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Bulletin No. 1997–8
February 24, 1997

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
T.D. 8702, page 4.
Final regulations relate to certain transfers of stock or
securities of domestic corporations by U.S. persons to
foreign corporations pursuant to the corporate organization, reorganization, or liquidation provisions of section
367 of the Code.
T.D. 8703, page 18.
Final regulations under section 6081 of the Code
provide new and simpler procedures for an individual to
obtain an automatic extension of time to file an individual income tax return.
T.D. 8704, page 12.
Final regulations under sections 952, 954, and 960 of
the Code relate to the definitions of subpart F income
and foreign personal holding company income of a
controlled foreign corporation and the allocation of
deficits to compute the deemed-paid foreign tax credit.

premiums. A public hearing will be held on April 30,
1997.
REG–246018–96, page 30.
Proposed regulations under section 801 of the Code
relate to the definition of life insurance reserves. A
public hearing will be held on April 17, 1997.
REG–248770–96, page 33.
Proposed regulations under section 6601 of the Code
relate to joint returns, property exempt from levy,
interest, penalties, offers in compromise, and the awarding of costs and certain fees.
Notice 97–14, page 23.
Low-income housing tax credit. Resident populations
of the various states, for determining the 1997 calendar
year (1) state housing credit ceiling under section 42(h)
of the Code, and (2) private activity bond volume cap
under section 146, are reproduced.

T.D. 8705, page 16.
REG–247862–96, page 32.
Final and temporary regulations under section 6071 of
the Code provide that disqualified persons and organization managers liable for Code section 4958 excise taxes
are required to file Form 4720.

EXEMPT ORGANIZATIONS

REG–209494–90, page 24.
Proposed regulations under section 41 of the Code
describe when computer software that is developed by
(or for the benefit of) a taxpayer, primarily for the
taxpayer’s internal use, can qualify for the credit for
increasing research activities. A public hearing will be
held on May 13, 1997.

Announcement 97–14, page 38.
A list is given of organizations now classified as private
foundations.

REG–209839–96, page 26.
Proposed regulations under section 832 of the Code
relate to the requirement that insurance companies
other than life insurance companies reduce, by 20
percent, their deductions for increases in unearned

Finding Lists begin on page 41.
Announcement of Disbarments and Suspensions begins on page 40.

Announcement 97–13, page 38.
A Taste of Orange County, Inc., Irvine, CA, no longer
qualifies as an organization to which contributions are
deductible under section 170 of the Code.

EXCISE TAX
Notice 97–15, page 23.
The Service intends to modify section 40.6302(c)–
1(c)(2) of the Excise Tax Procedural Regulations to
provide that the availability of the safe harbor deposit
rule based on look-back quarter liability is limited in
cases where a new excise tax is enacted or an expired
excise tax is reinstated.

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the

quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.

The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.

Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

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 of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a
single-copy basis.

court decisions, rulings, and procedures 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.

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.

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).

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.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in
this part, none of these announcements are consolidated in the Cumulative Bulletins.

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,

The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual 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, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 367.—Foreign
Corporations
26 CFR 1.367(a)–3: Treatment of transfers of
stock or securities to foreign corporations.

T.D. 8702
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Certain Transfers of Domestic
Stock or Securities by U.S. Persons
to Foreign Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to certain transfers of stock or securities of domestic
corporations by United States persons to
foreign corporations pursuant to the corporate organization, reorganization, or
liquidation provisions of the Internal
Revenue Code. These final regulations
modify the rules contained in the temporary regulations to reflect certain taxpayer comments received in response to
those temporary regulations. This action
is necessary to provide the public with
guidance to comply with the Tax Reform Act of 1984.
DATES: These regulations are effective
January 29, 1997. For dates of applicability of these regulations, see
§ 1.367(a)–3(c)(11).
FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 622–
3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has 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
1545–1478. Responses to these collections of information are required in
order for U.S. shareholders that transfer
stock or securities in section 367(a)
exchanges to qualify for an exception to
the general rule of taxation under section 367(a)(1).
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 one-time burden per
respondent: 10 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, T: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 a collection of information must be retained as
long as their contents may become material in the administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and
proposed regulations under sections
367(a) and (d) and section 6038B were
published in the Federal Register (51
FR 17936 [LR–3–86, 1986–1 C.B.
902]). These regulations were published
to provide the public with guidance
necessary to comply with changes made
to the Internal Revenue Code by the Tax
Reform Act of 1984. The IRS and the
Treasury Department later issued Notice
87–85 (1987–2 C.B. 395), which set
forth substantial changes to the 1986
regulations, effective with respect to
transfers occurring after December 16,
1987. A further notice of proposed
rulemaking, containing rules under section 367(a), as well as under section
367(b), was published in the Federal
Register on August 26, 1991 (56 FR
41993 [INTL–54–91; INTL–178–86,
1991–2 C.B. 1070]). The 1991 proposed
section 367(a) regulations were generally based upon the positions announced
in Notice 87–85, but the regulations
made certain modifications to Notice
87–85, particularly with respect to transfers of stock or securities of foreign
corporations. Subsequently, the IRS and
the Treasury Department issued Notice
94–46 (1994–1 C.B. 356), announcing
modifications to the positions set forth
in Notice 87–85 (and the 1991 proposed
regulations) with respect to transfers of
stock or securities of domestic corporations occurring after April 17, 1994.
Most recently, temporary and proposed regulations were published in the

4

Federal Register on December 26,
1995 (60 FR 66739 and 66771). The
temporary regulations, which are generally effective for transfers occurring after April 17, 1994, but cease to be
effective when the final regulations take
effect, generally incorporated the positions announced in Notice 94–46, with
certain modifications. These final regulations generally follow the rules set
forth in the temporary regulations, with
changes as described below. Explanation
of provisions
Section 367(a)(1) generally treats a
transfer of property (including stock or
securities) by a U.S. person to a foreign
corporation in connection with an exchange described in section 332, 351,
354, 356 or 361 as a taxable exchange
unless the transfer qualifies for an exception to this general rule.
Rules that address transfers of stock
or securities of domestic corporations
are contained in the final regulations
described herein. Rules that address
transfers of stock or securities of foreign
corporations under section 367(a) are
contained in Notice 87–85.
The final regulations retain the general rules set forth in the temporary
regulations, which provide that a U.S.
person that exchanges stock or securities
in a U.S. target company (UST) for
stock of a foreign corporation (the transferee foreign corporation (or TFC)) in
an exchange described in section 367(a)
will qualify for nonrecognition treatment
if certain reporting requirements are satisfied and each of the following conditions is met:
(i) U.S. transferors must receive no
more than 50 percent of the voting
power and value of the stock of the
TFC in the transfer (i.e., the 50-percent
ownership threshold is not exceeded);
(ii) U.S. officers, directors and
5-percent or greater shareholders of the
U.S. target must not own, in the aggregate, more than 50 percent of the voting
power and value of the TFC immediately after the transfer (i.e., the control
group case does not apply);
(iii) The U.S. person (exchanging
U.S. shareholder) either must not be a
5-percent transferee shareholder immediately after the transfer or, if the U.S.
person is a 5-percent transferee shareholder, must enter into a 5-year gain
recognition agreement (GRA) with respect to the UST stock or securities it
exchanged. (Without such GRA, the
transfer by the 5-percent transferee

shareholder will not qualify for nonrecognition treatment; however, transfers
by other U.S. transferors not subject to
the GRA requirement may qualify if all
other requirements are met.); and
(iv) The active trade or business requirement must be satisfied.
If one or more of the foregoing
requirements is not satisfied, the transfer
by the U.S. person of stock or securities
of a domestic corporation in exchange
for stock of a TFC is taxable under
section 367(a).
In response to suggestions from commentators, however, the final regulations
make a number of modifications to the
temporary regulations, principally in two
areas: (i) the treatment of transfers of
‘‘other property’’ in the context of the
50-percent ownership threshold requirement, and (ii) the active trade or business requirement.
Location:
Transfers of ‘‘Other Property’’
Under the temporary regulations, if
U.S. transferors receive more than 50
percent of the stock (by vote or value)
of the TFC, the 50-percent ownership
threshold is exceeded and the transfer is
taxable under section 367(a)(1). The
temporary regulations define a ‘‘U.S.
transferor’’ as a U.S. person who transfers (directly, indirectly or constructively) stock or securities of the U.S.
target company or ‘‘other property’’ for
stock of the TFC in an exchange described in section 367. Persons who
transfer U.S. target company stock or
other property are presumed to be U.S.
persons.
The inclusion of ‘‘other property’’ in
the class of tainted transferred property
was designed to prevent the avoidance
of the 50-percent ownership threshold
through ‘‘stuffing’’ transactions. For example, assume that FC, a foreign corporation, and UST, an unrelated U.S. corporation, seek to combine their
operations in a new foreign joint venture
company (JV). The shareholders of each
company will transfer their respective
stock interests in UST and FC to JV in
a transaction that would qualify as a
section 351 exchange unless the transaction was taxable under section 367(a)(1).
Assume that FC has all foreign shareholders. The value of the stock of UST
is 550x; the value of the stock of FC is
450x. Because UST is more valuable
than FC, UST’s shareholders would receive more than 50 percent of JV’s
stock. Consequently, even if the transaction would otherwise qualify for an
exception to the general rule of taxation

under section 367(a)(1), the transaction
would be taxable because the 50-percent
ownership threshold would be exceeded.
If, however, a U.S. person (X) contributed at least 100x in cash (or property)
to JV, JV would not issue more than 50
percent of its stock to the UST shareholders, and, therefore, the 50-percent
ownership threshold would not be exceeded. The temporary regulations, however, treat X as a U.S. transferor, so that
the 50-percent ownership threshold
would be exceeded in this case.
Commentators have pointed out that
the term ‘‘other property’’ raises issues
in the joint venture context that are
broader than the ‘‘stuffing’’ example
described above. Because the term
‘‘other property’’ is broad enough to
include stock of a foreign company, the
transfer of UST stock could be taxable
under section 367(a)(1) even if UST
were less valuable than the foreign
‘‘target’’ company (i.e., in cases where
U.S. transferors would receive less than
50 percent of the stock of the joint
venture company/TFC). Assume similar
facts as in the earlier example, except
that FC is widely- held and the shareholders of UST receive 40 percent of
the stock of JV, while the shareholders
of FC receive the remaining 60 percent.
No cash or any other property is transferred to the JV. In such case, if the
stock of FC constitutes ‘‘other property,’’ UST shareholders would not
qualify for an exception to section
367(a)(1) if they were unable to prove
that the U.S. shareholders of FC, if any,
received no more than 10 percent of the
stock of JV in the exchange.
Although the IRS and the Treasury
Department remain concerned with
‘‘stuffing’’ transactions, the final regulations consider the active trade or business test to be the primary safeguard for
preventing tax-motivated transactions
from qualifying for an exception under
these section 367(a) regulations. In particular, because the active trade or business test addresses ‘‘stuffing’’ transactions that occur within the 36-month
period prior to the acquisition, the final
regulations eliminate consideration of
transfers of other property with regard
to the 50-percent ownership threshold.
Thus, any TFC stock received by U.S.
persons in exchange for transfers of
other property will not be taken into
account in determining whether the 50percent ownership threshold is exceeded.
Active trade or business test: in general
The final regulations modify the ‘‘active trade or business’’ requirement that

