Td 9311

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 106.—Contributions by Employer to
Accident and Health Plans
A notice provides guidance on rollovers from
health Flexible Spending Arrangements (health
FSAs) and Health Reimbursement Arrangements
(HRAs) to Health Savings Accounts (HSAs). See
Notice 2007-22, page 670.

Section 223.—Health
Savings Accounts
A notice provides guidance on rollovers from
health Flexible Spending Arrangements (health
FSAs) and Health Reimbursement Arrangements
(HRAs) to Health Savings Accounts (HSAs). See
Notice 2007-22, page 670.

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

T.D. 9311
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Certain Transfers of Stock or
Securities by U.S. Persons to
Foreign Corporations

Section 263.—Capital
Expenditures

AGENCY: Internal Revenue Service
(IRS), Treasury.

A revenue procedure provides administrative
guidance permitting the use of a “Net Consideration Method” of accounting for certain patent cross
licensing arrangements. Under the method, only
cash and other non-patent-right consideration are
taken into account for withholding and capitalization
purposes. See Rev. Proc. 2007-23, page 675.

ACTION: Final and temporary regulations.

Section 263A.—Capitalization and Inclusion in
Inventory Costs of Certain Expenses
A revenue procedure provides administrative
guidance permitting the use of a “Net Consideration Method” of accounting for certain patent cross
licensing arrangements. Under the method, only
cash and other non-patent-right consideration are
taken into account for withholding and capitalization
purposes. See Rev. Proc. 2007-23, page 675.

SUMMARY: This document contains
final and temporary regulations under
section 367(a) of the Internal Revenue
Code (Code) regarding gain recognition
agreements. The final regulations are
necessary to update cross-references in
the current regulations. The temporary
regulations are necessary to respond to
comments requested in Notice 2005–74.
The regulations primarily affect U.S. persons that transfer stock or securities to
foreign corporations or corporations engaged in transactions that affect existing
gain recognition agreements. The text of
these temporary regulations also serves
as the text of the proposed regulations
(REG–147144–06) set forth in the notice
of proposed rulemaking on this subject
published elsewhere in this issue of the
Bulletin.
DATES: Effective Date: These regulations
are effective February 5, 2007.
Applicability Dates: For dates of
applicability, see §§1.367(a)–3T(f) and
1.367(a)–8T(h).
ADDRESSES: Send submissions to:
CC:PA:LPD:PR
(REG–147144–06),

2007–10 I.R.B.

635

room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–147144–06), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov
(IRS REG–147144–06).
FOR
FURTHER
INFORMATION
CONTACT: Daniel McCall, (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collections of information contained in these regulations have been reviewed and pending receipt and evaluation
of public comments, approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)) under control number 1545–2056. Response to these
collections of information is mandatory.
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.
For further information concerning this
collection of information, and where to
submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing the burden, please refer to the preamble
to the cross-referencing notice of proposed
rulemaking (REG–147144–06) published
elsewhere in this issue of the Bulletin.
Books and records relating to these 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

March 5, 2007

return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 367(a)(1) provides that if, in
connection with any exchange described
in section 332, 351, 354, 356, or 361,
a United States person (U.S. transferor)
transfers property to a foreign corporation
(transferee foreign corporation), such foreign corporation shall not, for purposes
of determining the extent to which gain
shall be recognized on such transfer, be
considered to be a corporation. Section
367(a)(2), (3) and (6) provides exceptions
to this general rule and grants regulatory
authority to provide additional exceptions
and to limit the statutory exceptions.
Exceptions to the general rule of section 367(a)(1) for certain transfers by a
U.S. transferor of the stock or securities
of a corporation (transferred corporation)
to a transferee foreign corporation are
provided in §1.367(a)–3 (initial transfer).
In some cases, these exceptions require,
among other things, that the U.S. transferor file a gain recognition agreement
(GRA), as provided in §1.367(a)–8. Section 1.367(a)–3(b)(1)(ii) and (c)(1)(iii)(B).
Pursuant to a GRA, the U.S. transferor
agrees, among other things, to include in
income the gain realized, but not recognized, on the initial transfer of the stock or
securities, and pay any applicable interest,
upon certain events (triggering events)
that occur before the close of the fifth full
taxable year following the year of the initial transfer. Section 1.367(a)–8(b)(1)(iii)
and (3)(i).
Section 1.367(a)–8(e)(1) and (2) provides that dispositions of the stock or
securities of the transferred corporation
are generally triggering events. Similarly,
§1.367(a)–8(e)(3) provides that dispositions of substantially all (within the
meaning of section 368(a)(1)(C)) of the
assets of the transferred corporation are
generally treated as deemed dispositions
of the stock or securities of the transferred
corporation and therefore are also triggering events. Finally, dispositions of
stock of the transferee foreign corporation can also be triggering events. See
§1.367(a)–8(f)(2)(ii).
Notwithstanding
these
rules,
§1.367(a)–8 provides that various
nonrecognition transactions are not trig-

March 5, 2007

gering events if certain requirements are
satisfied. For example, §1.367(a)–8(g)
provides exceptions for certain transactions involving the U.S. transferor, the
transferee foreign corporation, and the
transferred corporation. Although these
exceptions clearly contemplate some
nonrecognition transactions, the current
regulations are unclear whether, and if
so how, the exceptions apply to various
asset reorganizations involving section
361 exchanges by the U.S. transferor, the
transferee foreign corporation, and the
transferred corporation.
Section 1.367(a)–8 also provides that
certain nonrecognition transactions are
not triggering events because the GRA
is terminated without further effect. For
example, §1.367(a)–8(h)(3) lists certain
nonrecognition transactions that terminate
the GRA, provided that immediately after
the transaction the basis in the transferred
stock is not greater than the U.S. transferor’s basis in the stock that, immediately
before the initial transfer, necessitated the
GRA.
On September 28, 2005, the IRS and
the Treasury Department issued Notice 2005–74, 2005–2 C.B. 726, see
§601.601(d)(2), which announced the
intention to amend the regulations under
section 367(a) to address the effect on
GRAs of certain asset reorganizations involving the U.S. transferor, the transferee
foreign corporation, and the transferred
corporation. The notice was issued in
response to comments that the current
regulations do not adequately address
various asset reorganizations involving
the U.S. transferor, the transferee foreign
corporation, and the transferred corporation. Notice 2005–74 addressed the most
common of these reorganizations and requested comments on other transactions
(for example, certain upstream and downstream reorganizations).
Notice 2005–74 generally provided
that, if particular requirements are satisfied, certain asset reorganizations of
the U.S. transferor, the transferee foreign
corporation, or the transferred corporation
will not constitute triggering events. A key
premise of the notice was that the covered
transactions involved situations where the
ability to collect tax is sufficiently preserved in the event of a subsequent trigger
of the GRA (that is, the obligor under the
GRA remains unchanged as a result of the

636

asset reorganization). In light of taxpayer
comments and further study, however, the
IRS and Treasury Department have determined that there are additional instances
where the ability to collect tax after these
asset reorganizations and certain other
nonrecognition transactions (as defined
in section 7701(a)(45)) is sufficiently
preserved so that these transactions also
should not constitute a triggering event
if particular requirements are met. The
IRS and Treasury Department also have
concluded that other portions of the current section 367(a) regulations addressing
GRAs should be revised.
Explanation of Provisions
A. Overview
The temporary regulations adopt the
rules announced in Notice 2005–74, with
a number of modifications discussed below. Notice 2005–74 only provided guidance on a particular range of transactions,
namely certain asset reorganizations, that
are insufficiently addressed in the current
regulations. The temporary regulations respond to comments and provide guidance
on the effect on GRAs of transactions that
are not addressed in the current regulation
or Notice 2005–74. The temporary regulations also make additional changes to
the existing regulations. For example, the
temporary regulations modify and clarify
procedural requirements attendant to entering into GRAs. Finally, the temporary
regulations reorganize the current regulation so that distinct paragraphs address
triggering events, exceptions to triggering
events, and events that terminate a GRA.
The IRS and Treasury Department continue to consider issuing additional public
guidance that further revises §1.367(a)–8.
B. Effect of Certain Asset Reorganizations
and Nontaxable Liquidations on Gain
Recognition Agreements
1. Transfers of transferee foreign
corporation stock by U.S. transferor
a) Asset reorganizations
Notice 2005–74 provided that if, in a
section 361 transaction, a U.S. transferor
transfers all or a portion of the stock or
securities of the transferee foreign corporation to an acquiring domestic corpora-

2007–10 I.R.B.

tion (successor U.S. transferor) pursuant
to certain asset reorganizations, the exchanges made pursuant to the asset reorganization will trigger the gain recognition agreement, unless various conditions
are satisfied. These conditions are: (1)
the U.S. transferor must have been a member of a consolidated group (original consolidated group) at the time of the initial
transfer and the common parent of such
group (original common parent) entered
into the original GRA; (2) immediately after the asset reorganization, the successor
U.S. transferor is a member of the original consolidated group (consolidation continuity requirement); and (3) the original
common parent enters into a new GRA
with respect to the transfer subject to the
original GRA, modified by substituting the
successor U.S. transferor for the original
U.S. transferor. A notice of the asset reorganization also must be provided with
the successor U.S. transferor’s next annual
certification.
For this purpose, an asset reorganization is defined as a reorganization described in section 368(a)(1) involving
the transfer of assets by a corporation
to another corporation pursuant to section 361, except that such term shall include reorganizations described in section
368(a)(1)(D) or (G) only if the requirements of section 354(b)(1)(A) and (B) are
met.
The IRS and Treasury Department received several comments that the consolidation continuity requirement was unduly
restrictive because it focused on maintaining the same obligor for a GRA following the asset reorganization. Commentators asserted that an equal or better ability to collect the tax due as a result of a
triggering event subsequent to such a reorganization may be preserved in certain
instances where the consolidation continuity requirement would not be satisfied.
However, these same commentators noted
that if there were no consolidation continuity requirement, such that a U.S. transferor
that is a member of a consolidated group at
the time of the initial transfer could be acquired in a later asset reorganization by a
corporation (successor corporation) that is
not a member of such group without triggering the GRA, the actions of the successor corporation could inappropriately affect the liability of the original consolidated group under the GRA. As a result,

2007–10 I.R.B.

the commentators requested that the consolidation continuity requirement be curtailed or eliminated, while at the same time
not inappropriately exposing the original
consolidated group to the liabilities arising
from the actions of the successor corporation.
The IRS and Treasury Department generally agree with these views. Therefore,
the temporary regulations eliminate the
consolidation continuity requirement and
address concerns about the liability of a
consolidated group that disposes of a U.S.
transferor subject to a GRA.
Specifically, the temporary regulations
provide that when a U.S. transferor transfers all or a portion of the stock of the
transferee foreign corporation to an acquiring corporation in an asset reorganization,
the exchanges made pursuant to the reorganization will not be triggering events and
the GRA will terminate without further effect, but only if certain requirements are
satisfied. These requirements ensure that
the ability to collect tax is sufficiently preserved and that the terms of the GRA are
administrable.
First, the acquiring corporation (successor U.S. transferor) must be a domestic
corporation, and the successor U.S. transferor or the common parent of the consolidated group of which the successor U.S.
transferor is a member (as applicable) must
enter into a new GRA to recognize gain
with respect to the initial transfer during
the remaining term of the original GRA
(with certain modifications).
Second, with its next certification, the
successor U.S. transferor must provide to
the IRS the new GRA, notice of the transaction, and Form 8838 (Consent To Extend
the Time To Assess Tax Under Section 367
– Gain Recognition Agreement) to extend
the period of assessment of tax on the initial transfer.
Third, unless the successor U.S. transferor is a member of the same consolidated
group of which the U.S. transferor was a
member immediately before the asset reorganization, the person entering into the
new GRA must elect that, if the new GRA
is triggered in whole or in part, the person will include the required amount in the
year of the triggering event (as opposed
to the year of the initial transfer). Requiring an inclusion in these circumstances
only in the year of a subsequent triggering
event when the U.S. transferor is no longer

637

owned by the same consolidated group is
necessary, among other reasons, because
the successor U.S. transferor may not have
existed in the year of the initial transfer. In
such a case, the successor U.S. transferor
would not be able to amend a return for
the year of the initial transfer to include
any tax due as a result of a subsequent triggering event. Moreover, the requirement
is appropriate even if the successor U.S.
transferor did exist in the year of the initial
transfer because its tax year for the year of
the initial transfer may be closed. In sum,
this requirement assures the GRA rules are
administrable and that the ability to collect
tax is sufficiently preserved. If these requirements are met, the original GRA will
terminate without further effect.
The IRS and Treasury Department
have decided to eliminate the consolidation continuity requirement because these
three requirements adequately address
the government’s concern in this area by,
among other things, preserving the ability
to collect the tax due as a result of a triggering event subsequent to a covered asset
reorganization. In many asset reorganizations, the successor U.S. transferor will
have an equal or greater ability to pay the
tax due in the case of a subsequent triggering event than would the original U.S.
transferor. Furthermore, the current regulations generally do not impose any financial or other requirements on the ability of
a U.S. transferor to enter into a GRA. But
see §1.367(a)–8(d) (imposing a security
requirement in certain situations). Consequently, the IRS and Treasury Department
believe that even if in some circumstances
an acquisition of a U.S. transferor may
affect the ability to collect the tax due as a
result of a subsequent triggering event (for
example, the U.S. transferor is acquired
from a consolidated group by another consolidated group whose value is less than
that of the original consolidated group),
the requirements above nonetheless sufficiently preserve the ability to collect the
tax that would be due if the new GRA
were triggered and ensure that the terms
of the GRA are administrable.
As described in this section, the temporary regulations require that the acquirer
be a domestic corporation because, among
other reasons, the IRS and Treasury Department are concerned that if a foreign
acquirer is allowed to enter into a new
GRA, it may be difficult for the IRS to

March 5, 2007

collect any tax due in the event of a subsequent trigger of the GRA. However, the
IRS and Treasury Department continue to
study whether it would be appropriate to
allow a domestic corporate shareholder of
the U.S. transferor to enter into a new GRA
when a U.S. transferor is acquired by a foreign corporation in an asset reorganization
under conditions similar to those provided
in §1.367(a)–3T(e). The IRS and Treasury
Department welcome more detailed comments on specific approaches that could
extend these rules to foreign acquisitions
of the U.S. transferor.
b) Nontaxable liquidations
The current regulations provide that, if
a corporate U.S. transferor liquidates in
a transaction that qualifies under sections
332 and 337, the GRA is triggered unless (1) the U.S. transferor filed a consolidated income tax return with a U.S. parent
corporation both in the year of the initial
transfer and the year of the liquidation, and
(2) the common parent enters into a new
GRA, with certain modifications. Section
1.367(a)–8(f)(2)(ii).
The temporary regulations provide a
similar rule. However, the temporary
regulations eliminate the consolidation
continuity requirement, so the U.S. transferor is no longer required to be a member
of the same consolidated group in the
year of the initial transfer and the year of
the liquidation. Consequently, the temporary regulations provide that where a
U.S. transferor disposes of the stock of
the foreign transferee corporation in a liquidation that qualifies under sections 332
and 337, the disposition will not constitute a triggering event provided that: (1)
the distributee (successor U.S. transferor)
is a domestic corporation described in
section 332(b)(1); (2) the successor U.S.
transferor or, if the successor U.S. transferor is a member of a consolidated group,
the common parent of the successor U.S.
transferor’s group, enters into a new GRA
covering the remaining term of the original GRA (with certain modifications); (3)
where the successor U.S. transferor is not a
member of the original consolidated group
immediately after the liquidation, the person entering into the GRA agrees that if
there is a subsequent triggering event, the
taxpayer will recognize the gain in the
year of the triggering event (as opposed to

March 5, 2007

the year of the initial transfer); and (4) the
successor U.S. transferor provides, with
its next annual certification, Form 8838 to
extend the period of assessment of the tax
on the initial transfer. If these conditions
are satisfied, the original GRA will terminate without further effect.
For reasons similar to those discussed
above in the context of asset reorganizations involving the U.S. transferor, the IRS
and Treasury Department believe that the
temporary regulations sufficiently address
the government’s concerns in this area, including preserving the ability to collect tax
due as a result of a subsequent triggering
event. As a result, it is not necessary for
the U.S. transferor to be a member of the
same consolidated group in the year of the
transfer and the year of the liquidation. In
addition, the IRS and Treasury Department
believe that it is appropriate to require an
inclusion in the year of a subsequent triggering event if the successor U.S. transferor was not a member of a consolidated
group with the U.S. transferor immediately
before the liquidation for reasons similar
to those discussed regarding asset reorganizations involving the U.S. transferor.
2. Transfers of transferred corporation
stock or securities by transferee foreign
corporation in an asset reorganization
Notice 2005–74 provided that if, in
a section 361 transaction, a transferee
foreign corporation transfers stock or securities of a transferred corporation to a
foreign acquiring corporation in an asset reorganization, the exchanges made
pursuant to the reorganization will be a
triggering event, unless certain conditions
are met. These conditions require that the
U.S. transferor, common parent, or new
common parent corporation, as applicable,
enter into a new GRA, with certain modifications. In addition, the U.S. transferor
also is required to provide the new GRA
and a notice of the asset reorganization
with its next annual certification.
For purposes of this rule, Notice
2005–74 retained the same definition
of asset reorganization as used for the provision dealing with transfers of transferee
corporation stock, with certain modifications. Specifically, Notice 2005–74
excludes the following asset reorganizations: (1) triangular asset reorganizations
described in §1.358–6(b); and (2) asset

