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following events occur simultaneously at the
effective time of the transaction: All of the
assets and liabilities of Z, the combining
entity and sole member of the transferor unit,
become the assets and liabilities of Y, the
combining entity and sole member of the
transferee unit, and Z ceases its separate legal
existence for all purposes. Accordingly, the
transaction qualifies as a statutory merger or
consolidation for purposes of section
368(a)(1)(A).
Example 9. Transaction effected pursuant
to foreign statutes. (i) Z and Y are entities
organized under the laws of Country Q and
classified as corporations for Federal tax
purposes. Z and Y combine. Pursuant to
statutes of Country Q the following events
occur simultaneously: All of the assets and
liabilities of Z become the assets and
liabilities of Y and Z’s separate legal
existence ceases for all purposes.
(ii) The transaction satisfies the
requirements of paragraphs (b)(1)(ii) of this
section because the transaction is effected
pursuant to statutes of Country Q and the
following events occur simultaneously at the
effective time of the transaction: All of the
assets and liabilities of Z, the combining
entity of the transferor unit, become the
assets and liabilities of Y, the combining
entity and sole member of the transferee unit,
and Z ceases its separate legal existence for
all purposes. Accordingly, the transaction
qualifies as a statutory merger or
consolidation for purposes of section
368(a)(1)(A).
(iv) Effective dates. This paragraph
(b)(1) applies to transactions occurring
after the date these regulations are
published as final regulations in the
Federal Register. For rules regarding
statutory mergers or consolidations on
or after January 24, 2003, and before
these regulations are published as final
regulations in the Federal Register, see
§ 1.368–2T(b)(1). For rules regarding
statutory mergers or consolidations
before January 24, 2003, see § 1.368–
2(b)(1) as it applies before January 24,
2003 (see 26 CFR part 1, revised April
1, 2002).
*
*
*
*
*
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 05–202 Filed 1–4–05; 8:45 am]
BILLING CODE 4830–01–M
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Internal Revenue Service
attend the hearing, Guy Traynor, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
26 CFR Part 1
Paperwork Reduction Act
DEPARTMENT OF THE TREASURY
[REG–125628–01]
RIN 1545–BA65
Revision of Income Tax Regulations
Under Sections 358, 367, 884, and
6038B Dealing With Statutory Mergers
or Consolidations Under Section
368(a)(1)(A) Involving One or More
Foreign Corporations
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
SUMMARY: This document contains
proposed regulations amending the
income tax regulations under various
provisions of the Internal Revenue Code
(Code) to account for statutory mergers
and consolidations under section
368(a)(1)(A) (including reorganizations
described in section 368(a)(2)(D) and
(E)) involving one or more foreign
corporations. These proposed
regulations are issued concurrently with
proposed regulations (REG–117969–00)
that would amend the definition of a
reorganization under section
368(a)(1)(A) to include certain statutory
mergers or consolidations effected
pursuant to foreign law.
DATES: Written and electronic comments
and requests to speak and outlines of
topics to be discussed at the public
hearing scheduled for May 19, 2005, at
10 a.m. must be received by April 28,
2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–125628–01), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–125628–
01), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC, or sent
electronically, via the IRS Internet site
at: http://www.irs.gov/regs or via the
Federal eRulemaking Portal at http://
www.regulations.gov (IRS and REG–
125628–01). The public hearing will be
held in the Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Robert W. Lorence, Jr., (202) 622–3860;
concerning submissions, the hearing, or
placement on the building access list to
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The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:T:SP
Washington, DC 20224. Comments on
the collection of information should be
received no later than March 7, 2005.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the IRS,
including whether the information will
have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
can be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collection of information in this
proposed regulation is in § 1.367(a)–
3(d)(2)(vi)(B)(1)(ii). This information is
required to inform the IRS of a domestic
corporation that is claiming an
exception from the application of
section 367(a) and (d) to certain
transfers of property to a foreign
corporation that is re-transferred by the
foreign corporation to a domestic
corporation controlled by the foreign
corporation. The information is in the
form of a statement attached to the
domestic corporation’s U.S. income tax
return for the year of the transfer
certifying that if the foreign corporation
disposes of the stock of the domestic
controlled corporation with a tax
avoidance purpose, the domestic
corporation will file an income tax
return (or amended return, as the case
may be) reporting gain. The collection of
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information is mandatory. The likely
respondents are domestic corporations.
Estimated total annual reporting
burden: 50 hours.
Estimated average annual burden
hours per respondent: 1 hour.
Estimated number of respondents: 50.
Estimated annual frequency of
responses: on occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
Section 368(a)(1)(A) defines a
reorganization to include a statutory
merger or consolidation (A
reorganization). For transactions
completed before January 24, 2003,
regulations under section 368(a)(1)(A)
provided that a reorganization was a
merger or consolidation effected
pursuant to the corporation law of the
United States or a State or Territory or
the District of Columbia. See 1.368–
2(b)(1), as in effect before January 24,
2003.
On January 24, 2003, the IRS and the
Treasury Department issued proposed
regulations (REG–126485–01, 2003–9
I.R.B. 542, 66 FR 57400) and temporary
regulations (TD 9038, 2003–9 I.R.B. 524,
68 FR 3384), revising the definition of
a statutory merger or consolidation. The
proposed and temporary regulations
define a statutory merger or
consolidation in a manner intended to
ensure that those transactions are not
divisive in nature. Accordingly, the
regulations generally require that all the
assets and liabilities of the merged
corporation (other than assets
distributed or liabilities discharged in
the transaction) are transferred to the
acquiring corporation and that the
separate legal identity of the merged
corporation ceases to exist in the
transaction.
Pursuant to a notice of proposed
rulemaking (proposed section 368
regulations) published
contemporaneously with this document,
the IRS and Treasury are proposing
further revisions to the definition of a
statutory merger or consolidation to take
into account those transactions effected
pursuant to foreign law. The proposed
section 368 regulations amend the 2003
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proposed regulations and provide that
an A reorganization may occur, if
certain conditions are satisfied,
pursuant to the laws of a foreign
jurisdiction, including a U.S.
possession.
In light of this change, this document
contains proposed amendments to the
regulations under certain international
Code provisions (sections 367, 884, and
6038B) to account for statutory mergers
and consolidations involving one or
more foreign corporations. Current
international tax regulations are
premised on an A reorganization being
limited to a statutory merger or
consolidation involving domestic
corporations effected pursuant to
domestic law. See, e.g., Rev. Rul. 57–
465 (1957–2 C.B. 250). As a result,
conforming changes must be made to
these international tax regulations to
ensure that they apply appropriately to
statutory mergers and consolidations
effected pursuant to foreign law. The
proposed regulations also modify the
section 367(a) and (b) regulations to
address several other related issues.
Explanation of Provisions
A. Basis and Holding Period Rules
The proposed regulations provide
basis and holding period rules for
certain transactions involving foreign
corporations with section 1248
shareholders in order to preserve
relevant section 1248 amounts. A
section 1248 shareholder is a U.S.
person that satisfies the ownership
requirements of section 1248(a) with
respect to a foreign corporation. Section
1248(a) applies to a U.S. person that
owns stock (directly, indirectly, or
constructively) with 10 percent or more
of the voting power in the foreign
corporation at any time during the 5year period ending on the sale or
exchange of the stock when the foreign
corporation was a controlled foreign
corporation (CFC). Gain recognized by a
section 1248 shareholder on the sale or
exchange of stock of the foreign
corporation is included in gross income
as a dividend to the extent of the
earnings and profits of the foreign
corporation that are attributable to the
stock sold or exchanged and that were
accumulated while the stock was held
by the U.S. person when the foreign
corporation was a CFC (the section 1248
amount).
The IRS and Treasury believe that it
is important to preserve section 1248
amounts in certain nonrecognition
exchanges of foreign corporation stock.
Preservation of section 1248 amounts is
a function of the holding period and
basis in the stock of the foreign
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corporation being exchanged. One of the
underlying policies of section 367(b) is
the preservation of the potential
application of section 1248 in
connection with certain nonrecognition
exchanges. H. Rep. No. 94–658, 94th
Cong., 1st Sess., at 242 (Nov. 12, 1975).
These proposed regulations provide
basis and holding period rules to
preserve section 1248 amounts in the
context of certain section 354 exchanges
and certain triangular reorganizations.
The basis and holding period rules of
the proposed regulations also apply to a
foreign corporate shareholder of a
foreign corporation that is a party to the
reorganization, provided that the foreign
corporate shareholder has at least one
U.S. person that is a section 1248
shareholder with respect to the foreign
corporate shareholder and to the foreign
corporation. This rule is necessary to
preserve application of section 964(e) to
the foreign corporate shareholder with
respect to lower-tier foreign
corporations. Under section 964(e), if a
CFC sells or exchanges stock in another
foreign corporation, gain recognized on
the sale or exchange is included in the
income of the CFC as a dividend to the
same extent that it would have been
included under section 1248(a) if the
CFC were a U.S. person. Such dividend
income may be treated as subpart F
income that is included in the income
of U.S. shareholders of the CFC.
1. Section 354 Exchanges
The proposed regulations apply to
certain section 354 exchanges involving
foreign corporations, including
exchanges of multiple blocks of stock.
The proposed regulations preserve the
bases and holding periods in different
blocks of stock in certain foreign target
corporations by requiring the
exchanging shareholder to establish the
particular shares of stock that were
received in exchange for shares of a
particular block of target stock. If the
exchanging shareholder cannot establish
the particular shares of target stock that
were received for shares of a particular
block of stock, then the shareholder
must designate which shares of stock
were received in exchange for shares of
a particular block of stock, provided that
the designation is consistent with the
terms of the exchange. These tracing
methods are used to determine the
resulting tax consequences when stock
received in a nonrecognition exchange
is subsequently sold or otherwise
exchanged. If the exchanging
shareholder cannot establish, and does
not designate, the particular shares
received, the shareholder is treated as
selling or otherwise exchanging a share
received in a nonrecognition exchange
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for a share that was purchased or
acquired at the earliest time.
The IRS and Treasury recently
published proposed section 358
regulations (REG–116564–03) that
determine the basis of stock or securities
received in section 354 exchanges
(proposed section 358 regulations). The
proposed section 358 regulations
generally provide that the basis of each
share of stock or security received in an
exchange to which section 354, 355, or
356 applies will be the same as the basis
of the share of stock or security
exchanged therefor. For these purposes,
the determination of which share of
stock or security is received in exchange
for a particular share of stock or security
is made in accordance with the terms of
the exchange or distribution.
These proposed regulations apply the
principles of the proposed section 358
regulations to certain exchanges of stock
of a foreign corporation by either a
section 1248 shareholder, or a foreign
corporate shareholder where at least one
U.S. person is a section 1248
shareholder with respect to such foreign
corporate shareholder and to the foreign
corporation whose shares are exchanged
(collectively and individually, section
367(b) shareholder), to ensure the
preservation of section 1248 amounts.
The proposed regulations also include
specific guidance on the shareholder’s
holding period in the stock received in
the section 354 exchange. The proposed
regulations do not, however, apply to
distributions described in section 355.
Consistent with the proposed section
358 regulations, the proposed
regulations hereunder would not apply
to section 351 exchanges or to
exchanges to which both section 351
and section 354 (or section 356) apply,
if, in addition to stock being received,
other property is received or liabilities
are assumed. This limitation is intended
to prevent a conflict between the rules
for determining basis in a section 351
exchange (including the application of
section 357(c)) and the rules proposed
in this document. The IRS and Treasury
are considering approaches for the
preservation of section 1248 amounts in
section 351 transactions in which
liabilities are assumed or other property
is received, and comments are requested
in this regard.
In addition, the IRS and Treasury are
considering developing specific rules
for situations in which stock of the
foreign acquiring corporation is not
issued in the exchange (for example,
when the exchanging shareholder owns
all the stock of the foreign acquiring
corporation). One possible approach
may be for each existing share of stock
in that corporation to be divided into
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portions to account for the different
basis and holding periods of the stock
of the foreign acquiring corporation and
the stock of the acquired corporation in
order to preserve section 1248 amounts.
Comments are requested regarding this
approach or possible alternative
approaches.
2. Triangular Reorganizations
The proposed regulations provide
special basis and holding period rules
for triangular reorganizations where the
merging or surviving corporation is a
foreign corporation with a section
367(b) shareholder. These rules apply to
reorganizations described in section
368(a)(1)(A) and (a)(2)(D) (forward
triangular merger) and to parenthetical
section 368(a)(1)(C) reorganizations. In
these transactions, the surviving
corporation (S) acquires substantially all
the assets of the acquired corporation
(T), and the T shareholders exchange
their T stock for stock of the corporation
(P) that is in control (within the
meaning of section 368(c)) of S. These
rules also apply to reorganizations
described in section 368(a)(1)(A) and
(a)(2)(E) (reverse triangular merger). In a
reverse triangular merger, S, a
controlled subsidiary of P, merges into
T, the surviving corporation, and the T
shareholders exchange their T stock for
stock of P.
Under current regulations, in a
forward triangular merger or a
parenthetical C reorganization, P’s basis
in its S stock is adjusted as if P had
acquired the T assets directly from T in
a section 362(b) exchange and then had
transferred the T assets to S in a
transaction in which P’s basis in S stock
is determined under section 358. See
§ 1.358–6(c)(1) (commonly referred to as
the ‘‘over-the-top’’ basis rules). Under
current regulations, in a reverse
triangular merger, P’s basis in the T
stock it receives immediately after the
transaction is equal to its basis in its S
stock immediately before the transaction
adjusted as if T had merged into S in a
forward triangular merger and the overthe-top basis rules had applied. See
§ 1.358–6(c)(2). If a reverse triangular
merger also qualifies as a section 351
transfer or a section 368(a)(1)(B)
reorganization, P can determine its basis
in its S stock either by using the overthe-top basis rules as described in the
prior sentence or by treating P as if it
had acquired the T stock from the
former shareholders of T in a
transaction in which basis is determined
under section 362(b) (carryover stock
basis).
The IRS and Treasury are concerned
that, in certain exchanges involving
foreign corporations, application of the
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751
over-the-top basis rules would not
properly preserve the section 1248 or
964(e) amounts with respect to the stock
of S or T. The proposed regulations
provide that, in determining the stock
basis of the surviving corporation in
certain triangular reorganizations,
outside stock basis will be used instead
of inside asset basis pursuant to § 1.358–
6(c). For example, in the case of a
forward triangular merger (or a
parenthetical C reorganization), where P
is a domestic corporation, S is a foreign
corporation, T is a foreign corporation,
and T has a section 1248 shareholder,
the basis and holding period in the T
stock, not the T assets, are used to
determine P’s basis in the S stock. The
same rules apply to certain reverse
triangular mergers, where S merges into
T with T surviving. In that case, P’s
basis in the T stock immediately after
the transaction would reflect the basis
and holding period of the T stock
instead of the T assets.
Under this stock basis approach for
triangular reorganizations, the proposed
regulations provide for a divided basis
and holding period in each share of
stock in the surviving corporation to
reflect the relevant section 1248
amounts in the S stock and T stock. In
particular, each share of S stock in a
forward triangular merger, and each
share of T stock in a reverse triangular
merger, where P is a section 367(b)
shareholder immediately after the
transaction, is divided into portions
reflecting the basis and holding period
of the S stock and the T stock before the
transaction. However, the proposed
regulations contain a de minimis
exception to this rule. Under this
exception, if the value of the S stock
immediately before the transaction is de
minimis (for example, where S is a
corporation formed to facilitate the
transaction), then each share of the
surviving corporation is not divided;
instead, the basis of the S stock is added
to the basis of the stock of the surviving
corporation held by P. The value of the
S stock would be de minimis for this
purpose if it is less than 1 percent of the
value of the surviving corporation (S or
T) immediately after the transaction.
