Treatment of Distributions to Foreign Persons Under Sections 367(e)(1) and 367(e)(2)

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8834]

RIN 1545-AU22 and 1545-AX30

Treatment of Distributions to Foreign Persons Under Sections

367(e)(1) and 367(e)(2)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document amends the Income Tax Regulations by removing

temporary regulations on the treatment of distributions to foreign

persons under section 367(e) of the Internal Revenue Code and adding

final regulations under section 367(e). These final regulations are

necessary to implement section 367(e)(1) and (2), as added to the

Internal Revenue Code by the Tax Reform Act of 1986, which affects U.S.

corporations.

DATES: These regulations are effective August 9, 1999.

FOR FURTHER INFORMATION CONTACT: Guy A. Bracuti, 202-622-3860 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in this final rule has been reviewed

and, pending receipt and evaluation of public comments, approved by the

Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned

control number 1545-1487.

The collections of information in this regulation are in

Secs. 1.367(e)-1(d)(2), 1.367(e)-1(d)(3), 1.367(e)-2(b)(2), and

1.6038B-1(e). This information is required to obtain certain exemptions

from taxation and to satisfy other information reporting requirements

imposed by the Internal Revenue Code (Code). This information will be

used by the Internal Revenue Service to verify whether a taxpayer is

entitled to an exemption from income tax. The likely respondents are

large corporations.

Comments on the collections of information should be sent to the

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

of the Treasury, Office of Information and Regulatory Affairs,

Washington, DC 20503, with copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.

Comments on the collection of information should be received by October

8, 1999.

Comments are specifically requested concerning: Whether the

collections of information are necessary for the proper performance of

the functions of the IRS, including whether the information will have

practical utility; The accuracy of the estimated burden associated with

the collection of information (see below); How the quality, utility,

and clarity of the information to be collected may be enhanced; How the

burden of complying with the collections of information may be

minimized, including through the application of automated collection

techniques or other forms of information technology; and Estimates of

capital or start-up costs and costs of operation, maintenance, and

purchase of services to provide information. The estimated total annual

reporting and/or recordkeeping burden is 2,471 hours. The estimated

average annual burden hours per respondent and/or recordkeeper is 11

hours. The estimated number of respondents and/or recordkeepers is 217.

The estimated annual frequency of responses is once.

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 assigned by the Office of Management and Budget.

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

Section 367(e)(1) amended the Code by providing regulatory

authority to tax gain on a domestic distributing corporation's section

355 distribution of stock or securities to foreign persons. Section

367(e)(2) amended the Code by requiring a liquidating corporation to

recognize gain (or loss) attributable to property distributed in a

section 332 liquidation to a foreign parent corporation, except to the

extent regulations provide otherwise.

On January 16, 1990, temporary regulations under section 367(e)(1)

and (2) were published in the Federal Register (55 FR 1406 (TD 8280,

1990-1 C.B. 80)). A cross-referenced Notice of Proposed Rulemaking was

published on that same date under RIN 1545-AL35 (55 FR 1472 (1990-1

C.B. 678)). The temporary regulations were proposed and issued to

implement section 367(e) of the Internal Revenue Code of 1986 (Code),

as amended by sections 631(d)(1) and 1810(g) of the Tax Reform Act of

1986 (100 Stat. 2085, 2272, Public

[[Page 43073]]

Law 99-514 (1986-3 C.B.)). On January 25, 1993, final regulations under

section 367(e)(1) were published in the Federal Register (58 FR 5927

(TD 8472, 1993-1 C.B. 51)). RIN 1545-AL35 was thereby closed. The

preamble of TD 8472 stated that final regulations under section

367(e)(2) would be promulgated in a separate Treasury decision and that

taxpayers could apply the provisions contained in Sec. 1.367(e)-2T to

distributions occurring on or after January 16, 1993, and prior to the

date that is 30 days after final regulations under section 367(e)(2)

are published in the Federal Register. The final regulations under

section 367(e)(1) were removed and replaced with temporary regulations

that were published in the Federal Register on August 14, 1996 (61 FR

42165 (TD 8682, 1996-2 C.B. 12)). A cross-referenced Notice of Proposed

Rulemaking was published on August 14, 1996 under RIN 1545-AU22 (61 FR

42217). A new RIN (RIN 1545-AX30) has been issued under which the

section 367(e)(2) proposed regulations will be finalized.

No significant comments were received with respect to the 1996

Notice of Proposed Rulemaking with respect to section 367(e)(1).

Comments were received with respect to the 1990 Notice of Proposed

Rulemaking with respect to sections 367(e)(1) and 367(e)(2). No

hearings were held on either Notice of Proposed Rulemaking.

Explanation of Revisions and Summary of Comments

I. Overview

These final regulations address the tax consequences of a

distribution by a domestic corporation of its subsidiary's stock to

foreign shareholders in a transaction described in section 355

(outbound section 355 distribution), a liquidation of a domestic

corporation into a foreign parent corporation in a transaction

described in section 332 (outbound liquidation), and a liquidation of a

foreign corporation into a foreign parent corporation in a transaction

described in section 332 (foreign-to-foreign liquidation).

Section 367(e) grants the Secretary authority to provide the extent

to which a distributing corporation in an outbound section 355

distribution or liquidation or foreign-to-foreign liquidation may

obtain the benefit of nonrecognition treatment when it makes the

distribution to a foreign shareholder. The purpose of section 367 is to

prevent the inappropriate avoidance of U.S. tax that can arise from the

application of nonrecognition provisions in the cross-border context.

A. Outbound Section 355 Distributions

Section 367(e)(1) provides that a distribution under section 355

(or so much of section 356 as relates to section 355) by a U.S.

corporation to its foreign shareholders is accorded nonrecognition

treatment except to the extent provided in regulations. Section

1.367(e)-1 provides the circumstances under which such a distribution

is taxable.

The legislative history to section 367(e)(1) provides that

``transfers of stock by domestic corporations to foreign persons

pursuant to Code section 355 * * * will give rise to the recognition of

gain under Code section 367(e), to the extent provided in regulations.

The committee expects that the Secretary will carefully consider the

extent to which it is appropriate, in view of the purpose of section

367(e), to require the recognition of gain upon the transfer of the

stock of a domestic corporation to foreign persons under section 355.''

H.R. Rep. 426, 99th Cong., 1st Sess. 931 (1985); S. Rep. 313, 99th

Cong., 2nd Sess. 950 (1986).

The temporary regulations under section 367(e)(1) provide a general

rule that a domestic distributing corporation is taxed on a

distribution of controlled stock to foreign shareholders, regardless of

whether the controlled corporation is a domestic corporation or a

foreign corporation. Several exceptions are provided in the current

temporary regulations in the case of an outbound distribution of stock

of a domestic controlled corporation.

Consistent with the legislative history above and the temporary

regulations, the final regulations continue to provide that an outbound

section 355 distribution of a foreign controlled corporation is taxable

to the distributing corporation. See also sections 367(b) and 1248(f)

of the Code. In the case of an outbound section 355 distribution of a

domestic controlled corporation, however, the final regulations amend

the temporary regulations by providing that the distributing

corporation shall obtain the benefit of nonrecognition treatment. In

weighing the administrative burdens to taxpayers and the Government in

connection with rules requiring gain recognition agreements and similar

arrangements, the IRS and Treasury believe that adequate protections

are in place to protect the policies of section 367(e)(1).

Specifically, significant protections are provided in sections 355(d)

and (e) and the device and continuity of interest requirements of

section 355.

B. Outbound and Foreign-to-Foreign Liquidations

Generally, a liquidating corporation does not recognize gain or

loss on a distribution in complete liquidation into a parent

corporation that meets the ownership requirements of section 332(b).

See Section 337(a) of the Code. Section 367(e)(2) provides that a

section 332 liquidation into a foreign parent is taxed to the

liquidating corporation, except to the extent provided in regulations.

Section 1.367(e)-2 provides the circumstances under which gain or loss

on assets distributed in a section 332 liquidation into a foreign

parent is not currently recognized.

Section 332 was enacted in 1935 to encourage the simplification of

corporate structures and was retained in 1986 as an exception to the

repeal of the General Utilities doctrine. Consistent with the policies

of section 332, the final regulations generally tax the distribution of

assets in an outbound liquidation but provide exceptions for assets

over which the United States retains adequate taxing jurisdiction. The

final regulations retain the exceptions in the proposed regulations for

a distribution of assets used in the conduct of a U.S. trade or

business and for a distribution of a U.S. real property interest

(USRPI). In addition, the final regulations provide a new exception for

a distribution of stock of a domestic subsidiary that is 80 percent

owned by vote and value directly by the liquidating corporation.