638

reorganizations where, after the reorganization, the same corporation is both the
transferee foreign corporation (or successor transferee foreign corporation, as
applicable) and the transferred corporation
(or the successor transferred corporation,
as applicable).
The temporary regulations generally incorporate these rules and provide that if the
above conditions are satisfied the original
GRA will terminate without further effect.
However, even if these conditions are satisfied, the temporary regulations provide
specific gain recognition rules if the transferee foreign corporation transfers stock
or securities of the transferred corporation in an asset reorganization and the U.S.
transferor recognizes gain under section
356(a)(1). See section C of this preamble.
As noted in this preamble, Notice
2005–74 excluded from the definition of
the term asset reorganization any triangular asset reorganizations of the transferee foreign corporation and transferred
corporation and certain upstream and
downstream reorganizations. In response
to comments and upon further study by
the IRS and Treasury Department, the
temporary regulations address the treatment of triangular asset reorganizations
of the transferee foreign corporation and
certain upstream and downstream reorganizations. See sections G and H of this
preamble.
3. Transfers of substantially all of a
transferred corporation’s assets
Notice 2005–74 provides that if a transferred corporation transfers substantially
all its assets in an asset reorganization,
the exchanges made pursuant to the reorganization will be a triggering event, unless certain conditions are met. These
conditions require that the U.S. transferor,
U.S. parent corporation or new U.S. parent corporation, as applicable, enters into a
new GRA, with certain modifications. The
U.S. transferor also is required to provide
the new GRA and the notice of the asset reorganization with its next annual certification. The definition of asset reorganization
is the same as that used in asset reorganizations involving the transferee foreign corporation.
The temporary regulations generally incorporate these rules and provide that if
these conditions are met, the original GRA

2007–10 I.R.B.

will terminate without further effect. However, even if these conditions are satisfied,
the temporary regulations provide specific
gain recognition rules (described in section C of this preamble) if the transferred
corporation transfers substantially all of its
assets in an asset reorganization and the
transferee foreign corporation recognizes
gain under section 356(a)(1). In addition,
although the definition of asset reorganization excludes triangular asset reorganizations and downstream mergers of the transferee foreign corporation, the temporary
regulations address the tax treatment of
these transactions. See sections G and H
of this preamble.
C. Special Rules Regarding
Nonrecognition Transactions Involving
Money or Other Property
The current regulations provide that
certain nonrecognition transactions are
not triggering events if particular requirements are satisfied. However, commentators have stated that the current regulations provide that certain nonrecognition
transactions at the transferee foreign corporation or transferred corporation level
in which any money or other property (as
described in sections 351(b) or 356(a)) is
received in exchange are triggering events
without exception. These commentators
assert that it is not appropriate to trigger
an entire GRA as a result of receiving
a relatively minor amount of “boot” in
the nonrecognition transaction. These
commentators also note that the current
regulations do not address clearly the
treatment of transfers of transferee foreign
corporation stock by a U.S. transferor in
a nonrecognition transaction in which the
U.S. transferor receives boot.
The IRS and Treasury Department
agree that the receipt of boot under section
351(b) or 356(a)(1) in connection with
the disposition of transferred corporation
stock or securities, or substantially all of
a transferred corporation’s assets, should
not automatically trigger all the gain under a GRA. Accordingly, the temporary
regulations provide that if certain conditions are met, the entire GRA will not be
triggered when a transferee foreign corporation disposes of transferred corporation
stock or securities in a nonrecognition
transaction simply because the transferee
foreign corporation receives boot.

2007–10 I.R.B.

However, the IRS and Treasury Department believe that the GRA should be triggered to the extent that gain would be recognized in such a transaction by a transferee foreign corporation or a transferred
corporation, before taking into account basis increases that may apply to the stock
or securities disposed of as a result of triggering the GRA. The current, as well as
the temporary regulations, provide that if
a U.S. transferor is required to recognize
gain because of a triggering event, then
certain basis increases are allowed as of
the date of the initial transfer. Therefore,
in determining the amount of gain that is
recognized under the GRA in such a transaction, the temporary regulations provide
that the U.S. transferor first must recognize that amount of gain that the transferee
foreign corporation or transferred corporation would have recognized under 351(b)
or 356(a)(1), before taking into account
the basis increases that are allowed under
the regulations as of the date of the initial transfer. Second, if the U.S. transferor
has not recognized all the gain realized,
but not recognized, on the initial transfer,
then its new GRA will reflect any remaining unrecognized gain on the initial transfer. Third, after the consequences of the
transaction are determined under the temporary regulations, then the taxpayer must
determine the amount of gain, if any, that
the transferee foreign corporation or transferred corporation must recognize under
351(b) or 356(a)(1). In determining the
amount to be recognized, the basis of the
stock disposed of shall reflect the basis increase allowed as a result of the gain recognized under the GRA by the U.S. transferor.
This special rule limiting recognition
of gain in otherwise nonrecognition transactions involving boot applies only if the
U.S. transferor complies with the otherwise applicable requirements of the exception to recognizing all of the gain subject to
the GRA when there is a triggering event.
This special rule is intended to require the
U.S. transferor to recognize only an appropriate amount of income, without automatically triggering the entire GRA.
The IRS and Treasury Department also
believe that additional guidance is needed
on the treatment of transfers of transferee
foreign corporation stock by a U.S. transferor in a nonrecognition exchange in
which the U.S. transferor receives boot.

639

Therefore, the temporary regulations treat
the disposition of transferee foreign corporation stock in a nonrecognition transaction by the U.S. transferor when the
U.S. transferor receives money or other
property as described in section 351(b)
or 356(a) as a termination of the GRA
in whole or in part. Consequently, if a
new GRA is filed, then the U.S. transferor
will recognize gain under the new GRA
in the event of a subsequent triggering
event in the amount of the gain realized,
but not recognized, in the initial transfer
less any gain recognized by the U.S. transferor under section 351(b) and 356(a)(1)
in connection with the nonrecognition
transaction. If, however, a new GRA is
not filed in connection with the nonrecognition transaction, then the original GRA
is triggered, and the U.S. transferor must
recognize the gain that was realized, but
not recognized, on the initial transfer less
any gain recognized by the U.S. transferor under section 351(b) or 356(a)(1) in
connection with the nonrecognition transaction.
D. Effect of Consolidation and
Deconsolidation on Gain Recognition
Agreements
Commentators noted that the current
regulation does not adequately address the
effect on GRAs of certain transactions involving consolidated groups. For example, the commentators noted that it is not
clear what effect a U.S. transferor becoming a member of a consolidated group has
on an existing GRA. The current regulations do provide, however, that if a U.S.
transferor is a member of a consolidated
group at the time of the initial transfer and
ceases to be a member of the group during
the term of the GRA, the common parent of
such group that entered into the GRA continues to be liable under the original GRA.
Section 1.367(a)–8(b)(5)(ii). Several commentators have raised concerns that such
a result is not appropriate because the actions of an acquirer could unilaterally affect the liability of the original consolidated group under the GRA.
The IRS and Treasury Department
agree that the effect of these transactions
needs to be clarified and rationalized. Accordingly, in response to these concerns,
the temporary regulations provide specific
rules addressing these transactions. In par-

March 5, 2007

ticular, the IRS and Treasury Department
believe that the U.S. parent corporation of
a consolidated group should not continue
to be liable under a GRA with respect to a
U.S. transferor that is no longer a member
of such group.
The temporary regulations provide that
when a U.S. transferor becomes a member
of a consolidated group (including a transaction where it joins such a group after
being a member of another consolidated
group) the transaction is a triggering event
unless certain conditions are met. If these
conditions are satisfied, the original GRA
is terminated without further effect. These
conditions require the U.S. parent corporation of the consolidated group that the
U.S. transferor joins (1) to enter into a new
GRA for the remaining term of the original GRA and (2) to elect to recognize gain
in the taxable year of any subsequent triggering event (as opposed to the year of the
initial transfer). A notice of the consolidation transaction must also be filed with
the next annual certification. The IRS and
Treasury Department believe that these requirements ensure that a GRA remains in
effect after a U.S. transferor joins a consolidated group. These requirements are also
consistent with §1.1502–77(a), which provides that the common parent is the sole
agent for each member of the consolidated
group.
In addition, the temporary regulations
also cover situations in which a U.S. transferor ceases to be a member of a consolidated group and does not become a member of a new consolidated group. In these
cases, the transaction is a triggering event,
unless certain conditions are met. If these
conditions are satisfied, the original GRA
is terminated without further effect. These
conditions require the U.S. transferor (1)
to enter into a new GRA for the remaining
term of the original gain recognition agreement and (2) to elect that in the event of a
subsequent triggering event the U.S. transferor will recognize gain in the year of the
triggering event. The U.S. transferor must
also provide notice of the deconsolidation
with the next annual certification.
E. U.S. Transferor Goes Out of Existence
in a Transaction Giving Rise to a Gain
Recognition Agreement
The current regulation provides that
when a U.S. transferor goes out of exis-

March 5, 2007

tence in a transaction giving rise to a GRA,
gain generally qualifies for nonrecognition treatment only if the U.S. transferor
is owned by a single U.S. parent corporation, 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 a GRA.
Section 1.367(a)–8(f)(2)(i). The current
regulation provides that a U.S. transferor
that is controlled by five or fewer domestic
corporations may request a ruling that the
transaction qualifies for nonrecognition
treatment. Section 1.367(a)–8(f)(2)(i).
Notice 2005–74, in turn, provides a rule
that treats all members of the U.S. parent’s
consolidated group for the taxable year
that includes the transfer as a single corporation for purposes of §1.367(a)–8(f)(2)(i).
Thus, a U.S. transferor that is not directly
owned by a single U.S. parent corporation may still qualify for nonrecognition,
without requesting a ruling, when the U.S.
transferor goes out of existence in a transaction giving rise to a GRA, if it is indirectly wholly owned by members of a consolidated group.
The IRS and Treasury Department
believe it is necessary to provide additional guidance on how GRAs are entered
into when a U.S. transferor is controlled
by multiple corporate shareholders with
which the U.S. transferor does not join in
filing a consolidated return. Moreover,
the IRS and Treasury Department believe
that in this area a single rule should apply
both in consolidated and nonconsolidated
situations. As a result, the temporary regulations provide unified rules, replacing
both the current regulations and Notice
2005–74, in situations in which a U.S.
transferor goes out of existence in a transaction giving rise to a GRA.
The temporary regulations generally
provide that when a U.S. transferor goes
out of existence in a transaction giving
rise to a GRA, the gain may qualify for
nonrecognition treatment if (1) the requirements of section 367(a)(5) and any
regulations under that paragraph are satisfied such that five or fewer domestic corporations control the U.S. transferor and
appropriate basis adjustments are made,
(2) the requirements of §1.367(a)–3(c)(1)
are satisfied if the transferred corporation
is domestic, (3) all domestic corporate
shareholders of the U.S. transferor that

640

own at least five percent of either the
total voting power or the total fair market value of the stock of the transferee
foreign corporation immediately after
the transaction enter into GRAs with respect to their pro rata share of the gain
in the transferred stock or securities that
designate such domestic corporate shareholders as U.S. transferors for purposes of
§§1.367(a)–3(b) and (c) and 1.367(a)–8T,
and (4) all domestic corporate shareholders that enter into GRAs elect to recognize
any gain upon a subsequent trigger of the
GRA in the year of the triggering event.
The temporary regulations eliminate
the current regulation’s option to request
a private letter ruling because guidance is
now provided on how GRAs are entered
into by five or fewer domestic corporations
that control a U.S. transferor satisfying
section 367(a)(5). In addition, the temporary regulations clarify that the terms of
section 367(a)(5) must be satisfied (along
with other requirements) to avoid gain
recognition on the U.S. transferor’s section 361 transfer of stock or securities to
a foreign acquiring corporation. Therefore, the rule in Notice 2005–74 treating
consolidated group members as a single
corporation is incorporated by reference to
section 367(a)(5), which provides that all
members of the same affiliated group are
treated as one corporation. Lastly, because
these rules address how gain recognition
may be avoided under section 367(a)(1)
on the initial transfer itself, rather than the
effect of subsequent transactions on existing GRAs, these rules have been removed
from §1.367(a)–8 and included instead in
§1.367(a)–3T(e).
F. Transfers of Transferred Corporation’s
Assets
Under the current regulations, dispositions of substantially all of the assets
of the transferred corporation (within the
meaning of section 368(a)(1)(C)) are generally treated as deemed dispositions of
the stock or securities of the transferred
corporation and therefore are triggering
events. Section 1.367(a)–8(e)(3). In Revenue Ruling 57–518, 1957–2 C.B. 253,
see §601.601(d)(2), the IRS stated that
what constitutes “substantially all of the
properties” as the term is used in section
368(a)(1)(C) “will depend upon the facts
and circumstances in each case rather than

2007–10 I.R.B.

upon any particular percentage.” However, Revenue Procedure 77–37, 1977–2
C.B. 568, see §601.601(d)(2), provides
that for ruling purposes, the transfer by
a corporation of 70 percent of its gross
assets or 90 percent of its assets net of
liabilities will generally be deemed to be
a transfer of substantially all of the assets
of a corporation.
Commentators have noted that defining substantially all by reference to section 368(a)(1)(C) may not be appropriate
in the context of the GRA rules. The
IRS and Treasury Department, however,
generally believe that defining “substantially all” for these purposes by reference
to the definition of the term under section
368(a)(1)(C) is appropriate. Nonetheless,
the IRS and Treasury Department believe
that it is important to clarify the scope of
the term “substantially all,” as used in the
current regulation and the temporary regulations. One commentator suggested that
if a transferred corporation disposes of less
than 70 percent of its gross assets or 90
percent of its assets net of liabilities, the
transfer will not be treated as a disposition of substantially all of the assets of
the transferred corporation for purposes of
§1.367(a)–8(e)(3), and thus, such a disposition would not trigger a GRA. This suggestion is not correct. If, upon considering
the facts and circumstances, a transferred
corporation has disposed of substantially
all its assets, such a transaction is a triggering event, even if the transferred corporation disposes of less than 70 percent of a
corporation’s gross assets or 90 percent of
its assets net of liabilities. The “substantially all” safe harbor provided in Revenue
Procedure 77–37 is intentionally high so
that the IRS does not need to engage in a
factually detailed analysis before issuing a
letter ruling. As a result, in the context of
GRAs, the Revenue Procedure’s threshold
does not mean that a disposition of substantially all the assets does not occur upon
the disposition of a lesser amount of assets.
Therefore, the temporary regulations provide that whether a transferred corporation
has disposed of substantially all of its assets is determined under all the facts and
circumstances.

2007–10 I.R.B.

G. Transactions that Terminate the GRA
1. Taxable dispositions of transferee
foreign corporation stock
Section 1.367(a)–8(h)(1) provides that
a GRA will terminate, in whole or in part,
as a result of certain taxable dispositions
of the transferee foreign corporation stock
by the U.S. transferor. A key premise for
this termination rule is that the basis in
the transferee foreign corporation stock received by the U.S. transferor in the initial
transfer is assumed to reflect the basis in
the transferred stock or securities.
The IRS and Treasury Department continue to believe this termination rule is appropriate. As a result, the temporary regulations generally retain this rule. However,
the temporary regulations modify the termination rule to ensure that a GRA terminates only when the transferee foreign corporation stock disposed of in fact reflects
the basis of the transferred stock or securities. This termination rule only applies to
transferee foreign corporation stock that is
received (or deemed received) in the initial transfer. The IRS and Treasury Department understand that in some cases,
taxpayers may take the position that the
basis in the transferee foreign corporation
stock does not reflect the basis of the transferred stock or securities. For example,
taxpayers may take the position that the
basis in such transferee foreign corporation stock received also reflects the basis of
other property that had a built-in loss when
it was transferred to the transferee foreign
corporation. Thus, the termination rule in
the temporary regulations will apply only
when the basis of the transferee foreign
corporation stock received (or deemed received) in the initial transfer properly reflects the sum of the aggregate basis of
the transferred stock or securities immediately before the initial transfer, plus any
increase in the basis of such stock or securities as a result of recognizing gain on
the transfer. In addition, for purposes of
this basis determination, basis increases to
the transferee foreign corporation stock as
a result of income inclusions (for example,
pursuant to section 961) shall not be taken
into account.
In cases where the basis of the relevant transferee foreign corporation stock
exceeds the basis of the transferred stock
or securities, however, the temporary regu-

641

lations allow the U.S. transferor to take advantage of this termination rule if it elects
to reduce its basis in the transferee foreign
corporation stock such that it does not exceed the basis it had in the transferred stock
or securities. If the U.S. transferor makes
this election, the basis reduction will be effective immediately before the taxable disposition that terminates the GRA. In addition, if the U.S. transferor makes this
election, it may increase its basis in other
stock of the transferee foreign corporation
it holds, if any, by a corresponding amount
but not above the fair market value of such
stock.
Similar rules apply in the case of partial
dispositions of transferee foreign corporation stock and dispositions of transferee
foreign corporation stock in nonrecognition transactions in which a portion of the
realized gain is recognized.
2. Certain inbound distributions or
transfers of the transferred stock
Section 1.367(a)–8(h)(3) provides that
a distribution of the transferred stock in
a transaction qualifying under section 355
or sections 332 and 337 will terminate the
GRA if the U.S. transferor’s basis in the
transferred stock or securities that it receives in the section 355 or 332 and 337
transaction does not exceed the basis the
U.S. transferor had in the transferred stock
or securities immediately before the initial
transfer. In response to comments, however, the temporary regulations allow the
U.S. transferor to take advantage of this
termination rule if it elects to reduce the
basis of the transferred stock or securities
if the basis exceeds the basis the U.S. transferor had in the transferred stock or securities immediately before the initial transfer.
For purposes of this basis determination,
basis increases to the transferred stock as a
result of income inclusions (for example,
pursuant to section 961) shall not be taken
into account. If the U.S. transferor elects
to reduce basis in the transferred stock or
securities it receives, the U.S. transferor
shall increase its basis in other transferee
foreign corporation stock (if any) by a corresponding amount but not above the fair
market value of such stock.
Although the temporary regulations
generally provide that a GRA terminates
in certain section 332 liquidations of the
transferee foreign corporation, the IRS

