Td 9446

tiplying the income inclusion by the percentage that the section 1248 amount attributable to such share of stock bears to
the aggregate section 1248 amount attributable to all of the shares of stock transferred in the deemed section 351 exchange.
(4) Example. The rules of this paragraph (e) are illustrated by the following
example:
Example. (i) Facts. (A) FP, a foreign corporation, wholly owns USP, a domestic corporation.
USP wholly owns CFC1, and CFC1 wholly owns
CFC2. CFC2 wholly owns CFC3. CFC1, CFC2 and
CFC3 are controlled foreign corporations within the
meaning of section 957(a). USP, CFC1, CFC2 and
CFC3 use a calendar taxable year. CFC1 owns 30%
of the outstanding stock of FS, a foreign corporation.
FP owns the remaining 70% of the outstanding stock
of FS. The CFC2 stock has a $40x basis and $100x
fair market value. The FS stock held by CFC1 has
a $60x basis and $100x fair market value. As of
December 31, year 1, CFC2 has $20x of section 1248
earnings and profits, CFC3 has $40x of section 1248
earnings and profits, and FS has zero earnings and
profits. On December 31, year 1, in a transaction
described in section 304(a)(1), CFC1 sells the CFC2
stock to FS for $100x cash. FS is not a controlled
foreign corporation (within the meaning section
957(a)) either before or after the sale of the CFC2
stock.
(B) Because CFC1 wholly owns CFC2 before the
transaction and is treated, under section 318, as indirectly owning 100% of the CFC2 stock after the
transaction, under section 304(a)(1), CFC2 and FS
are treated as if CFC1 contributed the CFC2 stock to
FS in a deemed section 351 exchange in exchange
solely for $100x of FS stock, and then FS redeemed
for $100x cash its stock deemed issued to CFC1. Because CFC1 wholly owned CFC2 before the transaction and is treated, under section 318, as indirectly
owning 100% of CFC2 after the transaction, section
302(a) does not apply to the redemption. Instead, under section 302(d), the redemption is treated as a distribution to which section 301 applies. Pursuant to
section 304(b)(2), $20x of the distribution is treated
as a dividend from the earnings and profits of CFC2.
With respect to the remaining $80x, CFC1 takes the
position that $40x is applied against and reduces the
basis of the FS stock deemed issued in the transaction, and $40x is applied against and reduces the basis of the FS stock held by CFC1 prior to (and after)
the transaction.
(ii) Analysis. Under paragraph (e)(2) of this section, the transfer by CFC1 of the CFC2 stock to FS in
the deemed section 351 exchange is subject to paragraph (b) of this section to the extent the distribution
received by CFC1 in redemption of the FS stock issued in the deemed section 351 exchange is applied
against and reduces, under section 301(c)(2), the basis of the FS stock held by CFC1 before (and after) the
transaction. Thus, because $40x of the distribution
received by CFC1 from FS in redemption of the FS
stock issued in the deemed section 351 exchange is
applied against and reduces, under section 301(c)(2),
the basis of the FS stock held by CFC1 before (and
after) the transaction, under paragraph (b) of this section, CFC1 must include $40x in income as a deemed

2009–9 I.R.B.

§1.1248–1 Treatment of gain from certain
sales or exchanges of stock in certain
foreign corporations.

distributions in redemption of stock), section 331(a)(1) (relating to distributions in
complete liquidation of a corporation), or
section 331(a)(2) (relating to distributions
in partial liquidation of a corporation).
For purposes of section 1248(a), gain recognized by a shareholder under section
301(c)(3) in connection with a distribution
of property by a corporation with respect
to its stock shall be treated as gain from
the sale or exchange of stock of such corporation.
(c) through (f) [Reserved]. For further
guidance, see §1.1248–1(c) through (f).
(g) Effective/applicability dates. (1)
[Reserved]. For further guidance, see
§1.1248–1(g)(1).
(2) Paragraph (b) of this section applies
to distributions that occur on or after February 10, 2009.
(h) Expiration date. This section expires on or before February 10, 2012.

*****
(b) [Reserved]. For further guidance,
see §1.1248–1T(b).

Linda M. Kroening,
Acting Deputy Commissioner
for Services and Enforcement.

dividend. See §1.367(b)–2(e) for the treatment of the
$40x income inclusion. In total, CFC1 recognizes
dividend income of $60x, $20x from the application
of section 304(a)(1) to the sale of the CFC2 stock to
FS and $40x under paragraph (b) of this section by
reason of the application of paragraph (e)(2) of this
section.

(f) Effective/applicability date. Paragraph (e) of this section applies to transfers
occurring on or after February 10, 2009.
See §1.367(b)–4, as contained in 26 CFR
part 1 revised as of April 1, 2008, for
transfers occurring on or after February 21,
2006, and before February 10, 2009.
(g) Expiration date. This section expires on or before February 10, 2012.
Par. 6. Section 1.1248–1 is amended by
revising paragraphs (b) and (g) and adding
paragraph (h) to read as follows:

*****
(g) Effective/applicability date. (1) The
third sentence in paragraph (a)(1), paragraph (a)(4), and paragraph (a)(5), Example 4, of this section apply to income inclusions that occur on or after July 30, 2007.
A taxpayer may elect to apply paragraph
(a)(4) of this section to income inclusions
in open taxable years provided that it consistently applies paragraph (a)(4) of this
section for income inclusions in the first
year for which the election is applicable
and in all subsequent years.
(2) [Reserved]. For further guidance,
see §1.1248–1T(g)(2).
(h) [Reserved]. For further guidance,
see §1.1248–1T(h).
Par. 7. Section 1.1248–1T is added to
read as follows:
§1.1248–1T Treatment of gain from
certain sales or exchanges of stock in
certain foreign corporations (temporary).
(a) [Reserved]. For further guidance,
see §1.1248–1(a).
(b) Sale or exchange. For purposes
of section 1248(a), the term sale or exchange includes the receipt of a distribution which is treated as in exchange for
stock under section 302(a) (relating to

607

Approved January 13, 2009.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on February 10,
2009, 8:45 a.m., and published in the issue of the Federal
Register for February 11, 2009, 74 F.R. 6824)

26 CFR 1.367(a)–3: Treatment of transfers of stock
or securities to foreign corporations.

T.D. 9446
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Gain Recognition Agreements
With Respect to Certain
Transfers of Stock or
Securities by United
States Persons to Foreign
Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.

March 2, 2009

ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final regulations under section 367(a) of the
Internal Revenue Code (Code) concerning gain recognition agreements filed by
United States persons with respect to transfers of stock or securities to foreign corporations. The regulations finalize temporary regulations published on February 5,
2007 (T.D. 9311, 2007–1 C.B. 635). The
regulations primarily affect United States
persons that transfer (or have transferred)
stock or securities to foreign corporations
and that will enter (or have entered) into a
gain recognition agreement with respect to
such a transfer.
DATES: Effective Date: These regulations
are effective February 11, 2009.
Applicability Dates: For dates of
applicability, see §§1.367(a)–3(g) and
1.367(a)–8(r).
ADDRESSES: Send submissions to:
CC:PA:LPD:PR
(REG–147144–06),
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
Federal
eRulemaking
Portal at www.regulations.gov (IRS
REG–147144–06).
FOR
FURTHER
INFORMATION
CONTACT: S. James Hawes, (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in
these regulations have been reviewed
and 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.
The collections of information in these
final regulations are in §1.367(a)–8(d), (g),
(k), and (o). Responses to the collections
of information are required to avoid recog-

March 2, 2009

nizing gain under an existing gain recognition agreement and to facilitate electronic
filing. The regulations also require the
amount of any gain recognized under a
gain recognition agreement and applicable
interest due with respect to any additional
tax due with respect to such gain to be
reflected on a schedule included with the
electronically-filed return of the taxpayer.
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.
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
return information are confidential, as required by 26 U.S.C. 6103.
Background
On February 5, 2007, the IRS and
Treasury Department issued temporary
and proposed regulations under section
367(a) concerning the terms and conditions for a gain recognition agreement
(GRA) filed by a United States person
(the U.S. transferor) in connection with a
transfer of stock or securities to a foreign
corporation (transferee foreign corporation) and the impact of certain transactions on an existing GRA (the 2007
regulations). 72 F.R. 5184 (T.D. 9311,
2007–1 C.B. 635). No public hearing
on the 2007 regulations was requested
or held; however, numerous comments
were received. After considering the
comments received, the IRS and Treasury
Department adopt the 2007 regulations,
with modifications, as final regulations
under section 367(a).
This Treasury
decision also removes the temporary
regulations and revises cross-references
where appropriate to reflect the removal
and replacement of the temporary
regulations with final regulations.
Summary of Comments and
Explanation of Revisions
A. Subsequent Nonrecognition
Transfers—In General
The 2007 regulations provide specific
exceptions for certain dispositions or other
events that would otherwise require gain

608

to be recognized under an existing GRA
(triggering event). The exceptions generally apply to dispositions that qualify for
nonrecognition treatment under the Code
and require the U.S. transferor to enter into
a new GRA with respect to the initial transfer for the remaining term of the existing
GRA.
Several commentators asserted that the
exceptions provided by the 2007 regulations did not literally apply to various
dispositions qualifying for nonrecognition
treatment because the entity making the
transfer is not described in the relevant
exception, thus inappropriately resulting
in gain recognition under a GRA. For example, assume that in year 1 a domestic
corporation, USP, transfers stock of a foreign corporation, FS1, to another foreign
corporation, FS2, pursuant to an exchange
to which section 351 applies (the initial
transfer). USP files a GRA with respect to
the initial transfer. In year 2, FS2 transfers
the FS1 stock received from USP in year 1
to another foreign corporation, FS3, solely
in exchange for stock of FS3 under section
351. The year 2 transfer of the FS1 stock
by FS2 would constitute a triggering event
for purposes of the GRA filed by USP
with respect to the initial transfer, but the
transfer qualifies for an exception under
the 2007 regulations. USP complies with
the requirements of the 2007 regulations
with respect to the GRA filed for the initial
transfer. In year 3, FS3 contributes the
FS1 stock received from FS2 in year 2 to
another foreign corporation, FS4, solely in
exchange for stock of FS4 under section
351. The year 3 transfer of the FS1 stock
by FS3 is a triggering event with respect
to the GRA entered into by USP in connection with the initial transfer.
The 2007 regulations provide an exception for certain subsequent transfers
of the transferred stock in a transaction
to which section 351 applies (section 351
exchange), but the exception does not
clearly apply when the transferor in the
section 351 exchange is not the transferee
foreign corporation. Commentators expressed similar concerns with respect to
other nonrecognition transactions, including liquidations described in section 332
(section 332 liquidation), transactions to
which section 355 applies (section 355
transactions), and transactions involving
partnerships.
The commentators suggested various alternatives for avoiding

2009–9 I.R.B.

the inappropriate triggering of a GRA in
such cases.
The IRS and Treasury Department
agree that certain nonrecognition transactions that may not qualify for an exception
under the 2007 regulations should not
trigger an existing GRA. Because specific exceptions provide certainty to the
relevant transactions, the final regulations retain the exceptions of the 2007
regulations with modifications so that the
exceptions apply to transactions involving
one or more entities not clearly described
in the 2007 regulations. For example,
under the final regulations the exception
for a section 351 exchange of the transferred stock applies to any transfer of the
transferred stock regardless of the identity
of the transferor. The final regulations include additional specific exceptions and a
general exception for certain transactions
that cannot be adequately covered by a
specific exception because of the myriad
factual permutations.
The general exception provided by the
final regulations applies generally to any
disposition or other event that would otherwise constitute a triggering event if the
disposition is a nonrecognition transaction
(as defined in section 7701(a)(45), but including an exchange described in section
351(b) or 356 even if all gain realized is
recognized); a U.S. transferor retains a direct or indirect interest in the transferred
stock or securities (or the assets of the
transferred corporation, such as where the
transferred corporation has liquidated in
the interim); and the U.S. transferor that retains such direct or indirect interest enters
into a new GRA with respect to the initial
transfer. However, if, as a result of the disposition or other event, a foreign corporation acquires all or part of the transferred
stock or securities (or substantially all the
assets of the transferred corporation) the
general exception shall apply only if the
U.S. transferor owns at least five percent
(applying the attribution rules of section
318, as modified by section 958(b)) of the
total voting power and the total value of
the outstanding stock of such foreign corporation immediately after the disposition
or other event. This five percent ownership condition is intended to limit the application of the general exception in transactions where the U.S. transferor retains a
minimal interest in the transferred stock or
securities (or substantially all the assets of

2009–9 I.R.B.

the transferred corporation). The final regulations include examples to illustrate the
application of the general exception.
A disposition or other event to which
the general exception applies shall be
subject to the provisions of the final regulations to the same extent and in the same
manner as a disposition or event to which
a specific exception applies. For example,
even though a specific exception is generally available for a section 351 exchange
of the transferred stock by the transferee
foreign corporation, the U.S. transferor
must still recognize gain under the existing
GRA to the extent the transferee foreign
corporation would otherwise recognize
gain in the exchange under section 351(b).
The U.S. transferor must therefore similarly recognize gain in connection with
a disposition or other event to which the
general exception applies to the extent that
the transferee foreign corporation would
otherwise recognize gain in the exchange
under section 351(b).
A new GRA filed under the general exception is generally subject to the same
terms and conditions as the existing GRA,
but must also describe the subsequent dispositions that would constitute triggering
events (based on the principles of the final
regulations, but not including any triggering event otherwise described in the final
regulations) and include a statement that
the U.S. transferor agrees to treat such dispositions as triggering events. In addition,
the final regulations provide that, with respect to a new GRA filed under the general
exception, a triggering event shall also include any other disposition or event that is
inconsistent with the principles of the triggering event exceptions including, for example, an indirect disposition of the transferred stock or securities or of substantially
all of the assets of the transferred corporation. This additional condition is similar to
the condition applicable to a GRA filed in
connection with an indirect stock transfer
described in §1.367(a)–3(d).
One commentator requested that an exception be provided for a securities lending
transaction to which section 1058 applies.
The final regulations do not provide such
an exception.

609

B. Dispositions Pursuant to an
Intercompany Transaction
Under the 2007 regulations, a complete
or partial disposition by the U.S. transferor
of the stock of the transferee foreign corporation received in the initial transfer generally requires the U.S. transferor to recognize gain under the GRA. Exceptions
to this general rule are provided for certain nonrecognition transfers to which sections 351, 354, or 721 applies. As described further in part D. of this Preamble,
the 2007 regulations provide further that a
GRA shall instead terminate (in whole or
in part) if the U.S. transferor disposes of all
or part of the stock of the transferee foreign
corporation received in the initial transfer pursuant to a transaction in which all
gain realized is recognized currently and
included in taxable income as a result of
the disposition, but only if the basis of the
stock disposed of (excluding certain adjustments to such basis) is not greater than
the basis in the transferred stock or securities at the time of the initial transfer.
If the U.S. transferor disposes of stock
of the transferee foreign corporation pursuant to an intercompany transaction
(within the meaning of §1.1502–13) that
is not described in section 351 or 354,
the conditions for terminating the existing GRA (in whole or in part) are not
satisfied because, under the provisions of
§1.1502–13, the U.S. transferor generally
defers taking into account any gain realized and recognized on the disposition.
Thus, such a disposition would be a triggering event.
Several commentators asserted that it
is inappropriate to require the U.S. transferor to recognize gain under the GRA in
such cases because the stock of the transferee foreign corporation remains within
the consolidated group of which the U.S.
transferor is a member. It is also inappropriate to terminate the GRA because
the intercompany item has not been taken
into account. Instead, the commentators
recommended that the GRA remain in
effect for its remaining term. The IRS
and Treasury Department agree with this
recommendation, and the final regulations
provide a specific exception for dispositions of stock of the transferee foreign
corporation pursuant to an intercompany
transaction (intercompany transaction exception) to which a specific triggering

March 2, 2009

event exception does not apply. If the intercompany transaction exception applies,
the U.S. transferor remains subject to the
existing GRA. But see the discussion below when the intercompany transaction is
a nonrecognition transaction in which an
amount of gain is recognized.
The intercompany transaction exception is available if two conditions are satisfied. The first condition is that the basis
of the stock of the transferee foreign corporation disposed of in the intercompany
transaction is not greater than the sum
of the aggregate basis in the transferred
stock or securities at the time of the initial
transfer, any increase to the basis of the
transferred stock or securities by reason
of gain recognized by the U.S. transferor
in connection with the initial transfer, and
any increase to the basis of the stock of the
transferee foreign corporation by reason of
income inclusions by the U.S. transferor
(for example, pursuant to section 961).
To satisfy this basis condition, the U.S.
transferor can elect to reduce the basis of
the stock of the transferee foreign corporation, effective immediately before the
intercompany transaction.
The second condition is that the annual certification filed with respect to the
existing GRA for the taxable year during
which the intercompany transaction occurs
includes a complete description of the intercompany transaction and a schedule illustrating how the basis condition is satisfied.
Because the final regulations provide
specific exceptions for certain nonrecognition transfers of stock of the transferee
foreign corporation (for example, pursuant
to a section 351 exchange), the new intercompany transaction exception applies
only to the extent the intercompany transaction gives rise to an intercompany item
(as defined in §1.1502–13(b)(2)). If the
intercompany item is a gain, the existing
GRA must be divided into two separate
agreements — one that remains with the
U.S. transferor (of an amount equal to
the intercompany item) and another that
moves to the acquiring member (of an
amount equal to the remaining amount of
the existing GRA amount). For example,
assume the amount of the existing GRA
is $100x, the intercompany transaction
is described in section 351(b), and the
U.S. transferor recognizes $20x gain (the
intercompany item) in the intercompany

March 2, 2009

transaction. The intercompany transaction
exception applies to the extent of the $20x
intercompany item, and the exception for
section 351 exchanges applies to the remainder of the transfer. Thus, the U.S.
transferor remains subject to a $20x GRA
(to the extent of the $20x intercompany
item), and the acquiring member becomes
subject to an $80x GRA. This result is
similar to that of a transfer of the stock of
the transferee foreign corporation to a domestic acquiring corporation in a section
351 exchange that is not an intercompany
transaction but in which the U.S. transferor
recognizes gain under section 351(b). In
such a case, the amount of the new GRA
entered into by the domestic acquiring
corporation is reduced by the amount of
gain recognized by the U.S. transferor on
the transfer under section 351(b). The
U.S. transferor does not remain subject to
a GRA because the gain recognized under
section 351(b) is taken into account. By
contrast, if the section 351 exchange were
an intercompany transaction, the U.S.
transferor must remain subject to a GRA
in an amount equal to the gain recognized
under section 351(b) because the gain has
not been taken into account.
If the intercompany item is a loss, however, the U.S. transferor shall remain subject to the entire GRA. In addition, in such
a case, the termination rule that applies to
dispositions of the stock of the transferee
foreign corporation in which all realized
gain is recognized and included in taxable
income during the taxable year of the disposition shall not apply.
The final regulations provide rules to
coordinate the subsequent inclusion in
taxable income of an intercompany item
and an amount of gain recognized under
the GRA. Generally, under the coordination rule, if subsequent to an intercompany
transaction to which the intercompany
transaction exception applies, a disposition or other event occurs that requires
the U.S. transferor to take into account
the intercompany item related to the intercompany transaction (under the provisions
of §1.1502–13), the disposition shall not
constitute a triggering event. Instead the
GRA shall terminate without further effect
or the amount of gain subject to the GRA
shall be reduced based on the principles of
the termination rule that applies to certain
dispositions of the stock of the transferee
foreign corporation received in the initial

610

transfer. The final regulations include an
example illustrating this rule.
C. Divisive Reorganizations
The preamble to the 2007 regulations
requested comments concerning whether
specific exceptions should be provided for
divisive reorganizations involving the U.S.
transferor, the transferee foreign corporation, or the transferred corporation. No
comments were received. However, the
final regulations provide a specific exception for divisive reorganizations involving
a transfer of the stock of the transferee
foreign corporation received in the initial
transfer to a domestic corporation (domestic controlled corporation) before the distribution of the stock of the domestic controlled corporation. The specific exception
applies if the domestic controlled corporation enters into a new GRA with respect to
the initial transfer. The IRS and Treasury
Department expect the general exception
to apply to other divisive reorganizations,
as appropriate. The final regulations include examples illustrating the application
of the general exception to divisive reorganizations.
D. GRA Termination Events
If certain conditions are met, under the
2007 regulations an existing GRA terminates without further effect (termination
rule) if the U.S. transferor (or other specified United States persons) re-acquires
the transferred stock or securities, or the
U.S. transferor disposes of the stock of the
transferee foreign corporation received in
the initial transfer. One condition for the
application of the termination rule is that,
with certain adjustments, the basis of the
transferred stock or securities in the hands
of the U.S. transferor (or other specified
United States person) immediately following the acquisition or the basis of stock
of the transferee foreign corporation disposed of by the U.S. transferor, as relevant,
must not be greater than the basis of the
transferred stock or securities at the time
of the initial transfer. To satisfy this basis
condition, the 2007 regulations generally
permit the U.S. transferor (or other United
States person) to reduce the basis of the
transferred stock or securities (or the stock
of the transferee foreign corporation, as
applicable). The 2007 regulations further
permit an increase to basis of other stock

2009–9 I.R.B.

