Notice 98-34

Internal Revenue

bulletin

Bulletin No. 1998–27
July 6, 1998

HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 98–33, page 26.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for July 1998.

T.D. 8770, page 4.
Final and temporary regulations under sections 367 and
6038B of the Code relate to certain transfers of stock or securities by U.S. persons to foreign corporations and related
reporting requirements.

Notice 98–34, page 30.
This notice modifies the expatriation ruling practice under
sections 877, 2107, and 2501(a)(3) of the Code, and also
modifies the categories of long-term residents eligible to
submit a ruling request.

Notice 98–35, page 35.
This notice announces that Treasury and the Service will
withdraw the temporary regulations and proposed regulations issued on March 23, 1998 (T.D. 8767 and REG–
104537–97), and will issue proposed regulations regarding
the treatment of hybrid arrangements under subpart F, and

separate proposed regulations providing guidance on the
treatment of a controlled foreign corporation’s distributive
share of partnership income. This notice requests public
comment, and formally withdraws Notice 98–11.

Rev. Proc. 98–38, page 29.
Section 911(d)(4) waiver. Guidance is provided to individuals who fail to meet the eligibility requirements of section
911(d)(1) of the Code because adverse conditions in a foreign country preclude the individual from meeting those requirements. A current list of countries and the dates those
countries are subject to the section 911(d)(4) waiver is
provided.

EXEMPT ORGANIZATIONS
Announcement 98–60, page 39.
A list is given of organizations now classified as private foundations.

Announcement 98–61, page 38.
Veterans of Foreign Wars Post 5316 no longer qualifies as
an organization to which contributions are deductible under
section 170 of the Code.

Finding Lists begin on page 42.
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 38.
Index for January-June 1998 begins on page 45.

Department of the Treasury
Internal Revenue Service

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

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Introduction
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dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
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of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
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Revenue rulings represent the conclusions of the Service on
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For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 1998. See
Rev. Rul. 98–33, page 26.

Section 367.—Foreign
Corporations
26 CFR 1.367(a)–3 Treatment of transfers of stock
or securities to foreign corporations

T.D. 8770
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 7 and 602
Certain Transfers of Stock or
Securities by U.S. Persons to
Foreign Corporations and
Related Reporting Requirements
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
regulations relating to certain transfers of
stock or securities by U.S. persons to foreign corporations pursuant to the corporate organization and reorganization provisions of the Internal Revenue Code, and
the reporting requirements related to such
transfers. The regulations provide the
public with guidance necessary to comply
with the Tax Reform Act of 1984.
DATES: These regulations are effective
July 20, 1998.
FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 6223860 (not a toll-free number).

July 6, 1998

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1271. Responses to these collections of information are required in order
for certain U.S. shareholders that transfer
stock or securities in section 367(a) exchanges to qualify for an exception to the
general rule of taxation under section
367(a)(1).
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The estimated burden per respondent
varies from .5 to 8 hours, depending upon
individual circumstances, with an estimated average of 4 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FS:FP, Washington, DC 20224, and 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.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and proposed regulations under sections 367(a)
and (d), and 6038B were published in the
Federal Register (51 F.R. 17936 [T.D.
8087 (1986–1 C.B. 175)]). These regulations, which addressed transfers of stock
or securities and other assets, as well as
related reporting requirements, were published to provide the public with guidance
necessary to comply with changes made

4

to the Internal Revenue Code by the Tax
Reform Act of 1984. The IRS and the
Treasury Department later issued Notice
87–85 (1987–2 C.B. 395), which set forth
substantial changes to the 1986 regulations, effective with respect to transfers of
domestic or foreign stock or securities occurring after December 16, 1987. A further notice of proposed rulemaking containing rules under section 367(a) with
respect to transfers of domestic or foreign
stock or securities, as well as section
367(b), was published in the Federal
Register on August 26, 1991 (56 F.R.
41993 [INTL–54–91; INTL–178–86
(1991–2 C.B. 1070)]). The section 367(a)
portion of the 1991 proposed regulations
was generally based upon the positions
announced in Notice 87–85, but the regulations proposed certain modifications to
Notice 87–85, particularly with respect to
transfers of stock or securities of foreign
corporations.
Subsequently, the IRS and the Treasury
Department have issued guidance focusing on the transfers of stock or securities
of domestic corporations. Notice 94–46
(1994–1 C.B. 356) announced modifications to the positions set forth in Notice
87–85 (and the 1991 proposed regulations) with respect to transfers of stock or
securities of domestic corporations occurring after April 17, 1994. Temporary and
proposed regulations (referred to as the inversion regulations) implementing Notice
94–46 (with certain modifications) were
published in the Federal Register on December 26, 1995 (60 F.R. 66739 and
66771 [T.D. 8638 (1996–1 C.B. 43)]).
Final inversion regulations, published in
the Federal Register on December 27,
1996 (61 F.R. 61849 [T.D. 8702 (1997–1
C.B. 92)]), generally followed the rules
contained in the temporary regulations,
with modifications.
The final regulations herein address
transfers of foreign stock or securities,
and other matters addressed in the 1991
proposed regulations under section 367(a)
that were not addressed in the 1996 final
inversion regulations.
In addition, these final regulations address those portions of the 1991 proposed
section 367(b) regulations that relate to

1998–27 I.R.B.

transactions that are subject to both sections 367(a) and (b). The remainder of
the 1991 proposed section 367(b) regulations will be finalized at a later date.
This document also contains final regulations under section 6038B with respect
to reporting requirements applicable to
transfers of stock or securities described
under section 367(a). Rules regarding
outbound transfers to corporations of assets other than stock (including intangibles), and outbound transfers to foreign
partnerships will be addressed in separate
guidance.
Finally, these final regulations contain
a clarification with respect to the scope of
certain outbound transfers of intangibles
that are subject to section 367(d).
Explanation of Provisions
Sections 367(a) and (b): introduction
Section 367(a)(1) generally treats a
transfer of property (including stock or
securities) by a U.S. person to a foreign
corporation (an outbound transfer) in an
exchange described in section 332, 351,
354, 356 or 361 as a taxable exchange unless the transfer qualifies for an exception
to this general rule.
Section 367(a)(2) provides that, except
as provided by regulations, section
367(a)(1) shall not apply to the transfer of
stock or securities of a foreign corporation which is a party to the exchange or a
party to the reorganization. Section
367(a)(3) contains an exception to section
367(a)(1) for certain outbound transfers
of tangible assets other than stock or securities. Section 367(a)(5) contains limitations on any exceptions to section
367(a)(1) in certain instances.
Section 367(b) provides that, with respect to certain nonrecognition transfers
in connection with which there is no
transfer of property described in section
367(a)(1), a foreign corporation will retain its status as a corporation unless regulations provide otherwise.
These final regulations address transactions described in both sections 367(a)
and (b), and are prescribed under the authority of both sections 367(a) and (b).
Stock transfers under sections 367(a)
and (b): scope
Outbound transfers of stock that are subject to section 367(a) may be either direct
(such as an outbound transfer of stock de-

1998–27 I.R.B.

scribed under section 351), indirect (as described below with respect to certain transfers) or constructive (such as an outbound
stock transfer that may occur pursuant to a
change in an entity’s classification). See
§1.367(a)–3(a) (as amended) for the general rules regarding the scope of stock
transfers that are subject to section 367(a).
Indirect stock transfers: in general
The current temporary regulations contain illustrative examples of certain transactions, including triangular reorganizations described under section
368(a)(1)(A) and either section
368(a)(2)(D) or (E), section 368(a)(1)(B)
or (C), that are treated as indirect stock
transfers subject to section 367(a) where
the acquired company and the acquiring
company are domestic corporations and
the shareholders of the acquired company
receive stock of the acquiring company’s
foreign parent in the exchange. (Under
the terminology used in the proposed and
final regulations, in the case of a reorganization described in sections 368(a)(1)(A)
and (a)(2)(E), U.S. shareholders exchange
their stock for stock of the acquired company’s foreign parent.)
The proposed regulations clarified the
treatment of indirect stock transfers, and
provided extensive examples of the rules.
The proposed regulations provided that
transactions that are treated as indirect
stock transfers include: (i) successive section 351 exchanges, and (ii) section
368(a)(1)(C) reorganizations followed by
section 368(a)(2)(C) exchanges. In addition, the reorganizations illustrated under
the existing temporary regulations are
also treated as indirect stock transfers
under the proposed regulations where the
acquired and/or acquiring corporations
are foreign corporations.
The proposed regulations requested
comments as to the scope of the indirect
stock transfer rules. The IRS and the
Treasury Department carefully considered
comments received with respect to the
scope of the indirect stock transfer rules
and have decided to retain the rules set
forth in the proposed regulations. These
rules are contained in §1.367(a)–3(d), and
additional examples are provided in the
final regulations.
Indirect stock transfer rules and
section 367(d)
In the case of a triangular section

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368(a)(1)(C) reorganization in which a
U.S. target company (UST) transfers its assets to a foreign acquiring company (FA)
and UST’s U.S. parent company (USP) receives stock of FA’s foreign parent (the
transferee foreign corporation or TFC) in
exchange for the UST stock, the indirect
stock transfer rules and the asset transfer
rules will apply contemporaneously.
If UST is taxable under section 367(a)
with respect to its outbound (section 361)
transfer of all or a portion of its tangible
assets (because such assets do not qualify
for an exception to section 367(a)(1)),
USP will receive a step up in the basis of
its stock in UST, provided that USP and
UST file a consolidated Federal income
tax return. See §1.1502–32. USP will
also be deemed to make an indirect transfer of the stock of UST for TFC stock.
See §1.367(a)–3(d)(1)(iv). Thus, if USP
receives at least five percent of either the
total value or the total voting power of the
stock of TFC (i.e., USP is a 5-percent
shareholder (which is also referred to as a
5-percent transferee shareholder in
§1.367(a)–3(c)(5)(ii)) and the value of the
UST stock exceeds USP’s basis in UST
(taking into account basis adjustments relating to the asset transfer), USP may
qualify for nonrecognition treatment by
entering into a gain recognition agreement (GRA), described below, provided
that the requirements of §1.367(a)–
3(c)(1) are satisfied. See, e.g., §1.367(a)–
3(d)(3), Example 7 through Example 7C.
If the asset transfer involves tangible
assets and the transfer is fully taxable (so
that USP’s basis in its UST stock equals
the value of the UST stock), the indirect
stock transfer would not be taxable under
section 367(a), and, hence, no GRA
would be required. In contrast, if the assets transferred by UST include intangibles that are taxable under section 367(d),
the exact manner in which section 367(d)
operates is less certain.
The regulations under section 367(d) do
not address the tax consequences when the
U.S. transferor goes out of existence pursuant to the transaction. The IRS and the
Treasury Department are studying the
manner in which the rules under section
367(d) should operate when the U.S. transferor goes out of existence contemporaneously with (or subsequent to) its outbound
transfer of an intangible. Comments are
requested with respect to this issue.

July 6, 1998

Transactions subject to sections 367(a)
and (b)
An outbound transfer of foreign stock
or securities can be subject to both sections 367(a) and (b). Pursuant to section
367(a)(2), §1.367(a)–3T(b) of the current
temporary regulations provides that, if an
exchange is described in section 354 or
361, an outbound transfer of stock or securities of a foreign corporation that is a
party to the reorganization is not subject
to section 367(a). Thus, for example, an
outbound transfer in which a U.S. person
exchanges stock in one controlled foreign
corporation (CFC) for another CFC that
qualifies as a reorganization under section
368(a)(1)(B) (a B reorganization), including a transfer that qualifies as both a B reorganization and a section 351 exchange,
is subject only to section 367(b), not section 367(a). In such case, no GRA, described below, is required under the current temporary regulations to preserve
nonrecognition treatment. In contrast, an
outbound transfer of foreign stock that
qualifies as a section 351 exchange but
not a B reorganization is currently subject
to only section 367(a), not section 367(b),
and, thus, a GRA may be required to preserve nonrecognition treatment.
The IRS and the Treasury Department
believe that substantially similar transactions, such as these, should not be treated
in markedly different manners. Thus,
these final regulations adopt the approach
contained in the proposed regulations:
that all outbound transfers of foreign
stock will be subject to sections 367(a)
and (b) concurrently, except to the extent
that the exchange is fully taxable under
section 367(a)(1). See §1.367(a)–3(b)(2).
Sections 367(a) and (b): exceptions to
taxation
Once a determination is made that a
particular outbound transfer of stock or
securities is subject to section 367(a), the
next determination is the tax treatment of
such transfer. In general, the current rules
regarding the outbound transfer of stock
or securities under section 367(a) provide
for three different tax consequences depending upon the particular facts: (i) certain transfers retain nonrecognition treatment without condition, (ii) certain
transfers retain nonrecognition treatment
only if the U.S. transferor enters into a
GRA, and (iii) certain transfers of stock
are taxable to the U.S. transferor under

July 6, 1998

section 367(a)(1) with no option to file a
GRA to secure nonrecognition treatment.
These final regulations retain this general
framework.
The current rules governing whether a
taxpayer may qualify for an exception
under section 367(a) in the case of an outbound transfer of stock are described in
§1.367(a)–3(c) of the final inversion regulations (in the case of domestic stock or
securities) and Notice 87–85 (in the case
of foreign stock or securities).
Notice 87–85 provides that in the case
of an outbound transfer of foreign stock or
securities to which section 367(a) applies,
a U.S. transferor may generally qualify for
nonrecognition treatment if it either (i) is
not a 5-percent shareholder, or (ii) is a 5percent shareholder but enters into a GRA
for a term of 5 or 10 years, depending
upon the TFC stock owned by all U.S.
transferors. Under current law, a 5-percent shareholder that qualifies for nonrecognition treatment under section 367(a)
by filing a GRA agrees that if the TFC disposes of the stock of the transferred corporation in a taxable transaction during the
term of the GRA, the 5-percent shareholder must amend its return for the year
of the transfer and include in income the
amount that it realized but did not recognize with respect to the stock of the transferred corporation, and pay the tax due,
plus interest, on this amount. (Under Notice 87–85, the term of the GRA is 5 years
if all U.S. transferors, in the aggregate,
own less than 50 percent of both the total
voting power and the total value of the
TFC immediately after the transfer, or 10
years if all U.S. transferors, in the aggregate, own 50 percent or more of either the
total voting power or the total value of the
TFC immediately after the transfer.) Although GRAs are currently used solely
with respect to outbound transfers of stock
or securities, the IRS and the Treasury Department may, at a later date, permit taxpayers to secure nonrecognition treatment
under section 367(a) with respect to other
types of assets by entering into GRAs.
Notice 87–85, however, provides no
exception to section 367(a)(1) if a U.S.
transferor transfers stock in a CFC in
which it is a United States shareholder (as
defined in §7.367(b)–2(b) or section
953(c)) but does not receive back stock in
a CFC in which it is a United States shareholder.

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The final regulations, following the
proposed regulations on this point, provide that a transfer described in the preceding paragraph, such as a section 351
exchange in which a U.S. transferor exchanges stock of a CFC in which it is a
United States shareholder for stock of a
non-CFC, is not automatically taxable.
Instead, both sections 367(a) and (b)
apply to the exchange. If the U.S. transferor is required under section 367(a) to
enter into a GRA to preserve nonrecognition treatment and fails to do so, the transaction is fully taxable under section
367(a) (and, as a consequence, the section
1248 amount that would be included as a
dividend under section 367(b) had a GRA
been filed is instead treated as a dividend
under section 1248). If the U.S. transferor is required to enter into a GRA and
properly does so, the U.S. transferor is required under section 367(b) to include in
income the section 1248 amount attributable to the stock exchanged. The amount
of the GRA equals the gain realized on the
transfer less the inclusion under section
367(b). See §1.367(a)–3(b)(2).
As noted above, Notice 87–85 addressed outbound transfers of both domestic and foreign stock. The (1996)
final inversion regulations superseded
Notice 87–85 with respect to outbound
transfers of domestic stock. The rules in
Notice 87–85 with respect to outbound
transfers of foreign stock have been incorporated into these final regulations with
respect to transfers that occur prior to July
20, 1998. See §1.367(a)–3(g). Notice
87–85 will be obsolete when these final
regulations are effective.
Section 367(a): post-GRA transactions
Section 1.367(a)–8 provides general
rules regarding terms and conditions relating to GRAs, and the manner in which
post-GRA transactions impact the GRA.
The general terms and conditions for
GRAs have not changed significantly
from the terms and conditions set forth in
§1.367(a)–3T(g) of the current temporary
regulations, except that the final regulations contain an election (the GRA election), described below, to permit the taxpayer to include the GRA amount in
income in the year of the triggering event
(with interest on the tax due from the year
of the transfer) rather than on an amended
return for the year of the initial transfer.
In addition, the final regulations generally

1998–27 I.R.B.

follow the proposed regulations by providing a more comprehensive explanation
of the manner in which the GRA is affected by both taxable and nontaxable dispositions by the U.S. transferor, the TFC,
and the transferred corporation.
The current temporary regulations provide that the GRA is triggered if (i) the
TFC disposes of all or a portion of the
stock of the transferred corporation, or (ii)
the transferred corporation disposes of a
substantial portion of its assets. The term
substantial portion was not defined in the
regulations.
Both the final and the proposed regulations use the rule from the current temporary regulations that a GRA is triggered to
the extent that the TFC disposes of all or a
portion of the stock of the transferred corporation. The final regulations also adopt
the rule contained in the proposed regulations that a GRA is triggered if the transferred corporation disposes of substantially all of its assets (within the meaning
of section 368(a)(1)(C)). In addition, the
final regulations provide that a GRA will
be triggered if the U.S. transferor is either
a U.S. citizen or long-term resident (as
defined in section 877(e)(2)) at the time
of the initial transfer and such person
ceases to be a U.S. citizen or long-term
resident during the GRA term.
Under the current temporary regulations, if a GRA is triggered, the U.S.
transferor must amend its tax return for
the year of the initial transfer, include in
income the gain that was realized but not
recognized, and pay the tax due thereon
with interest. The proposed regulations
would have maintained the amended return/interest charge requirement, but requested comments as to (i) the amount of
gain to be recognized by the U.S. transferor upon a triggering event, (ii) the year
in which the gain should be included in
the income of the U.S. transferor, and (iii)
whether an interest charge is appropriate.
A number of commentators have suggested that the 10-year GRA term under
Notice 87–85 in certain instances is too
restrictive because a disposition of the
stock of the transferred corporation in
year 8, for example, would likely not be a
tax avoidance transfer but the interest
charges would be burdensome in such
case. Other commentators suggested a
deferred income approach similar to that
applicable in the consolidated return deferred intercompany context.

1998–27 I.R.B.

In response to these comments, these
final regulations contain two significant
modifications to the current temporary
regulations. First, in conformity with the
final inversion regulations, these regulations provide that the GRA term will be 5
years in all cases involving outbound
transfers of foreign stock. (Moreover,
taxpayers may elect to apply these final
regulations to past transactions so that any
10-year GRA that is in existence (i.e., has
not been triggered) on July 20, 1998 will
be a 5-year GRA. Thus, the 10-year GRA
will be considered to be a 5-year GRA by
the IRS, and, such GRA will terminate on
the fifth full taxable year following the
close of the taxable year of the initial
transfer.) Second, because the IRS and
the Treasury Department are concerned
that the amended return requirement can
be burdensome to taxpayers in the event
that a GRA is triggered, the final regulations contain an election (the GRA election), which must be filed with the U.S.
transferor’s tax return that includes the
date of the initial transfer, that permits
taxpayers to report a triggering event in
the year of the triggering event rather than
on an amended return for the year of the
initial transfer. (No such election is available with respect to GRAs that are in existence when these final regulations become effective.)
Even if a transferor makes a GRA election, such person is still required to extend
the statute of limitations, comply with all
of the applicable GRA reporting requirements (such as filing annual certifications)
and, in the case of a triggering event, include in income the GRA amount plus interest in the same manner as under the current temporary regulations, except that (i)
the GRA amount and interest would be included on the U.S. transferor’s tax return
for the year that includes the triggering
event, and (ii) other computations, such as
the section 1248 amount (if any) attributable to the transferred stock, will be determined on the triggering date rather than
the date of the initial transfer.
Consistent with the proposed regulations, the final regulations clarify that
post-GRA nonrecognition transactions
(e.g., nonrecognition transactions in
which the U.S. transferor transfers the
stock of the TFC, the TFC transfers the
stock of the transferred corporation, or the
transferred corporation transfers substan-

7

tially all of its assets) generally do not
trigger the GRA, provided that the U.S.
transferor reports the transaction and
amends the GRA to reflect the post-GRA
transaction.
The current temporary regulations do
not provide instances that would cause the
GRA to be terminated (i.e., extinguished).
The proposed regulations would have
provided that the GRA would be terminated if either (i) the U.S. transferor disposed of all of its TFC stock in a taxable
transaction, or (ii) the transferred company is a U.S. company that sold substantially all of its assets in a taxable transaction (but only if the transferred company
was affiliated with the U.S. transferor
under section 1504(a)(2) prior to the initial transfer).
The final regulations retain these two
rules. In addition, the final regulations
also provide that a GRA will be terminated if (i) the TFC distributes the stock
of the transferred corporation back to the
U.S. transferor in a section 355 exchange,
or (ii) the TFC liquidates into the U.S.
transferor under section 332, provided
that, immediately after the section 355
distribution or section 332 liquidation, the
U.S. transferor’s basis in the transferred
stock is less than or equal to the basis that
it had in the transferred stock immediately
prior to the initial transfer of such stock.
Finally, the current temporary regulations provide (and the 1991 proposed regulations would have provided) certain restrictions on taxpayers’ ability to use net
operating losses and credits to offset the
amount of gain recognized upon the trigger of a GRA. In response to suggestions
from commentators, the final regulations
remove these restrictions.
Section 367(a) and “check-the-box”
rules
The IRS and the Treasury Department
are aware that taxpayers may attempt to
use the entity classification (i.e., checkthe-box) regulations to avoid entering into
GRAs. For example, assume that a U.S.
transferor (USP) owns all of the stock of
two CFCs, CFC1 and CFC2. USP transfers the stock of CFC2 to CFC1 in an exchange otherwise described as both a section 351 exchange and a B reorganization.
USP elects under §301.7701–3(c) to treat
CFC2 as a disregarded entity, and such
election is effective immediately prior to
the transfer.

July 6, 1998

Provided that the election is respected,
USP would, for Federal income tax purposes, transfer the assets (and not the
stock) of CFC2 to CFC1 in a section 351
exchange. If the assets will be used by
CFC1 in the active conduct of a trade or
business outside the United States, the
transfer of the assets by USP will qualify
for the exception contained in section
367(a)(3) and §1.367(a)–2T (as limited by
certain provisions, including §§1.367(a)–
4T through 1.367(a)–6T). If the assets are
disposed of (either directly by CFC2 or
because the stock of CFC2 is disposed of
by CFC1) in connection with the transfer
to CFC1, the step transaction doctrine
may apply to deny nonrecognition treatment to the outbound transfer to the extent it is treated as an asset transfer. In addition, the active trade or business
exception under §1.367(a)–2T is inapplicable if, as part of the same transaction in
which the TFC received the assets, it disposes of such assets. See §1.367(a)–
2T(c). Thus, if USP intended to sell
CFC2 or its business at the time of the
election or the asset transfer, the transfer
would be treated as a taxable exchange
under section 367(a)(1). If the step transaction doctrine and the active trade or
business anti-avoidance rule do not apply,
however, the use of the “check-the-box”
regulations in this context will not be
viewed as inconsistent with the purposes
of section 367(a), and, therefore, the
transaction will be respected as an asset
transfer.
Section 367(a) and tax-motivated
transactions
The IRS and the Treasury Department
are aware that certain taxpayers have entered into (or are contemplating) transactions that are designed to avoid the inversion regulations under §1.367(a)–3(c). In
these transactions (where a foreign corporation acquires the stock of a domestic
corporation), one or more U.S. transferors
attempt to avoid taxation under the inversion regulations by retaining an equity interest (or receiving a modified equity interest) in the domestic target corporation.
Such interest, however, is typically coupled with an interest in the foreign acquirer, or a right to convert the interest in
the domestic target into stock of the foreign acquirer.
The IRS and the Treasury Department
are currently scrutinizing these transac-

July 6, 1998

tions on a case-by-case basis using substance over form (or other) principles, and
are studying whether it is appropriate to
issue specific guidance with respect to
these transactions. Comments are requested as to the instances in which a U.S.
transferor that receives (or maintains) a
stock interest in the domestic target in circumstances similar to those described
above should not be treated as having received stock in the foreign acquirer for
purposes of section 367(a).
Section 367(b)
This document finalizes the 1991 proposed section 367(b) regulations to the
extent necessary to address those transfers
of foreign stock subject to both sections
367(a) and (b) under the 1991 proposed
regulations.
In addition, this document contains a
number of other miscellaneous provisions, at the request of commentators.
First, under current law, if a United
States shareholder (defined under
§7.367(b)–2(b) as a 10 percent shareholder of a CFC within the past 5 years)
exchanges, under section 351, stock of a
foreign corporation for stock of a domestic corporation, the U.S. transferor is not
taxable under section 367(b). However,
if the transaction constitutes a section
354 exchange, under §7.367(b)–7(c)(1)
the United States shareholder must include in income the section 1248 amount
attributable to the stock exchanged. Consistent with the 1991 proposed regulations as well as the purpose of these final
regulations to harmonize the Federal income tax consequences of substantially
similar transactions, the final section
367(b) regulations provide that a section
1248 inclusion generally is not required
in the case of the section 354 exchange
described above. (This result is accomplished by excluding domestic stock from
the categories of nonqualifying consideration described in §1.367(b)–4(b)(1).
Thus, these transfers will generally be respected as nonrecognition exchanges
under 367(b).)
Second, consistent with the principles
of section 367(b), in cases where the final
regulations do not require that the section
1248 amount be included in income, the
regulations clarify the appropriate treatment of post-reorganization exchanges
under section 1248 or 367(b). See
§1.367(b)–4(b)(5).