March 5, 2007

and Treasury Department are studying to
what extent this rule should apply when
the transferee foreign corporation has a
minority shareholder and therefore recognizes gain under section 336 in connection
with the section 332 liquidation. As noted
in the request for comments, although
the IRS and Treasury Department generally believe it is appropriate to terminate
entirely the GRA in a section 332 liquidation, in other circumstances it may not
be appropriate. For example, if after an
initial transfer, a wholly-owned transferee
foreign corporation issues a minority interest to a foreign shareholder, completely
terminating the GRA upon a section 332
liquidation of the transferee foreign corporation does not account for the fact that
the U.S. transferor has indirectly disposed
of up to 20 percent of its interest in the
transferred stock or securities. Therefore,
when the temporary regulations are finalized, the IRS and Treasury Department
may address the effect that section 336
gain has on a gain recognition agreement
when a transferee foreign corporation with
a minority shareholder liquidates under
section 332.
The temporary regulations expand the
current rule to terminate GRAs when certain U.S. persons other than the original
U.S. transferor receive the stock or securities that was transferred in the initial transfer. For example, if the transferred corporation is distributed to a domestic corporation or U.S. individual other than the
U.S. transferor in a section 355 “split off,”
the GRA would terminate if the domestic corporation or U.S. individual receives
the transferred stock or securities with a
basis that is not greater than the basis the
U.S. transferor had in the transferred stock
or securities immediately before the initial
transfer.
Finally, and in response to comments
requested in Notice 2005–74, the temporary regulations also expand the current
rule to provide that the GRA will terminate in additional transactions where the
U.S. transferor or a domestic corporation
receives the transferred stock or securities
with a basis that is not greater than the
basis the U.S. transferor had in the transferred stock or securities immediately before the initial transfer. These transactions
are upstream asset reorganizations where
the U.S. transferor acquires the assets of
the transferee foreign corporation, down-

March 5, 2007

stream asset reorganizations where the
transferred corporation acquires the assets
of the transferee foreign corporation, and
certain other asset reorganizations where
a domestic corporation acquires the assets of the transferee foreign corporation.
Consequently, the temporary regulations
generally provide that the GRA terminates
in particular circumstances when the transferred stock or securities are held with the
correct basis by certain U.S. persons, even
if the U.S. person is not the original U.S.
transferor.
However, the IRS and Treasury Department believe that it is not appropriate
for the GRA to terminate when the transferred stock or securities may then be disposed of, directly or indirectly, by a foreign shareholder without being subject to
U.S. tax. Therefore, this termination rule
is limited to section 332 liquidations, section 355 distributions, and asset reorganizations where the domestic corporation
that holds the transferred stock or securities after the transaction is either the U.S.
transferor or a member of the same consolidated group of which the U.S. transferor
is then a member. The IRS and Treasury
Department continue to study whether it
would be appropriate to expand the scope
of the rule to transactions where the acquirer is not a member of the same consolidated group of which the U.S. transferor is
then a member and request comments regarding such a rule.
H. Triangular Reorganizations of
Transferee Foreign Corporation and
Transferred Corporation
Notice 2005–74 provides rules that allow a U.S. transferor to avoid gain recognition on certain asset reorganizations
of the transferee foreign corporation and
transferred corporation. However, Notice
2005–74 restricts the definition of “asset
reorganization” to exclude triangular asset
reorganizations of the transferee foreign
corporation and transferred corporation.
In response to comments and after further study, the temporary regulations address the treatment of certain triangular asset reorganizations. Specifically, they provide that if the transferee foreign corporation or transferred corporation is acquired
in a triangular asset reorganization, the exchanges made pursuant to the reorganization will not be triggering events if certain

642

requirements are satisfied. For purposes
of this rule, a triangular asset reorganization is limited to a transaction in which the
acquiring subsidiary is foreign. The additional requirements are as follows. First,
the U.S. transferor or common parent must
enter into a new GRA to recognize gain
with respect to the initial transfer during
the remaining term of the original GRA,
with certain modifications. In the case of a
triangular asset reorganization of the transferee foreign corporation, the U.S. transferor also must make certain designations
depending on whether the parent corporation of the foreign acquiring subsidiary is
foreign or domestic and depending on the
type of triangular asset reorganization. Finally, the U.S. transferor must provide notice of the transaction with its next annual
certification.
I. Other Changes
The current regulations refer to “stock
of the transferred corporation” in some
paragraphs but refer to “stock or securities of the transferred corporation” in other
paragraphs. The temporary regulations refer to “stock or securities of the transferred
corporation” because either stock or securities, or both, may be subject to a GRA
when transferred to a transferee foreign
corporation by a U.S. person. In contrast,
the temporary regulations generally refer
only to stock, and not securities, of the
transferee foreign corporation. The rules
applying to a disposition of the transferee
foreign corporation are concerned primarily with transactions in which the U.S.
transferor loses or decreases its control of
the transferee foreign corporation, which
does not occur when a U.S. transferor disposes of securities of the transferee foreign
corporation.
The current regulation provides a reasonable cause exception to triggering a
GRA when the person required to file the
GRA fails to comply in any material respect with the terms of a GRA, or when
the person fails to meet the timeliness requirement for submitting a GRA. The temporary regulations retain this reasonable
cause exception but provide additional
guidance on how the person should submit a request for reasonable cause relief.
The temporary regulations also provide
that the Area Director or Director of Field
Operations, as applicable, shall notify the

2007–10 I.R.B.

person in writing within 120 days of the
filing if the person will be granted reasonable cause relief or if additional time is
required to make the determination. The
120-day period runs from the date that the
IRS notifies the person that its request has
been received. Once this period begins,
the person shall be deemed to have established reasonable cause if it is not again
notified within 120 days.
Effective Dates
With the exception of the special boot
rules described in section C of this preamble, these temporary regulations apply
to GRAs filed with respect to transfers of
stock or securities occurring on or after
March 7, 2007. The boot rules described in
section C of this preamble apply to GRAs
filed with respect to transfers of stock or
securities occurring on or after 180 days
after February 5, 2007. However, GRAs
that are filed after March 7, 2007 in connection with transactions entered into pursuant to a contract that was binding before
February 5, 2007 are not subject to these
regulations, but taxpayers may elect to apply the rules of these regulations to such
a GRA. For all open years, taxpayers may
apply rules of these regulations that were
not already effective under §1.367(a)–8 to
GRAs filed before March 7, 2007. Similar effective date rules are provided for
those transfers discussed in section E of
this preamble (regarding a U.S. transferor
that goes out of existence in a transaction
giving rise to a GRA).
Special Analyses
It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that 5 U.S.C. 553(b) and (d) do not apply
to these regulations. For applicability of
the Regulatory Flexibility Act, please refer to the cross-referenced notice of proposed rulemaking published elsewhere in
this Bulletin. Pursuant to section 7805(f)
of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact
on small business.

2007–10 I.R.B.

Request for Comments
The IRS and Treasury Department
are considering issuing subsequent public guidance to address additional issues
under section 367(a). Accordingly, comments are requested regarding the application of §1.367(a)–8, including whether
other transactions should be excepted
from being treated as triggering events
pursuant to rules similar to those contained in the temporary regulations. For
example, comments are requested as to
the most appropriate treatment of divisive reorganizations qualifying under
section 368(a)(1)(D) or (G), involving the
U.S. transferor corporation, the transferee
foreign corporation, and the transferred
corporation. Comments also are requested
on how a GRA is affected by a subsequent
transaction to which section 304 applies
involving transferee foreign corporation
stock or transferred corporation stock.
The IRS and Treasury Department believe
that the rules in the temporary regulations
generally deal with many transactions to
which section 304 applies but request specific comments on any issues raised.
In addition, the IRS and Treasury Department request comments on the rule
in §1.367(a)–8T(b)(3)(iii), which imposes
interest on the additional tax, if any, that is
required to be paid as a result of a triggering event. Specifically, comments are requested on whether interest should be imposed even when no additional tax is ultimately due as a result of a triggering event
because, for example, a taxpayer has sufficient net operating losses to offset the
tax that would otherwise be due as a result of a triggering event. If an interest charge is not required in such a case,
a taxpayer may be viewed as inappropriately benefiting from deferring the realized
but unrecognized gain on the initial transfer until a later year. However, there are
other instances where the current regulations clearly permit such a benefit (for example, under §1.367(a)–8(h)(1)(i) in certain taxable dispositions of the stock of the
transferee foreign corporation).
As described in section B.1.a of this
preamble, comments are requested on
whether a GRA should not be triggered,
if certain conditions similar to those provided in §1.367(a)–3T(e) are met, when
a U.S. transferor is acquired by a foreign
corporation in an asset reorganization.

643

Specifically, the IRS and Treasury Department request comments on how to
reconcile the terms of the GRA that would
be filed pursuant to §1.367(a)–3T(e) with
the terms of a new GRA that would be
filed to avoid triggering the original GRA.
For example, the transferee foreign corporation under the outstanding GRA (and
under the new GRA filed to avoid triggering the outstanding GRA) would be the
transferred corporation with respect to the
GRA filed pursuant to §1.367(a)–3T(e).
Finally, and as described in section G.2
of this preamble, the IRS and Treasury
Department are studying to what extent
the GRA termination rule should apply
when the transferee foreign corporation
liquidates in a transaction described in
section 332 but also recognizes gain under
section 336 because of a minority shareholder. Comments are requested on how
the termination rule should address such
a transaction, taking into consideration
potentially different results depending on
whether the minority shareholder is also
subject to a GRA or is, for example, instead a foreign person who was issued
transferee foreign corporation stock after
the initial transfer.
For information on how to submit comments or request a public hearing, see the
section “Comments and Requests for a
Public Hearing,” set forth in the notice of
proposed rulemaking published elsewhere
in this issue of the Bulletin.
Drafting Information
The principal author of these temporary
regulations is Daniel McCall of the Office of Associate Chief Counsel (International). However, other personnel from the
IRS and the Treasury Department participated in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding new entries to
read as follows:
Authority: 26 U.S.C. 7805* * *
Section 1.367(a)–3T(e) also issued under 367(a) and (b).* * *

March 5, 2007

Section 1.367(a)–8T also issued under
367(a) and (b).* * *

Par. 2. For each entry in the table in the
“Section” column, remove the language in

the “Remove” column and add the language in the “Add” column in its place.

Section

Remove

Add

1.367(a)–3(d)(3), Example 1(ii), fourth
sentence

§1.367(a)–8(e)

§1.367(a)–8T(d)(1)

1.367(a)–3(d)(3), Example 1(ii), fourth
sentence

§1.367(a)–8(b)(1)(vii)

§1.367(a)–8T(b)(1)(vii)

1.367(a)–3(d)(3), Example 1(ii), fifth
sentence

§1.367(a)–8(b)(1)(vii)

§1.367(a)–8T(b)(1)(vii)

1.367(a)–3(d)(3), Example 1A(ii), first
sentence

§1.367(a)–8(a)(3)

§1.367(a)–8T(a)(3)

1.367(a)–3(d)(3), Example 4(i), first
sentence

§1.367(a)–8(e)(3)(i)

§1.367(a)–8T(d)(2)

1.367(a)–3(d)(3), Example 4(ii), first
sentence

§1.367(a)–8(e)(3)(i)

§1.367(a)–8T(d)(2)

1.367(a)–3(d)(3), Example 4(ii), second
sentence

§1.367(a)–8(h)(2), because A and W filed
a consolidated Federal income tax return
prior to the transaction,

§1.367(a)–8T(g)(2), because A owned
an amount of stock in W described in
section 1504(a)(2) immediately before
the transaction,

1.367(a)–3(d)(3), Example 6(ii), last
sentence

§1.367(a)–8(e)(3)(i)

§1.367(a)–8T(d)(2)

1.367(a)–3(d)(3), Example 7A(ii), last
sentence

§1.367(a)–8(b)(5)

§1.367(a)–8T(b)(5)

paragraph (d)(3), Example 7A(ii), last
sentence

and (e)(3)(i).

and V satisfies the requirements contained
in §1.367(a)–8T(e)(1)(iii).

1.367(a)–3(d)(3), Example 8(ii), second
to last sentence

§1.367(a)–8(e)(3)(i)

§1.367(a)–8T(d)(2)

1.367(a)–3(d)(3), Example 11(ii), sixth
sentence

§1.367(a)–8(e)

§1.367(a)–8T(d)(1)

1.367(a)–3(d)(3), Example 11(ii), sixth
sentence

§1.367(a)–8(b)(1)(vii)

§1.367(a)–8T(b)(1)(vii)

1.367(a)–3(e)(1)(A), first sentence

(e)

(g)

1.367(a)–3(e)(1)(F), third sentence

(g)

(j)

1.367(a)–3(e)(2), first sentence

(e)(1) and (g)

(g)(1) and (j)

1.367(a)–3(e)(2), second sentence

(e)(2)

(g)(2)

1.367(a)–3(e)(2)(G), first sentence

(e)(1)(G)

(g)(1)(G)

1.367(a)–3(g)(1), first sentence

(g)(2)

(j)(2)

1.367(a)–3(g)(2)(i), first sentence

(g)(2)(iii), (g)(2)(iv)

(j)(2)(iii), (j)(2)(iv)

1.367(a)–3(g)(2)(ii), first sentence

(g)(2)(iii) or (iv)

(j)(2)(iii) or (iv)

1.367(a)–3(g)(2)(ii), fourth sentence

§1.367(a)–3(f)

§1.367(a)–3(h)

1.367(a)–3(g)(2)(iii), first sentence

(g)(2)(ii)

(j)(2)(ii)

1.367(a)–3(g)(2)(iv), first sentence

(g)(2)(i) and (ii)

(j)(2)(i) and (ii)

1.367(b)–4(b)(1)(iii), Example 4(i), last
sentence

§1.367(a)–8(f)(2)

§1.367(a)–3T(e)

March 5, 2007

644

2007–10 I.R.B.

Par. 3. Section 1.367(a)–3 is amended
as follows:
1. The second sentence of paragraph (a)
is revised.
2. The first sentence of paragraph
(d)(2)(iii) is revised.
3. Paragraph (d)(2)(iv) is revised.
4. The title and introductory text of
paragraph (d)(2)(v) is revised.
5. The last two sentences of paragraph
(d)(3), Example 1A(ii) are revised.
6. The last two sentences of paragraph
(d)(3), Example 5A(ii) are revised.
7. The first and second sentences of
paragraph (d)(3), Example 7(ii) are revised.
8. The third sentence of paragraph
(d)(3), Example 7A(ii) is revised.
9. The last sentence of paragraph
(d)(3), Example 9(ii) is revised.
10. The title of paragraph (d)(3), Example 10 is revised.
11. The third sentence of paragraph
(d)(3), Example 12(ii) is revised.
12. Redesignating paragraphs (e), (f),
and (g) as paragraphs (g), (h), and (j), respectively.
13. Adding new paragraphs (e) and (i).
The revisions and addition read as follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
(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 exceptions set
forth in paragraph (b) of this section (regarding transfers of foreign stock or securities), paragraph (c) of this section (regarding transfers of domestic stock or securities), or paragraph (e) of this section
(regarding transfers of stock or securities
in a section 361 exchange) applies. * * *
*****
(d) * * *
(2)(iii) * * * For purposes of determining the amount of gain that a U.S.
person is required to include in income
as a result of a triggering event, see
§1.367(a)–8T(b)(3)(i) and (d).

2007–10 I.R.B.