or securities in the transferred corporation
(or stock of the transferee foreign corporation, as applicable) by a corresponding
amount, but not in excess of fair market
value.
The final regulations retain the termination rule and the conditions for its application, including the option to reduce basis. However, the IRS and Treasury Department have determined that it is inappropriate to permit the shifting of basis to
other stock or securities in the case of an
election to reduce the basis of stock or securities. The final regulations, therefore,
do not permit the U.S. transferor (or other
United States person) to increase the basis of other stock or securities of the transferred corporation (or stock of the transferee foreign corporation, as applicable).
The general exception, however, may apply allowing the U.S. transferor (or other
United States person) to enter into a new
GRA in connection with a transaction in
which the transferred stock or securities
are re-acquired in lieu of reducing the basis of the transferred stock or securities.
One commentator questioned whether
the termination rule applies in the case
of a downstream asset reorganization of
the transferee foreign corporation into the
transferred corporation because the U.S.
transferor receives newly-issued stock of
the transferred corporation in the transaction and not the stock transferred in
the initial transfer. The IRS and Treasury
Department believe it is appropriate for
the termination rule to apply in the case
of such downstream asset reorganizations.
Accordingly, by revising the location of
a rule contained in the 2007 regulations,
the final regulations clarify that the term
transferred stock or securities includes any
stock or securities of the transferred corporation with a basis determined, in whole
or in part, by reference to the basis of the
stock or securities transferred in the initial
transfer. Thus, in the case of a downstream
asset reorganization, for purposes of the
termination rule, the newly-issued stock
of the transferred corporation deemed
distributed by the transferee foreign corporation to the U.S. transferor under section
361(c) is the stock transferred in the initial
transfer.
The 2007 regulations provide an exception for certain expropriation losses
that would otherwise constitute triggering
events. The final regulations modify the

2009–9 I.R.B.

rule to provide instead that the amount of
gain subject to a GRA is reduced to the
extent a loss is sustained with respect to
stock of the transferee foreign corporation,
the transferred stock or securities, or substantially all the assets of the transferred
corporation by reason of an expropriation
of such property by the government of a
foreign country, any political subdivision
thereof, or any agency or instrumentality
of the foregoing.
E. Transfers by U.S. Transferor Pursuant
to an Outbound Asset Reorganization
The 2007 regulations provide an exception for a transfer of stock of the transferee foreign corporation by the U.S. transferor to a domestic corporation pursuant to
an asset reorganization described in section 368(a)(1). See §1.367(a)–8T(e)(3)(i).
The preamble to the 2007 regulations requested comments concerning whether an
exception should also be provided for an
outbound transfer of the stock of the transferee foreign corporation by the U.S. transferor to a foreign corporation pursuant to
an asset reorganization described in section 368(a)(1). No comments were received. However, after studying the issue further and considering the principles
of the proposed regulations recently issued under sections 367(a)(5), 367(b), and
1248(f) (73 FR 49278), the IRS and Treasury Department have determined that it
is appropriate for an exception to apply to
such an outbound transfer. The final regulations do not include a specific exception
for such outbound transfers, but the IRS
and Treasury Department expect the general exception provided by the final regulations to apply to such transfers, as appropriate. The final regulations include an
example illustrating the application of the
general exception to such a transfer.
F. Ordering Rule if Triggering Event
Affects Multiple GRAs
The final regulations provide an ordering rule to determine the amount of gain
recognized under a GRA when a disposition or other event requires gain to be recognized under more than one GRA. The
ordering rule adopts a “first-in-time” approach, providing that gain must first be
recognized under the GRA that relates to
the earliest initial transfer, then under the

611

GRA that relates to the transfer immediately following the initial transfer, and
so forth until the appropriate amount of
gain under each GRA has been recognized.
This ordering rule clarifies that the gain
recognized under a GRA is determined after taking into account any increase to the
basis of the transferred stock or securities
resulting from gain recognized under another GRA that relates to an earlier initial
transfer. The final regulations include an
example to illustrate the ordering rule.
G. Section 301 Distributions
The 2007 regulations define a disposition as any transfer that would constitute
a disposition for any purpose of the Code
and the regulations under the Code, but
exclude a stock redemption described
under section 302(d) (dividend equivalent redemption) to the extent section
301(c)(1) applies. One commentator requested that the final regulations clarify
whether the rule for dividend equivalent
redemptions applies to redemptions of
stock of the transferee foreign corporation,
the transferred corporation, or both. The
commentator also requested that the final
regulations confirm that a distribution of
property to which section 301(c)(2) applies (including in the case of a dividend
equivalent redemption) does not constitute
a disposition of the relevant stock.
The final regulations provide that a disposition generally does not include the receipt of a distribution of property with respect to stock to which section 301 applies,
including by reason of section 302(d). The
final regulations provide further that a dividend equivalent redemption shall constitute a disposition if the U.S. transferor does
not enter into a new GRA that includes appropriate provisions to account for the redemption. The final regulations include an
example illustrating this rule and describing the types of appropriate provisions that
should be included in the new GRA. The
provisions to be included in the GRA are
necessary, for example, to account for a
dividend equivalent redemption that occurs pursuant to a transaction to which section 304(a)(1) applies and in which the
transferor does not retain a direct or indirect interest in the acquiring corporation.
In such a case, the GRA would need to
provide appropriate provisions to account
for indirect dispositions of the transferred

March 2, 2009

stock that should require gain to be recognized under the new GRA.
The final regulations provide that the
U.S. transferor must recognize gain under
a GRA to the extent gain is recognized
under section 301(c)(3) with respect to the
transferred stock and that the amount of
gain subject to the GRA is reduced to the
extent the U.S. transferor recognizes gain
under section 301(c)(3) with respect to the
stock of the transferee foreign corporation
received in the initial transfer.
H. Elections under Section 338
One commentator requested that the
final regulations provide an exception for
a deemed sale of the assets of the transferred corporation or the transferee foreign
corporation by reason of an election under section 338(g). The commentator
posited a fact pattern where the U.S. transferor entered into a GRA in connection
with a transfer of less than 20 percent of
the outstanding stock of the transferred
corporation to the transferee foreign corporation, and, within the GRA term, the
transferee foreign corporation acquires
additional stock of the transferred corporation constituting a qualified stock
purchase (within the meaning of section
338(d)(3)) and makes an election under
section 338(g) with respect to such acquisition. The deemed asset sale that
results from the section 338(g) election
is a sale for all purposes of the Code (see
§1.338–2(c)(6)) and thus, under the 2007
regulations, would require the U.S. transferor to recognize the full amount of gain
subject to the GRA. The commentator asserted that providing an exception for such
a deemed asset sale was consistent with
the policies of the GRA regime because
the deemed asset sale is not a monetization
of the assets or stock of the transferred
corporation.
The IRS and Treasury Department
agree with the commentator, and the final
regulations provide that a deemed sale of
assets of the transferred corporation or the
transferee foreign corporation by reason
of an election under section 338(g) shall
not constitute a triggering event for purposes of the GRA. However, the sale of
stock of the target corporation pursuant
to the qualified stock purchase shall be
taken into account for purposes of a GRA.
The sale of stock of the transferred or

March 2, 2009

transferee foreign corporation by the seller
should either require gain to be recognized
under a GRA or terminate the GRA without further effect if the conditions for the
termination rule are satisfied, even if an
election under section 338(g) is made.
By contrast, a deemed sale of assets
of a domestic corporation by reason of
an election under section 338(h)(10) shall
continue to be taken into account for purposes of §1.367(a)–8. Thus, for example, if an election under section 338(h)(10)
were made with respect to the U.S. transferor, the deemed sale of the stock of the
transferee foreign corporation held by the
U.S. transferor would constitute a disposition of such stock that either requires gain
to be recognized under the GRA or terminates the GRA if the conditions for the termination rule are satisfied.
On August 22, 2008, the IRS
and Treasury Department issued proposed regulations under section 336(e)
(REG–143544–04, 2008–42 I.R.B. 947)
that provide rules generally consistent with
the rules that apply to elections under section 338(h)(10). The proposed regulations
under section 336(e) shall be applicable
to dispositions occurring on or after the
proposed regulations are published as final regulations in the Federal Register.
The proposed regulations do not apply if
the selling corporation or the target corporation is foreign. When final regulations
under section 336(e) are promulgated,
the IRS and Treasury Department anticipate that a deemed asset sale pursuant
to a section 336(e) election with respect
to a domestic corporation shall be taken
into account for purposes of §1.367(a)–8,
similar to a deemed asset sale pursuant
to an election under section 338(h)(10).
Comments are requested in this regard,
including what special rules would be required with respect to an existing GRA
if an election under section 336(e) were
permitted if the selling corporation or the
target corporation were foreign.
I. Expatriation under Section 877A
The 2007 regulations provide that a
GRA shall be triggered immediately before the date on which an individual U.S.
transferor loses United States citizenship
or ceases to be taxed as a lawful permanent
resident (as defined in section 877(e)(2)).
This rule applies even if the individual

612

U.S. transferor would have recognized
gain with respect to the stock of the transferee foreign corporation under section
877. The final regulations generally retain
this rule, modified for the enactment of
section 877A. Further, the final regulations make clear that the termination rule
that applies in certain cases where the
U.S. transferor disposes of the stock of
the transferee foreign corporation is not
applicable to an individual U.S. transferor
that is subject to section 877A.
J. GRA Content
Comments were received regarding
whether the information required with a
GRA could instead be made available by
the U.S. transferor “upon request.” The
final regulations confirm that the information required with a GRA must be included
with the GRA as filed with the tax return
of the U.S. transferor.
K. Other Changes
Under the 2007 regulations, certain
dispositions that qualify for an exception
nonetheless require the U.S. transferor to
recognize gain under the existing GRA.
For example, to the extent the transferee
foreign corporation would be required to
recognize gain under section 351(b) or
356(a)(1) in connection with an exchange
of the transferred stock, the U.S. transferor must recognize gain under the GRA
notwithstanding that an exception applies
to the exchange of the transferred stock.
The final regulations retain this rule; however, the final regulations refer to any
disposition or event that requires gain to
be recognized under a GRA as a “gain
recognition event.” A gain recognition
event includes a triggering event, a disposition that would constitute a triggering
event but for the application of an exception (such as the section 351(b) or 356
exchange described above), and a section
301 distribution that would require gain
to be recognized under section 301(c)(3)
with respect to the transferred stock.
The final regulations clarify the amount
of gain subject to a GRA that is filed by
a domestic corporate shareholder of a domestic corporation (the U.S. transferor)
that transfers stock or securities to the
transferee foreign corporation pursuant to
an outbound asset reorganization that is

2009–9 I.R.B.

subject to section 367(a)(5) and the regulations under that section.
The final regulations clarify that, if a
GRA is entered into in connection with a
transfer of a partnership interest, a complete or partial disposition of such partnership interest shall constitute a triggering
event for purposes of the GRA.
The 2007 regulations provide exceptions for certain dispositions of stock of
the transferee foreign corporation or of
substantially all the assets of the transferred corporation that are described in
section 351, 354 (but only in the case
of a reorganization described in section
368(a)(1)(B)), or 721, if, in addition to
other requirements, the U.S. transferor
complies with requirements similar to
those for the exception that applies to similar dispositions of the transferred stock or
securities. See §1.367(a)–8T(e)(1)(ii). In
response to comments requesting certainty
concerning the requirements that must be
satisfied, the final regulations identify the
specific requirements that must be satisfied with respect to such dispositions.
The 2007 regulations provide that, if
the transferred corporation is domestic and
at the time of the initial transfer the U.S.
transferor owned stock in the transferred
corporation satisfying the requirements of
section 1504(a)(2), the GRA shall terminate without further effect if the transferred
corporation disposes of substantially all of
its assets in a transaction in which all gain
realized is recognized currently. The final
regulations retain this termination rule but
add, as an additional condition for its application, that the U.S. transferor and the
transferred corporation were members of
the same consolidated group on the date of
the initial transfer. This change was made
because the IRS and Treasury Department
expect a lesser degree of inside and outside basis disparity within a consolidated
group.
The final regulations provide that, if the
initial transfer and one or more dispositions or other events (even if an exception applies) that affect the GRA filed by
the U.S. transferor with respect to the initial transfer occur within the same taxable
year of such U.S. transferor, or if multiple
dispositions or events that affect an existing GRA (even if an exception applies) occur in a taxable year of the U.S. transferor
that does not include the initial transfer,

2009–9 I.R.B.

the U.S. transferor is only required to enter into a single GRA for such taxable year.
The GRA must describe the initial transfer and/or each subsequent disposition or
other event that affects the GRA. This rule
does not apply, however, if a disposition or
other event requires a new GRA to be filed
by a United States person that was not the
U.S. transferor with respect to the existing
GRA.
The final regulations provide that the
determination of whether a disposition of
substantially all of the assets of the transferred corporation has occurred shall be
made on the basis of one or more related
transactions. The final regulations provide further that the determination shall be
made without regard to a disposition of assets described in section 1221(a)(1) in the
ordinary course of business.

Special Analyses

IRS documents cited in this preamble
are made available by the Superintendent
of Documents, U.S. Government Printing
Office, Washington, DC 20402.

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 also has been determined
that 5 U.S.C. 553(b) and (d) do not apply
to these regulations.
It is hereby certified that the collections of information contained in these
regulations will not have a significant
economic impact on a substantial number
of small entities. Accordingly, a regulatory flexibility analysis is not required.
These regulations primarily will affect
United States persons that are large corporations engaged in cross-border corporate
transactions. Thus, the number of affected small entities—in whichever of the
three categories defined in the Regulatory
Flexibility Act (small businesses, small
organizations, and small governmental jurisdictions)—will not be substantial. The
IRS and Treasury Department estimate
that small organizations and small governmental jurisdictions are likely to be
affected only insofar as they might hold
a portfolio interest in stock or securities
and in the unlikely event that they transfer
such stock or securities to a foreign corporation. While a certain number of small
entities may transfer stock or securities to
a foreign corporation in connection with
an acquisition or reorganization, the IRS
and Treasury Department do not anticipate
the number to be substantial. Furthermore,
the IRS and Treasury Department estimate
that those small entities that are affected by
the regulations will likely face a burden of
approximately two hours at an hourly rate
of $200. Considering that the collections
of information enable taxpayers to defer
the current recognition of gain that is subject to a gain recognition agreement, the
IRS and Treasury believe that $400 is not
a significant economic impact. Pursuant
to section 7805(f) of the Internal Revenue
Code, this regulation was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.

Effect on Other Documents

Drafting Information

The following publication is obsolete
as of February 11, 2009: Notice 2005–74,
2005–2 C.B. 726.

The principal authors of these regulations are Daniel McCall, formerly of the
Office of the Associate Chief Counsel (In-

Effective/Applicability Dates
The final regulations generally apply to
transfers of stock or securities occurring on
or after March 13, 2009. The final regulations shall not apply to transfers of stock
or securities occurring on or after March
13, 2009 that are entered into pursuant to
a contract that was binding before February 11, 2009 (subject to customary conditions) and all times thereafter. However,
taxpayers may apply the final regulations
to such transfers provided the final regulations are applied consistently to all such
transfers. Taxpayers may also apply the
rules of the final regulations that were not
already effective under §1.367(a)–8 (see
26 CFR part 1, revised April 1, 2006)
and §1.367(a)–8T to any gain recognition
agreement filed with respect to a transfer
of stock or securities occurring on a date
that is before March 13, 2009 and during a
taxable year for which the period of limitations on assessments under section 6501(a)
of the Code has not closed.
Availability of IRS Documents

613

March 2, 2009

ternational), and S. James Hawes, of the
Office of the 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 removing the entries
for §§1.367(a)–3T(e) and 1.367(a)–8T to
read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. Section 1.338–1 is amended
by adding a new sentence at the end of
paragraph (a)(2), to read as follows:
§1.338–1. General principles; status of
old target and new target.
(a) * * *

(2) * * * See also §1.367(a)–8(k)(13)
for a rule applicable to gain recognition agreements (filed under section
§§1.367(a)–3(b)(1)(ii) and 1.367(a)–8)
and deemed asset sales as a result of an
election under section 338(g).
*****
§1.367(a)–3 [Amended]
Par. 3. 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(c)(3)(iii)(B)(1)(i)(A)

1296(b)

1297(b)

1.367(a)–3(d)(2)(iii)

§1.367(a)–8T(b)(3)(i) and (d)

§1.367(a)–8(c)(1)(i)

1.367(a)–3(d)(2)(v)

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)(i)

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

§1.367(a)–8T(d)(1)

§1.367(a)–8(j)(1)

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

§1.367(a)–8T(b)(1)(vii)

§1.367(a)–8(c)(2)(vi)

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

§1.367(a)–8T(b)(1)(vii)

§1.367(a)–8(c)(2)(vi)

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

§1.367(a)–8T(a)(3)

§1.367(a)–8(d)(3) and (e)(1)(i)

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

§1.367(a)–8T(d)(4)

§1.367(a)–8(j)(5)

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

§1.367(a)–8T(e)(8)

§1.367(a)–8(k)(10)

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

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)(i)

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

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)

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

§1.367(a)–8T(g)(2)

§1.367(a)–8(o)(4)

1.367(a)–3(d)(3), Example 5A(ii), second
to last sentence

§1.367(a)–8T(g)(2)

§1.367(a)–8(o)(4)

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

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)(i)

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

§1.367(a)–8T(g)(2)

§1.367(a)–8(o)(4)

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

§1.367(a)–8T(e)(1)(iii)

§1.367(a)–8(k)(4)

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

§1.367(a)–8T(g)(2)

§1.367(a)–8(o)(4)

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

§1.367(a)–8T(b)(5)

§1.367(a)–8(g)

March 2, 2009

614

2009–9 I.R.B.

Section

Remove

Add

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

§1.367(a)–8T(e)(1)(iii)

§1.367(a)–8(k)(4)

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

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 9(ii), last
sentence

§1.367(a)–8T(d)(2)

§1.367(a)–8(j)(2)(i)

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

§1.367(a)–8T(d)(1)

§1.367(a)–8(j)(1)

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

§1.367(a)–8T(b)(1)(vii)

§1.367(a)–8(c)(2)(vi)

1.367(a)–3(d)(3), Example 12(ii), third
sentence

§1.367(a)–3T(e)

§1.367(a)–3(e)

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

§1.367(a)–3T(e)

§1.367(a)–3(e)

1.367(b)–13(a)(2)(iii)

or (iii) or in sections 368(a)(1)(G) and
(a)(2)(D)

(iii), or (v)

Par. 4. For each entry in the table, redesignate the paragraph designated in the
“Old Paragraph” column as the new para-

graph designation in the “New Paragraph”
column to read as follows:

§1.367(a)–3(g) [Redesignated]
Section 1.367(a)–3(g) is redesignated
as follows:

Old Paragraph

New Paragraph

1.367(a)–3(g)(1)(A)

1.367(a)–3(g)(1)(i)

1.367(a)–3(g)(1)(B)

1.367(a)–3(g)(1)(ii)

1.367(a)–3(g)(1)(B)(1)

1.367(a)–3(g)(1)(ii)(A)

1.367(a)–3(g)(1)(B)(2)

1.367(a)–3(g)(1)(ii)(B)

1.367(a)–3(g)(1)(B)(3)

1.367(a)–3(g)(1)(ii)(C)

1.367(a)–3(g)(1)(B)(4)

1.367(a)–3(g)(1)(ii)(D)

1.367(a)–3(g)(1)(B)(5)

1.367(a)–3(g)(1)(ii)(E)

1.367(a)–3(g)(1)(B)(6)

1.367(a)–3(g)(1)(ii)(F)

1.367(a)–3(g)(1)(C)

1.367(a)–3(g)(1)(iii)

1.367(a)–3(g)(1)(D)

1.367(a)–3(g)(1)(iv)

1.367(a)–3(g)(1)(D)(1)

1.367(a)–3(g)(1)(iv)(A)

1.367(a)–3(g)(1)(D)(2)

1.367(a)–3(g)(1)(iv)(B)

1.367(a)–3(g)(1)(D)(3)

1.367(a)–3(g)(1)(iv)(C)

1.367(a)–3(g)(1)(E)

1.367(a)–3(g)(1)(v)

1.367(a)–3(g)(1)(F)

1.367(a)–3(g)(1)(vi)

1.367(a)–3(g)(2)(G)

1.367(a)–3(g)(1)(vii)

Par. 5. Section 1.367(a)–3 is amended
by:
1. In the first sentence of paragraph
(b)(1), remove the words “Except as provided in section 367(a)(5)” and add “Ex-

2009–9 I.R.B.

cept as provided in section 367(a)(5) and
paragraph (e) of this section” in their place.
2. In the first sentence of paragraph
(c)(1), remove the words “Except as provided in section 367(a)(5)” and add “Ex-

615

cept as provided in section 367(a)(5) and
paragraph (e) of this section” in their place.
3. Revising paragraphs (d)(2)(iv).
4. Revising the last sentence of paragraph (d)(3), Example 5(ii).

