Notice 2012-15 (IRB 2012-9)

tax return filed by the qualified tax-exempt organization for the employment tax
period for which the credit is claimed.
Any excess credit (i.e., any credit that
exceeds the employer social security tax
for the period the credit is claimed) may
be carried forward and will be included
in the qualified tax-exempt organization’s
cumulative calculation on Form 5884–C
filed for a subsequent tax period to the
extent provided in the instructions to Form
5884–C.

qualified veteran described in § 51(d)(3)
on or after November 22, 2011, and before
May 22, 2012, will be considered to satisfy the requirements of § 51(d)(13)(A)(ii)
if the employer submits the completed prescreening notice to the DLA to request certification not later than June 19, 2012. The
alternative methods of signing and filing
Forms 8850, as described in Sections IV
and V, are effective for Forms 8850 filed
with a DLA on or after March 10, 2012.
DRAFTING INFORMATION

VII. REQUEST FOR COMMENTS
The Treasury Department and the IRS
request comments on alternative methods
for certification of a veteran as a qualified
veteran described in § 51(d)(3) in addition
to the methods of signing and filing electronically or by facsimile described in this
notice. In particular, comments related
to certification of a veteran as a qualified
veteran described in clause (ii)(II), (iii), or
(iv) of § 51(d)(3)(A) are requested. Comments are also requested on alternative
methods of filing Form 8850. Comments
must be submitted by April 12, 2012. All
materials submitted will be available for
public inspection and copying. Comments
should be submitted to Internal Revenue Service, CC:PA:LPD:RU (Notice
2012–13), Room 5203, PO Box 7604, Ben
Franklin Station, Washington, DC 20224.
Submissions may also be hand-delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to the Courier’s Desk,
1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:RU
(Notice 2012–13), Room 5203. Submissions may also be sent electronically via
the internet to the following email address:
[email protected].
Include the notice number (Notice
2012–13) in the subject line.
VIII. EFFECT ON OTHER
DOCUMENTS
This
notice
supplements
2002–44, 2002–1 C.B. 809.

Ann.

EFFECTIVE DATE

The principal authors of this notice are Robin Ehrenberg and Ligeia
Donis of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information on the submission of
comments or the comments submitted,
contact Regina Johnson at (202) 622–7180
(not a toll-free number). For further
information regarding the WOTC for
qualified veterans, electronic filing,
and facsimile submissions, contact
Ms. Ehrenberg at (202) 622–6080 (not a
toll-free number). For further information
on how to claim the WOTC on behalf
of tax-exempt organizations, contact
Ligeia Donis at (202) 622–6040 (not a
toll-free number).

Application of Section 367 to
Section 304 Transactions
Notice 2012–15
SECTION 1. OVERVIEW
This notice provides guidance under
section 367(a) and (b) of the Internal Revenue Code (Code) in the case of certain
transfers of stock to foreign corporations
in exchange for property under section
304. The Internal Revenue Service (IRS)
and the Department of the Treasury (Treasury Department) will amend the regulations under section 367 to incorporate
the guidance described in this notice.
The amendments to the regulations will
apply to transfers occurring on or after
February 10, 2012.

Amendments made to § 51, § 52, and
§ 3111 by the Act are effective for individuals who begin work for the employer on
or after November 22, 2011. As described
in Section III, any employer who hires any

February 27, 2012

424

SECTION 2. BACKGROUND
.01 Section 367(a)
Section 367(a)(1) generally provides
that if a United States person transfers
property to a foreign corporation in an
exchange described in section 332, 351,
354, 356, or 361, the foreign corporation shall not be considered a corporation
for purposes of determining the extent to
which the United States person recognizes
gain on such transfer. Section 367(a)(2)
and (3) provide specific exceptions to the
general rule, and the Secretary has authority under section 367(a)(6) to promulgate
regulations providing exceptions for other
transfers.
Section 1.367(a)–3 provides exceptions
to the general rule of section 367(a)(1)
for certain transfers by a U.S. person of
stock or securities to a foreign corporation.
In some cases, these exceptions require
the U.S. person to file a gain recognition
agreement (GRA) and other related documents under the provisions of § 1.367(a)–8
(GRA regulations). The GRA regulations
were revised in 2009 (T.D. 9446, 2009–1
C.B. 607) to provide further guidance,
including examples addressing when a
GRA needs to be filed, when it will be
triggered, and when exceptions to these
triggering events apply. The triggering
event exceptions address distributions in
redemption of stock, including by reason
of the application of section 304(a)(1).
See § 1.367(a)–8(n)(1) and (q)(2), Example 14. The GRA regulations also include
a general exception that, under certain
circumstances, applies to dispositions or
other events not otherwise specifically
excepted. See § 1.367(a)–8(k)(14).
.02 Section 367(b)
Section 367(b)(1) provides that in the
case of an exchange described in section
332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate
to prevent the avoidance of Federal income taxes. Section 367(b)(2) provides
that the regulations prescribed pursuant to
section 367(b)(1) shall include (but shall
not be limited to) regulations dealing with