If there are two or more blocks of
stock in T or S held by a section 367(b)
shareholder immediately before the
transaction, then each share of the
surviving corporation (S or T) is further
divided to account for each block of
stock. If two or more blocks of stock are
held by one or more shareholders that
are not section 367(b) shareholders, then
shares in these blocks are aggregated
into one divided portion for basis
purposes. If none of the S or T
shareholders is a section 367(b)
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shareholder, then the over-the-top basis
rules of § 1.358–6 apply instead of the
rules in these proposed regulations.
The proposed regulations provide
special rules when stock of the
surviving corporation has a divided
basis and holding period. Earnings and
profits accumulated prior to the
reorganization are attributed to a
divided portion of a share of stock based
on the block of stock whose basis and
holding period the divided portion
reflects. Post-reorganization earnings
and profits are attributed to each
divided share of stock pursuant to
section 1248 and the regulations
thereunder. The amount of earnings and
profits attributed to a divided share of
stock pursuant to section 1248 are
further attributed to a divided portion of
such share of stock based on its fair
market value in relation to the other
divided portions. Finally, shares of
stock are no longer divided into separate
portions if section 1248 or 964(e)
becomes inapplicable to a subsequent
sale or exchange of the stock.
The special basis rules in these
proposed regulations apply to all
triangular reorganizations where T has
at least one section 367(b) shareholder,
even if such shareholders own less than
a controlling interest in T. The IRS and
Treasury are considering whether the
current basis rules of § 1.358–6 should
apply in cases where section 367(b)
shareholders do not own a substantial
percentage of the stock of T, or whether
taxpayers should be permitted to elect
to apply the current basis rules under
§ 1.358–6 to determine P’s basis in the
stock of the surviving corporation (S or
T), provided that all section 367(b)
shareholders of T include in income the
section 1248 amounts with respect to
the stock exchanged. Comments are
requested in this regard.
The use of stock basis to determine
P’s basis in the surviving corporation
also presents administrative concerns
when a portion of the stock of T is
widely held. In the case of a
reorganization described in section
368(a)(1)(B), which presents similar
issues, Rev. Proc. 81–70 (1980–2 C.B.
729) provides that statistical sampling
techniques, if appropriate, are permitted
to determine the basis of stock received
by the acquiring corporation. In this
regard, the IRS and Treasury recently
have requested comments whether Rev.
Proc. 81–70 should be revised to reflect
changes in the marketplace since its
publication. See Notice 2004–44 (2004–
28 I.R.B. 32). Comments are requested
on expanding this guidance to apply
under the proposed regulations, for
example in cases where blocks of T
stock are held by persons that are not
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section 367(b) shareholders and such
shares are aggregated into a single
divided portion for basis and holding
period purposes.
B. Exceptions to the Application of
Section 367(a)
Under section 367(a), a U.S. person
recognizes gain, but not loss, on the
transfer of property to a foreign
corporation in an exchange described in
section 351, 354, 356, or 361, unless an
exception applies. Section 367(a),
however, does not apply to a section
354 exchange by a U.S. person of: (1)
Stock of a foreign corporation in a
section 368(a)(1)(E) reorganization; or
(2) stock of a domestic or foreign
corporation for stock of a foreign
corporation in an asset reorganization
described in section 368(a)(1)(C), (D), or
(F) that is not treated as an indirect
stock transfer under § 1.367(a)–3(a).
The proposed regulations amend
§ 1.367(a)-3(a) so that this exception to
the application of section 367(a) also
applies to A reorganizations (including
forward and reverse triangular mergers).
In addition, the proposed regulations
clarify that § 1.367(a)-3(a) applies to
exchanges described in section 356, as
well as in section 354. Section 356
applies to an exchange that would
qualify as a section 354 exchange except
for the fact that money or other property
is received in the exchange.
Taxpayers have questioned why the
exception to the application of section
367(a) in § 1.367(a)-3(a) includes
exchanges of stock but not exchanges of
securities in section 368(a)(1)(E)
reorganizations and certain asset
reorganizations. The IRS and Treasury
believe that it is appropriate to provide
comparable treatment for exchanges of
securities in this context. Accordingly,
Notice 2005–6 (2005–5 IRB), published
contemporaneously with these proposed
regulations, announces that the IRS and
Treasury intend to amend § 1.367(a)-3(a)
to apply the exception from section
367(a) to exchanges of stock or
securities. Notice 2005–6 provides that
the applicable date of the amendment
will be January 5, 2005.
The proposed regulations also provide
rules concerning the application of
section 367(a) to reverse triangular
mergers, where stock of P, a corporation
that controls the merging corporation S,
is treated as transferred (along with any
other property of S) to the surviving
corporation T in a section 361 transfer.
If S is a domestic corporation and T is
a foreign corporation, section 367(a)
applies to the transfer by S of the P
stock to T, unless an exception applies.
The IRS and Treasury believe that, if
the stock of P is provided to S pursuant
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to the plan of reorganization, the section
361 transfer of the P stock from S to T
should not be subject to section 367(a),
and the proposed regulations so
provide. If P does not provide its stock
to S pursuant to the plan of
reorganization, then the P stock will be
treated as property of S and the transfer
of such stock will be subject to section
367(a).
The IRS and Treasury intend to
amend the regulations under section
6038B to conform with the changes
made in these regulations.
C. Concurrent Application of Section
367(a) and (b)
The proposed regulations modify the
current application of section 367(a) and
(b) to transactions that require the
inclusion in income of the all earnings
and profits amount under section
367(b). Section 1.367(a)-3(b)(2) provides
rules for the concurrent application of
section 367(a) and (b) to transfers of
stock of a foreign corporation. This may
occur, for example, when a U.S.
shareholder exchanges stock of a foreign
corporation (foreign acquired
corporation) for stock of another foreign
corporation (foreign acquiring
corporation). See § 1.367(a)-3(b)(1). It
may also occur when an acquiring
corporation (foreign or domestic)
acquires the assets of a foreign acquired
corporation, and the U.S. shareholder
exchanges stock of the foreign acquired
corporation for stock of the foreign
parent of the acquiring corporation in a
triangular reorganization.
The U.S. person’s exchange of stock of
the foreign acquired corporation for
stock of either the foreign acquiring
corporation or the foreign parent is
subject to section 367(a). See § 1.367(a)3(b) and (d). If the exchanging U.S.
shareholder owns 5 percent or more (by
vote or value) of the stock of the foreign
acquiring corporation or the foreign
parent immediately after the exchange,
the shareholder recognizes gain, if any,
under section 367(a), unless the
shareholder enters into a gain
recognition agreement as provided in
§ 1.367(a)-8. If the exchanging
shareholder is not a 5-percent
shareholder, then the exchanging
shareholder does not recognize gain, if
any, on the exchange.
The U.S. shareholder’s exchange
described above also may be subject to
section 367(b). If the exchanging U.S.
shareholder is a section 1248
shareholder of the foreign acquired
corporation, and the stock of the foreign
acquiring corporation (or its foreign
parent corporation) is not stock in a
corporation that is a CFC as to which
the U.S. shareholder is a section 1248
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shareholder immediately after the
exchange, then the exchanging
shareholder must include in income the
section 1248 amount with respect to the
stock exchanged. See § 1.367(b)–4. If,
instead, a domestic acquiring
corporation acquires the assets of a
foreign acquired corporation, and the
U.S. shareholder exchanges stock of the
foreign acquired corporation for stock of
the foreign parent of the acquiring
corporation in a triangular
reorganization, then the exchanging
shareholder must include in income the
all earnings and profits amount with
respect to the stock of the acquired
corporation. See § 1.367(b)–3. Unlike
the section 1248 amount, the all
earnings and profits amount is not
limited by the shareholder’s gain
inherent in the stock of the foreign
acquired corporation.
In cases where section 367(a) and (b)
apply concurrently to a transaction,
existing § 1.367(a)–3(b)(2) provides that
section 367(b) will not apply if the
transfer is taxable under section 367(a).
If the transfer is taxable under section
367(a), the exchanging U.S. shareholder
will recognize gain inherent in the
exchanged stock (subject to
recharacterization as dividend income
under section 1248). If the transfer is not
taxable under section 367(a), because
the exchanging U.S. shareholder either
is not a 5-percent shareholder or enters
into a gain recognition agreement, then
section 367(b) applies and the exchange
is subject to either § 1.367(b)–3 or
1.367(b)–4 at the shareholder level.
Questions with respect to the
concurrent application of section 367(a)
and (b) have arisen in situations that
otherwise would require inclusion of
the all earnings and profits amount
under § 1.367(b)–3. If the all earnings
and profits amount is greater than the
section 367(a) gain with respect to the
stock of the foreign acquired
corporation, under current law the
exchanging shareholder effectively may
elect to be taxed on the lesser amount
of gain under section 367(a) simply by
failing to file a gain recognition
agreement. In that case, section 367(b)
would not apply and the shareholder
would avoid inclusion in income of the
greater all earnings and profits amount.
The ability to elect to recognize the
lesser gain inherent in the stock
exchanged in such cases is inconsistent
with the policies of section 367(b) that
apply to inbound transactions,
including preventing conversion of tax
deferral into tax forgiveness and
ensuring that the domestic acquiring
corporation’s section 381 carryover
basis reflects an after-tax amount.
Accordingly, the IRS and Treasury
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believe that the all earnings and profits
amount provisions under § 1.367(b)–3
should not operate electively in these
cases. The proposed regulations require
that, for exchanges subject to § 1.367(b)–
3 and section 367(a), section 367(b)
would apply before section 367(a). In
that case, inclusion of the all earnings
and profits amount would increase the
exchanging shareholder’s stock basis for
purposes of computing the
shareholder’s gain under section 367(a).
Thus, if the all earnings and profits
amount exceeds the inherent gain in the
exchanged stock, gain is not recognized
under section 367(a). If the transaction
does not involve inclusion of the all
earnings and profits amount (for
example, if § 1.367(b)–4 applies), the
existing ordering rules continue to
apply.
D. Parenthetical Section 368(a)(1)(B)
Reorganizations
In a parenthetical reorganization
under section 368(a)(1)(B), if a U.S.
shareholder exchanges stock of an
acquired corporation for voting stock of
a foreign corporation that controls
(within the meaning of section 368(c))
the acquiring corporation, the U.S.
shareholder is treated as making an
indirect transfer of stock of the acquired
corporation to the foreign controlling
corporation in a transfer subject to
section 367(a). See § 1.367(a)–
3(d)(1)(iii). This result occurs even if the
acquiring corporation is domestic. If the
U.S. shareholder owns five percent or
more (by vote or value) of the stock of
the foreign controlling corporation, the
shareholder must recognize gain
inherent in the exchanged stock, unless
a gain recognition agreement is filed. A
gain recognition agreement filed with
respect to the transfer may be triggered
(and gain on the initial transfer of stock
will be recognized) if the foreign
controlling corporation disposes of the
stock of the acquiring corporation, or
the acquiring corporation disposes of
the stock of the acquired corporation,
within 5 years of the initial transfer. See
§ 1.367(a)–3(d)(2)(ii).
The proposed regulations revise the
indirect stock transfer rules to include
triangular section 368(a)(1)(B)
reorganizations in which a U.S.
shareholder exchanges stock of the
acquired corporation for voting stock of
a domestic corporation that controls a
foreign acquiring corporation. In such a
case, the gain recognition agreement
may be triggered if the domestic
controlling corporation disposes of the
stock of the foreign acquiring
corporation, or the foreign acquiring
corporation disposes of the stock of the
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753
acquired corporation, within 5 years of
the initial transfer.
E. Transfers of Assets Following Certain
Asset Reorganizations
If a U.S. shareholder exchanges stock
or securities of an acquired corporation
for stock or securities of a foreign
acquiring corporation in a
reorganization described in section
368(a)(1)(C), and the foreign acquiring
corporation transfers all or part of the
assets of the acquired corporation to a
subsidiary controlled (within the
meaning of section 368(c)) by the
foreign acquiring corporation in a
transaction described in section
368(a)(2)(C), the U.S. shareholder is
treated, for purposes of section 367(a),
as transferring the stock of the acquired
corporation to the foreign acquiring
corporation to the extent of the assets
transferred to the controlled subsidiary.
§ 1.367(a)–3(d)(1)(v). Section
368(a)(2)(C) provides that a transaction
otherwise qualifying as a reorganization
under section 368(a)(1)(A), (B), (C), and
(G) will not be disqualified because all
or part of the assets or stock acquired in
the transaction are transferred to a
corporation controlled by the acquiring
corporation.
On August 16, 2004, the IRS and
Treasury issued proposed regulations
under § 1.368–2(k) that permit assets or
stock acquired in any reorganization
under section 368(a)(1) to be transferred
to a corporation controlled by the
acquiring corporation without
disqualifying the reorganization. Prior to
these proposed regulations, the IRS and
Treasury issued Rev. Rul. 2002–85
(2002–2 C.B. 986) which extended this
treatment to section 368(a)(1)(D)
reorganizations. Notice 2002–77 (2002–
2 C.B. 997) issued contemporaneously
with Rev. Rul. 2002–85, provided that
§ 1.367(a)–3(d)(1)(v) would be amended
to treat transactions described in Rev.
Rul. 2002–85 as indirect stock transfers,
if the transfer of assets by the acquiring
corporation to its controlled subsidiary
occurred pursuant to the plan of
reorganization.
The effect of the proposed regulations
under § 1.368–2(k) is to permit transfers
of assets or stock to a controlled
subsidiary in reorganizations not
specifically identified or mentioned in
section 368(a)(2)(C) (section 368(a)(1)(D)
and (F) reorganizations). The proposed
regulations amend the indirect stock
transfer rules to conform to the changes
in the section 368 regulations. As a
result, the proposed regulations provide
that the transfer of assets to a controlled
subsidiary subsequent to an asset
reorganization under section 368(a)(1)
would constitute an indirect transfer of
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stock, provided the transfer of assets by
the foreign acquiring corporation to its
controlled subsidiary occurs as part of
the same transaction.
F. Indirect Transfers Involving a Change
in Domestic or Foreign Status of
Acquired Corporation
As indicated above, under existing
§ 1.367(a)–3(d)(1)(v), a U.S. shareholder
of an acquired corporation is treated as
transferring the stock of the acquired
corporation to the foreign acquiring
corporation to the extent of the assets
transferred to the controlled subsidiary.
Thus, if the acquired corporation is
foreign, the U.S. shareholder is treated
as transferring stock of a foreign
corporation to the foreign acquiring
corporation in a transaction that is
subject to the § 1.367(a)–3(b) stock
transfer rules. If the acquired
corporation is domestic, the U.S.
shareholder is treated as transferring
stock of a domestic corporation to the
foreign acquiring corporation in a
transaction that is subject to § 1.367(a)–
3(c). This deemed transfer of domestic
stock prevails even if the controlled
subsidiary is foreign. Similar rules
apply to parenthetical C reorganizations.