In a foreign-to-foreign liquidation, the final regulations

generally adopt the rules provided in the proposed regulations. Thus,

the regulations generally provide that the liquidation is not taxable,

except to the extent that assets used in a U.S. trade or business are

distributed and not used in a U.S. trade or business over the

subsequent ten-year period. The ten-year period (which is also used in

the U.S. trade or business exception for outbound liquidations)

supplements the principles contained in section 864(c)(7). The

regulations also tax a distribution of assets that had formerly been

used in the conduct of a U.S. trade or business by the liquidating

corporation.

II. Details of Provisions

A. Outbound Section 355 Distributions

The final regulations amend the rule in the temporary regulations

and do not require gain recognition on an outbound section 355

distribution of the stock or securities of a domestic corporation. The

final regulations continue to require gain recognition on an outbound

section

[[Page 43074]]

355 distribution of the stock or securities of a foreign corporation.

Where gain recognition is required, the final regulations amend the

rules for determining the residency status of distributees of stock or

securities in an outbound section 355 distribution. A distributee is

presumed to be a person who is not a qualified U.S. person (i.e., a

person that is not a U.S. citizen, resident, or corporation), except to

the extent that the distributing corporation certifies that the

distributee is a qualified U.S. person. A publicly traded distributing

corporation may use a reasonable analysis with respect to distributees

who are not five percent shareholders of publicly traded stock to

demonstrate the number of distributees that are qualified U.S. persons.

A reasonable analysis includes a determination of the actual number of

distributees that are qualified U.S. persons or a reasonable

statistical analysis of shareholder records and other relevant

information. The final regulations also broaden the look-through rule

in the temporary regulations for determining the identity of the

distributees of stock or securities of a controlled corporation

received by a partnership, trust or estate to include stock or

securities received by a disregarded entity.

Section 1.367(e)-1 is applicable to distributions occurring in

taxable years ending after August 8, 1999.

B. Outbound and Foreign-to-Foreign Liquidations

1. General Rule

The final regulations under section 367(e)(2) contain two sets of

rules, depending upon whether the liquidating corporation is domestic

or foreign. The final regulations retain the rules of the proposed

regulations with respect to foreign-to-foreign liquidations with only

minor modification.

In the case of an outbound liquidation, a domestic liquidating

corporation is generally required to recognize gain (or loss) on the

distributed assets. In determining the amount of gain or loss

recognized under the general rule, the proposed regulations contain an

anti-netting rule and an anti-stuffing rule that limit the domestic

liquidating corporation's ability to recognize losses.

Several commentators criticized the anti-netting rule contained in

the proposed regulations as overly broad because the rule prohibits the

netting of ordinary losses against capital gains. The final regulations

take this into account and allow the netting of ordinary or capital

losses against ordinary or capital gains to the same extent allowed

under general rules of the Code, including section 1211.

Commentators also questioned the propriety of the anti-stuffing

rule in the proposed regulations and argued that the anti-stuffing

rules contained in section 336(d) and the loss limitation rules of

section 382 should sufficiently address loss trafficking concerns. The

anti-stuffing rule contained in the proposed regulations disallows the

recognition of losses attributable to property acquired in capital

contributions, section 332 liquidations, and exchanges under sections

351 and 361 within five years of the distribution.

The IRS and Treasury do not believe that sections 336(d) and 382

alone adequately address the Government's loss trafficking concerns.

For example, neither section 336(d) nor 382 would limit a liquidating

corporation's ability to recognize a loss that is acquired in a

reorganization among affiliates even though the loss could not have

been recognized if those corporations were liquidated individually. The

anti-stuffing rule in the proposed regulations also does not adequately

protect against the use of losses to offset gains where the loss

corporation acquires the gain property.

After considering the issue, the Treasury and the IRS have amended

the anti-stuffing rule in the final regulations to limit the

recognition of built-in gains and losses attributable to property

received by the domestic liquidating corporation in a reorganization or

liquidation occurring within two years prior to the distribution.

Sections 336(d) and 382 also limit loss recognition in applicable

circumstances.

Comments also requested clarification on the treatment of a

distribution of an interest in a publicly traded partnership (PTP). The

final regulations provide that an interest in a PTP that is treated as

a corporation under section 7704(a) shall be treated in the same manner

as stock.

The final regulations retain the look-through rule for a domestic

liquidating corporation's distribution of a partnership interest to its

foreign parent. The look-through rule provides that, for purposes of

the regulation, a domestic liquidating corporation is treated as

distributing its proportionate share of the partnership property. The

Treasury and the IRS hereby request comments on the proper method of

calculating such gain or loss and reserve a section in the final

regulations with respect to this issue. Comments should consider the

application of similar rules in other cross-border contexts, such as

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

2. Exceptions to General Rule

The proposed regulations contain exceptions to the general gain

recognition rule for the distribution of property used in a U.S. trade

or business and the distribution of a USRPI. The final regulations

retain the two exceptions with some modifications and add an additional

exception for stock of a domestic subsidiary corporation.

Under the proposed regulations, a domestic liquidating corporation

does not recognize gain (or loss) on the distribution of property used

in a U.S. trade or business, if: (1) The foreign parent is not a

controlled foreign corporation; (2) the foreign parent continues to use

the property in a U.S. trade or business for a ten-year period

following the distribution of such property; and (3) the domestic

liquidating corporation and the foreign parent attach a statement to

their U.S. income tax returns for the year of distribution. If within

the ten-year period following a distribution, the property ceases to be

used in the foreign parent's U.S. trade or business other than by a

disposition, then the foreign parent is required to file an amended

U.S. income tax return on behalf of the domestic liquidating

corporation and recognize gain thereon. If the foreign parent disposes

of such property, then the foreign parent recognizes gain (or loss) on

its U.S. income tax return for the year of disposition in lieu of the

domestic liquidating corporation recognizing gain on an amended return

for the year of distribution. Also, under the proposed regulations,

gain recognition is not triggered on involuntary conversions of such

property under section 1033, like-kind exchanges of such property under

section 1031, and the abandonment of obsolete or worthless property.

The final regulations modify the U.S. trade or business property

exception in response to comments in several respects. First, the final

regulations make the exception available to a domestic liquidating

corporation that liquidates into a controlled foreign corporation.

Second, the final regulations no longer require that the foreign parent

file an amended return on behalf of the liquidating corporation when

property ceases to be used in the conduct of a U.S. trade or business

(whether by disposition or otherwise), provided that the foreign parent

properly recognizes gain (or loss in the case of a disposition) as if

the property had been sold for fair market value at the time the

property ceases to be used in the conduct of a U.S. trade or business.

Third, the final regulations

[[Page 43075]]

expand the types of dispositions that will not trigger gain

recognition. U.S. trade or business property may be transferred to

another person without gain recognition, if the transfer is a

disposition normally entitled to nonrecognition under the Code and the

transferor and transferee satisfy various procedural requirements.

The final regulations retain the exception for a distribution of a

USRPI contained in the proposed regulation with only minor

modification.

The final regulations add a new exception that allows for

nonrecognition of gain on a distribution of stock of a domestic

subsidiary that is 80 percent owned (by vote and value) directly by the

domestic liquidating corporation, provided that the liquidation does

not have as a principal purpose the avoidance of U.S. tax on a

subsequent disposition of the domestic subsidiary.

3. General Anti-abuse Rule

The final regulations contain a new anti-abuse rule that allows the

Commissioner to require the liquidating corporation to recognize gain

(or treat the liquidating corporation as if it had recognized loss) on

the distribution of property pursuant to the liquidation if a principal

purpose of the liquidation is the avoidance of U.S. tax. The rule would

apply, for example, if a principal purpose of a liquidation is the

distribution of a domestic liquidating corporation's earnings and

profits without a U.S. withholding tax. In certain circumstances, the

Service is also concerned about a liquidation of a domestic corporation

into a U.S. branch of a foreign corporation in a manner that

facilitates the avoidance of U.S. tax, including the inappropriate use

of attributes such as net operating losses. Liquidations used to

facilitate the avoidance of tax may be challenged under existing law.

The Treasury and the IRS hereby solicit comments, however, as to other

measures that should be taken to adequately address such transactions,

including the more specific identification of the conditions under

which liquidated property, particularly securities and other financial

instruments, may be considered to be used in a U.S. trade or business.

