Certain Transfers of Domestic Stock or Securities by U.S. Persons to Foreign Corporations

DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 602

[TD 8638]

RIN 1545-AT44

Certain Transfers of Domestic Stock or Securities by U.S. Persons

to Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: These temporary regulations provide the public with guidance

necessary to comply with the Tax Reform Act of 1984. These regulations

amend the Income Tax Regulations with respect to certain transfers of

stock or securities of domestic corporations by United States persons

to foreign corporations pursuant to the corporate organization,

reorganization, or liquidation provisions of the Internal Revenue Code.

This Treasury decision also removes certain of the existing temporary

regulations regarding transfers by U.S. persons of stock or securities

of both domestic and foreign corporations. This action is necessary to

update the existing temporary regulations and to reflect certain of the

changes announced by Notice 87-85 (1987-2 C.B. 395) (with respect to

transfers of both domestic and foreign stock or securities) and by

Notice 94-46 (1994-1 C.B. 356) (with respect to transfers of stock or

securities of a domestic corporation). The text of these temporary

regulations also serves as the text of the proposed regulations set

forth in the notice of proposed rulemaking on this subject in the

Proposed Rules section of this issue of the Federal Register. When

finalized, the regulations under section 367(a) relating to the

transfer of stock or securities will integrate the regulations herein

with the 1991 proposed regulations relating to transfers of stock or

securities (see Proposed Rule Secs. 1.367(a)-3 and 1.367(a)-8,

published at 56 FR 41993, August 26, 1991).

EFFECTIVE DATE: April 17, 1994. For further information, see the

Applicability and Effective Dates section under SUPPLEMENTARY

INFORMATION.

FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 622-3860

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Applicability and Effective Dates

These regulations are generally applicable to transfers occurring

after April 17, 1994, the effective date of Notice 94-46. However, the

active trade or business requirement (described in Sec. 1.367(a)-

3T(c)(1)(iii) of the temporary regulations herein), which was not

contained in Notice 94-46, is effective for transfers occurring January

25, 1996. Moreover, these regulations remove as ``deadwood'' paragraphs

(c)(1) through (c)(4), (d), (e), (f), (g)(1)(iii) and (h)(1) of

Sec. 1.367(a)-3T of the existing temporary regulations with respect to

transfers occurring after December 16, 1987, the effective date of

Notice 87-85.

Paperwork Reduction Act

These regulations are being issued without prior notice and public

procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).

For this reason, the collection of information contained in these

regulations has been reviewed and, pending receipt and evaluation of

public comments, approved by the Office of Management and Budget under

control number 1545-1478. Responses to this collection of information

are required in order for U.S. shareholders that transfer stock or

securities in section 367(a) exchanges to qualify for an exception to

the general rule of taxation under section 367(a)(1).

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

For further information concerning this collection of information,

and where to submit comments on the collection of information and the

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble to the cross-referencing notice of

proposed rulemaking published in the Proposed Rules section of this

issue of the Federal Register. Books or records relating to a

collection of information must be retained as long as their contents

may become material in the administration of any internal revenue law.

Generally, tax returns and tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

On May 16, 1986, temporary and proposed regulations under sections

367 (a) and (d) and section 6038B were published in the Federal

Register (51 FR 17936). These regulations were published to provide the

public with guidance necessary to comply with changes made to the

Internal Revenue Code by the Tax Reform Act of 1984. Included in the

1986 temporary regulations was Sec. 1.367(a)-3T, concerning transfers

of stock or securities of domestic or foreign corporations by U.S.

persons to foreign corporations. Subsequently, the IRS and the Treasury

Department issued Notice 87-85 (1987-2 C.B. 395), which set forth

substantial changes to be made to Sec. 1.367(a)-3T, effective with

respect to transfers occurring after December 16, 1987. A further

notice of proposed rulemaking, containing rules under section 367(a),

as well as under section 367(b), was published in the Federal Register

on August 26, 1991 (56 FR 41993). The 1991 proposed section 367(a)

regulations were generally based upon the positions announced in Notice

87-85, but the regulations made certain modifications to Notice 87-85,

particularly with respect to transfers of stock or securities of

foreign corporations.

Most recently, the IRS and the Treasury Department issued Notice

94-46 (1994-1 C.B. 356), announcing modifications to the positions set

forth in Notice 87-85 (and the 1991 proposed regulations) with respect

to transfers of stock or securities of domestic corporations occurring

after April 17, 1994. The temporary regulations set forth herein

generally incorporate the modifications announced in Notice 94-46. The

notice of proposed rulemaking on this subject in the Proposed Rules

section of this issue of the Federal

[[Page 66740]]

Register supplements and, where inconsistent with, supersedes, the 1991

proposed regulations with respect to transfers of domestic stock or

securities occurring after April 17, 1994.

Notice 94-46 announced that the regulations under section 367(a)

would be amended to deny nonrecognition treatment to the transfer of

stock or securities of a domestic corporation by a U.S. person to a

foreign corporation if all U.S. transferors owned in the aggregate 50

percent or more of either the total voting power or the total value of

the stock of the transferee foreign corporation immediately after the

exchange. (Under the approach taken in Notice 87-85, transfers of

domestic stock or securities occurring prior to April 18, 1994 (and

after December 16, 1987) were generally denied nonrecognition treatment

only in the case of a single U.S. transferor that owned more than 50

percent of the total voting power or the total value of the stock of

the transferee foreign corporation immediately after the transfer or of

a U.S. transferor that held at least 5 percent (but no more than 50

percent) of the total voting power or the total value of the stock of

the transferee foreign corporation immediately after the transfer and

that failed to enter into a gain recognition agreement.)

