Treatment of Section 355 Distributions by U.S. Corporations to Foreign Persons

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209827-96]

RIN 1545-AU22

Treatment of Section 355 Distributions by U.S. Corporations to

Foreign Persons

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary

regulations and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: In the Rules and Regulations section of this issue of the

Federal Register, the IRS is issuing temporary regulations revising the

final regulations under section 367(e)(1) with respect to section 355

distributions of stock or securities by domestic corporations to

foreign persons. The IRS is also modifying the temporary regulations

under section 6038B to provide that distributions described under

section 367(e)(1) are subject to rules under section 6038B. The text of

those temporary regulations also serves as the text of these proposed

regulations. This document also provides notice of a public hearing on

these proposed regulations.

DATES: Written comments must be received by November 7, 1996. Outlines

of topics to be discussed at the public hearing scheduled for November

20, 1996, at 10 a.m. must be received by October 31, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (INTL 0020-96), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand

delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R

(INTL-0020-96), Courier's Desk, Internal Revenue Service, 1111

Constitution Ave. NW., Washington, DC. The public hearing will be held

in the IRS Auditorium, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Philip L.

Tretiak at (202) 622-3860; concerning submissions and the hearing,

Evangelista Lee at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

[[Page 42218]]

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of information should be sent to the

Office of Management and Budget, Attn: Desk Officer for the Department

of Treasury, Office of Information and Regulatory Affairs, Washington,

DC 20503, with copies to the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP, Washington, DC 20224. Alternatively,

taxpayers may submit comments electronically via the Internet by

selecting the ``Tax Regs'' option on the IRS Home Page, or by

submitting comments directly to the IRS Internet site at http://

www.irs.ustreas.gov/prod/tax regs/comments.html. Comments on the

collection of information should be received by October 15, 1996.

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

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

information displays a valid control number.

The collection of information under section 367(e)(1) is in

Sec. 1.367(e)-1T(c) (1)(ii), (2)(i)(C) and (3). The temporary

regulations provide that in order for taxpayers to qualify for either

the ``U.S. real property holding corporation exception'' or the

``publicly traded corporation'' exception, taxpayers must comply with

the reporting requirements contained in Sec. 1.367(e)-1T(c)(1)(ii) and

Sec. 1.367(e)-1T(c)(2)(i)(C), respectively. The temporary regulations

also modify the reporting requirements under the ``gain recognition

agreement'' exception (Sec. 1.367(e)-1T(c)(3)). Under the temporary

regulations, the controlled corporation, in addition to the

distributing corporation, must sign the gain recognition agreement

(Sec. 1.367(e)-1T(c)(3) (ii)(F) and (iii)), extend the statute of

limitations accordingly (Sec. 1.367(e)-1T(c)(3) (ii)(F) and (iv)), and

annually report its distributees to the distributing corporation but

not the Service (Sec. 1.367(e)-1T(c)(3)(v)(B)). This information is

required by the IRS as a condition for a taxpayer to qualify for an

exception to the general rule of taxation under section 367(e)(1), and

to avoid the penalties contained under section 6038B. This information

will be used to determine whether a taxpayer properly qualifies for a

claimed exception. The respondents generally will be U.S. corporations,

probably subsidiaries of foreign multinationals, that are either

distributing another corporation or being distributed under section

355, pursuant to a corporate restructuring.

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.

Estimated total annual reporting burden: 2,124 hours. (This equals

the sum of (i) the prior burden of 1,604 hours, and (ii) the additional

burden of 520 hours contained in the new regulations.) The estimated

annual burden per respondent varies from 1 hour to 8 hours, depending

on individual circumstances, with an estimated average of 2 hours.

Estimated number of respondents: 462.

Estimated annual frequency of responses: Once (in the case of

taxpayers that qualify for the U.S. real property holding company

exception and the publicly traded company exception). Annually (in the

case of taxpayers that qualify for the gain recognition agreement

exception).

Background

The temporary regulations published in the Rules and Regulations

section of this issue of the Federal Register amend the Income Tax

Regulations (26 CFR part 1) under section 367(e)(1). The temporary

regulations under section 367(e)(1) contain rules relating to the

distribution of stock or securities under section 355 by a domestic

corporation to a person that is not a U.S. person.

The text of those temporary regulations also serves as the text of

these proposed regulations. The preamble to the temporary regulations

explains the reasons for the modifications to the final regulations

contained in the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It is hereby certified that

these regulations do not have a significant impact on a substantial

number of small entities. This certification is based on the fact that

these regulations will primarily affect large multinational

corporations with foreign shareholders. The regulations do not

significantly alter the reporting or recordkeeping duties of small

entities. Therefore, a Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, this notice

of proposed rulemaking will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small business.

Comments and Notice of Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the Internal Revenue

Service. All comments will be available for public inspection and

copying.

A public hearing has been scheduled for November 20, 1996, at 10

a.m. in the IRS Auditorium. Because of access restrictions, visitors

will not be admitted beyond the building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by November 7, 1996, and submit an outline of

the topics to be discussed and the time to be devoted to each topic

(signed original and eight (8) copies) by October 31, 1996.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these proposed regulations is Philip L.

Tretiak of the Office of Associate Chief Counsel (International), IRS.

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income tax, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

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

Par. 2. Section 1.367(e)-1 is added to read as follows:

Sec. 1.367(e)-1 Treatment of section 355 distributions by U.S.

corporations to foreign persons.

[The text of this proposed section is the same as the text of

Sec. 1.367(e)-1T

[[Page 42219]]

published elsewhere in this issue of the Federal Register].

Par. 3. Section 1.6038B-1, as proposed on May 16, 1986, at 51 FR

17990, is amended by revising the second sentence of paragraph

(b)(2)(i) and adding the text of paragraph (e) to read as follows:

Sec. 1.6038B-1 Reporting of transfers described in section 367.

[The text of proposed paragraphs (b)(2)(i) and (e) are the same as

the text of Sec. 1.6038B-1T (b)(2)(i) and (e) published elsewhere in

this issue of the Federal Register].

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96-20631 Filed 8-9-96; 12:19 pm]

BILLING CODE 4830-01-U