(iv) * * * 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 §1.367(a)–3 and §1.367(a)–8, including, for example, as an additional triggering event an indirect disposition of the
transferred stock or securities. For example, in the case of a triangular section
368(a)(1)(B) reorganization described in
paragraph (d)(1)(iii)(A) of this section,
a triggering event shall include an indirect disposition of the transferred stock or
securities by the transferee foreign corporation, such as a disposition of the stock
of the acquiring corporation (either foreign or domestic) by the transferee foreign
corporation. In the case of a triangular
section 368(a)(1)(B) reorganization described in paragraph (d)(1)(iii)(B) of this
section, a disposition of the stock of the
acquiring corporation by the domestic
issuing corporation in a taxable transaction shall, for example, terminate the gain
recognition agreement if the principles
of §1.367(a)–8T(g)(1)(i)(A) and (B) are
satisfied. See Examples 5 and 5A of this
section.
(v) Determination of whether substantially all of the transferred corporation’s
assets are disposed of. For purposes of
applying §1.367(a)–8T(d)(2) to determine
whether substantially all of the assets of
the transferred corporation have been disposed of, 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)—
*****
(3) * * *
Example 1A. * * *
(ii) * * * If A leaves the P group, the gain recognition agreement would be triggered pursuant to
§1.367(a)–8T(d)(4), unless the exception provided
under §1.367(a)–8T(e)(8) applies.
*****
Example 5A * * *
(ii) * * * If Y sold substantially all of its assets (within the meaning of section 368(a)(1)(C)),
the gain recognition agreement would be terminated because U owned an amount of stock in Y
described in section 1504(a)(2) immediately before
the transaction and Y is a domestic corporation. See
§1.367(a)–8T(g)(2). In addition, if F disposed of the
stock of S in a taxable transaction the gain recognition agreement would be terminated if the principles
of §1.367(a)–8T(g)(1)(i)(A) and (B) are satisfied.
*****
Example 7. * * *

645

(ii) * * * The disposition by R, the transferred
corporation, of substantially all of its assets would
terminate the gain recognition agreement if the
assets were disposed of in a taxable transaction
because V owned an amount of stock in Z described in section 1504(a)(2) immediately before the
transaction, and R is a domestic corporation. See
§1.367(a)–8T(g)(2). Because the assets were transferred in an exchange to which section 351 applies,
such transfer does not trigger the gain recognition
agreement if V complies with the requirements contained in §1.367(a)–8T(e)(1)(iii). * * *
Example 7A. * * *
(ii) * * * Thus, the gain recognition agreement
would terminate because V owned an amount of stock
in Z described in section 1504(a)(2) immediately before the transaction, and R is a domestic corporation.
See §1.367(a)–8T(g)(2).* * *
*****
Example 9. * * *
(ii) * * * To determine whether there is a triggering event under §1.367(a)–8T(d)(2), both the Business A assets in M and the Business B assets in R
must be considered.
Example 10. Concurrent application of asset
transfer and indirect stock transfer rules in section
368(a)(1)(A)/(a)(2)(D) reorganization—(i) Facts.
***
*****
Example 12. * * *
(ii) * * * E’s transfer of its N stock could qualify for nonrecognition treatment if D satisfies the requirements in §1.367(a)–3T(e).* * *

*****
(e) [Reserved]. For further guidance,
see §1.367(a)–3T(e).
(f) [Reserved]. For further guidance,
see §1.367(a)–3T(f).
*****
(i) [Reserved].
*****
Par. 4. Section 1.367(a)–3T is added to
read as follows:
§1.367(a)–3T Treatment of transfers of
stock or securities to foreign corporations
(temporary).
(a) through (d) [Reserved]. For further
guidance, see §1.367(a)–3(a) through (d).
(e) Transfers by a domestic corporation
to a foreign corporation in a section 361
exchange—(1) General rule. Notwithstanding paragraphs (b) and (c) of this
section, if the U.S. transferor is a domestic
corporation that transfers stock or securities to a foreign corporation in a section
361 exchange that would otherwise be
subject to section 367(a)(1) under paragraph (a) of this section, such transfer shall
not be subject to section 367(a)(1) if—

March 5, 2007

(i) The conditions set forth in the second sentence of section 367(a)(5) and any
regulations under that section have been
satisfied, such that, for example, the U.S.
transferor is controlled (within the meaning of section 368(c)) by 5 or fewer domestic corporations and appropriate basis
adjustments are made;
(ii) In the case of transferred property
that is stock or securities of a domestic corporation, the conditions set forth in paragraph (c) of this section are satisfied;
(iii) All domestic corporate shareholders of the U.S. transferor immediately
before the transaction that own 5 percent
or more (applying the attribution rules
of section 318, as modified by section
958(b)) of the total voting power or the
total fair market value of the stock of the
transferee foreign corporation immediately after the transaction enter into gain
recognition agreements as provided in
§1.367(a)–8T with respect to their pro
rata share (determined by the relative fair
market value of the U.S. transferor stock
or securities owned) of the gain that was
realized but not recognized on the transfer
of the stock or securities of the transferred
corporation that, in addition to the terms of
§1.367(a)–8T(b), designate such domestic
corporate shareholders as U.S. transferors
for purposes of paragraphs (b) and (c) of
this section and §1.367(a)–8T; and
(iv) All domestic corporate shareholders that enter into gain recognition agreements pursuant to paragraph (e)(1)(iii) of
this section make the election described in
§1.367(a)–8T(b)(1)(vii).
(2) Certain triangular asset reorganizations. If a transaction described in paragraph (e)(1) of this section qualifies as a
triangular asset reorganization described in
§1.358–6(b)(2)(i) through (iii), or in sections 368(a)(1)(G) and (a)(2)(D), the principles of §1.367(a)–3(d)(2)(iv) shall apply
with respect to any gain recognition agreements filed in connection with such transaction.
(3) Example. The provisions of paragraph (e)(1) of this section are illustrated
in the following example:
Example. (i) Facts. US1 and US2, domestic corporations, own 60% and 40%, respectively, of the
fair market value of UST, also a domestic corporation. US1 and US2 are not members of the same
consolidated group and are unrelated. UST owns
100% of FC, a foreign corporation. In year 1, UST
transfers 100% of the stock of FC to FA, a foreign
corporation, in a reorganization described in section

March 5, 2007

368(a)(1)(A) after which US1 and US2 own 6% and
4%, respectively, of the stock of FA. At the time of
the initial transfer, the section 1248 amount with respect to the FC stock is $0. The notice requirement
under §1.367(b)–1(c) is satisfied. Section 7874 does
not apply to FA’s acquisition of the stock of FC. US1
and US2 satisfy the conditions set forth in the second sentence of section 367(a)(5), including making
appropriate basis adjustments. Pursuant to paragraph
(e)(1) of this section, US1 enters into a gain recognition agreement to recognize its pro rata share of the
gain realized but not recognized on UST’s transfer
of the stock of FC to FA, designates itself as a U.S.
transferor for purposes of paragraph (b) of this section
and §1.367(a)–8T, and makes the election described
in §1.367(a)–8T(b)(1)(vii). US2 does not enter into
a gain recognition agreement with respect to its pro
rata share of the gain realized but not recognized on
UST’s transfer of the stock of FC to FA because US2
owns less than 5 percent of the stock of FA. In year
4, FA sells 30% of the FC stock for cash.
(ii) Result. Because the requirements of paragraph (e)(1)(i) through (iv) of this section are satisfied, the transfer of the FC stock by UST to FA
in the year 1 reorganization is not subject to section
367(a)(1). In addition, because FA partially disposes
of the stock of FC in year 4, US1 must recognize 30%
of its pro rata share of the gain realized but not recognized on the initial transfer of the FC stock to FA pursuant to §1.367(a)–8T(d)(1)(iii). The proportion of
gain recognized by US1 is determined by reference to
the relative fair market value of the UST stock owned
by US1 at the time of the initial transfer. Thus, US1
must include 18% of the gain realized, but not recognized, on the initial transfer (the 30% of the transferred property that was disposed of multiplied by the
amount of gain subject to the gain recognition agreement (corresponding to the 60% of the fair market
value of UST stock that US1 held immediately before
the initial transfer)), and pay any applicable interest.
(iii) Alternate facts. The facts are the same as
in paragraph (i) of this Example, except that US1
and US2 are members of a consolidated group in
which USP is the common parent. US2 is also a
5-percent transferee shareholder as a result of applying the attribution rules of section 318, as modified by section 958(b). The result is the same as
in paragraph (ii) of this Example, except that under
§1.367(a)–8T(a)(3)(i)(A) USP files gain recognition
agreements on behalf of both US1 and US2. Thus,
US1 and US2 must include in income in year 4 18%
and 12%, respectively, of the gain realized, but not
recognized, on the initial transfer (the 30% of the
transferred property that was disposed of multiplied
by the amount of gain subject to the gain recognition
agreement (corresponding to the 60% and 40% of the
fair market value of UST stock that US1 and US2, respectively, held immediately before the initial transfer)), and pay any applicable interest.

(f) Effective date—(1) General rule.
The rules of this §1.367(a)–3T(e) apply to
transfers of stock or securities occurring
on or after March 7, 2007. However, these
rules do not apply to transfers of stock
or securities occurring on or after March
7, 2007, if such transfer was entered into
pursuant to a written agreement which

646

was (subject to customary conditions)
binding before February 5, 2007, and at
all times thereafter. Solely for purposes
of this paragraph (f), a transfer described
in the preceding sentence shall be deemed
to be a transfer occurring before March
7, 2007. For matters covered in this section for periods before March 7, 2007
but on or after July 20, 1998, the rule of
§1.367(a)–8(f)(2)(i) (see 26 CFR part 1,
revised April 1, 2006) applies.
(2) Transfers before effective date—(i)
General rule. Taxpayers may apply the
rules of §1.367(a)–3T(e) to transfers before March 7, 2007 and after July 20, 1998,
for all open taxable years ending on or after
July 20, 1998. This paragraph (f)(2)(i) applies only to rules in §1.367(a)–3T(e) that
were not already effective under the rules
of §1.367(a)–8(f)(2)(i).
(ii) Special filing rule. This paragraph
(f)(2)(ii) provides the time and manner
in which taxpayers may apply paragraph
(f)(2)(i) of this section. Notwithstanding
the rules provided in §1.367(a)–8T(a)(2),
all agreements, certifications, or other information related to the gain recognition
agreement that should have been filed on
or before March 7, 2007 with respect to
a transfer shall be treated as having been
timely filed, provided they are attached
to a Federal income tax return amending
the taxpayer’s Federal income tax return
for the taxable year in which they should
have been attached. The amended return
described in the preceding sentence must
be filed before August 6, 2007. A taxpayer
that wishes to apply paragraph (f)(2)(i) of
this section but that fails to meet the filing
requirement described in the preceding
sentence must request reasonable cause
relief as provided in §1.367(a)–8T(e)(10).
(3) Expiration. The applicability of this
section expires on or before February 1,
2010.
*****
Par. 5. Section 1.367(a)–8 is amended
by revising paragraphs (a) through (i) to
read as follows:
§1.367(a)–8 Gain recognition agreement
requirements.
(a) through (i) [Reserved]. For further
guidance, see §1.367(a)–8T(a) through
(h).
Par. 6. Section 1.367(a)–8T is added to
read as follows:

2007–10 I.R.B.

§1.367(a)–8T Gain recognition agreement
requirements (temporary).
(a) In general. This section specifies
the terms and conditions for an agreement to recognize gain entered into pursuant to §§1.367(a)–3(b) through (d) and
1.367(a)–3T(e) to qualify for nonrecognition treatment under section 367(a).
(1) Definitions. The following definitions apply for purposes of this section:
(i) Asset reorganization. Except as otherwise provided in this paragraph (a)(1)(i),
the term asset reorganization means a reorganization described in section 368(a)(1)
involving the transfer of assets by a corporation to another corporation pursuant to
section 361, except that such term shall include reorganizations described in section
368(a)(1)(D) or (G) only if the requirements of section 354(b)(1)(A) and (B) are
met. For purposes of paragraphs (e)(3)(ii)
and (e)(3)(iii) of this section, the following reorganizations are excluded from the
term “asset reorganization”:
(A) Triangular asset reorganizations
described in §1.358–6(b)(2)(i) through
(iii) or in sections 368(a)(1)(G) and
(a)(2)(D). For rules applicable to triangular asset reorganizations described
in §1.358–6(b)(2)(i) through (iii) or in
sections 368(a)(1)(G) and (a)(2)(D), see
paragraph (e)(4) of this section.
(B) Asset reorganizations where, after
the reorganization, the same corporation
is both the transferee foreign corporation
(or successor transferee foreign corporation, as applicable) and the transferred corporation (or the successor transferred corporation, as applicable); for example, the
acquisition of the transferee foreign corporation’s assets by the transferred corporation in a reorganization described in section 368(a)(1). For rules applicable to certain upstream and downstream reorganizations involving the transferee foreign corporation and transferred corporation, see
paragraphs (e)(6) and (g)(3) of this section.
(ii) The term common parent means
a corporation that controls an affiliated
group of corporations that files its Federal
income tax returns on a consolidated basis.
(iii) The term consolidated group has
the meaning set forth in §1.1502–1(h).
(iv) The term disposition means any
transfer that would constitute a disposition for any purpose of the Internal Revenue Code and the regulations thereun-

2007–10 I.R.B.

der. It also includes an indirect disposition of the stock of the transferred corporation as described in §1.367(a)–3(d). It
does not, however, include a redemption
of stock under section 302(d) to the extent
the redemption is treated as a distribution
to which section 301(c)(1) applies.
(v) The term gain recognition agreement means an agreement described in
paragraph (b) of this section.
(vi) The term initial transfer means
a transfer in connection with which a
gain recognition agreement is filed in
connection with an exchange described
in §§1.367(a)–3(b) through (d) and
1.367(a)–3T(e).
(vii) The term nonrecognition transaction means any disposition of property in a
transaction in which gain or loss is not recognized in whole or in part for purposes of
subtitle A.
(viii) The term transferee foreign corporation means the foreign corporation the
stock of which is received in an exchange
described in section 367(a) by a U.S. transferor.
(ix) Transferred corporation. Other
than in the case of an indirect stock
transfer, the term transferred corporation
means the corporation the stock or securities of which are transferred by a U.S.
transferor to a foreign corporation in an
exchange described in section 367(a)(1).
In the case of an indirect stock transfer,
the term transferred corporation has the
meaning set forth in §1.367(a)–3(d)(2)(ii).
(x) The term triggering event means
an event described in paragraph (d) of
this section, except as provided in paragraphs (e) (exceptions to triggering events)
and (g) (terminations of gain recognition
agreements) of this section.
(xi) The term U.S. transferor
means a U.S. person (as defined in
§1.367(a)–1T(d)(1)) that transfers stock
or securities of the transferred corporation in exchange for stock or securities
of the transferee foreign corporation in
an exchange described in section 367(a).
For the application of the rules of this
section to indirect transfers involving
partnerships and interests therein, see
§1.367(a)–1T(c)(3).
(2) Filing requirements for gain recognition agreements. A U.S. transferor’s
gain recognition agreement must be attached to, and filed by the due date (including extensions) of, the U.S. transferor’s in-

647

come tax return for the taxable year that
includes the date of the initial transfer, except that if the U.S. transferor is a member
of a consolidated group for the taxable year
in which the transfer was made, the agreement must be attached to the consolidated
group’s tax return. If a new gain recognition agreement is entered into pursuant to
an exception in paragraph (e) of this section, the agreement must be attached to,
and filed by the due date (including extensions) of, the applicable income tax return
for the taxable year that includes the date
of the triggering event. If the timeliness
requirement of this paragraph (a)(2) is not
satisfied, see paragraph (e)(10) of this section.
(3) Who must sign—(i) General rule.
The gain recognition agreement must be
signed under penalties of perjury by the
appropriate party corresponding to the following categories of U.S. transferor. A
gain recognition agreement may also be
signed by an agent authorized to do so under a general or specific power of attorney.
(A) In the case of a corporate U.S.
transferor, a responsible officer, except
that if the U.S. transferor (or successor
U.S. transferor designated in a new gain
recognition agreement entered into under
paragraph (e) of this section) is a member,
but not the common parent of a consolidated group for the taxable year in which
the transfer was made (or for the taxable
year in which a new gain recognition
agreement is entered into under paragraph
(e) of this section) the agreement must be
entered into by the common parent and
signed by a responsible officer of such
common parent.
(B) In the case of an individual U.S.
transferor (including a partner who is
treated as a U.S. transferor by virtue of
§1.367(a)–1T(c)(3)), the individual.
(C) In the case of a trust or estate, a
trustee, executor, or equivalent fiduciary.
(D) In the case of a bankruptcy case under Title 11, United States Code, a debtor
in possession or trustee.
(ii) Signature requirement. When a
gain recognition agreement, certification,
or other information is required under
this section to be attached to and filed by
the due date (including extensions) of a
U.S. Federal income tax return and signed
under penalties of perjury by the person
who signs the return, the attachment and
filing of an unsigned copy is considered

March 5, 2007

to satisfy such requirement, provided the
taxpayer retains the original in its records
in the manner specified by §1.6001–1(e).
(b) Gain recognition agreement—(1)
Contents. The gain recognition agreement
must set forth the following information,
with the heading “GAIN RECOGNITION
AGREEMENT UNDER §1.367(a)–8T”
and with paragraphs labeled to correspond
with the numbers set forth as follows:
(i) A statement that the document submitted constitutes the U.S. 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 U.S. 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 U.S.
transferor’s tax returns for the five full taxable years following the year of the initial
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 U.S.
transferor will be informed of any triggering events.
(vii) A statement as to whether, if all or
a portion of the gain recognition agreement
is triggered under paragraph (d) 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.
(2) Description of property transferred.
(i) The agreement shall include a description of each property transferred by the
U.S. transferor, an estimate of the fair market value of the property as of the date
of the initial 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
U.S. transferor.
(ii) The U.S. transferor must provide the
following information:
(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

March 5, 2007

any) represents of the total stock outstanding of the transferred 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
pursuant to §1.367(a)–3T(e), 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 under
that paragraph.
(D) If the transferred corporation is a
domestic corporation, the taxpayer identification number of the transferred corporation, together with a statement describing
whether, and if so, how, section 7874 applies to the transfer, and a statement that all
of the requirements of §1.367(a)–3(c)(1)
are satisfied.
(E) If the transferred corporation is
a foreign corporation, a statement as
to whether the U.S. transferor was a
section 1248 shareholder, as defined in
§1.367(b)–2(b), of the transferred corporation immediately before the exchange,
and, if so, a statement as to whether the
U.S. transferor is a section 1248 shareholder with respect to the transferee
foreign corporation stock received, and
whether any reporting requirements or
other rules contained in regulations under
section 367(b) are applicable, and, if so,
whether they have been satisfied.
(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
through 1.367(a)–6T).
(3) Terms of agreement—(i) General
rule. If before the close of the fifth full
taxable year (not less than 60 months) fol-

648

lowing the close of the taxable year of
the initial transfer, there is a triggering
event, then, unless an election is made under paragraph (b)(1)(vii) of this section,
by the 90th day thereafter the U.S. transferor must file an amended Federal income
tax return for the year of the initial 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 triggering event 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 taxable year 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 in income the gain
realized, but not recognized, on the initial
transfer, 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.
(iii) Reporting of interest and gain. If
additional tax is required to be paid pursuant to paragraph (b)(3)(i) of this section, 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 U.S. transferor’s Federal 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, a
taxpayer should include the amount of gain
as taxable income on its Federal income
tax return (together with other income or
loss items) and include the amount of interest in its payment (or reduce the amount of
any refund due by the amount of the interest). A taxpayer must also attach to its Federal income tax return a separate schedule with the heading “Calculation of Section 367 Tax and Interest,” on which the
amount of tax attributable to the gain and
the interest required to be paid under this
section are separately identified and calculated.
(iv) Basis adjustments—(A) Transferee
foreign corporation. If a U.S. transferor is