Some commentators have suggested
that the determination of whether
domestic or foreign stock is deemed
transferred should be based on the
status of the controlled subsidiary,
rather than the status of the acquired
corporation. Under this approach, if the
acquired corporation were domestic and
the controlled subsidiary were foreign,
the U.S. shareholders would be deemed
to transfer foreign corporation stock
subject to § 1.367(a)–3(b), rather than
domestic corporation stock subject to
§ 1.367(a)–3(c). The IRS and Treasury
believe that, consistent with the
framework of the current regulations, it
is appropriate for the rules to continue
to apply based on the stock that is
owned and exchanged by the U.S.
person in the transaction (rather than on
the stock of the controlled subsidiary).
The IRS and Treasury are considering
the application of §§ 1.367(a)–3(b),
1.367(a)–3(c), and 1.367(a)–8 to
situations where the foreign acquiring
corporation transfers assets of the
acquired corporation to multiple
controlled subsidiaries (including both
domestic and foreign subsidiaries),
comments are requested in this regard.
G. Coordination of the Indirect Stock
Transfer Rules and the Asset Transfer
Rules
In the case of an indirect stock
transfer that also involves a transfer of
assets by a domestic corporation to a
foreign corporation, § 1.367(a)–
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3(d)(2)(vi) generally provides that
section 367(a) and (d) apply to the
transfer of assets prior to application of
the indirect stock transfer rules.
However, section 367(a) does not apply
to such transfers to the extent that the
foreign acquiring corporation transfers
the assets received in the asset transfer
to a domestic corporation controlled
(within the meaning of section 368(c))
by the foreign acquiring corporation in
a transfer described in section
368(a)(2)(C) or in a transfer described in
section 351, provided the domestic
transferee’s basis in the assets is no
greater than the basis that the domestic
acquired corporation had in such assets.
The initial asset transfer to the foreign
corporation is not subject to section
367(a) in such cases because the assets
re-transferred to the domestic
corporation remain subject to U.S.
corporate tax.
The IRS and Treasury are concerned
that asset reorganizations subject to this
coordination rule may be used to
facilitate corporate inversion
transactions. An inversion generally
involves a U.S. multinational
corporation reincorporating outside the
United States for tax purposes (either as
a foreign corporation or as a subsidiary
of a new foreign corporation). The IRS
and Treasury also are concerned that the
coordination rule might be used to
facilitate divisive transactions. The
proposed regulations address both of
these concerns by modifying the scope
of the coordination rule.
The revised coordination rule
operates as follows. Section 367(a) and
(d) generally apply to the transfer of
assets to a foreign corporation even if
the foreign corporation transfers all or
part of the assets received to a
controlled domestic corporation. This
general rule, however, is subject to two
exceptions which do not require income
recognition under section 367(a) and (d)
on the transfer of assets to the foreign
corporation to the extent that assets are
re-transferred to the domestic controlled
corporation.
The first exception applies if the
domestic acquired corporation is
controlled (within the meaning of
section 368(c)) by 5 or fewer domestic
corporations, appropriate basis
adjustments as provided in section
367(a)(5) are made to the stock of the
foreign acquiring corporation, and any
other conditions provided in regulations
under section 367(a)(5) are satisfied.
Although there currently are no
regulations under section 367(a)(5), this
exception will incorporate any
conditions or limitations in future
regulations once published.
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In cases where the first exception
does not apply, the second exception
applies if the following two conditions
are satisfied: (1) The indirect transfer of
stock of the domestic acquired
corporation satisfies the requirements of
§ 1.367(a)–3(c)(1)(i), (ii), and (iv), and
(c)(6); and (2) the domestic acquired
corporation attaches a statement
(described below) to its tax return for
the taxable year of the transfer.
The statement that the domestic
acquired corporation files must certify
that, if the foreign acquiring corporation
disposes of any stock of the domestic
controlled corporation with a principal
purpose of avoiding U.S. tax that would
have been imposed on the domestic
acquired corporation had it disposed of
the re-transferred assets, the domestic
acquired corporation will amend its
return for the year of the initial
transaction and recognize gain
(described below). The disposition of
stock is presumed to have a principal
purpose of tax avoidance if the
disposition occurs within 2 years of the
transfer. The presumption may be
rebutted, however, if the domestic
acquired corporation (or the foreign
acquiring corporation on its behalf)
demonstrates to the satisfaction of the
Commissioner that the transaction did
not have a principal purpose of tax
avoidance.
If the domestic acquired corporation
recognizes gain pursuant to the
statement, it is treated as if, immediately
prior to the exchange, it had transferred
the re-transferred assets, including any
intangible assets, directly to a domestic
corporation in exchange for stock of the
corporation in a transaction that is
treated as a section 351 exchange, and
immediately sold the stock to an
unrelated party at fair market value in
a sale in which it recognizes gain, if any,
but not loss. For purposes of this rule,
the deemed transfer to a domestic
corporation is treated as a section 351
exchange regardless of whether all the
requirements for nonrecognition under
section 351 are otherwise satisfied.
Treating the domestic acquired
corporation as recognizing gain on the
disposition of stock, rather than assets,
is intended to approximate the
consequences that would have resulted
had the domestic acquired corporation
transferred the assets to a corporation
and sold the stock received in such
transfer prior to the outbound
reorganization. In addition, this
treatment is consistent with other
provisions that address divisive
transactions. See, e.g., section 355(e)
and § 1.367(e)–(2)(b)(2)(iii).
The basis that the foreign acquiring
corporation has in the stock of the
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domestic controlled corporation is
increased by the amount of gain
recognized by the domestic acquired
corporation under these rules
immediately prior to its disposition;
however, the basis of the re-transferred
assets held by the domestic controlled
corporation will not be increased by
such gain. Finally, the anti-abuse
provision under § 1.367(d)–1T(g)(6) will
not apply to intangible property
included in the re-transferred assets.
H. Application of Section 367(b)
Regulations to Certain Triangular
Reorganizations
Section 367(b) applies to exchanges
under sections 332, 351, 354, 355, 356,
and 361 (except to the extent described
in section 367(a)(1)) in which the status
of a foreign corporation as a corporation
for tax purposes is necessary for
application of the relevant
nonrecognition provisions. Except as
provided in regulations, under section
367(b) a foreign corporation that is a
party to such an exchange is considered
to be a corporation for tax purposes, and
therefore the parties involved in the
transaction are eligible for
nonrecognition treatment.
Section 1.367(b)–4 applies to
acquisitions by a foreign corporation
(the foreign acquiring corporation) of
the stock or assets of another foreign
corporation (the foreign acquired
corporation) in certain nonrecognition
exchanges (a section 367(b) exchange).
Consistent with section 1248,
§ 1.367(b)–4(b)(1)(i) addresses
exchanges by a section 1248 shareholder
(or, in certain cases, a CFC shareholder
that has a section 1248 shareholder),
and generally requires such a
shareholder to include in income its
section 1248 amount as a result of a
section 367(b) exchange, if immediately
after the exchange (i) the stock received
in the exchange is not stock in a
corporation that is a controlled foreign
corporation as to which the section 1248
shareholder described above is a section
1248 shareholder, or (ii) the foreign
acquiring corporation or the foreign
acquired corporation (if any, such as in
a transaction described in section
368(a)(1)(B) or 351), is not a controlled
foreign corporation as to which the
section 1248 shareholder described
above is a section 1248 shareholder.
Therefore, in a triangular
reorganization (such as a triangular
reorganization described in section
368(a)(1)(C)) that is within the scope of
§ 1.367(b)–4, a section 367(b)
shareholder must include in income the
section 1248 amount if, for example, it
receives stock of a domestic corporation
in exchange for its stock in a controlled
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foreign corporation. This is the case
because, immediately after the
exchange, the section 367(b)
shareholder does not hold stock in a
corporation that is a controlled foreign
corporation as to which such
shareholder is a section 367(b)
shareholder.
Pursuant to the basis rules contained
in this proposed regulation under
§ 1.367(b)–13, the section 1248 amount
with respect to the stock of the foreign
acquired corporation that is exchanged
can be properly preserved in the stock
of a foreign corporation owned by a
domestic corporation when the section
367(b) shareholder receives stock of the
domestic corporation in a triangular
reorganization. Consequently, the
proposed regulations provide that a
section 367(b) shareholder receiving
stock of a domestic corporation in a
triangular reorganization is not required
to include in income the section 1248
amount under § 1.367(b)–4(b)(1)(i),
provided that the domestic corporation,
immediately after the exchange, is a
section 1248 shareholder of the
surviving corporation (or in the case of
a parenthetical section 368(a)(1)(B)
reorganization, of the acquired
corporation) that is itself a controlled
foreign corporation.
I. Application of Section 367(b)
Regulations to Certain Outbound
Reorganizations
If a domestic corporation is a section
1248 shareholder with respect to a
foreign corporation and transfers the
stock in such foreign corporation to
another foreign corporation in a section
361 transfer, the domestic corporation
must include in income the section
1248 amount, if any, with respect to the
stock of the transferred foreign
corporation. See section 1248(f)(1) and
§ 1.367(b)–4(b)(2)(ii), Example 4.
Taxpayers have commented that this
rule may result in income inclusions in
some cases where the section 1248
amount could be preserved, such that a
current inclusion may not be necessary
or appropriate. The IRS and Treasury
are considering the application of
section 367(a)(5) and section 1248(f)(1)
to such transactions, in conjunction
with § 1.367(b)–13 of these regulations,
to preserve section 1248 amounts, and
comments are requested in this regard.
The IRS and Treasury also are
considering, and request comments, on
situations in which there are multiple
shareholders (including minority
shareholders) of the domestic
corporation; multiple assets (including
appreciated and depreciated assets
being transferred as part of the section
361 transfer); and liabilities being
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755
assumed in connection with the
transaction.
J. Nonrecognition Transactions Under
the FIRPTA and PFIC Provisions
Section 897(a) generally treats gain or
loss from the disposition of a U.S. real
property interest by a nonresident alien
individual or a foreign corporation as
gain or loss that is effectively connected
with the conduct of a trade or business
within the United States. Sections
897(d) and (e) provide rules that apply
section 897 in the context of
distributions and nonrecognition
exchanges of U.S. real property
interests. Temporary regulations were
issued under sections 897(d) and (e)
providing guidance on the application
of section 897 to certain corporate
transactions involving U.S. real property
interests. See § 1.897–5T, 1.897–6T, and
Notice 89–85 (1989–2 C.B. 403). These
rules do not specifically address A
reorganizations because such
regulations were based on A
reorganizations being limited to
statutory mergers between domestic
corporations. The IRS and Treasury
intend to revise these regulations to
reflect A reorganizations and welcome
comments on revisions that are
necessary to apply these regulations to
A reorganizations, as well as comments
on other issues under the regulations.
Section 1291(f) provides authority to
issue regulations concerning the
exchange of stock in a passive foreign
investment company (PFIC) in a
nonrecognition transaction. Proposed
regulations were published in the
Federal Register (57 FR 11047) on April
1, 1992, providing rules for the
disposition of PFIC stock by U.S.
shareholders in nonrecognition
exchanges. See § 1.1291–6 of the
proposed regulations. The application of
these proposed regulations is based on
A reorganizations being limited to
statutory mergers between domestic
corporations. The IRS and Treasury
intend to revise these proposed
regulations to reflect A reorganizations
and welcome comments on revisions
that are necessary in this regard, as well
as comments on other issues under
these regulations.
Proposed Effective Date
Except as otherwise specified, these
regulations are proposed to apply to
transactions occurring after the date
these regulations are published as final
regulations in the Federal Register.
Special Analyses
The IRS and the Treasury Department
have determined that this notice of
proposed rulemaking is not a significant
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regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment pursuant to that
Order is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these
regulations, and that because this
regulation does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this
regulation will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are submitted timely to the IRS. The
IRS and Treasury Department
specifically request comments on the
clarity of the proposed regulations and
on how they can be made easier to
understand. All comments will be
available for public inspection and
copying.
A public hearing has been scheduled
for May 19, 2005, beginning at 10 a.m.
in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building
security procedures, visitors must enter
at the Constitution Avenue entrance. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT portion of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments must submit
written or electronic comments and an
outline of the topics to be discussed and
the time to be devoted to each topic (a
signed original and eight (8) copies) by
April 28, 2005. A period of 10 minutes
will be allotted to each person for
making comments. An agenda showing
the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the
agenda will be available free of charge
at the hearing.
Drafting Information
The principal author of these
regulations is Robert W. Lorence, Jr., of
the Office of Associate Chief Counsel
(International). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes. Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In section 1.358–1, paragraph
(a) is amended by adding a sentence at
the end of the paragraph to read as
follows:
§ 1.358–1
Basis to distributes.
(a) * * * In the case of certain section
354 or 356 exchanges of stock in a
foreign corporation, § 1.367(b)–13
applies instead of the rules of § 1.358–
2.
*
*
*
*
*
Par. 3. In § 1.358–6, paragraph (e) is
amended by adding a sentence at the
end of the paragraph to read as follows:
§ 1.358–6 Stock basis in certain triangular
reorganizations.
*
*
*
*
*
(e) * * * For certain triangular
reorganizations where the surviving
corporation (S or T) is foreign, see
§ 1.367(b)–13.
*
*
*
*
*
Par. 4. Section 1.367(a)–3 is amended
as follows:
1. In paragraph (a), remove the third
and fourth sentences, and add five
sentences in their place.
2. Revise paragraph (b)(2)(i).
3. Revise paragraph (c)(5)(vi).
4. In paragraph (d)(1), introductory
text, first sentence, add the
parenthetical ‘‘(or in a domestic
corporation in control of a foreign
acquiring corporation in a triangular
section 368(a)(1)(B) reorganization)’’
after the words ‘‘for stock or securities
in a foreign corporation’’.
5. In paragraph (d)(1), introductory
text, remove the last sentence and add
three sentences in its place.
6. In paragraph (d)(1)(i), remove the
last sentence and add a sentence in its
place.
7. In paragraph (d)(1)(ii), add a
sentence at the end of the paragraph.
8. Paragraph (d)(1)(iii) is revised.
9. In paragraph (d)(1)(iv), remove the
language ‘‘Example 7’’ and add
‘‘Example 8’’ in its place, and remove
‘‘Example 11’’ and add ‘‘Example 14’’ in
its place.
10. Revise paragraph (d)(1)(v).
11. Revise paragraphs (d)(2)(i) and (ii).
12. In paragraph (d)(2)(iv), last
sentence, remove the language
‘‘Example 4’’ and add ‘‘Examples 5 and
5A’’ in its place.
13. Revise paragraph (d)(2)(v)(C).
14. Redesignate paragraph (d)(2)(v)(D)
as paragraph (d)(2)(v)(F).
15. Add new paragraphs (d)(2)(v)(D)
and (E).
16. Revise paragraph (d)(2)(vi).
17. In paragraph (d)(3), redesignate
the examples as follows and add the
following new examples:
Redesignate
As
Add
Example 12 .........................................................................
Example 16 ........................................................................
Example 15.
Examples 11 and 11A ........................................................
Examples 14 and 14A .......................................................
Examples 10 and 10A ........................................................
Examples 13 and 13A .......................................................
Example 9 ...........................................................................
Example 12 ........................................................................
Examples 10 and 11.
Example 8 ...........................................................................