5

must be satisfied for a U.S. transferor to
qualify for an exception to the general
rule of taxability under section
367(a)(1).
Under the requirement contained in
the temporary regulations, no exception
under section 367(a)(1) is available unless (i) the TFC or an affiliate was
engaged in an active trade or business
for the entire 36-month period prior to
the exchange (the 36-month test), and
(ii) such business was substantial in
relation to the business of the U.S.
target company (the substantiality test).
For this purpose, an affiliate is generally
defined by reference to the rules in
section 1504(a) (without the exclusion
of foreign corporations).
The active trade or business test under the final regulations includes (i) a
modified 36-month test, (ii) a new antiavoidance rule requiring that the transaction not be undertaken with an intention that the TFC cease its active trade
or business, and (iii) a modified substantiality test. The final regulations make a
number of other modifications and clarifications to the active trade or business
test. For example, the final regulations
permit the TFC to consider only an
80-percent owned foreign subsidiary (referred to as a ‘‘qualified subsidiary’’),
and not an affiliate, to satisfy the active
trade or business test on its behalf.
Active trade or business test: 36-month
test and intent test
Under the 36-month test contained in
the temporary regulations, the TFC or
an affiliate is required to be engaged in
an active trade or business for the entire
36 months immediately preceding the
date of the transfer. Under the final
regulations, this test can be satisfied by
acquired businesses that have a 36month operating history, unless they are
acquired with the principal purpose of
satisfying the active trade or business
test.
In addition to the 36-month test, the
active trade or business test in the final
regulations contains a requirement that
the transaction not be undertaken with
an intention that the TFC cease its
active business. The IRS and the Treasury Department believe that if a TFC
with a 36- month active business history
does not intend to maintain such business, but is only used as a vehicle to
acquire the UST, an ‘‘inversion’’ transaction rather than a synergy of two
businesses has been effected.
Under the temporary regulations,
there is uncertainty as to whether an
affiliate of a newly-formed TFC can

satisfy the active trade or business test
on behalf of the TFC for the (36-month)
period prior to the exchange. Subject to
a stuffing rule, the final regulations
clarify that, for purposes of determining
whether a TFC satisfies the 36-month
test, the TFC may take into account an
active business of a company that is a
qualified subsidiary immediately after
the transaction, even if such company
was not a qualified subsidiary for all or
part of the 36 months prior to the
transaction. Thus, for example, if the
TFC is a new foreign joint venture
company, it will not be disqualified
from satisfying the active trade or business test solely because its qualifying
active trade or business was engaged in
by a qualified subsidiary whose stock is
received in the exchange.
Under the temporary regulations, it is
unclear whether a newly-formed joint
venture TFC could satisfy the active
trade or business test if, in the transaction, it received both stock of a UST
(from U.S. transferors) and an active
trade or business (i.e., a foreign branch)
that had been operating for at least 36
months prior to the exchange (from
foreign transferors). This uncertainty
arose because the active trade or business test in the temporary regulations
required that either the TFC or an
affiliate satisfy the 36-month requirement. Although the temporary regulations did not intend to establish a
preference for transfers of stock (i.e.,
affiliates) vis-a-vis assets, the temporary
regulations did not expressly provide
that a TFC could utilize a newlytransferred foreign branch to satisfy the
TFC’s active trade or business requirement.
The final regulations clarify that, subject to a stuffing rule, the TFC may
satisfy the active trade or business test if
it receives in the exchange foreign assets that constituted an active trade or
business during such 36-month period.
Active trade or business test: qualified
subsidiaries
The final regulations permit a TFC to
take into account only qualified subsidiaries, rather than affiliates, to satisfy
the active trade or business test. This
aspect of the active trade or business
test has been narrowed because the IRS
and the Treasury Department do not
believe that a TFC should satisfy the
active trade or business exception
merely because its parent company (or
an affiliate of the parent company) is
engaged in an active trade or business.

For example, assume that foreign parent (FP), which is engaged in an active
business outside the United States (either directly or through a subsidiary),
forms a foreign subsidiary (FS) and
contributes cash to FS. Shareholders of
a U.S. target company (UST) then transfer all of the stock of UST in exchange
for 20 percent of the stock of FS in a
transaction described in sections
368(a)(1)(B) and 367(a). If FS is permitted to satisfy the active trade or business
test by taking into account FP’s business, UST has effectively ‘‘gone offshore’’ in an inversion transaction. Because the shareholders of UST receive
stock of FS (which is the TFC), and not
FP, such shareholders will have no interest in FP’s active business. In contrast,
if the shareholders received stock of FP
in an exchange described in section
367(a), such persons would participate
in FP’s active business, and the active
trade or business test under the final
regulations would be satisfied.
Active Trade or Business Test:
Partnership Interests
The temporary regulations did not
address whether the TFC could satisfy
the active trade or business requirement
by taking into account an interest in a
partnership engaged in an active trade or
business.
The final regulations permit a TFC
(or a qualified subsidiary) to take into
account the active trade or business
engaged in outside the United States by
any qualified partnership as there defined. Active trade or business test:
substantiality test
Under the temporary regulations, the
second prong of the active trade or
business requirement is the substantiality
test. The active trade or business of the
TFC is required to be ‘‘substantial’’
vis-a-vis the active trade or business of
the UST, but the temporary regulations
do not define substantiality.
The final regulations modify the substantiality requirement. Under the final
regulations, the substantiality test no
longer compares the active trade or
business of the TFC vis-a-vis the UST.
Instead, it requires that the entire value
of the TFC be at least equal to the
entire value of the UST at the time of
the transaction. However, for this purpose, the value of the TFC may include
the value of assets (including stock)
acquired within the 36-month period
prior to the transaction only if (i) such
assets were acquired in the ordinary
course of business, or (ii) such assets (or

6

their proceeds) do not produce and are
not held for the production of passive
income (as defined under section
1296(b)), and were not acquired with
the principal purpose of satisfying the
active trade or business test. A special
rule applies if the asset acquired by the
TFC in the 36-month period prior to the
exchange is stock of a qualified subsidiary or qualified partnership engaged in
an active trade or business. In such case,
the value of the stock or partnership
interest may be taken into account, but
must be reduced in accordance with the
principles described above.
When formulating the substantiality
test under the final regulations, the IRS
and the Treasury Department considered
and rejected other alternatives considered to be more complex and burdensome for taxpayers. For example, a
comparison of the active business of the
TFC vis-a-vis the active business of the
UST for the 36-month period prior to
the acquisition, taking into account the
property, payroll and sales of the two
companies, was considered and rejected.
Indirect and constructive transfers
One commentator suggested that the
IRS clarify the definition of ‘‘U.S.
Transferor’’ contained in the temporary
regulations, which refers to a U.S. person who transfers ‘‘directly, indirectly or
constructively’’ UST stock or other
property. The IRS and the Treasury
Department believe that the reference to
‘‘direct, indirect and constructive’’ transfers may have been unclear and, thus,
the final regulations delete such reference. Such technical modification does
not modify the substantive law in which
indirect and constructive transfers may
be treated as transfers subject to section
367(a)(1) (see § 1.367(a)–1T(c)(2) with
respect to the ‘‘indirect’’ stock transfer
rules; constructive transfers include, but
are not limited to, section 367(a) transfers that result from section 304 transactions and section 367(a) transfers that
result from a change in classification of
an entity from a foreign partnership to a
foreign corporation). GRA term
Under the temporary regulations, a
5-percent transferee shareholder is required to file a GRA. The duration is 5
years if all U.S. transferors own less
than 50 percent of the total voting
power and total value of the TFC stock
immediately after the transfer. The duration of the GRA is 10 years if the U.S.
transferors own 50 percent or more of
the TFC stock immediately after the
transaction, or if the 5-percent transferee
shareholder is unable to prove that all

U.S. transferors own less than 50 percent of the total voting power and total
value of the TFC immediately after the
transfer. Thus, in determining whether a
5- or 10-year GRA is appropriate, the
temporary regulations take into account
cross-ownership (i.e., consideration of
stock owned independently of the transaction) by all U.S. transferors, and contain a presumption that a 10-year GRA
is required.
For example, assume that UST shareholders receive 30 percent of the stock
of the TFC in a nonrecognition transaction that qualifies for an exception under
section 367(a). Assume further that one
UST shareholder, X, a U.S. person,
transfers stock of UST in the section
367(a) exchange and owns 5 percent of
the TFC after the transaction. Under the
temporary regulations, X is required to
file a 10-year GRA unless X can prove
that all U.S. transferors in the aggregate
own less than 50 percent of the voting
power and value of the TFC immediately after the transfer (taking into account the 30 percent received in the
transaction by U.S. target shareholders
plus any other stock that such persons
may own independently of the transaction). If the companies are publicly
traded or widely-held, it is burdensome
and may be impractical for X to rebut
the presumption that U.S. transferors
own 50 percent or more of the TFC
stock.
In response to comments received and
in the interest of simplification, the final
regulations provide that any 5-percent
transferee shareholder that is required to
file a GRA upon the transfer of domestic stock or securities is required to file
a 5-year GRA; 10-year GRAs will no
longer be required in the case of
5-percent transferee shareholders who
transfer domestic stock or securities.
Other Areas in Which Comments Were
Received
After careful consideration by the IRS
and the Treasury Department, the positions set forth in the temporary regulations were generally not modified in
response to certain comments other than
those described above. For example, the
final regulations did not modify: (i) the
amount of stock U.S. transferors could
receive without exceeding the ownership
threshold (i.e., not more than 50 percent), (ii) testing the 50-percent ownership threshold at the time of the exchange, and (iii) the presumption that all
shareholders of the U.S. target company
are U.S. persons.

PLR Option in Limited Instances
The final regulations provide that, in
limited instances, the IRS may consider
issuing private letter rulings to taxpayers
that (i) satisfy all of the requirements
contained in these regulations, with the
exception of the active trade or business
test, or (ii) make a good faith effort, but
are unable to establish non-adverse applicability of the ownership attribution
rules. The IRS and the Treasury Department are aware that the active trade or
business test is mechanical in nature
and, thus, in limited instances, a taxpayer may demonstrate an ongoing and
substantial active trade or business even
though it fails to meet the test set forth
in the final regulations. However, in no
event will the IRS rule on the issue of
whether a TFC acquired an active business with the principal purpose of satisfying the 36-month test and/or the substantiality test.
Other Matters
The IRS and the Treasury Department
expect to issue additional final regulations under section 367(a) to address the
transfer of stock or securities of foreign
corporations and other matters contained
in the 1991 proposed regulations not
addressed herein. Until the 1991 proposed regulations are finalized, the positions originally announced in Notice
87–85 will continue to govern the availability of section 367(a) exceptions for
transfers of stock or securities of foreign
corporations. See § 1.367(a)–3(d).
Special Analyses
It has been determined that this regulation is not a significant regulatory
action as defined in EO 12866. Therefore, a regulatory assessment is not
required. It is hereby certified that this
regulation does not have a significant
economic impact on a substantial number of small entities. This certification is
based on the fact that the number of
U.S. target companies that are acquired
by foreign corporations in nonrecognition transactions subject to section
367(a), and thus are subject to collection
of information, is estimated to be only
100 per year. Moreover, because these
regulations will primarily affect large
shareholders and U.S. multinational corporations with foreign operations, it is
estimated that very few of the 100
transactions will involve small entities.
Thus, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursu-

7

ant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Philip L. Tretiak of the Office of
Associate Chief Counsel (International),
within the Office of Chief Counsel, IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*