In Notice 94-46, the IRS and the Treasury Department invited

comments on possible exceptions to the general rule set forth in the

Notice, specifically with respect to cases where (i) a domestic

corporation is acquired by a foreign corporation that is engaged in an

active trade or business and that, prior to the transaction, is

unrelated to the acquired corporation or its shareholders, or (ii) the

transferee foreign corporation is a controlled foreign corporation

(within the meaning of section 957) after the transfer. After

consideration of the comments received, the IRS and the Treasury

Department have concluded that no exceptions to the general rule are

warranted.

In the Notice, the IRS and the Treasury Department also invited

specific comment on whether special rules should be provided to

determine the ownership of the transferee foreign corporation in cases

where the corporation is publicly traded. As described below, in

response to comments received, the ``cross-ownership'' rules of Notice

94-46 have been modified in a way that will ameliorate the burdens of

identifying shareholders of publicly traded (or widely-held)

corporations and that should reduce the impact of the general rule on

business combinations involving unrelated U.S. and foreign corporations

that are engaged in the active conduct of a trade or business.

Need for Temporary Regulations

The rules contained in this Treasury decision provide taxpayers

with guidance necessary to comply with Notice 94-46, which was

effective with respect to transfers of stock or securities of domestic

corporations to foreign corporations occurring after April 17, 1994.

The provisions of Notice 94-46 were made immediately effective to

forestall certain tax-avoidance transfers by U.S. persons of the stock

of U.S.-based multinationals to foreign corporations. Because of the

Notice's immediate effective date, there is a need for implementing

regulations on which both taxpayers and the Service may rely with

respect to current transfers.

Based on these considerations, it is determined that immediate

regulatory guidance will ensure the efficient administration of the tax

laws and that it would be impracticable and contrary to the public

interest to issue this Treasury decision with prior notice under

section 553(b) or subject to the effective date limitation of section

553(d) of title 5 of the United States Code.

Explanation of Provisions

Section 367(a)(1) generally treats a transfer of property

(including stock or securities) by a U.S. person to a foreign

corporation in connection with an exchange described in section 332,

351, 354, 356 or 361 as a taxable exchange unless the transfer

qualifies for an exception to this general rule. Temporary regulations

published on May, 16, 1986 (TD 8087) provided exceptions in the case of

certain transfers of stock or securities of domestic and foreign

corporations (see Sec. 1.367(a)-3T). Notice 87-85 announced

modifications to those exceptions for transfers of domestic or foreign

stock or securities occurring after December 16, 1987. Proposed

regulations issued on August 26, 1991 largely incorporated the

positions set forth in Notice 87-85, and expanded the application of

section 367(a) with respect to certain transfers of stock or securities

of foreign corporations. Notice 94-46 announced modifications to the

exceptions originally announced in Notice 87-85, effective with respect

to certain transfers of stock or securities of domestic corporations

occurring after April 17, 1994.

Both the temporary regulations herein and the notice of proposed

rulemaking on this subject in the Proposed Rules section of this issue

of the Federal Register generally incorporate the positions taken in

Notice 94-46, with modifications as described below. As indicated

previously, Notice 94-46 did not modify the positions taken in Notice

87-85 governing the transfer of stock or securities of a foreign

corporation. Until the 1991 proposed regulations are finalized, the

positions originally announced in Notice 87-85 will continue to govern

the availability of section 367(a) exceptions for transfers of stock or

securities of foreign corporations.

In addition to implementing the positions announced in Notice 94-

46, this Treasury decision removes those portions of Sec. 1.367(a)-3T

of the 1986 temporary regulations that Notice 87-85 announced would no

longer be applicable with respect to stock transfers occurring after

December 16, 1987. This includes removal of the exceptions in

paragraphs (c) (1) through (4) (providing exceptions for certain

transfers of domestic stock or securities); of paragraph (d) (providing

exceptions for certain transfers of foreign stock or securities,

including an exception for transfers to a foreign corporation organized

in the same foreign country as the corporation the stock of which is

being transferred); of paragraph (e) (involving exceptions where stock

is an operating asset or where there is a consolidation of an

integrated business); and of paragraph (f) (exceptions where U.S.

transferors obtain a limited interest in the transferee foreign

corporation).

The temporary regulations herein also incorporate (in paragraph

(a)) the 1991 proposed regulations' restatement of the general rule

applicable to outbound stock transfers (see Prop. Reg. Sec. 1.367(a)-

3(a)). This restatement revises the general rule contained in the 1986

temporary regulations to reflect changes to section 367 made by

Congress after promulgation of those regulations. For example, the 1986

temporary regulations' statement of the general rule included transfers

of stock or securities in section 332 liquidations as one of the

transactions covered by section 367(a) (see Sec. 1.367(a)-3T(a)). The

restatement of the general rule in the temporary regulations herein

removes the reference to section 332 because an outbound transfer of

stock or securities pursuant to a section 332 liquidation is now

covered by section 367(e)(2) and the regulations under Sec. 1.367(e)-

2T. Even though the temporary regulations under Sec. 1.367(e)-2T have

sunset (because they were promulgated as temporary regulations on

January 12, 1990 (TD 8280) and were not finalized within three years of

that date), the Service announced its

[[Page 66741]]

intention to follow the principles of those regulations in the preamble

to the final regulations under section 367(e)(1) (see the preamble to

the final section 367(e)(1) regulations in TD 8472, adopted January 15,

1993).

