# Certain Outbound Property Transfers by Domestic Corporations; Certain Stock Distributions by Domestic Corporations

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-05700

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 19, 2013
- **Citation:** 78 FR 17024

## Text

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9614]
RIN 1545-AM97
Certain Outbound Property Transfers by Domestic Corporations; Certain Stock Distributions by Domestic Corporations

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final and temporary regulations.

SUMMARY:

This document contains final and temporary regulations that apply to transfers of certain property by a domestic corporation to a foreign corporation in certain nonrecognition exchanges, or to distributions of stock of certain foreign corporations by a domestic corporation in certain nonrecognition distributions. The final regulations also establish reporting requirements for property transfers and stock distributions to which the final regulations apply. The regulations affect domestic corporations that transfer property to foreign corporations in certain nonrecognition transactions, or that distribute the stock of certain foreign corporations in certain nonrecognition distributions, and certain domestic shareholders of those domestic corporations.

DATES:

Effective date:
These regulations are effective on March 19, 2013.

Applicability dates:
For dates of applicability, see §§ 1.367(a)-1(g), 1.367(a)-3(g), 1.367(a)-7(j), 1.367(b)-6, 1.1248-1(g), 1.1248-6(e), 1.1248-8(d), 1.1248(f)-3(b), and 1.6038B-1(g).

FOR FURTHER INFORMATION CONTACT:

Robert B. Williams, Jr., (202) 622-3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in the regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2183.

The collections of information are in §§ 1.367(a)-7(c) and (e)(2), 1.367(a)-8(c), 1.1248(f)-2(a)(3), (b)(1) and (c)(1), and 1.6038B-1(c)(6). The collections of information are mandatory. The likely respondents are domestic corporations.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number.

Books and records relating to a collection of information must be retained as long as their contents might 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 August 20, 2008, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued proposed regulations under sections 367, 1248, and 6038B of the Internal Revenue Code (Code) (2008 proposed regulations) concerning transfers of property by a domestic corporation to a foreign corporation in an exchange described in section 361(a) or (b) (section 361 exchange), and certain nonrecognition distributions of stock of a foreign corporation by a domestic corporation (REG-209006-89; 73 FR 49278, 2008-41 IRB 867). A correction to the 2008 proposed regulations was published in the
Federal Register
on September 26, 2008 (73 FR 56535; 2008-41 IRB 867). No public hearing on the 2008 proposed regulations was requested or held; however, comments were received. Based, in part, on comments received, the Treasury Department and the IRS adopt the 2008 proposed regulations, with modifications, as final regulations. As discussed in paragraph G. of this preamble, a portion of the 2008 proposed regulations is adopted, with modifications, in temporary regulations published elsewhere in this issue of the
Federal Register
. Those temporary regulations also modify final regulations under section 367(a) concerning transfers of stock or securities by a domestic corporation to a foreign corporation in a section 361 exchange. All comments will be available at
www.regulations.gov
or upon request.

Summary of Comments and Explanation of Revisions

A. Regulations Under Section 367(a)(5)

1. Overview

In general, section 367(a)(5) provides that the exceptions to section 367(a)(1) in section 367(a)(2) and (a)(3) do not apply in the case of a section 361 exchange in which a domestic corporation (U.S. transferor) transfers assets to a foreign corporation, unless the U.S. transferor is controlled (within the meaning of section 368(c)) by five or fewer (but at least one) domestic corporations (each a control group member, and together the control group) and basis adjustments and other conditions as provided in regulations are satisfied. The policy underlying section 367(a)(5) is the protection of corporate-level gain on appreciated property following the repeal of the
General Utilities
doctrine. See H.R. Rep. No 795, 100th Cong., 2d Sess. 60 (1988).

The 2008 proposed regulations would implement section 367(a)(5) by providing that, as a general rule, the exceptions to section 367(a)(1) do not apply to a transfer of certain property by the U.S. transferor to a foreign acquiring corporation in a section 361 exchange. An exception to the general rule is provided, at the election of the U.S. transferor and members of the control group (elective exception), subject to conditions that are intended, in part, to ensure that the net gain (if any) realized by the U.S. transferor in connection with the transfer of property subject to section 367(a) (defined as
inside gain
) is, in the aggregate, recognized currently by the U.S. transferor or, to the extent permitted, preserved in the stock received in the reorganization by certain domestic corporate shareholders of the U.S. transferor.

Section 337(d) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made by subtitle D of title VI of the Tax Reform Act of 1986 (concerning the repeal of the
General Utilities
doctrine), including regulations providing for appropriate coordination of the provisions of section 337 with the provisions of the Code relating to taxation of foreign corporations and their shareholders.

2. Calculation of Inside Gain

In addition to the adjusted basis of certain transferred property, for purposes of computing inside gain, the 2008 proposed regulations take into account certain liabilities of the U.S. transferor that would give rise to a deduction when paid (deductible liabilities). Under the 2008 proposed regulations, a deductible liability would be defined as a liability assumed in the section 361 exchange or satisfied in connection with the reorganization (within the meaning of section 361(c)(3)), but only if payment of the liability would give rise to a deduction. Section 361(c)(3) provides that the U.S. transferor recognizes no gain or loss on the satisfaction of a liability with stock received in connection with the reorganization, but does not prevent the U.S. transferor from obtaining a deduction on payment of the liability with the stock received. The policy for allowing a deductible liability to reduce

inside gain is that the U.S. transferor has not received a tax benefit for such liability but the liability reduces the value of the stock received. Accordingly, under the final regulations, a deductible liability is limited to a liability that is assumed in the section 361 exchange if payment of the liability would give rise to a deduction.

Several comments suggested that other tax attributes of the U.S. transferor should also be taken into account in computing inside gain (in particular, net operating losses and foreign tax credits) because those other tax attributes are similar to the adjusted basis of the transferred property and deductible liabilities. Recognizing the complexity that would result if other tax attributes were taken into account, other comments suggested that the final regulations permit the U.S. transferor to elect to recognize an amount of gain sufficient to utilize all or a portion of any additional tax attributes. Another comment, however, considered this recommendation to be inconsistent with the basic approach of section 367(a)(1), which only takes into account the adjusted basis of the transferred property in determining the amount of gain required to be recognized by the U.S. transferor.

The Treasury Department and the IRS believe that taking into account other tax attributes of the U.S. transferor in determining inside gain would substantially increase the complexity of the final regulations and IRS examinations of these transactions. In addition, a U.S. transferor can utilize any other available tax attributes by not electing to apply the elective exception. Accordingly, the comment was not adopted.

3. Built-In Loss in Stock of the U.S. Transferor Corporation

To qualify for the elective exception under the 2008 proposed regulations, each control group member must reduce its adjusted basis (as determined under section 358) in the stock received in the reorganization by the amount (if any) that its portion of the inside gain exceeds the gain (or loss) in that stock (outside gain) but for the application of section 367(a)(5). In certain cases, the required basis adjustment will convert built-in loss stock into built-in gain stock. For example, assume that prior to the application of the elective exception the control group member has a $150x adjusted basis (as determined under section 358) in stock received that has a fair market value of $100x (that is, there is a $50x built-in loss in the stock). If the control group member's share of inside gain is $30x, its adjusted basis in the stock received must be reduced to $70x, resulting in $30x of built-in gain in the stock and eliminating the $50x pre-existing built-in loss.

Several comments suggested that reducing the adjusted basis of built-in loss stock to this extent is inappropriate and recommended that final regulations treat a reduction to an existing built-in loss the same as a reduction to basis that would increase built-in gain. For example, under the previous assumed facts, the approach in these comments would reduce the adjusted basis of the stock by $30x (the control group member's share of inside gain), reducing the built-in loss to $20x.

Another comment recommended that the provisions be modified to preserve both the domestic corporate shareholder's share of inside gain as well as the built-in gain (or loss) existing in the stock received before any required basis adjustment. Specifically, the comment suggested that any outside built-in gain (loss) should be treated as a deferred gain (loss) that would be taken into account based on principles similar to those of section 267(a)(1).

Consistent with the legislative history to section 367(a)(5), the Treasury Department and the IRS believe that the amount of outside built-in gain or loss should not affect the required reduction to the adjusted basis of the stock received in the transaction. That is, the basis must be reduced to an amount such that the gain in the stock corresponds to the proportionate amount of inside gain. See S. Rep. No. 445, 100th Cong., 2d Sess. 62-3 (1988). Therefore, the final regulations do not adopt these recommendations. The final regulations do, however, clarify that if a U.S. transferor does not have inside gain, that is, there is no net built-in gain in the U.S. transferor's assets, stock basis adjustments are not required to be made by control group members, even if the outside stock loss of a control group member is greater than the net built-in loss attributable to the control group member.

4. Disposition of a Significant Amount of Section 367(a) Property

The 2008 proposed regulations would deny the application of the elective exception if, with a principal purpose of avoiding U.S. tax, the foreign acquiring corporation disposes of a significant amount of the property received from the U.S. transferor (disposition rule).

Several comments recommended that the disposition rule be conformed to the provisions of § 1.367(a)-8 concerning gain recognition agreements. Specifically, one comment recommended that a defined period be set for the reach of the disposition rule. In this regard, the gain recognition agreement provisions generally require gain recognition only if a triggering event occurs during the term of the gain recognition agreement, which is the period ending with the close of the fifth full taxable year (not less than 60 months) following the year in which the transfer requiring the gain recognition agreement occurred.

Another comment recommended that the final regulations include provisions similar to those of the gain recognition provisions in § 1.367(a)-8(k)(14) to address nonrecognition transfers of property. Those provisions generally provide that a transfer of assets subject to a gain recognition agreement during the term of the gain recognition agreement in certain nonrecognition transactions will not be triggering events if specified conditions are satisfied. Other comments suggested that this disposition rule is not necessary because § 1.367(a)-2T(c)(1) denies the exception under section 367(a)(3) in certain cases when the transferred property is re-transferred to another person as part of the same transaction.

The Treasury Department and the IRS believe that safeguards in addition to § 1.367(a)-2T(c)(1) are needed in the case of outbound reorganizations that qualify for the elective exception, but agree that adopting certain aspects of the gain recognition agreement provisions is appropriate. Accordingly, the final regulations deny the elective exception only if, with a principal purpose of avoiding U.S. tax, the foreign acquiring corporation disposes of a significant amount of the property received from the U.S. transferor during the 60-month period that begins on the date of distribution or transfer (within the meaning of § 1.381(b)-1(b)), which generally is the date on which the transfer of property by the U.S. transferor to the foreign acquiring corporation is completed.

Furthermore, the final regulations provide that property that is subsequently transferred pursuant to a nonrecognition provision is not treated as disposed of for purposes of the disposition rule, provided such transfer satisfies, and is treated in a manner consistent with the principles underlying § 1.367(a)-8(k) (concerning non-triggering events with respect to gain recognition agreements) and more generally the provisions of § 1.367(a)-8 concerning gain recognition agreements.

Finally, one comment suggested that dispositions of property in the ordinary course of business should not deny the application of the elective exception,

even if the disposition occurs within the two-year “presumption of tax avoidance” period following the reorganization. The Treasury Department and the IRS agree with this comment. Accordingly, the final regulations provide an exception for dispositions of property occurring in the ordinary course of business.

5. Definitions of Section 367(a) Property and Section 367(d) Property

Subject to a special rule, the 2008 proposed regulations define section 367(a) property as any property other than section 367(d) property. The 2008 proposed regulations define section 367(d) property as property to which section 367(d) applies.

In response to a comment, the final regulations clarify that section 367(d) property is property described in section 936(h)(3)(B). Section 367(d)(1) provides that, except as provided in regulations, if a United States person transfers any intangible property (within the meaning of section 936(h)(3)(B)) to a foreign corporation in an exchange described in section 351 or 361, section 367(d) (and not section 367(a)) applies to such transfer. Accordingly, income or gain attributable to the transfer of property by a U.S. person to a foreign corporation in a section 351 exchange or section 361 exchange is taken into account either in accordance with section 367(d)(2)(A)(ii)(I) or (d)(2)(A)(ii)(II), or in accordance with section 367(a) and the regulations thereunder in the case of a section 361 exchange subject to section 367(a)(5). For guidance concerning transfers of section 367(d) property in outbound asset reorganizations, see Notice 2012-39 (IRB 2012-31) (see § 601.601(d)(2)(ii)(
b
) of this chapter).