March 2, 2009

5. Removing the last sentence of paragraph (d)(3), Example 5A(ii).
6. Revising paragraph (e).
7. Revising and reserving paragraph
(f).
8. Revising the heading for paragraph
(g) and adding new paragraph (g)(1)(viii).
The revisions and addition read as follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*****
(d) * * *
(2) * * *
(iv) Gain recognition agreements involving multiple parties. The U.S. person’s agreement to recognize gain, as provided in §1.367(a)–8, shall include appropriate provisions consistent with the principles of §1.367(a)–8. See Examples 5 and
5A of this section and §1.367(a)–8(j)(9).
*****
(3) * * *
Example 5. * * *
(ii) * * * Under §1.367(a)–8(j)(9), the
gain recognition agreement would be triggered if F sold all or a portion of the stock
of S.
*****
(e) Transfers by a domestic corporation
to a foreign corporation in a section 361
exchange—(1) General rule. If a domestic corporation (U.S. transferor) transfers
stock or securities to a foreign corporation
(transferee foreign corporation) in an exchange described in section 361(a) or (b),
or in an exchange described in section 351
that is also described in section 361(a) or
(b) (collectively, a section 361 exchange),
such transfer shall be subject to section
367(a)(1), unless the conditions of paragraphs (e)(1)(i) through (iv) of this section
are satisfied.
(i) The conditions set forth in section
367(a)(5) and any regulations under that
section have been satisfied including that:
(A) The U.S. transferor is controlled
(within the meaning of section 368(c)) by
five or fewer (but at least one) domestic
corporations (control group members) at
the time of the section 361 exchange;
(B) The U.S. transferor recognizes the
amount of the gain realized in the section 361 exchange that is allocable to any
shareholder that is not a control group

March 2, 2009

member (based on the value of the ownership interest in the U.S. transferor held by
the shareholder at the time of the section
361 exchange);
(C) The U.S. transferor recognizes the
amount of the gain realized in the section
361 exchange allocable to a control group
member that cannot be preserved in the
stock received by the control group member in the transaction; and
(D) Appropriate adjustments are made
to the basis of the stock received by each
control group member in the transaction.
(ii) If the stock or securities transferred
in the section 361 exchange are of a domestic corporation, the conditions in paragraphs (c)(1)(i), (ii), and (iv) of this section
are satisfied.
(iii) Each control group member that
owns five 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 enters into a gain recognition agreement as
provided in §1.367(a)–8. The amount of
gain subject to the gain recognition agreement shall equal the amount of the gain realized by the U.S. transferor on the transfer
of the stock or securities in the section 361
exchange that is allocable to such control
group member (based on the ownership interest (by value) in the U.S. transferor held
by the control group member at the time of
the section 361 exchange) reduced by the
amount of such allocable gain that is recognized by the U.S. transferor with respect
to the control group member. The gain
recognition agreement shall designate the
control group member as the U.S. transferor for purposes of paragraphs (b) and (c)
of this section and §1.367(a)–8.
(iv) Each control group member that
enters into a gain recognition agreement
pursuant to paragraph (e)(1)(iii) of this
section makes the election described in
§1.367(a)–8(c)(2)(vi).
(2) Certain triangular asset reorganizations. If a transfer of stock or securities
described in paragraph (e)(1) of this section is pursuant to a triangular asset reorganization described in §1.358–6(b)(2)(i)
through (iii), the gain recognition agreement filed by a control group member pursuant to paragraph (e)(1)(iii) of this section
shall include provisions consistent with the
principles of §1.367(a)–8 to account for

616

all the parties to the reorganization. See
§1.367(a)–8(j)(9).
(3) Examples. The following examples
illustrate the provisions of paragraph (e)(1)
of this section. Except as otherwise indicated, assume US1, US2, USP, and UST
are domestic corporations; US1 and US2
are not related; CFC1, CFC2, FA, and FC
are foreign corporations; the section 1248
amount attributable to the stock of a foreign corporation is zero; and section 7874
does not apply to the transaction.
Example 1. Outbound asset reorganization. (i)
Facts. US1 and US2 own 60% and 40%, respectively,
of the outstanding stock of UST. UST wholly owns
FC. The FC stock held by UST has a $20x basis and
a $100x fair market value. UST merges with and
into FC in an asset reorganization described in section
368(a)(1)(A). In the section 361 exchange that is part
of the reorganization, UST transfers all of its FC stock
to FA. UST distributes the FA stock it received in the
section 361 exchange to US1 and US2 pursuant to
the plan of reorganization. The conditions set forth
in the second sentence of section 367(a)(5) and the
regulations under that section are satisfied, including
adjusting the basis of the FA stock received by US1
and US2 in the reorganization, as appropriate. After
the reorganization, US1 and US2 own 6% and 4%,
respectively, of the outstanding stock of FA.
(ii) Result. If the conditions of paragraph (e)(1)(i)
through (iv) of this section are satisfied, the transfer
of the FC stock by UST to FA in the section 361 exchange is not subject to section 367(a)(1). Because
US1 and US2 complied with the requirements of section 367(a)(5), the requirement of paragraph (e)(1)(i)
of this section is satisfied. Paragraph (e)(1)(ii) of this
section is not applicable because FC is a foreign corporation. Pursuant to paragraph (e)(1)(iii) of this section, US1 enters into a gain recognition agreement
with respect to its share of the gain realized by UST
on the transfer of the FC stock to FA in the section
361 exchange ($48x, or 60% of $80x). The amount
of gain subject to the gain recognition agreement is
$48x because UST did not recognize any amount of
such gain under section 367(a)(5) or the regulations
under that section with respect to US1. US1 is designated as the U.S. transferor on the gain recognition
agreement for purposes of paragraph (b) of this section and §1.367(a)–8. US1 makes the election described in §1.367(a)–8(c)(2)(vi) with respect to the
gain recognition agreement. Because US2 owns less
than 5% of the stock of FA after the reorganization,
US2 is not required to enter into a gain recognition
agreement with respect to its share of the gain realized by UST on the transfer of the FC stock to FA in
the section 361 exchange.
(iii) Alternate facts. The facts are the same as
in paragraph (i) of this Example, except that, in year
4, FA disposes of 25% of the FC stock in a taxable
exchange. Under §1.367(a)–8(c)(1)(i) and (j)(1), the
partial disposition of the FC stock requires US1 to
include in income 25% of the gain subject to the gain
recognition agreement filed in year 1 ($12x, or 25%
of $48x) and pay applicable interest on any additional
tax due on such inclusion.
(iv) Alternate facts. The facts are the same as
in paragraph (iii) of this Example, except that US1

2009–9 I.R.B.

and US2 are members of a consolidated group of
which USP is the common parent. Because US2 is
considered to own at least 5% of the stock of FA
following the reorganization by reason of the attribution rules of section 318, as modified by section
958(b), a gain recognition agreement must also be
entered into on behalf of US2 with respect to the
amount of the gain realized but not recognized by
UST on the transfer of the FC stock to FA that is
allocable to US2 ($32x, or 40% of $80x). Under
§1.367(a)–8(d)(3) and §1.1502–77(a)(1), USP enters
into the gain recognition agreements on behalf of US1
and US2. In year 4, US1 and US2 must include in
income 25% of the amount of gain subject to their respective gain recognition agreement ($12x for US1
and $8x for US2) and pay applicable interest on any
additional tax due on such inclusion.
Example 2. Divisive reorganization. (i) Facts.
US1 wholly owns UST. The UST stock has a $120x
basis and $150x fair market value. UST wholly owns
CFC2. The CFC2 stock has a $20x basis and a $50x
fair market value. UST also owns Business A that
has a fair market value of $100x. In a divisive reorganization that satisfies the requirements of section
368(a)(1)(D), UST transfers the CFC2 stock to CFC1,
a newly-formed corporation, in exchange solely for
CFC1 stock. The transfer of the CFC2 stock to CFC1
is a section 361 exchange. UST then distributes the
CFC1 stock to US1 in a transaction that qualifies under section 355. Under section 358, the pre-exchange
basis in the UST stock ($120x) is allocated between
the UST stock and the CFC1 stock based on the relative fair market values of such stock. Therefore, immediately after the transaction, the basis of the UST
stock is $80x ($120x multiplied by $100x/$150x),
and the basis of the CFC1 stock is $40x ($120x multiplied by $50x/$150x). The conditions set forth in
section 367(a)(5) and the regulations under that section are satisfied, including reducing the basis of the
CFC1 stock received by US1 in the transaction by
$20x so that the $30x built-in gain in the CFC2 stock
transferred in the section 361 exchange is preserved
in the CFC1 stock received by US1 in the transaction.
(ii) Result. Because US1 complied with the requirements of section 367(a)(5) and regulations under
that section, the requirement of paragraph (e)(1)(i) of
this section is satisfied. Paragraph (e)(1)(ii) of this
section is not applicable because CFC2 is a foreign
corporation. Pursuant to paragraph (e)(1)(iii) of this
section, US1 enters into a gain recognition agreement with respect to its share of the gain realized
by UST on the transfer of the CFC2 stock to CFC1
in the section 361 exchange ($30x). The amount of
gain subject to the gain recognition agreement is $30x
because UST did not recognize any amount of such
gain under section 367(a)(5) or the regulations under
that section with respect to US1. US1 is designated
as the U.S. transferor on the gain recognition agreement for purposes of paragraph (b) of this section and
§1.367(a)–8. US1 makes the election described in
§1.367(a)–8(c)(2)(vi) with respect to the gain recognition agreement.

ration in a section 361 exchange, see
§1.367(b)–4(b)(1)(iii), Example 4. For
rules relating to certain distributions of
stock of a foreign corporation by a domestic corporation, see section 1248(f) and
the regulations under that section.
(f) [Reserved].
(g) Effective/applicability date (1) * * *
(viii)(A) Except as provided in this
paragraph (g)(1)(viii), the rules of paragraph (e) of this section apply to transfers
of stock or securities occurring on or after March 13, 2009. For matters covered
in this section for periods before March
13, 2009 but on or after March 7, 2007,
the rules of §1.367(a)–3T(e) (see 26 CFR
part 1, revised April 1, 2007) apply. 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.
(B) Taxpayers may apply the rules of
§1.367(a)–3(e) to transfers occurring before March 13, 2009 and during a taxable year for which the period of limitations on assessments under section 6501(a)
has not closed, if done consistently to all
such transfers occurring during each taxable year. A taxpayer applies the rules of
§1.367(a)–3(e) to transfers occurring before March 13, 2009 and during a taxable
year for which the period of limitations on
assessments under section 6501(a) has not
closed, by including the gain recognition
agreement, annual certification, or other
information filing, that is required as a result of the rules of §1.367(a)–3(e) applying
to such a transfer, with an amended tax return for the taxable year in which the transfer occurs that is filed on or before August
10, 2009. A taxpayer that wishes to apply the rules of §1.367(a)–3(e) to transfers
occurring before March 13, 2009 and during a taxable year for which the period of
limitations on assessments under section
6501(a) has not closed but that fails to meet
the filing requirement described in the preceding sentence must request relief for reasonable cause for such failure as provided
in §1.367(a)–8.

(4) Cross-references. For other examples that illustrate the application of
this paragraph (e), see §1.367(a)–8(q)(2),
Examples 6 and 24. For rules relating to
an acquisition of the stock of a foreign
corporation by another foreign corpo-

*****

2009–9 I.R.B.

§1.367(a)–3T [Removed]
Par. 6.
moved.

Section 1.367(a)–3T is re-

617

Par. 7. Section 1.367(a)–8 is revised to
read as follows:
§1.367(a)–8 Gain recognition agreement
requirements.
(a) Scope. This section provides the
terms and conditions for a gain recognition
agreement entered into by a United States
person pursuant to §1.367(a)–3(b) through
(e) in connection with a transfer of stock
or securities to a foreign corporation pursuant to an exchange that would otherwise
be subject to section 367(a)(1). Paragraph
(b) of this section provides definitions and
special rules. Paragraphs (c) through (h)
of this section identify the form, content,
and other conditions of a gain recognition
agreement. Paragraph (i) of this section
is reserved. Paragraph (j) of this section
identifies certain events that may require
gain to be recognized under a gain recognition agreement. Paragraph (k) of this section provides exceptions for certain events
that would otherwise require gain to be
recognized under a gain recognition agreement. Paragraph (l) of this section is reserved. Paragraph (m) of this section provides rules that require gain to be recognized under a gain recognition agreement
in connection with certain events to which
an exception under paragraph (k) of this
section otherwise applies. Paragraph (n)
of this section provides special rules in the
case of a distribution of property with respect to stock to which section 301 applies.
Paragraph (o) of this section provides rules
for certain transactions that terminate or
reduce the amount of gain subject to a gain
recognition agreement. Paragraph (p) of
this section provides relief for reasonable
cause for certain failures to comply with
the requirements of this section. Paragraph
(q) of this section provides examples that
illustrate the rules of the section. Paragraph (r) of this section provides effective
dates for the provisions of this section.
(b) Definitions and special rules. The
following definitions and special rules apply for purposes of this section.
(1) Definitions—(i) Asset reorganization—(A) General rule. Except as
provided in paragraph (b)(1)(i)(B) of this
section, an asset reorganization is a reorganization described in section 368(a)(1)
that involves an exchange of property described in section 361(a) or (b) (a section
361 exchange).

March 2, 2009

(B) Exceptions. An asset reorganization does not include the following:
(1) A reorganization described in section 368(a)(1)(D) or (G) if the requirements of section 354(b)(1)(A) and (B) are
not met.
(2) For purposes of paragraphs
(j)(2)(ii)(B), (k)(6)(ii), and (k)(6)(iii) of
this section, a triangular asset reorganization. For rules applicable to a triangular
asset reorganization, see paragraph (k)(7)
of this section.
(ii) A consolidated group has the meaning set forth in §1.1502–1(h).
(iii) Disposition. Except as provided in
this paragraph (b)(1)(iii), a disposition includes any transfer that would constitute
a disposition for any purpose of the Internal Revenue Code. A disposition includes an indirect disposition of the stock
of the transferred corporation as described
in §1.367(a)–3(d). Except as provided in
paragraph (n)(1) of this section, a disposition does not include the receipt of a distribution of property with respect to stock
to which section 301 applies (including by
reason of section 302(d)). See paragraphs
(n)(2) and (o)(3) of this section for rules
that apply if gain is recognized under section 301(c)(3). A complete or partial disposition by installment sale (under section
453) shall be treated as a disposition in the
year of the installment sale.
(iv) A gain recognition event is an event
described in paragraphs (j) through (o) of
this section that requires gain to be recognized under a gain recognition agreement.
(v) The initial transfer means a transfer of stock or securities (transferred stock
or securities) to a foreign corporation pursuant to an exchange that would otherwise
be subject to section 367(a)(1) but with respect to which a gain recognition agreement is entered into by a United States
person pursuant to §1.367(a)–3(b) through
(e).
(vi) An intercompany item has the
meaning set forth in §1.1502–13(b)(2).
(vii) An intercompany transaction has
the meaning set forth in §1.1502–13(b)(1).
(viii) A nonrecognition transaction
has the meaning set forth in section
7701(a)(45). In addition, a nonrecognition transaction includes an exchange
described in section 351(b) or 356 even if
all gain realized in the exchange is recognized.

March 2, 2009

(ix) The terms P, S, and T have the
meanings set forth in §1.358–6(b)(1)(i),
(ii), and (iii), respectively.
(x) The determination of whether substantially all of the assets of the transferred
corporation have been disposed of is based
on all the facts and circumstances.
(xi) A timely-filed return is a Federal
income tax return filed by the due date
set forth in section 6072(a) or (b), plus
any extension of time to file such return
granted under section 6081.
(xii) Transferee foreign corporation.
Except as provided in this paragraph
(b)(1)(xii), the transferee foreign corporation is the foreign corporation to which the
transferred stock or securities are transferred in the initial transfer. In the case of
an indirect stock transfer, the transferee
foreign corporation has the meaning set
forth in §1.367(a)–3(d)(2)(i). The transferee foreign corporation also includes a
corporation designated as the transferee
foreign corporation in the case of a new
gain recognition agreement entered into
under this section.
(xiii) Transferred corporation. Except
as provided in this paragraph (b)(1)(xiii),
the transferred corporation is the corporation the stock or securities of which
are transferred in the initial transfer. In
the case of an indirect stock transfer, the
transferred corporation has the meaning
set forth in §1.367(a)–3(d)(2)(ii). The
transferred corporation also includes a
corporation designated as the transferred
corporation in the case of a new gain
recognition agreement entered into under
this section.
(xiv) A triangular asset reorganization is a reorganization described in
§1.358–6(b)(2)(i), (ii), (iii), or (v).
(xv) The U.S. transferor is the
United States person (as defined in
§1.367(a)–1T(d)(1)) that transfers the
transferred stock or securities to the transferee foreign corporation in the initial
transfer. For purposes of determining the
U.S. transferor in the case of a transfer by
a partnership, see §1.367(a)–1T(c)(3)(i).
The U.S. transferor also includes the
United States person designated as the
U.S. transferor in the case of a new gain
recognition agreement entered into under
this section including, for example, under
paragraph (k)(14) of this section.
(2) Special rules—(i) Stock deemed
received or transferred. References to

618

stock received include stock deemed received (for example, pursuant to section
367(c)(2)). References to a transfer of
stock or securities include a deemed transfer of stock or securities.
(ii) Stock of the transferee foreign
corporation. References to stock of the
transferee foreign corporation includes
any stock of the transferee foreign corporation the basis of which is determined, in
whole or in part, by reference to the basis
of the stock of the transferee foreign corporation received by the U.S. transferor in
the initial transfer.
(iii) Transferred stock or securities.
References to transferred stock or securities includes any stock or securities of
the transferred corporation the basis of
which is determined, in whole or in part,
by reference to the basis of the stock or
securities transferred in the initial transfer.
(c) Gain recognition agreement—(1)
Terms of agreement—(i) General rule.
Except as provided in this paragraph
(c)(1)(i), if a gain recognition event occurs
during the period beginning on the date
of the initial transfer and ending as of the
close of the fifth full taxable year (not less
than 60 months) following the close of the
taxable year in which the initial transfer
occurs (GRA term), the U.S. transferor
must include in income the gain realized
but not recognized on the initial transfer
by reason of entering into the gain recognition agreement. In the case of a gain
recognition event that occurs as a result of
a partial disposition of stock, securities,
or a partnership interest, as applicable, the
U.S. transferor is required to recognize a
proportionate amount of the gain subject
to the gain recognition agreement, determined based on the fair market value of
the stock, securities, or partnership interest, as applicable, disposed of (measured
at the time of the partial disposition) as
compared to the fair market value of all the
stock, securities, or partnership interest,
as applicable (measured at the time of the
partial disposition). If the U.S. transferor
must recognize gain under this paragraph
as a result of an event described in paragraph (m) or (n) of this section, see those
paragraphs to determine the amount of the
gain that must be recognized. The amount
of gain subject to the gain recognition
agreement shall be reduced by the amount
of gain recognized under this paragraph.
If the amount of gain subject to the gain

2009–9 I.R.B.

recognition agreement is reduced to zero,
the gain recognition agreement shall terminate without further effect.
(ii) Ordering rule for gain recognized
under multiple gain recognition agreements. If a gain recognition event occurs
that requires gain to be recognized under multiple gain recognition agreements,
gain shall first be recognized under the
gain recognition agreement that relates to
the earliest initial transfer, then under the
gain recognition agreement that relates to
the immediately following initial transfer
and so forth until the appropriate amount
of gain has been recognized under each
gain recognition agreement. The amount
of gain recognized under a gain recognition agreement shall be determined after
taking into account, as appropriate, any
increase to basis (including the basis of
the transferred stock or securities) under
paragraph (c)(4) of this section resulting
from gain recognized under another gain
recognition agreement. For an illustration
of this ordering rule, see paragraph (q)(2)
of this section, Example 6.
(iii) Taxable year in which gain is reported—(A) Year of initial transfer. Except as provided in paragraph (c)(1)(iii)(B)
of this section, the U.S. transferor must report any gain recognized under paragraph
(c)(1)(i) of this section on an amended
Federal income tax return for the taxable
year of the initial transfer. The amended
return must be filed on or before the 90th
day following the date on which the gain
recognition event occurs.
(B) Year of gain recognition event. If
an election under paragraph (c)(2)(vi) of
this section is made with the gain recognition agreement or if paragraph (c)(5)(ii) of
this section applies to the gain recognition
agreement, the U.S. transferor must report any gain recognized under paragraph
(c)(1)(i) of this section on its Federal income tax return for the taxable year during
which the gain recognition event occurs.
If an election under paragraph (c)(2)(vi) of
this section is made with the gain recognition agreement or if paragraph (c)(5)(ii) of
this section applies to the gain recognition
agreement but the U.S. transferor does not
report the gain recognized on its Federal
income tax return for the taxable year during which the gain recognition event occurs, the Commissioner may require the
U.S. transferor to report the gain on an
amended Federal income tax return for the

2009–9 I.R.B.

taxable year during which the initial transfer occurred.
(iv) Offsets. No special limitations
apply with respect to offsetting gain recognized under paragraph (c)(1)(i) of this
section with net operating losses, capital
losses, credits against tax, or similar items.
(v) Payment and reporting of interest.
Interest must be paid on any additional tax
due with respect to gain recognized by the
U.S. transferor under paragraph (c)(1)(i) of
this section. Any interest due shall be determined based on the rates under section
6621 for the period between the date that
was prescribed for filing the Federal income tax return of the U.S. transferor for
the year of the initial transfer and the date
on which the additional tax due is paid. If
paragraph (c)(1)(iii)(B) of this section applies, any interest due must be included
with the payment of tax due with the Federal income tax return of the U.S. transferor for the taxable year during which the
gain recognition event occurs (or should
reduce the amount of any refund due to the
U.S. transferor for such taxable year). A
schedule entitled “Calculation of Section
367 Tax and Interest” that separately identifies and calculates any additional tax and
interest due must be included with the Federal income tax return on which any interest due is reported.
(2) Content of gain recognition agreement. The gain recognition agreement
must be entitled “GAIN RECOGNITION
AGREEMENT UNDER §1.367(a)–8”
and include the information described in
paragraphs (c)(2)(i) through (viii) of this
paragraph with the corresponding paragraph numbers. The information required
under this paragraph (c)(2) and paragraph
(c)(3) of this section must be included in
the gain recognition agreement as filed.
(i) A statement that the document constitutes an agreement by the U.S. transferor
to recognize gain in accordance with the
requirements of this section.
(ii) A description of the transferred
stock or securities and other information
as required in paragraph (c)(3) of this section.
(iii) A statement that the U.S. transferor
agrees to comply with all the conditions
and requirements of this section, including to recognize gain under the gain recognition agreement in accordance with paragraph (c)(1)(i) of this section, extend the
statute of limitations on assessments of tax