4. Effective Date

Section 1.367(e)-2 is applicable to distributions occurring 30 days

after August 9, 1999 or, if a taxpayer elects, to distributions in

taxable years ending after August 8, 1999. In addition, taxpayers may

rely on the principles contained in the temporary regulations issued

under section 367(e)(2) on January 16, 1990 for distributions occurring

prior to 30 days after August 9, 1999.

C. Section 6038B

The regulations under section 6038B are also revised to require

reporting for transactions described in section 367(e)(1) and (2) in

accordance with the final regulations under section 367(e)(1) and (2).

Special Analyses

It has been determined that these regulations are not a significant

regulatory action as defined in Executive Order 12866. Therefore, a

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

collections of information contained in this regulation will not have a

significant economic impact on a substantial number of small entities.

This certification is based upon the fact that the number of section

367(e) distributions that require reporting under these regulations is

estimated to be only 400 per year. Moreover, because these regulations

will primarily affect large multinational corporations, it is estimated

that out of the 400 transactions very few, if any, will involve small

entities. Thus, 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 Code, the notice of proposed

rulemaking preceding these regulations was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on the impact of the proposed regulations on small business.

Drafting Information: The principal author of these regulations is

Guy A. Bracuti of the Office of Associate Chief Counsel

(International). 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 is amended by

removing the entry for 1.367(e)-1T and by adding entries in numerical

order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.367(e)-1 also issued

under 26 U.S.C. 367(e)(1). Section 1.367(e)-2 also issued under 26

U.S.C. 367(e)(2). * * *

Sec. 1.367(e)-0T through Sec. 1.367(e)-2T [Removed]

Par. 2. Sections 1.367(e)-0T, 1.367(e)-1T, and 1.367(e)-2T are

removed.

Par. 3. Sections 1.367(e)-0, 1.367(e)-1, and 1.367(e)-2 are added

to read as follows:

Sec. 1.367(e)-0 Outline of Secs. 1.367(e)-1 and 1.367(e)-2.

This section lists captioned paragraphs contained in

Secs. 1.367(e)-1 and 1.367(e)-2 as follows:

Sec. 1.367(e)-1 Distributions described in section 367(e)(1).

(a) Purpose and scope.

(b) Gain recognition.

(1) General rule.

(2) Stock owned through partnerships, disregarded entities, trusts,

and estates.

(3) Gain computation.

(4) Treatment of distributee.

(c) Nonrecognition of gain.

(d) Determining whether distributees are qualified U.S. persons.

(1) General rule--presumption of foreign status.

(2) Non-publicly traded distributing corporations.

(3) Publicly traded distributing corporations.

(i) Five percent shareholders.

(ii) Other distributees.

(4) Qualified exchange or other market.

(e) Reporting under section 6038B.

(f) Effective date.

Sec. 1.367(e)-2 Distributions described in section 367(e)(2).

(a) Purpose and scope.

(1) In general.

(2) Nonapplicability of section 367(a).

(b) Distribution by a domestic corporation.

(1) General rule.

(i) Recognition of gain and loss.

(ii) Operating rules.

(A) General rule.

(B) Overall loss limitation.

(1) Overall loss limitation rule.

(2) Example.

(C) Special rules for built-in gains and losses attributable to

property received in liquidations and reorganizations.

(iii) Distribution of partnership interest.

(A) General rule.

(B) Gain or loss calculation. [Reserved]

(C) Basis adjustments.

(D) Publicly traded partnerships.

(2) Exceptions.

(i) Distribution of property used in a U.S. trade or business.

(A) Conditions for nonrecognition.

(B) Qualifying property.

(C) Required statement.

(1) Declaration and certification.

(2) Property description.

[[Page 43076]]

(3) Distributee identification.

(4) Treaty benefits waiver.

(5) Statute of limitations extension.

(D) Failure to file statement.

(E) Operating rules.

(1) Gain or loss recognition by the foreign distributee corporation.

(i) Taxable dispositions.

(ii) Other triggering events.

(2) Gain recognition by the domestic liquidating corporation.

(i) General rule.

(ii) Amended return.

(iii) Interest.

(iv) Joint and several liability.

(3) Schedule for property no longer used in a U.S. trade or

business.

(4) Nontriggering events.

(i) Conversions, certain exchanges, and abandonment.

(ii) Amendment to Master Property Description

(5) Nontriggering transfers to qualified transferees.

(ii) Distribution of certain U.S. real property interests.

(iii) Distribution of stock of domestic subsidiary corporations.

(A) Conditions for nonrecognition.

(B) Exceptions when the liquidating corporation is a U.S. real

property holding corporation.

(C) Anti-abuse rule.

(D) Required statement.

(3) Other consequences.

(i) Distributee basis in property.

(ii) Reporting under section 6038B.

(iii) Other rules.

(c) Distribution by a foreign corporation.

(1) General rule--gain and loss not recognized.

(2) Exceptions.

(i) Property used in a U.S. trade or business.

(A) General rule.

(B) Ten-year active U.S. business exception.

(C) Required statement.

(D) Operating rules.

(ii) Property formerly used in a U.S. trade or business.

(3) Other consequences.

(i) Distributee basis in property.

(ii) Other rules.

(d) Anti-abuse rule.

(e) Effective date.

Sec. 1.367(e)-1 Distributions described in section 367(e)(1).

(a) Purpose and scope. This section provides rules for recognition

(and nonrecognition) of gain by a domestic corporation (distributing

corporation) on a distribution of stock or securities of a corporation

(controlled corporation) to foreign persons that is described in

section 355. Paragraph (b) of this section contains the general rule

that gain is recognized on the distribution to the extent stock or

securities of controlled are distributed to foreign persons. Paragraph

(c) of this section provides an exception to the gain recognition rule

for distributions of stock or securities of a domestic corporation.

Paragraph (d) of this section contains rules for determining whether

distributees of stock or securities in a section 355 distribution are

qualified U.S. persons. Paragraph (e) of this section cross-references

section 6038B for certain reporting obligations. Finally, paragraph (f)

of this section specifies the effective date of this section.

(b) Gain recognition--(1) General rule. If a domestic corporation

makes a distribution of stock or securities of a corporation that

qualifies for nonrecognition under section 355 to a person who is not a

qualified U.S. person, then, except as provided in paragraph (c) of

this section, the distributing corporation shall recognize gain (but

not loss) on the distribution under section 367(e)(1). A distributing

corporation shall not recognize gain under this section with respect to

a section 355 distribution to a qualified U.S. person. For purposes of

this section, a qualified U.S. person is--

(A) A citizen or resident of the United States; or

(B) A domestic corporation.

(2) Stock owned through partnerships, disregarded entities, trusts,

and estates. For purposes of this section, distributing corporation

stock or securities owned by or for a partnership (whether foreign or

domestic) are owned proportionately by its partners. A partner's

proportionate share of the stock or securities of the distributing

corporation shall be equal to the partner's distributive share of the

gain that would have been recognized had the partnership sold the stock

or securities (at a taxable gain) immediately before the distribution.

The partner's distributive share of gain shall be determined under the

rules and principles of sections 701 through 761 and the regulations

thereunder. For purposes of this section, stock or securities owned by

or for an entity that is disregarded as an entity (disregarded entity)

under Sec. 1.7701-3(b)(1)(ii) or (b)(2)(i)(C) are owned directly by the

owner of such disregarded entity. For purposes of this section, stock

or securities owned by or for a trust or estate (whether foreign or

domestic) are owned proportionately by the persons who would be treated

as owning such stock or securities under section 318(a)(2)(A) and (B).

In applying section 318(a)(2)(B)(i), if a trust includes interests that

are not actuarially ascertainable, all such interests shall be

considered to be owned by foreign persons. In a case where an interest

holder in a partnership, a disregarded entity, trust, or estate that

(directly or indirectly) owns stock of the distributing corporation is

itself a partnership, disregarded entity, trust, or estate, the rules

of this paragraph (b)(2) apply to such interest holder.

(3) Gain computation. Gain recognized under paragraph (b)(1) of

this section shall be equal to the excess of the fair market value of

the stock or securities distributed to persons who are not qualified

U.S. persons (determined as of the time of the distribution) over the

distributing corporation's adjusted basis in the stock or securities

distributed to such distributees. For purposes of the preceding

sentence, the distributing corporation's adjusted basis in each unit of

each class of stock or securities distributed to a distributee shall be

equal to the distributing corporation's total adjusted basis in all of

the units of the respective class of stock or securities owned

immediately before the distribution, divided by the total number of

units of the class of stock or securities owned immediately before the

distribution.