6. Treatment of a RIC, REIT, or S Corporation

One comment suggested that if the policy of section 367(a)(5) is to preserve U.S. taxing jurisdiction over corporate-level gain, then section 367(a)(5) should not generally apply to a regulated investment company (RIC), real estate investment trust (REIT), or S corporation (collectively, special corporate entities), because those entities generally are not subject to corporate-level tax. The comment further suggested that to the extent those special corporate entities are subject to corporate-level tax, the final regulations should incorporate a targeted gain recognition rule to address those limited situations. In contrast, another comment noted that exempting special corporate entities from the application of section 367(a)(5) could facilitate the use of special corporate entities to avoid U.S. tax. A third comment asserted that, at a minimum, even though special corporate entities may not generally be subject to corporate-level tax, special corporate entities should be permitted to be members of the control group, because the amount of inside gain preserved in stock received by special corporate entities could, when recognized, be wholly or partly subject to U.S. tax in the hands of shareholders of the special corporate entities.

The Treasury Department and the IRS remain concerned about exempting special corporate entities from the application of section 367(a)(5). Section 367(a)(1) addresses transfers of certain appreciated property by a United States person to a foreign corporation in certain nonrecognition exchanges described in subchapter C of the Code. This general rule applies equally to special corporate entities, as it does to any U.S. person, including any domestic corporation. Although special corporate entities are generally not subject to entity-level tax, the underlying income (including built-in gain in assets) flows through to their owners. Because the owners of special corporate entities generally receive a basis determined under section 358 in the shares of the foreign acquiring corporation, preservation of corporate-level tax on the inside gain is not assured.

The Treasury Department and the IRS also remain concerned about allowing special corporate entities to be members of the control group. If a special corporate entity was allowed to be a member of the control group, whether the inside gain preserved in the hands of a special corporate entity is ever subject to U.S. corporate tax would depend on the extent of the domestic corporate ownership of the special corporate entity at the time the gain is recognized. The domestic corporate ownership at the time the gain is recognized may decrease or increase from the time the reorganization occurred.

Accordingly, the final regulations do not adopt the recommendations to provide relief from the application of section 367(a)(5) to special corporate entities, or allow special corporate entities to be control group members.

7. Indirect Stock Ownership

Several comments recommended that the final regulations permit indirect ownership of the U.S. transferor through partnerships or foreign corporations to be taken into account for purposes of satisfying the control requirement of section 367(a)(5). Section 367(a)(5), however, incorporates the control requirement of section 368(c), which requires the direct ownership of stock. Furthermore, there is no indication in the legislative history to section 367(a)(5) that indirect stock ownership should also be considered for this purpose. In addition, as noted in the preamble to the 2008 proposed regulations, the Treasury Department and the IRS are concerned with the additional complexity that would result if indirect ownership were taken into account. Thus, the final regulations do not adopt this recommendation.

8. Treatment of Affiliated Group Members as a Single Corporation

The 2008 proposed regulations provide that members of an affiliated group of corporations (within the meaning of section 1504) are treated as a single corporation for purposes of the control requirement of section 367(a)(5). Several comments stated that the wording of this aggregation rule could be read to suggest that the affiliated group members are also treated as a single corporation for other purposes, including, for example, to determine the amount of any required stock basis adjustments. The final regulations revise the aggregation rule to clarify that affiliated group members are treated as a single corporation only for purposes of the control requirement.

9. Transfers Described in Other Nonrecognition Provisions

The 2008 proposed regulations clarify that section 367(a)(5) applies to a transfer of property described in section 351 if the transfer is also described in section 361(a) or (b). This clarification ensures that the policies underlying section 367(a)(5) are not undermined by transfers described in section 361(a) or (b) that also qualify for nonrecognition under section 351.

One comment suggested that transfers described in section 361(a) or (b) could also be described in nonrecognition provisions other than section 351, such as section 354. In response to this comment, the general rule in the final regulations is modified to provide that, unless an exception applies, the U.S. transferor recognizes any gain realized with respect to section 367(a) property. Thus, for purposes of recognizing gain under the general rule it is irrelevant whether, in addition to section 361(a) or (b), the transfer is also eligible for nonrecognition treatment under other exchanges enumerated in section 367(a)(1). Moreover, the general rule is issued under regulatory authority granted under both section 367(a)(5) and section 337(d). Accordingly, if a transfer of items of property that is described in

section 361(a) or (b) is also described in a nonrecognition provision that is not enumerated in section 367(a)(1) (such as section 1036), the U.S. transferor recognizes gain or loss realized on the transfer of such items of property, but the amount of loss recognized on the property shall not exceed the amount of gain recognized on the property. The Treasury Department and the IRS believe that permitting the recognition of losses to the extent of gains in such a case is consistent with the repeal of the
General Utilities
doctrine. See section 337(d). However, losses described in the prior sentence may be subject to other limitations, including, for example, section 267(f).

10. Other Clarifications and Modifications

The 2008 proposed regulations provide for various determinations to be made “at the time of the section 361 exchange,” and therefore do not take into account the possibility that the property of the U.S. transferor may not be transferred on a single date to the foreign acquiring corporation. Accordingly, the final regulations no longer use the phrase “at the time of the section 361 exchange” as the time for making certain determinations required under the regulations. For example, under the final regulations the determination as to whether the control requirement is satisfied is instead made immediately before the reorganization.

Under the final regulations, the computation of a shareholder's ownership interest percentage in the U.S. transferor for purposes of various calculations also generally must be made immediately before the reorganization. However, the final regulations further revise the computation of the ownership interest percentage to take into account certain distributions by the U.S. transferor of a portion of its property. Specifically, under the final regulations, the ownership interest percentage is determined after taking into account any distribution by the U.S. transferor of money or other property not received from the foreign acquiring corporation in exchange for property of the U.S. transferor acquired in the section 361 exchange.

The final regulations remove references in the 2008 proposed regulations to stock that is deemed received because references to stock received necessarily include stock that is deemed received. No substantive change is intended by the removal of references to stock that is deemed received. Similarly, in describing a control group member's stock basis adjustments, the final regulations remove references to blocks of stock because such references are not necessary to the determination of which basis in stock is reduced. No substantive change is intended by this modification.

The 2008 proposed regulations contain a reasonable cause relief provision in § 1.367(a)-7(e)(2), pursuant to which a control group member's failure to timely comply with any requirement of § 1.367(a)-7 will be deemed not to have occurred if the failure was due to reasonable cause and not willful neglect. The reasonable cause relief provision includes a provision that the control group member will be deemed to have established that the failure to comply was due to reasonable cause and not willful neglect if the control group member requesting relief is not notified by the IRS within 120 days of IRS acknowledgement of receipt of the request. As discussed in the preamble to temporary regulation published elsewhere in this issue of the
Federal Register
, the Treasury Department and the IRS believe it is appropriate to eliminate the 120-day provision from the reasonable cause relief provision of § 1.367(a)-7(e)(2). Other than the elimination of the 120-day provision, the reasonable cause relief provision is retained in the temporary regulations.

Other modifications to § 1.367(a)-7 are generally intended to coordinate the rules with other provisions, such as §§ 1.367(a)-3T(e), 1.367(b)-4, 1.1248(f)-1, and 1.1248(f)-2, when the property transferred in the section 361 exchange is stock or securities.

B. Other Regulations Under Section 367(a)

The 2008 proposed regulations would modify § 1.367(a)-1T(b)(4)(i)(B) to provide that an increase in basis under section 362 for gain recognized by the U.S. transferor under section 367(a) is allocated among the transferred property with respect to which gain is recognized in proportion to the gain realized by the U.S. transferor.

The final regulations clarify this rule to provide that if gain is recognized under section 367 with respect to a particular item of property, the foreign transferee corporation increases its basis in that item of property for such gain. The final regulations further clarify that any gain recognized that is not with respect to a particular item of property (for example, gain recognized under the branch loss recapture rules) is then allocated in proportion to the gain realized by the U.S. transferor with respect to all items of property transferred, but for this purpose the gain realized is determined after taking into account gain recognized under other provisions of section 367 that apply with respect to particular items of property.

C. Regulations Under Section 367(b)

1. Modified Example 4 of § 1.367(b)-4(b)(1)

Final regulations issued under section 367(b) on January 24, 2000, provide that if a U.S. transferor that is a section 1248 shareholder of a foreign acquired corporation transfers the stock of such corporation to a foreign acquiring corporation in a section 361 exchange, the U.S. transferor must include in income the section 1248 amount attributable to the stock of the foreign acquired corporation. As part of the analysis, the final regulations state that immediately after the exchange, the U.S. transferor is not a section 1248 shareholder because the stock of the U.S. transferor is cancelled. This is the case even if the foreign acquiring corporation and the foreign acquired corporation are controlled foreign corporations (within the meaning of § 1.367(b)-2(a)). See § 1.367(b)-4(b)(1)(iii),
Example 4.
The 2008 proposed regulations would modify § 1.367(b)-4(b)(1)(iii),
Example 4,
to provide that the requirements in § 1.367(b)-4(b)(1)(i)(B) are applied immediately after the section 361 exchange (and before the distribution of the foreign stock under section 361(c)(1)).

One comment requested that the analysis in
Example 4,
as revised by the 2008 proposed regulations, be clarified to address the fact that the stock of the foreign corporation received in the transaction is immediately distributed by the U.S. transferor. That is, the comment questioned whether the analysis has the effect of respecting the transitory ownership of stock for purposes of applying § 1.367(b)-4. The comment further noted that Revenue Ruling 83-23 (1983-1 CB 82) disregards transitory ownership of stock for purposes of applying the section 367(b) regulations then in effect.

Unless otherwise provided, judicial doctrines and principles, such as substance-over-form and the step-transaction doctrine, apply in determining whether the conditions for an income inclusion under § 1.367(b)-4(b)(1) are satisfied, just as such principles and doctrines apply for purposes of determining the appropriate treatment of a transaction under any provision of section 367 (and more generally, section 1248). Thus, for example, an issuance of stock by the

foreign acquiring corporation in connection with the exchange being tested under § 1.367(b)-4 would be taken into account in determining whether an income inclusion under § 1.367(b)-4(b)(1) is required. Nevertheless, for purposes of applying § 1.367(b)-4(b)(1), the Treasury Department and the IRS believe it is appropriate to respect the ownership of stock by the U.S. transferor in the context of outbound section 361 exchanges (such as the transaction addressed in
Example 4
). This treatment is appropriate because the section 1248 amount in the stock of the foreign acquired corporation will, in the aggregate, either be preserved in the hands of certain domestic corporate shareholders of the U.S. transferor pursuant to § 1.1248(f)-2(c), or be included in the gross income of the U.S. transferor as a result of the distribution of such stock under section 361(c) pursuant to § 1.1248(f)-1(b)(3). Accordingly, the final regulations provide that in the case of an outbound transfer of stock of a foreign corporation in a section 361 exchange, the requirements of § 1.367(b)-4(b)(1)(ii)(B) apply after the section 361 exchange, but prior to and without taking into account the U.S. transferor's distribution under section 361(c)(1).

2. Other Modifications to § 1.367(b)-4

The final regulations modify § 1.367(b)-4(b)(1) by expanding the type of exchanges for which an income inclusion is not required to include a section 361 exchange of foreign stock by a foreign target that is itself acquired in a triangular asset reorganization involving stock of a domestic controlling (parent) corporation. Furthermore, the final regulations modify the format and organization of § 1.367(b)-4(a) and (b)(1) to clarify its application.

D. Section 1248(f) Regulations and Section 1.1248-8

1. Section 337 Distributions

The 2008 proposed regulations under section 1248(f) would provide exceptions to the operative rule of section 1248(f)(1) that requires a domestic corporation (distributing corporation) that distributes stock of certain foreign corporations under sections 337, 355(c)(1), or 361(c)(1) to include in income the section 1248 amount (if any) in the foreign stock distributed. Except in the case of a section 337 distribution, the exceptions apply only if an affirmative election is made (assuming the requirements for making the election are satisfied). The requirements for the election include making adjustments to the basis and holding period of the stock in the hands of the distributee to the extent necessary to preserve the section 1248 amount in the foreign stock in the hands of the distributee. In the case of a section 337 distribution, the exception applies if certain conditions are satisfied without the need to make adjustments to the basis or holding period of the distributed stock, which should generally be the case. However, the Treasury Department and the IRS believe that taxpayers should be permitted to elect to make any necessary basis and holding period adjustments to avoid a section 1248 inclusion for section 337 distributions. The final regulations are modified accordingly.