619

as provided in paragraph (f) of this section,
and file the certification described in paragraph (g) of this section.
(iv) A statement that arrangements have
been made to ensure that the U.S. transferor is informed of any events that affect
the gain recognition agreement, including
triggering events or other gain recognition
events.
(v) In the case of a new gain recognition
agreement filed under this section—
(A) A description of the event (such as
a triggering event) and the applicable exception, if any, that gave rise to the new
gain recognition agreement (such as a triggering event exception), including the date
of the event and the name, address, and
taxpayer identification number (if any) of
each person that is a party to the event;
(B) As applicable, a description of the
class, amount, and characteristics of the
stock, securities or partnership interest received in the transaction; and
(C) As applicable, a calculation of the
amount of gain that remains subject to the
new gain recognition agreement as a result
of the application of paragraph (m), (n), or
(o) of this section.
(vi) A statement whether the U.S. transferor elects to include in income any gain
recognized under paragraph (c)(1)(i) of
this section in the taxable year during
which a gain recognition event occurs.
See paragraph (c)(5)(ii) of this section for
a rule that requires, in certain cases, for
the gain recognized pursuant to a new gain
recognition agreement to be included in
income during the taxable year in which
the gain recognition event occurs.
(vii) A statement whether a gain recognition event has occurred during the taxable year of the initial transfer.
(viii) A statement describing any disposition of assets of the transferred corporation during such taxable year other than in
the ordinary course of business.
(3) Description of transferred stock or
securities and other information. The gain
recognition agreement shall include the
following:
(i) A description of the transferred stock
or securities including—
(A) The type or class, amount, and characteristics of the transferred stock or securities;
(B) A calculation of the amount of the
built-in gain in the transferred stock or securities that are subject to the gain recog-

March 2, 2009

nition agreement, reflecting the basis and
fair market value on the date of the initial
transfer;
(C) The amount of any gain recognized
by the U.S. transferor on the initial transfer; and
(D) The percentage (by voting power
and value) that the transferred stock (if
any) represents of the total stock outstanding of the transferred corporation on the
date of the initial transfer.
(ii) The name, address, place of incorporation, and taxpayer identification number (if any) of the transferred corporation.
(iii) The date on which the U.S. transferor acquired the transferred stock or securities.
(iv) The name, address and place of incorporation of the transferee foreign corporation, and a description of the stock or
securities received by the U.S. transferor in
the initial transfer, including the percentage of stock (by vote and value) of the
transferee foreign corporation received in
such exchange.
(v) If the initial transfer is described in
§1.367(a)–3(e), a statement that the conditions of section 367(a)(5) and any regulations under that section have been satisfied, and a description of any adjustments
to the basis of the stock received in the
transaction or other adjustments made pursuant to section 367(a)(5) and any regulations under that section.
(vi) If the transferred corporation is
domestic, a statement describing the application of section 7874 to the transaction,
and indicating that the requirements of
§1.367(a)–3(c)(1) are satisfied.
(vii) If the transferred corporation is
foreign, a statement indicating 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 initial transfer, and whether the
U.S. transferor is a section 1248 shareholder with respect to the transferee foreign corporation immediately after the
initial transfer, 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.
(viii) If the initial transfer involves a transfer by a partnership (see
§1.367(a)–1T(c)(3)(i)) or a transfer of a
partnership interest (see section 367(a)(4)
and §1.367(a)–1T(c)(3)(ii)) a complete

March 2, 2009

description of the transfer, including a description of the partners in the partnership.
(ix) If the transaction involved the
transfer of property other than the transferred stock or securities and the transaction was subject to the indirect stock
transfer rules of §1.367(a)–3(d), a statement indicating whether—
(A) The reporting requirements under
section 6038B have been satisfied with respect to the transfer of such other property;
(B) Whether gain was recognized under
section 367(a)(1);
(C) Whether section 367(d) applied to
the transfer of such property; and
(D) Whether the other property transferred qualified for the active foreign
trade or business exception under section
367(a)(3).
(4) Basis adjustments for gain recognized. The following basis adjustments
shall be made if gain is recognized under
paragraph (c)(1)(i) of this section.
(i) Stock or securities of transferee foreign corporation. The basis of the stock or
securities, as applicable, of the transferee
foreign corporation received by the U.S.
transferor in the initial transfer shall be increased as of the date of the initial transfer
by the amount of gain recognized.
(ii) Transferred stock or securities. The
basis of the transferred stock or securities
shall be increased as of the date of the initial transfer by the amount of the gain recognized.
(iii) Other appropriate adjustments.
The basis of other stock, securities, or a
partnership interest shall be increased, as
appropriate, in accordance with the principles of this paragraph (c)(4). Under no
circumstances shall the basis of stock, securities, or of a partnership interest held by
a U.S. person that does not recognize gain
under paragraph (c)(1)(i) of this section
be increased under this paragraph (c)(4).
In addition, under no circumstances shall
the basis of any property be increased by
the amount of any additional tax due or
interest paid with respect to such tax, nor
shall the basis of the assets of the transferred corporation be increased as a result
of gain recognized by the U.S. transferor
under paragraph (c)(1)(i) of this section.
(iv) Cross-reference. See paragraph
(q)(2) of this section, Examples 1, 2, 3, and
5 for illustrations of the rules of this paragraph (c)(4). See also §1.367(a)–1T(b)(4)
for rules that determine the increase to

620

basis of property resulting from the application of section 367(a).
(5) Terms and conditions of a new gain
recognition agreement—(i) General rule.
A new gain recognition agreement entered
into pursuant to this section shall replace
the existing gain recognition agreement,
which shall terminate without further effect. The term of the new gain recognition
agreement shall be the remaining term of
the existing gain recognition agreement.
The amount of gain subject to the new
gain recognition agreement shall equal the
amount of gain subject to the existing gain
recognition agreement, reduced by any
gain recognized under paragraph (c)(1)(i)
of this section with respect to the existing
gain recognition agreement by reason of
the gain recognition event that gives rise
to the new gain recognition agreement.
The new gain recognition agreement shall,
as applicable, be subject to the conditions
and requirements of this section to the
same extent as the existing gain recognition agreement. For example, a triggering
event with respect to the new gain recognition agreement will generally include
a disposition of the transferred stock or
securities or of substantially all the assets of the transferred corporation. If,
however, the transferred stock is canceled
or redeemed pursuant to the disposition
or other event that gives rise to the new
gain recognition agreement (for example,
pursuant to a liquidation where the transferee foreign corporation is the corporate
distributee (within the meaning of section 334(b)(2)), or an asset reorganization
where the transferee foreign corporation is
the acquiring corporation) the transferred
stock is not subject to the new gain recognition agreement.
(ii) Special rule for inclusion of gain.
If the U.S. transferor with respect to the
new gain recognition agreement is not the
U.S. transferor with respect to the existing gain recognition agreement, or a member of the consolidated group of which the
U.S. transferor with respect to the existing
gain recognition agreement was a member
on the date of the initial transfer, then any
gain recognized under paragraph (c)(1)(i)
of this section with respect to the new gain
recognition agreement must be included in
income in the taxable year during which
the gain recognition event occurs.
(d) Filing requirements—(1) General
rule. A gain recognition agreement en-

2009–9 I.R.B.

tered into with respect to an initial transfer
must be included with the timely-filed return of the U.S. transferor for the taxable
year during which the initial transfer occurs.
(2) Special requirements—(i) New gain
recognition agreement. A new gain recognition agreement entered into under this
section must be included with the timelyfiled return of the U.S. transferor (as identified in the new gain recognition agreement) for the taxable year during which the
disposition or event that requires the new
gain recognition agreement occurs. If the
new gain recognition agreement is entered
into by the U.S. transferor that entered into
the existing gain recognition agreement,
the new gain recognition agreement is in
lieu of the annual certification otherwise
required for such taxable year under paragraph (g) of this section with respect to the
existing gain recognition agreement.
(ii) Multiple events within a taxable
year. Except as otherwise provided in this
paragraph (d)(2)(ii), if the initial transfer and one or more dispositions or other
events (even if a triggering event exception
applies) that affect the gain recognition
agreement entered into by the U.S. transferor with respect to the initial transfer
occur within the same taxable year of such
U.S. transferor, or if multiple dispositions
or other events occur in a taxable year of
the U.S. transferor that does not include
the initial transfer, only one gain recognition agreement is required to be entered
into and included with the timely-filed
return of the U.S. transferor for such taxable year. The gain recognition agreement
must describe the initial transfer and/or
each disposition or other event that affects
the gain recognition agreement (even if a
triggering event exception applies). This
paragraph does not apply, however, if any
such disposition or other event requires
a new gain recognition agreement to be
entered into by a United States person
other than the U.S. transferor with respect
to the initial transfer or that entered into
the existing gain recognition agreement,
as applicable.
(3) Common parent as agent for U.S.
transferor. If the U.S. transferor is a
member but not the common parent of a
consolidated group, the common parent of
the consolidated group is the agent for the
U.S. transferor under §1.1502–77(a)(1).
Thus, the common parent must file the

2009–9 I.R.B.

gain recognition agreement on behalf of
the U.S. transferor. References in this section to the timely-filed return of the U.S.
transferor include the timely-filed return
of the consolidated group of which the
U.S. transferor is a member, as applicable.
(e) Signatory—(1) General rule. The
gain recognition agreement must be signed
under penalties of perjury by an agent of
the U.S. transferor that is authorized to
sign under a general or specific power of
attorney, or by the appropriate party based
on the category of the U.S. transferor described in this paragraph (e)(1).
(i) If the U.S. transferor is a corporation
but not a member of a consolidated group,
a responsible officer of the U.S. transferor.
If the U.S. transferor is a member of a
consolidated group, a responsible officer
of the common parent of the consolidated
group.
(ii) If the U.S. transferor is an individual, the individual.
(iii) If the U.S. transferor is a trust or
estate, a trustee, executor, or equivalent
fiduciary of the U.S. transferor.
(iv) In a bankruptcy case under Title 11,
United States Code, a debtor in possession
or trustee.
(2) Signature requirement. The inclusion of an unsigned copy of the gain recognition agreement with the timely-filed
return of the U.S. transferor shall satisfy
the signature requirement of paragraph
(e)(1) of this section if the U.S. transferor
retains the original signed gain recognition agreement in the manner specified by
§1.6001–1(e).
(f) Extension of period of limitations on
assessments of tax—(1) General rule. In
connection with the filing of a gain recognition agreement, the U.S. transferor must
extend the period of limitations on assessments of tax with respect to the gain realized but not recognized on the initial transfer through the close of the eighth full taxable year following the taxable year during which the initial transfer occurs. The
U.S. transferor extends the period of limitations by filing Form 8838 “Consent to
Extend the Time to Assess Tax Under Section 367—Gain Recognition Agreement.”
The Form 8838 must be signed by a person authorized to sign the gain recognition
agreement under paragraph (e)(1) of this
section.
(2) New gain recognition agreement. If
a new gain recognition agreement is en-

621

tered into under this section, the U.S. transferor must extend the period of limitations
on assessments of tax on the initial transfer through the close of the eighth full taxable year following the taxable year during which the initial transfer occurs, consistent with paragraph (f)(1) of this section,
unless the U.S. transferor with respect to
the new gain recognition agreement is the
U.S. transferor with respect to the existing gain recognition agreement, or a member of the consolidated group of which the
U.S. transferor with respect to the existing
gain recognition agreement was a member
on the date of the initial transfer.
(g) Annual certification. Except as provided in paragraph (d)(2)(i) of this section,
the U.S. transferor must include with its
timely-filed return for each of the five full
taxable years following the taxable year of
the initial transfer a certification (annual
certification) that includes the information
described in paragraphs (g)(1) through (3)
of this section, as appropriate. The annual
certification must be signed by a person
authorized under paragraph (e)(1) of this
section to sign the gain recognition agreement for the initial transfer. The inclusion
of an unsigned copy of the annual certification with the relevant timely-filed return
of the U.S. transferor shall satisfy the signature requirement of paragraph (e)(1) of
this section provided the U.S. transferor retains the original signed certification in the
manner specified by §1.6001–1(e).
(1) A statement of whether a gain recognition event has or has not occurred during such taxable year. If a gain recognition
event has occurred during such taxable
year, the annual certification must state:
(i) The amount of gain subject to the
gain recognition agreement at the time of
the gain recognition event;
(ii) The amount of gain recognized under the gain recognition agreement by reason of the gain recognition event; and
(iii) A calculation of the reduction to the
amount of gain subject to the gain recognition agreement by reason of the gain recognition event (for example, in the case of a
gain recognition event described in paragraph (n)(2) of this section).
(2) A complete description of any event
occurring during such taxable year that has
terminated or reduced the amount of gain
subject to the gain recognition agreement
(for example, an event described in paragraph (o) of this section), including a cal-

March 2, 2009

culation of any reduction to the amount of
gain subject to the gain recognition agreement.
(3) A statement describing any disposition of assets of the transferred corporation
during the taxable year not in the ordinary
course of business.
(h) Use of security. The U.S. transferor
may be required to furnish a bond or other
security that satisfies the requirements of
§301.7101–1 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
transferred stock or securities 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.
(i) [Reserved.]
(j) Triggering events. Except as provided in this section, if an event described
in paragraphs (j)(1) through (10) of this
section (triggering event) occurs during
the GRA term, the U.S. transferor must
recognize gain under the gain recognition
agreement in accordance with paragraph
(c)(1)(i) of this section. This paragraph
(j) generally requires the U.S. transferor
to recognize gain (and pay applicable interest with respect to any additional tax
due as provided in paragraph (c)(1)(v) of
this section) under the gain recognition
agreement to the extent the transferred
stock or securities are disposed of, directly or indirectly. This paragraph (j) also
requires the U.S. transferor to recognize
gain under the gain recognition agreement
in certain cases where it is not appropriate for the gain recognition agreement to
continue. See paragraph (k) of this section
for exceptions available for certain events
that would otherwise constitute triggering
events under this paragraph (j). See paragraph (o) of this section for certain events
that terminate or reduce the amount of gain
subject to a gain recognition agreement.
(1) Disposition of transferred stock or
securities. A complete or partial disposition of the transferred stock or securities.
See paragraph (q)(2) of this section, Example 2 for an illustration of the rule of this
paragraph (j)(1).

March 2, 2009

(2) Disposition of substantially all of
the assets of the transferred corporation—(i) General rule. Except as provided
in paragraph (j)(2)(ii) of this section, a
disposition in one or more related transactions of substantially all of the assets of the
transferred corporation (including stock
or securities in a subsidiary corporation or
a partnership interest). If the transferred
corporation is domestic, see paragraph
(o)(4) of this section.
(ii) Exceptions. For purposes of paragraph (j)(2)(i) of this section, the following dispositions shall be disregarded—
(A) Dispositions of property described
in section 1221(a)(1) occurring in the ordinary course of business;
(B) An exchange of stock or securities
described in section 354 that is pursuant to
an asset reorganization; and
(C) An exchange of stock by a corporate distributee (as defined in section
334(b)(2)) pursuant to a complete liquidation to which section 332 applies.
(3) Disposition of certain partnership
interests. If the initial transfer occurs by
reason of the transfer of a partnership interest, a complete or partial disposition
of such partnership interest. See section
367(a)(4) and §1.367(a)–1T(c)(3)(ii).
(4) Disposition of stock of the transferee
foreign corporation. A complete or partial disposition of the stock of the transferee foreign corporation received by the
U.S. transferor in the initial transfer. For
purposes of this section, an individual U.S.
transferor that loses U.S. citizenship or
ceases to be a lawful permanent resident
of the United States (within the meaning
of section 7701(b)(6)) shall be treated as
disposing of all the stock of the transferee
foreign corporation received in the initial
transfer as of the date before the loss of
such status.
(5) 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 the U.S. transferor
joining another consolidated group as part
of the same transaction.
(6) Consolidation. A U.S. transferor
becomes a member of a consolidated
group, including a U.S. transferor that is a
member of a consolidated group and that

622

becomes a member of another consolidated group.
(7) Death of an individual; trust or estate ceases to exist. A U.S. transferor that
is an individual dies, or a U.S. transferor
that is a trust or estate ceases to exist.
(8) Failure to comply. The U.S. transferor fails to comply in any material respect with any requirement of this section
or with the terms of the gain recognition
agreement, including failure to file an annual certification under paragraph (g) of
this section. If a failure to include information in a gain recognition agreement as
filed constitutes a failure to comply in a
material respect, the U.S. transferor cannot avoid the application of this paragraph
(j)(8) by subsequently making such information available. A material failure under
this paragraph (j)(8) shall extend the period of limitations on assessments of tax
until the close of the third full taxable year
ending after the date on which the Director of Field Operations or Area Director receives actual notice of the failure to comply from the U.S. transferor.
(9) Gain recognition agreement filed
in connection with indirect stock transfers
and certain triangular asset reorganizations. With respect to a gain recognition
agreement entered into in connection with
an indirect stock transfer (as defined in
§1.367(a)–3(d)), or a triangular asset reorganization under §1.367(a)–3(e)(2), an
indirect disposition of the transferred stock
or securities. For example, in the case
of an indirect stock transfer described in
§1.367(a)–3(d)(1)(iii)(A), a complete or
partial disposition of the stock of the acquiring corporation.
(10) Gain recognition agreement filed
pursuant to paragraph (k)(14) of this section. In the case of a gain recognition
agreement entered into pursuant to paragraph (k)(14) of this section, in addition to
any disposition or other event described in
paragraphs (j)(1) through (9) of this section,—
(i) Any disposition or other event identified as a triggering event in a new gain
recognition agreement as required under
paragraph (k)(14)(iii) of this section; and
(ii) Any disposition or other event that
is inconsistent with the principles of paragraph (k) of this section including, for example, an indirect disposition of the transferred stock or securities.

2009–9 I.R.B.

(k) Triggering event exceptions.
Notwithstanding paragraph (j) of this section, a disposition or other event described
in paragraphs (k)(1) through (14) of this
section shall not constitute a triggering
event. This paragraph (k) generally provides exceptions for certain dispositions
that constitute nonrecognition transactions but only if, immediately after the
disposition, a U.S. transferor retains, as
applicable, a direct or indirect interest in
the transferred stock or securities, or in
the assets of the transferred corporation,
and a new gain recognition agreement
is entered into with respect to the initial
transfer in accordance with this paragraph
(k). Notwithstanding the application of
this paragraph (k), if a gain recognition
event described under paragraphs (m)
and (n) of this section occurs during the
GRA term the U.S. transferor may be required to recognize gain under the gain
recognition agreement in accordance with
paragraph (c)(1)(i) of this section. See
paragraph (o) of this section which provides that, notwithstanding paragraph (j)
of this section, certain dispositions or other
events shall instead terminate or reduce
the amount of gain subject to a gain recognition agreement.
(1) Transfers of stock of the transferee
foreign corporation to a corporation or
partnership. A disposition of stock of
the transferee foreign corporation received
in the initial transfer pursuant to an exchange to which section 351, 354 (but only
in a reorganization described in section
368(a)(1)(B) that is not a triangular reorganization), 361 (but only in a divisive
reorganization to which section 355 applies), or 721 applies, shall not constitute a
triggering event if a new gain recognition
agreement is entered into in accordance
with paragraphs (k)(1)(i) through (iv) of
this section, as applicable. In the case of
an exchange to which section 354 applies
that is pursuant to a triangular reorganization described in section 368(a)(1)(B), see
paragraph (k)(14) of this section and paragraph (q)(2) of this section, Example 4.
(i) In the case of an exchange to which
section 351 or 354 applies in which stock
of a foreign acquiring corporation is received, the U.S. transferor includes with
the new gain recognition agreement a
statement that a complete or partial disposition of the stock of the foreign acquiring
corporation received in the exchange shall

2009–9 I.R.B.

constitute a triggering event. The principles of paragraph (o)(1)(i) or (ii), as
appropriate, shall be applied to determine
whether a subsequent complete or partial
disposition of the stock of the foreign
acquiring corporation received in the exchange shall instead terminate or reduce
the amount of the new gain recognition
agreement.
(ii) In the case of an exchange to which
section 351 or 354 applies in which stock
of a domestic acquiring corporation is received, the domestic acquiring corporation
enters into the new gain recognition agreement, which must designate the domestic acquiring corporation as the U.S. transferor for purposes of this section. For an illustration of the rule provided by this paragraph (k)(1)(ii), see paragraph (q)(2) of
this section, Example 3.
(iii) In the case of a section 361 exchange that is pursuant to a divisive reorganization to which section 355 applies
and in which stock of a domestic corporation (domestic controlled corporation) is
received, the domestic controlled corporation enters into the new gain recognition
agreement, which must designate the domestic controlled corporation as the U.S.
transferor for purposes of this section. For
an illustration of the rule provided by this
paragraph (k)(1)(iii), see paragraph (q)(2)
of this section, Example 11.
(iv) In the case of an exchange to which
section 721 applies, the U.S. transferor
includes with the new gain recognition
agreement a statement that a complete
or partial disposition of the partnership
interest received in the exchange shall
constitute a triggering event for purposes
of the new gain recognition agreement.
(2) Complete liquidation of U.S. transferor under sections 332 and 337. A distribution by the U.S. transferor of the stock
of the transferee foreign corporation received in the initial transfer to which section 337 applies, that is pursuant to a complete liquidation under section 332, shall
not constitute a triggering event if the corporate distributee (as defined in section
334(b)(2)) is a domestic corporation (domestic corporate distributee) and the domestic corporate distributee enters into a
new gain recognition agreement. The new
gain recognition agreement must designate
the domestic corporate distributee as the
U.S. transferor for purposes of this section.

