaction. Those earnings and

profits are attributable to DC2 under section 1248.

However, paragraph (d)(1) of this section does not

apply for purposes of applying section 367(b) or

964(e) to subsequent exchanges of FC1 stock by

FC2. For these purposes, the determination of the

earnings and profits attributable to FC2’s stock in

FC1 is made under the principles of section 1248

and, as a result, includes a computation that refers

to the $20 of earnings and profits attributable to

FC2’s section 1223(2) holding period in the FC1

stock.

(B) In the event FC2 exchanges FC1 stock in a

transaction that is subject to section 367(b) or

964(e), a proportionate reduction must be made to

the $20 of earnings and profits that was previously

attributed under paragraph (d)(1) of this section to

DC1’s stock in FC2. Thus, for example, if FC2

sells 50 percent of its FC1 stock (at a time when

there have been no other reductions that affect the

$20 of FC1 earnings and profits), paragraph (d)(2)

of this section requires DC1 to proportionately reduce the $20 of earnings and profits that was previously attributed to its FC2 stock (to $10). This

reduction occurs without regard to whether FC2

recognizes gain on its sale of FC1 stock.

Example 2—(i) Facts. The facts are the same

as in Example 1, except that in a reorganization

described in section 368(a)(1)(C), FC1 transfers

all of its assets to FC2 in exchange for 40 percent

of FC2 stock. FC1 then distributes the stock of

FC2 to DC1, and the FC1 stock held by DC1 is

canceled. None of FC1’s assets include stock.

(ii) Result. FC2’s acquisition of FC1 is not described in paragraph (b)(1)(i), (2)(i), or (3) of this

section. As a result, DC1 is not required to include

in income the section 1248 amount attributable to

its FC1 stock and the rules of paragraph (d)(1) of

this section apply. Thus, for purposes of applying

section 367(b) or 1248 to subsequent exchanges,

484

the determination of the earnings and profits attributable to DC1’s stock in FC2 will include a

computation that refers to 40 percent of the postreorganization earnings and profits of FC2, and

that refers to 100 percent of the pre-reorganization

earnings and profits of FC1. The earnings and

profits attributable to DC1’s stock in FC2 will not

include any of the $40 of earnings and profits accumulated by FC2 prior to the transaction. Those

earnings and profits are attributable to DC2 under

section 1248.

Example 3—(i) Facts. DC1, a domestic corporation, owns all of the outstanding stock of FC1, a

foreign corporation. FC1 owns all of the outstanding stock of FC3, a foreign corporation. DC1 has

owned all of the stock of FC1 since FC1’s formation, and FC1 has owned all of the stock of FC3

since FC3’s formation. FC3 has $20 of earnings

and profits, all of which is eligible for inclusion in

the section 1248 amount attributable to DC1’s

stock in FC1 and in the section 1248 amount attributable to FC1’s stock in FC3. Such earnings

and profits are similarly eligible for inclusion as a

dividend attributable to FC1’s stock in FC3 under

section 964(e). DC2, a domestic corporation,

owns all of the outstanding stock of FC2, a foreign

corporation. DC2 has owned all of the stock of

FC2 since FC2’s formation. FC2 has $40 of earnings and profits, all of which is eligible for inclusion in the section 1248 amount attributable to

DC2’s stock in FC2. DC1 and DC2 are unrelated.

In a reorganization described in section

368(a)(1)(B), FC1 transfers all of the stock of FC3

to FC2 in exchange for 40 percent of FC2 stock.

(ii) Result. (A) FC1’s transfer of FC3 to FC2 is

not described in paragraph (b)(1)(i), (2)(i), or (3)

of this section. As a result, FC1 is not required to

include in income the section 1248 amount attributable to its FC3 stock and the rules of paragraph

(d)(1) of this section apply. Thus, for purposes of

applying section 367(b) or 1248 to subsequent exchanges of FC1 stock, the determination of the

earnings and profits attributable to DC1’s stock in

FC1 will include a computation that refers to 40

percent of the post-reorganization earnings and

profits of FC2 and FC3, and that refers to 100 percent of the $20 of pre-reorganization earnings and

profits of FC3. The earnings and profits attributable to FC1’s stock in FC2 will not include any of

the $40 of earnings and profits accumulated by

FC2 prior to the transaction. Those earnings and

profits are attributable to DC2 under section 1248.