2007–10 I.R.B.

required to recognize gain under this section as a result of a triggering event, then
the transferee foreign corporation’s basis
in the transferred stock or securities 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.
(B) U.S. transferor. If a U.S. transferor
is required to recognize gain as a result of a
triggering event, then the U.S. transferor’s
basis in the stock of the transferee foreign
corporation received (or deemed received)
in the initial transfer shall be increased by
the amount of gain required to be recognized (as of the date of the initial transfer)
(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. In no case, however, shall the
transferred corporation’s net asset basis be
increased as a result of the U.S. transferor
recognizing gain under this section as a result of a triggering event.
(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 at the time of the transfer is $0. In the
exchange, D receives 20 percent of the voting stock
of F. The transaction is subject to both sections 367(a)
and (b). See §§1.367(a)–3(b) and 1.367(b)–1(a). All
of the requirements of §1.367(a)–3(b)(1) are satisfied, and D enters into a gain recognition agreement
to qualify for nonrecognition treatment and does not
make the election contained in paragraph (b)(1)(vii)
of this section. Two years after the initial transfer,
F transfers all of the S stock to F1, a foreign corporation, in an exchange to which section 351 applies,
and D complies with the requirements of paragraph
(e)(1)(ii) of this section. Four 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 and complies
with the requirements of paragraph (e)(1)(i) of this
section. D complies with the notice requirement
under §1.367(b)–1(c) for each transaction subject
to section 367(b). Because D complies with the
requirements of paragraph (e) for each transaction
that would otherwise be a triggering event, D is not
required to recognize the gain that was realized, but
not recognized, on the initial transfer. Five years
after the initial transfer, S disposes of substantially
all (as described in paragraph (d)(2) of this section)

2007–10 I.R.B.

of its assets, 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 the triggering event
and paragraph (b)(3)(iv) of this section, the amount
of gain required to be recognized as a result of S’s
disposition of substantially all its assets (but not the
tax or interest required to be paid on such amount) is
reflected by an increased basis (as of the date of the
initial transfer) in D’s partnership interest, the partnership’s interest in the 20 percent voting stock of F,
F‘s stock of F1, and F1’s 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 gain
recognition agreement, a waiver of the period of limitation on assessment of tax
upon the gain realized on the initial 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 initial transfer. The waiver shall also contain 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. 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
initial transfer a certification that there has
not been a triggering event, and a description of any exception under paragraph
(e) of this section if such an exception
is relied upon for the position that there
has not been a triggering event. The U.S.
transferor must include with its annual
certification a statement describing any
dispositions of assets by the transferred
corporation that are not made in the ordinary course of business. The annual
certification pursuant to this paragraph
(b)(5) 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.
(c) Use of security. The U.S. transferor may be required to furnish a bond
or other security that satisfies the require-

649

ments of §301.7101–1 of this chapter if the
Area Director, Field Examination, Small
Business/Self Employed or the Director
of Field Operations, Large and Mid-Size
Business (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 generally will be required
only if the stock or securities transferred
are a principal asset of the U.S. transferor
and the Director has reason to believe that
a disposition of the stock or securities may
be contemplated.
(d) Triggering events. If there is a triggering event described in this paragraph
(d) during the term of the gain recognition agreement, the U.S. transferor must
include in income the gain realized, but
not recognized, upon the initial transfer as provided in paragraph (b)(3)(i) of
this section. In addition, the U.S. transferor must pay any interest required by
paragraph (b)(3)(iii) of this section. See
§1.367(a)–3(d)(2)(iv) for additional triggering events when a gain recognition
agreement has been filed in connection
with an indirect stock transfer. Except to
the extent provided in paragraphs (e) and
(g) of this section, if any of the following
events occur during the term of the gain
recognition agreement, it shall constitute
a triggering event:
(1) Disposition of stock or securities
of the transferred corporation—(i) In general. A disposition, in whole or in part, by
the transferee foreign corporation (or any
other person) of the transferred stock or securities received by the transferee foreign
corporation in the initial transfer. For purposes of this section, a reference to transferred stock or securities shall also include
stock or securities of the transferred corporation the basis of which is determined
(directly or indirectly) in whole or in part,
by reference to the basis of the stock or securities transferred in the initial transfer. A
disposition of all or a portion of the stock
or securities of the transferred corporation
by installment sale is treated as a disposition of the stock or securities in the year of
the installment sale.
(ii) Example. The provisions of this
paragraph (d)(1)(i) are illustrated by the
following example:
Example. Interaction between trigger of gain
recognition agreement and subpart F rules—(i)
Facts. USP, a domestic corporation, owns all of

March 5, 2007

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; the stock of CFC2 has a fair market value
of $100. In a transaction described in sections 351
and 368(a)(1)(B), USP transfers the stock of CFC2
to CFC1 in exchange for additional stock of CFC1
with a basis of $50. 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
gain recognition agreement for $50 under this section. No election under paragraph (b)(1)(vii) of this
section is made. USP also complies with the notice
requirement under §1.367(b)–1(c). Two years after
the initial transfer, CFC1 sells the stock of CFC2
for $120. At the time of the sale, the section 1248
amount with respect to the CFC2 stock continues
to be $30. The $70 of gain recognized on the sale
of CFC2 stock would give rise to a $70 subpart F
inclusion to USP under section 951(a)(1)(A).
(ii) Result—(A) Trigger of gain recognition
agreement with no election. CFC1’s sale of CFC2
stock is a triggering event. As a result, USP must
amend its return for the year of the initial transfer and
include $50 in income (as well as pay any applicable
interest), $30 of which will be recharacterized as a
dividend pursuant to section 1248. Under paragraph
(b)(3)(iv) of this section, as of the date of the initial
transfer, CFC1 has a basis of $100 in its CFC2 stock,
and USP has a basis in its CFC1 stock of $100. As
a result of the sale of CFC2 stock by CFC1, USP
will have a $20 subpart F inclusion under section
951(a)(1)(A).
(B) Trigger of gain recognition agreement with
election. Assume the same facts as in paragraph (i)
of this Example, except that USP 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 the initial transfer. The result is the
same as above, except that USP will include the $50
of gain on its tax return for the year of the triggering
event, together with interest. For purposes of determining the amount of the $50 gain characterized as a
dividend pursuant to section 1248, if any, of the $50
inclusion, USP will take into account the section 1248
amount of CFC2 at the time of the disposition in the
year of the triggering event.

(iii) Partial dispositions. If the transferee foreign corporation or any other person disposes of only a portion of the stock
or securities of the transferred corporation,
then the U.S. transferor is required to recognize only a proportionate amount of the
gain realized, but not recognized, upon the
initial transfer. The proportion required
to be recognized shall be determined by
reference to the fair market value of the
transferred stock or securities disposed of
and the total fair market value of the transferred stock or securities immediately before the disposition.
(2) Disposition of substantially all
of the transferred corporation’s assets.
A disposition of substantially all of the

March 5, 2007

transferred corporation’s assets (including
stock in a subsidiary corporation or an
interest in a partnership) by the transferred
corporation or any other person. Solely
for purposes of this section, the term substantially all has the meaning provided
under section 368(a)(1)(C). Accordingly,
the determination of whether substantially
all of the transferred corporation’s assets
have been disposed of shall be made under all the facts and circumstances. For
purposes of this paragraph (d)(2), dispositions of stock in connection with an asset
reorganization of a corporation all or a
portion the stock of which is owned by
the transferred corporation, or a liquidation of a corporation the stock of which is
owned by the transferred corporation in an
amount satisfying the requirements of section 1504(a)(2) and to which sections 332
and 337 apply, shall not be taken into account. If the initial transfer was an indirect
stock transfer, see §1.367(a)–3(d)(2)(v).
If the transferred corporation is a domestic
corporation, see paragraph (g)(2) of this
section. For an example of when a disposition of substantially all the transferred
corporation’s assets by a person other than
the transferred corporation is a triggering event under this paragraph (d)(2), see
paragraph (e)(6)(ii) of this section.
(3) Disposition of the stock of the transferee foreign corporation—(i) General
rule. A disposition in whole or in part,
by the U.S. transferor of the stock of the
transferee foreign corporation that is received (or deemed received) in the initial
transfer. For purposes of this section, a
reference to stock described in the preceding sentence shall also include stock of the
transferee foreign corporation the basis of
which is determined, directly or indirectly,
in whole or in part, by reference to the
basis of the stock of the transferee foreign
corporation that is received (or deemed
received) in the initial transfer.
(ii) Partial dispositions. If the U.S.
transferor disposes of only a portion of the
stock of the transferee foreign corporation
that is received (or deemed received) in the
initial transfer, then the U.S. transferor is
required to recognize only a proportionate
amount of the gain realized, but not recognized, upon the initial transfer. The proportion required to be recognized shall be
determined by reference to the fair market
value of the transferee foreign corporation
stock disposed of and the total fair market

650

value of the transferee foreign corporation
stock immediately before the disposition.
(4) Deconsolidation. A U.S. transferor
that is a member of a consolidated group
ceases to be a member of the consolidated
group, other than by reason of an acquisition of the assets of the U.S. transferor in
a transaction to which section 381(a) applies, or by reason of joining a new consolidated group as part of the same transaction. However, in the case of a transaction
to which section 381(a) applies, see paragraph (d)(3) of this section (providing that
a triggering event includes a disposition of
the stock of the transferee foreign corporation).
(5) Consolidation. A U.S. transferor
becomes a member of a consolidated
group.
(6) Individual U.S. transferor becomes
a non-citizen nonresident. A U.S. transferor that is an individual loses U.S. citizenship, or a U.S. transferor that is a longterm resident ceases to be taxed as a lawful
permanent resident (as defined in section
877(e)(2)). Immediately before 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. No additional inclusion
is required under section 877 with respect
to the transferred stock or securities, 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.
(7) Death of an individual; trust or estate goes out of existence. An individual
U.S. transferor dies, or a U.S. transferor
that is a trust or estate goes out of existence.
(8) Failure to comply. The failure to
comply in any material respect with the requirements of this section or with the terms
of a gain recognition agreement (for example, a failure to file an annual certification
or Form 8838). Such a material failure to
comply shall extend the period for assessment of tax until three years after the date
on which the Director of Field Operations
or Area Director receives actual notice of
the failure to comply.
(e) Exceptions. Notwithstanding paragraph (d) of this section, the following events shall not constitute triggering
events:

2007–10 I.R.B.

(1) Certain nonrecognition transactions—(i) Dispositions of stock of the
transferee foreign corporation by the
U.S. transferor—(A) Transfers to a corporation or partnership. Except to the
extent provided in paragraph (g)(1)(iv)
of this section, a disposition of stock of
the transferee foreign corporation by the
U.S. transferor in an exchange to which
section 351, 354 (but only in a reorganization described in section 368(a)(1)(B)),
or 721 applies, will not be a triggering
event under paragraph (d)(3) of this section, and the original gain recognition
agreement shall terminate without further
effect, if the U.S. transferor complies with
requirements similar to those contained in
paragraph (e)(1)(ii) of this section, providing for notice and an agreement to
recognize gain in the case of a direct or
indirect disposition of the stock previously
held by the U.S. transferor. See paragraph
(e)(3)(i) of this section for dispositions of
the transferee foreign corporation stock in
certain asset reorganizations.
(B) Liquidations of the U.S. transferor
under sections 332 and 337. The disposition of the transferee foreign corporation stock pursuant to a liquidation of the
U.S. transferor under sections 332 and 337
will not be a triggering event under paragraph (d)(3) of this section, and the original gain recognition agreement shall terminate without further effect, if the following
conditions are satisfied:
(1) The distributee is a domestic corporation described in section 332(b)(1).
(2) The domestic distributee corporation (successor U.S. transferor) enters into
a new gain recognition agreement pursuant
to which it agrees to recognize gain (during the remaining term of the original gain
recognition agreement), with respect to the
initial transfer, modified by substituting
the successor U.S. transferor in place of
the original U.S. transferor, and agreeing
to treat the successor U.S. transferor as the
original U.S. transferor for purposes of this
section. If, however, in connection with
a liquidation described in section 332, the
U.S. transferor recognizes gain under section 336 with respect to a portion of the
stock of the transferee foreign corporation,
and the conditions described in paragraph
(g)(1) of this section are satisfied, the new
gain recognition agreement that the successor U.S. transferor enters into shall reflect the gain realized, but not recognized,

2007–10 I.R.B.

on the initial transfer (subject to adjustment for prior partial dispositions) less that
proportion corresponding to gain recognized under section 336. The proportion
is determined by reference to the relative
fair market values of the transferee foreign
corporation stock received (or deemed received) in the initial transfer on which the
U.S. transferor recognized gain under section 336 and the total fair market value of
the transferee foreign corporation stock received (or deemed received) by the U.S.
transferor in the initial transfer that is distributed by the U.S. transferor in the liquidation.
(3) The successor U.S. transferor
makes the election described in paragraph (b)(1)(vii) of this section. However,
if the U.S. transferor was a member of
a consolidated group in the year of the
initial transfer, and the successor U.S.
transferor is also a member of the original consolidated group immediately after
the liquidation, no such election must be
made.
(4) The successor U.S. transferor provides with its next annual certification (described in paragraph (b)(5) of this section)
the new gain recognition agreement, a notice of the liquidation, and Form 8838 to
extend the period for assessment of the tax
on the initial transfer to a date not earlier
than the eighth full taxable year following
the taxable year of the initial transfer.
(ii) Transfers of stock or securities
of the transferred corporation by the
transferee foreign corporation to a corporation or partnership. Except to the
extent provided in paragraph (f)(1)(i) of
this section, a disposition of stock or
securities of the transferred corporation
by the transferee foreign corporation in
an exchange to which section 351, 354
(but only in a reorganization described
in section 368(a)(1)(B)), or 721 applies,
will not be a triggering event described
in paragraph (d)(1) of this section, and
the original gain recognition agreement
shall terminate without further effect, if
the following conditions are satisfied:
(A) 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 stock
or securities (or receives stock in a corporation that controls the corporation acquiring the transferred stock or securities in the

651

case of a triangular section 368(a)(1)(B)
reorganization).
(B) The U.S. transferor provides a notice of the transfer with its next annual
certification under paragraph (b)(5) of this
section, setting forth—
(1) A full description of the transfer;
(2) The applicable nonrecognition provision; and
(3) The name, address, and taxpayer
identification number (if any) of the new
transferee of the transferred stock or securities.
(C) The U.S. transferor provides with
its next annual certification a new gain
recognition agreement pursuant to which
it agrees to recognize gain (during the remaining term of the original gain recognition agreement) with respect to the initial
transfer, and in which it agrees that any of
the following events also constitutes a triggering event:
(1) A disposition of the stock or securities or partnership interest that the transferee foreign corporation received in exchange for the transferred stock or securities (other than in a disposition which itself
qualifies under the rules of paragraph (e) of
this section).
(2) The corporation or partnership that
acquired the transferred stock or securities
disposes of such property (other than in a
disposition which itself qualifies under the
rules of paragraph (e) of this section).
(3) Any other disposition that has the effect of an indirect disposition of the transferred stock or securities.
(iii) Transfers of the transferred corporation’s assets to a corporation or partnership. Except to the extent provided in
paragraph (f)(1)(ii) of this section, a disposition of substantially all of the transferred
corporation’s assets by the transferred corporation in an exchange to which section
351, 354 (but only in a reorganization
described in section 368(a)(1)(B)—for
example, where stock in a subsidiary corporation comprises substantially all of the
transferred corporation’s assets), or 721
applies, will not be a triggering event under paragraph (d)(2) of this section, and
the original gain recognition agreement
shall terminate without further effect, if
the transferred corporation receives (or is
deemed to receive) in exchange for all or a
portion of its assets stock in a corporation
or an interest in a partnership that acquired
the assets of the transferred corporation

March 5, 2007

(or receives stock in a corporation that
controls the corporation acquiring the assets) and the U.S. transferor complies with
requirements similar to those contained in
paragraph (e)(1)(ii) of this section, (providing for notice and an agreement to
recognize gain in the case of a direct or
indirect disposition of the assets previously held by the transferred corporation).
See paragraph (e)(3)(iii) of this section
for dispositions of substantially all of the
transferred corporation’s assets in certain
asset reorganizations.
(2) Recapitalizations—(i) Transferred
corporation. Except to the extent provided
in paragraph (f)(1) of this section, a transaction described in section 368(a)(1)(E) of
the transferred corporation will not be a
triggering event under paragraph (d)(1) of
this section. The description of this exception that is required to be filed with the annual certification under paragraph (b)(5) of
this section must include a description of
the type or class, amount, and characteristics of the stock or securities that the transferred corporation issued in the reorganization.
(ii) Transferee foreign corporation. A
section 368(a)(1)(E) reorganization of the
transferee foreign corporation will not be a
triggering event under paragraph (d)(3) of
this section. The description of this exception that is required to be filed with the annual certification under paragraph (b)(5) of
this section must include a description of
the type or class, amount, and characteristics of the stock or securities that the transferee foreign corporation issued in the reorganization. See paragraph (g)(1) of this
section for rules regarding the recognition
of gain by the U.S. transferor in connection
with nonrecognition exchanges.
(3) Certain asset reorganizations—(i)
Transfers of transferee foreign corporation’s stock by U.S. transferor. Except to
the extent provided in paragraph (g)(1)(iv)
of this section, if the U.S. transferor transfers all or a portion of the stock of the
transferee foreign corporation to a domestic acquiring corporation (successor U.S.
transferor) pursuant to an asset reorganization, the exchanges made pursuant to such
asset reorganization will not be triggering
events described in paragraph (d)(3) of this
section, and the original gain recognition
agreement shall terminate without further
effect, if the following conditions are satisfied:

March 5, 2007

(A) The common parent of the original
consolidated group, successor U.S. transferor, or new common parent, as applicable, enters into a new gain recognition
agreement pursuant to which the successor U.S. transferor agrees to recognize gain
(during the remaining term of the original gain recognition agreement) with respect to the initial transfer, modified by
substituting the successor U.S. transferor
in place of the original U.S. transferor and
agreeing to treat the successor U.S. transferor as the original U.S. transferor for purposes of this section.
(B) The successor U.S. transferor
or new common parent, as applicable,
makes the election described in paragraph
(b)(1)(vii) of this section. However, if the
U.S. transferor was a member of a consolidated group in the year of the initial
transfer, and the successor U.S. transferor
is also a member of the original consolidated group immediately after the asset
reorganization, no such election must be
made.
(C) The successor U.S. transferor provides with its next annual certification (described in paragraph (b)(5) of this section)—
(1) The new gain recognition agreement;
(2) A notice of the transfer setting forth
a full description of the transfer (including
the date of such transfer), and the successor
U.S. transferor’s name, address, and taxpayer identification number; and
(3) Form 8838 to extend the period for
assessment of the tax on the initial transfer
to a date not earlier than the eighth full
taxable year following the taxable year of
the initial transfer.
(ii) Transfers of transferred corporation
stock or securities by transferee foreign
corporation to a foreign acquiring corporation. Except to the extent provided in
paragraph (f)(1) of this section, if the transferee foreign corporation transfers all or
a portion of the stock or securities of the
transferred corporation to a foreign acquiring corporation (successor transferee foreign corporation) in an asset reorganization, the exchanges made pursuant to such
reorganization will not be triggering events
described in paragraph (d)(1) or (d)(3) of
this section, and the original gain recognition agreement shall terminate without further effect, if the following conditions are
satisfied:

652

(A) The U.S. transferor or common parent, as applicable, enters into a new gain
recognition agreement pursuant to which
the U.S. transferor agrees to recognize gain
(during the remaining term of the original gain recognition agreement), with respect to the initial transfer, substituting the
successor transferee foreign corporation in
place of the original transferee foreign corporation, and agreeing to treat the successor transferee foreign corporation as the
original transferee foreign corporation for
purposes of this section.
(B) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) the new
gain recognition agreement and a notice of
the transfer setting forth a full description
of the transfer (including the date of such
transfer), and the successor transferee foreign corporation’s name, address, and taxpayer identification number (if any).
(iii) Transfers of substantially all of the
transferred corporation’s assets. Except
to the extent provided in paragraph (f)(2)
of this section, if the transferred corporation transfers substantially all of its assets to an acquiring corporation (successor transferred corporation) pursuant to an
asset reorganization, the exchanges made
pursuant to such asset reorganization will
not be triggering events under paragraph
(d)(1) or (d)(2) of this section, and the original gain recognition agreement shall terminate without further effect, if the following conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters into a new gain
recognition agreement pursuant to which
the U.S. transferor agrees to recognize gain
(during the remaining term of the original
gain recognition agreement), with respect
to the initial transfer, modified by—
(1) Substituting the successor transferred corporation in place of the original
transferred corporation and agreeing to
treat the successor transferred corporation
as the original transferred corporation for
purposes of this section; and
(2) Treating only the assets acquired by
the successor transferred corporation from
the original transferred corporation pursuant to the asset reorganization as the assets subject to the triggering event rules
under paragraph (d)(2) of this section.
(B) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) the new

2007–10 I.R.B.

gain recognition agreement and a notice of
the transfer setting forth a full description
of the transfer (including the date of such
transfer), and the successor transferred
corporation’s name, address, and taxpayer
identification number (if any).
(iv) Example. The rules of paragraph
(e)(3) of this section are illustrated by the
following examples:
Example 1. (i) Facts. UST, a domestic corporation incorporated under the laws of State A, owns
100% of the stock of TFD, a foreign corporation. In
year 1, UST transfers all of the TFD stock to TFC, a
foreign corporation, in an exchange to which section
351 applies. In the exchange, UST receives 100%
of the stock of TFC. The transaction is subject to
both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). All of the requirements of
§1.367(a)–3(b)(1) are satisfied, and UST enters into
a gain recognition agreement. UST also complies
with the notice requirement under §1.367(b)–1(c).
In year 3, UST transfers its assets in a section 361(a)
exchange to USA, a newly formed domestic corporation incorporated under the laws of State B, in
exchange for stock of USA, and UST distributes such
stock to its shareholders in a transaction described in
section 368(a)(1)(F).
(ii) Result. The transfer of the TFC stock by UST
to USA pursuant to the section 368(a)(1)(F) reorganization is a triggering event under paragraph (d)(3)
of this section. If, however, UST complies with the
requirements contained in paragraph (e)(3)(i) of this
section, the transfer will not be a triggering event.
(iii) Alternate facts. The facts are the same as
in paragraph (i) of this Example 1, except that the
acquiring corporation is foreign instead of domestic.
Because paragraph (e)(3)(i) of this section provides
an exception to a triggering event under paragraph
(d)(3) of this section only if the acquiring corporation
in the asset reorganization is a domestic corporation,
the section 368(a)(1)(F) reorganization is a triggering
event without exception. See also section 367(a)(5)
and §§1.367(a)–1T(f) and 1.367(a)–3T(e) (providing
that certain corporate shareholders of a U.S. transferor may enter into a gain recognition agreement
when the U.S. transferor goes out of existence in a
section 361 initial transfer).
Example 2. (i) Facts. UST, a domestic corporation, owns 100% of the stock of three foreign
corporations, FC1, FC2 and FC3. In year 1, USP
transfers 100% of the stock of FC1 to FC2 in an
exchange to which section 351 applies. The transaction is subject to both sections 367(a) and (b).
See §§1.367(a)–3(b) and 1.367(b)–1(a). All of the
requirements of §1.367(a)–3(b)(1) are satisfied, and
UST enters into a gain recognition agreement. UST
also complies with the notice requirement under
§1.367(b)–1(c). In year 4, in a reorganization described in section 368(a)(1)(D), FC2 transfers all
of its assets, including the stock of FC1, to FC3 in
exchange for FC3 stock. FC2 transfers the FC3 stock
to UST in exchange for FC2 stock held by UST, and
the FC2 stock is canceled.
(ii) Analysis. The transfer of FC1 stock to FC3
and the exchange of FC2 stock for FC3 stock by UST
pursuant to the reorganization described in section
368(a)(1)(D) are triggering events under paragraphs

2007–10 I.R.B.

(d)(1) and (d)(3) of this section. If, however, UST
complies with the requirements contained in paragraph (e)(3)(ii) of this section, the transfers will not
be triggering events.
Example 3. (i) Facts. UST, a domestic corporation, owns 100% of the stock of two foreign
corporations, FC1 and FC2. In year 1, UST transfers
100% of the stock of FC1 to FC2 in an exchange to
which section 351 applies. The transaction is subject
to both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). All of the requirements of
§1.367(a)–3(b)(1) are satisfied, and UST enters into
a gain recognition agreement. UST also complies
with the notice requirement under §1.367(b)–1(c).
In year 4, in a reorganization described in section
368(a)(1)(C), FC1 transfers all of its assets to FC3,
an unrelated foreign corporation, in exchange for
FC3 stock. FC1 transfers the FC3 stock to FC2 in
exchange for the FC1 stock held by FC2 and the FC1
stock is canceled.
(ii) Analysis. FC1’s transfer of all of its assets to
FC3 and FC2’s exchange of FC1 stock for FC3 stock
pursuant to the reorganization described in section
368(a)(1)(C) are triggering events under paragraphs
(d)(2) and (d)(1) of this section, respectively. If, however, UST complies with the requirements contained
in paragraph (e)(3)(iii) of this section, the transfers
will not be triggering events.

(4) Certain triangular reorganizations—(i) Triangular asset reorganizations of the transferee foreign corporation.
For purposes of this paragraph (e)(4),
the term triangular asset reorganization
means a triangular reorganization described in §1.358–6(b)(2)(i) through (iii)
or in sections 368(a)(1)(G) and (a)(2)(D)
where the acquiring subsidiary is foreign.
Except to the extent provided in paragraph (f)(1) or (g)(1)(iv) of this section,
the exchanges made pursuant to a triangular asset reorganization of the transferee
foreign corporation will not be triggering
events under paragraph (d)(1) or (d)(3) of
this section, and the original gain recognition agreement shall terminate without
further effect, if the following conditions
are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters into a new gain
recognition agreement pursuant to which
the U.S. transferor agrees to recognize gain
(during the remaining term of the original
gain recognition agreement), with respect
to the initial transfer, and in which the U.S.
transferor agrees to—
(1) If the parent corporation of the foreign acquiring subsidiary is foreign, treat
such foreign parent as the original transferee foreign corporation for purposes
of this section and treat as a triggering
event a disposition of the stock of the foreign acquiring subsidiary, or, in the case

653

of a reorganization described in section
368(a)(2)(E), the corporation originally
identified as the transferee foreign corporation; and
(2) If the parent corporation of the
foreign acquiring subsidiary is domestic,
treat the foreign acquiring subsidiary as
the original transferee foreign corporation
for purposes of this section, and apply the
principles of paragraph (g) of this section
to taxable dispositions by the domestic
parent corporation of the foreign acquiring
subsidiary or, in the case of a reorganization described in section 368(a)(2)(E),
the corporation originally identified as the
transferee foreign corporation. In the case
of a reorganization described in section
368(a)(2)(E) where the transferee foreign
corporation is the merged corporation,
rather than the surviving corporation, then
the surviving corporation shall be treated
as the transferee foreign corporation for
purposes of this section.
(B) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) the new
gain recognition agreement and a notice of
the transfer setting forth a full description
of the transfer (including the date of such
transfer) and the name, address, and taxpayer identification number (if any) for the
parent corporation of the foreign acquiring
subsidiary.
(ii) Triangular asset reorganizations of
the transferred corporation. Except to
the extent provided in paragraph (f)(1) or
(f)(2) of this section, the exchanges made
pursuant to a triangular asset reorganization of the transferred corporation will not
be triggering events in paragraph (d)(1)
or (d)(2) of this section, and the original
gain recognition agreement shall terminate
without further effect, if the following conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters into a new gain
recognition agreement pursuant to which
the U.S. transferor agrees to recognize gain
(during the remaining term of the original gain recognition agreement), in accordance with the rules of paragraph (b)
of this section, with respect to the initial
transfer, and in which the U.S. transferor
agrees to—
(1) Treat a disposition of the stock of the
acquiring parent as a triggering event;
(2) If the reorganization is a triangular
C reorganization or a reorganization de-

March 5, 2007

scribed in section 368(a)(2)(D), treat a disposition of the stock of the foreign acquiring subsidiary as a triggering event; and
(3) If the reorganization is described
in section 368(a)(2)(E) and the merged
corporation is the transferred corporation,
treat a disposition of the stock of the surviving corporation as a triggering event.
(B) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) the new
gain recognition agreement and a notice of
the transfer setting forth a full description
of the transfer (including the date of such
transfer) and the name, address, and taxpayer identification number (if any) for the
parent corporation of the foreign acquiring
subsidiary.
(5) Compulsory transfers. A compulsory transfer under §1.367(a)–4T(f)(2) that
is not reasonably foreseeable by the U.S.
transferor is not a triggering event under
paragraphs (d)(1) through (d)(3) of this
section.
(6) Certain liquidations and upstream
reorganizations of the transferred corporation into the transferee foreign corporation—(i) General rule. A transfer of
assets by the transferred corporation to
the transferee foreign corporation pursuant to a liquidation described in section
332, where the transferee foreign corporation is described in section 332(b)(1),
or pursuant to a reorganization described
in section 368(a), and related exchanges
of stock or securities of the transferred
corporation will not be triggering events
under paragraph (d)(1) or (d)(2) of this
section. The description of this exception
that is required to be filed with the annual certification under paragraph (b)(5)
of this section must include a description
of the transaction. In such a case, the
original gain recognition agreement shall
continue to apply during the remainder of
its term. If, however, in connection with
a liquidation described in section 332, the
transferred corporation recognizes gain
under section 336 with respect to a portion
of its assets, such assets shall be treated
as disposed of for purposes of paragraph
(d)(2) of this section.
(ii) Example. The principles of this
paragraph (e)(6) are illustrated by the following example:
Example. (i) Facts. UST, a domestic corporation, owns 100 percent of the stock of TFD, a foreign
corporation. UST transfers all of the TFD stock to

March 5, 2007

newly-formed TFC, a foreign corporation, in an exchange to which section 351 applies. In the exchange,
UST receives 100 percent of the voting stock of TFC.
The transaction is subject to both sections 367(a) and
(b). See §§1.367(a)–3(b) and 1.367(b)–1(a). All of
the requirements of §1.367(a)–3(b)(1) are satisfied,
and UST enters into a gain recognition agreement
to qualify for nonrecognition treatment and does not
make the election described in paragraph (b)(1)(vii)
of this section. UST also complies with the notice requirement under §1.367(b)–1(c). Two years after the
initial transfer, TFD liquidates into TFC in a transaction described in sections 332 and 337, and UST complies with the requirements of this paragraph (e)(6).
Four years after the initial transfer, TFC disposes of
substantially all of the assets previously held by TFD.
(ii) Result. Because paragraph (d)(2) of this section provides that a disposition of substantially all of
the transferred corporation’s assets by any person is
a triggering event, TFC’s disposition of substantially
all of the assets previously held by TFD is a triggering event. Under the terms of the gain recognition
agreement, UST must amend its return for the year
of the initial transfer and include in income the gain
realized, but not recognized, on the initial transfer of
the stock of TFD to TFC, and pay any interest charge.

(7) Death of an individual U.S. transferor. If the U.S. transferor is an individual
and such individual dies, the individual’s
death will not be a triggering event under
paragraph (d)(7) of this section, if—
(i) The person winding up the affairs of
the U.S. 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
U.S. transferor under the duration of the
gain recognition agreement;
(ii) The person winding up the affairs
of the U.S. transferor provides security
as provided under paragraph (c) of this
section for any possible liability of the
U.S. transferor under the gain recognition
agreement; or
(iii) The person winding up the affairs
of the U.S. transferor obtains a ruling from
the Internal Revenue Service providing for
successors to the U.S. transferor under the
gain recognition agreement.
(8) Deconsolidation. A deconsolidation described in paragraph (d)(4) of this
section will not be a triggering event, and
the original gain recognition agreement
shall terminate without further effect, if
the following conditions are satisfied:
(i) The U.S. transferor enters into a new
gain recognition agreement pursuant to
which the U.S. transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement) with
respect to the initial transfer and makes the

654

election described in paragraph (b)(1)(vii)
of this section.
(ii) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) notice of
the deconsolidation.
(9) Consolidation. A consolidation described in paragraph (d)(5) of this section
will not be a triggering event, and the original gain recognition agreement shall terminate without further effect, if the following
conditions are satisfied:
(i) The common parent of the consolidated group that includes the U.S. transferor immediately after the consolidation
enters into a new gain recognition agreement pursuant to which the U.S. transferor
agrees to recognize gain (during the remaining term of the original gain recognition agreement) with respect to the initial
transfer and in which it makes the election
described in paragraph (b)(1)(vii) of this
section.
(ii) The U.S. transferor provides with
its next annual certification (described in
paragraph (b)(5) of this section) a notice
of the consolidation.
(10) Reasonable cause exception for
failure to comply—(i) Request for relief. A failure to comply described in
paragraph (d)(8) of this section will not
be a triggering event, and the timeliness requirement with respect to a gain
recognition agreement shall be considered
satisfied notwithstanding a failure to file
the agreement in a timely manner, if the
person required to file the gain recognition agreement, annual certification, or
Form 8838 is able to demonstrate to the
Area Director, Field Examination, Small
Business/Self Employed or the Director
of Field Operations, Large and Mid-Size
Business (Director) having jurisdiction of
the taxpayer’s tax return for the taxable
year, that such failure was due to reasonable cause and not willful neglect. In
determining whether the person has reasonable cause, the Director shall consider
whether the person acted reasonably and
in good faith. Whether the person acted
reasonably and in good faith will be determined after considering all the facts and
circumstances. The Director shall notify
the person in writing within 120 days of
the filing if it is determined that the failure to comply was not due to reasonable
cause, or if additional time will be needed
to make such determination. For this pur-

2007–10 I.R.B.

pose, the 120-day period shall begin to run
on the date the Service notifies the person
in writing that the request has been received and assigned for review. Once such
period commences, if the person is not
again notified within 120 days, then the
person shall be deemed to have established
reasonable cause. The reasonable cause
exception of this paragraph (e)(10) shall
apply only if, once the person becomes
aware of the failure to file or comply with
the agreement, the person complies with
the requirements of paragraph (e)(10)(ii)
of this section.
(ii) Requirements for reasonable cause
relief—(A) Time of submission. Requests
for reasonable cause relief will only be
considered if once the person becomes
aware of the failure to file or comply with
the agreement, the person attaches all the
documents that should have been filed,
as well as a complete written statement
setting forth the reasons for the failure to
timely comply, to an amended return that
amends the return to which the documents
should have been attached pursuant to the
rules of section 367(a) and the regulations
under that paragraph.
(B) Notice requirement.
In addition to the requirement of paragraph
(e)(10)(ii)(A) of this section, the person must provide a copy of the amended
return and all required attachments to the
Director as follows:
(1) If the taxpayer is under examination for any taxable year when the person
requests relief, the taxpayer must provide
a copy of the amended return and attachments to the personnel conducting the examination.
(2) If the taxpayer is not under examination for any taxable year when the person
requests relief, the taxpayer must provide
a copy of the amended return and attachments to the Director having jurisdiction
over the taxpayer’s return.
(f) Gain recognized in connection with
certain nonrecognition transactions—(1)
Dispositions of transferred stock or securities—(i) General rule. If a disposition of
the transferred stock or securities occurs
in connection with a nonrecognition transaction described in paragraph (e)(1)(ii),
(e)(2)(i), (e)(3)(ii), (e)(3)(iii), or (e)(4) of
this section and gain is recognized by the
transferee foreign corporation in connection with the transaction (for example,
under sections 351(b) or 356(a)(1)), the

2007–10 I.R.B.