2. Section 361(c)(1) Distributions of Stock Involving Section 361 Exchanges

(a) Interaction With Regulations Under Section 367(a)

Application of the 2008 proposed regulations under section 1248(f), in combination with the 2008 proposed regulations under § 1.367(a)-7, could in certain cases result in aggregate basis adjustments and gain recognition (or deemed dividend inclusions) that exceed the built-in gain in the property transferred by the U.S. transferor in the section 361 exchange. The final regulations are modified to address this result.

(b) Allocation of Section 358 Basis to Portions of a Share

If in a section 361 exchange the U.S. transferor transfers property, other than a single block of stock of a foreign corporation with respect to which the U.S. transferor is a section 1248 shareholder, each share of stock of the foreign distributed corporation is required to be divided into portions. The 2008 proposed regulations would provide that for purposes of computing basis in a portion of a share of stock of the foreign distributed corporation, the distributee section 1248 shareholder's section 358 basis in that share is allocated to a portion of a share pro rata based on the fair market value of the property to which the portion relates relative to the aggregate fair market value of all property received by the foreign distributed corporation.

The final regulations modify this rule, providing that the distributee's section 358 basis in a share of the distributed foreign corporation is allocated to a portion of a share pro rata based on the basis of the property to which the portion relates relative to the aggregate basis of all property received by the foreign distributed corporation. As a result of this modification, the aggregate built-in gain in the respective portion of all shares to which a block of foreign stock transferred with a section 1248 amount relates will more closely match the built-in gain in such foreign stock transferred. Because the section 1248 amount is limited to the built-in gain in the stock, the modification will minimize basis reductions to portions of shares that may otherwise be required to preserve the section 1248 amount in foreign stock transferred.

(c) Preservation of the Section 1248(f) Amount

The 2008 proposed regulations would provide that if the section 1248(f) amount attributable to a portion of a share of stock (including a whole share, if appropriate) of the foreign distributed corporation received by a distributee section 1248 shareholder in the distribution exceeds the distributee section 1248 shareholder's postdistribution amount in the portion (excess amount), then the distributee section 1248 shareholder's section 358 basis in the portion is reduced by the excess amount.

The final regulations modify the 2008 proposed regulations to provide that the section 358 basis in the portion is not reduced below zero, and therefore to the extent the excess amount exceeds the section 358 basis in the portion, the domestic distributing corporation must include that portion of the section 1248(f) amount attributable to the portion of the share in gross income as a dividend. The excess amount can exceed the section 358 basis in the portion, for example, where the section 1248(f) amount attributable to the control group member exceeds the inside gain attributable to the control group member.

The Treasury Department and the IRS considered whether a distributee required to decrease basis in a portion of a share should be allowed to increase the basis in another portion of the same share or in another share (or portion thereof). Due to additional complexities that would arise from such rules, such as ensuring that the basis increase does not decrease the section 1248(f) amount in another portion or create (or increase) a built-in loss in another portion, the Treasury Department and the IRS decline to provide such rules. However, the modification made by the final regulations providing that the section 358 basis in a share of stock is allocated among portions of such share of stock based on the basis (rather than the fair market value) of the property transferred to the foreign distributed corporation in the section 361 exchange will, in many

cases, minimize the amount of basis decreases.

(d) Multiple Classes of Stock

The 2008 proposed regulations did not provide rules for situations in which multiple classes of stock of the foreign distributed corporation are received. The final regulations provide that if multiple classes of stock are received by a control group member, the section 1248(f) amount “traced” to such control group member is attributed to a share (or portion of a share) of stock received by the control group member based on the ratio of the fair market value of such share to the fair market value of all shares received by the control group member. Furthermore, the final regulations make consistent modifications to the regulations under § 1.1248-8 (concerning the attribution of section 1248 earnings and profits of stock of a foreign corporation transferred in a section 361 exchange to a share or portion of a share of stock of the foreign distributed corporation received by a section 1248 shareholder).

3. Other Modifications to the Section 1248(f) Regulations

The final regulations clarify that if the domestic distributing corporation distributes stock of the foreign distributed corporation that it did not receive in a section 361 exchange (existing stock) in addition to stock of the foreign distributed corporation that it did receive in the section 361 exchange (new stock), then certain rules apply to the existing stock and another set of rules apply to the new stock. This could occur, for example, if the domestic distributing corporation owns an existing foreign subsidiary and as part of the plan that includes a distribution of that stock that qualifies under section 355, the domestic distributing corporation contributes additional property to the foreign subsidiary in exchange for additional stock of the foreign subsidiary.

The final regulations refer to a distribution of stock that is not received in a section 361 exchange as an “existing stock distribution,” and a distribution of stock received in a section 361 exchange as a “new stock distribution.”

The 2008 proposed regulations contain a reasonable cause relief provision in § 1.1248(f)-3, pursuant to which a reporting person's failure to timely comply with any requirement of § 1.1248(f)-2 will be deemed not to have occurred if the failure was due to reasonable cause and not willful neglect. The reasonable cause relief provision includes a provision that the reporting person will be deemed to have established that the failure to comply was due to reasonable cause and not willful neglect if the control group member requesting relief is not notified by the IRS within 120 days of IRS acknowledgement of receipt of the request. As discussed in the preamble to temporary regulation published elsewhere in this issue of the
Federal Register
, the Treasury Department and the IRS believe it is appropriate to eliminate the 120-day provision from the reasonable cause relief provision of § 1.1248(f)-3. Other than the elimination of the 120-day provision, the reasonable cause relief provision is retained in the temporary regulations.

E. Definition of “Sale or Exchange” for Purposes of Section 1248

The 2008 proposed regulations amended § 1.1248-1(b) to clarify the definition of the term “sale or exchange” to include gain recognized under section 301(c)(3). No changes to § 1.1248-1(b) are included as part of these final regulations because after issuance of the 2008 proposed regulations a temporary regulation was issued that included this amendment. See § 1.1248-1T(b), issued in TD 9444 (February 10, 2009), and changes finalized by TD 9585 (April 24, 2012).

F. Regulations Under Section 6038B

The 2008 proposed regulations contain various reporting requirements. For example, the 2008 regulations under section 6038B describe how the U.S. transferor makes the election under § 1.367(a)-7(c), including requiring the U.S. transferor to file a statement containing specified information. The final regulations identify certain additional items of information that must be included with the statement making the election. The 2008 regulations also require the U.S. transferor to file a statement agreeing to file an amended return in certain cases if the foreign acquiring corporation subsequently disposes of a significant amount of section 367(a) property acquired in the section 361 exchange. The final regulations modify the disposition rules to provide that certain dispositions of section 367(a) property are not dispositions for this purpose.

Finally, as discussed in the preamble to temporary regulation published elsewhere in this issue of the
Federal Register
, the Treasury Department and the IRS believe it is appropriate to eliminate the 120-day provision from the reasonable cause relief procedures of § 1.6038B-1(f)(3). Other than the elimination of the 120-day provision, the reasonable cause relief provision is retained in the temporary regulations.

G. Elimination of Coordination Rule Exception in § 1.367(a)-3(d)(2)(vi)(B)(1)(i)

Section 1.367(a)-3(d)(2)(vi)(A) (coordination rule) provides that if in connection with an indirect stock transfer, as defined in § 1.367(a)-3(d)(1), a U.S. person transfers assets to a foreign corporation (direct asset transfer) in an exchange described in sections 351 or 361, the rules of section 367 and the regulations under that section apply first to the direct asset transfer and then to the indirect stock transfer. However, the regulations provide two exceptions to the coordination rule for asset reorganizations to the extent the foreign acquiring corporation re-transfers the transferred assets to a controlled domestic corporation, but only if such domestic corporation's basis in the re-transferred assets is not greater than the U.S. transferor corporation's basis in the assets and the conditions in either paragraph § 1.367(a)-3(d)(2)(vi)(B)(
1
)(
i
) or (d)(2)(vi)(b)(
1
)(
ii
) are satisfied. The 2008 proposed regulations would modify the exceptions to the coordination rule exceptions, including clarifications described in Notice 2008-10 (2008-1 CB 277).

As discussed in the preamble to temporary regulations published elsewhere in this issue of the
Federal Register
, the Treasury Department and the IRS believe it is appropriate to eliminate the coordination rule exception under § 1.367(a)-3(d)(2)(vi)(B)(
1
)(
i
). The coordination rule exception in § 1.367(a)-3(d)(2)(vi)(B)(
1
)(
ii
) is retained in the temporary regulations.

H. Effective/Applicability Dates

1. Regulations Under Sections 367(a) and 6038B

Section 1.367(a)-7 and the revisions to §§ 1.367(a)-1 and 1.6038B-1 apply to transfers occurring on or after April 18, 2013.

2. Regulations Under Sections 367(b) and 1248

The 2008 proposed regulations provide that the rules under sections 367(b) and 1248(f), including the modification to
Example 4
of § 1.367(b)-4(b)(1)(iii), apply to distributions or exchanges, respectively, occurring on or after the date that is 30 days after the date the regulations are published as final regulations in the
Federal Register
.

Comments requested that taxpayers be allowed to rely on the modifications to

Example 4
of § 1.367(b)-4(b)(1)(iii) and § 1.1248-8, and the regulations under section 1248(f) for all open tax years. Other comments requested that these regulations be effective on the date the regulations are published as final regulations in the
Federal Register
, rather than 30 days after such date.

The Treasury Department and the IRS do not believe that taxpayers should be able to rely on the modifications to
Example 4
of § 1.367(b)-4(b)(1)(iii) and § 1.1248-8, and the regulations under section 1248(f) prior to the effective date. Taxpayers must apply section 1248(f), which does not include the exceptions provided in § 1.1248(f)-2 for such prior periods. Accordingly, distributions described in section 1248(f)(1) during such period result in an inclusion unless the exception described in section 1248(f)(2) applies. Similarly, taxpayers must take into account
Example 4
of § 1.367(b)-4(b)(1)(iii) (before amendment by these final regulations) for such prior periods. The Treasury Department and the IRS also believe, because the regulations under sections 367(b) and 1248(f) operate together with the rules of § 1.367(a)-7, the provisions should be subject to consistent effective dates. Therefore, the final regulations retain the 30-day delay in the effective date for these rules.

Modifications to § 1.1248-6 apply to a sale, exchange, or other disposition of the stock of a domestic corporation on or after September 21, 1987.

Subject to rules implementing the effective dates announced in Notice 87-64 (1987-2 CB 375), the final regulations under section 1248(f) are applicable as of the date that is 30 days following the issuance of the final regulations.

Availability of IRS Documents

IRS notices cited in this preamble are made available by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Effect on Other Documents

The following publication is obsolete as of April 18, 2013:

Notice 87-64 (1987-2 CB 375).

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act (5 U.S.C. Chapter 6) apply to these regulations.

It is hereby certified that the collection of information contained in this regulation will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. These regulations primarily will affect large domestic corporations that transfer property to a foreign corporation in certain corporate reorganizations. Thus, the number of affected small entities will not be substantial. Small domestic corporations could be shareholders of a larger domestic corporation involved in a transaction subject to the regulations, and the small domestic corporations could be required to make certain adjustments to basis and holding period under the regulations. However, the exceptions requiring the adjustments are elective and, moreover, the Treasury Department and the IRS do not anticipate the number of these shareholders to be substantial. Furthermore, the Treasury Department and the IRS estimate that any small entities that are affected by the regulations will likely face a burden of approximately ten hours (at an hourly rate of $200) from the adjustments made to the basis of the stock received in the reorganization. Considering that the collections of information enable taxpayers to defer or avoid the recognition of potentially large amounts of gain, the Treasury Department and the IRS believe that $2,000 is not a significant economic impact. Pursuant to section 7805(f), the notice of proposed rule making preceding this regulation was submitted to the Administrator of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Robert B. Williams, Jr. of the Office of Associate Chief Counsel (International) and Sean W. Mullaney, formerly of the Office of Associate Chief Counsel (International); however, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects

26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602
Reporting and recordkeeping requirements.

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 is amended by adding entries in numerical order to read in part as follows:

Authority:

26 U.S.C. 7805 * * *

Section 1.367(a)-1 also issued under 26 U.S.C. 367(a).

Section 1.367(a)-1T also issued under 26 U.S.C. 367(a).

Section 1.367(a)-3 also issued under 26 U.S.C. 367(a).