623

(3) Transfers of transferred stock or securities to a corporation or partnership. A
disposition of the transferred stock or securities pursuant to an exchange to which
section 351, 354 (but only in a reorganization described in section 368(a)(1)(B)),
or 721 applies, shall not constitute a triggering event if the U.S. transferor enters
into a new gain recognition agreement that
provides that the dispositions described in
paragraphs (k)(3)(i) and (ii) of this section
shall constitute triggering events for purposes of the new gain recognition.
(i) A complete or partial disposition of
the stock, securities, or partnership interest
(as applicable) received in exchange for
the transferred stock or securities.
(ii) Any other event that is inconsistent with the principles of this paragraph
(k), including the indirect disposition of
the transferred stock or securities.
(4) Transfers of substantially all of the
assets of the transferred corporation. A
disposition of substantially all of the assets of the transferred corporation pursuant
to an exchange to which section 351, 354
(but only in a reorganization described in
section 368(a)(1)(B)), or 721 applies, shall
not constitute a triggering event if the U.S.
transferor enters into a new gain recognition agreement that provides that a complete or partial disposition of the stock, securities, or partnership interest (as applicable) received in exchange for the assets
shall constitute a triggering event for purposes of the new gain recognition agreement.
(5) Recapitalizations and section 1036
exchanges. A complete or partial disposition of the transferred stock or securities,
or of the stock of the transferee foreign
corporation received in the initial transfer,
pursuant to a reorganization described under section 368(a)(1)(E), or pursuant to a
transaction to which section 1036 applies,
shall not constitute a triggering event if
the U.S. transferor enters into a new gain
recognition agreement.
(6) Certain asset reorganizations—(i)
Stock of transferee foreign corporation. If
stock of the transferee foreign corporation
received in the initial transfer is transferred
to a domestic acquiring corporation in a
section 361 exchange that is pursuant to an
asset reorganization, the exchanges made
pursuant to the asset reorganization shall
not constitute triggering events if the domestic acquiring corporation enters into a

March 2, 2009

new gain recognition agreement that designates the domestic acquiring corporation
as the U.S. transferor for purposes of this
section. For an illustration of the rule provided by this paragraph (k)(6), see paragraph (q)(2) of this section, Example 5. If
the acquiring corporation is foreign, see
paragraph (k)(14) of this section and paragraph (q)(2) of this section, Example 6.
(ii) Transferred stock or securities. If
the transferred stock or securities are transferred to a foreign acquiring corporation
in a section 361 exchange that is pursuant
to an asset reorganization, the exchanges
made pursuant to the asset reorganization
shall not constitute triggering events if
the U.S. transferor enters into a new gain
recognition agreement that designates the
foreign acquiring corporation as the transferee foreign corporation for purposes of
this section. For an illustration of the rule
provided by this paragraph, see paragraph
(q)(2) of this section, Example 7. If the
transfer is to a domestic acquiring corporation, or is pursuant to a triangular asset
reorganization, see paragraph (k)(14) or
(o)(5) of this section.
(iii) Assets of transferred corporation.
If substantially all of the assets of the
transferred corporation are transferred to a
foreign or domestic acquiring corporation
in a section 361 exchange that is pursuant
to an asset reorganization, the exchanges
made pursuant to the asset reorganization
shall not constitute triggering events if
the U.S. transferor enters into a new gain
recognition agreement that, unless the
acquiring corporation is the transferee foreign corporation, designates the acquiring
corporation as the transferred corporation
for purposes of this section. Only the
assets of the transferred corporation received by the acquiring corporation shall
be treated as assets of the transferred corporation for purposes of this section (for
example, only such assets will be taken
into account for purposes of paragraph
(j)(2) of this section). For an illustration
of the rule provided by this paragraph, see
paragraph (q)(2) of this section, Example
8. If the transferred corporation is domestic, see section 367(a)(1) and (a)(5), and
paragraph (o)(4) of this section. If the
transfer is pursuant to a triangular asset
reorganization, see paragraph (k)(14) of
this section.
(7) Certain triangular reorganizations—(i) Transferee foreign corporation.

March 2, 2009

If substantially all of the assets of the transferee foreign corporation are transferred to
a foreign acquiring corporation in a section
361 exchange that is pursuant to a triangular asset reorganization, the exchanges
made pursuant to the reorganization shall
not constitute triggering events if a new
gain recognition agreement is entered into
in accordance with paragraphs (k)(7)(i)(A)
through (C) of this section. If the acquiring corporation is domestic, see paragraph
(k)(14) of this section. For rules that apply
to gain recognition agreements entered
into as a result of an indirect stock transfer,
see §1.367(a)–3(d)(2)(iv) and paragraph
(j)(9) of this section.
(A) If P is foreign, the new gain recognition agreement designates P as the transferee foreign corporation and includes a
statement that the U.S. transferor agrees to
treat a complete or partial disposition of
the S stock held by P as a triggering event.
(B) Except as provided in paragraph
(k)(7)(i)(C) of this section, if P is domestic, P enters into the new gain recognition
agreement that designates P as the U.S.
transferor and S as the transferee foreign
corporation.
(C) If the triangular asset reorganization
is described in section 368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferee foreign corporation is the merged
corporation, the U.S. transferor enters into
the new gain recognition agreement and
designates the surviving corporation as the
transferee foreign corporation.
(ii) Transferred corporation. If substantially all of the assets of the transferred
corporation are transferred in a section
361 exchange pursuant to a triangular asset reorganization, the exchanges made
pursuant to the reorganization shall not
constitute triggering events if the U.S.
transferor enters into a new gain recognition agreement in accordance with paragraph (k)(7)(ii)(A) of this section and, as
applicable, paragraph (k)(7)(ii)(B) or (C)
of this section.
(A) The new gain recognition agreement includes a statement that the U.S.
transferor agrees to treat a complete or partial disposition of the P stock received in
the reorganization as a triggering event.
(B) If the triangular asset reorganization is described in section 368(a)(1)(C),
or section 368(a)(1)(A) or (G) by reason of
section 368(a)(2)(D), the new gain recognition agreement includes a statement that

624

the U.S. transferor agrees to treat a complete or partial disposition of the S stock
held by P as a triggering event.
(C) If the triangular asset reorganization
is described in section 368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferred corporation is the merged corporation, the new gain recognition agreement
includes a statement that the U.S. transferor agrees to treat a complete or partial
disposition of the stock of the surviving
corporation as a triggering event.
(8) Complete liquidation of transferred
corporation. A distribution of substantially all of the assets of the transferred
corporation to which section 337 applies,
and the related exchange of the transferred
stock to which section 332 applies, shall
not constitute triggering events, if the U.S.
transferor enters into a new gain recognition agreement. If the transferred corporation is domestic, see §1.367(e)–2 and paragraph (o)(4) of this section. See paragraph
(q)(2) of this section, Example 9 for an illustration of the rules provided in this paragraph (k)(8).
(9) Death of U.S. transferor. The death
of a U.S. transferor shall not constitute a
triggering event if the person winding up
the affairs of the U.S. transferor—
(i) Retains sufficient assets of the U.S.
transferor to satisfy any possible Federal
tax liability of the U.S. transferor under the
gain recognition agreement for the duration of the extended period of limitations
on assessments of tax on the gain realized
but not recognized in the initial transfer;
(ii) Provides security as required under paragraph (h) of this section for any
possible Federal tax liability of the U.S.
transferor under the gain recognition
agreement; or
(iii) Obtains a ruling from the Internal Revenue Service providing for one or
more successors to the U.S. transferor under the gain recognition agreement.
(10) Deconsolidation. A deconsolidation of the U.S. transferor shall not constitute a triggering event if the U.S. transferor
enters into a new gain recognition agreement.
(11) Consolidation. A consolidation of
the U.S. transferor shall not constitute a
triggering event if the U.S. transferor enters into a new gain recognition agreement.
See paragraph (d)(3) of this section.
(12) Intercompany transactions—(i)
General rule. If, pursuant to an inter-

2009–9 I.R.B.

company transaction, the U.S. transferor
disposes of stock of the transferee foreign
corporation received in the initial transfer, this paragraph (k)(12) applies to such
disposition to the extent the intercompany transaction creates an intercompany
item that is not taken into account in the
taxable year during which the intercompany transaction occurs. To the extent this
paragraph (k)(12) applies, the disposition
shall not constitute a triggering event, and
the U.S. transferor shall remain subject
to the gain recognition agreement if the
conditions of paragraphs (k)(12)(i)(A) and
(B) of this section are satisfied. To the
extent the intercompany transaction does
not create an intercompany item see, for
example, paragraph (k)(1) and paragraph
(q)(2) of this section, Example 20. See
paragraph (o)(6) of this section for the effect on a gain recognition agreement when
an intercompany item from an intercompany transaction to which this paragraph
(k)(12)(i) applies is taken into account.
(A) At the time of the disposition, the
basis of the stock of the transferee foreign
corporation received in the initial transfer that is disposed of in the intercompany transaction is not greater than the sum
of the amounts described in paragraphs
(k)(12)(i)(A)(1) through (3) of this section.
If only a portion of the stock of the transferee foreign corporation received in the
initial transfer is disposed of, then the basis of such stock shall be compared with a
proportionate amount (measured by value
as determined at the time of the disposition) of the amounts described in paragraph (k)(12)(i)(A)(1) through (3) of this
section. To satisfy the basis condition
of this paragraph (k)(12)(i)(A), the U.S.
transferor may reduce the basis of the stock
of the transferee foreign corporation received in the initial transfer that is disposed
of in the intercompany transaction in accordance with the principles of paragraph
(o)(1)(iii) of this section.
(1) The aggregate basis of the transferred stock or securities at the time of the
initial transfer;
(2) The amount of any increase to the
basis of the transferred stock or securities
by reason of gain recognized by the U.S.
transferor on the initial transfer; and
(3) The amount of any increase to the
basis of the stock disposed of by reason of
an income inclusion by the U.S. transferor

2009–9 I.R.B.

with respect to such stock (for example,
pursuant to section 961(a)).
(B) The annual certification filed with
respect to the existing gain recognition
agreement for the taxable year during
which the intercompany transaction occurs includes a complete description of
the intercompany transaction and a schedule illustrating how the basis condition of
paragraph (k)(12)(i)(A) of this section is
satisfied.
(ii) Certain dispositions following intercompany transaction. A subsequent
disposition of stock of the transferee foreign corporation that is transferred in an
intercompany transaction to which the exception provided by paragraph (k)(12)(i)
of this section applies shall not constitute
a triggering event if—
(A) The stock is transferred to a member of the consolidated group that includes
the U.S. transferor immediately after the
disposition, and
(B) The annual certification filed with
respect to the existing gain recognition
agreement for the taxable year during
which the subsequent disposition occurs
includes a complete description of the disposition.
(13) Deemed asset sales pursuant to
section 338(g) elections. A deemed sale
of the assets of the transferred corporation
or the transferee foreign corporation as a
result of an election under section 338(g)
shall not constitute a triggering event. This
paragraph does not apply to the sale of the
stock of the target corporation (within the
meaning of section 338(d)(2)) with respect
to which such election is made.
(14) Other dispositions or events. A
disposition or other event that would constitute a triggering event, without regard to
this paragraph (k)(14), shall not constitute
a triggering event if the conditions of paragraph (k)(14)(i) through (iii) of this section, as applicable, are satisfied. See paragraph (q)(2), Examples 4, 6, 10, 12, 17, 21,
and 23 of this section for illustrations of the
rules provided by this paragraph (k)(14).
(i) The disposition qualifies as a nonrecognition transaction.
(ii) Immediately after the disposition or
other event, a U.S. transferor retains a direct or indirect interest in the transferred
stock or securities or, as applicable, in substantially all of the assets of the transferred
corporation (for example, in a case where
the transferred corporation has been liq-

625

uidated pursuant to section 332). If, as
a result of the disposition or other event,
a foreign corporation acquires the transferred stock or securities or, as applicable, substantially all the assets of the transferred corporation, the condition of this
paragraph (k)(14)(ii) shall be satisfied only
if the U.S. transferor owns at least five percent (applying the attribution rules of section 318, as modified by section 958(b)) of
the total voting power and the total value of
the outstanding stock of such foreign corporation.
(iii) A new gain recognition agreement
is entered into by the U.S. transferor described in paragraph (k)(14)(ii) of this section that includes—
(A) An explanation of why this paragraph (k)(14) applies to the disposition or
other event; and
(B) A description of each subsequent
disposition or other event that would constitute a triggering event, other than those
described in paragraph (j) of this section,
with respect to the new gain recognition
agreement based on the principles of paragraphs (j) and (k) of this section including,
for example, an indirect disposition of the
transferred stock or securities.
(l) [Reserved.]
(m) Receipt of boot in nonrecognition transactions—(1) Dispositions of
transferred stock or securities. Notwithstanding paragraph (k) of this section,
if gain is required to be recognized (not
including any gain that would be treated
as a dividend under section 356(a)(2))
in connection with a disposition of the
transferred stock or securities to which
an exception under paragraph (k) of this
section otherwise applies (triggering event
exception), the U.S. transferor shall recognize gain under paragraph (c)(1)(i) of
this section equal to the amount of gain
required to be recognized in connection
with the disposition, but not in excess of
the amount of gain subject to the gain
recognition agreement. For purposes of
this paragraph (m)(1), the amount of gain
required to be recognized in connection
with the disposition shall be determined
before taking into account any increase
to the basis of the transferred stock or securities under paragraph (c)(4)(ii) of this
section. See paragraph (q)(2) of this section, Example 13, for an illustration of the
rule provided by this paragraph (m)(1).

March 2, 2009

(2) Dispositions of assets of transferred
corporation. If gain is required to be recognized (not including any gain that would
be treated as a dividend under section
356(a)(2)) in connection with a disposition of substantially all of the assets of the
transferred corporation to which a triggering event exception otherwise applies, the
U.S. transferor shall recognize gain under
paragraph (c)(1)(i) of this section equal to
the amount of gain required to be recognized in connection with the disposition,
but not in excess of the amount of gain
subject to the gain recognition agreement.
(n) Special rules for distributions with
respect to stock—(1) Certain dividend
equivalent redemptions treated as dispositions. A redemption of the transferred
stock or of stock of the transferee foreign
corporation received in the initial transfer that is treated by reason of section
302(d) as a distribution of property to
which section 301 applies shall constitute
a disposition for purposes of this section
unless the U.S. transferor enters into a new
gain recognition agreement that includes
appropriate provisions to account for the
redemption. For an illustration of the rule
of this paragraph (n)(1), see paragraph
(q)(2) of this section, Example 14.
(2) Gain recognized under section
301(c)(3). If gain is required to be recognized under section 301(c)(3) with respect
to the transferred stock, the U.S. transferor shall recognize gain under the gain
recognition agreement in accordance with
paragraph (c)(1)(i) of this section in an
amount equal to the gain required to be
recognized under section 301(c)(3), but
not in excess of the amount of gain subject
to the gain recognition agreement. For this
purpose, the amount of gain required to be
recognized under section 301(c)(3) shall
be determined before taking into account
any increase in the basis of the transferred
stock under paragraph (c)(4)(ii) of this
section.
(o) Dispositions or other events that
terminate or reduce the amount of gain
subject to the gain recognition agreement. Notwithstanding paragraph (j) of
this section, the following dispositions or
other events shall not constitute triggering events but instead shall terminate or
reduce the amount of gain subject to the
gain recognition agreement.
(1) Taxable disposition of stock of the
transferee foreign corporation—(i) Com-

March 2, 2009

plete disposition. Except as otherwise
provided in this paragraph (o)(1)(i), if the
U.S. transferor disposes of all the stock
of the transferee foreign corporation received in the initial transfer in a transaction
in which all gain realized is recognized
and included in taxable income during
the taxable year of the disposition, the
gain recognition agreement shall terminate without further effect if, at the time
of the disposition, the aggregate basis of
such stock is not greater than the sum
of the amounts described in paragraphs
(o)(1)(i)(A) through (C) of this section.
This paragraph shall not apply to a disposition of stock of the transferee foreign
corporation pursuant to an intercompany
transaction to which paragraph (k)(12)
of this section applies. This paragraph
shall also not apply to an individual U.S.
transferor that loses U.S. citizenship or
ceases to be a lawful permanent resident
of the United States (within the meaning
of section 7701(b)(6)).
(A) The aggregate basis of the transferred stock or securities at the time of the
initial transfer;
(B) The amount of any increase to the
basis of the transferred stock or securities
by reason of gain recognized by the U.S.
transferor on the initial transfer; and
(C) The amount of any increase to the
basis of the stock disposed of by reason of
an income inclusion by the U.S. transferor
with respect to such stock (for example,
pursuant to section 961(a)).
(ii) Partial dispositions. A partial disposition by the U.S. transferor of the stock
of the transferee foreign corporation received in the initial transfer in a transaction
otherwise described in paragraph (o)(1)(i)
of this section shall reduce the amount of
gain subject to the gain recognition agreement based on the relative fair market
value of the stock disposed of (measured
at the time of the disposition) compared to
the fair market value of all of the stock of
the transferee foreign corporation received
in the initial transfer (measured at the
time of the disposition). For determining
whether the basis condition of paragraph
(o)(1)(i) of this section is satisfied in the
case of a partial disposition, the aggregate
basis of the stock disposed of is compared
to a proportionate amount (based on fair
market value, as measured at the time of
the partial disposition) of the amounts described in paragraphs (o)(1)(i)(A) through

626

(C) of this section. For an illustration of
the rules of this paragraph (o)(1)(ii), see
paragraph (q)(2), Example 15, of this section.
(iii) Reduction of stock basis. For purposes of satisfying the basis condition of
paragraph (o)(1)(i) or (ii) of this section,
the U.S. transferor may reduce the aggregate basis of the stock of the transferee
foreign corporation received in the initial
transfer, effective immediately before the
disposition. For an illustration of the rules
of this paragraph (o)(1)(iii), see paragraph
(q)(2), Example 16, of this section. The
U.S. transferor reduces the basis of the
stock of the transferee foreign corporation by including a statement with the
timely-filed return of the U.S. transferor
for the taxable year in which the disposition occurs, entitled “Election to Reduce
Stock Basis Under §1.367(a)–8(o)(1)(iii)”
and that includes—
(A) A description, including the date, of
the disposition;
(B) A description of the stock of the
transferee foreign corporation disposed of
and the basis adjustments made under this
paragraph (o)(1)(iii); and
(C) The fair market value of all the
stock of the transferee foreign corporation
held by the U.S. transferor at the time of
the disposition.
(2) Gain recognized in connection with
certain nonrecognition transactions. If the
U.S. transferor recognizes gain in connection with a complete or partial disposition
of stock of the transferee foreign corporation received in the initial transfer that
is described in paragraph (k) of this section, and the basis condition of paragraph
(o)(1)(i) or (ii) of this section, as applicable, is satisfied with the respect to such disposition, the amount of gain subject to the
new gain recognition agreement filed under paragraph (k) of this section as a result
of such disposition shall equal the amount
of gain subject to the existing gain recognition agreement reduced by the amount of
gain recognized by the U.S. transferor on
the disposition. If the U.S. transferor recognizes gain in connection with a complete
or partial disposition of the stock of the
transferee foreign corporation received in
the initial transfer that is described in paragraph (k) of this section, and the condition
of paragraph (o)(1)(i) or (ii) of this section,
as applicable, is satisfied with the respect
to the disposition, but a new gain recogni-

2009–9 I.R.B.

tion agreement is not filed with respect to
such disposition so that a triggering event
exception does not apply to the disposition,
the amount of gain required to be recognized by the U.S. transferor under the existing gain recognition agreement shall be
reduced by the amount of the gain recognized on the disposition.
(3) Gain recognized under section
301(c)(3). If the U.S. transferor recognizes
gain under section 301(c)(3) with respect
to the stock of the transferee foreign corporation received in the initial transfer, the
amount of gain subject to the gain recognition agreement shall be reduced by the
amount of such recognized gain.
(4) Dispositions of substantially all of
the assets of a domestic transferred corporation. Except as otherwise provided
in this paragraph (o)(4), the gain recognition agreement shall terminate without further effect if substantially all of the assets
of the transferred corporation are disposed
of in a transaction in which all gain realized is recognized and included in taxable income during the taxable year of the
disposition, but only if, at the time of the
initial transfer, the U.S. transferor owned
stock in the transferred corporation satisfying the requirements of section 1504(a)(2)
and the U.S. transferor and the transferred
corporation were members of the same
consolidated group. If the initial transfer
was part of an indirect stock transfer, the
gain recognition agreement shall terminate
without further effect if substantially all
of the assets of the transferred corporation
(taking into account §1.367(a)–3(d)(2)(v))
are disposed of in a transaction in which all
gain realized is recognized and included in
taxable income during the taxable year of
the disposition, but only if at the time of the
initial transfer the U.S. transferor owned
stock in the transferred corporation satisfying the requirements of section 1504(a)(2)
(for example, in the case of a reorganization described in section 368(a)(1)(A)
by reason of section 368(a)(2)(E)) and the
U.S. transferor and the transferred corporation were members of the same consolidated group.
(5) Certain distributions or transfers of
transferred stock or securities to U.S. persons. To the extent a distribution or transfer of the transferred stock or securities satisfies the conditions of paragraphs (o)(5)(i)
through (iii) of this section, the gain recognition agreement shall terminate without