8

Third, in an effort to reduce the reporting burdens of U.S. persons that make
outbound transfers of foreign stock or securities, the section 367(b) regulations are
amended to provide that, to the extent that
a transaction is described in both sections
367(a) and (b), and the exchanging shareholder is not a United States shareholder
of the corporation whose stock is exchanged, reporting under section 367(b)
is not required. See §1.367(b)–1(c).
Finally, the proposed section 367(b)
regulations provided that final regulations generally would be effective for exchanges that occur on or after 30 days
after the final regulations were published
in the Federal Register. However,
§1.367(b)–2(d) (relating to the definition
of the all earnings and profits amount)
was proposed to be effective for transfers
occurring on or after August 26, 1991. In
response to comments regarding this provision and its effective date, a separate
notice of proposed rulemaking is issued
with these final regulations to delete the
August 26, 1991, effective date with respect to the all earnings and profits
amount. Thus, the definition of the all
earnings and profits amount that will be
included in forthcoming section 367(b)
final regulations will apply to exchanges
that occur on or after 30 days after the issuance of those final regulations.
The IRS and the Treasury Department
will issue guidance at a later date to address section 367(b) provisions described
in the 1991 proposed regulations that are
not addressed herein.
Section 6038B: in general
Section 6038B, as enacted under the
Deficit Reduction Act of 1984 (Public
Law 98–369), provided that U.S. persons
that made certain outbound transfers of
property to foreign corporations were required to report those transfers in the
manner prescribed by regulations. The
penalty for failure to comply with the regulations was 25 percent of the gain realized on the exchange, unless the failure
was due to reasonable cause and not to
willful neglect. (The penalty was modified by the Taxpayer Relief Act of 1997
(TRA ’97).)
Section 1.6038B–1T, promulgated on
May 15, 1986, by TD 8087 (together with
regulations under sections 367(a) and
(d)), provided rules concerning the information that was required to be reported

1998–27 I.R.B.

under section 6038B with respect to transfers of property to foreign corporations.
Section 6038B: transfers of stock or
securities
Section 1.6038B–1T(b)(2)(i) of the
current temporary regulations provides,
inter alia, that no notice is required under
section 6038B with respect to a transfer of
stock or securities described in §1.367(a)–
3T(f)(1) of the current temporary regulations. Section 1.367(a)–3T(f)(1) had provided that an outbound transfer of stock
or securities of a domestic or foreign corporation was not taxable under section
367(a)(1) if immediately after the transfer
(i) all U.S. transferors owned in the aggregate less than 20 percent of both the total
voting power and the total value of the
stock of the TFC, or (ii) all U.S. transferors owned in the aggregate 20 percent or
more of either the total voting power or
the total value of the stock of the TFC, but
less than 50 percent of that total voting
power and total value and the subject U.S.
transferor was not a 5-percent shareholder.
Notice 87–85 superseded the 1986 temporary regulations under section 367(a)
(including §1.367(a)–3T(f)(1)) with respect to the exceptions available for outbound stock transfers. Notice 87–85 provided that final regulations would
incorporate the rules contained in the Notice, for transfers occurring after December 16, 1987. The exceptions in the 1986
temporary regulations, including
§1.367(a)–3T(f)(1) of the current temporary regulations, were removed as deadwood (for transfers occurring after December 16, 1987) by the 1995 temporary
inversion regulations (T.D. 8638).
Prior to the issuance of these final regulations, however, section 6038B had not
been amended with respect to outbound
transfers of stock or securities. Thus,
there was uncertainty whether a U.S.
transferor that qualified under the inversion regulations or Notice 87–85 for nonrecognition treatment without filing a
GRA (i.e., such U.S. transferor was not a
5-percent shareholder) was required to
comply with section 6038B.
To reduce the reporting burdens on
U.S. taxpayers that make outbound transfers of stock subject to section 6038B,
the final section 6038B regulations provide that, with respect to transfers occurring after December 16, 1987, and before

1998–27 I.R.B.

these final regulations are generally effective, a U.S. transferor that makes an outbound transfer subject to section 367(a)
will not be subject to section 6038B with
respect to such transfer if (i) such person
was not a 5-percent shareholder and the
transfer qualified for nonrecognition
treatment under section 367(a), or (ii)
such person was not a 5-percent shareholder in the case of a taxable transaction
but such person included the gain on its
Federal income tax return for the taxable
year that included the date of the transfer.
With respect to transfers occurring after
these final regulations are effective, these
regulations contain the two exceptions described above. In addition, a 5-percent
shareholder that is required to file a GRA
is not subject to section 6038B provided
that a GRA is properly filed. Moreover,
U.S. transferors that are taxable on their
outbound transfers of stock or securities
(such as under the inversion regulations
or because a 5-percent shareholder that
was eligible to qualify for nonrecognition
treatment chose not to file a GRA) are not
subject to section 6038B if they properly
report the gain recognized on the transfer
on their tax returns that include the date of
the transfer.
Thus, a U.S. transferor that does not
properly report the gain recognized on its
outbound stock transfer has not met its
section 6038B filing obligation with respect to such transfer, and will be subject
to the penalty under section 6038B, unless the transferor’s failure to report the
gain from the outbound transfer was due
to reasonable cause and not willful neglect. Such person will also be subject to
the extended statute of limitations under
section 6501(c)(8).
Section 6038B: transfers of cash and
unappreciated property
As noted above, prior to the enactment
of TRA ’97, the penalty for failure to
comply with section 6038B was 25 percent of the gain realized on the outbound
transfer. Thus, in the case of an outbound
transfer of cash or unappreciated property
required to be reported under section
6038B, no penalty was imposed upon the
failure to report the transfer.
Pursuant to the TRA ’97, the penalty
for failure to report under section 6038B
is revised from 25 percent of the gain realized in the property transferred to 10
percent of the fair market value of the

9

property transferred, but limited to
$100,000 unless the failure to report the
exchange was due to intentional disregard. (The final regulations reflect the
modification to the penalty provision
under section 6038B.)
In response to the TRA ’97 change to
the penalty structure under section
6038B, these final regulations clarify that
transfers of unappreciated property are required to be reported, or the 10 percent
penalty will apply. These final regulations, however, do not require outbound
transfers of cash to be reported. Rules regarding outbound transfers of cash will be
provided in future regulations.
Section 6038B: other transfers
Pursuant to TRA ’97, certain outbound
transfers to foreign partnerships are required to be reported under section
6038B. Rules regarding outbound transfers to foreign corporations of assets not
covered in these final regulations (such as
intangibles), and outbound transfers to
foreign partnerships, will be addressed in
separate guidance.
Section 367(d) and other TRA ’97
matters
A clarification provides that certain
rules under section 367(a) will also apply
under section 367(d) for purposes of determining the identity of the transferor
that makes an outbound transfer of an intangible subject to section 367(d). Section 367(a)(4) and §1.367(a)–1T(c)(5)
provide that, for purposes of section
367(a), a partnership is treated as an aggregate in cases where a U.S. person
transfers a partnership interest or a partnership makes an outbound transfer of
stock (or other assets).
The IRS and the Treasury Department
believe that the identity of the transferor
has been and must be consistent under
both sections 367(a) and (d). Consequently, a U.S. person may not attempt
the use of a foreign partnership as an intermediary (in light of the repeal of section 1491) for an outbound transfer of an
intangible by a U.S. person to a foreign
corporation to avoid section 367(d). In
the case of a transfer of an intangible by a
partnership to a foreign corporation that
qualifies as a section 351 exchange, each
partner that is a U.S. person is treated as
transferring its share of the intangible in a
transfer that is subject to section 367(d).

July 6, 1998

Guidance under TRA ’97 relating to the
repeal of section 1491 may address situations in which inappropriate results can be
achieved through transactions facilitated
by such repeal. For example, guidance
may address the appropriate tax consequences when a U.S. person who is a
United States shareholder of a CFC transfers stock in the CFC to a foreign partnership, and immediately after the transfer
the foreign corporation loses its status as a
CFC. Guidance is generally not, however,
expected to require gain recognition under
section 721(c) in cases where gain is not
inappropriately shifted to foreign persons.

to 5 years, thus eliminating the need for
annual certifications in years 5 through 9.
Moreover, the requirements under section
6038B have been substantially revised for
outbound transfers of stock described in
section 367(a) so that the amount of filing
required under that section will be significantly reduced. In addition, as a general
matter, these regulations will primarily affect large shareholders and U.S. multinational corporations with foreign operations. Thus, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Drafting Information

Effective Dates
The final regulations contained herein
are generally effective for transfers occurring on or after July 20, 1998. However,
taxpayers generally may elect to apply the
final regulations under §1.367(a)–3(b)
and (d) to transfers of foreign stock or securities occurring after December 17,
1987. A taxpayer that makes the election
must apply section 367(b) and the regulations thereunder to such transfers. In the
case of a transfer described in section
351, an electing transferor must apply
section 367(b) and the regulations thereunder as if the exchange was described in
§7.367(b)–7. Thus, for example, in a case
of a section 351 exchange in which a U.S.
person exchanges stock of a CFC in
which it is a United States shareholder but
does receive back stock of a CFC in
which it is a United States shareholder,
the electing transferor must include in income the section 1248 amount with respect to the transferred stock.
Special Analyses
It has been determined that this regulation is not a significant regulatory action
as defined in EO 12866. Therefore, a regulatory assessment is not required. It is
hereby certified that the collection of information contained in this regulation will
not have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that these final regulations generally reduce the reporting requirements in comparison with the requirements contained
under current law and the proposed sections 367(a) and (b) regulations. For example, the maximum term of the GRA
under section 367(a) is reduced from 10

July 6, 1998

The principal author of these regulations is Philip L. Tretiak of the Office of
Associate Chief Counsel (International),
within the Office of Chief Counsel, IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 7 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by revising the entry for
section 1.367(b)–7 and adding new entries to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3 also issued under
26 U.S.C. 367(a) and (b).
Section 1.367(a)–8 also issued under
26 U.S.C. 367(a) and (b).
Section 1.367(b)–1 also issued under
26 U.S.C. 367(a) and (b). * * *
Section 1.367(b)–4 also issued under
26 U.S.C. 367(a) and (b).
Section 1.367(b)–7 also issued under
26 U.S.C. 367(a) and (b). * * *
Par. 2. Section 1.367(a)–1T is
amended as follows:
1. Paragraph (a), fourth sentence is
amended by removing the reference
“§1.367(a)–3T” and adding “§1.367(a)–
3” in its place.
2. Paragraph (a), last sentence is
amended by removing the reference
“§1.6038B–1T” and adding “§§1.6038B–
1 and 1.6038B–1T” in its place.

10

3. Paragraph (b)(2)(i) is removed and
reserved.
4. Paragraph (b), the concluding text
immediately following paragraph (b)(2)(iii) is removed.
5. Paragraph (c)(1), the last sentence is
removed.
6. Paragraph (c)(2) is revised to read as
set forth below.
7. Paragraph (c)(3)(ii)(C), the second
sentence of the concluding text immediately following paragraph (c)(3)(ii)(C)(2)
is amended by removing the language
“§1.367(a)–3T” and adding “§1.367(a)–
3” in its place.
§1.367(a)–1T Transfers to foreign
corporations subject to section 367(a):
in general (temporary).
*

*

*

*

*

(c) * * *
(2) Indirect transfers in certain reorganizations. [Reserved] For further guidance, see §1.367(a)–3(d).
*

*

*

*

*

Par. 3. Section 1.367(a)-3 is amended
as follows:
1. Paragraphs (a) and (b) are revised.
2. Paragraph (c)(1)(iii)(B) is amended
by removing the reference “§1.367(a)–
3T(g)” and adding “§1.367(a)–8” in its
place.
3. Revising paragraph (d).
4. Removing paragraphs (e) through
(h) and adding paragraphs (e), (f) and (g).
The revisions and additions read as follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign
corporations.
(a) In general. This section provides
rules concerning the transfer of stock or
securities by a U.S. person to a foreign
corporation in an exchange described in
section 367(a). In general, a transfer of
stock or securities by a U.S. person to a
foreign corporation that is described in
section 351, 354 (including a reorganization described in section 368(a)(1)(B) and
including an indirect stock transfer described in paragraph (d) of this section),
356 or section 361(a) or (b) is subject to
section 367(a)(1) and, therefore, is treated
as a taxable exchange, unless one of the

1998–27 I.R.B.

exceptions set forth in paragraph (b) of
this section (regarding transfers of foreign
stock or securities) or paragraph (c) of
this section (regarding transfers of domestic stock or securities) applies. However,
if in an exchange described in section
354, a U.S. person exchanges stock of one
foreign corporation for stock of another
foreign corporation in a reorganization
described in section 368(a)(1)(E), or a
U.S. person exchanges stock of a domestic corporation for stock of a foreign corporation pursuant to an asset reorganization described in section 368(a)(1)(C),
(D) or (F) that is not treated as an indirect
stock transfer under paragraph (d) of this
section, such section 354 exchange is not
a transfer to a foreign corporation subject
to section 367(a). See, e.g., paragraph
(d)(3) Example 12. For rules regarding
other indirect or constructive transfers of
stock or securities subject to section
367(a), see §1.367(a)–1T(c). For additional rules relating to an exchange involving a foreign corporation in connection with which there is a transfer of
stock, see section 367(b) and the regulations under that section. For additional
rules regarding a transfer of stock or securities in an exchange described in section
361(a) or (b), see section 367(a)(5) and
any regulations under that section. For
rules regarding reporting requirements
with respect to transfers described under
section 367(a), see section 6038B and the
regulations thereunder.
(b) Transfers by U.S. persons of stock
or securities of foreign corporations to
foreign corporations—(1) General rule.
Except as provided in section 367(a)(5), a
transfer of stock or securities of a foreign
corporation by a U.S. person to a foreign
corporation that would otherwise be subject to section 367(a)(1) under paragraph
(a) of this section shall not be subject to
section 367(a)(1) if either—
(i) Less than 5-percent shareholder.
The U.S. person owns less than five percent (applying the attribution rules of section 318, as modified by section 958(b))
of both the total voting power and the
total value of the stock of the transferee
foreign corporation immediately after the
transfer; or
(ii) 5-percent shareholder. The U.S.
person enters into a five-year gain recognition agreement with respect to the transferred stock or securities as provided in
§1.367(a)–8.

1998–27 I.R.B.

(2) Certain transfers subject to sections 367(a) and (b)—(i) In general. A
transfer of foreign stock or securities described in section 367(a) or any regulations thereunder as well as in section
367(b) or any regulations thereunder shall
be concurrently subject to sections 367(a)
and (b) and the regulations thereunder,
except to the extent that the transferee foreign corporation is not treated as a corporation under section 367(a)(1). The example in paragraph (b)(2)(ii) of this
section illustrates the rules of this paragraph (b)(2). For an illustration of the interaction of the indirect stock transfer
rules under section 367(a) (described
under paragraph (d) of this section) and
the rules of section 367(b), see paragraph
(d)(3) Example 11 of this section.
(ii) Example. The following example
illustrates the provisions of this paragraph
(b)(2):
Example. (i) Facts. DC, a domestic corporation,
owns all of the stock of FC1, a controlled foreign
corporation within the meaning of section 957(a).
DC’s basis in the stock of FC1 is $50, and the value
of such stock is $100. The section 1248 amount
with respect to such stock is $30. FC2, also a foreign corporation, is owned entirely by foreign individuals who are not related to DC or FC1. In a reorganization described in section 368(a)(1)(B), FC2
acquires all of the stock of FC1 from DC in exchange for 20 percent of the voting stock of FC2.
FC2 is not a controlled foreign corporation after the
reorganization.
(ii) Result without gain recognition agreement.
Under the provisions of this paragraph (b), if DC
fails to enter into a gain recognition agreement, DC
is required to recognize in the year of the transfer the
$50 of gain that it realized upon the transfer, $30 of
which will be treated as a dividend under section
1248.
(iii) Result with gain recognition agreement. If
DC enters into a gain recognition agreement under
§1.367(a)-8 with respect to the transfer of FC1
stock, the exchange will also be subject to the provisions of section 367(b) and the regulations thereunder to the extent that it is not subject to tax under
section 367(a)(1). In such case, DC will be required
to recognize the section 1248 amount of $30 on the
exchange of FC1 for FC2 stock. See §1.367(b)-4(b).
The deemed dividend of $30 recognized by DC will
increase its basis in the FC1 stock exchanged in the
transaction and, therefore, the basis of the FC2 stock
received in the transaction. The remaining gain of
$20 realized by DC (otherwise recognizable under
section 367(a)) in the exchange of FC1 stock will
not be recognized if DC enters into a gain recognition agreement with respect to the transfer. (The result would be unchanged if, for example, the exchange of FC1 stock for FC2 stock qualified as a
section 351 exchange, or as an exchange described
in both sections 351 and 368(a)(1)(B).)

*

*

*

11

*

*

(d) Indirect stock transfers in certain
nonrecognition transfers—(1) In general. For purposes of this section, a U.S.
person who exchanges, under section 354
(or section 356) stock or securities in a
domestic or foreign corporation for stock
or securities in a foreign corporation in
connection with one of the following
transactions described in paragraphs
(d)(1)(i) through (v) of this section (or
who is deemed to make such an exchange
under paragraph (d)(1)(vi) of this section)
shall be treated as having made an indirect
transfer of such stock or securities to a foreign corporation that is subject to the rules
of this section, including, for example, the
requirement, where applicable, that the
U.S. transferor enter into a gain recognition agreement to preserve nonrecognition
treatment under section 367(a). If the U.S.
person exchanges stock or securities of a
foreign corporation, see also section
367(b) and the regulations thereunder. For
an example of the concurrent application
of the indirect stock transfer rules under
section 367(a) and the rules of section
367(b), see, e.g., paragraph (d)(3) Example 11 of this section.
(i) Mergers described in sections
368(a)(1)(A) and (a)(2)(D). A U.S. person exchanges stock or securities of a corporation (the acquired corporation) for
stock or securities of a foreign corporation that controls the acquiring corporation in a reorganization described in sections 368(a)(1)(A) and (a)(2)(D). See,
e.g., paragraph (d)(3) Example 1 of this
section.
(ii) Mergers described in sections
368(a)(1)(A) and (a)(2)(E). A U.S. person exchanges stock or securities of a corporation (the acquiring corporation) for
stock or securities in a foreign corporation
that controls the acquired corporation in a
reorganization described in sections
368(a)(1)(A) and (a)(2)(E).
(iii) Triangular reorganizations described in section 368(a)(1)(B). A 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 connection with a reorganization
described in section 368(a)(1)(B). See,
e.g., paragraph (d)(3) Example 4 of this
section.
(iv) Triangular reorganizations described in section 368(a)(1)(C). A U.S.

July 6, 1998

person exchanges stock or securities of a
corporation (the acquired corporation) for
voting stock or securities of a foreign corporation that controls the acquiring corporation in a reorganization described in
section 368(a)(1)(C). See, e.g., paragraph
(d)(3) Example 5 of this section (for an
example of a triangular section
368(a)(1)(C) reorganization involving domestic acquired and acquiring corporations), and paragraph (d)(3) Example 7 of
this section (for an example involving a
domestic acquired corporation and a foreign acquiring corporation). If the acquired corporation is a foreign corporation, see paragraph (d)(3) Example 11 of
this section, and section 367(b) and the
regulations thereunder.
(v) Reorganizations described in sections 368(a)(1)(C) and (a)(2)(C). A U.S.
person exchanges stock or securities of a
corporation (the acquired corporation) for
voting stock or securities of a foreign acquiring corporation in a reorganization
described in sections 368(a)(1)(C) and
(a)(2)(C) (other than a triangular section
368(a)(1)(C) reorganization described in
paragraph (d)(1)(iv) of this section). In
the case of a reorganization in which
some but not all of the assets of the acquired corporation are transferred pursuant to section 368(a)(2)(C), 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. (Other assets shall
be treated as having been transferred in an
asset transfer rather than an indirect stock
transfer, and such asset transfer would be
subject to the other provisions of section
367, including sections 367(a)(1), (3), (5)
and (d) if the acquired corporation is a domestic corporation.) See, e.g., paragraph
(d)(3) Example 5B of this section.
(vi) Successive transfers of property to
which section 351 applies. A U.S. person
transfers property (other than stock or securities) to a foreign corporation in an exchange described in section 351, and all
or a portion of such assets transferred to
the foreign corporation by such person
are, in connection with the same transaction, transferred to a second corporation
that is controlled by the foreign corporation in one or more exchanges described
in section 351. For purposes of this paragraph (d)(1) and §1.367(a)–8, the initial
transfer by the U.S. person shall be

July 6, 1998

deemed to be a transfer of stock described
in section 354. (Any assets transferred to
the foreign corporation that are not transferred by the foreign corporation to a second corporation shall be treated as a
transfer of assets subject to the general
rules of section 367, including sections
367(a)(1), (3), (5) and (d), and not as an
indirect stock transfer under the rules of
this paragraph (d).) See, e.g., paragraph
(d)(3) Example 10 and Example 10A of
this section.
(2) Special rules for indirect transfers.
If a U.S. person is considered to make an
indirect transfer of stock or securities described in paragraph (d)(1) of this section,
the rules of this section and §1.367(a)–8
shall apply to the transfer. For purposes
of applying the rules of this section and
§1.367(a)–8:
(i) Transferee foreign corporation.
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 that 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 a triangular section
368(a)(1)(C) reorganization described in
paragraph (d)(1)(iv) of this section followed by a section 368(a)(2)(C) transfer
or a section 368(a)(1)(C) reorganization
followed by a section 368(a)(2)(C) transfer described in paragraph (d)(1)(v) of
this section, the transferred corporation
shall be the transferee corporation; and in
the case of successive section 351 transfers described in paragraph (d)(1)(vi) of
this section, the transferred corporation
shall be the transferee corporation in the
final section 351 transfer. The transferred
property shall be the stock or securities of
the transferred corporation, as appropriate
in the circumstances.
(iii) Amount of gain. The amount of
gain that a U.S. person is required to include in income in the event of a disposition (or a deemed disposition) of some or
all of the stock or securities of the transferred corporation shall be the proportionate share (as determined under §1.367(a)–
8(e)) of the U.S. person’s gain realized
but not recognized in the initial exchange

12

(or deemed exchange) of stock or securities under section 354.
(iv) Gain recognition agreements involving multiple parties. The U.S. transferor’s agreement to recognize gain, as
provided in §1.367(a)–8, shall include appropriate provisions, consistent with the
principles of these rules, requiring the
transferor to recognize gain in the event
of a direct or indirect disposition of the
stock or assets of the transferred corporation. For example, in the case of a triangular section 368(a)(1)(B) reorganization
described in paragraph (d)(1)(iii) of this
section, a disposition of the transferred
stock shall include an indirect disposition
of such stock by the transferee foreign
corporation, such as a disposition of such
stock by the acquiring corporation or a
disposition of the stock of the acquiring
corporation by the transferee foreign corporation. See, e.g., paragraph (d)(3) Example 4 of this section.
(v) Determination of whether the
transferred corporation disposed of substantially all of its assets. For purposes of
applying §1.367(a)–8(e)(3)(i) to determine whether the transferred corporation
has disposed of substantially all of its assets, the following assets shall be taken
into account (but only if such assets are
not fully taxable under section 367 in the
taxable year that includes the indirect
transfer)—
(A) In the case of a sections 368(a)(1)(A) and (a)(2)(D) reorganization, and a
triangular section 368(a)(1)(C) reorganization described in paragraph (d)(1)(i) or
(iv) of this section, respectively, the assets
of the acquired corporation;
(B) In the case of a sections 368(a)(1)(A) and (a)(2)(E) reorganization described in paragraph (d)(1)(ii) of this section, the assets of the acquiring
corporation immediately prior to the
transaction;
(C) In the case of a sections 368(a)(1)(C) and (a)(2)(C) reorganization described in paragraph (d)(1)(v) of this section, the assets of the acquired
corporation that are subject to a transfer
described in section 368(a)(2)(C); and
(D) In the case of successive section
351 exchanges described in paragraph
(d)(1)(vi) of this section, the assets that
are both transferred initially to the foreign
corporation, and transferred by the foreign corporation to a second corporation.

1998–27 I.R.B.

(vi) Coordination between asset transfer rules and indirect stock transfer rules.
If, pursuant to any of the transactions described in paragraph (d)(1) of this section,
a domestic corporation transfers (or is
deemed to transfer) assets to a foreign
corporation (other than in an exchange
described in section 354), 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. However, if a transaction is described in this paragraph (d),
section 367(a) shall not apply in the case
of a domestic acquired corporation that
transfers its assets to a foreign acquiring
corporation, to the extent that such assets
are re-transferred to a domestic corporation in a transfer described in section
368(a)(2)(C) or paragraph (d)(1)(vi) of
this section, but only if the domestic
transferee’s basis in the assets is no
greater than the basis that the domestic
acquired company had in such assets.
See, e.g., paragraph (d)(3) Example 8 and
Example 10A of this section.
(3) Examples. The rules of this paragraph (d) and §1.367(a)–8 are illustrated
by the following examples:
Example 1. Section 368(a)(1)(A)/(a)(2)(D) reorganization—(i) Facts. F, a foreign corporation,
owns all the stock of Newco, a domestic corporation. A, a domestic corporation, owns all of the
stock of W, also a domestic corporation. A and W
file a consolidated Federal income tax return. A
does not own any stock in F (applying the attribution
rules of section 318, as modified by section 958(b)).
In a reorganization described in sections
368(a)(1)(A) and (a)(2)(D), Newco acquires all of
the assets of W, and A receives 40% of the stock of F
in an exchange described in section 354.
(ii) Result. Pursuant to paragraph (d)(1)(i) of
this section, the reorganization is subject to the indirect stock transfer rules. F is treated as the transferee foreign corporation, and Newco 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). If F disposes (within the meaning of
§1.367(a)–8(e)) of all (or a portion) of Newco’s
stock within the five-year term of the agreement
(and A has not made a valid election under
§1.367(a)–8(b)(1)(vii)), A is required to file 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.
If A has made a valid election under §1.367(a)–
8(b)(1)(vii) to include the amount subject to the gain
recognition agreement in the year of the triggering

1998–27 I.R.B.

event, A would instead include the gain on its tax return for the taxable year that includes the triggering
event, together with interest.
Example 1A. Transferor is a subsidiary in consolidated group—(i) Facts. The facts are the same as
in Example 1, except that A is owned by P, a domestic corporation, and for the taxable year in which the
transaction occurred, P, A and W filed a consolidated
Federal income tax return.
(ii) Result. Even though A is the U.S. transferor,
P is required under §1.367(a)–8(a)(3) to enter into
the gain recognition agreement and comply with the
requirements under §1.367(a)–8. In the event that A
leaves the P group, A would make the annual certifications required under §1.367(a)–8(b)(5)(ii). P
would remain liable with A under the gain recognition agreement.
Example 2. Taxable inversion pursuant to indirect stock transfer rules—(i) Facts. The facts are
the same as in Example 1, except that A receives
more than fifty percent of either the total voting
power or the total value of the stock of F in the
transaction.
(ii) Result. A is required to include in income in
the year of the exchange the amount of gain realized
on such exchange. See paragraph (c)(1)(i) of this
section. If A fails to include the income on its
timely-filed return, A will also be liable for the
penalty under section 6038B (together with interest
and other applicable penalties) unless A’s failure to
include the income is due to reasonable cause and
not willful neglect. See §1.6038B–1(f).
Example 3. Disposition by U.S. transferred corporation of substantially all of its assets—(i) Facts.
The facts are the same as in Example 1, except that,
during the third year of the gain recognition agreement, Newco disposes of substantially all (as described in §1.367(a)–8(e)(3)(i)) of the assets described in paragraph (d)(2)(v)(A) of this section for
cash and recognizes currently all of the gain realized
on the disposition.
(ii) Result. Under §1.367(a)–8(e)(3)(i), the gain
recognition agreement is generally triggered when
the transferred corporation disposes of substantially
all of its assets. However, under the special rule contained in §1.367(a)–8(h)(2), because A and W filed a
consolidated Federal income tax return prior to the
transaction, and Newco, the transferred corporation,
is a domestic corporation, the gain recognition agreement is terminated and has no further effect.
Example 4. Triangular section 368(a)(1)(B) reorganization—(i) Facts. F, a foreign corporation,
owns all the stock of S, a domestic corporation. U, a
domestic corporation, owns all of the stock of Y,
also a domestic corporation. U does not own any of
the stock of F (applying the attribution rules of section 318, as modified by section 958(b)). In a triangular reorganization described in section 368(a)(1)(B) and paragraph (d)(1)(iii) of this section, S
acquires all the stock of Y, and U receives 10% of
the voting stock of F.
(ii) Result. 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 into
a five-year gain recognition agreement. For purposes of this section, F is treated as the transferee
foreign corporation and Y is treated as the transferred corporation. See paragraphs (d)(2)(i) and (ii)