2012–9 I.R.B.

the sale or exchange of stock or securities in a foreign corporation by a United
States person, including regulations providing the circumstances under which gain
is recognized or deferred, amounts are included in gross income as a dividend, adjustments are made to earnings and profits, or adjustments are made to the basis of
stock or securities.
Regulations under section 367(b) generally provide that if the potential application of section 1248 cannot be preserved
following the acquisition of the stock or
assets of a foreign corporation (foreign acquired corporation) by another foreign corporation in an exchange subject to section
367(b), including an exchange described
in section 351, then certain exchanging
shareholders of the foreign acquired corporation must include in income as a dividend the section 1248 amount (as defined
in § 1.367(b)–2(c)) attributable to the stock
of the foreign acquired corporation. See
§ 1.367(b)–4(b).
.03 Section 304
Section 304(a)(1) generally provides
that, for purposes of sections 302 and 303,
if one or more persons are in control of
each of two corporations and in return for
property one of the corporations (the acquiring corporation) acquires stock in the
other corporation (the issuing corporation)
from the person (or persons) so in control,
then such property shall be treated as a
distribution in redemption of the stock of
the acquiring corporation. To the extent
section 301 applies to the distribution, the
transferor and the acquiring corporation
are treated as if (1) the transferor transferred the stock of the issuing corporation
to the acquiring corporation in exchange
for stock of the acquiring corporation in
a transaction to which section 351(a) applies, and (2) the acquiring corporation
then redeemed the stock it is deemed to
have issued in the transaction.
.04 Application of Section 367 to Section
304 Transactions
On February 21, 2006, the IRS and the
Treasury Department issued final regulations (T.D. 9250, 2006–1 C.B. 588) providing that section 367(a) and (b) shall not
apply to certain transfers of stock of a foreign or domestic corporation to a foreign

2012–9 I.R.B.

acquiring corporation to which section 351
applies (deemed section 351 exchange) by
reason of section 304(a)(1) (2006 regulations).
The preamble to the 2006 regulations
stated that the policies underlying section 367(a) and (b) are preserved even
if a deemed section 351 exchange is not
subject to section 367(a) and (b) because
generally the income recognized by the
transferor in the transaction (dividend
income, capital gain, or both) should
equal or exceed the built-in gain in the
transferred stock. The preamble further
explained that the application of section
367 to deemed section 351 exchanges results in complexity and uncertainty.
Comments were received, however,
stating that the transferor may not recognize income equal to or greater than the
built-in gain in the transferred stock if,
under section 301(c)(2), the transferor is
permitted to recover the basis of shares
of the foreign acquiring corporation held
before (and after) the transaction. In response to these comments, temporary regulations were published on February 11,
2009 (T.D. 9444, 2009–1 C.B. 603)
(2009 regulations), which modified the
treatment of section 304 transactions
provided by the 2006 regulations. The
2009 regulations retain the general rule
that the deemed section 351 exchange will
not be a transfer to a foreign corporation
subject to section 367(a). However, the
2009 regulations provide an exception
if a U.S. person reduces its basis under
section 301(c)(2), in whole or in part, in its
stock of the foreign acquiring corporation
other than the stock deemed issued to the
U.S. person in the deemed section 351
exchange. In such case, the U.S. person
recognizes gain under section 367(a)(1)
equal to the amount by which the gain
realized by the U.S. person exceeds the
amount of the distribution that is treated
as a dividend under section 301(c)(1)
and included in gross income of the U.S.
person. Furthermore, the 2009 regulations
provide that a U.S. person cannot avoid
such gain by entering into a GRA.
The 2009 regulations made similar revisions to the 2006 regulations under section
367(b). Specifically, the 2009 regulations
provide that § 1.367(b)–4(b) applies to
a deemed section 351 exchange only to
the extent the distribution received by the