*

*

*

*

Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
Part 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.367(a)–3 is added to
read as follows:
§ 1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
(a) In general. This section provides
rules concerning the transfer of stock or
securities by a U.S. person to a foreign
corporation in an exchange described in
section 367(a). In general, a transfer of
stock or securities by a U.S. person to a
foreign corporation that is described in
section 351, 354 (pursuant to a reorganization described in section 368(a)(1)(B))
or section 361(a) or (b) is subject to
section 367(a)(1) and, therefore, is
treated as a taxable exchange, unless
one of the exceptions set forth in paragraph (c) or (d) of this section or
§ 1.367(a)–3T(b) applies. For additional
rules relating to an exchange involving a
foreign corporation in connection with
which there is a transfer of stock, see
section 367(b) and the regulations under
that section. For additional rules regarding a transfer of stock or securities in an
exchange described in section 361(a) or
(b), see section 367(a)(5) and any regulations under that section.
(b) [Reserved] For further guidance,
see § 1.367(a)– 3T(b).
(c) Transfers by U.S. persons of stock
or securities of domestic corporations to
foreign corporations—(1) In general.
Except as provided in section 367(a)(5),
a transfer of stock or securities of a
domestic corporation by a U.S. person

to a foreign corporation that would
otherwise be subject to section 367(a)(1)
under paragraph (a) of this section shall
not be subject to section 367(a)(1) if the
domestic corporation the stock or securities of which are transferred (referred to
as the U.S. target company) complies
with the reporting requirements in paragraph (c)(6) of this section and if each
of the following four conditions is met:
(i) Fifty percent or less of both the
total voting power and the total value of
the stock of the transferee foreign corporation is received in the transaction, in
the aggregate, by U.S. transferors (i.e.,
the amount of stock received does not
exceed the 50-percent ownership threshold).
(ii) Fifty percent or less of each of
the total voting power and the total
value of the stock of the transferee
foreign corporation is owned, in the
aggregate, immediately after the transfer
by U.S. persons that are either officers
or directors of the U.S. target company
or that are five-percent target shareholders (as defined in paragraph (c)(5)(iii) of
this section) (i.e., there is no control
group). For purposes of this paragraph
(c)(1)(ii), any stock of the transferee
foreign corporation owned by U.S. persons immediately after the transfer will
be taken into account, whether or not it
was received in the exchange for stock
or securities of the U.S. target company.
(iii) Either—
(A) The U.S. person is not a fivepercent transferee shareholder (as defined in paragraph (c)(5)(ii) of this section); or
(B) The U.S. person is a five-percent
transferee shareholder and enters into a
five-year agreement to recognize gain
with respect to the U.S. target company
stock or securities it exchanged in the
form provided in § 1.367(a)–3T(g); and
(iv) The active trade or business test
(as defined in paragraph (c)(3) of this
section) is satisfied.
(2) Ownership presumption. For purposes of paragraph (c)(1) of this section,
persons who transfer stock or securities
of the U.S. target company in exchange
for stock of the transferee foreign corporation are presumed to be U.S. persons.
This presumption may be rebutted in
accordance with paragraph (c)(7) of this
section.
(3) Active trade or business test—(i)
In general. The tests of this paragraph
(c)(3), collectively referred to as the
active trade or business test, are satisfied
if:

(A) The transferee foreign corporation or any qualified subsidiary (as
defined in paragraph (c)(5)(vii) of this
section) or any qualified partnership (as
defined in paragraph (c)(5)(viii) of this
section) is engaged in an active trade or
business outside the United States,
within the meaning of § 1.367(a)–
2T(b)(2) and (3), for the entire 36month period immediately before the
transfer;
(B) At the time of the transfer, neither the transferors nor the transferee
foreign corporation (and, if applicable,
the qualified subsidiary or qualified
partnership engaged in the active trade
or business) have an intention to substantially dispose of or discontinue such
trade or business; and
(C) The substantiality test (as defined
in paragraph (c)(3)(iii) of this section) is
satisfied.
(ii) Special rules. For purposes of
paragraphs (c)(3)(i)(A) and (B) of this
section, the following special rules apply:
(A) The transferee foreign corporation, a qualified subsidiary, or a qualified partnership will be considered to be
engaged in an active trade or business
for the entire 36-month period preceding
the exchange if it acquires at the time
of, or any time prior to, the exchange a
trade or business that has been active
throughout the entire 36-month period
preceding the exchange. This special
rule shall not apply, however, if the
acquired active trade or business assets
were owned by the U.S. target company
or any affiliate (within the meaning of
section 1504(a) but excluding the exceptions contained in section 1504(b) and
substituting ‘‘50 percent’’ for ‘‘80 percent’’ where it appears therein) at any
time during the 36-month period prior to
the acquisition. Nor will this special rule
apply if the principal purpose of such
acquisition is to satisfy the active trade
or business test.
(B) An active trade or business does
not include the making or managing of
investments for the account of the transferee foreign corporation or any affiliate
(within the meaning of section 1504(a)
but excluding the exceptions contained
in section 1504(b) and substituting ‘‘50
percent’’ for ‘‘80 percent’’ where it
appears therein). (This paragraph
(c)(3)(ii)(B) shall not create any inference as to the scope of § 1.367(a)–
2T(b)(2) and (3) for other purposes.)
(iii) Substantiality test—(A) General
rule. A transferee foreign corporation
will be deemed to satisfy the substanti-

8

ality test if, at the time of the transfer,
the fair market value of the transferee
foreign corporation is at least equal to
the fair market value of the U.S. target
company.
(B) Special rules. (1) For purposes of
paragraph (c)(3)(iii)(A) of this section,
the value of the transferee foreign corporation shall include assets acquired
outside the ordinary course of business
by the transferee foreign corporation
within the 36-month period preceding
the exchange only if either—
(i) Both—
(A) At the time of the exchange, such
assets or, as applicable, the proceeds
thereof, do not produce, and are not
held for the production of, passive income as defined in section 1296(b); and
(B) Such assets are not acquired for
the principal purpose of satisfying the
substantiality test; or
(ii) Such assets consist of the stock
of a qualified subsidiary or an interest in
a qualified partnership. See paragraph
(c)(3)(iii)(B)(2) of this section.
(2) For purposes of paragraph
(c)(3)(iii)(A) of this section, the value of
the transferee foreign corporation shall
not include the value of the stock of any
qualified subsidiary or the value of any
interest in a qualified partnership, held
directly or indirectly, to the extent that
such value is attributable to assets acquired by such qualified subsidiary or
partnership outside the ordinary course
of business and within the 36-month
period preceding the exchange unless
those assets satisfy the requirements in
paragraph (c)(3)(iii)(B)(1) of this section.
(3) For purposes of paragraph
(c)(3)(iii)(A) of this section, the value of
the transferee foreign corporation shall
not include the value of assets received
within the 36-month period prior to the
acquisition, notwithstanding the special
rule in paragraph (c)(3)(iii)(B)(1) of this
section, if such assets were owned by
the U.S. target company or an affiliate
(within the meaning of section 1504(a)
but without the exceptions under section
1504(b) and substituting ‘‘50 percent’’
for ‘‘80 percent’’ where it appears
therein) at any time during the 36-month
period prior to the transaction.
(4) Special rules—(i) Treatment of
partnerships. For purposes of this paragraph (c), if a partnership (whether
domestic or foreign) owns stock or
securities in the U.S. target company or
the transferee foreign corporation, or
transfers stock or securities in an ex-

change described in section 367(a), each
partner in the partnership, and not the
partnership itself, is treated as owning
and as having transferred, or as owning,
a proportionate share of the stock or
securities. See § 1.367(a)–1T(c)(3).
(ii) Treatment of options. For purposes of this paragraph (c), one or more
options (or an interest similar to an
option) will be treated as exercised and
thus will be counted as stock for purposes of determining whether the 50percent threshold is exceeded or whether
a control group exists if a principal
purpose of the issuance or the acquisition of the option (or other interest) was
the avoidance of the general rule contained in section 367(a)(1).
(iii) U.S. target has a vestigial ownership interest in transferee foreign corporation. In cases where, immediately
after the transfer, the U.S. target company owns, directly or indirectly (applying the attribution rules of sections
267(c)(1) and (5)), stock of the transferee foreign corporation, that stock will
not in any way be taken into account
(and, thus, will not be treated as outstanding) in determining whether the
50-percent threshold under paragraph
(c)(1)(i) of this section is exceeded or
whether a control group under paragraph
(c)(1)(ii) of this section exists.
(iv) Attribution rule. Except as otherwise provided in this section, the rules
of section 318, as modified by the rules
of section 958(b), shall apply for purposes of determining the ownership or
receipt of stock, securities or other property under this paragraph (c).
(5) Definitions—(i) Ownership statement. An ownership statement is a statement, signed under penalties of perjury,
stating—
(A) The identity and taxpayer identification number, if any, of the person
making the statement;
(B) That the person making the statement is not a U.S. person (as defined in
paragraph (c)(5)(iv) of this section);
(C) That the person making the statement either—
(1) Owns less than 1 percent of the
total voting power and total value of a
U.S. target company the stock of which
is described in Rule 13d–1(d) of Regulation 13D (17 CFR 240.13d–1(d)) (or
any rule or regulation to generally the
same effect) promulgated by the Securities and Exchange Commission under
the Securities and Exchange Act of 1934
(15 USC 78m), and such person did not
acquire the stock with a principal purpose to enable the U.S. transferors to

satisfy the requirement contained in
paragraph (c)(1)(i) of this section; or
(2) Is not related to any U.S. person
to whom the stock or securities owned
by the person making the statement are
attributable under the rules of section
958(b), and did not acquire the stock
with a principal purpose to enable the
U.S. transferors to satisfy the requirement contained in paragraph (c)(1)(i) of
this section;
(D) The citizenship, permanent residence, home address, and U.S. address,
if any, of the person making the statement; and
(E) The ownership such person has
(by voting power and by value) in the
U.S. target company prior to the exchange and the amount of stock of the
transferee foreign corporation (by voting
power and value) received by such
person in the exchange.
(ii) Five-percent transferee shareholder. A five-percent transferee shareholder is a person that owns at least five
percent of either the total voting power
or the total value of the stock of the
transferee foreign corporation immediately after the transfer described in
section 367(a)(1). For special rules involving cases in which stock is held by
a partnership, see paragraph (c)(4)(i) of
this section.
(iii) Five-percent target shareholder
and certain other 5-percent shareholders. A five-percent target shareholder is
a person that owns at least five percent
of either the total voting power or the
total value of the stock of the U.S.
target company immediately prior to the
transfer described in section 367(a)(1).
If the stock of the U.S. target company
(or any company through which stock of
the U.S. target company is owned indirectly or constructively) is described in
Rule 13d–1(d) of Regulation 13D (17
CFR 240.13d–1(d)) (or any rule or regulation to generally the same effect),
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (15 USC 78m),
then, in the absence of actual knowledge
to the contrary, the existence or absence
of filings of Schedule 13–D or 13–G (or
any similar schedules) may be relied
upon for purposes of identifying fivepercent target shareholders (or a fivepercent shareholder of a corporation
which itself is a five-percent shareholder
of the U.S. target company). For special
rules involving cases in which U.S.
target company stock is held by a
partnership, see paragraph (c)(4)(i) of
this section.