2009–9 I.R.B.

further effect, or the amount of gain subject to the gain recognition agreement shall
be reduced, as appropriate.
(i) Distributions or transfers described
in section 337, 355, or 361. The transferred stock or securities are distributed or
transferred pursuant to a transaction described in paragraph (o)(5)(i)(A) through
(D) of this section, as appropriate.
(A) A distribution described in section
337 that is pursuant to a complete liquidation described in section 332. See paragraph (q)(2) of this section, Example 18,
for an illustration of the rule provided by
this paragraph (o)(5)(i)(A).
(B) A distribution to which section
355 applies. See paragraph (q)(2) of this
section, Example 19, for an illustration
of the rule provided by this paragraph
(o)(5)(i)(B).
(C) A section 361 exchange that is pursuant to an asset reorganization. See paragraph (q)(2) of this section, Example 22,
for an illustration of the rule provided by
this paragraph (o)(5)(i)(C).
(D) A distribution to which section
361(c) applies that is pursuant to an asset
reorganization. See paragraph (q)(2) of
this section, Example 22, for an illustration of the rule provided by this paragraph
(o)(5)(i)(D).
(ii) Qualified recipient. The recipient of
the transferred stock or securities in the relevant transaction described in paragraph
(o)(5)(i) of this section (qualified recipient) is—
(A) The U.S. transferor;
(B) A member of the consolidated
group that includes the U.S. transferor
immediately after the transaction; or
(C) An individual that is a United States
person.
(iii) Basis requirement—(A) General
rule. Immediately after the relevant transaction described in paragraph (o)(5)(i) of
this section, the aggregate basis of the
transferred stock or securities received by
the qualified recipient is not greater than
the aggregate basis of such stock or securities at the time of the initial transfer (as
adjusted for gain recognized by the U.S.
transferor on the initial transfer attributable to such stock or securities). For this
purpose, the basis of the transferred stock
in the hands of the qualified recipient shall
be determined without regard to any basis attributable to income inclusions with
respect to the stock (for example, under

627

section 961(a)). In the case of a distribution to which section 355 applies, any
adjustments to basis under §1.367(b)–5(c)
shall be made before determining whether
the basis condition of this paragraph is
satisfied.
(B) Election to reduce basis in transferred stock or securities. If the basis
condition of paragraph (o)(5)(iii)(A) of
this section is not satisfied, each qualified recipient may reduce the basis of the
transferred stock or securities received
in the transaction to the extent necessary to satisfy the basis condition. A
qualified recipient reduces the basis of
the transferred stock or securities by including a statement with its timely-filed
return for the taxable year during which
the distribution or transfer occurs entitled
“Election to Reduce Stock Basis Under
§1.367(a)–8(o)(5)(iii)(B)” and that includes—
(1) A complete description and the date
of the distribution or transfer;
(2) The fair market value of the transferred stock or securities received by the
qualified recipient in the transaction; and
(3) The basis of the transferred stock or
securities received by the qualified recipient immediately before and after the basis
reduction.
(6) Dispositions or other event following certain intercompany transactions. If,
subsequent to an intercompany transaction
to which paragraph (k)(12) of this section
applies, a disposition or other event occurs
that requires the U.S. transferor to take
into account the intercompany item related
to the intercompany transaction (under the
provisions of §1.1502–13), the gain recognition agreement shall terminate without
further effect or the amount of gain subject to the gain recognition agreement shall
be reduced based on the principles of paragraph (o)(1)(i) or (ii) of this section, as appropriate. For an illustration of the rules of
this paragraph (o)(6), see paragraph (q)(2)
of this section, Example 20.
(7) Expropriations under foreign law.
The amount of gain subject to the gain
recognition agreement shall be reduced to
the extent the stock or securities of the
transferee foreign corporation received in
the initial transfer, the transferred stock or
securities, or substantially all the assets of
the transferred corporation, are expropriated, seized, or subjected to a similar taking of such property by the government

March 2, 2009

of a foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing. Principles similar
to those of paragraph (o)(1)(i) or (o)(1)(ii)
of this paragraph, as relevant, shall be applied to determine the amount of the reduction.
(p) Relief for reasonable cause for
failure to comply—(1) Request for relief.
A U.S. transferor that fails to file timely
a gain recognition agreement, waiver of
period of limitations on assessments of
tax, annual certification, or other information required under this section shall be
considered to have satisfied the timeliness
requirement with respect to such filing,
and a failure to comply in any material respect with any requirement of this section
or with the terms of the gain recognition
agreement that would otherwise constitute
a triggering event shall not constitute a
triggering event, if a request for relief is
filed as provided under paragraph (p)(2) of
this section and the U.S. transferor 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 tax return of
the U.S. transferor for the taxable year to
which the failure relates, that such failure was due to reasonable cause and not
willful neglect. Whether the failure was
due to reasonable cause and not willful
neglect will be determined by the Director
after considering all the facts and circumstances. The Director shall notify the U.S.
transferor in writing within 120 days if it
is determined that the failure was not due
to reasonable cause, or if additional time
will be needed to make a determination.
For this purpose, the 120-day period shall
begin on the date the Internal Revenue
Service notifies the U.S. transferor in writing that the request for reasonable cause
relief has been received and assigned for
review. If the U.S. transferor is not again
notified before the close of the 120-day
period, the U.S. transferor shall be deemed
to have established that the failure to file
timely or comply was due to reasonable
cause and not willful neglect.
(2) Procedures for filing requests for relief—(i) Time of submission. Requests for
relief under paragraph (p)(1) of this section shall be considered only if, as soon
as the U.S. transferor becomes aware of
the failure to file timely or comply in any

March 2, 2009

material respect with any requirement of
this section, an amended return is filed for
the taxable year to which the failure relates
that includes the information that should
have been included with the original return for such taxable year or otherwise
complies with the rules of this section and
that includes a written statement explaining the reasons for the failure to file timely
or comply. The amended return must be
filed with the applicable Internal Revenue
Service Center with which the U.S. transferor filed its original return for such taxable year.
(ii) Notice requirement. In addition to
the requirement of paragraph (p)(2)(i) of
this section, the U.S. transferor must comply with the requirements of paragraph
(p)(2)(ii)(A) or (B) of this section, as applicable.
(A) If any taxable year of the U.S.
transferor is under examination when the
amended return is filed, a copy of the
amended return and any information required to be included with such return
must be delivered to the Internal Revenue
Service personnel conducting the examination.
(B) If no taxable year of the U.S.
transferor is under examination when the
amended return is filed, a copy of the
amended return and any information required to be included with such return
must be delivered to the Director having
jurisdiction over the return.
(q) Examples—(1) Presumed facts and
references. For purposes of the examples
in paragraph (q)(2) of this section, and except where otherwise indicated, the following is presumed.
(i) UST, USP, and DC are domestic corporations that each use a calendar taxable
year.
(ii) USP wholly owns UST and is the
common parent of the consolidated group
of which UST is a member.
(iii) TFC, TFD, F1, and FA are foreign
corporations.
(iv) UST wholly owns TFD.
(v) In a section 351 exchange, UST
transfers all of the stock of TFD (TFD
stock) to TFC in exchange solely for stock
of TFC (the initial transfer).
(vi) Pursuant to §1.367(a)–3(b)(1)(ii)
and this section, UST enters into a gain
recognition agreement in connection with
the initial transfer and makes the election
described under paragraph (c)(2)(vi) of

628

this section with respect to the gain recognition agreement.
(vii) As applicable, the section
1248 amount (within the meaning of
§1.367(b)–2(c)) or all earnings and
profits amount (within the meaning of
§1.367(b)–2(d)) attributable to the stock
of a foreign corporation is zero.
(viii) All transactions are respected under general principles of tax law, including
the step transaction doctrine.
(ix) References to a U.S. transferor entering into a gain recognition agreement
mean, where applicable, that the common
parent of the consolidated group of which
the U.S. transferor is a member has filed
the gain recognition agreement on behalf
of the U.S. transferor in accordance with
paragraph (d)(3) of this section.
(x) Taxable years during the GRA term
are referred to, for example, as year 1 and
year 2.
(2) Examples. The following examples
illustrate the application of the rules of this
section.
Example 1. Basis adjustments from gain recognized under the gain recognition agreement. (i) Facts.
TFC wholly owns F1. In year 3, pursuant to a section
351 exchange, TFC transfers all of the TFD stock to
F1 in exchange solely for voting stock of F1. UST
enters into a new gain recognition agreement with
respect to the initial transfer under paragraph (k)(3)
of this section, and therefore the transfer by TFC of
the TFD stock to F1 is not a triggering event. Under
paragraph (c)(5)(i) of this section, the existing gain
recognition agreement terminates without further effect. In year 4, in an exchange to which section 721
applies, UST contributes the TFC stock received in
the initial transfer to PRS, a domestic partnership,
in exchange for a partnership interest. UST enters
into a new gain recognition agreement with respect
to the initial transfer under paragraph (k)(1) of this
section, and therefore the transfer by UST of the TFC
stock to PRS is not a triggering event. Under paragraph (c)(5)(i) of this section, the new gain recognition agreement filed by UST in year 3 terminates
without further effect. In year 5, TFD disposes of
substantially all of its assets in a transaction that constitutes a triggering event under paragraph (j)(2)(i) of
this section. Under paragraph (c)(1)(i) of this section,
UST recognizes the gain realized but not recognized
on the initial transfer by reason of entering into the
gain recognition agreement.
(ii) Result. Under paragraph (c)(4) of this section,
the basis of the PRS interest held by UST, the TFC
stock held by PRS that was received from UST in
year 4, the F1 stock held by TFC that was received
in exchange for the TFD stock in year 3, and the TFD
stock held by F1 that was received from TFC in year 3
is increased by the amount of gain recognized by UST
(but not by the additional tax or interest paid as result
of such gain) with respect to the initial transfer under
the gain recognition agreement. However, the basis
of the assets of TFD (including the assets disposed

2009–9 I.R.B.

of in year 5) is not increased as a result of the gain
recognized by UST.
Example 2. Impact of gain recognition event on
computation of income. (i) Facts. At the time of
the initial transfer, the TFD stock has a $50x basis, a $100x fair market value, and a $30x section
1248 amount. The amount of gain subject to the gain
recognition agreement is $50x. UST did not make
an election under paragraph (c)(2)(vi) of this section
with respect to the gain recognition agreement. In
year 3, TFC disposes of the TFD stock received in
the initial transfer in exchange for $120x cash.
(ii) Result—(A) Gain recognition without an
election. The disposition by TFC of the TFD stock
in year 3 is a triggering event under paragraph (j)(1)
of this section. As a result, under paragraph (c)(1)(i)
of this section, UST must recognize and include in
income $50x gain under the gain recognition agreement. Under paragraph (c)(1)(iii)(A) of this section,
UST must report the $50x gain on an amended return
filed for the taxable year of the initial transfer. Under
paragraph (c)(1)(v) of this section, UST must pay
applicable interest on any additional tax due with
respect to the $50x gain recognized. Under section
1248(a), $30x of the gain recognized by UST under
the gain recognition agreement is recharacterized as
a dividend. Under paragraph (c)(4) of this section,
as of the date of the initial transfer, the basis of the
TFC stock received by UST in the initial transfer and
the TFD stock received by TFC in the initial transfer,
respectively, is increased by $50x. After taking into
account the increase to the basis of the TFD stock,
TFC recognizes $20x gain on the disposition of the
TFD stock in year 3.
(B) Gain recognition with an election. If UST
made an election under paragraph (c)(2)(vi) of this
section with the gain recognition agreement filed for
the initial transfer, the result would be the same as in
paragraph (ii)(A) of this Example 2, except that UST
must include in income the $50x gain recognized under the gain recognition agreement on its tax return
filed for year 3. Any additional tax due with respect
to the $50x gain and applicable interest on the additional tax due must be included with such return. The
amount, if any, of the $50x gain recognized by UST
under the gain recognition agreement that is characterized as a dividend under section 1248(a) is determined in year 3.
Example 3. Transfer of stock of the transferee
foreign corporation to a domestic corporation in a
section 351 exchange. (i) Facts. UST wholly owns
DC. In year 3, pursuant to a section 351 exchange,
UST transfers all of the TFC stock received in the
initial transfer to DC in an exchange solely for voting
stock of DC.
(ii) Result. The year 3 transfer of the TFC stock
by UST to DC constitutes a triggering event under
paragraph (j)(4) of this section. However, the transfer shall not constitute a triggering event pursuant to
paragraph (k)(1)(ii) of this section if DC enters into
a new gain recognition agreement with respect to the
initial transfer that designates DC as the U.S. transferor for purposes of this section. Pursuant to paragraphs (c)(4)(i) and (ii) of this section, if DC is required to recognize gain under the new gain recognition agreement, the basis of the stock of TFC and
TFD would be increased by the amount of gain recognized. However, pursuant to paragraph (c)(4)(iii)
of this section, no adjustment would be made to the

2009–9 I.R.B.

basis of the DC voting stock received by UST in year
3 as a result of such gain recognition. Alternatively, if
the conditions for the application of paragraph (k)(14)
of this section are satisfied UST could instead enter
into the new gain recognition agreement with respect
to the initial transfer.
Example 4. Transfer of stock of the transferee foreign corporation in a triangular section 368(a)(1)(B)
reorganization. (i) Facts. DC wholly owns FA. In
year 3, pursuant to a triangular reorganization described in section 368(a)(1)(B), UST transfers all of
the TFC stock received in the initial transfer to FA
in exchange solely for 20% of the outstanding voting
stock of DC. At the time of the reorganization, the
TFC stock has a basis in excess of fair market value.
(ii) Result. (A) The transfer by UST of the
TFC stock to FA is an indirect stock transfer under
§1.367(a)–3(d)(1)(iii)(B). Accordingly, to preserve
nonrecognition treatment, UST must enter into a separate gain recognition agreement under this section
with respect to such transfer.
(B) With respect to the gain recognition agreement filed for the initial transfer of the TFD stock,
the transfer by UST of the TFC stock to FA is a triggering event under paragraph (j)(4) of this section.
However, the transfer shall not constitute a triggering event if the conditions of the exception provided
by paragraph (k)(14) of this section are satisfied.
(1) The condition of paragraph (k)(14)(i) of this
section is satisfied because the transfer qualifies as
a nonrecognition transaction (assuming UST enters
into a gain recognition agreement as described in
paragraph (ii)(A) of this Example 4).
(2) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the
transfer DC, a domestic corporation that is eligible
to be a U.S. transferor, owns at least 5% (applying
the attribution rules of section 318, as modified by
section 958(b)) of the total voting power and total
fair market value of the outstanding stock of FA. As
a result, DC is treated as retaining an indirect interest
in the TFD stock immediately following the transfer.
(3) The condition of paragraph (k)(14)(iii) of this
section is satisfied if DC enters into a new gain recognition agreement with respect to the initial transfer of
the TFD stock that, based on the principles of paragraph (j) of this section, describes the subsequent dispositions or other events that would constitute triggering events for purposes of the new gain recognition agreement (other than the dispositions and other
events described in paragraph (j) of this section). For
example, a complete or partial disposition of the stock
of FA would constitute a triggering event for purposes
of the new gain recognition agreement.
Example 5. Transfer of stock of the transferee foreign corporation to a domestic corporation pursuant
to an asset reorganization. (i) Facts. At the time of
the initial transfer the TFD stock has a $50x basis and
a $100x fair market value. Therefore, the amount
of gain subject to the gain recognition agreement is
$50x. In year 3, pursuant to an asset reorganization
described in section 368(a)(1)(A), UST transfers its
assets to DC in exchange solely for 20% of the outstanding stock of DC. UST distributes the stock of
DC to USP pursuant to the plan of reorganization.
(ii) Result. The transfer by UST of the TFC stock
to DC constitutes a triggering event under paragraph
(j)(4) of this section. However, pursuant to paragraph (k)(6)(i) of this section, if DC enters into a new

629

gain recognition agreement with respect to the initial
transfer that designates DC as the U.S. transferor, the
transfer shall not constitute a triggering event.
Example 6. Transfer of stock of the transferee foreign corporation to a foreign corporation pursuant to
an asset reorganization. (i) Facts. The facts are the
same as in Example 5, except the acquiring corporation in the asset reorganization is FA, and, at the
time of the asset reorganization, the TFC stock transferred by UST to FA has a $50x basis and a $150x
fair market value. All of the conditions under section
367(a)(5) and the regulations under that section are
satisfied, and no adjustment is required to the basis
of the FA stock received by USP in the transaction.
(ii) Result. (A) The transfer by UST of the TFC
stock to FA is described in section 361(a) and is therefore subject to section 367(a)(5). In general, UST
cannot file a gain recognition agreement with respect
to such transfer, and the transfer therefore is subject
to the general rule of section 367(a)(1). However, if
the conditions of §1.367(a)–3(e)(1)(i) through (iv) are
satisfied, USP can enter into a gain recognition agreement with respect to the transfer to avoid the recognition of gain by UST on the transfer under section
367(a)(1). If the exception provided by paragraph
(k)(14) of this section applies so that the transfer by
UST of the TFC stock to FA is not a triggering event
with respect to the gain recognition agreement filed
for the initial transfer (discussed in paragraph (ii)(B)
of this Example 6), the amount of gain subject to the
gain recognition agreement (if entered into) with respect to the transfer by UST of the TFC stock to FA
in the asset reorganization is $100x.
(B) Under paragraph (j)(4) of this section, the
transfer of the TFC stock by UST to FA is a triggering event with respect to the gain recognition agreement for the initial transfer. The exception provided
by paragraph (k)(6)(i) of this section does not apply
to such transfer because FA, the acquiring corporation in the asset reorganization, is foreign. However,
the transfer shall not constitute a triggering event if
the conditions of the exception provided by paragraph
(k)(14) of this section are satisfied.
(1) The condition of paragraph (k)(14)(i) of this
section is satisfied because the transfer of the TFC
stock to FA qualifies as a nonrecognition transaction
(assuming USP enters into a gain recognition agreement with respect to such transfer).
(2) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the
transfer USP, a domestic corporation that is eligible
to be a U.S. transferor, owns at least 5% (applying
the attribution rules of section 318, as modified by
section 958(b)) of the total voting power and total
fair market value of the outstanding stock of FA. As a
result, USP is treated as retaining an indirect interest
in the TFD stock immediately following the transfer.
(3) The condition of paragraph (k)(14)(iii) of
this section is satisfied if USP enters into a new
gain recognition agreement with respect to the initial
transfer of the TFD stock that, based on the principles of paragraph (j) of this section, describes the
subsequent dispositions or other events that would
constitute triggering events for purposes of the new
gain recognition agreement, other than those already
provided in paragraph (j) of this section. For example, a disposition of the stock of FA would constitute
such a triggering event for purposes of the new gain
recognition agreement.