Section 1.367(a)-7 also issued under 26 U.S.C. 367(a), (b), (c), and 337(d).

Section 1.367(a)-8 also issued under 26 U.S.C. 367(a).

Section 1.367(b)-0 also issued under 26 U.S.C. 367(b).

Section 1.367(b)-4(b)(1) also issued under 26 U.S.C. 367(b).

Section 1.367(b)-6 also issued under 26 U.S.C. 367(b).

Section 1.367(e)-1(a) also issued under 26 U.S.C. 367(e).

Section 1.1248-1 also issued under 26 U.S.C. 1248(a)

Section 1.1248-6 also issued under 26 U.S.C. 1248(e).

Section 1.1248-8(b)(2)(iv) also issued under 26 U.S.C. 367(b), 1248(a), (c), and (f).

Section 1.1248(f)-1 also issued under 26 U.S.C. 367(b) and 1248(f).

Section 1.1248(f)-2 also issued under 26 U.S.C. 367(b) and 1248(f).

Section 1.1248(f)-3 also issued under 26 U.S.C. 367(b) and 1248(f).

Section 1.6038B-1 also issued under 26 U.S.C. 6038B.

Par. 2.
Section 1.367(a)-1 is amended by:

1. Adding paragraphs (b)(4)(i)(B) and (C).
2. Adding paragraph (g)(4).
The additions read as follows:

§ 1.367(a)-1
Transfers to foreign corporations subject to section 367(a): In general.
(a) through (b)(4)(i)(A) [Reserved]. For further guidance see § 1.367(a)-1T(a) through (b)(4)(i)(A).

(B) Appropriate adjustments to earnings and profits, basis, and other affected items will be made according to otherwise applicable rules, taking into account the gain recognized under section 367(a)(1). For purposes of applying section 362, the foreign corporation's basis in the property received is increased by the amount of gain recognized by the U.S. transferor under section 367(a) and the regulations issued pursuant to that section. To the extent the regulations provide that the U.S. transferor recognizes gain with

respect to a particular item of property, the foreign corporation increases its basis in that item of property by the amount of such gain recognized. For example, §§ 1.367(a)-3, 1.367(a)-4T, and 1.367(a)-5T provide that gain is recognized with respect to particular items of property. To the extent the regulations do not provide that gain recognized by the U.S. transferor is with respect to a particular item of property, such gain is treated as recognized with respect to items of property subject to section 367(a) in proportion to the U.S. transferor's gain realized in such property, after taking into account gain recognized with respect to particular items of property transferred under any other provision of section 367(a). For example, § 1.367(a)-6T provides that branch losses must be recaptured by the recognition of gain realized on the transfer but does not associate the gain with particular items of property. See also § 1.367(a)-1T(c)(3) for rules concerning transfers by partnerships or of partnership interests.

(C) The transfer will not be recharacterized for U.S. Federal tax purposes solely because the U.S. person recognizes gain in connection with the transfer under section 367(a)(1). For example, if a U.S. person transfers appreciated stock or securities to a foreign corporation in an exchange described in section 351, the transfer is not recharacterized as other than an exchange described in section 351 solely because the U.S. person recognizes gain in the transfer under section 367(a)(1).

(b)(4)(ii) through (d)(2) [Reserved]. For further guidance see § 1.367(a)-1T(b)(4)(ii) through (d)(2).

(d)(4) through (g)(3) [Reserved]. For further guidance see § 1.367(a)-1T(d)(4) through (g)(3).

(4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this section apply to transfers occurring on or after April 18, 2013. For guidance with respect to paragraph (b)(4)(i)(B) of this section before April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012.

Par. 3.
Section 1.367(a)-1T is amended by revising paragraph (b)(4)(i)(B) and adding paragraphs (b)(4)(i)(C) and (g)(4) to read as follows:

§ 1.367(a)-1T
Transfers to foreign corporations subject to section 367(a): In general (temporary).

(b) * * *

(4) * * *

(i) * * *

(B) [Reserved]. For further guidance see § 1.367(a)-1(b)(4)(i)(B).

(C) [Reserved]. For further guidance see § 1.367(a)-1(b)(4)(i)(C).

(g) * * *

(4) [Reserved]. For further guidance see § 1.367(a)-1(g)(4).

Par. 4.
Section 1.367(a)-3 is amended by:

1. Revising the second sentence of paragraph (a)(3).
2. Revising paragraphs (b)(1) and (c)(1).

3. Adding a sentence at the end of paragraph (d)(2)(vi)(D)(
2
).

4. Revising paragraph (d)(3),
Example 6A
(ii).

5. Adding a sentence between the second and third sentences of paragraph (d)(3),
Example 8
(ii).

6. Revising the first sentence of paragraph (d)(3),
Example 8B
(ii).

7. Revising the first sentence of paragraph (d)(3),
Example 8C
(ii).

8. Revising the third sentence of paragraph (d)(3),
Example 10
(ii).

9. Revising paragraph (d)(3),
Example 11
(ii).

10. Revising the second and third sentences of paragraph (d)(3),
Example 12
(ii), and removing the last sentence.

11. Revising paragraph (d)(3),
Example 16
(ii).

12. Revising the paragraph (g) subject heading.
13. Revising paragraph (g)(1)(v)(A) and (B).
The revisions and additions to read as follows:

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

(3) * * * For additional rules regarding a transfer of stock or securities in an exchange described in section 361(a) or (b), see § 1.367(a)-7. * * *

(b)
Transfers of stock or securities of foreign corporations
—(1)
General rule.
Except as provided in paragraph (e) of this section, a transfer of stock or securities of a foreign 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 will not be subject to section 367(a)(1) if either—

(c)
Transfers of stock or securities of domestic corporations
—(1)
General rule.
Except as provided in paragraph (e) of this section, 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 will 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:

(d) * * *

(2) * * *

(vi) * * *

(D) * * *

(
2
) * * * For this purpose, a disposition by the foreign acquiring corporation of stock of the domestic controlled corporation more than 5 years after completion of the transfer described in paragraph (d)(2)(vi)(A) of this section is deemed to not have a principal purpose of tax avoidance.

(3) * * *

Example 6A.
* * *

(ii)
Result.
The transfer of the Business A assets by Z to F does not constitute an indirect stock transfer under paragraph (d) of this section, and, subject to the conditions and requirements of section 367(a)(5) and § 1.367(a)-7(c), the Business A assets qualify for the section 367(a)(3) active trade or business exception and are not subject to section 367(a)(1). The transfer of the Business B and C assets by Z to F must first be tested under sections 367(a)(1), (a)(3), and (a)(5). Z recognizes $20 of gain on the outbound transfer of the Business C assets, as those assets do not qualify for an exception to section 367(a)(1). Subject to the conditions and requirements of section 367(a)(5) and § 1.367(a)-7(c), the Business B assets qualify for the active trade or business exception under section 367(a)(3). Pursuant to paragraphs (d)(1) and (d)(2)(vii)(A)(
2
) of this section, V is deemed to transfer the stock of a foreign corporation to F in a section 354 exchange subject to the rules of paragraphs (b) and (d) of this section. V must enter into the gain recognition agreement in the amount of $30 to preserve Z's nonrecognition treatment with respect to its transfer of Business B assets. Under paragraphs (d)(2)(i) and (d)(2)(ii) of this section, F is the transferee foreign corporation and R is the transferred corporation.

Example 8.
* * *

(ii) * * * Subject to the conditions and requirements of section 367(a)(5) and § 1.367(a)-7(c), the Business B assets qualify for the active trade or business exception under section 367(a)(3). * * *

Example 8B.
* * *

(ii) * * * Under section 367(a)(5) and § 1.367(a)-7(b), the active trade or business exception under section 367(a)(3) does not apply to Z's transfer of assets to R. * * *

Example 8C.
* * *

(ii) * * * Under section 367(a)(5) and § 1.367(a)-7(b), the active trade or business exception under section 367(a)(3) does not apply to Z's transfer of assets to R. * * *

Example 10.
* * *

(ii) * * * Subject to the conditions and requirements of section 367(a)(5) and § 1.367(a)-7(c), the Business B assets qualify

for the active trade or business exception under section 367(a)(3). * * *

Example 11.
* * *

(ii)
Result.
Under paragraph (d)(1)(ii) of this section, V is treated as indirectly transferring Z stock to F. V must recognize gain on its indirect transfer of Z stock to F under section 367(a) (and section 1248 will be applicable) if V does not enter into a gain recognition agreement with respect to the indirect stock transfer in accordance with § 1.367(a)-8. Under paragraph (b)(2) of this section, if V enters into a gain recognition agreement with respect to the indirect stock transfer, the exchange will be subject to the provisions of section 367(b) and the regulations pursuant to such section as well as section 367(a). Under § 1.367(b)-4(b), however, no income inclusion is required because, immediately after the exchange, F and Z are controlled foreign corporations with respect to which V is a section 1248 shareholder. Under paragraphs (d)(2)(i) and (d)(2)(ii) of this section, the transferee foreign corporation is F, and the transferred corporation is Z (the acquiring corporation). If F disposes (within the meaning of § 1.367(a)-8(j)(1)) of all (or a portion) of Z stock within the term of the gain recognition agreement, V must either file an amended return for the year of the indirect stock transfer and include in income, with interest, the gain realized but not recognized on the initial exchange or if a valid election under § 1.367(a)-8(c)(2)(vi) was made, currently recognize the gain and pay the related interest. Under paragraph (d)(2)(v)(B) of this section, to determine whether, for purposes of the gain recognition agreement, Z (the transferred corporation) disposes of substantially all of its assets, only the assets held by Z immediately before the transaction are taken into account. Because D is wholly owned by F, a foreign corporation, the control requirement of section 367(a)(5) and § 1.367(a)-7(c)(1) cannot be satisfied. Therefore, section 367(a)(5) and § 1.367(a)-7(b) preclude the application of the active trade or business exception under section 367(a)(3) to any property transferred by D to Z. Thus, under section 367(a)(1), D must recognize the gross amount of gain in each asset transferred to Z, or $40.

Example 12.
* * *

(ii) * * * Subject to the conditions and requirements of section 367(a)(5) and § 1.367(a)-7(c), the active trade or business exception under section 367(a)(3) applies to E's transfer of Business X assets. E's transfer of its N stock could qualify for nonrecognition treatment if D satisfies the requirements in § 1.367(a)-3T(e)(3). * * *

Example 16.
* * *

(ii)
Result.
The section 368(a)(1)(D) reorganization is not an indirect stock transfer described in paragraph (d) of this section. Moreover, the section 354 exchange by D of F1 stock for F2 stock is not an exchange described under section 367(a). See paragraph (a)(2)(ii) of this section.

(g)
Effective/applicability dates.

(1) * * *

(v) * * *

(A) Except as provided in paragraphs (g)(1)(v)(B) of this section and § 1.367(a)-3T(g)(1)(ix), the rules of paragraph (d)(2)(vi) of this section apply only to transactions occurring on or after January 23, 2006. See § 1.367(a)-3(d)(2)(vi), as contained in 26 CFR part 1 revised as of April 1, 2005, for transactions occurring on or after July 20, 1998, and before January 23, 2006.

(B)(
1
) For purposes of paragraph (d)(2)(vi)(B)(
1
) of this section as contained in 26 CFR part 1 revised as of April 1, 2007, except as provided in paragraph (g)(1)(v)(B)(
3
) of this section, the following conditions must be satisfied for transactions occurring on or after December 28, 2007, and before March 18, 2013: The conditions and requirements of section 367(a)(5) and paragraph (g)(1)(v)(B)(
2
) of this section must be satisfied with respect to the domestic acquired corporation's transfer of assets to the foreign acquiring corporation and those conditions and requirements apply before the application of the exception under paragraph (d)(2)(vi)(B)(
1
) of this section as contained in 26 CFR part 1 revised as of April 1, 2007.