(4) Treatment of distributee. If the distribution otherwise

qualifies for nonrecognition under section 355, each distributee shall

be considered to have received stock or securities in a distribution

qualifying for nonrecognition under section 355, even though the

distributing corporation may recognize gain on the distribution under

this section. Thus, the distributee shall not be considered to have

received a distribution described in section 301 or a distribution in

an exchange described in section 302(b) upon the receipt of the stock

or securities of the controlled corporation, and the domestic

distributing corporation shall have no withholding responsibilities

under section 1441. Except where section 897(e)(1) and the regulations

thereunder cause gain to be recognized by the distributee, the basis of

the distributed domestic or foreign corporation stock in the hands of

the foreign distributee shall be the basis of the distributed stock

determined under section 358 without any increase for any gain

recognized by the domestic corporation on the distribution.

(c) Nonrecognition of gain. A domestic distributing corporation

shall not recognize gain under paragraph (b)(1) of this section on the

distribution of stock or securities of a domestic corporation.

(d) Determining whether distributees are qualified U.S. persons--

(1) General rule--presumption of foreign status. Except as provided in

paragraphs (d)(2) and (3) of this section, all distributions of stock

or securities in a distribution described in paragraph (b)(1) of this

section are presumed to be to persons who are not qualified U.S.

persons, as

[[Page 43077]]

defined in paragraph (b)(1) of this section.

(2) Non-publicly traded distributing corporations. If the class of

stock or securities of the distributing corporation (in respect to

which stock or securities of the controlled corporation are

distributed) is not regularly traded on a qualified exchange or other

market (as defined in paragraph (d)(4) of this section), then the

distributing corporation may only rebut the presumption contained in

paragraph (d)(1) of this section by identifying the qualified U.S.

persons to which controlled corporation stock or securities were

distributed and by certifying the amount of stock or securities that

were distributed to the qualified U.S. persons.

(3) Publicly traded distributing corporations. If the class of

stock or securities of the distributing corporation (in respect to

which stock or securities of the controlled corporation are

distributed) is regularly traded on a qualified exchange or other

market (as defined in paragraph (d)(4) of this section), then the

distributing corporation may only rebut the presumption contained in

paragraph (d)(1) of this section as described in this paragraph (d)(3).

(i) Five percent shareholders. A publicly traded distributing

corporation may only rebut the presumption contained in paragraph

(d)(1) of this section with respect to distributees that are five

percent shareholders of the class of stock or securities of the

distributing corporation (in respect to which stock or securities of

the controlled corporation are distributed) by identifying the

qualified U.S. persons to which controlled corporation stock or

securities were distributed and by certifying the amount of stock or

securities that were distributed to the qualified U.S. persons. A five

percent shareholder is a distributee who is required under U.S.

securities laws to file with the Securities and Exchange Commission

(SEC) a Schedule 13D or 13G under 17 CFR 240.13d-1 or 17 CFR 240.13d-2,

and provide a copy of same to the distributing corporation under 17 CFR

240.13d-7.

(ii) Other distributees. A distributing corporation that has made a

distribution described in paragraph (d)(3) of this section may rebut

the presumption contained in paragraph (d)(1) of this section with

respect to distributees that are not five percent shareholders (as

defined in this paragraph (d)(3)) by relying on and providing a

reasonable analysis of shareholder records and other relevant

information that demonstrates a number of distributees that are

qualified U.S. persons. Taxpayers may rely on such analysis, unless it

is subsequently determined that there are actually fewer distributees

who are qualified U.S. persons than were demonstrated in the analysis.

(4) Qualified exchange or other market. For purposes of paragraph

(d) of this section, the term qualified exchange or other market means,

for any taxable year--

(i) A national securities exchange which is registered with the SEC

or the national market system established pursuant to section 11A of

the Securities Exchange Act of 1934 (15 U.S.C. 78f); or

(ii) A foreign securities exchange that is regulated or supervised

by a governmental authority of the country in which the market is

located and which has the following characteristics--

(A) The exchange has trading volume, listing, financial disclosure,

and other requirements designed to prevent fraudulent and manipulative

acts and practices, to remove impediments to and perfect the mechanism

of a free and open market, and to protect investors; and the laws of

the country in which the exchange is located and the rules of the

exchange ensure that such requirements are actually enforced; and

(B) The rules of the exchange ensure active trading of listed

stocks.

(e) Reporting under section 6038B. See the regulations under

section 6038B for reporting requirements for distributions under this

section.

(f) Effective date. This section shall be applicable to

distributions occurring in taxable years ending after August 8, 1999.

Sec. 1.367(e)-2 Distributions described in section 367(e)(2).

(a) Purpose and scope--(1) In general. This section provides rules

requiring gain and loss recognition by a corporation on its

distribution of property to a foreign corporation in a complete

liquidation described in section 332. Paragraph (b)(1) of this section

contains the general rule that gain and loss are recognized when a

domestic corporation makes a distribution of property in complete

liquidation under section 332 to a foreign corporation that meets the

stock ownership requirements of section 332(b) with respect to stock in

the domestic corporation. Paragraph (b)(2) of this section provides the

only exceptions to the gain and loss recognition rule of paragraph

(b)(1) of this section. Paragraph (b)(3) of this section refers to

other consequences of distributions described in paragraphs (b)(1) and

(2) of this section. Paragraph (c)(1) of this section contains the

general rule that gain and loss are not recognized when a foreign

corporation makes a distribution of property in complete liquidation

under section 332 to a foreign corporation that meets the stock

ownership requirements of section 332(b) with respect to stock in the

foreign liquidating corporation. Paragraph (c)(2) of this section

provides the only exceptions to the nonrecognition rule of paragraph

(c)(1) of this section. Paragraph (c)(3) of this section refers to

other consequences of distributions described in paragraphs (c)(1) and

(2) of this section. Paragraph (d) of this section contains an anti-

abuse rule. Finally, paragraph (e) of this section specifies the

effective date for the rules of this section. The rules of this section

are issued pursuant to the authority conferred by section 367(e)(2).

(2) Nonapplicability of section 367(a). Section 367(a) shall not

apply to a complete liquidation described in section 332 by a domestic

liquidating corporation into a foreign corporation that meets the stock

ownership requirements of section 332(b).

(b) Distribution by a domestic corporation--(1) General rule--(i)

Recognition of gain and loss. If a domestic corporation (domestic

liquidating) makes a distribution of property in complete liquidation

under section 332 to a foreign corporation (foreign distributee) that

meets the stock ownership requirements of section 332(b) with respect

to stock in the domestic liquidating corporation, then--

(A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall

not apply; and

(B) The domestic liquidating corporation shall recognize gain or

loss on the distribution of property to the foreign distributee, except

as provided in paragraph (b)(2) of this section.

(ii) Operating rules--(A) General rule. Except as provided in

paragraphs (b)(1)(ii) (B) and (C) of this section, the rules contained

in section 336 will apply to the gain and loss recognized pursuant to

this section.

(B) Overall loss limitation--(1) Overall loss limitation rule. Loss

in excess of gain from the distribution shall not be recognized. If

realized losses exceed recognized losses, the losses shall be

recognized on a pro rata basis with respect to the realized loss

attributable to each distributed loss asset in the category of assets

(i.e., capital or ordinary) to which the realized but unrecognized loss

relates. For additional limitations on the

[[Page 43078]]

recognition of losses, see, e.g., section 1211.

(2) Example. The following example illustrates the overall loss

limitation rule, the pro rata loss allocation method, and the general

capital loss limitation rule in section 1211(a):

Example. F, a foreign corporation, owns all stock of US1, a

domestic corporation. US1 owns the following capital assets: Asset

A, which has a fair market value of $100 and an adjusted basis of

$40; Asset B, which has a fair market value of $60 and an adjusted

basis of $80; and, Asset C, which has a fair market value of $40 and

an adjusted basis of $100. US1 also owns the following business

assets that will generate ordinary income (or loss) upon

disposition: Asset D, which has a fair market value of $100 and an

adjusted basis of $40; Asset E, which has a fair market value of $60

and an adjusted basis of $100; and, Asset F, which has a fair market

value of $40 and an adjusted basis of $80. US1 liquidates into F and

distributes all assets to F in liquidation. None of the assets

qualify for nonrecognition under paragraph (b)(2) of this section.