For purposes of applying section 367(b) or 964(e)

to subsequent exchanges of FC2 stock, the determination of the earnings and profits attributable to

FC1’s stock in FC2 will include a computation that

refers to 40 percent of the post-reorganization

earnings and profits of FC2 and FC3, and that

refers to 100 percent of the $20 of pre-reorganization earnings and profits of FC3. The earnings and

profits attributable to FC1’s interest in FC2 do not

include any of the $40 of earnings and profits accumulated by FC2 prior to the transaction. However, paragraph (d)(1) of this section does not

apply for purposes of applying section 367(b) or

964(e) to subsequent exchanges of FC3 stock by

FC2. For these purposes, the determination of the

earnings and profits attributable to FC2’s stock in

FC3 is made under the principles of section 1248

and, as a result, includes a computation that refers

2000–6 I.R.B.

to the $20 of earnings and profits attributable to

FC2’s section 1223(2) holding period in the FC3

stock.

(B) In the event FC2 exchanges FC3 stock in a

transaction that is subject to section 367(b) or

964(e), a proportionate reduction must be made to

the $20 of earnings and profits that was previously

attributed under paragraph (d)(1) of this section to

DC1’s stock in FC1 (for purposes of subsequent

application of section 367(b) or 1248) as well as to

FC1’s stock in FC2 (for purposes of subsequent

application of section 367(b) or 964(e)). Thus, for

example, if FC2 sells 50 percent of its FC3 stock

(at a time when there have been no other reductions that affect the $20 of FC3 earnings and profits), paragraph (d)(2) of this section requires DC1

and FC1 to proportionately reduce the $20 of earnings and profits that was previously attributed to

their FC1 and FC2 stock, respectively (to $10).

These reductions occur without regard to whether

FC2 recognizes gain on its sale of FC3 stock.

Par. 7. Sections 1.367(b)–5 and

1.367(b)–6 are added to read as follows:

§1.367(b)–5 Distributions of stock described in section 355.

(a) In general—(1) Scope. This section

provides rules relating to a distribution

described in section 355 and to which section 367(b) applies. For purposes of this

section, the terms distributing corporation, controlled corporation, and distributee have the same meaning as used in section 355 and the regulations thereunder.

(2) Treatment of distributees as exchanging shareholders. For purposes of

the section 367(b) regulations, all distributees in a transaction described in paragraph (b), (c), or (d) of this section shall

be treated as exchanging shareholders that

realize income in a section 367(b) exchange.

(b) Distribution by a domestic corporation—(1) General rule. In a distribution described in section 355, if the distributing corporation is a domestic

corporation and the controlled corporation is a foreign corporation, the following general rules shall apply–

(i) If the distributee is a corporation,

then the controlled corporation shall be

considered to be a corporation; and

(ii) If the distributee is an individual,

then, solely for purposes of determining

the gain recognized by the distributing

corporation, the controlled corporation

shall not be considered to be a corporation, and the distributing corporation shall

recognize any gain (but not loss) realized

on the distribution.

(2) Section 367(e) transactions. The

rules of paragraph (b)(1) of this section

shall not apply to a foreign distributee to

2000–6 I.R.B.

the extent gain is recognized under section 367(e)(1) and the regulations thereunder.

(3) Determining whether distributees

are individuals. All distributees in a distribution described in paragraph (b)(1) of

this section are presumed to be individuals. However, the shareholder identification principles of §1.367(e)–1(d) (including the reporting procedures in

§1.367(e)–1(d)(2) and (3)) shall apply for

purposes of rebutting this presumption.

(4) Applicable cross-references. For

rules with respect to a distributee that is a

partnership, trust or estate, see

§1.367(b)–2(k). For additional rules relating to a distribution of stock of a foreign corporation by a domestic corporation, see section 1248(f) and the

regulations thereunder. For additional

rules relating to a distribution described in

section 355 by a domestic corporation to a

foreign distributee, see section 367(e)(1)

and the regulations thereunder.

(c) Pro rata distribution by a controlled foreign corporation—(1) Scope.

This paragraph (c) applies to a distribution described in section 355 in which the

distributing corporation is a controlled

foreign corporation and in which the

stock of the controlled corporation is distributed pro rata to each of the distributing

corporation’s shareholders.

(2) Adjustment to basis in stock and income inclusion. If the distributee’s postdistribution amount (as defined in paragraph (e)(2) of this section) with respect

to the distributing or controlled corporation is less than the distributee’s predistribution amount (as defined in paragraph

(e)(1) of this section) with respect to such

corporation, then the distributee’s basis in

such stock immediately after the distribution (determined under the normal principles of section 358) shall be reduced by

the amount of the difference. However,

the distributee’s basis in such stock shall

not be reduced below zero, and to the extent the foregoing reduction would have

reduced basis below zero, the distributee

shall instead include such amount in income as a deemed dividend from such

corporation.

