July 6, 1998 4 1998–27 I.R.B.

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of July 1998. SeeRev. Rul. 98–33, page 26.

Section 367.—ForeignCorporations

26 CFR 1.367(a)–3 Treatment of transfers of stockor securities to foreign corporations

T.D. 8770

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1, 7 and 602

Certain Transfers of Stock orSecurities by U.S. Persons toForeign Corporations andRelated Reporting Requirements

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsregulations relating to certain transfers ofstock or securities by U.S. persons to for-eign corporations pursuant to the corpo-rate organization and reorganization pro-visions of the Internal Revenue Code, andthe reporting requirements related to suchtransfers. The regulations provide thepublic with guidance necessary to complywith the Tax Reform Act of 1984.

DATES: These regulations are effectiveJuly 20, 1998.

FOR FURTHER INFORMATION CON-TACT: Philip L. Tretiak at (202) 622-3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number1545–1271. Responses to these collec-tions of information are required in orderfor certain U.S. shareholders that transferstock or securities in section 367(a) ex-changes to qualify for an exception to thegeneral rule of taxation under section367(a)(1).

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number.

The estimated burden per respondentvaries from .5 to 8 hours, depending uponindividual circumstances, with an esti-mated average of 4 hours.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service, Attn: IRS Re-ports Clearance Officer, T:FS:FP, Wash-ington, DC 20224, and to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, DC 20503.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

On May 16, 1986, temporary and pro-posed regulations under sections 367(a)and (d), and 6038B were published in theFederal Register (51 F.R. 17936 [T.D.8087 (1986–1 C.B. 175)]). These regula-tions, which addressed transfers of stockor securities and other assets, as well asrelated reporting requirements, were pub-lished to provide the public with guidancenecessary to comply with changes made

to the Internal Revenue Code by the TaxReform Act of 1984. The IRS and theTreasury Department later issued Notice87–85 (1987–2 C.B. 395), which set forthsubstantial changes to the 1986 regula-tions, effective with respect to transfers ofdomestic or foreign stock or securities oc-curring after December 16, 1987. A fur-ther notice of proposed rulemaking con-taining rules under section 367(a) withrespect to transfers of domestic or foreignstock or securities, as well as section367(b), was published in the FederalRegister on August 26, 1991 (56 F.R.41993 [INTL–54–91; INTL–178–86(1991–2 C.B. 1070)]). The section 367(a)portion of the 1991 proposed regulationswas generally based upon the positionsannounced in Notice 87–85, but the regu-lations proposed certain modifications toNotice 87–85, particularly with respect totransfers of stock or securities of foreigncorporations.

Subsequently, the IRS and the TreasuryDepartment have issued guidance focus-ing on the transfers of stock or securitiesof domestic corporations. Notice 94–46(1994–1 C.B. 356) announced modifica-tions to the positions set forth in Notice87–85 (and the 1991 proposed regula-tions) with respect to transfers of stock orsecurities of domestic corporations occur-ring after April 17, 1994. Temporary andproposed regulations (referred to as the in-version regulations) implementing Notice94–46 (with certain modifications) werepublished in the Federal Register on De-cember 26, 1995 (60 F.R. 66739 and66771 [T.D. 8638 (1996–1 C.B. 43)]).Final inversion regulations, published inthe Federal Register on December 27,1996 (61 F.R. 61849 [T.D. 8702 (1997–1C.B. 92)]), generally followed the rulescontained in the temporary regulations,with modifications.

The final regulations herein addresstransfers of foreign stock or securities,and other matters addressed in the 1991proposed regulations under section 367(a)that were not addressed in the 1996 finalinversion regulations.

In addition, these final regulations ad-dress those portions of the 1991 proposedsection 367(b) regulations that relate to

transactions that are subject to both sec-tions 367(a) and (b). The remainder ofthe 1991 proposed section 367(b) regula-tions will be finalized at a later date.

This document also contains final regu-lations under section 6038B with respectto reporting requirements applicable totransfers of stock or securities describedunder section 367(a). Rules regardingoutbound transfers to corporations of as-sets other than stock (including intangi-bles), and outbound transfers to foreignpartnerships will be addressed in separateguidance.

Finally, these final regulations containa clarification with respect to the scope ofcertain outbound transfers of intangiblesthat are subject to section 367(d).

Explanation of Provisions

Sections 367(a) and (b): introductionSection 367(a)(1) generally treats a

transfer of property (including stock orsecurities) by a U.S. person to a foreigncorporation (an outbound transfer) in anexchange described in section 332, 351,354, 356 or 361 as a taxable exchange un-less the transfer qualifies for an exceptionto this general rule.

Section 367(a)(2) provides that, exceptas provided by regulations, section367(a)(1) shall not apply to the transfer ofstock or securities of a foreign corpora-tion which is a party to the exchange or aparty to the reorganization. Section367(a)(3) contains an exception to section367(a)(1) for certain outbound transfersof tangible assets other than stock or secu-rities. Section 367(a)(5) contains limita-tions on any exceptions to section367(a)(1) in certain instances.

Section 367(b) provides that, with re-spect to certain nonrecognition transfersin connection with which there is notransfer of property described in section367(a)(1), a foreign corporation will re-tain its status as a corporation unless regu-lations provide otherwise.

These final regulations address transac-tions described in both sections 367(a)and (b), and are prescribed under the au-thority of both sections 367(a) and (b).

Stock transfers under sections 367(a) and (b): scope

Outbound transfers of stock that are sub-ject to section 367(a) may be either direct(such as an outbound transfer of stock de-

scribed under section 351), indirect (as de-scribed below with respect to certain trans-fers) or constructive (such as an outboundstock transfer that may occur pursuant to achange in an entity’s classification). See§1.367(a)–3(a) (as amended) for the gen-eral rules regarding the scope of stocktransfers that are subject to section 367(a).

Indirect stock transfers: in generalThe current temporary regulations con-

tain illustrative examples of certain trans-actions, including triangular reorgani-zations described under section368(a)(1)(A) and either section368(a)(2)(D) or (E), section 368(a)(1)(B)or (C), that are treated as indirect stocktransfers subject to section 367(a) wherethe acquired company and the acquiringcompany are domestic corporations andthe shareholders of the acquired companyreceive stock of the acquiring company’sforeign parent in the exchange. (Underthe terminology used in the proposed andfinal regulations, in the case of a reorgani-zation described in sections 368(a)(1)(A)and (a)(2)(E), U.S. shareholders exchangetheir stock for stock of the acquiredcom-pany’s foreign parent.)

The proposed regulations clarified thetreatment of indirect stock transfers, andprovided extensive examples of the rules.The proposed regulations provided thattransactions that are treated as indirectstock transfers include: (i) successive sec-tion 351 exchanges, and (ii) section368(a)(1)(C) reorganizations followed bysection 368(a)(2)(C) exchanges. In addi-tion, the reorganizations illustrated underthe existing temporary regulations arealso treated as indirect stock transfersunder the proposed regulations where theacquired and/or acquiring corporationsare foreign corporations.

The proposed regulations requestedcomments as to the scope of the indirectstock transfer rules. The IRS and theTreasury Department carefully consideredcomments received with respect to thescope of the indirect stock transfer rulesand have decided to retain the rules setforth in the proposed regulations. Theserules are contained in §1.367(a)–3(d), andadditional examples are provided in thefinal regulations.

Indirect stock transfer rules and section 367(d)

In the case of a triangular section

368(a)(1)(C) reorganization in which aU.S. target company (UST) transfers its as-sets to a foreign acquiring company (FA)and UST’s U.S. parent company (USP) re-ceives stock of FA’s foreign parent (thetransferee foreign corporation or TFC) inexchange for the UST stock, the indirectstock transfer rules and the asset transferrules will apply contemporaneously.

If UST is taxable under section 367(a)with respect to its outbound (section 361)transfer of all or a portion of its tangibleassets (because such assets do not qualifyfor an exception to section 367(a)(1)),USP will receive a step up in the basis ofits stock in UST, provided that USP andUST file a consolidated Federal incometax return. See §1.1502–32. USP willalso be deemed to make an indirect trans-fer of the stock of UST for TFC stock.See §1.367(a)–3(d)(1)(iv). Thus, if USPreceives at least five percent of either thetotal value or the total voting power of thestock of TFC (i.e., USP is a 5-percentshareholder (which is also referred to as a5-percent transferee shareholder in§1.367(a)–3(c)(5)(ii)) and the value of theUST stock exceeds USP’s basis in UST(taking into account basis adjustments re-lating to the asset transfer), USP mayqualify for nonrecognition treatment byentering into a gain recognition agree-ment (GRA), described below, providedthat the requirements of §1.367(a)–3(c)(1) are satisfied. See, e.g., §1.367(a)–3(d)(3), Example 7through Example 7C.

If the asset transfer involves tangibleassets and the transfer is fully taxable (sothat USP’s basis in its UST stock equalsthe value of the UST stock), the indirectstock transfer would not be taxable undersection 367(a), and, hence, no GRAwould be required. In contrast, if the as-sets transferred by UST include intangi-bles that are taxable under section 367(d),the exact manner in which section 367(d)operates is less certain.

The regulations under section 367(d) donot address the tax consequences when theU.S. transferor goes out of existence pur-suant to the transaction. The IRS and theTreasury Department are studying themanner in which the rules under section367(d) should operate when the U.S. trans-feror goes out of existence contemporane-ously with (or subsequent to) its outboundtransfer of an intangible. Comments arerequested with respect to this issue.

1998–27 I.R.B. 5 July 6, 1998

Transactions subject to sections 367(a)and (b)

An outbound transfer of foreign stockor securities can be subject to both sec-tions 367(a) and (b). Pursuant to section367(a)(2), §1.367(a)–3T(b) of the currenttemporary regulations provides that, if anexchange is described in section 354 or361, an outbound transfer of stock or se-curities of a foreign corporation that is aparty to the reorganization is not subjectto section 367(a). Thus, for example, anoutbound transfer in which a U.S. personexchanges stock in one controlled foreigncorporation (CFC) for another CFC thatqualifies as a reorganization under section368(a)(1)(B) (a B reorganization), includ-ing a transfer that qualifies as both a B re-organization and a section 351 exchange,is subject only to section 367(b), not sec-tion 367(a). In such case, no GRA, de-scribed below, is required under the cur-rent temporary regulations to preservenonrecognition treatment. In contrast, anoutbound transfer of foreign stock thatqualifies as a section 351 exchange butnot a B reorganization is currently subjectto only section 367(a), not section 367(b),and, thus, a GRA may be required to pre-serve nonrecognition treatment.

The IRS and the Treasury Departmentbelieve that substantially similar transac-tions, such as these, should not be treatedin markedly different manners. Thus,these final regulations adopt the approachcontained in the proposed regulations:that all outbound transfers of foreignstock will be subject to sections 367(a)and (b) concurrently, except to the extentthat the exchange is fully taxable undersection 367(a)(1). See §1.367(a)–3(b)(2).

Sections 367(a) and (b): exceptions totaxation

Once a determination is made that aparticular outbound transfer of stock orsecurities is subject to section 367(a), thenext determination is the tax treatment ofsuch transfer. In general, the current rulesregarding the outbound transfer of stockor securities under section 367(a) providefor three different tax consequences de-pending upon the particular facts: (i) cer-tain transfers retain nonrecognition treat-ment without condition, (ii) certaintransfers retain nonrecognition treatmentonly if the U.S. transferor enters into aGRA, and (iii) certain transfers of stockare taxable to the U.S. transferor under

section 367(a)(1) with no option to file aGRA to secure nonrecognition treatment.These final regulations retain this generalframework.

The current rules governing whether ataxpayer may qualify for an exceptionunder section 367(a) in the case of an out-bound transfer of stock are described in§1.367(a)–3(c) of the final inversion reg-ulations (in the case of domestic stock orsecurities) and Notice 87–85 (in the caseof foreign stock or securities).

Notice 87–85 provides that in the caseof an outbound transfer of foreign stock orsecurities to which section 367(a) applies,a U.S. transferor may generally qualify fornonrecognition treatment if it either (i) isnot a 5-percent shareholder, or (ii) is a 5-percent shareholder but enters into a GRAfor a term of 5 or 10 years, dependingupon the TFC stock owned by all U.S.transferors. Under current law, a 5-per-cent shareholder that qualifies for non-recognition treatment under section 367(a)by filing a GRA agrees that if the TFC dis-poses of the stock of the transferred corpo-ration in a taxable transaction during theterm of the GRA, the 5-percent share-holder must amend its return for the yearof the transfer and include in income theamount that it realized but did not recog-nize with respect to the stock of the trans-ferred corporation, and pay the tax due,plus interest, on this amount. (Under No-tice 87–85, the term of the GRA is 5 yearsif all U.S. transferors, in the aggregate,own less than 50 percent of both the totalvoting power and the total value of theTFC immediately after the transfer, or 10years if all U.S. transferors, in the aggre-gate, own 50 percent or more of either thetotal voting power or the total value of theTFC immediately after the transfer.) Al-though GRAs are currently used solelywith respect to outbound transfers of stockor securities, the IRS and the Treasury De-partment may, at a later date, permit tax-payers to secure nonrecognition treatmentunder section 367(a) with respect to othertypes of assets by entering into GRAs.

Notice 87–85, however, provides noexception to section 367(a)(1) if a U.S.transferor transfers stock in a CFC inwhich it is a United States shareholder (asdefined in §7.367(b)–2(b) or section953(c)) but does not receive back stock ina CFC in which it is a United States share-holder.

The final regulations, following theproposed regulations on this point, pro-vide that a transfer described in the pre-ceding paragraph, such as a section 351exchange in which a U.S. transferor ex-changes stock of a CFC in which it is aUnited States shareholder for stock of anon-CFC, is not automatically taxable.Instead, both sections 367(a) and (b)apply to the exchange. If the U.S. trans-feror is required under section 367(a) toenter into a GRA to preserve nonrecogni-tion treatment and fails to do so, the trans-action is fully taxable under section367(a) (and, as a consequence, the section1248 amount that would be included as adividend under section 367(b) had a GRAbeen filed is instead treated as a dividendunder section 1248). If the U.S. trans-feror is required to enter into a GRA andproperly does so, the U.S. transferor is re-quired under section 367(b) to include inincome the section 1248 amount attribut-able to the stock exchanged. The amountof the GRA equals the gain realized on thetransfer less the inclusion under section367(b). See §1.367(a)–3(b)(2).

As noted above, Notice 87–85 ad-dressed outbound transfers of both do-mestic and foreign stock. The (1996)final inversion regulations supersededNotice 87–85 with respect to outboundtransfers of domestic stock. The rules inNotice 87–85 with respect to outboundtransfers of foreign stock have been incor-porated into these final regulations withrespect to transfers that occur prior to July20, 1998. See §1.367(a)–3(g). Notice87–85 will be obsolete when these finalregulations are effective.

Section 367(a): post-GRA transactionsSection 1.367(a)–8 provides general

rules regarding terms and conditions re-lating to GRAs, and the manner in whichpost-GRA transactions impact the GRA.The general terms and conditions forGRAs have not changed significantlyfrom the terms and conditions set forth in§1.367(a)–3T(g) of the current temporaryregulations, except that the final regula-tions contain an election (the GRA elec-tion), described below, to permit the tax-payer to include the GRA amount inincome in the year of the triggering event(with interest on the tax due from the yearof the transfer) rather than on an amendedreturn for the year of the initial transfer.In addition, the final regulations generally

July 6, 1998 6 1998–27 I.R.B.

follow the proposed regulations by pro-viding a more comprehensive explanationof the manner in which the GRA is af-fected by both taxable and nontaxable dis-positions by the U.S. transferor, the TFC,and the transferred corporation.

The current temporary regulations pro-vide that the GRA is triggered if (i) theTFC disposes of all or a portion of thestock of the transferred corporation, or (ii)the transferred corporation disposes of asubstantial portion of its assets. The termsubstantial portionwas not defined in theregulations.

Both the final and the proposed regula-tions use the rule from the current tempo-rary regulations that a GRA is triggered tothe extent that the TFC disposes of all or aportion of the stock of the transferred cor-poration. The final regulations also adoptthe rule contained in the proposed regula-tions that a GRA is triggered if the trans-ferred corporation disposes of substan-tially all of its assets (within the meaningof section 368(a)(1)(C)). In addition, thefinal regulations provide that a GRA willbe triggered if the U.S. transferor is eithera U.S. citizen or long-term resident (asdefined in section 877(e)(2)) at the timeof the initial transfer and such personceases to be a U.S. citizen or long-termresident during the GRA term.

Under the current temporary regula-tions, if a GRA is triggered, the U.S.transferor must amend its tax return forthe year of the initial transfer, include inincome the gain that was realized but notrecognized, and pay the tax due thereonwith interest. The proposed regulationswould have maintained the amended re-turn/interest charge requirement, but re-quested comments as to (i) the amount ofgain to be recognized by the U.S. trans-feror upon a triggering event, (ii) the yearin which the gain should be included inthe income of the U.S. transferor, and (iii)whether an interest charge is appropriate.

A number of commentators have sug-gested that the 10-year GRA term underNotice 87–85 in certain instances is toorestrictive because a disposition of thestock of the transferred corporation inyear 8, for example, would likely not be atax avoidance transfer but the interestcharges would be burdensome in suchcase. Other commentators suggested adeferred income approach similar to thatapplicable in the consolidated return de-ferred intercompany context.