(
2
) The domestic acquired corporation is controlled (within the meaning of section 368(c)) by five or fewer (but at least one) domestic corporations (controlling domestic corporations) immediately before the reorganization, appropriate basis adjustments under section 367(a)(5) are made to the stock received by the controlling domestic corporations in the reorganization, and any other conditions as provided in regulations under section 367(a)(5) are satisfied. For purposes of determining whether the domestic acquired corporation is controlled by five or fewer domestic corporations, all members of the same affiliated group within the meaning of section 1504 are treated as one corporation. Any adjustments to stock basis required under section 367(a)(5) must be made to the stock received by the controlling domestic corporation in the reorganization so the appropriate amount of built-in gain in the property transferred by the domestic acquired corporation to the foreign acquiring corporation in the section 361 exchange is reflected in the stock received. The basis adjustment requirement cannot be satisfied by adjusting the basis in stock of the foreign acquiring corporation held by the controlling domestic corporation before the reorganization. To the extent the appropriate amount of built-in gain in the property transferred by the domestic acquired corporation to the foreign acquiring corporation in the section 361 exchange cannot be preserved in the stock received by the controlling domestic corporation in the reorganization, the domestic acquired corporation's transfer of property to the foreign acquiring corporation is subject to section 367(a) and (d).

(
3
) For transactions occurring on or after August 19, 2008, and before March 18, 2013, the following condition also applies: To the extent any of the re-transferred assets constitute property to which section 367(d) applies, the exception under paragraph (d)(2)(iv)(B)(
1
) of this section, as contained in 26 CFR part 1 revised as of April 1, 2007, applies only if the property to which section 367(d) applies is treated as property subject to section 367(a) for purposes of satisfying the conditions and requirements of section 367(a)(5).

Par. 5.
Section 1.367(a)-7 is added to read as follows:

§ 1.367(a)-7
Outbound transfers of property described in section 361(a) or (b).

(a)
Scope and purpose.
This section provides rules under section 367(a)(5) that apply to the transfer of certain property (including stock or securities) by a domestic corporation (U.S. transferor) to a foreign corporation (foreign acquiring corporation) in a section 361 exchange. This section applies only to the transfer of section 367(a) property. See section 367(d) for rules applicable to transfers of section 367(d) property. Paragraph (b) of this section provides the general rule requiring the recognition of gain on the transfer of section 367(a) property, while paragraph (c) of this section provides an elective exception to the general rule that is available if certain requirements are satisfied. Paragraph (d) of this section provides rules for applying the elective exception to a section 361 exchange followed by successive distributions to which section 355 applies. Paragraph (e) of this section provides rules for recognizing gain on section 367(a) property, reasonable cause relief provisions, an anti-abuse rule, and special rules that take into account income inclusions under § 1.367(b)-4 and gain recognition under § 1.367(a)-6T. Paragraph (f) of this section provides definitions, and paragraph (g) of this section provides examples. Paragraph (h) of this section provides applicable cross-references, paragraph (i) of this section is reserved, and paragraph (j) of this section provides effective/applicability dates.

(b)
General rule
—(1)
Nonrecognition exchanges enumerated in section 367(a)(1).
Except to the extent provided in paragraphs (b)(2) and (c) of this

section, the exceptions to section 367(a)(1) provided in section 367(a) and the regulations under that section do not apply to a transfer of section 367(a) property by a U.S. transferor to a foreign acquiring corporation in a section 361 exchange, and the U.S. transferor shall recognize any gain (but not loss) realized with respect to the section 367(a) property under section 367(a)(1). Realized gain is recognized pursuant to the prior sentence notwithstanding the application of any other nonrecognition provision enumerated in section 367(a)(1) to the transfer (such as section 351 or 354).

(2)
Nonrecognition exchanges not enumerated in section 367(a)(1).
To the extent a transfer of items of property described in paragraph (b)(1) of this section also qualifies for nonrecognition under a provision that is not enumerated in section 367(a)(1) (such as section 1036), the U.S. transferor recognizes gain or loss realized on the transfer of such items of property, but the amount of loss recognized on the property shall not exceed the amount of gain recognized on the property. See section 337(d).

(c)
Elective exception.
Except to the extent provided in paragraph (d) of this section, paragraph (b) of this section does not apply to the transfer of section 367(a) property by a U.S. transferor to a foreign acquiring corporation in a section 361 exchange if the conditions of paragraphs (c)(1), (c)(2), (c)(3), and (c)(4) of this section are satisfied, and an election to apply the exception provided by this paragraph (c) is made in the manner provided by paragraph (c)(5) of this section. If this paragraph (c) applies to the section 361 exchange, see, for example, §§ 1.367(a)-2T, 1.367(a)-3T, 1.367(a)-4T, 1.367(a)-5T, or 1.367(a)-6T, as applicable, for additional requirements that must be satisfied in order for the U.S. transferor to not recognize gain under section 367(a)(1) on the transfer of section 367(a) property in the section 361 exchange. Nothing in this section provides for the nonrecognition of gain not otherwise permitted under another provision of the Internal Revenue Code (Code) or the regulations.

(1)
Control.
Immediately before the reorganization, the U.S. transferor is controlled (within the meaning of section 368(c)) by five or fewer, but at least one, control group members. For illustrations of this rule, see paragraph (g) of this section,
Example 4
and
Example 5.

(2)
Gain recognition
—(i)
Non-control group members.
The U.S. transferor recognizes gain equal to the product of the inside gain multiplied by the aggregate ownership interest percentage of all non-control group members, reduced (but not below zero) by the sum of the amounts described in paragraphs (c)(2)(i)(A), (c)(2)(i)(B), and (c)(2)(i)(C) of this section.

(A) Gain recognized with respect to stock or securities under § 1.367(a)-3T(e)(3)(iii)(B) (including any portion treated as a deemed dividend under section 1248(a));

(B) Gain recognized with respect to stock or securities under § 1.367(a)-6T (including any portion treated as a deemed dividend under section 1248(a)) attributable to non-control group members (as determined pursuant to § 1.367(a)-7(e)(5)); and

(C) A deemed dividend included in income under § 1.367(b)-4 attributable to non-control group members (as determined pursuant to § 1.367(a)-7(e)(4)).

(ii)
Control group members.
With respect to each control group member, the U.S. transferor recognizes gain equal to the amount, if any, by which the amount described in paragraph (c)(2)(ii)(A) of this section exceeds the amount described in paragraph (c)(2)(ii)(B) of this section.

(A) The product of the inside gain multiplied by such control group member's ownership interest percentage, reduced (but not below zero) by the sum of the amounts described in paragraphs (c)(2)(ii)(A)(
1
), (c)(2)(ii)(A)(
2
), and (c)(2)(ii)(A)(
3
) of this section (attributable inside gain).

(
1
) Gain recognized with respect to stock or securities under § 1.367(a)-3T(e)(3)(iii)(C) (including any portion treated as a deemed dividend under section 1248(a)) attributable to the control group member;

(
2
) Gain recognized with respect to stock or securities under § 1.367(a)-6T (including any portion treated as a deemed dividend under section 1248(a)) attributable to the control group member (as determined pursuant to § 1.367(a)-7(e)(5)); and

(
3
) A deemed dividend included in income under § 1.367(b)-4 attributable to the control group member (as determined pursuant to § 1.367(a)-7(e)(4)).

(B) The product of the section 367(a) percentage multiplied by the fair market value of the stock received by the U.S. transferor in the section 361 exchange and distributed to the control group member under section 354, 355, or 356.

(iii)
Illustration of rules.
For an illustration of gain recognition under paragraph (c)(2)(i) of this section, see paragraph (g) of this section,
Example 1.
For an illustration of gain recognition under paragraph (c)(2)(ii) of this section, see paragraph (g) of this section,
Example 2.

(3)
Basis adjustments required for control group members
—(i)
General rule.
Except as provided in paragraph (c)(3)(iv) of this section, if there is any attributable inside gain (determined under paragraph (c)(2)(ii)(A) of this section) with respect to a control group member, then such control group member's aggregate basis in the stock received in exchange for (or with respect to, as applicable) stock or securities of the U.S. transferor under section 354, 355, or 356, as determined under section 358 and the regulations under that section (section 358 basis), is reduced by the amount in paragraph (c)(3)(i)(A), (c)(3)(i)(B), or (c)(3)(i)(C) of this section, as applicable.

(A) If the control group member has outside gain, the amount, if any, by which the attributable inside gain, reduced by any gain recognized by the U.S. transferor with respect to the control group member under paragraph (c)(2)(ii) of this section, exceeds the control group member's outside gain.

(B) If the control group member has outside loss, the amount, if any, by which the attributable inside gain, reduced by any gain recognized by the U.S. transferor with respect to the control group member under paragraph (c)(2)(ii) of this section, exceeds the control group member's outside loss (for this purpose, treating the outside loss as a negative amount).

(C) If the control group member has no outside gain or outside loss, the amount of the attributable inside gain, reduced by any gain recognized by the U.S. transferor with respect to the control group member under paragraph (c)(2)(ii) of this section.

(ii)
Stock received in the section 361 exchange.
This paragraph (c)(3) applies only to stock received by the U.S. transferor in the section 361 exchange and distributed to the control group member in exchange for (or with respect to, as applicable) stock or securities of the U.S. transferor.

(iii)
Pro rata adjustments.
The section 358 basis of each share of stock received by the control group member must be reduced pro rata based on the relative section 358 basis of all shares of stock received by the control group member.

(iv)
Successive distributions to which section 355 applies.
Paragraph (c)(3) of this section does not apply to a control group member that distributes the stock of a foreign acquiring corporation received from the U.S. transferor in a distribution satisfying the requirements of section 355 (section 355 distribution) that is in connection with a transaction described in paragraph (d) of this

section (relating to successive section 355 distributions). If paragraph (c)(3) of this section does not apply to a control group member pursuant to this paragraph (c)(3)(iv), then paragraph (c)(3) of this section shall apply to the final distributee (as defined in paragraph (d) of this section) that receives the stock of the foreign acquiring corporation in the final section 355 distribution described in paragraph (d) of this section.

(v)
Illustration of rules.
For illustrations of the adjustment to stock basis under paragraph (c)(3)(i) of this section, see paragraph (g) of this section,
Example 1
and
Example 2,
§ 1.367(a)-3T(e)(8),
Example 3,
and § 1.1248(f)-2(e),
Example 3.
For an illustration of the adjustment to stock basis under paragraph (c)(3)(iii) of this section, see paragraph (g) of this section,
Example 3.

(4)
Agreement to amend or file a U.S. income tax return
—(i)
General rule.
Except as provided in paragraph (c)(4)(ii) of this section, the U.S. transferor complies with the requirements of § 1.6038B-1(c)(6)(iii), relating to the requirement to report gain that was not recognized by the U.S. transferor upon certain subsequent dispositions by the foreign acquiring corporation of section 367(a) property received from the U.S. transferor in the section 361 exchange.

(ii)
Exception.
To the extent section 367(a) property transferred in the section 361 exchange is subject to § 1.367(a)-3T(e) (relating to transfers of stock or securities by a domestic corporation to a foreign corporation in a section 361 exchange), § 1.6038B-1(c)(6)(iii) does not apply with respect to the transfer of that property.

(5)
Election and reporting requirements
—(i)
General rule.
The U.S. transferor and each control group member elect to apply the provisions of paragraph (c) of this section in the manner provided under paragraph (c)(5)(ii) or (c)(5)(iii) of this section, as applicable, and by entering into a written agreement described in paragraph (c)(5)(iv) of this section. If a control group member distributes the stock of the foreign acquiring corporation received from the U.S. transferor in a section 355 distribution that is in connection with a transaction described in paragraph (d) of this section, the final distributee that receives that stock in the final section 355 distribution elects to apply the provisions of this paragraph (c) and enters into the written agreement instead of the control group member. For this purpose, the term
control group member
will be replaced by the term
final distributee,
as appropriate.

(ii)
Control group member
—(A)
Time and manner of making election.
Each control group member elects to apply the provisions of paragraph (c) of this section by including a statement (in the form and with the content specified in paragraph (c)(5)(ii)(B) of this section) on or with a timely filed return for the taxable year in which the reorganization occurs. If the control group member is a member of a consolidated group but is not the common parent of the consolidated group, the common parent makes the election on behalf of the control group member.

(B)
Form and content of election statement.
The statement must be entitled, “ELECTION TO APPLY EXCEPTION UNDER § 1.367(a)-7(c),” and set forth:

(
1
) The name and taxpayer identification number (if any) of the control group member, the U.S. transferor, the foreign acquiring corporation and, in the case of a triangular reorganization (within the meaning of § 1.358-6(b)(2)), the corporation that controls the foreign acquiring corporation; the control group member's ownership interest percentage in the U.S. transferor; and the percentage of voting stock and non-voting stock of the U.S. transferor owned by the control group member for purposes of satisfying the control requirement of paragraph (c)(1) of this section;

(
2
) If the control group member is a member of a consolidated group but is not the common parent, the name and taxpayer identification number of the common parent;

(
3
) The amount of the adjustment (if any) to stock basis required under paragraph (c)(3) of this section, the resulting adjusted basis in the stock, and the fair market value of the stock, or if no stock was received, indicate no stock was received; and

(
4
) The date on which the written agreement described in paragraph (c)(5)(iv) of this section was entered into.