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Example 9 ..........................................................................
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Redesignate
As
Add
Examples 7, 7A, 7B, and 7C ..............................................
Examples 8, 8A, 8B, and 8C .............................................
Examples 6 and 6A ............................................................
Examples 7 and 7A ...........................................................
Examples 5, 5A, and 5B ....................................................
Examples 6, 6A, and 6B ....................................................
Examples 6C and 6D.
Example 4 ...........................................................................
Example 5 ..........................................................................
Example 5A.
Example 3 ...........................................................................
Example 4 ..........................................................................
Example 2 ...........................................................................
Example 3 ..........................................................................
Example 2.
18. In paragraph (d)(3), newly
designated Example 6A, paragraph (i),
the first and last sentences are revised.
19. In paragraph (d)(3), newly
designated Example 6B and Example 9
are revised.
20. In paragraph (d)(3), for each of the
newly designated Examples listed in the
first column, replace the language in the
second column with the language in the
third column:
Redesignated examples
Remove
Example 6A, paragraph (i), first sentence ........................................................................
Example 5 ............................................
Example 6.
Example 7, paragraph (i) ..................................................................................................
Example 5 ............................................
Example 6.
Example 7A, paragraph (i) and paragraph (ii), penultimate sentence .............................
Example 6 ............................................
Example 7.
Example 8, paragraph (i) ..................................................................................................
Example 5 ............................................
Example 6.
Example 8A, paragraph (i) ...............................................................................................
Example 7 ............................................
Example 8.
Example 8B, paragraph (i) ...............................................................................................
Example 7 ............................................
Example 8.
Example 8C, paragraph (i) ...............................................................................................
Example 7 ............................................
Example 8.
Example 12, paragraph (i), third sentence .......................................................................
Example 9 ............................................
Example 12.
Example 13A, paragraph (i) and paragraph (ii), first sentence ........................................
Example 10 ..........................................
Example 13.
Example 14A, paragraph (i) .............................................................................................
Example 11 ..........................................
Example 14.
22. In paragraph (e)(1), remove the
first sentence and add two sentences in
its place.
The revisions and additions are as
follows:
§ 1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*
*
*
*
*
(a) * * * However, if, in an exchange
described in section 354 or 356, a U.S.
person exchanges stock of a foreign
corporation in a reorganization
described in section 368(a)(1)(E), or a
U.S. person exchanges stock of a
domestic or foreign corporation for
stock of a foreign corporation pursuant
to an asset reorganization that is not
treated as an indirect stock transfer
under paragraph (d) of this section, such
section 354 or 356 exchange is not a
transfer to a foreign corporation subject
to section 367(a). See paragraph (d)(3),
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Example 16, of this section. For
purposes of this section, an asset
reorganization is defined as a
reorganization described in section
368(a)(1) involving a transfer of assets
under section 361. If, in a transfer
described in section 361, a domestic
merging corporation transfers stock of a
controlling corporation to a foreign
surviving corporation in a
reorganization described in sections
368(a)(1)(A) and (a)(2)(E), such section
361 transfer is not subject to section
367(a) if the stock of the controlling
corporation is provided to the merging
corporation by the controlling
corporation pursuant to the plan of
reorganization; a section 361 transfer of
other property, including stock of the
controlling corporation not provided by
the controlling corporation pursuant to
the plan of reorganization, by the
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domestic merging corporation to the
foreign surviving corporation pursuant
to such a reorganization is subject to
section 367(a). For special basis and
holding period rules involving foreign
corporations that are parties to certain
reorganizations under section 368(a)(1),
see § 1.367(b)–13. * * *
(b) * * *
(2) * * *
(i) In general. A transfer of foreign
stock or securities described in section
367(a) and the regulations thereunder as
well as in section 367(b) and the
regulations thereunder shall be subject
concurrently to sections 367(a) and (b)
and the regulations thereunder, except
as provided in paragraph (b)(2)(i)(A) or
(B) of this section. See paragraph (d)(3),
Example 11, of this section.
(A) If a foreign corporation transfers
assets to a domestic corporation in a
transaction to which § 1.367(b)–3(a) and
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(b) and the indirect stock transfer rules
of paragraph (d) of this section apply,
then the section 367(b) rules shall apply
prior to the section 367(a) rules. See
paragraph (d)(3), Example 15, of this
section. This paragraph (b)(2)(i)(A)
applies only to transactions occurring
after the date these regulations are
published as final regulations in the
Federal Register.
(B) Except as provided in paragraph
(b)(2)(i)(A) of this section, section 367(b)
and the regulations thereunder shall not
apply if the foreign corporation is not
treated as a corporation under section
367(a)(1). See paragraph (d)(3), Example
14, of this section.
*
*
*
*
*
(c) * * *
(5) * * *
(vi) Transferee foreign corporation.
Except as provided in paragraph
(d)(1)(iii)(B) of this section, the
transferee foreign corporation shall be
the foreign corporation that issues stock
or securities to the U.S. person in the
exchange.
*
*
*
*
*
(d) * * *
(1) * * * For examples of the
concurrent application of the indirect
stock transfer rules under section 367(a)
and the rules of section 367(b), see
paragraph (d)(3), Examples 14 and 15 of
this section. For purposes of this
paragraph (d), if a corporation acquiring
assets in a reorganization described in
section 368(a)(1) transfers all or a
portion of such assets to a corporation
controlled (within the meaning of
section 368(c)) by the acquiring
corporation as part of the same
transaction, the subsequent transfer of
assets to the controlled corporation will
be referred to as a controlled asset
transfer. See section 368(a)(2)(C).
(i) * * * See paragraph (d)(3),
Example 1 of this section for an example
of a reorganization described in sections
368(a)(1)(A) and (a)(2)(D) involving
domestic acquired and acquiring
corporations, and see paragraph (d)(3),
Example 10 of this section for an
example involving a domestic acquired
corporation and a foreign acquiring
corporation.
(ii) * * * See paragraph (d)(3),
Example 2 of this section for an example
of a reorganization described in sections
368(a)(1)(A) and (a)(2)(E) involving
domestic acquired and acquiring
corporations, and see paragraph (d)(3),
Example 11 of this section for an
example involving a domestic acquired
corporation and a foreign acquiring
corporation.
(iii) Triangular reorganizations
described in section 368(a)(1)(B)—(A) A
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U.S. person exchanges stock of the
acquired corporation for voting stock of
a foreign corporation that is in control
(as defined in section 368(c)) of the
acquiring corporation in a
reorganization described in section
368(a)(1)(B). See paragraph (d)(3),
Example 5 of this section.
(B) A U.S. person exchanges stock of
the acquired corporation for voting
stock of a domestic corporation that is
in control (as defined in section 368(c))
of a foreign acquiring corporation in a
reorganization described in section
368(a)(1)(B).
(1) For purposes of paragraphs (b) and
(c) of this section, the foreign acquiring
corporation is considered to be the
transferee foreign corporation even
though the U.S. transferor receives stock
of the domestic controlling corporation
in the exchange.
(2) If stock of a foreign acquired
corporation is exchanged for the voting
stock of a domestic corporation in
control of a foreign acquiring
corporation, then the exchange will be
subject to the rules of paragraph (b) of
this section. If the exchanging
shareholder is a section 1248
shareholder with respect to the foreign
acquired corporation, the indirect
transfer will be subject to sections
367(a) and (b) concurrently. For the
application of section 367(b) to the
exchange, see §§ 1.367(b)–4 and
1.367(b)–13(c).
(3) If stock of a domestic acquired
corporation is exchanged for the voting
stock of a domestic corporation in
control of a foreign acquiring
corporation, then the exchange will be
subject to the rules of paragraph (c) of
this section.
(4) For purposes of applying the gain
recognition agreement provisions of
paragraph (d)(2) of this section and
§ 1.367(a)–8, the domestic controlling
corporation will be treated as the
transferee foreign corporation. Thus, a
disposition of foreign acquiring
corporation stock by the domestic
controlling corporation, or a disposition
of acquired corporation stock by the
foreign acquiring corporation, will
trigger the gain recognition agreement.
See paragraph (d)(3), Example 5A of this
section.
(5) This paragraph (d)(1)(iii)(B)
applies only to transactions occurring
after the date these regulations are
published as final regulations in the
Federal Register.
*
*
*
*
*
(v) Transfers of assets to subsidiaries
in certain section 368(a)(1)
reorganizations. A U.S. person
exchanges stock or securities of a
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corporation (the acquired corporation)
for stock or securities of a foreign
acquiring corporation in an asset
reorganization (other than a triangular
section 368(a)(1)(C) reorganization
described in paragraph (d)(1)(iv) of this
section or a reorganization described in
sections 368(a)(1)(A) and (a)(2)(D) or
(a)(2)(E) described in paragraphs
(d)(1)(i) or (ii) of this section) that is
followed by a controlled asset transfer.
In the case of a transaction described in
this paragraph (d)(1)(v) in which some
but not all of the assets of the acquired
corporation are transferred in a
controlled asset transfer, the transaction
shall be considered to be an indirect
transfer of stock or securities subject to
this paragraph (d) only to the extent of
the assets so transferred. The remaining
assets shall be treated as having been
transferred in an asset transfer rather
than an indirect stock transfer, and such
asset transfer shall be subject to the
other provisions of section 367,
including sections 367(a)(1), (3), and (5),
and (d) if the acquired corporation is a
domestic corporation. See paragraph
(d)(3), Examples 6A and 6B of this
section.
*
*
*
*
*
(2) * * *
(i) Transferee foreign corporation.
Except as provided in paragraph
(d)(1)(iii)(B) of this section, the
transferee foreign corporation shall be
the foreign corporation that issues stock
or securities to the U.S. person in the
exchange.
(ii) Transferred corporation. The
transferred corporation shall be the
acquiring corporation, except as
provided in this paragraph (d)(2)(ii). In
the case of a triangular section
368(a)(1)(B) reorganization described in
paragraph (d)(1)(iii) of this section, the
transferred corporation shall be the
acquired corporation. In the case of an
indirect stock transfer described in
paragraph (d)(1)(i), (ii), or (iv) of this
section followed by a controlled asset
transfer, or an indirect stock transfer
described in paragraph (d)(1)(v) of this
section, the transferred corporation shall
be the controlled corporation to which
the assets are transferred. In the case of
successive section 351 transfers
described in paragraph (d)(1)(vi) of this
section, the transferred corporation shall
be the corporation to which the assets
are transferred in the final section 351
transfer. The transferred property shall
be the stock or securities of the
transferred corporation, as appropriate
under the circumstances.
*
*
*
*
*
(v) * * *
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(C) In the case of an asset
reorganization followed by a controlled
asset transfer, as described in paragraph
(d)(1)(v) of this section, the assets of the
acquired corporation that are transferred
to the corporation controlled by the
acquiring corporation;
(D) In the case of a triangular
reorganization described in section
368(a)(1)(C) followed by a controlled
asset transfer, or a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(D) followed by a controlled asset
transfer, the assets of the acquired
corporation including those transferred
to the corporation controlled by the
acquiring corporation;
(E) In the case of a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(E) followed by a controlled asset
transfer, the assets of the acquiring
corporation including those transferred
to the corporation controlled by the
acquiring corporation; and
*
*
*
*
*
(vi) Coordination between asset
transfer rules and indirect stock transfer
rules— (A) General rule. If, pursuant to
any of the transactions described in
paragraph (d)(1) of this section, a U.S.
person transfers (or is deemed to
transfer) assets to a foreign corporation
in an exchange described in section 351
or 361, the rules of section 367,
including sections 367(a)(1), (a)(3), and
(a)(5), as well as section 367(d), and the
regulations thereunder shall apply prior
to the application of the rules of this
section.
(B) Exceptions. (1) If a transaction is
described in paragraph (d)(2)(vi)(A) of
this section, sections 367(a) and (d)
shall not apply to the extent a domestic
corporation (domestic acquired
corporation) transfers its assets to a
foreign corporation (foreign acquiring
corporation) in an asset reorganization,
and such assets (re-transferred assets)
are transferred to a domestic corporation
(domestic controlled corporation)
controlled (within the meaning of
section 368(c)) by the foreign acquiring
corporation as part of the same
transaction, provided that the domestic
controlled corporation’s basis in such
assets is no greater than the basis that
the domestic acquired corporation had
in such assets and the conditions
contained in either of the following
paragraphs are satisfied:
(i) The domestic acquired corporation
is controlled (within the meaning of
section 368(c)) by 5 or fewer domestic
corporations, appropriate basis
adjustments as provided in section
367(a)(5) are made to the stock of the
foreign acquiring corporation, and any
other conditions as provided in
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regulations under section 367(a)(5) are
satisfied. For purposes of determining
whether the domestic acquired
corporation is controlled by 5 or fewer
domestic corporations, all members of
the same affiliated group within the
meaning of section 1504 shall be treated
as 1 corporation.
(ii) The requirements of paragraphs
(c)(1)(i), (ii), and (iv), and (c)(6) of this
section are satisfied with respect to the
indirect transfer of stock in the domestic
acquired corporation, and the domestic
acquired corporation attaches a
statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S.
income tax return for the taxable year of
the transfer.
(2) Sections 367(a) and (d) shall not
apply to transfers described in
paragraph (d)(1)(vi) of this section
where a U.S. person transfers assets to
a foreign corporation in a section 351
exchange, to the extent that such assets
are transferred by such foreign
corporation to a domestic corporation in
another section 351 exchange, but only
if the domestic transferee’s basis in the
assets is no greater than the basis that
the U.S. transferor had in such assets.
(C) Required statement. The statement
required by paragraph (d)(2)(vi)(B)(1)(ii)
of this section shall be entitled
‘‘Required Statement under § 1.367(a)–
3(d) for Assets Transferred to a
Domestic Corporation’’ and shall be
signed under penalties of perjury by an
authorized officer of the domestic
acquired corporation and by an
authorized officer of the foreign
acquiring corporation. The required
statement shall contain a certification
that, if the foreign acquiring corporation
disposes of any stock of the domestic
controlled corporation in a transaction
described in paragraph (d)(2)(vi)(D) of
this section, the domestic acquired
corporation shall recognize gain as
described in paragraph (d)(2)(vi)(E)(1) of
this section. The domestic acquired
corporation (or the foreign acquiring
corporation on behalf of the domestic
acquired corporation) shall file a U.S.
income tax return (or an amended U.S.
tax return, as the case may be) for the
year of the transfer reporting such gain.
(D) Gain recognition transaction. (1) A
transaction described in this paragraph
(d)(2)(vi)(D) is one where a principal
purpose of the transfer by the domestic
acquired corporation is the avoidance of
U.S. tax that would have been imposed
on the domestic acquired corporation on
the disposition of the re-transferred
assets. A transfer may have a principal
purpose of tax avoidance even though
the tax avoidance purpose is
outweighed by other purposes when
taken together.
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759
(2) For purposes of paragraph
(d)(2)(vi)(D)(1) of this section, a
transaction is deemed to have a
principal purpose of tax avoidance if the
foreign acquiring corporation disposes
of any stock of the domestic controlled
corporation (whether in a recognition or
non-recognition transaction) within 2
years of the transfer. The rule in this
paragraph (d)(2)(vi)(D)(2) shall not
apply if the domestic acquired
corporation (or the foreign acquiring
corporation on behalf of the domestic
acquired corporation) demonstrates to
the satisfaction of the Commissioner
that the avoidance of U.S. tax was not
a principal purpose of the transaction.