In response to these comments, thesefinal regulations contain two significantmodifications to the current temporaryregulations. First, in conformity with thefinal inversion regulations, these regula-tions provide that the GRA term will be 5years in all cases involving outboundtransfers of foreign stock. (Moreover,taxpayers may elect to apply these finalregulations to past transactions so that any10-year GRA that is in existence (i.e., hasnot been triggered) on July 20, 1998 willbe a 5-year GRA. Thus, the 10-year GRAwill be considered to be a 5-year GRA bythe IRS, and, such GRA will terminate onthe fifth full taxable year following theclose of the taxable year of the initialtransfer.) Second, because the IRS andthe Treasury Department are concernedthat the amended return requirement canbe burdensome to taxpayers in the eventthat a GRA is triggered, the final regula-tions contain an election (the GRA elec-tion), which must be filed with the U.S.transferor’s tax return that includes thedate of the initial transfer, that permitstaxpayers to report a triggering event inthe year of the triggering event rather thanon an amended return for the year of theinitial transfer. (No such election is avail-able with respect to GRAs that are in exis-tence when these final regulations be-come effective.)

Even if a transferor makes a GRA elec-tion, such person is still required to extendthe statute of limitations, comply with allof the applicable GRA reporting require-ments (such as filing annual certifications)and, in the case of a triggering event, in-clude in income the GRA amount plus in-terest in the same manner as under the cur-rent temporary regulations, except that (i)the GRA amount and interest would be in-cluded on the U.S. transferor’s tax returnfor the year that includes the triggeringevent, and (ii) other computations, such asthe section 1248 amount (if any) attribut-able to the transferred stock, will be deter-mined on the triggering date rather thanthe date of the initial transfer.

Consistent with the proposed regula-tions, the final regulations clarify thatpost-GRA nonrecognition transactions(e.g., nonrecognition transactions inwhich the U.S. transferor transfers thestock of the TFC, the TFC transfers thestock of the transferred corporation, or thetransferred corporation transfers substan-

tially all of its assets) generally do nottrigger the GRA, provided that the U.S.transferor reports the transaction andamends the GRA to reflect the post-GRAtransaction.

The current temporary regulations donot provide instances that would cause theGRA to be terminated (i.e., extinguished).The proposed regulations would haveprovided that the GRA would be termi-nated if either (i) the U.S. transferor dis-posed of all of its TFC stock in a taxabletransaction, or (ii) the transferred com-pany is a U.S. company that sold substan-tially all of its assets in a taxable transac-tion (but only if the transferred companywas affiliated with the U.S. transferorunder section 1504(a)(2) prior to the ini-tial transfer).

The final regulations retain these tworules. In addition, the final regulationsalso provide that a GRA will be termi-nated if (i) the TFC distributes the stockof the transferred corporation back to theU.S. transferor in a section 355 exchange,or (ii) the TFC liquidates into the U.S.transferor under section 332, providedthat, immediately after the section 355distribution or section 332 liquidation, theU.S. transferor’s basis in the transferredstock is less than or equal to the basis thatit had in the transferred stock immediatelyprior to the initial transfer of such stock.

Finally, the current temporary regula-tions provide (and the 1991 proposed reg-ulations would have provided) certain re-strictions on taxpayers’ ability to use netoperating losses and credits to offset theamount of gain recognized upon the trig-ger of a GRA. In response to suggestionsfrom commentators, the final regulationsremove these restrictions.

Section 367(a) and “check-the-box”rules

The IRS and the Treasury Departmentare aware that taxpayers may attempt touse the entity classification (i.e., check-the-box) regulations to avoid entering intoGRAs. For example, assume that a U.S.transferor (USP) owns all of the stock oftwo CFCs, CFC1 and CFC2. USP trans-fers the stock of CFC2 to CFC1 in an ex-change otherwise described as both a sec-tion 351 exchange and a B reorganization.USP elects under §301.7701–3(c) to treatCFC2 as a disregarded entity, and suchelection is effective immediately prior tothe transfer.

1998–27 I.R.B. 7 July 6, 1998

Provided that the election is respected,USP would, for Federal income tax pur-poses, transfer the assets (and not thestock) of CFC2 to CFC1 in a section 351exchange. If the assets will be used byCFC1 in the active conduct of a trade orbusiness outside the United States, thetransfer of the assets by USP will qualifyfor the exception contained in section367(a)(3) and §1.367(a)–2T (as limited bycertain provisions, including §§1.367(a)–4T through 1.367(a)–6T). If the assets aredisposed of (either directly by CFC2 orbecause the stock of CFC2 is disposed ofby CFC1) in connection with the transferto CFC1, the step transaction doctrinemay apply to deny nonrecognition treat-ment to the outbound transfer to the ex-tent it is treated as an asset transfer. In ad-dition, the active trade or businessexception under §1.367(a)–2T is inapplic-able if, as part of the same transaction inwhich the TFC received the assets, it dis-poses of such assets. See §1.367(a)–2T(c). Thus, if USP intended to sellCFC2 or its business at the time of theelection or the asset transfer, the transferwould be treated as a taxable exchangeunder section 367(a)(1). If the step trans-action doctrine and the active trade orbusiness anti-avoidance rule do not apply,however, the use of the “check-the-box”regulations in this context will not beviewed as inconsistent with the purposesof section 367(a), and, therefore, thetransaction will be respected as an assettransfer.

Section 367(a) and tax-motivatedtransactions

The IRS and the Treasury Departmentare aware that certain taxpayers have en-tered into (or are contemplating) transac-tions that are designed to avoid the inver-sion regulations under §1.367(a)–3(c). Inthese transactions (where a foreign corpo-ration acquires the stock of a domesticcorporation), one or more U.S. transferorsattempt to avoid taxation under the inver-sion regulations by retaining an equity in-terest (or receiving a modified equity in-terest) in the domestic target corporation.Such interest, however, is typically cou-pled with an interest in the foreign ac-quirer, or a right to convert the interest inthe domestic target into stock of the for-eign acquirer.

The IRS and the Treasury Departmentare currently scrutinizing these transac-

tions on a case-by-case basis using sub-stance over form (or other) principles, andare studying whether it is appropriate toissue specific guidance with respect tothese transactions. Comments are re-quested as to the instances in which a U.S.transferor that receives (or maintains) astock interest in the domestic target in cir-cumstances similar to those describedabove should not be treated as having re-ceived stock in the foreign acquirer forpurposes of section 367(a).

Section 367(b)This document finalizes the 1991 pro-

posed section 367(b) regulations to theextent necessary to address those transfersof foreign stock subject to both sections367(a) and (b) under the 1991 proposedregulations.

In addition, this document contains anumber of other miscellaneous provi-sions, at the request of commentators.

First, under current law, if a UnitedStates shareholder (defined under§7.367(b)–2(b) as a 10 percent share-holder of a CFC within the past 5 years)exchanges, under section 351, stock of aforeign corporation for stock of a domes-tic corporation, the U.S. transferor is nottaxable under section 367(b). However,if the transaction constitutes a section354 exchange, under §7.367(b)–7(c)(1)the United States shareholder must in-clude in income the section 1248 amountattributable to the stock exchanged. Con-sistent with the 1991 proposed regula-tions as well as the purpose of these finalregulations to harmonize the Federal in-come tax consequences of substantiallysimilar transactions, the final section367(b) regulations provide that a section1248 inclusion generally is not requiredin the case of the section 354 exchangedescribed above. (This result is accom-plished by excluding domestic stock fromthe categories of nonqualifying consider-ation described in §1.367(b)–4(b)(1).Thus, these transfers will generally be re-spected as nonrecognition exchangesunder 367(b).)

Second, consistent with the principlesof section 367(b), in cases where the finalregulations do not require that the section1248 amount be included in income, theregulations clarify the appropriate treat-ment of post-reorganization exchangesunder section 1248 or 367(b). See§1.367(b)–4(b)(5).

Third, in an effort to reduce the report-ing burdens of U.S. persons that makeoutbound transfers of foreign stock or se-curities, the section 367(b) regulations areamended to provide that, to the extent thata transaction is described in both sections367(a) and (b), and the exchanging share-holder is not a United States shareholderof the corporation whose stock is ex-changed, reporting under section 367(b)is not required. See §1.367(b)–1(c).

Finally, the proposed section 367(b)regulations provided that final regula-tions generally would be effective for ex-changes that occur on or after 30 daysafter the final regulations were publishedin the Federal Register. However,§1.367(b)–2(d) (relating to the definitionof the all earnings and profits amount)was proposed to be effective for transfersoccurring on or after August 26, 1991. Inresponse to comments regarding this pro-vision and its effective date, a separatenotice of proposed rulemaking is issuedwith these final regulations to delete theAugust 26, 1991, effective date with re-spect to the all earnings and profitsamount. Thus, the definition of the allearnings and profits amount that will beincluded in forthcoming section 367(b)final regulations will apply to exchangesthat occur on or after 30 days after the is-suance of those final regulations.

The IRS and the Treasury Departmentwill issue guidance at a later date to ad-dress section 367(b) provisions describedin the 1991 proposed regulations that arenot addressed herein.

Section 6038B: in generalSection 6038B, as enacted under the

Deficit Reduction Act of 1984 (PublicLaw 98–369), provided that U.S. personsthat made certain outbound transfers ofproperty to foreign corporations were re-quired to report those transfers in themanner prescribed by regulations. Thepenalty for failure to comply with the reg-ulations was 25 percent of the gain real-ized on the exchange, unless the failurewas due to reasonable cause and not towillful neglect. (The penalty was modi-fied by the Taxpayer Relief Act of 1997(TRA ’97).)

Section 1.6038B–1T, promulgated onMay 15, 1986, by TD 8087 (together withregulations under sections 367(a) and(d)), provided rules concerning the infor-mation that was required to be reported

July 6, 1998 8 1998–27 I.R.B.

under section 6038B with respect to trans-fers of property to foreign corporations.

Section 6038B: transfers of stock orsecurities

Section 1.6038B–1T(b)(2)(i) of thecurrent temporary regulations provides,inter alia, that no notice is required undersection 6038B with respect to a transfer ofstock or securities described in §1.367(a)–3T(f)(1) of the current temporary regula-tions. Section 1.367(a)–3T(f)(1) had pro-vided that an outbound transfer of stockor securities of a domestic or foreign cor-poration was not taxable under section367(a)(1) if immediately after the transfer(i) all U.S. transferors owned in the aggre-gate less than 20 percent of both the totalvoting power and the total value of thestock of the TFC, or (ii) all U.S. transfer-ors owned in the aggregate 20 percent ormore of either the total voting power orthe total value of the stock of the TFC, butless than 50 percent of that total votingpower and total value and the subject U.S.transferor was not a 5-percent share-holder.

Notice 87–85 superseded the 1986 tem-porary regulations under section 367(a)(including §1.367(a)–3T(f)(1)) with re-spect to the exceptions available for out-bound stock transfers. Notice 87–85 pro-vided that final regulations wouldincorporate the rules contained in the No-tice, for transfers occurring after Decem-ber 16, 1987. The exceptions in the 1986temporary regulations, including§1.367(a)–3T(f)(1) of the current tempo-rary regulations, were removed as dead-wood (for transfers occurring after De-cember 16, 1987) by the 1995 temporaryinversion regulations (T.D. 8638).

Prior to the issuance of these final regu-lations, however, section 6038B had notbeen amended with respect to outboundtransfers of stock or securities. Thus,there was uncertainty whether a U.S.transferor that qualified under the inver-sion regulations or Notice 87–85 for non-recognition treatment without filing aGRA (i.e., such U.S. transferor was not a5-percent shareholder) was required tocomply with section 6038B.

To reduce the reporting burdens onU.S. taxpayers that make outbound trans-fers of stock subject to section 6038B,the final section 6038B regulations pro-vide that, with respect to transfers occur-ring after December 16, 1987, and before

these final regulations are generally effec-tive, a U.S. transferor that makes an out-bound transfer subject to section 367(a)will not be subject to section 6038B withrespect to such transfer if (i) such personwas not a 5-percent shareholder and thetransfer qualified for nonrecognitiontreatment under section 367(a), or (ii)such person was not a 5-percent share-holder in the case of a taxable transactionbut such person included the gain on itsFederal income tax return for the taxableyear that included the date of the transfer.

With respect to transfers occurring afterthese final regulations are effective, theseregulations contain the two exceptions de-scribed above. In addition, a 5-percentshareholder that is required to file a GRAis not subject to section 6038B providedthat a GRA is properly filed. Moreover,U.S. transferors that are taxable on theiroutbound transfers of stock or securities(such as under the inversion regulationsor because a 5-percent shareholder thatwas eligible to qualify for nonrecognitiontreatment chose not to file a GRA) are notsubject to section 6038B if they properlyreport the gain recognized on the transferon their tax returns that include the date ofthe transfer.

Thus, a U.S. transferor that does notproperly report the gain recognized on itsoutbound stock transfer has not met itssection 6038B filing obligation with re-spect to such transfer, and will be subjectto the penalty under section 6038B, un-less the transferor’s failure to report thegain from the outbound transfer was dueto reasonable cause and not willful ne-glect. Such person will also be subject tothe extended statute of limitations undersection 6501(c)(8).

Section 6038B: transfers of cash andunappreciated property

As noted above, prior to the enactmentof TRA ’97, the penalty for failure tocomply with section 6038B was 25 per-cent of the gain realized on the outboundtransfer. Thus, in the case of an outboundtransfer of cash or unappreciated propertyrequired to be reported under section6038B, no penalty was imposed upon thefailure to report the transfer.

Pursuant to the TRA ’97, the penaltyfor failure to report under section 6038Bis revised from 25 percent of the gain re-alized in the property transferred to 10percent of the fair market value of the

property transferred, but limited to$100,000 unless the failure to report theexchange was due to intentional disre-gard. (The final regulations reflect themodification to the penalty provisionunder section 6038B.)

In response to the TRA ’97 change tothe penalty structure under section6038B, these final regulations clarify thattransfers of unappreciated property are re-quired to be reported, or the 10 percentpenalty will apply. These final regula-tions, however, do not require outboundtransfers of cash to be reported. Rules re-garding outbound transfers of cash will beprovided in future regulations.

Section 6038B: other transfers Pursuant to TRA ’97, certain outbound

transfers to foreign partnerships are re-quired to be reported under section6038B. Rules regarding outbound trans-fers to foreign corporations of assets notcovered in these final regulations (such asintangibles), and outbound transfers toforeign partnerships, will be addressed inseparate guidance.

Section 367(d) and other TRA ’97matters

A clarification provides that certainrules under section 367(a) will also applyunder section 367(d) for purposes of de-termining the identity of the transferorthat makes an outbound transfer of an in-tangible subject to section 367(d). Sec-tion 367(a)(4) and §1.367(a)–1T(c)(5)provide that, for purposes of section367(a), a partnership is treated as an ag-gregate in cases where a U.S. persontransfers a partnership interest or a part-nership makes an outbound transfer ofstock (or other assets).

The IRS and the Treasury Departmentbelieve that the identity of the transferorhas been and must be consistent underboth sections 367(a) and (d). Conse-quently, a U.S. person may not attemptthe use of a foreign partnership as an in-termediary (in light of the repeal of sec-tion 1491) for an outbound transfer of anintangible by a U.S. person to a foreigncorporation to avoid section 367(d). Inthe case of a transfer of an intangible by apartnership to a foreign corporation thatqualifies as a section 351 exchange, eachpartner that is a U.S. person is treated astransferring its share of the intangible in atransfer that is subject to section 367(d).

1998–27 I.R.B. 9 July 6, 1998

Guidance under TRA ’97 relating to therepeal of section 1491 may address situa-tions in which inappropriate results can beachieved through transactions facilitatedby such repeal. For example, guidancemay address the appropriate tax conse-quences when a U.S. person who is aUnited States shareholder of a CFC trans-fers stock in the CFC to a foreign partner-ship, and immediately after the transferthe foreign corporation loses its status as aCFC. Guidance is generally not, however,expected to require gain recognition undersection 721(c) in cases where gain is notinappropriately shifted to foreign persons.

Effective Dates

The final regulations contained hereinare generally effective for transfers occur-ring on or after July 20, 1998. However,taxpayers generally may elect to apply thefinal regulations under §1.367(a)–3(b)and (d) to transfers of foreign stock or se-curities occurring after December 17,1987. A taxpayer that makes the electionmust apply section 367(b) and the regula-tions thereunder to such transfers. In thecase of a transfer described in section351, an electing transferor must applysection 367(b) and the regulations there-under as if the exchange was described in§7.367(b)–7. Thus, for example, in a caseof a section 351 exchange in which a U.S.person exchanges stock of a CFC inwhich it is a United States shareholder butdoes receive back stock of a CFC inwhich it is a United States shareholder,the electing transferor must include in in-come the section 1248 amount with re-spect to the transferred stock.

Special Analyses

It has been determined that this regula-tion is not a significant regulatory actionas defined in EO 12866. Therefore, a reg-ulatory assessment is not required. It ishereby certified that the collection of in-formation contained in this regulation willnot have a significant economic impact ona substantial number of small entities.This certification is based upon the factthat these final regulations generally re-duce the reporting requirements in com-parison with the requirements containedunder current law and the proposed sec-tions 367(a) and (b) regulations. For ex-ample, the maximum term of the GRAunder section 367(a) is reduced from 10

to 5 years, thus eliminating the need forannual certifications in years 5 through 9.Moreover, the requirements under section6038B have been substantially revised foroutbound transfers of stock described insection 367(a) so that the amount of filingrequired under that section will be signifi-cantly reduced. In addition, as a generalmatter, these regulations will primarily af-fect large shareholders and U.S. multina-tional corporations with foreign opera-tions. Thus, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.