The revised statement of the general rule herein refers explicitly

to transfers that may be indirect or constructive. Thus, transactions

that are recharacterized as indirect or constructive stock transfers

will be subject to the section 367(a) stock transfer regulations and

will be taxable unless an exception applies.

The restatement of the general rule herein is not intended to

change the 1986 temporary regulations' treatment of a case in which

stock or securities of a foreign corporation are transferred pursuant

to a reorganization described in section 368(a)(1)(B), including a

transaction that is described in both section 368(a)(1)(B) and section

351. It is anticipated, however, that the final regulations issued with

respect to an outbound transfer of foreign stock or securities will

incorporate the principles of the 1991 proposed regulations, and thus,

for example, a transaction described in both section 368(a)(1)(B) and

section 351 will be subject to section 367(a).

Notice 87-85 and the 1991 Proposed Regulations

Under Notice 87-85 and the 1991 proposed regulations, a U.S.

transferor of stock or securities that owns five percent or more of

either the total voting power or the total value of the transferee

foreign corporation immediately after the transfer generally is not

subject to current taxation under section 367(a)(1) if that transferor

enters into a gain recognition agreement (GRA). The term of the GRA is

five years if all U.S. transferors, in the aggregate, own less than 50

percent of both the total voting power and the total value of the stock

of the transferee foreign corporation immediately after the transfer,

or ten years if the U.S. transferors, in the aggregate, own 50 percent

or more of either the total voting power or the total value of the

stock of the transferee foreign corporation immediately after the

transfer. U.S. transferors that own an interest of less than 5 percent

in the transferee foreign corporation immediately after the transfer

are not taxable under section 367(a)(1) and are not required to enter

into a GRA. If a single U.S. transferor transfers stock or securities

of a domestic corporation and owns directly or by attribution more than

50 percent of either the total voting power or the total value of the

stock of the transferee foreign corporation immediately after the

transfer, gain is recognized on the exchange.

The determination whether (i) a U.S. transferor owns five percent

or more of the transferee foreign corporation immediately after the

transfer, (ii) U.S. transferors own in the aggregate 50 percent or more

of the transferee foreign corporation (and, thus, whether a 10-year GRA

is required), or (iii) a single U.S. transferor owns more than 50

percent of the transferee foreign corporation (and, thus, whether gain

is recognized) takes into account both stock of the transferee foreign

corporation received by the U.S. transferor(s) in the exchange and

stock in the transferee foreign corporation owned by the U.S.

transferor(s) independent of the exchange (referred to as cross-

ownership).

Notice 87-85 and the 1991 proposed regulations presume that U.S.

transferors own in the aggregate 50 percent or more of the total voting

power or the total value of the transferee foreign corporation

immediately after the transfer (and thus a ten-year GRA is required),

unless U.S. transferors can demonstrate otherwise (referred to as the

ownership presumption). The ownership presumption contained in both the

Notice and the 1991 proposed regulations actually consists of two

rebuttable presumptions, one relating to ownership of stock in the U.S.

corporation the stock or securities of which are transferred (referred

to as the U.S. target company) and the other relating to ownership of

stock in the transferee foreign corporation.

Under the first presumption, all persons that exchange U.S. target

company stock (or other property) for stock of the transferee foreign

corporation in the exchange are presumed to be U.S. persons. Thus, if

shareholders of the U.S. target company receive 50 percent or more of

the stock of the transferee foreign corporation in the exchange, U.S.

transferors are presumed to own 50 percent or more of the stock of the

transferee foreign corporation immediately after the transfer. Even if

application of this first presumption does not result in U.S.

transferors being deemed to own at least 50 percent of the total voting

power or the total value of the transferee foreign corporation

immediately after the transfer, the second presumption may do so. The

second presumption is that U.S. transferors also own stock of the

transferee foreign corporation independent of the exchange in an amount

sufficient to bring their total ownership immediately after the

exchange up to 50 percent. This second component of the ownership

presumption is referred to as the cross-ownership presumption.

Notice 94-46

Notice 94-46 modified the exceptions set forth in Notice 87-85 with

respect to post-April 17, 1994 transfers of stock or securities of

domestic corporations. The purpose of Notice 94-46 was to forestall

outbound transfers that are structured to avoid or that lay a

foundation for future avoidance of the Internal Revenue Code anti-

deferral regimes by imposing a shareholder-level tax on such transfers.

Notice 94-46 stated that regulations would provide that the transfer of

stock or securities of a domestic corporation by a U.S. person to a

foreign corporation described in section 367(a) would be taxable if all

U.S. transferors owned, in the aggregate, 50 percent or more of either

the total voting power or the total value of the stock of the

transferee corporation immediately after the exchange. All U.S.

transferors, regardless of their level of ownership, would be subject

to tax in such a case.