(iii)
Statement by U.S. transferor.
The U.S. transferor elects to apply the provisions of paragraph (c) of this section in the form and manner set forth in § 1.6038B-1(c)(6)(ii).

(iv)
Written agreement.
The U.S. transferor and each control group member must enter into a written agreement satisfying the conditions of this paragraph on or before the due date (including extensions) for the U.S. transferor's tax return for the taxable year in which the reorganization occurs. Each party to the agreement must retain the original or a copy of the agreement in the manner specified by § 1.6001-1(e). Each party to the agreement must provide a copy of the agreement to the Internal Revenue Service within 30 days of the receipt of a request for the copy of the agreement. The written agreement must—

(A) State the document constitutes an agreement entered into pursuant to paragraph (c)(5) of this section;

(B) Identify the U.S. transferor, the foreign acquiring corporation, the corporation that controls the foreign acquiring corporation (in the case of a triangular reorganization within the meaning of § 1.358-6(b)(2)), and each control group member, and provide the taxpayer identification number (if any) for each corporation;

(C) State the amount of gain (if any) recognized by the U.S. transferor under paragraph (c)(2) of this section; and

(D) With respect to each control group member, state the amount of the adjustment (if any) to stock basis required under paragraph (c)(3) of this section, the resulting adjusted basis in the stock, and the fair market value of the stock. Alternatively, if a control group member did not receive any stock, indicate that no stock was received.

(d)
Section 361 exchange followed by successive distributions to which section 355 applies.
If the U.S. transferor distributes stock of the foreign acquiring corporation received in the section 361 exchange to a control group member in a section 355 distribution and, as part of a plan or series of related transactions, that stock is further distributed in one or more successive section 355 distributions, paragraph (c) of this section can apply to the section 361 exchange only to the extent each subsequent section 355 distribution is to a member of the affiliated group (within the meaning of section 1504) that includes the U.S. transferor immediately before the reorganization. In that case, each affiliated group member that receives stock of the foreign acquiring corporation in the final section 355 distribution (final distributee) is subject to the requirements of paragraphs (c)(3) and (c)(5) of this section. If this paragraph (d) applies, then for purposes of applying paragraphs (c)(3), (c)(5) or (e)(2) of this section the term
control group member
is replaced by the term
final distributee,
as appropriate.

(e)
Other rules
—(1)
Section 367(a) property with respect to which gain is recognized.
Except as otherwise provided in this paragraph (e)(1), gain recognized by the U.S. transferor pursuant to paragraph (c)(2) of this section will be treated as recognized with respect to the section 367(a) property transferred in the section 361

exchange in proportion to the amount of gain realized by the U.S. transferor on the transfer of each item of section 367(a) property. This paragraph (e)(1) will be applied after taking into account any gain or deemed dividends (including any deemed dividends under section 1248(a)) recognized by the U.S. transferor on the transfer of the section 367(a) property in the section 361 exchange pursuant to all other provisions of sections 367(a) and (b) and the regulations under that section. See, for example, §§ 1.367(a)-2T, 1.367(a)-3T(e), 1.367(a)-4T, 1.367(a)-5T, 1.367(a)-6T, and 1.367(b)-4. If the U.S. transferor recognizes gain (including gain treated as a deemed dividend under section 1248(a)) pursuant to § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) with respect to stock or securities transferred in the section 361 exchange, the realized gain in such stock or securities shall not be taken into account for purposes of applying this paragraph (e)(1) to gain recognized under paragraph (c)(2) of this section attributable to U.S. transferor shareholders described in § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C). Accordingly, gain recognized under paragraph (c)(2) attributable to such U.S. transferor shareholders shall not be treated as recognized with respect to such stock or securities under this paragraph. Furthermore, to the extent gain recognized by the U.S. transferor under paragraph (c)(2) is treated as recognized with respect to stock in a foreign corporation transferred in the section 361 exchange to which section 1248(a) applies, the portion of such gain treated as a deemed dividend under section 1248(a) is the product of the amount of the gain multiplied by the ratio of the amount that would be treated as a deemed dividend under section 1248(a) if all gain in the transferred stock were recognized under § 1.367(a)-7(b) and the amount of gain realized in the transferred stock. See § 1.367(a)-1T(b)(4) and § 1.367(a)-1(b)(4)(i)(B) for additional rules on the character, source, and adjustments relating to gain recognized under section 367(a)(1), and § 1.367(b)-2(e) for rules on the timing, treatment, and effect of amounts included in income as deemed dividends pursuant to regulations under section 367(b).

(2) [Reserved]. For further guidance see § 1.367(a)-7T(e)(2).

(3)
Anti-abuse rule.
Any property of the U.S. transferor acquired with a principal purpose of affecting any determination under this section (including, for example, the section 367(a) percentage, inside gain, or inside basis) shall not be taken in account for purposes of any determination under this section. Nothing in this paragraph (e)(3) constitutes a limitation on or modification to judicial doctrines, including step-transaction or substance-over-form.

(4)
Certain income inclusions under § 1.367(b)-4
—(i)
Income inclusion attributable to U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A).
If pursuant to § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) the U.S. transferor is required to recognize gain on the transfer of foreign stock (all or a portion of which is treated as a deemed dividend under section 1248(a)), and if pursuant to § 1.367(b)-4(b)(1)(i) the U.S. transferor is also required to include in income as a deemed dividend the section 1248 amount (within the meaning of § 1.367(b)-2(c)) in the foreign stock, then the section 1248 amount included in income under § 1.367(b)-4(b)(1)(i) is attributable to each U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A) pursuant to this paragraph (e)(4)(i). The portion of the section 1248 amount attributable to each U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A) is the portion of the section 1248 amount that bears the same ratio as such U.S. transferor shareholder's ownership interest percentage bears to the aggregate ownership interest percentage of all U.S. transferor shareholders described in § 1.367(a)-3T(e)(3)(iii)(A).

(ii)
Ordering rules for determining section 1248 amount.
The section 1248 amount (within the meaning of § 1.367(b)-2(c)) included in income as a deemed dividend under § 1.367(b)-4(b)(1)(i) is determined after taking into account any gain recognized under §§ 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) or 1.367(a)-6T that is treated as a deemed dividend under section 1248(a). See § 1.367(a)-3T(e)(7) and paragraph (e)(5)(ii) of this section for rules to determine the amount of gain recognized under §§ 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) or 1.367(a)-6T, respectively, that is treated as a deemed dividend under section 1248(a).

(5)
Certain gain under § 1.367(a)-6T
—(i)
Gain attributable to U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A).
If pursuant to § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C), the U.S. transferor is required to recognize gain on the transfer of stock or securities, and if pursuant to § 1.367(a)-6T the U.S. transferor is also required to recognize gain, then gain recognized under § 1.367(a)-6T (including any portion treated as a deemed dividend under section 1248(a)) to the extent treated as recognized with respect to the stock or securities, is attributable to each U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A) pursuant to this paragraph (e)(5)(i). The portion of the gain (including any portion treated as a deemed dividend under section 1248(a)) that is attributable to each U.S. transferor shareholder described in § 1.367(a)-3T(e)(3)(iii)(A) is the portion of the gain that bears the same ratio as such U.S. transferor shareholder's ownership interest percentage bears to the aggregate ownership interest percentage of all U.S. transferor shareholders described in § 1.367(a)-3T(e)(3)(iii)(A).

(ii)
Gain subject to section 1248(a).
If the U.S. transferor recognizes gain under § 1.367(a)-6T with respect to transferred stock that is stock in a foreign corporation to which section 1248(a) applies, the portion of such gain treated as a deemed dividend under section 1248(a) is determined after taking into account any gain recognized under § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) and the amount of such gain treated as a deemed dividend under section 1248(a) pursuant to § 1.367(a)-3T(e)(7).

(f)
Definitions.
The following definitions apply for purposes of this section:

(1)
Control group, control group member, and non-control group member
—(i)
General rule.
Except as provided in paragraph (f)(1)(ii) of this section, the
control group
is the group of five or fewer, but at least one, domestic corporations that controls (within the meaning of section 368(c)) the U.S. transferor immediately before the reorganization. If the U.S. transferor is owned directly by more than five domestic corporations immediately before the reorganization, but some combination of five or fewer domestic corporations controls the U.S. transferor, the U.S. transferor must designate the five or fewer domestic corporations that comprise the control group on Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation.” For purposes of identifying the control group, members of an affiliated group (within the meaning of section 1504) are treated as a single corporation. Except as provided in paragraph (f)(1)(ii) of this section, a
control group member
is a domestic corporation that is part of the control group. A
non-control group member
is a shareholder of the U.S. transferor immediately before the reorganization that is not a control group member.

(ii)
Exception for certain entities.
Regulated investment companies (as defined in section 851(a)), real estate

investment trusts (as defined in section 856(a)), and S corporations (as defined in section 1361(a)) cannot be control group members.

(2)
Deductible liability
is any liability of the U.S. transferor that is assumed in the section 361 exchange if payment of the liability would give rise to a deduction.

(3)
Fair market value
is the fair market value determined without regard to mortgages, liens, pledges, or other liabilities. For this purpose, the fair market value of any property subject to a nonrecourse indebtedness shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject.

(4)
Inside basis
is the aggregate basis of the section 367(a) property transferred by the U.S. transferor in the section 361 exchange and, except as otherwise provided in this paragraph (f)(4), increased by any gain recognized or any deemed dividend included in income by the U.S. transferor under section 367 on the transfer of the section 367(a) property in the section 361 exchange, but not including any gain recognized under paragraph (c)(2) of this section. If the U.S. transferor transfers stock or securities and recognizes gain under § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) with respect to such stock or securities, then inside basis is not increased for gain recognized or deemed dividends included in income that are described in paragraph (f)(4)(i), (f)(4)(ii), or (f)(4)(iii) of this section.

(i) Gain recognized under § 1.367(a)-3T(e)(3)(iii)(B) or (e)(3)(iii)(C) (including any portion treated as a deemed dividend under section 1248(a));

(ii) Gain recognized under § 1.367(a)-6T (including any portion treated as a deemed dividend under section 1248(a)) attributable to U.S. transferor shareholders described in § 1.367(a)-3T(e)(3)(iii)(A) (as determined pursuant to § 1.367(a)-7(e)(5));

(iii) A deemed dividend included in income under § 1.367(b)-4(b) attributable to U.S. transferor shareholders described in § 1.367(a)-3T(e)(3)(iii)(A) (as determined pursuant to § 1.367(a)-7(e)(4)).

(5)
Inside gain
is the amount (but not below zero) by which the aggregate fair market value of the section 367(a) property transferred in the section 361 exchange exceeds the sum of:

(i) The inside basis; and

(ii) The product of the section 367(a) percentage multiplied by the aggregate deductible liabilities of the U.S. transferor.

(6)
Outside gain or loss
is the product of the section 367(a) percentage multiplied by the difference between—

(i) The aggregate fair market value of the stock received by a control group member in exchange for (or with respect to, as applicable) stock or securities of the U.S. transferor under section 354, 355, or 356, and

(ii) The control group member's aggregate section 358 basis (as defined in paragraph (c)(3) of this section) in such stock received, determined without regard to any adjustment to that basis under paragraph (c)(3) of this section.

(7)
Ownership interest percentage
is the ratio of the fair market value of the stock in the U.S. transferor owned by a shareholder to the fair market value of all of the outstanding stock of the U.S. transferor. Except as provided in this paragraph (f)(7), the ownership interest percentage of a shareholder is determined immediately before the reorganization. For purposes of determining the ownership interest percentage with respect to each shareholder, however, the numerator and denominator of the fraction are first reduced as described in this paragraph (f)(7). The numerator is reduced (but not below zero) by any distributions by the U.S. transferor of money or other property (within the meaning of section 356) to such shareholder pursuant to the plan of reorganization, but only to the extent such money or other property is not provided by the foreign acquiring corporation in exchange for property of the U.S. transferor acquired in the section 361 exchange. Furthermore, the denominator of the fraction is reduced (but not below zero) by all such distributions by the U.S. transferor to all shareholders. For illustrations of this definition, see paragraph (g) of this section,
Example 4
and
Example 5.