Drafting Information

The principal author of these regula-tions is Philip L. Tretiak of the Office ofAssociate Chief Counsel (International),within the Office of Chief Counsel, IRS.However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1, 7 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the entry forsection 1.367(b)–7 and adding new en-tries to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.367(a)–3 also issued under

26 U.S.C. 367(a) and (b).Section 1.367(a)–8 also issued under

26 U.S.C. 367(a) and (b).Section 1.367(b)–1 also issued under

26 U.S.C. 367(a) and (b). * * *Section 1.367(b)–4 also issued under

26 U.S.C. 367(a) and (b).Section 1.367(b)–7 also issued under

26 U.S.C. 367(a) and (b). * * * Par. 2. Section 1.367(a)–1T is

amended as follows:1. Paragraph (a), fourth sentence is

amended by removing the reference“§1.367(a)–3T” and adding “§1.367(a)–3” in its place.

2. Paragraph (a), last sentence isamended by removing the reference“§1.6038B–1T” and adding “§§1.6038B–1 and 1.6038B–1T” in its place.

3. Paragraph (b)(2)(i) is removed andreserved.

4. Paragraph (b), the concluding textimmediately following paragraph (b)(2)-(iii) is removed.

5. Paragraph (c)(1), the last sentence isremoved.

6. Paragraph (c)(2) is revised to read asset forth below.

7. Paragraph (c)(3)(ii)(C), the secondsentence of the concluding text immedi-ately following paragraph (c)(3)(ii)(C)(2)is amended by removing the language“§1.367(a)–3T” and adding “§1.367(a)–3” in its place.

§1.367(a)–1T Transfers to foreigncorporations subject to section 367(a):in general (temporary).

* * * * *

(c) * * *(2) Indirect transfers in certain reorga-

nizations. [Reserved] For further guid-ance, see §1.367(a)–3(d).

* * * * *

Par. 3. Section 1.367(a)-3 is amendedas follows:

1. Paragraphs (a) and (b) are revised.2. Paragraph (c)(1)(iii)(B) is amended

by removing the reference “§1.367(a)–3T(g)” and adding “§1.367(a)–8” in itsplace.

3. Revising paragraph (d).4. Removing paragraphs (e) through

(h) and adding paragraphs (e), (f) and (g).The revisions and additions read as fol-

lows:

§1.367(a)–3 Treatment of transfers ofstock or securities to foreigncorporations.

(a) In general. This section providesrules concerning the transfer of stock orsecurities by a U.S. person to a foreigncorporation in an exchange described insection 367(a). In general, a transfer ofstock or securities by a U.S. person to aforeign corporation that is described insection 351, 354 (including a reorganiza-tion described in section 368(a)(1)(B) andincluding an indirect stock transfer de-scribed in paragraph (d) of this section),356 or section 361(a) or (b) is subject tosection 367(a)(1) and, therefore, is treatedas a taxable exchange, unless one of the

July 6, 1998 10 1998–27 I.R.B.

exceptions set forth in paragraph (b) ofthis section (regarding transfers of foreignstock or securities) or paragraph (c) ofthis section (regarding transfers of domes-tic stock or securities) applies. However,if in an exchange described in section354, a U.S. person exchanges stock of oneforeign corporation for stock of anotherforeign corporation in a reorganizationdescribed in section 368(a)(1)(E), or aU.S. person exchanges stock of a domes-tic corporation for stock of a foreign cor-poration pursuant to an asset reorganiza-tion described in section 368(a)(1)(C),(D) or (F) that is not treated as an indirectstock transfer under paragraph (d) of thissection, such section 354 exchange is nota transfer to a foreign corporation subjectto section 367(a). See, e.g., paragraph(d)(3) Example 12. For rules regardingother indirect or constructive transfers ofstock or securities subject to section367(a), see §1.367(a)–1T(c). For addi-tional rules relating to an exchange in-volving a foreign corporation in connec-tion with which there is a transfer ofstock, see section 367(b) and the regula-tions under that section. For additionalrules regarding a transfer of stock or secu-rities in an exchange described in section361(a) or (b), see section 367(a)(5) andany regulations under that section. Forrules regarding reporting requirementswith respect to transfers described undersection 367(a), see section 6038B and theregulations thereunder.

(b) Transfers by U.S. persons of stockor securities of foreign corporations toforeign corporations—(1) General rule.Except as provided in section 367(a)(5), atransfer of stock or securities of a foreigncorporation by a U.S. person to a foreigncorporation that would otherwise be sub-ject to section 367(a)(1) under paragraph(a) of this section shall not be subject tosection 367(a)(1) if either—

(i) Less than 5-percent shareholder.The U.S. person owns less than five per-cent (applying the attribution rules of sec-tion 318, as modified by section 958(b))of both the total voting power and thetotal value of the stock of the transfereeforeign corporation immediately after thetransfer; or

(ii) 5-percent shareholder.The U.S.person enters into a five-year gain recog-nition agreement with respect to the trans-ferred stock or securities as provided in§1.367(a)–8.

(2) Certain transfers subject to sec-tions 367(a) and (b)—(i) In general. Atransfer of foreign stock or securities de-scribed in section 367(a) or any regula-tions thereunder as well as in section367(b) or any regulations thereunder shallbe concurrently subject to sections 367(a)and (b) and the regulations thereunder,except to the extent that the transferee for-eign corporation is not treated as a corpo-ration under section 367(a)(1). The ex-ample in paragraph (b)(2)(ii) of thissection illustrates the rules of this para-graph (b)(2). For an illustration of the in-teraction of the indirect stock transferrules under section 367(a) (describedunder paragraph (d) of this section) andthe rules of section 367(b), see paragraph(d)(3) Example 11of this section.

(ii) Example. The following exampleillustrates the provisions of this paragraph(b)(2):

Example.(i) Facts. DC, a domestic corporation,owns all of the stock of FC1, a controlled foreigncorporation within the meaning of section 957(a).DC’s basis in the stock of FC1 is $50, and the valueof such stock is $100. The section 1248 amountwith respect to such stock is $30. FC2, also a for-eign corporation, is owned entirely by foreign indi-viduals who are not related to DC or FC1. In a reor-ganization described in section 368(a)(1)(B), FC2acquires all of the stock of FC1 from DC in ex-change for 20 percent of the voting stock of FC2.FC2 is not a controlled foreign corporation after thereorganization.

(ii) Result without gain recognition agreement.Under the provisions of this paragraph (b), if DCfails to enter into a gain recognition agreement, DCis required to recognize in the year of the transfer the$50 of gain that it realized upon the transfer, $30 ofwhich will be treated as a dividend under section1248.

(iii) Result with gain recognition agreement. IfDC enters into a gain recognition agreement under§1.367(a)-8 with respect to the transfer of FC1stock, the exchange will also be subject to the provi-sions of section 367(b) and the regulations thereun-der to the extent that it is not subject to tax undersection 367(a)(1). In such case, DC will be requiredto recognize the section 1248 amount of $30 on theexchange of FC1 for FC2 stock. See §1.367(b)-4(b).The deemed dividend of $30 recognized by DC willincrease its basis in the FC1 stock exchanged in thetransaction and, therefore, the basis of the FC2 stockreceived in the transaction. The remaining gain of$20 realized by DC (otherwise recognizable undersection 367(a)) in the exchange of FC1 stock willnot be recognized if DC enters into a gain recogni-tion agreement with respect to the transfer. (The re-sult would be unchanged if, for example, the ex-change of FC1 stock for FC2 stock qualified as asection 351 exchange, or as an exchange describedin both sections 351 and 368(a)(1)(B).)

* * * * *

(d) Indirect stock transfers in certainnonrecognition transfers—(1) In gen-eral. For purposes of this section, a U.S.person who exchanges, under section 354(or section 356) stock or securities in adomestic or foreign corporation for stockor securities in a foreign corporation inconnection with one of the followingtransactions described in paragraphs(d)(1)(i) through (v) of this section (orwho is deemed to make such an exchangeunder paragraph (d)(1)(vi) of this section)shall be treated as having made an indirecttransfer of such stock or securities to a for-eign corporation that is subject to the rulesof this section, including, for example, therequirement, where applicable, that theU.S. transferor enter into a gain recogni-tion agreement to preserve nonrecognitiontreatment under section 367(a). If the U.S.person exchanges stock or securities of aforeign corporation, see also section367(b) and the regulations thereunder. Foran example of the concurrent applicationof the indirect stock transfer rules undersection 367(a) and the rules of section367(b), see, e.g., paragraph (d)(3) Exam-ple 11of this section.

(i) Mergers described in sections368(a)(1)(A) and (a)(2)(D).A U.S. per-son exchanges stock or securities of a cor-poration (the acquired corporation) forstock or securities of a foreign corpora-tion that controls the acquiring corpora-tion in a reorganization described in sec-tions 368(a)(1)(A) and (a)(2)(D). See,e.g., paragraph (d)(3) Example 1of thissection.

(ii) Mergers described in sections368(a)(1)(A) and (a)(2)(E).A U.S. per-son exchanges stock or securities of a cor-poration (the acquiring corporation) forstock or securities in a foreign corporationthat controls the acquired corporation in areorganization described in sections368(a)(1)(A) and (a)(2)(E).

(iii) Triangular reorganizations de-scribed in section 368(a)(1)(B).A U.S.person exchanges stock of the acquiredcorporation for voting stock of a foreigncorporation that is in control (as definedin section 368(c)) of the acquiring corpo-ration in connection with a reorganizationdescribed in section 368(a)(1)(B). See,e.g., paragraph (d)(3) Example 4of thissection.

(iv) Triangular reorganizations de-scribed in section 368(a)(1)(C).A U.S.

1998–27 I.R.B. 11 July 6, 1998

person exchanges stock or securities of acorporation (the acquired corporation) forvoting stock or securities of a foreign cor-poration that controls the acquiring corpo-ration in a reorganization described insection 368(a)(1)(C). See, e.g., paragraph(d)(3) Example 5of this section (for anexample of a triangular section368(a)(1)(C) reorganization involving do-mestic acquired and acquiring corpora-tions), and paragraph (d)(3) Example 7ofthis section (for an example involving adomestic acquired corporation and a for-eign acquiring corporation). If the ac-quired corporation is a foreign corpora-tion, see paragraph (d)(3) Example 11ofthis section, and section 367(b) and theregulations thereunder.

(v) Reorganizations described in sec-tions 368(a)(1)(C) and (a)(2)(C). A U.S.person exchanges stock or securities of acorporation (the acquired corporation) forvoting stock or securities of a foreign ac-quiring corporation in a reorganizationdescribed in sections 368(a)(1)(C) and(a)(2)(C) (other than a triangular section368(a)(1)(C) reorganization described inparagraph (d)(1)(iv) of this section). Inthe case of a reorganization in whichsome but not all of the assets of the ac-quired corporation are transferred pur-suant to section 368(a)(2)(C), the transac-tion shall be considered to be an indirecttransfer of stock or securities subject tothis paragraph (d) only to the extent of theassets so transferred. (Other assets shallbe treated as having been transferred in anasset transfer rather than an indirect stocktransfer, and such asset transfer would besubject to the other provisions of section367, including sections 367(a)(1), (3), (5)and (d) if the acquired corporation is a do-mestic corporation.) See, e.g., paragraph(d)(3) Example 5Bof this section.

(vi) Successive transfers of property towhich section 351 applies.A U.S. persontransfers property (other than stock or se-curities) to a foreign corporation in an ex-change described in section 351, and allor a portion of such assets transferred tothe foreign corporation by such personare, in connection with the same transac-tion, transferred to a second corporationthat is controlled by the foreign corpora-tion in one or more exchanges describedin section 351. For purposes of this para-graph (d)(1) and §1.367(a)–8, the initialtransfer by the U.S. person shall be

deemed to be a transfer of stock describedin section 354. (Any assets transferred tothe foreign corporation that are not trans-ferred by the foreign corporation to a sec-ond corporation shall be treated as atransfer of assets subject to the generalrules of section 367, including sections367(a)(1), (3), (5) and (d), and not as anindirect stock transfer under the rules ofthis paragraph (d).) See, e.g., paragraph(d)(3) Example 10and Example 10Aofthis section.

(2) Special rules for indirect transfers.If a U.S. person is considered to make anindirect transfer of stock or securities de-scribed in paragraph (d)(1) of this section,the rules of this section and §1.367(a)–8shall apply to the transfer. For purposesof applying the rules of this section and§1.367(a)–8:

(i) Transferee foreign corporation.The transferee foreign corporation shallbe the foreign corporation that issuesstock or securities to the U.S. person inthe exchange.

(ii) Transferred corporation.Thetransferred corporation shall be the ac-quiring corporation, except that in thecase of a triangular section 368(a)(1)(B)reorganization described in paragraph(d)(1)(iii) of this section, the transferredcorporation shall be the acquired corpora-tion; in the case of a triangular section368(a)(1)(C) reorganization described inparagraph (d)(1)(iv) of this section fol-lowed by a section 368(a)(2)(C) transferor a section 368(a)(1)(C) reorganizationfollowed by a section 368(a)(2)(C) trans-fer described in paragraph (d)(1)(v) ofthis section, the transferred corporationshall be the transferee corporation; and inthe case of successive section 351 trans-fers described in paragraph (d)(1)(vi) ofthis section, the transferred corporationshall be the transferee corporation in thefinal section 351 transfer. The transferredproperty shall be the stock or securities ofthe transferred corporation, as appropriatein the circumstances.

(iii) Amount of gain. The amount ofgain that a U.S. person is required to in-clude in income in the event of a disposi-tion (or a deemed disposition) of some orall of the stock or securities of the trans-ferred corporation shall be the proportion-ate share (as determined under §1.367(a)–8(e)) of the U.S. person’s gain realizedbut not recognized in the initial exchange

(or deemed exchange) of stock or securi-ties under section 354.

(iv) Gain recognition agreements in-volving multiple parties. The U.S. trans-feror’s agreement to recognize gain, asprovided in §1.367(a)–8, shall include ap-propriate provisions, consistent with theprinciples of these rules, requiring thetransferor to recognize gain in the eventof a direct or indirect disposition of thestock or assets of the transferred corpora-tion. For example, in the case of a trian-gular section 368(a)(1)(B) reorganizationdescribed in paragraph (d)(1)(iii) of thissection, a disposition of the transferredstock shall include an indirect dispositionof such stock by the transferee foreigncorporation, such as a disposition of suchstock by the acquiring corporation or adisposition of the stock of the acquiringcorporation by the transferee foreign cor-poration. See, e.g., paragraph (d)(3) Ex-ample 4 of this section.

(v) Determination of whether thetransferred corporation disposed of sub-stantially all of its assets.For purposes ofapplying §1.367(a)–8(e)(3)(i) to deter-mine whether the transferred corporationhas disposed of substantially all of its as-sets, the following assets shall be takeninto account (but only if such assets arenot fully taxable under section 367 in thetaxable year that includes the indirecttransfer)—

(A) In the case of a sections 368(a)-(1)(A) and (a)(2)(D) reorganization, and atriangular section 368(a)(1)(C) reorgani-zation described in paragraph (d)(1)(i) or(iv) of this section, respectively, the assetsof the acquired corporation;

(B) In the case of a sections 368(a)-(1)(A) and (a)(2)(E) reorganization de-scribed in paragraph (d)(1)(ii) of this sec-tion, the assets of the acquiringcorporation immediately prior to thetransaction;

(C) In the case of a sections 368(a)-(1)(C) and (a)(2)(C) reorganization de-scribed in paragraph (d)(1)(v) of this sec-tion, the assets of the acquiredcorporation that are subject to a transferdescribed in section 368(a)(2)(C); and

(D) In the case of successive section351 exchanges described in paragraph(d)(1)(vi) of this section, the assets thatare both transferred initially to the foreigncorporation, and transferred by the for-eign corporation to a second corporation.

July 6, 1998 12 1998–27 I.R.B.

(vi) Coordination between asset trans-fer rules and indirect stock transfer rules.If, pursuant to any of the transactions de-scribed in paragraph (d)(1) of this section,a domestic corporation transfers (or isdeemed to transfer) assets to a foreigncorporation (other than in an exchangedescribed in section 354), the rules of sec-tion 367, including sections 367(a)(1),(a)(3) and (a)(5), as well as section367(d), and the regulations thereundershall apply prior to the application of therules of this section. However, if a trans-action is described in this paragraph (d),section 367(a) shall not apply in the caseof a domestic acquired corporation thattransfers its assets to a foreign acquiringcorporation, to the extent that such assetsare re-transferred to a domestic corpora-tion in a transfer described in section368(a)(2)(C) or paragraph (d)(1)(vi) ofthis section, but only if the domestictransferee’s basis in the assets is nogreater than the basis that the domesticacquired company had in such assets.See, e.g., paragraph (d)(3) Example 8andExample 10Aof this section.

(3) Examples.The rules of this para-graph (d) and §1.367(a)–8 are illustratedby the following examples:

Example 1. Section 368(a)(1)(A)/(a)(2)(D) reor-ganization—(i) Facts. F, a foreign corporation,owns all the stock of Newco, a domestic corpora-tion. A, a domestic corporation, owns all of thestock of W, also a domestic corporation. A and Wfile a consolidated Federal income tax return. Adoes not own any stock in F (applying the attributionrules of section 318, as modified by section 958(b)).In a reorganization described in sections368(a)(1)(A) and (a)(2)(D), Newco acquires all ofthe assets of W, and A receives 40% of the stock of Fin an exchange described in section 354.