The rules of Notice 94-46 incorporated the ownership presumption of

Notice 87-85. As a result of the cross- ownership aspect of that

presumption, even if U.S. shareholders receive significantly less than

50 percent of the stock of a transferee foreign corporation in an

exchange described in section 367(a), the transaction could still be

taxable. If, for example, U.S. shareholders of a U.S. target company

received 30 percent of the stock of a transferee foreign corporation in

an exchange described in section 367(a)(1), those shareholders would be

presumed to own independently at least an additional 20 percent of the

stock of the transferee foreign corporation immediately after the

transfer, with the result that the exchange would be taxable (unless

the cross-ownership presumption were rebutted). Commentators argued

that where a U.S. target company and a foreign acquirer were publicly

traded or widely-held, taxpayers' ability to rebut the cross-ownership

aspect of the ownership presumption was limited. As a result, Notice

94-46 potentially had the effect of forestalling acquisitions of U.S.

public companies by larger foreign corporations in cases where they

were unrelated and both engaged in the active conduct of a trade or

business.

In response to comments received from taxpayers, and in particular

with respect to the difficulties of rebutting the cross-ownership

presumption, these temporary regulations modify positions taken in

Notice 94-46 in two significant ways. First, the regulations shift the

ownership threshold from ``50 percent

[[Page 66742]]

or more'' to ``more than 50 percent'' so that a U.S. transferor may

qualify for an exception to section 367(a) in cases where U.S.

transferors, in the aggregate, receive exactly 50 percent of the stock

of the transferee foreign corporation in the exchange. The relaxation

of the ownership threshold was intended to give 50-50 joint ventures

involving unrelated U.S. and foreign corporations that are engaged in

active businesses the option of using a foreign transferee corporation.

Where a foreign corporation is smaller than a U.S. corporation that it

acquires, the transaction will still generally be taxable; it would not

be taxable if the U.S. participant were the acquiring corporation in

the transaction (or if another U.S. holding company were the acquiring

corporation). Second, although the regulation retains the presumption

that shareholders of the U.S. target company are U.S. persons, it does

not, in general, retain the cross-ownership presumption and no longer,

as a general matter, takes cross-ownership into account. The regulation

counts cross-ownership only in the limited circumstance where U.S.

officers, directors, and 5-percent or greater shareholders of the U.S.

target company own, in the aggregate, more than 50 percent of the total

voting power or the total value of the transferee foreign corporation

immediately after the transfer (a control group case). In such a case,

the exchange is taxable to all U.S. transferors. The regulation allows

taxpayers to rely on Schedule 13-D or 13-G filings made under the

Securities Exchange Act of 1934 (15 U.S.C. 78m) to identify 5-percent

shareholders of public companies for this purpose.

Although cross-ownership does not count toward the 50 percent

ownership threshold (unless the control group case applies), it is

still relevant in determining whether a U.S. transferor owns five

percent or more of the transferee foreign corporation under the rules

originally announced in Notice 87-85. Moreover, cross-ownership

continues to be relevant for determining whether a 5-year or 10-year

GRA is required under the rules originally announced in 87-85, and, for

these purposes, there continues to be a rebuttable presumption.

In addition to the two modifications described above that were made

in response to comments received with respect to Notice 94-46, these

regulations contain a new active trade or business requirement not

contained in Notice 94-46, which taxpayers must meet in order to

qualify for an exception to the general rule of taxation under section

367(a). The IRS and the Treasury Department added the active trade or

business requirement to address abuse potential, in particular, in a

case in which a U.S. target company is smaller than a foreign acquirer

that was formed and capitalized with a view to enabling the smaller

U.S. company to move offshore. The IRS and the Treasury Department

believe that this type of transaction presents an inappropriate

opportunity for avoiding the anti-deferral regime without payment of

the tax envisioned by Notice 94-46. The IRS and the Treasury Department

believe that an exception to taxation is proper only in cases where a

combination of two active businesses is contemplated and that the

opportunity for tax avoidance is ameliorated when such businesses have

been conducted for a period of at least 36 months prior to the

exchange. Under the requirement contained in the regulations, no

exception to taxation is available unless either the transferee foreign

corporation or an affiliate of that corporation was engaged in the

active conduct of a trade or business for the entire 36-month period

prior to the exchange, and unless such business is substantial in

relation to the business conducted by the U.S. target company. For this

purpose, an affiliate is generally defined by reference to the rules in

section 1504(a) (without the exclusion of foreign corporations), and

generally includes a parent, subsidiary or brother-sister corporation

of the transferee foreign corporation.

To summarize, under the temporary regulations, a U.S. person that

exchanges stock or securities in a U.S. corporation for stock of a

foreign corporation in an exchange described in section 367(a) will be

taxable in cases where:

(i) The 50 percent ownership threshold is exceeded;

(ii) The control group case applies;

(iii) The active trade or business requirement is not met; or

(iv) The exchanging U.S. shareholder owns five percent or more of

the stock of the transferee foreign corporation and fails to enter into

a GRA and/or satisfy the requirements of section 6038B.

The duration of the GRA in case (iv) is 5 years if the transferor

can demonstrate that all U.S. transferors in the aggregate own less

than 50 percent of the total voting power or the total value of the

stock of the transferee foreign corporation immediately after the

transfer or 10 years if U.S. transferors own exactly 50 percent (or

more than 50 percent as a result of cross-ownership) of the transferee

foreign corporation immediately after the transfer. In all cases other

than those enumerated in (i) through (iv) above, a U.S. person that

transfers stock or securities of a domestic corporation in exchange for

stock of a transferee foreign corporation will not be taxable under

section 367(a) if certain reporting requirements described in the

regulations are met.