13

of this section. Under paragraph (d)(2)(iv) of this
section, 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 5. Triangular section 368(a)(1)(C) reorganization—(i) Facts. F, a foreign corporation,
owns all of the stock of R, a domestic corporation
that operates an historical business. V, a domestic
corporation, owns all of the stock of Z, also a domestic corporation. V does not own any of the stock of F
(applying the attribution rules of section 318 as modified by section 958(b)). In a triangular reorganization described in section 368(a)(1)(C) (and paragraph
(d)(1)(iv) of this section), R acquires all of the assets
of Z, and V receives 30% of the voting stock of F.
(ii) Result. The consequences of the transfer are
similar to those described in Example 1; V is required to enter into a 5-year gain recognition agreement under §1.367(a)–8 to secure nonrecognition
treatment under section 367(a). Under paragraphs
(d)(2)(i) and (ii) of this section, F is treated as the
transferee foreign corporation and R is treated as the
transferred corporation. In determining whether, in
a later transaction, R has disposed of substantially
all of its assets under §1.367(a)–8(e)(3)(i), see paragraph (d)(2)(v)(A) of this section.
Example 5A. Section 368(a)(1)(C) reorganization
followed by section 368(a)(2)(C) exchange—(i)
Facts. The facts are the same as in Example 5, except that the transaction is structured as a section
368(a)(1)(C) reorganization, followed by a section
368(a)(2)(C) exchange, and R is a foreign corporation. The following additional facts are present. Z
has 3 businesses: Business A with a basis of $10 and
a value of $50, Business B with a basis of $10 and a
value of $40, and Business C with a basis of $10 and
a value of $30. V and Z file a consolidated Federal
income tax return and V has a basis of $30 in the Z
stock, which has a value of $120. Assume that Businesses A and B consist solely of assets that will satisfy the section 367(a)(3) active trade or business
exception; none of Business C’s assets will satisfy
the exception. Z transfers all 3 businesses to F in exchange for 30 percent of the F stock, which Z distributes to V pursuant to a section 368(a)(1)(C) reorganization. F then contributes Businesses B and C
to R pursuant to section 368(a)(2)(C).
(ii) Result. The transfer of the Business A assets
by Z to F is subject to the general rules under section
367, as such transfer does not constitute an indirect
stock transfer. The transfer by Z of the Business B
and C assets to F must first be tested under sections
367(a)(1), (3) and (5). Z recognizes $20 of gain on
the outbound transfer of the Business C assets, as
such assets do not qualify for an exception to section
367(a)(1). The Business B assets, which will be
used by R in an active trade or business outside the
United States, qualify for the exception under section 367(a)(3) and §1.367(a)–2T(c)(2). V is deemed
to transfer the stock of Z to F in a section 354 exchange subject to the rules of paragraph (d). V must
enter into the gain recognition agreement in the
amount of $30 to preserve Z’s nonrecognition treatment with respect to its transfer of Business B assets. Under paragraphs (d)(2)(i) and (ii) of this section, F is the transferee foreign corporation and R is
the transferred corporation.
Example 5B. Section 368(a)(1)(C) reorganization followed by section 368(a)(2)(C) exchange with

July 6, 1998

U.S. transferee—(i) Facts. The facts are the same as
in Example 5A, except that R is a U.S. corporation.
(ii) Result. As in Example 5A, the outbound
transfer of Business A assets to F is subject to section 367(a) and is not affected by the rules of this
paragraph (d). The Business B assets qualified for
nonrecognition treatment; the Business C assets did
not. However, pursuant to paragraph (d)(2)(vi) of
this section, the Business C assets are not subject to
section 367(a)(1), provided that the basis of the assets in the hands of R is no greater than the basis of
the assets in the hands of Z. V is deemed to make an
indirect transfer under the rules of this paragraph
(d). To preserve nonrecognition treatment under
section 367(a), V must enter into a 5-year 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 were not
taxable under section 367(a)(1) but were treated as
an indirect stock transfer.
Example 6. Triangular section 368(a)(1)(C) reorganization followed by 351 exchange—(i) Facts.
The facts are the same as in Example 5, except that,
during the fourth year of the gain recognition agreement, R transfers substantially all of the assets received from Z to K, a wholly-owned domestic subsidiary of R, in an exchange described in section
351.
(ii) Result. The disposition by R, the transferred
corporation, of substantially all of its assets would
trigger the gain recognition agreement if the assets
were disposed of in a taxable transaction. However,
because the assets were transferred in a nonrecognition transaction, such transfer does not trigger the
gain recognition agreement if V satisfies the reporting requirements contained in §1.367(a)–8(g)(3)(i)
(which includes the requirement that V amend its
gain recognition agreement to reflect the transaction). See also paragraph (d)(2)(iv) of this section.
To determine whether substantially all of the assets
are disposed of, any assets of Z that were transferred
by Z to R and then contributed by R to K are taken
into account.
Example 6A. Triangular section 368(a)(1)(C) reorganization followed by section 351 exchange with
foreign transferee—(i) Facts. The facts are the
same as in Example 6 except that K is a foreign corporation.
(ii) Result. This transfer of assets by R to K
must be analyzed to determine its effect upon the
gain recognition agreement, and such transfer is also
an outbound transfer of assets that is taxable under
section 367(a)(1) unless the active trade or business
exception under section 367(a)(3) applies. If the
transfer is fully taxable under section 367(a)(1), the
transfer is treated as if the transferred company, R,
sold substantially all of its assets. Thus, the gain
recognition agreement would be triggered (but see
§1.367(a)–8(b)(3)(ii) for potential offsets to the gain
to be recognized). If each asset transferred qualifies
for nonrecognition treatment under section
367(a)(3) and the regulations thereunder (which require, under §1.367(a)–2T(a)(2), the transferor to
comply with the reporting requirements under section 6038B), the result is the same as in Example 6.
If a portion of the assets transferred qualify for nonrecognition treatment under section 367(a)(3) and a
portion are taxable under section 367(a)(1) (but such
portion does not result in the disposition of substantially all of the assets), the gain recognition agree-

July 6, 1998

ment will not be triggered if such information is reported as required under §1.367(a)–8(b)(5) and
(e)(3)(i).
Example 7. Concurrent application of asset
transfer and indirect stock transfer rules in consolidated return setting—(i) Facts. Assume the same
facts as in Example 5, except that R is a foreign corporation and V and Z file a consolidated return for
Federal income tax purposes. The properties of Z
consist of Business A assets, with an adjusted basis
of $50 and fair market value of $90, and Business B
assets, with an adjusted basis of $50 and a fair market
value of $110. Assume that the Business A assets do
not qualify for the active trade or business exception
under section 367(a)(3), but that the Business B assets do qualify for the exception. V’s basis in the Z
stock is $100, and the value of such stock is $200.
(ii) Result. Under paragraph (d)(2)(vi), the assets of Businesses A and B that are transferred to R
must be tested under sections 367(a)(3) and (a)(5)
prior to consideration of the indirect stock transfer
rules of this paragraph (d). Thus, Z must recognize
$40 of income under section 367(a)(1) on the outbound transfer of Business A assets. Under
§1.1502-32, because V and Z file a consolidated return, V’s basis in its Z stock increases from $100 to
$140 as a result of Z’s $40 gain. Provided that all of
the other requirements under paragraph (c)(1) of this
section are satisfied, to qualify for nonrecognition
treatment with respect to V’s indirect transfer of Z
stock, V must enter into a gain recognition agreement in the amount of $60 (the gain realized but not
recognized by V in the stock of Z after the $40 basis
adjustment). If F sells a portion of its stock in R
during the term of the agreement, V will be required
to recognize a portion of the $60 gain subject to the
agreement. To determine whether R disposes of
substantially all of its assets (under §1.367(a)–
8(e)(3)(i)), only the Business B assets will be considered (because the transfer of the Business A assets was taxable to Z under section 367). See paragraph (d)(2)(v)(A) of this section.
Example 7A. Concurrent application without
consolidated returns—(i) Facts. The facts are the
same as in Example 7, except that V and Z do not
file consolidated income tax returns.
(ii) Result. Z would still recognize $40 of gain
on the transfer of its Business A assets, and the Business B assets would still qualify for the active trade
or business exception under section 367(a)(3).
However, V’s basis in its stock of Z would not be increased by the amount of Z’s gain. V’s indirect
transfer of stock will be taxable unless V enters into
a gain recognition agreement (as described in
§1.367(a)–8) for the $100 of gain realized but not
recognized with respect to the stock of Z.
Example 7B. Concurrent application with individual U.S. shareholder—(i) Facts. The facts are
the same as in Example 7, except that V is an individual U.S. citizen.
(ii) Result. Section 367(a)(5) would prevent the
application of the active trade or business exception
under section 367(a)(3). Thus, Z’s transfer of assets
to R would be fully taxable under section 367(a)(1).
Z would recognize $100 of income. V’s basis in its
stock of Z is not increased by this amount. V is taxable with respect to its indirect transfer of its Z stock
unless V enters into a gain recognition agreement in
the amount of the $100, the gain realized but not recognized with respect to its Z stock.

14

Example 7C. Concurrent application with nonresident alien shareholder—(i) Facts. The facts are
the same as in Example 7, except that V is a nonresident alien.
(ii) Result. Pursuant to section 367(a)(5), the active trade or business exception under section
367(a)(3) is not available with respect to Z’s transfer
of assets to R. Thus, Z has $100 of gain with respect
to the Business A and B assets. Because V is a nonresident alien, however, V is not subject to section
367(a) with respect to its indirect transfer of Z stock.
Example 8. Concurrent application with section
368(a)(2)(C) Exchange—(i) Facts. The facts are
the same as in Example 7, except that R transfers the
Business A assets to M, a wholly-owned domestic
subsidiary of R, in an exchange described in section
368(a)(2)(C).
(ii) Result. Pursuant to paragraph (d)(2)(vi) of
this section, section 367(a)(1) does not apply to Z’s
transfer of Business A assets to R, because such assets are transferred to M, a domestic corporation.
Sections 367(a)(1), (3) and (5), as well as section
367(d), apply to Z’s transfer of assets to R to the extent that such assets are not transferred to M. However, the Business B assets qualify for an exception
to taxation under section 367(a)(3). Thus, if the requirements of paragraph (c)(1) 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 realized on the Z stock, $100, the entire
transaction qualifies for nonrecognition treatment
under section 367(a)(1). See also section 367(a)(5)
and any regulations issued thereunder. 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 substantially all of the assets have been disposed of (as
described under §1.367(a)–8(e)(3)(i)), the Business
A assets in M and the Business B assets in R must
both be considered.
Example 9. Concurrent application of direct and
indirect stock transfer rules—(i) Facts. F, a foreign
corporation, owns all of the stock of O, also a foreign corporation. D, a domestic corporation, owns
all of the stock of E, also a domestic corporation,
which owns all of the stock of N, also a domestic
corporation. Prior to the transactions described in
this Example 9, D, E and N filed a consolidated income tax return. D has a basis of $100 in the stock
of E, which has a fair market value of $160. The N
stock has a fair market value of $100, and E has a
basis of $60 in such stock. In addition to the stock
of N, E owns the assets of Business X. The assets of
Business X have a fair market value of $60, and E
has a basis of $50 in such assets. Assume that the
Business X assets qualify for nonrecognition treatment under section 367(a)(3). D does not own any
stock in F (applying the attribution rules of section
318 as modified by section 958(b)). In a triangular
reorganization described in section 368(a)(1)(C) and
paragraph (d)(1)(iv) of this section, O acquires all of
the assets of E, and D exchanges its stock in E for
40% of the voting stock of F.
(ii) Result. E’s transfer of its assets, including
the N stock, must be tested under the general rules of
section 367(a) before consideration of D’s indirect

1998–27 I.R.B.

transfer of the stock of E. E’s transfer of the assets
of Business X qualify for nonrecognition under section 367(a)(3). E could qualify for nonrecognition
treatment with respect to its transfer of N stock if it
enters into a gain recognition agreement (and all of
the requirements of paragraph (c)(1)(i) of this section are satisfied); however under §1.367(a)8(f)(2)(i), D, the parent of the consolidated group,
must enter into the agreement. O is the transferee
foreign corporation; N is the transferred corporation.
D may also qualify for nonrecognition with respect
to its indirect transfer of the stock of E if it enters
into a separate gain recognition agreement with respect to the E stock (and all of the requirements of
paragraph (c)(1)(i) of this section are satisfied). As
to this transfer, F is the transferee foreign corporation; O is the transferred corporation. The amount
of the gain recognition agreement is $60. See also
section 367(a)(5) and any regulations issued thereunder.
Example 10. Successive section 351 exchanges—(i) Facts. D, a domestic corporation,
owns all the stock of X, a controlled foreign corporation that operates an historical business, which
owns all the stock of Y, a controlled foreign corporation that also operates an historical business. The
properties of D consist of Business A assets, with an
adjusted basis of $50 and a fair market value of $90,
and Business B assets, with an adjusted basis of $50
and a fair market value of $110. Assume that the
Business B assets qualify for the exception under
section 367(a)(3) and §1.367(a)–2T(c)(2), but that
the Business A assets do not qualify for the exception. In an exchange described in section 351, D
transfers the assets of Businesses A and B to X, and,
in connection with the same transaction, X transfers
the assets of Business B to Y in another exchange
described in section 351.
(ii) Result. Under paragraph (d)(1)(vi) of this
section, this transaction is treated as an indirect
stock transfer for purposes of section 367(a), but the
transaction is not recharacterized for purposes of
section 367(b). Moreover, under paragraph (d)(2)(vi) of this section, the assets of Businesses A and B
that are transferred to X must be tested under section
367(a)(3). The Business A assets, which were not
transferred to Y, are subject to the general rules of
section 367(a), and not the indirect stock transfer
rules described in this paragraph (d). D must recognize $40 of income on the outbound transfer of
Business A assets. The transfer of the Business B
assets is subject to both the asset transfer rules
(under section 367(a)(3)) and the indirect stock
transfer rules of this paragraph (d) and §1.367(a)-8.
Thus, D’s transfer of the Business B assets will not
be subject to section 367(a)(1) if D enters into a
five-year gain recognition agreement with respect to
the stock of Y. Under paragraphs (d)(2)(i) and (ii) of
this section, X will be treated as the transferee foreign corporation and Y will be treated as the transferred corporation for purposes of applying the
terms of the agreement. If X sells all or a portion of
the stock of Y during the term of the agreement, D
will be required to recognize a proportionate amount
of the $60 gain that was realized by D on the initial
transfer of the Business B assets.
Example 10A. Successive section 351 exchanges
with ultimate domestic transferee—(i) Facts. The
facts are the same as in Example 10, except that Y is
a domestic corporation.

1998–27 I.R.B.

(ii) Result. As Example 10, D must recognize
$40 of income on the outbound transfer of the Business A assets. Although the Business B assets qualify for the exception under section 367(a)(3) (and
end up in U.S. corporate solution, in Y), the $60 of
gain realized on the Business B assets is nevertheless taxable under paragraphs (c)(1) and (d)(1)(vi) of
this section because the transaction is considered to
be a transfer by D of stock of a domestic corporation, Y, in which D receives more than 50 percent of
the stock of the transferee foreign corporation, X. A
gain recognition agreement is not permitted.
Example 11. Concurrent application of indirect
stock transfer rules and section 367(b)—(i) Facts.
F, a foreign corporation, owns all of the stock of
Newco, which is also a foreign corporation. P, a domestic corporation, owns all of the stock of S, a foreign corporation that is a controlled foreign corporation within the meaning of section 957(a). P’s basis
in the stock of S is $50 and the value of S is $100.
The section 1248 amount with respect to S stock is
$30. In a reorganization described in section
368(a)(1)(C) (and paragraph (d)(1)(iv) of this section), Newco acquires all of the properties of S, and
P exchanges its stock in S for 49 percent of the stock
of F.
(ii) Result. P’s exchange of S stock for F stock
under section 354 will be taxable under section
367(a) (and section 1248 will be applicable) if P
fails to enter into a 5-year gain recognition agreement in accordance with §1.367(a)–8. Under paragraph (b)(2) of this section, if P 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
§7.367(b)–7(c)(1)(i) of this chapter, P must recognize the section 1248 amount of $30 because P exchanged stock of a controlled foreign corporation, S,
for stock of a foreign corporation that is not a controlled foreign corporation, F. The indirect stock
transfer rules do not apply with respect to section
367(b). The deemed dividend of $30 recognized by
P will increase P’s basis in the F stock received in
the transaction, and F’s basis in the Newco stock.
Thus, the amount of the gain recognition agreement
is $20 ($50 gain realized on the transfer less the $30
inclusion under section 367(b)). Under paragraphs
(d)(2)(i) and (ii) of this section, F is treated as the
transferee foreign corporation and Newco is the
transferred corporation.
Example 11A. Triangular section 368(a)(1)(C)
reorganization involving foreign acquired corporation—(i) Facts. Assume the same facts as in Example 11, except that P receives 51 percent of the stock
of F.
(ii) Result. P may still enter into a gain recognition agreement to avoid taxation under section
367(a). There is, however, no inclusion under section 367(b) because P would be exchanging stock in
one controlled foreign corporation for another. The
amount of the gain recognition agreement is $50.
See, also, §1.367(b)–4(b)(4).
Example 12. Direct asset reorganization not subject to stock transfer rules—(i) Facts. D is a publicly traded domestic corporation. D’s assets consist
of tangible assets, including stock or securities. In a
reorganization described in section 368(a)(1)(F), D
becomes a foreign corporation, F.
(ii) Result. The reorganization is characterized
under §1.367(a)–1T(f). D’s outbound transfer of as-

15

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

(e) Effective dates—(1) In general.
The rules in paragraphs (a), (b) and (d) of
this section apply to transfers occurring
on or after July 20, 1998. The rules in
paragraph (c) of this section with respect
to transfers of domestic stock or securities
are generally applicable for transfers occurring after January 29, 1997. See
§1.367(a)–3(c)(11). For rules regarding
transfers of domestic stock or securities
after December 16, 1987, and before January 30, 1997, and transfers of foreign
stock or securities after December 16,
1987, and before July 20, 1998, see paragraph (g) of this section.
(2) Election. Notwithstanding paragraphs (e)(1) and (g) of this section, taxpayers may, by timely filing an original or
amended return, elect to apply paragraphs
(b) and (d) of this section to all transfers
of foreign stock or securities occurring
after December 16, 1987, and before July
20, 1998, except to the extent that a gain
recognition agreement has been triggered
prior to July 20, 1998. If an election is
made under this paragraph (e)(2), the provisions of §1.367(a)–3T(g) (see 26 CFR
part 1, revised April 1, 1998) shall apply,
and, for this purpose, the term substantial
portion under §1.367(a)–3T(g)(3)(iii)
(see 26 CFR part 1, revised April 1, 1998)
shall be interpreted to mean substantially
all as defined in section 368(a)(1)(C). In
addition, if such an election is made, the
taxpayer must apply the rules under section 367(b) and the regulations thereunder
to any transfers occurring within that period as if the election to apply §1.367(a)–
3(b) and (d) to transfers occurring within
that period had not been made, except that
in the case of an exchange described in
section 351 the taxpayer must apply section 367(b) and the regulations thereunder
as if the exchange was described in
§7.367(b)–7 of this chapter. For example,
if a U.S. person, pursuant to a section 351
exchange, transfers stock of a controlled
foreign corporation in which it is a United
States shareholder but does not receive

July 6, 1998

back stock of a controlled foreign corporation in which it is a United States shareholder, the U.S. person must include in income under §7.367(b)–7 of this chapter
the section 1248 amount attributable to
the stock exchanged (to the extent that the
fair market value of the stock exchanged
exceeds its adjusted basis). Such inclusion is required even though §7.367(b)–7
of this chapter, by its terms, did not apply
to section 351 exchanges.
(f) Former 10-year gain recognition
agreements. If a taxpayer elects to apply
the rules of this section to all prior transfers occurring after December 16, 1987,
any 10-year gain recognition agreement
that remains in effect (has not been triggered in full) on July 20, 1998, will be
considered by the Internal Revenue Service to be a 5-year gain recognition agreement with a duration of five full taxable
years following the close of the taxable
year of the initial transfer.
(g) Transition rules regarding certain
transfers of domestic or foreign stock or
securities after December 16, 1987, and
prior to July 20, 1998—(1) Scope. Transfers of domestic stock or securities described under section 367(a) that occurred
after December 16, 1987, and prior to
April 17, 1994, and transfers of foreign
stock or securities described under section
367(a) that occur after December 16, 1987,
and prior to July 20, 1998, are subject to
the rules contained in section 367(a) and
the regulations thereunder, as modified by
the rules contained in paragraph (g)(2) of
this section. For transfers of domestic
stock or securities described under section
367(a) that occurred after April 17, 1994
and before January 30, 1997, see Temporary Income Regulations under section
367(a) in effect at the time of the transfer
(§1.367(a)–3T(a) and (c), 26 CFR part 1,
revised April 1, 1996) and paragraph
(c)(11) of this section. For transfers of domestic stock or securities described under
section 367(a) that occur after January 29,
1997, see §1.367(a)–3(c).
(2) Transfers of domestic or foreign
stock or securities: additional substantive
rules—(i) Rule for less than 5-percent
shareholders. Unless paragraph (g)(2)(iii) of this section applies (in the case of
domestic stock or securities) or paragraph
(g)(2)(iv) of this section applies (in the
case of foreign stock or securities), a U.S.
transferor that transfers stock or securities

July 6, 1998

of a domestic or foreign corporation in an
exchange described in section 367(a) and
owns less than 5 percent of both the total
voting power and the total value of the
stock of the transferee foreign corporation
immediately after the transfer (taking into
account the attribution rules of section
958) is not subject to section 367(a)(1)
and is not required to enter into a gain
recognition agreement.
(ii) Rule for 5-percent shareholders.
Unless paragraph (g)(2)(iii) or (iv) of this
section applies, a U.S. transferor that
transfers domestic or foreign stock or securities in an exchange described in section 367(a) and owns at least 5 percent of
either the total voting power or the total
value of the stock of the transferee foreign
corporation immediately after the transfer
(taking into account the attribution rules
under section 958) may qualify for nonrecognition treatment by filing a gain
recognition agreement in accordance with
§1.367(a)–3T(g) in effect prior to July 20,
1998, (see 26 CFR part 1, revised April 1,
1998) for a duration of 5 or 10 years. The
duration is 5 years if the U.S. transferor
(5-percent shareholder) determines that
all U.S. transferors, in the aggregate, own
less than 50 percent of both the total voting power and the total value of the transferee foreign corporation immediately
after the transfer. The duration is 10 years
in all other cases. See, however,
§1.367(a)–3(f). If a 5-percent shareholder
fails to properly enter into a gain recognition agreement, the exchange is taxable to
such shareholder under section 367(a)(1).
(iii) Gain recognition agreement option
not available to controlling U.S. transferor if U.S. stock or securities are transferred. Notwithstanding the provisions of
paragraph (g)(2)(ii) of this section, in no
event will any exception to section
367(a)(1) apply to the transfer of stock or
securities of a domestic corporation
where the U.S. transferor owns (applying
the attribution rules of section 958) more
than 50 percent of either the total voting
power or the total value of the stock of the
transferee foreign corporation immediately after the transfer (i.e., the use of a
gain recognition agreement to qualify for
nonrecognition treatment is unavailable in
this case).
(iv) Loss of United States shareholder
status in the case of a transfer of foreign
stock. Notwithstanding the provisions of

16

paragraphs (g)(2)(i) and (ii) of this section, in no event will any exception to
section 367(a)(1) apply to the transfer of
stock of a foreign corporation in which
the U.S. transferor is a United States
shareholder (as defined in §7.367(b)–2(b)
of this chapter or section 953(c)) unless
the U.S. transferor receives back stock in
a controlled foreign corporation (as defined in section 953(c), section 957(a) or
section 957(b)) as to which the U.S. transferor is a United States shareholder immediately after the transfer.
§1.367(a)–3T [Removed]
Par. 4. Section 1.367(a)–3T is removed.
Par. 5. Section 1.367(a)–8 is added to
read as follows:
§1.367(a)–8 Gain recognition agreement
requirements.
(a) In general. This section specifies
the general terms and conditions for an
agreement to recognize gain entered into
pursuant to §1.367(a)–3(b) or (c) to qualify for nonrecognition treatment under
section 367(a).
(1) Filing requirements. A transferor’s
agreement to recognize gain (described in
paragraph (b) of this section) must be attached to, and filed by the due date (including extensions) of, the transferor’s income tax return for the taxable year that
includes the date of the transfer.
(2) Gain recognition agreement forms.
Any agreement, certification, or other
document required to be filed pursuant to
the provisions of this section shall be submitted on such forms as may be prescribed therefor by the Commissioner (or
similar statements providing the same information that is required on such forms).
Until such time as forms are prescribed,
all necessary filings may be accomplished
by providing the required information to
the Internal Revenue Service in accordance with the rules of this section.
(3) Who must sign. The agreement to
recognize gain must be signed under
penalties of perjury by a responsible officer in the case of a corporate transferor,
except that if the transferor is a member
but not the parent of an affiliated group
(within the meaning of section 1504(a)(1)), that files a consolidated Federal income tax return for the taxable year in
which the transfer was made, the agree-

1998–27 I.R.B.

ment must be entered into by the parent
corporation and signed by a responsible
officer of such parent corporation; by the
individual, in the case of an individual
transferor (including a partner who is
treated as a transferor by virtue of
§1.367(a)-–1T(c)(3)); by a trustee, executor, or equivalent fiduciary in the case of a
transferor that is a trust or estate; and by a
debtor in possession or trustee in a bankruptcy case under Title 11, United States
Code. An agreement may also be signed
by an agent authorized to do so under a
general or specific power of attorney.
(b) Agreement to recognize gain—(1)
Contents. The agreement must set forth
the following information, with the heading “GAIN RECOGNITION AGREEMENT UNDER §1.367(a)–8”, and with
paragraphs labeled to correspond with the
numbers set forth as follows—
(i) A statement that the document submitted constitutes the transferor’s agreement to recognize gain in accordance with
the requirements of this section;
(ii) A description of the property transferred as described in paragraph (b)(2) of
this section;
(iii) The transferor’s agreement to recognize gain, as described in paragraph
(b)(3) of this section;
(iv) A waiver of the period of limitations as described in paragraph (b)(4) of
this section;
(v) An agreement to file with the transferor’s tax returns for the 5 full taxable
years following the year of the transfer a
certification as described in paragraph
(b)(5) of this section;
(vi) A statement that arrangements
have been made in connection with the
transferred property to ensure that the
transferor will be informed of any subsequent disposition of any property that
would require the recognition of gain
under the agreement; and
(vii) A statement as to whether, in the
event all or a portion of the gain recognition agreement is triggered under paragraph (e) of this section, the taxpayer
elects to include the required amount in
the year of the triggering event rather than
in the year of the initial transfer. If the
taxpayer elects to include the required
amount in the year of the triggering event,
such statement must be included with all
of the other information required under
this paragraph (b), and filed by the due

1998–27 I.R.B.

date (including extensions) of the transferor’s income tax return for the taxable
year that includes the date of the transfer.
(2) Description of property transferred—(i) The agreement shall include a
description of each property transferred
by the transferor, an estimate of the fair
market value of the property as of the date
of the transfer, a statement of the cost or
other basis of the property and any adjustments thereto, and the date on which the
property was acquired by the transferor.
(ii) If the transferred property is stock
or securities, the transferor must provide
the information contained in paragraphs
(b)(2)(ii)(A) through (F) of this section as
follows—
(A) The type or class, amount, and
characteristics of the stock or securities
transferred, as well as the name, address,
and place of incorporation of the issuer of
the stock or securities, and the percentage
(by voting power and value) that the stock
(if any) represents of the total stock outstanding of the issuing corporation;
(B) The name, address and place of incorporation of the transferee foreign corporation, and the percentage of stock (by
voting power and value) that the U.S.
transferor received or will receive in the
transaction;
(C) If stock or securities are transferred in an exchange described in section
361(a) or (b), a statement that the conditions set forth in the second sentence of
section 367(a)(5) and any regulations
under that section have been satisfied, and
an explanation of any basis or other adjustments made pursuant to section
367(a)(5) and any regulations thereunder;
(D) If the property transferred is stock
or securities of a domestic corporation,
the taxpayer identification number of the
domestic corporation whose stock or securities were transferred, together with a
statement that all of the requirements of
§1.367(a)–3(c)(1) are satisfied;
(E) If the property transferred is stock
or securities of a foreign corporation, a
statement as to whether the U.S. transferor was a United States shareholder (a
U.S. transferor that satisfies the ownership requirements of section 1248(a)(2) or
(c)(2)) of the corporation whose stock
was exchanged, and, if so, a statement as
to whether the U.S. transferor is a United
States shareholder with respect to the
stock received, and whether any reporting

17

requirements contained in regulations
under section 367(b) are applicable, and,
if so, whether they have been satisfied;
and
(F) If the transaction involved the
transfer of assets other than stock or securities and the transaction was subject to
the indirect stock transfer rules of
§1.367(a)–3(d), a statement as to whether
the reporting requirements under section
6038B have been satisfied with respect to
the transfer of property other than stock or
securities, and an explanation of whether
gain was recognized under section
367(a)(1) and whether section 367(d) was
applicable to the transfer of such assets,
or whether any tangible assets qualified
for nonrecognition treatment under section 367(a)(3) (as limited by section
367(a)(5) and §§1.367(a)–4T, 1.367(a)–
5T and 1.367(a)–6T).
(3) Terms of agreement—(i) General
rule. If prior to the close of the fifth full
taxable year (i.e., not less than 60 months)
following the close of the taxable year of
the initial transfer, the transferee foreign
corporation disposes of the transferred
property in whole or in part (as described
in paragraphs (e)(1) and (2) of this section), or is deemed to have disposed of the
transferred property (under paragraph
(e)(3) of this section), then, unless an election is made in paragraph (b)(1)(vii) of
this section, by the 90th day thereafter the
U.S. transferor must file an amended return for the year of the transfer and recognize thereon the gain realized but not recognized upon the initial transfer, with
interest. If an election under paragraph
(b)(1)(vii) of this section was made, then,
if a disposition occurs, the U.S. transferor
must include the gain realized but not recognized on the initial transfer in income
on its Federal income tax return for the period that includes the date of the triggering
event. In accordance with paragraph
(b)(3)(iii) of this section, interest must be
paid on any additional tax due. (If a taxpayer properly makes the election under
paragraph (b)(1)(vii) of this section but
later fails to include the gain realized in income, the Commissioner may, in his discretion, include the gain in the taxpayer’s
income in the year of the initial transfer.)
(ii) Offsets. No special limitations
apply with respect to net operating losses,
capital losses, credits against tax, or similar items.