9

(iv) U.S. Person. For purposes of this
section, a U.S. person is defined by
reference to § 1.367(a)–1T(d)(1). For
application of the rules of this section to
stock or securities owned or transferred
by a partnership that is a U.S. person,
however, see paragraph (c)(4)(i) of this
section.
(v) U.S. Transferor. A U.S. transferor
is a U.S. person (as defined in paragraph (c)(5)(iv) of this section) that
transfers stock or securities of one or
more U.S. target companies in exchange
for stock of the transferee foreign corporation in an exchange described in section 367.
(vi) Transferee foreign corporation. A
transferee foreign corporation is the foreign corporation whose stock is received
in the exchange by U.S. persons.
(vii) Qualified Subsidiary. A qualified
subsidiary is a foreign corporation
whose stock is at least 80-percent
owned (by total voting power and total
value), directly or indirectly, by the
transferee foreign corporation. However,
a corporation will not be treated as a
qualified subsidiary if it was affiliated
with the U.S. target company (within
the meaning of section 1504(a) but
without the exceptions under section
1504(b) and substituting ‘‘50 percent’’
for ‘‘80 percent’’ where it appears
therein) at any time during the 36-month
period prior to the transfer. Nor will a
corporation be treated as a qualified
subsidiary if it was acquired by the
transferee foreign corporation at any
time during the 36-month period prior to
the transfer for the principal purpose of
satisfying the active trade or business
test, including the substantiality test.
(viii) Qualified partnership. (A) Except as provided in paragraph (c)(5)(viii)(B) or (C) of this section, a qualified partnership is a partnership in
which the transferee foreign corporation—
(1) Has active and substantial management functions as a partner with
regard to the partnership business; or
(2) Has an interest representing a 25
percent or greater interest in the partnership’s capital and profits.
(B) A partnership is not a qualified
partnership if the U.S. target company
or any affiliate of the U.S. target company (within the meaning of section
1504(a) but without the exceptions under section 1504(b) and substituting ‘‘50
percent’’ for ‘‘80 percent’’ where it
appears therein) held a 5 percent or
greater interest in the partnership’s capi-

tal and profits at any time during the
36-month period prior to the transfer.
(C) A partnership is not a qualified
partnership if the transferee foreign corporation’s interest was acquired by that
corporation at any time during the 36month period prior to the transfer for
the principal purpose of satisfying the
active trade or business test, including
the substantiality test.
(6) Reporting requirements of U.S.
target company. (i) In order for a U.S.
person that transfers stock or securities
of a domestic corporation to qualify for
the exception provided by this paragraph
(c) to the general rule under section
367(a)(1), in cases where 10 percent or
more of the total voting power or the
total value of the stock of the U.S.
target company is transferred by U.S.
persons in the transaction, the U.S.
target company must comply with the
reporting requirements contained in this
paragraph (c)(6). The U.S. target company must attach to its timely filed U.S.
income tax return for the taxable year in
which the transfer occurs a statement
titled ‘‘Section 367(a)—Reporting of
Cross-Border Transfer Under Reg.
§ 1.367(a)–3(c)(6),’’ signed under penalties of perjury by an officer of the
corporation to the best of the officer’s
knowledge and belief, disclosing the
following information—
(A) A description of the transaction
in which a U.S. person or persons
transferred stock or securities in the
U.S. target company to the transferee
foreign corporation in a transfer otherwise subject to section 367(a)(1);
(B) The amount (specified as to the
percentage of the total voting power and
the total value) of stock of the transferee
foreign corporation received in the
transaction, in the aggregate, by persons
who transferred stock or securities of
the U.S. target company. For additional
information that may be required to
rebut the ownership presumption of
paragraph (c)(2) of this section in cases
where more than 50 percent of either
the total voting power or the total value
of the stock of the transferee foreign
corporation is received in the transaction, in the aggregate, by persons who
transferred stock or securities of the
U.S. target company, see paragraph
(c)(7) of this section;
(C) The amount (if any) of transferee
foreign corporation stock owned directly
or indirectly (applying the attribution
rules of sections 267(c)(1) and (5))
immediately after the exchange by the
U.S. target company;

(D) A statement that there is no control group within the meaning of paragraph (c)(1)(ii) of this section;
(E) A list of U.S. persons who are
officers, directors or five-percent target
shareholders and the percentage of the
total voting power and the total value of
the stock of the transferee foreign corporation owned by such persons both
immediately before and immediately after the transaction; and
(F) A statement that includes the following—
(1) A statement that the active trade
or business test described in paragraph
(c)(3) of this section is satisfied by the
transferee foreign corporation and a description of such business;
(2) A statement that on the day of the
transaction, there was no intent on the
part of the transferors or the transferee
foreign corporation (or any qualified
subsidiary or any qualified partnership,
if relevant) to substantially dispose of or
discontinue its active trade or business;
and
(3) A statement that the substantiality
test described in paragraph (c)(3)(iii) of
this section is satisfied, and documentation that such test is satisfied, including
the value of the transferee foreign corporation and the value of the U.S. target
company on the day of the transfer, and
either one of the following—
(i) A statement demonstrating that the
value of the transferee foreign corporation 36 months prior to the acquisition,
plus the value of any assets described in
paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the transferee foreign corporation within the 36month period, less the amount of any
liabilities acquired during that period,
exceeds the value of the U.S. target
company on the acquisition date; or
(ii) A statement demonstrating that
the value of the transferee foreign corporation on the date of the acquisition,
reduced by the value of any assets not
described in paragraph (c)(3)(iii)(B) of
this section (including stock) acquired
by the transferee foreign corporation
within the 36-month period, exceeds the
value of the U.S. target company on the
date of the acquisition.
(ii) For purposes of this paragraph
(c)(6), an income tax return will be
considered timely filed if such return is
filed, together with the statement required by this paragraph (c)(6), on or
before the last date for filing a Federal
income tax return (taking into account
any extensions of time therefor) for the
taxable year in which the transfer oc-

10

curs. If a return is not timely filed
within the meaning of this paragraph
(c)(6), the District Director may make a
determination, based on all facts and
circumstances, that the taxpayer had
reasonable cause for its failure to file a
timely filed return and, if such a determination is made, the requirement contained in this paragraph (c)(6) shall be
waived.
(7) Ownership statements. To rebut
the ownership presumption of paragraph
(c)(2) of this section, the U.S. target
company must obtain ownership statements (described in paragraph (c)(5)(i)
of this section) from a sufficient number
of persons that transfer U.S. target company stock or securities in the transaction that are not U.S. persons to demonstrate that the 50-percent threshold of
paragraph (c)(1)(i) of this section is not
exceeded. In addition, the U.S. target
company must attach to its timely filed
U.S. income tax return (as described in
paragraph (c)(6)(ii) of this section) for
the taxable year in which the transfer
occurs a statement, titled ‘‘Section
367(a)–Compilation of Ownership Statements under Reg. § 1.367(a)–3(c),’’
signed under penalties of perjury by an
officer of the corporation, disclosing the
following information:
(i) The amount (specified as to the
percentage of the total voting power and
the total value) of stock of the transferee
foreign corporation received, in the aggregate, by U.S. transferors;
(ii) The amount (specified as to the
percentage of total voting power and
total value) of stock of the transferee
foreign corporation received, in the aggregate, by foreign persons that filed
ownership statements;
(iii) A summary of the information
tabulated from the ownership statements,
including—
(A) The names of the persons that
filed ownership statements stating that
they are not U.S. persons;
(B) The countries of residence and
citizenship of such persons; and
(C) Each of such person’s ownership
(by voting power and by value) in the
U.S. target company prior to the exchange and the amount of stock of the
transferee foreign corporation (by voting
power and value) received by such
persons in the exchange.
(8) Certain transfers in connection
with performance of services. Section
367(a)(1) shall not apply to a domestic
corporation’s transfer of its own stock or
securities in connection with the performance of services, if the transfer is

considered to be to a foreign corporation
solely by reason of § 1.83–6(d)(1).
(9) Private letter ruling option. The
Internal Revenue Service may, in limited
circumstances, issue a private letter ruling to permit the taxpayer to qualify for
an exception to the general rule under
section 367(a)(1) if—
(i) A taxpayer is unable to satisfy all
of the requirements of paragraph (c)(3)
of this section relating to the active
trade or business test of paragraph
(c)(1)(iv) of this section, but such taxpayer meets all of the other requirements contained in paragraphs (c)(1)(i)
through (c)(1)(iii) of this section, and
such taxpayer is substantially in compliance with the rules set forth in paragraph (c)(3) of this section; or
(ii) A taxpayer is unable to satisfy
any requirement of paragraph (c)(1) of
this section due to the application of
paragraph (c)(4)(iv) of this section. Notwithstanding the preceding sentence, in
no event will the Internal Revenue Service rule on the issue of whether the
principal purpose of an acquisition was
to satisfy the active trade or business
test, including the substantiality test.
(10) Examples. This paragraph (c)
may be illustrated by the following
examples:
Example 1. Ownership presumption. (i) FC, a
foreign corporation, issues 51 percent of its stock
to the shareholders of S, a domestic corporation,
in exchange for their S stock, in a transaction
described in section 367(a)(1).
(ii) Under paragraph (c)(2) of this section, all
shareholders of S who receive stock of FC in the
exchange are presumed to be U.S. persons. Unless
this ownership presumption is rebutted, the condition set forth in paragraph (c)(1)(i) of this section
will not be satisfied, and the exception in paragraph (c)(1) of this section will not be available.
As a result, all U.S. persons that transferred S
stock will recognize gain on the exchange. To
rebut the ownership presumption, S must comply
with the reporting requirements contained in paragraph (c)(7) of this section, obtaining ownership
statements (described in paragraph (c)(5)(i) of this
section) from a sufficient number of non-U.S.
persons who received FC stock in the exchange to
demonstrate that the amount of FC stock received
by U.S. persons in the exchange does not exceed
50 percent.
Example 2. Filing of Gain Recognition Agreement. (i) The facts are the same as in Example 1,
except that FC issues only 40 percent of its stock
to the shareholders of S in the exchange. FC
satisfies the active trade or business test of
paragraph (c)(1)(iv) of this section. A, a U.S.
person, owns 10 percent of S’s stock immediately
before the transfer. All other shareholders of S
own less than five percent of its stock. None of
S’s officers or directors owns any stock in FC
immediately after the transfer. A will own 15
percent of the stock of FC immediately after the
transfer, 4 percent received in the exchange, and
the balance being stock in FC that A owned prior
to and independent of the transaction. No S
shareholder besides A owns five percent or more

of FC immediately after the transfer. The reporting
requirements under paragraph (c)(6) of this section
are satisfied.
(ii) The condition set forth in paragraph
(c)(1)(i) of this section is satisfied because, even
after application of the presumption in paragraph
(c)(2) of this section, U.S. transferors could not
receive more than 50 percent of FC’s stock in the
transaction. There is no control group because
five-percent target shareholders and officers and
directors of S do not, in the aggregate, own more
than 50 percent of the stock of FC immediately
after the transfer (A, the sole five-percent target
shareholder, owns 15 percent of the stock of FC
immediately after the transfer, and no officers or
directors of S own any stock of FC immediately
after the transfer). Therefore, the condition set
forth in paragraph (c)(1)(ii) of this section is
satisfied. The facts assume that the condition set
forth in paragraph (c)(1)(iv) of this section is
satisfied. Thus, U.S. persons that are not fivepercent transferee shareholders will not recognize
gain on the exchange of S shares for FC shares. A,
a five-percent transferee shareholder, will not be
required to include in income any gain realized on
the exchange in the year of the transfer if he files
a 5-year gain recognition agreement (GRA) and
complies with section 6038B.
Example 3. Control Group. (i) The facts are the
same as in Example 2, except that B, another U.S.
person, is a 5-percent target shareholder, owning
25 percent of S’s stock immediately before the
transfer. B owns 40 percent of the stock of FC
immediately after the transfer, 10 percent received
in the exchange, and the balance being stock in
FC that B owned prior to and independent of the
transaction.
(ii) A control group exists because A and B,
each a five-percent target shareholder within the
meaning of paragraph (c)(5)(iii) of this section,
together own more than 50 percent of FC immediately after the transfer (counting both stock received in the exchange and stock owned prior to
and independent of the exchange). As a result, the
condition set forth in paragraph (c)(1)(ii) of this
section is not satisfied, and all U.S. persons (not
merely A and B) who transferred S stock will
recognize gain on the exchange.
Example 4. Partnerships. (i) The facts are the
same as in Example 3, except that B is a
partnership (domestic or foreign) that has five
equal partners, only two of whom, X and Y, are
U.S. persons. Under paragraph (c)(4)(i) of this
section, X and Y are treated as the owners and
transferors of 5 percent each of the S stock owned
and transferred by B and as owners of 8 percent
each of the FC stock owned by B immediately
after the transfer. U.S. persons that are fivepercent target shareholders thus own a total of 31
percent of the stock of FC immediately after the
transfer (A’s 15 percent, plus X’s 8 percent, plus
Y’s 8 percent).
(ii) Because no control group exists, the condition in paragraph (c)(1)(ii) of this section is
satisfied. The conditions in paragraphs (c)(1)(i)
and (iv) of this section also are satisfied. Thus,
U.S. persons that are not five-percent transferee
shareholders will not recognize gain on the exchange of S shares for FC shares. A, X, and Y,
each a five-percent transferee shareholder, will not
be required to include in income in the year of the
transfer any gain realized on the exchange if they
file 5-year GRAs and comply with section 6038B.