(E) Amount of gain recognized and
other matters. (1) In the case of a
transaction described in paragraph
(d)(2)(vi)(D) of this section, solely for
purposes of this paragraph (d)(2)(vi)(E),
the domestic acquired corporation shall
be treated as if, immediately prior to the
transfer, it transferred the re-transferred
assets, including any intangible assets,
directly to a domestic corporation in
exchange for stock of such domestic
corporation in a transaction that is
treated as a section 351 exchange, and
immediately sold such stock to an
unrelated party for its fair market value
in a sale in which it shall recognize
gain, if any (but not loss). Any gain
recognized by the domestic acquired
corporation pursuant to this paragraph
(d)(2)(vi)(E) will increase the basis that
the foreign acquiring corporation has in
the stock of the domestic controlled
corporation immediately before the
transaction described in paragraph
(d)(2)(vi)(D) of this section, but will not
increase the basis of the re-transferred
assets held by the domestic controlled
corporation. Section 1.367(d)–1T(g)(6)
shall not apply with respect to any
intangible property included in the retransferred assets described in the
preceding sentence.
(2) If additional tax is required to be
paid as a result of a transaction
described in paragraph (d)(2)(vi)(D) of
this section, then interest must be paid
on that amount at rates determined
under section 6621 with respect to the
period between the date prescribed for
filing the domestic acquired
corporation’s income tax return for the
year of the transfer and the date on
which the additional tax for that year is
paid.
(F) Examples. For illustrations of the
rules in paragraph (d)(2)(vi) of this
section, see paragraph (d)(3), Examples
6B, 6C, 6D, 9, and 13A of this section.
(G) Effective dates. Paragraph
(d)(2)(vi) of this section applies only to
transactions occurring after the date
these regulations are published as final
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regulations in the Federal Register. See
§ 1.367(a)–3(d)(2)(vi), as contained in 26
CFR part 1 revised as of April 1, 2004,
for transactions occurring on or after
July 20, 1998, until the date these
regulations are published as final
regulations in the Federal Register.
(3) * * *
Example 2. Section 368(a)(1)(A)/(a)(2)(E)
reorganization—(i) Facts. The facts are the
same as in Example 1, except that Newco
merges into W and Newco receives stock of
W which it distributes to F in a
reorganization described in sections
368(a)(1)(A) and (a)(2)(E). Pursuant to the
reorganization, A receives 40 percent of the
stock of F in an exchange described in
section 354.
(ii) Result. The consequences of the
transfer are similar to those described in
Example 1. Pursuant to paragraph (d)(1)(ii) of
this section, the reorganization is subject to
the indirect stock transfer rules. F is treated
as the transferee foreign corporation, and W
is treated as the transferred corporation.
Provided that the requirements of paragraph
(c)(1) of this section are satisfied, including
the requirement that A enter into a five-year
gain recognition agreement as described in
§ 1.367(a)–8, A’s exchange of W stock for F
stock under section 354 will not be subject
to section 367(a)(1).
*
*
*
*
*
Example 5A. Triangular section
368(a)(1)(B) reorganization—(i) Facts. The
facts are the same as in Example 5, except
that F is a domestic corporation and S is a
foreign corporation.
(ii) Result. U’s exchange of Y stock for
stock of F, a domestic corporation in control
of S, the foreign acquiring corporation, is
treated as an indirect transfer of Y stock to
a foreign corporation under paragraph
(d)(1)(iii) of this section. U’s exchange of Y
stock for F stock will not be subject to section
367(a)(1) provided that all of the
requirements of paragraph (c)(1) are satisfied,
including the requirement that U enter in a
five-year gain recognition agreement. In
satisfying the 50 percent or less ownership
requirements of paragraph (c)(1)(i) and (ii) of
this section, U’s indirect ownership of S
stock (through its direct ownership of F
stock) will determine whether the
requirement of paragraph (c)(1)(i) is satisfied
and will be taken into account in
determining whether the requirement of
paragraph (c)(1)(ii) is satisfied. (See
paragraph (c)(4)(iv)). For purposes of
applying the gain recognition agreement
provisions of paragraph (d)(2) of this section
and § 1.367(a)–8, F is treated as the transferee
foreign corporation. The gain recognition
agreement would be triggered 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 6A. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer—(i) Facts. The facts are the same as
in Example 6, except that the transaction is
structured as a section 368(a)(1)(C)
reorganization, followed by a controlled asset
transfer, and R is a foreign corporation. * * *
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F then contributes Businesses B and C to R
in a controlled asset transfer. * * *
*
*
*
*
*
Example 6B. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in Example 6A, except that R is a domestic
corporation.
(ii) Result. As in Example 6A, the
outbound transfer of the Business A assets to
F is not affected by the rules of this
paragraph (d) and is subject to the general
rules under section 367. However, the
Business A assets qualify for the section
367(a)(3) active trade or business exception.
The Business B and C assets are part of an
indirect stock transfer under this paragraph
(d) but must first be tested under sections
367(a) and (d). The Business B assets qualify
for the active trade or business exception
under section 367(a)(3); the Business C assets
do not. However, pursuant to paragraph
(d)(2)(vi)(B) of this section, the Business C
assets are not subject to section 367(a) or (d),
provided that the basis of the Business C
assets in the hands of R is no greater than the
basis of the assets in the hands of Z, and
appropriate basis adjustments are made
pursuant to section 367(a)(5) to the stock of
F held by V. (In this case, no adjustments are
required because, pursuant to section 358, V
takes a basis of $30 in the stock of F, which
is equal to V’s proportionate share of the
basis in the assets of Z ($30) transferred to
F.) V also is deemed to make an indirect
transfer of stock under the rules of paragraph
(d). To preserve non-recognition treatment
under section 367(a), V must enter into a 5year gain recognition agreement in the
amount of $50, the amount of the
appreciation in the Business B and C assets,
as the transfer of such assets by Z was not
taxable under section 367(a)(1) and
constituted an indirect stock transfer.
Example 6C. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in Example 6B, except that Z is owned by
individuals, none of whom qualify as fivepercent target shareholders with respect to Z
within the meaning of paragraph (c)(5)(iii) of
this section. The following additional facts
are present. No U.S. persons that are either
officers or directors of Z own any stock of F
immediately after the transfer. F is engaged
in an active trade or business outside the
United States that satisfies the test set forth
in paragraph (c)(3) of this section.
(ii) Result. The transfer of the Business A
assets is not affected by the rules of this
paragraph (d). However, the transfer of such
assets is subject to gain recognition under
section 367(a)(1), because the section
367(a)(3) active trade or business exception is
inapplicable pursuant to section 367(a)(5).
The Business B and C assets are part of an
indirect stock transfer under this paragraph
(d) but must first be tested under sections
367(a) and (d). The transfer of the Business
B assets (which otherwise would satisfy the
section 367(a)(3) active trade or business
exception) generally is subject to section
367(a)(1) pursuant to section 367(a)(5). The
transfer of the Business C assets generally is
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subject to sections 367(a)(1) and (d).
However, pursuant to paragraph (d)(2)(vi)(B)
of this section, the transfer of the Business B
and C assets is not subject to sections
367(a)(1) and (d), provided the basis of the
Business B and C assets in the hands of R is
no greater than the basis in the hands of Z
and certain other requirements are satisfied.
Since Z is not controlled within the meaning
of section 368(c) by 5 or fewer domestic
corporations, the indirect transfer of Z stock
must satisfy the requirements of paragraphs
(c)(1)(i), (ii), and (iv), and (c)(6) of this
section, and Z must attach a statement
described in paragraph (d)(2)(vi)(C) of this
section to its U.S. income tax return for the
taxable year of the transfer. In general, the
statement must contain a certification that, if
F disposes of the stock of R (in a recognition
or nonrecognition transaction) and a
principal purpose of the transfer is the
avoidance of U.S. tax that would have been
imposed on Z on the disposition of the
Business B and C assets transferred to R, then
Z (or F on behalf of Z) will file a return (or
amended return as the case may be)
recognizing gain ($50), as if, immediately
prior to the reorganization, Z transferred the
Business B and C assets to a domestic
corporation in exchange for stock in a
transaction treated as a section 351 exchange
and immediately sold such stock to an
unrelated party for its fair market value. A
transaction is deemed to have a principal
purpose of U.S. tax avoidance if F disposes
of R stock within two years of the transfer,
unless Z (or F on behalf of Z) can rebut the
presumption to the satisfaction of the
Commissioner. See paragraph (d)(2)(vi)(D)(2)
of this section. With respect to the indirect
transfer of Z stock, the requirements of
paragraphs (c)(1)(i), (ii), and (iv) of this
section are satisfied. Thus, assuming Z
attaches the statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S. income
tax return and satisfies the reporting
requirements of (c)(6) of this section, the
transfer of Business B and C assets is not
subject to section 367(a) or (d).
Example 6D. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in Example 6C, except that the Z
shareholders receive 60 percent of the F stock
in exchange for their Z stock in the
reorganization.
(ii) Result. The requirement of paragraph
(c)(1)(i) of this section is not satisfied because
the Z shareholders that are U.S. persons do
not receive 50 percent or less of the total
voting power and the total value of the stock
of F in the transaction. Accordingly, Z
shareholders that are U.S. persons are subject
to section 367(a)(1) on their exchange of Z
stock for F stock pursuant to the
reorganization. For the same reason, the
conditions of paragraph (d)(2)(vi)(B)(1)(ii) of
this section are not met. Accordingly, the
transfer of Business B and C assets is subject
to sections 367(a)(1) and (d), even though
such assets are re-transferred to R, a domestic
corporation. As in Example 6C, the transfer
of Business A assets, which is not affected by
the rules of paragraph (d) of this section, is
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subject to gain recognition under sections
367(a)(1) and (5).
*
*
*
*
*
Example 9. Concurrent application with a
controlled asset transfer—(i) Facts. The facts
are the same as in Example 8, except that R
transfers the Business A assets to M, a wholly
owned domestic subsidiary of R, in a
controlled asset transfer. In addition, V’s
basis in its Z stock is $90.
(ii) Result. Pursuant to paragraph
(d)(2)(vi)(B) of this section, sections 367(a)
and (d) do not apply to Z’s transfer of the
Business A assets to R, because such assets
are re-transferred to M, a domestic
corporation, provided that the basis of the
Business A assets in the hands of M is no
greater than the basis of the assets in the
hands of Z, and certain other requirements
are satisfied. Because Z is controlled (within
the meaning of section 368(c)) by V, a
domestic corporation, appropriate basis
adjustments must be made pursuant to
section 367(a)(5) to the stock of F held by V.
(In this case, no adjustments are required
because, pursuant to section 358, V takes a
basis of $90 in the stock of F, which is less
than V’s proportionate share of the basis in
the assets of Z ($100) transferred to R.)
Section 367(a)(1) does not apply to Z’s
transfer of its Business B assets to R (which
are not re-transferred to M) because such
assets qualify for an exception to gain
recognition under section 367(a)(3). With
respect to the indirect transfer of Z stock,
such transfer is not subject to gain
recognition under section 367(a)(1) if the
requirements of paragraph (c) of this section
are satisfied, including the requirement that
V enter into a 5-year gain recognition
agreement and comply with the requirements
of § 1.367(a)–8 with respect to the gain ($100)
realized on the Z stock. Under paragraphs
(d)(2)(i) and (ii) of this section, the transferee
foreign corporation is F and the transferred
corporation is M. Pursuant to paragraph
(d)(2)(iv) of this section, a disposition by F
of the stock of R, or a disposition by R of the
stock of M, will trigger the gain recognition
agreement. To determine whether an asset
disposition constitutes a deemed disposition
of the transferred corporation’s stock under
the rules of § 1.367(a)–8(e)(3)(i), both the
Business A assets in M and the Business B
assets in R must be considered.
Example 10. Concurrent application in
section 368(a)(1)(A)/(a)(2)(D)
reorganization—(i) Facts. The facts are the
same as in Example 8, except that R acquires
all of the assets of Z in a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(D). Pursuant to the reorganization, V
receives 30 percent of the stock of F in a
section 354 exchange.
(ii) Result. The consequences of the
transaction are similar to those in Example 8.
The assets of Businesses A and B that are
transferred to R must be tested under section
367(a) prior to the consideration of the
indirect stock transfer rules of this paragraph
(d). The Business B assets qualify for the
active trade or business exception under
section 367(a)(3). Because the Business A
assets do not qualify for the exception, Z
must recognize $40 of gain under section
367(a) on the transfer of Business A assets to
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R. Because V and Z file a consolidated return,
V’s basis in the stock of Z is increased from
$100 to $140 as a result of Z’s $40 gain. V’s
indirect transfer of Z stock will be taxable
under section 367(a) unless V enters into a
gain recognition agreement in the amount of
$60 ($200 value of Z stock less $140 adjusted
basis) and the other requirements of
paragraph (c)(1) of this section are satisfied.
Example 11. Section 368(a)(1)(A)/(a)(2)(E)
reorganization—(i) Facts. F, a foreign
corporation, owns all the stock of D, a
domestic corporation. V, a domestic
corporation, owns all the stock of Z, a foreign
corporation. V has a basis of $100 in the
stock of Z which has a fair market value of
$200. D is an operating corporation with
assets valued at $100 with a basis of $60. In
a reorganization described in sections
368(a)(1)(A) and (a)(2)(E), D merges into Z,
and V exchanges its Z stock for 55 percent
of the outstanding F stock.
(ii) Result. Under paragraph (d)(1)(ii) of
this section, V is treated as making an
indirect transfer of Z stock to F. V’s exchange
of Z stock for F stock will be taxable under
section 367(a) (and section 1248 will be
applicable) if V fails to enter into a 5-year
gain recognition agreement in accordance
with the requirements of § 1.367(a)–8. Under
paragraph (b)(2) of this section, if V enters
into a gain recognition agreement, the
exchange will be subject to the provisions of
section 367(b) and the regulations thereunder
as well as section 367(a). Under § 1.367(b)–
4(b) of this chapter, however, no income
inclusion is required because both F and Z
are controlled foreign corporations with
respect to which V is a section 1248
shareholder immediately after the exchange.
Under paragraphs (d)(2)(i) and (ii) of this
section, the transferee foreign corporation is
F, and the transferred corporation is Z (the
acquiring corporation). If F disposes (within
the meaning of § 1.367(a)–8(e)) of all (or a
portion) of Z stock within the 5-year term of
the agreement (and V has not made a valid
election under § 1.367(a)–8(b)(1)(vii)), V is
required to file an amended return for the
year of the transfer and include in income,
with interest, the gain realized but not
recognized on the initial section 354
exchange. To determine whether Z (the
transferred corporation) disposes of
substantially all of its assets, the assets of Z
immediately prior to the transaction are
taken into account, pursuant to paragraph
(d)(2)(v)(B) of this section. Because D is
owned by F, a foreign corporation, section
367(a)(5) precludes any assets of D from
qualifying for nonrecognition under section
367(a)(3). Thus, D recognizes $40 of gain on
the transfer of its assets to Z under section
367(a)(1).
*
*
*
*
*
Example 15. Concurrent application of
indirect stock transfer rules and section
367(b)— (i) Facts. F, a foreign corporation,
owns all of the stock of Newco, a domestic
corporation. P, a domestic corporation, owns
all of the stock of FC, a foreign corporation.