July 6, 1998

(iii) Interest. If additional tax is required to be paid, then interest must be
paid on that amount at the rates determined under section 6621 with respect to
the period between the date that was prescribed for filing the transferor’s income
tax return for the year of the initial transfer and the date on which the additional
tax for that year is paid. If the election in
paragraph (b)(1)(vii) of this section is
made, taxpayers should enter the amount
of interest due, labelled as “sec. 367 interest” at the bottom right margin of page
1 of the Federal income tax return for the
period that includes the date of the triggering event (page 2 if the taxpayer files a
Form 1040), and include the amount of
interest in their payment (or reduce the
amount of any refund due by the amount
of the interest). If the election in paragraph (b)(1)(vii) of this section is made,
taxpayers should, as a matter of course,
include the amount of gain as taxable income on their Federal income tax returns
(together with other income or loss
items). The amount of tax relating to the
gain should be separately stated at the
bottom right margin of page 1 of the Federal income tax return (page 2 if the taxpayer files a Form 1040), labelled as “sec.
367 tax.”
(iv) Basis adjustments—(A) Transferee. If a U.S. transferor is required to
recognize gain under this section on the
disposition by the transferee foreign corporation of the transferred property, then
in determining for U.S. income tax purposes any gain or loss recognized by the
transferee foreign corporation upon its
disposition of such property, the transferee foreign corporation’s basis in such
property shall be increased (as of the date
of the initial transfer) by the amount of
gain required to be recognized (but not by
any tax or interest required to be paid on
such amount) by the U.S. transferor. In
the case of a deemed disposition of the
stock of the transferred corporation described in paragraph (e)(3)(i) of this section, the transferee foreign corporation’s
basis in the transferred stock deemed disposed of shall be increased by the amount
of gain required to be recognized by the
U.S. transferor.
(B) Transferor. If a U.S. transferor is
required to recognize gain under this section, then the U.S. transferor’s basis in the
stock of the transferee foreign corporation

July 6, 1998

shall be increased by the amount of gain
required to be recognized (but not by any
tax or interest required to be paid on such
amount).
(C) Other adjustments. Other appropriate adjustments to basis that are consistent with the principles of this paragraph
(b)(3)(iv) may be made if the U.S. transferor is required to recognize gain under
this section.
(D) Example. The principles of this
paragraph (b)(3) are illustrated by the following example:
Example—(i) Facts. D, a domestic corporation
owning 100 percent of the stock of S, a foreign corporation, transfers all of the S stock to F, a foreign
corporation, in an exchange described in section
368(a)(1)(B). The section 1248 amount with respect
to the S stock is $0. In the exchange, D receives 20
percent of the voting stock of F. All of the requirements of §1.367(a)–3(c)(1) are satisfied, and D enters into a five-year gain recognition agreement to
qualify for nonrecognition treatment and does not
make the election contained in paragraph (b)(1)(vii)
of this section. One year after the initial transfer, F
transfers all of the S stock to F1 in an exchange described in section 351, and D complies with the requirements of paragraph (g)(2) of this section. Two
years after the initial transfer, D transfers its entire
20 percent interest in F’s voting stock to a domestic
partnership in exchange for an interest in the partnership. Three years after the initial exchange, S
disposes of substantially all (as described in paragraph (e)(3)(i) of this section) of its assets in a transaction that would be taxable under U.S. income tax
principles, and D is required by the terms of the gain
recognition agreement to recognize all the gain that
it realized on the initial transfer of the stock of S.
(ii) Result. As a result of this gain recognition
and paragraph (b)(3)(iv) of this section, D is permitted to increase its basis in the partnership interest by
the amount of gain required to be recognized (but
not by any tax or interest required to be paid on such
amount), the partnership is permitted to increase its
basis in the 20 percent voting stock of F, F is permitted to increase its basis in the stock of F1, and F1 is
permitted to increase its basis in the stock of S. S,
however, is not permitted to increase its basis in its
assets for purposes of determining the direct or indirect U.S. tax results, if any, on the sale of its assets.

(4) Waiver of period of limitation. The
U.S. transferor must file, with the agreement to recognize gain, a waiver of the
period of limitation on assessment of tax
upon the gain realized on the transfer.
The waiver shall be executed on Form
8838 (Consent to Extend the Time to Assess Tax Under Section 367—Gain
Recognition Agreement) and shall extend
the period for assessment of such tax to a
date not earlier than the eighth full taxable
year following the taxable year of the
transfer. Such waiver shall also contain

18

such other terms with respect to assessment as may be considered necessary by
the Commissioner to ensure the assessment and collection of the correct tax liability for each year for which the waiver
is required. The waiver must be signed
by a person who would be authorized to
sign the agreement pursuant to the provisions of paragraph (a)(3) of this section.
(5) Annual certification—(i) In general. The U.S. transferor must file with
its income tax return for each of the five
full taxable years following the taxable
year of the transfer a certification that the
property transferred has not been disposed of by the transferee in a transaction
that is considered to be a disposition for
purposes of this section, including a disposition described in paragraph (e)(3) of
this section. The U.S. transferor must include with its annual certification a statement describing any taxable dispositions
of assets by the transferred corporation
that are not in the ordinary course of business. The annual certification pursuant to
this paragraph (b)(5) must be signed
under penalties of perjury by a person
who would be authorized to sign the
agreement pursuant to the provisions of
paragraph (a)(3) of this section.
(ii) Special rule when U.S. transferor
leaves its affiliated group. If, at the time
of the initial transfer, the U.S. transferor
was a member of an affiliated group
(within the meaning of section 1504(a)(1)) filing a consolidated Federal income
tax return but not the parent of such
group, the U.S. transferor will file the annual certification (and provide a copy to
the parent corporation) if it leaves the
group during the term of the gain recognition agreement, notwithstanding the fact
that the parent entered into the gain recognition agreement, extended the statute of
limitations pursuant to this section, and
remains liable (with other corporations
that were members of the group at the
time of the initial transfer) under the gain
recognition agreement in the case of a
triggering event.
(c) Failure to comply—(1) General
rule. If a person that is required to file an
agreement under paragraph (b) of this section fails to file the agreement in a timely
manner, or if a person that has entered into
an agreement under paragraph (b) of this
section fails at any time to comply in any
material respect with the requirements of

1998–27 I.R.B.

this section or with the terms of an agreement submitted pursuant hereto, then the
initial transfer of property is described in
section 367(a)(1) (unless otherwise excepted under the rules of this section) and
will be treated as a taxable exchange in the
year of the initial transfer (or in the year of
the failure to comply if the agreement was
filed with a timely-filed (including extensions) original (not amended) return and
an election under paragraph (b)(1)(vii) of
this section was made). Such a material
failure to comply shall extend the period
for assessment of tax until three years after
the date on which the Internal Revenue
Service receives actual notice of the failure to comply.
(2) Reasonable cause exception. If a
person that is permitted under §1.367(a)–
3(b) or (c) to enter into an agreement (described in paragraph (b) of this section)
fails to file the agreement in a timely
manner, as provided in paragraph (a)(1)
of this section, or fails to comply in any
material respect with the requirements of
this section or with the terms of an agreement submitted pursuant hereto, the provisions of paragraph (c)(1) of this section
shall not apply if the person is able to
show that such failure was due to reasonable cause and not willful neglect and if
the person files the agreement or reaches
compliance as soon as he becomes aware
of the failure. Whether a failure to file in
a timely manner, or materially comply,
was due to reasonable cause shall be determined by the district director under all
the facts and circumstances.
(d) Use of security. The U.S. transferor may be required to furnish a bond or
other security that satisfies the requirements of §301.7101-1 of this chapter if
the district director determines that such
security is necessary to ensure the payment of any tax on the gain realized but
not recognized upon the initial transfer.
Such bond or security will generally be
required only if the stock or securities
transferred are a principal asset of the
transferor and the director has reason to
believe that a disposition of the stock or
securities may be contemplated.
(e) Disposition (in whole or in part) of
stock of transferred corporation—(1) In
general—(i) Definition of disposition.
For purposes of this section, a disposition
of the stock of the transferred corporation
that triggers gain under the gain recogni-

1998–27 I.R.B.

tion agreement includes any taxable sale
or any disposition treated as an exchange
under this subtitle, (e.g., under sections
301(c)(3)(A), 302(a), 311, 336, 351(b) or
section 356(a)(1)), as well as any deemed
disposition described under paragraph
(e)(3) of this section. It does not include a
disposition that is not treated as an exchange, (e.g., under section 302(d) or
356(a)(2)). A disposition of all or a portion of the stock of the transferred corporation by installment sale is treated as a
disposition of such stock in the year of the
installment sale. A disposition of the
stock of the transferred corporation does
not include certain transfers treated as
nonrecognition transfers (under paragraph
(g) of this section) in which the gain
recognition agreement is retained but
modified, or certain transfers (under paragraph (h) of this section) in which the
gain recognition agreement is terminated
and has no further effect.
(ii) Example. The provisions of this
paragraph (e) are illustrated by the following example:
Example. Interaction between trigger of gain
recognition agreement and subpart F rules—(i)
Facts. A U.S. corporation (USP) owns all of the
stock of two foreign corporations, CFC1 and CFC2.
USP’s section 1248 amount with respect to CFC2 is
$30. USP has a basis of $50 in its stock of CFC2;
CFC2 has a value of $100. In a transaction described in section 351 and 368(a)(1)(B), USP transfers the stock of CFC2 in exchange for additional
stock of CFC1. The transaction is subject to both
sections 367(a) and (b). See §§1.367(a)–3(b) and
1.367(b)–1(a). To qualify for nonrecognition treatment under section 367(a), USP enters into a 5-year
gain recognition agreement for $50 under this section. No election under paragraph 8(b)(1)(vii) of
this section is made. USP also complies with the notice requirement under §1.367(b)–1(c).
(ii) Trigger of gain recognition agreement with
no election. Assume that in year 2, CFC1 sells the
stock of CFC2 for $120, and that there were no distributions by CFC2 prior to the sale. USP must
amend its return for the year of the initial transfer
and include $50 in income (with interest), $30 of
which will be recharacterized as a dividend pursuant
to section 1248. As a result, CFC1 has a basis of
$100 in CFC2. As a result of the sale of CFC2 stock
by CFC1, USP will have $20 of subpart F foreign
personal holding company income. See section 951,
et. seq., and the regulations thereunder.
(iii) Trigger of gain recognition agreement with
election. Assume the same facts as in paragraphs (i)
and (ii) of this Example, except that when USP attached the gain recognition agreement to its timely
filed Federal income tax return for the year of the
initial transfer, it elected under paragraph (b)(1)(vii)
of this section to include the amount of gain realized
but not recognized on the initial transfer, $50, in the
year of the triggering event rather than in the year of

19

the initial transfer. In such case, the result is the
same as in paragraph (e)(1)(ii)(B) of this section, except that USP will include the $50 of gain on its year
2 return, together with interest. For purposes of determining the dividend component, if any, of the $50
inclusion, USP will take into account the section
1248 amount of CFC2 at the time of the disposition
in Year 2.

(2) Partial disposition. If the transferee foreign corporation disposes of (or
is deemed to dispose of) only a portion of
the transferred stock or securities, then
the U.S. transferor is required to recognize only a proportionate amount of the
gain realized but not recognized upon the
initial transfer of the transferred property.
The proportion required to be recognized
shall be determined by reference to the
relative fair market values of the transferred stock or securities disposed of and
retained. Solely for purposes of determining whether the U.S. transferor must
recognize income under the agreement
described in paragraph (b) of this section,
in the case of transferred property (including stock or securities) that is fungible
with other property owned by the transferee foreign corporation, a disposition by
such corporation of any such property
shall be deemed to be a disposition of no
less than a ratable portion of the transferred property.
(3) Deemed dispositions of stock of
transferred corporation—(i) Disposition
by transferred corporation of substantially all of its assets—(A) In general.
Unless an exception applies (as described
in paragraph (e)(3)(i)(B) of this section),
a transferee foreign corporation will be
treated as having disposed of the stock or
securities of the transferred corporation if,
within the term of the gain recognition
agreement, the transferred corporation
makes a disposition of substantially all
(within the meaning of section 368(a)(1)(C)) of its assets (including stock in a
subsidiary corporation or an interest in a
partnership). If the initial transfer that necessitated the gain recognition agreement
was an indirect stock transfer, see
§1.367(a)–3(d)(2)(v). If the transferred
corporation is a U.S. corporation, see
paragraph (h)(2) of this section.
(B) The transferee foreign corporation
will not be deemed to have disposed of
the stock of the transferred corporation if
the transferred corporation is liquidated
into the transferee foreign corporation
under sections 337 and 332, provided that

July 6, 1998

the transferee foreign corporation does
not dispose of substantially all of the assets formerly held by the transferred corporation (and considered for purposes of
the substantially all determination) within
the remaining period during which the
gain recognition agreement is in effect. A
nonrecognition transfer is not counted for
purposes of the substantially all determination as a disposition if the transfer satisfies the requirements of paragraph (g)(3)
of this section. A disposition does not include a compulsory transfer as described
in §1.367(a)–4T(f) that was not reasonably forseeable by the U.S. transferor at
the time of the initial transfer.
(ii) U.S. transferor becomes a non-citizen nonresident. If a U.S. transferor loses
U.S. citizenship or a long-term resident
ceases to be taxed as a lawful permanent
resident (as defined in section 877(e)(2)),
then immediately prior to the date that the
U.S. transferor loses U.S. citizenship or
ceases to be taxed as a long-term resident,
the gain recognition agreement will be
triggered as if the transferee foreign corporation disposed of all of the stock of the
transferred corporation in a taxable transaction on such date. No additional inclusion is required under section 877, and a
gain recognition agreement under section
877 may not be used to avoid taxation
under section 367(a) resulting from the
trigger of the section 367(a) gain recognition agreement.
(f) Effect on gain recognition agreement if U.S. transferor goes out of existence—(1) In general. If an individual
transferor that has entered into an agreement under paragraph (b) of this section
dies, or if a U.S. trust or estate that has entered into an agreement under paragraph
(b) of this section goes out of existence
and is not required to recognize gain as a
consequence thereof with respect to all of
the stock of the transferee foreign corporation received in the initial transfer and
not previously disposed of, then the gain
recognition agreement will be triggered
unless one of the following requirements
is met—
(i) The person winding up the affairs
of the transferor retains, for the duration
of the waiver of the statute of limitations
relating to the gain recognition agreement, assets to meet any possible liability
of the transferor under the duration of the
agreement;

July 6, 1998

(ii) The person winding up the affairs
of the transferor provides security as provided under paragraph (d) of this section
for any possible liability of the transferor
under the agreement; or
(iii) The transferor obtains a ruling
from the Internal Revenue Service providing for successors to the transferor
under the gain recognition agreement.
(2) Special rule when U.S. transferor
is a corporation—(i) U.S. transferor
goes out of existence pursuant to the
transaction. If the transferor is a U.S.
corporation that goes out of existence in a
transaction in which the transferor’s gain
would have qualified for nonrecognition
treatment under §1.367(a)–3(b) or (c) had
the U.S. transferor remained in existence
and entered into a gain recognition agreement, then the gain may generally qualify
for nonrecognition treatment only if the
U.S. transferor is owned by a single U.S.
parent corporation and the U.S. transferor
and its parent corporation file a consolidated Federal income tax return for the
taxable year that includes the transfer, and
the parent of the consolidated group enters into the gain recognition agreement.
However, notwithstanding the preceding
sentence, a U.S. transferor that was controlled (within the meaning of section
368(c)) by five or fewer domestic corporations may request a ruling that, if certain conditions prescribed by the Internal
Revenue Service are satisfied, the transaction may qualify for nonrecognition
treatment.
(ii) U.S. corporate transferor is liquidated after gain recognition agreement is
filed. If a U.S. transferor files a gain
recognition agreement but is liquidated
during the term of the gain recognition
agreement, such agreement will be terminated if the liquidation does not qualify as
a tax-free liquidation under sections 337
and 332 and the U.S. transferor includes
in income any gain from the liquidation.
If the liquidation qualifies for nonrecognition treatment under sections 337 and
332, the gain recognition agreement will
be triggered unless the U.S. parent corporation and the U.S. transferor file a consolidated Federal income tax return for
the taxable year that includes the dates of
the initial transfer and the liquidation of
the U.S. transferor, and the U.S. parent
enters into a new gain recognition agreement and complies with reporting require-

20

ments similar to those contained in paragraph (g)(2) of this section.
(g) Effect on gain recognition agreement of certain nonrecognition transactions—(1) Certain nonrecognition transfers of stock or securities of the transferee
foreign corporation by the U.S. transferor.
If the U.S. transferor disposes of any
stock of the transferee foreign corporation
in a nonrecognition transfer and the U.S.
transferor complies with reporting requirements similar to those contained in
paragraph (g)(2) of this section, the U.S.
transferor shall continue to be subject to
the terms of the gain recognition agreement in its entirety.
(2) Certain nonrecognition transfers of
stock or securities of the transferred corporation by the transferee foreign corporation. (i) If, during the period the gain
recognition agreement is in effect, the
transferee foreign corporation disposes of
all or a portion of the stock of the transferred corporation in a transaction in
which gain or loss would not be required
to be recognized by the transferee foreign
corporation under U.S. income tax principles, such disposition will not be treated
as a disposition within the meaning of
paragraph (e) of this section if the transferee foreign corporation receives (or is
deemed to receive), in exchange for the
property disposed of, stock in a corporation, or an interest in a partnership, that
acquired the transferred property (or receives stock in a corporation that controls
the corporation acquiring the transferred
property); and the U.S. transferor complies with the requirements of paragraphs
(g)(2)(ii) through (iv) of this section.
(ii) The U.S. transferor must provide a
notice of the transfer with its next annual
certification under paragraph (b)(5) of
this section, setting forth—
(A) A description of the transfer;
(B) The applicable nonrecognition
provision; and
(C) The name, address, and taxpayer
identification number (if any) of the new
transferee of the transferred property.
(iii) The U.S. transferor must provide
with its next annual certification a new
agreement to recognize gain (in accordance with the rules of paragraph (b) of
this section) if, prior to the close of the
fifth full taxable year following the taxable year of the initial transfer, either—

1998–27 I.R.B.

(A) The initial transferee foreign corporation disposes of the interest (if any)
which it received in exchange for the
transferred property (other than in a disposition which itself qualifies under the
rules of this paragraph (g)(2)); or
(B) The corporation or partnership that
acquired the property disposes of such
property (other than in a disposition
which itself qualifies under the rules of
this paragraph (g)(2)); or
(C) There is any other disposition that
has the effect of an indirect disposition of
the transferred property.
(iv) If the U.S. transferor is required to
enter into a new gain recognition agreement, as provided in paragraph (g)(2)(iii)
of this section, the U.S. transferor must
provide with its next annual certification
(described in paragraph (b)(5) of this section) a statement that arrangements have
been made, in connection with the nonrecognition transfer, ensuring that the
U.S. transferor will be informed of any
subsequent disposition of property with
respect to which recognition of gain
would be required under the agreement.
(3) Certain nonrecognition transfers of
assets by the transferred corporation. A
disposition by the transferred corporation
of all or a portion of its assets in a transaction in which gain or loss would not be required to be recognized by the transferred
corporation under U.S. income tax principles, will not be treated as a disposition
within the meaning of paragraph (e)(3) of
this section if the transferred corporation
receives in exchange stock or securities in
a corporation or an interest in a partnership that acquired the assets of the transferred corporation (or receives stock in a
corporation that controls the corporation
acquiring the assets). If the transaction
would be treated as a disposition of substantially all of the transferred corporation’s assets, the preceding sentence shall
only apply if the U.S. transferor complies
with reporting requirements comparable
to those of paragraphs (g)(2)(ii) through
(iv) of this section, providing for notice,
an agreement to recognize gain in the case
of a direct or indirect disposition of the
assets previously held by the transferred
corporation, and an assurance that necessary information will be provided to appropriate parties.
(h) Transactions that terminate the
gain recognition agreement—(1) Taxable

1998–27 I.R.B.

disposition of stock or securities of transferee foreign corporation by U.S. transferor. (i) If the U.S. transferor disposes of
all of the stock of the transferee foreign
corporation that it received in the initial
transfer in a transaction in which all realized gain (if any) is recognized currently,
then the gain recognition agreement shall
terminate and have no further effect. If
the transferor disposes of a portion of the
stock of the transferee foreign corporation
that it received in the initial transfer in a
taxable transaction, then in the event that
the gain recognition agreement is later
triggered, the transferor shall be required
to recognize only a proportionate amount
of the gain subject to the gain recognition
agreement that would otherwise be required to be recognized on a subsequent
disposition of the transferred property
under the rules of paragraph (b)(2) of this
section. The proportion required to be
recognized shall be determined by reference to the percentage of stock (by value)
of the transferee foreign corporation received in the initial transfer that is retained by the United States transferor.
(ii) The rule of this paragraph (h) is illustrated by the following example:
Example. A, a United States citizen, owns 100
percent of the outstanding stock of foreign corporation X. In a transaction described in section 351, A
exchanges his stock in X (and other assets) for 100
percent of the outstanding voting and nonvoting
stock of foreign corporation Y. A submits an agreement under the rules of this section to recognize gain
upon a later disposition. In the following year, A
disposes of 60 percent of the fair market value of the
stock of Y, thus terminating 60 percent of the gain
recognition agreement. One year thereafter, Y disposes of 50 percent of the fair market value of the
stock of X. A is required to include in his income in
the year of the later disposition 20 percent (40 percent interest in Y multiplied by a 50 percent disposition of X) of the gain that A realized but did not recognize on his initial transfer of X stock to Y.

(2) Certain dispositions by a domestic
transferred corporation of substantially
all of its assets. If the transferred corporation is a domestic corporation and the
U.S. transferor and the transferred corporation filed a consolidated Federal income
tax return at the time of the transfer, the
gain recognition agreement shall terminate and cease to have effect if, during the
term of such agreement, the transferred
corporation disposes of substantially all
of its assets in a transaction in which all
realized gain is recognized currently. If

21

an indirect stock transfer necessitated the
filing of the gain recognition agreement,
such agreement shall terminate if, immediately prior to the indirect transfer, the
U.S. transferor and the acquired corporation filed a consolidated return (or, in the
case of a section 368(a)(1)(A) and
(a)(2)(E) reorganization described in
§1.367(a)–3(d)(1)(ii), the U.S. transferor
and the acquiring corporation filed a consolidated return) and the transferred corporation disposes of substantially all of its
assets (taking into account §1.367(a)–
3(d)(2)(v)) in a transaction in which all
realized gain is recognized currently.
(3) Distribution by transferee foreign
corporation of stock of transferred corporation that qualifies under section 355 or
section 337. If, during the term of the
gain recognition agreement, the transferee
foreign corporation distributes to the U.S.
transferor, in a transaction that qualifies
under section 355, or in a liquidating distribution that qualifies under sections 332
and 337, the stock that initially necessitated the filing of the gain recognition
agreement (and any additional stock received after the initial transfer), the gain
recognition agreement shall terminate and
have no further effect, provided that immediately after the section 355 distribution or section 332 liquidation, the U.S.
transferor’s basis in the transferred stock
is less than or equal to the basis that it had
in the transferred stock immediately prior
to the initial transfer that necessitated the
GRA.
(i) Effective date. The rules of this
section shall apply to transfers that occur
on or after July 20, 1998. For matters
covered in this section for periods before
July 20, 1998, the corresponding rules of
§1.367(a)–3T(g) (see 26 CFR part 1, revised April 1, 1998) and Notice 87–85
((1987–2 C.B. 395); see §601.601(d)–
(2)(ii) of this chapter) apply. In addition,
if a U.S. transferor entered into a gain
recognition agreement for transfers prior
to July 20, 1998, then the rules of
§1.367(a)–3T(g) (see 26 CFR part 1, revised April 1, 1998) shall continue to
apply in lieu of this section in the event of
any direct or indirect nonrecognition
transfer of the same property. See, also,
§1.367(a)–3(f).
Par. 6. Section 1.367(b)–1 is added to
read as follows:

July 6, 1998

§1.367(b)–1 Other transfers.
(a) Scope. Section 367(b) and the regulations thereunder set forth certain rules
regarding the extent to which a foreign
corporation shall be considered to be a
corporation in connection with an exchange to which section 367(b) applies.
An exchange to which section 367(b) applies is any exchange described in section
332, 351, 354, 355, 356 or 361, with respect to which the status of a foreign corporation as a corporation is relevant for
determining the extent to which income
shall be recognized or for determining the
effect of the transaction on earnings and
profits, basis of stock or securities, or
basis of assets. Notwithstanding the preceding sentence, a section 367(b) exchange does not include a transfer to the
extent that the foreign corporation fails to
be treated as a corporation by reason of
section 367(a)(1). See §1.367(a)–3(b)(2)(ii) for an illustration of the interaction
of sections 367(a) and (b). This paragraph applies for transfers occurring on or
after July 20, 1998.
(b) [Reserved]. For further guidance,
see §7.367(b)–1(b) of this chapter.
(c) Notice required—(1) In general.
If any person referred to in section 6012
(relating to the requirement to make returns of income) realized gain or other income (whether or not recognized) on account of any exchange to which section
367(b) applies, such person must file a
notice of such exchange on or before the
last date for filing a Federal income tax
return (taking into account any extensions
of time therefor) for the person’s taxable
year in which such gain or other income is
realized. This notice must be filed with
the district director with whom the person
would be required to file a Federal income tax return for the taxable year in
which the exchange occurs. Notwithstanding anything in this paragraph (c)(1)
to the contrary, no notice under this paragraph (c)(1) is required to the extent a
transaction is described in both section
367(a) and (b), and the exchanging person
is not a United States shareholder of the
corporation whose stock is exchanged.
This paragraph applies to transfers occurring on or after July 20, 1998.
(c)(2) through (f) [Reserved]. For further guidance, see §7.367(b)–1(c)(2)
through (f) of this chapter.