(11) Effective date. This paragraph (c)
applies to transfers occurring after January 29, 1997. However, taxpayers may
elect to apply this section in its entirety

11

to all transfers occurring after April 17,
1994, provided that the statute of limitations of the affected tax year or years is
open.
(d) Transfers of stock or securities of
foreign corporations. For guidance, see
Notice 87–85 (1987–2 C.B. 395). See
§ 601.601(d)(2) of this chapter.
(e) through (h) [Reserved] For further
guidance, see § 1.367(a)–3T(e) through
(h).
Par. 3. In § 1.367(a)–3T, paragraphs
(a), (c) and (d) are revised to read as
follows:
§ 1.367(a)–3T Treatment of transfers of
stock or securities to foreign corporations (temporary).
(a) [Reserved] For further information, see § 1.367(a)–3(a).
*

*

*

*

*

(c) and (d) [Reserved] For further
information, see § 1.367(a)–3(c) and
(d).
*

*

*

*

*

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority for citation for
part 602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 5. Section 602.101, paragraph (c)
is amended by revising the entry for
1.367(a)–3T and adding an entry to the
table in numerical order to read as
follows:
§ 602.101 OMB Control numbers.
*

*

*

*

*

(c) * * *
CFR part or section
where identified and
described

Current OMB
control No.

*
*
*
*
*
1.367(a)–3 . . . . . . . . . . . . 1545–0026
1545–1478
1.367(a)–3T. . . . . . . . . . . 1545–0026
*
*
*
*
*
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 11, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on
December 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for December 30,
1996, 61 F.R. 68633)

Section 952.—Subpart F Income
Defined
26 CFR 1.952–1: Subpart F income defined.

T.D. 8704
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Foreign Base
Company Income and Foreign
Personal Holding Company Income
of a Controlled Foreign Corporation
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the definitions of subpart F income and foreign
personal holding company income of a
controlled foreign corporation and the
allocation of deficits for purposes of
computing the deemed-paid foreign tax
credit. These regulations are necessary
to provide guidance that coordinates
with previously published guidance under section 954. These regulations will
affect United States shareholders of controlled foreign corporations.
DATES: These regulations are effective
January 2, 1997.
For specific dates of applicability, see
§§ 1.952–1(f)(5), 1.952–2(c)(1), 1.954–
2(b)(3) and 1.960–1(i)(6).
FOR FURTHER INFORMATION CONTACT: Valerie Mark, (202) 622–3840
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
On September 7, 1995, proposed
regulations (IL–75–92 [1995–2 C.B.
480]) amending the Income Tax Regulations (26 CFR Part 1) under sections
952, 954(c) and 960 of the Internal
Revenue Code (Code) were published in
the Federal Register (60 FR 46548). In
final regulations under section 954 (T.D.
8618 [1995–2 C.B. 89]), also published
on that date (60 FR 46500), a provision
relating to the treatment of tax-exempt
interest under the foreign personal holding company income rules was reserved.
The proposed regulations provided rules
for the treatment of tax-exempt interest

and also provided guidance under sections 952 and 960 to coordinate with the
final regulations. No public hearing was
requested or held. One written comment
was received on the proposed regulations. After consideration of this comment, the proposed regulations are
adopted as final regulations without
amendment.

§ 1.954–2(g)(2)

Explanation of Provisions

§ 1.957–1(c)

§ 1.952–1(e) and (f) and 1.960–1(i)

Technical corrections are made to
§ 1.957–1(c) Examples 8 and 9.

Sections 1.952–1(e) and (f) and
1.960–1(i) are unchanged from the proposed regulations.
§§ 1.952–2(c)(1) and 1.954–2(b)(3)
Under § 1.954–2T(b)(6), interest income that was exempt from tax under
section 103 was included in the foreign
personal holding company income of the
controlled foreign corporation. However,
the net foreign base company income
that was attributable to tax-exempt interest was treated as tax-exempt interest in
the hands of the United States shareholder upon a deemed distribution under
subpart F and therefore excluded for
regular tax purposes but potentially subject to the alternative minimum tax.
Section 1.954–2(b)(3), as proposed and
finalized, amends the rule in the temporary regulations to provide that foreign
personal holding company income includes interest income that is exempt
from tax under section 103. The taxexempt interest would not retain its
character as such in the hands of the
United States shareholder upon a
deemed distribution under subpart F. As
a result of the treatment of tax-exempt
interest in these final regulations, Rev.
Rul. 72–527 (1972–2 C.B. 456) is obsoleted.
A commentator argued that treatment
of tax-exempt interest in the proposed
regulations was contrary to section 103.
This comment was rejected. The Code
does not specifically address how section 103 applies in the context of subpart F. Although § 1.952–2 provides
that, in general, U.S. tax principles
apply in computing subpart F income,
this regulation makes certain Code provisions inapplicable when necessary to
serve the purposes of subpart F. See
§ 1.952–2(c)(1).
§ 1.954–1(d)(4)(iii)
The example in § 1.954–1(d)(4)(iii) is
amended to correct a mathematical error.

12

The regulations are amended to
clarify that income derived in the trade
or business of trading foreign currency
is not excluded from foreign personal
holding company income under the
business needs exception. A technical
correction is made to § 1.954–2(g)(2)(ii)(B)(2).

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also 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 these regulations do not impose a
collection of information on small entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue 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 its impact on
small business.
Drafting Information
The principal authors of these regulations are Barbara Felker and Valerie
Mark of the Office of the Associate
Chief Counsel (International), IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.960–1 also issued under 26
U.S.C. 960(a). * * *
Par. 2. Section 1.952–1 is amended by
adding paragraphs (e) and (f) to read as
follows:

§ 1.952–1 Subpart F income defined.
*

*

*

*

*

(e) Application of current earnings
and profits limitation—(1) In general. If
the subpart F income (as defined in
section 952(a)) of a controlled foreign
corporation exceeds the foreign corporation’s earnings and profits for the taxable year, the subpart F income includible in the income of the corporation’s
United States shareholders is reduced
under section 952(c)(1)(A) in accordance with the following rules. The
excess of subpart F income over current
year earnings and profits shall—
(i) First, proportionately reduce subpart F income in each separate category
of the controlled foreign corporation, as
defined in § 1.904–5(a)(1), in which
current earnings and profits are zero or
less than zero;
(ii) Second, proportionately reduce
subpart F income in each separate category in which subpart F income exceeds current earnings and profits; and
(iii) Third, proportionately reduce
subpart F income in other separate categories.
(2) Allocation to a category of subpart F income. An excess amount that is
allocated under paragraph (e)(1) of this
section to a separate category must be
further allocated to a category of subpart
F income if the separate category contains more than one category of subpart
F income described in section 952(a) or,
in the case of foreign base company
income, described in § 1.954–1(c)(1)(iii)(A)(1) or (2). In such case, the
excess amount that is allocated to the
separate category must be allocated to
the various categories of subpart F income within that separate category on a
proportionate basis.
(3) Recapture of subpart F income
reduced by operation of earnings and
profits limitation. Any amount in a category of subpart F income described in
section 952(a) or, in the case of foreign
base company income, described in
§ 1.954–1(c)(1)(iii)(A)(1) or (2) that is
reduced by operation of the current year
earnings and profits limitation of section
952(c)(1)(A) and this paragraph (e) shall
be subject to recapture in a subsequent
year under the rules of section 952(c)(2)
and paragraph (f) of this section.
(4) Coordination with sections 953
and 954. The rules of this paragraph (e)
shall be applied after the application of
sections 953 and 954 and the regulations
under those sections, except as provided
in § 1.954–1(d)(4)(ii).

(5) Earnings and deficits retain separate limitation character. The income
reduction rules of paragraph (e)(1) of
this section shall apply only for purposes of determining the amount of an
inclusion under section 951(a)(1)(A)
from each separate category as defined
in § 1.904–5(a)(1) and the separate categories in which recapture accounts are
established under section 952(c)(2) and
paragraph (f) of this section. For rules
applicable in computing post-1986 undistributed earnings, see generally section 902 and the regulations under that
section. For rules relating to the allocation of deficits for purposes of
computing foreign taxes deemed paid
under section 960 with respect to an
inclusion under section 951(a)(1)(A), see
§ 1.960–1(i).
(f) Recapture of subpart F income in
subsequent taxable year—(1) In general. If a controlled foreign corporation’s subpart F income for a taxable
year is reduced under the current year
earnings and profits limitation of section
952(c)(1)(A) and paragraph (e) of this
section, recapture accounts will be established and subject to recharacterization in any subsequent taxable year to
the extent the recapture accounts were
not previously recharacterized or distributed, as provided in paragraphs (f)(2)
and (3) of this section.
(2) Rules of recapture—(i) Recapture
account. If a category of subpart F
income described in section 952(a) or,
in the case of foreign base company
income, described in § 1.954–1(c)(1)(iii)(A)(1) or (2) is reduced under the
current year earnings and profits limitation of section 952(c)(1)(A) and paragraph (e) of this section for a taxable
year, the amount of such reduction shall
constitute a recapture account.
(ii) Recapture. Each recapture account of the controlled foreign corporation will be recharacterized, on a proportionate basis, as subpart F income in
the same separate category (as defined
in § 1.904–5(a)(1)) as the recapture account to the extent that current year
earnings and profits exceed subpart F
income in a taxable year. The United
States shareholder must include his pro
rata share (determined under the rules of
§ 1.951–1(e)) of each recharacterized
amount in income as subpart F income
in such separate category for the taxable
year.
(iii) Reduction of recapture account
and corresponding earnings. Each recapture account, and post-1986 undistributed earnings in the separate cat-