(ii) Result. Pursuant to paragraph (d)(1)(i) ofthis section, the reorganization is subject to the indi-rect stock transfer rules. F is treated as the trans-feree foreign corporation, and Newco is treated asthe transferred corporation. Provided that the re-quirements of paragraph (c)(1) of this section aresatisfied, including the requirement that A enter intoa five-year gain recognition agreement as describedin §1.367(a)–8, A’s exchange of W stock for F stockunder section 354 will not be subject to section367(a)(1). If F disposes (within the meaning of§1.367(a)–8(e)) of all (or a portion) of Newco’sstock within the five-year term of the agreement(and A has not made a valid election under§1.367(a)–8(b)(1)(vii)), A is required to file anamended return for the year of the transfer and in-clude in income, with interest, the gain realized butnot recognized on the initial section 354 exchange.If A has made a valid election under §1.367(a)–8(b)(1)(vii) to include the amount subject to the gainrecognition agreement in the year of the triggering

event, A would instead include the gain on its tax re-turn for the taxable year that includes the triggeringevent, together with interest.

Example 1A. Transferor is a subsidiary in consol-idated group—(i) Facts. The facts are the same asin Example 1,except that A is owned by P, a domes-tic corporation, and for the taxable year in which thetransaction occurred, P, A and W filed a consolidatedFederal income tax return.

(ii) Result. Even though A is the U.S. transferor,P is required under §1.367(a)–8(a)(3) to enter intothe gain recognition agreement and comply with therequirements under §1.367(a)–8. In the event that Aleaves the P group, A would make the annual certifi-cations required under §1.367(a)–8(b)(5)(ii). Pwould remain liable with A under the gain recogni-tion agreement.

Example 2. Taxable inversion pursuant to indi-rect stock transfer rules—(i) Facts. The facts arethe same as in Example 1,except that A receivesmore than fifty percent of either the total votingpower or the total value of the stock of F in thetransaction.

(ii) Result. A is required to include in income inthe year of the exchange the amount of gain realizedon such exchange. See paragraph (c)(1)(i) of thissection. If A fails to include the income on itstimely-filed return, A will also be liable for thepenalty under section 6038B (together with interestand other applicable penalties) unless A’s failure toinclude the income is due to reasonable cause andnot willful neglect. See §1.6038B–1(f).

Example 3. Disposition by U.S. transferred cor-poration of substantially all of its assets—(i) Facts.The facts are the same as in Example 1,except that,during the third year of the gain recognition agree-ment, Newco disposes of substantially all (as de-scribed in §1.367(a)–8(e)(3)(i)) of the assets de-scribed in paragraph (d)(2)(v)(A) of this section forcash and recognizes currently all of the gain realizedon the disposition.

(ii) Result. Under §1.367(a)–8(e)(3)(i), the gainrecognition agreement is generally triggered whenthe transferred corporation disposes of substantiallyall of its assets. However, under the special rule con-tained in §1.367(a)–8(h)(2), because A and W filed aconsolidated Federal income tax return prior to thetransaction, and Newco, the transferred corporation,is a domestic corporation, the gain recognition agree-ment is terminated and has no further effect.

Example 4. Triangular section 368(a)(1)(B) re-organization—(i) Facts. F, a foreign corporation,owns all the stock of S, a domestic corporation. U, adomestic corporation, owns all of the stock of Y,also a domestic corporation. U does not own any ofthe stock of F (applying the attribution rules of sec-tion 318, as modified by section 958(b)). In a trian-gular reorganization described in section 368(a)(1)-(B) and paragraph (d)(1)(iii) of this section, Sacquires all the stock of Y, and U receives 10% ofthe voting stock of F.

(ii) Result. U’s exchange of Y stock for F stockwill not be subject to section 367(a)(1), providedthat all of the requirements of paragraph (c)(1) aresatisfied, including the requirement that U enter intoa five-year gain recognition agreement. For pur-poses of this section, F is treated as the transfereeforeign corporation and Y is treated as the trans-ferred corporation. See paragraphs (d)(2)(i) and (ii)

of this section. Under paragraph (d)(2)(iv) of thissection, the gain recognition agreement would betriggered if F sold all or a portion of the stock of S,or if S sold all or a portion of the stock of Y.

Example 5. Triangular section 368(a)(1)(C) reor-ganization—(i) Facts. F, a foreign corporation,owns all of the stock of R, a domestic corporationthat operates an historical business. V, a domesticcorporation, owns all of the stock of Z, also a domes-tic corporation. V does not own any of the stock of F(applying the attribution rules of section 318 as mod-ified by section 958(b)). In a triangular reorganiza-tion described in section 368(a)(1)(C) (and paragraph(d)(1)(iv) of this section), R acquires all of the assetsof Z, and V receives 30% of the voting stock of F.

(ii) Result. The consequences of the transfer aresimilar to those described in Example 1;V is re-quired to enter into a 5-year gain recognition agree-ment under §1.367(a)–8 to secure nonrecognitiontreatment under section 367(a). Under paragraphs(d)(2)(i) and (ii) of this section, F is treated as thetransferee foreign corporation and R is treated as thetransferred corporation. In determining whether, ina later transaction, R has disposed of substantiallyall of its assets under §1.367(a)–8(e)(3)(i), see para-graph (d)(2)(v)(A) of this section.

Example 5A. Section 368(a)(1)(C) reorganizationfollowed by section 368(a)(2)(C) exchange—(i)Facts. The facts are the same as in Example 5,ex-cept that the transaction is structured as a section368(a)(1)(C) reorganization, followed by a section368(a)(2)(C) exchange, and R is a foreign corpora-tion. The following additional facts are present. Zhas 3 businesses: Business A with a basis of $10 anda value of $50, Business B with a basis of $10 and avalue of $40, and Business C with a basis of $10 anda value of $30. V and Z file a consolidated Federalincome tax return and V has a basis of $30 in the Zstock, which has a value of $120. Assume that Busi-nesses A and B consist solely of assets that will sat-isfy the section 367(a)(3) active trade or businessexception; none of Business C’s assets will satisfythe exception. Z transfers all 3 businesses to F in ex-change for 30 percent of the F stock, which Z dis-tributes to V pursuant to a section 368(a)(1)(C) reor-ganization. F then contributes Businesses B and Cto R pursuant to section 368(a)(2)(C).

(ii) Result. The transfer of the Business A assetsby Z to F is subject to the general rules under section367, as such transfer does not constitute an indirectstock transfer. The transfer by Z of the Business Band C assets to F must first be tested under sections367(a)(1), (3) and (5). Z recognizes $20 of gain onthe outbound transfer of the Business C assets, assuch assets do not qualify for an exception to section367(a)(1). The Business B assets, which will beused by R in an active trade or business outside theUnited States, qualify for the exception under sec-tion 367(a)(3) and §1.367(a)–2T(c)(2). V is deemedto transfer the stock of Z to F in a section 354 ex-change subject to the rules of paragraph (d). V mustenter into the gain recognition agreement in theamount of $30 to preserve Z’s nonrecognition treat-ment with respect to its transfer of Business B as-sets. Under paragraphs (d)(2)(i) and (ii) of this sec-tion, F is the transferee foreign corporation and R isthe transferred corporation.

Example 5B. Section 368(a)(1)(C) reorganiza-tion followed by section 368(a)(2)(C) exchange with

1998–27 I.R.B. 13 July 6, 1998

U.S. transferee—(i) Facts. The facts are the same asin Example 5A,except that R is a U.S. corporation.

(ii) Result. As in Example 5A,the outboundtransfer of Business A assets to F is subject to sec-tion 367(a) and is not affected by the rules of thisparagraph (d). The Business B assets qualified fornonrecognition treatment; the Business C assets didnot. However, pursuant to paragraph (d)(2)(vi) ofthis section, the Business C assets are not subject tosection 367(a)(1), provided that the basis of the as-sets in the hands of R is no greater than the basis ofthe assets in the hands of Z. V is deemed to make anindirect transfer under the rules of this paragraph(d). To preserve nonrecognition treatment undersection 367(a), V must enter into a 5-year gainrecognition agreement in the amount of $50, theamount of the appreciation in the Business B and Cassets, as the transfer of such assets by Z were nottaxable under section 367(a)(1) but were treated asan indirect stock transfer.

Example 6. Triangular section 368(a)(1)(C) re-organization followed by 351 exchange—(i) Facts.The facts are the same as in Example 5,except that,during the fourth year of the gain recognition agree-ment, R transfers substantially all of the assets re-ceived from Z to K, a wholly-owned domestic sub-sidiary of R, in an exchange described in section351.

(ii) Result. The disposition by R, the transferredcorporation, of substantially all of its assets wouldtrigger the gain recognition agreement if the assetswere disposed of in a taxable transaction. However,because the assets were transferred in a nonrecogni-tion transaction, such transfer does not trigger thegain recognition agreement if V satisfies the report-ing requirements contained in §1.367(a)–8(g)(3)(i)(which includes the requirement that V amend itsgain recognition agreement to reflect the transac-tion). See also paragraph (d)(2)(iv) of this section.To determine whether substantially all of the assetsare disposed of, any assets of Z that were transferredby Z to R and then contributed by R to K are takeninto account.

Example 6A. Triangular section 368(a)(1)(C) re-organization followed by section 351 exchange withforeign transferee—(i) Facts. The facts are thesame as in Example 6except that K is a foreign cor-poration.

(ii) Result. This transfer of assets by R to Kmust be analyzed to determine its effect upon thegain recognition agreement, and such transfer is alsoan outbound transfer of assets that is taxable undersection 367(a)(1) unless the active trade or businessexception under section 367(a)(3) applies. If thetransfer is fully taxable under section 367(a)(1), thetransfer is treated as if the transferred company, R,sold substantially all of its assets. Thus, the gainrecognition agreement would be triggered (but see§1.367(a)–8(b)(3)(ii) for potential offsets to the gainto be recognized). If each asset transferred qualifiesfor nonrecognition treatment under section367(a)(3) and the regulations thereunder (which re-quire, under §1.367(a)–2T(a)(2), the transferor tocomply with the reporting requirements under sec-tion 6038B), the result is the same as in Example 6.If a portion of the assets transferred qualify for non-recognition treatment under section 367(a)(3) and aportion are taxable under section 367(a)(1) (but suchportion does not result in the disposition of substan-tially all of the assets), the gain recognition agree-

ment will not be triggered if such information is re-ported as required under §1.367(a)–8(b)(5) and(e)(3)(i).

Example 7. Concurrent application of assettransfer and indirect stock transfer rules in consoli-dated return setting—(i) Facts. Assume the samefacts as in Example 5,except that R is a foreign cor-poration and V and Z file a consolidated return forFederal income tax purposes. The properties of Zconsist of Business A assets, with an adjusted basisof $50 and fair market value of $90, and Business Bassets, with an adjusted basis of $50 and a fair marketvalue of $110. Assume that the Business A assets donot qualify for the active trade or business exceptionunder section 367(a)(3), but that the Business B as-sets do qualify for the exception. V’s basis in the Zstock is $100, and the value of such stock is $200.

(ii) Result. Under paragraph (d)(2)(vi), the as-sets of Businesses A and B that are transferred to Rmust be tested under sections 367(a)(3) and (a)(5)prior to consideration of the indirect stock transferrules of this paragraph (d). Thus, Z must recognize$40 of income under section 367(a)(1) on the out-bound transfer of Business A assets. Under§1.1502-32, because V and Z file a consolidated re-turn, V’s basis in its Z stock increases from $100 to$140 as a result of Z’s $40 gain. Provided that all ofthe other requirements under paragraph (c)(1) of thissection are satisfied, to qualify for nonrecognitiontreatment with respect to V’s indirect transfer of Zstock, V must enter into a gain recognition agree-ment in the amount of $60 (the gain realized but notrecognized by V in the stock of Z after the $40 basisadjustment). If F sells a portion of its stock in Rduring the term of the agreement, V will be requiredto recognize a portion of the $60 gain subject to theagreement. To determine whether R disposes ofsubstantially all of its assets (under §1.367(a)–8(e)(3)(i)), only the Business B assets will be con-sidered (because the transfer of the Business A as-sets was taxable to Z under section 367). See para-graph (d)(2)(v)(A) of this section.

Example 7A. Concurrent application withoutconsolidated returns—(i) Facts. The facts are thesame as in Example 7, except that V and Z do notfile consolidated income tax returns.

(ii) Result. Z would still recognize $40 of gainon the transfer of its Business A assets, and the Busi-ness B assets would still qualify for the active tradeor business exception under section 367(a)(3).However, V’s basis in its stock of Z would not be in-creased by the amount of Z’s gain. V’s indirecttransfer of stock will be taxable unless V enters intoa gain recognition agreement (as described in§1.367(a)–8) for the $100 of gain realized but notrecognized with respect to the stock of Z.

Example 7B. Concurrent application with indi-vidual U.S. shareholder—(i) Facts. The facts arethe same as in Example 7,except that V is an indi-vidual U.S. citizen.

(ii) Result. Section 367(a)(5) would prevent theapplication of the active trade or business exceptionunder section 367(a)(3). Thus, Z’s transfer of assetsto R would be fully taxable under section 367(a)(1).Z would recognize $100 of income. V’s basis in itsstock of Z is not increased by this amount. V is tax-able with respect to its indirect transfer of its Z stockunless V enters into a gain recognition agreement inthe amount of the $100, the gain realized but not rec-ognized with respect to its Z stock.

Example 7C. Concurrent application with non-resident alien shareholder—(i) Facts. The facts arethe same as in Example 7,except that V is a nonresi-dent alien.

(ii) Result. Pursuant to section 367(a)(5), the ac-tive trade or business exception under section367(a)(3) is not available with respect to Z’s transferof assets to R. Thus, Z has $100 of gain with respectto the Business A and B assets. Because V is a non-resident alien, however, V is not subject to section367(a) with respect to its indirect transfer of Z stock.

Example 8. Concurrent application with section368(a)(2)(C) Exchange—(i) Facts. The facts arethe same as in Example 7,except that R transfers theBusiness A assets to M, a wholly-owned domesticsubsidiary of R, in an exchange described in section368(a)(2)(C).

(ii) Result. Pursuant to paragraph (d)(2)(vi) ofthis section, section 367(a)(1) does not apply to Z’stransfer of Business A assets to R, because such as-sets are transferred to M, a domestic corporation.Sections 367(a)(1), (3) and (5), as well as section367(d), apply to Z’s transfer of assets to R to the ex-tent that such assets are not transferred to M. How-ever, the Business B assets qualify for an exceptionto taxation under section 367(a)(3). Thus, if the re-quirements of paragraph (c)(1) of this section aresatisfied, including the requirement that V enter intoa 5-year gain recognition agreement and complywith the requirements of §1.367(a)–8 with respect tothe gain realized on the Z stock, $100, the entiretransaction qualifies for nonrecognition treatmentunder section 367(a)(1). See also section 367(a)(5)and any regulations issued thereunder. Under para-graphs (d)(2)(i) and (ii) of this section, the transfereeforeign corporation is F and the transferred corpora-tion is M. Pursuant to paragraph (d)(2)(iv) of thissection, a disposition by F of the stock of R, or a dis-position by R of the stock of M, will trigger the gainrecognition agreement. To determine whether sub-stantially all of the assets have been disposed of (asdescribed under §1.367(a)–8(e)(3)(i)), the BusinessA assets in M and the Business B assets in R mustboth be considered.

Example 9. Concurrent application of direct andindirect stock transfer rules—(i) Facts. F, a foreigncorporation, owns all of the stock of O, also a for-eign corporation. D, a domestic corporation, ownsall of the stock of E, also a domestic corporation,which owns all of the stock of N, also a domesticcorporation. Prior to the transactions described inthis Example 9,D, E and N filed a consolidated in-come tax return. D has a basis of $100 in the stockof E, which has a fair market value of $160. The Nstock has a fair market value of $100, and E has abasis of $60 in such stock. In addition to the stockof N, E owns the assets of Business X. The assets ofBusiness X have a fair market value of $60, and Ehas a basis of $50 in such assets. Assume that theBusiness X assets qualify for nonrecognition treat-ment under section 367(a)(3). D does not own anystock in F (applying the attribution rules of section318 as modified by section 958(b)). In a triangularreorganization described in section 368(a)(1)(C) andparagraph (d)(1)(iv) of this section, O acquires all ofthe assets of E, and D exchanges its stock in E for40% of the voting stock of F.

(ii) Result. E’s transfer of its assets, includingthe N stock, must be tested under the general rules ofsection 367(a) before consideration of D’s indirect

July 6, 1998 14 1998–27 I.R.B.

transfer of the stock of E. E’s transfer of the assetsof Business X qualify for nonrecognition under sec-tion 367(a)(3). E could qualify for nonrecognitiontreatment with respect to its transfer of N stock if itenters into a gain recognition agreement (and all ofthe requirements of paragraph (c)(1)(i) of this sec-tion are satisfied); however under §1.367(a)-8(f)(2)(i), D, the parent of the consolidated group,must enter into the agreement. O is the transfereeforeign corporation; N is the transferred corporation.D may also qualify for nonrecognition with respectto its indirect transfer of the stock of E if it entersinto a separate gain recognition agreement with re-spect to the E stock (and all of the requirements ofparagraph (c)(1)(i) of this section are satisfied). Asto this transfer, F is the transferee foreign corpora-tion; O is the transferred corporation. The amountof the gain recognition agreement is $60. See alsosection 367(a)(5) and any regulations issued there-under.

Example 10. Successive section 351 ex-changes—(i) Facts. D, a domestic corporation,owns all the stock of X, a controlled foreign corpo-ration that operates an historical business, whichowns all the stock of Y, a controlled foreign corpora-tion that also operates an historical business. Theproperties of D consist of Business A assets, with anadjusted basis of $50 and a fair market value of $90,and Business B assets, with an adjusted basis of $50and a fair market value of $110. Assume that theBusiness B assets qualify for the exception undersection 367(a)(3) and §1.367(a)–2T(c)(2), but thatthe Business A assets do not qualify for the excep-tion. In an exchange described in section 351, Dtransfers the assets of Businesses A and B to X, and,in connection with the same transaction, X transfersthe assets of Business B to Y in another exchangedescribed in section 351.