July 6, 1998

Par. 6a. Section 1.367(b)-4 is added to
read as follows:
§1.367(b)–4 Certain exchanges of stock
described in section 354, 351, or sections
354 and 351.
(a) In general. This section applies to
an exchange of stock in a foreign corporation by a United States shareholder if the
exchange is described in section 351, or is
described in section 354 and is made pursuant to a reorganization described in section 368(a)(1)(B) (including an exchange
that is also described in section 351),
without regard to whether the exchange
may also be described in section 361.
(b) Recognition of income. If an exchange is described in paragraph (b)(1),
(2) or (3) of this section, the exchanging
shareholder shall include in income as a
deemed dividend the section 1248 amount
attributable to the stock that it exchanges.
See, also, §1.367(a)–3(b)(2). However, in
the case of a recapitalization described in
paragraph (b)(3) of this section that occurred prior to July 20, 1998, the exchanging shareholder shall include the
section 1248 amount on its tax return for
the taxable year that includes the exchange described in paragraph (b)(2)(iii)
of this section (and not in the taxable year
of the recapitalization), except that no inclusion is required if both the recapitalization and the exchange described in paragraph (b)(2)(iii) of this section occurred
prior to July 20, 1998.
(1) Loss of United States shareholder
or controlled foreign corporation status.
An exchange is described in this paragraph (b)(1) if—
(i) An exchanging shareholder receives
stock of a foreign corporation that is not a
controlled foreign corporation;
(ii) An exchanging shareholder receives stock of a controlled foreign corporation as to which the exchanging United
States shareholder is not a United States
shareholder; or
(iii) The corporation whose stock is
exchanged is not a controlled foreign corporation immediately after the transfer.
(2) Receipt by domestic corporation of
preferred or other stock in certain instances. An exchange is described in this
paragraph (b)(2) if—
(i) Immediately before the exchange,
the foreign acquired corporation and the

22

foreign acquiring corporations are not
members of the same affiliated group
(within the meaning of section 1504(a),
but without regard to the exceptions set
forth in section 1504(b), and substituting
the words “more than 50” in place of the
words “at least 80” in sections 1504(a)(2)(A) and (B));
(ii) Immediately after the exchange, a
domestic corporation meets the ownership threshold specified by section 902(a)
or (b) such that it may qualify for a
deemed paid foreign tax credit if it receives from the foreign acquiring corporation a distribution (directly or through
tiers) of its earnings and profits; and
(iii) The exchanging shareholder receives preferred stock (other than preferred stock that is fully participating with
respect to dividends, redemptions and
corporate growth) in consideration for
common stock or preferred stock that is
fully participating with respect to dividends, redemptions and corporate growth,
or, in the discretion of the District Director (and without regard to whether the
stock exchanged is common stock or preferred stock), receives stock that entitles it
to participate (through dividends, redemption payments or otherwise) disproportionately in the earnings generated by
particular assets of the foreign acquired
corporation or foreign acquiring corporation. See, e.g., paragraph (b)(4) Example
1 through Example 3 of this section.
(3) Certain exchanges involving recapitalizations. An exchange pursuant to
a recapitalization under section 368(a)(1)(E) shall be deemed to be an exchange
described in this paragraph (b)(3) if the
following conditions are satisfied—
(i) During the 24-month period immediately preceding or following the date of
the recapitalization, the corporation that
undergoes the recapitalization (or a predecessor of, or successor to, such corporation) also engages in a transaction that
would be described in paragraph (b)(2) of
this section but for paragraph (b)(2)(iii) of
this section, either as the foreign acquired
corporation or the foreign acquiring corporation; and
(ii) The exchange in the recapitalization is described in paragraph (b)(2)(iii)
of this section.
(4) Examples. The rules of paragraph
(b)(2) of this section are illustrated by the
following examples:

1998–27 I.R.B.

Example 1—(i) Facts. FC1 is a foreign corporation. DC is a domestic corporation that is unrelated
to FC1. DC owns all of the outstanding stock of
FC2, a foreign corporation, and FC2 has no outstanding preferred stock. The value of FC2 is $100
and DC has a basis of $50 in the stock of FC2. The
section 1248 amount attributable to the stock of FC2
held by DC is $20. In a reorganization described in
section 368(a)(1)(B), FC1 acquires all of the stock
of FC2 and, in exchange, DC receives FC1 voting
preferred stock that constitutes 10 percent of the outstanding voting stock of FC1 for purposes of section
902(a). Immediately after the exchange, FC1 and
FC2 are controlled foreign corporations and DC is a
United States shareholder of FC1, so paragraph
(b)(1) of this section does not require inclusion in income of the section 1248 amount.
(ii) Result. Pursuant to §1.367(a)–3(b)(2), the
transfer is subject to both section 367(a) and section
367(b). Under §1.367(a)–3(b)(1), DC will not be
subject to tax under section 367(a)(1) if it enters into
a gain recognition agreement in accordance with
§1.367(a)–8. The amount of the gain recognition
agreement is $50 less any inclusion under section
367(b). Even though paragraph (b)(1) of this section
does not apply to require inclusion in income by DC
of the section 1248 amount, DC must nevertheless
include the $20 section 1248 amount in income as a
deemed dividend from FC2 under paragraph (b)(2)
of this section. Thus, if DC enters into a gain recognition agreement, the amount is $30 (the $50 gain
realized less the $20 recognized under section
367(b)). (If DC fails to enter into a gain recognition
agreement, it must include in income under section
367(a)(1) the $50 of gain realized; $20 of which is
treated as a dividend. Section 367(b) does not apply
in such case.)
Example 2—(i) Facts. The facts are the same as
in Example 1, except that DC owns all of the outstanding stock of FC1 immediately before the transaction.
(ii) Result. Both section 367(a) and section
367(b) apply to the transfer. Paragraph (b)(2) of this
section does not apply to require inclusion of the
section 1248 amount. Under paragraph (b)(2)(i) of
this section, the transaction is outside the scope of
paragraph (b)(2) of this section, because FC1 and
FC2 are, immediately before the transaction, members of the same affiliated group (within the meaning of such paragraph). Thus, if DC enters into a
gain recognition agreement in accordance with
§1.367(a)–8, the amount of such agreement is $50.
As in Example 1, if DC fails to enter into a gain
recognition agreement, it must include in income
$50, $20 of which will be treated as a dividend.
Example 3—(i) Facts. FC1 is a foreign corporation. DC is a domestic corporation that is unrelated
to FC1. DC owns all of the stock of FC2, a foreign
corporation. The section 1248 amount attributable
to the stock of FC2 held by DC is $20. In a reorganization described in section 368(a)(1)(B), FC1 acquires all of the stock of FC2 in exchange for FC1
voting stock that constitutes 10 percent of the outstanding voting stock of FC1 for purposes of section
902(a). The FC1 voting stock received by DC in the
exchange carries voting rights in FC1, but by agreement of the parties the shares entitle the holder to
dividends, amounts to be paid on redemption, and
amounts to be paid on liquidation, which are to be
determined by reference to the earnings or value of

1998–27 I.R.B.

FC2 as of the date of such event, and which are affected by the earnings or value of FC1 only if FC1
becomes insolvent or has insufficient capital surplus
to pay dividends.
(ii) Result. Under §1.367(a)–3(b)(1), DC will
not be subject to tax under section 367(a)(1) if it enters into a gain recognition agreement with respect
to the transfer of FC2 stock to FC1. Under
§1.367(a)–3(b)(2), the exchange will be subject to
the provisions of section 367(b) and the regulations
thereunder to the extent that it is not subject to tax
under section 367(a)(1). Furthermore, even if DC
would not otherwise be required to recognize income under this section, the District Director may
nevertheless require that DC include the $20 section
1248 amount in income as a deemed dividend from
FC2 under paragraph (b)(2) of this section.

(5) Special rules for applying section
1248 to subsequent exchanges. (i) If income is not required to be recognized
under paragraph (b) of this section in a
transaction described in paragraph (b)(1)
of this section involving a foreign acquiring corporation, then, for purposes of applying section 1248 or 367(b) to subsequent exchanges, the earnings and profits
attributable to an exchanging shareholder’s stock received in the transaction
shall be determined by reference to the
exchanging shareholder’s pro rata interest
in the earnings and profits of the foreign
acquiring corporation and foreign acquired corporation that accrue after the
transaction, as well as its pro rata interest
in the earnings and profits of the foreign
acquired corporation that accrued prior to
the transaction. See also section 1248(c)(2)(D)(ii). The earnings and profits attributable to an exchanging shareholder’s
stock received in the transaction shall not
include any earnings and profits of the
foreign acquiring corporation that accrued
prior to the transaction.
(ii) The following example illustrates
this paragraph (b)(5):
Example. (i) Facts. DC1, a domestic corporation, owns all of the stock of FC1, a foreign corporation. DC1 has owned all of the stock of FC1 since
FC1’s formation. DC2, a domestic corporation,
owns all of the stock of FC2, a foreign corporation.
DC2 has owned all of the stock of FC2 since FC2’s
formation. DC1 and DC2 are unrelated. In a reorganization described in section 368(a)(1)(B), DC1
transfers all of the stock of FC1 to FC2 in exchange
for 40 percent of FC2. DC1 enters into a five-year
gain recognition agreement under the provisions of
§§ 1.367(a)–3(b) and 1.367(a)–8 with respect to the
transfer of FC1 stock to FC2.
(ii) Result. DC1’s transfer of FC1 to FC2 is an
exchange described in paragraph (b) of this section.
Because the transfer is not described in paragraph
(b)(1), (2) or (3) of this section, DC1 is not required

23

to include in income the section 1248 amount attributable to the exchanged FC1 stock and the special
rule of this paragraph (b)(5) applies. Thus, for purposes of applying section 1248 or section 367(b) to
subsequent exchanges, the earnings and profits attributable to DC1’s interest in FC2 will be determined by reference to 40 percent of the post-reorganization earnings and profits of FC1 and FC2, and
by reference to 100 percent of the pre-reorganization
earnings and profits of FC1. The earnings and profits attributable to DC1’s interest in FC2 do not include any earnings and profits accrued by FC2 prior
to the transaction. Those earnings and profits are attributed to DC2 under section 1248.

(6) Effective date. This section applies
to transfers occurring on or after July 20,
1998.
(c) and (d) [Reserved]. For further
guidance, see §7.367(b)–4(c) and (d) of
this chapter.
Par. 7. In §1.367(b)-7, paragraphs (a)
and (b) are added to read as follows:
§1.367(b)–7 Exchange of stock
described in section 354.
(a) Scope. (1) This section applies to
an exchange of stock in a foreign corporation (other than a foreign investment company as defined in section 1246(b)) occurring on or after July 20, 1998, if—
(i) The exchange is described in section 354 or 356 and is made pursuant to a
reorganization described in section
368(a)(1)(B) through (F); and
(ii) The exchanging person is either a
United States shareholder or a foreign
corporation having a United States shareholder who is also a United States shareholder of the corporation whose stock is
exchanged.
(2) However, this section shall not
apply if a United States shareholder exchanges stock of a foreign corporation in
an exchange described in section
368(a)(1)(B). For further guidance, see
§1.367(b)-4.
(b) [Reserved]. For further guidance,
see §7.367(b)–7(b) of this chapter.
*

*

*

*

*

Par. 8. Section 1.367(d)–1T is amended
by adding a sentence at the end of paragraph (a) to read as follows:
§1.367(d)–1T Transfers of intangible
property to foreign corporations
(temporary).
(a) * * * For purposes of determining
whether a U.S. person has made a transfer

July 6, 1998

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

*

*

*

*

Par. 9. Section 1.6038B–1 is added to
read as follows:
§1.6038B–1 Reporting of certain
transactions.
(a) Purpose and scope. This section
sets forth information reporting requirements under section 6038B concerning
certain transfers of property to foreign
corporations. Paragraph (b) of this section provides general rules explaining
when and how to carry out the reporting
required under section 6038B with respect to the transfers to foreign corporations. Paragraph (c) of this section and
§1.6038B–1T(d) specify the information
that is required to be reported with respect
to certain transfers of property that are described in section 6038B(a)(1)(A) and
367(d), respectively. Section 1.6038B–
1T(e) specifies the limited reporting that
is required with respect to transfers of
property described in section 367(e)(1).
Paragraph (f) of this section sets forth the
consequences of a failure to comply with
the requirements of section 6038B and
this section. For effective dates, see paragraph (g) of this section. For rules regarding transfers to foreign partnerships,
see section 6038B(a)(1)(B) and any regulations thereunder.
(b) Time and manner of reporting—(1)
In general—(i) Reporting procedure.
Except for stock or securities qualifying
under the special reporting rule of paragraph (b)(2) of this section, or cash,
which is currently not required to be reported, any U.S. person that makes a
transfer described in section 6038B(a)(1)(A), 367(d) or (e)(1) is required to report
pursuant to section 6038B and the rules of
this section and must attach the required
information to Form 926 (Return by
Transferor of Property to a Foreign Corporation, Foreign Estate or Trust, or Foreign Partnership). For purposes of determining a U.S. transferor that is subject to
section 6038B, the rules of §1.367(a)–
1T(c) and §1.367(a)–3(d) shall apply with
respect to a transfer described in section
367(a), and the rules of §1.367(a)–1T(c)
shall apply with respect to a transfer described in section 367(d). Notwithstand-

July 6, 1998

ing any statement to the contrary on Form
926, the form and attachments must be attached to, and filed by the due date (including extensions) of, the transferor’s income tax return for the taxable year that
includes the date of the transfer (as defined in §1.6038B–1T(b)(4)). Any attachment to Form 926 required under the rules
of this section is filed subject to the transferor’s declaration under penalties of perjury on Form 926 that the information
submitted is true, correct, and complete to
the best of the transferor’s knowledge and
belief.
(ii) Reporting by corporate transferor.
If the transferor is a corporation, Form
926 must be signed by an authorized officer of the corporation. If, however, the
transferor is a member of an affiliated
group under section 1504(a)(1) that files a
consolidated Federal income tax return,
but the transferor is not the common parent corporation, an authorized officer of
the common parent corporation must sign
Form 926.
(iii) Transfers of jointly-owned property. If two or more persons transfer
jointly-owned property to a foreign corporation in a transfer with respect to
which a notice is required under this section, then each person must report with
respect to the particular interest transferred, specifying the nature and extent of
the interest. However, a husband and
wife who jointly file a single Federal income tax return may file a single Form
926 with their tax return.
(2) Exceptions and special rules for
transfers of stock or securities under section 367(a)—(i) Transfers on or after July
20, 1998. A U.S. person that transfers
stock or securities on or after July 20,
1998, in a transaction described in section
6038(a)(1)(A) will be considered to have
satisfied the reporting requirement under
section 6038B and paragraph (b)(1) of
this section if either—
(A) The U.S. transferor owned less
than 5 percent of both the total voting
power and the total value of the transferee
foreign corporation immediately after the
transfer (taking into account the attribution rules of section 318 as modified by
section 958(b)), and either:
(1) The U.S. transferor qualified for
nonrecognition treatment with respect to
the transfer (i.e., the transfer was not taxable under §§1.367(a)–3(b) or (c)); or

24

(2) The U.S. transferor is a tax-exempt
entity and the income was not unrelated
business income; or
(3) The transfer was taxable to the U.S.
transferor under §1.367(a)–3(c), and such
person properly reported the income from
the transfer on its timely-filed (including
extensions) Federal income tax return for
the taxable year that includes the date of
the transfer; or
(B) The U.S. transferor owned 5 percent or more of the total voting power or
the total value of the transferee foreign
corporation immediately after the transfer
(taking into account the attribution rules
of section 318 as modified by section
958(b)) and either:
(1) The transferor (or one or more successors) properly entered into a gain
recognition agreement under §1.367(a)–
8; or
(2) The transferor is a tax-exempt entity and the income was not unrelated
business income; or
(3) The transferor properly reported
the income from the transfer on its timelyfiled (including extensions) Federal income tax return for the taxable year that
includes the date of the transfer.
(ii) Transfers before July 20, 1998.
With respect to transfers occurring after
December 16, 1987, and prior to July 20,
1998, a U.S. transferor that transferred
U.S. or foreign stock or securities in a
transfer described in section 367(a) is not
subject to section 6038B if such person is
described in paragraph (b)(2)(i)(A) of this
section.
(3) Special rule for transfers of cash.
[Reserved].
(4) [Reserved]. For further guidance,
see §1.6038B-1T(b)(4).
(c) Information required with respect
to transfers described in section
6038B(a)(1)(A). A U.S. person that transfers property to a foreign corporation in
an exchange described in section
6038B(a)(1)(A) (including unappreciated
property other than cash) must provide
the following information, in paragraphs
labelled to correspond with the number or
letter set forth in this paragraph (c) and
§1.6038B–1T(c)(1) through (5). If a particular item is not applicable to the subject
transfer, the taxpayer must list its heading
and state that it is not applicable. For special rules applicable to transfers of stock
or securities, see paragraph (b)(2)(ii) of
this section.

1998–27 I.R.B.

(1) through (5) [Reserved]. For further
guidance, see §1.6038B–1T(c)(1) through
(5).
(6) Application of section 367(a)(5). If
the asset is transferred in an exchange described in section 361(a) or (b), a statement that the conditions set forth in the
second sentence of section 367(a)(5) and
any regulations under that section have
been satisfied, and an explanation of any
basis or other adjustments made pursuant
to section 367(a)(5) and any regulations
thereunder.
(d) and (e) [Reserved]. For further
guidance, see §1.6038B–1T(d) and (e).
(f) Failure to comply with reporting requirements—(1) Consequences of failure. If a U.S. person is required to file a
notice (or otherwise comply) under paragraph (b) of this section and fails to comply with the applicable requirements of
section 6038B and this section, then with
respect to the particular property as to
which there was a failure to comply—
(i) That property shall not be considered to have been transferred for use in
the active conduct of a trade or business
outside of the United States for purposes
of section 367(a) and the regulations
thereunder;
(ii) The U.S. person shall pay a penalty
under section 6038B(b)(1) equal to 10
percent of the fair market value of the
transferred property at the time of the exchange, but in no event shall the penalty
exceed $100,000 unless the failure with
respect to such exchange was due to intentional disregard (described under paragraph (g)(4) of this section); and
(iii) The period of limitations on assessment of tax upon the transfer of that
property does not expire before the date
which is 3 years after the date on which
the Secretary is furnished the information
required to be reported under this section.
See section 6501(c)(8) and any regulations thereunder.
(2) Failure to comply. A failure to
comply with the requirements of section
6038B is—
(i) The failure to report at the proper
time and in the proper manner any material information required to be reported
under the rules of this section; or
(ii) The provision of false or inaccurate
information in purported compliance with
the requirements of this section. Thus, a
transferor that timely files Form 926 with
the attachments required under the rules of

1998–27 I.R.B.

this section shall, nevertheless, have failed
to comply if, for example, the transferor
reports therein that property will be used
in the active conduct of a trade or business
outside of the United States, but in fact the
property continues to be used in a trade or
business within the United States.
(3) Reasonable cause exception. The
provisions of paragraph (f)(1) of this section shall not apply if the transferor shows
that a failure to comply was due to reasonable cause and not willful neglect.
The transferor may do so by providing a
written statement to the district director
having jurisdiction of the taxpayer’s return for the year of the transfer, setting
forth the reasons for the failure to comply.
Whether a failure to comply was due to
reasonable cause shall be determined by
the district director under all the facts and
circumstances.
(4) Definition of intentional disregard.
If the transferor fails to qualify for the exception under paragraph (f)(3) of this section and if the taxpayer knew of the rule
or regulation that was disregarded, the
failure will be considered an intentional
disregard of section 6038B, and the monetary penalty under paragraph (f)(1)(ii) of
this section will not be limited to
$100,000. See §1.6662–3(b)(2).
(g) Effective date. This section applies
to transfers occurring on or after July 20,
1998. See §1.6038B–1T for transfers occurring prior to July 20, 1998.
Par. 10. Section 1.6038B–1T is
amended as follows:
1. The section heading is revised.
2. Paragraphs (a) through (b)(2) are revised.
3. Paragraph (b)(3) is redesignated as
paragraph (b)(4).
4. New paragraph (b)(3) is added and
reserved.
5. Paragraph (c) introductory text is revised and paragraph (c)(6) is added.
6. Paragraph (f) is revised.
7. Paragraph (g) is added.
The revisions and additions read as follows:
§1.6038B–1T Reporting of certain
transactions (temporary).
(a) through (b)(2) [Reserved]. For further guidance, see §1.6038B–1(a) through
(b)(2).
(b)(3) [Reserved].
*

*

*

25

*

*

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

*

*

*

*

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

*

*

*

*

(f) [Reserved]. For further guidance,
see §1.6038B–1(f).
(g) Effective date. This section applies
to transfers occurring after December 31,
1984, except paragraph (e)(1) applies to
transfers occurring on or after September
13, 1996. See §1.6038B–1T(a) through
(b)(2), (c) introductory text, and (f) (26
CFR part 1, revised April 1, 1998) for
transfers occurring prior to July 20, 1998.
See §1.6038B–1 for transfers occurring
on or after July 20, 1998.
PART 7—TEMPORARY INCOME TAX
REGULATIONS UNDER THE TAX
REFORM ACT OF 1976
Par. 11. The authority citation for part
7 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 12. Section 7.367(b)–1 is
amended as follows:
1. Paragraphs (a) and (c)(1) are revised.
2. The authority citation at the end of
the section is removed.
The revisions read as follows:
§7.367(b)–1 Other transfers.
(a) [Reserved] For guidance relating
to transfers occurring on or after July 20,
1998, see §1.367(b)–1(a) of this chapter.
*

*

*

*

*

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

*

*

*

*

Par. 13. Section 7.367(b)-4 is amended
as follows:
1. Paragraphs (a) and (b) are revised.
2. The authority citation at the end of
the section is removed.
The revision reads as follows:
§7.367(b)-4 Certain changes described
in more than one Code provision.
(a) and (b) [Reserved]. For guidance
relating to transfers occurring on or after

July 6, 1998

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

*

*

*

*

Par. 14. Section 7.367(b)–7 is
amended as follows:
1. Paragraph (a) is revised.
2. The authority citation at the end of
the section is removed.
The revision reads as follows:
§7.367(b)–7 Exchange of stock
described in section 354.
(a) [Reserved] For guidance relating
to transfers occurring on or after July 20,
1998, see §1.367(b)–7(a) of this chapter.
*

*

*

*

*

PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 15. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 16. In §602.101, paragraph (c) is
amended by:
1. Removing the following entry from
the table:
CFR part or section
where identified
and described
*

*

Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved May 13, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on June
18, 1998, at 8:45 a.m., and published in the issue of
the Federal Register for June 19, 1998, 63 F.R.
33550)

Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of July 1998. See Rev. Rul.
98–33, page 26.

Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Current OMB
control No.
*

*

*

Section 467.—Certain Payments
for the Use of Property or
Services

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

*

*

*

*

2. Adding the following entry to the
table in numerical order to read as follows:
§602.101 OMB Control numbers.
*

*

*

*

*

(c) * * *
CFR part or section
where identified
and described
*

*

Current OMB
control No.
*

*

*

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

July 6, 1998

*

*

*

*

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

Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 1998. See
Rev. Rul. 98–33, page 26.

26

Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 1998. See
Rev. Rul. 98–33, page 26.

Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

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

Rev. Rul. 98–33
This revenue ruling provides various
prescribed rates for federal income tax
purposes for July 1998 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable federal rates (AFR) for the current month for
purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term adjusted applicable federal rates (adjusted
AFR) for the current month for purposes

1998–27 I.R.B.

of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the appropriate percentages for determining the

low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Table 5
contains the federal rate for determining
the present value of an annuity, an interest

for life or for a term of years, or a remainder or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the blended annual rate for purposes of
section 7872.

REV. RUL. 98–33 TABLE 1
Applicable Federal Rates (AFR) for July 1998
Period for Compounding
Annual

Semiannual

Quarterly

Monthly

5.56%
6.12%
6.69%
7.25%

5.48%
6.03%
6.58%
7.12%

5.44%
5.99%
6.53%
7.06%

5.42%
5.96%
6.49%
7.02%

Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR

5.68%
6.25%
6.83%
7.41%
8.58%
10.04%

5.60%
6.16%
6.72%
7.28%
8.40%
9.80%

5.56%
6.11%
6.66%
7.21%
8.31%
9.68%

5.54%
6.08%
6.63%
7.17%
8.26%
9.61%

Long-Term
AFR
110% AFR
120% AFR
130% AFR

5.88%
6.48%
7.08%
7.68%

5.80%
6.38%
6.96%
7.54%

5.76%
6.33%
6.90%
7.47%

5.73%
6.30%
6.86%
7.42%

Short-Term
AFR
110% AFR
120% AFR
130% AFR

REV. RUL. 98–33 TABLE 2
Adjusted AFR for July 1998
Period for Compounding
Annual
Short-term
adjusted AFR
Mid-term
adjusted AFR
Long-term
adjusted AFR

1998–27 I.R.B.

Semiannual

Quarterly

Monthly

3.80%

3.76%

3.74%

3.73%

4.22%

4.18%

4.16%

4.14%

5.00%

4.94%

4.91%

4.89%

27

July 6, 1998

REV. RUL. 98–33 TABLE 3
Rates Under Section 382 for July 1998
Adjusted federal long-term rate for the current month

5.00%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)

5.15%

REV. RUL. 98–33 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for July 1998
Appropriate percentage for the 70% present value low-income housing credit

8.35%

Appropriate percentage for the 30% present value low-income housing credit

3.58%

REV. RUL. 98–33 TABLE 5
Rate Under Section 7520 for July 1998
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest

6.8%

REV. RUL. 98–33 TABLE 6
Blended Annual Rate for 1998
Section 7872(e)(2) blended annual rate for 1998

Section 1288.—Treatment of
Original Issue Discount on TaxExempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

July 6, 1998

5.63%

Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

28

Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of July 1998. See Rev. Rul. 98–33, page 26.