Final regulations under section 367(a) are expected to address the

transfer of stock or securities of foreign corporations and other

matters contained in the 1991 proposed regulations that are not

addressed herein.

Special Analyses

It has been determined that this temporary regulation is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not required. It also has been

determined that this regulation does not have a significant impact on a

substantial number of small entities. Thus, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply to these regulations, and

therefore, a Regulatory Flexibility Analysis is not required. Pursuant

to section 7805(f) of the Internal Revenue Code, a copy of these

temporary regulations will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small business.

Drafting Information

The principal author of these regulations is Philip L. Tretiak of

the Office of Associate Chief Counsel (International), within the

Office of Chief Counsel, Internal Revenue Service. However, other

personnel from the IRS and Treasury Department 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 continues to read in

part as follows:

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

[[Page 66743]]

Par. 2. Section 1.367(a)-3T is amended by revising paragraphs (a),

(c), (d), (e), (f), (g)(1) and (h)(1) to read as follows:

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

foreign corporations (temporary).

(a) In general. This section provides rules concerning the transfer

of stock or securities by a U.S. person to a foreign corporation in an

exchange described in section 367(a). In general, a transfer of stock

or securities by a U.S. person (directly, indirectly or constructively)

to a foreign corporation that is described in section 351, 354

(pursuant to a reorganization described in section 368(a)(1)(B)) or

section 361(a) or (b) is subject to section 367(a)(1) and, therefore,

is treated as a taxable exchange, unless one of the exceptions set

forth in paragraph (b), (c) or (d) of this section applies. For

additional rules relating to an exchange involving a foreign

corporation in connection with which there is a transfer of stock, see

section 367(b) and the regulations under that section. For additional

rules regarding a transfer of stock or securities in an exchange

described in section 361(a) or (b), see section 367(a)(5) and any

regulations under that section.

* * * * *

(c) Transfers by U.S. persons of stock or securities of domestic

corporations to foreign corporations--(1) In general. Except as

provided in section 367(a)(5), a transfer of stock or securities of a

domestic corporation by a U.S. person to a foreign corporation that

would otherwise be subject to section 367(a)(1) under paragraph (a) of

this section shall not be subject to section 367(a)(1) if the domestic

corporation the stock or securities of which are transferred (referred

to as the U.S. target company) complies with the reporting requirements

in paragraph (c)(4) of this section and if each of the following four

conditions is met:

(i) Fifty percent or less of both the total voting power and the

total value of the stock of the transferee foreign corporation is

received in the transaction, in the aggregate, by U.S. transferors

(i.e., the amount of stock received does not exceed the 50 percent

threshold).

(ii) No more than 50 percent of each of the total voting power and

the total value of the stock of the transferee foreign corporation is

owned, in the aggregate, immediately after the transfer by U.S. persons

who are either officers or directors of the U.S. target company or who

are five-percent target shareholders (as defined in paragraph

(c)(6)(iii) of this section) (i.e., there is no control group). For

purposes of this paragraph (c)(1)(ii), any stock of the transferee

foreign corporation owned by U.S. persons immediately after the

transfer will be taken into account, whether or not it was received in

the exchange for stock or securities of the U.S. target company.

(iii) In the case of a transfer occurring after January 25, 1996,

the transferee foreign corporation or an affiliate of the transferee

foreign corporation has been engaged in the active conduct of a trade

or business, within the meaning of Sec. 1.367(a)-2T(b)(2) and (3), that

is substantial in comparison to the trade or business of the U.S.

target company, for the entire 36-month period immediately preceding

the date of the transfer.

(iv) Either--

(A) The U.S. person is not a five-percent transferee shareholder

(as defined in paragraph (c)(6)(ii) of this section); or

(B) The U.S. person is a five-percent transferee shareholder and

enters into an agreement to recognize gain with respect to the U.S.

target company stock or securities it exchanged in the form provided in

paragraph (g) of this section, as modified by paragraph (c)(3) of this

section (setting the duration of the gain recognition agreement).

(2) Ownership Presumption. For purposes of paragraph (c)(1) of this

section, persons who transfer stock or securities of the U.S. target

company or other property in exchange for stock of the transferee

foreign corporation are presumed to be U.S. persons. This presumption

may be rebutted in accordance with paragraph (c)(4)(ii) of this

section.

(3) Term of the gain recognition agreement. If, immediately after

the transfer described in section 367(a)(1), all U.S. transferors own

in the aggregate less than fifty percent of both the total voting power

and the total value of the stock of the transferee foreign corporation

(counting both stock of the transferee foreign corporation owned as a

result of the exchange as well as stock of the transferee foreign

corporation owned independently by such U.S. transferors), the

agreement to recognize gain shall be in the form specified in paragraph

(g)(3) of this section. The term of the agreement shall be ten years,

rather than the five years specified in paragraph (g)(3) of this

section, the waiver described in paragraph (g)(4) of this section shall

extend the period for assessment of tax for an additional five years,

and the certification and waiver described in paragraph (g)(5) of this

section must be filed for an additional five years if--

(i) The five-percent transferee shareholder cannot determine

whether the condition in the preceding sentence is satisfied; or

(ii) Immediately after the transfer, all U.S. transferors own in

the aggregate fifty percent or more of either the total voting power or

the total value of the stock of the transferee foreign corporation

(counting both stock of the transferee foreign corporation owned as a

result of the exchange, as well as stock of the transferee foreign

corporation owned independently by such U.S. transferors).