13

egory containing the recapture account,
will be reduced in any taxable year by
the amount which is recharacterized under paragraph (f)(2)(ii) of this section.
In addition, each recapture account, and
post-1986 undistributed earnings in the
separate category containing the recapture account, will be reduced in the
amount of any distribution out of that
account (as determined under the ordering rules of section 959(c) and paragraph (f)(3)(ii) of this section).
(3) Distribution ordering rules—
(i) Coordination of recapture and distribution rules. If a controlled foreign
corporation distributes an amount out of
earnings and profits described in section
959(c)(3) in a year in which current
year earnings and profits exceed subpart
F income and there is an amount in a
recapture account for such year, the
recapture rules will apply first.
(ii) Distributions reduce recapture accounts first. Any distribution made by a
controlled foreign corporation out of
earnings and profits described in section
959(c)(3) shall be treated as made first
on a proportionate basis out of the
recapture accounts in each separate category to the extent thereof (even if the
amount in the recapture account exceeds
post-1986 undistributed earnings in the
separate category containing the recapture account). Any remaining distribution shall be treated as made on a
proportionate basis out of the remaining
earnings and profits of the controlled
foreign corporation in each separate category. See section 904(d)(3)(D).
(4) Examples. The application of
paragraphs (e) and (f) of this section
may be illustrated by the following
examples:
Example 1. (i) A, a U.S. person, is the sole
shareholder of CFC, a controlled foreign corporation formed on January 1, 1998, whose functional
currency is the u. In 1998, CFC earns 100u of
foreign base company sales income that is general
limitation income described in section 904(d)(1)(I)
and incurs a (200u) loss attributable to activities
that would have produced general limitation income that is not subpart F income. In 1998 CFC
also earns 100u of foreign personal holding company income that is passive income described in
section 904(d)(1)(A), and 100u of foreign personal
holding company income that is dividend income
subject to a separate limitation described in section
904(d)(1)(E) for dividends from a noncontrolled
section 902 corporation. CFC’s subpart F income
for 1998, 300u, exceeds CFC’s current earnings
and profits, 100u, by 200u. Under section
952(c)(1)(A) and paragraph (e) of this section,
subpart F income is limited to CFC’s current
earnings and profits of 100u, all of which is
included in A’s gross income under section
951(a)(1)(A). The 200u of CFC’s 1998 subpart F
income that is not included in A’s income in 1998

by reason of section 952(c)(1)(A) is subject to
recapture under section 952(c)(2) and paragraph
(f) of this section.
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
account, the rules of paragraphs (e)(1) and (2) of
this section apply. Under paragraph (e)(1)(i) of
this section, the amount by which CFC’s subpart F
income exceeds its earnings and profits for 1998,
200u, first reduces from 100u to 0 CFC’s subpart
F income in the general limitation category, which
has a current year deficit of (100u) in earnings and
profits. Next, under paragraph (e)(1)(iii) of this
section, the remaining 100u by which CFC’s 1998
subpart F income exceeds earnings and profits is
applied proportionately to reduce CFC’s subpart F
income in the separate categories for passive
income (100u) and dividends from the
noncontrolled section 902 corporation (100u).
Thus, A includes 50u of passive limitation/foreign
personal holding company income and 50u of
dividends from the noncontrolled section 902
corporation/foreign personal holding company income in gross income in 1998. CFC has 100u in
its general limitation/foreign base company sales
income recapture account attributable to the 100u
of foreign base company sales income that is not
included in A’s income by reason of the earnings
and profits limitation of section 952(c)(1)(A). CFC
also has 50u in its passive limitation recapture
account, all of which is attributable to foreign
personal holding company income, and 50u in its
recapture account for dividends from the
noncontrolled section 902 corporation, all of
which is attributable to foreign personal holding
company income.
(iii) For purposes of computing post-1986 undistributed earnings, the rules of sections 902 and
960, including the rules of § 1.960–1(i), apply.
Under § 1.960–1(i), the general limitation deficit
of (100u) is allocated proportionately to reduce
passive limitation earnings of 100u and
noncontrolled section 902 dividend earnings of
100u. Thus, passive limitation earnings are reduced by 50u to 50u (100u passive limitation
earnings/200u total earnings in positive separate
categories x (100u) general limitation deficit = 50u
reduction), and the noncontrolled section 902
corporation earnings are reduced by 50u to 50u
(100u noncontrolled section 902 corporation
earnings/200u total earnings in positive separate
categories x (100u) general limitation deficit = 50u
reduction). All of CFC’s post-1986 foreign income
taxes with respect to passive limitation income and
dividends from the noncontrolled section 902
corporation are deemed paid by A under section
960 with respect to the subpart F inclusions (50u
inclusion/50u earnings in each separate category).
After the inclusion and deemed-paid taxes are
computed, at the close of 1998 CFC has a (100u)
deficit in general limitation earnings (100u subpart
F earnings + (200u) nonsubpart F loss), 50u of
passive limitation earnings (100u of earnings attributable to foreign personal holding company
income - 50u inclusion) with a corresponding
passive limitation/foreign personal holding company income recapture account of 50u, and 50u of
earnings subject to a separate limitation for dividends from the noncontrolled section 902 corporation (100u earnings - 50u inclusion) with a
corresponding noncontrolled section 902
corporation/foreign personal holding company income recapture account of 50u.
Example 2. (i) The facts are the same as in
Example 1 with the addition of the following
facts. In 1999, CFC earns 100u of foreign base

company sales income that is general limitation
income and 100u of foreign personal holding
company income that is passive limitation income.
In addition, CFC incurs (10u) of expenses that are
allocable to its separate limitation for dividends
from the noncontrolled section 902 corporation.
Thus, CFC’s subpart F income for 1999, 200u,
exceeds CFC’s current earnings and profits, 190u,
by 10u. Under section 952(c)(1)(A) and paragraph
(e) of this section, subpart F income is limited to
CFC’s current earnings and profits of 190u, all of
which is included in A’s gross income under
section 951(a)(1)(A).
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
accounts, the rules of paragraphs (e)(1) and (2) of
this section apply. While CFC’s general limitation
post-1986 undistributed earnings for 1999 are 0
((100u) opening balance + 100u subpart F income), CFC’s general limitation subpart F income
(100u) does not exceed its general limitation
current earnings and profits (100u) for 1999.
Accordingly, under paragraph (e)(1)(iii) of this
section, the amount by which CFC’s subpart F
income exceeds its earnings and profits for 1999,
10u, is applied proportionately to reduce CFC’s
subpart F income in the separate categories for
general limitation income, 100u, and passive income, 100u. Thus, A includes 95u of general
limitation foreign base company sales income and
95u of passive limitation foreign personal holding
company income in gross income in 1999. At the
close of 1999 CFC has 105u in its general
limitation/foreign base company sales income recapture account (100u from 1998 + 5u from
1999), 55u in its passive limitation/foreign personal holding company income recapture account
(50u from 1998 + 5u from 1999), and 50u in its
dividends from the noncontrolled section 902
corporation/foreign personal holding company income recapture account (all from 1998).
(iii) For purposes of computing post-1986 undistributed earnings in each separate category, the
rules of sections 902 and 960, including the rules
of § 1.960–1(i), apply. Thus, post-1986 undistributed earnings (or an accumulated deficit) in each
separate category are increased (or reduced) by
current earnings and profits or current deficits in
each separate category. The accumulated deficit in
CFC’s general limitation earnings and profits
(100u) is reduced to 0 by the addition of 100u of
1999 earnings and profits. CFC’s passive limitation earnings of 50u are increased by 100u to
150u, and CFC’s noncontrolled section 902 corporation earnings of 50u are decreased by (10u) to
40u. After the addition of current year earnings
and profits and deficits to the separate categories
there are no deficits remaining in any separate
category. Thus, the allocation rules of § 1.960–
1(i)(4) do not apply in 1999. Accordingly, in
determining the post-1986 foreign income taxes
deemed paid by A, post-1986 undistributed earnings in each separate category are unaffected by
earnings in the other categories. Foreign taxes
deemed paid under section 960 for 1999 would be
determined as follows for each separate category:
with respect to the inclusion of 95u of foreign
base company sales income out of general limitation earnings, the section 960 fraction is 95u
inclusion/0 total earnings; with respect to the
inclusion of 95u of passive limitation income the
section 960 fraction is 95u inclusion/150u passive
earnings. Thus, no general limitation taxes would
be associated with the inclusion of the general
limitation earnings because there are no accumulated earnings in the general limitation category.

14

After the deemed-paid taxes are computed, at the
close of 1999 CFC has a (95u) deficit in general
limitation earnings and profits ((100u) opening
balance + 100u current earnings - 95u inclusion),
55u of passive limitation earnings and profits (50u
opening balance + 100u current foreign personal
holding company income - 95u inclusion), and
40u of earnings and profits subject to the separate
limitation for dividends from the noncontrolled
section 902 corporation (50u opening balance +
(10u) expense).
Example 3. (i) A, a U.S. person, is the sole
shareholder of CFC, a controlled foreign corporation whose functional currency is the u. At the
beginning of 1998, CFC has post-1986 undistributed earnings of 275u, all of which are general
limitation earnings described in section
904(d)(1)(I). CFC has no previously-taxed earnings and profits described in section 959(c)(1) or
(c)(2). In 1998, CFC has a (200u) loss in the
shipping category described in section
904(d)(1)(D), 100u of foreign personal holding
company income that is passive income described
in section 904(d)(1)(A), and 125u of general
limitation manufacturing earnings that are not
subpart F income. CFC’s subpart F income for
1998, 100u, exceeds CFC’s current earnings and
profits, 25u, by 75u. Under section 952(c)(1)(A)
and paragraph (e) of this section, subpart F
income is limited to CFC’s current earnings and
profits of 25u, all of which is included in A’s
gross income under section 951(a)(1)(A). The 75u
of CFC’s 1998 subpart F income that is not
included in A’s income in 1998 by reason of
section 952(c)(1)(A) is subject to recapture under
section 952(c)(2) and paragraph (f) of this section.
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
account, the rules of paragraphs (e)(1) and (2) of
this section apply. Under paragraph (e)(1) of this
section, the amount of CFC’s subpart F income in
excess of earnings and profits for 1998, 75u,
reduces the 100u of passive limitation foreign
personal holding company income. Thus, A includes 25u of passive limitation foreign personal
holding company income in gross income, and
CFC has 75u in its passive limitation/foreign
personal holding company income recapture account.
(iii) For purposes of computing post-1986 undistributed earnings in each separate category the
rules of sections 902 and 960, including the rules
of § 1.960–1(i), apply. Under § 1.960– 1(i), the
shipping limitation deficit of (200u) is allocated
proportionately to reduce general limitation earnings of 400u and passive limitation earnings of
100u. Thus, general limitation earnings are reduced by 160u to 240u (400u general limitation
earnings/500u total earnings in positive separate
categories x (200u) shipping deficit = 160u reduction), and passive limitation earnings are reduced
by 40u to 60u (100u passive earnings/500u total
earnings in positive separate categories x (200u)
shipping deficit = 40u reduction). Five-twelfths of
CFC’s post-1986 foreign income taxes with respect to passive limitation earnings are deemed
paid by A under section 960 with respect to the
subpart F inclusion (25u inclusion/60u passive
earnings). After the inclusion and deemed-paid
taxes are computed, at the close of 1998 CFC has
400u of general limitation earnings (275u opening
balance + 125u current earnings), 75u of passive
limitation earnings (100u of foreign personal holding company income - 25u inclusion), and a
(200u) deficit in shipping limitation earnings.