P’s basis in the stock of FC is $50 and the
value of FC stock is $100. The all earnings
and profits amount with respect to the FC
stock held by P is $60. See § 1.367(b)–2(d).
In a reorganization described in sections
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368(a)(1)(A) and (a)(2)(D) (and paragraph
(d)(1)(i) of this section), Newco acquires all
of the properties of FC, and P exchanges its
stock in FC for 20 percent of the stock in F.
(ii) Result. Because a domestic corporation,
Newco, acquires the assets of a foreign
corporation, FC, in an asset reorganization to
which § 1.367(b)–3(a) and (b) and the indirect
stock rules of paragraph (d) of this section
apply, the section 367(b) rules apply before
the section 367(a) rules apply. See § 1.367(a)–
3(b)(2)(i)(A). Under the rules of section
367(b), P must include in income the all
earnings and profits amount of $60 with
respect to its FC stock. See § 1.367(b)–3.
Although P’s exchange of FC stock for F stock
under section 354 is an indirect stock
transfer, no gain is recognized under section
367(a), because P’s basis in the FC stock is
increased by the amount ($60) included in
income under the rules of section 367(b). See
§ 1.367(b)–2(e)(3)(ii). Alternatively, if P’s all
earnings and profits amount were $30, then
the amount of the income inclusion and basis
adjustment under the rules of section 367(b)
would be $30, and the amount of gain subject
to section 367(a)(1) would be $20 unless P
entered into a 5-year gain recognition
agreement in accordance with § 1.367(a)–8.
*
*
*
*
*
(e) * * *
(1) In general. Except as provided in
paragraphs (b)(2)(i)(A), (d)(1)(iii)(B), and
(d)(2)(vi)(G), or in this paragraph (e), the
rules in paragraphs (a), (b), and (d) of
this section apply to transfers occurring
on or after July 20, 1998. The rules in
paragraphs (a) and (d) of this section, as
they apply to section 368(a)(1)(A)
reorganizations (including
reorganizations described in section
368(a)(2)(D) or (E)) involving a foreign
acquiring or acquired corporation, apply
only to transfers occurring after the date
these regulations are published as final
regulations in the Federal Register.
* * *
*
*
*
*
*
Par. 5. Section 1.367(a)–8 is amended
as follows:
1. In paragraphs (c)(2) and (d), remove
the words ‘‘district director’’ and add
‘‘Director of Field Operations’’ in their
place.
2. In paragraph (e)(1)(i), a sentence is
added after the first sentence.
The addition reads as follows:
§ 1.367(a)–8 Gain recognition agreement
requirements.
*
*
*
*
*
(e) * * *
(1) * * *
(i) * * * It also includes an indirect
disposition of the stock of the
transferred corporation as described in
§ 1.367(a)–3(d)(2)(iv). * * *
*
*
*
*
*
Par. 6. In § 1.367(b)–1(a), remove the
third and fourth sentences and add a
sentence in their place to read as
follows:
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§ 1.367(b)–1
Other transfers.
(a) * * * For rules coordinating the
concurrent application of sections
367(a) and (b), including the extent to
which section 367(b) does not apply if
the foreign corporation is not treated as
a corporation under section 367(a), see
§ 1.367(a)–3(b)(2)(i). * * *
*
*
*
*
*
Par. 7. In § 1.367(b)–3(b)(3)(ii), revise
paragraph (i) of Example 5 to read as
follows:
§ 1.367(b)–3 Repatriation of foreign
corporate assets in certain nonrecognition
transactions.
*
*
*
(b) * * *
(3) * * *
(ii) * * *
*
*
Example 5—(i) Facts. DC1, a domestic
corporation, owns all of the outstanding
stock of FC1, a foreign corporation. FC1 owns
all of the outstanding stock of FC2, a foreign
corporation. The all earnings and profits
amount with respect to the FC2 stock owned
by FC1 is $20. In a reorganization described
in section 368(a)(1)(A), DC2, a domestic
corporation unrelated to FC1 or FC2, acquires
all of the assets and liabilities of FC2
pursuant to a State W merger. FC2 receives
DC2 stock and distributes such stock to FC1.
The FC2 stock held by FC1 is canceled, and
FC2 ceases its separate legal existence.
*
*
*
*
*
Par. 8. Section 1.367(b)–4 is amended
as follows.
1. Paragraph (a) is revised.
2. Redesignate paragraph (b)(1)(ii) as
paragraph (b)(1)(iii), and add new
paragraph (b)(1)(ii).
3. In newly designated paragraph
(b)(1)(iii), after Example 3, add
Examples 3A and 3B.
The revisions and additions read as
follows:
§ 1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.
(a) Scope. This section applies to an
acquisition by a foreign corporation (the
foreign acquiring corporation) of the
stock or assets of a foreign corporation
(the foreign acquired corporation) in an
exchange described in section 351 or a
reorganization described in section
368(a)(1). In the case of a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(E), this section applies if stock of
the foreign surviving corporation is
exchanged for stock of a foreign
corporation in control of the merging
corporation; in such a case, the foreign
surviving corporation is treated as a
foreign acquired corporation for
purposes of this section. A foreign
corporation that undergoes a
reorganization described in section
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368(a)(1)(E) is treated as both the foreign
acquired corporation and foreign
acquiring corporation for purposes of
this section. See § 1.367(a)–3(b)(2) for
transactions subject to the concurrent
application of this section and section
367(a).
(b) * * *
(1) * * *
(ii) Exception. In the case of a
triangular reorganization described in
section 368(a)(1)(B) or (C), or a
reorganization described in sections
368(a)(1)(A) and (a)(2)(D) or (E), an
exchange is not described in paragraph
(b)(1)(i) of this section if the stock
received in the exchange is stock of a
domestic corporation and, immediately
after the exchange, such domestic
corporation is a section 1248
shareholder of the acquired corporation
(in the case of a triangular section
368(a)(1)(B) reorganization) or the
surviving corporation (in the case of a
reorganization described in sections
368(a)(1)(A) and (a)(2)(D) or (E)) and
such acquired or surviving corporation
is a controlled foreign corporation. See
paragraph (b)(1)(iii) of this section,
Example 3B for an illustration of this
rule.
(iii) * * *
Example 3A. (i) Facts. The facts are the
same as in Example 3, except that FC1
merges into FC2 in a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(E). Pursuant to the reorganization, DC
exchanges its FC2 stock for stock of FP.
(ii) Result. The result is similar to the result
in Example 3. The transfer is an indirect
stock transfer subject to section 367(a). See
§ 1.367(a)–3(d)(1)(ii). Accordingly, DC’s
exchange of FC2 stock for FP stock will be
taxable under section 367(a) (and section
1248 will be applicable) if DC fails to enter
into a gain recognition agreement. If DC
enters into a gain recognition agreement, the
exchange will be subject to the provisions of
section 367(b) and the regulations
thereunder, as well as section 367(a). If FP
and FC2 are controlled foreign corporations
as to which DC is a (direct or indirect)
section 1248 shareholder immediately after
the reorganization, then paragraph (b)(1)(i) of
this section does not apply to require
inclusion in income of the section 1248
amount and the amount of the gain
recognition agreement is the amount of gain
realized on the indirect stock transfer. If FP
or FC2 is not a controlled foreign corporation
as to which DC is a (direct or indirect)
section 1248 shareholder immediately after
the exchange, then DC must include in
income the section 1248 amount ($20)
attributable to the FC2 stock that DC
exchanged. Under these circumstances, the
gain recognition agreement would be the
amount of gain realized on the indirect
transfer, less the $20 section 1248 income
inclusion.
Example 3B. (i) Facts. The facts are the
same as Example 3, except that USP, a
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domestic corporation, owns the controlling
interest (within the meaning of section
368(c)) in FC1 stock. FC2 merges into FC1 in
a reorganization described in sections
368(a)(1)(A) and (a)(2)(D). Pursuant to the
reorganization, DC exchanges its FC2 stock
for USP stock.
(ii) Result. Because DC receives stock of a
domestic corporation, USP, in the section
354 exchange, the transfer is not an indirect
stock transfer subject to section 367(a).
Accordingly, the exchange will be subject
only to the provisions of section 367(b) and
the regulations thereunder. Under paragraph
(b)(1)(ii)(A) of this section, because the stock
received is stock of a domestic corporation
(USP) and, immediately after the exchange,
USP is a section 1248 shareholder of FC1 (the
acquiring corporation) and FC1 is a
controlled foreign corporation, the exchange
is not described in paragraph (b)(1)(i) of this
section and DC includes no amount in its
gross income. See § 1.367(b)–13(b) and (c) for
the basis and holding period rules applicable
to this transaction, which cause USP’s
adjusted basis and holding period in the
stock of FC1 after the transaction to reflect
the basis and holding period that DC had in
its FC2 stock.
*
*
*
*
*
Par. 9. In § 1.367(b)–6, paragraph
(a)(1), add a sentence to the end to read
as follows:
§ 1.367(b)–6 Effective dates and
coordination rules.
(a) * * *
(1) * * * The rules of §§ 1.367(b)–3
and 1.367(b)–4, as they apply to
reorganizations described in section
368(a)(1)(A) (including reorganizations
described in section 368(a)(2)(D) or (E))
involving a foreign acquiring or foreign
acquired corporation, apply only to
transfers occurring after the date these
regulations are published as final
regulations in the Federal Register.
*
*
*
*
*
Par. 10. Section 1.367(b)–13 is added
to read as follows:
§ 1.367(b)–13 Special rules for determining
basis and holding period.
(a) Scope and definitions—(1) Scope.
This section provides special basis and
holding period rules for certain
transactions involving the acquisition of
property by a foreign acquiring
corporation in nonrecognition
exchanges. Special rules apply to
determine the basis and holding period
of stock in a foreign corporation
received by certain shareholders in a
section 354 or 356 exchange. In
addition, special rules apply to
determine the basis and holding period
of stock of certain foreign surviving
corporations held by a controlling
corporation whose stock is issued in an
exchange under section 354 or 356 in a
triangular reorganization. This section
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applies to transactions that are subject
to section 367(b) as well as section
367(a), including transactions
concurrently subject to sections 367(a)
and (b).
(2) Definitions. For purposes of this
section, the following definitions apply:
(i) A foreign acquired corporation is a
foreign corporation whose stock or
assets are acquired by a foreign
corporation in a reorganization
described in section 368(a)(1). In a
reverse triangular merger, where T is a
foreign corporation, T is treated as a
foreign acquired corporation. A foreign
corporation that undergoes a
reorganization described in section
368(a)(1)(E) is treated as a foreign
acquired corporation.
(ii) A block of stock has the meaning
provided in § 1.1248–2(b).
(iii) A triangular reorganization is a
reorganization described in § 1.358–
6(b)(2)(i), (ii), or (iii) (but not a
reorganization described in § 1.358–
6(b)(2)(iv)). A triangular C
reorganization, a forward triangular
merger, and a reverse triangular merger
each is a reorganization described in
§ 1.358–6(b)(2)(i), (ii), or (iii),
respectively. For purposes of triangular
reorganizations—
(A) P is a corporation that is a party
to a reorganization that is in control
(within the meaning of section 368(c)) of
another party to the reorganization and
whose stock is transferred pursuant to
the reorganization;
(B) S is a corporation that is a party
to the reorganization and that is
controlled by P; and
(C) T is a corporation that is another
party to the reorganization.
(b) Determination of basis and
holding period for exchanges of foreign
stock—(1) Application. Except as
provided in paragraph (b)(4) of this
section, this paragraph (b) applies to a
shareholder that exchanges stock of a
foreign acquired corporation in an
exchange under section 354 or 356 for
stock of a controlled foreign
corporation, if—
(i) Immediately before the exchange
either such shareholder is a section
1248 shareholder with respect to the
foreign acquired corporation, or such
shareholder is a foreign corporation and
a United States person is a section 1248
shareholder with respect to both such
foreign corporation and the foreign
acquired corporation; and
(ii) The exchange is not described in
§ 1.367(b)–4(b)(1)(i), (2)(i), or (3).
(2) Basis and holding period rules—(i)
If a shareholder surrenders a share of
stock in an exchange under the terms of
section 354 or 356, the basis and
holding period of each share of stock
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received in the exchange shall be the
same as the basis and holding period of
the allocable portion of the share or
shares of stock exchanged therefor, as
adjusted under § 1.358–1 (such that the
section 1248 amount of each share of
stock exchanged is preserved in the
share or shares of stock received). If
more than one share of stock is received
in exchange for one share of stock, the
basis of the share of stock surrendered
shall be allocated to the shares of stock
received in the exchange in proportion
to the fair market value of the shares of
stock received. If one share of stock is
received in respect of more than one
share of stock or a fraction of a share of
stock is received, the basis of the shares
of stock surrendered must be allocated
to the share of stock received, or a
fraction thereof received, in a manner
that reflects, to the greatest extent
possible, that a share of stock is received
in respect of shares of stock acquired on
the same date and at the same price. The
provisions of this paragraph may be
applied, to the extent possible, on the
basis of blocks of stock.
(ii) If a shareholder that purchased or
acquired shares of stock in a corporation
on different dates or at different prices
exchanges such shares of stock under
the terms of section 354 or 356, and the
shareholder is not able to identify which
particular share or shares of stock (or
portion of a share of stock) is received
in exchange for a particular share or
shares of stock, the shareholder may
designate which share or shares of stock
is received in exchange for a particular
share or shares of stock, provided that
such designation is consistent with the
terms of the exchange or distribution.
The designation must be made on or
before the first date on which the basis
of a share of stock received is relevant.
The basis of a share received, for
example, is relevant when such share is
sold or otherwise transferred. The
designation will be binding for purposes
of determining the Federal tax
consequences of any sale or transfer of
a share received. If the shareholder fails
to make a designation, then the
shareholder will not be able to identify
which share is sold or transferred for
purposes of determining the basis of
property sold or transferred under
section 1012 and § 1.1012–1(c) and,
instead, will be treated as selling or
transferring the share received in
respect of the earliest share purchased
or acquired. See paragraph (e), Example
1 of this section for an illustration of
this paragraph (b).
(3) In the case of a triangular
reorganization, this paragraph (b)
applies only to the exchange of T stock
for P stock by T shareholders. See
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paragraph (c) of this section to
determine the basis and holding period
of stock of the surviving corporation (S
or T) held by P immediately after a
triangular reorganization.
(4) Paragraphs (b)(1) through (3) of
this section shall not apply to determine
the basis of a share of stock received by
a shareholder in an exchange described
in both section 351 and section 354 or
356, if, in connection with the
exchange, the shareholder exchanges
property for stock in an exchange to
which neither section 354 nor 356
applies or liabilities of the shareholder
are assumed.
(c) Determination of basis and holding
period for triangular reorganizations—
(1) Application. In the case of a
triangular reorganization, this paragraph
(c) applies, if—
(i) In the case of a reverse triangular
merger—
(A) Immediately before the
transaction, either P is a section 1248
shareholder with respect to S, or P is a
foreign corporation and a United States
person is a section 1248 shareholder
with respect to both P and S; and
(B) P’s exchange of S stock is not
described in § 1.367(b)–3(a) and (b) or in
§ 1.367(b)–4(b)(1)(i), (2)(i), or (3); or
(ii)(A) Immediately before the
transaction, a shareholder of T is either
a section 1248 shareholder with respect
to T or a foreign corporation and a
United States person is a section 1248
shareholder with respect to both such
foreign corporation and T; and
(B) With respect to at least one of the
exchanging shareholders described in
paragraph (c)(1)(ii)(A) of this section,
the exchange of T stock is not described
in § 1.367(b)–3(a) and (b) or in
§ 1.367(b)–4(b)(1)(i), (2)(i), or (3).