(ii) Result. Under paragraph (d)(1)(vi) of thissection, this transaction is treated as an indirectstock transfer for purposes of section 367(a), but thetransaction is not recharacterized for purposes ofsection 367(b). Moreover, under paragraph (d)(2)-(vi) of this section, the assets of Businesses A and Bthat are transferred to X must be tested under section367(a)(3). The Business A assets, which were nottransferred to Y, are subject to the general rules ofsection 367(a), and not the indirect stock transferrules described in this paragraph (d). D must recog-nize $40 of income on the outbound transfer ofBusiness A assets. The transfer of the Business Bassets is subject to both the asset transfer rules(under section 367(a)(3)) and the indirect stocktransfer rules of this paragraph (d) and §1.367(a)-8.Thus, D’s transfer of the Business B assets will notbe subject to section 367(a)(1) if D enters into afive-year gain recognition agreement with respect tothe stock of Y. Under paragraphs (d)(2)(i) and (ii) ofthis section, X will be treated as the transferee for-eign corporation and Y will be treated as the trans-ferred corporation for purposes of applying theterms of the agreement. If X sells all or a portion ofthe stock of Y during the term of the agreement, Dwill be required to recognize a proportionate amountof the $60 gain that was realized by D on the initialtransfer of the Business B assets.

Example 10A. Successive section 351 exchangeswith ultimate domestic transferee—(i) Facts. Thefacts are the same as in Example 10, except that Y isa domestic corporation.

(ii) Result. As Example 10,D must recognize$40 of income on the outbound transfer of the Busi-ness A assets. Although the Business B assets qual-ify for the exception under section 367(a)(3) (andend up in U.S. corporate solution, in Y), the $60 ofgain realized on the Business B assets is neverthe-less taxable under paragraphs (c)(1) and (d)(1)(vi) ofthis section because the transaction is considered tobe a transfer by D of stock of a domestic corpora-tion, Y, in which D receives more than 50 percent ofthe stock of the transferee foreign corporation, X. Again recognition agreement is not permitted.

Example 11. Concurrent application of indirectstock transfer rules and section 367(b)—(i) Facts.F, a foreign corporation, owns all of the stock ofNewco, which is also a foreign corporation. P, a do-mestic corporation, owns all of the stock of S, a for-eign corporation that is a controlled foreign corpora-tion within the meaning of section 957(a). P’s basisin the stock of S is $50 and the value of S is $100.The section 1248 amount with respect to S stock is$30. In a reorganization described in section368(a)(1)(C) (and paragraph (d)(1)(iv) of this sec-tion), Newco acquires all of the properties of S, andP exchanges its stock in S for 49 percent of the stockof F.

(ii) Result. P’s exchange of S stock for F stockunder section 354 will be taxable under section367(a) (and section 1248 will be applicable) if Pfails to enter into a 5-year gain recognition agree-ment in accordance with §1.367(a)–8. Under para-graph (b)(2) of this section, if P enters into a gainrecognition agreement, the exchange will be subjectto the provisions of section 367(b) and the regula-tions thereunder as well as section 367(a). Under§7.367(b)–7(c)(1)(i) of this chapter, P must recog-nize the section 1248 amount of $30 because P ex-changed stock of a controlled foreign corporation, S,for stock of a foreign corporation that is not a con-trolled foreign corporation, F. The indirect stocktransfer rules do not apply with respect to section367(b). The deemed dividend of $30 recognized byP will increase P’s basis in the F stock received inthe transaction, and F’s basis in the Newco stock.Thus, the amount of the gain recognition agreementis $20 ($50 gain realized on the transfer less the $30inclusion under section 367(b)). Under paragraphs(d)(2)(i) and (ii) of this section, F is treated as thetransferee foreign corporation and Newco is thetransferred corporation.

Example 11A. Triangular section 368(a)(1)(C)reorganization involving foreign acquired corpora-tion—(i) Facts. Assume the same facts as in Exam-ple 11, except that P receives 51 percent of the stockof F.

(ii) Result. P may still enter into a gain recogni-tion agreement to avoid taxation under section367(a). There is, however, no inclusion under sec-tion 367(b) because P would be exchanging stock inone controlled foreign corporation for another. Theamount of the gain recognition agreement is $50.See, also, §1.367(b)–4(b)(4).

Example 12. Direct asset reorganization not sub-ject to stock transfer rules—(i) Facts. D is a pub-licly traded domestic corporation. D’s assets consistof tangible assets, including stock or securities. In areorganization described in section 368(a)(1)(F), Dbecomes a foreign corporation, F.

(ii) Result. The reorganization is characterizedunder §1.367(a)–1T(f). D’s outbound transfer of as-

sets is taxable under section 367(a)(1). Even if anyof D’s assets would have otherwise qualified for anexception to section 367(a)(1), section 367(a)(5)provides that no exception can apply. The section368(a)(1)(F) reorganization is not an indirect stocktransfer described in paragraph (d) of this section.Moreover, the exchange by D’s shareholders of Dstock for F stock in an exchange described undersection 354 is not an exchange described under sec-tion 367(a). See paragraph (a) of this section.

(e) Effective dates—(1) In general.The rules in paragraphs (a), (b) and (d) ofthis section apply to transfers occurringon or after July 20, 1998. The rules inparagraph (c) of this section with respectto transfers of domestic stock or securitiesare generally applicable for transfers oc-curring after January 29, 1997. See§1.367(a)–3(c)(11). For rules regardingtransfers of domestic stock or securitiesafter December 16, 1987, and before Jan-uary 30, 1997, and transfers of foreignstock or securities after December 16,1987, and before July 20, 1998, see para-graph (g) of this section.

(2) Election. Notwithstanding para-graphs (e)(1) and (g) of this section, tax-payers may, by timely filing an original oramended return, elect to apply paragraphs(b) and (d) of this section to all transfersof foreign stock or securities occurringafter December 16, 1987, and before July20, 1998, except to the extent that a gainrecognition agreement has been triggeredprior to July 20, 1998. If an election ismade under this paragraph (e)(2), the pro-visions of §1.367(a)–3T(g) (see 26 CFRpart 1, revised April 1, 1998) shall apply,and, for this purpose, the term substantialportion under §1.367(a)–3T(g)(3)(iii)(see 26 CFR part 1, revised April 1, 1998)shall be interpreted to mean substantiallyall as defined in section 368(a)(1)(C). Inaddition, if such an election is made, thetaxpayer must apply the rules under sec-tion 367(b) and the regulations thereunderto any transfers occurring within that pe-riod as if the election to apply §1.367(a)–3(b) and (d) to transfers occurring withinthat period had not been made, except thatin the case of an exchange described insection 351 the taxpayer must apply sec-tion 367(b) and the regulations thereunderas if the exchange was described in§7.367(b)–7 of this chapter. For example,if a U.S. person, pursuant to a section 351exchange, transfers stock of a controlledforeign corporation in which it is a UnitedStates shareholder but does not receive

1998–27 I.R.B. 15 July 6, 1998

back stock of a controlled foreign corpo-ration in which it is a United States share-holder, the U.S. person must include in in-come under §7.367(b)–7 of this chapterthe section 1248 amount attributable tothe stock exchanged (to the extent that thefair market value of the stock exchangedexceeds its adjusted basis). Such inclu-sion is required even though §7.367(b)–7of this chapter, by its terms, did not applyto section 351 exchanges.

(f) Former 10-year gain recognitionagreements.If a taxpayer elects to applythe rules of this section to all prior trans-fers occurring after December 16, 1987,any 10-year gain recognition agreementthat remains in effect (has not been trig-gered in full) on July 20, 1998, will beconsidered by the Internal Revenue Ser-vice to be a 5-year gain recognition agree-ment with a duration of five full taxableyears following the close of the taxableyear of the initial transfer.

(g) Transition rules regarding certaintransfers of domestic or foreign stock orsecurities after December 16, 1987, andprior to July 20, 1998—(1) Scope. Trans-fers of domestic stock or securities de-scribed under section 367(a) that occurredafter December 16, 1987, and prior toApril 17, 1994, and transfers of foreignstock or securities described under section367(a) that occur after December 16, 1987,and prior to July 20, 1998, are subject tothe rules contained in section 367(a) andthe regulations thereunder, as modified bythe rules contained in paragraph (g)(2) ofthis section. For transfers of domesticstock or securities described under section367(a) that occurred after April 17, 1994and before January 30, 1997, see Tempo-rary Income Regulations under section367(a) in effect at the time of the transfer(§1.367(a)–3T(a) and (c), 26 CFR part 1,revised April 1, 1996) and paragraph(c)(11) of this section. For transfers of do-mestic stock or securities described undersection 367(a) that occur after January 29,1997, see §1.367(a)–3(c).

(2) Transfers of domestic or foreignstock or securities: additional substantiverules—(i) Rule for less than 5-percentshareholders. Unless paragraph (g)(2)-(iii) of this section applies (in the case ofdomestic stock or securities) or paragraph(g)(2)(iv) of this section applies (in thecase of foreign stock or securities), a U.S.transferor that transfers stock or securities

of a domestic or foreign corporation in anexchange described in section 367(a) andowns less than 5 percent of both the totalvoting power and the total value of thestock of the transferee foreign corporationimmediately after the transfer (taking intoaccount the attribution rules of section958) is not subject to section 367(a)(1)and is not required to enter into a gainrecognition agreement.

(ii) Rule for 5-percent shareholders.Unless paragraph (g)(2)(iii) or (iv) of thissection applies, a U.S. transferor thattransfers domestic or foreign stock or se-curities in an exchange described in sec-tion 367(a) and owns at least 5 percent ofeither the total voting power or the totalvalue of the stock of the transferee foreigncorporation immediately after the transfer(taking into account the attribution rulesunder section 958) may qualify for non-recognition treatment by filing a gainrecognition agreement in accordance with§1.367(a)–3T(g) in effect prior to July 20,1998, (see 26 CFR part 1, revised April 1,1998) for a duration of 5 or 10 years. Theduration is 5 years if the U.S. transferor(5-percent shareholder) determines thatall U.S. transferors, in the aggregate, ownless than 50 percent of both the total vot-ing power and the total value of the trans-feree foreign corporation immediatelyafter the transfer. The duration is 10 yearsin all other cases. See, however,§1.367(a)–3(f). If a 5-percent shareholderfails to properly enter into a gain recogni-tion agreement, the exchange is taxable tosuch shareholder under section 367(a)(1).

(iii) Gain recognition agreement optionnot available to controlling U.S. trans-feror if U.S. stock or securities are trans-ferred. Notwithstanding the provisions ofparagraph (g)(2)(ii) of this section, in noevent will any exception to section367(a)(1) apply to the transfer of stock orsecurities of a domestic corporationwhere the U.S. transferor owns (applyingthe attribution rules of section 958) morethan 50 percent of either the total votingpower or the total value of the stock of thetransferee foreign corporation immedi-ately after the transfer (i.e., the use of again recognition agreement to qualify fornonrecognition treatment is unavailable inthis case).

(iv) Loss of United States shareholderstatus in the case of a transfer of foreignstock. Notwithstanding the provisions of

paragraphs (g)(2)(i) and (ii) of this sec-tion, in no event will any exception tosection 367(a)(1) apply to the transfer ofstock of a foreign corporation in whichthe U.S. transferor is a United Statesshareholder (as defined in §7.367(b)–2(b)of this chapter or section 953(c)) unlessthe U.S. transferor receives back stock ina controlled foreign corporation (as de-fined in section 953(c), section 957(a) orsection 957(b)) as to which the U.S. trans-feror is a United States shareholder imme-diately after the transfer.

§1.367(a)–3T [Removed]

Par. 4. Section 1.367(a)–3T is removed.Par. 5. Section 1.367(a)–8 is added to

read as follows:

§1.367(a)–8 Gain recognition agreementrequirements.

(a) In general. This section specifiesthe general terms and conditions for anagreement to recognize gain entered intopursuant to §1.367(a)–3(b) or (c) to qual-ify for nonrecognition treatment undersection 367(a).

(1) Filing requirements. A transferor’sagreement to recognize gain (described inparagraph (b) of this section) must be at-tached to, and filed by the due date (in-cluding extensions) of, the transferor’s in-come tax return for the taxable year thatincludes the date of the transfer.

(2) Gain recognition agreement forms.Any agreement, certification, or otherdocument required to be filed pursuant tothe provisions of this section shall be sub-mitted on such forms as may be pre-scribed therefor by the Commissioner (orsimilar statements providing the same in-formation that is required on such forms).Until such time as forms are prescribed,all necessary filings may be accomplishedby providing the required information tothe Internal Revenue Service in accor-dance with the rules of this section.

(3) Who must sign. The agreement torecognize gain must be signed underpenalties of perjury by a responsible offi-cer in the case of a corporate transferor,except that if the transferor is a memberbut not the parent of an affiliated group(within the meaning of section 1504(a)-(1)), that files a consolidated Federal in-come tax return for the taxable year inwhich the transfer was made, the agree-

July 6, 1998 16 1998–27 I.R.B.

ment must be entered into by the parentcorporation and signed by a responsibleofficer of such parent corporation; by theindividual, in the case of an individualtransferor (including a partner who istreated as a transferor by virtue of§1.367(a)-–1T(c)(3)); by a trustee, execu-tor, or equivalent fiduciary in the case of atransferor that is a trust or estate; and by adebtor in possession or trustee in a bank-ruptcy case under Title 11, United StatesCode. An agreement may also be signedby an agent authorized to do so under ageneral or specific power of attorney.

(b) Agreement to recognize gain—(1)Contents. The agreement must set forththe following information, with the head-ing “GAIN RECOGNITION AGREE-MENT UNDER §1.367(a)–8”, and withparagraphs labeled to correspond with thenumbers set forth as follows—

(i) A statement that the document sub-mitted constitutes the transferor’s agree-ment to recognize gain in accordance withthe requirements of this section;

(ii) A description of the property trans-ferred as described in paragraph (b)(2) ofthis section;

(iii) The transferor’s agreement to rec-ognize gain, as described in paragraph(b)(3) of this section;

(iv) A waiver of the period of limita-tions as described in paragraph (b)(4) ofthis section;

(v) An agreement to file with the trans-feror’s tax returns for the 5 full taxableyears following the year of the transfer acertification as described in paragraph(b)(5) of this section;

(vi) A statement that arrangementshave been made in connection with thetransferred property to ensure that thetransferor will be informed of any subse-quent disposition of any property thatwould require the recognition of gainunder the agreement; and

(vii) A statement as to whether, in theevent all or a portion of the gain recogni-tion agreement is triggered under para-graph (e) of this section, the taxpayerelects to include the required amount inthe year of the triggering event rather thanin the year of the initial transfer. If thetaxpayer elects to include the requiredamount in the year of the triggering event,such statement must be included with allof the other information required underthis paragraph (b), and filed by the due

date (including extensions) of the trans-feror’s income tax return for the taxableyear that includes the date of the transfer.

(2) Description of property trans-ferred—(i) The agreement shall include adescription of each property transferredby the transferor, an estimate of the fairmarket value of the property as of the dateof the transfer, a statement of the cost orother basis of the property and any adjust-ments thereto, and the date on which theproperty was acquired by the transferor.

(ii) If the transferred property is stockor securities, the transferor must providethe information contained in paragraphs(b)(2)(ii)(A) through (F) of this section asfollows—

(A) The type or class, amount, andcharacteristics of the stock or securitiestransferred, as well as the name, address,and place of incorporation of the issuer ofthe stock or securities, and the percentage(by voting power and value) that the stock(if any) represents of the total stock out-standing of the issuing corporation;

(B) The name, address and place of in-corporation of the transferee foreign cor-poration, and the percentage of stock (byvoting power and value) that the U.S.transferor received or will receive in thetransaction;

(C) If stock or securities are trans-ferred in an exchange described in section361(a) or (b), a statement that the condi-tions set forth in the second sentence ofsection 367(a)(5) and any regulationsunder that section have been satisfied, andan explanation of any basis or other ad-justments made pursuant to section367(a)(5) and any regulations thereunder;

(D) If the property transferred is stockor securities of a domestic corporation,the taxpayer identification number of thedomestic corporation whose stock or se-curities were transferred, together with astatement that all of the requirements of§1.367(a)–3(c)(1) are satisfied;

(E) If the property transferred is stockor securities of a foreign corporation, astatement as to whether the U.S. trans-feror was a United States shareholder (aU.S. transferor that satisfies the owner-ship requirements of section 1248(a)(2) or(c)(2)) of the corporation whose stockwas exchanged, and, if so, a statement asto whether the U.S. transferor is a UnitedStates shareholder with respect to thestock received, and whether any reporting

requirements contained in regulationsunder section 367(b) are applicable, and,if so, whether they have been satisfied;and

(F) If the transaction involved thetransfer of assets other than stock or secu-rities and the transaction was subject tothe indirect stock transfer rules of§1.367(a)–3(d), a statement as to whetherthe reporting requirements under section6038B have been satisfied with respect tothe transfer of property other than stock orsecurities, and an explanation of whethergain was recognized under section367(a)(1) and whether section 367(d) wasapplicable to the transfer of such assets,or whether any tangible assets qualifiedfor nonrecognition treatment under sec-tion 367(a)(3) (as limited by section367(a)(5) and §§1.367(a)–4T, 1.367(a)–5T and 1.367(a)–6T).