(3) Interaction with §1.367(b)–2(e)(3)(ii).

The basis increase provided in

§1.367(b)–2(e)(3)(ii) shall not apply to a

deemed dividend that is included in income

pursuant to paragraph (c)(2) of this section.

485

(4) Basis redistribution. If a distributee

reduces the basis in the stock of the distributing or controlled corporation (or has

an inclusion with respect to such stock)

under paragraph (c)(2) of this section, the

distributee shall increase its basis in the

stock of the other corporation by the

amount of the basis decrease (or deemed

dividend inclusion) required by paragraph

(c)(2) of this section. However, the distributee’s basis in such stock shall not be

increased above the fair market value of

such stock and shall not be increased to

the extent the increase diminishes the distributee’s postdistribution amount with respect to such corporation.

(d) Non-pro rata distribution by a controlled foreign corporation—(1) Scope.

This paragraph (d) applies to a distribution described in section 355 in which the

distributing corporation is a controlled

foreign corporation and in which the

stock of the controlled corporation is not

distributed pro rata to each of the distributing corporation’s shareholders.

(2) Treatment of certain shareholders

as distributees. For purposes of the section 367(b) regulations, all persons owning stock of the distributing corporation

immediately after a transaction described

in paragraph (d)(1) of this section shall be

treated as distributees of such stock. For

other applicable rules, see paragraph

(a)(2) of this section.

(3) Inclusion of excess section 1248

amount by exchanging shareholder. If

the distributee’s postdistribution amount

(as defined in paragraph (e)(2) of this section) with respect to the distributing or

controlled corporation is less than the distributee’s predistribution amount (as defined in paragraph (e)(1) of this section)

with respect to such corporation, then the

distributee shall include in income as a

deemed dividend the amount of the difference. For purposes of this paragraph

(d)(3), if a distributee owns no stock in

the distributing or controlled corporation

immediately after the distribution, the distributee’s postdistribution amount with respect to such corporation shall be zero.

(4) Interaction with §1.367(b)–2(e)(3)(ii)—

(i) Limited application. The basis increase

provided in §1.367(b)–2(e)(3)(ii) shall apply

to a deemed dividend that is included in income pursuant to paragraph (d)(3) of this section only to the extent that such basis increase

does not increase the distributee’s basis above

February 7, 2000

the fair market value of such stock and does

not diminish the distributee’s postdistribution

amount with respect to such corporation.

(ii) Interaction with predistribution

amount. For purposes of this paragraph

(d), the distributee’s predistribution

amount (as defined in paragraph (e)(1) of

this section) shall be determined without

regard to any basis increase permitted

under paragraph (d)(4)(i) of this section.

(e) Definitions—(1) Predistribution

amount. For purposes of this section, the

predistribution amount with respect to a

distributing or controlled corporation is the

distributee’s section 1248 amount (as defined in §1.367(b)–2(c)(1)) computed immediately before the distribution (and after

any section 368(a)(1)(D) transfer connected with the section 355 distribution),

but only to the extent that such amount is

attributable to the distributing corporation

and any corporations controlled by it immediately before the distribution (the distributing group) or the controlled corporation and any corporations controlled by it

immediately before the distribution (the

controlled group), as the case may be,

under the principles of §§1.1248–1(d)(3),

1.1248–2 and 1.1248–3. However, the

predistribution amount with regard to the

distributing group shall be computed without taking into account the distributee’s

predistribution amount with respect to the

controlled group.

(2) Postdistribution amount. For purposes of this section, the postdistribution

amount with respect to a distributing or

controlled corporation is the distributee’s

section 1248 amount (as defined in

§1.367(b)–2(c)(1)) with respect to such

stock, computed immediately after the

distribution (but without regard to paragraph (c) or (d) of this section (whichever

is applicable)). The postdistribution

amount under this paragraph (e)(2) shall

be computed before taking into account

the effect (if any) of any inclusion under

section 356(a) or (b).

(f) Exclusion of deemed dividend from

foreign personal holding company income.

In the event an amount is included in income as a deemed dividend by a foreign

corporation under paragraph (c) or (d) of

this section, such deemed dividend shall

not be included as foreign personal holding

company income under section 954(c).

(g) Examples. The following examples illustrate the rules of this section:

February 7, 2000

Example 1—(i) Facts. USS, a domestic corporation, owns 40 percent of the outstanding stock of

FD, a controlled foreign corporation (CFC). USS

has owned the stock since FD was incorporated,

and FD has always been a CFC. USS has a basis

of $80 in its FD stock, which has a fair market

value of $200. FD owns 100 percent of the outstanding stock of FC, a foreign corporation. FD

has owned the stock since FC was incorporated.