(4) Reporting requirements of U.S. target company. (i) In order for

a U.S. person that transfers stock or securities of a domestic

corporation to qualify for the exception to the general rule under

section 367(a)(1) provided by this paragraph (c), the U.S. target

company must comply with the reporting requirements contained in this

paragraph (c)(4). The U.S. target company must attach to its timely

filed U.S. income tax return (or a subsequent, timely filed amended

return) for the taxable year in which the transfer occurs a statement

titled ``Section 367(a)--Reporting of Cross-Border Transfer Under Reg.

Sec. 1.367(a)-3T(c)(4),'' signed under penalties of perjury by an

officer of the corporation, disclosing the following information--

(A) A description of the transaction in which a U.S. person or

persons transferred stock or securities in the U.S. target company to

the transferee foreign corporation in a transfer otherwise subject to

section 367(a)(1);

(B) The amount (specified as to the percentage of the total voting

power and the total value) of stock of the transferee foreign

corporation received in the transaction, in the aggregate, by persons

who transferred stock or securities of the U.S. target company or other

property. For additional information that may be required to rebut the

ownership presumption of paragraph (c)(2) of this section in cases

where more than 50 percent of either the total voting power or the

total value of the stock of the transferee foreign corporation is

received in the transaction, in the aggregate, by persons who

transferred stock or securities of the U.S. target company or other

property, see paragraph (c)(4)(ii) of this section;

(C) The amount (if any) of transferee foreign corporation stock

owned directly or indirectly (applying the attribution rules of

sections 267(c)(1) and (5)) immediately after the exchange by the U.S.

target company;

[[Page 66744]]

(D) A statement that there is no control group within the meaning

of paragraph (c)(1)(ii) of this section;

(E) A list of U.S. persons who are officers, directors or five-

percent target shareholders and the percentage of the total voting

power and the total value of the stock of the transferee foreign

corporation owned by such persons both immediately before and

immediately after the transaction; and

(F) A statement that the active trade or business test described in

paragraph (c)(1)(iii) of this section is satisfied by the transferee

foreign corporation or an affiliate and a description of such business.

(ii) To rebut the ownership presumption of paragraph (c)(2) of this

section, the U.S. target company must obtain ownership statements

(described in paragraph (c)(6)(i) of this section) from a sufficient

number of persons that transfer U.S. target company stock or securities

(or other property) in the transaction that are not U.S. persons to

demonstrate that the 50 percent threshold is not exceeded. In addition,

the U.S. target company must attach to its timely filed U.S. income tax

return (or a subsequent, timely filed amended return) for the taxable

year in which the transfer occurs a statement, titled ``Section

367(a)--Compilation of Ownership Statements under Reg. Sec. 1.367(a)-

3T(c),'' signed under penalties of perjury by an officer of the

corporation, disclosing the following information:

(A) The amount (specified as to the percentage of the total voting

power and the total value) of stock of the transferee foreign

corporation received, in the aggregate, by U.S. transferors;

(B) The amount (specified as to the percentage of total voting

power and total value) of stock of the transferee foreign corporation

received, in the aggregate, by foreign persons that filed ownership

statements;

(C) A summary of the information tabulated from the ownership

statements, including--

(1) The names of the persons that filed ownership statements

stating that they are not U.S. persons;

(2) The countries of residence and citizenship of such persons; and

(3) The ownership of such persons (by voting power and by value) in

the U.S. target company prior to the exchange and the amount of stock

of the transferee foreign corporation (by voting power and value)

received by such persons in the exchange.

(iii) For purposes of paragraph (c)(4), an income tax return

(including an amended return) will be considered timely filed if it is

filed prior to the time that the Internal Revenue Service discovers

that the reporting requirements of this paragraph have not been

satisfied.

(5) Special Rules--(i) Treatment of partnerships. For purposes of

paragraph (c), if a partnership (whether domestic or foreign) owns or

transfers stock or securities or other property in an exchange

described in section 367(a), each partner in the partnership, and not

the partnership itself, is treated as owning and as having transferred

a proportionate share of the stock or securities or other property. See

Sec. 1.367(a)-1T(c)(3).

(ii) Treatment of options. For purposes of paragraph (c) of this

section, one or more options (or an interest similar to an option) will

be treated as exercised and thus will be counted as stock for purposes

of determining whether the 50 percent threshold is exceeded or whether

a control group exists if a principal purpose of the issuance or the

acquisition of the option (or other interest) was the avoidance of the

general rule contained in section 367(a).

(iii) U.S. target has a vestigial ownership interest in transferee

foreign corporation. In cases where, immediately after the transfer,

the U.S. target company owns, directly or indirectly (applying the

attribution rules of sections 267(c) (1) and (5)) stock of the

transferee foreign corporation, that stock will not in any way be taken

into account (and, thus, will not be treated as outstanding) in

determining whether the 50 percent threshold under paragraph (c)(1)(i)

of this section is exceeded or whether a control group under paragraph

(c)(1)(ii) of this section exists.