(3) Terms of agreement—(i) Generalrule. If prior to the close of the fifth fulltaxable year (i.e., not less than 60 months)following the close of the taxable year ofthe initial transfer, the transferee foreigncorporation disposes of the transferredproperty in whole or in part (as describedin paragraphs (e)(1) and (2) of this sec-tion), or is deemed to have disposed of thetransferred property (under paragraph(e)(3) of this section), then, unless an elec-tion is made in paragraph (b)(1)(vii) ofthis section, by the 90th day thereafter theU.S. transferor must file an amended re-turn for the year of the transfer and recog-nize thereon the gain realized but not rec-ognized upon the initial transfer, withinterest. If an election under paragraph(b)(1)(vii) of this section was made, then,if a disposition occurs, the U.S. transferormust include the gain realized but not rec-ognized on the initial transfer in incomeon its Federal income tax return for the pe-riod that includes the date of the triggeringevent. In accordance with paragraph(b)(3)(iii) of this section, interest must bepaid on any additional tax due. (If a tax-payer properly makes the election underparagraph (b)(1)(vii) of this section butlater fails to include the gain realized in in-come, the Commissioner may, in his dis-cretion, include the gain in the taxpayer’sincome in the year of the initial transfer.)

(ii) Offsets. No special limitationsapply with respect to net operating losses,capital losses, credits against tax, or simi-lar items.

1998–27 I.R.B. 17 July 6, 1998

(iii) Interest. If additional tax is re-quired to be paid, then interest must bepaid on that amount at the rates deter-mined under section 6621 with respect tothe period between the date that was pre-scribed for filing the transferor’s incometax return for the year of the initial trans-fer and the date on which the additionaltax for that year is paid. If the election inparagraph (b)(1)(vii) of this section ismade, taxpayers should enter the amountof interest due, labelled as “sec. 367 in-terest” at the bottom right margin of page1 of the Federal income tax return for theperiod that includes the date of the trig-gering event (page 2 if the taxpayer files aForm 1040), and include the amount ofinterest in their payment (or reduce theamount of any refund due by the amountof the interest). If the election in para-graph (b)(1)(vii) of this section is made,taxpayers should, as a matter of course,include the amount of gain as taxable in-come on their Federal income tax returns(together with other income or lossitems). The amount of tax relating to thegain should be separately stated at thebottom right margin of page 1 of the Fed-eral income tax return (page 2 if the tax-payer files a Form 1040), labelled as “sec.367 tax.”

(iv) Basis adjustments—(A) Trans-feree. If a U.S. transferor is required torecognize gain under this section on thedisposition by the transferee foreign cor-poration of the transferred property, thenin determining for U.S. income tax pur-poses any gain or loss recognized by thetransferee foreign corporation upon itsdisposition of such property, the trans-feree foreign corporation’s basis in suchproperty shall be increased (as of the dateof the initial transfer) by the amount ofgain required to be recognized (but not byany tax or interest required to be paid onsuch amount) by the U.S. transferor. Inthe case of a deemed disposition of thestock of the transferred corporation de-scribed in paragraph (e)(3)(i) of this sec-tion, the transferee foreign corporation’sbasis in the transferred stock deemed dis-posed of shall be increased by the amountof gain required to be recognized by theU.S. transferor.

(B) Transferor. If a U.S. transferor isrequired to recognize gain under this sec-tion, then the U.S. transferor’s basis in thestock of the transferee foreign corporation

shall be increased by the amount of gainrequired to be recognized (but not by anytax or interest required to be paid on suchamount).

(C) Other adjustments.Other appro-priate adjustments to basis that are consis-tent with the principles of this paragraph(b)(3)(iv) may be made if the U.S. trans-feror is required to recognize gain underthis section.

(D) Example. The principles of thisparagraph (b)(3) are illustrated by the fol-lowing example:

Example—(i) Facts. D, a domestic corporationowning 100 percent of the stock of S, a foreign cor-poration, transfers all of the S stock to F, a foreigncorporation, in an exchange described in section368(a)(1)(B). The section 1248 amount with respectto the S stock is $0. In the exchange, D receives 20percent of the voting stock of F. All of the require-ments of §1.367(a)–3(c)(1) are satisfied, and D en-ters into a five-year gain recognition agreement toqualify for nonrecognition treatment and does notmake the election contained in paragraph (b)(1)(vii)of this section. One year after the initial transfer, Ftransfers all of the S stock to F1 in an exchange de-scribed in section 351, and D complies with the re-quirements of paragraph (g)(2) of this section. Twoyears after the initial transfer, D transfers its entire20 percent interest in F’s voting stock to a domesticpartnership in exchange for an interest in the part-nership. Three years after the initial exchange, Sdisposes of substantially all (as described in para-graph (e)(3)(i) of this section) of its assets in a trans-action that would be taxable under U.S. income taxprinciples, and D is required by the terms of the gainrecognition agreement to recognize all the gain thatit realized on the initial transfer of the stock of S.

(ii) Result. As a result of this gain recognitionand paragraph (b)(3)(iv) of this section, D is permit-ted to increase its basis in the partnership interest bythe amount of gain required to be recognized (butnot by any tax or interest required to be paid on suchamount), the partnership is permitted to increase itsbasis in the 20 percent voting stock of F, F is permit-ted to increase its basis in the stock of F1, and F1 ispermitted to increase its basis in the stock of S. S,however, is not permitted to increase its basis in itsassets for purposes of determining the direct or indi-rect U.S. tax results, if any, on the sale of its assets.

(4) Waiver of period of limitation.TheU.S. transferor must file, with the agree-ment to recognize gain, a waiver of theperiod of limitation on assessment of taxupon the gain realized on the transfer.The waiver shall be executed on Form8838 (Consent to Extend the Time to As-sess Tax Under Section 367—GainRecognition Agreement) and shall extendthe period for assessment of such tax to adate not earlier than the eighth full taxableyear following the taxable year of thetransfer. Such waiver shall also contain

such other terms with respect to assess-ment as may be considered necessary bythe Commissioner to ensure the assess-ment and collection of the correct tax lia-bility for each year for which the waiveris required. The waiver must be signedby a person who would be authorized tosign the agreement pursuant to the provi-sions of paragraph (a)(3) of this section.

(5) Annual certification—(i) In gen-eral. The U.S. transferor must file withits income tax return for each of the fivefull taxable years following the taxableyear of the transfer a certification that theproperty transferred has not been dis-posed of by the transferee in a transactionthat is considered to be a disposition forpurposes of this section, including a dis-position described in paragraph (e)(3) ofthis section. The U.S. transferor must in-clude with its annual certification a state-ment describing any taxable dispositionsof assets by the transferred corporationthat are not in the ordinary course of busi-ness. The annual certification pursuant tothis paragraph (b)(5) must be signedunder penalties of perjury by a personwho would be authorized to sign theagreement pursuant to the provisions ofparagraph (a)(3) of this section.

(ii) Special rule when U.S. transferorleaves its affiliated group.If, at the timeof the initial transfer, the U.S. transferorwas a member of an affiliated group(within the meaning of section 1504(a)-(1)) filing a consolidated Federal incometax return but not the parent of suchgroup, the U.S. transferor will file the an-nual certification (and provide a copy tothe parent corporation) if it leaves thegroup during the term of the gain recogni-tion agreement, notwithstanding the factthat the parent entered into the gain recog-nition agreement, extended the statute oflimitations pursuant to this section, andremains liable (with other corporationsthat were members of the group at thetime of the initial transfer) under the gainrecognition agreement in the case of atriggering event.

(c) Failure to comply—(1) Generalrule. If a person that is required to file anagreement under paragraph (b) of this sec-tion fails to file the agreement in a timelymanner, or if a person that has entered intoan agreement under paragraph (b) of thissection fails at any time to comply in anymaterial respect with the requirements of

July 6, 1998 18 1998–27 I.R.B.

this section or with the terms of an agree-ment submitted pursuant hereto, then theinitial transfer of property is described insection 367(a)(1) (unless otherwise ex-cepted under the rules of this section) andwill be treated as a taxable exchange in theyear of the initial transfer (or in the year ofthe failure to comply if the agreement wasfiled with a timely-filed (including exten-sions) original (not amended) return andan election under paragraph (b)(1)(vii) ofthis section was made). Such a materialfailure to comply shall extend the periodfor assessment of tax until three years afterthe date on which the Internal RevenueService receives actual notice of the fail-ure to comply.

(2) Reasonable cause exception.If aperson that is permitted under §1.367(a)–3(b) or (c) to enter into an agreement (de-scribed in paragraph (b) of this section)fails to file the agreement in a timelymanner, as provided in paragraph (a)(1)of this section, or fails to comply in anymaterial respect with the requirements ofthis section or with the terms of an agree-ment submitted pursuant hereto, the pro-visions of paragraph (c)(1) of this sectionshall not apply if the person is able toshow that such failure was due to reason-able cause and not willful neglect and ifthe person files the agreement or reachescompliance as soon as he becomes awareof the failure. Whether a failure to file ina timely manner, or materially comply,was due to reasonable cause shall be de-termined by the district director under allthe facts and circumstances.

(d) Use of security.The U.S. trans-feror may be required to furnish a bond orother security that satisfies the require-ments of §301.7101-1 of this chapter ifthe district director determines that suchsecurity is necessary to ensure the pay-ment of any tax on the gain realized butnot recognized upon the initial transfer.Such bond or security will generally berequired only if the stock or securitiestransferred are a principal asset of thetransferor and the director has reason tobelieve that a disposition of the stock orsecurities may be contemplated.

(e) Disposition (in whole or in part) ofstock of transferred corporation—(1) Ingeneral—(i) Definition of disposition.For purposes of this section, a dispositionof the stock of the transferred corporationthat triggers gain under the gain recogni-

tion agreement includes any taxable saleor any disposition treated as an exchangeunder this subtitle, (e.g., under sections301(c)(3)(A), 302(a), 311, 336, 351(b) orsection 356(a)(1)), as well as any deemeddisposition described under paragraph(e)(3) of this section. It does not include adisposition that is not treated as an ex-change, (e.g., under section 302(d) or356(a)(2)). A disposition of all or a por-tion of the stock of the transferred corpo-ration by installment sale is treated as adisposition of such stock in the year of theinstallment sale. A disposition of thestock of the transferred corporation doesnot include certain transfers treated asnonrecognition transfers (under paragraph(g) of this section) in which the gainrecognition agreement is retained butmodified, or certain transfers (under para-graph (h) of this section) in which thegain recognition agreement is terminatedand has no further effect.

(ii) Example. The provisions of thisparagraph (e) are illustrated by the fol-lowing example:

Example. Interaction between trigger of gainrecognition agreement and subpart F rules—(i)Facts. A U.S. corporation (USP) owns all of thestock of two foreign corporations, CFC1 and CFC2.USP’s section 1248 amount with respect to CFC2 is$30. USP has a basis of $50 in its stock of CFC2;CFC2 has a value of $100. In a transaction de-scribed in section 351 and 368(a)(1)(B), USP trans-fers the stock of CFC2 in exchange for additionalstock of CFC1. The transaction is subject to bothsections 367(a) and (b). See §§1.367(a)–3(b) and1.367(b)–1(a). To qualify for nonrecognition treat-ment under section 367(a), USP enters into a 5-yeargain recognition agreement for $50 under this sec-tion. No election under paragraph 8(b)(1)(vii) ofthis section is made. USP also complies with the no-tice requirement under §1.367(b)–1(c).

(ii) Trigger of gain recognition agreement withno election. Assume that in year 2, CFC1 sells thestock of CFC2 for $120, and that there were no dis-tributions by CFC2 prior to the sale. USP mustamend its return for the year of the initial transferand include $50 in income (with interest), $30 ofwhich will be recharacterized as a dividend pursuantto section 1248. As a result, CFC1 has a basis of$100 in CFC2. As a result of the sale of CFC2 stockby CFC1, USP will have $20 of subpart F foreignpersonal holding company income. See section 951,et. seq., and the regulations thereunder.

(iii) Trigger of gain recognition agreement withelection. Assume the same facts as in paragraphs (i)and (ii) of this Example, except that when USP at-tached the gain recognition agreement to its timelyfiled Federal income tax return for the year of theinitial transfer, it elected under paragraph (b)(1)(vii)of this section to include the amount of gain realizedbut not recognized on the initial transfer, $50, in theyear of the triggering event rather than in the year of

the initial transfer. In such case, the result is thesame as in paragraph (e)(1)(ii)(B) of this section, ex-cept that USP will include the $50 of gain on its year2 return, together with interest. For purposes of de-termining the dividend component, if any, of the $50inclusion, USP will take into account the section1248 amount of CFC2 at the time of the dispositionin Year 2.

(2) Partial disposition. If the trans-feree foreign corporation disposes of (oris deemed to dispose of) only a portion ofthe transferred stock or securities, thenthe U.S. transferor is required to recog-nize only a proportionate amount of thegain realized but not recognized upon theinitial transfer of the transferred property.The proportion required to be recognizedshall be determined by reference to therelative fair market values of the trans-ferred stock or securities disposed of andretained. Solely for purposes of deter-mining whether the U.S. transferor mustrecognize income under the agreementdescribed in paragraph (b) of this section,in the case of transferred property (includ-ing stock or securities) that is fungiblewith other property owned by the trans-feree foreign corporation, a disposition bysuch corporation of any such propertyshall be deemed to be a disposition of noless than a ratable portion of the trans-ferred property.

(3) Deemed dispositions of stock oftransferred corporation—(i) Dispositionby transferred corporation of substan-tially all of its assets—(A) In general.Unless an exception applies (as describedin paragraph (e)(3)(i)(B) of this section),a transferee foreign corporation will betreated as having disposed of the stock orsecurities of the transferred corporation if,within the term of the gain recognitionagreement, the transferred corporationmakes a disposition of substantially all(within the meaning of section 368(a)-(1)(C)) of its assets (including stock in asubsidiary corporation or an interest in apartnership). If the initial transfer that ne-cessitated the gain recognition agreementwas an indirect stock transfer, see§1.367(a)–3(d)(2)(v). If the transferredcorporation is a U.S. corporation, seeparagraph (h)(2) of this section.

(B) The transferee foreign corporationwill not be deemed to have disposed ofthe stock of the transferred corporation ifthe transferred corporation is liquidatedinto the transferee foreign corporationunder sections 337 and 332, provided that

1998–27 I.R.B. 19 July 6, 1998

the transferee foreign corporation doesnot dispose of substantially all of the as-sets formerly held by the transferred cor-poration (and considered for purposes ofthe substantially all determination) withinthe remaining period during which thegain recognition agreement is in effect. Anonrecognition transfer is not counted forpurposes of the substantially all determi-nation as a disposition if the transfer satis-fies the requirements of paragraph (g)(3)of this section. A disposition does not in-clude a compulsory transfer as describedin §1.367(a)–4T(f) that was not reason-ably forseeable by the U.S. transferor atthe time of the initial transfer.

(ii) U.S. transferor becomes a non-citi-zen nonresident.If a U.S. transferor losesU.S. citizenship or a long-term residentceases to be taxed as a lawful permanentresident (as defined in section 877(e)(2)),then immediately prior to the date that theU.S. transferor loses U.S. citizenship orceases to be taxed as a long-term resident,the gain recognition agreement will betriggered as if the transferee foreign cor-poration disposed of all of the stock of thetransferred corporation in a taxable trans-action on such date. No additional inclu-sion is required under section 877, and again recognition agreement under section877 may not be used to avoid taxationunder section 367(a) resulting from thetrigger of the section 367(a) gain recogni-tion agreement.

(f) Effect on gain recognition agree-ment if U.S. transferor goes out of exis-tence—(1) In general.If an individualtransferor that has entered into an agree-ment under paragraph (b) of this sectiondies, or if a U.S. trust or estate that has en-tered into an agreement under paragraph(b) of this section goes out of existenceand is not required to recognize gain as aconsequence thereof with respect to all ofthe stock of the transferee foreign corpo-ration received in the initial transfer andnot previously disposed of, then the gainrecognition agreement will be triggeredunless one of the following requirementsis met—

(i) The person winding up the affairsof the transferor retains, for the durationof the waiver of the statute of limitationsrelating to the gain recognition agree-ment, assets to meet any possible liabilityof the transferor under the duration of theagreement;

(ii) The person winding up the affairsof the transferor provides security as pro-vided under paragraph (d) of this sectionfor any possible liability of the transferorunder the agreement; or

(iii) The transferor obtains a rulingfrom the Internal Revenue Service pro-viding for successors to the transferorunder the gain recognition agreement.

(2) Special rule when U.S. transferoris a corporation—(i) U.S. transferorgoes out of existence pursuant to thetransaction. If the transferor is a U.S.corporation that goes out of existence in atransaction in which the transferor’s gainwould have qualified for nonrecognitiontreatment under §1.367(a)–3(b) or (c) hadthe U.S. transferor remained in existenceand entered into a gain recognition agree-ment, then the gain may generally qualifyfor nonrecognition treatment only if theU.S. transferor is owned by a single U.S.parent corporation and the U.S. transferorand its parent corporation file a consoli-dated Federal income tax return for thetaxable year that includes the transfer, andthe parent of the consolidated group en-ters into the gain recognition agreement.However, notwithstanding the precedingsentence, a U.S. transferor that was con-trolled (within the meaning of section368(c)) by five or fewer domestic corpo-rations may request a ruling that, if cer-tain conditions prescribed by the InternalRevenue Service are satisfied, the trans-action may qualify for nonrecognitiontreatment.

(ii) U.S. corporate transferor is liqui-dated after gain recognition agreement isfiled. If a U.S. transferor files a gainrecognition agreement but is liquidatedduring the term of the gain recognitionagreement, such agreement will be termi-nated if the liquidation does not qualify asa tax-free liquidation under sections 337and 332 and the U.S. transferor includesin income any gain from the liquidation.If the liquidation qualifies for nonrecogni-tion treatment under sections 337 and332, the gain recognition agreement willbe triggered unless the U.S. parent corpo-ration and the U.S. transferor file a con-solidated Federal income tax return forthe taxable year that includes the dates ofthe initial transfer and the liquidation ofthe U.S. transferor, and the U.S. parententers into a new gain recognition agree-ment and complies with reporting require-

ments similar to those contained in para-graph (g)(2) of this section.