US1's total realized capital loss is $80, but it may only recognize

$60 of that loss. See section 1211(a). US1's total realized ordinary

loss is $80, but it may only recognize $60 of that loss. See

paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $45

(60 X .75) of the recognized capital loss to Asset B and will

allocate the remaining $15 (60 X .25) of recognized capital loss to

Asset C. See paragraph (b)(1)(ii)(B)(1) of this section. US1 will

allocate $30 (60 X .50) of the recognized ordinary loss to Asset E

and will allocate the remaining $30 (60 X .50) to Asset F. See

paragraph (b)(1)(ii)(B)(1) of this section.

(C) Special rules for built-in gains and losses attributable to

property received in liquidations and reorganizations. Built-in losses

attributable to property received in a transaction described in

sections 332 or 361 (during the two-year period ending on the date of

the distribution in liquidation covered by this section) shall not

offset gain from property not received in the same transaction. Built-

in gains attributable to property received in a transaction described

in sections 332 or 361 (during the two-year period ending on the date

of the distribution in liquidation covered by this section) shall not

offset loss from property not received in the same transaction. Built-

in gain or loss is that amount of gain or loss on property that existed

at the time the domestic liquidating corporation acquired such

property. See sections 336(d) and 382 for additional limitations on the

recognition of losses.

(iii) Distribution of partnership interest--(A) General rule. If a

domestic corporation distributes a partnership interest (whether

foreign or domestic) in a distribution described in paragraph (b)(1)(i)

of this section, then for purposes of applying this section the

domestic liquidating corporation shall be treated as having distributed

a proportionate share of partnership property. Accordingly, the

applicability of the recognition rules of paragraphs (b)(1) (i) and

(ii) of this section, and of any exception to recognition provided in

this section shall be determined with reference to the partnership

property, rather than to the partnership interest itself. Where the

partnership property includes an interest in a lower-tier partnership,

the applicability of any exception with respect to the interest in the

lower-tier partnership shall be determined with reference to the lower-

tier partnership property. In the case of multiple tiers of

partnerships, the applicability of an exception shall be determined

with reference to the property of each partnership, applying the rule

contained in the preceding sentence. A domestic liquidating

corporation's proportionate share of partnership property shall be

determined under the rules and principles of sections 701 through 761

and the regulations thereunder.

(B) Gain or loss calculation. [Reserved]

(C) Basis adjustments. The foreign distributee corporation's basis

in the distributed partnership interest shall be equal to the domestic

liquidating corporation's basis in such partnership interest

immediately prior to the distribution, increased by the amount of gain

and reduced by the amount of loss recognized by the domestic

liquidating corporation on the distribution of the partnership

interest. Solely for purposes of sections 743 and 754, the foreign

distributee corporation shall be treated as having purchased the

partnership interest for an amount equal to the foreign corporation's

adjusted basis therein.

(D) Publicly traded partnerships. The distribution by a domestic

liquidating corporation of an interest in a publicly traded partnership

that is treated as a corporation for U.S. income tax purposes under

section 7704(a) shall not be subject to the rules of paragraphs

(b)(1)(iii) (A) and (B) of this section. Instead, the distribution of

such an interest shall be treated in the same manner as a distribution

of stock. Thus, a transfer of an interest in a publicly traded

partnership that is treated as a U.S. corporation for U.S. income tax

purposes shall be treated in the same manner as stock in a domestic

corporation, and a transfer of an interest in a publicly traded

partnership that is treated as a foreign corporation for U.S. income

tax purposes shall be treated in the same manner as stock in a foreign

corporation.

(2) Exceptions--(i) Distribution of property used in a U.S. trade

or business--(A) Conditions for nonrecognition. A domestic liquidating

corporation shall not recognize gain or loss under paragraph (b)(1) of

this section on its distribution of property (including inventory) used

by the domestic liquidating corporation in the conduct of a trade or

business within United States, if--

(1) The foreign distributee corporation, immediately thereafter and

for the ten-year period beginning on the date of the distribution of

such property, uses the property in the conduct of a trade or business

within the United States;

(2) The domestic liquidating corporation attaches the statement

described in paragraph (b)(2)(i)(C) of this section to its U.S. income

tax returns for the taxable years that include the distributions in

liquidation; and

(3) The foreign distributee corporation attaches a copy of the

property description contained in paragraph (b)(2)(i)(C)(2) of this

section to its U.S. income tax return for the tax year that includes

the date of distribution.

(B) Qualifying property. Property is used by the foreign

distributee corporation in the conduct of a trade or business in the

United States within the meaning of this paragraph (b)(2)(i) only if

all income from the use of the property and all income or gain from the

sale or exchange of the property would be subject to taxation under

section 882(a) as effectively connected income. Also, stock held by a

dealer as inventory or for sale in the ordinary course of its trade or

business shall be treated as inventory and not as stock in the hands of

both the domestic liquidating corporation and the distributee foreign

corporation. Notwithstanding the foregoing, the exception provided in

this paragraph (b)(2)(i) shall not apply to intangibles described in

section 936(h)(3)(B).

(C) Required statement. The statement required by paragraph

(b)(2)(i)(A) of this section shall be entitled ``Required Statement

under Sec. 1.367(e)-2(b)(2)(i)'' and shall be prepared by the domestic

liquidating corporation and signed under penalties of perjury by an

authorized officer of the domestic liquidating corporation and by an

authorized officer of the foreign distributee corporation. The

statement shall contain the following items:

(1) Declaration and certification. A declaration that the

distribution to the foreign distributee corporation is one to which the

rules of this paragraph

[[Page 43079]]

(b)(2)(i) apply and a certification that the domestic liquidating

corporation and the foreign distributee corporation agree to all of the

terms and conditions set forth in this paragraph (b)(2)(i).

(2) Property description. A description of all property distributed

by the domestic liquidating corporation (irrespective of whether the

property qualifies for nonrecognition). Such description shall be

entitled ``Master Property Description'' and shall identify the

property that continues to be used by the foreign distributee

corporation in the conduct of a trade or business within the United

States, including the location, adjusted basis, estimated fair market

value, a summary of the method (including appraisals if any) used for

determining such value, and the date of distribution of such items of

property. The description shall also identify the property excepted

from gain recognition under paragraphs (b)(2)(ii) and (iii) of this

section.

(3) Distributee identification. An identification of the foreign

distributee corporation, including its name and address, taxpayer

identification number, residence, and place of incorporation.

(4) Treaty benefits waiver. With respect to property entitled to

nonrecognition pursuant to this paragraph (b)(2)(i), a declaration by

the foreign distributee corporation that it irrevocably waives any

right under any treaty (whether or not currently in force at the time

of the liquidation) to sell or exchange any item of such property

without U.S. income taxation or at a reduced rate of taxation, or to

derive income from the use of any item of such property without U.S.

income taxation or at a reduced rate of taxation.

(5) Statute of limitations extension. An agreement by the domestic

liquidating corporation and the foreign distributee corporation to

extend the statute of limitations on assessments and collections (under

section 6501) with respect to the domestic liquidating corporation on

the distribution of each item of property until three years after the

date on which all such items of property have ceased to be used in a

trade or business within the United States, but in no event shall the

extension be for a period longer than 13 years from the filing of the

original U.S. income tax return for the taxable year of the last

distribution of any such item of property. The agreement to extend the

statute of limitation shall be executed on a Form 8838, ``Consent to

Extend the Time to Assess Tax Under Section 367--Gain Recognition

Agreement.''

(D) Failure to file statement. If a domestic liquidating

corporation that would otherwise qualify for nonrecognition on the

distribution of property under this paragraph (b)(2)(i) fails to file

the statement described in paragraph (b)(2)(i)(C) of this section or

files a statement that does not comply with the requirements of

paragraph (b)(2)(i)(C) of this section, the Commissioner may treat the

domestic liquidating corporation as if it had claimed nonrecognition

under this paragraph (b)(2)(i) and met all the requirements of

paragraph (b)(2)(i)(C) of this section, if such treatment is necessary

to prevent the domestic liquidating corporation or the foreign

distributee corporation from otherwise deriving a tax benefit by such

failure.

(E) Operating rules. By the domestic liquidating corporation's

claiming nonrecognition under this paragraph (b)(2)(i) and filing a

statement described in paragraph (b)(2)(i)(C) of this section, the

domestic liquidating corporation and the foreign distributee

corporation agree to be subject to the rules of this paragraph

(b)(2)(i)(E).