Example 4. (i) The facts are the same as in
Example 3 with the addition of the following
facts. In 1999, CFC earns 50u of general limitation earnings that are not subpart F income and
75u of passive limitation income that is foreign
personal holding company income. Thus, CFC has
125u of current earnings and profits. CFC distributes 200u to A. Under paragraph (f)(3)(i) of this
section, the recapture rules are applied first. Thus,
the amount by which 1999 current earnings and
profits exceed subpart F income, 50u, is
recharacterized as passive limitation foreign personal holding company income. CFC’s total subpart F income for 1999 is 125u of passive
limitation foreign personal holding company income (75u current earnings plus 50u recapture
account), and the passive limitation/foreign personal holding company income recapture account
is reduced from 75u to 25u.
(ii) CFC has 150u of previously-taxed earnings
and profits described in section 959(c)(2) (25u
attributable to 1998 and 125u attributable to
1999), all of which is passive limitation earnings
and profits. Under section 959(c), 150u of the
200u distribution is deemed to be made from
earnings and profits described in section 959(c)(2).
The remaining 50u is deemed to be made from
earnings and profits described in section 959(c)(3).
Under paragraph (f)(3)(ii) of this section, the
dividend distribution is deemed to be made first
out of the passive limitation recapture account to
the extent thereof (25u). Under paragraph
(f)(2)(iii) of this section, the passive limitation
recapture account is reduced from 25u to 0. The
remaining distribution of 25u is treated as made
out of CFC’s general limitation earnings and
profits.
(iii) For purposes of computing post-1986 undistributed earnings, the rules of section 902 and
960, including the rules of § 1.960–1(i), apply.
Thus, the shipping limitation accumulated deficit
of (200u) reduces general limitation earnings and
profits of 450u and passive limitation earnings and
profits of 150u on a proportionate basis. Thus,
100% of CFC’s post-1986 foreign income taxes
with respect to passive limitation earnings are
deemed paid by A under section 960 with respect
to the 1999 subpart F inclusion of 125u (100u
inclusion (numerator limited to denominator)/100u
passive earnings). No post-1986 foreign income
taxes remain to be deemed paid under section 902
in connection with the 25u distribution from the
passive limitation/foreign personal holding company income recapture account. One-twelfth of
CFC’s post-1986 foreign income taxes with respect to general limitation earnings are deemed
paid by A under section 902 with respect to the
distribution of 25u general limitation earnings and
profits described in section 959(c)(3) (25u
inclusion/300u general limitation earnings). After
the deemed-paid taxes are computed, at the close
of 1999 CFC has 425u of general limitation
earnings and profits (400u opening balance + 50u
current earnings - 25u distribution), 0 of passive
limitation earnings (75u recapture account + 75u
current foreign personal holding company income
- 125u inclusion - 25u distribution), and a (200u)
deficit in shipping limitation earnings.

(5) Effective date. Paragraph (e) of
this section and this paragraph (f) apply
to taxable years of a controlled foreign
corporation beginning after March 3,
1997.
Par. 3. In § 1.952–2, paragraph (c)(1)
is revised to read as follows:

§ 1.952–2 Determination of gross income and taxable income of a foreign
corporation.
*

*

*

*

*

(c) Special rules for purposes of this
section—(1) Nonapplication of certain
provisions. Except where otherwise distinctly expressed, the provisions of
subchapters F, G, H, L, M, N, S, and T
of chapter 1 of the Internal Revenue
Code shall not apply and, for taxable
years of a controlled foreign corporation
beginning after March 3, 1997, the
provisions of section 103 of the Internal
Revenue Code shall not apply.
*

*

*

*

*

Par. 4. In § 1.954–1, the Example in
paragraph (d)(4)(iii) is revised to read as
follows:
§ 1.954–1 Foreign base company income.
*

*

*

*

*

(d) * * *
(4) * * *
(iii) * * *
Example. During its 1995 taxable year, CFC, a
controlled foreign corporation, earns royalty income, net of taxes, of $100 that is foreign
personal holding company income. CFC has no
expenses associated with this royalty income. CFC
pays $50 of foreign income taxes with respect to
the royalty income. For 1995, CFC has current
earnings and profits of $50. CFC’s subpart F
income, as determined prior to the application of
this paragraph (d), exceeds its current earnings and
profits. Thus, under paragraph (d)(4)(ii) of this
section, the amount of CFC’s only net item of
income, the royalty income, will be limited to $50.
The remaining $50 will be subject to
recharacterization in a subsequent taxable year
under section 952(c)(2). Because the amount of
foreign income taxes paid with respect to this net
item of income is $50, the effective rate of tax on
the item, for purposes of this paragraph (d), is 50
percent ($50 of taxes/$50 net item + $50 of taxes).
Accordingly, an election under paragraph (d)(5) of
this section may be made to exclude the item of
income from the computation of subpart F income.
*

*

*

*

*

Par. 5. In § 1.954–2, paragraphs
(b)(3), (g)(2)(ii)(B)(1)(i) and (g)(2)(ii)(B)(2) are revised to read as follows:
§ 1.954–2 Foreign personal holding
company income.
*

*

*

*

*

*

*

*

*

(g) * * *
(2) * * *
(ii) * * *
(B) * * *
(1) * * *
(i) Arises from a transaction (other
than a hedging transaction) entered into,
or property used or held for use, in the
normal course of the controlled foreign
corporation’s trade or business, other
than the trade or business of trading
foreign currency;
*

*

*

*

*

(2) The foreign currency gain or loss
arises from a bona fide hedging transaction, as defined in paragraph (a)(4)(ii) of
this section, with respect to a transaction
or property that satisfies the requirements of paragraphs (g)(2)(ii)(B)(1)(i)
through (iii) of this section, provided
that any gain or loss arising from such
transaction or property that is attributable to changes in exchange rates is
clearly determinable from the records of
the CFC as being derived from such
transaction or property. For purposes of
this paragraph (g)(2)(ii)(B)(2), a hedging
transaction will satisfy the aggregate
hedging rules of § 1.1221–2(c)(7) only
if all (or all but a de minimis amount)
of the aggregate risk being hedged
arises in connection with transactions or
property that satisfy the requirements of
paragraphs (g)(2)(ii)(B)(1)(i) through
(iii) of this section, provided that any
gain or loss arising from such transactions or property that is attributable to
changes in exchange rates is clearly
determinable from the records of the
CFC as being derived from such transactions or property.
*

*

*

*

*

Par. 6. Section 1.957–1 is amended
by:
1. Removing the last sentence of
paragraph (c) Example 8 and adding
two sentences in its place.
2. Revising the last sentence of paragraph (c) Example 9
The addition and revision read as
follows:

*

(b) * * *
(3) Treatment of tax exempt interest.
For taxable years of a controlled foreign
corporation beginning after March 3,
1997, foreign personal holding company
income includes all interest income, in-

15

cluding interest that is described in
section 103 (see § 1.952–2(c)(1)).

§ 1.957–1 Definition of controlled foreign corporation.
*

*

*

*

*

(c) * * *
Example 8. JV was a controlled foreign corporation on the following day because over 50
percent of the total value in the corporation was

held by a person that was a United States
shareholder under section 951(b). See § 1.951–
1(f).
Example 9. JV became a controlled foreign
corporation on the following day because over 50
percent of the total value in the corporation was
held by a person that was a United States
shareholder under section 951(b).
*

*

*

*

*

Par. 7. In § 1.960–1, paragraph (i) is
added to read as follows:
§ 1.960–1 Foreign tax credit with respect to taxes paid on earnings and
profits of controlled foreign corporations.
*

*

*

*

*

(i) Computation of deemed-paid taxes
in post-1986 taxable years—(1) General rule. If a domestic corporation is
eligible to compute deemed-paid taxes
under section 960(a)(1) with respect to
an amount included in gross income
under section 951(a), then, such domestic corporation shall be deemed to have
paid a portion of the foreign corporation’s post-1986 foreign income taxes
determined under section 902 and the
regulations under that section in the
same manner as if the amount so included were a dividend paid by such
foreign corporation (determined by applying section 902(c) in accordance with
section 904(d)(3)(B)).
(2) Ordering rule for computing
deemed-paid taxes under sections 902
and 960. If a domestic corporation computes deemed-paid taxes under both sections 902 and 960 in the same taxable
year, section 960 shall be applied first.
After the deemed-paid taxes are computed under section 960 with respect to
a deemed income inclusion, post-1986
undistributed earnings and post-1986
foreign income taxes in each separate
category shall be reduced by the appropriate amounts before deemed-paid taxes
are computed under section 902 with
respect to a dividend distribution.
(3) Computation of post-1986 undistributed earnings. Post-1986 undistributed earnings (or an accumulated deficit
in post-1986 undistributed earnings) are
computed under section 902 and the
regulations under that section.
(4) Allocation of accumulated deficits. For purposes of computing post1986 undistributed earnings under sections 902 and 960, a post-1986
accumulated deficit in a separate category shall be allocated proportionately
to reduce post-1986 undistributed earn-

ings in the other separate categories.
However, a deficit in any separate category shall not permanently reduce
earnings in other separate categories, but
after the deemed-paid taxes are computed the separate limitation deficit shall
be carried forward in the same separate
category in which it was incurred. In
addition, because deemed-paid taxes
may not exceed taxes paid or accrued
by the controlled foreign corporation, in
computing deemed-paid taxes with respect to an inclusion out of a separate
category that exceeds post-1986 undistributed earnings in that separate category, the numerator of the deemed-paid
credit fraction (deemed inclusion from
the separate category) may not exceed
the denominator (post-1986 undistributed earnings in the separate category).
(5) Examples. The application of this
paragraph (i) may be illustrated by the
following examples. See § 1.952–1(f)(4)
for additional illustrations of these rules.

facts. In 1999, CFC distributes 150u to A. CFC
has 100u of previously-taxed earnings and profits
described in section 959(c)(2) attributable to 1998,
all of which is passive limitation earnings and
profits. Under section 959(c), 100u of the 150u
distribution is deemed to be made from earnings
and profits described in section 959(c)(2). The
remaining 50u is deemed to be made from earnings and profits described in section 959(c)(3).
The entire dividend distribution of 50u is treated
as made out of CFC’s general limitation earnings
and profits. See section 904(d)(3)(D).
(ii) For purposes of computing post-1986 undistributed earnings under section 902 with respect to
the 1999 dividend of 50u, the shipping limitation
accumulated deficit of (50u) reduces general limitation earnings and profits of 100u to 50u. Thus,
100% of CFC’s post-1986 foreign income taxes
with respect to general limitation earnings are
deemed paid by A under section 902 with respect
to the 1999 dividend of 50u (50u dividend/50u
general limitation earnings). After the deemed-paid
taxes are computed, at the close of 1999 CFC has
50u of general limitation earnings (100u opening
balance - 50u distribution), 0 of passive limitation
earnings, and a (50u) deficit in shipping limitation
earnings. (6) Effective date. This paragraph (i)
applies to taxable years of a controlled foreign
corporation beginning after March 3, 1997.

Example 1. (i) A, a U.S. person, is the sole
shareholder of CFC, a controlled foreign corporation formed on January 1, 1998, whose functional
currency is the u. In 1998 CFC earns 100u of
general limitation income described in section
904(d)(1)(I) that is not subpart F income and 100u
of foreign personal holding company income that
is passive income described in section
904(d)(1)(A). In 1998 CFC also incurs a (50u)
loss in the shipping category described in section
904(d)(1)(D). CFC’s subpart F income for 1998,
100u, does not exceed CFC’s current earnings and
profits of 150u. Accordingly, all 100u of CFC’s
subpart F income is included in A’s gross income
under section 951(a)(1)(A). Under section
904(d)(3)(B) of the Internal Revenue Code and
paragraph (i)(1) of this section, A includes 100u of
passive limitation income in gross income for
1998.
(ii) For purposes of computing post-1986 undistributed earnings under sections 902, 904(d) and
960 with respect to the subpart F inclusion, the
shipping limitation deficit of (50u) is allocated
proportionately to reduce general limitation earnings of 100u and passive limitation earnings of
100u. Thus, general limitation earnings are reduced by 25u to 75u (100u general limitation
earnings/200u total earnings in positive separate
categories x (50u) shipping deficit = 25u reduction), and passive limitation earnings are reduced
by 25u to 75u (100u passive earnings/200u total
earnings in positive separate categories x (50u)
shipping deficit = 25u reduction). All of CFC’s
post-1986 foreign income taxes with respect to
passive limitation earnings are deemed paid by A
under section 960 with respect to the 100u subpart
F inclusion of passive income (75u inclusion
(numerator limited to denominator under paragraph (i)(4) of this section)/75u passive earnings).
After the inclusion and deemed-paid taxes are
computed, at the close of 1998 CFC has 100u of
general limitation earnings, 0 of passive limitation
earnings (100u of foreign personal holding company income - 100u inclusion), and a (50u) deficit
in shipping limitation earnings.
Example 2. (i) The facts are the same as in
Example 1 with the addition of the following

Margaret Milner Richardson,
Commissioner of Internal Revenue.