(2) Basis and holding period rules. In
the case of a triangular reorganization
described in this paragraph (c), each
share of stock of the surviving
corporation (S or T) held by P must be
divided into portions attributable to the
S stock and the T stock immediately
before the exchange. See paragraph (e)
of this section, Examples 2 through 5 for
illustrations of this rule.
(i) Portions attributable to S stock—
(A) In the case of a forward triangular
merger or a triangular C reorganization,
the basis and holding period of the
portion of each share of surviving
corporation stock attributable to the S
stock is the basis and holding period of
such share of stock immediately before
the exchange.
(B) In the case of a reverse triangular
merger, the basis and holding period of
the portion of each share of surviving
corporation stock attributable to the S
stock is the basis and the holding period
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immediately before the exchange of a
proportionate amount of the S stock to
which the portion relates. If P is a
shareholder described in paragraph
(c)(1)(i)(A) of this section with respect to
S, and P exchanges two or more blocks
of S stock pursuant to the transaction,
then each share of the surviving
corporation (T) attributable to the S
stock must be further divided into
separate portions to account for the
separate blocks of stock in S.
(C) If the value of S stock immediately
before the triangular reorganization is
less than one percent of the value of the
surviving corporation stock immediately
after the triangular reorganization, then
P may determine its basis in the
surviving corporation stock by applying
the rules of paragraph (c)(2)(ii) of this
section to determine the basis and
holding period of the surviving
corporation stock attributable to the T
stock, and then increasing the basis of
each share of surviving corporation
stock by the proportionate amount of P’s
aggregate basis in the S stock
immediately before the exchange
(without dividing the stock of the
surviving corporation into separate
portions attributable to the S stock).
(ii) Portions attributable to T stock—
(A) If any exchanging shareholder of T
stock is described in paragraph (c)(1)(ii)
of this section, the basis and holding
period of the portion of each share of
stock in the surviving corporation
attributable to the T stock is the basis
and holding period immediately before
the exchange of a proportionate amount
of the T stock to which such portion
relates. If any exchanging shareholder of
T stock is described in paragraph
(c)(1)(ii) of this section, and such
shareholder exchanges two or more
blocks of T stock pursuant to the
transaction, then each share of surviving
corporation stock attributable to the T
stock must be further divided into
separate portions to account for the
separate blocks of T stock.
(B) If no exchanging shareholder of T
stock is described in paragraph (c)(1)(ii)
of this section, the rules of § 1.358–6(c)
apply to determine the basis of the
portion of each share of the surviving
corporation attributable to T
immediately before the exchange.
(d) Special rules applicable to divided
shares of stock —(1) In general—(i)
Shares of stock in different blocks can
be aggregated into one divided portion
for basis purposes, if such shares
immediately before the exchange are
owned by one or more shareholders that
are—
(A) Neither section 1248 shareholders
with respect to the corporation nor
foreign corporate shareholders; or
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(B) Foreign corporate shareholders,
provided that no United States persons
are section 1248 shareholders with
respect to both such foreign corporate
shareholders and the corporation.
(ii) For purposes of determining the
amount of gain realized on the sale or
exchange of stock that has a divided
portion pursuant to paragraph (c) of this
section, any amount realized on such
sale or exchange will be allocated to
each divided portion of the stock based
on the relative fair market value of the
stock to which the portion is
attributable at the time the portions
were created.
(iii) Shares of stock will no longer be
required to be divided if section 1248 or
section 964(e) would not apply to a
disposition or exchange of such stock.
(2) Pre-exchange earnings and profits.
All earnings and profits (or deficits)
accumulated by a foreign corporation
before the reorganization and
attributable to a share (or block) of stock
for purposes of section 1248 are
attributable to the divided portion of
stock with the basis and holding period
of that share (or block). See § 1.367(b)–
4(d).
(3) Post-exchange earnings and
profits. Any earnings and profits (or
deficits) accumulated by the surviving
corporation subsequent to the
reorganization are attributed to each
divided share of stock pursuant to
section 1248 and the regulations
thereunder. The amount of earnings and
profits (or deficits) attributable to a
divided share of stock is further
attributed to the divided portions of
such share of stock based on the relative
fair market value of each divided
portion of stock.
(e) Examples. The rules of this section
are illustrated by the following
examples:
Example 1. (i) Facts. US1 is a domestic
corporation that owns all the stock of FT, a
foreign corporation with 100 shares of stock
outstanding. Each share of FT stock is valued
at $10x. Because US1 acquired the stock of
FT at two different dates, US1 owns two
blocks of FT stock for purposes of section
1248. The first block consists of 60 shares.
The shares in the first block have a basis of
$300x ($5x per share), a holding period of 10
years, and $240x ($4x per share) of earnings
and profits attributable to the shares for
purposes of section 1248. The second block
consists of 40 shares. The shares in the
second block have a basis of $600x ($15x per
share), a holding period of 2 years, and $80x
($2x per share) of earnings and profits
attributable to the shares for purposes of
section 1248. US2, a domestic corporation,
owns all of the stock of FP, a foreign
corporation, which owns all of the stock of
FS, a foreign corporation. FT merges into FS
with FS surviving in a reorganization
described in section 368(a)(1)(A). Pursuant to
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the reorganization, US1 receives 50 shares of
FS stock with a value of $1,000x for its FT
stock in an exchange that qualifies for
nonrecognition under section 354.
(ii) Basis and holding period
determination—(A) US1 is a section 1248
shareholder of FT immediately before the
exchange and exchanges its FT stock for
stock of a controlled foreign corporation (FS)
as to which US1 is a section 1248
shareholder immediately after the exchange.
US1 is not required to include income under
§ 1.367(b)-4(b) with respect to the exchange.
Accordingly, the basis and holding period of
the FS stock received by US1 is determined
pursuant to paragraph (b) of this section.
(B) Pursuant to paragraph (b) of this
section, 30 shares of the FS stock received by
US1 in the reorganization (valued at $20x per
share and exchanged for US1’s first block of
60 shares of FT stock) have a basis of $300x
($10x per share), a holding period of 10
years, and $240x of earnings and profits ($8x
per share) attributable to such shares for
purposes of section 1248. In addition, 20
shares of the FS stock (valued at $20 per
share and exchanged for US1’s second block
of 40 shares of FT stock) have a basis of
$600x ($30x per share), a holding period of
2 years, and $80x of earnings and profits ($4x
per share) attributable to such shares for
purposes of section 1248.
(iii) Subsequent Disposition. Assume,
subsequent to the exchange, US1 disposes of
20 shares of FS stock. On or before the date
of the disposition when the basis of the F1
shares received by US1 becomes relevant,
US1 can designate the 20 shares from the first
block, the second block, or from any
combination of shares in both blocks.
Example 2. (i) Facts. The facts are the same
as in Example 1, except that US1 receives 50
shares of FP stock (instead of FS stock) with
a value of $1,000x in exchange for its FT
stock. Accordingly, the merger of FT into FS
qualifies as forward triangular merger, and
immediately after the exchange US1 is a
section 1248 shareholder with respect to FP
and FS. Additionally, prior to the
transaction, FP owned two blocks of FS
stock. Each block consisted of 10 shares with
a value of $200x ($20x per share). The shares
in the first block had a basis of $50x ($5x per
share), a holding period of 10 years, and $50x
($5x per share) of earnings and profits
attributable to such shares for purposes of
section 1248. The shares in the second block
had a basis of $100x ($10x per share), a
holding period of 5 years, and $20x ($2x per
share) of earnings and profits attributable to
such shares for purposes of section 1248.
(ii) Basis and holding period
determination. (A) The basis and holding
period of the FP shares received by US1 in
the exchange are determined pursuant to
paragraph (b) of this section and are identical
to the results in Example 1.
(B)(1) US1 is a section 1248 shareholder of
FT immediately before the transaction.
Moreover, US1 is not required to include
income under § 1.367(b)–3(b) or 1.367(b)–4(b)
as described in paragraph (c)(2) of this
section. Accordingly, the basis and holding
period of the FS stock held by FP
immediately after the triangular
reorganization is determined pursuant to
paragraph (c) of this section.
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(2) Pursuant to paragraph (c) of this
section, each share of FS stock is divided into
portions attributable to the basis and holding
period of the FS stock held by FP
immediately before the exchange (the FS
portion) and the FT stock held by US1
immediately before the exchange (the FT
portion). The basis and holding period of the
FS portion is the basis and holding period of
the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock
in the first block has a portion with a basis
of $5x, a value of $20x, a holding period of
10 years, and $5x of earnings and profits
attributable to such portion for purposes of
section 1248. Each share of FS stock in the
second block has a portion with a basis of
$10x, a value of $20x, a holding period of 5
years, and $2x of earnings and profits
attributable to such portion for purposes of
section 1248.
(3) Because the exchanging shareholder of
FT stock (US1) is a section 1248 shareholder,
the holding period and basis of the FT
portion is the holding period and the
proportionate amount of the basis of the FT
stock immediately before the exchange to
which such portion relates. Further, because
US1 exchanged two blocks of FT stock, the
FT portion must be divided into two separate
portions attributable to the two blocks of FT
stock. Thus, each share of FS stock will have
a second portion with a basis of $15x ($300x
basis / 20 shares), a value of $30x ($600x
value / 20 shares), a holding period of 10
years, and $12x of earnings and profits
($240x / 20 shares) attributable to such
portion for purposes of section 1248. Each
share of FS stock will have a third portion
with a basis of $30x ($600x basis / 20 shares),
a value of $20x ($400x value / 20 shares), a
holding period of 2 years, and $4x of
earnings and profits ($80x / 20 shares)
attributable to such portion for purposes of
section 1248.
(iii) Assume, immediately after the
transaction, FP disposes of a share of FS
stock from the first block. When FP disposes
of any share of its FS stock, it is treated as
disposing of each divided portion of such
share. With respect to the first portion
(attributable to the FS stock), FP recognizes
a gain of $15x ($20x value¥$5x basis), $5x
of which is treated as a dividend under
section 1248. With respect to the second
portion (attributable to the first block of FT
stock), FP recognizes a gain of $15x ($30x
value¥$15x basis), $12x of which is treated
as a dividend under section 1248. With
respect to the third portion (attributable to
the second block of FT stock), FP recognizes
a capital loss of $10x ($20x value¥$30x
basis).
(iv) Assume further, immediately after the
transaction, FP also disposes of a share of
stock from the second block of FS stock. With
respect to the first portion (attributable to the
FS stock), FP recognizes a gain of $10x ($20x
value¥$10x basis), $2x of which is treated as
a dividend under section 1248. With respect
to the second portion (attributable to the first
block of FT stock), FP recognizes a gain of
$15x ($30x value¥$15x basis), $12x of
which is treated as a dividend under section
1248. With respect to the third portion
(attributable to the second block of FT stock),
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FP recognizes a capital loss of $10x ($20x
value¥$30x basis).
Example 2A. (i) Facts. The facts are the
same as in Example 2, except that FS merges
into FT with FT surviving in a reverse
triangular merger. Pursuant to the merger,
US1 receives FP stock with a value of
$1,000x in exchange for its FT stock, and FP
receives 10 shares of FT stock with a value
of $1,400x in exchange for its FS stock.
Immediately after the exchange, US1 is a
section 1248 shareholder with respect to FP
and FT.
(ii) Basis and holding period
determination—(A) The basis and holding
period of the FP shares received by US1 and
the stock of the surviving corporation held by
FP are the same as in Example 2, except that
each share of the surviving corporation (FT,
instead of FS) will be divided into four
portions instead of three portions. Because
FP exchanges two blocks of FS stock, the FS
portion must be divided into two separate
portions attributable to the two blocks of FS
stock. Because US1 exchanges two blocks of
FT stock, the FT portion must be divided into
two separate portions attributable to the two
blocks of FT stock.
(B) Thus, each share of the surviving
corporation (FT) will have a first portion
(attributable to the first block of FS stock)
with a basis of $5x ($50x / 10 shares), a value
of $20x ($200x / 10 shares), a holding period
of 10 years, and $5x of earnings and profits
($50x / 10 shares) attributable to such portion
for purposes of section 1248. Each share of
FT stock will have a second portion
(attributable to the second block of FS stock)
with a basis of $10x ($100x / 10 shares), a
value of $20x ($200x / 10 shares), a holding
period of 5 years, and $2x of earnings and
profits ($20x / 10 shares) attributable to such
portion for purposes of section 1248.
Moreover, each share of FT stock will have
a third portion (attributable to the first block
of FT stock) with a basis of $30x ($300x basis
/ 10 shares), a value of $60x ($600x value /
10 shares), a holding period of 10 years, and
$24x of earnings and profits ($240x / 10
shares) attributable to such portion for
purposes of section 1248. Lastly, each share
of FT stock will have a fourth portion
(attributable to the second block of FT stock)
with a basis of $60x ($600x basis / 10 shares),
a value of $40x ($400x value / 10 shares), a
holding period of 2 years, and $8x of
earnings and profits ($80x / 10 shares)
attributable to such portion for purposes of
section 1248.
Example 3. (i) Facts. USP, a domestic
corporation, owns all the stock of FS, a
foreign corporation with 10 shares of stock
outstanding. Each share of FS stock has a
value of $10x, a basis of $5x, a holding
period of 10 years, and $7x of earnings and
profits attributable to such share for purposes
of section 1248. FP, a foreign corporation,
owns the stock of FT, another foreign
corporation. FP and FT do not have any
section 1248 shareholders. FT has assets with
a value of $100x, a basis of $50x, and no
liabilities. The FT stock held by FP has a
value of $100x and a basis of $75x. FT
merges into FS with FS surviving in a
forward triangular merger. Pursuant to the
reorganization, FP receives USP stock with a
value of $100x in exchange for its FT stock.
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765
(ii) Basis and holding period
determination—(A) Because USP is a section
1248 shareholder of FS immediately before
the transaction, the basis and holding period
of the FS stock held by USP immediately
after the triangular reorganization is
determined pursuant to paragraph (c) of this
section.
(B) Pursuant to paragraph (c) of this
section, each share of FS stock is divided into
portions attributable to the basis and holding
period of the FS stock held by USP
immediately before the exchange (the FS
portion) and the basis of FT’s net assets (the
FT portion) immediately before the exchange.
The basis of FT’s net assets (and not FT
stock) is used to determine the FT portion
because FT does not have a section 1248
shareholder immediately before the
transaction. As a result, the rules of § 1.358–
6(c) apply to determine the basis of the FT
portion of each share of FS stock. The basis
and holding period of the FS portion is the
basis and holding period of the FS stock held
by USP immediately before the exchange.