(iv) Attribution rule. The rules of section 958 shall apply for

purposes of determining the ownership of stock, securities or other

property under this paragraph (c).

(6) Definitions--(i) Ownership statement. An ownership statement is

a statement, signed under penalties of perjury, stating--

(A) The identity and taxpayer identification number, if any, of the

person making the statement;

(B) That the person making the statement is not a U.S. person (as

defined in paragraph (c)(6)(iv) of this section);

(C) That the person making the statement is not related to any U.S.

person to whom the stock or securities owned by the person making the

statement are attributable under the rules of section 958, or, if stock

or securities are so attributable, the identity and taxpayer

identification number of the relevant U.S. person;

(D) The citizenship, permanent residence, home address, and U.S.

address, if any, of the person making the statement; and

(E) The ownership such person has (by voting power and by value) in

the U.S. target company prior to the exchange and the amount of stock

of the transferee foreign corporation (by voting power and value)

received by such person in the exchange.

(ii) Five-percent transferee shareholder. A five-percent transferee

shareholder is a person that owns at least five percent of either the

total voting power or the total value of the stock of the transferee

foreign corporation immediately after the transfer described in section

367(a)(1). For special rules involving cases in which stock is held by

a partnership, see paragraph (c)(5)(i) of this section.

(iii) Five-percent target shareholder. A five-percent target

shareholder is a person that owns at least five percent of either the

total voting power or the total value of the stock of the U.S. target

company immediately prior to the transfer described in section

367(a)(1). If the stock of the U.S. target company is described in Rule

13d-1(d) of Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or

regulation to generally the same effect), promulgated by the Securities

and Exchange Commission under the Securities Exchange Act of 1934 (15

USC 78m), the existence or absence of filings of Schedule 13-D or 13-G

(or any similar schedules) may be relied upon for purposes of

identifying five-percent target shareholders. For special rules

involving cases in which U.S. target company stock is held by a

partnership, see paragraph (c)(5)(i) of this section.

(iv) U.S. Person. For purposes of this section, a U.S. person is

defined by reference to Sec. 1.367(a)-1T(d)(1). For application of the

rules of this section to stock or securities owned or transferred by a

partnership that is a U.S. person, however, see paragraph (c)(5)(i) of

this section.

(v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined

in paragraph (c)(6)(iv) of this section) who transfers directly,

indirectly or constructively stock or securities of the U.S. target

company or other property in exchange for stock of the transferee

foreign corporation in an exchange described in section 367.

(vi) Transferee foreign corporation. A transferee foreign

corporation is the foreign corporation whose stock is received in the

exchange by U.S. persons.

[[Page 66745]]

(vii) Affiliate. An affiliate is a corporation that is a member of

the same affiliated group (as defined in section 1504(a), without

regard to section 1504(b)(3)) as the transferee foreign corporation.

(7) Certain transfers in connection with performance of services.

Section 367(a)(1) shall not apply to a domestic corporation's transfer

of its own stock or securities in connection with the performance of

services, if the transfer is considered to be to a foreign corporation

solely by reason of Sec. 1.83-6(d)(1).

(8) Examples. This paragraph (c) may be illustrated by the

following examples:

Example 1. Ownership presumption. (i) FC, a foreign corporation,

issues 51 percent of its stock to the shareholders of S, a domestic

corporation, in exchange for their S stock, in a transaction

described in section 367(a)(1).

(ii) Under paragraph (c)(2) of this section, all shareholders of S

who receive stock of FC in the exchange are presumed to be U.S.

persons. Unless this ownership presumption is rebutted, the condition

set forth in paragraph (c)(1)(i) of this section will not be satisfied,

and the exception in paragraph (c)(1) of this section will not be

available. As a result, all U.S. persons that transferred S stock will

recognize gain on the exchange. To rebut the ownership presumption, S

must comply with the reporting requirements contained in paragraph

(c)(4)(ii) of this section, obtaining ownership statements (described

in paragraph (c)(6)(i) of this section) from a sufficient number of

non-U.S. persons who received FC stock in the exchange to demonstrate

that the amount of FC stock received by U.S. persons in the exchange

does not exceed 50 percent.

Example 2. Filing of Gain Recognition Agreement. (i) The facts are

the same as in Example 1, except that FC issues only 40 percent of its

stock to the shareholders of S in the exchange. FC satisfies the active

trade or business test (described in paragraph (c)(1)(iii) of this

section). A, a U.S. person, owns 10 percent of S's stock immediately

before the transfer. All other shareholders of S own less than five

percent of its stock. None of S's officers or directors owns any stock

in FC immediately after the transfer. A will own 15 percent of the

stock of FC immediately after the transfer, 4 percent received in the

exchange, and the balance being stock in FC that A owned prior to and

independent of the transaction. No S shareholder besides A owns five

percent or more of FC immediately after the transfer. The reporting

requirements under paragraph (c)(4)(i) of this section are satisfied.