16

Approved December 11, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 17)

Section 6071.—Time for Filing
Returns and Other Documents
26 CFR 53.6071–1T: Time for filing returns
(temporary).

T.D. 8705
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
Requirement of Return and Time
for Filing
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
final and temporary regulations providing that disqualified persons and organization managers liable for Internal Revenue Code section 4958 excise taxes are
required to file Form 4720. The regulations also specify the filing date for
returns for the period to which the new

excise taxes applied retroactively. These
excise taxes are imposed on excess
benefit transactions between disqualified
persons, as statutorily defined, and sections 501(c)(3) and (4) organizations,
except for private foundations.
DATES: These regulations are effective
January 2, 1997.
For dates of applicability, see
§ 53.6071–1T(f) of these regulations.
FOR FURTHER INFORMATION CONTACT: Phyllis Haney, (202) 622–4290
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Foundation and Similar Excise
Taxes regulations (26 CFR part 53)
under sections 6011 and 6071. These
regulations provide guidance relating to
the requirement of a return to accompany payment of section 4958 excise
taxes and the time for filing that return.
These rules were first published in Notice 96–46 (1996–39 I.R.B. 7) (September 23, 1996).
Taxpayer Bill of Rights 2, Public Law
104–168, 110 Stat. 1452 (TBOR2), enacted July 30, 1996, added section 4958
to the Code. As described more fully
below, section 4958 imposes excise
taxes on excess benefit transactions.
Section 4958 taxes apply retroactively to
excess benefit transactions occurring on
or after September 14, 1995. The taxes
do not, however, apply to any benefit
arising from a transaction pursuant to
any written contract which was binding
on September 13, 1995, and at all times
thereafter before such transaction occurred.
An ‘‘excess benefit transaction’’ subject to tax under section 4958 is any
transaction in which an economic benefit is provided by an organization described in section 501(c)(3) (except for
a private foundation) or 501(c)(4) directly or indirectly to, or for the use of,
any disqualified person if the value of
the economic benefit provided exceeds
the value of the consideration (including
the performance of services) received
for providing the benefit. A ‘‘disqualified person’’ is any person who was, at
any time during the 5-year period ending on the date of the excess benefit
transaction, in a position to exercise
substantial influence over the affairs of
the organization. Disqualified persons
also include family members and certain
entities in which at least 35 percent of

the control or beneficial interest are held
by persons described in the preceding
sentence. An ‘‘organization manager’’ is
any officer, director, trustee, or any
individual having powers or responsibilities similar to those of any officer,
director, or trustee.
Section 4958 imposes three taxes. The
first tax is equal to 25 percent of the
excess benefit amount, and is to be paid
by any disqualified person who engages
in an excess benefit transaction. The
second tax is equal to 200 percent of the
excess benefit amount, and is to be paid
by any disqualified person if the excess
benefit transaction is not corrected
within the taxable period. The third tax
is equal to 10 percent of the excess
benefit amount, and is to be paid by any
organization manager who knowingly
participates in an excess benefit transaction. The maximum amount of this third
tax with respect to any one excess
benefit transaction may not exceed
$10,000. These regulations prescribe
Form 4720 for calculating and paying
the first and third taxes described above.
TBOR2 also amended section 6033(b)
to require section 501(c)(3) organizations to report the amounts of the taxes
paid under section 4958 with respect to
excess benefit transactions involving the
organization, as well as any other information the Secretary may require concerning those transactions. Section
6033(f) also was amended to impose the
same reporting requirements on section
501(c)(4) organizations. Those amendments to section 6033 only apply to
organizations’ returns for taxable years
beginning after July 30, 1996. These
and other TBOR2 amendments to the
reporting requirements for section
501(c)(3) and (4) organizations are reflected on IRS Forms 990 and 990–EZ
beginning with the 1996 versions.
Explanation of Provisions
The regulations provide that disqualified persons and organization managers,
as defined in sections 4958(f)(1) and
(2), who are liable for section 4958
excise taxes on excess benefit transactions, as defined in section 4958(c)(1),
are required to file a return on Form
4720. The general rule is that returns
will be due on or before the 15th day of
the fifth month following the close of
the disqualified person’s or organization
manager’s taxable year. The regulations
also provide that returns on Form 4720
for taxable years ending after September
13, 1995, and on or before July 30,
1996, will be due on or before Decem-

17

ber 15, 1996. See Notice 96–46
(1996–39 I.R.B. 7) (September 23,
1996).
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 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 regulation does not impose a
collection of information on small entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, these temporary regulations will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regulations is Phyllis Haney, Office of Associate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and Treasury Department participated in their
development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 53 is
amended as follows:
PART 53—FOUNDATION AND SIMILAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. In § 53.6011–1, paragraph (b)
is amended by:
1. Removing from the first sentence,
the language ‘‘or 4955(a),’’ and adding
‘‘, 4955(a), or 4958(a),’’ in its place.
2. Removing from the last sentence,
the language ‘‘or 4955(a),’’ and adding
‘‘, 4955(a), or 4958(a),’’ in its place.
Par. 3. Section 53.6071–1T is added
to read as follows:
§ 53.6071–1T Time for filing returns
(temporary).
(a) through (e) [Reserved]. For further
guidance see § 53.6071–1(a) through
(e).
(f) Taxes imposed on excess benefit
transactions engaged in by organizations described in sections 501(c)(3)

(except private foundations) and
501(c)(4)—(1) General rule. A Form
4720 required by § 53.6011–1(b) for a
disqualified person or organization manager liable for tax imposed by section
4958(a) shall be filed by that person on
or before the 15th day of the fifth
month following the close of such person’s taxable year.
(2) Special rule for taxable years
ending after September 13, 1995, and
on or before July 30, 1996. A Form
4720 required by § 53.6011–1(b) for a
disqualified person or organization manager liable for tax imposed by section
4958(a) on an excess benefit transaction
occurring in such person’s taxable year
ending after September 13, 1995, and on
or before July 30, 1996, is due on or
before December 15, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 10, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 25)

Section 6081.—Extension of Time
for Filing Returns
26 CFR 1.6081–4: Automatic extension of time for
filing individual income tax returns.

T.D. 8703
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Automatic Extension of Time for
Filing Individual Income Tax
Returns; Automatic Extension of
Time to File Partnership Return of
Income, Trust Income Tax Return,
and U.S. Real Estate Mortgage
Investment Conduit Income Tax
Return
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that reflect new and
simpler procedures for an individual to
obtain an automatic extension of time to
file an individual income tax return.
This document also contains final regulations that provide new and simpler

procedures for a partnership, trust, and
Real Estate Mortgage Investment Conduit (REMIC) to obtain an automatic
extension of time to file partnership,
trust, and REMIC returns.
EFFECTIVE DATE: The regulations are
effective December 31, 1996.
FOR FURTHER INFORMATION CONTACT: Margaret A. Owens, (202) 622–
6232 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control numbers
1545–1479 and 1545–0148. Responses
to this collection of information are
required to obtain a benefit (an automatic 4-month extension of time to file
an individual income tax return or an
automatic 3-month extension of time to
file a partnership return of income, a
trust income tax return, or a REMIC
income tax return).
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.
Estimates of the reporting burden in
these final regulations are reflected in
the burden estimates of either Form
4868, Application for Automatic Extension of Time to File U.S. Individual
Income Tax Return, or Form 8736,
Application for Automatic Extension of
Time To File U.S. Return for a Partnership, REMIC or for Certain Trusts.
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, T: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 a collection of information must be retained as
long as their contents may become material in the administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26 U.S.C. 6103.

18

Background
Extensions for Individual Income Tax
Returns
On January 4, 1996, temporary regulations (T.D. 8651 [1996–1 C.B. 312])
providing new and simpler procedures
for individuals to obtain an automatic
extension of time to file an individual
income tax return were published in the
Federal Register (6l FR 260). A notice
of proposed rulemaking (IA–41–93
[1996–1 C.B. 770]) cross-referencing
the temporary regulations was published
in the Federal Register for the same
day (61 FR 338).
Written comments responding to the
notice of proposed rulemaking were received. No public hearing was requested
or held. After consideration of all the
comments, the temporary regulations under sections 6081 and 6651 relating to
the automatic extension of time to file
individual income tax returns are
adopted as revised by this Treasury
Decision, and the corresponding temporary regulations are removed. The comments and revisions are discussed below
in the section on Explanation of Provisions and Summary of Comments.
Extensions for Partnership Returns of
Income and Trust Income Tax Returns
On April 5, 1988, temporary regulations (T.D. 8190 [1988–1 C.B. 394])
relating to the automatic extension of
time to file partnership returns of income and trust income tax returns were
published in the Federal Register (53
FR 11066). A notice of proposed
rulemaking (LR–29–88 [1988–1 C.B.
934]) cross-referencing the temporary
regulations was published in the Federal Register for the same day (53 FR
11103).
In accordance with section 860F(e),
REMICs have been generally treated as
partnerships with regard to extensions of
time to file. A REMIC has been allowed
an automatic 3-month extension of time
to file if (1) an application was prepared
on Form 8736, (2) the application was
signed by the person duly authorized,
(3) the application was filed on or
before the date Form 1066, U.S. Real
Estate Mortgage Investment Conduit Income Tax Return, was due, (4) the
application showed the full amount
properly estimated as tax, and (5) the
application was accompanied by full
remittance of the amount properly esti-

mated as tax that was unpaid as of the
date prescribed for filing Form 1066.
Written comments responding to the
notice of proposed rulemaking and the
request for comments were received. No
public hearing was requested or held.
After consideration of all the comments,
the temporary regulations under section
6081 relating to the automatic extension
of time to file partnership returns of
income, trust income tax returns, and
REMIC income tax returns are adopted
as revised by this Treasury decision, and
the corresponding temporary regulations
are removed. The comments and revisions are discussed below.
Explanation of Provisions and Summary
of Comments
These final regulations provide that
individuals may obtain an automatic
4-month extension of time to file an
individual income tax return without
remitting the unpaid amount of any tax
properly estimated to be due with the
application for extension of time to file.
Under these final regulations, an individual’s inability to pay is not a condition for obtaining an automatic 4-month
extension. However, taxpayers are encouraged to make payments in order to
minimize interest and penalties imposed
on unpaid amounts.
The final regulations remove the
regulatory requirement that Forms 4868
be signed.
Most commentators responded favorably to the proposed and temporary
regulations. Some commentators suggested that the IRS should develop a
bulk method for submitting applications
for automatic extensions so that return
preparers could submit a list of the
required information for all their clients
on one Form 4868. The final regulations
provide that the IRS may prescribe other
methods for submitting an application in
lieu of a paper application on Form
4868. In April 1996, the IRS provided a
method of filing Forms 4868 electronically through the Electronic Transmitted
Documents System. See Publication
1346. The IRS continues to offer this
method of filing Forms 4868. If there is
still a need for other methods, suggestions should be sent to: CC:DOM:CORP:R (REG–209643–93), Room
5226

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Addf3b0f984cabd82. Public record. Not legal advice.