425

exchanging shareholder in redemption of
the stock deemed issued by the foreign
acquiring corporation is applied against
and reduces, pursuant to section 301(c)(2),
the basis of stock of the foreign acquiring corporation held by the exchanging
shareholder other than the stock deemed
issued to the exchanging shareholder in
the deemed section 351 exchange.
.05 Section 1248(a)
Section 1248(a) generally provides that
if a U.S. person that satisfies certain ownership requirements sells or exchanges
stock in a controlled foreign corporation
(or a foreign corporation that was a controlled foreign corporation within the past
five years), then the gain recognized on
the sale or exchange is included in gross
income of such person as a dividend to
the extent of the earnings and profits of
the foreign corporation (and in certain
cases, earnings and profits of foreign subsidiaries of such foreign corporation) that
are attributable to such stock. The 2009
regulations provide that 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 foreign corporation with respect to
its stock is treated as gain from the sale or
exchange of stock of such corporation.
SECTION 3. REVISED APPROACH TO
SECTION 304 TRANSACTIONS
After consideration of the comments received and the underlying policies of section 367(a) and (b), the IRS and the Treasury Department believe that the amount
of income taken into account as a result of
a section 304 distribution generally should
not affect the application of section 367 to
the deemed section 351 exchange. Furthermore, in the case of a transfer of stock
by a U.S. person to a foreign corporation,
the revised GRA regulations should substantially reduce the complexity and uncertainty resulting from the filing of a GRA
in connection with a deemed section 351
exchange. Accordingly, the IRS and the
Treasury Department believe it is appropriate to revise the approach to the interaction of sections 367 and 304 under the
2006 regulations and 2009 regulations by
providing that section 367(a) and (b) apply
fully to the deemed section 351 exchange.

February 27, 2012

SECTION 4. APPLICATION OF
SECTION 367 TO SECTION 304
TRANSACTIONS

GRA with respect to the entire section 304
transaction. See § 1.367(a)–8(d)(2)(ii).
.02 Application of Section 367(b)

The IRS and the Treasury Department
will amend the section 367 regulations to
provide that the section 351 exchange that
is deemed to occur in a section 304 transaction is subject to section 367(a) and (b)
in the manner described below.
.01 Application of Section 367(a)
To the extent that, pursuant to section 304(a)(1), a U.S. person is treated as
transferring stock of a domestic or foreign
corporation to a foreign corporation (foreign acquiring corporation) in a deemed
section 351 exchange, the transfer is subject to section 367(a) and the regulations
thereunder, including the exceptions described in § 1.367(a)–3(b)(1) and (c)(1),
as applicable. Thus, a transferor in a section 304 transaction that is a U.S. person
may, in certain cases, be permitted to enter
into a GRA pursuant to § 1.367(a)–8 to
avoid the recognition of gain under section
367(a)(1).
If the U.S. person (referred to in the
GRA regulations as the U.S. transferor)
enters into a GRA with respect to a deemed
section 351 exchange, the deemed redemption of the stock of the foreign acquiring
corporation deemed issued to the U.S. person pursuant to section 304(a)(1) constitutes a disposition of the transferee foreign corporation stock under § 1.367(a)–8.
See § 1.367(a)–8(b)(1)(iii) and (n)(1). As
a result, the deemed redemption is generally treated as a triggering event within
the meaning of § 1.367(a)–8(j). However,
consistent with the redemption rules provided in § 1.367(a)–8(n)(1), the redemption will not be treated as a triggering event
if the U.S. person that transfers the stock
in the deemed section 351 exchange (or a
U.S. person that is treated as a successor
U.S. transferor as a result of the deemed
redemption) enters into a new GRA that
includes appropriate provisions to account
for the redemption, provided the principles
of § 1.367(a)–8(k)(14)(ii) and (iii) are satisfied. Generally, the requirement to file
an initial GRA for the deemed section 351
exchange and a new GRA by reason of the
deemed redemption will be satisfied if the
U.S. person that transfers the stock in the
deemed section 351 exchange files a single