1998–27 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, sections 911, 1.911–1)

Rev. Proc. 98–38
SECTION 1. PURPOSE
01. This revenue procedure provides
information to any individual who failed
to meet the eligibility requirements of
§ 911(d)(1) of the Internal Revenue Code
because adverse conditions in a foreign
country precluded the individual from
meeting those requirements for taxable
year 1997.
02. The Internal Revenue Service has
previously listed countries for which the
eligibility requirements of § 911(d)(1) of
the Code are waived under § 911(d)(4)
because of adverse conditions in those
countries during the time periods stated.
See Rev. Proc. 97–51, 1997–45 I.R.B. 9,
Rev. Proc. 96–33, 1996-1 C.B. 720, and
Rev. Proc. 95–45, 1995–2 C.B. 412. This
revenue procedure lists countries added to
the list in 1997, for which the eligibility
requirements of § 911(d)(1) are waived.
Rev. Proc. 97–51, Rev. Proc. 96–33, and
Rev. Proc. 95–45 remain in full force and
effect; the periods listed therein are omitted from this revenue procedure for
brevity.
SEC. 2. BACKGROUND
01. Section 911(a) of the Code allows a
“qualified individual,” as defined in §
911(d)(1), to exclude foreign earned income and housing cost amounts from gross
income. Section 911(c)(3) of the Code allows a qualified individual to deduct housing cost amounts from gross income.
02. Section 911(d)(1) of the Code defines the term “qualified individual” as an
individual whose tax home is in a foreign

country and who is (A) a citizen of the
United States and establishes to the satisfaction of the Secretary of the Treasury
that the individual has been a bona fide
resident of a foreign country or countries
for an uninterrupted period that includes
an entire taxable year, or (B) a citizen or
resident of the United States who, during
any period of 12 consecutive months, is
present in a foreign country or countries
during at least 330 full days.
03. Section 911(d)(4) of the Code provides an exception to the eligibility requirements of § 911(d)(1). An individual
will be treated as a qualified individual
with respect to a period in which the individual was a bona fide resident of, or was
present in, a foreign country if the individual left the country during a period for
which the Secretary of the Treasury, after
consultation with the Secretary of State,
determines that individuals were required
to leave because of war, civil unrest, or
similar adverse conditions that precluded
the normal conduct of business. An individual must establish that but for those
conditions the individual could reasonably have been expected to meet the eligibility requirements.
04. For 1997, the Secretary of the Treasury in consultation with the Secretary of
State, has determined that war, civil unrest, or similar adverse conditions that precluded the normal conduct of business existed in the following countries beginning
on or after the specified periods:
Date of Departure
Country

On or After

Albania
March 12, 1997
Cambodia
July 9, 1997
Central African
Republic
March 28, 1997
Democratic Republic
of the Congo
(formerly Zaire)
May 3, 1997

Date of Departure
Country

On or After

Republic of the
Congo

June 7, 1997

Sierra Leone
Tajikistan

May 28, 1997
November 26, 1997

.05 Accordingly, for purposes of § 911
of the Code, an individual who left one of
the foregoing countries on or after the
specified departure date shall be treated as
a qualified individual with respect to the
period during which that individual was
present in, or was a bona fide resident of,
such foreign country if the individual establishes a reasonable expectation of
meeting the requirements of § 911(d) but
for those conditions.
.06 To qualify for relief under § 911(d)–
(4) of the Code, an individual must have
established residency or have been physically present in the foreign country on or
prior to the date that the Secretary of the
Treasury determines that individuals were
required to leave the foreign country. Individuals who establish residency or are first
physically present in the foreign country
after the date that the Secretary prescribes,
shall not be treated as qualified individuals
under § 911(d)(4) of the Code pursuant to
§ 911(d)(4)(C). For example, individuals
who are first physically present in Albania
after March 12, 1997, are not eligible to
qualify for the exemption prescribed in §
911(d)(4) of the Code.
.07 In order to assist those individuals
who are filing prior year or amended tax
returns, the Internal Revenue Service is republishing the country added to the list in
1996 for which the eligibility requirements
of § 911(d)(1) of the Code are waived
under § 911(d)(4) for the year 1996:

Date of Departure
Country
Central African Republic
No new departure dates were added to the
list for tax years 1994 and 1995.
SEC. 3. INQUIRIES
A taxpayer who needs assistance on

1998–27 I.R.B.

On or After

On or Before

May 21, 1996

September 12, 1996

how to claim this exclusion, or on how to
file an amended return, should contact a
local IRS Office or, for a taxpayer residing or traveling outside the United States,
the nearest overseas IRS office.

29

SEC. 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 97–51, 1997–45 I.R.B. 9 is
supplemented.

July 6, 1998

DRAFTING INFORMATION
The principal author of this revenue
procedure is Leslie B. van der Wal of the
Office of Associate Chief Counsel
(International). For further information
regarding this revenue procedure contact
Mr. Carl Cooper at (202) 622-3840 (not a
toll-free call).

Notice 98–34
SECTION I. PURPOSE
Sections 877, 2107, and 2501(a)(3) of
the Internal Revenue Code (Code) govern
the federal tax treatment of certain former
U.S. citizens and former U.S. long-term
residents. Section IV of Notice 97–19,
1997–1 C.B. 394, provides guidance regarding the ruling request process under
these sections, including the procedures
for submitting a ruling request and the effect of a favorable ruling.
This notice modifies certain portions of
section IV of Notice 97–19 by providing
that certain individuals, in order to rebut
the presumption of tax motivation under
sections 877(a)(2), 2107(a)(2)(A), and
2501(a)(3)(B), are no longer required to
obtain a substantive ruling that the individual did not have a principal purpose of
tax avoidance. Rather, these individuals
may rebut the presumption of tax avoidance if they submit a complete ruling request in good faith. The Service will rule
as to whether a submission was complete
and provided in good faith. However, unless the Service also issues a substantive
ruling that the individual’s expatriation
did not have for one of its principal purposes the avoidance of U.S. taxes, an individual who receives a ruling that his or
her request is complete and was submitted
in good faith may, in a subsequent examination of the individual’s returns, ultimately be found to have had a principal
purpose of tax avoidance based on all the
facts and circumstances.
This notice also specifies the information required to be submitted in order to
receive a ruling from the Service that a request is complete and was submitted in
good faith, as well as modifies the categories of former long-term residents eligible to submit ruling requests.
Treasury and the Service expect to
issue regulations to incorporate the guid-

July 6, 1998

ance set forth in this notice. Until such
regulations are issued, taxpayers may rely
on the guidance set forth in this notice.
SECTION II. BACKGROUND
Section 877 generally provides that a
citizen who loses U.S. citizenship or a
long-term resident (as defined in section
877(e)(2)) who ceases to be taxed as a
U.S. resident (collectively, individuals
who “expatriate”) within the 10-year period immediately preceding the close of
the taxable year will be taxed on U.S.
source income (as modified by section
877(d)) for such taxable year, unless such
loss or cessation did not have for one of
its principal purposes the avoidance of
U.S. taxes. Sections 2107 and 2501(a)(3)
provide special estate and gift tax
regimes, respectively, for individuals who
expatriate with a principal purpose to
avoid U.S. taxes.
A former citizen is considered to have
expatriated with a principal purpose to
avoid U.S. taxes for purposes of sections
877, 2107 and 2501(a)(3) if the individual’s average income tax liability (the
“tax liability test”) or the individual’s net
worth (the “net worth test”) on the date of
expatriation exceed certain thresholds.
See sections 877(a)(2), and 2107(a)(2)(A)
and 2501(a)(3)(B).
A former U.S. citizen whose net worth
or average tax liability exceeds these
thresholds, however, will not be considered to have a principal purpose of tax
avoidance by reason of one of those tests
if that former citizen is described within
certain statutory categories and submits a
request for a ruling within one year of the
date of loss of U.S. citizenship for the
Secretary’s determination as to whether
such loss had for one of its principal purposes the avoidance of U.S. taxes. See
sections 877(c)(1), 2107(a)(2)(B), and
2501(a)(3)(C).
The tax liability and net worth tests
also apply for purposes of determining
whether a former long-term resident is
considered to have a principal purpose of
tax avoidance. Section 877(e)(3)(A) provides that the exception set forth in section 877(c) with respect to U.S. citizens
who submit a request for a ruling shall not
apply to former long-term residents.
However, section 877(e)(4) gives the Secretary the authority to exempt categories
of former long-term residents from sec-

30

tion 877. In addition, section 877(e)(5)
authorizes the Secretary to prescribe appropriate regulations to carry out the purposes of section 877(e).
In section IV of Notice 97–19, Treasury and the Service announced that, until
regulations are issued, a former long-term
resident may request a ruling for a determination as to whether such individual
had a principal purpose of tax avoidance
if the individual is within certain categories enumerated in section IV of Notice
97–19. Section IV of Notice 97–19 also
provides detailed guidance on ruling requests under sections 877, 2107 and
2501(a)(3), including the procedures for
submitting a request, the information that
must be submitted with a request, and the
effect of a favorable determination.
SECTION III. RULING REQUEST
SUBMISSIONS
Difficulties of current ruling practice.
Since the issuance of Notice 97–19, the
Service has received a substantial number
of requests for rulings under sections
877(c)(1), 2107(a)(2)(B), and 2501(a)(3)(C). In considering these requests, the
Service has found that making a determination regarding tax avoidance in an advance ruling presents difficulties due to
the inherently factual and subjective nature of the inquiry. In some cases, the Service has been able to reach a determination as to whether the individual’s
expatriation had for one of its principal
purposes the avoidance of U.S. taxes
based on the information submitted with
the ruling request. In other cases, however, the Service has not been able to
make a definitive advance determination
regarding a principal purpose of tax avoidance because the information submitted
with the ruling request did not clearly establish the existence or lack of such a principal purpose.
Under section IV of Notice 97–19, an
expatriate eligible to submit a ruling will
be subject to sections 877, 2107, or 2501,
unless such individual obtains a favorable
ruling, rather than merely submits a request, that the individual’s expatriation
did not have for one of its principal purposes the avoidance of U.S. taxes. Thus,
under current law, an expatriate would be
adversely affected (i.e., the presumption
of tax avoidance would apply) if the Service were unable to make an advance de-

1998–27 I.R.B.

termination regarding tax motivation in
certain cases because of the inherently
factual and subjective nature of such an
inquiry.
Modification of current ruling practice.
Due to the foregoing reasons, Treasury
and the Service have decided to modify
the current ruling practice. Under the
modified ruling practice, an individual
may overcome the presumption of tax
avoidance under sections 877(a)(2),
2107(a)(2)(A), and 2501(a)(3)(B) by submitting a request for a ruling as to
whether the individual’s expatriation had
for one of its principal purposes the
avoidance of U.S. taxes, provided that
such individual’s ruling request is complete and was submitted in good faith.
Under such circumstances, the presumption of tax avoidance under sections
877(a)(2), 2107(a)(2)(A), and 2501(a)(3)(B) will not apply even if the individual
does not receive a substantive ruling that
the individual’s expatriation did not have
for one of its principal purposes the avoidance of U.S. taxes. However, in a subsequent examination of such an individual’s
returns, the individual may ultimately be
found to have had a principal purpose of
tax avoidance based on the individual’s
facts and circumstances. Treasury and the
Service believe that this approach is supported by section 877(c)(1)(B), which
contemplates that the Service may determine that the conclusive presumption of
tax avoidance under section 877(a)(2)
does not apply if an eligible individual
submits a ruling request for a determination as to whether the individual’s expatriation had for one of its principal purposes
the avoidance of U.S. taxes.
Effect of ruling request submissions
and administration of rulings under new
ruling practice. To reflect the change in
the Service’s ruling practice, this notice
modifies section IV of Notice 97–19 as
set forth below.
Under this notice, if an expatriate’s tax
liability or net worth exceeds the applicable thresholds, the presumption in sections 877(a)(2), 2107(a)(2)(A) and
2501(a)(3)(B) that the expatriate had a
principal purpose of tax avoidance will
not apply if the expatriate (i) is eligible to
submit a ruling request that his or her expatriation did not have for one of its principal purposes the avoidance of U.S.
taxes, (ii) submits such a request in a

1998–27 I.R.B.

timely manner, and (iii) provides the Service with a complete and good faith ruling
request submission.
The Service will rule as to whether a
submission was complete and provided in
good faith. A ruling that a request constitutes a complete and good faith submission may, depending on the information
submitted, also contain either:
(1) a substantive ruling that the individual’s expatriation did not have for one
of its principal purposes the avoidance of
U.S. taxes in those cases where the information submitted clearly establishes the
lack of such a principal purpose; or
(2) a substantive ruling that the individual’s expatriation did have for one of
its principal purposes the avoidance of
U.S. taxes in those cases where the information submitted clearly establishes the
existence of such a principal purpose.
Alternatively, a ruling that a request
constitutes a complete and good faith submission may express no opinion as to
whether the individual’s expatriation had
for one of its principal purposes the avoidance of U.S. taxes in those cases where the
information submitted clearly establishes
neither the existence nor lack of such a
principal purpose. If the Service rules
solely that a request was complete and
submitted in good faith, such a ruling is
not conclusive as to whether the individual ultimately can be found to have a principal purpose of tax avoidance under sections 877(a)(1), 2107(a)(1), and
2501(a)(3)(A) based on the individual’s
facts and circumstances. See section
877(c)(1).
If, for any reason, the Service does not
issue a favorable substantive ruling that
the individual’s expatriation did not have
for one of its principal purposes the
avoidance of U.S. taxes, information collected as part of the ruling process may be
forwarded to the Office of Assistant Commissioner (International) to consider in
any later examination of the individual’s
returns.
Content of ruling request submissions.
In addressing the numerous requests received after the issuance of Notice 97-19,
the Service has found that the information
required in section IV of Notice 97-19 to
be submitted with ruling requests was insufficient in many instances for the Service to make a substantive determination
as to whether an individual’s expatriation

31

had for one of its principal purpose the
avoidance of U.S. taxes. Accordingly,
this notice modifies the information that
must be submitted with ruling requests to
ensure that all useful information is submitted with these requests. Much of the
information requested below was also requested in Notice 97–19. For convenience, however, the list below sets forth
all of the information that must be included with ruling requests submitted
after July 6, 1998.
To be considered a complete and good
faith submission by the Service, a request
submitted by a citizen or long-term resident for a ruling as to whether the individual’s expatriation had for one of its principal purposes the avoidance of U.S. taxes
must contain the following information,
with paragraphs labeled to correspond
with the numbers set forth below:
(1) the date (or expected date) of expatriation;
(2) a full explanation of the individual’s reasons for expatriating;
(3) the individual’s date of birth;
(4) all foreign countries of which the
individual is a resident for tax purposes
and/or intends to obtain residence for tax
purposes, and a statement as to whether
the individual is subject to worldwide income and estate taxation in the country of
residence. If the individual is not subject
to worldwide taxation, attach an explanation of the manner in which the individual
is taxed (e.g., whether foreign source pension income or capital gains are exempt
from tax);
(5) all foreign countries of which the
individual is a citizen and/or intends to
acquire citizenship after expatriation;
(6) the countries where the individual’s
spouse (if any) and parents were born, the
countries of citizenship and residence of
the individual’s spouse (if any), and a
statement as to whether the individual’s
spouse has expatriated or intends to expatriate;
(7) the country where the individual’s
tax home is located (within the meaning
of section 911(d)(3));
(8) a description of the individual’s ties
to the United States and the individual’s
ties to the foreign country where the individual resides (or intends to reside) for the
period that began five years prior to expatriation and ends on the date that the ruling request is submitted, including the lo-

July 6, 1998

cation of the individual’s permanent
home, family and social relations, occupation(s), political, cultural, or other activities, business activities, personal belongings, the place from which the
individual administers property, the juris-

diction in which the individual holds a
driver’s license, the location where the individual conducts routine personal banking activities, the location of the individual’s cemetery plot (if any), and any other
similar information;
(a)
Fair Market
Value (FMV)

Assets

(9) a balance sheet, in substantially the
following format, that sets forth the individual’s assets and liabilities immediately
prior to expatriation:

(b)
U.S. Adjusted
Basis

(c)
Gain (Loss)
[col.(a) less col.(b)]

1 Cash, including bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 Marketable stock and securities issued by U.S. companies . . . . . . .
3 Marketable stock and securities issued by foreign companies . . . .
4 Nonmarketable stock and securities issued by U.S. companies . . .
5 Nonmarketable stock and securities issued by foreign companies .
6 Pensions from services performed in the U.S. . . . . . . . . . . . . . . . . .
7 Pensions from services performed outside the U.S. . . . . . . . . . . . .
8 Partnership interests (attach statement as described below) . . . . . .
9 Assets held by trusts you own under sections 671 through 679
(attach statement as described below) . . . . . . . . . . . . . . . . . . . . . . .
10 Beneficial interests in nongrantor trusts (attach statement as
described below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 Intangibles used in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 Intangibles used outside the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 Loans to U.S. persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 Loans to foreign persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 Real property located in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . .
16 Real property located outside the U.S. . . . . . . . . . . . . . . . . . . . . . .
17 Business property located in the U.S. . . . . . . . . . . . . . . . . . . . . . . .
18 Business property located outside the U.S. . . . . . . . . . . . . . . . . . . .
19 Other assets (attach statement) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20 Total assets (add lines 1 through 19) . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities

Amount

21 Installment obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22 Mortgages, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24 Total liabilities (add lines 21 through 23) . . . . . . . . . . . . . . . . . . . .
25 Net worth (subtract line 24 from line 20) . . . . . . . . . . . . . . . . . . .
For purposes of allocating the property interests of a nongrantor trust to a beneficiary, use the methodology described
under section III of Notice 97–19 (i.e.,
based on facts and circumstances where

July 6, 1998

possible). To determine the value of a
beneficial interest in a nongrantor trust,
use the valuation principles under section
2512 and the regulations thereunder without regard to any prohibitions or restric-

32

tions on such interest. See section III of
Notice 97–19. In addition, the individual
must attach to the balance sheet a statement that separately identifies each partnership interest, each portion of a trust

1998–27 I.R.B.

that the individual is considered to own
under sections 671 through 679, and each
nongrantor trust in which the individual
holds a beneficial interest. This statement
must identify:
(i) the EIN of the partnership or trust
(if any),
(ii) the assets and liabilities of each
partnership or trust (categorized according to the categories of the balance sheet)
attributable to the individual’s interest in
the partnership or trust,
(iii) in the case of a grantor trust, an
explanation of the facts and law (including the applicable section of the Internal
Revenue Code) that establishes that the
trust (or portion of a trust) is treated for
U.S. tax purposes as owned by the individual, and
(iv) in the case of a nongrantor trust,
the methodology used to determine the individual’s beneficial interest in each trust;
(10) a statement as to whether there
have been (or are expected to be) significant changes in the individual’s assets and
liabilities for the period that began five
years prior to expatriation and ends ten
years following the date of expatriation.
If so, the individual should attach an explanation of such changes;
(11) a description of all exchanges described in section 877(d)(2)(B) and all removals of appreciated tangible personal
property from the United States (as described in section V of Notice 97–19),
that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including exchanges that took place prior to
February 6, 1995) and ending on the date
that the ruling request is submitted, or
(ii) occurred, or are expected to
occur, during the 10- year period following expatriation.
If the individual is subject to section 877
because of section 511(g)(3)(A) of the
Health Insurance Portability and Accountability Act of 1996 (see section X of Notice 97–19), the individual must also include a description of all exchanges
described under section 877(d)(2)(B) that
occurred on or after the date of the individual’s expatriating act (see section X of
Notice 97–19) and before February 6,
1995;
(12) a description of all occurrences
under section 877(d)(2)(E)(ii) that are
treated as exchanges under section

1998–27 I.R.B.

877(d)(2) (as described in section V of
Notice 97–19) that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including occurrences that took place prior to
February 24, 1997) and ending on the
date that the ruling request is submitted,
or
(ii) occurred, or are expected to
occur, during the 10-year period following expatriation;
(13) a statement describing the nature
and status of any ongoing audits, disputes
or other matters pending before the Internal Revenue Service;
(14) a statement as to whether the individual satisfied his or her U.S. tax liability
during the period that he or she was a U.S.
citizen or lawful permanent resident of
the United States;
(15) a copy of the individual’s U.S. tax
returns (including all attachments and
schedules) for each of the three years
prior to expatriation, and, if filed or required to be filed prior to the date the ruling request is submitted, the U.S. tax returns for the year during which the
individual expatriated and for all years
subsequent to expatriation. If Form 1116,
Foreign Tax Credit, was filed with these
income tax returns, provide copies of documents required to be attached to Form
1116 (e.g., foreign income tax return, receipt for payment of foreign tax, or other
secondary evidence of payment or accrual
of foreign taxes accepted by the District
Director, as described in Treas. Reg.
§ 1.905–2). If there is a discrepancy between the income or gain reported for tax
purposes with respect to the assets set
forth in the balance sheet in paragraph (9)
above and the income or gain that reasonably would be expected to be generated
by such assets, provide a complete explanation of such discrepancy;
(16) a copy of the information statement filed in accordance with section
6039G of the Code. If the information
statement has not been filed, a statement
as to when the individual intends to file
the information statement;
(17) a calculation of the individual’s
projected U.S. and foreign income tax liability upon a deemed disposition at fair
market value of all of the individual’s assets immediately following expatriation,
including a description of the foreign income tax treatment (e.g., tax-exempt in-

33

come and rates of tax) that would arise as
a result of such disposition, under each of
the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident;
(18) a projection of the individual’s
U.S. and foreign income tax liability for
each of the three years following expatriation, including a description of the foreign
income tax treatment (e.g., tax-exempt income and rates of tax), under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.
If the individual expects a substantial
change in his or her projected U.S. or foreign income tax liability as a result of a
change in income for the remainder of the
10-year period, attach an explanation;
(19) a statement indicating whether the
individual has transferred any property by
gift with an aggregate value of $100,000
or more (including gifts to the individual’s spouse), regardless of whether or not
such transfers were taxable under subtitle
B of the Code, during the period that
began five years prior to expatriation and
ending on the date that the ruling request
is submitted. If so, include a description
of the gift, provide an estimate of its fair
market value, indicate when and to
whom the gift was made, and attach
copies of the relevant U.S. gift tax returns
(if any);
(20) a statement indicating whether the
individual expects to make any substantial gifts during any year of the 10-year
period following expatriation. If so, include a projection of the U.S. and foreign
gift and other transfer taxes that would be
owed on the expected transfer of property
by gift during this period, including a description of the foreign tax treatment
(e.g., manner and rates of tax) that would
result upon the transfer of such property,
under each of the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and

July 6, 1998

(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident domiciled in the United States.
The individual should also describe the
expected gift, provide an estimate of its
fair market value, and indicate when and
to whom the individual expects to make
the gift;
(21) in the case of an individual age 60
or older on the date of expatriation, the
present value (determined as of the date
of expatriation) of the estimated U.S., foreign and other death taxes that would be
imposed as a result of the individual’s
death, and a description of the foreign tax
treatment that would arise as a result of
the individual’s death, under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident domiciled in the United States.
For purposes of this calculation, the estimated death tax is determined based on
the assumption that the individual’s taxable estate consists of the value of property that would comprise the taxable estate if the individual died immediately
before the date of expatriation without
taking into account any potential marital
or charitable deduction. The present
value of the estimated death tax liability
as of the date of expatriation is determined under the tables prescribed by section 7520 and Treas. Reg. § 20.2031–7,
using the appropriate interest rate under
section 7520 for that date and the individual’s age as of that date;
(22) in the case of an individual who
would be considered to own a trust under
sections 671 through 679 if the individual
had remained a U.S. citizen or U.S. resident, a description of the U.S. and foreign
tax treatment to both the trust and the individual (in the country of organization of
the trust and the individual’s country of
residence) of the expected trust income
and distributions for each of the three
years following expatriation, under each
of the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.

July 6, 1998

If the individual expects a substantial
change in the projected U.S. or foreign income tax liability of such trust income
and distributions for the remainder of the
10-year period following expatriation, attach an explanation;
(23) in the case of an individual who is
a beneficiary (as determined under section III of Notice 97–19) of a trust, a description of the U.S. and foreign tax treatment of the expected trust distributions to
the individual for each of the three years
following expatriation, under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.
If the individual expects a substantial
change in the projected U.S. or foreign income tax liability of such trust distributions for the remainder of the 10-year period following expatriation, attach an
explanation; and
(24) any other information reasonably
required by the Service after its review of
the submission.
Although individuals must provide
good faith estimates of fair market values,
formal appraisals are not required. If an
individual fails to provide the aforementioned information, including information
reasonably required by the Service, the
individual’s ruling request may be closed
pursuant to section 10.06(3) of Rev. Proc.
98–1, 1998-1 I.R.B. 7. If an individual’s
request is closed, the individual will not
be considered to have submitted a complete and good faith ruling request. Accordingly, the individual will be considered by the Service to have expatriated
with a principal purpose to avoid U.S.
taxes under sections 877(a)(2), 2107(a)(2)(A) and 2501(a)(3)(B).
Procedures for submitting ruling requests and user fees. Individuals should
refer to section 8 of Rev. Proc. 98–1,
1998–1 I.R.B. 7, 24, for general instructions on the proper procedures to follow
when submitting ruling requests. Individuals should also consult section 15 of
Rev. Proc. 98–1, 1998–1 I.R.B. 7, 51 for
information on the applicable user fee that
must be submitted with a ruling request.
Effective date. Section III of this notice
is effective for pending ruling requests

34

and requests submitted after July 6, 1998.
However, an individual with a request
currently pending with the Service as of
July 6, 1998 is not required to submit any
additional information unless requested to
do so.
This notice does not affect the validity
of any rulings previously issued by the
Service. An individual who previously
withdrew a ruling request is not considered
to have submitted a complete and good
faith request. However, such individual
may resubmit a ruling request in accordance with this notice. Such a resubmission must be filed by the later of October 6,
1998 or the date that is one year following
the date of the individual’s expatriation.
SECTION IV. LONG-TERM
RESIDENTS ELIGIBLE TO SUBMIT
RULING REQUESTS
Modification of categories of individuals eligible to submit ruling requests.
Section IV of Notice 97–19 provides that
long- term residents within certain categories are eligible to submit a ruling request. Under Category (1) of Notice 97–
19, long-term residents who are citizens
of certain countries and become fully liable to tax in such country by reason of
the individual’s residence are eligible to
submit a ruling request. This notice modifies Category (1) to read as follows:
(1) the individual becomes (not later
than the close of a reasonable period after
the individual’s expatriation) a resident
fully liable to income tax in one of the following countries:
(a) the country in which the individual was born,
(b) the country where the individual’s spouse was born, or
(c) the country where either of the
individual’s parents was born.
For this purpose, a resident who is not
domiciled in a country is not considered a
resident fully liable to income tax in such
country if his or her income is subject to
tax in a different manner than the income
of a resident who is domiciled in the
country.
If a former long-term resident within
the aforementioned category expatriated
prior to July 6, 1998 such individual will
be considered to have submitted a timely
ruling request if such request is filed by
the later of January 6, 1999 or the date

1998–27 I.R.B.

that is one year following the date of the
individual’s expatriation.
The following example illustrates circumstances under which an individual is
not considered a resident fully liable to income tax in a foreign jurisdiction:
Example 1. A, a former long-term resident, expatriated on January 1, 1998. A exceeded the threshold
of the net worth test on the date of her expatriation.
After A expatriated, A moved to Country B. A was
born in Country B. A is considered a resident of
Country B, but is not domiciled in Country B.
Under Country B’s income tax laws, nondomiciliary
residents of Country B are not taxed on foreign
source income unless such income is remitted to
Country B. Residents of Country B who are also
domiciled in Country B, however, are liable to tax in
Country B on worldwide income, regardless of
whether such income is remitted to Country B.
Since A is not liable to tax on foreign source income
in the same manner as a domiciliary resident of
Country B, A is not considered a resident fully liable
to income tax in Country B. Accordingly, A is not
eligible to submit a ruling request under paragraph
(1) above.

SECTION V. EFFECT ON OTHER
DOCUMENTS
Section IV of Notice 97–19 is modified.
REQUEST FOR COMMENTS
Treasury and the Service invite public
comments on the guidance provided in
this notice. Comments should be submitted by September 6, 1998 to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R (Notice 98–34)
Room 5228
Washington, DC 20044
or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html
The comments you submit will be
available for public inspection and copying.
DRAFTING INFORMATION
The principal author of this notice is
Trina Dang of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Ms. Dang or Willard Yates at (202) 6223880 (not a toll-free call).
PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed

1998–27 I.R.B.

and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1531.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The collection of information related to
the submission of ruling requests is required to help the Secretary make a determination as to whether an individual submitted a complete and good faith request
and to help the Secretary make a determination as to whether the individual expatriated with a principal purpose to avoid
U.S. taxes. This information will be used
by the Service for tax administration purposes.
The respondents will be eligible individuals who lose U.S. citizenship or cease
to be taxed as lawful permanent residents
of the United States. The estimated total
annual reporting burden is 350 hours.
The estimated annual burden per respondent is 3.5 hours. The estimated annual
number of respondents is 100. The estimated annual frequency of responses is
on occasion.
Books or records relating to collections
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 section 6103 of the Code.