Neither FD nor FC own stock in any other corporation. FD has earnings and profits of $0 and a fair

market value of $250 (not considering its ownership of FC). FC has earnings and profits of $300,

none of which is described in section 1248(d), and

a fair market value of $250. In a pro rata distribution described in section 355, FD distributes to

USS stock in FC worth $100; thereafter, USS’s FD

stock is worth $100 as well.

(ii) Result—(A) FD’s distribution is a transaction described in paragraph (c)(1) of this section.

Under paragraph (c)(2) of this section, USS must

compare its predistribution amounts with respect

to FD and FC to its respective postdistribution

amounts. Under paragraph (e)(1) of this section,

USS’s predistribution amount with respect to FD

or FC is its section 1248 amount computed immediately before the distribution, but only to the extent such amount is attributable to FD or FC.

Under §1.367(b)–2(c)(1), USS’s section 1248

amount computed immediately before the distribution is $120, all of which is attributable to FC.

Thus, USS’s predistribution amount with respect

to FD is $0, and its predistribution amount with respect to FC is $120. These amounts are computed

as follows: If USS had sold its FD stock immediately before the transaction, it would have recognized $120 of gain ($200 fair market value å $80

basis). All of the gain would have been treated as

a dividend under section 1248, and all of the section 1248 amount would have been attributable to

FC (based on USS’s pro rata share of FC’s earnings and profits (40 percent x $300)).

(B) Under paragraph (e)(2) of this section,

USS’s postdistribution amount with respect to FD

or FC is its section 1248 amount with respect to

such corporation, computed immediately after the

distribution (but without regard to paragraph (c) of

this section). Under §1.367(b)–2(c)(1), USS’s

section 1248 amounts computed immediately after

the distribution with respect to FD and FC are $60

and $0, respectively. These amounts, which are

USS’s postdistribution amounts, are computed as

follows: Under the normal principles of section

358, USS allocates its $80 predistribution basis in

FD between FD and FC according to the stock

blocks’ relative values, yielding a $40 basis in

each block. If USS sold its FD stock immediately

after the distribution, none of the resulting gain

would be treated as a dividend under section 1248.

If USS sold its FC stock immediately after the distribution, it would have a $60 gain ($100 fair market value å $40 basis), all of which would be

treated as a dividend under section 1248.

(C) The basis adjustment and income inclusion

rules of paragraph (c)(2) of this section apply to

the extent of any difference between USS’s postdistribution and predistribution amounts. In the

case of FD, there is no difference between the two

amounts and, as a result, no adjustment or income

inclusion is required. In the case of FC, USS’s

486

postdistribution amount is $60 less than its predistribution amount. Accordingly, under paragraph

(c)(2) of this section, USS is required to reduce its

basis in its FC stock from $40 to $0 and include

$20 in income as a deemed dividend from FC.

Under paragraph (c)(3) of this section, the basis

increase provided in §1.367(b)–2(e)(3)(ii) does

not apply with regard to the $20 deemed dividend.

Under the rules of paragraph (c)(4) of this section,

USS increases its basis in FD by the amount by

which it decreased its basis in FC, as well as by the

amount of its deemed dividend inclusion ($40 +

$40 + $20 = $100).

Example 2—(i) Facts. USS1 and USS2, domestic corporations, each own 50 percent of the

outstanding stock of FD, a controlled foreign corporation (CFC). USS1 and USS2 have owned

their FD stock since it was incorporated, and FD

has always been a CFC. USS1 and USS2 each

have a basis of $500 in their FD stock, and the fair

market value of each block of FD stock is $750.

FD owns 100 percent of the outstanding stock of

FC, a foreign corporation. FD owned the stock

since FC was incorporated. Neither FD nor FC

own stock in any other corporation. FD has earnings and profits of $0 and a fair market value of

$750 (not considering its ownership of FC). FC

has earnings and profits of $500, none of which is

described in section 1248(d), and a fair market

value of $750. In a non-pro rata distribution described in section 355, FD distributes all of the

stock of FC to USS2 in exchange for USS2’s FD

stock.

(ii) Result—(A) FD’s distribution is a transaction described in paragraph (d)(1) of this section.

Under paragraph (d)(2) of this section, USS1 is

considered a distributee of FD stock. Under paragraph (d)(3) of this section, USS1 and USS2 must

compare their predistribution amounts with respect to FD and FC stock to their respective postdistribution amounts. Un

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