February 27, 2012

To the extent that, pursuant to section
304(a)(1), a foreign corporation (foreign
acquiring corporation) acquires the stock
of a foreign corporation in a deemed
section 351 exchange, such exchange is
subject to section 367(b) and the regulations thereunder, including § 1.367(b)–4.
Thus, for example, if a deemed section
351 exchange results in the loss of status
as a section 1248 shareholder as provided
in § 1.367(b)–4(b)(1)(i), the exchanging
shareholder must include in income as a
deemed dividend the section 1248 amount
attributable to the foreign stock that is
transferred in the deemed section 351 exchange.
.03 Example
Example. (i) Facts. USP, a domestic corporation,
owns all of the outstanding stock of FT and FA, each
a foreign corporation. USP’s tax basis in the FT stock
is $50x, and the FT stock has a fair market value of
$100x. The section 1248 amount (within the meaning of § 1.367(b)–2(c)) with respect to the FT stock
is $10x. FA has earnings and profits of $200x, all
of which are available for distribution taking into account section 304(b)(5). In a transaction to which
section 304(a)(1) applies, USP transfers all of its FT
stock to FA in exchange for $100x cash.
(ii) Application of section 304(a)(1). Under section 304(a)(1), USP and FA are treated as if USP
transferred its FT stock to FA in a section 351(a) exchange solely for FA stock, and then FA redeemed its
deemed issued stock in exchange for the cash. The
redemption of the FA stock deemed issued by FA to
USP is treated as a distribution to which section 301
applies. The entire distribution is treated under section 301(c)(1) as a dividend (as defined in section
316) out of the earnings and profits of FA.
(iii) Application of section 367(a). Under section 4.01 of this notice, § 1.367(a)–3(b) applies to
USP’s transfer of the FT stock to FA in exchange
for FA stock. As a result, USP recognizes gain on
the transfer under section 367(a)(1) unless USP enters into a GRA with respect to the transfer pursuant
to § 1.367(a)–3(b)(1)(ii) and § 1.367(a)–8. However, the deemed redemption by FA of the stock it
is deemed to issue to USP would constitute a triggering event with respect to such GRA as described
in § 1.367(a)–8(j). The redemption will not constitute a triggering event, however, if USP enters into a
new GRA that includes appropriate provisions to account for the redemption and that is consistent with
the principles of § 1.367(a)–8(k)(14)(ii) and (iii). After the redemption, USP owns at least 5% of the total
voting power and the total value of the outstanding
stock of FA. Thus, if USP enters into a new GRA that
satisfies the requirements of § 1.367(a)–8(k)(14)(iii),
the deemed redemption will not constitute a triggering event. In this case, the requirement that an initial

426

GRA be filed for the deemed section 351 exchange
and a new GRA be filed by reason of the deemed redemption will be satisfied if USP files a single GRA
pursuant to § 1.367(a)–8(d)(2)(ii).
(iv) Application of section 367(b). Under section 4.02 of this notice, § 1.367(b)–4 applies to
USP’s transfer of the FT stock to FA in exchange
for FA stock. Under § 1.367(b)–2(a) and (b), USP
is a section 1248 shareholder with respect to FT, a
controlled foreign corporation, immediately before
the exchange. Section 1.367(b)–4(b)(1)(i) does not
apply to require USP to include in income the $10x
section 1248 amount with respect to the FT stock
because each of FA and FT is a controlled foreign
corporation as to which USP is a section 1248 shareholder immediately after the exchange.

SECTION 5. FINALIZATION OF
THE 2009 REGULATIONS UNDER
SECTION 1248
The IRS and the Treasury Department
will finalize the portions of the 2009 regulations that address the application of
section 1248 to gain recognized with respect to stock upon distributions, including
gain under section 301(c)(3), in separate
published guidance effective February 10,
2009.
SECTION 6. EFFECTIVE DATE
The regulations described in this notice shall apply to section 304 transactions
occurring on or after February 10, 2012.
Pending the issuance of the regulations described in this notice, the IRS will not
challenge reasonable interpretations of the
application of section 367(a) and (b) to
deemed section 351 exchanges and related
deemed redemptions completed on or after
February 10, 2012, including reasonable
interpretations of the GRA rules as applied
to such deemed section 351 exchanges and
deemed redemptions under the principles
of § 1.367(a)–8(k)(14)(ii) and (iii).
SECTION 7. COMMENTS
The IRS and the Treasury Department
request comments on the regulations to be
issued under this notice.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information in this
notice were previously reviewed and approved by the Office of Management
and Budget in connection with Treasury Decision 9446 in accordance with
the Paperwork Reduction Act of 1995

2012–9 I.R.B.