March 2, 2009

(iii) Alternate facts. Assume the same facts as in
paragraph (i) of this Example 6, including that paragraph (k)(14) of this section applies to the year 3 reorganization so that USP enters into a new gain recognition agreement with respect to the initial transfer of
the TFD stock that occurred in year 1 (GRA 1), and
that under §1.367(a)–3(e) USP enters into a separate
gain recognition agreement with respect to the initial
transfer of the TFC stock by UST to FA pursuant to
the year 3 asset reorganization (GRA 2). Assume further that in year 4 TFC disposes of 10% of the TFD
stock pursuant to a transaction that constitutes a triggering event with respect to GRA 1. The disposition
of the TFD stock is not a triggering event with respect
to GRA 2 because the TFD stock disposed of does
not constitute substantially all the assets of TFC. Under paragraphs (j)(1) and (c)(1)(i) of this section, USP
must recognize $5x gain (10% of $50x) under GRA
1. Under paragraph (c)(4)(i) and (ii) of this section,
as of the date of the initial transfer (with respect to
which GRA 1 was filed), the basis of the TFC stock
and TFD stock, respectively, is increased by $5x. Under paragraph (c)(1)(i) of this section, the amount of
gain subject to GRA 1 is reduced from $50x to $45x.
Similarly, because the transferred stock for purposes
of GRA 2 is the TFC stock, the amount of gain subject
to GRA 2 is reduced from $100x to $95x to reflect the
increase to the basis of the TFC stock.
Example 7. Transfer of transferred stock to a foreign corporation pursuant to an asset reorganization.
(i) Facts. UST wholly owns FA. In year 4, pursuant
to a reorganization described in section 368(a)(1)(D),
TFC transfers all of the TFD stock to FA in exchange
solely for stock of FA. TFC distributes the FA stock
to UST pursuant to the plan of reorganization.
(ii) Analysis. In general, the year 4 transfer by
TFC of the TFD stock to FA and the exchange by UST
of the TFC stock for FA stock constitute triggering
events under paragraphs (j)(1) and (4) of this section,
respectively. However, under paragraph (k)(6)(ii) of
this section, the transfers shall not constitute triggering events if UST enters into a new gain recognition
agreement with respect to the initial transfer that designates FA as the transferee foreign corporation.
Example 8. Transfer of substantially all the assets
of the transferred corporation pursuant to an asset reorganization. (i) Facts. In year 4, pursuant to an asset reorganization described in section 368(a)(1)(C),
TFD transfers all of its assets to FA in exchange solely
for voting stock of FA. TFD distributes the FA voting
stock to TFC pursuant to the plan of reorganization.
(ii) Analysis. The year 4 transfer by TFD of all
its assets to FA and the exchange by TFC of its TFD
stock for FA voting stock pursuant to the reorganization constitute triggering events under paragraphs
(j)(2) and (j)(1) of this section, respectively. However, under paragraph (k)(6)(iii) of this section, the
transfers shall not constitute triggering events if UST
enters into a new gain recognition agreement with
respect to the initial transfer that designates FA as
the transferred corporation. In addition, under paragraph (k)(6)(iii) of this section only the assets of TFD
acquired by FA in the asset reorganization shall be
treated as assets of the transferred corporation for purposes of the new gain recognition agreement.
Example 9. Complete liquidation of transferred
corporation into transferee foreign corporation. (i)
Facts. UST does not make an election under paragraph (c)(2)(vi) of this section in connection with the

March 2, 2009

gain recognition agreement entered into with respect
to the initial transfer. In year 3, TFD distributes all of
its assets to TFC pursuant to a complete liquidation
to which sections 332 and 337 apply. Under paragraph (k)(8) of this section, UST enters into a new
gain recognition agreement with respect to the initial
transfer such that the liquidation is not a triggering
event. Under paragraph (c)(5)(i) of this section, the
new gain recognition agreement is subject to the conditions and requirements of this section to the same
extent as the existing gain recognition agreement, except that the transferred stock is no longer subject
to the gain recognition agreement because the transferred stock is cancelled by reason of the liquidation.
In year 5 TFC disposes of substantially all of the assets received from TFD in the year 3 liquidation.
(ii) Result. The year 5 disposition by TFC of
substantially all of the assets received from TFD
in the year 3 liquidation is a triggering event under
paragraph (j)(2) of this section, and therefore UST
must recognize the gain subject to the gain recognition agreement. UST must report the gain recognized
on an amended return for the taxable year during
which the initial transfer occurred. UST must also
pay applicable interest on any additional tax due
with respect to the gain recognized. Under paragraph
(c)(4)(i) of this section, the basis of the TFC stock
received by UST in the initial transfer is increased
as of the date of the initial transfer by the amount
of gain recognized under the gain recognition agreement. The basis of the assets of TFD, however, is
not increased.
Example 10. Transfer of transferred stock to foreign corporation in section 351 exchange, followed
by a section 332 liquidation of the foreign corporation. (i) Facts. In year 3, pursuant to a section
351 exchange, TFC transfers the TFD stock to F1, a
newly formed corporation, in exchange solely for voting stock of F1. The transfer by TFC of the TFD stock
to F1 is not a triggering event because UST complies
with the conditions of paragraph (k)(3) of this section.
In year 5, F1 distributes all of its assets to TFC in a
complete liquidation to which sections 332 and 337
apply.
(ii) Result. The distribution of the TFD stock by
F1, and the exchange of F1 stock by TFC pursuant
to the year 5 liquidation of F1 constitute triggering
events under paragraphs (j)(1) and (k)(3)(i) of this
section, respectively. However, if paragraph (k)(14)
of this section applies, neither the distribution of the
TFD stock by F1, nor the exchange by TFC of the F1
stock, shall constitute a triggering event.
(A) The condition of paragraph (k)(14)(i) of
this section is satisfied because the distribution of
the TFD stock, and the exchange of F1 stock, both
qualify as nonrecognition transactions.
(B) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the distribution UST, a domestic corporation that is eligible
to be a U.S. transferor, owns at least 5% (applying the
attribution rules of section 318, as modified by section 958(b)) of the stock of TFC. As a result, UST
is treated as retaining an indirect interest in the TFD
stock following the complete liquidation of F1.
(C) The condition of paragraph (k)(14)(iii) of
this section is satisfied if UST enters into a new gain
recognition agreement. Because after the complete
liquidation of F1, UST wholly owns TFC, which
wholly owns TFD, as was the case immediately after

630

the initial transfer, UST is not required to describe,
with the new gain recognition agreement, other dispositions or events that would constitute triggering
events based on the principles of paragraph (j) of
this section, other than the dispositions or events
described in paragraph (j) of this section.
Example 11. Disposition of stock of transferee
foreign corporation pursuant to a divisive reorganization. (i) Facts. In year 3, pursuant to a divisive reorganization described in section 368(a)(1)(D), UST
transfers all of the TFC stock to DC, a newly-formed
corporation, in exchange solely for stock of DC. UST
then distributes all of the DC stock to USP in a transaction to which section 355 applies.
(ii) Result. The transfer of the TFC stock by
UST to DC constitutes a triggering event under paragraph (j)(4) of this section. However, under paragraph (k)(1)(iii) of this section, the transfer of the
TFC stock shall not constitute a triggering event if
DC enters into a new gain recognition agreement that
designates DC as the U.S. transferor for purposes of
this section.
(iii) Alternate facts. The facts are the same as in
paragraph (i) of this Example 11, except that UST
transfers only 90% of the TFC stock to DC. Paragraph
(k)(1)(iii) of this section applies only with respect to
the TFC stock transferred to DC. Thus, the conditions
of paragraph (k)(1)(iii) of this section are satisfied
if DC enters into a new gain recognition agreement
with respect to the TFC stock received from UST.
The amount of gain subject to the new gain recognition agreement entered into by DC equals 90% of
the amount of gain subject to the gain recognition
agreement entered into by UST with respect to the
initial transfer. The amount of gain subject to the gain
recognition agreement entered into by UST with respect to the initial transfer is reduced by the amount
of gain subject to the new gain recognition agreement
entered into by DC. The gain recognition agreement
entered into by UST with respect to the initial transfer
continues to apply to the remaining TFC stock held by
UST.
Example 12. Disposition of transferred stock pursuant to a divisive reorganization. (i) Facts. In year 3,
pursuant to a divisive reorganization described in section 368(a)(1)(D), TFC transfers all of the TFD stock
to F1, a newly formed corporation, in exchange solely
for all of the outstanding stock of F1. TFC then distributes all of the F1 stock to UST in a transaction to
which section 355 applies.
(ii) Result. The transfer by TFC of the TFD stock
to F1 constitutes a triggering event under paragraph
(j)(1) of this section. However, if paragraph (k)(14)
of this section applies, neither the transfer of the
TFD stock by TFC to F1, nor the distribution of the
F1 stock by TFC to UST, shall constitute triggering
events.
(A) The condition of paragraph (k)(14)(i) of this
section is satisfied because the dispositions of the
TFD stock and F1 stock qualify as nonrecognition
transactions.
(B) The condition of paragraph (k)(14)(ii) of
this section is satisfied because immediately after
the transfer UST, an eligible U.S. transferor, owns
at least 5% (applying the attribution rules of section
318, as modified by section 958(b)) of the total
voting power and the total fair market value of the
outstanding stock of F1. As a result, UST is treated

2009–9 I.R.B.

as retaining an indirect interest in the TFD stock
following the dispositions.
(C) The condition of paragraph (k)(14)(iii) of
this section is satisfied if UST enters into a new
gain recognition agreement with respect to the initial
transfer that describes the subsequent dispositions or
other events that would constitute triggering events
based on the principles of paragraph (j) of this section, other than those described in paragraph (j) of
this section. For example, a complete or partial
disposition of the F1 stock would constitute a triggering event for purposes of the new gain recognition
agreement (subject to the exceptions provided by
paragraph (k) of this section).
Example 13. Receipt of boot by the transferee
foreign corporation in a subsequent section 351 exchange. (i) Facts. At the time of the initial transfer,
the TFD stock has a $50x basis and $100x fair market
value. The amount of gain subject to the gain recognition agreement is $50x. In year 3, TFC and X, an unrelated foreign corporation, form F1. TFC transfers
the TFD stock to F1 in exchange for $35x cash and
$65x stock of F1. At the time of the transfer, the TFD
stock has a $50x basis and $100x fair market value.
The F1 stock received by TFC represents 25% of the
outstanding stock of F1. Without regard to the gain
recognized under the gain recognition agreement and
any adjustments to basis under paragraph (c)(4)(ii) of
this section, under section 351(b) TFC would recognize $35x gain in connection with the transfer of the
TFD stock to F1. UST complies with the conditions
of paragraph (k)(3) of this section, and therefore the
disposition by TFC of the TFD stock does not constitute a triggering event.
(ii) Result. Under paragraph (m)(1) of this section, UST must recognize $35x gain under the gain
recognition agreement as a result of the year 3 disposition by TFC of the TFD stock. Thus, the amount of
gain subject to the new gain recognition agreement
entered into by UST pursuant to paragraph (k)(3) of
this section is $15x. Under paragraph (c)(4)(ii) of
this section, as of the date of the initial transfer, the
basis of the TFD stock held by TFC is increased by
$35x, the amount of the gain recognized by UST under the gain recognition agreement. Under paragraph
(c)(4)(i) of this section, the basis of the TFC stock received by UST in the initial transfer is also increased
by $35x. After taking into account the increase to the
basis of the TFD stock under paragraph (c)(4)(ii) of
this section, TFC recognizes $15x gain under section
351(b) in connection with the year 3 transfer of the
TFD stock to F1. Under section 362(a), the basis of
the TFD stock in the hands of F1 is $100x.
Example 14. Complete disposition of transferred
stock pursuant to a section 304(a)(1) transaction. (i)
Facts. UST wholly owns FA. In year 3, in a transaction to which section 304(a)(1) applies, TFC transfers all of the TFD stock to FA in exchange for cash.
Under section 304(a)(1), TFC and FA are treated as
if TFC transferred the TFD stock to FA in a section
351 exchange in exchange solely for FA stock, and
then FA redeemed the FA stock deemed issued in exchange for the cash. Under section 302(d), the redemption of the FA stock deemed issued by FA to
TFC under section 304(a)(1) is treated as a distribution to which section 301 applies.
(ii) Result. (A) In general, the deemed contribution by TFC of the TFD stock to FA in the section 351
exchange is a triggering event under paragraph (j)(1)

2009–9 I.R.B.

of this section. However, under paragraph (k)(3) of
this section the deemed contribution shall not be a
triggering event if UST enters into a new gain recognition agreement with respect to the initial transfer in
which it agrees to treat as a triggering event a complete or partial disposition of the FA stock deemed
received by TFC.
(B) Under paragraph (n)(1) of this section, the redemption of the FA stock deemed received by TFC
in exchange for the TFD stock shall not constitute
a disposition if UST enters into a new gain recognition agreement with respect to the initial transfer
that includes appropriate provisions to take into account such redemption. Therefore, under the new
gain recognition agreement UST must agree to treat
as a triggering event a complete or partial disposition
of the stock of FA. Pursuant to paragraph (d)(2)(ii)
of this section, UST is permitted to enter into a single
new gain recognition agreement in year 3, but the gain
recognition agreement must provide a complete description of the section 304(a)(1) transaction including the deemed section 351 exchange and redemption
of the FA stock.
Example 15. Reduction in amount of gain subject to gain recognition agreement, followed by triggering event. (i) Facts. In year 3, UST disposes of
60% of the TFC stock received in the initial transfer in a transaction in which the conditions of paragraph (o)(1)(ii) of this section are satisfied. Thus, the
amount of gain subject to the gain recognition agreement is reduced by 60%. In year 5, TFC disposes of
50% of the TFD stock in a transaction that constitutes
a triggering event.
(ii) Result. As a result of the year 5 disposition
by TFC of 50% of the TFD stock, under paragraphs
(j)(1) and (c)(1)(i) of this section, UST must recognize and include in income 50% of the gain subject to
the gain recognition agreement (because of the year
3 disposition of TFC stock, the amount of gain subject to the gain recognition agreement equals 40% of
the gain realized, but not recognized, on the initial
transfer). UST must pay applicable interest on any
additional tax due with respect to the gain recognized.
The amount of gain subject to the gain recognition
agreement is reduced by the amount of gain recognized by UST (the remaining gain equals 20% of the
gain realized, but not recognized, by UST on the initial transfer).
Example 16. Taxable sale of stock of transferee
foreign corporation and election to reduce stock basis. (i) Facts. UST wholly owns F1 and TFD. The F1
stock has a $100x basis and $90x fair market value,
and the TFD stock has a $0x basis and $100x fair
market value. UST also owns real property with a
$10x basis and $10x fair market value. In year 1,
pursuant to a section 351 exchange, UST transfers
the real property, the TFD stock, and the F1 stock to
TFC in exchange solely for 20 shares of TFC stock.
UST enters into a gain recognition agreement with respect to the transfer of the TFD stock. The amount
of the gain recognition agreement is $100x. UST
takes the position that the basis of each share of TFC
stock received in the exchange is $5.5x (a proportionate amount of the $110x aggregate basis of the transferred property). In year 3, UST disposes of all its
TFC stock in a transaction in which all gain realized
is recognized and included in taxable income.
(ii) Result. The year 3 disposition of the TFC
stock is a triggering event under paragraph (j)(4) of

631

this section. The disposition does not terminate the
gain recognition agreement pursuant to paragraph
(o)(1)(i) of this section because the basis of each
share of TFC stock received in exchange for the TFD
stock in the initial transfer is $5.5x, which exceeds
the $0x basis of the TFD stock at time of the initial
transfer. However, under paragraph (o)(1)(iii) of this
section, to satisfy the basis condition of paragraph
(o)(1)(i) of this section, UST can reduce the basis of
the 10 shares of the TFC stock received in exchange
for the TFD stock to $0x. If UST reduces the basis of
the 10 shares of TFC stock to $0x, under paragraph
(o)(1)(i) of this section the disposition of the TFC
stock shall not constitute a triggering event but instead shall terminate the gain recognition agreement
without further effect.
Example 17. Successive section 351 exchanges,
section 301 distributions, and transactions involving
partnerships. (i) Facts. UST owns a 40 percent capital and profits interest in a foreign partnership (PRS).
PRS wholly owns TFD and other assets with basis
equal to fair market value. The TFD stock has a $50x
basis and $200x fair market value. TFC wholly owns
F1. On day 1 of year 1, in a section 351 exchange,
UST transfers its PRS interest to TFC in exchange
solely for stock of TFC (initial transfer). On that same
day, in a section 351 exchange, TFC transfers the PRS
interest received from UST to F1 in exchange solely
for stock of F1. In year 3, PRS receives a $150x
distribution from TFD to which section 301 applies.
Under section 301(c), $25x of the distribution constitutes a dividend, $50x is applied against and reduces
the basis of the TFD stock held by PRS, and the remaining $75x is treated as gain from the sale or exchange of property. With respect to the TFD stock
deemed transferred by UST in the initial transfer, under section 301(c), $10x (40% of $25x) of the distribution constitutes a dividend, $20x (40% of $50x) is
applied against and reduces the basis of TFD stock,
and $30x (40% of $75x) is treated as gain from the
sale or exchange of property. In year 5, pursuant to
a distribution to which section 731 applies, PRS distributes all of the TFD stock to F1.
(ii) Result. (A) Successive section 351 transfers.
Under section 367(a)(4) and §1.367(a)–1T(c)(3)(ii),
the transfer of the PRS interest by UST to TFC is
treated, for purposes of section 367(a), as a transfer
by UST to TFC of its proportionate share of the TFD
stock held by PRS (the initial transfer). The initial
transfer by UST of the TFD stock to TFC is subject
to the general rule of section 367(a)(1), unless UST
enters into a gain recognition agreement with respect
to such transfer pursuant to §1.367(a)–3(b)(1)(ii) and
this section. Under paragraph (c)(3)(viii) of this section, the gain recognition agreement must include a
complete description of the transfer, including a description of the partners of PRS. Even if UST enters
into a gain recognition agreement with respect to the
initial transfer, under paragraph (j)(3) of this section,
the subsequent transfer by TFC of the PRS interest
to F1 is a triggering event unless UST enters into a
new gain recognition agreement with respect to the
initial transfer under paragraph (k)(14) that provides
that, in addition to the triggering events provided in
paragraph (j) of this section, a complete or partial disposition of the F1 stock received by TFC in exchange
for the PRS interest shall constitute a triggering event
for purposes of the gain recognition agreement. The
new gain recognition agreement must also provide

March 2, 2009

that any other disposition that is inconsistent with the
principles of paragraph (k), including an indirect disposition of the TFD stock or of substantially all of the
assets of TFD, shall constitute a triggering event for
purposes of the new gain recognition agreement. Under paragraph (d)(2)(ii) of this section, UST is permitted to enter into a single gain recognition agreement with respect to the initial transfer and the subsequent transfer by TFC of the PRS interest, but the
agreement must include a complete description of the
initial transfer and the subsequent transfer of the PRS
interest.
(B) Section 301 distribution from TFD to PRS.
Under paragraph (b)(1)(iii) of this section, the section
301 distribution received by PRS from TFD is not
a disposition (and therefore does not affect the gain
recognition agreement) to the extent it is described in
section 301(c)(1) or (2). However, under paragraph
(n)(2) of this section, to the extent the distribution is
described in section 301(c)(3), UST must recognize
gain ($30x) under the gain recognition agreement.
For this purpose, the amount of the distribution that
is described in section 301(c)(3) is determined before
taking into account the increase to the basis of the
TFD stock under paragraph (c)(4)(ii) of this section.
(C) Distribution of TFD stock by PRS to F1. The
year 5 distribution of the TFD stock by PRS to F1 is a
triggering event under paragraph (j)(1) of this section,
unless paragraph (k)(14) of this section applies.
(1) The condition of paragraph (k)(14)(i) of this
section is satisfied because the distribution qualifies
as a nonrecognition transaction.
(2) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the distribution UST, a domestic corporation that is eligible
to be a U.S. transferor, owns at least 5% (applying the
attribution rules of section 318, as modified by section 958(b)) of the total voting power and total value
of the outstanding stock of F1. As a result, UST is
treated as retaining an indirect interest in the TFD
stock following the distribution.
(3) The condition of paragraph (k)(14)(iii) of
this section is satisfied if UST enters into a new
gain recognition agreement with respect to the initial
transfer. The new gain recognition agreement need
not describe additional dispositions or other events
that would constitute triggering events because,
pursuant to paragraph (c)(5) of this section, the dispositions or other events described in paragraph (j) of
this section or in the existing gain recognition agreement apply to the new gain recognition agreement.
Example 18. Complete liquidation of transferee
foreign corporation. (i) Facts. TFD has 10 shares
of stock outstanding immediately before the initial
transfer. On the date of the initial transfer, the TFD
stock has a $0x basis and $90x fair market value. In
year 2, in exchange for 1 share of TFD stock TFC
transfers real estate to TFD with a $10x basis and
$10x fair market value. In year 4, TFC distributes
the 11 shares of TFD stock to UST in a complete
liquidation to which sections 332 and 337 apply.
(ii) Result. In determining whether the gain
recognition agreement entered into by UST with
respect to the initial transfer is terminated under
paragraph (o)(5) of this section, or triggered under
paragraphs (j)(1) and (j)(4) of this section, only the
10 shares of TFD stock transferred by UST in the
initial transfer are considered. Thus, the 1 share of

March 2, 2009

TFD stock received by TFC in exchange for the real
estate in year 2 is not taken into account.
Example 19. Spin-off of transferred corporation.
(i) Facts. Before the initial transfer, the TFD stock has
an $80x basis and a $100x fair market value, and the
TFC stock has a $100x basis and a $100x fair market
value. In year 4, TFC distributes all of the TFD stock
to UST in a transaction to which section 355 applies.
At the time of the distribution, the TFD stock has a
$200x fair market value, and the TFC stock (without
regard to the value of the TFD stock held by TFC)
has a $100x fair market value. At such time, the TFC
stock has a $180x basis. As determined under section
358, immediately after the distribution, the TFC stock
has a $60x basis, and the TFD stock has a $120x basis.
(ii) Result. The distribution of the TFD stock by
TFC in year 4 is a triggering event under paragraph
(j)(1) of this section. The distribution does not terminate the gain recognition agreement under paragraph (o)(5) of this section because after the distribution, the basis of the TFD stock in the hands of UST
($120x) is greater than the basis of the TFD stock at
the time of the initial transfer ($80x). However, if
UST reduces the basis of the TFD stock to $80x (as
provided under paragraph (o)(5)(iii) of this section)
the gain recognition agreement will terminate without further effect. If UST does not elect to reduce the
basis of the TFD stock, see paragraph (k)(14) of this
section.
Example 20. Intercompany transaction followed
by disposition to nonmember. (i) Facts. At the time
of the initial transfer, the TFD stock has a $50x basis and $100x fair market value. The amount of the
gain recognition agreement is $50x. In year 3, UST
distributes all of the TFC stock to USP in a transaction to which section 301 applies. At the time of
the distribution, the TFC stock has a $50x basis and
$90x fair market value. Under section 311(b), UST
must recognize $40x gain (the intercompany item)
on the distribution, but because the distribution is
an intercompany transaction, under the provisions of
§1.1502–13, the $40x gain is not taken into account
in year 3. In year 4, USP sells all of the TFC stock
to X, an unrelated corporation. Under the provisions
of §1.1502–13, in year 4 UST takes into account the
$40x intercompany item as a result of the sale of the
TFC stock to X.
(ii) Result. (A) The year 3 distribution of the
TFC stock by UST to USP does not terminate the
gain recognition agreement under paragraph (o)(1) of
this section because UST does not include the $40x
gain in taxable income during year 3. Under paragraph (j)(4) of this section, the year 3 distribution of
the TFC stock by UST to USP is generally a triggering event; however, because the distribution is an intercompany transaction that creates an intercompany
item, the distribution shall not constitute a triggering
event if the conditions of paragraph (k)(12)(i) of this
section are satisfied.
(1) The condition of paragraph (k)(12)(i)(A) of
this section is satisfied because the aggregate basis of
the TFC stock distributed ($50x) is not greater than
the sum of the aggregate basis of the TFD stock at
the time of the initial transfer ($50x).
(2) The condition of paragraph (k)(12)(i)(B) of
this section is satisfied if the next annual certification
for the existing gain recognition agreement includes
a complete description of the intercompany transac-