U.S. transferor must recognize gain pursuant to the gain recognition agreement
as determined under paragraph (f)(1)(ii)
of this section. This paragraph (f)(1)(i)
shall not apply to the extent that the gain
recognized is treated as a dividend under
section 356(a)(2).
(ii) Method for determining amount of
gain to be recognized. The portion of
the gain recognition agreement that must
be recognized under paragraph (f)(1)(i) of
this section, if any, is the gain that would be
recognized by the transferee foreign corporation on such disposition (but not in
excess of the amount of the gain recognition agreement). For purposes of this paragraph (f)(1)(ii), the gain that would be recognized in the nonrecognition transactions
listed in paragraph (f)(1)(i) of this section
by the transferee foreign corporation shall
be calculated before taking into account
any basis increase that may apply under
paragraph (b)(3)(iv) of this section as a result of the gain that the U.S. transferor is
required to recognize. If the amount of
gain that the transferee foreign corporation would be required to recognize is less
than the amount of the gain subject to the
gain recognition agreement, then the new
gain recognition agreement filed pursuant
to paragraph (e)(1)(ii), (e)(2)(i), (e)(3)(ii),
(e)(3)(iii), or (e)(4) of this section shall
provide that the U.S. transferor shall recognize the remaining portion of the gain
that was realized, but not recognized, on
the initial transfer if a subsequent triggering event occurs.
(iii) Example. The rule of this paragraph (f)(1) is illustrated by the following
example:
Example. (i) Facts. UST, a domestic corporation
owning 100% of the stock of TFD, a foreign corporation, transfers all of the TFD stock to newly-formed
TFC, a foreign corporation, in an exchange to which
section 351 applies. In the exchange, UST receives
100% of the stock of TFC. The transaction is subject
to both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). All of the requirements of
§1.367(a)–3(b)(1) are satisfied, and UST enters into
a gain recognition agreement to qualify for nonrecognition treatment and does not make the election
contained in paragraph (b)(1)(vii) of this section.
UST also complies with the notice requirement under §1.367(b)–1(c). At the time of the initial transfer,
UST has a basis of $50 in the stock of TFD, which
has a fair market value of $100. Thus, the amount
of gain subject to the gain recognition agreement is
$50. Two years after the initial transfer, TFC and
X, an unrelated domestic corporation, form CFC, a
foreign corporation. TFC transfers the stock of TFD
to CFC in an exchange to which section 351 applies.

655

UST also complies with the notice requirement under
§1.367(b)–1(c). At the time of the transfer, TFC’s
basis in the TFD stock equals $50 and the fair market
value remains $100. In the exchange, TFC receives
25% of the stock of CFC and $35 of cash. Before taking into account adjustments made under paragraph
(b)(3)(iv) of this section, TFC would recognize $35
of gain under section 351(b). X transfers property to
CFC in exchange for the remaining 75% of the CFC
stock. Under paragraph (d)(1) of this section, TFC’s
disposition of the TFD stock is a triggering event.
However, UST complies with the requirements of
paragraph (e)(1)(ii) of this section providing for an
exception to the triggering event.
(ii) Result. Under paragraph (f)(1)(ii) of this
section, pursuant to the terms of the gain recognition
agreement, UST must recognize $35 of the $50 gain
realized, but not recognized, on the initial transfer.
The new gain recognition agreement that UST files
pursuant to paragraph (e)(1)(ii)(C) of this section
will reflect the $15 that remains of the gain realized,
but not recognized, on the initial transfer. Under
paragraph (b)(3)(iv)(A) of this section, TFC’s basis
in the TFD stock is increased (as of the date of the
initial transfer) by $35 to $85. Under paragraph
(b)(3)(iv)(B) of this section, UST’s basis in the TFC
stock is also increased by $35. Finally, after taking
account of adjustments under paragraph (b)(3)(iv) of
this section, TFC must recognize $15 of gain under
section 351(b).

(2) Dispositions of substantially all
of the transferred corporation’s assets.
If a disposition of substantially all of
the assets of the transferred corporation
occurs in connection with a nonrecognition transaction described in paragraph
(e)(1)(iii), (e)(3)(iii), or (e)(4)(ii) of this
section and gain is recognized on such
disposition (for example, under section
351(b) or 356(a)(1)), the U.S. transferor
must recognize gain pursuant to the gain
recognition agreement to the extent of
such gain recognized (but not in excess of
the gain realized, but not recognized, on
the initial transfer). This paragraph (f)(2)
shall not apply to the extent that recognized gain is treated as a dividend under
section 356(a)(2).
(g) Transactions that terminate the
gain recognition agreement or reduce the
amount of gain required to be recognized
pursuant to a gain recognition agreement.
Notwithstanding paragraph (d) of this
section, the following events shall not
constitute triggering events and instead
shall either terminate the gain recognition
agreement, or reduce the amount of gain
required to be recognized pursuant to a
gain recognition agreement:
(1) Taxable disposition of stock of the
transferee foreign corporation by U.S.
transferor—(i) General rule. If the U.S.

March 5, 2007

transferor disposes of all the stock of the
transferee foreign corporation that is received (or deemed received) in the initial
transfer, then the gain recognition agreement shall terminate without further effect
if—
(A) Immediately before the disposition,
the aggregate basis of the transferee foreign corporation stock disposed of does
not exceed the sum of the aggregate basis
of the transferred stock or securities immediately before the initial transfer plus any
increase in the basis of such stock or securities as a result of the recognition of
gain on the initial transfer. For purposes
of this paragraph (g)(1)(i)(A), an increase
in basis of the stock disposed of as a result of an income inclusion with respect to
such stock (for example, pursuant to section 961) shall not be taken into account;
and
(B) All realized gain (if any) in the stock
disposed of is recognized currently and included in taxable income as a result of the
disposition.
(ii) Partial dispositions—(A) General
rule. If the U.S. transferor disposes of
a portion of the stock of the transferee
foreign corporation that is received (or
deemed received) in the initial transfer in
a transaction that satisfies the conditions
described in paragraphs (g)(1)(i)(A) and
(B) of this section, such disposition will
not be a triggering event and the gain
recognition shall remain in effect. For
purposes of determining whether the condition described in paragraph (g)(1)(i)(A)
of this section is satisfied, however, the
aggregate basis of the stock of the transferee foreign corporation disposed of is
compared to the aggregate basis of the
transferred stock or securities exchanged
for such stock at the time of the initial
transfer.
(B) Subsequent triggering event. If the
gain recognition agreement is triggered after a disposition described in paragraph
(g)(1)(ii)(A) of this section, the U.S. transferor shall be required to recognize only a
proportionate amount of the gain subject to
the gain recognition agreement that otherwise would be required to be recognized
on a subsequent triggering event. Except
as provided in paragraph (g)(1)(iv) of this
section, the proportion required to be recognized shall be determined by reference
to the percentage of stock (based on relative fair market value) of the transferee

March 5, 2007

foreign corporation received (or deemed
received) in the initial transfer that is retained by the U.S. transferor.
(iii) The rule of paragraph (g)(1)(ii) of
this section is illustrated by the following
example:
Example. (i) Facts. A, a United States citizen,
owns 100% of the outstanding stock of foreign corporation X. In a transaction to which section 351
applies, A exchanges his stock in X (and other assets) for 100% of the outstanding stock of foreign
corporation Y. The transaction is subject to both
sections 367(a) and (b). See §§1.367(a)–3(b) and
1.367(b)–1(a). A enters into a gain recognition
agreement, makes the election contained in paragraph (b)(1)(vii) of this section, and also complies
with the notice requirement under §1.367(b)–1(c).
In the second year following the initial transfer, A
disposes of 60% of the fair market value of the stock
of Y, and the requirements of paragraphs (g)(1)(i)(A)
and (B) are met with respect to such disposition.
In the fourth year following the initial transfer, Y
disposes of 50% of the fair market value of the stock
of X.
(ii) Result. The disposition of 60% of the stock
of Y is not a triggering event, and the gain recognition agreement continues in effect. The disposition
of X stock, however, is a triggering event under paragraph (d)(1)(i) of this section. As a result of the subsequent disposition of 50% of the stock of X, under
paragraphs (d)(1)(iii) and (g)(1)(ii)(B) of this section,
A is required to include in income in the year of such
disposition 20% (40% of the fair market value of Y
multiplied by 50% of the fair market value of X) of
the gain that A realized but did not recognize on the
initial transfer of the X stock to Y, and pay any applicable interest.

(iv) Certain nonrecognition transactions. The rules described in these paragraphs (g)(1)(iv)(A) through (C) apply
if the U.S. transferor disposes of all or
a portion of the stock of the transferee
foreign corporation received (or deemed
received) in the initial transfer pursuant
to a nonrecognition transaction described
in paragraph (e)(1)(i), (e)(2)(ii), (e)(3)(i),
or (e)(3)(ii) of this section, the condition described in paragraph (g)(1)(i)(A)
of this section is satisfied with respect to
such disposition, and gain is recognized
in connection with the disposition (for example, under sections 351(b), 356(a)(1),
or 336). If, however, only a portion of the
stock of the transferee corporation stock
is disposed of pursuant to this paragraph
(g)(1)(iv), then for purposes of determining whether the condition described in
paragraph (g)(1)(i)(A) of this section is
satisfied, the aggregate basis of the stock
disposed of is compared to the aggregate
basis of the transferred stock or securities
exchanged for such stock at the time of the
initial transfer.

656

(A) U.S. transferor files new gain
recognition agreement. This paragraph
(g)(1)(iv)(A) applies if the U.S. transferor (or successor U.S. transferor, as
applicable) enters into a new gain recognition agreement as provided in paragraph
(e)(1)(i), (e)(3)(i), or (e)(3)(ii) of this
section, as applicable. In such a case,
the amount of gain subject to the new
gain recognition agreement shall equal
the amount of gain realized, but not recognized, on the initial transfer, less any
gain recognized by the U.S. transferor in
connection with the nonrecognition transaction. If the amount of gain recognized
on the transfer is equal to or greater than
the amount of gain realized, but not recognized, on the initial transfer, then the
original gain recognition agreement shall
terminate without further effect.
(B) U.S. transferor does not file a new
gain recognition agreement. This paragraph (g)(1)(iv)(B) applies if the U.S.
transferor (or successor U.S. transferor,
as applicable) fails to enter into a new
gain recognition agreement as provided in
paragraph (e)(1)(i), (e)(3)(i), or (e)(3)(ii)
of this section, as applicable. In such a
case, the amount required to be recognized
by the U.S. transferor pursuant to the gain
recognition agreement shall be the amount
of gain realized, but not recognized, on the
initial transfer, less any gain recognized
by the U.S. transferor in connection with
the nonrecognition transaction.
(C) Special rule for recapitalizations.
Because paragraph (e)(2)(ii) of this section
does not require the U.S. transferor to enter
into a new gain recognition agreement, the
amount of gain subject to the gain recognition agreement shall equal the amount of
gain realized, but not recognized, on the
initial transfer, less any gain recognized
by the U.S. transferor in connection with
the nonrecognition transaction described
in paragraph (e)(2)(ii) of this section.
(v) Election to reduce basis—(A) General rule. For purposes of paragraphs
(g)(1)(i), (ii) and (iv) of this section, the
U.S. transferor may elect to reduce its
aggregate basis in the stock disposed of
effective immediately before the disposition such that the condition described in
paragraph (g)(1)(i)(A) is satisfied. If an
election is made pursuant to this paragraph
(g)(1)(v), the U.S. transferor may increase
its basis in other stock of the transferee
foreign corporation it holds, if any, by a

2007–10 I.R.B.

corresponding amount but not above the
fair market value of such stock.
(B) Election. The election pursuant to
this paragraph (g)(1)(v) is made by filing
with the U.S. transferor’s income tax return for the taxable year in which the disposition of the transferee foreign corporation stock occurs, a statement setting forth
the following information, with the heading “Election to Reduce Stock Basis Under
§1.367(a)–8T(g)(1)(v)”:
(1) A description of the transferee foreign corporation stock that the U.S. transferor has disposed of.
(2) An estimate of the fair market value
of the stock as of the date of the disposition.
(3) A comparison of the basis of the
transferee foreign corporation stock before
and after the election that is made pursuant
to this paragraph (g)(1)(v).
(4) The date on which the transferee
foreign corporation stock was disposed of
by the U.S. transferor.
(vi) The rules of paragraph (g)(1) of
this section are illustrated by the following
examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of the stock of two foreign corporations, FC1 and FC2. The basis and fair market value
of the FC1 stock is $100 and $90, respectively. The
basis and fair market value of the FC2 stock is $0
and $100, respectively. USP also owns land that has
a basis and fair market value of $10. In year 1, USP
transfers 100% of the stock of FC1 and FC2 and the
land to FC3, a newly formed foreign corporation, in
exchange for 20 shares of FC3 stock. The transfer
of the stock of FC1 and FC2 qualifies under section
351 and section 368(a)(1)(B). The transfer of the
land qualifies under section 351. The transfer of the
FC2 stock is subject to both section 367(a) and (b).
See §§1.367(a)–3(b) and 1.367(b)–1(a). Pursuant to
§1.367(a)–3(b)(1)(ii) and this section, USP enters
into a gain recognition agreement with respect to the
$100 of gain in the FC2 stock and complies with the
notice requirement under §1.367(b)–1(c). USP takes
the position that its basis in each of the 20 shares
of FC3 stock received in the transfer equals $5.5
(($100+$0+10)/20). In year 3, USP sells 100% of its
FC3 stock to an unrelated person for cash.
(ii) Result. The disposition of the FC3 stock is a
triggering event described in paragraph (d)(3) of this
section. The disposition does not terminate the gain
recognition agreement pursuant to paragraph (g)(1)(i)
of this section because USP takes the position that the
basis of each of the 10 shares of FC3 stock it received
in exchange for the FC2 stock in the initial transfer
equals $5.5. Thus, the total basis in the 10 shares received for the FC2 stock equals $55, which exceeds
the $0 basis USP had in the FC2 stock it transferred to
FC3 in the initial transfer. As a result, the condition
described in paragraph (g)(1)(i)(A) of this section is
not satisfied. USP may, however, elect to reduce its
basis in 10 of the FC3 shares it disposes of from $5.5

2007–10 I.R.B.

to $0, and increase its basis in its remaining 10 shares
of FC2 stock by $5.5, pursuant to paragraph (g)(1)(v)
of this section. As a result, the condition described in
paragraph (g)(1)(i)(A) of this section would be satisfied, the disposition would not be a triggering event,
and the gain recognition would terminate without further effect.
Example 2. (i) Facts. USP, a domestic corporation, owns 100% of the stock of FC1, a foreign
corporation. The basis and fair market value of the
FC1 stock is $0 and $80, respectively. In year 1,
USP transfers 100% of the stock of FC1 to FC2,
a newly formed foreign corporation, in exchange
for 20 shares of FC2 stock. The transfer of the
stock of FC1 qualifies under section 351 and section
368(a)(1)(B). The transfer of the FC1 stock is subject
to both section 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). Pursuant to §1.367(a)–3(b)(1)(ii)
and this section, USP enters into a gain recognition
agreement with respect to the $80 of gain in the
FC1 stock and complies with the notice requirement
under §1.367(b)–1(c). USP’s basis and fair market
value in the FC2 stock it receives at the time of the
transfer is $0 and $80, respectively. In year 3, when
the fair market value of the FC2 stock continues to
equal $80, USP transfers land that has a basis and
fair market value of $20 to FC2 in a transfer that
qualifies under section 351, but does not receive
additional shares of FC2 in connection with such
transfer. In year 5, USP sells 100% of its FC2 stock
to an unrelated person for cash.
(ii) Result. The disposition of the FC3 stock is a
triggering event described in paragraph (d)(3) of this
section. The disposition would not terminate the gain
recognition agreement pursuant to paragraph (g)(1)(i)
of this section if the basis in each of the 20 FC2
shares that USP sells equals $1 ($20/20 shares) because immediately before the disposition the basis in
the FC2 shares received for the FC1 shares exceeds
the basis of the FC1 shares at the time of the initial
transfer. As a result, the condition described in paragraph (g)(1)(i)(A) of this section would not be satisfied. USP may, however, elect to adjust its basis in
its FC2 shares such that 16 of the shares have zero
basis (reflecting the basis of the FC1 stock) and 4 of
the shares have $20 of basis (reflecting the basis of
the land). In such a case, the condition described in
paragraph (g)(1)(i)(A) of this section would be satisfied, the disposition would not be a triggering event,
and the gain recognition agreement would terminate
without further effect.