(8)
Section 361 exchange
is an exchange described in section 361(a) or (b).

(9)
Section 367(a) percentage
is the ratio of the aggregate fair market value of the section 367(a) property transferred by the U.S. transferor in the section 361 exchange to the aggregate fair market value of all property transferred by the U.S. transferor in the section 361 exchange.

(10)
Section 367(a) property.
Except as provided in paragraph (e)(3) of this section,
section 367(a) property
is any property, as defined in § 1.367(a)-1T(d)(4), other than section 367(d) property.

(11)
Section 367(d) property
is property described in section 936(h)(3)(B).

(12)
Timely filed return
is a U.S. income tax return filed on or before the due date set forth in section 6072(b), including any extensions of time to file the return granted under section 6081.

(13)
U.S. transferor shareholder
is a person that is either a control group member or a non-control group member.

(g)
Examples.
The rules of this section are illustrated by the examples set forth in this paragraph (g). See also § 1.367(a)-3T(e)(8),
Example 2
and
Example 3.
The analysis of the following examples is limited to a discussion of issues under this section. Unless otherwise indicated, for purposes of the following examples: DP1, DP2, and DC are domestic corporations that do not join in the filing of a consolidated return and none of which is a regulated investment company, a real estate investment trust, or an S corporation; FP and FA are foreign corporations created or organized under the laws of Country B and are unrelated to DP1, DP2, and DC; each corporation has a single class of stock outstanding; each share of stock of DC owned by a shareholder of DC has an identical stock basis; Business A consists solely of section 367(a) property whose fair market value exceeds its basis and that, but for the application of this section, would qualify for the active foreign trade or business exception under § 1.367(a)-2T; the fair market value of any FA stock received in a reorganization is equal to the fair market value of property exchanged therefor; FA is not a surrogate foreign corporation for purposes of section 7874 because one or more of the conditions of section 7874(a)(2)(B) is not satisfied; DC has no liabilities; DP1 and DP2 satisfy the requirements of paragraph (c)(5) of this section, and DC satisfies the requirements of § 1.6038B-1(c)(6)(ii).

Example 1.

Tainted assets and non-control group ownership.

(i)
Facts.
DP1, DP2, and FP own 50%, 30%, and 20%, respectively, of the outstanding stock of DC. DP1 and DP2 are members of the same affiliated group within the meaning of section 1504. DP1's DC stock has a $120x basis and $100x fair market value. DP2's DC stock has a $50x basis and $60x fair market value. DC owns inventory with a $40x basis and a $100x fair market value. DC also owns Business A (excluding the inventory) with a $10x basis and $100x fair market value. In a reorganization described in section 368(a)(1)(F), DC transfers the inventory and Business A to FA, a newly formed corporation, in exchange for all of the outstanding stock of FA. DC's transfer of the inventory and Business A to FA qualifies as a section 361 exchange. DP1, DP2, and FP exchange the DC stock for a proportionate amount of FA stock pursuant to section 354.

(ii)
Result.
(A) Under section 367(a)(3)(B)(i), DC must recognize $60x gain ($100x fair market value less $40x basis) on the transfer of the inventory to FA. The basis of the inventory in the hands of FA is increased by the gain recognized of $60x (that is, increased from $40x to $100x). See § 1.367(a)-1(b)(4)(i)(B). Under section 367(a)(5) and paragraph (b) of this section, DC's transfer of Business A to FA is subject to the general rule of section 367(a)(1). As a result, DC must also generally recognize $90x gain ($100x fair market value less $10x basis) on the transfer of Business A to FA notwithstanding the application of section 361 (or any other nonrecognition provision enumerated in section 367(a)(1)). However, if the conditions and requirements of paragraph (c) of this section are met, DC's transfer of Business A to FA would qualify for the active foreign trade or business exception provided by section 367(a)(3) and § 1.367(a)-2T.

(B) The requirement of paragraph (c)(1) of this section is satisfied because DC is controlled (within the meaning of section 368(c)) by five or fewer domestic corporations immediately before the reorganization (in this case, by a single domestic corporation because DP1 and DP2 together own 80% of the stock of DC). DP1 and DP2 are treated as a single domestic corporation for this purpose under paragraph (f)(1)(i) of this section because DP1 and DP2 are members of the same affiliated group.

(C) Paragraph (c)(2)(i) of this section would be satisfied only if DC recognizes $18x gain on the transfer of Business A, which is the amount of inside gain attributable to FP, a non-control group member. The $18x gain equals the product of the inside gain ($90x) multiplied by FP's ownership interest percentage (20%) in DC, reduced by $0x (the sum of the amounts described in paragraphs (c)(2)(i)(A) through (c)(2)(i)(C) of this section). Under paragraph (f)(5) of this section, the $90x inside gain is the amount by which the aggregate fair market value ($200x) of the section 367(a) property (inventory and Business A) exceeds $110x, the sum of the inside basis of $110x and the product of the section 367(a) percentage (100%) multiplied by the deductible liabilities of DC ($0x). Under paragraph (f)(4) of this section, the inside basis equals the $50x aggregate basis of the section 367(a) property transferred in the section 361 exchange, increased by the $60x gain recognized by DC on the transfer of the inventory to FA, but not by the $18x gain recognized by DC under paragraph (c)(2)(i) of this section attributable to FP. The section 367(a) percentage is 100% because the only assets transferred are the inventory and Business A, which are section 367(a) property. Under paragraph (e)(1) of this section, the $18x gain recognized under paragraph (c)(2)(i) of this section is treated as recognized with respect to Business A. FA's basis in Business A as determined under section 362 is increased for the $18x gain recognized. See § 1.367(a)-1(b)(4)(i)(B).

(D) Paragraph (c)(2)(ii) of this section is not applicable with respect to either DP1 or DP2 because the attributable inside gain with respect to each such shareholder can be preserved in the FA stock received. As stated in paragraph (ii)(C) of this
Example 1,
the amount of the inside gain is $90x. The attributable inside gain with respect to DP1 of $45x (equal to the product of $90x inside gain multiplied by DP1's 50% ownership interest percentage, reduced by $0x (the sum of the amounts described in paragraphs (c)(2)(ii)(A)(
1
) through (c)(2)(ii)(A)(
3
) of this section)) does not exceed $100x (equal to the product of the section 367(a) percentage of 100% multiplied by $100x fair market value of FA stock received by DP1). Similarly, the attributable inside gain with respect to DP2 of $27x (equal to the product of $90x inside gain multiplied by DP2's 30% ownership interest percentage, reduced by $0x (the sum of the amounts described in paragraphs (c)(2)(ii)(A)(
1
) through (c)(2)(ii)(A)(
3
) of this section)) does not exceed $60x (equal to the product of the section 367(a) percentage of 100% multiplied by $60x fair market value of FA stock received by DP2).

(E) Each control group member (DP1 and DP2) separately computes any required adjustment to stock basis under paragraph (c)(3) of this section. DP1's section 358 basis in the FA stock received of $120x (the amount of DP1's basis in the DC stock exchanged) is reduced to preserve the attributable inside gain with respect to DP1, less any gain recognized with respect to DP1 under paragraph (c)(2)(ii) of this section. Because DC does not recognize gain on the section 361 exchange with respect to DP1 under paragraph (c)(2)(ii) of this section (as determined in paragraph (ii)(D) of this
Example 1
), the attributable inside gain of $45x with respect to DP1 is not reduced under paragraph (c)(3)(i)(B) of this section. DP1's outside loss in the FA stock is $20x, the product of the section 367(a) percentage of 100% multiplied by $20x loss (equal to the difference between $100x fair market value and $120x section 358 basis in FA stock). Thus, DP1's $120x section 358 basis in the FA stock must be reduced by $65x (excess of $45x, reduced by $0x, over $20x outside loss) to $55x.

(F) DP2's aggregate section 358 basis in the FA stock received of $50x (the amount of DP2's basis in the DC stock exchanged) is reduced to preserve the attributable inside gain with respect to DP2, less any gain recognized with respect to DP2 under paragraph (c)(2)(ii) of this section. Because DC does not recognize gain on the section 361 exchange with respect to DP2 (as determined in paragraph (ii)(D) of this
Example 1
), the attributable inside gain of $27x with respect to DP2 is not reduced under paragraph (c)(3)(i)(A) of this section. DP2's outside gain in the FA stock is $10x, the product of the section 367(a) percentage of 100% multiplied by $10x gain (equal to the difference between $60x fair market value and $50x section 358 basis in FA stock). Thus, DP2's $50x section 358 basis in the FA stock must be reduced by $17x (excess of $27x, reduced by $0x, over the $10x outside gain) to $33x.

(G) Paragraph (c)(4) of this section would be satisfied only if DC complies with the requirements of § 1.6038B-1(c)(6)(iii), including filing with its timely filed return for the year of the reorganization a statement agreeing to file an amended return reporting the gain realized but not recognized on the section 361 exchange in certain cases if a significant amount of the section 367(a) property received in the section 361 exchange is disposed of, directly or indirectly, in one or more related transactions within the prescribed 60-month period.

Example 2.

Triangular reorganization involving an exchange of section 367(a) property for foreign stock and cash.

(i)
Facts.
(A) DP1 wholly owns DC. DP1 and DC file a consolidated return. DP1's DC stock has a $170x basis and $200x fair market value. DC owns Business A, which has a $10x basis and $200x fair market value. FP wholly owns FA.

(B) In a triangular reorganization described in section 368(a)(1)(A) by reason of section 368(a)(2)(D), DC transfers Business A to FA in exchange for $180x of FP stock and $20x cash. DC's transfer of Business A to FA qualifies as a section 361 exchange. DP1 exchanges its DC stock for $180x of FP stock and $20x cash pursuant to section 356. The triangular reorganization constitutes an indirect stock transfer under § 1.367(a)-3(d)(1)(i), and DP1 properly files a gain recognition agreement under § 1.367(a)-8 with respect to the transfer. See also § 1.367(a)-3(d)(2)(vii).

(ii)
Result.
(A) Under section 367(a)(5) and paragraph (b) of this section, DC's transfer of Business A to FA is subject to the general rule of section 367(a)(1). As a result, DC must generally recognize $190x gain ($200x fair market value less $10x basis) on the transfer of Business A to FA notwithstanding the application of section 361 (or any other nonrecognition exchange enumerated in section 367(a)(1)). However, if the requirements of paragraph (c) of this section are satisfied, DC's transfer of Business A to FA would qualify for the active foreign trade or business exception provided in section 367(a)(3) and § 1.367(a)-2T.

(B) The requirement of paragraph (c)(1) of this section is satisfied because DC is controlled (within the meaning of section 368(c)) by five or fewer domestic corporations immediately before the reorganization (in this case, by a single domestic corporation, DP1).

(C) DC is not required to recognize gain under paragraph (c)(2)(i) of this section because, immediately before the reorganization, DC is wholly owned by DP1, a control group member. In addition, DP1's ownership interest percentage is 100%. Paragraph (c)(2)(ii) of this section would be satisfied only if DC recognizes $10x gain, computed as the amount by which the attributable inside gain with respect to DP1 of $190x (the product of $190x inside gain multiplied by DP1's ownership interest percentage of 100%, reduced by $0x (the sum of the amounts in paragraphs (c)(2)(ii)(A)(
1
) through (c)(2)(ii)(A)(
3
) of this section)) exceeds $180x (the product of the section 367(a) percentage of 100% multiplied by $180x fair market value of FP stock received by DP1). Under paragraph (f)(5) of this section, the $190x inside gain is the amount by which the $200x aggregate fair market value of Business A exceeds $10x (the sum of the inside basis of $10x and the product

of the section 367(a) percentage (100%) multiplied by the deductible liabilities of DC ($0x)). Under paragraph (f)(4) of this section, the inside basis equals the $10x aggregate basis of the section 367(a) property transferred in the section 361 exchange (not increased by the $10x gain recognized by DC under paragraph (c)(2)(ii) of this section). The section 367(a) percentage is 100% because the only asset transferred is Business A, which is section 367(a) property. Under § 1.1502-32(b)(2), DP1 increases the basis of its DC stock by the $10x gain recognized, that is, from $170x to $180x. Under paragraph (e)(1) of this section, the $10x gain recognized under paragraph (c)(2)(ii) of this section is treated as recognized with respect to Business A. FA's basis in Business A as determined under section 362 is increased for the $10x gain recognized. See § 1.367(a)-1(b)(4)(i)(B).