632

tion and an explanation of how the basis condition of
paragraph (k)(12)(i)(A) of this section is satisfied.
(B) Under paragraph (o)(6) of this section and the
principles of paragraph (o)(1)(i) of this section, because the year 4 sale of the TFC stock to X requires
UST to take into account the $40x gain (the intercompany item) from the year 3 distribution, the year 4
sale terminates the gain recognition agreement. If,
alternatively, in year 4 USP had sold only 30% of the
TFC stock, then under paragraph (o)(6) of this section and the principles of paragraph (o)(1)(ii) of this
section the amount of gain subject to the gain recognition agreement would be reduced by 30%.
(iii) Alternate facts. Intercompany transaction
followed by sale of transferee foreign corporation to
member. Assume the same facts as in paragraph (i) of
this Example 20, except that, instead of USP selling
the TFC stock to X, in year 4 USP sells the TFC stock
to USS in exchange for $90x cash. UST and USS are
members of the USP consolidated group immediately
after the sale. The results of the year 3 distribution
of the TFC stock by UST to USP are the same as in
paragraph (ii) of this Example 20. In addition, under
paragraph (k)(12)(ii) of this section, the year 4 sale
by USP of the TFC stock to USS is not a triggering
event, provided UST includes a complete description
of the sale with the annual certification filed for the
gain recognition agreement in year 4.
(iv) Alternate facts. Intercompany transaction
followed by complete liquidation of transferee foreign
corporation. Assume the same facts as in paragraph
(i) of this Example 20, except that, instead of USP
selling the TFC stock to X, in year 4 TFC distributes
all of its assets to USP in a complete liquidation to
which sections 332 and 337 apply. The result is the
same as in paragraph (ii) of this Example 20 because,
under the provisions of §1.1502–13, in year 4 UST
takes into account the $40x gain (the intercompany
item) from the year 3 distribution.
(v) Alternate facts. Intercompany transaction followed by triggering event. Assume the same facts
as in paragraph (i) of this Example 20, except that
instead of USP selling the TFC stock to X, in year
4 TFC disposes of all of the TFD stock in a transaction that constitutes a triggering event under paragraph (j)(1) of this section. Under paragraph (c)(1)(i)
of this section UST must recognize $50x gain under
the gain recognition agreement. Under paragraphs
(c)(4)(i) and (ii) of this section, as of the date of the
initial transfer the basis of the TFC stock and TFD
stock, respectively, is increased by $50x.
(vi) Alternate facts. Intercompany transaction
followed by section 351 transfer to member. The facts
are the same as in paragraph (i) of this Example 20,
except that, in year 3, in a section 351 exchange UST
transfers all of the TFC stock to USS in exchange for
$10x cash and $80x of stock of USS. USS is a member of the USP consolidated group immediately after
the exchange. The transfer of the TFC stock by UST
to USS is an intercompany transaction. Under section 351(b), UST must generally recognize $10x gain
(intercompany item) in connection with the transfer;
however, under the provisions of §1.1502–13, UST
does not take the $10x gain into account in year 3.
Under paragraph (k)(12) of this section, as result of
the intercompany transaction creating an intercompany item ($10x gain), the existing gain recognition
agreement ($50x gain) must be divided between UST
and USS. UST shall remain subject to a gain recog-

2009–9 I.R.B.

nition agreement of $10x (equal to the amount of the
intercompany item). The amount of the gain recognition agreement entered into by USS under paragraph
(k)(1) of this section is $40x (equal to the amount of
the existing gain recognition agreement, reduced by
the amount of the of the gain recognition agreement
to which UST remains subject).
Example 21. Transfer of transferred stock to
United States person other than U.S. transferor. (i)
Facts. An individual (A) that is a United States
citizen wholly owns TFD, TFC, and DC. A transfers
the TFD stock to TFC in a section 351 exchange and
enters into a gain recognition agreement with respect
to such transfer. In year 5, pursuant to an asset
reorganization, TFC transfers all of its assets to DC
in exchange solely for DC stock. TFC distributes the
DC stock to A pursuant to the plan of reorganization.
(ii) Result. The transfer by TFC of the TFD stock
to DC and the exchange by A of the TFC stock for DC
stock pursuant to the asset reorganization are triggering events under paragraphs (j)(1) and (j)(4) of this
section, respectively. The gain recognition agreement
does not terminate under paragraph (o)(5) of this section because DC is neither the U.S. transferor, nor
an individual that is a United States person, nor a
member of the same consolidated group of which the
U.S. transferor is a member. However, if paragraph
(k)(14) of this section applies the exchanges shall not
constitute triggering events.
(A) The condition of paragraph (k)(14)(i) of this
section is satisfied because the transfer of the TFD
stock to DC qualifies as a nonrecognition transaction.
(B) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the
transfer DC, a domestic corporation that is eligible
to be a U.S. transferor, retains a direct interest in the
TFD stock following the transfer.
(C) The condition of paragraph (k)(14)(iii) of this
section is satisfied if DC enters into a new gain recognition agreement with respect to the initial transfer.
Under paragraph (k)(14)(iii)(B) of this section, DC
is not required to describe any subsequent dispositions or other events that (based on the principles of
paragraph (j) of this section) would constitute triggering events for purposes of the new gain recognition
agreement, other than the dispositions or other events
described in paragraph (j) of this section, because DC
holds a direct interest in TFD after the asset reorganization.
Example 22. Transfer of transferred stock to consolidated group member. (i) Facts. UST wholly owns
DC, a member of the USP consolidated group that includes UST. In year 5, pursuant to an asset reorganization described in section 368(a)(1)(A) TFC merges
with and into DC. Immediately after the asset reorganization, DC wholly owns TFD, and the basis of the
TFD stock is not greater than the aggregate basis of
such stock at the time of the initial transfer.
(ii) Result. The gain recognition agreement filed
by UST with respect to the initial transfer terminates
without further effect if the conditions of paragraph
(o)(5) of this section are satisfied.
(A) The condition of paragraph (o)(5)(i) of this
section is satisfied because the transfer of the TFD
stock is a section 361 exchange.
(B) The condition of paragraph (o)(5)(ii) of this
section is satisfied because DC is a member of the
consolidated group that includes UST immediately
after the section 361 exchange.

2009–9 I.R.B.

(C) The condition of paragraph (o)(5)(iii) of this
section is satisfied because the aggregate basis of
the TFD stock immediately after the section 361
exchange is not greater than the aggregate basis
of the TFD stock at the time of the initial transfer (as adjusted for any gain recognized by UST
on such transfer). If the basis condition of paragraph (o)(5)(iii) were not satisfied, under paragraph
(o)(5)(iii) of this section, DC could reduce the basis
of the TFD stock received in the reorganization. Alternatively, a new gain recognition agreement could
be entered into if paragraph (k)(14) of this section
applied to the disposition of the TFD stock pursuant
to the section 361 exchange.
(iii) Alternate facts. The facts are the same as in
paragraph (i) of this Example 22, except that instead
of TFC merging into DC, TFC merges into TFD in a
reorganization described in section 368(a)(1)(A). The
gain recognition agreement terminates without further effect if the conditions of paragraph (o)(5) of this
section are satisfied.
(A) The condition of paragraph (o)(5)(i) of this
section is satisfied because the TFD stock issued by
TFD to TFC in the reorganization, which is treated
as transferred stock under paragraph (b)(2)(iii) of this
section, is distributed by TFC to UST pursuant to section 361(c).
(B) The condition of paragraph (o)(5)(ii) of this
section is satisfied because UST is the U.S. transferor.
(C) The condition of paragraph (o)(5)(iii) of this
section is satisfied if the aggregate basis of the TFD
stock received by UST from TFC is not greater than
the aggregate basis of the TFD stock at the time of the
initial transfer (as adjusted for any gain recognized by
UST on such transfer). If the basis condition of paragraph (o)(5)(iii) were not satisfied, under paragraph
(o)(5)(iii) of this section, UST could reduce the basis
of the TFD stock received in the reorganization.
Example 23. Split-off of transferred stock. (i)
Facts. X, a domestic corporation that is unrelated to
USP and UST, wholly owns TFC. Pursuant to a reorganization described in section 368(a)(1)(B), UST
transfers all of the TFD stock to TFC in exchange for
50% of the outstanding voting stock of TFC. UST enters into a gain recognition agreement with respect to
such transfer. In year 4, in a split-off transaction to
which section 355 applies, TFC distributes all of the
TFD stock to X in exchange for all the TFC stock held
by X.
(ii) Result. Under paragraph (j)(1) of this section,
the year 4 distribution of the TFD stock to X constitutes a triggering event. However, the distribution
shall not constitute a triggering event if paragraph
(k)(14) of this section applies. The gain recognition
agreement does not terminate under paragraph (o)(5)
of this section because X is not a recipient described
in paragraph (o)(5)(ii) of this section.
(A) The condition of paragraph (k)(14)(i) of this
section is satisfied because the distribution of the
TFD stock qualifies as a nonrecognition transaction.
(B) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the distribution X, a domestic corporation that is eligible to
be a U.S. transferor, retains a direct interest in the
TFD stock.
(C) The condition of paragraph (k)(14)(iii) of this
section is satisfied if X enters into a new gain recognition agreement with respect to the initial transfer.
Under paragraph (k)(14)(iii)(B) of this section, X is

633

not required to describe, with the new gain recognition agreement, any subsequent dispositions or other
events that (based on the principles of paragraph (j) of
this section) would constitute triggering events, other
than the dispositions described in paragraph (j) of this
section, because X directly owns TFD after the distribution.
(D) If X were a United States citizen, the gain
recognition agreement would terminate if the condition of paragraph (o)(5)(iii) of this section were satisfied. Alternatively, the gain recognition agreement
would continue for its remaining term if the conditions for the application of paragraph (k)(14) of this
section were satisfied.
(iii) Alternate facts. Distribution to unrelated foreign corporation. The facts are the same as in paragraph (i) of this Example 23, except that X is a foreign
corporation wholly owned by DC. DC is unrelated to
UST. The results are the same as in paragraph (ii) of
this Example 23, except as follows.
(A) The condition of paragraph (k)(14)(ii) of this
section is satisfied because immediately after the distribution DC, a domestic corporation that is eligible to
be a U.S. transferor, owns at least 5% (applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and total value of
the outstanding stock of X. As a result, DC is treated
as retaining an indirect interest in the TFD stock immediately following the distribution.
(B) The condition of paragraph (k)(14)(iii) of this
section is satisfied if DC enters into a new gain recognition agreement with respect to the initial transfer.
Under paragraph (k)(14)(iii)(B) of this section, DC
must, in addition to the dispositions described in paragraph (j) of this section, include as a triggering event
a complete or partial disposition of the stock of X.
(iv) Alternate facts. Distribution to nonresident
alien individual. The facts are the same as in paragraph (i) of this Example 23, except that X is a nonresident alien individual. Paragraph (k)(14) of this
section does not apply to the distribution because the
conditions of paragraph (k)(14)(ii) and (iii) of this
section cannot be satisfied. Therefore, the distribution is a triggering event, and UST will recognize gain
under the gain recognition agreement as required under paragraphs (c)(1)(i) and (v) of this section. The
result would be the same if X were a foreign corporation and, immediately after the distribution, no United
States person owned at least 5% (applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and value of the outstanding stock of X.
Example 24. Applicability of this section to gain
recognition agreements filed before March 13, 2009.
(i) Facts. The facts are the same as in paragraph (i) of
Example 6, except that the initial transfer occurred on
March 7, 2007, and the asset reorganization occurred
on July 1, 2008.
(ii) Result. Under paragraph (r)(1)(ii) of this section, the rules of §1.367(a)–8T (see 26 CFR part 1,
revised April 1, 2007) apply to the transfers pursuant
to the asset reorganization because the initial transfer
occurred on March 7, 2007. As a result of the disposition of the TFC stock pursuant to the asset reorganization, under §1.367(a)–8T(d), USP is required to recognize the gain subject to the gain recognition agreement and pay applicable interest on any additional tax
due with respect to such gain. Because the acquiring
corporation in the asset reorganization is foreign, an

March 2, 2009

exception under §1.367(a)–8T(e) is not available for
the exchange of TFC stock by USP. However, pursuant to paragraph (r)(2)(i) of this section, because
the exception provided by paragraph (k)(14) of this
section is not included in §1.367(a)–8T, USP may
apply paragraph (k)(14) of this section to such exchange (provided the conditions of paragraph (k)(14)
of this section are satisfied), if the statute of limitations on assessments of tax for the 2007 tax year has
not closed. If USP applies paragraph (k)(14) of this
section to its exchange of the TFC stock pursuant to
the asset reorganization, under paragraph (r)(2)(ii) of
this section USP must include the new gain recognition agreement required under paragraph (k)(14)(iii)
of this section with an amended Federal income tax
return for its 2008 tax year that is filed before August
10, 2009.
Example 25. Applicability of this section to gain
recognition agreements filed before March 13, 2009.
(i) Facts. The initial transfer occurs in 2004. In 2005,
pursuant to a section 351 exchange, TFC transfers
the TFD stock to F1 in exchange solely for F1 voting stock. UST does not file a new gain recognition agreement under §1.367(a)–8(g)(2) with respect
to the exchange.
(ii) Result. Under paragraph (r)(1)(ii) of this
section, the rules of §1.367(a)–8 (see 26 CFR part
1, revised April 1, 2006) apply to the year 2005
disposition of the TFD stock because UST filed the
gain recognition agreement after July 20, 1998, but
before March 7, 2007. Under §1.367(a)–8(e) (see
26 CFR part 1, revised April 1, 2006), as a result
of the disposition of the TFD stock by TFC, UST
must recognize the amount of gain subject to the
gain recognition agreement. Paragraph (r)(2)(i) of
this section does not apply because the rule provided
by paragraph (k)(3) of this section was included in
§1.367(a)–8(g)(2) (see 26 CFR part 1, revised April
1, 2006). However, UST may request relief for
reasonable cause under §1.367(a)–8(c)(2) (see 26
CFR part 1, revised April 1, 2006) to file a new gain
recognition agreement with respect to the disposition
of the TFD stock by TFC in 2005.

(r) Effective/applicability date—(1)
General rule—(i) Transfers occurring on
or after March 13, 2009. The rules of this
section apply to gain recognition agreements filed with respect to transfers of
stock or securities occurring on or after
March 13, 2009. However, the rules of
this section do not apply to gain recognition agreements filed with respect to any
such transfer occurring on or after March
13, 2009, if such transfer was entered into
pursuant to a written agreement that was
(subject to customary conditions) binding before February 11, 2009, and at all
times thereafter. Solely for purposes of
this paragraph (r), a transfer described in
the preceding sentence shall be deemed to
be a transfer occurring before March 13,
2009 to which the rules of §1.367(a)–8
(see 26 CFR part 1, revised April 1,
2006) apply. See paragraph (r)(2)(iii) of
this section for the ability to apply the

March 2, 2009

rules of this section with respect to gain
recognition agreements filed for taxable
years ending before March 13, 2009.
(ii) Transfers occurring before March
13, 2009. For matters covered in this
section for periods before March 13,
2009 but on or after March 7, 2007,
the corresponding rules of §1.367(a)–8T
(see 26 CFR part 1, revised April 1,
2007) apply. 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 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).
(2) Applicability to gain recognition agreements filed before March 13,
2009—(i) General rule.
Taxpayers
may apply the rules of this regulation
§1.367(a)–8 that were not included in
§1.367(a)–8T (see 26 CFR part 1, revised
April 1, 2007), to gain recognition agreements filed with respect to transfers of
stock or securities for all open taxable
years, if done consistently to all transfers.
A U.S. transferor subject to section 877
and §1.367(a)–8T(d)(6) shall not apply the
rules of this regulation to reach a contrary
result. A taxpayer that failed to file a gain
recognition agreement for a transfer, or to
comply materially with any requirement
of this section with respect to an existing
gain recognition agreement, must obtain
relief for reasonable cause for such failure
under §1.367(a)–8T(e)(10) before applying the rules of this regulation §1.367(a)–8
that were not included in §1.367(a)–8T
as permitted by this paragraph (r)(2). See
paragraph (q)(2) of this section, Examples
24 and 25 for illustrations of the rule provided by this paragraph (r)(2)(i).
(ii) Taxable years ending before March
13, 2009. Notwithstanding the requirements of §1.367(a)–8(d), any gain recognition agreement or other filing required

634

by reason of electing to apply the rules
of this regulation §1.367(a)–8 that were
not included in §1.367(a)–8T, as permitted by this paragraph (r)(2), for a taxable
year ending before March 13, 2009 shall
be considered filed in accordance with
the requirements of §1.367(a)–8(d), provided the gain recognition agreement or
other filing is attached to an original or
amended return for such taxable year. An
amended return required to be filed by
reason of electing to apply the rules of
this regulation §1.367(a)–8 that were not
included in §1.367(a)–8T, as permitted by
this paragraph (r)(2), must be filed on or
before August 10, 2009. A taxpayer that
wishes to apply the rules of this regulation §1.367(a)–8 that were not included in
§1.367(a)–8T, as permitted by this paragraph (r)(2), but that fails to meet the filing
requirement described in the preceding
sentence must request relief for reasonable
cause under paragraph (p) of this section.
(iii) Taxable years ending after effective date. A taxpayer that entered into
a gain recognition agreement to which
§1.367(a)–8T (see 26 CFR part 1, revised
April 1, 2007) applies may apply the rules
of this section in a tax year ending on
or after March 13, 2009 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)–8(d).
§1.367(a)–8T [Removed]
Par. 8.
moved.

Section 1.367(a)–8T is re-

PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. In §602.101, paragraph (b)
is amended by removing an entry for
§1.367(a)–8T from the table and adding
an entry for §1.367(a)–8 to the table in
numerical order to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *

2009–9 I.R.B.

CFR part or section where
identified and described

Current OMB
Control No.

*****
1.367(a)–8

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

1545–2056

*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved January 16, 2009.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on February 9,
2009, 11:15 a.m., and published in the issue of the Federal
Register for February 11, 2009, 74 F.R. 6951)

Section 3406.—Backup
Withholding
Entities required to report under section 6050W
must perform backup withholding if the payee fails
to furnish a correct Taxpayer Identification Number
(“TIN”). This announcement alerts 6050W filers that
they may now partificipate in the TIN matching program. See Announcement 2009-6, page 643.

Section 6050W.—Returns
Relating to Payments Made
in Settlement of Payment
Card and Third Party
Network Transactions
Entities required to report under section 6050W
must perform backup withholding if the payee fails
to furnish a correct Taxpayer Identification Number
(“TIN”). This announcement alerts 6050W filers that
they may now partificipate in the TIN matching program. See Announcement 2009-6, page 643.

Section 6103.—Confidentiality and Disclosure
of Returns and Return
Information
26 CFR 301.6103(p)(7)–1: Procedures for administrative review of a determination that an authorized
recipient has failed to safeguard returns or return information.

T.D. 9445
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Procedures for Administrative
Review of a Determination
That an Authorized Recipient
Has Failed to Safeguard Tax
Returns or Return Information
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final regulations regarding administrative
review procedures for certain government
agencies and other authorized recipients
of returns or return information whose
receipt of returns and return information
may be suspended or terminated because
they do not maintain proper safeguards.
The regulations provide guidance to responsible IRS personnel and authorized
recipients as to these administrative procedures.
DATES: Effective Date: These regulations
are effective on February 11, 2009.
Applicability Date: These regulations
apply to all authorized recipients of returns
and return information that are subject to
the safeguard requirements set forth in section 6103(p)(4) on or after February 11,
2009.

2009–9 I.R.B.

635

FOR
FURTHER
INFORMATION
CONTACT: Wendy L. Kribell, (202)
622–4570 (not a toll-free number).
Background
This document contains final regulations
amending the Procedure and Administration Regulations (26 CFR Part 301) under section 6103(p)(4), (p)(7), and (q) of
the Internal Revenue Code (Code). Section 6103 protects returns and return information from disclosure except to certain government agencies and other authorized recipients, including State tax agencies as provided in section 6103(d). Section 6103(p)(4) provides that certain authorized recipients must establish procedures satisfactory to the IRS for safeguarding the returns and return information. The
IRS reviews, on a regular basis, safeguards
established by these authorized recipients.
If the IRS determines that an authorized
recipient has failed to maintain adequate
safeguards or has made any unauthorized
inspections or disclosures of returns or return information, section 6103(p)(4) authorizes the IRS to terminate or suspend
disclosure of returns and return information to the authorized recipient until the
IRS is satisfied that adequate steps have
been taken to ensure adequate safeguards
or prevent additional unauthorized inspections or disclosures.
Section 6103(p)(7) requires the Secretary to prescribe regulations providing for
administrative review of an IRS determination that a State tax agency has failed to
meet the safeguarding requirements. Former §301.6103(p)(7)–1 contained procedures to allow State tax agencies, prior to a
suspension or termination of disclosure, to
appeal a preliminary finding by the IRS of
inadequate safeguards or unauthorized disclosure, or to establish that the agency had
taken steps to prevent a recurrence of the
violation. Section 6103(q) further authorizes the Secretary to prescribe such other
regulations as are necessary to carry out
the provisions of section 6103 generally.

March 2, 2009