(ii) The condition set forth in paragraph (c)(1)(i) of this

section is satisfied because, even after application of the

presumption in paragraph (c)(2) of this section, U.S. transferors

could not receive more than 50 percent of FC's stock in the

transaction. There is no control group because five-percent target

shareholders and officers and directors of S do not, in the

aggregate, own more than 50 percent of the stock of FC immediately

after the transfer (A, the sole five-percent target shareholder,

owns 15 percent of the stock of FC immediately after the transfer,

and no officers or directors of S own any stock of FC immediately

after the transfer). Therefore, the condition set forth in paragraph

(c)(1)(ii) of this section is satisfied (and A's cross-ownership of

FC stock is not taken into account). The facts assume that the

condition set forth in paragraph (c)(1)(iii) of this section is

satisfied. Thus, U.S. persons that are not five-percent transferee

shareholders will not recognize gain on the exchange of S shares for

FC shares. A, a five-percent transferee shareholder, will not be

required to include in income any gain realized on the exchange in

the year of the transfer if he files a gain recognition agreement

(GRA) and complies with section 6038B. The duration of the GRA is

five years if all U.S. transferors own in the aggregate less than 50

percent of the total voting power and the total value of FC

immediately after the transfer, and ten years if this condition is

not satisfied. If A lacks the information to determine whether he is

eligible to file a five-year GRA (because the determination includes

a cross-ownership inquiry for all U.S. transferors), he is required

to file a ten-year GRA.

Example 3. Control Group. (i) The facts are the same as in Example

2, except that B, another U.S. person, is a 5- percent target

shareholder, owning 25 percent of S's stock immediately before the

transfer. B owns 40 percent of the stock of FC immediately after the

transfer, 10 percent received in the exchange, and the balance being

stock in FC that B owned prior to and independent of the transaction.

(ii) A control group exists because A and B, each a five-percent

target shareholder within the meaning of paragraph (c)(6)(iii) of this

section, together own more than 50 percent of FC immediately after the

transfer (counting both stock received in the exchange and stock owned

prior to and independent of the exchange). As a result, the condition

set forth in paragraph (c)(1)(ii) of this section is not satisfied, and

all U.S. persons (not merely A and B) who transferred S stock will

recognize gain on the exchange.

Example 4. Partnerships. (i) The facts are the same as in

Example 3, except that B is a partnership (domestic or foreign) that

has five equal partners, only two of whom, X and Y, are U.S.

persons. X and Y are treated as the owners and transferors of 5

percent each of the S stock owned and transferred by B and as owners

of 8 percent each of the FC stock owned by B immediately after the

transfer. Five-percent target shareholders thus own a total of 31

percent of the stock of FC immediately after the transfer (A's 15

percent, plus X's 8 percent, plus Y's 8 percent).

(ii) Because no control group exists, the condition in paragraph

(c)(1)(ii) of this section is satisfied. The conditions in paragraphs

(c)(1) (i) and (iii) of this section also are satisfied. Thus, U.S.

persons that are not five- percent transferee shareholders will not

recognize gain on the exchange of S shares for FC shares. A, X, and Y,

each a five-percent transferee shareholder, will not be required to

include in income in the year of the transfer any gain realized on the

exchange if they file GRAs and comply with section 6038B. The duration

of the GRA is five years if all U.S. transferors own in the aggregate

less than 50 percent of the total voting power and the total value of

FC immediately after the transfer, and ten years if this condition is

not satisfied. If A, X, and Y lack the information to determine whether

they are eligible to file five-year GRAs (because the determination

includes a cross- ownership inquiry for all U.S. transferors), they are

required to file ten-year GRAs.

(9) Effective date. This paragraph (c) applies to transfers

occurring after April 17, 1994. However, paragraph (c)(1)(iii) of this

section applies only to transfers occurring after January 25, 1996. For

transfers occurring before December 17, 1987, see Sec. 1.367(a)-3T(c)

(1) through (4) as contained in 26 CFR Part 1 revised April 1, 1995.

(d) Transfers of stock or securities of foreign corporations. For

guidance, see Notice 87-85 (1987-2 C.B. 395). See Sec. 601.601(d)(2) of

this chapter.

(e) [Reserved.] For transfers occurring before December 17, 1987,

see Sec. 1.367(a)-3T(e) as contained in 26 CFR Part 1 revised April 1,

1995.

(f) [Reserved.] For transfers occurring before December 17, 1987,

see Sec. 1.367(a)-3T(f) as contained in 26 CFR Part 1 revised April 1,

1995.

(g) Transferor's agreement to recognize gain upon later disposition

by transferee--(1) In general. A transfer of stock or securities shall

not be subject to section 367(a)(1) if--

(i) The transferor complies with the reporting requirements of

section 6038B and any regulations thereunder; and

(ii) The transferor files a binding agreement to recognize gain

upon the transferee corporation's later disposition of the transferred

stock or securities, in

[[Page 66746]]

accordance with the rules of this section.

* * * * *

(h) Anti-abuse rules.

(1) [Reserved.] For transfers occurring before December 17, 1987,

see Sec. 1.367(a)-3T(h)(1) as contained in 26 CFR Part 1 revised April

1, 1995.

* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority for citation for part 602 continues to read

as follows:

Authority: 26 U.S.C. 7805.

Par. 4. In Sec. 602.101, paragraph (c) is amended by revising the

entry in the table for ``1.367(a)-3T'' to read as follows:

``1.367(a)-3T.............................. 0026

1478''.

Dated: December 13, 1995.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95-30829 Filed 12-22-95; 8:45 am]

BILLING CODE 4830-01-U