(1) Gain or loss recognition by the foreign distributee

corporation--(i) Taxable dispositions. If, within the ten-year period

from the date of a distribution of qualifying property, the foreign

distributee corporation disposes of any qualifying property in a

transaction subject to tax under section 882(a), then the foreign

distributee corporation shall recognize such gain (or loss) and

properly report it on a timely filed U.S. income tax return. If the

foreign distributee corporation recognizes gain (or loss) under this

paragraph (b)(2)(i)(E)(1)(i) and properly reports such gain (or loss)

on its U.S. income tax return, then the domestic liquidating

corporation shall not recognize gain attributable to such property

under paragraph (b)(2)(i)(E)(2) of this section.

(ii) Other triggering events. If, within the ten-year period from

the date of distribution, any qualifying property ceases to be used by

the foreign distributee corporation in the conduct of a trade or

business in the United States (other than by reason of a taxable

disposition described in paragraph (b)(2)(i)(E)(1)(i) of this section,

a nontriggering event described in paragraph (b)(2)(i)(E)(4) of this

section, or a nontriggering transfer described in paragraph

(b)(2)(i)(E)(5) of this section), then the foreign distributee

corporation shall recognize gain (but not loss) attributable to such

property and properly report it on a timely filed U.S. income tax

return. If the foreign distributee corporation properly reports gain

under this paragraph (or if such qualified property is not gain

property on the date that it ceases to be used in the foreign

distributee corporation's U.S. trade or business), then the domestic

liquidating corporation shall not recognize gain attributable to such

property under paragraph (b)(2)(i)(E)(2) of this section. The gain

recognized under this paragraph (b)(2)(i)(E)(1)(ii) shall be an amount

equal to the fair market value of the property on the date it ceases to

be used in the foreign distributee corporation's U.S. trade or business

less the foreign distributee corporation's adjusted basis in such

property.

(2) Gain recognition by the domestic liquidating corporation--(i)

General rule. If, within the ten-year period from the date of

distribution, any qualifying property described in paragraph

(b)(2)(i)(B) of this section ceases to be used by the foreign

distributee corporation (or a qualifying transferee described in

paragraph (b)(2)(i)(E)(5) of this section) in the conduct of a trade or

business in the United States for any reason (including but not limited

to the sale or exchange of such property or the removal of the property

from conduct of the trade or business), then, except to the extent gain

(or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this

section, the domestic liquidating corporation shall recognize the gain

(but not loss) realized but not recognized upon the initial

distribution of such item of property. The domestic liquidating

corporation shall recognize gain pursuant to this paragraph

(b)(2)(i)(E)(2)(i) on the amended U.S. income tax return described in

paragraph (b)(2)(i)(E)(2)(ii) of this section.

(ii) Amended return. If gain recognition is required pursuant to

paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign distributee

corporation shall file an amended U.S. income tax return on behalf of

the domestic liquidating corporation for the year of the distribution

of such item of property. On the amended return, the domestic

liquidating corporation may use any losses (or credits) existing in the

year of the distribution to offset the gain recognized pursuant to

paragraph (b)(2)(i)(E)(2)(i) of this section (or the tax thereon),

provided that the losses (or credits) were otherwise available in the

year distribution and were not used in another year. The amended return

shall be filed no later than the due date (including extensions) for

the return of the foreign distributee corporation for the taxable year

in which the property ceases to be used by the foreign distributee

corporation in the conduct of a trade or business in the United States.

(iii) Interest. If the domestic liquidating corporation owes

additional

[[Page 43080]]

tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section for the

year of liquidation, then interest must be paid on that amount at the

rates determined under section 6621. The interest due will be

calculated from the due date of the domestic liquidating corporation's

U.S. income tax return for the year of the distribution to the date on

which the additional tax for that year is paid.

(iv) Joint and several liability. The foreign distributee

corporation shall be jointly and severally liable for any tax owed by

the domestic liquidating corporation as a result of the application of

this section, and shall succeed to the domestic liquidating

corporation's agreement to extend the statute of limitations on

assessments and collections under section 6501.

(3) Schedule for property no longer used in a U.S. trade or

business. If qualifying property (other than inventory) ceases to be

used by the foreign distributee corporation in the conduct of a U.S.

trade or business in the ten-year period beginning on the date of

distribution of such property from the domestic liquidating corporation

to the foreign distributee corporation, then the foreign distributee

corporation shall list on a separate schedule (attached to its U.S.

income tax return for the year of cessation) all such qualifying

property. For purposes of this paragraph (b)(2)(i)(E)(3), property

ceases to be used in a U.S. trade or business whenever such property is

sold, exchanged, or otherwise removed from the U.S. trade or business,

irrespective of whether the domestic liquidating corporation filed an

amended return under paragraph (b)(2)(i)(E)(2) of this section, and

irrespective of whether the property ceases to be used in the foreign

distributee corporation's U.S. trade or business by virtue of a

nontriggering event described in paragraph (b)(2)(i)(E)(4) of this

section or a nontriggering transfer described in paragraph

(b)(2)(i)(E)(5) of this section.

(4) Nontriggering events--(i) Conversions, certain exchanges, and

abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall not

be triggered if qualifying property described in paragraph (b)(2)(i)(B)

of this section is involuntarily converted into, or exchanged for,

similar qualifying property used in the conduct of a trade or business

in the United States, to the extent such conversion or exchange

qualifies for nonrecognition under section 1033 or 1031. Also, the

abandonment or disposal of worthless or obsolete property shall not

trigger gain (or loss) under this paragraph (b)(2)(i)(E).

(ii) Amendment to Master Property Description. If the foreign

distributee corporation acquires replacement property by virtue of a

conversion or exchange of the qualifying property under this paragraph

(b)(2)(i)(E)(4), then the foreign distributee corporation shall attach

to its U.S. income tax return for the year of the acquisition such

replacement property a schedule entitled ``Amendment to Master Property

Description Required by Sec. 1.367(e)-2(b)(2)(i)'' that lists the

replacement property and the property being replaced.

(5) Nontriggering transfers to qualified transferees. Gain (or

loss) under this paragraph (b)(2)(i)(E) will not be triggered if

qualifying property described in paragraph (b)(2)(i)(B) of this section

is transferred to another person (qualified transferee) in a

transaction qualifying for nonrecognition under the Internal Revenue

Code (other than transactions described in paragraphs

(b)(2)(i)(E)(4)(i) and (c)(1) of this section), if--

(i) The qualified transferee (and all other subsequent qualified

transferees), immediately thereafter and for the ten-year period

beginning on the date of the initial distribution of such qualifying

property from the domestic liquidating corporation to the foreign

distributee corporation, uses the property in the conduct of a trade or

business in the United States;

(ii) The foreign distributee corporation (or its successor in

interest) prepares and attaches to its U.S. income tax return for the

year of transfer a statement entitled ``Required Statement under

Sec. 1.367(e)-2(b)(2)(i)(E)(5) for Property Transferred to a Qualified

Transferee'' that is signed under penalties of perjury by an authorized

officer of the foreign distributee corporation and by a person

similarly authorized by the qualified transferee;

(iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of

this section shall contain a description of all qualifying property

transferred by the foreign distributee corporation (or qualified

transferee) to the qualified transferee (or subsequent qualified

transferee);

(iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of

this section shall also contain an identification of the qualified

transferee (or subsequent qualified transferee), including its name and

address, taxpayer identification number, residence, and place of

incorporation (if applicable);

(v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of

this section shall also contain a declaration by the qualifying

transferee (or subsequent qualifying transferee) that it irrevocably

waives any right under any treaty (whether or not currently in force at

the time of the liquidation) to sell or exchange any item of such

property without U.S. income taxation or at a reduced rate of taxation,

or to derive income from the use of any item of such qualifying

property without U.S. income taxation or at a reduced rate of taxation;

and

(vi) A declaration that the transfer to the qualifying transferee

(or subsequent qualifying transferee) is one to which the rules of this

paragraph (b)(2)(i)(E)(5) apply and a certification that the foreign

distributee corporation (or its successor in interest) and the

qualifying transferee (or subsequent qualifying transferee) agree to

all of the terms and conditions set forth in paragraph (b)(2)(i)(E)(1)

of this section, replacing ``foreign distributee corporation'' with

``qualifying transferee'' and replacing references to ``section

882(a)'' with ``section 871(b)'' (as the case may be).