Treatment of Hybrid
Arrangements Under Subpart F
Notice 98–35
In General
On January 16, 1998, the Treasury Department issued Notice 98–11, in which it
announced its intention to issue regulations to prevent the use of certain arrangements involving controlled foreign corporations and “hybrid branches” under
subpart F. A hybrid branch is regarded as
a branch for U.S. tax purposes, but as a
separate entity (e.g., a corporation) for
foreign tax purposes. On March 23,
1998, temporary and proposed regulations on these matters (T.D. 8767 and
REG–104537–97) were issued. The tem-

35

porary regulations cover transactions involving hybrid branches and equivalent
transactions involving partnerships under
subpart F. The proposed regulations, in
addition to the provisions also contained
in the temporary regulations, cover the
treatment of a CFC’s distributive share of
income of a partnership in which a CFC is
a partner.
In this Notice, the Treasury and the IRS
announce their intention to withdraw the
temporary regulations and proposed regulations issued on March 23, 1998 (T.D.
8767 and REG–104537–97). Notice 98–
11 is also hereby withdrawn. The public
hearing announced in the proposed regulations for July 15, 1998, will also be canceled.
Proposed Regulations on Hybrid
Transactions
The Treasury and the IRS also hereby
announce their intention to issue a notice
of proposed rulemaking covering hybrid
transactions. Under these proposed regulations, payments (including accruals) between a CFC and its hybrid branch, or between hybrid branches of the CFC, or
between a CFC (and its hybrid branch)
and the hybrid branch of a related CFC
(collectively “hybrid branch payments”)
will give rise to subpart F income in the
circumstances described below. When
certain conditions are present, the nonsubpart F income of the CFC, in the
amount of the hybrid branch payment,
will be recharacterized as subpart F income of the CFC. Those conditions include that: the hybrid branch payment reduces the foreign tax of the payor; the
hybrid branch payment would have been
foreign personal holding company income if made between separate CFCs;
and there is a significant disparity (as described below) between the effective rate
of tax on the payment in the hands of the
payee and the hypothetical rate of tax that
would have applied if the income had
been taxed in the hands of the payor.
The proposed regulations will make
clear that the CFC and the hybrid branch,
or the hybrid branches, will be treated as
separate corporations only to recharacterize non-subpart F income as subpart F income in the amount of the hybrid branch
payment, and to apply the tax disparity
rule. For all other purposes (e.g., for purposes of the earnings and profits limita-

July 6, 1998

tion of section 952), a CFC and its hybrid
branch, or hybrid branches, will not be
treated as separate corporations.
The proposed regulations will provide
that the amount recharacterized as subpart
F income is the gross amount of the hybrid branch payment limited by the
amount of the CFC’s earnings and profits
attributable to non-subpart F income.
This amount is the excess of current earnings and profits over subpart F income,
determined after the application of the
rules of sections 954(b) and 952(c) and
before the application of the rules of the
proposed regulations. To the extent that
the full amount required to be recharacterized under this provision cannot be
recharacterized because it exceeds earnings and profits attributable to non-subpart F income, there will be no requirement to carry such amounts back or
forward to another year.
For purposes of determining the
amount of taxes deemed paid under section 960, the amount of non-subpart F income recharacterized as subpart F income
will be treated as attributable to income in
separate foreign tax credit baskets in proportion to the ratio of non-subpart F income in each basket to the total amount of
non-subpart F income of the CFC for the
taxable year.
The proposed regulations will provide
that, under certain circumstances, the
recharacterization rules will also apply to
a CFC’s proportionate share of any hybrid
branch payment made between a partnership in which the CFC is a partner and a
hybrid branch of the partnership, or between hybrid branches of such a partnership. When the partnership is treated as
fiscally transparent by the CFC’s taxing
jurisdiction, the recharacterization rules
will be applied by treating the hybrid
branch payment as if it had been made directly between the CFC and the hybrid
branch, or as though the hybrid branches
of the partnership had been hybrid
branches of the CFC, as applicable. If the
partnership is treated as a separate entity
by the CFC’s taxing jurisdiction, the
recharacterization rules will be applied to
the partnership as if it were a CFC.
The proposed regulations will provide
that income will not be recharacterized
unless there is a disparity between the effective rate at which the hybrid branch
payment is taxed to the payee and a hypo-

July 6, 1998

thetical tax rate that the payor would have
been subject to had the payment not been
made. This provision will be similar to
the rule in §1.954–3(b), and will adopt the
same percentage tests as contained in that
provision. The proposed regulations will
also provide a special high tax exception
applicable to the hybrid branch payment
that is similar to the one contained in section 954(b)(4).
These proposed regulations will also
provide rules to prevent expenses, including related person interest expense that
normally would be allocable under section 954(b)(5) to subpart F income of a
CFC, from being allocated to a payment
from which the expense arises. The allocation limit will apply: (i) to the extent
such payment is included in the subpart F
income of the CFC; (ii) if the expense
arises from any payment by the CFC to a
hybrid partnership in which the CFC is a
partner; and (iii) if the payment reduces
foreign tax and there is a significant disparity in tax rates between the payor and
payee jurisdictions.
Certain rules addressing the application
of the related person exceptions with respect to hybrid branches and partnerships
will be covered in the proposed regulations. In the case of a payment by a CFC
to a hybrid branch of a related CFC, the
related person exceptions will apply to
exclude the payments from the foreign
personal holding company income of the
recipient CFC only if the payment would
have qualified for the exception if the hybrid branch had been a separate CFC incorporated in the jurisdiction in which the
payment is subject to tax (other than a
withholding tax). Likewise, the regulations will address the situation where a
partnership receives an item of income
that reduces the income tax of the payor.
In such a case, the related person exceptions of section 954(c)(3) apply to exclude the income from the foreign personal holding company income of the
CFC partner only where: the exception
would have applied if the CFC earned the
income directly (testing relatedness and
country of incorporation at the CFC partner level); and either the partnership is organized and operates in the CFC’s country of incorporation, the partnership is
treated as fiscally transparent in the
CFC’s countries of incorporation and operation, or there is no significant disparity

36

between the effective rate of tax imposed
on the income and the rate of tax that
would be imposed on the income if
earned directly by the CFC partner.
Effective Dates
It is intended that these proposed regulations on hybrid transactions (whether
through branches or partnerships) will not
be finalized before January 1, 2000.
When finalized, the proposed regulations
will be effective for all payments made on
or after June 19, 1998, under hybrid
arrangements, except as provided below.
Permanent Relief
The proposed regulations will not
apply to any payments made under hybrid
arrangements entered into before June 19,
1998.
This exception shall be permanent so
long as the arrangement is not substantially modified on or after June 19, 1998.
“Substantial modification” shall include,
for example, expansion of the arrangement, a more than 50% change in the U.S.
ownership (direct or indirect) of any entity that is a party to the arrangement
(other than a transfer of ownership within
a controlled group determined under section 1563(a), without regard to section
1563(a)(4)), or any measure which materially increases the tax benefit of the
arrangement, but would not include the
daily reissuance of a demand loan by operation of law, or the renewal of a loan, license or rental agreement on the same
terms and conditions that occurs pursuant
to the terms of the agreement and without
action of any party thereto, and would not
occur solely by reason of a subsequent
drawdown under a grandfathered master
credit facility agreement.
Transition relief
Additionally, to the extent that a payment is a “qualifying hybrid branch payment” made under an arrangement entered into on or after June 19, 1998, and
before the date of finalization of the regulations, the proposed regulations will not
apply earlier than the first taxable year of
the United States shareholder beginning
on or after the expiration of five calendar
years from the date of finalization of the
regulations, to classify as subpart F income any payment which would other-

1998–27 I.R.B.

wise give rise to subpart F income under
the proposed regulations. This transition
relief shall apply for so long as the
arrangement is not substantially modified
(as described above) after the finalization
of the regulations. However, in the case
of a United States shareholder that disposes of the business with respect to
which the grandfathered hybrid arrangement was established, this transition relief
shall also apply to a newly-established
hybrid arrangement entered into after the
date of finalization of the regulations
which does not provide materially greater
tax benefits than the prior grandfathered
hybrid arrangement (and subject to the
limit described below).
For purposes of calculations under this
transition relief, the “qualified hybrid
branch payments,” “maximum payment
limit” and “non-subpart F earnings and
profits amount” shall be calculated on a
country-by-country basis with respect to
the United States shareholder (within the
meaning of section 951(b)). For purposes
of these rules, all United States shareholders that are members of a controlled group
(within the meaning of section 1563(a),
without regard to section 1563(a)(4))
shall be treated as a single United States
shareholder. Therefore the relevant hybrid branch payments for purposes of determining “qualified hybrid branch payments” shall be all hybrid branch
payments deductible in a certain country.
Likewise the “maximum payment limit”
is the limit relating to hybrid branch payments deductible in that country. Finally,
“non-subpart F earnings and profits” is
calculated by reference to the earnings
and profits of all qualified business units
(as defined in section 989(a)) of CFCs
carrying on a business in that country
(disregarding the net losses of any qualified business unit in that country).
A “qualifying hybrid branch payment”
is a payment attributable (within the
meaning of that term as set forth below)
to a United States shareholder that otherwise would be recharacterized as subpart
F income under the proposed regulations
(without regard to the permanent grandfather rule contained herein) but that, when
aggregated with all other such payments
attributable to such United States shareholder for that country in a taxable year,
does not exceed the “maximum payment
limit” attributable to such United States

1998–27 I.R.B.

shareholder for that country (as described
below).
The “maximum payment limit” attributable to a United States shareholder for a
country is 50% of the total of the “nonsubpart F earnings and profits amount”
from CFCs (or qualified business units
thereof) in that country owned by such
shareholder on June 19, 1998. The “nonsubpart F earnings and profits amount” of
a CFC (or qualified business unit thereof)
is the highest of the CFC’s non-subpart F
earnings and profits (or portion thereof relating to the qualified business unit) for
any of its last seven taxable years ending
before June 19, 1998. If a CFC owned by
a United States shareholder on June 19,
1998, has not been owned by such shareholder for the entire seven-year period,
the earnings for the pre-acquisition period
may nevertheless be taken into account in
determining the non-subpart F earnings
and profits amount. (For purposes of this
calculation any short taxable year shall be
annualized.) In the case of a new business
established after June 18, 1991, the United
States shareholder may elect to compute
its non-subpart F earnings and profits
amount in respect of that business by
using an amount equal to 20% of the net
active equity of the business on June 19,
1998. (Net active equity means active assets minus indebtedness in excess of passive assets, computed based on tax book
value.) For purposes of these calculations,
non-subpart F earnings and profits would
not include any amounts which would be
foreign personal holding company income
under section 954(c), but for the application of the high tax exception of 954(b).
For purposes of these calculations, active
assets shall mean assets which produce
non-subpart F earnings and profits (taking
into account the preceding sentence). Additionally, non-subpart F earnings and
profits would be calculated before reduction by any hybrid branch payments, related party interest payments, or creditable
foreign tax. Finally, for purposes of these
calculations, non-subpart F earnings and
profits shall be computed as if the provisions in H.R. 2513 (with respect to the active financing exception) had been in effect for all relevant periods.
Special rules will apply in the case of a
CFC that is not wholly-owned by a
United States shareholder. A payment is
“attributable” to a United States share-

37

holder if such payment is made by an entity (whether recognized as such for purposes of foreign or domestic law) that is
owned more than 50%, directly or indirectly, by the United States shareholder (a
“controlled entity”). Where there is no
United States shareholder that directly or
indirectly owns greater than 50%, the
United States shareholders of the CFC
may designate one such shareholder to be
deemed the greater-than-50%-owner for
purposes of this provision (the regulations
will require that such designation be disclosed on an attachment to a Form 5471
filed by the United States shareholder so
designated) and, if no such designation is
made, no United States shareholder shall
be the greater-than-50%-owner. The
maximum payment limit, which is computed based on the CFC’s total non-subpart F earnings and profits with respect to
a country, is attributed entirely to the controlling (or deemed controlling) shareholder. No portion of such maximum
payment limit is attributed to any other
shareholder. In determining whether a
hybrid branch payment made by a controlled entity is a qualifying hybrid branch
payment, the entire amount of such payment is applied against the controlling (or
deemed controlling) shareholder’s maximum payment limit. If such a payment is
a qualifying hybrid branch payment with
respect to a controlling (or deemed controlling) shareholder, it also is a qualifying hybrid branch payment with respect to
all other United States shareholders.
If hybrid branch payments made under
pre-June 19 and post-June 18 arrangements exceed the maximum payment
limit, then the excess shall be subpart F
income under the hybrid branch rules,
limited, however, to the amount attributable to post-June 18 arrangements. If hybrid branch payments made under postJune 18 arrangements exceed the
maximum payment limit (when aggregated with payments under pre-June 19
arrangements), then the subpart F income
shall be deemed to arise under the most
recent hybrid branch arrangement entered
into (and this rule shall be applied in reverse chronological order to the extent
that there is not sufficient non-subpart F
earnings and profits (without taking into
account the special rules above) in the entity (or entities) entering into the most recent hybrid branch arrangement).

July 6, 1998

The regulations will require that the existence of post-June 18 arrangements be
disclosed on an attachment to a Form
5471.
Proposed Regulations on Treatment of a
CFC’s Distributive Share of Partnership
Income
It is intended, after the current proposed regulations are withdrawn, that the
part of the current proposed regulations
dealing primarily with the treatment of a
CFC partner’s distributive share of partnership income (i.e., that part of the proposed regulations not also contained in
the current temporary regulations) will be
issued as a separate notice of proposed
rulemaking and will be finalized separately, in the normal course, from the regulations on hybrid branch transactions.
The effective date of these proposed regulations will be no earlier than the date of
finalization.
Request for Comments on Hybrid Branch
Regulations
The purpose of this action is to allow
Congress an appropriate period to review
the important policy issues raised by the
regulations, including the continuing applicability of the policy rationale of subpart F, and, if appropriate, address these
issues by legislation. Also during this period the Treasury will conduct a thorough
review of the issues raised by these hybrid
regulations with all interested parties.
The regulations will request comments on
the following issues, among others.
Comments will be requested on what
the policy objectives underlying subpart F
are and whether these policy objectives
are still appropriate. Do these objectives
include preventing undue incentives for
U.S. businesses to invest in operations
abroad? How should subpart F interact
with principles of U.S. current taxation of
worldwide income from the activities of
U.S. persons abroad? Is subpart F intended to prevent the ability to improperly
shift income from the United States to a
foreign jurisdiction that might be difficult
to detect under section 482? Is subpart F
intended to prevent opportunities for U.S.
businesses operating internationally to
achieve lower rates of current taxation
than their domestic counterparts? Does
subpart F seek to address issues of harmful tax competition between countries?

July 6, 1998

If a significant policy objective of subpart F is primarily to prevent any undue
incentive favoring foreign over domestic
investment, is it appropriate and possible
to construct an administrable rule
(whether administratively or by legislation) that could distinguish those cases
where an investment abroad would not
have occurred absent the tax incentive afforded by a hybrid arrangement? For example, would it be appropriate to include
an exception from the recharacterization
rule of the proposed regulations if at the
time a hybrid arrangement is entered into
the taxpayer can establish that the capital
invested directly or indirectly by the
United States shareholder in the CFC
making the hybrid branch payments under
the hybrid arrangement would have been
invested independent of the benefits arising from the hybrid arrangement?
The regulations will also invite comments on the various effective dates contained in the regulations (for example,
whether the five-year grandfather provision should be made permanent) and on
the restrictions on subsequent changes to
arrangements after certain of the effective
dates.

Deletion From Cumulative List of
Organizations Contributions to
Which Are Deductible Under
Section 170 of the Code
Announcement 98–61
The name of an organization that no
longer qualifies as an organization contributions to which are deductible under section 170 of the Internal Revenue Code of
1986 is listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that the organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an organization ceases to qualify under section
170 where the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such
revocation was imminent, or (3) was in
part responsible for or was aware of the
activities or deficiencies on the part of the

38

organization which gave rise to the loss of
qualification.
Moreover, if the Service has announced
suspension of advance assurance of deductibility of contributions to an organization pending examination, and the qualification of the organization is subsequently
terminated, contributions made after the
date specified in the announcement in the
Internal Revenue Bulletin are not deductible. In such a case, the date of suspension will appear after the name of the
organization to which it applies.
Veterans of Foreign Wars Post 5316
Kentwood, LA

Section 7428(c) Validation of
Certain Contributions Made
During Pendency of Declaratory
Judgment Proceedings
This announcement serves notice to potential donors that the organization listed
below has recently filed a timely declaratory judgment suit under section 7428 of
the Code, challenging revocation of its
status as an eligible donee under section
170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice of
revocation is published in the Internal
Revenue Bulletin and ends on the date on
which a court first determines that an organization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1). In the case of individual contributors, the maximum amount of
contributions protected during this period
is limited to $1,000.00, with a husband
and wife being treated as one contributor.
This protection is not extended to any individual who was responsible, in whole or
in part, for the acts or omissions of the organization that were the basis for the revocation. This protection also applies
(but without limitation as to amount) to
organizations described in section
170(c)(2) which are exempt from tax
under section 501(a). If the organization
ultimately prevails in its declaratory judgment suit, deductibility of contributions
would be subject to the normal limitations
set forth under section 170.
Great Plains Health Alliance, Inc.
Phillipsburg, KS

1998–27 I.R.B.

Part IV. Items of General Interest
Foundations Status of Certain
Organizations
Announcement 98–60
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices
under section 508(b) of the Code. This
listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.
Former Public Charities. The following
organizations (which have been treated as
organizations that are not private foundations described in section 509(a) of the
Code) are now classified as private foundations:
American Bosnia Relief Association,
St. Louis, MO
Arizona Quail Preservation Society,
Phoenix, AZ
Arts & Education Foundation of Alabama
Inc., Birmingham, AL
Asian Americans of Connecticut Inc.,
W. Hartford, CT
Bill Cobb Ministries Inc., Bethany, OK
Binghamton Outreach Center Inc.,
Binghamton, NY
Bread of Life Christian Mission, Plant
City, FL
Carlisle Center for Violence Prevention
Inc., Carlisle, MA
Centipede Artists Cooperative, Danbury,
CT
Child Placement Professionals Inc., Ada,
OH
Child Support Recovery Foundation,
Mesa, AZ
Citizens Assisting Pacific Palisades
Youth Inc., Pacific Palisades, CA
Cobb County District Attorneys AntiDrug Poster Contest Inc., Marietta,
GA
Dr. Jorge Prieto Community Clinic,
Chicago, IL
Eddie Robinson Foundation, Anaheim
Hills, CA
Fathers Against Violence Inc., Carlisle,
MA

1998–27 I.R.B.

First Step Emergency Shelter, Long
Beach, CA
573 Warren Street HD FC, Brooklyn, NY
Flites Emergency Shelter and Affordable
Housing, Sun Valley, CA
Freedom Today Not Tomorrow Inc.,
Olathe, KS
Good Samaritan Production Inc., Detroit,
MI
Hampden Land Project, Inc., Hampden,
MA
Handicapped Children Services Inc.,
Arcadia, CA
Handicapped Services International, Inc.,
New York, NY
Historic Sites & Shipwrecks Restoration
& Preservation Society Inc., Fort
Lauderdale, FL
In the Name of Jesus Christ Ministry,
Charlotte, NC
Independent Service Providers Network,
Honolulu, HI
Interethnic Inc., Dallas, TX
Inspirit Counseling Center, San Anselmo,
CA
Kafkaz Folk Song and Dance Ensemble,
Fairfax, CA
King County Foster Parent Association,
Seattle, WA
Knoxville Home Child Care Association,
Knoxville, TN
Lao Highland Association of King
County, Seattle, WA
Lawrence Township Free Commodity
Services, Cedarville, NJ
Long Beach Japanese Language Booster
Association, Torrance, CA
MLTH Incorporation, Silverdale, WA
Malemte Football Booster Club,
Fairbanks, AK
Marcs International Gymnastics,
San Leandro, CA
Mayors Youth Center Inc., Granite City,
IL
Mobile Elder Care, Mobile, AL
Mother Tierras Inc., Havre de Grace,
MD
National Association of Community
Athletic Organization, Inc., Fort
Thomas, KY
Native American Heritage Committee
Inc., Porterville, CA
New Beginning Economic Development
Inc., Palmdale, CA
New Hampshire Tennis Foundation,
Contoocook, NH

39

Norwalk High Football Booster Club,
Irvine, CA
S T E P Association, Seattle, WA
Salt Council Inc., Las Vegas, NV
Schuylkill Ethnic and Cultural
Association, Pottsville, PA
Seniors Foundation Inc., Boston, MA
Southern California Center for Music and
the Arts, Chino, CA
Southwest Louisiana Economic
Development Inc., Lake Charles, LA
St. Jude Day Care Center Incorporated,
Memphis, TN
Toppers Association Inc., Brooklyn, NY
Veteran Family Service Corporation,
Baldwin Park, CA
Vietnam Veterans United for Aid &
Assistance, San Jose, CA
W L Turner Residential Services,
Pasadena, CA
Wallowa Valley Arts Council, Enterprise,
OR
Walnut Creek Youth Football Inc.,
Walnut Creek, CA
Washington Abuse Survivor Education
Foundation, Spokane, WA
Wee Care Preschool, Bakersfield, CA
Wee Folk Educational Centers,
Los Angeles, CA
Wel Garden Foundation, Granite Bay, CA
Welcome Home Senior Adult
Association, Lynnwood, WA
Were All In This Together Foundation
Inc., Los Angeles, CA
West Coast Motorcycle Museum,
Ventura, CA
West Hollywood Urban Conservation
League, West Hollywood, CA
Wheeler Community Club, Wheeler, CA
Wheelhouse Training and Education for
People with Handicaps, Inc., Lakeland,
FL
Wheta Foundation, Inc., Spring Valley,
NY
Wide Smiles, Stockton, CA
Williamsbridge Senior Citizens Assoc.,
Inc., Bronx, NY
Willits Youth Football Association Inc.,
Willits, CA
Wilson County Coalition of Adolescent
Pregnancy, Wilson, NC
Wings, Oxford, MS
Women In Criminal Justice, Stockton,
CA
Women of Color-United Incorporated,
Green Bay, WI

July 6, 1998

Women United to Prevent Violence
Against Women Inc., Greenbelt, MD
Women With Class, Denver, CO
Womens National Aids Resource, Inc.,
New York, NY
World Care Organization Inc., Charlotte,
NC
World Information Service Inc., Allston,
MA
World Relief Organization Inc., Bishop,
CA
Worlds Face, Beford, NY
Worldwide Council on Alcoholism,
Paterson, NJ
Wyoming State Predatory Animal Board,
Casper, WY
Yadkin County United Way, Yadkinville,
NC
Yankton Regional Council on Aging Inc.,
Yakton, SD
Yardley Makefield Playground Park Inc.,
Yardley, PA
Yavapai Soccer League, Prescott, AZ
Yes We Can Save the Can Inc.,
Collingswood, NJ
YSI International, Hollywood, FL
Young Adventurers Inc., Pompano
Beach, FL
Young Freedom Corps, San Antonio, TX

July 6, 1998

Young Foundation, Glenwood, IL
Young Love Productions, Cincinnati, OH
Young Minority Golf Association,
Detroit, MI
Young Rangers Baseball Club Inc.,
Bedford, TX
Young Voices Initiative, Inc., New
Haven, CT
Youngstown Area Alliance of Black
School Educators, Youngstown, OH
Youth Athletic Association, Omaha, NE
Youth Baseball Association Inc., Fayette,
MO
Youth Baseball and Softball Booster
Club, West Plaines, MO
Youth Diplomat Corps Incorporated,
Speedway, IN
Youth & Family Developmental Core
Inc., Miami, FL
Youth for a Drug Free America,
Cincinnati, OH
Youth for Christ International Ministries,
Englewood, CO
Youth Maritime Programs Incorporated,
Newark, CA
Youth Museum Exhibit Collaborative
Inc., Houston, TX
Youth Rodeo Championship, Portales,
NM

40

Youth 2000 Inc., Dallas, TX
Youth Unlimited Inc., Live Oak, TX
Youth Valley Team Federation, Apple
Valley, CA
Yucaipa Swim Team Inc., Yucaipa, CA
Zaire Educational Council Association,
Washington, DC
Zeal Civic Club Inc., St. Petersburg, FL
Zion Hill Ministries Inc., Kansas City,
KS
Zion Human Services Inc. Shreveport,
LA
Zoological Gardens Foundation Inc.,
Pelham, AL
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as provided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

1998–27 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior published position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the substance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published ruling is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously published ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be published that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

Abbreviations

E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.

PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

The following abbreviations in current use and formerly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.

1998–27 I.R.B.