Thus, each share of FS stock has a portion
with a basis of $5x, a value of $10x, and a
holding period of 10 years. The basis of the
FT portion is the basis of the FT assets to
which such portion relates. Thus, each share
of FS stock has a second portion with a basis
of $5x ($50x basis in FT’s assets / 10 shares)
and a value of $10x ($100x value of FT’s
assets / 10 shares). All of FS’s earnings and
profits prior to the transaction ($70x) is
attributed solely to the FS portion in each
share of FS stock. The FS portion of each
share of FS stock has earnings and profits of
$7x ($70x / 10 shares) attributable to such
portion for purposes of section 1248. As a
result of each share of stock being divided
into portions, the basis of the FS stock is not
averaged with the basis of the FT assets to
increase the section 1248 amount with
respect to the stock of the surviving
corporation (FS).
Example 4. (i) Facts. US, a domestic
corporation, owns all of the stock of FT, a
foreign corporation. The FT stock held by US
constitutes a single block of stock with a
value of $1,000x, a basis of $600x, and
holding period of 5 years. USP, a domestic
corporation, forms FS, a foreign corporation,
pursuant to the plan of reorganization and
capitalizes it with $10x of cash. FS merges
into FT with FT surviving in a reverse
triangular merger and a reorganization
described in section 368(a)(1)(B). Pursuant to
the reorganization, US receives USP stock
with a value of $1,000x in exchange for its
FT stock, and USP receives 10 shares of FT
stock with a value of $1,010x in exchange for
its FS stock.
(ii) Basis and holding period
determination. (A) U.S. and USP are section
1248 shareholders of FT and FS, respectively,
immediately before the transaction. Neither
US nor USP is required to include income
under § 1.367(b)–3(b) or 1.367(b)–4(b) as
described in paragraph (c)(2) of this section.
The basis and holding period of the FT stock
held by USP is determined pursuant to
paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this
section, because the exchanging shareholder
of FT stock (US) is a section 1248
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shareholder of FT, each share of the
surviving corporation (FT) has a
proportionate amount of the basis and
holding period of the FT stock immediately
before the exchange to which such share
relates. Thus, the portion of each share of FT
stock attributable to the FT stock has a basis
of $60x ($600x basis / 10 shares), a value of
$100x ($1,000x value / 10 shares), and a
holding period of 5 years. Because the value
of FS stock immediately before the triangular
reorganization ($10x) is less than one percent
of the value of the surviving corporation (FT)
immediately after the triangular
reorganization ($1,010x), USP may determine
its basis in the stock of the surviving
corporation (FT) by increasing the basis of
each share of FT stock by the proportionate
amount of USP’s aggregate basis in the FS
stock immediately before the exchange
(without dividing each share of FT stock into
separate portions to account for FS and FT).
If USP so elects, USP’s basis in each share
of FT stock is increased by $1x ($10x basis
in FS stock / 10 shares). As a result, each
share of FT stock has a basis of $61x, a value
of $101x, and a holding period of 5 years.
Example 5. (i) Facts. U.S., a domestic
corporation, owns all of the stock of FT, a
foreign corporation. The FT stock held by
U.S. constitutes one block of stock with a
basis of $170x, a value of $200x, a holding
period of 5 years, and $10x of earnings and
profits attributable to such stock for purposes
of section 1248. FP, a foreign corporation,
owns all the stock of FS, a foreign
corporation. FS has 10 shares of stock
outstanding. No United States person is a
section 1248 shareholder with respect to FP
or FS. The FS stock held by FP has a value
of $100x and a basis of $50x ($5x per share).
FT merges into FS with FS surviving in a
forward triangular merger. Pursuant to the
merger, U.S. receives FP stock with a value
of $200x for its FT stock in an exchange that
qualifies for non-recognition under section
354. FP is a controlled foreign corporation
and U.S. is a section 1248 shareholder with
respect to FP and FS immediately after the
exchange.
(ii) Basis and holding period
determination. (A) Because U.S. is a section
1248 shareholder of FT immediately before
the transaction, and U.S. is not required to
include income under §§ 1.367(b)–3(b) and
1.367(b)–4(b) as described in paragraph (c)(2)
of this section, the basis and holding period
of the FS stock held by FP immediately after
the triangular reorganization is determined
pursuant to paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this
section, each share of FS stock is divided into
portions attributable to the basis and holding
period of the FS stock held by FP
immediately before the exchange (the FS
portion) and the FT stock held by U.S.
immediately before the exchange (the FT
portion). The basis and holding period of the
FS portion is the basis and holding period of
the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock
has a portion with a basis of $5x and a value
of $10x. Because the exchanging shareholder
of FT stock (U.S.) is a section 1248
shareholder of FT, the basis and holding
period of the FT portion is the proportionate
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amount of the basis and the holding period
of the FT stock immediately before the
exchange to which such portion relates.
Thus, each share of FS stock will have a
second portion with a basis of $17x ($170x
basis/10 shares), a value of $20x ($200x
value/10 shares), a holding period of 5 years,
and $1x of earnings and profits ($10x
earnings and profits/10 shares) attributable to
such portion for purposes of section 1248.
(iii) Subsequent disposition. (A) Several
years after the merger, FP disposes of all of
its FS stock in a transaction governed by
section 964(e). At the time of the disposition,
FS stock has decreased in value to $210x (a
post-merger reduction in value of $90x), and
FS has incurred a post-merger deficit in
earnings and profits of $30x.
(B) Pursuant to paragraph (d)(1)(ii) of this
section, for purposes of determining the
amount of gain realized on the sale or
exchange of stock that has a divided portion,
any amount realized on such sale or
exchange is allocated to each divided portion
of the stock based on the relative fair market
value of the stock to which the portion is
attributable at the time the portions were
created. Immediately before the merger, the
value of the FS stock in relation to the value
of both the FS stock and the FT stock was
one-third ($100x/($100x plus $200x)).
Likewise, immediately before the merger, the
value of the FT stock in relation to the value
of both the FT stock and the FS stock was
two-thirds ($200x/$100x plus $200x).
Accordingly, one-third of the $210x amount
realized is allocated to the FS portion of each
share and two-thirds to the FT portion of
each share. Thus, the amount realized
allocated to the FS portion of each share is
$7x (one-third of $210x divided by 10
shares). The amount realized allocated to the
FT portion of each share is $14x (two-thirds
of $210x divided by 10 shares).
(C) Pursuant to paragraph (d)(3) of this
section, any earnings and profits (or deficits)
accumulated by the surviving corporation
subsequent to the reorganization are
attributed to the divided portions of shares of
stock based on the relative fair market value
of each divided portion of stock.
Accordingly, one-third of the post-merger
earnings and profits deficit of $30x is
allocated to the FS portion of each share and
two-thirds to the FT portion of each share.
Thus, the deficit in earnings and profits
allocated to the FS portion of each share is
$1x (one-third of $30x divided by 10 shares).
The deficit in earnings and profits allocated
to the FT portion of each share is $2x (twothirds of $30x divided by 10 shares).
(D) When FP disposes of its FS stock, FP
is treated as disposing of each divided
portion of a share of stock. With respect to
the FS portion of each share of stock, FP
recognizes a gain of $2x ($7x value¥$5x
basis), which is not recharacterized as a
dividend because a deficit in earnings and
profits of $1x is attributable to such portion
for purposes of section 1248. With respect to
the FT portion of each share of stock, FP
recognizes a loss of $3x ($14x value¥$17x
basis).
(e) Effective date. This section applies
to exchanges occurring after the date
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these regulations are published as final
regulations in the Federal Register.
Par. 11. Section 1.884–2 is amended
as follows:
1. Paragraphs (c)(3) through
(c)(6)(i)(A) are revised.
2. Paragraphs (c)(6)(i)(B), (C), and (D)
are added.
3. Paragraphs (c)(6)(ii) through (f) are
revised.
4. Paragraph (g) is amended by adding
a sentence at the end.
The revisions and additions read as
follows:
§ 1.884–2 Special rules for termination or
incorporation of a U.S. trade or business or
liquidation or reorganization of a foreign
corporation or its domestic subsidiary.
*
*
*
*
*
(c)(3) through (c)(6)(i)(A) [Reserved].
For further guidance, see § 1.884–
2T(c)(3) through (c)(6)(i)(A).
(c)(6)(i)(B) Shareholders of the
transferee (or of the transferee’s parent
in the case of a triangular reorganization
described in section 368(a)(1)(C) or a
reorganization described in sections
368(a)(1)(A) and 368(a)(2)(D) or (E)) who
in the aggregate owned more than 25
percent of the value of the stock of the
transferor at any time within the 12month period preceding the close of the
year in which the section 381(a)
transaction occurs sell, exchange or
otherwise dispose of their stock or
securities in the transferee at any time
during a period of three years from the
close of the taxable year in which the
section 381(a) transaction occurs.
(c)(6)(i)(C) In the case of a triangular
reorganization described in section
368(a)(1)(C) or a reorganization
described in sections 368(a)(1)(A) and
368(a)(2)(D) or (E), the transferee’s
parent sells, exchanges, or otherwise
disposes of its stock or securities in the
transferee at any time during a period of
three years from the close of the taxable
year in which the section 381(a)
transaction occurs.
(c)(6)(i)(D) A corporation related to
any such shareholder or the shareholder
itself if it is a corporation (subsequent
to an event described in paragraph
(c)(6)(i)(A) or (B) of this section) or the
transferee’s parent (subsequent to an
event described in paragraph (c)(6)(i)(C)
of this section), uses, directly or
indirectly, the proceeds or property
received in such sale, exchange or
disposition, or property attributable
thereto, in the conduct of a trade or
business in the United States at any
time during a period of three years from
the date of sale in the case of a
disposition of stock in the transferor, or
from the close of the taxable year in
which the section 381(a) transaction
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occurs in the case of a disposition of the
stock or securities in the transferee (or
the transferee’s parent in the case of a
triangular reorganization described in
section 368(a)(1)(C) or a reorganization
described in sections 368(a)(1)(A) and
(a)(2)(D) or (E)). Where this paragraph
(c)(6)(i) applies, the transferor’s branch
profits tax liability for the taxable year
in which the section 381(a) transaction
occurs shall be determined under
§ 1.884–1, taking into account all the
adjustments in U.S. net equity that
result from the transfer of U.S. assets
and liabilities to the transferee pursuant
to the section 381(a) transaction,
without regard to any provisions in this
paragraph (c). If an event described in
paragraph (c)(6)(i)(A), (B), or (C) of this
section occurs after the close of the
taxable year in which the section 381(a)
transaction occurs, and if additional
branch profits tax is required to be paid
by reason of the application of this
paragraph (c)(6)(i), then interest must be
paid on that amount at the
underpayment rates determined under
section 6621(a)(2), with respect to the
period between the date that was
prescribed for filing the transferor’s
income tax return for the year in which
the section 381(a) transaction occurs
and the date on which the additional tax
for that year is paid. Any such
additional tax liability together with
interest thereon shall be the liability of
the transferee within the meaning of
section 6901 pursuant to section 6901
and the regulations thereunder.
(c)(6)(ii) through (f) [Reserved]. For
further guidance, see § 1.884–2T(c)(6)(ii)
through (f).
(g) * * * Paragraphs (c)(6)(i)(B), (C),
and (D), are applicable for tax years
beginning after December 31, 1986,
except that such paragraphs are
applicable to transactions occurring
after the date these regulations are
published as final regulations in the
Federal Register in the case of
reorganizations described in sections
368(a)(1)(A) and 368(a)(2)(D) or (E).
Par. 12. In § 1.884–2T, paragraphs
(c)(6)(i)(B), (C), and (D) are revised to
read as follows:
§ 1.884–2T Special rules for termination or
incorporation of a U.S. trade or business or
liquidation or reorganization of a foreign
corporation or its domestic subsidiary
(Temporary).
*
*
(c) * *
(6) * *
(i) * *
*
*
*
*
VerDate jul<14>2003
*
*
16:24 Jan 04, 2005
Jkt 205001
(B), (C), and (D) [Reserved]. For
further guidance, see § 1.884–
2(c)(6)(i)(B), (C), and (D).
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 05–201 Filed 1–4–05; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
767
DC 20044. Submission may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–152945–04),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC or sent
electronically, via the IRS Internet site
at http://www.irs.gov/regs or via the
Federal eRulemaking Portal at http://
www.regulations.gov (IRS and REG–
152945–04).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, A.
G. Kelley, (202) 622–6040; concerning
submission of comments, Treena
Garrett, (202) 622–3401 (not toll-free
numbers).
26 CFR Part 31
[REG–152945–04]
RIN 1545–BD96
Flat Rate Supplemental Wage
Withholding
SUPPLEMENTARY INFORMATION:
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
The Employment Tax Regulations
distinguish between regular wages paid
for a payroll period and supplemental
wages for purposes of income tax
withholding. Although the regulations
do not give a comprehensive definition
of the term ‘‘supplemental wages,’’ the
regulations provide that supplemental
wages include ‘‘* * * bonuses,
commissions, and overtime pay, paid
for the same or a different period, or
without regard to a particular period.’’
Regulations and revenue rulings have
provided other examples. See
§ 31.3401(a)–1(b)(8)(i)(b)(2) of the
regulations (sick pay paid by an agent of
the employer); § 31.3401(a)–4(c) of the
regulations (wages paid under
reimbursement and other expense
allowance arrangements); Rev. Rul. 67–
257)1967–2 C.B. 359) (income
recognized on exercise of nonqualified
stock option); Rev. Rul. 67–131 (1967–
1 C.B. 291) (lump sum payment of
accumulated annual leave); and Rev.
Rul. 66–294 (1966–2 C.B. 459) (lump
sum vacation payment, overtime pay,
lump sum retroactive pay, sick pay paid
separately from regular pay).
Section 31.3402(g)–1 of the
regulations provides the current rules
for withholding income tax from a
payment of supplemental wages. Two
procedures have been generally
available to the employer with respect
to such supplemental wage payments.
Under the first procedure (the aggregate
procedure), employers calculate the
amount of withholding due by
aggregating the amount of supplemental
wages with the regular wages paid for
the current payroll period or for the
most recent payroll period this year, and
treating the aggregate as if it were a
single wage payment for the regular
payroll period.
AGENCY:
SUMMARY: This document contains
proposed regulations amending the
regulations that provide for the flat rate
of withholding applicable to calculating
the amount of income tax withholding
on supplemental wages. The proposed
amendment to the regulations reflects
changes in the law made by the Revenue
Reconciliation Act of 1993, the
Economic Growth and Tax Relief
Reconciliation Act of 2001, the Jobs and
Growth Tax Relief Reconciliation Act of
2003, and the American Jobs Creation
Act of 2004. Under the American Jobs
Creation Act of 2004, the optional flat
rate for withholding on supplemental
wages will generally remain at 25
percent for payments made after
December 31, 2004, but may change if
income tax rates change. However, the
2004 Act also provides that, after 2004,
if an employee receives supplemental
wages in excess of one million dollars
from an employer in a calendar year, the
excess of the supplemental wages over
one million dollars is subject to
mandatory income tax withholding at
the highest income tax rate. The highest
income tax rate is currently 35 percent.
In determining whether an employer
has reached the one million dollar
threshold for an employee,
supplemental wage payments from all
businesses under common control and
from agents will be taken into account.
DATES: Written or electronic comments
and requests for a public hearing must
be received by April 5, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–152945–04), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
PO 00000
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E:\FR\FM\05JAP1.SGM
05JAP1
| File Type | application/pdf |
| File Title | Document |
| Subject | Extracted Pages |
| Author | U.S. Government Printing Office |
| File Modified | 2005-01-05 |
| File Created | 2005-01-05 |