(D) Paragraph (c)(3) of this section would be satisfied only if DP1's section 358 basis in the FP stock is reduced by the amount by which the attributable inside gain with respect to DP1, reduced by any gain recognized by DC with respect to DP1 under paragraph (c)(2)(ii) of this section, exceeds DP1's outside gain in the FP stock. DP1's section 358 basis in the FP stock is $180x, computed as $180x basis in DC stock, as determined in paragraph (ii)(C) of this
Example 2,
decreased by $20x cash received and increased by $20x gain recognized under section 356 (such amount equal to the lesser of the $20x cash received and the $20x gain in the DC stock, computed as $200x fair market value less $180x basis). Because DC recognizes $10x gain on the section 361 exchange with respect to DP1 under paragraph (c)(2)(ii) of this section as determined in paragraph (ii)(C) of this
Example 2,
the $190x attributable inside gain with respect to DP1 is reduced by $10x to $180x under paragraph (c)(3)(i)(C) of this section. DP1's outside gain in the FP stock is $0x, the product of the section 367(a) percentage of 100% multiplied by $0x gain (the difference between $180x fair market value and $180x section 358 basis in FP stock). Thus, DP1's section 358 basis in the FP stock ($180x) must be reduced by $180x ($190x attributable inside gain reduced by $10x) to $0x.

(E) Paragraph (c)(4)(i) of this section would be satisfied only if DC complies with the requirements of § 1.6038B-1(c)(6)(iii), including filing with its tax return for the year of the reorganization a statement agreeing to file an amended return reporting the gain on the section 361 exchange in certain cases if a significant amount of the section 367(a) property received in the section 361 exchange is disposed of, directly or indirectly, in one or more related transactions within the prescribed 60-month period.

Example 3.

Adjustment to basis of multiple blocks of stock; transfer of section 367(d) property.

(i)
Facts.
(A) DP1 wholly owns DC. One half of DP1's shares of stock in DC, each with an identical basis, has an aggregate basis of $60x and fair market value of $100x (Block 1). The other one half of DP's shares of stock in DC, each with an identical basis, has an aggregate basis of $120x and fair market value of $100x (Block 2). DC owns Business A ($15x basis and $150x fair market value) (excluding the patent) and a patent ($0x basis and $50x fair market value). The patent is section 367(d) property.

(B) In a reorganization described in section 368(a)(1)(F), DC transfers Business A and the patent to FA, a newly formed corporation, in exchange for 2 shares of FA stock. DC's transfer of Business A and the patent to FA qualifies as a section 361 exchange. DP1 exchanges Block 1 and Block 2 for the two shares of FA stock pursuant to section 354. Pursuant to § 1.358-2(a)(2)(i), one share of the FA stock corresponds to Block 1 (Share 1) and the other share of FA stock corresponds to Block 2 (Share 2). The basis of Share 1 and Share 2 correspond to the basis of Block 1 and Block 2, respectively.

(ii)
Result.
(A) Under section 367(a)(5) and paragraph (b) of this section, DC's transfer of Business A to FA is subject to the general rule of section 367(a)(1). As a result, DC must generally recognize $135x of gain on the transfer of Business A to FA notwithstanding the application of section 361 (or any other nonrecognition exchange described in section 367(a)(1)). However, if the requirements of paragraph (c) of this section are met, DC's transfer of Business A to FA would qualify for the active foreign trade or business exception provided in section 367(a)(3). For rules applicable to DC's transfer of the patent to FA, see section 367(d).

(B) The requirement of paragraph (c)(1) of this section is satisfied because DC is controlled (within the meaning of section 368(c)) by five or fewer domestic corporations immediately before the reorganization (in this case, by a single domestic corporation, DP1).

(C) Paragraph (c)(2)(i) of this section is not applicable because, immediately before the reorganization, DC is wholly owned by DP1, a control group member. In addition, DP1's ownership interest percentage is 100%. Paragraph (c)(2)(ii) of this section is not applicable because the attributable inside gain with respect to DP1 can be preserved in the FA stock received. The attributable inside gain with respect to DP1 of $135x (equal to the product of $135x inside gain multiplied by DP1's 100% ownership interest percentage, reduced by $0x (the sum of the amounts in paragraphs (c)(2)(ii)(A)(
1
) through (c)(2)(ii)(A)(
3
) of this section)) does not exceed $150x (equal to the product of the section 367(a) percentage of 75% multiplied by $200x fair market value of FA stock received by DP1). Under paragraph (f)(5) of this section, the $135x inside gain is the amount by which the aggregate fair market value of Business A ($150x) exceeds $15x, the sum of the inside basis of Business A ($15x) and the product of the section 367(a) percentage (75%) multiplied by the deductible liabilities of DC ($0x). Under paragraph (f)(4) of this section, the inside basis equals the $15x aggregate basis of the section 367(a) property transferred in the exchange. The section 367(a) percentage of 75% is equal to the ratio of the fair market value of the section 367(a) property ($150x for Business A) to the fair market value of all the property transferred ($200x, the sum of $150x for Business A and $50x for the patent).

(D) Under paragraph (c)(3) of this section, DP1's aggregate section 358 basis of $180x in the stock of FA (computed as the sum of $60x basis in Share 1 and $120x basis in Share 2) is reduced by the amount by which the attributable inside gain with respect to DP1, reduced by any gain recognized by DC with respect to DP1 under paragraph (c)(2)(ii) of this section, exceeds DP1's outside gain in the FP stock received. Because DC recognizes no gain on the section 361 exchange with respect to DP1 under paragraph (c)(2)(ii) of this section as determined in paragraph (ii)(C) of this
Example 3,
the $135x attributable inside gain with respect to DP1 is not reduced under paragraph (c)(3)(i)(A) of this section. DP1's outside gain in Share 1 and Share 2 in the aggregate is $15x, the product of the section 367(a) percentage of 75% multiplied by $20x (the difference between $200x aggregate fair market value and $180x aggregate section 358 basis in the FA stock received by DP1). Thus, DP1's section 358 basis in the FA stock ($180x) must be reduced by $120x (the excess of $135x attributable inside gain, reduced by $0x, over $15x outside gain) to $60x.

(E) Under paragraph (c)(3)(iii) of this section, the $120x reduction to basis is allocated between Share 1 and Share 2 based on the relative section 358 basis of each share. Therefore, the basis in Share 1 is reduced by $40x ($120x multiplied by $60x/$180x). As adjusted, DP1's basis in Share 1 is $20x ($60x less $40x). The basis in Share 2 is reduced by $80x ($120x multiplied by $120x/$180x). As adjusted, DP1's basis in Share 2 is $40x ($120x less $80x).

(F) Paragraph (c)(4)(i) of this section would be satisfied only if DC complies with the requirements of § 1.6038B-1(c)(6)(iii), including filing with its tax return for the year of the reorganization, a statement agreeing to file an amended return reporting the gain realized but not recognized on the section 361 exchange in certain cases if a significant amount of the section 367(a) property received in the section 361 exchange is disposed of, directly or indirectly, in one or more related transactions within the prescribed 60-month period.

Example 4.

Control requirement and ownership interest percentage; non-qualified property provided by foreign acquiring corporation.

(i)
Facts.
DP1 and FP own 80% and 20%, respectively, of the outstanding stock of DC. DC owns Business A with a basis of $0x and $100x fair market value. DP1's DC stock has a fair market value of $80x, and FP's DC stock has a fair market value of $20x. In a reorganization described in section 368(a)(1)(D), DC transfers Business A to FA in exchange for $80x of FA stock and $20x cash. DC's transfer of Business A to FA qualifies as a section 361 exchange. DP1 exchanges its $80x of DC stock for $60x of FA stock and $20x cash, and FP exchanges its $20x of DC stock for $20x of FA stock.

(ii)
Result.
(A) The requirement of paragraph (c)(1) of this section is satisfied because DC is controlled (within the meaning

of section 368(c)) by five or fewer domestic corporations immediately before the reorganization (in this case, by a single domestic corporation, DP1). The fact that the $20x cash is distributed solely to DP1 does not change the analysis of the control requirement. The control requirement is determined immediately before the reorganization and is not affected by distributions of property.

(B) Pursuant to paragraph (f)(7) of this section, the ownership interest percentages of DP1 and FP immediately before the reorganization are 80% ($80x/($80x + $20x)) and 20% ($20x/($80x + $20x)), respectively. The fact that the $20x of cash is distributed solely to DP1 does not change this result. The distribution of the $20x of cash is not taken into account for purposes of the ownership interest percentage computation because the $20x of cash distributed by DC is provided by FA to DC in the section 361 exchange.

Example 5. Control requirement and ownership interest percentage; non-qualified property provided by U.S. transferor.

(i)
Facts.
The facts are the same as in
Example 4,
except as follows. Business A has a fair market value of $80x (and not $100x) and DC also owns inventory with a basis of $0x and fair market value of $20x. DC transfers Business A, but not the inventory, to FA in exchange for $80x of FA stock. DP1 exchanges its $80x of DC stock for $60x of FA stock and the $20x of inventory, and FP exchanges its $20x of DC stock for $20x of FA stock.

(ii)
Result.
(A) The requirement of paragraph (c)(1) of this section is satisfied because DC is controlled (within the meaning of section 368(c)) by five or fewer domestic corporations immediately before the reorganization (in this case, by a single domestic corporation, DP1). The fact that the $20x of inventory is not transferred to FA, but is instead distributed solely to DP1, does not change the analysis of the control requirement. The control requirement is determined immediately before the reorganization, and is not affected by distributions of property.

(B) Pursuant to the general rule of paragraph (f)(7) of this section, the ownership interest percentages of DP1 and FP immediately before the reorganization would be 80% ($80x/($80x + $20x)) and 20% ($20x/($80x + $20x)), respectively. In this case, however, the distribution of the $20x inventory to DP1 is taken into account for purposes of computing the ownership interest percentage of DP1 and FP because the inventory is not provided by FA to DC in the section 361 exchange. With respect to DP1, the numerator of the ownership interest percentage computation is $60x, computed as the fair market value of DC stock owned by DP1 immediately before the reorganization but reduced by the fair market value of the inventory distributed to DP1 ($80x less $20x). With respect to FP, the numerator of the ownership interest percentage computation is $20x, the fair market value of the DC stock owned by FP immediately before the reorganization. With respect to both DP1 and FP, the denominator of the ownership interest percentage computation is $80x, computed as the fair market value of all DC stock immediately before the reorganization, but reduced by the fair market value of the inventory distributed to DP1 ($100x, less $20x). Accordingly, the ownership interest percentage of DP1 is 75% ($60x/$80x), and the ownership interest percentage of FP is 25% ($20x/$80x).

(h)
Applicable cross-references.
For rules relating to the character, source, and adjustments resulting from gain recognized by a U.S. transferor under section 367(a), see § 1.367(a)-1(b)(4)(i)(B) and § 1.367(a)-1T(b)(4). For rules relating to transfers of stock or securities in a section 361 exchange, see § 1.367(a)-3T(e). For rules relating to the acquisition of the stock or assets of a foreign corporation by another foreign corporation, see § 1.367(b)-4. For rules relating to transfers of section 367(d) property by a U.S. transferor to a foreign corporation, see section 367(d). For rules relating to distributions of stock of a foreign corporation by a domestic corporation under section 355 or 361, see §§ 1.367(b)-5, 1.367(e)-1, and 1.1248(f)-1 through 1.1248(f)-3. For additional rules relating to certain reporting requirements of a U.S. transferor, see § 1.6038B-1. For rules regarding expatriated entities, see section 7874 and the regulations under that section.

(i) [Reserved].

(j)
Effective/applicability date.
This section applies to transfers occurring on or after April 18, 2013.

Par. 6.
Section 1.367(a)-8 is amended by:

1. Adding paragraph (c)(6).
2. Revising the first sentence of paragraph (j)(9).
The addition and revision read as follows:

§ 1.367(a)-8
Gain recognition agreement requirements.

(c) * * *

(6)
Cross-reference.
For gain recognition agreements entered into pursuant to certain outbound asset reorganizations, see § 1.367(a)-3T(e)(6).

(j) * * *

(9)
Gain recognition agreement filed in connection with indirect stock transfers and certain triangular asset reorganizations.
With respect to a gain recogn

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-05700. Public record. Not legal advice.