(2) Certain dispositions by a domestic
transferred corporation of substantially
all of its assets. If, immediately before
the initial transfer, the U.S. transferor
owned an amount of stock in the transferred corporation described in section
1504(a)(2), and the transferred corporation is domestic, then the gain recognition
agreement shall terminate without further
effect if the transferred corporation disposes of substantially all of its assets in
a transaction in which all realized gain is
recognized currently. If an indirect stock
transfer necessitated the filing of the gain
recognition agreement, such agreement

657

shall terminate if, immediately before
the indirect transfer, the U.S. transferor
owned an amount of stock in the acquired corporation described in section
1504(a)(2) (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 owned an amount of
stock in the acquiring corporation described in section 1504(a)(2)) 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 or transfer by transferee foreign corporation of stock or securities of transferred corporation under
section 337, 355 or 361—(i) Scope. This
paragraph (g)(3) applies if the transferee
foreign corporation distributes or transfers
the stock or securities that initially necessitated the filing of the gain recognition
agreement (and any additional stock received after the initial transfer) pursuant to
any of the following transactions:
(A) A liquidating distribution to the
U.S. transferor or a domestic corporation
that is a member of the same consolidated
group of which the U.S. transferor is then
a member and that qualifies under sections
332 and 337, if such domestic distributee corporation is described in section
332(b)(1).
(B) A distribution to the U.S. transferor,
a domestic corporation that is a member of
the same consolidated group of which the
U.S. transferor is a member, or an individual that is a United States person, that qualifies under section 355.
(C) A transfer to the U.S. transferor or
a domestic corporation that is a member
of the same consolidated group of which
the U.S. transferor is then a member and
to which section 361 applies (but, if in
connection with a reorganization described
in section 368(a)(1)(D) or (G), only if the
requirements of section 354(b)(1)(A) and
(B) are met).
(ii) General rule. If a distribution or
transfer is described in paragraph (g)(3)(i)
of this section, the gain recognition agreement shall terminate without further effect,
provided that immediately after such distribution or transfer the basis in the transferred stock or securities in the hands of
the domestic corporation or individual, as
applicable, does not exceed the basis that

March 5, 2007

the U.S. transferor had in the transferred
stock or securities immediately before the
initial transfer. For purposes of this paragraph (g)(3)(ii), only the basis in the stock
or securities transferred shall be taken into
account, and increases to stock basis as a
result of income inclusions with respect
to stock (for example, pursuant to section 961) shall not be taken into account.
In the case of a transaction described in
paragraph (g)(3)(i)(B) of this section, any
reductions or redistributions of stock basis under §1.367(b)–5(c)(2) or (4), respectively, shall be made before applying the
rules of this paragraph (g)(3)(ii).
(iii) Election to reduce basis in stock
or securities of transferred corporation.
For purposes of paragraph (g)(3)(ii) of this
section, the domestic corporation or individual, as applicable, may elect to reduce
the basis in the stock or securities transferred to equal the basis the U.S. transferor
had in the corresponding transferred stock
or securities immediately before the initial transfer, such that the gain recognition
agreement shall terminate without further
effect. If such an election is made, the domestic corporation or individual may increase its basis in other stock of the transferred corporation it holds, if any, by a corresponding amount but not above the fair
market value of such stock.
(iv) Election. The election pursuant to
paragraph (g)(3)(iii) of this section is made
by filing with the domestic corporation’s
or individual’s income tax return for the
taxable year in which the distribution or
transfer occurs, a statement setting forth
the following information, with the heading “Election to Reduce Stock Basis Under
§1.367(a)–8T(g)(3)(iii)”:
(1) A description of the stock or securities received.
(2) An estimate of the fair market value
of the stock or securities as of the date of
their receipt.
(3) A statement comparing the basis of
the stock or securities before and after the
election.
(4) The date on which the stock or securities were received.
(v) Examples. The rules of paragraph
(g)(3) of this section are illustrated by the
following examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of the stock of two foreign corporations, FC1 and FC2. FC1 has 10 shares of stock
issued and outstanding. In year 1, when the basis and

March 5, 2007

fair market value of the FC1 stock is $0 and $90, respectively, USP transfers its 10 shares of FC1 stock
to FC2 in an exchange to which section 351 applies.
The transaction is subject to both sections 367(a) and
(b). See §§1.367(a)–3(b) and 1.367(b)–1(a). Pursuant to §1.367(a)–3(b)(1)(ii) and this section, USP
enters into a gain recognition agreement with respect
to such transfer. USP also complies with the notice
requirement under §1.367(b)–1(c). In year 2, FC2
transfers land with a basis and fair market value of
$10 to FC1 in exchange for one newly issued share
of FC1 stock. In year 4, FC2 distributes all of its FC1
stock to USP in a liquidating distribution that qualifies under sections 332 and 337.
(ii) Result. In determining whether the gain
recognition agreement entered into by USP is terminated under paragraph (g)(3) of this section, or
in the alternative triggered under paragraph (d)(1)
of this section, only the stock of FC1 transferred by
USP to FC2 in year 1 is considered. Thus, the basis
in the one share of FC1 stock issued to FC2 in year
2 in exchange for land is not taken into account. If
instead of FC1 actually issuing another share of stock
to FC2 in exchange for the land, FC1 was deemed to
issue stock to FC2 in such exchange, then the gain
recognition agreement would terminate only if USP
elects to adjust the basis in its FC1 shares such that
nine of the shares have zero basis and one of the
shares has $10 of basis.
Example 2. (i) Facts. USP, a domestic corporation, owns 100% of the stock of two foreign
corporations, FC and FD. In year 1, USP transfers
100% of the stock of FC to FD in an exchange to
which section 351 applies. The transaction is subject
to both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). At the time of the initial transfer, USP has a basis of $80 in its stock of FC;
the stock of FC has a fair market value of $100.
USP’s basis in its stock of FD, and the fair market
value of the FD stock, are both $100. Pursuant to
§1.367(a)–3(b)(1)(ii) and this section, USP enters
into a gain recognition agreement with respect to the
initial transfer. USP also complies with the notice
requirement under §1.367(b)–1(c). In year 4, FD
distributes all of the stock of FC to USP in a pro rata
distribution to which section 355 applies. At the time
of the distribution, the fair market value of the FC
stock has increased to $200, while the fair market
value of the FD stock has remained $100. Under
section 358, USP allocates its $180 predistribution
basis in its FD stock between the FD stock and FC
stock according to the stock blocks’ relative fair
market values, yielding a $60 basis in the FD stock
and a $120 basis in the FC stock. Immediately before
the distribution, USP’s section 1248 amount with
respect to FC and FD is zero.
(ii) Result. The distribution of FC stock is a triggering event under paragraph (d)(1) of this section.
The distribution does not terminate the gain recognition agreement under paragraph (g)(3) of this section
because after the distribution, USP’s basis of $120 in
the FC stock exceeds the $80 basis that USP had in
the FC stock at the time of the initial transfer. If, however, USP elects to reduce its basis in the FC stock
it receives to $80, then the condition described in
paragraph (g)(3) of this section will be satisfied, and
the gain recognition agreement will terminate without
further effect. In addition, the $40 of basis that USP
elected to reduce is redistributed to the stock of FD,

658

the result of which is that USP has a basis of $100 in
its FD stock.

(h) Effective date—(1) General
rule—(i) Gain recognition agreements
filed for transfers on or after effective
date. With the exception of paragraph (f)
of this section, the rules of this section
apply to gain recognition agreements filed
with respect to transfers of stock or securities under Treas. Reg. §§1.367(a)–3(b)
through (d) and 1.367(a)–3T(e) occurring
on or after March 7, 2007. The rules of
paragraph (f) of this section apply to gain
recognition agreements filed with respect
to transfers of stock or securities under
Treas. Reg. §§1.367(a)–3(b) through (d)
and 1.367(a)–3T(e) occurring on or after
August 6, 2007. However, the rules of this
section do not apply to gain recognition
agreements filed with respect to such a
transfer of stock or securities occurring
on or after March 7, 2007, if such transfer was entered into pursuant to a written
agreement which was (subject to customary conditions) binding before February
5, 2007, and at all times thereafter. Solely
for purposes of this paragraph (h), a transfer described in the preceding sentence
shall be deemed to be a transfer occurring
before March 7, 2007 to which the rules
of §1.367(a)–8 (see 26 CFR part 1, revised April 1, 2006) apply. See paragraph
(h)(2)(iii) of this section for the ability to
apply the rules of this section with respect
to gain recognition agreements filed before March 7, 2007.
(ii) Gain recognition agreements filed
for transfers before effective date. For
matters covered in this section for periods before March 7, 2007 but on or after July 20, 1998, the corresponding rules
of §1.367(a)–8 (see 26 CFR part 1, revised April 1, 2006) apply. 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 before July 20,
1998, then the rules of §1.367(a)–3T(g)
(see 26 CFR part 1, revised April 1, 1998)
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(h).

2007–10 I.R.B.

(2) Applicability to gain recognition
agreements filed before effective date—(i)
General rule. This paragraph (h)(2)(i)
applies only to rules in this regulation
§1.367(a)–8T that were not already effective under the rules of §1.367(a)–8 (see
26 CFR part 1, revised April 1, 2006).
Taxpayers may apply all or part of these
regulations to gain recognition agreements
filed with respect to transfers of stock or
securities, for all open years, on or after
July 20, 1998. If a taxpayer failed to file a
gain recognition agreement with respect to
a transfer of stock or securities on or after
July 20, 1998 and before March 7, 2007,
the taxpayer must first obtain reasonable
cause relief under §1.367(a)–8(c)(2) to
file the gain recognition agreement before
the taxpayer may apply this paragraph
(h)(2)(i).
(ii) Special filing rule for tax year ending before effective date. This paragraph
(h)(2)(ii) provides the time and manner
in which taxpayers may apply paragraph
(h)(2)(i) of this section. Notwithstanding
the rules provided in §1.367(a)–8T(a)(2),
all agreements, certifications, or other information related to such gain recognition
agreement that should have been filed on
or before March 7, 2007 shall be treated
as having been timely filed, provided they
are attached to a Federal income tax return
amending the taxpayer’s Federal income
tax return for the taxable year in which
they should have been attached. The
amended return described in the preceding sentence must be filed before August
6, 2007. A taxpayer that wishes to apply paragraph (h)(2)(i) of this section but
that fails to meet the filing requirement
described in the preceding sentence must
request reasonable cause relief as provided
in paragraph (e)(10) of this section.
(iii) Tax year ending after effective date.
A taxpayer that entered into a gain recog-

nition agreement to which §1.367(a)–8
(see 26 CFR part 1, revised April 1, 2006)
applies may apply the rules of this section
in a tax year ending on or after March 7,
2007 by attaching the agreement, certification, or other information related to
such gain recognition agreement that the
rules of this section require in accordance
with the rules of this section and with
the time and manner rules provided in
§1.367(a)–8T(a)(2).
(iv) Examples. The rules of paragraph
(h)(2) of this section are illustrated by the
following examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of the stock of two foreign
corporations, FC and FD. In 2003, USP transfers
100% of the stock of FC to FD in an exchange to
which section 351 applies. The transaction is subject
to both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). Pursuant to §1.367(a)–3(b)(1)(ii)
and this section, USP enters into a gain recognition
agreement with respect to the initial transfer. USP
also complies with the notice requirement under
§1.367(b)–1(c). In 2005, FD distributes all of the
stock of FC to USP in a pro rata distribution to which
section 355 applies. Under section 358, USP’s basis
in its FC stock exceeds the basis that USP had in FC
immediately before the initial transfer.
(ii) Result. Under paragraph (h)(1)(ii) of this
section, the rules of §1.367(a)–8 apply because the
gain recognition agreement was filed before March
7, 2007. As a result of the year 2005 transaction,
under §1.367(a)–8(e)(1), USP is required to recognize all of the gain subject to the gain recognition
agreement, and pay any applicable interest. The
gain recognition agreement does not terminate under
§1.367(a)–8(h)(3) because USP’s basis in its FC
stock immediately after the section 355 distribution
exceeds the basis USP had in the FC stock immediately before the initial transfer. However, paragraph
(g)(3)(iii) of this section provides a rule that would
allow USP to elect to reduce its basis in the FC stock
such that the conditions in paragraph (g)(3) of this
section would be satisfied and the gain recognition
agreement would terminate without further effect.
Under paragraph (h)(2)(i) of this section, USP may
apply paragraph (g)(3)(iii) of this section to the 2005
transaction, if 2005 is an open year, because the
rule provided in paragraph (g)(3)(iii) of this section
was not already effective under §1.367(a)–8. Under

paragraph (h)(2)(ii) of this section, USP must submit
the documents required under paragraph (g)(3)(iii) of
this section to a Federal income tax return amending
its 2005 Federal income tax return before August 6,
2007.
Example 2. (i) Facts. UST, a domestic corporation, owns 100% of the stock of two foreign
corporations, TFC and TFD. In 2003, USP transfers
100% of the stock of TFD to TFC in an exchange to
which section 351 applies. The transaction is subject
to both sections 367(a) and (b). See §§1.367(a)–3(b)
and 1.367(b)–1(a). All of the requirements of
§1.367(a)–3(b)(1) are satisfied, and UST enters into
a gain recognition agreement. UST also complies
with the notice requirement under §1.367(b)–1(c).
In 2005, TFC transfers its TFD stock to F1, also a
foreign corporation, in an exchange to which section
351 applies. UST does not file a new gain recognition agreement under §1.367(a)–8(g)(2).
(ii) Result. Under paragraph (h)(1)(ii) of this
section, the rules of §1.367(a)–8 apply because the
gain recognition agreement was filed before March
7, 2007. Under §1.367(a)–8(e), UST must recognize
the gain realized, but not recognized, on its initial
transfer of TFD stock. Paragraph (h)(2)(i) of this
section does not apply because the rule in paragraph
(e)(1)(ii) of this section was already effective under
§1.367(a)–8(g)(2). Therefore, UST’s only recourse
from recognizing the gain subject to the gain recognition agreement is the reasonable cause exception
provided in §1.367(a)–8(c)(2).

(3) Expiration. The applicability of this
section expires on or before February 1,
2010.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 8. In §602.101, paragraph (b) is revised by adding an entry for §1.367(a)–8T
in numerical order to the table to read as
follows:
§602.101 OMB Control numbers.
*****

CFR part or section where
identified and described

Current OMB
control No.

*****
1.367(a)–8T

...........................................................

1545–2056

*****

2007–10 I.R.B.

659

March 5, 2007

Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved January 31, 2007.
Eric Solomon,
Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on February 1,
2007, 8:52 a.m., and published in the issue of the Federal
Register for February 5, 2007, 72 F.R. 5174)

Section 807.—Rules for
Certain Reserves
Insurance companies; interest rate
tables. Prevailing state assumed interest
rates are provided for the determination of
reserves under section 807 of the Code for
contracts issued in 2006 and 2007. Rev.
Rul. 92–19 supplemented in part.

Rev. Rul. 2007–10
For purposes of § 807(d)(4) of the Internal Revenue Code, for taxable years be-

ginning after December 31, 2005, this ruling supplements the schedules of prevailing state assumed interest rates set forth
in Rev. Rul. 92–19, 1992–1 C.B. 227.
This information is to be used by insurance
companies in computing their reserves for
(1) life insurance and supplementary total
and permanent disability benefits, (2) individual annuities and pure endowments,
and (3) group annuities and pure endowments. As § 807(d)(2)(B) requires that the
interest rate used to compute these reserves
be the greater of (1) the applicable federal
interest rate, or (2) the prevailing state assumed interest rate, the table of applicable
federal interest rates in Rev. Rul. 92–19 is
also supplemented.
Following are supplements to schedules
A, B, C, and D to Part III of Rev. Rul.
92–19, providing prevailing state assumed
interest rates for insurance products with
different features issued in 2006 and 2007,
and a supplement to the table in Part IV of
Rev. Rul. 92–19, providing the applicable federal interest rates under § 807(d) for
2006 and 2007. This ruling does not supplement Parts I and II of Rev. Rul. 92–19.

This is the fifteenth supplement to
the interest rates provided in Rev. Rul.
92–19. Earlier supplements were published in Rev. Rul. 93–58, 1993–2 C.B.
241 (interest rates for insurance products issued in 1992 and 1993); Rev. Rul.
94–11, 1994–1 C.B. 196 (1993 and 1994);
Rev. Rul. 95–4, 1995–1 C.B. 141 (1994
and 1995); Rev. Rul. 96–2, 1996–1 C.B.
141 (1995 and 1996); Rev. Rul. 97–2,
1997–1 C.B. 134 (1996 and 1997); Rev.
Rul. 98–2, 1998–2 C.B. 259 (1997 and
1998); Rev. Rul. 99–10, 1999–1 C.B.
671 (1998 and 1999); Rev. Rul. 2000–17,
2000–1 C.B. 842 (1999 and 2000); Rev.
Rul. 2001–11, 2001–1 C.B. 780 (2000 and
2001); Rev. Rul. 2002–12, 2002–1 C.B.
624 (2001 and 2002); Rev. Rul. 2003–24,
2003–1 C.B. 557 (2002 and 2003); Rev.
Rul. 2004–14, 2004–1 C.B. 511 (2003
and 2004); Rev. Rul. 2005–29, 2005–1
C.B. 1080 (2004 and 2005); and Rev. Rul.
2006–25, 2006–20 I.R.B. 882 (May 15,
2006) (2005 and 2006).

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST RATES
BASED ON THE 1980 AMENDMENTS TO THE
NAIC STANDARD VALUATION LAW
A. Life insurance valuation:

Guarantee Duration
(years)

Calendar Year of Issue
2007

10 or fewer

4.50**

More than 10
but not more than 20

4.25**

More than 20

4.00**

Source: Rates calculated from the monthly averages, ending June 30, 2006, of Moody’s Composite Yield on Seasoned Corporate
Bonds.
* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard Valuation
Law; the terms are defined in Rev. Rul. 92–19.
** As these rates exceed the applicable federal interest rate for 2007 of 3.97 percent, the valuation interest rate to be used for this
product under § 807 is the applicable rate specified in this table.

March 5, 2007

660

2007–10 I.R.B.