(ii) Distribution of certain U.S. real property interests. A

domestic liquidating corporation shall not recognize gain (or loss)

under paragraph (b)(1) of this section on the distribution of a U.S.

real property interest (other than stock in a former U.S. real property

holding corporation that is treated as a U.S. real property interest

for five years under section 897(c)(1)(A)(ii)). If property distributed

by the domestic liquidating corporation is a U.S. real property

interest that qualifies for nonrecognition under this paragraph

(b)(2)(ii) in addition to nonrecognition provided by paragraph

(b)(2)(i) of this section, then the domestic liquidating corporation

shall secure nonrecognition pursuant to this paragraph (b)(2)(ii) and

not pursuant to the provisions of paragraph (b)(2)(i) of this section.

(iii) Distribution of stock of domestic subsidiary corporations--

(A) Conditions for nonrecognition. A domestic liquidating corporation

shall not recognize gain or loss under paragraph (b)(1) of this section

on a distribution of stock of an 80 percent domestic subsidiary

corporation, if the domestic liquidating corporation attaches a

statement described in paragraph (b)(2)(iii)(D) of this section to its

U.S. income tax return for the year of the distribution of such stock.

For purposes of this paragraph (b)(2)(iii), a corporation is an 80

percent domestic subsidiary corporation, if--

(1) The subsidiary corporation is a domestic corporation (but not a

foreign

[[Page 43081]]

corporation that has made an election under section 897(i) to be

treated as a U.S. corporation for purposes of section 897);

(2) The domestic liquidating corporation owns (directly) at least

80 percent of the total voting power of the stock of such corporation;

and

(3) The domestic liquidating corporation owns (directly) at least

80 percent of the total value of all stock of such corporation.

(B) Exceptions when the liquidating corporation is a U.S. real

property holding corporation. If the domestic liquidating corporation

is a U.S. real property holding corporation (as defined in section

897(c)(2)) at the time of liquidation (or was a U.S. real property

holding corporation with respect to the foreign distributee corporation

during the five year period ending on the date of liquidation), then

the exception in paragraph (b)(2)(iii)(A) of this section shall apply

only to the distribution of stock of an 80 percent domestic subsidiary

corporation that is a U.S. real property holding corporation (as

defined in section 897(c)(2)) at the time of the liquidation and

immediately thereafter.

(C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A)

of this section shall not apply, if a principal purpose of the

distribution of the 80 percent domestic subsidiary corporation's stock

is the avoidance of U.S. tax that would have been imposed on the

domestic liquidating corporation's disposition of such stock (directly

or indirectly) to an unrelated party. A distribution may have a

principal purpose of tax avoidance even though the tax avoidance

purpose is outweighed by other purposes (taken together or separately).

(2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a

distribution of stock of the 80 percent domestic subsidiary corporation

will be deemed to have been made pursuant to a plan, one of the

principal purposes of which was the avoidance of U.S. tax, if the

foreign distributee corporation disposes of any such stock within two

years of such distribution. The rule in this paragraph

(b)(2)(iii)(C)(2) will not apply if the foreign distributee corporation

can demonstrate to the satisfaction of the Commissioner that a

principal purpose of the liquidation was not the avoidance of U.S. tax.

(D) Required statement. The statement required by paragraph

(b)(2)(iii)(A) of this section shall be entitled ``Required Statement

under Sec. 1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic

Subsidiary Corporations'' and shall be prepared by the domestic

liquidating corporation and shall be signed under penalties of perjury

by an authorized officer of the domestic liquidating corporation and by

an authorized officer of the foreign distributee corporation. The

required statement shall contain a certification that states that if

the foreign distributee corporation disposes of any stock subject to

paragraph (b)(2)(iii)(A) of this section in a transaction described in

paragraph (b)(2)(iii)(C) of this section, then the domestic liquidating

corporation shall recognize all realized gain attributable to such

stock at the time of distribution, and the domestic liquidating

corporation (or the foreign distributee corporation on behalf of the

domestic liquidating corporation) shall file a U.S. income tax return

(or amended U.S. income tax return, as the case may be) for the year of

distribution reporting the gain attributable to such stock.

(3) Other consequences--(i) Distributee basis in property. The

foreign distributee corporation's basis in property subject to this

paragraph (b) shall be the same as the domestic liquidating

corporation's basis in such property immediately before the

liquidation, increased by any gain, or reduced by any loss recognized

by the domestic liquidating corporation on such property pursuant to

paragraph (b)(1) of this section. In no case, however, will the foreign

distributee corporation's adjusted basis in distributed property exceed

the fair market value of such property at the time of liquidation.

(ii) Reporting under section 6038B. Section 6038B and the

regulations thereunder apply to a domestic liquidating corporation's

transfer of property to a foreign distributee corporation under section

367(e)(2).

(iii) Other rules. For other rules that may be applicable, see

sections 1248, 897, and 381.

(c) Distribution by a foreign corporation--(1) General rule--gain

and loss not recognized. If a foreign corporation (foreign liquidating)

makes a distribution of property in complete liquidation under section

332 to a foreign corporation (foreign distributee) that meets the stock

ownership requirements of section 332(b) with respect to stock in the

foreign liquidating corporation, then, except as provided in paragraph

(c)(2) of this section, section 337 (a) and (b)(1) shall apply and the

foreign liquidating corporation shall not recognize gain (or loss) on

the distribution under section 367(e)(2). If a foreign liquidating

corporation distributes a partnership interest (whether foreign or

domestic), then such corporation shall be treated as having distributed

a proportionate share of partnership property in accordance with the

principles of paragraph (b)(1)(iii) of this section.

(2) Exceptions--(i) Property used in a U.S. trade or business--(A)

General rule. A foreign liquidating corporation (including a

corporation that has made an effective election under section 897(i))

that makes a distribution described in paragraph (c)(1) of this section

shall recognize gain on the distribution of qualified property, as

described in paragraph (b)(2)(i)(B) of this section (other than U.S.

real property interests), that is used by the foreign liquidating

corporation in the conduct of a trade or business within the United

States at the time of distribution.

(B) Ten-year active U.S. business exception. A foreign liquidating

corporation shall not recognize gain under paragraph (c)(2)(i)(A) of

this section, if--

(1) The foreign distributee corporation, immediately thereafter and

for the ten-year period beginning on the date of the distribution of

such property, uses the property in the conduct of a trade or business

in the United States;

(2) The foreign distributee corporation is not entitled to benefits

under a comprehensive income tax treaty (this requirement shall apply

only if the foreign liquidating corporation (or predecessor

corporation) was not entitled to benefits under a comprehensive income

tax treaty); and

(3) The foreign liquidating corporation and foreign distributee

corporation attach the statement described in paragraph (c)(2)(i)(C) of

this section to their U.S. income tax returns for their taxable years

that include the distribution.

(C) Required statement. The statement required by paragraph

(c)(2)(i)(B)(3) of this section shall be entitled ``Required Statement

under Sec. 1.367(e)-2(c)(2)(i),'' shall be prepared by foreign

liquidating corporation, shall be signed under penalties of perjury by

an authorized officer of the foreign liquidating corporation and by an

authorized officer of the foreign distributee corporation, and shall be

identical to the statement described in paragraph (b)(2)(i)(C) of this

section, except that ``Sec. 1.367(e)-2(c)(2)(i)(B)'' shall be

substituted for references to ``Sec. 1.367(e)-2(b)(2)(i)'' and

``foreign liquidating corporation'' shall be substituted for ``domestic

liquidating corporation'' each time it appears. References in the rules

of paragraph (b)(2)(i)(C) of this section to various rules in paragraph

(b) of this section shall be applied as if such references were to this

paragraph (c). However, the

[[Page 43082]]

statement described in this paragraph (c)(2)(i)(C) shall be modified as

follows:

(1) The foreign distributee corporation shall not be required to

waive its income tax treaty benefits as required by Sec. 1.367(e)-

2(b)(2)(i)(C)(4), unless--

(i) The foreign liquidating corporation was required to waive its

treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in

connection with the distribution of such property in a prior

liquidation distribution subject to the provisions of this section; or

(ii) The foreign distributee corporation is entitled benefits under a

treaty to which the foreign liquidating corporation was not entitled.

(2) If the foreign distributee is required to waive treaty benefits

because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the

foreign distributee shall only be required to waive benefits that were

not available to the foreign liquidating corporation (or a predecessor

corporation) prior to liquidation.