(44 U.S.C. 3507(d)) under control number
1545–2056.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information, unless the
collection of information displays a valid
control number.
The collections of information are in
sections 4.01 and 4.02 of this notice. Responses to the collections of information
are required to avoid recognizing gain under section 367, including under an existing gain recognition agreement, and to
facilitate electronic filing. The likely respondents are large corporations.
The estimated burden will change as
follows:
The estimated total annual reporting
burden will increase by 100 hours.
The estimated annual burden per respondent remains 2 hours. The estimated
number of respondents will increase by 50.
The estimated annual frequency of responses remains once per year.
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.
SECTION 9. DRAFTING
INFORMATION

Treasury Department participated in its
development. For further information
regarding this notice, contact Mr. Bowen
at (202) 622–3860 (not a toll-free call).

Update for Weighted Average
Interest Rates, Yield Curves,
and Segment Rates
Notice 2012–16
This notice provides guidance as to the
corporate bond weighted average interest
rate and the permissible range of interest
rates specified under § 412(b)(5)(B)(ii)(II)
of the Internal Revenue Code as in effect for plan years beginning before 2008.
It also provides guidance on the corporate bond monthly yield curve (and
the corresponding spot segment rates),
and the 24-month average segment rates
under § 430(h)(2). In addition, this notice provides guidance as to the interest
rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning before 2008, the
30-year Treasury weighted average rate
under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under
§ 417(e)(3)(D) as in effect for plan years
beginning after 2007.
CORPORATE BOND WEIGHTED
AVERAGE INTEREST RATE

The principal author of this notice is
Ryan A. Bowen of the Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and the

For Plan Years
Beginning in

Sections
412(b)(5)(B)(ii)
and
412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by

Month

Year

Corporate
Bond Weighted
Average

February

2012

5.67

YIELD CURVE AND SEGMENT
RATES
Generally for plan years beginning
after 2007 (except for delayed effective
dates for certain plans under sections 104,
105, and 106 of PPA), § 430 of the Code
specifies the minimum funding requirements that apply to single employer plans
pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used
to determine a plan’s target normal cost

2012–9 I.R.B.

and funding target. Under this provision,
present value is generally determined using three 24-month average interest rates
(“segment rates”), each of which applies
to cash flows during specified periods.
However, an election may be made under
§ 430(h)(2)(D)(ii) to use the monthly yield
curve in place of the segment rates. Section 430(h)(2)G) set forth a transitional
rule applicable to plan years beginning in
2008 and 2009 under which the segment

427

the Pension Protection Act of 2006 (PPA),
provide that the interest rates used to calculate current liability and to determine
the required contribution under § 412(l)
for plan years beginning in 2004 through
2007 must be within a permissible range
based on the weighted average of the rates
of interest on amounts invested conservatively in long term investment grade
corporate bonds during the 4-year period
ending on the last day before the beginning
of the plan year.
Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate
and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the
monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining
the monthly composite corporate bond rate
as set forth in Notice 2004–34 continues to
apply in determining that rate. See Notice
2006–75, 2006–2 C.B. 366.
The composite corporate bond rate for
January 2012 is 4.56 percent. Pursuant
to Notice 2004–34, the Service has determined this rate as the average of the
monthly yields for the included corporate
bond indices for that month.
The following corporate bond weighted
average interest rate was determined for
plan years beginning in the month shown
below.

Permissible Range
90%
5.10

to

100%
5.67

rates were blended with the corporate bond
weighted average described above, including an election under § 430(h)(2)(G)(iv)
for an employer to use the segment rates
without the transitional rule.
Notice 2007–81, 2007–2 C.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond
segment rates used to compute the target normal cost and the funding target.

February 27, 2012