(g) Effect on gain recognition agree-ment of certain nonrecognition transac-tions—(1) Certain nonrecognition trans-fers of stock or securities of the transfereeforeign corporation by the U.S. transferor.If the U.S. transferor disposes of anystock of the transferee foreign corporationin a nonrecognition transfer and the U.S.transferor complies with reporting re-quirements similar to those contained inparagraph (g)(2) of this section, the U.S.transferor shall continue to be subject tothe terms of the gain recognition agree-ment in its entirety.

(2) Certain nonrecognition transfers ofstock or securities of the transferred cor-poration by the transferee foreign corpo-ration. (i) If, during the period the gainrecognition agreement is in effect, thetransferee foreign corporation disposes ofall or a portion of the stock of the trans-ferred corporation in a transaction inwhich gain or loss would not be requiredto be recognized by the transferee foreigncorporation under U.S. income tax princi-ples, such disposition will not be treatedas a disposition within the meaning ofparagraph (e) of this section if the trans-feree foreign corporation receives (or isdeemed to receive), in exchange for theproperty disposed of, stock in a corpora-tion, or an interest in a partnership, thatacquired the transferred property (or re-ceives stock in a corporation that controlsthe corporation acquiring the transferredproperty); and the U.S. transferor com-plies with the requirements of paragraphs(g)(2)(ii) through (iv) of this section.

(ii) The U.S. transferor must provide anotice of the transfer with its next annualcertification under paragraph (b)(5) ofthis section, setting forth—

(A) A description of the transfer;(B) The applicable nonrecognition

provision; and(C) The name, address, and taxpayer

identification number (if any) of the newtransferee of the transferred property.

(iii) The U.S. transferor must providewith its next annual certification a newagreement to recognize gain (in accor-dance with the rules of paragraph (b) ofthis section) if, prior to the close of thefifth full taxable year following the tax-able year of the initial transfer, either—

July 6, 1998 20 1998–27 I.R.B.

(A) The initial transferee foreign cor-poration disposes of the interest (if any)which it received in exchange for thetransferred property (other than in a dis-position which itself qualifies under therules of this paragraph (g)(2)); or

(B) The corporation or partnership thatacquired the property disposes of suchproperty (other than in a dispositionwhich itself qualifies under the rules ofthis paragraph (g)(2)); or

(C) There is any other disposition thathas the effect of an indirect disposition ofthe transferred property.

(iv) If the U.S. transferor is required toenter into a new gain recognition agree-ment, as provided in paragraph (g)(2)(iii)of this section, the U.S. transferor mustprovide with its next annual certification(described in paragraph (b)(5) of this sec-tion) a statement that arrangements havebeen made, in connection with the non-recognition transfer, ensuring that theU.S. transferor will be informed of anysubsequent disposition of property withrespect to which recognition of gainwould be required under the agreement.

(3) Certain nonrecognition transfers ofassets by the transferred corporation.Adisposition by the transferred corporationof all or a portion of its assets in a transac-tion in which gain or loss would not be re-quired to be recognized by the transferredcorporation under U.S. income tax princi-ples, will not be treated as a dispositionwithin the meaning of paragraph (e)(3) ofthis section if the transferred corporationreceives in exchange stock or securities ina corporation or an interest in a partner-ship that acquired the assets of the trans-ferred corporation (or receives stock in acorporation that controls the corporationacquiring the assets). If the transactionwould be treated as a disposition of sub-stantially all of the transferred corpora-tion’s assets, the preceding sentence shallonly apply if the U.S. transferor complieswith reporting requirements comparableto those of paragraphs (g)(2)(ii) through(iv) of this section, providing for notice,an agreement to recognize gain in the caseof a direct or indirect disposition of theassets previously held by the transferredcorporation, and an assurance that neces-sary information will be provided to ap-propriate parties.

(h) Transactions that terminate thegain recognition agreement—(1) Taxable

disposition of stock or securities of trans-feree foreign corporation by U.S. trans-feror. (i) If the U.S. transferor disposes ofall of the stock of the transferee foreigncorporation that it received in the initialtransfer in a transaction in which all real-ized gain (if any) is recognized currently,then the gain recognition agreement shallterminate and have no further effect. Ifthe transferor disposes of a portion of thestock of the transferee foreign corporationthat it received in the initial transfer in ataxable transaction, then in the event thatthe gain recognition agreement is latertriggered, the transferor shall be requiredto recognize only a proportionate amountof the gain subject to the gain recognitionagreement that would otherwise be re-quired to be recognized on a subsequentdisposition of the transferred propertyunder the rules of paragraph (b)(2) of thissection. The proportion required to berecognized shall be determined by refer-ence to the percentage of stock (by value)of the transferee foreign corporation re-ceived in the initial transfer that is re-tained by the United States transferor.

(ii) The rule of this paragraph (h) is il-lustrated by the following example:

Example. A, a United States citizen, owns 100percent of the outstanding stock of foreign corpora-tion X. In a transaction described in section 351, Aexchanges his stock in X (and other assets) for 100percent of the outstanding voting and nonvotingstock of foreign corporation Y. A submits an agree-ment under the rules of this section to recognize gainupon a later disposition. In the following year, Adisposes of 60 percent of the fair market value of thestock of Y, thus terminating 60 percent of the gainrecognition agreement. One year thereafter, Y dis-poses of 50 percent of the fair market value of thestock of X. A is required to include in his income inthe year of the later disposition 20 percent (40 per-cent interest in Y multiplied by a 50 percent disposi-tion of X) of the gain that A realized but did not rec-ognize on his initial transfer of X stock to Y.

(2) Certain dispositions by a domestictransferred corporation of substantiallyall of its assets.If the transferred corpo-ration is a domestic corporation and theU.S. transferor and the transferred corpo-ration filed a consolidated Federal incometax return at the time of the transfer, thegain recognition agreement shall termi-nate and cease to have effect if, during theterm of such agreement, the transferredcorporation disposes of substantially allof its assets in a transaction in which allrealized gain is recognized currently. If

an indirect stock transfer necessitated thefiling of the gain recognition agreement,such agreement shall terminate if, imme-diately prior to the indirect transfer, theU.S. transferor and the acquired corpora-tion filed a consolidated return (or, in thecase of a section 368(a)(1)(A) and(a)(2)(E) reorganization described in§1.367(a)–3(d)(1)(ii), the U.S. transferorand the acquiring corporation filed a con-solidated return) and the transferred cor-poration disposes of substantially all of itsassets (taking into account §1.367(a)–3(d)(2)(v)) in a transaction in which allrealized gain is recognized currently.

(3) Distribution by transferee foreigncorporation of stock of transferred corpo-ration that qualifies under section 355 orsection 337. If, during the term of thegain recognition agreement, the transfereeforeign corporation distributes to the U.S.transferor, in a transaction that qualifiesunder section 355, or in a liquidating dis-tribution that qualifies under sections 332and 337, the stock that initially necessi-tated the filing of the gain recognitionagreement (and any additional stock re-ceived after the initial transfer), the gainrecognition agreement shall terminate andhave no further effect, provided that im-mediately after the section 355 distribu-tion or section 332 liquidation, the U.S.transferor’s basis in the transferred stockis less than or equal to the basis that it hadin the transferred stock immediately priorto the initial transfer that necessitated theGRA.

(i) Effective date.The rules of thissection shall apply to transfers that occuron or after July 20, 1998. For matterscovered in this section for periods beforeJuly 20, 1998, the corresponding rules of§1.367(a)–3T(g) (see 26 CFR part 1, re-vised April 1, 1998) and Notice 87–85((1987–2 C.B. 395); see §601.601(d)–(2)(ii) of this chapter) apply. In addition,if a U.S. transferor entered into a gainrecognition agreement for transfers priorto July 20, 1998, then the rules of§1.367(a)–3T(g) (see 26 CFR part 1, re-vised April 1, 1998) shall continue toapply in lieu of this section in the event ofany direct or indirect nonrecognitiontransfer of the same property. See, also,§1.367(a)–3(f).

Par. 6. Section 1.367(b)–1 is added toread as follows:

1998–27 I.R.B. 21 July 6, 1998

§1.367(b)–1 Other transfers.

(a) Scope.Section 367(b) and the reg-ulations thereunder set forth certain rulesregarding the extent to which a foreigncorporation shall be considered to be acorporation in connection with an ex-change to which section 367(b) applies.An exchange to which section 367(b) ap-plies is any exchange described in section332, 351, 354, 355, 356 or 361, with re-spect to which the status of a foreign cor-poration as a corporation is relevant fordetermining the extent to which incomeshall be recognized or for determining theeffect of the transaction on earnings andprofits, basis of stock or securities, orbasis of assets. Notwithstanding the pre-ceding sentence, a section 367(b) ex-change does not include a transfer to theextent that the foreign corporation fails tobe treated as a corporation by reason ofsection 367(a)(1). See §1.367(a)–3(b)-(2)(ii) for an illustration of the interactionof sections 367(a) and (b). This para-graph applies for transfers occurring on orafter July 20, 1998.

(b) [Reserved]. For further guidance,see §7.367(b)–1(b) of this chapter.

(c) Notice required—(1) In general.If any person referred to in section 6012(relating to the requirement to make re-turns of income) realized gain or other in-come (whether or not recognized) on ac-count of any exchange to which section367(b) applies, such person must file anotice of such exchange on or before thelast date for filing a Federal income taxreturn (taking into account any extensionsof time therefor) for the person’s taxableyear in which such gain or other income isrealized. This notice must be filed withthe district director with whom the personwould be required to file a Federal in-come tax return for the taxable year inwhich the exchange occurs. Notwith-standing anything in this paragraph (c)(1)to the contrary, no notice under this para-graph (c)(1) is required to the extent atransaction is described in both section367(a) and (b), and the exchanging personis not a United States shareholder of thecorporation whose stock is exchanged.This paragraph applies to transfers occur-ring on or after July 20, 1998.

(c)(2) through (f) [Reserved]. For fur-ther guidance, see §7.367(b)–1(c)(2)through (f) of this chapter.

Par. 6a. Section 1.367(b)-4 is added toread as follows:

§1.367(b)–4 Certain exchanges of stockdescribed in section 354, 351, or sections354 and 351.

(a) In general. This section applies toan exchange of stock in a foreign corpora-tion by a United States shareholder if theexchange is described in section 351, or isdescribed in section 354 and is made pur-suant to a reorganization described in sec-tion 368(a)(1)(B) (including an exchangethat is also described in section 351),without regard to whether the exchangemay also be described in section 361.

(b) Recognition of income.If an ex-change is described in paragraph (b)(1),(2) or (3) of this section, the exchangingshareholder shall include in income as adeemed dividend the section 1248 amountattributable to the stock that it exchanges.See, also, §1.367(a)–3(b)(2). However, inthe case of a recapitalization described inparagraph (b)(3) of this section that oc-curred prior to July 20, 1998, the ex-changing shareholder shall include thesection 1248 amount on its tax return forthe taxable year that includes the ex-change described in paragraph (b)(2)(iii)of this section (and not in the taxable yearof the recapitalization), except that no in-clusion is required if both the recapitaliza-tion and the exchange described in para-graph (b)(2)(iii) of this section occurredprior to July 20, 1998.

(1) Loss of United States shareholderor controlled foreign corporation status.An exchange is described in this para-graph (b)(1) if—

(i) An exchanging shareholder receivesstock of a foreign corporation that is not acontrolled foreign corporation;

(ii) An exchanging shareholder re-ceives stock of a controlled foreign corpo-ration as to which the exchanging UnitedStates shareholder is not a United Statesshareholder; or

(iii) The corporation whose stock isexchanged is not a controlled foreign cor-poration immediately after the transfer.

(2) Receipt by domestic corporation ofpreferred or other stock in certain in-stances. An exchange is described in thisparagraph (b)(2) if—

(i) Immediately before the exchange,the foreign acquired corporation and the

foreign acquiring corporations are notmembers of the same affiliated group(within the meaning of section 1504(a),but without regard to the exceptions setforth in section 1504(b), and substitutingthe words “more than 50” in place of thewords “at least 80” in sections 1504(a)-(2)(A) and (B));

(ii) Immediately after the exchange, adomestic corporation meets the owner-ship threshold specified by section 902(a)or (b) such that it may qualify for adeemed paid foreign tax credit if it re-ceives from the foreign acquiring corpo-ration a distribution (directly or throughtiers) of its earnings and profits; and

(iii) The exchanging shareholder re-ceives preferred stock (other than pre-ferred stock that is fully participating withrespect to dividends, redemptions andcorporate growth) in consideration forcommon stock or preferred stock that isfully participating with respect to divi-dends, redemptions and corporate growth,or, in the discretion of the District Direc-tor (and without regard to whether thestock exchanged is common stock or pre-ferred stock), receives stock that entitles itto participate (through dividends, re-demption payments or otherwise) dispro-portionately in the earnings generated byparticular assets of the foreign acquiredcorporation or foreign acquiring corpora-tion. See, e.g., paragraph (b)(4) Example1 through Example 3of this section.

(3) Certain exchanges involving re-capitalizations.An exchange pursuant toa recapitalization under section 368(a)-(1)(E) shall be deemed to be an exchangedescribed in this paragraph (b)(3) if thefollowing conditions are satisfied—

(i) During the 24-month period imme-diately preceding or following the date ofthe recapitalization, the corporation thatundergoes the recapitalization (or a prede-cessor of, or successor to, such corpora-tion) also engages in a transaction thatwould be described in paragraph (b)(2) ofthis section but for paragraph (b)(2)(iii) ofthis section, either as the foreign acquiredcorporation or the foreign acquiring cor-poration; and

(ii) The exchange in the recapitaliza-tion is described in paragraph (b)(2)(iii)of this section.

(4) Examples.The rules of paragraph(b)(2) of this section are illustrated by thefollowing examples:

July 6, 1998 22 1998–27 I.R.B.

Example 1—(i) Facts. FC1 is a foreign corpora-tion. DC is a domestic corporation that is unrelatedto FC1. DC owns all of the outstanding stock ofFC2, a foreign corporation, and FC2 has no out-standing preferred stock. The value of FC2 is $100and DC has a basis of $50 in the stock of FC2. Thesection 1248 amount attributable to the stock of FC2held by DC is $20. In a reorganization described insection 368(a)(1)(B), FC1 acquires all of the stockof FC2 and, in exchange, DC receives FC1 votingpreferred stock that constitutes 10 percent of the out-standing voting stock of FC1 for purposes of section902(a). Immediately after the exchange, FC1 andFC2 are controlled foreign corporations and DC is aUnited States shareholder of FC1, so paragraph(b)(1) of this section does not require inclusion in in-come of the section 1248 amount.

(ii) Result. Pursuant to §1.367(a)–3(b)(2), thetransfer is subject to both section 367(a) and section367(b). Under §1.367(a)–3(b)(1), DC will not besubject to tax under section 367(a)(1) if it enters intoa gain recognition agreement in accordance with§1.367(a)–8. The amount of the gain recognitionagreement is $50 less any inclusion under section367(b). Even though paragraph (b)(1) of this sectiondoes not apply to require inclusion in income by DCof the section 1248 amount, DC must neverthelessinclude the $20 section 1248 amount in income as adeemed dividend from FC2 under paragraph (b)(2)of this section. Thus, if DC enters into a gain recog-nition agreement, the amount is $30 (the $50 gainrealized less the $20 recognized under section367(b)). (If DC fails to enter into a gain recognitionagreement, it must include in income under section367(a)(1) the $50 of gain realized; $20 of which istreated as a dividend. Section 367(b) does not applyin such case.)

Example 2—(i) Facts. The facts are the same asin Example 1, except that DC owns all of the out-standing stock of FC1 immediately before the trans-action.

(ii) Result. Both section 367(a) and section367(b) apply to the transfer. Paragraph (b)(2) of thissection does not apply to require inclusion of thesection 1248 amount. Under paragraph (b)(2)(i) ofthis section, the transaction is outside the scope ofparagraph (b)(2) of this section, because FC1 andFC2 are, immediately before the transaction, mem-bers of the same affiliated group (within the mean-ing of such paragraph). Thus, if DC enters into again recognition agreement in accordance with§1.367(a)–8, the amount of such agreement is $50.As in Example 1, if DC fails to enter into a gainrecognition agreement, it must include in income$50, $20 of which will be treated as a dividend.

Example 3—(i) Facts. FC1 is a foreign corpora-tion. DC is a domestic corporation that is unrelatedto FC1. DC owns all of the stock of FC2, a foreigncorporation. The section 1248 amount attributableto the stock of FC2 held by DC is $20. In a reorga-nization described in section 368(a)(1)(B), FC1 ac-quires all of the stock of FC2 in exchange for FC1voting stock that constitutes 10 percent of the out-standing voting stock of FC1 for purposes of section902(a). The FC1 voting stock received by DC in theexchange carries voting rights in FC1, but by agree-ment of the parties the shares entitle the holder todividends, amounts to be paid on redemption, andamounts to be paid on liquidation, which are to bedetermined by reference to the earnings or value of

FC2 as of the date of such event, and which are af-fected by the earnings or value of FC1 only if FC1becomes insolvent or has insufficient capital surplusto pay dividends.