(3) The property description described in paragraph (b)(2)(i)(C)(2)

of this section shall include only the qualified U.S. trade or business

property described in paragraph (c)(2)(i) of this section.

(D) Operating rules. By the foreign liquidating corporation's

claiming nonrecognition under paragraph (c)(2)(i)(B) of this section

and filing a statement described in paragraph (c)(2)(i)(C) of this

section, the foreign liquidating corporation and the foreign

distributee corporation agree to be subject to the rules of paragraph

(c)(2)(i) of this section, as well as the rules of paragraphs

(b)(2)(i)(D) and (E) of this section. In applying the rules of

paragraphs (b)(2)(i)(D) and (E) of this section, ``foreign liquidating

corporation'' shall be used instead of ``domestic liquidating

corporation'' each time it appears. References in the rules of

paragraphs (b)(2)(i)(D) and (E) of this section to various rules in

paragraph (b) of this section shall be applied as if such references

were to this paragraph (c).

(ii) Property formerly used in a United States trade or business. A

foreign liquidating corporation that makes a distribution described in

paragraph (c)(1) of this section shall recognize gain (but not loss) on

the distribution of property (other than U.S. real property interests)

that had ceased to be used by the foreign liquidating corporation in

the conduct of a U.S. trade or business within the ten-year period

ending on the date of distribution and that would have been subject to

section 864(c)(7) had it been disposed. Section 864(c)(7) shall govern

the treatment of any gain recognized on the distribution of assets

described in this paragraph as income effectively connected with the

conduct of a trade or business within the United States.

(3) Other consequences--(i) Distributee basis in property. The

foreign distributee corporation's basis in property subject to this

paragraph (c) shall be the same as the foreign liquidating

corporation's basis in such property immediately before the

liquidation, increased by any gain, or reduced by any loss recognized

by the foreign liquidating corporation on such property, pursuant to

paragraph (c)(2) of this section. In no event, however, will the

foreign distributee corporation's adjusted basis in distributed

property exceed the fair market value of such property at the time of

liquidation.

(ii) Other rules. For other rules that may apply, see sections

367(b) and 381.

(d) Anti-abuse rule. The Commissioner may require either a domestic

liquidating corporation or a foreign liquidating corporation to

recognize gain on a distribution in liquidation described in paragraph

(b) or (c) of this section (or treat the liquidating corporation as if

it had recognized loss on a distribution in liquidation), if a

principal purpose of the liquidation is the avoidance of U.S. tax

(including, but not limited to, the distribution of a liquidating

corporation's earnings and profits with a principal purpose of avoiding

U.S. tax). A liquidation may have a principal purpose of tax avoidance

even though the tax avoidance purpose is outweighed by other purposes

(taken together or separately).

(e) Effective date. This section shall be applicable to

distributions occurring 30 days after August 9, 1999 or, if taxpayer so

elects, to distributions in taxable years ending after August 8, 1999.

Par. 4. Section 1.6038B-1 is amended by revising the fourth

sentence of paragraph (a), the first sentence of paragraph (b)(1)(i),

and paragraphs (d), (e), and (g) to read as follows:

Sec. 1.6038B-1 Reporting of certain transactions to foreign

corporations.

(a) * * * Section 1.6038B-1(e) describes the filing requirements

for property transfers described in section 367(e). * * *

(b) Time and manner of reporting--(1) In general--(i) Reporting

procedure. Except for stock or securities qualifying under the special

reporting rule of paragraph (b)(2) of this section, or cash, which is

subject to special rules contained in paragraph (b)(3) of this section,

any U.S. person that makes a transfer described in section

6038B(a)(1)(A), 367(d), or 367(e), is required to report pursuant to

section 6038B and the rules of this section and must attach the

required information to Form 926, ``Return by Transferor of Property to

a Foreign Corporation.'' * * *

* * * * *

(d) [Reserved]. For further guidance, see Sec. 1.6038B-1T(d).

(e) Transfers subject to section 367(e)--(1) In general. If a

domestic corporation (distributing corporation) makes a distribution

described in section 367(e)(1) or section 367(e)(2), the distributing

corporation must comply with the reporting requirements of this

paragraph (e). Unless otherwise provided in this section, a

distributing corporation making a distribution described in sections

367(e)(1) or 367(e)(2) must file a Form 926, ``Return by a U.S.

Transferor of Property to a Foreign Corporation (under section 367),''

as amended and modified by this section.

(2) Reporting requirements for section 367(e)(1) distributions of

domestic controlled corporations. A domestic distributing corporation

making a distribution of the stock or securities of a domestic

corporation under section 355 is not required to file a Form 926, as

described in paragraph (e)(1) of this section, and shall have no other

reporting requirements under section 6038B.

(3) Reporting requirements for section 367(e)(1) distributions of

foreign controlled corporations. If the distributing corporation makes

a section 355 distribution of the stock or securities of a foreign

controlled corporation to distributee shareholders who are not

qualified U.S. persons, as defined in Sec. 1.367(e)-1(b)(1), then the

distributing corporation shall complete Part 1 of the Form 926 and

attach a signed copy of such form to its U.S. income tax return for the

year of the distribution. The distributing corporation shall also

attach to its U.S. income tax return for the year of distribution a

statement signed under the penalties of perjury entitled, ``Addendum to

Form 926.'' The addendum shall contain a brief description of the

transaction, state the number of shares distributed to distributees who

are not qualified U.S. persons (applying the rules contained in

Sec. 1.367(e)-1(d)), and state the basis and fair market value of the

distributed stock or securities (including a list stating the amounts

that were distributed to distributees who were not qualified U.S.

persons and distributees who were qualified U.S. persons).

(4) Reporting rules for section 367(e)(2) distributions by domestic

[[Page 43083]]

liquidating corporations. If the distributing corporation makes a

distribution of property in complete liquidation under section 332 to a

foreign distributee corporation that meets the stock ownership

requirements of section 332(b) with respect to the stock of the

distributing corporation, then the distributing corporation shall

complete a Form 926 and attach a signed copy of such form to its U.S.

income tax return for the year of the distribution. The property

description contained in Part III of the Form 926 shall contain a

description of all property distributed by the liquidating corporation

(regardless of whether the property qualifies for nonrecognition). The

description shall also identify the property excepted from gain

recognition under Sec. 1.367(e)-2(b)(2)(ii) and (iii). If the

distributing corporation distributes property that will be used by the

foreign distributee corporation in a U.S. trade or business and the

distributing corporation does not recognize gain on such distribution

under Sec. 1.367(e)-2(b)(2)(i), then the distributing corporation may

satisfy the requirements of this section by completing Part 1 of the

Form 926, noting thereon that the information required by the Form 926

is contained in the statement required by Sec. 1.367(e)-

2(b)(2)(i)(C)(2), and attaching a signed copy of the Form 926 to its

U.S. income tax return for the year of the distribution.

* * * * *

(g) Effective dates. This section applies to transfers occurring on

or after July 20, 1998, except paragraph (e) of this section, which

applies to transfers that are subject to Secs. 1.367(e)-1(f) and

1.367(e)-2(e). See Sec. 1.6038B-1T for transfers occurring prior to

July 20, 1998- See also Sec. 1.6038B-1T(e) in effect prior to August 9,

1999, (as contained in 26 CFR part 1 revised April 1, 1999) for

transfers described in section 367(e) that are not subject to

Secs. 1.367(e)-1(f) and 1.367(e)-2(e).

Par. 5. Section 1.6038B-1T is amended by revising the section

heading, revising paragraph (e) and revising the first sentence of

paragraph (g), to read as follows.

Sec. 1.6038B-1T Reporting of certain transactions to foreign

corporations (temporary).

* * * * *

(e) [Reserved] For further guidance, see Sec. 1.6038B-1(e).

* * * * *

(g) Effective date. This section applies to transfers occurring

after December 31, 1984. * * *

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

Par. 6. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 7. In Sec. 602.101, paragraph (b) is amended in the table by

removing the entries for 1.367(e)-1T and 1.367(e)-2T, revising the

entry for 1.6038B-1, and adding entries in numerical order to read as

follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(b) * * *

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

Current OMB

CFR part or section where identified and described Control No.

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

* * * * *

1.367(e)-1.............................................. 1545-1487

1.367(e)-2.............................................. 1545-1487

* * * * *

1.6038B-1............................................... 1545-1487

1545-1615

* * * * *

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

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: July 29, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 99-20092 Filed 8-6-99; 8:45 am]

BILLING CODE 4830-01-P