41

July 6, 1998

Numerical Finding List1

Notices—Continued

Revenue Procedures—Continued

Bulletins 1998–1 through 1998–26

98–11, 1998–6 I.R.B. 18
98–12, 1998–5 I.R.B. 12
98–13, 1998–6 I.R.B. 19
98–14, 1998–8 I.R.B. 27
98–15, 1998–9 I.R.B. 8
98–16, 1998–15 I.R.B. 12
98–17, 1998–11 I.R.B. 6
98–18, 1998–12 I.R.B. 11
98–19, 1998–13 I.R.B. 24
98–20, 1998–13 I.R.B. 25
98–21, 1998–15 I.R.B. 14
98–22, 1998–17 I.R.B. 5
98–23, 1998–18 I.R.B. 9
98–24, 1998–17 I.R.B. 5
98–25, 1998–18 I.R.B. 11
98–26, 1998–18 I.R.B. 14
98–27, 1998–18 I.R.B. 14
98–28, 1998–19 I.R.B. 7
98–29, 1998–22 I.R.B. 8
98–30, 1998–22 I.R.B. 9
98–31, 1998–22 I.R.B. 10
98–32, 1998–22 I.R.B. 23
98–33, 1998–25 I.R.B. 10

98–13, 1998–4 I.R.B. 21
98–14, 1998–4 I.R.B. 22
98–15, 1998–4 I.R.B. 25
98–16, 1998–5 I.R.B. 19
98–17, 1998–5 I.R.B. 21
98–18, 1998–6 I.R.B. 20
98–19, 1998–7 I.R.B. 30
98–20, 1998–7 I.R.B. 32
98–21, 1998–8 I.R.B. 27
98–22, 1998–12 I.R.B. 11
98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
98–25, 1998–11 I.R.B. 7
98–26, 1998–13 I.R.B. 26
98–27, 1998–15 I.R.B. 15
98–28, 1998–15 I.R.B. 14
98–29, 1998–15 I.R.B. 22
98–30, 1998–17 I.R.B. 6
98–31, 1998–23 I.R.B. 9
98–32, 1998–17 I.R.B. 11
98–33, 1998–19 I.R.B. 7
98–34, 1998–18 I.R.B. 15
98–35, 1998–21 I.R.B. 6
98–36, 1998–23 I.R.B. 10
98–37, 1998–26 I.R.B. 6
98–39, 1998–26 I.R.B. 36

Announcements:
98–1, 1998–2 I.R.B. 38
98–2, 1998–2 I.R.B. 38
98–3, 1998–2 I.R.B. 38
98–4, 1998–4 I.R.B. 31
98–5, 1998–5 I.R.B. 25
98–6, 1998–5 I.R.B. 25
98–7, 1998–5 I.R.B. 26
98–8, 1998–6 I.R.B. 96
98–9, 1998–7 I.R.B. 35
98–10, 1998–7 I.R.B. 35
98–11, 1998–8 I.R.B. 42
98–12, 1998–8 I.R.B. 43
98–13, 1998–8 I.R.B. 43
98–14, 1998–8 I.R.B. 44
98–15, 1998–10 I.R.B. 36
98–16, 1998–9 I.R.B. 17
98–17, 1998–9 I.R.B. 16
98–18, 1998–10 I.R.B. 44
98–19, 1998–10 I.R.B. 44
98–20, 1998–11 I.R.B. 25
98–21, 1998–11 I.R.B. 26
98–22, 1998–12 I.R.B. 33
98–23, 1998–12 I.R.B. 34
98–24, 1998–12 I.R.B. 35
98–25, 1998–13 I.R.B. 43
98–26, 1998–14 I.R.B. 28
98–27, 1998–15 I.R.B. 30
98–28, 1998–15 I.R.B. 30
98–29, 1998–16 I.R.B. 48
98–30, 1998–17 I.R.B. 38
98–32, 1998–17 I.R.B. 39
98–33, 1998–17 I.R.B. 39
98–34, 1998–17 I.R.B. 39
98–35, 1998–17 I.R.B. 40
98–36, 1998–18 I.R.B. 18
98–37, 1998–19 I.R.B. 24
98–38, 1998–19 I.R.B. 26
98–39, 1998–20 I.R.B. 24
98–40, 1998–20 I.R.B. 24
98–41, 1998–20 I.R.B. 25
98–42, 1998–21 I.R.B. 26
98–43, 1998–21 I.R.B. 26
98–44, 1998–22 I.R.B. 24
98–45, 1998–23 I.R.B. 18
98–46, 1998–25 I.R.B. 11
98–47, 1998–23 I.R.B. 5
98–48, 1998–24 I.R.B. 6
98–49, 1998–23 I.R.B. 19
98–50, 1998–23 I.R.B. 20
98–51, 1998–24 I.R.B. 7
98–52, 1998–24 I.R.B. 37
98–53, 1998–24 I.R.B. 37
98–54, 1998–25 I.R.B. 11
98–55, 1998–26 I.R.B. 41
98–56, 1998–26 I.R.B. 44
Notices:
98–1, 1998–3 I.R.B. 42
98–2, 1998–2 I.R.B. 22
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25
98–5, 1998–3 I.B.R. 49
98–6, 1998–3 I.R.B. 52
98–7, 1998–3 I.R.B. 54
98–8, 1998–4 I.R.B. 6
98–9, 1998–4 I.R.B. 8
98–10, 1998–6 I.R.B. 9

1

Proposed Regulations:
PS–158–86, 1998–11 I.R.B. 13
REG–100841–97, 1998–8 I.R.B. 30
REG–102144–98, 1998–15 I.R.B. 25
REG–102894–97, 1998–3 I.R.B. 59
REG–104062–97, 1998–10 I.R.B. 34
REG–104537–97, 1998–16 I.R.B. 21
REG–104691–97, 1998–11 I.R.B. 13
REG–105163–97, 1998–8 I.R.B. 31
REG–106031–98, 1998–26 I.R.B. 38
REG–109333–97, 1998–9 I.R.B. 9
REG–109704–97, 1998–3 I.R.B. 60
REG–110965–97, 1998–13 I.R.B. 42
REG–115795–97, 1998–8 I.R.B. 33
REG–119449–97, 1998–10 I.R.B. 35
REG–120200–97, 1998–12 I.R.B. 32
REG–120882–97, 1998–14 I.R.B. 25
REG–121268–97, 1998–20 I.R.B. 12
REG–121755–97, 1998–9 I.R.B. 13
REG–208299–90, 1998–16 I.R.B. 26
REG–209276–87, 1998–11 I.R.B. 18
REG–209322–82, 1998–15 I.R.B. 26
REG–209373–81, 1998–14 I.R.B. 26
REG–209463–82, 1998–4 I.R.B. 27
REG–209476–82, 1998–8 I.R.B. 36
REG–209484–87, 1998–8 I.R.B. 40
REG–209485–86, 1998–11 I.R.B. 21
REG–209682–94, 1998–17 I.R.B. 20
REG–209807–95, 1998–8 I.R.B. 40
REG–243025–96, 1998–18 I.R.B. 18
REG–251502–96, 1998–9 I.R.B. 14
REG–251698–96, 1998–20 I.R.B. 14
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
98–11, 1998–4 I.R.B. 9
98–12, 1998–4 I.R.B. 18

Revenue Rulings:
98–1, 1998–2 I.R.B. 5
98–2, 1998–2 I.R.B. 15
98–3, 1998–2 I.R.B. 4
98–4, 1998–2 I.R.B. 18
98–5, 1998–2 I.R.B. 20
98–6, 1998–4 I.R.B. 4
98–7, 1998–6 I.R.B. 6
98–8, 1998–7 I.R.B. 24
98–9, 1998–6 I.R.B. 5
98–10, 1998–10 I.R.B. 11
98–11, 1998–10 I.R.B. 13
98–12, 1998–10 I.R.B. 5
98–13, 1998–11 I.R.B. 4
98–14, 1998–11 I.R.B. 4
98–15, 1998–12 I.R.B. 6
98–16, 1998–13 I.R.B. 18
98–17, 1998–13 I.R.B. 21
98–18, 1998–14 I.R.B. 22
98–19, 1998–15 I.R.B. 5
98–20, 1998–15 I.R.B. 8
98–21, 1998–18 I.R.B. 7
98–22, 1998–19 I.R.B. 5
98–23, 1998–18 I.R.B. 5
98–24, 1998–19 I.R.B. 6
98–25, 1998–19 I.R.B. 4
98–26, 1998–21 I.R.B. 4
98–27, 1998–22 I.R.B. 4
98–28, 1998–22 I.R.B. 5
98–29, 1998–24 I.R.B. 4
98–30, 1998–25 I.R.B. 8
98–31, 1998–25 I.R.B. 4
98–32, 1998–25 I.R.B. 4
Treasury Decisions:
8740, 1998–3 I.R.B. 4
8741, 1998–3 I.R.B. 6
8742, 1998–5 I.R.B. 4
8743, 1998–7 I.R.B. 26
8744, 1998–7 I.R.B. 20
8745, 1998–7 I.R.B. 15
8746, 1998–7 I.R.B. 4
8747, 1998–7 I.R.B. 18

See footnote at end of list.

July 6, 1998

42

1998–27 I.R.B.

Numerical Finding List—Continued
Bulletins 1998–1 through 1998–26
Treasury Decisions—Continued
8748, 1998–8 I.R.B. 24
8749, 1998–7 I.R.B. 16
8750, 1998–8 I.R.B. 4
8751, 1998–10 I.R.B. 23
8752, 1998–9 I.R.B. 4
8753, 1998–9 I.R.B. 6
8754, 1998–10 I.R.B. 15
8755, 1998–10 I.R.B. 21
8756, 1998–12 I.R.B. 4
8757, 1998–13 I.R.B. 4
8758, 1998–13 I.R.B. 15
8759, 1998–13 I.R.B. 19
8760, 1998–14 I.R.B. 4
8761, 1998–14 I.R.B. 13
8762, 1998–14 I.R.B. 15
8763, 1998–15 I.R.B. 5
8764, 1998–15 I.R.B. 9
8765, 1998–16 I.R.B. 11
8766, 1998–16 I.R.B. 17
8767, 1998–16 I.R.B. 4
8768, 1998–20 I.R.B. 4

1

A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.

1998–27 I.R.B.

43

July 6, 1998

Finding List of Current Action on
Previously Published Items1
Bulletins 1998–1 through 1998–26
Revenue Procedures:
91–59
Updated and superseded by
98–25, 1998–11 I.R.B. 7
94–16
Modified and superseded by
98–22, 1998–12 I.R.B. 11

Revenue Procedures—Continued
97–34
Superseded by
98–35, 1998–21 I.R.B. 6
97–35
Modified by
98–39, 1998–26 I.R.B. 36
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:

93–62
Modified and superseded by
98–22, 1998–12 I.R.B. 11

68–352
Obsoleted by
98–24, 1998–19 I.R.B. 6

95–35
95–35A
Superseded by
98–19, 1998–7 I.R.B. 30

70–225
Modified by
98–27, 1998–22 I.R.B. 4

96–29
Modified and superseded by
98–22, 1998–12 I.R.B. 11
97–1
Superseded by
98–1, 1998–1 I.R.B. 7
97–2
Superseded by
98–2, 1998–1 I.R.B. 74
97–3
Superseded by
98–3, 1998–1 I.R.B. 100
97–4
Superseded by
98–4, 1998–1 I.R.B. 113

73–198
Modified by
98–24, 1998–19 I.R.B. 6
75–17
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
75–406
Obsoleted by
98–27, 1998–22 I.R.B. 4
92–19
Supplemented in part by
98–2, 1998–2 I.R.B. 15
96–30
Obsoleted by
98–27, 1998–22 I.R.B. 4

97–5
Superseded by
98–5, 1998–1 I.R.B. 155
97–6
Superseded by
98–6, 1998–1 I.R.B. 183
97–7
Superseded by
98–7, 1998–1 I.R.B. 222
97–8
Superseded by
98–8, 1998–1 I.R.B. 225
97–21
Superseded by
98–2, 1998–1 I.R.B. 74
97–24
97–24A
Superseded by
98–33, 1998–19 I.R.B. 7
97–26
Obsoleted by
98–28, 1998–15 I.R.B. 14
97–28
Superseded by
98–36, 1998–23 I.R.B. 10
97–32
Superseded by
98–37, 1998–26 I.R.B. 6

1

A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–27 through 1997–52 will be found in Internal
Revenue Bulletin 1998–1, dated January 5, 1998.

July 6, 1998

44

1998–27 I.R.B.

Index

ESTATE TAX—Continued

INCOME TAX—Continued

Internal Revenue Bulletins
1998–1 Through 1998–26

Revocable trust; election (RP 13) 4, 21
Special use value; farms; interest rates
(RR 22) 19, 5
Underpayment interest, interest expense
deduction, estates (RP 15) 4, 25
Valuation of compensatory stock options
(RP 34) 18, 15

Books and records; automatic data processing system (RP 25) 11, 7
Business expenses:
Underground waste storage tank (RR
25) 19, 4
Capital gains and charitable remainder
trusts (Notice 20) 13, 25
Classification settlement program:
Extended until further notice (Notice
21) 15, 14
Domestic assets/liability and investment
yield percentages (RP 31) 23, 9
Education loans (Notice 7) 3, 54
Elections under section 7704(g) (Notice
3) 3, 48
Electronic Federal Tax Payment System:
Batch filers and bulk filers (RP 32) 17,
11
Electronic funds transfer; failure to deposit penalty (Notice 30) 22, 9
Employee plans:
Administrative programs; closing
agreements (RP 22) 12, 11
Determination letters (RP 6) 1, 183;
(RP 14) 4, 22
Discrimination; CODAs (Notice 1) 3,
42
Eligible deferred compensation plans
(Notice 8) 4, 6
Group health plans; COBRA continuation coverage; HIPAA portability
(Notice 12) 5, 12
Net unrealized appreciation; capital
gains (Notice 24) 17, 5
Funding:
Full funding limitations, weighted
average interest rate for January 1998 (Notice 9) 4, 8; February 1998 (Notice 15) 9, 8;
March 1998 (Notice 18) 12, 11;
April 1998 (Notice 26) 18, 14;
May 1998 (Notice 32) 22, 23;
June 1998 (Notice 33) 25, 10
Letter rulings, etc. (RP 4) 1, 113
Limitations on benefits and contributions (RR 1) 2, 5
Minimum Funding Standards (RP 10)
2, 35
Qualification (Notice 29) 22, 8;
CODAs (RR 30) 25, 8
Recovery of basis; retirees (Notice 2)
2, 22
SIMPLE-IRAs (Notice 4) 2, 25
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225

For the index of items published during
the first six months of 1997, see I.R.B.
1998–1, dated January 5, 1998.
The abbreviation and number in parenthesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page
number on which it appears.
Key to Abbreviations:
RR
Revenue Ruling
RP
Revenue Procedure
TD
Treasury Decision
CD
Court Decision
PL
Public Law
EO
Executive Order
DO
Delegation Order
TDO
Treasury Department Order
TC
Tax Convention
SPR
Statement of Procedural
Rules
PTE
Prohibited Transaction
Exemption

EMPLOYMENT TAX
Magnetic media; electronic filing; 1998
Form W–4 specifications (RP 26) 13,
26
Proposed regulations:
26 CFR 31.3121(v)(2)–1, revised;
FICA and FUTA taxation of amounts
under employee benefit plans (REG–
209484–87; REG–209807–95) 8, 40
26 CFR 31.6053–1, –4; electronic tip
reports (REG–104691–97) 11, 13
Student FICA exception (RP 16) 5, 19

ESTATE TAX
Regulations:
26 CFR 20.2041–3, 20.2056(d)–2,
amended; 20.2046–1, revised; property interests and disclaimer (TD
8744) 7, 20
26 CFR 25.2702–5, –7, amended; qualified prsonal residence trust, sale of
residence (TD 8743) 7, 26
26 CFR 25.2511–1, 25.2514–3,
25.2518–1, –2, amended; property
interests and disclaimers (TD 8744)
7, 20

1998–27 I.R.B.

EXCISE TAX
Bows and arrows; taxable and nontaxable
articles (RR 5) 2, 20
Federal excise taxes for consular officers
and employees, exemption (RR 24) 19,
6
Proposed regulations:
26 CFR 40.0–1T, added; 40.6011(a)–
1T, added; 40.6302(c)–2T, added;
deposits of excise taxes (REG–
102894–97) 3, 59
26 CFR 54.4980B–1, added; group
health plans continuation coverage
requirements (REG–209485–86) 11,
21
Regulations:
26 CFR 40.0–1(a), amended;
40.6011(a)–1(a)(2)(iii), 40.5302(c)–
1, amended, 40.6302(c)–2(b)(2)(iii),
added; deposits of excise taxes (TD
8740) 3, 4
26 CFR 40.6011(a)–1(b)(2)(vi),
amended; 48.4082–5T, removed;
48.4082–5, added; 48.4081–1,
amended; 48.4082–5T, redesignated;
48.6416(b)(4)–1, removed; 48.6421–
3(d)(2), amended; 48.6427–3(d)(2),
amended; 48.6715–1(a)(3), revised;
48.6715–2T, removed; gasoline and
diesel fuel excise tax; special rules for
Alaska, definitions (TD 8748) 8, 24

GIFT TAX
Nonstatutory stock option, transfer (RR
21) 18, 7
Qualifying income interest, disposition
(RR 8) 7, 24
Valuation of compensatory stock options
(RP 34) 18, 15

INCOME TAX
Advance pricing agreements, small business taxpayers (Notice 10) 6, 9
Article XIII (8) Rev. Proc. (RP 21) 8, 27
Automobile owners and lessees (RP 24)
10, 31; (RP 30) 17, 6

45

July 6, 1998

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued
Environmental cleanup costs; letter
rulings (RP 17) 5, 21
Exempt Organizations:
Letter rulings, etc. (RP 4) 1, 113
Organizations excepted from reporting
lobbying expenditures (RP 19) 7,
30
Tax consequences of physicians recruitment incentives provided by
hospitals (RR 15) 12, 6
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225
Failure to deposit federal tax; penalty
abatement (Notice 14) 8, 27
Foreign partnerships, reporting transfer of
property by U.S. persons (Notice 17)
11, 6
Foreign tax credit abuse (Notice 5) 3, 49
Fringe benefits aircraft valuation formula,
first half of 1998 (RR 14) 11, 4
Fuel from a nonconventional source,
credit; section 29 inflation adjustment;
reference price for 1997 (Notice 28)
19, 7
Insurance companies:
Discounting estimated salvage recoverable (RP 12) 4, 18
Interest rate tables (RR 2) 2, 15
Loss reserves; discounting unpaid
losses (RP 11) 4, 9
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1998
(RR4) 2, 18; February 1998
(RR7) 6, 6; March 1998 (RR11)
10, 13; April 1998 (RR 18) 14,
22; May (RR 23) 18, 5; June
1998 (RR 28) 22, 5
Rates, underpayments and overpayments (RR 17) 13, 21; calendar
quarter beginning July 1, 1998
(RR 32) 25, 4
Inventory:
LIFO:
Price indexes; department stores for
November 1997 (RR 6) 4, 4; December 1997 (RR 9) 6, 5; January
1998 (RR 16) 13, 18; February
1998 (RR 20) 15, 8; March 1998
(RR 26) 21, 4; April 1998 (RR
29) 24, 4
Shrinkage estimates:
Changing method of accounting for
estimating inventory shrinkage
(RP 29) 15, 22

July 6, 1998

Letter rulings, determination letters, and
information letters issued by Associate
Chief Counsel (Domestic), Associate
Chief Counsel (EBEO), Associate
Chief Counsel (Enforcement Litigation), and Associate Chief Counsel
(International) (RP 1) 1, 7
Losses attributable to a disaster during
1997 (RR 12) 10, 5
Low-income housing tax credit (Notice
13) 6, 19
Satisfactory bond; “bond factor”
amounts for the period October
through December 1997 (RR 3) 2, 4;
January–March 1998 (RR 13) 11, 4;
April-June 1998 (RR 31) 25, 4
Magnetic media/electronic filing:
Specifications for 1998 Forms 1098,
1099, 5498, and W–2G (RP 35) 19,
6
Form 1040NR (RP 36) 23, 10
Methods of accounting; involuntary
changes (Notice 31) 22, 10
Package design; amortization; capitalization; amortizable section 197 intangible
(RP 39) 26, 36
Passive foreign investment companies:
Shareholders may use rules of sec.
1.1295–1T(b)(4), (f), and (g) to taxable years beginning before January
1, 1998 (Notice 22) 17, 5
Proposed regulations:
26 CFR 1.72(p)–1, amended; loans to
plan participants (REG–209476–82)
8, 36
26 CFR 1.141–7, 1.142(f)(4)–1, 1.150–
5, added; 1.141–8, –15, amended;
obligations of states and political
subdivisions (REG–110965–97) 13,
42
26 CFR 1.195–1, added; election to
amortize start-up expenditures
(REG–209373–81) 14, 26
26 CFR 1.356–6, added; reorganizations, nonqualified preferred stock
(REG–121755–97) 9, 13
26 CFR 1.368–1, amended; corporate
reorganizations, continuity of interest (REG–120882–97) 14, 25
26 CFR 1.401(a)(9)–1, amended; qualified plans and individual retirement
plans, required distributions (REG–
209463–82) 4, 27
26 CFR 1.417(e)–1 and paragraph (d),
revised; 1.417(e)–1T and paragraph
(d), revised; valuation of plan distributrions (TD 8768) 20, 4

46

26 CFR 1.460–6, amended; election
not to apply look-back method in de
minimis cases (REG–120200–97)
12, 32
26 CFR 1.469–10, revised; 1.7704–1,
added; investment income, passive
activity income and loss rules for
publicly traded partnerships
(REG–105163–97) 8, 31
26 CFR 1.475(g)–2, new; 1.482–8,
added; 1.482–0, –1, –2, 1.863,
1.863–7(a)(1), 1.864–4, –6, 1.894–1,
amended; 1.482–9, redesignated;
global dealing operation allocation
and sourcing of income and deductions among taxpayers (REG–
208299–90) 16, 26
26 CFR 1.513–7, added; travel and tour
activities of tax exempt organizations (REG–121268–97) 20, 12
26 CFR 1.702–1, 1.954–1, 301.7701–3,
amended; 1.952–1(b), (c), redesignated 1.954–2(a)(5), (6), 1.954–
4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),
added (REG–104537–97) 16, 21
26 CFR 1.732–1, amended; 1.732–2,
amended; 1.734–1(e), added; 1.743–
1, revised; 1.751–1, amended;
1.755–1, revised; 1.1017–1, revised;
adjustments to basis of partnership
property and partnership interest
(REG–209682–94) 17, 20
26 CFR 1.864(b)–1; trading safe harbors (REG–106031–98) 26, 38
26 CFR 1.925(a)–1, (b)–1, added;
1.927(e)–1, amended; foreign sales
corporation transfer pricing source
and grouping rules (REG–102144–
98) 15, 25
26 CFR 1.1291–1, 1.1293–1, 1.1295–1,
–3, 1.1297–3(c), added; 1.1296–4,
amended; passive foreign investment
company preferred shares, special
income exclusion (REG–115795–
97) 8, 33
26 CFR 1.1361–0, amended; 1.1361–1,
amended; 1.1361–1(d)(3), removed;
1.1361–2 through –6 and intermediary sections, added; 1.1362–0,
amended; 1.1362–2, amended;
1.1362–8, added; 1.1368–0,
amended; 1.1368–2(d)(2), amended;
1.1374–8(b), amended; S corporation subsidiaries (REG–251698–96)
20, 14
26 CFR 1.1397E–1, added; qualified
zone academy bonds (REG–
119449–97) 10, 35

1998–27 I.R.B.

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued
26 CFR 1.1502–3(c), revised; 1.1502–
4(f)(3), (g)(3), added; 1.1502–9(b)(1)(v), added; 1.1502–21(c)(1)(iii),
amended; consolidated returns, limitations on the use of certain losses
and credits (REG–104062–97) 10, 34
26 CFR 1.6031–1, removed;
1.6031(a)–1, added; 1.6063–1,
amended; partnership returns
(REG–209322–82) 15, 26
26 CFR 1.7702B–1, –2, added; qualified long-term care insurance contracts (REG–109333–97) 9, 9
26 CFR 301.6159–1, amended; agreements for tax liability installment
payments (REG–100841–97) 8, 30
26 CFR 301.6404–2, added; abatement
of interest (REG–209276–87) 11, 18
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection actions (REG–251502–96) 9, 14
26 CFR 54.9812–1, added; mental
health parity; HIPAA (REG–
109704–97) 3, 60
Qualified Funeral Trust; guidance (Notice
6) 3, 52
Qualified intermediary agreements:
Guidance provided to foreign financial
institutions (RP 27) 15, 15
Qualified mortgage bonds, mortgage
credit certificates:
Guidance provided regarding use of national and area median gross income
figures by issuers (RP 28) 15, 14
Qualified Subchapter S Trust (QSST)
conversion to Electing Small Business
Trust (ESBT) 10, 30
Qualified Zone Academy Zone Bonds
(RP) 3, 100
Real estate transactions (RP 20) 7, 32
Regulations:
26 CFR 1.61–12, 1.249–1, 1.1016–5,
1.1275–1, amended; 1.163–13,
1.171–5, added; 1.171–1, –2, –3, –4,
revised; 1.1016–9, removed; amortizable bond premium (TD 8746) 7, 4
26 CFR 1.141–0, –2, amended;
1.141–7, –8, removed; 1.141–7T,
–8T, –15T, 1.142(f)(4)–1T, 1.150–
5T, added; 1.141–15, revised; obligations of states and political subdivisions (TD 8757) 13, 4

1998–27 I.R.B.

26 CFR 1.166–3(a)(3), 1.1001–4,
added; 1.166–3T, 1.1001–4T, removed; modifications of bad debts
and dealer assignments of notional
principal contracts (TD 8763) 15, 5
26 CFR 1.280B–1, added; building demolition, definition of structure (TD
8745) 7, 15
26 CFR 1.338–2, 1.368–1, –2,
amended; 1.368–1T, added; corporate reorganizations, continuity of interest, and continuity of business enterprise (TD 8760) 14, 4; (TD 8761)
14, 13
26 CFR 1.354–1, 1.355–1, 1.356–3,
amended; reorganizations, treatment
of warrants as securities (TD 8752)
9, 4
26 CFR 1.356–6T, added; reorganizations, nonqualified preferred stock
(TD 8753) 9, 6
26 CFR 1.446–1, amended; 1.446–1T,
removed; 301.9100–0, added;
301.9100–1, revised; 301.9100–2,
–3, added; 301.9100–1T, –2T, –3T;
removed extensions of time to make
elections (TD 8742) 5, 4
26 CFR 1.453.11; installment obligations received from liquidating corporations (TD 8762) 14, 15
26 CFR 1.460–0, amended; 1.460–6T,
added; election not to apply lookback method in de minimis cases
(TD 8756) 12, 4
26 CFR 1.468A–2, –3, –8, amended;
nuclear decommissioning funds; revised schedules of ruling amounts
(TD 8758) 13, 15
26 CFR 1.904–5(o), 1.904–5T, 1.954–
0(b), 1.954–1, amended; 1.954–1T,
–2T, –9T, added; 301.7701–3(f)(1),
amended; controlled foreign corporation relating to partnerships and
branches (TD 8767) 16, 4
26 CFR 1.905–2, amended; foreign tax
credit filing requirements (TD 8759)
13, 19
26 CFR 1.925(a)–1T, 1.925(b)–
1T(b)(3)(i), amended; 1.927(e)–1T,
revised; foreign sales corporation
transfer pricing source and grouping
rules (TD 8764) 15, 9
26 CFR 1.985–1, –5(a), amended;
1.985–7, added; dollar approximate
separate transactions method of accounting (DASTM) to profit and loss

47

method of accounting, change from
P&L method to DASTM (TD 8765)
16, 11
26 CFR 1.1271–1, 1.1275–1, amended;
debt instruments with original issue
discount, annuity contracts (TD
8754) 10, 15
26 CFR 1.1202–0, –2, added; qualified
small business stock (TD 8749) 7, 16
26 CFR 1.1290–0, amended; 1.1294–0,
added; a. 1291–0T, amended;
1.1291–1T, added; 1.1291–9,
amended; 1.1293–0, –1T, added;
1.1295–0, –1T, –3T, 1.1297–3T(c),
added; passive foreign investment
company preferred shares, special
income exclusion (TD 8750) 8, 4
26 CFR 1.1396–1; empowerment zone
employment credit, qualified zone
employees (TD 8747) 7, 18
26 CFR 1.1397E–1T, added; qualified
zone academy bonds (TD 8755) 10,
21
26 CFR 1.1502–3, –4, –9(a),
–21T(c)(1)(iii), amended; 1.1502–
3T, –4T, –9T, –55T, added; 1.1502–
23T(b), (c), redesignated; consolidated returns, limitations on the use
of certain losses and credits, overall
foreign loss accounts (TD 8751) 10,
23
26 CFR 54.9801–2T, amended;
54.9801–4T, –5T, revised; 54.9804–
1T, redesignated; 54.9806–1T, redesignated; 54.9812–1T, added; mental
health parity, interim rules (TD
8741) 3, 6
Relocation payments:
Authorized by sec. 105(a)(11) of Housing and Community Development
Act, not includible in gross income
(RR 19) 15, 5
Renewable electricity production credit;
calendar year 1998 inflation adjustment
factor and reference prices. (Notice 27)
18, 14
Reorganizations; exchange of securities
(RR 10) 10, 11
Reproduction of Forms 1096, 1098, 1099,
5498, and W–2G (RP 37) 26, 6
Rulings:
Areas in which advance rulings will not
be issued:
Associate Chief Counsel (Domestic), Associate Chief Counsel
(EBEO) (RP 3) 1, 100

July 6, 1998

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued
Associate Chief Counsel (International) (RP 7) 1, 222
Rural airports (RP 18) 6, 20
Social security benefits under U.S.Canada treaty, recent changes (Notice
23) 18, 9
Spin-off of subsidiary (RR 27) 22, 4
Technical advice to district directors and

July 6, 1998

chiefs, appeals offices, Associate Chief
Counsel (Domestic), Associate Chief
Counsel (EBEO), Associate Chief
Counsel (Enforcement Litigation), and
Associate Chief Counsel (International)
(RP 2) 1, 74
Tentative differential earnings rate for
1997 (Notice 19) 13, 24

48

Treatment of hybrid arrangements under
subpart F (Notice 11) 6, 18
Trust, election to treat U.S. person;
domestic trust (Notice 25) 18, 11
Withholding regulations:
Effective date of sec. 1441 withholding
regulations amended (Notice 16) 15,
12

1998–27 I.R.B.

Notes

1998–27 I.R.B.

49

July 6, 1998

Notes

July 6, 1998

50

1998–27 I.R.B.

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