(ii) Result. Under §1.367(a)–3(b)(1), DC willnot be subject to tax under section 367(a)(1) if it en-ters into a gain recognition agreement with respectto the transfer of FC2 stock to FC1. Under§1.367(a)–3(b)(2), the exchange will be subject tothe provisions of section 367(b) and the regulationsthereunder to the extent that it is not subject to taxunder section 367(a)(1). Furthermore, even if DCwould not otherwise be required to recognize in-come under this section, the District Director maynevertheless require that DC include the $20 section1248 amount in income as a deemed dividend fromFC2 under paragraph (b)(2) of this section.

(5) Special rules for applying section1248 to subsequent exchanges. (i) If in-come is not required to be recognizedunder paragraph (b) of this section in atransaction described in paragraph (b)(1)of this section involving a foreign acquir-ing corporation, then, for purposes of ap-plying section 1248 or 367(b) to subse-quent exchanges, the earnings and profitsattributable to an exchanging share-holder’s stock received in the transactionshall be determined by reference to theexchanging shareholder’s pro rata interestin the earnings and profits of the foreignacquiring corporation and foreign ac-quired corporation that accrue after thetransaction, as well as its pro rata interestin the earnings and profits of the foreignacquired corporation that accrued prior tothe transaction. See also section 1248(c)-(2)(D)(ii). The earnings and profits attrib-utable to an exchanging shareholder’sstock received in the transaction shall notinclude any earnings and profits of theforeign acquiring corporation that accruedprior to the transaction.

(ii) The following example illustratesthis paragraph (b)(5):

Example. (i) Facts. DC1, a domestic corpora-tion, owns all of the stock of FC1, a foreign corpora-tion. DC1 has owned all of the stock of FC1 sinceFC1’s formation. DC2, a domestic corporation,owns all of the stock of FC2, a foreign corporation.DC2 has owned all of the stock of FC2 since FC2’sformation. DC1 and DC2 are unrelated. In a reorga-nization described in section 368(a)(1)(B), DC1transfers all of the stock of FC1 to FC2 in exchangefor 40 percent of FC2. DC1 enters into a five-yeargain recognition agreement under the provisions of§§ 1.367(a)–3(b) and 1.367(a)–8 with respect to thetransfer of FC1 stock to FC2.

(ii) Result. DC1’s transfer of FC1 to FC2 is anexchange described in paragraph (b) of this section.Because the transfer is not described in paragraph(b)(1), (2) or (3) of this section, DC1 is not required

to include in income the section 1248 amount attrib-utable to the exchanged FC1 stock and the specialrule of this paragraph (b)(5) applies. Thus, for pur-poses of applying section 1248 or section 367(b) tosubsequent exchanges, the earnings and profits at-tributable to DC1’s interest in FC2 will be deter-mined by reference to 40 percent of the post-reorga-nization earnings and profits of FC1 and FC2, andby reference to 100 percent of the pre-reorganizationearnings and profits of FC1. The earnings and prof-its attributable to DC1’s interest in FC2 do not in-clude any earnings and profits accrued by FC2 priorto the transaction. Those earnings and profits are at-tributed to DC2 under section 1248.

(6) Effective date.This section appliesto transfers occurring on or after July 20,1998.

(c) and (d) [Reserved]. For furtherguidance, see §7.367(b)–4(c) and (d) ofthis chapter.

Par. 7. In §1.367(b)-7, paragraphs (a)and (b) are added to read as follows:

§1.367(b)–7 Exchange of stockdescribed in section 354.

(a) Scope. (1) This section applies toan exchange of stock in a foreign corpora-tion (other than a foreign investment com-pany as defined in section 1246(b)) occur-ring on or after July 20, 1998, if—

(i) The exchange is described in sec-tion 354 or 356 and is made pursuant to areorganization described in section368(a)(1)(B) through (F); and

(ii) The exchanging person is either aUnited States shareholder or a foreigncorporation having a United States share-holder who is also a United States share-holder of the corporation whose stock isexchanged.

(2) However, this section shall notapply if a United States shareholder ex-changes stock of a foreign corporation inan exchange described in section368(a)(1)(B). For further guidance, see§1.367(b)-4.

(b) [Reserved]. For further guidance,see §7.367(b)–7(b) of this chapter.

* * * * *

Par. 8. Section 1.367(d)–1T is amendedby adding a sentence at the end of para-graph (a) to read as follows:

§1.367(d)–1T Transfers of intangibleproperty to foreign corporations(temporary).

(a) * * * For purposes of determiningwhether a U.S. person has made a transfer

1998–27 I.R.B. 23 July 6, 1998

of intangible property that is subject to therules of section 367(d), the rules of§1.367(a)–1T(c) shall apply.

* * * * *

Par. 9. Section 1.6038B–1 is added toread as follows:

§1.6038B–1 Reporting of certaintransactions.

(a) Purpose and scope.This sectionsets forth information reporting require-ments under section 6038B concerningcertain transfers of property to foreigncorporations. Paragraph (b) of this sec-tion provides general rules explainingwhen and how to carry out the reportingrequired under section 6038B with re-spect to the transfers to foreign corpora-tions. Paragraph (c) of this section and§1.6038B–1T(d) specify the informationthat is required to be reported with respectto certain transfers of property that are de-scribed in section 6038B(a)(1)(A) and367(d), respectively. Section 1.6038B–1T(e) specifies the limited reporting thatis required with respect to transfers ofproperty described in section 367(e)(1).Paragraph (f) of this section sets forth theconsequences of a failure to comply withthe requirements of section 6038B andthis section. For effective dates, see para-graph (g) of this section. For rules re-garding transfers to foreign partnerships,see section 6038B(a)(1)(B) and any regu-lations thereunder.

(b) Time and manner of reporting—(1)In general—(i) Reporting procedure.Except for stock or securities qualifyingunder the special reporting rule of para-graph (b)(2) of this section, or cash,which is currently not required to be re-ported, any U.S. person that makes atransfer described in section 6038B(a)(1)-(A), 367(d) or (e)(1) is required to reportpursuant to section 6038B and the rules ofthis section and must attach the requiredinformation to Form 926 (Return byTransferor of Property to a Foreign Cor-poration, Foreign Estate or Trust, or For-eign Partnership). For purposes of deter-mining a U.S. transferor that is subject tosection 6038B, the rules of §1.367(a)–1T(c) and §1.367(a)–3(d) shall apply withrespect to a transfer described in section367(a), and the rules of §1.367(a)–1T(c)shall apply with respect to a transfer de-scribed in section 367(d). Notwithstand-

ing any statement to the contrary on Form926, the form and attachments must be at-tached to, and filed by the due date (in-cluding extensions) of, the transferor’s in-come tax return for the taxable year thatincludes the date of the transfer (as de-fined in §1.6038B–1T(b)(4)). Any attach-ment to Form 926 required under the rulesof this section is filed subject to the trans-feror’s declaration under penalties of per-jury on Form 926 that the informationsubmitted is true, correct, and complete tothe best of the transferor’s knowledge andbelief.

(ii) Reporting by corporate transferor.If the transferor is a corporation, Form926 must be signed by an authorized offi-cer of the corporation. If, however, thetransferor is a member of an affiliatedgroup under section 1504(a)(1) that files aconsolidated Federal income tax return,but the transferor is not the common par-ent corporation, an authorized officer ofthe common parent corporation must signForm 926.

(iii) Transfers of jointly-owned prop-erty. If two or more persons transferjointly-owned property to a foreign cor-poration in a transfer with respect towhich a notice is required under this sec-tion, then each person must report withrespect to the particular interest trans-ferred, specifying the nature and extent ofthe interest. However, a husband andwife who jointly file a single Federal in-come tax return may file a single Form926 with their tax return.

(2) Exceptions and special rules fortransfers of stock or securities under sec-tion 367(a)—(i) Transfers on or after July20, 1998. A U.S. person that transfersstock or securities on or after July 20,1998, in a transaction described in section6038(a)(1)(A) will be considered to havesatisfied the reporting requirement undersection 6038B and paragraph (b)(1) ofthis section if either—

(A) The U.S. transferor owned lessthan 5 percent of both the total votingpower and the total value of the transfereeforeign corporation immediately after thetransfer (taking into account the attribu-tion rules of section 318 as modified bysection 958(b)), and either:

(1) The U.S. transferor qualified fornonrecognition treatment with respect tothe transfer (i.e., the transfer was not tax-able under §§1.367(a)–3(b) or (c)); or

(2) The U.S. transferor is a tax-exemptentity and the income was not unrelatedbusiness income; or

(3) The transfer was taxable to the U.S.transferor under §1.367(a)–3(c), and suchperson properly reported the income fromthe transfer on its timely-filed (includingextensions) Federal income tax return forthe taxable year that includes the date ofthe transfer; or

(B) The U.S. transferor owned 5 per-cent or more of the total voting power orthe total value of the transferee foreigncorporation immediately after the transfer(taking into account the attribution rulesof section 318 as modified by section958(b)) and either:

(1) The transferor (or one or more suc-cessors) properly entered into a gainrecognition agreement under §1.367(a)–8; or

(2) The transferor is a tax-exempt en-tity and the income was not unrelatedbusiness income; or

(3) The transferor properly reportedthe income from the transfer on its timely-filed (including extensions) Federal in-come tax return for the taxable year thatincludes the date of the transfer.

(ii) Transfers before July 20, 1998.With respect to transfers occurring afterDecember 16, 1987, and prior to July 20,1998, a U.S. transferor that transferredU.S. or foreign stock or securities in atransfer described in section 367(a) is notsubject to section 6038B if such person isdescribed in paragraph (b)(2)(i)(A) of thissection.

(3) Special rule for transfers of cash.[Reserved].

(4) [Reserved]. For further guidance,see §1.6038B-1T(b)(4).

(c) Information required with respectto transfers described in section6038B(a)(1)(A).A U.S. person that trans-fers property to a foreign corporation inan exchange described in section6038B(a)(1)(A) (including unappreciatedproperty other than cash) must providethe following information, in paragraphslabelled to correspond with the number orletter set forth in this paragraph (c) and§1.6038B–1T(c)(1) through (5). If a par-ticular item is not applicable to the subjecttransfer, the taxpayer must list its headingand state that it is not applicable. For spe-cial rules applicable to transfers of stockor securities, see paragraph (b)(2)(ii) ofthis section.

July 6, 1998 24 1998–27 I.R.B.

(1) through (5) [Reserved]. For furtherguidance, see §1.6038B–1T(c)(1) through(5).

(6) Application of section 367(a)(5).Ifthe asset is transferred in an exchange de-scribed in section 361(a) or (b), a state-ment that the conditions set forth in thesecond sentence of section 367(a)(5) andany regulations under that section havebeen satisfied, and an explanation of anybasis or other adjustments made pursuantto section 367(a)(5) and any regulationsthereunder.

(d) and (e) [Reserved]. For furtherguidance, see §1.6038B–1T(d) and (e).

(f) Failure to comply with reporting re-quirements—(1) Consequences of fail-ure. If a U.S. person is required to file anotice (or otherwise comply) under para-graph (b) of this section and fails to com-ply with the applicable requirements ofsection 6038B and this section, then withrespect to the particular property as towhich there was a failure to comply—

(i) That property shall not be consid-ered to have been transferred for use inthe active conduct of a trade or businessoutside of the United States for purposesof section 367(a) and the regulationsthereunder;

(ii) The U.S. person shall pay a penaltyunder section 6038B(b)(1) equal to 10percent of the fair market value of thetransferred property at the time of the ex-change, but in no event shall the penaltyexceed $100,000 unless the failure withrespect to such exchange was due to in-tentional disregard (described under para-graph (g)(4) of this section); and

(iii) The period of limitations on as-sessment of tax upon the transfer of thatproperty does not expire before the datewhich is 3 years after the date on whichthe Secretary is furnished the informationrequired to be reported under this section.See section 6501(c)(8) and any regula-tions thereunder.

(2) Failure to comply. A failure tocomply with the requirements of section6038B is—

(i) The failure to report at the propertime and in the proper manner any mater-ial information required to be reportedunder the rules of this section; or

(ii) The provision of false or inaccurateinformation in purported compliance withthe requirements of this section. Thus, atransferor that timely files Form 926 withthe attachments required under the rules of

this section shall, nevertheless, have failedto comply if, for example, the transferorreports therein that property will be usedin the active conduct of a trade or businessoutside of the United States, but in fact theproperty continues to be used in a trade orbusiness within the United States.

(3) Reasonable cause exception.Theprovisions of paragraph (f)(1) of this sec-tion shall not apply if the transferor showsthat a failure to comply was due to rea-sonable cause and not willful neglect.The transferor may do so by providing awritten statement to the district directorhaving jurisdiction of the taxpayer’s re-turn for the year of the transfer, settingforth the reasons for the failure to comply.Whether a failure to comply was due toreasonable cause shall be determined bythe district director under all the facts andcircumstances.

(4) Definition of intentional disregard.If the transferor fails to qualify for the ex-ception under paragraph (f)(3) of this sec-tion and if the taxpayer knew of the ruleor regulation that was disregarded, thefailure will be considered an intentionaldisregard of section 6038B, and the mon-etary penalty under paragraph (f)(1)(ii) ofthis section will not be limited to$100,000. See §1.6662–3(b)(2).

(g) Effective date. This section appliesto transfers occurring on or after July 20,1998. See §1.6038B–1T for transfers oc-curring prior to July 20, 1998.

Par. 10. Section 1.6038B–1T isamended as follows:

1. The section heading is revised.2. Paragraphs (a) through (b)(2) are re-

vised.3. Paragraph (b)(3) is redesignated as

paragraph (b)(4).4. New paragraph (b)(3) is added and

reserved.5. Paragraph (c) introductory text is re-

vised and paragraph (c)(6) is added.6. Paragraph (f) is revised. 7. Paragraph (g) is added.The revisions and additions read as fol-

lows:

§1.6038B–1T Reporting of certaintransactions (temporary).

(a) through (b)(2) [Reserved]. For fur-ther guidance, see §1.6038B–1(a) through(b)(2).

(b)(3) [Reserved].

* * * * *

(c) Introductory text [Reserved]. Forfurther guidance, see §1.6038B–1(c).

* * * * *

(6) [Reserved]. For further guidance,see §1.6038B–1(c)(6).

* * * * *

(f) [Reserved]. For further guidance,see §1.6038B–1(f).

(g) Effective date.This section appliesto transfers occurring after December 31,1984, except paragraph (e)(1) applies totransfers occurring on or after September13, 1996. See §1.6038B–1T(a) through(b)(2), (c) introductory text, and (f) (26CFR part 1, revised April 1, 1998) fortransfers occurring prior to July 20, 1998.See §1.6038B–1 for transfers occurringon or after July 20, 1998.

PART 7—TEMPORARY INCOME TAXREGULATIONS UNDER THE TAXREFORM ACT OF 1976

Par. 11. The authority citation for part7 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 12. Section 7.367(b)–1 is

amended as follows:1. Paragraphs (a) and (c)(1) are re-

vised.2. The authority citation at the end of

the section is removed.The revisions read as follows:

§7.367(b)–1 Other transfers.

(a) [Reserved] For guidance relatingto transfers occurring on or after July 20,1998, see §1.367(b)–1(a) of this chapter.

* * * * *

(c)(1) [Reserved] For guidance relatingto transfers occurring on or after July 20,1998, see §1.367(b)–1(c) of this chapter.

* * * * *

Par. 13. Section 7.367(b)-4 is amendedas follows:

1. Paragraphs (a) and (b) are revised.2. The authority citation at the end of

the section is removed.The revision reads as follows:

§7.367(b)-4 Certain changes describedin more than one Code provision.

(a) and (b) [Reserved]. For guidancerelating to transfers occurring on or after

1998–27 I.R.B. 25 July 6, 1998

July 20, 1998, see §1.367(b)–4(a) and (b)of this chapter.

* * * * *

Par. 14. Section 7.367(b)–7 isamended as follows:

1. Paragraph (a) is revised.2. The authority citation at the end of

the section is removed.The revision reads as follows:

§7.367(b)–7 Exchange of stockdescribed in section 354.

(a) [Reserved] For guidance relatingto transfers occurring on or after July 20,1998, see §1.367(b)–7(a) of this chapter.

* * * * *

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 15. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 16. In §602.101, paragraph (c) is

amended by:1. Removing the following entry from

the table:

CFR part or section Current OMBwhere identified control No. and described

* * * * *

1.367(a)–3T . . . . . . . . . . . . . 1545–0026

* * * * *

2. Adding the following entry to thetable in numerical order to read as fol-lows:

§602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section Current OMBwhere identified control No. and described

* * * * *

1.367(a)–8 . . . . . . . . . . . . . . . 1545–1271

* * * * *

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

Approved May 13, 1998.

Donald C. Lubick,Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on June18, 1998, at 8:45 a.m., and published in the issue ofthe Federal Register for June 19, 1998, 63 F.R.33550)

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted applicable federal long-term rate isset forth for the month of July 1998. See Rev. Rul.98–33, page 26.

Section 412.—Minimum FundingStandards

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 467.—Certain Paymentsfor the Use of Property orServices

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page26.

Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 482.—Allocation ofIncome and Deductions AmongTaxpayers

Federal short-term, mid-term, and long-termrates are set forth for the month of July 1998. SeeRev. Rul. 98–33, page 26.

Section 483.—Interest onCertain Deferred Payments

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 642.—Special Rules forCredits and Deductions

Federal short-term, mid-term, and long-termrates are set forth for the month of July 1998. SeeRev. Rul. 98–33, page 26.

Section 807.—Rules for CertainReserves

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 1998. See Rev. Rul. 98–33, page 26.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate, andthe long-term exempt rate. For purposesof sections 1274, 1288, 382, and othersections of the Code, tables set forth therates for July 1998.

July 6, 1998 26 1998–27 I.R.B.